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FORM 10-K/A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE
REQUIRED)
For the fiscal year ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15
(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(NO FEE REQUIRED)
For the transition period from ____________ to ________________
Commission File Number: 0-11551
EXECUTONE INFORMATION SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
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Virginia 86-0449210
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer
Identification No.)
478 Wheelers Farms Road, Milford, Connecticut 06460
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(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (203)876-7600
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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N/A None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
7 1/2% CONVERTIBLE SUBORDINATED DEBENTURES, DUE MARCH 15, 2011
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(Title of Class)
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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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the common stock held by nonaffiliates of the
registrant (assuming for this purpose that all executive officers and directors
of the registrant are affiliates) as of March 29, 1996 was $125,909,320, based
on the last sale price for the common stock on that date.
The number of shares outstanding of the registrant's only class of common stock,
$.01 par value per share, as of March 29, 1996, was 51,865,163.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference into the Part of this Form
10-K indicated below:
Part II - 1995 Annual Report to Shareholders
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TABLE OF CONTENTS
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Item Page
PART I
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1. Business 1
2. Properties 15
3. Legal Proceedings 15
4. Submission of Matters to a Vote of Security Holders 16
Executive Officers of the Registrant 17
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters 20
6. Selected Financial Data 20
7. Management's Discussion and Analysis of Financial Condition 20
and Results of Operations
8. Financial Statements and Supplementary Data 20
9. Changes in and Disagreements with Accountants on 20
Accounting and Financial Disclosure
PART III
10. Directors and Executive Officers of the Registrant 20
11. Executive Compensation 22
12. Security Ownership of Certain Beneficial Owners and Management 28
13. Certain Relationships and Related Transactions 31
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 32
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PART I
ITEM 1. BUSINESS
General
EXECUTONE Information Systems, Inc. ("EXECUTONE" or the "Company")
designs, manufactures, sells, installs and supports voice processing systems and
healthcare communications systems. EXECUTONE also provides cost-effective
long-distance telephone service through its INFOSTAR'r'/LD+ program. Products
are sold under the EXECUTONE'r', INFOSTAR'r', IDS'tm', LIFESAVER'tm' and
INFOSTAR/ILS'tm' brand names through a worldwide network of direct sales and
service offices and independent distributors.
EXECUTONE's executive offices are located at 478 Wheelers Farms Road,
Milford, Connecticut 06460, telephone (203) 876-7600. The Common Stock of
EXECUTONE is traded on the NASDAQ National Market System under the symbol
"XTON", and its Convertible Subordinated Debentures due 2011 trade on the NASDAQ
system under the symbol "XTONG".
Recent Developments
On April 10, 1996, the Company entered into an agreement to sell the
Company's direct sales and service organization, including its network services
division, to a new acquisition company led by Bain Capital, Inc. and including
Triumph Capital Group (the "Buyer"). The purchase price will consist of $61.5
million in cash, a $5.9 million junior subordinated note due July 1, 2004, with
interest at 7.5% per year, and warrants to purchase 8% of the equity issued as
of the closing in the new company. The sale is expected to close on May 31,
1996, subject to the Buyer's financing and other conditions.
The purchase and sale agreement also provides that the Company and the
Buyer will enter into a five-year exclusive distributor agreement pursuant to
which the Buyer will sell and service EXECUTONE'r' and INFOSTAR'r' telephone
products to business and commercial locations that require up to 400 telephones.
The sale will include the Company's National Service Center. The sale
does not include the Pittsburgh direct sales and service office, which the
Company has separately agreed to sell to one of its existing independent
distributors for approximately $1.3 million in cash and notes. The sale also
does not include any of the healthcare communications division, the call center
management division, the videoconferencing division, the National Accounts or
Federal Systems marketing groups or the recently acquired Unistar business.
On April 10, 1996, the Company also announced that it had given notice
of its intention to terminate its distribution agreement with GPT Video Systems
due to failures by GPT to deliver properly functioning videoconferencing
products on a timely basis. The Company has not yet finalized its plans for its
videoconferencing division.
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On December 19, 1995, the Company acquired 100% of the common stock of
Unistar Gaming Corp., a Delaware corporation ("Unistar"). Unistar, through its
subsidiary Unistar Entertainment, Inc., has an exclusive five-year contract to
design, develop, finance, and manage the National Indian Lottery (the "NIL" or
"Lottery"). 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 ("Coeur d'Alene Tribe"). In return for providing these management
services, Unistar will be paid a fee equal to 30% of the profits of the NIL.
The Registrant acquired 100% of Unistar for 3.7 million shares of
Common Stock, 250,000 shares of Cumulative Convertible Preferred Stock, Series A
("Series A Preferred Stock") and 100,000 shares of Cumulative Contingently
Convertible Preferred Stock, Series B ("Series B Preferred Stock").
The Series A Preferred Stock has voting rights equal to one share of
Common Stock and will earn dividends equal to 18.5% of the consolidated Retained
Earnings of Unistar as of the end of a fiscal period, less any dividends paid to
the holders of the Series A Preferred Stock prior to such date. The Series B
Preferred Stock has voting rights equal to one share of Common Stock and will
earn dividends equal to 31.5% of the consolidated Retained Earnings of Unistar
as of the end of a fiscal period, less any dividends paid to the holders of the
Series B Preferred Stock prior to such date. All dividends on Preferred Stock
are payable (I) when and as declared by the Board of Directors, (ii) upon
conversion or redemption of the Series A and Series B Preferred Stock or (iii)
upon liquidation. The Series A and Series B Preferred Stock is redeemable for a
total of 13.3 million shares of Common Stock (Series A Preferred Stock for 4.925
million shares and Series B Preferred Stock for 8.375 million shares) at the
Company's option. The Series A Preferred Stock is convertible for up to 4.925
million shares of Common Stock and the Series B Preferred Stock is contingently
convertible for up to 8.375 million shares of Common Stock (a total of an
additional 13.3 million shares of Common Stock) if Unistar meets certain revenue
and profit parameters. Shareholder approval is required before any of the Series
B Preferred Stock can be converted or redeemed. The Company intends to submit
the terms of the Series B Preferred Stock to its shareholders for approval at
the 1996 Annual Meeting.
The telephone operations of the NIL cannot begin until the resolution
of a pending legal proceeding. Certain states have attempted to block the NIL by
filing letters under 18 U.S.C. Section 1084 preventing long-distance carriers
from providing telephone service to the NIL based on allegations that the NIL is
not legal. The Coeur d'Alene Tribe has initiated legal action to argue that the
Lottery is authorized by the Indian Gaming Regulatory Act ("IGRA") passed in
1988, that IGRA preempts state and federal statutes, and that the states lack
authority to issue the Section 1084 notification letters to any carrier. On
February 28, 1996, the Coeur d"Alene tribal court ruled that all requirements of
IGRA have been satisfied, that the Section 1084 letters are invalid, and that
the long distance carrier is obligated to provide telephone service for the NIL.
Although the ruling is likely to be appealed to the tribal supreme court and
ultimately to U.S. Federal District Court, the Company believes the initial
ruling and the Coeur d'Alene Tribe's position will be upheld.
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In July 1995, the Company reorganized its core business into five
divisions: Computer Telephony, Healthcare Communication Systems, Call Center
Management, Videoconferencing Products, and Network Services. The business of
Executone, Inc. acquired by the Company in 1988 was a telephone equipment
business that focused its direct selling effort on office sites with fewer than
20 phones, with an emphasis on selling additional hardware to generate revenues
in the form of moves, adds and changes ("MAC") and service, mainly on a time and
material basis. The average system size in the customer base at that time was in
the 8-10 phone range. It was originally expected in 1988 that the MAC and
service revenues generated by the customer base would be increasingly profitable
as the base of customers grew. Since 1988, the Company has expanded its product
line to the high-end user, with larger customers and more sophisticated products
to serve customers' total communications needs. 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. With the IDS product, a digital
platform for various communications functions, which was developed after the
acquisition, the Company's product lines now provide sophisticated software
applications, including integrated voice mail, call center applications (ACD,
IVR's and predictive dialers), infrared locator systems, nurse call systems and
computer telephony interfaces that drive its telephony products.
The development in the nature and complexity of our product lines has
changed the way the Company has to market its products. Unlike many companies in
its industry that focus on one particular product to one market, the Company
provides multiple products and applications to its particular market niche. This
requires the Company to have expertise in each particular market segment in
which it competes because the Company's competitors are primarily one-product
companies or divisions who are experts in their particular market niche.
Therefore, the Company consolidated the sales, marketing and product development
functions for each market segment under a divisional management structure,
headed by a division president. The sales force has been restructured such that
each sales person is assigned to a specific division and will sell only within
that division's market segment. The specialization of the sales force included
the addition of sales representatives with the necessary product and market
expertise, as well as substantial retraining for the remaining sales
representatives.
Business Strategy
EXECUTONE is a vertically integrated voice processing and healthcare
communications company. The Company controls the major elements of its business,
ranging from product design, manufacturing and marketing to distribution,
installation, service and support. Revenues are derived from both from new
installations and from the Company's existing customer base through additions,
changes, upgrades or relocation of previously installed systems, maintenance
contracts, service charges and sales of network services. The Company's products
and services are marketed and sold through a worldwide network of Company direct
sales and service offices and independent distributors. The Company is organized
into five divisions focusing on different products and market segments: computer
telephony, healthcare communication systems, call
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center management, videoconferencing products, and network (voice, data and
video) services.
The objective of the computer telephony division is to offer
value-added products and services. The Company's integrated digital telephone
systems emphasize flexible software applications, such as data switching and
computer telephone interface, designed to enhance the customer's ability to
communicate, obtain and manage information. The Company's telephone systems
provide the platform for its other voice processing software applications, such
as automatic call distribution.
The healthcare communications systems division provides to its
healthcare facility customers integration of voice and data between nurse and
patient communication systems and hospital information systems, resulting in
increased flexibility and efficiency in hospital operations, and improved
patient care. EXECUTONE has been a recognized name in this market for many years
with its LIFESAVER'tm' and CARE/COM'r'II-E nurse call systems. The Company is
also creating software applications specific to hospital and nursing homes to
help resolve other labor intensive tasks.
The healthcare communications division also markets the
INFOSTAR/ILS'tm' locator system, released in early 1994. The INFOSTAR/ILS system
can improve productivity, save time and expense for users and eliminate overhead
paging by instantly locating staff and equipment in a facility. Each person or
piece of equipment wears an individually coded badge that transmits infrared
signals to sensors placed throughout the facility, which forward the location
information to a central processing unit. The location data can be accessed on
local display stations. The ILS'tm' system can be integrated with the Company's
telephone systems and the LIFESAVER'tm' nurse call system to provide additional
productivity improvements for hospital environments. The ILS system is also
marketed by the computer telephony division for office environments.
The call center management division develops and sells sophisticated
telephony products that integrate a computerized digital telephone system
platform with high-volume inbound, outbound and internal call processing
systems. Such systems include automatic call distribution systems, predictive
dialing systems, scripting software to assist agents handling calls, and
interactive voice response systems. Certain of these systems also provide data
interface with host or mainframe computers. These systems are sold to call
center customers that have a need for systems to efficiently and
cost-effectively receive or place their customer or prospect calls, distribute
those calls to available live operators, obtain information from callers, record
and distribute messages from callers, and produce management reports on call
activity.
The videoconferencing division is the exclusive distributor of products
of GPT Video Systems ("GPT") in the United States. The division also provides
videoconferencing network services such as multipoint conferencing, network
bridging and network design to its videoconferencing customers.
The network services division offers cost-effective voice, data and
video
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long-distance service, least-cost routing, network design and network support
services, enabling customers to make more efficient and cost-effective use of
their telecommunications systems. Services are sold primarily to telephony
customers in the United States.
In 1995, the Company acquired Unistar. Unistar, through its subsidiary
Unistar Entertainment, Inc., has an exclusive five-year contract with the Coeur
d'Alene Tribe of Idaho to design, develop, finance, and manage the National
Indian Lottery (the "NIL" or the "Lottery"). The NIL will be a national
telephone lottery authorized by the federal Indian Gaming Regulatory Act
("IGRA") and a compact between the State of Idaho and the Coeur d'Alene Tribe.
In return for providing these management services to the NIL, Unistar will be
paid a fee equal to 30% of the profits of the NIL. Through Unistar, the Company
will provide development and management of the network design and call center
applications for the Lottery's operations. It is anticipated that calls to
purchase lottery tickets will be made via 800 number lines and processed by
interactive voice response systems, as well as live agents located on the Coeur
d'Alene Reservation using ACD software to manage a high volume of calls. The
Lottery will require an extensive telephone network to handle the anticipated
call volume.
The telephone operations of the NIL cannot begin until resolution of a
pending legal proceeding. See "Legal Proceedings."
Computer Telephony Products
The Company offers a complete line of applications-oriented computer
telephony systems, ranging from those satisfying the basic voice communications
needs of small businesses to those capable of meeting the complex voice and data
communications demands of much larger business locations that need fully
featured telecommunications systems. The Company markets the IDS'tm' Integrated
Digital System, along with an expanding line of software applications and
features operating on that platform. The Company's largest telephone platform is
the IDS'tm'/System 648 digital system, which can accommodate up to 648
nonblocking voice ports and 648 nonblocking data ports. The Company believes its
installed telephone equipment base exceeds 3 million desktops.
In 1996, the Company introduced its TAPI telephone, designed to support
any desktop application using the TAPI standard for computer-telephone
integration, in order to speed inbound and outbound call handling and increase
productivity. The TAPI telephone can eliminate time spent searching for
telephone numbers, looking up PBX feature codes, misdialing or searching for
information to handle a call.
The Company's telephone systems are characterized by flexible software
and a hardware design that makes them readily adaptable to evolving technology
and customer requirements. The Company attributes the market acceptance of its
systems to cost-effective design and to the sophistication of its software
options. The software in each system provides such features as automatic
dialing, add-on conferencing, call forwarding, last number redialing, message
waiting, paging capability, internal diagnostic routines and other commonly used
communications features. The Company's systems also include an integrated
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automated attendant feature to answer and transfer calls quickly and efficiently
without operator intervention, and a video display terminal and management
reports that permit the monitoring of calls and improve the efficiency of
directing calls to the appropriate extensions. The Company's telephone systems
also support sophisticated applications such as voice mail and call center
products as well as the Company's locator system.
The Company also offers a voice mail system that can be integrated with
the IDS'tm' telephone systems and with telephone systems manufactured by others.
The voice message or voice mail system receives, records, stores, distributes,
transfers and replays messages from both external and internal callers and can
supplement other call center systems.
The Company develops its application-specific software options using
high-level programming languages to facilitate further enhancements and
portability. EXECUTONE's software includes remote capabilities built into
certain systems that enable the Company to customize and update selected
features continuously, which increases the value of such systems and lengthens
their useful lives. Certain of the Company's systems are capable of having
service diagnostics, updates and modifications performed on a remote basis. The
ability to provide such off-site servicing increases the efficiency of customer
support and service.
Healthcare Communication Products
The Company develops, manufactures, markets and services a line of
specialized internal communications systems that are used primarily in the
healthcare industry. These internal communications systems are
microprocessor-based patient-to-nurse communication systems, intercoms, paging
and sound equipment, and room status indicators.
The Company's LIFESAVER'tm' nurse call system is an advanced system
integrating voice and data communication between nurse and patient and providing
enhanced self-diagnostics. The LIFESAVER'tm' system is a state-of-the- art
communications network that provides routine and emergency signaling, voice
communications and data transmission. The nurse console offers menu-driven
functions and step-by-step user prompts. The system is highly flexible, offering
many programmable features that allow customization of its operations to the
hospital's needs. A single system can serve more than 300 patient beds (150
rooms) and up to eight nurse control stations, and up to eight systems can be
networked for centralized operation.
The CARE/COM'r' II-E nurse call system represents the first step in
EXECUTONE's plan to bring the benefits of a totally integrated communications
system to the healthcare market on the Company's IDS digital platform. The
CARE/COM'r' lI-E system provides patient-to-staff and staff-to-staff voice
communication on an automatic three-level call priority basis. This new system
can currently support 72 patient stations per system, with the ability to
integrate three systems together and support 216 patient stations. A three-line
LCD display Nurse Control Station allows simple call processing and system
operation. The
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system is highly flexible to meet the individually defined needs of today's
hospitals and long-term care facilities.
The LIFESAVER'tm' nurse call system integrates with the Company's
locator system.
The Healthcare Division also markets the INFOSTAR'r' /PRS patient
reporting system, an automated voice storage system that allows the efficient
transfer of patient information between nurses. Patient reports are password-
protected for confidentiality and admission, discharge and transfer information
are also supported. The system uses standard telephone instruments and provides
full voice messaging capability. The INFOSTAR'r'/PRS system reduces report time,
provides continuity at shift changes, and improves report quality.
In 1995, the Healthcare Division began marketing the Communicator
system manufactured by Dialogic Communications Corporation, in which the Company
has an equity investment. The Communicator product is a P.C.-based, automated
callout system that rapidly locates personnel to fulfill routine or emergency
staffing needs, searching multiple locations until responses are sufficient to
satisfy the staffing need. The system also provides real-time management reports
of employee eligibility, availability, and responses. Using the Communicator
system, hospitals can improve staffing efficiency, avoid miscommunication, and
enhance productivity.
Locator Systems
The Company's INFOSTAR/ILS'tm' locator system is an integrated system
using infrared transmitter badges to communicate location data to sensors
installed throughout a facility. The badges transmit regularly at
user-programmed intervals and can be worn by staff personnel or attached to
equipment. The location data is collected by the sensors and forwarded to a
central processing unit that organizes the data so it can be accessed at one or
more display stations. The display of staff and equipment location information
can be in the form of a list or in the form of a map of the facility using
icons. The display can be filtered to show only particular staff members, groups
of personnel, particular pieces of equipment or groups of equipment. The system
can be integrated with either the IDS telephone systems, allowing the activation
of features and display of information on the telephone set, or the Company's
nurse call systems, allowing the activation of features and display of
information at the nurse control station and patient stations. The
INFOSTAR/VLS'tm' version of this product allows outside callers to locate
personnel within a facility, find out who the person is with, complete the call,
or leave a voice message. The ILS and VLS systems can also be integrated to
other manufacturers' PBXs. Nortel has now made ILS available to its dealer
network for sale by its dealers in conjunction with Nortel PBXs.
Call Center Management Products
The Company's call center management products consist of the following
systems, which can be integrated with the Company's computer telephone systems
and with each other to provide large-volume inbound, outbound and
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internal call management. Computer-telephone integration ("CTI") technology
integrates the IDS'tm' call processing function with information in a customer's
computer database. Primarily used by large incoming call centers to
automatically identify incoming callers and by outbound centers to contact and
provide records of contacts, CTI limits the amount of time that an agent spends
contacting or identifying the caller, thereby providing better customer service,
reducing the number of required agents and reducing telephone line and
transmission expense.
Predictive Dialers and Scripting Products - The INFOSTAR'r'/Predictive
Dialer is an automated call system designed to boost productivity in outbound
call centers. The system integrates telephone, data collection and transaction
processing functions for those customers who require high volume contact by
telephone to transact business, such as sales, credit and collections, blood
banks and fund-raising. Working with the host computer and the IDS'tm' telephone
system platform, the dialer automatically dials telephone numbers pulled from
the host computer database and detects "live" calls. Available representatives
receive these calls and, through CTI, can view screen information about the
customer from the database immediately after the customer answers the phone. The
system predicts the availability of agents in order to reduce abandoned calls
and increase agent productivity, and reduces agent contact with busy signals, no
answers, wrong numbers and answering machines. Management reports provide
instant and historical feedback on call distribution, list management, data
input integrity and file maintenance. Scripting software allows the call center
to create a script to guide its agents through various call scenarios and prompt
the input of desired information.
Automatic Call Distribution ("ACD") - ACD systems are designed to
increase responsiveness to inbound callers and increase agent productivity. ACD
systems provide the capability to distribute or route incoming calls to
available agents based upon management's specifications, and allow the
supervisor of the call processing group to monitor call traffic on-line via a
computer terminal. The Company produces ACD software for call centers of up to
500 agents in multiple shifts (225 in any single shift), in five levels of
sophistication, the highest of which is "Custom Plus ACD." Custom Plus ACD
provides the capability to store and retrieve call data for a limited period,
print out standard call traffic reports, customize reports to the needs of a
specific application, monitor traffic with color screens and graphics, and
greatly enhance the ability to store and retrieve historical call data.
Interactive Voice Response - The Company's interactive voice response
("IVR") systems provide businesses with automated handling of routine calls.
Voice response systems allow callers to input and retrieve information into or
from computers by means of the dialpads on their telephones. The caller is
guided by voice prompts to input data by dialing numbers, which the IVR system
converts into computer keystrokes. The IVR system can also convert computer
screen information into voice prompts, allowing callers to retrieve information
from computers. The voice response product provides advanced computer access
applications and advanced facilities, such as ISDN, that interface with the
Company's IDS'tm' family of telephone systems and other advanced voice
processing applications.
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Videoconferencing Systems and Services
The Videoconferencing Division markets videoconferencing equipment in
the United States and provides video network services including video
networking, network design, multipoint conferencing, and video network bridging.
The Company provides its videoconferencing customers with a "turnkey" solution
including equipment installation, network services, maintenance and customer
support.
Network Services
The Company markets INFOSTAR'r'/LD+ long-distance telephone service to
its customers. INFOSTAR'r'/LD+ provides a complete service to the Company's
customers from the initial sale through billing and customer support. The
Company has contracted with major carriers including Sprint, Worldcom and
Teleport Communications to carry the long-distance traffic for both voice and
data on their networks. The Company has also signed agreements to provide
alternative local access in select cities throughout the U.S. This program
offers many features including six-second billing rates, accounting codes,
international service, 800 service, "T-1" access and specialized management
reporting.
The Company also provides the following network services:
Network Designer - The Company can perform a computer-generated
analysis of a customer's calling patterns in order to recommend the optimum
configuration of its network. Recommendations would include the long-distance
carriers and the number of lines needed.
Least Cost Routing ("LCR") - LCR stores current tariff tables for the
appropriate long-distance carriers employed by the customer and automatically
selects the least expensive carrier for each specific call at the moment the
call is placed.
Data Switching - Data switching provides the capability to switch data
between mainframe, minicomputers, personal computers, terminals and peripherals
through the telephone systems.
Centrex Capability and Applications - The Company's telephone systems
can be programmed to function in conjunction with and enhance the features of
Centrex services offered by the local telephone companies.
Sales and Marketing
Developing and maintaining a strong relationship with the end-user
customer is the focus of the Company's marketing strategy. The Company's
distribution network consists of (1) 70 Company-owned direct sales and service
locations in the major markets in the United States; (2) domestic independent
distributors with approximately 110 locations operating under exclusive and
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nonexclusive agreements throughout the United States and Canada; (3) a National
Accounts Division that uses the sales, installation, service and support
capabilities of EXECUTONE's distribution network to serve multiple offices and
departments of companies; (4) a Federal Systems Division that uses the
distribution network to serve offices of the U. S. Government and its agencies;
(5) vertical marketing organizations of the healthcare communications, call
center, network and videoconferencing divisions; and (6) 20 independent
distributors operating in sixteen other foreign countries.
For those distributors that have exclusive distribution rights for
specified products, retention of such rights is subject to satisfaction of
established criteria for sales and service to customers on an ongoing basis. The
divesting of or acquisition of customer bases to or from distributors in
specific geographic territories may occur in the normal course of the Company's
business.
EXECUTONE's National Accounts Division provides uniformity in pricing,
coordination, installation, billing and service for National Accounts Division
customers such as Electronic Data Systems, Airborne Express, Paychex, Inc., W.
W. Grainger, Home Quarters Warehouse, Inc., Bridgestone/Firestone, Carlson
Companies, Fidelity Investments and TCI Cable. The Division coordinates the
sales, installation, service and support functions of direct and independent
sales offices to serve the multiple offices and departments of large companies.
The Company's Federal Systems Division addresses the special
procurement and administrative requirements of the U.S. Government. Sales are
made through a combination of master contracts and competitively solicited
proposals for large or complex telecommunications requirements. Federal Systems
coordinates the installation, service and support activities of direct and
independent sales offices to provide ongoing support to federal agency offices
nationwide.
Backlog consists primarily of products that have been ordered and that
will be shipped or installed within 30 to 60 days of the order (other than call
center and healthcare orders, which have a longer lead time), or systems the
installation of which is not yet required by the customer. Backlog as of
December 31, 1995, was $ 33,091,000 compared to $29,390,000 at December 31,
1994, and the Company expects virtually all of such backlog to be filled within
the current fiscal year.
Customer Support and Service
The Company operates a National Service Center that diagnoses system
problems for many of the end-user customers of its direct sales and service
offices, coordinates field service personnel and programs certain corrections
remotely from a centralized location at its corporate headquarters. The National
Service Center helps the Company in providing consistent customer service and
support while improving the productivity of the Company's technicians. All
service calls received from customers are controlled from initial diagnosis to
ultimate disposition through an internally-developed and maintained proprietary
software package. The National Service Center maintains detailed customer
records and also markets and monitors certain products and services such as
maintenance
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contracts. It is the primary point of contact for customer needs, questions or
requests. Additionally, the National Service Center provides the Company with
statistical data and reports regarding a product's performance, which can be
used to make enhancements and improvements. This data is also available for each
of the Company's locations and each of its technicians.
EXECUTONE warrants parts and labor on its systems, typically for one
year, and provides maintenance and service after warranty expiration either on a
contract or time and materials basis. Most of the Company's products are
repaired at its 56,000-square foot repair facility located in Poway, California.
Product Development and Engineering
As of March 1, 1996, EXECUTONE employed over 100 individuals engaged in
product design and development. The Company's product development program is
designed to anticipate and respond to customer needs through development of new
products and enhancement of existing products. During 1995, the Company's
engineering efforts focused on applications-oriented software products,
including new releases of voice messaging, call center and healthcare
communications software. EXECUTONE continually strives to reduce production
costs by incorporating new technology into its design and manufacturing
operations. For the years ended December 31, 1995, 1994, and 1993,
Company-sponsored product development and engineering expenditures (including
product management and testing) amounted to approximately $14.7 million, $12.2
million, and $9.9 million, respectively.
Manufacturing
Most of EXECUTONE's telephone products are manufactured by Wong's
Electronics Company, Ltd. ("Wong's") in Hong Kong or China, by Quality
Telecommunication Products, also referred to as Compania Dominicana de Telefonos
("Codetel"), in the Dominican Republic, and by the Company directly in Poway,
California. Many of the printed circuit boards for the Company's products are
manufactured, and many products are assembled into systems and system
components, in the United States.
The Company's Manufacturing Services Agreement with Wong's currently
expires in February 1997 but is automatically extended each year for an
additional one-year term unless either party gives notice of termination three
months prior to expiration of the current term. The contract may be terminated
earlier by either party in the event of a material breach by the other party.
If the agreement between Wong's and EXECUTONE should be terminated for
any reason, or if Wong's is unable to ship or has to reduce shipments, or if
restrictions are imposed materially limiting the importation of products
produced by foreign manufacturers, the Company could be affected adversely until
satisfactory alternative sources are in place. The profitability of EXECUTONE's
operations could be affected to the extent it is unable to reflect the direct
and indirect costs of products purchased from Wong's in its pricing policies.
The prices for products purchased by EXECUTONE from its suppliers are payable in
U.S.
11
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<PAGE>
dollars.
The majority of EXECUTONE's specialized healthcare and internal
communication systems are produced in the United States at the Company's
facility in Poway, California or at domestic subcontractors. The functions of
repair, warehousing and distribution of the Company's products are performed at
the Company's facilities in Poway.
Trademarks, Patents and Copyrights
Management believes that the continued success of EXECUTONE is
dependent upon the ability to design, develop and market new products and new or
enhanced applications. The patentability of such new products or applications is
evaluated and patent applications are filed where necessary to protect unique
developments. The Company currently holds eight utility patents, expiring at
various times between 2007 and 2012, has 13 U.S. patent applications pending,
and seven patent applications pending in numerous foreign countries.
The Company has registered or applied to register its trademarks when
it believes registration to be important to its ongoing business operations. The
Company also generally claims copyright protection for software, circuit
designs, schematics and technical documentation used in connection with its
products, and relies upon trade secret, contract and copyright laws to protect
its proprietary rights in its software, designs and documentation.
Certain of EXECUTONE's products incorporate technology and software
licensed from independent third parties. Generally, these licenses require
payment of a royalty for each system sold that incorporates the licensed
technology or require that the Company purchase the product from the licensor.
Government Regulation
Many of the Company's systems are designed to be connected to the
public telecommunications network and as such are required to comply with
certain rules of the Federal Communications Commission ("FCC") pertaining to
telecommunications equipment. The Company's network services are generally
required to be tariffed and are subject to regulation by the public utility
commissions of the various states and by the FCC. The Company has not
experienced any material adverse effect on its business or operations as a
result of such regulation and compliance.
Certain uses of outbound call processing systems are regulated by
federal and state law. Among other things, the FCC has adopted rules pursuant to
the Federal Telephone Consumer Protection Act to protect residential telephone
subscribers' privacy rights to avoid receiving telephone solicitations to which
they object. Certain states have enacted similar laws limiting access to
telephone subscribers who object to receiving solicitations. Although compliance
with these laws may limit the potential use of the Company's predictive dialer
systems in some respects, the Company's systems can be programmed to operate
12
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automatically in full compliance with these laws through the use of appropriate
calling lists and calling campaign time parameters.
To the extent the Company markets its products internationally, it is
required to comply with applicable foreign law, including certification of its
products by appropriate government regulatory organizations.
Competition
The market segments in which the Company offers its products and
services are highly competitive. The under 300-desktop voice processing segment
in the United States, the primary market for the Company's telephony division,
is served by many domestic and foreign communications equipment manufacturers
and distributors, including Lucent Technologies (the former equipment business
of AT&T), Nortel (formerly named Northern Telecom), and the Regional Bell
Operating Companies (the "RBOCs"), as well as numerous specialized software
companies. The Company believes that it may be third in telephone system
shipments to the under 300-desktop voice processing market, after AT&T/Lucent
and Nortel, based on industry surveys of 1994 data. However, such information
may not be sufficient to make an exact assessment of the Company's competitive
position relative to its competitors. Similarly, the Company faces strong
competition in network services, including AT&T, MCI, Sprint, and numerous long
distance resellers. Although the Company can be competitive on price compared to
several of these companies, many of EXECUTONE's competitors have substantially
more capital, technology and marketing resources than the Company.
Competition in the Company's market segments is expected to increase
significantly with passage in February 1996 of the Telecommunications Act of
1996 (the "Act"). Under the Act, long-distance companies, cable companies and
others will be permitted to compete with local telephone companies to offer
local service. The RBOCs and other local telephone companies will be permitted
to offer long-distance services if their local market meets certain criteria to
measure the existence of local competition.
The Company believes its call center division is in a good competitive
position although to date it has not penetrated a significant portion of this
market. The Company believes it is currently the only vendor that supplies
inbound, outbound and administrative call processing integrated with a telephone
system platform.
The Company's principal competitors in healthcare communications are
Hill-Rom Company, DuKane and Rauland-Borg. The Company believes it has a strong
competitive position in nurse call and locator products.
The Company believes that it has several competitors in
videoconferencing but is not yet able to estimate its competitive position
relative to such competitors.
The Company competes by offering a full array of integrated
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<PAGE>
telecommunication products and services to its customers. The Company also
competes on the basis of the quality of its products, its customer service,
nationwide distribution and installation, and price.
Employees
As of March 1, 1996, EXECUTONE employed approximately 2,400 persons,
directly and through its subsidiaries. Approximately 5% of the employees of the
Company and its subsidiaries are represented by unions, all of which are
represented by the International Brotherhood of Electrical Workers. Management
believes that the Company's relations with its employees are good.
14
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<PAGE>
ITEM 2. PROPERTIES
EXECUTONE's principal offices are located in two leased buildings in
Milford, Connecticut. The Company has sales offices, warehouses, manufacturing
and distribution facilities throughout the United States. As of December 31,
1995, the Company utilized 73 facilities in the United States with an aggregate
of approximately 792,000 square feet for its ongoing operations.
The Company's facilities are occupied under lease agreements except for
one facility. This Company-owned building is approximately 15,000 square feet,
and is used for a direct sales and service office. The current annual rent for
the Company's facilities is approximately $9.2 million. The Company has one
facility totaling approximately 14,000 square feet of space that is no longer
used in ongoing operations and is subleased.
The Company believes its facilities are adequate and generally suitable
for its business requirements at the present time and for the immediate future.
The following is a brief description of the primary facilities of the Company.
<TABLE>
<CAPTION>
Use Location Approximate Size
<S> <C> <C>
Corporate and Direct Sales Milford, Connecticut 150,000 square feet
Headquarters; National Customer
Service Center; and Research,
Development and Engineering
Facility
Distribution, Production & Poway, California 115,000 square feet
Repair Center and Warehouse
Direct Sales and Service Major cities across U.S. 496,000 square feet
Offices, including warehouses
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
On October 16, 1995, the Coeur d 'Alene Tribe filed an action entitled
Coeur d'Alene Tribe v. AT&T Corp. in the Tribal Court, located in Plummer, Idaho
(Case No. C195-097), requesting a ruling that the NIL is legal under IGRA, that
IGRA preempts state laws on the subject of Indian gaming, and the NIL cannot be
blocked by state action, and an injunction preventing AT&T from refusing to
provide telephone service to the NIL. This action was necessary because several
network carriers have been sent Section 1084 letters under the Federal
Communications Act by states opposed to the NIL. These letters state that the
NIL is illegal under state and federal laws and prohibit the carriers from
carrying network traffic for the NIL. The telephone operations of the NIL cannot
begin until resolution of this proceeding and agreement of a network carrier to
carry the network traffic of the NIL. On February 28, 1996, the Tribal Court
ruled that all
15
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<PAGE>
requirements of IGRA have been satisfied, that the Section 1084 letters are
invalid, and that AT&T is obligated to provide telephone service for the NIL.
Although AT&T has stated that it will appeal the ruling to the tribal supreme
court and ultimately to U.S. federal court, the Company believes the initial
ruling and the Coeur d'Alene Tribe's position will be upheld. However, this
litigation, as well as other litigation which could be brought by states opposed
to the NIL, could delay commencement of operations, and it is impossible at this
time to predict when the NIL will commence operations. The Company does not
believe the outcome of this litigation will have a material adverse effect on
the Company's consolidated financial position, results of operations or
liquidity.
The Company currently is a named defendant in a number of lawsuits and
is a party to a number of other proceedings that have arisen in the normal
course of its business. Those lawsuits and proceedings relate primarily to the
collection of indebtedness owed to the Company, the performance of products sold
by the Company, and various contract disputes. In the opinion of the Company,
these proceedings are not expected to have a material adverse effect on the
consolidated financial position, results of operations or liquidity of the
Company and, to the extent they are not covered by insurance, reserves adequate
to satisfy such liabilities have been established.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS
No matter was submitted to a vote of security holders in the fourth
quarter of the fiscal year covered by this report.
16
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<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position With Company
<S> <C> <C>
Alan Kessman 49 Chairman of the Board, President and Chief
Executive Officer
Stanley M. Blau 58 Vice Chairman of the Board
Michael W. Yacenda 44 Executive Vice President
Barbara C. Anderson 44 Vice President, General Counsel and Secretary
James E. Cooke III 47 Vice President, National Accounts
Anthony R. Guarascio 42 Vice President, Finance and Chief Financial Officer
Israel J. Hersh 42 Vice President, Software Engineering
Elizabeth Hinds 54 Vice President, Human Resources
Robert W. Hopwood 52 Vice President, Customer Care
Andrew Kontomerkos 50 Senior Vice President, Hardware Engineering and
Production
David E. Lee 49 Vice President, Business Development
John T. O'Kane 66 Vice President, MIS
Frank J. Rotatori 53 Vice President, Healthcare Sales
Shlomo Shur 46 Senior Vice President, Advanced Technology
</TABLE>
Alan Kessman has served as Chairman and Chief Executive Officer of the
Company since 1988. Prior to that, he had served as President and Chief
Executive Officer of ISOETEC Communications, Inc., a predecessor of the Company
("ISOETEC"), since 1983. From 1978 to 1983, Mr. Kessman served as President of
three operating subsidiaries of Rolm Corporation, and from 1981 to 1983, he
served as a Corporate Vice President of Rolm Corporation, responsible for sales
and service in the eastern United States.
Stanley M. Blau has served as Vice Chairman of EXECUTONE since 1988.
Prior thereto, from June 1987 to July 1988, Mr. Blau was the President and Chief
Executive Officer of Vodavi Technology Corporation, a predecessor of the Company
("Vodavi"). Mr. Blau was formerly the President and Chairman of the Board of
Consolidated Communications, Inc., a telecommunications products
17
<PAGE>
<PAGE>
supply company he founded in 1973.
Michael W. Yacenda has served as Executive Vice President of EXECUTONE
since January 1990. Prior to that time, he was Vice President, Finance and Chief
Financial Officer of the Company from July 1988 to January 1990. He served as a
Vice President of ISOETEC from 1983 to 1988. From 1974 to 1983, Mr. Yacenda was
employed by Arthur Andersen & Co., a public accounting firm. Mr. Yacenda is a
certified public accountant.
Barbara C. Anderson has been Vice President, General Counsel and
Secretary since 1990. From 1985 to 1989, she was Corporate Counsel of United
States Surgical Corporation, a manufacturer of medical devices.
James E. Cooke III has served as Vice President, National Accounts
since February 1995. Prior to that time, from 1992 until 1995, Mr. Cooke served
as Division Manager of Operations for the Company, and from 1988 through 1991,
Mr. Cooke was a District Manager for the Company. From 1985 until 1988, Mr.
Cooke was the President of an interconnect company, and from 1981 to 1985, he
was a General Manager and a Regional Manager of the Jarvis Corporation. For
eight years prior to that time, he worked at Xerox Corporation in various sales
and management positions.
Anthony R. Guarascio has been Vice President, Finance and Chief
Financial Officer since January 1994, and prior thereto was Vice President and
Corporate Controller since January 1990. From 1984 until 1990, Mr. Guarascio was
the Corporate Controller of the Company and ISOETEC.
Israel J. Hersh has been Vice President, Software Engineering since
February 1995. Mr. Hersh joined the Company as Director of Software Development
in 1984, and was promoted to Senior Director of Software Engineering in January
1994. Prior to his employment with the Company, Mr. Hersh was a manager of the
software development department for T-Bar, Inc. Mr. Hersh has a B.S. in
Electrical Engineering from Tel Aviv University and a MS in Electrical
Engineering from Bridgeport University.
Elizabeth Hinds has been Vice President, Human Resources since January
1995. Prior to joining the Company, Ms. Hinds was Vice President, Human
Resources of Chilton Company, a wholly-owned subsidiary of Capital
Cities/American Broadcasting Company, Inc. ("CC/ABC"), from February 1993 until
January 1995. Ms. Hinds was the Director of Human Resources for CC/ABC from June
1987 until February 1993.
Robert W. Hopwood has served as Vice President, Customer Care since
January 1990. From 1983 until 1990, Mr. Hopwood was the Director of Technical
Operations of the Company and ISOETEC.
Andrew Kontomerkos has been Senior Vice President, Hardware Engineering
and Production since January 1994, and prior thereto was Vice President,
Hardware Engineering since 1988. He served as a Vice President of ISOETEC since
1983. From 1982 to 1983, he was a Vice President and founder
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of SAM Communications, Inc., a telecommunications research and development
company which was one of the predecessors to ISOETEC; that corporation was
merged into ISOETEC in 1983. From 1979 to 1982, Mr. Kontomerkos was Director of
Telecommunications Systems Development of TIE/communications, Inc., a
manufacturer of telecommunications systems.
David E. Lee has been Vice President, Business Development since
February 1995. Prior thereto, from October 1990 to February 1995, Mr. Lee was
Division Manager for the Network Services Division of the Company. From 1984
until 1990, Mr. Lee held various management positions within the Company. Mr.
Lee served as Director, International Finance of GTE Corporation from 1983 to
1984 and prior thereto, he held various financial management positions within
GTE Corporation.
John T. O'Kane has served as Vice President, MIS since January 1990.
From 1988 until 1990, Mr. O'Kane was Director of MIS for the Company. Prior to
that time and since 1981, he was the Vice President of MIS for Executone, Inc.,
a predecessor of the Company.
Frank J. Rotatori has been Vice President, Healthcare Sales since
February 1995. Prior thereto he was Vice President, European Operations since
February 1994, and prior thereto was Director of Call Center Management Products
during 1992 and 1993, Vice President-Direct Sales from 1990 through 1991 and
Vice President-Customer Service of the Company from 1988 to 1990. Mr. Rotatori
joined ISOETEC in 1986 as a regional manager. From 1982 to 1986, he served as
General Manager and Eastern Regional Manager for Rolm Corporation. For 13 years
prior to that time, he worked at Xerox Corporation in various manufacturing,
accounting, sales and service management positions.
Shlomo Shur has been Senior Vice President, Advanced Technology since
January 1994, and prior thereto was Vice President, Software Engineering since
1988. He served as a Vice President of ISOETEC from 1983 to 1988. From 1982 to
1983, he was Vice President and a founder of SAM Communications, Inc., a
telecommunications research and development company which was one of the
predecessors to ISOETEC; that corporation was merged into ISOETEC in 1983. From
1978 to 1982, Mr. Shur was Manager, Software Development for TIE/communications,
Inc., a manufacturer of telecommunications systems.
19
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Incorporated by reference to "Stock Data" in the Registrant's 1995
Annual Report to Shareholders.
ITEM 6. SELECTED FINANCIAL DATA
Incorporated by reference to "Selected Financial Data" in the
Registrant's 1995 Annual Report to Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Incorporated by reference to "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Registrant's 1995 Annual
Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements are incorporated by reference to the Financial
Statements in the Registrant's 1995 Annual Report to Shareholders. The Schedule
appears at pages S-1 through S-2 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
The following persons are currently serving as directors and have been
nominated by the Board of Directors as candidates for re-election as directors
at the Annual Meeting of Shareholders to be held on July 30, 1996. Certain
information regarding each director is set forth below, including each
individual's principal occupation and business experience during
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at least the last five years, other directorships in other public companies, and
the year in which the individual was elected a director of the Company or one of
its predecessor companies.
<TABLE>
<CAPTION>
Director
Name Age Principal Occupation Since
<S> <C> <C> <C>
Alan Kessman 49 President, Chief Executive Officer and 1983
Chairman of the Board of the Company
since 1988; formerly President, Chief
Executive Officer and Chairman of the
Board of ISOETEC Communications, Inc.
("ISOETEC"), one of the Company's
predecessor corporations, since 1983.
From 1981 to 1983, Mr. Kessman served
as a Corporate Vice President of Rolm
Corporation.
Stanley M. Blau 58 Vice Chairman of the Company since 1983
1988; formerly President and Chief
Executive Officer of Vodavi Technology
Corporation ("Vodavi"), one of the
Company's predecessor corporations,
from 1987 until July 1988.
Thurston R. Moore 49 Partner, Hunton & Williams (Attorneys), 1990
Richmond, Virginia, since 1981.
Richard S. Rosenbloom 63 David Sarnoff Professor of Business 1992
Administration, Harvard Business
School, since 1980. Mr. Rosenbloom is
a director of Arrow Electronics, Inc.
Jerry M. Seslowe 50 Managing Director of Resource Holdings 1996
Ltd., an investment and financial
consulting firm, since prior to 1991.
William R. Smart 75 Senior Vice President of Cambridge 1992
Strategic Management Group in
Cambridge, Massachusetts since 1984.
From 1984 to 1992, Chairman of the
Board, Electronic Associates, Inc.
Mr. Smart is a director of National
Data Computer Company and American
International Petroleum Company.
</TABLE>
Executive Officers
See Part 1 for information and identification of executive officers of
the
21
<PAGE>
<PAGE>
Company.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires that the
Company's directors and executive officers, and persons who own more than 10% of
a registered class of the Company's equity securities, file with the Securities
and Exchange Commission initial reports of ownership and reports of change in
ownership of Common Stock and other equity securities of the Company. Officers,
directors and greater than 10% shareholders are required by SEC regulation to
furnish the Company with copies of all Section 16(a) forms that they file.
To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company, and written representations that no other
reports were required, during the fiscal year ended December 31, 1995, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than 10% beneficial owners were complied with.
ITEM 11. EXECUTIVE COMPENSATION
Director Compensation
Each non-employee director receives an annual retainer of $10,000, payable
in equal quarterly installments, plus a fee of $1,250 for each Board meeting
attended. The Company also reimburses directors for their travel and
accommodation expenses incurred in attending Board meetings.
In addition, each non-employee director is granted annually an option
to purchase shares of the Company's Common Stock under the terms and conditions
of the Company's 1990 Directors' Stock Option Plan approved by the shareholders
on June 20, 1990. During June 1995, each outside director was granted a
five-year option for 3,000 shares at a per share exercise price of $2.50, the
closing market price on the date of grant. Each non-employee director was also
granted an additional five-year option ( for 12,300 shares at $3.15 per share in
the case of Mr. Seslowe, and 13,300 shares at $3.00 per share in the case of the
other non-employee directors) pursuant to an amendment to the Plan approved by
the Board of Directors in November 1995, subject to approval by the shareholders
of the Company at the 1996 Annual Meeting. These options were granted at a price
equal to 120% of the closing market price of the Common Stock on the date of
grant. The number of shares granted to each director under the amended Plan is
determined by reference to an annual formula designed to award each
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director five-year options having a value of $10,000 based on the Black-Scholes
option valuation model and the current price of the Company's Common Stock.
As of March 31, 1996, options to purchase 39,000 shares of Common
Stock were outstanding under the 1990 terms of the Plan, and options to purchase
an additional 52,200 shares were outstanding under the amendment to the
Directors' Stock Option Plan subject to shareholder approval of the amendment at
the 1996 Annual Meeting of Shareholders. Under the Plan as amended, subject to
shareholder approval, options to purchase 140,800 shares were available for
future grant under the Directors' Stock Option Plan.
On February 1, 1996, June 23, 1992 and September 24, 1992, Jerry M.
Seslowe, Richard S. Rosenbloom and William R. Smart were each granted warrants
to purchase 25,000 shares of the Company's Common Stock at $2.63, $1.25 and
$1.16, respectively, the closing market prices on those dates. The warrants vest
ratably over a three-year period and expire on February 1, 2001, June 23, 1997
and September 24, 1997, respectively. Messrs. Seslowe, Rosenbloom and Smart
received these warrants upon being elected to serve on the Company's Board of
Directors.
Executive Compensation
Summary Compensation Table
The following table sets forth the compensation by the Company of the
Chief Executive Officer and the four most highly compensated other executive
officers of the Company for services in all capacities to the Company and its
subsidiaries during the past three fiscal years.
