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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark one)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 28, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 000-23457
ENTEX INFORMATION SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 93-133715291
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Six International Drive, Rye Brook, New York 10573-1058
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(914) 935-3600
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.0001 Par Value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of voting and non-voting common equity of the
registrant held by nonaffiliates of the registrant, as of July 29, 1998:
$73,584,372.
Number of shares of Common Stock, $.0001 par value, outstanding as of July
29, 1998: 32,401,416 (excluding 82,500 treasury shares).
DOCUMENTS INCORPORATED BY REFERENCE:
None
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TABLE OF CONTENTS
Page
PART I
ITEM 1. Business.............................................................1
ITEM 2. Properties..........................................................15
ITEM 3. Legal Proceedings...................................................15
ITEM 4. Submission of Matters to a Vote of Security Holders.................15
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters...............................................16
ITEM 6. Selected Financial Data.............................................16
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation..........................................17
ITEM 7A. Quantitative and Qualitative Disclosure About Market Risk...........23
ITEM 8. Financial Statements and Supplementary Data.........................23
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..........................................25
PART III
ITEM 10. Directors and Executive Officers of the Registrant..................25
ITEM 11. Executive Compensation..............................................28
ITEM 12. Security Ownership of Certain Beneficial Owners and Management......32
ITEM 13. Certain Relationships and Related Transactions......................33
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.....37
SIGNATURES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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PART I
References contained herein to Fiscal 1994, Fiscal 1995, Fiscal 1996,
Fiscal 1997, Fiscal 1998 and Fiscal 1999 mean the fiscal years ended July 3,
1994, July 2, 1995, June 30, 1996, June 29, 1997, June 28, 1998 and June 27,
1999, respectively. As used herein, unless the context otherwise requires,
"ENTEX" or the "Company" refers to ENTEX Information Services, Inc. and its
subsidiaries. Unless another source is specifically indicated, all industry and
market share data set forth herein are based upon estimates by ENTEX management.
This Annual Report on Form 10-K (this "Form 10-K") contains forward looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act") and Section 21E of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). The Company's actual results may differ
materially from the results projected in the forward looking statements. Factors
that might cause such a difference include, but are not limited to, those
discussed in "Item 1. Business," including the section therein entitled
"--Business Factors," and in "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations."
ITEM 1. BUSINESS.
ENTEX Information Services, Inc. is a leading provider of integrated
personal computer ("PC") management solutions to meet the distributed
information technology systems and end-user support requirements of Fortune 1000
companies and other large enterprises. The Company's integrated PC management
solutions include PC Acquisition Services (multi-vendor product procurement
customized to meet specific end-user requirements); Outsourcing Services
(support services for the total PC infrastructure including network management,
help desk and deskside support, and asset management); and Network, Professional
and Migration Services (consulting and implementation services for network
design, integration, migration and conversion). ENTEX provides a single source
integrated service for its customers' PC/server platforms (system design,
operations support and product procurement) which management believes can
enhance the value of their information technology investment, significantly
reduce their operating expenses and improve management control over their
existing and future information technology systems.
The proliferation of complex PC/server network systems and support
infrastructures coupled with rapidly changing technology lifecycles has
significantly increased the management requirements and cost of distributed
information technology systems. As a result, many organizations are outsourcing
the management and support of their PC and network infrastructure needs. The
Company believes that key criteria which businesses consider when evaluating PC
and network integration service providers include the provider's ability: (i) to
deliver an integrated, cost-effective solution spanning the PC and network
lifecycle; (ii) to supply multi-vendor PC and network products customized to
specific end-user demands; and (iii) to provide consistent services on a
national basis. The Company believes its size and scope of operations, its
existing base of PC outsourcing contracts and its experience in managing various
technology platforms enable it to offer best practice methodologies which are
more effective than in-house systems which could be developed by its customers
acting on their own. Management believes its integrated PC management solutions
allow its customers to reallocate resources towards their core competencies and
enhance competitiveness with access to leading edge technology.
ENTEX was formed in August 1993 in a management-led buyout of the
information systems business of JWP Inc. ("JWPIS"). The Company's principal
stockholders are Dort A. Cameron III, Chairman of the Company's Board of
Directors, and entities controlled by Mr. Cameron (the "Cameron Affiliates").
Other equity holders of the Company include certain executives and employees of
the Company, IBM and Microsoft.
Business Strategy
The Company's objective is to be the premier provider of integrated
PC-management solutions to meet the distributed information technology systems
and end-user support requirements of Fortune 1000 and other large enterprises.
Key elements of the Company's strategy are to:
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Leverage Customer Relationships to Expand Services Provided. The
Company believes that once it has begun delivering efficiency improvements
and cost savings to a customer, it has the opportunity to enhance its
relationship by selling additional services. The Company realizes higher
profit margins by leveraging its initial marketing costs and realizing
economies of scale when providing incremental services to a customer. The
Company's strategy is to leverage existing customer relationships to expand
the number of services it provides to each customer and to increase the
number of affiliated operations of such customers to which it sells
services.
Expand Customer Base by Targeting Outsourcing and Integration
Services. The Company targets the Fortune 1000 and other large enterprises
with over 1,000 installed PCs to provide its outsourcing and integration
services. Management believes many of these companies have limited
information technology resources and legacy information technology systems
and are prepared to outsource to the Company rather than perform on their
own the necessary system upgrades and migrations to new information
technology platforms. Historically, the Company used its product
procurement relationships to initiate the marketing of outsourcing and
integration services. The Company augments this strategy by capitalizing on
its industry leadership in outsourcing and system migrations by initiating
customer relationships with higher margin service offerings and following
with product procurement.
Focus Marketing on System Migrations. The Microsoft Windows NT(TM),
Intel Pentium(TM) processor based operating platform is rapidly becoming
the preferred technology system standard for larger enterprises. The
Company's strategy is to leverage its experience, reputation and
capabilities in outsourcing and product procurement and its relationships
with major corporations to market the design and implementation of system
migrations for PCs and servers. In addition, the Company believes its
migration projects provide opportunities to market outsourcing services to
support these new systems, as well as procurement of equipment that is
typically installed in migration projects.
Maintain Technological Leadership by Leveraging Strategic Alliances
with Vendors. The Company's position as a leading PC systems integrator
enables it to establish and maintain strategic relationships with leading
original equipment manufacturers ("OEMs") and suppliers. Such alliances
provide the Company's technical staff access to the latest product and
technology developments before commercial release, allow the Company's
sales and service personnel to regularly attend manufacturers' on-site
presentations and training and enable the Company to provide its customers
with cost-effective purchasing and financing alternatives. The Company's
strategy is to continue building technological leadership through strong
vendor relationships which enhance the Company's ability to implement
and/or support the latest technologies for its customers.
Increase Build-to-Order Assembly and Enhance Inventory Management. The
Company has been shifting the focus of its product distribution strategy
from product resale to providing value-added services including
configuration and build-to-order assembly. These value-added services
enhance its vendor and customer relationships, accelerate inventory turns
and modify the inventory mix from finished goods to more cost-effective
component parts. The Company's strategy is to continue reducing its
inventory investment while improving product availability and delivery
schedules by increasing build-to-order assembly services for several of the
leading computing equipment OEMs.
Reduce Costs and Enhance Customer Service Through Centralization. The
Company invests in its infrastructure, both in terms of personnel and
systems, to increase its operating efficiency while providing high levels
of customer service at lower cost for its customers. PC acquisition,
distribution and configuration services are provided from a national
integration and distribution center, and network integration and support
services are provided from a national service center. Both national centers
are located near Cincinnati, Ohio. The Company believes its integration and
distribution center provides high-quality, build-to-order assembly and
configuration services with a customer reported error free rate of 99.7%.
The
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Company's strategy is to continue investing in its centralized services to
gain economies of scale in operations and enhance quality control and
customer service.
Competition
The computer product and services industry is intensely competitive and
management believes competition will intensify in the future. As an independent
PC systems integrator, ENTEX competes with companies which can provide a
combination of product procurement and services such as PC systems integrators
and high-end systems integrators, as well as companies who provide either
products or services such as PC resellers and distributors, specialty service
providers and direct marketers. The Company believes that the key criteria which
businesses consider when evaluating PC network integration service providers
include the provider's ability: (i) to deliver one integrated solution spanning
the PC network lifecycle; (ii) to supply multi-vendor network products
customized to specific end-user demands; and (iii) to provide services on a
national and international basis.
PC systems integrators include CompuCom, Digital Equipment Corporation
("DEC"), GE Capital Information Technology Solutions, Inacom, Vanstar and Wang.
High-end systems integrators have traditionally been mainframe-oriented service
providers who in response to the proliferation of PC/server systems began
offering service and support for PC based, distributed computing environments.
High-end systems integrators include Andersen Consulting, Computer Sciences
Corporation, IBM Global Services and SHL Systemhouse, a division of MCI
Communications. PC distributors and resellers, including Inacom, MicroAge and
Tech Data, have continued to increase their level of services and to provide
more comprehensive desktop support. Specialty service providers are firms who
have focused their business exclusively on providing PC and network related
services and include DecisionOne and Technology Service Solutions. Direct
marketers include Dell, Gateway, Micron and Unisys. In addition to these large
national companies, ENTEX also competes against numerous regional and local
companies, many of which have long-standing customer relationships. The
principal competitive factors in the Company's industry include the breadth and
quality of product and service offerings, product availability, pricing, and
expertise and size of technical workforce. The Company believes that it competes
favorably with respect to each of these factors.
Some of the Company's competitors have greater financial, technical and
marketing resources. As a result, such companies may be able to respond more
quickly to new or emerging technologies and changes in customer needs or devote
more resources to the development, promotion and sales of their services than
the Company. In addition, competition could result in price decreases and
depress gross profit margins in the industry. Further declines in the Company's
gross margins may exacerbate the impact of fluctuating net revenues and
operating costs on the Company's operating results and have a material adverse
effect on the Company's business, operating results and financial condition.
Products and Services
ENTEX offers its customers a single source for integrated PC management
solutions which encompass the design, configuration, integration and on-going
management of an enterprise's distributed computing systems. ENTEX delivers
total technology management solutions to its customers at the desktop, network
and enterprise level. These services encompass three primary areas of expertise:
PC Acquisition Services; Outsourcing Services; and Network Professional and
Migration Services.
PC Acquisition Services. The Company sells and distributes a full range of
multiple vendor personal computer and network products, software and
peripherals, providing its customers with a single source for all their product
needs. To ensure product availability, the Company maintains a large inventory
at its ISO 9001 certified Integration Center located in Erlanger, Kentucky,
which is adjacent to the Greater Cincinnati Metropolitan International Airport.
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Customers use the Company for product procurement because ENTEX provides
high product availability, rapid system configuration, and accurate and reliable
product shipment. The Company's customers improve their purchasing decisions by
leveraging the Company's extensive experience in evaluating products for
performance, reliability, ease of use and compatibility with other hardware and
software products. Customers also benefit from the Company's logistics
management services, which involve the coordination of product delivery, receipt
and installation. ENTEX provides the customer with extensive support ranging
from product information to delivery estimated time of arrivals to ordering and
billing support through its centralized Corporate Account Center ("CAC") located
in Mason, Ohio.
The Company charges separately for configuration services. The Company's
configuration processes load and configure operating systems, applications and
proprietary software to customer specifications. Through vendor build-to-order
programs, ENTEX receives system components from OEMs and completes the
manufacturing process to a customer's specific requirements. In Fiscal 1998,
over 63% of all desktop PCs, 52% of all laptop PCs and 42% of all servers
shipped by ENTEX were configured with additional hardware components, customer
specific software and proprietary applications. The Company customizes an
average of 25,000 units every month.
The Company sources products from over 2,400 manufacturers through direct
relationships with computer related manufacturers and second sourcing
arrangements with some of the largest wholesale distributors in the country.
Through ENTEX, customers may purchase application software either in
separate shrink-wrapped units or on a Volume License Agreement ("VLA") basis.
Under VLAs, a customer receives discounts for site licenses based on the number
of sites. The Company also provides related software management services which
reduce the administrative costs associated with ensuring compliance with site
licenses. Customers may also provide the Company with their proprietary software
for installation. The Company's System Builder is an automated system which
loads and configures operating system, application and proprietary software to
customer specifications. Utilizing its System Builder electronic configuration,
ENTEX downloads two terabytes of customer software every day. Unlike traditional
configuration methods which require the copying of software from one hard disk
to another, System Builder utilizes a 100 megabit per second Ethernet-based
asynchronous transfer mode system infrastructure which can rapidly download
software from ENTEX's servers to multiple PCs simultaneously. The Company has
over 600 ports to load software onto PCs at any one time.
Outsourcing Services. ENTEX is one of the leaders in PC outsourcing in the
U.S. Outsourcing -- or hiring outside experts to help manage information
technology functions -- is becoming more common among enterprises worldwide. The
Company provides customers with outsourcing services under long term contracts
and short term contracts (terms of less than twelve months), although many of
these contracts are terminable, some upon short notice. Outsourcing services are
typically provided through a mixture of on-site and centrally managed resources.
All outsourcing contracts have an on-site element. The Company may incur
significant initial capital investments consisting of both personnel costs and
capital expenditures, which are then recovered over the life of the contract.
As part of its outsourcing capabilities, the Company offers a variety of
core support services including PC and network operation and support services;
maintenance and repair; warranty services; and system management and upgrades.
Desktop support services include installation, moves, adds, and changes to
desktop computing devices. In addition, deskside services include on-going
support of PCs from an end-user perspective, including application enablement,
optimization and connectivity.
The Company provides on-site help desk services at customers' locations, as
well as centrally through the Company's SolutionLine service. Help desk services
provide support for end-user hardware and software inquiries and support leading
hardware, software and network products. On-site help desk support is provided
by the Company's trained personnel 24 hours per day, seven days per week. By
outsourcing help desk services, customers are
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able to reduce training and system costs, benefit from the Company's knowledge
and experience, reduce the time for problem resolution and increase closure
rates.
The Company has recently emphasized its SolutionLine service for
centralized help desk operations. SolutionLine is located in the National
Service Center ("NSC") and supports every leading manufacturer's PC and network
hardware products, as well as over 70 software products, including certain
customer proprietary products. The Company utilizes automatic call dispatch
equipment and knowledge bases to ensure high quality, responsive service.
Installation, maintenance and repair services are available 24 hours per
day, seven days per week, by dedicated, on-site personnel or the Company's field
technicians. The Company has established strict performance standards for its
service technicians which require them to respond within established time limits
and has in place escalation procedures built into service contracts to ensure
timely response. Each ENTEX service technician is manufacturer-certified. The
Company believes that its installation and integration services, as well as its
maintenance and repair capabilities, reduce downtime and increase the stability
of its customers' systems and prolong the useful lives of its customers'
technology assets.
An integral part of the Company's core support services is ServiceLine, the
Company's centralized national dispatch center. Customers may call ServiceLine
on an around the clock basis. Service requests are automatically logged and
dispatched to field engineers via cellular text-based devices or radio-frequency
laptop computers. In addition to the service request, warranty information and
special customer requirements are transmitted to the engineer. Using these
communications devices, service technicians have on-line access to the Company's
products and spare parts information. The Company has also closely integrated
ServiceLine into its SolutionLine help desk services. Calls into SolutionLine
which cannot be resolved over the phone can be escalated to ServiceLine for
dispatch of a field technician. ServiceLine representatives track the service
job and compile reports submitted by the field engineer. ServiceLine ensures
that customers requiring assistance have a dedicated point of contact and that
service technicians are able to respond swiftly.
The Company provides a range of extended warranty programs on all products
that it is authorized to service, passing existing manufacturer warranties on to
clients. By contracting for the Company's warranty services, customers can
simplify warranty claims procedures by standardizing service warranties across
different hardware platforms and contacting a single source for all service
requests and obtaining on-site assistance.
The Company provides network management services for local-area, wide-area
and enterprise networks. The Company's day-to-day network management operations
assist customers in stabilizing and administering more effectively their
distributed systems. The Company also offers remote management and
administration and support for network managers and administrators through its
centralized enterprise SupportLine services. The Company conducts both on-site
and remote network monitoring. By closely monitoring file server status, disk
statistics and server response times, the Company can recommend ongoing
preventive maintenance measures designed to maximize network availability.
Network, Professional and Migration Services. The Company provides
customers with network design, implementation and integration services on a
project basis. The consulting services which the Company provides include
design, installation and upgrade of local-area, wide-area and enterprise
networks. The Company also assists customers in the implementation of messaging
and Internet/Intranet technologies, provides comprehensive support to network
managers and administrators and helps customers with their network operating
systems, network-based applications and connectivity. The Company has expanded
its capabilities to perform remote network management and systems administration
and centralized enterprise support services from its NSC.
The Company also provides a wide range of PC and server migration services
to assist customers in transitioning from one computing environment to another,
including Windows NT(TM) and BackOffice(TM) upgrades and
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migrations, local-area network migrations, desktop operating system migrations
and messaging migrations. Customers purchase these services from the Company to
optimize their use of information technology and reduce their costs and
disruption of changing technology platforms.
Operations
The Company's sales and service structure combines the benefits of a
flexible, nationwide network of field offices with the efficiencies of
centralized back office functions and personnel, including help desk services,
remote network management, national dispatch services and product acquisition
specialists, designed to support the Company's field personnel. The Company has
48 branch offices located in 30 states. Of these branch offices, five also serve
as area offices to support the Company's five operating regions (East, Midwest,
South, Central and West). The area offices are located in or near Boston,
Massachusetts; Chicago, Illinois; Atlanta, Georgia; Denver, Colorado; and
Sacramento, California. These area offices are charged with the additional
responsibility of supporting and coordinating the sales and support activities
of the branch offices located within each of the five areas and are supported by
senior management personnel at each branch office.
The NSC is located in an approximately 155,000 square foot facility in
Mason, Ohio and is the focal point of ENTEX's nationwide service operations. The
NSC houses the Company's CAC, SolutionLine, ServiceLine, the Network Operations
Center and ENTEX University. In Fiscal 1996, the Company expanded its CAC. The
CAC operates out of the NSC in Mason, Ohio and provides customers with a single
point of contact for sales support, the receipt and processing of product orders
and inquiries regarding product information and recommendations and order
tracking and delivery. CAC personnel are also responsible for ongoing tracking
of industry pricing, communicating changes in vendor prices or policies and
product compatibility information.
The Company provides its customers with several electronic commerce
options. Order Access-Web is an inter/intranet-based order placement tool with
customized product catalogs, order/invoice information and shipment tracking. In
addition to Order Access-Web, ENTEX offers an Electronic Data Interchange
("EDI") capability to help its customers automate order processing and
administration, providing reduced costs and higher productivity for both the
Company and the customer.
ENTEX's Integration Center is located in Erlanger, Kentucky, less than five
miles from the Greater Cincinnati Metropolitan International Airport. During
Fiscal 1998, more than 99% of the orders for non-configured in-stock products
which were received by 8 p.m. Eastern Standard Time were shipped that night and
could be received the next day in the continental United States, while 95% of
in-stock configured systems were shipped within 48 hours of order placement. The
facility is 255,000 square feet and is ISO 9001 certified. ENTEX utilizes Skyway
Freight Systems, Inc. ("Skyway"), an independent shipping company, as its
primary transportation agent for sorting and consolidating multi-box orders and
performing tracking of all outbound shipments.
Pricing of Services
Outsourcing services are generally provided to customers pursuant to
service contracts which typically have a minimum term of twelve months and are
renewable annually. Outsourcing contracts can be terminated by the customer for
failure to perform specified services or at the option of the holder upon at
least 30 days notice. Although from time to time certain of the Company's
outsourcing contracts have been terminated, in the aggregate, such early
terminations have not been material. Such contracts provide for pricing on
either a time and materials basis, a fixed price, per seat basis (used primarily
for billing the Company's employees who are assigned to customer locations), or
a performance-oriented Service Level Agreement ("SLA"). Under the Company's
SLAs, fees for a specific suite of services are tied contractually to
pre-defined performance metrics or are determined on a "per seat" basis. To
date, revenues derived under performance-oriented SLAs have accounted for a
minority of the Company's revenues but the Company has recently begun offering
these arrangements to a broader range of its customers.
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Network, professional and migration services are generally provided to
customers under consulting contracts with varying terms depending upon the scope
of the engagement but which are typically less than one year. Most of these
contracts provide for payment on a periodic basis, or upon the attainment of
milestones. In a limited number of cases, network, professional and migration
service contracts provide for payment on a time and materials basis. In each
case, revenue is billed in accordance with the terms of the contract.
Sales and Marketing
The Company targets its marketing efforts primarily at senior level
executive, financial and information management personnel at Fortune 1000
companies and other large enterprises. ENTEX markets its products and services
through its national sales force of over 450 employees operating from 48 branch
offices. The Company leverages its regional structure by empowering its local
branch offices to initiate, establish and manage accounts in their local area
and tailor service solutions to meet customer needs. On more complex or larger
projects, the field offices are supported by the significant additional
available technical expertise at the regional, national or corporate levels.
Although most of the field offices support multiple accounts, several of the
Company's field offices were established to service a single, large account. For
certain national account relationships, either regional or national account
managers are designated specific account coverage. Bid preparation and/or
negotiation is coordinated with senior executives depending upon potential
contract size. The Company's sales personnel have a sales commission program
which is designed to constitute a substantial portion of the employee's overall
compensation. While sales orders may be placed with the field offices, the
Company's CAC is assuming a greater role in the product order process.
Since 1994, the Company has pursued a strategy of building alliances with
large, international systems integrators and service providers in order to serve
large, multi-national customers through a single point of contact and to
increase the Company's market presence abroad. In November 1994, the Company
entered into an arrangement with InfoProducts Europe, a division of N.V.
Koninklijke KNP BT based in The Netherlands, with offices in 17 European
countries ("Info Products"). In December 1995, the Company entered into an
arrangement with Otsuka Shokai in Japan ("Otsuka Shokai"). The Company also has
an arrangement with Migesa in Mexico, Transmarco in Singapore and Senteq in
Australia, as well as others. Collectively, this global alliance has more than
320 international offices located in 35 countries and had total revenues in 1998
in excess of $8.5 billion, with approximately 20,000 employees. In August 1998,
the Company, Info Products and Otsuka Shokai formed a limited liability company
formalizing the global alliance among such companies and providing a mechanism
for other global alliance participants to become formal co-venturers.
In Fiscal 1998, none of the Company's customers accounted for more than 6%
of the Company's total net revenues. In Fiscal 1998, the Company had either sold
product or provided services to approximately one-half of the Fortune 200 U.S.
based companies.
Vendor Relationships
The Company's position as a leading PC systems integrator enables it to
establish and maintain strategic relationships with leading manufacturers and
suppliers. Such relationships provide the Company's technical staff access to
the latest product and technology developments before commercial release, allow
the Company's sales and service personnel to regularly attend manufacturers'
on-site presentations and training, and enable the Company to provide its
customers with cost-effective purchasing and financing alternatives.
The Company purchases products directly from more than 2,400 hardware,
software and peripheral manufacturers, generally on a nonexclusive basis. In
Fiscal 1998, the ten largest vendor relationships accounted for 76.7% of product
revenues and 92.2% of market development funds ("MDF"), respectively.
