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 December 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 13-3715291
(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 32,435,195 (excluding 82,500
treasury shares) on January 24, 1999.
<PAGE>
ENTEX INFORMATION SERVICES, INC.
INDEX
Page Numbers
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
December 27, 1998 and June 28, 1998 2
Consolidated Statements of Operations
For the Three and Six Months Ended December 27, 1998
and December 28, 1997 3
Condensed Consolidated Statements of Cash Flows for
the Six Months Ended December 27, 1998
and December 28, 1997 4
Notes to Condensed Consolidated Financial Statements 5 - 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7 - 14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
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ENTEX INFORMATION SERVICES, INC
Part I - Financial Information
Consolidated Balance Sheets
(Dollars in thousands except share data)
<TABLE>
<CAPTION>
Unaudited
December 27, June 28,
1998 1998
<S> <C> <C>
----------- ---------
Assets
Current assets:
Cash and cash equivalents $ 19,635 $ 14,265
Trade receivables (net of allowance for doubtful
accounts of $4,573 and $4,662, respectively) 369,098 368,344
Vendor receivables (net of allowance of $3,187
and $3,787, respectively) 51,253 47,592
Inventories 142,026 192,841
Other current assets 6,808 8,683
--------- ---------
Total current assets 588,820 631,725
--------- ---------
Property, plant and equipment, net 52,669 61,009
Goodwill (net of accumulated amortization of
$14,805 and $12,861, respectively) 39,833 41,929
Other assets, net 6,172 1,756
--------- ---------
Total assets $687,494 $736,419
========= =========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable $331,461 $338,602
Accrued liabilities 72,656 67,381
Notes payable and current installments
of long-term debt 217,617 295,681
--------- ---------
Total current liabilities 621,734 701,664
--------- ---------
Long-term debt 132,895 53,239
Other long-term liabilities 477 661
--------- ---------
Total long-term liabilities 133,372 53,900
--------- ---------
Total liabilities 755,106 755,564
--------- ---------
Stockholders' equity (deficit):
Preferred stock, 2,000,000 shares authorized;
no shares issued or outstanding -- --
Common stock, $.0001 par value; 100 million
shares authorized, 32,429,910 and 32,413,366
shares issued and outstanding, respectively 3 3
Additional paid-in capital 19,576 19,477
Retained earnings (deficit) (87,161) (38,564)
Accumulated other comprehensive income (28) (59)
Treasury stock, 82,500 shares at cost (2) (2)
-------- --------
Total stockholders' equity (deficit) (67,612) (19,145)
-------- --------
$687,494 $736,419
======== ========
See accompanying notes to condensed consolidated financial statements.
Page 2
</TABLE>
<PAGE>
ENTEX INFORMATION SERVICES, INC.
Consolidated Statements of Operations
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
Unaudited Unaudited
------------------ ------------------
Three Months Ended Three Months Ended Six Months Ended Six Months Ended
December 27, December 28, December 27, December 28,
1998 1997 1998 1997
------------------ ------------------ ---------------- ----------------
<S> <C> <C> <C> <C>
Net revenues:
Product revenues $ 500,282 $ 543,758 $ 938,533 $ 1,044,696
Service revenues 124,386 110,622 241,274 216,523
------------ ------------- ------------- -------------
Total net revenues 624,668 654,380 1,179,807 1,261,219
------------ ------------- ------------- -------------
Costs and expenses:
Cost of products sold 457,929 486,318 863,408 937,099
Cost of services provided 92,465 86,953 177,366 166,825
Inventory charges 5,000 -- 5,000 --
Selling, general and
administrative expenses 68,324 63,323 137,181 125,138
Restructuring costs 14,000 -- 14,000 --
Unusual charges 13,300 -- 13,300 --
----------- ----------- ----------- -----------
Income (loss) from operations (26,350) 17,786 (30,448) 32,157
Interest expense, net 9,015 9,327 18,710 18,996
Other income (575) -- (575) --
----------- ----------- ----------- -----------
Income (loss) before income taxes (34,790) 8,459 (48,583) 13,161
Provision for income taxes 6 6 14 8
----------- ----------- ----------- -----------
Net income (loss) $ (34,796) $ 8,453 $ (48,597) $ 13,153
=========== =========== =========== ===========
Common share data:
Basic earnings (loss) per share $ (1.07) $ .26 $ (1.50) $ .41
=========== =========== =========== ===========
Diluted earnings (loss) per share $ (1.07) $ .25 $ (1.50) $ .39
=========== =========== =========== ===========
Basic weighted average number
of shares of common stock
outstanding 32,428,243 32,399,060 32,409,532 32,399,060
Common equivalent shares from
stock options and warrants using -- 1,328,665 -- 1,328,665
the treasury stock method
----------- ----------- ----------- -----------
Diluted weighted average number
of shares of common
stock outstanding 32,428,243 33,727,725 32,409,532 33,727,725
=========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
Page 3
</TABLE>
<PAGE>
ENTEX INFORMATION SERVICES, INC.
