EXECUTONE INFORMATION SYSTEMS, INC. 6/30/96 10-Q
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
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 (IRS 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 July 31, 1996 was 51,707,480.
<PAGE>
INDEX
EXECUTONE Information Systems, Inc.
Page #
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
June 30, 1996 and December 31, 1995. 3
Consolidated Statements of Operations -
Three Months and Six Months Ended
June 30, 1996 and 1995. 4
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1996 and 1995. 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
2
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
(In thousands, except for share amounts) 1996 1995
<S> <C> <C>
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 43,552 $ 8,092
Accounts receivable, net of
allowance of $1,139 and $1,715 26,228 48,531
Inventories 22,288 32,765
Prepaid expenses and other current assets 3,298 6,584
Total Current Assets 95,366 95,972
PROPERTY AND EQUIPMENT, net 8,311 18,462
INTANGIBLE ASSETS, net 19,958 20,022
DEFERRED TAXES 21,367 29,616
OTHER ASSETS 9,615 3,772
$ 154,617 $ 167,844
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 993 $ 932
Accounts payable 33,664 30,676
Accrued payroll and related costs 3,612 6,870
Accrued liabilities 17,023 11,851
Deferred revenue and customer deposits 2,981 19,781
Total Current Liabilities 58,273 70,110
LONG-TERM DEBT 14,006 29,829
LONG-TERM DEFERRED REVENUE --- 2,805
TOTAL LIABILITIES 72,279 102,744
STOCKHOLDERS' EQUITY:
Common stock: $.01 par value; 80,000,000 shares
authorized; 51,688,191 and 51,658,492 issued
and outstanding 517 517
Preferred stock: $.01 par value; Cumulative Convertible
Preferred Stock (Series A), 250,000 shares authorized,
issued and outstanding; Cumulative Contingently
Convertible Preferred Stock (Series B), 100,000 shares
authorized, issued and outstanding 7,300 7,300
Additional paid-in capital 78,403 79,668
Retained earnings (deficit) (since July 1, 1988) (3,882) (22,385)
Total Stockholders' Equity 82,338 65,100
$ 154,617 $ 167,844
The accompanying notes are an integral part of these consolidated
balance sheets.
</TABLE>
3
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EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
(in thousands, except for per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
REVENUES $51,982 $78,417 $118,948 $149,225
COST OF REVENUES 32,973 46,396 73,459 88,855
Gross Profit 19,009 32,021 45,489 60,370
OPERATING EXPENSES:
Product development and engineering 3,611 3,720 7,375 7,427
Selling, general and administrative 22,575 26,454 48,849 50,258
Provision for restructuring (Note H) 0 44,042 0 44,042
26,186 74,216 56,224 101,727
OPERATING LOSS (7,177) (42,195) (10,735) (41,357)
INTEREST EXPENSE (755) (1,043) (1,563) (1,958)
GAIN ON SALE OF BUSINESSES (NOTE F) 42,618 0 42,618 0
ACQUISITION COSTS 0 (1,006) 0 (1,006)
OTHER INCOME (EXPENSE) 315 19 531 295
INCOME (LOSS) BEFORE INCOME TAXES 35,001 (44,225) 30,851 (44,026)
PROVISION (BENEFIT) FOR INCOME TAXES:
Cash 4,000 100 4,100 200
Noncash (Note C) 10,009 (4,389) 8,249 (4,409)
14,009 (4,289) 12,349 (4,209)
NET INCOME (LOSS) $20,992 $(39,936) $ 18,502 $(39,817)
EARNINGS (LOSS) PER SHARE $ 0.40 $ (0.86) $ 0.35 $ (0.86)
WEIGHTED AVG. COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 52,803 46,590 52,773 46,268
</TABLE>
The accompanying notes are an integral part of these consolidated
statements.
