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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark one)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 27, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 000-23457
ENTEX INFORMATION SERVICES, INC.
(Exact name of registrant as specified in its charter)
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Delaware 93-133715291
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
Six International Drive, Rye Brook, New York 10573-1058
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code:
(914) 935-3600
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.0001 Par Value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of voting and non-voting common equity of
the registrant held by non-affiliates of the registrant, as of June 27, 1999,
was $22,487,534.
Number of shares of Common Stock, $.0001 par value, outstanding as of
June 27, 1999: 32,437,070 (excluding 82,500 treasury shares).
DOCUMENTS INCORPORATED BY REFERENCE:
Exhibit list begins on page 43
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TABLE OF CONTENTS
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Page
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PART I.................................................................................................... 1
ITEM 1. BUSINESS................................................................................ 1
ITEM 2. PROPERTIES.............................................................................. 13
ITEM 3. LEGAL PROCEEDINGS....................................................................... 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................................... 13
PART II................................................................................................... 14
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS................... 14
ITEM 6. SELECTED FINANCIAL DATA................................................................. 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.... 17
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK............................... 24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................................. 24
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.... 27
PART III.................................................................................................. 27
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...................................... 27
ITEM 11. EXECUTIVE COMPENSATION.................................................................. 30
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......................... 35
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................................... 37
PART IV................................................................................................... 42
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K......................... 42
SIGNATURES................................................................................................ 48
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................................................ 50
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PART I
References contained herein to Fiscal 1995, Fiscal 1996, Fiscal 1997,
Fiscal 1998 and Fiscal 1999 mean the fiscal years ended July 2, 1995, June 30,
1996, June 29, 1997, June 28, 1998 and June 27, 1999, respectively. As used
herein, unless the context otherwise requires, "ENTEX" or the "Company" refers
to ENTEX Information Services, Inc. and its subsidiaries. Unless another source
is specifically indicated, all industry and market share data set forth herein
are based upon estimates by ENTEX management. This Annual Report on Form 10-K
(this "Form 10-K") contains forward looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). The Company's actual results may differ materially from the
results projected in the forward looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Item 1.
Business," including the section therein entitled " -- Business Factors," and in
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations."
ITEM 1. BUSINESS.
ENTEX Information Services, Inc. is a leading provider of distributed
computing management solutions to meet the support requirements of Fortune 1,000
companies and other large enterprises for their local-area networks, wide-area
networks and end-users. The Company's computing management solutions include
Outsourcing Services (managed support services for the total distributed
computer infrastructure including network management, help desk, deskside
support and asset management); Field Services (providing trained technicians to
perform help desk and deskside support services on-site at customer locations);
and Consulting Services (analysis, design, integration, implementation and
optimization services for distributed networks and technology migrations). ENTEX
provides a single source for service for its customers' personal computer (PC)
and server platforms including system design, operations support and change
management.
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
provide cost-effective solutions spanning the PC and network lifecycle; (ii) to
support multi-vendor PC and network products; 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 distributed computing
management services which are more effective than in-house solutions and
services that could be developed by its customers acting on their own.
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ENTEX was formed in August 1993 in a management-led buyout of the
information systems business of JWP Inc. ("JWPIS"). The Company's principal
stockholders are Dort A. Cameron III, Chairman of the Company's Board of
Directors, and entities controlled by Mr. Cameron (the "Cameron Affiliates").
Other equity holders of the Company include certain executives and employees of
the Company, IBM and Microsoft.
COMPETITION
The information technology services industry is intensely competitive
and the Company's management believes competition will intensify in the future.
As an independent provider of distributed computing management services, ENTEX
competes with companies which can provide a combination of product procurement
and services such as PC systems integrators; high-end systems integrators; PC
resellers and distributors; specialty service providers; and PC manufacturers.
The principal competitive factors in the Company's industry include the breadth,
quality and consistency of service offerings; pricing; and expertise and size of
technical workforce.
PC systems integrators include CompuCom Systems, Inc. ("CompuCom"), GE
Capital Information Technology Solutions, Inacom and Wang. High-end systems
integrators include Andersen Consulting, Computer Sciences Corporation, IBM
Global Services and SHL Systemhouse, a division of Electronic Data Systems
Corporation. PC resellers and distributors, including Ingram Micro, MicroAge and
Tech Data, have continued to increase their level of services and to provide
more comprehensive desktop support. Specialty service providers are firms that
have focused their business exclusively on providing PC and network related
services and include International Network Services, Alternative Resources
Corporation, DecisionOne and Technology Service Solutions. Manufacturers include
Dell, Compaq, Hewlett-Packard, IBM 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 and have in-country operations to service international
customers. 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.
SERVICES
ENTEX offers its customers a single source for distributed computing
management services, which encompass the design, configuration, integration and
ongoing management of
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an enterprise's distributed computing systems. ENTEX delivers total technology
management solutions to its customers at the desktop, network and enterprise
level. These services are comprised of three primary areas of expertise:
Outsourcing Services, Field Services and Consulting Services.
Outsourcing Services. Outsourcing -- or hiring outside experts to
manage information technology functions -- is becoming more common among
enterprises worldwide. The Company provides customers with Outsourcing Services
generally under long term contracts, 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. The Company may
incur significant initial costs consisting of both personnel costs and capital
expenditures, which are then recovered over the life of the contract.
As part of its outsourcing capabilities, the Company offers a variety
of 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;
application enablement; optimization and connectivity.
The Company provides on-site help desk services at customers'
locations, as well as centrally through the Company's Solution Line(R) service.
Help desk services provide support for end-user hardware and software inquiries
and support leading hardware, software and network products. The Company
provides national dispatch of field technicians through Serviceline(TM), the
Company's centralized national dispatch center.
The Company provides network management services for local-area,
wide-area and enterprise networks. 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.
Field Services. The Company provides trained technical personnel to
customers to augment and supplement their existing information technology staffs
or fill temporarily open positions. The Company provides oversight and human
resources management of the Field Services personnel, who are generally placed
under short term contracts (terms of less than 12 months). The services provided
by such personnel are similar in nature to the on-site services that the Company
provides within its Outsourcing division, including help desk; maintenance and
repair; warranty services; and desktop support services.
Consulting Services. The Company provides customers with analysis,
design, implementation, integration and optimization services on a project
basis. These services include: (i) design, installation and upgrade of
local-area, wide-area and enterprise networks; (ii) implementation of messaging
and internet/intranet technologies; (iii) comprehensive support to assist
customers with their network operating systems, network-based applications and
connectivity; (iv) design and installation of network, systems and enterprise
management solu-
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tions; (v) a wide range of PC and server migration services to assist customers
in transitioning from one computing environment to another, including Windows
NT(TM), Windows2000(TM) and BackOffice(TM) upgrades and migrations, local-area
network migrations, desktop operating system migrations and messaging
migrations.
OPERATIONS
The Company's sales and service structure combines the benefits of a
flexible, nationwide network of field offices with the efficiencies of
centralized back office functions and personnel, including help desk, remote
network management and national dispatch services specialists, to support the
Company's field personnel. The Company is organized into 19 areas comprising a
total of 39 locations in 27 states. These areas are organized into three
geographic regions (East, Central and West). Regional offices are located in or
near New York, New York; Chicago, Illinois; and Denver, Colorado.
The Company's National Service Center ("NSC") is located in an
approximately 141,000 square foot facility in Mason, Ohio and is the focal point
of ENTEX's nationwide service operations. The NSC houses Solution Line,
Serviceline, the Network Operations Center and the Customer Briefing Center.
PRICING OF SERVICES
Outsourcing Services are generally provided to customers pursuant to
service contracts which typically have a term of twenty-four to thirty-six
months. Outsourcing Services contracts can be terminated by the customer for
failure to perform specified services or at the option of the customer upon at
least 30 days notice. Although from time to time certain of the Company's
outsourcing contracts have been terminated, in the aggregate, such early
terminations have not been material. Such contracts provide for pricing on
either a time-and-materials basis; a fixed price, per seat basis (used primarily
for billing the Company's employees who are assigned to customer locations); or
a performance-oriented Service Level Agreement ("SLA"). Under the Company's
SLAs, fees for a specific suite of services are tied contractually to
pre-defined performance metrics or are determined on a "per seat" basis. Of the
Company's top 58 outsourcing contracts, approximately 72% provide revenue under
SLAs.
Field Services are generally provided to customers pursuant to service
contracts which typically have a term of three to twelve months. Field Services
contracts can be terminated by the customer for failure to perform specified
services or at the option of the customer upon at least 30 days notice.
Although from time to time certain of the Company's Field Services contracts
have been terminated, in the aggregate, such early terminations have not been
material. Such contracts provide for pricing on a time-and-materials basis.
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Consulting 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. Many of these contracts
provide for payment on a periodic basis, or upon the attainment of milestones.
In the remainder of cases, Consulting Services contracts provide for payment on
a time-and-materials basis. In each case, revenue is billed in accordance with
the terms of the contract.
SALES AND MARKETING
The Company targets its marketing efforts primarily at senior level
executive, financial and information management personnel at Fortune 1,000
companies and other large enterprises. ENTEX markets its services through its
national sales force of approximately 100 employees operating from its 39
office locations organized into 19 areas. The Company leverages its regional
structure by empowering its field offices to initiate, establish and manage
accounts in their areas and tailor service solutions to meet customer needs. On
more complex or larger projects, the field offices are supported by the
significant additional available technical expertise at the regional, national
or corporate levels. Although most of the field offices support multiple
accounts, several of the Company's field offices were established to service a
single large account. Bid preparation and/or negotiation is coordinated with the
Company's senior executives depending upon potential contract size. The
Company's sales personnel have a sales commission program which is designed to
constitute a significant portion of the employee's overall compensation.
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. The Company has entered into
arrangements with InfoProducts Europe, a division of Buhrmann N.V. based in The
Netherlands ("InfoProducts"), Otsuka Shokai in Japan ("Otsuka Shokai"), Migesa
in Mexico, Transmarco in Singapore and Senteq in Australia, as well as others.
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 1999, four of the Company's customers accounted for twenty
percent (20%) of its total net revenues, although no individual customer
accounted for more than 6% of such revenues. In Fiscal 1999, the Company
provided services to approximately one-half of the Fortune 200 U.S. based
companies.
VENDOR RELATIONSHIPS
In the Company's position as an independent provider of distributed
computing management services it has established and maintains strategic
relationships with leading manufacturers and suppliers. Such relationships
enable the Company to provide its customers with authorized warranty repairs.
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EMPLOYEES
As of June 27, 1999, the Company had over 5,800 full-time and full-time
equivalent employees including approximately 100 sales representatives. 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 service-oriented nature of the Company's business requires the
recruiting and training of a significant number of qualified technical
personnel. 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.
The Company's voluntary employee turnover for Fiscal 1999 was 32%.
REORGANIZATION AND DIVESTITURE
In November 1998, the Company reorganized its operations by creating
two operating units: ENTEX Technology Acquisition Services Division (the "TAS
Division") and ENTEX Services Division, each functioning as a separate operating
division within the Company. The TAS Division offered hardware and software
solutions to large businesses, including custom configuration, channel assembly,
electronic commerce and integration services. The Services Division was
comprised of the Company's current Outsourcing Services, Field Services and
Consulting Services divisions. The reorganization was intended to allow
each division to focus on anticipating trends and capitalize on new market
opportunities within their respective markets.
Effective May 10, 1999, ENTEX sold certain assets of the TAS Division
to CompuCom (the "TAS Sale"). The transaction was structured as an asset sale
for cash. Included in the TAS Sale was all of the inventory and equipment in the
Company's Erlanger, Kentucky Integration Center and its Corporate Account Call
Center in Mason, Ohio. Over 1,000 employees in the TAS Division became employees
of CompuCom. The TAS Division had revenues of approximately $2.0 billion in
Fiscal 1998. After giving effect to the proceeds of the $137.4 million received
by the Company from the TAS Sale, and after accounting for goodwill, inventories
and fixed assets and deal-related expenses, the TAS Sale resulted in a loss for
the Company of $16.7 million. This loss has been reflected as discontinued
operations in the accompanying condensed consolidated financial statements. The
operating results of the TAS Division have been classified as discontinued
operations. The accounts receivable of the TAS Division were not included in the
TAS Sale. The proceeds from the TAS Sale, together with accounts receivable of
the TAS Division which the Company has collected and continues to collect, are
being used to pay down accounts payable and interest-bearing obligations.
Simultaneously with the completion of the TAS Sale, the Company paid
approximately $78 million to repay in full its obligations under a secured line
of credit from FINOVA Capital Corporation.
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BUSINESS FACTORS
Investors should carefully consider all of the information contained
herein, including the following business factors. In addition, this Form 10-K
contains certain forward looking statements and trend analysis based on current
expectations. Actual results may differ materially due to a number of factors,
including those set forth below.
High Degree of Leverage; Dependence on IBMCC; Future Capital Needs
As of June 27, 1999, after giving effect to the TAS Sale, the
application of the net proceeds therefrom and the collection of the accounts
receivable from the TAS Division through such date, the Company had outstanding
indebtedness of approximately $228.3 million. This 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.
The Company's working capital is financed under a revolving line of
credit of up to $250 million (the "IBMCC Working Capital Line of Credit") with
IBM Credit Corporation ("IBMCC"). The amount of available borrowings under such
agreement are asset based. As a result of the disposition of the TAS Division
assets, the available line of credit was reduced to $150 million on August 10,
1999 and thereafter. The IBMCC Working Capital Line of Credit expires on July
31, 2001 and can be terminated by IBMCC upon 60 days' prior notice. During the
period beginning May 10, 1999 and ending November 9, 1999, the borrowing base
under the IBMCC Working Capital Line of Credit has been expanded to allow the
Company up to $20 million greater credit availability than otherwise would be
allowed. There can be no assurance that IBMCC will not terminate the IBMCC
Working Capital Line of Credit. 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 and the Company's 12-1/2%
Senior Subordinated Notes due 2006 contain or incorporate by reference through
cross-default provisions a number of significant covenants that, among other
things, restrict the ability of the Company
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to (i) declare dividends or redeem or repurchase capital stock, (ii) prepay,
redeem or purchase debt, (iii) incur liens and engage in sale-leaseback
transactions, (iv) make loans and investments, (v) incur additional
indebtedness, (vi) amend or otherwise alter debt and other material agreements,
(vii) engage in mergers, acquisitions and asset sales, (viii) enter into
transactions with affiliates and (ix) 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, accounts receivable and certain
intellectual property of the Company and such guarantor subsidiaries. In
addition, under the IBMCC Working Capital Line of Credit, the Company is
required to comply with financial covenants with respect to (i) ratio of current
assets to current liabilities, (ii) minimum tangible net worth and (iii) ratio
of earning before interest, taxes, depreciation and amortization ("EBITDA") to
interest expense. 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.
Fluctuations in Operating Results
The Company's operating results have varied in the past, and the
Company expects its operating 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 distributed computing related services in
general and demand for the Company's services in particular. The Company's
operating results may be especially sensitive to changes in 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 utilization rate of service personnel and
competitive conditions. 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 all of these factors, the Company believes
that its operating results are likely to vary.
Intense Competition
The information services industry is intensely competitive, and
management believes competition will intensify in the future. As an independent
provider of distributed computing management services, ENTEX competes with
companies which can provide a combination of product procurement and services
such as PC systems integrators; high-end systems integrators; PC resellers and
distributors; specialty service providers and PC manufacturers. PC systems
integrators include CompuCom, GE Capital Information Technology Solutions,
Inacom and Wang. High-end system integrators have traditionally been
mainframe-oriented service providers and include Andersen Consulting, Computer
Sciences Corporation, IBM Global
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Services and SHL Systemhouse, a division of Electronic Data Systems Corporation.
PC resellers and distributors include Ingram Micro, Tech Data and MicroAge.
Specialty service providers are firms which have focused their business
exclusively on providing PC and network related services and include
International Network Services, Alternative Resources Corporation, DecisionOne
and Technology Service Solutions. Manufactures such as Compaq, Dell, Hewlett
Packard, IBM and Unisys are increasing direct sales to the Company's customer
base and raising the services content of their selling effort. 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 and have
in-country operations to service international customers. 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. 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.
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 service operations require the
recruiting and training of a significant number of qualified technical
personnel. 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 turnover for Fiscal 1999 was 32%.
Contract Pricing Policy
The Company has for several years focused its pricing policies for
service offerings 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 meet any service
and support performance metrics. Failure by the Company to accurately estimate
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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
provides certain warranty services to its customers 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.
Rapid Technological Change
The information technology 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 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 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.
Management of Transition to Service Focus
The Company has recently completed a reorganization into two divisions
followed by the subsequent sale of the TAS Division. This reorganization and
divestiture have placed a significant strain on the Company's management,
financial, sales, technical and support systems and personnel. The Company's
efforts to transition to a service only business effectively will divert
significant management resources and attention from day-to-day operations. The
Company has only recently begun to operate as a service only business. To the
extent that this transition requires more time or resources to complete or is
less successful than anticipated, it could have a material adverse effect on the
Company.
Dependence on National Service Center
A number of the Company's service offerings depend on central service
and dispatch coordination from its NSC in Mason, Ohio. Disruption of operations
at the Mason facility, including power or telecommunications failures, natural
disasters such as fires, tornadoes or floods, or work stoppages, would have a
material adverse effect on the Company's business, operating results and
financial condition.
Control by Principal Stockholders
The directors and executive officers of the Company beneficially own
substantially in excess of a majority of the outstanding shares of common stock,
$.0001 par value, of the
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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 the Cameron 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 the Cameron Affiliates, is subject to a
Stockholders' Agreement dated as of December 10, 1993, as amended (the
"Stockholders' Agreement"). In 1983, Mr. Cameron, the Chairman of the Board of
Directors and a co-founder of the Company, was diagnosed with multiple
sclerosis.
Year 2000 Readiness
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 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 "Y2K-ready" or not.
Renovation is the process in which systems undergo necessary upgrades or
replacements or are retired. Validation is the process in which renovated
systems are tested within the Company's infrastructure to validate that either
the readiness assessment is correct or that the renovated system or component
can be integrated without causing or being affected by a Year 2000 impact.
Implementation is the process in which a prepared 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 then-current business operations and assessed for compliance
status. Based on this review, the Company scheduled each system either for
renovation or validation.
Effective May 10, 1999, the Company sold certain assets of the TAS
Division. The applications and systems used to support that portion of the
business were maintained through August 13, 1999. Efforts with regard to
Y2K-readiness for such applications and systems were either completed before the
sale or halted as a result of the sale. Renovation and validation activities
have been reduced to address only those required to support ongoing operations.
11
<PAGE> 14
Assessments have also been completed in the systems processing and
telecommunications environments. A similar activity in the employee desktop
environment was completed in March 1999. The Company's inventory and assessment
of its non-IT systems (facilities and security systems) was completed in April
1999 and will be Y2K-ready by September 30, 1999. An effort to replace the
Company's core financial reporting system is underway and expected to be
completed by April 1, 2000. The current environment will be validated by October
15, 1999 and will remain in place until final cut over is complete.
As a result of these efforts, the Company intends to implement any
required changes or upgrades by October 31, 1999, with validation of these
changes and upgrades scheduled shortly thereafter. Contingency plans have
been developed for specific business processes and related applications in the
event the Company experiences outages of up to a five day duration resulting
from the failure of a system to properly address the Year 2000 issue. Such
plans are based on the Company's assessment of its ability to successfully make
and validate all required changes and upgrades. The worst case scenario
involves outages that exceed five business days and extend indefinitely. The
Company is committed to supplementing the existing contingency plans with
long-term plans in the event that successful validation of applications changes
and upgrades has not occurred by November 15, 1999.
Total costs to complete the Company's Year 2000 efforts for ongoing
operations are estimated at approximately $4.3 million. As of August 31, 1999,
the Company has spent approximately $3.2 million. The remaining amount is for
completing necessary equipment upgrades before October 1999 and providing staff
contingency support through March 2000.
In addition to upgrading its own systems, the Company has contacted
certain significant customers and suppliers to determine their Year 2000
readiness profile. To date, the Company has not received any information that
would indicate that the Year 2000 would result in any significant disruption
from such customers and suppliers.
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 readiness initiatives will have a
material adverse effect on the Company's business, operating results or
financial condition, there can be no assurance that the costs associated with
updating software or recovering from potential systems interruptions would not
have a material adverse effect on the Company's business, operating results and
financial condition.
12
<PAGE> 15
ITEM 2. PROPERTIES.
The Company's headquarters are located in Rye Brook, New York, where
the Company leases approximately 31,200 square feet of office space under a
lease which expires on May 30, 2002, approximately 12,100 square feet under a
lease which expires May 31, 2002 and approximately 3,800 square feet under a
lease which expires May 31, 2000. As of September 11, 1999, the Company also
leases approximately 141,000 square feet of office space in Mason, Ohio, which
houses the Company's NSC, including Solution Line, dispatch services and a
training center. The lease for such property expires on July 17, 2005. The
Company leases approximately 19,200 square feet of office space in Canton,
Massachusetts to accommodate the Company's data processing and credit and
collections departments under a lease which expires June 30, 2003.
The Company leases additional office space for sales, services and
support staff in various states. The Company believes that alternate office
space is available on comparable terms in each location.
ITEM 3. LEGAL PROCEEDINGS.
The Company is engaged in legal actions arising in the ordinary course
of business but is not currently a party to any legal actions which could have a
material adverse effect on its business, financial conditions or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
fourth quarter of Fiscal 1999.
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<PAGE> 16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
As of June 27, 1999, the Company had outstanding 32,437,070 shares of
Common Stock, $.0001 par value, held by approximately 2,205 stockholders and no
shares of preferred stock. There is no established public trading market for any
class of the Company's equity securities.
The Company has not paid any dividends on any of its capital stock and
does not anticipate that any cash dividends will be declared in the foreseeable
future. The IBMCC Working Capital Line of Credit prohibits the payment of
dividends.
In Fiscal 1999, the Company did not issue or sell any unregistered
securities.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements of the Company and the
related notes thereto and Management's Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere herein. The consolidated
financial data as of and for the fiscal years ended July 2, 1995, June 30, 1996,
June 29, 1997, June 28, 1998, and June 27, 1999 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 27, 1999 and June 28, 1998 and for each of the years in
the three year period ended June 27, 1999, and the report thereon, are included
elsewhere in this Form 10-K. The information set forth herein has been adjusted
for stock dividends. See Note 7 of Notes to Consolidated Financial Statements.
14
<PAGE> 17
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------------------------------------------------------
June 27, June 28, June 29, June 30, July 2,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands, except share data)
<S> <C> <C> <C> <C> <C>
Statements of Operations Data:
Net revenues ........................... $ 483,619 $ 436,361 $ 339,704 $ 201,008 $ 126,843
Cost and expenses:
Cost of services provided ........ 368,269 334,219 259,507 163,381 106,836
Inventory charges ................. 1,000 -- -- -- --
Selling, general and administrative
expenses .......................... 145,611 147,937 125,982 96,156 66,293
Restructuring charges: ............ 2,000 -- -- -- --
Unusual charges ................... 3,800 -- -- -- --
Loss from operations............... (37,061) (45,795) (45,785) (58,529) (46,286)
Non-recurring stock compensation
charges ........................... -- -- -- 3,637 --
--------------------------------------------------------------------------------------
Interest expense net ................... 36,548 36,663 37,147 29,726 23,151
Other income ........................... 708 -- 462 -- --
-------------------------------------------------------------------------------------
Loss from continuing operations before
income taxes ........................... (72,901) (82,458) (82,470) (91,892) (69,437)
Provision for income taxes ............. 2 (1) 25 28 --
-------------------------------------------------------------------------------------
Loss from continuing operations ........ (72,903) (82,457) (82,495) (91,920) (69,437)
Discontinued operations:
Income (loss) from operations (net
of income tax expense) ............ (11,275) 100,600 84,039 66,244 40,183
Loss on disposal .................. (16,743) -- -- -- --
--------------------------------------------------------------------------------------
Net income (loss) ...................... $ (100,921) $ 18,143 $ 1,544 $ (25,676) $ (29,254)
======================================================================================
</TABLE>
15
<PAGE> 18
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------------------------------------------------------
June 27, June 28, June 29, June 30, July 2,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands, except share data)
Common Share Data(1):
<S> <C> <C> <C> <C> <C>
Continuing operations .................. (2.25) (2.55) (2.55) (2.93) (2.22)
Discontinued operations ................ $ (.86) 3.11 2.60 2.11 1.28
---------------------------------------------------------------------------------------
Basic and diluted earnings (loss) per
share .................................. $ (3.11) $ .56 $ (.05) $ (.82) $ (.94)
=======================================================================================
Basic and diluted weighted average
number of shares of common stock
outstanding............................. 32,417,274 32,357,968 32,281,463 31,348,340 31,333,300
======================================================================================
</TABLE>
<TABLE>
<CAPTION>
As of
---------------------------------------------------------------------------
June 27, June 28, June 29, June 30, July 2,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets....................... $233,755 $736,419 $683,590 $590,588 $415,170
Total long-term liabilities........ 124,546 53,900 49,486 52,509 37,224
Stockholders' equity (deficit)..... (119,971) (19,145) (37,732) (39,515) (31,305)
</TABLE>
(1) See Note 1 of Notes to Consolidated Financial Statements for an
explanation of the calculation of weighted average number of shares
outstanding.
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<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.
This section contains trend analysis and other forward-looking
statements based on current expectations. Actual results may differ materially,
due to a number of factors including those set forth in the section entitled
"Business Factors" contained in Item 1.
OVERVIEW
ENTEX, a company engaged in principally one line of business, is a
leading provider of distributed computing management solutions in the United
States, managing more than 700,000 personal computer desktops largely at Fortune
1000 companies. The Company provides information technology services to meet the
support requirements of its customers for their local-area networks, wide-area
networks, and end users.
During Fiscal 1996 and 1997, the Company completed several acquisitions
to improve its ability to meet customer demands for expanded service offerings,
including the acquisitions of (i) Random Access, Inc. ("Random Access"), a
provider of information technology solutions through the sale of microcomputers
and technical services to corporate and institutional customers in the western
United States, and (ii) FCP Technologies, Inc. ("FCP"), a systems integrator
specializing in network integration, migration and consulting services. Each
acquisition was accounted for as a purchase and the results of each have been
included in the consolidated financial statements since the date of each
acquisition. See Note 2 of Notes to Consolidated Financial Statements.
