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, 1996
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.
(Exact name of registrant as specified in its charter)
Virginia 86-0449210
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
478 Wheelers Farms Road, Milford, Connecticut 06460
(Address of principal executive offices) (Zip Code)
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
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
(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 ___
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. [ ]
The aggregate market value of the common stock held by non-affiliates
of the registrant (assuming for this purpose that all executive officers and
directors of the registrant are affiliates) as of March 24, 1997 was
$117,323,737, 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 24, 1997, was
49,471,481.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference into the Part of
this Form 10-K indicated below:
Part II 1996 Annual Report to Shareholders
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TABLE OF CONTENTS
Item Page
PART I
1. Business 1
2. Properties 11
3. Legal Proceedings 11
4. Submission of Matters to a Vote of Security Holders 12
Executive Officers of the Registrant 13
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters 16
6. Selected Financial Data 16
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
8. Financial Statements and Supplementary Data 16
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 16
PART III
10. Directors and Executive Officers of the Registrant 17
11. Executive Compensation 18
12. Security Ownership of Certain Beneficial Owners and
Management 25
13. Certain Relationships and Related Transactions 29
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
30
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PART I
ITEM 1. BUSINESS
General
EXECUTONE Information Systems, Inc. ("EXECUTONE" or the
"Company") develops, markets and supports voice and data
communications systems. Products and services include telephone
systems, voice mail systems, in-bound and out-bound call center
systems and specialized healthcare communications systems. The
Company, through its Unistar Entertainment subsidiary, also has the
exclusive right to design, develop and manage the National Indian Lottery
(the "NIL" or the "Lottery"). Products are sold under the EXECUTONE'r',
INFOSTAR'r', IDS'tm', LIFESAVER'tm', INFOSTAR/ILS'tm' and UNISTAR'tm'
brand names through a worldwide network of direct sales and service
employees 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
In 1996, the Company sold its direct sales and service
organization, including its network services division and the national
service center, to Clarity Telecom Holdings, Inc. d/b/a/ Executone
Business Solutions ("Clarity") for consideration valued at $69.6 million.
The Company and Clarity also entered into a five-year exclusive
distributor agreement pursuant to which Clarity sells and services
EXECUTONE'r' and INFOSTAR'r' telephone products to business and
commercial locations that require up to 400 telephones.
The sale did not include the Pittsburgh direct sales and service
office, which the Company separately sold to one of its existing
independent distributors.
After the sale, the Computer Telephony business consists of
telephone products 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.
In April 1996, the Company rescinded its distribution agreement
with GPT Video Systems due to failures by GPT to deliver properly
functioning videoconferencing products on a timely basis. The Company
has also commenced a legal action against GPT to recover its damages.
In June 1996, the Company completed the sale of its videoconferencing
division, including customer service contracts and certain inventory.
On December 19, 1995, the Company acquired 100% of the
common stock of Unistar Gaming Corp., a Delaware corporation
("Unistar Gaming"). Unistar Gaming, through its subsidiary Unistar
Entertainment, Inc. ("Unistar"), has an exclusive five-year contract to
design, develop, finance, and manage the Lottery, a national lottery
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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" or the
"Tribe"). In return for providing these management services, Unistar will
be paid a fee equal to 30% of the profits of the Lottery.
The Company acquired 100% of Unistar for 3.7 million shares of
Common Stock, 250,000 shares of its Cumulative Convertible Preferred
Stock, Series A ("Series A Preferred Stock") and 100,000 shares of its
Cumulative Contingently Convertible Preferred Stock, Series B ("Series B
Preferred Stock").
The telephone operations of the Lottery may not 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, that Section 1084 is inapplicable 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 Section 1084 is inapplicable and that the
states lack jurisdiction to interfere with the NIL which will operate in
Idaho on the Reservation, and that the long distance carrier cannot
refuse service to the NIL based upon Section 1084, an allegation that
the NIL is in violation of IGRA or the federal anti-lottery statutes.
This ruling and a related order dated May 1,1996 are being appealed
to the Tribal Appellate Court and probably will be appealed ultimately
to 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.
Overview of Business
The Company's revenues are derived from product sales to distributors,
direct sales of healthcare communications and call center products,
and direct sales to national accounts and federal government customers,
as well as installations, additions, changes, upgrades or relocation of
previously installed systems, maintenance contracts, and service charges
to the existing base of healthcare, call center, national account and federal
government customers. The Company's products and services are
marketed and sold through a national network of Company direct sales and
service employees and independent distributors.
The Computer Telephony business offers value-added products
and services to the small to medium-sized business customer. 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 and data software applications,
such as automatic call distribution.
The Healthcare Communications business 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 markets software applications specific
to hospital and nursing homes to help resolve other labor intensive tasks.
The Healthcare Communications business also markets the
INFOSTAR/ILS'tm' locator system, which can improve productivity, save
time and expense for users and eliminate overhead paging by instantly
locating staff and equipment in a facility. Each
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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 ILS system can be
integrated with the Company's telephone systems and nurse call systems
to provide additional productivity improvements for hospital environments.
The Call Center Management business 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, and scripting software to
assist agents handling calls. 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.
In 1995, the Company acquired Unistar. Unistar has an
exclusive five-year contract with the Coeur d'Alene Tribe to design,
develop, finance, and manage the Lottery, a national lottery authorized by
IGRA and a compact between the State of Idaho and the Tribe. Unistar
provides development and management of the software, network design
and call center applications for the Lottery's operations.
The telephone operations of the Lottery may not begin until
resolution of a pending legal proceeding. See "Legal Proceedings"
Although the Unistar legal situation is essentially unchanged,
management is hopeful that the Tribe will receive a positive decision
early this year in the Tribal Appellate Court, affirming the Tribal Court's
rulings last year on the legality of the National Indian Lottery, and that
such a decision will accelerate a federal court decision. In the meantime,
Unistar is developing the business and gaming systems needed to
conduct the Lottery, and plans to test these systems at an Internet test
site between April and June 1997. Assuming the successful completion
of these tests, Unistar plans a controlled expanded test from July to
September, and assuming continued successful results, a national
launch over the Internet in the fourth quarter of 1997.
Computer Telephony Products
The Company develops and distributes a complete line of
applications-oriented computer telephony products that are easy to
install, easy to maintain and easy to use, and that create visible value for
its customers. The Company's complete portfolio of applications are
built upon the Integrated Digital System (IDS'tm') family of digital telephone
systems. Products range from PBXs to satisfy the basic voice
communications needs of small- to medium-sized businesses to
standards-compliant CT applications, standalone and LAN-based
applications including voice mail, unified messaging, Automatic Call
Distribution (ACD) and wireless communications.
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 standards-based, cost-
effective design and to the sophistication of its software options. The
Company's systems include an integrated automated attendant feature to
answer and transfer calls quickly and efficiently without operator
intervention. The Integrated Operator Terminal and management reports
capabilities permit the monitoring of calls and improve the efficiency of
directing calls to the appropriate extensions. The Company's latest
achievement in call processing, the Ultimate Operator, takes the
operator's console to a new level by delivering superior call handling and
reporting
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capabilities in a Windows environment. The IDS systems also
support sophisticated call center and healthcare applications in addition
to the Company's Integrated Locator System. The recent introduction of
the Company's LAN Card allows users with access to their organization's
network to manage the IDS through their desktop PCs.
The Company has steadily introduced a portfolio of products fully
compliant with the latest industry standards (TAPI, TSAPI, CSTA) and
incorporating the most advanced elements of computer telephony
integration. The TAPI telephones support any desktop application using
the TAPI standard for computer-telephone integration. Unified Messaging
and Voice Activated Speed Dial further increase productivity by speeding
the calling process.
The Company also offers a voice mail system that can be
integrated with the IDS telephone systems and with telephone systems
manufactured by others. The INFOSTAR/VX2 voice mail system
receives, records, stores, distributes, transfers and replays messages
from both external and internal callers and can supplement other call
center systems. In 1996 the Company introduced the INFOSTAR/VXC
Voice Exchange Card, a complete voice processing system built on a
card that integrates directly into the IDS switch, eliminating the need for a
standalone voice mail system. In 1997, the Company signed an
agreement to distribute the Active Voice line of voice processing and
unified messaging products.
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.
Platform Systems. Released on January 17, 1997, the
Healthcare Communications Platform (HCP) is the communications
solution dedicated to a single platform technology for complete systems
integration. The HCP exemplifies the Company's commitment to provide
total communication capability. With the HCP system, the nurse call
function is now integrated with an IDS phone system to provide the dual
function at one master control center. Nurse call, locator, wireless
phones, pocket pagers, patient reports, and management reports can all
integrate seamlessly using a single platform fully utilizing all product
benefits.
Nurse Call Systems. 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 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
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control stations, and up to eight
systems can be networked for centralized operation. The LIFESAVER
integrates with the Company's locator system.
The CARE/COM 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 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 five-line LCD display Nurse Control
Station allows simple call processing and system operation. The system
is highly flexible to meet the individually defined needs of today's
hospitals and long-term care facilities.
