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Filed Pursuant to Rule 424(b)(3)
Registration Nos. 333-64805,
333-64805-01, 333-64805-02,
333-64805-03, 333-64805-04 and
333-64805-05
PROSPECTUS
ENTEX INFORMATION SERVICES, INC.
OFFER TO EXCHANGE ITS 12 1/2% SENIOR SUBORDINATED NOTES DUE 2006,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
FOR ANY AND ALL OF ITS 12 1/2% SENIOR SUBORDINATED NOTES DUE 2006
------------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON FEBRUARY 24, 1999, UNLESS EXTENDED.
------------------------
ENTEX Information Services, Inc., a Delaware corporation (the "Company"),
hereby offers, upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying Letter of Transmittal (which together constitute
the "Exchange Offer"), to exchange up to $100,000,000 aggregate principal amount
of its new 12 1/2% Senior Subordinated Notes due 2006 (the "New Notes"), which
have been registered under the Securities Act of 1933, as amended (the
"Securities Act"), for a like principal amount of its outstanding 12 1/2% Senior
Subordinated Notes due 2006 (the "Old Notes"), which have not been so
registered. The terms of the New Notes are identical in all material respects to
the Old Notes, except for certain transfer restrictions relating to the Old
Notes. The New Notes will evidence the same indebtedness as the Old Notes and
will be issued pursuant to, and entitled to the benefits of, the same Indenture
that governs the Old Notes (the "Indenture"). As used herein, the term "Notes"
means the Old Notes and the New Notes, treated as a single class.
The Company will accept for exchange any and all Old Notes validly tendered
and not withdrawn prior to 5:00 p.m., New York City time, on February 24, 1999,
unless extended (as, and if, so extended, the "Expiration Date"). Tenders of Old
Notes may be withdrawn at any time prior to the Expiration Date. The Exchange
Offer is not conditioned upon any minimum principal amount of Old Notes being
tendered for exchange pursuant to the Exchange Offer. The Exchange Offer is
subject to certain other customary conditions. See "The Exchange Offer."
The New Notes will bear interest from and including the date of
consummation of the Exchange Offer. Interest on the New Notes will be payable
semi-annually in arrears on each February 1 and August 1 of each year,
commencing February 1, 1999, at the rate of 12 1/2% per annum. The New Notes
will mature on August 1, 2006. Interest on the New Notes will accrue from the
last interest payment date on which interest was paid on the Old Notes
surrendered in exchange therefor or, if no interest has been paid on the Old
Notes, from the date of original issuance of the Old Notes. The Notes will be
redeemable at the option of the Company, in whole or in part, at any time on or
after August 1, 2003, at the redemption prices set forth herein plus accrued
interest to the date of redemption. In addition, upon a Change of Control (as
defined herein) on or prior to August 1, 2000, the Company, at its option, may
redeem all but not less than all of the Notes outstanding at a redemption price
equal to 112.5% of the aggregate principal amount of the Notes so redeemed plus
accrued interest to the date of redemption. The Company, at its option, may
redeem in the aggregate up to 35% of the original principal amount of the Notes
at any time or from time to time prior to August 1, 2000, at a redemption price
equal to 112.5% of the aggregate principal amount so redeemed plus accrued
interest to the date of redemption, with the Net Proceeds (as defined herein) of
one or more Public Equity Offerings (as defined herein) of the Company, provided
that at least $65.0 million of the original principal amount of the Notes
remains outstanding immediately after the occurrence of any such redemption and
that any such redemption occurs within 90 days following the closing of any such
Public Equity Offering. See "Description of the Notes -- Optional Redemption."
(Continued on next page)
SEE "RISK FACTORS" BEGINNING ON PAGE 14 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY HOLDERS PRIOR TO TENDERING THEIR OLD NOTES IN THE
EXCHANGE OFFER.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
THE DATE OF THIS PROSPECTUS IS JANUARY 22, 1999.
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(Continued from cover page)
Upon a Change of Control, each holder of the Notes will be entitled to
require the Company to purchase such holder's Notes at 101% of the principal
amount thereof plus accrued interest to the date of purchase. See "Description
of the Notes -- Certain Covenants -- Change of Control Offer." In addition, the
Company will be obligated in certain instances to make an offer to purchase the
Notes at a purchase price in cash equal to 100% of the principal amount thereof
plus accrued interest to the date of purchase with the net cash proceeds of
certain asset sales. See "Description of the Notes -- Certain
Covenants -- Limitation on Certain Asset Sales."
The Notes are general unsecured obligations of the Company subordinate in
right of payment to all existing and future Senior Indebtedness (as defined
herein) of the Company, senior in right of payment to all existing and future
subordinated indebtedness of the Company and pari passu in right of payment with
all future senior subordinated indebtedness of the Company. The Notes are fully
and unconditionally guaranteed, on an unsecured senior subordinated basis, as to
payment of principal, premium, if any, and interest, jointly and severally, by
all of the existing and future domestic Restricted Subsidiaries (as defined
herein) of the Company. See "Description of the Notes -- Guarantees." As of
September 27, 1998, the Company had outstanding $354.0 million of total
Indebtedness (as defined herein), $229.2 million of which was Senior
Indebtedness and $24.9 million of which was Indebtedness subordinated to the
Notes.
The holder of each Old Note accepted for exchange will receive a New Note
having a principal amount equal to that of the surrendered Old Note. Old Notes
accepted for exchange will cease to accrue interest from and after the date of
consummation of the Exchange Offer. Holders of Old Notes accepted for exchange
will not receive any payment in respect of accrued interest on such Old Notes.
Old Notes not tendered or not accepted for exchange will continue to accrue
interest from and after the date of consummation of the Exchange Offer.
The Old Notes were issued and sold on July 29, 1998 (the "Old Notes
Offering") in a transaction exempt from the registration requirements of the
Securities Act and may not be offered or sold in the United States unless so
registered or pursuant to an applicable exemption under the Securities Act. The
New Notes are being offered hereunder in order to satisfy certain obligations of
the Company contained in the Registration Rights Agreement (as defined herein).
Based on interpretations by the staff of the Securities and Exchange Commission
(the "Commission") as set forth in Exxon Capital Holdings Corporation (avail.
May 13, 1988), Morgan Stanley & Co. Incorporated (avail. June 5, 1991) and
Shearman & Sterling (avail. July 2, 1993) and other no-action letters issued to
third parties, the Company believes that New Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be offered for resale, resold and
otherwise transferred by any holder thereof (other than a holder that is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act), without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such New Notes are acquired in
the ordinary course of such holder's business and such holder has no arrangement
or understanding with any person to participate in a distribution of such New
Notes. However, the Company has not sought a no-action letter with respect to
the Exchange Offer and there can be no assurance that the staff of the
Commission would make a similar determination with respect to the Exchange
Offer. Each holder of Old Notes, other than a broker-dealer, must acknowledge
that it is not engaged in, and does not intend to engage or participate in, a
distribution of New Notes and has no arrangement or understanding to participate
in a distribution of New Notes. Each broker-dealer that receives New Notes for
its own account pursuant to the Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any resale of such New Notes. The Letter
of Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of New Notes received in exchange for Old Notes acquired by such
broker-dealer as a result of market-making activities or other trading
activities. The Company has agreed that, for a period ending on the close of
business on the 180th day following the Expiration Date, it will make this
Prospectus available to any broker-dealer for use in connection with any such
resale. See "Plan of Distribution."
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The Company will not receive any proceeds from the Exchange Offer. The
Company will pay all the expenses incident to the Exchange Offer. In the event
the Company terminates the Exchange Offer and does not accept for exchange any
Old Notes, the Company will promptly return the Old Notes to the holders
thereof. See "The Exchange Offer."
There has previously been only a limited secondary market, and no public
market, for the Old Notes. The Old Notes are eligible for trading in The Portal
Market. The Company has been advised by the Initial Purchasers (as defined
herein) that they intend to make a market for the New Notes; however, the
Initial Purchasers are not obligated to do so, and the Company does not
currently intend to list the New Notes on any securities exchange. Any
market-making may be discontinued at any time, and there is no assurance that an
active public market for the New Notes will develop or, that if such a market
develops, that it will continue. This Prospectus may be used by the Initial
Purchasers in connection with offers and sales of the New Notes which may be
made by them from time to time in market-making transactions at negotiated
prices relating to prevailing market prices at the time of sale. The Initial
Purchasers may act as principal or agent in such transaction.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH
THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE
SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING HEREBY TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS OR
THE ACCOMPANYING LETTER OF TRANSMITTAL, AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. NEITHER THE DELIVERY OF THIS PROSPECTUS OR THE ACCOMPANYING LETTER OF
TRANSMITTAL NOR ANY EXCHANGE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE
ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE
SUBSEQUENT TO THE DATE HEREOF.
MARKET DATA USED THROUGHOUT THIS PROSPECTUS WAS OBTAINED FROM CONSULTANT'S
REPORTS AND INDUSTRY PUBLICATIONS. INDUSTRY PUBLICATIONS AND CONSULTANT'S
REPORTS GENERALLY STATE THAT THE INFORMATION CONTAINED THEREIN HAS BEEN OBTAINED
FROM SOURCES BELIEVED TO BE RELIABLE, BUT THAT THE ACCURACY AND COMPLETENESS OF
SUCH INFORMATION IS NOT GUARANTEED. THE COMPANY HAS NOT INDEPENDENTLY VERIFIED
THIS MARKET DATA.
Old Notes in the aggregate principal amount of $100 million were issued
originally in global form (the "Global Old Note"). The Global Old Note was
deposited with, or on behalf of, The Depository Trust Company, as the initial
depository with respect to the Old Notes (in such capacity, the "Depository").
The Global Old Note is registered in the name of Cede & Co., as nominee of the
Depository, and the beneficial interests in the Global Old Note are shown on,
and transfers thereof are effected only through, records maintained by the
Depository and its participants. The use of the Global Old Note to represent
certain of the Old Notes permits the Depository's participants, and anyone
holding a beneficial interest in an Old Note registered in the name of such a
participant, to transfer interests in the Old Notes electronically in accordance
with the Depository's established procedures without the need to transfer a
physical certificate. Except as provided below, the New Notes will also be
issued initially as a note in global form (the "Global New Note" and, together
with the Global Old Note, the "Global Notes") and deposited with, or on behalf
of, the Depository.
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AVAILABLE INFORMATION
The Company has filed with the Commission a registration statement on Form
S-4 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement" or the "Exchange Offer Registration Statement") under
the Securities Act with respect to the New Notes offered hereby. This
Prospectus, which forms a part of the Registration Statement, does not contain
all of the information set forth in the Registration Statement and the exhibits
and schedules thereto, certain parts of which are omitted in accordance with the
rules and regulations of the Commission. For further information with respect to
the Company and the New Notes offered hereby, reference is made to the
Registration Statement and the exhibits and schedules thereto. Any statements
made in this Prospectus concerning the provisions of certain documents are not
necessarily complete and, in each instance, reference is made to the copy of
such document filed as an exhibit to the Registration Statement otherwise filed
with the Commission.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Commission. The Registration Statement, the exhibits forming a part thereof and
such reports, proxy statements and other information can be inspected and copied
at the public reference facilities maintained by the Commission at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following
Regional Offices of the Commission: New York Regional Office, Seven World Trade
Center, 13th Floor, New York, New York 10048; and Chicago Regional Office,
Citicorp Center, 500 West Madison Street, 14th Floor, Chicago, Illinois 60601.
Copies of such material can be obtained from the Public Reference Section of the
Commission, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. The Commission also maintains an Internet Web Site at
http://www.sec.gov that contains reports and other information.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
THIS PROSPECTUS INCLUDES "FORWARD-LOOKING STATEMENTS," INCLUDING STATEMENTS
CONTAINING THE WORDS "BELIEVES," "ANTICIPATES," "EXPECTS" AND WORDS OF SIMILAR
IMPORT. ALL STATEMENTS OTHER THAN STATEMENTS OF HISTORICAL FACT INCLUDED IN THIS
PROSPECTUS, INCLUDING, WITHOUT LIMITATION, THE STATEMENTS UNDER "SUMMARY," "RISK
FACTORS," "MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS," "BUSINESS" AND ELSEWHERE HEREIN, REGARDING THE COMPANY
OR ANY OF THE TRANSACTIONS DESCRIBED HEREIN, INCLUDING THE TIMING, FINANCING,
STRATEGIES AND EFFECTS OF SUCH TRANSACTIONS, ARE FORWARD-LOOKING STATEMENTS.
ALTHOUGH THE COMPANY BELIEVES THAT THE EXPECTATIONS REFLECTED IN SUCH
FORWARD-LOOKING STATEMENTS ARE REASONABLE, IT CAN GIVE NO ASSURANCE THAT SUCH
EXPECTATIONS WILL PROVE TO HAVE BEEN CORRECT. IMPORTANT FACTORS THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM EXPECTATIONS ARE DISCLOSED IN THIS
PROSPECTUS, INCLUDING, WITHOUT LIMITATION, IN CONJUNCTION WITH THE
FORWARD-LOOKING STATEMENTS IN THIS PROSPECTUS AND/OR UNDER "RISK FACTORS." THE
COMPANY DOES NOT INTEND TO UPDATE THESE FORWARD-LOOKING STATEMENTS.
FOR PENNSYLVANIA RESIDENTS ONLY
NEW NOTES OFFERED IN THIS EXCHANGE OFFER TO PENNSYLVANIA RESIDENTS MAY ONLY
BE EXCHANGED FOR OLD NOTES HELD BY PENNSYLVANIA RESIDENTS WHO ARE INSTITUTIONAL
INVESTORS AS DEFINED BY SECTION 102(k) OF THE PENNSYLVANIA SECURITIES ACT OF
1972 AND RULE 102.111 OF THE PENNSYLVANIA CODE, AS AMENDED.
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SUMMARY
The following summary information is qualified in its entirety by reference
to the more detailed information and financial statements (including the notes
thereto) appearing elsewhere in this Prospectus. References contained in this
Prospectus 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. Unless the
source was specifically indicated, all industry and market share data set forth
in this Prospectus are based upon estimates by ENTEX management. As used in this
Prospectus, unless the context otherwise requires, "ENTEX" or the "Company"
refers to ENTEX Information Services, Inc., a Delaware corporation, and its
subsidiaries.
THE COMPANY
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. 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.
In November 1998, the Company reorganized its operations by creating two
distinct operating divisions: ENTEX Technology Acquisition Services Division
(the "TAS Division") and ENTEX Services Division (the "Services Division"). The
TAS Division offers hardware and software solutions to large businesses,
including custom configuration, channel assembly, electronic commerce and
integration services. The Services Division offers desktop outsourcing,
enterprise network and consulting services and traditional maintenance and
support services. The reorganization was intended to allow each division to
focus on anticipating trends and capitalize on new market opportunities within
their respective markets. The new focus should allow each division to
collaborate more closely and effectively with their customers, concentrate on
the Company's products and services and utilize the talents of each division's
employees more efficiently and profitably while continuing to provide integrated
management solutions.
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.
The Company competes in two primary markets: product procurement of PC
hardware, software and peripherals and information technology services and its
two divisions are structured and managed to focus on these markets. Dataquest,
the research division of the Gartner Group, estimated the total U.S. market for
PC hardware, software and peripherals procurement at $99 billion in 1997.
According to Dataquest, this market has grown at a compound annual rate of
approximately 23% from 1994 through 1997. This growth has been
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due in large part to the growth of the domestic economy, the beginning of a
technology migration to the Pentium II(TM) microprocessor, migration to new
desktop and network operating systems and increased demand for products for a
mobile workforce including laptop PCs. According to Dataquest, the total U.S.
market for information technology services is estimated to have exceeded $128
billion in 1997. Management believes this market has grown at a compound annual
rate of approximately 23% from 1994 through 1997. In the information technology
service specialties of network integration and outsourcing, Dataquest reports
that the U.S. market is estimated to have exceeded $15 billion and $24 billion,
respectively, in 1997. Management believes as corporations analyze the cost of
supporting their PC and network environments, an increasing number will rely
upon third-party systems integration and outsourcing to design, build, expand
and maintain their information technology systems.
ENTEX intends to use its industry leadership in outsourcing and system
migrations to capitalize upon these trends. The Company seeks to establish
long-term relationships with large corporations that are information intensive
and require more effective management of their distributed information
technology. ENTEX provides products and/or significant services to some of the
most recognized U.S. corporations, several of which are considered technology
leaders in their respective industries, including AlliedSignal, American
Express, CIGNA, Coca-Cola, GTE, Hoffmann-La Roche, Koch Industries, KPMG,
Metropolitan Life, Microsoft, Motorola, Pfizer and US West. The Company believes
that its position as a supplier to leaders in certain industries allows it to
attract leaders in a variety of other industries thereby increasing the
diversification of its customer base. The 100 largest customers accounted for
approximately 63% and 64% of total net revenues during Fiscal 1998 and the three
months ended September 27, 1998, respectively, and no one customer accounted for
more than 6% of total net revenues in these periods.
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.
In November 1998, the Company announced the formation of two operating divisions
to focus on each of these business segments. For Fiscal 1998 and the three
months ended September 27, 1998, product sales accounted for 81.7% and 78.9%,
respectively, of total net revenues and 65.4% and 50.6%, respectively, of total
gross profit, while services accounted for 18.3% and 21.1%, respectively, of
total net revenues and 34.6% and 49.4%, respectively, of total gross profit.
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.
- - PC Acquisition Services. Through its TAS Division, the Company distributes a
full range of multi-vendor PC and network products, software and peripherals,
providing its customers with a single source for all such needs. ENTEX's
product procurement solutions are based on (i) product sourcing arrangements
from the largest original equipment manufacturers ("OEMs"), (ii) customized
configuration services and (iii) build-to-order assembly to meet specific
end-user requirements. In the twelve months ended September 27, 1998,
approximately 93% of all products sold by the Company were purchased directly
from OEMs, including Cisco, Compaq, Digital Equipment Corporation ("DEC"),
Hewlett-Packard ("HP"), IBM, Intel, Kingston, Microsoft, NEC, 3Com and
Toshiba. The Company also provides shrink-wrapped and Volume License Agreement
("VLA") application software enabling it to provide a complete fully
integrated hardware and software solution. The Company's state-of-the-art, ISO
9001 certified integration center (the first in the industry to receive ISO
certification) customizes an average of 25,000 units per month. In the twelve
months ended September 27, 1998, over 63% of all desktop PCs, 54% of all
laptop PCs and 47% of all servers shipped by ENTEX were configured by ENTEX
with additional hardware components, customer-specific software and/or
proprietary applications. Most configured systems are pre-tested on a mirror
image of the customers' operating platform to ensure seamless and virus-free
delivery and integration with the customers' existing infrastructure. In the
twelve months ended September 27, 1998, more than 99% of non-configured
in-stock orders were shipped same day, while 98% of in-stock configured
systems were shipped within 48 hours of order placement. ENTEX is increasing
its amount of build-to-
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order OEM assembly partnerships to reduce inventory while providing greater
product availability and responsiveness to customers. The Company is currently
providing build-to-order assembly for IBM, Compaq and HP products.
- - Outsourcing Services. Through its Services Division, the Company provides
total support for PCs, servers and related network hardware and software
including network implementation, operation and support, warranty services,
help desk and deskside support and asset management. Management believes the
Company is one of the largest providers of PC outsourcing services to large
enterprise users. As of September 27, 1998, the Company had multi-year
outsourcing service contracts covering more than 682,000 PCs and servers. The
Company offers on-site and centralized maintenance and support services to its
customers with approximately 4,000 of the Company's technical professionals
on-site daily at customer locations as of September 27, 1998. ENTEX certifies
its engineers and consultants in the installation and maintenance of
multi-vendor hardware and software. The Company also provides a centralized
service center operation which includes a 24-hour help desk, a call dispatch
service and a network support line, which together handle approximately 90,000
customer calls per month. The Company has developed best practice
methodologies through managing a large, diverse installed base of PCs under
corporate outsourcing arrangements which it leverages to meet unique customer
requirements. ENTEX was one of the first in the industry to establish
multi-year, performance-oriented Service Level Agreements ("SLAs") which
specify measurable support levels and benchmarks tailored to individual
customer needs. As of September 27, 1998, the Company's 100 largest
outsourcing service contracts ranged from 200 to 60,000 PCs and had an average
annualized contract value of over $2.7 million. As part of its outsourcing
arrangements, ENTEX generally provides significant PC Acquisition Services to
its customers. The 100 largest outsourcing service contracts in effect as of
September 27, 1998, provided for approximately $2.31 in product revenues for
every $1.00 of services; however, the customers under such contracts are not
generally committed to purchase such products. Management expects the volume
of outsourcing contracts to accelerate as an increasing number of large
enterprises evaluate the total cost of ownership and technical capabilities of
their existing systems.
- - Network, Professional and Migration Services. Through its Services Division,
the Company provides customers with network design, implementation and
integration services on a project basis, including the design, installation
and upgrade of local-area, wide-area and enterprise networks. The Company also
provides a wide range of migration services to assist customers in
transitioning from one computing environment to another, including Microsoft
Windows NT(TM) and BackOffice(TM) migrations, local-area network migrations,
desktop PC operating system migrations and messaging migrations. The Company
believes it is one of the industry leaders in system migrations, having
completed such migrations on approximately 242,000 units as of September 27,
1998. ENTEX believes it employs one of the largest group of Microsoft
certified systems engineers to perform system migrations and upgrades to
Windows-based technology. The Company has completed some of the largest system
migrations for corporations which are leaders in their respective industries,
and the Company believes it has developed core competencies that are
leveragable over its existing customer base.
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. The
creation of the TAS Division and the Services Division is intended to allow the
Company to better focus on each of its business segments. Key elements of the
Company's strategy are to:
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
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to each customer and to increase the number of affiliated operations of such
customers to which it sells services. In Fiscal 1995, the Company had 51
customers which purchased products and services totaling at least $5 million. In
Fiscal 1998, those same customers had more than doubled their aggregate
purchases of services from $57.9 million in Fiscal 1995 to $134.7 million.
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. ENTEX has completed PC and
server migrations on approximately 242,000 units as of September 27, 1998,
including a 40,000 desktop migration transitioning one customer's business to a
32-bit Windows NT(TM) environment, which management believes is one of the
largest 32-bit migrations undertaken in the United States to date. 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 OEMs and
suppliers such as Compaq, HP, IBM and Microsoft. 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
inventories decreased from $184.4 million as of September 28, 1997 to $142.9
million as of September 27, 1998, or 22.5%. The Company's inventory turns
improved from 9.5x for the twelve months ended September 28, 1997 to 10.2x for
the twelve months ended September 27, 1998. 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. The Company is currently
providing build-to-order assembly for IBM, Compaq and HP products.
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.
4
<PAGE> 9
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 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.
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. Other equity holders of the
Company include certain executives and employees of the Company, IBM and
Microsoft.
The Company's principal executive offices are located at Six International
Drive, Rye Brook, New York. The Company's telephone number is (914) 935-3600.
5
<PAGE> 10
THE EXCHANGE OFFER
Registration Agreement........ The Old Notes were sold by the Company on July
29, 1998 (the "Original Issue Date") to CIBC
Oppenheimer Corp. and Lazard Freres & Co. LLC
(the "Initial Purchasers"), who placed the Old
Notes with certain institutional investors. In
connection therewith, the Company executed and
delivered for the benefit of the holders of the
Old Notes a registration rights agreement (the
"Registration Rights Agreement") providing for,
among other things, the Exchange Offer. See
"The Exchange Offer -- Terms of the Exchange
Offer."
Terms of the Exchange Offer... New Notes are being offered in exchange for a
like principal amount of Old Notes. Old Notes
may be exchanged only in integral multiples of
$1,000. The Company will issue the New Notes to
holders promptly following the Expiration Date.
See "Risk Factors -- Consequences of Failure to
Exchange."
Expiration Date............... 5:00 p.m. New York City time on February 24,
1999, unless the Exchange Offer is extended, in
which case the term "Expiration Date" means the
latest date and time to which the Exchange
Offer is extended. See "The Exchange
Offer -- Terms of the Exchange Offer."
Conditions to the Exchange
Offer......................... The Exchange Offer is not conditioned upon any
minimum aggregate principal amount of Old Notes
being tendered or accepted for exchange.
However, the Exchange Offer is subject to
certain customary conditions, which may be
waived by the Company. The Company reserves the
right to terminate or amend the Exchange Offer
at any time prior to the Expiration Date upon
the occurrence of any such condition. The
Exchange Offer is also subject to the terms and
provisions of the Registration Rights
Agreement. NO VOTE OF THE COMPANY'S
SECURITYHOLDERS IS REQUIRED TO EFFECT THE
EXCHANGE OFFER AND NO SUCH VOTE (OR PROXY
THEREFOR) IS BEING SOUGHT HEREBY. See "The
Exchange Offer -- Certain Conditions to the
Exchange Offer."
Procedures for Tendering Old
Notes......................... Each holder of Old Notes wishing to accept the
Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof,
in accordance with the instructions contained
herein and therein, and mail or otherwise
deliver such Letter of Transmittal, or such
facsimile, together with the Old Notes, or a
Book-Entry Confirmation (as defined), as the
case may be, and any other required
documentation to Marine Midland Bank, as
exchange agent (the "Exchange Agent") at the
address set forth herein. The method of
delivery of such documentation is at the
election and risk of the holder. By executing
the Letter of Transmittal, each holder will
represent to the Company, among other things,
that (i) the New Notes acquired pursuant to the
Exchange Offer by the holder and any beneficial
owners of Old Notes are being obtained in the
ordinary course of business of the person
receiving such New Notes, (ii) neither the
holder nor such beneficial owner is
participating in, intends to participate in or
has
6
<PAGE> 11
an arrangement or understanding with any person
to participate in the distribution of such New
Notes and (iii) neither the holder nor such
beneficial owner is an "affiliate," as defined
under Rule 405 of the Securities Act, of the
Company. Each broker-dealer that receives New
Notes for its own account in exchange for Old
Notes, where such Old Notes were acquired by
such broker or dealer as a result of
market-making activities or other trading
activities (other than Old Notes acquired
directly from the Company), must acknowledge in
the Letter of Transmittal that it will deliver
a prospectus in connection with any resale of
such New Notes. See "The Exchange
Offer -- Procedures for Tendering Old Notes"
and "Plan of Distribution."
Special Procedures for
Beneficial Owners............. Any beneficial owner whose Old Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee
and who wishes to tender should contact such
registered holder promptly and instruct such
registered holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes
to tender on such owner's own behalf, such
owner must, prior to completing and executing
the Letter of Transmittal and delivering his or
her Old Notes, either make appropriate
arrangements to register ownership of the Old
Notes in such owner's name or obtain a properly
completed bond power from the registered
holder. The transfer of registered ownership
may take considerable time. See "The Exchange
Offer -- Procedures for Tendering Old Notes."
Guaranteed Delivery
Procedures.................... Holders of Old Notes who wish to tender their
Old Notes and whose Old Notes are not
immediately available or who cannot deliver
their Old Notes, the Letter of Transmittal or
any other documents required by the Letter of
Transmittal to the Exchange Agent (or comply
with the procedures for book-entry transfer)
prior to the Expiration Date must tender their
Old Notes according to the guaranteed delivery
procedures set forth in "The Exchange
Offer -- Guaranteed Delivery Procedures."
Book-Entry Transfer........... Any financial institution that is a participant
in the Book-Entry Transfer Facility's (as
defined) system may make book-entry delivery of
Old Notes by causing the Book-Entry Transfer
Facility to transfer such Old Notes into the
Exchange Agent's account at the Book-Entry
Transfer Facility in accordance with such Book-
Entry Transfer Facility's procedures for
transfer. See "The Exchange Offer -- Book-Entry
Transfer."
Withdrawal Rights............. Tenders of Old Notes may be withdrawn at any
time prior to 5:00 p.m. New York City time, on
the Expiration Date. See "The Exchange
Offer -- Withdrawal of Tenders."
Acceptance of Old Notes and
Delivery of New Notes......... Upon satisfaction or waiver of all conditions
of the Exchange Offer, the Company will accept
for exchange any and all Old Notes which are
properly tendered and not withdrawn prior to
5:00 p.m., New York City time, on the
Expiration Date. The New Notes issued pursuant
to the Exchange Offer will be delivered
promptly
7
<PAGE> 12
following the Expiration Date. See "The
Exchange Offer -- Acceptance of Old Notes for
Exchange; Delivery of New Notes."
Federal Income Tax
Consequences.................. The exchange of Old Notes for New Notes by
tendering holders will not be a taxable
exchange for federal income tax purposes as a
result of such exchange. See "Certain Federal
Income Tax Consequences."
Regulatory Approvals.......... The Company does not believe that the receipt
of any material federal or state regulatory
approvals will be necessary in connection with
the Exchange Offer. See "The Exchange
Offer -- Regulatory Approvals."
Use of Proceeds............... The Company will not receive any proceeds from
the exchange pursuant to the Exchange Offer.
See "Use of Proceeds."
Exchange Agent................ Marine Midland Bank is serving as Exchange
Agent in connection with the Exchange Offer.
See "The Exchange Offer -- Exchange Agent."
Consequences of Failure
to Exchange................. The trading market for the holder's Old Notes
could be adversely affected upon completion of
the Exchange Offer if such holder does not
participate in the Exchange Offer. See "The
Exchange Offer -- Consequences of Failure to
Exchange."
Resales of the New Notes...... The New Notes are being offered hereunder in
order to satisfy certain obligations of the
Company contained in the Registration Rights
Agreement. Based on interpretations by the
staff of the Commission as set forth in Exxon
Capital Holdings Corporation (avail. May 13,
1988), Morgan Stanley & Co. Incorporated
(avail. June 5, 1991) and Shearman & Sterling
(avail. July 2, 1993) and other no-action
letters issued to third parties, the Company
believes that the New Notes issued pursuant to
the Exchange Offer to a holder in exchange for
Old Notes may be offered for resale, resold and
otherwise transferred by any holder thereof
(other than any such holder which is an
"affiliate" of the Company within the meaning
of Rule 405 under the Securities Act), without
compliance with the registration and prospectus
delivery provisions of the Securities Act,
provided that such New Notes are acquired in
the ordinary course of such holder's business
and such holder is not participating, does not
intend to participate and has no arrangement or
understanding with any person to participate in
the distribution of such New Notes. If any
holder acquires New Notes in the Exchange Offer
for the purpose of distributing or
participating in a distribution of New Notes,
such holder cannot rely on the position of the
staff of the Commission set forth in its
no-action and interpretive letters and must
comply with the registration and prospectus
delivery requirements of the Securities Act in
connection with a secondary resale transaction,
unless an exemption from registration is
otherwise available. Each broker-dealer that
receives New Notes for its own account pursuant
to the Exchange Offer must acknowledge that (i)
Old Notes tendered by it in the Exchange Offer
were acquired in the ordinary course of its
business as a result of market-making or other
trading activities and (ii) it
8
<PAGE> 13
will deliver a prospectus in connection with
any resale of New Notes received in the
Exchange Offer. This Prospectus, as it may be
amended or supplemented from time to time, may
be used by a broker-dealer in connection with
any resale of the New Notes received in
exchange for Old Notes where such Old Notes
were acquired by such broker-dealer as a result
of market-making or other trading activities
(other than Old Notes acquired directly from
the Company). The Company has agreed that, for
a period of 180 days following the consummation
of the Exchange Offer, it will make this
Prospectus available to any broker-dealer for
use in connection with any such resale. See
"The Exchange Offer -- Resales of the New
Notes" and "Plan of Distribution."
SUMMARY DESCRIPTION OF THE NEW NOTES
The Exchange Offer relates to the exchange of up to $100,000,000 aggregate
principal amount of Old Notes for an equal aggregate principal amount of New
Notes. Holders of New Notes will be entitled to the benefits of the Indenture.
The New Notes will be identical to the Old Notes, except that (i) the New Notes
will have been registered under the Securities Act and thus will not bear
restrictive legends restricting their transfer pursuant to the Securities Act
and (ii) holders of New Notes will not be entitled to registration rights that
holders of the Old Notes have under the Registration Rights Agreement except
under limited circumstances. See "Description of the Notes."
Securities Offered............ Up to $100,000,000 principal amount of 12 1/2%
Senior Subordinated Notes due 2006 (the "New
Notes").
Maturity Date................. August 1, 2006.
Interest Rate................. The New Notes will bear interest at a rate of
12 1/2% per annum.
Interest Payment Dates........ Interest will accrue on the New Notes from the
last interest payment date on which interest
was paid on the Old Notes surrendered in
exchange therefor or if no interest has been
paid on the Old Notes, from the Original Issue
Date and will be payable semi-annually on each
February 1 and August 1 of each year,
commencing February 1, 1999. Interest on the
New Notes will be paid on the basis of a
360-day year of twelve 30-day months.
Ranking....................... The New Notes will be general unsecured
obligations of the Company subordinate in right
of payment to all existing and future Senior
Indebtedness (as defined herein) of the
Company, senior in right of payment to all
existing and future subordinated indebtedness
of the Company and pari passu in right of
payment with all future senior subordinated
indebtedness of the Company. As of September
27, 1998, the Company had outstanding $354.0
million of total Indebtedness (as defined
herein), $229.2 million of which was Senior
Indebtedness and $24.9 million of which was
Indebtedness subordinated to the Notes. See
"Description of the Notes -- Subordination."
Guarantees.................... The New Notes will be fully and unconditionally
guaranteed, on an unsecured senior subordinated
basis, as to payment of principal, premium, if
any, and interest, jointly and severally (the
"Guarantees"), by all of the direct and
indirect domestic Restricted Subsidiaries (as
defined herein) of the Company (the
"Guarantors"). The Guarantees will be
subordinated to all Guarantor
9
<PAGE> 14
Senior Indebtedness (as defined herein) of the
respective Guarantors. A "Restricted
Subsidiary" means a Subsidiary of the Company
other than an Unrestricted Subsidiary (as
defined herein) and includes all of the
Subsidiaries of the Company existing as of the
Issue Date. An "Unrestricted Subsidiary" means
(a) any Subsidiary of an Unrestricted
Subsidiary and (b) any Subsidiary of the
Company which is classified after the Issue
Date as an Unrestricted Subsidiary by a
resolution adopted by the Board of Directors of
the Company; provided that a Subsidiary
organized or acquired after the Issue Date may
be so classified as an Unrestricted Subsidiary
only if such classification is in compliance
with the covenant set forth under "Description
of the Notes -- Certain Covenants -- Limitation
on Restricted Payments." See "Description of
the Notes." As of the Issue Date, the Notes
will be Guaranteed by all of the Company's
domestic subsidiaries which consist of ENTEX
Information Services of Michigan, Inc., ENTEX
Information Services of Colorado, Inc., ENTEX
Services, Inc., Erlanger Land Co., Inc. and FCP
Technologies, Inc. As of the Issue Date, the
Company will have three foreign subsidiaries
which will not guarantee the Notes.
