EXECUTONE INFORMATION SYSTEMS, INC. - 10-Q (3/31/99)
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, 1999
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 28, 1999 was 62,848,347.
<PAGE>
INDEX
EXECUTONE Information Systems, Inc.
Page #
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
March 31, 1999 and December 31, 1998. 3
Consolidated Statements of Operations -
Three Months Ended March 31, 1999 and 1998. 4
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1999 and 1998. 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
2
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
(In thousands, except for share amounts) 1999 1998
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 911 $ 1,482
Accounts receivable, net of
allowance of $1,563 and $1,720 24,006 25,531
Inventories 23,610 24,753
Prepaid expenses and other current assets 4,869 4,966
Total Current Assets 53,396 56,732
PROPERTY AND EQUIPMENT, net 10,327 10,604
INTANGIBLE ASSETS, net 3,763 3,795
DEFERRED TAXES 22,811 22,811
OTHER ASSETS 8,747 16,363
$ 99,044 $ 110,305
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 1,038 $ 856
Accounts payable 13,184 18,093
Accrued payroll and related costs 4,140 3,969
Accrued liabilities 13,760 15,046
Deferred revenue and customer deposits 2,344 2,439
Total Current Liabilities 34,466 40,403
LONG-TERM DEBT 22,641 23,693
OTHER LONG-TERM LIABILITIES 2,245 2,445
TOTAL LIABILITIES 59,552 66,541
STOCKHOLDERS' EQUITY:
Common stock: $.01 par value; 80,000,000 shares
authorized; 49,438,578 and 49,834,807 issued
and outstanding 494 498
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 70,386 71,624
Accumulated deficit (38,688) (35,658)
Total Stockholders' Equity 39,492 43,764
$ 99,044 $ 110,305
The accompanying notes are an integral part of these consolidated
balance sheets.
</TABLE>
3
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EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
(In thousands, except for per share amounts) March 31,
1999 1998
<S> <C> <C>
REVENUES $ 31,749 $ 33,903
COST OF REVENUES 21,376 23,065
Gross Profit 10,373 10,838
OPERATING EXPENSES:
Product development and engineering 2,365 2,513
Selling, general and administrative 11,468 9,625
Provision for special charges --- 2,344
13,833 14,482
OPERATING LOSS (3,460) (3,644)
INTEREST EXPENSE (753) (508)
OTHER INCOME, net 1,183 23
LOSS BEFORE INCOME TAXES (3,030) (4,129)
INCOME TAX BENEFIT --- (1,651)
NET LOSS $ (3,030) $ (2,478)
LOSS PER SHARE $ (0.06) $ (0.05)
AVERAGE DILUTED COMMON SHARES 49,529 49,698
The accompanying notes are an integral part of these consolidated
statements.
</TABLE>
4
<PAGE>
EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
(In thousands) March 31,
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,030) $ (2,478)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 874 877
Income tax benefit not currently receivable --- (1,651)
Noncash items, including noncash interest
expense, noncash provision for losses on
accounts receivable and income from
equity investment 117 152
Gain on distributor note and warrant redemption (1,161) ---
Change in working capital items:
Accounts receivable 1,610 3,808
Inventories 1,115 (3,115)
Accounts payable and accruals (5,065) 1
Restricted cash --- 5,084
Other working capital items 80 1,169
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (5,460) 3,847
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (210) (241)
Investment in eLottery (1,404) (2,428)
Proceeds from distributor note and
warrant redemption 9,261 ---
Other, net 120 (230)
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 7,767 (2,899)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments under revolving credit facility (1,313) ---
Repayments of other long-term debt (263) (291)
Repurchase of stock (1,341) ---
Proceeds from issuance of stock 39 86
NET CASH USED BY FINANCING ACTIVITIES (2,878) (205)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (571) 743
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 1,482 7,727
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 911 $ 8,470
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
5
<PAGE>
EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - NATURE OF THE BUSINESS AND FORMATION OF THE COMPANY
EXECUTONE Information Systems, Inc. (the Company) develops,
markets and supports voice and data communications and
information systems. Products and services include telephone
systems, voice mail systems, inbound and outbound call center
systems and specialized healthcare communications and workflow
management systems. Products and services are sold under the
EXECUTONE, INFOSTAR, IDS, LIFESAVER and INFOSTAR/ILS brand names
through a national network of independent distributors and direct
sales and service employees. The Company's products are
manufactured primarily in the United States, Malaysia, China and
the Dominican Republic.
The Company's eLottery subsidiary (formerly named Unistar Gaming
Corp.) develops, provides and maintains Internet, intranet and
telephone communications, accounting, database and other
applications and services for use by the domestic and
international lottery market. eLottery's UniStar Entertainment
subsidiary has the exclusive right to design, develop and manage
the National Indian Lottery (NIL) of the Coeur d'Alene Tribe of
Idaho (CDA). The NIL was operational beginning in January 1998.
