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 31, 1994
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 No. 0-11551
EXECUTONE Information Systems, Inc.
(Exact name of registrant as specified in its charter)
Virginia 86-0449210
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6 Thorndal Circle, Darien, Connecticut 06820
(Address of principal executive offices) (Zip Code)
(203) 655-6500
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
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 Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
The number of shares outstanding of registrant's Common Stock, $.01
par value per share, as of April 29, 1994 was 43,958,846.
<PAGE>
INDEX
EXECUTONE Information Systems, Inc.
Page #
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 1994
and December 31, 1993. 3
Consolidated Statements of Operations -
Three Months Ended March 31, 1994 and 1993. 4
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1994 and 1993. 5
Notes to Consolidated Financial Statements. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION 12
SIGNATURES 13
EXHIBIT 11. STATEMENT REGARDING COMPUTATION
OF PER SHARE EARNINGS 14
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except for share amounts)
March 31, December 31,
1994 1993
ASSETS (Unaudited) (Restated)
CURRENT ASSETS:
Cash and cash equivalents $ 7,522 $ 7,406
Accounts receivable, net of
allowance of $882 and $1,017 36,636 37,567
Inventories 29,404 29,092
Prepaid expenses and other
current assets 6,877 5,789
Net assets of discontinued
operation 9,667 8,538
Total Current Assets 90,106 88,392
PROPERTY AND EQUIPMENT, net 15,028 14,727
INTANGIBLE ASSETS, net 43,627 44,215
DEFERRED TAXES 24,738 25,200
OTHER ASSETS 5,588 2,623
NET ASSETS OF DISCONTINUED
OPERATION --- 397
$ 179,087 $ 175,554
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 2,854 $ 2,989
Accounts payable 27,732 29,295
Accrued payroll and related costs 8,412 7,750
Accrued liabilities 7,085 7,057
Accrued restructuring costs 1,259 1,381
Deferred revenue and customer
deposits 18,548 17,713
Total Current Liabilities 65,890 66,185
LONG-TERM DEBT 33,601 32,279
LONG-TERM DEFERRED REVENUE 1,513 1,345
TOTAL LIABILITIES 101,004 99,809
STOCKHOLDERS' EQUITY:
Common stock: $.01 par value;
60,000,000 shares authorized;
43,876,915 and 41,205,498
issued and outstanding 439 412
Additional paid-in capital 69,745 68,275
Retained earnings 7,899 7,058
Total Stockholders' Equity 78,083 75,745
$ 179,087 $ 175,554
The accompanying notes are an integral part of these consolidated
balance sheets.
<PAGE>
EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except for per share amounts)
3 Months Ended March 31,
1994 1993
REVENUES: (Restated)
Product $ 29,086 $ 30,593
Base 36,221 32,471
65,307 63,064
COST OF REVENUES 39,386 37,966
Gross Profit 25,921 25,098
OPERATING EXPENSES:
Research, development &
engineering 2,162 1,809
Selling, general & administrative 22,452 20,371
24,614 22,180
OPERATING INCOME 1,307 2,918
INTEREST, AMORTIZATION AND OTHER
EXPENSES, NET:
Cash 422 794
Noncash 742 715
1,164 1,509
INCOME BEFORE INCOME TAXES
FROM CONTINUING OPERATIONS 143 1,409
PROVISION FOR INCOME TAXES:
Cash 100 83
Noncash (utilization of
pre-acquisition tax
benefits - refer to Note E) (43) 480
TOTAL PROVISION FOR INCOME TAXES 57 563
INCOME FROM CONTINUING OPERATIONS 86 846
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS [NET OF INCOME TAXES
OF $102 AND $(82)] 153 (123)
GAIN ON DISPOSAL OF DISCONTINUED
OPERATIONS (NET OF INCOME TAXES
OF $403) 604 ---
NET INCOME $ 843 $ 723
EARNINGS PER SHARE:
INCOME FROM CONTINUING
OPERATIONS $ --- $ 0.02
INCOME FROM DISCONTINUED
OPERATIONS 0.02 ---
NET INCOME $ 0.02 $ 0.02
WEIGHTED AVG. COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 47,898 47,713
The accompanying notes are an integral part of these consolidated
statements.
