-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UonLSEMZtP2MIyyX6n7mQXAcrfxiWW906IEb8PJiWfLRTlCwYArT2sjsi5n3cySo 0H7GBUPosV0NqGAyMtplfQ== 0000725282-95-000034.txt : 19951119 0000725282-95-000034.hdr.sgml : 19951119 ACCESSION NUMBER: 0000725282-95-000034 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: EXECUTONE INFORMATION SYSTEMS INC CENTRAL INDEX KEY: 0000725282 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-TELEPHONE INTERCONNECT SYSTEMS [7385] IRS NUMBER: 860449210 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-11551 FILM NUMBER: 95591766 BUSINESS ADDRESS: STREET 1: 478 WHEELERS FARMS RD CITY: MILFORD STATE: CT ZIP: 06460 BUSINESS PHONE: 2038767600 MAIL ADDRESS: STREET 1: 478 WHEELERS FARMS RD CITY: MILFORD STATE: CT ZIP: 06460-1847 FORMER COMPANY: FORMER CONFORMED NAME: VODAVI TECHNOLOGY CORP DATE OF NAME CHANGE: 19880802 10-Q 1 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 September 30, 1995 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 October 31, 1995 was 47,138,647. INDEX EXECUTONE Information Systems, Inc. Page # PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - September 30, 1995 and December 31, 1994. 3 Consolidated Statements of Operations - Three Months and Nine Months Ended September 30, 1995 and 1994. 4 Consolidated Statements of Cash Flows - Nine Months Ended September 30, 1995 and 1994. 5 Notes to Consolidated Financial Statements. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 PART II. OTHER INFORMATION 15 SIGNATURES 16 EXHIBIT 11. STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS 17 2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS September 30, December 31, (In thousands, except for share amounts) 1995 1994 (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 7,817 $ 7,849 Accounts receivable, net of allowance of $1,505 and $1,335 45,268 46,675 Inventories (Note C) 31,520 40,300 Prepaid expenses and other current assets 5,073 7,358 Total Current Assets 89,678 102,182 PROPERTY AND EQUIPMENT, net 18,804 18,967 INTANGIBLE ASSETS, net (Note C) 4,213 38,415 DEFERRED TAXES 30,606 26,979 OTHER ASSETS 3,956 2,938 $ 147,257 $ 189,481 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt $ 906 $ 777 Accounts payable 26,641 39,369 Accrued payroll and related costs 7,776 7,026 Accrued liabilities 10,122 9,192 Deferred revenue and customer deposits 19,552 18,757 Total Current Liabilities 64,997 75,121 LONG-TERM DEBT 28,455 24,698 LONG-TERM DEFERRED REVENUE 2,770 2,354 TOTAL LIABILITIES 96,222 102,173 STOCKHOLDERS' EQUITY: Common stock: $.01 par value; 80,000,000 shares authorized; 47,100,564 and 45,647,894 issued and outstanding 471 456 Additional paid-in capital 74,508 72,303 Retained earnings (accumulated deficit) (23,944) 14,549 Total Stockholders' Equity 51,035 87,308 $ 147,257 $ 189,481 The accompanying notes are an integral part of these consolidated balance sheets. 3 EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands, Three Months Ended Nine Months Ended except for per share amounts) September 30, September 30, 1995 1994 1995 1994 REVENUES: Product $ 34,623 $ 36,814 $103,470 $102,450 Base 39,541 39,733 119,920 116,016 74,164 76,547 223,390 218,466 COST OF REVENUES 43,973 44,783 133,411 128,951 Gross Profit 30,191 31,764 89,979 89,515 OPERATING EXPENSES: Research, development and engineering 2,818 2,398 8,691 6,899 Selling, general and administrative 24,429 24,834 74,982 71,425 Provision for restructuring and unusual items (Note C) - - 44,042 - 27,247 27,232 127,715 78,324 OPERATING INCOME (LOSS) 2,944 4,532 (37,736) 11,191 INTEREST, AMORTIZATION AND OTHER EXPENSES, NET: Cash 890 430 2,490 1,620 Noncash (167) 790 575 2,092 723 1,220 3,065 3,712 ACQUISITION COSTS (Note I) 16 - 1,022 - INCOME (LOSS) BEFORE INCOME TAXES FROM CONTINUING OPERATIONS 2,205 3,312 (41,823) 7,479 PROVISION (BENEFIT) FOR INCOME TAXES: Cash 100 100 300 300 Noncash (Note E) 782 1,226 (3,627) 2,693 882 1,326 (3,327) 2,993 INCOME (LOSS) FROM CONTINUING OPERATIONS 1,323 1,986 (38,496) 4,486 INCOME FROM DISCONTINUED OPERATIONS (net of income tax provision of $102) - - - 153 GAIN ON DISPOSAL OF DISCONTINUED OPERATIONS (net of income tax provision of $403) - - - 604 NET INCOME (LOSS) $ 1,323 $ 1,986 $(38,496) $ 5,243 EARNINGS (LOSS) PER SHARE: Continuing Operations $ 0.03 $ 0.04 $ (0.83) $ 0.09 Discontinued Operations --- --- --- 0.02 Net Income (Loss) $ 0.03 $ 0.04 $ (0.83) $ 0.11 WEIGHTED AVG. COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 49,014 47,182 46,478 47,495 The accompanying notes are an integral part of these consolidated statements. 