However, in response to an adverse legal opinion on December 17,
1998, eLottery and the CDA terminated the operations of the NIL
and the US Lottery telephone and Internet operations managed by
eLottery.
NOTE B - BASIS OF PRESENTATION
The accompanying consolidated financial statements include the
accounts of the Company and its subsidiaries. In consolidating
the accompanying financial statements, all significant
intercompany transactions have been eliminated. Investments in
affiliated companies owned more than 20%, but not in excess of
50%, are recorded under the equity method.
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 three-month periods ended March 31, 1999 and 1998, the
Company made cash payments for income taxes of approximately
$51,000 and $54,000, 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 periods. Common stock
equivalents, the convertible preferred stock and the convertible
debentures which are antidilutive have been excluded from the
computations.
A reconciliation of the Company's loss per share calculations for
the three-month periods ended March 31, 1999 and 1998, 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 March 31, 1999:
Basic and Diluted Loss Per Share:
Net Loss $(3,030) 49,529 $(0.06)
For the three months ended March 31, 1998:
Basic and Diluted Loss Per Share:
Net Loss $(2,478) 49,698 $(0.05)
</TABLE>
The Company's Convertible Subordinated Debentures are convertible
into approximately 1.5 million shares of common stock as of March
31, 1999. 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. Incremental common shares assumed to be issued for
stock options totaling 540,000 and 61,000 shares as of March 31,
1999 and 1998, respectively, were not included in the computation
of diluted earnings per share due to the net losses for both
periods. Options to purchase 783,000 and 1.2 million shares of
common stock as of March 31, 1999 and 1998, respectively, were
not included in the computation of diluted earnings per share
because the exercise price was greater than the average market
price of the shares of common stock.
The convertible preferred stock issued in connection with the
acquisition of eLottery was antidilutive, at issuance, and has
been excluded from the above calculations. On April 13, 1999,
the convertible preferred stock was redeemed (See Note G).
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, 1999 and
December 31, 1998:
<TABLE>
<CAPTION>
(amounts in thousands) 3/31/99 12/31/98
<S> <C> <C>
Raw Materials $ 3,138 $ 2,527
Finished Goods 20,472 22,226
$ 23,610 $ 24,753
</TABLE>
7
<PAGE>
NOTE F - eLOTTERY
Acquisition
On December 19, 1995, EXECUTONE Information Systems, Inc.
("Executone') acquired 100% of the common stock of Unistar Gaming
Corp. for common and preferred stock with a combined value of
$12.7 million. In January 1999, Unistar Gaming Corp. changed its
name to eLottery, Inc. ("eLottery"). Any reference herein to
eLottery shall be deemed to include business conducted under the
name Unistar Gaming Corp. eLottery's wholly-owned subsidiary,
UniStar Entertainment, Inc. ("UniStar Entertainment") has an
exclusive five-year management agreement with the CDA, which was
the primary asset acquired, to provide design, development,
financial and management services to the NIL. The NIL was
operational beginning in January 1998. However, in response to
an adverse legal opinion on December 17, 1998, eLottery and the
CDA terminated the operations of the NIL and the US Lottery
telephone and Internet operations managed by eLottery.
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, as originally issued, was to earn dividends equal to
18.5% of the consolidated retained earnings of eLottery 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, as originally issued, was to earn dividends equal to
31.5% of the consolidated retained earnings of eLottery 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 were payable (i) when and as declared by the
Board of Directors, (ii) upon conversion or redemption of the
Series A and Series B Preferred Stock or (iii) upon liquidation.
As of March 31, 1999, no dividends had accrued to the preferred
stockholders. The Series A and Series B Preferred Stock were
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 eLottery met certain revenue and
profit parameters, the Series A Preferred Stock was convertible
for up to 4.925 million shares of common stock and the Series B
Preferred Stock was convertible for up to 8.375 million shares of
common stock (a total of 13.3 million shares of common stock).
On April 7, 1999, the Company reached agreement with the
preferred shareholders to accelerate redemption of the Series A
and Series B preferred shares, with such shares actually being
redeemed effective April 13, 1999 (see Note G).
