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, 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 (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, 1996 was 51,906,168.
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INDEX
EXECUTONE Information Systems, Inc.
Page #
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
March 31, 1996 and December 31, 1995. 3
Consolidated Statements of Operations -
Three Months Ended March 31, 1996 and 1995. 4
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1996 and 1995. 5
Notes to Consolidated Financial Statements. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION 14
SIGNATURES 15
EXHIBIT 11. STATEMENT REGARDING COMPUTATION
OF PER SHARE EARNINGS 16
2
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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) 1996 1995
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,280 $ 8,092
Accounts receivable, net of
allowance of $1,480 and $1,715 43,718 48,531
Inventories 36,380 32,765
Prepaid expenses and other current assets 4,587 6,584
Total Current Assets 90,965 95,972
PROPERTY AND EQUIPMENT, net 18,781 18,462
INTANGIBLE ASSETS, net 19,990 20,022
DEFERRED TAXES 31,376 29,616
OTHER ASSETS 3,199 3,772
$ 164,311 $ 167,844
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 938 $ 932
Accounts payable 30,869 30,676
Accrued payroll and related costs 8,558 6,870
Accrued liabilities 9,218 11,851
Deferred revenue and customer deposits 20,409 19,781
Total Current Liabilities 69,992 70,110
LONG-TERM DEBT 28,879 29,829
LONG-TERM DEFERRED REVENUE 2,780 2,805
TOTAL LIABILITIES 101,651 102,744
STOCKHOLDERS' EQUITY:
Common stock: $.01 par value; 80,000,000
shares authorized; 51,865,163 and
51,658,492 issued and outstanding 519 517
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 79,716 79,668
Retained earnings (deficit)
(since July 1, 1988) (24,875) (22,385)
Total Stockholders' Equity 62,660 65,100
$ 164,311 $ 167,844
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)
(In thousands, except for Three Months Ended
per share amounts) March 31,
1996 1995
REVENUES:
Product $30,243 $31,948
Base 36,723 38,860
66,966 70,808
COST OF REVENUES 40,486 42,459
Gross Profit 26,480 28,349
OPERATING EXPENSES:
Product development and engineering 3,764 3,707
Selling, general and administrative 26,274 23,804
30,038 27,511
OPERATING INCOME (LOSS) (3,558) 838
INTEREST AND OTHER EXPENSES, NET 592 638
INCOME (LOSS) BEFORE INCOME TAXES (4,150) 200
PROVISION (BENEFIT) FOR INCOME TAXES:
Cash 100 100
Noncash (Note C) (1,760) (20)
(1,660) 80
NET INCOME (LOSS) $(2,490) $ 120
EARNINGS (LOSS) PER SHARE $ (0.05) $ ---
WEIGHTED AVG. COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 51,853 48,838
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)
Three Months Ended
(In thousands) March 31,
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (2,490) $ 120
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization 1,529 1,776
Benefit for income taxes not currently payable (1,760) (20)
Noncash expenses, including noncash interest
expense, noncash provision for losses on accounts
receivable and income from equity investment 273 457
Change in working capital items:
Accounts receivable 4,535 1,070
Inventories (3,509) (4,726)
Accounts payable and accruals (428) (9,572)
Other working capital items 2,625 1,529
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 775 (9,366)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment, net (1,846) (1,483)
Other, net 253 (140)
NET CASH USED BY INVESTING ACTIVITIES (1,593) (1,623)
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayments) borrowings under revolving credit facility (751) 9,633
Repayments of other long-term debt (270) (279)
Repurchase of stock (326) ---
Proceeds from issuance of stock 353 1,070
Other borrowings --- 750
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (994) 11,174
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,812) 185
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 8,092 7,849
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 6,280 $ 8,034
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 and
data communications 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 and independent
sales and service offices. The Company is organized into five
divisions: Computer Telephony, Healthcare Communications
Systems, Call Center Management ("CCM"), Videoconferencing
Products and Network Services.
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 three-month periods ended March 31, 1996 and 1995, the
Company made cash payments for income taxes of approximately
$9,000 and $44,000, respectively.
