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 September 30, 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 October 31, 1995 was 47,138,647.
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INDEX
EXECUTONE Information Systems, Inc.
Page #
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
September 30, 1995 and December 31, 1994. 3
Consolidated Statements of Operations -
Three Months and Nine Months Ended September 30, 1995
and 1994. 4
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1995 and 1994. 5
Notes to Consolidated Financial Statements. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II. OTHER INFORMATION 15
SIGNATURES 16
EXHIBIT 11. STATEMENT REGARDING COMPUTATION
OF PER SHARE EARNINGS 17
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
(In thousands, except for share amounts) 1995 1994
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 7,817 $ 7,849
Accounts receivable, net of
allowance of $1,505 and $1,335 45,268 46,675
Inventories (Note C) 31,520 40,300
Prepaid expenses and other current assets 5,073 7,358
Total Current Assets 89,678 102,182
PROPERTY AND EQUIPMENT, net 18,804 18,967
INTANGIBLE ASSETS, net (Note C) 4,213 38,415
DEFERRED TAXES 30,606 26,979
OTHER ASSETS 3,956 2,938
$ 147,257 $ 189,481
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 906 $ 777
Accounts payable 26,641 39,369
Accrued payroll and related costs 7,776 7,026
Accrued liabilities 10,122 9,192
Deferred revenue and customer deposits 19,552 18,757
Total Current Liabilities 64,997 75,121
LONG-TERM DEBT 28,455 24,698
LONG-TERM DEFERRED REVENUE 2,770 2,354
TOTAL LIABILITIES 96,222 102,173
STOCKHOLDERS' EQUITY:
Common stock: $.01 par value; 80,000,000 shares
authorized; 47,100,564 and 45,647,894 issued
and outstanding 471 456
Additional paid-in capital 74,508 72,303
Retained earnings (accumulated deficit) (23,944) 14,549
Total Stockholders' Equity 51,035 87,308
$ 147,257 $ 189,481
The accompanying notes are an integral part of these consolidated
balance sheets.
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EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, Three Months Ended Nine Months Ended
except for per share amounts) September 30, September 30,
1995 1994 1995 1994
REVENUES:
Product $ 34,623 $ 36,814 $103,470 $102,450
Base 39,541 39,733 119,920 116,016
74,164 76,547 223,390 218,466
COST OF REVENUES 43,973 44,783 133,411 128,951
Gross Profit 30,191 31,764 89,979 89,515
OPERATING EXPENSES:
Research, development and
engineering 2,818 2,398 8,691 6,899
Selling, general and
administrative 24,429 24,834 74,982 71,425
Provision for restructuring
and unusual items (Note C) - - 44,042 -
27,247 27,232 127,715 78,324
OPERATING INCOME (LOSS) 2,944 4,532 (37,736) 11,191
INTEREST, AMORTIZATION AND
OTHER EXPENSES, NET:
Cash 890 430 2,490 1,620
Noncash (167) 790 575 2,092
723 1,220 3,065 3,712
ACQUISITION COSTS (Note I) 16 - 1,022 -
INCOME (LOSS) BEFORE INCOME TAXES
FROM CONTINUING OPERATIONS 2,205 3,312 (41,823) 7,479
PROVISION (BENEFIT) FOR INCOME TAXES:
Cash 100 100 300 300
Noncash (Note E) 782 1,226 (3,627) 2,693
882 1,326 (3,327) 2,993
INCOME (LOSS) FROM CONTINUING
OPERATIONS 1,323 1,986 (38,496) 4,486
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 (LOSS) $ 1,323 $ 1,986 $(38,496) $ 5,243
EARNINGS (LOSS) PER SHARE:
Continuing Operations $ 0.03 $ 0.04 $ (0.83) $ 0.09
Discontinued Operations --- --- --- 0.02
Net Income (Loss) $ 0.03 $ 0.04 $ (0.83) $ 0.11
WEIGHTED AVG. COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 49,014 47,182 46,478 47,495
The accompanying notes are an integral part of these consolidated
statements.