Legal and Other Risks
On October 16, 1995, the CDA filed an action entitled Coeur
d'Alene Tribe v. AT&T Corp. in the Tribal Court, located in
Plummer, Idaho (Case No. C195-097): (i) requesting a ruling that
the NIL is legal under the federal Indian Gaming Regulatory Act
of 1988 ("IGRA"), that IGRA preempts state laws on the subject of
Indian gaming, that Section 1084 is inapplicable and that
therefore the states lack authority to issue Section 1084
notification letters to any long-distance carrier; and (ii)
seeking an injunction preventing AT&T from refusing to provide
telephone service to the NIL. The CDA took the position that all
NIL gaming activity was occurring on "Indian lands" as required
by IGRA. On February 28, 1996, the Tribal Court ruled: (i) that
all requirements of IGRA have been satisfied; (ii) that Section
1084 is inapplicable and the states lack jurisdiction to
interfere with the NIL; and (iii) that AT&T cannot refuse service
to the NIL. On July 2, 1997, the Tribal Appellate Court affirmed
the lower Tribal Court's
May 1, 1996 ruling and analysis upholding the CDA's right to
conduct the NIL telephone lottery. On
8
<PAGE>
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, to obtain a federal court ruling on the validity and
enforceability of the Tribal Court ruling. On December 17, 1998,
that Court issued an opinion and order denying the motions and
counter-claims of the CDA and granting declaratory judgment in
favor of AT&T upholding the position of AT&T and overruling the
decisions of the Tribal Courts. In response to that decision,
eLottery and the CDA terminated operations of the NIL and the US
Lottery in every state where it had been offered. The CDA has
filed a notice of appeal of the District Court decision; however,
eLottery will not participate in or fund any appeal of this
ruling.
On September 14, 1998, the CDA, eLottery and representatives of
the U.S. Department of Justice had discussions regarding a
declaratory judgment to be sought jointly from the U.S. District
Court for the District of Idaho as to whether the operation of
the NIL is legal under 18 U.S.C. Sections 1952 and 1955. eLottery
was informed that the Department of Justice views such operation
to be in violation of such statutes. The Department of Justice
proposed that the parties file a joint stipulation of facts and
cross-motions for summary judgment in the declaratory judgment
action. On December 17, 1998, the Idaho Federal District Court
issued an opinion and order granting declaratory judgment in
favor of the action styled AT&T v. Coeur d' Alene Tribe. In
response to that decision, eLottery and the CDA terminated
operation of the NIL and the US Lottery. In light of the ruling
of the U.S. District Court of Idaho and the termination of the
NIL and the US Lottery, eLottery has requested confirmation from
the Department of Justice that no further action will be taken.
On May 28, 1997, the Attorney General of the State of Missouri
brought an action in the Circuit Court of Jackson County,
Missouri, against the CDA and UniStar Entertainment seeking to
enjoin the NIL games offered by the CDA over the Internet and
managed by UniStar Entertainment. The complaint also sought
civil penalties, attorneys fees and court costs. The complaint
alleged that the NIL violates Missouri anti-gambling laws and
that the marketing of the games violates the Missouri
Merchandising Practices Act. UniStar Entertainment and the CDA
removed the case to the U.S. District Court for the Western
District of Missouri, which denied the State's subsequent motion
to remand back to the state court. The court also subsequently
granted a motion to dismiss the CDA from this case based on
sovereign immunity. The court preliminarily denied a motion to
dismiss UniStar Entertainment based on sovereign immunity,
although the court indicated it might reconsider that decision.
UniStar Entertainment filed a motion for reconsideration of its
motion for dismissal. The State of Missouri has appealed 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 federal case against UniStar
Entertainment and the next day filed a new action against
Executone, UniStar Entertainment and two tribal officials, with
essentially the same allegations, in state court. The State
obtained a temporary restraining order from a state judge against
Executone, UniStar Entertainment and two tribal officials
enjoining the marketing of the NIL Internet and telephone
lotteries 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. 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 Coeur d'Alene Tribal Court
are pending. The State of Missouri has appealed to the Eighth
Circuit the denial of its motion to remand the case to state
court or, in the alternative, to seek a preliminary injunction.
On January 6, 1999, the Eighth Circuit dismissed Missouri's
appeal from the Eastern District of Missouri. In the same
opinion, the Eight Circuit vacated the decisions from the Western
District of
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Missouri as to the CDA and remanded that case to the Western
District for a hearing on whether the Internet games of the NIL are
gaming activities "on Indian lands." The Eighth Circuit also held
valid Missouri's voluntary dismissal of UniStar Entertainment from
the Western District lawsuit. In light of the termination of the
NIL and the US Lottery, eLottery anticipates seeking dismissal of
the Missouri actions.
On September 15, 1997, the State of Wisconsin, by its Attorney
General, filed an action in the Wisconsin State Circuit Court for
Dane County against Executone, UniStar Entertainment and the CDA,
to permanently enjoin the NIL offered by the CDA on the Internet.
The complaint alleged that the offering of the NIL violates
Wisconsin anti-gambling laws and that legality of the NIL has
been misrepresented to Wisconsin residents in violation of state
law. In addition to an injunction, the suit sought restitution,
civil penalties, attorneys' fees and court costs. Executone,
UniStar Entertainment and the CDA have removed the case to the
U.S. District Court in Wisconsin. On February 18, 1998, the
District Court dismissed the CDA from the case based on sovereign
immunity and dismissed Executone based on the State's failure to
state a claim against Executone. The State of Wisconsin appealed
the dismissal of the CDA to the Seventh Circuit Court of Appeals.