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 March 31, 1996
and December 31, 1995:
(amounts in thousands) 3/31/96 12/31/95
Raw Materials $ 5,865 $ 4,783
Finished Goods 30,515 27,982
$ 36,380 $ 32,765
NOTE F - 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 March 31, 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). Shareholder approval is required before any of
the Series B Preferred Stock can be converted or redeemed.
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. Any appeal of this ruling
must be filed by May 31, 1996. The Company expects this ruling
will be appealed but believes the CDA's position will be upheld.
NOTE G - SUBSEQUENT EVENTS
On April 9, 1996, the Company entered into an agreement to
sell substantially all of the Direct Sales and Services Group,
including its long-distance reseller business and National
Service Center, for $67.4 million to an acquisition company led
by Bain Capital, Inc. The purchase price will consist of $61.5
million in cash and a $5.9 million note. In addition, the
Company will receive warrants to purchase 8% of the common
stock of the new company, issued as of the closing, for $1.1
million, exercisable for three years. The sale is expected to
close on May 30, 1996, subject to the buyer's financing and
other conditions. The agreement also provides that the Company
and the buyer will enter into a five-year exclusive
distribution agreement under which the buyer will sell and
service the Company's telephony equipment to those businesses
and commercial locations that require up to 400 telephones.
The sale does not include the Pittsburgh direct sales and
service office, which the Company has separately agreed to sell
to one of its existing independent distributors for approximately
$1.3 million in cash and notes. The Company will retain its Healthcare
Communications and Call Center Management businesses, along with its
National Accounts and Federal Systems marketing groups and the recently
acquired Unistar business. In addition, the Company will continue to make
telephony product sales to its independent distributors, of which the
newly-formed Bain company will be the largest distributor.
On April 10, 1996, the Company announced that it had given
notice of its termination of its distribution agreement with GPT
Video Systems due to failures by GPT to deliver properly
functioning videoconferencing products on a timely basis. The
Company is negotiating an agreement with a third party to sell
its videoconferencing business. Terms of the contract have yet
to be finalized.
NOTE H - OTHER MATTERS
For each of the three-month periods ended March 31, 1996 and
1995, the Company made cash payments of approximately $1.2
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.
There were no non-cash financing activities for the three-month
periods ended March 31, 1996 and 1995.
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 develops, markets and supports voice and data
communications systems. Products include telephone systems,
voice mail systems, inbound and outbound call center systems and
healthcare communications systems. Products are sold under the
EXECUTONE, INFOSTAR, IDS, LIFESAVER and INFOSTAR/ILS brand names.
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 ("base revenues").
Overview
On April 9, 1996, the Company entered into an agreement to sell
substantially all of its Direct Sales and Services Group,
including its long-distance reseller business and National
Service Center, for $67.4 million to an acquisition company led
by Bain Capital, Inc. 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
significantly and increase market share. This will benefit both
the Company and the newly-formed Bain company. 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 the newly-formed Bain company will be the
largest distributor. The Company will use a portion of the
proceeds of the sale to strengthen its balance sheet and
pay down all of its existing bank debt. The effort, management
resources and decisions made in order to finalize a transaction of
this magnitude had a negative impact on the Company's profitability
for the first three months of 1996. Due to the pending nature
of the transaction during the quarter, the Company was unable to
implement a planned restructuring of the direct sales
organization to create a more efficient selling effort and
reduce selling, general and administrative costs until the
second quarter. As a result, selling, general and
administrative costs were approximately $1.5 million higher than
they would have been for the quarter had the restructuring been
done at the beginning of the year. In addition, the Company
believes the resources directed toward the sale of the direct
sales organization and the timing of new installations and
moves, adds, and changes ("MAC") contributed to the decrease in
revenue for the quarter compared to the same period in 1995, as
evidenced by the $4.5 million increase in backlog since the end
of 1995. Upon completion of the sale transaction, the Company's
focus will be toward the third and fourth quarters of the year,
at which point it expects to realize cost savings of
approximately $2 million per quarter. These savings will
represent the full impact of the cost-saving actions in the
remaining business and the assumption of certain overhead costs
by the newly-formed Bain company. Management believes this sale
will be good for both companies. The newly-formed Bain company
will be able to focus on sales and service and the expansion of
market share. Executone will benefit from that expansion
through increased product sales and will focus on product
development and retain sales in markets where it believes it can
have a dominant position.