Patient Reporting Systems. The Healthcare Division also
markets the INFOSTAR /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, and discharge and transfer information are
also supported. The system uses standard telephone instruments and
provides full voice messaging capability. The INFOSTAR/PRS system
reduces report time, provides continuity at shift changes, and improves
report quality.
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 version of this product allows outside
callers using non-IDS based products 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. The ILS
system is also marketed by the Computer Telephony sales channels for
office environments.
The Events Processing System collects information from the ILS
system and associates the data to logical, workable and productive real
time data for a customer's employees and assets. Specific applications
include: door monitoring, wandering patient alert, staff presence
indicators, badge button press (staff assist or emergency assist), asset
management and equipment tracking. The system allows a facility to
program events that will trigger alarms, lock doors, light lights, open
elevator doors, and more. The system is completely programmable,
which allows the customer to determine which applications will best fit
their needs.
Wireless Telephone Systems. The Healthcare Communications
group also markets the Ericsson Freeset, an in-building wireless
communications system which operates on the 900MHz bandwidth. Its
low power output (.75mW) makes it ideal for the healthcare environment,
which is very sensitive to high power devices such as cellular telephones
and 2-way radios that may interfere with vital telemetry equipment. The
Freeset system is extremely flexible in providing complete coverage over
a large area
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based on its ability to add as many base stations as
necessary to provide coverage. The system can grow to support up to
600 handsets, making it the system of choice for large installations.
The Company also markets the Monarch'tm' 1.9GHz Wireless
Telephone System, which is an in-building wireless communications tool
that provides cellular-like mobility to a facility without expensive airtime
charges. The Monarch system operates on the 1.9GHz U-PCS
bandwidth set aside by the FCC strictly for personal communications use
which means the signal will not cause interference or be interfered with
by conventional telemetry equipment. The Monarch system can support
up to 2 base stations per system, providing a coverage area of over
250,000 square feet in a typical office environment. In an open
warehouse environment, the coverage is much greater. Each base
station allows for eight simultaneous conversations and the Monarch
system can support a maximum of up to 32 handsets.
Other Communication Products. The INFOSTAR 'r'/StatLink 'tm'
product is designed to provide call management and integration of
EXECUTONE nurse call systems to telephone numbers, wireless
telephones and pager devices. INFOSTAR/StatLink has the flexibility to
modify patient call flow based on the specific requirements of the
healthcare facility. Calls can be routed on a 4-level priority basis to any
extension, telephone or site pager configured in the database. The
system is a communications solution that can be integrated with any
PBX. Patient priorities and requests can be managed more efficiently
and calls can be completed on a more timely basis with less strain on the
staff and patients.
The INFOSTAR'r'/InfoSTAT'tm' product is a software package
intended for use in emergency departments to provide complete
communication of real time events and data. Used as a daily operational
tool, the InfoSTAT system provides emergency staff with priority data and
conditions affecting the department. Staff can check at a glance the
status of treatment rooms, room and bed assignments, hospital staff
assignment and location, and patient status and location. InfoSTAT is
customized for each hospital and integrates with a facility's existing
administrative software such as ADT systems.
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 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
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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.
Sales and Marketing
The Company's distribution network consists of (1) domestic
independent distributors with approximately 180 locations operating
under exclusive and nonexclusive agreements throughout the United
States and Canada; (2) 138 direct healthcare and call center sales and
service employees in the United States; (3) a National Accounts group
that uses the sales, installation, service and support capabilities of
EXECUTONE's distribution network to serve multiple offices and
departments of companies; (4) a Government Systems group that uses
the distribution network to serve offices of federal, state and local
government agencies; and (5) 24 independent distributors operating in 17
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 business provides uniformity
in pricing, coordination, installation, billing and service for National
Accounts customers such as Electronic Data Systems, Airborne Express,
Paychex, Inc., W. W. Grainger, Home Quarters Warehouse, Inc.,
Bridgestone/Firestone, Carlson Companies, PetsMart and TCI Cable.
The National Accounts group coordinates the sales, installation, service
and support functions of independent sales offices to serve the multiple
offices and departments of large companies.
The Company's Government Systems group addresses the
special procurement and administrative requirements of federal, state
and local government agencies. Sales are made through a combination
of master contracts and competitively solicited proposals for large or
complex telecommunications requirements. Government Systems
coordinates the installation, service and support activities of independent
sales offices to provide ongoing support to government agency offices
nationwide.
Although the Company offers a broad range of products through
various sales channels nationwide, computer telephony product
purchases by Clarity, the purchaser of the Company's direct sales and
service organization and the Company's largest distributor, represented a
significant portion of the Company's total revenues in 1996 and
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are expected to continue to represent a large portion of the Company's
revenues. The loss of Clarity as a customer could have a material
adverse effect on the Company, assuming the Company could not
replace the shipments with other alternative distribution. The Company
believes that it has the means within a reasonable period of time to
establish alternative distribution channels in most of Clarity's
territory were that to become necessary. However, the Company does
not currently believe there is any significant risk of losing Clarity
as a customer because Clarity is dependent upon a continued supply of
the Company's proprietary products to service and upgrade its large
existing customer base.
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, 1996, was $23,159,000
compared to $33,091,000 at December 31, 1995, and the Company
expects virtually all of such backlog to be filled within the current fiscal
year.
Product Maintenance
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, 1997, EXECUTONE employed approximately 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 1996, the Company's engineering efforts
focused on applications-oriented software products, including new
releases of computer telephone system, 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, 1996,
1995, and 1994, Company-sponsored product development and
engineering expenditures (including product management and testing)
amounted to approximately $13.8 million, $14.7 million, and $12.2 million,
respectively.
Manufacturing
Most of EXECUTONE's telephone products are manufactured by
Wong's Electronics Company, Ltd. ("Wong's") in Malaysia, 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 1998 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
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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. 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 ten utility patents, expiring at various times
between 2007 and 2013, has six U.S. patent applications pending, and
six patent applications pending in several 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 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
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
9
<PAGE>
government regulatory organizations.
Competition
The market segments in which the Company offers its products
and services are highly competitive. The under 400-desktop voice
communications segment in the United States, the primary market for the
Company's Computer Telephony sales channels, is served by many
domestic and foreign communications equipment and software
manufacturers and distributors, including Lucent Technologies (the
former equipment business of AT&T), Nortel (formerly named Northern
Telecom), Toshiba, InterTel and Mitel, as well as numerous specialized
companies. The Company believes that it may be fourth in telephone
system shipments to the under 400-desktop voice communications
market, after AT&T/Lucent, Nortel, and Toshiba, based on industry
surveys of 1996 data. However, such information may not be sufficient to
make an exact assessment of the Company's competitive position
relative to its competitors. 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.
The Company believes its call center products are in a good
competitive position although to date it has not penetrated a significant
portion of this market. Principal competitors are EIS, Davox, Mosaix and
Melita.
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 competes by offering a full array of integrated
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, 1997, EXECUTONE employed approximately 750
persons, directly and through its subsidiaries. Less than 3% of the
employees of the Company and its subsidiaries are represented by
unions, all of which employees are represented by the International
Brotherhood of Electrical Workers. Management believes that the
Company's relations with its employees are good.
10
<PAGE>
ITEM 2. PROPERTIES
EXECUTONE's principal offices are located in a leased facility in
Milford, Connecticut. The Company has warehouse, manufacturing and
distribution facilities in Poway, California. As of December 31, 1996, the
Company utilized 4 facilities in the United States with an aggregate of
approximately 273,000 square feet for its ongoing operations.
The Company's facilities are occupied under lease agreements.
The current annual rent for the Company's facilities is approximately $3
million. The Company also subleases from Clarity small areas of 30
former district sales offices, aggregating approximately 23,000 square
feet, for use by sales and technical employees for approximately
$600,000 per year. 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.
Use Location Approximate
Size
Corporate Headquarters Milford, Connecticut 150,000
and Research, Development square feet
and Engineering Facility
Distribution, Production & Poway, California 115,000
Repair Center and Warehouse square feet
Other, including warehouses Milford, Connecticut 30,800
and subleased office space square feet
ITEM 3. LEGAL PROCEEDINGS
On October 16, 1996, 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 Lottery to
be developed and managed by the Company's Unistar Entertainment subsidiary is
legal under IGRA, that IGRA preempts state and federal laws on the subject
of Indian gaming, that Section 1084 is inapplicable and that the states lack
authority to issue Section 1084 notification letters to any carrier,
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 may not 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 requirements of
IGRA have been satisfied, that Section 1084 is inapplicable and the states
lack jurisdiction to interfere with the NIL, and that AT&T cannot refuse
service to the NIL based upon Section 1084, an allegation that the NIL
is in violation of IGRA or the
11
<PAGE>
federal anti-lottery statutes. 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 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 telephone 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.
