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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[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, 1997
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. [X]
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 31, 1998 was $97,872,323, 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 31, 1998, was 49,721,084.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference into the Part of this Form
10-K indicated below:
Part II 1997 Annual Report to Shareholders
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TABLE OF CONTENTS
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Item Page
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PART I
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1. Business 1
2. Properties 16
3. Legal Proceedings 16
4. Submission of Matters to a Vote of Security Holders 18
Executive Officers of the Registrant 19
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters 22
6. Selected Financial Data 22
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 22
8. Financial Statements and Supplementary Data 22
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 22
PART III
10. Directors and Executive Officers of the Registrant 23
11. Executive Compensation 24
12. Security Ownership of Certain Beneficial Owners
and Management 31
13. Certain Relationships and Related Transactions 34
PART IV
14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 36
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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's UniStar Entertainment indirect subsidiary ("UniStar") has the
exclusive right to design, develop and manage the National Indian Lottery and US
Lottery (collectively, the "Lottery") offered by the Coeur d'Alene Indian Tribe
of Idaho (the "Coeur d'Alene Tribe" or the "Tribe"). Executone's products are
sold under the EXECUTONE, INFOSTAR, IDS, LIFESAVER, and INFOSTAR/ILS brand names
through a national network of independent distributors and direct sales and
service employees. (Capitalized product names used in this report are registered
or unregistered trademarks of the Company or its subsidiaries except where
specifically identified with products of an unaffiliated company.)
Executone's executive offices are located at 478 Wheelers Farms Road,
Milford, Connecticut 06460, telephone (203) 876-7600. The common stock of
EXECUTONE (the "Common Stock") is traded on the NASDAQ National Market System
under the symbol "XTON", and its Convertible Subordinated Debentures due 2011
(the "Debentures") trade on the NASDAQ system under the symbol "XTONG".
Recent Developments
On January 8, 1998, the Company announced that Alan Kessman, Chairman,
President and Chief Executive Officer of Executone, intends to retire from the
management of the day to day operations of the Company. Mr. Kessman will remain
as a member of the Board of Directors of Executone and will remain in his
current position until his successor is selected. The search firm of
Spencer Stuart is currently conducting a search for a new chief executive
officer for the Company.
The Company currently has three primary business units: computer
telephony, healthcare communications and its subsidiary UniStar, which is
engaged in the management of telephone and Internet-based national lotteries. In
December 1997 the Board of Directors of the Company appointed a Special
Committee consisting of Messrs. Blau, Moore and Rosenbloom to analyze the
possibility of a separation of the business of UniStar from the other businesses
of the Company. The Company hired Furman Selz LLC to advise the Company as to
certain financing and corporate restructuring options that may be available to
the Company to increase shareholder value and aid the fuller development of
Executone's various business units. The Company believed that the then current
market price of the Common Stock did not fairly recognize the potential of its
computer telephony and healthcare communications businesses or the growth
potential of UniStar. Furman Selz's engagement was to determine how these
potential values may be better recognized and whether each of the Company's
primary business units should remain a part of the consolidated entity, become a
stand-alone company, or be sold to a third party.
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Based upon the recommendation of the Special Committee, the Board of
Directors has determined that it is in the best interests of the shareholders to
separate the business of the Company's UniStar subsidiary from the operations of
its computer telephony and healthcare communications businesses. The Company
expects, subject to completion of further analysis and receipt of necessary
approvals, that the separation would be effected through a taxable distribution
to shareholders later this year.
Overview of Business and Strategy
The Company's revenues are derived primarily from product sales to
distributors, direct sales of healthcare communications, and direct sales to
national accounts and government customers. The Company also derives revenue
from installations, additions, changes, upgrades or relocation of previously
installed systems, maintenance contracts, and service charges to the existing
base of healthcare, national account and government customers. The Company's
products and services are marketed and sold through a national network of
independent distributors and Company direct sales and service employees.
The Company's 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. Its sophisticated call center
management products integrate a computerized digital telephone system platform
with high-volume inbound, outbound and internal call processing systems,
including automatic call distribution systems, predictive dialing systems, and
scripting software to assist agents handling calls.
The Company's Healthcare Communications business provides to its
healthcare facility customers nurse and patient communication systems, the
INFOSTAR/ILS infrared locator system, and integration of voice and data between
such systems, telephone systems and hospital information systems, resulting in
increased productivity, 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 and CARE/COM II-E nurse call systems. The Company
markets software applications specific to hospital and nursing homes to help
resolve other labor intensive tasks.
On December 19, 1995, the Company acquired 100% of the common stock of
Unistar Gaming Corp., a Delaware corporation ("Unistar Gaming"). Unistar
Gaming's subsidiary, UniStar, has an exclusive five-year contract ending January
2003 to design, develop, finance, and manage the Lottery, a national lottery
authorized by federal law and by a compact between the State of Idaho and the
Coeur d'Alene Tribe. UniStar provides development and management of the
software, network design and call center applications for the Lottery's
operations. In return for providing these management services, UniStar will be
paid a fee equal to 30% of the profits of the Lottery. The Lottery has commenced
operations but is not yet profitable.
The Internet and telephone operations of the Lottery are the subject of
three pending legal proceedings. There are significant market, political and
legal risks associated with the development of the Lottery. See "LEGAL
PROCEEDINGS" and UNISTAR BUSINESS -- Government Regulation and Legislation." The
Company believes there is a national market for the Lottery based upon research
into the experience of other national lotteries and the growth of the overall
lottery market. However, there is no
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assurance that there will be acceptance of a telephone or Internet lottery.
Based upon opinions from outside legal counsel, the Company also believes that
favorable legal decisions rendered by the Coeur d'Alene Tribal Court and the
Tribal Appellate Court will be affirmed by the Idaho federal court. The Company
believes that the pending Missouri and Wisconsin cases will have similar
favorable outcomes. However, there is no assurance of such legal outcomes. In
the event that the Lottery does not attain the level of market acceptance
anticipated by the Company or if the outcome of the pending lawsuits is adverse,
the Company would have to reevaluate its investment in UniStar.
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COMPUTER TELEPHONY BUSINESS
Computer Telephony Products
The Company develops and distributes a complete line of computer
telephony (CT) products that the Company believes are easy to install, easy to
maintain and easy to use, and that create visible value for its customers.
Products include PBXs, call center management products, standards-compliant CT
applications, standalone and LAN-based applications, and wireless
communications. Markets for the Company's products range from small- to
medium-sized businesses, to call centers and national and government
organizations. 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 the
sophistication of its software options.
The Company's CT products include an integrated automated attendant
feature to answer and transfer calls quickly and efficiently without operator
intervention. The Integrated Operator Terminal has management reports
capabilities to permit the monitoring of calls and improve the efficiency of
directing calls to the appropriate extensions. The systems also support
sophisticated call center and healthcare applications, and the Company's
Integrated Locator System. The Company's LAN Card allows users access to their
organization's network, to manage the systems through their desktop PCs.
The Company has 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/VX3 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.
The Company recently introduced the Eclipse CT server platform, a
centerpiece software package that enables Executone's advanced CT applications
to run on all Executone configurations, from 16 to 648 stations. 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 capabilities in a Microsoft Windows'r' environment. The Company has
also recently introduced NSS, a computer telephony networking solution that
connects multiple phone systems into a single, feature-rich network, improving
communications across multi-location organizations.
The Company's call center management products 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 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
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caller, thereby providing better customer service, reducing the number of
required agents and reducing telephone line and transmission expense.
The Company recently developed a promising call center application for
Internet Telephony using VocalTec's Surf&Call'tm' software in conjunction with
VocalTec's Telephony Gateway'tm', which allows an Internet user, with a simple
point-and-click, to actually speak to a live call center agent over the
Internet, without disrupting their "surfing" session. The Company also recently
introduced its Sentinel application, a server-based computer telephony software
application that provides call center supervisors with the ability to manage
from a single desktop. By providing data in a modern Windows'r' NT-based
interface, the Sentinel product eliminates the need for multiple PCs at the
supervisor workstation.
The INFOSTAR/Predictive Dialer is an automated call system designed to
boost productivity in outbound call centers. The system integrates telephone,
data collection and transaction processing functions for those customers who
require high volume contact by telephone to transact business, such as sales,
credit and collections, blood banks and fund-raising. Working with the host
computer and the IDS'tm' telephone system platform, the dialer automatically
dials telephone numbers pulled from the host computer database and detects
"live" calls. Available representatives receive these calls and, through CTI,
can view screen information about the customer from the database immediately
after the customer answers the phone. The system predicts the availability of
agents in order to reduce abandoned calls and increase agent productivity, and
reduces agent contact with busy signals, no answers, wrong numbers and answering
machines. Management reports provide instant and historical feedback on call
distribution, list management, data input integrity and file maintenance.
Scripting software allows the call center to create a script to guide its agents
through various call scenarios and prompt the input of desired information.
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.
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.
In 1997, the Company signed an agreement to distribute Active Voice
Corporation's line of voice processing and unified messaging products. Also in
1997, the Company signed an agreement with Dialogic Corporation pursuant to
which the parties expect to develop the industry's first completely open
business communications platform
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with full PBX functionality.
Computer Telephony Sales and Marketing
The Company's computer telephony distribution network consists of (1)
domestic independent distributors with approximately 186 locations operating
under exclusive and nonexclusive agreements throughout the United States and
Canada; (2) a National Accounts group that uses the sales, installation, service
and support capabilities of direct employees and the distribution network to
serve multiple offices and departments of companies; (3) a Government Systems
group that uses the distribution network to serve offices of federal, state and
local government agencies; and (4) 7 independent distributors operating in 6
other foreign countries.
For those distributors that have exclusive distribution rights for
specified computer telephony 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.
The Company's National Accounts group provides uniformity in pricing,
coordination, installation, billing and service for National Accounts customers
such as Airborne Express, W. W. Grainger, Bridgestone/Firestone, PetsMart and
Management Recruiters-Sales Consultants. The National Accounts division
coordinates the sales, installation, service and support functions of
independent sales offices to serve the multiple offices and departments of large
multi-site companies that seek out-sourced solutions.
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.
Sales to Claricom, Inc. ("Claricom"), the Company's largest distributor,
decreased by $16 million in 1997 compared to 1996. The reduced level of sales
to Claricom had a significant impact on the financial results for 1997.
Effective April 1, 1998, Claricom became a non-exclusive distributor of the
Company's products in all parts of its territory. It is the Company's
intention to supplement sales in the Claricom territories with additional
distribution. The Company has identified other distributors to sell the
Company's products in certain parts of Claricom's territory, which over
time will give the Company the ability to increase revenues by adding
alternative distribution in Claricom's territories.
Since Claricom accounted for more than 10% of the Company's revenues in
1997 and is expected to continue to represent a large portion of the Company's
revenues, the reduction of sales to Claricom could have a material adverse
effect on the Company if the Company could not supplement the shipments to the
Claricom territories with other alternative distribution. The Company believes
that within a reasonable period of time it can establish alternative
distribution channels in Claricom's major markets to supplement the reduced
volume from Claricom. However, the Company cannot state with certainty when, or
the extent to which, such alternative distribution arrangements will be
completed or their effect on revenues.
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Backlog of the telephony business 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 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, 1997, was $10,814,000 compared to $12,921,000 at December 31,
1996, and the Company expects virtually all of such backlog to be filled within
the current fiscal year.
Computer Telephony 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. 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 has not penetrated a significant portion of the call center
market. Principal competitors are EIS, Davox, Mosaix and Melita.
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.
HEALTHCARE COMMUNICATIONS BUSINESS
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-staff and staff-to-staff communication systems,
locator systems, intercoms, paging and sound equipment, and room status
indicators.
Patient Communication Systems
The INFOSTAR/HCP Healthcare Communications Platform is a communications
solution dedicated to a single platform for complete systems integration. The
HCP platform is the building block allowing for shared resources resulting in
cost efficiencies. It provides a single, digital communication fabric to
facilitate patient-staff calls and staff-staff calls. It improves efficiency
through the integration of Executone's full product line which includes
LifeSaver, CareCom II-E, INFOSTAR/ILS, PRS, TeleSearch and StatLink.
Nurse Call Systems. The Company's LifeSaver nurse call system is a fully
software-driven, digital nurse call system. 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 system integrates voice and data in one PC - based
system. With the capability to answer calls right from the patient's bedside,
this system can dramatically increase the efficiency of the nursing staff,
reduce clerical activity and improve the quality of care delivered to the
patient.
The CARE/COM II-E nurse call system brings the benefits of a totally
integrated digital communications system to the healthcare market on the
Company's IDS digital platform. The CARE/COM lI-E system provides two-way
patient-to-staff and staff-to-staff voice communication on an automatic
three-level call priority basis. Its two-way voice and tone signal capability,
emergency signaling and sophisticated features facilitate easy handling of all
calls. 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.
INFOSTAR/PRS Patient Reporting System. The Healthcare Communications
group also markets the INFOSTAR /PRS patient reporting system, an automated
voice storage system that allows the efficient transfer of patient information
between nurses. Nurses dictate patient information into a report "patient file"
using the telephone, like a voice-mail system. Nurses can listen to reports on
their patients, record reports at convenient times and leave messages for other
nurses, groups or staff members. 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.
Wireless Telephone Systems. The Healthcare Communications group
currently distributes the Monarch and the Ericsson Freeset wireless telephones.
The Monarch telephones utilize PCS (personal communication systems) technology,
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 Federal Communications
Commission ("FCC") strictly for personal communications use which means the
signal will not cause interference to or be interfered with by conventional
telemetry equipment. The Monarch system is capable of supporting two base
station antennas providing a coverage area of over 250,000 square feet in a
typical office environment, up to 32 handsets, and up to 16 simultaneous
conversations. The Ericsson Freeset system is 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 based on its
ability to add as many base stations as necessary to provide coverage. The
system can grow to support up to 1,500 handsets, making it the system of choice
for large installations. These wireless systems can be integrated with nurse
call systems and locator systems offered by the Healthcare business.
INFOSTAR/Statlink System. The INFOSTAR/StatLink product is designed to
provide call management and integration of EXECUTONE nurse call systems to
wireless telephones, pager devices and extension numbers. 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
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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.
Resource Management Systems
INFOSTAR/ILS Locator Systems. The INFOSTAR/ILS locator system is an
infrared based wireless locating system that allows users to find staff,
patients and equipment quickly and easily via LAN-based PC's, EXECUTONE display
telephones, EXECUTONE nurse communication systems, or any other touch tone
telephone inside or outside the healthcare facility. The ILS is an integrated
system using infrared transmitter badges to communicate location data to sensors
installed throughout a facility. Each person or piece of equipment wears an
individually coded badge that transmits infrared signals to sensors placed
throughout the facility, which forward the location information to a central
processing unit. The 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 ILS system can also be integrated to other
manufacturers' PBXs. The ILS system is also marketed by the Computer Telephony
sales channels for office environments.
INFOSTAR/EPS System. The INFOSTAR/EPS Events Processing System collects
information from the ILS locator system and generates "alarms" that signal
personnel that a user defined parameter has been exceeded. The system 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 is
completely programmable, which allows customers to determine which applications
will best fit their needs.
INFOSTAR/VLS System. The INFOSTAR/VLS Voice Locator System integrates
with the PBX telephone system and enables facilities with EXECUTONE or
non-EXECUTONE PBX's or callers from outside the facility to locate people and
assets, and either connect the call to the nearest phone, transfer to voice mail
or obtain information about others persons presently in the location.
Software Systems
InfoSTAT. The INFOSTAR/InfoSTAT 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.
InfoSTAT means the end of the archaic "grease board". A flashing color shows
which patients have been "waiting too long" or "who is next". InfoSTAT provides
the speed, flexibility and efficiency that only comes with a computerized
system. 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
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facility's existing administrative software such as ADT systems.
ReportStar. The ReportStar feature for Microsoft Windows 95 is a
management reporting package which is designed to provide healthcare managers
with information generated from data collected by the EXECUTONE HCP Healthcare
Platform, LifeSaver, CARE/COM II-E and INFOSTAR/ILS locator systems. ReportStar
for Windows 95 is an Oracle-based program which provides users with 6 different
reports that can be viewed on screen, printed as needed or scheduled to run on
any predetermined schedule. Users can select the details of the desired report
from a simple screen which was designed with a graphical user interface to make
it easy for staff to access.
Healthcare Sales and Marketing
The Company's healthcare communications distribution network consists of
(1) domestic independent distributors with approximately 81 locations operating
under exclusive and nonexclusive agreements throughout the United States; (2)
200 direct healthcare sales and service employees in the United States; (3) the
Government Systems group, which uses the distribution network to serve
healthcare customers who are federal, state and local government agencies; and
(4) 16 independent distributors operating in 12 foreign countries.
Distributors of the Company's healthcare communications products are
required to meet established criteria for sales and service to customers on an
ongoing basis.
No customer of the healthcare business accounts for 10% or more of its
revenue.
Healthcare backlog consists primarily of products that have been ordered
and that will be shipped or installed within 180 days of the order or systems
the installation of which is not yet required by the customer. Healthcare order
backlog as of December 31, 1997, was $14,601,000 compared to $9,583,000 at
December 31, 1996, and the Company expects virtually all of such healthcare
backlog to be filled within the current fiscal year.
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 innovative integrated healthcare
communications 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.
TELEPHONY AND HEALTHCARE OPERATIONS
Product Development and Engineering
As of December 31, 1997, the Company employed approximately 100
individuals engaged in computer telephony and healthcare 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 1997, the Company's engineering efforts
focused on applications-oriented software products, including new releases of
computer telephony and healthcare communications software. The Company
continually strives to reduce production costs by incorporating new technology
into its design and manufacturing operations. For the years ended December 31,
1997, 1996, and 1995, Company-sponsored product
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development and engineering expenditures (including product management and
testing) amounted to approximately $12.8 million, $13.8 million, and $14.7
million, respectively.
Manufacturing
Most of the Company'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 1999 but is automatically extended each year for an
additional one-year term unless either party gives notice of termination three
months prior to expiration of the current term. The contract may be terminated
earlier by either party in the event of a material breach by the other party.
If the agreement between Wong's and Executone should be terminated for
any reason, or if Wong's is unable to ship or has to reduce shipments, or if
restrictions are imposed materially limiting the importation of products
produced by foreign manufacturers, the Company could be affected adversely until
satisfactory alternative sources are in place. The profitability of Executone's
operations could be affected to the extent it is unable to reflect the direct
and indirect costs of products purchased from Wong's in its pricing policies.
The prices for products purchased by Executone from its suppliers are payable in
U.S. 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.
Product Maintenance
Executone warrants parts and labor on its telephone and healthcare
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 repair facility located in Poway,
California.
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 14 utility patents, expiring at
various times between 2006 and 2017, 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
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and documentation.
Certain of the telephony and healthcare 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 telephony and healthcare systems are designed to
be connected to the public telecommunications network and as such are required
to comply with certain rules of the 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 telephony and healthcare products
internationally, it is required to comply with applicable foreign law, including
certification of its products by appropriate government regulatory
organizations.
Employees
As of March 1, 1998, Executone employed approximately 700 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.
UNISTAR BUSINESS
UniStar History
On December 19, 1995, the Company acquired 100% of the common stock of
Unistar Gaming. Unistar Gaming's subsidiary, UniStar, has an exclusive five-year
contract ending January 2003 to design, develop, finance, and manage the
Lottery, a national lottery authorized by federal law and by a compact between
the State of Idaho and the Coeur d'Alene Tribe. UniStar provides development and
management of the software, network design and call center applications for the
Lottery's operations. In return for providing these management services, the
Tribe has agreed to pay UniStar a fee equal to 30% of the profits of the
Lottery. The Lottery has commenced operations but is not yet profitable. In an
attempt to block the Lottery, certain states filed letters under 18 U.S.C.
Section 1084 to prevent the long-distance carriers from providing toll-free
telephone service to the Lottery and the States of Missouri and Wisconsin have
filed suit against the Lottery. See "Legal Proceedings."
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The Tribe's initial plan was to establish a telephone lottery that could
be played by any individual of majority age, residing in one of the 36 states or
the District of Columbia that currently operates a state-run lottery. It was
originally contemplated that customers would call an "800" number and ticket
purchases would be processed with interactive voice response equipment or live
agents in a call center located on the Tribe's Reservation in Idaho. The call
center would use ACD (automated call distribution) software to process
nationwide lottery sales.
After the Company's purchase of UniStar, the Lottery business plan
evolved, in response to legal challenges, to encompass Internet-based instant
lottery games, and, as of January 1998, a local, non-toll-free telephone and
Internet-accessible weekly draw lottery. The Company has made a significant
investment in UniStar, which initially created 8% stock dilution to the
Company's shareholders, and since the purchase has invested additional cash to
develop the software and hardware system, build the Lottery building, fund the
legal and lobbying efforts, commence the marketing and advertising campaigns,
and pay other costs related to the project.
UniStar Sales and Marketing
The US Lottery began test marketing its Instant ticket games on the
Internet in July 1997. Through December 31, 1997, the US Lottery generated
revenues of $1.5 million. On January 20, 1998 the US Lottery launched its first
draw game, the "Super6". Tickets for the Super6 can be purchased either over the
Internet or by telephone. As of March 31, 1998, the registered customer base of
the US Lottery (including the instant and the weekly games) was approximately
21,000 established accounts with about 3,000 active players. Initially,
UniStar's marketing efforts for the Lottery were confined to Internet links and
advertising on gaming-related Internet sites and on general search engines.
UniStar began direct mail advertising for the Tribe's instant US Lottery games
in November 1997. Local print and radio advertising promoting the new weekly
draw Lottery game began on a limited basis in a few small markets in January
1998. Lottery revenues were $537,000 and $1,196,000 for the quarters ending
September 30, 1997 and December 31, 1997 respectively.
Due to advertising, professional fees and other startup costs, the
Lottery has yet to generate a profit. As a result, UniStar has not recognized
any revenue as of December 31, 1997.
In addition to the legal risks, there are market risks associated with
the development of the Lottery. The Company believes there is a national market
for the Lottery based upon research into the experience of other national
lotteries and the growth of the overall lottery market. However, there is no
assurance that there will be acceptance of a telephone or Internet lottery. In
the event that the telephone and Internet Lottery games do not attain the level
of market acceptance anticipated by the Company, the Company would have to
reevaluate its investment in UniStar.
UniStar Product Development
During 1997, UniStar contracted with third parties for software
development and system architecture for the Internet and telephone-based
Lottery. The architecture of the Internet-based Lottery, particularly the
business system, data base structure and the
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banking interface, was completed in 1997 for the Tribe's Internet instant games
and was a critical building block in UniStar's further development of the
telephone-based Lottery that the Tribe launched in January 1998.
The Lottery product portfolio consists of two product lines - instant
lottery games and draw lottery games. Instant games are modeled after state
lottery "scratch off" instant tickets. The instant game product line includes
Lotto, Bingo and Classic "scratch off" lottery games. The Lottery currently
offers four live instant games and five instant games in a "demo" mode only. The
"demo" only games are scheduled to go live in the second quarter of 1998.
The draw product line consists of the Super6 draw lottery where tickets
are available both by telephone or over the Internet. The Super6 offers a
jackpot prize of $1,000,000 which will grow as the prize pool grows. Drawings
are held Tuesdays at 1:00PM Pacific Time. The Lottery expects to announce
"Pick 3" and "Powerball" type games later in 1998.
Patents, Trademarks, and Copyrights
Management believes that the success of the Lottery, and therefore at
least initially of UniStar, 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. UniStar currently has two U.S.
patent applications pending.
UniStar 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 its software used in
connection with the Lottery and relies upon trade secret, contract and copyright
laws to protect its proprietary rights in its software, designs and
documentation.
Certain of the Lottery products incorporate technology and software
licensed by UniStar from independent third parties. Generally, these licenses
have required payment of a license fee for the licensed technology.
Competition
UniStar has little competition in the development and management of
authorized Indian gaming enterprises. The broader area of gaming entertainment
is highly competitive. The market is served by the States through
state-sponsored lotteries and by many domestic and foreign gaming companies,
including several large land-based casino companies. All of these competitors
have substantially more capital, and therefore more technology and marketing
resources, than UniStar or the Company.
Government Regulation and Legislation
The Lottery developed and managed by UniStar for the Tribe is authorized
under the federal Indian Gaming Regulatory Act of 1988 ("IGRA"). In managing the
Lottery, UniStar must observe all laws and regulations applicable to the
Lottery. IGRA defined three classes of Indian gaming. IGRA established the
jurisdictional and regulatory control for each class and created the National
Indian Gaming Commission (the "NIGC") to enforce the provisions of IGRA.
Lotteries are defined as Class III gaming. Class III gaming is governed by the
terms of the Tribe/State compact and the rules and regulations
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of the NIGC. The Lottery is also governed by the rules and policies promulgated
by the Coeur d'Alene Tribal Council.
In 1992, the Coeur d'Alene Tribe signed a Compact with the State of
Idaho (the "Compact"). The Compact specifically provides for the conduct of the
Lottery games. The Compact was approved by the Secretary of the Interior on
February 5, 1993 and notice thereof was published in the Federal Register. The
Tribe entered into a management agreement with UniStar for the conduct of the
Lottery. The Chairman of the NIGC approved the management contract and the
amendments thereto as required by law. By resolution, the Tribe has authorized
the Lottery to be conducted under the management agreement. The Coeur d'Alene
Tribe has complied with IGRA and all other applicable rules, regulations and
laws.
It is the opinion of the Tribe and UniStar that state anti-gambling laws
and regulations are not applicable to the Lottery because the entire subject of
Indian gaming is governed by federal law and therefore state laws and
regulations are preempted by IGRA. See "Legal Proceedings."
The employees of the Lottery undergo extensive background checks
including fingerprinting which is sent to the Federal Bureau of Investigation.
The Lottery also has made and will continue to make reasonable efforts to
address the issue of problem gambling and to prevent participation by minors. To
attempt to address problem gamblers, the Lottery has voluntarily established a
credit limit of $500 per month. The system requires each user to have a credit
card. To prevent access by minors, the Lottery matches the address provided on
the application to the credit card before allowing access. When verification of
the account is sent to the lawful credit card holder, any unlawful access by a
minor should be detected and end. The Lottery also regularly runs match tests
between its database of social security numbers and other databases available to
determine the age ranges of the holders by generic number sequences. The Lottery
mails all correspondence to the person and address associated with the credit
card so if a minor was playing, the adult would still be the person receiving
the correspondence. Winnings are paid only by a check issued and mailed directly
to the person and mailing address on the account.
Senate Bill 474 offered by Senator Jon Kyl (the "Kyl Bill") seeks to
amend 18 U.S.C. Sections 1081 and 1084, which currently prohibit the interstate
transmission of bets and wagers on sporting events and contests. The Kyl Bill
would remove the current limitation to sporting bets and wagers and extend
Sections 1081 and 1084 to virtually all forms of bets and wagers, as well as to
lotteries and other gaming, in an attempt to prohibit all gaming conducted over
the telephone and the Internet. The Kyl bill was proposed in 1997 but was not
voted on by the full Senate. There is a similar bill pending in the House of
Representatives. There is currently no exception in any of the proposed bills
for gaming conducted by an Indian tribe that is authorized by IGRA. The Company
is supporting efforts to have such an exception included in the bill. The Kyl
Bill and the House counterpart seek to prohibit the activities of the Lottery
and the activities of UniStar in managing the Lottery, which would have a
material adverse effect on UniStar's business.
Employees
As of March 1, 1998, UniStar employed three general and administrative
management employees, not including the customer service and technical employees
employed by the Lottery, none of whom are represented by unions.
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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, 1997, the Company leased 8
facilities in the United States with an aggregate of approximately 283,000
square feet for its ongoing operations. The current annual rent for the
Company's leased facilities is approximately $3.2 million. The Company also
subleases from Claricom small areas of 31 former district sales offices,
aggregating approximately 24,000 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.
<TABLE>
<CAPTION>
Use Location Approximate Size
- --- -------- -----------------
<S> <C> <C>
Corporate Headquarters Milford, Connecticut 150,000
and Research, Development square feet
and Engineering Facility
Distribution, Production & Poway, California 112,000
Repair Center and Warehouse square feet
Other, including warehouses Milford, Connecticut 45,000
and subleased office space and various locations square feet
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
On October 16, 1995, the Coeur d'Alene Tribe filed an action entitled
Coeur d'Alene Tribe v. AT&T Corp. in the Tribal Court, located in Plummer, Idaho
(Case No. C195-097), requesting a ruling that the Tribe's Lottery to be
developed and managed by the Company's UniStar subsidiary is legal under IGRA,
that IGRA preempts state laws on the subject of Indian gaming, that Section 1084
is inapplicable and that therefore 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 Lottery. This action was necessary
because several network carriers have been sent Section 1084 letters by states
opposed to the Lottery. These letters state that the Lottery is illegal under
state and federal laws and prohibit the interstate carriers from carrying "800
number" network traffic for the Lottery. Although in January 1998 the Tribe
began to offer a weekly draw Lottery for which tickets could be purchased over
the telephone, it has done so using a local telephone number, meaning that the
Lottery's customers must pay toll charges for each call. The use of an "800"
number for lottery ticket sales may not begin until resolution of this
proceeding and agreement of a network carrier to carry the network traffic of
the Lottery. On February 28, 1996, the Tribal Court ruled (i) that all
requirements of IGRA have been satisfied, (ii) that Section 1084 is inapplicable
and the states lack jurisdiction to interfere with the Lottery, and (iii) that
AT&T cannot refuse service to the Lottery based upon Section 1084, an allegation
that the Lottery is in violation of IGRA or the federal anti-lottery statutes.
This ruling and a related order dated May 1, 1996 were subsequently appealed to
the Tribal Appellate Court, which on July 2, 1997 affirmed the lower Tribal
Court's May 1, 1996 ruling and analysis upholding the
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Tribe's right to conduct the telephone Lottery. On August 22, 1997, AT&T filed a
complaint for declaratory judgment against the Tribe in the U.S. District Court
for the District of Idaho, to obtain a federal court ruling on the validity and
enforceability of the Tribal Court ruling. The Tribe has answered the complaint.
In March 1998, the attorneys general of nineteen states filed a motion for
permission to submit a brief as amicus curiae in the case with respect to the
Tribal Court's interpretation of IGRA and in support of the position taken by
AT&T.
On May 28, 1997, the Attorney General of the State of Missouri brought
an action in the Circuit Court of Jackson County, Missouri, against the Coeur
d'Alene Tribe and UniStar seeking to enjoin the Lottery games offered by the
Tribe over the Internet and managed by UniStar. The complaint also sought civil
penalties, attorneys fees and court costs. The complaint alleges that the
Lottery violates Missouri anti-gambling laws and that the marketing of the games
violates the state's Merchandising Practices Act. UniStar and the Tribe removed
the case to the U.S. District Court for the Western District of Missouri, which
denied the State's subsequent motion to remand back to the state court. The
court also subsequently granted a motion to dismiss the Tribe from this case
based on sovereign immunity. The court denied a motion to dismiss UniStar based
on sovereign immunity, although the court indicated it might reconsider that
decision. UniStar filed a motion for reconsideration of its motion for
dismissal. The State of Missouri has filed a notice of appeal evidencing its
intent to appeal to the Eighth Circuit Court of Appeals the dismissal of the
Tribe.
On January 28, 1998, the State of Missouri sought to dismiss voluntarily
the existing federal case against UniStar and the next day filed a new action
against the Company, UniStar and two tribal officials, with essentially the same
allegations, in state court. The State obtained a temporary restraining order
from a state judge against the Company, UniStar, and two officials of CDA
enjoining the marketing of the Internet and telephone Lottery in the State of
Missouri. On February 5, 1998, the U. S. District Court for the Eastern District
of Missouri ruled that this second case also should be heard in federal court,
transferred the second case to the Western District of Missouri where the
original case had been filed, and dissolved the state court's temporary
restraining order, effective February 9, 1998. A motion to dismiss the second
case based on the sovereign immunity of all the defendants and a motion to
abstain in favor of the jurisdiction of the Coeur d'Alene Tribal Court are
pending. The State of Missouri has filed a notice of appeal evidencing its
intent to appeal the denial of its motion to remand the case to state court or,
in the alternative, to grant a preliminary injunction.