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The Company's strategy is to reduce its inventory investment while
improving product availability and delivery schedules by increasing
build-to-order assembly services for products from several of the leading
computing equipment OEMs. The Company is certified as a final assembler in the
build-to-order assembly programs for Compaq, Hewlett Packard and IBM. The
Company has also established relationships with Microsoft and Compaq to deliver
Windows NT(TM) solutions and with Novell to enhance its engineers' technical
skills and capabilities with respect to network migrations. The Company intends
to continue to maintain such relationships and create new alliances.
Purchasing and Rebates
The Company receives volume incentives and rebates from certain
manufacturers related to sales and purchases of certain products which are
recorded as a reduction of cost of products sold when earned. Other incentives
may require specific incremental action on the part of the Company such as
training, advertising or other pre-approved market development activities and
are recognized as an offset to the related costs when the required action is
performed.
Vendors sometimes provide MDF incentive programs to the Company. The MDF
available under these programs are principally determined based on the quarterly
volume of sales or net purchases of the vendor's product. The Company recognizes
the incentives related to volume purchases as purchase discounts which reduce
the cost of products sold when earned. The aggregate MDF paid to a large
solution provider such as ENTEX can be significant. In Fiscal 1998, the total
MDF was $63.6 million.
The Company's vendor agreements are believed to be in the form customarily
used by each manufacturer and typically contain provisions which allow
termination by either party upon 30-90 days' notice. Generally, the Company's
vendor agreements do not require it to sell a specified quantity of products or
restrict the Company from selling similar products manufactured by competitors.
Consequently, the Company has the flexibility to terminate or curtail sales of
one product line in favor of another product line as a result of technological
change, pricing considerations, product availability, customer demand and vendor
distribution policies.
The Company attempts to protect itself from inventory obsolescence and
inventory price reductions by negotiating price protection and stock balancing
arrangements with its vendors and enforcing a limited return policy with its
customers. Subject to certain conditions, these arrangements entitle the Company
to receive refunds from manufacturers equal to price decreases on inventory
carried by the Company and provide the Company the ability to return, subject to
certain conditions, including restocking fees, slow moving or obsolete products.
The Company receives price changes from vendors on a daily basis; the changes
generally take effect immediately. The Company takes the position that, due to
its volume and order frequency, in-transit goods are price protected. In
addition, under most vendor agreements, subject to certain conditions, the
Company has the right to return for credit or exchange for other products a
portion of those inventory items purchased, within a designated period of time.
A vendor who elects to terminate a distribution agreement generally will
repurchase from the Company the vendor's products carried in the Company's
inventory.
Employees
As of June 28, 1998, the Company had over 8,200 full-time and full-time
equivalent employees, including over 450 in sales representatives, approximately
5,600 in the Company's field technical service and support operations, and over
460 in distribution and configuration operations. Approximately 3,900 Company
employees work full-time at customer sites nationwide. None of the Company's
employees is subject to a collective bargaining agreement. The Company has never
experienced a work stoppage and considers its employee relations to be good.
The Company's expanding services business requires the recruiting and
training of a significant number of additional qualified technical personnel,
including project managers and network integration specialists. Frequently,
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the Company must rapidly hire a significant number of technical personnel to
staff projects at customer sites. Competition for qualified technical and sales
personnel is intense, as the Company competes with other service providers, as
well as with its own customers, including those at whose locations ENTEX
employees work. The growth of the systems integration industry has created a
premium for a skilled workforce. In particular, the Company believes there is a
general shortage of trained system engineers, and, as such, estimates wage
inflation of approximately 9% annually for these positions.
The Company's voluntary employee turnover for Fiscal 1998 was 30.8%. As
demand for the Company's services has grown, the Company has used temporary
workers to fill many jobs and as a result has experienced greater turnover.
Business Factors
Investors should carefully consider all of the information contained
herein, including the following business factors. In addition, this Form 10-K
contains certain forward looking statements and trend analysis based on current
expectations. Actual results may differ materially due to a number of factors,
including those set forth below.
High Degree of Leverage; Dependence on IBMCC; Future Capital Needs
To meet its substantial working capital requirements and to finance its
business and expansion, the Company relies on several credit facilities. As of
June 28, 1998, after giving effect to the offering (the "Offering") of senior
subordinated notes (the "Notes") by the Company which occurred in July 1998, and
the application of the net proceeds therefrom, the Company had outstanding
indebtedness of approximately $353.6 million. This substantial leverage may have
several important consequences for the Company, including, but not limited to,
the following: (i) the Company's ability to obtain additional financing in the
future for working capital, acquisitions, capital expenditures, general
corporate or other requirements may be limited or impaired; (ii) a substantial
portion of the Company's cash flow from operations will be dedicated to
servicing its indebtedness; and (iii) the Company's ability to withstand
competitive pressures or adverse economic conditions, and to take advantage of
future business opportunities that may arise, may be negatively affected. The
Company's inability to service its indebtedness or obtain additional financing,
as needed, on favorable terms would have a material adverse effect on the
Company's business, operating results and financial condition.
A substantial portion of the Company's working capital is financed under a
revolving line of credit of up to $525 million (the "IBMCC Working Capital Line
of Credit") with IBM Credit Corporation ("IBMCC"). The IBMCC Working Capital
Line of Credit expires on July 1, 2001. The IBMCC Working Capital Line of Credit
can be terminated by IBMCC upon 60 days' prior notice. There can be no assurance
that IBMCC will not terminate the IBMCC Working Capital Line of Credit. The
Company maintains a vendor relationship with IBM, of which IBMCC is an
affiliate. There can be no assurance that any deterioration in the
vendor-customer relationship between the Company and IBM will not adversely
affect the Company's relationship with IBMCC. In addition, from time to time,
the Company has failed to comply with certain financial covenants under the
IBMCC Working Capital Line of Credit. In the past, IBMCC has waived such
defaults. However, there can be no assurance that IBMCC will waive future
breaches.
Since a substantial portion of the Company's indebtedness bears interest at
floating rates, an increase in interest rates could adversely affect, among
other things, the ability of the Company to meet its debt service obligations.
The Company is currently not a party to any financial arrangement to mitigate
its exposure to an increase in interest rates.
-9-
<PAGE>
Restrictive Debt Covenants
The IBMCC Working Capital Line of Credit, the Notes and the FINOVA
Inventory Line of Credit (as defined below) contain or incorporate by reference
through cross-default provisions a number of significant covenants that, among
other things, restrict the ability of the Company to (i) declare dividends or
redeem or repurchase capital stock, (ii) prepay, redeem or purchase debt, (iii)
incur liens and engage in sale-leaseback transactions, (iv) make loans and
investments, (v) incur additional indebtedness, (vi) amend or otherwise alter
debt and other material agreements, (vii) make capital expenditures, (viii)
engage in mergers, acquisitions and asset sales, (ix) enter into transactions
with affiliates and (x) alter the business it conducts. The indebtedness
outstanding under the IBMCC Working Capital Line of Credit is guaranteed by
three of the Company's domestic subsidiaries and is secured by a first priority
lien on the inventory and accounts receivable (excluding inventory pledged to
FINOVA and inventory subject to a purchase money security interest in favor of
Hewlett Packard on which IBMCC has a second priority lien) and certain
intellectual property of the Company and such guarantor subsidiaries. The Notes
are guaranteed by the Company's domestic subsidiaries. In addition, under the
IBMCC Working Capital Line of Credit, the Company is also required to comply
with financial covenants with respect to (i) ratio of current assets to current
liabilities, (ii) ratio of total liabilities minus aggregate outstanding
principal amount of subordinated debt to tangible net worth, (iii) ratio of
earning before interest, taxes, depreciation and amortization ("EBITDA") for the
immediately preceding four fiscal quarters to interest expense for such period,
(iv) minimum consolidated net income for each fiscal year and (v) minimum
working capital. If the Company were unable to borrow under the IBMCC Working
Capital Line of Credit due to a default or failure to meet certain specified
borrowing base prerequisites for borrowing, it could be left without sufficient
liquidity.
Declining Gross Margins for Product Sales
Approximately 81.7% of the Company's total net revenues in Fiscal 1998 were
generated through sales of PC hardware, software and related products. The
Company believes that competitive conditions will continue to place pressures on
its product gross margins. Furthermore, the original purchase price of products
is often offset by favorable vendor allowances and negotiated price protection
agreements against price decreases on inventory carried by the Company. There
can be no assurance that vendors will continue to offer such vendor allowances
or price protection at the current levels. OEMs have indicated that current MDF
programs will be altered. A reduction or elimination of such vendor programs
could significantly decrease the Company's product gross margins. In addition,
such vendor allowances and refunds for price decreases are not automatic and
must be tracked and collected by the Company. The Company's failure to
effectively manage such vendor receivables may further decrease product gross
margins. From 1994 to 1996, the Company experienced certain accounting
difficulties resulting from incorrect estimates and assumptions made in
calculating the gross margin of its PC Acquisition business. Although the
Company was entitled to receive vendor allowances with respect to computer
hardware purchases, the Company failed to collect a significant percentage of
such allowances. Further declines in the Company's product gross margins or
failure to collect on vendor allowances may have a material adverse effect on
the Company's business, operating results and financial condition.
Fluctuations in Operating Results
The Company's operating results have varied in the past, and the Company
expects its operating results, particularly its quarterly results, to continue
to fluctuate. The Company's net revenues may fluctuate due to a variety of
factors, including the level of expenditures by large enterprises for PC
hardware, software and related products and services in general, demand for the
Company's products and services in particular, the timing of orders for the
Company's products and services, product supply constraints, the Company's
build-to order programs and customer demand driven by the introduction and
adoption of new products. Due to its narrow product gross margins, the Company's
operating results may be especially sensitive to changes in the mix of product
and service revenues, the margin mix of products sold, the margin mix of
services sold and the level of its operating expenses. The Company's operating
expenses may fluctuate as a result of numerous factors, including the timing and
rate of new em-
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<PAGE>
ployee hiring, the amount and timing of vendor-provided allowances, the
utilization rate of service personnel, competitive conditions and the impact of
acquisitions. The Company's costs are largely fixed in the near term, and the
Company may be unable to adjust spending in a timely manner to compensate for an
unexpected revenue shortfall. As a result, revenue shortfalls may have an
immediate and disproportionate adverse effect on operating results. In addition,
if the Company spends to build its capabilities to support higher revenue
levels, the Company's near term operating results will suffer until it achieves
its revenue goals. Due to the Company's recent growth, it is difficult to
discern seasonal trends. However, the Company believes that first and third
fiscal quarter revenues may be negatively affected due to generally lower
computing equipment purchases during the summer months, which coincide with the
first fiscal quarter, and in January, which falls within the third fiscal
quarter. Due to all of these factors, the Company believes that its operating
results are likely to vary, in particular on a quarterly basis. As a result,
period-to-period comparisons of its operating results are not necessarily
meaningful, and quarterly results may not be indicative of results to be
expected for a full year.
Intense Competition
The computer products and services industry is intensely competitive, and
management believes competition will intensify in the future. As an independent
PC systems integrator, ENTEX competes with companies which can provide a
combination of product procurement and services such as PC system integrators
and high-end systems integrators, as well as companies which provide either
products or services such as PC resellers and distributors, specialty service
providers and direct marketers. In addition, there is increased competition from
manufacturers such as Compaq, DEC, Hewlett Packard, IBM and Unisys who sell
direct to the Company's customer base. PC system integrators include CompuCom
Systems, DEC, GE Capital Information Technology Solutions, Inacom, Vanstar and
Wang. High-end system integrators have traditionally been mainframe-oriented
service providers and include Andersen Consulting, Computer Sciences
Corporation, IBM Global Services and SHL Systemhouse, a division of MCI
Communications. PC resellers and distributors include Inacom, Tech Data and
MicroAge. Specialty service providers are firms which have focused their
business exclusively on providing PC and network related services and include
DecisionOne and Technology Service Solutions. Direct marketers include Dell,
Gateway, Micron and Unisys. In addition to these large national companies, ENTEX
also competes against numerous regional and local companies, many of which have
long-standing customer relationships. Some of the Company's competitors have
greater financial, technical and marketing resources at a lower cost structure
than the Company. As a result, such companies may be able to respond more
quickly to new or emerging technologies and changes in customer needs, devote
more resources to the development, promotion and sales of their services or
deliver products at a lower price than the Company. In addition, competition
could result in price decreases and depress gross margins in the industry.
Further declines in the Company's gross margins may exacerbate the impact of
fluctuating net revenues and operating costs on the Company's operating results
and have a material adverse effect on the Company's business, operating results
and financial condition.
Increased Competition from Direct Marketers
The Company competes with several manufacturers in meeting the distributed
information needs of large enterprises. Notably, direct marketers such as Dell
compete with the Company by selling directly to Fortune 1000 companies and other
large enterprises. The expansion of the direct selling model has increased the
competitive risks in an already highly competitive market. To combat the
additional competition, the Company has enhanced its System Builder program to
provide for final assembly services and has joined with certain vendors to
provide products to customers on a build-to-order basis. However, there can be
no assurance that ENTEX will be able to successfully transition from its current
systems, which utilize high levels of inventory, to managing a more streamlined
product fulfillment process. In addition, there can be no assurance that the
Company's vendors can supply components on a "just-in-time" basis to allow
successful management of a build-to-order program. The Company's failure to
successfully transition to the build-to order process could have a material
adverse effect on the Company's business, operating results and financial
condition. See "--Intense Competition."
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Increased Emphasis on Service Offerings
The Company's service operations are characterized by higher gross margins
than those attainable in product sales. During Fiscal 1998, compared to Fiscal
1997, service revenues grew 27.4% to $450.5 million, while product revenues
declined 5.7% to $2,006.2 million. The Company's success in increasing its
service revenues will depend primarily on the continued need for the Company's
services and the continued acceptance by large companies of outsourcing and
system migrations as solutions to their PC management needs. In addition, the
Company must have the ability to identify opportunities where its service
solutions are appropriate, sell such service solutions at attractive margins,
successfully implement such solutions and maintain the quality of its service
offerings. To the extent that the Company does not successfully increase the
proportion of revenues attributable to its service business, the Company's
operating margins may be adversely affected. In order to expand its service
operations, the Company will need to recruit, train and retain a significant
number of qualified technical personnel and integrate them into the Company.
There can be no assurance that the Company will do so successfully. The expense
of these efforts and the costs associated with the hiring of additional service
personnel and expansion of the Company's service infrastructure will be incurred
prior to increases in service revenues. If service revenues do not increase
sufficiently or the Company fails to accurately price its services, the
Company's business, operating results and financial condition would be
materially adversely affected.
Need to Recruit and Retain Management, Technical and Sales Personnel
The Company believes that its future success depends, to a large extent,
upon the efforts and abilities of its executive officers, managers, technical
and sales personnel. The Company's expansion of its service operations requires
the recruiting and training of a significant number of additional qualified
technical personnel, including project managers and network integration
specialists. Frequently, the Company must rapidly hire a significant number of
technical personnel to staff projects at customer sites. The Company's inability
to hire such personnel within the time schedule agreed to with the customer
could damage customer relationships and result in lost revenues. Competition for
qualified technical and sales personnel is intense. The Company competes with
other service providers as well as with its own customers, including those at
whose locations ENTEX employees work. Failure by the Company to attract and
train skilled managers, technical and sales personnel on a timely basis, or the
inability of the Company to retain such personnel, could materially adversely
affect the Company's business, operating results and financial condition. The
Company's employee turnover for Fiscal 1998 was 30.8%. In 1983, Mr. Cameron, the
Chairman of the Board of Directors and a co-founder of the Company, was
diagnosed with multiple sclerosis.
Contract Pricing Policy
The Company has begun implementing and intends to expand the use of new
pricing policies for its service offerings. Such new pricing policies include
pricing on a fixed fee or per end-user basis and on a service and support
performance metrics basis rather than on a time and materials basis. As a
result, the Company must accurately assess the scope of work of each project and
estimate the resources required to complete the project and to meet any service
and support performance metrics. Failure by the Company to accurately estimate
the scope of a project or support expenses or to meet service and support
performance metrics could have a material adverse effect on the Company's
business, operating results and financial condition. In addition, the Company
has certain warranty service commitments for which the Company seeks
reimbursement from manufacturers. A reduction by manufacturers in the scope or
duration of their reimbursements for warranties which the Company cannot
contractually pass on to its customers or the failure of the Company to properly
track and collect such reimbursements could have a material adverse effect on
the Company's business, operating results and financial condition.
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<PAGE>
Dependence on Vendors
A significant portion of the Company's revenues are derived from sales of
PC hardware, software and related products. Approximately 64.4% of such product
revenues in Fiscal 1998 were attributable to sales of products manufactured by
Compaq, Hewlett Packard and IBM. The Company's agreements with these
manufacturers do not provide for long-term supply commitments and can be
terminated with 15 to 90 days' notice. From time to time, the PC industry has
experienced product constraints, with vendors allocating product based on
criteria beyond the buyer's control. In the event the Company is not able to
obtain sufficient quantities of products from its vendors or sufficient
component parts for use in its build-to-order programs, the Company's business,
operating results and financial condition could be materially adversely
affected. The Company works closely with its key manufacturers. Many
manufacturers provide vendor allowances in the form of MDF, which reduce the
cost of products sold and which the Company uses to subsidize a variety of
activities including many of its employee and customer training programs. In
Fiscal 1998, the Company recorded $63.6 million in connection with MDF. In
addition to MDF, the Company's major manufacturers offer special pricing which
the Company passes on directly to its customers. Many manufacturers also provide
ENTEX with early previews of new products and technology and instruction and
training for ENTEX technical and support personnel on the use of these new
products. There can be no assurance that these arrangements will continue in the
future. In the event that these arrangements were discontinued or industry
practices were to change, commercial terms with vendors were to change generally
or the Company were to otherwise lose vendor support, the Company's business,
operating results and financial condition could be materially adversely
affected. See "--Declining Gross Margins for Product Sales."
Risks Associated with Inventory Management
In order to offer rapid delivery and efficient support and service to its
customers, the Company maintains relatively high levels of products and parts
inventory. The Company attempts to protect itself from inventory obsolescence
and inventory price reductions by negotiating price protection and stock
balancing arrangements with its vendors and enforcing a limited return policy
with its customers. These arrangements entitle the Company to receive refunds
from manufacturers equal to price decreases on inventory carried by ENTEX and
provide ENTEX the ability to return, subject to certain conditions including
restocking fees, slow moving products. Such price protection and stock balancing
provisions provided through the Company's supply agreements or particular
manufacturers' sales policies may provide only limited protection against
inventory risks. The Company's suppliers have been decreasing the level of price
protection and return privileges offered, and there can be no assurance that
such suppliers will not continue to further decrease or eliminate such
protection in the future. Manufacturers experiencing financial difficulties may
also be unable or unwilling to honor their price protection and stock balancing
commitments. Further, the Company regularly disposes of excess and obsolete
inventory at discounts to the Company's original purchase price. Although the
Company sets up reserves for losses associated with the disposal of excess and
obsolete items and records inventories net of these reserves, there can be no
assurance that such reserves will be adequate. Changes in industry practices
which increase the risks associated with maintaining high levels of inventory,
the Company's inability to effectively manage its current and future inventory
or significant adjustments to the value of its inventory could materially
adversely affect the Company's business, operating results and financial
condition. See "--Increased Competition from Direct Marketers."
Rapid Technological Change
The PC products and services industry is subject to rapid technological
change, evolving industry standards and frequent new product and service
introductions. The Company must, on a timely and cost-effective basis,
continuously respond to new product introductions. It must source such new
products, develop and introduce new services which keep pace with technological
developments and increasingly sophisticated network systems and train its
employees to provide the necessary services to support new products and systems.
There can be no assurance that the Company will be able to source new products
to meet customer demand, respond to technological developments in a timely
manner, if at all, or that its service offerings will adequately meet the
changing requirements of its
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<PAGE>
customers and achieve market acceptance. Further, suppliers may restrict the
Company's access to new products. The Company's failure to successfully source
new products or develop and introduce new services which meet evolving customer
needs could have a material adverse effect on the Company's business, operating
results and financial condition.
Management of Growth
The Company has experienced significant growth since its inception. This
rapid growth has placed, and is expected to continue to place, a significant
strain on the Company's management, financial, sales, technical and support
systems and personnel. The Company's ability to manage its growth effectively
will require it to continue to develop and improve its operational, financial
and other internal systems and train, manage and motivate its employees. The
Company has in the past evaluated and will continue in the future to evaluate
the acquisition of businesses that complement or expand the Company's technical
skills, service offerings or geographical presence. Integrating newly acquired
companies could be costly and may result in the loss of customers and key
personnel and may disrupt operations. Additionally, integrating newly acquired
businesses may divert significant management resources and attention from
day-to-day operations.
Dependence on Integration Center, Freight Delivery Provider and National Service
Center
All of the Company's product configuration, build-to-order and distribution
activities are conducted at the Company's Integration Center in Erlanger,
Kentucky. Disruption of operations at its Integration Center for any reason,
including power or telecommunications failures, natural disasters such as fires,
tornadoes or floods, or work stoppages, would have a material adverse effect on
the Company's business, operating results and financial condition. In addition,
the Company relies almost entirely on Skyway for the delivery of its products.
The failure or inability of Skyway to deliver products to the Company's
customers on a timely basis, whether as a result of a work stoppage or
slow-down, or the unanticipated termination of the Company's arrangement with
Skyway, could have a material adverse effect on the Company's business,
operating results and financial condition.
A number of the Company's service offerings depend on central service and
sales support or dispatch coordination from its NSC in Mason, Ohio. Disruption
of operations at the Mason facility, including power or telecommunications
failures, natural disasters such as fires, tornadoes or floods, or work
stoppages, would have a material adverse effect on the Company's service
operations and could affect customer relationships.
Year 2000 Compliance
The Company uses a significant number of computer software programs and
operating systems in its internal operations, including applications used in
financial business systems and various administration functions. As the Year
2000 approaches, each of these computer systems will be affected in some way by
the rollover of the two-digit year value to 00. If these systems are unable to
properly recognize date sensitive information when the year changes to 2000,
they could generate erroneous data or cause a system to fail. The Company is
utilizing both internal and external resources to identify, correct or reprogram
and test the systems for Year 2000 compliance. The Company completed an
inventory of its information technology ("IT") systems in December 1997. The
Company is now in the renovation or validation phases of its IT systems and
currently intends to implement these systems by June 1999. The Company is
currently implementing the R3TM Enterprise Resource Planning System from SAP at
an estimated cost of $30 million over the twelve months ending March 1999. The
Company's inventory and assessment of its non-IT systems (facilities and
warehouse-based, including scanners, conveyers and security systems) is expected
to be complete by December 31, 1998, followed by any required renovation. All
validation and implementation of these non-IT systems is expected to be
completed by June 1999. The company expects to spend approximately $2 to $5
million in addition to the SAP implementation to complete its Year 2000 project
upgrade. In addition to upgrading its own systems, the Company has contacted
certain significant customers and suppliers to determine their Year 2000
compliance profile. To date, the Company has not received any information which
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would indicate that the Year 2000 will result in any significant disruption from
them. The Company currently intends to complete joint testing of Year 2000 date
data with its EDI customers and suppliers by June 1999.
All potential risks and uncertainties associated with the Year 2000 issue
cannot be fully and accurately quantified. A contingency plan has been
developed to renovate existing systems if the planned implementation of the SAP
replacement system fails to adequately deal with the Year 2000 issue. Other
contingency plans will be developed if third party data interchange partners
fail compliance testing or if the replacement or renovation of other existing
systems is not on schedule. Although the Company does not believe that any
additional costs or potential loss in revenue will have a material adverse
effect on the Company's business, operating results or financial condition, the
Company is still analyzing its computer systems, and, to the extent they are not
fully year 2000 compliant, there can be no assurance that the costs necessary to
update software or potential systems interruptions would not have a material
adverse effect on the Company's business, operating results and financial
condition. See Item 7.