A motion to dismiss the case against UniStar Entertainment on the
basis of sovereign immunity was denied. UniStar Entertainment
appealed the denial of its motion to dismiss to the Seventh
Circuit Court of Appeals. In light of the termination of the NIL
and the US Lottery, eLottery anticipates seeking dismissal of
this action.
Investment in eLottery
The Company periodically evaluates the recoverability of its
investment in eLottery 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 underlying
businesses. If the sum of such cash flows is not sufficient to
recover the Company's investment in eLottery, projected cash
flows would then be discounted and the carrying value of
Company's investment would be adjusted accordingly. On December
17, 1998, the United States District Court for the District of
Idaho ruled in the case of AT&T vs. Coeur d'Alene Tribe that the
orders previously issued by the Tribal Court upholding the
legality of the US Lottery were erroneous (see Legal and Other
Risks for a description of the litigation). In response to this
legal decision, eLottery and the CDA terminated operation of the
NIL and the US Lottery in every state where it had been offered.
Management determined that all of eLottery's assets related to
the NIL were impaired and were written down to zero during the
fourth quarter of 1998. All of the Company's remaining
investment in eLottery relates to its business as an Internet
retailer of lottery products for legally authorized entities.
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 March 31, 1999.
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 March 31,
1999, approximately $3.3 million has been spent on software
development. Such payments are being capitalized and depreciated
over a five-year period.
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NOTE G - DIVESTITURE OF CORE BUSINESSES
On March 29, 1999, the Company announced that it planned to
divest its core telephone and healthcare businesses and change
the name of the Company to eLottery, Inc. At the same time, the
Executone Board of Directors announced it had received an offer
for those businesses from a group to be led by Stanley J. Kabala,
Chairman and Chief Executive Officer of Executone, and that it
has formed a special committee of the Board to accomplish that
divestiture.
The offer from management is approximately $70 million and is
subject to a number of conditions including negotiation of a
definitive agreement, financing, the waiver or expiration of a
pre-existing right of first offer, and approval of the Executone
shareholders. A final decision as to the method of divesting
this business has not been made by the Board. The Company
expects to recognize a gain on the transaction, which may be
deferred over some undetermined future period, dependent upon the
final terms.
The proceeds of any sale will remain in the Company to help it
accelerate the achievement of eLottery's business plans. At the
conclusion of the transaction and subject to shareholder
approval, Executone would be renamed eLottery, Inc. eLottery's
activities to date have been primarily related to the
organization of the company, developing the business and gaming
systems necessary to operate a national telephone lottery and the
USlottery.com Internet site and preparing a marketing plan for
selling its technology to entities licensed to sell lottery
tickets. With the termination of operations of the NIL and the
divestiture of the core telephony and healthcare businesses,
eLottery expects to derive its future revenues from acting as an
Internet retailer of lottery products for legally authorized
entities and the sale or licensing of the technology it has
developed and advertising on its Internet web site,
eLotteryWorld.com. eLottery has yet to record any revenue.
On April 13, 1999, as part of its plan to separate its telephony
and healthcare businesses from eLottery, the Company accelerated
the redemption of its Series A and Series B preferred stock.
Upon redemption, the preferred shares were redeemed for 13.3
million shares of common stock, or approximately 21% of
eLottery's common stock, and will no longer be entitled to
receive a total of 50% of eLottery's retained earnings as
preferred dividends.
NOTE H - SEGMENTS
The Company's reportable business segments provide products and
services, which are marketed through both retail and independent
distribution channels. These businesses are managed and reported
separately because they serve distinct markets.
<TABLE>
<CAPTIONS>
Three-month period ended March 31,1999
Computer
(amounts in thousands) Telephony Healthcare eLottery Corporate Totals
<S> <C> <C> <C> <C> <C>
Revenue from
External Customers $ 23,255 $ 8,494 $ -- $ -- $ 31,749
Intersegment Revenues 1,830 2,220 -- -- 4,050
Segment Income (Loss) 560 (1,833) (653) (1,534) (3,460)
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Three-month period ended March 31,1998
Computer
(amounts in thousands) Telephony Healthcare eLottery Corporate Totals
Revenue from
External Customers $ 24,708 $ 9,195 $ -- $ -- $ 33,903
Intersegment Revenues 1,911 2,138 -- -- 4,049
Segment Income (Loss) (362) (744) (194) -- (1,300)
</TABLE>
The following reconciles the Company's segment loss to the
reported net loss for the three-month periods ended March 31,
1999 and 1998:
<TABLE>
<CAPTION>
(Amounts in thousands) 1999 1998
<S> <C> <C>
Total segment income (loss) $(3,460) $(1,300)
Special charges -- (2,344)
Interest expense (753) (508)
Other income, net 1,183 23
Income tax benefit -- 1,651
$(3,030) $(2,478)
</TABLE>
Corporate assets were reduced by approximately $8.0 million
during the first quarter of 1999 due to the repayment of the note
receivable from Claricom and the redemption of Claricom warrants
issued to the Company (See Note I).
