Executone Information Systems, Inc. March 31, 1997 10-Q
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, 1997
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, 1997 was 49,371,481.
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INDEX
EXECUTONE Information Systems, Inc.
Page #
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
March 31, 1997 and December 31, 1996. 3
Consolidated Statements of Operations -
Three Months Ended March 31, 1997 and 1996. 4
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1997 and 1996. 5
Notes to Consolidated Financial Statements. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
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
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<CAPTION>
EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
(In thousands, except for share amounts) 1997 1996
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 21,122 $ 27,696
Accounts receivable, net of
allowance of $2,392 and $2,106 34,635 38,992
Inventories 18,439 16,814
Prepaid expenses and other current assets 2,694 3,099
Total Current Assets 76,890 86,601
RESTRICTED CASH 5,052 5,031
PROPERTY AND EQUIPMENT, net 7,241 7,578
INTANGIBLE ASSETS, net 19,861 19,893
DEFERRED TAXES 18,092 18,434
OTHER ASSETS 16,861 14,472
$ 143,997 $ 152,009
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 918 $ 882
Accounts payable 29,113 31,416
Accrued payroll and related costs 3,639 3,398
Accrued liabilities 11,360 13,943
Deferred revenue and customer deposits 3,659 3,164
Total Current Liabilities 48,689 52,803
LONG-TERM DEBT 13,685 13,837
LONG-TERM DEFERRED REVENUE 349 22
TOTAL LIABILITIES 62,723 66,662
STOCKHOLDERS' EQUITY:
Common stock: $.01 par value; 80,000,000 shares
authorized; 49,471,481 and 51,173,755 issued
and outstanding 495 512
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 71,545 76,113
Retained earnings (since July 1, 1988) 1,934 1,422
Total Stockholders' Equity 81,274 85,347
$ 143,997 $ 152,009
The accompanying notes are an integral part of these consolidated
balance sheets.
</TABLE>
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<TABLE>
<CAPTION>
EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
(In thousands, except for per share amounts) March 31,
1997 1996
<S> <C> <C>
REVENUES $ 39,019 $ 66,966
COST OF REVENUES 24,899 40,446
Gross Profit 14,120 26,520
OPERATING EXPENSES:
Product development and engineering 3,300 3,764
Selling, general and administrative 10,047 26,256
13,347 30,020
OPERATING INCOME (LOSS) 773 (3,500)
INTEREST EXPENSE (434) (808)
LOSS ON SALE OF BUSINESSES (Note G) --- (4,877)
OTHER INCOME 515 216
INCOME (LOSS) BEFORE INCOME TAXES 854 (8,969)
PROVISION (BENEFIT) FOR INCOME TAXES:
Cash --- 100
Noncash (Note C) 342 (3,711)
342 (3,611)
NET INCOME (LOSS) $ 512 $ (5,358)
EARNINGS (LOSS) PER SHARE $ 0.01 $ (0.10)
WEIGHTED AVG. COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 50,229 51,853
The accompanying notes are an integral part of these consolidated
statements.
</TABLE>
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<TABLE>
<CAPTION>
EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
(In thousands) March 31,
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 512 $ (5,358)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 820 1,529
Loss on sale of businesses (Note G) --- 4,877
Provision (benefit) for income taxes not
currently payable 342 (3,711)
Noncash expenses, including noncash interest
expense, noncash provision for losses on
accounts receivable and income from
equity investment 100 276
Change in working capital items:
Accounts receivable 4,472 3,817
Inventories (1,633) (3,722)
Accounts payable and accruals (4,521) 47
Other working capital items 900 3,036
NET CASH PROVIDED BY OPERATING ACTIVITIES 992 791
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (433) (1,846)
Investment in Unistar (1,475) (75)
Other, net (772) 310
NET CASH USED BY INVESTING ACTIVITIES (2,680) (1,611)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments under revolving credit facility --- (751)
Repayments of other long-term debt (304) (270)
Repurchase of stock (4,716) (326)
Proceeds from issuance of stock 134 353
NET CASH USED BY FINANCING ACTIVITIES (4,886) (994)
DECREASE IN CASH AND CASH EQUIVALENTS (6,574) (1,814)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 27,696 8,092
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 21,122 $ 6,278
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
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 and data communications systems.