12
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
Name Age Position With Company
Alan Kessman 50 Chairman of the Board,
President and
Chief Executive Officer
Michael W. Yacenda 45 Executive Vice President and
President, UniStar
Entertainment
Barbara C. Anderson 45 Vice President, General
Counsel and Secretary
James E. Cooke III 48 Vice President, National
Accounts
Anthony R. Guarascio 43 Vice President, Finance and
Chief Financial Officer
Israel J. Hersh 43 Vice President,
Software Engineering
Elizabeth Hinds 55 Vice President,
Human Resources
Robert W. Hopwood 53 Vice President and Vice
President-Operations,
Unistar Entertainment
Andrew Kontomerkos 51 Senior Vice President,
Hardware Engineering and
Production
Vic Northrup 40 Vice President,
Computer Telephony
Frank J. Rotatori 54 Vice President, Healthcare
Communications
Shlomo Shur 47 Senior Vice President,
Advanced Technology
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.
13
<PAGE>
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 1996. Prior to that time, from 1992 until 1996,
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 1996. 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 1996. 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 1996. Ms. Hinds was the
Director of Human Resources for CC/ABC from June 1987 until February
1993.
Robert W. Hopwood has been Vice President of the Company
and Vice President-Operations of its Unistar Entertainment subsidiary
since May 1996, and prior thereto served as Vice President, Customer
Care of the Company from 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 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.
14
<PAGE>
Vic Northrup has been Vice President of the Company since February 1997,
and President of the Computer Telephony business since May 1996. Prior
thereto, he was Senior Director of Sales and Operations and a district general
manager of the Company.
Frank J. Rotatori has been Vice President, Healthcare
Communications since February 1996. 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.
15
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Incorporated by reference to "Stock Data" in the Registrant's
1996 Annual Report to Shareholders.
ITEM 6. SELECTED FINANCIAL DATA
Incorporated by reference to "Selected Financial Data" in the
Registrant's 1996 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 1996 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 1996 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.
16
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
COMPANY
The following persons are currently serving as directors and have been
nominated by the Board of Directors as candidates for election as
directors at the Annual Meeting of Shareholders to be held on July 29,
1997. Certain information regarding each director is set forth below,
including each individual's principal occupation and business experience
during the last five years, 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 50 President, Chief Executive Officer, 1983
and Chairman of the Company
since 1988; and of one of the
Company's predecessor corporations
since 1983.
Stanley M. Blau 59 President, The Blau Group Ltd., an 1983
investment firm; formerly Vice
Chairman of the Company from 1988
until 1996; and Chief Executive
Officer of one of the Company's predecessor
corporations, from 1987 until July 1988.
Thurston R. Moore 50 Partner, Hunton & Williams (Attorneys), 1990
Richmond, Virginia, since 1981.
Richard S. Rosenbloom 64 David Sarnoff Professor of Business 1992
Administration, Harvard Business School,
since 1980. Mr. Rosenbloom is a director
of Arrow Electronics, Inc.
Jerry M. Seslowe 51 Managing Director of Resource Holdings 1996
Ltd., an investment and financial consulting
firm, since 1983.
</TABLE>
Executive Officers
See Part I for information concerning executive officers of the Company.
Section 16(a) Beneficial Ownership Reporting Compliance
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.
17
<PAGE>
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, 1996, all Section 16(a) filing requirements applicable to its officers,
directors and greater than 10% beneficial owners were complied with,
except that Mr. Israel Hersh, a Vice President of the Company, failed to
file a timely Report on Form 4 to report an open market sale of Common
Stock.
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 (the "Plan") approved by the shareholders on June 20, 1990 and
amended, with the approval of the shareholders, on July 30, 1996.
As of March 31, 1997, 30,000 shares had been issued upon
exercise of options granted under the original terms of the Plan, options
to purchase 24,000 shares of Common Stock were outstanding under the
original terms of the Plan, and options to purchase an additional 77,600
shares were outstanding under the 1996 amendment to the Plan. The
number of shares for which options may be granted each year are
determined by reference to the Black-Scholes option pricing model to
provide an option equal in value to $10,000 based upon the market price
of the Common Stock at the date of grant. An aggregate of up to
250,000 shares are issuable under the Plan. Each non-employee
director received options to purchase 12,900 shares in 1996.
On February 1, 1996 and June 23, 1992, Jerry M. Seslowe and
Richard S. Rosenbloom were each granted warrants to purchase 25,000
shares of the Company's Common Stock at $2.63 and $1.25 per share,
respectively, the closing market prices on those dates. The warrants vest
ratably over a three-year period and expire on February 1, 2001 and June
23, 1997, respectively. Messrs. Seslowe and Rosenbloom received
these warrants upon being elected to serve on the Company's Board of
Directors.
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<PAGE>
Summary Compensation Table
The following table sets forth the compensation by the Company
of the Chief Executive Officer and the four most highly compensated
other executive officers of the Company for services in all capacities to
the Company and its subsidiaries during the past three fiscal years.
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
Other Annual Awards of All Other
Name and Salary Bonus Compensation Options/ Compensation
Principal Position Year ($) ($) (1) ($) (2) SARs (#) ($)(3)
<S> <C> <C> <C> <C> <C> <C>
Alan Kessman 1996 400,000 63,000 -0- -0- 9,536
Chairman of the Board, 1995 400,000 -0- -0- -0- 10,328
President and Chief 1994 391,000 100,000 8,506 -0- 8,084
Executive Officer
Michael W. Yacenda 1996 256,000 49,900 -0- -0- 5,935
Executive Vice President 1995 256,000 -0- -0- -0- 6,353
1994 243,154 39,600 10,000 -0- 56,484
Shlomo Shur 1996 215,700 12,393 -0- -0- 5,192
Senior Vice President, 1995 215,700 -0- -0- -0- 5,514
Advanced Technology 1994 211,539 23,088 10,000 -0- 4,856
Andrew Kontomerkos 1996 214,000 12,350 -0- -0- 5,703
Senior Vice President, 1995 214,000 -0- -0- -0- 5,535
Hardware Engineering 1994 205,888 38,025 10,000 -0- 5,509
and Production
Anthony Guarascio 1996 160,000 42,000 -0- -0- 2,993
Vice President and 1995 160,000 -0- -0- 2,919
Chief Financial 1994 155,000 14,000 -0- 23,002
Officer
</TABLE>
(1) Includes special bonuses awarded in 1994 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 totaling
$50,000, $30,000, $15,000, $20,000, and $8,000 were awarded to Messrs.
Kessman, Yacenda, Shur, Kontomerkos, and Guarascio, respectively.
(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. All
credits shown in this column were used to exercise stock options in 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 and by Mr. Guarascio in the amount
of $20,383. The credits were granted in 1988, 1992 and 1994 (see Note
2 above). The column does not include 1992 or 1994 credits used in
1994 that were reported as "Other Annual Compensation" for 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
19
<PAGE>
individuals in the following amounts in 1996: Mr.
Kessman, $8,876; Mr. Yacenda, $5,275; Mr. Shur, $4,532; Mr.
Kontomerkos, $5,043; and Mr. Guarascio, $2,333; in the following
amounts in 1995: Mr. Kessman, $9,668; Mr. Yacenda, $5,693; Mr. Shur,
$4,854; Mr. Kontomerkos, $4,875; and Mr. Guarascio, $2,259; and in the
following amounts in 1994: Mr. Kessman, $7,424; Mr. Yacenda, $4,774;
Mr. Shur, $4,196; Mr. Kontomerkos, $4,849; and Mr. Guarascio, $1,959.
Employment Agreement
The Company and Mr. Kessman entered into an employment
continuity agreement in January 1995 that provides certain benefits to Mr.
Kessman in the event of the termination of Mr. Kessman's employment
following a change in control in the Company, including a lump sum
payment equal to 2.99 times his then current base salary plus the
average of any bonuses awarded to Mr. Kessman during the two fiscal
years preceding the termination of his employment. Under the terms of
the agreement, a change in control includes the acquisition of beneficial
ownership of 20% of the Company's voting securities by any person or
group. The agreement continues through the length of Mr. Kessman's
employment with the Company.
Option Grants in Last Fiscal Year
There were no grants of options made to any officers during 1996.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-
End Option Values
The following table sets forth each exercise of stock options
made during the year ended December 31, 1996 by the Chief Executive
Officer and the four most highly compensated other executive officers
and the fiscal year-end value of unexercised options held by those
individuals as of December 31, 1996. There were no exercises or
holdings of stock appreciation rights by any officers during 1996, and
there are no outstanding stock appreciation rights.
<TABLE>
<CAPTION>
Number of Value of Unexercised
Unexercised Options In-the Money Options at
Share at Fiscal Year-End(#) Fiscal Year-End ($) (1)
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized ($) Unexercisable Unexercisable
<S> <C> <C> <C> <C>
Alan Kessman 65,688 $108,472 22,500/12,500 $15,938/4,688
Michael W. 35,000 83,125 50,000/8,000 38,250/3,000
Yacenda
Shlomo Shur 35,000 89,688 38,750/6,250 29,531/2,344
Andrew 24,000 61,500 30,000/5,000 22,500/1,875
Kontomerkos
Anthony 19,000 48,688 33,750/6,250 23,906/2,344
Guarascio
</TABLE>
(1) Based upon the last sale price on December 31, 1996 of
$2.375 per share of Common Stock.