NOTE I - OTHER MATTERS
For the three-month periods ended March 31, 1999 and 1998,
respectively, the Company made cash payments of approximately
$0.8 million and $0.5 million for interest expense on
indebtedness.
During the three-month period ended March 31, 1999, noncash
financing activities included capital lease obligations incurred
in connection with computer software and equipment acquisitions
of $0.6 million.
For the quarters ended March 31, 1999 and 1998, the Company had
two individual customers, each of which generated in excess of
10% of the Company's revenues. Both customers are included in
the Computer Telephony segment. One customer accounted for $4.1
million and $4.5 million in sales for the 1999 and 1998 periods,
respectively. The second customer accounted for $4.2 million and
$3.3 million for the same periods, respectively.
On February 26, 1999, the Company received $9.3 million from
Claricom as payment in full for Claricom's outstanding $5.9
million junior subordinated note plus interest, along with the
redemption of the warrants issued to the Company as part of the
sale of the direct offices in 1996. As a result, the Company
recorded a gain of $1.2 million during the first quarter of 1999.
The gain is included in Other Income, net.
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The Company recorded a total of $9.0 million in reorganization
and other special charges during year ended December 31, 1998, of
which $2.3 million was recorded during the first quarter of 1998.
At March 31, 1999, the remaining reserve balance associated with
these charges was $4.9 million. These amounts will be paid
during 1999, with the exception of $1.5 million related to the
patent litigation settlement, which will be paid subsequent to
December 31, 1999.
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.
13
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis explains trends in the
Company's financial condition and results of operations for the
three-month periods ended March 31, 1999 compared with the same
period 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, 1998. Management
believes that 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.
OVERVIEW
The Company develops, markets and supports voice and data
communications and information systems. Products and services
include telephone systems, voice mail systems, inbound and
outbound call center systems and specialized healthcare
communications and workflow management systems. 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. The Company's eLottery subsidiary (formerly named
Unistar Gaming Corp.) develops, provides and maintains Internet,
intranet and telephone communications, accounting, database and
other applications and services for use by the domestic and
international lottery market. eLottery's UniStar Entertainment
subsidiary has the exclusive right to design, develop and manage
the National Indian Lottery (NIL) of the Coeur d'Alene Tribe of
Idaho (CDA). The NIL was operational beginning in January 1998.
However, in response to an adverse legal opinion on
December 17, 1998, eLottery and the CDA terminated the operations
of the NIL and US Lottery telephone and Internet operations
managed by eLottery.
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.
DIVESTITURE OF CORE TELEPHONY AND HEALTHCARE BUSINESSES
On March 29, 1999, the Company announced that it planned to
divest its core telephony and healthcare businesses and change
the name of the Company to eLottery, Inc. At the same time, the
Executone Board of Directors announced it had received an offer
for those businesses from a group to be led by
14
<PAGE>
Stanley J. Kabala, Chairman and Chief Executive Officer of
Executone, and that it has formed a special committee of the
Board to accomplish that divestiture. The offer from management
is in the range of $70 million and is subject to a number of
conditions including negotiation of a definitive agreement,
financing, the waiver or expiration of a pre-existing right of
first offer, and approval of the Executone shareholders. A final
decision as to the method of divesting this business has not been
made by the Board.
Under the management offer, the proceeds of the sale will remain
in the public company, eLottery, to help it accelerate the
achievement of its business plans. The Board believes this
transaction creates more value for the Company's shareholders
than the spin off of the eLottery common stock, which had
potentially significant corporate and individual tax
consequences. As a result, the Company has terminated its
previously filed registration statement.
On April 13, 1999, as part of its plan to separate its telephony
and healthcare businesses from eLottery, the Company accelerated
the redemption of its Series A and Series B preferred stock. All
of the Company's preferred shares were redeemed for approximately
13.3 million common shares. The Company believes this
transaction will simplify its capital structure and align the
interests of the former preferred and current common
shareholders.
RESULTS OF OPERATIONS
In the first quarter of 1999, the Company continued its efforts
to make significant changes in its business practices. These
changes, which began in the second half of 1998, are intended to
improve the Company's performance in future periods.
Revenues for the first quarter of 1999 were $31.7 million, with an
operating loss of $3.5 million and a net loss of $3.0 million or
($.06) per common share. Revenues for the first quarter of 1998
were $33.9 million, with an operating loss of $3.6 million and a
net loss of $2.5 million or ($.05) per common share. The 1998
results include a $2.3 million special charge, covering severance
and benefits continuation costs. The decrease in revenue 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. The increase in the net loss compared to
the first quarter of 1998 is due to several factors; the $2.2
million decrease in revenue, $1.5 million in professional fees
incurred during the quarter to help identify and initiate the
changes in business processes now underway, and the Company's more
conservative treatment of its pretax loss, for which no tax
benefit was taken in the first quarter of 1999 compared to a tax
benefit of $1.7 million taken in the same period in 1998.
