UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 29, 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 ( ) NO ( X )
THE NUMBER OF OUTSTANDING SHARES OF THE REGISTRANT'S COMMON STOCK, PAR
VALUE $.0001 PER SHARE, WAS 32,404,610 ON MARCH 29, 1998.
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 13, 1998
-------------------------------------------------------------------------
<PAGE>
ENTEX INFORMATION SERVICES, INC.
INDEX
PAGE NUMBERS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS AS OF
MARCH 29, 1998 AND JUNE 29, 1997 2
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED MARCH 29, 1998
AND MARCH 30, 1997 3
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
THE NINE MONTHS ENDED MARCH 29, 1998
AND MARCH 30, 1997 4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 6 - 11
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 12
ITEM 2. CHANGES IN SECURITIES 12
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 12
ITEM 5. OTHER INFORMATION 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 12
SIGNATURES 13
1
<PAGE>
ENTEX INFORMATION SERVICES, INC.
PART I - FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Unaudited
March 29, June 29,
1998 1997
--------- ---------
<S> <C> <C>
Assets
Current assets:
Cash ................................................................... $ 9,231 $ 15,838
Trade receivables (net of allowance for doubtful accounts
of $4,771 and $4,746, respectively) ................................. 346,841 334,196
Vendor receivables (net of allowance of $1,933 and $2,000, respectively) 43,020 37,789
Inventories ............................................................ 168,084 183,957
Other current assets ................................................... 8,262 9,228
--------- ---------
Total current assets ............................................ 575,438 581,008
Property, plant and equipment, net ........................................ 53,670 55,049
Goodwill, net ............................................................. 42,976 45,887
Other assets, net ......................................................... 1,305 1,646
--------- ---------
Total assets ........................................................... $ 673,389 $ 683,590
========= =========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable ....................................................... $ 293,708 $ 269,962
Accrued liabilities .................................................... 69,569 53,598
Notes payable and current installments of long-term debt ............... 274,786 348,276
--------- ---------
Total current liabilities ....................................... 638,063 671,836
Long-term debt ............................................................ 53,688 48,215
Other long-term liabilities ............................................... 950 1,271
--------- ---------
Total long-term liabilities ..................................... 54,638 49,486
Total liabilities ...................................................... 692,701 721,322
--------- ---------
Stockholders' equity (deficit):
Preferred stock, 2 million shares authorized;
no shares issued or outstanding ...................................... -- --
Common stock, $.0001 par value; 100 million shares
authorized, 32,404,610 and 32,357,840 shares issued and
outstanding, respectively ............................................. 3 3
Additional paid-in capital ................................................ 19,426 19,003
Retained earnings (deficit) ............................................... (38,688) (56,707)
Treasury stock, shares at cost ............................................ (2) (2)
Cumulative translation adjustments ........................................ (51) (29)
--------- ---------
Total stockholders' equity (deficit) ................................... (19,312) (37,732)
--------- ---------
$ 673,389 $ 683,590
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
2
<PAGE>
ENTEX INFORMATION SERVICES, INC.
Consolidated Statements of Operations
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
Unaudited Unaudited
Three Months Ended Nine Months Ended
------------------------------- -------------------------------
March 29, March 30, March 29, March 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net revenues:
Product revenues $ 479,267 $ 506,370 $ 1,523,963 $ 1,584,941
Service revenues 114,567 92,824 331,090 249,268
------------ ------------ ------------ ------------
Total net revenues 593,834 599,194 1,855,053 1,834,209
Cost of revenues:
Cost of products sold 428,968 456,088 1,366,067 1,439,985
Cost of services provided 87,299 71,161 254,124 188,710
------------ ------------ ------------ ------------
Cost of revenues 516,267 527,249 1,620,191 1,628,695
Product gross margin 50,299 50,282 157,896 144,956
Services gross margin 27,268 21,663 76,966 60,558
----------- ------------ ------------ ------------
Total gross margin 77,567 71,945 234,862 205,514
Selling, general and
Administrative expenses 63,995 61,811 189,133 187,265
------------ ------------ ------------ ------------
Income from operations 13,572 10,134 45,729 18,249
Interest expense, net 8,702 9,418 27,698 27,308
------------ ------------ ------------ ------------
Income (loss) before
Income taxes 4,870 716 18,031 (9,059)
Provision for income taxes 4 9 12 24
------------ ------------ ------------ ------------
Net income (loss) $ 4,866 $ 707 $ 18,019 $ (9,083)
============ ============ ============ ============
Common Share Data:
Basic earnings (loss) per share $ .15 $ .02 $ .56 $ (.28)
============ ============ ============ ============
Diluted earnings (loss) per share $ .14 $ .02 $ .53 $ (.28)
============ ============ ============ ============
Basic weighted average number of
shares of common stock outstanding 32,362,643 32,312,020 32,341,754 32,312,020
Common equivalent shares from stock
options and warrants using the