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
Other Awards
Annual of All
Name and Bonus ($) Compensa- Options/ Other(3)
Principal Position Year Salary ($) (1) tion($) (2) SARs(#) Compensation
($)
<S> <C> <C> <C> <C> <C> <C>
Alan Kessman 1995 400,000 -0- 1,100 -0- 10,328
</TABLE>
23
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<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Chairman of the
Board, 1994 391,100 100,000 8,506 -0- 6,978
President and
Chief 1993 374,850 150,764 -0- 50,000 263,491
Executive Officer
Michael W. 1995 256,00 -0- 1,100 -0- 6,353
Yacenda
Executive Vice 1994 243,154 39,600 10,000 -0- 55,597
President
1993 225,879 58,684 -0- 32,000 160,388
Stanley M. Blau 1995 197,789 -0- -0- 15,000 3,367
Vice Chairman
1994 201,738 7,713 -0- 15,000 3,276
1993 193,973 37,083 -0- 20,000 22,645
Shlomo Shur 1995 215,700 -0- -0- -0- 5,514
Senior Vice
President 1994 211,539 23,088 10,000 -0- 4,199
Advanced
Technology 1993 203,390 38,885 -0- 25,000 4,750
Andrew 1995 214,000 -0- -0- -0- 5,535
Kontomerkos
Senior Vice 1994 205,888 28,025 10,000 -0- 4,899
President
Hardware 1993 193,973 37,083 -0- 20,000 6,060
Engineering and
Production
(1) Includes special bonus awarded to certain Company employees following
successful implementation of measures to overcome the effect of a fire at
the facilities of one of the Company's major suppliers in China in December
1993. Special bonuses totalling $50,000, $30,000, $15,000 and $20,000 were
awarded to Messrs. Kessman, Yacenda, Shur and Kontomerkos, respectively.
24
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<PAGE>
(2) This category represents employee stock option credits that could have been
used after July 1, 1993 and prior to December 31, 1994 to pay the exercise
price of employee stock options held by the employee. Stock purchased with
the 1992 option credits must be held for one year. All credits shown in
this column were used to exercise stock options in 1993 or 1994. See Note
3.
(3) This category includes for 1994 stock option credits used to pay the
exercise price of employee stock options exercised during 1994 by Mr.
Yacenda in the amount of $50,549. This category includes for 1993 stock
option credits used to pay the exercise price of employee stock options
exercised during 1993 in the following amounts: Mr. Kessman $256,240; Mr.
Yacenda, $155,250, and Mr. Blau, $19,200. The credits were granted in 1988,
1992 and 1994 (see note 2 above). The column does not include 1992 or 1994
credits used in 1993 or 1994 that were reported as "Other Annual
Compensation" for 1992 or 1994. This category also includes for each
individual a matching contribution by the Company under the Company's
401(k) plan in the amount of $660 each for each year. This column also
includes premiums paid by the Company for long-term disability and life
insurance for the individuals in the following amounts in 1995: Mr.
Kessman, $9,668; Mr. Yacenda, $5,693; Mr. Shur, $4,854; Mr. Blau, $2,707;
and Mr. Kontomerkos, $4,875; in the following amounts in 1994: Mr. Kessman,
$7,424; Mr. Yacenda, $4,774; Mr. Shur, $4,196; Mr. Blau, $2,820; and Mr.
Kontomerkos, $4,849; and in the following amounts in 1993: Mr. Kessman,
$6,591; Mr. Yacenda, $4,478; Mr. Blau, $2,785; Mr. Shur, $4,090;
25
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<PAGE>
Mr. Kontomerkos, $5,400.
Employment Agreement
The Company and Mr. Kessman entered into an employment continuity
agreement in January, 1995 that provides certain benefits to Mr. Kessman in the
event of the termination of Mr. Kessman's employment following a change in
control in the Company, including a lump sum payment equal to 2.99 times his
then current base salary plus the average of any bonuses awarded to Mr. Kessman
during the two fiscal years preceding the termination of his employment. Under
the terms of the agreement, a change in control includes the acquisition of
beneficial ownership of 20% of the Company's voting securities by any person or
group. The agreement continues through the length of Mr. Kessman's employment
with the Company.
Option Grants in Last Fiscal Year
The following table sets forth the individual grants of stock options made
during the year ended December 31, 1995 to the Chief Executive Officer and the
four most highly compensated
26
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other executive officers of the Company. There were no grants of stock
appreciation rights made to any officers during 1995, and there are no
outstanding stock appreciation rights.
</TABLE>
<TABLE>
<CAPTION>
Potential Realized Value
at Assumed Annual Rates of
Stock Price Appreciation
Individual Grants for Option Term
- - ------------------------------------------------------------------------------------------------ -------------------------------
% of Total
Options Exercise
Granted to or Base
Options Employees in Price Expiration
Name Granted (#) Fiscal Year ($/Sh) Date 5% ($) 10% ($)
- - ------------------------------------------------------------------------------------------------ -------------------------------
<S> <C> <C> <C> <C> <C> <C>
Alan Kessman 0 0 0 0 0 0
Michael W. Yacenda 0 0 0 0 0 0
Stanley M. Blau 15,000 2.5 $3.13 3/23/00 12,950 28,617
Shlomo Shur 0 0 0 0 0 0
Andrew Kontomerkos 0 0 0 0 0 0
</TABLE>
The option reported in the above table expires in five years, and vests 25% per
year over four years.
Aggregated Option Exercises in Last Fiscal Year and Fiscal
Year-End Option Values
The following table sets forth each exercise of stock options made during
the year ended December 31, 1995 by the Chief Executive Officer and the four
most highly compensated other executive officers and the fiscal year-end value
of unexercised options held by those individuals as of December 31, 1995. There
were no exercises or holdings of stock appreciation rights by any officers
during 1995, and there are no outstanding stock appreciation rights.
27
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Unexercised In-the-Money
Options Options
at Fiscal at Fiscal
Year-End (#) Year-End ($) (1)
--------------- -------------------
Shares Acquired Exercisable/ Exercisable/
Name on Exercise (#) Value Realized ($) Unexercisable Unexercisabl
-------------- ------------------ --------------
<S> <C> <C> <C> <C>
Alan Kessman 137,500 262,500 65,688/35,000 74,097/18,438
Michael W. 158,273 302,697 66,000/27,000 60,313/16,688
Yacenda
Stanley M. Blau 0 -0- 381,500/15,000 446,719/8,438
Shlomo Shur 286,930 495,854 62,500/17,500 59,219/9,219
Andrew Kontomerkos 296,425 578,660 45,250/13,750 42,078/7,109
</TABLE>
(1) Based upon the last sale price on December 29, 1995 of $2.31 per share of
Common Stock.
Compensation Committee Interlocks and Insider Participation
The members of the Compensation Committee in 1995 were Thurston Moore,
Richard Rosenbloom, and William Smart.
No member of the Committee is a former or current officer or employee
of the Company or any subsidiary, except that Mr. Moore has acted as an
Assistant Secretary of the Company. Mr. Moore is a partner in the law firm of
Hunton & Williams, which regularly acts as counsel to the Company.
28
<PAGE>
<PAGE>
No executive officer of the Company served as a director or a member of the
Compensation Committee or of the equivalent body of any entity, any one of whose
executive officers serve on the Compensation Committee or the Board of Directors
of the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
Ownership of Common Stock by Directors, Officers and
Principal Shareholders
The following table sets forth the number of shares of Common Stock
beneficially owned as of March 31, 1996, by each current director of the
Company, by all current directors and officers of the Company as a group and by
each person known to the Company to be a beneficial owner of more than five
percent of the Company's outstanding Common Stock. Unless otherwise noted, the
owner has sole voting and dispositive power with respect to the securities.
<TABLE>
<CAPTION>
Percentage
Shares of Common Stock of
Name of Beneficial Owner Beneficially Owned Common Stock (1)
------------------------ ----------------------- ----------------
<S> <C> <C>
Stanley M. Blau (2) . . . . . . . . . 753,846 1.4
Entities Associated with Hambrecht &
Quist Group (3) . . . . . . . . . 4,822,989 9.3
One Bush Street
San Francisco, CA 94104
Alan Kessman (4) . . . . . . . . . . 1,760,682 3.4
Thurston R. Moore (5) . . . . . . . . 108,635 *
Entities Associated with
Edmund H. Shea, Jr. (6). . . . . 3,249,895 6.3
655 Brea Canyon Road
</TABLE>
29
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Percentage
Shares of Common Stock of
Name of Beneficial Owner Beneficially Owned Common Stock (1)
------------------------ ----------------------- ----------------
<S> <C> <C>
Walnut Creek, CA 91789
Richard S. Rosenbloom (7) . . . . . . 50,300 *
Jerry M. Seslowe (8) . . . . . . . . 69,444 *
William R. Smart (9) . . . . . . . . 60,300 *
All Directors and Officers as a Group
(20 persons) (10) . . . . . . . . . 6,079,953 14.3
</TABLE>
* Less than 1%
(1) Based upon 51,865,163 shares of Common Stock outstanding as of March 31,
1996. In cases where the beneficial ownership of the individual or group
includes options, warrants, or convertible securities, the percentage is based
on the 51,865,163 shares actually outstanding plus the shares of Common Stock
issuable upon exercise or conversion of any such options, warrants, or
convertible securities held by the individual or group. The percentage does not
reflect or assume the exercise or conversion of any options, warrants or
convertible securities not owned by the individual or group in question.
(2) Includes 362,750 shares subject to options exercisable within 60 days of
June 3, 1996. Includes 16,250 shares subject to options not exercisable within
60 days of June 3, 1996.
(3) The Hambrecht & Quist entities share power to vote and dispose of all of
such shares.
(4) Includes 62,500 shares subject to options exercisable within 60 days of June
3, 1996. Includes 12,500 shares subject to options not exercisable within 60
days of June 3, 1996. Includes 765,503 shares as to which voting and dispositive
power is shared. Includes 187,500 shares held in a revocable trust for Mr.
Kessman's children, over which Mr. Kessman has no control and as to which shares
he disclaims any beneficial ownership. Includes 9,412 shares of Common Stock
issuable upon conversion of the Company's Debentures (of which Mr. Kessman owns
$100,000 principal amount or .5% of the principal amount outstanding).
(5) Includes 28,300 shares subject to options, all of which are exercisable
within 60 days of June 3, 1996.
(6) Includes 11,935 shares of Common Stock issuable upon
30
<PAGE>
<PAGE>
conversion of the Company's Debentures, of which entities affiliated with Mr.
Shea beneficially own less than 1% of the outstanding principal amount or
$126,812 principal amount. The Shea entities share the power to vote and dispose
of all of such shares.
(7) Mr. Rosenbloom beneficially owns 50,300 shares subject to options and
warrants, all of which are exercisable within 60 days of June 3, 1996.
(8) Mr. Seslowe beneficially owns 37,300 shares of Common Stock subject to
options and warrants, none of which are exercisable within 60 days of June 3,
1996. Includes 12,755 shares owned by Resource Holdings Associates, in which Mr.
Seslowe has a greater than 10% ownership and of which he is a managing director.
Does not include 203,756 shares of Common Stock contingently issuable upon
conversion of the Series A Preferred Stock and the Series B Preferred Stock
owned by Mr. Seslowe, or 45,874 shares of Common Stock contingently issuable
upon conversion of Preferred Stock owned by Resource Holdings, none of which
shares of Preferred Stock are or will become convertible within 60 days of June
3, 1996.
(9) Mr. Smart beneficially owns 50,300 shares subject to options and warrants,
of which 49,550 are exercisable within 60 days of June 3, 1996.
(10) Includes 976,262 shares subject to options or warrants exercisable within
60 days of June 3, 1996. Includes 196,650 shares subject to options or warrants
not exercisable within 60 days of June 3, 1996. Also includes 64,000 shares of
Common Stock issuable upon conversion of the Company's Debentures (of which the
group beneficially owns $680,000 principal amount, or 3.5% of the principal
amount outstanding). Includes 924,978 shares as to which voting and dispositive
power is shared and 289,445 shares as to which beneficial ownership is
disclaimed.
Ownership of Preferred Stock by Directors, Officers and
Principal Shareholders
The following table sets forth the number of shares of Convertible
Cumulative Preferred Stock, Series A, and Contingently Convertible Cumulative
Preferred Stock, Series B, beneficially owned as of March 31, 1996, by all
current directors and officers of the Company who beneficially own any of such
shares, and by each person known to the Company to be a beneficial owner of more
than five percent of the Company's outstanding Preferred Stock. The table also
shows
31
<PAGE>
<PAGE>
the percentage of each series beneficially owned, based upon 250,000 shares of
Series A Stock and 100,000 shares of Series B Stock outstanding as of March 31,
1996. No other director, nominee for director or officer owns any shares of the
Company's Preferred Stock. Unless otherwise noted, the owner has sole voting and
dispositive power with respect to the securities.
<TABLE>
<CAPTION>
Shares of Preferred Stock
Beneficially Owned and Percent of Class
Series A Stock
Series B Stock
Name of Beneficial Owner
<S> <C> <C>
Cooper Life Sciences 78,819 (31.53%)
31,528 (31.53%)
160 Broadway
New York, NY 10038
Jerry M. Seslowe 3,830 (1.53%)
1,532 (1.53%)
James W. Spencer 26,625 (10.65%)
10,650 (10.65%)
8446 Bronze Lane
Highlands Ranch, CO 80126
Watermark Investments 127,895 (51.16%)
Limited 51,157 (51.16%)
730 Fifth Avenue
New York, NY 10019
All Directors and Officers 3,830 (1.53%)
as a Group (20 persons) 1,532 (1.53%)
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS
Hunton & Williams regularly acts as counsel to the Company. Mr. Moore,
a director of the Company, is a
32
<PAGE>
<PAGE>
partner at Hunton & Williams.
In connection with the Company's acquisition of Unistar, the
Company paid or agreed to pay Resource Holdings Ltd, a former shareholder of
Unistar, accrued investment banking fees incurred by Unistar prior to the
acquisition of $105,000, and total finder's fees of $320,000 based on the value
of the transaction. Mr. Seslowe was elected a director of the Company after the
acquisition. Both Resource Holdings and Mr. Seslowe acquired Common Stock and
Preferred Stock of the Company in exchange for their shares of Unistar. Mr.
Seslowe is a managing director of and owns more than 10% of Resource Holdings.
The Company's management believes that the transactions with Resource Holdings
were on terms as favorable to the Company as could be expected from unaffiliated
third parties.
The Executive Stock Incentive Plan (the "Incentive Plan")
approved by shareholders at the 1994 Annual Meeting was implemented in October
1994 with 30 employees participating. Under the terms of the Incentive Plan
eligible employees were granted the right to purchase shares of the Company's
Common Stock at a price of $3.1875 per share. Participating employees financed
the purchases of these shares through loans by the Company's bank lenders at the
prime rate less 1/4%. The loans are fully-recourse to the participating
employees but are guaranteed by letters of credit from the Company to the
lending banks. The Company holds the purchased Common Stock as security for the
repayment of the loans. The following table contains information about
borrowings in excess of $60,000 by executive officers that were outstanding
during 1995 pursuant to the Incentive Plan that are guaranteed by the Company.
<TABLE>
<CAPTION>
Unpaid
Indebtedness
Highest Amount of at
Indebtedness Between 3/31/96
Name 1/1/95 and 3/31/96 (1) Including Accrued Interest
- - ----- ---------------------- --------------------------
<S> <C> <C>
Alan Kessman $1,912,500 $2,097,195
Michael W. Yacenda $1,115,625 $1,223,364
Shlomo Shur $ 557,813 $ 611,682
Andrew Kontomerkos $ 557,813 $ 611,682
Barbara C. Anderson $ 318,750 $ 349,533
</TABLE>
33
<PAGE>
<PAGE>
<TABLE>
<S> <C> <C>
James E. Cooke III $ 318,750 $ 349,533
Anthony R. $ 446,250 $ 489,345
Guarascio
Israel J. Hersh $ 95,625 $ 104,860
Robert W. Hopwood $ 318,750 $ 348,912
David E. Lee $ 318,750 $ 349,533
Frank J. Rotatori $ 191,250 $ 209,720
- - ---------------------
(1) Amounts shown are exclusive of accrued interest.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES AND REPORTS ON FORM 8-K
(a)(1), (a)(2) and (d). The financial
statements required by this item and incorporated herein by
reference are as follows:
Report of Independent Public Accountants
Consolidated Balance Sheets - December
31, 1995 and 1994
Consolidated Statements of Operations -
Years ended December 31, 1995, 1994 and 1993
Consolidated Statements of Changes in Stockholders' Equity -
Three years ended December 31, 1995
Consolidated Statements of Cash Flows Years ended December
31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements
The schedules to consolidated financial statements required
by this item and included in this report are as follows:
34
<PAGE>
<PAGE>
Report of Independent Public Accountants
on Schedule
Schedule II - Valuation and Qualifying
Accounts
(a)(3) and (c). The exhibits required by this item and
included in this report or incorporated herein by reference are as follows:
</TABLE>
<TABLE>
<CAPTION>
Exhibit No.
<S> <C>
2-1 Agreement and Plan of Merger by and
among EXECUTONE Information
Systems, Inc., Executone Newco, Inc.,
and Unistar Gaming Corp., dated as of
December 19, 1995. Incorporated by
reference to the Registrant's Current
Report on Form 8-K dated January 3,
1996.
2-2 Asset Purchase Agreement among V
Technology Acquisition Corporation,
EXECUTONE Information Systems,
Inc. and Vodavi, Inc. dated November
5, 1993, and Amendment dated
February 18, 1994. Incorporated by
reference to the Registrant's Annual
Report on Form 10-K for the year
ended December 31, 1993.
2-3 Asset Purchase Agreement by and
among Tone Holdings, Inc. and Tone
Acquisition Corporation, EXECUTONE
Network Services, Inc. and
EXECUTONE Information Systems,
Inc. dated as of April 9, 1996, and
Amendment No. 1 to Asset Purchase
Agreement dated as of May 31, 1996,
by and among Clarity Telecom
Holdings, Inc. (formerly known as
Tone Holdings, Inc.), Clarity Telecom,
Inc. (formerly known as Tone
Acquisition Corporation),
EXECUTONE Network Services, Inc.
and EXECUTONE Information
Systems, Inc. (Confidential portions
have been omitted and filed separately
with the Commission pursuant to a request
for confidential treatment.) Filed herewith.
</TABLE>
35
<PAGE>
<PAGE>
<TABLE>
<S> <C>
3-1 Articles of Incorporation, as amended
through December 18, 1995 (restated
for electronic filing). Previously filed.
3-2 Articles of Amendment dated and filed
December 19, 1995, amending the Company's
Articles of Incorporation. Incorporated
by reference to the Registrant's
Current Report on Form 8-K dated January
3, 1996.
3-3 Bylaws, as amended. Incorporated by
reference to the Registrant's
Registration Statement on Form S-3
(File No. 33-62257) filed August 30,
1995.
4-1 Second Amended and Restated Loan
and Security Agreement dated as of
August 30, 1994 and First Amendment
thereto dated January 1, 1995,
between EXECUTONE Information
Systems, Inc., Continental Bank N.A.
and the other Lenders named therein.
Incorporated by reference to the
Registrant's Annual Report on Form
10-K for the year ended December 31,
1994.
4-2 Loan Agreement dated as of August
30, 1994, between EXECUTONE
Information Systems, Inc., certain
employees thereof, and the Lenders
named therein. Incorporated by
reference to the Registrant's Annual
Report on Form 10-K for the year
ended December 31, 1994.
4-3 First Amendment dated January 1,
1995, Second Amendment dated
September 29, 1995, and Third
Amendment dated December 29,
1995, to the Second Amended and
Restated Loan and Security
Agreement by and among
EXECUTONE Information Systems,
Inc., the Financial Institutions Listed
on the Signature Page Thereof, and
Bank of America Illinois. Previously
filed.
</TABLE>
36
<PAGE>
<PAGE>
<TABLE>
<S> <C>
4-10 Indenture dated March 1, 1986 with
United States Trust Company of New
York relating to 7 1/2% Convertible
Subordinated Debentures of Vodavi
Technology Corporation due March
15, 2011. Incorporated by reference
to Vodavi Technology Corporation's
Registration Statement on Form S-1
(as amended) (Registration No. 33-
3827) filed on March 9, 1986 and
amended April 1, 1986.
4-11 First Supplemental Indenture dated
August 4, 1989 with United States
Trust Company of New York relating
to 7 1/2% Convertible Subordinated
Debentures due March 15, 2011.
Incorporated by reference to the
Registrant's Annual Report on Form
10-K for the year ended December 31,
1989.
4-12 Specimen Certificate representing 7
1/2% Convertible Subordinated
Debentures. Incorporated by
reference to the Registrant's Annual
Report on Form 10-K for the year
ended December 31, 1989.
10-1 1984 Employee Stock Purchase Plan
of EXECUTONE Information Systems,
Inc. Incorporated by reference to the
Registrant's Registration Statement on
Form S-8 (File No. 33-23294) declared
effective by the Commission on
August 23, 1988.
10-2 1986 Stock Option Plan of
EXECUTONE Information Systems,
Inc. Incorporated by reference to the
Registrant's Registration Statement on
Form S-8 (File No. 33-23294) declared
effective by the Commission on
August 23, 1988.
10-3 1984 Stock Option Plan of
EXECUTONE Information Systems,
Inc. Incorporated by reference to the
Registrant's Annual Report on Form
10-K for the year ended December 31,
</TABLE>
37
<PAGE>
<PAGE>
<TABLE>
<S> <C>
1990, as amended by Form 8 filed on
August 20, 1991.
10-4 401(k) Savings Plan of Vodavi Technology
Corporation dated December 27, 1985.
Incorporated by reference to the
Registrant's Annual Report on Form
10-K for the year ended December 31, 1989.
10-5 Stock Option Bonus Credit Plan of
EXECUTONE Information Systems,
Inc. dated December 31, 1988.
Incorporated by reference to the
Registrant's Annual Report on Form
10-K for the year ended December 31,
1989.
10-6 1990 Directors' Stock Option Plan.
Incorporated by reference to the
Registrant's Annual Report on Form
10-K for the year ended December 31,
1990, as amended by Form 8 filed on
August 20, 1991.
10-7 1994 Executive Stock Incentive Plan.
Incorporated by reference to the
Registrant's Annual Report on Form
10-K for the year ended December 31,
1994.
10-9 Volume Purchase Agreement dated
January 31, 1992, between U. S.
Sprint Communications Company
Limited Partnership and EXECUTONE
Information Systems, Inc.
Incorporated by reference to the
Registrant's Annual Report on Form
10-K for the year ended December 31,
1991, as amended by Form 8 filed on
June 12, 1992.
10-10 Amendments dated as of April 1,
1995, and 1993 to Volume Purchase
Agreement dated January 31, 1992,
between U. S. Sprint Communications
Company Limited Partnership and
EXECUTONE Information Systems,
Inc. (Confidential portions have
been omitted and filed separately with
the Commission pursuant to a request
for confidential treatment.)
Filed herewith.
</TABLE>
38
<PAGE>
<PAGE>
<TABLE>
<S> <C>
10-12 Warrant to Purchase 143,181 shares
of Common Stock of the Registrant in
favor of Continental Bank N. A. (now
Bank of America Illinois) dated
December 28, 1990. Incorporated by
reference to the Registrant's Annual
Report on Form 10-K for the year
ended December 31, 1990, as
amended by Form 8 filed on August
20, 1991.
10-13 Warrant to Purchase 50,000 shares of
Common Stock of the Registrant in
favor of Continental Bank N. A. (now
Bank of America Illinois) dated
December 28, 1990. Incorporated by
reference to the Registrant's Annual
Report on Form 10-K for the year
ended December 31, 1990, as
amended by Form 8 filed on August
20, 1991.
10-16 Manufacturing Services Agreement
dated as of January 10, 1995,
between EXECUTONE Information
Systems, Inc. and Compania
Dominicana de Telefonos, C por A
(Codetel). Previously filed.
10-17 Manufacturing Services Agreement
dated February 9, 1990 between
Wong's Electronics Co., Ltd. and
EXECUTONE Information Systems,
Inc. Incorporated by reference to the
Registrant's Annual Report on Form
10-K for the year ended December 31,
1990, as amended by Form 8 filed on
August 20, 1991.
10-19 Warrant to Purchase 25,000 Shares of
Common Stock of EXECUTONE
Information Systems, Inc. in favor of
Richard S. Rosenbloom dated June
23, 1992. Incorporated by reference
to the Registrant's Annual Report on
Form 10-K for the year ended
December 31, 1992.
10-20 Warrant to Purchase 25,000 Shares of
Common Stock of EXECUTONE
</TABLE>
39
<PAGE>
<PAGE>
<TABLE>
<S> <C>
Information Systems, Inc. in favor of
William R. Smart dated September 24,
1992. Incorporated by reference to
the Registrant's Annual Report on
Form 10-K for the year ended
December 31, 1992.
10-21 Management Agreement for the
National Indian Lottery dated January
16,1995. Previously filed.
10-22 Distributor Agreement dated as of May
31, 1996, between EXECUTONE
Information Systems, Inc. and Clarity
Telecom, Inc. Filed herewith.
11 Statement regarding computation of
per share earnings. Previously filed.
13 1995 Annual Report to Shareholders
of EXECUTONE Information Systems,
Inc. Filed herewith.
21 Subsidiaries of EXECUTONE
Information Systems, Inc. Previously
filed.
23 Consent of Arthur Andersen LLP.
Previously filed.
27 Financial Data Schedule. Filed
herewith.
</TABLE>
Undertakings
For the purposes of complying with the rules governing Form
S-8 under the Securities Act of 1933, the undersigned registrant hereby
undertakes as follows, which undertaking shall be incorporated by reference into
registrant's Registration Statements on the following Form S-8 filings:
S-8 Reg. No. 2-91008 filed May 9, 1984 on
1983 Employee Stock Purchase Plan
(650,000 shares)
S-8 Reg. No. 33-959 filed October 17, 1985
on 1984 Stock Option Plan (390,000 shares)
40
<PAGE>
<PAGE>
S-8 Reg. No. 33-6604 filed June 19, 1986 on
1983 Stock Option Plan (350,000 shares)
S-8 Reg. No. 33-16585 filed August 24,
1987 on 1986 and 1983 Stock Option Plans
(800,000 shares)
S-8 Reg. No. 33-23294 filed August 3, 1988
on 1986 Stock Option Plan (7,000,000
shares) and Employee Stock Purchase Plan
(500,000 shares)
S-8 Reg. No. 33-42561 filed September 4,
1991 on 1984 Employee Stock Purchase
Plan (350,000 shares) and Directors' Stock
Option Plan (100,000 shares)
S-8 Reg. No. 33-45015 filed January 2, 1992
on 1984 Employee Stock Purchase Plan
(400,000 shares)
S-8 Reg. No. 33-57519 filed January 31,
1995 on 1984 Employee Stock Purchase
Plan (1,000,000 shares).
Insofar as indemnification arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933 and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to the court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
Reports on Form 8-K
The Registrant filed no reports on Form 8-K during the
quarter ended December 31, 1995.
41
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Alan Kessman
--------------------------
Alan Kessman, Chairman, President
and Chief Executive Officer
April 12, 1996
Milford, Connecticut
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
April 12, 1996 /s/ Alan Kessman
-----------------------------
Alan Kessman
Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
April 12, 1996 /s/ Stanley M. Blau
----------------------------
Stanley M. Blau
Vice Chairman of the Board of
Directors
April 12, 1996 /s/ Anthony R. Guarascio
-----------------------------
Anthony R. Guarascio
Vice President-Finance
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
April 12, 1996 /s/ Thurston R. Moore
-------------------------------
42
<PAGE>
<PAGE>
Thurston R. Moore
Director
April 12, 1996 /s/ Richard S. Rosenbloom
--------------------------
Richard S. Rosenbloom
Director
April 12, 1996 /s/ Jerry M. Seslowe
---------------------------
Jerry M. Seslowe
Director
April 12, 1996 /s/ William R. Smart
----------------------------
William R. Smart
Director
43
<PAGE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
EXECUTONE Information Systems, Inc.:
We have audited in accordance with generally accepted auditing standards, the
financial statements included in EXECUTONE Information Systems, Inc. and
subsidiaries' annual report to stockholders incorporated by reference in this
Form 10-K, and have issued our report thereon dated January 26, 1996. Our audit
was made for the purpose of forming an opinion on those statements taken as a
whole. The schedule listed in Item 14 is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and are not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Stamford, Connecticut
January 26, 1996
44
<PAGE>
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(Amounts in Thousands)
<TABLE>
<CAPTION>
Additions Deductions
--------------------------------------------- --------------
Charged Net
Balance at (Credited) (Credited) Writeoffs of Balance at
Beginning to Costs and to Other Uncollectible End of
Description of Period Expenses Accounts Accounts Period
----------- --------- -------------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995
Deducted from asset accounts:
Allowance for doubtful accounts $ 1,335 $ 1,872 -- ($1,492) $ 1,715
Allowance for uncollectible
notes receivable 691 (432) -- -- 259
Year ended December 31, 1994
Deducted from asset accounts:
Allowance for doubtful accounts 1,017 1,381 -- (1,063) 1,335
Allowance for uncollectible
notes receivable 1,084 (393) -- -- 691
Year ended December 31, 1993 *
Deducted from asset accounts:
Allowance for doubtful accounts 1,046 1,285 -- (1,314) 1,017
Allowance for uncollectible
notes receivable 1,604 (440) (80) -- 1,084
</TABLE>
* Restated to reflect the disposition of the VCS Division, which was sold as
of March 1994.
S-2
<PAGE>
<PAGE>
EXECUTONE INFORMATION SYSTEMS, INC.
EXHIBITS TO 1995 ANNUAL REPORT ON FORM 10-K
<TABLE>
<CAPTION>
Exhibit No.
<S> <C>
2-1 Agreement and Plan of Merger by and
among EXECUTONE Information
Systems, Inc., Executone Newco, Inc.,
and Unistar Gaming Corp., dated as of
December 19, 1995. Incorporated by
reference to the Registrant's Current
Report on Form 8-K dated January 3,
1996.
2-2 Asset Purchase Agreement among V
Technology Acquisition Corporation,
EXECUTONE Information Systems,
Inc. and Vodavi, Inc. dated November
5, 1993, and Amendment dated
February 18, 1994. Incorporated by
reference to the Registrant's Annual
Report on Form 10-K for the year
ended December 31, 1993.
2-3 Asset Purchase Agreement by and
among Tone Holdings, Inc. and Tone
Acquisition Corporation, EXECUTONE
Network Services, Inc. and
EXECUTONE Information Systems,
Inc. dated as of April 9, 1996, and
Amendment No. 1 to Asset Purchase
Agreement dated as of May 31, 1996,
by and among Clarity Telecom
Holdings, Inc. (formerly known as
Tone Holdings, Inc.), Clarity Telecom,
Inc. (formerly known as Tone
Acquisition Corporation),
EXECUTONE Network Services, Inc.
and EXECUTONE Information
Systems, Inc. (Confidential portions
have been omitted and filed separately
with the Commission pursuant to a request
for confidential treatment.) Filed herewith.
3-1 Articles of Incorporation, as amended
through December 18, 1995 (restated
for electronic filing). Preiously filed.
3-2 Articles of Amendment dated and filed
December 19, 1995, amending the Company's
Articles of Incorporation. Incorporated
by reference to the Registrant's
Current Report on Form 8-K dated January
3, 1996.
</TABLE>
45
<PAGE>
<PAGE>
<TABLE>
<S> <C>
3-3 Bylaws, as amended. Incorporated by
reference to the Registrant's
Registration Statement on Form S-3
(File No. 33-62257) filed August 30,
1995.
4-1 Second Amended and Restated Loan
and Security Agreement dated as of
August 30, 1994 and First Amendment
thereto dated January 1, 1995,
between EXECUTONE Information
Systems, Inc., Continental Bank N.A.
and the other Lenders named therein.
Incorporated by reference to the
Registrant's Annual Report on Form
10-K for the year ended December 31,
1994.
4-2 Loan Agreement dated as of August
30, 1994, between EXECUTONE
Information Systems, Inc., certain
employees thereof, and the Lenders
named therein. Incorporated by
reference to the Registrant's Annual
Report on Form 10-K for the year
ended December 31, 1994.
4-3 First Amendment dated January 1,
1995, Second Amendment dated
September 29, 1995, and Third
Amendment dated December 29,
1995, to the Second Amended and
Restated Loan and Security
Agreement by and among
EXECUTONE Information Systems,
Inc., the Financial Institutions Listed
on the Signature Page Thereof, and
Bank of America Illinois. Previously
filed.
4-10 Indenture dated March 1, 1986 with
United States Trust Company of New
York relating to 7 1/2% Convertible
Subordinated Debentures of Vodavi
Technology Corporation due March
15, 2011. Incorporated by reference
to Vodavi Technology Corporation's
Registration Statement on Form S-1
(as amended) (Registration No. 33-
3827) filed on March 9, 1986 and
amended April 1, 1986.
</TABLE>
46
<PAGE>
<PAGE>
<TABLE>
<S> <C>
4-11 First Supplemental Indenture dated
August 4, 1989 with United States
Trust Company of New York relating
to 7 1/2% Convertible Subordinated
Debentures due March 15, 2011.
Incorporated by reference to the
Registrant's Annual Report on Form
10-K for the year ended December 31,
1989.
4-12 Specimen Certificate representing
7 1/2% Convertible Subordinated
Debentures. Incorporated by
reference to the Registrant's Annual
Report on Form 10-K for the year
ended December 31, 1989.
10-1 1984 Employee Stock Purchase Plan
of EXECUTONE Information Systems,
Inc. Incorporated by reference to the
Registrant's Registration Statement on
Form S-8 (File No. 33-23294) declared
effective by the Commission on
August 23, 1988.
10-2 1986 Stock Option Plan of
EXECUTONE Information Systems,
Inc. Incorporated by reference to the
Registrant's Registration Statement on
Form S-8 (File No. 33-23294) declared
effective by the Commission on
August 23, 1988.
10-3 1984 Stock Option Plan of
EXECUTONE Information Systems,
Inc. Incorporated by reference to the
Registrant's Annual Report on Form
10-K for the year ended December 31,
1990, as amended by Form 8 filed on
August 20, 1991.
10-4 401(k) Savings Plan of Vodavi Technology
Corporation dated December 27, 1985.
Incorporated by reference to the
Registrant's Annual Report on Form 10-K
for the year ended December 31, 1989.
10-5 Stock Option Bonus Credit Plan of
EXECUTONE Information Systems,
Inc. dated December 31, 1988.
</TABLE>
47
<PAGE>
<PAGE>
<TABLE>
<S> <C>
Incorporated by reference to the
Registrant's Annual Report on Form
10-K for the year ended December 31,
1989.
10-6 1990 Directors' Stock Option Plan.
Incorporated by reference to the
Registrant's Annual Report on Form
10-K for the year ended December 31,
1990, as amended by Form 8 filed on
August 20, 1991.
10-7 1994 Executive Stock Incentive Plan.
Incorporated by reference to the
Registrant's Annual Report on Form
10-K for the year ended December 31,
1994.
10-9 Volume Purchase Agreement dated
January 31, 1992, between U. S.
Sprint Communications Company
Limited Partnership and EXECUTONE
Information Systems, Inc.
Incorporated by reference to the
Registrant's Annual Report on Form
10-K for the year ended December 31,
1991, as amended by Form 8 filed on
June 12, 1992.
10-10 Amendments dated as of April 1,
1995, and 1993 to Volume Purchase
Agreement dated January 31, 1992,
between U. S. Sprint Communications
Company Limited Partnership and
EXECUTONE Information Systems,
Inc. (Confidential portions have been
omitted and filed separately with the
Commission pursuant to a request for
confidential treatment.) Filed herewith.
10-12 Warrant to Purchase 143,181 shares
of Common Stock of the Registrant in
favor of Continental Bank N. A. (now
Bank of America Illinois) dated
December 28, 1990. Incorporated by
reference to the Registrant's Annual
Report on Form 10-K for the year
ended December 31, 1990, as
amended by Form 8 filed on August
20, 1991.
10-13 Warrant to Purchase 50,000 shares of
Common Stock of the Registrant in
favor of Continental Bank N. A. (now
</TABLE>
48
<PAGE>
<PAGE>
<TABLE>
<S> <C>
Bank of America Illinois) dated
December 28, 1990. Incorporated by
reference to the Registrant's Annual
Report on Form 10-K for the year ended
December 31, 1990, as amended by Form 8
filed on August 20, 1991.
10-16 Manufacturing Services Agreement
dated as of January 10, 1995,
between EXECUTONE Information
Systems, Inc. and Compania
Dominicana de Telefonos, C por A
(Codetel). Previously filed.
10-17 Manufacturing Services Agreement
dated February 9, 1990 between
Wong's Electronics Co., Ltd. and
EXECUTONE Information Systems,
Inc. Incorporated by reference to the
Registrant's Annual Report on Form
10-K for the year ended December 31,
1990, as amended by Form 8 filed on
August 20, 1991.
10-19 Warrant to Purchase 25,000 Shares of
Common Stock of EXECUTONE
Information Systems, Inc. in favor of
Richard S. Rosenbloom dated June
23, 1992. Incorporated by reference
to the Registrant's Annual Report on
Form 10-K for the year ended
December 31, 1992.
10-20 Warrant to Purchase 25,000 Shares of
Common Stock of EXECUTONE
Information Systems, Inc. in favor of
William R. Smart dated September 24,
1992. Incorporated by reference to
the Registrant's Annual Report on
Form 10-K for the year ended
December 31, 1992.
10-21 Management Agreement for the
National Indian Lottery dated January
16, 1995. Previously filed.
10-22 Distributor Agreement dated as of May
31, 1996, between EXECUTONE
Information Systems, Inc. and Clarity
Telecom, Inc. Filed herewith
</TABLE>
49
<PAGE>
<PAGE>
<TABLE>
<S> <C>
11 Statement regarding computation of
per share earnings. Previously filed.
13 1995 Annual Report to Shareholders
of EXECUTONE Information Systems,
Inc. Filed herewith.
21 Subsidiaries of EXECUTONE
Information Systems, Inc. Previously
filed.
23 Consent of Arthur Andersen LLP.
Previously filed.
27 Financial Data Schedule. Filed
herewith.
</TABLE>
50
STATEMENT OF DIFFERENCES
The trademark symbol shall be expressed as ............... 'tm'
The registered trademark symbol shall be expressed as .....'r'
The section symbol shall be expressed as ................. 'ss'
<PAGE>
<PAGE>
ASSET PURCHASE AGREEMENT
by and among
TONE HOLDINGS, INC. AND
TONE ACQUISITION CORPORATION,
EXECUTONE NETWORK SERVICES, INC.
AND
EXECUTONE INFORMATION
SYSTEMS, INC.
<PAGE>
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE I
DEFINITIONS
1.1 Accounts Receivable.............................................................................1
1.2 Affiliate.......................................................................................2
1.3 Agreement.......................................................................................2
1.4 Assets..........................................................................................2
1.5 Assignment and Assumption Agreement.............................................................3
1.6 Assumed Liabilities.............................................................................3
1.7 Audited Financial Statements....................................................................4
1.8 Authorized Products.............................................................................4
1.9 Authorized Software.............................................................................4
1.10 Balance Sheet...................................................................................4
1.11 Bank............................................................................................4
1.12 Bank Accounts...................................................................................4
1.13 Bank Borrowings.................................................................................4
1.14 Bank Financing..................................................................................4
1.15 Bank Loan Agreement.............................................................................5
1.16 Bill of Sale....................................................................................5
1.17 Books and Records...............................................................................5
1.18 Buyer...........................................................................................5
1.19 Closing.........................................................................................5
1.20 Closing Balance Sheet...........................................................................5
1.21 Closing Date....................................................................................5
1.22 Code............................................................................................6
1.23 Company.........................................................................................6
1.24 Contracts.......................................................................................6
1.25 Customer Base...................................................................................6
1.26 DSO Business....................................................................................6
1.27 Distributor Agreement...........................................................................6
1.28 Employee Benefit Plan...........................................................................6
1.29 ENS.............................................................................................7
1.30 ERISA...........................................................................................7
1.31 Escrow Agent....................................................................................7
1.32 Escrow Agreement................................................................................7
1.33 Excluded Assets.................................................................................7
1.34 Excluded Business...............................................................................7
1.35 Excluded Claims.................................................................................8
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<S> <C> <C>
1.36 Excluded Customers..............................................................................8
1.37 Final Net Asset Statement.......................................................................8
1.38 Financial Statements............................................................................8
1.39 Financing Commitments...........................................................................8
1.40 Final Cash Price................................................................................8
1.41 Fixed Assets....................................................................................8
1.42 GAAP............................................................................................9
1.43 Holdings........................................................................................9
1.44 Initial Cash Price..............................................................................9
1.45 Inventory.......................................................................................9
1.46 Junior Subordinated Note........................................................................9
1.47 Knowledge of Buyer..............................................................................9
1.48 Knowledge of Sellers............................................................................9
1.49 Law.............................................................................................9
1.50 Leased Premises................................................................................10
1.51 Leases.........................................................................................10
1.52 MAC Business...................................................................................10
1.53 Material Adverse Effect........................................................................10
1.54 National Account...............................................................................10
1.55 Net Assets.....................................................................................10
1.56 Network Resale Business........................................................................11
1.57 Opinion of Buyer's Counsel.....................................................................11
1.58 Opinion of Sellers' Counsel....................................................................11
1.59 Ordinary Course of Business....................................................................11
1.60 PBX............................................................................................11
1.61 Permits........................................................................................11
1.62 Permitted Liens................................................................................11
1.63 Person.........................................................................................11
1.64 Prepaid Expenses...............................................................................12
1.65 Real Property..................................................................................12
1.66 Required Consents..............................................................................12
1.67 Retained Liabilities...........................................................................12
1.68 Sales Contracts................................................................................13
1.69 Sellers........................................................................................13
1.70 Service Contracts..............................................................................13
1.71 Shared Assets..................................................................................14
1.72 Sprint Contract................................................................................14
1.73 Stockholders Agreement.........................................................................14
1.74 Stock Put Agreement............................................................................14
1.75 Sublease/HQ....................................................................................14
1.76 Tax or Taxes...................................................................................14
1.77 Tax Return.....................................................................................15
1.78 Telephone Numbers..............................................................................15
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
1.79 Territory......................................................................................15
1.80 Transitional Services Term Sheet...............................................................15
1.81 Unaudited Interim Financial Statements.........................................................15
1.82 Unistar Business...............................................................................15
1.83 Warrants.......................................................................................15
ARTICLE II
PURCHASE AND SALE
2.1 Purchase and Sale; Assignment and Assumption...................................................16
2.2 [Reserved].....................................................................................16
2.3 Deliveries at Closing..........................................................................16
2.4 Final Net Asset Statement......................................................................18
2.5 Transfer or Sales Taxes........................................................................20
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLERS
3.1 Organization of Sellers........................................................................20
3.2 Authorization; Enforceability..................................................................20
3.3 No Violation or Conflict.......................................................................21
3.4 Title to Assets................................................................................22
3.5 All Assets Necessary to Conduct Business.......................................................22
3.6 No Litigation..................................................................................23
3.7 Contracts......................................................................................23
3.8 Accounts Receivable............................................................................24
3.9 Financial Statements...........................................................................24
3.10 Permits........................................................................................25
3.11 Real Property..................................................................................26
3.12 Fees and Expenses of Brokers and Others........................................................27
3.13 Inventory......................................................................................27
3.14 Books and Records..............................................................................28
3.15 Tax Matters....................................................................................28
3.16 Compliance with Law............................................................................29
3.17 Employment Agreements and Benefits.............................................................29
3.18 Labor Matters..................................................................................30
3.19 Insurance......................................................................................31
3.20 No Adverse Change..............................................................................32
3.21 Absence of Questionable Payments...............................................................34
3.22 Absence of Undisclosed Liabilities.............................................................34
3.23 Certain Transactions...........................................................................34
3.24 Subsidiaries and Affiliates....................................................................35
3.25 Product Liability..............................................................................36
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
3.26 Product Warranty...............................................................................36
3.27 Investment Representations.....................................................................36
3.28 Consents.......................................................................................38
3.29 Distributor Agreement..........................................................................38
3.30 Territory......................................................................................38
3.31 International Call Back........................................................................38
3.32 Accounts; Funds, etc...........................................................................38
3.33 ENS Assets.....................................................................................39
3.34 Disclosure.....................................................................................39
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER
4.1 Organization of Buyer..........................................................................39
4.2 Authorization; Enforceability..................................................................39
4.3 No Violation or Conflict.......................................................................40
4.4 No Broker......................................................................................40
4.5 No Litigation..................................................................................40
4.6 Financing Commitments..........................................................................41
4.7 Capitalization.................................................................................41
ARTICLE V
CERTAIN MATTERS PENDING THE CLOSING
5.1 Carry on in Regular Course.....................................................................42
5.2 Indebtedness...................................................................................42
5.3 Compensation...................................................................................42
5.4 Compliance with Law............................................................................43
5.5 Access.........................................................................................43
5.6 Cooperation....................................................................................44
5.7 Publicity......................................................................................44
5.8 Confidentiality................................................................................44
5.9 Exclusivity....................................................................................45
5.10 Updated Financial Information..................................................................46
5.11 Title Insurance and Surveys....................................................................46
5.12 [Reserved].....................................................................................46
5.13 Additional Territories.........................................................................46
ARTICLE VI
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF BUYER
6.1 Accuracy of Representations and Warranties.....................................................47
6.2 Proceedings and Instruments Satisfactory.......................................................47
</TABLE>
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<PAGE>
<PAGE>
<TABLE>
<S> <C> <C>
6.3 No Litigation..................................................................................47
6.4 Consents.......................................................................................48
6.5 Lien Waivers and Estoppel Certificates.........................................................48
6.6 Due Diligence..................................................................................48
6.7 Environmental Due Diligence....................................................................48
6.8 Financing......................................................................................48
6.9 Financial Statements...........................................................................49
6.10 Customer Review................................................................................49
6.11 Sellers' Performance...........................................................................49
6.12 No Material Adverse Change.....................................................................49
6.13 Title to Real Estate...........................................................................49
ARTICLE VII
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF SELLERS
7.1 Accuracy of Representations and Warranties.....................................................50
7.2 Proceedings and Instruments Satisfactory.......................................................50
7.3 No Litigation..................................................................................50
7.4 Buyer's Performance............................................................................50
ARTICLE VIII
INDEMNITIES AND ADDITIONAL COVENANTS
8.1 Indemnification................................................................................51
8.2 Employment Matters.............................................................................57
8.3 Bulk Sales Compliance..........................................................................60
8.4 Post-Closing Agreements........................................................................60
8.5 Certain Employee Obligations...................................................................62
8.6 Additional Instruments; Cooperation............................................................62
8.7 Use of Name....................................................................................62
8.8 Allocation of Purchase Price...................................................................63
8.9 Access to Books and Records....................................................................64
8.10 Best Efforts...................................................................................65
8.11 Sales Agency...................................................................................66
8.12 Non-Competition................................................................................67
8.13 Non-Solicitation of Employees..................................................................68
8.14 Rights of First Offer..........................................................................68
8.15 Sellers' Confidentiality Covenant..............................................................70
8.16 Additional Financial Information...............................................................71
8.17 Shared Assets..................................................................................72
8.18 Video Conferencing Equipment...................................................................73
8.19 Notification of Certain Hires..................................................................74
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<PAGE>
</TABLE>
<TABLE>
<S> <C> <C>
ARTICLE IX
TERMINATION
9.1 Termination....................................................................................74
9.2 Rights on Termination; Waiver..................................................................76
ARTICLE X
MISCELLANEOUS
10.1 Entire Agreement; Amendment....................................................................78
10.2 Expenses.......................................................................................79
10.3 Governing Law..................................................................................79
10.4 Assignment.....................................................................................79
10.5 Notices........................................................................................79
10.6 Counterparts; Headings.........................................................................80
10.7 Interpretation.................................................................................80
10.8 Severability...................................................................................81
10.9 No Reliance....................................................................................82
10.10 Parties in Interest............................................................................82
10.11 Specific Performance...........................................................................82
</TABLE>
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<PAGE>
<PAGE>
EXHIBITS
EXHIBIT DESCRIPTION
1.5 Assignment and Assumption Agreement
1.7 Application of GAAP
1.12 Bank Accounts
1.16 Bill of Sale
1.24 Contracts
1.27 Distributor Agreement
1.32 Escrow Agreement
1.33 Excluded Assets
1.35 Excluded Claims
1.46 Junior Subordinated Note
1.50 Leased Premises
1.51 Leases
1.54 National Account List
1.57 Opinion of Buyer's Counsel
1.58 Opinion of Sellers' Counsel
1.61 Permits
1.62 Permitted Liens
1.65 Real Property Description
1.71 Shared Assets
1.73 Stockholders Agreement
1.74 Stock Put Agreement
1.78 Telephone Numbers
1.79 Territory
1.80 Transitional Services Term Sheet
1.83 Form of Warrants
2.4 Net Asset Calculations
3.1 Sellers Qualifications and Licenses To Do Business
3.6 Pending Litigation
3.7 Material Contracts
3.9 Financial Statements
3.10(a) Material Permits
3.10(b) Tariffs and Filings
3.11(a) Real Property Leases
3.11(b) Real Property Exceptions
3.17 Employment Agreements and Benefits
3.18 Labor Matters
3.19 Insurance
3.20 Adverse Changes, Etc.
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<PAGE>
3.24 Subsidiaries and Affiliates
3.26 Product and Service Warranties
3.28 Required Consents
3.30 Territory Exception
3.31 International Callback Customers
3.33 ENS Asset
4.4 Buyer's Broker
6.6 Reviewed Materials
6.10 Customer Review
8.2 Employment Matters
8.4(d) Terms of Use of Executone Name
8.8 Allocation of Purchase Price
8.13 DSO Liason
8.17 Division of Mainframe Computers
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<PAGE>
<PAGE>
ASSET PURCHASE AGREEMENT
ASSET PURCHASE AGREEMENT, made as of April 9, 1996, by and among TONE
HOLDINGS, INC., a Delaware corporation ("Holdings"), and its wholly-owned
subsidiary TONE ACQUISITION CORPORATION, a Delaware corporation ("Tone") (Tone,
together with Holdings, the "Buyer"), EXECUTONE INFORMATION SYSTEMS, INC., a
Virginia corporation (the "Company"), and its wholly-owned subsidiary EXECUTONE
NETWORK SERVICES, INC., a Virginia corporation ("ENS") (the Company and ENS
collectively referred to herein as the "Sellers").
