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 June 30, 1994
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)
6 Thorndal Circle, Darien, Connecticut 06820
(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 July 31, 1994 was 43,593,878.
INDEX
EXECUTONE Information Systems, Inc.
Page #
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 1994
and December 31, 1993. 3
Consolidated Statements of Operations -
Three Months and Six Months Ended
June 30, 1994 and 1993. 4
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1994 and 1993. 5
Notes to Consolidated Financial Statements. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION 12
SIGNATURES 13
EXHIBIT 11. STATEMENT REGARDING COMPUTATION
OF PER SHARE EARNINGS 14
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except for share amounts)
June 30, December 31,
1994 1993
ASSETS (Unaudited) (Restated)
CURRENT ASSETS:
Cash and cash equivalents $ 7,624 $ 7,406
Accounts receivable, net of
allowance of $1,278 and $1,017 42,974 37,567
Inventories 31,943 29,092
Prepaid expenses and other
current assets 7,828 5,789
Net assets of discontinued
operation --- 8,538
Total Current Assets 90,369 88,392
PROPERTY AND EQUIPMENT, net 15,174 14,727
INTANGIBLE ASSETS, net 43,058 44,215
DEFERRED TAXES 23,228 25,200
OTHER ASSETS 7,644 2,623
NET ASSETS OF DISCONTINUED
OPERATION --- 397
$ 179,473 $ 175,554
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 2,386 $ 2,989
Accounts payable 32,252 29,295
Accrued payroll and related costs 9,143 7,750
Accrued liabilities 8,916 7,057
Accrued restructuring costs 1,200 1,381
Deferred revenue and customer
deposits 18,118 17,713
Total Current Liabilities 72,015 66,185
LONG-TERM DEBT 26,717 32,279
LONG-TERM DEFERRED REVENUE 1,876 1,345
TOTAL LIABILITIES 100,608 99,809
STOCKHOLDERS' EQUITY:
Common stock: $.01 par value;
60,000,000 shares authorized;
43,393,323 and 41,205,498
issued and outstanding 434 412
Additional paid-in capital 68,116 68,275
Retained earnings 10,315 7,058
Total Stockholders' Equity 78,865 75,745
$ 179,473 $ 175,554
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, except for per share amounts)
Three Months Ended Six Months Ended
6/30/94 6/30/93 6/30/94 6/30/93
REVENUES: (Restated) (Restated)
Product $ 36,550 $ 34,801 $ 65,636 $ 65,394
Base 40,062 33,682 76,283 66,153
76,612 68,483 141,919 131,547
COST OF REVENUES 44,781 41,116 84,169 79,082
Gross Profit 31,831 27,367 57,750 52,465
OPERATING EXPENSES:
Research, development
and engineering 2,339 2,377 4,501 4,186
Selling, general
& administrative 24,139 21,723 46,591 42,094
26,478 24,100 51,092 46,280
OPERATING INCOME 5,353 3,267 6,658 6,185
INTEREST, AMORTIZATION AND
OTHER EXPENSES, NET:
Cash 589 678 1,011 1,472
Noncash 740 714 1,482 1,429
1,329 1,392 2,493 2,901
INCOME BEFORE INCOME TAXES
FROM CONTINUING OPERATIONS 4,024 1,875 4,165 3,284
PROVISION FOR INCOME TAXES:
Cash 100 84 200 167
Noncash (utilization of
pre-acquisition tax
benefits - Note D) 1,510 666 1,465 1,146
1,610 750 1,665 1,313
INCOME FROM CONTINUING
OPERATIONS 2,414 1,125 2,500 1,971
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS [NET OF INCOME
TAXES OF $51, $102 AND $(31),
RESPECTIVELY] --- 77 153 (46)
GAIN ON DISPOSAL OF
DISCONTINUED OPERATIONS
(NET OF INCOME TAXES
OF $403) --- --- 604 ---
NET INCOME $ 2,414 $ 1,202 $ 3,257 $ 1,925
EARNINGS PER SHARE:
INCOME FROM CONTINUING
OPERATIONS $ 0.05 $ 0.03 $ 0.05 $ 0.04
DISCONTINUED
OPERATIONS 0.00 0.00 0.02 0.00
NET INCOME $ 0.05 $ 0.03 $ 0.07 $ 0.04
WEIGHTED AVG. COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING 47,651 48,368 47,737 47,994
The accompanying notes are an integral part of these consolidated statements.