treasury stock method 1,352,131 560,354 1,326,430 --
------------ ------------ ------------ ------------
Diluted weighted average number of
shares of common stock outstanding 33,714,774 32,872,374 33,668,184 32,312,020
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
ENTEX INFORMATION SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Unaudited
Nine Months Ended
March 29, March 30,
1998 1997
-------- --------
<S> <C> <C>
Net cash provided by (used in) operating activities $ 75,124 $ (28,137)
Cash flows from investing activities:
Capital expenditures (12,249) (18,629)
Cash paid for acquisitions -- (6,478)
Other -- (1,179)
-------- --------
Net cash used in investing activities (12,249) (26,286)
Cash flows from financing activities:
Proceeds from borrowings 80,658 75,000
Change in cash overdraft 7,927 (9,861)
Proceeds from sale of common stock, net 291 (120)
Repayments on borrowings (158,358) (13,469)
-------- --------
Net cash (used in) provided by financing activities (69,482) 51,550
Decrease in cash (6,607) (2,873)
Cash at beginning of period 15,838 12,603
-------- --------
Cash at end of period $ 9,231 $ 9,730
======== ========
Supplemental disclosure of cash flow information:
Interest paid $ 27,387 $ 25,529
======== ========
Tax refund $ (372) $ (12,188)
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
ENTEX INFORMATION SERVICES, INC.
Notes to Consolidated Financial Statements
1. DESCRIPTION OF THE BUSINESS
ENTEX is a leading provider of personal computer ("PC") solutions to meet
the distributed information technology systems and end-user support
requirements of Fortune 1000 companies and other large enterprises. The
Company's total PC management capabilities include acquisition and
procurement services and network, professional and other outsourcing
service support for the PC- based network environment.
2. CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements are unaudited and reflect all
adjustments (consisting only of normal recurring adjustments) which are, in
the opinion of management, necessary for a fair presentation of the
financial position and operating results for the interim periods. The
results of operations for the three and nine months ended March 29, 1998
are not necessarily indicative of the results for the entire fiscal year
ended June 28, 1998. These unaudited financial statements should be read in
conjunction with the financial statements included in the Company's
registration statement on Form 10 for the fiscal year ended June 29, 1997.
3. INVENTORIES
Inventories consist of the following:
Unaudited
March 29, June 29,
1998 1997
--------- ---------
Finished goods held for resale $158,543 $175,300
Spare parts 9,541 8,657
--------- ---------
$168,084 $183,957
========= =========
4. COMMON STOCK SPLIT
As of November 25, 1997, the Board of Directors approved an increase in the
number of authorized common 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 split.
5. NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings Per Share. The new standard simplifies the computation of
earnings per share (EPS), and requires the presentation of two new amounts,
basic and diluted earnings per share. During 1998, the Company adopted SFAS
128 and restated its computation of EPS for the prior period.
In addition, in June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income". This statement is effective for periods beginning
after December 15, 1997 with early adoption permitted. The Company is
evaluating the effect this statement will have on its financial reporting
and disclosures.
In June 1997, the Financial Accounting Standards Board issued Statement No.
131, "Disclosures About Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 131, which is effective for fiscal periods beginning
after December 15, 1997, revises information regarding the reporting of
certain operating segments. It also establishes standards for related
disclosures about products and services, geographic areas and major
customers. The Company is evaluating the effect this statement will have
on its disclosures of segment and related information.
5
<PAGE>
ENTEX INFORMATION SERVICES, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
(Dollars in thousands)
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information contained in this Report on Form 10-Q includes forward looking
statements. Since this information is based on current expectations which
involve risks and uncertainties, actual results could differ materially from
those expressed in the forward looking statements. Reference is made to the
Company's registration statement on Form 10 for a further discussion of certain
risk factors.
OVERVIEW
ENTEX is a leading provider of personal computer ("PC") solutions to meet the
distributed information technology systems and end-user support requirements of
Fortune 1000 companies and other large enterprises. The Company's total PC
management capabilities include acquisition and procurement services and network
and professional and other outsourcing service support for the PC-based network
environment.
During fiscal 1996 and 1997, the Company completed several acquisitions to meet
customer demand for expanded service offerings including (i) Random Access, Inc.
("Random Access"), a provider of information technology solutions through the
sale of microcomputers and technical services to corporate and institutional
clients in the western United States, and (ii) FCP Technologies, Inc. ("FCP"), a
systems integrator based in Maryland, 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.
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. While product revenues have
historically accounted for more than 80 % of net revenues, service revenues have
grown in absolute dollar terms and as a percentage of net revenues in each
fiscal year since the Company's inception.
