FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
( X ) Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended September 27, 1998
or
( ) Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from to
Commission file number : 000-23457
ENTEX INFORMATION SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 93 -133715291
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification Number)
6 International Drive, Rye Brook, N.Y. 10573-1058
(914) 935-3600
(Address, including zip code and telephone number, including area code, of
principal executive offices)
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 and Exchange Act of 1934 during the preceding twelve
months, and (2) has been subject to such filing requirements
for the past ninety days:
YES ( X ) NO ( )
The number of outstanding shares of the Registrant's Common
Stock, par value $.0001 per share, was 32,423,160 (excluding
82,500 treasury shares) on October 30, 1998.
-------------------------------------------------------------------
<PAGE>
ENTEX INFORMATION SERVICES, INC.
INDEX
Page Numbers
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
September 27, 1998 and June 28, 1998 2
Consolidated Statements of Operations
For the Three Months Ended September 27, 1998
and September 28, 1997 3
Condensed Consolidated Statements of Cash Flows for
the Three Months Ended September 27, 1998
and September 28, 1997 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6 - 9
PART II. OTHER INFORMATION
Item 3. Defaults Upon Senior Securities 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
<PAGE>
ENTEX INFORMATION SERVICES, INC.
Part I - Financial Information
Consolidated Balance Sheets
(Dollars in thousands except share data)
<TABLE>
<CAPTION>
Unaudited
September 27, June 28,
1998 1998
<S> <C> <C>
---------- -----------
Assets
Current assets:
Cash ......................................................... $ 9,436 $ 14,265
Trade receivables (net of allowance for doubtful accounts
of $4,578 and $4,662, respectively) ................... 375,859 368,344
Vendor receivables (net of allowances of $2,925 and $3,787
respectively) ......................................... 40,704 47,592
Inventories .................................................. 142,947 192,841
Other current assets ......................................... 8,548 8,683
--------- ---------
Total current assets .................................. 577,494 631,725
--------- ---------
Property, plant and equipment, net .............................. 65,363 61,009
Goodwill (net of accumulated amortization .......................
of $13,571 and $12,861, respectively) .................... 40,881 41,929
Other assets, net ............................................... 6,114 1,756
--------- ---------
Total assets ................................................. $ 689,852 $ 736,419
========= =========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable ............................................. $ 298,106 $ 338,602
Accrued liabilities .......................................... 69,994 67,381
Notes payable and current installments of long-term debt ..... 221,668 295,681
--------- ---------
Total current liabilities ............................. 589,768 701,664
--------- ---------
Long-term debt .................................................. 132,361 53,239
Other long-term liabilities ..................................... 577 661
--------- ---------
Total long-term liabilities ........................... 132,938 53,900
--------- ---------
Total liabilities 722,706 755,564
--------- ---------
Stockholders' equity (deficit):
Preferred stock, 2,000,000 shares authorized;
no shares issued or outstanding ............................ -- --
Common stock, $.0001 par value; 100 million shares ..............
authorized, 32,407,656 and 32,413,366 shares issued and
outstanding, respectively ................................... 3 3
Additional paid-in capital ...................................... 19,539 19,477
Retained earnings (deficit) ..................................... (52,364) (38,564)
Accumulated other comprehensive income .......................... (30) (59)
Treasury stock, 82,500 shares, at cost .......................... (2) (2)
--------- ---------
Total stockholders' equity (deficit) ......................... (32,854) (19,145)
--------- ---------
$ 689,852 $ 736,419
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 2
<PAGE>
ENTEX INFORMATION SERVICES, INC.