Mandatory Redemption.......... There will be no mandatory redemption
requirements with respect to the New Notes.
Optional Redemption........... The New Notes will be redeemable at the option
of the Company, in whole or in part, at any
time on or after August 1, 2003, at the
redemption prices set forth herein plus accrued
interest to the date of redemption. In
addition, upon a Change of Control (as defined
herein) on or prior to August 1, 2000, the
Company, at its option, may redeem all but not
less than all of the New Notes outstanding at a
redemption price equal to 112.5% of the
aggregate principal amount of the New Notes so
redeemed plus accrued interest to the date of
redemption. The Company, at its option, may
redeem in the aggregate up to 35% of the
original principal amount of the Notes at any
time or from time to time prior to August 1,
2000, at a redemption price equal to 112.5% of
the aggregate principal amount so redeemed plus
accrued interest to the date of redemption,
with the Net Proceeds (as defined herein) of
one or more Public Equity Offerings (as defined
herein) of the Company, provided that at least
$65.0 million of the original principal amount
of the Notes remains outstanding immediately
after the occurrence of any such redemption and
that any such redemption occurs within 90 days
following the closing of any such Public Equity
Offering.
Change of Control............. In the event of a Change of Control, the
Company will be required to make an offer to
purchase all outstanding New Notes at a
purchase price equal to 101% of the principal
amount thereof plus accrued interest to the
date of purchase. See "Description of the
Notes -- Certain Covenants -- Change of Control
Offer." There can be no assurance that the
Company will have sufficient funds or will be
contractually permitted by outstanding Senior
Indebtedness to pay the required purchase price
for all New Notes tendered by holders upon a
Change of Control.
Asset Sale Proceeds........... The Company will be obligated in certain
instances to make an offer to purchase the New
Notes at a purchase price in cash equal
10
<PAGE> 15
to 100% of the principal amount thereof plus
accrued interest to the date of purchase with
the net cash proceeds of certain asset sales.
See "Description of the Notes -- Certain
Covenants -- Limitation on Certain Asset
Sales."
Certain Covenants............. The Indenture will contain covenants for the
benefit of the holders of the New Notes that,
among other things, restrict the ability of the
Company and its Restricted Subsidiaries to: (i)
incur additional Indebtedness; (ii) pay
dividends and make distributions; (iii) issue
stock of Restricted Subsidiaries; (iv)
repurchase stock; (v) create liens; (vi) enter
into transactions with affiliates; (vii) merge
or consolidate the Company or any of the
Guarantors; and (viii) transfer and sell
assets. These covenants are subject to a number
of important exceptions. See "Description of
the Notes -- Certain Covenants."
RISK FACTORS
Holders of the Old Notes should consider carefully the information set
forth under the caption "Risk Factors" and all other information set forth in
this Prospectus prior to tendering their Old Notes in the Exchange Offer.
11
<PAGE> 16
SUMMARY CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT SHARE 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 June 28, 1998 have been derived from
consolidated financial statements of the Company, which have been audited by
KPMG 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 Prospectus. Historical data as of and for the three months
ended September 28, 1997 and September 27, 1998, and as of and for the twelve
months ended September 27, 1998 have been derived from unaudited interim
consolidated financial statements of the Company which, in the opinion of
management, have been prepared on the same basis as the audited consolidated
financial statements and include all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the information. Data for the
three months ended September 27, 1998 may not be indicative of the results to be
expected for the full fiscal year. The information set forth herein has been
adjusted for stock dividends. See Note 7 of notes to the Company's consolidated
financial statements.
The following information is qualified in its entirety by, and should be
read in conjunction with, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
of the Company (including the notes thereto) included elsewhere herein.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED THREE MONTHS ENDED
-------------------------------------------------------------- -----------------------------
JULY 3, JULY 2, JUNE 30, JUNE 29, JUNE 28, SEPTEMBER 28, SEPTEMBER 27,
1994(1) 1995 1996 1997 1998 1997 1998
---------- ---------- ---------- ---------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenues:
Product revenues................ $1,019,010 $1,342,323 $1,940,796 $2,126,973 $2,006,161 $ 500,938 $ 438,252
Service revenues................ 75,917 130,940 207,511 353,624 450,471 105,901 116,888
---------- ---------- ---------- ---------- ---------- ----------- -----------
Total net revenues............ 1,094,927 1,473,263 2,148,307 2,480,597 2,456,632 606,839 555,140
Cost of revenues:
Cost of products sold........... 917,939 1,236,940 1,764,775 1,922,826 1,800,085 450,781 405,479
Cost of services provided....... 64,300 110,349 168,957 267,554 341,612 79,872 84,901
---------- ---------- ---------- ---------- ---------- ----------- -----------
Total cost of revenues........ 982,239 1,347,289 1,933,732 2,190,380 2,141,697 530,653 490,380
Product gross profit............. 101,071 105,383 176,021 204,147 206,076 50,157 32,773
Service gross profit............. 11,617 20,591 38,554 86,070 108,859 26,029 31,987
---------- ---------- ---------- ---------- ---------- ----------- -----------
Total gross profit............ 112,688 125,974 214,575 290,217 314,935 76,186 64,760
Selling, general and
administrative expenses......... 100,790 132,586 192,312 251,963 259,712 61,815 68,857
Nonrecurring stock compensation
costs........................... -- -- 18,185 -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------- -----------
Income (loss) from operations... 11,898 (6,612) 4,078 38,254 55,223 14,371 (4,097)
Interest expense, net............ 17,444 23,151 29,726 37,147 36,663 9,669 9,695
Other income..................... -- -- -- 462 -- -- --
---------- ---------- ---------- ---------- ---------- ----------- -----------
Income (loss) before income
taxes......................... (5,546) (29,763) (25,648) 1,569 18,560 4,702 (13,792)
Provision (benefit) for income
taxes........................... (2,225) (509) 28 25 417 2 8
---------- ---------- ---------- ---------- ---------- ----------- -----------
Net income (loss)................ $ (3,321) $ (29,254) $ (25,676) $ 1,544 $ 18,143 $ 4,700 $ (13,800)
========== ========== ========== ========== ========== =========== ===========
COMMON SHARE DATA:(2)
Basic earnings (loss) per
share........................... $ (.12) $ (.93) $ (.82) $ .05 .56 $ .15 $ (.43)
========== ========== ========== ========== ========== =========== ===========
Diluted earnings (loss) per
share........................... $ (.12) $ (.93) $ (.82) $ .05 .53 $ .14 $ (.43)
========== ========== ========== ========== ========== =========== ===========
Basic weighted average number of
shares of common stock
outstanding..................... 28,053,165 31,333,300 31,348,340 32,281,463 32,357,968 32,399,060 32,402,154
Diluted weighted average number
of shares of common stock
outstanding..................... 28,053,165 31,333,300 31,348,340 33,572,160 34,269,146 33,736,205 32,402,154
========== ========== ========== ========== ========== =========== ===========
</TABLE>
12
<PAGE> 17
<TABLE>
<CAPTION>
FISCAL YEAR ENDED THREE MONTHS ENDED
-------------------------------------------------------------- -----------------------------
JULY 3, JULY 2, JUNE 30, JUNE 29, JUNE 28, SEPTEMBER 28, SEPTEMBER 27,
1994(1) 1995 1996 1997 1998 1997 1998
---------- ---------- ---------- ---------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA(3)........................ $ 18,897 $ 146 $ 35,903 $ 56,639 $ 78,569 $ 19,697 $ 1,187
Cash Flow provided by (used in)
operating activities............ -- (8,954) (74,670) (26,100) 54,809 21,098 7,162
Depreciation and amortization.... 6,999 6,758 13,640 18,385 23,346 5,326 5,285
Interest expense, net............ 17,444 23,151 29,726 37,147 36,663 9,669 9,695
Capital expenditures............. 2,420 7,178 19,205 21,737 19,655 4,219 8,593
Ratio of earnings to fixed
charges(4)...................... -- -- -- 1.0x 1.5x 1.5x --
</TABLE>
<TABLE>
<CAPTION>
TWELVE MONTHS
ENDED
SEPTEMBER 27, 1998
------------------
<S> <C>
FINANCIAL DATA:
EBITDA...................................................... $60,058
Interest expense (inclusive of interest accrued on asset
based financing)(5)....................................... 37,855
EBITDA/interest expense (inclusive of interest accrued on
asset based financing)(5)................................. 1.6x
Total debt (exclusive of asset based financing)/EBITDA...... 2.3x
Total debt/EBITDA........................................... 5.9x
</TABLE>
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 27, 1998
------------------
<S> <C>
BALANCE SHEET DATA:
Cash........................................................ $ 9,436
Working capital (deficit) (exclusive of cash)............... (21,710)
Total assets................................................ 689,852
Asset based financing (6)................................... 216,385
Total debt (exclusive of asset based financing)(6).......... 137,643
Total stockholders' equity (deficit)........................ (32,854)
</TABLE>
- ---------------
(1) The statement of operations data for Fiscal 1994 present the results of
operations from August 6, 1993, the date the Company acquired the net assets
of JWPIS.
(2) See Note 1 to the Company's consolidated financial statements for an
explanation of the calculation of weighted average number of shares
outstanding.
(3) Represents income (loss) from operations plus depreciation and amortization
and, in Fiscal 1996, nonrecurring stock compensation costs. The Company has
included information concerning EBITDA in this Registration Statement
because it is used by certain investors as a measure of a company's ability
to service its debt obligations. EBITDA is not intended to represent cash
flow from operations as defined by generally accepted accounting principles
and should not be used as an alternative to net income as an indicator of
operating performance or to cash flows as a measure of liquidity.
(4) For purposes of computing the ratio of earnings to fixed charges, fixed
charges consist of interest (including the interest component of rental
expenses) and amortization of debt expense. Earnings consist of earnings
from continuing operations before taxes, plus fixed charges. For Fiscal
1994, Fiscal 1995 and Fiscal 1996, earnings were insufficient to cover fixed
charges by $5.5 million, $29.8 million and $25.6 million, respectively. For
the three months ended September 27, 1998, earnings were insufficient to
cover fixed charges by $13.8 million.
(5) Interest expense is adjusted to reflect amortization on a straight-line
basis of the deferred financing fees of $3.6 million related to the Old Note
Offering over a period of eight years and of the deferred financing fees of
$1.1 million related to the IBMCC Working Capital Line of Credit
restructuring over a period of three years.
(6) Excludes certain non-interest bearing amounts ($124.0 million as of
September 27, 1998) owed to IBMCC and FINOVA (as defined herein) which are
classified as accounts payable on the Company's consolidated balance sheet.
See "Description of Other Indebtedness" and Note 5 to the Company's
consolidated financial statements.
13
<PAGE> 18
RISK FACTORS
In addition to the other information in this Prospectus, holders of the Old
Notes should carefully consider the following factors prior to exchanging Old
Notes for the New Notes offered hereby. In addition, this document 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.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes, as set forth in the legend thereon, as a
consequence of the issuance of the Old Notes pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities Act
and applicable state securities laws. In general, the Old Notes may not be
offered or sold, unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. The Company does not currently anticipate that
it will register the Old Notes under the Securities Act. Based on
interpretations by the staff of the Commission set forth in Exxon Capital
Holdings Corporation (avail. May 13, 1988), Morgan Stanley & Co. Incorporated
(avail. June 5, 1991) and Shearman & Sterling (avail. July 2, 1993) and other
no-action letters issued to third parties, the Company believes that the New
Notes issued pursuant to the Exchange Offer to a holder in exchange for Old
Notes may be offered for resale, resold or otherwise transferred by any holder
thereof (other than any such holder which is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act) without compliance with
the registration and prospectus delivery provisions of the Securities Act,
provided that such New Notes are acquired in the ordinary course of such
holder's business and such holder is not participating, does not intend to
participate and has no arrangement or understanding with any person to
participate in the distribution of such New Notes. Each broker-dealer that
receives New Notes for its own account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in connection with any resale of
such New Notes. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with any resale of New Notes received in exchange
for Old Notes where such Old Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities (other than Old
Notes acquired directly from the Company). The Company has agreed that, for a
period of 180 days following the consummation of the Exchange Offer, it will
make this Prospectus available to any broker-dealer for use in connection with
any such resale. However, the ability of any holder to resell the New Notes is
subject to applicable state securities laws as described in "-- Blue Sky
Restrictions on Resale of New Notes" below. To the extent that Old Notes are
tendered and accepted in the Exchange Offer, the trading market, if any, for the
Old Notes not so tendered could be adversely affected. See "The Exchange Offer"
and "Plan of Distribution."
FAILURE TO COMPLY WITH EXCHANGE OFFER PROCEDURES
To participate in the Exchange Offer and avoid the restrictions on transfer
of the Old Notes, holders of Old Notes must transmit a properly completed Letter
of Transmittal, including all other documents required by such Letter of
Transmittal, to the Exchange Agent at one of the addresses set forth below under
"The Exchange Offer-Exchange Agent" on or prior to the Expiration Date. In
addition, either (i) certificates for such Old Notes must be received by the
Exchange Agent along with the Letter of Transmittal, (ii) a timely confirmation
of a book-entry transfer of such Old Notes, if such procedure is available, into
the Exchange Agent's account at the Book-Entry Transfer Facility pursuant to the
procedure for book-entry transfer described herein must be received by the
Exchange Agent prior to the Expiration Date or (iii) the holder must comply with
the guaranteed delivery procedures described herein and in the Letter of
Transmittal. The method of delivery of the Old Notes and the Letter of
Transmittal and all other required documents to the Exchange Agent is at the
election and risk of the holder. See "The Exchange Offer."
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<PAGE> 19
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
September 27, 1998, the Company had outstanding indebtedness of approximately
$354.0 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 IBMCC. The IBMCC Working Capital Line of Credit expires on July
1, 2001 and can be reduced or terminated by IBMCC upon 60 days' prior notice.
There can be no assurance that IBMCC will not reduce or 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.
RESTRICTIVE DEBT COVENANTS
The IBMCC Working Capital Line of Credit, the FINOVA Inventory Line of
Credit (as defined herein) and the Notes offered hereby 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, including the Notes, (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 Capital Corporation
("FINOVA") and inventory subject to a purchase money security interest in favor
of HP 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 EBITDA for the fiscal year-to-date to interest
expense for the fiscal year-to-date and (iii) tangible net worth. 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.
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<PAGE> 20
DECLINING GROSS MARGINS FOR PRODUCT SALES
Approximately 81.7% of the Company's total net revenues in Fiscal 1998 and
approximately 78.9% of the Company's total net revenues in the three months
ended September 27, 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 market development funds ("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 employee 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, HP, IBM and Unisys who sell direct to the
Company's customer base. PC system integrators include CompuCom Systems, DEC, GE
Capital Informa-
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<PAGE> 21
tion 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."
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 and the twelve months
ended September 27, 1998, compared to Fiscal 1997 and the twelve months ended
September 28, 1997, service revenues grew 27.4% and 19.0%, respectively, to
$450.5 million and $461.5 million, respectively, while product revenues declined
5.7% and 7.5%, respectively, to $2,006.2 million and $1,943.5 million,
respectively. 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.
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<PAGE> 22
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 voluntary 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.
DEPENDENCE ON VENDORS
A significant portion of the Company's revenues are derived from sales of
PC hardware, software and related products. Approximately 70.5% of such product
revenues for the twelve months ended September 27, 1998 were attributable to
sales of products manufactured by Compaq, HP 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 and for the three months ended September 27, 1998, the Company
recorded $63.6 million and $9.8 million, respectively, 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."
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<PAGE> 23
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 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 Freight Systems, Inc.
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<PAGE> 24
("Skyway"), an independent shipping company, 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 National Service Center ("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 may 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 applications 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 this review, the Company has
scheduled each system for either renovation or validation. As of June 28, 1998,
the Company was in the process of implementing the R3(TM) Enterprise Resource
Planning System ("ERP") from SAP. It was anticipated that the implementation of
ERP would address Year 2000 compliance in many of the systems identified in the
Company's inventory. The Company has now postponed implementation of ERP pending
a final decision whether or not to abandon the project. As a result of these
factors, the Company has begun to renovate existing systems. Assessments have
also been completed in the processing and telecommunications environments. A
similar activity is currently underway in the employee desktop environment and
is expected to be completed by March 1999. As a result of these efforts, the
Company intends to implement any required changes or upgrades by June 1999. The
Company's inventory and assessment of its non-information technology systems
(facilities and warehouse-based, including scanners, conveyors and security
systems) is expected to be completed by April 1999, followed by any required
renovation. All validation and implementation of these non-information
technology systems is expected to be completed by June 1999. Total costs to
complete the Company's Year 2000 project upgrade are now estimated at
approximately $18 million. As of November 30, 1998, the Company has spent
approximately $13 million, of which approximately $12 million is attributable to
SAP. 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 Electronic Data Interchange ("EDI") customers and suppliers by June
1999.
All potential risks and uncertainties associated with the Year 2000 issue
cannot be fully and accurately quantified. 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 associated with Year 2000 compliance initiatives 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 "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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<PAGE> 25
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 the common
stock 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 "Management" and "Principal Stockholders."
SUBORDINATION
The Notes will be unsecured and subordinated to the prior payment in full
of all Senior Indebtedness whether existing upon the consummation of the Old
Notes Offering or thereafter incurred. As of September 27, 1998, the aggregate
outstanding principal amount of all Senior Indebtedness was approximately $229.2
million. In the event of a bankruptcy, liquidation or reorganization of the
Company, the assets of the Company will be available to pay obligations on the
Notes only after all Senior Indebtedness has been paid in full, and there may
not be sufficient assets remaining to pay amounts due on any or all of the
Notes. In addition, the Company may not pay principal or premium, if any, or
interest on the Notes if any Designated Senior Indebtedness (as defined herein)
is not paid when due or any other default on any Designated Senior Indebtedness
occurs and the maturity of such Designated Senior Indebtedness is accelerated in
accordance with its terms, unless, in either case, such amount has been paid in
full or the default has been cured or waived and such acceleration has been
rescinded. In addition, if any default occurs with respect to Designated Senior
Indebtedness and certain other conditions are satisfied, the Company may not
make any payments on the Notes for a designated period of time. Finally, if any
judicial proceeding is pending with respect to any such default in payment of
any Designated Senior Indebtedness, or other default with respect to certain
Designated Senior Indebtedness, or if the maturity of the Notes is accelerated
because of a default under the Indenture and such default constitutes a default
with respect to any Designated Senior Indebtedness, the Company may not make any
payment on the Notes.
FRAUDULENT CONVEYANCE CONSIDERATIONS
Under applicable provisions of the U.S. bankruptcy law or comparable
provisions of state fraudulent transfer laws, if any Guarantor, at the time it
incurs a Guarantee, (a)(i) was or is insolvent or rendered insolvent by reason
of such occurrence, (ii) was or is engaged in a business or transaction for
which the assets remaining with such Guarantor constituted unreasonably small
capital or (iii) intended or intends to incur, or believed or believes that it
would incur, debts beyond its ability to pay such debts as they mature and (b)
received or receives less than reasonably equivalent value or fair
consideration, the obligations of such Guarantor under its Guarantee could be
avoided or claims in respect of such Guarantee could be subordinated to all
other debts of such Guarantor. Among other things, a legal challenge of a
Guarantee on fraudulent conveyance grounds may focus on the value of the
benefits, if any, realized by such Guarantor as a result of the issuance by the
Company of the Notes. To the extent that any Guarantee was a fraudulent
conveyance or held unenforceable for any other reason, the holders of the Notes
would cease to have any claim in respect of such Guarantor and would solely be
creditors of the Company and any other Guarantors whose Guarantee were not void
or held unenforceable.
Each Guarantor will agree, jointly and severally with the other Guarantors,
to contribute to the obligation of any Guarantor under a Guarantee of the Notes.
Further, the Guarantee of each Guarantor will provide that it is limited to an
amount that would not render the Guarantor thereunder insolvent. The Company
believes that none of the Guarantors will be, at the time or as a result of the
issuance of the Guarantees, insolvent, that none of the Guarantors is or will be
engaged in a business or transaction for which its remaining assets constitute
unreasonably small capital and that none of the Guarantors will have intended or
will intend to incur debts beyond its ability to pay such debts as they mature.
Since each of the components of the question
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<PAGE> 26
whether a Guarantee is a fraudulent conveyance is inherently fact-based and
fact-specific, there can be no assurance that a court rendering a decision on
such questions would agree with the Company.
BLUE SKY RESTRICTIONS ON RESALE OF NEW NOTES
In order to comply with the securities laws of certain jurisdictions, the
New Notes may not be offered or resold by any holder unless they have been
registered or qualified for sale in such jurisdictions or any exemption from
registration or qualifications is available and the requirements of such
exemption have been satisfied. The Company does not currently intend to register
or qualify the resale of the New Notes in any such jurisdictions. However, an
exemption is generally available for sales to registered broker-dealers and
certain institutional buyers. Other exemptions under applicable state securities
laws may also be available.
ABSENCE OF PUBLIC MARKET FOR THE NEW NOTES
There has previously been only a limited secondary market, and no public
market, for the Old Notes. The New Notes are a new issue of securities, have no
established trading market, and may not be widely distributed. The Company does
not intend to list the New Notes on any national securities exchange or the
Nasdaq Stock Market or to seek the admission thereof to trading on any automated
quotation system. No assurance can be given that an active public or other
market will develop for the New Notes or as to the liquidity of or the trading
market for the New Notes. If a trading market does not develop or is not
maintained, holders of the New Notes may experience difficulty in reselling the
New Notes or may be unable to sell them at all. If a market for the New Notes
develops, any such market may be discontinued at any time. If a public trading
market develops for the New Notes, future trading prices of the New Notes will
depend on many factors, including, among other things, prevailing interest
rates, the Company's results of operations and the market for similar
securities, and the price at which the holders of New Notes will be able to sell
such New Notes is not assured and the New Notes could trade at a premium or
discount to their purchase price or face value. Depending on prevailing interest
rates, the market for similar securities and other factors, including the
financial condition of the Company, the New Notes may trade at a discount from
their principal amount.
22
<PAGE> 27
CAPITALIZATION
The following table sets forth (a) the cash, (b) the asset based financing,
other notes payable and current installments of long-term debt and (c) the
consolidated capitalization of the Company as of September 27, 1998. This table
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's consolidated
financial statements (including the notes thereto) included elsewhere herein.
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 27, 1998
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Cash........................................................ $ 9,436
========
Asset based financing, other notes payable and current
installments of long-term debt(1):
Asset based financing (IBMCC Working Capital Line of
Credit)................................................ $216,385
Junior Subordinated Debentures............................ 3,750
Other debt................................................ 1,533
--------
Total asset based financing, other notes payable
and current installments of long-term debt....... $221,668
========
Long-term debt (excluding current installments):
Senior Subordinated Notes due 2006........................ $100,000
Junior Subordinated Debentures(2)......................... 21,121
Other debt................................................ 11,241
--------
Total long-term debt (excluding current
installments).................................... 132,362
--------
Stockholders' equity (deficit).............................. (32,854)
--------
Total capitalization.............................. $ 99,508
========
</TABLE>
- ---------------
(1) In addition to the amounts shown above, as of September 27, 1998, an
additional $77.4 million and $46.6 million were owed to IBMCC and FINOVA,
respectively, under the IBMCC Working Capital Line of Credit and the FINOVA
Inventory Line of Credit, which amounts were non-interest bearing and were
classified as accounts payable on the Company's consolidated balance sheet.
See "Description of Other Indebtedness -- IBM Credit Corporation" and
"-- FINOVA Capital Corporation."
(2) Net of unamortized discount of $17.6 million. See "Description of Other
Indebtedness -- Other Indebtedness."
23
<PAGE> 28
SELECTED CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT SHARE 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 June 28, 1998 have been derived from
consolidated financial statements of the Company, which have been audited by
KPMG 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 Prospectus. Historical data as of and for the three months
ended September 28, 1997 and September 27, 1998 have been derived from unaudited
interim consolidated financial statements of the Company which, in the opinion
of management, have been prepared on the same basis as the audited consolidated
financial statements and include all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the information. Data for the
three months ended September 27, 1998 may not be indicative of the results to be
expected for the full fiscal year. The information set forth herein has been
adjusted for stock dividends. See Note 7 of notes to the Company's consolidated
financial statements.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED THREE MONTHS ENDED
-------------------------------------------------------------- -----------------------------
JULY 3, JULY 2, JUNE 30, JUNE 29, JUNE 28, SEPTEMBER 28, SEPTEMBER 27,
1994(1) 1995 1996 1997 1998 1997 1998
---------- ---------- ---------- ---------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF
OPERATIONS DATA:
Net revenues:
Product revenues... $1,019,010 $1,342,323 $1,940,796 $2,126,973 $2,006,161 $ 500,938 $ 438,252
Service revenues... 75,917 130,940 207,511 353,624 450,471 105,901 116,888
---------- ---------- ---------- ---------- ---------- ----------- -----------
Total net
revenues... 1,094,927 1,473,263 2,148,307 2,480,597 2,456,632 606,839 555,140
Cost of revenues:
Cost of products
sold............. 917,939 1,236,940 1,764,775 1,922,826 1,800,085 450,781 405,479
Cost of services
provided......... 64,300 110,349 168,957 267,554 341,612 79,872 84,901
---------- ---------- ---------- ---------- ---------- ----------- -----------
Total cost
of
revenues... 982,239 1,347,289 1,933,732 2,190,380 2,141,697 530,653 490,380
Product gross
profit............. 101,071 105,383 176,021 204,147 206,076 50,157 32,773
Service gross
profit............. 11,617 20,591 38,554 86,070 108,859 26,029 31,987
---------- ---------- ---------- ---------- ---------- ----------- -----------
Total gross
profit.... 112,688 125,974 214,575 290,217 314,935 76,186 64,760
Selling, general and
administrative
expenses........... 100,790 132,586 192,312 251,963 259,712 61,815 68,857
Nonrecurring stock
compensation
costs.............. -- -- 18,185 -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------- -----------
Income
(loss)
from
operations... 11,898 (6,612) 4,078 38,254 55,223 14,371 (4,097)
Interest expense,
net................ 17,444 23,151 29,726 37,147 36,663 9,669 9,695
Other income......... -- -- -- 462 -- -- --
---------- ---------- ---------- ---------- ---------- ----------- -----------
Income (loss)
before income
taxes............ (5,546) (29,763) (25,648) 1,569 18,560 4,702 (13,792)
Provision (benefit)
for income taxes... (2,225) (509) 28 25 417 2 8
---------- ---------- ---------- ---------- ---------- ----------- -----------
Net income (loss).... $ (3,321) $ (29,254) $ (25,676) $ 1,544 $ 18,143 $ 4,700 $ (13,800)
========== ========== ========== ========== ========== =========== ===========
</TABLE>
24
<PAGE> 29
<TABLE>
<CAPTION>
FISCAL YEAR ENDED THREE MONTHS ENDED
-------------------------------------------------------------- -----------------------------
JULY 3, JULY 2, JUNE 30, JUNE 29, JUNE 28, SEPTEMBER 28, SEPTEMBER 27,
1994(1) 1995 1996 1997 1998 1997 1998
---------- ---------- ---------- ---------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
COMMON SHARE DATA:
(2)
Basic earnings (loss)
per share.......... $ (.12) $ (.93) $ (.82) $ .05 .56 $ .15 $ (.43)
========== ========== ========== ========== ========== =========== ===========
Diluted earnings
(loss) per share... $ (.12) $ (.93) $ (.82) $ .05 .53 $ .14 $ (.43)
========== ========== ========== ========== ========== =========== ===========
Basic weighted
average number of
shares of common
stock
outstanding........ 28,053,165 31,333,300 31,348,340 32,281,463 32,357,968 32,399,060 32,402,154
Diluted weighted
average number of
shares of common
stock
outstanding........ 28,053,165 31,333,300 31,348,340 33,572,160 34,269,146 33,736,205 32,402,154
========== ========== ========== ========== ========== =========== ===========
OTHER DATA:
EBITDA(3)............ $ 18,897 $ 146 $ 35,903 $ 56,639 $ 78,569 $ 19,697 $ 1,187
Cash flow provided by
(used in) operating
activities......... -- (8,954) (74,670) (26,100) 54,809 21,098 7,162
Depreciation and
amortization....... 6,999 6,758 13,640 18,385 23,346 5,326 5,285
Interest expense,
net................ 17,444 23,151 29,726 37,147 36,663 9,669 9,695
Capital
expenditures....... 2,420 7,178 19,205 21,737 19,655 4,219 8,593
Ratio of earnings to
fixed charges
(4)................ -- -- -- 1.0x 1.5x 1.5x --
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED THREE MONTHS ENDED
-------------------------------------------------------------- ------------------
JULY 3, JULY 2, JUNE 30, JUNE 29, JUNE 28, SEPTEMBER 27,
1994(1) 1995 1996 1997 1998 1998
---------- ---------- ---------- ---------- ---------- ------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (AT
PERIOD END):
Cash........................ $ 11,192 $ 12,081 $ 12,603 $ 15,838 $ 14,265 $ 9,436
Working capital (deficit)
(exclusive of cash)....... (11,338) (49,059) (81,456) (106,666) (84,204) (21,710)
Total assets................ 351,777 415,170 590,588 683,590 736,419 689,852
Asset based financing (5)... 134,038 150,975 263,025 338,005 290,328 216,385
Total debt (exclusive of
asset based
financing)(5)............. 67,182 66,012 58,911 58,486 58,592 137,643
Total stockholders' equity
(deficit)................. (2,623) (31,305) (39,515) (37,732) (19,145) (32,854)
</TABLE>
- ---------------
(1) The statement of operations data for Fiscal 1994 present the results of
operations from August 6, 1993, the date the Company acquired the net assets
of JWPIS.
(2) See Note 1 to the Company's consolidated financial statements for an
explanation of the calculation of weighted average number of shares
outstanding.
(3) Represents income (loss) from operations plus depreciation and amortization
and, in Fiscal 1996, nonrecurring stock compensation costs. The Company has
included information concerning EBITDA in this Registration Statement
because it is used by certain investors as a measure of a company's ability
to service its debt obligations. EBITDA is not intended to represent cash
flow from operations as defined by generally accepted accounting principles
and should not be used as an alternative to net income as an indicator of
operating performance or to cash flows as a measure of liquidity.
(4) For purposes of computing the ratio of earnings to fixed charges, fixed
charges consist of interest (including the interest component of rental
expenses) and amortization of debt expense. Earnings consist of earnings
from continuing operations before taxes, plus fixed charges. For Fiscal
1994, Fiscal 1995 and Fiscal 1996, earnings were insufficient to cover fixed
charges by $5.5 million, $29.8 million and $25.6 million, respectively. For
the three months ended September 27, 1998, earnings were insufficient to
cover fixed charges by $13.8 million.
(5) Excludes certain non-interest bearing amounts ($124.0 million as of
September 27, 1998) owed to IBMCC and FINOVA which are classified as
accounts payable on the Company's consolidated balance sheet. See
"Description of Other Indebtedness" and Note 5 to the Company's consolidated
financial statements.
25
<PAGE> 30
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 "Risk Factors."
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 the each acquisition. See Note 2 of notes
to the Company's consolidated financial statements.
The Company has two principal sources of revenue: product revenues and
service revenues. Product revenues include acquisition and procurement of
personal computer and network products, software and peripherals. Service
revenues include network services, professional services, outsourcing services,
PC and network operation support services, on-site and centrally located help
desk services, as well as asset management services.
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. For the
three months ended September 27, 1998 and September 28, 1997, product sales
accounted for 78.9% and 82.5% of total net revenues and 50.6% and 65.8% of total
gross profit, respectively, while services accounted for 21.1% and 17.5% of
total net revenues and 49.4% and 34.2% of total gross profit, respectively.
26
<PAGE> 31
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 THREE MONTHS ENDED
-------------------------------- ------------------------------
JUNE 30, JUNE 29, JUNE 28, SEPTEMBER 28, SEPTEMBER 27,
1996 1997 1998 1997 1998
-------- -------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net revenues:
Product revenues........... 90.3% 85.7% 81.7% 82.5% 78.9%
Service revenues........... 9.7 14.3 18.3 17.5 21.1
----- ----- ----- ----- -----
Total net
revenues......... 100.0 100.0 100.0 100.0 100.0
Cost of revenues............. 90.0 88.3 87.2 87.4 88.3
----- ----- ----- ----- -----
Gross margin(1).............. 10.0 11.7 12.8 12.6 11.7
Selling, general and
administrative expenses.... 9.0 10.2 10.6 10.2 12.4
Nonrecurring stock
compensation costs......... 0.8 -- -- -- --
----- ----- ----- ----- -----
Income from operations....... 0.2 1.5 2.2 2.4 (0.7)
Interest expense, net........ 1.4 1.4 1.5 1.6 1.8
Income (loss) before income
taxes...................... (1.2) 0.1 0.7 0.8 (2.5)
Provision (benefit) for
income taxes............... -- -- -- -- --
----- ----- ----- ----- -----
Net income (loss)............ (1.2)% 0.1% 0.7% 0.8% (2.5)%
</TABLE>
- ---------------
(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:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED THREE MONTHS ENDED
-------------------------------- ------------------------------
JUNE 30, JUNE 29, JUNE 28, SEPTEMBER 28, SEPTEMBER 27,
1996 1997 1998 1997 1998
-------- -------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Product gross margin.... 9.1% 9.6% 10.3% 10.0% 7.5%
Services gross margin... 18.6% 24.3% 24.2% 24.6 27.4
</TABLE>
Three Months Ended September 27, 1998 Compared to Three Months Ended September
28, 1997
Consolidated net loss for the three months ended September 27, 1998 was
$13.8 million compared to consolidated net income of $4.7 million in the three
months ended September 28, 1997. The net loss was primarily a result of a
decrease in product revenues and the corresponding gross margin, as well as
increased selling, general and administrative expenses, partially offset by
increased service revenues and services gross margin.
Product revenues. Product revenues were $438.3 million for the three
months ended September 27, 1998 as compared to $500.9 million for the three
months ended September 28, 1997, a decrease of $62.6 million or 12.5%. The
revenue decline primarily reflects availability constraints during the quarter
and a slow-down in orders from a number of significant customers as well as
declining average sales prices.