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Unaudited
Six Months Ended
December 27, December 28,
1998 1997
---- ----
<S> <C> <C>
Net cash provided by operating activities $ 19,300 $ 58,816
Cash flows from investing activities:
Capital expenditures (11,493) (7,021)
--------- ---------
Net cash used in investing activities (11,493) (7,021)
--------- ---------
Cash flows from financing activities:
Proceeds from borrowings 147,719 70,979
Change in cash overdraft 1,581 (15,399)
Payments on debt (151,737) (139,294)
--------- ---------
Net cash used in
financing activities (2,437) (52,916)
--------- ---------
Increase (decrease) in cash
and cash equivalents 5,370 (1,121)
Cash and cash equivalents:
Beginning of period 14,265 15,838
--------- ---------
End of period $ 19,635 $ 14,717
========= =========
Supplemental disclosure of cash
flow information:
Interest paid $ 12,849 $ 19,574
========= =========
Income taxes paid (refunded) $ 817 $ (632)
========= =========
See accompanying notes to condensed consolidated financial statements.
Page 4
</TABLE>
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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.
Cash equivalents include short-term, highly liquid investments with a maturity
of three months or less from the date of acquisition. Included in cash
equivalents are treasury notes of approximately $6 million to be used to finance
a February 1, 1999 interest payment and are therefore restricted.
The results of operations for the six months ended December 27, 1998 are not
necessarily indicative of the results to be expected for the fiscal year ending
June 27, 1999.
2. Special Items
In November 1998, the Company's Board of Directors authorized management actions
that resulted in the reorganization of ENTEX's business to create two operating
units: a Technology Acquisition Services Division and a Services Division, each
functioning as a separate operating division within ENTEX Information Services.
The reorganization was intended to reduce costs and increase operational focus
to respond to new market dynamics.
As a result, during the second fiscal quarter ended December 27, 1998, the
Company recorded a restructuring charge of $14 million. The restructuring charge
includes $7 million to cover costs related to involuntary severance benefits in
connection with a workforce reduction affecting approximately 450 employees, of
which approximately 300 had left the Company at December 27, 1998. Reductions
occurred in virtually all areas of the Company. In addition, the restructuring
charge includes $7 million in connection with branch office consolidations,
facilities reductions and other costs. As of December 27, 1998, $4.5 million of
costs have been charged against the reserve. The remaining liability of $9.5
million at December 27, 1998, primarily relates to future lease obligations, net
of estimates of sublease income and remaining severance payments, and is
classified as accrued liabilities in the consolidated balance sheet.
Also, during the second fiscal quarter ended December 27, 1998, the Company
recorded unusual items totaling $18.3 million (of which $15.7 million is
non-cash) in connection with the reorganization. These non-recurring unusual
items consist of $10.7 million related to the Company's abandonment of
implementation of the R3TM Enterprise Resource Planning System ("ERP") from SAP,
$5 million, recorded as cost of revenues, to expedite the liquidation of excess
finished goods and spare parts, and $2.6 million primarily related to incentives
to employees during the restructuring effort.
Page 5
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ENTEX INFORMATION SERVICES, INC.
Notes to Condensed Consolidated Financial Statements
In addition, during the second fiscal quarter ended December 27, 1998, the
Company recorded a gain of $575,000 in connection with the early retirement of
$1.4 million of BusinessLand Incorporated debentures. The gain is classified as
other income in the consolidated statement of income.
