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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 (I.R.S. Employer
of incorporation or organization) 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 of the
Direct Sales and Service Group (including the separate sale of the Pittsburgh
office) relates primarily to the retail distribution channel of the Computer
Telephony division and includes the entire network services division. After the
sale, the Computer Telephony division consists of telephony product sales to
independent distributors, of which Clarity is the largest distributor, along
with the National Accounts and Federal Systems marketing groups. The Company
retains its Healthcare Communications and Call Center Management businesses and
the 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. In June 1996, the Company completed the sale of its
videoconferencing division, including customer service contracts and certain
inventory, to BT Visual Images LLC for approximatley $115,000, plus the
assumption of certain liabilities relating to the business, of the division.
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In April 1996, the Company also sold its inmate calling business,
including certain equipment and customer contracts, for approximately $550,000
plus the assumption of certain obligations relating to the business. This
business was part of the Computer Telephony division.
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 Company 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.
This ruling and a related order dated May 1, 1996 are being appealed to the
Tribal Appellate Court and probably will be appealed to the United States
federal courts as well. The Company has been advised by its outside counsel,
Hunton & Williams, that based upon such firm's review of the applicable
statutes, regulations and case law, it believes that the National Indian Lottery
is authorized under IGRA and that the favorable rulings issued by the Coeur
D'Alene Tribal Court on February 28, and May 1, 1996 should be upheld on appeal.
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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.
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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
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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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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.
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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
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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.
This ruling and a related order dated May 1, 1996 are being appealed to the
Tribal Appellate Court and probably will be appealed to the United States
federal courts as well. The Company has been advised by its outside counsel,
Hunton & Williams, that based upon such firm's review of the applicable
statutes, regulations and case law, it believes that the National Indian Lottery
is authorized under IGRA and that the favorable rulings issued by the Coeur
D'Alene Tribal Court on February 28, and May 1, 1996 should be upheld on appeal.
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.
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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
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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.
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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
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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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<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.
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(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;
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Mr. Kontomerkos, $5,400.
Employment Agreement
The Company and Mr. Kessman entered into an employment continuity
agreement in January, 1995 that provides certain benefits to Mr. Kessman in the
event of the termination of Mr. Kessman's employment following a change in
control in the Company, including a lump sum payment equal to 2.99 times his
then current base salary plus the average of any bonuses awarded to Mr. Kessman
during the two fiscal years preceding the termination of his employment. Under
the terms of the agreement, a change in control includes the acquisition of
beneficial ownership of 20% of the Company's voting securities by any person or
group. The agreement continues through the length of Mr. Kessman's employment
with the Company.
Option Grants in Last Fiscal Year
The following table sets forth the individual grants of stock options made
during the year ended December 31, 1995 to the Chief Executive Officer and the
four most highly compensated
26
<PAGE>
<PAGE>
other executive officers of the Company. There were no grants of stock
appreciation rights made to any officers during 1995, and there are no
outstanding stock appreciation rights.
</TABLE>
<TABLE>
<CAPTION>
Potential Realized Value
at Assumed Annual Rates of
Stock Price Appreciation
Individual Grants for Option Term
- ------------------------------------------------------------------------------------------------ -------------------------------
% of Total
Options Exercise
Granted to or Base
Options Employees in Price Expiration
Name Granted (#) Fiscal Year ($/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.) Previously filed.
</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.)
Previously filed.
</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. Previously filed.
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.
23.1 Consent of Arthur Andersen LLP.
Filed herewith.
23.2 Consent of Hunton & Williams. Filed
herewith.
27 Financial Data Schedule. Previously
filed.
</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
February 18, 1997
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.