4
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EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
(In thousands) June 30,
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 18,502 $ (39,817)
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities:
Depreciation and amortization 2,807 3,355
Gain on sale of businesses (Note F) (42,618) ---
Provision for restructuring and unusual
items (Note H) --- 44,042
Provision/(benefit) for income taxes not
currently payable 8,249 (4,409)
Noncash expenses, including noncash
interest expense, noncash provision
for losses on accounts receivable and
income from equity investment (204) (138)
Change in working capital items:
Accounts receivable 4,905 (2,280)
Inventories (4,614) (3,007)
Accounts payable and accruals 2,096 (9,539)
Other working capital items 3,153 1,119
NET CASH USED BY OPERATING ACTIVITIES (7,724) (10,674)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (2,164) (2,270)
Proceeds from sale of businesses (Note F) 61,948 ---
Other, net 351 540
NET CASH PROVIDED/(USED) BY INVESTING ACTIVITIES 60,135 (1,730)
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayments) borrowings under revolving
credit facility (15,445) 11,012
Repayments of other long-term debt (464) (535)
Repurchase of stock (1,983) (88)
Proceeds from issuance of stock 546 855
Other borrowings 395 750
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (16,951) 11,994
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 35,460 (410)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 8,092 7,849
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 43,552 $ 7,439
</TABLE>
Note: The change in working capital items in this statement exclude the
effects of the sale of the direct sales offices and any noncash
transactions.
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") develops,
markets and supports voice, data and healthcare communications
systems. Products and services include telephone systems, voice
mail systems, in-bound and out-bound call center systems,
specialized healthcare communications systems and application
consulting services and activities through the Unistar
subsidiary. Products are sold under the EXECUTONE, INFOSTAR,
IDS, LIFESAVER, INFOSTAR/ILS and UNISTAR brand names through a
worldwide network of direct sales and service employees 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. Certain prior year amounts have been
reclassified to conform to the current year's presentation.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from these estimates.
As of July 1, 1988, an accumulated deficit of approximately $49.7
million was eliminated.
NOTE C - INCOME TAXES
The Company accounts for income taxes in accordance with FAS No.
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 of the Company.
For the six-month periods ended June 30, 1996 and 1995, the
Company made cash payments for income taxes of approximately
$779,000 and $89,000, respectively.
6
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NOTE D - 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.
NOTE E - INVENTORIES
Inventories are stated at lower of first-in, first-out ("FIFO")
cost or market and consist of the following at June 30, 1996 and
December 31, 1995:
<TABLE>
<CAPTION>
(amounts in thousands) 6/30/96 12/31/95
<S> <C> <C>
Raw Materials $ 4,864 $ 4,783
Finished Goods 17,424 27,982
$22,288 $32,765
</TABLE>
NOTE F - SALE OF BUSINESSES
On May 31, 1996, the Company sold its direct sales and service
organization, including its network services division and
National Service Center, to Clarity Telecom Holdings, Inc.
(Clarity), a new acquisition company formed for the acquisition
by Bain Capital, Inc. The Company received $61.5 million in
cash, a $5.9 million junior subordinated note due July 1, 2004,
with interest at 7.5% per year, and warrants to purchase 8% of
the equity issued as of the closing in the new company for $1.1
million, exercisable for three years. After discounting the
notes and the warrants based upon a 12% discount rate, the total
value of the consideration received was $69.6 million. The
Company and the buyer also entered into a five-year exclusive
distributor agreement pursuant to which the buyer will sell and
service EXECUTONE and INFOSTAR telephone products to business and
commercial locations that require up to 400 telephones.
The Company retained the healthcare communications division, the
call center management division, the National Accounts and
Federal Systems marketing groups as well as the recently acquired
Unistar business. The sale does not include the Pittsburgh
direct sales and service office, which the Company sold to one of
its existing independent distributors for approximately $1.3
million in cash and notes in May 1996, resulting in no gain or
loss.
The Company recorded a pretax gain of $47.5 million on the sale
to Clarity net of transaction, severance and other costs related
to the sale. The proceeds were used to repay the Company's bank
borrowings, and the excess was invested in short-term cash
investments. The final proceeds from this sale are subject to
adjustment based upon the closing balance sheets of the
businesses sold to Clarity. The Company does not expect any such
adjustment to have a material adverse effect on the results of
operations, cash flow or financial position.
On April 10, 1996, the Company announced that it had given notice
of its intention to terminate its distribution agreement with GPT
Video Systems due to failures by GPT to deliver properly
functioning videoconferencing products on a timely basis. In
June 1996, the Company sold its videoconferencing
7
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division to BT Visual Images LLC for a $0.2 million note,
royalties on videoconferencing revenue through June 1998 and
contingent consideration related to the sale of inventory. The
Company recorded a pretax reserve for loss of $3.9 million on the
transaction.