20
<PAGE>
COMPENSATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION
It is the responsibility of the Compensation Committee of
the Board of Directors to administer the Company's
incentive plans, review the performance of management
and approve the compensation of the Chief Executive
Officer and other executive officers of the Company.
The Compensation Committee believes that the Company's
success depends on the coordinated efforts of individual
employees working as a team toward defined common
goals. The objectives of the Company's compensation
program are to align executive compensation with business
objectives, to reward individual and team performance
furthering the business objectives, and to attract, retain and
reward employees who will contribute to the long-term
success of the Company with competitive salary and
incentive plans.
Specifically, executive compensation decisions are based
on the following factors:
1. The total direct compensation package for the
Company's executives is made up of three elements: base
salary, a short-term incentive program in the form of a
performance-based bonus, and a long-term incentive
program in the form of stock options and other inducements
to own the Company's stock.
2. The Committee believes that the total compensation of
all executives should have a large incentive element that is
dependent upon overall Company performance measured
against objectives established at the beginning of the fiscal
year. Bonus and stock opportunities represent a significant
portion of the total compensation package, in an attempt to
further the Company's goal of linking compensation more
closely to the Company's performance. The percentage of
direct compensation that is dependent upon the Company's
attainment of its objectives also generally increases as the
responsibility of the officer in question for the overall
corporate performance increases.
3. Total compensation levels, i.e., base salary, bonus
potential, and number of stock options, are established by
individual levels of responsibility and regular reference to
competitive compensation levels for executives performing
similar functions and having equivalent levels of
responsibility. However, whether actual bonuses are paid
to each executive depends upon the achievement of
Company profitability goals. In the case of certain
executives who have direct responsibility for individual
business units, a portion of the incentive compensation for
such executives may consist of bonuses tied to the
performance against predetermined targets of the individual
business units for which they are responsible.
4. In 1995 and 1996, the Compensation Committee did
not perform a general survey of executive compensation.
The Committee determined that the operating results of the
Company did not support any base salary increases for
officers and no changes were made to the compensation of
any officers named in the Summary Compensation Table.
In 1994 and in previous years, the Compensation
Committee has reviewed various executive compensation
data developed by the Company's Human Resources
Department with an independent consultant from base
salary and bonus compensation information reported in a
nationally recognized independent compensation survey
(the "Survey") for a group of companies in the Company's
industry or similar industries and of comparable size and
complexity. The Committee compared the base salary and
bonus levels of the Survey group to the existing salary and
bonus compensation of the Company's management.
21
<PAGE>
5. The Committee views the 50th percentile of the Survey
data as average compensation for comparable positions and
believes it is the minimum level necessary for the Company
to be competitive in attracting and retaining qualified
executives in its industry and geographic locations.
Therefore, the base salaries for the Chief Executive Officer
and the four other highest paid executive officers were
established in 1994 at approximately the 50th percentile for
comparable positions in the Survey companies.
6. Merit increases in base salary for executives other than
Mr. Kessman have been reviewed on an individual basis by
Mr. Kessman and increases are dependent upon a favorable
evaluation by Mr. Kessman of individual executive
performance relative to individual goals, the functioning of
the executive's team within the corporate structure, success
in furthering the corporate strategy and goals, and
individual management skills. Based upon his evaluation,
Mr. Kessman recommends base salary increases to the
Committee for its approval.
7. In addition to base salary and merit increases, the
Compensation Committee considers incentive bonuses for
its executive officers, including the Chief Executive
Officer, both prospectively based upon the attainment of
specific performance goals, and retrospectively based upon
the Committee's discretionary judgment as to the
performance during the year of the Company and its
executive officers or other considerations deemed
appropriate at the time. Bonus potential for 1996 was the
same as for 1995 and 1994 for all officers named in the
Summary Compensation Table. To establish 1996 bonus
potential for executive officers, including the Chief
Executive Officer, the Compensation Committee reviewed
recommendations by the Chief Executive Officer based on
data provided by the Survey. The Committee provided that
each officer would be eligible for a bonus equal to a
percentage of his or her salary consistent with the Survey
data if certain pre-established 1996 pretax income targets or
goals were achieved by the Company. The bonus incentive
was structured so that if the Company fully achieved or
exceeded its predetermined 1996 goals, total cash
compensation of the executive (salary and bonus) would
increase to approximately the 75th percentile of the Survey
salary data. Partial achievement of the pretax income goals
(above 75% attainment) would result in partial bonus
payments. In 1996 the pretax income from operations,
excluding the gain on sale of certain businesses, for the
entire year was below the 75% threshold though pre-tax
operating income for the second six months of the year was
on plan as adjusted for the operations remaining after the
sale of the direct selling organization in May 1996.
Therefore, the Compensation Committee approved payment
of the quarterly portion of the bonus plan for the last two
quarters of 1996 which amounted to about 2.5% of salary
for each of the executives. Additionally, the Committee
approved additional special bonuses for certain executives
based on their successful completion of the sale of the
direct selling organization and the successful
implementation of the changes after the sale and the
operating performance of the Company in the last six
months of the year. Mr. Kessman received a $10,000
bonus in accordance with the existing plan for the last two
quarters of 1996 (2.5% of base salary), plus a $25,000
bonus for the successful completion of the sale of the direct
selling organization and an additional special bonus of
$28,000 for the Company's performance after the sale of
the direct organization.
The Committee reserves the right to make discretionary
bonus awards in appropriate circumstances where an
executive might merit a bonus based on other
considerations.
8. All executives, including the Chief Executive Officer,
are eligible for annual stock option grants under the
employee stock option plans applicable to employees
generally, as approved by the Compensation Committee.
The number of options granted to any individual depends
on individual performance, salary level and competitive
data. In addition, in determining the number of stock
options granted to each senior executive, the Compensation
Committee reviews the unvested options of each executive
to determine
22
<PAGE>
the future benefits potentially available to the
executive. The number of options granted will depend in
part on the total number of unvested options deemed
necessary to create a long-term incentive on the part of the
executive to remain with the Company in order to realize
future benefits.
No options were granted in 1996 to Mr. Kessman or the
four highest paid other executive officers.
In conclusion, the Compensation Committee believes that
the base salary, bonus and stock options of the Company's
Chief Executive Officer and other executives are
appropriate in light of competitive pay practices and the
Company's performance against short and long-term
performance goals.
RICHARD ROSENBLOOM
JERRY SESLOWE
PERFORMANCE GRAPH
The graph below compares, for the last five fiscal years, the
yearly percentage change in cumulative total returns
(assuming reinvestment of dividends and interest) of (i) the
Company's Common Stock, (ii) the Company's
Debentures, (iii) the NASDAQ Stock Market and (iv) a
peer group index constructed by the Company (the "Peer
Group").
The Peer Group consists of the following companies:
Aspect Telecommunications Corp. Inter-Tel, Inc.
Boston Technology, Inc. InterVoice, Inc.
Brite Voice Systems, Inc. Microlog Corporation
Centigram Communications Corp. Mitel Corporation
Comdial Corporation Norstan, Inc.
Davox Corporation Octel Communications Corp.
Digital Sound Corporation
Electronic Information Systems, Inc. Syntellect, Inc.
Mosaix (formerly Teknekron Communications
Digital Systems International, Inc.) Systems, Inc. (TCSI)
TIE/Communications, Inc., was formerly included among
the Peer Group companies. It has been eliminated because
it is now privately held.
The Peer Group includes companies who compete with the
Company in the general voice communications equipment
area as well as those active in several more specialized
areas, such as ACD (automatic call distribution), voice
mail, interactive voice response systems, and predictive
dialing systems, as well as additional general voice
communications companies. The Company believes that
the mix of the companies in the Peer Group accurately
reflects the mix of businesses in which the Company is
currently engaged and will be engaged in the foreseeable
future.
The Peer Group is not identical to the Survey group used to
evaluate compensation of executives described in the
Compensation Committee Report. The Peer Group above
does not provide sufficient compensation data for the
Committee's purposes, and the Survey group includes
non-public entities for whom stock price data for the
performance graph is unavailable.
23
<PAGE>
Although AT&T and Northern Telcom are the Company's
principal competitors in supplying voice communications
equipment, software and services to the under-300-desktop
market, the business in which the Company is primarily
engaged, both of those companies are much larger than the
Company and derive most of their revenues from other
lines of business and so have not been included in the Peer
Group. The returns of each Peer Group issuer have been
weighted in the graph below to reflect that issuer's stock
market capitalization at the beginning of each calendar
year.
