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, 1995
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.)
478 Wheelers Farms Road, Milford, Connecticut 06460
(Address of principal executive offices) (Zip Code)
(203) 876-7600
(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 30, 1995 was 46,803,428.
<PAGE>
INDEX
EXECUTONE Information Systems, Inc.
Page #
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 1995
and December 31, 1994. 3
Consolidated Statements of Operations -
Three Months Ended March 31, 1995 and 1994. 4
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1995 and 1994. 5
Notes to Consolidated Financial Statements. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION 11
SIGNATURES 12
EXHIBIT 11. STATEMENT REGARDING COMPUTATION
OF PER SHARE EARNINGS 13
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
(In thousands, except for share amounts) 1995 1994
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 8,034 $ 7,849
Accounts receivable, net of
allowance of $1,570 and $1,335 45,162 46,675
Inventories 44,432 40,300
Prepaid expenses and other current assets 6,652 7,358
Total Current Assets 104,280 102,182
PROPERTY AND EQUIPMENT, net 19,786 18,967
INTANGIBLE ASSETS, net 37,791 38,415
DEFERRED TAXES 26,999 26,979
OTHER ASSETS 3,258 2,938
$ 192,114 $ 189,481
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 811 $ 777
Accounts payable 30,118 39,369
Accrued payroll and related costs 7,519 7,026
Accrued liabilities 7,413 8,187
Accrued restructuring costs 966 1,005
Deferred revenue and customer deposits 19,580 18,757
Total Current Liabilities 66,407 75,121
LONG-TERM DEBT 34,831 24,698
LONG-TERM DEFERRED REVENUE 2,355 2,354
TOTAL LIABILITIES 103,593 102,173
STOCKHOLDERS' EQUITY:
Common stock: $.01 par value; 60,000,000 shares
authorized; 46,430,758 and 45,647,894 issued
and outstanding 464 456
Additional paid-in capital 73,388 72,303
Retained earnings 14,669 14,549
Total Stockholders' Equity 88,521 87,308
$ 192,114 $ 189,481
The accompanying notes are an integral part of these consolidated
balance sheets.
3
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EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
(In thousands, except for per share amounts) March 31,
1995 1994
REVENUES:
Product $ 31,948 $ 29,086
Base 38,860 36,221
70,808 65,307
COST OF REVENUES 42,726 39,386
Gross Profit 28,082 25,921
OPERATING EXPENSES:
Research, development and engineering 2,928 2,162
Selling, general and administrative 23,679 22,452
26,607 24,614
OPERATING INCOME 1,475 1,307
INTEREST, AMORTIZATION AND
OTHER EXPENSES, NET:
Cash 573 511
Noncash 702 653
1,275 1,164
INCOME BEFORE INCOME TAXES
FROM CONTINUING OPERATIONS 200 143
PROVISION FOR INCOME TAXES:
Cash 100 100
Noncash (utilization of pre-acquisition
tax benefits - Note D) (20) (43)
80 57
INCOME FROM CONTINUING OPERATIONS 120 86
INCOME FROM DISCONTINUED OPERATIONS
(net of income tax provision of $102) - 153
GAIN ON DISPOSAL OF DISCONTINUED
OPERATIONS (net of income tax provision of $403) - 604
NET INCOME $ 120 $ 843
EARNINGS PER SHARE:
CONTINUING OPERATIONS $ --- $ ---
DISCONTINUED OPERATIONS --- 0.02
NET INCOME $ --- $ 0.02
WEIGHTED AVG. COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 48,838 47,898
The accompanying notes are an integral part of these consolidated
statements.
4
<PAGE>
EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
(In thousands) March 31,
1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 120 $ 86
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,776 1,938
Noncash expenses, including noncash interest
expense, provision for income taxes not
currently payable and provision for losses
on accounts receivable 437 450
2,333 2,474
Change in working capital items:
Inventory (4,726) (738)
A/P (9,272) (1,568)
Other working capital items 2,338 1,152
(11,660) (1,154)
NET CASH (USED)/PROVIDED BY CONTINUING
OPERATIONS (9,327) 1,320
Cash flows from discontinued operations --- (449)
NET CASH (USED)/PROVIDED BY OPERATING
ACTIVITIES (9,327) 871
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment, net (1,483) (850)
Other (140) (1,888)
NET CASH USED BY INVESTING ACTIVITIES (1,623) (2,738)
CASH FLOWS FROM FINANCING ACTIVITIES:
Restructuring cost payments, net (39) (122)
Borrowings under revolving credit facility 9,633 2,587
Borrowings from Connecticut Development Authority 750 ---
Repayment of term note under credit facility --- (312)
Repayments of other long-term debt (279) (417)
Repurchase of stock --- (750)
Proceeds from issuance of stock 1,070 997
NET CASH PROVIDED BY FINANCING ACTIVITIES 11,135 1,983
INCREASE IN CASH AND CASH EQUIVALENTS 185 116
CASH AND CASH EQUIVALENTS -
BEGINNING OF PERIOD 7,849 7,406
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 8,034 $ 7,522
The accompanying notes are an integral part of these consolidated
statements.