4 EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended (In thousands) September 30, 1995 1994 CASH FLOWS FROM OPERATING ACTIVITIES: Income (loss) from continuing operations $(38,496) $ 4,486 Adjustments to reconcile net income (loss) to net cash (used) provided by continuing operations: Depreciation and amortization 4,701 5,904 Provision for restructuring and unusual items (Note C) 44,042 --- Provision (benefit) for income taxes not currently payable (3,627) 2,693 Noncash expenses, including noncash interest expense, noncash provision for losses on accounts receivable and income from equity investment 59 1,816 6,679 14,899 Change in working capital items: Inventory (1,347) (6,183) Accounts payable (12,730) 1,202 Other working capital items 4,476 (6,085) (9,601) (11,066) NET CASH (USED) PROVIDED BY CONTINUING OPERATIONS (2,922) 3,833 Cash flows from discontinued operations --- (449) NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES (2,922) 3,384 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment, net (2,950) (3,231) Proceeds from sale of VCS 1,200 9,700 Isoetec Texas settlement --- (1,087) Other 583 (539) NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES (1,167) 4,843 CASH FLOWS FROM FINANCING ACTIVITIES: Restructuring cost payments, net (404) (254) Borrowings under revolving credit facility 3,033 806 Borrowings from Connecticut Development Authority 750 --- Repayment of term note under credit facility --- (3,750) Repayments of other long-term debt (380) (1,077) Repurchase of stock (192) (5,365) Proceeds from issuance of stock 1,250 1,437 NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 4,057 (8,203) (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (32) 24 CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 7,849 7,406 CASH AND CASH EQUIVALENTS - END OF PERIOD $ 7,817 $ 7,430 The accompanying notes are an integral part of these consolidated statements. 5 EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE A - NATURE OF THE BUSINESS EXECUTONE Information Systems, Inc. (the "Company") designs, manufactures, sells, installs, supports and services voice processing systems and provides cost-effective long-distance telephone service and videoconferencing services. The Company is also a leading supplier of specialized hospital communications equipment. Products are sold under the EXECUTONE, INFOSTAR, IDS, LIFESAVER and INFOSTAR/ILS brand names through a worldwide network of direct sales and service offices and independent distributors. NOTE B - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, all adjustments, which include normal recurring adjustments, considered necessary for a fair presentation of the results for the interim periods presented have been included. As of July 1, 1988, an accumulated deficit of approximately $49.7 million was eliminated. NOTE C - PROVISION FOR RESTRUCTURING In June 1995, the Company reorganized its business into five divisions: Healthcare Communications, Call Center, Videoconferencing, Network Services, and Computer Telephony. The new strategic focus is on software applications in the communications market. The business that was acquired in 1988 was a telephone equipment hardware company focused on customers with small systems, with an emphasis on selling additional hardware and service to generate add-on revenue. Under the new strategy, the business acquired in 1988 will be de-emphasized. The Company adopted FAS No. 121, which was issued in March 1995, requiring impairment to be measured at the lowest level of identifiable cash flows. The Company concluded there was an impairment. As a result, the Company recorded a $44.0 million provision for restructuring consisting of a $33.5 million goodwill impairment, an $8.8 million writedown of inventory, primarily service stock relating to the impaired assets and other non-recurring inventory adjustments, $0.9 million related to the shutdown of the Company's Scottsdale, Arizona facility and $0.8 million of other unusual items. The intangibles generated by the acquisition of this business in 1988 were approximately $51 million, of which $46 million was applicable to the telephony goodwill of the business described above. In accordance with the provisions of FAS No. 121, Accounting for the Impairment of Long-Lived Assets, the Company prepared projections of future operating cash flows relating to this business using historical 6 trends and projections based upon the Company's new strategic direction. These projections indicated that this business would not generate sufficient operating cash flows in the future. The amount of impairment loss was the entire carrying value of the telephony goodwill of $33.5 million as of June 30, 1995. The remaining intangibles on the Consolidated Balance Sheet as of September 30, 1995 primarily relate to the Company's Healthcare business. The write-off of inventory consisted of $1.3 million of raw materials inventory and $7.5 million of finished goods inventory. These amounts were determined based upon a review of specific inventory parts along with current and projected usage, incorporating the new strategic direction of the Company. The Company