In consideration of the mutual covenants, conditions and agreements set
forth herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, it is hereby agreed that:
ARTICLE I
DEFINITIONS
When used in this Agreement, the following terms shall have the
meanings specified:
1.1 Accounts Receivable. "Accounts Receivable" shall mean all accounts
receivable of Sellers arising out of the DSO Business, together with all
security and associated rights related thereto (including, without limitation,
all security deposits, letters of credit and security interests in collateral).
<PAGE>
<PAGE>
1.2 Affiliate. "Affiliate" shall mean, as to any person, any other
person or entity that, directly or indirectly through one or more
intermediaries, controls, is controlled by or is under common control with such
person.
1.3 Agreement. "Agreement" shall mean this Asset Purchase Agreement.
1.4 Assets. "Assets" shall mean (a) all assets reflected on the Balance
Sheet and all assets of the DSO Business of the same nature as those reflected
on the Balance Sheet that have been acquired in the Ordinary Course of Business
since the date of the Balance Sheet (other than assets reflected on such Balance
Sheet that have been disposed of in the Ordinary Course of Business since the
date of the Balance Sheet) including, without limitation: (i) the Real Property,
and all improvements, fixtures and fittings thereon, easements, rights-of way,
and other appurtenant rights thereto (such as appurtenant rights in and to
public streets); (ii) the Fixed Assets; (iii) the Inventory; (iv) all Accounts
Receivable (net of reserves), notes receivable (net of reserves), securities,
Prepaid Expenses and other current assets of the DSO Business; (b) all rights
under the Leases; (c) all rights of the Sellers under the Permits; (d) originals
and all copies of customer and mailing lists of the DSO Business (including
copies embodied or stored electronically); (e) all rights of the Sellers under
the Contracts; (f) all claims, deposits, prepayments, refunds, causes of action,
choses in action, rights of recovery, rights of set off and rights of recoupment
of the DSO Business (other than Excluded Claims); (g) all Books and Records; (h)
the Bank Accounts; (i) the Telephone Numbers; (j) subject to Sections 8.6 and
8.11, all right, title and interest in the names and marks ULTRASTAR LD and
UNTRASTAR 800, and all goodwill associated therewith; (k) the Customer Base; (l)
all other assets of the Sellers of every kind and description, tangible or
intangible, used primarily
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<PAGE>
<PAGE>
in the DSO Business, other than the Excluded Assets and other than the tangible
personal property components of the Shared Assets as provided in Section 8.17;
(m) except as provided in Section 8.11, all right, title and interest in the
long distance products Infostar'r' LD+, Infostar 'r' 800 and Infostar 'r'
Calling Card.
1.5 Assignment and Assumption Agreement. "Assignment and Assumption
Agreement" shall mean the Assignment and Assumption Agreement between Sellers
and Buyer in the form of Exhibit 1.5 attached hereto.
1.6 Assumed Liabilities. "Assumed Liabilities" shall mean (a) all
liabilities of the Sellers set forth on the face of the Balance Sheet (rather
than in any notes thereto), excluding amounts payable to Sellers and further
excluding liabilities discharged prior to Closing; (b) all liabilities of the
Sellers incurred after the date of the Balance Sheet in the Ordinary Course of
Business that would, if incurred during the last fiscal year, be required in
accordance with GAAP to be set forth on the face of the Balance Sheet (rather
than any notes thereto), excluding amounts payable to Sellers; (c) all
liabilities and obligations of the Sellers under the Leases; (d) all liabilities
and obligations under the Contracts other than under Service Contracts to the
extent assigned to Buyer; (e) all liabilities under Service Contracts to the
extent reserved therefor on the Closing Balance Sheet; (e) liabilities and
obligations to the extent listed in Part II of Exhibit 8.2 hereof; and (f)
additional liabilities not described in clauses (a) through (e) above incurred
by the DSO Business in the Ordinary Course of Business in an aggregate amount
not exceeding $200,000. "Assumed Liabilities" shall not include the Retained
Liabilities, except to the extent, if any, that liabilities or obligations
-3-
<PAGE>
<PAGE>
otherwise included in clause (vi) of the definition of Retained Liabilities are
subsumed in clause (f) of this Section 1.6.
1.7 Audited Financial Statements. "Audited Financial Statements" shall
mean the balance sheet and related statements of income and cash flows of the
DSO Business as of and for the fiscal year ended December 31, 1995 prepared in
accordance with GAAP on a basis consistent throughout the periods covered
thereby (applied in accordance with the practices and methodologies set forth on
Exhibit 1.7), audited by Arthur Andersen LLP, the Company's independent public
accountants and delivered to Buyer on or before May 15, 1996.
1.8 Authorized Products. "Authorized Products" shall have the meaning
set forth in the Distributor Agreement.
1.9 Authorized Software. "Authorized Software" shall have the meaning
set forth in the Distributor Agreement.
1.10 Balance Sheet. "Balance Sheet" shall mean the balance sheet
contained in the Financial Statements.
1.11 Bank. "Bank" shall mean Bank of America Illinois, N.A.
1.12 Bank Accounts. "Bank Accounts" shall mean the bank and lock-box
accounts described in Exhibit 1.12 attached hereto.
1.13 Bank Borrowings. "Bank Borrowings" shall mean borrowings by
Sellers from the Bank under the Bank Loan Agreement.
1.14 Bank Financing. "Bank Financing" shall mean the proposed senior
credit facilities in an aggregate principal amount of up to $60 million, to be
provided to Buyer by a syndicate of banks arranged by NationsBanc Capital
Markets, Inc.
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<PAGE>
<PAGE>
1.15 Bank Loan Agreement. "Bank Loan Agreement" shall mean the Second
Amended and Restated Loan and Security Agreement between the Bank and the
Company, dated as of August 30, 1994, as amended on January 11, 1995, September
29, 1995 and December 29, 1995.
1.16 Bill of Sale. "Bill of Sale" shall mean the Bill of Sale from
Sellers to Buyer in the form of Exhibit 1.16 attached hereto.
1.17 Books and Records. "Books and Records" shall mean all business and
financial books, records, files, data, billing systems, ledgers, plans,
documents, correspondence, lists, notebooks, marketing materials produced by or
for the DSO Business or ordered by or for the DSO Business prior to the Closing,
reports, maintenance and service records, and other information of Sellers
relating principally to the DSO Business, in each case whether written or
electronically stored or otherwise recorded including, without limitation, all
customer lists, financial and accounting records, purchase orders and invoices,
sales orders and sales order log books, credit and collection records,
correspondence and miscellaneous records.
1.18 Buyer. "Buyer" shall have the meaning set forth in the preamble
above.
1.19 Closing. "Closing" shall mean the meeting of the parties to be
held at 10:00 a.m., local time, on the Closing Date, at such time and place as
the parties may mutually agree in writing.
1.20 Closing Balance Sheet. "Closing Balance Sheet" shall have the
meaning set forth in Section 2.4(a).
1.21 Closing Date. "Closing Date" shall mean May 30, 1996 or such other
date as the parties may mutually agree.
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<PAGE>
<PAGE>
1.22 Code. "Code" shall mean the Internal Revenue Code of 1986, as
amended, and any successor thereto.
1.23 Company. "Company" shall have the meaning set forth in the
preamble above.
1.24 Contracts. "Contracts" shall mean (a) the Leases, (b) the Service
Contracts, (c) the Sales Contracts and (d) those other contracts, agreements,
purchase orders, leases, license agreements, relationships and commitments
related to the DSO Business that are specifically listed on Exhibit 1.24
attached hereto.
1.25 Customer Base. "Customer Base" shall mean the past and present
customers of the DSO Business (other than the Excluded Customers), including,
without limitation, all of Sellers' rights under and interests in all associated
customer lists, the Sales Contracts, the Service Contracts and the MAC Business
related to such customers.
1.26 DSO Business. "DSO Business" shall mean the business of Sellers of
selling, leasing, installing, servicing and maintaining telephone and related
products (including, but not limited to key and PBX systems and voice mail) and
other telephony products and software (including, but not limited to, the MAC
Business), to and for end-user customers located within the Territory other than
Excluded Customers and the Excluded Business and acting as sales agent or
reseller of long-distance and local exchange services and related services.
1.27 Distributor Agreement. "Distributor Agreement" shall mean the
Distributor Agreement in the form attached hereto as Exhibit 1.27.
1.28 Employee Benefit Plan. "Employee Benefit Plan" shall mean an
"employee benefit plan" as defined in Sections 3(1), 3(2) and 3(3) of ERISA that
provides compensation or other benefits to any present or former employee of the
DSO Business, or any dependent or
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beneficiary thereof, and any other plans that provide compensation or other
benefits, whether or not subject to ERISA, to any present or former employee of
the DSO Business, or any dependent or beneficiary thereof or any material
benefit plan or program.
1.29 ENS. "ENS" shall have the meaning set forth in the preamble above.
1.30 ERISA. "ERISA" shall mean the Employee Retirement Income Security
Act of 1974, as amended.
1.31 Escrow Agent. "Escrow Agent" shall mean Brown Brothers Harriman
and Co. or, if it is not willing or able to act in such capacity, such other
institution as the parties may agree to.
1.32 Escrow Agreement. "Escrow Agreement" shall mean the Escrow
Agreement, dated as of the date hereof, by and among the Company, Buyer and
Escrow Agent, in the form attached hereto as Exhibit 1.32.
1.33 Excluded Assets. "Excluded Assets" shall mean all Sales Contracts
and Service Contracts with Excluded Customers, Excluded Claims, assets related
to or used in connection with the Excluded Business, business licenses, deferred
taxes, cash on hand on the Closing Date, and all other assets and contracts
specifically identified on Exhibit 1.33 attached hereto.
1.34 Excluded Business. "Excluded Business" shall mean the (i)
manufacturing, research and development, technical support and training
businesses conducted by Sellers, (ii) the Unistar Business, (iii) the sale,
installation, service and maintenance of products to and for Excluded Customers,
except as provided in the Distributor Agreement, (iv) the international call
back business and (v) the business of providing pay phones and network services
to inmates of correctional instititions.
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1.35 Excluded Claims. "Excluded Claims" shall mean those items of
Accounts Receivable and other claims against customers of the DSO Business
listed in Exhibit 1.35 attached hereto.
1.36 Excluded Customers. "Excluded Customers" shall mean all of
Sellers' existing National Accounts, video conferencing customers, healthcare
customers, international call back customers (to the extent such international
call back customers require services or products which are otherwise part of the
Excluded Business), call center customers, United States federal government
customers and customers located outside the Territory.
1.37 Final Net Asset Statement. "Final Net Asset Statement" shall mean
the statement of Net Assets as of the Closing Date, prepared and delivered in
accordance with Section 2.4 hereof.
1.38 Financial Statements. "Financial Statements" shall mean the
unaudited balance sheet and related unaudited statement of income of the DSO
Business as of and for the year ended December 31, 1995.
1.39 Financing Commitments. "Financing Commitments" shall mean the
written commitments to loan money to or subscribe for equity of Buyer to
consummate the transactions contemplated herein and to operate the DSO Business
after the Closing, copies of which have heretofore been provided by Buyer to
Sellers.
1.40 Final Cash Price. "Final Cash Price" shall mean the Initial Cash
Price, adjusted to reflect any adjustment payment required pursuant to Section
2.4.
1.41 Fixed Assets. "Fixed Assets" shall mean all tangible personal
property used in connection with the DSO Business, including, without
limitation, all fixed assets, chattels,
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machines, machinery, equipment, vehicles, leasehold improvements, computer
hardware, fixtures, furniture, furnishings, handling equipment, implements,
parts, supplies, tools and accessories of all kinds.
1.42 GAAP. "GAAP" shall mean generally accepted accounting principles
in the United States as promulgated by the Financial Standards Accounting Board
of the American Institute of Certified Public Accountants or its committees as
of the date hereof.
1.43 Holdings. "Holdings" shall have the meaning set forth in the
preamble above.
1.44 Initial Cash Price. "Initial Cash Price" shall mean $61.5 million.
1.45 Inventory. "Inventory" shall mean all of Sellers' inventories of
Authorized Products, spare parts and supplies held by or for use or sale in the
DSO Business.
1.46 Junior Subordinated Note. Junior Subordinated Note shall mean the
promissory note issued to the Company by Holdings at the Closing in the
principal amount of $5,870,000 in the form of Exhibit 1.46 hereto.
1.47 Knowledge of Buyer. "Knowledge of Buyer" shall mean actual
knowledge of Buyer, after due inquiry. For purposes of this Section 1.47, "due
inquiry" shall mean inquiry in a manner reasonably appropriate to determine the
truth of the applicable statement.
1.48 Knowledge of Sellers. "Knowledge of Sellers" shall mean the actual
knowledge of Sellers, after due inquiry. For purposes of this Section 1.48, "due
inquiry" shall mean inquiry in a manner reasonably appropriate to determine the
truth of the applicable statement.
1.49 Law. "Law" shall mean any U.S., state, province, local or other
constitution, law or governmental requirement of any kind, and the rules,
regulations and orders promulgated thereunder.
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1.50 Leased Premises. "Leased Premises" shall mean the premises leased
by Sellers and used in the DSO Business as set forth on Exhibit 1.50.
1.51 Leases. "Leases" shall mean all rights with respect to leasehold
interests and subleases (i) related to the Real Property, Leased Premises and
Fixed Assets, which Leases are listed on Exhibit 1.51 attached hereto or (ii)
relating to copiers, postage meters and other customary office equipment located
and used at Leased Premises and the Real Property in the Ordinary Course of
Business.
1.52 MAC Business. "MAC Business" shall mean the moves, adds and
changes business associated with the DSO Business.
1.53 Material Adverse Effect. "Material Adverse Effect" shall mean,
with respect to any Person or business, any change or effect, which, singly or
in the aggregate with related changes or effects, is materially adverse to the
business, operations, assets, prospects or condition, financial or otherwise, of
such Person or business, considered as a whole with any wholly-owned
subsidiaries of any such Person.
1.54 National Account. "National Account" shall mean a corporate
customer or prospect of Sellers that has 40 or more locations, including one or
more locations within the Territory, and is, on or before the Closing Date, on
the National Account List, a copy of which is attached hereto as Exhibit 1.54.
1.55 Net Assets. "Net Assets" shall mean the Assets (less intangibles)
transferred to Buyer at Closing less Assumed Liabilities assumed by Buyer at
Closing, all as derived from the Closing Balance Sheet and the procedures
described in Exhibit 2.4.
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1.56 Network Resale Business. "Network Resale Business" shall mean that
segment of the DSO Business whereby Sellers market, sell and provide to
customers long-distance telephone service products and resell long-distance
network services except and excluding Sellers' international call back business.
1.57 Opinion of Buyer's Counsel. "Opinion of Buyer's Counsel" shall
mean the opinion of Ropes & Gray, counsel to Buyer, in the form attached hereto
as Exhibit 1.57.
1.58 Opinion of Sellers' Counsel. "Opinion of Sellers' Counsel" shall
mean the opinion of Hunton & Williams, counsel to Sellers, in the form attached
hereto as Exhibit 1.58.
1.59 Ordinary Course of Business. "Ordinary Course of Business" shall
mean the ordinary course of the DSO Business consistent with the Sellers' past
custom and practice (including with respect to quantity and frequency).
1.60 PBX. "PBX" shall mean private branch exchange.
1.61 Permits. "Permits" shall mean all governmental approvals,
authorizations, registrations, permits and licenses or any pending applications
relating to the foregoing, including, without limitation, those listed on
Exhibit 1.61 attached hereto.
1.62 Permitted Liens. "Permitted Liens" shall mean those liens
affecting the Assets that are specifically listed on Exhibit 1.62 hereto as
modified at Closing pursuant to Section 6.13 hereof.
1.63 Person. "Person" shall mean any natural person, partnership,
corporation, trust, association, unincorporated organization, governmental
entity, joint venture or other legal entity.
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1.64 Prepaid Expenses. "Prepaid Expenses" shall mean all deposits under
the Contracts and prepaid expenses related to the DSO Business.
1.65 Real Property. "Real Property" shall mean, collectively, the real
property and improvements related thereto owned and used by Sellers in
connection with the operation of the DSO Business and described in the legal
descriptions attached as Exhibit 1.65 attached hereto.
1.66 Required Consents. "Required Consents" shall mean all consents or
approvals, including those of the Bank (with respect to the Bank Loan Agreement)
and state and federal governmental agencies, that are necessary or required in
order to transfer the Assets from Sellers to Buyer and to give effect to the
transactions contemplated herein.
1.67 Retained Liabilities. "Retained Liabilities" shall mean: (i) any
liability or obligation related to or arising out of the Excluded Claims, (ii)
any and all of the Sellers' liabilities and obligations not related to or
arising out of the DSO Business, (iii) any liability or obligation of the
Sellers for Taxes, (iv) any liability or obligation of the Sellers for product
warranty for products sold by the Sellers prior to the Closing Date, and (v) any
and all of the Sellers' liabilities and obligations (to the extent not included
in the Assumed Liabilities): (a) to indemnify any person (including either of
the Sellers) for events occurring prior to the Closing Date; (b) arising as a
result of any legal or equitable action or judicial or administrative proceeding
initiated at any time in respect of anything done, suffered to be done or
omitted to be done by such Sellers or any of their directors, officers,
employees or agents prior to the Closing (including, without limitation, those
arising out of the matters described on Exhibit 3.6 and Exhibit 3.18); (c) for
costs and expenses incurred in connection with this Agreement,
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the making or performance of this Agreement and the transactions contemplated
hereby; (d) under this Agreement or under any side agreement between any of the
Sellers on the one hand and the Buyer on the other hand entered into between
Sellers and Buyer on or before the Closing Date; (e) for services rendered by
Sellers prior to the Closing Date pursuant to Service Contracts in excess of the
amount reserved therefor on the Closing Balance Sheet; (f) arising out of any
Employee Benefit Plan established or maintained by the Sellers or to which the
Sellers contributes or any liability for the termination of any such plan
(except to the extent, if any, otherwise provided in Section 8.2); (g) for
making payments or providing benefits of any kind to their employees or former
employees including workers compensation, medical care or long-term disability
care or arising out of any agreements providing for payments upon consummation
of the transactions contemplated hereby (other than as provided in Section 8.2
hereof); (h) for indebtedness for money borrowed; (i) pertaining to the Sellers
or their respective businesses and arising out of or resulting from
noncompliance prior to the Closing Date with any Laws; (j) under any leases,
contracts, or agreements which are not Contracts; and (k) of a type excluded in
the calculation of Net Assets pursuant to the procedures set forth in Exhibit
2.4.
1.68 Sales Contracts. "Sales Contracts" shall mean all those contracts
for the sale of products and software to customers included in the Customer
Base.
1.69 Sellers. "Sellers" shall have the meaning set forth in the
preamble hereto.
1.70 Service Contracts. "Service Contracts" shall mean all those
contracts for the maintenance and service of products and software to customers
included in the Customer Base.
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1.71 Shared Assets. "Shared Assets" shall mean the assets listed on
Exhibit 1.71 attached hereto.
1.72 Sprint Contract. "Sprint Contract" shall mean the Volume Purchase
Agreement between US Sprint Communications Company L.P. and the Company, dated
as of January 31, 1992, as amended in 1993 and further amended as of April 1,
1995.
1.73 Stockholders Agreement. "Stockholders Agreement" shall mean the
Stockholders Agreement of Holdings substantially in the form of Exhibit 1.73
attached hereto.
1.74 Stock Put Agreement. "Stock Put Agreement" means the Stock Put
Agreement between the Company and Holdings for the purchase and sale of shares
of Class A Common Stock of Holdings and Class L Common Stock of Holdings
representing 8% of the outstanding shares of each such Class at Closing,
substantially in the form of Exhibit 1.74 attached hereto.
1.75 Sublease/HQ. "Sublease/HQ" shall mean that sublease to be entered
into between Sellers and Buyer pursuant to Section 8.4 hereof, relating to
portions of Sellers' headquarters or other facilities on the terms described on
the Transition Services Term Sheet.
1.76 Tax or Taxes. "Tax" or "Taxes" means any federal, state, local, or
foreign income, gross receipts, license, payroll, employment, excise, severance,
stamp, occupation, premium, windfall profits, environmental (including taxes
under Code 'ss'. 59A), customs duties, capital stock, franchise, profits,
withholding, social security (or similar, including FICA), unemployment,
disability, real property, personal property, sales, use, transfer,
registration, value added, alternative or add-on minimum, estimated, or other
tax of any kind whatsoever, including any interest, penalty, or addition
thereto, whether disputed or not.
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1.77 Tax Return. "Tax Return" means any return, declaration, report,
claim for refund, or information return or statement relating to Taxes,
including any schedule or attachment thereto, and including any amendment
thereof.
1.78 Telephone Numbers. "Telephone Numbers" shall mean Sellers' rights
in and to the "800" and other telephone numbers used in the DSO Business, which
numbers are listed in Exhibit 1.78 attached hereto.
1.79 Territory. "Territory" shall mean the geographic areas described
in Exhibit 1.79 attached hereto and any additional geographic areas as to which
the Company and the Buyer shall agree will be included in the Territory pursuant
to Section 5.13 hereto.
1.80 Transitional Services Term Sheet. "Transitional Services Term
Sheet" shall mean the term sheet attached as Exhibit 1.80 with respect to the
agreement or agreements to be entered into pursuant to Section 8.4 hereof
providing for shared services between Buyer and the Company following the
Closing Date.
1.81 Unaudited Interim Financial Statements. "Unaudited Interim
Financial Statements" shall mean the balance sheet and the related statement of
income of the DSO Business as of and for the three month period ended March 31,
1996.
1.82 Unistar Business. "Unistar Business" shall mean the business of
developing, marketing and managing the National Indian Lottery, and other gaming
activities.
1.83 Warrants. "Warrants" shall mean warrants to purchase 28,985 shares
of Class A Common Stock of Holdings and 5,797 shares of Class L Common Stock of
Holdings representing 8% of the outstanding shares of each such class at Closing
(other than shares
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issued to lenders as contemplated by the Financing Commitments), in the form
attached hereto as Exhibit 1.83.
ARTICLE II
PURCHASE AND SALE
2.1 Purchase and Sale; Assignment and Assumption. (a) Sellers hereby
agree that, upon all of the terms and subject to the conditions of this
Agreement, Sellers shall sell, convey, transfer and deliver to Buyer the Assets,
free and clear of any pledge, lien, claim, mortgage, option, security interest,
charge or encumbrance of any kind except for Permitted Liens.
(b) Buyer hereby agrees, upon all of the terms and subject to
all of the conditions of this Agreement, to purchase from Sellers the Assets and
to assume from Sellers the Assumed Liabilities.
2.2 [Reserved].
2.3 Deliveries at Closing. (a) By Sellers to Buyer. At the Closing,
Sellers shall deliver, or cause to be delivered, duly executed counterparts of
the following items to Buyer: (i) the Assignment and Assumption Agreement; (ii)
the Bill of Sale; (iii) the deed relating to the Real Property; (iv) the
Distributor Agreement; (v) the Sublease/HQ; (vi) the agreements contemplated by
the Transitional Services Term Sheet; (vii) the Opinion of Sellers' Counsel;
(viii) the Escrow Agreement; (ix) such instruments of transfer, conveyance and
assignment as may reasonably be requested by Buyer and its counsel; (x) a
certificate of the corporate secretary of each of the Company and ENS as to such
matters as may reasonably be requested by Buyer and its counsel; (xi) a FIRPTA
certificate; (xii) the Stock Put Agreement; (xiii) the
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Stockholders Agreement; and (xiv) various certificates, instruments and
documents referred to in Article VI.
(b) By Buyer to Sellers. Buyer shall deliver, or cause to be
delivered at Closing:
(i) to ENS, (A) $1,000 in cash payable by wire
transfer of funds in accordance with written instruction of ENS given
to the Buyer at least two business days prior to the Closing Date and
(B) the Warrants;
(ii) to the Escrow Agent, $7.5 million in cash
(the "Escrowed Funds") payable by wire transfer of funds in accordance
with written instructions of the Escrow Agent given to the Buyer at
least two business days prior to the Closing Date, to be held in escrow
pursuant to the terms of the Escrow Agreement; and
(iii) to the Company (A) an amount of cash
equal to the Initial Cash Price minus the amounts paid pursuant to
clauses (i) and (ii) of this Section 2.3(b), by wire transfer of funds
in accordance with written instructions of the Company given to the
Buyer at least two business days prior to the Closing Date, and (B)
duly executed counterparts of the following items: (1) the Assignment
and Assumption Agreement; (2) the Distributor Agreement; (3) the Junior
Subordinated Note; (4) the Stock Put Agreement; (5) the Sublease/HQ;
(6) the agreements contemplated by the Transitional Services Term
Sheet; (7) the Opinion of Buyer's Counsel; (8) a certificate of the
corporate secretary of Buyer as to such matters as may reasonably be
requested by Sellers and their counsel; (9) the Escrow Agreement; (10)
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the Stockholders Agreement; and (11) various certificates, instruments and
documents referred to in Article VII.
2.4 Final Net Asset Statement.
(a) Within 60 days after the Closing Date, Buyer shall cause
its independent accounting firm to prepare and deliver to Sellers (i) a balance
sheet of the DSO Business as of the Closing Date prepared in accordance with
GAAP applied in accordance with the practices and methodologies set forth on
Exhibit 1.7 (the "Closing Balance Sheet") and which shall be audited by Buyer's
certified public accountants and (ii) a draft Final Net Asset Statement derived
from the Closing Balance Sheet in the manner set forth in Exhibit 2.4. Seller
will reimburse Buyer for one-half of the reasonable out-of-pocket expenses
incurred in connection with the audit contemplated by this Section 2.4(a) up to
a maximum reimbursement obligation of Seller for said audit of $80,000.
(b) If Sellers do not object to the draft Final Net Asset
Statement within 30 days following delivery thereof, such draft shall constitute
the Final Net Asset Statement. If Sellers have any objections to the draft Final
Net Asset Statements, Sellers will deliver a detailed written statement
describing its objections to Buyer within 30 days after delivery thereof. Any
objections shall be limited to arithmetic error or the failure of the Closing
Balance Sheet to comply with GAAP applied in accordance with the practices and
methodologies set forth on Exhibit 1.7 or the methodology prescribed in Exhibit
2.4. Buyer and Sellers will use their reasonable best efforts to resolve any
such objections. If a final resolution is not obtained within 10 days after
Buyer has received the statement of objections, Buyer and Sellers will select
certified public accountants mutually acceptable to them to
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resolve any remaining objections. If Buyer and Sellers are unable to agree on
the choice of certified public accountants, they will select a "big six"
nationally-recognized accounting firm by lot after excluding Price Waterhouse
LLP and Arthur Anderson LLP.
(c) Buyer will revise the draft Final Net Asset Statement, as
required, to reflect the resolution of all objections (as agreed upon by the
parties or directed by such accounting firm) and deliver the revised draft Final
Net Asset Statement to Sellers within 5 days after the resolution of such
objections. Such draft Final Net Asset Statement if revised as provided above or
if not objected to by Sellers shall constitute the Final Net Asset Statement.
(d) Within 5 days after agreement upon the Final Net Asset
Statement, Buyer and Sellers shall adjust the Initial Cash Price in accordance
with this subsection. If Net Assets as set forth on the Final Net Asset
Statement are equal to or greater than $7,045,000, then the Initial Cash Price
shall not be adjusted. If the Net Assets are less than $7,045,000 then the
Escrow Agent shall remit to Buyer a portion of the Escrow Amount (as defined in
the Escrow Agreement) equal to the amount by which the Net Assets are less than
$7,045,000.
(e) If any unresolved objections are submitted to an
accounting firm for resolution as provided above, Sellers shall bear one-half of
the fees and expenses of such accounting firm and the Buyer shall bear the other
half of such fees and expenses.
(f) Upon reasonable request, each of Buyer and Sellers shall
provide the other (and such other's advisors and representatives) with access
(including copies if so requested) to all working papers related to the draft
Final Net Asset Statement, and to all books and records related to the DSO
Business that are required to verify the accuracy of the
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draft Final Net Asset Statement. Buyer and Sellers shall otherwise fully
cooperate with each other in connection with finalization of the draft Final Net
Asset Statement.
2.5 Transfer or Sales Taxes. Sellers will pay all sales, stamp,
recordation and transfer Taxes arising out of, or related to, the transactions
contemplated by this Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLERS
Each of the Sellers hereby jointly and severally represents and
warrants to Buyer that:
3.1 Organization of Sellers. Each of the Sellers is a corporation duly
organized, validly existing and in good standing under the laws of the
Commonwealth of Virginia. Each of the Sellers has full corporate power to carry
on its business as now being conducted and to own, operate and hold under lease
the Assets as, and in the places where, such Assets now are owned, operated or
held. Each of the Sellers is duly qualified or licensed as a foreign
corporation, and is in good standing, in each jurisdiction in which the assets
held or used by it or the nature of its business requires such qualification.
Exhibit 3.1 lists each jurisdiction where either of the Sellers is qualified or
licensed to do business as a foreign corporation and is in good standing in
connection with the DSO Business.
3.2 Authorization; Enforceability. The execution, delivery and
performance by each of the Sellers of this Agreement, the Escrow Agreement, the
Distributor Agreement, the Stock Put Agreement, the Stockholders Agreement and
the other documents and instruments contemplated hereby and the consummation of
the transactions contemplated herein to which either of the Sellers is a party
are within the corporate powers of Sellers and have been duly authorized by all
necessary corporate actions of Sellers. The sale of the Assets by Sellers to
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Buyer pursuant to this Agreement does not require the approval of the
shareholders of the Company. This Agreement has been duly executed and delivered
by each of the Sellers. This Agreement is, and the other documents and
instruments required hereby to which either of the Sellers is a party,
including, without limitation, the Escrow Agreement, the Distributor Agreement,
the Stock Put Agreement and the Stockholders Agreement, when executed and
delivered by the parties thereto, will be the valid and binding obligations of
each of the Sellers, enforceable against Sellers in accordance with their
respective terms.
3.3 No Violation or Conflict. Subject to obtaining the Required
Consents, the execution, delivery and performance by Sellers of this Agreement,
the Escrow Agreement, the Distributor Agreement, the Stock Put Agreement, the
Stockholders Agreement and all of the other documents and instruments
contemplated hereby to which either of the Sellers is a party, do not and will
not (a) conflict with or violate any Law, judgment, injunction, ruling, order or
decree binding on Sellers or any of their respective assets, (b) conflict with,
result in a breach of, constitute a default under, result in the acceleration
of, create the right in any party to accelerate, terminate, modify or cancel or
require any notice under any Contract or other contract, license, lease,
instrument, arrangement or agreement to which either of the Sellers is a party
or by which either is bound or to which any of their respective assets are
subject, or (c) conflict with or violate the Articles of Incorporation or Bylaws
of Sellers. Except for the Required Consents, no consent of any other person,
and no notice to, filing or registration with, or authorization, consent or
approval of, any governmental, regulatory or self-regulatory agency is necessary
or is required to be made or obtained by Sellers in connection with the
execution and delivery of this Agreement, the Escrow Agreement, the Distributor
Agreement,
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the Stock Put Agreement, the Stockholders Agreement or the consummation of the
transactions contemplated hereby.
3.4 Title to Assets. Each of the Sellers, as applicable, owns good,
valid and marketable title to, or a valid leasehold interest in, all of the
Assets, free and clear of any and all mortgages, liens, encumbrances, charges,
claims, restrictions, pledges, security interests or impositions except for
Permitted Liens and except for liens on the Assets securing Bank Borrowings,
which liens will be released at or prior to Closing. Upon delivery of the Assets
to Buyer at the Closing and upon Buyer's payment of the purchase consideration
therefor, good, valid and marketable title to the Assets, free and clear of all
mortgages, liens, encumbrances, charges, claims, restrictions, pledges, security
interests or impositions, except for Permitted Liens, will pass to Buyer.
3.5 All Assets Necessary to Conduct Business. The Assets and the rights
under the Distributor Agreement, the services contemplated by the Transitional
Services Term Sheet and by Section 8.11 and the Shared Assets comprise all of
the assets, properties, rights and services of every type and description, real,
personal, tangible and intangible (other than the senior executive management
function performed by the Company's chief executive officer, chief financial
officer and chief operating officer) (i) used by Sellers to generate the
revenues and income reflected in the income statement included in the Financial
Statements, (ii) reflected on the balance sheet which will be included in the
Audited Financial Statements and (iii) necessary to the conduct of the DSO
Business (including the Network Resale Business) as currently conducted by
Sellers.
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3.6 No Litigation. Except as set forth in Exhibit 3.6 attached hereto,
there is no litigation, arbitration, proceeding, governmental investigation,
citation or action of any kind pending or, to the Knowledge of Sellers, proposed
or threatened, nor any basis therefor (a) relating to the DSO Business, the
Assets, the Contracts or any of the Assumed Liabilities, or (b) that seeks
restraint, prohibition, damages or other relief in connection with this
Agreement or the consummation of the transactions contemplated hereby or that
questions the validity of this Agreement or any action to be taken in connection
herewith.
3.7 Contracts. Exhibit 3.7(a) attached hereto is a true and complete
list of all Contracts pursuant to which Sellers have any continuing obligations
that constitute: (a) a lease of any real or personal property with aggregate
annual rental payments in excess of $75,000; (b) an agreement to purchase or
sell a capital asset for a price in excess of $50,000; or (c) any other
agreement involving an obligation or contractual liability in excess of $75,000
in the aggregate; (d) confidentiality or noncompetition agreements relating to
the DSO Business; (e) any agreement under which a security interest or lien has
been or may be imposed upon the Assets or the Distributor Agreement other than
Leases; and (f) any Sales Contract or Service Contract that differs materially
from the forms of Sales Contract and Service Contract delivered to Buyer prior
to the date hereof. Each Contract listed on Exhibit 3.7(a) and Exhibit 1.23 is
and, to the Knowledge of Sellers, each other Contract is, in full force and
effect and enforceable in accordance with its terms. Except as set forth on
Exhibit 3.6 with respect to alleged defaults, Sellers have performed each term,
covenant and condition that is required to be performed by it at or before the
date hereof under each of the Contracts listed on Exhibit 3.7(a) and Exhibit
1.23 and, to the Knowledge of Sellers, under each of the other Contracts.
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Except as set forth in Exhibit 3.7(b), no event has occurred that would, with
the passage of time or compliance with any applicable notice requirements,
constitute a default by Sellers or, to the Knowledge of Sellers, any other party
under any of the Contracts, and, to the Knowledge of Sellers, no party to any of
the Contracts intends to cancel, terminate or exercise any option under any of
the Contracts. Except as set forth on Exhibit 3.7(c), Sellers have made no prior
assignment of the Contracts or any of their rights or obligations thereunder.
3.8 Accounts Receivable. All Accounts Receivable and notes receivable
of the DSO Business are reflected properly on the Books and Records in
accordance with GAAP, are valid receivables, arose from bona fide transactions
in the Ordinary Course of Business and are not subject to any setoffs or
counterclaims except as recorded as accounts payable. Since December 31, 1995
there has been no material adverse change in the composition of accounts
receivable of the DSO Business in terms of aging and no event has occurred that
would, under GAAP applied in accordance with the practices and methodologies set
forth on Exhibit 1.7, require an increase in the ratio of the reserve for
uncollectible accounts receivable to total accounts receivable for the DSO
Business.
3.9 Financial Statements. Attached hereto as Exhibit 3.9 are the
Financial Statements. The Financial Statements are true and correct in all
material respects, fairly present the financial condition and results of
operations of the DSO Business as of and for the period indicated and were
prepared in accordance with GAAP applied on a basis consistent throughout the
periods covered thereby (applied in accordance with the practices and
methodologies set forth on Exhibit 1.7) and are consistent with the books and
records of Sellers. The Audited Financial Statements and Unaudited Interim
Financial Statements will be
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true and correct in all material respects, fairly present the financial
condition and results of operations of the DSO Business as of and for the
periods indicated and be prepared in accordance with GAAP applied on a basis
consistent throughout the periods covered thereby (applied in accordance with
the practices and methodologies set forth on Exhibit 1.7) and be consistent with
the books and records of Sellers. The Unaudited Interim Financial Statements
will include all adjustments (including normal recurring adjustments) which in
the opinion of Sellers' management are necessary for a fair presentation of the
results for the interim period covered thereby.
3.10 Permits. (a) The Company possesses all Permits necessary to
conduct the DSO Business as it is currently operated by Sellers and the business
proposed to be conducted by the Company pursuant to the Distributor Agreement.
All such Permits are in full force and effect and are being complied with in all
respects. Exhibit 3.10(a) is a true and complete list of all Permits (including
without limitation all Permits required in connection with distribution by the
Company of long distance and local exchange products and related services)
necessary for or material to the conduct of the DSO Business as it is currently
operated by Sellers and the business proposed to be conducted by the Company
pursuant to the Distributor Agreement. No representation is made as to the
transferability of any Permits specified in Exhibit 3.10(a).
(b) The Sellers have made all filings, including without
limitation all tariffs, required by the Federal Communications Commission (the
"FCC") and all states having jurisdiction over the business of Sellers relating
to the DSO Business. Exhibit 3.10(b) is a true and complete list of all tariffs
(and similar filings) filed with the FCC or such states by the
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Company or ENS, as applicable. All such tariffs (and similar filings) are in
full force and effect and are being complied with in all respects.
3.11 Real Property. Except as set forth on Exhibit 3.11, the Real
Property and the Leased Premises constitute all real property owned or leased by
Sellers and used in the DSO Business. Exhibit 3.11(a) includes a list of all
leases pertaining to the Leased Premises. With respect to each such parcel of
Real Property or Leased Premises, except as set forth on Exhibit 3.11(b) and
except for Permitted Liens:
(a) neither of Sellers has received any notice of any, and to
the Knowledge of Sellers there are no, threatened, condemnation proceedings,
lawsuits or administrative actions relating to the parcel or other matters
affecting adversely the current use, occupancy or value thereof;
(b) there are no leases, subleases, licenses, concessions or
other agreements, written or oral, granting to any Person the right of use or
occupancy of any portion of the parcel;
(c) there are no outstanding options or rights of first
refusal to purchase the parcel, or any portion thereof or interest therein;
(d) all facilities on such parcel have received all approvals
of governmental authorities (including Permits) required in connection with the
ownership or operation thereof and have been operated and maintained in material
accordance with applicable Laws;
(e) there are no Persons (other than Sellers) in possession
of such parcel;
(f) any Leases in connection therewith are legal, valid,
binding and enforceable against each party thereto and in full force and effect
and, subject to obtaining
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Required Consents, will continue to be legal, valid, binding and enforceable
against all parties thereto, and in full force and effect on identical terms
following the consummation of the transaction contemplated hereby;
(g) Sellers are not in breach or default of any Leases of such
parcel and, to the Knowledge of Sellers, no party to such Leases is in breach or
default and no event has occurred which, with notice or lapse of time, would
constitute a breach or default or permit termination, modification, or
acceleration thereunder; and
(h) there are no disputes or oral agreements in effect as to
the Leases or subleases or Real Property.
3.12 Fees and Expenses of Brokers and Others. Neither of the Sellers is
committed to any liability for any brokers' or finders' fees or any similar fees
in connection with the transactions contemplated by this Agreement, including
the conveyance of the Assets to Buyer, and neither has retained any broker or
other intermediary to act on its behalf in connection with the transactions
contemplated by this Agreement. All other fees and expenses (including
attorneys' and accountants' fees) of Sellers in connection with the transactions
contemplated herein shall be paid in full by Sellers.
3.13 Inventory. The Inventory consists of supplies, purchased parts,
finished goods, and repaired and returned goods. All Inventory is merchantable
and fit or suitable and usable for sale or use in the Ordinary Course of
Business, and none of the Inventory is slow-moving, obsolete, below standard
quality, damaged, or defective, subject only to the reserve for Inventory set
forth on the face of the Balance Sheet (rather than in any notes thereto) as
adjusted for the passage of time through the Closing Date in accordance with
GAAP applied in
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accordance with the practices and methodologies set forth on Exhibit 1.7.
Inventory of returned goods that is subject to repair is reflected in such
reserve for Inventory. Inventory reflected in the Balance Sheet and in the Books
and Records is valued at the lower of cost (on a first-in, first-out basis) or
market in accordance with GAAP applied in accordance with the practices and
methodologies set forth on Exhibit 1.7, consistently applied. Since the date of
the Balance Sheet, no Inventory has been sold or disposed of except through
sales or use in the Ordinary Course of Business.
3.14 Books and Records. The Books and Records are complete and correct.
3.15 Tax Matters. (i) Each of the Sellers has filed all Tax Returns
relating to the DSO Business that it was required to file, (ii) no claim has
ever been made by an authority in a jurisdiction where either of the Sellers
does not file Tax Returns that it is subject to taxation by that jurisdiction
with respect to the DSO Business, (iii) neither of the Sellers has in effect any
waiver of any statute of limitations in respect of Taxes relating to the DSO
Business or agreed to any extension of time with respect to any outstanding Tax
assessment or deficiency relating to the DSO Business, (iv) none of the Assumed
Liabilities is an excise Tax under Code Section 4999 or an obligation to make
any payments that will not be deductible under Code Section 280G or will be
subject to the excise Tax of Code Section 4999, (v) other than inchoate liens
for Taxes not yet due and payable and sales and use Taxes collected but not yet
due and payable, there are no unpaid Taxes payable by Sellers that are or could
become a lien on any Asset or a liability of Buyer as a result of its purchase
of the Assets, and (vi) the value of the Assets (excluding money) of the Company
to be sold hereunder is less than two-thirds in
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fair market value of all of the Company's assets (excluding money) used in
trades or businesses carried on by the Company within the meaning of Code
Section 279(b)(1)(B).
3.16 Compliance with Law. Except as set forth in Exhibit 3.18 attached
hereto, the DSO Business, as conducted by Sellers, and Sellers' use of the
Assets and performance under the Contracts does not violate or conflict with,
and has not violated or conflicted with, any Law. Except as set forth on
Exhibits 3.6 and 3.18, Sellers are not aware of any proposed laws, rules,
regulations, ordinances, orders, judgments, decrees, governmental takings,
condemnations or other proceedings which would be applicable to the Assets or
the DSO Business and which might adversely affect the Assets or the DSO
Business.
3.17 Employment Agreements and Benefits. Exhibit 3.17 attached hereto
is a true and complete list of all agreements relating to the compensation and
other benefits of present and former employees, salesmen, consultants and other
agents of the DSO Business, including, without limitation, collective bargaining
agreements and pension, retirement, bonus, stock option, profit sharing, health,
disability, life insurance, hospitalization, education or other similar plans or
arrangements (whether or not subject to ERISA), true and complete copies of
which have been delivered by Sellers to Buyer. Except as set forth in Exhibit
3.17, Sellers do not and have not contributed to or maintained a "multiemployer
plan" (as defined in ERISA Section 3(37)). The provisions of each Employee
Benefit Plan and the administration of each such plan are in all material
respects in compliance with its terms and applicable Law, and Sellers have not
received any notice alleging to the contrary with respect to any such plan.
There is no action, claim or demand of any kind (other than routine claims for
benefits) that has been brought (or, to the Knowledge of Sellers, is proposed or
threatened) against any plan
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described in Exhibit 3.17 or the assets thereof, or against the fiduciary of any
such plan. No circumstance exists and no event (including any action or failure
to do any act) has occurred with respect to any employee benefit plan (as
defined in Section 3(3) of ERISA) maintained or formerly maintained by Sellers
or to which Sellers are or have been required to contribute, that could subject
Buyer to liability, or the assets of the DSO Business to any lien, under ERISA
or the Code, nor will the transactions contemplated by this Agreement give rise
to any such liability or lien. Except as described in Exhibit 3.17 attached
hereto and other than as required under Section 601 et seq. of ERISA, no such
plan that is an employee welfare benefit plan (as defined in Section 3(1) of
ERISA) provides benefits or coverage following retirement or other termination
of employment. No provision of any such plan would result in any limitation on
the ability of Sellers to terminate the plan with respect to employees of the
DSO Business.