Service revenues. Service revenues were $116.9 million for the three
months ended September 27, 1998 as compared to $105.9 million for the three
months ended September 28, 1997, an increase of $11.0 million or 10.4%. The
increase reflects increased demand from existing customers and the addition of
new large accounts. Service revenues as a percentage of total net revenues
increased to 21.1% for the quarter ended September 27, 1998 as compared to 17.5%
in the quarter ended September 28, 1997 due to higher service revenues coupled
with a decline in the product business. The Company is focused on continuing to
increase service revenues.
Gross margins. Total gross margins declined to 11.7% for the three months
ended September 27, 1998 as compared to 12.6% for the three months ended
September 28, 1997. Product gross margin as a percentage of product revenues
declined to 7.5% or $32.8 million for the three months ended September 27, 1998
as
27
<PAGE> 32
compared to 10.0% or $50.2 million for the three months ended September 28,
1997. The decrease reflects pricing pressures and a reduction in vendor
incentive programs. Services gross margin increased $6.0 million or 23% to $32.0
million, reflecting operating efficiencies on increased service revenues.
Selling, general and administrative expenses. Selling, general and
administrative expenses as a percentage of total revenues increased to 12.4% for
the quarter ended September 27, 1998 from 10.2% in the previous year's quarter
reflecting increased expenditures as well as lower sales volumes in the product
business. For the three months ended September 27, 1998, selling, general and
administrative expenses were $68.9 million compared to $61.8 million for the
quarter ended September 28, 1997, an increase of $7.1 million, reflecting
increased investments in company-wide infrastructure, training and field
operations to support service business growth.
Income (loss) from operations. Loss from operations was $4.1 million for
the three months ended September 27, 1998 as compared to income from operations
of $14.4 million in the quarter ended September 28, 1997. The loss reflects the
decline in gross margin on product revenues and increased selling, general and
administrative expenses, partially offset by increased gross margin on service
revenues.
Interest expense, net. Net interest expense was essentially unchanged for
the three months ended September 27, 1998 compared to the three months ended
September 28, 1997.
Provisions for income taxes. The Company utilized net operating loss
carryforwards to offset federal income tax requirements for the three months
ended September 28, 1997.
Net income (loss). As a result of the factors mentioned above, net loss
for the three months ended September 27, 1998 was $13.8 million as compared to
net income of $4.7 million for the three months ended September 28, 1997.
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 enterprise
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
28
<PAGE> 33
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 1997
and 1998, the Company did not believe that it had sufficient reason to conclude
that it was more 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 Fiscal 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
29
<PAGE> 34
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.
Provisions for income taxes. The Company utilized net operating loss
carryforwards to offset federal income tax requirements for Fiscal 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.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly statements of
operations data for the eight quarters ended September 27, 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 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.
30
<PAGE> 35
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------
DECEMBER 29, MARCH 30, JUNE 29, SEPTEMBER 28,
1996 1997 1997 1997
------------ --------- -------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues:
Product revenues........ $552,609 $506,370 $542,032 $500,938
Service revenues........ 84,770 92,824 104,356 105,901
-------- -------- -------- --------
Total net revenue..... 637,379 599,194 646,388 606,839
-------- -------- -------- --------
Cost of revenues:
Cost of products sold... 501,181 456,088 482,841 450,781
Cost of services
provided.............. 63,510 71,161 78,844 79,872
-------- -------- -------- --------
Cost of revenues...... 564,691 527,249 561,685 530,653
-------- -------- -------- --------
Product gross margin...... 51,428 50,282 59,191 50,157
Services gross margin..... 21,260 21,663 25,512 26,029
-------- -------- -------- --------
Total gross margin...... 72,688 71,945 84,703 76,186
Selling, general and
administrative
expenses................ 66,907 61,811 64,698 61,815
-------- -------- -------- --------
Income (loss) from
operations.............. 5,781 10,134 20,005 14,371
Interest expense, net..... 9,758 9,418 9,839 9,669
Other income.............. -- -- 462 --
-------- -------- -------- --------
Income (loss) before
income taxes.......... (3,977) 716 10,628 4,702
Provision for income
taxes................... 5 9 1 2
-------- -------- -------- --------
Net income (loss)....... $ (3,982) $ 707 $ 10,627 $ 4,700
======== ======== ======== ========
Basic earnings (loss) per
share................... $ (.12) $ .02 $ .33 $ .15
======== ======== ======== ========
Diluted earnings (loss)
per share............... $ (.12) $ .02 $ .33 $ .14
======== ======== ======== ========
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------
DECEMBER 28, MARCH 29, JUNE 28, SEPTEMBER 27,
1997 1998 1998 1998
------------ --------- -------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues:
Product revenues........ $543,758 $479,267 $482,198 $438,252
Service revenues........ 110,622 114,567 119,381 116,888
-------- -------- -------- --------
Total net revenue..... 654,380 593,834 601,579 555,140
-------- -------- -------- --------
Cost of revenues:
Cost of products sold... 486,318 428,968 434,018 405,479
Cost of services
provided.............. 86,953 87,299 87,488 84,901
-------- -------- -------- --------
Cost of revenues...... 573,271 516,267 521,506 490,380
-------- -------- -------- --------
Product gross margin...... 57,440 50,299 48,180 32,773
Services gross margin..... 23,669 27,268 31,893 31,987
-------- -------- -------- --------
Total gross margin...... 81,109 77,567 80,073 64,760
Selling, general and
administrative
expenses................ 63,323 63,995 70,579 68,857
-------- -------- -------- --------
Income (loss) from
operations.............. 17,786 13,572 9,494 (4,097)
Interest expense, net..... 9,327 8,702 8,965 9,695
Other income.............. -- -- -- --
-------- -------- -------- --------
Income (loss) before
income taxes.......... 8,459 4,870 529 (13,792)
Provision for income
taxes................... 6 4 405 8
-------- -------- -------- --------
Net income (loss)....... $ 8,453 $ 4,866 $ 124 $(13,800)
======== ======== ======== ========
Basic earnings (loss) per
share................... $ .26 $ .15 $ -- $ (.43)
======== ======== ======== ========
Diluted earnings (loss)
per share............... $ .25 $ .14 $ -- $ (.43)
======== ======== ======== ========
</TABLE>
31
<PAGE> 36
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------------
DECEMBER 29, MARCH 30, JUNE 29, SEPTEMBER 28, DECEMBER 28, MARCH 29,
1996 1997 1997 1997 1997 1998
------------ --------- -------- ------------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Net revenues:
Product revenues........ 86.7% 84.5% 83.9% 82.5% 83.1% 80.7%
Service revenues........ 13.3 15.5 16.1 17.5 16.9 19.3
-------- -------- -------- -------- -------- --------
Total net revenues.... 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues.......... 88.6 88.0 86.9 87.4 87.6 86.9
-------- -------- -------- -------- -------- --------
Gross margin(1)........... 11.4 12.0 13.1 12.6 12.4 13.1
Selling, general and
administrative
expenses................ 10.5 10.3 10.0 10.2 9.7 10.8
-------- -------- -------- -------- -------- --------
Income from operations.... 0.9 1.7 3.1 2.4 2.7 2.3
Interest expense, net..... 1.5 1.6 1.5 1.6 1.4 1.5
-------- -------- -------- -------- -------- --------
Income (loss) before
income taxes............ (0.6) 0.1 1.6 0.8 1.3 0.8
Provision (benefit) for
income taxes............ -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Net income (loss)......... (0.6)% 0.1% 1.6% 0.8% 1.3% 0.8%
======== ======== ======== ======== ======== ========
<CAPTION>
THREE MONTHS ENDED
------------------------
JUNE 28, SEPTEMBER 27,
1998 1998
-------- -------------
<S> <C> <C>
Net revenues:
Product revenues........ 80.2% 78.9%
Service revenues........ 19.8 21.1
-------- --------
Total net revenues.... 100.0 100.0
Cost of revenues.......... 86.7 88.3
-------- --------
Gross margin(1)........... 13.3 11.7
Selling, general and
administrative
expenses................ 11.7 12.4
-------- --------
Income from operations.... 1.6 (0.7)
Interest expense, net..... 1.6 1.8
-------- --------
Income (loss) before
income taxes............ -- (2.5)
Provision (benefit) for
income taxes............ -- --
-------- --------
Net income (loss)......... --% (2.5)%
======== ========
</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
------------------------------------------------------------------------------
DECEMBER 29, MARCH 30, JUNE 29, SEPTEMBER 28, DECEMBER 28, MARCH 29,
1996 1997 1997 1997 1997 1998
------------ --------- -------- ------------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Product gross
margin............. 9.3% 9.9% 10.9% 10.0% 10.6% 10.5%
Services gross
margin............. 25.1% 23.3% 24.4% 24.6% 21.4% 23.8%
<CAPTION>
THREE MONTHS ENDED
------------------------
JUNE 28, SEPTEMBER 27,
1998 1998
-------- -------------
<S> <C> <C>
Product gross
margin............. 10.0% 7.5%
Services gross
margin............. 26.7% 27.4%
</TABLE>
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 1998, Fiscal 1997 and
Fiscal 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 1997 and Fiscal 1996,
respectively, increased due to greater working capital requirements resulting
from higher revenues. Cash provided by operating activities was $7.2 million for
the three months ended September 27, 1998 as compared to $21.1 million for the
comparable period in 1997. The cash provided by operations during the three
months ended September 27, 1998 resulted primarily from depreciation and other
non-cash charges to income, and from changes in operating assets and
liabilities, partially offset by the net loss of $13.8 million.
Cash used in investing activities was $19.7 million, $27.8 million and
$33.1 million in Fiscal 1998, Fiscal 1997 and Fiscal 1996, respectively. Cash
used in investing activities was $8.6 million during the three months ended
September 27, 1998 compared with $4.2 million for the three months ended
September 28, 1997. 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 1998, Fiscal 1997 and Fiscal 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. Cash used in
financing activities was $3.4 million during the three months ended September
27, 1998 compared to $22.4 million for the three months ended September 28,
1997. In July 1998, the Company issued the Old Notes. (See Note 10 of the notes
to the Company's
32
<PAGE> 37
consolidated financial statements). The net proceeds were used to repay
outstanding indebtedness of the Company, resulting in an increase in working
capital of approximately $74 million.
As of September 27, 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.
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 and $216.4 million as of September
27, 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. The IBMCC Financing
Agreement expires on July 1, 2001. Prior to July 29, 1998, amounts outstanding
under the IBMCC Working Capital Line of Credit bore interest at the prime rate
plus 0.50%. On July 29, 1998, the Company renegotiated this agreement which
resulted in a reduction in the financing rate from the prime rate plus 0.50% to
LIBOR plus 2.10%. On December 27, 1998, the agreement was again renegotiated
resulting in an increase in the financing rate from LIBOR plus 2.10% to LIBOR
plus 2.60% (8.13% at January 1, 1999). Such rate is subject to increase or
decrease depending on the Company's financial performance. Borrowings under the
IBMCC Financing Agreement are secured by the Company's assets, including certain
accounts receivable, certain inventories and other assets.
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. Amounts
outstanding under the IBMCC Long-Term Loan and Special Working Capital Advance
bore 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. On July 29, 1998, the IBMCC Long-Term Loan and Special Working Capital
Advance were repaid in full.
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 equal to or greater
than 0.90 to 1.00; (ii) from July 1, 1998 to and including December 31, 1998,
not permit the ratio of EBITDA for the fiscal year-to-date to interest expense
for the fiscal year-to-date to be less than 0.25 to 1.00; from July 1, 1998 to
and including March 31, 1999, not permit the ratio of EBITDA for the fiscal
year-to-date to interest expense for the fiscal year-to-date to be less than
0.70 to 1.00; from July 1, 1998 to and including June 30, 1999, not permit the
ratio of EBITDA for the fiscal year-to-date to interest expense for the fiscal
year-to-date to be less than 1.00 to 1.00; and from July 1, 1999 and thereafter,
not permit the ratio of EBITDA for the fiscal year-to-date to interest expense
for the fiscal year-to-date to be less than 1.75 to 1.00; and (iii) from October
1, 1998, maintain tangible net worth as of the end of each fiscal quarter equal
to or greater than the tangible net worth requirement for such fiscal quarter.
For purposes of this section of the IBMCC Financing Agreement, the tangible net
worth requirement for the fiscal quarter ended December 27, 1998 shall mean $12
million and for each fiscal quarter thereafter shall mean the sum of the
tangible net worth requirement for the previous fiscal quarter plus 80% of the
Company's consolidated net income for such fiscal quarter. If consolidated net
income for a fiscal quarter is less than zero dollars then for purposes of the
tangible net worth requirement, consolidated net income shall be deemed to be
zero dollars. In addition, the IBMCC Financing Agreement prohibits the Company
from paying cash dividends on Common Stock.
The Company's line of credit with FINOVA provides for borrowings of up to
$110 million. The line of credit is secured by the Company's inventory financed
by FINOVA. At June 28, 1998 and September 27, 1998, the principal amount
outstanding under this line of credit was $86.4 million and $46.6 million,
33
<PAGE> 38
respectively. Under the terms of the agreement with FINOVA, the Company pays no
interest on this borrowing.
On July 29, 1998, the Company completed the Old Note Offering. (See Note 10
of the notes to the Company's consolidated financial statements). The Old Notes
bear interest at a rate of 12 1/2% per annum and will mature on August 1, 2006.
The Old Notes are fully and unconditionally guaranteed by all of the Company's
domestic subsidiaries. The Old Notes are not guaranteed by the Company's three
foreign subsidiaries. There are no restrictions on the ability of the guarantors
of the Old Notes to loan, transfer or dividend funds to the Company.
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.
Recent Developments
In November 1998, the Company's Board of Directors authorized management
actions that resulted in the reorganization of ENTEX's business to create two
operating units: the TAS Division and the Services Division, each functioning as
a separate operating division within the Company. The reorganization is intended
to reduce costs and increase operational focus to respond to new market
dynamics.
As a result of these actions, the Company will record a pre-tax
restructuring charge estimated at $10-$12 million during the second fiscal
quarter ending December 27, 1998. The restructuring charge included costs
related to severance in connection with a workforce reduction, as well as branch
office consolidation and facilities reductions. In addition, the Company expects
to record a further non-cash charge estimated at up to $10-$15 million primarily
in connection with the re-evaluation of the functionality of software
investments that have been made which may require an alternative solution for
portions of the new business lines.
In November 1998, the Company deposited, with the Trustee under the Old
Notes, funds to make the interest payment due February 1, 1999 on such notes.
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 may 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
(information technology and non-information technology). 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.
The Company completed an inventory of its applications 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 this
review, the Company has scheduled each system for either renovation or
34
<PAGE> 39
validation. As of June 28, 1998, the Company was in the process of implementing
the R3(TM) ERP from SAP. It was anticipated that the implementation of ERP would
address Year 2000 compliance in many of the systems identified in the Company's
inventory. The Company has now postponed implementation of ERP pending a final
decision whether or not to abandon the project. As a result of these factors,
the Company has begun to renovate existing systems. Assessments have also been
completed in the processing and telecommunications environments. A similar
activity is currently underway in the employee desktop environment and is
expected to be completed by March 1999. As a result of these efforts, the
Company intends to implement any required changes or upgrades by June 1999. The
Company's inventory and assessment of its non-information technology systems
(facilities and warehouse-based, including scanners, conveyers and security
systems) is expected to be completed by April 1999, followed by any required
renovation. All validation and implementation of these non-information
technology systems is expected to be completed by June 1999. Total costs to
complete the Company's Year 2000 project upgrade are now estimated at
approximately $18 million. As of November 30, 1998, the Company has spent
approximately $13 million, of which approximately $12 million is attributable to
SAP.
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. 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 associated with Year 2000 compliance initiatives 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.
35
<PAGE> 40
BUSINESS
THE COMPANY
ENTEX Information Services, Inc. is a leading provider of integrated 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.
In November 1998, the Company reorganized its operations by creating two
distinct operating divisions: the TAS Division and the Services Division. The
TAS Division offers hardware and software solutions to large businesses,
including custom configuration, channel assembly, electronic commerce and
integration services. The Services Division offers desktop outsourcing,
enterprise network and consulting services and traditional maintenance and
support services. The reorganization was intended to allow each division to
focus on anticipating trends and capitalize on new market opportunities within
their respective markets. The new focus should allow each division to
collaborate more closely and effectively with their customers, concentrate on
the Company's products and services and utilize the talents of each division's
employees more efficiently and profitably while continuing to provide integrated
management solutions.
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 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. Other equity holders of the Company include certain
executives and employees of the Company, IBM and Microsoft. At September 27,
1998, ENTEX employed over 8,400 personnel, including temporary employees,
providing national coverage from 48 branch locations covering all major U.S.
cities. Of the more than 8,400 employees, approximately 3,900 were dedicated
on-site technical professionals at customer locations. In addition to ENTEX's
North American operations, in 1994 the Company formed a global alliance with
several leading international PC systems integrators and leading international
hardware and software vendors to provide multi-national corporations with a
single point of contact to manage worldwide information technology product and
service requirements. This alliance covered 35 countries in June 1998.
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
36
<PAGE> 41
large enterprises. The creation of the TAS Division and the Services Division is
intended to allow the Company to better focus on each of its business segments.
Key elements of the Company's strategy are to:
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. In Fiscal 1995, the Company had 51
customers which purchased products and services totaling at least $5 million. In
Fiscal 1998, those same customers had more than doubled their aggregate
purchases of services from $57.9 million in Fiscal 1995 to $134.7 million.
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. ENTEX has completed PC and
server migrations on approximately 242,000 units as of September 27, 1998,
including a 40,000 desktop migration transitioning one customer's business to a
32-bit Windows NT(TM) environment, which management believes is one of the
largest 32-bit migrations undertaken in the United States to date. 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 OEMs and
suppliers such as Compaq, HP, IBM and Microsoft. 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
inventories decreased from $184.4 million as of September 28, 1997 to $142.9
million as of September 27, 1998, or 22.5%. The Company's inventory turns
improved from 9.5x for the twelve months ended September 28, 1997 to 10.2x for
the twelve months ended September 27, 1998. 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
37
<PAGE> 42
computing equipment OEMs. The Company is currently providing build-to-order
assembly for IBM, Compaq and HP products.
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 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.
INDUSTRY BACKGROUND
The information technology industry is undergoing significant changes. The
mainstays of computing since the mid 1980's were mainframes and decentralized PC
networks. However, with computer chips doubling in capacity every 18 months and
with the advent of Internet and Intranet network connectivity, technology users
are increasingly focusing on: (i) dealing with legacy systems as enterprises
migrate to new architectures and platforms; (ii) accelerated technology
obsolescence; (iii) the installation of advanced technology and implementation
of network computing; (iv) the selection of packaged applications and network
infrastructures; and (v) network bandwidth requirements. While the rate of
change in information technology is accelerating, the dependence upon existing
systems for mission critical applications within large corporations is even
greater. Nearly all major large corporations deploy mission critical enterprise
applications over PC/server networks connecting thousands of desktop PCs with
hundreds of servers linked to mainframe hosts and interconnected over multiple
domestic and international sites. Many of these networks consist of a variety of
different computers, running different operating systems and applications. The
Company believes the challenge for companies of managing in this climate of
constant technological change, in which replacement cycles for products are
shortening and technical demands on legacy systems are increasing, all of which
is compounded by a shortage of qualified technical professionals, is placing
strain on many companies' existing resources.
Product Sales. According to a proprietary study developed by Dataquest for
ENTEX, domestic users purchased approximately $99 billion in 1997 in information
technology products. Of the total products purchased in 1997, approximately 74%,
8% and 18% were spent on PC hardware, software and peripherals, respectively.
Information technology product expenditures are forecast by Dataquest to
continue growing at a compound annual growth rate of 6% through 2001, exceeding
$127 billion in annual product sales, due primarily to upgrades to open
architecture platforms such as Windows NT(TM), which is quickly emerging as the
preferred 32-bit operating system in corporate enterprise computing.
Services. According to Dataquest, the information technology services
market represents a high growth market within the information technology
industry and comprises a large complement of vendors and service providers,
providing end-users with competitive selections. The information technology
services market includes maintenance and non-maintenance types of services for
the information technology market. The core service segments include: business
management services, consulting, development and integration, education and
training, hardware maintenance and support, information technology management
services, and software maintenance and support. According to an October 1997
report by Dataquest, the U.S. information services market exceeded $128 billion
in 1997 and is forecast to grow at a compound annual rate of 14% through 2001.
In the information technology submarkets of network integration and outsourcing
services, Dataquest estimates the total U.S. market exceeded $15 billion and $24
billion, respectively, for 1997. Dataquest estimates the markets for network
integration services and outsourcing services to each grow at compound annual
rates of over 15% through 2001.
Management believes that the decision-making process that businesses face
when designing, selecting and deploying information technology solutions is
becoming more costly and complex. Businesses must select
38
<PAGE> 43
from an expanding number of product options with shortening lifecycles.
Businesses seeking to implement enterprise-wide information management solutions
often must integrate diverse and incompatible hardware and software environments
which have independently evolved within their organizations. Such integration
typically requires the design of a new network, the upgrade of existing hardware
and software, and the migration to new systems. In addition, a shortage of
qualified information technology personnel has limited the ability of many
businesses to capitalize on the latest technologies. Many businesses find it
increasingly difficult and costly to maintain the internal infrastructure needed
to support their networks.
A study published in January 1998 conducted by the Gartner Group, a leading
information technology industry research organization, concluded the cost of
desktop and network capital is less than 30% of the annual technology cost, with
the balance spent on technical support, administration and end user operations.
According to the Gartner Group, the annual cost of a Windows 95 networked PC is
approximately $10,000, resulting in a total cost of ownership as high as $50,000
during its five-year lifetime. As corporations quantify the cost components of
supporting their PC and network environments, ENTEX management believes an
increasing number will rely upon third party system integration and outsourcing
to design, build, expand and maintain their information technology systems.
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.
The Company believes mainframe focused traditional systems integrators,
computer resellers and distributors and specialty service suppliers generally
offer limited service capabilities and cannot deliver the total integrated PC
service solutions necessary to increase end-user satisfaction and reduce the
cost of computing for many of these large corporate enterprises. Management
believes these suppliers have been largely unable to meet the demand from large
enterprises for single source sophisticated PC infrastructure services,
outsourcing, and network migration and integration services. The Company
believes independent service providers, such as the Company, are taking market
share from the major OEM service providers faster than the OEMs are contracting
new business. The Company believes this is happening for several reasons
including: (i) customers are looking for single-source providers who support
multiple computer hardware and software platforms; (ii) independent service
providers are viewed as being unbiased toward computer purchase decisions; and
(iii) OEMs are increasingly outsourcing customer maintenance service (including
warranty and post-warranty services) and technical customer support such as help
desk services to independents in order to focus on their core design, technology
and marketing competencies.
PC systems integrators include CompuCom, 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,
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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. Through its
research and extensive experience, the Company has identified and quantified the
cost components of supporting the PC and network computing environment. ENTEX
works closely with its customers to identify opportunities for reducing total
costs while improving end-user support by developing and implementing an
integrated services solution. Management believes that tangible cost and
productivity benefits of ENTEX's integrated approach are: (i) better product
sourcing; (ii) rapid, consistent and high quality configuration and delivery;
(iii) efficient multi-location project roll-out; (iv) enhanced asset management;
(v) improved network design and operation; (vi) higher system and network
availability; (vii) faster resolution of help desk inquiries; (viii) faster
response and settlement of repair requests; and (ix) accurate performance
metrics and systems monitoring capability. ENTEX's value-based solutions are
intended to lead to higher end-user satisfaction, easier PC and network
management and reduced computing costs.
ENTEX delivers total technology management solutions to its customers at
the desktop, network and enterprise level. These services encompass three
primary areas of expertise including PC Acquisition Services; Outsourcing
Services; and Network, Professional and Migration Services.
PC Acquisition Services. Through its TAS Division, 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 (which was approximately $142.9 million as of
September 27, 1998) at its ISO 9001 certified Integration Center located in
Erlanger, Kentucky, which is adjacent to the Greater Cincinnati Metropolitan
International Airport. At September 27, 1998, this inventory consisted of over
10,600 SKUs.
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 (with over 270
dedicated support professionals) 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 and
for the three months ended September 27, 1998, configuration services accounted
for approximately $14.1 million and $3.0 million, respectively, of total net
revenues. In the twelve months ended September 27, 1998, more than 99% of non-
configured in-stock orders were shipped same day, while 98% of in-stock
configured systems were shipped within 48 hours of order placement. Using the
Company's inventory management systems, the Company is able to track inventory
on a real-time basis from point of receipt through shipment. The Company's
inbound
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product tracking, expediting and second sourcing techniques further enhance
ENTEX's ability to provide high product availability while improving its
inventory turns.
OEMs typically build to forecast rather than to order. To enhance product
availability, OEMs are contracting with third party assemblers to assemble
components into open bays and mass customize per customer specifications.
ENTEX's model for product delivery is based on mass customization, rather than
mass production. ENTEX was a pilot member of IBM's Joint Manufacturing Agreement
Program, which is now the Authorized Assembler Program ("AAP"). The Company also
recently commenced final assembly under HP's channel assembly program and
Compaq's final assembly program. These programs have provided ENTEX with the
essential ingredients to increase its mass customization efforts through a
"build-to-order" final assembly approach.
In the twelve months ended September 27, 1998, over 63% of all desktop PCs,
54% of all laptop PCs and 47% 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.
Most configured systems are then pre-tested on a mirror-image of the customer's
operating environment to ensure seamless and virus-free delivery and integration
with the customer's information technology infrastructure. The Company's system
configuration operations are located in an environmentally controlled and
electrostatic discharge free area of the Company's integration center that
supports staging, bench-testing, asset tagging and warranty labeling for
customer-specific configuration of CPUs, application and customer proprietary
software, memory, network cards and other peripherals.
The Company sources products from over 2,400 manufacturers including Cisco,
Compaq, DEC, HP, IBM, Kingston, Microsoft, NEC, 3Com and Toshiba. Working
through direct relationships with 135 of the largest computer related
manufacturers in the world, ENTEX has formed strategic relationships with these
manufacturers, in addition to carrying the products of over 2,300 additional
manufacturers. In addition, through second sourcing arrangements with some of
the largest wholesale distributors in the country including Ingram Micro and
Tech Data, ENTEX can provide virtually any PC-related product which a customer
requires.
Through ENTEX, customers may purchase application software either in
separate "shrink-wrapped" units or on a VLA basis. In Fiscal 1998 and for the
three months ended September 27, 1998, over 70.7% and 80.6%, respectively, of
the application software purchased from ENTEX was on a 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
asynchonous 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. Management believes
its system loading process is one of the most advanced in the industry.
Outsourcing Services. Outsourcing -- or hiring outside experts to help
manage information technology functions -- is becoming more common among
enterprises worldwide. Management believes companies have many reasons to
outsource, but the most common are: (i) outsourcing is a logical extension of
the propensity among companies to shed non-core components of their businesses
(e.g. claims processing, payroll or facility maintenance) and turn them over to
vendor specialists; (ii) outsourcing is viewed as another tool to help them stay
competitive, often by acquiring access to leading-edge technology; and (iii)
program development is shifting away from expensive in-house proprietary
applications to outsourced programming incorporating flexible enterprise
applications.
While some outsourcing contracts are all encompassing, most deals involve
the responsibility for one or more information technology functions such as the
help desk, deskside support, network support and asset
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management. Then as circumstances dictate, customers may target additional
information technology areas for outsourcing. ENTEX's customers, through the
Company's Services Division, may choose from a variety of outsourcing options
and/or create a customized solution by contracting for discrete services or
bundling services to form an integrated approach. The Company provides customers
with outsourcing services under long term contracts (approximately 43% of the
100 largest contracts as of September 27, 1998 had terms of two years or more)
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. As of September 27, 1998, the
Company's 100 largest outsourcing service contracts ranged from 200 to 60,000
PCs and had an average annualized contract value of over $2.7 million, although
many of these contracts have been substantially performed and/or may be
terminable upon short notice. 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.
ENTEX is one of the leaders in PC outsourcing in the U.S. As of September
27, 1998, the Company had multi-year system outsourcing service contracts
covering more than 682,000 PCs and servers. The Company believes it will
continue its leadership position in PC outsourcing services due to its best
practice methodology, diverse installed base, SLA approach and centralized
operations.
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 highly trained personnel 24 hours per day, seven days per week.
By outsourcing help desk services, customers are able to reduce training and
system costs, benefit from the Company's extensive knowledge and experience,
reduce the time for problem resolution and increase closure rates. The Company
believes that its help desk services create new sales opportunities for other
Company services.
The Company has recently emphasized its SolutionLine service for
centralized help desk operations. SolutionLine is located in the National
Service Center ("NSC") and is staffed by 161 technical support engineers.
SolutionLine 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. Customers benefit
from the broader technical expertise of the larger group of engineers who staff
SolutionLine and experience faster response times than may be possible with an
on-site operation that provides limited help desk support. In addition, the
Company believes that by increasing its centralized help desk operations, it
will be able to monitor more carefully help desk activity, including response
times and call closure rates. A central operation also improves the Company's
ability to gauge product performance, enabling it to communicate product defects
to vendors more effectively and to make more valuable purchasing recommendations
to its customers.
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. Customers benefit from the Company's extensive installation
experience and investment in technical training and certification. 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
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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. Through its Services
Division, 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. Customers benefit from the Company's extensive experience
in designing sophisticated enterprise-level networks and its ability to deploy
networks rapidly and cost-effectively. With the acquisition of FCP in July 1996,
the Company further strengthened its capabilities in this area by adding
experienced skills in enterprise-level network consulting, design and
implementation.
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 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. Windows NT(TM) is emerging as the preferred 32-bit
operating system in corporate enterprise computing. Of the approximately 210
million installed PCs worldwide, one industry analyst estimates that
approximately one half are based on 486/386 technology and will have to be
replaced in order to effectively run new 32-bit operating systems such as
Windows NT(TM). ENTEX has completed PC and server migrations on approximately
242,000 units as of September 27, 1998, the majority of which were to the
Windows platform. ENTEX believes it is among the leaders in system migrations
and that it employs one of the largest groups of Microsoft certified systems
engineers to perform such migrations to Windows based technology. The Company
has performed a 40,000 desktop migration which management believes to be one of
the largest 32-bit migrations undertake in the United States to date. In several
of the Company's migration projects, the Company also provides the hardware,
software and peripherals.
OPERATIONS
The Company is structured to combine the benefits of a flexible, nationwide
network of field locations, 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
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Company's field personnel. The Company currently has 48 field locations in 30
states. As part of the reorganization, the Company is reducing the number and
size of its locations.
The Company currently employs approximately 5,500 technical and over 470
sales field personnel. This provides the Company with national sales coverage
and the ability to respond rapidly to any service or product request. With
respect to sales activities, field locations are typically responsible for
developing and managing customer relationships, including initial
sales-generating activities and ongoing account management. Area vice presidents
and, in the case of larger accounts, senior vice presidents generally supervise
and assist field locations in these activities. Once the Company has contracted
to provide services or products, the area vice presidents ensure that proper
resources are allocated to provide and manage such services. When on-hand
technical personnel are unavailable to staff projects, the Company may be
required to hire additional full-time or temporary personnel, or coordinate
within the organization to relocate existing resources from other projects.
Approximately 3,900 of the Company's technical employees work full-time at
customer sites nationwide and are fully integrated into a customer's information
services departments, providing such customers with hands-on end-user support
and network management. The Company is currently staffing on-site operations for
over 100 customers, many of which include multiple locations. On-site activities
consist primarily of staffing help desk lines, providing core services, such as
maintenance and repair, network management, acquisition advisory services and
coordinating asset management activities. On-site technicians receive support
from the Company's NSC.
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 Corporate Account Center, SolutionLine, ServiceLine,
the Network Operations Center and ENTEX University. Over 600 employees work at
the NSC. By centralizing all service and support functions in one facility, the
Company is able to leverage the depth and breadth of technical experience to
more effectively support its field technicians. The Company is also expanding
its research and development laboratories at its NSC to develop, among other
things, advanced remote network management.
In Fiscal 1996, the Company expanded its Corporate Account Center ("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. At September 27, 1998, the CAC was staffed by
over 300 personnel, each knowledgeable about the Company's product offerings. By
centralizing order fulfillment functions, the CAC removes time consuming,
clerical responsibilities from its field sales force, resulting in a more
focused sales effort and reduced response time for product orders and inquiries.
The CAC typically receives 117,000 calls per month.
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.
The Company has over 300 customers using the Web based product. In addition to
Order Access-Web, ENTEX offers an EDI capability to help its customers automate
order processing and administration, providing reduced costs and higher
productivity for both the Company and the customer. EDI is used by 45 of the
Company's largest customers.
ENTEX's state-of-the-art Integration Center is located in Erlanger,
Kentucky, less than five miles from the Greater Cincinnati Metropolitan
International Airport. During the twelve months ended September 27, 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 98% 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, the first such facility ISO certified in
the industry. The Company conducts all system configurations and build-to-order
final systems assembly in an environmentally controlled and electrostatic
discharge free section of the Integration Center. The Company utilizes a
paperless,
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radio-frequency controlled warehouse management system which tracks inventory
from receipt to shipment, provides real-time information on product availability
and ensures accurate order fulfillment.
ENTEX utilizes Skyway as its primary transportation agent, sorting and
consolidating multi-box orders and performing tracking of all outbound
shipments. Skyway is a recognized expert in information technology
transportation acting as the primary shipping agent for Compaq, HP and IBM,
among others. The Company intends to expand its relationship with Skyway to
fully integrate its inventory management system with Skyway's freight management
system to enhance online visibility and decision making along the entire supply
chain from vendor to shipping docks, including in-transit merges, reroutes, drop
ship or bypass. Online integration is scheduled to be completed during the first
half of 1999.
The Company has made significant systems investments to develop systems
which enable the Company to provide a better quality of service and reduce costs
for customers. Order Access and Order Access-Web, in conjunction with Catalog
Builder, allow customers to electronically order products and services by
consulting on-line product catalogs. Service Access is used by the Company to
dispatch and communicate with its field technical personnel. PowerHelp manages
incoming service calls and provides on-site help desk personnel with customer
files while managing the escalation process and tracking problem resolution.
Computer Systems Group Information Systems ("CSGIS") is the centralized order
processing and financial accounting and reporting system which allows the
Company to track customer orders and reduce processing time, and the Company's
warehouse management system is used to manage inventory in order to provide
ENTEX customers with high product availability.
Maintaining a consistently high level of technical training across all
branch offices is a fundamental priority for ENTEX. The Company's training
includes certification programs by individual hardware and software vendors, as
well as internally developed courses. ENTEX University, located in the NSC,
regularly schedules and coordinates service training and determines that branch
certification levels are maintained. The Company has adopted a company-wide
review process which ensures that employees at each of its branch offices
achieve training objectives.