On May 10, 1999, the Company sold certain assets of the TAS Division to
CompuCom. The transaction was structured as an asset sale for cash. Included in
the sale were all of the inventory and equipment in the Company's Erlanger,
Kentucky Integration Center and its Corporate Account Call Center in Mason,
Ohio. Over 1,000 employees in the Company's former TAS Division became employees
of CompuCom. After giving effect to the proceeds of $137.4 million received by
the Company for the transaction, and after accounting for goodwill, inventories,
fixed assets, and deal-related expenses, the transaction resulted in a loss of
$16.7 million. This loss is reflected in discontinued operations in the
accompanying condensed consolidated financial statements. The operating results
of the TAS Division have been classified as discontinued operations. The
accounts receivable of the TAS Division were not included in the TAS Sale. The
proceeds from the TAS Sale, together with the accounts receivable of the TAS
Division which the Company has collected and continues to collect, are being
used to pay down accounts payable and interest-bearing obligations.
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:
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<PAGE> 20
<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------------------------------------------------
June 27, 1999 June 28, 1998 June 29, 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net revenues ............................... 100.0% 100.0% 100.0%
Cost of services provided .................. 76.2 76.6 76.4
Inventory charges .......................... 0.2 -- --
Selling, general and administrative
expenses.................................... 30.1 33.9 37.1
Restructuring charges ...................... 0.4 0.0 0.0
Unusual charges ............................ 0.8 0.0 0.0
------------ ------------- -------------
Loss from operations ....................... (7.7) (10.5) (13.5)
Interest expense, net ...................... 7.6 8.4 10.9
Other expense (income) ..................... (0.1) 0.0 (0.1)
------------ ------------- -------------
Loss from continuing operations before
income taxes ........................... (15.1) (18.9) (24.3)
Provision (benefit) for income taxes........ -- -- --
------------ ------------- -------------
Loss from continuing operations ............ (15.1) (18.9) (24.3)
Discontinued operations .................... (5.8) 23.1 24.7
------------ ------------- -------------
Net income (loss) .......................... (20.9)% 4.2% 0.4%
============ ============= =============
</TABLE>
FISCAL 1999 COMPARED TO FISCAL 1998
Consolidated net loss for Fiscal 1999 was $100.9 million compared to
consolidated net income of $18.1 million for Fiscal 1998. The results for Fiscal
1999 include a restructuring charge and related non-recurring unusual items
totaling $6.8 million and a $988,000 gain on the early retirement of $3.75
million of debt. The results also include a loss from discontinued operations of
$28.0 million. Excluding these items, the net loss from continuing operations
would have been $67.1 million.
Revenues: Revenues were $483.6 million in Fiscal 1999 as compared to
$436.4 million in Fiscal 1998, an increase of $47.2 million or 10.8%. The
increase reflects increased demand from existing customers and the addition of
new large accounts.
Gross margin: Gross margin (excluding the charge associated with the
liquidation of excess spare parts) increased to 23.8% in Fiscal 1999 as compared
to 23.4% in Fiscal 1998. This represents an increase of $13.2 million or 13% to
$115.3 million, reflecting operating efficiencies on increased revenues.
Including the inventory charge, gross margin in 1999 was 23.6%.
Selling, general and administrative expenses: Selling, general and
administrative expenses as a percentage of revenues decreased to 30.1% in Fiscal
1999 from 33.9% in Fiscal 1998. Selling, general and administrative expenses
were $145.6 million in Fiscal 1999 as
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<PAGE> 21
compared to $147.9 million in Fiscal 1998, a decrease of $2.3 million,
reflecting cost reductions as a result of the reorganization announced in the
second quarter ended December 27, 1998.
Loss from operations: Loss from operations was $37.1 million for Fiscal
1999 as compared to $45.8 million for Fiscal 1998. This improvement reflects the
impact of higher revenues and better margin, partially offset by the
restructuring charges and unusual items. Excluding the restructuring charges and
unusual items, loss from operations for Fiscal 1999 was $31.3 million. See Note
3 to the Condensed Consolidated Financial Statements for additional details
concerning the restructuring charge and unusual items.
Interest expense, net: Net interest expense totaled $36.5 million for
Fiscal 1999 as compared to $36.7 million for Fiscal 1998. The expense includes
amounts paid to support the working capital needs of the TAS Division. The
decrease was driven by reductions in debt levels, partially offset by the higher
borrowing rates associated with the 12 1/2% Senior Subordinated Notes due 2006.
Other income: Other income represents a $988,000 gain on the early
retirement of debt partially offset by a $280,000 Company share of loss in
Knowledge Alliance Holdings, Inc. ("KAH").
Discontinued operations: Loss from discontinued operations was $28.0
million for Fiscal 1999, which includes a loss on disposal of $16.7 million.
This compares to income from discontinued operations of $100.6 million in Fiscal
1998. The loss reflects lower revenues and a decrease in gross margin from 10.5%
to 7.9%. In addition, special inventory charges related to the expedited
liquidation of inventory, as opposed to through the normal course of business,
contributed to the loss. Partially offsetting these items are lower selling,
general and administrative expenses. In addition, the loss in Fiscal 1999
includes the restructuring charge and unusual items attributable to discontinued
operations recorded in the second quarter of the current year. See Notes 2
and 3 to the Condensed Consolidated Financial Statements for additional details
concerning the restructuring charge and unusual items.
Net income (loss): As a result of the factors mentioned above, net loss
for Fiscal 1999 was $100.9 million as compared to net income of $18.1 million
for Fiscal 1998.
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.
Revenues: Revenues were $436.4 million for Fiscal 1998 as compared to
$339.7 million for Fiscal 1997, an increase of $96.7 million or 28.5%. These
increases reflected increase in demand from existing customers and the addition
of new large accounts.
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<PAGE> 22
Gross margins: Service margin percentage remained essentially flat at
23.4% in Fiscal 1998 and 23.6% in Fiscal 1997.
Selling, general and administrative expenses: Selling, general and
administrative expenses increased to $147.9 million in Fiscal 1998 as compared
to $126.0 million in Fiscal 1997 reflecting increased investments in training
and field operations as well as higher allocation of corporate overhead to
support service revenue growth. Selling, general, and administrative expenses as
a percentage of total revenues decreased to 33.9% in Fiscal 1998 from 37.1% in
Fiscal 1997.
Loss from operations: Loss from operations was $82.5 million in Fiscal
1998 and Fiscal 1997. The growth in the service revenues and margins was
completely offset by increases in selling, general and administrative expenses
to support the service business expansion.
Interest expense, net: Interest expense (including amounts to support
the working capital needs of the TAS Division) decreased slightly to $36.7
million in Fiscal 1998 from $37.1 million in Fiscal 1997, a decrease of $484 or
1.3%. The decrease was driven by reductions in debt levels.
Provisions for income taxes: The Company utilized net operating loss
carry-forwards to offset federal income tax requirements in Fiscal 1998. While
the Company considered the improved operations over the course of fiscal year
1997 and 1998, the Company did not believe that it had sufficient reason to
conclude that it was more likely than not that the deferred tax asset would be
realized.
Net income: As a result of the factors mentioned above, net income in
Fiscal 1998 was $18.1 million compared to net income of $1.5 million in Fiscal
1997.
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
$26.9 million, $54.8 million and $(26.1) million in Fiscal 1999, 1998 and 1997,
respectively. Cash was provided by operations during Fiscal 1999 despite the net
loss of $100.9 million due to the non-cash impact resulting from write-off of
goodwill, non-cash portion of the restructuring and unusual charges and
depreciation and amortization, combined with wind down of operating assets and
liabilities, principally receivables, inventory, and payables of the TAS
Division. Cash provided from operations during 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 reflected higher working capital needs resulting from growth in
revenues.
20
<PAGE> 23
Cash provided by investing activities was $117.3 million in fiscal 1999
and principally reflected the sale of TAS Division. In addition, $20.6 million
was used for capital expenditures. In Fiscal 1998 and 1997 cash of $19.7 million
and $21.7 million, respectively was used for capital expenditures.
Cash provided from (used in) financing activities was $(145.8) million,
$(36.7) million and $57.2 million in Fiscal 1999, 1998 and 1997, respectively.
The proceeds from the TAS Sale during Fiscal 1999 were principally used to pay
down accounts payable and interest bearing debt. The fluctuations in cash from
financing activities during these periods resulted primarily from changes in the
Company's borrowings to support the business growth and availability of cash
from operations.
As of June 27, 1999, the Company's primary source of liquidity
consisted of financing provided by IBMCC. The IBMCC Working Capital Line of
Credit provided for borrowings of up to $250 million, the interest bearing
portion of which was $98.3 million as of June 27, 1999. As a result of the
disposition of the TAS Division assets, the available line of credit was reduced
to $150 million on August 10, 1999 and thereafter. The IBMCC Working Capital
Line of Credit is asset based, and management believes that the amount which
will be available to it thereunder will meet the Company's liquidity needs for
the next 12 months. The amount of available borrowings and such line of credit
expire on July 31, 2001, and can be reduced or terminated by IBMCC upon 60 days'
prior notice. Amounts outstanding under the IBMCC Working Capital Line of Credit
bear interest at the LIBOR plus 3.00% (7.9% at June 27, 1999). Borrowings under
the IBMCC Working Capital Line of Credit are secured by the Company's assets,
including accounts receivable, certain inventories and other assets.
In connection with the Company's acquisition of Random Access in
September 1995, the IBMCC Working Capital Line of Credit was amended to provide
a long-term loan in the aggregate principal amount of $20 million (the
"Long-Term Loan"). The IBMCC Working Capital Line of Credit was further amended
in December 1996 to provide for a short-term loan in the original principal
amount of $55 million (the "Short-Term Loan") and a special working capital
advance in the original principal amount of $20 million (the "Special Working
Capital Advance"). As a result of the offering of $100 million aggregate
principal amount of 12 1/2% Senior Subordinated Notes due 2006 by the Company
which occurred in July 1998 (the "Notes Offering"), the Long-Term Loan and the
Special Working Capital Advance were paid in full to IBMCC. The Short-Term Loan
was paid in full prior to the Notes Offering.
The IBMCC Working Capital Line of Credit 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 addition, the IBMCC Working Capital Line of Credit contains
restrictive covenants which require the Company to, among other things: (i)
maintain a ratio of current assets to current liabilities of at least 0.72 to
1.00 from September 1999 through March 2000, 0.74 to 1.00 from June 2000 through
September 2000, and 0.85 to 1.00 thereafter; (ii) maintain the ratio of EBITDA
to interest expense for the fiscal quarter ending September 30, 1999 (1.10 to
1.00), for the fiscal quarter ending December 31, 1999 (1.15 to 1.00), for the
fiscal quarter ending March 31, 2000 (1.20 to 1.00), for the fiscal quarter
ending June 30, 2000 (1.40 to 1.00), and for any fiscal quarter thereafter (1.80
to 1.00); and (iii) maintain at the end of the fiscal quarter ending September
30, 1999, a tangible net worth of negative $12 million, and as of the end of
each fiscal quarter thereafter the sum of tangible net worth for the previous
fiscal quarter (or, in
21
<PAGE> 24
the event there is a loss for such previous quarter, $0) plus eighty percent
(80%) of the Consolidated Net Income for such previous fiscal quarter plus one
hundred percent (100%) of the net proceeds received from the issuance of
additional equity.
In addition, the IBMCC Working Capital Line of Credit prohibits the
Company from paying cash dividends on Common Stock.
On July 29, 1998, the Company completed the Notes Offering (see
Note 5 to the Company's consolidated financial statements).
Capital expenditures totaled $20.7 million during Fiscal Year 1999. The
Company believes its current cash balances and its available credit facilities
will be sufficient to meet its anticipated cash needs for capital expenditures
for the next 12 months. The Company intends to continue to finance a significant
portion of its working capital needs through credit facilities. The Company
believes that it may seek to raise additional funds through public or private
equity or debt financing or from other sources to support the future growth of
the business. However, there can be no assurance that the Company will be able
to raise such additional funding.
Year 2000 Readiness
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 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 "Y2K-ready" or not.
Renovation is the process in which systems undergo necessary upgrades,
replacements or are retired. Validation is the process in which renovated
systems are tested within the Company's infrastructure to validate that either
the readiness assessment is correct or that the renovated system or component
can be integrated without causing or being affected by a Year 2000 impact.
Implementation is the process in which a prepared system is installed into the
Company's production environment and is utilized to support business operations.
22
<PAGE> 25
The Company completed an inventory of its applications systems in
December 1997. More than 30 systems were identified, prioritized according to
criticality to then-current business operations, and assessed for compliance
status. Based on this review, the Company scheduled each system either for
renovation or validation. An initiative was also begun to install certain
modules in the SAP R/3(TM) Enterprise Requirements Planning (ERP) product to
address Year 2000 preparedness in many of the systems identified in the
Company's inventory. In December 1998 the Company abandoned implementation of
SAP R/3(TM) and has written off its investment of $10.7 million.
Effective May 10, 1999, the Company sold certain assets of the TAS
Division. The applications and systems used to support that portion of the
business were maintained through August 13, 1999. Efforts with regard to
Y2K-readiness for such applications and systems were either completed before the
sale or halted as a result of the sale. Renovation and validation activities
have been reduced to address only those required to support ongoing operations.
Assessments have also been completed in the systems processing and
telecommunications environments. A similar activity in the employee desktop
environment was completed in March 1999. The Company's inventory and assessment
of its non-IT systems (facilities and security systems) was completed in April
1999 and will be Y2K-ready by September 30, 1999. An effort to replace the
Company's core financial reporting system is underway and expected to be
completed by April 1, 2000. The current environment will be validated by October
15, 1999 and will remain in place until final cut over is complete.
As a result of these efforts, the Company intends to implement any
required changes or upgrades by October 31, 1999, with validation of these
changes and upgrades scheduled shortly thereafter. Contingency plans have been
developed for specific business processes and related applications in the event
the Company experiences outages of up to a five day duration resulting from the
failure of a system to properly address the Year 2000 issue. Such plans are
based on the Company's assessment of its ability to successfully make and
validate all required changes and upgrades. The worst case scenario involves
outages that exceed five business days and extend indefinitely. The Company is
committed to supplementing the existing contingency plans with long-term plans
in the event that successful validation of applications changes and upgrades has
not occurred by November 15, 1999.
Total costs to complete the Company's Year 2000 efforts for ongoing
operations are estimated at approximately $4.3 million. As of August 31, 1999,
the Company has spent approximately $3.2 million. The remaining amount is for
completing necessary equipment upgrades before October 1999 and providing staff
contingency support through March 2000.
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<PAGE> 26
In addition to upgrading its own systems, the Company has contacted
certain significant customers and suppliers to determine their Year 2000
readiness profile. To date, the Company has not received any information that
would indicate that the Year 2000 would result in any significant disruption
from such customers and suppliers.
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 readiness initiatives will have a
material adverse effect on the Company's business, operating results or
financial condition, there can be no assurance that the costs associated with
updating software or recovering from potential systems interruptions would not
have a material adverse effect on the Company's business, operating results and
financial condition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The Company is exposed to interest rate risk primarily through its
asset based financing agreement. The Company utilizes these borrowings to meet
its working capital needs. As of June 27, 1999, the Company had borrowings of
approximately $98.3 million outstanding which have a variable interest rate of
7.9%. Using a yield to maturity analysis and assuming an increase in interest
rate on these borrowings of 25 basis points, future annual cash flows would be
negatively effected by $246,000. The interest rate variability on all other debt
would not have a material adverse effect on the Company's financial statements.
Currently, the Company does not enter into financial instruments for
trading or other speculative purposes or to manage interest rate exposure.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 14 for an index of the Company's Consolidated Financial
Statements and related schedule filed herewith.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly statements
of operations data for the eight quarters ended June 27, 1999, 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
24
<PAGE> 27
elsewhere herein. The operating results for any quarter are not indicative of
the operating results for any future period.
25
<PAGE> 28
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------------------------------------------------------
June 27, March 28, December 27, September 27, June 29, March 29, December 28, September 28,
1999 1999 1998 1998 1998 1998 1997 1997
---- ---- ---- ---- ---- ---- ---- ----
(In thousands, except per share data)
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues .......... $127,159 $121,470 $121,141 $113,849 $115,461 $111,180 $107,087 $102,633
Costs and expenses:
Cost of services
provided ......... 98,396 96,217 90,563 83,093 85,702 85,550 85,041 77,926
Inventory charges ..... -- -- 1,000 -- -- -- -- --
Selling, general and
administrative
expenses ......... 31,636 33,602 39,725 40,648 37,770 36,174 36,513 37,480
Restructuring charges . -- -- 2,000 -- -- -- -- --
Unusual charges ....... -- 2,500 1,300 -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from
Operations ....... (2,873) (10,849) (13,447) (9,892) (8,011) (10,544) (14,467) (12,773)
Interest expense, net . 7,351 10,487 9,015 9,695 8,965 8,702 9,327 9,669
Other expense (income) 280 (413) (575) -- --
-------- -------- -------- -------- -------- -------- -------- --------
Loss from continuing
operations before
income taxes ..... (10,504) (20,923) (21,887) (19,587) (16,976) (19,246) (23,794) (22,442)
Provision
For income taxes . -- -- 1 1 -- 1 (1) (1)
-------- -------- -------- -------- -------- -------- -------- --------
income (loss)
from continuing
operations ....... (10,504) (20,923) (21,888) (19,588) (16,976) (19,247) (23,793) (22,441)
-------- -------- -------- --------- -------- -------- -------- --------
Discontinued
operations:
Income (loss) from
Operations
(net of income tax
expense) ......... 5,492 (9,646) (12,909) 5,788 17,100 24,113 32,246 27,141
Loss on disposal ...... -- (16,743) -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Net Income (loss) ..... $ (5,012) $(47,312) $(34,797) $(13,800) $ 124 $ 4,866 $ 8,453 $ 4,700
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
26
<PAGE> 29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The executive officers, directors and other key employees of the
Company, and their ages and positions as of June 27, 1999, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Dort A. Cameron III 54 Chairman of the Board of Directors
John A. McKenna, Jr. 44 Chief Executive Officer and Director
Kenneth A. Ghazey 43 President and Director
Richard Nathanson(1) 42 President, Services Division
Michael G. Archambault 47 Senior Vice President, Chief Financial Officer and Treasurer
Lynne A. Burgess 49 Senior Vice President, General Counsel and Assistant
Secretary
Spencer J. McIlmurray 45 Senior Vice President, Chief Information Officer
Shirley S. Mehta 45 Vice President and Controller
Kim Nathanson 43 Senior Vice President, Human Resources
R. Randolph Devening(2) 57 Director
Linwood A. Lacy, Jr.(2) 54 Director
Frank W. Miller(2) 54 Director
</TABLE>
1 Mr. Nathanson resigned in August 1999.
2 Member of the Audit and Compensation Committees.
27
<PAGE> 30
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. Mr. Cameron
holds a B.A. from Middlebury College and an M.B.A. from Boston University. In
1983, Mr. Cameron was diagnosed with multiple sclerosis.
Mr. McKenna co-founded the Company in August 1993, and has served as a
Director 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. Mr. McKenna holds a B.A. from Trinity College.
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 recycling company, from 1993 to December 1996. Mr.
Ghazey is a Certified Public Accountant and holds a B.S. in Accounting from the
University of Vermont.
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. From
October 1998 to August 1999, Mr. Nathanson 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. 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. Mr. Archambault is a
Certified Public Accountant and holds an M.S. in Accounting and a B.S. in
Finance from Northeastern University.
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 to
the law firm of Collier, Shannon, Rill and Scott, specializing in commercial and
antitrust matters. Ms. Burgess holds a B.A. from William Smith College and a
J.D. from Fordham University School of Law.
28
<PAGE> 31
Mr. McIlmurray joined the Company in September 1998 as Senior Vice
President, Chief Information Officer. From 1993 to 1998. Mr. McIlmurray served
as Vice President, Information Technology Services, for Avon Products, Inc., a
global direct seller of consumer packaged goods. Mr. McIlmurray holds a B.A.
from Boston College and an M.B.A. from Cornell University.
Ms. Mehta joined the Company in February 1997 as Assistant Controller
and has served as Vice President and Controller since December 1998. From June
1988 to February 1997, Ms. Mehta held a variety of financial management
positions at Kraft General Foods, a subsidiary of the Philip Morris
Companies, most recently as Financial Director. Ms. Mehta is a Certified Public
Accountant and holds an M.B.A. in Accounting and Finance from the Graduate
School of Business, Columbia University and a B.A. in Economics from
Fordham University.
Ms. Nathanson joined the Company in July 1996 as Vice President of
Paragon Programs in connection with the Company's acquisition of FCP. From
October 1998 to May 1999, she served as Senior Vice President of Product
Management. Ms. Nathanson has served as the Company's Senior Vice President,
Human Resources since May 1999. Prior to joining the Company, Ms. Nathanson
served as the Chief Operating Officer and Chairman of the Board of FCP, a
company which she co-founded in 1984.
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 Food Brands 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. Mr. Devening serves as a director of Hancock Fabrics Inc.,
and Hussman Corporation. Mr. Devening holds a B.A. from Stanford University and
an M.B.A. from the Harvard Graduate School of Business.
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. and
pcOrder.com, Inc., as well as several private companies. Mr. Lacy holds a B.S.
in Chemical Engineering and an M.B.A. from the University of Virginia.
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 as a director to other private companies and a high yield investment
fund. Through Miller Associates, Inc., Mr. Miller served as an interim Chief
Executive Officer and Director of a privately held workout credit for Cherrydale
Farms, Inc., which filed for bankruptcy protection on March 15, 1999. Mr. Miller
holds a B.S. in Industrial Management from the Lowell Technological Institute.
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.
29
<PAGE> 32
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 option plans and makes recommendations to the Board of Directors
regarding such matters.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
All reports required to be filed pursuant to Section 16(a) of the
Exchange Act were timely filed.
ITEM 11. EXECUTIVE COMPENSATION.
EXECUTIVE OFFICER COMPENSATION
The following table sets forth information concerning the compensation
paid by the Company during the Company's fiscal years ending June 27, 1999, June
28, 1998 and June 29, 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"):
<TABLE>
<CAPTION>
NAME AND PRINCIPAL FISCAL ANNUAL LONG TERM COMPENSATION
POSITION YEAR COMPENSATION AWARD
---------------------------------------------------------------------
SECURITIES ALL OTHER
SALARY BONUS(1) UNDERLYING COMPENSATION
------ -------- OPTIONS/SAR(2) ------------
($) ($) -------------- ($)
<S> <C> <C> <C> <C> <C>
John A. McKenna, Jr. .... 1999 425,000 800,000 -- 28,733
Chief Executive Officer 1998 373,461 127,750 30,000 17,533
1997 350,000 150,171 -- 21,333
Kenneth A. Ghazey(3) .... 1999 366,827 806,000 -- 27,099
President 1998 298,462 100,375 -- 12,299
1997 126,923 0 880,000 5,195
</TABLE>
30
<PAGE> 33
<TABLE>
<CAPTION>
NAME AND PRINCIPAL FISCAL ANNUAL LONG TERM COMPENSATION
POSITION YEAR COMPENSATION AWARD
---------------------------------------------------------------------
SECURITIES ALL OTHER
SALARY BONUS(1) UNDERLYING COMPENSATION
------ -------- OPTIONS/SAR(2) ------------
($) ($) -------------- ($)
<S> <C> <C> <C> <C> <C>
John F. Lyons(4) ........ 1999 244,711 409,375 -- 3,096
President, TAS Division 1998 199,520 88,750 25,000 2,933
1997 174,462 101,516 -- 4,175
Richard Nathanson(5) .... 1999 239,615 167,500 -- 1,035
President, Services 1998 193,800 117,910 -- 344
Division
1997 258,048 193,787(6) 187,395 2,041
Michael G. Archambault(7) 1999 246,854 244,375 15,000 5,197
Senior Vice President, 1998 160,000 35,040 75,000 731
Chief Financial Officer 1997 15,385 0 -- 699
and Treasurer
Dort A. Cameron III ..... 1999 400,000 0 -- 17,358
Chairman of the Board 1998 400,000 0 150,000 18,801
of Directors 1997 400,000 0 -- 18,801
</TABLE>
(1) Includes bonus compensation awarded in Fiscal 1999 in connection with
the closing of the TAS Sale as follows: $500,000 to each of John
McKenna and Ken Ghazey; $275,000 to John Lyons; and $100,000 to Michael
Archambault.
(2) The stock options listed in the table represent options to purchase
Common Stock of the Company under the Company's 1996 Performance
Incentive Plan ("PIP") or the Company's 1996 Stock Option Plans (the
"EIS Plans") and have been adjusted for stock dividends.
(3) Mr. Ghazey joined the Company in January 1997.
(4) In connection with the TAS Sale, Mr. Lyons accepted a position with
CompuCom and resigned from the Company in May 1999.
(5) Mr. Nathanson resigned in August 1999.
(6) Includes $120,787 bonus payable by FCP at the time of the acquisition
and paid by the Company after the closing.
(7) Mr. Archambault joined the Company in May 1997.
31
<PAGE> 34
Option Grants In Last Fiscal Year
The following table sets forth for certain information concerning
grants of options to each of the Named Officers during Fiscal 1999.
<TABLE>
<CAPTION>
Potential Realizable
Number of Percent of Value of Assumed
Securities Total Options Annual Rates of
Underlying Granted to Stock Price
Options Employees in Exercise Price Expiration Appreciation for
Name Granted (#) Fiscal 1999 Per Share(1) Date (2) Option Term(3)
----------- ----------- ------------ -------- --------------
5% 10%
-- ---
<S> <C> <C> <C> <C> <C> <C>
Michael G. Archambault.... 15,000(4) 5.37% $4.12 09/28/08 $125,276 $317,473
</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.
(2) Options may terminate before their expiration date 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 15,000 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 June 30,
1999, and an additional twenty percent (20%) shall vest after each
anniversary of June 30, 1999.