On September 15, 1997, the State of Wisconsin, by its Attorney General,
filed an action in the Wisconsin State Circuit Court for Dane County against the
Company, UniStar and the Coeur d'Alene Tribe, to permanently enjoin the US
Lottery offered by the Tribe on the Internet. The complaint alleges that the
offering of the US Lottery violates Wisconsin anti-gambling laws and that
legality of the US Lottery has been misrepresented to Wisconsin residents in
violation of state law. In addition to an injunction, the suit seeks
restitution, civil penalties, attorneys' fees and court costs. The Company,
UniStar and the Tribe have removed the case to the U. S. District Court in
Wisconsin. On February 18, 1998, the District Court dismissed the Tribe from the
case based on sovereign immunity and dismissed Executone based on the State's
failure to state a claim against Executone. Motions to dismiss the case against
UniStar were denied. UniStar has filed a notice of appeal evidencing its intent
to appeal to the Seventh Circuit Court of Appeals the denial of its motion to
dismiss.
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
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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
and the Tribal Appellate Court on July 2, 1997 will be affirmed by the Idaho
federal court. The Company believes UniStar will also prevail in the Missouri
and Wisconsin lawsuits. However, there is no assurance of such legal outcomes.
UniStar and the Tribe believe that the Lottery is legal and intend to defend the
right of the Tribe to offer the Lottery on the Internet and via the telephone.
Based on the anticipated outcome of the pending legal actions, 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. However, the pending litigation, as well as other litigation which
could be brought by states or others opposed to the Lottery, could delay or
suspend certain Lottery operations, and it is impossible at this time to
predict the nature or extent of any delays or suspension of operations that
might occur.
The Company currently is a named defendant in a number of other lawsuits
and is a party to a number of other proceedings that have arisen in the normal
course of its business. Those lawsuits and proceedings relate primarily to the
collection of indebtedness owed to the Company, the performance of products sold
by the Company, and various contract disputes. In the opinion of the Company,
these proceedings are not expected to have a material adverse effect on the
consolidated financial position, results of operations or liquidity of the
Company and, to the extent they are not covered by insurance, reserves adequate
to satisfy such liabilities have been established.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders in the fourth
quarter of the fiscal year covered by this report.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position With Company
- ---- --- ---------------------
<S> <C> <C>
Alan Kessman 51 Chairman of the Board,
President and
Chief Executive Officer
Michael W. Yacenda 46 Executive Vice President and
President, UniStar Entertainment
Barbara C. Anderson 46 Vice President, General Counsel
and Secretary
James E. Cooke III 49 Vice President, National Accounts
Anthony R. Guarascio 44 Vice President, Finance and Administration
and Chief Financial Officer
Israel J. Hersh 44 Vice President,
Software Engineering
Robert W. Hopwood 54 Vice President and Vice
President-Operations,
Unistar Entertainment
Andrew Kontomerkos 52 Senior Vice President,
Hardware Engineering and
Production
Vic Northrup 41 Vice President, and
President, Computer Telephony
Frank J. Rotatori 55 Vice President, and
President, Healthcare Communications
Shlomo Shur 48 Senior Vice President,
Advanced Technology
</TABLE>
Alan Kessman has served as Chairman and Chief Executive Officer of the
Company since 1988. Prior to that, he had served as President and Chief
Executive Officer of ISOETEC Communications, Inc., a predecessor of the Company
("ISOETEC"), since 1983. From 1978 to 1983, Mr. Kessman served as President of
three operating subsidiaries of Rolm Corporation, and from 1981 to 1983, he
served as a Corporate Vice President of Rolm Corporation, responsible for sales
and service in the eastern United States. See "Recent Developments" above.
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Michael W. Yacenda has served as Executive Vice President of Executone
since January 1990, and as President of UniStar since 1996. 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.
Robert W. Hopwood has been Vice President of the Company and Vice
President-Operations of its UniStar 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.
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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.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Incorporated by reference to "Stock Data" in the Registrant's 1997
Annual Report to Shareholders.
ITEM 6. SELECTED FINANCIAL DATA
Incorporated by reference to "Selected Financial Data" in the
Registrant's 1997 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 1997 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 1997 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.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following persons are currently serving as directors of the Company. 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>
NAME AGE PRINCIPAL OCCUPATION DIRECTOR SINCE
- ---- --- -------------------- --------------
<S> <C> <C> <C>
Alan Kessman 51 President, Chief Executive Officer, 1983
and Chairman of the Company
since 1988; and of one of the
Company's predecessor corporations
since 1983.
Louis K. Adler 62 Private Investor; President and Director, 1997
Bancshares, Inc., Houston, Texas,
since 1973; former director of
Unistar Gaming Corporation, prior to
its acquisition by the Company.
Mr. Adler is also a director of Hospitality
Worldwide Services, Inc.
Stanley M. Blau 60 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 51 Partner, Hunton & Williams (Attorneys), 1990
Richmond, Virginia, since 1981.
Richard S. Rosenbloom 65 David Sarnoff Professor of Business 1992
Administration, Harvard Business School,
since 1980. Mr. Rosenbloom is a director
of Arrow Electronics, Inc.
Jerry M. Seslowe 52 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.
23
<PAGE>
<PAGE>
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.
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, 1997, all Section 16(a)
filing requirements applicable to its officers, directors and greater than 10%
beneficial owners were complied with.
ITEM 11. EXECUTIVE COMPENSATION
DIRECTOR COMPENSATION
Each director who does not receive other direct compensation from the
Company receives an annual retainer of $10,000, payable in equal quarterly
installments, plus a fee of $1,250 for each Board meeting attended,
$1,250 for each three telephone conference call meetings, and $1,250 for
each Committee meeting held separately from a Board meeting. In addition,
each such 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, 1998, 36,000 shares had been issued upon exercise of
options granted under the original terms of the Plan, options to purchase 18,000
shares of Common Stock were outstanding under the original terms of the Plan,
and options to purchase an additional 132,400 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 of Messrs. Adler, Moore,
Rosenbloom and Seslowe received options to purchase 13,700 shares under this
Plan in 1997.
On February 1, 1996 and July 29,1997, Jerry M. Seslowe and Louis K.
Adler, respectively, were each granted warrants to purchase 25,000 shares of the
Company's Common Stock at $2.63 and $2.00 per share, respectively, the closing
market prices on those dates. The warrants vest ratably over a three-year period
and expire on February 1, 2001 and July 29, 2002, respectively. Messrs. Seslowe
and Adler received these warrants upon being elected to serve on the Company's
Board of Directors.
The Company also reimburses directors for their travel and accommodation
expenses incurred in attending Board meetings.
24
<PAGE>
<PAGE>
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation by the Company of the
Chief Executive Officer and the four most highly compensated other executive
officers of the Company for services in all capacities to the Company and its
subsidiaries during the past three fiscal years.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION ----------------------
OTHER ANNUAL AWARDS OF ALL OTHER
NAME AND SALARY BONUS COMPENSATION OPTIONS/ COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($) SARs(#) ($) (1)
- ----------------- ----- -------- ----- ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Alan Kessman 1997 400,000 -0- -0- -0- 9,849(2)
Chairman of the Board, 1996 400,000 63,000 -0- -0- 9,536
President and Chief 1995 400,000 -0- -0- -0- 10,328
Executive Officer
Michael W. Yacenda 1997 256,000 -0- -0- -0- 5,997
Executive Vice President 1996 256,000 49,900 -0- -0- 5,935
1995 256,000 -0- -0- -0- 6,353
Shlomo Shur 1997 215,700 -0- -0- -0- 5,233
Senior Vice President, 1996 215,700 12,393 -0- -0- 5,192
Advanced Technology 1995 215,700 -0- -0- -0- 5,514
Andrew Kontomerkos 1997 214,000 -0- -0- -0- 5,896
Senior Vice President, 1996 214,000 12,350 -0- -0- 5,703
Hardware Engineering 1995 214,000 -0- -0- -0- 5,535
and Production
Vic Northrup 1997 162,885 31,750 -0- -0- 660
Vice President and 1996 137,837 64,375 -0- 25,000 660
President, Computer 1995 126,223 83,353 -0- -0- 660
Telephony Division
</TABLE>
(1) This category 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 following individuals in the following
amounts in 1997: Mr. Kessman, $9,189; Mr. Yacenda, $5,337; Mr. Shur, $4,573;
and Mr. Kontomerkos, $5,236; in the following amounts in 1996: Mr. Kessman,
$8,876; Mr. Yacenda, $5,275; Mr. Shur, $4,532; and Mr. Kontomerkos, $5,043;
and in the following amounts in 1995: Mr. Kessman, $9,668; Mr. Yacenda,
$5,693; Mr. Shur, $4,854; and Mr. Kontomerkos, $4,875.
(2) Does not include the payment of approximately $1,300,000 accrued under Mr.
Kessman's employment continuity agreement described immediately below.
EMPLOYMENT CONTINUITY 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 without cause or following
a change in control in the Company, including a lump sum payment equal to 2.99
times his then
25
<PAGE>
<PAGE>
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.
In January 1998, Mr. Kessman announced his intention to retire from the
management of the day-to-day operations of the Company. Mr. Kessman is
remaining in his current position until his successor is selected.
In accordance with the diminishment of responsibility provisions
of his employment continuity agreement, the Company will pay Mr.
Kessman approximately $1.3 million, which includes severance of approximately
$1.1 million and continuation of certain benefits for four years. The Company
will incur this cost during the first quarter of 1998. As of March 31, 1997,
Mr. Kessman had indebtedness to the Company of $2.4 million relating to the
Executive Stock Incentive Plan. These obligations will remain outstanding until
December 2001 notwithstanding Mr. Kessman's retirement; however, during 1998 Mr.
Kessman will pledge an additional 500,000 shares of Common Stock to the Company
as security for the loan and guarantee and after 1998 will pay 100% of the
interest accrued on the loan as it becomes due. See "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS."
OPTION GRANTS IN LAST FISCAL YEAR
There were no grants of options made to any officers during 1997.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth each exercise of stock options made
during the year ended December 31, 1997 by the Chief Executive Officer and the
four most highly compensated other executive officers and the fiscal year-end
value of unexercised options held by those individuals as of December 31, 1997.
There were no exercises or holdings of stock appreciation rights by any officers
during 1997, and there are no outstanding stock appreciation rights.
<TABLE>
<CAPTION>
Number of Value of Unexercised
Unexercised Options In-the Money Options at
Shares at FiscalYear-End(#) Fiscal Year-End($)(1)
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized ($) Unexercisable Unexercisable
<S> <C> <C> <C> <C>
Alan Kessman 10,000 $7,500 25,000/-0- 4,700/0
Michael W 26,000 23,556 32,000/-0- 6,016/0
Yacenda
Shlomo Shur 20,000 18,120 25,000/-0- 4,700/0
Andrew 15,000 13,590 20,000/-0- 3,670/0
Kontomerkos
Vic Northrup -0- -0- 34,108/28,036 -0/0-
</TABLE>
(1) Based upon the last sale price on December 31, 1997 of $2.188 per
share of Common Stock.
26
<PAGE>
<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 1997, the Compensation Committee reviewed executive compensation data
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.
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, since
1994 the base salaries for the Chief Executive Officer and the four other
highest paid executive officers have been established at
27
<PAGE>
<PAGE>
approximately the 50th percentile for comparable positions in the Survey
companies. In 1997, the Committee approved setting each executive's total cash
compensation at approximately the median for the comparable position in the
benchmark population of companies included in the Survey. As a result, the
Committee approved no increase in salary for Mr. Kessman or any of the four
other highest paid executive officers except one officer who was initially
elected as an executive officer in 1997.
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. To establish
1997 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 1997
pretax income targets or goals were achieved by the Company. Partial achievement
of the pretax income goals (above 74% attainment) would result in partial bonus
payments. The Committee also approved bonus eligibility for division presidents
that would be based on division performance without regard to overall corporate
performance. In 1997, the pretax income from operations for the year was below
the applicable threshold. Therefore, the Committee approved no bonus payments to
Mr. Kessman or any of the four other highest paid executive officers for 1997
except bonuses paid to one of the four other highest paid executive officers
based on his division's performance.
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 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 1997 to Mr. Kessman or the four highest paid other
executive officers.
9. In December 1997, the Board of Directors on the recommendation of the
Committee approved certain modifications and waivers under the 1994 Executive
Stock Incentive Plan. The Board of Directors approved the extension of the
participant loans and the
28
<PAGE>
<PAGE>
Company's guarantee of those loans from August 1999 until December 2001, subject
to the approval of the lending bank, and deferred the interest payment (15% of
the bank interest accrued in 1997) that would have otherwise been due from each
participant to the Company in January 1998. The Board of Directors also decided
to waive restrictions in the Plan to allow participants to sell a portion or all
of their Plan stock in 1998, subject to applicable legal requirements and to
repayment of the loan with the proceeds of the shares sold.
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.
LOUIS K. ADLER
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 Mosaix
Davox Corporation Norstan, Inc.
Digital Sound Corporation Syntellect, Inc.
Electronic Information Systems, Inc. Teknekron Communications
Systems, Inc.(TCSI)
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.
29
<PAGE>
<PAGE>
Although AT&T and Nortel 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.
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 1992 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C>
XTON $100 $159 $179 $128 $131 $121
NASDAQ $100 $115 $112 $159 $195 $240
PEER GROUP $100 $190 $179 $252 $327 $306
XTONG $100 $138 $137 $160 $178 $198
</TABLE>
[PERFORMANCE GRAPH]
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee are Louis K. Adler, Richard
Rosenbloom and Jerry Seslowe.
No member of the Committee is a former or current officer or employee of
the Company or any subsidiary.
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.
30
<PAGE>
<PAGE>
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 February 28, 1998, 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
Title of Class Beneficial Owner Beneficial Ownership Percent of Class(1)
<S> <C> <C> <C>
Common Stock Heartland Advisors, Inc. 9,213,455(2) 18.60%
790 North Milwaukee Street
Milwaukee, WI 53202
Entities Associated with 3,245,078(3) 6.56
Edmund H., Shea, Jr.
655 Brea Canyon Road
Walnut Creek, CA
91789
Series A Stock Cooper Life Sciences 78,819 31.53
160 Broadway
New York, NY 10038
Watertone Holdings, L.P. 154,160 61.81
and Watertone Investments L.L.C.
730 Fifth Avenue
New York, NY 10038
Series B Stock Cooper Life Sciences 31,528 31.53
160 Broadway
New York, NY 10038
Watertone Holdings, L.P. 61,807 61.81
and Watertone Investments L.L.C.
730 Fifth Avenue
New York, NY 10038
</TABLE>
(1) With respect to the Common Stock, percentages shown are based upon
49,716,084 shares of Common Stock actually outstanding as of February 28, 1998.
In cases where the beneficial ownership of the individual or group includes
options, warrants or convertible securities, the percentage is based on
49,716,084 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,
31
<PAGE>
<PAGE>
warrants or convertible securities not owned by the individual or group in
question. In the case of the Series A and Series B Preferred Stock, percentages
shown are based on 250,000 and 100,000 shares, respectively, actually
outstanding as of February 28, 1998.
(2) Heartland Advisors shares power to vote 625,000 of 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 February 28, 1998, 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
Title of Class Beneficial Owner Beneficial Ownership Percentage of Class (1)
<S> <C> <C> <C>
Common Stock Louis K. Adler 138,123(2)
Stanley M. Blau 543,193 1.05
Alan Kessman 1,737,337(3) 3.35
Andrew Kontomerkos 463,284(4) *
Thurston R. Moore 135,235(5) *
Vic Northrup 127,537(6) *
Richard S. Rosenbloom 76,900(7) *
Jerry M. Seslowe 209,615(8) *
Shlomo Shur 740,708(9) 1.43
Michael W. Yacenda 990,360(10) 1.91
All Directors and 6,349,422(11) 12.25
Officers as a Group
(17 Persons)
Series A Stock Louis K. Adler 1,436 *
Stanley M. Blau -0-
Alan Kessman -0-
Andrew Kontomerkos -0-
Thurston R. Moore -0-
Vic Northrup -0-
Richard S. Rosenbloom -0-
Jerry M. Seslowe 4,692(12) 1.87
Shlomo Shur -0-
Michael W. Yacenda -0-
All Directors and 6,128 2.45
Officers as a Group
(17 Persons)
</TABLE>
32
<PAGE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Series B Stock Louis K. Adler 575 *
Stanley M. Blau -0-
...........................Alan Kessman -0-
Andrew Kontomerkos -0-
Thurston R. Moore -0-
Vic Northrup -0-
Richard S. Rosenbloom -0-
Jerry M. Seslowe 1,877(13) 1.87
Shlomo Shur -0-
Michael W. Yacenda -0-
All Directors and 2,452 2.45
Officers as a Group
(17 Persons)
</TABLE>
* Less than 1%.
(1) With respect to the Common Stock, percentages shown are based upon
49,716,084 shares of Common Stock actually outstanding as of February 28, 1998.
In cases where the beneficial ownership of the individual or group includes
options, warrants or convertible securities, the percentage is based on
49,716,084 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. In the case of the Series A and
Series B Preferred Stock, percentages shown are based on 250,000 and 100,000
shares, respectively, actually outstanding as of February 28, 1998.
(2) Includes 83,615 shares issuable upon exercise of options and 25,000 shares
issuable upon exercise of warrants, 91,918 of which are exercisable within 60
days of June 1, 1998. Does not include 76,445 shares of Common Stock
contingently issuable upon conversion of the Preferred Stock owned by
Mr. Adler.
(3) Includes 25,000 shares subject to options exercisable within 60 days of June
1, 1998.
(4) Includes 20,000 shares subject to options exercisable within 60 days of June
1, 1998.
(5) Includes 48,900 shares subject to options exercisable within 60 days of June
1, 1998.
(6) Includes 56,494 shares subject to options, of which 34,108 are exercisable
within 60 days of June 1, 1998.
(7) Includes 48,900 shares subject to options exercisable within 60 days of June
1, 1998.
(8) Includes 51,612 shares subject to options, all of which are exercisable, and
25,000 shares subject to warrants, 16,666 of which are exercisable within 60
days of June 1, 1998. Also includes 12,755 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.
33
<PAGE>
<PAGE>
(9) Includes 25,000 shares subject to options exercisable within 60 days of June
1, 1998.
(10) Includes 32,000 shares subject to options exercisable within 60 days of
June 1, 1998 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 462,327 and 16,666, respectively, are exercisable within 60
days of June 1, 1998, 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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the Company's acquisition of Unistar Gaming, in 1995 and
1996 the Company paid Resource Holdings Ltd, a former shareholder of Unistar
Gaming, accrued investment banking fees incurred by Unistar Gaming 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 in 1996 as
a nominee of the holders of the Preferred Stock.. Both Resource Holdings and Mr.
Seslowe acquired Common Stock and Preferred Stock of the Company in exchange for
their shares of Unistar Gaming. 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 1994 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 key
employees were granted the right to purchase shares of the Company's Common
Stock at the market price, which was $3.1875 per share at the time of purchase.
Participating employees financed the purchases of these shares through loans by
the Company's bank lender at the prime rate less 1/4%, payable over five years.
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 lends the
employee 85% of the interest due to the bank. The Company holds the purchased
Common Stock as security for its guarantees of the repayment of the loans. Sales
of the shares purchased under the Plan are subject to certain restrictions.
In December 1997, the Compensation Committee of the Board of Directors of
the Company agreed, subject to the Company obtaining the agreement of the
lending bank, that it would allow the participant loans to remain outstanding
until December 2001 instead of requiring repayment in August 1999, and that it
would defer collection from each participant of the 15% of the 1997 interest on
the loans that would otherwise have been currently payable to the Company. The
Committee also decided to waive certain restrictions in the Plan to allow
participants to sell a portion or all of their Plan stock in 1998, subject to
applicable legal requirements and to repayment of the loan with the proceeds of
the shares sold.
34
<PAGE>
<PAGE>
The following table contains information about borrowings in excess of
$60,000 by executive officers that were outstanding during 1997 pursuant to the
Executive Plan and that are guaranteed by the Company. The amounts listed below
also include the interest paid by the Company to the bank, reimbursement of
which is owed by the individual to 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.
<TABLE>
<CAPTION>
HIGHEST AMOUNT OF UNPAID
INDEBTEDNESS BETWEEN INDEBTEDNESS
JANUARY 1, 1997 AND MARCH 31, 1998, AT MARCH 31, 1998
INCLUDING INCLUDING
NAME ACCRUED INTEREST ACCRUED INTEREST
- ---- ----------------------------------- -----------------
<S> <C> <C>
Alan Kessman $2,382,242 $2,353,992
Michael W. Yacenda 1,389,641 1,389,641
Shlomo Shur 694,821 694,821
Andrew Kontomerkos 694,821 694,821
Barbara C. Anderson 322,490 243,758
James E. Cooke III 397,040 397,040
Anthony R. Guarascio 555,857 555,857
Israel J. Hersh 119,112 119,112
Robert W. Hopwood 396,420 396,420
Vic Northrup 280,209 280,209
Frank J. Rotatori 238,224 238,224
</TABLE>
35
<PAGE>
<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, 1997 and 1996
Consolidated Statements of Operations - Years ended December 31, 1997, 1996
and 1995
Consolidated Statements of Changes in Stockholders' Equity - Three years ended
December 31, 1997
Consolidated Statements of Cash Flows - Years ended December 31, 1997, 1996 and
1995
Notes to Consolidated Financial Statements
The schedule to consolidated financial statements required by this item and
included in this report is 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
Information Systems, Inc. dated as of April 9, 1996, and Amendment No.
1 to
36
<PAGE>
<PAGE>
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 Revolving Credit Agreement dated as of October 31, 1997 between the
Registrant and Bank Of America National Trust And Savings Association.
Filed herewith.
4-2 Amended and Restated Loan Agreement dated as of July 22, 1996, between
EXECUTONE Information Systems, Inc., certain employees thereof, and the
Lenders named therein. Filed herewith.
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.
10-5 Stock Option Bonus Credit Plan of EXECUTONE Information Systems,
Inc. dated
37
<PAGE>
<PAGE>
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. Incorporated
by reference to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1996, filed on March 31, 1997.
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.
10-16 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 Louis K. Adler dated July 29,
1997. Filed herewith.
10-20 Warrant to Purchase 25,000 Shares of Common Stock of the Registrant, in
favor of Jerry M. Seslowe, dated February 1, 1996. Incorporated by
reference to the Registrant's Annual Report on Form 10-K/A for the year
ended December 31, 1996 filed on April 30, 1997.
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 Amended and Restated Distributor Agreement dated as of April 1, 1998,
between EXECUTONE Information Systems, Inc. and Claricom, Inc. d/b/a/
Executone Business Solutions (formerly Clarity Telecom, Inc.).
(Confidential portions have been omitted and filed separately with the
Commission pursuant to a request for confidential treatment.) Filed
herewith.
11 Statement regarding computation of per share earnings. Filed
herewith. Please see Note E to the Consolidated Financial Statements
in the Registrant's 1997 Annual Report to Shareholders.
13 1997 Annual Report to Shareholders of EXECUTONE Information
Systems, Inc. Filed herewith.
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. Filed herewith.
38
<PAGE>
<PAGE>
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 23, 1988 on 1986 Stock Option Plan
(7,000,000 shares) and Employee Stock Purchase Plan (500,000 shares)
S-8 Reg. No. 33-42561 filed September 4, 1991 on 1984 Employee Stock Purchase
Plan (350,000 shares) and Directors' Stock Option Plan (100,000 shares)
S-8 Reg. No. 33-45015 filed January 2, 1992 on 1984 Employee Stock Purchase
Plan (400,000 shares)
S-8 Reg. No. 33-57519 filed January 31, 1995 on 1984 Employee Stock Purchase
Plan (1,000,000 shares).
Insofar as indemnification arising under the Securities Act of 1933 (the "Act")
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to the court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
Reports on Form 8-K
The Registrant filed no reports on Form 8-K during the quarter ended December
31, 1997.
39
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned thereunto duly authorized.
EXECUTONE Information Systems, Inc.
By: /s/ Alan Kessman
------------------------------------
Alan Kessman, Chairman, President
and Chief Executive Officer
April 14, 1998
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.
<TABLE>
<S> <C>
April 14, 1998 /s/ Alan Kessman
------------------------------
Alan Kessman
Chairman, President and Chief Executive
Officer (Principal Executive Officer)
April 14, 1998 /s/ Louis K. Adler
------------------------------
Louis K. Adler, Director
April 14, 1998 /s/ Stanley M. Blau
------------------------------
Stanley M. Blau, Director
April 14, 1998 /s/ Anthony R. Guarascio
-------------------------------
Anthony R. Guarascio
Vice President, Finance and Administration,
and Chief Financial Officer
(Principal Financial and Accounting Officer)
April 14, 1998 /s/ Thurston R. Moore
------------------------------
Thurston R. Moore, Director
April 14, 1998 /s/ Richard S. Rosenbloom
------------------------------
Richard S. Rosenbloom, Director
April 14, 1998 /s/ Jerry M. Seslowe
------------------------------
Jerry M. Seslowe, Director
</TABLE>
40
<PAGE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
EXECUTONE Information Systems, Inc.:
We have audited in accordance with generally accepted auditing standards, the
financial statements included in EXECUTONE Information Systems, Inc. and
subsidiaries' annual report to stockholders incorporated by reference in this
Form 10-K, and have issued our report thereon dated February 7, 1998. 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
February 7, 1998
S-1
<PAGE>
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(Amounts in Thousands)
<TABLE>
<CAPTION>
Additions Deductions
------------------------------------- ------------------------
Charged Charged Net
Balance at (Credited) (Credited) Writeoffs of Balance at
Beginning to Costs and to Other Uncollectible End of
Description of Period Expenses Accounts Accounts Period
-------------- ------------ ------------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997
Deducted from asset accounts:
Allowance for doubtful accounts 2,106 150 --- (442) 1,814
Allowance for uncollectible notes
receivable 2,216 127 --- --- 2,343
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
</TABLE>
* Adjustments related to sale of direct sales organization.
S-2
STATEMENT OF DIFFERENCES
The trademark symbol shall be expressed as..................................'tm'
The registered trademark symbol shall be expressed as....................... 'r'
<PAGE>
<PAGE>
EXECUTONE INFORMATION SYSTEMS, INC.
EXHIBITS TO 1997 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 Revolving Credit Agreement dated as of October 31, 1997 between the
Registrant and Bank Of America National Trust And Savings Association.
Filed herewith.
4-2 Amended and Restated Loan Agreement dated as of July 22, 1996, between
EXECUTONE Information Systems, Inc., certain employees thereof, and the
Lenders named therein. Filed herewith.
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
E-3
<PAGE>
<PAGE>
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.
10-5 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. Incorporated
by reference to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1996, filed on March 31, 1997.
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.
10-16 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 Louis K. Adler dated July 29,
1997. Filed herewith.
10-20 Warrant to Purchase 25,000 Shares of Common Stock of the Registrant, in
favor of Jerry M. Seslowe, dated February 1, 1996. Incorporated by
reference to the Registrant's Annual Report on Form 10-K/A for the year
ended December 31, 1996 filed on April 30, 1997.
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 Amended and Restated Distributor Agreement dated as of April 1, 1998,
between EXECUTONE Information Systems, Inc. and Claricom, Inc. d/b/a/
Executone Business Solutions (formerly Clarity Telecom, Inc.).
(Confidential portions have been omitted and filed separately with the
Commission pursuant to a request for confidential treatment.) Filed
herewith.
11 Statement regarding computation of per share earnings. Filed herewith.
Please see Note E to the Consolidated Financial Statements in the
Registrant's 1997 Annual Report to Shareholders.
E-3
<PAGE>
<PAGE>
13 1997 Annual Report to Shareholders of EXECUTONE Information Systems,
Inc. Filed herewith.
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. Filed herewith.
E-3
<PAGE>
<PAGE>
EXHIBIT 4.1
REVOLVING CREDIT AGREEMENT
DATED AS OF OCTOBER 31, 1997
BETWEEN
EXECUTONE INFORMATION SYSTEMS, INC.