Consolidated Statements of Operations
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
Unaudited
Three Months Ended
---------------------------
September 27, September 28,
1998 1997
--------- ---------
<S> <C> <C>
Net revenues:
Product revenues .......................................... $ 438,252 $ 500,938
Service revenues .......................................... 116,888 105,901
----------- ---------
Total net revenues ................................. 555,140 606,839
----------- ---------
Cost of revenues:
Cost of products sold ..................................... 405,479 450,781
Cost of services provided ................................. 84,901 79,872
----------- ---------
Cost of revenues ................................... 490,380 530,653
----------- ---------
Product gross margin ........................................ 32,773 50,157
Services gross margin ........................................ 31,987 26,029
----------- ---------
Total gross margin ................................. 64,760 76,186
Selling, general and administrative expenses ................. 68,857 61,815
----------- ---------
Income (loss) from operations ...................... (4,097) 14,371
Interest expense, net ........................................ 9,695 9,669
----------- ---------
Income (loss) before income taxes .................. (13,792) 4,702
Provision for income taxes ................................... 8 2
---------- ---------
Net income (loss)................................... $ (13,800) $ 4,700
========== =========
Common Share Data:
Basic earnings (loss) per share .................... $ (.43) $ .15
=========== ==========
Diluted earnings (loss) per share................... $ (.43) $ .14
========== ==========
Basic weighted average number of shares of
common stock outstanding ........................... 32,402,154 32,399,060
Common equivalent shares from stock
options and warrants using the
treasury stock method .............................. -- 1,337,145
---------- ----------
Diluted weighted average number of
shares of common stock outstanding ................. 32,402,154 33,736,205
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 3
<PAGE>
ENTEX INFORMATION SERVICES, INC.
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Unaudited
Three Months Ended
September 27, September 28,
1998 1997
---------- ----------
<S> <C> <C>
Net cash provided by operating activities .................... $ 7,162 $ 21,098
--------- ---------
Cash flows from investing activities:
Capital expenditures ..................................... (8,593) (4,219)
--------- ---------
Net cash used in investing activities ........... (8,593) (4,219)
--------- ----------
Cash flows from financing activities:
Proceeds from borrowings ................................. 132,306 30,185
Change in cash overdraft ................................. (3,527) 6,107
Payments on debt ......................................... (132,177) (58,679)
--------- ----------
Net cash used in financing activities ............. (3,398) (22,387)
--------- ----------
Decrease in cash ............................................. (4,829) (5,508)
Cash at beginning of period .................................. 14,265 15,838
--------- ---------
Cash at end of period ........................................ $ 9,436 $ 10,330
========= =========
Supplemental disclosure of cash flow information:
Interest paid ........................................... $ 8,566 $ 10,383
========= =========
Income taxes paid (refunded) ............................ $ 587 $ (658)
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 4
<PAGE>
ENTEX INFORMATION SERVICES, INC.
Notes to Condensed Consolidated Financial Statements
1. Basis of Presentation
The unaudited condensed consolidated financial statements included herein have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. However, in the opinion of management of the Company, the
condensed consolidated financial statements include all adjustments, which
consist only of normal recurring accruals, necessary to present fairly the
financial information for such periods. These condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and the notes thereto included in the Company's Annual Report on Form
10-K for the fiscal year ended June 28, 1998.
The results of operations for the three months ended September 27, 1998 are not
necessarily indicative of the results to be expected for the fiscal year ending
June 27, 1999.
2. Comprehensive Income
Effective for the quarter ended September 27, 1998, the Company adopted
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("FAS 130"). Comprehensive income includes both net income and other
comprehensive income. Included in other comprehensive income are foreign
currency translation gains (losses). In accordance with the disclosure
requirements of FAS 130, comprehensive income (loss) for the three months ended
September 27, 1998 and September 28, 1997 was $(13,771) and $4,692,
respectively. Other comprehensive income (loss) for the three months ended
September 27, 1998 and September 28, 1997 was $29 and $(8), respectively.
3. Subsequent Event
In October 1998, the Company's Board of Directors authorized management actions
that will result in the reorganization of ENTEX's business to create two
operating units: a Technology Acquisition Services Division and a Services
Division, each functioning as a separate operating division within ENTEX
Information Services.