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 SLA. The Company was one of the first in the industry to
price service offerings on other than a time and materials basis. 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. Using
this pricing structure, customers may forecast their costs with greater
predictability, evaluate the effectiveness of ENTEX's solutions based on the
attainment of the predetermined performance metrics in the SLAs, and are more
likely to attain these performance goals. This pricing methodology also provides
incentive to the Company to continuously improve the efficiency and quality of
the services it delivers. 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.
At September 27, 1998, performance metrics are incorporated into approximately
51% of the Company's 100 largest outsourcing contracts, of which 35% have
penalties for failure to meet the required performance levels.
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.
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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 separate division sales forces with a combined total of over 470
sales employees. The Services Division and the TAS Division are each divided
into three regions. The sales personnel in each region are responsible for
developing and managing customer relationships, including initial
sales-generating activities and ongoing account management. The regional sales
personnel for the Services Division will be supported by the National Pursuit
Team which will assist in responding to outsourcing proposals. In addition, the
sales personnel from both divisions will be supported by the significant
additional available technical expertise at the national and corporate levels.
Although most of the field locations support multiple accounts, several of the
Company's field locations were established to service a single, large account.
For certain national account relationships, either area or senior vice
presidents are designated specific account coverage. Bid preparation and/or
negotiation is coordinated with senior executives depending upon potential
contract size. In addition to the support from regional, national or corporate
levels, the Company enhances its sales force's technical skills with consistent
training and education, much of which is jointly sponsored by the OEMs.
Management believes by broadening the general skill base of its sales force, it
increases the likelihood of cross selling multiple products and services. The
Company's sales personnel have sales commission programs which are designed to
constitute a substantial portion of the employee's overall compensation. The
sales employees in each of the divisions are incented to sell the products or
services, as the case may be, of the other division. While sales orders may be
placed with the field offices, the Company's CAC is assuming a greater role in
the product order process. Approximately 85% of product orders in the three
months ended September 27, 1998 were placed through the CAC.
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 and for the three months ended September 27, 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. The
table below lists the names of selected customers of the Company which purchased
products and services in excess of $5.0 million in Fiscal 1998 and their
respective industries.
Banking
ABN AMRO Bank N.V.
Banc One
Bank of Boston
State Street Bank and Trust
Wachovia Bank
Consumer Products
Anheuser Busch
Cola-Cola
Gillette
Mead
Warner Brothers
Information Services
First Data
Lexis-Nexis
M&I Data Services
Pitney Bowes
Simon & Schuster
Manufacturing
AlliedSignal
Union Carbide
Transportation
Toyota
Technology
Hewlett-Packard
International Business Machines
Microsoft
Motorola
Tivoli Systems
Telecommunications
AT&T
GTE
Pacific Bell
U.S. West
Energy, Petroleum and Chemicals
Florida Power & Light
Koch Industries
Shell Oil
Texaco
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Healthcare
Hoffmann-La Roche
Memorial Sloan Kettering
Cancer Center
Schering-Plough
Smithkline Beecham
Warner Lambert
Insurance
Allstate
American Reinsurance
Blue Cross Blue Shield
CIGNA
Firemans Fund Insurance
The Hartford
Metropolitan Life Insurance
Mutual of Omaha
Financial Services
American Express
Bear Stearns
Morgan Stanley
Putnam Investments
Government
State of California
Professional Services
Deloitte & Touche
Jacobs Engineering
KPMG
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 and for the three months ended September 27, 1998, the ten largest
vendor relationships accounted for 76.7% and 81.0%, respectively, of product
revenues and 92.2% and 88.2%, respectively, of MDF. The following table lists
examples of many of the Company's key vendors:
<TABLE>
<S> <C> <C> <C>
3Com Compaq Madge SCO
Acer Connect McAfee Seagate
Adaptec Corel Megahertz Shiva
Adobe Cornerstone Microcom Sony
APC Digi Microsoft Sun
Apple DEC Mitsubishi Symantec
Ascend Extended Systems Multitech Tech Data
ASI(AssetPro) FTP NEC Tektronix
AST Hayes Netscape Texas Instruments
AT&T HP Nokia Toshiba
Attachmate Hitachi Novell US Robotics
Banyan IBM Okidata WRQ
Bay Networks Ingram Micro Olicom Xerox
Cheyenne Kingston Oracle Xircom
Cisco Lexmark Panasonic Xylogics
Citrix Lotus Procom
Claris Quarterdeck
</TABLE>
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, HP and IBM. In Fiscal 1998 and for
the three months ended September 27, 1998, ENTEX performed final assembly
services for approximately 44% and 75%, respectively, of the IBM desktop PCs
shipped by the Company. 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.
The ENTEX/Microsoft Initiative ("EMI") is a dedicated ENTEX business unit
focused on the implementation of Microsoft products and solutions for ENTEX's
large account customers. With the backing of Microsoft, EMI offers ENTEX
customers a highly trained and certified workforce, fully integrated into
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<PAGE> 52
ENTEX's total PC management capabilities and nationwide structure. In addition,
the EMI business unit works hand-in-hand with local Microsoft branches to
deliver consistent service and unique service methodologies. Utilizing ENTEX's
national size and scale, customers benefit from a diversity of expertise and
integrated solutions at the point of business. EMI was established in June 1996
and as of June 28, 1998 had approximately 150 ENTEX systems engineers and
consultants, delivering comprehensive support and implementation for Microsoft
products across a broad spectrum of platforms. Each EMI professional team member
receives 360 hours of initial training and 100 hours of training each year
thereafter. EMI's current activities consist primarily of product migrations of
desktop PCs and servers from legacy systems to the Windows NT(TM) operating
system. Management believes larger corporations are increasingly adopting the
Windows NT(TM) system as their preferred operating platform.
The ENTEX/Lotus/IBM Team ("ELITeam") is a strategic partnership with
focused resources for the purpose of establishing an IBM/Lotus line of business
within the ENTEX field organization. The key objectives of the ELITeam are to
create a profitable IBM/Lotus services unit within ENTEX to drive installations
and conversions, build IBM/Lotus skills to industry leading expertise, and
expand IBM/Lotus software revenue and market share. With the backing of IBM and
Lotus, the ELITeam offers ENTEX customers implementation and support expertise
for mission-critical solutions using Lotus Notes(TM) and Domino(TM), as well as
IBM's web-enabled middleware, groupware, and systems management software
products in Windows NT(TM) environments. ELITeam was established in April 1997
and as of September 27, 1998 had over 90 ENTEX technical professionals,
delivering comprehensive support and implementation for IBM/Lotus products in
multi-platform environments, including Windows NT(TM). The ELITeam, fully
integrated into ENTEX's Total PC Management capabilities and nationwide
structure, is one of the largest nationwide teams of IBM/Lotus product
implementation and support experts outside of IBM itself.
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 and for the
three months ended September 27, 1998, the total MDF was $63.6 million and $9.8
million, respectively. See "Risk Factors -- Dependence on Vendors."
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,
48
<PAGE> 53
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 September 27, 1998, the Company had over 8,400 full-time and
full-time equivalent employees, including over 470 in sales, approximately 5,500
in the Company's field technical service and support operations, and over 410 in
distribution and configuration operations. Approximately 3,900 Company technical
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, 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; a survey from the Saratoga Institute estimated
voluntary industry turnover at approximately 17.2% for 1997. 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 believes that attracting and retaining strong technical, sales
and support staff is essential to meeting the needs of its customers. The
Company believes that its best source of recruiting is through existing employee
referrals. The Company estimates that approximately 39% of its hiring in Fiscal
1998 was through referrals and also believes that there is generally less
turnover among these hires. In addition, the Company employs approximately 60
recruiters to scout qualified technical personnel nationwide and plans to add to
its network of recruiters to assist in expanding its technical employee base.
When the Company is unable to fill positions through either of these methods, it
frequently employs temporary workers (of the Company's existing workforce,
approximately 10% is temporary). Due to the demand for employees in the
industry, the Company estimates that the incremental cost of hiring a temporary
worker is approximately 40% higher than the fully loaded (including benefits)
cost of a full-time employee.
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.
The Company's goal is to reduce the employee turnover ratio to
approximately 23% by 2000 through the implementation of new retention measures,
and by focusing on long-term career development initiatives. The Company
believes that developing a career path for individuals includes providing
necessary and cutting edge training and education, providing adequate job
mobility and providing comprehensive and easy to use benefits. Through ENTEX
University, the Company has an annual event which provides additional training
for sales people and technicians. Also, the Company has implemented just-in-time
training by providing access (24 hours a day, seven days a week) to course
offerings via the Internet. The Company believes it can help stagger the
experience levels within the organization while at the same time, offer young
professionals the opportunity to build a solid career path.
FACILITIES
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 March 31, 1999 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 the 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
49
<PAGE> 54
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.
LITIGATION AND 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.
50
<PAGE> 55
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND OTHER KEY EMPLOYEES
The executive officers, directors and other key employees of the Company,
and their ages and positions as of December 10, 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 Chief Executive Officer and Director
Kenneth A. Ghazey.................... 42 President and Director
Dale H. Allardyce(1)................. 49 Executive Vice President, Operations
Michael G. Archambault............... 47 Senior Vice President, Chief Financial Officer
and Treasurer
Lynne A. Burgess..................... 49 Senior Vice President, General Counsel
John F. Lyons........................ 45 President, Technology Acquisition Services
Division
Richard Nathanson.................... 41 President, Services Division
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. Allardyce resigned effective December 31, 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. Mr.
Cameron is currently serving as a Director of TLC Beatrice Company. See "Risk
Factors -- Need to Recruit and Retain Management, Technical and Sales
Personnel."
Mr. McKenna co-founded the Company in August 1993, and has served as a
Director since its inception and as Chief Executive Officer since April 1996.
Mr. McKenna also served as President of the Company from August 1993 until
December 1998. 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 held various sales and management positions at IBM from
1978 through 1987.
Mr. Ghazey joined the Company as Executive Vice President, Finance and
Administration, Chief Financial Officer and Director in January 1997 and has
served as President of the Company since December 1998. 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. 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.
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<PAGE> 56
Mr. Archambault joined the Company in May 1997 as Vice President and
Treasurer. He served as Senior Vice President, Treasurer from March 1998 and has
served as Senior Vice President, Chief Financial Officer and Treasurer since
December 1998. 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.
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.
Mr. Lyons joined the Company in April 1994 as Vice President, Marketing and
served as Senior Vice President, Sales and Marketing from October 1996 to
October 1998. Since October 1998, Mr. Lyons has served as President of the
Company's Technology Acquisition Services Division. 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. 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
served as Senior Vice President, Services from April 1997 to October 1998. Since
October 1998, Mr. Nathanson has served as President of the Company's Services
Division. 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. Devening has served as a Director of the Company since June 1996. Since
August 1994, Mr. Devening has served as Chairman, 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
serves as a director of Hancock Fabrics Inc., and Hussman 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 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 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.
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<PAGE> 57
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, administers the
Company's stock purchase and stock option plans and makes recommendations to the
Board of Directors regarding such matters.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation paid
by the Company during Fiscal 1998 and Fiscal 1997 to the Company's Chief
Executive Officer and each of the Company's five other most highly compensated
executive officers (collectively, the "Named Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
---------------
AWARDS
---------------
ANNUAL COMPENSATION SECURITIES ALL OTHER
FISCAL --------------------- UNDERLYING COMPENSATION
NAME AND PRINCIPAL 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 1997 126,923 -- 880,000 5,195
and Administration, and Chief
Financial Officer
Dale H. Allardyce (3).............. 1998 260,769 107,035 75,000 2,396
Executive Vice President,
Operations 1997 224,423 155,371 -- 5,462
David J. Csira (4)................. 1998 230,000 118,844 -- 52,032(5)
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(6) 187,395 2,041
</TABLE>
- ---------------
(1) The stock options listed in the table represent options to purchase shares
of Common Stock 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 dividends.
(2) Mr. Ghazey was appointed Executive Vice President, Finance and
Administration and Chief Financial Officer in January 1997.
(3) Mr. Allardyce resigned effective December 31, 1998.
(4) Mr. Csira resigned in May 1998.
(5) Includes $49,232 paid to Mr. Csira pursuant to a Severance and Release
Agreement, including payment for 120 hours of accrued vacation time.
(6) Includes $120,787 bonus payable by FCP at the time of its acquisition and
paid by the Company.
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<PAGE> 58
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
--------------------------------------------------------
NUMBER PERCENT OF POTENTIAL REALIZABLE VALUE
OF TOTAL OF ASSUMED ANNUAL RATES OF
SECURITIES OPTIONS EXERCISE STOCK PRICE APPRECIATION FOR
UNDERLYING GRANTED TO PRICE OPTION TERM (3)
OPTIONS EMPLOYEES PER EXPIRATION -----------------------------
NAME GRANTED IN FISCAL 1998 SHARE(1) DATE (2) 5% 10%
- ---- ---------- -------------- -------- ---------- ------------ ------------
<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. As a result of his December 31, 1998
resignation, 25,000 of Mr. Allardyce's options, which would have vested as
of February 9, 2000, will be forfeited.
(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.
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<PAGE> 59
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
Under the Company's Non-Employee Director Stock Plan, as amended through
October 1998, each non-employee director receives an annual retainer that
contemplates attendance at up to six Board or Committee meetings per year. Each
year, non-employee directors may elect to receive payment for the annual
retainer either in cash or in the form of shares of the Company's Common Stock.
Fees for meetings attended in excess of those covered by the annual retainer are
paid in cash on a per meeting basis. In addition, the Company reimburses
directors for expenses incurred in attending board and committee meetings. As of
December 10, 1998, the Company had issued an aggregate 66,630 shares of the
Company's Common Stock to its non-employee directors pursuant to the Company's
1996 Non-Employee Director Stock Plan. During Fiscal 1996 and Fiscal 1997, Mr.
Devening and Mr. Lacy were each granted an aggregate of 37,500 options to
purchase shares of the Company's Common Stock in consideration for services
rendered as a director of the Company. In November 1998, Messrs. Devening, Lacy
and Miller were each granted 25,000 options to purchase shares of the Company's
Common Stock in consideration for services rendered as directors 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 Chief
Executive Officer, Kenneth A. Ghazey, the Company's President, Dale H.
Allardyce, the Company's Executive Vice President, Operations, John F. Lyons,
President of the Company's TAS Division, Richard Nathanson, President of the
Company's Services Division 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 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
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<PAGE> 60
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 retention agreements provide that upon (i)
termination of employment by the Company for other than cause or as a result of
death, disability, voluntary resignation or normal retirement at age sixty-five
or (ii) a change of control (as defined below) followed by (a) a termination for
other than cause or as a result of his death, disability, voluntary resignation,
or normal retirement, (b) a reduction in his compensation, (c) a reduction in
the level of authority or scope of responsibilities or (d) 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. Allardyce and Mr. Lyons are subject
to covenants not to compete during the period of time the Company is paying
severance.
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 Mr. Cameron and entities controlled by Mr. Cameron (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.
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.
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<PAGE> 61
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Share Ownership
As of December 10, 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 ("ENTEX
Associates"), 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 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, along with Mr. McKenna, have pledged the Common Stock 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
connection with the Old 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. 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 repaid in connection
with the merger of ENTEX Holdings with and into the Company on June 28, 1996
(the "Holdings Merger"). The remaining balance on the 1993 Notes, approximately
$4.1 million, was repaid with the proceeds of the Old 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 Notes. In April 1996, the
Company sold to Knowledge Alliance Holdings, Inc. ("KAH"), a corporation
controlled by the Cameron Affiliates, 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
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<PAGE> 62
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 is serving 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. 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 December 10, 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
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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 IBMCC Financing
Agreement provides for borrowings under the IBMCC Working Capital Line of Credit
of up to $525.0 million, of which $77.4 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 as of
September 27, 1998. The amount of available borrowings under the IBMCC Financing
Agreement may be adjusted upwards for higher seasonal purchasing requirements
and may be reduced or terminated by IBMCC upon 60 days, prior written notice.
The IBMCC Working Capital Line of Credit expires on July 1, 2001. Amounts
outstanding under the IBMCC Working Capital Line of Credit bear interest at
LIBOR plus 2.60% (8.13% at January 1, 1999). 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 July 1997 amendments, as well as amendments made
in July and December of 1998, 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 on July 29,
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 connection with the
Old Notes Offering, subject to repledge under certain conditions. 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
"Business -- Business Factors", "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and Note 7 of the notes to the Company's consolidated financial
statements.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock as of December 10, 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, (ii) each of the Company's directors,
(iii) each of the Named Officers, and (iv) all directors and executive officers
of the Company as a group and has been adjusted for stock dividends:
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED(1)
---------------------
NAME OF GROUP OR BENEFICIAL OWNERS NUMBER PERCENT
- ---------------------------------- ---------- -------
<S> <C> <C>
Dort A. Cameron III(2)...................................... 24,227,392 74.4%
c/o Entex Information Services, Inc.
Six International Drive
Rye Brook, NY 10573
IBM Credit Corporation(3)................................... 2,436,055 7.4
1133 Westchester Avenue
White Plains, NY 10604
John A. McKenna, Jr.(4)(5).................................. 1,519,764 4.6
Kenneth Ghazey(6)........................................... 576,000 1.7
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).................................... 71,315 *
Linwood A. (Chip) Lacy, Jr.(13)............................. 74,051 *
Frank W. Miller(14)......................................... 46,264 *
All directors and executive officers as a group (15
persons)(15).............................................. 27,456,063 79.9%
========== ====
</TABLE>
- ---------------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
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 December 10, 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 "Risk
Factors -- Control by Principal Stockholders."
(2) Includes 21,407,739 shares of Common Stock 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 Common Stock owned by Mr. Cameron which are subject to an option
exercisable within 60 days of December 10, 1998. Includes 1,851,850 shares
of Common Stock owned by Mr. Cameron which are subject to an immediately
exercisable option to purchase such shares which Mr. Cameron granted to
IBMCC.
(3) Includes 1,851,850 shares of Common Stock owned by Mr. Cameron which are
subject to an option immediately exercisable by IBMCC to purchase such
shares and 584,205 shares of Common Stock subject to an immediately
exercisable warrant.
(4) Includes 877,560 shares of Common Stock owned by Mr. McKenna which are
subject to an option exercisable within 60 days of December 10, 1998.
Excludes unvested options to purchase 847,560 shares of Common Stock.
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<PAGE> 65
(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 has the
right to purchase all shares of Common Stock owned by him. If the Company
is unable to purchase such shares in cash, Mr. Cameron or his 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 "Risk
Factors -- Control by Principal Stockholders."
(6) Includes 576,000 shares of Common Stock owned by Mr. Ghazey which are
subject to an option exercisable within 60 days of December 10, 1998.
(7) Includes 25,000 shares of Common Stock owned by Mr. Allardyce which are
subject to an option exercisable within 60 days of December 10, 1998. Mr.
Allardyce resigned effective December 31, 1998.
(8) Includes 71,665 shares of Common Stock owned by Mr. Csira which are subject
to an option exercisable within 60 days of December 10, 1998.
(9) Mr. Csira resigned in May 1998.
(10) Includes 5,000 shares of Common Stock currently owned by Mr. Lyons which
are subject to an option exercisable within 60 days of December 10, 1998.
(11) Includes 93,697 shares of Common Stock currently owned by Mr. Nathanson
which are subject to an option exercisable within 60 days of December 10,
1998.
(12) Includes 50,000 shares of Common Stock owned by Mr. Devening which are
subject to an option exercisable within 60 days of December 10, 1998.
(13) Includes 50,000 shares of Common Stock owned by Mr. Lacy which are subject
to an option exercisable within 60 days of December 10, 1998.
(14) Includes 25,000 shares of Common Stock owned by Mr. Miller which are
subject to an option exercisable within 60 days of December 10, 1998.
(15) Includes 1,994,922 shares of Common Stock which are subject to options
exercisable within 60 days of December 10, 1998.
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DESCRIPTION OF OTHER INDEBTEDNESS
Set forth below is a brief description of certain indebtedness that will
remain outstanding upon the completion of the Offering.
IBM CREDIT CORPORATION
The Company is a borrower under the IBMCC Financing Agreement which
provides for the IBMCC Working Capital Line of Credit of up to $525.0 million,
of which the interest bearing portion was $216.4 million and the non-interest
bearing portion was $77.4 million, in each case as of September 27, 1998. The
amount of the interest bearing portion available borrowings under this line of
credit may be adjusted upwards for higher seasonal purchasing requirements, and
may be reduced or terminated by IBMCC upon 60 days prior written notice.
Approximately $63.9 million of the net proceeds from the Old Notes Offering was
used to repay amounts outstanding under the IBMCC Working Capital Line of
Credit.
IBMCC has been the Company's principal working capital lender since the
Company's formation in August 1993. The IBMCC Working Capital Line of Credit has
been renewed annually since that time. In connection with the Old Notes
Offering, on July 29, 1998 IBMCC agreed to extend the expiration date of the
IBMCC Working Capital Line of Credit to July 1, 2001. Prior to July 29, 1998,
amounts outstanding under the IBMCC Working Capital Line of Credit bore interest
at the prime rate plus 0.50%. On July 29, 1998, the Company renegotiated this
agreement which resulted in a reduction in the financing rate from the prime
rate plus 0.50% to LIBOR plus 2.10%. On December 27, 1998, the agreement was
again renegotiated resulting in an increase in the financing rate from LIBOR
plus 2.10% to LIBOR plus 2.60% (8.13% at January 1, 1999). Such rate is subject
to increase or decrease depending on the Company's financial performance.
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. The IBMCC Working Capital Line of Credit contains 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, including the Notes, (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 HP in which IBMCC has a second
priority lien) and certain intellectual property of the Company and such
guarantor subsidiaries. Mr. Cameron, ENTEX Associates and John A. McKenna, Jr.,
the Company's President and Chief Executive Officer, pledged the shares of
Common Stock held by each of them as additional collateral. In connection with
the Old Notes Offering, the pledge of such shares was released, subject to
repledge under certain conditions. 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 EBITDA for the fiscal year-to-date to interest expense for the fiscal
year-to-date and (iii) tangible net worth.
The IBMCC Financing Agreement contains customary representations and
warranties as well as conditions precedent to advances, including the lack of
any defaults and the continued accuracy of the Company's representations and
warranties. Events of default under the IBMCC Financing Agreement include those
usual and customary for agreements of this type including, among other things,
default in the payment of principal and interest, material breaches of
representations and warranties, certain events of bankruptcy or insolvency, and
failure to comply with covenants and other obligations in the agreement. Upon
the occurrence and continuance of an event of default, IBMCC can terminate the
IBMCC Financing Agreement and declare the outstanding advances due and payable.
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<PAGE> 67
FINOVA CAPITAL CORPORATION
The FINOVA Inventory Line of Credit provides for borrowings of up to $110
million and is secured primarily by the Company's inventory financed by FINOVA.
Amounts outstanding under this line of credit bear interest only in the event
that payments extend beyond the terms for the inventory which is financed.
During Fiscal 1998 and for the three months ended September 27, 1998, the
Company paid no interest for borrowings under this line of credit. At September
27, 1998, $46.6 million was outstanding under the FINOVA Inventory Line of
Credit, all of which was non-interest bearing and was classified as accounts
payable on the Company's consolidated balance sheet.
OTHER INDEBTEDNESS
In addition, as of September 27, 1998, the Company had other outstanding
long-term indebtedness consisting primarily of (a) $6.9 million owed to
Microsoft Corporation with self-amortizing principal payments through June 21,
2002, with interest payments at 4% per annum in each of the first two annual
payments and 6% per annum thereafter, (b) $4.3 million of a self-amortizing
mortgage loan for the Erlanger, Kentucky integration center which bears interest
at 8.75% and is due February 2007 and (c) the Junior Subordinated Debentures
discounted to yield 20% including cash interest payments at a rate of 5.5% per
annum that will accrete to their face value of $43.1 million by their due date
of March 1, 2007.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF EXCHANGE OFFER
The Old Notes were sold by the Company on July 29, 1998 to the Initial
Purchasers, who placed the Old Notes with certain institutional investors. In
connection therewith, the Company and the Initial Purchasers entered into the
Registration Rights Agreement, pursuant to which the Company agreed, for the
benefit of the holders of the Old Notes, that the Company would, at its sole
cost, (i) within 120 days following the original issuance of the Old Notes, file
with the Commission the Exchange Offer Registration Statement (of which this
Prospectus is a part) under the Securities Act with respect to an issue of a
series of new notes of the Company identical in all material respects to the
series of Old Notes and (ii) use its best efforts to cause such Exchange Offer
Registration Statement to become effective under the Securities Act within 180
days following the original issuance of the Old Notes. Upon the effectiveness of
the Exchange Offer Registration Statement (of which this Prospectus is a part),
the Company will offer to the holders of the Old Notes the opportunity to
exchange their Old Notes for a like principal amount of New Notes, to be issued
without a restrictive legend and which may be reoffered and resold by the holder
without restrictions or limitations under the Securities Act. The term "holder"
with respect to any Note means any person in whose name such Note is registered
on the books of the Company or any other person who has obtained a properly
completed bond power from the registered holder.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal (which together constitute the
Exchange Offer), the Company will accept for exchange Old Notes that are
properly tendered on or prior to the Expiration Date and not withdrawn as
permitted below. As used herein, the term "Expiration Date" means 5:00 p.m., New
York City time, on February 24, 1999; provided, however, that if the Company, in
its sole discretion, has extended the period of time during which the Exchange
Offer is open, the term "Expiration Date" means the latest time and date to
which the Exchange Offer is extended.
As of the date of this Prospectus, $100,000,000 aggregate principal amount
of Old Notes is outstanding. This Prospectus, together with the Letter of
Transmittal, is first being sent on or about January 25, 1999, to all holders of
Old Notes known to the Company. The Company's obligation to accept Old Notes for
exchange pursuant to the Exchange Offer is subject to certain customary
conditions as set forth below under "-- Certain Conditions to the Exchange
Offer."
The Company expressly reserves the right, at any time and from time to
time, to extend the period of time during which the Exchange Offer is open, and
thereby to delay acceptance for exchange of any Old Notes, by giving oral or
written notice of such extension to the holders of the Old Notes as described
below. During any such extension, all Old Notes previously tendered will remain
subject to the Exchange Offer and may be accepted for exchange by the Company.
Any Old Notes not accepted for exchange for any reason will be returned without
expense to the tendering holders thereof as promptly as practicable after the
expiration or termination of the Exchange Offer.
Old Notes tendered in the Exchange Offer must be in denominations of $1,000
or any integral multiple thereof.
The Company expressly reserves the right to amend or terminate the Exchange
Offer, and not to accept for exchange any Old Notes not theretofore accepted for
exchange, upon the occurrence of any of the conditions to the Exchange Offer
specified below under "-- Certain Conditions to the Exchange Offer." The Company
will give oral or written notice of any extension, amendment, non-acceptance or
termination to the holders of the Old Notes as promptly as practicable, such
notice in the case of any extension to be issued by means of a press release or
other public announcement no later than 9:00 a.m., New York City time, on the
next business day after the previously scheduled Expiration Date.
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<PAGE> 69
PROCEDURES FOR TENDERING OLD NOTES
Only a registered holder of Old Notes may tender such Old Notes in the
Exchange Offer. The tender to the Company of Old Notes by a holder thereof as
set forth below and the acceptance thereof by the Company will constitute a
binding agreement between the tendering holder and the Company upon the terms
and subject to the conditions set forth in this Prospectus and in the
accompanying Letter of Transmittal. Except as set forth below, a holder who
wishes to tender Old Notes for exchange pursuant to the Exchange Offer must
transmit a properly completed and duly executed Letter of Transmittal, including
all other documents required by such Letter of Transmittal, to Marine Midland
Bank (the "Exchange Agent") at one of the addresses set forth below under
"Exchange Agent" on or prior to the Expiration Date. In addition, either (i)
certificates for such Old Notes must be received by the Exchange Agent along
with the Letter of Transmittal, (ii) a timely confirmation of a book-entry
transfer (a "Book-Entry Confirmation") of such Old Notes, if such procedure is
available, into the Exchange Agent's account at The Depository Trust Company
(the "Book-Entry Transfer Facility") pursuant to the procedure for book-entry
transfer described below must be received by the Exchange Agent prior to the
Expiration Date or (iii) the holder must comply with the guaranteed delivery
procedures described below.
THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH DELIVERY
IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH
RETURN RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR OLD NOTES SHOULD
BE SENT TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS,
COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS
FOR SUCH HOLDERS.
Any beneficial owner of Old Notes whose Old Notes are registered in the
name of a broker, dealer, commercial bank, trust company, or other nominee and
who wishes to tender such Old Notes in the Exchange Offer should contact the
registered holder promptly and instruct such registered holder to tender on such
beneficial owner's behalf. If such beneficial owner wishes to tender on its own
behalf, such owner must, prior to completing and executing the Letter of
Transmittal and delivering such beneficial owner's Old Notes, either make
appropriate arrangements to register ownership of such Old Notes in such
beneficial owner's name or obtain a properly completed bond power from the
registered holder. The transfer of registered ownership may take considerable
time.
Signatures on a Letter of Transmittal or a notice of withdrawal described
below (see "-- Withdrawal of Tenders"), as the case may be, must be guaranteed
(see "-- Guaranteed Delivery Procedures") unless the Old Notes surrendered for
exchange pursuant thereto are tendered (i) by a registered holder of the Old
Notes who has not completed the box entitled "Special Issuance Instructions" or
"Special Delivery Instructions" on the Letter of Transmittal or (ii) for the
account of an Eligible Institution (as defined below). In the event that
signatures on a Letter of Transmittal or a notice of withdrawal, as the case may
be, are required to be guaranteed, such guaranties must be by a financial
institution (including most banks, savings and loan associations and brokerage
houses) that is a participant in the Securities Transfer Agents Medallion
Program, the New York Stock Exchange Medallion Program or the Stock Exchanges
Medallion Program (collectively, "Eligible Institutions"). If Old Notes are
registered in the name of a person other than a signer of the Letter of
Transmittal, the Old Notes surrendered for exchange must be endorsed by or be
accompanied by a written instrument or instruments of transfer or exchange in
satisfactory form as determined by the Company in its sole discretion, duly
executed by the registered holder exactly as the name or names of the registered
holder or holders appear on the Old Notes with the signature thereon guaranteed
by an Eligible Institution.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Old Notes tendered for exchange will be determined by
the Company in its sole discretion, which determination shall be final and
binding. The Company reserves the absolute right to reject any and all tenders
of any particular Old Notes not properly tendered or not to accept any
particular Old Notes not properly tendered or the acceptance of which might, in
the judgment of the Company or its counsel, be unlawful. The Company also
reserves the
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absolute right to waive any defects or irregularities or conditions of the
Exchange Offer as to any particular Old Notes either before or after the
Expiration Date (including the right to waive the ineligibility of any holder
who seeks to tender Old Notes in the Exchange Offer). The interpretation by the
Company of the terms and conditions of the Exchange Offer as to any particular
Old Notes either before or after the Expiration Date (including the Letter of
Transmittal and the instructions thereto) shall be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of Old Notes for exchange must be cured within such reasonable period of time as
the Company shall determine. None of the Company, the Exchange Agent or any
other person shall be under any duty to give notification of any defect or
irregularity with respect to any tender of Old Notes for exchange, nor shall any
of them incur any liability for failure to give such notification.
If the Letter of Transmittal or any Old Notes or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such person should so indicate when signing, and, unless waived by the
Company, proper evidence satisfactory to the Company of their authority to so
act must be submitted with the Letter of Transmittal.
By tendering Old Notes for exchange, each holder will represent to the
Company that, among other things, the New Notes acquired pursuant to the
Exchange Offer are being acquired in the ordinary course of business of the
person receiving such New Notes, whether or not such person is the holder, and
that neither the holder nor such other person has any arrangement or
understanding with any person to engage or participate in a distribution of the
New Notes. If any holder or any such other person is an "affiliate," as defined
under Rule 405 of the Securities Act, of the Company or is engaged in or intends
to engage in, or has an arrangement or understanding with any person to
participate in, a distribution of such New Notes to be acquired pursuant to the
Exchange Offer, such holder or any such other person (i) may not rely on the
applicable interpretation of the staff of the Commission and (ii) must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale transaction. Each broker-dealer that receives New
Notes for its own account in exchange for Old Notes, where such Old Notes were
acquired by such broker-dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. See "Plan of Distribution." The
Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Company will accept, promptly after the Expiration Date, all Old Notes
properly tendered and will issue the New Notes promptly after acceptance of the
Old Notes. See "-- Certain Conditions to the Exchange Offer" below. For purposes
of the Exchange Offer, the Company will be deemed to have accepted properly
tendered Old Notes for exchange when, as and if the Company has given oral or
written notice thereof to the Exchange Agent.
For each Old Note accepted for exchange, the holder of such Old Note will
receive a New Note having a principal amount equal to that of the surrendered
Old Note. Accordingly, registered holders of New Notes on the relevant record
date for the first interest payment date following the consummation of the
Exchange Offer will receive interest accruing from the most recent date to which
interest has been paid on the Old Notes or, if no interest has been paid, from
July 29, 1998. Old Notes accepted for exchange will cease to accrue interest
from and after the date of consummation of the Exchange Offer. Holders whose Old
Notes are accepted for exchange will not receive any payment in respect of
accrued interest on such Old Notes otherwise payable on any interest payment
date for which the record date occurs on or after consummation of the Exchange
Offer. Old Notes not tendered or not accepted for exchange will continue to
accrue interest from and after the date of consummation of the Exchange Offer.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of certificates for such Old Notes or a timely Book-Entry
Confirmation of such Old Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility, a properly completed and duly executed Letter of
Transmittal and all other
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required documents. If any tendered Old Notes are not accepted for any reason
set forth in the terms and conditions of the Exchange Offer or if Old Notes are
submitted for a greater principal amount than the holder desires to exchange,
such unaccepted or non-exchanged Old Notes will be returned without expense to
the tendering holder thereof (or, in the case of Old Notes tendered by
book-entry transfer into the Exchange Agent's account at the Book-Entry Transfer
Facility pursuant to the book-entry procedures described below, such
non-exchanged Old Notes will be credited to an account maintained with such
Book-Entry Transfer Facility) as promptly as practicable after the expiration or
termination of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus, and
any financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Old Notes by causing the
Book-Entry Transfer Facility to transfer such Old Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Old Notes may be effected through book-entry transfer at the
Book-Entry Transfer Facility, the Letter of Transmittal or a facsimile thereof,
with any required signature guarantees and any other required documents, must in
any case, be transmitted to and received by the Exchange Agent at the addresses
set forth below under "-- Exchange Agent" on or prior to the Expiration Date or
the guaranteed delivery procedures described below must be complied with.
