EXECUTONE INFORMATION SYSTEMS, INC. - 10-Q - SEPTEMBER 30, 1998
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 September 30, 1998
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 October 31, 1998 was 49,820,179.
<PAGE>
INDEX
EXECUTONE Information Systems, Inc.
Page#
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
September 30, 1998 and December 31, 1997. 3
Consolidated Statements of Operations -
Three Months and Nine Months Ended
September 30, 1998 and 1997. 4
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1998 and 1997. 5
Notes to Consolidated Financial Statements. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
PART II. OTHER INFORMATION 21
SIGNATURES 22
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
(In thousands, except for share amounts) 1998 1997
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,811 $ 7,727
Restricted cash --- 5,084
Accounts receivable, net of
allowance of $1,160 and $1,814 29,285 33,403
Inventories 22,975 20,436
Prepaid expenses and other current assets 3,996 4,091
Total Current Assets 59,067 70,741
PROPERTY AND EQUIPMENT, net 10,834 7,767
INTANGIBLE ASSETS, net 16,805 19,765
DEFERRED TAXES 22,811 18,577
OTHER ASSETS 30,126 22,014
$ 139,643 $ 138,864
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 781 $ 951
Accounts payable 19,177 23,009
Accrued payroll and related costs 3,912 3,007
Accrued liabilities 12,754 13,123
Deferred revenue and customer deposits 4,484 2,541
Total Current Liabilities 41,108 42,631
LONG-TERM DEBT 23,380 14,643
OTHER LONG-TERM LIABILITIES 963 1,092
TOTAL LIABILITIES 65,451 58,366
STOCKHOLDERS' EQUITY:
Common stock: $.01 par value; 80,000,000 shares
authorized; 49,820,179 and 49,660,359 issued
and outstanding 498 497
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 71,543 71,500
Retained earnings (deficit) (5,149) 1,201
Total Stockholders' Equity 74,192 80,498
$ 139,643 $ 138,864
The accompanying notes are an integral part of these consolidated
balance sheets.
</TABLE>
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EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
(In thousands, except September 30, September 30,
for per share amounts) 1998 1997 1998 1997
<S> <C> <C> <C> <C>
REVENUES $33,605 $42,936 $102,215 $116,732
COST OF REVENUES 23,159 28,044 69,081 77,821
Gross Profit 10,446 14,892 33,134 38,911
OPERATING EXPENSES:
Product development and
engineering 2,413 3,202 7,466 9,939
Selling, general and
administrative 10,327 10,179 29,543 30,423
Special charges 860 --- 5,343 ---
13,600 13,381 42,352 40,362
OPERATING INCOME/(LOSS) (3,154) 1,511 (9,218) (1,451)
INTEREST EXPENSE (664) (562) (1,710) (1,499)
OTHER INCOME, net 236 372 346 1,183
INCOME/(LOSS) BEFORE TAXES (3,582) 1,321 (10,582) (1,767)
PROVISION/(BENEFIT) FOR
INCOME TAXES (1,433) 528 (4,232) (701)
NET INCOME/(LOSS) $(2,149) $ 793 $(6,350) $ (1,066)
EARNINGS/(LOSS) PER SHARE $ (0.04) $ 0.02 $ (0.13) $ (0.02)
WEIGHTED SHARES OF COMMON STOCK
AND EQUIVALENTS OUTSTANDING 49,801 49,648 49,744 49,657
The accompanying notes are an integral part of these consolidated
statements.
</TABLE>
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EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
(In thousands) 1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(6,350) $ (1,066)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 2,661 2,248
Benefit for income taxes not currently payable (4,232) (701)
Noncash expenses, including noncash interest
expense, noncash provision for losses on
accounts receivable and income from equity
investment 250 548
Change in working capital items:
Accounts receivable 3,825 4,718
Inventories (2,665) (5,812)
Accounts payable and accruals (4,096) (7,760)
Restricted cash 5,084 ---
Other working capital items (135) (929)
NET CASH USED BY OPERATING ACTIVITIES (5,658) (8,754)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (726) (1,295)
Investment in Unistar (5,842) (4,000)
Other, net (302) (1,082)
NET CASH USED BY INVESTING ACTIVITIES (6,870) (6,377)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit facility 8,410 ---
Repayments of other long-term debt (841) (890)
Repurchase of stock (148) (5,400)
Proceeds from issuance of stock 191 746
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 7,612 (5,544)
DECREASE IN CASH AND CASH EQUIVALENTS (4,916) (20,675)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 7,727 27,696
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 2,811 $ 7,021
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's
UniStar Entertainment indirect subsidiary has an exclusive five-
year contract ending January 2003 with the Coeur d'Alene Tribe of
Idaho to design, develop, finance and manage the National Indian
Lottery. Executone's products and services are sold under the
EXECUTONEO, INFOSTARO, IDS, LIFESAVER and INFOSTAR/ILS brand
names through a national network of independent distributors and
company direct sales and service employees.
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 those estimates.
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 nine-month periods ended September 30, 1998 and 1997, the
Company made cash payments for income taxes of approximately
$75,000 and $424,000, 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, the convertible
preferred stock and the convertible debentures which are
antidilutive have been excluded from the computations.