4
EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands) Six Months Ended
June 30,
1994 1993
(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 2,500 $ 1,971
Adjustments to reconcile net income to net
cash provided by continuing operations:
Depreciation and amortization 3,877 4,111
Noncash expenses, including noncash
interest expense, provision for
income taxes not currently payable
and provision for losses on
accounts receivable 2,178 1,632
8,555 7,714
Net change in working capital items (4,844) 1,236
NET CASH PROVIDED BY CONTINUING OPERATIONS 3,711 8,950
Cash Flows from Discontinued Operations (551) (2,653)
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,160 6,297
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,637) (922)
Proceeds from sale of VCS 9,700 ---
Receivable for emergency production
costs (Note G) (4,000) ---
Other 505 (828)
NET CASH USED BY INVESTING ACTIVITIES 4,568 (1,750)
CASH FLOWS FROM FINANCING ACTIVITIES:
Restructuring cost payments (181) (225)
Repayments under revolving credit
facility (2,403) (3,148)
Repayment of term note under credit
facility (2,768) (625)
Repayments of other long-term debt (682) (772)
Repurchase of stock (2,589) ---
Proceeds from issuances of stock 1,113 305
NET CASH USED BY FINANCING
ACTIVITIES (7,510) (4,465)
INCREASE IN CASH AND CASH EQUIVALENTS 218 82
CASH AND CASH EQUIVALENTS -
BEGINNING OF PERIOD 7,406 7,404
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 7,624 $ 7,486
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, markets, installs, supports and services voice
processing systems and provides cost-effective long-distance
telephone service. 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 - 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 and a $1.2 million note, fully
secured by a letter of credit and payable in September 1995. The
proceeds were received on April 11, 1994 and 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
Statement of Operations. Prior year consolidated financial
statements have been restated to present VCS as a discontinued
operation. Net revenues of the discontinued operation for the
three-month period ended June 30, 1993 were $8.1 million. For the
six-month periods ended June 30, 1994 and 1993, net revenues of the
discontinued operation were $8.6 million and $15.5 million,
respectively.
6
NOTE D - 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 fair value of the net assets at acquisition.
For the six-month periods ended June 30, 1994 and 1993, the Company
made cash payments for income taxes of approximately $223,000 and
$63,000, respectively.
NOTE E - EARNINGS PER SHARE
Earnings per share is based on the weighted average number of
shares of common stock, convertible preferred stock (which was
entirely converted in 1993) and dilutive common stock equivalents
(which include stock options and warrants) outstanding during the
periods. Common stock equivalents and the convertible debentures
which are antidilutive have been excluded from the computations.
NOTE F - INVENTORIES
Inventories are stated at lower of first-in, first-out ("FIFO")
cost or market and consist of the following at June 30, 1994 and
December 31, 1993 (amounts in thousands):
6/30/94 12/31/93
Raw Materials $ 3,416 $ 3,363
Finished Goods 28,527 25,729
$31,943 $29,092
NOTE G - OTHER MATTERS
For the six-month periods ended June 30, 1994 and 1993, the Company
made cash payments of approximately $1.4 million and $2.0 million,
respectively, for interest expense on indebtedness.
During the six-month periods ended June 30, 1994 and 1993, noncash
financing activities other than those related to the sale of VCS
(See Note C) included capital lease obligations incurred in
connection with equipment acquisitions of $552,000 and $292,000,
respectively, noncash proceeds for issuances of stock from
application of credits under an option credit plan of $224,000 and
$243,000, respectively, and Common Stock Purchase Warrants
exercised through bond conversion of $1.1 million and $155,000,
respectively.