24
<PAGE>
Comparison of Five-Year Cumulative Return
Among EXECUTONE, including the Common
Stock ("XTON") and the Debentures ("XTONG"),
the NASDAQ (US) Index and the Company's
Peer Group
<TABLE>
CAPTION>
Weighted Average
Cumulative Total Returns 1991 1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C>
XTON $100 $223 $354 $400 $285 $292
NASDAQ $100 $116 $134 $131 $185 $227
PEER GROUP $100 $134 $236 $213 $305 $382
XTONG $100 $181 $249 $248 $288 $321
[PERFORMANCE GRAPH]
</TABLE>
Compensation Committee Interlocks and Insider Participation
The members of the Compensation Committee until July 30,
1996, were Thurston Moore, Richard Rosenbloom and William Smart.
The members of the Compensation Committee commencing July 30,
1996, were Richard Rosenbloom and Jerry Seslowe.
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.
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
The following table lists any person (including any "group" as that
term is used in Section 13(d)(3) of the Exchange Act) who, to the
knowledge of the Company, was the beneficial owner as of March 31,
1997, of more than 5% of the outstanding voting shares of the Company.
Unless otherwise noted, the owner has sole voting and dispositive power
with respect to the securities.
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Percentage
Title of Class Beneficial Owner Beneficial Ownership of Class(1)
<S> <C> <C> <C>
Common Stock Entitles Associated with 4,557,989 (2) 9.22
Hambrecht & Quist
Group
One Bush Street
San Francisco, CA
94104
Entities Associates with 3,245,078 (3) 6.58
Edmund H., Shea, Jr.
655 Brea Canyon Road
Walnut Creek, CA
25
<PAGE>
91789
Series A Stock Cooper Life Sciences 78,819 31.53
160 Broadway
New York, NY 10038
James W. Spencer 26,265 10.65
3042 Spring Hill Road
Smyrna, GA 30080
Watertone L.L.C. 127,895 51.16
730 Fifth Avenue
New York, NY 10038
Series B Stock Cooper Life Sciences 31,528 31.53
160 Broadway
New York, NY 10038
James W. Spencer 10,650 10.65
3042 Spring Hill Road
Smyrna, GA 30080
Watertone L.L.C. 51,157 51.16
730 Fifth Avenue
New York, NY 10038
</TABLE>
(1) With respect to the Common Stock, percentages shown are based
upon 49,471,481 shares of Common Stock actually outstanding as of
March 31, 1997. In cases where the beneficial ownership of the
individual or group includes options, warrants or convertible securities,
the percentage is based on 49,471,481 shares actually outstanding, plus
the number of shares 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) The Hambrecht & Quist entities share power to vote and dispose of
all such shares.
(3) Includes 11,935 shares of Common Stock issuable upon conversion
of the Company's Debentures, of which entities associated with Mr. Shea
own $148,800 in principal amount, representing less than 1% of the
outstanding principal amount. The Shea entities share the power to vote
and dispose of all such shares.
The following table sets forth as of March 31, 1997, the beneficial
ownership of the Company's voting shares by all current directors and
nominees of the Company, the Chief Executive Officer, and the four next
most highly compensated executive officers and all directors and
executive officers of the Company as a group. Unless otherwise
indicated, each person listed below has sole voting and investment power
over all shares beneficially owned by him or her.
<TABLE>
<CAPTION>
Name of Amount and Nature of Percentage
Title of Class Beneficial Owner Beneficial Ownership of Classs (1)
<S> <C> <C> <C>
Common Stock Stanley M. Blau 705,429 (2) 1.42
Anthony Guarascio 264,060 (3) *
26
<PAGE>
Alan Kessman 1,741,336 (4) 3.52
Andrew Kontomerkos 471,732 (5) *
Thurston R. Moore 124,535 (6) *
Richard S. Rosenbloom 63,200 (7) *
Jerry M. Seslowe 195,915 (8) *
Shlomo Shur 742,055 (9) 1.52
Michael W. Yacenda 1,005,190 (10) 2.03
All Directors and 6,382,855 (11) 12.65
Officers as a Group
(17 persons)
Series A Stock Stanley M. Blau -0-
Anthony Guarascio -0-
Alan Kessman -0-
Andrew Kontomerkos -0-
Thurston R. Moore -0-
Richard S. Rosenbloom -0-
Jerry M. Seslowe 4,692 (12) 1.87
Shlomo Shur -0-
Michael W. Yacenda -0-
All Directors and 4,692 1.87
Officers as a Group
(17 persons)
Series B Stock Stanley M. Blau -0-
Anthony Guarascio -0-
Alan Kessman -0-
Andrew Kontomerkos -0-
Thurston R. Moore -0-
Richard S. Rosenbloom -0-
Jerry M. Seslowe 1,877 (13) 1.87
Shlomo Shur -0-
Michael W. Yacenda -0-
All Directors and 1,877 1.87
Officers as a Group
(17 persons)
</TABLE>
(1) With respect to the Common Stock, percentages shown are based
upon 49,471,481 shares of Common Stock actually outstanding as of
March 31, 1997. In cases where the beneficial ownership of the
individual or group includes options, warrants or convertible securities,
the percentage is based on 49,471,481 shares actually outstanding, plus
the number of shares 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 300,000 shares subject to options exercisable within 60
days of June 1, 1997.
27
<PAGE>
(3) Includes 40,000 shares subject to options exercisable within 60 days
of June 1, 1997 and 9,412 shares issuable upon conversion of the
Company's Debentures, of which Mr. Guarascio beneficially owns
$100,000 in principal amount or less than 1% of the outstanding principal
amount.
(4) Includes 35,000 shares subject to options exercisable within 60 days
of June 1, 1997.
(5) Includes 35,000 shares subject to options exercisable within 60 days
of June 1, 1997.
(6) Includes 38,200 shares subject to options exercisable within 60 days
of June 1, 1997.
(7) Includes 38,200 shares subject to options and 25,000 shares subject
to warrants exercisable within 60 days of June 1, 1997.
(8) Includes 37,912 shares subject to options and 25,000 shares subject
to warrants, 46,245 of which are exercisable within 60 days of June 1,
1997. Also includes12,755 shares of Common Stock owned and 63,559
shares of Common Stock subject to exercisable options held by
Resource Holdings Associates, of which Mr. Seslowe is a managing
director and in which he holds a greater than 10% ownership interest.
Does not include 203,756 shares of Common Stock contingently issuable
upon conversion of the Preferred Stock owned by Mr. Seslowe or the
45,875 shares of Common Stock contingently issuable upon conversion
of the Preferred Stock owned by Resource Holdings Associates.
(9) Includes 45,000 shares subject to options exercisable within 60 days
of June 1, 1997.
(10) Includes 58,000 shares subject to options exercisable within 60 days
of June 1, 1997 and 3,576 shares issuable upon conversion of the
Company's Debentures, of which Mr. Yacenda beneficially owns $38,000
in principal amount or less than 1% of the outstanding principal amount.
(11) Includes 903,742 shares subject to options, and 50,000 shares
subject to warrants, of which 661,286 and 33,334, respectively, are
exercisable within 60 days of June 1, 1997, and 45,176 shares issuable
upon conversion of the Company's Debentures.
(12) Includes 862 shares held by Resource Holdings.
(13) Includes 345 shares held by Resource Holdings.
28
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
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 "Executive Plan") approved by
shareholders at the 1994 Annual Meeting was implemented in October
1994 with 30 employees participating. Under the terms of the Executive
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 lender 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 bank. The Company holds the
purchased Common Stock as security for its guarantees of the
repayment of the loans. The following table contains information about
borrowings in excess of $60,000 by executive officers that were
outstanding during 1996 pursuant to the Executive Plan that are
guaranteed by the Company. No director, nominee, or beneficial owner
of more than 5% of any class of voting securities is eligible for
participation in the Executive Plan.
Highest Amount of Unpaid
Indebtedness Between Indebtedness
1/1/96 and 3/31/97, at 3/31/97
Including Including
Name Accrued Interest Accrued Interest
Alan Kessman $2,227,051 $2,227,051
Michael W. Yacenda 1,312,691 1,312,691
Shlomo Shur 649,557 649,557
Andrew Kontomerkos 649,557 649,557
Barbara C. Anderson 353,287 317,067
James E. Cooke III 371,175 371,175
Anthony R. Guarascio 519,645 519,645
Israel J. Hersh 111,353 111,353
Robert W. Hopwood 374,434 374,434
Vic Northrup 262,104 262,104
Frank J. Rotatori 222,705 222,705
29
<PAGE>
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, 1996 and 1995
Consolidated Statements of Operations - Years ended December 31,
1996, 1995 and 1994
Consolidated Statements of Changes in Stockholders' Equity - Three
years ended December 31, 1996
Consolidated Statements of Cash Flows - Years ended December 31,
1996, 1995 and 1994
Notes to Consolidated Financial Statements
The schedules to consolidated financial statements required by this item
and included in this report are as follows:
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:
Exhibit No.
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
30
<PAGE>
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. Incorporated by
reference to the Registrant's Annual Report on Form 10-K/A for
the year ended December 31, 1995 filed on June 4, 1996.