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EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
(In thousands) September 30,
1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Income (loss) from continuing operations $(38,496) $ 4,486
Adjustments to reconcile net income (loss)
to net cash (used) provided by continuing
operations:
Depreciation and amortization 4,701 5,904
Provision for restructuring and
unusual items (Note C) 44,042 ---
Provision (benefit) for income taxes
not currently payable (3,627) 2,693
Noncash expenses, including noncash
interest expense, noncash provision
for losses on accounts receivable and
income from equity investment 59 1,816
6,679 14,899
Change in working capital items:
Inventory (1,347) (6,183)
Accounts payable (12,730) 1,202
Other working capital items 4,476 (6,085)
(9,601) (11,066)
NET CASH (USED) PROVIDED BY CONTINUING
OPERATIONS (2,922) 3,833
Cash flows from discontinued operations --- (449)
NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES (2,922) 3,384
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment, net (2,950) (3,231)
Proceeds from sale of VCS 1,200 9,700
Isoetec Texas settlement --- (1,087)
Other 583 (539)
NET CASH (USED) PROVIDED BY INVESTING
ACTIVITIES (1,167) 4,843
CASH FLOWS FROM FINANCING ACTIVITIES:
Restructuring cost payments, net (404) (254)
Borrowings under revolving credit facility 3,033 806
Borrowings from Connecticut Development
Authority 750 ---
Repayment of term note under credit facility --- (3,750)
Repayments of other long-term debt (380) (1,077)
Repurchase of stock (192) (5,365)
Proceeds from issuance of stock 1,250 1,437
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 4,057 (8,203)
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (32) 24
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 7,849 7,406
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 7,817 $ 7,430
The accompanying notes are an integral part of these consolidated statements.
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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 and videoconferencing services. 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 - PROVISION FOR RESTRUCTURING
In June 1995, the Company reorganized its business into five
divisions: Healthcare Communications, Call Center,
Videoconferencing, Network Services, and Computer Telephony. The
new strategic focus is on software applications in the
communications market. The business that was acquired in 1988
was a telephone equipment hardware company focused on customers
with small systems, with an emphasis on selling additional
hardware and service to generate add-on revenue. Under the new
strategy, the business acquired in 1988 will be de-emphasized.
The Company adopted FAS No. 121, which was issued in March 1995,
requiring impairment to be measured at the lowest level of
identifiable cash flows. The Company concluded there was an
impairment. As a result, the Company recorded a $44.0 million
provision for restructuring consisting of a $33.5 million
goodwill impairment, an $8.8 million writedown of inventory,
primarily service stock relating to the impaired assets and other
non-recurring inventory adjustments, $0.9 million related to the
shutdown of the Company's Scottsdale, Arizona facility and $0.8
million of other unusual items.
The intangibles generated by the acquisition of this business in 1988
were approximately $51 million, of which $46 million was applicable to
the telephony goodwill of the business described above. In accordance
with the provisions of FAS No. 121, Accounting for the Impairment
of Long-Lived Assets, the Company prepared projections of future
operating cash flows relating to this business using historical
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trends and projections based upon the Company's new strategic
direction. These projections indicated that this business would
not generate sufficient operating cash flows in the future. The
amount of impairment loss was the entire carrying value of the
telephony goodwill of $33.5 million as of June 30, 1995. The
remaining intangibles on the Consolidated Balance Sheet as of
September 30, 1995 primarily relate to the Company's Healthcare
business.
The write-off of inventory consisted of $1.3 million of raw
materials inventory and $7.5 million of finished goods inventory.
These amounts were determined based upon a review of specific
inventory parts along with current and projected usage,
incorporating the new strategic direction of the Company. The
Company will continue to maintain adequate levels of service
stock for the telephony hardware customer base and amortize it
over the estimated product/service life of the related systems.
NOTE D - 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, received in
April 1994, and a $1.2 million note, the proceeds of which were
received in September 1995, which 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 Statements of
Operations.
NOTE E - 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 book value of net assets.
For the nine-month periods ended September 30, 1995 and 1994, the
Company made cash payments for income taxes of approximately
$138,000 and $228,000, respectively.
NOTE F - EARNINGS PER SHARE
Earnings per share is based on the weighted average number of
shares of common stock 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.