5
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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, sells, 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 cash proceeds were received in April 1994 and
were used to reduce borrowings under the Company's credit
facility.
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. Net revenues of the
discontinued operation for the three-month period ended March 31,
1994 were $8.6 million.
6
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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, 1995 and 1994, the
Company made cash payments for income taxes of approximately
$44,000 and $50,000, respectively.
NOTE E - EARNINGS PER SHARE
Earnings per share is based on the weighted average number of
shares of common 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, 1995 and
December 31, 1994:
(amounts in thousands) 3/31/95 12/31/94
Raw Materials $ 3,633 $ 3,082
Finished Goods 40,799 37,218
$44,432 $40,300
NOTE G - OTHER MATTERS
For the three-month periods ended March 31, 1995 and 1994, the
Company made cash payments of approximately $1.2 million and $1.1
million, respectively, for interest expense on indebtedness.
There were no noncash financing activities for the three-month
period ended March 31, 1995. During the three-month period ended
March 31, 1994, 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, noncash proceeds for issuances of stock from
application of credits under an option credit plan of $155,000
and Common Stock Purchase Warrants exercised through bond
conversion of $1.0 million.
Refer to the Consolidated Statements of Cash Flows for
information on all cash-related operating, investing and
financing activities.
7
<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 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 margins 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
Overall, revenues from the core telephony business were strong
during the three-month period ended March 31, 1995, but profits
were largely unchanged because of cost increases from investments
made in new developing product lines. Revenue increases from the
Company's new products did not materialize to offset the
investments in these new businesses, including some new call
center management and videoconferencing products. The Company
continues to experience longer sales cycles than anticipated for
these products and the investments in these new businesses, which
totaled approximately $9 million during 1994, are ahead of the
anticipated revenue stream. However, the Company did achieve
overall record bookings for the quarter, especially in the new
product lines. The Company anticipates that increased revenues
from these product lines should begin to be realized within the
next six to nine months.
Total revenues for the three-month period ended March 31, 1995
were 8% higher than the comparable 1994 period. Product revenues
for the three-month period ended March 31, 1995 increased 10%
over the corresponding 1994 period primarily due to a 20%
increase in healthcare revenues. Base revenues for the three-
month period ended March 31, 1995 continued their consistent
growth, increasing 7% compared to the first quarter of 1994. The
increase in base revenues was primarily attributable to increased
sales of system upgrades and expansions and increased revenue
from maintenance contracts.
Gross profit for the three-month period ended March 31, 1995
increased almost $2.2 million compared to the corresponding 1994
period. As a percentage of sales, gross profit was unchanged
from the prior year at 39.7% as the revenue growth during the
three-month period ended March 31, 1995 was comparable to the
revenue mix of the prior year period. Voice processing and base
revenues represented almost 69% of the sales volume compared to
70% for the comparable 1994 period. The Company continues to
emphasize marketing value-added products to the customer base and
increasing sales of application-specific software products, which
should lead to higher gross profits.
8
<PAGE>
Operating income, as a percentage of total revenues, did not
change significantly compared to the three-month period ended
March 31, 1994. Research, development and engineering expenses
increased for the three-month period ended March 31, 1995
compared to the corresponding 1994 period, as the Company
continues to invest in engineering for new product development
and application-specific software products. SG&A expenditures
for the three-month period have increased in total dollars versus
the comparable 1994 period but, as a percentage of sales, have
decreased slightly. The dollar increase is largely the result of
higher selling expenses, which reflect the impact of higher sales
volume and the investment in personnel and training for the
Company's new products.
Interest, amortization and other expenses, net for the three-
month period ended March 31, 1995 were slightly higher than the
corresponding 1994 period due, primarily, to higher interest
rates under the Company's credit facility.