Control by Principal Stockholders
The directors and executive officers of the Company beneficially own
substantially in excess of a majority of the outstanding shares of common stock,
$.0001 par value, of the Company (the "Common Stock"). As a result, the
directors and executive officers of the Company are able to control the election
of members of the Company's Board of Directors and generally exercise control
over the Company's corporate actions. In particular, Mr. Cameron and his
affiliates exercise a high degree of control over the Company's actions. In
addition, the majority of the outstanding shares of Common Stock owned by
certain employees and former employees, other than Mr. Cameron and his
affiliates, is subject to a Stockholders' Agreement dated as of December 10,
1993, as amended (the "Stockholders' Agreement"). See Items 12 and 13.
ITEM 2. PROPERTIES.
The Company's headquarters are located in Rye Brook, New York, where the
Company leases approximately 31,200 square feet of office space under a lease
which expires on May 30, 2002, approximately 12,100 square feet under a lease
which expires December 31, 1998 and approximately 3,800 square feet under a
lease which expires April 29, 2000. In addition, the Company owns a 255,000
square foot facility in Erlanger, Kentucky which serves as the Company's
integration center. The Company also leases approximately 150,000 square feet of
office space in Mason, Ohio, which houses the Company's NSC, including its CAC,
SolutionLine, dispatch services and training centers. The lease for such
property expires on July 17, 2005. The Company leases approximately 19,200
square feet of office space in Canton, Massachusetts to accommodate the
Company's data processing and credit and collections departments under a lease
which expires June 30, 2003.
The Company leases additional office space for sales, services and support
staff in various states. The Company believes that alternate office space is
available on comparable terms in each location.
ITEM 3. LEGAL PROCEEDINGS.
The Company is engaged in legal actions arising in the ordinary course of
business but is not currently a party to any legal actions which could have a
material adverse effect on its business, financial conditions or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of Fiscal 1998.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
As of June 28, 1998, the Company had outstanding 32,330,866 shares of
Common Stock, $.0001 par value, held by 2,189 stockholders and no shares of
preferred stock. There is no established public trading market for any class of
the Company's equity securities.
The Company has not paid any dividends on any of its capital stock and does
not anticipate that any cash dividends will be declared in the foreseeable
future. The IBMCC Financing Agreement prohibits the payment of dividends.
In Fiscal 1998, the Company issued and sold the following securities (as
adjusted for stock dividends):
(a) In June 1997, the Company issued 41,220 shares of the Company's
Common Stock to non-employee Directors pursuant to the Non-Employee
Share Plan.
(b) In July 1997, the Company issued warrants for purchase of 167,235
shares of Common Stock to IBMCC which are currently exercisable at
$7.55 per share.
(c) In October 1997, the Company issued warrants for purchase of
83,620 shares of Common Stock to IBMCC which are currently exercisable
at $7.55 per share.
(d) In November 1997, the Company issued warrants for purchase of
340,230 shares of Common Stock to Microsoft Corporation pursuant to
the antidilution provisions of a warrant for 375,000 shares already in
place, all of which warrants are currently exercisable at $7.55 per
share.
(e) In December 1997, the Company issued 10,350 shares to Non-employee
Directors pursuant to the Non-employee Director Share Plan.
The issuances of the securities described in Items 5(b), (c) and (d) were
deemed to be exempt from registration under the Securities Act in reliance on
Section 4(2). The issuance of the securities described in Items 5(a) and (e)
were deemed to be exempt from registration under the Securities Act in reliance
on Rule 701 promulgated thereunder. The recipients of securities in each such
transaction represented their intentions to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the share
certificates issued in such transactions. All recipients had access, through
their relationships with the Company, to information about the Company.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements of the Company and the
related notes thereto and Management's Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere herein. The consolidated
financial data as of and for the fiscal years ended July 3, 1994, July 2, 1995,
June 30, 1996, June 29, 1997 and July 28, 1998 have been derived from
consolidated financial statements of the Company, which have been audited by
KPMG Peat Marwick LLP, independent certified public accountants. The
consolidated financial statements as of June 28, 1998 and June 27, 1997 and for
each of the years in the three year period ended June 28, 1998, and the report
thereon, are included elsewhere in this Form 10-K. The information set forth
herein has been adjusted for stock dividends. See Note 7 of Notes to
Consolidated Financial Statements.
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<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------------------------------------------------------
June 28, June 29, June 30, July 2, July 3,
1998 1997 1996 1995 1994 (1)
----------- ----------- ----------- ----------- -------------
(In thousands, except share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenues:
Product revenues.................. $2,006,161 $2,126,973 $1,940,796 $1,342,323 $1,019,010
Service revenues.................. 450,471 353,624 207,511 130,940 75,917
--------- --------- --------- --------- ---------
Total net revenues............. 2,456,632 2,480,597 2,148,307 1,473,263 1,094,927
--------- --------- --------- --------- ---------
Cost of revenues:
Cost of products sold............. 1,800,085 1,922,826 1,764,775 1,236,940 917,939
Cost of services provided......... 341,612 267,554 168,957 110,349 64,300
--------- --------- --------- --------- ---------
Cost of revenues............... 2,141,697 2,190,380 1,933,732 1,347,289 982,239
--------- --------- --------- --------- ---------
Product gross margin................ 206,076 204,147 176,021 105,383 101,071
Services gross margin............... 108,859 86,070 38,554 20,591 11,617
--------- --------- --------- --------- ---------
Total gross margin............. 314,935 290,217 214,575 125,974 112,688
Selling, general and
administrative expenses........... 259,712 251,963 192,312 132,586 100,790
Nonrecurring stock compensation costs -- -- 18,185 -- --
--------- --------- --------- --------- ---------
Income (loss) from operations.. 55,223 38,254 4,078 (6,612) 11,898
Interest expense, net............... 36,663 37,147 29,726 23,151 17,444
Other income........................ -- 462 -- -- --
--------- --------- --------- --------- ---------
Income (loss) before income taxes 18,560 1,569 (25,648) (29,763) (5,546)
Provision (benefit) for income taxes 417 25 28 (509) (2,225)
--- -- -- ---- ------
Net income (loss).............. $ 18,143 $ 1,544 $ (25,676) $ (29,254) $ (3,321)
========== ========== ========== ========== ==========
Common Share Data: (2)
Basic earnings (loss) per share..... $ .56 $ .05 $ (.82) $ (.93) $ (.12)
========== ========== ========== ========== ==========
Diluted earnings (loss) per share... $ .53 $ .05 $ (.82) $ (.93) $ (.12)
========== ========== ========== ========== ==========
Basic weighted average number of
shares of common stock outstanding 32,357,968 32,281,463 31,348,340 31,333,300 28,053,165
Diluted weighted average number of
shares of common stock outstanding 34,269,146 33,572,160 31,348,340 31,333,300 28,053,165
========== ========== ========== ========== ==========
As of
----------------------------------------------------------------------
June 28, June 29, June 30, July 2, July 3,
1998 1997 1996 1995 1994
----------- ----------- ------------ ----------- --------------
(In thousands)
Balance Sheet Data:
Total assets......................... $736,419 $683,590 $590,588 $415,170 $351,777
Total long-term liabilities.......... 53,900 49,486 52,509 37,224 38,425
Stockholders' equity (deficit)....... (19,145) (37,732) (39,515) (31,305) (2,623)
</TABLE>
- --------------------
(1) The statements of operations data for the Company's 1994 fiscal year
presents the results of operations from August 5, 1993, the date the
Company acquired the net assets of the domestic information systems
business of JWPIS.
(2) See Note 1 of Notes to Consolidated Financial Statements for an
explanation of the calculation of weighted average number of shares
outstanding.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
This section contains trend analysis and other forward-looking statements
based on current expectations. Actual results may differ materially, due to a
number of factors including those set forth in the section entitled "Business
Factors" contained in Item 1.
-17-
<PAGE>
Overview
ENTEX is a leading provider of integrated PC solutions to meet the
distributed information technology systems and end-user support requirements of
Fortune 1000 companies and other large enterprises. ENTEX offers its customers a
single source for integrated PC management solutions, including sophisticated PC
infrastructure procurement and configuration, outsourcing and desktop migration
and integration services.
During Fiscal 1996 and 1997, the Company completed several acquisitions to
improve its ability to meet customer demands for expanded service offerings,
including (i) Random Access, Inc. ("Random Access"), a provider of information
technology solutions through the sale of microcomputers and technical services
to corporate and institutional clients in the western United States, and (ii)
FCP Technologies, Inc. ("FCP"), a systems integrator specializing in network
integration, migration and consulting services. Each acquisition was accounted
for as a purchase and the results of each have been included in the consolidated
financial statements since the date of each acquisition. See Note 2 of Notes to
Consolidated Financial Statements.
From its inception, the Company has sold customized PC-based systems to
large corporate clients through its PC Acquisition Services line of business. In
Fiscal 1995, the Company made a strategic decision to accelerate the development
of service solutions complementary to its product solutions. The Company's goal
is to increase its proportion of service revenues, which are typically
characterized by higher gross margins than those obtainable from product sales.
For Fiscal 1998, 1997 and 1996, product sales accounted for 81.7%, 85.7% and
90.3% of total net revenues and 65.4%, 70.3% and 82.0% of total gross profit,
respectively, while services accounted for 18.3%, 14.3% and 9.7% of total net
revenues and 34.6%, 29.7% and 18.0% of total gross profit, respectively.
Results of Operations
The following table sets forth the percentage of total net revenues
represented by the items in the Company's statements of operations for the
period indicated:
<TABLE>
<CAPTION>
Fiscal Year Ended
----------------------------------------------
June 28, June 29, June 30,
1998 1997 1996
----------- ------------- -------------
<S> <C> <C> <C>
Net revenues:
Product revenues............................... 81.7% 85.7% 90.3%
Service revenues............................... 18.3 14.3 9.7
----------- ------------- -------------
Total net revenues.......................... 100.0 100.0 100.0
Cost of revenues................................. 87.2 88.3 90.0
----------- ------------- -------------
Gross margin (1)................................. 12.8 11.7 10.0
Selling, general and administrative expenses..... 10.6 10.2 9.0
Nonrecurring stock compensation costs............ -- -- 0.8
----------- ------------- -------------
Income from operations.......................... 2.2 1.5 0.2
Interest expense, net............................ 1.5 1.4 1.4
Income (loss) before income taxes................ 0.7 0.1 (1.2)
Provision (benefit) for income taxes............. -- -- --
----------- ------------- -------------
Net income (loss)................................ 0.7% 0.1% (1.2)%
</TABLE>
-18-
<PAGE>
- -------------
(1) Product gross margin as a percentage of product revenues and service
gross margin as a percentage of service revenue for each period was as
follows:
Fiscal Year Ended
---------------------------------------
June 28, June 29, June 30,
1998 1997 1996
---------- ----------- ---------
Product gross margin....... 10.3% 9.6% 9.1%
Services gross margin...... 24.2% 24.3% 18.6%
Fiscal 1998 Compared to Fiscal 1997
The Company's net income improved in Fiscal 1998 to $18.1 million compared
to net income of $1.5 million in Fiscal 1997. The improvement was primarily a
result of growth in the services business.
Product revenues. Product revenues were $2,006.2 million in Fiscal 1998 as
compared to $2,127.0 million in Fiscal 1997, a decrease of $120.8 million or
5.7%. While the Company experienced overall unit growth in sales of desktops,
laptops and server units during Fiscal 1998, the revenue decline reflects lower
average sales prices due to manufacturers' price reductions.
Service revenues. Service revenues were $450.5 million for Fiscal 1998 as
compared to $353.6 million for Fiscal 1997, an increase of $96.9 million or
27.4%. Service revenues as a percentage of total net revenues increased to 18.3%
for Fiscal 1998 as compared to 14.3% in Fiscal 1997. These increases reflect
increase in demand from existing customers and the addition of new large
accounts. The Company is focused on continuing to increase service revenue.
Gross margins. Total gross margins increased to 12.8% in Fiscal 1998 as
compared to 11.7% in Fiscal 1997. Product gross margin as a percentage of
product revenues increased to 10.3% or $206.1 million in Fiscal 1998 as compared
to 9.6% or $204.1 million in Fiscal 1997. These increases reflect the Company's
efforts to improve product margins through improved controls over price
protection arrangements and vendor allowances and the Company's participation in
certain manufacturers' programs designed to increase sales of specific products.
Future product margins may be adversely influenced by manufacturers' pricing
strategies and increased competition. Service margin percentage remained
essentially flat at 24.2% in Fiscal 1998 and 24.3% in Fiscal 1997.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased slightly to $259.7 million in Fiscal 1998 as
compared to $252.0 million in Fiscal 1997. Selling, general, and administrative
expenses as a percentage of total revenues increased to 10.6% in Fiscal 1998
from 10.2% in Fiscal 1997, reflecting increased investments in training and
field operations to support service revenue growth.
Income from operations. Income from operations was $55.2 million in Fiscal
1998 as compared to $38.3 million in Fiscal 1997, an increase of $17.0 million.
The increase reflects growth in the higher margin service business and
improvements in product gross margins, while containing selling, general and
administrative expenses to support the service business expansion.
Interest expense, net. Net interest expense decreased slightly to $36.7
million in Fiscal 1998 from $37.1 million in Fiscal 1997, a decrease of $484
thousand or 1.3%. The decrease was driven by reductions in debt levels.
Provisions for income taxes. The Company utilized net operating loss
carryforwards to offset federal income tax requirements in Fiscal 1998. While
the Company considered the improved operations over the course of fiscal year
1997 and 1998, the Company did not believe that it had sufficient reason to
conclude that it was more
-19-
<PAGE>
likely than not that the deferred tax asset would be realized given softness in
the product business. The Company will reevaluate the foregoing premise in
connection with future periods.
Net income. As a result of the factors mentioned above, net income in
Fiscal 1998 was $18.1 million as compared to net income of $1.5 million in
Fiscal 1997.
Fiscal 1997 Compared to Fiscal 1996
The Company's net income improved in Fiscal 1997 to $1.5 million compared
to a net loss of $25.7 million in Fiscal 1996. The improvement resulted from an
increase in product gross margins attributable to improved controls over vendor
programs, an increased percentage of higher margin services in the revenue base
and the effect of a non-recurring stock compensation charge in 1996.
Product revenues. Product revenues were $2,127.0 billion in Fiscal 1997 as
compared to $1,940.8 billion in Fiscal 1996, an increase of $186.2 million or
9.6%. The increase was primarily due to an increase of $159 million in equipment
sales and a $27 million increase in software sales. The increase in equipment
sales reflected the sale of more desktops, laptops and server units to existing
customers as well as new customers, although at a lower average sales price due
to manufacturers' price reductions.
Service revenues. Service revenues were $353.6 million in Fiscal 1997 as
compared to $207.5 million in Fiscal 1996, an increase of $146.1 million or
70.4%. The increase was due to higher professional service and outsourcing
revenues which were favorably affected by the acquisition of FCP, increased
sales to existing customers and the addition of new customers. An increase in
unit volume of products sold, such as desktops and laptops, also contributed to
the growth in service revenues which the Company believes will continue to
create demand for services such as configuration and installation. The Company's
emphasis on growing service revenues was reflected in the growth of service
revenues as a percentage of total net revenues from 9.7% in Fiscal 1996 to 14.3%
in Fiscal 1997.
Gross margins. Total gross margins increased to 11.7% in Fiscal 1997 from
10.0% in Fiscal 1996, primarily due to the increased product and service
revenues, improved cost controls and increased service revenues in the mix of
products sold. Product gross margins were 9.6% in Fiscal 1997 as compared to
9.1% in Fiscal 1996. The increase in product gross margins was primarily due to
the Company's efforts to improve controls over price protection arrangements and
vendor allowances and to a lesser extent the Company's involvement in certain
manufacturers' programs designed to increase sales of specific products. The
increase was partially offset by competitive pricing strategies. Service gross
margins increased to 24.3% in Fiscal 1997 from 18.6% in Fiscal 1996 as a result
of pricing changes, a greater mix of higher margin professional services and the
Company's ability to improve utilization of its service personnel.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $252.0 million in Fiscal 1997 as compared to $192.3
million in Fiscal 1996, an increase of $59.7 million or 31.1%. The increase was
in support of the Company's growth in services including investments in
enterprise-wide technology infrastructure to support operations.
Income from Operations. Income from operations was $38.3 million in Fiscal
1997 as compared to $4.1 million in Fiscal 1996, an increase of $34.2 million.
This increase was due to overall improved profit margins and the effect of
nonrecurring stock compensation costs of $18.2 million which were recorded in
Fiscal 1996.
Interest expense, net. Net interest expense was $37.1 million in Fiscal
1997 as compared to $29.7 million in Fiscal 1996, an increase of $7.4 million or
25.0%. The increase was due to increased interest rates charged to the Company
by lenders and increased financing to support revenue growth.
-20-
<PAGE>
Provisions for income taxes. The Company utilized net operating loss
carryforwards to offset federal income tax requirements for the fiscal years
1997 and 1996. Although the Company recognized net income for Fiscal 1997, based
on the history of negative pretax earnings, the Company determined that it was
more likely than not that the deferred tax asset would not be realized.
Net income. As a result of the factors mentioned above, net income was $1.5
million in Fiscal 1997 as compared to a net loss of $25.7 million in Fiscal
1996.
Liquidity and Capital Resources
The Company has historically financed its operations with borrowings under
various credit lines. Cash provided by (used in) operating activities was $54.8
million, $(26.1) million and $(74.7) million in fiscal years 1998, 1997 and
1996, respectively. Cash provided by operations during Fiscal 1998 resulted
primarily from net income of $18.1 million, depreciation and other non-cash
charges to income, and from changes in operating assets and liabilities. Cash
used in operations in fiscal years 1997 and 1996, respectively, increased due to
greater working capital requirements resulting from higher revenues.
Cash used in investing activities was $19.7 million, $27.8 million and
$33.1 million in fiscal years 1998, 1997 and 1996, respectively. Cash was used
during these periods for capital expenditures and for acquisitions.
Cash provided from (used in) financing activities was $(36.7) million,
$57.2 million and $108.3 million in fiscal years 1998, 1997 and 1996,
respectively. The fluctuations in cash from financing activities during these
periods resulted primarily from changes in the Company's borrowings to support
the business growth and availability of cash from operations.
As of June 28, 1998, the Company's primary source of liquidity consisted of
various financing provided by IBMCC and an asset based financing facility with
FINOVA Capital Corporation ("FINOVA"). The IBMCC Financing Agreement provides
for borrowings under the IBMCC Working Capital Line of Credit of $525 million,
the interest bearing portion of which was $290.3 million as of June 28, 1998.
The amount of available borrowings under the IBMCC Financing Agreement may be
increased for higher seasonal purchasing requirements, and may be reduced or
terminated by IBMCC upon 60 days prior written notice. Amounts outstanding under
the IBMCC Working Capital Line of Credit bear interest at the prime rate plus
.50% (9.0% at June 28, 1998). Borrowings under the IBMCC Financing Agreement are
secured by the Company's assets, including certain accounts receivable, certain
inventories and other assets. The agreement is subject to annual renewal. As of
July 29, 1998, the Company renegotiated this agreement. This new agreement
resulted in a significant reduction in the financing rate from prime plus 0.50%
(9.0% at June 28, 1998) to LIBOR plus 2.10% (7.75% at July 29, 1998).
In connection with the Company's acquisition of Random Access in September
1995, the IBMCC Financing Agreement was amended to provide for the IBMCC
Long-Term Loan in the original principal amount of $20 million. The IBMCC
Financing Agreement was further amended in December 1996 and July 1997 to
provide for the Short-Term Loan in the original principal amount of $55 million
and the Special Working Capital Advance in the original principal amount of $20
million. The Short-Term Loan was repaid in full during Fiscal 1998. In addition,
$10.0 million of the $20.0 million Special Working Capital Advance has been paid
down. Amounts outstanding under the IBMCC Long-Term Loan and Special Working
Capital Advance bear interest at the prime rate plus 2.50% (11.0% at June 28,
1998). At June 28, 1998, $17.3 million of principal was outstanding under the
IBMCC Long-Term Loan, and $10.0 million of principal was outstanding under the
Special Working Capital Advance.
As of June 28, 1998, the Company had $110 million available for borrowing
under its inventory line of credit with FINOVA. The line of credit is secured by
the Company's inventory financed by FINOVA. At June 28, 1998, the principal
amount outstanding under this line of credit was $86.4 million. Under the terms
of the agreement with FINOVA, the Company pays no interest on this borrowing.
-21-
<PAGE>
The IBMCC Financing Agreement provides that if Dort A. Cameron III ceases
to own and/or control at least 35% of the issued and outstanding capital stock
of the Company, the Company will be deemed to be in default under the IBMCC
Financing Agreement. In addition, the IBMCC Financing Agreement contains
restrictive covenants which require the Company to, among other things, (i)
maintain a ratio of current assets to current liabilities of at least 0.83 to
1.00; (ii) maintain the total liabilities minus the aggregate outstanding
principal amount of certain indebtedness during each fiscal year at an amount no
greater than $800 million; (iii) not permit the sum of tangible net worth plus
the aggregate outstanding principal amount of certain indebtedness to be less
than $60 million for the fiscal quarter ended December 1997, $48.2 million for
the fiscal quarter ended March 1998 and $38.7 million for all periods
thereafter; (iv) not permit the ratio of EBIT for interest expense for the
period of two consecutive fiscal quarters then ended to be less than 1.40 to
1.00 for the fiscal quarter ended December 1997, 1.60 to 1.00 for the fiscal
quarter ended March 1998 and 1.70 to 1.00 for each fiscal quarter thereafter;
(v) not permit the consolidated net income for the fiscal quarter ended December
1997 to be less than 0.70% of sales for such fiscal quarter and for any fiscal
quarter thereafter to be less than 1.00% of sales for such fiscal quarter; (vi)
not permit the aggregate amount of capital expenditures made in any fiscal year
to exceed $30 million net of dispositions related to such capital expenditures;
and (vii) maintain working capital deficit of no more than ($100.5) million for
the fiscal quarter ended December 1997, ($92.3) million for the fiscal quarter
ended March 1998 and at least ($83.8) million for periods thereafter. As of June
28, 1998, the Company is in compliance with these restrictive covenants except
for (iv) and (v) for which IBMCC has waived compliance.
In addition, the IBMCC Financing Agreement prohibits the Company from
paying cash dividends on Common Stock.
On July 29, 1998, the Company completed its offering of $100 million
aggregate principal amount of its 12 1/2% Senior Subordinated Notes due 2006
(see Note 10 to the Company's consolidated financial statements).
Capital expenditures totaled $19.7 million during fiscal year ended June
28, 1998 and approximately $5 million was committed under existing purchase
orders as of June 28, 1998. The Company believes its current cash balances and
its available credit facilities will be sufficient to meet its anticipated cash
needs for capital expenditures for the next 12 months. The Company intends to
continue to finance a significant portion of its working capital needs through
credit facilities. The Company believes that it may seek to raise additional
funds through public or private equity or debt financing or from other sources
to support the future growth of the business. However, there can be no assurance
that the Company will be able to raise such additional funding.