GUARANTEED DELIVERY PROCEDURES
If a registered holder of the Old Notes desires to tender such Old Notes
and the Old Notes are not immediately available, or time will not permit such
holder's Old Notes or other required documents to reach the Exchange Agent
before the Expiration Date, or the procedure for book-entry transfer cannot be
completed on a timely basis, a tender may be effected if (i) the tender is made
through an Eligible Institution, (ii) on or prior to 5:00 P.M., New York City
time, on the Expiration Date, the Exchange Agent receives from such Eligible
Institution a properly completed and duly executed Letter of Transmittal (or a
facsimile thereof) and Notice of Guaranteed Delivery, substantially in the form
provided by the Company (by telegram, telex, facsimile transmission, mail or
hand delivery), setting forth the name and address of the holder of the Old
Notes and the amount of Old Notes tendered, stating that the tender is being
made thereby and guaranteed that within three New York Stock Exchange ("NYSE")
trading days after the date of execution of the Notice of Guaranteed Delivery,
the certificates for all physically tendered Old Notes, in proper form for
transfer, or a Book-Entry Confirmation, as the case may be, and any other
documents required by the Letter of Transmittal will be deposited by the
Eligible Institution with the Exchange Agent and (iii) the certificates for all
physically tendered Old Notes, in proper form for transfer, or a Book-Entry
Confirmation, as the case may be, and any other documents required by the Letter
of Transmittal will be deposited by the Eligible Institution within three NYSE
trading days after the date of execution of the Notice of Guaranteed Delivery.
WITHDRAWAL OF TENDERS
Tenders of Old Notes may be withdrawn at any time prior to 5:00 P.M., New
York City time, on the Expiration Date. For a withdrawal to be effective, a
written notice of withdrawal must be received by the Exchange Agent at one of
the addresses set forth below under "-- Exchange Agent." Any such notice of
withdrawal must specify the name of the person having tendered the Old Notes to
be withdrawn, identify the Old Notes to be withdrawn (including the principal
amount of such Old Notes), and (where certificates for Old Notes have been
transmitted) specify the name in which such Old Notes are registered, if
different from that of the withdrawing holder. If certificates for Old Notes
have been delivered or otherwise identified to the Exchange Agent, then prior to
the release of such certificates the withdrawing holder must also submit the
serial numbers of the particular certificates to be withdrawn and a signed
notice of withdrawal with signatures guaranteed by an Eligible Institution
unless such holder is an Eligible Institution in which case such guarantee will
not be required. If Old Notes have been tendered pursuant to the procedure for
book-entry transfer described above, any notice of withdrawal must specify the
name and number of the account at the Book-Entry Transfer Facility to be
credited with the withdrawn Old Notes and otherwise comply with the
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<PAGE> 72
procedures of such facility. All questions as to the validity, form and
eligibility (including time of receipt) of such notices will be determined by
the Company, whose determination will be final and binding on all parties. Any
Old Notes so withdrawn will be deemed not to have been validly tendered for
exchange for purposes of the Exchange Offer. Any Old Notes which have been
tendered for exchange but which are not exchanged for any reason will be
returned to the holder thereof without cost to such holder (or, in the case of
Old Notes tendered by book-entry transfer into the Exchange Agent's account at
the Book-Entry Transfer Facility pursuant to the book-entry transfer procedures
described above, such Old Notes will be credited to an account maintained with
such Book-Entry Transfer Facility for the Old Notes) as soon as practicable
after withdrawal, rejection of tender or termination of the Exchange Offer.
Properly withdrawn Old Notes may be retendered by following one of the
procedures described under "-- Procedures for Tendering Old Notes" above at any
time on or prior to the Expiration Date.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provisions of the Exchange Offer, and subject to
its obligations pursuant to the Registration Rights Agreement, the Company shall
not be required to accept for exchange, or to issue New Notes in exchange for,
any Old Notes, and may terminate or amend the Exchange Offer, if, at any time
before the acceptance of such New Notes for exchange, any of the following
events shall occur:
(a) any injunction, order or decree shall have been issued by any
court or any governmental agency that would prohibit, prevent or otherwise
materially impair the ability of the Company to proceed with the Exchange
Offer;
(b) any change, or any development involving a prospective change, in
the business or financial affairs of the Company or any of its subsidiaries
has occurred which, in the reasonable judgment of the Company, might
materially impair the ability of the Company to proceed with the Exchange
Offer or materially impair the contemplated benefits of the Exchange Offer
to the Company;
(c) any law, statute, rule or regulation is proposed, adopted or
enacted, which, in the reasonable judgment of the Company, might materially
impair the ability of the Company to proceed with the Exchange Offer or
materially impair the contemplated benefits of the Exchange Offer to the
Company;
(d) any governmental approval has not been obtained, which approval
the Company shall, in its reasonable discretion, deem necessary for the
consummation of the Exchange Offer as contemplated hereby; or
(e) the Exchange Offer will violate any applicable law or any
applicable interpretation of the staff of the Commission.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company in whole or in part at any time and from time to time in
its reasonable discretion. The failure by the Company at any time to exercise
any of the foregoing rights shall not be deemed a waiver of any such right and
such right shall be deemed an ongoing right which may be asserted at any time
and from time to time.
In addition, the Company will not accept for exchange any Old Notes
tendered, and no New Notes will be issued in exchange for any such Old Notes, if
at such time any stop order is threatened by the Commission or in effect with
respect to the Registration Statement of which this Prospectus is a part or the
qualification of the Indenture under the Trust Indenture Act of 1939, as amended
(the "TIA").
The Exchange Offer is not conditioned on any minimum principal amount of
Old Notes being tendered for exchange.
EXCHANGE AGENT
Marine Midland Bank has been appointed as the Exchange Agent for the
Exchange Offer. All executed Letters of Transmittal should be directed to the
Exchange Agent at one of the addresses set forth below. Questions and requests
for assistance, requests for additional copies of this Prospectus or of the
Letter of
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Transmittal and requests or Notices of Guaranteed Delivery should be directed to
the Exchange Agent addressed as follows:
<TABLE>
<S> <C> <C>
By Registered or Certified Mail: By Overnight Courier: By Hand:
MARINE MIDLAND BANK MARINE MIDLAND BANK MARINE MIDLAND BANK
140 Broadway, Level A 140 Broadway, Level A 140 Broadway, Level A
New York, New York 10005-1180 New York, New York 10005-1180 New York, New York 10005-1180
Attention: Corporate Trust Attention: Corporate Trust
Operations Operations
By Facsimile:
(for Eligible Institutions only)
(212) 658-2292
</TABLE>
DELIVERY OF THE LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH
ABOVE DOES NOT CONSTITUTE A VALID DELIVERY OF SUCH LETTER OF TRANSMITTAL.
RESALES OF THE NEW NOTES
Based on interpretations by the staff of the Commission as set forth in
Exxon Capital Holdings Corporation (avail. May 13, 1988), Morgan Stanley & Co.
Incorporated (avail. June 5, 1991) and Shearman & Sterling (avail. July 2, 1993)
and other no-action letters issued to third parties, the Company believes that
the New Notes issued pursuant to the Exchange Offer to a holder in exchange for
Old Notes may be offered for resale, resold and otherwise transferred by any
holder thereof (other than such holder which is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act) without compliance with
the registration and prospectus delivery provisions of the Securities Act,
provided that such New Notes are acquired in the ordinary course of such
holder's business and such holder is not participating, does not intend to
participate and has no arrangement or understanding with any person to
participate in the distribution of such New Notes. The Company has not requested
or obtained, and does not intend to seek, an interpretive letter from the staff
of the Commission with respect to this Exchange Offer, and the Company and the
holders are not entitled to rely on interpretive advice provided by the staff of
the Commission to other persons, which advice was based on the facts and
conditions represented in such letters. Although there can be no assurance that
the staff of the Commission would make a similar determination with respect to
the Exchange Offer, the Exchange Offer is being conducted in a manner intended
to be consistent with the facts and conditions represented in such letters. If
any holder acquires New Notes in the Exchange Offer for the purpose of
distributing or participating in a distribution of the New Notes, such holder
cannot rely on the position of the staff of the Commission set forth in the
above no-action and interpretive letters and must comply with the registration
and prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction, unless an exemption from registration is otherwise
available
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities (other than Old Notes acquired directly
from the Company). The Company has agreed that, for a period of 180 days
following the consummation of the Exchange Offer, it will make this Prospectus
available to any broker-dealer for use in connection with any such resale. See
"Plan of Distribution." Under the Registration Rights Agreement, the Company is
required to allow such broker-dealers and other persons, if any, subject to
similar prospectus delivery requirements to use this Prospectus in connection
with the resale of such New Notes.
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FEES AND EXPENSES
The expenses of soliciting tenders of Old Notes will be borne by the
Company. The principal solicitation is being made by mail; however, additional
solicitation may be made by telegraph, telephone or in person by officers and
regular employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company. Such expenses include, among others, fees and expenses
of the Exchange Agent and the Trustee, accounting and legal fees and printing
costs.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing New Notes or Old Notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be issued in the name
of, any person other than the registered holder of the Old Notes tendered, or if
tendered Old Notes are registered in the name of any person other than the
person signing the Letter of Transmittal, or if a transfer tax is imposed for
any reason other than the exchange of Old Notes pursuant to the Exchange Offer,
then the amount of any such transfer taxes (whether imposed on the registered
holder or any other person) will be payable by the tendering holder. If
satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer taxes must
accompany the tender of Old Notes.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes,
which is the principal amount as reflected in the Company's accounting records
on the date of the exchange. Accordingly, no gain or loss for accounting
purposes will be recognized by the Company. The expenses of the Exchange Offer
and the unamortized expenses related to the issuance of the Old Notes will be
amortized over the term of the New Notes.
REGULATORY APPROVALS
The Company does not believe that the receipt of any material federal or
state regulatory approvals will be necessary in connection with the Exchange
Offer.
TRANSFER TAXES
Holders who tender their Old Notes for exchange will not be obligated to
pay any transfer taxes in connection therewith, except that holders who instruct
the Company to register New Notes in the name of, or request that Old Notes not
tendered or not accepted in the Exchange Offer be returned to, a person other
than the registered tendering holder will be responsible for the payment of any
applicable transfer tax thereon.
OTHER
Participation in the Exchange Offer is voluntary and holders of Old Notes
should carefully consider whether to accept the terms and conditions thereof.
Holder of the Old Notes are urged to consult their financial and tax advisors in
making their own decisions on what action to take with respect to the Exchange
Offer.
As a result of the making of, and upon acceptance for exchange of all
validly tendered Old Notes pursuant to the terms of the Exchange Offer, the
Company will have fulfilled a covenant contained in the
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terms of the Old Notes and the Registration Rights Agreement. Holders of the Old
Notes who do not tender their Old Notes in the Exchange Offer will continue to
hold such Old Notes and will be entitled to all the rights, and limitations
applicable thereto, under the Indenture, except for such rights under the
Registration Rights Agreement (including rights to receive Additional Interest)
which by their terms terminate or cease to have further effect as a result of
the making and consummation of the Exchange Offer. All untendered Old Notes will
continue to be subject to the restrictions on transfer set forth in the
Indenture and the Company does not currently anticipate that it will register
the Old Notes under the Securities Act. To the extent that Old Notes are
tendered and accepted in the Exchange Offer, the trading market, if any, for any
remaining Old Notes could be adversely affected. See "Risk
Factors -- Consequences of Failure to Exchange."
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DESCRIPTION OF THE NOTES
The Old Notes were, and the New Notes will be, issued under an Indenture,
dated as of July 29, 1998 (the "Indenture"), among the Company, the Guarantors
and Marine Midland Bank, as Trustee (the "Trustee"). The terms of the New Notes
are identical in all material respects to the Old Notes, except that the New
Notes have been registered under the Securities Act and, therefore, will not
bear legends restricting their transfer and will not contain certain provisions
providing for an increase in the interest rate thereon under certain
circumstances described in the Registration Rights Agreement, the provisions of
which will terminate upon the consummation of the Exchange Offer. The following
summary of certain provisions of the Indenture and the Notes does not purport to
be complete and is subject to, and is qualified in its entirety by reference to,
all the provisions of the Indenture (including the definitions of certain terms
therein and those terms made a part thereof by the TIA) and the Notes.
A copy of the form of Indenture may be obtained from the Company by any
holder or prospective investor upon request. Definitions relating to certain
capitalized terms are set forth under "-- Certain Definitions" and throughout
this description. Capitalized terms that are used but not otherwise defined
herein have the meanings assigned to them in the Indenture and such definitions
are incorporated herein by reference.
GENERAL
The Notes will be limited in aggregate principal amount to $100,000,000.
The Notes will be general unsecured obligations of the Company, subordinate in
right of payment to all existing and future Senior Indebtedness of the Company,
senior in right of payment to all existing and future subordinated indebtedness
of the Company and pari passu in right of payment with all future senior
subordinated Indebtedness of the Company.
The Notes will be fully and unconditionally guaranteed, on an unsecured
senior subordinated basis, as to payment of principal, premium, if any, and
interest, jointly and severally, by the Guarantors.
MATURITY, INTEREST AND PRINCIPAL
The Notes will mature on August 1, 2006. The Notes will bear interest at a
rate of 12 1/2% per annum from the date of original issuance of the Old Notes
until maturity. Interest is payable semi-annually in arrears on February 1 and
August 1, commencing February 1, 1999, to holders of record of the Notes at the
close of business on the immediately preceding January 15 and July 15,
respectively. Interest on the Notes will be paid on the basis of a 360-day year
of twelve 30-day months.
OPTIONAL REDEMPTION
The Notes will be redeemable at the option of the Company, in whole or in
part, at any time on or after August 1, 2003 at the following redemption prices
(expressed as a percentage of principal amount), together, in each case, with
accrued interest to the redemption date, if redeemed during the twelve-month
period beginning on August 1 of each year listed below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---- ----------
<S> <C>
2003...................................................... 106.250%
2004...................................................... 103.125%
2005 and thereafter....................................... 100.000%
</TABLE>
Notwithstanding the foregoing, upon a Change of Control on or prior to
August 1, 2000, the Company, at its option, may redeem all but not less than all
of the Notes outstanding at a redemption price equal to 112.5% of the aggregate
principal amount of the Notes so redeemed plus accrued interest to the date of
redemption. In addition, the Company may redeem in the aggregate up to 35% of
the original principal amount of the Notes at any time and from time to time
prior to August 1, 2000 at a redemption price equal to 112.5% of the aggregate
principal amount so redeemed plus accrued interest to the redemption date out of
the Net Proceeds of one or more Public Equity Offerings; provided that at least
$65.0 million of the original principal amount of the Notes remain outstanding
immediately after the occurrence of any such redemption and that any such
redemption occurs within 90 days following the closing of any such Public Equity
Offering.
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In the event of redemption of fewer than all of the Notes, the Trustee
shall select by lot or in such other manner as it shall deem fair and equitable
the Notes to be redeemed. The Notes will be redeemable in whole or in part upon
not less than 30 nor more than 60 days' prior written notice, made by first
class mail to a holder's last address as it shall appear on the register
maintained by the Registrar of the Notes. On and after any redemption date,
interest will cease to accrue on the Notes or portions thereof called for
redemption unless the Company shall fail to redeem any such Note.
SUBORDINATION
The indebtedness represented by the Notes is, to the extent and in the
manner provided in the Indenture, subordinated in right of payment to the prior
indefeasible payment and satisfaction in full in cash of all existing and future
Senior Indebtedness of the Company. As of September 27, 1998, the principal
amount of outstanding Indebtedness which was Senior Indebtedness was
approximately $229.2 million. In addition, certain other amounts due under the
Credit Facility as of such date would have constituted Senior Indebtedness. See
Note (1) to "Capitalization" for non-interest bearing amounts due to IBMCC and
FINOVA as of such date.
In the event of any insolvency or bankruptcy case or proceeding, or any
receivership, liquidation, arrangement, reorganization or other similar case or
proceeding in connection therewith, relative to the Company or to its creditors,
as such, or to its assets, whether voluntary or involuntary, or any liquidation,
dissolution or other winding-up of the Company, whether voluntary or involuntary
and whether or not involving insolvency or bankruptcy, or any general assignment
for the benefit of creditors or other marshaling of assets or liabilities of the
Company (except in connection with the merger or consolidation of the Company or
its liquidation or dissolution following the transfer of substantially all of
its assets, upon the terms and conditions permitted under the circumstances
described under "-- Merger, Consolidation or Sale of Assets") (all of the
foregoing referred to herein individually as a "Bankruptcy Proceeding" and
collectively as "Bankruptcy Proceedings"), the holders of Senior Indebtedness
will be entitled to receive payment and satisfaction in full in cash of all
amounts due on or in respect of all Senior Indebtedness before the holders of
the Notes are entitled to receive or retain any payment or distribution of any
kind (other than a payment or distribution in the form of Permitted Junior
Securities) on account of the Notes. In the event that, notwithstanding the
foregoing, the Trustee or any holder of Notes receives any payment or
distribution of assets of the Company of any kind, whether in cash, property or
securities, including, without limitation, by way of set-off or otherwise, in
respect of the Notes before all Senior Indebtedness is paid and satisfied in
full in cash, then such payment or distribution (other than a payment or
distribution in the form of Permitted Junior Securities) will be held by the
recipient in trust for the benefit of holders of Senior Indebtedness and will be
immediately paid over or delivered to the holders of Senior Indebtedness or
their representative or representatives to the extent necessary to make payment
in full of all Senior Indebtedness remaining unpaid, after giving effect to any
concurrent payment or distribution, or provision therefor, to or for the holders
of Senior Indebtedness. By reason of such subordination, in the event of
liquidation or insolvency, creditors of the Company who are holders of Senior
Indebtedness may recover more, ratably, than other creditors of the Company, and
creditors of the Company who are not holders of Senior Indebtedness or of the
Notes may recover more, ratably, than the holders of the Notes.
No payment or distribution (other than a payment or distribution in the
form of Permitted Junior Securities) of any assets or securities of the Company
or any Subsidiary of any kind or character (including, without limitation, cash,
property and any payment or distribution which may be payable or deliverable by
reason of the payment of any other Indebtedness of the Company being
subordinated to the payment of the Notes by the Company) may be made by or on
behalf of the Company or any Subsidiary, including, without limitation, by way
of set-off or otherwise, for or on account of the Notes, or for or on account of
the purchase, redemption, defeasance or other acquisition of any Notes, and
neither the Trustee nor any holder or owner of any Notes shall take or receive
from the Company or any Subsidiary, directly or indirectly in any manner,
payment in respect of all or any portion of the Notes following the occurrence
of a Payment Default, and in any such event, such prohibition shall continue
until such Payment Default is cured, waived in writing or ceases to exist. At
such time as the prohibition set forth in the preceding sentence shall no longer
be in effect,
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subject to the provisions of the following paragraph, the Company shall resume
making any and all required payments in respect of the Notes, including any
missed payments.
Upon the occurrence of a Non-Payment Event of Default, no payment or
distribution (other than a payment or distribution in the form of Permitted
Junior Securities) of any assets or securities of the Company or any Subsidiary
of any kind or character (including, without limitation, cash, property and any
payment or distribution which may be payable or deliverable by reason of the
payment of any other Indebtedness of the Company being subordinated to the
payment of the Notes by the Company) may be made by the Company, including,
without limitation, by way of set-off or otherwise, for or on account of the
Notes, or for or on account of the purchase, redemption, defeasance or other
acquisition of any Notes, and neither the Trustee nor any holder or owner of any
Notes shall take or receive from the Company or any Subsidiary, directly or
indirectly in any manner, payment in respect of all or any portion of the Notes
for a period (a "Payment Blockage Period") commencing on the date of receipt by
the Trustee of written notice from an authorized Person on behalf of the holders
of Designated Senior Indebtedness of the Company (the "Authorized Person") of
such Non-Payment Event of Default unless and until (subject to any blockage of
payments that may then be in effect under the preceding paragraph) the earliest
of (w) more than 179 days shall have elapsed since receipt of such written
notice by the Trustee, (x) such Non-Payment Event of Default shall have been
cured or waived in writing or shall have ceased to exist, (y) or such Designated
Senior Indebtedness shall have been paid in full or (z) such Payment Blockage
Period shall have been terminated by written notice to the Company or the
Trustee from such Authorized Person, after which, in the case of clause (w),
(x), (y) or (z), the Company shall resume making any and all required payments
in respect of the Notes, including any missed payments. Notwithstanding any
other provisions of the Indenture, in no event shall a Payment Blockage Period
commenced in accordance with the provisions of the Indenture described in this
paragraph extend beyond 179 days from the date of the receipt by the Trustee of
the notice referred to above (the "Initial Blockage Period"). Any number of
additional Payment Blockage Periods may be commenced during the Initial Blockage
Period; provided, however, that no such additional Payment Blockage Period shall
extend beyond the Initial Blockage Period. After the expiration of the Initial
Blockage Period, no Payment Blockage Period may be commenced until at least 180
consecutive days have elapsed from the last day of the Initial Blockage Period.
Notwithstanding any other provision of the Indenture, no event of default with
respect to Designated Senior Indebtedness (other than a Payment Default) which
existed or was continuing on the date of the commencement of any Payment
Blockage Period initiated by an Authorized Person shall be, or be made, the
basis for the commencement of a second Payment Blockage Period initiated by an
Authorized Person, whether or not within the Initial Blockage Period, unless
such event of default shall have been cured or waived for a period of not less
than 90 consecutive days.
Each Guarantee will, to the extent set forth in the Indenture, be
subordinated in right of payment to the prior payment in full of all Guarantor
Senior Indebtedness of the respective Guarantor, including obligations of such
Guarantor with respect to the Credit Facility (including any guarantee thereof),
and will be subject to the rights of holders of Designated Senior Indebtedness
of such Guarantor to initiate blockage periods, upon terms substantially
comparable to the subordination of the Notes to all Senior Indebtedness. As of
September 27, 1998, the Guarantors had approximately $229.2 million of Guarantor
Senior Indebtedness (excluding guarantees of Senior Indebtedness).
If the Company or any Guarantor fails to make any payment on the Notes or
any Guarantee when due or within any applicable grace period, whether or not on
account of payment blockage provisions, such failure would constitute an Event
of Default under the Indenture and would enable the holders of the Notes to
accelerate the maturity thereof. See "-- Events of Default."
A holder of Notes by his acceptance of Notes agrees to be bound by such
provisions and authorizes and expressly directs the Trustee, on his behalf, to
take such action as may be necessary or appropriate to effectuate the
subordination provided for in the Indenture and appoints the Trustee his
attorney-in-fact for such purpose.
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CERTAIN COVENANTS
The Indenture will contain, among others, the following covenants.
Limitation on Additional Indebtedness
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, incur any Indebtedness (including Acquired
Indebtedness); provided, that the Company and any Guarantor may incur
Indebtedness if (i) after giving effect to the incurrence of such Indebtedness
and the receipt and application of the proceeds thereof, the Company's Fixed
Charge Coverage Ratio (determined on a pro forma basis) is at least 2.0 to 1, if
such Indebtedness is incurred on or prior to August 1, 2000, and 2.5 to 1 if
such Indebtedness is incurred thereafter, and (ii) no Triggering Default Event
shall have occurred and be continuing at the time or as a consequence of the
incurrence of such Indebtedness. For purposes of computing the Fixed Charge
Coverage Ratio, (A) if the Indebtedness which is the subject of a determination
under this provision is Acquired Indebtedness, or Indebtedness incurred in
connection with the simultaneous acquisition (by way of merger, consolidation or
otherwise) of any Person, business, property or assets (an "Acquisition") or
Indebtedness of an Unrestricted Subsidiary being designated as a Restricted
Subsidiary, then such ratio shall be determined by giving effect (on a pro forma
basis, as if the transaction or redesignation had occurred at the beginning of
the four-quarter period used to make such calculation) to both the incurrence or
assumption of such Acquired Indebtedness or such other Indebtedness and the
inclusion in the Company's EBITDA of the EBITDA of the acquired Person,
business, property or assets or redesignated Subsidiary, (B) if any Indebtedness
outstanding or to be incurred (x) bears a floating rate of interest, the
interest expense on such Indebtedness shall be calculated as if the rate in
effect on the date of determination had been the applicable rate for the entire
period (taking into account on a pro forma basis any Interest Rate Agreement
applicable to such Indebtedness if such Interest Rate Agreement has a remaining
term as at the date of determination in excess of 12 months), (y) bears, at the
option of the Company or a Restricted Subsidiary, a fixed or floating rate of
interest, the interest expense on such Indebtedness shall be computed by
applying, at the option of the Company or such Restricted Subsidiary, either a
fixed or floating rate and (z) was incurred under a revolving credit facility,
the interest expense on such Indebtedness shall be computed based upon the
average daily balance of such Indebtedness during the applicable period, (C) the
Fixed Charge Coverage Ratio shall not take into account Permitted Indebtedness
that is incurred at the same time as Indebtedness under this paragraph, (D) for
any quarter included in the calculation of such ratio prior to the date that any
Asset Sale was consummated, or that any Indebtedness was incurred, or that any
Acquisition was effected, by the Company or any Restricted Subsidiary, such
calculation shall be made on a pro forma basis, giving effect to each Asset
Sale, incurrence of Indebtedness or Acquisition, as the case may be, and the use
of any proceeds therefrom, as if the same had occurred at the beginning of the
four-quarter period used to make such calculation and (E) for any quarter prior
to the date hereof included in the calculation of such ratio, such calculation
shall be made on a pro forma basis, giving effect to the issuance of the Notes
and the use of the net proceeds therefrom as if the same had occurred at the
beginning of the four-quarter period used to make such calculation.
Notwithstanding the foregoing, (i) the Company and its Restricted
Subsidiaries may incur Permitted Indebtedness, without meeting the Indebtedness
incurrence provisions of the preceding paragraph, and (ii) neither the Company
nor any of its Restricted Subsidiaries may incur Indebtedness that ranks junior
in right of payment to the Notes that has a maturity or mandatory sinking fund
payment prior to the maturity of the Notes.
Limitation on Restricted Payments
The Company will not make, and will not permit any Restricted Subsidiary
to, directly or indirectly, make, any Restricted Payment, unless:
(a) no Triggering Default Event shall have occurred and be continuing
at the time of or immediately after giving effect to such Restricted
Payment;
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(b) immediately after giving pro forma effect to such Restricted
Payment, the Company could incur at least $1.00 of additional Indebtedness
(other than Permitted Indebtedness) under the covenant set forth under
"-- Limitation on Additional Indebtedness"; and
(c) immediately after giving effect to such Restricted Payment, the
aggregate of all Restricted Payments declared or made after the Issue Date
does not exceed the sum of (1) $10.0 million plus (2)(i) 50% of the
cumulative Consolidated Net Income of the Company subsequent to March 31,
1998 (or minus 100% of any cumulative deficit in Consolidated Net Income
during such period); (ii) 100% of the aggregate Net Proceeds and the fair
market value of securities or other property received by the Company from
the issue or sale, after the Issue Date, of Capital Stock (other than
Disqualified Capital Stock or Capital Stock of the Company issued to any
Restricted Subsidiary) of the Company or any Indebtedness or other
securities of the Company convertible into or exercisable or exchangeable
for Capital Stock (other than Disqualified Capital Stock) of the Company
which has been so converted or exercised or exchanged, as the case may be;
(iii) in the case of the disposition or repayment of any Investment
constituting a Restricted Payment made after the Issue Date, an amount
equal to the lesser of the return of capital with respect to such
Investment and the initial amount of such Investment, in either case, less
the cost of the disposition of such Investment; and (iv) in the event
Capital Stock of an Unrestricted Subsidiary is paid as a dividend or other
distribution or payment on Capital Stock of the Company, the lesser of an
amount equal to any Investment in such Unrestricted Subsidiary which
constituted a Restricted Payment made after the Issue Date or the fair
market value of the Capital Stock so dividend or distributed. For purposes
of determining under this clause (c) the amount expended for Restricted
Payments, cash distributed shall be valued at the face amount thereof and
property other than cash shall be valued at its fair market value.
The provisions of this covenant will not prohibit (i) the payment of any
distribution within 60 days after the date of declaration thereof, if at such
date of declaration such payment would comply with the provisions of the
Indenture; (ii) the repurchase, redemption or other acquisition or retirement of
any shares of Capital Stock of the Company or Indebtedness subordinated to the
Notes by conversion into, or by or in exchange for, shares of Capital Stock
(other than Disqualified Capital Stock), or out of the Net Proceeds of the
substantially concurrent sale (other than to a Restricted Subsidiary) of other
shares of Capital Stock of the Company (other than Disqualified Capital Stock);
(iii) the repurchase, redemption or other acquisition or retirement of
Indebtedness of the Company subordinated to the Notes in exchange for, by
conversion into, or out of the Net Proceeds of, a substantially concurrent sale
or incurrence of Indebtedness (other than any Indebtedness owed to a Restricted
Subsidiary) of the Company that is contractually subordinated in right of
payment to the Notes to at least the same extent as the Indebtedness
subordinated to the Notes being redeemed or retired; (iv) the retirement of any
shares of Disqualified Capital Stock by conversion into, or by exchange for,
shares of Disqualified Capital Stock, or out of the Net Proceeds of the
substantially concurrent sale (other than to a Restricted Subsidiary) of other
shares of Disqualified Capital Stock; (v) the mandatory repurchase of Capital
Stock of the Company by the Company upon the death or disability of certain
current and former employees of the Company pursuant to the terms of Section
5(c) of the Stockholders' Agreement, as amended and in effect on the Issue Date;
(vi) the repurchase, redemption or other acquisition or retirement for value of
any Capital Stock of the Company held by any of the Company's (or any of its
Subsidiaries') current or former employees; provided, that the aggregate price
paid pursuant to this clause (vi) for all such repurchased, redeemed, acquired
or retired Capital Stock shall not exceed $2.0 million; (vii) any Investment
made with the proceeds of the substantially concurrent sale (other than to a
Restricted Subsidiary) of shares of Capital Stock of the Company (other than
Disqualified Capital Stock); and (viii) the purchase, repurchase, redemption or
other acquisition or retirement for value of Junior Subordinated Debentures
(each, a "repurchase") which would otherwise constitute a Restricted Payment;
provided that the aggregate amount expended in connection with repurchases under
this clause (viii) may not exceed the excess of $4.1 million over the aggregate
amount expended in connection with repurchases under this clause (viii) with
respect to Junior Subordinated Debentures that are subsequently applied to repay
the Junior Subordinated Debentures in accordance with their terms; provided,
that, for purposes of determining whether Restricted Payments can be made
pursuant to the previous paragraph, all payments made pursuant to clauses (i),
(v) (net of any amounts received by the Company from insuring the lives of
current or former employees), (vi) and (vii) of
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this paragraph will reduce the amount that would otherwise be available for such
Restricted Payments and payments made pursuant to the other clauses of this
paragraph shall not so reduce the amount available for Restricted Payments.
Not later than the date of making any Restricted Payment which may only be
made pursuant to subclause (c) above, the Company shall deliver to the Trustee
an Officers' Certificate stating that such Restricted Payment is permitted and
setting forth the basis upon which the calculations required by this covenant
were computed, which calculations may be based upon the Company's latest
available financial statements, and that no Triggering Default Event exists and
is continuing and no Triggering Default Event will occur immediately after
giving effect to such Restricted Payment.
Limitation on Other Senior Subordinated Debt
The Company will not, and will not permit any Guarantor, to incur any
Indebtedness that is both (i) subordinate in right of payment to any Senior
Indebtedness of the Company or any Guarantor Senior Indebtedness of such
Guarantor, as the case may be, and (ii) senior in right of payment to the Notes
or the Guarantee of such Guarantor, as the case may be. For purposes of this
covenant, Indebtedness is deemed to be senior in right of payment to the Notes
or any of the Guarantees, as the case may be, if it is not explicitly
subordinate in right of payment to Senior Indebtedness or Guarantor Senior
Indebtedness, as the case may be, at least to the same extent as the Notes and
the Guarantee, as the case may be, are subordinate to Senior Indebtedness or
Guarantor Senior Indebtedness, as the case may be.
Limitations on Liens
The Company will not, and will not permit any Restricted Subsidiary to,
create, incur or otherwise cause or suffer to exist any Liens of any kind (other
than Permitted Liens) upon any property or asset of the Company or such
Restricted Subsidiary to secure Indebtedness which is pari passu with or
subordinate in right of payment to the Notes or the Guarantees, as the case may
be, unless (i) if such Lien secures Indebtedness which is pari passu with the
Notes or the Guarantees, the Notes or the Guarantees, as the case may be, are
secured on an equal and ratable basis with the obligation so secured until such
time as such obligation is no longer secured by a Lien and (ii) if such Lien
secures Indebtedness which is subordinated to the Notes or the Guarantees, such
Indebtedness secured by such Lien and such Lien shall be subordinated to the
Lien granted to the Holders of the Notes to the same extent as such Indebtedness
is subordinated to the Notes or the Guarantees, as the case may be.
Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, create or otherwise cause or suffer to exist or become
effective any encumbrance or restriction on the ability of any Restricted
Subsidiary to (a)(i) pay dividends or make any other distributions to the
Company or any other Restricted Subsidiary (A) on its Capital Stock or (B) with
respect to any other interest or participation in, or measured by, its profits,
or (ii) pay any Indebtedness owed to the Company or any Restricted Subsidiary or
(b) make loans or advances to the Company or any other Restricted Subsidiary or
(c) transfer any of its properties or assets to the Company or any other
Restricted Subsidiary, except for such encumbrances or restrictions existing
under or by reasons of (i) encumbrances or restrictions existing on the Issue
Date to the extent and in the manner such encumbrances and restrictions are in
effect on the Issue Date, (ii) the Indenture, the Notes and the Guarantees,
(iii) the Credit Facility, (iv) applicable law, (v) customary nonassignment
provisions in leases, (vi) permitted Refinancing Indebtedness, provided that the
restrictions contained in the agreements governing such Refinancing Indebtedness
shall not be materially more restrictive than those contained in the agreements
governing the Indebtedness being refinanced, (vii) customary restrictions
imposed in connection with Purchase Money Indebtedness or Capital Lease
Obligations permitted under the covenant entitled "-- Limitation on Incurrence
of Indebtedness" as long as such customary restrictions are not materially more
restrictive than those set forth in the Credit Facility on the Issue Date
(except that they may impose restrictions on the transfer of the asset so
financed), (viii) restrictions in agreements with Persons acquired by the
Company or any Restricted Subsidiary which do not extend to
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Property or assets other than the Property or assets of such Persons, (ix)
customary restrictions in security agreements or mortgages securing Indebtedness
of the Company or a Restricted Subsidiary to the extent such restrictions
restrict the transfer of the property subject to such security agreements and
mortgages or (x) customary restrictions with respect to a Restricted Subsidiary
pursuant to an agreement that has been entered into for the sale or disposition
of all or substantially all of the Capital Stock or assets of such Restricted
Subsidiary.