AND
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION
<PAGE>
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I
DEFINITIONS, INTERPRETATION OF AGREEMENT AND
COMPLIANCE WITH FINANCIAL RESTRICTIONS.................................... 1
1.1 Definitions..................................................... 1
"Agreement"................................................ 1
"Applicable Percentage".................................... 1
"Authorized Officer"....................................... 3
"Bank"..................................................... 3
"Banking Day".............................................. 3
"Breakage Date"............................................ 3
"Capitalized Lease"........................................ 3
"Code"..................................................... 3
"Commitment"............................................... 3
"Company".................................................. 3
"Consolidated Net Worth"................................... 3
"Credit"................................................... 4
"Disbursement Date"........................................ 4
"Dollars".................................................. 4
"EBITDA"................................................... 4
"Environmental Laws"....................................... 4
"ERISA".................................................... 4
"ERISA Affiliate".......................................... 4
"Eurocurrency Reserve Requirement"......................... 5
"Eurodollar Loan".......................................... 5
"Event of Default"......................................... 5
"Federal Funds Effective Rate"............................. 5
"Federal Reserve Board".................................... 5
"Fiscal Quarter"........................................... 5
"Fiscal Year".............................................. 6
"GAAP"..................................................... 6
"Hazard Materials"......................................... 6
"Indebtedness"............................................. 6
"Interbank Rate"........................................... 6
"Interest Period".......................................... 7
"Investment"............................................... 7
"Issuance Request"......................................... 7
"Letter of Credit"......................................... 7
"Letter of Credit Availability"............................ 7
"Letter of Credit Outstandings"............................ 8
"Liabilities".............................................. 8
"Lien"..................................................... 8
"Loan"..................................................... 8
"Occupational Safety and Health Law"....................... 8
"Note"..................................................... 8
"Payment Date"............................................. 8
"PBGC"..................................................... 9
"Person"................................................... 9
"Plan"..................................................... 9
</TABLE>
(i)
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
"Rate Hedging Obligations"................................ 9
"Reference Rate".......................................... 9
"Reference Rate Loan"..................................... 9
"Reimbursement Obligations"............................... 9
"Related Party"........................................... 9
"Reportable Event"........................................ 10
"Senior Funded Debt"...................................... 10
"Senior Funded Debt Cash Flow Ratio"...................... 10
"Stated Expiry Date"...................................... 10
"Subsidiary".............................................. 10
"Taxes"................................................... 10
"Termination Date......................................... 10
"Trade Accounts Payable".................................. 10
"Unmatured Event of Default".............................. 10
1.2 Other Definitional Provisions................... 10
1.3 Interpretation of Agreement..................... 11
1.4 Compliance with Financial Restrictions.......... 11
ARTICLE II
COMMITMENT OF THE BANK; CERTAIN LOAN TERMS;
LETTERS OF CREDIT................................................ 11
2.1 Loans..................................................... 11
2.2 Loan Options.............................................. 11
2.3 Borrowing Procedures...................................... 11
2.4 Continuation and/or Conversion of Loans................... 12
2.5 Note Evidencing Loans..................................... 12
2.6 Funding Losses............................................ 12
2.7 Capital Adequacy.......................................... 13
2.8 Letters of Credit......................................... 14
(a) Requests.............................................. 14
(b) Issuances............................................. 14
(c) Fees and Expenses..................................... 15
(d) Disbursements......................................... 15
(e) Reimbursement......................................... 15
(f) Deemed Disbursements.................................. 16
(g) Nature of Reimbursement Obligations................... 17
(h) Increased Costs; Indemnity............................ 17
(i) Termination Date...................................... 18
ARTICLE III
INTEREST AND FEES..................................................... 18
3.1 Interest.................................................. 18
(a) Reference Rate Loans.................................. 18
(b) Eurodollar Loans...................................... 18
(c) Interest After Maturity............................... 19
3.2 Nonuse Fee................................................ 19
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
3.3 Closing Fee.................................................. 19
3.4 Method of Calculating Interest and Fees...................... 19
ARTICLE IV
PAYMENTS, PREPAYMENTS, REDUCTION OR TERMINATION OF THE CREDIT.... 19
4.1 Place of Payment............................................ 19
4.2 Prepayments................................................. 20
4.3 Setoff...................................................... 20
ARTICLE V
ADDITIONAL PROVISIONS RELATING TO
EURODOLLAR LOANS ................................................ 21
5.1 Increased Cost ............................................. 21
5.2 Deposits Unavailable or Interest Rate Unascertainable or
Inadequate; Impracticability ........................... 21
5.3 Changes in Law Rendering Eurodollar Loans Unlawful.......... 22
5.4 Funding .................................................... 23(a)
(a) Discretion of the Bank as to Manner of Funding.............. 23(b)
(b) Funding Through the Sale of Participations.................. 23
ARTICLE VI
REPRESENTATIONS AND WARRANTIES................................... 23
6.1 Existence .................................................. 23
6.2 Authorization............................................... 23
6.3 No Conflicts................................................ 24
6.4 Validity and Binding Effect................................. 24
6.5 No Default.................................................. 24
6.6 Financial Statements........................................ 24
6.7 Litigation.................................................. 24
6.8 Liens....................................................... 25
6.9 Subsidiaries................................................ 25
6.10 Partnerships................................................ 25
6.11 Purpose..................................................... 25
6.12 Regulation U................................................ 26
6.13 Compliance.................................................. 26
6.14 Pension and Welfare Plans................................... 26
6.15 Taxes ...................................................... 26
6.16 Investment Company Act Representation....................... 26
6.17 Public Utility Holding Company Act Representation........... 26
6.18 Environmental and Safety and Health Matters................. 26
6.19 Insurance .................................................. 27
6.20 Contracts; Labor Matters.................................... 27
6.21 Accuracy of Information..................................... 28
</TABLE>
(iii)
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
6.22 Title to Properties......................................... 28
ARTICLE VII
COMPANY'S COVENANTS ............. .............................. 28
7.1 Financial Statements and Other Reports..................... 28
(a) Annual Audit Report................................... 28
(b) Quarterly Financial Statement........................ 29
(c) Officer's Certificate................................. 29
(e) Report of Change in Subsidiaries or Partnerships...... 29
(f) Requested Information................................. 30
7.2 Notices ................................................... 30
(a) Default............................................... 30
(b) Litigation............................................ 30
(c) Pension and Welfare Plans............................. 30
(d) Material Adverse Change............................... 30
(e) Other Events.......................................... 30
7.3 Existence ................................................. 30
7.4 Nature of Business......................................... 30
7.5 Books, Records and Access.................................. 30
7.6 Insurance ................................................. 31
7.7 Repair .................................................... 31
7.8 Taxes ..................................................... 31
7.9 Compliance................................................. 31
7.10 Pension Plans.............................................. 31
7.11 Merger, Purchase and Sale.................................. 31
7.12 Consolidated Net Worth..................................... 32
7.13 Capital Expenditures....................................... 32
7.14 Maintenance of Minimum Liquidity........................... 32
7.15 Senior Funded Debt Cash Flow Ratio......................... 33
7.16 Capitalized Leases......................................... 33
7.17 Liens...................................................... 33
7.18 Indebtedness............................................... 33
7.19 Other Agreements........................................... 34
7.20 Use of Proceeds............................................ 34
7.21 Transactions With Related Parties.......................... 34
7.22 Hostile Acquisitions....................................... 34
ARTICLE VIII
CONDITIONS PRECEDENT TO ALL LOANS .................................... 34
8.1 Notice....................................................... 34
8.2 Default...................................................... 34
8.3 Warranties................................................... 34
8.4 Certification................................................ 35
ARTICLE IX
</TABLE>
(iv)
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
CONDITION PRECEDENT TO INITIAL LOAN................................... 35
9.1 Note ...................................................... 35
9.2 Resolutions................................................ 35
9.3 Incumbency Certificate..................................... 35
9.4 Opinion ................................................... 35
9.5 Good Standing ............................................. 35
ARTICLE X
EVENTS OF DEFAULT AND REMEDIES .................................. 35
10.1 Events of Default.......................................... 35
(a) Non-Payment ........................................... 36
(b) Non-Payment of Other Indebtedness...................... 36
(c) Acceleration of Other Indebtedness..................... 36
(d) Other Obligations...................................... 36
(e) Insolvency ............................................ 36
(f) Pension Plans.......................................... 37
(g) Agreements ............................................ 37
(h) Other Agreements....................................... 37
(i) Warranty .............................................. 37
(j) Litigation ............................................ 37
10.2 Remedies................................................... 38
ARTICLE XI
GENERAL......... ................................................ 38
11.1 Waiver and Amendments....................................... 38
11.2 Notices..................................................... 38
11.3 Expenses ................................................... 39
11.4 Information................................................. 39
11.5 Severability................................................ 39
11.6 Law ........................................................ 40
11.7 Successors.................................................. 40
11.8 WAIVER OF JURY TRIAL; WAIVER OF CONSEQUENTIAL DAMAGES....... 40
11.9 CONSENT TO JURISDICTION..................................... 40
11.10 COUNTERPARTS .............................................. 40
</TABLE>
(v)
<PAGE>
<PAGE>
EXHIBIT A -Note
EXHIBIT B -Schedule of Litigation
EXHIBIT C -Schedule of Liens
EXHIBIT D -Schedule of Subsidiaries
EXHIBIT E -Schedule of Partnerships and Joint Ventures
EXHIBIT F -Opinion of Counsel
(vi)
<PAGE>
<PAGE>
REVOLVING CREDIT AGREEMENT
THIS AGREEMENT, dated as of October 31, 1997, is entered into between
EXECUTONE INFORMATION SYSTEMS, INC., a Virginia corporation (the "Company"), and
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, a national banking
corporation, having its principal office at 231 South LaSalle Street, Chicago,
Illinois 60697 (the "Bank").
W I T N E S S E T H :
WHEREAS, the Company has requested the Bank to make available to the
Company a revolving line of credit for loans in an aggregate amount not to
exceed $35,000,000 which extensions of credit the Company will use for its
working capital needs and general business purposes;
NOW, THEREFORE, in consideration of the mutual agreements herein
contained, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS, INTERPRETATION OF AGREEMENT AND
COMPLIANCE WITH FINANCIAL RESTRICTIONS
1.1 Definitions. In addition to the terms defined elsewhere in this
Agreement, the following terms shall have the meanings indicated for purposes of
this Agreement (such meanings to be equally applicable to both the singular and
plural forms of the terms defined):
"Agreement" means this Revolving Credit Agreement, as it may be
amended, modified or supplemented from time to time.
"Applicable Percentage" means at any time of determination, with
respect to Eurodollar Loans or Reference Rate Loans, the applicable percentage
set forth below based on the Senior Funded Debt Cash Flow Ratio for the company
at such time:
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<PAGE>
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Level Senior Funded Debt Cash Eurodollar Loans Reference Rate
Flow Ratio Percentage Loan Percentage
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------
1 Less than or equal to 1.00x 1.75% 0%
- -------------------------------------------------------------------------------------------------------
2 More than 1.00x but less than or equal to 2.00x 2.25% 0%
- -------------------------------------------------------------------------------------------------------
3 More than 2.00x but less than or equal to 3.00x 2.50% 0.5%
- -------------------------------------------------------------------------------------------------------
4 More than 3.00x but less than or equal to 3.50x 2.75% 0.75%
- -------------------------------------------------------------------------------------------------------
</TABLE>
For purposes of the foregoing, (a) from the closing date of this
Agreement until November 20, 1997, the Applicable Percentages shall be
determined in accordance with Level 2, (b) from and after such date,
the Applicable Percentages shall be determined at any time by
reference to the Senior Funded Debt Cash Flow Ratio in effect at the
time, (c) any change in the Applicable Percentages based on a change
in such Ratio shall be effective for all purposes five (5) days from
delivery to the Bank of an Officer's Certificate of the Company with
respect to the financial statements to be delivered pursuant to
Section 7.1, (i) setting forth in reasonable detail the calculation of
such Ratio for such fiscal period and (ii) stating that the signer has
reviewed the terms of this Agreement and has made, or caused to be
made under his or her supervision, a review in reasonable detail of
the transactions and condition of the Company and its Subsidiaries
during the accounting period covered by the related financial
statements and that such review has not disclosed the existence during
or at the end of such accounting period, and that the signer does not
have knowledge of the existence as at the date of such Officer's
Certificate, of any condition or event that constitutes an Unmatured
Event of Default or an Event of Default and (d) notwithstanding the
foregoing provisions of clauses (b) and (c), no reduction in the
Applicable Percentages shall be effective if any Unmatured Event of
Default or Event of Default shall have occurred and be continuing. It
is understood that the foregoing Officer's Certificate shall be
permitted to be delivered prior to, but in no event later than, the
time of the actual delivery of the financial statements required to be
delivered pursuant to Section 7.1 for the applicable fiscal period.
Any change in the Applicable Percentages due to a change in the
applicable Level shall be effective on the effective date of such
change in the applicable Level and shall apply to all Eurodollar Rate
Loans made on or after the commencement of the period (and to
Reference Rate Loans that are outstanding at any time during the
period) commencing on the effective date of such change in the
applicable Level and ending on the date
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<PAGE>
<PAGE>
immediately preceding the effective date of the next such change in
applicable Level.
"Authorized Officer" means any officer or employee of the Company
designated by the Company from time to time in a schedule, which schedule shall
become effective when received by the Bank.
"Bank" -- see Preamble.
"Banking Day" means any day other than a Saturday, Sunday or legal
holiday on which banks are authorized or required to be closed in Chicago,
Illinois and, with respect to Eurodollar Loans, a day on which dealings in
Dollars may be carried on by the Bank in the interbank eurodollar market.
"Breakage Date", is defined in Section 2.6.
"Capital Expenditures" shall mean with respect to any Person, for any
period, the aggregate of all expenditures (whether paid in cash or accrued as
liabilities) during that period and including that portion of Capitalized Leases
that is capitalized on the balance sheet of such Person by such Person during
such period that, in conformity with GAAP, are required to be included in or
reflected by the property, plant or equipment or similar fixed asset accounts
reflected in the combined and consolidated balance sheet of such Person
(including equipment which is purchased simultaneously with the trade-in of
existing equipment owned by such Person to the extent of the gross amount of
such purchase price less the book value of the equipment being traded in at such
time), but excluding expenditures made in connection with the replacement or
restoration of assets, to the extent reimbursed or financed from insurance
proceeds paid on account of the loss of or damage to the assets being replaced
or restored, or from awards of compensation arising from the taking by
condemnation or eminent domain of such assets being replaced.
"Capitalized Lease" means any lease which is or should be capitalized
on the balance sheet of the lessee in accordance with GAAP.
"Code" means the Internal Revenue Code of 1986 and any successor
statute of similar import, together with the regulations thereunder, in each
case as in effect from time to time. References to sections of the Code shall be
construed to also refer to any successor sections.
"Commitment" means $35,000,000.
"Company" -- see Preamble.
"Consolidated Net Worth" means, at any time, the total of shareholders,
equity (including capital stock, additional paid-in
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<PAGE>
capital and retained earnings after deducting treasury stock) of the Company and
its consolidated Subsidiaries calculated in accordance with GAAP.
"Credit" means the Bank's commitment to make Loans under the terms of
this Agreement.
"Disbursement Date" is defined in Section 2.8(d).
"Dollars" and the symbol "$" mean lawful money of the United States of
America.
"EBITDA" means for any period of determination, the Company's net
earnings (or loss) after provision for taxes plus cash charges against income
for foreign, federal and state income taxes for such period plus depreciation
and amortization expenses for such period, plus the Company's aggregate interest
expense for such period, plus any extraordinary losses arising outside of the
ordinary course of business during such period which have been included in the
calculation of net earnings, minus extraordinary gains arising outside the
ordinary course of business during such period which have been included in the
calculation of net earnings.
"Environmental Laws" means the Resource Conservation and Recovery Act,
the Comprehensive Environmental Response, Compensation and Liability Act, any
so-called "Superfund" or "Superlien" law, the Toxic Substances Control Act, the
Hazardous Materials Transportation Act, the Federal Water Pollution Control Act,
the Federal Insecticide, Fungicide and Rodenticide Act, and the Clean Air Act
and any other federal, state or local statute, law, ordinance, code, rule,
regulation, order or decree or other requirement regulating, relating to, or
imposing liability or standards of conduct (including, but not limited to,
permit requirements, and emission or effluent restrictions) concerning any
Hazardous Materials or any hazardous, toxic or dangerous waste, substance or
constituent, or any pollutant or contaminant or other substance, whether solid,
liquid or gas, as now or at any time hereafter in effect.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and any successor statute of similar import, together with the
regulations thereunder, in each case as in effect from time to time. References
to sections of ERISA shall be construed to also refer to any successor sections.
"ERISA Affiliate" means any corporation, trade or business that is,
along with the Company, a member of a controlled group of corporations or a
controlled group of trades or businesses, as described in sections 414(b) and
414(c), respectively, of the Code or Section 4001 of ERISA.
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<PAGE>
<PAGE>
"Eurocurrency Reserve Requirement" means, with respect to any Eurodollar
Loan for any Interest Period, a percentage equal to the daily average during
such Interest Period of the percentages in effect on each day of such Interest
Period, as prescribed by the Federal Reserve Board, for determining the
aggregate maximum reserve requirements (including all basic, supplemental,
marginal and other reserves) applicable to "Eurocurrency liabilities" pursuant
to Regulation D or any other then applicable regulation of the Federal Reserve
Board which prescribes reserve requirements applicable to "Eurocurrency
liabilities," as presently defined in Regulation D. Without limiting the effect
of the foregoing, the Eurocurrency Reserve Requirement shall reflect any other
reserves required to be maintained by the Bank against (i) any category of
liabilities that includes deposits by reference to which the Interbank Rate
(Reserve Adjusted) is to be determined, or (ii) any category of extensions of
credit or other assets that includes Eurodollar Loans. For purposes of this
Agreement, any Eurodollar Loans hereunder shall be deemed to be "Eurocurrency
liabilities," as defined in Regulation D, and, as such, shall be deemed to be
subject to such reserve requirements without the benefit of, or credit for,
proration, exceptions or offsets which may be available to the Bank from time to
time under Regulation D.
"Eurodollar Loan" means any Loan which bears interest at a rate
determined with reference to the Interbank Rate (Reserve Adjusted).
"Event of Default, means any of the events described in Section 10.1.
"Federal Funds Effective Rate" means, for any day, an interest rate per
annum equal to the weighted average of the rates on overnight Federal funds
transactions with members of the Federal Reserve System arranged by Federal
funds brokers, as published for such day by the Federal Reserve Bank of New
York, or, if such rate is not so published for any day which is a Banking Day,
the average of the quotations for such day on such transactions received by the
Bank from three Federal funds brokers of recognized standing selected by it. In
the case of a day which is not a Banking Day, the Federal Funds Effective Rate
for such day shall be the Federal Funds Effective Rate for the next preceding
Banking Day. For purposes of this Agreement and the Note, each change in the
Alternate Reference Rate due to a change in the Federal Funds Effective Rate
shall take effect on the effective date of such change in the Federal Funds
Effective Rate.
"Federal Reserve Board" means the Board of Governors of the Federal
Reserve System or any successor thereto.
"Fiscal Quarter" means any quarter of a Fiscal Year.
-5-
<PAGE>
<PAGE>
"Fiscal Year" means any period of 12 consecutive calendar months ending
on the 31st day of December. References to a Fiscal Year with a number
corresponding to any calendar year (e.g. "Fiscal Year 1997") refer to the Fiscal
Year ending on the 31st day of December occurring during such calendar year.
"GAAP" means generally accepted accounting principles as applied in the
preparation of the audited financial statement of the Company referred to in
Section 6.6.
"Hazardous Materials" means any pollutant, contaminant, toxic
substance, hazardous substance, hazardous material, hazardous chemical or
hazardous waste defined or qualifying as such in (or for the purposes of) any
Environmental Law, and shall include, but not be limited to, petroleum,
including crude oil or any fraction thereof which is liquid at standard
conditions of temperature or pressure (60 degrees Fahrenheit and 14.7 pounds per
square inch absolute), any radioactive material, including, but not limited to,
any source, special nuclear or by-product material as defined at 42 U.S.C.
Section 2011 et. seq., as amended or hereafter amended, polychlorinated
biphenyls and asbestos in any form or condition and any chemical, material,
pollutant or substance, release or discharge of which or exposure to which is
prohibited, limited or regulated by any Federal, state or local governmental or
regulatory authority or could pose a hazard to the health and safety of the
occupants of any properties of the Company or the owners and/or occupants of
property adjacent to any such property.
"Indebtedness" of any Person means, without duplication, (i) any
obligation of such Person for borrowed money, including, without limitation, (a)
any obligation of such Person evidenced by bonds, debentures, notes or other
similar debt instruments, and (b) any obligation for borrowed money which is
non-recourse to the credit of such Person but which is secured by a Lien on any
asset of such Person, (ii) any obligation of such Person on account of deposits
or advances, (iii) any obligation of such Person for the deferred purchase price
of any property or services, except Trade Accounts Payable, (iv) any obligation
of such Person as lessee under a Capitalized Lease, (v) all guaranties issued by
such Person and (vi) any Indebtedness of another Person secured by a Lien on any
asset of such first Person, whether or not such Indebtedness is assumed by such
first Person. For all purposes of this Agreement, the Indebtedness of any Person
shall include the Indebtedness of any partnership or joint venture in which such
Person is a general partner or a joint venturer.
"Interbank Rate" means, with respect to each Interest Period for a
Eurodollar Loan, the rate per annum at which Dollar deposits in immediately
available funds are offered to the Bank two Banking Days prior to the beginning
of such Interest Period by major banks in the interbank eurodollar market at or
about 10:00 a.m., Chicago time, for delivery on the first day of such Interest
Period, for
-6-
<PAGE>
<PAGE>
the number of days comprised therein and in an amount equal to the amount of the
Eurodollar Loan to be outstanding during such Interest Period.
"Interbank Rate (Reserve Adjusted)" means, with respect to each Interest
Period for a Eurodollar Loan, a rate per annum (rounded upward, if necessary,
to the nearest 1/100 of 1%) determined pursuant to the following formula:
Interbank Rate Interbank Rate
(Reserve Adjusted) 1-Eurocurrency Reserve Requirement
"Interest Period" means (i) with respect to any Eurodollar Loan, the
period commencing on the borrowing date of such Eurodollar Loan or the date a
Reference Rate Loan is converted into such Eurodollar Loan or the last day of
the prior Interest Period for such Eurodollar Loan, as the case may be, and
ending on the numerically corresponding day one, two or three months thereafter,
as selected by the Company pursuant to Section 2.3 or Section 2.4; provided,
however, that:
(a) any Interest Period which would otherwise end on a day which
is not a Banking Day shall end on the next succeeding Banking Day
unless such next succeeding Banking Day falls in another calendar
month, in which case such Interest Period shall end on the next
preceding Banking Day;
(b) any Interest Period which begins on the last Banking Day of a
calendar month (or on a day for which there is no numerically
corresponding day in the calendar month at the end of such
Interest Period) shall end on the last Banking Day of the
calendar month at the end of such Interest Period; and
(c) no Interest Period shall extend beyond the Termination Date.
"Investment" means any investment, made in cash or by delivery of any
kind of property or asset, in any Person, whether by acquisition of shares of
stock or similar interest, Indebtedness or other obligation or security, or by
loan, advance or capital contribution, or otherwise.
"Issuance Request" is defined in Section 2.8(a).
"Letter of Credit" is defined in Section 2.7.
"Letter of Credit Availability" means, at any time, the difference
between (i) the Commitment and (ii) the sum of (A) the aggregate outstanding
principal amount of all Loans and (B) the then aggregate Letter of Credit
Outstandings.
-7-
<PAGE>
<PAGE>
"Letter of Credit Outstandings" means, at any time, an amount equal to
the sum of:
(a) the aggregate stated amount at such time of all Letters of
Credit then outstanding and undrawn (as such aggregate stated
amount shall be adjusted, from time to time, as a result of
drawings, the issuance of Letters of Credit, or otherwise); and
(b) the then aggregate amount of all unpaid and outstanding
Reimbursement Obligations.
"Liabilities" means all obligations of the Company and its Subsidiaries
with respect to any Indebtedness and/or any guaranty of any Indebtedness
howsoever created, arising or evidenced, whether direct or indirect, absolute or
contingent, now or hereafter existing, or due or to become due.
"Lien" means any mortgage, pledge, hypothecation, judgment lien or
similar legal process, title retention lien, or other lien or security interest,
including, without limitation, the interest of a vendor under any conditional
sale or other title retention agreement and the interest of a lessor under any
Capitalized Lease.
"Loan" means a loan by the Bank to the Company under Section 2.1, and
shall be a Reference Rate Loan or a Eurodollar Loan (each of which shall be a
"type" of Loan).
"Occupational Safety and Health Law" means the occupational Safety and
Health Act of 1970, as amended, and any other federal, state or local statute,
law, ordinance, code, rule, regulation, order or decree regulating, relating to
or imposing liability or standards of conduct concerning employee health and/or
safety.
"Note" means the Company's promissory note, substantially in the form
set forth as Exhibit A with appropriate insertions, as such promissory note may
be amended, supplemented or otherwise modified from time to time, and the term
"Note" shall include any substitutions for, or renewals of, such promissory
note.
"Payment Date" means (i) with respect to any Eurodollar Loan, the last
day of each Interest Period with respect thereto and, if such Interest Period is
in excess of three months, the day three months after the commencement of such
Interest Period and thereafter the day three months after each succeeding
Payment Date; (ii) with respect to any Reference Rate Loan, the last day of each
March, June, September and December, commencing on the first such date to occur
after such Reference Rate Loan is made or a Eurodollar Loan is converted into
such Reference Rate Loan; and (iii) as to any fees, the last day of each March,
June, September and December, commencing on the first such date to occur after
the date hereof.
-8-
<PAGE>
<PAGE>
"PBGC" means the Pension Benefit Guaranty Corporation and any entity
succeeding to any or all of its functions under ERISA.
"Person" means an individual, partnership, corporation, trust, joint
venture, joint stock company, association, unincorporated organization,
government or agency or political subdivision thereof, or other entity.
"Plan" means a "pension plan," as such term is defined in ERISA,
established or maintained by the Company or any ERISA Affiliate or as to which
the Company or any ERISA Affiliate contributes or is a member or otherwise may
have any liability.
"Rate Hedging Obligations" of a Person means any and all obligations of
such Person, whether absolute or contingent and howsoever and whensoever
created, arising, evidenced or acquired (including all renewals, extensions and
modifications thereof and substitutions therefor), under (a) any and all
agreements, devices or arrangements designed to protect at least one of the
parties thereto from the fluctuations of interest rates, exchange rates or
forward rates applicable to such parties' assets, liabilities or exchange
transactions, including, but not limited to, dollar-denominated or
cross-currency interest rate exchange agreements, forward currency exchange
agreements, interest rate cap or collar protection agreements, forward rate
currency or interest rate options, puts and warrants, and (b) any and all
cancellations, buybacks, reversals, terminations or assignments of any of the
foregoing.
"Reference Rate" means, at any time, the rate of interest then most
recently announced by the Bank at Chicago, Illinois as its reference rate. For
purposes of this Agreement and the Note, each change in the Reference Rate shall
take effect on the effective date of the change in the Reference Rate.
"Reference Rate Loan" means any Loan which bears interest at a rate
determined with reference to the Reference Rate.
"Reimbursement Obligations" is defined in Section 2.8(e).
"Related Party" means, for purposes of Section 7.21 only, any Person
(other than a Subsidiary) (i) which directly or indirectly through one or more
intermediaries controls, or is controlled by, or is under common control with,
the Company, (ii) which beneficially owns or holds 10% or more of the equity
interest of the Company, or (iii) 10% or more of the equity interest of which is
beneficially owned or held by the Company or a Subsidiary. The term "control"
means the possession, directly or indirectly, of the power to direct or cause
the direction of the management and policies of a Person, whether through the
ownership of voting securities, by contract or otherwise.
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<PAGE>
"Reportable Event', has the meaning given to such term in
ERISA.
"Senior Funded Debt" means all Loans, Letters of Credit Outstandings,
Capitalized Leases and any other senior indebtedness permitted hereunder.
"Senior Funded Debt Cash Flow Ratio" means the ratio, (A) for the
purposes of determining the Applicable Percentage, as measured at the end of
each Fiscal Quarter for the four immediately preceding Fiscal Quarters, of (i)
Senior Funded Debt to (ii) EBITDA; and (B) for the purposes of Section 7.15
hereof, as measured at the end of each Fiscal Quarter for the four immediately
preceding Fiscal Quarters, of (i) Senior Funded Debt to (ii) EBITDA on an
annualized basis of the period of four Fiscal Quarters then ending beginning the
Fiscal Quarter ending September 30, 1997.
"Stated Expiry Date, is defined in Section 2.8(a).
"Subsidiary" means any Person of which or in which the Company and its
other Subsidiaries own directly or indirectly 50% or more of (i) the combined
voting power of all classes of stock having general voting power under ordinary
circumstances to elect a majority of the board of directors of such Person, if
it is a corporation, (ii) the capital interest or profits interest of such
Person, if it is a partnership, joint venture or similar entity, or (iii) the
beneficial interest of such Person, if it is a trust, association or other
unincorporated organization.
"Taxes" with respect to any Person means taxes, assessments or other
governmental charges or levies imposed upon such Person, its income or any of
its properties, franchises or assets.
"Termination Date" means January 31, 2000.
"Trade Accounts Payable" of any Person means trade accounts payable of
such Person with a maturity of not greater than 90 days incurred in the ordinary
course of such Person's business.
"Unmatured Event of Default" means any event or condition which, with
the lapse of time or giving of notice to the Company or both, would constitute
an Event of Default.
1.2 Other Definitional Provisions. Unless otherwise defined or the
context otherwise requires, all financial and accounting terms used herein or in
any certificate or other document made or delivered pursuant hereto shall be
defined in accordance with GAAP. Unless otherwise defined therein, all terms
defined in this Agreement shall have the defined meanings when used in the Note
or in any certificate or other document made or delivered pursuant hereto.
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<PAGE>
1.3 Interpretation of Agreement. A Section or an Exhibit is, unless
otherwise stated, a reference to a section hereof or an exhibit hereto, as the
case may be. Section captions used in this Agreement are for convenience only,
and shall not affect the construction of this Agreement. The words "hereof,"
"herein," "hereto" and "hereunder" and words of similar purport when used in
this Agreement shall refer to this Agreement as a whole and not to any
particular provision of this Agreement.
1.4 Compliance With Financial Restrictions. Compliance with each of the
financial ratios and restrictions contained in Article VII shall, except as
otherwise provided herein, be determined in accordance with GAAP consistently
followed.
ARTICLE II
COMMITMENT OF THE BANK; CERTAIN LOAN TERMS;
LETTERS OF CREDIT
2.1 Loans. Subject to the terms and conditions of this Agreement and in
reliance upon the warranties of the Company set forth herein, the Bank agrees to
make Loans to the Company, which Loans the Company may prepay and reborrow
during the period from the date hereof to, but not including, the Termination
Date, in such amounts as the Company may from time to time request, but not
exceeding the Commitment, less the then aggregate Letter of Credit Outstandings,
in the aggregate at any one time outstanding.
2.2 Loan Options. Each Loan shall be a Reference Rate Loan or a
Eurodollar Loan, as shall be selected by the Company, except as otherwise
provided herein. Any combination of types of Loans may be outstanding at the
same time, except that no more than five (5) Eurodollar Loans having different
Interest Periods may be outstanding at any one time. As to any Eurodollar Loan,
the Bank may, if it so elects, fulfill its commitment by causing a foreign
branch or affiliate to make or continue such Loan; provided, however, that in
such event such Loan shall be deemed for the purposes of this Agreement to have
been made by the Bank and the obligation of the Company to repay such Loan shall
nevertheless be to the Bank and shall be deemed held by the Bank, to the extent
of such Loan, for the account of such branch or affiliate.
2.3 Borrowing Procedures. The Company shall give the Bank prior written
or telephonic notice of each Loan, which shall be received by the Bank, in the
case of a Reference Rate Loan, not later than 11:00 a.m. on the proposed
borrowing date, Chicago time, with respect to such Loan, or, in the case of a
Eurodollar Loan, not later than 11:00 a.m., Chicago time, two Banking Days prior
to the borrowing date, with respect to such Loan. Each such notice shall specify
(i) the borrowing date (which shall be a Banking Day), (ii) the amount and type
of Loan, and (iii) if such Loan is
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<PAGE>
to be a Eurodollar Loan, the initial Interest Period for such Loan. The Company
shall promptly confirm each such telephonic notice in writing (it being
understood, however, that the Company's failure to confirm any telephonic notice
or otherwise comply with the provisions of this Section 2.3 shall not affect the
obligation of the Company to repay each Loan in accordance with the terms of
this Agreement and the Note). The Bank will pay to the Company the amount of the
Loan on the date designated in the notice of borrowing upon receipt of the
documents required under Article VIII and IX (with respect to the initial Loan)
with respect to the Loan.
2.4 Continuation and/or Conversion of Loans. The Company may elect to
(i) continue any outstanding Eurodollar Loan from the current Interest Period
for such Loan into a subsequent Interest Period to begin on the last day of such
current Interest Period, or (ii) convert any outstanding Reference Rate Loan
into a Eurodollar Loan, or (iii) convert any outstanding Eurodollar Loan into a
Reference Rate Loan on the last day of the current Interest Period for such
Eurodollar Loan by giving the Bank prior written or telephonic notice of such
continuation or conversion, which shall be received by the Bank not later than
11:00 a.m., Chicago time, two Banking Days prior to the effective date of
continuation or conversion. Each such notice shall specify (a) the effective
date of continuation or conversion (which shall be a Banking Day), (b) the type
of Loan the Loan is to be continued as or converted into and the amount of such
Loan, and (c) the Interest Period or maturity date for such Loan, if applicable.
The Company shall promptly confirm each such telephonic notice in writing.
Absent timely notice of continuation or conversion, each Eurodollar Loan shall
automatically convert into a Reference Rate Loan on the last day of the current
Interest Period for such Loan unless paid in full on such last day. No Loan
shall be converted into a Eurodollar Loan and no Eurodollar Loan shall be
continued less than one month before the Termination Date or at any time that an
Event of Default or an Unmatured Event of Default shall exist.
2.5 Note Evidencing Loans. The Loans shall be evidenced by the Note,
which shall be dated the date of the initial Loan and shall mature on the
Termination Date. All Loans made by the Bank to the Company pursuant to this
Agreement and all payments of principal shall be evidenced by the Bank in its
records or, at its option, on the schedule (or any continuation thereof)
attached to the Note, which records or schedule shall be rebuttable presumptive
evidence of the subject matter thereof.
2.6 Funding Losses. The Company will indemnify the Bank upon demand
against any loss or expense which the Bank may sustain or incur (including,
without limitation, any loss or expense sustained or incurred in obtaining,
liquidating or employing deposits or other funds acquired to effect, fund or
maintain any Loan) as a consequence of (i) any failure of the Company to make
any payment when due of any amount due hereunder or under the Note, (ii) any
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failure of the Company to borrow, continue or convert a Loan on a date specified
therefor in a notice thereof, or (iii) any payment (including, without
limitation, any payment pursuant to Section 5.3 or Section 10.2), prepayment or
conversion of any Eurodollar Loan on a date other than the last day of the
Interest Period for such Loan. In the case of a Eurodollar Loan, such loss or
expense shall include an amount equal to the present value of the excess, if
any, as reasonably determined by the Bank, of (a) the amount of interest that
would have accrued on the principal amount so paid, prepaid or converted or not
borrowed, continued or converted for the period from the date of such payment,
prepayment or conversion or failure to borrow, continue or convert (such date
being hereinafter referred to as the "Breakage Date") to the last day of the
then current Interest Period for such Loan (or, in the case of a failure to
borrow, continue or convert, the Interest Period for such Loan that would have
commenced on the date of such failure) at the rate of interest applicable to
such Loan under the terms of this Agreement over (b) the amount of interest that
the Bank would have earned had it invested the entire amount of funds so paid,
prepaid or converted or the entire amount of funds acquired to effect, fund or
maintain the Loan not borrowed, continued or converted, as the case may be, in
U.S. Government Treasury Securities with a maturity comparable to such period or
Interest Period. The present value of such excess shall be calculated by
discounting such excess to the Breakage Date at the interest rate expressly
borne by such U.S. Government Treasury Securities or, if none, the effective
interest rate on such Securities. Determinations by the Bank for purposes of
this Section 2.6 of the amount required to indemnify the Bank against any such
loss or expense shall be conclusive in the absence of manifest error.