3.18 Labor Matters. Except as set forth in Exhibit 3.18, with respect
to all employees of the DSO Business, there is no grievance or litigation,
arbitration proceeding, governmental investigation, citation or action of any
kind pending (or, to the Knowledge of Sellers, proposed or threatened) against
Sellers relating to employment, employment practices, terms and conditions of
employment or wages and hours. Except as set forth in Exhibit 3.18, Sellers have
no information that any executive, key employee, or group of employees of the
DSO Business has any plans to terminate employment with Sellers. The DSO
Business has not experienced any labor disputes or work stoppage due to labor
disagreements. Except as set forth in Exhibit 3.18, with respect to the DSO
Business, Sellers are in compliance with all applicable Laws respecting
employment and employment practices, terms and conditions of
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employment and wages and hours and have not been and are not engaged in any
unfair labor practice as defined in the National Labor Relations Act, as
amended. There is no unfair labor practice charge or complaint against any of
Sellers relating to the DSO Business pending or threatened before the National
Labor Relations Board. Except as disclosed in Exhibit 3.18, no collective
bargaining agreement of any of the Company and its subsidiaries restricts the
DSO Business from relocating or closing any of its operations. The only
employees of the Sellers subject to the collective bargaining agreements listed
on Exhibit 1.24 are employees engaged in the DSO Business.
3.19 Insurance. Exhibit 3.19 attached hereto sets forth the following
information with respect to each insurance policy (including policies providing
property, casualty, liability and workers' compensation coverage and bond and
surety arrangements) to which Sellers have been a party, a named insured or
otherwise the beneficiary of coverage at any time within the past two years in
connection with the conduct of the DSO Business:
(a) the name, address and telephone number of the agent;
(b) the name of the insurer, the name of the policyholder and
the name of each covered insured; and
(c) the policy number and the period of coverage.
Exhibit 3.19 attached hereto accurately and completely describes any
self-insurance arrangements affecting the DSO Business.
With respect to each such insurance policy: (a) the policy is legal,
valid, binding, enforceable, and in full force and effect; (b) Sellers are not
in breach or default and no event has occurred which, with notice or the lapse
of time, would constitute such a breach or default
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by Sellers, or permit termination, modification, or acceleration, under the
policy; and (c) complete copies of all policies and related indemnity or premium
payment agreements have been delivered to Buyer. All such policies provide
adequate coverage for all normal risks incident to the Company's assets,
properties and business operations and are in character and amount at least
equivalent to that carried by Persons engaged in a business subject to the same
or similar risks, perils or hazards.
3.20 No Adverse Change. Except as set forth in Exhibit 3.20 attached
hereto, since December 31, 1995, the DSO Business has been operated in the
Ordinary Course of Business and substantially in the same manner as previously
conducted, and there has been no change in, and, to the Knowledge of Sellers, no
fact or condition exists or is contemplated or threatened (other than general
economic or industry conditions) which might cause such a change in, the
condition or prospects of the DSO Business, financial or otherwise, which could
be adverse to the DSO Business. Without limiting the foregoing, since December
31, 1995, except as set forth in Exhibit 3.20 there has not been: (a) any loss,
damage, condemnation or destruction to any of the Assets (whether covered by
insurance or not); (b) any borrowings by Sellers related to the DSO Business
other than Bank Borrowings and trade payables arising in the Ordinary Course of
Business; (c) any mortgage, pledge, lien or encumbrance made on any of the
Assets, except for (i) Permitted Liens and (ii) liens securing Bank Borrowings
which liens will be released at or prior to Closing; (d) any sale, transfer or
other disposition of the Assets, other than sales of inventory in the Ordinary
Course of the Business or as contemplated by this Agreement; (e) any
distribution agreement entered into in the Territory with a third party; (f) any
contract, agreement, lease or license involving payments or
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commitments to pay in excess of $75,000 entered into in connection with the DSO
Business other than Sales Contracts and Service Contracts entered into in the
Ordinary Course of Business; (g) any acceleration, termination, modification or
cancellation (other than a non-renewal) of any agreement, contract, lease or
license in connection with the DSO Business involving payment or a commitment to
pay in excess of $50,000 in the aggregate; (h) any capital expenditures in
excess of $1,000,000 in the aggregate made or committed nor any single capital
expenditure in excess of $50,000 made or committed nor any capitalized lease
obligation entered into in connection with the DSO Business; (i) any note, bond
or other debt security issued or any indebtedness for borrowed money created,
assumed or guaranteed other than Bank Borrowings in the Ordinary Course of
Business; (j) any delay or postponement of payments of accounts payable or other
liabilities outside the Ordinary Course of Business; (k) any acceleration of the
payment of any accounts receivable or notes receivable, or any provision of
discounts or other incentive for early payment, or any special cash collection
programs established with respect to the DSO Business; (l) any termination or
threatened termination by one or more customers material to the DSO Business of
their respective business relationships with the DSO Business or any agreement
by any such customers not to do business with the DSO Business on terms and
conditions at least as favorable as provided to Sellers on the date of the
Balance Sheet, and to the Knowledge of Sellers, there are no facts which would
form the basis therefor; (m) any modification, change or increase in the
compensation or employment terms of any of the officers or employees of the DSO
Business other than in the Ordinary Course of Business; (n) any payment pursuant
to any employee benefit plan, incentive, severance, bonus or other plan,
contract or commitment for the benefit
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of any employee of the DSO Business other than in the Ordinary Course of
Business; (o) any termination of any number of employees of DSO Business which
in the aggregate could be adverse to the DSO Business, except as set forth in
Exhibit 8.2; or (p) any commitment made to do any of the foregoing.
3.21 Absence of Questionable Payments. To the Knowledge of Sellers,
neither of Sellers, nor any director, officer, agent, employee or other Person
acting on Sellers' behalf has, in connection with the DSO Business, (a) used any
corporate or other funds for unlawful contributions, payments, gifts or
entertainment, or made any unlawful expenditures relating to political activity
to government officials or others or established or maintained any unlawful or
unrecorded funds in violation of Section 30A of the Securities Exchange Act of
1934, as amended, or any other applicable foreign, federal or state Law; or (b)
accepted or received any unlawful contributions, payments, expenditures or
gifts.
3.22 Absence of Undisclosed Liabilities. Neither of Sellers has, with
respect to the DSO Business, any liabilities or obligations of any kind, whether
absolute, accrued, asserted or unasserted, contingent or otherwise, that would
have been required to be disclosed on a balance sheet of the DSO Business or
included in the notes thereto prepared as of the date hereof, in accordance with
GAAP, except liabilities, obligations or contingencies that are accrued or
reserved against in the Balance Sheet or reflected in the notes thereto, or that
were incurred after the date of the Balance Sheet in the Ordinary Course of
Business and consistent with past practices.
3.23 Certain Transactions. None of the directors or officers of Sellers
or any affiliate of such directors or officers and no affiliate of Sellers is
currently a party to any
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transaction related to the DSO Business (other than for services as employees,
officers and directors), including, without limitation, any contract, agreement
or other arrangement providing for the furnishing of services to or by,
providing for rental of real or personal property to or from, or otherwise
requiring payments to or from, any such Person, or to or from any corporation,
partnership, trust or other entity in which any such Person owns in excess of
five percent of the outstanding equity interest. The pricing for services and
transactions between the Company and the DSO Business (i) is based upon
application of the discounts set forth in the Company's 1996 Distribution Price
Book to OEM list prices and (ii) is reflected in the Financial Statements, the
Unaudited Interim Financial Statements and the Books and Records of the DSO
Business at the discounts reflected in Exhibit 1.7(B) and (A) in respect of the
Unaudited Interim Financial Statements and the 1996 Books and Records upon
prices which are set forth in the 1996 Distribution Price Book or (B) in the
case of the Financial Statements on prices which are not materially different
from those on the 1996 Distribution Price Book. Sellers have delivered to Buyer
a true and correct copy of the 1996 Distribution Price Book.
3.24 Subsidiaries and Affiliates. Exhibit 3.24 attached hereto sets
forth a list of all corporations, partnerships, joint ventures or other business
organizations or entities in which the Company holds an ownership interest. No
subsidiary of the Company, other than ENS, conducts any business similar to, has
any agreement or arrangement with or is involved in any way with, the DSO
Business or any of its assets. Other than ENS, no subsidiary of the Company has
any direct or indirect ownership interest in any of the Assets.
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3.25 Product Liability. To the Knowledge of the Sellers, except as set
forth in Exhibit 3.6, neither of the Sellers has any liability relating to the
DSO Business (whether asserted or unasserted, whether absolute or contingent,
whether accrued or unaccrued, whether liquidated or unliquidated, and whether
due or to become due) arising out of any injury to individuals or property as a
result of the ownership, possession, or use of any product sold, leased, or
delivered by the DSO Business.
3.26 Product Warranty. Substantially all of the products and services
sold, leased and delivered by Sellers in connection with the DSO Business have
conformed in all material respects with all applicable contractual commitments
and all express and implied warranties, and neither of the Sellers, with respect
to the DSO Business, has any material liability (whether known or unknown,
whether asserted or unasserted, whether absolute or contingent, whether accrued
or unaccrued, whether liquidated or unliquidated and whether due or to become
due) for replacement or repair thereof or other damages in connection therewith,
subject only to the reserve for product warranty and service claims set forth on
the face of the Balance Sheet (rather than in any notes thereto) as adjusted for
operations and transactions in accordance with GAAP through the Closing Date.
Substantially all of the products and services manufactured, sold, leased and
delivered by the DSO Business are subject to standard terms and conditions of
sale, service or lease. Exhibit 3.26 includes copies of the standard terms and
conditions of sale or leases for the DSO Business (containing applicable
guaranty, warranty and indemnity provisions).
3.27 Investment Representations.
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(a) The Company acknowledges that the Junior Subordinated Note
has not been and will not be registered under any state or federal
securities laws and that the Junior Subordinated Note is not and will
not be transferable in the absence of registration under such laws or
the availability of an exemption from the registration requirements
thereof. The Company is acquiring the Junior Subordinated Note solely
for its own account for the purpose of investment and not with a view
to the distribution thereof. The Company is a sophisticated investor
with knowledge and experience in business and financial matters, has
received all information concerning the Buyer which it deems
appropriate with respect to its acquisition of the Junior Subordinated
Note and has had the opportunity to obtain additional information as
desired in order to evaluate the merits and the risks inherent in
holding the Junior Subordinated Note. The Company is able to bear the
economic risk and lack of liquidity inherent in holding the Junior
Subordinated Note, and is an accredited investor as defined in
Regulation D promulgated under the Securities Act of 1933, as amended.
(b) ENS acknowledges that the Warrants have not been and the
shares of capital stock issuable pursuant to the Warrants or the Stock
Put Agreement (the "Shares") will not be registered under any state or
federal securities laws and that the Shares will not be transferable in
the absence of registration under such laws or the availability of an
exemption from the registration requirements thereof. ENS is acquiring
the Warrants and will acquire the Shares solely for its own account for
the purpose of investment and not with a view to the distribution
thereof. ENS is a sophisticated investor with knowledge and experience
in business and financial matters,
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has received all information concerning the Buyer which it deems
appropriate with respect to its acquisition of the Warrants and the
Shares and has had the opportunity to obtain additional information as
desired in order to evaluate the merits and the risks inherent in
holding the Warrants and the Shares. ENS is able to bear the economic
risk and lack of liquidity inherent in holding the Warrants and Shares,
and is an accredited investor as defined in Regulation D promulgated
under the Securities Act of 1933, as amended. 3.28 Consents. Exhibit
3.28 sets forth a true, correct and complete list of any Required
Consent and the Person and subject matter or contract to which such consent
relates.
3.29 Distributor Agreement. The form, terms and provisions of the
Distributor Agreement attached hereto as Exhibit 1.27 are at least as favorable
to the Buyer as to price, payment, discount, support, warranty and delivery
terms as any other distribution agreements between the Company and any third
party distributor.
3.30 Territory. Except as set forth in Exhibit 3.30, the Territory
represents the entire geographic area of the United States in which the Sellers
currently conduct or at any time since January 1, 1996 have conducted the DSO
Business, other than the Network Resale Business, which is conducted throughout
the United States.
3.31 International Call Back. Exhibit 3.31 sets forth a true, correct
and complete list of all international call back customers included within the
definition of Excluded Customers.
3.32 Accounts; Funds, etc. Exhibit 1.12 identifies all bank accounts or
similar accounts for the deposit of cash or securities maintained by or on
behalf of the DSO Business.
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At and after the Closing, all monies and accounts arising out of, relating to or
established for the DSO Business shall be held by, and accessible only to,
Buyer.
3.33 ENS Assets. Exhibit 3.33 sets forth a full and accurate
description of the assets of ENS to be transferred hereunder, together with
Sellers' best estimate of the value of such assets.
3.34 Disclosure. No representation or warranty of Sellers contained
herein, and no statement contained in the Exhibits hereto or any certificate
furnished by Sellers pursuant to the provisions hereof, contains or will contain
any untrue statement of a material fact or omits or will omit to state a
material fact necessary to make the statements contained herein or therein, in
light of the circumstances under which they were made, not misleading in any
material respect.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER
Each of Holdings and Tone hereby represents and warrants to Sellers
that:
4.1 Organization of Buyer. Each of Holdings and Tone is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware.
4.2 Authorization; Enforceability. The execution, delivery and
performance by Buyer of this Agreement, the Escrow Agreement, the Distributor
Agreement, the Stock Put Agreement, the Warrants, the Junior Subordinated Note,
the Stockholders Agreement and all of the other documents and instruments
contemplated hereby to which such Buyer is a party are within the corporate
power of Buyer and have been duly authorized by all necessary corporate action
of Buyer. This Agreement is, and the other documents and instruments
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required hereby to which such Buyer is a party including, without limitation,
the Escrow Agreement, the Distributor Agreement, the Stock Put Agreement, the
Warrants, the Junior Subordinated Note, the Stockholders' Agreement will be,
when executed and delivered by such Buyer, the valid and binding obligations of
Buyer, enforceable against Buyer in accordance with their respective terms.
4.3 No Violation or Conflict. The execution, delivery and performance
by Buyer of this Agreement, the Escrow Agreement, the Distributor Agreement, the
Stock Put Agreement, the Warrants, the Junior Subordinated Note, the
Stockholders Agreement and all of the other documents and instruments
contemplated hereby to which Buyer is a party do not and will not conflict with
or violate any Law, judgment, order or decree binding on Buyer or the
Certificate of Incorporation or Bylaws of Buyer or any contract or agreement to
which Buyer is a party or by which it is bound. No consent of any other person,
and no notice to, filing or registration with, or authorization, consent or
approval of, any governmental, regulatory or self-regulatory agency is necessary
or is required to be made or obtained by Buyer in connection with the
transactions contemplated in this Agreement.
4.4 No Broker. Buyer has not had any dealings, negotiations or
communications with any broker or other intermediary in connection with the
transactions contemplated by this Agreement, except as set forth on Exhibit 4.4.
4.5 No Litigation. There is no litigation, arbitration, proceeding,
governmental investigation, citation or action of any kind pending (or, to the
Knowledge of Buyer, proposed or threatened) against Buyer relating to this
Agreement or the transactions contemplated hereby.
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4.6 Financing Commitments. Attached hereto as Exhibit 4.6 are true,
complete and correct copies of each Financing Commitment.
4.7 Capitalization. The authorized capital stock of Holdings consists
of 9,915,000 shares of Class A Common Stock, $.001 par value per share and
85,000 shares of Class L Common Stock, $.001 par value per share. As of the
Closing, there will be issued and outstanding: (a) shares of Class A Common
Stock in an amount equal to 333,333 plus the amount of shares of Class A Common
Stock issued to lenders as contemplated by the Financing Commitments, and (b)
66,667 shares of Class L Common Stock; and upon the Closing all such shares will
be validly issued, fully paid and nonassessable. As of the Closing, Holdings
will have reserved, for issuance in accordance with the Warrants and the Stock
Put Agreement, the shares issuable thereunder. As of the Closing, the shares of
Class A Common Stock and Class L Common Stock issuable pursuant to the Warrants
or the Stock Put Agreement shall represent 8% of the number of outstanding
shares of the Class A Common Stock and the Class L Common Stock (other than
shares, if any, issued to lenders as contemplated by the Financing Commitments,
respectively, and Holdings shall have reserved such Shares for issuance pursuant
to the Warrants or the Stock Put Agreement. As of the Closing, except for
warrants to purchase shares of Class L Common Stock and Class A Common Stock
issuable to lenders who are providing financing for the transactions
contemplated by this Agreement and for options issued to management of Buyer and
options, if any, issued to the Person listed on Exhibit 4.4, and except as
provided in the Certificate of Incorporation of Holdings or in the Stockholders
Agreement, there will be no outstanding options, warrants or other rights to
purchase or acquire shares of Class A Common Stock or
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Class L Common Stock of Holdings. Except as set forth in the Warrants, the Stock
Put Agreement, the Stockholders Agreement or as imposed by applicable securities
laws, there are no restrictions on the transfer or voting of the Shares.
ARTICLE V
CERTAIN MATTERS PENDING THE CLOSING
The parties agree as follows:
5.1 Carry on in Regular Course. Sellers shall cause the DSO Business to
be conducted in the Ordinary Course of Business and in accordance with past
practice and to use its reasonable best efforts to preserve its properties,
business and relationships with its suppliers and customers. Sellers will advise
Buyer promptly in writing of any event that would constitute a breach of any
representation or warranty contained in Article III or that could have a
Material Adverse Effect on the DSO Business.
5.2 Indebtedness. Neither of Sellers shall, with respect to the DSO
Business, (a) create, incur or assume any indebtedness for borrowed money,
except for Bank Borrowings consistent with past practice, (b) mortgage, pledge
or otherwise encumber any of its properties or assets, except for Permitted
Liens and except for liens securing Bank Borrowings, which liens will be
released at or prior to Closing or (c) create or assume any other indebtedness
except accounts payable and other liabilities incurred in the Ordinary Course of
Business.
5.3 Compensation. Neither of Sellers shall, with respect to the DSO
Business or the employees of the DSO Business, grant any increases, except for
increases in the Ordinary Course of Business, in the rate of pay of any of such
employees. Without the prior written consent of Buyer, neither of Sellers shall
institute any new Employee Benefit Plan, amend,
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alter or terminate, in whole or in part, any Employee Benefit Plan of Sellers or
assume, enter into, amend, alter or terminate any labor or collective bargaining
agreement which affects any employees of the DSO Business, except in any such
case as required by Law (in respect of which Sellers shall provide Buyer with
prior notice), the terms of any existing Employee Benefit Plan or as otherwise
expressly contemplated by this Agreement.
5.4 Compliance with Law. Sellers shall cause the DSO Business to be
conducted in compliance in all material respects with all applicable Laws, and
with all orders of any court or of any federal, state, municipal or other
governmental department binding upon Sellers (except for any such orders which
are being contested by Sellers in good faith by appropriate proceedings which
Sellers have disclosed to Buyer).
5.5 Access. At Buyer's expense, Buyer and its authorized agents,
officers and representatives shall have, and from the date hereof through the
Closing Date Sellers shall provide, reasonable access to the employees of the
DSO Business, customers in the Customer Base (as provided in Section 6.10
hereof), Books and Records, Contracts and the Real Property and Leased Premises
to conduct such examinations and investigations of the Assets as Buyer deems
necessary; provided, however, that such examinations and investigations: (a)
shall be conducted during Sellers' normal business hours; and (b) shall not
unreasonably interfere with Sellers' operations and activities. Sellers shall
cooperate, and shall cause their employees, counsel, independent auditors and
financial advisors to cooperate, in all reasonable respects with Buyer's
examinations and investigations and shall afford Buyer, upon Buyer's request,
joint access to the suppliers of the DSO Business and customers included in the
Customer Base.
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5.6 Cooperation. Buyer and Sellers will cooperate in all respects in
connection with the giving of any notices to any governmental authority, and
will cooperate and use their best efforts to secure the permission, approval,
determination, consent or waiver of any governmental authority required by Law
and any third party, including the Required Consents in connection with the
transfer of the Assets from Sellers to Buyer.
5.7 Publicity. All general notices, releases, statements and
communications to the employees of the DSO Business, suppliers and customers
included in the Customer Base and to the general public and the press relating
to the transactions covered by this Agreement shall be made only at such times
and in such manner as may be mutually agreed upon by Buyer and Sellers;
provided, however, that either Sellers or Buyer shall be entitled to make a
public announcement of the proposed transaction if, in the opinion of its legal
counsel, such announcement is required to comply with Law provided that such
party required to make such disclosure shall provide prior notice to the other
party. Sellers agree that, without the prior consent of Buyer, Sellers shall not
publicly disclose or refer to any Person who has committed to provide financing
to Buyer or any affiliate thereof without the prior written consent of Buyer.
5.8 Confidentiality. Notwithstanding any other provision of this
Agreement to the contrary, Buyer agrees that, unless and until the transactions
contemplated herein are consummated, Buyer shall remain subject to all of the
terms and conditions of the Confidentiality Agreement, dated January 21, 1996,
between Sellers and Canton Communications Capital, Inc. ("CCCI"), for itself and
on behalf of its Affiliates and partners (the "Confidentiality Agreement"), the
terms of which Confidentiality Agreement are
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incorporated herein by reference, except that such Confidentiality Agreement is
hereby modified to include all of Buyer's potential financing sources in the
group of persons to whom Buyer may furnish the "Confidential Information" (as
defined in the Confidentiality Agreement) pursuant to the terms of such
Confidentiality Agreement.
5.9 Exclusivity. Sellers will not, and will not permit any officer,
director, investment banker or other representative of any Sellers to, directly
or indirectly (i) solicit, initiate or encourage the submission of any proposal
or offer from any Person, firm or corporation, relating to, or participate in
the negotiation of, agree to, recommend or consummate any (a) merger or
consolidation involving the DSO Business, (b) acquisition or purchase of the
Assets or the DSO Business, or (c) similar transaction or business combination
involving the DSO Business or (ii) solicit, initiate or encourage the submission
of any proposal or offer from any Person, firm or corporation or engage in any
discussions relating to (a) merger or consolidation, sale of substantial assets,
sale of shares of capital stock (including without limitation by way of a tender
offer) or similar transactions involving the Company or (b) agree to, recommend
or approve any such transaction; provided, however, that nothing contained in
this Subsection (ii) shall prevent the Board of Directors of the Company from
considering, negotiating, approving and recommending to the stockholders of the
Company a bona fide transaction of a type described in Subsection (ii) not
solicited in violation of this Agreement provided that the Board of Directors of
the Company determines in good faith (upon advice of independent counsel) that
it is required to do so in order to discharge properly its fiduciary duties.
Sellers will promptly notify Buyer if any Person makes any proposal, offer,
inquiry or contract with respect to any of the foregoing.
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5.10 Updated Financial Information. Sellers will promptly provide Buyer
with the Audited Financial Statements and the Unaudited Interim Financial
Statements on or prior to May 15, 1996 and April 30, 1996, respectively.
5.11 Title Insurance and Surveys. Buyer will obtain title insurance
commitments, policies and riders and a current survey with respect to Real
Property in form and substance, and from an insurance company, satisfactory to
Buyer. Sellers will reimburse Buyer for one-half of the reasonable expenses
incurred in connection with obtaining such commitments and binders (including
but not limited to costs of conducting surveys). It is understood that from and
after Closing Buyer shall be responsible for paying premiums with respect to
such title insurance.
5.12 [Reserved]
5.13 Additional Territories. Sellers agree that if, from the date
hereof through the Closing Date, an authorized distributor ceases to have
exclusive rights to sell and license the Company's telephony products in any
area of the United States not included in the Territory or is otherwise
terminated or ceases to act as an independent distributor in such area, then the
Company shall offer to Buyer the right to negotiate with the Company to include
such area within the Territory, including the right to include such area within
the Distributor's Area as defined in the Distributor Agreement. The Company
agrees that it shall not require distribution terms and conditions for such area
less favorable to Buyer than that offered to third party distributors in similar
areas for similar products.
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ARTICLE VI
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF BUYER
Each and every obligation of Buyer to be performed on the Closing Date
shall be subject to the satisfaction prior to or at the Closing of the following
express conditions precedent:
6.1 Accuracy of Representations and Warranties. The representations and
warranties of Sellers set forth in this Agreement shall have been true and
correct and shall be true and correct in all material respects as of the Closing
Date as if made as of such time.
6.2 Proceedings and Instruments Satisfactory. All proceedings,
corporate or other, to be taken by Sellers in connection with the transactions
contemplated by this Agreement, and all documents incident thereto, shall be
substantially in the form shown on any Exhibit hereto, or, if a form of any such
document is not so shown, then it shall be reasonably satisfactory in form and
substance to Buyer and Buyer's counsel, and Sellers shall have made available to
Buyer for examination the originals or true and correct copies of all available
documents that Buyer may reasonably request in connection with the transactions
contemplated by this Agreement.
6.3 No Litigation. No investigation, suit, action or other proceeding
shall be threatened or pending before any court or governmental agency that
seeks restraint, prohibition, damages or other relief in connection with the
Agreement or the consummation of the transactions contemplated hereby or causes
any of the transactions contemplated by this Agreement to be rescinded following
consummation and no such injunction, judgment, order, decree, ruling or charge
shall be in effect.
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6.4 Consents. All Required Consents shall have been obtained (other
than governmental regulatory consents, approvals and waivers related to the
transfer of the Sprint Contract and the approvals relating thereto of regulatory
agencies in respect of the resale of long-distance and local exchange services)
and such Required Consents shall be in full force and effect.
6.5 Lien Waivers and Estoppel Certificates. Each of Sellers shall have
used its reasonable good faith efforts to deliver to Buyer: (a) waivers of any
statutory landlord or lessor liens with respect to the Leased Premises and (b)
estoppel certificates, reasonably satisfactory in form and substance to Buyer,
from each landlord of the Leased Premises.
6.6 Due Diligence. Prior to the Closing Date, Sellers shall have
granted Buyer and its representatives adequate access to the Books and Records,
the Contracts and the employees of the DSO Business, any other documents,
resources and personnel relating to the DSO Business and Buyer shall have
completed and be reasonably satisfied with the results of its due diligence
investigation; (it being understood that Buyer has been granted access to the
materials listed in Exhibit 6.6 attached hereto).
6.7 Environmental Due Diligence. Buyer shall have completed its due
diligence review of environmental matters related to the DSO Business,
including, without limitation, an environmental audit of the Real Property and
Leased Premises and the results of such review shall be reasonably satisfactory
to Buyer.
6.8 Financing. Buyer shall have obtained the Bank Financing,
substantially in accordance with the terms set forth in the applicable Financing
Commitment.
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6.9 Financial Statements. Sellers shall have delivered to Buyer the
Audited Financial Statements and the Unaudited Interim Financial Statements and
the Audited Financial Statements shall not be materially different from the
Financial Statements.
6.10 Customer Review. Using customer information supplied by Sellers,
Buyer shall have conducted a statistical sampling of the customers included in
the Customer Base by means of a customer survey, using procedures and
methodology described in Exhibit 6.10, and Buyer shall have determined to its
reasonable satisfaction that a reasonable percentage of the customers so
surveyed are bona fide ongoing customers of the DSO Business.
6.11 Sellers' Performance. Each of the obligations of Sellers to be
performed or complied with on or before the Closing Date pursuant to the terms
of this Agreement, including, without limitation, the Closing deliveries
required by Section 2.3(a), shall have been duly performed or complied with, in
all material respects, on or before the Closing Date.
6.12 No Material Adverse Change. Since December 31, 1995, there shall
not have occurred any material adverse change in the financial condition,
results of operation or business of the DSO Business or of the Company.
6.13 Title to Real Estate. Seller shall have obtained the title
insurance commitment and current survey satisfactory to Buyer as provided in
Section 5.11 hereof and upon Closing the exceptions to title delineated thereon
shall be deemed Permitted Liens for purposes hereof.
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ARTICLE VII
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF SELLERS
Each and every obligation of Sellers to be performed on the Closing
Date shall be subject to the satisfaction prior to or at the Closing of the
following express conditions precedent:
7.1 Accuracy of Representations and Warranties. The representations and
warranties of Buyer set forth in this Agreement shall have been true and correct
and shall be true and correct in all material respects as of the Closing Date as
if made as of such time.
7.2 Proceedings and Instruments Satisfactory. All proceedings,
corporate or other, to be taken by Buyer in connection with the transactions
contemplated by this Agreement, and all documents incident thereto, shall be
substantially in the form shown on any Exhibit hereto, or, if a form of any such
documents is not so shown, then it shall be reasonably satisfactory in form and
substance to Sellers and its counsel, and Buyer shall have made available to
Sellers for examination the originals or true and correct copies of all
available documents that Sellers may reasonably request in connection with the
transactions contemplated by this Agreement.
7.3 No Litigation. No investigation, suit, action or other proceeding
shall be threatened or pending before any court or governmental agency that
seeks restraint, prohibition, damages or other relief in connection with the
Agreement or the consummation of the transactions contemplated hereby or cause
any of the transactions contemplated by this Agreement to be rescinded following
consummation and no such injunction, judgment, order, decree, ruling or charge
shall be in effect.
7.4 Buyer's Performance. Each of the obligations of Buyer to be
performed or complied with on or before the Closing Date pursuant to the terms
of this Agreement,
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including, without limitation, the Closing deliveries required by Section
2.3(b), shall have been duly performed or complied with, in all material
respects, on or before the Closing Date.
ARTICLE VIII
INDEMNITIES AND ADDITIONAL COVENANTS
8.1 Indemnification.
(a) Survival of Representations and Warranties. The representations and
warranties of Sellers and Buyer shall survive the execution of and delivery of
this Agreement and the consummation of the transactions contemplated hereby and
shall be effective until the relevant time limitation for making any indemnity
claim in respect of such representations and warranties under Section 8.1 shall
have been reached and no longer, regardless of any investigation that may have
been made at any time by or on behalf of the party to which such representations
and warranties are made.
(b) Indemnity by Sellers. Sellers hereby agree to indemnify, defend and
hold harmless Buyer and its directors, officers and Affiliates against and in
respect of any and all damages, liabilities, obligations, claims, demands,
judgments, liens, injunctions, charges, orders, decrees, rulings, dues,
assessments, Taxes, losses, fines, penalties, fees, amounts paid in settlement,
costs and expenses, including, without limitation, reasonable attorneys' fees
and expert witness fees and disbursements in connection with investigating,
defending or settling any action or threatened action, arising out of any claim,
damages, complaint, demand, cause of action, audit, investigation, hearing,
action, suit or other proceeding asserted or initiated or otherwise existing in
respect of any matter (hereinafter referred to collectively as the
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"Losses"), which any such party may at any time suffer, sustain or become
subject to, in connection with, incident to, resulting from or arising out of or
in any way relating to or by or incur, or become subject to, as a result of or
in connection with: (i) the inaccuracy of any representation or warranty made by
Sellers herein (other than in Sections 3.1, 3.2 and 3.4), or any
misrepresentation or breach of any such representation or warranty or breach of
the covenants contained in Section 5.1, 5.3, 5.4, 5.5, 5.6 and 5.10; (ii) the
inaccuracy of any representation or warranty made by Sellers in Sections 3.1,
3.2, and 3.4 or any misrepresentation or breach of the representations and
warranties made by Sellers in Sections 3.1, 3.2 and 3.4 or any nonfulfillment or
breach of any covenant or agreement on the part of Sellers under this Agreement
(other than the covenant contained in Section 5.1, 5.3, 5.4, 5.5, 5.6 and 5.10)
or under any of the documents and instruments delivered by Sellers pursuant to
this Agreement including, without limitation, the failure by Sellers to satisfy,
perform and discharge all Retained Liabilities; and (iii) claims by third
parties against Buyer relating to any liability of Sellers that is not an
Assumed Liability (including any liability of Sellers that becomes a liability
of Buyer under any bulk transfer law of any jurisdiction, under any common law
doctrine of de facto merger or successor liability, or otherwise by operation of
law); provided, however, that the right to such indemnification, defense and
reimbursement shall only be available with respect to any claim enumerated in
the following chart if such
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right is asserted (whether or not such Losses have actually been incurred) on or
before the respective dates set forth below:
For Representations and
Warranties Set Forth All Claims Must be
in the Following Sections Asserted by:
------------------------- ------------
Section 3.15................... 20 days after expiration date of applicable
statute of limitations or any extensions
thereof required by any applicable taxing
authority relating to the Tax giving rise to
the Loss
Sections 3.1, 3.2 and 3.4 ..... No time limitation
Sections 3.8 and 3.13 ......... Expiration of the period provided under
Section 2.4 for determination of the Final
Net Asset Statement
Other representations and
warranties ................... April 10, 1998
Claims based on fraud or the breach of any covenant may be asserted at any time.
For purposes of determining the amount of Losses of the types referred to in
subsections 8.1(b)(i) and (ii), representations and warranties shall be read as
if all references to materiality were deleted therefrom.
The foregoing limitations regarding time periods and the provisions of
Section 8.1(c) shall not affect the rights and obligations of the parties hereto
in respect of the other provisions of this Agreement, including without
limitation, Sellers' obligations to indemnify Buyer with respect to Losses of
the types described in Sections 8.1(b)(ii) and 8.1(b)(iii). Buyer shall provide
Sellers written notice for any claim made in respect of the indemnification
provided in this Section 8.1(b), whether or not arising out of a claim by a
third party.
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(c) Basket; Indemnity Cap. Sellers shall not be required to
indemnify Buyer pursuant to Section 8.1(b)(i) unless and to the extent that the
amount of Losses for which indemnification is sought exceeds $400,000; provided,
that the aggregate maximum liability of Sellers to Buyer pursuant to Section
8.1(b)(i) shall not exceed $15,000,000; and provided further, that with respect
to any breach or inaccuracy of the representation set forth in Section 3.15(vi),
the liability of Sellers shall be limited to Losses resulting from the
non-deductibility to Buyer of interest payable on the Junior Subordinated Note
by reason of the application of Code Section 279.
(d) Indemnity by Buyer. Buyer hereby agrees to indemnify,
defend and hold harmless Sellers and their respective directors, officers and
Affiliates against and in respect of all Losses which any such party may at any
time suffer, sustain or become subject to, in connection with, incident to,
resulting from or arising out of or in any way relating to or by or incur, or
become subject to, as a result of or in connection with: (i) the inaccuracy of
any representation or warranty made by Buyer herein (other than in Section 4.1
and 4.2), or any misrepresentation or breach of any such representation or
warranty; (ii) the inaccuracy of any representation or warranty made by Buyer in
Section 4.1 and 4.2 or any misrepresentation or breach of the representations
and warranties made by Buyer in Section 4.1 and 4.2 or any nonfulfillment or
breach of any covenant or agreement on the part of Buyers under this Agreement
or under any of the documents and instruments delivered by Buyer pursuant to
this Agreement including, without limitation, the failure by Buyer to satisfy,
perform and discharge all Assumed Liabilities; and (iii) claims by third parties
against Sellers relating to any Assumed Liability; provided, however, that the
right to such indemnification, defense and
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reimbursement shall only be available with respect to any claim enumerated in
the following chart if such right is asserted (whether or not such Losses have
actually been incurred) on or before the respective dates set forth below:
For Representations and
Warranties Set Forth All Claims Must be
in the Following Sections Asserted by:
------------------------- ------------
Sections 4.1 and 4.2 .......... No time limitation
Other representations and
warranties .................... April 1, 1998
Claims based on fraud or the breach of any covenant may be asserted at any time.
(e) Matters Involving Third Parties. (i) If any third party
shall notify any Party (the "Indemnified Party") with respect to any matter (a
"Third Party Claim") which may give rise to a claim for indemnification against
any other Party (the "Indemnifying Party") under this Section 8.1, then the
Indemnified Party shall promptly notify each Indemnifying Party thereof in
writing; provided, however, that no delay on the part of the Indemnified Party
in notifying any Indemnifying Party shall relieve the Indemnifying Party from
any obligation hereunder unless (and then solely to the extent) the Indemnifying
Party thereby is prejudiced.
(ii) Any Indemnifying Party will have the
right to defend the Indemnified Party against the Third Party Claim with counsel
of its choice reasonably satisfactory to the Indemnified Party so long as (A)
the Indemnifying Party notifies the Indemnified Party in writing that the
Indemnifying Party will Indemnify the Indemnified Party from and against the
entirety of any Losses the Indemnified Party may suffer resulting from, arising
out of, relating to, in the nature of, or caused by the Third Party Claim, (B)
the
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Indemnifying Party provides the Indemnified Party with evidence acceptable to
the Indemnified Party that the Indemnifying Party will have the financial
resources to defend against the Third Party Claim and fulfill its
indemnification obligations hereunder, (C) the Third Party Claim involves only
money damages and does not seek an injunction or other equitable relief, (D)
settlement of, or an adverse judgment with respect to, the Third Party Claim is
not, in the good faith judgment of the Indemnified Party, likely to establish a
precedential custom or practice adverse to the continuing business interests of
the Indemnified Party, and (E) the Indemnifying Party conducts the defense of
the Third Party Claim actively and diligently.
(iii) So long as the Indemnifying Party is
conducting the defense of the Third Party Claim in accordance with this Section
8.1(e), (A) the Indemnified Party may retain separate co-counsel at its sole
cost and expense and participate in the defense of the Third Party Claim;
provided, however, that to the extent the notification given by the Indemnifying
Party pursuant to Section 8.1(e)(ii)(A) (the "Indemnifying Notice") is given
more than 15 days after the Indemnified Party provided the required notice of
the Third Party Claim (the "15-day Period"), costs and expenses of counsel to be
borne by the Indemnified Party pursuant to this clause (A) shall exclude such
costs and expenses incurred after the 15-day Period and prior to the
Indemnifying Notice, in which event such costs and expenses shall be borne by
the Indemnifying Party, (B) the Indemnified Party will not consent to the entry
of any judgment or enter into any settlement with respect to the Third Party
Claim without the prior written consent of the Indemnifying Party (which consent
shall not unreasonably be withheld), and (C) the Indemnifying Party will not
consent to the entry of any judgment or enter into any
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settlement with respect to the Third Party Claim unless written agreement is
obtained releasing the Indemnified party from all liability thereunder.
(iv) In the event any of the conditions in
this Section 8.1(e) is or becomes unsatisfied, however, (A) the Indemnified
Party may defend against, and consent to the entry of any judgment or enter into
any settlement with respect to, the Third Party Claim in any manner it may deem
appropriate after consultation with the Indemnifying Party, (B) the Indemnifying
Party will reimburse the Indemnified Party promptly and periodically for the
costs of defending the Third Party Claim (including attorneys' fees and
expenses), and (C) the Indemnifying Party will remain responsible for any Losses
the Indemnified Party may suffer resulting from, arising out of, relating to, in
the nature of, or caused by the Third Party Claim to the fullest extent provided
in this Section 8.1.
(f) Sole Remedy. This Section 8.1 shall be each party's sole
remedy (except for termination pursuant to Article IX), at law or in equity,
against the other party with respect to losses incurred as a result of the
breach of, or any inaccuracy in, any representation or warranty contained in
this Agreement.
8.2 Employment Matters.
(a) As of the Closing Date, Sellers shall terminate the
employment of the employees of the DSO Business that Buyer shall specify to
Sellers (the "Designated Employees") prior to Closing. The parties agree that
the individual named on Exhibit 8.13 will not be a Designated Employee, it being
the Company's intent to continue employing such individual as the person
responsible for the group within the Company supporting the Buyer under the
Distributor Agreement. Buyer agrees to offer employment to such Designated
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Employees at Closing and to grant credit to the Designated Employees for unused
vacation to the extent accrued in the Ordinary Course of Business and reflected
on the Closing Balance Sheet. [ Confidential Treatment Requested ]
(b) [ Confidential Treatment Requested ]
(c) Buyer agrees to establish a 401(k) savings plan for the
benefit of Buyer's employees. Under Buyer's 401(k) savings plan, Buyer's
employees who are former employees of the Company may, subject to the terms and
conditions of the Company's 401(k) plan, roll any assets distributed by the
Company pursuant to the Company's 401(k) plan into the Buyer's 401(k) savings
plan on a tax-free basis under Section 401(a)(31) of the Code.
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(d) Buyer agrees to provide commercially reasonable health
care coverage to certain of Buyer's employees who are former employees of the
Company and who have pre-existing medical conditions on the Closing Date or, in
the event that commercially reasonable health care coverage is unavailable for
such employees, the Company will provide such employees notice of their COBRA
continuation coverage and shall provide such COBRA continuation coverage through
the expiration thereof. Buyer agrees to promptly reimburse the Company for the
amounts actually paid by the Company pursuant to this Section 8.2(d) up to a
maximum of $450,000.
8.3 Bulk Sales Compliance. Buyer hereby waives compliance by Sellers
with the provisions of the bulk sales law of any U.S. jurisdiction, and Sellers
covenant and agree to pay and discharge when due all claims of any governmental
entities and creditors of Sellers and its subsidiaries that could be asserted
against Buyer by reason of such non-compliance. Sellers agree to indemnify and
hold Buyer harmless from and against and shall on demand reimburse Buyer for any
and all losses, damages, costs, expenses, liabilities, obligations and claims of
any kind, including, without limitation, reasonable attorneys' fees and other
legal costs and expenses, suffered by Buyer by reason of Sellers' failure to pay
and discharge any such claims.
8.4 Post-Closing Agreements. (a) For a period of time equal to the
remaining term of the applicable Lease, Buyer shall grant a license to Sellers
to use certain space located at each of the Leased Premises for the use of
Sellers' employees engaged in sales of products and services to Excluded
Customers. Sellers shall have the right to use at each Leased Premises an amount
of space equal to 160 square feet for each employee of Sellers working at such
Leased
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Premises. Sellers shall pay a rental rate for such space equal to the rent per
square foot paid by Buyer for the Leased Premises in which such space is
located, multiplied by the number of Sellers' employees working at such Leased
Premises, determined as of the beginning of each month during the term of such
license. Such arrangements shall be subject to the additional terms and
conditions set forth on the Transition Services Term Sheet and otherwise on
mutually acceptable terms.
(b) Sellers shall grant a sublease to Buyer to use the space located at
its Milford, Connecticut, headquarters required for Buyer to conduct the portion
of the DSO Business conducted from such facility at a rental rate equal to
$20.00 per square foot on the terms and subject to the conditions described in
the Transitional Services Term Sheet.
(c) For the period following the Closing Date, Sellers agree to provide
to Buyer certain management information, financial management and human
resources services in connection with Buyer's conduct of the DSO Business
following the Closing Date in accordance with the terms and conditions specified
in the Transitional Services Term Sheet.
(d) Effective on the Closing, the Company hereby (i) grants Buyer a
non-exclusive, perpetual, royalty-free license to (A) use the name "EXECUTONE"
to service the Customer Base (other than to use such name as its corporate name
or trade name (i.e. "Executone of __________") except as provided in the
Distributor Agreement) and (B) use and relicense Authorized Software in
connection with servicing the Customer Base, (ii) agrees to provide to Buyer for
a period ending seven years after the discontinuance of the manufacture of the
applicable product or software, Authorized Products and Authorized Software
(including upgrades) for sale to the Customer Base so that Buyer can continue to
service the Customer
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Base, and (iii) agrees to provide Buyer for the same period spare parts,
replacement equipment, replacement copies of Authorized Software and related
documentation (and upgrades thereto) and all other equipment, software and
diagnostics (and upgrades thereto) required to continue to service and maintain
the Authorized Products and Authorized Software and related documentation and
manuals (and upgrades thereto) so that the Buyer can continue to service and
maintain its end-user customers. The foregoing grant and agreements shall be
subject to the conditions set forth on Exhibit 8.4(d) and shall continue
irrespective of whether the Distributor Agreement continues to be in force and
effect.
8.5 Certain Employee Obligations. The Company agrees that, in respect
of the employees covered by the collective bargaining contract covering
Philadelphia employees (the "Union Employees") with the Local Union 1448
International Brotherhood of Electrical Workers dated May 2, 1994 (the "Union
Contract"), the Company will provide notice to all such Union Employees of their
COBRA continuation coverage and shall provide such COBRA continuation coverage
through a period ending on the earlier of the expiration of the Union Contract
and the expiration of the COBRA continuation coverage. Buyer agrees to promptly
reimburse the Company for the amounts actually paid by Sellers pursuant to this
Section 8.5.
8.6 Additional Instruments; Cooperation. At any time and from time to
time after the Closing, at either party's request and without further
consideration, Sellers or Buyer, as the case may be, shall execute and deliver
such other instruments of sale, transfer, conveyance, assignment and
confirmation and take such other action as Sellers or Buyer may reasonably deem
necessary or desirable in order to more effectively transfer, convey and assign
to Buyer, and to confirm Buyer's title to and interest in, the Assets and the
Contracts
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and the consummation of the transactions contemplated herein. Without limiting
the generality of the foregoing, Sellers will, at the time of transfer of the
Network Resale Business as contemplated by Section 8.11, assign and transfer to
Buyer all right, title and interest in and to the products known as "ULTRASTAR
LD" and "ULTRASTAR 800" including all names and marks associated therewith
together with all goodwill associated with such marks.
8.7 Use of Name. (a) Buyer agrees that without Sellers' consent it will
not, nor will it permit the DSO Business after the Closing Date to, make any use
of any trade name or service mark held by Sellers in any manner other than as
specifically provided in this Agreement or in the Distributor Agreement;
provided, however, that during any period commencing thirty (30) days after any
material disruption (whether by reason of cessation of the telephone and related
software business or otherwise) in the Sellers' supply to Buyer of Authorized
Products (as defined in the Distributor Agreement) and throughout the period in
which such material disruption is continuing, at a time when Buyer is entitled,
under the terms of this Agreement or the Distributor Agreement, to purchase and
distribute such products and does not have sufficient inventory in stock to
satisfy purchase orders and maintenance requirements of its customers, the Buyer
shall be permitted to use (subject to the conditions set forth on Exhibit
8.4(d)) the name "EXECUTONE" in combination with one or more distinctive marks
to produce telephony and software products to service Buyer's customers. The
Seller agrees to execute and deliver such documents and take such actions as may
reasonably be requested by Buyer to give effect to the foregoing.
8.8 Allocation of Purchase Price. The parties agree that the purchase
consideration for the Assets shall be allocated among the Assets in accordance
with their relative fair market
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values as set forth on Exhibit 8.8 attached hereto. The parties further agree
that the relative fair market values of the Assets (to the extent required to be
taken into account for Tax purposes) may be adjusted in accordance with an
appraisal to be obtained by Buyer at its expense to establish a final allocation
prior to the filing of the applicable Tax Returns of Buyer and Sellers. Sellers
and Buyer shall use such final allocation for all book and Tax purposes,
including filing IRS Form 8594 and their respective Tax Returns and no party
shall take a position inconsistent with said final allocation except to the
extent required by law.
