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 March 28, 1999
or
( ) Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from _____________ to ______________
Commission file number : 000-23457
ENTEX INFORMATION SERVICES, INC.
(Exact name of registrant as specified in its charter)
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 32,353,060 (excluding
82,500 treasury shares) on April 25, 1999.
<PAGE>
ENTEX INFORMATION SERVICES, INC.
INDEX
Page Numbers
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
March 28, 1999 and June 28, 1998 2
Consolidated Statements of Operations
For the Three and Nine Months Ended March 28, 1999
and March 29, 1998 3
Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended March 28, 1999
and March 29, 1998 4
Notes to Condensed Consolidated Financial Statements 5 - 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8 - 14
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 15
PART II. OTHER INFORMATION
Item 3. Defaults Upon Senior Securities 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
<PAGE>
ENTEX INFORMATION SERVICES, INC.
Part I - Financial Information
Consolidated Balance Sheets
(Dollars in thousands except share data)
<TABLE>
<CAPTION>
Unaudited
March 28, June 28,
1999 1998
<S> <C> <C>
---------- --------
Assets
Current assets:
Cash and cash equivalents $ 12,740 $ 14,265
Trade receivables (net of allowance for doubtful
accounts of $4,952 and $4,662, respectively) 337,642 368,344
Vendor receivables (net of allowance of $3,461
and $3,787, respectively) 39,518 47,592
Inventories 15,343 12,736
Other current assets 6,448 8,683
Current assets of discontinued operations to be sold 99,543 180,105
--------- ---------
Total current assets 511,234 631,725
Property, plant and equipment, net 34,863 34,648
Goodwill (net of accumulated amortization
of $3,064 and $2,319, respectively) 11,108 11,853
Other assets, net 6,216 1,756
Noncurrent assets of discontinued operations
to be sold 12,314 56,437
-------- --------
Total assets $575,735 $736,419
======== ========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable $295,315 $338,602
Accrued liabilities 66,793 67,381
Notes payable and current installments
of long-term debt 198,474 295,681
-------- --------
Total current liabilities 560,582 701,664
Long-term debt 129,731 53,239
Other long-term liabilities 372 661
-------- --------
Total long-term liabilities 130,103 53,900
Total liabilities 690,685 755,564
-------- --------
Stockholders' equity (deficit):
Preferred stock, 2,000,000 shares authorized;
no shares issued or outstanding -- --
Common stock, $.0001 par value; 100 million
shares authorized, 32,435,280 and 32,413,366
shares issued and outstanding, respectively 3 3
Additional paid-in capital 19,591 19,477
Retained earnings (deficit) (134,473) (38,564)
Accumulated other comprehensive income (69) (59)
Treasury stock, 82,500 shares at cost (2) (2)
-------- --------
Total stockholders' equity (deficit) (114,950) (19,145)
-------- --------
$575,735 $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 Nine Months Ended Nine Months Ended
March 28, March 29, March 28, March 29,
1999 1998 1999 1998
------------------ ------------------ ----------------- -----------------
<S> <C> <C> <C> <C>
Net revenues $ 121,470 $ 111,180 $ 356,460 $ 320,900
------------ ------------ ------------ ------------
Costs and expenses:
Cost of services provided 96,217 85,550 269,873 248,517
Inventory charges -- -- 1,000 --
Selling, general and
administrative expenses 33,602 36,174 113,975 110,167
Restructuring costs -- -- 2,000 --
Unusual charges 2,500 -- 3,800 --
------------ ------------ ------------ ------------
Income (loss) from operations (10,849) (10,544) (34,188) (37,784)
Interest expense, net 10,487 8,702 29,197 27,698
Other income (413) -- (988) --
------------ ------------ ------------ ------------
Loss from continuing
operations before income taxes (20,923) (19,246) (62,397) (65,482)
Provision for income taxes -- 1 2 (1)
------------ ------------ ------------ ------------
Loss from continuing operations (20,923) (19,247) (62,399) (65,481)
Discontinued operations:
Income (loss) from operations (net of
income tax expense) (9,646) 24,113 (16,767) 83,500
Loss on disposal (16,743) -- (16,743) --
------------ ------------ ------------ ------------
Net income (loss) $ (47,312) $ 4,866 $ (95,909) $ 18,019
============= ============ ============ ============
Basic earnings (loss) per common share:
Continuing operations $ (.64) $ (.59) $ (1.93) $ (2.02)
Discontinued operations (.82) .74 (1.03) 2.58