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A summary of the Company's loss per share calculations for the
three-month and nine-month periods ended September 30, 1998 and
1997, respectively, is as follows:
<TABLE>
<CAPTION>
Per Share
(in thousands, except for per share amounts) Loss Shares Amount
<S> <C> <C> <C>
For the three months ended September 30, 1998:
Basic and Diluted Loss Per Share: $(2,149) 49,801 $(0.04)
For the three months ended September 30, 1997:
Basic and Diluted Gain Per Share: $ 793 49,648 $ 0.02
For the nine months ended September 30, 1998:
Basic and Diluted Loss Per Share: $(6,350) 49,744 $(0.13)
For the nine months ended September 30, 1997:
Basic and Diluted Loss Per Share: $(1,066) 49,657 $(0.02)
</TABLE>
The Company's Convertible Subordinated Debentures are convertible
into approximately 1.5 million shares of common stock as of
September 30, 1998. The shares issuable upon conversion of the
Debentures were not included in the computation of diluted
earnings per share because they would be antidilutive for each of
the periods presented. In those periods where there are net
losses, all stock options and warrants were antidilutive,
regardless of the exercise prices. Options to purchase 313,000
and 258,000 shares of common stock as of September 30, 1998 and
1997, respectively, were not included in the computation of
diluted earnings per share for those periods presented above in
which there were net losses. During the three-month period ended
September 30, 1998, the share amount includes 16,000 shares of
dilutive stock options and warrants. The convertible preferred
stock issued in connection with the acquisition of Unistar is
antidilutive and has been excluded from the above calculations
(See Note F).
In 1997, the Company adopted FAS No. 128, "Earnings per Share,"
effective for periods ending after December 15, 1997. As a
result, the Company's reported earnings per share for prior
periods were restated. Reported earnings per share as of
September 30, 1997 was unchanged as a result of this accounting
change.
NOTE E - INVENTORIES
Inventories are stated at lower of first-in, first-out (FIFO)
cost or market and consist of the following at September 30, 1998
and December 31, 1997:
<TABLE>
<CAPTION>
September 30, December 31,
(amounts in thousands) 1998 1997
<S> <C> <C>
Raw Materials $ 2,537 $ 4,672
Finished Goods 20,438 15,764
$22,975 $20,436
</TABLE>
7
<PAGE>
NOTE F - UNISTAR
Acquisition
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 valued at $5.4
million and 350,000 shares of newly issued preferred stock valued
at $7.3 million. Unistar Gaming's subsidiary, UniStar
Entertainment, Inc., has an exclusive five-year contract to
design, develop, finance and manage the National Indian Lottery
(NIL) for the Coeur d'Alene Tribe of Idaho ("CDA" or "the
Tribe"). The NIL comprises a national telephone lottery, as well
as Internet-based lottery games authorized by federal law and by
a compact between the State of Idaho and CDA. In return for
providing these management services to the NIL, 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 included in intangible assets and is being amortized
over the five-year term of the contract commencing with the three-
month period ended March 31, 1998.
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 September 30, 1998, 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 convertible for up to 8.375
million shares of common stock (a total of an additional 13.3
million shares of common stock).
Legal and Other Risks
On September 14, 1998, Unistar, the CDA and representatives of
the US Department of Justice had discussions regarding a
declaratory judgment to be sought jointly from the US District
Court for the District of Idaho as to whether the operation of
the NIL is legal under 18 U.S.C. 1952 and 1955. Unistar was
informed that the Department of Justice views such operation to
be in violation of such statutes. The Company and Unistar
believe, based on advice of outside counsel, that the operation
of the NIL is legal. The Department of Justice has proposed that
the parties file a joint stipulation of facts and cross-motions
for summary judgment in the declaratory judgment action. Unistar
has not yet determined whether any such joint stipulation and
action for declaratory judgment is in its best interests. If
Unistar and the Department of Justice do not agree as to such a
jointly pursued action, the Department of Justice may determine
to commence civil or criminal proceedings against Unistar. As in
the case of other pending actions described below, a decision in
this proposed proceeding against Unistar and the CDA could
ultimately result in the shutting down of the NIL's telephone and
Internet lotteries. While this is a possible outcome, the Company
and Unistar do not believe it to be the probable outcome. However, in
8
<PAGE>
the event that NIL's activities are suspended, the Company would
have to re-evaluate the extent of impairment of its intangibles
in accordance with FAS No. 121, "Accounting for the Impairment of
Long-Lived Assets." The Company would also have to write off its
reimbursable advances to the NIL. These events would have a
material adverse effect on Unistar's current business and on the
Company's financial position and results of operations.
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. In 1995,
the CDA initiated legal action against AT&T Corporation (AT&T) 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 law, that 18 U.S.C.
Section 1084 is inapplicable and, therefore, 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 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 Tribal 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 and a related
order dated May 1, 1996 were subsequently appealed to the Tribal
Appellate Court, which on July 2, 1997 affirmed the lower Tribal
Court's May 1, 1996 ruling and analysis upholding the CDA's right
to conduct the telephone lottery. On August 22, 1997, AT&T filed
a complaint for declaratory judgment against the CDA in the U.S.
District Court for the District of Idaho. The CDA has answered
that complaint and filed a motion for partial summary judgment,
which is currently pending. The attorneys general of nineteen
states have been granted leave to submit a brief as amicus curiae
in the case with respect to the Tribal Court's interpretation of
IGRA and in support of the position taken by AT&T.
On May 28, 1997, the State of Missouri brought an action in the
Missouri Circuit Court in Kansas City against Unistar and the CDA
to enjoin the NIL's US Lottery Internet instant games offered by
the CDA and managed by Unistar. The complaint also seeks civil
penalties, attorney's fees and court costs. The complaint
alleged that the US Lottery violates Missouri anti-gaming laws
and that the marketing and promotion of the US Lottery violate
the Missouri Merchandising Practices Act. The CDA and Unistar
removed the case to the U.S. District Court for the Western
District of Missouri, which denied the State's subsequent motion
to remand the case back to the state court. The Court also
subsequently granted a motion to dismiss by CDA based on
sovereign immunity. The Court denied the motion to dismiss
Unistar based on sovereign immunity, although the Court indicated
it might reconsider that decision. Unistar filed a motion for
reconsideration of its motion for dismissal. The State of
Missouri has appealed to the dismissal of the CDA to the Eighth
Circuit Court of Appeals.