6
<PAGE>
ENTEX INFORMATION SERVICES, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
(Dollars in thousands)
The following table sets forth the percentage of total net revenues represented
by the items in the Company's statements of operations for the periods
indicated:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 29, March 30, March 29, March 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net revenues:
Product revenues 80.7% 84.5% 82.2% 86.4%
Service revenues 19.3 15.5 17.8 13.6
------- ------- ------- -------
Total net revenues 100.0 100.0 100.0 100.0
Cost of revenues 86.9 88.0 87.3 88.8
------- ------- ------- -------
Gross margin (1) 13.1 12.0 12.7 11.2
Selling, general and administrative
expenses 10.8 10.3 10.2 10.2
------- ------- ------- -------
Income from operations 2.3 1.7 2.5 1.0
Interest expense, net 1.5 1.6 1.5 1.5
------- ------- ------- -------
Income (loss) before income taxes .8 .1 1.0 (.5)
Provision for income taxes -- -- -- --
------- ------- ------- -------
Net income (loss) .8% .1% 1.0% (.5)%
======= ======= ======= =======
</TABLE>
(1) Product gross margin as a percentage of product revenues and service gross
margin as a percentage of service revenues for each period was as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Mar. 29, Mar. 30, Mar. 29, Mar. 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Product gross margin 10.5% 9.9% 10.4% 9.1%
Service gross margin 23.8% 23.3% 23.2% 24.3%
</TABLE>
7
<PAGE>
ENTEX INFORMATION SERVICES, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
(Dollars in thousands)
Three Months Ended March 29, 1998 Compared to Three Months Ended March 30, 1997
The Company's net income improved in the three months ended March 29, 1998 to
$4.9 million compared to $707 thousand in the three months ended March 30, 1997.
The improvement was a result of an increase in service gross margins and a
higher percentage of services in the revenue base.
Product revenues: Product revenues were $479.3 million for the three months
ended March 29, 1998 as compared to $506.4 million for the three months ended
March 30, 1997, a decrease of $27.1 million or 5.4%. While the Company
experienced overall unit growth in sales of desktops, laptops and server units
during the quarter ended March 29, 1998, the revenue decline reflects the price
reductions in average sales price driven by lower manufacturer prices and
intense competition.
Service revenues: Service revenues were $114.6 million for the three months
ended March 29, 1998 as compared to $92.8 million for the three months ended
March 30, 1997, an increase of $21.8 million or 23.4%. Service revenues as a
percentage of total net revenues increased to 19.3% for the quarter ended March
29, 1998 as compared to 15.5% in the quarter ended March 30, 1997. These
increases reflect increase in demand from existing customers and the addition of
new large accounts. The Company is focused on continuing to increase service
revenues.*
Gross margins: Total gross margins increased to 13.1% for the three months
ended March 29, 1998 as compared to 12.0% for the three months ended March 30,
1997. Product gross margin as a percentage of product revenues increased to
10.5% or $50.3 million for the three months ended March 29, 1998 as compared to
9.9% or $50.3 million for the three months ended March 30, 1997. These increases
reflect the Company's efforts to improve product margins through improved
controls over price protection arrangements and vendor allowances as well as the
Company's participation in certain manufacturers' programs designed to increase
sales of specific products. Future product margins may be adversely influenced
by manufacturers' pricing strategies and increased competition.* Service gross
margins increased $5.6 million or 25.9% to $27.3 million reflecting growth in
service revenue.
Selling, general and administrative expenses: Selling, general and
administrative expenses were $64.0 million for the three months ended March 29,
1998 as compared to $61.8 million for the quarter ended March 30, 1997, an
increase of $2.2 million or 3.5% reflecting the improvement in infrastructure to
support the business expansion.
Income from operations: Income from operations was $13.6 million for the
three months ended March 29, 1998 as compared to $10.1 million in the quarter
ended March 30, 1997, an increase of $3.5 million or 33.9%. The increase
reflects significant improvements in product gross margins, shift in revenue mix
towards higher margin services.
Interest expense, net: Net interest expense decreased to $8.7 million for
the three months ended March 29, 1998 as compared to $9.4 million for the three
months ended March 30, 1997, a decrease of $707 thousand or 7.6%. The decrease
was driven principally by paydown of loans under the IBMCC financing agreement
(see "Liquidity and Capital Resources" section).
- --------------------------------------------------------------------------------
*This statement is forward-looking reflecting current expectations. There can be
no assurances that the Company's actual performance will meet the Company's
current expectations. The reader is cautioned that other sections and sentences
not so identified may also contain forward-looking information. Reference is
made to the Company's registration statement on Form 10 for a further discussion
of these risks.