------------ ------------ ------------ -----------
Net income (loss) $ (1.46) $ .15 $ (2.96) $ .56
============ =========== ============ ===========
$ (1.93)
Diluted earnings (loss) per common share:
---------------
Continuing operations $ (.64) $ (.59) $ (1.93) $ (2.02)
Discontinued operations (.82) .74 (1.03) 2.58
------------ ------------ ------------ -----------
Net income (loss) $ (1.46) $ .15 $ (2.96) $ .56
============ =========== ============ ===========
Basic and diluted weighted average
number of shares of common
stock outstanding 32,435,223 32,362,643 32,421,290 32,341,754
============ =========== ============ ===========
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
Nine Months Ended
--------------------------
March 28, March 29,
1999 1998
---- ----
<S> <C> <C>
Net cash provided by operating activities $ 50,269 $ 75,124
--------- ----------
Cash flows from investing activities:
Capital expenditures (14,538) (12,249)
Proceeds from disposals 530 --
--------- ----------
Net cash used in investing
activities (14,008) (12,249)
--------- ----------
Cash flows from financing activities:
Proceeds from borrowings 217,074 80,658
Change in cash overdraft (10,969) 7,927
Debt financing costs (4,367) --
Proceeds from sales of common stock, net 114 291
Payments on debt (239,638) (158,358)
--------- ----------
Net cash used in
financing activities (37,786) (69,482)
Decrease in cash and cash equivalents (1,525) (6,607)
Cash and cash equivalents:
Beginning of period 14,265 15,838
End of period
--------- ----------
$ 12,740 $ 9,231
========= ==========
Supplemental disclosure of cash
flow information:
Interest paid $ 24,977 $ 27,387
========= ==========
Income taxes paid (refunded) $ 1,485 $ (372)
========= ==========
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.
Reclassifications of prior-year data have been made, where
appropriate, to conform to the current year presentation.
The results of operations for the nine months ended March 28,
1999 are not necessarily indicative of the results to be
expected for the fiscal year ending June 27, 1999.
2. Discontinued Operations
Effective May 10, 1999, the Company sold certain assets
(inventory, land and building, and fixed assets) of its
Technology Acquisition Services ("TAS") Division to CompuCom
Systems, Inc. ("CompuCom"). The transaction was structured as
an asset sale for cash. Included in the sale were all of the
inventory and equipment in the Company's Erlanger, Kentucky
Integration Center and its Corporate Account Call Center in
Mason, Ohio. Over 1000 employees in the Company's former TAS
Division will become employees in CompuCom. After giving
effect to the proceeds of $137.4 million received by the
Company for the transaction, and after accounting for the
write-off of goodwill, inventories and fixed assets and
deal-related expenses, the transaction will result in a loss
for ENTEX. This loss of $16.7 million, and the loss from
operations of $16.8 millionfor the nine months ended
March 28, 1999, which includes a $12 million
inventory charge related to the expedited liquidation of
inventory as opposed to through the normal course of business,
is reflected in discontinued operations in the accompanying
condensed consolidated financial statements. The operating
results of the TAS Division for prior fiscal periods have been
restated to reflect the TAS Division discontinued operations.
The TAS Division had revenues of $432 million and $1.4
billion, and $483 million and $1.5 billion for the three and
nine months ended March 28, 1999 and March 29, 1998,
respectively. The TAS Division had gross profit of $34.1
million, $111.8 million, and $51.9 million and $162.7 million
for the three and nine months ended March 28, 1999 and March
29, 1998, respectively.
Page 5
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ENTEX INFORMATION SERVICES, INC.
Notes to Condensed Consolidated Financial Statements
The current and noncurrent assets of the TAS Division
purchased by CompuCom have been classified as such in the
accompanying consolidated balance sheet. Other assets of the
TAS Division that were not sold to CompuCom are reflected in
the consolidated balance sheet as follows:
March 28, 1999 June 28, 1998
-------------- -------------
Trade receivables, net of allowance
of $3,867 and $3,659, respectively $255,746 $289,802
Vendor receivables, net of allowance
of $3,461 and $3,787 $ 39,419 $ 47,592
The Company expects to collect such receivables and use the
net proceeds therefrom to pay down debt.