3-1 Articles of Incorporation, as amended through December 18,
1995. Incorporated by reference to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1995
filed on April 15, 1996.
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.
Incorporated by reference to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1995 filed on April
15, 1996.
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.
31
<PAGE>
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. 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 as amended July 30, 1996.
Previously filed.
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. Incorporated by
reference to the Registrant's Annual Report on Form 10-K/A for
the year ended December 31, 1995 filed on August 29, 1996.
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).
Incorporated by reference to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1995 filed on April
15, 1996.
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 the
Registrant, in favor or Jerry M. Seslowe, dated February 1, 1996.
Filed herewith.
10-21 Management Agreement for the National Indian Lottery dated
January 16,1995. Incorporated by reference to the Registrant's
Annual Report on Form 10-K for the year ended December 31,
1995 filed on April 15, 1996.
32
<PAGE>
10-22 Distributor Agreement dated as of May 31, 1996, between
EXECUTONE Information Systems, Inc. and Clarity Telecom,
Inc. Incorporated by reference to the Registrant's Annual Report
on Form 10-K/A for the year ended December 31, 1995 filed on
June 4, 1996.
11 Statement regarding computation of per share earnings.
Previously filed.
13 1996 Annual Report to Shareholders of EXECUTONE
Information Systems, Inc. Previously filed.
21 Subsidiaries of EXECUTONE Information Systems, Inc. Filed
herewith.
23.1 Consent of Arthur Andersen LLP. Filed herewith.
23.2 Consent of Hunton & Williams. Filed herewith.
27 Financial Data Schedule. Previously filed.
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)
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
33
<PAGE>
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, 1996.
34
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned thereunto duly authorized.
EXECUTONE Information Systems, Inc.
By: __/s/ Alan Kessman___________________
Alan Kessman, Chairman, President
and Chief Executive Officer
April 28, 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.
April 28, 1997 __/s/ Alan Kessman______________
Alan Kessman
Chairman, President and Chief Executive
Officer (Principal Executive Officer)
April 28, 1997 ______________________________
Stanley M. Blau
Director
April 28, 1997 __/s/ Anthony Guarascio__________
Anthony R. Guarascio
Vice President-Finance, and Chief Financial
Officer (Principal Financial and Accounting
Officer)
April 28, 1997 ___/s/ Thurston R. Moore___________
Thurston R. Moore
Director
April 28, 1997 ___/s/ Richard S. Rosenbloom___
Richard S. Rosenbloom
Director
April 28, 1997 ______________________________
Jerry M. Seslowe
Director
35
<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 31, 1997. 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 31, 1997
S-1
<PAGE>
SCHEDULE II
<TABLE>
<CAPTION>
VALUATION AND QUALIFYING ACCOUNTS
(Amounts in Thousands)
Additions Deductions
Charged Charged Net
Balance at (Credited) (Credited) Writeoffs Balance at
Beginning to Costs to Other Uncollectible End of
of Period and Expenses Accounts Accounts Period
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996
Deducted from asset accounts:
Allowance for doubtful accounts $1,715 $1,921 $(551)* $(979) $2,106
Allowance for uncollectible
notes receivable 259 (82) 2,039* ---- 2,216
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
* Adjustments related to sale of direct sales
organization
</TABLE>
S-2
<PAGE>
EXECUTONE INFORMATION SYSTEMS, INC.
EXHIBITS TO 1996 ANNUAL REPORT ON FORM 10-K
Exhibit No.
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. Incorporated by
reference to the Registrant's Annual Report on Form 10-K/A for
the year ended December 31, 1995 filed on June 4, 1996.
3-1 Articles of Incorporation, as amended through December 18,
1995. Incorporated by reference to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1995
filed on April 15, 1996.
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.
Incorporated by reference
E-1
<PAGE>
to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1995 filed on April
15, 1996.
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, 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 as amended on July 30, 1996.
Previously filed.
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. Incorporated by
reference to the Registrant's Annual Report on Form 10-K/A for
the year ended December 31, 1995 filed on August 29, 1996.
E-2
<PAGE>
10-16 Manufacturing Services Agreement dated as of January 10,
1996, between EXECUTONE Information Systems, Inc. and
Compania Dominicana de Telefonos, C por A (Codetel).
Incorporated by reference to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1995 filed on April
15, 1996.
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 the
Registrant, in favor or Jerry M. Seslowe, dated February 1, 1996.
Filed herewith.
10-21 Management Agreement for the National Indian Lottery dated
January 16,1995. Incorporated by reference to the Registrant's
Annual Report on Form 10-K for the year ended December 31,
1995 filed on April 15, 1996.
10-22 Distributor Agreement dated as of May 31, 1996, between
EXECUTONE Information Systems, Inc. and Clarity Telecom,
Inc. Incorporated by reference to the Registrant's Annual Report
on Form 10-K/A for the year ended December 31, 1995 filed on
June 4, 1996.
11 Statement regarding computation of per share earnings.
Previously filed.
13 1996 Annual Report to Shareholders of EXECUTONE
Information Systems, Inc. Previously filed.
21 Subsidiaries of EXECUTONE Information Systems, Inc. Filed
herewith.
23.1 Consent of Arthur Andersen LLP. Filed herewith.
23.2 Consent of Hunton & Williams. Filed herewith.
27 Financial Data Schedule. Previously filed.
E-3
<PAGE>
EXHIBIT 10-20
NEITHER THIS WARRANT NOR THE SHARES OF COMMON
STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (the "Act"). NEITHER THIS WARRANT NOR SUCH
SHARES MAY BE SOLD, TRANSFERRED, PLEDGED OR
HYPOTHECATED EXCEPT AS PROVIDED IN SECTION 4 OF THE
WARRANT TO PURCHASE COMMON STOCK OF THE COMPANY
EXPIRING FEBRUARY 1, 2001, A COPY OF WHICH IS ON FILE
AT THE PRINCIPAL OFFICE OF THE COMPANY.
Issued as of Void after February 1, 2001
February 1, 1996
WARRANT TO PURCHASE 25,000 SHARES
OF COMMON STOCK
OF
EXECUTONE INFORMATION SYSTEM, INC.
(incorporated under the Laws of the
Commonwealth of Virginia)
THIS IS TO CERTIFY THAT, JERRY M. SESLOWE ("Seslowe")
or his permitted registered assigns (Seslowe and such assigns
sometimes hereinafter being referred to as the "Holder"), is entitled,
subject to the terms and conditions set forth herein, and further subject to
an adjustment as hereinafter provided, to purchase from EXECUTONE
INFORMATION SYSTEMS, INC., a Virginia corporation (the "Company"),
an aggregate of Twenty-Five Thousand (25,000) fully paid and
nonassessable shares (the "Underlying Shares") of the common stock of
the Company, $0.01 par value ("Common Stock"), upon payment of the
purchase price of SIXTY-FIVE THOUSAND SEVEN HUNDRED FIFTY
DOLLARS ($65,750.00) or TWO DOLLARS AND SIXTY-THREE CENTS
($2.63) per Underlying Share (the "Purchase Price"), and also is entitled
to exercise the other appurtenant rights, powers and privileges
hereinafter set forth at any time from and after 9:00 a.m. (Eastern
Standard Time) February 1, 1996 and on or before 5:00 p.m. (Eastern
Standard Time), on February 1, 2001.
This Warrant (the "Warrant") entitles the Holder hereof to
purchase up to an aggregate of 25,000 shares of Common Stock, which
right shall vest ratably over a period of three (3) years, one-third on
February 1, 1997, one-third on February 1, 1998 and one-third on
February 1, 1999; provided, however, that if Seslowe ceases to be a
director of the Company, either voluntarily or because he has not been
reelected by the Shareholders of the Company, then Seslowe's vesting of
rights shall terminate as of the date he is no longer a director of the
Company.
THE EXERCISE AND TRANSFER OF THIS WARRANT ARE
RESTRICTED BY THE PROVISIONS OF SECTION 4 HEREOF
<PAGE>
1. Exercise of Warrant.
This Warrant may be exercised in whole or in part by the Holder
hereof, by delivery to the Company at its principal office at 478 Wheelers
Farms Road, Milford, CT 06460 of (a) a written notice to the Holder, in
substantially the form of the Subscription Notice attached hereto as
Exhibit "A", of such Holder's election to exercise this Warrant, which
notice shall specify the number of Underlying Shares to be purchased, (b)
a check payable to the Company in an amount equal to the aggregate
Current Price (as defined below) of the number of shares of Common
Stock being purchased and (c) this Warrant. The Company shall, as
soon as reasonably practicable, execute and deliver or cause to be
delivered to Holder, in accordance with such notice, one or more
certificates representing the aggregate number of shares of Common
Stock specified in such notice. The stock certificate(s) so delivered shall
be issued in the name of the Holder or such other name as shall be
designated in such notice. Such certificate(s) shall be deemed to have
been issued and the Holder or any other person so designated to be
named therein shall be deemed for all purposes to have become a
Holder of record of such Underlying Shares as of the date such notice is
received by the Company. If this Warrant shall have been exercised only
in part, the Company shall, at the time of delivery of said certificate(s),
deliver to the Holder a new Warrant evidencing the rights of the Holder to
purchase the remaining shares of Common Stock called for by this
Warrant (stated in Shares), which new Warrant shall in all other respects
be identical to this Warrant, or, at the request of the Holder, appropriate
notation may be made on this Warrant and the same returned to the
Holder.