Year 2000 Compliance
The Company uses a significant number of computer software programs and
operating systems in its internal operations, including applications used in
financial business systems and various administration functions. As the Year
2000 approaches, each of these computer systems will be affected in some way by
the rollover of the two-digit year value to 00. If these systems are unable to
properly recognize date sensitive information when the year changes to 2000,
they could generate erroneous data or cause a system to fail. The Company is
utilizing both internal and external resources to identify, correct or reprogram
and test the systems for Year 2000 compliance.
ENTEX classifies its Year 2000 project into five phases: inventory,
assessment, renovation, validation and implementation. Inventory is the process
in which all electronic/computer components are defined for all systems (IT and
non-IT). Assessment is the process in which all components are classified as
either compliant or non-compliant. Renovation is the process in which a system
is upgraded, replaced or retired. Validation is the process in which compliant
systems are tested within the Company's infrastructure to validate that either
the initial compliant assessment is correct or the upgrade or replacement from
the renovation phase is compliant within the Company's infrastructure.
Implementation is the process in which a compliant system is installed into the
Company's production environment and is utilized to support business operations.
-22-
<PAGE>
The Company completed an inventory of its IT systems in December 1997. More
than 30 systems were identified, prioritized according to criticality to
business operations, and assessed for current compliance status. Based on the
status, the Company has scheduled each system for either renovation or
validation. The Company is now in the renovation or validation phases of its IT
systems and currently intends to implement these systems by June 1999. The
Company is currently implementing the R3TM Enterprise Resource Planning System
from SAP at an estimated cost of $30 million over the twelve months ending March
1999. As of June 28, 1998, the Company has spent approximately $8 million. The
Company's inventory and assessment of its non-IT systems (facilities and
warehouse-based, including scanners, conveyers and security systems) is expected
to be complete by December 31, 1998, followed by any required renovation. All
validation and implementation of these non-IT systems is expected to be
completed by June 1999. The Company expects to spend approximately $2 to $5
million in addition to the SAP implementation to complete its Year 2000 project
upgrade.
In addition to upgrading its own systems, the Company has contacted certain
significant customers and suppliers to determine their Year 2000 compliance
profile. To date, the Company has not received any information which would
indicate that the Year 2000 will result in any significant disruption from them.
The Company currently intends to complete joint testing of Year 2000 date data
with its EDI customers and suppliers by June 1999.
All potential risks and uncertainties associated with the Year 2000 issue
can not be fully and accurately quantified. A contingency plan has been
developed to renovate existing systems if the planned implementation of the SAP
replacement system fails to adequately deal with the Year 2000 issue. Other
contingency plans will be developed if third party data interchange partners
fail compliance testing or if the replacement or renovation of other existing
systems is not on schedule. Although the Company does not believe that any
additional costs or potential loss in revenue will have a material adverse
effect on the Company's business, operating results or financial condition, the
Company is still analyzing its computer systems, and, to the extent they are not
fully year 2000 compliant, there can be no assurance that the costs necessary to
update software or potential systems interruptions would not have a material
adverse effect on the Company's business, operating results and financial
condition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The Company is exposed to interest rate risk primarily through its asset
based financing agreement. The Company utilizes these borrowings to meet its
working capital needs. As of June 28, 1998, the Company had borrowings of
approximately $290,328,000 outstanding which have a variable interest rate of
7.75%. Using a yield to maturity analysis and assuming an increase in interest
rate on these borrowings of 25 basis points, future cash flows would be effected
by $726,000. The interest rate variability on all other debt would not have a
material adverse effect on the Company's financial statements.
Currently, the Company does not enter into financial instruments for
trading or other speculative purposes or to manage interest rate exposure.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 14 for an index of the Company's Consolidated Financial Statements
and related schedule filed herewith.
Quarterly Results of Operations
The following table sets forth certain unaudited quarterly statements of
operations data for the eight quarters ended June 28, 1998, as well as such data
expressed as a percentage of total net revenues. The unaudited data has been
prepared on the same basis as the audited financial statements appearing
elsewhere herein, and include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of such information
-23-
<PAGE>
for the periods presented. Such statement of operations data should be read in
conjunction with the consolidated financial statements of the Company and the
related notes thereto appearing elsewhere herein. The operating results for any
quarter are not indicative of the operating results for any future period.
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------------------------------------------------------
June 28, March 29, December 28, September 28, June 29, March 30, December 29, September 29,
1998 1998 1997 1997 1997 1997 1996 1996
--------- --------- ------------ ------------- -------- --------- ------------ -------------
(In thousands, except per share data)
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues:
Product revenues.. $ 482,198 $ 479,267 $543,758 $500,938 $542,032 $506,370 $552,609 $525,962
Service revenues.. 119,381 114,567 110,622 105,901 104,356 92,824 84,770 71,674
------- ------- ------- ------- ------- ------ ------ ------
Total net
revenue.......... 601,579 593,834 654,380 606,839 646,388 599,194 637,379 597,636
------- ------- ------- ------- ------- ------- ------- -------
Cost of revenues:
Cost of
products sold... 434,018 428,968 486,318 450,781 482,841 456,088 501,181 482,716
Cost of services
provided........ 87,488 87,299 86,953 79,872 78,844 71,161 63,510 54,039
------ ------ ------ ------ ------ ------ ------ ------
Cost of revenues. 521,506 516,267 573,271 530,653 561,685 527,249 564,691 536,755
------- ------- ------- ------- ------- ------- ------- -------
Product gross
margin.......... 48,180 50,299 57,440 50,157 59,191 50,282 51,428 43,246
Services gross
margin.......... 31,893 27,268 23,669 26,029 25,512 21,663 21,260 17,635
------ ------ ------ ------ ------ ------ ------ ------
Total gross
margin.......... 80,073 77,567 81,109 76,186 84,703 71,945 72,688 60,881
Selling, general and
administrative
expenses........ 70,579 63,995 63,323 61,815 64,698 61,811 66,907 58,547
------ ------ ------ ------ ------ ------ ------ ------
Income from
operations...... 9,494 13,572 17,786 14,371 20,005 10,134 5,781 2,334
Interest
expense, net.... 8,965 8,702 9,327 9,669 9,839 9,418 9,758 8,132
Other income...... -- -- -- -- 462 -- -- --
------ ------- -------- -------- -------- -------- -------- --------
Income (loss)
before
income taxes... 529 4,870 8,459 4,702 10,628 716 (3,977) (5,798)
Provision
(benefit) for
income taxes.... 405 4 6 2 1 9 5 10
------ -------- ------- ------- ------- ------- ------- -------
Net income (loss) $ 124 $ 4,866 $ 8,453 $ 4,700 $ 10,627 $ 707 $ (3,982) $ (5,808)
====== ======== ======= ======= ======= ======= ======= =======
Basic earnings
(loss) per
share........... $ -- $ .15 $ .26 $ .15 $ .33 $ .02 $ (.12) $ (.18)
====== ======== ======= ======= ======= ======= ======= =======
Diluted earnings
(loss) per share $ -- $ .14 $ .25 $ .14 $ .33 $ .02 $ (.12) $ (.18)
====== ======== ======= ======= ======= ======= ======= =======
Three Months Ended
--------------------------------------------------------------------------------------------------------
June 28, March 29, December 28, September 28, June 29, March 30, December 29, September 29,
1998 1998 1997 1997 1997 1997 1996 1996
--------- --------- ------------ ------------- -------- --------- ------------ -------------
Net revenues:
Product
revenues....... 80.2% 80.7% 83.1% 82.5% 83.9% 84.5% 86.7% 88.0%
Service
revenues....... 19.8 19.3 16.9 17.5 16.1 15.5 13.3 12.0
------ ------- -------- -------- -------- -------- -------- --------
Total net
revenues...... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues.. 86.7 86.9 87.6 87.4 86.9 88.0 88.6 89.8
------ ------- -------- -------- -------- -------- -------- --------
Gross margin(1)... 13.3 13.1 12.4 12.6 13.1 12.0 11.4 10.2
Selling, general
and administrative
expenses........ 11.7 10.8 9.7 10.2 10.0 10.3 10.5 9.8
------ ------- -------- -------- -------- -------- -------- --------
Income from
operations...... 1.6 2.3 2.7 2.4 3.1 1.7 0.9 0.4
Interest
expense, net.... 1.6 1.5 1.4 1.6 1.5 1.6 1.5 1.4
Other income...... -- -- -- -- -- -- -- --
------ ------- -------- -------- -------- -------- -------- --------
Income (loss)
before income
taxes........... -- 0.8 1.3 0.8 1.6 0.1 (0.6) (1.0)
Provision
(benefit) for
income taxes.... -- -- -- -- -- -- -- --
------ ------- -------- -------- -------- -------- -------- --------
Net income
(loss).......... --% 0.8% 1.3% 0.8% 1.6% 0.1% (0.6)% (1.0)%
====== ======= ======== ======== ======== ======== ======== =======
</TABLE>
- -------------
(1) Product gross margin as a percentage of product revenues and services
gross margin as a percentage of service revenue for each period were as
follows:
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------------------------------------------------------------
June 28, March 29, December 28, September 28, June 29, March 30, December 29, September 29,
1998 1998 1997 1997 1997 1997 1996 1996
---------- --------- ------------ ------------- -------- --------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Product gross margin 10.0% 10.5% 10.6% 10.0% 10.9% 9.9% 9.3% 8.2%
Services gross margin 26.7% 23.8% 21.4% 24.6% 24.4% 23.3% 25.1% 24.6%
</TABLE>
-24-
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The executive officers, directors and other key employees of the Company,
and their ages and positions as of June 28, 1998, are as follows:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Dort A. Cameron III........................ 53 Chairman of the Board of Directors
John A. McKenna, Jr........................ 43 President, Chief Executive Officer and Director
Kenneth A. Ghazey.......................... 42 Executive Vice President, Finance and
Administration, Chief Financial Officer and Director
Dale H. Allardyce.......................... 48 Executive Vice President, Operations
David J. Csira (1)......................... 41 Executive Vice President, Field Operations
Michael G. Archambault..................... 46 Senior Vice President, Treasurer
Richard P. Bannon.......................... 52 Senior Vice President, Controller
Lynne A. Burgess........................... 49 Senior Vice President, General Counsel
John F. Lyons.............................. 45 Senior Vice President, Sales & Marketing
Mark G. Mindell............................ 47 Senior Vice President, Human Resources
Richard Nathanson.......................... 41 Senior Vice President, Services
William K. Todd............................ 53 Senior Vice President, Manufacturing and Distribution
R. Randolph Devening (2)................... 56 Director
Linwood A. (Chip) Lacy, Jr. (2)............ 53 Director
Frank W. Miller (2)........................ 53 Director
</TABLE>
- -------------
(1) Mr. Csira resigned in May 1998.
(2) Member of the Audit and Compensation Committees.
Mr. Cameron co-founded the Company in August 1993, and has served as a
director and Chairman of the Board of the Company since its formation. From
October 1988 to the present, Mr. Cameron has served as the managing general
partner of EBD, L.P., the general partner of The Airlie Group, L.P., a private
investment limited partnership; from June 1984 to the present, as the general
partner of BMA, the general partner of Investment Limited Partnership, a private
investment limited partnership; and from December 1995 to the present, as
managing member of Airlie Enterprises LLC, a private consulting company ("Airlie
Enterprises"). Mr. Cameron is currently serving as a director of TLC Beatrice
Company. Mr. Cameron holds a B.A. from Middlebury College and an M.B.A. from
Boston University. In 1983, Mr. Cameron was diagnosed with multiple sclerosis.
Mr. McKenna co-founded the Company in August 1993, and has served as a
Director and as President of the Company since its inception and as Chief
Executive Officer since April 1996. From March 1989 to March 1993, Mr. McKenna
held various positions with JWPIS, including Executive Vice President of Sales
and Marketing, President of the Integration Services Division, and most recently
as Senior Executive Vice President. Mr. McKenna holds a B.A. from Trinity
College.
-25-
<PAGE>
Mr. Ghazey joined the Company as Executive Vice President, Finance and
Administration, Chief Financial Officer and Director in January 1997. Mr. Ghazey
served as President, Chief Operating Officer and a Director for Darling
International, a publicly-owned food waste recycler, from 1993 to December 1996,
and as Executive Vice President, Chief Financial Officer and Treasurer of
Darling International from 1990 to 1992. Mr. Ghazey is a Certified Public
Accountant and holds a B.S. in accounting from the University of Vermont.
Mr. Allardyce joined the Company in February 1995 as Executive Vice
President, Operations. From January 1993 to February 1995, Mr. Allardyce served
as Senior Vice President of the TSI Business Unit at THORN Americas, Inc., a
consumer rental company. From March 1982 to December 1992, Mr. Allardyce was
employed by The Southland Corporation, an operator of convenience stores, most
recently as Vice President of Distribution, Manufacturing and Procurement. Mr.
Allardyce holds a B.B.A. in Industrial Management from the University of Texas.
Mr. Archambault joined the Company in May 1997 as Vice President and
Treasurer. From September 1989 to 1997, Mr. Archambault served as Vice President
of Finance and Investor Relations for Symbol Technologies, Inc., a manufacturer
of bar code data capture systems worldwide. From 1988 to September 1989, Mr.
Archambault was Vice President of Finance at American Savings Bank. From 1980 to
1988, Mr. Archambault held various Accounting and Treasury positions with
Combustion Engineering, Inc., most recently as Director of Investor Relations.
Mr. Archambault is a Certified Public Accountant and holds an M.S. in Accounting
and a B.S. in Finance from Northeastern University.
Mr. Bannon joined the Company in December, 1996 as VP and Controller and
has served as Senior Vice President and Controller since January, 1998. From
January 1968 to December 1996, Mr. Bannon held various accounting and finance
positions at IBM. Most recently, Mr. Bannon served as Director of Accounting
Services. While at IBM, Mr. Bannon also held the positions of Director, External
Financial Reporting; Controller, Storage Systems Division; Controller, Data
Systems Division and Functional Manager Positions in Corporate Consolidation
Accounting and Financial Planning. Mr. Bannon holds a B.B.A. from Iona College.
Ms. Burgess joined the Company in May 1994 as Vice President and General
Counsel and has served as Senior Vice President and General Counsel since
January 1998. From October 1992 to May 1994, Ms. Burgess was Of Counsel at the
law firm of Collier, Shannon, Rill and Scott, specializing in commercial and
antitrust matters. From August 1978 to October 1991, Ms. Burgess was legal
counsel for various business units within American National Can Company and
served as Assistant General Counsel at American National Can Company from
January 1987 to October 1991. Ms. Burgess holds a B.A. from William Smith
College and a J.D. from Fordham University School of Law.
Mr. Lyons joined the Company in April 1994 as Vice President, Marketing and
has served as Senior Vice President, Sales and Marketing since October 1996.
From August 1993 until March 1994, Mr. Lyons was Vice President, Sales and
Marketing for Carrabassett Spring Water. From July 1976 to July 1993, Mr. Lyons
held various sales and marketing management positions at IBM. Mr. Lyons holds a
B.S. in marketing from Syracuse University.
Dr. Mindell joined the Company in March 1998 as Senior Vice President,
Human Resources. Immediately prior to joining the Company, he served as Vice
President & CIO, Organization Networking for Wonderware Corporation, a plant
floor automation software development company. From 1991 to 1996, Dr. Mindell
held the positions of Director, Information Services & Business Reengineering
and Director, Organization Planning & Development for Siemens Corporation, and,
from 1985 to 1991, was President and CEO of Orecon Associates, a human
resources, systems development and business reengineering consulting
corporation. Dr. Mindell holds B.A. degrees in Communications and Political
Science from Northern Illinois University, an M.A. in Organizational
Communication from Central Michigan University and a Ph.D. in Organization
Behavior from Kent State University.
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<PAGE>
Mr. Nathanson joined the Company in July 1996 as Senior Vice President,
Network and Professional Services in connection with the Company's acquisition
of FCP, a network integration and professional services consulting firm and has
served as Senior Vice President, Services since April 1997. From February 1984
to July 1996, Mr. Nathanson served as President and Chief Executive Officer of
FCP.
Mr. Todd joined the Company as Director of Distribution in August 1993 in
connection with the acquisition of JWPIS. Mr. Todd served as Vice President of
Logistics from July 1995 to January 1998, and since January 1998, has served as
Senior Vice President of Manufacturing and Distribution at the Company's
Integration Center in Erlanger, Kentucky. From September 1992 to August 1993,
Mr. Todd was Director of Distribution for JWPIS. From September 1982 to August
1992, Mr. Todd held various positions at Wang Laboratories, most recently as
Director of Manufacturing, including two years in Limerick, Ireland. Mr. Todd
holds a B.B.S. in Business Management from New Hampshire College.
Mr. Devening has served as a Director of the Company since June 1996. Since
August 1994, Mr. Devening has served as President and Chief Executive Officer of
Foodbrands America, Inc., a diversified food manufacturing company. From April
1993 to July 1994, Mr. Devening served as Vice Chairman and Chief Financial
Officer of Fleming Companies, Inc., a food distribution and marketing company.
From July 1989 to March 1993, Mr. Devening served as Executive Vice President
and Chief Financial Officer at Fleming Companies, Inc. Mr. Devening holds a B.A.
from Stanford University and an M.B.A. from the Harvard Graduate School of
Business. Mr. Devening serves as a director of Hancock Fabrics Inc. and Hussmann
Corporation, and is a director nominee of Factory Mutual Insurance Company.
Mr. Lacy has served as a Director of the Company since June 1996. From July
1985 until May 1996, Mr. Lacy served as the Chief Executive Officer and Chairman
of Ingram Micro Inc. and its predecessor company Micro D Inc., a distributor of
microcomputer products. From December 1993 to January 1996, Mr. Lacy served as
President of Ingram Industries, the holding company of Ingram Micro Inc. From
June 1995 to April 1996, he served as the Chief Executive Officer of Ingram
Industries. From October 1996 to October 1997, Mr. Lacy served as President and
Chief Executive Officer of MicroWarehouse, a direct marketer of computer
products. Mr. Lacy holds a B.S. in Chemical Engineering and an M.B.A. from the
University of Virginia. Mr. Lacy serves as a director of Earthlink Network, Inc.
Mr. Miller has served as a Director of the Company since September 1993.
Since January 1995, Mr. Miller has served as President of Miller Associates,
Inc., a management consulting firm. From February 1990 to December 1994, Mr.
Miller served as the Vice Chairman and Chief Executive Officer of Darling
International, a publicly owned food waste recycling company. Mr. Miller holds a
B.S. in Industrial Management from the Lowell Technological Institute. Mr.
Miller serves on the boards of directors of several private companies. Mr.
Miller served as a director of Sound Advice, Inc. which sought bankruptcy
protection under Chapter 11 of the Bankruptcy Code in Fiscal 1998.
The Company currently has six directors. All directors serve on the Board
of Directors of the Company until their successors are elected and qualified.
There are no family relationships among any of the directors or executive
officers of the Company. The Company's executive officers serve at the
discretion of the Board of Directors.
In June 1996, the Board of Directors established an Audit Committee and a
Compensation Committee. The Audit Committee is currently comprised of Messrs.
Devening, Lacy and Miller and is chaired by Mr. Miller. The Audit Committee
oversees the activities of the Company's independent auditors and reviews with
the independent auditors the Company's internal accounting procedures and
controls. The Compensation Committee is currently comprised of Messrs. Devening,
Lacy and Miller and is chaired by Mr. Devening. The Compensation Committee makes
recommendations to the Board of Directors with respect to general compensation
and benefit levels and other related matters, reviews and approves the
compensation and benefits for the Company's executive officers, admin-
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<PAGE>
isters the Company's stock purchase and stock option plans and makes
recommendations to the Board of Directors regarding such matters.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
All reports required to be filed pursuant to Section 16(a) of the Exchange
Act were timely filed with the exception that the Annual Statement of Changes in
Beneficial Ownership on Form 5 for each of Michael G. Archambault, R. Randolph
Devening, Linwood A. Lacy, Jr. and Frank W. Miller were filed two days after the
required filing date.
ITEM 11. EXECUTIVE COMPENSATION.
Executive Officer Compensation
The following table sets forth information concerning the compensation paid
by the Company during the Company's fiscal years ending June 28, 1998 and June
29, 1997 to the Company's Chief Executive Officer, and each of the Company's
four other most highly compensated executive officers (collectively, the "Named
Officers"):
<TABLE>
<CAPTION>
Summary Compensation Table
Long-term
Compensation
Annual Compensation Award
Securities All Other
Name and Principal Fiscal Underlying Compensation
Position Year Salary ($) Bonus ($) Options (#)(1) ($)
- ------------------ ------ ---------- ---------- -------------- ------------
<S> <C> <C> <C> <C> <C>
John A. McKenna, Jr......................... 1998 373,461 127,750 30,000 17,533
President and Chief Executive Officer 1997 350,000 150,171 -- 21,333
Kenneth Ghazey (2).......................... 1998 298,462 100,375 -- 12,299
Executive Vice President, Finance and 1997 126,923 -- 880,000 5,195
Administration, and Chief Financial
Officer
Dale H. Allardyce........................... 1998 260,769 107,035 75,000 2,396
Executive Vice President, Operations 1997 224,423 155,371 -- 5,462
David J. Csira (3).......................... 1998 230,000 118,844 -- 52,032 (4)
Executive Vice President, Field 1997 222,846 116,877 66,665 4,752
Operations
John F. Lyons............................... 1998 199,520 88,750 25,000 2,933
Senior Vice President, Sales and 1997 174,462 101,516 -- 4,175
Marketing
Richard Nathanson........................... 1998 193,800 117,910 -- 344
Senior Vice President, Services 1997 258,048 193,787 (5) 187,395 2,041
</TABLE>
- -------------
(1) The stock options listed in the table represent options to purchase Common
Stock of the Company under the Company's 1996 Performance Incentive Plan
("PIP") or the Company's 1996 Stock Option Plan (the "EIS Plan") and have
been adjusted for stock dividends.
(2) Mr. Ghazey was appointed Executive Vice President, Finance and
Administration and Chief Financial Officer in January 1997.
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<PAGE>
(3) Mr. Csira resigned in May 1998.
(4) Includes $49,232 paid to Mr. Csira pursuant to a Severance and Release
Agreement, including payment for 120 hours of accrued vacation time.
(5) Includes $120,787 bonus payable by FCP at the time of the acquisition and
paid by the Company after the closing.
Option Grants In Last Fiscal Year
The following table sets forth for each of the Named Officers who received
options granted during Fiscal 1998 certain information concerning such grants.
<TABLE>
<CAPTION>
Individual Grants
Percent of
Number of Total Potential Realizable Value
Securities Options Exercise of Assumed Annual Rates of
Underlying Granted to Price Stock Price Appreciation for
Options Employees Per Expiration Option Term (3)
Granted (#) in Fiscal Share (1) Date (2) 5% 10%
Name 1998
- ---- ----------- ---------- --------- ---------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
John A. McKenna, Jr........... 30,000 (4) 1.52% $6.64 02/09/08 $125,276 $317,473
Dale H. Allardyce............. 75,000 (5) 3.79% $6.64 02/09/08 $313,190 $793,684
John F. Lyons................. 25,000 (6) 1.26% $4.63 09/10/07 $141,770 $275,669
</TABLE>
- -------------
(1) In determining the fair market value of the Company's Common Stock, the
Board of Directors considered various factors, including the Company's
financial condition and business prospects, its operating results, the
absence of a market for its Common Stock, the risks normally associated
with investments in companies engaged in similar businesses and the
market prices of securities of certain competitors. The exercise price
for options granted under the PIP may be paid in any form as shall be
permitted by the Company's Compensation Committee of the Board of
Directors, including without limitation cash, shares of the Company's
Common Stock, other awards granted or other property, including
promissory notes. The exercise price for options granted under the EIS
Plan may be paid in cash or other property including promissory notes,
shares of the Company's Common Stock, or any form of "cashless" exercise,
including by net exercise, as shall be permitted by the Company's
Compensation Committee of the Board of Directors.