8
<PAGE>
ENTEX INFORMATION SERVICES, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
(Dollars in thousands)
Provisions for income taxes: The Company utilized net operating loss
carryforwards to offset federal income tax requirements for the three months
ended March 29, 1998. Although the Company recognized net income for the three
months ended March 29, 1998, based on the history of negative pretax earnings,
the Company has determined that it would be prudent to maintain the valuation
reserve against the deferred tax asset until it can sustain several quarters of
profitable operations. While the Company considered the improved operations over
the course of fiscal year 1997, and fiscal 1998 interim periods, 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. The Company will
reevaluate the foregoing premise in connection with future periods.
Net income: As a result of the factors mentioned above, net income for the
three months ended March 29, 1998 was $4.9 million as compared to $707 thousand
for the three months ended March 30, 1997.
Nine Months Ended March 29, 1998 Compared to Nine Months Ended March 30, 1997
The Company's net income improved in the nine months ended March 29, 1998 to
$18.0 million compared to a net loss of $9.1 million in the nine months ended
March 30, 1997. The improvement was a result of an increase in product gross
margins attributable to enhanced controls over vendor programs and a higher
percentage of services in the revenue base.
Product revenues: Product revenues were $1.524 billion for the nine months
ended March 29, 1998 as compared to $1.585 billion for the nine months ended
March 30, 1997, a decrease of $61.0 million or 3.8%. While the Company
experienced overall unit growth in sales of desktops, laptops and server units
during the nine months ended March 29, 1998, the revenue decline reflects the
price reductions in average sales price driven by lower manufacturer prices and
intense competition.
Service revenues: Service revenues were $331.1 million for the nine months
ended March 29, 1998 as compared to $249.3 million for the nine months ended
March 30, 1997, an increase of $81.8 million or 32.8%. Service revenues as a
percentage of total net revenues increased to 17.8% for the nine months ended
March 29, 1998 as compared to 13.6% in the nine months ended March 30, 1997.
These increases reflect increase in demand from existing customers and the
addition of new large accounts. The Company is focused on continuing to increase
service revenue.*
Gross margins: Total gross margins increased to 12.7% for the nine months
ended March 29, 1998 as compared to 11.2% for the nine months ended March 30,
1997. Product gross margin as a percentage of product revenues increased to
10.4% or $157.9 million for the nine months ended March 29, 1998 as compared to
9.1% or $145.0 million for the nine months ended March 30, 1997. These increases
reflect the Company's efforts to improve product margins through improved
controls over price protection arrangements and vendor allowances and the
Company's participation in certain manufacturers' programs designed to increase
sales of specific products. Future product margins may be adversely influenced
by manufacturers' pricing strategies and increased competition.* Service margin
percentage declined slightly from 24.3% to 23.2% reflecting the investment in
national accounts.
Selling, general and administrative expenses: Selling, general and
administrative expenses were essentially flat, $189.1 million for the nine
months ended March 29, 1998 as compared to $187.3 million for the nine months
ended March 30, 1997. Selling, general and administrative expenses as a
percentage of total revenues remained flat at 10.2%.
- --------------------------------------------------------------------------------
*This statement is forward-looking reflecting current expectations. There can be
no assurances that the Company's actual performance will meet the Company's
current expectations. The reader is cautioned that other sections and sentences
not so identified may also contain forward-looking information. Reference is
made to the Company's registration statement on Form 10 for a further discussion
of these risks.
9
<PAGE>
ENTEX INFORMATION SERVICES, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
(Dollars in thousands)
Income from operations: Income from operations was $45.7 million for the
nine months ended March 29, 1998 as compared to $18.2 million in the nine months
ended March 30, 1997, an increase of $27.5 million. The increase reflects growth
in the higher margin service business and significant improvements in product
gross margins, while containing selling, general and administrative expenses to
support the business expansion.
Interest expense, net: Net interest expense increased to $27.7 million for
the nine months ended March 29, 1998 as compared to $27.3 million for the nine
months ended March 30, 1997, an increase of $400 thousand or 1.4%. The increase
was driven by higher working capital needs.
Provisions for income taxes: The Company utilized net operating loss
carryforwards to offset federal income tax requirements for the nine months
ended March 29, 1998. Although the Company recognized net income for the nine
months ended March 29, 1998, based on the history of negative pretax earnings,
the Company has determined that it would be prudent to maintain the valuation
reserve against the deferred tax asset until it can sustain several quarters of
profitable operations. While the Company considered the improved operations over
the course of fiscal year 1997 and fiscal 1998 interim periods, 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. The Company will
reevaluate the foregoing premise in connection with future periods.
Net income: As a result of the factors mentioned above, net income for the
nine months ended March 29, 1998 was $18.0 million as compared to a net loss of
$9.1 million for the nine months ended March 30, 1997.
Liquidity and Capital Resources
The Company has historically financed its operations with borrowings under
various credit lines. Cash provided by operating activities was $75.1 million
for the nine months ended March 29, 1998.