February 18, 1997 /s/ Alan Kessman
-----------------------------
Alan Kessman
Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
February 18, 1997 /s/ Stanley M. Blau
----------------------------
Stanley M. Blau
Vice Chairman of the Board of
Directors
February 18, 1997 /s/ Anthony R. Guarascio
-----------------------------
Anthony R. Guarascio
Vice President-Finance
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
February 18, 1997 /s/ Thurston R. Moore
-------------------------------
42
<PAGE>
<PAGE>
Thurston R. Moore
Director
February 18, 1997 /s/ Richard S. Rosenbloom
--------------------------
Richard S. Rosenbloom
Director
February 18, 1997 /s/ Jerry M. Seslowe
---------------------------
Jerry M. Seslowe
Director
February 18, 1997 /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.) Previously filed.
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.) Previously filed.
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. Previously filed.
</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.
23.1 Consent of Arthur Andersen LLP.
Filed herewith.
23.2 Consent of Hunton & Williams. Filed
herewith.
27 Financial Data Schedule. Previously
filed.
</TABLE>
50
STATEMENT OF DIFFERENCES
The registered trademark symbol shall be expressed as .....'r'
The trademark symbol shall be expressed as ............... 'tm'
<PAGE>
<PAGE>
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
<PAGE>
<PAGE>
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.
<PAGE>
<PAGE>
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
<PAGE>
<PAGE>
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
<PAGE>
<PAGE>
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 sale does not include the Pittsburgh direct sales and service office, which
the Company has agreed to sell to one of its existing independent
distributors for approximately $1.3 million in cash and notes. The sale of the
direct Sales and Service Group (including the separate sale of the Pittsburgh
office) relates primarily to the retail distribution channel of the Computer
Telephony division and includes the entire network services division. After the
sale, the Computer Telephony division will consist of telephony products sales
to independent distributors, of which the newly-formed Bain company will be the
largest distributor, along with the National Accounts and Federal Systems
marketing groups. The Company will retain its Healthcare Communications and
Call Center Management businesses and the recently acquired Unistar business.
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 agreed to sell to one of its existing independent
distributors for approximately $1.3 million in cash and notes. The sale of the
direct Sales and Service Group (including the separate sale of the Pittsburgh
office) relates primarily to the retail distribution channel of the Computer
Telephony division and includes the entire network services division. After the
sale, the Computer Telephony division will consist of telephony products sales
to independent distributors, of which the newly-formed Bain company will be the
largest distributor, along with the National Accounts and Federal Systems
marketing groups. The Company will retain its Healthcare Communications and
Call Center Management businesses and the recently acquired Unistar business.
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>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included or incorporated by reference in this Form 10-K/A into the
Company's previously filed Registration Statements File Nos. 33-45015,
33-57519, 33-42561, 33-62257, 33-23294, 33-16585, 33-3827, 33-6604, 33-959,
2-91008, 33-40623, 33-46874, 33-46875 and 33-50628.
ARTHUR ANDERSEN LLP
----------------------------------
ARTHUR ANDERSEN LLP
Stamford, Connecticut
February 18, 1997
<PAGE>
<PAGE>
Exhibit 23.2
February 17, 1997
EXECUTONE Information Systems, Inc.
478 Wheelers Farms Road
Milford, CT 06460
ANNUAL REPORT ON FORM 10-K/A FOR THE
FISCAL YEAR ENDED DECEMBER 31, 1995
TO BE FILED FEBRUARY 18, 1997 (FILE NO. 000-11551)
--------------------------------------------------
Gentlemen:
This firm has reviewed the information set forth in the ninth paragraph
under "Recent Developments" under Item 1., Business, and the information set
forth in the first paragraph under Item 3, Legal Proceedings, of the Annual
Report on Form 10-K/A for the fiscal year ended December 31, 1995 of EXECUTONE
Information Systems, Inc. (the "Company"). We understand that the information
set forth therein as it related to the issue of the authorization of the
National Indian Lottery under 25 U.S.C. 2701 et seq. is based upon the advice
provided to the Company by this firm.
We consent to the summarization of such advice and the reference to us in
the prospectus.
Very truly yours,
HUNTON & WILLIAMS
<PAGE>