2.7 Capital Adequacy. If the Bank shall reasonably determine that the
application or adoption of any law, rule, regulation, directive, interpretation,
treaty or guideline regarding capital adequacy, or any change therein or in the
interpretation or administration thereof, whether or not having the force of law
(including, without limitation, application of changes to Regulation H and
Regulation Y of the Federal Reserve Board issued by the Federal Reserve Board on
January 19, 1989 and regulations of the Comptroller of the Currency, Department
of the Treasury, 12 CFR Part 3, Appendix A, issued by the Comptroller of the
Currency on January 27, 1989) increases the amount of capital required or
expected to be maintained by the Bank or any Person controlling the Bank, and
such increase is based upon the existence of the Bank's obligations hereunder
and other commitments of this type, then from time to time, within 10 days after
demand from the Bank, the Company shall pay to the Bank such amount or amounts
as will compensate the Bank or such controlling Person, as the case may be, for
such increased capital requirement. The determination of any amount to be paid
by the Company under this Section 2.7 shall take into consideration the policies
of the Bank or any Person controlling the Bank with respect to capital adequacy
and shall be
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based upon any reasonable averaging, attribution and allocation methods. A
certificate of the Bank setting forth the amount or amounts as shall be
necessary to compensate the Bank as specified in this Section 2.7 shall be
delivered to the Company and shall be conclusive in the absence of manifest
error.
2.8 Letters of Credit.
(a) Requests. By delivering to the Bank a request on or before
10:00 a.m., Chicago time, the Company may request, from time to time prior to
the Termination Date and on not less than three nor more than ten Banking Days,
notice, that the Bank issue a letter of credit in such form as approved by the
Bank (each a "Letter of Credit"), and for such purposes described in the request
for such Letter of Credit (an "Issuance Request"). The stated amount of any
Letter of Credit requested to be issued pursuant to such Issuance Request shall
be denominated in Dollars. Each Letter of Credit shall by its terms:
(i) be issued in a stated amount which does not exceed (or would
not exceed) the then Letter of Credit Availability;
(ii) be stated to expire on a date (its "Stated Expiry Date") not
later than the earlier of (a) one year from the date of issuance
or (b) the Termination Date; and
(iii) on or prior to its Stated Expiry Date
(A) terminate immediately upon notice to the Bank from the
beneficiary thereunder that all obligations covered
thereby have been terminated, paid, or otherwise satisfied
in full,
(B) reduce in part immediately and to the extent the
beneficiary thereunder has notified the Bank that the
obligations covered thereby have been paid or otherwise
satisfied in part, or
(C) terminate thirty Banking Days after notice to the
beneficiary thereunder from the Bank that an Event of
Default has occurred and is continuing.
(b) Issuances. Subject to the terms and conditions of this
Agreement, the Bank shall issue Letters of Credit in accordance with the
Issuance Requests made therefor. If the Issuance Request consists of, or is
supplemented by, the Bank's standard letter of credit application form, the
terms of such application shall apply with respect to such Letter of Credit, but
only to the extent such terms are not inconsistent with the provisions hereof.
The Bank's commitment to issue Letters of
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Credit or extend any outstanding Letter of Credit shall terminate on the
Termination Date.
(c) Fees and Expenses. The Company agrees to pay to the Bank (i)
in respect of each standby Letter of Credit, a fee equal to 2% per annum
(calculated from and including the date of issuance (or date of renewal or
extension, if any) thereof to the Stated Expiry Date thereof) on the stated
amount of such Letter of Credit, payable in arrears on each Payment Date and on
the Termination Date, and (ii) in respect of all other Letters of Credit, such
other fees as shall be agreed to between the Bank and the Company from time to
time, payable upon the issuance of each such Letter of Credit. The Company
further agrees to pay to the Bank all administrative expenses of the Bank in
connection with the issuance, maintenance, modification (if any), and
administration of each Letter of Credit upon demand from time to time.
(d) Disbursements. The Bank will notify the Company promptly of
the presentment for payment of any Letter of Credit, together with notice of the
date (the "Disbursement Date") such payment shall be made. Subject to the terms
and provisions of such Letter of Credit, the Bank shall make such payment to the
beneficiary (or its designee) of such Letter of Credit. Prior to 1:00 p.m.,
Chicago time, on the Disbursement Date, the Company will reimburse the Bank for
all amounts which it has disbursed under such Letter of Credit. To the extent
the Bank is not reimbursed in full in accordance with the third sentence of this
Subsection 2.8(d), the Company's Reimbursement Obligation shall accrue interest
at a fluctuating rate determined by reference to the Reference Rate, plus a
margin of 2% per annum, payable on demand. In the event the Bank is not
reimbursed by the Company on the Disbursement Date, or if the Bank must for any
reason return or disgorge such reimbursement, the Bank shall fund the
Reimbursement Obligation therefor by making Loans as provided in Section 2.3
(the Company being deemed to have given a timely request therefor for such
amount); provided, however, for the purpose of determining the availability to
make Loans immediately prior to giving effect to the application of the proceeds
of such Loans, such Reimbursement Obligation shall be deemed not to be
outstanding at such time.
(e) Reimbursement. The Company's obligation (a "Reimbursement
Obligation") under Subsection 2.8(d) to reimburse the Bank with respect to each
disbursement under any Letter of Credit (including interest thereon) shall be
absolute and unconditional under any and all circumstances and irrespective of
any setoff, counterclaim, or defense to payment which the Company may have or
have had against the Bank or any beneficiary of a Letter of Credit, including
any defense based upon the occurrence of any Event of Default, any draft,
demand, or certificate, or other document presented under a Letter of Credit
proving to be forged, fraudulent, invalid, or insufficient, the failure of any
disbursement under any Letter of Credit to conform to the terms of
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the applicable Letter of Credit (if, in the Bank's good faith opinion, such
disbursement is determined to be appropriate) or any non-application or
misapplication by the beneficiary of the proceeds of such disbursement, or the
legality, validity, form, regularity, or enforceability of such Letter of
Credit; provided, however, that nothing herein shall adversely affect the right
of the Company to commence or prosecute any proceeding against the Bank for any
wrongful disbursement made by the Bank under a Letter of Credit as a result of
acts or omissions constituting gross negligence or willful misconduct on the
part of the Bank.
(f) Deemed Disbursements. Upon the occurrence and during the
continuation of any Event of Default, an amount equal to that portion of Letter
of Credit Outstandings attributable to outstanding and undrawn Letters of Credit
shall, at the option of the Bank, and without demand upon or notice to the
Company, be deemed to have been paid or disbursed by the Bank under such Letters
of Credit (notwithstanding that such amount may not in fact have been so paid or
disbursed), and, upon notification by the Bank to the Company of its obligations
under this Section, the Company shall be immediately obligated to reimburse the
Bank the amount deemed to have been so paid or disbursed by the Bank. Any
amounts so received by the Bank from the Company pursuant to this Section shall
be held as collateral security for the repayment of the Company's obligations in
connection with the Letters of Credit issued by the Bank. At any time when such
Letters of Credit shall terminate and all obligations of the Company are either
terminated or paid or reimbursed to the Bank in full, the obligations of the
Company under this Section shall be reduced accordingly (subject, however, to
reinstatement in the event any payment in respect of such Letters of Credit is
recovered in any manner from the Bank), and, if no Event of Default shall be
continuing, the Bank will return to the Company the excess, if any, of
(i) the aggregate amount deposited by the Company with the Bank
and not theretofore applied by the Bank to any Reimbursement
Obligation
over
(ii) the aggregate amount of all Reimbursement Obligations owing
to the Bank pursuant to this Section, as so adjusted.
At such time when all Events of Default shall have been cured or waived, the
Bank shall return to the Company all amounts then on deposit with the Bank
pursuant to this Section. All amounts on deposit pursuant to this Section shall,
until their application to any Reimbursement obligation or their return to the
Company, as the case may be, bear interest at the daily average Interbank Rate
(Reserve Adjusted), which interest shall be held by the Bank as additional
collateral security for the repayment of the Company's
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obligations in connection with the Letters of Credit issued by the Bank.
(g) Nature of Reimbursement Obligations. The Company shall assume all
risks of the acts, omissions, or misuse of any Letter of Credit by the
beneficiary thereof. The Bank (except to the extent of its own gross
negligence or willful misconduct) shall not be responsible for:
(i) the form, validity, sufficiency, accuracy, genuineness, or
legal effect of any Letter of Credit or any document submitted by any
party in connection with the application for an issuance of a Letter of
Credit, even if it should in fact prove to be in any or all respects
invalid, insufficient, inaccurate, fraudulent, or forged;
(ii) the form, validity, sufficiency, accuracy, genuineness, or
legal effect of any instrument transferring or assigning or purporting
to transfer or assign a Letter of Credit or the rights or benefits
thereunder or proceeds thereof in whole or in part, which may prove to
be invalid or ineffective for any reason;
(iii) failure of the beneficiary to comply fully with conditions
required in order to demand payment under a Letter of Credit;
(iv) errors, omissions, interruptions, or delays in transmission
or delivery of any messages, by mail, cable, telegraph, telex, or
otherwise; or
(v) any loss or delay in the transmission or otherwise of any
document or draft required in order to make a disbursement under a
Letter of Credit or of the proceeds thereof.
None of the foregoing shall affect, impair, or prevent the vesting of any of the
rights or powers granted the Bank hereunder.
(h) Increased Costs; Indemnity. If by reason of
(i) any change in applicable law, regulation, rule, decree or
regulatory requirement, or any change in the interpretation or
application by any judicial or regulatory authority of any law,
regulation, rule, decree or regulatory requirement, or
(ii) compliance by the Bank with any direction, request, or
requirement (whether or not having the force of law) of any
governmental or monetary authority including, without limitation,
Regulation D) of the Federal Reserve Board:
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(a) the Bank shall be subject to any tax (other than taxes on
income and franchises), levy, charge, or withholding of any nature or to
any variation thereof, or to any penalty with respect to the maintenance
or fulfillment of its obligations under this Section 2.8, whether
directly or by such being imposed on or suffered by the Bank;
(b) any reserve, deposit, or similar requirement is or shall be
applicable, imposed, or modified in respect of any Letters of Credit
issued by the Bank; or
(c) there shall be imposed on the Bank any other condition
regarding this Section 2.8 or any Letter of Credit;
and the result of the foregoing is to directly or indirectly increase the cost
to the Bank of issuing, making, or maintaining any Letter of Credit or to reduce
any amount receivable in respect thereof by the Bank, then, and in any such case
the Bank may, at any time after the additional cost is incurred or the amount
received is reduced, notify the Company thereof, and the Company shall pay on
demand such amounts as the Bank may specify to be necessary to compensate the
Bank for such additional cost or reduced receipt, together with interest on such
amount from the date demanded until payment in full thereof at a rate equal at
all times to the Reference Rate plus 2% per annum. The determination by the Bank
of any amount due pursuant to this Subsection 2.8(h), as set forth in a
statement setting forth the calculation thereof in reasonable detail, shall be
rebuttable presumptive evidence of such amount due.
(i) Termination Date. All of the Company's obligations under this
Section 2.8 (including, without limitation, its Reimbursement Obligations under
Subsections (d) and (e), shall continue in full force and effect after the
Termination Date and/or the payment in full of all Loans.
ARTICLE III
INTEREST AND FEES
3.1 Interest.
(a) Reference Rate Loans. The unpaid principal amount of each
Reference Rate Loan shall bear interest prior to maturity at a rate per annum
equal to the Reference Rate in effect from time to time plus the Applicable
Percentage. Accrued interest on each Reference Rate Loan shall be payable on
each Payment Date and at maturity.
(b) Eurodollar Loans. The unpaid principal amount of each
Eurodollar Loan shall bear interest prior to maturity at a
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rate per annum equal to the Interbank Rate (Reserve Adjusted) in effect for each
Interest Period with respect to such Eurodollar Loan plus the Applicable
Percentage. Accrued interest on each Eurodollar Loan shall be payable on each
Payment Date and at maturity.
(c) Interest After Maturity. The Company shall pay to the Bank
interest on any amount of principal of any Loan which is not paid when due,
whether at stated maturity, by acceleration or otherwise, accruing from and
including the date such amount shall have become due to, but not including, the
date of payment thereof in full at the rate per annum which is equal to the
greater of (i) 2% in excess of the rate applicable to the unpaid principal
amount immediately before it became due, or (ii) 2% in excess of the applicable
per annum rate of interest otherwise payable hereunder. After maturity, accrued
interest shall be payable on demand.
3.2 Nonuse Fee. The Company agrees to pay to the Bank a fee equal to
0.375% per annum on the daily average amount by which the Commitment exceeds the
sum of (i) the outstanding aggregate principal balance of the Loans plus (ii)
the Letter of Credit Outstandings. The fee provided for in this Section 3.2
shall be payable quarterly, in arrears, on the last day of each Fiscal Quarter,
and on the Termination Date for the quarter (or portion thereof) then ended.
3.3 Closing Fee. On the closing date, the Company agrees to pay to the
Bank a non-refundable closing fee of $50,000.
3.4 Method of Calculating Interest and Fees. Interest on each Reference
Rate Loan shall be calculated on the basis of a year consisting of 360 days and
paid for actual days elapsed, calculated as to such Reference Rate Loan from and
including the date such Loan is made or the date a Eurodollar Loan is converted
into such Reference Rate Loan to, but not including, the date such Reference
Rate Loan is paid. Interest on each Eurodollar Loan shall be calculated on the
basis of a year consisting of 360 days and paid for actual days elapsed,
calculated as to each Interest Period from and including the first day thereof
to, but not including, the last day thereof. Any fees shall be calculated on the
basis of a year consisting of 360 days and paid for actual days elapsed.
ARTICLE IV
PAYMENTS, PREPAYMENTS, REDUCTION OR
TERMINATION OF THE CREDIT AND SETOFF
4.1 Place of Payment. All payments hereunder (including payments with
respect to the Note) shall be made without setoff or counterclaim and shall be
made to the Bank in immediately available funds prior to 12:30 p.m., Chicago
time, on the date due at its
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office at 231 South LaSalle Street, Chicago, Illinois 60697, or at such other
place or for such other account as may be designated by the Bank to the Company
in writing. Any payments received after such time shall be deemed received on
the next Banking Day. Subject to the definition of the term "Interest Period,"
whenever any payment to be made hereunder or under the Note shall be stated to
be due on a date other than a Banking Day, such payment may be made on the next
succeeding Banking Day, and such extension of time shall be included in the
calculation of interest or any fees. The Company hereby authorizes the Bank to
debit the Company's commercial Account No. 74-75594 for payment when due of all
interest, principal, fees and other amounts payable hereunder (including amounts
payable under the Note). The Bank shall mail to the Company advices of debits
made to such account. The preceding provision of this Section 4.1 shall not
affect the Company's obligation to pay when due all amounts payable by the
Company under this Agreement or the Note, whether or not there are sufficient
funds therefor in such account.
4.2 Prepayments. The Company may from time to time, upon at least ten
Banking Days prior written or telephonic notice received by the Bank, prepay the
principal of the Loans in whole or in part, as contemplated by Section 2.1;
provided, however, that any partial prepayment of principal of the Loans shall
be in a minimum amount of $100,000 or an integral multiple thereof, that any
prepayment of Eurodollar Loans shall only be with the consent of the Bank, and
provided further that any prepayment of principal shall be subject to the
indemnification provisions of Section 2.6, but shall otherwise be without any
premium or penalty. Any prepayment of the principal of the Loans shall include
accrued interest to the date of prepayment on the principal amount being
prepaid. The Company shall promptly confirm any telephonic notice of prepayment
in writing.
4.3 Setoff. In addition to and not in limitation of all other rights and
remedies (including other rights of setoff) that the Bank or other holder of the
Note may have, the Bank or such other holder shall, upon the occurrence of any
Event of Default described in Section 10.1 or any Unmatured Event of Default
described in Section 10.1(e), have the right to appropriate and apply to the
payment of any and all Loans and other liabilities of the Company hereunder
(whether or not then due), in such order of application as the Bank or such
other holder may elect, any and all balances, credits, deposits (general or
special, time or demand, provisional or final), accounts or moneys of the
Company then or thereafter with the Bank or such other holder. The Bank shall
promptly advise the Company of any such setoff and application but failure to do
so shall not affect the validity of such setoff and application. To secure the
payment of such Loans and other liabilities, the Company hereby grants the Bank
and each such other holder a continuing security interest in such balances,
credits, deposits, accounts or moneys.
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ARTICLE V
ADDITIONAL PROVISIONS RELATING TO
EURODOLLAR LOANS
5.1 Increased Cost. If, as a result of any law, rule, regulation, treaty
or directive, or any change therein or in the interpretation or administration
thereof, or compliance by the Bank with any request or directive (whether or not
having the force of law) from any court, central bank, governmental authority,
agency or instrumentality, or comparable agency;
(a) any tax, duty or other charge with respect to any Eurodollar
Loan, the Note or the Bank's obligation to make Eurodollar Loans is
imposed, modified or deemed applicable, or the basis of taxation of
payments to the Bank of the principal of, or interest on, any Eurodollar
Loan (other than taxes imposed on the overall net income of the Bank by
the jurisdiction in which the Bank has its principal office) is changed;
(b) any reserve, special deposit, special assessment or similar
requirement against assets of, deposits with or for the account of, or
credit extended by, the Bank is imposed, modified or deemed applicable;
or
(c) any other condition affecting this Agreement or any
Eurodollar Loan is imposed on the Bank or the relevant market;
and the Bank determines that, by reason thereof, the cost to the Bank of making
or maintaining any Eurodollar Loan is increased, or the amount of any sum
receivable by the Bank hereunder or under the Note in respect of any Eurodollar
Loan is reduced; then, the Company shall pay to the Bank upon demand such
additional amount or amounts as will compensate the Bank for such additional
cost or reduction (provided that the Bank has not been compensated for such
additional cost or reduction in the calculation of the Eurocurrency Reserve
Requirement). Determinations by the Bank for purposes of this Section 5.1 of the
additional amounts required to compensate the Bank in respect of the foregoing
shall be conclusive in the absence of manifest error. In determining such
amounts, the Bank may use any reasonable averaging, attribution and allocation
methods.
5.2 Deposits Unavailable or Interest Rate Unascertainable or Inadequate;
Impracticability. If the Company has any Eurodollar Loan outstanding, or has
notified the Bank of its intention to borrow a Eurodollar Loan as provided
herein, then in the event that, prior to any Interest Period, the Bank shall
have determined (which determination shall be conclusive and binding on the
parties hereto) that:
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(a) deposits of the necessary amount for the relevant Interest
Period are not available to the Bank in the relevant market or that, by
reason of circumstances affecting such market, adequate and reasonable
means do not exist for ascertaining the Interbank Rate for such Interest
Period; or
(b) the Interbank Rate (Reserve Adjusted) will not adequately and
fairly reflect the cost to the Bank of making or funding the Eurodollar
Loans for such Interest Period; or
(c) the making or funding of Eurodollar Loans has become
impracticable as a result of any event occurring after the date of this
Agreement which, in the opinion of the Bank, materially and adversely
affects such Loans or the Bank's obligation to make such Loans or the
relevant market;
the Bank shall promptly give notice of such determination to the Company, and
(i) any notice of a new Eurodollar Loan previously given by the Company and not
yet borrowed or converted shall be deemed to be a notice to make a Loan of
another type, as selected by the Company, and (ii) the company shall be
obligated to either prepay in full any outstanding Eurodollar Loans without any
premium or penalty on the last day of the then current Interest Period with
respect thereto or convert any such Loans to Loans of another type, as selected
by the Company, on such last day.
5.3 Changes in Law Rendering Eurodollar Loans Unlawful. If at any time
due to the adoption of any law, rule, regulation, treaty or directive, or any
change therein or in the interpretation or administration thereof by any court,
central bank, governmental authority, agency or instrumentality, or comparable
agency charged with the interpretation or administration thereof, or for any
other reason arising subsequent to the date hereof, it shall become unlawful or
impossible for the Bank to make or fund any Eurodollar Loan which it is
committed to make hereunder, the obligation of the Bank to provide such Loans
shall, upon the happening of such event, forthwith be suspended for the duration
of such illegality or impossibility. If any such event shall make it unlawful or
impossible for the Bank to continue any Eurodollar Loans previously made by it
hereunder, the Bank shall, upon the happening of such event, notify the Company
thereof in writing, and the Company shall, on the earlier of (i) the last day of
the then current Interest Period with respect thereto or (ii) if required by
such law, rule, regulation, treaty, directive or interpretation, on such date as
shall be specified in such notice, either convert each such unlawful Loan to a
Loan of another type or prepay in full each such unlawful Loan, together with
accrued interest thereon, without any premium or penalty (except as provided in
Section 2.6).
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5.4 Funding.
(a) Discretion of the Bank as to Manner of Funding.
Notwithstanding any provision of this Agreement to the contrary, the Bank shall
be entitled to fund and maintain its funding of all or any part of the Loans in
any manner it sees fit; it being understood, however, that for purposes of this
Agreement, all determinations hereunder shall be made as if the Bank had
actually funded and maintained each Eurodollar Loan during the Interest Period
for such Loan through the purchase of deposits having a term corresponding to
such Interest Period and bearing an interest rate equal, in the case of a
Eurodollar Loan, to the Interbank Rate for such Interest Period (whether or not
the Bank shall have granted any participations in such Loan).
(b) Funding Through the sale of Participations. Notwithstanding
any provision of this Agreement to the contrary, the Company acknowledges that
the Bank may fund all or any part of the Loans by sales of participations to
various participants, and agrees that the Bank may, in invoking its rights under
this Section 5 or under Section 2.6, demand and receive payment for costs and
other amounts incurred by, or allocable to, any such participant, or take other
action arising from circumstances applicable to any such participant, to the
same extent that such participant could demand and receive payments, or take
other action, under this Article V or under Section 2.6 as if such participant
were the Bank under this Agreement.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES
To induce the Bank to grant the Credit and to make the Loans, the Company
represents and warrants that:
6.1 Existence. The Company and all of its corporate Subsidiaries are
corporations duly organized, validly existing and in good standing under the
laws of the states of their respective incorporation. All of the Company's other
Subsidiaries, if any, are entities duly organized, validly existing and in good
standing under the laws of the jurisdictions of their respective organization.
The Company and all of its Subsidiaries are in good standing and are duly
qualified to do business in each state where, because of the nature of their
respective activities or properties, such qualification is required.
6.2 Authorization. The Company is duly authorized to execute and deliver
this Agreement and the Note and is and will continue to be duly authorized to
borrow monies hereunder and to perform its obligations under this Agreement and
the Note. The execution, delivery and performance by the Company of this
Agreement and the
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Note and the borrowings hereunder do not and will not require any
consent or approval of any governmental agency or authority.
6.3 No Conflicts. The execution, delivery and performance by the Company
of this Agreement and the Note do not and will not conflict with (i) any
provision of law, (ii) the charter or by-laws of the Company, (iii) any
agreement binding upon the Company, or (iv) any court or administrative order or
decree applicable to the Company, and do not and will not require, or result in,
the creation or imposition of any Lien on any asset of the Company or any of its
Subsidiaries.
6.4 Validity and Binding Effect. This Agreement is, and the Note when
duly executed and delivered will be, a legal, valid and binding obligation of
the Company, enforceable against the Company in accordance with its terms,
except as enforceability may be limited by bankruptcy, insolvency or other
similar laws of general application affecting the enforcement of creditors'
rights or by general principles of equity limiting the availability of equitable
remedies.
6.5 No Default. Neither the Company nor any of its Subsidiaries is in
default under any agreement or instrument to which the Company or any Subsidiary
is a party or by which any of their respective properties or assets is bound or
affected, which default might materially and adversely affect the financial
condition or operations of the Company and its Subsidiaries taken as a whole. No
Event of Default or Unmatured Event of Default has occurred and is continuing.
6.6 Financial Statements. The Company's audited consolidated and
consolidating financial statement as of December 31, 1996 and the Company's
unaudited consolidated and consolidating financial statement as at September 30,
1997, copies of which have been furnished to the Bank, have been prepared in
conformity with generally accepted accounting principles applied on a basis
consistent with that of the preceding Fiscal Year and period and present fairly
the financial condition of the Company and its Subsidiaries as at such dates and
the results of their operations for the periods then ended, subject (in the case
of the interim financial statement) to year-end audit adjustments. Since
September 30, 1997, there has been no material adverse change in the financial
condition of the Company and its Subsidiaries taken as a whole.
6.7 Litigation. No claims, litigation, arbitration proceedings or
governmental proceedings are pending or threatened against or are affecting the
Company or any of its Subsidiaries, the results of which might materially and
adversely affect the financial condition or operations of the Company and its
Subsidiaries taken as a whole, except those referred to in a schedule furnished
to the Bank contemporaneously herewith and
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attached hereto as Exhibit B. Other than any liability incident to such claims,
litigation or proceedings or provided for or disclosed in the financial
statements referred to in Section 6.6, neither the Company nor any of its
Subsidiaries has any contingent liabilities which are material to the Company
and its Subsidiaries taken as a whole.
6.8 Liens. None of the property, revenues or assets of the Company or
any of its subsidiaries is subject to any Lien, except:
(a) Liens for current Taxes not delinquent or Taxes being
contested in good faith and by appropriate proceedings and as to which
such reserves or other appropriate provisions as may be required by GAAP
are being maintained;
(b) carriers', warehousemen's, mechanics', materialmen's and
other like statutory Liens arising in the ordinary course of business
securing obligations which are not overdue for a period of more than 30
days or which are being contested in good faith and by appropriate
proceedings and as to which such reserves or other appropriate
provisions as may be required by GAAP are being maintained;
(c) pledges or deposits in connection with workers, compensation,
unemployment insurance and other social security legislation;
(d) deposits to secure the performance of bids, trade, contracts,
leases, statutory obligations, and other obligations of a like nature
incurred in the ordinary course of business;
(e) Liens disclosed in the financial statements referred to in
Section 6.6;
(a) Liens listed on Exhibit C; and
(g) other Liens approved in writing by the Bank.
6.9 Subsidiaries. The Company has no Subsidiaries except as listed on
Exhibit D. The Company and its Subsidiaries own the percentage of its
Subsidiaries as set forth on Exhibit D.
6.10 Partnerships. Neither the Company nor any of its Subsidiaries is a
partner or joint venturer in any partnership or joint venture other than the
partnerships and joint ventures listed on Exhibit E.
6.11 Purpose. The proceeds of the Loans will be used by the Company for
general corporate purposes.
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6.12 Regulation U. The Company is not engaged in the business of
purchasing or selling "margin stock," as such term is defined in Regulation U of
the Federal Reserve Board, or extending credit to others for the purpose of
purchasing or carrying margin stock, and no part of the proceeds of any Loan
will be used to purchase or carry any margin stock or for any other purpose
which would violate any of the margin regulations of the Federal Reserve Board.
6.13 Compliance. The Company and its Subsidiaries are in material
compliance with ail statutes and governmental rules and regulations applicable
to them.
6.14 Pension and Welfare Plans. Each Plan complies in all material
respects with all applicable statutes and governmental rules and regulations,
and (i) no Reportable Event has occurred and is continuing with respect to any
Plan, (ii) neither the Company nor any ERISA Affiliate has withdrawn from any
Plan or instituted steps to do so, and (iii) no steps have been instituted to
terminate any Plan. No condition exists or event or transaction has occurred in
connection with any Plan which could result in the incurrence by the Company or
any ERISA Affiliate of any material liability, fine or penalty. Neither the
Company nor any ERISA Affiliate is a member of, or contributes to, any multiple
employer Plan as described in Section 4064 of ERISA.
6.15 Taxes. Each of the Company and its Subsidiaries has filed all tax
returns which are required to have been filed and has paid, or made adequate
provisions for the payment of, all of its Taxes which are due and payable,
except such Taxes, if any, as are being contested in good faith and by
appropriate proceedings and as to which such reserves or other appropriate
provisions as may be required by GAAP have been maintained.
6.16 Investment Company Act Representation. The Company is not an
"investment company" or a company "controlled" by an "investment company" within
the meaning of the Investment Company Act of 1940, as amended.
6.17 Public Utility Holding Company Act Representation. The Company is
not a "holding company" or a "subsidiary company" of a "holding company" or an
"affiliate" of a "holding company" within the meaning of the Public Utility
Holding Company Act of 1935, as amended.
6.18 Environmental and Safety and Health Matters. Except as disclosed on
Schedule 6.18, the Company and each of its Subsidiaries and/or each property,
operations and facility that the Company or any subsidiary may own, operate or
control (i) complies in all material respects with (A) all applicable
Environmental Laws and (E) all applicable occupational Safety and Health Laws;
(ii) is not subject to any judicial or administrative proceeding alleging the
violation of any Environmental Law or Occupational Safety and
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Health Law; (iii) has not received any notice (A) that it may be in violation of
any Environmental Law or Occupational Safety and Health Law, (B) threatening the
commencement of any proceeding relating to allegedly unlawful, unsafe or
unhealthy conditions or (C) alleging that it is or may be responsible for any
response, cleanup, or corrective action, including but not limited to any
remedial investigation/feasibility studies, under any Environmental Law or
Occupational Safety and Health Law; (iv) is not the subject of federal or state
investigation evaluating whether any investigation, remedial action or other
response is needed to respond to (A) a spillage, disposal or release or
threatened release into the environment of any Hazardous Material or other
hazardous, toxic or dangerous waste, substance or constituent, or other
substance or (B) any allegedly unsafe or unhealthful condition; (v) has not
filed any notice under or relating to any Environmental Law or Occupational
Safety and Health Law indicating or reporting (A) any past or present spillage,
disposal or release into the environment of, or treatment, storage or disposal
of, any Hazardous Material or other hazardous, toxic or dangerous waste,
substance or constituent, or other substance or (B) any potentially unsafe or
unhealthful condition, and there exists no basis for such notice irrespective of
whether or not such notice was actually filed and (vi) has no material
contingent liability in connection with (A) any actual or potential spillage,
disposal or release into the environment of, or otherwise with respect to, any
Hazardous Material or other hazardous, toxic or dangerous waste, substance or
constituent, or other substance, whether on any premises owned or occupied by
the company or any Subsidiary or on any other premises or (B) any unsafe or
unhealthful condition. Except as disclosed on Schedule 6.18, there are no
Hazardous Materials on, in or under any property or facilities owned, operated
or controlled by the Company or any Subsidiary, including but not limited to
such Hazardous Materials that may be contained in underground storage tanks, but
excepting such Hazardous Materials used in accordance with all applicable laws
and in the same manner as an ordinary consumer (e.g., gasoline in tanks of motor
vehicles, small amounts of cosmetic cleaners, etc.). The materiality standard
used in this Section 6.18 shall be exceeded only if the fact or facts giving
rise to a breach of the representation and warranty contained herein might
result in liability in excess of $100,000 in the aggregate.
6.19 Insurance. The Company and each of its Subsidiaries maintain
insurance to such extent and against such hazards and liabilities as is commonly
maintained by companies similarly situated.
6.20 Contracts; Labor Matters. Except as disclosed on Schedule 6.20: (a)
neither the Company nor any Subsidiary is a party to any contract or agreement,
or is subject to any charge, corporate restriction, judgment, decree or order,
which materially and adversely affects its business, property, assets,
operations or
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condition, financial or otherwise; (b) no labor contract to which the Company or
any Subsidiary is a party or is otherwise subject is scheduled to expire prior
to the Termination Date; (c) neither the Company nor any Subsidiary has, within
the two-year period preceding the date of this Agreement, taken any action which
would have constituted or resulted in a "plant closing" or "mass layoff" within
the meaning of the Federal Worker Adjustment and Retraining Notification Act of
1988 or any similar applicable federal, state or local law, and the Company has
no reasonable expectation that any such action is or will be required at any
time prior to the Termination Date and (d) on the date of this Agreement (i)
neither the Company nor any Subsidiary is a party to any labor dispute and (ii)
there are no strikes or walkouts relating to any labor contracts to which the
Company or any Subsidiary is a party or is otherwise subject.