The cash provided by operations during the nine months ended March 29, 1998
resulted primarily from net income of $18.0 million, depreciation and other
non-cash charges to income of $14.0 million and from changes in working capital
needs.
Cash used in investing activities was $12.2 million during the nine months ended
March 29, 1998 and was used primarily for capital expenditures.
Cash used in financing activities was $69.5 million during the nine months ended
March 29, 1998.
As of March 29, 1998, the Company's primary source of liquidity consisted of
various financings provided under the Fourth Amended and Restated Agreement for
Wholesale Financing, as amended ("IBMCC Financing Agreement") with IBM Credit
Corporation ("IBMCC") and an inventory financing facility with FINOVA Capital
Corporation ("FINOVA"). The IBMCC Financing Agreement provides for borrowings
under a working capital line of credit of up to $525 million (the "IBMCC Working
Capital Line of Credit"). At March 29, 1998, the amount outstanding under the
IBMCC Working Capital Line of Credit was $392.4 million of which $286.5 million
was interest bearing. The amount of available borrowings under the IBMCC
Financing Agreement may be increased for higher seasonal purchasing
requirements, and may be reduced or terminated by IBMCC upon 60 days written
notice. Amounts outstanding under the IBMCC Working Capital Line of Credit bear
interest at the prime rate plus .50% (9.0% at March 29, 1998). Borrowings under
the IBMCC Financing Agreement are secured by the Company's assets, including
certain accounts receivable, certain inventories and other assets. The agreement
is subject to annual renewal and expires September 15, 1998.
10
<PAGE>
ENTEX INFORMATION SERVICES, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
(Dollars in thousands)
In connection with the Company's acquisition of Random Access in September 1995,
the IBMCC Financing Agreement was amended to provide for a term loan in the
original principal amount of $20 million (the "IBMCC Long-Term Loan"). The IBMCC
Financing Agreement was further amended in December 1996 and July 1997 to
provide 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"). On
November 28, 1997, the Short-Term Loan was repaid in full. In addition, $10
million of the $20 million Special Working Capital Advance has been paid down.
Amounts outstanding under the IBMCC Long-Term Loan and the Special Working
Capital Advance bear interest at the prime rate plus 2.50% (11.0% at March 29,
1998). At March 29, 1998, $17.3 million of principal was outstanding under the
Long-Term Loan and $10.0 million of principal was outstanding under the Special
Working Capital Advance.
As of March 29, 1998, the Company had $110 million available for borrowing under
its inventory line of credit with FINOVA. The line of credit is secured by the
Company's inventory financed by FINOVA. At March 29, 1998, the principal amount
outstanding under this line of credit was $62 million. Under terms of the
agreement with FINOVA, the Company paid no interest on this borrowing.
The IBMCC Financing Agreement provides that if Dort A. Cameron III ceases to own
and/or control at least 35% of the issued and outstanding capital stock of the
Company, the Company will be deemed to be in default under the IBMCC Financing
Agreement. In addition, the IBMCC Financing Agreement contains restrictive
covenants with respect to maintenance of minimum tangible net worth, current
ratio, fixed asset additions, fixed charges and certain additional indebtedness
and prohibits the Company from paying cash dividends on Common Stock.
The Company is aware of the issues associated with the programming code in
existing computer systems as the millennium (year 2000) approaches. The "year
2000" problem is complex since virtually every computer operation will be
affected in some way by the rollover of the two digit year value to 00. The
issue is whether computer systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail. The Company is utilizing both internal and external resources to identify,
correct or reprogram, and test the systems for the year 2000 compliance. It is
anticipated that all reprogramming efforts will be complete by December 31,
1999, allowing adequate time for testing.* In this connection, the Company will
be implementing the R/3 TM Enterprise Resource Planning solution from SAP at an
estimated cost of $30 million over the next 12 months. Given the information
known at this time about the Company's systems, coupled with the Company's
ongoing efforts to upgrade or replace business critical systems, the Company
does not believe that any additional costs will have a material adverse effect
on the Company's business, operating results and financial condition. However,
the Company is still analyzing its remaining computer systems and, to the extent
they are not fully year 2000 compliant, there can be no assurance that the costs
necessary to update software or potential systems interruptions would not have a
material adverse effect on the Company's business, operating results and
financial condition.
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.
- --------------------------------------------------------------------------------
*This statement is forward-looking reflecting current expectations. There can be
no assurances that the Company's actual performance will meet the Company's
current expectations. The reader is cautioned that other sections and sentences
not so identified may also contain forward-looking information. Reference is
made to the Company's registration statement on Form 10 for a further discussion
of these risks.