Products and services include telephone systems, voice mail
systems, inbound and outbound call center systems, and
specialized healthcare communications systems. The Company,
through its Unistar Entertainment subsidiary, also has an
exclusive five-year contract with the Coeur d'Alene Tribe of
Idaho (CDA) to design, develop, finance and manage the National
Indian Lottery (NIL). Products and services 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.
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 those 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, 1997 and 1996, the
Company made cash payments for income taxes of approximately
$335,000 and $9,000, respectively.
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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
period. Common stock equivalents, the convertible preferred
stock and the convertible debentures which are antidilutive have
been excluded from the computations.
In February 1997, the Financial Accounting Standards Board issued
a new standard on earnings per share. The Company will adopt the
new standard as of December 31, 1997. If earnings per share for
the three-month period ended March 31, 1997 had been calculated
in accordance with the new standard, it would have been
unchanged.
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, 1997 and
December 31, 1996:
<TABLE>
<CAPTION>
(amounts in thousands) 3/31/97 12/31/96
<S> <C> <C>
Raw Materials $ 3,654 $ 3,493
Finished Goods 14,785 13,321
$18,439 $16,814
</TABLE>
NOTE F - UNISTAR
On December 19, 1995, the Company acquired 100% of the common
stock of Unistar Gaming Corporation (Unistar Gaming) for 3.7
million shares of the Company's common stock and 350,000 shares
of newly issued preferred stock. Unistar Gaming has an exclusive
five-year contract to design, develop, finance and manage the
National Indian Lottery through its wholly-owned subsidiary,
Unistar Entertainment, Inc. (Unistar). The NIL will be a
national telephone lottery authorized by Federal law and a
compact between the State of Idaho and the Coeur d'Alene Indian
Tribe of Idaho. In return for providing these management
services, Unistar will be paid a fee equal to 30% of the profits
of the NIL. The excess of the purchase price over the value of
the net liabilities assumed has been allocated to the management
agreement with the CDA and will be amortized over the five-year
term of the contract commencing with the first significant
lottery revenues.
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,
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(ii) upon conversion or redemption of the Series A and Series B
Preferred Stock or (iii) upon liquidation. As of March 31, 1997,
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 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. This ruling is
currently being appealed to the Tribal Appellate Court. A
hearing was held on March 24, 1997, and the Company is currently
awaiting an opinion. Although the Company also anticipates an
appeal to the U.S. Federal District Court, the Company believes,
based on consultation with and opinions rendered by outside legal
counsel, that the CDA's position will be upheld on appeal. In
1995, the Company accrued $1 million to cover estimated legal
costs through the possible appeal to the U.S. Federal District
Court. If the matter is appealed beyond the U.S. Federal
District Court or if additional court challenges are brought by
states opposed to the NIL, the Company estimates that additional
legal costs could be in the range of $1 million to $2 million.
Funding for Unistar capital expenditures, including the computers
and software to build the telecommunications system will be
capitalized and depreciated over the life of the management
agreement. Funding by Unistar on behalf of the NIL to complete
the building on the CDA reservation will be deferred and
amortized over the life of the management agreement. The
guaranteed monthly advance to the CDA, which began in January
1996, will be reimbursed when the NIL is operational and making
profit distributions to Unistar. In addition, the Company has
capitalized other fundings, consisting primarily of professional
fees and other expenses, which the Company believes are
reimbursable in accordance with the terms of the management
agreement. Total funding as described above totaled $3.6 million
through March 31, 1997 and is reflected in non-current other
assets.
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 million and $12 million. The costs include
capital expenditures for computers and software to build the
telecommunications system, funds to complete the building on the
CDA reservation which will be the operations center for the
lottery, and various start-up expenses including personnel-
related costs and advertising expenses. The Company is also
required to make a guaranteed payment of $300,000 per year to the
CDA. The cost estimate does not include a $4 million jackpot
reserve which could be required dependent upon certain
conditions. If the Company ultimately must fund a jackpot
reserve, it will be repaid to Unistar solely from NIL net
revenues in equal installments over the term of the agreement.
The Company expects it will be able to obtain additional
financing for these costs, if necessary.