<PAGE>
EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands) Three Months Ended
March 31,
1994 1993
(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 86 $ 846
Adjustments to reconcile net income to net
cash provided by continuing operations:
Depreciation and amortization 1,938 2,035
Noncash expenses, including noncash
interest expense, provision for
income taxes not currently payable
and provision for losses on
accounts receivable 383 658
2,407 3,539
Net change in working capital items (1,154) 845
NET CASH PROVIDED BY CONTINUING OPERATIONS 1,253 4,384
Cash Flows from Discontinued Operations (551) (958)
NET CASH PROVIDED BY OPERATING ACTIVITIES 702 3,426
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (850) (509)
Other (1,719) (28)
NET CASH USED BY INVESTING ACTIVITIES (2,569) (537)
CASH FLOWS FROM FINANCING ACTIVITIES:
Restructuring cost payments (122) (73)
Borrowings (repayments) under revolving
credit facility 2,587 (2,364)
Repayment of term note under credit
facility (312) (312)
Repayments of other long-term debt (417) (378)
Repurchase of stock (750) ---
Proceeds from issuances of stock 997 268
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES 1,983 (2,859)
INCREASE IN CASH AND CASH EQUIVALENTS 116 30
CASH AND CASH EQUIVALENTS -
BEGINNING OF PERIOD 7,406 7,404
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 7,522 $ 7,434
The accompanying notes are an integral part of these consolidated
statements.
<PAGE>
EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - NATURE OF THE BUSINESS
EXECUTONE Information Systems, Inc. (the "Company") designs,
manufactures, markets, installs, supports and services voice
processing systems and provides cost-effective long-distance
telephone service. The Company is also a leading supplier of
specialized hospital communications equipment. Products are sold
under the EXECUTONE, INFOSTAR, IDS, LIFESAVER and INFOSTAR/ILS
brand names through a worldwide network of direct sales and service
offices and independent distributors.
NOTE B - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In
the opinion of management, all adjustments, which include normal
recurring adjustments, considered necessary for a fair presentation
of the results for the interim periods presented have been
included.
As of July 1, 1988, an accumulated deficit of approximately $49.7
million was eliminated.
NOTE C - SALE OF VODAVI COMMUNICATIONS SYSTEMS DIVISION
As of March 31, 1994 the Company sold its Vodavi Communications
Systems Division (VCS), which sold telephone equipment to supply
houses and dealers under the brand names STARPLUS and INFINITE, for
approximately $10.9 million. Proceeds of the sale consisted of
approximately $9.7 million in cash and a $1.2 million note, fully
secured by a letter of credit and payable in September 1995. The
proceeds were received on April 11, 1994 and were used to reduce
borrowings under the Company's credit facility. As of March 31,
1994, the cash portion of the proceeds is reflected in the
Consolidated Balance Sheet as Net assets of Discontinued Operation
and the note portion of the receivable is included in other assets.
The application of these proceeds as of March 31, 1994 would have
reduced long-term debt to $23.8 million.
The sale resulted in an after-tax gain of $604,000 (net of income
tax provision of $403,000). The results of VCS have been reported
separately as a discontinued operation in the Consolidated
Statement of Operations. Prior year consolidated financial
statements have been restated to present VCS as a discontinued
operation. Net revenues of the discontinued operation for the
three-month periods ended March 31, 1994 and 1993 were $8.6 million
and $7.3 million, respectively.
NOTE D - INCOME TAXES
The Company accounts for income taxes in accordance with FAS 109,
Accounting for Income Taxes. The deferred tax asset represents the
benefits that are more likely than not to be realized from the
utilization of pre and post-acquisition tax benefit carryforwards,
which include net operating losses, tax credits and the excess of
tax bases over the fair value of the net assets at acquisition.
For the three-month periods ended March 31, 1994 and 1993, the
Company made cash payments for income taxes of approximately
$50,000 and $6,000, respectively.
NOTE E - EARNINGS PER SHARE
Earnings per share is based on the weighted average number of
shares of common stock, convertible preferred stock (which was
entirely converted in 1993) and dilutive common stock equivalents
(which include stock options and warrants) outstanding during the
periods. Common stock equivalents and the convertible debentures
which are antidilutive have been excluded from the computations.
NOTE F - INVENTORIES
Inventories are stated at lower of first-in, first-out ("FIFO")
cost or market and consist of the following at March 31, 1994 and
December 31, 1993 (amounts in thousands):
3/31/94 12/31/93
Raw Materials $ 3,120 $ 3,363
Finished Goods 26,284 25,729
-------- --------
$29,404 $29,092
======== ========
NOTE G - OTHER MATTERS
For the three-month periods ended March 31, 1994 and 1993, the
Company made cash payments of approximately $1.1 million and $1.6
million, respectively, for interest expense on indebtedness.
During the three-month periods ended March 31, 1994 and 1993,
noncash financing activities other than those related to the sale
of VCS (See Note C) included capital lease obligations incurred in
connection with equipment acquisitions of $256,000 and $99,000,
respectively, noncash proceeds for issuances of stock from
application of credits under an option credit plan of $155,000 and
$170,000, respectively, and Common Stock Purchase Warrants
exercised thru bond conversion of $1.0 million and $104,000,
respectively.