8.9 Access to Books and Records. The Company may retain a single set of
copies of any books and records of the DSO Business which the Company reasonably
believes will be required by it for the purpose of (i) performing any of the
Company's accounting, tax or financing reporting obligations, (ii) complying
with any audit conducted by any taxing authority and (iii) complying with
discovery requests arising in litigation currently pending against the Sellers
or otherwise conducting Sellers' defense in such actions. From and after the
Closing, Buyer will authorize and permit the Company and its representatives to
have access during normal business hours, upon reasonable notice and for
reasonable purposes and in such manner as will not unreasonably interfere with
the conduct of Buyer's business, to all of the books and records that the
Company did not retain a copy of and which are related, directly or indirectly,
to the Sellers' business to the extent necessary for the purpose set forth in
the preceding sentence. From and after the Closing, Sellers will authorize and
permit Buyer and its representatives to have access during normal business
hours, upon reasonable notice and for reasonable purposes and in such manner as
will not unreasonably interfere with the conduct of Sellers' business, to all
books, records, files, documents and correspondence
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related, directly or indirectly, to the DSO Business which Sellers retain in
their possession for the purpose of performing any of the Buyer's accounting,
tax or financial reporting obligations or complying with any audit conducted by
any taxing authority. Buyer and Sellers agree to maintain after the Closing Date
all books and records in accordance with their respective normal document
retention practices. The Buyer or the Company, as the case may be, shall
reimburse the other party for the reasonable out-of-pocket expenses incurred by
it in performing the covenants contained in this Section 8.9. Sellers shall
protect and accord confidential treatment to the information disclosed pursuant
to this Section 8.9 as provided in Section 8.15. Notwithstanding anything to the
contrary contained in this Section 8.9, Sellers will not be permitted to copy or
otherwise retain any Books and Records or any portion thereof, including without
limitation any customer lists or other proprietary information (except to the
extent set forth in the first sentence of Section 8.9 or as required for
provision of services contemplated by the Transition Services Term Sheet; and to
the extent a copy of such Books and Records are retained by Sellers, the Sellers
shall (a) use all reasonable efforts to safeguard and not disclose the
information contained therein and (b) promptly upon request of Buyer deliver to
Buyer or destroy such Books and Records containing customer information or other
proprietary information relating to the DSO Business).
8.10 Best Efforts. Subject to the terms and conditions herein provided,
each of the parties hereto agrees to use its best efforts to take, or cause to
be taken, all action, and to do, or cause to be done, all things necessary,
proper and advisable under applicable Law, to obtain the consents of all third
parties necessary to consummate and make effective the transactions contemplated
by this Agreement and to effect the replacement, renewal or transfer to Buyer of
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the Permits. In case at any time after the Closing, any further action is
necessary or desirable to carry out the purposes of this Agreement, including,
without limitation; entering into subleases or subcontracts, the proper officers
and directors of each party to this Agreement shall take all such necessary
action. Buyer and Sellers will execute any additional instruments necessary to
consummate the transactions contemplated hereby. Seller shall cooperate and use
its best efforts to assist Buyer in obtaining the consent and approvals of all
third parties, including without limitation the consent of Sprint, the local
exchange carriers and the state regulatory authorities, necessary for Buyer to
sell or resell long distance service and local exchange service and access.
8.11 Sales Agency. (a) Buyer and Sellers acknowledge that the transfer
of the Network Resale Business requires, among other things, the approval of
certain governmental agencies and long distance and local access carriers.
Sellers agree that, from the Closing until such time as the transfer of the
Network Resale Business to Buyer has been effected, Sellers will enter into a
sales agency agreement with Buyer, in substantially the form attached to the
Distributor Agreement as Exhibit B-1, which will provide for Buyer to resell, as
Sellers' agent, the products and services that are the subject of the Network
Resale Business. Such sales agency agreement will provide that Buyer will enjoy
the economic benefits and bear the economic burdens of the Sprint Contract in
full and shall remain in effect until the earlier to occur of (i) the assignment
of the Sprint Contract to Buyer, (ii) Buyer entering into a replacement contract
with U. S. Sprint or another long-distance carrier, or (iii) the expiration or
termination of the Sprint Contract. Sellers will use their reasonable best
efforts to maintain the Sprint Contract and any local area contracts for the
Buyer's benefit until the Buyer notifies
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the Company that Buyer no longer requires the Sprint Contract or any of such
local area contracts to remain in effect. Sellers agree that, upon the request
of Buyer, Sellers shall terminate the Sprint Contract and any of such local area
contracts as soon as practicable under the terms of such agreements. Buyer
covenants that, while such sales agency agreement is in place, Buyer will comply
with all tariffs and regulatory and contractual requirements and restrictions
applicable to Sellers in connection with the Sprint Contract and the Network
Resale Business, and Buyer acknowledges and agrees that Sellers will have no
obligation to renew or extend the Sprint Contract.
(b) Following the transfer of the Network Resale Business to Buyer as
contemplated hereby, the Company agrees that it will not sell, directly or
indirectly, long distance and local exchange and access telephone services other
than pursuant to a sales agency agreement with Buyer pursuant to an agreement
substantially in the form of Exhibit B-1 to the Distributor Agreement which will
provide that the Company will act as Buyer's agent for such services and will
include Buyer's agreement to provide such service to the Company at prices at
least as low as that provided to any other resale agent of Buyer and shall pay
the Company a commission of fifteen percent (15%). The Company shall not be
permitted to act as an agent for a third party provider of long distance and
local exchange and access telephone services during the period that the Buyer is
required by the Company to sell exclusively Authorized Products within the
Territory under the Distributor Agreement.
(c) Sellers hereby grant Buyer, effective from and after the Closing
Date, a non-exclusive, perpetual royalty-free license to use the names and marks
"INFOSTAR'r' CALLING
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CARD" and "INFOSTAR'r' 800" for use with network services products in the
Network Resale Business.
8.12 Non-Competition. Sellers agree that, for a period expiring five
years following the Closing Date, Sellers will not engage in the DSO Business as
it exists on the Closing Date within the Territory; provided, however, that this
restriction shall not limit Sellers' ability to create dual distribution, to
sell directly in the Territory, to terminate the Distributor Agreement, or
otherwise exercise any of its rights, all pursuant to the terms of the
Distributor Agreement; provided, further, however, that Sellers agree not to
engage in the business of providing long distance service and related local
exchange access and service other than through the sales agency agreement
pursuant to and as otherwise provided in Section 8.11(b) above.
8.13 Non-Solicitation of Employees. Sellers agree that, for a period of
two years following the Closing Date, Sellers will not hire, or attempt to hire,
for employment in any business venture, any person who is a Designated Employee
as contemplated hereby; provided, however, that the Company shall be permitted
to hire any Designated Employee who is hired by Buyer if Buyer subsequently
terminates the employment of such Designated Employee; and provided further that
the Company shall be permitted to hire any Designated Employee who either
declines employment with Buyer or who after accepting such employment
subsequently resigns if, and only if, such Designated Employee initiates
(without direct or indirect solicitation by either Seller other than general
newspaper publication of job offerings) contact with the Company regarding such
employment with the Company at a time not less than forty-five (45) days after
the later of the Closing Date or the date of such
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employee's resignation. It is understood that the person listed on Exhibit 8.13
hereof will not be a Designated Employee.
8.14 Rights of First Offer. The Seller shall not at any time prior to
the termination of the Distributor Agreement directly or indirectly transfer,
assign or otherwise dispose of, whether by sale, merger, consolidation or other
transaction ("Transfer") its telephone equipment and related software business
(the "Subject Business") to any Person other than the Buyer unless the Seller
first (i) gives the Buyer not less than sixty (60) days prior written notice of
its intent to Transfer the Subject Business (the "Offer Notice") which notice
shall set forth the principal terms of the proposed Transfer, including the
transaction structure, purchase price and other principal business terms,
identity of any proposed transferee (if known) and any other material term of
the proposed transaction and (ii) offers to Transfer the Subject Business to the
Buyer (or, at the Buyer's option, to any Affiliate of the Buyer which the Buyer
may designate) on the terms set forth in such Offer Notice (or, in the case of a
Transfer of all or a portion of the consideration for which would consist of
non-cash items, at the Buyer's option, for cash in an amount equal to the fair
market value of the total consideration proposed to be received in respect of
the Subject Business). The Buyer (or its designee) may elect to purchase the
Subject Business on the terms specified in the Offer Notice by delivering
written notice of such election to the Seller within thirty (30) days after
receipt by the Buyer of the Offer Notice. If the Buyer (or such designee) has
elected to purchase the Subject Business from the Seller, such Transfer will be
consummated as soon as practical after the delivery of such election notice. If
the Buyer (or such designee) has not elected to purchase the Subject Business
within such 30-day period, the Seller may, within 120 days
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thereafter, enter into a binding agreement to Transfer the Subject Business at a
price no less than 95% of the price specified in the Offer Notice and on other
terms which are not, taken as a whole, materially more favorable to the
transferee(s) than those offered to the Buyer in the Offer Notice. In the event
that such binding agreement to Transfer the Subject Business is not entered into
within 150 days following the date of the Offer Notice with the Transfer being
consummated within a reasonable time thereafter, the Seller and the Subject
Business shall again become subject to the restrictions on Transfer contained in
this Section 8.14. Notwithstanding any contrary terms of the foregoing
provisions of this Section 8.14, in the event the Company receives an
unsolicited offer to acquire all or any significant portion of the Subject
Business, Seller shall (a) notify Buyer of all material terms of such offer, (b)
grant Buyer a reasonable amount of time to match such offer or any increased
offer made by such a third party, (c) if Buyer agrees to match such offer which
is not then increased by such third party, sell the Subject Business to Buyer on
such terms and (d) at all stages of such process keep Buyer reasonably informed
as to the status of negotiations and provide an opportunity (including at least
as much time as may be offered to the Person making such unsolicited offer and
any other competing bidders) to match the offer and thereby purchase the Subject
Business. Notwithstanding the provisions of this Section 8.14, Sellers may
determine not to sell the Subject Business to any Person.
8.15 Sellers' Confidentiality Covenant. After Closing, Sellers will,
and will cause their subsidiaries and Affiliates to: (i) treat and hold
confidential and not disclose confidential information concerning the DSO
Business and its affairs (including but not limited to information concerning
the Assets and the Assumed Liabilities) to the extent not generally
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known in the public (the "Confidential Information"), (ii) refrain from using
any of the Confidential Information except in connection with this Agreement,
and (iii) deliver promptly to the Buyer or destroy, at the request and option of
the Buyer, all tangible embodiments (and all copies) of the Confidential
Information which are in its possession. In the event that Sellers are requested
or required (by oral question or request for information or documents in any
legal proceeding, interrogatory, subpoena, civil investigative demand, or
similar process) to disclose any Confidential Information, Sellers will notify
the Buyer promptly of such request or requirement so that the Buyer may seek an
appropriate protective order or waive compliance with the provisions of this
Section. If, in the absence of a protective order or the receipt of a waiver
hereunder, the Sellers are, on the advice of counsel, compelled to disclose any
Confidential Information to any tribunal, Sellers shall use their best efforts
to obtain, at the request of the Buyer, an order or other assurance that
confidential treatment will be accorded to such portion of the Confidential
Information required to be disclosed as the Buyer shall designate.
8.16 Additional Financial Information. Sellers shall furnish or shall
cause the Company's independent accountants to furnish not later than May 15,
1996 audited financial statements for the DSO Business for the years ended
December 31, 1995, December 31, 1994 and December 31, 1993 prepared in
accordance with GAAP applied consistently throughout the periods covered thereby
(and applied in accordance with the practices and methodologies as set forth on
Exhibit 1.7) in a form meeting the requirements of Regulation S-X of the
Securities Act of 1933, as amended (the "Securities Act"), and the consent of
the Company's independent accountants to the inclusion of their reports on such
financial statements in any
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registration statement of the Buyer under the Securities Act and any amendments
thereto; and for the purposes of assisting Buyer with any such registration
statement and subsequent reporting requirements under the Securities Exchange
Act of 1934, as amended, the Sellers will deliver to Buyer (i) unaudited income
statements and balance sheets of the DSO Business for each 1996 calendar quarter
completed prior to or on the Closing Date, (ii) unaudited income statements and
balance sheets of the DSO Business for each 1995 calendar quarter and (iii) an
unaudited income statement and balance sheet of the DSO Business for the period
from January 1, 1996 through the Closing Date. The financial statements and
schedules described in clauses (i) and (ii) above for the first quarter of 1996
and 1995, respectively, will be provided by April 30, 1996. Each subsequent 1996
quarter's financial statements and schedules (together with the corresponding
1995 quarter's financial statements described in clause (ii) above) shall be
delivered to Buyer by Sellers within 60 days after the last day of such quarter,
and the financial statements described in clause (iii) above shall be delivered
to Buyer by Sellers within 90 days after the Closing Date; provided that Sellers
shall use reasonable best efforts to promptly cause the delivery of such audited
financial statements as soon as practicable after the execution of this
Agreement. The Parties acknowledge and agree that time is of the essence in the
performance of the provisions of this Section 8.16 and Sellers shall provide
Buyer unaudited financial information with respect to the DSO Business for the
years 1992 and 1991 meeting the requirements of item 301 of Regulation S-K
(Selected Financial Data) of the Securities Act by September 30, 1996. If the
Closing occurs, the Buyer shall reimburse Sellers for one-half the reasonable
out-of-pocket expenses incurred by them in preparing the Audited Financial
Statements delivered pursuant to Section 5.10 and the
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additional financial information delivered pursuant to this Section 8.16, up to
a maximum reimbursement of $150,000.
8.17 Shared Assets. All computer software and other intangible property
included within the Shared Assets will be transferred by Sellers to Buyer at
Closing. Buyer agrees to, and, effective upon the Closing and the transfer to
Buyer of such property hereby does, grant to Sellers a perpetual, non-exclusive,
royalty-free license to use, copy and modify, to the extent required by Sellers
to operate their continuing businesses or to provide the services contemplated
by the Transition Services Term Sheet, the computer software identified on
Exhibit 1.71. Any modifications or enhancements to such software made by Sellers
after Closing shall be the sole property of Sellers. The tangible personal
property, if any, included within the Shared Assets will be subject to
joint-ownership pursuant to arrangements which grant each of the Company and
Buyer a right of first refusal with respect to disposition of any such Shared
Assets and which provide for equal sharing of the proceeds of any such
disposition; provided, however, that the mainframe computers located at the
Company's Milford facility will be jointly-owned and shared until such time as
such mainframe computers can be separated without jeopardizing their ability to
support the DSO Business and Sellers' remaining businesses, respectively, at
which time ownership of such mainframe computers will be divided as indicated on
Exhibit 8.17. Sellers and Buyer will negotiate and execute at Closing license
agreements and/or other documentation reasonably required or appropriate to give
effect to the foregoing understandings.
8.18 Video Conferencing Equipment. The parties agree that from and
after the Closing the Sellers will provide access to and permit Buyer to use the
video conferencing
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equipment located in offices of the DSO Business, including reasonable access to
such equipment to employees of the Buyer. Sellers agree that, in the event
Sellers remove the video conferencing equipment from Buyer's offices after
Closing, Sellers shall refurbish and repair such offices to Buyer's reasonable
satisfaction to return Buyer's offices to a commercially reasonable appearance
and function (or, upon Buyer's election, reimburse Buyer for its reasonable
expenses for such actions).
8.19 Notification of Certain Hires. After Closing, Buyer will notify
the Company prior to hiring any Person who is, after Closing, an officer,
director or manager of the Company after Closing.
ARTICLE IX
TERMINATION
9.1 Termination. This Agreement may be terminated and the transactions
contem plated hereby may be abandoned as follows:
(a) the parties may terminate this Agreement at any time prior to the
Closing Date by mutual written agreement of Sellers and Buyer;
(b) the Buyer may terminate this Agreement by giving written notice to
the Company at any time prior to the Closing (i) in the event the Sellers have
breached any representation, warranty, or covenants contained in this Agreement
in any material respect, the Buyer has notified the Sellers of the breach, and
the breach has continued without cure for a period of 30 days after the notice
of breach or (ii) if the Closing shall not have occurred on or before June 30,
by reason of the failure of any condition precedent under Article VI hereto
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(unless the failure results primarily from the Buyer thereunder breaching any
representation, warranty, or covenants contained in this Agreement);
(c) the Sellers may terminate this Agreement by giving written notice
to the Buyer at any time prior to the Closing (i) in the event the Buyer has
breached any representation, warranty, or covenant contained in the Agreement in
any material respect, the Company has notified the Buyer of the breach, and the
breach has continued without cure for a period of 30 days after the notice of
breach or (ii) if the Closing shall not have occurred on or before June 30, by
reason of the failure of any condition precedent under Article VII hereof
(unless the failure results primarily from the Sellers themselves breaching any
representation, warranty, or covenant contained in this Agreement);
(d) by Buyer in the event that (i) any person (or group of persons)
acquires or enters into one or more agreements to acquire more than 25% of the
outstanding capital stock of the Company, whether from the Company or pursuant
to a tender offer or exchange offer or otherwise, (ii) the Company or any
Subsidiary thereof enters into one or more agreements with respect to a merger
or other business combination involving the Company pursuant to which any person
(or group of persons) acquires more than 25% of the outstanding capital stock of
the Company or the entity surviving such merger or business combination, (iii)
one or more agreements are entered into with respect any other transaction
pursuant to which any person (or group of persons) acquires or would acquire
control of assets (including for this purpose the Assets and the outstanding
capital stock of the Company and the entity surviving any merger or combination
including any of them) of the Company equal to the lesser of the fair market
value of the Assets or 25% of the fair market value of all the assets of the
Company
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immediately prior to such transaction, (iv) the Board of Directors of the
Company shall have approved any transaction described in (i), (ii) or (iii)
above, or (v) a tender offer or exchange offer for more than 25% of the
outstanding common stock of the Company or a proxy context challenging the
transactions contemplated hereby is commenced;
(e) by Seller or Buyer in the event that the Board of Directors of the
Company determines to withdraw, modify or change its approval of the Agreement
or the transactions contemplated hereby in a manner adverse to Buyer or shall
have resolved to do so other than following an event which entitles Sellers to
terminate this Agreement pursuant to Section 9.1(c);
(f) by Buyer in the event the condition set forth in Section 6.3 will
not be or has not been satisfied.
9.2 Rights on Termination; Waiver. (a) If this Agreement is terminated
pursuant to Section 9.1, all further obligations of the parties under or
pursuant to this Agreement shall terminate without further liability of either
party to the other, except as otherwise provided in Section 9.2(b), 9.2(c), or
9.2(d) hereof; provided, that no termination pursuant to Section 9.1(b) or (c)
shall relieve any party of any liability arising from or relating to any breach
prior to such termination; and provided further that the obligations contained
in the Confidentiality Agreement shall survive any such termination.
(b) In the event this Agreement is terminated by Buyer pursuant to
Section 9.1(d) hereof, Sellers shall promptly (and upon the occurrence of an
event specified in 9.1(d)(i), (ii), (iii), (iv) or (v) within one business day)
pay to Buyer $2.1 million plus Buyer's fees and expenses (i) relating to the
transactions contemplated by this Agreement and payable to
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Persons other than Bain Capital, Inc. and its Affiliates (including, without
limitation, attorneys', accountants', financial advisors', consultants' and
commitment fees related to the financing for the transaction) or (ii) payable
under the Financing Commitments, whether or not payable to Bain Capital, Inc. or
any of its Affiliates (all such fees and expenses being referred to herein as
the "Expenses"), the payment of which shall be in lieu of the payment of any
damages otherwise incurred by Buyer as a result thereof.
(c) In the event this Agreement is terminated by Buyer pursuant to
Section 9.1(e) thereof, Sellers shall promptly pay to Buyer $3.5 million plus
the Expenses, the payment of which shall be in lieu of the payment of any
damages otherwise incurred by Buyer as a result thereof.
(d) In the event this Agreement is terminated by Buyer after 120 days
of an event which entitles Buyer to terminate the Agreement pursuant to Section
9.1(f) hereof (the "Waiting Period"), Seller shall promptly (i) pay Buyer the
Expenses (ii) deliver to Buyer the number of shares of Common Stock of the
Company determined by dividing $1,000,000 by the average of the closing price of
the Company's Common Stock as reported on Nasdaq National Market for the 30
trading days prior to such termination which shares shall be entitled to be
registered with the Securities and Exchange Commission for resale by Buyer on
terms reasonably acceptable to Buyer and (iii) pay Buyer $500,000. In the event
this Agreement is terminated by Buyer after 30 days of an event which entitles
Buyer to terminate the Agreement pursuant to Section 9.1(f) and before the
expiration of the Waiting Period, the Company shall promptly pay Buyer one-half
of the Expenses. In the event this Agreement is terminated to Buyer pursuant to
Section 9.1(f) as a result of an action, suit or proceeding
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pursuant to which an injunction, order, judgment or ruling has been issued which
prohibits the consummation of the transactions contemplated this Agreement or
would require the transactions contemplated by this Agreement to be rescinded,
the Company shall promptly pay Buyer the Expenses. Any amounts paid to Buyer
pursuant to this Section 9.2(d) shall be in lieu of payment of any damages
otherwise incurred by Buyer as a result of any such termination.
(e) If any of the conditions set forth in Article VI of this Agreement
have not been satisfied, Buyer may nevertheless elect to waive such conditions
and proceed with the consummation of the transactions contemplated hereby. If
any of the conditions set forth in Article VII of this Agreement have not been
satisfied, Sellers may nevertheless elect to waive such conditions and proceed
with the consummation of the transactions contemplated hereby.
(f) Sellers will not terminate this Agreement at any time during the
125-day period commencing at the time Buyer is first entitled to terminate this
Agreement pursuant to Section 9.1(f).
ARTICLE X
MISCELLANEOUS
10.1 Entire Agreement; Amendment. This Agreement and the documents
referred to herein and to be delivered pursuant hereto constitute the entire
agreement between the parties pertaining to the subject matter hereof, and
supersede all prior and contemporaneous agreements, understandings, negotiations
and discussions of the parties, whether oral or written, and there are no
warranties, representations or other agreements between the parties
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in connection with the subject matter hereof, except as specifically set forth
herein or therein. No amendment, supplement, modification, waiver or termination
of this Agreement shall be binding unless executed in writing by the party to be
bound thereby. No waiver of any of the provisions of this Agreement shall be
deemed or shall constitute a waiver of any other provision of this Agreement,
whether or not similar, nor shall such waiver constitute a continuing waiver
unless otherwise expressly provided. The representations and warranties of each
party hereto shall be deemed to be material and to have been relied upon by the
other party, notwithstanding any investigation heretofore or hereafter made by
the other party.
10.2 Expenses. Except as otherwise specifically provided herein, each
of the parties hereto shall pay the fees and expenses of their respective
counsel, accountants and other experts and the other expenses incident to the
negotiation and preparation of this Agreement and consummation of the
transactions contemplated hereby.
10.3 Governing Law. This Agreement shall be construed and interpreted
according to the laws of the State of New York, without regard to the conflicts
of law rules thereof.
10.4 Assignment. This Agreement and each party's respective rights
hereunder may not be assigned, by operation of Law or otherwise, without the
prior written consent of the other party; provided, however, that Buyer may
assign its rights hereunder, without the consent of Sellers, to any lender
providing a Financing Commitment.
10.5 Notices. All communications, notices and disclosures required or
permitted by this Agreement shall be in writing and shall be deemed to have been
given at the earlier of the date (a) when delivered personally or by messenger
or by reputable overnight delivery service to an officer of the other party, (b)
the third day after mailing when mailed by registered or
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certified United States mail, postage prepaid, return receipt requested, or (c)
when received via telecopy, telex or other electronic transmission, in all cases
addressed to the person for
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whom it is intended at his address set forth below or to such other address as a
party shall have designated by notice in writing to the other party in the
manner provided by this Section:
If to Sellers: EXECUTONE Information Systems, Inc.
478 Wheelers Farms Road
Milford, Connecticut 06460
Attention: Mr. Alan Kessman, President
and Chief Executive Officer
With a copy to: Hunton & Williams
Riverfront Plaza, East Tower
951 East Byrd Street
Richmond, Virginia 23219-4074
Attention: Thurston R. Moore, Esq.
If to Buyer: Tone Holdings, Inc.
c/o Bain Capital, Inc.
Two Copley Place
Boston, MA 02116
Attention: Mr. Jonathan Lavine
With a copy to: Ropes & Gray
One International Place
Boston, MA 02116
Attention: Lauren I. Norton, Esq.
10.6 Counterparts; Headings. This Agreement may be executed in several
counterparts, each of which shall be deemed an original, but such counterparts
shall together constitute but one and the same Agreement. The Table of Contents
and Article and Section headings in this Agreement are inserted for convenience
of reference only and shall not constitute a part hereof.
10.7 Interpretation. Unless the context requires otherwise, all words
used in this Agreement in the singular number shall extend to and include the
plural, all words in the
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<PAGE>
plural number shall extend to and include the singular and all words in any
gender shall extend to and include all genders. All references to contracts,
agreements, leases or other understandings or arrangements shall refer to oral
as well as written matters. The specificity of any representation or warranty
contained herein shall not be deemed to limit the generality of any other
representation or warranty contained herein. The parties hereto intend that each
representation, warranty and covenant contained herein shall have independent
significance. If any party has breached any representation, warranty or covenant
contained herein in any respect, the fact that there exists any other
representation, warranty or covenant relating to the same subject matter
(regardless of the relative levels of specificity) which the party has not
breached shall not detract from or mitigate the fact that such party is in
breach of the first representation, warranty or covenant. Neither the listing
nor description of any item, matter or document in any Exhibit hereto nor the
furnishing or availability for review of any document shall be construed to
modify, qualify or disclose an exception to any representation or warranty of
any party made herein or in connection herewith, except to the extent that such
representation or warranty specifically refers to such Exhibit and such
modification, qualification or exception is described with reasonable
specificity in such Exhibit.
10.8 Severability. In the event that any provision hereof (including,
without limitation, any of the provisions of Sections 8.12 and 8.13 hereof)
would, under applicable law, be invalid or unenforceable in any respect, such
provision shall (to the extent permitted under applicable law) be construed by
modifying or limiting it so as to be valid and enforceable to the maximum extent
compatible with, and possible under, applicable
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<PAGE>
law. The provisions hereof (including, without limitation, each of the
provisions of Sections 8.12 and 8.13 hereof) are severable, and in the event any
provision hereof should be held invalid or unenforceable in any respect, it
shall not invalidate, render unenforceable or otherwise affect any other
provision hereof.
10.9 No Reliance. No third party is entitled to rely on any of the
representations, warranties and agreements contained in this Agreement. Buyer
and Sellers assume no liability to any third party because of any reliance on
the representations, warranties and agreements of Buyer or Sellers contained in
this Agreement.
10.10 Parties in Interest. This Agreement shall be binding upon and
inure solely to the benefit of each party hereto, and nothing in this Agreement,
express or implied, is intended to or shall confer upon any other person any
rights, benefits or remedies of any nature whatsoever under or by reason of this
Agreement.
10.11 Specific Performance. The parties hereto agree that irreparable
damage would occur in the event any of the provisions of this Agreement were not
performed in accordance with the terms hereof and that the parties shall be
entitled to specific performance of the terms hereof, in addition to any other
remedy at law or equity.
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<PAGE>
IN WITNESS WHEREOF, each party hereto has caused this Asset Purchase
Agreement to be executed in its name by a duly authorized officer as of the day
and year first above written.
TONE HOLDINGS, INC.
-------------------------------------------------
By:______________________________________________
Its:_____________________________________________
TONE ACQUISITION CORPORATION
-------------------------------------------------
By:______________________________________________
Its:_____________________________________________
EXECUTONE INFORMATION SYSTEMS, INC.
-------------------------------------------------
By:______________________________________________
Its:_____________________________________________
EXECUTONE NETWORK SERVICES, INC.
-------------------------------------------------
By:______________________________________________
Its:_____________________________________________
[ Exhibits Deleted ]
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Amendment No. 1
to
Asset Purchase Agreement
This Amendment No.1 (the "Amendment") is made as of this 31st day of
May 1996 to the Asset Purchase Agreement dated as of April 9, 1996 (the
"Agreement") by and among Clarity Telecom Holdings, Inc., a Delaware corporation
formerly known as Tone Holdings, Inc. ("Holdings"), Clarity Telecom, Inc. a
Delaware corporation formerly known as Tone Acquisition Corporation ("Clarity
Telecom," and, together with Holdings, the "Buyer"), EXECUTONE Network Services,
Inc., a Virginia corporation (the "ENS") and EXECUTONE Information Systems, Inc.
("the Company" and, together with the ENS the "Sellers"). Capitalized terms used
and not otherwise defined in this Amendment are used herein as defined in the
Agreement.
WHEREAS, the Sellers and the Buyer have entered into the Agreement and
such parties have determined that it is in their mutual best interests to amend
and modify the Agreement in certain respects as set forth below;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants, conditions and agreements set forth herein and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, it is hereby agreed that:
1. Employee Matters.
1.1. Union Employees. The fifth sentence of Section 8.2(a) of the
Agreement is hereby amended and restated as follows:
[ Confidential Treatment Requested ]
<PAGE>
<PAGE>
[ Confidential Treatment Requested ]
Section 8.2 of the Agreement is hereby amended by adding the following
paragraph immediately following section 8.2(d):
"(e) Sellers' agree from and after the Closing to be governed
by the collective bargaining agreements resulting from
Seller-union negotiations, which negotiations and dealings
will comply with applicable law with respect to the employees
listed on Exhibit 8.2A. The renegotiated collective bargaining
agreements will contain terms and conditions substantially
similar to those listed on Exhibit 8.2B. Employees listed on
Exhibit 8.2A are currently subject to the collective
bargaining agreements listed on Exhibit 8.2B and are not
Designated Employees. Until such collective bargaining
agreements have been negotiated, Sellers' will operate in
conformity with the terms and conditions contained in the
collective bargaining agreements listed on Exhibit 8.2B in
respect of the employees listed on Exhibit 8.2A."
1.2.
[ Confidential Treatment Requested ]
Section 8.2 is hereby amended by adding the following paragraph
immediately following paragraph (e) above:
"(f) Sellers agree to promptly reimburse Buyer for all
severance costs (to the extent of the comparable severance
package utilized for the employees referred to in Section
8.2(b)) of Buyer and any of its subsidiaries relating to the
termination on or before January 31, 1997 of employees
providing service to the Company's Healthcare Customers (as
defined in the Distributor Agreement) which the Company
notifies Buyer by December 31, 1996 that it does not intend to
hire. Notwithstanding Section 8.13 of the Agreement, Seller
will have the right to offer employment to any such employees
following the Closing Date."
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<PAGE>
1.3. Employee Benefits. Section 8.2 is hereby amended by adding the
following paragraph immediately following paragraph (f) above:
"(g) Sellers and Buyer understand and agree that Sun Life of
Canada, the Company's current medical stop loss insurance
carrier, will, after the Closing, provide continuous coverage
to the employees of the Company and the employees of Buyer and
its subsidiaries, as if the transactions contemplated hereby
had not occurred provided that the Company and Buyer continue
to pay the applicable stop loss premiums through December 31,
1996. Accordingly, each of the Company and Buyer agree to pay
the premium allocable to their respective employees through
December 31, 1996. The Company agrees to amend the stated
policyholder under such stop loss policy to "EXECUTONE
Information Systems, Inc. and Affiliated Companies" and to
list "Clarity Telecom Holdings, Inc., and its subsidiaries,
including Clarity Telecom, Inc." as Affiliated Companies under
such policy and not to terminate Sellers' participation in
such stop loss policy prior to December 31, 1996."
1.4. Company Options. Section 8.2 of the Agreement is hereby amended to
add the following paragraph immediately following paragraph (g) above:
"(h) Sellers agree that effective as of the Closing, all stock
options of the Company previously granted to employees of the
Company who are Designated Employees shall become fully vested
and that such stock options shall thereafter be exercisable in
accordance with their terms; provided, however, that, for
those stock options that would have vested pursuant to their
original terms on or before May 31, 1998, stock purchased
thereunder will be restricted as to resale, and the stock
certificates therefor shall be held by the Company, until May
31, 1997, and, for those stock options that would have vested
pursuant to their original terms after May 31, 1998, stock
purchased thereunder will be restricted as to resale, and the
stock certificates therefor shall be held by the Company,
until May 31, 1998".
2. Transitional Services. Section 8.4(c) is hereby amended and restated
in its entirety as follows:
"(c) For the period beginning on the Closing Date and ending
60 days thereafter, Sellers agree to (i) reimburse Buyer for
certain finance services and (ii) provide certain MIS, payroll
processing,
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<PAGE>
accounts payable and benefits administration services in each
case in connection with Buyer's conduct of the DSO Business
following the Closing Date, and Buyer agrees to provide
certain sales and use tax services in accordance with the
terms and conditions specified in the Transitional Services
Agreement dated the date hereof by and among the Company and
Clarity Telecom."
3. Government Contracts.
3.1 Outstanding Bids Section 1.4 of the Agreement is hereby amended by
inserting immediately after Section 1.4(m) the following:
"; and (n) rights of the Sellers to enter into a contract and
perform the services under the terms of each of the
outstanding bids provided to state and local governments and
government agencies set forth on Exhibit 1.4(n) to this
Agreement if such outstanding bids were awarded to Buyer after
the Closing Date."
Article III is hereby amended by inserting after Section 3.34 the
following:
"3.35. Government Contracts. Exhibit 1.4(n) sets forth a true,
correct and complete list of all outstanding bids of the
Sellers for sales and service contracts relating to the DSO
Business and responses to requests for proposals in respect of
which the Company has outstanding applicable bid bonds. As of
the Closing Date, these outstanding bids have not been awarded
or performed in any respect by Sellers and no payments have
been received by Sellers in respect of such outstanding bids.
All such outstanding bids require bid bonds to be purchased in
connection therewith and a true and accurate list of such bid
bonds is set forth on Exhibit 1.4(n) hereto."
3.2 Outstanding Contracts. Article VIII is hereby amended by inserting
after Section 8.19 the following:
"8.20 Government Contracts. Buyer agrees to provide at the
direction of Seller, the maintenance services called for in
the outstanding state and local government Sales Contracts and
Service Contracts of Seller relating to the DSO Business set
forth on Exhibit 8.20A to this Agreement.
Section 8.1 is hereby amended by inserting after paragraph (f) the
following:
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<PAGE>
"(g) Bid and Performance Bonds. Buyer will indemnify and hold
harmless Sellers for (i) liability under the bid bonds
identified on Exhibit 1.4(n) to this Agreement and for (ii)
liability under performance bonds to the extent that Seller
incurs liability under such performance bonds as a result of a
breach by Buyer of the obligation to provide services in
respect of the customer Contract relating to such performance
bond as contemplated in Section 8.20.
4. Required Consents. The Sellers and Buyers acknowledge that
notwithstanding the terms of the Agreement, all of the Required Consents were
not obtained on or prior to the Closing. Accordingly, Section 8.1 is hereby
amended by adding the following:
"(g) Sellers agree to indemnify and hold harmless Buyer and
its directors, officers and Affiliates in respect of any
Losses which any such party may at any time suffer, sustain or
become subject to in connection with, incident to, resulting
from or arising out of or in any way relating to or by or
incur or become subject to, as a result of or in connection
with the failure to obtain the Required Consents prior to
Closing other than the excluded consents listed on Exhibit
8.1(g) (such Required Consents other than the excluded
consents listed on Exhibit 8.1(g) being hereinafter to be
referred to as the "Post-Closing Required Consent") where such
failure results in: (i) the failure of the other party to the
applicable Contract to recognize Buyer as the party entitled
to performance, possession or the benefits (as applicable)
under such Contract or (ii) the exercise by the other party to
the applicable Contract of any rights or remedies thereunder.
Buyer agrees that Sellers shall have no obligation to
indemnify Buyer under this Section 8.1(g) in the event a Post-
Closing Required Consent is obtained prior to Buyer suffering
any Losses. In addition, Buyer agrees that Sellers shall have
no obligation to indemnify Buyer under this Section 8.1(g)
upon the expiration of the current term of any Contracts
requiring Post-Closing Required Consent."
Section 8.6 is hereby amended by adding the following sentence
immediately following the last sentence:
"Without limiting the generality of the foregoing, Buyer and
Sellers will, following Closing, cooperate with each other and
use their best efforts to obtain the Post-Closing Required
Consents, including the execution and delivery of additional
agreements, documents and certificates reasonably required by
such third party providing such consent."
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<PAGE>
5. Network Resale Business.
Article III is hereby amended by adding immediately following Section
3.35 above the following:
"3.36 Network Resale Business. Attached hereto as Exhibit
3.36A are true and correct copies of all of the Company's
resale or sales agency agreements for long distance or local
access services and regional bell operating companies agency
or marketing agreements. Except as set forth in Exhibit 3.36B,
none of such agreements have been or are in default with
respect to the obligations of the Company, or to the knowledge
of Sellers, with respect to the obligations of any third party
and no event has occurred that would, with the passage of time
or compliance with any applicable notice requirements,
constitute a default or a right of the Company, or to the
knowledge of the Sellers, any third party to such agreements,
to cancel, terminate or exercise any option, nor has the
Company failed to meet minimum volume commitments in any such
agreements and, to the knowledge of Sellers, there is no basis
therefore."
Section 8.11 is hereby amended by adding immediately following
paragraph (c) the following:
"(d) Notwithstanding any provision contained in this Agreement
to the contrary, in connection with the transfer of the
Network Resale Business to Buyer, other than with respect to
the Sprint Contract which shall be governed by the Network
Addendum between the Company and Buyer dated May 31, 1996,
Buyer shall prior to November 30, 1996 determine the
agreements set forth on Exhibit 3.36A which it will request
Sellers to assign to Buyer. If such agreements are not
determined by Buyer to be assigned to Buyer, Sellers shall
promptly terminate such agreements when requested by Buyer."
6. Representations and Warranties.
6.1 Clause (c) of Section 3.7 is hereby amended and restated in
its entirety as follow:
"(c) any other agreement involving an obligation or contractual
liability in excess of $125,000 in the aggregate,"
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<PAGE>
6.2. Exhibit 3.7(a) is hereby amended by adding the list set forth
in Attachment A hereto and designating it as "Sales Contracts
and Service Contracts differing from the form of Sales
Contract and Service Contract included in Exhibit 3.26".
6.3 Exhibit 3.28 is hereby amended by adding the list set
forth in Attachment A hereto.
6.4 Exhibits 1.24, 3.17 and 3.28 are hereby amended by adding the
following to the section entitled "Collective Bargaining
Agreements":
"San Diego
Local Union No. 569
International Brotherhood of Electrical Workers
and
Executone Information Systems, Inc.
June 1, 1994 - June 30, 1997"
6.5 Exhibits 3.1 and 3.28 are hereby amended to reflect that, as of the
effective date of the Agreement, the Company was not qualified to do business as
a foreign corporation in Rhode Island and South Dakota, and was not in good
standing in Tennessee, and that, as of May 31, 1996, the Company is not so
qualified in Rhode Island, and is not in good standing in Tennessee; and,
further, that ENS is so qualified only in California and New York.
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<PAGE>
6.6 Exhibits 1.24, 3.7 and 3.28 are hereby modified by adding the
following contracts:
"Network Services Marketing Agreement dated February 19, 1996, between
Bell Atlantic Network Services, Inc. and EXECUTONE Information Systems,
Inc. (Pennsylvania office).
Program Enrollment Terms Agreement dated October 20, 1995 by and
between WORLDCOM Network Services, Inc., d/b/a WilTel, and EXECUTONE
Information Systems, Inc.
Voice Mail Marketing Agreement dated April 1, 1995 by and between
Pacific Bell and EXECUTONE Information Systems, Inc.
TRW Business Credit Services Agreement dated August 6, 1994, by and
between TRW and EXECUTONE Information Systems, Inc.
Software License and Database Subscription Agreement dated March 31,
1993, between Vertex, Inc. and EXECUTONE Information Systems, Inc."
by amending the reference to the Network Services Marketing Agreements
with Pacific Bell to read:
"Network Services Marketing Agreements dated January 17, 1996, and
March 6, 1996 by and between Pacific Bell and EXECUTONE Information
Systems, Inc. (Sacramento and San Francisco respectively)"
by amending the reference to the Network Services Marketing Agreements
with Bell Atlantic Network Services, Inc. to read:
"Network Services Marketing Agreements between Bell Atlantic Network
Services, Inc. and EXECUTONE Information Systems, Inc. (Maryland and
Virginia, both expiring 3/31/96.)"
by amending the reference to the Agent Marketing Sales Agency
Agreements with U.S. West Communications, Inc. to read:
"Agent Marketing Sales Agency Agreements dated January 6, 1994
and February 25, 1994, by and between U.S. West Communications,
Inc. and EXECUTONE Information Systems, Inc. (Colorado and
Arizona, respectively)."
by amending the reference to the agreements with NYNEX to read:
-8-
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<PAGE>
"Agreements for Sale of Services and Account Management effective as of
February 1, 1996, between NYNEX and EXECUTONE Information Systems, Inc.
(Boston and New York) (signed by Company, returned copies not signed by
NYNEX)."
and by deleting the following contract:
"Home Purchase Service Agreement dated August 6, 1993, between
Americorp Relocation Management, Inc. and EXECUTONE Information
Systems, Inc."
6.7. Exhibits 1.24 and 3.7 are hereby modified by adding the following
contract:
"Service Agreement dated October 13, 1995, by and between Computer
Output Systems, Inc. and EXECUTONE Information Systems, Inc."
7. Credits. Article VIII is hereby amended by adding the following
immediately following Section 8.20:
"8.21 Credits and Pricing. Company agrees to provide Buyer the
following credits and pricing for the term of the Distributor
Agreement:
(i) Company will provide Buyer up to $ [ Confidential Treatment
Requested ] per year in credits to be earned and credited upon
Buyer's purchases (at the Standard Distributor Agreement
pricing) of any combination of T-1 digital kit (PN 15510K) (a
credit of $ [ Confidential Treatment Requested ] each), ECVM
(PN 21640) (a credit of $ [ Confidential Treatment Requested ]
each) and the initial LCR download (a credit of $
[Confidential Treatment Requested] each), which are installed
pursuant to any "Hammer-It-Home" promotional contract having
at least a three-year term and for which a signed copy of such
contract is provided to Company with the applicable order;
(ii) after utilization of the credits provided for in subsection
(i) above for any given year, Company will sell Buyer the T-1
kit (PN 15510K) at an actual purchase price of $
[Confidential Treatment Requested] each and all LCR downloads
at $ [ Confidential Treatment Requested ] per download; and
(iii) Company will provide free LCR updates for all customers of
Buyer identified in writing to the Company prior to June 30,
1996, who were provided LCR at no cost pursuant to a
Hammer-It-Home contract prior to May 31, 1996, for the
remaining terms of such contracts.
(iv) Buyer will pay Company the then current full OEM price for any
T-1's sold by Distributor pursuant to a "Hammer-It-Home"
contract that is terminated and for which the end-user
customer is required to pay retail price pursuant to such
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contract. Within 30 days after the end of each six-month
period ending June 30 and December 31, Distributor shall
provide Company with a report of all "Hammer-it-Home" contract
terminations during the previous six-month period, and pay the
required OEM price therefor (less any amounts previously paid
pursuant to subsection (ii) hereof for the same units)."
8. Software Products.
Article VIII is hereby amended by adding immediately following Section
8.21 above the following:
"8.22. [ Confidential Treatment Requested ]
9. Tax Exemption Certificates.
Article VIII is hereby amended by inserting after Section 8.22 above
the following:
"8.23. Sales and Use Taxes. Buyer agrees that, as soon as
reasonably practical following the Closing Date, it shall
procure and deliver to Sellers resale tax exemption
certificates relating to the sale by Sellers to Buyer of
Inventory pursuant to this Agreement for each applicable state
in which Sellers are subject to sales and use taxes in
connection with the sale of the Assets pursuant to this
Agreement."
10. Counterparts; Headings. This amendment may be executed in several
counterparts, each of which shall be deemed an original, but such counterparts
shall together constitute but one and the same instrument and be deemed a part
of the Agreement. The Section headings in this amendment are inserted for
convenience of reference only and shall not constitute a part hereof.
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<PAGE>
IN WITNESS WHEREOF, each party hereto has caused this Amendment to be
executed in its name by a duly authorized officer as of the date first written
above.
Clarity Telecom Holdings, Inc.
By_______________________
Name:
Title:
Clarity Telecom, Inc.
By_______________________
Name:
Title:
EXECUTONE Information Systems, Inc.
By_______________________
Name:
Title:
EXECUTONE Network Services, Inc.
By_______________________
Name:
Title:
[ Exhibits Deleted ]
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[EXHIBIT 10-10 CONTAINS MATERIAL THAT IS THE SUBJECT OF A REQUEST FOR
CONFIDENTIAL TREATMENT PURSUANT TO RULE 24b-2 UNDER THE SECURITIES EXCHANGE
ACT OF 1934]
SECOND AMENDMENT TO
VOLUME PURCHASE AGREEMENT
THIS SECOND AMENDMENT (the "Amendment") is made effective this 1st day of April,
1995 to the Volume Purchase Agreement entered into an January 31, 1992, and the
Amendment to the Agreement entered into on ________________, 1993 (collectively
the "Agreement") by SPRINT COMMUNICATIONS COMPANY L.P. and EXECUTONE INFORMATION
SYSTEMS, INC. ("Reseller"). Sprint and Reseller are "Parties" hereto.
In consideration of the mutual promises contained herein, the Parties amend the
Agreement as follows:
1. Subparagraph 5(a) is stricken in its entirety and a new Subparagraph 5(a) is
added to read as follows:
a) Except as otherwise provided herein, the initial term of this Agreement (the
"Initial Term") shall commence on the date first written above and terminate May
3, 1998. At the end of the Initial Term the Agreement will remain in full force
and effect until terminated by either Party upon ninety days written notice to
the other Party. The agreement entered into between Sprint and Reseller
regarding Carrier Identification Code ("CIC") and release of Sprint's name for
the purpose of providing Reseller's customers with a fulfillment piece will also
continue in effect for the duration of the Agreement.
2. Exhibit B to the Agreement is stricken in its entirety and a new Exhibit B is
added to read as follows:
EXHIBIT B
PRICING
1. PRICING FOR DOMESTIC INTERSTATE SERVICES. The following interstate Services
will be priced as set forth below. As used herein, "Peak" period pricing applies
to traffic defined as "day" usage, and "Off-Peak" pricing applies to "evening"
and
<PAGE>
<PAGE>
"night/weekend" usage, as defined in Sprint's FCC Tariff No. 2, Section
5.1.A. The following interstate flat rates will apply to traffic originating and
terminating in the 48 contiguous states only. Tariff rates will apply to traffic
originating and/or terminating in Alaska, Hawaii, Puerto Rico and the U.S.
Virgin Islands.
DIAL 1 WATS
<TABLE>
<CAPTION>
Gross Monthly Volume of Service Peak Off Peak
------------------------------- ---- --------
<S> <C> <C>
$0 to $2,499,999
$2,500,000 to $2,999,999
$3,000,000 to $3,499,999
$3,500,000 and above
FONLINE 800
Gross Monthly Volume of Service Peak Off Peak
------------------------------- ---- --------
$0 to $2,499,999
$2,500,000 to $2,999 999
$3,000,000 to $3,499:999
$3,500,000 and above
ULTRA WATS NETWORK EXTENSION
Gross Monthly Volume of Service Peak Off Peak
------------------------------- ---- --------
$0 to $2,499,999
$2,500,000 to $2,999,999
$3,000,000 to $3,499,999
$3,500,000 and above
ULTRA 800 NETWORK EXTENSION
Gross Monthly Volume of Service Peak Off Peak
------------------------------- ---- --------
$0 to $2,499,999
$2,500 000 to $2,999 999
$3,000,000 to $3,499:999
$3,500,000 and above
</TABLE>
2
<PAGE>
<PAGE>
FONCARD
<TABLE>
<CAPTION>
Gross Monthly
- - -------------
Volume of Service Peak Off Peak Surchg
- - ----------------- ---- -------- ------
<S> <C> <C> <C>
$0 to $2,499,999
$2,500,000 to $2,999,999
$2,000,000 to $3,499,999
$3,500,000 and above
</TABLE>
2. PRICING FOR INTRASTATE SERVICES. A monthly credit based on intrastate usage
in the following jurisdictions will be applied to the amount invoiced for
Reseller's interstate usage (the "Interstate Adjustment"). The Interstate
Adjustment will equal the difference between (a) Sprint's Tariff price for
Reseller's intrastate usage of the following Service and (b) such Sex-vice
priced at the following rates for all time periods:
<TABLE>
<CAPTION>
Ultra
Dial 1 WATS FONline 800
State WATS Net Ext 800 Net Ext
- - ----- ------ ------- ------- -------
<S> <C> <C> <C> <C>
New York
N.Carolina
Florida
Texas
Penn.