8
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In February 1997, the Company signed agreements with Virtual
Gaming Technologies (formerly Internet Gaming Technologies (IGT))
and CasinoWorld Holdings, Ltd. (CWH). The agreements call for
the Company to invest $700,000 in IGT common stock, which was
done in September 1996 under a previous agreement. In addition,
the Company will obtain a 200,000-share, five-year option set at
15% more than
the price per share on the initial investment, or $3.45 per
share. The Company will acquire all hardware for the system
without financial obligation by either IGT or CWH. The Company
estimates that such hardware charges, which are included in the
cost estimates previously noted of $7 million to $12 million,
will be approximately $2 million to $3 million. CWH is to
provide project management services overseeing the development of
the software for the NIL, with the Company contracting
independently for system software development. Such charges are
not to exceed $2 million.
The investment in IGT is being accounted for under the cost
method. All hardware costs incurred will be capitalized and
depreciated over the useful life of the assets, beginning when
the assets are placed in service. As of March 31, 1997, $1.0
million in progress payments have been made toward the software
system. Such payments are being deferred until completion of the
system and will be capitalized and depreciated over the term of
the management agreement.
There are market and legal risks associated with the development
of the NIL. 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. Based upon opinions from outside legal
counsel, the Company also believes that the legal decision
rendered by the CDA Tribal Court will ultimately be upheld on
appeal. However, there is no assurance of such a legal outcome.
In the event that a telephone lottery does not attain the level
of market acceptance anticipated by the Company or if the CDA
Tribal Court decision is not upheld on appeal, the Company would
have to reevaluate the viability of the Unistar subsidiary to
determine if the Company's investment has been impaired.
NOTE G - SALE OF BUSINESSES
On May 31, 1996, the Company sold its direct sales and service
organization, including its network services division (DSOs) to
Clarity Telecom Holdings, Inc. d/b/a Executone Business Solutions
(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 recording the notes
and the warrants at their fair market value, the total value of
the consideration received was $69.6 million. The Company and
Clarity also entered into a five-year exclusive distributor
agreement pursuant to which Clarity will sell and service
EXECUTONE and INFOSTAR telephone products to business and
commercial locations that require up to 400 telephones.
The sale did 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 sale of the DSOs
(including the separate sale of the Pittsburgh office) related
primarily to the retail distribution channel of the Computer
Telephony division and included the Network Services division.
After the sale, the Computer Telephony division consists of
telephony product sales to independent distributors, of which
Clarity is the largest distributor, along with the National
Accounts and Federal Systems marketing channels. The Company
retains its Healthcare Communications and Call Center Management
businesses and the Unistar business.
9
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During 1996, the Company recorded a pretax gain of $48.9 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 cash proceeds of $61.5 million include $5.0 million held in
escrow. These funds, including interest, are classified as
restricted cash and will be released to the Company in April
1998, subject to potential indemnity claims by Clarity.
Sales to Clarity for the three-month period ended March 31, 1997
totaled $10.1 million or 26% of the Company's total revenues.
Accounts receivable from Clarity at March 31, 1997 was $9.7
million or 28% of the Company's total accounts receivable.
In 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 equipment inventory. During
the three-month period ended March 31, 1996, the Company recorded
a loss of $3.9 million on the transaction. The Company has filed
a legal action against GPT Video Systems, with whom the Company
terminated its distribution agreement for failure to deliver
properly functioning videoconferencing products on a timely
basis.
In 1996, the Company also sold its inmate calling business for
$0.5 million in cash and notes. During the three-month period
ended March 31, 1996, the Company recorded a loss of $1.0 million
on the transaction. This business was part of the Computer
Telephony division. 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 H - OTHER MATTERS
For the three-month periods ended March 31, 1997 and 1996, the
Company made cash payments of approximately $0.8 million and $1.2
million, respectively, 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, 1997 and 1996.
Refer to the Consolidated Statements of Cash Flows for
information on all cash-related operating, investing and
financing activities.
10
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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 and services include telephone
systems, voice mail systems, inbound and outbound call center
systems, and specialized healthcare communications systems. The
Company, through its Unistar Entertainment subsidiary, also has
the exclusive right to design, develop and manage the National
Indian Lottery. 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.
Overview
Overall, during the three-month period ended March 31, 1997, the
Company generated revenues of $39 million and earnings of $0.01
per share compared to the comparable period in 1996, which
included an operating loss of $3.5 million, a pretax loss of $9.0
million and a net loss of $0.10 per share. The comparable period
in 1996 included pretax reserves of $4.9 million for the shutdown
and termination of the videoconferencing and inmate calling
businesses.