will continue to maintain adequate levels of service stock for the telephony hardware customer base and amortize it over the estimated product/service life of the related systems. NOTE D - SALE OF VODAVI COMMUNICATIONS SYSTEMS DIVISION As of March 31, 1994, the Company sold its Vodavi Communications Systems Division ("VCS"), which sold telephone equipment to supply houses and dealers under the brand names STARPLUS and INFINITE, for approximately $10.9 million. Proceeds of the sale consisted of approximately $9.7 million in cash, received in April 1994, and a $1.2 million note, the proceeds of which were received in September 1995, which were used to reduce borrowings under the Company's credit facility. The sale resulted in an after-tax gain of $604,000 (net of income tax provision of $403,000). The results of VCS have been reported separately as a discontinued operation in the Consolidated Statements of Operations. NOTE E - INCOME TAXES The Company accounts for income taxes in accordance with FAS 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 book value of net assets. For the nine-month periods ended September 30, 1995 and 1994, the Company made cash payments for income taxes of approximately $138,000 and $228,000, respectively. NOTE F - EARNINGS PER SHARE Earnings per share is based on the weighted average number of shares of common stock and dilutive common stock equivalents (which include stock options and warrants) outstanding during the periods. Common stock equivalents and the convertible debentures which are antidilutive have been excluded from the computations. 7 NOTE G - INVENTORIES Inventories are stated at lower of first-in, first-out ("FIFO") cost or market and consist of the following at September 30, 1995 and December 31, 1994: (amounts in thousands) 9/30/95 12/31/94 Raw Materials $ 3,649 $ 3,082 Finished Goods 27,871 37,218 $ 31,520 $ 40,300 During the nine-month period ended September 30, 1995, total inventories before the noncash adjustment of $8.8 million (see Note C) are unchanged. However, since June 30, 1995, total inventories have been reduced by $1.8 million. NOTE H - UNISTAR ACQUISITION On November 2, 1995, the Company announced that it has agreed to acquire 100% of the outstanding common stock of UNISTAR Gaming Corporation ("UNISTAR"), a privately-held company that has an exclusive five-year contract to design, develop, finance, and manage the National Indian Lottery ("NIL"). The NIL will be a national telephone lottery authorized by federal law and by a compact between the State of Idaho and the Coeur d'Alene Indian Tribe of Idaho ("CDA"). In exchange for providing these management services to the NIL, UNISTAR will be paid a fee equal to 30% of the profits of the NIL. EXECUTONE will acquire 100% of UNISTAR for 3.7 million shares of common stock and 1 million shares of preferred stock. Each preferred share will have voting rights equal to 25% of a common share and will earn dividends equal to its proportionate share of 50% of the UNISTAR subsidiary's net income. The preferred stock will be redeemable for 13.3 million shares of common stock at EXECUTONE's option. The preferred stock will also be convertible into shares of the Company's common stock if either of the following conditions are met: 1. If after one year but prior to the end of the management contract, the lottery is operational and UNISTAR has a minimum annual net income of $1.0 million, preferred shares are convertible into common shares at a rate of 1.25 times annual net income in excess of a threshold amount of $1.0 million to a maximum of 13.3 million common shares. 2. If after the fourth year but prior to the end of the management contract, the cumulative revenues of UNISTAR plus 25% of any revenues generated by the Company from the operations of the lottery, excluding dividends received by the Company from UNISTAR, exceed $50.0 million, preferred shares are convertible into 13.3 million shares of common stock. Shareholder approval is required in the event that either of the conditions for conversion of the preferred stock are met. The NIL cannot become operational until resolution of a pending legal proceeding. In an attempt to block the NIL, certain states have filed Section 1084 letters to prevent the long-distance carriers from providing service to the NIL. The CDA has initiated legal action to compel the long-distance carriers to provide service to the NIL. The CDA's brief argues that the lottery is authorized by the Indian Gaming 8 Regulatory Act ("IGRA") passed by Congress in 1988, that the IGRA preempts state and federal statutes, and that the states lack authority to issue the Section 1084 notification letters to any carrier. Based upon a legal review by four different law firms, the Company believes this position will be upheld by the courts. Once a favorable court ruling is obtained, the