California
(Intrastate)
California
(IntraLATA)
Virginia
</TABLE>
The Interstate Adjustment will not exceed the amount invoiced for interstate
usage on the invoice to which the Adjustment is applied.
3. PRICING FOR INTERNATIONAL SERVICES. The following international Services will
be priced as set forth below. Billing increments are the first thirty seconds
and each six-second period thereafter.
A) ULTRAWATS NETWORK EXTENSION
<TABLE>
<CAPTION>
Country Standard Discount Economy
------- -------- -------- -------
<S> <C> <C> <C>
Argentina
Australia
</TABLE>
3
<PAGE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Austria
Belgium
Bermuda
Brazil
Chile
China
Costa Rica
Denmark
Finland
France
Germany
Greece
Guam
Country Standard Discount Economy
------- -------- -------- -------
Hong Kong
Hungary
India
Ireland
Israel
Italy
Japan
Malaysia
Mexico
Netherlands
New Zealand
Nicaragua
Norway
Poland
Portugal
Saudi Arabia
Singapore
South Africa
South Korea
Spain
Sweden
Switzerland
Taiwan
Thailand
UAE
United Kingdom
Venezuela
</TABLE>
Dial 1 WATS
<TABLE>
<CAPTION>
Country Standard Discount Economy
------- -------- -------- -------
<S> <C> <C> <C> <C>
Argentina
Australia
Austria
Belgium
Bermuda
</TABLE>
4
<PAGE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Brazil
Chile
China
Costa Rica
Denmark
Finland
France
Germany
Greece
Guam
Hong Kong
Hungary
India
Ireland
Country Standard Discount Economy
------- -------- -------- -------
Israel
Italy
Japan
Malaysia
Mexico
Netherlands
New Zealand
Nicaragua
Norway
Poland
Portugal
Saudi Arabia
Singapore
South Africa
South Korea
Spain
Sweden
Switzerland
Taiwan
Thailand
UAE
United Kingdom
Venezuela
</TABLE>
Canadian Terminating Traffic. The following special per minute rates
will apply to Canadian terminating traffic:
<TABLE>
<CAPTION>
Service Day Evening Night
- - ------- --- ------- -----
<S> <C> <C> <C>
Ultra WATS Network Extension
Dial 1 WATS
</TABLE>
5
<PAGE>
<PAGE>
Canadian originating Traffic. The following special per minute rates
will apply to Canadian originating traffic:
<TABLE>
<CAPTION>
Service Day Evening Night
------- --- ------- -----
<S> <C> <C> <C>
FONline 800
Ultra 800 Network Extension
</TABLE>
4. GENERAL PRICING PROVISIONS
A. Forward Pricing. From April 1, 1995 to March 31, 1996, services will
be priced under the Agreement as though Reseller generated the greater of (a)
its actual Gross Monthly Volume of Service or (b) $_________ in Gross Monthly
Volume of Service.
B. Extended Pricing offer. If Reseller maintains Gross Monthly Volume of
Service in excess of $_________ for a period of three consecutive months, Sprint
will propose an addendum to the Agreement to include special pricing for Gross
Monthly Volume of Service over the $5,000,000 level.
C. Signing Credit. Sprint shall apply a one-time credit to Reseller's
account in the amount of $__________ within 60 days following execution of this
Amendment by both Parties.
D. FoNline 800 Service Charge. There will be a $____ monthly recurring
service charge for each FONline 800 account.
E. Directory Listing Charge. There will be a $_____ monthly recurring
charge for 800 numbers (FONline 800 and Ultra 800) that require 800 toll-free
directory assistance listing.
F. COC Charge. There will be a $____ per port monthly recurring charge
for Central office Connections.
G. EFC Charge. There will be a $____ per port monthly recurring Entrance
Facility Charge when Reseller utilizes Sprint's entrance facilities.
H. Daytime Traffic Requirement. Reseller must maintain a minimum of __%
daytime traffic to
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<PAGE>
receive the flat rate pricing provided in this Agreement. For every percentage
point that Reseller's daytime traffic falls below 851, the per-minute flat rates
for daytime traffic will increase by _________________________________________.
This increase will apply one month in arrears to all daytime rates. Reseller's
compliance with this requirement will be measured on a quarterly basis.
I.Primary Carrier Requirement. Reseller must use Sprint as its primary
underlying carrier for interexchange telecommunications services and will routs
at least 90% of its interstate Dial I WATS and Ultra WATS Network Extension
traffic to Sprint during the term of the Agreement. Reseller will provide Sprint
with the following information in a format mutually acceptable to the Parties:
(i) quarterly summaries of Reseller's customer invoices for interstate Dial 1
WATS and Ultra WATS Network Extension services; and (ii) an annual audited
summary of such invoices prepared by Reseller's independent outside auditor.
This minimum usage requirement will cease to apply if all of the following
conditions are satisfied: (a) Reseller obtains bonafide offers from two major,
nationwide interexchange carriers to provide Dial I WATS and Ultra WATS Network
Extension service (the "offers"); and (b) the Offers to provide Dial I WATS and
Ultra WATS Network Extension service for at least one year at prices averaging
at least $0.01 per minute better than the day/evening/night/weekend prices for
such services provided under the-Agreement; and (c) Sprint fails to match the
offer within 90 days after receiving notice thereof.
J. Usage Commitment. Beginning may 1, 1996, Reseller will generate each
month usage sufficient to result in a monthly net invoiced amount ("Net Monthly
Usage") of at least $_________ (the "Usage Commitment"). Reseller will pay a
surcharge (the "Usage Commitment Surcharge") any month that it fails to meet the
Usage Commitment. The Usage Commitment Surcharge will equal ten percent of the
difference between the actual Net Monthly Usage and the Usage Commitment. The
Usage Commitment Surcharge will be applied to Reseller's invoice one month in
arrears.
K. Usage Commitment Credit. Beginning May 1, 1996, Reseller will receive
a credit (the "Usage
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Commitment Credit") for each period of six consecutive months (a "Credit
Period") that Reseller's total Net Monthly Usage equals at least $__________.
The Usage Commitment Credit will equal all Usage Commitment Surcharges applied
to Reseller's account during the respective Credit Period. The Credit Periods
will be: May 1, 1996 to October 31, 1996; November 1, 1996 to April 30, 1997;
May 1, 1997 to October 31, 1997; and November 1, 1997 to April 30, 1998. The
Usage Commitment Credit will be applied as soon as possible following completion
of each Credit Period.
L. No Additional Discounts. No additional discounts in
any form, Tariff or otherwise, will be applied to reduce the flat rate
prices set forth in this Exhibit B.
M. Availability of Services. Services may be purchased under the
Agreement only by reseller and its majority-owned subsidiaries on behalf of
Reseller, its majority-owned subsidiaries, and customers of Reseller to whom
Reseller sells the service. Execution hereof in no way adversely -effects any
other existing agreements between Sprint and Reseller not referenced herein,
including but not limited to, the Promotional discount Agreement as presently
and subsequently amended.
N. Administrative Fee. If Sprint is subject to a PIC dispute
("slamming") charge as a result of Reseller's actions, Reseller shall, at the
sole discretion of Sprint, pay Sprint an administrative fee (the "Administrative
Feel') equal to fifteen dollars ($__) for each ANI involved in the PIC dispute.
The Administrative Fee is assessed to partially defray Sprint's expenses
associated with the handling of PIC disputes. The Administrative Fee will be
calculated and applied in six month intervals from the commencement of the
Agreement.
0. Transaction Fees. Reseller must pay Sprint the following fees (the
"Transaction Fees"), which will be measured and applied in six month intervals
from commencement of the Agreement:
a) If ANIs on the Sprint network make up over 15% of the ANIs
Reseller submits for activation during any six month period, Reseller must pay
Sprint
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a Transaction Fee of $25 for each ANI in excess of the 15% threshold; and
b) Reseller must pay Sprint a Transaction Fee of $2,500 per T-1
($1,500 per DAL) for T-1s that it submits for activation that are connected to
an existing Sprint account at the time the order is submitted.
P. Contributory and Eligible Table. The following table shows the usage
and products, both domestic and international, that contribute to the Gross
Monthly Volume of Service in the flat rate pricing tables. All usage under the
Agreement of Reseller and its majority-owned subsidiaries will be both
contributory and eligible in the following tables.
<TABLE>
<CAPTION>
Usage Contributory Eligible Neither
- - ----- ------------ -------- -------
<S> <C> <C> <C>
Interstate X X -
Intrastate X X -
International X X -
Directory Assistance - - X
Operator Service - - X
Location Fees - - X
Channel Banks - - X
Line Charges - - X
Access Flow-through - - X
Nonrecurring Charges - - X
Taxes - - X
</TABLE>
<TABLE>
<CAPTION>
Products Contributory Eligible Neither
- - -------- ------------ -------- -------
<S> <C> <C> <C>
Dial 1 WATS X X -
Ultra WATS X X -
FONcard
Surcharge X X -
Usage X X -
FONline 800 X X -
Ultra 800 X X -
</TABLE>
3. Intrastate special rates are stated in Peak and-Off-Peak pricing. Peak period
pricing will be applicable to traffic defined as "DAY" usage and Off-Peak
pricing will be applicable to traffic defined as "EVENING" and "NIGHT/WEEKEND"
in Sprint's FCC Tariff No. 2, Section 5.1.A.
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<PAGE>
4. Sprint will continue to waive Reseller's Sprint T-1 installation charges for
the remaining term of the Agreement as stated in a memorandum dated September
13, 1994. Sprint will continue to provide a 20% discount off of the monthly
recurring charge for T-1 access as provided in a memorandum dated September 13,
1994.
5. All other terms and conditions of the Agreement shall remain in full force
and effect.
6. The offer to amend the Agreement as provided in this Amendment will be
withdrawn if this Amendment is not executed by both Parties on or before August
31, 1995.
EXECUTED by the undersigned effective the first day of April, 1995.
EXECUTONE INFORMATION SPRINT COMMUNICATIONS
SYSTEMS, INC. COMPANY L.P.
By: ________________________ By:______________________
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<PAGE>
[EXHIBIT 10-10 CONTAINS MATERIAL THAT IS THE SUBJECT OF A REQUEST FOR
CONFIDENTIAL TREATMENT PURSUANT TO RULE 24b-2 UNDER THE SECURITIES EXCHANGE
ACT OF 1934]
AMENDMENT TO AGREEMENT
THIS AMENDMENT (the "Amendment') is made effective this _______ day of
___________, 1993 to that certain Volume Purchase Agreement dated January 31,
1992, ("the Agreement") by and between Sprint Communications Company L.P.
("Sprint"), and Executone Information Systems, Inc. ("Reseller"). Sprint and
Reseller are referred to herein collectively as "Parties," and individually as a
"Party."
In consideration for the mutual promises contained in the Agreement and this
Amendment, the Parties hereby amend the Agreement as follows:
1. Subparagraph 1(a) is hereby stricken in its entirety and a new
Subparagraph 1(a) is added to the Agreement to read as follows:
1. Definitions
a) "Eligible Services" means: (1) services listed in Gross Monthly Volume
Contributory and Eligible Table in Exhibit B which are eligible for the
discounts provided herein; and (2) international services listed in the Gross
International Monthly Volume Contributory and Eligible Table attached hereto
which are eligible for the discounts provided herein.
2. Subparagraphs 1(f), 1(g), and 1(h) are hereby added to the Agreement to
read as follows:
1. Definitions
f) "Gross Monthly Volume" means the charges for Services provided under
this Agreement priced at Tariff rates net of all credits or adjustments
provided by Tariff.
g) "Gross International Monthly Volume" means the charges for international
Services provided under this Agreement priced at Tariffed rates net of all
credits or adjustments provided by Tariff less Network WATS charges or credit.
h) "Net Invoice" means the charges for Services priced in accordance with
the discounts or special pricing provided for in this Agreement net of all
credits or adjustments provided by Tariff or under this Agreement.
3. Subparagraph 3(g) is hereby added to the Agreement to read as follows:
3. The Transaction
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g) If Reseller provides network access for Ultra WATS and Ultra 800 Service,
then Reseller shall provide, at Reseller's expense, all access to the Sprint
Point of Presence, or to the Service Wire Center (SWC). If Reseller provides
access only to the SWC, then Reseller will be assessed both Non-Recurring
Charges (NRC) and Monthly Recurring Charges (MRC) for Central Office Connection
(COC) and Entrance Facility Cost (EFC). If Reseller elects to provide access to
Sprint's Point of Presence (POP), only NRC and MRC charges for COC will apply,
and Reseller must not use Sprint's leased SWC-to-POP entrance facilities.
4. Ultra WATS/Ultra 800 (Sprint Provided and Customer Provided Access) pricing
is added to Exhibit B to replace existing pricing and reads as follows:
Ultra Wats'r' (Sprint Provided Access)
<TABLE>
<CAPTION>
Flat Rate Price
Gross Monthly Volume Peak Off Peak
- - --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 0 - $
$ 100,000 - $
$ 500,000 - $
$ 750,000 - $
$ 1,000,000 - $
$ 2,000,000 - $
$ 3,000,000 + $
</TABLE>
Ultra 800 (Sprint Provided Access)
<TABLE>
<CAPTION>
Flat Rate Price
Gross Monthly Volume Peak Off Peak
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0 - $
$ 100,000 - $
$ 500,000 - $
$ 750,000 - $
$ 1,000,000 - $
$ 2,000,000 - $
$ 3,000,000 + $
</TABLE>
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<PAGE>
<PAGE>
Ultra Wats'r' (Customer Provided Access)
<TABLE>
<CAPTION>
Flat Rate Price
Gross Monthly Volume Peak Off Peak
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 0 - $
$ 100,000 - $
$ 500,000 - $
$ 750,000 - $
$ 1,000,000 - $
$ 2,000,000 - $
$ 3,000,000 + $
</TABLE>
Ultra 800 (Customer Provided Access)
<TABLE>
<CAPTION>
Flat Rate Price
Gross Monthly Volume Peak Off Peak
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 0 - $
$ 100,000 - $
$ 500,000 - $
$ 750,000 - $
$ 1,000,000 - $
$ 2,000,000 - $
$ 3,000,000 + $
</TABLE>
At least eighty percent (80%) of all Ultra WATS usage under this Agreement shall
terminate in a Regional Bell Operating Company ("RBOC") NPA-NXX. At least eighty
percent (80%) of all Ultra 800 usage under this Agreement shall originate in an
RBOC NPA-NXX. If either of the above conditions are not satisfied then Sprint
may, at its option, apply a $0.05 per minute surcharge to all traffic that fails
to meet either condition.
For Ultra WATS/Ultra 800 Service (Sprint Provided and Customer Provided Access)
there is no minimum daytime requirement.
5. A new Paragraph 2 is added to Exhibit to read as follows:
2. International Pricing
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<PAGE>
<PAGE>
A. General Provisions
1) The total dollar amount of the discounts provided for in this Paragraph 2
shall be applied as a credit against the amount Reseller is invoiced for
interstate usage, so long as the net amount invoiced for interstate usage
exceeds the total dollar amount of such credit.
2) Discounts shall apply to Standard, Discount and Economy international
calling periods.
3) Discounts are applied 1 month in arrears - net of Network WATS
4) Reseller will receive Network WATS as prescribed in Sprint's Tariff No.
2 for International traffic (__ discounts on Standard, Discount and Economy
calling periods).
B. Additive Discount Schedule
1) Group 1 - Australia, Guam, Hong Kong, India, Japan, New Zealand,
Singapore, Taiwan, United Kingdom.
<TABLE>
<CAPTION>
Gross International Monthly Volume
----------------------------------------------------------------
<S> <C> <C> <C> <C>
$200K $150K - 200K $75K - 150K $10K - 75K
</TABLE>
2) Group 2 - Austria, Canada, Denmark, Finland, France, Germany, Hungary,
Korea (South), Norway, Sweden, Switzerland, Venezuela.
<TABLE>
<CAPTION>
Gross International Monthly Volume
----------------------------------------------------------------
<S> <C> <C> <C> <C>
$200K $150K - 200K $75K - 150K $10K - 75K
</TABLE>
3) Group 3 - Argentina, Belgium, Bermuda, Ireland, Kuwait, Malaysia,
Saudia Arabia, South Africa, Spain, United Arab Emirates.
<TABLE>
<CAPTION>
Gross International Monthly Volume
----------------------------------------------------------------
<S> <C> <C> <C> <C>
$200K $150K - 200K $75K - 150K $10K - 75K
</TABLE>
-4-
<PAGE>
<PAGE>
4) Group 4 - Brazil, Chile, China, Costa Rica, Greece, Israel, Italy,
Mexico, Poland, Portugal, Thailand
<TABLE>
<CAPTION>
Gross International Monthly Volume
------------------------------------------------------------------
<S> <C> <C> <C> <C>
$200K $150K - 200K $75K - 150K $10K - 75K
</TABLE>
C. Gross International Monthly Volume Contributory and Eligible Table
The following table shows the type of usage- and product types that will
contribute to the Gross International Monthly Volume levels and will be eligible
for the Additive Discounts on international traffic.
CONTRIBUTORY ELIGIBLE NEITHER
TYPE OF USAGE:
Interstate - - X
Intrastate - - X
International X* X** -
Directory Assistance - - X
Operator Services - - X
Location Fees - - X
Channel Banks - - X
Line Charges - - X
Access Flow-through - - X
Nonrecurring Charges - - X
Taxes - - X
PRODUCTS:
Dial I WATS X X -
FONCARD
Surcharge X - -
Usage X X -
FONLINE 800 X - -
Ultra WATS'r' X X -
Ultra 800 X - -
* All countries
** Eligible Countries listed in Paragraph 2.B. of this Exhibit
-5-
<PAGE>
<PAGE>
6. It is understood and agreed that the Ultra WATS and Ultra 800 products
provided for in Exhibit B herein shall not be eligible for the special Customer
Appreciation Promotion provided for in that certain Sprint Customer Appreciation
Program - Letter Agreement entered into by and between Sprint and Reseller on
March 4, 1993.
7. All other terms and conditions of the Agreement and the Amendment shall
remain in full force and effect.
EXECUTED effective the date first above written.
EXECUTONE INFORMATION SPRINT COMMUNICATIONS
SYSTEMS, INC. COMPANY L.P.
By: _________________________________ By: ______________________________
Name: _______________________________ Name: Daniel L. Pearce
Title: ______________________________ Title: Vice President & Gen. Mgr.DBG
Date: _______________________________ Date: _______________________________
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<PAGE>
EXHIBIT 10-22
EXECUTONE INFORMATION SYSTEMS, INC.
DISTRIBUTOR AGREEMENT
- - --------------------------------------------------------------------------------
AGREEMENT dated as of May 31, 1996, between EXECUTONE INFORMATION SYSTEMS,
INC. and Clarity Telecom, Inc., a Delaware corporation ("Distributor").
WHEREAS, Company (as defined in Section 26 below) wants to appoint Distributor
as the Authorized Distributor within the Districts described in Exhibit A to
this Agreement ("Distributor's Area") of the products described in Exhibit B to
this Agreement (the "Authorized Products"), including spare parts therefor, and
as a licensee of any software imbedded therein or otherwise an integral part
thereof described in Exhibit B (the "Authorized Software");
WHEREAS, Distributor wants to be appointed to promote the sale and service of
the Authorized Products and to license the use of the Authorized Software in
conjunction with the sale of the Authorized Products in Distributor's Area; and
WHEREAS, the execution and delivery of this Agreement is a condition to
Distributor's Purchase of the Company's DSO Business as defined in the Purchase
Agreement pursuant to an Asset Purchase Agreement by and among the Company,
EXECUTONE Network Services, Inc., Clarity Telecom Holdings, Inc. (formerly known
as Tone Holdings, Inc.) and the Distributor dated April 9, 1996 (the "Purchase
Agreement").
NOW, THEREFORE, in consideration of the mutual promises in this Agreement and
other good and valuable consideration, the parties agree as follows:
1. AUTHORIZED DISTRIBUTOR. Distributor is hereby granted the exclusive and
non-exclusive rights as provided in Section 12 hereof, to sell, service and
maintain the Authorized Products and to license the Authorized Software in
Distributor's Area; provided that Distributor shall
<PAGE>
<PAGE>
not have the right to sell to National Accounts and Company Accounts in
the Distributor's Area. In consideration for Company's grant to
Distributor of the rights to sell and service the Authorized Products
and to license the Authorized Software in Distributor's Area,
Distributor agrees to purchase the quantities of Authorized Products
and license the quantities of Authorized Software required by
Distributor's Quota as defined in Section 7 of this Agreement, and not
to sell or promote Competing Products in Distributor's Area, as that
term is defined in Exhibit C and except as provided in Exhibit C or in
Section 12(e) hereof, without the express prior written consent of
Company.
2. COMPANY SUPPORT OF DISTRIBUTOR. The Company shall:
(a) refer to Distributor a portion of the leads for Authorized
Products and Authorized Software in the Distributor's Area of
which Company becomes aware, in the same proportion as the
Distributor's purchases of Authorized Products and Authorized
Software for the District bear to all purchases of Authorized
Products and Authorized Software for the District;
(b) make available promotional programs from time to time at
Company's discretion subject to Company's normal charges for
such programs;
(c) sell, at special prices or terms, an assortment of the
Authorized Products to be used by Distributor to demonstrate
those products to customers and to train personnel;
(d) make available courses and materials for training
Distributor's personnel at Company's normal charges;
(e) make available technical and service support, including
installation and technical manuals, subject to Company's
normal charges for such support;
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(f) market the Authorized Products directly to National Accounts,
Cross-Territorial Accounts and Company Accounts in accordance
with the National Accounts Policy set forth as Exhibit D (the
"NAP") , the Cross-Territorial Policy set forth as Exhibit E
(the "CTP") and the Company Accounts Policy set forth as
Exhibit F (the "Company Accounts Policy"), respectively, all
of which Company expressly reserves the right to amend (except
as provided therein) from time to time when Company in its
reasonable discretion determines such amendment to be
desirable;
(g) utilize its best efforts to provide to Distributor Authorized
Products that are competitive in the marketplace in function,
features and price. Distributor and Company recognize that,
from time to time, Company will develop and introduce new
products bearing the Authorized Trademarks and which Company
believes to be competitive with Competing Products available
in the marketplace. Company shall make such new Authorized
Products available to Distributor for sale and license in
Distributor's Area on the same exclusive or non-exclusive
basis as applies to the Authorized Products hereunder and
thereafter such new Authorized Products shall be Authorized
Products as defined in this Agreement;
(h) use its best efforts to have Distributor elected to Company's
Independent Distributor Advisory Board; and
(i) as soon as available after the end of each fiscal year,
deliver to Distributor financial statements consisting of
balance sheet, income statement and, at Distributor's request,
a statement of sources and uses of funds for such year
prepared in accordance with generally accepted accounting
principles and reviewed by a certified public accountant.
3. TRADEMARK LICENSE AND USE. In order to promote and protect the
Company's trademark rights, the parties agree that:
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<PAGE>
<PAGE>
(a) AUTHORIZED USES. Company grants to Distributor a nonexclusive,
non-transferrable license to use the trademarks described in
Exhibit C (the "Authorized Trademarks"):
(i) only in connection with the sale and service,
and promotion of sale and service, of the Authorized
Products;
(ii) only in the Distributor's Area in which Distributor
is authorized to sell and service the related
Authorized Products;
(iii) only during the term of this Agreement or to service
products installed prior to the termination of this
Agreement;
(iv) only in the manner described in this Section and
Exhibit C; and
(v) as provided in the Purchase Agreement.
(b) PROHIBITED USES. Distributor is not granted any license or
right to use the mark or name EXECUTONE INFORMATION SYSTEMS,
EISI, OR EIS, or any comparable derivative thereof. Except as
expressly authorized in Exhibit C (the "Authorized Name"),
Distributor shall not use the Authorized Trademarks as part of
Distributor's trade or corporate name, nor shall Distributor
otherwise trade under the Authorized Trademarks or any
derivative thereof.
(c) NONTRANSFERABILITY. Distributor shall not assign or sublicense
its rights to use the Authorized Trademarks or Authorized Name
to any other person or entity except as otherwise permitted by
this Agreement.
(d) DISTRIBUTOR'S COVENANTS. Distributor hereby agrees that
Distributor:
(i) shall use the Authorized Trademarks only as expressly
authorized and only in conjunction with the R or TM
symbol as appropriate;
(ii) shall not use the Authorized Trademarks in any
disparaging way or in any way that might confuse
other products with the Authorized Products in a
manner which would jeopardize the Company's interests
in the Authorized Trademark; and
(iii) shall not challenge or contest in any way the
validity of the Authorized Trademarks, their
registration or their ownership by the Company.
(e) PRODUCT ALTERATIONS. Distributor may affix to the back of any
Authorized Product or copy of Authorized Software a legend in
the following form:
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For Sales and Service
(Name of Distributor)
(Address of Distributor)
(Local Telephone Number of Distributor)
(Installation Date)
For 24-Hour Emergency Service Call:
(Telephone Number)
However, Distributor shall not remove, change, obscure, or add to the
labels, markings, names or trademarks that Company has affixed to any
Authorized Product.
4. DISTRIBUTOR'S SALES RESPONSIBILITIES. In order to develop the market
for the Authorized Products in Distributor's Area, Distributor shall:
(a) promote the sale of the Authorized Products throughout
Distributor's Area and maintain accurate records with respect
to sales of the Authorized Products (which records are
acknowledged to be the proprietary business information of
Distributor);
(b) make sales of Authorized Products to customers in
Distributor's Area sufficient to meet Distributor's Quota as
provided in Section 7;
(c) maintain a sufficient inventory of the Authorized Products to
meet the demand in Distributor's Area;
(d) timely install the Authorized Products in a workmanlike and
professional manner in accordance with instructions and
specifications;
(e) properly train customer's personnel in the operation and use
of the Authorized Products, as reasonably requested by
customers;
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(f) maintain a trained sales force of sufficient size to serve
Distributor's Area and meet Distributor's Quota;
(g) avoid doing anything that might materially and adversely
affect the sales potential for the Authorized Products except
as otherwise permitted under this Agreement;
(h) except as specifically provided for in Sections 4(i) and (k)
herein, refrain from selling the Authorized Products to any
entity other than to end-users located in Distributor's Area;
(i) refrain from selling the Authorized Products and spare parts
therefor outside of Distributor's Area except as specifically
authorized by the NAP, the CTP or the Company Accounts Policy,
each of which Company expressly reserves the right to amend
(except as provided therein) from time to time when Company in
its reasonable discretion determines such amendment to be
desirable, or as otherwise specifically authorized in writing;
(j) refrain from selling the Authorized Products to former
authorized Distributors of Authorized Products and to
secondary market resellers identified to Distributor by the
Company. The Company will assist Distributor in the sale of
Distributor's excess inventory of Authorized Product to other
Authorized Distributors by coordinating an exchange program
between Distributors or any other entity which Company
authorizes for the purchase of Distributor's inventory of
Authorized Product;
(k) Company and Distributor recognize exchange between
Distributors will be necessary from time to time for emergency
service requirements and Company agrees that Distributor may
sell Authorized Products to other Authorized Distributors for
this purpose. Distributor agrees that such sales of Authorized
Products will be of an incidental nature for emergency
purposes. Company and Distributor recognize that
6
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<PAGE>
such incidental sales between Distributors are in the best
interest of the Company and its Distributors in order to
facilitate quick response to service outages; however,
Distributor and Company specifically agree that it is not the
intent of this Section 4(k) for Distributor to become a source
of product supply to any other Distributor in breach of its
financial obligations to Company and/or for Distributor to
purchase the Authorized Products in bulk from the Company to
take advantage of Company's volume purchase discounts and
resell portions of such bulk purchases to another Authorized
Distributor;
(l) obtain at Distributor's expense all state, local, and other
licenses and permits necessary for operation of the
Distributorship, and furnish Company with Distributor's local
sales tax license number; and
(m) utilize its reasonable best efforts to market Authorized
Products within its assigned territory to assist Company in
the attainment of its market share objectives provided to the
Distributor.
5. DISTRIBUTOR'S SERVICE RESPONSIBILITIES. In order to service adequately
customers in Distributor's Area and to ensure consistent nationwide
service of the Authorized Products, Distributor shall:
(a) install and service, subject to Distributor's customary
charges and credit criteria, all Authorized Products and Other
Company Products, as defined in Exhibit F, installed in
Distributor's Area, regardless of whether they were sold by
Distributor but subject to the Company Accounts Policy, the
NAP and the CTP;
(b) except to the extent faster response times are reasonably
required by Company for National Accounts, Cross-Territorial
Accounts or Company Accounts, respond:
(i) within 4 hours to all Emergency Service Requests,
defined as all requests to remedy problems that are
not isolated failures of a minority of station
7
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<PAGE>
instruments and/or a minority of trunks and/or system
components not required for normal processing of
voice, video and/or data communications;
(ii) within 48 hours to 95% of all non-Emergency Service
Requests; and
(iii) within ten (10) business days to 100% of customers'
requests for routine adds, moves or changes of
equipment, subject to availability of product from
Company.
It is the intent of this Section that Distributor utilize its best
efforts to achieve these goals on a consistent basis. Occasional
failures and/or delays will not be a Material Breach of this Agreement.
(c) make available emergency service 24 hours a day, 365 days a
year, for all of its customers, and all National Accounts,
Cross-Territorial Accounts and Company Accounts in
Distributor's Area;
(d) as requested by Company, make available installation and
service to National Accounts, Cross-Territorial Accounts and
Company Accounts in Distributor's Area as required by and
subject to the Company Accounts Policy, NAP or CTP;
(e) maintain trained personnel, spare parts, and equipment
sufficient to service all Authorized Products and Other
Company Products in Distributor's Area; provided, however,
that Distributor shall not be required to maintain any spare
parts for Call Center Products; and
(f) maintain complete records of all service requests and service
calls, including: the name of the customer; the date(s) and
time(s) of the request, response, and correction of the
problem; the nature of the problem; any parts used; any
charges; and whether the service was performed under warranty.
8
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6. DISTRIBUTOR'S FINANCIAL AND REPORTING RESPONSIBILITIES.
(a) FINANCIAL CONDITION. Distributor shall maintain a financial
condition adequate to perform its obligations as an authorized
distributor.
(b) REPORTING RESPONSIBILITIES. Distributor shall submit to
Company:
(i) as soon as available after the end of each fiscal
year, financial statements consisting of balance
sheet, income statement, and at Company's request, a
statement of sources and uses of funds, for such year
prepared in accordance with generally accepted
accounting principles and reviewed by a certified
public accountant;
(ii) at Company's request, a list of all persons and
entities having an ownership interest in Distributor,
and the nature and percentage of each such ownership
interest; and
(iii) within thirty (30) days of the end of each quarter
Distributor will complete and send to Company a
summary report of retail sales of Authorized Products
and service activity performed by Distributor within
Distributor's Area. The information required may be
modified from time to time as required by changes in
the market or within the industry. The information
provided by Distributor will be analyzed by Company
and consolidated on a national and regional basis and
reported back to Distributor.
(iv) within 15 days after the end of each month, to the
extent required by the agreement between the Company
and Oracle Corporation, a third party software
licensor of software contained in or sold with
ILS(TM)Authorized Products that contain the
management reports feature or licensed with
Authorized Software relating to such Authorized
Products, the names and addresses of sublicensees of
such software sublicensed by Distributor within the
preceding month, the date of purchase and
installation, the specific Authorized Product and
Authorized Software installed, including the make
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or model designation and the software release number
of the software programs licensed, and the maximum
number of users per system. Company agrees to
maintain the confidentiality of and not to use such
information in any manner whatsoever, except to the
extent it is required to provide such information to
Oracle, without the prior written consent of the
Distributor.
7. PURCHASE, PAYMENT, SALES AND SHIPMENTS.
(a) PURCHASE AND PAYMENT BY DISTRIBUTOR.
(i) FORECASTS. In order to assist Company in scheduling
the production and delivery of the Authorized
Products, Distributor will deliver and update during
the term of this Agreement a rolling six-month
forecast of its purchases. Distributor's initial
forecast is attached hereto as Exhibit G. On or
before the first day of each calendar month,
Distributor shall deliver an updated forecast in the
form attached hereto as Exhibit G. Each such forecast
shall cover the succeeding six calendar months. Such
forecasts are nonbinding and for advisory or planning
purposes only.
(ii) QUOTA. Quota is defined as the minimum dollar volume
of Authorized Product and Authorized Software listed
in Exhibit B, that Company requires Distributor to
purchase or license from Company during each calendar
year of this Agreement. The Quota for any calendar
quarter of any year (a "Quarter") is one-quarter of
the annual Quota unless otherwise stated on Exhibit
H. Attached as Exhibit H are the Quotas that the
Company and Distributor have mutually agreed upon for
the initial Term. For any extension period of this
Agreement, the Quotas shall be as mutually agreed
between Company and Distributor. For purposes of
Quota performance measurement, Company will calculate
Distributor's purchases based upon the then current
Distributor Net Price, defined as the price at which
Company sells the Authorized Products to its lowest
volume distributor. Following the
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end of each Quarter, Company will provide Distributor
with a report of Distributor's Quota performance.
(iii) PURCHASE ORDERS. Orders for the purchase of the
Authorized Products shall be made by Distributor by
purchase orders, specifying the quantity and
description of Authorized Products desired. Any term
or condition of such purchase orders that is
inconsistent with any term or condition of this
Agreement shall be of no force and effect whatsoever,
and any additional term or condition of such purchase
order shall be construed so as to be consistent with
the intent of this Agreement.
(iv) PAYMENT. Subject to subsection 7(b), payment by
Distributor to Company for each order of Authorized
Products shall be made in cash, or by check or wire
transfer. Until the earlier of third anniversary
hereof and such time as 60-day terms are no longer
required by Distributor's banks, payment by
Distributor shall be made within the longer of (i)
sixty days of invoice date and (ii) the most
favorable payment terms provided to the Company's
other distributors. Thereafter, payment by
Distributor shall be made within thirty days of
invoice date for the balance of the term of this
Agreement. Distributor shall pay each invoice in full
subject to appropriate credits and offsets.
Distributor must notify Company in writing within 30
days of the date of the invoice or the date of
receipt of product ordered, whichever is longer, of
any disputed invoice amount along with an explanation
of the reason of the dispute.
(b) SALES AND SHIPMENTS BY COMPANY.
(i) PRICES AND TERMS. Company will sell at prices and on
terms determined by Company from time to time, as
reflected in the Company's Authorized Product Price
Book. At all times during the period or periods in
which Distributor is not in Material Breach of this
Agreement, Company agrees to sell to Distributor at
the most favorable terms and conditions, including
without limitation prices and discount level, made
available to any other
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authorized distributor for a territory located in the
United States for the same products, excluding sales
to the Federal Government. Company agrees to promptly
notify Distributor in writing if the Company has or
has entered into an agreement with any other
authorized distributor which contains terms and
provisions which are more favorable to such other
authorized distributor than those contained herein.
Company shall, upon the request of Distributor, amend
this Agreement to reflect such more favorable
provisions. All prices are exclusive of all taxes
(except taxes on Company's income) including federal,
state, and local sales, use, value-added or similar
taxes. Distributor will pay all such taxes unless
Distributor has given Company a valid exemption
resale certificate prior to shipment. Company
expressly reserves the right to change prices with
not less than forty-five days notice to Distributor,
and Company also reserves the right to change credit
terms at any time if in Company's opinion
Distributor's financial condition or payment record
so warrants. If Distributor becomes materially
delinquent in the payment of any material sum due to
Company, Company may suspend performance under this
Agreement and may require Distributor to make payment
in advance of any subsequent shipments of Authorized
Products. By exercising the foregoing right, Company
is in no way waiving any of its other rights and
remedies at law or under this Agreement. Distributor
hereby grants and Company reserves a purchase money
security interest in each Authorized Product in
respect of which the Company has not been paid
pursuant to a purchase order, and any proceeds
thereof, for the amount of the purchase price. At
Company's request, Distributor will sign any
documents required to perfect such security interest.
Full payment of the purchase price of the Authorized
Product will release the security interest on that
Product.
(ii) SHIPMENT. Except as otherwise provided herein,
Company will ship to the locations designated in
Distributor's purchase order within Distributor's
Area in accordance with Company's published shipping
schedules in effect at the time of shipment. Company
will provide Authorized Products and
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Authorized Software to Distributor in an amount at
least equal to the Distributor's forecasts provided
to the Company pursuant to Section 7(a)(i). At all
times during the period or periods in which
Distributor is not in Material Breach and in which
Distributor has the exclusive right to sell, license,
service and maintain the Authorized Products and
Authorized Software as provided in Section 12, the
Company shall provide Distributor priority in
shipment of Authorized Products and Authorized
Software over other authorized distributors of the
same products. Company shall not be liable for any
failures to ship or delays in shipping caused by
circumstances described in Section 19. Company shall
use its best efforts to maintain sufficient inventory
in stock to meet Distributor's purchase orders and
needs. Risk of loss shall pass to Distributor F.O.B.
Company dock, but Company will assist Distributor in
tracking shipments and processing claims related to
lost or damaged goods. Title to each shipment of
Authorized Products shall pass to Distributor upon
receipt by Company of payment for such shipment as
provided in Section 7(a)(iv) herein with the
exception of Software, title to which shall remain
vested in Company at all times as provided by the
Software License contained in Section 15. Company
may, in its sole discretion, honor Distributor's
requests to drop ship to installation locations
within Distributor's Area and to expedite shipments,
but Company reserves the right to pass on to
Distributor any additional costs incurred as a result
of such requests. Company reserves the right to
refuse shipment of Authorized Products if Distributor
has failed to make timely payment for prior shipments
as required by Section 7(a)(iv). In the event that
Company elects to exercise its right not to ship
Authorized Products by reason of Distributor's
failure to make timely payments for prior shipments,
or otherwise places Distributor on credit hold, it
shall immediately notify Distributor as soon as such
election is made.
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(c) EXPORTS TO AND FROM DISTRIBUTOR'S AREA.
(i) Distributor shall not export or reexport Authorized
Products without such valid export or reexport
authorization as may be required, or otherwise
violate any export or reexport restriction imposed by
authorities in the country of origin of such
Authorized Products or by other authorities
concerned.
(ii) Company shall, where applicable, issue Certificates
of Origin for Authorized Products shipped under this
Agreement, duly verified by the authorities
concerned.
8. LIMITED WARRANTY AND RESTRICTION ON ALTERATION.
(a) LIMITED WARRANTY. Company warrants that all Authorized
Products sold to Distributor pursuant to this Agreement will
perform in accordance with Company's written specifications
therefor and will be free from defects in material and
workmanship for the period from the date of shipment F.O.B.,
Company specified in Exhibit B (the "Warranty Period"),
provided that such Authorized Products are installed in
compliance with Company's written installation specifications,
to the extent applicable, and given normal service and
maintenance by Distributor during the Warranty Period. Company
warrants that the Authorized Software will be free from any
defect that causes a material nonconformity between its
performance as described in the Related Documentation
accompanying the Authorized Software, as specified in Exhibit
B, and actual performance during the Warranty Period for the
Authorized Product in which the Authorized Software is
imbedded or otherwise an integral part. Company's obligation
under this warranty shall be limited to repair or replace, at
Company's option, any part(s) or Authorized Software that may
prove defective under normal and proper use and service for
the Warranty Period. For such repairs and replacements,
Distributor shall pay the cost for shipment to Company's
plant; and Company shall pay the cost for shipment from
Company's plant. Company agrees to use its best efforts to
ship any repaired or
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replacement Authorized Product within thirty (30) days of the
date Company shall have received the defective Authorized
Product. This warranty shall not apply to lamps, fuses,
batteries or other such items normally consumed in operation
which have a normal life shorter than the Warranty Period.
(b) DISCLAIMERS. THE WARRANTIES CONTAINED IN THIS SECTION ARE IN
LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR
PURPOSE. THESE WARRANTIES SHALL BE VOID AS TO PRODUCT DAMAGED
OR RENDERED UNSERVICEABLE OR NONFUNCTIONAL BY NEGLIGENCE OF
NON-COMPANY PERSONNEL, MISUSE, THEFT, VANDALISM, FIRE,
LIGHTNING, POWER SURGES, WATER OR OTHER PERIL, OR ACTS OF GOD,
BY FAILURE OF DISTRIBUTOR TO COMPLY WITH PUBLISHED TECHNICAL
REQUIREMENTS OR BY SERVICES OR PRODUCTS OF OTHER VENDORS,
INCLUDING WITHOUT LIMITATION THE LINES OF ANY LOCAL EXCHANGE
TELEPHONE COMPANY. REPAIR, RELOCATION OR ALTERATION OF THE
PRODUCT BY PERSONS NOT AUTHORIZED BY COMPANY VOIDS THE
WARRANTY. LIABILITY OF COMPANY HEREUNDER IS EXPRESSLY LIMITED
TO THE REPAIR OR REPLACEMENT DESCRIBED ABOVE, AND IN NO EVENT
SHALL COMPANY BE LIABLE FOR ANY INDIRECT, SPECIAL, INCIDENTAL
OR CONSEQUENTIAL DAMAGES, SUCH AS LOST SALES, LOST PROFITS OR
INJURY TO PROPERTY, IN RESPECT OF WARRANTY CLAIMS OR ANY OTHER
ECONOMIC DAMAGES RELATING TO THE PERFORMANCE OR FUNCTIONALITY
OF THE AUTHORIZED PRODUCTS OR AUTHORIZED SOFTWARE, WHETHER
THEY ARE ALLEGED TO ARISE IN CONTRACT OR TORT OR OTHERWISE. NO
EXPRESS OR IMPLIED WARRANTY IS MADE AGAINST INTRUSIONS INTO
THE COMPANY'S VOICE PROCESSING SYSTEMS BY FRAUDULENT CALLERS
OR AGAINST ANY
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TOLL FRAUD. COMPANY MAKES NO WARRANTIES AS TO THE LAWFULNESS
OF USING ANY FEATURE OF THE AUTHORIZED PRODUCTS TO MONITOR,
RECORD OR FORWARD ANY ORAL, WIRE OR ELECTRONIC COMMUNICATION.
(c) RESTRICTION ON ALTERATION. Company shall not be liable for any
warranty offered by Distributor that differs from the warranty
quoted above. Company does not warrant any Authorized Products
that have been modified without Company's prior written
consent, and Distributor shall not make or permit to be made,
any alterations or modifications of any Authorized Products
without the prior written consent of Company. Distributor
agrees to hold harmless and indemnify Company against claims
of any kind related to any unauthorized alterations or
modifications of Authorized Products made or authorized in
writing by Distributor, or related to warranties by
Distributor that differ from the warranty quoted above.
(d) SURVIVAL. This Section 8 shall survive the termination or
expiration of this Agreement.
9. POST-WARRANTY PERIOD REPAIRS. After the Warranty Period has expired,
Company shall provide repair and replacement service for Authorized
Products at Distributor's expense in accordance with the charges
therefor specified in Company's Authorized Product Price Book. For such
repairs and replacements, Distributor shall pay the cost of shipment to
Company's plant; Company shall pay the cost for shipment from Company's
plant. Distributor shall adhere to the return procedure described in
Company's Authorized Product Price Book and shall adhere to such other
return procedures as Company shall reasonably require from time to
time. Distributor shall not return any defective Authorized Product
unless Distributor has properly completed the return forms described in
Company's Authorized Product Price Book. Company agrees to use its best
efforts to ship repaired or refurbished Authorized Products to
Distributor within thirty (30) days of the date Company shall have
received the defective Authorized Products at its plant. If
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Company has not shipped the repaired or refurbished Authorized Product
within forty (40) days of the date Company shall have received the
defective Authorized Product at its plant, the repair charge shall be
reduced as specified in Company's Authorized Product Price Book. Under
no circumstances shall Company be liable for any consequential or other
damages resulting from failure to ship repaired or refurbished
Authorized Products within thirty (30) days, other than any direct
damages to Distributor arising from failure of Company to ship repaired
or refurbished Authorized Products within sixty (60) days of receipt by
Company. Notwithstanding the foregoing, if Distributor is in Material
Breach of any of its payment obligations to Company, Company reserves
the right to require Distributor to make payment for post-Warranty
Period Repairs before Company ships repaired or replacement Authorized
Products. By exercising the foregoing right, Company is in no way
waiving any of its other rights and remedies at law or under this
Agreement. This Section 9 shall survive the termination or expiration
of this Agreement.
10. COMPANY'S RESERVATION OF RIGHTS. Company reserves the right at any time
to:
(a) discontinue, modify or upgrade existing Authorized Products;
provided, however, that Company shall notify Distributor
ninety (90) days in advance of any product discontinuance,
shall directly or indirectly provide factory repairs for such
product to Authorized Distributors for a period of seven (7)
years from its discontinuance, and shall directly or
indirectly provide spare parts, replacement parts, Authorized
Software and Related Documentation and all other equipment,
software, diagnostics and manuals required to service and
maintain the Authorized Products, Authorized Software and
Related Documentation for such product to Distributor, for a
period of five (5) years from its discontinuance;
(b) nondiscriminatorily sell to Distributor any Authorized
Products, of the Authorized Trademark brand(s) of which
Distributor is an Authorized Distributor, based upon
Distributor's ability to sell, install, or service the same;
and
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(c) make Distributor's rights under this Agreement subject to the
NAP, CTP and Company Accounts Policy, each of which Company
reserves the right to amend from time to time whenever Company
in its reasonable discretion determines such amendment to be
advisable.
11. SALES AND SERVICE OUTSIDE DISTRIBUTOR'S AREA. Distributor is an
authorized distributor of Authorized Products only in Distributor's
Area, except as specifically provided otherwise in this Agreement. In
the event that Distributor sells any Authorized Products for
installation outside Distributor's Area, Distributor shall comply with
the CTP regarding such sale and the related installation and service
requirements in effect at the time of the sale. Nothing contained
herein shall limit or restrict Distributor's ability to sell other
products and services, including Competing Products, outside
Distributor's Area.
Company shall provide Distributor prior written notice of any customer
that requires service outside Distributor's Area and that is not
subject to the Cross-Territorial Policy set forth in Exhibit E and an
opportunity to demonstrate to Company that Distributor is able to
service such customer. In the event that Distributor elects not to
service such customer or is unable to provide service to such customer
on the terms set forth herein, Company shall be entitled to directly or
indirectly provide such service to such customer.