6.21 Accuracy of Information. All information supplied by the Company to
the Bank in writing in connection with this Agreement and the transactions
contemplated herein and therein on or before the date hereof with respect to the
Company and its Subsidiaries is true, complete and accurate in all material
respects; and the Company does not know of any fact which it has not disclosed
in writing to the Lenders which is material to the Company or any Subsidiary or
the ability of the Company or any Subsidiary to perform its obligations
hereunder or under the Note.
6.22 Title to Properties. Each of the Company and Subsidiaries has good
and marketable title to its properties reflected on the financial statements
referred to in Section 6.2 or acquired since the date thereof except for such
assets as have been disposed of since the date thereof as no longer used or
useful in the conduct of its business or as have been disposed of in the
ordinary course of business as presently conducted and all such properties are
free and clear of Liens, except for Liens permitted under Section 7.17.
ARTICLE VII
COMPANY'S COVENANTS
From the date of this Agreement and thereafter until the expiration or
termination of the Credit and until the Note and other liabilities of the
Company hereunder are paid in full, the Company agrees that, unless the Bank
shall otherwise expressly consent in writing, it will:
7.1 Financial Statements and Other Reports-. Furnish to the Bank:
(a) Annual Audit Report. Within 90 days after each Fiscal Year of
the Company, a copy of the annual audit report
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of the Company and its Subsidiaries prepared on a consolidating and
consolidated basis and in conformity with GAAP and certified by an
independent certified public accountant who shall be satisfactory to the
Bank, together with a certificate from such accountant, (i)
acknowledging to the Bank such accountant's understanding that the Bank
is relying on such annual audit report, (ii) containing a computation
of, and showing compliance with, each of the financial ratios and
restrictions contained in this Article VII, and (iii) to the effect
that, in making the examination necessary for the signing of such annual
audit report, such accountant has not become aware of any Event of
Default or Unmatured Event of Default that has occurred and is
continuing, or, if such accountant has become aware of any such event,
describing it and the steps, if any, being taken to cure it;
(b) Quarterly Financial Statement. Within 45 days after the end
of each Fiscal Quarter of the Company, a copy of the unaudited financial
statement of the Company and its Subsidiaries prepared in the same
manner as the audit report referred to in preceding Clause (a), signed
by the Company's chief financial officer and consisting of at least a
balance sheet as at the close of such Fiscal Quarter and statements of
earnings and cash flows for such Fiscal Quarter and for the period from
the beginning of such Fiscal Year to the end of such Fiscal Quarter;
(c) Officer's Certificate. Together with the financial statements
furnished by the Company under preceding Clauses (a) and (b), a
certificate of the Company's chief financial officer, dated the date of
such annual audit report or such quarterly or monthly financial
statement, as the case may be, to the effect that no Event of Default or
Unmatured Event of Default has occurred and is continuing, or, if there
is any such event, describing it and the steps, if any, being taken to
cure it, and containing a computation of, and showing compliance with,
each of the financial ratios and restrictions contained in this Article
VII;
(d) SEC and Other Reports. Copies of each filing and report made
by the Company or any Subsidiary with or to any securities exchange or
the Securities and Exchange Commission and of each communication from
the Company or any Subsidiary to shareholders generally, promptly upon
the filing or making thereof;
(e)Report of Change in Subsidiaries or Partnerships. Promptly
from time to time, a written report of any change in the list of the
Company's Subsidiaries set forth on Exhibit D or in the list of
partnerships and joint ventures set forth on Exhibit E; and
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(f) Requested Information. Promptly from time to time, such other
reports or information as the Bank may reasonably request.
7.2 Notices. Notify the Bank in writing of any of the following
immediately upon learning of the occurrence thereof, describing the same and, if
applicable, the steps being taken by the Person(s) affected with respect
thereto:
(a) Default. The occurrence of an Event of Default or an
Unmatured Event of Default;
(b) Litigation. The institution of any litigation, arbitration
proceeding or governmental proceeding which is material to the Company
and its Subsidiaries taken as a whole;
(c) Pension and Welfare Plans. The occurrence of a Reportable
Event with respect to any Plan; the institution of any steps by the
Company, any ERISA Affiliate, the PBGC or any other Person to terminate
any Plan; the institution of any steps by the Company or any ERISA
Affiliate to withdraw from any Plan; or the incurrence of any material
increase in the contingent liability of the Company or any Subsidiary
with respect to any post-retirement welfare benefits;
(d) Material Adverse Change. The occurrence of a material
adverse change in the business, operations or financial condition of the
Company and its Subsidiaries taken as a whole; or
(e) Other Events. The occurrence of such other events as the
Bank may from time to time specify.
7.3 Existence. Maintain and preserve, and cause each Subsidiary to
maintain and preserve, its respective existence as a corporation or other form
of business organization, as the case may be, and all rights, privileges,
licenses, patents, patent rights, copyrights, trademarks, trade names,
franchises and other authority to the extent material and necessary for the
conduct of its respective business in the ordinary course as conducted from time
to time.
7.4 Nature of Business. Engage, and cause each Subsidiary to engage, in
substantially the same fields of business as it is engaged in on the date
hereof.
7.5 Books, Records and Access. Maintain, and cause each Subsidiary to
maintain, complete and accurate books and records in which full and correct
entries in conformity with GAAP shall be made of all dealings and transactions
in relation to its respective business and activities; permit, and cause each
Subsidiary to permit, access by the Bank to the books and records of the Company
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and such Subsidiary during normal business hours; and permit, and cause each
Subsidiary to permit, the Bank to make copies of such books and records;
provided, however, the Bank shall use its best efforts to maintain the
confidentiality of any information derived from such books and records.
7.6 Insurance. Maintain, and cause each Subsidiary to maintain,
insurance to such extent and against such hazards and liabilities as is commonly
maintained by companies similarly situated or as the Bank may reasonably request
from time to time.
7.7 Repair. Maintain, preserve and keep, and cause each Subsidiary to
maintain, preserve and keep, its properties in good repair, working order and
condition.
7.8 Taxes. Pay, and cause each Subsidiary to pay, when due, all of its
Taxes, unless and only to the extent that the Company or such Subsidiary, as the
case may be, is contesting such Taxes in good faith and by appropriate
proceedings and the Company or such Subsidiary has set aside on its books such
reserves or other appropriate provisions therefor as may be required by GAAP.
7.9 Compliance. Comply, and cause each Subsidiary to comply, with all
statutes and governmental rules and regulations applicable to it.
7.10 Pension Plans. Not permit, and not permit any Subsidiary to permit,
any condition to exist in connection with any Plan (other than a "multi-employer
plan", as such term is defined in ERISA) which might constitute grounds for the
PBGC to institute proceedings to have such Plan terminated or a trustee
appointed to administer such Plan; and not engage in, or permit to exist or
occur, or permit any of its Subsidiaries to engage in, or permit to exist or
occur, any other condition, event or transaction with respect to any Plan which
could result in the incurrence by the Company or any of its Subsidiaries of any
material liability, fine or penalty.
7.11 Merger, Purchase and Sale. Not, and not permit any Subsidiary to:
(a) be a party to any merger or consolidation;
(b) except in the normal course of its business, sell, transfer,
convey, lease or otherwise dispose of all or any substantial part of the
assets of the Company and its Subsidiaries taken as a whole; or
(c) purchase or otherwise acquire the assets or capital stock of
any Person without the prior written consent of the Bank except where
(i) the total purchase price of such acquisition (together with all
other such acquisitions made
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during such Fiscal Year) is not greater than $10,000,000 (including
the value of any stock issued, assets exchanged or transaction
expenses incurred to consummate such acquisition) and (ii) there is no
Event of Default or Unmatured Event of Default after giving effect to
such acquisition.
For purposes of this Section 7.11 only, a sale, transfer, conveyance,
lease or other disposition of assets shall be deemed to be a "substantial part"
of the assets of the Company and its Subsidiaries only if the value of such
assets, when added to the value of all other assets sold, transferred, conveyed,
leased or otherwise disposed of by the Company and its Subsidiaries (other than
in the normal course of business during the same Fiscal Year, exceeds 10% of the
company's consolidated total assets determined as of the end of the immediately
preceding Fiscal Year. As used in the preceding sentence, the term "value" shall
mean, with respect to any asset disposed of, the greater of such asset's book or
fair market value as of the date of disposition, with "book value" being the
value of such asset as would appear immediately prior to such disposition on a
balance sheet of the owner of such asset prepared in accordance with GAAP.
7.12 Consolidated Net Worth. Not permit the Company's Consolidated Net
Worth as at the last day of each Fiscal Quarter to be less than the
corresponding amount set forth below opposite each such Fiscal Quarter:
<TABLE>
<CAPTION>
Fiscal Quarter Amount
---------------------------------------------------------------
<S> <C>
For all Fiscal Quarters Ended in 1997 $79,000,000
For all Fiscal Quarters Ended in 1998 $80,000,000
For all Fiscal Quarters Ended in 1999 $81,000,000
and thereafter
</TABLE>
7.13 Capital Expenditures. Not, and not permit any Subsidiary to make any
Capital Expenditures, or commit to make any Capital Expenditures if, after
giving effect to such Capital Expenditures, the aggregate amount of all Capital
Expenditures made by the Company and its Subsidiaries on a consolidated basis in
Fiscal Year would exceed, in the aggregate, the corresponding amount set forth
below opposite such Fiscal Year:
<TABLE>
<CAPTION>
Fiscal Year Amount
----------- ------
<S> <C>
1997 $4,500,000
1998 $6,500,000
1999 and thereafter $5,000,000
</TABLE>
7.14 Maintenance of Minimum Liquidity. Not permit the ratio of total
accounts receivable plus cash balances (exclusive of operating cash balances in
checking accounts) to Total Senior Funded Debt, to be less than 1.20 to 1.0 at
all times.
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7.15 Senior Funded Debt Cash Flow Ratio. Maintain the Senior Funded Debt
Cash Flow Ratio of not greater than 3.5 to 1.0 at all times.
7.16 Capitalized Leases. Not, and not permit any Subsidiary to, incur or
permit to exist any Indebtedness as lessee under Capitalized Leases if, after
giving effect to such Capitalized Lease, the aggregate amount of all Capitalized
Leases entered into by the Company and its Subsidiaries on a consolidated basis
would exceed, in the aggregate, $6,500,000.
7.17 Liens. Not, and not permit any Subsidiary to, create or permit to
exist any Lien with respect to any assets now owned or hereafter acquired,
except:
(a) Liens for current Taxes not delinquent or Taxes being
contested in good faith and by appropriate proceedings and as to which
such reserves or other appropriate provisions as may be required by
GAAP are being maintained;
(b) carriers', warehousemen's, mechanics', material-men's,
repairmen's, and other like statutory Liens arising in the ordinary
course of business securing obligations which are not overdue for a
period of more than 30 days or which are being contested in good faith
and by appropriate proceedings and as to which such reserves or other
appropriate provisions as may be required by GAAP are being maintained;
(c) pledges or deposits in connection with workers'
compensation, unemployment insurance and other social security
legislation;
(d) deposits to secure the performance of bids, trade
contracts, leases, statutory obligations and other obligations of a
like nature incurred in the ordinary course of business;
(e) Liens granted by any Subsidiary to secure such
Subsidiary's Indebtedness to the Company or to any other Subsidiary;
(f) Liens in favor of the Bank; and
(g) other Liens approved in writing by the Bank.
7.18 Indebtedness. Not, and not permit any Subsidiary to, incur or
permit to exist any Indebtedness (excluding Indebtedness as lessee under
Capitalized Leases), except: (a) Indebtedness under the terms of this
Agreement; (b) other Indebtedness outstanding on the date hereof and listed on
Schedule 7.18; (c) Indebtedness hereafter incurred in connection with Liens
permitted under Section 7.17(d) and (d) other Indebtedness approved in writing
by the Bank.
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7.19 Other Agreements. Not, and not permit any Subsidiary to, enter into
any agreement containing any provision which would be violated or breached by
the Company's performance of its obligations hereunder or under any instrument
or document delivered or to be delivered by the Company hereunder or in
connection herewith.
7.20 Use of Proceeds. Not permit any proceeds of the Loans to be used,
either directly or indirectly, for the purpose, whether immediate, incidental or
ultimate, of "purchasing or carrying any margin stock" within the meaning of
Regulation U of the Federal Reserve Board, as amended from time to time; and
furnish to the Bank, upon its request, a statement in conformity with the
requirements of Federal Reserve Form U-1 referred to in Regulation U.
7.21 Transactions With Related Parties. Not, and not permit any
Subsidiary to, enter into or be a party to any transaction or arrangement,
including, without limitation, the purchase, sale, lease or exchange of property
or the rendering of any service, with any Related Party, except in the ordinary
course of and pursuant to the reasonable requirements of the Company's or such
Subsidiary's business and upon fair and reasonable terms no less favorable to
the Company or such Subsidiary than would obtain in a comparable arm's-length
transaction with a Person not a Related Party.
7.22 Hostile Acquisitions. Notwithstanding Section 7.11 of this
Agreement, the Company will not, nor will it permit any Subsidiary to, acquire a
controlling interest in any Person if the board of directors (or the functional
equivalent thereof) of such Person has not recommended or approved such
acquisition.
ARTICLE VIII
CONDITIONS PRECEDENT TO ALL LOANS
The obligation of the Bank to make any Loan is subject to the satisfaction of
each of the following conditions precedent;
8.1 Notice. The Bank shall have received timely notice of such Loan in
accordance with Section 2.3.
8.2 Default. Before and after giving effect to such Loan, no Event of
Default or Unmatured Event of Default shall have occurred and be continuing.
8.3 Warranties. Before and after giving effect to such Loan, the
warranties in Article VI shall be true and correct as though made on the date of
such Loan, except for such changes as are specifically permitted hereunder.
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8.4 Certification. The Company shall have delivered to the Bank a
certificate of the Company, signed on the Company's behalf by its president or
chief financial officer, as to the matters set out in Sections 8.2 and 8.3.
ARTICLE IX
CONDITION PRECEDENT TO INITIAL LOAN
The obligation of the Bank to make the initial Loan hereunder is subject to the
satisfaction of the condition precedent, in addition to the applicable
conditions precedent set forth in Article VIII above, that the Company shall
have delivered to the Bank all of the following, each duly executed and dated
the date of the initial Loan or such earlier date as is satisfactory to the Bank
and in form and substance satisfactory to the Bank:
9.1 Note. Its Note.
9.2 Resolutions. A copy, duly certified by the secretary or an assistant
secretary of the Company, of (i) the resolutions of the Company's Board of
Directors authorizing or ratifying the execution and delivery of this Agreement
and the Note and authorizing the borrowings hereunder, (ii) all documents
evidencing other necessary corporate action, and (iii) all approvals or
consents, if any, with respect to this Agreement and the Note.
9.3 Incumbency Certificate. A certificate of the secretary or an
assistant secretary of the Company certifying the names of the Company's
officers authorized to sign this Agreement, the Note and all other documents or
certificates to be delivered hereunder, together with the true signatures of
such officers.
9.4 Opinion. An opinion of counsel to the Company, addressed to the
Bank, in substantially the form of Exhibit F.
9.5 Good Standing. Certificates of good standing certified by the
appropriate governmental officer in each of Virginia and each other state where
the Company is qualified to do business or where, because of the nature of its
business or properties, qualification to do business is required.
ARTICLE X
EVENTS OF DEFAULT AND REMEDIES
10.1 Events of Default. Each of the following shall constitute an Event
of Default under this Agreement:
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(a) Non-Payment. Default, and the continuance thereof for five days, in
the payment when due of any principal of, or interest on, any Loan or any fee
hereunder.
(b) Non-Payment of Other Indebtedness. Default in the payment when due,
whether by acceleration or otherwise subject to any applicable grace period), of
any Indebtedness of, or guaranteed by, the Company or any Subsidiary (other than
(i) any Indebtedness of any Subsidiary to the Company or to any other Subsidiary
and (ii) the Indebtedness evidenced by the Note).
(c) Acceleration of Other Indebtedness. Any event or condition shall
occur which results in the acceleration of the maturity of any Indebtedness of,
or guaranteed by, the Company or any Subsidiary (other than (i) any Indebtedness
of any Subsidiary to the Company or to any other Subsidiary and (ii) the
Indebtedness evidenced by the Note) or enables the holder or holders of such
other Indebtedness or any trustee or agent for such holders (any required notice
of default having been given and any applicable grace period having expired) to
accelerate the maturity of such other Indebtedness.
(d) Other Obligations. Default in the payment when due, whether by
acceleration or otherwise, or in the performance or observance (subject to any
applicable grace period) of (i) any obligation or agreement of the Company or
any Subsidiary to or with the Bank (other than any obligation or agreement of
the Company hereunder or under the Note), or (ii) any material obligation or
agreement of the Company or any Subsidiary to or with any other Person (other
than (x) any such material obligation or agreement constituting or related to
Indebtedness, (y) Trade Accounts Payable, and (z) any material obligation or
agreement of any Subsidiary to the Company or to any other Subsidiary), except
only to the extent that the existence of any such default is being contested by
the Company or such Subsidiary, as the case may be, in good faith and by
appropriate proceedings and the Company or such Subsidiary shall have set aside
on its books such reserves or other appropriate provisions therefor as may be
required by GAAP.
(e) Insolvency. The Company or any of its Subsidiaries becomes
insolvent, or generally fails to pay, or admits in writing its inability to pay,
its debts as they mature, or applies for, consents to, or acquiesces in, the
appointment of a trustee, receiver or other custodian for the Company or such
Subsidiary or for a substantial part of the property of the Company or such
Subsidiary, or makes a general assignment for the benefit of creditors; or, in
the absence of such application, consent or acquiescence, a trustee, receiver or
other custodian is appointed for the Company or any of its
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Subsidiaries or for a substantial part of the property of the Company or any of
its Subsidiaries and is not discharged within 30 days; or any bankruptcy,
reorganization, debt arrangement or other proceeding under any bankruptcy or
insolvency law, or any dissolution or liquidation proceeding, is instituted by
or against the Company or any of its Subsidiaries and, if instituted against the
Company or any of its subsidiaries, is consented to or acquiesced in by the
Company or such Subsidiary or remains for 30 days undismissed; or any warrant of
attachment or similar legal process is issued against any substantial part of
the property of the Company or any of its Subsidiaries which is not released
within 30 days of service.
(f) Pension Plans. The institution by the Company or any ERISA Affiliate
of steps to terminate any Plan if, in order to effectuate such termination, (i)
the Company or any ERISA Affiliate would be required to make a contribution to
such Plan or would incur a liability or obligation to such Plan and (ii)
immediately after giving effect to the payment or satisfaction of such
contribution, liability or obligation (if made or undertaken by the Company or
any Subsidiary) an Event of Default or Unmatured Event of Default would exist
and be continuing; or the institution by the PBGC of steps to terminate any
Plan.
(g) Agreements. Default in the performance of any of the Company's
agreements set forth in Sections 7.1, 7,5 and 7.11 through 7.18.
(h) Other Agreements. Default in the performance of any of the Company's
agreements herein set forth (and not constituting an Event of Default under any
of the other subsections of this Section 10.1) and continuance of such default
for 30 days after notice thereof to the Company from the Bank.
(i) Warranty. Any warranty made by the Company herein is untrue or
misleading in any material respect when made or deemed made; or any schedule,
statement, report, notice, certificate or other writing furnished by the Company
to the Bank is untrue or misleading in any material respect on the date as of
which the facts set forth therein are stated or certified; or any certification
made or deemed made by the Company to the Bank is untrue or misleading in any
material respect on or as of the date made or deemed made.
(j) Litigation. There shall be entered against the Company or any
Subsidiary one or more judgments or decrees in excess of $100,000 in the
aggregate at any one time outstanding for the Company and all Subsidiaries,
excluding those judgments or decrees (i) that shall have been
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outstanding less than 30 calendar days from the entry thereof, (ii) for
not more than $3,000,000 during the time which a stay of enforcement of
such judgment or decree is in effect by reason of a pending appeal or
otherwise, or (iii) for and to the extent which the Company or any
Subsidiary is insured and with respect to which the insurer has assumed
responsibility in writing or for and to the extent which the Company or
any Subsidiary is otherwise indemnified if the terms of such
indemnification and the Person providing such indemnification are
satisfactory to the Bank.
10.2 Remedies. If any Event of Default described in Section 10,1 shall
have occurred and be continuing, the Bank may declare the Credit to be
terminated and the Note to be due and payable, whereupon the Credit shall
immediately terminate and the Note shall become immediately due and payable, all
without notice of any kind (except that if an event described in Section 10.1(e)
occurs, the Credit shall immediately terminate and the Note shall become
immediately due and payable without declaration or notice of any kind). The Bank
shall promptly advise the Company of any such declaration, but failure to do so
shall not impair the effect of such declaration.
ARTICLE XI
GENERAL
11.1 Waiver and Amendments. No failure or delay on the part of the Bank
or the holder of the Note in the exercise of any power or right, and no course
of dealing between the Company and the Bank or the holder of the Note, shall
operate as a waiver of such power or right, nor shall any single or partial
exercise of any power or right preclude other or further exercise thereof or the
exercise of any other power or right. The remedies provided for herein are
cumulative and not exclusive of any remedies which may be available to the Bank
at law or in equity. No notice to or demand on the Company not required
hereunder or under the Note shall in any event entitle the Company to any other
or further notice or demand in similar or other circumstances or constitute a
waiver of the right of the Bank or the holder of the Note to any other or
further action in any circumstances without notice or demand. No amendment,
modification or waiver of, or consent with respect to, any provision of this
Agreement or the Note shall in any event be effective unless the same shall be
in writing and signed and delivered by the Bank. Any waiver of any provision of
this Agreement or the Note, and any consent to any departure by the Company from
the terms of any provision of this Agreement or the Note, shall be effective
only in the specific instance and for the specific purpose for which given.
11.2 Notices. Except as otherwise expressly provided herein, any notice
hereunder to the Company or the Bank shall be in writing
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(including telecopy communication) and shall be given to the Company or the Bank
at its address or telecopier number set forth on the signature pages hereof or
at such other address or telecopier number as the Company or the Bank may, by
written notice, designate as its address or telecopier number for purposes of
notice hereunder. All such notices shall be deemed to be given when transmitted
by telecopier, personally delivered or, in the case of a mailed notice, when
sent by registered or certified mail, postage prepaid, in each case addressed as
specified in this Section 11.2; provided, however, that notices to the Bank
under Sections 2.3, 2.4, 4.2 and 4.3 shall not be effective until actually
received by the Bank.
11.3 Expenses. The Company agrees, whether or not any Loan is made
hereunder, to pay the Bank upon demand for all reasonable expenses, including
reasonable fees of attorneys and paralegals for the Bank (who may be employees
of the Bank) and other legal expenses and costs of collection, incurred by the
Bank in connection with (i) the preparation, negotiation and execution of this
Agreement, the Note and any other instrument or document provided for herein or
delivered or to be delivered hereunder or in connection herewith, (ii) the
preparation, negotiation and execution of any and all amendments to this
Agreement, the Note or any such other instrument or document, and (iii) the
enforcement of the Company's obligations hereunder or under the Note or any such
other instrument or document. The Company also agrees to (a) indemnify and hold
the Bank harmless from any loss or expense which may arise or be created by the
acceptance of telephonic or other instructions for making Loans or disbursing
the proceeds thereof, and (b) pay, and save the Bank harmless from all liability
for, any stamp or other tax which may be payable with respect to the execution
or delivery of this Agreement or the issuance of the Note or any other
instrument or document provided for herein or delivered or to be delivered
hereunder or in connection herewith. The Company's foregoing obligations shall
survive any termination of this Agreement.
11.4 Information. The Bank may, upon the prior written consent of the
Company, furnish any information concerning the Company in the possession of the
Bank from time to time to assignees of the rights and/or obligations of the Bank
hereunder and to participants in any Loan (including prospective assignees and
participants) and may furnish information in response to credit inquiries
consistent with general banking practice.
11.5 Severability. Any provision of this Agreement which is prohibited
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof or affecting the validity or
enforceability of such provision in any other jurisdiction.
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11.6 Law. This Agreement and the Note shall be contracts made under and
governed by the internal laws of the State of Illinois (without regard to
conflict of laws provisions thereof).
11.7 Successors. This Agreement shall be binding upon the Company and
the Bank and their respective successors and assigns, and shall inure to the
benefit of the Company and the Bank and the successors and assigns of the Bank.
The Company shall not assign its rights or duties hereunder without the consent
of the Bank.
11.8 WAIVER OF JURY TRIAL; WAIVER OF CONSEQUENTIAL DAMAGES. EACH OF THE
COMPANY AND THE BANK WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR
PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS (i) UNDER THIS AGREEMENT OR UNDER ANY
AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE
FUTURE BE DELIVERED IN CONNECTION HEREWITH OR (ii) ARISING FROM ANY BANKING
RELATIONSHIP EXISTING IN CONNECTION WITH THIS AGREEMENT, AND AGREES THAT ANY
SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY.
NEITHER THE COMPANY NOR THE BANK SHALL BE LIABLE TO THE OTHER FOR CONSEQUENTIAL
DAMAGES ARISING FROM ANY BREACH OF CONTRACT, TORT OR OTHER WRONG RELATING TO THE
ESTABLISHMENT, ADMINISTRATION OR COLLECTION OF THE LIABILITIES OR RELATING IN
ANY WAY TO THIS AGREEMENT OR UNDER ANY AMENDMENT, INSTRUMENT, DOCUMENT OR
AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION
HEREWITH, OR THE ACTION OR INACTION OF THE COMPANY UNDER ANY ONE OR MORE HEREOF
OR THEREOF.
11.9 CONSENT TO JURISDICTION. To induce the Bank to accept this
Agreement, the Company irrevocably agrees that, subject to the Bank's sole and
absolute election, ALL ACTIONS OR PROCEEDINGS IN ANY WAY, MANNER OR RESPECT,
ARISING OUT OF OR FROM OR RELATED TO THIS AGREEMENT SHALL BE LITIGATED IN COURTS
HAVING SITUS WITH THE CITY OF CHICAGO, STATE OF ILLINOIS. THE COMPANY HEREBY
CONSENTS AND SUBMITS TO THE JURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURT
LOCATED WITHIN SAID CITY AND STATE AND WAIVES PERSONAL SERVICE OF ANY AND ALL
PROCESS UPON THE COMPANY, AND AGREES THAT ALL SUCH SERVICE OF PROCESS MAY BE
MADE BY REGISTERED MAIL DIRECTED TO THE COMPANY AT THE ADDRESS STATED ON THE
SIGNATURE PAGE HEREOF AND SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED UPON
ACTUAL RECEIPT THEREOF.
11.10 COUNTERPARTS. This Agreement may be executed in any number of
counterparts and all of such counterparts taken together shall be deemed to
constitute one and the same agreement.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed at Chicago, Illinois by their respective officers thereunto duly
authorized as of the date first written above.
EXECUTONE INFORMATION SYSTEMS, INC.
By:________________________________
David Krietzberg
Title: Treasurer
Address: 478 Wheelers Farms Road
Milford, Connecticut 06460
Attention: Barbara Anderson, Esq.
Telecopier number: (203) 882-6607
BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION
By:________________________________
L. Richard DiDonato
Title: Vice President
Address: 231 South LaSalle Street Chicago, Illinois
60697
Attention: L. Richard DiDonato
Telecopier number: (312) 828-1974
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EXHIBIT A
REVOLVING NOTE
$35,000,000 Due: January 30, 2000
Chicago, Illinois: October 31,1997
FOR VALUE RECEIVED, the undersigned EXECUTONE INFORMATION SYSTEMS, INC.,
a Virginia corporation (the "Company"), hereby promises to pay to the order of
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION (the "Bank") the
principal sum of THIRTY FIVE MILLION DOLLARS ($35,000,000) or the amount
outstanding as endorsed on the grid attached to this Note (or recorded in the
Bank's books and records, if the Bank is the holder hereof). Such endorsement or
recording by the Bank shall, absent manifest error, be rebuttably presumptive
evidence of the principal balance due on this Note.
The Company further promises to pay interest on the aggregate unpaid
principal amount hereof from time to time outstanding from the date hereof until
payment in full at the rates per annum which shall be determined in accordance
with the provisions of the Loan Agreement hereinafter referred to. Said interest
shall be payable on each date provided for in the Loan Agreement (as defined
below); provided, however, that interest on any principal portion which is not
paid when due shall be payable on demand.
The portions of the principal sum hereof from time to time denominated
as Reference Rate Loans or Eurodollar Loans and payments of principal or
interest thereof shall be noted by the holder of this Note in its records, or at
its option, on the grid schedule attached hereto.
All payments of principal and interest under this Note shall be made in
immediately available funds at the office of the Bank at 231 South LaSalle
Street, Chicago, Illinois 60697, or at such other place as the Bank shall notify
the Company in writing.
This Note evidences indebtedness incurred by the Company under a
Revolving Credit Agreement dated as of October 31, 1997 (as the same may be
amended, restated, supplemented or otherwise modified and in effect from time to
time, "Loan Agreement"; capitalized terms used but not otherwise defined herein
shall have the meanings given to them in the Loan Agreement) between the Company
and the Bank, to which Loan Agreement reference is hereby made for a statement
of its terms and provisions, including those under which this Note may be paid
prior to maturity.
The Company expressly waives any presentment, demand, protest or notice
in connection with this Note.
This Note is made under and governed by the internal laws of the State
of Illinois (without regard to conflict of laws provisions thereof).
Address:
EXECUTONE INFORMATION SYSTEMS, INC.
478 Wheelers Farms Road By:___________________________
Milford, Connecticut 06460 Title:________________________
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EXHIBIT 4.2
AMENDED AND RESTATED LOAN AGREEMENT
THIS AMENDED AND RESTATED LOAN AGREEMENT (the"Agreement") is made as of
the 22nd day of July, 1996 by and among EXECUTONE INFORMATION SYSTEMS, INC., a
Virginia corporation ("Executone"), CERTAIN DESIGNATED EMPLOYEES OF EXECUTONE
LISTED ON THE SIGNATURE PAGES HEREOF and Exhibit A ("Borrowers") and BANK OF
AMERICA ILLINOIS, an Illinois banking corporation having its principal office at
231 South LaSalle Street, Chicago, Illinois 60697 (formerly known as Continental
Bank N.A.) ("Lender").
R E C I T A L S:
A. Borrowers, Executone, Bank of America Illinois, Fleet Bank N.A. and
Bank of Boston were parties to a certain Loan Agreement dated as of August 30,
1994 (the "Prior Agreement").
B. Borrowers desire Lender to pay in full the portions of the loan held
by Fleet Bank N.A. and Bank of Boston as Lenders under the Prior Agreement so
that Bank of America Illinois will remain as the sole Lender.
C. On the date hereof, the Borrowers hereto together with the balances
adjacent to such Borrower's name as set forth on the respective signature page,
constitute all of the obligations of such Borrower subject to this Agreement,
and Executone may not designate new employee borrowers.
NOW, THEREFORE, in consideration of any loan or advance or grant of
credit hereafter made to Borrowers by the Lender, and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties agree as follows:
1. DEFINITIONS AND OTHER TERMS.
1.1 Definitions. In addition to terms defined elsewhere in this
Agreement or any Supplement, Schedule or Exhibit hereto, when used herein, the
following terms shall have the following meanings (such meanings shall be
equally applicable to the singular and plural forms of the terms used, as the
context requires):
"Agreement" is defined in the Preamble as it may be amended,
restated, modified or supplemented from time to time.