Company currently estimates that it will be about nine months before the NIL is operational. Final consummation of this transaction is subject to completion of the documentation and approval from the Company's senior lenders. NOTE I - OTHER MATTERS In the beginning of 1995, the Company was involved in extensive negotiations to acquire the Dictaphone division of Pitney Bowes. In April 1995, the acquisition was awarded to another bidder. The Company incurred approximately $1.0 million in fees and expenses relating to the attempted acquisition which were expensed during the second and third quarters of 1995. For the nine-month periods ended September 30, 1995 and 1994, the Company made cash payments of approximately $3.0 million and $2.4 million, respectively, for interest expense on indebtedness. The only noncash financing activities for the nine-month period ended September 30, 1995 were capital lease obligations incurred in connection with equipment acquisitions of $0.3 million. During the nine-month period ended September 30, 1994, noncash financing activities other than those related to the sale of VCS (See Note D) included capital lease obligations incurred in connection with equipment acquisitions of $0.7 million, noncash proceeds for issuances of stock from application of credits under an option credit plan of $0.3 million and Common Stock Purchase Warrants exercised through bond conversion of $1.1 million. In September 1994, the Company paid $1.2 million to the former shareholders of Isoetec Texas, Inc. in partial settlement of claims by such shareholders. This payment was an adjustment of the purchase price recorded when the Company acquired Isoetec Texas, Inc. in 1990 and increased intangible assets accordingly. Refer to the Consolidated Statements of Cash Flows for information on all cash-related operating, investing and financing activities. 9 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Introduction The Company's revenues are primarily derived from sales of its products and services through a worldwide network of direct sales and service offices and independent distributors. The Company's end-user revenues are derived from two primary sources: (1) sales of systems to new customers, which include sales of application- specific software options ("product revenues"), and (2) servicing the end-user base through the upgrade, expansion, enhancement (which includes sales of application-specific software options) and maintenance of previously installed systems, as well as revenues from the INFOSTAR/LD+ program (commonly referred to as "base revenues"). Base revenues usually generate higher operating income margin than initial sales of systems, since the Company's selling expenses for base revenues are lower than those for initial system sales. Sales of the Company's application- specific software options and related services generally produce higher operating income margins than both system sales and base revenues due to the added performance value and relatively low production costs of such proprietary software and services. Restructuring - Change in Business Strategy In June 1995, the Company reorganized its business into five divisions: Healthcare Communications, Call Center, Videoconferencing, Network Services and Computer Telephony. The new strategic focus is toward larger systems and software application-oriented products and away from smaller, hardware- based telephone systems. Based upon the commitment to move in this new direction, the Company adopted FAS No. 121 in the second quarter of 1995 and recorded an impairment of the telephony goodwill that was established as part of the 1988 acquisition, along with the related service stock. This impairment was based upon the projected future operating cash flows of that business. The business that was acquired in 1988 was a telephone equipment hardware company that focused its selling effort on smaller systems without software applications, with an emphasis on selling additional hardware to generate revenues in the form of move, adds and changes ("MAC") and service, mainly on a time and material basis. The strategy the Company is now pursuing is to focus on software solutions versus the hardware orientation of the business purchased in the 1988 acquisition. In addition, the Company's IDS platform (IDS Systems 108, 228, 432 and 648), which was developed post-acquisition, incorporates a switching bus to provide everything from basic communication to sophisticated software applications including Integrated Voice Mail, Call Center Applications (ACD, IVRs and Predictive Dialers), Variable Band Width Cards for Video Products, Locating Devices, Nurse Call and Computer Port Interfaces which drive the computer telephony products. The change in strategic focus has also resulted in changes in the way the Company markets its products. Due to the sophistication of these products, the Company divisionalized its sales effort with specialists who are experts in the products that they sell, effective July 1, 1995. 