<PAGE>
In December 1993, there was a fire at the Company's main
subcontractor's production facility in China. As a result,
additional costs were incurred to manufacture product at Company
facilities and alternative manufacturing subcontractors. The
Company believes it will be reimbursed by its insurance carrier for
these costs and, accordingly, has established a receivable of $1.8
million for amounts incurred through March 31, 1994.
Refer to the consolidated statements of cash flows for information
on all cash-related operating, investing and financing activities.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Introduction
The Company's revenues are primarily derived from sales of its
products and services through a worldwide network of Company-owned
direct sales and service offices and independent distributors. The
Company's end-user revenues are derived from two primary sources:
(1) sales of systems to new customers, which include sales of
application-specific software options ("product revenues"), and (2)
servicing the end-user base through the upgrade, expansion,
enhancement (which includes sales of application-specific software
options) and maintenance of previously installed systems, as well
as revenues from the INFOSTAR/LD+ program (commonly referred to as
"base revenues"). Base revenues usually generate higher operating
income margin than initial sales of systems, since the Company's
selling expenses for base revenues are lower than those for initial
system sales. Sales of the Company's application-specific software
options and related services generally produce higher operating
income margin than both system sales and base revenues due to the
added performance value and relatively low production costs of such
proprietary software and services.
Results of Operations
Total revenues for the three-month period ended March 31, 1994 were
4% higher than the comparable 1993 period. Product revenues for
the three-month period ended March 31, 1994 decreased slightly from
the corresponding 1993 period due, primarily, to inventory
shortages caused by a fire which occurred at the Company's main
subcontractor's production facility in China in December 1993 (see
page 10). Base revenues for the three-month period ended March 31,
1994 were 12% higher than the comparable 1993 period. The increase
in base revenues was primarily attributable to continuing growth in
sales to the Company's existing customer base, including increased
sales of systems upgrades, expansions and maintenance as well as
volume increases generated by the LD+ program.
For the three-month period ended March 31, 1994, gross profit as a
percentage of total revenues was 39.7% a minimal change from 39.8%
for the comparable 1993 period. While bookings of newer, higher
margin products continue to grow, they have not yet significantly
increased gross margin due to the costs of entering new markets,
the minimal relative revenue generated by these new products and
increased backlog resulting from inventory shortages.
Operating income as a percentage of total revenues for the three-
month period ended March 31, 1994 was 2.0% as compared to 4.6% for
the corresponding 1993 period due to higher operating expenses.
Research, development and engineering expenses continue to reflect
increased investments in engineering for the development of new
higher margin products. SG&A expenditures increased primarily due
to the investment of resources necessary to service the Company's
expanding customer base and new product lines and higher sales
volume.
<PAGE>
Interest, amortization and other expenses, net for the three-month
period ended March 31, 1994 was lower than the corresponding 1993
period due, primarily, to lower interest expense for the Company's
credit facility resulting from lower borrowing levels and an
interest rate reduction on the Company's bank borrowings.
For the three-month period ended March 31, 1994 the Company
recorded a provision for income taxes of $57,000 for continuing
operations, $102,000 for discontinued operations and $403,000 for
the gain on the sale of its VCS division. Of the total provision,
$462,000 was recorded as a reduction of the deferred tax asset to
reflect the utilization of pre-acquisition tax benefits. As a
result of the utilization of these benefits, the Company does not
have a significant tax liability for the period. The Company has
substantial tax benefit carryforwards which means that minimal
taxes will be paid in the near future.
In December 1993, a fire occurred at the Company's main
subcontractor's production facility in Shinzen, China, causing
inventory shortages. The Company attempted to alleviate production
restrictions and product shortages caused by the fire through
existing inventory, equivalent equipment substitution, purchases
from other subcontractors and/or production at the Company's own
facilities, but was unable to ship approximately $3 million of
orders during the quarter. A new facility has since been built and
is expected to reach full capacity by June 30, 1994. The Company
estimates that by June 30, 1994, it will have incurred
approximately $3 million in additional direct costs related to the
emergency production, of which $1.8 million has been incurred as of
March 31, 1994. The Company believes these additional costs will
be recovered from insurance and, accordingly, has established a
receivable for amounts incurred through March 31, 1994.
If all of the product that was ordered had been available for
shipment, the Company estimates that its revenues would have been
$68.3 million and that net income would have increased by
approximately $900,000 to $1.7 million or $0.04 per share.