On January 28, 1998, the State of Missouri sought to dismiss
voluntarily the existing case against Unistar and filed the next
day, a new action against the Company, Unistar and two tribal
officials, with essentially the same allegations, in a state
court in a different district. The State obtained a temporary
restraining order from a state judge enjoining the marketing of
the Internet and telephone lottery in the State of Missouri. On
February 5, 1998, the U.S. District Court for the Eastern
District of Missouri ruled that this second case also should be
heard in federal court, transferred the second case to the
Western District of Missouri, where the original case had been
filed, and dissolved the state court's temporary restraining
order, effective February 9, 1998. A motion to dismiss the
second case based on the sovereign immunity of all the defendants
and a motion to abstain in favor of the jurisdiction of the CDA
Tribal Court are pending. The State of Missouri has filed an
appeal of the denial of its motion to remand the case to State
Court or in the alternative to grant a preliminary injunction.
On July 31, 1998, the District Court for the Western District of
Missouri stayed proceedings in the case pending resolution of the
pending appeals in the Eighth Circuit and pending federal
legislation.
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On September 15, 1997, the State of Wisconsin filed an action in
the Wisconsin State Circuit Court for Dane County against the
Company, Unistar and the CDA, to permanently enjoin the US
Lottery offered by the Tribe on the Internet and managed by
Unistar. The complaint alleges that the offering of the US
Lottery violates Wisconsin anti-gambling laws and that legality
of the US Lottery has been misrepresented to Wisconsin residents
in violation of state law. In addition to an injunction, the
suit seeks restitution, civil penalties, attorneys' fees and
court costs. The Company, Unistar and the CDA have removed the
case to the U.S. District Court in Wisconsin. On February 18,
1998, the District Court dismissed the Tribe from the case based
on sovereign immunity and dismissed the Company based on the
State's failure to state a claim against the Company. Motions
to dismiss the case against Unistar were denied. Unistar has
appealed the denial of its motion to dismiss to the Seventh
Circuit Court of Appeals. The State of Wisconsin is appealing
the dismissal of the Tribe.
The Company believes, based on consultation with and opinions
rendered by outside legal counsel, that the favorable rulings of
the tribal courts will be affirmed by the Idaho federal court.
The Company believes that Unistar also will prevail in the
Missouri and Wisconsin lawsuits. However, there is no assurance
of such a legal outcome.
In July 1998, the Senate passed an appropriations bill to fund
the departments of Commerce, Justice and State for fiscal 1999
which included as an amendment a ban on Internet gaming offered
by Senators John Kyl from Arizona and Richard Bryan from Nevada.
The measure would have criminalized certain Internet gaming
activities but would have allowed states to create their own
"closed loop" intrastate computer gambling networks. Congress
adjourned without enacting any version of this Internet gaming
ban into law.
The Company is supporting efforts to include exceptions in any
Internet gaming bill for gaming conducted by an Indian tribe that
is authorized by IGRA. If legislation is signed into law which
prohibits Internet gaming without such an exception, it would
have a material adverse effect on Unistar's business as it
relates to the NIL. However, the Company believes that if the
final legislation includes exceptions for states to create their
own computer gambling networks, it will create opportunities for
Unistar to service this potential market with its ELT system
(enhanced lottery terminals).
There are also market 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. In the
event that the telephone and Internet lotteries do not attain the
level of market acceptance anticipated by the Company, the
Company would have to reevaluate its investment in Unistar.
Funding of Unistar
Funding for Unistar capital expenditures, including the computers
and software to build the telecommunications system, is being
capitalized and depreciated over the life of the management
agreement. The guaranteed monthly advance of $25,000 to the CDA,
which began in January 1996, will be reimbursed when the NIL is
making profit distributions to Unistar. In addition, the Company
has capitalized other fundings, consisting primarily of direct
Unistar expenses, professional fees and other expenses, which the
Company believes are reimbursable in accordance with the terms of
the management agreement. Cumulative funding as described above
totals $12.2 million ($4.8 million for the nine-month period
ended September 30, 1998) and is reflected in property and
equipment or other non-current assets, as appropriate.
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The Company has also funded legal and other accrued liabilities
assumed as part of the acquisition of Unistar totaling, on a
cumulative basis, $3.1 million ($0.7 million for the nine-month
period ended September 30, 1998). Such cash flows, which were
previously reflected as part of the change in working capital
items, are now reflected as part of the investment in Unistar in
the statement of cash flows. Prior year amounts have been
reclassified to conform to the current year's presentation. The
investment in Unistar reflected on the statement of cash flows
includes the deferred charges and assumed liabilities noted above
for a cumulative total of $15.3 million ($5.5 million for the
nine-month period ended September 30, 1998). Since inception,
the Company has also funded various Unistar expenses totaling
$1.8 million ($0.3 million for the nine-month period ended
September 30, 1998, excluding depreciation and amortization),
which are reflected in the Company's consolidated net income.
Cumulative cash expenditures on Unistar, including Unistar
expenses, amounts paid on capital lease obligations, and
approximately $0.6 million related to the development of the
enhanced lottery terminal (ELT) business, total $17.1 million as
of September 30, 1998.
During the three-month period ended June 30, 1998, certain
provisions in the Management Agreement were clarified based upon
the current operational status of the NIL. These provisions
relate to whether or not certain pre- and post-acquisition costs
are reimbursable from the NIL. Accordingly, during that period,
$5.0 million was reclassified to other assets representing
additional amounts reimbursable from the NIL, offset by a $2.8
million reduction in goodwill (reflecting pre-acquisition costs)
and $2.2 million in deferred revenue (reflecting post-
acquisition costs). These adjustments reflected the additional
expenditures receivable from the NIL and will be repaid when the
NIL is making profit distributions.