(2) Options may terminate before their expiration dates if the optionee's
status as an employee or consultant is terminated or upon the optionee's
death or disability. Options must generally be exercised within 30 days
of the termination of the optionee's status as an employee or consultant
of the Company, or within 12 months after such optionee's death or
disability. If, however, an optionee is terminated for cause, all vested
options shall be canceled on the date of grant.
(3) The 5% and 10% assumed annual rates of compounded stock price
appreciation are mandated by rules of the Securities and Exchange
Commission and do not represent the Company's estimate or projection of
the Company's future Common Stock prices.
(4) Represents 30,000 shares of the Company's Common Stock subject to a
non-qualified stock option. All options were granted pursuant to the
Company's PIP and vested immediately upon grant.
(5) Represents 45,000 shares of the Company's Common Stock subject to an
incentive stock option and 30,000 shares of the Company's Common Stock
subject to a non-qualified stock option. All options were granted
pursuant to the Company's PIP. One-third of such options vested
immediately upon grant and an additional one-third of such options shall
vest after each anniversary of February 9, 1998.
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<PAGE>
(6) Represents 25,000 shares of the Company's Common stock subject to an
incentive stock option. All options were granted pursuant to the
Company's PIP. Twenty percent (20%) of such options vested on September
10, 1998, and an additional twenty percent (20%) of such options shall
vest after each anniversary of September 10, 1998.
Fiscal Year-End Option Values
The following table sets forth the value of outstanding options held by the
Named Officers as of June 28, 1998 and has been adjusted for stock dividends.
<TABLE>
<CAPTION>
Number of Securities Underlying
Unexercised Options at Fiscal Value of Unexercised in-the-Money
Year-End (#) Options at Fiscal Year-End (1)
-------------------------------- ---------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
John A. McKenna, Jr............. 877,560 847,560 $1,703,596 $1,703,596
Kenneth Ghazey.................. 333,330 546,670 $1,533,318 $2,514,682
Dale H. Allardyce............... 25,000 50,000 -- --
David J. Csira.................. 71,665 -- $ 316,709 --
John F. Lyons................... 5,000 20,000 $ 10,050 $ 40,200
Richard Nathanson............... 93,697 93,698 $ 431,006 $ 431,011
</TABLE>
- -------------
(1) Calculated on the basis of the fair market value of the Common Stock at
June 28, 1998, $6.64 per share (as determined by the Company's Board of
Directors), less the exercise price payable for such shares, multiplied
by the number of shares underlying the option.
Director Compensation
The Company does not pay cash compensation to its directors. However, under
the Company's 1996 Non-Employee Director Stock Plan, each non-employee director
receives an annual retainer and fees for each Board or committee meeting in the
form of shares of the Company's Common Stock. In addition, the Company
reimburses directors for expenses incurred in attending board and committee
meetings. During Fiscal 1998, the Company issued an aggregate 59,126 shares of
the Company's Common Stock to its non-employee directors pursuant to the
Company's 1996 Non-Employee Director Share Plan. During Fiscal 1996 and Fiscal
1997, Mr. Devening and Mr. Lacy were each granted an aggregate 37,500 options to
purchase shares of the Company's Common Stock in consideration for services
rendered as a director of the Company.
Since inception, the Company has paid Mr. Cameron a salary for services
rendered in his capacity as Chairman of the Board. During Fiscal 1998, his
annual salary was $400,000. On July 1, 1998, the Company entered into an
employment agreement with Mr. Cameron. See "--Employment Agreements."
Employment Agreements
The Company has entered into agreements with certain of the Company's
executive officers, including John A. McKenna, Jr., the Company's President and
Chief Executive Officer, Kenneth A. Ghazey, the Company's Executive Vice
President, Finance and Administration, and Chief Financial Officer, Dale H.
Allardyce, the Company's Executive Vice President, Operations, John F. Lyons,
the Company's Senior Vice President, Sales and Marketing, Richard Nathanson, the
Company's Senior Vice President, Services and Dort A. Cameron III, Chairman of
the Board of Directors.
Mr. McKenna's severance agreement provides that upon a Severance Event (as
defined below), he will be entitled to a payment equal to 12 times his monthly
compensation as of the date of termination (including his bonus
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<PAGE>
or any variable compensation at 100% of target). In addition, if a Severance
Event occurs or Mr. McKenna's employment is terminated prior to a public
offering or change of control (as defined below) and the Company elects to
repurchase his shares of Common Stock pursuant to the Stockholders' Agreement,
Mr. McKenna shall be entitled to receive (i) the difference between the book
value as of the end of the most recent fiscal year and the Share Value (as
defined below) and (ii) a tax gross-up for the difference between ordinary
income tax treatment and capital gains tax treatment resulting from such
repurchase, computed to put Mr. McKenna in the same position he would have been
in if he had timely made an Internal Revenue Code of 1986, as amended, Section
83(b) election. A "Severance Event" is defined as (i) a termination for any
reason other than cause or as a result of his death, disability or voluntary
resignation or (ii) a change of control which results in a reduction of his base
compensation, a reduction in the level of authority or scope of responsibilities
or relocation. The agreement provides for the acceleration of the vesting period
pertaining to stock options granted to him in addition to extending his exercise
period to two years after termination in the event of a Severance Event. Mr.
McKenna's severance agreement terminates on August 6, 2000.
Mr. Ghazey's at-will employment agreement provides for an initial annual
base salary of $275,000 and participation in the ENTEX Management Incentive Plan
at a target bonus of 50% of his base salary for 100% achievement of established
goals. In addition, Mr. Ghazey's employment agreement provides that upon (i) the
termination of his employment by the Company for other than cause or as a result
of death, disability or voluntary resignation, (ii) a change of control (as
defined below) or (iii) a unilateral decrease in his aggregate compensation,
benefits and incentive package which is not uniformly applied to all other
senior executive officers, he will be entitled to one year's base salary at the
then current rate and all incentive compensation earned but not paid and under
the Management Incentive Plan then in effect.
Mr. Allardyce's and Mr. Lyon's agreements are effective until 24 months
following a change of control (as defined below) or until November 30, 1998 if
no change of control has occurred by such date. Mr. Allardyce's and Mr. Lyon's
retention agreements provide that upon a change of control followed by (i) a
termination for other than cause or as a result of his death, disability or
voluntary resignation, (ii) a reduction in his compensation, (iii) a reduction
in the level of authority or scope of responsibilities or (iv) a relocation, he
will be entitled to 12 times his monthly compensation as of the date of
termination (including his bonus at 100% of target).
Mr. Nathanson's employment agreement provides for an initial monthly base
salary of $18,333, participation in the ENTEX Management Incentive Plan at a
target bonus of not less than 50% of his base salary and $1,000 per month for
mortgage expenses. In addition, Mr. Nathanson's employment agreement provides
that upon termination without cause, he will be entitled to severance payments
equal to 12 times his monthly compensation as of the date of termination plus
bonus at 100% of target. Mr. Nathanson is subject to a covenant not to compete
until the later of July 1999 or one year after his employment with the Company
is terminated.
Mr. Cameron's employment agreement is effective until July 1, 2001. Mr.
Cameron's employment agreement provides for an initial annual base salary of
$400,000 and participation in the Company's existing and future long term
incentive plans at a level determined by the Board of Directors. The Company has
agreed to provide hospitalization, medical, dental and health coverage to Mr.
Cameron and his spouse following the termination of Mr. Cameron's employment
agreement for the remainder of their lives or until comparable coverage is
obtained from another employer or until comparable coverage can be obtained at
commercially reasonable rates, up to a maximum actual cost to the Company of
$1.5 million. In addition, Mr. Cameron's employment agreement provides that upon
(i) death, (ii) disability or (iii) termination of his employment by the Company
without cause or termination by Mr. Cameron for Good Reason (as defined below),
he will be entitled to receive the base salary at the then current rate for the
longer of (x) the remainder of the term of the agreement (without regard to the
earlier termination) and (y) one year. Mr. Cameron is subject to a covenant not
to compete until three years following the termination of his employment.
A "change of control" for purposes of Mr. McKenna's agreement is defined as
an event in which the Cameron Affiliates no longer own voting securities of the
Company entitled to cast a majority of votes for election of the
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<PAGE>
Board of Directors of the Company. A "change of control" for purposes of Mr.
Allardyce's, Mr. Lyon's and Mr. Ghazey's agreements is defined as a transfer of
ownership or control of more than 50% of all of the assets or shares of the
Company. For purposes of Mr. Cameron's employment agreement, for "Good Reason"
means a termination of Mr. Cameron's employment agreement by Mr. Cameron
following a reduction in his annual base salary, a material alteration in his
authorities or responsibilities, the failure to elect or continue Mr. Cameron as
Chairman of the Board of Directors, the failure to maintain directors and
officers liability insurance covering Mr. Cameron or a material breach of the
agreement by the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of July 29, 1998 for (i)
each person or entity who is known by the Company to beneficially own five
percent or more of the outstanding Common Stock of the Company, (ii) each of the
Company's directors, (iii) each of the Named Officers (as defined above), and
(iv) all directors and executive officers of the Company as a group:
Shares Beneficially Owned (1)
Name of Group or Beneficial Owners Number Percent
- ---------------------------------- ------------------ ---------
Dort A. Cameron III(2)
c/o ENTEX Information Services, Inc.
Six International Drive
Rye Brook, NY 10573.................. 24,227,392 74.4%
IBM Credit Corporation(3)
1133 Westchester Avenue
White Plains, NY 10604................... 2,436,055 7.0
John A. McKenna, Jr.(4)(5).................. 1,519,764 4.6
Kenneth Ghazey(6)........................... 333,330 1.0
Dale H. Allardyce(7)........................ 313,999 1.0
David J. Csira(5)(8)(9)..................... 264,330 *
John F. Lyons(10)........................... 125,417 *
Richard Nathanson(11)....................... 93,697 *
R. Randolph Devening(12).................... 44,709 *
Linwood A. (Chip) Lacy, Jr.(13)............. 45,010 *
Frank W. Miller............................. 19,407 *
All directors and executive officers
as a group (16 persons)(14).............. 27,279,387 80.1
- -------------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of Common Stock subject to options held by that person that are
currently exercisable or exercisable within 60 days of July 29, 1998, are
deemed outstanding. Such shares, however, are not deemed outstanding for
the purposes of computing the percentage ownership of each other person.
Except as indicated in the footnotes to this table, pursuant to the
Stockholders' Agreement and pursuant to applicable community property laws,
each stockholder named in the table has sole voting and investment power
with respect to the shares set forth opposite such stockholder's name. See
Items 1 and 13.
(2) Includes 21,407,739 shares registered in the name of ENTEX Associates L.P.
Dort A. Cameron III is the sole stockholder of the Putnam Group, Inc., the
general partner of ENTEX Associates L.P. Includes 150,000 shares of the
Company's Common Stock owned by Mr. Cameron which are subject to an option
exercisable within 60 days of July 29, 1998. Includes 1,851,850 shares
currently owned by Mr. Cameron which are
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<PAGE>
subject to an immediately exercisable option to purchase such shares which
Mr. Cameron granted to IBMCC. See Item 13.
(3) Includes 1,851,850 shares of Common Stock currently owned by Mr. Cameron
which are subject to an option immediately exercisable by IBMCC to purchase
such shares and 584,205 shares of the Company's Common Stock subject to an
immediately exercisable warrant. See Item 13.
(4) Includes 877,560 shares of Common Stock owned by Mr. McKenna which are
subject to an option exercisable within 60 days of July 29, 1998. Excludes
unvested options to purchase 847,560 shares of the Company's Common Stock.
(5) Pursuant to the Stockholders' Agreement, in the event that Mr. McKenna's or
Mr. Csira's employment is terminated for any reason, the Company shall have
the right to purchase all shares of Common Stock owned by him. If the
Company is unable to purchase such shares in cash, the Cameron Affiliates
will have a right to purchase such shares. The Company waived its right to
purchase the shares of Common Stock held by Mr. Csira following the
termination of his employment with the Company. See Items 1 and 13.
(6) Includes 333,330 shares of the Company's Common Stock owned by Mr. Ghazey
which are subject to an option exercisable within 60 days of July 29, 1998.
(7) Includes 25,000 shares of the Company's Common Stock currently owned by Mr.
Allardyce which are subject to an option exercisable within 60 days of July
29, 1998.
(8) Includes 71,665 shares of the Company's Common Stock currently owned by Mr.
Csira which are subject to an option exercisable within 60 days of July 29,
1998.
(9) Mr. Csira resigned in May 1998.
(10) Includes 5,000 shares of the Company's Common Stock currently owned by Mr.
Lyons which are subject to an option exercisable within 60 days of July 29,
1998.
(11) Includes 93,697 shares of the Company's Common Stock currently owned by Mr.
Nathanson which are subject to an option exercisable within 60 days of July
29, 1998.
(12) Includes 25,000 shares of the Company's Common Stock owned by Mr. Devening
which are subject to an option exercisable within 60 days of July 29, 1998.
(13) Includes 25,000 shares of the Company's Common Stock owned by Mr. Lacy
which are subject to an option exercisable within 60 days of July 29, 1998.
(14) Includes 1,657,752 shares of the Company's Common Stock which are subject
to options exercisable within 60 days of July 29, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Share Ownership
As of July 29, 1998, Dort A. Cameron III, the Company's Chairman, owned of
record 2,669,653 shares of the Company's Common Stock. In addition, as of such
date, ENTEX Associates, L.P., a Delaware limited partnership, owned 21,407,739
shares of the Company's Common Stock. Mr. Cameron is the sole stockholder of The
Putnam Group, Inc., the general partner of ENTEX Associates, L.P. (the "Putnam
Group"). Two of the limited partners of ENTEX Associates, L.P., Airlie
Associates and Airlie Associates II, are general partnerships consisting of Mr.
Cameron's relatives. The other limited partners of ENTEX Associates, L.P. are
business associates of Mr. Cameron. Mr. Cameron has voting and dispositive power
over the shares of the Company's Common Stock held by ENTEX Associates, L.P.
and, accordingly, may be deemed to have beneficial ownership with respect to
these shares. In connection with the restructuring of indebtedness under the
IBMCC Financing Agreement in December 1996, Mr. Cameron and ENTEX Associates,
L.P. ("Entex Associates"), along with Mr. McKenna, pledged the Common Stock
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<PAGE>
held by each to IBMCC as additional collateral. See "--IBMCC Financing." The
pledges of Mr. Cameron, ENTEX Associates and Mr. McKenna were released in 1998
in connecton with the Notes Offering.
Indebtedness Between the Company and Certain Affiliates
In July 1993, Mr. Cameron, Airlie Associates and Airlie Associates II
loaned $3.13 million, $340,000 and $780,000, respectively, to ENTEX Holdings,
Inc. ("ENTEX Holdings"), the former parent of the Company which was merged with
and into the Company on June 28, 1996 (the "Holdings Merger"). In addition, in
December 1993 Mr. Cameron loaned ENTEX Holdings $312,500. These loans are
evidenced by promissory notes (the "1993 Notes"). The 1993 Notes have been
assumed by the Company and $415,925 principal amount was repaid in connection
with the Holdings Merger. The remaining balance on the 1993 Notes, approximately
$4.1 million, was repaid with the proceeds of the Notes Offering. On August 6,
1993, the Company borrowed $5.3 million from Citibank N.A. to partially finance
the acquisition of JWPIS. Mr. Cameron personally guaranteed the repayment of
this loan. In connection with the Holdings Merger, the outstanding balance of
this loan, approximately $4.1 million, was repaid.
Payments to Affiliates
From December 1993 to December 1995, ENTEX Holdings paid to the Putnam
Group a monthly overhead allocation fee of $15,000 for a total of $360,000. Such
monthly fee was paid by ENTEX Holdings to Airlie Enterprises from January 1996
to June 1996, and by the Company to Airlie Enterprises from July 1996 to the
present. In addition, in October 1995, ENTEX Holdings paid a consulting fee to
Airlie Enterprises in the amount of $500,000.
Transfer of Entex Holdings Investments; Assets
During fiscal years 1994, 1995 and 1996, ENTEX Holdings invested $335,000
in National Teacher Academy, Inc. in exchange for promissory notes and shares
representing 51% of the outstanding capital stock of National Teacher Academy,
Inc. In connection with the Holdings Merger, ENTEX Holdings transferred to Mr.
Cameron the promissory notes and stock of National Teacher Academy, Inc. in
exchange for a $335,000 reduction in the amounts outstanding under the 1993
Notes. In July 1994, ENTEX Holdings invested $50,000 in Russian Investors, L.P.
in exchange for shares representing approximately 10% of the profit of Russian
Investors, L.P. In connection with the Holdings Merger, ENTEX Holdings
transferred to Mr. Cameron the partnership interest of Russian Investors, L.P.
in exchange for a $50,000 reduction in the amounts outstanding under the 1993
Notes. In June 1995, ENTEX Holdings loaned a consultant to the Company $30,925.
In connection with the Holdings Merger, Mr. Cameron acquired the loan in
exchange for a $30,925 reduction in Mr. Cameron's 1993 Note. In April 1996, the
Company sold to Knowledge Alliance Holdings, Inc. ("KAH") the PC training
business which the Company had previously acquired in connection with the merger
of Random Access. The book value of such business was $1.1 million at the time
of the transfer to KAH. In consideration for this transfer, the Company received
shares of KAH representing 25% of its then outstanding capital stock. The
Company also entered into an agreement with KAH to market these training
services. The agreement granted the Company an option to purchase up to an
additional 2,500 shares of common stock of KAH depending on the level of sales
of such training services by the Company. KAH was granted the option to purchase
the assets of the training business conducted by the Company in Minneapolis,
Minnesota for book value of such assets on the date of acquisition. This option
was exercised on August 1, 1996. For Fiscal 1999, the Company has outsourced
substantially all of its training activities to KAH. Mr. McKenna serves as a
director of KAH.
Stockholders' Agreement
On December 10, 1993, ENTEX Holdings, Dort A. Cameron III, ENTEX
Associates, L.P. and the Participants entered into the Stockholders' Agreement
in connection with the sale and purchase of a total of 5,860,690 shares, net of
repurchases, of the Common Stock (the "Original Shares") of ENTEX Holdings by
the Participants.
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<PAGE>
The Stockholders' Agreement is binding on the Company as the successor
corporation of ENTEX Holdings and all obligations of the Participants and the
Cameron Affiliates relating to the shares of Common Stock of ENTEX Holdings
relate to the shares of Common Stock of the Company. Pursuant to the
Stockholders' Agreement, each of the Cameron Affiliates and each of the
Participants agreed to vote their shares of Common Stock to elect one
Participant nominated by the Participants and acceptable to the Cameron
Affiliates to the Board of Directors of the Company. In addition, in the event
of (i) any proposed capital reorganization of the Company, (ii) any
reclassification or recapitalization of the Company, (iii) any transfer of all
or substantially all of the assets of the Company, (iv) any consolidation or
merger involving the Company and any other person, (v) any dissolution,
liquidation or winding-up of the Company, or (vi) any material transaction
affecting the capital stock of the Company which is not in the ordinary course
of business and which is required by the laws of Delaware to be submitted to a
vote of the stockholders of the Company, the Participants agreed to vote their
shares of Common Stock in the same manner as the Cameron Affiliates.
In addition, pursuant to the Stockholders' Agreement, in the event that
certain Participants die or become disabled (the "Non-Electing Participants"),
the Company will have the right to purchase all of the shares of Common Stock of
such Participants. Upon death or disability, the Non-Electing Participants and
their legal representatives will have the right to require the Company to
purchase all of their shares of Common Stock. The per share price to be paid by
the Company shall equal the greater of the Original Purchase Price (as defined
below) or the Share Value (as defined below). As of July 29, 1998, the
Non-Electing Participants total six individuals who collectively own 759,336
shares of Common Stock. The Company has obtained an insurance policy that would
cover the purchase price of such shares in the event of the exercise of such put
options. The Company will have the right to purchase shares of Common Stock if
other Participants, including John McKenna and David Csira ("Plan 2
Participants"), are terminated for any reason. If a Plan 2 Participant's
employment is terminated for cause, the per share value shall equal the lesser
of Original Purchase Price and the Book Value (as defined below) and if for any
other reason, shall equal the Book Value. If the Company is not able to pay for
a Participant's shares of Common Stock in cash, the Company must assign its
rights to the Cameron Affiliates. The Company waived its right to purchase the
shares of Common Stock held by Mr. Csira following the termination of his
employment with the Company.
"Share Value" shall mean the amount determined by multiplying (a) the net
income of the Company on a consolidated basis for the four most recent fiscal
quarters of the Company immediately preceding the date of the termination of the
Plan 1 Participant's employment, as shown on the financial statements of the
Company, determined in accordance with GAAP, by (b) the Earnings Multiple, and
dividing the product so obtained by the number of shares of Common Stock issued
and outstanding on a fully diluted basis. "Earnings Multiple" shall mean the
arithmetic average of the "price to earnings ratio" of each of certain publicly
traded companies as reported in composite transactions in the Wall Street
Journal on the last day of each of the six calendar months immediately preceding
the date of repurchase of such Common Stock. "Original Purchase Price" shall
mean the original purchase price paid for the Original Shares, as adjusted for
stock dividends. "Book Value" shall mean the book value of a share of Common
Stock as of the end of the most recent fiscal year.
The Stockholders' Agreement will terminate upon the consummation of a
public offering; provided, that the voting provisions shall terminate upon the
earlier of (a) the consummation of a public offering or (b) December 10, 2000,
and provided, further, that certain provisions relating to the Company's right
to repurchase a Participant's shares of Common Stock shall terminate upon the
earlier of (x) the consummation of a public offering or (y) a change of control.
A "change of control" is defined as an event in which the Cameron Affiliates no
longer own voting securities of the Company entitled to cast a majority of votes
for election of the Board of Directors of the Company.