REVENUE
Revenues were $31.7 million during the three month period ended
March 31, 1999, compared to $33.9 million for the same period in
1998. Revenue, by business, was distributed as follows (in
millions):
<TABLE>
<CAPTION>
Inc (Dec)
Three-month period ended 1999 1998 $ %
<S> <C> <C> <C> <C>
Computer Telephony $ 23.2 $ 24.7 ($ 1.5) (6.1%)
Healthcare 8.5 9.2 ( 0.7) (7.6%)
$ 31.7 $ 33.9 ($ 2.2) (6.5%)
</TABLE>
15
<PAGE>
Computer Telephony
Computer telephony products range from PBXs 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. Customers range
from small companies with fewer than ten employees to large
national accounts and government agencies with fewer than 400
extensions at any individual location. 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 first quarter of 1999, Computer Telephony revenues
decreased $1.5 million, or 6%, compared to the same quarter last
year. In the wholesale channel, the Company no longer offers
distributor-focused sales incentives at the end of each quarter.
In the past, this often resulted in inflated distributor
inventory and excessive receivables. Incentives are now being
directed at stimulating end user demand, with the intent of
creating value for both the end user and the distributor. With
these changes in business practice, the Company believes that
these distributors have reduced most of their excess inventory
that had accumulated over several years of supply push incentive
programs.
Purchases by Claricom, the Company's largest independent
distributor, were approximately $0.4 million lower in the first
quarter of 1999 compared to the same period in 1998, which was
the last quarter when Claricom purchases were influenced by the
old distributor contract. Management believes that the recent
acquisition or Claricom by Staples is a very positive development
for the Company, given their increased financial strength and
Staples' marketing and product distribution strength.
Healthcare
Healthcare products range from traditional nurse call systems,
intercoms and room status indicators to more sophisticated
patient reporting systems, infrared locating systems and wireless
technologies. All of these products can be seamlessly integrated
to enhance a facility's communications and information
networking. Healthcare customers include hospitals, surgical
centers, nursing homes and assisted living centers.
Healthcare reported $0.7 million lower sales for the first
quarter of 1999 compared to the same period in 1998, but almost
$1.0 million higher than the fourth quarter of 1998. Compared to
the prior year, the lower revenue reflects the negative effects
of increased sales force turnover that resulted from the
Company's efforts to offer the business for sale during 1998 and
the change in business practice away from supply push distributor
incentive programs. With the changes this business continues to
make in its installation process and the end of distributor-
focused sales incentives, the Company believes that the revenue
increase from the previous sequential quarter is indicative of a
return to growth. Healthcare has a record backlog of almost $18
million as of March 31, 1999.
GROSS PROFIT
Gross profit for the first quarter of 1999 was $10.4 million or
32.7 % of revenue, compared to $10.8 million or 32.0% of revenue
for the same quarter last year. The decrease in gross profit of
only $0.4 million is due to the lower volume. The volume decrease
has been largely offset by higher pricing margins in the Computer
Telephony business, resulting from the discontinuance of the
Company's old pricing practices, along with lower fixed costs,
resulting from the Company's cost reduction efforts.
16
<PAGE>
OPERATING EXPENSES
Product development expenses were $2.4 million for the first
quarter of 1999, a decrease of approximately $0.1 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 approximately the current level for the
remainder of 1999. Selling, general and administrative expenses
were $11.5 million, or 36.1% of revenue for the first quarter of
1999, compared to $9.6 million or 28.4% of revenue for the same
period in 1998. The increase is primarily due to $1.5 million in
professional fees incurred to help the Company evaluate its
business practices, determine the necessary changes and implement
those changes. While the changes that have been generated by this
process are beginning to reduce costs in other parts of the
business, the full impact will not be felt until the fourth
quarter of 1999. The Company expects to pay an additional $2.0
million in fees to complete this process during the second and
third quarters of 1999. eLottery expenses increased approximately
$0.5 million during the first quarter of 1999 compared to the same
period last year due to the Company's efforts to develop and
market eLottery's products, along with the Company's practice in
the first quarter of 1998 of charging the NIL for personnel
expenses which, with the termination of the NIL, are now included
in the Company's expenses. On a comparable basis, excluding the
special charges in 1998 and the professional fees in 1999,
selling, general and administrative expenses for the core
businesses declined approximately $0.2 million, primarily as a
result of reduced headcount.