"Attorneys' Fees" means the reasonable value of the services
(and costs, charges and expenses related thereto) of the attorneys (and
all paralegals,secretaries,
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accountants and other staff employed by such attorneys) employed by the
Lender (including but not limited to attorneys and paralegals who are
employees of the Lender) from time to time (a) in the case of the
Lender, (i) in connection with the negotiation, preparation, execution,
delivery, administration and enforcement of this Agreement, any Related
Agreement, and all other documents or instruments provided for herein or
therein or delivered or to be delivered hereunder or under any thereof
or in connection herewith or with any thereof, (ii) to prepare
documentation related to the Loans made and other Liabilities incurred
hereunder and (iii) to prepare any amendment to or waiver under this
Agreement or any Related Agreement and any documents or instruments
related thereto and (b) in the case of the Lender (i) to represent the
Lender in any litigation, contest, dispute, suit or proceeding or to
commence, defend or intervene in any litigation, contest, dispute, suit
or proceeding or to file a petition, complaint, answer, motion or other
pleading, or to take any other action in or with respect to, any
litigation, contest, dispute, suit or proceeding (whether instituted by
the Lender, Borrower or any other Person and whether in bankruptcy or
otherwise) in any way or respect relating to the Collateral, this
Agreement or any Related Agreement, or Borrower's affairs, (ii) to
protect, collect, lease, sell, take possession of, or liquidate any of
the Collateral, (iii) to attempt to enforce any security interest in any
of the Collateral or to give any advice with respect to such
enforcement, (iv) to prepare, negotiate and review any amendment to or
any waiver under this Agreement or any Related Agreement or any
documents or instruments related thereto, and (v) to enforce any right
of the Lender to collect any of the Liabilities under this Agreement,
any Related Agreement, and all other documents provided for herein or
therein.
"Banking Day" means any day other than Saturday, Sunday or legal holiday
on which banks are authorized or required to be closed for the conduct of
commercial banking business in Chicago, Illinois.
"Borrower" has the meaning ascribed to such term in the Preamble.
"Closing Date" means the date of this Agreement contained on the cover
page hereof.
"Demand Deposit Account" has the meaning ascribed to such term in the
Executone Agreement.
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"Executone" has the meaning ascribed to such term in the
Preamble.
"Executone Agreement" means the Second Amended and Restated Loan
and Security Agreement between Executone and Lender dated August 30,
1994, as amended, restated, modified or supplemented from time to time.
"Event of Default" has the meaning ascribed to such term in
Section 7,1.
"Letter of Credit Support" means the establishment and
maintenance of a stand-by letter of credit on application of Executone
pursuant to the Executone Agreement and Section 5.2(a) to support the
Borrowers, obligations hereunder.
"Liabilities" means with respect to each Borrower, all of the
liabilities, obligations and indebtedness of such Borrower to the Lender
of any kind or nature under or in connection with this Agreement or any
Related Agreement, however created, arising or evidenced, whether direct
or indirect, absolute or contingent, now or hereafter existing or due or
to become due, and including but not limited to such Borrower's
obligations under any Note, and tii) interest, charges, expenses,
Attorneys' Fees and other sums chargeable to Borrower by the Lender
under this Agreement or any Related Agreement. "Liabilities" shall also
include any and all amendments, restatements, extensions, renewals,
refundings or refinancings of any of the foregoing.
"Loan" means any loan made pursuant to Section 2.2 of the Prior
Agreement.
"Maximum Eligible Amount" means, with respect to each Borrower,
a maximum amount, to be determined by Executone, which was loaned to
such Borrower pursuant to the Prior Agreement.
"Note" means the promissory note executed by each Borrower
substantially in the form attached hereto as Exhibit B evidencing any
Loan to any Borrower pursuant to this Agreement or the Prior Agreement.
"Person" means any individual, sole proprietorship, partnership,
joint venture, trust, unincorporated organization, association,
corporation, institution, entity or government (whether national,
federal, state, county, city, municipal or otherwise, including, without
limitation, any instrumentality, division, agency, body or department
thereof).
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"Reference Rate" means, at any time, the rate of interest then
most recently announced by Lender at Chicago, Illinois as its reference
rate. Each change in the interest rate on any Loan shall take effect on
the effective date of the change in the Reference Rate.
"Related Agreement" means any agreement, instrument or document
heretofore, now, or hereafter delivered to the Lender with respect to or
in connection with or pursuant to this Agreement or any of the
Liabilities, and executed by or on behalf of any Borrower.
"Stock Option Plan" means the Executone 1994 Executive Stock
Incentive Plan established by Executone whereby certain officers of
Executone who are participants under such plan may purchase shares of
common stock in Executone.
"Unmatured Event of Default" means any event or condition which
after the giving of notice or lapse of time or both would become an
Event of Default.
1.2 Interpretation of Agreement. A Section, an Exhibit, a Supplement or
a Schedule is, unless otherwise stated, a reference to a section hereof, an
exhibit hereto, a supplement hereto or a schedule hereto, as the case may be.
Section captions used in this Agreement are for convenience only and shall not
affect the construction of this Agreement. The words "hereof," "herein,"
"hereto" and "hereunder" and words of similar import when used in this Agreement
refer to this Agreement as a whole and not to any particular provision of this
Agreement.
1.3 Exercise of Discretion. Unless a different standard is specifically
referred to, whenever the Lender is authorized to exercise its discretion herein
or in any Related Agreement, Lender shall be entitled to take any action with
respect to the matter in question that might be taken by a commercial lender
acting in good faith under similar circumstances in connection with a secured
financing transaction of the size and nature contemplated by this Agreement and
based upon the information then available to such Person(s).
2. EXISTING LOANS.
2.1 On the date of this Agreement, Lender has made Loans to the
Borrowers listed on the respective individual Borrower signature pages hereto in
the amounts adjacent to such Borrower's name on such signature page (the
"Loans"). It is agreed and understood that Executone may not, without further
amendment, designate additional Borrowers. The Loans shall be subject to the
Agreement as restated hereby and shall continue to be evidenced by the Notes. It
is agreed and understood
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that this is not a revolving facility and once repaid, no Loan may be
reborrowed.
2.2 Notes. Each Loan is evidenced by a Note to Lender substantially in
the form attached hereto as Exhibit B.
2.3 Principal Payments. The aggregate principal amount of the Loans made
to each Borrower shall be repaid on August 30, 1999. Any Loan may be prepaid in
whole or in part at any time.
3. INTEREST AND FEES.
3.1 Interest Rate. The outstanding principal balance of the Loans and
other Liabilities of Borrowers hereunder shall bear interest until paid at a
fluctuating rate per annum equal to the Reference Rate less one-half of one
percent (0.50%), provided, however, that if any amount of any Loan to any
Borrower is not paid when due, whether by acceleration or otherwise, the entire
unpaid principal balance of the Loan made to such Borrower shall accrue at a
rate per annum equal to the greater of (a) the rate of interest which is three
percent (3%) higher than the applicable per annum rate of interest otherwise
payable hereunder or (b) the rate of interest which is three percent (3t) higher
than the applicable per annum rate of interest in effect at the time such amount
became due. Interest on the unpaid principal amount of each Loan shall accrue
from and including the date the Loan was made to, but not including, the date
such Loan is paid. Interest and any fee shall be calculated an the basis of a
year consisting of 360 days and paid for actual days elapsed.
3.2 Interest Payments. Interest is payable by each Borrower quarterly,
in arrears, on the last Banking Day on each calendar quarter (March 31, June 30,
September 30, and December 31). Executone hereby agrees that Lender may provide
for the payment of such interest by charging Executone's Demand Deposit Account
established with Lender pursuant to the Executone Agreement.
3.3 Fee. Executone agrees to pay Lender on each August 30 during the
term hereof, an annual arrangement fee of Five Thousand Dollars ($5,000).
3.3 Attorneys' Fees. Executone agrees to pay all Attorneys' Fees.
4. CONDITIONS PRECEDENT; DELIVERY OF DOCUMENTS.
4.1 Conditions Precedent to Effectiveness of this Agreement. The
effectiveness of this Agreement and the obligation of the Lender to make or
continue the Loans to each
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Borrower is subject to Section 4.2 hereof and satisfaction of the following
conditions precedent:
(a) Executone Agreement. The Executone Agreement shall continue
to be in full force and effect as evidenced by Executone's signature to
this document;
(b) Fees and Expenses. All fees and expenses of the Lender that
are payable by Borrowers or Executone pursuant to this Agreement shall
be paid in full;
(c) Secretary's Certificate. The Lender shall have received a
Certificate of Executone's Secretary or Assistant Secretary, in the form
of Exhibit D hereto, certifying (i) that attached thereto is a true and
complete copy of the Stock Option Plan as in effect on the date thereof;
(ii) that attached thereto is a true and complete copy of the
resolutions of Executone's Board of Directors establishing and
authorizing the Stock Option Plan and the execution and delivery of this
Agreement and the provisions of the Letter of Credit Support as
contemplated hereunder, (iii) attached thereto is a true and complete
copy of Executone's Articles of Incorporation and Bylaws as in effect on
the date thereof, and (iv) a verification of the incumbency of all
officers of Executone duly authorized to execute and delivery this
Agreement and any Related Agreement on behalf of Executone;
(d) Opinion of Counsel. The Lenders shall have received a
satisfactory opinion of counsel to Executone, substantially in form of
Exhibit E hereto;
(e) No Conflict. No law or regulation affecting any Lender's
entering into the secured financing transaction contemplated by this
Agreement shall impose upon any Lender any material obligation, fee,
liability, loss, cost, expense or damage;
(f) No Event of Default. There is no event of default or
unmatured event of default under the Prior Agreement or under the
Executone Agreement; and
(g) Letter of Credit Support. The Letter of Credit substantially
in the form of Exhibit C shall be in full force and effect for an amount
equal to at least 102.6% of the aggregate principal amount of the Loans
listed on the Borrower's signature pages hereto.
4.2 Effectiveness of Agreement with Respect to Each Borrower. The
Agreement shall take effect with respect to each Borrower when Lender receives
an executed signature page for each
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Borrower and a Note executed by such Borrower. Upon receipt of the Notes, Lender
will record the accurate unpaid principal amount of the Notes issued under the
Prior Agreement in its records as the aggregate unpaid principal amount of the
Note, mark the original Notes as replaced by the Note and, on request, return
the original Notes to the Borrower. All references in the Agreement to Notes
shall be deemed to refer to the Note executed in connection with this restated
Agreement. The replacement of the original Notes with the Note shall not be
construed to deem paid or forgiven the unpaid principal amount of, or unpaid
accrued interest on, the original Notes outstanding at the time of replacement.
5. BORROWER COVENANTS.
Each Borrower agrees for him or herself that until all of the
Liabilities of such Borrower are paid in full, unless Lender shall otherwise
consent in writing, he or she will:
5.1 Financial Reports. Within ninety (90) days after the end of each
calendar year, provide the Lender, as requested, with a personal financial
statement (using the financial statement format provided in connection with the
Prior Agreement.
5.2 Notices. Notify the Lender in writing (or by telephone with written
confirmation to follow within two -(2) Banking Days of the telephone call)
immediately upon learning of the occurrence of an Event of Default.
5.3 Further Information. Promptly provide, upon the request of Lender,
any further information or documents to Lender that Lender may reasonably
require from time to time in relation to this Agreement or any Related
Agreement.
5.4 Use of Proceeds. The proceeds of each Loan requested under Section
2.1 of the Prior Agreement have been used by Borrowers only to purchase shares
of common stock in Executone pursuant to and in conformity with the Stock Option
Plan.
6. DEFAULT.
6.1 Event of Default. With respect to each Borrower, each of the
following shall constitute an "Event of Default" under this Agreement:
(a) Non-Payment. Default in the payment, when due or declared
due, of any of such Borrower's Liabilities;
(b) False Information in the Designation. Any information
provided by such Borrower or by Executone with respect to such Borrower
herein, in any Designation or any
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Borrowing Notice or otherwise in connection with this Agreement or the
Related Agreements shall prove to be false or misleading in any material
respect at the time made;
(c) Non-Compliance with this Agreement. Default in the
performance of any of Borrower's agreements set forth herein or in any
Related Agreement (and not constituting an Event of Default under any of
the other subsections of this Section 6.1), and the continuance of such
default for more than thirty (30) days after notice thereof to Borrower
from Lender;
(d) Dismissal. Such Borrower's employment with Executone is
terminated for any reason by either Executone or such Borrower;
(e) Insolvency. Such Borrower becomes insolvent, or generally
fails to pay, or admits in writing his or her inability to pay, his or
her debts as they mature, or applies for, consents to, or acquiesces in
the appointment of a trustee, receiver or other custodian for such
Borrower or for a material part of the property of such Borrower or
makes a general assignment for the benefit of creditors; or, in the
absence of such application, consent or acquiescence, a trustee,
receiver or other custodian is appointed for such Borrower or for a
substantial part of the property of Borrower and is not discharged or
dismissed within thirty (30) days; or any bankruptcy, reorganization,
debt arrangement or other proceeding under any bankruptcy or insolvency
law, or any dissolution or liquidation proceeding, is instituted by such
Borrower; or any bankruptcy, reorganization or other proceeding under
any bankruptcy or insolvency law is instituted against such Borrower and
is not discharged or dismissed within 30 days; or any warrant of
attachment or similar legal process is issued against any substantial
part of the property of such Borrower;
(f) Default under the Executone Agreement. Any "Event of
Default" (as defined in the Executone Agreement) occurs under the
Executone Agreement;
(g) Executone's Failure to Perform. Executone fails to perform
any of its obligations hereunder pursuant to this Agreement; and
(h) Letter of Credit Support. The issuer of the Letter of Credit
Support shall have notified the Lender that the Letter of Credit Support
shall not be renewed or that it shall he terminated for any reason at
any time prior to its expiration.
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6.2 Effect of Event of Default; Remedies;
(a) In the event that one or more Events of Default described in
Section 6.1(e) shall occur with respect to a Borrower, such Borrower's
Note or Notes shall be immediately due and payable without demand,
notice or declaration of any kind whatsoever.
(b) In the event an Event of Default with respect to a Borrower
other than one described in Section 6.1(e) shall occur, then Lender may
declare all Liabilities of such Borrower immediately due and payable
without demand or notice of any kind whatsoever.
(c) The Lender may exercise any one or more or all of the
following remedies, all of which are cumulative and nonexclusive;
(i) Any remedy contained in this Agreement or in any of
the Related Agreements;
(ii) Any rights and remedies available to Lender under the
Uniform Commercial Code or any other applicable law; and
(iii) Draw upon the Letter of Credit Support in accordance
with its terms.
However, notwithstanding anything herein to the contrary, if an Event of
Default described in Section 6.1(h) shall occur, then the Lender shall
draw upon the Letter of Credit Support. In addition, should any Event of
Default occur and be continuing with respect to any Borrower, Lender may
draw upon the Letter of Credit Support, either (i) as necessary to repay
any amounts then due and owing to Lender from such Borrower or (ii) as
necessary to repay Lender the entire amount of the Liabilities owing to
Lender from such Borrower under the terms of the applicable Note and
this Agreement, whether or not such amounts are then due.
7. MISCELLANEOUS.
7.1 Covenant of Executone. Executone shall promptly notify Lender of (i)
the termination of any Borrower's employment with Executone, or (ii) any
alteration, amendment or termination of the Stock Option Plan.
7.2 Borrower Waiver. Except as otherwise provided for in this Agreement,
each Borrower waives (i) presentment, demand and protest and notice of
presentment, protest, default, non-payment, maturity, release, compromise,
settlement, one or more extensions
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or renewals of any or all Notes, contract rights, documents, and instruments, at
any time held by the Lender on which any Borrower may in any way be liable and
hereby ratifies and confirms whatever the Lender may do in this regard. Borrower
acknowledges that it has been advised by counsel of its choice with respect to
this Agreement and the transactions evidenced by this Agreement.
7.3 Lawful Interest. In no contingency or event whatsoever shall the
interest rate charged pursuant to the terms of this Agreement exceed the highest
rate permissible under any law which a court of competent jurisdiction shall, in
a final determination, deem applicable hereto. In the event that such a court
determines that any Lender has received interest hereunder or under any Note in
excess of the highest lawful rate, such Lender shall promptly refund such excess
interest to the applicable Borrower.
7.4 Notices. Except as otherwise expressly provided herein, any notice
hereunder to any and all Borrowers or the Lender shall be in writing and shall
be given to the affected Borrower, or the Lender at its address or facsimile
number set forth on the signature page hereof or at such other address or
facsimile number as such party may, by written notice, designate for purposes of
notices hereunder. All such notices shall be deemed to be given when transmitted
by facsimile and receipt thereof confirmed by telephone, delivered by courier,
personally delivered or, in the case of notice by mail, three (3) Banking Days
following deposit in the United States mails, properly addressed as herein
provided, with proper postage prepaid.
7.5 Severability. Any provision of this Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof or affecting the validity or enforceability of such
provision in any other jurisdiction.
7.6 Successors. This Agreement shall be binding upon Borrowers,
Executone, and the Lender and the assigns of the Lender. None of the Borrowers
or Executone shall assign their rights or duties hereunder without the consent
of the Lender.
7.7 Construction and Governing Law. Each of the Borrowers and Executone
acknowledge that this Agreement shall not be binding upon the Lender or become
effective until and unless accepted by the Lender in writing. If so accepted by
the Lender, this Agreement and the Related Agreements shall, unless otherwise
expressly provided therein, be deemed to have been negotiated and entered into
in, and shall be governed and controlled by the laws of, the State of Illinois
as to interpretation, enforcement, validity, construction, effect, choice of
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law, and in all other respects, including, but not limited to the legality of
the interest rate and other charges, but excluding perfection of security
interests and liens which shall be governed and controlled by the laws of the
relevant jurisdiction.
7.8 Consent to Jurisdiction. To induce the Lender to accept this
Agreement, each of the Borrowers and Executone irrevocably agrees that, subject
to the Lender's sole and absolute election, ALL ACTIONS OR PROCEEDINGS IN ANY
WAY, MANNER OR RESPECT, ARISING OUT OF OR FROM OR RELATED TO THIS AGREEMENT, OR
THE RELATED AGREEMENTS SHALL BE LITIGATED IN COURTS HAVING SITUS WITHIN THE CITY
OF CHICAGO, STATE OF ILLINOIS. BORROWERS AND EXECUTONE HEREBY CONSENT AND SUBMIT
TO THE JURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURT LOCATED WITHIN SAID
CITY AND STATE AND WAIVE PERSONAL SERVICE OF ANY AND ALL PROCESS, AND AGREE THAT
ALL SUCH SERVICE OF PROCESS MAY BE MADE BY REGISTERED MAIL DIRECTED TO BORROWERS
AND EXECUTONE AT THE ADDRESS STATED ON THE SIGNATURE PAGE HEREOF AND SERVICE SO
MADE SHALL BE DEEMED TO BE COMPLETED UPON ACTUAL RECEIPT THEREOF.
7.9 Counterparts. This Agreement may be executed in any number of
counterparts and by the different parties on separate counterparts, and each
such counterpart shall be deemed to be an original, but all such counterparts
shall together constitute but one and the same Agreement. Executone and each of
the Borrowers agree that the failure of any one or more of the Borrowers to
execute this Agreement does not waive or excuse the obligations and duties of
Executone and any of the Borrowers who do execute this Agreement.
7.10 WAIVER OF JURY TRIAL; WAIVER OF CONSEOUENTIAL DAMAGES. EACH
BORROWER, EXECUTONE, AND THE LENDER WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY
ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS (i) UNDER THIS AGREEMENT OR
ANY RELATED AGREEMENT OR UNDER ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT
DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR (ii)
ARISING FROM ANY BANKING RELATIONSHIP EXISTING IN CONNECTION WITH THIS
AGREEMENT, AND AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A
JUDGE AND NOT BEFORE A JURY.
NONE OF THE BORROWERS, EXECUTONE OR THE LENDER SHALL BE LIABLE TO THE
OTHER FOR CONSEQUENTIAL DAMAGES ARISING FROM ANY BREACH OF CONTRACT, TORT OR
OTHER WRONG RELATING TO THE ESTABLISHMENT, ADMINISTRATION OR COLLECTION OF THE
LIABILITIES OR RELATING IN ANY WAY TO THIS AGREEMENT OR ANY RELATED AGREEMENT OR
UNDER ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN
THE FUTURE BE DELIVERED IN CONNECTION HEREWITH, OR THE ACTION OR INACTION OF ANY
BORROWER UNDER ANY ONE OR MORE HEREOF OR THEREOF.
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7.11 Amendment and Restatement of Prior Agreement. The Prior Agreement
shall, upon execution hereof, be deemed to be amended and restated in the form
hereof and Lender shall return to the Borrowers the promissory notes issued to
the Lenders under the Prior Agreement, upon execution of new promissory notes
payable to Lender, it being understood that Loans hereunder constitute
indebtedness under the Prior Agreement, as amended and restated hereby.
12
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IN WITNESS WHEREOF, the parties hereto have either executed this Agreement
individually or caused this Agreement to be executed by their respective
officers thereunto duly authorized as of the date first written above.
EXECUTONE INFORMATION SYSTEMS, INC.
By:David Krietzberg
Its: Treasurer
Address:
478 Wheelers Farms Road
Milford, Connecticut 06460
Telephone: (203) 876-7600
Facsimile: (203) 882-0400
Attention: Barbara Anderson, Esq.
BANK OF AMERICA ILLINOIS
By: PF Wilcox
Its Vice President
Address:
231 South LaSalle Street
Chicago, Illinois 60697
Telephone: (312) 828-2345
Facsimile: (312) 974-0357
Attention: Private Bank
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EXHIBIT 10-19
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 JULY 29, 2002, A COPY OF WHICH IS
ON FILE AT THE PRINCIPAL OFFICE OF THE COMPANY.
Issued as of Void after July 29, 2002
July 29, 1997
WARRANT TO PURCHASE 25,000 SHARES
OF COMMON STOCK
OF
EXECUTONE INFORMATION SYSTEMS, INC.
(incorporated under the Laws of the
Commonwealth of Virginia)
THIS IS TO CERTIFY THAT, LOUIS K. ADLER ("Adler") or his permitted
registered assigns (Adler 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
FIFTY THOUSAND DOLLARS ($50,000.00) or TWO DOLLARS AND ZERO CENTS ($2.00) 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) July 29, 1997 and on or
before 5:00 p.m. (Eastern Standard Time), on July 29, 2002.
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 July 29, 1998, one-third on July
29, 1999 and one-third on July 29, 2000; provided, however, that if Adler ceases
to be a director of the Company, either voluntarily or because he has not been
reelected by the Shareholders of the Company, then Adler'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
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
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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 Adler
otherwise than by Will or the laws of descent and distribution and, during the
lifetime of Adler, 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) Adler's heirs
and devisees, or (ii) Adler'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.
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 July 29, 2002, 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
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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 "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 Adler'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 Adler 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 Adler 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 Adler's directorship with the Company within the meaning of this
paragraph.
In the event Adler'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
July 29, 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 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 Zero Cents ($2.00).
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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 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
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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.
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 29th day of July, 1997
COMPANY:
EXECUTONE INFORMATION SYSTEMS, INC.,
a Virginia corporation
By: Alan Kessman
_____________
Alan Kessman
Its: President
[CORPORATE SEAL]
ATTEST:
Barbara C. Anderson
___________________
Barbara C. Anderson
Vice President, General Counsel and Secretary
HOLDER:
By
______________________
Louis K. Adler
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EXHIBIT 10-22
EXHIBIT 10-22 CONTAINS MATERIAL THAT IS THE SUBJECT OF A REQUEST FOR
CONFIDENTIAL TREATMENT PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE ACT
OF 1934, AS AMENDED.
EXECUTONE INFORMATION SYSTEMS, INC.
AMENDED AND RESTATED DISTRIBUTOR AGREEMENT
AGREEMENT effective as of April 1, 1998, between EXECUTONE INFORMATION SYSTEMS,
INC., a Virginia corporation ("Company") and Claricom, Inc., d/b/a/ Executone
Business Solutions, a Delaware corporation ("Distributor").
WHEREAS, the parties hereto are currently party to a Distributor Agreement dated
as of May 31, 1996, amended as of December 19, 1996 (as amended, the "Prior
Agreement"), pursuant to which Company (as defined in Section 25 below) has
appointed Distributor as an Authorized Distributor in certain territories for
Authorized Products and Authorized Software;
WHEREAS, the execution and delivery of the Prior Agreement was a condition to
Distributor's Purchase and the Company's sale of the Company's DSO Business as
defined in the Purchase Agreement pursuant to an Asset Purchase Agreement by and
among the Company, EXECUTONE Network Services, Inc., Claricom Holdings, Inc.
(formerly known as Tone Holdings, Inc.) and the Distributor dated April 9, 1996,
as amended (the "Purchase Agreement");
WHEREAS, the parties to the Prior Agreement wish to amend and restate the Prior
Agreement as provided herein;
WHEREAS, Company wants to appoint Distributor as an Authorized Distributor of
the products described in Exhibit B (the "Authorized Products"), including spare
parts therefor, and as a licensee of any Software imbedded therein or otherwise
an integral part thereof described in Exhibit B (the "Authorized Software"),
within the area described in Exhibit A to this Agreement ("Distributor's Area");
and
WHEREAS, Distributor wants to be appointed, to promote the sale and service of
the Authorized Products, and to sublicense the use of the Authorized Software in
conjunction with the sale of the Authorized Products;
NOW, THEREFORE, in consideration of the mutual promises in this Agreement and
other good and valuable consideration, the parties agree as follows:
1. AUTHORIZED DISTRIBUTOR. Except as provided in the Cross-Territorial Policy
attached hereto as Exhibit D, which is hereby incorporated by reference in this
Agreement, Distributor is granted the non-exclusive rights, as indicated in
Exhibit B, and, in accordance with the terms of this Agreement Distributor
agrees, to sell, service and maintain the Authorized Products and to sublicense
the Authorized Software throughout Distributor's Area. Authorized Products and
Authorized Software are the products and software in the Product Group described
in the Exhibit B executed by the Distributor and for which a Quota has been
agreed to by execution of a related Exhibit J. Distributor is not authorized
hereunder to market, sell, license, sublicense or service National Accounts or
Federal Accounts except as provided in Exhibit E ("National Accounts Policy" or
"NAP") and Exhibit F ("Federal Accounts Policy" or "FAP"), respectively, each of
which shall be effective only if separately executed by Distributor and Company.
Distributor is not authorized hereunder to market, sell, license, sublicense or
service the Authorized Products or Authorized Software to Call Center Customers
or Health Care Accounts, except as provided in Exhibit G ("CCM Accounts Policy"
or "CAP") or Exhibit H ("Health Care Accounts Policy" or "HCAP"), each of which
shall be effective only if separately executed by Distributor and the Company;
provided, however, that Distributor is authorized to offer, sell, install and
service Authorized Telephony Products and offer, license, install and service
Authorized Telephony Software to Health Care Accounts who are not Health Care
National Accounts or acute care hospitals in those portions of Distributor's
Area in which there is no exclusive authorized Health Care Product Group
distributor. The portions of Distributor's Area in which there is an exclusive
Health Care Product Group distributor are marked on Exhibit A hereto.
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2. COMPANY SUPPORT OF DISTRIBUTOR NETWORK. In order to support Company's
nationwide network of authorized distributors, Company shall:
(a) refer to Distributor a portion of the leads for Authorized Products and
Authorized Software in each county in Distributor's Area of which
Company becomes aware, in the same proportion as Distributor bears to
the number of all authorized distributors of Authorized Products and
Authorized Software for such county in Distributor's Area;
(b) make available promotional programs and materials from time to time at
Company's discretion subject to Company's normal charges for such
programs and materials;
(c) sell, at special prices or terms, an assortment of the Authorized
Products to be used by Distributor to demonstrate those products to
customers and to train personnel;
(d) make available courses and materials for training Distributor's
personnel at Company's normal charges;
(e) make available technical and service support, including installation and
technical manuals, subject to Company's normal charges for such support,
except that technical support shall be provided free of charge to
technicians and other Distributor representatives who are employed by
Distributor (while Distributor is an authorized distributor) on products
or software for which the requesting Distributor representative is
currently Company-certified;
(f) market the Authorized Products directly to National Accounts,
Cross-Territorial Accounts and Company Accounts (as defined below) in
accordance with the Cross-Territorial Policy and the applicable Company
Account Policy, all of which Company expressly reserves the right to
amend (except as provided therein) from time to time when Company in its
reasonable discretion determines such amendment to be desirable.
"Company Accounts" shall mean those customer groups, i.e., National
Accounts, Federal Accounts, CCM Accounts and/or Health Care Accounts,
for which Distributor has executed the applicable Company Account Policy
(Exhibit E, F, G and/or H, respectively);
(g) act in good faith and in a fair, equitable, and ethical manner both to
Distributor and end-users with respect to all matters covered by this
Agreement;
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(h) utilize its best efforts to provide to Distributor Authorized Products
that are competitive in the marketplace in function, features and price.
Distributor and Company recognize that, from time to time, Company will
develop and introduce new products bearing the Authorized Trademarks,
and that by providing these products the Company enhances the ability of
Distributor to achieve its Quotas. Company shall make such new
Authorized Products available to Distributor for Distributor's Area on
the same non-exclusive basis as applies to the Authorized Trademark
brands hereunder and thereafter such new Authorized Products shall be
Authorized Products as defined in this Agreement;
(i) use its best efforts to have Distributor elected to Company's
Independent Distributor Advisory Board;
(j) as soon as available after the end of each fiscal year, deliver to
Distributor financial statements consisting of balance sheet, income
statement and, at Distributor's request, a statement of sources and uses
of funds for such year prepared in accordance with generally accepted
accounting principles and reviewed by a certified public accountant; and
(k) not disparage the Distributor or the Distributor's employees in any
sales brochures, presentations or materials produced by Company or in
any advertisements approved by Company and take reasonable corrective
action in the event Company determines that any employee of Company has
engaged or is engaging in such disparagement.
3. TRADEMARK LICENSE AND USE. In order to promote and protect the Company's
trademark rights, the parties agree that:
(a) AUTHORIZED USES. Company grants to Distributor a nonexclusive,
non-transferable (except as provided herein) license to use the
trademarks described in Exhibit C (the "Authorized Trademarks"):
(i) only in connection with the sale and service, and promotion of
sale and service, of the Authorized Products and Authorized
Software;
(ii) only in the Distributor's Area;
(iii) only during the term of this Agreement or to service products
installed prior to the termination of this Agreement;
(iv) only in the manner described in this Section and Exhibit C; and
(v) as provided in the Purchase Agreement (excluding Sections 8.6 and
8.11(c) of the Purchase Agreement).
(b) PROHIBITED USES. Distributor is not granted any license or right to use
the mark or name EXECUTONE INFORMATION SYSTEMS, EISI, OR EIS, or any
comparable derivative thereof. Except as expressly authorized in Exhibit
C (the "Authorized Name"), Distributor shall not use the Authorized
Trademarks as part of Distributor's trade or corporate name, nor shall
Distributor otherwise trade under the Authorized Trademarks or any
derivative thereof.
(c) NONTRANSFERABILITY. Distributor shall not assign or sublicense its
rights to use any of the Authorized Trademarks or Authorized Name to any
other person or entity, except as otherwise permitted by this Agreement.
(d) DISTRIBUTOR'S COVENANTS. Distributor hereby agrees that Distributor:
(i) shall use the Authorized Trademarks only as expressly authorized
and only in conjunction with the R or TM symbol as appropriate;
(ii) shall not, either in or outside of Distributor's Area, use the
Authorized Trademarks in any disparaging way or in any way that
might confuse other products with the Authorized Products in a
manner which would jeopardize the Company's interests in the
Authorized Trademarks; and
(iii) shall not challenge or contest in any way the validity of the
Authorized Trademarks, their registration or their ownership by
the Company.
(e) PRODUCT ALTERATIONS. Distributor may affix to the back of any Authorized
Product or packaging or documentation of a copy of Authorized Software a
legend in the following form:
For Sales and Service
(Name of Distributor)
(Address of Distributor)
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(Local Telephone Number of Distributor)
(Installation Date)
For 24-Hour Emergency Service Call:
(Telephone Number)
However, Distributor shall not remove, change, obscure, or add to the
labels, markings, names or trademarks that Company has affixed to any
Authorized Product or Authorized Software.