IBMCC Financing
The Company has financed a significant portion of its working capital needs
under the IBMCC Financing Agreement. IBMCC is the beneficial owner of more than
5% of the outstanding capital stock of the Company. The
-35-
<PAGE>
IBMCC Financing Agreement provides for borrowings under the IBMCC Working
Capital Line of Credit of up to $525.0 million, of which $89.7 million was owed
to IBMCC on a non-interest bearing basis and was classified as accounts payable
on the Company's consolidated balance sheet and $216.4 million was owed to IBMCC
on an interest-bearing basis and was classified as notes payable, in each case
after giving pro forma effect to the Offering of the Notes which closed in July
1998 and the use of proceeds therefrom. The amount of available borrowings under
the IBMCC Financing Agreement may be adjusted upwards for higher seasonal
purchasing requirements, and may be reduced by IBMCC upon 60 days' prior written
notice. The IBMCC Working Capital Line of Credit matures on July 1, 2001 and is
terminable upon 60 days' prior notice by IBMCC. Amounts outstanding under the
IBMCC Working Capital Line of Credit bear interest at LIBOR plus 2.10% (7.75% at
July 29, 1998). Such rate is subject to increase or decrease depending on the
Company's financial performance. The IBMCC Working Capital Line of Credit is
secured by certain inventory, accounts receivable and certain intellectual
property. In connection with the Company's acquisition of Random Access in
September 1995, the IBMCC Financing Agreement was amended to provide for the
IBMCC Long-Term Loan in the original principal amount of $20 million. The IBMCC
Long-Term Loan is required to remain outstanding unless there are no outstanding
interest bearing advances under the IBMCC Financing Agreement. The IBMCC
Financing Agreement was further amended in December 1996 and July 1997 to
provide for the Short-Term Loan in the original principal amount of $55 million
and the Special Working Capital Advance in the original principal amount of $20
million. The December 1996 and 1997 amendments also included favorable revisions
to the financial covenant requirements and the payment schedule for the Company,
including agreements to waive all financial covenant defaults pertaining to
Fiscal 1997. The Short-Term Loan has been repaid in full. In addition, the IBMCC
Long-Term Loan and the Special Working Capital Advance were repaid in full
subsequent to June 28, 1998. The IBMCC Financing Agreement provides that if Dort
A. Cameron III ceases to own and/or control at least 35% of the issued and
outstanding capital stock of the Company, the Company will be deemed to be in
default. In connection with the financing arrangement, Mr. Cameron has granted
to IBMCC an option to acquire 1,851,850 shares of Common Stock held by him. The
option is immediately exercisable at a price of $.02 per share and expires July
15, 2001. IBMCC holds a warrant to purchase up to 333,350 shares of the
Company's Common Stock which was committed to by ENTEX Holdings in August 1993
and issued in November 1994 in connection with a settlement of a dispute between
International Business Machines Corporation, JWPIS and ENTEX Holdings. In
connection with the restructuring of indebtedness under the IBMCC Financing
Agreement in December 1996, Mr. Cameron, Mr. McKenna and ENTEX Associates, L.P.
have pledged the Common Stock held by each to IBMCC as additional collateral.
The pledges of Mr. Cameron, ENTEX Associates and Mr. McKenna were released in
1998 in connection with the Notes Offering. In connection with an amendment to
the IBMCC Financing Agreement on July 15, 1997 the Company entered into a
warrant agreement pursuant to which IBMCC was issued warrants to acquire up to
250,855 shares of Common Stock. All warrants issued to IBMCC under the warrant
agreement may be exercised at any time prior to July 31, 2004 at an exercise
price of $7.55. In addition, under the warrant agreement, IBMCC was granted the
right to sell the Common Stock issuable upon exercise of the warrants (the
"Warrant Shares") along with any sale of Common Stock representing more than 20%
of the capital stock of the Company held by the Cameron Affiliates. Mr. Cameron
has a right to require IBMCC to sell the Warrant Shares along with any sale of
Common Stock representing 50% or more of the capital stock of the Company by the
Cameron Affiliates. IBMCC was also granted certain demand and piggyback
registration rights for the Warrant Shares. See Item 1 and 7 and Note 7 of the
Notes to Consolidated Financial Statements.
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<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
Financial Statements and Schedules
Financial Statements and Financial Statement Schedules. The following
Consolidated Financial Statements and supporting schedule of ENTEX Information
Services, Inc. and the Report of Independent Auditors are included at pages F-1
through F-17 of this Form 10-K.
Description Page No.
----------- --------
Independent Auditors' Report...............................................F-1
Consolidated Balance Sheets as of June 28, 1998
and June 29, 1997 ......................................................F-2
Consolidated Statements of Operations for Years
Ended June 28, 1998, June 29, 1997 and June 30, 1996....................F-3
Consolidated Statements of Cash Flows for the Years
Ended June 28, 1998, June 29, 1997 and June 30, 1996.....................F-4
Consolidated Statements of Stockholders' Equity
(Deficit) for the Years Ended June 28, 1998,
June 29, 1997 and June 30, 1996 .........................................F-5
Notes to Consolidated Financial Statements.................................F-6
Schedule II - Valuation and Qualifying Accounts and Reserves...............F-17
Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be set forth
therein is included in the Consolidated Financial Statements or notes thereto.
Reports on Form 8-K
Current Report on Form 8-K dated August 11, 1998, reporting the completion
on July 29, 1998, of the Company's offering of $100 million aggregate principal
amount of its 12 1/2% Senior Subordinated Notes due 2006.
-37-
<PAGE>
Exhibits
Exhibit Number Description
+2.1 Agreement and Plan of Reorganization by and between ENTEX
Holdings, Inc. and the Company dated as of June 28, 1996.
+2.2 Agreement and Plan of Merger by and among the Company, ENTEX
Acquisition Corp. and Random Access, Inc. and related amendment.
+2.3 Agreement and Plan of Reorganization among the Company, EIS
Acquisition Corporation and FCP Technologies, Inc.
+3.1 Certificate of Incorporation of the Company, as amended.
+3.2 Amended and Restated By-Laws of the Company.
+4.1 Form of the Company's Common Stock Certificate.
+10.1 Form of Indemnification Agreement entered into by the Company
with each of its directors and executive officers.
+10.2 Agreement between John A. McKenna, Jr. and the Company dated
August 7, 1994 and related amendment.
+10.3 Letter Agreement between Kenneth A. Ghazey and the Company dated
January 6, 1997.
+10.4 Retention Agreement between Dale H. Allardyce and the Company
dated November 17, 1997.
+10.5 Retention Agreement between John F. Lyons and the Company dated
November 17, 1997.
+10.6 Letter Agreement between David J. Csira and the Company dated
November 15, 1996.
+10.7 Employment Agreement between Richard Nathanson and the Company
dated July 10, 1996.
+10.8 Stockholders' Agreement among ENTEX Holdings, Inc., Dort A.
Cameron III and ENTEX Associates, L.P. dated December 10, 1993
and related amendments.
+10.9 ENTEX Holdings, Inc. 1996 Stock Option Plan and related
agreements.
+10.10 ENTEX Information Services, Inc. 1996 Stock Option Plan and
related agreements.
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<PAGE>
Exhibit Number Description
+10.11 1996 Performance Incentive Plan and related agreements.
+10.12 1996 Non-Employee Director Stock Plan.
+10.13 ENTEX Management Incentive Plan.
+10.14 Sublease Agreement dated June 6, 1997 between General Electric
Company and the Company and related consent.
+10.15 Lease Agreement dated January 20, 1995 between Royal Executive
Park II and the Company and related amendment.
+10.16 Sublease Agreement dated August 6, 1993 between JWP Inc., and
the Company and related amendments, consents and lease
agreements.
+10.17 Lease Agreement dated December 31, 1996 between the Company and
Duke Realty Limited Partnership and related amendments.
+10.18 Lease Agreement dated May 15, 1995 between the Company and Duke
Realty Limited Partnership and related amendments.
+10.19 Lease Agreement dated February 29, 1992 between the Company and
725 C.W. Associates Limited Partnership and related amendments.
+10.20 Dealer Loan and Security Agreement between FINOVA Capital
Corporation and the Company dated April 21, 1995 and Letter
Agreements dated April 17, 1995 and May 17, 1996.
+10.21 Fourth Amended and Restated Agreement for Wholesale Financing
by and between IBM Credit Corporation and the Company
and related amendments.
+10.22 Warrant Agreement between IBM Credit Corporation, ENTEX Holdings,
Inc. and the Company dated November 15, 1994.
+10.23 Warrant Agreement between IBM Credit Corporation and the Company
dated July 15, 1994.
10.24 Employment Agreement dated July 1, 1998 by and between the
Company and Dort. A Cameron III.
+21 Subsidiaries of the Company.
23 Consent of Independent Public Accountants.
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<PAGE>
Exhibit Number Description
24 Powers of Attorney (set forth on the signature page of this Form
10-K).
27 Financial Data Schedule.
- --------------------
+ Incorporated by reference to the exhibits to the Company's
Registration Statement on Form 10 filed on December 3, 1997, and all
amendments thereto.
-40-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ENTEX INFORMATION SERVICES, INC.
By: /s/ John A. McKenna, Jr.
------------------------------------
Name: John A. McKenna, Jr.
Title: President, Chief Executive Officer
and Director
Date: September 25, 1998
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
John A. McKenna, Jr. and Richard P. Bannon and each acting alone, his true and
lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments or supplements to this Form 10-K and
to file the same with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing necessary or appropriate to be done with this Form 10-K and
any amendments or supplements hereto, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Dort A. Cameron III Chairman of the Board September 25, 1998
- -------------------------------------
Dort A. Cameron III
/s/ John A. McKenna, Jr. President, Chief Executive Officer and September 25, 1998
- -------------------------------------
John A. McKenna, Jr. Director
/s/ Kenneth A. Ghazey Executive Vice President - Finance and September 25, 1998
- ------------------------------------- Administration, Chief Financial Officer and
Kenneth A. Ghazey Director
/s/ R. Randolph Devening Director September 25, 1998
- -------------------------------------
R. Randolph Devening
/s/ Linwood A. Lacy, Jr. Director September 25, 1998
- -------------------------------------
Linwood A. Lacy, Jr.
/s/ Frank W. Miller Director September 25, 1998
- -------------------------------------
Frank W. Miller
</TABLE>
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report............................................. F-1
Consolidated Balance Sheets as of June 28, 1998 and June 29, 1997........ F-2
Consolidated Statements of Operations for Years Ended
June 28, 1998, June 29, 1997 and June 30, 1996...................... F-3
Consolidated Statements of Cash Flows for Years Ended
June 28, 1998, June 29, 1997 and June 30, 1996...................... F-4
Consolidated Statements of Stockholders' Equity
(Deficit) for Years Ended June 28, 1998, June 29, 1997
and June 30, 1996................................................... F-5
Notes to Consolidated Financial Statements............................... F-6
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
ENTEX Information Services, Inc.:
We have audited the consolidated balance sheets of ENTEX Information
Services, Inc. and subsidiaries as of June 28, 1998 and June 29, 1997 and the
related consolidated statements of operations, cash flows and stockholders'
equity (deficit) for each of the years in the three-year period ended June 28,
1998. In connection with our audits of the consolidated financial statements, we
have also audited the financial statement schedule as listed in the accompanying
index. These consolidated financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express our opinion on these consolidated financial statements and financial
statement schedule based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ENTEX
Information Services, Inc. and subsidiaries as of June 28, 1998 and June 29,
1997, and the results of their operations and their cash flows for each of the
years in the three-year period ended June 28, 1998, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
KPMG Peat Marwick LLP
Stamford, Connecticut
August 21, 1998
F-1
<PAGE>
<TABLE>
<CAPTION>
ENTEX INFORMATION SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
June 28, June 29,
1998 1997
---------------- ----------------
ASSETS
Current assets:
<S> <C> <C>
Cash........................................................... $ 14,265 $ 15,838
Trade receivables, net of allowance for doubtful
accounts of $4,662 and $4,746, respectively................... 368,344 334,196
Vendor receivables, net of allowance of $3,787
and $2,000, respectively..................................... 47,592 37,789
Inventories.................................................... 192,841 183,957
Other current assets........................................... 8,683 9,228
---------- ----------
Total current assets......................................... 631,725 581,008
Property, plant and equipment, net............................. 61,009 55,049
Goodwill, net of accumulated amortization of $12,861
and $8,903, respectively..................................... 41,929 45,887
Other assets, net.............................................. 1,756 1,646
---------- ----------
Total assets............................................... $ 736,419 $ 683,590
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable............................................... $ 338,602 $ 269,962
Accrued liabilities............................................ 67,381 53,598
Notes payable and current installments of long-term debt....... 295,681 348,276
---------- ----------
Total current liabilities.................................... 701,664 671,836
---------- ----------
Long-term debt................................................. 53,239 48,215
Other long-term liabilities.................................... 661 1,271
---------- ----------
Total long-term liabilities.................................. 53,900 49,486
---------- ----------
Total liabilities.......................................... 755,564 721,322
---------- ----------
Stockholders' equity (deficit):
Preferred stock, 2,000,000 shares authorized; no shares -- --
issued or outstanding..........................................
Common stock, $.0001 par value; 100,000,000 shares authorized,
32,413,366 and 32,357,840 shares issued, respectively.......... 3 3
Additional paid-in capital........................................ 19,477 19,003
Retained earnings (deficit)....................................... (38,564) (56,707)
Treasury stock, 82,500 shares at cost............................. (2) (2)
Cumulative translation adjustments................................ (59) (29)
---------- ----------
Total stockholders' equity (deficit)......................... (19,145) (37,732)
---------- ----------
$ 736,419 $ 683,590
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
ENTEX INFORMATION SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share and per share data)
Years Ended
June 28, June 29, June 30,
1998 1997 1996
------------- ---------------- --------------
<S> <C> <C> <C>
Net revenues:
Product revenues........................ $ 2,006,161 $ 2,126,973 $ 1,940,796
Service revenues........................ 450,471 353,624 207,511
----------- ----------- -----------
Total net revenues.................... 2,456,632 2,480,597 2,148,307
----------- ----------- -----------
Cost of revenues:
Cost of products sold................... 1,800,085 1,922,826 1,764,775
Cost of services provided............... 341,612 267,554 168,957
----------- ----------- -----------
Cost of revenues...................... 2,141,697 2,190,380 1,933,732
----------- ----------- -----------
Product gross margin....................... 206,076 204,147 176,021
Services gross margin...................... 108,859 86,070 38,554
----------- ----------- -----------
Total gross margin...................... 314,935 290,217 214,575
Selling, general and administrative 259,712 251,963 192,312
expenses................................
Nonrecurring stock compensation costs...... -- -- 18,185
----------- ----------- -----------
Income from operations.................. 55,223 38,254 4,078
Interest expense, net...................... 36,663 37,147 29,726
Other income............................... -- 462 --
----------- ----------- -----------
Income (loss) before income taxes....... 18,560 1,569 (25,648)
Provision for income taxes................. 417 25 28
----------- ----------- -----------
Net income (loss)....................... $ 18,143 $ 1,544 $ (25,676)
=========== =========== ===========
Common Share Data:
Basic earnings (loss) per share......... $ .56 $ .05 $ (.82)
=========== =========== ===========
Diluted earnings (loss) per share....... $ .53 $ .05 $ (.82)
=========== =========== ===========
Basic weighted average number of shares of
common stock outstanding................ 32,357,968 32,281,463 31,348,340
Common equivalent shares from stock
options and warrants using the
treasury stock method................. 1,911,178 1,290,697 --
----------- ----------- -----------
Diluted weighted average number of
shares of common stock outstanding.... 34,269,146 33,572,160 31,348,340
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
ENTEX INFORMATION SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Years Ended
June 28, June 29, June 30,
1998 1997 1996
--------- ---------- ----------
Cash flows from operating activities:
Net income (loss)........................ $18,143 $ 1,544 $ (25,676)
Adjustments to reconcile net income
(loss) to net cash used in operating
activities:
Stock compensation costs............... -- -- 16,185
Depreciation and amortization.......... 19,388 14,146 10,628
Amortization of goodwill............... 3,958 4,239 3,012
Provision for doubtful trade and
vendor receivables................... 1,703 2,393 2,245
Accretion on long-term debentures and
notes................................ 2,416 2,032 1,996
Gain on sale of assets................. -- (504) --
Stock benefit plan compensation costs.. 180 -- --
Other.................................. (593) 20 404
Changes in working capital, net of effects
of acquisitions:
Trade receivables........................ (34,064) (31,168) (66,645)
Inventories.............................. (8,884) (8,161) (24,141)
Vendor receivables....................... (11,590) (18,219) (11,463)
Other current assets..................... 305 (396) 1,710
Accounts payable and accrued liabilities. 64,260 8,635 17,371
Other long-term liabilities.............. (413) (661) (296)
-------- -------- --------
Net cash provided by (used in)
operating Activities................. 54,809 (26,100) (74,670)
-------- -------- --------
Cash flows from investing activities:
Sale of assets, net of expenses.......... -- 2,285 8,483
Capital expenditures..................... (19,655) (21,737) (19,205)
Cash paid for acquisitions............... -- (7,216) (21,970)
Other.................................... -- (1,181) (395)
-------- -------- --------
Net cash used in investing activities.. (19,655) (27,849) (33,087)
-------- -------- --------
Cash flows from financing activities:
Proceeds from borrowing.................. 124,794 230,621 112,050
Change in cash overdraft................. 12,968 (13,687) 11,176
Proceeds from long-term debt............. -- -- 28,103
Issuance of common stock warrants........ -- -- 897
Proceeds from sale of common stock, net.. 294 268 385
Payments on debt......................... (174,783) (160,018) (44,332)
-------- -------- --------
Net cash (used in) provided from
financing activities................... (36,727) 57,184 108,279
-------- -------- --------
Increase (decrease) in cash................. (1,573) 3,235 522
Cash at beginning of period................. 15,838 12,603 12,081
-------- -------- --------
Cash at end of period....................... $ 14,265 $ 15,838 $ 12,603
======== ======== ========
Supplemental disclosure of cash flow
information:
Cash paid during the year for:
Interest paid $ 34,399 $ 36,458 $ 28,081
======== ======== ========
Taxes paid/(refunded)...................... $ (35) $ (12,087) $ 11,701
======== ======== ========
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
ENTEX INFORMATION SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(Dollars in thousands)
Additional Retained Cumulative
Common Stock Paid In Deferred Earnings Treasury Translation
Shares Amount Capital Compensation (Deficit) Stock Adjustments Total
------ ------ ---------- ------------ --------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, July 2, 1995 31,335 $ 3 $ 1,272 $ -- $ (32,575) $ (5) $ -- $ (31,305)
Purchase of -- -- -- -- -- (7) -- (7)
treasury stock..
Issuance of common
stock under stock 80 -- 381 -- -- 10 -- 391
purchase
arrangements....
Issuance of common 897
stock warrants.. -- -- 897 -- -- -- --
Issuance of common 1,262 -- 4,484 -- -- -- -- 4,484
stock...........
Deferred -- -- 11,701 (11,701) -- -- -- --
compensation....
Amortization of
deferred -- -- -- 11,701 -- -- -- 11,701
compensation....
Net (loss)........ -- -- -- -- (25,676) -- -- (25,676)
-------- ------ ---------- ------- --------- ------ ------- ---------
Balance, June 30, 1996 32,677 3 18,735 -- (58,251) (2) -- (39,515)
Return of treasury (429) -- -- -- -- -- -- --
stock...........
Issuance of common 110 -- 268 -- -- -- -- 268
stock...........
Foreign currency -- -- -- -- -- -- (29) (29)
change..........
Net income........ -- -- -- -- 1,544 -- -- 1,544
-------- ------ ---------- ------- --------- ------ ------- ---------
Balance, June 29, 1997 32,358 3 19,003 -- (56,707) (2) (29) (37,732)
Return of treasury (70) -- -- -- -- -- -- --
stock...........
Issuance of common 62 -- 180 -- -- -- -- 180
stock...........
Exercise of options 63 -- 294 -- -- -- -- 294
Foreign currency -- -- -- -- -- -- (30) (30)
change..........
Net income........ -- -- -- -- 18,143 -- -- 18,143
-------- ------ ---------- ------- --------- ------ ------- ---------
Balance, June 28, 1998 32,413 $ 3 $ 19,477 $ -- $ (38,564) $ (2) $ (59) $ (19,145)
======== ====== ========== ======= ========= ====== ======= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
ENTEX INFORMATION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(1) Summary of Significant Accounting Policies
(A) Description of the Business
ENTEX Information Services, Inc. ("ENTEX" or the "Company") was formed for
the purpose of acquiring, on August 6, 1993, the net assets of the personal
computer and systems integration business of JWP Information Services, Inc. On
June 28, 1996, the Company's former parent, ENTEX Holdings, Inc., ("Holdings")
was merged with and into the Company. Holdings' investment in the Company
represented its only substantive assets and operations, and accordingly, was
accounted for like a pooling-of-interests transaction.
ENTEX is a leading provider of integrated personal computer ("PC")
management solutions to meet the distributed information technology systems and
end user support requirements of Fortune 1000 companies and other large
enterprises. ENTEX offers its customers a single source for integrated PC
management solutions, including sophisticated PC infrastructure procurement and
configuration, outsourcing and desktop migration and integration services.
(B) Fiscal Year
The Company maintains its accounting records on a fifty-two week basis
ending on the Sunday closest to June 30. The accompanying financial statements
present the results of operations for the fiscal years June 30, 1997 to June 28,
1998, July 1, 1996 to June 29, 1997 and July 3, 1995 to June 30, 1996 .
(C) Consolidation
The consolidated financial statements include the financial statements of
the Company and its wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
(D) Inventories
Inventory for resale is stated at the lower of cost or market value.
Service parts inventory is valued using a moving weighted average market value
method. The Company assesses the appropriateness of the inventory valuations
giving consideration to obsolete, slow moving or non-saleable inventory.
(E) Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated
depreciation. Depreciation expense is calculated using the straight-line method
over the estimated useful lives of the assets. Such useful lives range from 25
years for buildings to three to seven years for furniture and equipment.
Leasehold and capital improvements are
F-6
<PAGE>
amortized using the straight-line method over the estimated useful life of the
property or over the term of the lease, whichever is shorter.
The Company systematically reviews the recoverability of its long-lived
assets by comparing their unamortized carrying value to their related
undiscounted future cash flows. Any impairment is charged to expense when such
determination is made.
(F) Capitalized Software
The Company capitalizes certain computer software license acquisition costs
which are amortized utilizing the straight-line method over their estimated
useful lives, which range from five to eight years.
In October 1997, the AICPA issued Statement of Position ("SOP") 97-2,
"Software Revenue Recognition", which supersedes SOP 91-1. SOP 97-2 generally
requires revenue earned on software arrangements involving multiple elements,
such as additional software products, upgrades or enhancements, to be allocated
to the various elements of such sale based on "vendor-specific objective
evidence of fair values" allocable to each such element. The Company's software
sales primarily consist of shrink wrap and volume license agreement software
sales. The Company's revenue recognition procedures as they relate to software
sales comply with SOP 97-2.
In 1998, the Company adopted the provisions of SOP 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use." The SOP
requires that certain costs related to the development or purchase of
internal-use software be capitalized and amortized over the estimated useful
life of the software. The SOP also requires that costs related to the
preliminary project stage and the post-implementation/operations stage of an
internal-use computer software development project be expensed as incurred. The
impact of adopting SOP 98-1 did not have a significant impact on previously
recorded amounts.
(G) Goodwill
Goodwill relates to the excess of cost over the net assets of acquired
businesses and is being amortized on a straight-line basis from ten to 20 years.
The Company reviews the recoverability of goodwill by comparing the
unamortized balance to the related anticipated undiscounted future cash flows
and measures any impairment based on the excess of the unamortized balance over
the present value of future cash flows, discounted using the Company's average
cost of funds.
(H) Revenue Recognition
Product revenue is recognized at the time of shipment to the customer.
Service revenue is recognized at the time the service is rendered or ratably
based on time elapsed or hours incurred if performed over a service contract
period. Unrecognized service revenue is deferred and included with accrued
liabilities and was $19,989 and $13,321 at June 28, 1998 and June 29, 1997,
respectively.
(I) Vendor Programs
The Company receives volume incentives and rebates (i.e. marketing
development funds) from certain manufacturers related to sales of certain
products which are recorded as a reduction of cost of sales when related
products are sold. Other incentives may require specific incremental action on
the part of the Company such as training, advertising or other pre-approved
market development activities and are recognized as an offset to the related
costs when the required action is performed.