3. 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 and six
months ended December 27, 1998 and December 28, 1997 was $(34,794) and
$(48,566), and $8,454 and $13,146, respectively. Other comprehensive income
(loss) for the three and six months ended December 27, 1998 and December 28,
1997 was $2 and $31, and $1 and $(7), respectively.
Page 6
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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.
Page 7
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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
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:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 27, December 28, December 27, December 28,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net revenue:
Product revenues 80.1% 83.1% 79.5% 82.8%
Service revenues 19.9 16.9 20.5 17.2
----- ----- ----- -----
Total net revenues 100.0 100.0 100.0 100.0
Cost of products sold 73.3 74.3 73.2 74.3
Cost of services provided 14.8 13.3 15.0 13.2
Inventory charges .8 -- .4 --
Selling, general and
administrative expenses 10.9 9.7 11.6 10.0
Restructuring costs 2.3 -- 1.2 --
Unusual items 2.1 -- 1.1 --
----- ----- ----- -----
Income (loss) from operations (4.2) 2.7 (2.5) 2.5
Interest expense, net 1.5 1.4 1.6 1.5
Other income (.1) -- -- --
----- ----- ----- -----
Income (loss) before
income taxes (5.6) 1.3 (4.1) 1.0
Provision for income taxes -- -- -- --
----- ----- ----- -----
Net income (loss) (5.6)% 1.3% (4.1)% 1.0%
===== ===== ===== =====
</TABLE>
(1) Product gross margin as a percentage of product revenues and services gross
margin as a percentage of service revenues (excluding unusual inventory charges)
for each period was as follows:
Three Months Ended Six Months Ended
Dec. 27, Dec. 28, Dec. 27, Dec. 28,
1998 1997 1998 1997
---- ---- ---- ----
Product gross margin 8.5% 10.6% 8.0% 10.3%
Services gross margin 25.7% 21.4% 26.5% 23.0%
Page 8
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ENTEX INFORMATION SERVICES, INC.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Three Months Ended December 27, 1998 Compared to Three Months Ended
December 28, 1997
Consolidated net loss for the three months ended December 27, 1998 was
$34.8 million compared to consolidated net income of $8.5 million in the three
months ended December 28, 1997. The results for the second fiscal quarter of
1999 include a restructuring charge and related non-recurring unusual items
totaling $32.3 million (of which $16.1 million is non-cash) and a $575,000 gain
on the early retirement of $1.4 million of debt. Excluding these items, the net
loss for the quarter ended December 27, 1998 would have been $3.1 million, and
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 $500.3 million for the three months
ended December 27, 1998 as compared to $543.8 million for the three months ended
December 28, 1997, a decrease of $43.5 million or 8.0%. The revenue decline
primarily reflects gross margin pressure as well as declining average sales
prices.
Service revenues: Service revenues were $124.4 million for the three months
ended December 27, 1998 as compared to $110.6 million for the three months ended
December 28, 1997, an increase of $13.8 million or 12.4%. 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 19.9% for
the quarter ended December 27, 1998 as compared to 16.9% in the quarter ended
December 28, 1997 due to higher service revenues coupled with a decline in the
product business. The Company is focused on continuing to increase service
revenues.
Gross margins: Total gross margins declined to 11.1% for the three months
ended December 27, 1998 as compared to 12.4% for the three months ended December
28, 1997. Excluding the non-recurring unusual charge to record costs to
liquidate excess finished goods inventory, product gross margin as a percentage
of product revenues was 8.5% or $42.4 million for the current quarter, as
compared to 10.6% or $57.4 million for the three months ended December 28, 1997.
The decrease is primarily the result of pricing pressures and a reduction in
vendor incentive programs. Including the unusual charge, product gross margin as
a percentage of product revenues declined to 7.7% or $38.4 million for the three
months ended December 27, 1998. Excluding the costs to expedite the liquidation
of excess spare parts, services gross margin increased $8.3 million or 34.7%
during the current quarter to $31.9 million reflecting operating efficiencies on
increased service revenues. Including these costs, services gross margin
increased $7.3 million or 30.6% to $30.9 million.