4. DISTRIBUTOR'S SALES RESPONSIBILITIES. In order to develop the market for the
Authorized Products and Authorized Software in Distributor's Area, Distributor
shall:
(a) maintain accurate records with respect to sales of the Authorized
Products and sublicenses of the Authorized Software (which records are
acknowledged to be the proprietary business information of Distributor);
(b) maintain a sufficient inventory of the Authorized Products and
Authorized Software to meet the demand in Distributor's Area for
accounts being installed, sold or serviced by Distributor;
(c) timely install the Authorized Products and Authorized Software in a
workmanlike and professional manner in accordance with instructions and
specifications for accounts being installed, sold or serviced by
Distributor;
(d) properly train customers' personnel in the operation and use of the
Authorized Products and Authorized Software, as reasonably requested by
customers for accounts being installed, sold or serviced by Distributor;
(e) maintain a trained sales force to sell Authorized Products and license
Authorized Software within Distributor's Area;
(f) not disparage the Company or the Company's employees, the Authorized
Products or Authorized Software or any Other Company Products in any
sales brochures, presentations or materials produced by Distributor or
in any advertisements approved by Distributor and take reasonable
corrective action in the event Distributor determines that any employee
of Distributor has engaged or is engaging in such disparagement ;
(g) except as specifically provided for in Section 4(i) and (j) herein,
refrain from selling the Authorized Products or sublicensing the
Authorized Software to any entity other than to end-users located in
Distributor's Area;
(h) refrain from selling the Authorized Products and spare parts therefor
and sublicensing Authorized Software outside of Distributor's Area
except as specifically authorized by the Cross-Territorial Policy, which
Company expressly reserves the right to amend (except as provided
therein) from time to time when Company in its reasonable discretion
determines such amendment to be desirable, or as otherwise specifically
authorized in writing;
(i) refrain from selling the Authorized Products or Authorized Software to
former authorized distributors of Authorized Products and Authorized
Software and to secondary market resellers identified to Distributor by
Company. The Company will provide Distributor with a list of authorized
distributors upon Distributor's request. The Company will assist
Distributor in the sale of Distributor's excess inventory of Authorized
Product to other Authorized Distributors by coordinating an exchange
program between Distributors or any other entity which Company
authorizes for the purchase of Distributor's inventory of Authorized
Product;
(j) Company and Distributor recognize exchange between Distributors will be
necessary from time to time for emergency service requirements and
Company agrees that Distributor may sell Authorized Products to and
purchase Authorized Products from other Authorized Distributors for this
purpose. Distributor agrees that such sales and purchases of Authorized
Products will be of an incidental nature for emergency purposes. Company
and Distributor recognize that such incidental sales and purchases
between Distributors are in the best interest of the Company and its
Distributors in order to facilitate quick response to service outages;
however, Distributor and Company specifically agree that it is not the
intent of this
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Section 4(j) for Distributor to become a source of product supply to any
other Distributor and/or for Distributor to purchase the Authorized
Products in bulk from the Company to take advantage of Company's volume
purchase discounts and resell portions of such bulk purchases to any
other Authorized Distributor; and
(k) obtain at Distributor's expense all state, local, and other licenses and
permits necessary for operation of Distributor's business of selling,
servicing and maintaining Authorized Product and Authorized Software,
and furnish Company with Distributor's local sales tax license number.
5. DISTRIBUTOR'S SERVICE RESPONSIBILITIES. In order to service adequately
customers being installed, sold or serviced by Distributor in Distributor's Area
and to ensure consistent nationwide service of the Authorized Products and
Authorized Software for such customers, Distributor shall:
(a) install and service, subject to Distributor's customary charges and
credit criteria, all Authorized Products and Authorized Software, being
installed, sold or serviced by Distributor in Distributor's Area,
subject to the Cross-Territorial Policy; provided, however, that
installation and service for National Accounts and Federal Accounts
shall not be provided except pursuant to the NAP, and/or the FAP,
respectively, executed by Distributor, and) installation and service for
CCM Accounts and Health Care Accounts shall not be provided except
pursuant to the CAP and/or HCAP executed by Distributor, respectively.
(b) install and service, upon the request of Company, and subject to the
applicable Company Accounts Policy, Other Company Products for any group
of Company Accounts for which Distributor has executed the applicable
Company Account Policy (Exhibit E, F, G and/or H, respectively). "Other
Company Products" are defined as any products or software marketed, sold
or licensed by the Company that are not Authorized Products or
Authorized Software as defined herein and are products or software
approved as "Other Company Products" hereunder by the Independent
Distributors' Advisory (IDA) Board.
(c) except to the extent that faster response times are reasonably required
by Company for Cross-Territorial Accounts or Company Accounts, respond:
(i) within 4 hours to all Emergency Service Requests, defined as all
requests to remedy problems that are not isolated failures of a
minority of station instruments and/or a minority of trunks
and/or system components not required for normal processing of
voice and/or data communications; and
(ii) within 48 hours to 95% of all non-Emergency Service Requests;
and
(iii) within ten (10) business days to 100% of customers' requests for
routine adds, moves or changes of equipment, subject to
availability of product from Company.
It is the intent of this Section that Distributor utilize its best efforts
to achieve these goals on a consistent basis. Occasional failures and/or
delays will not be a Material Breach of this Agreement.
(d) make available emergency service 24 hours a day, 365 days a year for all
of its customers in Distributor's Area, all Cross-Territorial Accounts
and all Company Accounts, as applicable, being sold, installed or
serviced by Distributor, subject to the NAP, FAP, CAP and/or HCAP as
agreed to in writing by the Distributor;
(e) as requested by Company, make available installation and service for
Authorized Products and Authorized Software to Cross-Territorial
Accounts in Distributor's Area subject to the Cross-Territorial Policy
and to Company Accounts, as applicable, in Distributor's Area, subject
to the NAP, FAP, CAP, and/or HCAP as agreed to in writing by the
Distributor, as applicable;
(f) maintain trained personnel, spare parts, and equipment sufficient to
service all Authorized Products and Authorized Software being sold,
installed or serviced by Distributor in Distributor's Area and all Other
Company Products for any group of Company Accounts for which (but only
for which) Distributor has executed the applicable Company Account
Policy (Exhibit E, F, G and/or H, respectively); and
(g) maintain complete records of all service requests and service calls
(which records are acknowledged to be the proprietary business
information of Distributor), including: the name of the customer; the
date(s) and time(s) of the request, response, and correction of the
problem; the nature of the problem; any parts used; any charges; and
whether the service was performed under warranty.
6. DISTRIBUTOR'S FINANCIAL AND REPORTING RESPONSIBILITIES.
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(a) FINANCIAL CONDITION. Distributor shall maintain a financial condition
adequate to perform its obligations hereunder.
(b) REPORTING RESPONSIBILITIES. Distributor shall submit to Company:
(i) as soon as available after the end of each fiscal year, financial
statements consisting of balance sheet and income statement
showing Distributor's financial condition, and at Company's
request, a statement of sources and uses of funds, for such year
prepared in accordance with generally accepted accounting
principles and reviewed by a certified public accountant;
(ii) at Company's request, a list of all persons and entities having
an ownership interest in Distributor, and the nature and
percentage of each such ownership interest;
(iii) within thirty (30) days of the end of each quarter Distributor
will complete and send to Company a summary report of retail
sales of Authorized Products and service activity performed by
Distributor within Distributor's Area. The information required
may be modified from time to time as reasonably required by
changes in the market or within the industry. The information
provided by Distributor will be analyzed by Company and
consolidated on a national and regional basis and reported back
to Distributor;
(iv) upon request of the Company within 15 days after the end of each
month, to the extent required by any license or VAR agreement
between the Company and any third party software licensor of
software contained in or sold with Authorized Products or
Authorized Software, including Oracle Corporation, the names and
addresses of sublicensees of such software sublicensed by
Distributor within the preceding month, the date of purchase and
installation, the specific Authorized Product and Authorized
Software installed, including the make or model designation and
the software release number of the software programs licensed,
and the maximum number of users per system; provided, however,
that this subparagraph shall not apply to licenses of Authorized
Software licensed directly by the Company to Distributor's
customers and provided further that the Distributor shall have no
obligations under this paragraph unless the Company provides
evidence of such third party requirement if requested by
Distributor. Company agrees to provide third party software
license forms when such software is ordered and/or before the
software is downloaded for execution by Distributor's customers,
to compile the information required to be reported, and to
maintain the confidentiality of and not to use such information
in any manner whatsoever, except to the extent it is required to
provide such information to the third party software licensor,
without the prior written consent of the Distributor;
(v) [CONFIDENTIAL TREATMENT REQUESTED]; and
(vi) as requested by the Company, but not more than once per quarter,
a report of the size of Distributor's sales force for Authorized
Products and Authorized Software by Office (for the purposes of
this Agreement "Office" is defined as Distributor's main office
locations, excluding any satellite locations).
7. PURCHASE, PAYMENT, SALES AND SHIPMENTS.
(a) PURCHASE AND PAYMENT BY DISTRIBUTOR.
(i) FORECASTS. In order to assist Company in scheduling the
production and delivery of the Authorized Products, Distributor
will deliver and update during the term of this Agreement a
rolling six-month forecast of its purchases. Distributor's
initial forecast is attached hereto as Exhibit I. On or before
the first day of each calendar month, Distributor shall deliver
an updated forecast in the form attached hereto as Exhibit I.
Each such forecast shall cover the succeeding six calendar
months. Such forecasts are nonbinding and for advisory or
planning purposes only.
(ii) QUOTA DETERMINATION. Quota is defined as the minimum dollar
volume of Authorized Product and Authorized Software that
Distributor must purchase or license from Company during each
calendar year of this Agreement in order to enjoy certain
benefits described in 7(b) that are contingent on Quota
attainment. The Quota shall be stated in terms of actual
purchases of Authorized Products and Authorized Software. Subject
to Section 7 (b) (i), the Quotas as of the date of this Agreement
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are stated in Exhibit J hereto. Quotas for additional areas or
territories, for Expansion Areas, for product groups other than
the Telephony Product Group, and for New Telephony Products as
defined in Exhibit B, shall be mutually agreed upon in writing by
Company and Distributor with reference to (i) the actual
potential new install customers within Distributor's Area, as
shown by the ABI database of opportunities representing between
20 and 250 desktops, and adjusted, pursuant to formulas agreed to
by the IDA Board, to take account of Distributor's existing
customer base, reasonable shrinkage factor and close ratios,
average system price and system life, and (ii) the estimated
equipment value of MAC and service business in Distributor's
Area.
(iii) QUOTA MEASUREMENT. The Quota for any calendar quarter (a
"Quarter") shall be one-fourth of the annual Quota for the
calendar year in which the Quarter falls, unless otherwise
specified herein. For any additional years of this Agreement, the
Quotas shall be determined by reference to the formula set forth
in subsection (ii) and as otherwise mutually agreed in writing
between Company and Distributor. For purposes of Quota
performance measurement, Company will calculate the Distributor's
purchases based upon the aggregate actual dollar amount of
Distributor's purchases of Authorized Products and Authorized
Software. Provided Distributor is not on credit hold, purchases
for this purpose will include orders for Authorized Product and
Authorized Software that have not yet been shipped due to the
Company being backordered on such Authorized Product, but
purchases shall not include any orders that are delayed due to
Distributor's credit hold. Following the end of each Quarter,
Company will provide Distributor with a report of Distributor's
Quota performance.
(iv) PURCHASE ORDERS. Orders for the purchase of the Authorized
Products and Authorized Software shall be made by Distributor by
purchase orders, specifying the quantity and description of
Authorized Products and Authorized Software desired. Any term or
condition of such purchase orders that is inconsistent with any
term or condition of this Agreement shall be of no force and
effect whatsoever, and any additional term or condition of such
purchase order shall be construed so as to be consistent with the
intent of this Agreement.
(v) PAYMENT. Subject to subsection 7(b), payment by Distributor to
Company for each order of Authorized Products and Authorized
Software shall be made in cash, or by check or wire transfer.
Subject to Company's rights under Section 7(b)(ii), payment by
Distributor shall be made within the longer of (i) sixty days of
the invoice date or (ii) the longest payment terms provided to
any of the Company's other distributors of any Authorized
Products or Authorized Software that purchases an amount equal to
or less than Distributor of such products for an equivalent
period of time, on the same terms and conditions provided to such
other authorized distributors (the "Standard Payment Period").
The Standard Payment Period shall be in effect until the earlier
of May 31, 1999 and such time as 60-day payment terms are no
longer required by Distributor's banks. Upon termination of the
Standard Payment Period, payment by Distributor shall be made
within the longer of (a) thirty days of invoice date or (b) the
longest Company-approved payment terms provided to any other
distributor of Authorized Product and Authorized Software whose
purchases are equal to or less than Distributor's purchases in
any given period for the balance of the term of this Agreement.
The invoice amount shall reflect the provisions of Section
7(b)(i) and any other pricing discounts, including promotional
pricing, which may be agreed to by Company and Distributor from
time to time. Distributor shall pay each invoice in full subject
to appropriate credits and offsets. Distributor must notify
Company in writing within 30 days of the date of the invoice or
the date of receipt of product ordered, whichever is later, of
any disputed invoice amount along with an explanation of the
reason for the dispute.
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(b) SALES AND SHIPMENTS BY COMPANY.
(i) PRICES AND TERMS.
(A) Subject to Section 7 (b) (i) (B), and Section 7 (b) (i) (C),
Company will sell all Authorized Products and Authorized Software
at prices and on terms determined by Company from time to time, as
reflected in the Company's Authorized Product Price Book. All
prices are exclusive of all taxes including federal, state, and
local sales, use, value-added or similar taxes. Distributor will
pay all such taxes, excluding taxes on Company's income, unless
Distributor has given Company a valid exemption resale certificate
prior to shipment. Subject to paragraph 7 (b) (i) (B) and 7 (b) (i)
(C) hereof, Company expressly reserves the right to change prices
with not less than forty-five days notice to Distributor; provided,
however, that Company (a) will honor pricing for a proposal
delivered prior to the price change notice for 90 days from the
date of the proposal, (b) will honor pricing for any customer
contract, if the contract was signed within the period following
the date of proposal specified in (a) above or prior to the date of
the price change notice, and if the product is shipped to
Distributor within ninety (90) days from the date of the applicable
contract.
(B) During the calendar year 1998, the following shall apply:
At all times during the period or periods in which Distributor is
not in Material Breach of this Agreement, and if the dollar amount
of Distributor's aggregate actual purchases of Authorized Products
and Authorized Software, measured as of (and including) the last
day of each Quarter, equals or exceeds, (1) with respect to the
second Quarter of 1998, [CONFIDENTIAL TREATMENT REQUESTED], or (2)
with respect to the second and third Quarters of 1998 together,
[CONFIDENTIAL TREATMENT REQUESTED], then during the succeeding
Quarter, the Company agrees to sell to Distributor at a discount of
[CONFIDENTIAL TREATMENT REQUESTED] off list prices reflected in the
Company's Authorized Product Price Book except for products in
discount categories S, N,. P, C, D and Z, and on the most favorable
terms and conditions, excluding discount levels, made available to
any other authorized distributor for a territory located in the
United States for the same products, excluding sales to the Federal
Government, in each case on the same terms and conditions provided
to such other authorized distributor applicable to such more
favorable terms and conditions which terms and conditions shall be
reasonably related to such other more favorable terms and
conditions provided to such other distributor. If the dollar amount
of Distributor's aggregate actual purchases of Authorized Products
and Authorized Software, measured as of (and including) the last
day in a particular Quarter, equals or exceeds, (1) with respect to
the second Quarter of 1998, [CONFIDENTIAL TREATMENT REQUESTED], or
(2) with respect to the second and third Quarters of 1998 together,
[CONFIDENTIAL TREATMENT REQUESTED], then during the succeeding
Quarter the applicable discount will be [CONFIDENTIAL TREATMENT
REQUESTED] off list prices reflected in the Company's Authorized
Product Price Book, except for products in discount categories S,
N,. P, C, D and Z, and sales will be on the most favorable terms
and conditions, excluding discount levels, made available to any
other authorized distributor (for a territory located in the United
States for the same products, excluding sales to the Federal
Government) that purchased an amount equal to or less than
Distributor during the applicable measurement period, in each case
on the same terms and conditions provided to such other authorized
distributor applicable to such more favorable terms and conditions
which terms and conditions shall be reasonably related to such
other more favorable terms and conditions. If the dollar amount of
Distributor's aggregate actual purchases of Authorized Products and
Authorized Software, measured as of (and including) the last day in
a particular Quarter, is less than, (1) with respect to the second
Quarter of 1998, [CONFIDENTIAL TREATMENT REQUESTED] or (2) with
respect to the second and third Quarters of 1998 together,
[CONFIDENTIAL TREATMENT REQUESTED], then during the succeeding
Quarter the applicable discount will be [CONFIDENTIAL TREATMENT
REQUESTED] off list prices reflected in the Company's Authorized
Product Price Book, except for products in discount categories S,
N,. P, C, D and Z, and sales will be on the most favorable terms
and conditions, excluding discount levels, made available to any
other authorized distributor (for a territory located in the United
States for the same products, excluding sales to the Federal
Government) that purchased an amount equal to or less than
Distributor during the applicable measurement period, in each case
on the same terms and conditions provided to such other authorized
distributor applicable to such more favorable terms and conditions
which terms and conditions shall be reasonably related to such
other more favorable terms and conditions. Distributor's failure to
qualify for the best or any other discount level or other more
favorable terms as of the end of any Quarter shall in no way
prejudice or affect the Distributor's ability to qualify for
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such best or any other discount level or other more favorable terms
as of the end of any other Quarter. For all purposes herein, the
Distributor shall be deemed pre-qualified for the [CONFIDENTIAL
TREATMENT REQUESTED] discount as provided above and other more
favorable terms and conditions during the second Quarter of 1998.
(C) On and as of the first day of the first Quarter of 1999, the
following shall apply:
At all times during the period or periods in which Distributor is
not in Material Breach of this Agreement, and if the dollar amount
of Distributor's aggregate actual purchases of Authorized Products
and Authorized Software measured as of (and including) the last day
of each Quarter, equals or exceeds (1) with respect to the second,
third and fourth Quarters of 1998 together, [CONFIDENTIAL TREATMENT
REQUESTED], or (2) thereafter, with respect to the immediately
preceding four Quarters, 100% of the Distributor's Quota for such
rolling four-quarter period, then during the succeeding Quarter the
Company agrees to sell to Distributor at the most favorable terms
and conditions, including without limitation the greater of a
[CONFIDENTIAL TREATMENT REQUESTED] discount and the most favorable
prices, discount levels and promotional pricing, made available to
any other authorized distributor for a territory located in the
United States for the same products, excluding sales to the Federal
Government, in each case on the same terms and conditions provided
to such other authorized distributor applicable to such more
favorable terms and conditions which terms and conditions shall be
reasonably related to such other more favorable terms and
conditions. If the dollar amount of Distributor's aggregate actual
purchases of Authorized Products and Authorized Software, measured
as of (and including) the last day of each Quarter, (1) with
respect to the second, third and fourth Quarters of 1998 together,
equals or exceeds [CONFIDENTIAL TREATMENT REQUESTED], or (2)
thereafter, with respect to the immediately preceding four
Quarters, is less than 100% of the Distributor's Quota for such
rolling four-quarter period but is equal to or greater than
[CONFIDENTIAL TREATMENT REQUESTED], then during the succeeding
Quarter the applicable discount will be the greater of
[CONFIDENTIAL TREATMENT REQUESTED] the best discount (including
promotional pricing) made available to any other authorized
distributor for a territory located in the United States for the
same products, excluding sales to the Federal Government, in each
case on the same terms and conditions provided to such other
authorized distributor applicable to such more favorable terms and
conditions, and sales will be on the most favorable terms and
conditions, excluding discount levels, made available to any other
authorized distributor (for a territory located in the United
States for the same products, excluding sales to the Federal
Government) that purchased an amount equal to or less than
Distributor during such rolling four quarter period, in each case
on the same terms and conditions provided to such other authorized
distributor applicable to such more favorable terms and conditions
which terms and conditions shall be reasonably related to such
other more favorable terms and conditions. If the dollar amount of
Distributor's aggregate actual purchases of Authorized Products and
Authorized Software measured as of (and including) the last day of
each Quarter, (1) with respect to the second, third and fourth
Quarters of 1998 together is equal to or exceeds is less than
[CONFIDENTIAL TREATMENT REQUESTED], or (2) thereafter, in a
particular rolling four-quarter period, is less than [CONFIDENTIAL
TREATMENT REQUESTED], then during the succeeding Quarter the
applicable discount will be the greater of [CONFIDENTIAL TREATMENT
REQUESTED] the best discount (including promotional pricing) made
available to any other authorized distributor, for a territory
located in the United States for the same products, excluding sales
to the Federal Government, in each case on the same terms and
conditions provided to such other authorized distributor applicable
to such more favorable terms and conditions, and sales will be on
the most favorable terms and conditions, excluding discount levels,
made available to any other authorized distributor (for a territory
located in the United States for the same products, excluding sales
to the Federal Government) that purchased an amount equal to or
less than Distributor during such rolling four quarter period, in
each case on the same terms and conditions provided to such other
authorized distributor applicable to such more favorable terms and
conditions which terms and conditions shall be reasonably related
to such other more favorable terms and conditions. The
Distributor's failure to qualify for the best or any other discount
level or other more favorable terms as of the end of any Quarter
shall in no way prejudice or affect the Distributor's ability to
qualify for such best or other discount level or other more
favorable terms as of the end of any other Quarter.
(D) In the event that Distributor's purchases during any Quarter,
measured as provided in this Section 7(b)(i), do not qualify it for
the best discount level, Company shall give Distributor notice
within ten days of the end of the Quarter of the amount by which
Distributor's purchases during the
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Quarter are less than the amount required to qualify Distributor
for the higher discount level or levels, and Distributor shall have
until 30 days following receipt of written notice from Company to
order (for immediate shipment) sufficient additional Authorized
Product or Authorized Software to qualify for any higher level
(which additional purchases shall be applied solely to the Quarter
preceding such purchases). As soon as Distributor has made such
additional purchases, it shall immediately qualify for the higher
discount level and if applicable to such discount level, also
immediately be entitled to other more favorable terms and
conditions as set forth in this Agreement, and any orders filled by
Company after cure (but no orders necessary to effect the cure)
shall be shipped and invoiced at the higher discount level.
Notwithstanding the foregoing, in the event Company fails to
provide the written notice required above, Distributor's purchases
for the preceding Quarter shall be deemed to be at Quota during
that Quarter.
(E) Distributor acknowledges and agrees that the Company may offer
special new distributor programs, terms and conditions, and
incentives (collectively, the "Incentives") and that Distributor
shall not be entitled to such Incentives pursuant to subsection
7(b)(i) except as otherwise provided in subsection 7(b)(i)(E)(iv)
and (v) hereof; provided that (i) such Incentives are available
only for a limited period of time; (ii) such Incentives are
available only to new distributors or to existing distributors with
respect to a new territory; (iii) such Incentives do not include
pricing, discounts and promotional pricing for Authorized Product
and Authorized Software; (iv) to the extent such Incentives, in the
aggregate, do not exceed [CONFIDENTIAL TREATMENT REQUESTED] (the
"Training Incentive Limit"); and (v) all such Incentives shall be
offered to Distributor on the same terms with respect to a new
territory. For the purposes of this Section 7(b)(i)(E)(iv),
measurement of the Training Incentive Limit shall include the cost
to Distributor should Distributor elect to purchase the same
technical training directly from Company (excluding travel and
lodging costs). In the event Company elects to provide technical
training in excess of the applicable Training Incentive Limit to a
new distributor, Distributor shall be entitled to receive technical
training with a cost to Distributor equal to the difference between
the cost of technical training actually provided and the applicable
Training Incentive Limit, at such times and for such Offices as
Distributor deems appropriate. In the event (A) [CONFIDENTIAL
TREATMENT REQUESTED] or (C) commencing April 1, 1999, and measured
each Quarter thereafter, Distributor has failed to purchase
[CONFIDENTIAL TREATMENT REQUESTED] of Authorized Products and
Authorized Software during the immediately preceding four Quarters,
then Distributor shall not be entitled to any Incentives as a
result of Incentives given by the Company under Sections 7(b)(i),
7(b)(i)(E)(iv), or 7(b)(i)(E)(v), in the case of (A) or (B)
[CONFIDENTIAL TREATMENT REQUESTED] and in the case of (C)for all
portions of Distributor's Area during the succeeding Quarter. For
the purposes of this Section 7(b)(i)(E) only, territory shall not
be limited to a single county in any state but shall mean the
market area that includes multiple counties served by an Office.
(F) Company agrees to promptly notify Distributor in writing (an
"MFN Notice") if the Company has entered into an agreement with any
other authorized distributor of any Authorized Products or
Authorized Software that contains terms and provisions which are
more favorable to such other authorized distributor than those
contained herein (such notice to contain a summary of each more
favorable term and condition). This Agreement shall be deemed to be
automatically amended to reflect any more favorable term or
provision on the same terms and conditions provided to such other
authorized distributor, which terms and conditions shall be
reasonably related to such other more favorable terms and
conditions provided to such other authorized distributor, upon
notice of acceptance by Distributor to the Company within 30 days
of receipt of the MFN Notice.
(G) Company and Distributor agree that notwithstanding anything to
the contrary in the Purchase Agreement or the Prior Distributor
Agreement, Distributor shall not be entitled to any pricing
discounts, promotions or credits for any base change outs,
government system sales, or particular equipment sales or software
downloads except (i) the software credits provided in Section 8.22
of the Purchase Agreement, and (ii) to the extent any such
discounts, promotions or credits are provided to any other
authorized distributor of Authorized Products and Authorized
Software in the United States, excluding sales to the Federal
Government, and then only on the same terms and conditions
applicable to such other authorized distributor with respect to
such discounts, promotions or credits which terms and conditions
shall be reasonably related to such discounts, promotions or
credits.
(ii) CHANGE IN CREDIT TERMS. If, in the Company's reasonable opinion,
Distributor's financial
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condition or payment record indicates the Distributor's inability to
pay amounts due or to become due hereunder,, the Company reserves the
right to change credit terms at any time. If, but only so long as
Distributor is materially delinquent, Distributor becomes materially
delinquent in the payment of any material sum due to Company (other
than amounts being disputed in good faith by Distributor), Company may
suspend performance under this Agreement and may require Distributor to
make payment in advance of any subsequent shipments of Authorized
Products or Authorized Software. By exercising the foregoing right,
Company is in no way waiving any of its other rights and remedies at
law or under this Agreement.
(iii) SECURITY INTEREST. Distributor hereby grants and Company reserves
a purchase money security interest in each Authorized Product in
respect of which the Company has not been paid pursuant to a purchase
order or any lesser amount mutually agreed upon by Company and
Distributor, and any proceeds thereof, for the amount of the purchase
price. At Company's request, Distributor will sign any documents
required to perfect such security interest. Full payment of the
purchase price of the Authorized Product will release the security
interest on that Product and Company will sign documents reasonably
required to evidence or effect release.
(iv) PRICE LISTS. Company has provided Distributor true and correct
copies of the list prices, discounts and transfer pricing by part
number in effect on June 1, 1996. Company agrees to provide to
Distributor, within five days of Distributor's request, a report of the
list prices and transfer prices by part number.
(v) SHIPMENT. Except as otherwise provided herein, Company will ship to
the locations designated in Distributor's purchase order in accordance
with Company's published shipping schedules in effect at the time of
shipment. Company will provide Authorized Products and Authorized
Software to Distributor in an amount at least equal to the
Distributor's forecasts provided to the Company pursuant to Section
7(a)(i). At all times during the period or periods in which Distributor
is not in Material Breach as defined herein, the Company shall provide
Distributor priority in shipment of each order received by Company from
Distributor over all other orders received by Company after receipt of
such order from Distributor, provided Distributor is willing to accept
incomplete orders at Company's request and gives Company at least one
day's advance notice of each $1 million of orders placed during the
last month of a Quarter. Company shall not be liable for any failures
to ship or delays in shipping caused by circumstances described in
Section 18. Company shall use its best efforts to maintain sufficient
inventory in stock to meet Distributor's purchase orders and needs.
Risk of loss shall pass to Distributor F.O.B. Company dock, but Company
will assist Distributor in tracking shipments and processing claims
related to lost or damaged goods. Title to each shipment of Authorized
Products shall pass to Distributor upon receipt by Company of payment
for such shipment as provided in Section 7(a)(v) herein with the
exception of Authorized Software, title to which shall remain vested in
Company at all times as provided by the Software License contained in
Section 14. Company may, in its sole discretion, honor Distributor's
requests to drop ship to installation locations within Distributor's
Area and to expedite shipments, but Company reserves the right to pass
on to Distributor any additional costs incurred as a result of such
requests. Company reserves the right to refuse shipment of Authorized
Products or Authorized Software if Distributor has failed to make
timely payment for prior shipments as required by Section 7(a)(v). In
the event that Company elects to exercise its right not to ship
Authorized Products or Authorized Software by reason of Distributor's
failure to make timely payments for prior shipments or other breaches,
or otherwise places Distributor on credit hold, it shall immediately
notify Distributor as soon as such election is made.
(c) EXPORTS TO AND FROM DISTRIBUTOR'S AREA.
(i) If the location of Distributor's Area so requires, Company shall
at its expense prepare, obtain, and transmit to the parties
concerned such documents as are normally required to export the
Authorized Products and Authorized Software. If such Authorized
Products or Authorized Software should be subject to license or
other authorization for export or reexport, Company shall at its
expense apply for such export or reexport authorization with the
authorities concerned. Distributor undertakes to procure the
information and to supply Company with the duly signed forms
required to obtain such authorization.
(ii) Distributor shall not export or reexport Authorized Products or
Authorized Software without such valid export or
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reexport authorization as may be required, or otherwise violate
any export or reexport restriction imposed by authorities in the
country of origin of such Authorized Products or Authorized
Software or by other authorities concerned.
(iii) Company shall, where applicable, issue Certificates of Origin for
Authorized Products and Authorized Software shipped under this
Agreement, duly verified by the authorities concerned.
8. LIMITED WARRANTY AND RESTRICTION ON ALTERATION.
(a) LIMITED WARRANTY. Company warrants that all Authorized Products sold to
Distributor pursuant to this Agreement will perform in accordance with
Company's written specifications therefor and will be free from defects
in material and workmanship for the period from the date of shipment
F.O.B. Company specified in Exhibit B (the "Warranty Period"), provided
that such Authorized Products are installed in compliance with Company's
written installation specifications, to the extent applicable, and given
normal service and maintenance by Distributor during the Warranty
Period. Company warrants that all Authorized Software licensed or
sublicensed by Distributor pursuant to this Agreement will be free from
any defect that causes a material nonconformity between its performance
as described in the Related Documentation accompanying the Authorized
Software, as specified in Exhibit B, and actual performance during the
Warranty Period for the Authorized Product in which the Authorized
Software is imbedded or otherwise an integral part. Company's obligation
under this warranty shall be limited to repair or replace, at Company's
option, any part(s) of Authorized Products or Authorized Software that
may prove defective under normal and proper use and service for the
Warranty Period. For such repairs and replacements, Distributor shall
pay the cost for shipment to Company's plant; Company shall pay the cost
for shipment from Company's plant. Company agrees to use its best
efforts to ship any repaired or replacement Authorized Product and
Authorized Software within thirty (30) days of the date Company shall
have received the defective Authorized Product or Authorized Software.
This warranty shall not apply to lamps, fuses, batteries or other such
items normally consumed in operation which have a normal life shorter
than the Warranty Period.
(b) DISCLAIMERS. THE WARRANTIES CONTAINED IN THIS SECTION AND IN SECTION 14
ARE IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE.