11
<PAGE>
ENTEX INFORMATION SERVICES, INC.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
- NONE
ITEM 2. Changes in Securities
- NONE
ITEM 3. Default Upon Senior Securities
- NONE
ITEM 4. Submission of Matters to a Vote of Security Holders
- NONE
ITEM 5. Other Information
- NONE
ITEM 6. Exhibits and Reports on Form 8-K
Exhibits (see Schedules which appear in final document)
10.11 1996 Non-Employee Director Stock Plan (Amended and
restated as of March 31, 1998)
27.1 Financial Data Schedule.
(a) Reports on Form 8-K
- NONE
12
<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.
May 13, 1998
ENTEX Information Services, Inc.
/s/ Kenneth A. Ghazey
----------------------
Kenneth A. Ghazey
Executive Vice President
and Chief Financial Officer
13
<PAGE>
ENTEX INFORMATION SERVICES, INC.
1996 Non-Employee Director Stock Plan
As amended and restated March 31, 1998
<PAGE>
ENTEX INFORMATION SERVICES, INC.
- --------------------------------------------------------------------------------
1996 Non-Employee Director Stock Plan-
- --------------------------------------------------------------------------------
Purpose................................................................... 1
Definitions............................................................... 2
Shares Available Under the Plan........................................... 3
Administration of the Plan................................................ 4
Eligibility............................................................... 5
Grants of Stock Units..................................................... 6
Crediting of Dividend Equivalents......................................... 7
Adjustment Provisions..................................................... 8
Changes to the Plan....................................................... 9
General Provisions........................................................ 10
<PAGE>
ENTEX INFORMATION SERVICES, INC.
1996 Non-Employee Director Stock Plan
1. Purpose. The purpose of this 1996 Non-Employee Director Stock Plan
(the "Plan") is to assist ENTEX Information Services, Inc., a Delaware
corporation (the "Company"), in attracting and retaining highly qualified
persons to serve as non-employee directors and to align such directors'
interests more closely with the interests of stockholders of the Company by
providing for the payment of a significant portion of their compensation in the
form of Company stock.
2. Definitions. For purposes of the Plan, the following terms shall be
defined as set forth below, in addition to the terms defined in Section 1
hereof:
(a) "Board" means the Company's Board of Directors.
(b) "Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time, including rules thereunder and successor provisions and rules
thereto.
(c) "Fair Market Value" of a share of Stock means, as of any given date,
the fair market value of the Stock as determined by the Board from time to time
in good faith; provided, however, if the Stock is publicly traded, then "Fair
Market Value" means the closing sale price per share reported on a consolidated
basis for stock listed on the principal stock exchange or market on which the
Stock is traded on the date as of which such value is being determined, or if
there is no sale on that date, then on the last previous day on which a sale was
reported.
(d) "Fiscal Month End" means the last Sunday of a month.
(e) "Participant" means a director who has been granted Stock Units which
have not yet been settled under the Plan.
(f) "Stock" means the Company's Common Stock and such other securities as
may be substituted (or resubstituted) for Stock pursuant to Section 8 hereof.
(g) "Stock Unit" means the credit to a Participant's Stock Unit Account
under Sections 6 or 7 hereof, which credit is denominated in shares of Stock and
represents the right to receive one share of Stock upon settlement of the Stock
Unit Account for each such credited Stock Unit, subject to such conditions as
are imposed under the Plan.
(h) "Stock Unit Account" means the account of a Participant to which Stock
Units are credited under Sections 6 and 7 hereof.
3. Shares Available Under the Plan. Subject to adjustment as provided
in Section 8 hereof, the total number of shares of Stock reserved and available
for issuance under the Plan is 150,000. Such shares may be authorized but
unissued shares or treasury shares.
4. Administration of the Plan. The Plan will be administered by the
Board.
5. Eligibility. Each director of the Company who, on any date on which
Stock Units are to be granted under Section 6 hereof, is not an executive
officer or employee, either full-time or part-time, of (i) the Company, (ii) any
parent of the Company, or (iii) any subsidiary of the Company, will be eligible,
on such date, to be granted Stock Units under Section 6 hereof. No person other
than those specified in this Section 5 will be eligible to participate in the
Plan.
<PAGE>
6. Grants of Stock Units.
(a) Meeting Fees. At any date on which, under the Board policy then in
effect, fees are payable with respect to meetings of the Board or a committee
thereof to a director who is then eligible to receive grants under Section 5
hereof, the Stock Unit Account of each such director shall be credited with a
number of Stock Units equal to the number of shares of Stock having an aggregate
Fair Market Value at that date equal to $2,000 for each such meeting (or series
of meetings entitling a director to a single meeting fee under board policy)
attended by the director on such date.
(b) Retainer. On the last business day prior to each Fiscal Month End, the
Stock Unit Account of each director who is then eligible to receive grants under
Section 5 hereof shall be credited with a number of Stock Units equal to the
number of shares of Stock having an aggregate Fair Market Value at that date
equal to $1,666.67.