Selling, general and administrative expenses: Selling, general and
administrative expenses as a percentage of total revenues increased to 10.9% for
the quarter ended December 27, 1998 from 9.7% in the same period a year ago,
reflecting increased expenditures as well as lower sales volume in the product
business. For the three months ended December 27, 1998, selling, general and
administrative expenses were $68.3 million as compared to $63.3 million for the
quarter ended December 28, 1997, an increase of $5.0 million, reflecting
increased investments in company-wide infrastructure and field operations to
support service business growth.
Page 9
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ENTEX INFORMATION SERVICES, INC.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Income (loss) from operations: Loss from operations was $26.4 million for
the three months ended December 27, 1998 as compared to income from operations
of $17.8 million in the quarter ended December 28, 1997. The loss reflects a $14
million restructuring charge and $18.3 million in non-recurring unusual items,
as well as the decline in gross margin on product revenues and increased
selling, general and administrative expenses, partially offset by increased
gross margin on service revenues. Excluding the restructuring charge and unusual
items, income from operations for the quarter ended December 27, 1998 was $5.9
million. See Note 2 to the condensed consolidated financial statements for
additional details concerning the restructuring charge and unusual items.
Interest expense, net: Net interest expense remained essentially unchanged
for the three months ended December 27, 1998 as compared to the three months
ended December 28, 1997. This is a result of reduced borrowing rates, partially
offset by increased debt levels in the current quarter, compared to the year ago
period.
Other income: Other income for the second fiscal quarter ended December 27,
1998, represents a $575,000 gain on the early retirement of debt.
Provisions for income taxes: The Company utilized net operating loss
carryforwards to offset federal income tax requirements for the three months
ended December 28, 1997.
Net income (loss): As a result of the factors mentioned above, the net loss
for the three months ended December 27, 1998 was $34.8 million as compared to
net income of $8.5 million for the three months ended December 28, 1997.
Six Months Ended December 27, 1998 Compared to Six Months Ended
December 28, 1997
Consolidated net loss for the six months ended December 27, 1998 was $48.6
million compared to consolidated net income of $13.2 million in the six months
ended December 28, 1997. The results for the six months ended December 27, 1998
include the restructuring charge, non-recurring unusual items, and the gain on
the early retirement of debt previously discussed. Excluding these items, the
net loss for the six months ended December 27, 1998 would have been $16.9
million, and 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 $938.5 million for the six months
ended December 27, 1998 as compared to $1,044.7 million for the six months ended
December 28, 1997, a decrease of $106.2 million or 10.2%. The revenue decline
primarily reflects availability constraints during the period and a slowdown in
orders from a number of significant customers as well as declining average sales
prices.
Service revenues: Service revenues were $241.3 million for the six months
ended December 27, 1998 as compared to $216.5 million for the six months ended
December 28, 1997, an increase of $24.8 million or 11.4%. 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 20.5% for
the six months ended December 27, 1998 as compared to 17.2% in the six months
Page 10
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ENTEX INFORMATION SERVICES, INC.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
ended December 28, 1997 due to higher service revenues coupled with a decline in
the product business. The Company is focused on continuing to increase service
revenues.
Gross margins: Total gross margins declined to 11.4% for the six months
ended December 27, 1998 as compared to 12.5% for the six months ended December
28, 1997. Excluding the unusual charge, product gross margin as a percentage of
product revenues was 8.0% or $75.1 million for the current period, as compared
to 10.3% or $107.6 million for the six months ended December 28, 1997. The
decrease reflects pricing pressures, product availability constraints and a
reduction in vendor incentive programs. Including the non-recurring unusual
inventory charge previously discussed, product gross margin as a percentage of
product revenues declined to 7.6% or $71.1 million for the six months ended
December 27, 1998. Excluding the costs associated with the liquidation of excess
spare parts, previously discussed, services gross margin increased $14.2 million
or 28.6% to $63.9 million reflecting operating efficiencies on increased service
revenues. Including these costs, services gross margin increased $13.2 million
or 26.6% to $62.9 million.