Limitation on Transactions with Affiliates
The Company will not, and will permit any Restricted Subsidiary to,
directly or indirectly, enter into or suffer to exist any transaction or series
of related transactions (including, without limitation, the sale, purchase,
exchange or lease of assets, property or services) with any Affiliate (including
entities in which the Company or any Restricted Subsidiaries owns a minority
interest) or holder of 10% or more of the Company's Common Stock (an "Affiliate
Transaction") or extend, renew, waive or otherwise modify the terms of any
Affiliate Transaction entered into prior to the Issue Date unless (i) such
Affiliate Transaction is between or among the Company and its Wholly Owned
Subsidiaries or (ii) the terms of such Affiliate Transaction are fair and
reasonable to the Company or such Restricted Subsidiary, as the case may be, and
the terms of such Affiliate Transaction are at least as favorable as the terms
which could be obtained by the Company or such Restricted Subsidiary, as the
case may be, in a comparable transaction made on an arm's-length basis between
unaffiliated parties. In any Affiliate Transaction involving an amount or having
a fair market value in excess of $1.0 million which is not permitted under
clause (i) above, the Company must obtain a resolution of the Board of Directors
certifying that such Affiliate Transaction complies with clause (ii) above. In
transactions with a fair market value in excess of $5.0 million which are not
permitted under clause (i) above, the Company must obtain a written opinion as
to the fairness of such a transaction to the Company or a Restricted Subsidiary
from a financial point of view from an independent investment banking,
accounting or appraisal firm.
The foregoing provisions will not apply to (i) any Restricted Payment that
is not prohibited by the provisions described under "-- Limitation on Restricted
Payments", (ii) fees and compensation paid to, and indemnity provided on behalf
of, officers, directors or employees of the Company or any Restricted Subsidiary
of the Company as determined in good faith by the Board of Directors of the
Company, (iii) any agreement as in effect as of the Issue Date or any amendment,
modification or replacement thereof or any transaction contemplated thereby so
long as any such amendment, modification or replacement is not more
disadvantageous to the holders of the Notes in any material respect than the
original agreement or transaction as in effect on the Issue Date, (iv) the
payment to Airlie Enterprises L.L.C. of an overhead allocation fee of $15,000
per month and (v) the payment to Knowledge Alliance on an annual basis in
connection with the training of Company employees of an amount not to exceed the
expenses incurred by the Company during its fiscal year ended June 28, 1998 in
connection with the comparable training of Company employees.
Limitation on Certain Asset Sales
The Company will not, and will not permit any Restricted Subsidiary to,
consummate an Asset Sale unless (i) the Company or such Restricted Subsidiary,
as the case may be, receives consideration at the time of such sale or other
disposition at least equal to the fair market value thereof; (ii) not less than
75% of the consideration received by the Company and its Restricted Subsidiaries
is in the form of cash or Temporary Cash Investments; and (iii) the Asset Sale
Proceeds received by the Company or such Restricted Subsidiary are applied (a)
first, to the extent the Company elects, or is required, to prepay, repay or
purchase debt under any then existing Senior Indebtedness or Guarantor Senior
Indebtedness within 365 days following the receipt of the Asset Sale Proceeds
from any Asset Sale, provided that any such repayment results in a permanent
reduction of the commitments thereunder in an amount equal to the principal
amount so repaid; (b) second, to the extent of the balance of Asset Sale
Proceeds after application as described above, to the extent the Company elects,
to an investment in assets (including Capital Stock or other securities
purchased in connection with the acquisition of Capital Stock or property of
another Person) used or useful in businesses similar or ancillary to the
business of the Company or Restricted Subsidiary as conducted at the time of
such
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Asset Sale, provided that such investment occurs on or prior to the 365th day
following receipt of such Asset Sale Proceeds (the "Reinvestment Date"); and (c)
third, if on the Reinvestment Date the Available Asset Sale Proceeds with
respect to any Asset Sale exceed $5.0 million, the Company shall apply an amount
equal to such Available Asset Sale Proceeds to an offer to purchase the Notes
(which offer may, at the option of the Company, also be made on a pro rata basis
to holders of all other Indebtedness of the Company ranking pari passu with the
Notes or the Guarantees), at a purchase price (in the case of the Notes) in cash
equal to 100% of the principal amount thereof plus accrued and unpaid interest,
if any, to the date of purchase (an "Excess Proceeds Offer"). If an Excess
Proceeds Offer is not fully subscribed, the Company may retain the portion of
the Available Asset Sale Proceeds not required to repurchase Notes. Pending the
final application of any such Asset Sale Proceeds in accordance with this
paragraph, the Company or such Restricted Subsidiary may invest such Asset Sale
Proceeds in any manner not prohibited by the Indenture including, without
limitation, the temporary repayment of Indebtedness.
If the Company is required to make an Excess Proceeds Offer, the Company
shall mail, within 30 days following the Reinvestment Date, a notice to the
Holders stating, among other things: (1) that such Holders have the right to
require the Company to apply the Available Asset Sale Proceeds to purchase such
Notes at a purchase price in cash equal to 100% of the principal amount thereof
plus accrued and unpaid interest, if any, to the date of purchase; (2) the
purchase date, which shall be no earlier than 30 days and not later than 60 days
from the date such notice is mailed; (3) the instructions, determined by the
Company, that each Holder must follow in order to have such Notes repurchased;
and (4) the calculations used in determining the amount of Available Asset Sale
Proceeds to be applied to the repurchase of such Notes.
Limitation on Capital Stock of Restricted Subsidiaries
The Company will not (i) sell, pledge, hypothecate or otherwise convey or
dispose of any Capital Stock of any Restricted Subsidiary (other than under the
Credit Facility, under the terms of any Designated Senior Indebtedness or, in
the case of any Person which becomes a Restricted Subsidiary after the Issue
Date, a pledge of the Capital Stock of such Person in connection with the
financing of such acquisition) or (ii) permit any Restricted Subsidiary to issue
any Capital Stock, other than directors qualifying shares or to the Company or
to a Wholly Owned Subsidiary of the Company. The foregoing restrictions shall
not apply to an Asset Sale made in compliance with "-- Limitation on Certain
Asset Sales" or any Restricted Payment that is not prohibited by the provisions
described under "-- Limitation on Restricted Payments."
Payments for Consent
Neither the Company nor any Restricted Subsidiary shall, directly or
indirectly, pay or cause to be paid any consideration, whether by way of
interest, fee or otherwise, to any holder of any Notes for or as an inducement
to any consent, waiver or amendment of any of the terms or provisions of the
Indenture or the Notes unless such consideration is offered to be paid or agreed
to be paid to all holders of the Notes which so consent, waive or agree to amend
in the time frame set forth in solicitation documents relating to such consent,
waiver or agreement.
Additional Guarantees
If the Company or any of its Restricted Subsidiaries acquires, creates,
organizes or designates a domestic Restricted Subsidiary, the fair market value
of which exceeds $25,000, then such newly acquired, created, organized or
designated domestic Restricted Subsidiary shall, within 30 days after the date
of its acquisition, creation, organization or designation, (i) execute and
deliver to the Trustee a supplemental indenture in form reasonably satisfactory
to the Trustee pursuant to which such domestic Restricted Subsidiary shall
unconditionally guarantee all of the Company's obligations under the Notes and
the Indenture on the terms set forth in the Indenture and (ii) deliver to the
Trustee an opinion of counsel that such supplemental indenture has been duly
authorized, executed and delivered by such domestic Restricted Subsidiary and
constitutes a legal, valid, binding and enforceable obligation of such domestic
Restricted Subsidiary, subject to normal exceptions. Thereafter, such domestic
Restricted Subsidiary shall be a Guarantor for all purposes of the Indenture.
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Change of Control Offer
Within 30 days of the occurrence of a Change of Control, the Company shall
notify the Trustee in writing of such occurrence and shall make an offer to
purchase (the "Change of Control Offer") the outstanding Notes at a purchase
price equal to 101% of the principal amount thereof plus any accrued interest to
the Change of Control Payment Date (as hereinafter defined) (such purchase price
being hereinafter referred to as the "Change of Control Purchase Price") in
accordance with the procedures set forth in this covenant.
Within 30 days of the occurrence of a Change of Control, the Company also
shall (i) cause a notice of the Change of Control Offer to be sent at least once
to the Dow Jones News Service or similar business news service in the United
States and (ii) send by first-class mail, postage prepaid, to the Trustee and to
each holder of the Notes, at the address appearing in the register maintained by
the Registrar of the Notes, a notice stating:
(1) that the Change of Control Offer is being made pursuant to this
covenant and that all Notes tendered will be accepted for payment, and
otherwise subject to the terms and conditions set forth herein;
(2) the Change of Control Purchase Price and the purchase date (which
shall be a Business Day no earlier than 30 days from the date such notice
is mailed (the "Change of Control Payment Date"));
(3) that any Note not tendered will continue to accrue interest;
(4) that, unless the Company defaults in the payment of the Change of
Control Purchase Price, any Notes accepted for payment pursuant to the
Change of Control Offer shall cease to accrue interest after the Change of
Control Payment Date;
(5) that holders accepting the offer to have their Notes purchased
pursuant to a Change of Control Offer will be required to surrender the
Notes to the Paying Agent at the address specified in the notice prior to
the close of business on the Business Day preceding the Change of Control
Payment Date;
(6) that holders will be entitled to withdraw their acceptance if the
Paying Agent receives, not later than the close of business on the third
Business Day preceding the Change of Control Payment Date, a telegram,
telex, facsimile transmission or letter setting forth the name of the
holder, the principal amount of the Notes delivered for purchase and a
statement that such holder is withdrawing his election to have such Notes
purchased;
(7) that holders whose Notes are being purchased only in part will be
issued new Notes equal in principal amount to the unpurchased portion of
the Notes surrendered, provided that each Note purchased and each such new
Note issued shall be in an original principal amount in denominations of
$1,000 and integral multiples thereof;
(8) any other procedures that a holder must follow to accept a Change
of Control Offer or effect withdrawal of such acceptance; and
(9) the name and address of the Paying Agent.
On the Change of Control Payment Date, the Company shall, to the extent
lawful, (i) accept for payment Notes or portions thereof tendered pursuant to
the Change of Control Offer, (ii) deposit with the Paying Agent money sufficient
to pay the purchase price of all Notes or portions thereof so tendered and (iii)
deliver or cause to be delivered to the Trustee Notes so accepted together with
an Officers' Certificate stating the Notes or portions thereof tendered to the
Company. The Paying Agent shall promptly mail to each holder of Notes so
accepted payment in an amount equal to the purchase price for such Notes, and
the Company shall execute and issue, and the Trustee shall promptly authenticate
and mail to such holder, a new Note equal in principal amount to any unpurchased
portion of the Notes surrendered; provided that each such new Note shall be
issued in an original principal amount in denominations of $1,000 and integral
multiples thereof.
The Indenture requires that if the Credit Facility is in effect, or any
amounts are owing thereunder or in respect thereof, at the time of the
occurrence of a Change of Control, prior to the mailing of the notice to
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holders described in the preceding paragraph, but in any event within 30 days
following any Change of Control, the Company covenants to (i) repay in full all
obligations under or in respect of the Credit Facility or offer to repay in full
all obligations under or in respect of the Credit Facility and repay the
obligations under or in respect of the Credit Facility of each lender who has
accepted such offer or (ii) obtain the requisite consent under the Credit
Facility to permit the purchase of the Notes as described above. The Company
must first comply with the covenant described in the preceding sentence before
it shall be required to purchase Notes in the event of a Change of Control;
provided that the Company's failure to comply with the covenant described in the
preceding sentence constitutes an Event of Default described in clause (iii)
under "-- Events of Default" below if not cured within 60 days after the notice
required by such clause. As a result of the foregoing, a holder of the Notes may
not be able to compel the Company to purchase the Notes unless the Company is
able at the time to refinance all of the obligations under or in respect of the
Credit Facility or obtain requisite consents under the Credit Facility. Failure
by the Company to make a Change of Control Offer when required by the Indenture
constitutes a default under the Indenture and, if not cured within 60 days after
notice, constitutes an Event of Default.
The Indenture provides that, (A) if the Company or any Restricted
Subsidiary has issued any outstanding (i) Indebtedness that is subordinated in
right of payment to the Notes or (ii) Preferred Stock, and the Company or such
Restricted Subsidiary is required to make a change of control offer or to make a
distribution with respect to such subordinated Indebtedness or Preferred Stock
in the event of a change of control, the Company shall not consummate any such
offer or distribution with respect to such subordinated Indebtedness or
Preferred Stock until such time as the Company shall have paid the Change of
Control Purchase Price in full to the holders of Notes that have accepted the
Company's Change of Control Offer and shall otherwise have consummated the
Change of Control Offer made to holders of the Notes and (B) the Company will
not issue Indebtedness that is subordinated in right of payment to the Notes or
Preferred Stock with change of control provisions requiring the payment of such
Indebtedness or Preferred Stock prior to the payment of Notes properly tendered
pursuant to a Change of Control Offer in the event of a Change of Control under
the Indenture.
In the event that a Change of Control occurs and the holders of Notes
exercise their right to require the Company to purchase Notes, if such purchase
constitutes a "tender offer" for purposes of Rule 14e-1 under the Exchange Act
at that time, the Company will comply with the requirements of Rule 14e-1 as
then in effect with respect to such purchase.
MERGER, CONSOLIDATION OR SALE OF ASSETS
The Company will not consolidate with, merge with or into, or transfer all
or substantially all of its assets (as an entirety or substantially as an
entirety in one transaction or a series of related transactions) to, any Person
unless: (i) the Company shall be the continuing Person, or the Person (if other
than the Company) formed by such consolidation or into which the Company is
merged or to which the properties and assets of the Company are transferred
shall be a corporation organized and existing under the laws of the United
States or any State thereof or the District of Columbia and shall expressly
assume, by a supplemental indenture, executed and delivered to the Trustee, in
form satisfactory to the Trustee, all of the obligations of the Company under
the Notes and the Indenture, and the obligations under the Indenture shall
remain in full force and effect; (ii) immediately before and immediately after
giving effect to such transaction, no Default or Event of Default shall have
occurred and be continuing; and (iii) immediately after giving effect to such
transaction on a pro forma basis the Company or such Person could incur at least
$1.00 of additional Indebtedness (other than Permitted Indebtedness) under the
covenant set forth under "-- Certain Covenants -- Limitation on Additional
Indebtedness," provided that a Person that is a Restricted Subsidiary may merge
into the Company or another Person that is a Restricted Subsidiary without
complying with this clause (iii). Notwithstanding the foregoing, in no event
need clause (i) of the preceding sentence be complied with in the event of a
transfer, through merger or otherwise, of the Company's Product Business;
however, in the event such Product Business constitutes all or substantially all
of the Company's assets, clauses (ii) and (iii) of the preceding sentence must
be complied with in the event of such a transfer.
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The Company will not permit any Guarantor to consolidate with, merge with
and into, or transfer all or substantially all of its assets (as an entirety or
substantially as an entirety in one transaction or series of related
transactions) to, any Person unless: (i) the transaction complies with
"-- Limitation on Certain Asset Sales", or (ii)(A) the Person into or to which
such Guarantor consolidates, merges or transfers its assets is (x) the Company
or a Guarantor or (y) a corporation organized and existing under the laws of the
United States or any State thereof or the District of Columbia and shall
expressly assume, by supplemental indenture, executed and delivered to the
Trustee, in form satisfactory to the Trustee, all of the obligations of such
Guarantor under its Guarantee and the Indenture, (B) immediately before and
immediately after giving effect to such transaction, no Default or Event of
Default shall have occurred and be continuing and (C) immediately after giving
effect to such transaction on a pro forma basis the Company or such Person could
incur at least $1.00 of additional Indebtedness (other than Permitted
Indebtedness) under the covenant set forth under "-- Limitation on Additional
Indebtedness."
In connection with any consolidation, merger or transfer of assets
contemplated by this provision, the Company shall deliver, or cause to be
delivered, to the Trustee, in form and substance reasonably satisfactory to the
Trustee, an Officers' Certificate and an opinion of counsel, each stating that
such consolidation, merger or transfer and the supplemental indenture in respect
thereto comply with this provision and that all conditions precedent herein
provided for relating to such transaction or transactions have been complied
with.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the Properties or assets of one or more Restricted
Subsidiaries of the Company, the Capital Stock of which constitutes all or
substantially all of the Properties and assets of the Company, shall be deemed
to be the transfer of all or substantially all of the assets of the Company. In
addition, the phrase "all or substantially all" of the assets of the Company
will likely be interpreted under applicable law and will be dependent upon
particular facts and circumstances. As a result, there may be a degree of
uncertainty in ascertaining whether a sale or transfer of "all or substantially
all" of the assets of the Company or any Restricted Subsidiary has occurred.
GUARANTEES
The Notes are unconditionally guaranteed on an unsecured senior
subordinated basis by the Guarantors. The obligations of the Guarantors on their
respective Guarantees are joint and several. All payments pursuant to the
Guarantee by a Guarantor are subordinated in right of payment to the prior
payment in full of all Guarantor Senior Indebtedness of such Guarantor, to the
same extent and in the same manner that all payments pursuant to the Notes are
subordinated in right of payment to the prior payment in full of all Senior
Indebtedness of the Company.
The obligations of each Guarantor are limited to the maximum amount as
will, after giving effect to all other contingent and fixed liabilities of such
Guarantor (including, without limitation, any Guarantor Senior Indebtedness of
such Guarantor) and after giving effect to any collections from or payments made
by or on behalf of any other Guarantor in respect of the obligations of such
other Guarantor under its Guarantee or pursuant to its contribution obligations
under the Indenture, result in the obligations of such guarantor under the
Guarantee not constituting a fraudulent conveyance or fraudulent transfer under
federal or state law. Each Guarantor that makes a payment or distribution under
a Guarantee shall be entitled to a contribution from each other Guarantor in a
pro rata amount based on the Adjusted Net Assets of each Guarantor.
A Guarantor shall be released from all of its obligations under its
Guarantee if all or substantially all of its assets are sold or all of its
Capital Stock is sold, in each case in a transaction in compliance with the
covenant described under "-- Certain Covenants -- Limitation on Certain Asset
Sales," or all of its Capital Stock is disposed of in a Restricted Payment that
is not prohibited by the provisions described under "-- Certain
Covenants -- Limitation on Restricted Payments" or the Guarantor merges with or
into or consolidates with, or transfers all or substantially all of its assets
to, the Company or another Guarantor in a transaction in compliance with
"-- Merger, Consolidation or Sale of Assets," and such Guarantor has delivered
to the Trustee an Officers' Certificate and an opinion of counsel, each stating
that all conditions precedent herein provided for relating to such transaction
have been complied with.
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EVENTS OF DEFAULT
The following events are defined in the Indenture as "Events of Default":
(i) default in payment of any principal of, or premium, if any, on the
Notes;
(ii) default for 30 days in payment of any interest on the Notes;
(iii) default by the Company or any Guarantor in the observance or
performance of any other covenant in the Notes or the Indenture for 60 days
after written notice from the Trustee or the holders of not less than 25%
in aggregate principal amount of the Notes then outstanding;
(iv) failure to pay when due (within the grace period provided in such
Indebtedness) principal, interest or premium in an aggregate amount of
$10.0 million or more with respect to any Indebtedness of the Company or
any Restricted Subsidiary, or the acceleration of any such Indebtedness
aggregating $10.0 million or more, which default or acceleration shall not
be cured, waived or postponed pursuant to an agreement with the holders of
such Indebtedness within 60 days after written notice, or such acceleration
shall not be rescinded or annulled within 20 days after written notice;
(v) any final judgment or judgments which can no longer be appealed
for the payment of money in excess of $10.0 million shall be rendered
against the Company or any Restricted Subsidiary (other than a judgment or
portion thereof as to which an insurance company of national reputation has
accepted full liability) and shall not be discharged or fully bonded for
any period of 60 consecutive days during which a stay of enforcement shall
not be in effect; and
(vi) certain events involving bankruptcy, insolvency or reorganization
of the Company or any Significant Subsidiary thereof.
The Indenture provides that the Trustee may withhold notice to the holders
of the Notes of any default (except in payment of principal of, premium, if any,
or interest on the Notes) if the Trustee considers it to be in the best interest
of the holders of the Notes to do so.
The Indenture will provide that if an Event of Default (other than an Event
of Default resulting from certain events of bankruptcy, insolvency or
reorganization of the Company) shall have occurred and be continuing, then the
Trustee or the holders of not less than 25% in aggregate principal amount of the
Notes then outstanding may declare to be immediately due and payable the entire
principal amount of all the Notes then outstanding plus accrued interest to the
date of acceleration and (i) such amounts with respect to the Notes shall become
immediately due and payable or (ii) if there are any amounts outstanding under
or in respect of the Credit Facility, such amounts with respect to the Notes
shall become due and payable upon the first to occur of an acceleration of
amounts outstanding under or in respect of the Credit Facility or five business
days after receipt by the Company and the representative of the holders of
Senior Indebtedness under or in respect of the Credit Facility of notice of the
acceleration of the Notes; provided, however, that after such acceleration but
before a judgment or decree based on such acceleration is obtained by the
Trustee, the holders of a majority in aggregate principal amount of outstanding
Notes may, under certain circumstances, rescind and annul such acceleration if
all Events of Default, other than nonpayment of accelerated principal, premium
or interest, have been cured or waived as provided in the Indenture. In case an
Event of Default resulting from certain events of bankruptcy, insolvency or
reorganization of the Company shall occur, the principal, premium and interest
with respect to all of the Notes shall be due and payable immediately without
any declaration or other act on the part of the Trustee or the holders of the
Notes.
The holders of a majority in principal amount of the Notes then outstanding
shall have the right to waive any existing default or compliance with any
provision of the Indenture, the Notes or the Guarantees and to direct the time,
method and place of conducting any proceeding for any remedy available to the
Trustee, subject to certain limitations specified in the Indenture.
No holder of any Note will have any right to institute any proceeding with
respect to the Indenture or for any remedy thereunder, unless such holder shall
have previously given to the Trustee written notice of a continuing Event of
Default and unless also the holders of at least 25% in aggregate principal
amount of the
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outstanding Notes shall have made written request and offered reasonable
indemnity to the Trustee to institute such proceeding as a trustee, and unless
the Trustee shall not have received from the holders of a majority in aggregate
principal amount of the outstanding Notes a direction inconsistent with such
request and shall have failed to institute such proceeding within 60 days.
However, such limitations do not apply to a suit instituted on such Note on or
after the respective due dates expressed in such Note.
DEFEASANCE AND COVENANT DEFEASANCE
The Indenture provides the Company may elect either (a) to defease and be
discharged from any and all obligations with respect to the Notes (except for
the obligations to register the transfer or exchange of such Notes, to replace
temporary or mutilated, destroyed, lost or stolen Notes, to maintain an office
or agency in respect of the Notes and to hold monies for payment in trust)
("defeasance") and to have the Guarantors released from any and all obligations
with respect to the Guarantees or (b) to be released from its obligations with
respect to the Notes under certain covenants contained in the Indenture and
described above under "-- Certain Covenants" ("covenant defeasance"), upon the
deposit with the Trustee (or other qualifying trustee), in trust for such
purpose, of money and/or United States Government Obligations which through the
payment of principal and interest in accordance with their terms will provide
money, in an amount sufficient to pay the principal of, premium, if any, and
interest on the Notes, on the scheduled due dates therefor or on a selected date
of redemption in accordance with the terms of the Indenture. Such a trust may
only be established if, among other things, the Company has delivered to the
Trustee an opinion of counsel (i) to the effect that neither the trust nor the
Trustee will be required to register as an investment company under the
Investment Company Act of 1940, as amended, and (ii) in the case of defeasance,
describing either a private ruling concerning the Notes or a published ruling of
the Internal Revenue Service to the effect that, and in the case of covenant
defeasance, stating that, holders of the Notes or Persons in their positions
will not recognize income, gain or loss for federal income tax purposes as a
result of such deposit, defeasance and discharge and will be subject to federal
income tax on the same amount and in the same manner and at the same times, as
would have been the case if such deposit, defeasance and discharge had not
occurred.
MODIFICATION OF INDENTURE
From time to time, the Company, the Guarantors and the Trustee may, without
the consent of holders of the Notes, amend the Indenture, the Notes or the
Guarantees or supplement the Indenture for certain specified purposes, including
providing for uncertificated Notes in addition to certificated Notes, and curing
any ambiguity, defect or inconsistency, or making any other change that does not
materially and adversely affect the rights of any holder. The Indenture contains
provisions permitting the Company, the Guarantors and the Trustee, with the
consent of holders of at least a majority in principal amount of the outstanding
Notes, to modify or supplement the Indenture or the Notes, except that no such
modification shall, without the consent of each holder affected thereby, (i)
reduce the amount of Notes whose holders must consent to an amendment,
supplement, or waiver to the Indenture or the Notes, (ii) reduce the rate of or
change the time for payment of interest on any Note, (iii) reduce the principal
of or premium on or change the stated maturity of any Note, (iv) make any Note
payable in money other than that stated in the Note or change the place of
payment from New York, New York, (v) change the amount or time of any payment
required by the Notes or reduce the premium payable upon any redemption of
Notes, or change the time before which no such redemption may be made, (vi)
waive a default in the payment of the principal of, interest on, or redemption
payment with respect, to any Note, (vii) amend, change or modify the obligation
of the Company to make and consummate a Change of Control Offer in the event of
a Change of Control or make and consummate an Excess Proceeds Offer, in each
case after such obligation has arisen, or waive any Default in the performance
of any such offers or modify any of the provisions or definitions with respect
to any such offers, (viii) modify or change any provision of the Indenture
affecting the ranking of the Notes in a manner adverse to the holders of the
Notes, or (ix) take any other action otherwise prohibited by the Indenture to be
taken without the consent of each holder affected thereby.
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REPORTS TO HOLDERS
The Indenture will provide that whether or not required by the rules and
regulations of the Commission, so long as any Notes are outstanding, the Company
shall furnish to the Trustee and to the holders of the Notes at the same time it
is or would have been required to file them with the Commission, (i) all annual
and quarterly financial information that would be required to be contained in a
filing with the Commission on Forms 10-K and 10-Q (without exhibits) if the
Company were required to file such forms, including a section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and, with respect to the annual information only, a report thereon
by the Company's independent certified public accountants and (ii) all current
reports that would be required to be filed with the Commission on Form 8-K
(without exhibits) if the Company were required to file such reports. In
addition, whether or not required by the rules and regulations of the
Commission, the Company will file a copy of all such information and reports
with the Commission for public availability (unless the Commission will not
accept such a filing). In addition, the Company shall furnish to the Trustee,
the holders of the Notes and to securities analysts and prospective investors,
upon their request, the information required to be delivered pursuant to Rule
144(d)(4) under the Securities Act and the exhibits omitted from the information
furnished pursuant to the preceding sentence, for so long as the Notes are not
freely transferable under the Securities Act. The Company will also comply with
the other provisions of sec. 314(a) of the Trust Indenture Act.
COMPLIANCE CERTIFICATE
The Company will deliver to the Trustee on or before 120 days after the end
of the Company's fiscal year and on or before 60 days after the end of each of
the first, second and third fiscal quarters in each year an Officers'
Certificate stating whether or not the signers know of any Default or Event of
Default that has occurred. If they do, the certificate will describe the Default
or Event of Default and its status.
THE TRUSTEE
The Trustee under the Indenture will be the Registrar and Paying Agent with
regard to the Notes. The Indenture provides that, except during the continuance
of an Event of Default, the Trustee will perform only such duties as are
specifically set forth in the Indenture. During the existence of an Event of
Default, the Trustee will exercise such rights and powers vested in it under the
Indenture and use the same degree of care and skill in its exercise as a prudent
person would exercise under the circumstances in the conduct of such person's
own affairs.
TRANSFER AND EXCHANGE
Holders of the Notes may transfer or exchange Notes in accordance with the
Indenture. The Registrar under such Indenture may require a holder, among other
things, to furnish appropriate endorsements and transfer documents, and to pay
any taxes and fees required by law or permitted by the Indenture. The Registrar
is not required to transfer or exchange any Note selected for redemption. Also,
the Registrar is not required to transfer or exchange any Note for a period of
15 days before selection of the Notes to be redeemed.
The Notes will be issued in a transaction exempt from registration under
the Securities Act and will be subject to the restrictions on transfer described
in "Notice to Investors."
The registered holder of a Note may be treated as the owner of it for all
purposes.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants contained in the Indenture. Reference is made to the Indenture for the
full definition of all such terms as well as any other capitalized terms used
herein for which no definition is provided. For purposes of the covenants, the
financial and other provisions of these definitions, when used with respect to
the Company, shall be determined on a consolidated basis with respect to the
Company and the Restricted Subsidiaries only.
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"Acquired Indebtedness" means Indebtedness of a Person (including an
Unrestricted Subsidiary) existing at the time such Person becomes a Restricted
Subsidiary or is merged or consolidated with or into the Company or a Restricted
Subsidiary or assumed in connection with the acquisition of assets from such
Person.
"Adjusted Net Assets" of any Person at any date shall mean the lesser of
the amount by which (x) the fair value of the property of such Person exceeds
the total amount of liabilities, including, without limitation, contingent
liabilities (after giving effect to all other fixed and contingent liabilities),
but excluding liabilities under the Guarantee of such Person at such date and
(y) the present fair saleable value of the assets of such Person at such date
exceeds the amount that will be required to pay the probable liability of such
Person on its debts (after giving effect to any collection from any Subsidiary
of such Person in respect of the obligations of such Person under the Guarantee
of such Person), excluding Indebtedness in respect of the Guarantee of such
Person, as they become absolute and matured.
"Affiliate" of any specified Person means any other Person which directly
or indirectly through one or more intermediaries controls, or is controlled by,
or is under common control with, such specified Person. For the purposes of this
definition, "control" (including, with correlative meanings, the terms
"controlling," "controlled by," and "under common control with"), as used with
respect to any Person, means the possession, directly or indirectly, of the
power to direct or cause the direction of the management or policies of such
Person, whether through the ownership of voting securities, by agreement or
otherwise.
"Asset Sale" means the sale, transfer or other disposition (other than to
the Company or any Restricted Subsidiary) in any single transaction or series of
related transactions having a fair market value in excess of $1 million of (a)
any Capital Stock of or other equity interest in any Restricted Subsidiary, (b)
all or substantially all of the assets of the Company or of any Restricted
Subsidiary, (c) real property or (d) all or substantially all of the assets of a
division, line of business or comparable business segment or part thereof of the
Company or any Restricted Subsidiary, provided that Asset Sales shall not
include (i) sales, transfers or other dispositions to the Company or to a
Restricted Subsidiary or to any other Person if after giving effect to such
sale, lease, conveyance, transfer or other disposition such other Person becomes
a Restricted Subsidiary, (ii) the sale, lease, conveyance, disposition or other
transfer of all or substantially all of the assets of the Company as permitted
under "-- Merger, Consolidation or Sale of Assets" (unless such transfer is of
the Company's Product Business and clause (i) of the first paragraph under such
section is not being complied with) and (iii) any Restricted Payment permitted
under "Certain Covenants -- Limitation on Restricted Payments."
"Asset Sale Proceeds" means, with respect to any Asset Sale, (i) cash
received by the Company or any Restricted Subsidiary from such Asset Sale
(including cash received as consideration for the assumption of liabilities
incurred in connection with or in anticipation of such Asset Sale), after (a)
provision for all income or other taxes measured by or resulting from such Asset
Sale, (b) payment of all brokerage commissions, underwriting and other fees and
expenses related to such Asset Sale, (c) provision for minority interest holders
in any Restricted Subsidiary as a result of such Asset Sale and (d) deduction of
appropriate amounts to be provided by the Company or a Restricted Subsidiary as
a reserve, in accordance with GAAP, against any liabilities associated with the
assets sold or disposed of in such Asset Sale and retained by the Company or a
Restricted Subsidiary after such Asset Sale, including, without limitation,
pension and other post employment benefit liabilities and liabilities related to
environmental matters or against any indemnification obligations associated with
the assets sold or disposed of in such Asset Sale, and (ii) promissory notes and
other noncash consideration received by the Company or any Restricted Subsidiary
from such Asset Sale or other disposition upon the liquidation or conversion of
such notes or noncash consideration into cash.
"Available Asset Sale Proceeds" means, with respect to any Asset Sale, the
aggregate Asset Sale Proceeds from such Asset Sale that have not been applied in
accordance with clauses (iii)(a) or (iii)(b), and which have not yet been the
basis for an Excess Proceeds Offer in accordance with clause (iii)(c), of the
first paragraph of "-- Certain Covenants -- Limitation on Certain Asset Sales.
"Capital Stock" means, with respect to any Person, any and all shares or
other equivalents (however designated) of capital stock, partnership interests
or any other participation, right or other interest in the
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nature of an equity interest in such Person or any option, warrant or other
security convertible into any of the foregoing.
"Capitalized Lease Obligations" means Indebtedness represented by
obligations under a lease that is required to be capitalized for financial
reporting purposes in accordance with GAAP, and the amount of such Indebtedness
shall be the capitalized amount of such obligations determined in accordance
with GAAP.