32
<PAGE> 35
FISCAL YEAR-END OPTION VALUES
The following table sets forth the value of outstanding options held by
the Named Officers as of June 27, 1999 and has been adjusted for stock
dividends.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL YEAR-END (#) OPTIONS AT FISCAL YEAR-END (1)
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C>
John A. McKenna, Jr. 1,725,120 0 -- --
Kenneth A. Ghazey 576,000 304,000 $ 374,400.00 $ 197,600.00
John F. Lyons 0 0 -- --
Richard Nathanson 93,697 93,698 $ 60,903.05 $ 60,903.70
Michael Archambault 25,000 65,000 $ 13,000.00 $ 19,500.00
Dort A. Cameron III 150,000 0 -- --
</TABLE>
(1) Calculated on the basis of the fair market value of the Common Stock at
June 27, 1999, $2.69 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 (the "Director Plan"), 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 June 27, 1999, the Company had issued an aggregate
68,815 shares of the Company's Common Stock to its non-employee directors
pursuant to the Director 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 its 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."
33
<PAGE> 36
EMPLOYMENT AGREEMENTS
The Company has entered into agreements with certain of the Company's
Named Officers, including: Dort A. Cameron III, Chairman of the Company's Board
of Directors; John A. McKenna, Jr., the Company's Chief Executive Officer;
Kenneth A. Ghazey, the Company's President; Richard Nathanson, the former
President of the Company's Services Division; and Michael G. Archambault. the
Company's Senior Vice President, Chief Financial Officer and Treasurer.
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 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. In addition,
the terms of certain of his stock option grant agreements provide that, in the
event of a Severance Event, the vesting of the options granted will be
accelerated and the exercise period for such options will be extended to two
years after termination. Mr. McKenna's severance agreement terminates on August
6, 2000.
Mr. Ghazey's 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 under the Management
Incentive Plan then in effect.
The retention agreement of Mr. Archambault provides 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, or (b) voluntary resignation following reduction in
compensation, reduction in the level of authority or scope of responsibilities
or relocation, he will be entitled to 12 times his monthly compensation as of
the date of termination (including
34
<PAGE> 37
bonus at 100% of target). Mr. Archambault is subject to a covenant not to
compete during the period of time the Company is paying severance.
Mr. Nathanson's employment agreement provided that upon termination
without cause, he is 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 August 2000. In
addition, in connection with his resignation in August 1999, Mr. Nathanson was
given an additional period of time to exercise his options.
Mr. Cameron's employment agreement is effective until July 1, 2001.
Such 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 will provide
hospitalization, medical, dental and health coverage to Mr. Cameron and his
spouse following the termination of the 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, 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), Mr.
Cameron 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 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 the agreements of Messrs. Archambault and Ghazey 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
authority or responsibilities, the failure to elect or continue Mr. Cameron as
Chairman of the Board of Directors, the failure to maintain directors and
officers liability insurance covering Mr. Cameron or a material breach of the
agreement by the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of August 31, 1999 for (i)
each person or entity who is known by the Company to beneficially own five
percent or more of the outstanding Common Stock of the Company, (ii) each of the
Company's directors, (iii) each of the Named Of-
35
<PAGE> 38
ficers (as defined above), and (iv) all directors and executive officers of the
Company as a group:
<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 74.3
c/o ENTEX Information Services, Inc.
6 International Drive
Rye Brook, NY 10573
IBM Credit(3) 2,436,055 7.4
1133 Westchester Avenue
White Plains, NY 10604
John A. McKenna, Jr.(4)(5) 2,367,324 6.9
Kenneth Ghazey(6) 576,000 1.7
John F. Lyons(7) 120,417 *
Richard Nathanson(8) 187,395 *
Michael G. Archambault(9) 28,000 *
R. Randolph Devening(10) 83,815 *
Linwood A. Lacy, Jr.(11) 94,898 *
Frank W. Miller(12) 46,264 *
All directors and executive officers as a group (12 persons)(13) 27,933,821 78.7
</TABLE>
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that
person, shares of Common Stock subject to options held by that person
that are currently exercisable or exercisable within 60 days of August
31, 1999, are deemed outstanding. Such shares, however, are not deemed
outstanding for the purposes of computing the percentage ownership of
each other person. Except as indicated in the footnotes to this table,
pursuant to the Stockholders' Agreement and pursuant to applicable
community property laws, each stockholder named in the table has sole
voting and investment power with respect to the shares set forth opposite
such stockholder's name. See Items 1 and 13.
(2) Includes 21,407,739 shares 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 currently exercisable. 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. See Item 13.
(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. See Item 13.
36
<PAGE> 39
(4) Includes 1,725,120 shares of Common Stock owned by Mr. McKenna which
are subject to an option currently exercisable.
(5) Pursuant to the Stockholders' Agreement, in the event that Mr.
McKenna's employment is terminated for any reason, the Company shall
have the right to purchase all shares of Common Stock owned by him. If
the Company is unable to purchase such shares in cash, the Cameron
Affiliates will have a right to purchase such shares. See Items 1 and
13.
(6) Includes 576,000 shares of Common Stock owned by Mr. Ghazey which are
subject to an option currently exercisable.
(7) In connection with the TAS sale, Mr. Lyons accepted a position with
CompuCom Systems, Inc. and resigned from the Company in May 1999.
(8) Includes 187,395 shares of Common Stock beneficially owned by Mr.
Nathanson which are subject to options currently exercisable. Mr.
Nathanson resigned in August 1999.
(9) Includes 28,000 shares of Common Stock owned by Mr. Archambault which
are subject to options currently exercisable.
(10) Includes 62,500 shares of Common Stock owned by Mr. Devening which are
subject to options currently exercisable.
(11) Includes 62,500 shares of Common Stock owned by Mr. Lacy which are
subject to options currently exercisable.
(12) Includes 25,000 shares of Common Stock owned by Mr. Miller which are
subject to options currently exercisable.
(13) Includes 3,042,915 shares of Common Stock which are subject to
options exercisable within 60 days of August 31, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
SHARE OWNERSHIP
As of June 27, 1999, Dort A. Cameron III, the Company's Chairman, owned
of record 2,669,653 shares of the Company's Common Stock. In addition, as of
such date, ENTEX Associates, L.P., a Delaware limited partnership, owned
21,407,739 shares of the Company's Common Stock. Mr. Cameron is the sole
stockholder of The Putnam Group, Inc., the general partner of ENTEX Associates,
L.P. (the "Putnam Group"). Two of the limited partners of ENTEX Associates,
L.P., Airlie Associates and Airlie Associates II, are general partnerships
consisting of Mr. Cameron's relatives. The other limited partners of ENTEX
Associates, L.P. are business associates of Mr. Cameron. Mr. Cameron has voting
and dispositive power over the shares of the Company's Common Stock held by
ENTEX Associates, L.P. and, accordingly, may be deemed to have beneficial
ownership with respect to these shares. In connection with the restructuring of
indebtedness under the IBMCC Working Capital Line of Credit
37
<PAGE> 40
in December 1996, Mr. Cameron and Entex Associates, L.P. ("ENTEX Associates"),
along with Mr. McKenna, 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
Notes Offering.
INDEBTEDNESS BETWEEN THE COMPANY AND CERTAIN AFFILIATES
In July 1993, Mr. Cameron, Airlie Associates and Airlie Associates II
loaned $3.13 million, $340,000 and $780,000, respectively, to ENTEX Holdings,
Inc. ("ENTEX Holdings"), the former parent of the Company which was merged with
and into the Company on June 28, 1996 (the "Holdings Merger"). In addition, in
December 1993 Mr. Cameron loaned ENTEX Holdings $312,500. These loans were
evidenced by promissory notes (the "1993 Notes"). The 1993 Notes were assumed by
the Company and $415,925 principal amount was repaid in connection with the
Holdings Merger. The remaining balance on the 1993 Notes, approximately $4.1
million, was repaid with the proceeds of the Notes Offering.
PAYMENTS TO AFFILIATES
During Fiscal 1999, the Company paid to Airlie Enterprises a monthly
overhead allocation fee of $15,000. The Company paid approximately $195,000 to
Atlantic Aviation, which leases an airplane from a corporation wholly owned by
Mr. Cameron, in Fiscal 1999 for use of such airplane.
During Fiscal 2000, the Company anticipates that it will pay
approximately $100,000 for consulting services to Miller Associates, Inc.
("MAI"). Mr. Miller, a director of the Company, is President and owns a 100%
interest in MAI.
For Fiscal 1999, the Company has outsourced substantially all of its
training activities to KAH and made payments to KAH of approximately $4.4
million. The Company owns a direct 8% interest in KAH. Mr. Cameron controls
and owns a direct 35% interest in KAH.
STOCKHOLDERS' AGREEMENT
On December 10, 1993, ENTEX Holdings, Dort A. Cameron III, ENTEX
Associates, L.P. and certain members of the Company's then current management
(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 Affili-
38
<PAGE> 41
ates 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 Non-Electing 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 June 27, 1999,
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 has the right to purchase shares of Common Stock if other
Participants, including John McKenna ("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.
"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 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 con-
39
<PAGE> 42
summation of a public offering or (b) December 10, 2000, and provided, further,
that certain provisions relating to the Company's right to repurchase a
Participant's shares of Common Stock shall terminate upon the earlier of (x) the
consummation of a public offering or (y) a change of control. A "change of
control" is defined as an event in which the Cameron Affiliates no longer own
voting securities of the Company entitled to cast a majority of votes for
election of the Board of Directors of the Company.
IBMCC FINANCING
The Company has financed a significant portion of its working capital
needs under the IBMCC Working Capital Line of Credit. IBMCC is the beneficial
owner of more than 5% of the outstanding capital stock of the Company. The IBMCC
Working Capital Line of Credit provides for borrowings of up to $250.0 million
($150 million from and after August 10, 1999), of which $98.3 million was owed
to IBMCC as of June 27, 1999 on an interest-bearing basis and was classified as
notes payable. The IBMCC Working Capital Line of Credit matures on July 31, 2001
and is terminable upon 60 days' prior notice by IBMCC. Amounts outstanding under
the IBMCC Working Capital Line of Credit bear interest at LIBOR plus 3.00% (7.9%
at June 27, 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. The IBMCC Working Capital Line of Credit 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 ("the IBMCC Option") to acquire 1,851,850 shares of Common
Stock held by him. The IBMCC 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 (the "1994 Warrant"). The 1994 Warrant is immediately
exercisable for a total exercise price of $10.00 and expires on July 15,2001. In
connection with an amendment to the IBMCC Working Capital Line of Credit 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 (the "1997
Warrant"). The 1997 Warrant may be exercised at any time prior to July 31, 2004
at an exercise price of $7.55 per share. In addition, IBMCC was granted the
right to sell the Common Stock issuable upon exercise of the 1994 and 1997
warrants (the "Warrant Shares") and any shares purchased upon exercise of the
IBMCC Option ("IBMCC Option 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 and any IBMCC Option 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
40
<PAGE> 43
demand and piggyback registration rights for the Warrant Shares and the IBMCC
Option Shares. See Items 1 and 7 and Notes 5 and 7 of the Notes to Consolidated
Financial Statements.
41
<PAGE> 44
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
FINANCIAL STATEMENTS AND SCHEDULES
Financial Statements and Financial Statement Schedules. The following
Consolidated Financial Statements and supporting schedule of ENTEX Information
Services, Inc. and the Report of Independent Auditors are included at pages F-1
through F-17 of this Form 10-K.
<TABLE>
<CAPTION>
DESCRIPTION PAGE NO.
- ----------- --------
<S> <C>
Independent Auditors' Report...................................................... F-1
Consolidated Balance Sheets as of June 27, 1999 and June 28, 1998.................
F-2
Consolidated Statements of Operations for Years Ended June 27, 1999, June 28,
1998 and June 29, 1997......................................................... F-3
Consolidated Statements of Cash Flows for the Years Ended June 27, 1999, June 28,
1998 and June 29, 1997......................................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended
June 27, 1999, June 28, 1998 and June 29, 1997................................. F-5
Notes to Consolidated Financial Statements........................................ F-6
Schedule II - Valuation and Qualifying Accounts and Reserves...................... F-18
</TABLE>
Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be set forth
therein is included in the Consolidated Financial Statements or notes thereto.
42
<PAGE> 45
REPORTS ON FORM 8-K
Current Report on Form 8-K dated May 11, 1999, reporting the sale of
TAS Division to CompuCom Systems, Inc.
EXHIBITS
EXHIBIT NUMBER DESCRIPTION
2.1 Agreement and Plan of Reorganization by and between
ENTEX Holdings, Inc. and the Company dated as of June
28, 1996, incorporated by reference to the Company's
Registration Statement on Form 10 (File No. 000-23457)
filed December 3, 1997 (the "Form 10")
2.2 Agreement and Plan of Merger by and among the
Company, ENTEX Acquisition Corp. and Random Access,
Inc., dated as of May 15, 1995, with amendment
thereto, incorporated by reference to Amendment No. 1
to the Company's Form 10 filed January 27, 1998
2.3 Agreement and Plan of Reorganization among the
Company, EIS Acquisition Corporation and FCP
Technologies, Inc., incorporated by reference to
Amendment No. 1 to the Company's Form 10 filed
January 27, 1998
2.4 Asset Purchase Agreement dated as of May 10, 1999 by
and between CompuCom Systems, Inc. and the Company,
incorporated by reference to the Company's Current
Report on Form 8K filed May 25, 1999
3.1 Certificate of Incorporation of the Company, as
amended, incorporated by reference to the Company's
Form 10
3.2 Amended and Restated Bylaws of the Company dated
December 9, 1998, incorporated by reference to the
Company's Current Report on Form 8K filed
December 23, 1998
4.1 Form of the Company's Common Stock Certificate,
incorporated by reference to the Company's Form 10
4.2 Indenture dated July 29, 1998, among the Company, the
Guarantors named therein, and Marine Midland Bank,
N.A., as trustee, incorporated by reference to the
Company's Current Report on Form 9K filed August 13,
1998
43
<PAGE> 46
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
4.3 Exchange Offer Registration Rights Agreement dated
July 29, 1998, among the Company, the Guarantors
named therein and CIBC Oppenheimer Corp. and Lazard
Freres & Co. LLC, incorporated by reference to the
Company's Current Report on Form 8K filed August 13,
1998
10.1 Stockholders' Agreement among ENTEX Holdings, Inc.,
Dort A. Cameron III, ENTEX Associates, L.P., and the
Participants named therein dated December 10, 1993,
with First Amendment thereto, incorporated by
reference to the Company's Form 10
10.1.1 Second Amendment to Stockholders' Agreement among
ENTEX Holdings, Inc., Dort A. Cameron III, ENTEX
Associates, L.P., and the Participants named therein
dated March 6, 1998, incorporated by reference to
Amendment No. 3 to the Company's Form 10 filed May 15,
1998
10.2 Fourth Amended and Restated Agreement for Wholesale
Financing by and between IBM Credit Corporation and
the Company, with Amendments 1 through 10 thereto,
incorporated by reference to Amendment No. 1 to the
Company's Form 10 filed January 27, 1998
10.2.1+ Amendment No. 11 to the Fourth Amended and Restated
Agreement for Wholesale Financing by and between IBM
Credit Corporation and the Company
10.2.2+ Amendment No. 12 to the Fourth Amended and Restated
Agreement for Wholesale Financing by and between IBM
Credit Corporation and the Company
10.2.3 Amendment No. 13 to the Fourth Amended and Restated
Agreement for Wholesale Financing by and between IBM
Credit Corporation and the Company, incorporated by
reference to the Company's Current Report on Form 8K
filed August 13, 1998
10.2.4 Amendment No. 14 to the Fourth Amended and Restated
Agreement for Wholesale Financing by and between IBM
Credit Corporation and the Company, incorporated by
reference to Amendment No. 1 to the Company's
Registration Statement on Form S-4 (File No.
333-64805) (the "S-4") filed January 8, 1999
44
<PAGE> 47
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
10.2.5+ Amendment No. 15 to the Fourth Amended and Restated
Agreement for Wholesale Financing by and between IBM
Credit Corporation and the Company
10.2.6+ Amendment No. 16 to the Fourth Amended and Restated
Agreement for Wholesale Financing by and between IBM
Credit Corporation and the Company
10.2.7+ Amendment No. 18 to the Fourth Amended and Restated
Agreement for Wholesale Financing by and between IBM
Credit Corporation and the Company
10.3 Warrant Agreement among IBM Credit Corporation, ENTEX
Holdings, Inc., and the Company dated November 15,
1994, incorporated by reference to the Company's Form
10
10.4 Warrant Agreement between IBM Credit Corporation and
the Company dated July 15, 1997, incorporated by
reference to the Company's Form 10
10.5 Non-Competition, Referral and Non-Disclosure
Agreement dated as of May 10, 1999, by and between
CompuCom Systems, Inc. and the Company, incorporated
by reference to the Company's Current Report on Form
8K filed May 25, 1999
10.6 Sublease Agreement dated June 6, 1997 between General
Electric Company and the Company with related
consent, incorporated by reference to Amendment No. 1
to the Company's Form 10 filed January 27, 1998
10.6.1+ Sublease Extension and Amendment between General
Electric Company and the Company
10.7 Lease Agreement dated January 20, 1995 between Royal
Executive Park II and the Company, with First
Amendment thereto, incorporated by reference to
Amendment No. 1 to the Company's Form 10 filed
January 27, 1998
45
<PAGE> 48
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
10.7.1+ Second Amendment of Lease by and between Reckson
Operating Partnership, L.P., successor-in-interest to
Royal Executive Park II, and the Company
10.8 Sublease Agreement dated August 6, 1993 between JWP
Inc. and the Company and related amendments, consents
and lease agreements, incorporated by reference to
Amendment No. 1 to the Company's Form 10 filed
January 27, 1998
10.9 Lease Agreement dated May 15, 1995 between the
Company and Duke Realty Limited Partnership, with the
First through Fourth Amendments thereto, incorporated
by reference to Amendment No. 1 to the Company's Form
10 filed January 27, 1998
10.9.1+ Fifth Lease Amendment to the Lease Agreement dated
May 15, 1995 between the Company and Duke Realty
Limited Partnership
10.10 Lease Agreement dated February 29, 1992 between the
Company and 725 C.W. Associates Limited Partnership
with related amendments, incorporated by reference to
Amendment No. 1 to the Company's Form 10 filed
January 27, 1998
10.11 Agreement between John A. McKenna, Jr. and the
Company dated August 7, 1994 with related amendment,
incorporated by reference to the Company's Form 10
10.12 Letter Agreement between Kenneth A. Ghazey and the
Company dated January 6, 1997, incorporated by
reference to the Company's Form 10
10.13 Employment Agreement between Richard Nathanson and
the Company dated July 10, 1996, incorporated by
reference to the Company's Form 10
10.14+ Retention Agreement between Michael G. Archambault
and the Company dated October 2, 1998.
10.15 Employment Agreement dated July 1, 1998 by and
between the Company and Dort A. Cameron III,
incorporated by reference to the Company's Annual
Report on Form 10K filed September 25, 1998
10.16+ ENTEX Senior Vice President Management
Compensation Plan Effective July 1999
46
<PAGE> 49
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
10.17+ ENTEX Acquisition Services Division Management
and Professional Compensation Plan Effective January
1999
10.18+ ENTEX Services Division Management and Professional
Compensation Plan Effective January 1999
10.19+ ENTEX Management and Professional Compensation Plan
Effective July 1997
10.20 ENTEX Holdings, Inc. 1996 Stock Option Plan with
related agreements, incorporated by reference to
Amendment No. 2 to the Company's Form 10 filed
January 29, 1998
10.21 ENTEX Information Services, Inc. 1996 Stock Option
Plan with related agreements, incorporated by
reference to Amendment No. 2 to the Company's Form 10
filed January 29, 1998
10.22 1996 Performance Incentive Plan with related
agreements, incorporated by reference to Amendment
No. 2 to the Company's Form 10 filed January 29, 1998
10.23 1996 Non-Employee Director Stock Plan, Amended and
Restated as of March 31, 1998, incorporated by
reference to the Company's Quarterly Report on Form
10Q filed May 13, 1998
10.23.1 First Amendment to the 1996 Non-Employee Director
Stock Plan, incorporated by reference to Amendment
No. 1 to the Company's S-4 filed January 8, 1999
10.24 Form of Indemnification Agreement, incorporated by
reference to the Company's Form 10
21+ Subsidiaries of the Company
24+ Powers of Attorney (set forth on the signature page
of this Form 10-K)
27+ Financial Data Schedule
- ------------------
+ Filed herewith.
47
<PAGE> 50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ENTEX INFORMATION SERVICES, INC.
By: /s/ John A. McKenna, Jr.
----------------------------
Name: John A. McKenna, Jr.
Title: Chief Executive Officer
and Director
Date: September 27, 1999
48
<PAGE> 51
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and
appoints John A. McKenna, Jr. and Michael G. Archambault and each acting alone,
his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any or all amendments or supplements to this
Form 10-K and to file the same with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents full power and authority to do and perform
each and every act and thing necessary or appropriate to be done with this Form
10-K and any amendments or supplements hereto, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or their substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Form 10-K has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Dort A. Cameron III Chairman of the Board September 27, 1999
- -----------------------------------
Dort A. Cameron III
/s/ John A. McKenna, Jr. Chief Executive Officer and September 27, 1999
- ----------------------------------- Director
John A. McKenna, Jr.
/s/ Kenneth A. Ghazey President and Director September 27, 1999
- -----------------------------------
Kenneth A. Ghazey
/s/ Michael G. Archambault Senior Vice President, Chief Financial September 27, 1999
- ----------------------------------- Officer and Treasurer
Michael G. Archambault
/s/ Shirley S. Mehta Vice President and Controller September 27, 1999
- -----------------------------------
Shirley S. Mehta
/s/ R. Randolph Devening Director September 27, 1999
- -----------------------------------
R. Randolph Devening
/s/ Linwood A. Lacy, Jr. Director September 27, 1999
- -----------------------------------
Linwood A. Lacy, Jr.
/s/ Frank W. Miller Director September 27, 1999
- -----------------------------------
Frank W. Miller
</TABLE>
49
<PAGE> 52
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report................................ F-1
Consolidated Balance Sheets as of June 27, 1999 and June 28,
1998...................................................... F-2
Consolidated Statements of Operations for Years Ended June
27, 1999, June 28, 1998 and June 29, 1997................. F-3
Consolidated Statements of Cash Flows for Years Ended June
27, 1999, June 28, 1998 and June 29, 1997................. F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for Years Ended June 27, 1999, June 28, 1998, and June 29,
1997 .................................................... F-5
Notes to Consolidated Financial Statements.................. F-6
Schedule II - Valuation and Qualifying
Accounts and Reserves...................................... F-18
</TABLE>
50
<PAGE> 53
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 27, 1999 and June 28, 1998 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 27,
1999. In connection with our audits of the consolidated financial statements, we
have also audited the financial statement schedule as listed in the accompanying
index. These consolidated financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express our opinion on these consolidated financial statements and financial
statement schedule based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ENTEX
Information Services, Inc. and subsidiaries as of June 27, 1999 and June 28,
1998, and the results of their operations and their cash flows for each of the
years in the three-year period ended June 27, 1999, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
KPMG LLP
Stamford, Connecticut
September 10, 1999
F-1
<PAGE> 54
ENTEX INFORMATION SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 27, JUNE 28,
1999 1998
---------- ---------
(DOLLARS IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 12,546 $ 14,265
Trade receivables, net of allowance for doubtful accounts
of $4,905 and $4,662, respectively..................... 142,533 368,344
Vendor receivables........................................ 5,066 47,592
Inventory................................................. 13,939 12,736
Other current assets...................................... 10,214 8,683
Current assets of discontinued operations to be sold...... -- 180,105
--------- --------
Total current assets.............................. 184,298 631,725
Property, plant and equipment, net.......................... 33,699 34,648
Goodwill, net of accumulated amortization of $3,311 and
$2,319, respectively...................................... 10,860 11,853
Other assets, net........................................... 4,898 1,756
Non-current assets of discontinued operations to be sold.... -- 56,437
--------- --------
Total assets...................................... $ 233,755 $736,419
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 49,842 $338,602
Accrued liabilities....................................... 57,935 67,381
Obligations related to restructuring...................... 4,933 --
Obligations related to discontinued operations............ 12,421 --
Notes payable and current installments of long-term
debt................................................... 104,049 295,681
--------- --------
Total current liabilities......................... 229,180 701,664
--------- --------
Long-term debt.............................................. 124,252 53,239
Other long-term liabilities................................. 294 661
--------- --------
Total long-term liabilities....................... 124,546 53,900
--------- --------
Total liabilities................................. 353,726 755,564
--------- --------
Stockholders' equity (deficit):
Preferred stock, 2,000,000 shares authorized; no shares
issued or outstanding.................................. -- --
Common stock, $.0001 par value; 100 million shares
authorized, 32,437,070 and 32,413,366 shares issued and
outstanding respectively............................... 3 3
Additional paid-in capital................................ 19,594 19,477
Retained earnings (deficit)............................... (139,485) (38,564)
Treasury stock, 82,500 shares at cost..................... (2) (2)
Accumulated other comprehensive income.................... (81) (59)
--------- --------
Total stockholders' equity (deficit).............. (119,971) (19,145)
--------- --------
$ 233,755 $736,419
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 55
ENTEX INFORMATION SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED
-------------------------------------------------------
JUNE 27, JUNE 28, JUNE 29,
1999 1998 1997
--------------- --------------- ---------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C>
Net revenues...................................... $ 483,619 $ 436,361 $ 339,704
Cost and expenses:
Cost of services provided....................... 368,269 334,219 259,507
Inventory charges............................... 1,000 -- --
Selling, general and administrative expenses.... 145,611 147,937 125,982
Restructuring charges........................... 2,000 -- --
Unusual charges................................. 3,800 -- --
----------- ----------- -----------
Loss from operations.............................. (37,061) (45,795) (45,785)
Interest expense, net............................. 36,548 36,663 37,147
Other income...................................... 708 -- 462
----------- ----------- -----------
Loss from continuing operations before income
taxes........................................... (72,901) (82,458) (82,470)
Provision for income taxes........................ 2 (1) 25
----------- ----------- -----------
Loss from continuing operations................... (72,903) (82,457) (82,495)
Discontinued operations:
Income (loss) from operations (less applicable
income taxes of $19 in 1999, $418 in 1998
and $-- in 1997.)............................ (11,275) 100,600 84,039
Loss on Disposal................................ (16,743) -- --
----------- ----------- -----------
Net income (loss)................................. $ (100,921) $ 18,143 $ 1,544
=========== =========== ===========
Common Share Data:
Basic and diluted (loss) per share:
Continuing operations........................ $ (2.25) $ (2.55) $ (2.55)
Discontinued operations...................... (.86) 3.11 2.60
----------- ----------- -----------
Net income (loss)............................ $ (3.11) $ .56 $ .05
=========== =========== ===========
Basic and diluted weighted average number of
shares of common stock outstanding.............. $32,417,274 $32,357,968 $32,281,463
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 56
ENTEX INFORMATION SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
-------------------------------------
JUNE 27, JUNE 28, JUNE 29,
1999 1998 1997
--------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $(100,921) $ 18,143 $ 1,544
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization........................... 20,249 19,388 14,146
Amortization of goodwill................................ 3,392 3,958 4,239
Loss on disposal of discontinued operations............. 16,743 -- --
Restructuring and unusual charges....................... 16,100 -- --
Provision for doubtful trade and vendor receivables..... (1,139) 1,703 2,393
Accretion on long-term debentures and notes............. 2,460 2,416 2,032
Gain on sale of assets.................................. -- -- (504)
Stock benefit plan compensation costs................... -- 180 --
Other................................................... (609) (593) 20
Changes in working capital, net of effects of acquisitions
and dispositions:
Trade receivables......................................... 227,176 (34,064) (31,168)
Inventories............................................... 78,933 (8,884) (8,161)
Vendor receivables........................................ 42,300 (11,590) (18,219)
Other assets.............................................. (499) 305 (396)
Accounts payable and accrued liabilities.................. (281,900) 64,260 8,635
Obligations related to restructuring...................... 4,933 -- --
Other long-term liabilities............................... (367) (413) (661)
--------- --------- ---------
Net cash provided by (used in) operating
activities....................................... 26,851 54,809 (26,100)
--------- --------- ---------
Cash flows from investing activities:
Proceeds from sale of assets of discontinued operations... 137,389 -- --
Proceeds from sales of property, plant & equipment........ 530 -- 2,285
Capital expenditures...................................... (20,641) (19,655) (21,737)
Cash paid for acquisitions................................ -- -- (7,216)
Other..................................................... -- -- (1,181)
--------- --------- ---------
Net cash from (used in) investing activities......... 117,278 (19,655) (27,849)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from borrowing................................... 223,574 124,794 230,621
Change in cash overdraft.................................. (18,515) 12,968 (13,687)
Debt financing costs...................................... (4,367) -- --
Proceeds from sale of common stock, net................... 117 294 268
Payments on debt.......................................... (346,657) (174,783) (160,018)
--------- --------- ---------
Net cash (used in) provided from financing
activities....................................... (145,848) (36,727) 57,184
--------- --------- ---------
Increase (decrease) in cash............................... (1,719) (1,573) 3,235
Cash at beginning of period............................... 14,265 15,838 12,603
--------- --------- ---------
Cash at end of period..................................... $ 12,546 $ 14,265 $ 15,838
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest paid........................................... $ 30,627 $ 34,399 $ 36,458
========= ========= =========
Taxes paid (refunded)................................... $ 1,553 $ (35) $ (12,087)
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 57
ENTEX INFORMATION SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL RETAINED OTHER
---------------- PAID IN EARNINGS TREASURY COMPREHENSIVE
SHARES AMOUNT CAPITAL (DEFICIT) STOCK INCOME TOTAL
------ ------ ---------- --------- -------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1996.......... 32,677 $3 $18,735 $ (58,251) $(2) $ -- $ (39,515)
Comprehensive income:
Net income.................. -- -- -- 1,544 -- -- 1,544
Currency translation
adjustments............... -- -- -- -- -- (29) (29)
---------
Comprehensive income.......... 1,515
Return of treasury stock...... (429) -- -- -- -- -- --
Issuance of common stock...... 110 -- 268 -- -- -- 268
------ -- ------- --------- --- ---- ---------
Balance, June 29, 1997.......... 32,358 3 19,003 (56,707) (2) (29) (37,732)
Comprehensive income:
Net income.................. -- -- -- 18,143 -- -- 18,143
Currency translation
adjustments............... -- -- -- -- -- (30) (30)
---------
Comprehensive income.......... 18,113
Return of treasury stock...... (70) -- -- -- -- -- --
Issuance of common stock...... 62 -- 180 -- -- -- 180
Exercise of options........... 63 -- 294 -- -- -- 294
------ -- ------- --------- --- ---- ---------
Balance, June 28, 1998.......... 32,413 3 19,477 (38,564) (2) (59) (19,145)
Comprehensive income:
Net income.................. -- -- -- (100,921) -- -- (100,921)
Currency translation
adjustments............... -- -- -- -- -- (22) (22)
---------
Comprehensive income.......... (100,943)
---------
Return of treasury stock...... (13) -- -- -- -- -- --
Issuance of common stock...... 13 -- 54 -- -- -- 54
Exercise of options........... 24 -- 63 -- -- -- 63
------ -- ------- --------- --- ---- ---------
Balance, June 27, 1999.......... 32,437 $3 $19,594 $(139,485) $(2) $(81) $(119,971)
====== == ======= ========= === ==== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 58
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 Inc. ("JWPIS"). 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.