Results of Operations
Revenues for the three-month period ended March 31, 1996 totaled
$67.0 million compared to $70.8 million for the three-month
period ended March 31, 1995. The 5% decrease in revenues was
primarily due to decreases in the level of system upgrades and
expansions in the telephony division and in new installations in
the healthcare division. However, the first quarter is
historically the Company's weakest and most volatile relating to
the timing of new installations. Despite the decline in new
healthcare installations, healthcare bookings for the quarter
were strong and healthcare backlog increased almost $2 million.
Gross profit for the three-month period ended March 31, 1996
decreased almost $1.9 million over the same period in 1995
primarily due to the revenue decrease, and the resulting lower
absorption of fixed cost overhead.
The first three months of 1996 generated an operating loss of
$3.6 million compared to operating income of $838,000 for the
same period in 1995. In addition to the impact of the lower
gross profit on operating income, selling, general and
administrative expenses increased almost $2.5 million during the
three-month period ended March 31, 1996 compared to the same
period in 1995. Due to the pending sale of the direct sales
organization during the first quarter, the Company was not able
to implement the planned restructuring of that sales
organization. As a result, the Company believes that there are
approximately $1.5 million in costs that could have been
eliminated in the first three months of 1996 had the
restructuring commenced at the beginning of the year, as
planned, rather than in the second quarter of 1996.
Interest and other expenses, net for the three-month period
ended March 31, 1996 decreased slightly compared to the same
period in 1995 primarily due to lower interest expense resulting
from the lower levels of bank borrowings under the credit
facility in the first quarter of 1996 as compared to the same
period in 1995.
For the three-month period ended March 31, 1996, the Company
recorded an income tax benefit of $1.7 million which was
recorded as an increase to the deferred tax asset reflecting
additional tax benefits to be utilized in the future. Due to
the Company's substantial remaining tax benefit carryforwards,
minimal taxes will be paid in the near future.
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 F 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. Any appeal of this ruling must be filed by May
31, 1996. The Company expects this ruling will be appealed but
believes the CDA's position will be upheld.
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 $5-10 million. The Company expects it will be
able to obtain additional financing for these costs, if necessary.
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.
Subsequent Events
On April 9, 1996, the Company entered into an agreement to sell
substantially all of the Direct Sales and Services Group,
including its long-distance reseller business and National
Service Center, for $67.4 million to an acquisition company led
by Bain Capital, Inc. (See Note G of the Notes to Consolidated
Financial Statements for the terms of the agreement.) The sale
is expected to close on May 30, 1996, subject to the buyer's
financing and other conditions. The agreement also provides
that the Company and the buyer will enter into a five-year
exclusive distribution agreement under which the buyer will sell
and service the Company's telephony equipment to those businesses
and commercial locations that require up to 400 telephones.
The Company will retain its Healthcare Communications and Call
Center Management ("CCM") businesses, along with its National
Accounts and Federal Systems marketing groups and the recently
acquired Unistar business. In addition, the Company will continue
to make telephony product sales to its independent distributors, of
which the newly-formed Bain company will be the largest distributor.
It is currently estimated that the transaction will result in a
pre-tax gain of approximately $40 million. Though the Company
will provide for income taxes at the full statutory rate, the
actual tax liability is expected to approximate $4 million.
After utilizing a significant portion of the Company's deferred
tax asset, the net gain is expected to be approximately $23-25
million. The Company expects to record the gain during the
three-month period ended June 30, 1996, when the transaction will
close.
The Company expects the sale will ultimately increase its market
share. The new ownership will focus more resources to manage
this business and will be dedicated to growing the sales
distribution channel. Telephony product sales through the
existing independent distributors and through the newly-formed
Bain company 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, and to the development
and marketing of the Healthcare and CCM product lines.
