<PAGE> 1
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 DECEMBER 28, 1997
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 32,409,410 ON DECEMBER 28, 1997.
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 11, 1998
<PAGE> 2
ENTEX INFORMATION SERVICES, INC.
INDEX
Page Numbers
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
December 28, 1997 and June 29, 1997 2
Consolidated Statements of Operations
For the Three and Six Months Ended December 28, 1997
and December 29, 1996 3
Condensed Consolidated Statements of Cash Flows for
the Six Months Ended December 28, 1997
and December 29, 1996 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6-12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
<PAGE> 3
ENTEX INFORMATION SERVICES, INC.
PART I - FINANCIAL INFORMATION
Consolidated Balance Sheets
(Dollars in thousands except share data)
<TABLE>
<CAPTION>
Unaudited
December 28, June 29,
1997 1997
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 14,717 $ 15,838
Trade receivables (net of allowance for doubtful accounts
of $4,774 and $4,746, respectively) 345,376 334,196
Vendor receivables (net of allowance of $3,517 and $2,000, respectively) 43,050 37,789
Inventories 173,416 183,957
Other current assets 7,617 9,228
--------- ---------
Total current assets 584,176 581,008
Property, plant and equipment, net 53,222 55,049
Goodwill (net of accumulated amortization
of $10,429 and $8,903, respectively) 44,018 45,887
Other assets, net 1,418 1,646
--------- ---------
Total assets $ 682,834 $ 683,590
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 286,640 $ 269,962
Accrued liabilities 74,867 53,598
Notes payable and current installments of long-term debt 287,804 348,276
--------- ---------
Total current liabilities 649,311 671,836
--------- ---------
Long-term debt 56,923 48,215
Other long-term liabilities 1,054 1,271
--------- ---------
Total long-term liabilities 57,977 49,486
--------- ---------
Total liabilities 707,288 721,322
--------- ---------
Stockholders' equity (deficit):
Preferred stock, 2 million shares authorized;
no shares issued or outstanding -- --
Common stock, $.0001 par value; 100 million shares
authorized, 32,409,410 and 32,357,840 shares issued and
outstanding, respectively 3 3
Additional paid-in capital 19,135 19,003
Retained earnings (deficit) (43,554) (56,707)
Treasury stock, shares at cost (2) (2)
Cumulative translation adjustments (36) (29)
--------- ---------
Total stockholders' equity (deficit) (24,454) (37,732)
--------- ---------
$ 682,834 $ 683,590
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 4
ENTEX INFORMATION SERVICES, INC.
Consolidated Statements of Operations
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
Unaudited Unaudited
Three Months Ended Six Months Ended
---------------------------- ----------------------------
December 28, December 29, December 28, December 29,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net revenues:
Product revenues $ 543,758 $ 552,609 $ 1,044,696 $ 1,078,571
Service revenues 110,622 84,770 216,523 156,444
------------ ------------ ------------ ------------
Total net revenues 654,380 637,379 1,261,219 1,235,015
Cost of revenues:
Cost of products sold 486,318 501,181 937,099 983,897
Cost of services provided 86,953 63,510 166,825 117,549
------------ ------------ ------------ ------------
Cost of revenues 573,271 564,691 1,103,924 1,101,446
Product gross margin 57,440 51,428 107,597 94,674
Services gross margin 23,669 21,260 49,698 38,895
------------ ------------ ------------ ------------
Total gross margin 81,109 72,688 157,295 133,569
Selling, general and
Administrative expenses 63,323 66,907 125,138 125,454
------------ ------------ ------------ ------------
Income from operations 17,786 5,781 32,157 8,115
Interest expense, net 9,327 9,758 18,996 17,890
------------ ------------ ------------ ------------
Income (loss) before
Income taxes 8,459 (3,977) 13,161 (9,775)
Provision for income taxes 6 5 8 15
------------ ------------ ------------ ------------
Net income (loss) $ 8,453 $ (3,982) $ 13,153 $ (9,790)
============ ============ ============ ============
Common Share Data:
Basic earnings (loss) per share $ .26 $ (.12) $ .41 $ (.30)
============ ============ ============ ============
Diluted earnings (loss) per share $ .25 $ (.12) $ .39 $ (.30)
============ ============ ============ ============
Weighted average number of shares of
common stock outstanding 32,399,060 32,323,112 32,399,060 32,323,112
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 5
ENTEX INFORMATION SERVICES, INC.