The Company expects to fund an additional $3 million through the
end of 1998. These costs primarily consist of various NIL and
Unistar operating expenses, including personnel-related costs,
advertising and legal expenses. The Company is also required to
make a guaranteed payment of $300,000 per year to the CDA, which
is included in the above estimates. The Company expects it will
be able to obtain additional financing for these costs, if
needed.
In February 1997, the Company signed agreements with Virtual
Gaming Technologies (formerly Internet Gaming Technologies (IGT))
and CasinoWorld Holdings, Ltd. (CWH). The agreements required
the Company to invest $700,000 in IGT common stock in September
1996 under a previous agreement. In addition, the Company was
granted 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. CWH provided project management services overseeing the
development of the software for the NIL, with the Company
contracting independently for system software development. The
Company acquired all hardware for the system without financial
obligation by either IGT or CWH. Approximately $800,000 in
hardware costs were incurred as of
September 30, 1998.
The investment in IGT is being accounted for under the cost
method. All hardware costs incurred are being capitalized and
depreciated over the useful life of the assets. As of September
30, 1998, $2.7 million in progress payments have been made toward
the software system. Such payments are being capitalized and
depreciated over the life of the asset or term of the management
agreement, whichever is shorter.
The Company periodically evaluates the recoverability of this
investment in Unistar in accordance with the provisions of FAS
No. 121, "Accounting for the Impairment of Long-Lived Assets" by
projecting future undiscounted net cash flows for the telephone
and Internet lotteries. If the sum of such cash flows is not
sufficient to recover the Company's investment in Unistar,
projected cash flows would then be discounted and the carrying
value of Company's investment would be adjusted accordingly.
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NOTE G - UNISTAR SPINOFF
As previously announced, in April 1998, the Company's Board of
Directors determined that it would be in the best interests of
the shareholders of the Company to separate Executone and its
wholly owned subsidiary Unistar. Under the terms of the existing
preferred stock, such a separation would cause immediate
conversion of the preferred stock into Executone Common Stock,
creating a 21% dilution to Executone shareholders including 21%
dilution of the common shareholders' interest in Unistar after
the separation. On August 12, 1998, Executone reached an
agreement with the preferred stockholders of Executone whereby
they will receive a 15% interest in Unistar upon separation and
shares of a new Unistar preferred stock that will be contingently
convertible into Unistar common stock in an amount, including the
common stock initially issued to them and giving effect to the
conversion, equal to 34% of the Unistar common stock. The new
Unistar preferred stock will retain many of the same rights as
the Executone preferred stock including convertibility into
additional shares of Unistar if the original milestones are met
and dividend rights. As a result of the agreement, the preferred
stockholders will not receive any shares of Executone in the
separation.
The Company intends to separate Unistar by a distribution to its
common shareholders of rights to purchase 85% of the common stock
of Unistar. Unistar currently plans to distribute one right for
each share of Executone common stock outstanding. Each five
rights will entitle the holder to purchase one share of Unistar
common stock upon payment of the exercise price of $.05 per right
or a total of $.25 per Unistar common share. Upon separation of
Unistar, the Company will provide a capital contribution to
Unistar which will be sufficient to fund continuing operations.
Approximately half of the anticipated cash contribution will be
financed from the Company's working capital and the rest will be
financed through the rights offering. The Company expects there
will be a public market for these rights in the event a shareholder
does not wish to exercise the right during the 30-day exercise
period. An investment group controlled by some of the Executone
preferred shareholders has agreed to exercise, at the same exercise
price, any rights that remain unexercised at the end of the exercise
period.
The Company has agreed to continue to provide financial support
to Unistar until the date of closing of the Offering (the
"Closing Date"), which support will not exceed an average sum of
$1.5 million per quarter in accordance with the terms of the
Share Exchange Agreement. The Company will also provide to
Unistar, at the Closing Date, in accordance with the terms of the
Share Exchange Agreement, $3.0 million in cash, and will assume
responsibility for, and pay when due, expenses incurred by
Unistar but not yet paid, provided, however, that the maximum of
such expenses shall not exceed $500,000. The purpose of this
contribution from Executone is to provide Unistar with sufficient
funds to continue as a going concern until Unistar achieves a
break-even cash flow. In addition, Unistar will receive an
estimated $2.5 million in proceeds from the Offering.
The Company currently expects the separation of UniStar to be
completed during the first quarter of 1999.
NOTE H - SPECIAL CHARGES
As a result of actions taken by the Company to improve its
business processes, including significant changes in its senior
management structure, the Company has recorded a total of $5.3
million in reorganization and other special charges during the
nine-month period ended September 30, 1998.
During the three-month period ended September 30, 1998, the
Company recorded $0.9 million in loan forgiveness, severance and
benefit continuation costs associated with changes in senior management,
12
<PAGE>
along with the associated recruiting costs for replacements.
During the three-month period ended June 30, 1998, the Company
recorded approximately $1.1 million in severance and benefit
continuation costs associated with actions taken to de-layer its
senior management. In addition, a sublessee notified the Company
that it would be terminating its sublease agreement for office
space for which the Company is the lessee. As a result, the
Company provided $1.0 million to reflect the rental cost during
the period the space is expected to be vacant.
During the three-month period ended March 31, 1998, the Company
recorded $1.5 million in severance costs for its former Chief
Executive Officer (CEO) and recruiting expenses for the new CEO.
It also recorded $0.8 million for severance and benefits
resulting from a workforce reduction during January and February
1998 and facility closure costs.