In April 1996, the Company also sold its inmate calling business
for $0.5 million in cash and notes and recorded a pretax loss of
$1.0 million. Neither the Pittsburgh direct sales office, the
videoconferencing division, nor the inmate calling business
constituted a material portion of the Company's assets, revenues
or net income prior to sale.
NOTE G - UNISTAR ACQUISITION
On December 19, 1995, the Company acquired 100% of the common
stock of Unistar Gaming Corporation ("Unistar") for 3.7 million
shares of the Company's common stock and 350,000 shares of newly
issued preferred stock.
The preferred stock consists of 250,000 shares of Cumulative
Convertible Preferred Stock, Series A ("Series A Preferred
Stock") and 100,000 shares of Cumulative Contingently Convertible
Preferred Stock, Series B ("Series B Preferred Stock"). The
Series A Preferred Stock has voting rights equal to one share of
common stock and will earn dividends equal to 18.5% of the
consolidated retained earnings of Unistar as of the end of a
fiscal period, less any dividends paid to the holders of the
Series A Preferred Stock prior to such date. The Series B
Preferred Stock has voting rights equal to one share of common
stock and will earn dividends equal to 31.5% of the consolidated
retained earnings of Unistar as of the end of a fiscal period,
less any dividends paid to the holders of the Series B Preferred
Stock prior to such date. All dividends on Preferred Stock are
payable (i) when and as declared by the Board of Directors, (ii)
upon conversion or redemption of the Series A and Series B
Preferred Stock or (iii) upon liquidation. As of June 30, 1996,
no dividends have accrued to the preferred stockholders. The
Series A and Series B Preferred Stock is redeemable for a total
of 13.3 million shares of common stock (Series A Preferred Stock
for 4.925 million shares and Series B Preferred Stock for 8.375
million shares) at the Company's option. In the event that
Unistar meets certain revenue and profit parameters, the Series A
Preferred Stock is convertible for up to 4.925 million shares of
common stock and the Series B Preferred Stock is contingently
convertible for up to 8.375 million shares of common stock (a
total of an additional 13.3 million shares of common stock).
In an attempt to block the NIL, certain states filed letters
under 18 U.S.C. Section 1084 to prevent the long-distance
carriers from providing telephone service to the NIL. The Coeur
d'Alene Tribe of Idaho (CDA) initiated legal action to compel the
long-distance carriers to provide telephone service to the NIL.
The CDA's position is that the lottery is authorized by the
Indian Gaming Regulatory Act ("IGRA") passed by Congress in 1988,
that IGRA preempts state and federal statutes, and that the
states lack authority to issue the Section 1084 notification
letters to any carrier. On February 28, 1996, the NIL was ruled
lawful by the CDA Tribal Court. The CDA Tribal Court found that
all requirements of IGRA have been satisfied and that the Section
1084 letters issued by certain state attorneys general in an
effort to interfere with the lawful operation of the NIL are
invalid. In addition, the Court found that the long-distance
carriers cannot refuse to provide the service requested in the
action based upon 18 U.S.C. Section 1084. Although this ruling
is being appealed to the Tribal appellate court and will probably
be appealed to the U.S. Federal
8
<PAGE>
Courts, the Company believes the Coeur d'Alene Tribe's position
will be upheld on appeal. The
Company has accrued $1 million to cover estimated legal costs
through the possible appeal to the U.S. Federal Courts. If the
matter is appealed beyond the U.S. Federal Courts, the Company
estimates that additional legal costs could be in the range of $1-
2 million.
NOTE H - PROVISION FOR RESTRUCTURING
In July 1995, the Company reorganized its then-existing
businesses into five divisions: Computer Telephony, Healthcare
Communications Systems, Call Center Management, Videoconferencing
Products, and Network Services and changed its business strategy
in the Computer Telephony division to focus on software
applications in the communications market. The Videoconferencing
and Network Services Divisions have since been sold (see Note F).
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 and was de-emphasized. The Company adopted FAS
No. 121, "Accounting for the Impairment of Long-Lived Assets,"
which was issued in March 1995, requiring impairment to be
measured by projecting the lowest level of identifiable future
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.
NOTE I - OTHER MATTERS
For the six-month periods ended June 30, 1996 and 1995,
respectively, the Company made cash payments of approximately
$1.7 million and $1.9 million for interest expense on
indebtedness.