As a result of these actions, the Company will record a pre-tax restructuring
charge estimated at $10 - $12 million during the second fiscal quarter ending
December 27, 1998. The restructuring charge includes costs related to severance
in connection with a workforce reduction, as well as branch office consolidation
and facilities reductions. It is expected that the reorganization will be
completed by the end of December 1998. In addition, the Company expects to
record a further non-cash charge estimated at up to $10 - $15 million primarily
in connection with the re-evaluation of the functionality of software
investments that have been made which may require an alternative solution for
portions of the new business lines.
Page 5
<PAGE>
ENTEX INFORMATION SERVICES, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This section contains trend analysis and other forward-looking statements based
on current expectations. Actual results may differ materially due to a number of
factors. Reference is made to the Company's Annual Report on Form 10-K for a
further discussion of certain business factors.
Overview
ENTEX is a leading provider of integrated personal computer ("PC") management
solutions to meet the distributed information technology systems and end-user
support requirements of Fortune 1000 companies and other large enterprises.
ENTEX offers its customers a single source for integrated PC management
solutions, including sophisticated infrastructure and configuration, outsourcing
and desktop migration and integration services.
The Company has two principal sources of revenue: product revenues and service
revenues. Product revenues include acquisition and procurement of personal
computer and network products, software and peripherals. Service revenues
include network services, professional services, outsourcing services, PC and
network operation support services, on-site and centrally located help desk
services, as well as asset management services.
Results of Operations
The following table sets forth the percentage of total net revenues represented
by the items in the Company's statements of operation for the periods indicated:
Three Months Ended
------------------
Sept. 27, Sept. 28,
1998 1997
------ ------
Net revenue:
Product revenues ...................................... 78.9% 82.5%
Service revenues ...................................... 21.1 17.5
----- -----
Total net revenues .............................. 100.0 100.0
Cost of revenues ........................ 88.3 87.4
----- -----
Gross margin (1) 11.7 12.6
Selling, general and administrative
expenses 12.4 10.2
----- -----
Income (loss) from operations (0.7) 2.4
Interest expense, net ................... 1.8 1.6
----- -----
Income (loss) before income taxes ....... (2.5) 0.8
Provision for income taxes .............. -- --
----- -----
Net income (loss) ....................... (2.5)% 0.8%
===== =====
Page 6
<PAGE>
ENTEX INFORMATION SERVICES, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
(1) Product gross margin as a percentage of product revenues and services
gross margin as a percentage of service revenues for each period was as follows:
Three Months Ended
------------------
Sept. 27, Sept. 28,
1998 1997
------ ------
Product gross margin 7.5% 10.0%
Services gross margin 27.4% 24.6%
Consolidated net loss for the three months ended September 27, 1998 was
$13.8 million compared to consolidated net income of $4.7 million in the three
months ended September 28, 1997. The net loss was primarily a result of a
decrease in product revenues and the corresponding gross margin, as well as
increased selling, general and administrative expenses, partially offset by
increased service revenues and services gross margin.
Product revenues: Product revenues were $438.3 million for the three months
ended September 27, 1998 as compared to $500.9 million for the three months
ended September 28, 1997, a decrease of $62.6 million or 12.5%. The revenue
decline primarily reflects availability constraints during the quarter and a
slowdown in orders from a number of significant customers as well as declining
average sales prices.
Service revenues: Service revenues were $116.9 million for the three months
ended September 27, 1998 as compared to $105.9 million for the three months
ended September 28, 1997, an increase of $11.0 million or 10.4%. The increase
reflects increased demand from existing customers and the addition of new large
accounts. Service revenues as a percentage of total net revenues increased to
21.1% for the quarter ended September 27, 1998 as compared to 17.5% in the
quarter ended September 28, 1997 due to higher service revenues coupled with a
decline in the product business. The Company is focused on continuing to
increase service revenue.