On May 10, 1999, the Company sold certain assets (inventory, land and
building, and fixed assets) of its products division, the Technology Acquisition
Services ("TAS") Division, to CompuCom Systems, Inc. ("CompuCom") (see note 2).
The resulting loss on the sale of the assets and the loss from operations of the
TAS Division for the year ended June 27, 1999 is reflected as discontinued
operations in the accompanying consolidated financial statements. The operating
results of the TAS Division for prior fiscal years have been restated to reflect
the TAS Division as discontinued operations.
ENTEX, a company engaged in principally one line of business, is a leading
provider of distributed computing management solutions to meet the support
requirements of Fortune 1000 companies and other large enterprises for their
local-area networks, wide-area networks, and end-users. ENTEX provides a single
source of service for its customers' personal computer ("PC") and server
platforms including system design, operations support and change management.
(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 29, 1998 to June 27,
1999, June 30, 1997 to June 28, 1998 and July 1, 1996 to June 29, 1997.
(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.
Reclassifications of prior year data have been made, where appropriate, to
conform to the current year presentation.
(d) Inventories
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
F-6
<PAGE> 59
ENTEX INFORMATION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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) 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.
As of June 30, 1997, 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 fair value of 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
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 $14,021 and $19,989 at June 27, 1999 and June 28,
1998, respectively.
(i) Risks and Uncertainties
The Company uses a significant number of computer software programs and
operating systems in its internal operations that may be affected by the year
2000 (the Y2K impact). The Company completed an inventory of its applications
systems in December 1997 and prioritized its assessment of Y2K compliance based
on the criticality of the applications to business operations. Required changes
to and upgrades of applications systems, telecommunications environments and
desk top environments are expected to be completed by October 31, 1999, with
validation of these changes and upgrades being scheduled shortly thereafter.
Contingency plans have been developed for specific business processes and
related applications in the event the Company experiences short-term outages of
up to a five day duration resulting from the failure of a system to properly
address the year 2000. Such contingency plans are based on the Company's
assessment of its ability to successfully make and validate all required changes
and upgrades. The Company is committed to supplementing the existing contingency
plans with long-term plans in the event that successful validation of
applications changes and upgrades has not occurred by November 15, 1999.
The Company's service business requires the recruiting and training of a
significant number of qualified technical personnel. The growth of the systems
integration industry has created a premium for a skilled
F-7
<PAGE> 60
ENTEX INFORMATION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
workforce; therefore, there is risk regarding the availability of qualified
technical personnel. In addition, the Company's asset based borrowings are
exposed to market risk due to fluctuations in interest rates.
In fiscal 1999, the top four customers represented 20% of 1999 revenue,
although no individual customer accounted for more than 6% of the total
revenue.
(j) Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, 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.
(k) 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 to fair value.
The estimated fair value of long-term debt, based on transactions and
bid/ask prices with investors, approximated $100.2 million at June 27, 1999 and
$57.7 million at June 28, 1998 (carrying value of $130.0 million and $58.6
million), respectively.
(l) 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 1999, 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.
(m) New Accounting Pronouncements
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, as
amended by SFAS No. 137, is effective for fiscal years beginning after June 15,
2000 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.
F-8
<PAGE> 61
ENTEX INFORMATION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(n) Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share", which is required to be adopted for both interim
and annual financial statements for periods ending after December 15, 1997. The
new standard simplifies the computation of earnings per share (EPS) and requires
the presentation of two new amounts, basic and diluted earnings per share.
During fiscal 1999, 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.
(o) Accumulated Other Comprehensive Income
Effective for the year ended June 27, 1999, 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. The only elements of accumulated other comprehensive
income are net income and foreign currency translation gains (losses).
(p) Interest Allocation
Consistent with EITF 87-24 (Allocation of Interest to Discontinued
Operations), the Company has not allocated interest expense to the operations of
the discontinued segment.
(2) ACQUISITIONS, DIVESTITURES AND DISCONTINUED OPERATIONS
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 investment in KAH
is included in other assets. In fiscal 1998 and 1999, KAH issued additional
shares of stock which reduced ENTEX's and Dort Cameron's direct ownership
percentages to 8% and 35%, respectively. The Company continues to account for
its investment in KAH under the equity method as a result of its principal
shareholder's 35% interest in KAH. The Company's share of recorded loss in KAH
amounting to $280 in 1999 is classified as other loss in the Consolidated
Statement of Operations.
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, of which $5,490 has been allocated to the TAS
Division based on the estimate paid for each division. The goodwill allocated to
the TAS Division, net of accumulated amortization, was charged to the loss on
the sale of the assets of the TAS Division in 1999 (see below).
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
which is included in Other Income.
On May 10, 1999, the Company sold certain assets (inventory, land and
building, and fixed assets) of its TAS Division to CompuCom. The transaction was
structured as an asset sale for cash. Included in the sale
F-9
<PAGE> 62
ENTEX INFORMATION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
were all of the inventory and equipment in the Company's Erlanger, Kentucky
Integration Center and its Corporate Account Call Center in Mason, Ohio. Over
1000 employees in the Company's former TAS Division became employees of
CompuCom. After giving effect to the proceeds of $137.4 million received by the
Company for the transaction, and after accounting for the goodwill, inventories
and fixed assets and deal-related expenses, the transaction resulted in a loss
for ENTEX. This loss of $16,743, and the loss from operations of $11,275 for
the fiscal year ended June 27, 1999 is reflected in discontinued operations in
the accompanying condensed consolidated financial statements. The net loss on
the sale of assets and loss from discontinued operations for the fiscal year
ended June 27, 1999, were previously estimated to be $16,743 and $16,767,
respectively.
The remaining obligations related to discontinued operations of $12.4
million at June 27, 1999, primarily relate to remaining severance payments
($6.3 million), future lease obligations ($1.3 million), transition costs ($1.3
million), and allowance for uncollectible trade receivables ($3.5 million), and
are classified as accrued liabilities in the consolidated balance sheet.
The TAS Division had revenues of $1,560 million, $2,020 million and $2,141
million for the fiscal years ended June 27, 1999, June 28, 1998 and June 29,
1997, respectively. The TAS Division had gross profit of $123.6 million, $212.8
million and $210.0 million for the fiscal years ended June 27, 1999, June 28,
1998 and June 29, 1997, respectively.
The current and noncurrent assets of the TAS Division purchased by CompuCom
have been classified as such in the accompanying consolidated balance sheet.
Other assets of the TAS Division that were not sold to CompuCom are reflected in
the consolidated balance sheet as follows:
<TABLE>
<CAPTION>
JUNE 27, JUNE 28,
1999 1998
-------- --------
<S> <C> <C>
Trade receivables, allowance of $3,500 in 1999 reflected
in obligations related to discontinued operations, and
net of allowance of $3,659 in 1998.................... $55,551 $289,802
Vendor receivables, net of allowances of $4,013 and
$3,787, respectively.................................. $ 5,066 $ 47,592
</TABLE>
The Company has used the net proceeds of such receivables to pay down
accounts payable and interest-bearing obligations.
(3) SPECIAL CHARGES
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: a Technology Acquisition Services Division and a Services
Division, each functioning as a separate operating division within ENTEX
Information Services. The reorganization was intended to reduce costs and
increase operational focus to respond to new market dynamics.
As a result, loss for the current year includes a restructuring charge of
$14 million ($12 million for discontinued operations and $2 million for
continuing operations) which the Company recorded during the second fiscal
quarter ended December 27, 1998. The restructuring charge includes $7 million to
cover costs related to involuntary severance benefits in connection with a
workforce reduction affecting approximately 450 employees, all of whom had left
the Company at March 28, 1999. In addition, the restructuring charge includes $7
million in connection with branch office consolidations, facilities reductions
and other costs. As of June 27, 1999, $9.1 million of costs had been charged
against the reserve.
The remaining liability of $4.9 million at June 27, 1999, primarily relates
to future lease obligations, net of estimates of sublease income ($4.2 million)
and remaining severance payments ($.7 million), and is classified as accrued
liabilities in the consolidated balance sheet.
F-10
<PAGE> 63
ENTEX INFORMATION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In addition, results for the current year include unusual items totaling
$20.8 million ($16 million for discontinued operations and $4.8 million for
continuing operations) in connection with the disposition of the Company's TAS
Division and reorganization. These unusual items consist of $2.0 million of
incentive compensation in connection with the disposition, $.5 million for
workforce reductions in continuing operations, $10.7 million related to the
Company's abandonment of implementation of the R3(TM) Enterprise Requirements
Planning System ("ERP") from SAP, $5.0 million, recorded as cost of revenues, to
expedite the liquidation of excess finished goods and spare parts, and $2.6
million primarily related to incentives to employees during the restructuring
effort.
Also included in the results is a gain of $988 in connection with the
early retirement of $3.75 million of BusinessLand Incorporated debentures. The
gain is classified as other income in the consolidated statements of operations.
(4) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
JUNE 27, JUNE 28,
1999 1998
-------- --------
<S> <C> <C>
Land................................................... $ -- $ --
Building and building improvements..................... -- 1,849
Office and computer equipment.......................... 38,148 43,012
Furniture and fixtures................................. 12,025 8,527
Leasehold improvements................................. 6,793 5,250
Capitalized software................................... 9,215 6,955
Other equipment........................................ 3,853 4,031
-------- --------
70,034 69,624
Accumulated depreciation and amortization.............. (36,335) (34,976)
-------- --------
$ 33,699 $ 34,648
======== ========
</TABLE>
Included in Non-current assets of discontinued operations at June 28, 1998
was $26,360 of net property, plant and equipment disposed of as part of the
divestiture of TAS Division.
(5) DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
JUNE 27, JUNE 28,
1999 1998
-------- --------
<S> <C> <C>
Asset based financing.................................. $ 98,299 $290,328
Other short-term debt................................ 5,750 5,353
-------- --------
104,049 295,681
Long-term debt......................................... 124,252 53,239
-------- --------
Total............................................. $228,301 $348,920
======== ========
</TABLE>
(a) Asset Based Financing
The Company has an asset based financing agreement with IBM Credit
Corporation (the "IBMCC Working Capital Line of Credit") which made credit
available of up to $250 million at June 27, 1999 and $525 million at June 28,
1998. As a result of the disposition of the TAS Division assets, the available
line of credit was reduced to $150 million on August 10, 1999 and
F-11
<PAGE> 64
ENTEX INFORMATION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
thereafter. Interest rates under the agreement were LIBOR plus 3.00% (base rate)
at June 27, 1999 and Prime plus 1/2% (base rate) at June 28, 1998. This
agreement is generally secured by inventories, equipment and accounts
receivable. The aggregate amount outstanding as of June 27, 1999 and June 28,
1998 were $98,299 and $380,065 respectively. Of these amounts, $98,299 and
$290,328, respectively, represent interest bearing liabilities and $0 and
$89,737, respectively, are non-interest bearing and are included within accounts
payable. Under this agreement the Company had available an additional $151,701
and $168,545 at June 27, 1999 and June 28, 1998, respectively.
The IBMCC Working Capital Line of Credit contains restrictive covenants
with respect to maintenance of minimum tangible net worth, current ratio, EBITDA
to interest expense ratio, and certain additional indebtedness. In addition, the
agreement prohibits the Company from paying cash dividends on common stock. The
Company was in compliance with all such covenants at June 27, 1999 and continued
to maintain an excess collateral position. At June 28, 1998, the Company was not
in compliance with all such covenants. IBM waived all defaults arising from such
non-compliance with covenants. The agreement expires on July 31, 2001, and can
be terminated by IBM Credit Corporation upon 60 days' notice.
(b) Other Short-Term Debt
Other short-term debt includes current installments of long-term debt
totaling $5,750 at June 27, 1999 and $5,138 at June 28, 1998.
The weighted average interest rate on short term debt was 7.7% and 9.0% at
June 27, 1999 and June 28, 1998, respectively.
(c) Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 27, JUNE 28,
1999 1998
-------- --------
<S> <C> <C>
Subordinated debt, 12.5% due 2006....................... $100,000 $ --
Subordinated debt, face value $38,750, due March 2007... 19,212 20,545
Notes payable at prime plus 2.5% due September 1999..... -- 17,250
Notes payable, face value $9,000, at 6%, due June
2002.................................................. 5,040 6,892
Notes payable at prime plus 2.5% due July 2000.......... -- 4,147
Mortgage loan for Erlanger, 8.75%, due February 2002.... -- 4,405
-------- -------
Total.............................................. $124,252 $53,239
======== =======
</TABLE>
On July 29, 1998, the Company completed its offering of $100 million
aggregate principal amount of its 12 1/2% Senior Subordinated Notes due 2006
(the "Notes"). The Notes were issued pursuant to an indenture dated July 29,
1998, among the Company, the Guarantors and Marine Midland Bank, N.A., as
Trustee. The Notes were privately placed in a transaction exempt from
registration under the Securities Act of 1933, as amended. The net proceeds from
the sale of the Notes were used to repay outstanding indebtedness of the
Company, which resulted in an increase in working capital of approximately $65
million. Included in the amounts repaid were the remaining balance of an IBM
Credit Corporation term loan made in December, 1996 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 three-year credit facility with
IBM Credit Corporation. Concurrent 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-12
<PAGE> 65
ENTEX INFORMATION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Aggregate annual principal payments of long-term debt subsequent to June
27, 1999 (including the subordinated debentures at face value) are as follows:
<TABLE>
<S> <C>
2000.............................................. $ 5,750
2001.............................................. 6,250
2002.............................................. 6,750
2003.............................................. 3,750
2004.............................................. 3,750
Thereafter........................................ 120,000
--------
146,250
Less unaccreted interest.......................... (16,248)
--------
$130,002
========
</TABLE>
(6) INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
--------------------------------
JUNE 27, JUNE 28, JUNE 29,
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal............................................... $-- $-- $--
State................................................. -- -- --
Foreign............................................... 2 (1) 25
Deferred:
Federal............................................... -- -- --
State................................................. -- -- --
-- --- ---
Total.............................................. $2 $(1) $25
== === ===
</TABLE>
Realization of the 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.
F-13
<PAGE> 66
ENTEX INFORMATION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the differences between income taxes computed at
Federal statutory rates (35% in 1999 and 1998 and 34% in 1997) and the provision
for income taxes is as follows:
<TABLE>
<CAPTION>
JUNE 27, JUNE 28, JUNE 29,
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Tax (benefit) at statutory Rate...................... $(35,322) $ 6,350 $ 533
Non-deductible goodwill.............................. 7,191 1,004 1,051
Non-deductible meals and entertainment expenses...... 38 394 437
State and local income tax, (benefit) net of federal
benefit............................................ (3,641) 1,040 --
Provision/(benefit) for valuation allowances......... 34,943 (8,995) (1,982)
Non-deductible stock compensation expense............ -- -- --
Other................................................ (3,207) 206 (14)
-------- ------- -------
Provision for income taxes........................... $ 2 $ (1) $ 25
======== ======= =======
</TABLE>
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 27, 1999 and June 28, 1998 are as follows:
<TABLE>
<CAPTION>
JUNE 27, JUNE 28,
1999 1998
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward...................... $ 47,061 $ 10,774
Accruals and reserves not currently deductible....... 5,592 4,456
Allowance for bad debts.............................. 1,487 1,563
Inventory valuation reserves......................... -- 4,932
Alternative Minimum Tax Credit....................... 548 --
Other................................................ 870 981
-------- --------
55,558 22,706
Valuation allowance.................................. (52,932) (10,741)
-------- --------
Total............................................. $ 2,626 $ 11,965
======== ========
Deferred tax liabilities:
Discount in subordinated debentures.................. $ -- $ 6,457
Other................................................ 2,626 5,508
-------- --------
Total............................................. $ 2,626 $ 11,965
======== ========
</TABLE>
Net current and non-current assets/liabilities are insignificant.
At June 29, 1999, the Company had a net operating loss carryforward of
approximately $119,000, which will expire in 2010 through 2018. Of such amounts,
approximately $6,500 relates to purchased net tax benefits which when realized
will decrease goodwill by approximately $2,600.
(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; the 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,
F-14
<PAGE> 67
ENTEX INFORMATION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 27, 1999
there were 4,371,610 shares reserved for issuance under the PIP and 4,586,225
shares reserved for issuance under the Holdings Plan and the EIS Plan. There
were 5,948,065 options outstanding under all Plans at June 27, 1999.
The Company's Non-Employee Director Stock Plan, as amended through October
1998, provides for payment of an annual retainer in either cash or shares of
Company stock based on fair market value at the time of grant. At June 27, 1999,
37,065 shares have been reserved for issuance, and 68,815 shares have been
issued.
At June 27, 1999 and June 28, 1998 there were 1,299,435 shares of common
stock reserved for outstanding warrants held by lenders. Warrants to purchase
333,350 shares of common stock were granted to IBMCC 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 IBM. Warrants
to purchase 375,000 shares of common stock granted on June 21, 1996 to Microsoft
were exercisable for $14.40 per share and expire on June 21, 2003. These
warrants were issued as consideration for less than market rate debt.
In connection with an amendment to the IBMCC Working Capital Line of Credit
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. Such
warrants 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.
F-15
<PAGE> 68
ENTEX INFORMATION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the Company's stock option activity, and related information
for the fiscal years ended June 27, 1999, June 28, 1998 and June 29, 1997 is as
follows (in thousands, except for the weighted average exercise prices):
<TABLE>
<CAPTION>
1999 1998 1997
----------------------- ----------------------- -----------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ -------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year....................... 6,412 $4.95 5,120 $5.19 3,260 $5.03
Granted.................... 274 4.12 1,978 4.96 2,325 5.34
Exercised.................. (24) 2.98 (63) 4.63 -- --
Canceled................... (714) 5.20 (623) 5.61 (465) 4.46
Outstanding -- end of year... 5,948 4.37 6,412 4.95 5,120 5.19
Exercisable -- end of year... 4,320 4.41 2,058 4.27 365 2.38
</TABLE>
The following summarizes information about the Company's stock options
outstanding and exercisable by price range at June 27, 1999 (options in
thousands):
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
---------------------------------------------- --------------------------
WEIGHTED-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......... 1,686 7.3 $2.04 1,052 $2.04
$4.00 - $8.00........ 3,831 5.8 4.84 2,990 4.80
$8.00 - $12.00....... 431 2.0 9.24 278 9.21
</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 expenses are as follows:
<TABLE>
<CAPTION>
JUNE 27, JUNE 28, JUNE 29,
1999 1998 1997
----------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net income............................. As reported $(100,921) $18,143 $ 1,544
Pro forma (102,044) 17,082 721
Compensation Expense................... Pro forma 1,123 1,061 823
Basic Earnings Per Share............... As reported (3.11) .56 .05
Pro forma (3.15) .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 4.60% to 6.02% for fiscal year 1999, 5.08% to 6.22% for fiscal year 1998 and
6.22% to 6.39% in fiscal 1997; expected dividend yield of 0.0%; and expected
life of 2.0 to 9.67 years. The per share weighted-average fair value of options
granted was $1.62 during fiscal year 1999, $1.11 during fiscal 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
F-16
<PAGE> 69
ENTEX INFORMATION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
employee's eligible compensation. The amount charged to expense for the matching
contribution was $2,120, $2,008 and $1,655 for the years ended June 27, 1999,
June 28, 1998 and June 29, 1997, respectively.
(9) LEASES
The Company routinely leases office buildings, equipment and automobiles.
These leases expire at various dates through August 2008. Certain leases contain
renewal provisions and generally require the Company to pay utilities,
insurance, taxes, and other operating expenses. Future minimum rental payments
under operating leases that have initial or remaining non-cancelable lease terms
in excess of one year as of June 27, 1999 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE:
- -----------------
<S> <C>
2000............................................. $11,450
2001............................................. 10,761
2002............................................. 9,376
2003............................................. 6,447
2004............................................. 3,857
Thereafter....................................... 4,624
-------
Total minimum lease payments................ $46,515
=======
</TABLE>
Rent expense for all operating leases totaled $11,973, $13,082 and $11,908
for the years ended June 27, 1999, June 28, 1998 and June 29, 1997,
respectively. At June 27, 1999, future minimum rentals to be received under
non-cancelable subleases approximate $3,336.
Capital leases are insignificant at June 27, 1999.
F-17
<PAGE> 70
Schedule II
ENTEX INFORMATION SERVICES, INC.
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Balance at Charged to Charged to
beginning costs and other Balance at
Description of period expenses accounts Deductions end of period
- ----------- ---------- --------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Allowance for
doubtful
accounts:
1999.......... $4,662 $1,083 $ -- $(840) $4,905
1998.......... 4,746 795 -- (879) 4,662
1997.......... 4,101 494 -- 171 4,746
Vendor
receivable
reserve:
1999......... $3,787 $ 226 $ -- $ -- $4,013
1998......... 2,000 1,787 -- -- 3,787
1997......... -- 2,000 -- -- 2,000
</TABLE>
F-18
<PAGE> 1
Exhibit 10.2.1
AMENDMENT NO. 11 TO THE
FOURTH AMENDED AND RESTATED AGREEMENT FOR WHOLESALE FINANCING
This Amendment No. 11 to the Fourth Amended and Restated Agreement for Wholesale
Financing (this "Amendment") is made as of January 29, 1998 by and between
ENTEX Information Services, Inc., a Delaware corporation ("Borrower") and IBM
Credit Corporation, a Delaware corporation ("IBM Credit").
RECITALS
A. Borrower and IBM Credit have entered into that certain Fourth Amended
and Restated Agreement for Wholesale Financing dated as of September 15, 1995
(as amended on September 19, 1995 and as further amended, supplemented or
otherwise modified from time to time, the "Agreement").