10 The Company's analysis indicated that the smaller system, hardware-oriented telephony business will not generate sufficient future operating cash flows to support the related telephony goodwill. Therefore, in accordance with the provisions of FAS No. 121, the Company determined that this goodwill was impaired and the entire carrying value of $33.5 million was written off during the three-month period ended June 30, 1995. The Company believes this write-off is appropriate for the following reasons: 1. The change in the Company's strategic focus and the establishment of five new operating divisions that will focus on sales to different markets. 2. A software versus hardware product orientation. 3. The determination that the new criteria of FAS No. 121, which provides more guidance regarding the conditions for and measurement of impairment of long-term assets, have been met. This includes the requirement to use the lowest level of identifiable cash flow to determine impairment. The Company also reviewed the service stock inventory required to support this business and concluded that an additional $8.8 million provision was required (See Note C for further discussion of the provision for restructuring). Results of Operations Revenues for the three-month period ended September 30, 1995 totaled $74.2 million compared to $76.5 million for the three- month period ended September 30, 1994. Net income for the three- month period ended September 30, 1995 was $1.3 million, or $0.03 per share, compared to net income of $2.0 million, or $0.04 per share, for the same period last year. Although revenue was less than anticipated, net income was in line with the Company's expectations as the lower costs generated from the divisionalization of the Company and the specialization of the sales force materialized sooner than anticipated. The telephony division continues to provide most of the Company's revenues and profits, and the Company is increasing its focus on the higher profile companies who need software application solutions. The 3% decrease in revenue for the three-month period ended September 30, 1995 compared to the same period in 1994 was primarily from the National Accounts group where the Company is less able to control the timing of new installations with the major national customers. The healthcare division, divisionalized at the beginning of this year, continues to show revenue growth compared to the same period in 1994. The call center, video and network divisions have yet to generate the desired revenue, but the divisionalization process continues to move forward. The Company now has division presidents in place and the individual businesses are aligning their management teams. Revenues for the three-month period ended September 30, 1995 were 3% lower than the comparable 1994 period, but revenues for the nine-month period ended September 30, 1995 were 2% higher than 1994. Product revenues decreased 6% for the three-month period ended September 30, 1995 and increased 1% for the nine-month period ended September 30, 1995 versus the comparable 1994 periods. As previously noted, the decrease for the three-month period ended September 30, 1995 was due to the timing of new installations with major national customers through our National Accounts group. Base revenues were comparable for the three- month period ended September 30, 1995 and increased 3% for the nine-month period ended September 30, 1995 versus the comparable 1994 periods. The increase for the nine-month period ended September 30, 1995 is primarily due to increased sales of system upgrades and expansions. 11 For the three-month periods ended September 30, 1995 and 1994, gross profit as a percentage of sales was 40.7% and 41.5%, respectively. For the nine-month periods ended September 30, 1995 and 1994, gross profit as a percentage of sales was 40.3% and 41.0%, respectively. The decrease from the 1994 periods is primarily due to lower sales volume which reduced the absorption of fixed cost overhead during the three-month period ended September 30, 1995 and product mix during the first six months of 1995. Operating income as a percentage of total revenues for the three- month periods ended September 30, 1995 and 1994 was 4.0% and 5.9%, respectively. For the nine-month periods ended September 30, 1995 and 1994, operating income before the provision for restructuring as a percentage of total revenues was 2.8% and 5.1%, respectively. Research, development and engineering expenses increased compared to both the three-month and nine- month periods in 1994 as the Company continues to invest in engineering for new product development and application-specific software products. Research, development