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Unaudited
Six Months Ended
-------------------------
December 28, December 29,
1997 1996
--------- ---------
<S> <C> <C>
Net cash provided by (used in) operating activities $ 58,816 $ (60,389)
Cash flows from investing activities:
Capital expenditures (7,021) (13,535)
Cash paid for acquisitions -- (5,779)
Other -- (1,179)
--------- ---------
Net cash used in investing activities (7,021) (20,493)
Cash flows from financing activities:
Proceeds from borrowings 70,979 75,000
Change in cash overdraft 15,399 8,781
Proceeds from sale of common stock, net -- (122)
Repayments on borrowings (139,294) (3,103)
--------- ---------
Net cash (used in) provided by financing activities (52,916) 80,556
Decrease in cash (1,121) (326)
Cash at beginning of period 15,838 12,603
--------- ---------
Cash at end of period $ 14,717 $ 12,277
========= =========
Supplemental disclosure of cash flow information:
Interest paid $ 19,574 $ 15,159
========= =========
Tax refund $ (632) $ (6,447)
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 6
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, and 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 six months ended December
28, 1997 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:
<TABLE>
<CAPTION>
Unaudited
December 28, June 29,
1997 1997
---------- --------
<S> <C> <C>
Finished goods held for resale $163,734 $175,300
Spare parts 9,682 8,657
-------- --------
$173,416 $183,957
======== ========
</TABLE>
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
prior periods.
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; however, the statement will have
no effect on the Company's results of operations, financial position,
capital resources, and liquidity.
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 and does not expect such
adoption to have a material effect on the financial statements.
5
<PAGE> 7
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.
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> 8
ENTEX INFORMATION SERVICES, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
(Dollars in thousands except per share data)
RESULTS OF OPERATIONS
The following table sets forth, for the unaudited periods indicated, the
Company's total net revenues, cost of revenues, gross margin, selling, general
and administrative expenses, income from operations, interest expense, income
(loss) before income tax, provision for income taxes and net income (loss).
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 28, December 29, December 28, December 29,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net revenues:
Product revenues $ 543,758 $ 552,609 $ 1,044,696 $ 1,078,571
Service revenues 110,622 84,770 216,523 156,444
------------ ------------ ------------ ------------
Total net revenues 654,380 637,379 1,261,219 1,235,015
Cost of revenues:
Cost of products sold 486,318 501,181 937,099 983,897
Cost of services provided 86,953 63,510 166,825 117,549
------------ ------------ ------------ ------------
Total cost of revenues 573,271 564,691 1,103,924 1,101,446
Product gross margin 57,440 51,428 107,597 94,674
Service gross margin 23,669 21,260 49,698 38,895
------------ ------------ ------------ ------------
Total gross margin 81,109 72,688 157,295 133,569
Selling, general and administrative expenses 63,323 66,907 125,138 125,454
------------ ------------ ------------ ------------
Income from operations 17,786 5,781 32,157 8,115
Interest expense, net 9,327 9,758 18,996 17,890
------------ ------------ ------------ ------------
Income (loss) before income taxes 8,459 (3,977) 13,161 (9,775)
Provision for income taxes 6 5 8 15
------------ ------------ ------------ ------------
Net income (loss) $ 8,453 $ (3,982) $ 13,153 $ (9,790)
------------ ------------ ------------ ------------
Basic earnings (loss) per share $ .26 $ (.12) $ .41 $ (.30)
============ ============ ============ ============
Diluted earnings (loss) per share $ .25 $ (.12) $ .39 $ (.30)
============ ============ ============ ============
Weighted average number of shares of common
stock outstanding 32,399,060 32,323,112 32,399,060 32,323,112
</TABLE>
7
<PAGE> 9
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 Six Months Ended
December 28, December 29, December 28, December 29,
1997 1996 1997 1996
----- ----- ----- -----
STATEMENT OF OPERATIONS DATA
<S> <C> <C> <C> <C>
Net revenues:
Product revenues 83.1% 86.7% 82.8% 87.3%
Service revenues 16.9 13.3 17.2 12.7
----- ----- ----- -----
Total net revenues 100.0 100.0 100.0 100.0
Cost of revenues 87.6 88.6 87.5 89.2
----- ----- ----- -----
Gross margin (1) 12.4 11.4 12.5 10.8
Selling, general and administrative
expenses 9.7 10.5 10.0 10.1
----- ----- ----- -----
Income from operations 2.7 .9 2.5 .7
Interest expense, net 1.4 1.5 1.5 1.5
----- ----- ----- -----
Income (loss) before income taxes 1.3 (.6) 1.0 (.8)
Provision (benefit) for income taxes -- -- -- --
----- ----- ----- -----
Net income (loss) 1.3% (.6)% 1.0% (.8)%
===== ===== ===== =====
</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 Six Months Ended
Dec. 28, Dec. 29, Dec. 28, Dec. 29,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Product gross margin 10.6% 9.3% 10.3% 8.8%
Service gross margin 21.4 25.1 23.0 24.9
</TABLE>
8
<PAGE> 10
ENTEX INFORMATION SERVICES, INC.
Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Dollars in thousands)
THREE MONTHS ENDED DECEMBER 28, 1997 COMPARED TO THREE MONTHS ENDED
DECEMBER 29, 1996
The Company's net income improved in the three months ended December 28, 1997 to
$8.5 million compared to a net loss of $4.0 million in the three months ended
December 29, 1996. The improvement was a result of an increase in product gross
margins attributable to enhanced controls over vendor programs, a higher
percentage of services in the revenue base, and containment of overhead
spending.
Product revenues: Product revenues were $543.8 million for the three
months ended December 28, 1997 as compared to $552.6 million for the three
months ended December 29, 1996, a decrease of $8.8 million or 1.6%. While the
Company experienced overall unit growth in sales of desktops, laptops and server
units during the quarter ended December 28, 1997, the revenue decline reflects
the price reductions in average sales price driven by lower manufacturer prices
and intense competition.
Service revenues: Service revenues were $110.6 million for the three
months ended December 28, 1997 as compared to $84.8 million for the three months
ended December 29, 1996, an increase of $25.8 million or 30.5%. Service revenues
as a percentage of total net revenues increased to 16.9% for the quarter ended
December 28, 1997 as compared to 13.3% in the quarter ended December 29, 1996.
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 as a percentage of total net revenues.*
Gross margins: Total gross margins increased to 12.4% for the three
months ended December 28, 1997 as compared to 11.4% for the three months ended
December 29, 1996. Product gross margin as a percentage of product revenues
increased to 10.6% or $57.4 million for the three months ended December 28, 1997
as compared to 9.3% or $51.4 million for the three months ended December 29,
1996. 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 involvement 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 $2.4 million or 11.3% to $23.7
million reflecting the higher growth in service revenue. However, the service
gross margin percentage declined to 21.4% for the three months ended December
28, 1997 as compared to 25.1% for the three months ended December 29, 1996
reflecting greater investments in national accounts and billing/utilization
inefficiencies in certain market areas.
Selling, general and administrative expenses: Selling, general and
administrative expenses were $63.3 million for the three months ended December
28, 1997 as compared to $66.9 million for the quarter ended December 29, 1996, a
decrease of $3.6 million or 5.4%. The decrease resulted from the implementation
of cost control programs.
Income from operations: Income from operations was $17.8 million for
the three months ended December 28, 1997 as compared to $5.8 million in the
quarter ended December 29, 1996, an increase of $12 million. The increase
reflects significant improvements in product gross margins, shift in revenue mix
towards higher margin services, as well as successful overhead cost containment.
Interest expense, net: Net interest expense decreased to $9.3 million
for the three months ended December 28, 1997 as compared to $9.8 million for the
three months ended December 29, 1996, a decrease of $431 thousand or 4.4%. The
decrease was driven principally by paydown of the loans under the IBMCC
financing agreement.
- --------------------------------------------------------------------------------
*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> 11
ENTEX INFORMATION SERVICES, INC.
Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Dollars in thousands)
Provision for income taxes: The Company utilized net operating loss
carryforwards to offset federal income tax requirements for the three months
ended December 28, 1997. Although the Company recognized net income for the
three months ended December 28, 1997, 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, the Company did not believe that
three quarters of profitable operations following two years of fairly
unprofitable operations was sufficient 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 December 28, 1997 was $8.5 million as compared to a net
loss of $4.0 million for the three months ended December 29, 1996.
SIX MONTHS ENDED DECEMBER 28, 1997 COMPARED TO SIX MONTHS ENDED
DECEMBER 29, 1996
The Company's net income improved in the six months ended December 28, 1997 to
$13.2 million compared to a net loss of $9.8 million in the six months ended
December 29, 1996. 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 $1.045 billion for the six
months ended December 28, 1997 as compared to $1.079 billion for the six months
ended December 29, 1996, a decrease of $33.9 million or 3.1%. While the Company
experienced overall unit growth in sales of desktops, laptops and server units
during the six months ended December 28, 1997, the revenue decline reflects the
price reductions in average sales price driven by lower manufacturer prices and
intense competition.
Service revenues: Service revenues were $216.5 million for the six
months ended December 28, 1997 as compared to $156.4 million for the six months
ended December 29, 1996, an increase of $60.1 million or 38.4%. Service revenues
as a percentage of total net revenues increased to 17.2% for the six months
ended December 28, 1997 as compared to 12.7% in the six months ended December
29, 1996. 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 as a percentage of total net revenues.*
Gross margins: Total gross margins increased to 12.5% for the six
months ended December 28, 1997 as compared to 10.8% for the six months ended
December 29, 1996. Product gross margin as a percentage of product revenues
increased to 10.3% or $107.6 million for the six months ended December 28, 1997
as compared to 8.8% or $94.7 million for the six months ended December 29, 1996.
These increases reflect the Company's efforts to improve product margins through
improved controls over price protection arrangements and vendor allowances and
to a lesser extent, the Company's involvement in certain manufacturers' programs
designed to increase sales of specific products. Future product margins may be
adversely influenced by manufacturers' pricing strategies and increased
competition. Service margin percentage declined slightly from 24.9% to 23.0%
reflecting the investment in national accounts and the billing/utilization
inefficiencies in certain markets.
Selling, general and administrative expenses: Selling, general and
administrative expenses were essentially flat, $125.1 million for the six months
ended December 28, 1997 as compared to $125.5 million for the six months ended
December 29, 1996. This reflects the Company's increased focus on containing the
overhead costs.
- --------------------------------------------------------------------------------
*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.
10
<PAGE> 12
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 $32.2 million for
the six months ended December 28, 1997 as compared to $8.1 million in the six
months ended December 29, 1996, an increase of $24.1 million. The increase
reflects higher mix of service revenue and significant improvements in gross
margins, while containing selling, general and administrative expenses to
support the business expansion.
Interest expense, net: Net interest expense increased to $19.0 million
for the six months ended December 28, 1997 as compared to $17.9 million for the
six months ended December 29, 1996, an increase of $1.1 million or 6.2%. The
increase was driven by higher working capital needs.
Provision for income taxes: The Company utilized net operating loss
carryforwards to offset federal income tax requirements for the six months ended
December 28, 1997. Although the Company recognized net income for the six months
ended December 28, 1997, 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, the Company did not believe that three quarters
of profitable operations following two years of fairly unprofitable operations
was sufficient 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 six months ended December 28, 1997 was $13.2 million as compared to a net
loss of $9.8 million for the six months ended December 29, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations with borrowings under
various credit lines. Cash provided by operating activities was $58.8 million
for the six months ended December 28, 1997.
The cash provided by operations during the six months ended December 28, 1997
resulted primarily from net income of $13.2 million, depreciation and other
non-cash charges to income of $9.1 million and from changes in working capital.
Cash used in investing activities was $7.0 million during the six months ended
December 28, 1997 and was used primarily for capital expenditures.
Cash used in financing activities was $52.9 million during the six months ended
December 28, 1997. The fluctuations in cash from financing activities during
this period related to paydown of borrowings.
As of December 28, 1997, the Company's primary source of liquidity consisted of
various financing 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 December 28, 1997, the amount outstanding under the
IBMCC Working Capital Line of Credit was $411.4 million of which $301.6 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 December 28, 1997).