SPECIAL CHARGES
As a result of actions taken by the Company to improve its
business processes, including significant changes in its senior
management structure, along with a provision for a patent
litigation settlement, the Company recorded a total of $9.0
million in reorganization and other special charges during year
ended December 31, 1998, of which $2.3 million was recorded
during the first quarter of 1998. At March 31, 1999, the
remaining reserve balance associated with these charges was $4.9
million. These amounts will be paid during 1999, with the
exception of $1.5 million related to the patent litigation
settlement, which will be paid subsequent to December 31, 1999.
INTEREST AND OTHER EXPENSE
Interest expense for the first quarter of 1999 increased $0.2
million compared to the same period in 1998 due to higher levels
of bank borrowings in 1999. Other income, net, for the first
quarter of 1999 increased $1.2 million compared to the same
period in 1998 due to a nonrecurring $1.2 million gain on the
receipt of payment from Claricom on the $5.9 million junior
subordinated note plus interest, along with the redemption of the
warrants held by the Company.
eLOTTERY
On December 19, 1995, EXECUTONE Information Systems, Inc.
("Executone') acquired 100% of the common stock of Unistar Gaming
Corp. for common and preferred stock with a combined value of
$12.7 million. In January 1999, Unistar Gaming Corp. changed its
name to eLottery, Inc. ("eLottery"). Any reference herein to
eLottery shall be deemed to include business conducted under the
name Unistar Gaming Corp. eLottery's wholly-owned subsidiary,
UniStar Entertainment, Inc. ("UniStar Entertainment") has an
exclusive five-year management agreement with the CDA, which was
the primary asset acquired, to provide design, development,
financial and management services to the National Indian Lottery.
The NIL was operational beginning in January 1998. However, in
response to an adverse legal opinion on December 17, 1998,
eLottery and the CDA terminated the operations of the NIL and the
US Lottery telephone and Internet operations managed by eLottery.
17
<PAGE>
eLottery's original mission was to develop, install and manage a
National Indian Lottery accessible by telephone. eLottery
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. In early 1998, as a hedge against potential adverse
legal and political decisions, eLottery began investigating
alternative applications and markets for its technology.
eLottery is now pursuing opportunities to become a web-based
retailer of lottery services and to license its systems and
services to state and international lotteries. The Company has
developed and operated systems software that enables the
electronic distribution of lottery tickets over the Internet,
Intranet and via telephone. The Company believes that the
electronic distribution of lottery tickets through these systems
will increase lottery sales because they make the purchase of
tickets more easily accessible and because they make use of
technology to enhance and enliven the lottery gaming experience.
With its unique and proven ability to offer lottery operators its
new Internet and Intranet-based lottery products worldwide, the
Company believes it is well positioned to capitalize on the
growth in non-traditional lottery sales.
During the first quarter of 1999, the Company incurred
approximately $1.8 million in cash expenditures related to
eLottery. Of that amount, approximately $1.0 million related to
the termination of NIL operations, including payment of
outstanding invoices, shutdown costs and severance and other
charges. The Company estimates an additional $0.6 million
remaining in NIL-related charges, all of which should be paid
during the second quarter of 1999. eLottery had a net loss
during the quarter of $0.7 million, incurring expenses for the
development and marketing of its products.
With the termination of the NIL and US Lottery, the Company
continues to face certain legal and other risks. See the Notes
to Consolidated Financial Statements for a discussion of the
legal issues and legislative proposals, which could impact the
Company and its eLottery business.
YEAR 2000
Status
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 information after December
31, 1999 could generate erroneous data or fail. Although the
Company estimated the cost to resolve the Year 2000 issue through
its current software system would have been less than $0.5
million, it decided as part of its long-term information systems
plan to convert to a new and more comprehensive software system
for its information technology (IT) infrastructure. The new
system will cost approximately $2.3 million, including
installation and data conversion costs. The Company expects the
new system to be operational by the end of the second quarter of
1999. The costs for the new system will be capitalized and
depreciated over the expected service life of the system
beginning in the third quarter of 1999.
Implementation of the new system began during the third quarter
of 1998. The Company has incurred approximately $1.7 million
through March 31, 1999, primarily for the purchase of software
licenses and certain system hardware, along with installation
costs. The system configuration has been completed, along with
documentation of the Company's business process procedures as
they will be used in the new system. The Company has also
completed and tested the data conversion processes. As of March
31, 1999, it is estimated that the installation process is 70% to
80% complete. Management believes that the conversion to new
software will resolve the Year 2000 issue as it relates to its IT
infrastructure. There are several peripheral systems that will
not be replaced by the new software. These systems are
18
<PAGE>
being made compliant using the Company's internal resources,
which have been redeployed from other projects. The remedial
effort is approximately 90% complete and is scheduled to be 100%
complete by the end of the second quarter of 1999. The total
remedial cost for these systems is approximately $50,000,
substantially all of which has been incurred as of March 31,
1999.
For non-IT systems (non-information technology that typically
includes imbedded technology such as micro-controllers), 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.