and engineering expenditures are expected to remain at current levels for the remainder of the year. SG&A expenses for the nine-month period ended September 30, 1995 remained higher than the comparable 1994 period primarily due to costs incurred during the first six months of 1995 to specialize the sales force and implement the Company's new strategy. SG&A for the three-month period ended September 30, 1995 was $0.4 million lower than the same period in 1994 and $2.4 million lower than the three-month period ended June 30, 1995 primarily due to the accelerated impact of the divisionalization and the realignment of the sales force. Interest, amortization and other expenses, net for the three- month and nine-month periods ended September 30, 1995 decreased versus the comparable periods in 1994, primarily due to the reduction in the amortization of goodwill resulting from the restructuring, partially offset by increased interest expense due to higher interest rates and higher average borrowing levels under the Company's credit facility since most of the cash used to reduce debt was generated at the end of the three-month period ended September 30, 1995. For the three-month period ended September 30, 1995, the Company recorded an income tax provision of $0.9 million. Of the total provision, $0.8 million was recorded as a reduction of the deferred tax asset to reflect the utilization of tax benefit carryforwards. As a result of the utilization of these benefits, the Company does not have a significant tax liability for the period. Due to the Company's substantial remaining tax benefit carryforwards, minimal taxes will be paid in the near future. As of March 31, 1994 the Company sold its Vodavi Communications Systems Division ("VCS"), which sold telephone equipment to supply houses and dealers under the brand names STARPLUS and INFINITE, for approximately $10.9 million. Proceeds of the sale consisted of approximately $9.7 million in cash, received in April 1994, and a $1.2 million note, the proceeds of which were received in September 1995. The proceeds were used to reduce borrowings under the Company's credit facility. The sale of VCS resulted in an after-tax gain of $604,000 (net of income tax provision of $403,000). The results of VCS have been reported separately as a discontinued operation in the Consolidated Statement of Operations. Net revenues of the discontinued operation for the nine-month period ended September 30, 1994 were $8.6 million. In September 1994, the Company paid $1.2 million to the former shareholders of Isoetec Texas, Inc. in partial settlement of claims by such shareholders. This payment was an adjustment of the purchase price recorded when the Company acquired Isoetec Texas, Inc. in 1990 and increased intangible assets accordingly. 12 In the beginning of 1995, the Company was involved in extensive negotiations to acquire the Dictaphone division of Pitney Bowes, an acquisition that would have more than doubled the Company's size. This business had similar products, markets and geographic locations, along with synergies in research and development. The Company was able to obtain commitments for a financial package supporting a bid of $450 million. However, in April 1995, the acquisition was awarded to another bidder. The Company incurred approximately $1 million in fees and expenses relating to the attempted acquisition which have been expensed during the second and third quarters of 1995. UNISTAR Acquisition On November 2, 1995, the Company announced that it has agreed to acquire 100% of the outstanding common stock of UNISTAR Gaming Corporation ("UNISTAR"), a privately-held company that has an exclusive five-year contract to design, develop, finance, and manage the National Indian Lottery ("NIL"). (See Note H for the terms of the agreement.) Final consummation of this transaction is subject to completion of the documentation and approval from the Company's senior lenders. Management believes the UNISTAR business is a natural extension of its telephony and call center business. The heart of the operation will be the NIL call center, which will be located on the Coeur d'Alene Indian Tribe of Idaho ("CDA") Reservation. Calls via an 800 number will be processed with Interactive Voice Response ("IVR") equipment or live agents using ACD software to process nationwide wagering activity. The Company is making a significant investment, which initially will create 8% dilution to our shareholders and require possibly $2 million to $3 million of cash prior to the resolution of the pending legal issues discussed below. However, in the opinion of the Company's management, this investment is justified based upon the potential returns. The NIL cannot become operational until resolution of a pending legal proceeding. In an attempt to block the NIL, certain states have filed Section 1084 