Gross margins: Total gross margins declined to 11.7% for the three months
ended September 27, 1998 as compared to 12.6% for the three months ended
September 28, 1997. Product gross margin as a percentage of product revenues
declined to 7.5% or $32.8 million for the three months ended September 27, 1998
as compared to 10.0% or $50.2 million for the three months ended September 28,
1997. The decrease reflects pricing pressures and a reduction in vendor
incentive programs. Services gross margin increased $6.0 million or 23% to $32.0
million, reflecting operating efficiencies on increased service revenues.
Selling, general and administrative expenses: Selling, general and
administrative expenses as a percentage of total revenues increased to 12.4% for
the quarter ended September 27, 1998 from 10.2% in the previous year's quarter
reflecting increased expenditures as well as lower sales volumes in the product
business. For the three months ended September 27, 1998, selling, general and
administrative expenses were $68.9 million compared to $61.8 million for the
quarter ended September 28, 1997, an increase of $7.1 million, reflecting
investments in company-wide infrastructure, training and field operations to
support service business growth.
Page 7
<PAGE>
ENTEX INFORMATION SERVICES, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Income (loss) from operations: Loss from operations was $4.1 million for
the three months ended September 27, 1998 as compared to income from operations
of $14.4 million in the quarter ended September 28, 1997. The loss reflects the
decline in gross margin on product revenues and increased selling, general and
administrative expenses, partially offset by increased gross margin on service
revenues.
Interest expense, net: Net interest expense was essentially unchanged for
the three months ended September 27, 1998 compared to the three months ended
September 28, 1997.
Provisions for income taxes: The Company utilized net operating loss
carryforwards to offset federal income tax requirements for the three months
ended September 28, 1997.
Net income (loss): As a result of the factors mentioned above, net loss for
the three months ended September 27, 1998 was $13.8 million as compared to net
income of $4.7 million for the three months ended September 28, 1997.
Liquidity and Capital Resources
The Company has historically financed its operations with borrowings under
various credit lines. Cash provided by operating activities was $7.2 million for
the three months ended September 27, 1998 as compared to $21.1 million for the
comparable period in 1997.
The cash provided by operations during the three months ended September 27,
1998 resulted primarily from depreciation and other non-cash charges to income,
and from changes in operating assets and liabilities, partially offset by the
net loss of $13.8 million.
Cash used in investing activities (capital expenditures) was $8.6 million
during the three months ended September 27, 1998 compared with $4.2 for the
three months ended September 28, 1997.
Cash used in financing activities was $3.4 million during the three months
ended September 27, 1998 compared to $22.4 million for the three months ended
September 28, 1997. During July 1998, the Company issued $100 million of 12 1/2%
Senior Subordinated Notes due 2006. The net proceeds were used to repay
outstanding indebtedness of the Company, resulting in an increase in working
capital of approximately $74 million.
At September 27, 1998, the Company had secured credit lines totaling $635
million, with $340.4 million outstanding under these lines. An aggregate amount
of $293.8 million was outstanding under the IBMCC Line of Credit, of which
$216.4 million was interest bearing. In addition, $46.6 million was outstanding
under the line of credit with Finova Capital Corporation, none of which was
interest bearing.
At September 27, 1998, the Company had no material commitments other than
obligations under its credit facilities, term notes and operating lease
facilities.
Page 8
<PAGE>
ENTEX INFORMATION SERVICES, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The IBMCC Financing Agreement contains restrictive covenants with respect
to maintenance of minimum tangible net worth, current ratio, fixed asset
additions, fixed charges and certain additional indebtedness. In addition, the
IBMCC Financing Agreement prohibits the Company from paying cash dividends on
common stock. At September 27, 1998, the Company was not in compliance with
certain of such covenants but continued to maintain an excess collateral
position. IBMCC has waived all defaults arising from such non-compliance for the
September quarter.
The Company intends to continue to finance a significant portion of its
working capital needs through credit facilities. The Company may seek to raise
additional funds through public or private equity or debt financing or from
other sources to support the future growth of the business. However, there can
be no assurance that the Company will be able to raise such additional funding.