3. 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, income for the nine months ended March 28, 1999
includes a restructuring charge of $14 million ($12 million
for discontinued operations and $2 million for continuing
operations) which the Company recorded during the second
fiscal quarter ended December 27, 1998. The restructuring
charge includes $7 million to cover costs related to
involuntary severance benefits in connection with a workforce
reduction affecting approximately 450 employees, all of whom
had left the Company at March 28, 1999. In addition, the
restructuring charge includes $7 million in connection with
branch office consolidations, facilities reductions and other
costs. As of March 28, 1999, $8.2 million of costs had been
charged against the reserve.
The remaining liability of $5.8 million at March 28, 1999,
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.
In addition, results for the nine months ended March 28, 1999
include unusual items totaling $20.8 million ($16 million for
discontinued operations and $4.8 million for continuing
operations) in connection with the disposition of the
Company's TASD and reorganization. These unusual items consist
of $2.0 million of incentive compensation in connection with
the disposition and $500,000 for workforce reductions in
continuing operations, recorded in the current quarter, $10.7
million related to the Company's abandonment of implementation
of the R3TM Enterprise Requirements Planning System
Page 6
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ENTEX INFORMATION SERVICES, INC.
Notes to Condensed Consolidated Financial Statements
("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.
Also included in the results for the third fiscal quarter and
nine months ended March 28, 1999 are gains of $413,000 and
$988,000, respectively, in connection with the early
retirement of $3.75 million of BusinessLand Incorporated
debentures. The gain is classified as other income in the
consolidated statements of operations.
4. 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 nine months ended March 28,
1999 and March 29, 1998 was $(47,353) and $(95,919), and
$4,851 and $17,997, respectively. Other comprehensive loss for
the three and nine months ended March 28, 1999 and March 29,
1998 was $(41) and $(10), and $(15) and $(22), respectively.
Page 7
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ENTEX INFORMATION SERVICES, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview
ENTEX is a leading provider of distributed computing infrastructure
services in the United States, managing more than 700,000 personal
computer desktops largely at Fortune 1000 companies. The Company
provides a complete spectrum of integrated technology solutions ranging
from desktop and network outsourcing and professional services to
dispatched point-solution services.
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.
Results of Operations
The following table sets forth the percentage of net revenues
represented by the items in the Company's statements of operation for
the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 28, March 29, March 28, March 29,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Cost of services provided 79.2 76.9 75.7 77.4
Inventory charges -- -- .3 --
Selling, general and
administrative
expenses 27.7 32.5 31.9 34.3
Restructuring costs -- -- .6 --
Unusual items 2.0 -- 1.1 --
----- ----- ----- -----
Loss from operations (8.9) (9.4) (9.6) (11.7)
Interest expense, net 8.6 7.9 8.2 8.7
Other income (.3) -- (1.1) --
----- ----- ----- -----
Loss from continuing
operations (17.2) (17.2) (17.2) (20.4)
Discontinued operations (21.7) 21.7 (9.4) 26.0
----- ----- ----- -----
Net income (loss) (38.9)% 4.4% (26.9)% 5.6%
===== ===== ===== =====
</TABLE>
Page 8
<PAGE>
ENTEX INFORMATION SERVICES, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months Ended March 28, 1999 Compared to Three Months Ended March 29, 1998
Consolidated net loss for the three months ended March 28,
1999 was $47.3 million compared to consolidated net income of $4.9
million in the three months ended March 29, 1998. The results for the
current year's quarter are primarily attributable to the loss and
unusual charges recorded in connection with the disposal of the
Company's Technical Acquisition Services Division, which has been
displayed as a discontinued operation, as well as increased interest
expense, partially offset by lower selling, general and administrative
expenses.
Revenues: Revenues were $121.5 million for the three months ended
March 28, 1999 as compared to $111.2 million for the three months ended
March 29, 1998, an increase of $10.3 million or 9.3%. The increase
reflects increased demand from existing customers and the addition of
new large accounts.
Gross margin: Gross margin was 20.8% or $25.3 million for the
current quarter as compared to 23.1% or $25.6 million for the three
months ended March 29, 1998. The decline is driven by reduced operating
efficiencies and disruption caused by the recent reorganization.