A "Change of Control" of the Company will be deemed to have occurred at
such time as (i) any Person (including a Person's Affiliates and associates),
other than a Permitted Holder, becomes the beneficial owner (as defined under
Rule 13d-3 or any successor rule or regulation promulgated under the Exchange
Act) of 50% or more of the total voting or economic power of the Common Stock of
the Company and/or warrants or options to acquire such Common Stock on a fully
diluted basis, (ii) any Person (including a Person's Affiliates and associates),
other than a Permitted Holder, becomes the beneficial owner of 35% or more of
the total voting power of the Common Stock of the Company and the Permitted
Holders beneficially own, in the aggregate, a lesser percentage of the total
voting power of the Common Stock of the Company than such other Person and do
not have the right or ability by voting power, contract or otherwise to elect or
designate for election a majority of the Board of Directors of the Company,
(iii) the Company consolidates with, or merges with or into, another Person or
conveys, transfers, leases or otherwise disposes of all or substantially all of
its assets to any Person, or any Person consolidates with, or merges with or
into the Company, pursuant to a transaction in which the outstanding Common
Stock of the Company is converted into or exchanged for cash, securities or
other property, other than any such transaction where (a)(1) the outstanding
Common Stock of the Company is not converted or exchanged at all (except to the
extent necessary to reflect a change in the jurisdiction of incorporation) or is
converted into or exchanged for Common Stock (other than Disqualified Capital
Stock) of the surviving or transferee corporation (the "Surviving Entity") and
(2) immediately after such transaction, no "person" or "group" (as such terms
are used in Sections 13(d) and 14(d) of the Exchange Act), other than a
Permitted Holder, is the "beneficial owner" (as defined in Rules 13d-3 and 13d-5
under the Exchange Act, except that a Person shall be deemed to have "beneficial
ownership" of all securities that such Person has the right to acquire, whether
such right is exercisable immediately or only after the passage of time),
directly or indirectly, of more than a majority of the total outstanding Common
Stock of the Surviving Entity, or (b) the holders of the Common Stock of the
Company outstanding immediately prior to the consolidation or merger hold,
directly or indirectly, at least a majority of the Common Stock of the surviving
corporation immediately after such consolidation or merger, or (iv) during any
period of two consecutive years, individuals who at the beginning of such period
constituted the Board of Directors of the Company (together with any new
directors whose election by such Board of Directors or whose nomination for
election by the shareholders of the Company has been approved by 66 2/3% of the
directors then still in office who either were directors at the beginning of
such period or whose election or recommendation for election was previously so
approved) cease to constitute a majority of the Board of Directors of the
Company.
"Common Stock" of any Person means all Capital Stock of such Person that is
generally entitled to (i) vote in the election of directors of such Person or
(ii) if such Person is not a corporation, vote or otherwise participate in the
selection of the governing body, partners, managers or others that will control
the management and policies of such Person.
"Consolidated Fixed Charges" means, with respect to any Person, for any
period the sum of a Person's (i) Consolidated Interest Expense, plus (ii) the
product of (x) the aggregate amount of all dividends paid on Disqualified
Capital Stock of such Person or, in the case of the Company, on each series of
Preferred Stock of each Restricted Subsidiary (other than dividends paid or
payable in additional shares of Preferred Stock or to such Person or any of its
Wholly Owned Subsidiaries) times (y) a fraction, the numerator of which is one
and the denominator of which is one minus the then current effective combined
federal, state and local tax rate of such Person (expressed as a decimal), in
each case, for the last four fiscal quarters for which financial statements are
available.
"Consolidated Interest Expense" means, with respect to any Person, for any
period and without duplication, the aggregate amount of interest which, in
conformity with GAAP, would be set forth opposite the caption "interest expense"
or any like caption on an income statement for such Person and its Subsidiaries
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on a consolidated basis (including, but not limited to, (i) imputed interest
included in Capitalized Lease Obligations, (ii) all commissions, discounts and
other fees and charges owed with respect to letters of credit and bankers'
acceptance financing, (iii) net payments made in connection with Interest Rate
Agreements, (iv) the interest portion of any deferred payment obligation, (v)
amortization of discount or premium, if any, and (vi) all other non-cash
interest expense (other than interest amortized to cost of sales)) plus all net
capitalized interest for such period and all interest paid under any guarantee
of Indebtedness (including a guarantee of principal, interest or any combination
thereof) of any Person, and minus (a) net payments received in connection with
Interest Rate Agreements and (b) amortization of deferred financing costs and
expenses.
"Consolidated Net Income" means, with respect to any Person, for any
period, the aggregate of the Net Income of such Person and its Subsidiaries for
such period, on a consolidated basis, determined in accordance with GAAP;
provided, however, that (a) the Net Income of any Person (the "other Person") in
which the Person in question or any of its Subsidiaries has less than a 100%
interest (which interest does not cause the net income of such other Person to
be consolidated into the net income of the Person in question in accordance with
GAAP) shall be included only to the extent of the amount of dividends or
distributions paid to the Person in question or the Subsidiary, (b) the Net
Income of any Subsidiary of the Person in question (other than a Guarantor) that
is subject to any restriction or limitation on the payment of dividends or the
making of other distributions (other than pursuant to the Notes or the
Indenture) shall be excluded to the extent of such restriction or limitation,
(c)(i) the Net Income of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition and (ii) any
net gain (but not loss) resulting from an Asset Sale by the Person in question
or any of its Subsidiaries other than in the ordinary course of business shall
be excluded and (d) extraordinary, unusual and non-recurring gains and losses
shall be excluded.
"Credit Facility" means collectively the IBMCC Working Capital Line of
Credit, the FINOVA Inventory Line of Credit and any other agreement or
arrangement with a vendor pursuant to which the Company or its Subsidiaries
purchases inventory for resale as such agreements or arrangements may be
amended, modified or supplemented from time to time or deferred, renewed,
extended, refunded, refinanced, restructured or replaced from time to time in
whole or in part, whether with the original parties or other lenders and whether
provided under similar agreements or otherwise and whether prior to, at or
subsequent to the termination or expiration of any such line of credit or other
agreement or arrangement.
"Designated Senior Indebtedness", as to the Company or any Guarantor, as
the case may be, means any Senior Indebtedness or Guarantor Senior Indebtedness,
as the case may be, (i) under the Credit Facility and (ii) in an original
principal amount (or committed availability) of at least $50.0 million if the
instrument governing the same expressly provides that such Indebtedness is
"Designated Senior Indebtedness" for purposes of the Indenture.
"Disqualified Capital Stock" means any Capital Stock of the Company or a
Restricted Subsidiary which, by its terms (or by the terms of any security into
which it is convertible or for which it is exchangeable at the option of the
holder), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable
at the option of the holder thereof, in whole or in part, on or prior to the
maturity date of the Notes, for cash or securities constituting Indebtedness.
Without limiting the foregoing, Disqualified Capital Stock shall be deemed to
include any Preferred Stock of a Restricted Subsidiary. Notwithstanding the
above, Preferred Stock of the Company or any Restricted Subsidiary that is
issued with the benefit of provisions requiring a change of control offer to be
made for such Preferred Stock in the event of a change of control of the Company
or such Restricted Subsidiary, which provisions have substantially the same
effect as the provisions of the Indenture described under "-- Certain
Covenants -- Change of Control Offer," shall not be deemed to be Disqualified
Capital Stock solely by virtue of such provisions.
"domestic" with respect to any Person, shall mean a Person whose
jurisdiction of incorporation or formation is the United States, any state
thereof or the District of Columbia.
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"EBITDA" means, with respect to any Person, for any period, an amount equal
to (a) the sum of (i) Consolidated Net Income for such period, plus (ii) the
provision for taxes for such period based on income or profits to the extent
such income or profits were included in computing Consolidated Net Income and
any provision for taxes utilized in computing net loss under clause (i) hereof,
plus (iii) Consolidated Interest Expense for such period, plus (iv) depreciation
for such period on a consolidated basis, plus (v) amortization of intangibles
for such period on a consolidated basis, plus (vi) any other non-cash items
reducing Consolidated Net Income for such period minus (b) all non-cash items
increasing Consolidated Net Income for such period, all for such Person and its
Subsidiaries determined in accordance with GAAP.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations of the Commission thereunder.
"fair market value" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for cash,
between a willing seller and a willing and able buyer, neither of whom is under
undue pressure or compulsion to complete the transaction. Fair market value
shall be determined by the Board of Directors of the Company acting reasonably
and in good faith.
"Fixed Charge Coverage Ratio" of any Person means, with respect to any
determination date, the ratio of (i) EBITDA for such Person's last four full
fiscal quarters for which financial statements are available to (ii)
Consolidated Fixed Charges of such Person for such period.
"foreign" with respect to any Person, shall mean a Person whose
jurisdiction of incorporation or formation is other than the United States, any
state thereof or the District of Columbia.
"GAAP" means generally accepted accounting principles consistently applied
as in effect in the United States from time to time.
"Guarantor Senior Indebtedness" means, with respect to any Guarantor, the
principal of and premium, if any, and interest (including, without limitation,
interest accruing or that would have accrued but for the filing of a bankruptcy,
reorganization or other insolvency proceeding whether or not such interest
constitutes an allowable claim in such proceeding) on, and any and all other
fees, expense reimbursement obligations and other amounts due pursuant to the
terms of all agreements, documents and instruments providing for, creating,
securing or evidencing or otherwise entered into in connection with, (a) all
Indebtedness and other obligations of such Guarantor under the Credit Facility,
(b) all obligations of such Guarantor with respect to any Interest Rate
Agreement, (c) all obligations of such Guarantor to reimburse any bank or other
Person in respect of amounts paid under letters of credit, acceptances or other
similar instruments, (d) all other Indebtedness of such Guarantor which does not
provide that it is to rank pari passu with or subordinate to the Guarantee of
such Guarantor and (e) all deferrals, renewals, extensions and refundings of,
and amendments, modifications and supplements to, any of the Guarantor Senior
Indebtedness described above. Notwithstanding anything to the contrary in the
foregoing, Guarantor Senior Indebtedness will not include (i) Indebtedness of
such Guarantor to any Restricted Subsidiary, (ii) Indebtedness represented by
the Guarantee of such Guarantor, (iii) any Indebtedness which by the express
terms of the agreement or instrument creating, evidencing or governing the same
is junior or subordinate in right of payment to any item of Guarantor Senior
Indebtedness, (iv) other than obligations referred to in clause (a) above, any
trade payable arising from the purchase of goods or materials or for services
obtained in the ordinary course of business, or (v) Indebtedness (other than
that described in clause (a) above) incurred in violation of the Indenture.
"incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (by conversion, exchange or otherwise), assume,
guarantee or otherwise become liable in respect of such Indebtedness or other
obligation or the recording, as required pursuant to GAAP or otherwise, of any
such Indebtedness or other obligation on the balance sheet of such Person (and
"incurrence," "incurred," "incurrable" and "incurring" shall have meanings
correlative to the foregoing); provided that a change in GAAP that results in an
obligation of such Person that exists at such time becoming Indebtedness shall
not be deemed an incurrence of such Indebtedness.
"Indebtedness" means (without duplication), with respect to any Person, any
indebtedness at any time outstanding, secured or unsecured, contingent or
otherwise, which is for borrowed money (whether or not the
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recourse of the lender is to the whole of the assets of such Person or only to a
portion thereof), or evidenced by bonds, notes, debentures or similar
instruments or representing the balance deferred and unpaid of the purchase
price of any Property (excluding, without limitation, any balances that
constitute accounts payable or trade payables, and other accrued liabilities
arising in the ordinary course of business) if and to the extent any of the
foregoing indebtedness would appear as a liability upon a balance sheet of such
Person prepared in accordance with GAAP, and shall also include, to the extent
not otherwise included (i) any Capitalized Lease Obligations, (ii) obligations
secured by a Lien to which the property or assets owned or held by such Person
is subject, whether or not the obligation or obligations secured thereby shall
have been assumed (provided, however, that if such obligation or obligations
shall not have been assumed, the amount of such indebtedness shall be deemed to
be the lesser of the principal amount of the obligation or the fair market value
of the pledged property or assets), (iii) guarantees of items of other Persons
which would be included within this definition for such other Persons (whether
or not such items would appear upon the balance sheet of the guarantor), (iv)
all obligations for the reimbursement of any obligor on any letter of credit,
banker's acceptance or similar credit transaction (provided that in the case of
any such letters of credit, the items for which such letters of credit provide
credit support are those of other Persons which would be included within this
definition for such other Persons), (v) Disqualified Capital Stock of such
Person or, in the case of the Company, any Restricted Subsidiary, and (vi)
obligations of any such Person under any Interest Rate Agreement applicable to
any of the foregoing (if and to the extent such Interest Rate Agreement
obligations would appear as a liability upon a balance sheet of such Person
prepared in accordance with GAAP). The amount of Indebtedness of any Person at
any date shall be the outstanding balance at such date of all unconditional
obligations as described above and, with respect to contingent obligations, the
maximum liability upon the occurrence of the contingency giving rise to the
obligation, provided (i) that the amount outstanding at any time of any
Indebtedness issued with original issue discount is the principal amount of such
Indebtedness less the remaining unamortized portion of the original issue
discount of such Indebtedness at such time as determined in conformity with GAAP
and (ii) that Indebtedness shall not include any liability for federal, state,
local or other taxes. Notwithstanding any other provision of the foregoing
definition, any trade payable arising from the purchase of goods or materials or
for services obtained in the ordinary course of business shall not be deemed to
be "Indebtedness" of the Company or any Restricted Subsidiary for purposes of
this definition. Furthermore, guarantees of (or obligations with respect to
letters of credit supporting) Indebtedness otherwise included in the
determination of such amount shall not also be included.
"Interest Rate Agreement" means, with respect to any Person, any interest
rate swap agreement, interest rate cap agreement, interest rate collar agreement
or other similar agreement designed to protect the party indicated therein
against fluctuations in interest rates.
"Investments" means, directly or indirectly, any advance, account
receivable (other than an account receivable arising in the ordinary course of
business or acquired as part of the assets acquired by the Company in connection
with an acquisition of assets which is otherwise permitted by the terms of the
Indenture), loan or capital contribution to (by means of transfers of Property
to others, payments for Property or services for the account or use of others or
otherwise), the purchase of any stock, bonds, notes, debentures, partnership or
joint venture interests or other securities of, the acquisition, by purchase or
otherwise, of all or substantially all of the business or assets or stock or
other evidence of beneficial ownership of, any Person or the making of any
investment in any Person. Investments shall exclude (i) extensions of trade
credit on commercially reasonable terms in accordance with normal trade
practices and (ii) the purchase of securities of any Person by such Person.
"Issue Date" means the date the Old Notes are first issued by the Company
and authenticated by the Trustee under the Indenture.
"Junior Subordinated Debentures" means the 5.5% Convertible Subordinated
Debentures Due 2007 of the Company.
"Lien" means, with respect to any Property or assets of any Person, any
mortgage or deed of trust, pledge, hypothecation, assignment, deposit
arrangement, security interest, lien, charge, easement, encumbrance, preference,
priority, or other security agreement or preferential arrangement of any kind or
nature whatsoever
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on or with respect to such Property or assets (including, without limitation,
any Capitalized Lease Obligation, conditional sales or other title retention
agreement having substantially the same economic effect as any of the
foregoing).
"Net Income" means, with respect to any Person, for any period, the net
income (loss) of such Person determined in accordance with GAAP.
"Net Investment" means the excess of (i) the aggregate amount of all
Investments in Unrestricted Subsidiaries or joint ventures made by the Company
or any Restricted Subsidiary on or after the Issue Date (in the case of an
Investment made other than in cash, the amount shall be the fair market value of
such Investment) over (ii) the sum of (A) the aggregate amount returned in cash
on or with respect to such Investments whether through interest payment,
principal payments, dividends or other distributions and (B) the net cash
proceeds received by the Company or any Restricted Subsidiary from the
disposition of all or any portion of such Investments (other than to a
Restricted Subsidiary of the Company); provided, however, that with respect to
all Investments made in an Unrestricted Subsidiary, the sum of clauses (A) and
(B) above with respect to such Investment shall not exceed the aggregate amount
of all such Investments made in such Unrestricted Subsidiary.
"Net Proceeds" means (a) in the case of any sale of Capital Stock by the
Company, the aggregate net proceeds received by the Company, after payment of
expenses, commissions and the like incurred in connection therewith, whether
such proceeds are in cash or in Property (valued at the fair market value
thereof, at the time of receipt) and (b) in the case of any exchange, exercise,
conversion or surrender of outstanding securities of any kind for or into shares
of Capital Stock of the Company which is not Disqualified Capital Stock, the net
book value of such outstanding securities on the date of such exchange,
exercise, conversion or surrender (plus any additional amount required to be
paid by the holder to the Company upon such exchange, exercise, conversion or
surrender, less any and all payments made to the holders, e.g., on account of
fractional shares and less all expenses incurred by the Company in connection
therewith).
"Non-Payment Event of Default" means any event (other than a Payment
Default) the occurrence of which entitles one or more Persons to accelerate the
maturity of any Designated Senior Indebtedness.
"Officer" means the Chairman of the Board, the Chief Executive Officer, the
President, any Executive Vice President, the Chief Financial Officer, the
Treasurer, any Assistant Treasurer, Controller, Secretary or any Vice-President
of the Company or any Subsidiary, as the case may be.
"Officers' Certificate" means a certificate signed by two Officers, one of
whom must be the principal executive officer, principal financial officer,
treasurer or principal accounting officer of the Company.
"Payment Default" means any default, whether or not any requirement for the
giving of notice, the lapse of time or both, or any other condition to such
default becoming an event of default has occurred, in the payment of principal
of (or premium, if any) or interest on or any other amount payable in connection
with Designated Senior Indebtedness.
"Permitted Holders" means (i) Dort A. Cameron III, (ii) Mr. Cameron's
spouse, children or other lineal descendants, the spouses of any of the
foregoing and any probate estate of any such individual and any trust, so long
as one or more of the foregoing individuals are the principal beneficiaries of
such trust and (iii) any Affiliate of any of the foregoing.
"Permitted Indebtedness" means:
(i) Indebtedness of the Company or any Restricted Subsidiary arising
under or in connection with the Credit Facility in an amount not to exceed
the greater of (a) $440.0 million less any mandatory prepayments actually
made thereunder (to the extent, in the case of payments of revolving credit
indebtedness, that the corresponding commitments have been permanently
reduced) or scheduled payments actually made thereunder or (b) the sum of
(x) 85% of consolidated accounts receivable of the Company and the
Restricted Subsidiaries and (y) 75% of consolidated inventory of the
Company and the Restricted Subsidiaries;
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(ii) Indebtedness under the Notes, the Guarantees and the Exchange
Notes and the guarantees thereof;
(iii) Indebtedness not covered by any other clause of this definition
which is outstanding on the date of the Indenture;
(iv) Indebtedness of the Company to any Restricted Subsidiary and
Indebtedness of any Restricted Subsidiary to the Company or another
Restricted Subsidiary provided that any Indebtedness of the Company and of
any Guarantor to any foreign Restricted Subsidiary is subordinated,
pursuant to a written agreement, to the Company's or such Guarantor's
obligations under the Indenture and the Notes at least to the same extent
that the Notes and the Guarantees are subordinated to Senior Indebtedness
and Guarantor Senior Indebtedness, respectively;
(v) Purchase Money Indebtedness and Capitalized Lease Obligations
incurred by the Company or any Restricted Subsidiary to acquire property in
the ordinary course of business which Purchase Money Indebtedness and
Capitalized Lease Obligations do not in the aggregate exceed $15.0 million
at any time outstanding;
(vi) Interest Rate Agreements;
(vii) additional Indebtedness of the Company and the Restricted
Subsidiaries not to exceed $10.0 million in principal amount outstanding at
any time;
(viii) additional Indebtedness of the Company or any Restricted
Subsidiary from the State of Ohio not to exceed $10.0 million in principal
amount; and
(ix) Refinancing Indebtedness.
"Permitted Investments" means, for any Person, Investments made on or after
the Issue Date consisting of:
(i) Investments by the Company, or by a Restricted Subsidiary, in the
Company or a Restricted Subsidiary;
(ii) Temporary Cash Investments;
(iii) Investments by the Company, or by a Restricted Subsidiary, in a
Person, if as a result of such Investment (a) such Person becomes a
Restricted Subsidiary or (b) such Person is merged, consolidated or
amalgamated with or into, or transfers or conveys substantially all of its
assets to, or is liquidated into, the Company or a Restricted Subsidiary;
(iv) reasonable and customary loans made to employees in connection
with their relocation;
(v) an Investment that is made by the Company or a Restricted
Subsidiary in the form of any stock, bonds, notes, debentures, partnership
or joint venture interests or other securities that are issued by a third
party to the Company or such Restricted Subsidiary solely as partial
consideration for the consummation of an Asset Sale that is otherwise
permitted under the covenant described under "-- Certain
Covenants -- Limitation or Certain Asset Sales"; and
(vi) other Investments that do not exceed $15.0 million at any time
outstanding (which amount, in the case of Investments made under this
clause (vi) in Unrestricted Subsidiaries and joint ventures, shall be
determined based on the Net Investment in such Unrestricted Subsidiaries
and joint ventures).
"Permitted Junior Securities" means debt or equity securities of the
Company or any Guarantor, as the case may be, or any successor corporation
provided for by a plan of reorganization or readjustment that are subordinated
to the Notes or the Guarantee of such Guarantor, as the case may be, to the same
extent that the Notes and the Guarantees are subordinated to the payment of all
Senior Indebtedness or Guarantor Senior Indebtedness of such Guarantor, as the
case may be.
"Permitted Liens" means (i) Liens on Property or assets of, or any shares
of stock of or secured debt of, any corporation existing at the time such
corporation becomes a Restricted Subsidiary of the Company or at
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the time such corporation is merged into the Company or any Restricted
Subsidiary; provided that such Liens are not incurred in connection with, or in
contemplation of, such corporation becoming a Restricted Subsidiary of the
Company or merging into the Company or any Restricted Subsidiary, (ii) Liens
securing Refinancing Indebtedness; provided that any such Lien on subordinated
Indebtedness does not extend to or cover any Property, shares or debt other than
the Property, shares or debt securing the Indebtedness so refunded, refinanced
or extended, (iii) Liens in favor of the Company or any Restricted Subsidiary,
(iv) Liens securing industrial revenue bonds, (v) Liens to secure Purchase Money
Indebtedness that is otherwise permitted under the Indenture, provided that (a)
any such Lien is created solely for the purpose of securing Indebtedness
representing, or incurred to finance, refinance or refund, the cost (including
sales and excise taxes, installation and delivery charges and other direct costs
of, and other direct expenses paid or charged in connection with, such purchase
or construction) of such Property and (b) such Lien does not extend to or cover
any Property other than such item of Property and any improvements on such item,
(vi) statutory liens or landlords', carriers', warehousemen's, mechanics',
suppliers', materialmen's, repairmen's or other like Liens arising in the
ordinary course of business which do not secure any Indebtedness and with
respect to amounts not yet delinquent or being contested in good faith by
appropriate proceedings, if a reserve or other appropriate provision, if any, as
shall be required in conformity with GAAP shall have been made therefor, (vii)
other Liens securing obligations incurred in the ordinary course of business
which obligations do not exceed $10.0 million in the aggregate at any one time
outstanding, (viii) Liens securing Interest Rate Agreements, (ix) Liens securing
reimbursement obligations with respect to letters of credit that encumber
documents and other Property, relating to such letters of credit and the
products and proceeds thereof, (x) any extensions, substitutions, replacements
or renewals of the foregoing, (xi) Liens for taxes, assessments or governmental
charges that are being contested in good faith by appropriate proceedings, (xii)
Liens under the Credit Facility and (xiii) Liens securing Capital Lease
Obligations permitted to be incurred under clause (v) of the definition of
"Permitted Indebtedness," provided that such Lien does not extend to any
Property other than that subject to the underlying lease.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization or
government (including any agency or political subdivision thereof).
"Preferred Stock" means any Capital Stock of a Person, however designated,
which entities the holder thereof to a preference with respect to dividends,
distributions or liquidation proceeds of such Person over the holders of other
Capital Stock issued by such Person.
"Product Business" means the procurement of PC hardware, software and
peripherals and related services.
"Property" of any Person means all types of real, personal, tangible,
intangible or mixed property owned by such Person whether or not included in the
most recent consolidated balance sheet of such Person and its Subsidiaries under
GAAP.
"Public Equity Offering" means any underwritten public offering by the
Company of shares of its common stock (however designated and whether voting or
non-voting) and any and all rights, warrants or options to acquire such common
stock pursuant to an effective registration statement filed with the Commission
in accordance with the Securities Act.
"Purchase Money Indebtedness" means any Indebtedness incurred by a Person
to finance the cost (including the cost of construction) of an item of Property,
the principal amount of which Indebtedness does not exceed the sum of (i) 100%
of such cost and (ii) reasonable fees and expenses of such Person incurred in
connection therewith.
"Refinancing Indebtedness" means Indebtedness that refunds, refinances or
extends any Indebtedness of the Company outstanding on the Issue Date or other
Indebtedness permitted to be incurred by the Company or the Restricted
Subsidiaries pursuant to the terms of the Indenture, but only to the extent that
(i) the Refinancing Indebtedness is subordinated to the Notes to at least the
same extent as the Indebtedness being refunded, refinanced or extended, if at
all, (b) the Refinancing Indebtedness is scheduled to mature either (a) no
earlier than the Indebtedness being refunded, refinanced or extended, or (b)
after the maturity date of
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the Notes, (iii) the portion, if any, of the Refinancing Indebtedness that is
scheduled to mature on or prior to the maturity date of the Notes has a weighted
average life to maturity at the time such Refinancing Indebtedness is incurred
that is equal to or greater than the weighted average life to maturity of the
portion of the Indebtedness being refunded, refinanced or extended that is
scheduled to mature on or prior to the maturity date of the Notes, (iv) such
Refinancing Indebtedness is in an aggregate principal amount that is equal to or
less than the sum of (a) the aggregate principal amount then outstanding under
the Indebtedness being refunded, refinanced or extended, (b) the amount of
accrued and unpaid interest, if any, and premiums owed, if any, not in excess of
preexisting prepayment provisions on such Indebtedness being refunded,
refinanced or extended, plus the amount of any premium required to be paid in
connection with such refinancing pursuant to the terms of the Indebtedness
refinanced or the amount of any premium reasonably determined by the Company as
necessary to accomplish such refinancing by means of a tender offer or privately
negotiated repurchase and (c) the amount of customary fees, expenses and costs
related to the incurrence of such Refinancing Indebtedness, and (v) such
Refinancing Indebtedness is incurred by the same Person that initially incurred
the Indebtedness being refunded, refinanced or extended, except that the Company
or a Guarantor may incur Refinancing Indebtedness to refund, refinance or extend
Indebtedness of any Restricted Subsidiary of the Company.
"Restricted Payment" means any of the following: (i) the declaration or
payment of any dividend or any other distribution or payment on Capital Stock of
the Company or any Restricted Subsidiary or any payment made to the direct or
indirect holders (in their capacities as such) of Capital Stock of the Company
or any Restricted Subsidiary of the Company (other than (x) dividends or
distributions payable solely in Capital Stock (other than Disqualified Capital
Stock), and (y) in the case of Restricted Subsidiaries, dividends or
distributions payable to the Company or to a Wholly Owned Subsidiary of the
Company); (ii) the purchase, redemption or other acquisition or retirement for
value of any Capital Stock of the Company or any Restricted Subsidiary (other
than Capital Stock owned by the Company or a Wholly Owned Subsidiary of the
Company); (iii) the making of any principal payment on, or the purchase,
defeasance, repurchase, redemption or other acquisition or retirement for value,
prior to any scheduled maturity, scheduled repayment or scheduled sinking fund
payment, of any Indebtedness which is subordinated in right of payment to the
Notes other than subordinated Indebtedness acquired in anticipation of
satisfying a scheduled sinking fund obligation, principal installment or final
maturity (in each case due within one year of the date of acquisition); (iv) the
making of any Investment in any Person other than a Permitted Investment; and
(v) forgiveness of any Indebtedness of an Affiliate of the Company to the
Company or a Restricted Subsidiary; provided, however, that the term "Restricted
Payment" does not include the declaration or payment of any dividend or any
other distribution or payment on Capital Stock of any Restricted Subsidiary
provided such dividends or other distributions or payments are made to the
Company (or a Restricted Subsidiary) on a pro rata basis (and in like form) to
all dividends or other distributions or payments so made to all other
shareholders thereof, to the extent the Company or a Restricted Subsidiary owns
shares of such series of Capital Stock. For purposes of determining the amount
expended for Restricted Payments, cash distributed or invested shall be valued
at the face amount thereof and Property other than cash shall be valued at its
fair market value.
"Restricted Subsidiary" means a Subsidiary of the Company other than an
Unrestricted Subsidiary and includes all of the Subsidiaries of the Company
existing as of the Issue Date. The Board of Directors of the Company may
designate any Unrestricted Subsidiary or any Person that is to become a
Subsidiary as a Restricted Subsidiary if immediately after giving effect to such
action (and treating any Acquired Indebtedness as having been incurred at the
time of such action), the Company could have incurred at least $1.00 of
additional Indebtedness (other than Permitted Indebtedness) pursuant to the
"-- Limitation on Additional Indebtedness" covenant.
"Senior Indebtedness" means the principal of and premium, if any, and
interest (including, without limitation, interest accruing or that would have
accrued but for the filing of a bankruptcy, reorganization or other insolvency
proceeding whether or not such interest constitutes an allowable claim in such
proceeding) on, and any and all other fees, expense reimbursement obligations
and other amounts due pursuant to the terms of all agreements, documents and
instruments providing for, creating, securing or evidencing or otherwise entered
into in connection with (a) all Indebtedness and other obligations of the
Company owed to
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lenders under the Credit Facility, (b) all obligations of the Company with
respect to any Interest Rate Agreement, (c) all obligations of the Company to
reimburse any bank or other Person in respect of amounts paid under letters of
credit, acceptances or other similar instruments, (d) all other Indebtedness of
the Company which does not provide that it is to rank pari passu with or
subordinate to the Notes and (e) all deferrals, renewals, extensions and
refundings of, and amendments, modifications and supplements to, any of the
Senior Indebtedness described above. Notwithstanding anything to the contrary in
the foregoing, Senior Indebtedness will not include (i) Indebtedness of the
Company to any Restricted Subsidiary, (ii) Indebtedness represented by the
Notes, (iii) any Indebtedness which by the express terms of the agreement or
instrument creating, evidencing or governing the same is junior or subordinate
in right of payment to any item of Senior Indebtedness, (iv) other than
obligations referred to in clause (a) above, any trade payable arising from the
purchase of goods or materials or for services obtained in the ordinary course
of business, or (v) Indebtedness (other than that described in clause (a) above)
incurred in violation of the Indenture.
"Significant Subsidiary" means any Restricted Subsidiary which would be a
"significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X,
promulgated pursuant to the Act and the Exchange Act, as in effect on the Issue
Date.
"Subsidiary" of any specified Person means any corporation, partnership,
joint venture, association or other business entity, whether now existing or
hereafter organized or acquired, (i) in the case of a corporation, of which more
than 50% of the total voting power of the Capital Stock entitled (without regard
to the occurrence of any contingency) to vote in the election of directors,
officers or trustees thereof is held by such first-named Person or any of its
Subsidiaries; or (ii) in the case of a partnership, joint venture, association
or other business entity, with respect to which such first-named Person or any
of its Subsidiaries has the power to direct or cause the direction of the
management and policies of such entity by contract or otherwise or if in
accordance with GAAP such entity is consolidated with the first-named Person for
financial statement purposes.
"Temporary Cash Investments" means (i) Investments in marketable, direct
obligations issued or guaranteed by the United States of America, or of any
governmental agency or political subdivision thereof, maturing within 365 days
of the date of purchase, (ii) Investments in United States dollar denominated
time deposits and United States dollar denominated certificates of deposit
(including Eurodollar time deposits and certificates of deposit) maturing within
365 days of the date of purchase thereof issued by any United States or Canadian
national, provincial or state (including the District of Columbia) banking
institution having capital, surplus and undivided profits aggregating at least
$250,000,000, or by any British, French, German, Japanese or Swiss national
banking institution having capital, surplus and undivided profits aggregating at
least $1,000,000,000, in each case that is (a) rated at least "A" by Standard &
Poor's Corporation or at least "A-2" by Moody's Investors Service Inc., or (b)
that is a party to the Credit Facility, (iii) Investments in commercial paper
maturing within 270 days after the issuance thereof that has the highest credit
rating of either of such rating agencies, (iv) Investments in readily marketable
direct obligations issued by any state of the United States of America or any
political subdivision thereof having the highest rating obtainable from either
of such rating agencies, (v) Investments in tax exempted and tax advantaged
instruments including, without limitation, municipal bonds, commercial paper,
auction rate preferred stock and variable rate demand obligations with the
highest short-term ratings by either of such rating agencies or a long-term debt
rating of AAA from Standard & Poor's Corporation, (vi) Investments in repurchase
agreements and reverse repurchase agreements with institutions described in
clause (ii) above that are fully secured by obligations described in clause (i)
above and (vii) Investments not exceeding 365 days in duration in money market
funds that invest substantially all of such funds' assets in the Investments
described in the preceding clauses (i) through (v).
"Triggering Default Event" means a Default or Event of Default described in
clauses (i), (ii), (iv), (v) or (vi) under the captions "-- Events of Default"
or any breach or violation under the covenants entitled "Merger, Consolidation
or Sale of Assets," "Limitation on Additional Indebtedness," "Limitation on
Restricted Payments," "Limitation on Other Senior Subordinated Debt,"
"Limitations on Liens," "Dividend and Other Payment Restrictions Affecting
Subsidiaries," "Limitation on Transactions with Affiliates,"
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"Limitation on Certain Asset Sales," "Limitation on Capital Stock of Restricted
Subsidiaries," "Payments for Consent" or "Change of Control Offer."
"Unrestricted Subsidiary" means (a) any Subsidiary of an Unrestricted
Subsidiary and (b) any Subsidiary of the Company which is classified after the
Issue Date as an Unrestricted Subsidiary by a resolution adopted by the Board of
Directors of the Company; provided that a Subsidiary organized or acquired after
the Issue Date may be so classified as an Unrestricted Subsidiary only if such
classification is in compliance with the covenant set forth under "-- Limitation
on Restricted Payments." The Trustee shall be given prompt notice by the Company
of each resolution adopted by the Board of Directors of the Company under this
provision, together with a copy of each such resolution adopted.
"Wholly Owned Subsidiary" means any Restricted Subsidiary all of the
outstanding Capital Stock (other than directors' qualifying shares) of which is
owned, directly or indirectly, by the Company.
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BOOK-ENTRY; DELIVERY AND FORM
The Old Notes were offered and sold to "qualified institutional buyers" (as
defined in Rule 144A under the Securities Act) ("QIBS") in reliance on Rule 144A
under the Securities Act ("Rule 144A Notes"). Old Notes were also be offered and
sold in offshore transactions in reliance on Regulation S under the Securities
Act ("Regulation S Notes").
Rule 144A Notes were initially represented by one or more notes in
registered, global form without interest coupons (collectively, the "Rule 144A
Global Note"). The Rule 144A Global Note was deposited upon issuance with the
Trustee as custodian for The Depository Trust Company ("DTC"), in New York, New
York, and registered in the name of DTC or its nominee, in each case for credit
to an account of a direct or indirect participant as described below. Regulation
S Notes were initially represented by one or more notes in registered, global
form without interest coupons (collectively, the "Regulation S Global Note,"
and, together with the Rule 144A Global Note, the "Global Old Notes"). The
Regulation S Global Note was deposited upon issuance with the Trustee as
custodian for DTC, and registered in the name of a nominee of DTC, in each case
for credit to the accounts of Euroclear System ("Euroclear") and Cedel Bank,
S.A. ("CEDEL"). Except for New Notes issued in certificated form, the New Notes
will be represented by one or more notes in registered, global form without
interest coupons (collectively, the "Global New Note" and, together with the
Global Old Notes, the "Global Notes"). The Global New Note will be deposited
upon issuance with the Trustee as custodian for DTC, and registered in the name
of DTC or its nominee, in each case for credit to an account of a direct or
indirect participant.