Recent Developments
In October 1998, the Company's Board of Directors authorized management
actions that will result in the reorganization of ENTEX's business to create two
operating units: a Technology Acquisition Services Division and a Services
Division, each functioning as a separate operating division within ENTEX
Information Services. The reorganization is intended to reduce costs and
increase operational focus to respond to new market dynamics.
As a result of these actions, the Company will record a pre-tax
restructuring charge estimated at $10 - $12 million during the second fiscal
quarter ending December 27, 1998. The restructuring charge includes costs
related to severance in connection with a workforce reduction, as well as branch
office consolidation and facilities reductions. It is expected that the
reorganization will be completed by the end of December 1998. In addition, the
Company expects to record a further non-cash charge estimated at up to $10 - $15
million primarily in connection with the re-evaluation of the functionality of
software investments that have been made which may require an alternative
solution for portions of the new business lines.
ENTEX's Year 2000 Program continues. As of September 27, 1998, expenditures
totaled $12.2 million. The Company is currently in the process of re-evaluating
the scope and timing of the implementation of the R3TM Enterprise Resource
Planning System from SAP. As an alternative, the Company will renovate its
existing systems. Regardless of the outcome of this review, ENTEX does not
anticipate a delay in the validation and implementation of its Year 2000 project
or any increase in cash outlays from those disclosed in its 1998 Annual Report
on Form 10-K.
In November 1998, the Company deposited with the Indenture Trustee under
its 12 1/2% Senior Subordinated Notes due 2006, funds to make the interest
payment due February 1, 1999 on such notes.
Page 9
<PAGE>
PART II - OTHER INFORMATION
Item 3. DEFAULTS UPON SENIOR SECURITIES
The IBMCC Financing Agreement contains restrictive
covenants with respect to maintenance of minimum
tangible net worth, current ratio, fixed asset
additions, fixed charges and certain additional
indebtedness. In addition, the IBMCC Financing Agreement
prohibits the Company from paying cash dividends on
common stock. At September 27, 1998, the Company was not
in compliance with certain of such covenants but
continued to maintain an excess collateral position.
IBMCC has waived all defaults arising from such
non-compliance for the September quarter.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K.
(27) Financial Data Schedule.
(b) ENTEX filed a report on Form 8-K dated July
29, 1998 under Item 5, "Other Events", and
Item 7, "Financial Statements and Exhibits"
during the quarter ended September 27, 1998.
No financial information was included with
this report.
Page 10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
ENTEX Information Services, Inc.
--------------------------------
(Registrant)
November 12, 1998 /s/ Kenneth A. Ghazey
---------------------
Kenneth A. Ghazey
Executive Vice President,
Finance and Administration
and Chief Financial Officer
November 12, 1998 /s/ Richard P. Bannon
---------------------
Richard P. Bannon
Senior Vice President,
Controller
Page 11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> JUN-28-1998
<PERIOD-START> JUN-30-1998
<PERIOD-END> SEP-27-1998
<CASH> 9,436
<SECURITIES> 0
<RECEIVABLES> 375,089
<ALLOWANCES> 4,578
<INVENTORY> 142,947
<CURRENT-ASSETS> 577,494
<PP&E> 100,685
<DEPRECIATION> 54,306
<TOTAL-ASSETS> 689,852
<CURRENT-LIABILITIES> 589,768
<BONDS> 132,361
0
0
<COMMON> 3
<OTHER-SE> (65,711)
<TOTAL-LIABILITY-AND-EQUITY> 689,852
<SALES> 438,252
<TOTAL-REVENUES> 555,140
<CGS> 405,479
<TOTAL-COSTS> 490,380
<OTHER-EXPENSES> 68,857
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,695
<INCOME-PRETAX> (13,792)
<INCOME-TAX> 8
<INCOME-CONTINUING> (13,800)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,800)
<EPS-PRIMARY> (0.43)
<EPS-DILUTED> (0.43)
</TABLE>