NOTE I - AMENDED DISTRIBUTOR AGREEMENT
On March 30, 1998, the Company entered into an Amended and
Restated Distributor Agreement (the "Amended Agreement") with
Claricom, purchaser of the direct sales offices and the Company's
largest distributor. The Amended Agreement, effective April 1,
1998 and continuing through December 31, 2001, provides, among
other things, that Claricom will be a non-exclusive distributor
of the Company's telephony products and that Claricom can market
products competing with those sold by the Company. Upon
execution of the Amended Agreement, Claricom released to the
Company the $5 million plus interest being held in escrow to
satisfy potential indemnity claims under the 1996 Asset Purchase
Agreement and waived all potential contract claims under the
prior distributor agreement.
NOTE J - OTHER MATTERS
For the nine-month periods ended September 30, 1998 and 1997,
respectively, the Company made cash payments of approximately
$1.7 million and $1.4 million for interest expense on
indebtedness.
During the nine-month periods ended September 30, 1998 and 1997,
respectively, noncash financing activities included capital lease
obligations incurred in connection with computer software and
equipment acquisitions of $0.8 million and $1.6 million.
The Company derives more than 10% of its revenue from a single,
independent distributor. Revenues from the distributor were
$14.2 million and $24.3 million, respectively, for the nine-month
periods ended September 30, 1998 and 1997 (see Note I). Refer to
the Consolidated Statements of Cash Flows for information on all
cash-related operating, investing and financing activities.
FAS No. 130, "Reporting Comprehensive Income", became effective
for fiscal years beginning after December 15, 1997. This
Statement does not apply to the Company because it had no items
of other comprehensive income in any of the periods presented.
In April 1998, the American Institute of Certified Public
Accountants issued Statement of Position 98-5, "Reporting on the
costs of Start-Up Activities" (SOP 98-5). SOP 98-5 requires
costs of start-up activities and organization costs to be
expensed as incurred. In addition, the pronouncement requires
that, effective January 1, 1999, previously capitalized start-up
costs be expensed and classified as a cumulative effect of a
change in accounting principle. The Company anticipates that
approximately $2.0 million in start-up costs relating to Unistar,
currently classified as assets, will be written off effective
January 1, 1999 in accordance with this new pronouncement, if
the separation of the Unistar business is not completed before
the end of 1998.
13
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In the third quarter of 1998, the Company put in motion
significant changes in its business practices, which are intended
to improve the Company's performance in future periods. While
some of these changes had an unfavorable impact on the Company's
financial results for the quarter, management believes these
actions are necessary to achieve the intended future
improvements.
Revenues for the third quarter of 1998 were $33.6 million, with an
operating loss of $3.2 million and a net loss of $2.1 million or
($.04) per common share. These results include a $0.9 million
charge, covering severance and benefits continuation costs (see
"Special Charges"). Revenues for the third quarter of 1997 were
$42.9 million, with operating income of $1.5 million and net
income of $0.8 million or $.02 per common share. The decrease in
revenue and, ultimately in profitability, was primarily
attributable to lower revenues generated by the Company's
independent distribution channel, including Claricom, the
Company's largest distributor, and the Healthcare Communications
group.
For 1998 to-date, revenues were $102.2 million, with an operating
loss of $9.2 million and a net loss of $6.4 million or ($0.13) per
share. The results include $5.3 million in special charges. The
operating loss was $3.9 million, excluding the special charges.
For the same period last year, revenues were $116.7 million, with
an operating loss of $1.5 million and a net loss of $1.1 million
or ($0.02) per share. Revenue decreased 12% year over year and is
primarily attributable to lower revenue from independent distribution
channel.
Subsequent to September 30, 1998, the Company negotiated a
significant settlement with a former supplier of the Company's
videoconferencing equipment, for $5 million in cash. The
settlement will be recorded in the fourth quarter as a gain. The
proceeds from the settlement, which were received in the fourth
quarter, were used to reduce outstanding bank borrowings.
The following discussion and analysis explains trends in the
Company's financial condition and results of operations for the
three-month and nine-month periods ended September 30, 1998
compared with the same periods last year. It is intended to help
shareholders and other readers understand the dynamics of the
Company's business and the key factors underlying its financial
results. This discussion should be read in conjunction with the
consolidated financial statements and notes included elsewhere in
this Form 10-Q, and with the Company's audited consolidated
financial statements and notes thereto for the year ended
December 31, 1997. Certain statements in this management's
discussion and analysis constitute forward-looking statements
within the meaning of the U.S. Private Securities Litigation
Reform Act of 1995 that are based on current expectations,
estimates and projections about the industries in which the
Company operates, management's beliefs and assumptions made by
management. Such forward-looking statements involve known and
unknown risks, uncertainties, and other factors which may cause
the actual results, performance or achievements of the Company,
or industry results, to be materially different from any future
results, performance, or achievements expressed or implied by
such forward-looking statements. Such risks, uncertainties and
assumptions include, among others, the following: general
economic and business conditions; demographic changes; import
protection and regulation; rapid technology development and
changes; timing of product introductions; the mix of
products/services; industry capacity and other industry trends;
and the ability of the Company to attract and retain key
employees.
14
<PAGE>
RESULTS OF OPERATIONS
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's UniStar Entertainment indirect subsidiary has the
exclusive right to design, develop and manage the National Indian
Lottery (NIL). The Company's products are sold under the
EXECUTONE, INFOSTAR, IDS, LIFESAVER and INFOSTAR/ILS brand
names through a national network of independent distributors and
company direct sales and service employees.
Revenues are derived from product sales to distributors, direct
sales of healthcare products, and direct sales to national
accounts and 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, national account and government
customers.