letters to prevent the long-distance carriers from providing service to the NIL. The CDA has initiated legal action to compel the long-distance carriers to provide service to the NIL. The CDA's brief argues that the lottery is authorized by the Indian Gaming Regulatory Act ("IGRA") passed by Congress in 1988, that the IGRA preempts state and federal statutes, and that the states lack authority to issue the Section 1084 notification letters to any carrier. Based upon a legal review by four different law firms, the Company believes this position will be upheld by the courts. Once a favorable court ruling is obtained, the Company estimates that it will be about nine months before the NIL is operational. Assuming satisfactory resolution of these legal issues, the additional costs to become operational may run between $5-10 million. The Company believes it will obtain additional financing for these costs. 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 $27 million and $30 million as of September 30, 1995 and December 31, 1994, respectively. The $44 million provision for restructuring recorded during the three-month period ended June 30, 1995 is a noncash charge that will not significantly affect the Company's current or future liquidity. At September 30, 1995 and December 31, 1994, cash and cash equivalents amounted to $7.8 million. During the three-month period ended September 30, 1995, the Company generated $9.3 million of cash, consisting of $7.7 million from operations, proceeds of $1.2 million for a long-term note relating to the sale of VCS and $0.4 million from other sources. Inventory levels were reduced by $1.8 million during the three-month period as the Company continues to reduce its working capital requirements. The cash was used primarily to reduce borrowings under the Company's credit facility by $8.0 million. 13 For the nine-month period ended September 30, 1995, the Company generated $7.9 million of cash, primarily from operations, increased bank borrowings by $3.0 million, received proceeds of $1.2 million for the VCS note and received the proceeds of a $0.8 million loan from the Connecticut Development Authority. The cash was primarily used to fund $9.6 million of working capital and to purchase $3.0 million of capital assets. For the comparable period in 1994, the Company generated $16.3 million of cash, primarily from operations, and funded approximately $11.1 million in working capital and other costs relating to the emergency production requirements resulting from the fire at our main subcontractor's facility in 1993. Total debt at September 30, 1995 was $29.4 million, an increase of $3.9 million from $25.5 million at December 31, 1994. The increase was a result of additional borrowings to fund working capital during the first six months of 1995. As of October 31, 1995, approximately $13.9 million of direct borrowings was available under the Company's credit facility. 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. 14 PART II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS Not applicable. Item 2. CHANGES IN SECURITIES Not applicable. Item 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. Item 5. OTHER INFORMATION Not applicable. Item 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits 11 - Statement Regarding Computation of Per Share Earnings b) Reports on Form 8-K Not applicable. 15 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, 1995 /s/ Alan Kessman Alan Kessman Chairman, President and Chief Executive Officer Dated: November 13, 1995 /s/ Anthony R. Guarascio Anthony R. Guarascio Vice President Finance and Chief Financial Officer 16 EX-11 2 EXHIBIT 11 EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS Three Months Ended Nine Months Ended September 30, September 30, 1995 1994 1995 1994 INCOME (LOSS) FROM CONTINUING OPERATIONS $ 1,323,000 $ 1,986,000 $(38,496,000) $ 4,486,000 DISCONTINUED OPERATIONS: INCOME FROM OPERATIONS, NET OF INCOME TAXES --- --- --- 153,000 GAIN ON DISPOSAL, NET OF INCOME TAXES --- --- --- 604,000 NET INCOME (LOSS) $ 1,323,000 $ 1,986,000 $(38,496,000) $ 5,243,000 WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 46,898,000 43,317,000 46,478,000 43,253,000 COMMON STOCK EQUIVALENT SHARES ASSUMED TO BE ISSUED FOR DILUTIVE STOCK OPTIONS AND WARRANTS 2,116,000 3,865,000 --- 4,242,000 TOTAL WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 49,014,000 47,182,000 46,478,000 47,495,000 EARNINGS (LOSS) PER COMMON SHARE: Continuing Operations $ 0.03 $ 0.04 $(.83) $ 0.09 Discontinued Operations --- --- --- 0.02 Net Income (Loss) $ 0.03 $ 0.04 $(.83) $ 0.11 17 EX-27 3
5 9-MOS DEC-31-1995 SEP-30-1995 7817 0 46773 1505 31520 89678 48613 29809 147257 64997 0 471 0 0 50564 147257 223390 223390 133411 133411 127715 0 3065 (41823) (3327) (38496) 0 0 0 (38496) (0.83) (0.83)
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