The earnings were lower than anticipated due to a shortfall of
$1.9 million in revenue from the computer telephony distribution
channel and a $1 million shortfall in call center revenue. The
order rate in the Computer Telephony division was at 99% of
plan. However due to the product mix of the orders received, the
Company was unable to fulfill approximately $1.7 million of
orders. The Company was also unable to air freight shipments in
from its supplier in time to convert product receipts into
revenue. This resulted in unfilled backorders of about $700,000
to the Company's largest distributor and about $1 million from
other distributors. In April, the Company was able to fulfill
the missed March orders. No orders from end users had to be
canceled as the Company was able to make shipments to accommodate
its distributors installation schedules. In order to avoid this
in the future, the Company will increase its inventory balances
and has arranged for increased visibility into the inventory
balances of its largest distributor.
The Company also recognized during the quarter that its
predictive dialer outbound calling business was setting up
conflicts within the sales channel. Rather than working together
to complete the sale, the distributor's sales force and the
Company's direct dialer sales representatives were competing with
each other for control of the account. As a result, the
predictive dialer products were not receiving proper support from
the distribution channel. The Company now believes that the
dialer can best be sold as a vertical application of the computer
telephony market. Accordingly, the Call Center business is being
merged into the Computer Telephony division and the Company is
revamping its dialer sales plan to capitalize on its strong
distribution channel.
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The highlight of the quarter was the Healthcare Communications
group which achieved all of its expectations, including setting a
record of new system bookings for the quarter of $7.3 million and
ending the quarter with a record backlog of $10.9 million.
Results of Operations
As a result of the business sales and dispositions consummated in
1996, the financial results for the three-month period ended March
31, 1997 are not comparable to the prior year, other than on
certain measures of overall profitability. Lower than anticipated
revenue from the Computer Telephony and CCM divisions offset a
solid performance from Healthcare Communications. Revenues for
the Computer Telephony group, including Independent Distribution,
National Accounts and Federal Systems, were $28.4 million.
Healthcare revenues were $8.8 million. The CCM division had
revenues of $1.8 million, which was slightly ahead of the
previous quarter. Gross profit margin for the first quarter was
36.2 % which is comparable to the previous quarter. This is less
than planned primarily as a result of lower Computer Telephony and
CCM revenues and, to a lesser extent, unfavorable product mix.
Product development expenses for the three-month period ended
March 31, 1997 were $3.3 million which is comparable to the
previous quarter's spending levels. Selling, general and
administrative expenses were $10 million due to the lower level of
sales. Operating income for the three-month period ended March
31, 1997 was $773,000 compared to an operating loss of $3.5
million for the same period in 1996.
Net income for the three-month period ended March 31, 1997 was
$512,000 or $0.01 per share on 50.2 million shares outstanding
compared to a net loss of $5.4 million or $0.10 per share on 51.9
million shares outstanding for the same period in 1996. Included
in the results for the three-month period ended March 31, 1996 is
a $4.9 million pretax loss on the shutdown and termination of the
videoconferencing and inmate calling businesses.
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. The initial goal of
this investment was to establish a telephone lottery that could
be played by an individual of majority age, residing in one of 36
states or the District of Columbia that currently operates a
state-run lottery. In the telephone-based NIL, calls via an 800
number will be processed with interactive voice response
equipment or live agents located on the Coeur d'Alene Indian
Tribe of Idaho (CDA) Reservation using ACD software to process
nationwide lottery sales. The Company has made a significant
investment in Unistar, which initially created 8% dilution to the
Company's shareholders. For the three-month period ended March
31, 1997, the Company invested $1.5 million as part of the cost
to develop the software system, building and other costs related
to the project. These costs have been recorded as assets on the
balance sheet. The total Unistar investment cost on the balance
sheet is $19.4 million at March 31, 1997, including $15.8 million
in goodwill and $3.6 million in other assets. In the opinion of
the Company's management, this investment is justified based upon
the potential returns.
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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 Tribal Court ruling has been appealed to the Tribal
Appellate Court, as expected. A hearing was held on
March 24, 1997, and the Company is currently awaiting an opinion.