Except as set forth below, the Global New Note may be transferred, in whole
but not in part, only to another nominee of DTC or to a successor of DTC or its
nominee. Beneficial interests in the Global New Note may not be exchanged for
New Notes in certificated form except in the limited circumstances described
below. See "-- Exchange of the Global New Note for Certificated New Notes."
The New Notes may be presented for registration of transfer and exchange at
the offices of the Registrar (as defined in the Indenture).
DEPOSITORY PROCEDURES
DTC has advised the Company that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Participants") and to facilitate the clearance and settlement of
transactions in those securities between the Participants through electronic
book-entry changes in accounts of the Participants. The Participants include
securities brokers and dealers (including the Initial Purchasers), banks, trust
companies, clearing corporations and certain other organizations. Access to
DTC's system is also available to other entities such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship with
a Participant, either directly or indirectly (collectively, the "Indirect
Participants"). Persons who are not Participants may beneficially own securities
held by or on behalf of DTC only through the Participants or the Indirect
Participants. The ownership interest and transfer of ownership interest of each
actual purchaser of each security held by or on behalf of DTC are recorded on
the records of the Participants and the Indirect Participants.
DTC has also advised the Company that pursuant to procedures established by
it, (i) upon deposit of the Global New Note, DTC will credit the accounts of
exchanging Participants with portions of the principal amount of the Global New
Note and (ii) ownership of such interests in the Global New Note will be shown
on, and the transfer of ownership thereof will be effected only through, records
maintained by DTC (with respect to the Participants) or by the Participants and
the Indirect Participants (with respect to other owners of beneficial interests
in the Global New Note).
Investors in the Global New Note may hold their interests therein directly
through DTC, if they are Participants in such system, or indirectly through
organizations which are Participants in such system.
The laws of some states require that certain persons take physical delivery
in definitive form of securities that they own. Consequently, the ability to
transfer beneficial interests in the Global New Note to such persons may be
limited to that extent. Because DTC can act only on behalf of the Participants,
which in turn
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act on behalf of the Indirect Participants and certain banks, the ability of a
person having beneficial interests in the Global New Note to pledge such
interests to persons or entities that do not participate in the DTC system, or
otherwise take actions in respect of such interests, may be affected by the lack
of a physical certificate evidencing such interests. For certain other
restrictions on the transferability of the New Notes, see "-- Exchange of the
Global New Note for Certificated New Notes."
EXCEPT AS DESCRIBED HEREIN, OWNERS OF INTERESTS IN THE GLOBAL NEW NOTE WILL
NOT HAVE NEW NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY
OF NEW NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED
OWNERS OR HOLDERS THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
Payments in respect of the principal of (and premium, if any) and interest
on the Global New Note registered in the name of DTC or its nominee will be
payable to DTC or its nominee in its capacity as the registered holder under the
Indenture. Under the terms of the Indenture, the Company and the Trustee will
treat the persons in whose names the New Notes, including the Global New Note,
are registered as the owners thereof for the purpose of receiving such payments
and for any and all other purposes whatsoever. Consequently, none of the
Company, the Initial Purchasers, the Trustee nor any agent of the Company, the
Initial Purchasers or the Trustee has or will have any responsibility or
liability for (i) any aspect or accuracy of DTC's records or any Participant's
or Indirect Participant's records relating to or payments made on account of
beneficial ownership interests in the Global New Note, or for maintaining,
supervising or reviewing any of DTC's records or any Participant's or Indirect
Participant's records relating to the beneficial ownership interests in the
Global New Note, or (ii) any other matter relating to the actions and practices
of DTC or any of the Participants or the Indirect Participants.
DTC has advised the Company that its current practice, upon receipt of any
payment in respect of securities such as the New Notes (including principal and
interest), is to credit the accounts of the relevant Participants with the
payment on the payment date, in amounts proportionate to their respective
holdings in principal amount of beneficial interests in the relevant security as
shown on the records of DTC. Payments by the Participants and the Indirect
Participants to the beneficial owners of New Notes will be governed by standing
instructions and customary practices and will not be the responsibility of DTC,
the Trustee or the Company. Neither the Company nor the Trustee will be liable
for any delay by DTC or any of the Participants in identifying the beneficial
owners of the New Notes, and the Company and the Trustee may conclusively rely
on and will be protected in relying on instructions from DTC or its nominee as
the registered owner of the Global New Note for all purposes.
Interests in the Global New Note will trade in DTC's Same-Day Funds
Settlement System and secondary market trading activity in such interests will
therefore settle in immediately available funds, subject in all cases to the
rules and procedures of DTC and the Participants. Transfers between Participants
in DTC will be effected in accordance with DTC's procedures and will be settled
in same-day funds.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of New Notes only at the direction of one or more Participants
to whose account with DTC interests in the Global New Note are credited and only
in respect of such portion of the aggregate principal amount of the New Notes as
to which such Participant or Participants has or have given such direction.
However, if any of the events described under "-- Exchange of Global New Note
for Certificated New Notes" occurs, DTC reserves the right to exchange the
Global New Note for New Notes in certificated form and to distribute such New
Notes to its Participants.
The information in this section concerning DTC and its book-entry systems
has been obtained from sources that the Company believes to be reliable, but the
Company takes no responsibility for the accuracy thereof.
Although DTC has agreed to the foregoing procedures to facilitate transfers
of interests in the Global New Note among accountholders in DTC, it is under no
obligation to perform or to continue to perform such procedures, and such
procedures may be discontinued at any time. None of the Company or the Trustee
nor any agent of the Company or the Trustee will have any responsibility for the
performance by DTC or its
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participants, indirect participants or accountholders of their respective
obligations under the rules and procedures governing their operations.
EXCHANGE OF THE GLOBAL NEW NOTE FOR CERTIFICATED NEW NOTES
New Notes issued or transferred to institutional "accredited investors"
within the meaning of subparagraph (a)(1), (2), (3) or (7) of Rule 501 under the
Securities Act who are not QIBs will be issued in registered certificated form.
In addition, the Global New Note is exchangeable for definitive New Notes in
registered certificated form if (i) DTC (x) notifies the Company that it is
unwilling or unable to continue as depository for the Global New Note and the
Company thereupon fails to appoint a successor depository or (y) has ceased to
be a clearing agency registered under the Exchange Act, (ii) the Company, at its
option, notifies the Trustee in writing that it elects to cause the issuance of
the New Notes in certificated form or (iii) there shall have occurred and be
continuing a Default or an Event of Default with respect to the Notes. In all
cases, certificated New Notes delivered in exchange for the Global New Note or
beneficial interests therein will be registered in the names, and issued in any
approved denominations, requested by or on behalf of DTC (in accordance with its
customary procedures).
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain material United States federal income
tax consequences generally applicable to (i) the exchange of Old Notes for New
Notes and (ii) the ownership and disposition of the New Notes. The federal
income tax considerations set forth below are based upon currently existing
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
applicable Treasury Regulations ("Treasury Regulations"), judicial authority,
and current administrative rulings and pronouncements of the Internal Revenue
Service (the "IRS"). There can be no assurance that the IRS will not take a
contrary view, and no ruling from the IRS has been, or will be, sought on the
issues discussed herein. Legislative, judicial, or administrative changes or
interpretations may be forthcoming that could alter or modify the statements and
conclusions set forth herein. Any such changes or interpretations may or may not
be retroactive and could affect the tax consequences discussed below. The
summary is not a complete analysis or description of all potential federal tax
considerations that may be relevant to, or of the actual tax effect that any of
the matters described herein will have on, particular holders, and does not
address state, local or other tax consequences. This summary does not address
the federal income tax consequences to (a) special classes of taxpayers (such as
S corporations, mutual funds, insurance companies, financial institutions, small
business investment companies, foreign companies, nonresident alien individuals,
regulated investment companies, real estate investment trusts, dealers in
securities or currencies, broker-dealers and tax-exempt organizations) who are
subject to special treatment under the federal income tax laws, (b) Holders that
hold Notes as part of a position in a "straddle," or as part of a "hedging,"
"conversion," or other integrated investment transaction for federal income tax
purposes, (c) Holders that do not hold the Notes as capital assets within the
meaning of section 1221 of the Code or (d) Holders whose functional currency is
not the U.S. dollar. Furthermore, estate and gift tax consequences are not
discussed herein.
As used herein, the term "U.S. Holder" means a beneficial owner of a New
Note that is for United States federal income tax purposes (i) a citizen or
resident of the United States, (ii) a corporation, partnership or other entity
created or organized in or under the laws of the United States or of any
political subdivision thereof, (iii) an estate the income of which is subject to
federal income tax regardless of source, or (iv) a trust if a court within the
United States is able to exercise primary supervision over the administration of
the trust and one or more U.S. persons that have the authority to control all
substantial decisions of the trust. As used herein, the term "Non-U.S. Holder"
means a beneficial owner of a New Note that is not a U.S. Holder.
BECAUSE INDIVIDUAL CIRCUMSTANCES MAY DIFFER, EACH PERSON CONSIDERING
EXCHANGING OLD NOTES FOR NEW NOTES IS STRONGLY URGED TO CONSULT HIS OR HER OWN
TAX ADVISOR WITH RESPECT TO HIS OR HER PARTICULAR TAX SITUATION AND AS TO ANY
FEDERAL, FOREIGN, STATE, LOCAL OR OTHER TAX CONSIDERATIONS (INCLUDING ANY
POSSIBLE CHANGES IN TAX LAW) AFFECTING THE PURCHASE, HOLDING AND DISPOSITION OF
THE NOTES.
FEDERAL INCOME TAX CONSEQUENCES OF TENDERING OLD NOTES FOR NEW NOTES
Exchange Offer. The exchange of Old Notes for New Notes pursuant to the
Exchange Offer should not be treated as an exchange or other taxable event for
United States federal income tax purposes because under Treasury regulations,
the New Notes should not be considered to differ materially in kind or extent
from the Old Notes. Rather, the New Notes received by a holder should be treated
as a continuation of the Old Notes in the hands of such holder. As a result,
there should be no United States federal income tax consequences to holders who
exchange Old Notes for New Notes pursuant to the Exchange Offer and any such
holder should have the same tax basis and holding period in the New Notes as it
had in the Old Notes immediately before the exchange.
FEDERAL INCOME TAX CONSEQUENCES OF OWNING NEW NOTES
U.S. Holders
Payment of Interest. The Old Notes were not issued with original issue
discount. As a result, payments of interest on a New Note generally will be
taxable to a U.S. Holder as ordinary interest income at the time
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such payments are accrued or are received, in accordance with the U.S. Holder's
regular method of tax accounting.
Market Discount. A Note will be considered to bear "market discount" if
the U.S. Holder's tax basis for the Note is less than the principal amount of
the Note by more than a de minimis amount.
Under the market discount rules, a U.S. Holder will be required to treat
any partial principal payment on, or any gain realized on the sale, exchange,
retirement or other disposition of, a Note as ordinary income to the extent of
the lesser of (i) the amount of such payment or realized gain or (ii) the market
discount which has not previously been included in income and is treated as
having accrued on such New Note at the time of such payment or disposition.
Market discount will be considered to accrue on a straight-line basis during the
period from the date of acquisition to the maturity date of the Note, unless the
U.S. Holder elects to accrue market discount on the basis of semiannual
compounding.
A U.S. Holder may be required to defer the deduction of all or a portion of
the interest paid or accrued on any indebtedness incurred or maintained to
purchase or carry a New Note with market discount until the maturity of the New
Note or certain earlier dispositions. A U.S. Holder may elect to include market
discount in income currently as it accrues, in which case the rules described
above regarding the treatment as ordinary income of gain upon the disposition of
the Note and upon the receipt of certain cash payments and regarding the
deferral of interest deductions will not apply. Persons considering making this
election should consult their tax advisors.
Premium. If a U.S. Holder's initial tax basis in any Note is greater than
the principal amount of the Note, the Note will be considered to have
"amortizable bond premium" equal in amount to such excess. A U.S. Holder may
elect to amortize such premium using a constant yield method over the remaining
term of the New Note and may offset interest otherwise required to be included
in respect of the New Note during any taxable year by the amortized amount of
such excess for the taxable year. Any election to amortize bond premium applies
to all taxable debt instruments acquired by the U.S. Holder on or after the
first day of the first taxable year to which such election applies and may be
revoked only with the consent of the IRS.
Disposition of a Note. Except as discussed above, upon the sale, exchange
or retirement of a New Note, a U.S. Holder generally will recognize taxable gain
or loss equal to the difference between the amount realized on the sale,
exchange or retirement (other than amounts representing accrued and unpaid
interest) and such U.S. Holder's adjusted tax basis in the New Note. A U.S.
Holder's adjusted tax basis in a New Note generally will equal such U.S.
Holder's initial investment in the Note increased by any accrued market discount
that the U.S. Holder has included in income and decreased by the amount of any
amortizable bond premium taken with respect to such Note. Such gain or loss
generally will be long-term capital gain or loss if the Note has been held for
more than one year.
Non-U.S. Holders
Interest. Subject to the discussion of backup withholding below, a
Non-U.S. Holder will generally not be subject to U.S. federal income or
withholding tax on payments of principal, premium, if any, and interest on a New
Note under the portfolio interest exemption of the Code, provided that (in the
case of interest): (i) the Non-U.S. Holder does not actually or constructively
own 10% or more of the total combined voting power of all classes of stock of
Holdings entitled to vote; (ii) the Non-U.S. Holder is not a controlled foreign
corporation that is related to the Company through stock ownership; (iii) such
interest is not effectively connected with a United States trade or business of
the Non-U.S. Holder; (iv) generally either (a) the beneficial owner of the Notes
certifies to Holdings or its agent, under penalties of perjury, that it is a
Non-U.S. Holder and provides a completed IRS Form W-8 ("Certificate of Foreign
Status") or (b) a securities clearing organization, bank or other financial
institution which holds customers' securities in the ordinary course of its
trade or business (a "financial institution") and which holds the New Notes,
certifies to Holdings or its agent, under penalties of perjury, that it has
received Form W-8 from the beneficial owner or that it has received from another
financial institution a Form W-8 and furnishes the payor with a copy thereof;
and (v) for payments made on or after January 1, 2000, the payment can be
reliably associated (within the meaning of applicable Treasury Regulations) with
IRS Form W-8. If any of the situations described in proviso (i), (ii) or (iv) of
the preceding sentence do not exist, interest on the New Notes when received is
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subject to United States withholding tax at the rate of 30% unless an income tax
treaty between the United States and the country of which the Non-U.S. Holder is
a tax resident provides for the elimination or reduction in the rate of U.S.
federal withholding tax.
If a Non-U.S. Holder of a New Note is engaged in a trade or business in the
United States and interest on the Note is effectively connected with the conduct
of such trade or business, such Non-U.S. Holder, although exempt from U.S.
federal withholding tax by reason of the delivery of a properly completed Form
4224, will be subject to U.S. federal income tax on such interest (including
OID) and on any gain realized on the sale, exchange or other disposition of a
New Note in the same manner as if it were a U.S. Holder. In addition, if such
Non-U.S. Holder is a foreign corporation, it may be subject to a branch profits
tax equal to 30% of its effectively connected earnings and profits for that
taxable year, unless it qualifies for a lower rate under an applicable income
tax treaty.
Sale, Retirement and Other Disposition of New Notes. A Non-U.S. Holder
generally will not be subject to U.S. federal income tax on any gain realized in
connection with the sale, exchange, retirement or other disposition of a New
Note (other than gain attributable to accrued interest, which is addressed in
the preceding paragraph), unless: (i) the gain is effectively connected with a
trade or business carried on by the Non-U.S. Holder within the United States;
(ii) if a tax treaty applies, the gain is attributable to an office or other
fixed place of business maintained in the United States by the Non-U.S. Holder;
or (iii) in the case of an individual Non-U.S. Holder, (a) such holder is
present in the United States for 183 days or more in the taxable year of
disposition and certain other conditions are satisfied, or (b) the Non-U.S.
Holder is subject to tax pursuant to provisions of the Code applicable to United
States expatriates.
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, under current U.S. federal tax law, payments to a U.S. Holder
of (a) principal, premium (if any) and interest on a New Note, and (b) the
proceeds of sale or other disposition of a New Note before maturity will be
subject to U.S. information reporting requirements. Subject to certain
exceptions, such payments will also generally be subject to "backup" withholding
tax at a rate of 31% if such U.S. Holder fails to supply a correct taxpayer
identification number and certain other information in the required manner. U.S.
Holders should consult their own tax advisors regarding their qualification for
exemption from backup withholding and the procedure for obtaining such an
exemption if applicable.
In general, there is no U.S. information reporting requirement or backup
withholding tax on payments to Non-U.S. Holders who provide the appropriate
certification described above regarding qualification for the portfolio interest
exemption from U.S. federal income tax for payments of principal or interest on
the New Notes.
Payment by the Company of principal on the New Notes or payment by a United
States office of a broker of the proceeds of a sale of a New Note is subject to
both backup withholding and information reporting unless the beneficial owner
provides a completed IRS Form W-8 which certifies under penalties of perjury
that such owner is a Non-U.S. Holder who meets all the requirements for
exemption from U.S. federal income tax on any gain from the sale, exchange or
retirement of a New Note.
In general, backup withholding and information reporting will not apply to
a payment of the gross proceeds of a sale of a New Note effected at a foreign
office of a broker. If, however, such broker is, for U.S. federal income tax
purposes, a U.S. person, a controlled foreign corporation or a foreign person
50% or more of whose gross income for certain periods is derived from activities
that are effectively connected with the conduct of a trade or business in the
United States, such payments will not be subject to backup withholding, but will
be subject to information reporting unless (i) such broker has documentary
evidence in its records that the beneficial owner is a Non-U.S. Holder and
certain other conditions are met, or (ii) the beneficial owner otherwise
establishes an exemption, provided such broker does not have actual knowledge
that the payee is a United States person. Non-U.S. Holders should consult their
tax advisors regarding the application of these rules to their particular
situations, the availability of an exemption therefrom and the procedure for
obtaining such an exemption, if available.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules will be allowed as a refund or a credit against such
holder's U.S. federal income tax liability, provided the required information is
furnished to the IRS.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Company has agreed that, starting on
the Expiration Date and ending on the close of business on the 180th day
following the Expiration Date, it will make this Prospectus, as amended or
supplemented, available to any broker-dealer for use in connection with any such
resale.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or at negotiated prices. Any such resale may be
made directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such New Notes. Any broker-dealer
that resells New Notes that were received by it for its own account pursuant to
the Exchange Offer and any broker or dealer that participates in a distribution
of such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit of any such resale of New Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that, by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. By acceptance of the
Exchange Offer, each broker-dealer that receives New Notes pursuant to the
Exchange Offer hereby agrees to notify the Company prior to using this
Prospectus in connection with the sale or transfer of New Notes, and
acknowledges and agrees that, upon receipt of notice from the Company of the
happening of any event which makes any statement in this Prospectus untrue in
any material respect or which requires the making of any changes in this
Prospectus in order to make the statements herein not misleading (which notice
the Company agrees to deliver promptly to such broker-dealer), such
broker-dealer will suspend use of this Prospectus until the Company has amended
or supplemented the Prospectus to correct such misstatement or omission and has
furnished copies of the amended or supplemented prospectus to such
broker-dealer.
For a period of 180 days after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement thereto to any broker-dealer that requests such documents in the
Letter of Transmittal. The Company has agreed to pay all expenses incident to
the Exchange Offer (including the expenses of any one special counsel for the
holders of the Notes) other than commissions or concessions of any brokers or
dealers and will indemnify the holders of the Notes participating in the
Exchange Offer (including any broker-dealers) against certain liabilities,
including liabilities under the Securities Act.
LEGAL MATTERS
Certain legal matters with respect to the New Notes will be passed upon for
the Company by Cahill Gordon & Reindel (a partnership including a professional
corporation) with respect to New York and Delaware law, Krys, Boyle, Freedman &
Sawyer, P.C. with respect to Colorado law and Powers, Chapman, DeAgostino,
Meyers & Milia with respect to Michigan law.
EXPERTS
The consolidated financial statements of the Company and its subsidiaries
appearing in this Prospectus have been audited by KPMG LLP, independent
certified public accountants, to the extent and for the periods indicated in
their report thereon. Such consolidated financial statements have been included
in reliance upon the report of KPMG LLP, appearing elsewhere herein, given upon
their authority as experts in accounting and auditing.
103
<PAGE> 108
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of June 28, 1998 and June 29,
1997...................................................... F-3
Consolidated Statements of Operations for Years Ended June
28, 1998, June 29, 1997 and June 30, 1996................. F-4
Consolidated Statements of Cash Flows for Years Ended June
28, 1998, June 29, 1997 and June 30, 1996................. F-5
Consolidated Statements of Stockholders' Equity (Deficit)
for Years Ended June 28, 1998, June 29, 1997 and June 30,
1996...................................................... F-6
Notes to Consolidated Financial Statements.................. F-7
Condensed Consolidated Balance sheets as of September 27,
1998 and June 28, 1998.................................... F-18
Condensed Consolidated Statements of Operations for the
Three Months Ended September 27, 1998 and September 28,
1997...................................................... F-19
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended September 27, 1998 and September 28,
1997...................................................... F-20
Notes to Condensed Consolidated Financial Statements........ F-21
</TABLE>
F-1
<PAGE> 109
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. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express our opinion on these
consolidated financial statements 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.
KPMG LLP
Stamford, Connecticut
August 21, 1998
F-2
<PAGE> 110
ENTEX INFORMATION SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 28, JUNE 29,
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
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-3
<PAGE> 111
ENTEX INFORMATION SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
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 expenses....... 259,712 251,963 192,312
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-4
<PAGE> 112
ENTEX INFORMATION SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
----------------------------------
JUNE 28, JUNE 29, JUNE 30,
1998 1997 1996
--------- --------- --------
<S> <C> <C> <C>
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
========= ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 113
ENTEX INFORMATION SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED CUMULATIVE
--------------- 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 treasury stock... -- -- -- -- -- (7) -- (7)
Issuance of common stock
under stock purchase
arrangements............... 80 -- 381 -- -- 10 -- 391
Issuance of common stock
warrants................... -- -- 897 -- -- -- -- 897
Issuance of common stock..... 1,262 -- 4,484 -- -- -- -- 4,484
Deferred compensation........ -- -- 11,701 (11,701) -- -- -- --
Amortization of deferred
compensation............... -- -- -- 11,701 -- -- -- 11,701
Net (loss)................... -- -- -- -- (25,676) -- -- (25,676)
------ -- ------- -------- -------- --- ---- --------
Balance, June 30, 1996......... 32,677 3 18,735 -- (58,251) (2) -- (39,515)
Return of treasury stock..... (429) -- -- -- -- -- -- --
Issuance of common stock..... 110 -- 268 -- -- -- -- 268
Foreign currency change...... -- -- -- -- -- -- (29) (29)
Net income................... -- -- -- -- 1,544 -- -- 1,544
------ -- ------- -------- -------- --- ---- --------
Balance, June 29, 1997......... 32,358 3 19,003 -- (56,707) (2) (29) (37,732)
Return of treasury stock..... (70) -- -- -- -- -- -- --
Issuance of common stock..... 62 -- 180 -- -- -- -- 180
Exercise of options.......... 63 -- 294 -- -- -- -- 294
Foreign currency change...... -- -- -- -- -- -- (30) (30)
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-6
<PAGE> 114
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 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-7
<PAGE> 115
ENTEX INFORMATION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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.
(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
F-8
<PAGE> 116
ENTEX INFORMATION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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
F-9
<PAGE> 117
ENTEX INFORMATION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
(3) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 28, JUNE 29,
1998 1997
-------- --------
<S> <C> <C>
Finished goods held for resale......................... $180,320 $175,300
Service parts.......................................... 12,521 8,657
-------- --------
$192,841 $183,957
======== ========
</TABLE>
F-10
<PAGE> 118
ENTEX INFORMATION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
JUNE 28, JUNE 29,
1998 1997
-------- --------
<S> <C> <C>
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
======== ========
</TABLE>
(5) DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
JUNE 28, JUNE 29,
1998 1997
-------- --------
<S> <C> <C>
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
======== ========
</TABLE>
(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 terminated 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.
F-11
<PAGE> 119
ENTEX INFORMATION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 2.10% (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:
<TABLE>
<S> <C>
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
========
</TABLE>
F-12
<PAGE> 120
ENTEX INFORMATION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
--------------------------------
JUNE 28, JUNE 29, JUNE 30,
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal....................................... $417 $-- $--
State......................................... -- -- --
Foreign....................................... -- 25 28
Deferred:
Federal....................................... -- -- --
State......................................... -- -- --
---- --- ---
Total................................. $417 $25 $28
==== === ===
</TABLE>
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:
<TABLE>
<CAPTION>
JUNE 29, JUNE 30, JUNE 30,
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
F-13
<PAGE> 121
ENTEX INFORMATION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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:
<TABLE>
<CAPTION>
JUNE 28, JUNE 29,
1998 1997
-------- --------
<S> <C> <C>
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
======== ========
</TABLE>
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
F-14
<PAGE> 122
ENTEX INFORMATION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 were 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
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE 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>
F-15
<PAGE> 123
ENTEX INFORMATION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
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:
<TABLE>
<CAPTION>
JUNE 28, JUNE 29,
1998 1997
--------- ---------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
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
</TABLE>
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
F-16
<PAGE> 124
ENTEX INFORMATION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
operating leases that have initial or remaining non-cancelable lease terms in
excess of one year as of June 28, 1998 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE:
- -----------------
<S> <C>
1999..................................................... $ 9,644
2000..................................................... 8,502
2001..................................................... 6,791
2002..................................................... 5,511
2003..................................................... 2,606
Thereafter................................................. 7,012
-------
Total minimum lease payments...................... $40,066
=======
</TABLE>
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.
(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 $74
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-17
<PAGE> 125
ENTEX INFORMATION SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
UNAUDITED
SEPTEMBER 27, JUNE 28,
1998 1998
------------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 9,436 $ 14,265
Trade receivables (net of allowance for doubtful accounts
of $4,578 and $4,662, respectively).................... 375,859 368,344
Vendor receivables (net of allowances of $2,925 and
$3,787, respectively).................................. 40,704 47,592
Inventories............................................... 142,947 192,841
Other current assets...................................... 8,548 8,683
-------- --------
Total current assets.............................. 577,494 631,725
-------- --------
Property, plan and equipment, net........................... 65,363 61,009
Goodwill (net of accumulated amortization of $13,571 and
$12,861, respectively).................................... 40,881 41,929
Other assets, net........................................... 6,114 1,756
-------- --------
Total assets...................................... $689,852 $736,419
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $298,106 $338,602
Accrued liabilities....................................... 69,994 67,381
Notes payable and current installments of long-term
debt................................................... 221,668 295,681
-------- --------
Total current liabilities......................... 589,768 701,664
-------- --------
Long-term debt.............................................. 132,361 53,239
Other long-term liabilities................................. 577 661
-------- --------
Total long-term liabilities............................ 132,938 53,900
-------- --------
Total liabilities................................. 722,706 755,564
-------- --------
Stockholders' equity (deficit):
Preferred stock, 2,000,000 shares authorized; no shares
issued or outstanding..................................... -- --
Common stock, $.0001 par value; 100 million shares
authorized, 32,407,656 and 32,413,366 shares issued and
outstanding, respectively................................. 3 3
Additional paid-in capital.................................. 19,539 19,477
Retained earnings (deficit)................................. (52,364) (38,564)
Accumulated other comprehensive income...................... (30) (59)
Treasury stock, 82,500 shares, at cost...................... (2) (2)
-------- --------
Total stockholders' equity (deficit).............. (32,854) (19,145)
-------- --------
$689,852 $736,419
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-18
<PAGE> 126
ENTEX INFORMATION SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
UNAUDITED
THREE MONTHS ENDED
--------------------------------
SEPTEMBER 27, SEPTEMBER 28,
1998 1997
------------- -------------
<S> <C> <C>
Net revenues:
Product revenues.......................................... $ 438,252 $ 500,938
Service revenues.......................................... 116,888 105,901
----------- -----------
Total net revenues................................ 555,140 606,839
----------- -----------
Cost of revenues:
Cost of products sold..................................... 405,479 450,781
Cost of services provided................................. 84,901 79,872
----------- -----------
Cost of revenues....................................... 490,380 530,653
----------- -----------
Product gross margin........................................ 32,773 50,157
Services gross margin....................................... 31,987 26,029
----------- -----------
Total gross margin........................................ 64,760 76,186
Selling, general and administrative expenses................ 68,857 61,815
----------- -----------
Income (loss) from operations............................. (4,097) 14,371
Interest expense, net....................................... 9,695 9,669
----------- -----------
Income (loss) before income taxes......................... (13,792) 4,702
Provision for income taxes.................................. 8 2
----------- -----------
Net income (loss)......................................... $ (13,800) $ 4,700
=========== ===========
Common Share Data:
Basic earnings (loss) per share........................... $ (.43) $ .15
=========== ===========
Diluted earnings (loss) per share......................... $ (.43) $ .14
=========== ===========
Basic weighted average number of shares of common stock
outstanding............................................... 32,402,154 32,399,060
Common equivalent shares from stock options and warrants
using the treasury stock method........................ -- 1,337,145
----------- -----------
Diluted weighted average number of shares of common stock
outstanding............................................ 32,402,154 33,736,205
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-19
<PAGE> 127
ENTEX INFORMATION SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
UNAUDITED
THREE MONTHS ENDED
-----------------------------
SEPTEMBER 27, SEPTEMBER 28,
1998 1997
------------- -------------
<S> <C> <C>
Net cash provided by operating activities................... $ 7,162 $21,098
--------- -------
Cash flows from investing activities:
Capital expenditures...................................... (8,593) (4,219)
--------- -------
Net cash used in investing activities............. (8,593) (4,219)
--------- -------
Cash flows from financing activities:
Proceeds from borrowings.................................. 132,306 30,185
Change in cash overdraft.................................. (3,527) 6,107
Payments on debt.......................................... (132,177) (58,679)
--------- -------
Net cash used in financing activities............. (3,398) (22,387)
--------- -------
Decrease in cash............................................ (4,829) (5,508)
Cash at beginning of period................................. 14,265 15,838
--------- -------
Cash at end of period....................................... $ 9,436 $10,330
========= =======
Supplemental disclosure of cash flow information:
Interest paid............................................. $ 8,566 $10,383
========= =======
Income taxes paid (refunded).............................. $ 587 $ (658)
========= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-20
<PAGE> 128
ENTEX INFORMATION SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements included herein
have been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. However, in the opinion of management of the Company, the
condensed consolidated financial statements include all adjustments, which
consist only of normal recurring accruals, necessary to present fairly the
financial information for such periods. These condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and the notes thereto included in the Company's Annual Report on Form
10-K for the fiscal year ended June 28, 1998.
The results of operations for the three months ended September 27, 1998 are
not necessarily indicative of the results to be expected for the fiscal year
ending June 27, 1999.
2. COMPREHENSIVE INCOME
Effective for the quarter ended September 27, 1998, the Company adopted
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("FAS 130"). Comprehensive income includes both net income and other
comprehensive income. Included in other comprehensive income are foreign
currency translation gains (losses). In accordance with the disclosure
requirements of FAS 130, comprehensive income (loss) for the three months ended
September 27, 1998 and September 28, 1997 was $(13,771) and $4,692,
respectively. Other comprehensive income (loss) for the three months ended
September 27, 1998 and September 28, 1997 was $29 and $(8), respectively.
3. SUBSEQUENT EVENT
In October 1998, the Company's Board of Directors authorized management
actions that will result in the reorganization of ENTEX's business to create two
operating units: a Technology Acquisition Services Division and a Services
Division, each functioning as a separate operating division within ENTEX
Information Services.
As a result of these actions, the Company will record a pre-tax
restructuring charge estimated at $10 - $12 million during the second fiscal
quarter ending December 27, 1998. The restructuring charge includes costs
related to severance in connection with a workforce reduction, as well as branch
office consolidation and facilities reductions. It is expected that the
reorganization will be completed by the end of December 1998. In addition, the
Company expects to record a further non-cash charge estimated at up to $10 - $15
million primarily in connection with the re-evaluation of the functionality of
software investments that have been made which may require an alternative
solution for portions of the new business lines.
F-21
<PAGE> 129
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFER
CONTAINED HEREIN OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND THE
ACCOMPANYING LETTER OF TRANSMITTAL AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR THE EXCHANGE AGENT. NEITHER THIS PROSPECTUS NOR THE ACCOMPANYING LETTER OF
TRANSMITTAL, OR BOTH TOGETHER, CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION
OF AN OFFER TO BUY ANY SECURITY OTHER THAN THOSE TO WHICH IT RELATES, NOR DOES
IT CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION OF ANY OFFER TO BUY, TO ANY
PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS, NOR THE ACCOMPANYING
LETTER OF TRANSMITTAL, OR BOTH TOGETHER, NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. iv
Special Note Regarding Forward-Looking
Statements.......................... iv
For Pennsylvania Residents Only....... iv
Summary............................... 1
Risk Factors.......................... 14
Capitalization........................ 23
Selected Consolidated Financial
Data................................ 24
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 26
Business.............................. 36
Management............................ 51
Principal Stockholders................ 60
Description of Other Indebtedness..... 62
The Exchange Offer.................... 64
Description of the Notes.............. 72
Book-Entry; Delivery and Form......... 97
Certain United States Federal Income
Tax Considerations.................. 100
Plan of Distribution.................. 103
Legal Matters......................... 103
Experts............................... 103
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
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$100,000,000
[ENTEX LOGO]
ENTEX INFORMATION
SERVICES, INC.
OFFER TO EXCHANGE ITS
12 1/2% SENIOR SUBORDINATED NOTES DUE 2006,
WHICH HAVE BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED,
FOR ANY AND ALL OF ITS
12 1/2% SENIOR SUBORDINATED NOTES DUE 2006
THE EXCHANGE AGENT FOR THE
EXCHANGE OFFER IS:
MARINE MIDLAND BANK
------------------------
PROSPECTUS
------------------------
JANUARY 22, 1999
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