For the three-month period ended March 31, 1995, the Company
recorded a provision for income taxes of $80,000. Of the total
provision, $20,000 was recorded as an increase to the deferred
tax asset to reflect the excess of amounts estimated to be
payable currently over the recorded tax provision. 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 during the first six months of 1994. The
production problems were largely alleviated by the Company's
ability to increase its own production and find alternative
manufacturing sources. In July 1994, the Company recovered $4
million from its insurance carrier for additional direct costs
related to the emergency production situation.
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 cash proceeds were received in April 1994 and
were used to reduce borrowings under the Company's credit
facility.
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. Net revenues of the
discontinued operation for the three-month period ended March 31,
1994 were $8.6 million.
The Company was recently involved in extensive negotiations to
acquire the Dictaphone division of Pitney Bowes, an acquisition
that would have more than doubled the Company's size. This
business had similar products, markets and geographic locations,
along with synergies in research and development. The Company
was able to obtain commitments for a financial package supporting
a bid of $450 million. However, in April 1995, the acquisition
was awarded to another firm. The Company incurred approximately
$750,000 in fees and expenses relating to the acquisition which
will be expensed during the three-month period ended June 30,
1995. The Company will be continuing its efforts to look for
opportunities to complement its product lines and expand its
markets.
9
<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 $25 million and $30 million
as of March 31, 1995 and December 31, 1994, respectively.
At March 31, 1995 and December 31, 1994, cash and cash
equivalents amounted to $8.0 million and $7.8 million,
respectively, or 8% of current assets. The Company generated
$3.4 million of cash, primarily from operations, increased bank
borrowings by $9.6 million and received the proceeds of a $0.8
million loan from the Connecticut Development Authority during
the three-month period ended March 31, 1995. The cash was used to
fund $11.7 million of working capital, purchase $1.5 million of
capital assets and for debt repayment and other payments totaling
$0.4 million. For the comparable period in 1994, the Company
generated $3.5 million of cash, primarily from operations, and
funded approximately $3.0 million in working capital and other
costs relating to the emergency production requirements. The
increase in the funding of working capital over the comparable
1994 period is primarily due to the rebuild of inventory depleted
during the emergency production situation and the change in the
Company's inventory planning to have more inventory on hand to
more easily deal with any potential supply interruptions in the
future, coupled with lower than anticipated revenue from our
newer products. The decrease in accounts payable for the three-
month period ended March 31, 1995 is a result of the timing of
payments for inventory purchases over the last six months. The
Company expects to reduce its working capital requirements from
these levels over the next six to nine months.
Total debt at March 31, 1995 was $35.6 million, an increase of
$10.1 million from $25.5 million at December 31, 1994. The
reason for the increase, as previously noted, was a requirement
for additional borrowings to fund working capital.
As of April 30, 1995, approximately $13.3 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.
10
<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.
11
<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, 1995 /s/ Alan Kessman
Alan Kessman
Chairman, President and
Chief Executive Officer
Dated: May 12, 1995 /s/ Anthony R. Guarascio
Anthony R. Guarascio
Vice President Finance and
Chief Financial Officer
12
<PAGE>
EXHIBIT 11
EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
Three Months Ended
March 31,
1995 1994
INCOME FROM CONTINUING OPERATIONS $ 120,000 $ 86,000
DISCONTINUED OPERATIONS:
INCOME FROM OPERATIONS,
NET OF INCOME TAXES --- 153,000
GAIN ON DISPOSAL,
NET OF INCOME TAXES --- 604,000
NET INCOME $ 120,000 $ 843,000
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 45,947,000 42,724,000
COMMON STOCK EQUIVALENT SHARES
ASSUMED TO BE ISSUED FOR DILUTIVE
STOCK OPTIONS AND WARRANTS 2,891,000 5,174,000
TOTAL WEIGHTED AVERAGE COMMON
AND COMMON EQUIVALENT SHARES
OUTSTANDING 48,838,000 47,898,000
EARNINGS PER COMMON SHARE:
Continuing Operations $ 0.00 $ 0.00
Discontinued Operations --- 0.02
Net Income $ 0.00 $ 0.02
13
<PAGE>
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<S> <C>
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<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1995
<CASH> 8,034
<SECURITIES> 0
<RECEIVABLES> 46,732
<ALLOWANCES> 1,570
<INVENTORY> 44,432
<CURRENT-ASSETS> 104,280
<PP&E> 48,356
<DEPRECIATION> 28,570
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<CURRENT-LIABILITIES> 66,407
<BONDS> 34,831
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<OTHER-SE> 88,057
<TOTAL-LIABILITY-AND-EQUITY> 192,114
<SALES> 70,808
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<CGS> 42,726
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