F-7
<PAGE>
(J) Risks & Uncertainties
The Company's business is dependent in large measure upon its relationship
with key vendors since a substantial portion of the Company's revenue is derived
from the sales of the products of such key vendors. Changes in the dynamics of
the industry, including the manner in which vendors approach the marketplace, or
the termination of, or a material change to the Company's agreements with these
vendors would have a material adverse effect on the Company. In addition, a
material decrease in the level of marketing development programs offered by
manufacturers, or an insufficient or interrupted supply of vendors' product
would also have a material adverse effect on the Company's business. In
addition, the Company's asset based borrowings are exposed to market risk due to
fluctuations in interest rates.
(K) Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method of SFAS 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in the tax rates is recognized
in income in the period that includes the enactment date.
(L) Financial Instruments
The Company's financial instruments, principally cash, accounts receivable
and accounts payable are carried at cost, which approximates fair value due to
the short-term maturity of these instruments. As amounts outstanding under the
Company's credit agreements bear interest approximating current market rates,
their carrying amounts approximate fair value.
(M) Stock-Based Compensation
The Company accounts for its stock option plans in accordance with
Accounting Principles Board Opinion No. 25, "Accounting For Stock Issued To
Employees." No compensation expense has been recognized in 1998 or 1997 because
the options had an exercise price equal to or greater than the market value of
the common stock on the date of the grant.
(N) New Accounting Pronouncements
The Financial Accounting Standards Board recently issued standards which
will be applicable to the Company but which the Company has not yet adopted:
FASB Statement No. 130, "Reporting Comprehensive Income" and FASB Statement No.
131, "Disclosures About Segments of an Enterprise and Related Information."
These statements are not expected to have a significant impact on the financial
statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires companies to recognize all derivatives as assets or liabilities
measured at their fair value. Gains and losses resulting from changes in the
values of those derivatives would be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. This statement is
effective for fiscal years beginning after June 15, 1999 and based on current
events the Company does not believe the statement will have a significant impact
on the financial statements.
On April 3, 1998, the Accounting Standards Executive Committee of the AICPA
released SOP 98-5, "Reporting on the Costs of Start-Up Activities." The SOP,
which is effective for periods beginning after December
F-8
<PAGE>
15, 1998, requires that at the beginning of the fiscal year of adoption, the
unamortized portion of deferred start up costs should be written off and
reported as a change in accounting principle. Future costs of start-up
activities should then be expensed as incurred. This statement is not expected
to have a significant impact on the financial statements.
(O) Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share", which is required to be adopted for both interim
and annual financial statements for periods ending after December 15, 1997. The
new standard simplifies the computation of earnings per share (EPS) and requires
the presentation of two new amounts, basic and diluted earnings per share.
During 1998, the company adopted SFAS 128 and restated its computation of EPS
for all periods.
Basic earnings per share is computed using the weighted average number of
shares of common stock outstanding during the period. Diluted earnings per share
reflect the dilutive effect of common stock equivalents using the treasury stock
method. Common stock equivalents include amounts computed on outstanding options
and warrants.
(2) Acquisitions and Divestitures
On September 19, 1995 the Company purchased all of the outstanding shares
of Random Access, Inc. ("Random Access") for $21,970. Random Access was a
provider of information technology solutions through the sale of microcomputers
and technical services to corporate and institutional clients in the western
United States. The Company issued a $20,000 four year interest-bearing note
payable to IBM Credit Corporation to fund this purchase. The acquisition has
been accounted for as a purchase, and the results of operations of Random Access
have been included in the accompanying financial statements since the date of
acquisition. The excess of the aggregate purchase price over the fair value of
the net assets acquired was $28,317.
On April 2, 1996, the Company sold the training business that was acquired
as part of the Random Access acquisition to Knowledge Alliance Holdings, Inc.
("KAH"), a wholly owned subsidiary of Training Holdings LLC. Training Holdings
LLC is a corporation controlled by Dort A. Cameron III, the Company's chairman
and majority stockholder, and his affiliates. The training business assets had a
net book value of approximately $1,100 and were exchanged for 2,500 shares of
KAH common stock, which represented 25% of its then outstanding shares. There
was no gain or loss recognized on the sale and the Company's $1,100 investment
in KAH is included in other assets. In connection with this sale, KAH was
granted the option to purchase the assets of the training business conducted by
ENTEX in Minneapolis, MN for the book value of the assets on the date of
acquisition. The option was exercised on August 1, 1996 and the purchase price
was $235. In fiscal 1998, Knowledge Alliance issued additional shares of stock
which reduced Entex's ownership percentage to 13%. Due to the fact that the
Company exercises significant influence, the Company accounts for their
investment using the equity method. The Company's share of earnings (loss) in
KAH since April 2, 1996 is insignificant.
On July 12, 1996, the Company acquired all the issued and outstanding stock
of FCP Technologies Inc. ("FCP") for $7,216, including direct acquisition costs.
FCP was a systems integrator based in Frederick, Maryland specializing in
network integration, migration and consulting services. The acquisition has been
accounted for as a purchase, and the results of operations of FCP have been
included in the accompanying financial statements since the date of acquisition.
The excess of the aggregate purchase price over the fair market value of the net
assets acquired was $14,077.
On April 18, 1997, the Company sold Education Access, acquired as part of
the acquisition of Random Access, for $2,285. The net gain on the sale was $504.
F-9
<PAGE>
(3) Inventories
Inventories consist of the following:
June 28, June 29,
1998 1997
---------- ---------
Finished goods held for resale....... $ 180,320 $ 175,300
Service parts........................ 12,521 8,657
--------- ---------
$ 192,841 $ 183,957
========= =========
(4) Property, Plant and Equipment
Property, plant and equipment consist of the following:
June 28, June 29,
1998 1997
----------- ----------
Land.................................. $ 1,305 $ 1,305
Building and building improvements.... 8,478 8,437
Office and computer equipment......... 60,620 47,061
Furniture and fixtures................ 12,002 11,471
Leasehold improvements................ 7,335 7,083
Capitalized software.................. 17,801 7,590
Other equipment....................... 6,462 6,363
-------- --------
114,003 89,310
Accumulated depreciation and
amortization.......................... (52,994) (34,261)
-------- --------
$ 61,009 $ 55,049
======== ========
(5) Debt
Debt consists of the following:
June 28, June 29,
1998 1997
----------- ----------
Asset based financing............... $ 290,328 $ 338,005
Other short-term debt............... 5,353 10,271
--------- ---------
295,681 348,276
Long-term debt...................... 53,239 48,215
--------- ---------
Total............................ $ 348,920 $ 396,491
========= =========
(A) Asset Based Financing
The Company has asset based financing agreements with IBM Credit
Corporation and Finova Capital Corporation which made credit available of up to
$635,000 at June 28, 1998 and June 29, 1997. These agreements provide that a
portion of the balance outstanding be non-interest bearing for a specific period
of time ranging from 30 to 60 days. Interest rates under the agreements are
prime plus 1/2% (base rate) at June 28, 1998 and June 29, 1997, respectively,
except for $10,000 which bears interest at base rate plus 2%. The agreements are
generally secured by inventories, equipment, and in certain instances, accounts
receivable. The aggregate amounts outstanding under the IBM Credit Agreement as
of June 28, 1998 and June 29, 1997 were $380,065 and $421,075, respectively. Of
these amounts, $290,328 and $338,005, respectively, represent interest bearing
liabilities and $89,737 and $83,070, respectively, are non-interest bearing and
are included within accounts payable. Under the financing agreement with IBM
Credit Corporation, a term loan in the original principal amount of $20 million
is required to be outstanding unless there are no outstanding interest bearing
advances under such financing agreement. $10 million of the IBM term loan
remained outstanding at June 28, 1998 (see Subsequent Events note 10). The
agreements may be termi-
F-10
<PAGE>
nated by the financiers immediately; upon certain events of default; or
otherwise within sixty days by either party with notice. The amounts outstanding
under the Finova Capital Agreement as of June 28, 1998 and June 29, 1997 were
$86,390 and $91,077 respectively, are non-interest bearing and are included with
accounts payable. Under these agreements the Company had available an additional
$168,545 and $122,848 at June 28, 1998 and June 29, 1997, respectively.
The above asset based financing agreements contain restrictive covenants
with respect to maintenance of minimum tangible net worth, current ratio, fixed
asset additions, fixed charges, and certain additional indebtedness. In
addition, the IBM Credit Corporation agreement prohibits the Company from paying
cash dividends on common stock. Under the IBM Credit Agreement at both June 28,
1998 and June 29, 1997, the Company was not in compliance with all such
covenants but continued to maintain an excess collateral position. IBM Credit
Corporation has waived all defaults arising from such non-compliance with
covenants. As of July 29, 1998, the Company re-negotiated a $525 million,
three-year credit facility with IBM Credit Corporation. The interest rate under
the new arrangement is LIBOR plus 2.1% (7.75% at July 29, 1998).
(B) Other Short-Term Debt
Other short-term debt includes current installments of long-term debt
totaling $5,138 at June 28, 1998 and $984 at June 29, 1997. Remaining amounts at
June 28, 1998 and June 29, 1997 are notes payable carrying an effective interest
rate of 4% to 7%.
The weighted average interest rate on short term debt was 9.0% and 9.2% at
June 28, 1998 and June 29, 1997, respectively.
(C) Long-Term Debt
Long-term debt consists primarily of (a) subordinated debentures discounted
to yield 20% that will accrete to their face value of $43,128 by their due date
of March 1, 2007 ($20,545 and $22,025 outstanding at June 28, 1998 and June 29,
1997, respectively), (b) a $17,250 note (outstanding at June 28, 1998 and June
29, 1997) issued in connection with the purchase of Random Access which bears
interest at prime plus 2.5% and is due on September 19, 1999 (see Subsequent
Events note 10), (c) a mortgage loan of $6,600 relating to the integration
center in Erlanger, Kentucky which bears interest at 8.75% and is due February
2007, of which $4,405 and $4,794 was outstanding at June 28, 1998 and June 29,
1997, respectively, (d) $4,146 (outstanding at June 28, 1998 and June 29, 1997,
respectively) in notes held by entities owned or controlled by the Company's
Chairman that bear interest at prime plus 2.5% and are due on July 29, 2000 (see
Subsequent Events note 10), (e) a $9,000 face amount six year interest bearing
note ($6,892 and $0 outstanding at June 28, 1998 and June 29, 1997,
respectively), due June 2002 bearing interest at 4.0% for the first two years,
and at 6.0% for the final four years.
Aggregate annual principal payments of long-term debt subsequent to June
28, 1998 (including the subordinated debentures at face value) are as follows:
1999........................... $ 5,138
2000........................... 6,173
2001........................... 10,858
2002........................... 7,254
2003........................... 4,300
Thereafter..................... 43,466
77,189
------
Less unaccreted interest....... (18,812)
-------
$ 58,377
========
F-11
<PAGE>
(6) Income Taxes
The provision for income taxes consists of the following:
For the Years Ended
-----------------------------------------
June 28, June 29, June 30,
1998 1997 1996
------------ ---------- ----------
Current:
Federal.................. $ 417 $ -- $ --
State.................... -- -- --
Foreign.................. -- 25 28
Deferred:
Federal.................. -- -- --
State.................... -- -- --
----- ----- -----
Total.................. $ 417 $ 25 $ 28
===== ===== =====
For the current year, the provision for income taxes was offset by the
utilization of a net operating loss carryforward. Realization of the remaining
deferred tax asset associated with the net operating loss carryforward is
dependent on the likelihood of generating sufficient taxable income prior to its
expiration. In determining the need for a deferred tax asset valuation
allowance, the Company considered the weight of available evidence to determine
whether it was more likely than not that the deferred tax assets would be
utilized. Due to the uncertainty of future results, it was concluded that
realization of deferred tax assets was not "more likely than not" and,
accordingly, a valuation allowance to reduce net deferred tax assets to zero was
recorded.
A reconciliation of the differences between income taxes computed at
Federal statutory rates (35% in 1998 and 34% in 1997 and 1996) and the provision
for income taxes is as follows:
June 29, June 30, June 30,
1998 1997 1996
--------- --------- ---------
Tax at statutory rate....................... $ 6,496 $ 533 $ (8,720)
Non-deductible goodwill..................... 1,004 1,051 782
Non-deductible meals and entertainment
expenses.................................... 394 437 263
Alternative minimum tax..................... 417 -- --
State and local income tax, net of federal
benefit..................................... 1,040 -- (589)
Provision/(benefit) for valuation allowances (8,995) (1,982) 4,335
Non-deductible stock compensation expense... -- -- 3,978
Other....................................... 61 (14) (21)
------- ------ -------
Provision for income taxes.................. $ 417 $ 25 $ 28
======= ====== =======
F-12
<PAGE>
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for tax and financial
reporting purposes. Significant components of the Company's deferred tax assets
and deferred tax liabilities at June 28, 1998 and June 29, 1997 are as follows:
June 28, June 29,
1998 1997
---- ----
Deferred tax assets:
Net operating loss carryforward................. $ 10,774 $ 19,425
Accruals and reserves not currently deductible.. 4,456 3,768
Allowance for bad debts......................... 1,563 1,576
Inventory valuation reserves.................... 4,932 2,157
Other........................................... 981 1,873
-------- --------
22,706 28,799
Valuation allowance............................. (10,741) (17,015)
-------- --------
Total......................................... $ 11,965 $ 11,784
======== ========
Deferred tax liabilities:
Discount in subordinated debentures............. $ 6,457 $ 7,106
Other........................................... 5,508 4,678
-------- --------
Total......................................... $ 11,965 $ 11,784
======== ========
Net current and non-current assets/liabilities are insignificant.
At June 28, 1998, the Company had a net operating loss carryforward of
approximately $27,000, which will expire in 2009 through 2011. Of such amounts,
approximately $7,700 relates to purchased net tax benefits which when realized
will decrease goodwill by approximately $3,050.
(7) Stock Options, Stock Benefit Plans and Warrants
The Company has three stock options plans: the ENTEX Holdings 1996 Stock
Option Plan (the "Holdings Plan") adopted February 1996, EIS Stock Option Plan
(the "EIS Plan") adopted July 1996, and the Performance Incentive Plan (the
"PIP") adopted August 1996 (collectively, the "Plans"). The Holdings Plan and
the EIS Plan provide for the issuance of incentive stock options ("ISOs") and
stock options that are non-qualified for Federal income tax purposes ("NQSOs").
The PIP provides for the issuance of ISOs, NQSOs, stock appreciation rights,
restricted stock, deferred stock, dividend equivalents and other stock-related
awards. The exercise price of the ISOs under all Plans may not be less than 100%
of fair market value at the time of grant. Options granted under the Holdings
Plan and the EIS Plan have an expiration of five years and generally vest over
three years. Options granted under the PIP have an expiration of ten years and
generally vest over five years. The Holdings Plan and EIS Plan were terminated
in June 1996 and August 1996, respectively, and therefore no further grants can
be awarded from such plans. At June 28, 1998 there were 4,389,350 shares
reserved for issuance under the PIP and 4,592,000 shares reserved for issuance
under the Holdings Plan and the EIS Plan. There were 6,411,955 options
outstanding under all Plans at June 28, 1998.
The Company has a Non-Employee Director Stock Plan, adopted August 1996,
which provides for the crediting of stock units representing the right to
receive common stock at not less than 100% of the fair market value at the time
of the credit. At June 28, 1998, 46,754 shares have been reserved for issuance,
and 53,246 shares have been issued.
In fiscal year 1996, certain managers and employees owned common stock of
the Company pursuant to Securities Purchase and Stockholders' Agreements
("Management Shares"), and share units pursuant to the 1993 Employee Share Unit
Plan ("SharePlan Shares"). Effective June 28, 1996, as a result of an amendment
to such plans, ownership was vested in the management shares, common stock was
issued for share units, and the Company recorded compensation expense of $11,701
relating to the Management Shares and $4,484 relating to the SharePlan Shares
based on fair value of the stock. The fair value of $3.56 was derived by
applying average market multiples of publicly traded competitors of the Company
to the Company's sales, operating income, EBITDA and forecasted
F-13
<PAGE>
net income. In addition, the Company assumed the obligation for the tax
withholding requirement for the SharePlan Shares of $2,000, which was recorded
as compensation expense. No compensation expense was recognized in connection
with the Management Shares or SharePlan Shares for the years ended June 28, 1998
and June 29, 1997.
At June 28, 1998 and June 29, 1997 there were 1,299,435 and 708,350 shares
of common stock reserved for outstanding warrants held by lenders. Warrants to
purchase 333,350 shares of common stock were granted on November 15, 1994, are
exercisable for $.20 and expire on July 15, 2001. These warrants were issued in
connection with a settlement of a dispute between the Company and the vendor.
Warrants to purchase 375,000 shares of common stock granted on June 21, 1996 to
Microsoft were exercisable for $14.40 per share and expire on June 21, 2003.
These warrants were issued as consideration for less than market rate debt.
In connection with an amendment to the IBMCC Financing Agreement on July
15, 1997, the Company entered into a warrant agreement pursuant to which IBMCC
was issued warrants to acquire up to 250,855 shares of common stock. All
warrants issued to IBMCC may be exercised at any time prior to July 1, 2004 at
an exercise price of $7.55.
On November 12, 1997, the Company issued an additional 340,230 warrants to
Microsoft pursuant to the anti-dilution provisions in the original warrant
purchase agreement. Concurrently, the exercise price was revised to $7.55, also
pursuant to the anti-dilution provisions of the original warrant purchase
agreement. The fair value of the re-priced 715,230 warrants was slightly below
the $897,000 recorded in June 1996, as such no additional discount on the debt
has been recorded.
On November 25, 1997 the Board of Directors approved an increase in the
number of authorized common stock shares from 10,000,000 to 100,000,000. In
addition, the Board of Directors authorized a stock split in the form of a
four-for-one stock dividend to holders of record as of November 25, 1997,
whereby each such share will be equal to five shares of common stock. All
references in the consolidated financial statements referring to shares, share
prices, per share amounts and stock plans have been adjusted retroactively for
the four-for-one stock dividend.
A summary of the Company's stock option activity, and related information
for the fiscal years ended June 28, 1998, June 29, 1997 and June 30, 1996 is as
follows (in thousands, except for the weighted average exercise prices):
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- ----------- ---------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 5,120 $ 5.19 3,260 $ 5.03 -- --
Granted...................... 1,978 4.96 2,325 5.34 3,565 $ 5.03
Exercised.................... (63) 4.63 -- -- -- --
Canceled..................... (623) 5.61 (465) 4.46 (305) 4.63
Outstanding-- end of year....... 6,412 4.95 5,120 5.19 3,260 5.03
Exercisable-- end of year....... 2,058 4.27 365 2.38 10 9.02
</TABLE>
The following summarizes information about the Company's stock options
outstanding and exercisable by price range at June 28, 1998 (options in
thousands):
<TABLE>
<CAPTION>
Outstanding Exercisable
-----------------------------------------------------------------------------
Wt. Average
Remaining
Range of Contractual Weighted-Average Weighted-Average
Exercise Prices Number Life Years Exercise Price Number Exercise Price
--------------- --------- ------------- ----------------- -------- -----------------
<S> <C> <C> <C> <C> <C>
$ .01-- $4.00 1,649 8.8 $ 2.04 515 $ 2.04
$4.00-- $8.00 4,103 6.4 4.87 1,504 4.91
$8.00-- $12.00 660 3.0 9.25 39 9.02
</TABLE>
F-14
<PAGE>
Pro forma information regarding net income is required by SFAS No. 123
"Accounting for Stock Based Compensation", and has been determined as if the
Company had accounted for its stock option plan under the fair value method of
that statement. Pro forma net income and compensation expense are as follows:
June 28, June 29,
1998 1997
----------- -----------
(In thousands,
except per share data)
Net income ................ As reported $ 18,143 $ 1,544
Pro forma 17,082 721
Compensation Expense....... Pro forma 1,061 823
Basic Earnings Per Share... As reported .56 .05
Pro forma .53 .02
For purposes of pro forma disclosures only, the estimated fair value of the
options is amortized to expense over the options' vesting period. The fair value
for all options was estimated at the date of grant using the Black-Scholes
multiple option model with the following assumptions: Risk-free interest rates
of 5.08% to 6.22%, for fiscal year 1998 and 6.22% to 6.39% for fiscal year 1997;
expected dividend yield of 0.0%; and expected life of 3.0 to 8.8 years. The per
share weighted-average fair value of options granted was $1.11 during fiscal
year 1998 and $1.40 during fiscal 1997. Volatility was not a factor in
calculating the fair value of options since the Company's stock is not publicly
traded.
(8) 401(k) Plan
The Company has a 401(k) Plan that covers all employees effective the first
day of the month following 30 days of employment and who are at least 21 years
of age. Employees may contribute between 1% and 15% of compensation subject to
the limitations imposed by law. The Company will match up to 3% of the
employee's eligible contribution. The amount charged to expense for the matching
contribution was $2,008 and $1,655 for the years ended June 28, 1998 and June
29, 1997, respectively. There was no matching contribution for the year ended
June 30, 1996.
(9) Leases
The Company routinely leases office buildings, equipment and automobiles.
These leases expire at various dates through July 2005. Certain leases contain
renewal provisions and generally require the Company to pay utilities,
insurance, taxes, and other operating expenses. Future minimum rental payments
under operating leases that have initial or remaining non-cancelable lease terms
in excess of one year as of June 28, 1998 are as follows:
Year Ending June:
----------------
1999....................... $ 9,644
2000....................... 8,502
2001....................... 6,791
2002....................... 5,511
2003....................... 2,606
Thereafter................. 7,012
--------
Total minimum lease payments. $ 40,066
========
Rent expense for all operating leases totaled $13,082, $11,908 and $9,412
for the years ended June 28, 1998, June 29, 1997, and June 30, 1996,
respectively.
The cost of assets recorded under capital leases was $273 and $1,870 at
June 28, 1998 and June 29, 1997, respectively. Accumulated amortization on such
assets was $152 and $638 at June 28, 1998 and June 29, 1997, respectively. The
present value of capital lease obligations as of June 28, 1998 and June 29, 1997
was $64 and $579, respectively.
F-15
<PAGE>
(10) Subsequent Events
On July 29, 1998, the Company completed its offering of $100 million
aggregate principal amount of its 12-1/2% Senior Subordinated Notes due 2006
(the "Notes"). The Notes were issued pursuant to an indenture dated July 29,
1998, among the Company, the Guarantors and Marine Midland Bank, N.A., as
Trustee. The Notes were privately placed in a transaction exempt from
registration under the Securities Act of 1933, as amended. The net proceeds from
the sale of the Notes were used to repay outstanding indebtedness of the
Company, which resulted in an increase in working capital of approximately $65
million. Included in the amounts repaid were the remaining balance of the IBM
Credit Corporation term loan as well as the $17,250 note related to the purchase
of Random Access. In connection with the issuance and sale of the Notes, the
Company re-negotiated a $525 million, three-year credit facility with IBM Credit
Corporation. The interest rate under the new arrangements is LIBOR plus 2.10%.
Concurrently, with the consummation of the offering, an affiliate of one of the
investors purchased $10 million of common stock of the Company from its current
shareholders. In connection with the purchase, the Company granted certain
registration rights.