The termination of the Company's agreement with GPT Video
Systems on April 10, 1996 was a result of GPT's inability to
provide a functioning product according to the originally agreed
upon schedule. As a result, the Company absorbed expenses in
1995 and in the first three months of 1996 that it is no longer
willing to absorb. The Company is negotiating an agreement to
sell the videoconferencing business. Terms of the contract have
yet to be finalized.
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 $22 million and $23
million as of March 31, 1996 and December 31, 1995, respectively.
At March 31, 1996 and December 31, 1995, cash and cash
equivalents amounted to $6.3 million and $8.1 million,
respectively. During the three-month period ended March 31,
1996, the $1.8 million decrease in cash was used to purchase
$1.8 million of capital equipment and repay borrowings of $1.0
million, offset by cash generated from operations of $0.8
million and from other sources of $0.2 million. Cash generated
from operating activities was $0.8 million for the three months
ended March 31, 1996 compared to the use of cash by operations
of $9.4 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 March 31, 1996 was $29.8 million, a decrease of
$1.0 million from $30.8 million at December 31, 1995.
As of April 30, 1996, approximately $8.4 million of direct
borrowings was available under the Company's credit facility.
The Company believes that cash flow from operations and the
proceeds to be generated by the pending sale 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 on
a comparative basis are very different. There are significant
changes in certain components which should be highlighted.
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
streamlining 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) the closing of the sale to Bain in the second
quarter of 1996, resulting in no network or direct telephony
revenue or earnings in the third or fourth quarter of 1996; (2)
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; (3)
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; (4) 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; (5) 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; (6) an increase for the six-month
period in 1996 of 26% over 1995 in the Company's National
Accounts and Federal Systems revenues; and (7) no videoconferencing
revenues or expenses and no charges in the third or fourth quarter
of 1996 relating to the exiting or sale of businesses, and 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 the level of caution appropriate
at a time when the transaction and proposed restructuring cost
savings have not yet been effected.
If actual events differ materially from the Company's assumptions,
projections and estimates, or if the sale does not occur as planned,
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.
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
On January 3, 1996, the Company filed a Current
Report on Form 8-K reporting the acquisition of
Unistar Gaming Corporation on December 19, 1995.
14
<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 15, 1996 /s/ Alan Kessman
Alan Kessman
Chairman, President and
Chief Executive Officer
Dated: May 15, 1996 /s/ Anthony R. Guarascio
Anthony R. Guarascio
Vice President Finance and
Chief Financial Officer
15
EXHIBIT 11
EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
Three Months Ended
March 31,
1996 1995
NET INCOME (LOSS) $ (2,490,000) $ 120,000
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 51,853,000 45,947,000
COMMON STOCK EQUIVALENT SHARES
ASSUMED TO BE ISSUED FOR DILUTIVE
STOCK OPTIONS AND WARRANTS --- 2,891,000
TOTAL WEIGHTED AVERAGE COMMON
AND COMMON EQUIVALENT SHARES
OUTSTANDING 51,853,000 48,838,000
EARNINGS (LOSS) PER COMMON SHARE $ (0.05) $ 0.00
16
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1996
<CASH> 6,280
<SECURITIES> 0
<RECEIVABLES> 45,198
<ALLOWANCES> 1,480
<INVENTORY> 36,380
<CURRENT-ASSETS> 90,965
<PP&E> 50,810
<DEPRECIATION> 32,029
<TOTAL-ASSETS> 164,311
<CURRENT-LIABILITIES> 69,992
<BONDS> 0
<COMMON> 519
0
7,300
<OTHER-SE> 54,841
<TOTAL-LIABILITY-AND-EQUITY> 164,311
<SALES> 66,966
<TOTAL-REVENUES> 66,966
<CGS> 40,486
<TOTAL-COSTS> 40,486
<OTHER-EXPENSES> 30,038
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 592
<INCOME-PRETAX> (4,150)
<INCOME-TAX> (1,660)
<INCOME-CONTINUING> (2,490)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,490)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