REVENUE
Revenue, by business, was distributed as follows (in millions):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
9/30/98 9/30/97 9/30/98 9/30/97
<S> <C> <C> <C> <C>
Computer Telephony $ 25.7 $ 32.6 $ 74.9 $ 87.1
Healthcare 7.9 10.3 27.3 29.6
$ 33.6 $ 42.9 $ 102.2 $ 116.7
</TABLE>
Computer Telephony
Computer Telephony products range from PBX's (private branch
exchanges) for small to medium-sized businesses to standards-
compliant computer telephony applications, LAN and Internet-based
applications, including voice mail, unified messaging, automatic
call distribution (ACD), predictive dialing and wireless
communications. This business targets the under-400-extension
market segment. These products are marketed through independent
distribution and direct sales, with the direct sales effort
focused on product and service sales to National and Government
Accounts.
In the third quarter of 1998, Computer Telephony revenues
decreased $6.9 million, or 21%, compared to the same quarter
last year. In the wholesale channel, the Company stopped offering
the distributor-focused sales incentives at the end of each
quarter, which often resulted in inflated distributor inventory
and excessive receivables. Future incentives will be directed at
stimulating end user demand, with the intent of creating value
for both the end user and the distributor. An initial result of
this new approach is that third quarter shipments to our
independent sales channel, excluding Claricom, decreased $2.6
million compared to the third quarter of 1997. Management's
intent for the new approach is to gain a clearer view of end user
demand for the Company's products, which is expected to allow
more effective management of the business.
The Company is also taking steps to strengthen its relationship
with Claricom. During the third quarter of 1998, Claricom again
purchased significant volumes at $6.4 million for the quarter.
Although this is
15
<PAGE>
$3.9 million less than the same quarter in 1997, it is an
increase of $3.2 million over the second quarter of 1998 and the
highest level since 1997 when Claricom purchases were influenced
by the old distributor contract, which required certain purchase
levels to maintain exclusive distribution rights in its
territories.
For 1998 to-date, the decrease in revenue compared to the same
period in 1997 is primarily due to lower shipments to Claricom.
Healthcare
Healthcare products comprise nurse call systems, intercoms and
room status indicators as well as more sophisticated patient
reporting systems, infrared locating systems and wireless
technologies. Customers include hospitals, surgical centers,
nursing homes and assisted living centers.
Healthcare revenue for the third quarter of 1998 decreased $2.4
million, or 23% compared to the same period in 1997. For 1998 to-
date, revenue decreased $2.3 million over the same period in
1997. These decreases were primarily the result of a change in
business practice whereby the Company will no longer ship
equipment to a customer site until it can complete each
contracted installation phase, at which time revenue will be
recognized. While there was a short-term impact on third quarter
revenue recognition, this new business practice also resulted in
a $0.5 million increase in the Healthcare backlog at the end of
September 1998 and is expected to shorten the Company's cash
conversion cycle. At the same time, the order rate for new
installations declined as competitors used the Company's efforts
to market this business for sale earlier in the year to create
concerns with potential customers about the Company's commitment
to this market and to recruit certain of the Company's sales and
operations employees.
GROSS PROFIT
Gross profit margin for the third quarter was $10.4 million or
31.1 % of revenue, compared to $14.9 million or 34.7% of revenue
for the same quarter last year. Lower margins reflect lower
fixed cost absorption due to lower volume and unfavorable channel
and product mix, resulting from the changes in our quarter end
sales incentives to independent distributors and lower revenue
from the Healthcare business.
For 1998 to-date, gross profit was $33.1 million or 32.4% of
revenue compared to $38.9 million or 33.3% of revenue for the same
period in 1997. The decrease is primarily due to lower volume.
OPERATING EXPENSES
Product development expenses were $2.4 million for the third
quarter of 1998, a decrease of approximately $0.8 million from the
same quarter last year. The decrease is a result of cost
reduction efforts and lower headcount. Product development costs
are expected to remain at the current level for the fourth quarter
of 1998. The same trends are evident on a year-to-date basis
compared to the same period in 1997.
Selling, general and administrative expenses were $10.3 million,
or 30.7% of revenue for the third quarter of 1998, compared to
$10.2 million or 23.7% of revenue for the third quarter of 1997.
Management believes these costs will decrease by approximately
$0.6 million from the current level after the separation of the
Unistar business. The unfavorable variances generated by Unistar
activities, which relate to the startup of Unistar's Intranet
business and legal expenses, along with higher employee benefit
costs, were partially offset by lower selling expenses. Year-to-
date, selling, general and
16
<PAGE>
administrative expenses were $29.5 million, or 28.9% of revenues,
compared to $30.4 million, or 26.1% of revenue for same period in
1997. The decrease is primarily a result of lower selling
expense.
SPECIAL CHARGES
During the third quarter, the Company recorded an $0.9 million
special charge consisting of loan forgiveness and severance costs
associated with changes in the Company's senior management
structure, along with recruiting costs for replacements. The
Company recorded an additional $4.4 million during the first and
second quarters to cover other costs of changes to the senior
management group, along with a charge for idle space on leased
premises.
INTEREST AND OTHER EXPENSE
Interest expense for the quarter and year-to-date increased
compared to the same periods in 1997 due to higher levels of bank
borrowings in 1998. Other income, net, for the quarter and year-
to-date decreased compared to the same periods in 1997 due to
lower interest income on invested cash and lower royalty income.
UNISTAR
On December 19, 1995, the Company acquired 100% of the common
stock of Unistar Gaming, a privately-held company which, through
its wholly-owned subsidiary, UniStar Entertainment, Inc., has an
exclusive five-year contract to design, develop, finance and
manage the National Indian Lottery (NIL) for the Coeur d'Alene
Tribe of Idaho ("CDA" or "the Tribe"). See Note F of the Notes
to Consolidated Financial Statements for the terms of the
agreement with the Tribe.