2. Fractional Shares.
This Warrant is only exercisable with respect to whole Underlying
Shares and not fractions thereof unless the Company otherwise agrees.
Accordingly, the Company shall not be required to issue certificates
representing fractions of Underlying Shares upon any exercise of this
Warrant; provided, however, in respect of any final fraction of a share it
may, at its sole option, in lieu of delivering a fractional share, make a
payment in cash based upon the then fair market value of such fraction
of the Underlying Shares.
3. Transfer, Division and Combination.
No Warrant granted under this Agreement shall be transferable
by Seslowe otherwise than by Will or the laws of descent and distribution
and, during the lifetime of Seslowe, shall not be exercisable by any other
person, but only by him. The Company agrees to maintain at its principal
office in Milford, Connecticut, books for the registration and transfer of
the Warrants and, subject to the provisions of this paragraph and Section
4 hereof, this Warrant and all rights hereunder are transferable ONLY
with respect to (i) Seslowe's heirs and devisees, or (ii) Seslowe's Estate
in whole or in part, on such books upon surrender of this Warrant at such
office, together with a written assignment of this Warrant duly executed
by the Holder hereof or his agent or attorney, and with funds sufficient to
pay any stock transfer taxes payable upon the making of such transfer.
Upon surrender and payment, the Company shall execute and deliver a
new Warrant(s) in the name of the assignee of Holder and in the
denominations specified in such instrument of assignment, and this
Warrant shall be canceled promptly. If and when this Warrant is
assigned in blank, the Company may, but shall not be obligated to, treat
the bearer hereof as the absolute owner of this Warrant for all purposes
and the Company shall not be affected by any notice to the contrary. A
warrant may be exercised by a Holder for the purchase of shares of
Common Stock without having a new Warrant issued.
<PAGE>
The Company shall pay all expenses, taxes (other than stock
transfer taxes and any of Holder's income taxes, if any, incurred as a
result of the transfer) and other charges payable in connection with the
preparation, issue and delivery of Warrants hereunder.
4. Restriction on Exercise and Transfer of Warrants and Transfer of
Warrants and Common Stock.
Except as otherwise provided herein, this Warrant and the
certificates representing the Underlying Shares shall be stamped or
otherwise imprinted with a legend substantially in the following form:
"Neither this Warrant nor the shares of Common Stock
issuable upon exercise of this Warrant have been registered
under the Securities Act of 1933, as amended (the "Act").
Neither this Warrant nor such Shares may be sold, transferred,
pledged or hypothecated except as provided in Section 4 of the
Warrant to purchase Common Stock of the Company expiring
February 1, 2001, a copy of which is on file at the principal office
of the Company."
This Warrant shall be exercisable (1) only if the issue of
Underlying Shares issuable upon exercise is exempt from the
requirements of registration under the Securities Act of 1933, as
amended (the "Act") (or any similar statute then in effect) and any
applicable state securities law or (2) upon registration of such Underlying
Shares in compliance therewith. This Warrant shall be transferable only
(i) with the prior written consent of the Company, or (ii) by will or the laws
of descent and distribution, and in either event only if the Warrant is
registered or the transfer is exempt from the requirements of registration
under the Act (or any similar statute then in effect) and any applicable
state securities law.
5. Acknowledgment by the Holder of Restrictions.
The Holder of this Warrant and certificates representing the
Underlying Shares, by acceptance hereof and thereof, acknowledges and
agrees that: (a) the Warrant and the Underlying Shares have not been
registered under the Act in reliance upon exemptions from the
registration provisions of the Act set forth therein, or in the rules and
regulations promulgated thereunder (and there is no obligation on the
part of the Company to register the Warrant or the Underlying Shares
under the Act); and (b) the Warrant and the Underlying Shares will not be
freely tradeable. The Holder represents that he fully understands the
restrictions on his ability to transfer this Warrant and the Underlying
Shares. Without limiting the foregoing and by way of illustration only, the
Holder understands that if he presently desired to sell Underlying Shares
pursuant to the exemption from the registration provisions of the Act
contained in Rule 144 (the "Rule") promulgated under the Act, as
presently constituted, such Underlying Shares might be sold by him
pursuant to the Rule only after a minimum holding period of two (2) years
(computed in accordance with the Rule) and, thereafter, only in the
limited amounts, in the manner and under the limited circumstances
prescribed by the Rule.
6. Change in Control.
The Warrant that is outstanding on a Control Change Date, as
hereinafter defined, shall be exercisable in whole or in part on that date
and thereafter during the remainder of the Warrant period stated in this
Warrant Agreement (the "Agreement"). A Change in Control occurs if,
after the date of this Agreement, (i) any person, including a
<PAGE>
"group" as defined in Section 13(d)(3) of the Securities and Exchange Act
of 1934 (the "Exchange Act"), becomes the owner or beneficial owner of
Company securities having twenty percent (20%) or more of the
combined voting power of the then outstanding Company securities that
may be cast for the election of the Company's directors (other than as a
result of an issuance of securities initiated by the Company, or open
market purchases approved in advance by the board, as long as the
majority at the time the purchases are made are directors who were
members of the Board immediately prior to the purchases being made
and approved such purchases); or (ii) as the direct or indirect result of, or
in connection with, a cash tender or exchange offer, a merger or other
business combination, a sale of assets, a contested election, or any
combination of these transactions, the persons who were directors of the
Company before such transactions cease to constitute a majority of the
Company's Board, or any successor's board, within two (2) years of the
last of such transactions. For purposes of this Agreement, the Control
Change Date is the date on which an event described in (i) or (ii) occurs.
If a Change in Control occurs on account of a series of transactions, the
Control Change Date is the date of the last of such transactions.
7. Change in Management.
Notwithstanding any specified vesting or applicable early
exercise Warrant prices, if this Warrant is outstanding on the date
Seslowe's directorship with the Company is terminated or constructively
terminated (as described herein) as a direct or indirect result of the
occurrence of one of the events specified in subsections (i) or (ii) of this
paragraph, this Warrant shall be exercisable, in whole or in part, at the
lowest Warrant price available during the term of the Warrant, on that
date and thereafter during the remainder of the Warrant period stated
herein. Such exercisability will occur if after the date of the Agreement,
(i) any person, including a "group" as defined in Section 13(d)(3) of the
Exchange Act, becomes the owner or beneficial owner of Company
securities having twenty percent (20%) or more of the combined voting
power of the then outstanding Company securities that may be cast for
the election of the Company's directors (other than as a result of an
issuance of securities initiated by the Company); or (ii) the Company is
the subject of a successful cash tender or exchange offer, is a party to a
merger or other business combination, sells a substantial portion of its
assets, experiences a change in management brought about by a
contested election or participates in any combination of these
transactions. For purposes of this paragraph, the Transaction Date is the
date on which an event described in subsections (i) or (ii) hereof occurs.
The date upon which Seslowe is no longer a member of the Board of
Directors of the Company either through resignation, a majority of the
shareholders of the Company not voting for Seslowe as a director or
voting for his earlier removal with or without cause or through his removal
by a majority of the members of the Board of Directors shall constitute a
constructive termination of Seslowe's directorship with the Company
within the meaning of this paragraph.
In the event Seslowe's service as a director of the Company
terminates for any other reason or due to any other cause, including
death, or a resignation or removal that is not a direct or indirect result of
the events described above, then this Warrant shall be exercisable, to the
same extent it was exercisable at the date of termination, for a period of
seven months following the date of termination, provided that in no event
shall this Warrant be exercisable after February 1, 2001.
8. Current Price: Adjustments.
As used in this Warrant, "Current Price" (per share of Underlying
Stock) at any date shall mean the amount equal to the quotient resulting
from dividing (i) the purchase
<PAGE>
price per Share provided herein by (ii) the
number of shares (including any fractional share) of Underlying Shares
comprising a Share on such date. A "Share" shall consist initially of one
share of Common Stock of the Company as such stock is constituted on
the date of this Agreement. The Purchase Price of a Share shall be Two
Dollars and Sixty-Three Cents ($2.63).
In the event that the outstanding Common Stock of the Company
is hereafter changed by reason of reorganization, merger, consolidation,
recapitalization, reclassification, stock split-up, combination of Shares,
stock dividends or the like, an appropriate adjustment shall be made by
the Board of Directors in the aggregate number of Underlying Shares
available under this Warrant and in the number of Underlying Shares and
price per Underlying Share subject to outstanding Warrants. If the
Company shall be reorganized, consolidated or merged with another
corporation, or if all or substantially all of the assets of the Company shall
be sold or exchanged, the Holder of the Warrant shall, at the time of
issuance of the stock under such corporate event, be entitled to receive
upon the exercise of the Holder's Warrant the same number and kind of
shares of stock or the same amount of property, cash or securities as the
Holder would have been entitled to receive upon the happening of any
such corporate event as if the Holder had been, immediately prior to such
event, the Holder of the number of Underlying Shares covered by the
Holder's Warrant.