B. The parties have agreed to modify the Agreement as more specifically
set forth below, upon and subject to the terms and conditions of this Amendment
as set forth herein.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, Borrower and IBM Credit hereby agree as follows:
Section 1. Definitions. All capitalized terms not otherwise defined herein
shall have the respective meanings set forth in the Agreement.
Section 2. Modification of Agreement
A. Section 3(c) of the Agreement is hereby amended by deleting the first
paragraph and items (A) through (E) thereof in their entirety and substituting,
in lieu thereof, the following:
"(c) "Value" shall mean at any time with respect to the items
specified below (i) which are owned by (and in the possession or under the
control of) Borrower and located in a jurisdiction in the United States in
which the Uniform Commercial Code has been adopted and (ii) as to which IBM
Credit has a valid, perfected first priority security interest, the sum of each
percentage specified opposite each such item of (x) in the case of any item of
Eligible Ingram Non-Financed Products, Financed Products or other inventory,
the lower of such item's cost and fair market value (in each case, net of
applicable reserves), provided that the aggregate Value of all Eligible Ingram
Non-Financed Products shall not exceed $15,000,000, and (y) in the case of
Eligible Receivables and Authorized Supplier Claims described below, the
outstanding face amount thereof.
ENTEX11 (01/98) page 1 of 4
<PAGE> 2
<TABLE>
<S> <C> <C>
A. Financed Products and other inventory located in the Erlanger, Kentucky; Canton, Massachusetts; Frederick,
Maryland; Kent, Washington; Atlanta, Georgia; Rio Rancho, New Mexico; Dupont, Oregon; Santa Clara, California;
Folsom, California; Sacramento, California; Chandler, Arizona; Wichita, Kansas; or Redmond, Washington warehouse.
(i) Obsolete or defective Service Parts 0%
(ii) IBM Service Parts which are neither obsolete nor defective 50%
(iii) Service parts which are neither IBM Service Parts nor obsolete or defective 50%
(iv) Financed Products on display for demonstration purposes 0%
(v) Financed Products constituting clearance or returned goods 0%
(vi) All other Financed Products 100%
(vii) Eligible Ingram Non-Financed Products 50%
Note: the total Value for Eligible Ingram Non-Financed Products shall not exceed $15,000,000
(viii) Other inventory constituting Collateral 20%
B. Financed Products and other inventory located outside of the Erlanger, Kentucky; Canton, Massachusetts; Frederick,
Maryland; Kent, Washington; Atlanta, Georgia; Rio Rancho, New Mexico; Dupont, Oregon; Santa Clara, California;
Folsom, California; Sacramento, California; Chandler, Arizona; Wichita, Kansas; or Redmond, Washington warehouse.
(ix) IBM Service Parts 0%
(x) Financed Products on display for demonstration purposes 0%
(xi) Financed Products constituting clearance or returned goods 0%
(xii) All other Financed Products 80%
(xiii) Eligible Ingram Non-Financed Products (other than Ingram Micro Products) 0%
(xiv) Other inventory constituting Collateral 3%
C. Eligible Receivables 90%
D. Authorized Supplier Claims 100%
E. Section 19 of the Agreement is hereby amended by deleting the defined terms of "HP Special Accounts Collateral" and
"HP Special Inventory Collateral."
</TABLE>
page 2 of 4
<PAGE> 3
Section 3. Representations and Warranties. Borrower makes to IBM Credit the
following representations and warranties all of which are material and are made
to induce IBM Credit to enter into this Amendment.
Section 3.1 Accuracy and Completeness of Warranties and Representations. All
representations made by Borrower in the Agreement were true and accurate and
complete in every respect as of the date made, and, as amended by this
Amendment, all representations made by Borrower in the Agreement are true,
accurate and complete in every material respect as of the date hereof, and do
not fail to disclose any material fact necessary to make representations not
misleading.
Section 3.2 Violation of Other Agreements. The execution and delivery of this
Amendment and the performance and observance of the covenants to be
performed and observed hereunder do not violate or cause Borrower not to be in
compliance with the terms of any agreement to which Borrower is a party.
Section 3.3 Litigation. Except as has been disclosed by Borrower to IBM Credit
in writing, there is no litigation, proceeding, investigation or labor dispute
pending or threatened against Borrower, which if adversely determined, would
materially adversely affect Borrower's ability to perform Borrower's
obligations under the Agreement and the other documents, instruments and
agreements executed in connection therewith or pursuant hereto.
Section 3.4 Enforceability of Amendment. This Amendment has been duly
authorized, executed and delivered by Borrower and is enforceable against
Borrower in accordance with its terms.
Section 4. Ratification of Agreement. Except as specifically amended hereby,
all of the provisions of the Agreement shall remain unamended and in full force
and effect. Borrower hereby, ratifies, confirms and agrees that the Agreement,
as amended hereby, represents a valid and enforceable obligation of Borrower,
and is not subject to any claims, offsets or defense.
Section 5. Governing Law. This Amendment shall be governed by and interpreted
in accordance with the laws of the State of New York.
page 3 of 4
<PAGE> 4
Section 6. Counterparts. This Amendment may be executed in any number of
counterparts, each of which shall be an original and all of which shall
constitute one agreement.
IN WITNESS WHEREOF, this Amendment has been duly executed by the authorized
officers of the undersigned as of the day and year first above written.
ENTEX INFORMATION SERVICES, INC.
By: /s/ Mike Archambault
--------------------------
Title: Treasurer
------------------------
Accepted and Agreed:
IBM CREDIT CORPORATION
By: /s/ Glenn Miotke
------------------------------------
Title: Manager Credit-Selected Accounts
----------------------------------
page 4 of 4
<PAGE> 1
Exhibit 10.2.2
AMENDMENT NO. 12 TO THE
FOURTH AMENDED AND RESTATED AGREEMENT FOR WHOLESALE FINANCING
This Amendment No. 12 to the Fourth Amended and Restated Agreement for
Wholesale Financing (this "Amendment") is made as of February 23, 1998 by and
between ENTEX Information Services, Inc., a Delaware corporation ("Borrower")
and IBM Credit Corporation, a Delaware corporation ("IBM Credit").
RECITALS
A. Borrower and IBM Credit have entered into that certain Fourth
Amended and Restated Agreement for Wholesale Financing dated as of September
15, 1995 (as amended on September 19, 1995 and as further amended, supplemented
or otherwise modified from time to time, the "Agreement").
B. Borrower and IBM Credit have entered into that certain Quick Lease
Advances Agreement dated as of April 28, 1997 (as amended, supplemented or
otherwise modified from time to time, the "QLA Agreement").
C. The parties have agreed to modify the Agreement as more specifically
set forth below, upon and subject to the terms and conditions of this Amendment
as set forth herein.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, Borrower and IBM Credit hereby agree as follows:
Section 1. Definitions. All capitalized terms not otherwise defined herein
shall have the respective meanings set forth in the Agreement and the QLA
Agreement and if there is a conflict between the Agreement and the QLA
Agreement in the definition of a term, the definition in the Agreement will
prevail.
Section 2. Modification of Agreement
A. Section 3.(c) of the Agreement is hereby amended by adding a
subsection "F" as follows:
"F. Eligible Invalid QLA Invoices
(i) Prior to February 23, 1998 0%
(ii) From February 23, 1998 through May 23, 1998 50%
(iii) From May 24, 1998 and thereafter 0%
Page 1 of 3
<PAGE> 2
B. Section 12 of the Agreement is hereby amended by adding the following
definition in its proper alphabetical order:
"Eligible Invalid QLA Invoice" shall mean any QLA Invoice (as defined in
the QLA Agreement) against which a QLA Advance (as defined in the QLA
Agreement) was made and which has become an Invalid QLA Advance (as defined in
the QLA Agreement) solely pursuant to item "(ii)" within such definition of
Invalid QLA Advance provided such QLA Invoice meets all other criteria of an
Eligible Receivable (as defined in the Agreement) except for the requirement
that Eligible Receivables not remain unpaid more than 90 days from invoice date.
Section 3. Representations and Warranties. Borrower makes to IBM Credit the
following representations and warranties all of which are material and are made
to induce IBM Credit to enter into this Amendment.
Section 3.1 Accuracy and Completeness of Warranties and Representations. All
representations made by Borrower in the Agreement were true and accurate and
complete in every respect as of the date made, and, as amended by this
Amendment, all representations made by Borrower in the Agreement are true,
accurate and complete in every material respect as of the date hereof, and do
not fail to disclose any material fact necessary to make representations not
misleading.
Section 3.2 Violation of Other Agreements. The execution and delivery of
this Amendment and the performance and observance of the covenants to be
performed and observed hereunder do not violate or cause Borrower not to be in
compliance with the terms of any agreement to which Borrower is a party.
Section 3.3 Litigation. Except as has been disclosed by Borrower to IBM
Credit in writing, there is no litigation, proceeding, investigation or labor
dispute pending or threatened against Borrower, which if adversely determined,
would materially adversely affect Borrower's ability to perform Borrower's
obligations under the Agreement and the other documents, instruments and
agreements executed in connection therewith or pursuant hereto.
Section 3.4 Enforceability of Amendment. This Amendment has been duly
authorized, executed and delivered by Borrower and is enforceable against
Borrower in accordance with its terms.
Section 4. Ratification of Agreement. Except as specifically amended
hereby, all of the provisions of the Agreement shall remain unamended and in
full force and effect. Borrower hereby, ratifies, confirms and agrees that the
Agreement, as amended hereby, represents a valid and enforceable obligation of
Borrower, and is not subject to any claims, offset or defense.
page 2 of 3
<PAGE> 3
Section 5. Governing Law. This Amendment shall be governed by and
interpreted in accordance with the laws of the State of New York.
Section 6. Counterparts. This Amendment may be executed in any number of
counterparts, each of which shall be an original and all of which shall
constitute one agreement.
IN WITNESS WHEREOF, this Amendment has been duly executed by the authorized
officers of the undersigned as of the day and year first above written.
ENTEX INFORMATION SERVICES, INC.
By: /s/
---------------------------------
Title:
------------------------------
Accepted and Agreed:
IBM CREDIT CORPORATION
By: /s/
---------------------------------
Title: Mgr. Global Strategic-
------------------------------
Account Marketing
page 3 of 3
<PAGE> 1
Exhibit 10.2.5
AMENDMENT NO. 15
TO THE
FOURTH AMENDED AND RESTATED AGREEMENT FOR WHOLESALE FINANCING
This Amendment No. 15 to the Fourth Amended and Restated Agreement for Wholesale
Financing (this "Amendment") is made as of February 20, 1999 by and between
ENTEX Information Services, Inc., a Delaware corporation ("Borrower") and IBM
Credit Corporation, a Delaware corporation ("IBM Credit").
RECITALS
A. Borrower and IBM Credit have entered into that certain Fourth
Amended and Restated Agreement for Wholesale Financing dated as of September
15, 1995 (as amended on September 19, 1995 and as further amended, supplemented
or otherwise modified from time to time, the "Agreement").
B. The parties have agreed to modify the Agreement as more
specifically set forth below, upon and subject to the terms and conditions of
this Amendment as set forth herein.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, Borrower and IBM Credit hereby agree as follows:
SECTION 1. DEFINITIONS. All capitalized terms not otherwise defined herein
shall have the respective meanings set forth in the Agreement.
SECTION 2. MODIFICATION OF AGREEMENT
Effective on February 20, 1999, Section 1 of the Agreement is hereby
amended by deleting the second sentence after the title "Line of Credit" of
Section 1 in its entirety and substituting, in lieu thereof, the following:
"The amount of the Line of Credit shall be $475,000,000 on any day, of
which (x) not less than $10,500,000 shall be available for Ingram Micro
Advances (as hereinafter defined) and (y) not more than 464,500,000 shall be
available for all other Advances (as hereinafter defined)."
SECTION 3. REPRESENTATIONS AND WARRANTIES. Borrower makes to IBM Credit the
following representations and warranties all of which are material and are made
to induce IBM Credit to enter into this Amendment.
SECTION 3.1 ACCURACY AND COMPLETENESS OF WARRANTIES AND REPRESENTATIONS. All
representations made by Borrower in the Agreement were true and accurate and
complete in every respect as of the date made, and, as amended by this
Amendment, all representations made by Borrower in the Agreement are true,
accurate and complete in every material respect as of the date hereof, and do
not fail to disclose any material fact necessary to make representations not
misleading.
1
<PAGE> 2
SECTION 3.2 VIOLATION OF OTHER AGREEMENTS. The execution and delivery of this
Amendment and the performance and observance of the covenants to be performed
and observed hereunder do not violate or cause Borrower not to be in compliance
with the terms of any agreement to which Borrower is a party.
SECTION 3.3 LITIGATION. Except as has been disclosed by Borrower to IBM Credit
in writing, there is no litigation, proceeding, investigation or labor dispute
pending or threatened against Borrower, which if adversely determined, would
materially adversely affect Borrower's ability to perform Borrower's
obligations under the Agreement and the other documents, instruments and
agreements executed in connection therewith or pursuant hereto.
SECTION 3.4 ENFORCEABILITY OF AMENDMENT. This Amendment has been duly
authorized, executed and delivered by Borrower and is enforceable against
Borrower in accordance with its terms.
SECTION 4. RATIFICATION OF AGREEMENT. Except as specifically amended hereby,
all of the provisions of the Agreement shall remain unamended and in full force
and effect. Borrower hereby, ratifies, confirms and agrees that the
Agreement, as amended hereby, represents a valid and enforceable obligation of
Borrower, and is not subject to any claims, offsets or defense.
SECTION 5. GOVERNING LAW. This Amendment shall be governed by and interpreted
in accordance with the laws of the State of New York.
SECTION 6. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, each of which shall be an original and all of which shall
constitute one agreement.
IN WITNESS WHEREOF, this Amendment has been duly executed by the authorized
officers of the undersigned as of the day and year first above written.
ENTEX INFORMATION SERVICES, INC.
By: /s/ Kenneth A. Ghazey By: /s/ John McKenna
----------------------------- -----------------------------
Title: President Title: CEO
-------------------------- --------------------------
Accepted and Agreed:
IBM CREDIT CORPORATION
By: /s/ Glenn Miotke
-----------------------------
Title: Mgr. Global Custom Solutions
-----------------------------
<PAGE> 1
Exhibit 10.2.6
ACKNOWLEDGMENT, WAIVER AND AMENDMENT NO. 16
TO THE
FOURTH AMENDED AND RESTATED AGREEMENT FOR WHOLESALE FINANCING
This Acknowledgment, Waiver and Amendment No. 16 to the Fourth Amended and
Restated Agreement for Wholesale Financing (this "Amendment") is made as of May
10, 1999 by and between ENTEX Information Services, Inc., a Delaware
corporation ("Borrower") and IBM Credit Corporation, a Delaware corporation
("IBM Credit").
RECITALS
A. Borrower and IBM Credit have entered into that certain Fourth Amended
and Restated Agreement for Wholesale Financing dated as of September 15, 1995
(as amended on September 19, 1995 and as further amended, supplemented or
otherwise modified from time to time, the "Agreement").
B. Borrower is in default of one or more of its financial covenants
contained in the Agreement; and
C. IBM Credit is willing to waive such defaults subject to the conditions
set forth below.
D. The parties have agreed to modify the Agreement as more specifically
set forth below, upon and subject to the terms and conditions of this Amendment
as set forth herein.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, Borrower and IBM Credit hereby agree as follows:
Section 1. Definitions. All capitalized terms not otherwise defined herein
shall have the respective meanings set forth in the Agreement.
Section 2. (A) Borrower acknowledges that the financial covenants set forth in
Section 12 of the Agreement are applicable to the financial results of Borrower
for the fiscal quarter ending March 31, 1999, and Borrower was required to
maintain such financial covenants at all times. Borrower further acknowledges
its attainment based on its draft financial statements was as follows:
<TABLE>
<CAPTION>
Covenant Covenant Requirement Covenant Actual
-------- -------------------- ---------------
<S> <C> <C>
Current assets to current Equal to or greater than 0.92:1:00
liabilities 0.90:1.00
EBITDA to Interest Expense Equal to or greater than
0.70:1.00 0.71:1.00
</TABLE>
Page 1 of 6
<PAGE> 2
Tangible Net Worth Equal to or greater than
Requirement $16,700,000 -$800,000
Section 3. Waivers to Agreement. IBM Credit hereby waives the defaults of
Borrower with the terms of the Agreement to the extent such defaults are set
forth in Section 2 hereof. In the event Borrower's actual financial results for
the fiscal quarter ending March 31, 1999, as reported in the financial
statements delivered by Borrower to IBM Credit pursuant to Section 2(c)(ii) of
the Agreement, are materially worse than as reported in Section 2 hereof, an
Event of Default shall be deemed to have occurred.
Section 4. Modification of Agreement
A. The following term is incorporated into and supplements the Agreement
as if fully set forth as an additional term therein:
"Borrower agrees to pay IBM Credit a fee in the amount of Three Hundred
Thousand Dollars ($300,000) which shall be due and payable on May 10, 1999
in consideration for modifying the terms of the Agreement and for
restructuring the financial covenants pursuant to Section 4 F., Section 4
G. and Section 4 H. of Amendment No. 16 to the Fourth Amended and Restated
Agreement for Wholesale Financing."
B. Section 1 of the Agreement is hereby amended by deleting the second
sentence after the title "Line of Credit" of Section 1 in its entirety and
substituting, in lieu thereof, the following:
"(a) The amount of the Line of Credit shall be (1) until the Compucom
Closing Date (as hereinafter defined), $475,000,000.00 on any day, (2) from the
Compucom Closing Date to and including June 9, 1999, the amount of the Line of
Credit shall be $300,000,000.00 on any day, (3) from June 10, 1999 to and
including August 9, 1999 the amount of the Line of Credit shall be
$250,000,000, and (4) from August 10, 1999 and thereafter, the amount of the
Line of Credit shall be $150,000,000 on any day."
C. Section 3(a) of the Agreement is hereby amended effective as of the
Compucom Closing Date by (1) changing the definition of Base Finance Charge
contained in the second paragraph of such Section 3(a) from "the sum of the
LIBOR for such day plus Applicable Margin" to "the sum of LIBOR (as hereinafter
defined) plus 300 basis points", and (2) deleting from the second line of the
third paragraph thereof the amount "$10,000" and substituting in lieu thereof,
the amount of "$5,000".
D. Effective on-the Compucom Closing Date to and including November 9,
1999, Section 3(c) of the Agreement is hereby amended by deleting items (A)
through (C) thereof in their entirety and substituting, in lieu thereof, the
following items (A) through (D):
Page 2 of 6
<PAGE> 3
"A. Financed Products and other inventory constituting Collateral
located in the Canton, Massachusetts; Kent, Washington; Atlanta, Georgia; Rio
Rancho, New Mexico; Dupont, Oregon; Santa Clara, California; Folsom, California;
Sacramento, California; Chandler, Arizona; Wichita, Kansas; or Redmond,
Washington warehouse:
(i) Financed Products (i)100%
(ii) Other inventory constituting Collateral
in which IBM Credit has a perfected first
priority security interest (ii)20%
B.(i) Eligible Receivables (i) 88%
(ii) Receivables that but for the fact that
they remain unpaid more than 90 days
from date of invoice would constitute
Eligible Receivables (ii)50%
C.(i) Authorized Supplier Claims (i) 88%
(ii) Authorized Supplier Claims for which
Borrower has not been paid more than
90 days from the date such claim was
submitted by Borrower (ii)50%
(iii) Verifiable payments owed by IBM
Credit to Borrower arising from lease
agreements more than 90 days from
date of invoice (iii)75%
D. Service parts which are neither obsolete
nor defective 30%
Notwithstanding any other provision of the Agreement, the
aggregate Value of the Collateral as set forth in this Section 3(c) shall not
exceed Twenty Million Dollars ($20,000,000) more than the aggregate Value of
the Collateral as determined pursuant to the terms of this Section 3(c) in
effect immediately prior to giving effect to this Amendment No. 16 to the
Agreement.
Page 3 of 6
<PAGE> 4
E. Effective on November 10, 1999 and thereafter, Section 3(c) of the
Agreement is hereby amended by deleting items (A) through (D) thereof in their
entirety and substituting, in lieu thereof, the following items (A) through (D):
"A. Financed Products and other inventory constituting Collateral located in
the Canton, Massachusetts; Kent, Washington; Atlanta, Georgia; Rio Rancho, New
Mexico; Dupont, Oregon; Santa Clara, California; Folsom, California; Sacramento,
California; Chandler, Arizona; Wichita, Kansas; or Redmond, Washington
warehouse:
(i) Financed Products (i) 100%
(ii) Other inventory constituting Collateral
in which IBM Credit has a perfected first
priority security interest (ii) 20%
B. Eligible Receivables 85%
C. Authorized Supplier Claims 85%
D. Service parts which are neither obsolete
nor defective 30%
F. Section 12 of the Agreement is hereby amended by deleting paragraph (a)
thereof in its entirety and substituting, in lieu thereof, the following
paragraph (a):
"(a) From October 1, 1998 to and including March 31, 1999, Borrower shall at
all times maintain a ratio of current assets to current liabilities equal to or
greater than 0.90:1.00, from April 1, 1999 to and including March 31, 2000,
Borrower shall at all times maintain a ratio of current assets to current
liabilities equal to or greater than 0.72:1.00, from April 1, 2000 to and
including September 30, 2000, Borrower shall at all times maintain a ratio of
current assets to current liabilities equal to or greater than 0.74:1.00, and
from October 1, 2000 and thereafter, Borrower shall at all times maintain a
ratio of current assets to current liabilities equal to or greater than
0.85:1.00."
G. Section 12 of the Agreement is hereby amended by deleting paragraph (b)
thereof in its entirety and substituting, in lieu thereof, the following
paragraph (b):
"(b) From July 1, 1998 to and including December 31, 1998, Borrower shall not
permit the ratio of (i) EBITDA for the fiscal year-to-date to (ii) Interest
Expense for the fiscal year-to-date to be less than 0.25:1.00; from July 1, 1998
to and including March 31, 1999, Borrower shall not permit the ratio of (i)
EBITDA for the fiscal year-to-date to (ii) Interest Expense for the fiscal
year-to-date to be less than 0.70:1.00; from April 1, 1999 to and including June
30, 1999, Borrower shall not permit the ratio of (i) EBITDA for the Fiscal
Quarter to (ii) Interest Expense for the Fiscal Quarter to be less than
0.55:1.00; from July 1, 1999 to and
Page 4 of 6
<PAGE> 5
including September 30, 1999, Borrower shall not permit the ratio of (i) EBITDA
for the Fiscal Quarter to (ii) Interest Expense for the Fiscal Quarter to be
less than 1.20:1.00; from October 1, 1999 to and including December 31, 1999,
Borrower shall not permit the ratio of (i) EBITDA for the Fiscal Quarter to (ii)
Interest Expense for the Fiscal Quarter to be less than 1.50:1.00; from January
1, 2000 to and including March 31, 2000. Borrower shall not permit the ratio of
(i) EBITDA for the Fiscal Quarter to (ii) Interest Expense for the Fiscal
Quarter to be less than 1.50:1.00; and from April 1, 2000 and thereafter,
Borrower shall not permit the ratio of (i) EBITDA for the Fiscal Quarter to (ii)
Interest Expense for the Fiscal Quarter to be less than 1.80:1.00."
H. Section 12 of the Agreement is hereby amended by deleting paragraph (c)
thereof in its entirety and substituting, in lieu thereof, the following
paragraph (c):
"(c) Borrower shall as of the end of each Fiscal Quarter commencing with
the Fiscal Quarter ending June 31, 1999 maintain Tangible Net Worth equal to or
greater than the Tangible Net Worth Requirement for such Fiscal Quarter. For
purposes of this section "Tangible Net Worth Requirement" (i) for the Fiscal
Quarter ending June 30, 1999, shall mean negative Eight Million Dollars
(-$8,000,000), and (ii) for each Fiscal Quarter thereafter shall mean the sum of
the Tangible Net Worth Requirement for the previous Fiscal Quarter plus eighty
percent (80%) of the Consolidated Net Income of Borrower for such previous
Fiscal Quarter plus One Hundred Percent (100%) of the net proceeds received from
the issuance of additional equity. If Consolidated Net Income for a Fiscal
Quarter is less than Zero Dollars ($0) then for purposes of Tangible Net Worth
Requirement, Consolidated Net Income shall be deemed to be Zero Dollars ($0)."
I. Section 19 of the Agreement is hereby amended by deleting the
definitions of "Applicable Margin" and "Indebtedness/EBITDA Ratio".
J. Section 19 of the Agreement is hereby amended by inserting, in the
appropriate alphabetical order, the following definition of "Compucom Closing
Date":
"Compucom Closing Date": shall mean, the date, which date shall be no later
than May 15, 1999, of the consummation of the closing of the Asset Purchase
Agreement, dated as of May 10, 1999 by and between Borrower and Compucom
Systems, Inc., a copy of which agreement has been provided to IBM Credit.
Section 5. Representations and Warranties. Borrower makes to IBM Credit the
following representations and warranties all of which are material and are made
to induce IBM Credit to enter into this Amendment.
Section 5.1 Accuracy and Completeness of Warranties and Representations. All
representations made by Borrower in the Agreement were true and accurate and
complete in every respect as of the date made, and, as amended by this
Amendment, all representations made
Page 5 of 6
<PAGE> 6
by Borrower in the Agreement are true, accurate and complete in every material
respect as of the date hereof, and do not fail to disclose any material fact
necessary to make representations not misleading.
SECTION 5.2 VIOLATION OF OTHER AGREEMENTS. The execution and delivery of this
Amendment and the performance and observance of the covenants to be performed
and observed hereunder do not violate or cause Borrower not to be in compliance
with the terms of any agreement to which Borrower is a party.
SECTION 5.3 LITIGATION. Except as has been disclosed by Borrower to IBM Credit
in writing, there is no litigation, proceeding, investigation or labor dispute
pending or threatened against Borrower, which if adversely determined, would
materially adversely affect Borrower's ability to perform Borrower's
obligations under the Agreement and the other documents, instruments and
agreements executed in connection therewith or pursuant hereto.
SECTION 5.4 ENFORCEABILITY OF AMENDMENT. This Amendment has been duly
authorized, executed and delivered by Borrower and is enforceable against
Borrower in accordance with its terms.