Selling, general and administrative expenses: Selling, general and
administrative expenses as a percentage of total revenues increased to 11.6% for
the six months ended December 27, 1998 from 10.0% in the same period in the
previous year reflecting increased expenditures as well as lower sales volume in
the product business. For the six months ended December 27, 1998, selling,
general and administrative expenses were $137.2 million as compared to $125.1
million for the six months ended December 28, 1997, an increase of $12.1
million, reflecting increased investments in company-wide infrastructure,
training and field operations to support service business growth.
Income (loss) from operations: Loss from operations was $30.5 million for
the six months ended December 27, 1998 as compared to income from operations of
$32.2 million in the six months ended December 28, 1997. The loss reflects the
restructuring charge and non-recurring unusual items, as well as the decline in
gross margin on product revenues and increased selling, general and
administrative expenses, partially offset by increased gross margin on service
revenues. Excluding the restructuring charge and unusual items, income from
operations for the six months ended December 27, 1998 was $1.8 million. See Note
2 to the condensed consolidated financial statements for additional details
concerning the restructuring charge and unusual items.
Interest expense, net: Net interest expense remained essentially unchanged
for the six months ended December 27, 1998 as compared to the six months ended
December 28, 1997. This is a result of reduced borrowing rates, partially offset
by increased debt levels, compared to the year ago period.
Other income: Other income for the six months ended December 27, 1998,
represents a $575,000 gain on the early retirement of debt.
Provisions for income taxes: The Company utilized net operating loss
carryforwards to offset federal income tax requirements for the six months ended
December 28, 1997.
Net income (loss): As a result of the factors mentioned above, net loss for
the six months ended December 27, 1998 was $48.6 million as compared to net
income of $13.2 million for the six months ended December 28, 1997.
Page 11
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ENTEX INFORMATION SERVICES, INC.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
The Company has historically financed its operations with borrowings under
various credit lines. Cash provided by operating activities was $19.3 million
for the six months ended December 27, 1998 compared to $58.8 million for the
comparable period in 1997.
The decrease in cash provided by operations during the six months ended
December 27, 1998 resulted primarily from the non-cash portion of the
restructuring charge and unusual charges, depreciation, other non-cash charges
to income and from changes in operating assets and liabilities, partially offset
by the net loss of $48.6 million.
Cash used in investing activities (capital expenditures) was $11.5 million
during the six months ended December 27, 1998 compared with $7.0 million during
the six months ended December 28, 1997.
Cash used in financing activities was $2.4 million during the six months
ended December 27, 1998 compared to $52.9 million during the six months ended
December 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 December 27, 1998, the Company had secured credit lines totaling $635
million, with $405.3 million outstanding under these lines. An aggregate amount
of $319.6 million was outstanding under the IBMCC Working Capital Line of Credit
with IBM Credit Corporation ("IBMCC"), of which $213.8 million was interest
bearing. In addition, $85.7 million was outstanding under the line of credit
with Finova Capital Corporation, none of which was interest bearing.
At December 27, 1998, the Company had no material commitments other than
obligations under its credit facilities, term notes and operating lease
facilities.
The IBMCC Financing Agreement contains restrictive covenants with respect
to maintenance of minimum tangible net worth, current ratio and fixed charge
coverage. In addition, the IBMCC Financing Agreement prohibits the Company from
paying cash dividends on common stock. In December 1998, the Company
renegotiated the IBMCC Financing Agreement resulting in favorable revisions to
the financial covenant requirements and an increase in the financing rate from
LIBOR plus 2.10% to LIBOR plus 2.60%. At December 27, 1998, the Company was in
compliance with all financial covenants and maintained an excess collateral
position.
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.
Page 12
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ENTEX INFORMATION SERVICES, INC.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Recent Developments
In January 1999, the Company filed a registration statement on Form S-4 in
connection with its offer to exchange any and all of its 12 1/2% Senior
Subordinated Notes due 2006 (the "Old Notes") with its 12 1/2% Senior
Subordinated Notes due 2006, which have been registered under the Securities Act
of 1933, as amended.
In November 1998, the Company deposited with the Trustee under the Old
Notes funds to make the interest payment due February 1, 1999 on such notes.