(c) Dividend Equivalents. A Participant to whose Stock Unit Account any
Stock Unit is credited under this Section 6 (whether pending settlement in
accordance with Section 6(d) or deferred settlement in accordance with Section
6(e)) shall be entitled to receive dividend equivalents, in the form of
additional Stock Units, in accordance with Section 7 hereof.
(d) Settlement of Stock Units. Except as provided in Section 6(e) hereof,
the Company will settle all Stock Units credited to each Participant's Stock
Unit Account on the last business day prior to each December and June Fiscal
Month End. Settlement shall be made by delivering to the Participant (or his or
her beneficiary) the number of shares of Stock equal to the number of such whole
Stock Units then credited to the Participant's Stock Unit Account, together with
cash in lieu of any fractional Stock Unit then credited to such Account.
(E) Elective Deferral. A Participant may elect to defer settlement of any
or all of his or her Stock Units, including Stock Units with respect to which a
previous deferral election has been made, by filing an irrevocable written
election with the Secretary of the Company by such date as may be specified by
the Board. The election shall specify the Stock Units to which it relates and
the period or periods of deferral. The Company will settle Stock Units deferred
under this Section 6(e) by delivering to the Participant (or his or her
beneficiary), as promptly as practicable after the end of the applicable
deferral period, the number of shares of Stock equal to the number of whole
Stock Units credited to the Participant's Stock Unit Account as to which the
deferral period has expired, together with cash in lieu of any fractional Stock
Unit then credited to such Account.
7. Crediting of Dividend Equivalents. A Participant shall be entitled
to receive dividend equivalents, as of the payment date for any dividend or
distribution on Stock, in an amount equal to the cash or fair market value of
any property other than Stock paid as a dividend or distribution on a single
share of Stock at that date multiplied by the number of Stock Units (including
any fractional shares) credited to his or her Stock Unit Account as of the
record date for such dividend or distribution. Such dividend equivalents shall
be credited as a number of Stock Units determined by dividing the aggregate
amount of such cash and the fair market value of such property (as determined by
the Board) by the Fair Market Value of a share of Stock at the payment date of
the dividend or distribution. Dividends paid in the form of additional shares of
Stock shall not result in the crediting of dividend equivalents, but shall
instead result in an adjustment in the number of shares credited as Stock Units,
in accordance with Section 8 hereof.
8. Adjustment Provisions. In the event that any dividend or other
distribution (whether in the form of cash, Stock, or other property),
recapitalization, forward or reverse split, reorganization, merger,
consolidation, spin-off, combination, repurchase, share exchange, liquidation,
dissolution or other similar corporate transaction or event affects the Stock
such that an adjustment is determined by the Board to be appropriate in order to
prevent dilution or enlargement of Participants' rights under the Plan, then the
Board will, in a manner that is proportionate to the change to the Stock and is
otherwise equitable, adjust (i) the number and kind of shares reserved for
issuance under the Plan, (ii) the number and kind of shares subject to each
grant of Stock Units hereunder, and (iii) the number and kind of shares to be
issued and delivered in settlement of outstanding Stock Units. The foregoing
notwithstanding, no adjustment may be made hereunder except as shall be
necessary to maintain the proportionate interest of a Participant under the Plan
and to preserve, without exceeding, the value of outstanding Stock Units and
potential grants of Stock Units. If at any date an insufficient number of shares
of Stock are available under the Plan for the automatic grant of Stock Units at
that date, Stock Units will be automatically granted proportionately to eligible
directors, to the extent shares are then available.
<PAGE>
9. Changes to the Plan. The Board may amend, alter, suspend,
discontinue, or terminate the Plan without the consent of stockholders or
Participants, except that any such action will be subject to the approval of the
Company's stockholders if such stockholder approval is required by any federal
or state law or regulation or the rules of any stock exchange or automated
quotation system on which the Stock may then be listed or quoted, or if the
Board determines in its discretion to seek or obtain stockholder approval;
provided that, without the consent of an affected Participant, no such action
may impair the rights of such Participant in respect of any previously granted
or outstanding Stock Units or Stock Unit Account.
10. General Provisions.
(a) Unfunded Nature of Plan; Agreements. Stock Unit Accounts are maintained
solely as bookkeeping entries by the Company evidencing unfunded obligations of
the Company. Accordingly, Participants will not have rights to specific property
of the Company or otherwise have rights other than as unsecured creditors in
respect of such Stock Unit Accounts. The Board may, however, authorize the
creation of trusts and deposit Stock therein, or make other arrangements, to
meet the Company's obligations under the Plan; provided, however, that such
actions and all other actions under this Section 10(a) shall be consistent with
Section 10(d) hereof. Such trusts or other arrangements shall be consistent with
the "unfunded" status of the Plan unless the Board otherwise determines with the
consent of each affected Participant.