Risk Assessment
Although the Company believes that internal Year 2000 compliance
will be achieved by December 31, 1999, there can be no assurance
that the Year 2000 problem will not have a material adverse
affect on the Company's business, financial condition and results
of operations. The failure by the Company to correct a material
Year 2000 problem could result in an interruption in, or a
failure of, certain normal business activities or operations.
Presently, the Company perceives that the most reasonably likely
worst case scenario related to the Year 2000 issue is associated
with potential concerns with the ability of third party vendors
to provide products used in the manufacturing process. A
significant disruption in the product manufacturing process could
prevent or delay the Company from completing new installations or
system upgrades and enhancements for its customers. This would
adversely affect the Company's results of operations, liquidity
and financial condition. The Company is not presently aware of
any vendor-related Year 2000 issue that is likely to result in
such a disruption.
Contingency Plan
The Company does not yet have a contingency plan in place to deal
with unforeseen conversion failures. Such a plan is currently
being developed and will include the identification of a team of
employees to be on call during the millennium change to monitor
key systems, providing for backup power sources, data retention
and recovery procedures for critical business data and
operational plans to address potential delays in product supply
from vendors. The contingency plan is expected to be in place by
June 1999.
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 andthat 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.
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 $10 million as of March 31,
1999 and December 31, 1998.
19
<PAGE>
At March 31, 1999 and December 31, 1998, cash and cash
equivalents amounted to $0.9 million and $1.5 million,
respectively, a decrease of $0.6 million. The decrease was
mainly due to the funding of the Company's operating losses,
along with additional expenditures to fund the termination of NIL
operations, the repayment of debt and the repurchase of stock,
all of which was largely offset by a nonrecurring cash receipt
from Claricom (see below).
The Company used $5.5 million in its operating activities during
the first quarter of 1999 compared to $3.8 million in cash
provided by operations for the same period in 1998. Excluding
the March 1998 release of $5.1 million held in escrow since the
sale of the direct offices in 1996, $1.2 million in funds were
used in operating activities for the first quarter of 1998. The
increase in funds used by operating activities is primarily due
to the funding of the 1999 operating loss and the reduction in
the Company's accounts payable during the first quarter of 1999.
Cash provided by investing activities totaled $7.8 million for
the first quarter of 1999, compared to $2.9 million of cash used
during the same period last year. The increase in cash provided
by investing activities is due to a nonrecurring cash receipt
from Claricom. On February 26, 1999, the Company received $9.3
million from Claricom as payment in full for Claricom's
outstanding $5.9 million junior subordinated note plus interest,
along with the redemption of the warrants issued to the Company
as part of the sale of the direct offices in 1996. The Company
used the proceeds to reduce outstanding bank borrowings and
accounts payable.
The Company used $2.9 million in cash from financing activities
during the first quarter of 1999. Cash was used to repay $1.6
million in borrowings, along with $1.3 million to repurchase
420,000 of the Company's common stock. During the same period in
1998, the Company used $0.2 million in cash in its financing
activities, primarily for debt repayment.
Total debt as of March 31, 1999 was $23.7 million, a decrease of
$0.8 million from $24.5 million at December 31, 1998. The
decrease is a result of a reduction in the Company's bank
borrowings by $1.3 million and the repayment of $0.2 million in
capital lease obligations. Debt was increased by $0.6 million in
connection with the acquisition of a new computer software
system, along with an increase to the carrying value of the
convertible subordinated debentures of $0.1 million due to
accretion.
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
On April 29, 1999, with the withdrawal of the eLottery
Registration Statement on Form S-1 on April 14, 1999
and the impending sale of the Company's core businesses
(see Note G of Notes to Consolidated Financial Statements
in Part I, Item 1), the Company filed a Current Report
on Form 8-K to disclose the risk factors that could
materially adversely affect the performance of eLottery.
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: April 29, 1999 /s/ Stanley J. Kabala
Stanley J. Kabala
Chairman, President and Chief Executive Officer
Dated: April 29, 1999 /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 March 31, 1999 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 911
<SECURITIES> 0
<RECEIVABLES> 25,569
<ALLOWANCES> 1,563
<INVENTORY> 23,610
<CURRENT-ASSETS> 53,396
<PP&E> 23,540
<DEPRECIATION> 13,213
<TOTAL-ASSETS> 99,044
<CURRENT-LIABILITIES> 34,466
<BONDS> 22,641
0
7,300
<COMMON> 494
<OTHER-SE> 31,698
<TOTAL-LIABILITY-AND-EQUITY> 99,044
<SALES> 31,749
<TOTAL-REVENUES> 31,749
<CGS> 21,376
<TOTAL-COSTS> 21,376
<OTHER-EXPENSES> 13,833
<LOSS-PROVISION> 38
<INTEREST-EXPENSE> 753
<INCOME-PRETAX> (3,030)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,030)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,030)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