In February 1996, the Company received the proceeds of the $1.8
million note from the sale of the Wisconsin direct sales office
in December 1995.
During the six-month period ended June 30, 1996, noncash
financing activities, other than those related to the sale of
certain of the Company's business (see Note F), included a
capital lease obligation incurred in connection with an equipment
acquisition of $0.3 million.
There were no non-cash financing activities for the six-month
period ended June 30, 1995.
Refer to the Consolidated Statements of Cash Flows for
information on all cash-related operating, investing and
financing activities.
9
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Introduction
The Company develops, markets and supports voice, data and
healthcare communications systems. Products and services include
telephone systems, voice mail systems, in-bound and out-bound
call center systems, specialized healthcare communications
systems, application consulting services and activities through
the Unistar subsidiary. Products are sold under the EXECUTONE,
INFOSTAR, IDS, LIFESAVER, INFOSTAR/ILS and UNISTAR brand names
through a worldwide network of direct sales and service employees
and independent distributors.
Revenues are derived from product sales to distributors, direct
sales of healthcare and call center products, and direct sales to
national accounts and federal government customers, as well as
installations, additions, changes, upgrades or relocation of
previously installed systems, maintenance contracts, and service
charges to the existing base of healthcare, call center, national
account and federal government customers.
Results of Operations
On May 31, 1996, the Company sold substantially all of its
direct sales and services group, including its long-distance
reseller business and National Service Center, for consideration
valued at $69.6 million to Clarity Telecom Holdings, Inc.
(Clarity). The Company believes that under new ownership, with
its increased resources and dedicated focus on sales and service,
the sales and service business will grow and increase market
share. This will benefit both the Company and Clarity. The
Company will benefit from the equipment sales to the former
direct sales offices. The Company will retain the Healthcare,
Call Center Management ("CCM"), National Accounts and Federal
Systems groups, as well as telephony equipment sales to the
independent distributors, of which Clarity will be the largest
distributor.
The first six months of 1996 represented a transition period for
the Company. The primary mission was to complete the sale of the
direct sales and service organization while transitioning to a
more focused Company. The Company's operating results were
adversely affected in both quarters of 1996. During the first
three months of 1996, the Company devoted much of its management
resources toward efforts to finalize the agreement to sell the
direct sales and service organization, which necessitated a delay
in the planned restructuring of the direct sales organization
until the second quarter. During the second three months of
1996, operating results were adversely affected by two factors.
First, as soon as the sale of the direct sales and service
offices and the long distance reseller business was announced in
April, the Company moved as quickly as possible to close the
transaction. This was done to mitigate the adverse affects of
uncertainty during any prolonged period of transition. This was
believed to be in the best long-term interests of both the
Company and Clarity. As a result, the May 31, 1996 closing
removed the June retail revenue, traditionally the Company's
strongest direct revenue month from the quarterly results,
without an immediate reduction in related expenses of the same
magnitude. This, combined with the customary adjustments and
structural changes necessitated by the transaction, resulted in a
transition period that is not comparable to previous periods.
Due to the nature and scope of the changes in the business, the
Company does not have complete comparative data available for the
1995 periods based upon the new structure.
10
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The Company reported an operating loss of $7.2 million for the
three-month period ended June 30, 1996 and $10.7 million for the
six-month period ended June 30, 1996. For the comparable three-
month and six-month periods in 1995, the Company reported
operating profits (before the provision for restructuring) of
$1.8 million and $2.7 million, respectively. The change is
attributable to the absence of June 1996 revenue and profit
related to the direct offices. For the months of April and May
1995, the operating loss was approximately $7 million which is
comparable to the same two months in 1996. During the month of
June 1995, the Company generated operating profits to convert the
$7 million operating loss into an operating profit of $1.8
million for the second quarter of 1995. This monthly trend is
typical for the Company's business whereby the last month in each
quarter is the strongest revenue and profit month.
Included in results for the second quarter of 1996 is a net gain
on the sale of businesses of $42.6 million. This includes a net
pretax gain of $47.5 million on the sale of the direct sales,
service and long distance businesses partially offset by losses
from the sale of the videoconferencing division and the inmate
calling business of $4.9 million. The second quarter of 1995
included a $44.0 million provision for restructuring consisting
primarily of a goodwill impairment based on the adoption of FAS
No. 121.