F-16
<PAGE>
<TABLE>
<CAPTION>
ENTEX INFORMATION SERVICES, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(Dollars in thousands)
Balance at Charged to Charged to
Beginning Costs and Other Balance at
Description of Period Expenses Accounts Deductions End of Period
----------- --------- -------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts
1998........................ $ 4,746 $ 795 $ -- $ (879) (1) $ 4,662
1997........................ 4,101 474 -- 171 (1) 4,746
1996........................ 2,455 2,101 -- (455) (1) 4,101
Vendor receivable reserve
1998........................ 2,000 1,787 -- -- 3,787
1997........................ -- 2,000 -- -- 2,000
1996........................ -- -- -- -- --
</TABLE>
- -------------
(1) Uncollectible accounts written off, net of recoveries.
F-17
<PAGE>
<TABLE>
<CAPTION>
ENTEX INFORMATION SERVICES, INC.
INDEX TO EXHIBITS
Sequential Page
Exhibit Number Description Number
-------------- ------------- ---------------
<S> <C> <C>
+2.1 Agreement and Plan of Reorganization by and
between ENTEX Holdings, Inc. and the --
Company dated as of June 28, 1996.
+2.2 Agreement and Plan of Merger by and among --
the Company, ENTEX Acquisition Corp. and
Random Access, Inc. and related amendment.
+2.3 Agreement and Plan of Reorganization among --
the Company, EIS Acquisition Corporation
and FCP Technologies, Inc.
+3.1 Certificate of Incorporation of the --
Company, as amended.
+3.2 Amended and Restated By-Laws of the Company. --
+4.1 Form of the Company's Common Stock --
Certificate.
+10.1 Form of Indemnification Agreement entered --
into by the Company with each of its
directors and executive officers.
+10.2 Agreement between John A. McKenna, Jr. and --
the Company dated August 7, 1994 and
related amendment.
+10.3 Letter Agreement between Kenneth A. Ghazey --
and the Company dated January 6, 1997.
+10.4 Retention Agreement between Dale H. --
Allardyce and the Company dated
November 17, 1997.
+10.5 Retention Agreement between John F. Lyons --
and the Company dated November 17, 1997.
<PAGE>
Sequential Page
Exhibit Number Description Number
-------------- ------------- ---------------
+10.6 Letter Agreement between David J. Csira and --
the Company dated November 15, 1996.
+10.7 Employment Agreement between Richard --
Nathanson and the Company dated July
10, 1996.
+10.8 Stockholders' Agreement among ENTEX --
Holdings, Inc., Dort A. Cameron III and
ENTEX Associates, L.P. dated December 10,
1993 and related amendments.
+10.9 ENTEX Holdings, Inc. 1996 Stock Option Plan --
and related agreements.
+10.10 ENTEX Information Services, Inc. 1996 Stock --
Option Plan and related agreements.
+10.11 1996 Performance Incentive Plan and related --
agreements.
+10.12 1996 Non-Employee Director Stock Plan. --
+10.13 ENTEX Management Incentive Plan. --
+10.14 Sublease Agreement dated June 6, 1997 --
between General Electric Company and the
Company and related consent.
+10.15 Lease Agreement dated January 20, 1995 --
-- between Royal Executive Park II and
the Company and related amendment.
+10.16 Sublease Agreement dated August 6, 1993 --
between JWP Inc., and the Company and
related amendments, consents and lease
agreements.
+10.17 Lease Agreement dated December 31, --
1996 -- between the Company and Duke
Realty Limited Partnership and related
amendments.
+10.18 Lease Agreement dated May 15, 1995 --
between -- the Company and Duke Realty
Limited Partnership and related
amendments.
-2-
<PAGE>
Sequential Page
Exhibit Number Description Number
-------------- ------------- ---------------
+10.19 Lease Agreement dated February 29, 1992 --
between the Company and 725 C.W. Associates
Limited Partnership and related amendments.
+10.20 Dealer Loan and Security Agreement --
between -- FINOVA Capital Corporation
and the Company dated April 21, 1995
and Letter Agreements dated April 17,
1995 and May 17, 1996.
+10.21 Fourth Amended and Restated Agreement for --
Wholesale Financing by and between IBM
Credit Corporation and the Company and
related amendments.
+10.22 Warrant Agreement between IBM Credit --
Corporation, ENTEX Holdings, Inc. and the
Company dated November 15, 1994.
+10.23 Warrant Agreement between IBM Credit --
Corporation and the Company dated July
15, 1994.
10.24 Employment Agreement dated July 1, 1998 by --
and between the Company and Dort. A Cameron
III.
+21 Subsidiaries of the Company. --
23 Consent of Independent Public Accountants. --
24 Powers of Attorney (set forth on the --
signature page of this Form 10-K).
27 Financial Data Schedule. --
</TABLE>
- --------------------
+ Incorporated by reference to the exhibits to the Company's
Registration Statement on Form 10 filed on December 3, 1997, and all
amendments thereto.
-3-
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated as of July 1, 1998, by and between ENTEX
Information Services, Inc., a Delaware corporation (the "Company"), and Dort A.
Cameron III ("Executive").
W I T N E S S E T H :
WHEREAS, Executive has been employed by the Company and has served as
Chairman of the Board of Directors of the Company;
WHEREAS, the Company desires to secure the continued services of Executive
and to enter into an agreement embodying the terms of such service arrangements
(the "Agreement"); and
WHEREAS, Executive desires to accept such employment and enter into such
Agreement;
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
the Company and Executive hereby agree as follows:
1. Employment.
(a) Agreement to Employ. Upon the terms and subject to the conditions of
this Agreement, the Company shall hereby continue to employ Executive, and
Executive hereby agrees to continue in the employ of the Company.
(b) Term of Employment. Except as provided in Paragraph 5, the Company
shall employ Executive for the period commencing on July 1, 1998 (the
"Commencement Date") and ending on the third anniversary of the Commencement
Date ("Employment Period").
2. Position and Duties.
During the Employment Period, Executive shall serve as an employee of the
Company in such position or positions as Executive and the Board of Directors of
the Company (the "Board") shall from time to time agree. During the Employment
Period, the Company shall use its best efforts, including nominating Executive
on the management slate, to have Executive elected and continued as Chairman of
the Board. Executive's duties hereunder shall be consistent with his duties with
the
<PAGE>
-2-
Company on the Commencement Date. During his employment hereunder, Executive
shall devote the amount of his time reasonably required for him to perform the
services required of him hereunder, except for vacation time and reasonable
periods of absence due to sickness, personal injury or other disability, and
shall use his best efforts and judgment to perform, improve and advance the
business and interests of the Company in a manner consistent with the duties of
his position. Nothing contained herein shall preclude Executive from (i) serving
on the board of directors of any business corporation with the consent of the
Board, (ii) serving on the board of or working for any charitable or community
organization or (iii) pursuing his personal financial and legal affairs, so long
as such activities, individually or collectively, do not materially interfere
with the performance of Executive's duties hereunder.
Unless Executive consents otherwise in writing, Executive's services
hereunder shall be performed at his office in Greenwich, Connecticut, subject to
such reasonable travel as the performance of Executive's duties and the business
of the Company may require.
3. Compensation.
(a) Base Salary. The Company shall pay Executive a base salary at the
annual rate of $400,000. Executive's base salary shall be subject to increase
from time to time at the discretion of the Board, and any such increase shall
not reduce or limit any other obligation of the Company hereunder. Executive's
annual base salary payable hereunder, as it may be increased from time to time
is referred to herein as "Base Salary." The Company shall pay Executive his Base
Salary in equal biweekly installments on the Company's regular pay dates.
(b) Incentive Compensation. Executive will be eligible to participate in
the Company's existing and future annual and long term incentive compensation
programs (including any stock option or other stock-based compensation program)
at a level determined from time to time by the Board.
4. Benefits and Perquisites, Expenses.
(a) Benefits. During the term of this Agreement, Executive shall be
eligible to participate in any welfare benefit plan of the Company, including,
without limitation, any group life, hospitalization, medical, dental, health,
accident or disability insurance or similar plan or program of the Company, now
existing or established hereafter, in accordance with
<PAGE>
-3-
and to the extent that Executive is eligible under the general provisions
thereof. Executive shall also be eligible to participate in any pension, profit
sharing, retirement, deferred compensation, and savings plans of the Company now
existing or established hereafter, in accordance with and to the extent that
Executive is eligible under the general provisions thereof. Notwithstanding the
foregoing, the group life insurance benefits provided to Executive on the
Commencement Date shall continue to be provided to Executive through the
Employment Period, and Executive and the Company shall pay their respective
portions of the cost of such coverage at rates in effect for senior executives.
Notwithstanding the foregoing, the hospitalization, medical, dental and health
coverage provided to Executive and his dependents on the Commencement Date (the
"Medical Coverage") shall continue to be provided to Executive and his
dependents on the same terms through the Employment Period, and the Company
shall continue to provide such Medical Coverage on the same terms to Executive
and his spouse for the remainder of their lives; provided, however, that the
Company will not be obligated to provide post-employment Medical Coverage to the
Executive or his spouse, as the case may be, if such person becomes eligible for
comparable coverage from another employer or comparable coverage can be obtained
at commercially reasonable rates for such person; provided further, however,
that the Company's obligation to provide post-termination Medical Benefits to
Executive and his dependents shall cease if, and when, the actual cost of such
coverage to the Company (determined as set forth below) exceeds $1.5 million.
The Medical Benefits costs which count toward the $1.5 million cap are those
which are allocable to coverage after the Executive's termination of employment
with the Company; provided, however, that in the case of termination of
Executive's employment due to Disability (as defined below) or death,
involuntary termination not for Cause (as defined below) or termination by the
Executive for Good Reason (as defined below), the Medical Benefits costs which
count toward the $1.5 million cap are those beginning on the later of (i) the
first anniversary of termination of employment or (ii) the end of the Employment
Period (determined without regard to early termination under Paragraph 5 below).
(b) Perquisites. Executive shall be entitled to up to six weeks paid
vacation time annually in accordance with the Company's policy. Executive shall
also be entitled to receive such other perquisites as are generally provided to
senior executives of the Company in accordance with the policies of the Company
and at the discretion of the Board. In addition, the Company shall provide
Executive with the use of an automobile
<PAGE>
-4-
selected by Executive with annual lease payments, insurance and maintenance
costs of no more than $24,000. To the extent the annual lease payments,
insurance and maintenance costs of such automobile exceed $24,000, Executive
shall be responsible for such costs.
(c) Business Expenses. The Company shall pay or reimburse Executive for all
reasonable expenses incurred or paid by Executive in performance of Executive's
duties hereunder, including first class travel, upon presentation of expense
statements or vouchers or such other supporting information as the Company may
reasonably require.
(d) Indemnification. The Company shall indemnify Executive and hold
Executive harmless from and against any claim, loss or cause of action arising
from or out of Executive's performance as an officer, director or employee of
the Company or any of its subsidiaries or in any other capacity in accordance
with the Indemnification Agreement between Executive and the Company dated
August 1, 1996.
5. Termination of Employment. The Employment Period shall terminate on the
first to occur of Executive's death, termination due to Disability, termination
by the Company for or without Cause or termination by Executive for or without
Good Reason.
(a) Termination Due to Death. In the event Executive's employment is
terminated due to death, Executive's spouse, if she survives Executive, or
otherwise Executive's estate, shall be entitled to receive the Base Salary at
the time of death in biweekly installments on the Company's regular pay dates
for the longer of (i) the remainder of the Employment Period without regard to
earlier termination under this Paragraph 5 or (ii) one year.
(b) Termination Due to Disability. In the event Executive's employment is
terminated due to Disability (as defined below), Executive shall be entitled to
receive the Base Salary at the time of Disability in equal biweekly installments
on the Company's regular pay dates for the longer of (i) the remainder of the
Employment Period without regard to earlier termination under this Paragraph 5
or (ii) one year.
For purposes of this paragraph "Disability" shall mean that for a period of
four consecutive months or for an aggregate of more than six months in any
twelve month period Executive is incapable of substantially fulfilling the
positions,
<PAGE>
-5-
authorities and responsibilities set forth in this Agreement, because of
physical, mental or emotional incapacity resulting from injury, sickness or
disease. Any question as to the existence, extent or potentiality of Executive's
Disability upon which Executive and the Company cannot agree shall be determined
by a qualified, independent physician selected by the Company and approved by
Executive (which approval shall not be unreasonably withheld). The determination
of any such physician shall be final and conclusive for all purposes of this
Agreement. Executive or his legal representative or any adult member of his
immediate family shall have the right to present to such physician such
information and arguments as to Executive's Disability as he, she or they deem
appropriate, including the opinion of Executive's personal physician.
(c) Termination by the Company for Cause. Executive may be terminated for
"Cause" by the Company. "Cause" shall mean (i) Executive is convicted of a
felony involving moral turpitude, (ii) action by Executive involving willful
malfeasance or gross misconduct in connection with his employment hereunder
having a material adverse effect on the business of the Company, or (iii)
substantial and continual refusal by Executive in breach of this Agreement to
perform the duties ordinarily performed by a person in Executive's position or
other duties assigned to Executive pursuant to the terms hereof. Executive shall
be permitted to respond and defend himself before the Board within thirty days
after written notification of any proposed termination for Cause which shall
specify in detail the reasons for such termination. If the Board does not
confirm by a three-fourth's affirmative vote (excluding the Executive) that the
Company had grounds for termination for Cause, Executive shall have the option
to treat his employment as not having terminated or as having been terminated by
the Company Without Cause.
In the event of a termination for Cause, Executive shall not be entitled to
receive any termination benefits under this Agreement other than Executive's
Base Salary through the date his employment terminates paid on the next regular
pay date of the Company. However, Executive and his spouse shall continue to
receive Medical Benefits as set forth in Paragraph 4(a) above.
(d) Termination Without Cause or For Good Reason. A termination "Without
Cause" shall mean a termination of employment by the Company other than due to
Disability or for Cause. A termination for "Good Reason" shall mean a
termination of employment by Executive following the occurrence of one or more
<PAGE>
-6-
of the following without Executive's written consent: a reduction in his annual
Base Salary; a material alteration in his authorities or responsibilities; the
failure to elect or continue Executive as a Chairman of the Board of Directors
of the Company; the failure to maintain directors and officers liability
insurance covering Executive; or a material breach of this Agreement by the
Company. Notwithstanding the foregoing, a termination shall not be treated as a
termination for Good Reason unless Executive shall have delivered a written
notice to the Board within 90 days of his having actual knowledge of the
occurrence of one of such events stating that he intends to terminate his
employment for Good Reason as a result of one of such events and such event, if
capable of being cured, shall not be cured within 30 days of the receipt of the
notice.
In the event of a termination Without Cause or a Termination for Good
Reason, Executive shall be entitled to receive the Base Salary at the time of
termination in equal biweekly installments on the Company's regular pay dates
for the longer of (i) the remainder of the Employment Period without regard to
earlier termination under this Paragraph 5 and (ii) one year.
6. Additional Rights. Nothing in this Agreement shall limit or otherwise
affect such rights as Executive may have under any contract or agreement with
the Company or any of its affiliated companies. Amounts which are vested
benefits or which Executive is otherwise entitled to receive under any plan,
policy, practice or program of or any contract or agreement with the Company or
any of its affiliated companies at or subsequent to the date of termination
shall be payable in accordance with such plan, policy, practice or program or
contract or agreement except as explicitly modified by this Agreement.
7. Full Settlement. The Company's obligation to make the payments provided
for in this Agreement and otherwise to perform its obligations hereunder shall
not be affected by any circumstances, including, without limitation, any
set-off, counterclaim, recoupment, defense or other right which the Company may
have against Executive or others. In no event shall Executive be obligated to
seek other employment by way of mitigation of the amounts payable to Executive
under any of the provisions of this Agreement or, if he obtains other
employment, to set-off from amounts payable under this Agreement any
remuneration paid or payable to Executive on account of such other employment.
<PAGE>
-7-
8. Noncompetition, Nonsolicitation and
Confidentiality.
(a) Noncompetition. Executive hereby covenants and agrees that from the
date hereof until three (3) years after the termination of his employment
hereunder (the "Non-Compete Period") he shall not, directly or indirectly, own,
operate, manage, join, control, participate in the ownership, management,
operation or control of, or be paid or employed by, or acquire any securities
of, or otherwise become associated with or provide assistance to, as an
employee, consultant, director, officer, shareholder, partner, agent, associate,
principal, representative or in any other capacity, any business entity or
activity which is directly or indirectly a "Competitive Business" (as
hereinafter defined); provided, however, that the foregoing shall not prevent
Executive from (a) performing services for a Competitive Business if such
Competitive Business is also engaged in other lines of business and if
Executive's services are restricted to employment in such other lines of
business; or (b) acquiring the securities of or an interest in any Competitive
Business, provided such ownership of securities or interests represents at the
time of such acquisition, but including any previously held ownership interests,
less than two percent (2%) of any class or type of securities of, or interest
in, such Competitive Business. The term "Competitive Business" shall mean and
include any business or activity that is substantially the same as any business
or activity then conducted by the Company, regardless of where such Competitive
Business is located.
(b) Nonsolicitation. Unless Executive has obtained the prior written
consent of the Company, he hereby covenants and agrees that, from the date
hereof until the expiration of the Non-Compete Period, he shall not, for or on
behalf of a Competitive Business, directly or indirectly, as owner, officer,
director, stockholder, partner, associate, consultant, manager, advisor,
representative, employee, agent creditor or otherwise, attempt to solicit or in
any other way disturb or service any person, firm or corporation that has been a
customer account of the Company at any time or times prior to the termination of
his employment hereunder, whether or not he at any time had any direct or
indirect account responsibility for, or contact with, such customer account.
(c) Confidentiality. Without the prior written consent of the Company,
except to the extent required by an order of a court having competent
jurisdiction or under subpoena from an appropriate government agency, Executive
shall not disclose
<PAGE>
-8-
any trade secrets, customer lists, drawings, designs, information regarding
product development, marketing plans, sales plans, manufacturing plans,
management organization (including data and other information relating to
members of the Board and management), operating policies and manuals, business
plans, financial records, packaging design or other financial, commercial,
business or technical information relating to the Company or any of its
subsidiaries (collectively, "Confidential Information"), to any third person
unless such Confidential Information has been previously disclosed to the public
by the Company or is otherwise in the public domain.
(d) Company Property. Promptly following Executive's termination of
employment, Executive shall return to the Company all property of the Company
and its subsidiaries, and all copies thereof in Executive's possession or under
his control, including, without limitations all products or prototypes delivered
to Executive for testing or evaluation and all Confidential Information in
whatever media such Confidential Information is maintained.
(e) Injunctive Relief with Respect to Covenants. Executive acknowledges and
agrees that the covenants and obligations of Executive with respect to
noncompetition, nonsolicitation, confidentiality and Company property relate to
special, unique and extraordinary matters and that a violation of any of the
terms of such covenants and obligations will cause the Company irreparable
injury for which adequate remedies at law are not available. Therefore,
Executive agrees that the Company shall be entitled to an injunction,
restraining order, or other equitable relief from any court of competent
jurisdiction restraining Executive from committing any violation of the
covenants and obligations with respect to noncompetition, nonsolicitation,
confidentiality and Company property. These injunctive remedies are cumulative
and are in addition to any other rights and remedies the Company may have at law
or in equity. In connection with the foregoing provision of this paragraph,
Executive represents that his economic means and circumstances are such that
such provisions will not prevent him from providing for himself and his family
on a basis satisfactory to him.
9. Governing Law and Arbitration.
(a) Arbitration. Any dispute or controversy arising under or in connection
with this Agreement shall be resolved by binding arbitration. The arbitration
shall be held in the city of New York, New York and except to the extent
inconsistent
<PAGE>
-9-
with this Agreement shall be conducted in accordance with the Voluntary Labor
Arbitration Rules of the American Arbitration Association then in effect at the
time of the arbitration.
(b) Governing Law. This Agreement shall be governed by the laws of the
State of New York, determined without regard to the principles of conflict of
laws thereof.
10. Miscellaneous.
(a) Survival. Paragraphs 4(a) (relating to benefits), 4(d) (relating to
indemnification), 5 (relating to termination), 8 (relating to noncompetition,
nonsolicitation and confidentiality) and 9 (relating to governing law and
arbitration) shall survive the termination hereof.
(b) Binding Effect. This Agreement shall be binding on the Company and any
successors thereto. This Agreement shall also enure to the benefit of
Executive's heirs, executors, administrators and legal representatives.
(c) Assignment. Except as provided under Paragraph 10(b) (relating to
binding effect), neither this Agreement nor any of the rights or obligations
hereunder shall be assigned or delegated by any party hereto without the prior
written consent of the other party.
(d) Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto with respect to the matters referred to herein.
(e) Severability Reformation. In the event that one or more of the
provisions of this Agreement shall become invalid, illegal or unenforceable in
any respect, the validity, legality and enforceability of the remaining
provisions contained herein shall not be affected thereby. In the event
Paragraph 8 is not enforceable in accordance with its terms, Executive and the
Company agree that such Paragraph should be reformed to make such Paragraph
enforceable in a manner which provides the Company the maximum rights permitted
at law.
(f) Waiver. Waiver by any party of any breach or default by the other party
of any of the provisions of this Agreement shall not operate as a waiver of any
other breach or default, whether similar to or different from the breach or
default waived. No waiver of any provision of this Agreement shall be implied
from any course of dealing between the parties
<PAGE>
-10-
hereto or from any failure by either party hereto to assert its or his rights
hereunder on any occasion or series of occasions.
(g) Notices. Any notice required or desired to be delivered under this
Agreement shall be in writing and shall be delivered personally, by courier
service or by registered mail, return receipt requested, and shall be effective
upon actual receipt by the party to which such notice shall be directed, and
shall be addressed as follows (or to such other address as the party entitled to
such notice shall hereafter designate in accordance with the terms hereof):
If to the Company:
ENTEX Information Services, Inc.
Six International Drive
Rye Brook, NY 10573-1058
Attention: General Counsel
If to Executive:
Dort A. Cameron, III
The Airlie Group
115 E. Putnam Avenue
Greenwich, CT 06830
(h) Amendments. This Agreement may not be altered, modified or amended
except by a written instrument signed by each of the parties hereto.
(i) Headings. Headings to paragraphs in this Agreement are for the
convenience of the parties only and are not intended to be part of or to affect
the meaning or interpretation hereof.
(j) Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed an original but all of which together shall constitute one
and the same instrument.
(k) Withholding. Any payments provided for herein shall be reduced by any
amounts required to be withheld by the Company from time to time under
applicable Federal, State or local income tax laws then in effect.
<PAGE>
-11-
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by
its duly authorized officer, and Executive has hereunto set his hand as of the
day and year first above written.
ENTEX INFORMATION SERVICES, INC.
WITNESS:
By: /s/ John A. McKenna, Jr.
- ------------------------------- --------------------------------
John A. McKenna, Jr.
President
WITNESS:
By: /s/ Dort A. Cameron III
- ------------------------------- --------------------------------
Dort A. Cameron III
Consent of Independent Public Auditors
We consent to the incorporation by reference in the registration statement
No. 333-45501 on Form S-8 of ENTEX Information Services, Inc. of our report,
dated August 21, 1998, relating to the consolidated balance sheets of ENTEX
Information Services, Inc. and subsidiaries as of June 28, 1998 and June 29,
1997, and the related consolidated statements of operations, cash flows and
stockholders' equity (deficit) for each of the years in the three-year period
ended June 28, 1998 and related schedule, which report appears in the Annual
Report on Form 10-K of ENTEX Information Services, Inc.
KPMG Peat Marwick LLP
Stamford, Connecticut
September 24, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> JUN-28-1998
<PERIOD-START> JUN-30-1997
<PERIOD-END> JUN-28-1998
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0
0
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