7
In December 1993, there was a fire at the Company's main
subcontractor's production facility in China. As a result,
additional costs were incurred to manufacture product at Company
facilities and alternative manufacturing subcontractors. In July
1994, the Company was reimbursed for $4.0 million of such costs by
its insurance carrier. The receivable for the amounts to be
reimbursed was included in other assets as of June 30, 1994.
Refer to the consolidated statements of cash flows for information
on all cash-related operating, investing and financing activities.
8
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 Company-owned
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.
Results of Operations
Total revenues for the three-month and six-month periods ended
June 30, 1994 were 12% and 8% higher, respectively, than the
comparable 1993 periods. Product revenues for the three-month
period ended June 30, 1994 increased 5% over the corresponding 1993
period due to a volume increase in voice processing products and an
increase in telephony sales through the Company's independent
distribution channel. For the six-month period ended June 30,
1994, product revenues increased only slightly from the
corresponding 1993 period due, primarily, to inventory shortages
caused by a fire which occurred at the Company's main
subcontractor's production facility in China in December 1993 (see
page 10). Base revenues for the three-month and six-month periods
ended June 30, 1994 were 19% and 15% higher, respectively, than the
comparable 1993 periods. The increase in base revenues was
primarily attributable to continuing growth in sales to the
Company's existing customer base, including increased sales of
systems upgrades, expansions and maintenance as well as volume
increases generated by the LD+ program.
For the three-month periods ended June 30, 1994 and 1993, gross
profit as a percentage of total revenues was 41.5% and 40.0%,
respectively. Gross profit as a percentage of total revenues for
the six-month periods ended June 30, 1994 and 1993 were 40.7% and
39.9%, respectively. In addition to the impact of the overall
revenue increases, much of the gross profit increase is due to
volume increases for the Company's voice mail and ACD products.
These software-oriented applications impact both base and product
gross profit and are among the Company's higher-margin products.
9
Operating income as a percentage of total revenues for the three-
month periods ended June 30, 1994 and 1993 was 7.0% and 4.8%,
respectively, and 4.7% for both six-month periods ended June 30,
1994 and 1993. Operating income as a percentage of total revenue
for the three months increased due to improved gross profit
margins. Research, development and engineering expenses increased
7.5% for the six-month period ended June 30, 1994 compared to the
corresponding 1993 period, continuing to reflect increased
investments in engineering for the development of new higher margin
products. The increase in SG&A expenditures is largely the result
of higher selling expenses, which reflect not only the impact of
the higher sales volume over the three- and six-month periods but
also the continued investment in personnel and training as the
nature and complexity of the Company's products increase and the
customer base expands.
Interest, amortization and other expenses, net for the three-month
and six-month periods ended June 30, 1994 was lower than the
corresponding 1993 period due, primarily, to lower interest expense
for the Company's credit facility resulting from lower borrowing
levels and an interest rate reduction on the Company's bank
borrowings.
For the three-month period ended June 30, 1994, the Company
recorded a provision for income taxes of $1.6 million for
continuing operations. For the six-month period ended June 30,
1994, the Company recorded a provision for income taxes of $1.7
million for continuing operations, $102,000 for discontinued
operations and $403,000 for the gain on the sale of its VCS
division. Of the total provision, $2.0 million was recorded as a
reduction of the deferred tax asset to reflect the utilization of
tax benefit carry forwards. As a result of the utilization of
these benefits, the Company does not have a significant tax
liability for the period. The Company has substantial tax benefit
carryforwards which means that minimal taxes will be paid in the
near future.
In December 1993, a fire occurred at the Company's main
subcontractor's production facility in Shinzen, China, causing
inventory shortages during the first six months of 1994. The
production problems have been largely alleviated by the Company's
ability to increase its own production and find alternative
manufacturing sources. The Company has established a receivable of
$4 million for additional direct costs related to the emergency
production as of June 30, 1994, which were recovered from the
Company's insurance carrier in July 1994. The subcontractor's
facility has since been rebuilt and the Company does not anticipate
any significant additional product costs will be incurred.