SECTION 6. RATIFICATION OF AGREEMENT. Except as specifically amended hereby,
all of the provisions of the Agreement shall remain unamended and in full force
and effect. Borrower hereby, ratifies, confirms and agrees that the Agreement,
as amended hereby, represents a valid and enforceable obligation of Borrower,
and is not subject to any claims, offsets or defense.
SECTION 7. GOVERNING LAW. This Amendment shall be governed by and interpreted
in accordance with the laws of the State of New York.
SECTION 8. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, each of which shall be an original and all of which shall
constitute one agreement.
IN WITNESS WHEREOF, this Amendment has been duly executed by the authorized
officers of the undersigned as of the day and year first above written.
ENTEX INFORMATION SERVICES, INC.
By: /s/ By: /s/
--------------------------- -----------------------------
Title: President Title: CEO
------------------------ --------------------------
Accepted and Agreed:
IBM CREDIT CORPORATION
By: /s/
---------------------------
Title: Manager, Commercial Financing Solutions Americas
Page 6 of 6
<PAGE> 1
Exhibit 10.2.7
AMENDMENT NO. 18
TO THE
FOURTH AMENDED AND RESTATED AGREEMENT FOR WHOLESALE FINANCING
This Amendment No. 18 to the Fourth Amended and Restated Agreement for Wholesale
Financing (this "Amendment") is made as of September 24, 1999 by and between
ENTEX Information Services, Inc., a Delaware corporation ("Borrower") and IBM
Credit Corporation, a Delaware corporation ("IBM Credit").
RECITALS
A. Borrower and IBM Credit have entered into that certain Fourth Amended and
Restated Agreement for Wholesale Financing dated as of September 15, 1995 (as
amended on September 15, 1995 and as further amended, supplemented or otherwise
modified from time to time, the "Agreement").
B. The parties have agreed to modify the Agreement as more specifically set
forth below, upon and subject to the terms and conditions of this Amendment as
set forth herein.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged,
Borrower and IBM Credit hereby agree as follows:
Section 1. Definitions. All capitalized terms not otherwise defined herein shall
have the respective meanings set forth in the Agreement.
Section 2. Modification of Agreement
A. The following term is incorporated into and supplements the Agreement as
if fully set forth as an additional term therein:
"Borrower agrees to pay IBM Credit a fee in the amount of Fifty Thousand
Dollars ($50,000.00) which shall be due and payable on October 10, 1999 in
consideration for modifying the terms of the Agreement and for
restructuring the financial covenants pursuant to Section 2 B., and Section
2 C. of Amendment No. 18 to the Fourth Amended and Restated Agreement for
Wholesale Financing."
B. Section 12 of the Agreement is hereby amended by deleting paragraph (b)
thereof in its entirety and substituting, in lieu thereof, the following
paragraph (b):
"(b) From April 1, 1999 to and including June 30, 1999, Borrower shall not
permit the ratio of (i) EBITDA for the fiscal year-to-date ending June 30, 1999
to (ii) Interest Expense for the fiscal year-to-date ending June 30, 1999 to be
less than 0.55:1.00; from July 1, 1999 to and including September 30, 1999,
Borrower shall not permit the ratio of (i) EBITDA for the Fiscal
<PAGE> 2
Quarter ending September 30, 1999 to (ii) Interest Expense for the Fiscal
Quarter ending September 30, 1999 to be less than 1.10:1.00; from October 1,
1999 to and including December 31, 1999, Borrower shall not permit the ratio of
(i) EBITDA for the Fiscal Quarter ending December 31, 1999 to (ii) Interest
Expense for the Fiscal Quarter ending December 31, 1999 to be less than
1.15:1.00; from January 1, 2000 to and including March 31, 2000, Borrower shall
not permit the ratio of (i) EBITDA for the Fiscal Quarter ending March 31, 2000
to (ii) Interest Expense for the Fiscal Quarter ending March 31, 2000 to be less
than 1.20:1.00; and from April 1, 2000 to and including June 30, 2000, Borrower
shall not permit the ratio of (i) EBITDA for the Fiscal Quarter ending June 30,
2000 to (ii) Interest Expense for the Fiscal Quarter June 30, 2000 to be less
than 1.40:1.00; and from July 1 and thereafter, Borrower shall not permit the
ratio of (i) EBITDA for any Fiscal Quarter ending during such period to (ii)
Interest Expense for such Fiscal Quarter to be less than 1.80:1.00."
C. Section 12 of the Agreement is hereby amended by de1eting paragraph (c)
thereof in its entirety and substituting, in lieu thereof, the following
paragraph (c):
"(c) Borrower shall as of the end of each Fiscal Quarter commencing with
the Fiscal Quarter ending September 30, 1999 maintain Tangible Net Worth equal
to or greater than the Tangible Net Worth Requirement for such Fiscal Quarter.
For purposes of this section "Tangible Net Worth Requirement" (i) for the Fiscal
Quarter ending September 30, 1999, shall mean negative Twelve Million Dollars
(-$12,000,000), and (ii) for each Fiscal Quarter thereafter, shall mean the sum
of the Tangible Net Worth Requirement for the previous Fiscal Quarter plus
eighty percent (80%) of the Consolidated Net Income of Borrower for such
previous Fiscal Quarter plus One Hundred Percent (100%) of the net proceeds
received from the issuance of additional equity. If Consolidated Net Income for
a Fiscal Quarter is less than Zero Dollars ($0) then for purposes of Tangible
Net Worth Requirement, Consolidated Net Income shall be deemed to be Zero
Dollars ($0)."
SECTION 3. REPRESENTATIONS AND WARRANTIES. Borrower makes to IBM Credit the
following representations and warranties all of which are material and are made
to induce IBM Credit to enter into this Amendment.
SECTION 3.1 ACCURACY AND COMPLETENESS OF WARRANTIES AND REPRESENTATIONS. All
representations made by Borrower in the Agreement were true and accurate and
complete in every respect as of the date made, and, as amended by this
Amendment, all representations made by Borrower in the Agreement are true,
accurate and complete in every material respect as of the date hereof, and do
not fail to disclose any material fact necessary to make representations not
misleading.
SECTION 3.2 VIOLATION OF OTHER AGREEMENTS. The execution and delivery of this
Amendment and the performance and observance of the covenants to be performed
and observed hereunder do not violate or cause Borrower not to be in compliance
with the terms of any agreement to which Borrower is a party.
<PAGE> 3
SECTION 3.3 LITIGATION. Except as has been disclosed by Borrower to IBM Credit
in writing, there is no litigation, proceeding, investigation or labor dispute
pending or threatened against Borrower, which if adversely determined, could
reasonably be expected to materially adversely affect Borrower's ability to
perform Borrower's obligations under the Agreement and the other documents,
instruments and agreements executed in connection therewith or pursuant hereto.
SECTION 3.4 ENFORCEABILITY OF AMENDMENT. This Amendment has been duly
authorized, executed and delivered by Borrower and is enforceable against
Borrower in accordance with its terms.
SECTION 4. RATIFICATION OF AGREEMENT. Except as specifically amended hereby, all
of the provisions of the Agreement shall remain unamended and in full force and
effect. Borrower hereby, ratifies, confirms and agrees that the Agreement, as
amended hereby, represents a valid and enforceable obligation of Borrower, and
is not subject to any claims, offsets or defense.
SECTION 5. GOVERNING LAW. This Amendment shall be governed by and interpreted in
accordance with the laws of the State of New York.
SECTION 6. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, each of which shall be an original and all of which shall
constitute one agreement.
IN WITNESS WHEREOF, this Amendment has been duly executed by the authorized
officers of the undersigned as of the day and year first above written.
ENTEX INFORMATION SERVICES, INC.
By: /s/ By: /s/
---------------------------- ----------------------------
Title: Title:
------------------------- -------------------------
Accepted and Agreed:
IBM CREDIT CORPORATION
By: /s/
----------------------------
Title: Manager, Commercial Financing Solutions Americas
<PAGE> 1
Exhibit 10.6.1
SUBLEASE EXTENSION AND AMENDMENT
THIS SUBLEASE EXTENSION AND AMENDMENT, is made as of April 7, 1999, by and
between, GENERAL ELECTRIC COMPANY ("Sublessor") and, ENTEX INFORMATION
SERVICES, INC. ("Sublessee").
RECITALS:
WHEREAS, Sublessor and Sublessee are parties to a Sublease dated June 6,
1997 ("Sublease") whereby Sublessor has Subleased to Sublessee 3,808 square feet
of net usable space on the first floor of the building located at and commonly
known as 6 International Drive, Rye Brook, Westchester County, New York
("Sublease Premises"); and
WHEREAS, the current term of the Sublease expires on April 29, 2000; and
WHEREAS, Sublessor and Sublessee desires to extend the term of the
Sublease for an additional month commencing April 30, 2000 and ending May 31,
2000 upon the terms and conditions as set forth in this Sublease Extension and
Amendment.
NOW THEREFORE, in consideration of the mutual covenants and agreements
contained herein and other good and valuable consideration, the receipt of
which is acknowledged, Sublessor and Sublessee agree as follows:
1. The term of the Sublease shall be extended for an additional month
commencing April 30, 2000 and terminating May 31, 2000 ("Extension
Term").
2. The provisions of Section 3 of the Sublease are amended to provide
that the Base Rent for the Premises during the Extension Term shall be
Six Thousand Two Hundred Sixty-Seven and 33/100 Dollars ($6,267.33),
which base rent Sublessee agrees to pay to Sublessor monthly, along
with all other additional rent as required under Section 3 of the
Sublease.
3 Sublessee shall have no further rights to extend the term of the
Sublease.
4. Except as otherwise modified and amended by the provisions set forth
in paragraphs 1 through 3 above, all other terms, covenants,
conditions, and provisions of the Sublease shall continue in full
force and effect during the Extension Term.
Page 1
<PAGE> 2
IN WITNESS WHEREOF, Sublessor and Sublessee have executed this Sublease
Extension and Amendment as of the date first written above.
SUBLESSOR
GENERAL ELECTRIC COMPANY
/s/ Mary Goos By: /s/ R. Palame
- --------------------------- -----------------------------------
Witness
/s/ Chuck Surum Title: Region Mgr.
- --------------------------- --------------------------------
Witness
SUBLESSEE
ENTEX INFORMATION SERVICES, INC.
/s/ Betty P. Reed By: /s/ George E. Perez
- --------------------------- -----------------------------------
Witness
/s/ Karen Feldman Title: Manager, Enterprise Facilities
- --------------------------- --------------------------------
Witness
Page 2
<PAGE> 1
Exhibit 10.7.1
SECOND AMENDMENT OF LEASE
AGREEMENT made effective as of the 31st day of December, 1998, by and
between RECKSON OPERATING PARTNERSHIP, L.P., a Delaware limited partnership
having an office at 660 White Plains Road, Tarrytown, New York 10591,
(hereinafter called "Landlord"), and ENTEX INFORMATION SERVICES, INC., having
an office at 6 International Drive, Reckson (formerly "Royal") Executive Park,
Rye Brook, New York 10573 (hereinafter called "Tenant").
RECITALS
WHEREAS, Royal Executive Park II, the predecessor-in-interest to Landlord,
and Tenant have entered into a Lease Agreement dated January 20, 1995 (the
"Original Lease") for the lease of certain premises (the "Leased Premises")
consisting of a portion of the ground floor in the building known as Reckson
Executive Park, Building 6, located in the Reckson (formerly "Royal") Executive
Park, Rye Brook, New York (the "Building"); and
WHEREAS, Royal Executive Park II, the predecessor-in-interest to Landlord,
and Tenant amended the Original Lease by entering into a First Amendment of
Lease dated October 18, 1995 (the "First Amendment" and, together with the
Original Lease, sometimes hereinafter collectively called the "Lease"),
whereby, among other things, the Expiration Date of the Original Lease was
extended to December 31, 1998; and
<PAGE> 2
WHEREAS, Landlord and Tenant desire to, among other things, amend the Lease
to further extend the term of the Lease for a period of three (3) years and five
(5) months to and including May 31, 2002.
NOW, THEREFORE, in consideration of the mutual premises contained herein
and for other good and valuable consideration, the receipt and sufficiency of
which being hereby acknowledged, the parties agree as follows:
ARTICLE I
Definitions
1.1 The recitals are specifically incorporated into the body of this
Agreement and shall be binding upon the parties hereto.
1.2 Unless expressly set forth to the contrary and except as modified by
this Agreement, all defined terms shall have the meanings as ascribed to them in
the Lease.
ARTICLE II
Lease Modifications
2.1 The Lease is hereby modified and amended as follows:
2.1.1 Lease of Premises. Landlord and Tenant hereby stipulate and agree
that the Leased Premises under the Lease contains 12,122 rentable square feet of
space.
2.1.2 Term. Article II, Section 2.01 of the Original Lease and Section 2
of the First Amendment are hereby modified and amended so as to further extend
the term of the Lease for a period
2
<PAGE> 3
of three (3) years and five (5) months to and including May 31, 2002. From and
after the date of this Agreement, all references to the term "Expiration Date"
under the Lease shall mean May 31, 2002.
2.1.3 Condition of Premises. Tenant hereby acknowledges that Landlord has
completed all work (if any) which it was obligated to perform under the Lease.
Tenant, therefore, also acknowledges that it is accepting the Leased Premises in
its "as is" condition and that Landlord shall have no obligation to perform any
work in or to the Leased Premises in order to prepare same for occupancy by
Tenant. Any alterations to be performed by Tenant in and to the Leased Premises
shall be subject to all of the terms, conditions and restrictions contained in
Article XI, Section 11.01 of the Original Lease.
2.1.4 Rental.
2.1.4.1 From the date of this Agreement through December 31, 1998,
the Annual Rental for the Leased Premises shall be payable in accordance with
Article IV of the Original Lease as modified by Section 3 of the First
Amendment.
2.1.4.2 Commencing on January 1, 1999 and continuing through the end
of the Term of the Lease, Annual Rental for the Leased Premises shall be payable
as follows:
During the period January 1, 1999 through and including December 31,
1999, the Annual Rental shall be in an amount equal to Two Hundred
Sixty-Six Thousand Six Hundred Eighty-Four and 04/100 ($266,684.04) Dollars
per annum, payable in equal monthly installments of Twenty-
3
<PAGE> 4
Two Thousand Two Hundred Twenty-Three and 67/100 ($22,223.67) Dollars;
During the period January 1, 2000 through and including December 31,
2000, the Annual Rental shall be in an amount equal to Two Hundred Ninety
Thousand Nine Hundred Twenty-Eight and 00/100 ($290,928.00) Dollars per
annum, payable in equal monthly installments of Twenty-Four Thousand Two
Hundred Forty-Four and 00/100 ($24,244.00) Dollars;
During the period January 1, 2001 through and including December 31,
2001, the Annual Rental shall be in an amount equal to Three Hundred Three
Thousand Fifty and 04/100 ($303,050.04) Dollars per annum, payable in equal
monthly installments of Twenty-Five Thousand Two Hundred Fifty-Four and
17/100 ($25,254.17) Dollars; and
During the period January 1, 2002 through and including May 31, 2002,
the Annual Rental shall be in an amount equal to One Hundred Twenty-six
Thousand Two Hundred Seventy and 85/100 ($126,270.85) Dollars for such five
(5) month period, payable in equal monthly installments of Twenty-Five
Thousand Two Hundred Fifty-Four and 17/100 ($25,254.17) Dollars.
2.1.4.3 Tenant acknowledges that the aforementioned Annual Rental is
exclusive of charges for Tenant's use of electric power in the Leased Premises,
which charges shall continue to be separately payable by Tenant in accordance
with Article V, Section 5.03 of the Original Lease, as amended by Section 6 of
the First Amendment.
2.1.5 Tenant Parking. Effective as of January 1, 1999, Section 13 of the
First Amendment shall be deleted in its entirety and, thereafter, Landlord shall
again only be required to provide Tenant with access to not less than forty (40)
non-exclusive parking spaces.
4
<PAGE> 5
2.1.6. NOTICES. Article XXI, Section 21.01 of the Original Lease is
hereby modified and amended by deleting the existing address for notices to
Landlord and replacing it with:
"Reckson Operating Partnership, L.P.
660 White Plains Road
Tarrytown, New York 11591
Attention: Director
with a copy to:
Lazer, Aptheker, Feldman, Rosella & Yedid, LLP
225 Old Country Road
Melville, New York 11747
Attn: Samuel Yedid, Esq."
2.1.7. INVESTOR'S APPROVAL. Section 25.02 of the Original Lease is
hereby deleted in its entirety.
2.1.8. RENEWAL OPTION. Section 20 of the First Amendment is hereby
deleted in its entirety. However, provided Tenant has complied with all the
terms, covenants and conditions of the Lease and is not then in default
thereof, Tenant shall have the option to renew the Lease, with respect to the
entire Leased Premises, for one (1) additional five (5) year period (the
"Renewal Term") to commence on June 1, 2002 and to expire on May 31, 2007, upon
the following terms and conditions:
(i) Tenant shall give notice to Landlord, in writing, no later than
June 1, 2001 that such option is being exercised. The parties agree to then
negotiate the minimum annual rent for the Renewal Term (the "Minimum Annual
Renewal Rent"). The Minimum Annual Renewal Rent is intended to be ninety-five
(95%) percent of
5
<PAGE> 6
the then current fair market annual rental rate per square foot per year for the
Leased Premises as of the commencement of the Renewal Term. Upon determination
of the Minimum Annual Renewal Rent, the Lease shall be renewed for the Renewal
Term on the same terms, covenants and conditions as contained in this Lease,
except that (A) the Minimum Annual Renewal Rent shall be fixed in accordance
with the provisions of this Section, (ii) the Leased Premises shall be delivered
in its "as is" condition as of the first day of the Renewal Term and (iii) there
shall be no further option to renew.
(ii) If Landlord and Tenant have not mutually agreed upon the Minimum
Annual Renewal Rent by December 1, 2001, they shall each select one real estate
appraiser each of whom shall conduct a real estate appraisal and furnish a
report to indicate their opinion of the fair market rental of the Leased
Premises.
(iii) If, after a review of the appraisal reports prepared and submitted in
accordance with Article 52(ii), above, Landlord and Tenant have not agreed on
the Minimum Annual Renewal Rent by February 1, 2002, the matter shall
immediately be submitted to arbitration before the American Arbitration
Association ("AAA"), and shall be determined by a single arbitrator in
accordance with the provisions of this lease and the then applicable rules of
the AAA within the County of Westchester, or of the closest office of the AAA.
The arbitrator shall, in determining the Minimum Annual Renewal Rent, take into
consideration the then existing current
6
<PAGE> 7
fair market rental value of similar premises in the vicinity. The arbitrator
shall then, on an expedited basis, choose one of the determinations of the two
appraisers originally selected by the parties. The parties agree that the
decision and determination to be made by the arbitrator with respect to the
Minimum Annual Renewal Rent shall be final and binding upon Landlord and Tenant.
(iv) Notwithstanding anything to the contrary contained in this Section,
in no event shall the Minimum Annual Renewal Rent be less than the minimum
annual rental rate applicable to the last twelve (12) months of the current term
of the Lease.
(v) Landlord and Tenant shall each separately pay their respective
designated appraisers. The expenses, fees and charges in connection with the
arbitration process set forth in clause (iii), above, shall be borne equally
between Landlord and Tenant.
(vi) Upon agreement as to the Minimum Annual Renewal Rent by the parties
hereto or upon the Minimum Annual Renewal Rent being fixed by the arbitrator, as
the case may be, the parties hereto shall enter into a supplementary agreement
extending the term of the Lease as hereinabove provided. In the event of no
agreement between the parties or no decision by arbitration prior to May 31,
2002, Tenant shall pay an interim fixed rental at the minimum annual rental
rate last in effect until the arbitration shall have been completed after which
Landlord and Tenant shall make
7
<PAGE> 8
appropriate adjustment of such interim rent, such adjustment to be as of the
commencement date of the Renewal Term.
This option to renew shall be personal to Entex Information Services, Inc. and
shall not be transferrable by operation of law or otherwise.
2.1.9 Cross-Defaults. Supplementing the provisions of Article XIII,
Section 13.01 of the Original Lease and Section 24 if the First Amendment, any
monetary default (beyond applicable notice and cure periods) by Tenant under any
other lease or license agreement for premises in the Building or any other
building within the Reckson Executive Park shall constitute a default under the
Lease.
ARTICLE III
Broker
------
3.1 Landlord and Tenant each represent to the other that this Second
Amendment of Lease was brought about by CB Richard Ellis, Inc., as broker, and
all negotiations with respect to this Second Amendment of Lease were conducted
exclusively among Landlord, Tenant and said broker. Landlord and Tenant each
agrees that if any claim is made for commissions by any other broker through or
on account of any acts of the representing party, such party will hold the other
free and harmless from any and all liabilities and expenses in connection
therewith, including reasonable attorney's fees. Specifically, Landlord shall
indemnify
8
<PAGE> 9
and hold Tenant harmless from and against any claim for commissions made by The
Galbreath Company or CB Richard Ellis, Inc. Landlord shall pay to CB Richard
Ellis, Inc. a renewal rate brokerage commission pursuant to a separate
agreement.
ARTICLE IV
RATIFICATION
4.1 Tenant represents and warrants that, to the best of its knowledge, the
Lease is presently in full force and effect, that no event of default has
occurred on the part of Landlord and that the Tenant has no defense or right of
offset in connection with Landlord's performance under the Lease to this date.
4.2 The parties hereby ratify and confirm all of the terms, covenants and
conditions of the Lease, except to the extent that those terms, covenants,
conditions are amended, modified or varied by this Agreement. If there is a
conflict between the provisions of the Lease, and the provisions of this
Agreement, the provisions of this Agreement shall control.
4.3 Landlord represents to Tenant that, as of the date of this Agreement,
there is no mortgage encumbering the Building in which the Leased Premises are
located.
9
<PAGE> 10
IN WITNESS WHEREOF, the parties have executed this Second Amendment to
Lease effective as of the day and year first above written.
RECKSON OPERATING PARTNERSHIP, L.P.
By: RECKSON ASSOCIATES REALTY CORP.,
its General Partner
<TABLE>
<S> <C>
Execution Date:
February , 1999 By: /s/
_______________________________
Execution Date: ENTEX INFORMATION SERVICES, INC.
February , 1999
By: /s/ Mike Archambault
________________________________
</TABLE>
<PAGE> 1
Exhibit 10.9.1
FIFTH LEASE AMENDMENT
THIS FIFTH LEASE AMENDMENT (the "Amendment") is executed this 13th day of
August, 1998, by and between DUKE REALTY LIMITED PARTNERSHIP, an Indiana limited
partnership ("Landlord"), and ENTEX INFORMATION SERVICES, INC., a Delaware
corporation ("Tenant").
W I T N E S S E T H :
WHEREAS, Landlord and Tenant entered into a certain lease dated May 15,
1995, as amended October 27, 1995, November 6, 1995, April 18, 1996 and July 1,
1996 (collectively, the "Lease"), whereby Tenant leased from Landlord certain
premises consisting of approximately 111,192 rentable square feet of space (the
"Original Premises") and 721 rentable square feet of additional space ("Third
Additional Space") in an office building commonly known as Governor's Pointe,
located at 4705 Duke Drive, Mason, Ohio 45040; and
WHEREAS, Landlord and Tenant desire to expand the Original Premises and
the Third Additional Space by approximately 29,071 rentable square feet (the
"Fourth Additional Space") which is comprised of space on the second floor of
the Building ("Second Floor Space") and the third floor of the Building ("Third
Floor Space") as depicted on EXHIBIT A-4 attached hereto; and
WHEREAS, Landlord and Tenant desire to amend certain provisions of the
Lease to reflect such expansion, changes and additions;
NOW, THEREFORE, in consideration of the foregoing premises, the mutual
covenants herein contained and each act performed hereunder by the parties,
Landlord and Tenant hereby agree that the Lease is amended as follows:
1. Incorporation of Recitals. The above recitals are hereby incorporated
into this Amendment as if fully set forth herein.
2. Amendment of Article 1. Lease of Premises.
(a) Commencing February 1, 1999 or such earlier time as Tenant occupies the
Fourth Additional Space ("Fourth Additional Space Commencement Date"), Article
1, Section 1.01 of the Lease is hereby amended by adding Exhibit A-4, attached
hereto and incorporated herein by reference, on which the Fourth Additional
Space is depicted. Collectively, the Original Premises, the Third Additional
Space and the Fourth Additional Space shall hereinafter be referred to as the
"Leased Premises".
(b) Commencing on the Fourth Additional Space Commencement Date,
Article 1, Section 1.02 is hereby amended by deleting subsections B, C, D, E
and K and substituting the following in lieu thereof:
B. Rentable Area: approximately 140,984 square feet;
C. Building Expense Percentage: 100%;
<PAGE> 2
D. Minimum Annual Rent:
Original Premises:
February 1, 1999 - July 17, 1999 $ 524,395.81 (5 mos., 17 days)
July 18, 1999 - July 17, 2000 $1,134,158.40 per year
July 18, 2000 - July 17, 2005 $1,245,350.40 per year
Third Additional Space:
February 1, 1999 - July 17, 1999 $ 3,316.99 (5 mos., 17 days)
July 18, 1999 - July 17, 2000 $ 7,173.96 per year
July 18, 2000 - July 17, 2005 $ 7,894.92 per year
Fourth Additional Space:
February 1, 1999 - January 31, 2000 $ 319,781.04 per year
February 1, 2000 - January 31, 2001 $ 327,920.88 per year
February 1, 2001 - January 31, 2002 $ 336,060.72 per year
February 1, 2002 - January 31, 2003 $ 344,491.32 per year
February 1, 2003 - January 31, 2004 $ 353,212.68 per year
February 1, 2004 - January 31, 2005 $ 361,933.92 per year
February 1, 2005 - July 17, 2005 $ 171,512.63 (5 mos., 17 days);
E. Monthly Rental Installments:
Original Premises:
February 1, 1999 - July 17, 2000 $ 94,513.20 per month
July 18, 2000 - July 17, 2005 $ 103,779.20 per month
Third Additional Space:
February 1, 1999 - July 17, 2000 $ 597.83 per month
July 18, 2000 - July 17, 2005 $ 657.91 per month
Fourth Additional Space:
February 1, 1999 - January 31, 2000 $ 26,648.42 per month
February 1, 2000 - January 31, 2001 $ 27,326.74 per month
February 1, 2001 - January 31, 2002 $ 28,005.06 per month
February 1, 2002 - January 31, 2003 $ 28,707.61 per month
February 1, 2003 - January 31, 2004 $ 29,434.39 per month
February 1, 2004 - January 31, 2005 $ 30,161.16 per month
February 1, 2005 - July 17, 2005 $ 30,912.16 per month;
K. Addresses for payments and notices:
Landlord: Duke Realty Limited Partnership
4555 Lake Forest Drive, Suite 400
Cincinnati, OH 45242
With Payments to: Duke Realty Limited Partnership
P.O. Box 960664
Cincinnati, OH 45296-0664
Tenant: Entex Information Services, Inc.