Unistar's original mission was to develop, install and manage a
National Indian Lottery accessible by telephone. Unistar
developed a state-of-the-art Internet and telephone-based system
providing both instant and draw lottery games, full player
accounting and tracking and automatic credit or debit card
clearance. As a hedge against potential adverse legal and
political decisions, Unistar began investigating alternative
applications and markets for its technology. Unistar has
developed an Intranet option whereby the games can be played from
dedicated kiosks (enhanced lottery terminals or "ELT's") located
anywhere and connected to a central system. Unlike slot machines
and Video Lottery Terminals (VLT's), the ELT system is a lottery
system and can be deployed by a state lottery under their
existing authority without additional legislation. The instant
games still offer similar play action. Since growth in lottery
revenues has slowed down and actually declined in some cases, a
number of state lotteries are considering the deployment of the
Unistar ELT system as an extension of their lottery product
lines. The Company's efforts in this area have included
presentations to several states discussing the potential
utilization of this system.
The Company has made a significant investment in Unistar, which
upon acquisition created 8% dilution to the Company's
stockholders and, subsequent to the acquisition, has required an
additional $17.1 million in cash. During the nine-month period
ended September 30, 1998, the Company invested $5.8 million as
part of the cost to develop the software systems, building and
other costs related to the project, most of which have been
recorded as assets on the balance sheet. The total Unistar
investment as of September 30, 1998 is $31.0 million, including
$13.0 million in intangibles and the remainder consisting of
property and equipment and other non-current assets, along with
funded Unistar expenses. Management believes this investment is
justified based upon the potential returns.
17
<PAGE>
During the second quarter of 1998, certain provisions in the
Management Agreement were clarified based upon the current
operational status of the NIL. These provisions relate to
whether or not certain pre- and post-acquisition costs are
reimbursable from the NIL. Accordingly, during the second
quarter of 1998, $5.0 million was reclassified to other assets
representing additional amounts reimbursable from the NIL, offset
by a $2.8 million reduction in goodwill (reflecting pre-
acquisition costs) and $2.2 million in deferred revenue
(reflecting post-acquisition costs). These adjustments reflected
the additional expenditures receivable from the NIL, to be repaid
when the NIL is making profit distributions.
The NIL conducts business under the US Lottery trade name. The US
Lottery began test marketing its Instant ticket games on the
Internet in July 1997 and, on April 3, 1998, announced five new
instant games on the Internet. On January 20, 1998, the US
Lottery launched its first Draw game, the "Super6", a national
weekly draw lottery. Tickets for the Super6 can be purchased
either over the Internet or by telephone. In addition, the US Lottery
recently launched a series of "Pick 3" draw games, all of which are
Internet and telephone-accessible. As of September 30, 1998, the
registered base of US Lottery was approximately 32,000, an increase
of 3,000 during the last three months. NIL revenue also has grown
significantly over the last five quarters, as follows: 9/30/97 -
$538,000, 12/31/97 - $1,254,000, 3/31/98 - $2,923,000, 6/30/98 -
$3,570,000, 9/30/98 - $4,168,000. As an early stage startup business,
the NIL has yet to generate a profit. As a result, Unistar has not
recognized any revenue under the terms of the Management
Agreement as of September 30, 1998.
See Note F of the Notes to Consolidated Financial Statements for
a discussion of legal issues and legislative proposals relating
to the Unistar business.
YEAR 2000
The Company has completed a review of its computer systems to
identify systems that could be affected by the "Year 2000" issue.
Systems that do not properly recognize such information could
generate erroneous data or fail. Although the Company estimates
the cost to resolve the Year 2000 issue through its current
software system is less than $0.5 million, it has decided as part
of its long-term information systems plan to convert to a new and
more comprehensive software system. The new system will cost
approximately $2.0 million, including installation and data
conversion costs. These costs will be capitalized and
depreciated over the expected service life of the system
beginning in 1999. Management believes that the conversion to
new software, which is currently underway and on schedule, will
resolve the Year 2000 issue. The few systems that will not be
replaced by the new software have either already been converted
or will be made compliant by the end of 1999 at minimal cost to
the Company. In the event that the conversion to the new
software system is not completed timely, the Year 2000 problem
may have a material impact on the operations of the Company. For
non-IT (non-information technology that typically includes
imbedded technology such as micro-controllers) systems, the
Company has reviewed its production and other equipment and
determined that there are no significant Year 2000 issues. The
Company has also begun seeking representations and assurances
from its key vendors regarding timely Year 2000 compliance.
Other than such surveys of its vendors, the Company has not made
an assessment as to whether any of its suppliers or service
providers will be affected by the date change. Should the
efforts of suppliers or service providers for the Company to
address the Year 2000 issue prove to be inadequate, the Company's
business, financial condition and results of operations may be
adversely impacted. The Company does not have a contingency plan
in place to deal with unforeseen conversion failures. Such a
plan is currently being developed.
18
<PAGE>
OTHER
On March 30, 1998, the Company entered into an Amended and
Restated Distributor Agreement with Claricom (the "Amended
Agreement"). The Amended Agreement, effective April 1, 1998 and
continuing through December 31, 2001, provides, among other
things, that Claricom will be a non-exclusive distributor of the
Company's telephony products and that Claricom can market
products competing with those sold by the Company. Upon
execution of the Amended Agreement, Claricom released to the
Company the $5 million plus interest being held in escrow to
satisfy potential indemnity claims under the 1996 Asset Purchase
Agreement and waived all potential contract claims under the
prior distributor agreement.
The Amended Agreement provides the opportunity to supplement
sales in the Claricom territories with additional distribution.