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NOTE G - INVENTORIES
Inventories are stated at lower of first-in, first-out ("FIFO")
cost or market and consist of the following at September 30, 1995
and December 31, 1994:
(amounts in thousands) 9/30/95 12/31/94
Raw Materials $ 3,649 $ 3,082
Finished Goods 27,871 37,218
$ 31,520 $ 40,300
During the nine-month period ended September 30, 1995, total
inventories before the noncash adjustment of $8.8 million (see
Note C) are unchanged. However, since June 30, 1995, total
inventories have been reduced by $1.8 million.
NOTE H - UNISTAR ACQUISITION
On November 2, 1995, the Company announced that it has agreed to
acquire 100% of the outstanding common stock of UNISTAR Gaming
Corporation ("UNISTAR"), a privately-held company that has an
exclusive five-year contract to design, develop, finance, and
manage the National Indian Lottery ("NIL"). The NIL will be a
national telephone lottery authorized by federal law and by a
compact between the State of Idaho and the Coeur d'Alene Indian
Tribe of Idaho ("CDA"). In exchange for providing these
management services to the NIL, UNISTAR will be paid a fee equal
to 30% of the profits of the NIL. EXECUTONE will acquire 100% of
UNISTAR for 3.7 million shares of common stock and 1 million
shares of preferred stock. Each preferred share will have voting
rights equal to 25% of a common share and will earn dividends
equal to its proportionate share of 50% of the UNISTAR
subsidiary's net income. The preferred stock will be redeemable
for 13.3 million shares of common stock at EXECUTONE's option.
The preferred stock will also be convertible into shares of the
Company's common stock if either of the following conditions are
met:
1. If after one year but prior to the end of the management
contract, the lottery is operational and UNISTAR has a
minimum annual net income of $1.0 million, preferred shares
are convertible into common shares at a rate of 1.25 times
annual net income in excess of a threshold amount of $1.0
million to a maximum of 13.3 million common shares.
2. If after the fourth year but prior to the end of the
management contract, the cumulative revenues of UNISTAR plus
25% of any revenues generated by the Company from the
operations of the lottery, excluding dividends received by
the Company from UNISTAR, exceed $50.0 million, preferred
shares are convertible into 13.3 million shares of common
stock.
Shareholder approval is required in the event that either of the
conditions for conversion of the preferred stock are met.
The NIL cannot become operational until resolution of a pending legal
proceeding. In an attempt to block the NIL, certain states have filed
Section 1084 letters to prevent the long-distance carriers from providing
service to the NIL. The CDA has initiated legal action to compel the
long-distance carriers to provide service to the NIL. The CDA's brief
argues that the lottery is authorized by the Indian Gaming
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Regulatory Act ("IGRA") passed by Congress in 1988, that the IGRA
preempts state and federal statutes, and that the states lack
authority to issue the Section 1084 notification letters to any
carrier. Based upon a legal review by four different law firms,
the Company believes this position will be upheld by the courts.
Once a favorable court ruling is obtained, the Company currently
estimates that it will be about nine months before the NIL is
operational. Final consummation of this transaction is subject
to completion of the documentation and approval from the
Company's senior lenders.
NOTE I - OTHER MATTERS
In the beginning of 1995, the Company was involved in extensive
negotiations to acquire the Dictaphone division of Pitney Bowes.
In April 1995, the acquisition was awarded to another bidder.
The Company incurred approximately $1.0 million in fees and
expenses relating to the attempted acquisition which were
expensed during the second and third quarters of 1995.
For the nine-month periods ended September 30, 1995 and 1994, the
Company made cash payments of approximately $3.0 million and $2.4
million, respectively, for interest expense on indebtedness.
The only noncash financing activities for the nine-month period
ended September 30, 1995 were capital lease obligations incurred
in connection with equipment acquisitions of $0.3 million.
During the nine-month period ended September 30, 1994, noncash
financing activities other than those related to the sale of VCS
(See Note D) included capital lease obligations incurred in
connection with equipment acquisitions of $0.7 million, noncash
proceeds for issuances of stock from application of credits under
an option credit plan of $0.3 million and Common Stock Purchase
Warrants exercised through bond conversion of $1.1 million.
In September 1994, the Company paid $1.2 million to the former
shareholders of Isoetec Texas, Inc. in partial settlement of
claims by such shareholders. This payment was an adjustment of
the purchase price recorded when the Company acquired Isoetec
Texas, Inc. in 1990 and increased intangible assets accordingly.