4705 Duke Drive
Mason, OH 45040
With a Copy to: Entex Information Services, Inc.
Attn: General Counsel
6 International Drive
Rye Brook, NY 10573
-2-
<PAGE> 3
4. Incorporation into Section 2.02. Construction of Tenant
Improvements. The following shall be added to Section 2.02 of the Lease:
"Landlord agrees to provide an allowance of Six Dollars and
Fifty Cents ($6.50) per rentable square foot of the Fourth Additional
Space for the cost of tenant finish improvements for the Fourth
Additional Space ("Fourth Additional Space Allowance"). Tenant shall be
responsible for the costs of any tenant finish improvements which
exceed the Fourth Additional Space Allowance. Landlord shall pay for
space planning and architectural constructing drawings for the Fourth
Additional Space which costs shall not be deducted from the Fourth
Additional Space Allowance.
Landlord agrees to perform and complete the work on the tenant
finish work for the Fourth Additional Space as determined by Tenant and
shall give Tenant written notice of the day on which Landlord expects
to complete such work. Landlord shall warrant the tenant finish work in
the Fourth Additional Space for one (1) year excluding normal wear and
tear and damage caused by the acts or omissions of Tenant.
Upon completion of the work in the Fourth Additional Space,
Tenant shall execute a letter of understanding as referred to in
Section 2.03 of the Lease."
5. Deletion of Section 18.19. Right of First Refusal. Tenant's
right of first refusal as set forth in Section 18.19 of the Lease is hereby
deleted and of no further force or effect.
6. Amendment of Section 18.21. Option to Terminate. Section
18.21 of the Lease is hereby amended to delete Tenant's option to terminate the
Lease at the end of the forty-eighth (48th) month of the Lease Term and to
increase the stated Termination Fee is Tenant exercises its right to terminate
the Lease at the end of the eighty-fourth (84th) month of the Lease Term to One
Million One Hundred Thirty-nine Thousand Three Hundred Ninety-one Dollars
($1,139,391,000).
7. Fourth Additional Space Commencement Date. If the Fourth
Additional Space is not available for Landlord to commence tenant finish work
on or before December 7, 1998, then the Fourth Additional Space Commencement
Date shall be adjusted to the earlier of the date that Landlord delivers the
Fourth Additional Space to Tenant complete with any tenant finish improvements
being completed by Landlord and this Amendment shall be revised to reflect
such new Fourth Additional Space Commencement Date. Notwithstanding the
foregoing, the Fourth Additional Space Commencement Date shall not be deferred
beyond the date on which Landlord would have been able to deliver the Leased
Premises with the tenant finish improvements being completed, but for delays
caused by the acts or omissions of Tenant. In addition, Landlord shall take
immediate legal action to gain possession of the Third Floor Space should it
not be available for tenant finish work by December 7, 1998. Notwithstanding
the above, if the Second Floor Space is not available on or before December 7,
1998, then this Amendment shall be adjusted to reflect the Third Floor Space
only and the Building Expense Percentage, Minimum Annual Rent, Monthly Rental
Installments and Fourth Additional Space Allowance shall be reduced
proportionately. If the Third Floor Space is not available to Landlord on or
before January 31, 1999, then Tenant may terminate this Amendment upon written
notice to Landlord on or before February 10, 1999. If Landlord has not
completed the tenant finish work in the Fourth Additional Space on or before
March 31, 1999 and such delay is not due to the acts of Landlord, then Tenant
may at its option complete such tenant finish
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<PAGE> 4
improvements and invoice Landlord for the reasonable costs of such tenant finish
improvements not to exceed the Allowance, or Tenant may terminate this Amendment
upon written notice to Landlord on or before April 10, 1999. The Minimum Annual
Rent and Annual Rental Adjustment for the Fourth Additional Space shall not
commence until the Fourth Additional Space Commencement Date, unless the Fourth
Additional Space Commencement Date is delayed as a result of the acts or
omissions of Tenant.
8. Tenant's Representations and Warranties. The undersigned represents
and warrants to Landlord that (i) Tenant is duly organized, validly existing and
in good standing in accordance with the laws of the state under which it was
organized; (ii) all action necessary to authorize the execution of this
Amendment has been taken by Tenant; and (iii) the individual executing and
delivering this Amendment on behalf of Tenant has been authorized to do so, and
such execution and delivery shall bind Tenant. Tenant, at Landlord's request,
shall provide Landlord with evidence of such authority.
9. Examination of Amendment. Submission of this instrument for
examination or signature to Tenant does not constitute a reservation or option,
and it is not effective until execution by and delivery to both Landlord and
Tenant.
10. Definitions. Except as otherwise provided herein, the capitalized
terms used in this Amendment shall have the definitions set forth in the Lease.
11. Incorporation. This Amendment shall be incorporated into and made a
part of the Lease, and all provisions of the Lease not expressly modified or
amended hereby shall remain in full force and effect.
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed
on the day and year first written above.
LANDLORD:
DUKE REALTY LIMITED PARTNERSHIP,
WITNESSES: an Indiana limited partnership
/s/ Naomi Gump
- ----------------------- By: Duke Realty Investments, Inc.,
Naomi Gump its general partner
- -----------------------
(Printed) By: /s/ James W. Gray
-------------------------------
/s/ Christi Jaeger James W. Gray
- ----------------------- Vice President and
Christi Jaeger General Manager
- -----------------------
(Printed)
TENANT:
ENTEX INFORMATION SERVICES, INC.,
a Delaware corporation
WITNESSES:
/s/ George E. Perez By: /s/ Dale Allardyce
- ----------------------- -------------------------------
George E. Perez
- ----------------------- Printed: Dale Allardyce
(Printed) --------------------------
Title: Executive Vice President,
----------------------------
/s/ Betty Reed Operations
- -----------------------
Betty Reed
- -----------------------
(Printed)
-4-
<PAGE> 5
STATE OF OHIO )
) SS:
COUNTY OF HAMILTON )
Before me, a Notary Public in and for said County and State, personally
appeared James W. Gray, by me known and by me known to be the Vice President
and General Manager of Duke Realty Investments, Inc., an Indiana corporation,
the general partner of Duke Realty Limited Partnership, an Indiana limited
partnership, who acknowledged the execution of the foregoing "Fifth Lease
Amendment" on behalf of said partnership.
WITNESS my hand and Notarial Seal this 18th day of August, 1998.
[NOTARIAL SEAL STATE OF OHIO] /s/Naomi Gump
-------------------------------
Notary Public
NAOMI GUMP
Naomi Gump -------------------------------
Notary Public, State of Ohio Printed Signature
My Commission Expires July 22, 2002
My Commission Expires: 7-22-02
My County of Residence: Hamilton
STATE OF NEW YORK )
) SS:
COUNTY OF WESTCH. )
Before me, a Notary Public in and for said County and State, personally
appeared Dale Allardyce, by me known and by me known to be the EXEC. VICE PRES.
of Entex Information Services, Inc., a Delaware corporation, who acknowledged
the execution of the foregoing "Fifth Lease Amendment" on behalf of said
corporation.
WITNESS my hand and Notarial Seal this 6th day of AUG, 1998.
/s/ Margaret J. O'Hare
-------------------------------------------
Notary Public
Margaret J. O'Hare
Notary Public, State of New York
No. 4874787
Qualified by Westchester County
Commission Expires November 19, 1998
-------------------------------------------
(Printed Signature)
My Commission Expires: ----------------------
My County of Residence: WESTCHESTER
----------------------
-5-
<PAGE> 1
EXHIBIT 10.14
ENTEX INFORMATION SERVICES, INC.
RETENTION AGREEMENT
AGREEMENT, dated as of the 2nd day of October, 1998, by and between ENTEX
Information Services, Inc. ("ENTEX"), a Delaware corporation and Mike
Archambault (the "Executive").
W I T N E S S E T H :
WHEREAS, the Executive is a key employee who has made and, if continued to be
employed by ENTEX, will continue to make valuable contributions to the
productivity and profitability of ENTEX; and
WHEREAS, ENTEX considers that providing termination benefits will operate as an
incentive for the Executive to remain employed by ENTEX;
NOW, THEREFORE, to induce the Executive to remain employed by ENTEX, and for
other good and valuable consideration, ENTEX and the Executive agree as follows:
1. CIRCUMSTANCES TRIGGERING RECEIPT OF TERMINATION BENEFITS
1.1 Except as set forth in Sections 1.2 and 1.3 below, if Executive's employment
is terminated for any reason, or if there is a "Change of Control Termination"
of the Executive's employment, ENTEX shall provide the Executive with the
benefits set forth in Section 2.
1.2 Termination benefits will not be paid upon:
(a) Termination by reason of the Executive's "Voluntary Resignation"
(b) Termination of the Executive for "Cause"
(c) Termination upon the Executive's normal retirement at age
sixty-five (65).
1.3. For the purpose of this Agreement, the placement of the Executive on
permanent or long-term disability status as defined by ENTEX's long-term
disability policy covering the Executive or the death of the Executive shall not
be deemed a termination and shall not qualify the Executive for the termination
benefits set forth in this Agreement.
2. TERMINATION BENEFITS
2.1 The amount of termination payment shall be the sum of (i) one year of the
Executive's annual base salary in effect as of the Termination Date, and (ii)
one year of the annual target bonus under the incentive bonus plan in which the
Executive was participating as of the Termination Date, assuming 100%
achievement of all bonus objectives (the "Termination Payment").
Should Change of Control Termination be due to the circumstances set
forth in Section 10.3(ii), the Termination Payment shall be calculated using the
base salary and annual target bonus in effect immediately preceding the Change
of Control Termination.
2.2 The Termination Payment shall be paid at regular intervals on the payroll
dates of ENTEX or any successor to ENTEX. Payments shall be subject to reduction
to the extent required to satisfy withholding tax obligations imposed by law or
authorized by the Executive.
<PAGE> 2
2.3 The Termination Payment shall be paid beginning with the month following the
month in which the Termination Date occurs. The Executive shall also receive the
full base salary and target bonus for the month in which the Termination Date
occurs.
2.4 Any accrued vacation due but not yet taken at the Termination Date shall be
paid to the Executive on the next payroll date following the Termination Date.
Executive will not continue to accrue vacation after the Termination Date.
2.5 The Executive's participation (including dependent coverage) in ENTEX's
group health, dental and vision plans in effect immediately prior to the
Termination Date shall continue during the Severance Period. The levels of
coverage and the Executive's contributions for such coverage will be those in
effect immediately prior to the Termination Date, subject to such changes to
coverage or employee contributions as made applicable to substantially all ENTEX
employees. If the Executive has not become eligible for health and welfare
benefits under any other plan at the expiration of the Severance Period, s/he
will become eligible for coverage under COBRA, subject to COBRA provisions,
including payment of monthly premiums.
2.6 For purposes of determining the rights of the Executive with respect to
vesting and exercise of any ENTEX stock options which have been granted prior to
the Termination Date, the Executive will be treated as continuing his/her
employment status with ENTEX until 6 months following the Termination Date.
2.7 Executive will be entitled to executive level outplacement services provided
by a mutually acceptable outplacement service provider at a value not to exceed
$30,000.
3. NO ENTITLEMENT OF EMPLOYMENT AND ACKNOWLEDGMENT OF "AT WILL" STATUS
3.1 This Agreement shall not be construed as and does not constitute a promise
or guaranty of continued employment, and Executive acknowledges that his/her
employment with ENTEX is "at will".
4. NON-COMPETE/CONFIDENTIALITY
4.1 Executive hereby covenants and agrees that during the Severance Period s/he
shall not, directly or indirectly, own, operate, manage, join, control,
participate in the ownership, management, operation or control of, or be paid or
employed by, or acquire any securities of, or otherwise become associated with
or provide assistance to, as an employee, consultant, director, officer,
shareholder, partner, agent, associate, principal, representative or in any
other capacity, any business entity or activity which is directly or indirectly
a "Competitive Business"; provided, however, that the foregoing shall not
prevent Executive from (a) performing services for a Competitive Business if
such Competitive Business is also engaged in other lines of business and if
Executive's services are restricted to such other lines of business; or (b)
acquiring the securities of or an interest in any Competitive Business, provided
such ownership of securities or interests represents at the time of such
acquisition, but including any previously held ownership interests, less than
two percent (2%) of any class or type of securities of, or interest in, such
Competitive Business.
4.2 Executive agrees that s/he will forever keep secret, confidential and
inviolate, will not disclose during his/her employment by ENTEX and will not
disclose or use at any time after termination of employment with ENTEX, any
proprietary or confidential information or business secret of ENTEX including,
without limitation, those relating to: a) the business, conduct, or operations
of ENTEX, or of any of its suppliers, customers, consultants, or licensees; b)
any
2
<PAGE> 3
methods, ways of doing business or know-how used in the sale, use or marketing
of ENTEX's product or services; c) the existence or betterment of, or possible
new uses or applications for, any such products or services; or d) any of
ENTEX's customer lists, pricing and purchasing information or policies. Upon
leaving the employ of ENTEX for any reason, the Executive shall promptly return
to ENTEX any and all notes, plans, paper and electronic files, customer lists or
other records, RFP's, account profiles, price sheets, reports, proposals,
technical information, and reproductions thereof, which relate in any way to
ENTEX's plans, operations, business assets, employee files or records, or any of
the foregoing items covered by this paragraph.
4.3 Executive agrees and acknowledges:
(a) that so long as s/he is an employee of ENTEX, s/he will devote
his/her best efforts and all his/her business time, efforts, and attention to
furthering the business interests of ENTEX, and that s/he will not directly or
indirectly engage in any Competitive Business;
(b) that the relationship between ENTEX and its customers and suppliers
are significant and valuable assets of ENTEX;
(c) that the relationships between ENTEX and its employees are
significant and valuable assets of ENTEX deserving protection from solicitation
to assist ENTEX in its interest in maintaining a stable work force, and because
of this interest, Executive agrees that during the term of his/her employment by
ENTEX, and for a period of one (1) year thereafter, s/he will not directly or
indirectly recruit, solicit, divert or employ any person who is an employee of
ENTEX, or any former employee of ENTEX within six (6) months of their leaving
ENTEX;
(d) that for a period of one (1) year following the termination of
Executive's employment with ENTEX for any reason, Executive will not directly or
indirectly solicit, service, have contact with, or divert any entity which is,
as of the Termination Date, or the immediate six month period prior to such
date, a customer of ENTEX with whom Executive had dealings, directly or
indirectly, as an employee of ENTEX.
4.4 Executive acknowledges that a breach of any of the covenants herein
contained would cause irreparable harm to ENTEX's business and that monetary
damages alone will not afford an adequate remedy. Therefore, in the event of any
such breach, or threatened breach, in addition to such other remedies to which
ENTEX may be entitled, ENTEX shall have the right to specific performance of the
covenants herein contained by way of temporary and/or permanent injunctive
relief, all as it elects.
4.5 The parties believe the restrictions in this Section 4 to be reasonable to
protect business activity. However, in the event that a court of competent
jurisdiction deems any provision hereof to be unreasonable, void or
unenforceable, such provision(s) shall be deemed severed from the remainder of
the Agreement, which shall continue in all other respects to be valid and
enforceable. Any such provision(s) of this Agreement declared void, unreasonable
or unenforceable shall be deemed revised to the minimum amount necessary in
order to be valid and enforceable.
5. RELEASE
5.1 In return for the payment and promises made by ENTEX herein, except for the
obligations of ENTEX hereunder, Executive agrees that, effective on the
Termination Date, s/he will unconditionally release and discharge ENTEX from any
and all claims, damages or causes of action, known or unknown, of whatever kind
of nature, which s/he has or may have against ENTEX, including, but not limited
to, any claims for relief, whether injunctive, declaratory, statutory, monetary
or otherwise, arising under any federal, state or local equal opportunity, age
discrimination or other law, ordinance, regulation or order (including, without
limitation, Title VII of the Civil Rights Act of 1964, as amended, and the Age
Discrimination in Employment Act of 1973,
3
<PAGE> 4
as amended ("ADEA"), or arising from or in connection with Executive's
employment by or provision of services to ENTEX or the separation therefrom,
whether based in contract, public policy, tort or otherwise.
For the purposes of this paragraph, "ENTEX" means ENTEX Information
Services, Inc., its subsidiaries, parent and affiliates, and the respective
successors, assigns, agents, shareholders, officers, directors, benefit plans,
and current and former employees of any of them.
With regard to Executive's waiver of his/her rights under the ADEA,
effective on the Termination Date, Executive will agree and acknowledge that
s/he:
(a) does not waive rights or claims that may arise after the
Termination Date;
(b) will waive rights under the ADEA in exchange for consideration as
set forth herein, which Executive acknowledges is in addition to anything of
value to which s/he is already entitled;
(c) was advised to consult with an attorney before entering into this
release and had the opportunity to do so;
(d) had twenty-one (21) days in which to consider and execute this
release. If Executive executed this release at any time prior to the end of the
twenty-one (21) day period, such early execution was a knowing and voluntary
waiver of Executive's right to consider this release for at least twenty-one
(21) days, and to review with an attorney;
(e) was advised that for a period of seven (7) days following the
execution of this release by Executive, Executive may revoke this release by
written notice to: General Counsel, ENTEX.
5.2 If the foregoing release is signed or to be performed or enforced in the
State of California, the provisions set forth in Attachment A shall be
incorporated into the terms of the release.
6. INDEMNIFICATION
6.1 ENTEX acknowledges and agrees that it shall remain subject to the
Indemnification Agreement dated June 26, 1997, between it and the Executive.
7. MITIGATION
7.1 The Executive is not required to mitigate the amount of any Termination
Payment to be made by ENTEX pursuant to this Agreement by seeking other
employment or otherwise, and no amount of the Termination Payment shall be
offset against or reduced by any amount earned by any other employment;
provided, however, that the benefits provided for in Section 2.5 shall terminate
upon the Executive's obtaining other employment and becoming eligible for
comparable benefits. The Executive hereby agrees to notify ENTEX promptly upon
obtaining employment.
8. EXCISE TAX LIMITATION
8.1 Anything in this Agreement to the contrary notwithstanding and except as set
forth below, in the event it shall be determined that any payment or
distribution by ENTEX to or for the benefit of the Executive (whether paid or
payable or distributed or distributable pursuant to the terms of this Agreement
or otherwise) (the "Total Payments") would be subject to the excise tax imposed
under Section 4999 of the Internal Revenue Code (the "Excise Tax"), then the
Total Payments shall be reduced (but not below zero) if and to the extent that a
reduction in the Total Payments would result in the Executive retaining a larger
amount, on an after-tax basis (taking into account Federal, state and local
income taxes and the Excise Tax), than if the Executive received the entire
amount of such Total Payments. Unless the Executive shall have given prior
written notice specifying a different order to ENTEX to effectuate the
foregoing, ENTEX shall reduce or
4
<PAGE> 5
eliminate the Total Payments, by first reducing or eliminating the portion of
the Total Payments which are not payable in cash and then by reducing or
eliminating cash payments, in each case in reverse order beginning with payments
or benefits which are to be paid the farthest in time from the Determination (as
hereinafter defined). Any notice given by the Executive pursuant to the
preceding sentence shall take precedence over the provisions of any other plan,
arrangement or agreement governing the Executive's rights and entitlements to
any benefits or compensation.
8.2 The Determination of whether the Total Payments shall be reduced as provided
in Section 8.1 and the amount of such reduction shall be made at ENTEX's expense
by an accounting firm selected by ENTEX from among the five largest accounting
firms in the United States (the "Accounting Firm"). The Accounting Firm shall
provide its determination (the "Determination"), together with detailed
supporting calculations and documentation to ENTEX and the Executive within 10
days of the Termination Date. If the Accounting Firm determines that no Excise
Tax is payable by the Executive with respect to the Total Payments, it shall
furnish the Executive with an opinion reasonably acceptable to the Executive
that no Excise Tax will be imposed with respect to any such payments and, absent
manifest error, such Determination shall be binding, final and conclusive upon
ENTEX and the Executive. If the Accounting Firm determines that an Excise Tax
would be payable, the Executive shall have the right to accept the Determination
of the Accounting Firm as to the extent of the reductions, if any, pursuant to
Section 8.1, or to have such Determination reviewed by an accounting firm
selected by the Executive, at the expense of ENTEX, in which case the
determination of such second accounting firm shall be binding, final and
conclusive upon ENTEX and the Executive.
9. SUCCESSORS
9.1 ENTEX will require any successor (whether direct or indirect, by purchase,
merger, consolidation or otherwise) to all or substantially all of the business
and/or assets of ENTEX to expressly assume and agree to perform this Agreement
in the same manner and to the same extent that ENTEX would be required to
perform it if no such succession has taken place.
10. DEFINITIONS
10.1 "Cause" means (i) a continued and willful failure by the Executive to
substantially perform the Executive's duties, which failure constitutes a gross
neglect of his/her duties, (iii) the commission by the Executive of an act of
fraud or embezzlement or an act which the Executive knew to be in gross
violation of his/her duties to ENTEX, or (iii) a felony conviction, guilty plea
to a felony charge, or plea of nolo contendere to a felony charge by the
Executive.
10.2 "Change of Control" means the transfer of ownership or control of more than
50% of all of the assets or shares of ENTEX, whether by tender offer, merger,
consolidation or sale of assets, or a change in the membership of the Board of
Directors in a contested election, or any combination of the foregoing
transactions.
10.3 "Change of Control Termination" means a Change of Control followed within
twelve (12) months by (i) the termination of the Executive's employment other
than for Cause or as a result of the Executive's death, disability, Voluntary
Resignation, or normal retirement; (ii) voluntary resignation following a
reduction of the Executive's base compensation and target bonus below the base
compensation and target bonus in effect immediately preceding the Change of
Control; (iii) voluntary resignation following a reduction to a level not
materially consistent with that existing immediately preceding the Change of
Control in the level of authority or scope of the responsibilities of the
Executive; or (iv) voluntary resignation following a relocation of the office at
which the Executive is expected to perform his/her responsibilities greater than
35 miles from the location of the office immediately preceding the Change of
Control.
5
<PAGE> 6
10.4 "Competitive Business" shall mean and include any business or activity that
is substantially the same as any business or activity then conducted by ENTEX,
regardless of where such Competitive Business is located.
10.5 "Severance Period" means the 12-month period during which termination
benefits are provided under Section 2.
10.6 "Termination Date" means:
(a) the date the Executive is terminated for reasons other than those
set forth in Sections 1.2 or 1.3, or
(b) the date of voluntary resignation of the Executive following Change
of Control for reasons set forth in Sections 10.3(ii), (iii) or (iv), provided,
however, that if ENTEX or any successor requests a period of transition from the
Executive, the Termination Date shall be the day after the expiration of such
transition period, which in no event shall exceed 60 days.
10.7 "Voluntary Resignation" shall mean the voluntary resignation by the
Executive of his/her employment with ENTEX.
11. ENTIRETY
11.1 This Agreement constitutes the entire agreement between the parties
pertaining to the subject matter contained herein and supersedes all prior and
contemporaneous agreements, representations and understandings of the parties.
No supplement, modification or amendment of this Agreement shall be binding
unless referring specifically to this Agreement and executed in writing by the
party against whom the enforcement of such amendment is sought. Any modification
or amendment by ENTEX must be signed by the President or an Executive Vice
President of ENTEX.
12. GOVERNING LAW
12.1 The validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the State of New York, without regard
to conflict of law principles.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and
delivered as of the day and year first set forth above.
ENTEX INFORMATION SERVICES, INC.
By: ___________________________________
John A. McKenna, Jr.
President
By: ___________________________________
Print Name:
6
<PAGE> 7
ATTACHMENT A
SECTION 1542 RELEASE. Executive understands and expressly agrees that
his/her release hereunder extends to claims against ENTEX of whatever nature and
kind, known or unknown, suspected or unsuspected, vested or contingent, past,
present or future, arising from or attributable to any incident or event,
occurring in whole or in part, on or before the Termination Date, and that any
and all rights granted under any state or federal law or regulation limiting the
effect of his/her release hereunder, including the provisions of Section 1542 of
the California Civil Code, ARE HEREBY EXPRESSLY WAIVED. Section 1542 of the
California Civil Code reads as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT
KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
SETTLEMENT WITH THE DEBTOR.
Thus, notwithstanding the provisions of Section 1542, and for the
purpose of implementing a full and complete release and discharge of ENTEX,
Executive expressly acknowledges that his/her release hereunder is intended to
include in its effect, without limitation, all claims which Executive does not
know or suspect to exist in his/her favor at the date of termination, and that
this release contemplates the extinguishment of any such claim or claims.
7
<PAGE> 1
Exhibit 10.16
ENTEX Senior Vice President
Management Compensation Plan
Effective July 1999
I. EFFECTIVE DATE
This ENTEX Senior Vice President Management Bonus Plan (the "Plan") is effective
as of the first day of the Company's fiscal month of July 1999, for the period
of 1st half, fiscal '2000. It supersedes all previous bonus plans and letters on
this subject and governs all Plan payments to eligible participants that are
made pursuant to this Plan.
II. ELIGIBILITY
Participants of the Plan will be limited to ENTEX employees who are approved for
participation in this Plan as defined within the Company's Human Resource
Policies. Participants will be notified of their participation in this Plan.
ENTEX personnel who are assigned to one of the following positions are eligible
to participate in this Plan. The Senior Vice President, Human Resources and the
Chief Executive Officer must approve any exceptions in writing.
----------------------------------------------------------
ELIGIBLE POSITION
----------------------------------------------------------
----------------------------------------------------------
Senior Vice President
----------------------------------------------------------
All designated employees will qualify as potential candidates for an award
according to the following criteria.
A. Employees must be employed by ENTEX in a covered position for at least one
full month during the measurement period. New employees will receive
prorated awards for full months of service during their first measurement
period.
B. Employees must be regular employees normally scheduled to work at least 30
hours per week.