12. EXCLUSIVITY; EXPANSION AREAS AND PRODUCTS.
(a) Except as otherwise specified in this Section 12, Distributor
shall have the exclusive right to sell, license, service, and
maintain the Authorized Products and Authorized Software in
Distributor's Area, subject to termination of such exclusive
rights as provided in this Section 12. Upon termination by the
Company of Distributor's exclusive rights to sell, license,
service and maintain the Authorized Products and Authorized
Software pursuant to this Section 12, Distributor shall have
the non-exclusive right to sell, license, service and maintain
the Authorized Products and Authorized Software to the extent
that the Company shall be entitled
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to appoint one other distributor in each District, if any of
the following events occurs and is not cured within 90 days
after Distributor's receipt of notice from Company; provided,
however, that Distributor may again have exclusive rights if
after 90 days it cures the event and Company has not at the
time of such cure appointed another distributor in the
Distributor's Area.
(i) The dollar amount of Distributor's aggregate actual
purchases (based on prices actually paid and not
Distributor Net Price) of Authorized Products and
Authorized Software during the last four full
Quarters, measured as of January 1 and July 1 of each
year, has been less than the amounts ("Adjusted
Quota") set forth in Exhibit H; or
(ii) Distributor is in Material Breach of this Agreement,
as defined in Section 16.
In the event of a termination of exclusivity as provided in
this Section 12, Company agrees that in each District in
Distributor's Area listed in Exhibit A, it will establish only
one alternative distributor for the Authorized Products and
Authorized Software that were sold by Distributor on an
exclusive basis immediately preceding such termination.
(b) Distributor acknowledges and agrees that (i) Company intends
to reserve to itself the rights to sell and license
INFOSTAR/ILS'tm' and Telesearch'tm' products directly or
indirectly in Distributor's Area as it has done in other areas
and that notwithstanding anything to the contrary herein
Distributor has only non-exclusive rights to sell or license
those products in any market or geographic area, (ii)
Distributor has only non-exclusive rights to sell and license
the Authorized Products and Authorized Software in the
counties within the sales territory of the Albuquerque, New
Mexico; Birmingham, Alabama; New York; Vermont; Chicago,
Illinois; Cleveland, Ohio; Connecticut; and Seattle in each
case as specified in Exhibit A, (iii) Distributor has limited
exclusivity in the Boston District pursuant to a three-year
supplemental agreement currently in effect with
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another independent distributor, which Company agrees to
enforce to protect Distributor's rights and not to renew or
extend at the end of its term.
(c) Distributor agrees that Company shall have the right to sell
and license (i) Other Company Products, as defined in Exhibit
F, directly or indirectly in any market or geographic area,
(ii) Authorized Products and Authorized Software directly in
Distributor's Area to its National Accounts, Federal Systems,
Healthcare, Call Center, and Videoconferencing Customers, as
defined in Exhibits D and F.
(d) Company agrees that if another authorized distributor ceases
to have exclusive rights to sell and license the Authorized
Products and Authorized Software in any area of the United
States not included in Distributor's Area or has been
terminated as a distributor in such area ("Expansion Area"),
then the Company shall offer to Distributor the right to
negotiate with Company and Company shall negotiate with
Distributor in good faith for a period of 30 days a Quota for
the Authorized Products and Authorized Software in the
Expansion Area in order that Company may expand Distributor's
Area to include the Expansion Area. Company further agrees
that if a quota is agreed to with respect to the Expansion
Area within such period, then Distributor's rights in the
Expansion Area shall be exclusive (i) to the extent possible
given Company's then existing contractual obligations and (ii)
provided Distributor is at such time entitled to maintain its
exclusive rights under this Section 12. Company agrees that it
shall not require terms and conditions, including a Quota for
the Expansion Area, less favorable to the Distributor than
that offered to third party distributors in similar areas for
similar products.
(e) Distributor shall be permitted to sell, market, service,
maintain and license Competing Products in Distributor's Area
in the event there is a Material Breach by Company.
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(f) Company agrees that if the Company determines to appoint a
third party distributor to sell (i) products and software
other than Authorized Products and Authorized Software,
including Other Company Products (defined in Exhibit D) or
(ii) any products and software to a National Account or
Company Account, then Company shall offer Distributor the
right to negotiate with Company and Company shall negotiate
with Distributor in good faith for a period of 30 days in
order that Company may expand Distributor's products or
customers to include such products and/or customers. Company
further agrees that if an agreement is reached with respect to
such products and/or customers, then Distributor's rights in
Distributor's Area with respect to such products and/or
customers shall be exclusive (i) to the extent possible given
Company's then existing contractual obligations and (ii)
provided Distributor is at such time entitled to maintain its
exclusive rights under Section 12.
(g) Company agrees that if Company receives notice from a third
party distributor of a change of control of such third party
distributor, Company will provide Distributor prompt notice
thereof. Company shall not purchase the third party
distributor unless it first offers Distributor 30 days in
which Distributor may negotiate to purchase the third party
distributor.
(h) Notwithstanding any other provision contained in this
Agreement, Distributor agrees that in the event Distributor
sells Competing Products in Distributor's Area, Company shall
be permitted to sell directly or indirectly a product of the
type of which Company is a seller or manufacturer in the same
Product Line. As used herein, "Product Line" means a product
designed for telephone switches for one of the following
segments: (i) between 1-25 lines; (ii) between 26-50 lines;
(iii) between 51 to 250 lines; and (iv) between 251 to 400
lines.
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13. CONSENT OF COMPANY REQUIRED.
(a) Distributor shall not, without the prior express written
consent of Company, which consent shall not be unreasonably
withheld:
(i) assign, delegate, sell or transfer this Agreement or
any rights or obligations created by it with respect
to any one or more Districts, except (A) in
connection with a sale or transfer of the business of
selling to and servicing the customer base in such
District or Districts or in connection with the sale
of Distributor, (B) to any lender providing financing
to the Distributor as contemplated by the Purchase
Agreement or any refinancing thereof, pursuant to
security arrangements entered into in connection with
such financings or refinancings or (C) to any
transferee of any such lender upon exercise of any of
such lender's remedies pursuant to security
arrangements contemplated in (B) above; or
(ii) appoint any sub-distributor or dealer for Authorized
Products in any District.
(b) Distributor shall not, unless Company has given its prior
written consent, which may be withheld in Company's sole
discretion, offer, agree to or permit any sale (including any
merger on consolidation) of Distributor or of substantially
all of its business or assets to (i) any of AT&T Corporation,
Lucent Technologies, Nortel or any of their successors or
direct or indirect majority-owned subsidiaries, during the one
year immediately following the date of this Agreement, or (ii)
Intertel Corporation or Mitel Corporation, or any of their
successors or direct or indirect majority-owned subsidiaries,
during the three years immediately following the date of this
Agreement; provided, however, that the provisions of this
subsection (b) shall automatically terminate upon an initial
public offering of common stock of Distributor.
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14. CONFIDENTIALITY.
(a) NONDISCLOSURE. Without the prior express written consent of
Company, Distributor shall not disclose to any third party, or
use for any purpose other than performance of this Agreement,
any confidential business information or trade secrets of
Company including but not limited to: product design
information, product technical manuals, product technical
bulletins, or Company pricing. Company and Distributor
recognize the necessity of disseminating selected information
included in the above documents to customers or prospective
customers in the sales process. Company agrees that
Distributor may provide such necessary information to
customers and prospective customers in the sales process
without Company's prior express written consent and
Distributor agrees to use its best efforts to protect the
confidentiality of this information.
(b) NO REVERSE ENGINEERING. Distributor shall not engage in, cause
to be engaged in, or permit any reverse engineering of
Authorized Products or Authorized Software. Reverse
engineering is defined as attempting through analysis of
component parts and/or software of the Authorized Products to
define the functionality of the components or software, and
thereby gain the ability to alter or reproduce that
functionality.
(c) SOFTWARE. Distributor hereby acknowledges that the Authorized
Software and Related Documentation specifically listed in
Exhibit B and all technical manuals relating to the Authorized
Products are proprietary to Company and constitute trade
secrets of Company. All applicable rights to patents,
copyrights, trademarks, and trade secrets of the Company are
and shall remain in Company. Distributor agrees to use utmost
reasonable diligence to protect the confidentiality and
proprietary rights of Company in the Authorized Software and
Related Documentation, and not to disclose the Authorized
Software or Related Documentation to any third party.
Distributor shall also promote compliance with the terms and
conditions of this
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Agreement by employees and agrees to place the software
sublicense language in Exhibit H in its sales contracts with
its customers. Distributor agrees to maintain records of these
software sublicense agreements and to represent Company's
interest in the protection of its rights to the Authorized
Software and Related Documentation. In the event that Company
has reason to believe Distributor's customer has violated the
software sublicense agreement, Distributor will make available
to Company these records on a customer specific basis.
(d) SURVIVAL. Distributor's obligations under this confidentiality
provision shall survive termination or nonrenewal of this
Agreement.
15. SOFTWARE LICENSE.
(a) LICENSE. The Company owns, or has licensed from the owner, the
Authorized Software and any other proprietary interests in the
Authorized Products and related materials and has the right to
license such Authorized Software and proprietary interests to
Distributor and to end-users. Subject to the terms and
conditions contained herein, Company grants Distributor a
non-exclusive license to use, in object code form, all
Authorized Software and Related Documentation as contemplated
by this Agreement. This grant shall be limited to use in
connection with the sale and service of the Authorized
Products as contemplated by this Agreement. This license shall
continue until the license is terminated in accordance with
this Agreement, or for the useful life of the Authorized
Product in which the Authorized Software is imbedded or of
which the Authorized Software is an integral part, or for the
useful life of the Authorized Software, whichever is longer.
Removal of the Authorized Software from the United States,
service by any unauthorized person, use of the Authorized
Software on any Authorized Product other than that for which
it was obtained or authorized, or on any non-Authorized
Product, shall constitute a breach of this Section 15 by
Distributor. Except as provided in the
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Purchase Agreement or as provided in Section 10, the software
license will terminate on expiration or termination of this
Agreement.
(b) MODIFICATION AND COPIES. Distributor may not modify or copy
the Authorized Software or Related Documentation without prior
written consent of Company. Distributor agrees to refrain from
taking any steps, including without limitation reverse
engineering, reverse assembly or reverse compilation, to
derive a source or object code equivalent of the Authorized
Software, or for any other purpose.
(c) INDEMNIFICATION. Company agrees that, if notified promptly and
given sole control of the defense and all related settlement
negotiations, it will indemnify and defend Distributor or its
customers who have executed a software sublicense against any
claim based on an allegation the Authorized Software infringes
a U.S. patent, copyright or trademark. Company shall have no
obligations under this Section in the case of claims resulting
from modifications to the Authorized Software made by
Distributor, end-users, or others, or combinations with
software or equipment provided by others. If any Authorized
Software becomes, or in Company's opinion is likely to become,
the subject of such claim of infringement, Company will, at
its expense, either, at its option, procure rights for
Distributor and its customers who have executed a software
sublicense to continue using the Authorized Software, or
replace or modify the Authorized Software to provide
noninfringing software that performs substantially similar
functions to the original Authorized Software. Upon failure of
the foregoing provisions of this subsection (c), Company will
refund the purchase price of the Authorized Product or license
fee for the Authorized Software less a reasonable allowance
for use. THIS SECTION STATES THE ENTIRE LIABILITY OF COMPANY
FOR INFRINGEMENT BY ANY AUTHORIZED SOFTWARE PROVIDED
HEREUNDER.
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16. TERMINATION OF AGREEMENT; REMEDIES FOR BREACH.
(a) This Agreement will expire on May 30, 2001, unless earlier
terminated for Material Breach as defined in subsection (b) of
this Section 16. Upon expiration of the term, this Agreement
may be renewed upon the mutual agreement of the parties.
(b) This Agreement may be terminated by either party for Material
Breach no less than 90 days after mailing written notice of
termination to the other party as provided in (c) below.
Material Breach of this Agreement shall mean:
(i) failure of Distributor to purchase at least 50% of
the applicable Adjusted Quota set forth in Exhibit H
for any period of four consecutive full Quarters;
(ii) material breach of Section 3, 4 (other than under
Section 4(b)), 5, 11, 13, 14 or 15 of this Agreement
by Distributor;
(iii) material breach of Section 2, 7(b), 8(a) or 12 of
this Agreement by the Company;
(iv) assignment of this Agreement by Distributor (except
as provided in Section 13) without the prior written
consent required by this Agreement;
(v) failure of Company to provide products that are
competitive in the marketplace in function, features
and price for a period of six consecutive months; or
(vi) sale or license by Distributor of Competing Products
(as defined in Exhibit C) in Distributor's Area
except as provided in Exhibit C or in Section 12(e)
of this Agreement.
(c) In the event that either party contends the other party is in
Material Breach of any of its obligations to the other party
under this Agreement, the party claiming Material Breach will
provide written notice by certified mail that specifically
itemizes each and every obligation of which the party contends
the other party is in substantial and
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Material Breach. In the event that the nonterminating party
fails to cure the breach within ninety (90) days of receipt of
such notice, the termination shall become effective.
17. DISTRIBUTOR'S OBLIGATIONS UPON TERMINATION. In the event of termination
of this Agreement, whether by non-renewal or for Material Breach,
Distributor shall:
(a) immediately pay all obligations for Authorized Products and
Authorized Software delivered to Distributor prior to
termination when such payments are due and payable to Company;
(b) except as provided in the Purchase Agreement, immediately
insofar as reasonably possible discontinue any and all uses of
the Authorized Trademarks and Authorized Name, as defined in
Exhibit C, if any, including:
(i) cancel all governmental certificates or licenses
reserving or registering Distributor's use of the
Authorized Trademarks or Authorized Name, if any;
(ii) remove the Authorized Trademarks or Authorized Name,
if any, from its premises, vehicles, sales proposals,
stationery, telephone directory listing, and other
advertising and promotional material; and
(iii) change its corporate and trade name to delete any use
of the Authorized Trademarks, Authorized Name, or any
name likely to cause confusion with any Authorized
Trademarks.
(c) not adopt the use of any mark or name deceptively similar to
any Authorized Trademarks, other than as provided in the
Purchase Agreement; and
(d) execute any documents or take any other reasonable steps that
will help transfer to Company ownership of all goods
repurchased, free and clear of any liens, encumbrances, or
security interest.
It is understood and agreed that (i) in the event of a Material Breach
of this Agreement by Distributor solely pursuant to Section 16(b)(i), the
Company's sole remedy is to terminate this Agreement in accordance with the
terms and procedures hereof and that Distributor shall have no
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obligations under this Agreement (and the Company shall have no claims against
Distributor) arising from such Material Breach of this Agreement pursuant to
Section 16(b)(i) other than provided in this Section 17 above and (ii) in the
event the Company has terminated this Agreement in accordance with its terms,
Distributor shall have no obligations under this Agreement for purchases of
Authorized Products and Authorized Software in respect of the Quota or the
Adjusted Quota.
18. COMPANY'S OBLIGATIONS AND DISTRIBUTOR'S OPTIONS UPON TERMINATION.
(a) In the event of termination of this Agreement, Company:
(i) may at Company's option cancel all unfilled orders
except those for such Authorized Products that have
been sold previously by Distributor to customers, as
evidenced by signed customers' orders submitted by
Distributor to Company at least twenty (20) days
prior to the effective termination date;
(ii) may within thirty (30) days after written
notification by Distributor of its existing
inventory, purchase from Distributor at Distributor's
cost less a reasonable allowance for use or damage,
if any, plus freight, either for cash or by set off
against debt or trade receivables, any or all of the
Authorized Products. In the event that Distributor
elects to sell its inventory of Authorized Products
and Company elects to purchase this inventory,
Distributor will allow Company to inspect this
inventory;
(iii) shall continue to directly or indirectly provide to
Distributor factory repairs for a period not to
exceed seven (7) years from the effective date at
which the Authorized Products are discontinued for
new system sales, or indefinitely in the case of
Authorized Products not yet discontinued, so that
Distributor can continue to service its end-user
customers; and
(iv) shall continue to directly or indirectly provide to
Distributor at its request necessary spare parts,
replacement parts, replacement copies of Authorized
Software and Related Documentation and all other
equipment, software, diagnostics and manuals required
to continue to service and maintain the Authorized
Products, Authorized Software and Related
Documentation, for
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a period not to exceed five (5) years from the
effective date at which the Authorized Products are
discontinued for new system sales, or indefinitely in
the case of Authorized Products that are not yet
discontinued, so that Distributor can continue to
service and maintain its end-user customers.
(v) purchase orders for factory repairs, spare parts,
replacement equipment and software, and Related
Documentation must be placed with Company at least 30
days in advance of the requested shipment date. The
order must be paid in full prior to shipment. Prices
will be the weighted average of the then current
prices paid by the Company's distributors for such
products.
(b) Company's obligations upon termination and Distributor's
options set forth in this Section 18 are specifically
conditioned upon Distributor's compliance with its obligations
upon termination set forth in Section 17 above, and with
Sections 3, 14, and 15, and all other provisions of this
Agreement that are applicable following termination. In the
event Distributor breaches any provision of Sections 3, 14,
15, or 17, or any other applicable provision of this Agreement
after receipt of written notice of nonrenewal or termination
from Company, and Distributor fails or refuses to cure such
breach within any stated cure period, Company may, at its sole
option, provide written notice to Distributor that any and all
rights of Distributor set forth in Section 18 are thereby
forfeited, and all of Company's obligations under this Section
18 shall immediately cease as of (1) the date set forth in
such notice, or (2) the date by which such breach(es) must be
cured and the same remains uncured, whichever date is sooner.
19. FORCE MAJEURE. Either party may be excused from timely performance
hereunder if and to the extent such performance is delayed or prevented
by fire, flood, earthquake or other Act of God, strike, lock-out or
labor dispute not involving the party, act of war, civil disturbance or
any similar event or occurrence beyond the reasonable control of the
party delaying or preventing its performance. Performance shall be
resumed as soon as reasonably possible after the event or occurrence
has been remedied. If performance is delayed or suspended for
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more than 90 days, and such delay or nonperformance would be a Material
Breach except for the provisions of this Section, then the party
entitled to the performance shall have the rights set forth in Section
16.
20. COMPLETE AGREEMENT AND NO ORAL MODIFICATION. This Agreement constitutes
the complete agreement between the parties, and supersedes all previous
agreements between the parties other than notes, credit, loan,
shareholder, lease, sublease or security agreements. The headings of
sections of this Agreement are included merely for the convenience of
the parties, and shall not be construed as part of the Agreement. This
Agreement may be modified only by a written agreement signed by both
parties.
21. CHOICE OF LAW AND FORUM. This Agreement shall be governed by, and
construed in accordance with, the laws of the Commonwealth of New York.
Any dispute arising under this Agreement that cannot be resolved by
agreement shall, whenever diversity or subject matter jurisdiction
exists, be submitted to the United States District Court in the
Southern District of New York, and the parties consent and submit to
the personal jurisdiction of such court. The prevailing party in any
litigation, arbitration, or other proceedings arising out of this
Agreement shall be reimbursed for all reasonable costs and expenses
incurred in such proceedings, including reasonable attorneys' fees.
22. NO WAIVER. A waiver of any breach or default of this Agreement shall
not be deemed to constitute a waiver of any subsequent breach or
default.
23. SEVERABILITY. If any of the terms or provisions of this Agreement or
the application thereof to any person or circumstance shall, for any
reason or to any extent, be held or determined to be invalid or
unenforceable, the remainder of this Agreement and the application of
such provisions to other persons or circumstances shall not be affected
thereby, but rather shall be enforced to the greatest extent permitted
by law.
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24. NOTICE. Any notice required by this Agreement shall be made in writing,
signed by a duly authorized agent of the party giving the notice, and
deposited in the United States mail, first class, postage prepaid,
addressed to the last known address of the addressee, unless
specifically required to be by certified mail.
25. RELATIONSHIP OF PARTIES. Distributor is an independent contractor.
Nothing in this Agreement shall be construed to mean that Distributor
is an agent, employee, franchisee or subcontractor of Company. This
Agreement shall not be construed to create any rights or obligations of
any person or entity other than the parties.
26. CONSTRUCTION; DEFINITION. For purposes of this Agreement, including all
exhibits hereto, the Company shall mean EXECUTONE Information Systems,
Inc., a Virginia corporation, its subsidiaries and any person that
directly or indirectly controls, is controlled by or is under common
control thereof and any successors and assigns thereof.
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27. AUTHORIZATION AND EXECUTION. The parties and the persons signing this
Agreement represent and warrant that those persons are fully authorized
to enter into the terms and conditions of, and to execute, this
Agreement on behalf of the respective parties.
COMPANY: DISTRIBUTOR:
EXECUTONE INFORMATION SYSTEMS, INC. CLARITY TELECOM, INC.
By:_____________________________________ By:_____________________________
Title:__________________________________ Title: _________________________
(Corporate Seal)
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EXHIBIT 11
EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1995 1994 1993
-------------------------------------
<S> <C> <C> <C>
Income (Loss) From Continuing Operations $(36,934) $6,734 $4,903
Discontinued Operatations:
Income from Operations, Net of Taxes --- 153 298
Gain on Disposal, Net of Taxes --- 604 ---
-------------------------------------
Net Income (Loss) $(36,934) $7,491 $5,201
-------------------------------------
-------------------------------------
Weighted Average Number of Common
Shares Outstanding 46,919 43,705 32,926
Common Stock Equivalent Shares Assumed
to be Issued for Dilutive Stock Options
and Warrants --- 3,992 15,357
-------------------------------------
Total Weighted Average Common and
Common Equivalent Shares Outstanding 46,919 47,697 48,283
-------------------------------------
-------------------------------------
Earnings (Loss) per Common Share:
Continuing Operations $ (0.79) $ 0.14 $ 0.10
Discontinued Operations 0.00 0.02 0.01
-------------------------------------
Net Income (Loss) $ (0.79) $ 0.16 $ 0.11
-------------------------------------
-------------------------------------
</TABLE>
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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 and independent sales and service
offices. 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'r'/LD+ program ("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 a
higher operating income margin than both system sales and base revenues due to
the added performance value and relatively low production costs of such
proprietary software and services.
During the year, the Company reorganized its business into divisions, with each
division focusing on different products and market segments. The discussion
which follows under the heading "Company Restructuring" will detail the change
in the Company's strategy which led to the restructuring, the resulting
impairment of long-lived assets and other restructuring charges, along with an
overview of each division's operating performance in 1995 (comparative data is
not available on a divisional basis).
COMPANY RESTRUCTURING
Change in business strategy
In July 1995, the Company reorganized its business into five divisions: Computer
Telephony, Healthcare Communications Systems, Call Center Management ("CCM"),
Videoconferencing Products, and Network Services. The current strategic focus is
toward larger systems and software application-oriented products and away from
hardware-oriented telephone systems.
The business that was acquired in 1988 was a telephone equipment company that
focused its direct selling effort on office sites with fewer than 20 phones 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 average system size in the customer base at that time was in the 8-10 phone
range. It was originally expected in 1988 that the MAC and service revenues
generated by the customer base would be increasingly profitable as the base of
customers grew. After the acquisition, the Company began to develop more
advanced products which incorporated digital technology and more
software-oriented applications and expanded its product line to the high-end
user, with larger customers and more sophisticated products to serve customers'
total communications needs. After a thorough review and analysis, it was
determined that direct selling of the smaller, hardware-oriented portion of the
telephony business was not profitable. This led to a definitive change in the
Company's business strategy which was announced on July 11, 1995. As a result of
the change in strategy and based upon the requirements of FAS No. 121 (see
section entitled "Impairment of goodwill and related service stock" which
follows), 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 strategy the Company is now pursuing is to focus on software solutions. With
the Integrated Digital System platform (Systems 108, 228, 432 and 648), which
was developed post-acquisition, the Company's product lines now provide
sophisticated software applications, including Integrated Voice Mail, Call
Center Applications (ACD, IVR's and Predictive Dialers), Locating Devices, Nurse
Call and Computer Telephony Interfaces which drive the computer telephony
products, videoconferencing equipment and network services.
The change in the nature and complexity of the Company's product lines has
changed the way it has to market its products. Unlike many companies in this
industry that focus on one particular product to one market, the Company
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provides multiple products and applications to its particular markets. This
requires expertise in each particular market segment because the Company's
competitors are primarily one-product companies who are experts in their
particular market niche. Therefore, the Company has consolidated the sales,
marketing and product development functions for each market segment under a
divisional management structure, headed by a division president. The sales force
has been restructured such that each sales person is assigned to a specific
division and will sell only products associated with that division. The
specialization of the sales force included the addition of sales representatives
with the necessary product and market expertise, as well as substantial
retraining for the remaining sales representatives.
Impairment of goodwill and related service stock
Once the Company decided to restructure and focus on sophisticated systems in
the computer telephony division, it reevaluated the realizability of goodwill
and the related service stock using the recently issued FAS No. 121, "Accounting
for the Impairment of Long-Lived Assets," issued in March 1995. FAS No. 121
requires the Company to project the lowest level of identifiable future cash
flows for purposes of determining whether there has been an impairment in
long-lived assets. The business acquired in 1988 would not generate future cash
flows sufficient to realize the goodwill and service stock on the Company's
balance sheet.
Prior to the second quarter of 1995 and the issuance of FAS No. 121, the Company
periodically reviewed the realizability of goodwill on the basis of whether the
goodwill was fully recoverable from projected, undiscounted net cash flows for
the business as a whole, which included both the smaller hardware-oriented
systems and the larger, sophisticated software-application telephony systems.
Undiscounted cash flows for the business as a whole were used because the
general rule under APB 17 was that goodwill and similar intangible assets could
not be disposed of apart from the enterprise as a whole, unless the Company sold
or otherwise liquidated a large segment or separable group of assets of the
acquired company. Based upon this evaluation, goodwill was not determined to be
impaired. The management decision discussed above to focus on the high end of
the telephony market caused the impairment of long-lived assets, which was
measured using the criteria of FAS No. 121.
Computer Telephony
The computer telephony division provides value-added products and services. The
Company's integrated digital telephone systems emphasize flexible software
applications, such as data switching and computer telephone interface, designed
to enhance the customer's ability to communicate, obtain and manage information.
The Company's telephone systems provide the platform for its other voice
processing software applications, such as voice messaging systems and ACD.
The computer telephony division remains the Company's largest contributor to
revenues and profits. Revenues for 1995 were $233 million, unchanged from the
prior year. The Company's base revenues, especially MAC and service, continued
their historical growth offset by a lower level of new installations during the
year. In addition, the division incurred transition costs related to the
restructuring which increased its operating expenses in 1995.
Healthcare Communications
The healthcare communications division provides to its hospital customers
integration of the flow of voice and data between nurse and patient, increased
flexibility and efficiency in hospital operations, and the means to improve
patient care.
Healthcare division revenues increased almost 15% during 1995 to $29 million.
Although there has been revenue growth due to the divisionalization of this
business in the beginning of 1995, the introduction of new products lowered
margins approximately $0.8 million due to higher introductory manufacturing
costs. The Company has transitioned the nurse call product line in 1995 with the
development of the LifeSaver'tm' and CareCom'r' IIE products. The higher 1995
manufacturing costs were due to the fact that offshore production was delayed
due to the fire at the Company's production facility. These products were
scheduled for transfer from the Company's pre-production facility in Poway,
California, but the fire caused a delay in that transfer for almost one year.
These products are now offshore and higher margins are anticipated, commencing
in the first half of 1996.
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Although the nurse call product line was transitioned in 1995, the Company
estimates that there is a customer base of approximately 8,500 systems. Taking
into account historical usage, the Company believes it has appropriate levels of
inventory on hand to support the servicing of the previously installed products.
CCM
The Call Center division develops and sells sophisticated telephony products
that integrate a computerized digital telephone system platform with high-volume
inbound, outbound and internal call processing systems. Such systems include
automatic call distribution systems, predictive dialers, scripting software to
assist agents handling calls, and interactive voice response systems.
In 1995, the Company established the divisional management structure and made
product improvements which are hoped to increase revenues in 1996 along with
improving profit margins. During 1995, the Company issued the latest release of
the predictive dialer product, which is a more competitive product from a price
and feature standpoint than its predecessor. In addition, the Interactive Voice
Response ("IVR") product, which had previously been produced by a third party,
has been replaced with a Company-manufactured product which should result in
higher gross profit margins. Backlog at the end of 1995 was at a record level
which should translate into a strong first half of 1996.
Videoconferencing Products
The videoconferencing division provides videoconferencing network services such
as multipoint conferencing, network bridging and network design to its
customers.
1995 was a startup year for the videoconferencing division. In addition to the
costs incurred to build a management team and sales force, divisional revenues
did not grow as quickly as anticipated because of delays by suppliers in
providing a competitively-priced product until the fourth quarter of 1995. The
process of establishing demo sites and hiring a dedicated sales force has almost
been completed.
Network Services
The network services division offers cost-effective voice and data long-distance
service, least-cost routing, network design and network support services,
enabling customers to make more efficient and cost-effective use of their
telecommunications systems.
Revenues were $24 million in 1995, a decrease from the previous year, but
profits increased due to a negotiated rate reduction from the carrier. Revenues
are down due to competitive pressures in the marketplace. The Company has met
this challenge with a division president and, with changes to incentive
compensation plans, has made long-distance sales as important to the Company's
sales managers as selling equipment. There are now 35 dedicated sales
representatives and 4 regional sales managers to work with the equipment sales
representatives to package network and equipment sales properly. As a result,
bookings at the end of 1995 were at their highest level for the entire year,
which are expected to translate into higher revenues in 1996.
1995 COMPARED TO 1994
Results of Operations
Total revenues for the year ended December 31, 1995 were $296.4 million, a $4.4
million increase over the comparable 1994 period. Base revenues increased 2%
compared to 1994, primarily due to increases in system upgrades and expansions
and increased revenue from maintenance contracts, partially offset by lower
volume generated by the INFOSTAR'r'/LD+ program. Product revenues increased 1%
compared to 1994, as the increase in new installations of healthcare products
and in shipments to the independent sales and service offices were partially
offset by a decrease in new telephony installations.
Cost of revenues consists of direct manufacturing costs, indirect installation
and service costs and other costs such as warehousing, software manufacturing
and quality inspection. Direct manufacturing costs are the primary component of
cost of revenues and are accounted for as direct costs related to specific base
and product revenues. Those costs other
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than direct manufacturing costs are treated as fixed cost overhead and are not
allocated specifically to base or product categories. Therefore, changes in
gross profit can be measured based upon the pricing margin (revenue less direct
manufacturing costs) on a product line basis and by the overall level of fixed
cost overhead relative to total revenue. Gross profit, as a percentage of
revenues, decreased slightly from 41.9% during 1994 to 41.5% during 1995 due to
a combination of factors including product mix, higher introductory
manufacturing costs for the healthcare products and a lower absorption of fixed
cost overhead.
Operating income, excluding the provision for restructuring, decreased $4.9
million compared to 1994 and, as a percentage of revenues, was 2.6% compared to
4.3% in 1994. The decrease in operating income is primarily due to increased
operating expenses during 1995. Product development and engineering increased
$2.5 million during 1995 as the Company continues to accelerate its investment
in engineering for new product development and application-specific software
products. Selling, general and administrative expenses increased $2.8 million
during the year, primarily representing the full year cost impact of the
divisional supporting management and sales structure.
Interest expense increased during 1995 due to higher average borrowing levels on
the revolving credit facility and increases in the Company's prime borrowing
rate during 1995. Other income, net increased primarily as a result of the 1995
gains on the sales of the customer bases in Wisconsin and Iowa and the related
direct sales offices, totaling $1.2 million.
During the first quarter of 1995, the Company was involved in extensive
negotiations to acquire the Dictaphone division of Pitney Bowes ("Dictaphone").
In April 1995, the acquisition was awarded to another bidder. The Company
incurred approximately $1 million in fees and expenses related to the attempted
acquisition which were recognized in the second and third quarters of 1995.
The Company accounts for income taxes in accordance with FAS No. 109,
"Accounting for Income Taxes." For the year ended December 31, 1995, the Company
recorded a net tax benefit of $2.3 million. This is comprised of $4.2 million of
tax benefit recognized as a result of the non-goodwill related portion of the
restructuring provision, partially offset by the $1.9 million tax provision on
earnings, excluding the restructuring provision. No tax benefit was recognized
on the goodwill portion of the provision for restructuring since it is not
deductible for tax purposes. The net tax benefit for the year was recorded as an
increase to the deferred tax asset reflecting additional tax benefits to be
utilized in the future. As of December 31, 1995, the deferred tax asset of $29.6
million represents the expected benefits to be received from the utilization of
tax benefit carryforwards which will result in the payment of minimal taxes in
the near future. The Company believes that the deferred tax asset will more
likely than not be recognized in the carryforward period. The Company had no
significant tax liability for the year ended December 31, 1995.
In October 1995, the FASB issued Statement No. 123, "Accounting for Stock-Based
Compensation." The Company will adopt the new pronouncement in fiscal year 1996
and has yet to decide whether it will record compensation cost or provide pro
forma disclosure.
Acquisition of Unistar Gaming Corporation
On December 19, 1995, the Company acquired 100% of the common stock of Unistar
Gaming Corporation ("Unistar") for 3.7 million shares of the Company's common
stock and 350,000 shares of newly issued preferred stock. Unistar,
privately-held prior to the acquisition, has an exclusive five-year contract to
design, develop, finance, and manage the National Indian Lottery ("NIL"). See
Note L of the Notes to Consolidated Financial Statements for the terms of the
agreement.
Management believes the Unistar business is a natural extension of its telephony
and call center businesses. Calls via an 800 number will be processed with IVR
equipment or live agents located on the Coeur d'Alene Indian Tribe of Idaho
("CDA") Reservation using ACD software to process nationwide wagering activity.
The Company has made a significant investment in Unistar, which initially
created 8% dilution to the Company's shareholders and will require possibly up
to $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.
In an attempt to block the NIL, certain states filed letters under 18 U.S.C.
Section 1084 to prevent the long-distance carriers from providing telephone
service to the NIL. The CDA initiated legal action to compel the long-distance
carriers to provide telephone service to the NIL. The CDA's position is that the
lottery is authorized by the Indian Gaming
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Regulatory Act ("IGRA") passed by Congress in 1988, that IGRA preempts state and
federal statutes, and that the states lack authority to issue the Section 1084
notification letters to any carrier. On February 28, 1996, the NIL was ruled
lawful by the CDA Tribal Court. The CDA Tribal Court found that all requirements
of IGRA have been satisfied and that the Section 1084 letters issued by certain
state attorneys general in an effort to interfere with the lawful operation of
the NIL are invalid. In addition, the Court found that the long-distance
carriers cannot refuse to provide the service requested in the action based upon
18 U.S.C. Section 1084. Any appeal of this ruling must be filed by May 31, 1996.
The Company expects this ruling will be appealed, but believes that the CDA's
position will be upheld.
Other than legal costs related to an appeal of the CDA Tribal Court ruling or
other actions by the states, if any, the Company estimates that the additional
costs to become operational may amount to between $5-10 million. Operational
capital includes capital expenditures for computers and software to build the
telecommunications system, funds to complete the building on the CDA reservation
which will be the operations center for the lottery, and various start-up
expenses including personnel-related costs and advertising expenses. The Company
is also required to make a guaranteed payment of $300,000 per year to the CDA.
The estimate of operating capital does not include a $4 million jackpot reserve
which could be required dependent upon certain conditions. If the Company
ultimately must fund a jackpot reserve, it will be repaid to Unistar solely from
NIL net revenues in equal installments over the term of the contract. The
Company expects it will be able to obtain additional financing for these costs,
if necessary.
The Company believes there is a national market for the NIL based upon research
into the experience of other national lotteries and the growth of the overall
lottery market. However, there is no assurance that there will be acceptance of
a telephone lottery.
Subsequent Events
On April 9, 1996, the Company entered into an agreement to sell substantially
all of the Direct Sales and Services Group, including its long-distance reseller
business and National Service Center, for $67.4 million to an acquisition
company led by Bain Capital, Inc. (See Note N of the Notes to Consolidated
Financial Statements for the terms of the agreement.) The sale is expected to
close on May 31, 1996, subject to the buyer's financing and other conditions.
The agreement also provides that the Company and the buyer will enter into a
five-year exclusive distribution agreement under which the buyer will sell and
service the Company's telephony equipment to those businesses and commercial
locations that require up to 400 telephones.
The Company will retain its Healthcare Communications and Call Center Management
businesses, along with its National Accounts and Federal Systems marketing
groups and the recently acquired Unistar business. In addition, the Company will
continue to make telephony product sales to its independent distributors, of
which the newly-formed Bain company will be the largest distributor.
In 1995, the Direct Sales and Services Group, including the long-distance
reseller business, had revenues of $191 million. On a pro forma basis, after
giving effect to the transaction, the Company's 1995 revenues would be
approximately $157 million. This includes $42 million in sales to the Direct
Sales and Services Group which were eliminated in the 1995 Statement of
Operations.
On April 10, 1996, the Company announced that it had given notice of its
termination of its distribution agreement with GPT Video Systems due to failures
by GPT to deliver properly-functioning videoconferencing products on a timely
basis. The Company is negotiating an agreement with a third party to sell its
videoconferencing business. Terms of the contract have yet to be finalized.
1994 COMPARED TO 1993
Results of Operations
Total revenues for the year ended December 31, 1994 were 7% higher than the
comparable 1993 period. Base revenues for 1994 increased 12% over 1993 primarily
due to volume increases generated by the INFOSTAR'r'/LD+ program, increased
sales of system upgrades and expansions and increased revenue from maintenance
contracts. Product revenues
<PAGE>
<PAGE>
for 1994 increased 3% over 1993 primarily due to increased sales of voice
processing products and sales decreases in non-voice processing applications and
healthcare revenue.
Gross profit increased $11.5 million compared to 1993, with the gross profit as
a percentage of total revenues increasing to 41.9% from 40.9%. The increases
were a result of the continuing favorable product mix of increased base revenue
and voice processing products. Voice processing and base revenues in 1994
accounted for 71% of the sales volume compared to 64% in 1993, indicating the
Company's shifting emphasis to market value-added products to the customer base
and increase sales of application-specific software products.
Operating income increased $1.4 million during 1994 and, as a percentage of
total revenues, was 4.3% compared to 4.1% for 1993. The increase in operating
income as a percentage of total revenues was primarily related to the increase
in gross profit margin, partially offset by continuing investments in the sales
force and sales support personnel, technical marketing support and product
development and engineering expenses for the development and sale of the new
higher margin products.
The decrease in interest expense during 1994 was primarily due to the favorable
impact of a lower level of bank borrowings.
For the year ended December 31, 1994, the Company recorded a provision for
income taxes of $3.3 million. Approximately 88% or $2.9 million of the total tax
provision was recorded as a reduction of the deferred tax asset to reflect the
utilization of tax benefits. As a result of the utilization of these benefits,
the Company had no significant tax liability for the year ended December 31,
1994. In addition, the Company recorded a provision for income taxes of $0.5
million, relating to discontinued operations, which also reduced the deferred
tax asset. During 1994, the Company adjusted its valuation allowance, resulting
in an increase in the deferred tax asset of $6.5 million, $5.2 million of which
was a reduction of goodwill as it related to pre-acquisition tax benefits and
$1.3 million of which reduced the 1994 provision for income taxes. The basis for
the adjustment of the valuation allowance was a significant increase in pre-tax
income from $7.6 million in 1993 to $10.0 million in 1994.
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 were largely alleviated by the
Company's ability to increase its own production and find alternative
manufacturing sources. In July 1994, the Company recovered $4 million from its
insurance carrier for additional direct costs related to the emergency
production situation.
As of March 31, 1994, the Company sold its Vodavi Communications Systems
Division ("VCS"), which sold telephone equipment to supply houses and dealers, a
different class of customer from continuing operations, under the brand names
STARPLUS'r' and INFINITE'tm', 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 revolving credit
facility. The sale resulted in an after-tax gain of $604,000 (net of income tax
provision of $403,000). Consolidated financial statements for the years ended
December 31, 1994 and 1993 present VCS as a discontinued operation. Net revenues
of the discontinued operation for 1994, through the date of sale, and 1993 were
$8.6 million and $31.6 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
$23 million, $30 million and $29 million as of December 31, 1995, 1994 and 1993,
respectively.
At December 31, 1995 and 1994, cash and cash equivalents amounted to $8.1
million and $7.8 million, respectively, or 8% of current assets. During the year
ended December 31, 1995, net cash was used to fund $3.9 million of operating
activities, purchase $3.5 million of capital equipment, repay $0.6 million of
debt and for other payments of $0.8 million. Cash was generated through $5.2
million of additional borrowings, $1.6 million in proceeds from the issuance of
stock, receipt of a $1.2 million note payment from the sale of VCS and $0.8
million in other proceeds. Cash used in operating activities during 1995
included $14.3 million in funding of working capital, primarily due to the high
level of accounts payable at the end of 1994 generated by inventory purchases
during the last quarter of 1994. The decrease in cash generated by operating
activities compared to 1994 is primarily due to the decrease in operating
income, excluding the
<PAGE>
<PAGE>
provision for restructuring, the funding of $1.0 million in cash expenses
relating to the attempted acquisition of Dictaphone and additional interest
payments of $0.8 million.
Total debt at December 31, 1995 was $30.8 million, an increase of $5.3 million
from $25.5 million at December 31, 1994. The increase in debt is due to $4.5
million in higher bank borrowings, $0.8 million in other borrowings, a $0.4
million capital lease obligation incurred in connection with equipment
acquisitions and an increase to the carrying value of the convertible
subordinated debentures of $0.2 million due to accretion. The additional
borrowings in 1995 were used to reduce the high level of accounts payable at the
end of 1994 generated by inventory purchases during the last quarter of 1994.
During the year, the Company made long-term debt and capital lease repayments of
$0.6 million.
The Company's secured credit facility (the "Credit Facility") was amended in
December 1995. The $45 million Credit Facility expires in August 1999 and
consists of a revolving line of credit providing for direct borrowings and up to
$15 million in letters of credit. Direct borrowings and letter of credit
advances are made available pursuant to a formula based on the levels of
eligible accounts receivable and inventories. The Credit Facility agreement
contains certain restrictive covenants which include, among other things, a
prohibition on the declaration or payment of any cash dividends on common stock,
minimum ratios of operating income to interest and fixed charges, and a maximum
ratio of total liabilities to net worth as well as certain restrictions on
start-up expenditures relating to Unistar and the NIL. Interest rates are also
subject to adjustment based upon certain financial ratios. During 1995, the
Company was in compliance with all such financial covenants. The Credit Facility
is secured by substantially all of the assets of the Company. Refer to Note D of
the Notes to Consolidated Financial Statements.
As of February 16, 1996, there were $13.4 million of direct borrowings and $14.9
million of letters of credit outstanding and $15.2 million of additional
borrowings available under the Credit Facility. Required principal payments for
debt in 1996 are $0.9 million. The Company believes that borrowings under the
Credit Facility and cash flow from operations will be sufficient to meet working
capital and other requirements for 1996.
<PAGE>
<PAGE>
SELECTED FINANCIAL DATA
The following is selected financial data for EXECUTONE for the five years ended
December 31, 1995.
(In thousands, except for per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
1995 1994 (1) 1993 (1) 1992 (1) 1991 (1)
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $296,393 $291,969 $271,765 $253,024 $243,616
======== ======== ======== ======== ========
Income (Loss) Before
Income Taxes From
Continuing Operations $(39,221) $ 10,041 $ 7,580 $ 4,320 $ 2,327
======== ========== ========== ========== ==========
Income (Loss) From
Continuing Operations $(36,934) $ 6,734 $ 4,903 $ 2,222 $ 1,146
Income (Loss) From
Discontinued Operations,
Net of Taxes --- 757 298 (157) (129)
Extraordinary Item - Gain on
Extinguishment of Debt,
Net of Taxes (2) --- --- --- 1,267 ---
------------- ------------- ------------- ---------- -------------
Net Income (Loss) $(36,934) $ 7,491 $ 5,201 $ 3,332 $ 1,017
======== ========== ========== ========== ==========
EARNINGS (LOSS) PER SHARE:
Continuing Operations $ (0.79) $ 0.14 $ 0.10 $ 0.05 $ 0.03
Discontinued Operations --- 0.02 0.01 --- ---
Extraordinary Item --- --- --- 0.03 ---
-------------- -------------- -------------- ------------ -------------
Net Income (Loss) $ (0.79) $ 0.16 $ 0.11 $ 0.08 $ 0.03
=========== =========== =========== =========== ==========
Total Assets $167,844 $189,481 $175,555 $179,294 $177,602
======== ======== ======== ======== ========
Long-Term Debt (3) $ 29,829 $ 24,698 $ 32,279 $ 43,752 $ 56,271
========= ========= ========= ========= =========
Cash Dividends Declared
Per Share (4) $ --- $ --- $ --- $ --- $ ---
============= ============= ============ ============= =============
</TABLE>
(1) Discontinued operations are presented for VCS which was sold in March 1994.
Refer to Note L of the Notes to Consolidated Financial Statements.
(2) The extraordinary item relates to the 1992 exchange of debentures for
Preferred Stock and Common Stock Purchase Warrants. Refer to Note D (b) of
the Notes to Consolidated Financial Statements.
(3) Includes capitalized leases.
(4) The Company has not declared or paid any cash dividends on its Common
Stock. Refer to "Stock Data".