Selling, general and administrative expenses: Selling, general
and administrative expenses as a percentage of revenues decreased to
27.7% for the quarter ended March 28, 1999 from 32.5% in the same
period a year ago. For the three months ended March 28, 1999, selling,
general and administrative expenses were $33.6 million as compared to
$36.2 million for the quarter ended March 29, 1998, a decrease of $2.6
million, primarily reflecting cost reductions realized as a result of
the reorganization announced in the second quarter ended December 27,
1998.
Loss from operations: Loss from operations was $10.8 million
for the three months ended March 28, 1999 as compared to $10.5 million
in the quarter ended March 29, 1998.
Interest expense, net: Net interest expense increased to $10.5
million for the three months ended March 28, 1999 as compared to $8.7
million for the three months ended March 29, 1998. The increase is due
to higher average debt levels and higher borrowing rates associated
with the 12 1/2% Senior Subordinated Notes.
Other income: Other income for the third fiscal quarter ended
March 28, 1999, represents a $413,000 gain on the early retirement of
debt.
Discontinued operations: Loss from discontinued operations was
$26.4 million for the three months ended March 28, 1999, which includes
a loss on disposal of $16.7 million. This compares to income from
discontinued operations of $24.1 million in the quarter ended March 29,
1998. The decrease reflects lower revenues and a reduction in gross
margin from 10.8% to 7.9%, as well as estimated operating losses of
$9.0 million from March 28, 1999 through the date of disposal. In addition,
a special inventory charge of $12 million related to the expedited
liquidation of inventory as opposed to through the normal course of business,
contributed to the loss. Partially offsetting these items are lower selling,
general and administrative expenses.
Page 9
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ENTEX INFORMATION SERVICES, INC.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Net income (loss): As a result of the factors mentioned above,
the net loss for the three months ended March 28, 1999 was $47.3
million as compared to net income of $4.9 million for the three months
ended March 29, 1998.
Nine Months Ended March 28, 1999 Compared to Nine Months Ended March 29, 1998
Consolidated net loss for the nine months ended March 28, 1999
was $95.9 million compared to consolidated net income of $18.0 million
in the nine months ended March 29, 1998. The results for the nine
months ended March 28, 1999 include a restructuring charge and related
non-recurring unusual items totaling $6.8 million (of which $2.3
million is non-cash) and a $988,000 gain on the early retirement of
$3.75 million of debt. The results also include a loss from
discontinued operations of $33.5 million. Excluding these items, the
net loss for the nine months ended March 28, 1999 from continuing
operations would have been $56.6 million.
Revenues: Revenues were $356.5 million for the nine months ended
March 28, 1999 as compared to $320.9 million for the nine months ended
March 29, 1998, an increase of $35.6 million or 11.1%. The increase
reflects increased demand from existing customers and the addition of
new large accounts.
Gross margin: Gross margin (excluding the charge associated with
the liquidation of excess spare parts) increased to 24.3% during the
nine months ended March 28, 1999 as compared to 22.6% for the nine months
ended March 29, 1998. This represents an increase of $14.2 million or 19.6%
to $86.6 million, reflecting operating efficiencies on increased revenues.
Selling, general and administrative expenses: Selling, general
and administrative expenses as a percentage of revenues decreased to
31.9% for the nine months ended March 28, 1999 from 34.3% in the same
period in the previous year. For the nine months ended March 28, 1999,
selling, general and administrative expenses were $114.0 million as
compared to $110.2 million for the nine months ended March 29, 1998, an
increase of $3.8 million, reflecting increased expenditures, partially
offset by cost reductions as a result of the reorganization announced
in the second quarter ended December 27, 1998.
Loss from operations: Loss from operations was $34.2 million
for the nine months ended March 28, 1999 as compared to $37.8 million
in the nine months ended March 29, 1998. This improvement reflects
increased gross margin, partially offset by the restructuring charge
and unusual items. Excluding the restructuring charge and unusual
items, loss from operations for the nine months ended March 28, 1999
was $27.4 million. See Note 3 to the Condensed Consolidated Financial
Statements for additional details concerning the restructuring charge
and unusual items.
Interest expense, net: Net interest expense totaled $29.2
million for the nine months ended March 28, 1999 as compared to $27.7
million for the nine months ended March 29, 1998. The increase is due
to higher average debt levels, higher borrowing rates associated with
the 12 1/2% Senior Subordinated Notes.