Refer to the Consolidated Statements of Cash Flows for
information on all cash-related operating, investing and
financing activities.
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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.
Restructuring - Change in Business Strategy
In June 1995, the Company reorganized its business into five
divisions: Healthcare Communications, Call Center,
Videoconferencing, Network Services and Computer Telephony. The
new strategic focus is toward larger systems and software
application-oriented products and away from smaller, hardware-
based telephone systems. Based upon the commitment to move in
this new direction, the Company adopted FAS No. 121 in the second
quarter of 1995 and recorded an impairment of the telephony
goodwill that was established as part of the 1988 acquisition,
along with the related service stock. This impairment was based
upon the projected future operating cash flows of that business.
The business that was acquired in 1988 was a telephone equipment
hardware company that focused its selling effort on smaller
systems without software applications, with an emphasis on
selling additional hardware to generate revenues in the form of
move, adds and changes ("MAC") and service, mainly on a time and
material basis.
The strategy the Company is now pursuing is to focus on software
solutions versus the hardware orientation of the business
purchased in the 1988 acquisition. In addition, the Company's
IDS platform (IDS Systems 108, 228, 432 and 648), which was
developed post-acquisition, incorporates a switching bus to
provide everything from basic communication to sophisticated
software applications including Integrated Voice Mail, Call
Center Applications (ACD, IVRs and Predictive Dialers), Variable
Band Width Cards for Video Products, Locating Devices, Nurse Call
and Computer Port Interfaces which drive the computer telephony
products. The change in strategic focus has also resulted in
changes in the way the Company markets its products. Due to the
sophistication of these products, the Company divisionalized its
sales effort with specialists who are experts in the products
that they sell, effective July 1, 1995.
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The Company's analysis indicated that the smaller system,
hardware-oriented telephony business will not generate sufficient
future operating cash flows to support the related telephony
goodwill. Therefore, in accordance with the provisions of FAS
No. 121, the Company determined that this goodwill was impaired
and the entire carrying value of $33.5 million was written off
during the three-month period ended June 30, 1995. The Company
believes this write-off is appropriate for the following reasons:
1. The change in the Company's strategic focus and the
establishment of five new operating divisions that will
focus on sales to different markets.
2. A software versus hardware product orientation.
3. The determination that the new criteria of FAS No. 121,
which provides more guidance regarding the conditions
for and measurement of impairment of long-term assets,
have been met. This includes the requirement to use the
lowest level of identifiable cash flow to determine
impairment.
The Company also reviewed the service stock inventory required to
support this business and concluded that an additional $8.8
million provision was required (See Note C for further discussion
of the provision for restructuring).
Results of Operations
Revenues for the three-month period ended September 30, 1995
totaled $74.2 million compared to $76.5 million for the three-
month period ended September 30, 1994. Net income for the three-
month period ended September 30, 1995 was $1.3 million, or $0.03
per share, compared to net income of $2.0 million, or $0.04 per
share, for the same period last year. Although revenue was less
than anticipated, net income was in line with the Company's
expectations as the lower costs generated from the
divisionalization of the Company and the specialization of the
sales force materialized sooner than anticipated.
The telephony division continues to provide most of the Company's
revenues and profits, and the Company is increasing its focus on
the higher profile companies who need software application
solutions. The 3% decrease in revenue for the three-month period
ended September 30, 1995 compared to the same period in 1994 was
primarily from the National Accounts group where the Company is
less able to control the timing of new installations with the
major national customers. The healthcare division,
divisionalized at the beginning of this year, continues to show
revenue growth compared to the same period in 1994. The call
center, video and network divisions have yet to generate the
desired revenue, but the divisionalization process continues to
move forward. The Company now has division presidents in place
and the individual businesses are aligning their management
teams.
Revenues for the three-month period ended September 30, 1995 were
3% lower than the comparable 1994 period, but revenues for the
nine-month period ended September 30, 1995 were 2% higher than
1994. Product revenues decreased 6% for the three-month period
ended September 30, 1995 and increased 1% for the nine-month
period ended September 30, 1995 versus the comparable 1994
periods. As previously noted, the decrease for the three-month
period ended September 30, 1995 was due to the timing of new
installations with major national customers through our National
Accounts group. Base revenues were comparable for the three-
month period ended September 30, 1995 and increased 3% for the
nine-month period ended September 30, 1995 versus the comparable
1994 periods. The increase for the nine-month period ended
September 30, 1995 is primarily due to increased sales of system
upgrades and expansions.