<PAGE>
<PAGE>
EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except for per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Product $138,752 $137,752 $134,209
Base 157,641 154,217 137,556
--------- --------- ---------
296,393 291,969 271,765
COST OF REVENUES 173,536 169,497 160,745
--------- --------- ---------
Gross Profit 122,857 122,472 111,020
--------- --------- ---------
OPERATING EXPENSES:
Product development and engineering 14,703 12,222 9,852
Selling, general and administrative 100,520 97,755 90,122
Provision for restructuring and unusual items
(Note B) 44,042 --- ---
---------- -------------- --------------
159,265 109,977 99,974
--------- --------- ----------
OPERATING INCOME (LOSS) (36,408) 12,495 11,046
INTEREST EXPENSE 3,920 3,089 3,556
OTHER INCOME, NET (2,129) (635) (90)
ACQUISITION COSTS (Note L) 1,022 --- ---
---------- -------------- --------------
INCOME (LOSS) BEFORE INCOME TAXES
FROM CONTINUING OPERATIONS (39,221) 10,041 7,580
PROVISION (BENEFIT) FOR INCOME TAXES:
Cash 350 400 335
Noncash (Note E) (2,637) 2,907 2,342
---------- ------------ -----------
(2,287) 3,307 2,677
---------- ------------ -----------
INCOME (LOSS) FROM CONTINUING
OPERATIONS (36,934) 6,734 4,903
Income from discontinued operations
(net of income tax provision of $102 and $158 ) --- 153 298
Gain on disposal of discontinued operations
(net of income tax provision of $403) --- 604 ---
------------- ----------- -------------
NET INCOME (LOSS) $ (36,934) $ 7,491 $ 5,201
========= ========== ==========
EARNINGS (LOSS) PER SHARE:
CONTINUING OPERATIONS $ (0.79) $ 0.14 $ 0.10
DISCONTINUED OPERATIONS --- 0.02 0.01
-------------- ----------- ------------
NET INCOME (LOSS) $ (0.79) $ 0.16 $ 0.11
========== ========== ===========
WEIGHTED AVERAGE NUMBER OF
SHARES OF COMMON STOCK AND
EQUIVALENTS OUTSTANDING 46,919 47,697 48,283
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
<PAGE>
EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(In thousands) Years Ended December 31,
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income (loss) from continuing operations $(36,934) $ 6,734 $ 4,903
Adjustments to reconcile net income (loss) to net
cash (used) provided by operating activities:
Depreciation and amortization 6,093 7,463 7,469
Deferred income tax provision (benefit) (2,637) 2,907 2,342
Provision for restructuring and unusual items
(Note B) 44,042 --- ---
Provision for losses on accounts receivable 1,440 893 725
Gains on sales of two direct sales offices (1,087) --- ---
Other, net (521) 1,251 270
Changes in working capital items:
Accounts receivable (4,205) (9,346) (4,337)
Inventories (3,121) (13,049) 4,073
Accounts payable and accruals (9,131) 10,497 2,732
Other working capital items, net 2,177 (552) (1,440)
---------- ----------- ---------
NET CASH (USED) PROVIDED BY CONTINUING
OPERATIONS (3,884) 6,798 16,737
---------- ---------- --------
Cash flows from discontinued operations --- (449) (209)
------------- ----------- ---------
NET CASH (USED) PROVIDED BY OPERATING
ACTIVITIES (3,884) 6,349 16,528
---------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (3,457) (6,091) (2,119)
Dispositions (acquisitions) of direct sales offices 125 (1,298) (750)
Proceeds from sale of VCS 1,200 9,700 ---
Other, net 822 (436) 8
---------- ---------- -----------
NET CASH (USED) PROVIDED BY
INVESTING ACTIVITIES (1,310) 1,875 (2,861)
--------- ---------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (repayments) under revolving credit facility 4,478 (4,199) (3,524)
Repayments of term note under credit facility --- (3,750) (1,250)
Repayments of GTE/Contel promissory note --- --- (4,000)
Repayments of other long-term debt (622) (1,781) (2,355)
Repurchase of stock (810) (8,450) (3,100)
Proceeds from issuance of stock 1,641 10,399 564
Other borrowings 750 --- ---
-------- ------------ -----------
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES 5,437 (7,781) (13,665)
--------- --------- -------
INCREASE IN CASH AND CASH EQUIVALENTS 243 443 2
CASH AND CASH EQUIVALENTS - BEGINNING
OF YEAR 7,849 7,406 7,404
--------- --------- ---------
CASH AND CASH EQUIVALENTS - END
OF YEAR $ 8,092 $ 7,849 $ 7,406
========= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
<PAGE>
EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(In thousands, except for share amounts) December 31, December 31,
1995 1994
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 8,092 $ 7,849
Accounts receivable, net of allowance
of $1,715 and $1,335 48,531 46,675
Inventories (Note B) 32,765 40,300
Prepaid expenses and other current assets 6,584 7,358
---------- -----------
Total Current Assets 95,972 102,182
PROPERTY AND EQUIPMENT, net 18,462 18,967
INTANGIBLE ASSETS, net (Notes B and L) 20,022 38,415
DEFERRED TAXES 29,616 26,979
OTHER ASSETS 3,772 2,938
----------- -----------
$167,844 $189,481
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 932 $ 777
Accounts payable 30,676 39,369
Accrued payroll and related costs 6,870 7,026
Accrued liabilities 11,851 9,192
Deferred revenue and customer deposits 19,781 18,757
---------- ----------
Total Current Liabilities 70,110 75,121
LONG-TERM DEBT 29,829 24,698
LONG-TERM DEFERRED REVENUE 2,805 2,354
----------- -----------
Total Liabilities 102,744 102,173
--------- ---------
STOCKHOLDERS' EQUITY:
Common stock: $.01 par value; 80,000,000 shares
authorized; 51,658,492 and 45,647,894 issued and
outstanding 517 456
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 ---
Additional paid-in capital 79,668 72,303
Retained earnings (deficit) (since July 1, 1988) (22,385) 14,549
---------- ----------
Total Stockholders' Equity 65,100 87,308
---------- ----------
$167,844 $189,481
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
<PAGE>
<PAGE>
EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Preferred Stock Additional Retained Total
(In thousands, except for ----------------- ------------------- Paid-In Earnings Stockholders'
share amounts) Shares Amount Shares Amount Capital (Deficit) Equity
------ ------ ------ ------ ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992 30,873,495 $309 674,865 $6,149 $60,721 $1,857 $69,036
Proceeds from issuances of stock
from employee stock plans 1,307,805 13 1,247 1,260
Proceeds from common stock
purchase warrants exercised
through bond conversion 1,418,300 14 971 985
Conversion of note payable
into preferred stock 200,000 1,909 365 2,274
Conversion of preferred stock
into common stock 8,748,650 88 (874,865) (8,058) 7,970 ---
Repurchase of stock (1,142,752) (12) (3,088) (3,100)
Amortization of deferred
compensation 89 89
Net income 5,201 5,201
--------------------------------------------------------------------------------------
Balance at December 31, 1993 41,205,498 $412 --- $ --- $68,275 $7,058 $75,745
Proceeds from issuances of stock
from employee stock plans 5,716,651 57 11,303 11,360
Proceeds from common stock
purchase warrants exercised
through bond conversion 1,507,000 15 1,056 1,071
Repurchase of stock (2,781,255) (28) (8,422) (8,450)
Amortization of deferred
compensation 91 91
Net income 7,491 7,491
--------------------------------------------------------------------------------------
Balance at December 31, 1994 45,647,894 $456 --- $ --- $72,303 $14,549 $87,308
Proceeds from issuances of stock
from employee stock plans 1,934,492 19 1,613 1,632
Warrants exercised for common
stock 363,549 4 (4) ---
Common and preferred stock issued
to acquire Unistar (Note L) 3,700,000 37 350,000 7,300 5,374 12,711
Common stock issued for
investment in DCC (Note G) 353,118 4 1,100 1,104
Repurchase of stock (340,561) (3) (807) (810)
Amortization of deferred
compensation 89 89
Net loss (36,934) (36,934)
----------------------------------------------------------------------------------------
Balance at December 31, 1995 51,658,492 $517 350,000 $7,300 $79,668 $(22,385) $65,100
======================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
<PAGE>
EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - NATURE OF THE BUSINESS AND FORMATION OF THE COMPANY
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'r', INFOSTAR'r', IDS'tm',
LIFESAVER'tm', and INFOSTAR/ILS'tm' brand names through a worldwide network of
direct and independent sales and service offices. The Company's products are
manufactured primarily in the United States, Hong Kong, China and the Dominican
Republic.
The Company was formed in July 1988 through the merger of ISOETEC
Communications, Inc. ("ISOETEC") with Vodavi Technology Corporation ("Vodavi").
The merger of ISOETEC into Vodavi was accounted for under the purchase method of
accounting and Vodavi was deemed to have undergone a quasi-reorganization for
accounting purposes. As of July 1988, Vodavi's accumulated deficit of
approximately $49.7 million was eliminated. Executone, Inc. was acquired in 1988
from Contel Corporation ("Contel") for promissory notes and cash.
NOTE B - PROVISION FOR RESTRUCTURING
In July 1995, the Company reorganized its business into five divisions: Computer
Telephony, Healthcare Communications Systems, Call Center Management,
Videoconferencing Products, and Network Services and changed its business
strategy in the Computer Telephony division. The current 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 current strategy, the business acquired in
1988 is being de-emphasized. The Company adopted FAS No. 121, "Accounting for
the Impairment of Long-Lived Assets," which was issued in March 1995, requiring
impairment to be measured by projecting the lowest level of identifiable future
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.
In accordance with the provisions of FAS No. 121, the Company prepared
projections of future operating cash flows relating to the telephony business
acquired in 1988 based upon the Company's new strategic direction. These
projections indicated that this business would not generate sufficient operating
cash flows to realize goodwill and the related service stock. The amount of
impairment of the telephony goodwill was $33.5 million as of June 30, 1995.
The write-off of inventory, primarily service stock, 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 strategic direction of the
Company. The Company will continue to maintain adequate levels of service stock
for the telephony hardware customer base which will be amortized over the
estimated product/service life of the related systems.
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The 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 on the equity method. Certain prior year amounts
have been reclassified to conform to the current year's presentation.
Use of Estimates. 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 these estimates.
<PAGE>
<PAGE>
Revenue Recognition. The Company recognizes revenue on equipment sales and
software licenses to independent sales and service offices when shipped. Revenue
from equipment, software and installation contracts with end-users is recognized
when the contract or contract phase for major installations is substantially
completed.
Revenue derived from the sale of service contracts is amortized ratably over the
service contract period on a straight-line basis.
Earnings Per Share. Earnings per share is based on the weighted average number
of shares of common stock and dilutive common stock equivalents (which include
stock options and warrants) outstanding during the period. Common stock
equivalents and the convertible debentures which are antidilutive have been
excluded from the computations.
Cash Equivalents. Cash equivalents include short-term investments with original
maturities of three months or less.
Inventories. Inventories are stated at the lower of first-in, first-out ("FIFO")
cost or market and consist of the following at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
(Amounts in thousands) 1995 1994
--------------------------- ---- ----
<S> <C> <C>
Raw Materials $ 4,783 $ 3,082
Finished Goods 27,982 37,218
-------- --------
$32,765 $40,300
======= =======
</TABLE>
Finished goods include service stock which is amortized over the estimated
product/service life of the related systems.
Intangible Assets. Intangible assets represent the excess of the purchase price
of the predecessor companies acquired over the fair value of the net tangible
assets acquired. Effective April 1, 1995, the carrying value of intangibles is
evaluated periodically in accordance with the provisions of FAS No. 121 by
projecting the lowest level of future undiscounted net cash flows of the
underlying businesses. If the sum of such cash flows is less than the book value
of the long-lived assets, including intangibles, projected future cash flows are
discounted and intangibles are adjusted accordingly. Prior to April 1, 1995, the
carrying value of intangibles was evaluated in accordance with the provisions of
APB 17, and was based upon aggregate cash flows of the business as a whole.
Amortization is provided over periods ranging from 10 to 40 years. Intangible
assets at December 31, 1995 and 1994 are net of accumulated amortization of $0.8
million and $13.6 million, respectively.
Property and Equipment. Property and equipment at December 31, 1995 and 1994
consist of the following:
<TABLE>
<CAPTION>
(Amounts in thousands) 1995 1994
---------------------- ---- ----
<S> <C> <C>
Land and building $ 1,364 $ 1,961
Furniture and fixtures 7,052 7,626
Leasehold improvements 2,828 2,620
Machinery and equipment 38,093 34,269
------- --------
49,337 46,476
Accumulated depreciation (30,875) (27,509)
------- --------
Property and equipment, net $18,462 $18,967
======= =======
</TABLE>
Depreciation is provided on a straight-line basis over the estimated economic
useful lives of property and equipment which range from three to ten years for
equipment and thirty years for a building. Amortization, principally of
leasehold improvements, is provided over the life of the respective lease terms
which range from three to ten years.
Income Taxes. The Company utilizes the liability method of accounting for income
taxes as set forth in FAS No. 109, "Accounting for Income Taxes." Under the
liability method, deferred taxes are determined based on the difference between
the financial statement and tax bases of assets and liabilities using enacted
tax rates in effect in the years in which the differences are expected to
reverse.
<PAGE>
<PAGE>
Product Development and Engineering. Product development and engineering costs
are expensed as incurred.
Fair Value of Financial Instruments. The fair value of the Company's Convertible
Subordinated Debentures at December 31, 1995 is approximately $14.3 million,
based upon market quotes. The carrying value of all other financial instruments
included in the accompanying financial statements approximate fair value as of
December 31, 1995 based upon current interest rates.
Noncash Investing and Financing Activities. The following noncash investing and
financing activities took place during the three years ended December 31, 1995:
<TABLE>
<CAPTION>
(Amounts in thousands) 1995 1994 1993
---------------------- ---- ---- ----
<S> <C> <C> <C>
Common and Preferred Stock issued to
acquire Unistar (Note L) $12,711 $ --- $ ---
Notes receivable for disposition of direct sales
offices (Note L) 1,911 --- ---
Equity investment in DCC (Note G) 1,505 --- ---
Common shares exchanged to exercise options
and warrants 1,137 455 8
Capital leases for equipment acquisitions 437 686 1,791
Note receivable for disposition of VCS
division (Note L) --- 1,200 ---
Common stock purchase warrants exercised
through bond conversion --- 1,071 985
Utilization of credits under a special
stock option incentive plan --- 737 696
Conversion of Preferred Stock into
Common Stock --- --- 8,058
Conversion of note payable into
Preferred Stock --- --- 2,274
</TABLE>
Refer to the consolidated statements of cash flows for information on
cash-related operating, investing and financing activities.
NOTE D - DEBT
The Company's debt is summarized below at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
(Amounts in thousands) 1995 1994
- - --------------------------- ---- ----
<S> <C> <C>
Borrowings Under Revolving Credit Facility (a) $15,445 $10,967
Convertible Subordinated Debentures (b) 12,098 11,855
Capital Lease Obligations (c) 2,412 2,408
Other 806 245
---------- ----------
Total Debt 30,761 25,475
Less: Current Portion of Long-Term Debt 932 777
---------- ----------
Total Long-Term Debt $29,829 $24,698
======= =======
</TABLE>
(a) The Company's Credit Facility was amended in December 1995. The amended $45
million Credit Facility consists of a revolving line of credit providing for
direct borrowings and up to $15 million in letters of credit. Direct borrowings
and letter of credit advances are made available pursuant to a formula based on
the levels of eligible accounts receivable and inventories. To minimize interest
on the revolving line of credit, the Company has the option to borrow money
based upon an adjusted prime borrowing rate (9.0% at December 31, 1995) or at an
adjusted eurodollar rate (8.2% at December 31, 1995). The Company had $11.0
million and $8.0 million outstanding subject to the adjusted eurodollar rate at
December 31, 1995 and 1994, respectively, with the balance at the adjusted prime
borrowing rate. Prior to August 1994, interest on amounts outstanding under the
revolving line of credit were based upon the lender's prime rate. The
<PAGE>
<PAGE>
revolving line of credit expires in August 1999. Approximately $14.7 million was
available at December 31, 1995 under the revolving line of credit, including
approximately $14.9 million which was committed to cover outstanding letters of
credit. The unused portion of the line of credit has a commitment fee of 0.375%.
The Company's average outstanding indebtedness under the revolving line of
credit for the years ended December 31, 1995 and 1994 was $17.4 million and
$13.1 million, respectively, and the average interest rate on such indebtedness
was 8.5% and 7.1%, respectively.
The Credit Facility agreement contains certain restrictive covenants which
include, among other things, a prohibition on the declaration or payment of any
cash dividends on common stock, minimum ratios of operating income to interest
and fixed charges, and a maximum ratio of total liabilities to net worth as well
as certain restrictions on start-up expenditures relating to Unistar and the NIL
(Refer to Note L). Interest rates are also subject to adjustment based upon
certain financial ratios. The Company was in compliance with all covenants in
1995. The Credit Facility is secured by substantially all of the assets of the
Company.
(b) The Company's Convertible Subordinated Debentures (the "Debentures"), issued
in April 1986, are due March 15, 2011 and bear interest at 7 1/2%, payable March
15th and September 15th. The face value of the outstanding Debentures at
December 31, 1995 was $16.5 million. The face value of the Debentures was
adjusted to fair value in connection with the Company's 1988
quasi-reorganization. The Debentures are convertible at the option of the holder
into Common Stock of the Company at any time on or before March 15, 2011, unless
previously redeemed, at a conversion price of $10.625 per share, subject to
adjustment in certain events. Subject to certain restrictions, the Debentures
are redeemable in whole or in part, at the option of the Company, at par in
1996. The Debentures are also subject to annual sinking fund payments of $1.5
million beginning March 15, 1997. In January 1992, $15 million principal amount
of Debentures with a book value of $10.1 million was exchanged for 674,865
shares of Convertible Preferred Stock and 2,999,400 Common Stock Purchase
Warrants. Debentures converted in the debt-for-equity exchange and in connection
with Warrant exercises were delivered in lieu of cash in satisfying sinking fund
requirements. Thus, no cash sinking fund payment will be due until March 2008.
(c) The Company has entered into capital lease arrangements for office furniture
and data processing and test equipment with a net book value of approximately
$2.3 million and $2.4 million at December 31, 1995 and 1994, respectively. Such
leases have been capitalized using implicit interest rates which range from 8%
to 14%.
The following is a schedule of future maturities of long-term debt at December
31, 1995:
<TABLE>
<CAPTION>
Years Ending December 31: (Amounts in thousands)
------------------------- -----------------------
<S> <C>
1996 $ 932
1997 842
1998 640
1999 15,742
2000 155
Thereafter 12,450
-------
$30,761
</TABLE>
(d) For the years ended December 31, 1995, 1994 and 1993, the Company made cash
payments of approximately $3.6 million, $2.8 million and $4.2 million,
respectively, for interest expense on indebtedness.
NOTE E - INCOME TAXES
The components of the provision (benefit) for income taxes applicable to income
(loss) from continuing operations for the three years ended December 31, 1995
are as follows:
<TABLE>
<CAPTION>
(Amounts in thousands) 1995 1994 1993
---------------------- ---- ---- ----
<S> <C> <C> <C>
Current - Federal $ 150 $ 200 $ 145
- State 200 200 190
--------- -------- --------
350 400 335
--------- -------- --------
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
(Amounts in thousands) 1995 1994 1993
---------------------- ---- ---- ----
<S> <C> <C> <C>
Deferred - Federal (1,922) 2,363 1,842
- State (715) 544 500
--------- -------- --------
(2,637) 2,907 2,342
-------- ------- -------
$(2,287) $3,307 $2,677
======== ====== ======
</TABLE>
For the years ended December 31, 1994 and 1993, the Company recorded a deferred
income tax provision of $505,000 and $158,000, respectively, related to
discontinued operations.
A reconciliation of the statutory federal income tax provision (benefit) to the
reported income tax provision (benefit) on income (loss) from continuing
operations for the three years ended December 31, 1995 is as follows:
<TABLE>
<CAPTION>
(Amounts in thousands) 1995 1994 1993
- - ---------------------- ---- ---- ----
<S> <C> <C> <C>
Statutory income tax provision (benefit) $(13,335) $3,415 $2,577
State income taxes, net of
federal income tax benefit (338) 676 526
Impairment of intangible assets 11,392 --- ---
Amortization of intangible assets 171 457 476
Adjustment of valuation allowance --- (1,252) (800)
Research and development credit (148) (250) (196)
Other (29) 261 94
----------- -------- ---------
Reported income tax provision (benefit) $ (2,287) $3,307 $2,677
======== ====== ======
</TABLE>
The components of and changes in the net deferred tax asset are as follows:
<TABLE>
<CAPTION>
Deferred
December 31, (Expense) December 31,
(Amounts in thousands) 1994 Benefit 1995
- - ---------------------- ------------ ---------- ------------
<S> <C> <C> <C>
Net operating loss and tax credit carryforwards $29,175 $(1,631) $27,544
Inventory reserves 5,405 2,800 8,205
Accrued liabilities and restructuring costs 1,446 (864) 582
Debenture revaluation (1,715) 90 (1,625)
Other (2,540) 2,194 (346)
--------- ------- ---------
31,771 2,589 34,360
Valuation allowance (4,792) 48 (4,744)
-------- --------- ---------
Deferred tax asset $26,979 $2,637 $29,616
======= ====== =======
</TABLE>
The deferred tax asset represents the benefits expected to be realized from the
utilization of pre- and post-acquisition tax benefit carryforwards, which
include net operating loss carryforwards ("NOLs"), tax credit carryforwards and
the excess of tax bases over fair value of the net assets of the Company. The
utilization of these tax benefits for financial reporting purposes will not be
reflected in the statement of operations, but will be reflected as a reduction
of the deferred tax asset.
In order to fully realize the remaining deferred tax asset of $29.6 million as
of December 31, 1995, the Company will need to generate future taxable income of
approximately $80 million prior to the expiration of the NOLs and tax credit
carryforwards. Although the Company believes that it is more likely than not
that the deferred tax asset will be fully realized based on current projections
of future pre-tax income, a valuation allowance has been provided for a portion
of the deferred tax asset. There was no significant adjustment to the valuation
allowance in 1995. During 1994, the Company adjusted its valuation allowance by
$6.5 million, $5.2 million of which was a reduction of goodwill as it related to
pre-acquisition tax benefits and $1.3 million of which reduced the 1994
provision for income taxes. During 1993, the Company adjusted its valuation
allowance by $4.8 million, $4.0 million of which was a reduction of goodwill as
it related to pre-acquisition tax benefits and $0.8 million of which reduced the
1993 provision for income taxes. The basis for the adjustments in 1994 and 1993
was a significant increase in pre-tax income from $4.3 million in 1992 to $10.0
million in 1994. Accordingly, historical earnings supported the realization of
the larger deferred tax asset. The amount of the deferred tax asset considered
realizable, however, could be reduced if estimates of future taxable income
during the carryforward period are reduced.
<PAGE>
<PAGE>
As of December 31, 1995, the Company has NOLs and tax credit carryforwards
(subject to review by the Internal Revenue Service) available to offset future
income for tax return purposes of approximately $69.3 million and $3.2 million,
respectively. A portion of the NOLs and tax credit carryforwards were generated
prior to the formation of the Company and their utilization is subject to
certain limitations imposed by the Internal Revenue Code. The NOLs expire as
follows:
<TABLE>
<CAPTION>
(Amounts in millions) 2002 2003 2004 2005 2006
--------------------- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C>
$0.5 $20.8 $26.0 $9.7 $12.3
</TABLE>
A reconciliation of the Company's income (loss) before taxes for financial
reporting purposes to taxable income for the three years ended December 31, 1995
is as follows:
<TABLE>
<CAPTION>
(Amounts in thousands) 1995 1994 1993
- - ---------------------- ---- ---- ----
<S> <C> <C> <C>
Income (loss) before taxes from continuing operations $(39,221) $10,041 $7,580
Discontinued operations --- 1,262 456
------------- --------- --------
Income (loss) before taxes for financial
reporting purposes (39,221) 11,303 8,036
Differences between income (loss) before taxes for
financial reporting purposes and taxable income:
Permanent differences 28,587 1,070 1,570
--------- --------- -------
Book taxable income (loss) (10,634) 12,373 9,606
Net changes in temporary differences 11,113 (5,016) (7,830)
--------- --------- -------
Taxable income $ 479 $ 7,357 $1,776
========== ======== ======
</TABLE>
The permanent differences relate to the write-off (in 1995) and amortization of
goodwill, which are not deductible. Changes in temporary differences principally
relate to the impairment in service stock inventory (in 1995), inventory
reserves and other costs accrued for book purposes, but not deducted for tax
purposes until subsequently paid.
For the years ended December 31, 1995, 1994 and 1993, the Company made cash
payments of approximately $214,000, $485,000 and $96,000, respectively, for
income taxes.
NOTE F - COMMITMENTS AND CONTINGENCIES
Operating Leases. The Company conducts its business operations in leased
premises under noncancellable operating lease agreements expiring at various
dates through 2005. Rental expense under operating leases amounted to $9.6
million, $10.1 million and $9.7 million for the years ended December 31, 1995,
1994 and 1993, respectively.
The following represents the future minimum rental payments due under
noncancellable operating leases that have initial or remaining lease terms in
excess of one year as of December 31, 1995:
<TABLE>
<CAPTION>
Years Ending December 31, (Amounts in thousands)
------------------------- ----------------------
<S> <C>
1996 $ 8,761
1997 7,724
1998 7,025
1999 5,435
2000 3,941
Thereafter 3,374
---------
$36,260
=========
</TABLE>
Litigation. The Company has various lawsuits, claims and contingent liabilities
arising from the conduct of business; however, in the opinion of management,
they are not expected to have a material adverse effect on the results of
operations, cash flow or financial position of the Company.
<PAGE>
<PAGE>
NOTE G - RELATED PARTY TRANSACTIONS
During 1995, the Company acquired 43% of the common stock and certain other
assets of Dialogic Communications Corporation ("DCC"), a vendor which supplies
the Company with certain call center products, in exchange for 353,118 shares of
the Company's common stock and $100,000 cash. This investment is included in
Other Assets and the related equity income is included in Other Income, Net.
NOTE H - STOCK OPTIONS AND WARRANTS
Information relative to the Company's stock option plans at December 31, 1995 is
as follows:
<TABLE>
<CAPTION>
Shares Per Share Range
------ ---------------
<S> <C> <C>
Total shares originally authorized 11,290,000
Options exercised/expired since inception of plans (7,074,104)
----------
Remaining shares reserved for issuance 4,215,896
Options outstanding 2,083,560 $0.69-3.25
----------
Shares available for granting of future options 2,132,336
==========
Options exercisable 1,124,469 $0.69-3.19
Options exercised -
Year ended December 31, 1995 1,970,760 $0.63-1.91
Year ended December 31, 1994 1,979,340 $0.63-2.88
Year ended December 31, 1993 1,144,395 $0.63-1.25
</TABLE>
Option prices under the Company's plans are equal to the market value of the
Common Stock on the dates the options are granted.
The Company has non-plan options outstanding at December 31, 1995 for 357,030
shares at prices ranging from $1.13 to $20.43 per share. These include options
for 300,000 shares granted to an officer by a predecessor company at a price of
$1.13 per share. Deferred compensation of $0.9 million was recorded for the
excess of the fair value over the exercise price at the date of grant and is
being amortized over 10 years ending in 1997. At December 31, 1995, all of the
non-plan options were exercisable. These options expire at various dates through
November 2000. Certain options include registration rights for the shares
issuable thereunder.
As of December 31, 1995, the Company has warrants outstanding which permit the
holder to purchase a total of 56,250 shares of Common Stock at prices ranging
from $1.06 to $1.25 per share, expiring through September 1997. Warrants were
exercised during the year ended December 31, 1994 for 860,919 shares of Common
Stock at prices ranging from $0.01 to $1.00 per share. Warrants were exercised
during the year ended December 31, 1993 for 9,700 shares of Common Stock at
$1.00 per share. At December 31, 1995, 39,584 warrants were exercisable.
In October 1995, the FASB issued Statement No. 123, "Accounting for Stock-Based
Compensation." The Company will adopt the new pronouncement in fiscal year 1996
and has yet to decide whether it will record compensation cost or provide pro
forma disclosure.
NOTE I - EMPLOYEE STOCK PURCHASE PLAN
A total of 2,750,000 shares of Common Stock are authorized for issuance under
the Company's employee stock purchase plan. The plan permits eligible employees
to purchase up to 1,000 shares of Common Stock at the lower of 85% of the fair
market value of the Common Stock at the beginning or at the end of each
six-month offering period. Pursuant to such plan, 229,636, 209,512 and 168,097
shares were sold to employees during the three years ended December 31, 1995,
1994 and 1993, respectively.
<PAGE>
<PAGE>
In 1994, the Company's shareholders adopted the 1994 Executive Stock Incentive
Plan, which enabled officers and other key employees to purchase a total of up
to 3,000,000 shares of the Company's Common Stock. During 1995 and 1994,
participants purchased 140,000 and 2,745,000 shares of Common Stock,
respectively, at fair market value, which were financed through individual bank
borrowings at market interest rates by each participant, payable over five
years. The Company lends the employee 85% of the interest due to the bank, with
$759,000 of such loans outstanding as of December 31, 1995. There were no
amounts outstanding as of December 31, 1994. The Company guarantees the
individual borrowings under a $9.4 million letter of credit which has a minimal
impact on the Company's borrowing capability. Employee loans guaranteed by the
Company with letters of credit as of December 31, 1995 and 1994 were $9.2
million and $8.7 million, respectively. These shares are held by the Company as
security for the borrowings under a loan and pledge agreement. Sales of such
shares by participants are subject to certain restrictions, and, generally, they
may not be sold for five years.
NOTE J - SAVINGS AND POST-RETIREMENT BENEFIT PLANS
The Company has a 401(k) Savings Plan under which it matches employee
contributions subject to the discretion of the Company's Board of Directors. The
Company's matching contribution, consisting of shares of its Common Stock
purchased in the open market, is equal to 25% of each employee's contribution,
up to a maximum of $660 per employee. The expense for the matching contribution
for the years ended December 31, 1995, 1994 and 1993 was approximately $687,000,
$500,000 and $372,000, respectively.
The Company has an obligation remaining from the acquisition of Executone, Inc.
to provide post-retirement health and life insurance benefits for a group of
fewer than 75 former Executone, Inc. employees, including seven current
employees of the Company. The Company does not provide post-retirement health or
life insurance benefits to any other employees. Effective January 1, 1993, the
Company adopted FAS No. 106, a standard on accounting for post-retirement
benefits other than pensions. This standard requires that the expected cost of
these benefits must be charged to expense during the years that employees render
services. The Company adopted the new standard prospectively and is amortizing
the transition obligation over a 20-year period.
Post-retirement benefit expense for the three years ended December 31, 1995
consists of the following:
<TABLE>
<CAPTION>
(Amounts in thousands) 1995 1994 1993
- - --------------------------- ---- ---- ----
<S> <C> <C> <C>
Interest on accumulated benefit obligation $219 $217 $190
Amortization of transition obligation 116 116 116
Amortization of unrecognized actuarial loss 20 23 ---
------ ------ -------
$355 $356 $306
==== ==== ====
</TABLE>
The status of the plan at December 31, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
(Amounts in thousands) 1995 1994
- - ---------------------- ---- ----
<S> <C> <C>
Accumulated post-retirement benefit obligation ("APBO"):
Retirees $2,779 $2,707
Active Employees 330 321
-------- --------
3,109 3,028
Unamortized transition obligation (1,977) (2,093)
Unrecognized net loss (486) (559)
------- -------
Accrued liability $ 646 $ 376
====== ======
</TABLE>
In determining the APBO as of December 31, 1995 and 1994, the weighted average
discount rate used was 7%. The Company used a healthcare cost trend rate of
approximately 11%, decreasing through 2006 and leveling off at 6% thereafter. A
1% increase in the healthcare trend rate would increase the APBO at December 31,
1995 by approximately 2% and increase the interest cost component of the
post-retirement benefit expense for 1995 by less than $10,000.
<PAGE>
<PAGE>
NOTE K - OTHER INCOME, NET
Other Income, Net consists of the following for the three years ended December
31, 1995:
<TABLE>
<CAPTION>
(Amounts in thousands) 1995 1994 1993
- - ---------------------- ---- ---- ----
<S> <C> <C> <C>
Interest income $ (285) $(287) $(252)
Equity in earnings of DCC (Note G) (401) --- ---
Gains on sales of direct sales offices (1,213) --- ---
Other, net (230) (348) 162
--------- ------ ------
$(2,129) $(635) $ (90)
======= ===== ======
</TABLE>
NOTE L - ACQUISITIONS/DISPOSITIONS
During the fourth quarter of 1995, the Company sold its customer bases in
Wisconsin and Iowa and the net assets of the related direct sales offices for a
total of $2.1 million, consisting of $125,000 cash, a $1.8 million note, the
proceeds of which were received in February 1996, and a $150,000 note due in
installments by November 2001. These sales generated a gain of approximately
$1.2 million, which is included in Other Income, Net for the year ended December
31, 1995.
On December 19, 1995, the Company acquired 100% of the common stock of Unistar
Gaming Corporation ("Unistar") for 3.7 million shares of the Company's common
stock and 350,000 shares of newly issued preferred stock. Unistar,
privately-held prior to the acquisition, 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 a compact
between the State of Idaho and the Coeur d'Alene Indian Tribe of Idaho ("CDA").
In return for providing these management services to the NIL, Unistar will be
paid a fee equal to 30% of the profits of the NIL. Unistar did not have any
assets or operations other than the NIL contract prior to its acquisition by the
Company.
The purchase price was approximately $12.7 million and was based upon the
determination by an investment banking firm of the value assigned to the common
and preferred stock. The common stock valuation was based upon the value of the
shares issued at the closing date, discounted for restrictions on the sale of
the shares, which range from six to twenty-six months. The preferred stock was
valued based upon the number of common shares which it was estimated that the
preferred shares may be converted into at some future date. The excess of the
purchase price over the value of the net liabilities assumed has been allocated
to the management agreement with the CDA and will be amortized over the
five-year term of the contract commencing with the first significant lottery
revenues.
The preferred stock consists of 250,000 shares of Cumulative Convertible
Preferred Stock, Series A ("Series A Preferred Stock") and 100,000 shares of
Cumulative Contingently Convertible Preferred Stock, Series B ("Series B
Preferred Stock"). The Series A Preferred Stock has voting rights equal to one
share of common stock and will earn dividends equal to 18.5% of the consolidated
retained earnings of Unistar as of the end of a fiscal period, less any
dividends paid to the holders of the Series A Preferred Stock prior to such
date. The Series B Preferred Stock has voting rights equal to one share of
common stock and will earn dividends equal to 31.5% of the consolidated retained
earnings of Unistar as of the end of a fiscal period, less any dividends paid to
the holders of the Series B Preferred Stock prior to such date. All dividends on
Preferred Stock are payable (i) when and as declared by the Board of Directors,
(ii) upon conversion or redemption of the Series A and Series B Preferred Stock
or (iii) upon liquidation. The Series A and Series B Preferred Stock is
redeemable for a total of 13.3 million shares of common stock (Series A
Preferred Stock for 4.925 million shares and Series B Preferred Stock for 8.375
million shares) at the Company's option. In the event that Unistar meets certain
revenue and profit parameters, the Series A Preferred Stock is convertible for
up to 4.925 million shares of common stock and the Series B Preferred Stock is
contingently convertible for up to 8.375 million shares of common stock (a total
of an additional 13.3 million shares of common stock). Shareholder approval is
required before any of the Series B Preferred Stock can be converted or
redeemed. Liquidation preferences for all Series A and Series B preferred shares
total $7.3 million as of December 31, 1995. Liquidation preference is based upon
fair market value of the Series A and Series B preferred shares as determined by
the investment banking firm engaged by the Company, plus any dividends in
arrears. As of December 31, 1995, no dividends have accrued to the preferred
stockholders. The preferred stock had no impact on earnings per share in 1995.
<PAGE>
<PAGE>
In an attempt to block the NIL, certain states filed letters under 18 U.S.C.
Section 1084 to prevent the long-distance carriers from providing telephone
service to the NIL. The CDA initiated legal action to compel the long-distance
carriers to provide telephone service to the NIL. The CDA's position is that the
lottery is authorized by the Indian Gaming Regulatory Act ("IGRA") passed by
Congress in 1988, that IGRA preempts state and federal statutes, and that the
states lack authority to issue the Section 1084 notification letters to any
carrier. On February 28, 1996, the NIL was ruled lawful by the CDA Tribal Court.
The CDA Tribal Court found that all requirements of IGRA have been satisfied and
the Section 1084 letters issued by certain state attorneys general in an effort
to interfere with the lawful operation of the NIL are invalid. In addition, the
Court found that the long-distance carriers cannot refuse to provide the service
requested in the action based upon 18 U.S.C. Section 1084. Any appeal of this
ruling must be filed by May 31, 1996. The Company expects this ruling will be
appealed but believes the CDA's position will be upheld. In recording the
purchase, the Company has accrued $1 million to cover the legal costs which it
anticipates are probable of being incurred to resolve these issues. Depending on
the outcome of the litigation, it is possible that additional costs may be
incurred.
Other than legal costs related to an appeal of the CDA Tribal Court ruling or
other actions by the states, if any, the Company estimates that the additional
costs to become operational may amount to between $5-10 million. Operational
capital includes capital expenditures for computers and software to build the
telecommunications system, funds to complete the building on the CDA reservation
which will be the operations center for the lottery, and various start-up
expenses including personnel-related costs and advertising expenses. The Company
is also required to make a guaranteed payment of $300,000 per year to the CDA.
The estimate of operating capital does not include a $4 million jackpot reserve
which could be required dependent upon certain conditions. If the Company
ultimately must fund a jackpot reserve, it will be repaid to Unistar solely from
NIL net revenues in equal installments over the term of the contract. The
Company expects it will be able to obtain additional financing for these costs,
if necessary.
The Company believes there is a national market for the NIL based upon research
into the experience of other national lotteries and the growth of the overall
lottery market. However, there is no assurance that there will be acceptance of
a telephone lottery.
During the first quarter 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 million in fees and expenses related to the attempted
acquisition which were recognized during the second and third quarters of 1995.
In 1990, the Company acquired all the outstanding shares of Isoetec Texas, Inc.,
an independent distributor of the Company's products. The transaction has been
accounted for by the purchase method. The purchase price was based upon a
multiple of 1989 pre-tax earnings of Isoetec Texas, Inc., subject to adjustment.
The purchase price originally recorded was based on cash payments to the former
owners of approximately $900,000, $250,000 of notes, 325,000 shares of common
stock and liabilities assumed of approximately $900,000.
The Company brought an action against the former owners of Isoetec Texas, Inc.
alleging breach of contract and fraud with respect to the calculation of 1989
pre-tax earnings and the purchase price. In November 1991, pursuant to the
purchase contract, an arbitrator ruled that 1989 pre-tax earnings should be
reduced by an amount that resulted in a reduction of the purchase price by
approximately $2 million. This reduction was assumed in the original purchase
price calculation and, as such, did not result in an adjustment to the recorded
purchase price. However, the arbitrator also awarded damages of approximately
$1.2 million to the former owners as additional purchase price. At that time,
the Company did not adjust its purchase price calculation since it believed that
the arbitrator went beyond its authority and decided to pursue the matter in
court. In 1994, after an appeal to the Fifth Circuit U.S. Court of Appeals, the
Company was required to pay $1.2 million as additional purchase price and
interest of $400,000. In addition, the Company was required to issue an
additional 78,866 shares of common stock to settle all remaining claims. These
payments were adjustments to the recorded purchase price.
As of March 31, 1994, the Company sold its Vodavi Communications Systems
Division ("VCS"), which sold telephone equipment to supply houses and dealers, a
different class of customer from continuing operations, under the brand names
STARPLUS'r' and INFINITE'tm', for approximately $10.9 million. Proceeds of the
sale consisted of approximately $9.7
<PAGE>
<PAGE>
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 resulted in an
after-tax gain of $604,000 (net of income tax provision of $403,000).
Consolidated financial statements for the years ended December 31, 1994 and 1993
present VCS as a discontinued operation. Net revenues of the discontinued
operation for the years ended December 31, 1994 (through the date of sale) and
1993 were $8.6 million and $31.6 million, respectively.
NOTE M - SELECTED QUARTERLY FINANCIAL DATA
The following is a summary of unaudited selected quarterly financial data for
the years ended December 31, 1995 and 1994:
<TABLE>
<CAPTION>
Three Months Ended
March 31, June 30, September 30, December 31,
(In thousands, except for per share amounts) 1995 1995 1995 1995
------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues $70,808 $78,417 $74,164 $73,004
Gross Profit 28,349 32,021 30,504 31,983
Income (Loss) Before Income Taxes 200 (44,225) 2,205 2,599
Net Income (Loss) 120 (39,936) 1,323 1,559
Earnings (Loss) Per Share --- (0.86) 0.03 0.04
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
March 31, June 30, September 30, December 31,
(In thousands, except for per share amounts) 1994 1994 1994 1994
---------- --------- ------------- -----------
<S> <C> <C> <C> <C>
Revenues $65,307 $76,612 $76,547 $73,503
Gross Profit 26,267 32,138 32,105 31,962
Income Before Income Taxes
from Continuing Operations 143 4,024 3,312 2,562
Income from Continuing Operations 86 2,414 1,986 2,248
Discontinued Operations 757 --- --- ---
Net Income 843 2,414 1,986 2,248
Earnings Per Share:
Continuing Operations --- 0.05 0.04 0.05
Discontinued Operations 0.02 --- --- ---
</TABLE>
The three months ended June 30, 1995 includes a provision for restructuring of
$44,042 (see Note L) and acquisition expenses of $1.0 million (see Note L). The
three months ended March 31, 1994 includes income of $757 from the
discontinuance and sale of the VCS division (see Note L).
NOTE N - SUBSEQUENT EVENTS
On April 9, 1996, the Company entered into an agreement to sell substantially
all of the Direct Sales and Services Group, including its long-distance reseller
business and National Service Center, for $67.4 million to an acquisition
company led by Bain Capital, Inc. The purchase price will consist of $61.5
million in cash, a $5.9 million note and warrants to purchase 8% of the common
stock of the new company, issued as of the closing, for $1.1 million,
exercisable for three years. The sale is expected to close on May 31, 1996,
subject to the buyer's financing and other conditions. The agreement also
provides that the Company and the buyer will enter into a five-year exclusive
distribution agreement under which the buyer will sell and service the Company's
telephony equipment to those businesses and commercial locations that require up
to 400 telephones.
<PAGE>
<PAGE>
The sale does not include the Pittsburgh direct sales and service office, which
the Company has separately agreed to sell to one of its existing independent
distributors for approximately $1.3 million in cash and notes. The Company will
retain its Healthcare Communications and Call Center Management businesses,
along with its National Accounts and Federal Systems marketing groups and the
recently acquired Unistar business. In addition, the Company will continue to
make telephony product sales to its independent distributors, of which the
newly-formed Bain company will be the largest distributor.
In 1995, the Direct Sales and Services Group, including the long-distance
reseller business, had revenues of $191 million. On a pro forma basis, after
giving effect to the transaction, the Company's 1995 revenues would be
approximately $157 million. This includes $42 million in sales to the Direct
Sales and Services Group which were eliminated in the 1995 Statement of
Operations.
On April 10, 1996, the Company announced that it had given notice of its
termination of its distribution agreement with GPT Video Systems due to failures
by GPT to deliver properly-functioning videoconferencing products on a timely
basis. The Company is negotiating an agreement with a third party to sell its
videoconferencing business. Terms of the contract have yet to be finalized.
STOCK DATA
The number of holders of record of the Company's Common Stock as of the close of
business on January 31, 1996 was approximately 2,100. The Common Stock is traded
on the NASDAQ National Market System under the symbol "XTON". As reported by
NASDAQ on February 16, 1996, the closing sale price of the Common Stock on the
NASDAQ National Market System was $2 7/16. The following table reflects in
dollars the high and low closing sale prices for EXECUTONE's Common Stock as
reported by the NASDAQ National Market System for the periods indicated:
<TABLE>
<CAPTION>
Fiscal Period High Low
------------- ----- ----
1995
<S> <C> <C>
First Quarter $3 7/16 $2 15/16
Second Quarter 3 3/8 2 1/8
Third Quarter 2 7/8 2 1/8
Fourth Quarter 2 7/8 2 1/8
1994
First Quarter $2 15/16 $2 3/16
Second Quarter 2 13/16 2 1/2
Third Quarter 3 5/16 2 1/2
Fourth Quarter 3 9/16 3
</TABLE>
The Company's Debentures are quoted on the NASDAQ System under the symbol
"XTONG". On February 16, 1996, the average of the closing bid and asked prices
per $1,000 principal amount of Debentures, as reported on the NASDAQ System, was
$850. The following table reflects in dollars the high and low average closing
sale prices for the Debentures, as reported by the NASDAQ System, for the
periods indicated:
<TABLE>
<CAPTION>
Fiscal Period High Low
------------- ---- ---
1995
<S> <C> <C>
First Quarter $824 $808
Second Quarter 824 788
Third Quarter 815 805
Fourth Quarter 850 815
1994
First Quarter $900 $863
Second Quarter 854 786
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Third Quarter 810 779
Fourth Quarter 815 775
</TABLE>
It is the present policy of the Board of Directors to retain earnings for use in
the business and the Company does not anticipate paying any cash dividends on
the Common Stock in the foreseeable future. The Company's current bank credit
agreement contains provisions prohibiting the payment of dividends on the Common
Stock.
<PAGE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
EXECUTONE Information Systems, Inc.:
We have audited the accompanying consolidated balance sheets of EXECUTONE
Information Systems, Inc. (a Virginia corporation) and subsidiaries as of
December 31, 1995 and 1994, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of EXECUTONE Information Systems,
Inc. and subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Stamford, Connecticut
January 26, 1996 (except with respect to the matter discussed in Note N, as to
which the date is April 10, 1996)
<PAGE>
<PAGE>
STOCKHOLDER INFORMATION
<TABLE>
<S> <C>
CORPORATE HEADQUARTERS INDEPENDENT PUBLIC ACCOUNTANTS
EXECUTONE Information Systems, Inc. Arthur Andersen LLP
478 Wheelers Farms Road Champion Plaza
Milford, Connecticut 06460 400 Atlantic Street
(203) 876-7600 Stamford, Connecticut 06912-0021
STOCK AND WARRANT TRANSFER AGENT OUTSIDE COUNSEL
American Stock Transfer and Trust Company Hunton & Williams
40 Wall Street Riverfront Plaza
New York, New York 10005 951 East Byrd Street
Richmond, Virginia 23219
BOND TRANSFER AGENT
U.S. Trust Company of New York ADDITIONAL INFORMATION
114 West 47th Street A copy of EXECUTONE's Annual Report on Form 10-K,
New York, New York 10036-1532 which is filed with the Securities and Exchange Commission,
is available without charge by writing to:
David Krietzberg
Treasurer/Investor Relations
Corporate Headquarters
</TABLE>
DIRECTORS AND OFFICERS
BOARD OF DIRECTORS
<TABLE>
<S> <C>
Alan Kessman Jerry M. Seslowe 1, 2
Chairman of the Board Managing Director
Resource Holdings, Ltd.
Stanley M. Blau
Vice Chairman William R. Smart 1
Senior Vice President
Thurston R. Moore Cambridge Strategic Management Group
Partner
Hunton & Williams
Richard S. Rosenbloom 1, 2
David Sarnoff Professor of Business Administration
Harvard Business School
1 Compensation committee member
2 Audit committee member
</TABLE>
OFFICERS
<TABLE>
<S> <C> <C>
Alan Kessman Anthony R. Guarascio David E. Lee
President and Chief Executive Officer Vice President, Finance and Vice President, Business
Chief Financial Officer Development
Stanley M. Blau
Vice Chairman Israel J. Hersh John T. O'Kane
Vice President, Software Engineering Vice President, MIS
Michael W. Yacenda
Executive Vice President Elizabeth Hinds Frank J. Rotatori
Vice President, Human Resources Vice President, Healthcare Sales
Barbara C. Anderson
Vice President, General Counsel and Robert W. Hopwood Shlomo Shur
Secretary Vice President, Customer Care Senior Vice President,
Advanced Technology
James E. Cooke III Andrew Kontomerkos
Vice President, National Accounts Senior Vice President, Hardware
Engineering and Production
</TABLE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet of EXECUTONE Information Systems, Inc. and
subsidiaries as of December 31, 1995 and the related consolidated statement of
operations for the year ended December 31, 1995 and is qualified in its
entirety by reference to such financial statements (see Exhibit 13).
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 8,092
<SECURITIES> 0
<RECEIVABLES> 50,246
<ALLOWANCES> 1,715
<INVENTORY> 32,765
<CURRENT-ASSETS> 95,972
<PP&E> 49,337
<DEPRECIATION> 30,875
<TOTAL-ASSETS> 167,844
<CURRENT-LIABILITIES> 70,110
<BONDS> 29,829
<COMMON> 517
0
7,300
<OTHER-SE> 57,283
<TOTAL-LIABILITY-AND-EQUITY> 167,844
<SALES> 296,393
<TOTAL-REVENUES> 296,393
<CGS> 173,536
<TOTAL-COSTS> 173,536
<OTHER-EXPENSES> 160,287
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,920
<INCOME-PRETAX> (39,221)
<INCOME-TAX> (2,287)
<INCOME-CONTINUING> (36,934)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (36,934)
<EPS-PRIMARY> (0.79)
<EPS-DILUTED> (0.79)
<PAGE>