Page 10
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ENTEX INFORMATION SERVICES, INC.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Other income: Other income for the nine months ended March 28,
1999, represents a $988,000 gain on the early retirement of debt.
Discontinued operations: Loss from discontinued operations was
$33.5 million for the nine months ended March 28, 1999, which includes
a loss on disposal of $16.7 million. This compares to income from
discontinued operations of $83.5 million for the nine months ended
March 29, 1998. The loss reflects lower revenues and a decrease in
gross margin from 10.6% to 8.1% as well as expected operating losses of
$9.0 million from March 28, 1999 through the date of disposal. In addition,
special inventory charges related to the expedited liquidation of inventory,
as opposed to through the normal course of business, contributed to the
loss. Partially offsetting these items are lower selling, general and
administrative expenses. In addition, the loss for the nine months
ended March 28, 1999 includes the restructuring charge and unusual
items attributable to discontinued operations recorded in the second
quarter of the current year. See Note 3 to the Condensed Consolidated
Financial Statements for additional details concerning the
restructuring charge and unusual items.
Net income (loss): As a result of the factors mentioned above,
net loss for the nine months ended March 28, 1999 was $95.9 million as
compared to net income of $18.0 million for the nine months ended March
29, 1998.
Liquidity and Capital Resources
The Company has historically financed its operations with
borrowings under various credit lines. Cash provided by operating
activities was $50.3 million for the nine months ended March 28, 1999
compared to $75.2 million for the comparable period in 1998.
Cash provided by operations during the nine months ended
March 28, 1999 resulted primarily from the net loss of $95.9 million,
partially offset by the non-cash portion of the restructuring and
unusual charges, depreciation and other non-cash charges to income and
from changes in operating assets and liabilities, principally inventory
at the TAS Division.
Cash used in investing activities (capital expenditures) was
$14.0 million during the nine months ended March 28, 1999 compared with
$12.2 million during the nine months ended March 29, 1998.
Cash used in financing activities was $37.8 million during the
nine months ended March 28, 1999 compared to $69.5 million during the
nine months ended March 29, 1998. 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.
Page 11
<PAGE>
ENTEX INFORMATION SERVICES, INC.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
At March 28, 1999, the Company had secured credit lines
totaling $575 million, with $356.9 million outstanding under these
lines. An aggregate amount of $281.9 million was outstanding under the
IBM Credit Corporation ("IBMCC") Working Capital Line of Credit, of
which $192.4 million was interest bearing. In addition, $75 million was
outstanding under the line of credit with Finova Capital Corporation,
none of which was interest bearing. In May 1999, the line of credit
with Finova Capital Corporation was paid in full and, as a result of
the disposal of TAS Division, the IBMCC Working Capital Line of Credit
was reduced to reflect lower inventory financing requirements.
At March 28, 1999, 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. At March 28, 1999, the Company was not in compliance with
certain of such covenants but continued to maintain an excess
collateral position. IBMCC has waived all defaults arising from such
non-compliance for the March quarter. In May 1999, the Company
renegotiated the IBMCC Financing Agreement resulting in favorable
revisions to the financial covenant requirements and an increase in the
financing rate to LIBOR plus 3.00%.
The Company intends to continue to finance a significant
portion of its working capital needs through credit facilities. The
Company may seek to raise additional funds through public or private
equity or debt financing or from other sources to support the future
growth of the business. However, there can be no assurance that the
Company will be able to raise such additional funding.
Recent Developments
On May 10, 1999, the Company sold certain assets of its TAS Division to
CompuCom. The transaction was structured as an asset sale for cash.
Included in the sale were all of the inventory and equipment in the
Company's Erlanger, Kentucky Integration Center and its Corporate
Account Call Center in Mason, Ohio. Over 1000 employees in the
Company's former TAS Division will become employees in CompuCom. After
giving effect to the proceeds of $137.4 million received by the Company
for the transaction, and after accounting for the write-off of
goodwill, inventories and fixed assets and deal-related expenses, the
transaction will result in a loss of $16.7 million. This loss is
reflected in discontinued operations in the accompanying condensed
consolidated financial statements. The operating results of the TAS
Division have been classified as discontinued operations.
The proceeds from this transaction, together with funds received from the
payment of accounts receivable of the TAS Division which were not included in
the sale, will be used to pay down debt.