The Company remains hopeful that a positive decision in Tribal
Appellate Court will accelerate a Federal Court decision on the
telephone-based lottery.
In February 1997, Unistar signed revised agreements with
CasinoWorld Holdings, Ltd. relating to software development,
system architecture and proprietary technology and a revised
agreement for an equity investment in Virtual Gaming Technologies
(formerly Internet Gaming Technologies). See Note F for the
terms of these agreements. The development of these systems is a
critical step in the process of developing the telephone lottery,
enabling the telephone lottery to begin as soon as the legal
issues are resolved. The initial beta test rollout of the
Internet lottery games has been launched with approximately 100
users with a plan to expand to 1,000 users by the end of June. To
date, all systems are working and the test trials are proceeding
as planned. It is anticipated that the national launch of the
Internet lottery will take place by the end of the year. The
Company estimates that an additional $6 million will be spent in
1997, prior to the national launch.
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 $39 million and $50 million
as of
March 31, 1997 and December 31, 1996, respectively.
At March 31, 1997 and December 31, 1996, cash and cash
equivalents amounted to $21.1 million and $27.7 million,
respectively, a decrease of $6.6 million. During the three-month
period ended
March 31,1997, the Company generated $1.0 million in cash flow
from operating activities. Cash was used to repurchase 1.8
million shares of the Company's common stock for $4.7 million,
fund $1.5 million in Unistar-related activities, invest $0.5
million in an infrared communications company and fund $0.4
million in capital expenditures.
During the three-month period ended March 31, 1997, cash
generated by operating activities increased by $0.2 million
compared to the same period in 1996. The increase is due to the
$4.3 million improvement in operating income, partially offset by
cash used to purchase inventory, payment of accrued liabilities
relating to the sale of the DSOs, and the collection of a note
receivable of $1.8 million during the 1996 period related to the
sale of the Wisconsin direct sales office.
Total debt at March 31, 1997 was $14.6 million, a decrease of
$0.1 million from $14.7 million at December 31, 1996.
Outstanding debt at March 31, 1997 consists of $12.4 million in
subordinated debt, due in 2011, with the balance primarily
capitalized lease obligations.
13
<PAGE>
Proceeds from the sale of the DSOs (see Note G) included $5.0
million of cash held in escrow and reported on the consolidated
balance sheets as restricted cash. These funds, plus interest,
will be released to the Company in April 1998, subject to
potential indemnity claims by Clarity.
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.
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: May 14, 1997 /s/ Alan Kessman
Alan Kessman
Chairman, President and
Chief Executive Officer
Dated: May 14, 1997 /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
Three Months Ended
March 31,
1997 1996
NET INCOME (LOSS) $ 512,000 $ (5,358,000)
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 49,881,000 51,853,000
COMMON STOCK EQUIVALENT SHARES
ASSUMED TO BE ISSUED FOR DILUTIVE
STOCK OPTIONS AND WARRANTS 348,000 ---
TOTAL WEIGHTED AVERAGE COMMON
AND COMMON EQUIVALENT SHARES
OUTSTANDING 50,229,000 51,853,000
EARNINGS (LOSS) PER COMMON SHARE $ 0.01 $ (0.10)
17
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements included in the registrant's filing on Form 10-Q for
the quarterly period ended March 31, 1997 and is qualified in it's entirety
by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 21,122
<SECURITIES> 0
<RECEIVABLES> 37,027
<ALLOWANCES> 2,392
<INVENTORY> 18,439
<CURRENT-ASSETS> 76,890
<PP&E> 24,507
<DEPRECIATION> 17,266
<TOTAL-ASSETS> 143,997
<CURRENT-LIABILITIES> 48,689
<BONDS> 13,685
<COMMON> 495
0
7,300
<OTHER-SE> 73,479
<TOTAL-LIABILITY-AND-EQUITY> 143,997
<SALES> 39,019
<TOTAL-REVENUES> 39,019
<CGS> 24,899
<TOTAL-COSTS> 24,899
<OTHER-EXPENSES> 13,347
<LOSS-PROVISION> (232)
<INTEREST-EXPENSE> 434
<INCOME-PRETAX> 854
<INCOME-TAX> 342
<INCOME-CONTINUING> 512
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 512
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