Any adjustment in the number of Underlying Shares shall apply
proportionately to only the unexercised portion of the Warrant granted
hereunder. If a fraction of a share would result from any such
adjustment, the adjustment shall be revised to the next lower whole
number of Underlying Shares.
9. Reservation of Shares.
The Company covenants and agrees that (a) so long as this
Warrant is outstanding, it has or will reserve and keep available out of its
authorized but unissued Common Stock, solely for the purpose of issuing
Underlying Shares from time to time upon the exercise of this Warrant,
an adequate number of Shares of Common Stock for delivery at the
times and in the manner provided herein upon exercise of this Warrant;
(b) the Underlying Shares delivered upon exercise of this Warrant shall
be validly issued and outstanding and fully paid and nonassessable
shares of Common Stock, free from any preemptive rights; and (c) it will
pay when due any and all Federal and state original issue taxes which
may be payable with respect to the issuance of the Warrant or of any
Shares of Common Stock upon exercise of the Warrant. The Company
shall not, however, be required (i) to pay any transfer tax which may be
payable with respect to any transfer of the Warrant, the issuance of
certificates of Common Stock in a name other than that of the Holder or
any transfer of Underlying Shares or (ii) to pay any Federal or state
income taxes of Holder which may occur as a result of the exercise of the
Warrant or (iii) to issue or deliver the Warrant or any certificate for
Underlying Shares until any such taxes shall have been paid by the
Holder.
10. No Rights of Shareholders; Limitation of Liability.
No Holder shall, based on being a holder of this Warrant, be
entitled to vote or receive dividends or be deemed the holder of Common
Stock or any other security of the Company which may at any time be
issuable on the exercise hereof for any purpose, nor shall anything
contained herein be construed to confer upon the Holder, as such, any of
the rights of a shareholder of the Company or any right to vote for the
election of directors or upon any matter submitted to shareholders at any
meeting thereof, or to give or withhold consent to any corporate action
(whether upon any recapitalization, issue of
<PAGE>
stock, reclassification of
stock, change to or of par value, consolidation, merger, conveyance or
otherwise) or to receive notice of meetings, or to receive dividends or
subscription rights or otherwise until this Warrant shall have been
exercised in accordance with Section 1 hereof. No provisions hereof, in
the absence of affirmative action by the Holder hereof to purchase shares
of Common Stock, and no mere enumeration herein of rights or
privileges of the Holder hereof, shall give rise to any liability of such
Holder for the purchase price or as a shareholder of the Company,
whether such liability is asserted by the Company, creditors of the
Company or others.
11. Replacement of Securities.
Upon receipt of evidence reasonably satisfactory to the Company
of the loss, theft, destruction or mutilation of any certificates evidencing
ownership of this Warrant and in the event of any such loss, theft or
destruction upon delivery of an indemnity agreement or, if the Holder so
elects, a surety bond reasonably satisfactory to the Company or, in the
case of any such mutilation, upon surrender and cancellation of any such
certificate, the Company shall forthwith execute and deliver in lieu thereof
a new Warrant of like tenor.
12. Negotiability.
Every Holder of this Warrant, by accepting the same, consents
and agrees with the Company that (a) this Warrant is transferable, in
whole or in part, only upon compliance with the conditions set forth herein
by the registered holder hereof in person or by an attorney duly
authorized in writing by the Holder at the office of the Company as
provided herein; (b) this Warrant may be transferred by the Holder only
with respect to that portion of the Warrant to which the Holder is vested at
the time of such transfer; and (c) the Company may deem and treat the
person in whose name this Warrant is registered as the absolute, true
and lawful owner for all purposes whatsoever, and the Company shall not
be affected by any notice to the contrary.
13. Change; Waiver; Applicable Law.
This Warrant and any term hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the
party against whom enforcement of such change, waiver, discharge or
termination is sought. This Warrant shall be construed and enforced in
accordance with the laws of the Commonwealth of Virginia.
14. Notices.
Any notice to be given to the Company under the terms hereof
shall be addressed to the Company in care of its President at 478
Wheelers Farms Road, Milford, Connecticut 06820, and any notice to the
Holder shall be addressed to his address as reflected on the records of
the Company, or at such other address as the Company, the Holder and
his successors or assigns may hereafter designate in writing to the other.
Any such notice shall have been deemed given upon personal delivery
or on the third business day after being enclosed in a properly sealed
envelope or wrapper properly addressed, registered or certified and
deposited (postage and registry or certification fee prepaid) in post office
or branch post office regularly maintained by the United States
Government.
<PAGE>
15. Forms of Election to Exercise or Transfer Warrant.
The form to be used in the event the Holder hereof desires to
exercise or transfer the Warrant is attached hereto as Exhibit "A".
IN WITNESS WHEREOF, the Company has caused this
Warrant to be signed in its name by its President or a duly authorized
Vice President.
DATED this______ day of ___________, 19___
COMPANY:
EXECUTONE INFORMATION SYSTEMS, INC.,
a Virginia corporation
By________________________
Alan Kessman
Its President
[CORPORATE SEAL]
ATTEST:
____________________________________
Barbara C. Anderson
Vice President, General Counsel and Secretary
HOLDER:
By __________________________
Jerry M. Seslowe
<PAGE>
EXHIBIT "A"
SUBSCRIPTION NOTICE
The undersigned, the Holder of the foregoing Warrant, hereby elects to
exercise purchase rights represented by such Warrant for, and to
purchase thereunder,______________________________________
(_____________________) shares of the Common Stock covered by
such Warrant and herewith makes payment in full therefor in the amount
of __________________________ Dollars ($________________) in
cash or check made payable to the Company, and requests that one or
more certificates for such shares (and any securities or property
deliverable upon such exercise) be issued in the name of and delivered
to _______________________________________________________,
whose address is ___________________________________________.
The undersigned agrees that, in the absence of an effective registration
statement with respect to Common Stock issued upon this exercise, the
undersigned is acquiring such Common Stock for investment and not
with a view to distribution thereof and that the certificate or certificates
representing such Common Stock may bear a legend substantially as
follows: "Neither this Warrant nor the Shares of Common Stock issuable
upon exercise of this Warrant have been registered under the Securities
Act of 1933, as amended (the "Act"). Neither this Warrant nor such
Shares may be sold, transferred, pledged or hypothecated in the absence
of an effective registration statement for the shares under the Act or
otherwise in compliance with the Act." The undersigned further agrees
that the shares represented by this Warrant may not be transferred
except as provided in Sections 3 and 4 of the Warrant to purchase
Common Stock of the Company expiring February 1, 2001, a copy of
which is on file at the principal office of the Company.
DATED:_______________ __________________________
Jerry M. Seslowe
Address:
<PAGE>
ASSIGNMENT
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and
transfers unto ___________________________________________, the
rights represented by the foregoing Warrant of EXECUTONE Information
Systems, Inc. and appoints ____________________________________,
attorney to transfer said rights on the books of said corporation, with full
power of substitution in the premises.
DATED:____________________ ________________________
Jerry M. Seslowe
NOTICE: The signature to this assignment must correspond with
the name as written upon the face of the within Warrant in every
particular, without alteration or enlargement or any change whatsoever.
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF EXECUTONE INFORMATION SYSTEMS, INC.
JURISDICTION OF %
NAME INCORPORATION OWNERSHIP BUSINESS
Unistar Gaming Corporation Delaware 100% Holding Company
478 Wheelers Farms Road
Milford, CT 06460-1847
Unistar Entertainment, Inc. Idaho 100% Lottery Management
478 Wheelers Farms Road
Milford, CT 06460-1847
All listed subsidiaries do business only under their corporate names listed
above. Certain inactive and immaterial subsidiaries, which if considered
in the aggregate as a single subsidiary would not constitute a "significant
subsidiary" as defined in Rule 1-02(w) of the Commission as of
December 31, 1997, are not listed.
<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, 33-42561, 33-23294, 33-16585, 33-6604, 33-959, 2-91008,
33-40623, 33-46874, 33-46875, 33-50628, 33-57519, 33-63637, 333-7279
and 33-62257.
ARTHUR ANDERSEN LLP
Stamford, Connecticut
April 29, 1997
<PAGE>
EXHIBIT 23.2
April 28 , 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, 1996
(File No. 000-11551)
Gentlemen:
This firm has reviewed the information set forth in the seventh 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, 1996 of EXECUTONE Information Systems, Inc.
(the "Company"). We understand that the information set forth therein as
it relates to the issue of the authorization of the National Indian Lottery
under 25 U.S.C. 2701 et seg. 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>