Page 12
<PAGE>
ENTEX INFORMATION SERVICES, INC.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
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 TAS 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 3 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. From that point forward, if these systems
are unable to properly recognize date sensitive information, 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 "Y2K-ready" or not. Renovation is the process in which systems
undergo necessary upgrades, replacements or are retired. Validation is
the process in which compliant systems are tested within the Company's
infrastructure to validate that either the readiness assessment is
correct or that the renovated system or component can be integrated
without causing or being affected by a Year 2000 impact. Implementation
is the process in which a prepared system is installed into the
Company's production environment and is utilized to support business
operations.
The Company completed an inventory of its applications systems
in December 1997. More than 30 systems were identified, prioritized
according to criticality to business operations, and assessed for
current readiness status. Based on this review, the Company scheduled
each system for either renovation, validation or replacement. At June
30, 1998, the Company was in the process of implementing the R3TM ERP
application set from SAP. At that time, it was anticipated that the
successful implementation of this product would address Year 2000
readiness issues inherent in the Company's inventory primarily through
replacement. The Company subsequently abandoned this program and has
written off its investment of $10.7 million. As a result, the Company
has broadened its efforts to renovate and validate most of the systems
identified in the inventory.
Page 13
<PAGE>
ENTEX INFORMATION SERVICES, INC.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Effective May 10, 1999, the Company sold certain assets of its TAS Division. The
applications and systems used in support of that portion of business
have either been transferred to the purchaser or will be used by the purchaser
for the transition period. Efforts with regard to "Y2Kreadiness" for such
applications and systems were either completed before the sale or have been
halted as a result of the sale. Ongoing renovation and validation
activities have been reduced to address only those remaining in the
ongoing business.
Assessments have been completed in the processing and
telecommunications environments. A similar activity in the employee
desktop environment was completed in March 1999. As a result of these
efforts, the Company intends to implement any required changes or
upgrades by September 30, 1999. The Company's inventory and assessment
of its non-IT systems (facilities and security systems) was completed
in April 1999, and will be "Y2K-ready" by September 30, 1999. An effort
to replace the Company's core financial reporting system is underway
and is expected to be completed by November 1, 1999. The current
environment will be supported in parallel until the final cut over is
complete.
Total costs to complete the Company's Year 2000 project
upgrade are now estimated at approximately $4.3 million. As of April
30, 1999, the Company has spent approximately $2.8 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.
All potential risks and uncertainties associated with the Year 2000
issue cannot be fully and accurately quantified. Contingency plans will
be developed if third party data interchange partners fail compliance
testing or if the replacement or renovation of other existing systems
is not on schedule. Although the Company does not believe that any
additional costs or potential loss in revenue associated with Year 2000
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 "Y2K-ready", 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>
ENTEX INFORMATION SERVICES, INC.
Part 1 - continued
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK
The Company is exposed to interest rate risk primarily through its
asset based financing agreement. The Company utilizes these borrowings
to meet its working capital needs. As of March 28, 1999, the Company
had borrowings of approximately $192,438,000 outstanding which have a
variable interest rate of 8.00%. Using a yield to maturity analysis and
assuming an increase in interest rate on these borrowings of 25 basis
points, future cash flows would be effected by $481,000. All other
borrowings are at fixed rates and therefore market interest rate
variability does not impact their future cash flows.
Currently, the Company does not enter into financial instruments for
trading or other speculative purposes or to manage interest rate
exposure.
Page 15
<PAGE>
PART II - OTHER INFORMATION
Item 3. DEFAULTS UPON SENIOR SECURITIES
The IBMCC Financing Agreement contains restrictive
covenants with respect to maintenance of minimum
tangible net worth, current ratio and fixed charge
coverage. In addition, the IBMCC Financing
Agreement prohibits the Company from paying cash
dividends on common stock. At March 28, 1999, the
Company was not in compliance with certain of such
covenants but continued to maintain an excess
collateral position. IBMCC has waived all defaults
arising from such non-compliance for the March
quarter.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K.
(27) Financial Data Schedule.
(b) ENTEX filed no reports on Form 8-K during the third fiscal quarter ended
March 28, 1999.
Page 16
<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)
May 17, 1999 Michael G. Archambault
Michael G. Archambault
Senior Vice President, CFO and Treasurer
May 17, 1999 Shirley S. Mehta
Shirley S. Mehta
Vice President and Controller
Page 17
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