In November 1998, the Company's Board of Directors authorized management
actions that resulted in the reorganization of ENTEX's business to create two
operating units: a Technology Acquisition Services Division and a Services
Division, each functioning as a separate operating division within ENTEX
Information Services. The reorganization was intended to reduce costs and
increase operational focus to respond to new market dynamics. As a result, the
Company recorded restructuring and other unusual charges during the second
fiscal quarter ended 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. See Note 2 to the Condensed
Consolidated Financial Statements.
Year 2000 Compliance
The Company uses a significant number of computer software programs and
operating systems in its internal operations, including applications used in
financial business systems and various administration functions. As the Year
2000 approaches, each of these computer systems may be affected in some way by
the rollover of the two-digit year value to 00. If these systems are unable to
properly recognize date sensitive information when the year changes to 2000,
they could generate erroneous data or cause a system to fail. The Company is
utilizing both internal and external resources to identify, correct or reprogram
and test the systems for Year 2000 compliance.
ENTEX classifies its Year 2000 project into five phases: inventory,
assessment, renovation, validation and implementation. Inventory is the process
in which all electronic/computer components are defined for all systems
(information technology and non-information technology). Assessment is the
process in which all components are classified as either compliant or
non-compliant. Renovation is the process in which a system is upgraded, replaced
or retired. Validation is the process in which compliant systems are tested
within the Company's infrastructure to validate that either the initial
compliant assessment is correct or the upgrade or replacement from the
renovation phase is compliant within the Company's infrastructure.
Implementation is the process in which a compliant system is installed into the
Company's production environment and is utilized to support business operations.
Page 13
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ENTEX INFORMATION SERVICES, INC.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
The Company completed an inventory of its applications systems in December
1997. More than 30 systems were identified, prioritized according to criticality
to business operations, and assessed for current compliance status. Based on
this review, the Company has scheduled each system for either renovation or
validation. At June 30, 1998, the Company was in the process of implementing the
R3TM ERP from SAP. It was anticipated that the implementation of ERP would
address Year 2000 compliance in many of the systems identified in the Company's
inventory. The Company has now abandoned implementation of ERP and written off
its investment of $10.7 million. As a result, the Company has begun to renovate
existing systems identified in the inventory. Assessments have also been
completed in the processing and telecommunications environments. A similar
activity is now underway in the employee desktop environment and is expected to
be completed by March 1999. As a result of these efforts, the Company intends to
implement any required changes or upgrades by June 1999. The Company's inventory
and assessment of its non-IT systems (facilities and warehouse-based, including
scanners, conveyers and security systems) is expected to be complete by April
1999, followed by any required renovation. All validation and implementation of
these non-IT systems is expected to be completed by June 1999. Total costs to
complete the Company's Year 2000 project upgrade are now estimated at
approximately $7 million. As of December 27, 1998, the Company has spent
approximately $2.4 million.
In addition to upgrading its own systems, the Company has contacted certain
significant customers and suppliers to determine their Year 2000 compliance
profile. To date, the Company has not received any information which would
indicate that the Year 2000 will result in any significant disruption from them.
The Company currently intends to complete joint testing of Year 2000 date data
with its EDI customers and suppliers by June 1999.
All potential risks and uncertainties associated with the Year 2000 issue
can not be fully and accurately quantified. Contingency plans will be developed
if third party data interchange partners fail compliance testing or if the
replacement or renovation of other existing systems is not on schedule. Although
the Company does not believe that any additional costs or potential loss in
revenue associated with Year 2000 compliance initiatives will have a material
adverse effect on the Company's business, operating results or financial
condition, the Company is still analyzing its computer systems, and, to the
extent they are not fully year 2000 compliant, there can be no assurance that
the costs necessary to update software or potential systems interruptions would
not have a material adverse effect on the Company's business, operating results
and financial condition.
Page 14
<PAGE>
PART II - OTHER INFORMATION
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
December 23, 1998 under Item 5, "Other
Events", and Item 7, "Financial Statements and
Exhibits." No financial statements were
included with this report.
Page 15
<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)
February 10, 1999 Michael G. Archambault
Michael G. Archambault
Senior Vice President, CFO
and Treasurer
February 10, 1999 Shirley S. Mehta
Shirley S. Mehta
Vice President and Controller
Page 16
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