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For the three-month periods ended September 30, 1995 and 1994,
gross profit as a percentage of sales was 40.7% and 41.5%,
respectively. For the nine-month periods ended September 30,
1995 and 1994, gross profit as a percentage of sales was 40.3%
and 41.0%, respectively. The decrease from the 1994 periods is
primarily due to lower sales volume which reduced the absorption
of fixed cost overhead during the three-month period ended
September 30, 1995 and product mix during the first six months of
1995.
Operating income as a percentage of total revenues for the three-
month periods ended September 30, 1995 and 1994 was 4.0% and
5.9%, respectively. For the nine-month periods ended September
30, 1995 and 1994, operating income before the provision for
restructuring as a percentage of total revenues was 2.8% and
5.1%, respectively. Research, development and engineering
expenses increased compared to both the three-month and nine-
month periods in 1994 as the Company continues to invest in
engineering for new product development and application-specific
software products. Research, development and engineering
expenditures are expected to remain at current levels for the
remainder of the year. SG&A expenses for the nine-month period
ended September 30, 1995 remained higher than the comparable 1994
period primarily due to costs incurred during the first six
months of 1995 to specialize the sales force and implement the
Company's new strategy. SG&A for the three-month period ended
September 30, 1995 was $0.4 million lower than the same period in
1994 and $2.4 million lower than the three-month period ended
June 30, 1995 primarily due to the accelerated impact of the
divisionalization and the realignment of the sales force.
Interest, amortization and other expenses, net for the three-
month and nine-month periods ended September 30, 1995 decreased
versus the comparable periods in 1994, primarily due to the
reduction in the amortization of goodwill resulting from the
restructuring, partially offset by increased interest expense due
to higher interest rates and higher average borrowing levels
under the Company's credit facility since most of the cash used
to reduce debt was generated at the end of the three-month period
ended September 30, 1995.
For the three-month period ended September 30, 1995, the Company
recorded an income tax provision of $0.9 million. Of the total
provision, $0.8 million was recorded as a reduction of the
deferred tax asset to reflect the utilization of tax benefit
carryforwards. As a result of the utilization of these benefits,
the Company does not have a significant tax liability for the
period. Due to the Company's substantial remaining tax benefit
carryforwards, minimal taxes will be paid in the near future.
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, received in
April 1994, and a $1.2 million note, the proceeds of which were
received in September 1995. The proceeds 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 nine-month period ended September 30, 1994 were
$8.6 million.
In September 1994, the Company paid $1.2 million to the former
shareholders of Isoetec Texas, Inc. in partial settlement of
claims by such shareholders. This payment was an adjustment of
the purchase price recorded when the Company acquired Isoetec
Texas, Inc. in 1990 and increased intangible assets accordingly.
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In the beginning of 1995, the Company was 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 bidder. The Company incurred
approximately $1 million in fees and expenses relating to the
attempted acquisition which have been expensed during the second
and third quarters of 1995.
UNISTAR Acquisition
On November 2, 1995, the Company announced that it has agreed to
acquire 100% of the outstanding common stock of UNISTAR Gaming
Corporation ("UNISTAR"), a privately-held company that has an
exclusive five-year contract to design, develop, finance, and
manage the National Indian Lottery ("NIL"). (See Note H for the
terms of the agreement.) Final consummation of this transaction
is subject to completion of the documentation and approval from
the Company's senior lenders.
Management believes the UNISTAR business is a natural extension
of its telephony and call center business. The heart of the
operation will be the NIL call center, which will be located on
the Coeur d'Alene Indian Tribe of Idaho ("CDA") Reservation. Calls
via an 800 number will be processed with Interactive Voice
Response ("IVR") equipment or live agents using ACD software to
process nationwide wagering activity. The Company is making a
significant investment, which initially will create 8% dilution
to our shareholders and require possibly $2 million to $3 million
of cash prior to the resolution of the pending legal issues
discussed below. However, in the opinion of the Company's
management, this investment is justified based upon the potential
returns.