(b) Compliance with Laws and Obligations. The Company will not be obligated
to issue or deliver shares of Stock in settlement of Stock Units in a
transaction subject to the registration requirements of the Securities Act of
1933, as amended, or any other federal or state securities law, any requirement
under any listing agreement between the Company and any stock exchange or
automated quotation system, or any other law, regulation or contractual
obligation of the Company, until such laws, regulations and other obligations of
the Company have been complied with to the satisfaction of the Company.
Certificates representing shares of Stock issued under the Plan will be subject
to such stop-transfer orders and other restrictions as may be applicable under
such laws, regulations and other obligations of the Company, including any
requirement that a legend or legends be placed thereon.
(c) Limitations on Transferability. No Stock Units or right under the Plan
shall be pledged, hypothecated, or otherwise encumbered or subject to any lien,
obligation, or liability of a Participant to any party (other than the Company
or a subsidiary), or assigned or transferred by such Participant otherwise than
by will or the laws of descent and distribution or to a designated beneficiary
upon the death of the Participant, unless, and only to the extent, such
transfers are expressly permitted by the Board (subject to any terms and
conditions which the Board may impose thereon). A beneficiary, transferee, or
other person claiming any rights under the Plan from or through any Participant
shall be subject to all terms and conditions of the Plan and any award agreement
applicable to such Participant, except as otherwise determined by the Board, and
to any additional terms and conditions deemed necessary or appropriate by the
Board.
(d) Compliance with Rule 16b-3. It is the intent of the Company that this
Plan comply in all respects with applicable provisions of Rule 16b-3 under the
Exchange Act. The Plan shall be interpreted as necessary to achieve this intent.
In addition, the Board shall take no action under the Plan which would cause
transactions under the Plan to fail to comply with Rule 16b-3.
(e) Designation of Beneficiary. Each Participant may designate, on forms
provided by the Company, one or more beneficiaries to receive the amounts
distributable pursuant to the Plan in the event of such Participant's death. The
Company may rely upon the beneficiary designation last filed in accordance with
the terms of the Plan.
(f) Crediting of Fractional Shares. The number of Stock Units credited to a
Stock Unit Account shall include fractional shares, calculated to at least three
decimal places.
(g) Other Compensation Arrangements. Nothing set forth in this Plan shall
prevent the Board from adopting other or additional compensation arrangements
for directors.
(h) No Right To Continue as a Director. Nothing contained in the Plan will
confer upon any eligible director any right to continue to serve as a director
of the Company.
<PAGE>
(i) No Stockholder Rights Conferred. Nothing contained in the Plan,
including the crediting of Stock Units to a Participant's Stock Unit Account,
will confer upon any Participant (or beneficiary or transferee thereof) any
rights of a stockholder of the Company unless and until shares of Stock are in
fact issued and delivered in settlement of Stock Units to such Participant or
his or her nominee (or beneficiary or transferee or a nominee thereof).
(j) Governing Law. The validity, construction, and effect of the Plan, and
any rules and regulations under the Plan, shall be determined in accordance with
the laws of the State of Delaware, without giving effect to principles of
conflicts of laws, and applicable federal law.
(k) Stockholder Approval, Effective Date, and Plan Termination. The Plan
has been adopted by the Board with the consent of the stockholders of the
Company and shall become effective on January 1, 1997. Unless earlier terminated
by action of the Board, the Plan shall remain in effect until such time as no
shares of Stock remain available for issuance under the Plan and the Company and
Participants have no further rights or obligations under the Plan in respect of
outstanding Stock Units under the Plan.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-Mos
<FISCAL-YEAR-END> JUN-28-1998
<PERIOD-START> JUN-30-1997
<PERIOD-END> MAR-29-1998
<CASH> 9,231
<SECURITIES> 0
<RECEIVABLES> 351,612
<ALLOWANCES> (4,771)
<INVENTORY> 168,084
<CURRENT-ASSETS> 575,438
<PP&E> 99,541
<DEPRECIATION> (45,871)
<TOTAL-ASSETS> 673,389
<CURRENT-LIABILITIES> 638,063
<BONDS> 0
0
0
<COMMON> 3
<OTHER-SE> (19,315)
<TOTAL-LIABILITY-AND-EQUITY> 673,389
<SALES> 1,523,963
<TOTAL-REVENUES> 1,855,053
<CGS> 1,366,067
<TOTAL-COSTS> 1,620,191
<OTHER-EXPENSES> 189,133
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,698
<INCOME-PRETAX> 18,031
<INCOME-TAX> 12
<INCOME-CONTINUING> 18,019
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,019
<EPS-PRIMARY> 0.56
<EPS-DILUTED> 0.53
</TABLE>