Sale of Businesses
On May 31, 1996, the Company sold its direct sales and service
organization, including its network services division, to Clarity
Telecom Holdings, Inc. (Clarity), a new acquisition company led
by Bain Capital, Inc., for consideration valued at $69.6 million.
The Company recorded a pretax gain of $47.5 million net of
transaction, severance and other related costs during the period
ended June 30, 1996. The proceeds were used to repay the
Company's bank borrowings and the excess was invested in short-
term cash investments. The final proceeds from this sale are
subject to adjustment based upon the closing balance sheets of
the businesses sold to Clarity. The Company does not expect any
such adjustment to have a material adverse effect on the results
of operations, cash flow or financial position.
The Company retains its healthcare communications, and call
center management businesses, its National Accounts and Federal
Marketing groups and the recently acquired Unistar business.
Within these businesses are the Company's high-end applications
and the most productive sales representatives, those which carry
$1 million per year sales quotas.
Management believes this sale will be good for both companies.
Clarity will be able to focus on sales and service and the
expansion of market share. The Company will benefit from that
expansion through increased product sales. Telephony product
sales through existing independent distributors and through
Clarity will continue to represent a substantial portion of the
Company's revenues. The sale will also allow the Company to
dedicate more of its resources to telephony product development,
particularly relating to the IDS platform, the development and
marketing of the Healthcare and CCM product line and the Unistar
business.
The Company is now directing its focus toward the third and
fourth quarter of 1996. With the restructuring of the sales
organization and the reduction in force during the second
quarter, the Company expects to meet its operating targets for
the balance of the year (see Forward-Looking Statements).
In June 1996, the Company sold its videoconferencing division to
BT Visual Images LLC for a $0.2 million note, royalties on
videoconferencing revenue through June 1998 and contingent
consideration related to the sale of inventory transferred to the
buyer as part of the sale. The Company recorded a reserve for
loss of $3.9 million on the transaction during the three-month
period ended June 30, 1996. The Company is currently negotiating
issues regarding the close of the business with GPT.
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Unistar Acquisition
On December 19, 1995, the Company acquired 100% of the 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 G of the Notes to Consolidated Financial Statements for
the terms of the agreement.)
Management believes the Unistar business is a natural extension
of its telephony and call center businesses. Calls via an 800
number will be processed with Interactive Voice Response ("IVR")
equipment or live agents located on the Coeur d'Alene Indian
Tribe of Idaho ("CDA") Reservation using ACD software to process
nationwide wagering activity. The Company has made a significant
equity investment in Unistar, which initially created 8% dilution
to the Company's shareholders and will require possibly up to $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.
In an attempt to block the NIL, certain states filed letters
under 18 U.S.C. Section 1084 to prevent the long-distance
carriers from providing telephone service to the NIL. The CDA
initiated legal action to compel the long-distance carriers to
provide telephone service to the NIL. The CDA's position is that
the lottery is authorized by the Indian Gaming Regulatory Act
("IGRA") passed by Congress in 1988, that IGRA preempts state and
federal statutes, and that the states lack authority to issue the
Section 1084 notification letters to any carrier. On February 28,
1996, the NIL was ruled lawful by the CDA Tribal Court. The CDA
Tribal Court found that all requirements of IGRA have been
satisfied and that the Section 1084 letters issued by certain
state attorneys general in an effort to interfere with the lawful
operation of the NIL are invalid. In addition, the Court found
that the long-distance carriers cannot refuse to provide the
service requested in the action based upon 18 U.S.C. Section
1084. The Company has accrued $1 million to cover estimated
legal costs through the possible appeal to the U.S. Federal
Courts. If the matter is appealed beyond the U.S. Federal
Courts, the Company estimates that additional legal costs could
be in the range of $1-2 million.
Other than legal costs related to an appeal of the CDA Tribal
Court ruling or other actions by the states, if any, the Company
estimates that the additional costs to become operational may
amount to between $7-12 million.
The Company believes there is a national market for the NIL based
upon research into the experience of other national lotteries and
the growth of the overall lottery market. However, there is no
assurance that there will be acceptance of a telephone lottery.
Provision for Restructuring
In July 1995, the Company reorganized its then-existing
businesses into five divisions: Computer Telephony, Healthcare
Communications Systems, Call Center Management, Videoconferencing
Products, and Network Services and changed its business strategy
in the Computer Telephony division to focus on software
applications in the communications market. The Videoconferencing
and Network Services Divisions have since been sold (see Note F).