C. Employees must be performing at a ME (meets expectations level) or higher.
D. Employees must be employed by ENTEX at the end of the measurement period.
E. Employees who transfer to a position that is ineligible for participation
in this Plan, or go on an authorized leave of absence, may earn performance
credit on a prorated basis in whole month increments, with no rounding for
a partial month's participation.
1
<PAGE> 2
III. AWARDS GUIDELINE
A. The annual target bonus is 50%.
B. Measurement periods will be the September and December quarter for fiscal
'2000.
C. Base salary is defined as the annual salary that is in effect on the last
day of the measurement period.
D. The target bonus will be based on earnings before interest, taxes,
depreciation, and amortization. (EBITDA).
IV. AWARD CALCULATION
A. The company achieves $8.0M EBITDA for the September quarter; participants
will be paid 12.5% of their base compensation. EBITDA achieved in the
quarter in excess of $8.0 million plus Senior Vice President 12.5 base
bonus will be split 90% to the company and 10% to the participants, with
the 10% pool paid to the participants on a pro rata basis, determined by
base compensation.
B. December quarter will be paid the same as the September quarter, except the
threshold EBITDA is $10.0 million, and the pool will be created after
achievement of $10.0 million EBITDA plus Senior Vice President 12.5 base
bonus.
C. If the company achieves both the $8.0 million and $10.0 million EBITDA
thresholds, the pool will increase to 20% for the December quarter. If the
$8.0 million threshold for September quarter is not achieved, the 10% pool
will apply for achievement in the December quarter.
V. EXTRAORDINARY OCCURRENCES
Awards may be adjusted or goals and/or results may be modified to reflect
positive or negative events. This may involve documented adjustments for certain
unusual business transactions, changes in the business climate, etc., that are
not directly attributable to the efforts of the participant and inappropriately
penalize or reward the participant in the award calculation. Modifications or
adjustments can be made only with the approval of the President, Service
Division.
VI. PAYMENT OF AWARDS
Awards will be determined as soon as possible following the close of the
measurement period.
2
<PAGE> 3
VII. METHOD OF PAYMENT
The participant's normal base salary payment method will be used; i.e., check or
direct deposit.
VIII. RIGHT TO MODIFY OR CANCEL
This Plan may be modified or discontinued at any time with the approval of the
Senior Vice President, Human Resources in conjunction with the President,
Services Division. These same individuals will make final decision on any
questions not clearly covered by the Plan, and in their sole discretion will
resolve any matter of dispute relating to the Plan. ENTEX personnel other than
these individuals do not have authority to modify this Plan and any attempt to
do so will not be valid.
IX. EMPLOYMENT AT WILL
The employment of all Plan participants is for an indefinite period and is
terminable at any time, for any reason, by either the Plan participant or ENTEX.
This Plan shall not be construed to create a contract of employment for a
specified period of time between ENTEX and any Plan participant.
3
<PAGE> 1
Exhibit 10.17
ENTEX Acquisition Services Division
Management and Professional Compensation Plan
Effective January 1999
I EFFECTIVE DATE
This Management and Professional Bonus Plan (the "Plan") is effective as of the
first day of ENTEX Technology Acquisition Services Division's (TASD) fiscal
third quarter, January 1999. It supercedes all previous bonus plans and letters
on this subject and governs all plan payments to eligible participants that are
made pursuant to this Plan.
II ELIGIBILITY
Participants of the Plan will be limited to TASD employees who are approved for
participation in this Plan in accordance with the Company's Human Resources
Policies and in some cases, approval of the Vice President, Human Resources or
President of TASD. Participants will be notified of their participation in this
Plan. TASD personnel who participate in this plan are management and
professional employees who are not participants in any other bonus or sales
plan.
A. All designated employees will qualify as potential candidates for an award
according to the following criteria:
1. Employees must be employed by TASD in a covered position for at least
one full month during the measurement period.
2. Employees must be regular employees normally scheduled to work at
least 30 hours per week.
3. Employees must be employed by TASD at the end of the measurement
period.
4. New employees will receive pro-rated awards for full months of service
during their first measurement period.
5. Employees who transfer to a position which is ineligible for
participation in this Plan, or go on an authorized leave of absence,
may earn performance credit on a prorated basis in whole month
increments, with no rounding for a partial month's participation.
6. Bonus payout for employees who terminate due to retirement,
disability, layoff or sale of business will be at the discretion of
management considering specific circumstances and reason for
termination.
7. Any employee who is terminated for unsatisfactory performance will not
receive payout under this plan.
III AWARD GUIDELINES
A. An annual target bonus (amount earned at 100% of goal) for each participant
will be established based upon the following matrix below:
2
<PAGE> 2
<TABLE>
<CAPTION>
POSITION TARGET BONUS
- ---------- ------------
<S> <C>
Executive Vice President 50% of base salary
Senior Vice President 50% of base salary
Vice President 30% of base salary
Grade E08 20% of base salary
Grade E07 15% of base salary
Grades E04-E06 8% of base salary
</TABLE>
B. Measurement periods will consist of quarterly periods consistent with
TASD's fiscal year.
C. Base salary is defined as one quarter the annual salary that is in effect
on the last day of the measurement period.
D. The target bonus will consist of one or two segments each worth a
certain percentage of the award. The segments are defined below:
EBT
EBT is defined as earnings before taxes. Performance will be measured against
quarterly budgets for this performance factor, consistent with TASD's fiscal
year. Performance for total TASD segment will be rounded to whole percentage
points. There will be no carryover from one measurement period to the next,
either in goal or achievement. At the end of each measurement period actual
performance will be measured against target. Example: quarterly goal is
$10,000,000; quarterly performance is $11,600,000; measurement is
11,600,000/10,000,000=116%.
Executive Vice President, Senior Vice President, Vice President Level (E09+)
<TABLE>
<CAPTION>
Segment Award Value
------- -----------
<S> <C>
TASD EBT 100%
Director Level (E07 through E08)
</TABLE>
<TABLE>
<CAPTION>
Segment Award Value
------- -----------
<S> <C>
TASD EBT 75%
INDIVIDUAL/TEAM OBJECTIVES 25%
</TABLE>
Management Level (E04 through E06)
3
<PAGE> 3
<TABLE>
<CAPTION>
Segment Award Value
------- -----------
<S> <C>
TASD EBT 50%
INDIVIDUAL/TEAM OBJECTIVES 50%
</TABLE>
INDIVIDUAL/TEAM OBJECTIVES
Individual/Team Objectives will be established at the beginning of each
measurement period. The stated objectives may be personal, team orientated, or
department-wide in scope. Each objective should be definable, consistent,
measurable, and should include appropriate measures of performance along with
time frames. Achievement of objectives will be rated at the end of each
measurement period to establish the degree to which each objective was
accomplished. This will be based on a scale of 0 to 150%, with a score of 100%
for performance that meets established goals. Performance will be rounded to
whole percentage points. There will be no carryover from one measurement period
to the next.
IV AWARD CALCULATION
See Appendix A
V EXTRAORDINARY OCCURRENCES
Awards may be adjusted or modifications to goals and/or results may be made to
reflect positive or negative events. This may involve documented adjustments for
certain unusual business transactions, changes in the business climate, etc.
which are not directly attributable to the efforts of the participant and
inappropriately penalize or reward the participant in the award calculation.
Modifications or adjustments can be made only with the approval of the Vice
President, Human Resources and or the President, TASD, in conjunction with the
Department Head.
VI PAYMENT OF AWARDS
Awards will be determined as soon as possible following the close of the
measurement period.
VII METHOD OF PAYMENT
The person's normal base salary payment method will be used; i.e. check or
direct deposit.
VIII RIGHT TO MODIFY OR CANCEL
This Plan may be modified or discontinued at any time with the approval of the
Vice President, Human Resources or the President of TASD. The Vice President in
conjunction with the President, TASD will make final decision on any questions
not clearly covered by the Plan, and will have sole discretion to resolve any
matter of dispute relating to the Plan.
4
<PAGE> 4
TASD personnel other than this individual do not have authority to modify this
Plan, and any attempt to do so will not be valid.
IX EMPLOYMENT AT WILL
The employment of all Plan participants is for an indefinite period and is
terminable at any time, for any reason by either the Plan participant or TASD.
This Plan shall not be construed to create a contract of employment for a
specified period of time between TASD and any Plan participant.
5
<PAGE> 5
APPENDIX A
Awards will be calculated using a weighted average of the measurements in IIID.
Independent calculation and award determinations will be made for each segment.
Minimum achievement for the TASD segment award is 80% of goal.
The amount of bonus earned for each will be based upon achievement according to
the following charts.
TASD
<TABLE>
<CAPTION>
% of Goal Achieved % of Target Bonus Earned
- ------------------ ------------------------
<S> <C>
Less than 80% 0%
80% to 99% 33.33% plus 3.33% for each 1% of goal achieved above 80%
100% to 109% 100% plus 4% for each 1% of goal achieved above 100%
110% to 119% 140% plus 3% for each 1% of goal achieved above 110%
120% + 170% plus 2% for each 1% of goal achieved above 120%
</TABLE>
INDIVIDUAL/TEAM OBJECTIVES
<TABLE>
<CAPTION>
% of Goal Achieved % of Target Bonus Earned
- ------------------ ------------------------
<S> <C>
0% to 150% 1% for each 1% of goal achieved
150%+ 150%
</TABLE>
EXAMPLE
Annual base salary: $50,000 (E04-E06)
Base salary as defined: $50,000/4 = $12,500
Target bonus: $12,500 x 8% = $1,000
Target bonus for TASD segment: $1,000 x 50%=$500
Target bonus for Personal Objectives segment: $1,000 x 50%=$500
TASD Segment
EBT goal: $10,000,000
EBT performance: $11,600,000
EBT measurement: $11,600,000/$10,000,000 = 116%
% of bonus earned from chart: 158%
Bonus amount = $500 x 158% = $790
Individual/Team Objectives Segment
110% of goal achieved
% of bonus earned from chart = 110%
Bonus amount = $500 x 110% = $550
TOTAL BONUS = $790 + $550 = $1,340
6
<PAGE> 1
Exhibit 10.18
ENTEX Services Division
Management and Professional Compensation Plan
Effective January 1999
I EFFECTIVE DATE
This Management and Professional Bonus Plan (the "Plan") is effective as of the
first day of the Company's fiscal month of January 1999. It supercedes all
previous bonus plans and letters on this subject and governs all plan payments
to eligible participants that are made pursuant to this Plan.
II ELIGIBILITY
Participants of the Plan will be limited to ENTEX employees who are approved for
participation in this Plan by Human Resources and the Compensation Committee of
the Board of Directors. Participants will be notified of their participation in
this Plan. ENTEX personnel who participate in this plan are management and
professional employees who are not participants in any other bonus or sales
plan.
A. All designated employees will qualify as potential candidates for an award
according to the following criteria:
1. Employees must be employed by ENTEX in a covered position for at least
one full month during the measurement period.
2. Employees must be regular employees normally scheduled to work at
least 30 hours per week.
3. Employees must be employed by ENTEX at the end of the measurement
period.
4. New employees will receive pro-rated awards for full months of service
during their first measurement period.
5. Employees who transfer to a position which is ineligible for
participation in this Plan, or go on an authorized leave of absence,
may earn performance credit on a prorated basis in whole month
increments, with no rounding for a partial month's participation.
III AWARD GUIDELINES
A. An annual target bonus (amount earned at 100% of goal) for each participant
will be established based upon the matrix below:
<TABLE>
<CAPTION>
------------------------------------------------- ---------------------------------------
ELIGIBLE POSITIONS TARGET %
------------------------------------------------- ---------------------------------------
<S> <C>
Executive Vice President 50%
------------------------------------------------- ---------------------------------------
Grade E08 20%
------------------------------------------------- ---------------------------------------
Grade E07 15%
------------------------------------------------- ---------------------------------------
Grades E04 - E06 8%
------------------------------------------------- ---------------------------------------
</TABLE>
<PAGE> 2
B. Measurement periods will consist of 6 month periods from on or about July 1
to December 31 and January 1 to June 30.
C. Base salary is defined as 1/2 of the annual salary which is in effect on
the last day of the measurement period.
D. The target bonus will consist of one or two segments (the Service Division
segment made of 2 parts) each worth a certain percentage of the award. The
segments are defined below:
PERSONAL OBJECTIVES
Personal Objectives will be established at the beginning of each measurement
period. The stated objectives may be personal, team orientated, or
department-wide in scope. Each objective should be definable, consistent,
measurable, and should include appropriate measures of performance along with
time frames. Achievement of objectives will be rated at the end of each
measurement period to establish the degree to which each objective was
accomplished. This will be based on a scale of 0 to 150%, with a score of 100%
for performance that meets established goals. Performance will be rounded to
whole percentage points. There will be no carryover from one measurement period
to the next.
FREE CASH FLOW
Free cash flow for the Services Division is defined as the operating
contribution (OC$) less capital expenditures. Performance will be measured
against semi-annual budgets for this performance factor, (July 1 to December 31,
and January 1 to June 30). Performance for total Services Division segment will
be rounded to whole percentage points. There will be no carryover from one
measurement period to the next, either in goal or achievement. At the end of
each measurement period actual performance will be measured against target
budget. Example: Semi-annual goal is $30,000,000 free cash flow; semi-annual
performance is $35,400,289 free cash flow; measurement is
35,400,289/30,000,000=118%.
SERVICES EBIT
EBIT is defined as earnings before interest and taxes. Performance will be
measured against semi-annual budgets for this performance factor, (July 1 to
December 31, and January 1 to June 30). Performance for total Services Division
segment will be rounded to whole percentage points. There will be no carryover
from one measurement period to the next, either in goal or achievement. At the
end of each measurement period actual performance will be measured against
target . Example: semi-annual goal is $45,000,000; semi-annual performance is
$52,492,000; measurement is 52,492,000/45,000,000=116.6%.
Executive Vice President, Senior Vice President, Vice President
<TABLE>
<CAPTION>
Segment Award Value
------- -----------
<S> <C>
SERVICES DIVISION 100%
EBIT 50%
Services Free Cash Flow 50%
</TABLE>
All Others
<PAGE> 3
<TABLE>
<CAPTION>
Segment Award Value
------- -----------
<S> <C>
PERSONAL OBJECTIVES 25%
SERVICE DIVISION 75%
EBIT 37.5%
Services Free Cash Flow 37.5%
</TABLE>
IV AWARD CALCULATION
See Appendix A
V EXTRAORDINARY OCCURRENCES
Awards may be adjusted or modifications to goals and/or results may be made to
reflect positive or negative events. This may involve documented adjustments for
certain unusual business transactions, changes in the business climate, etc.
which are not directly attributable to the efforts of the participant and
inappropriately penalize or reward the participant in the award calculation.
Modifications or adjustments can be made only with the approval of the Senior
Vice President Human Resources, in conjunction with the Department Head.
VI PAYMENT OF AWARDS
Awards will be determined as soon as possible following the close of the
measurement period.
VII METHOD OF PAYMENT
The person's normal base salary payment method will be used; ie. check or
direct deposit.
VIII RIGHT TO MODIFY OR CANCEL
This Plan may be modified or discontinued at any time with the approval of the
Compensation Committee of the Board of Directors. This same board will make
final decision on any questions not clearly covered by the Plan, and in their
sole discretion will resolve any matter of dispute relating to the Plan. ENTEX
personnel other than these individuals do not have authority to modify this
Plan, and any attempt to do so will not be valid.
IX EMPLOYMENT AT WILL
The employment of all Plan participants is for an indefinite period and is
terminable at any time, for any reason by either the Plan participant or ENTEX.
This Plan shall not be construed to create a contract of employment for a
specified period of time between ENTEX and any Plan participant.
<PAGE> 4
APPENDIX A
Awards will be calculated using a weighted average of the measurements in IIID.
Independent calculation and award determinations will be made for each segment.
Minimum achievement for the Services Division segment award is 80% of goal.
The amount of bonus earned for each will be based upon achievement according to
the following charts.
Services Division Attainment
<TABLE>
<CAPTION>
% of Goal Achieved % of Target Bonus Earned
- ------------------ ------------------------
<S> <C>
Less than 80% 0%
80% to 99% 33.33% plus 3.33% for each 1% of goal achieved above 80%
100% to 109% 100% plus 4% for each 1% of goal achieved above 100%
110% to 119% 140% plus 3% for each 1% of goal achieved above 110%
120% + 170% plus 2% for each 1% of goal achieved above 120%
</TABLE>
Personal Objectives
<TABLE>
<CAPTION>
% of Goal Achieved % of Target Bonus Earned
- ------------------ ------------------------
<S> <C>
0% to 150% 1% for each 1% of goal achieved
150%+ 150%
</TABLE>
EXAMPLE
Annual base salary: $50,000
Base salary as defined: $50,000/2 = $25,000
Target bonus: $25,000 x 8% = $2,000
Target bonus for Personal Objectives segment: $2,000 x 25%=$500
Target bonus for Services Division segment: $2,000 x 75%=$1,500
Personal Objectives Segment
110% of goal achieved
% of bonus earned from chart=110%
Bonus amount = $500 x 110% =$550
Services Division Attainment Segment
EBIT goal: $45,000,000
EBIT performance: $52,492,000
EBIT measurement: $52,492,000/$45,000,000 = 116.6%
Free cash flow budget: $30,000,000
Free cash flow performance: $35,400,289
<PAGE> 5
Free cash flow measurement: $35,400,289/$30,000,000 = 118%
Weighted average for Services Div. Attainment segment = 117%
% of bonus earned from chart = 161%
Bonus amount = $1,500 x 161% = $2,415
<TABLE>
<S> <C>
TOTAL BONUS =Executive Vice President 50% of base salary
Grade E08 20% of base salary
Grade E07 15% of base salary
Grades E04-E06 8% of base salary
</TABLE>
$550 + $2,415 = $2,965
<PAGE> 1
Exhibit 10.19
ENTEX Management and Professional
Compensation Plan Effective July 1997
I EFFECTIVE DATE
This Management and Professional Bonus Plan (the "Plan") is effective as of the
first day of the Company's fiscal month of July 1997. It supercedes all previous
bonus plans and letters on this subject and governs all plan payments to
eligible participants that are made pursuant to this Plan.
II ELIGIBILITY
Participants of the Plan will be limited to ENTEX employees who are approved for
participation in this Plan by Human Resources and the Compensation Committee of
the Board of Directors. Participants will be notified of their participation in
this Plan. ENTEX personnel who participate in this plan are management and
professional employees who are not participants in any other bonus or sales
plan.
A. All designated employees will qualify as potential candidates for an award
according to the following criteria:
1. Employees must be employed by ENTEX in a covered position for at least
one full month during the measurement period.
2. Employees must be regular employees normally scheduled to work at
least 30 hours per week.
3. Employees must be employed by ENTEX at the end of the measurement
period.
4. New employees will receive pro-rated awards for full months of service
during their first measurement period.
5. Employees who transfer to a position which is ineligible for
participation in this Plan, or go on an authorized leave of absence,
may earn performance credit on a prorated basis in whole month
increments, with no rounding for a partial month's participation.
III AWARD GUIDELINES
A. An annual target bonus (amount earned at 100% of goal) for each participant
will be established based upon the participant's position in the
organization.
B. Measurement periods will consist of 6 month periods from on or about July 1
to December 31 and January 1 to June 30.
C. Base salary is defined as 1/2 of the annual salary which is in effect on
the last day of the measurement period.
D. The target bonus will consist of one or two segments (the Company segment
made of 2 parts) each worth a certain percentage of the award. The segments
are defined below:
<PAGE> 2
PERSONAL OBJECTIVES
Personal Objectives will be established at the beginning of each measurement
period. The stated objectives may be personal, team orientated, or
department-wide in scope. Each objective should be definable, consistent,
measurable, and should include appropriate measures of performance along with
time frames. Achievement of objectives will be rated at the end of each
measurement period to establish the degree to which each objective was
accomplished. This will be based on a scale of 0 to 150%, with a score of 100%
for performance that meets established goals. Performance will be rounded to
whole percentage points. There will be no carryover from one measurement period
to the next.
FREE CASH FLOW
Free cash flow for the Company is defined as the operating contribution (OC$)
less capital expenditures. Performance will be measured against semi-annual
budgets for this performance factor, (July 1 to December 31, and January 1 to
June 30). Performance for total Company segment will be rounded to whole
percentage points. There will be no carryover from one measurement period to the
next, either in goal or achievement. At the end of each measurement period
actual performance will be measured against target budget. Example: Semi-annual
goal is $30,000,000 free cash flow; semi-annual performance is $35,400,289 free
cash flow; measurement is 35,400,289/30,000,000=118%.
EBITDA
EBITDA is defined as earnings before interest, taxes, depreciation and
amortization. Performance will be measured against semi-annual budgets for this
performance factor, (July 1 to December 31, and January 1 to June 30).
Performance for total Company segment will be rounded to whole percentage
points. There will be no carryover from one measurement period to the next,
either in goal or achievement. At the end of each measurement period actual
performance will be measured against target . Example: semi-annual goal is
$45,000,000; semi-annual performance is $52,492,000; measurement is
52,492,000/45,000,000=116.6%.
Executive Vice President, Senior Vice President, Vice President
<TABLE>
<CAPTION>
Segment Award Value
------- -----------
<S> <C>
COMPANY 100%
EBITDA 50%
Company Free Cash Flow 50%
</TABLE>
All Others
<TABLE>
<CAPTION>
Segment Award Value
------- -----------
<S> <C>
PERSONAL OBJECTIVES 25%
COMPANY 75%
EBITDA 37.5%
Company Free Cash Flow 37.5%
</TABLE>
<PAGE> 3
IV AWARD CALCULATION
See Appendix A
V EXTRAORDINARY OCCURRENCES
Awards may be adjusted or modifications to goals and/or results may be made to
reflect positive or negative events. This may involve documented adjustments for
certain unusual business transactions, changes in the business climate, etc.
which are not directly attributable to the efforts of the participant and
inappropriately penalize or reward the participant in the award calculation.
Modifications or adjustments can be made only with the approval of the Senior
Vice President Human Resources, in conjunction with the Department Head.
VI PAYMENT OF AWARDS
Awards will be determined as soon as possible following the close of the
measurement period.
VII METHOD OF PAYMENT
The person's normal base salary payment method will be used; ie. check or
direct deposit.
VIII RIGHT TO MODIFY OR CANCEL
This Plan may be modified or discontinued at any time with the approval of the
Compensation Committee of the Board of Directors. This same board will make
final decision on any questions not clearly covered by the Plan, and in their
sole discretion will resolve any matter of dispute relating to the Plan. ENTEX
personnel other than these individuals do not have authority to modify this
Plan, and any attempt to do so will not be valid.
IX EMPLOYMENT AT WILL
The employment of all Plan participants is for an indefinite period and is
terminable at any time, for any reason by either the Plan participant or ENTEX.
This Plan shall not be construed to create a contract of employment for a
specified period of time between ENTEX and any Plan participant.
<PAGE> 4
APPENDIX A
Awards will be calculated using a weighted average of the measurements in IIID.
Independent calculation and award determinations will be made for each segment.
Minimum achievement for the Company segment award is 80% of goal.
The amount of bonus earned for each will be based upon achievement according to
the following charts.
Company
<TABLE>
<CAPTION>
% of Goal Achieved % of Target Bonus Earned
- ------------------ ------------------------
<S> <C>
Less than 80% 0%
80% to 99% 33.33% plus 3.33% for each 1% of goal achieved above 80%
100% to 109% 100% plus 4% for each 1% of goal achieved above 100%
110% to 119% 140% plus 3% for each 1% of goal achieved above 110%
120% + 170% plus 2% for each 1% of goal achieved above 120%
</TABLE>
Personal Objectives
<TABLE>
<CAPTION>
% of Goal Achieved % of Target Bonus Earned
- ------------------ ------------------------
<S> <C>
0% to 150% 1% for each 1% of goal achieved
150%+ 150%
</TABLE>
EXAMPLE
Annual base salary: $50,000
Base salary as defined: $50,000/2 = $25,000
Target bonus: $25,000 x 8% = $2,000
Target bonus for Personal Objectives segment: $2,000 x 25%=$500
Target bonus for Company segment: $2,000 x 75%=$1,500
Personal Objectives Segment
110% of goal achieved
% of bonus earned from chart=110%
Bonus amount = $500 x 110% =$550
<PAGE> 5
Company Segment
EBITDA goal: $45,000,000
EBITDA performance: $52,492,000
EBITDA measurement: $52,492,000/$45,000,000 = 116.6%
Free cash flow budget: $30,000,000
Free cash flow performance: $35,400,289
Free cash flow measurement: $35,400,289/$30,000,000 = 118%
Weighted average for Company segment = 117%
% of bonus earned from chart = 161%
Bonus amount = $1,500 x 161% = $2,415
TOTAL BONUS = $550 + $2,415 = $2,965
<PAGE> 1
EXHIBIT 21
Subsidiaries of the Company
1. ENTEX Information Services of Colorado, Inc., a Colorado corporation
2. ENTEX Information Services of Michigan, Inc., a Michigan corporation
3. ENTEX Services, Inc., a Delaware corporation
4. FCP Technologies, Inc. a Delaware corporation
5. ENTEX Information Services International, Ltd., an Irish company
6. Servicios Informacion de ENTEX S.R.L., a Costa Rican limited liability
company
7. ENTEX Information Services International Pty Ltd., an Australian
company
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-27-1999
<PERIOD-START> JUN-29-1998
<PERIOD-END> JUN-27-1999
<CASH> 12,546
<SECURITIES> 0
<RECEIVABLES> 147,438
<ALLOWANCES> 4,905
<INVENTORY> 13,939
<CURRENT-ASSETS> 184,298
<PP&E> 70,034
<DEPRECIATION> 36,335
<TOTAL-ASSETS> 233,755
<CURRENT-LIABILITIES> 229,180
<BONDS> 124,252
0
0
<COMMON> 3
<OTHER-SE> (119,974)
<TOTAL-LIABILITY-AND-EQUITY> 233,755
<SALES> 0
<TOTAL-REVENUES> 483,619
<CGS> 0
<TOTAL-COSTS> 368,269
<OTHER-EXPENSES> 152,411
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36,548
<INCOME-PRETAX> (72,901)
<INCOME-TAX> 2
<INCOME-CONTINUING> (72,903)
<DISCONTINUED> (28,018)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (100,921)
<EPS-BASIC> 3.11
<EPS-DILUTED> 3.11
</TABLE>