As of March 31, 1994 the Company sold its Vodavi Communications
Systems Division (VCS), which sold telephone equipment to supply
houses and dealers under the brand names STARPLUS and INFINITE, for
approximately $10.9 million. Proceeds of the sale consisted of
approximately $9.7 million in cash and a $1.2 million note, fully
secured by a letter of credit and payable in September 1995. The
proceeds were received on April 11, 1994 and were used to reduce
borrowings under the Company's credit facility. As of March 31,
1994, the cash portion of the proceeds is reflected in the
Consolidated Balance Sheet as Net assets of Discontinued Operation
and the note portion of the receivable is included in other assets.
The application of these proceeds as of March 31, 1994 would have
reduced long-term debt to $23.8 million.
The sale of VCS resulted in an after-tax gain of $604,000 (net of
income tax provision of $403,000). The results of VCS have been
reported separately as a discontinued operation in the Consolidated
Statement of Operations. Prior year consolidated financial
statements have been restated to present VCS as a discontinued
operation. Net revenues of the discontinued operation for the
three-month periods ended March 31, 1994 and 1993 were $8.6 million
and $7.3 million, respectively.<PAGE>
Liquidity and Capital Resources
The Company's liquidity is represented by cash, cash equivalents
and cash availability under its existing credit facilities. The
Company's liquidity was approximately $26 million and $29 million
as of March 31, 1994 and December 31, 1993, respectively.
At March 31, 1994 and December 31, 1993, cash and cash equivalents
amounted to $7.5 million and $7.4 million, respectively, which
represented 8% of current assets. The Company generated $1.3
million in cash from continuing operations, after funding
approximately $3.0 million in costs relating to the emergency
production requirements, during the three-month period ended March
31, 1994 as compared to $4.4 million in cash from continuing
operations for the corresponding 1993 period. In addition to
funding the emergency production costs, the Company also
repurchased stock of $0.8 million and purchased equipment of $0.9
million.
Total debt at March 31, 1994 was $36.5 million, an increase of $1.2
million from $35.3 million at December 31, 1993. The increase in
debt is primarily due to increased borrowing levels under the
revolving credit facility of $2.6 million and capital lease
agreements for equipment purchases of $0.3 million. This was
partially offset by common stock purchase warrants exercised
through bond conversions of $1.0 million and repayments of other
long-term debt of $0.7 million.
On April 11, 1994, the Company received the cash proceeds from the
sale of the VCS division of $9.7 million, of which $2.2 million was
used to reduce the Company's term loan and $7.5 million was used to
reduce the Company's revolving credit facility.
As of April 29, 1994, approximately $16.4 million of direct
borrowings was available under the Company's credit facility. The
Company believes that borrowings available under the credit
facility and cash flow from operations will be sufficient to meet
working capital and other requirements for the next twelve months.
<PAGE>
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Not applicable.
Item 2. CHANGES IN SECURITIES
Not applicable.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
Item 5. OTHER INFORMATION
Not applicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
11 - Statement Regarding Computation
of Per Share Earnings
b) Reports on Form 8-K
Not applicable.<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 thereunto duly authorized.
EXECUTONE Information Systems, Inc.
Dated: May 12, 1994 /s/ Alan Kessman
Alan Kessman
Chairman, President and
Chief Executive Officer
Dated: May 12, 1994 /s/ Anthony R. Guarascio
Anthony R. Guarascio
Vice President Finance and
Chief Financial Officer
<PAGE>
EXHIBIT 11
EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
3 Months Ended March 31,
1994 1993
(Restated)
INCOME FROM CONTINUING
OPERATIONS $ 86,000 $ 845,000
DISCONTINUED OPERATIONS:
INCOME (LOSS) FROM
OPERATIONS, NET OF INCOME
TAXES 153,000 (122,000)
GAIN ON DISPOSAL,
NET OF INCOME TAXES 604,000 ---
NET INCOME $ 843,000 $ 723,000
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 42,724,000 31,323,000
COMMON STOCK EQUIVALENTS:
Add - Net shares assumed
to be issued for dilutive
stock options and warrants 3,638,000 4,114,000
Add - Shares assumed to be
issued on conversion of
preferred stock
(converted entirely in
1993) and exercise of
related warrants 1,536,000 12,276,000
TOTAL WEIGHTED AVERAGE COMMON
AND COMMON EQUIVALENT
SHARES OUTSTANDING 47,898,000 47,713,000
EARNINGS PER COMMON SHARE:
Income From Continuing
Operations $ --- $ 0.02
Income From Discontinued
Operations 0.02 ---
Net Income $ 0.02 $ 0.02
<PAGE>