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 and was de-emphasized. The
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Company adopted FAS No. 121, "Accounting for the Impairment of
Long-Lived Assets," which was issued in March 1995, requiring
impairment to be measured by projecting the lowest level of
identifiable future 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.
In accordance with the provisions of FAS No. 121, the Company
prepared projections of future operating cash flows relating to
the telephony business acquired in 1988 based upon the Company's
new strategic direction. These projections indicated that this
business would not generate sufficient operating cash flows to
realize goodwill and the related service stock. The amount of
impairment of the telephony goodwill was $33.5 million as of June
30, 1995.
The write-off of inventory, primarily service stock, 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 strategic direction of the
Company.
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 $68 million and $23 million
as of June 30, 1996 and December 31, 1995, respectively.
At June 30, 1996 and December 31, 1995, cash and cash equivalents
amounted to $43.6 million and $8.1 million, respectively, an
increase generated primarily by $61.9 million in cash proceeds
for the sale of the Company's direct sales and service
organization. During the six-month period ended June 30, 1996,
cash was used to repay $15.8 million of debt, including all of
the Company's bank borrowings, repurchase $2.0 of the Company's
common stock and to fund the $7.7 million in cash used by
operating activities. The remainder of the proceeds were
invested in short-term cash securities. Cash used by operating
activities was $7.7 million for the six months ended June 30,
1996 compared to the use of cash by operations of $10.6 million
for the same period in 1995. The improvement is due to the
inventory buildup in late 1994 which was funded in early 1995.
Total debt at June 30, 1996 was $15.0 million, a decrease of
$15.8 million from $30.8 million at December 31, 1995.
The Company believes that its existing cash balances and cash
flow from operations will be sufficient to meet working capital
and other requirements for the next twelve months.
Forward-Looking Statements
The Company's financial operations before and after the sale of
the direct sales and service organization are very different.
There are significant changes in certain components which should
be highlighted. Therefore, the Company believes it would be
meaningful to discuss the business on a forward-looking basis.
13
<PAGE>
Based upon the 1995 results of operations, gross profit as a
percentage of revenues was 41.5%. After the sale, gross profit
is expected to be in the 35 to 36% range. Product development
should remain constant in dollars, but due to the lower revenue
base will increase as a percentage of revenues from its current
level of about 5%, to the 7 to 8% range. SG&A is expected to
show a dramatic decrease after the sale. For 1995, SG&A was
almost 34% of revenues. After the sale, it is expected to
decline into the 19 to 20% range. The decrease will be a result
of the elimination of the large direct sales force and downsizing
of G&A expenses. Operating income, excluding the provision for
restructuring, was 2.6% of revenues for 1995. After the sale, it
is expected to be in the 8 to 10% range. Revenues are expected
to be in the $45 to $47 million range for the third quarter of
1996 and in the $47 to $49 million range for the fourth quarter
of 1996.
The forward-looking statements regarding estimated results for
the periods after the sale are based on several assumptions: (1)
growth in OEM sales of telephony product pursuant to the
distribution agreement with the new Bain company and other OEM
telephony shipments of 5% over 1995 OEM sales volume; (2) growth
in call center management sales, from $3.7 million for the third
and fourth quarters of 1995 combined to $8.7 million for the same
quarters in 1996; (3) growth of approximately 22% in healthcare
communications sales, from $14.6 million in the last two quarters
of 1995 to $17.9 million for the same period in 1996; (4)
projected reductions in corporate expenses resulting from the
sale of the direct sales and service and network businesses of
approximately $2.0 million for the third and fourth quarters of
1996 combined and additional overhead reductions of $2.5 million
for the third and fourth quarters of 1996 combined; (5) an
increase for the six-month period in 1996 of 26% over 1995 in the
Company's National Accounts and Federal Systems revenues; and (6)
no significant increases in product manufacturing costs.
The Company's forward-looking statements regarding estimates of
the proforma results for the periods after the sale should be
evaluated with an appropriate level of caution. If actual events
differ materially from the Company's assumptions, projections and
estimates, the Company's actual results could vary significantly
from the performance projected in the forward-looking statements.
Additional information is contained in a Report on Form 8-K filed
with the SEC on May 1, 1996 relating to the Company's forward-
looking statements.