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.
- --------------------------------------------------------------------------------
*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> 13
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
Long-Term Loan is required to remain outstanding unless there are no outstanding
interest bearing advances under the IBMCC Financing Agreement. The IBMCC
Financing Agreement was further amended in December 1996 and July 1997 to
provide 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. 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 December 28, 1997). At December
28, 1997, $17.3 million of principal was outstanding under the Long-Term Loan
and $14.0 million of principal was outstanding under the Special Working Capital
Advance.
As of December 28, 1997, 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 December 28, 1997, the principal
amount outstanding under this line of credit was $85.7 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.* 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 as necessary, it is currently not
anticipated that these year 2000 costs will have a material adverse effect on
the Company's business, operating results and financial condition. However, the
Company is still analyzing its computer systems and, to the extent they are not
fully year 2000 compliant, there can be no assurance that the costs necessary to
update software or potential systems interruptions would not have a material
adverse effect on the Company's business, operating results and financial
condition.
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.
12
<PAGE> 14
ENTEX INFORMATION SERVICES, INC.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
- NONE
ITEM 2. Changes in Securities
- Issued 10,350 shares of Common Stock to Directors
ITEM 3. Default Upon Senior Securities
- NONE
ITEM 4. Submission of Matters to a Vote of Security Holders
- NONE
ITEM 5. Other Information
On November 25, 1997, the Company increased the number of
shares of authorized Common Stock from 10,000,000 to 100,000,000. In
addition, the Company effectuated a stock split in the form of a
four-for-one stock dividend to holders of record as of November 25,
1997.
ITEM 6. Exhibits and Reports on Form 8-K
Exhibits
11.1 Statement of computation of earnings per share.
27.1 Financial Data Schedule.
(a) Incorporated by reference from the Company's Registration
Statement on Form 10 filed with the Securities and Exchange Commission
on December 3, 1997 and amended on January 29, 1998.
(b) Reports on Form 8-K - NONE
13
<PAGE> 15
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.
February 11, 1998
/s/ Kenneth A. Ghazey
----------------------------
Kenneth A. Ghazey
Executive Vice President
and Chief Financial Officer
14
<PAGE> 1
Exhibit 11.1
Entex Information Services, Inc.
Computation of Earnings Per Share
(In thousands except share and per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 28, December,29, December 28, December 29,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Weighted average common shares outstanding for the period 32,399,060 32,323,112 32,399,060 32,323,112
Common equivalent shares from stock options
and warrants using the treasury stock method 1,328,665 -- 1,328,665 --
-------------------------------------------------------------------
Weighted average common shares outstanding for the period
and diluted potential common share arrangements 33,727,725 32,323,112 33,727,725 32,323,112
Net income(loss) 8,453 (3,982) 13,153 (9,790)
Basic earnings per share $ 0.26 $ (0.12) $ 0.41 $ (0.30)
============ ============ ============ ============
Diluted earnings per share $ 0.25 $ (0.12) $ 0.39 $ (0.30)
============ ============ ============ ============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-28-1998
<PERIOD-START> JUN-30-1997
<PERIOD-END> DEC-28-1997
<CASH> 14,717
<SECURITIES> 0
<RECEIVABLES> 350,150
<ALLOWANCES> (4,774)
<INVENTORY> 173,416
<CURRENT-ASSETS> 584,176
<PP&E> 94,693
<DEPRECIATION> (41,471)
<TOTAL-ASSETS> 682,834
<CURRENT-LIABILITIES> 649,311
<BONDS> 56,923
0
0
<COMMON> 3
<OTHER-SE> (24,457)
<TOTAL-LIABILITY-AND-EQUITY> 682,834
<SALES> 1,044,696
<TOTAL-REVENUES> 1,261,219
<CGS> 937,099
<TOTAL-COSTS> 1,103,924
<OTHER-EXPENSES> 125,138
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,996
<INCOME-PRETAX> 13,161
<INCOME-TAX> 8
<INCOME-CONTINUING> 13,153
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,153
<EPS-PRIMARY> .41
<EPS-DILUTED> .39
</TABLE>