Other distributors are in the process of being identified to sell
the Company's products in certain parts of Claricom's territory.
The Company estimates it will take six months to a year from the
time a new distributor is assigned a territory to achieve a level
of sales productivity comparable to established distributors.
FAS No. 130, "Reporting Comprehensive Income" became effective
for fiscal years beginning after December 15, 1997. This
Statement does not apply to the Company because it had no items
of other comprehensive income in any of the periods presented.
In April 1998, the American Institute of Certified Public
Accountants issued Statement of Position 98-5, "Reporting on the
costs of Start-Up Activities" (SOP 98-5). SOP 98-5 requires
costs of start-up activities and organization costs to be
expensed as incurred. In addition, the pronouncement requires
that, effective January 1, 1999, previously capitalized start-up
costs be expensed and classified as a cumulative effect of a
change in accounting principle. The Company anticipates that
approximately $2.0 million in start-up costs relating to Unistar,
currently classified as assets, will be written off effective
January 1, 1999 in accordance with this new pronouncement, if the
separation of the Unistar business is not completed before the
end of 1998.
LIQUIDITY AND CAPITAL RESOURCES
On August 14, 1998, the Company entered into a new credit
facility with Fleet Capital Corp. The new credit facility
provides a maximum overall credit line of $30 million consisting
of a revolving line of credit for direct borrowings, along with
standby and trade letters of credit. Direct borrowings and
letter of credit advances are made available pursuant to a
formula based on the levels of eligible accounts receivable and
inventories. To minimize interest on the revolving line of
credit, the Company has the option to borrow based upon an
adjusted prime borrowing rate or an adjusted Eurodollar rate.
The credit facility is secured by substantially all of the
Company's assets and has a five-year term. Under the terms of
the new credit facility, the Company had approximately $6.7
million in borrowings available as of September 30, 1998. The
Company's liquidity, represented by cash, cash equivalents and
cash availability was $9.5 million as of September 30, 1998
compared to $28 million as of December 31, 1997.
At September 30, 1998 and December 31, 1997, cash and cash
equivalents amounted to $2.8 million and $7.7 million,
respectively, a decrease of $4.9 million. The decrease was
mainly due to the funding of the Companies year-to-date operating
losses, along with additional expenditures by Unistar for the
funding of NIL operations and the development of the Intranet
business.
19
<PAGE>
For the nine-month period ended September 30, 1998, excluding the
March 1998 release of $5.1 million held in escrow since the sale
of the direct offices in 1996, $10.7 million of cash was used to
fund operating activities, including the payment of approximately
$3.0 million in special charges. During the same period in 1997,
cash used by operating activities was $8.8 million
Cash used by investing activities totaled $6.9 million for the
year-to-date, compared to $6.4 million for the same period last
year. Spending primarily related to $5.8 million in expenditures
for Unistar activities, an increase of $1.8 million over the same
period in 1997. This was partially offset by lower capital and
other expenditures.
The Company generated $7.6 million in cash from financing
activities during 1998 to-date. The primary source of cash was
borrowings of $8.4 million, compared to no borrowings for the
same period in 1997. In 1997, the Company had sufficient cash on
hand to finance its operating requirements. For the same period
in 1997, the Company used $5.6 million in cash, primarily to
repurchase 2.1 million shares of the Company's common stock for
$5.4 million.
Total debt at September 30, 1998 was $24.2 million, an increase
of $8.6 million from $15.6 million at December 31, 1997. The
increase is a result of $8.4 million in bank borrowings from the
Company's existing credit facility, capital lease obligations of
$0.8 million incurred in connection with the acquisition of a new
computer software system and miscellaneous computer and
production equipment, and an increase to the carrying value of
the convertible subordinated debentures of $0.2 million due to
accretion. Debt was reduced by the repayment of $0.8 million in
capital lease obligations incurred in connection with equipment
and software acquisitions.
The Company believes that borrowings available under the credit
facility and cash flow from operations will be sufficient to meet
working capital and other requirements for the next twelve
months.
20
<PAGE>
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
See Note F of the Notes to Consolidated Financial
Statements in Part I, Item 1 for details on legal
proceedings.
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 (see Note D of Notes to
Consolidated Financial Statements in Part I,
Item 1).
b) Reports on Form 8-K
None.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this Report to be signed on
its behalf by the undersigned thereunto duly authorized.
EXECUTONE Information Systems, Inc.
Dated: November 13, 1998 /s/ Stanley J. Kabala
Stanley J. Kabala
Chairman, President and Chief
Executive Officer
Dated: November 13, 1998 /s/ Edward W. Stone
Edward W. Stone
Senior Vice President and Chief
Financial Officer
22
<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 September 30, 1998 and is qualified in it's
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,811
<SECURITIES> 0
<RECEIVABLES> 30,445
<ALLOWANCES> 1,160
<INVENTORY> 22,975
<CURRENT-ASSETS> 59,067
<PP&E> 23,070
<DEPRECIATION> 12,236
<TOTAL-ASSETS> 139,643
<CURRENT-LIABILITIES> 41,108
<BONDS> 23,380
0
7,300
<COMMON> 498
<OTHER-SE> 66,394
<TOTAL-LIABILITY-AND-EQUITY> 139,643
<SALES> 102,215
<TOTAL-REVENUES> 102,215
<CGS> 69,081
<TOTAL-COSTS> 69,081
<OTHER-EXPENSES> 42,352
<LOSS-PROVISION> 478
<INTEREST-EXPENSE> 1,710
<INCOME-PRETAX> (10,582)
<INCOME-TAX> (4,232)
<INCOME-CONTINUING> (6,350)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,350)
<EPS-PRIMARY> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