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
a) The Registrant's Annual Meeting of Shareholders was held on
July 30, 1996.
b) Proxies were solicited by the Registrant's management pursuant to
Regulation 14 under the Securities Act of 1934; there was no
solicitation in opposition to management's nominees listed in the
Proxy Statement dated June 3, 1996 and all such nominees were
elected pursuant to the vote of the shareholders.
c) The issuance of up to 8,375,000 shares of the Registrant's Common
Stock upon conversion or redemption of the Cumulative
Contingently Convertible Preferred Stock, Series B, described
under "Proposal 2" in the Proxy Statement dated June 3, 1996,
which section is incorporated herein by reference, was approved
by a vote of the majority of the Registrant's outstanding Common
and Preferred Stock as follows:
For: 26,344,232
Against: 724,404
Abstain: 181,710
d) The amendment of the Registrant's 1990 Directors Stock Option
Plan described under "Proposal 3" in the Proxy Statement dated
June 3, 1996, which section is incorporated herein by reference,
was approved by a vote of the majority of the Registrant's
outstanding Common and Preferred Stock as follows:
For: 38,540,409
Against: 1,008,503
Abstain: 170,775
e) The amendment of the Registrant's 1994 Executive Stock Incentive
Plan described under "Proposal 4" in the Proxy Statement dated
June 3, 1996, which section is incorporated herein by reference,
was approved by a vote of the majority of the Registrant's
outstanding Common and Preferred Stock as follows:
For: 38,576,769
Against: 994,964
Abstain: 147,954
f) The total number of shares of the Registrant's Common Stock,
$.01 par value, and Preferred Stock, $.01 per value, outstanding
as of June 3, 1996, the record date for the Annual Meeting, was
52,390,731, and 40,470,703 shares were represented in person or
by proxy at the Meeting.
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
On May 1, 1996, the Company filed a Current Report on
Form 8-K reporting the announcement of the agreement to sell the
direct sales and service organization, including the network
services division, and certain forward-looking financial
information.
On June 15, 1996, the Company filed a Current Report on Form
8-K reporting the closing of the sale of the direct sales
and service organization, including the network services
division, and pro forma financial information.
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: August 19, 1996 /s/ Alan Kessman
Alan Kessman
Chairman, President and
Chief Executive Officer
Dated: August 19, 1996 /s/ Anthony R. Guarascio
Anthony R. Guarascio
Vice President Finance and
Chief Financial Officer
16
<PAGE>
EXHIBIT 11
EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
NET INCOME (LOSS) $20,992,000 $(39,936,000) $18,502,000 $(39,817,000)
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES
OUTSTANDING 51,878,000 46,590,000 51,865,000 46,268,000
COMMON STOCK EQUIVALENT SHARES
ASSUMED TO BE ISSUED FOR DILUTIVE
STOCK OPTIONS AND WARRANTS 926,000 --- 908,000 ---
TOTAL WEIGHTED AVERAGE COMMON
AND COMMON EQUIVALENT SHARES
OUTSTANDING 52,803,000 46,590,000 52,773,000 46,268,000
EARNINGS (LOSS) PER COMMON
SHARE $ 0.40 $ (0.86) $ 0.35 $ (0.86)
</TABLE>
17
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS INCLUDED IN THE REGISTRANTS FILING ON FORM 10-Q FOR
THE QUARTERLY PERIOD ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 43552
<SECURITIES> 0
<RECEIVABLES> 27367
<ALLOWANCES> 1139
<INVENTORY> 22288
<CURRENT-ASSETS> 95366
<PP&E> 23995
<DEPRECIATION> 15684
<TOTAL-ASSETS> 154617
<CURRENT-LIABILITIES> 58273
<BONDS> 14006
<COMMON> 517
0
7300
<OTHER-SE> 74521
<TOTAL-LIABILITY-AND-EQUITY> 154617
<SALES> 118948
<TOTAL-REVENUES> 118948
<CGS> 73459
<TOTAL-COSTS> 73459
<OTHER-EXPENSES> 13075
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1563
<INCOME-PRETAX> 30851
<INCOME-TAX> 12349
<INCOME-CONTINUING> 18502
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18502
<EPS-PRIMARY> 0.40
<EPS-DILUTED> 0.40
</TABLE>