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 and a $1.2 million note, fully
secured by a letter of credit and payable in September 1995. The
proceeds were received on April 11, 1994 and were used to reduce
borrowings under the Company's credit facility.
10
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. Prior year consolidated financial
statements have been restated to present VCS as a discontinued
operation. Net revenues of the discontinued operation for the
three-month period ended June 30, 1993 were $8.1 million. For the
six-month periods ended June 30, 1994 and 1993, net revenues of the
discontinued operation were $8.6 million and $15.5 million,
respectively.
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 $29 million
as of June 30, 1994 and December 31, 1993, respectively.
At June 30, 1994 and December 31, 1993, cash and cash equivalents
amounted to $7.6 million and $7.4 million, respectively, which
represented 8% of current assets. The Company generated $3.7
million in cash from continuing operations, during the six-month
period ended June 30, 1994 as compared to $9.0 million in cash from
continuing operations for the corresponding 1993 period. The
decrease from prior year represents the impact of increased working
capital resulting from the rebuilding of inventory which was
depleted as a result of the product shortages caused by the
December fire, higher sales volume for the three-month period ended
June 30, 1994 as compared to the comparable 1993 period and the
slight increase in days sales outstanding from 50 days to 51 days.
Cash from operations was used to fund the $4.0 million in emergency
production costs over the period, which were reimbursed by
insurance in July 1994.
Total debt at June 30, 1994 was $29.1 million, a decrease of $6.2
million from $35.3 million at December 31, 1993. The reduction in
debt is due to the application of proceeds from the sale of VCS of
$9.7 million, of which $2.2 million was used to reduce the
Company's term loan and $7.5 million was used to reduce the
Company's revolving credit facility, common stock purchase warrants
exercised through bond conversions of $1.1 million and repayments
of other long-term debt of $0.9 million. This was partially offset
by increased borrowings under the revolving credit facility of $5.0
million and capital lease agreements for equipment purchases of
$0.5 million.
As of July 31, 1994, approximately $18.3 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.
11
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
a) The Registrant's Annual Meeting of Shareholders was held on
June 23, 1994.
b) Proxies were solicited by the Registrant's management pursuant to
Regulation 14 under the Securities Act of 1934; there was no
solicitation in opposition to management's nominees listed in the
Proxy Statement dated April 29, 1994 and all such nominees were
elected pursuant to the vote of the shareholders.
c) The amendment of the Registrant's 1984 Employee Stock Purchase
Plan described under "Proposal 2" in the Proxy Statement dated
April 29, 1994, which section is incorporated herein by reference,
was approved by a vote of the majority of the Registrant's
outstanding Common Stock as follows:
For: 29,262,657
Against: 505,820
Abstain: 159,587
d) The amendment of the Registrant's 1990 Directors' Stock Option
Plan described under "Proposal 3" in the Proxy Statement dated
April 29, 1994, which section is incorporated herein by reference,
was approved by a vote of the majority of the Registrant's
outstanding Common Stock as follows:
For: 38,258,903
Against: 714,751
Abstain: 189,780
e) The approval of the Registrant's 1994 Executive Stock Incentive
Plan described under "Proposal 4" in the Proxy Statement dated
April 29, 1994, which section is incorporated herein by reference,
was approved by a vote of the majority of the Registrant's
outstanding Common Stock as follows:
For: 27,297,958
Against: 947,277
Abstain: 177,028
f) The total number of shares of the Registrant's Common Stock, $.01
par value, outstanding as of April 25, 1994, the record date for
the Annual Meeting, was 43,890,842, and 39,247,884 shares were
represented in person or by proxy at the Meeting.
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.
12
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: August 11, 1994 /s/ Alan Kessman
Alan Kessman
Chairman, President and
Chief Executive Officer
Dated: August 11, 1994 /s/ Anthony R. Guarascio
Anthony R. Guarascio
Vice President Finance and
Chief Financial Officer
13