The NIL cannot become operational until resolution of a pending
legal proceeding. In an attempt to block the NIL, certain states
have filed Section 1084 letters to prevent the long-distance
carriers from providing service to the NIL. The CDA has
initiated legal action to compel the long-distance carriers to
provide service to the NIL. The CDA's brief argues that the
lottery is authorized by the Indian Gaming Regulatory Act
("IGRA") passed by Congress in 1988, that the IGRA preempts state
and federal statutes, and that the states lack authority to issue
the Section 1084 notification letters to any carrier. Based upon
a legal review by four different law firms, the Company believes
this position will be upheld by the courts. Once a favorable
court ruling is obtained, the Company estimates that it will be
about nine months before the NIL is operational.
Assuming satisfactory resolution of these legal issues, the additional
costs to become operational may run between $5-10 million. The
Company believes it will obtain additional financing for these costs.
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 $27 million and $30 million
as of September 30, 1995 and December 31, 1994, respectively.
The $44 million provision for restructuring recorded during the
three-month period ended June 30, 1995 is a noncash charge that
will not significantly affect the Company's current or future
liquidity.
At September 30, 1995 and December 31, 1994, cash and cash
equivalents amounted to $7.8 million. During the three-month
period ended September 30, 1995, the Company generated $9.3
million of cash, consisting of $7.7 million from operations,
proceeds of $1.2 million for a long-term note relating to the
sale of VCS and $0.4 million from other sources. Inventory
levels were reduced by $1.8 million during the three-month period
as the Company continues to reduce its working capital
requirements. The cash was used primarily to reduce borrowings
under the Company's credit facility by $8.0 million.
13
<PAGE>
For the nine-month period ended September 30, 1995, the Company
generated $7.9 million of cash, primarily from operations,
increased bank borrowings by $3.0 million, received proceeds of
$1.2 million for the VCS note and received the proceeds of a $0.8
million loan from the Connecticut Development Authority. The
cash was primarily used to fund $9.6 million of working capital
and to purchase $3.0 million of capital assets. For the
comparable period in 1994, the Company generated $16.3 million of
cash, primarily from operations, and funded approximately $11.1
million in working capital and other costs relating to the
emergency production requirements resulting from the fire at our
main subcontractor's facility in 1993.
Total debt at September 30, 1995 was $29.4 million, an increase
of $3.9 million from $25.5 million at December 31, 1994. The
increase was a result of additional borrowings to fund working
capital during the first six months of 1995.
As of October 31, 1995, approximately $13.9 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.
14
<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.
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 thereunto duly authorized.
EXECUTONE Information Systems, Inc.
Dated: November 13, 1995 /s/ Alan Kessman
Alan Kessman
Chairman, President and
Chief Executive Officer
Dated: November 13, 1995 /s/ Anthony R. Guarascio
Anthony R. Guarascio
Vice President Finance and
Chief Financial Officer
16
EXHIBIT 11
EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
INCOME (LOSS) FROM
CONTINUING OPERATIONS $ 1,323,000 $ 1,986,000 $(38,496,000) $ 4,486,000
DISCONTINUED OPERATIONS:
INCOME FROM OPERATIONS,
NET OF INCOME TAXES --- --- --- 153,000
GAIN ON DISPOSAL,
NET OF INCOME TAXES --- --- --- 604,000
NET INCOME (LOSS) $ 1,323,000 $ 1,986,000 $(38,496,000) $ 5,243,000
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING 46,898,000 43,317,000 46,478,000 43,253,000
COMMON STOCK EQUIVALENT
SHARES ASSUMED TO BE ISSUED
FOR DILUTIVE STOCK OPTIONS
AND WARRANTS 2,116,000 3,865,000 --- 4,242,000
TOTAL WEIGHTED AVERAGE COMMON
AND COMMON EQUIVALENT SHARES
OUTSTANDING 49,014,000 47,182,000 46,478,000 47,495,000
EARNINGS (LOSS) PER COMMON SHARE:
Continuing Operations $ 0.03 $ 0.04 $(.83) $ 0.09
Discontinued Operations --- --- --- 0.02
Net Income (Loss) $ 0.03 $ 0.04 $(.83) $ 0.11
17
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