THESE WARRANTIES SHALL BE VOID AS TO AUTHORIZED PRODUCT OR AUTHORIZED
SOFTWARE DAMAGED OR RENDERED UNSERVICEABLE OR NONFUNCTIONAL BY
NEGLIGENCE OF NONCOMPANY UNAUTHORIZED PERSONNEL, MISUSE, THEFT,
VANDALISM, FIRE, LIGHTNING, POWER SURGES, WATER OR OTHER PERIL, OR ACTS
OF GOD, BY FAILURE OF DISTRIBUTOR TO COMPLY WITH PUBLISHED TECHNICAL
REQUIREMENTS OR BY SERVICES OR PRODUCTS OF OTHER VENDORS, INCLUDING
WITHOUT LIMITATION THE CENTRAL OFFICE LINES OF ANY CENTRAL EXCHANGE
TELEPHONE COMPANY. REPAIR, RELOCATION OR ALTERATION OF THE PRODUCT BY
PERSONS NOT AUTHORIZED BY COMPANY VOIDS THE WARRANTY. LIABILITY OF
COMPANY HEREUNDER IS EXPRESSLY LIMITED TO THE REPAIR OR REPLACEMENT
DESCRIBED ABOVE AND THE REMEDIES PROVIDED IN SECTION 14, AND IN NO EVENT
SHALL COMPANY BE LIABLE FOR ANY INDIRECT, SPECIAL, INCIDENTAL OR
CONSEQUENTIAL DAMAGES, SUCH AS LOST SALES, LOST PROFITS OR INJURY TO
PROPERTY, OR ANY OTHER ECONOMIC DAMAGES RELATING TO THE PERFORMANCE OR
FUNCTIONALITY OF THE AUTHORIZED PRODUCTS OR AUTHORIZED SOFTWARE, WHETHER
THEY ARE ALLEGED TO ARISE IN CONTRACT OR TORT OR OTHERWISE. NO EXPRESS
OR IMPLIED WARRANTY IS MADE AGAINST INTRUSIONS INTO THE AUTHORIZED
PRODUCTS OR AUTHORIZED SOFTWARE BY FRAUDULENT CALLERS OR AGAINST ANY
TOLL FRAUD. COMPANY MAKES NO WARRANTIES AS TO THE LAWFULNESS OF USING
ANY FEATURE OF THE AUTHORIZED PRODUCTS OR AUTHORIZED SOFTWARE TO
MONITOR, RECORD OR FORWARD ANY ORAL, WIRE OR ELECTRONIC COMMUNICATION.
(c) RESTRICTION ON ALTERATION. Company shall not be liable for any warranty
offered by Distributor that differs from the warranty quoted above.
Company does not warrant any Authorized Products or Authorized Software
that have been modified without Company's prior written consent, and
Distributor shall not make or cause or permit to be made, any
alterations or modifications of any Authorized Products or Authorized
Software without the prior written consent of Company. Distributor
agrees to hold harmless and indemnify Company against claims of any kind
related to any unauthorized alterations or modifications of Authorized
Products or Authorized Software made or authorized in writing by
Distributor, or related to warranties by Distributor that differ from
the warranty quoted above.
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(d) SURVIVAL. This Section 8 shall survive termination or expiration of this
Agreement.
9. POST-WARRANTY PERIOD REPAIRS. After the Warranty Period has expired,
Distributor agrees to purchase all of its required repair and replacement
service for Authorized Products and Authorized Software from Company or
Company's authorized subcontractors, , but only so long as the Company's prices
are competitive and Company agrees to provide to Distributor all of
Distributor's required repair and replacement service for Authorized Products
and Authorized Software at Distributor's expense, subject to the provisions
relating to shipping charges below, in accordance with the charges therefor
specified in Company's Authorized Product Price Book. Company agrees that all of
its charges to Distributor for repair and replacement services shall be
competitive and at all times shall be no higher than the prices charged by
Company to any other authorized distributor of any Authorized Products or
Authorized Software in the United States. The Company's repair and replacement
prices shall be deemed to be "competitive" if they are no more than 10% higher
than any published or offered prices for the same repairs or replacements by
another company engaged in the business of making such repairs or replacements.
Distributor shall have no obligation to purchase such services from Company if
it provides Company with documentary evidence that the Company's prices therefor
are not "competitive". For such repairs and replacements, Distributor shall pay
the cost of shipment to Company's plant; Company shall pay the cost for shipment
from Company's plant. Distributor shall adhere to the return procedure described
in Company's Authorized Product Price Book and shall adhere to such other return
procedures as Company shall reasonably require from time to time. Distributor
shall not return any defective Authorized Product or Authorized Software unless
Distributor has properly completed the return forms described in Company's
Authorized Product Price Book. Company agrees to use its best efforts to ship
repaired or refurbished Authorized Products or Authorized Software to
Distributor within thirty (30) days of the date Company shall have received the
defective Authorized Products or Authorized Software at its plant. If Company
has not shipped the repaired or refurbished Authorized Product or Authorized
Software within forty (40) days of the date Company shall have received the
defective Authorized Product or Authorized Software at its plant, the repair
charge shall be reduced as specified in Company's Authorized Product Price Book.
Under no circumstances shall Company be liable for any consequential or other
damages resulting from failure to ship repaired or refurbished Authorized
Products or Authorized Software within thirty (30) days other than any direct
damages to Distributor arising from failure of Company to ship repaired or
Authorized Software within sixty (60) days of receipt by Company.
Notwithstanding the foregoing, if Distributor is in Material Breach of any of
its payment obligations to Company, Company reserves the right to require
Distributor to make payment for post-Warranty Period repairs before Company
ships repaired or replacement Authorized Products or Authorized Software. By
exercising the foregoing right, Company is in no way waiving any of its other
rights and remedies at law or under this Agreement.
10. COMPANY'S RESERVATION OF RIGHTS. Company reserves the right at any time to:
(a) discontinue, modify or upgrade existing Authorized Products and
Authorized Software; provided, however, that Company shall notify
Distributor ninety (90) days in advance of any product discontinuance,
shall directly or indirectly provide factory repairs for such product to
Distributor for a period of seven (7) years from its discontinuance, and
shall directly or indirectly provide spare parts, replacement equipment,
Authorized Software and Related Documentation and all other equipment,
software, diagnostics and manuals required to service and maintain the
Authorized Products, Authorized Software and Related Documentation for
such product to Distributor for a period of five (5) years from its
discontinuance;
(b) nondiscriminatorily sell to Distributor any Authorized Products and
Authorized Software of the Authorized Trademark brands of which
Distributor is an Authorized Distributor, based upon Distributor's
ability to sell, install, or service the same; and
(c) make Distributor's rights under this Agreement subject to the
Cross-Territorial Policy, NAP, CAP, FAP and HCAP, each of which Company
reserves the right to amend as provided therein from time to time
whenever Company in its reasonable discretion determines such amendment
to be advisable.
11. SALES AND SERVICE OUTSIDE DISTRIBUTOR'S AREA. Distributor is an authorized
distributor of Authorized Products and Authorized Software only in Distributor's
Area, except as specifically provided otherwise in this Agreement. In the event
that Distributor sells any Authorized Products or licenses any Authorized
Software for installation outside Distributor's Area, Distributor shall comply
with the Cross-Territorial Policy regarding such sale and the related
installation and service requirements in effect at the time of the sale. Nothing
contained herein shall limit or restrict Distributor's ability to sell other
products and services outside Distributor's Area.
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Effective July 1, 1998 (except in relation to item c(i) hereof which is
effective April 1, 1998), Company agrees that if (a) another authorized
distributor ceases to have exclusive rights to sell and license the Authorized
Products and Authorized Software in any area of the United States not included
in Distributor's Area or has been terminated as a distributor in such area
("Expansion Area"), (b) Distributor is not in Material Breach, and (c)
Distributor is either (i) entitled to the highest discount level under Section
7(b)(i) at the time of such termination, or (ii) Company offers to another
authorized distributor of Authorized Products and Authorized Software who has
not purchased amounts of such Authorized Products and Authorized Software equal
to or exceeding its Quota for the same period during which Distributor's
purchases would be measured under Section 7(b)(i), the nonexclusive rights to
sell and license the Authorized Products and Authorized Software in the
Expansion Area, then the Company shall offer to Distributor the right to
negotiate with Company and Company shall negotiate with Distributor in good
faith for a period of 30 days a Quota for the Authorized Products and Authorized
Software in the Expansion Area in order that Company may expand Distributor's
Area to include the Expansion Area on a non-exclusive basis and if the parties
agree on a Quota, this Agreement shall be amended to include the Expansion Area.
The parties acknowledge and agree that this paragraph of Section 11 shall not
apply to any area listed on Exhibit M hereto if Norstan Communications is being
offered or granted nonexclusive rights in such area. Company agrees that it
shall not require terms and conditions, including additional Quota for the
Expansion Area, less favorable to the Distributor than that offered to third
party distributors in similar areas for similar products.
Notwithstanding anything in this Agreement to the contrary, Distributor shall be
permitted to sell, market, service, maintain and license any products, software
or services, including without limitation, Competing Products (as defined in the
Prior Agreement) or any other products or services of any type whatsoever in any
territory whatsoever including in Distributor's Area, and to any individual or
entity whatsoever.
Provided Distributor has made actual aggregate purchases of Authorized Product
and Authorized Software sufficient to qualify for the pricing and terms provided
under the second sentence of Section 7(b)(i)(B) or the second sentence of
Section 7(b)(i)(C), whichever is applicable, for the relevant period at the time
of measurement, then in the event the Company determines to (i) acquire control
of another of Company's authorized distributors or (ii) otherwise assume the
territory of any other distributor, (any of the foregoing a "Transaction"), the
Company will give written notice to the Distributor of such Transaction and
afford the Distributor a thirty day period in which to negotiate a transaction
with such other distributor pursuant to which Distributor would directly or
indirectly assume control of or assume the territory of such other distributor
before the Company gives its consent or consummates such Transaction itself.
Upon the request of Distributor at any time, Company will promptly set forth in
writing to Distributor the terms, if any, pursuant to which the Company will
approve a potential similar Transaction by Distributor, including the additional
Quota it would require the Distributor to assume in connection with such similar
Transaction.
12. CONSENT OF COMPANY REQUIRED.
(a) Distributor shall not, without the prior express written consent of Company,
which consent shall not be unreasonably withheld:
(i) assign, delegate, sell or transfer this Agreement or any rights or
obligations created by it; with respect to any one or more counties in
Distributor's Area, except (A) in connection with a sale or transfer
of the business of selling to and servicing the customer base in such
county or counties or in connection with the sale of Distributor, (B)
to any lender providing financing to the Distributor as contemplated
by the Purchase Agreement or any refinancing thereof, pursuant to
security arrangements entered into in connection with such financings
or refinancings, or (C) to any transferee of any such lender upon
exercise of any of such lender's remedies pursuant to security
arrangements contemplated in (B) above.
(ii) appoint any subdistributor or dealer for Authorized Products or
Authorized Software in any county in Distributor's Area.
(b) Distributor shall not, unless Company has given its prior written consent,
which may be withheld in Company's sole discretion, offer, agree to or permit
any sale (including any merger or consolidation) of Distributor or of
substantially all of its business or assets to Intertel Corporation or Mitel
Corporation, or any of their successors or direct or indirect majority-owned
subsidiaries, prior to May 31, 1999; provided, however, that the provisions of
this subsection (b) shall automatically terminate upon an initial public
offering of common stock of Distributor.
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13. CONFIDENTIALITY.
(a) NONDISCLOSURE. Without the prior express written consent of Company or
Distributor, as the case may be, Distributor or Company, as the case may
be, shall not disclose to any third party any confidential business
information or trade secrets of the other, including but not limited to:
Company product design information, product technical manuals, product
technical bulletins, or Company or Distributor pricing, customer lists
or other customer information, and financial information. In addition,
each of the Company and Distributor, as the case may be, shall not use
any confidential business information or trade secrets of the other
except as expressly permitted herein. Company and Distributor recognize
the necessity of disseminating selected information included in the
above documents to customers or prospective customers in the sales
process. Company agrees that Distributor may provide this information to
customers and prospective customers in the sales process without
Company's prior express written consent and Distributor and Company
agree to use their best efforts to protect the confidentiality of all
confidential information of the other party (including without
limitation taking such actions as such party would take to protect its
own confidential information).
(b) NO REVERSE ENGINEERING. Distributor shall not engage in cause to be
engaged in, or permit any reverse engineering of Authorized Products or
Authorized Software or Other Company Products. Reverse engineering is
defined as attempting through analysis of component parts and/or
software to define the functionality of the components or software, and
thereby gain the ability to alter or reproduce that functionality.
(c) SOFTWARE. Distributor hereby acknowledges that the Authorized Software
and Related Documentation listed in Exhibit B and software contained in
Other Company Products are proprietary to Company and constitute trade
secrets of Company. All applicable rights to patents, copyrights,
trademarks, and trade secrets are and shall remain in Company.
Distributor agrees to use reasonable diligence to protect the
confidentiality and proprietary rights of Company in the Authorized
Software and Related Documentation, and not to disclose the Authorized
Software or Related Documentation to any third party. Distributor shall
also promote compliance with the terms and conditions of this Agreement
by employees and agrees to place the software sublicense language in
Exhibit K in its sales contracts with its customers. Distributor agrees
to maintain records of these software sublicense agreements and to
represent Company's interest in the protection of its rights to the
Authorized Software to the extent not in conflict with Distributor's
rights or interests. In the event that Company has reason to believe
Distributor's customer has violated the software sublicense agreement,
Distributor will make available to Company these records on a customer
specific basis.
(d) SURVIVAL. Distributor's and Company's obligations under this
confidentiality provision shall survive termination or nonrenewal of
this Agreement.
14. SOFTWARE LICENSE.
(a) LICENSE. The Company owns, or has licensed from the owner, the
Authorized Software and any other proprietary interests in the
Authorized Products and related materials and has the right to license
such Authorized Software and proprietary interests to Distributor and
end-users. Subject to the terms and conditions contained herein, Company
grants Distributor a non-exclusive license to use, in object code form,
all Authorized Software and Related Documentation as contemplated by
this Agreement. This grant shall be limited to use in connection with
the sale and service of the Authorized Products as contemplated by this
Agreement. This license shall continue until the license is terminated
in accordance with this Agreement, or for the useful life of the
Authorized Product in which the Authorized Software is imbedded or of
which the Authorized Software is an integral part, or for the useful
life of the Authorized Software, whichever is longer. Removal of the
Authorized Software from the United States by Distributor, service by
any unauthorized person at the direction of Distributor, use by
Distributor of the Authorized Software on any Authorized Product other
than that for which it was obtained or authorized, or on any
non-Authorized Product, shall constitute a breach of this Section 14 by
Distributor. Except as provided in the Purchase Agreement or as provided
in Sections 9 and 10, the software license will terminate on expiration
or termination of this Agreement.
(b) MODIFICATION AND COPIES. Distributor may not modify or copy the
Authorized Software or Related Documentation without prior written
consent of Company. Distributor agrees to refrain from taking any
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steps, including without limitation reverse engineering, reverse
assembly or reverse compilation, to derive a source or object code
equivalent of the Authorized Software, or for any other purpose.
(c) INDEMNIFICATION. Company agrees that, if notified promptly and given
sole control of the defense and all related settlement negotiations, it
will indemnify and defend Distributor or its customers who have executed
a software license or sublicense set forth in Exhibit K or L against any
claim based on an allegation the Authorized Software infringes a valid
U.S. patent, copyright or trademark. Company, expressly conditioned upon
the obligations of Distributor under a software sublicense set forth in
Exhibit K, will pay any resulting costs, damages and attorneys' fees
awarded by a court with respect to any such claim against Distributor or
its customers. Company shall have no obligations under this Section in
the case of claims resulting from modifications to the Authorized
Software made by Distributor, end-users, or others, or combinations with
software or equipment provided by others. If any Authorized Software
becomes, or in Company's opinion is likely to become, the subject of
such claim of infringement, Company will, at its expense, either, at its
option, procure rights for Distributor and its customers who have
executed a software license or sublicense to continue using the
Authorized Software, or replace or modify the Authorized Software to
provide noninfringing software that performs substantially similar
functions to the original Authorized Software. Upon failure of the
foregoing provisions of this subsection (c), Company will refund the
purchase price of the Authorized Product or license fee for the
Authorized Software less a reasonable allowance for use. THIS SECTION
STATES THE ENTIRE LIABILITY OF COMPANY FOR INFRINGEMENT BY ANY
AUTHORIZED SOFTWARE PROVIDED HEREUNDER.
(d) COMPANY LICENSING. Notwithstanding anything to the contrary in this
Agreement, Company may require at any time upon reasonable notice to
Distributor that any of the Authorized Software must be remotely
downloaded from the Company directly to the Distributor's customer and
that Distributor's customer must execute a separate software license
with the Company, substantially in the form of Exhibit L hereto,
directly licensing such Authorized Software and updates and revisions
thereof. If the Company exercises such right, it will make timely
downloads, will in no way interfere with Distributor's relationship with
such customers or any sales opportunity, will not use any information
regarding such customers except as expressly set forth herein, and will
treat as and keep all such information confidential.
(e) SURVIVAL. This section shall survive termination of this Agreement.
15. TERMINATION OF AGREEMENT.
(a) This Agreement will expire on December 31, 2001, unless earlier
terminated for Material Breach as defined in Section 15(b).
(b) This Agreement may be terminated by either party for Material Breach no
less than 90 days after mailing written notice of termination to the
other party as provided in subsection (c) below. Material Breach of this
Agreement shall mean:
(i) failure of Distributor to make aggregate actual purchases of
Authorized Products and Authorized Software [CONFIDENTIAL
TREATMENT REQUESTED] in all cases on the same basis as Quota is
measured (the amount, if any, by which any amount stated herein
exceeds Distributor's aggregate actual purchases for the
relevant period being referred to as the "Shortfall Amount");
(ii) material breach of Section 3, 4, 5, 9, 11, 12, 13, and/or 14 of
this Agreement by Distributor;
(iii) material breach of Section 2, 7(b), 8(a) ), 9, 11 (other than
the fourth paragraph), 13(a) or 14 by the Company;
(iv) dissolution, insolvency, bankruptcy of, or appointment by a
court of a permanent or temporary receiver for, Distributor or
Company; or a general assignment of a substantial portion of
Distributor's or Company's assets for the benefit of creditors
other than an assignment of assets as collateral for a loan in
the normal course of business;
(v) material failure to pay Distributor's accounts in accordance
with the terms of sales by Company to Distributor; or
(vi) failure of Company to provide Authorized Products and Authorized
Software that are competitive in the marketplace in functions,
features and price for a period of six consecutive months.
(c) In the event that either party contends the other party is in Material
Breach of any of its obligations to the other party under this
Agreement, the party claiming Material Breach will provide written
notice by certified mail that specifically itemizes each and every
obligation of which the party contends the other party is in Material
Breach. Subject to the next sentence, in the event that the
nonterminating party fails to cure the
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breach within ninety (90) days of receipt of such notice, the
termination shall become effective. In order to cure a breach
described in Section 15(b)(i), Distributor must make purchases of
Authorized Products and Authorized Software, within the 30 days
following receipt of such notice, equal to the applicable Shortfall
Amount, which purchases shall be applied only to the Quarter
immediately preceding such purchases, or such termination shall become
effective.
16. DISTRIBUTOR'S OBLIGATIONS UPON TERMINATION. In the event of termination of
this Agreement, whether by non-renewal or for Material Breach, Distributor
shall:
(a) immediately pay all obligations for Authorized Product and Authorized
Software delivered to Distributor prior to termination when they are due
and payable to Company, subject to appropriate credits and off-sets;
(b) except as provided in the Purchase Agreement, immediately insofar as
reasonably possible discontinue any and all uses of the Authorized
Trademarks and Authorized Name as defined in Exhibit C, if any,
including:
(i) cancel all governmental certificates or licenses reserving or
registering Distributor's use of the Authorized Trademarks or
Authorized Name, if any;
(ii) remove the Authorized Trademarks or Authorized Name, if any,
from its premises, vehicles, sales proposals, stationery,
telephone directory listing, and other advertising and
promotional material;
(iii) change its corporate and trade name to delete any use of the
Authorized Trademarks, Authorized Name, or any name likely to
cause confusion with any Authorized Trademarks;
(c) not adopt the use of any mark or name deceptively similar to any
Authorized Trademarks, other than as provided in the Purchase
Agreement; and
(d) execute any documents or take any other reasonable steps which will help
transfer to Company ownership of all goods repurchased, free and clear
of any liens, encumbrances or security interests.
It is understood and agreed that (i) in the event of a Material Breach of
this Agreement by Distributor solely pursuant to Section 15(b)(i) or a
Material Breach by Company pursuant to Section 15(b)(vi), the other party's
sole remedy is to terminate this Agreement in accordance with the terms and
procedures hereof and that neither party shall have any obligations under
this Agreement (and neither party shall have any claims against the other)
arising from such Material Breach of this Agreement pursuant to Section
15(b)(i) and Section 15(b)(vi) other than provided in this Section 16 above.
17. COMPANY'S OBLIGATIONS AND DISTRIBUTOR'S OPTIONS UPON TERMINATION.
(a) In the event of termination of this Agreement whether by non-renewal or
Material Breach, Company:
(i) may at Company's option cancel all unfilled orders except those
for such Authorized Products and Authorized Software that have
been sold previously by Distributor to customers, as evidenced
by signed customers' orders submitted by Distributor to Company
at least twenty (20) days prior to the effective termination
date;
(ii) if Distributor so elects, may within thirty (30) days after
written notification by Distributor of its existing inventory,
purchase from Distributor at Distributor's cost less a
reasonable allowance for use or damage, if any, plus freight,
either for cash or by set off against debt or trade receivables
owed by Distributor to Company, any or all of the Authorized
Products and Authorized Software. In the event that Distributor
elects to sell its inventory of Authorized Products and
Authorized Software and Company elects to purchase this
inventory, Distributor will allow Company to inspect this
inventory;
(iii) shall continue to directly or indirectly provide to Distributor
factory repairs for a period not to exceed seven (7) years from
the effective date at which the Authorized Products are
discontinued for new system sales, or indefinitely in the case
of Authorized Products not yet discontinued, so that Distributor
can continue to service and maintain its end-user customers.
Orders for factory repairs must be placed with Company at least
30 days in advance of the requested shipment date. The order
must be paid in full prior to shipment. Prices will be at the
then current Distributor Net Price for the Product Group.
Company will continue to honor its warranty obligations;
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(iv) shall continue to directly or indirectly provide to Distributor
at its request necessary spare parts, replacement parts,
replacement copies of Authorized Software and Related
Documentation and all other equipment, software, diagnostics and
manuals required to continue to service and maintain the
Authorized Products, Authorized Software and Related
Documentation, for a period not to exceed five (5) years from
the effective date at which the Authorized Products are
discontinued for new system sales, or indefinitely in the case
of Authorized Products that are not yet discontinued, so that
Distributor can continue to service and maintain its end-user
customers. Purchase orders for spare parts, replacement
equipment and software and documentation must be placed with
Company at least 30 days in advance of the requested shipment
date. The order must be paid in full prior to shipment. Prices
will be at a 60% discount off Company's list price for such
parts; and
(v) immediately pay all obligations to Distributor when they are due
and payable, subject to appropriate credits and set-offs.
(b) Company's obligations upon termination and Distributor's options set
forth in this Section 17 are specifically conditioned upon
Distributor's compliance with its obligations upon termination set
forth in Section 16 above, and with Sections 3, 13, and 14, and all
other provisions of this Agreement that are expressly made applicable
following termination. In the event Distributor breaches any provision
of Sections 3, 13, 14, or 16, or any other applicable provision of this
Agreement after receipt of written notice of nonrenewal or termination
from Company, and Distributor fails or refuses to cure such breach
within the stated cure period (or 30 days from receipt of notice of
such breach if no such cure period is stated), Company may, at its sole
option, provide written notice to Distributor that any and all rights
of Distributor set forth in this Section 17 are thereby forfeited, and
all of Company's obligations under this Section 17 shall immediately
cease as of (1) the date set forth in such notice, or (2) the date by
which such breach must be cured and the same remains uncured, whichever
date is later.
(c) A proper termination or nonrenewal of this Agreement in accordance with
the terms hereof shall not give rise to any liability for compensation,
reimbursement or damages, including but not limited to claims of loss
of clientele, prospective profits or anticipated sales, or for other
consequential, incidental or indirect damages. If either party claims
that a termination or nonrenewal of this Agreement is improper, such
party shall so notify the other party in writing, setting forth the
basis for the party's claim that the termination or non-renewal is
improper, within thirty (30) days of receipt of the notice of
termination, and in such event the other party shall have the option of
rescinding the termination or nonrenewal within the fifteen (15) days
following receipt of such written notification from such party without
any liability to such party for an improper termination or nonrenewal.
If either party fails to so notify the other party of such claim of
improper termination or nonrenewal, then such party agrees that it
shall have waived its rights to challenge the termination thereafter,
and the other party shall have no liability to such party in respect of
such termination or nonrenewal. Except as provided in this Section (c),
nothing shall limit the Company's or Distributor's rights to damages or
other legal or equitable remedies for any breach of this Agreement by
the other. In the event of litigation or other alternative dispute
resolution proceeding arising from any such claim of improper
termination, Company and Distributor agree that the prevailing party
shall be entitled to collect from the non-prevailing party
reimbursement for all of its costs and reasonable attorneys' fees
incurred in defending or bringing such litigation or proceeding.
18. FORCE MAJEURE. Either party may be excused from timely performance hereunder
if and to the extent such performance is delayed or prevented by fire,
flood, earthquake or other Act of God, strike, lock-out or labor dispute not
involving the party, act of war, civil disturbance or any similar event or
occurrence beyond the reasonable control of the party delaying or preventing
its performance. Performance shall be resumed as soon as reasonably possible
after the event or occurrence has been remedied. If performance is delayed
or suspended for more than 90 days, and such delay or nonperformance would
be a Material Breach except for the provisions of this Section, then the
party entitled to the performance shall have the rights set forth in Section
15.
19. COMPLETE AGREEMENT AND NO ORAL MODIFICATION. This Agreement constitutes the
complete agreement between the parties, and supersedes all previous
agreements between the parties other than the Government Systems Agreement
dated as of February 28, 1998, the Settlement, Release and Covenant Not to
Sue Agreement dated effective March 30, 1998, and notes, credit, loan,
shareholder, lease, sublease or security agreements, and guarantees.
Distributor has paid no fee in connection with this Agreement. The headings
of sections of this Agreement are included merely for the convenience of the
parties, and shall not be construed
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as part of the Agreement. This Agreement and any exhibits, schedules or
attachments may be modified only by a written agreement signed by both
parties.
20. CHOICE OF LAW AND FORUM. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of New York. Except as provided in
Section 26, any dispute arising under this Agreement that cannot be resolved
by agreement shall, whenever diversity or subject matter jurisdiction
exists, be submitted to the United States District Court in the Southern
District of New York, and the parties consent and submit to the personal
jurisdiction of such court. The prevailing party in any litigation,
arbitration, or other proceedings arising out of this Agreement shall be
reimbursed for all reasonable costs and expenses incurred in such
proceedings, including reasonable attorneys' fees.
21. NO WAIVER. A waiver of any breach or default of this Agreement shall not be
deemed to constitute a waiver of any subsequent breach or default.
22. SEVERABILITY. If any of the terms or provisions of this Agreement or the
application thereof to any person or circumstance shall, for any reason or
to any extent, be held or determined to be invalid or unenforceable, the
remainder of this Agreement and the application of such provisions to other
persons or circumstances shall not be affected thereby, but rather shall be
enforced to the greatest extent permitted by law.
23. NOTICE. Any notice required by this Agreement shall be made in writing,
signed by a duly authorized agent of the party giving the notice, and
delivered by hand or deposited in the United States mail, first class,
postage prepaid, unless specifically required to be by certified mail, and
addressed as follows.
If to Company: EXECUTONE Information Systems, Inc.
478 Wheelers Farms Road
Milford, Connecticut 06460
Attention: President
With a copy to: EXECUTONE Information Systems, Inc.
478 Wheelers Farms Road
Milford, Connecticut 06460
Attention: General Counsel
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If to Distributor: Claricom, Inc. d/b/a/
EXECUTONE Business Solutions
478 Wheelers Farms Road
Milford, Connecticut 06460
Attention: President
With a copy to: Claricom, Inc. d/b/a/
EXECUTONE Business Solutions
478 Wheelers Farms Road
Milford, Connecticut 06460
Attention: Corporate Counsel
and to Ropes & Gray
One International Place
Boston, MA 02110
Attn: Joel Freedman
and to Bain Capital, Inc.
Two Copley Place
Boston, MA 02116
Attention: Mr. J. Lavine and Mr. D. Poler
24. RELATIONSHIP OF PARTIES. Distributor is an independent contractor. Nothing
in this Agreement shall be construed to mean that Distributor is an agent,
employee, franchisee or subcontractor of Company. This Agreement shall not
be construed to create any rights or obligations of any person or entity
other than the parties.
25. CONSTRUCTION; DEFINITION. For purposes of this Agreement, including all
exhibits hereto, the Company shall mean EXECUTONE Information Systems, Inc.,
a Virginia corporation, its subsidiaries and any person that directly or
indirectly controls, is controlled by or is under common control thereof and
any successors and assigns thereof.
26. ARBITRATION. Any controversy relating to the phrase "reasonably related to"
in Section 7(b)(i) that cannot be settled by mutual agreement shall be
finally settled by arbitration as follows: Any party who is aggrieved shall
deliver a notice to the other party hereto setting forth the substance of
the dispute. Any points remaining in dispute 10 days after the other party's
receipt of such notice shall be submitted to binding arbitration in the
State of Connecticut before a single arbitrator with industry experience
mutually agreeable to the parties, and failing such agreement, appointed in
accordance with the American Arbitration Association Arbitration Rules (the
"Rules"), modified only as herein expressly provided. The arbitrator may
enter a default decision against any party who fails to participate in the
arbitration proceedings after having been notified of the proceedings. The
arbitrator will be instructed to render a decision within ten business days.
The decision of the arbitrator on the points in dispute submitted to him
will be final, unappealable and binding, effective for all purposes as of
the date of the controversy (as determined by such arbitrator). In any
arbitration under this Section, the non-prevailing party shall pay the
expenses of the arbitration, including its own and the prevailing party's
fees and expenses (including reasonable attorneys' fees).
27. AUTHORIZATION AND EXECUTION. The parties and the persons signing this
Agreement represent and warrant that those persons are fully authorized to
enter into the terms and conditions of, and to execute, this Agreement on
behalf of the respective parties.
COMPANY: DISTRIBUTOR:
EXECUTONE INFORMATION SYSTEMS, INC. CLARICOM, INC.
By: _______________________________ By: ___________________________
_______________________________ ____________________________
Its:_______________________________ Its: _____________________________
(Corporate Seal)
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DESCRIPTION OF EXHIBITS
EXHIBIT A Distributor's Authorized Area
EXHIBIT B Distributor's Authorized Products and Authorized Software
EXHIBIT C Distributor's Use of Company's Trademarks
EXHIBIT D Cross Territorial Policy
EXHIBIT E National Accounts Policy
EXHIBIT F Federal Accounts Policy
EXHIBIT G CCM Accounts Policy (Not Applicable)
EXHIBIT H Health Care Accounts Policy (Not Applicable)
EXHIBIT I Distributor's Forecast Form
EXHIBIT J Nonexclusive Distributor's Quota
EXHIBIT K Software License Form
EXHIBIT I Software License Form
EXHIBIT M Areas Exempt from Certain Provisions of Section 11
[EXHIBITS OMITTED]
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EXHIBIT 11
EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
- -------------------------------------------------------------------------------
1997 1996 1995
-------------------------------------------------
<S> <C> <C> <C>
Income (Loss) From Continuing Operations
Before Extraordinary Item $ (221) $ 24,162 $(36,934)
Extraordinary Item, Net of Taxes --- (355) ---
------------ ---------- -------------
Net Income (Loss) $ (221) $ 23,807 $(36,934)
========= ======== ========
Earnings (Loss) Per Share:
Income (Loss) Before Extraordinary Item $ --- $ 0.47 $ (0.79)
Extraordinary Item --- (0.01) ---
------------ --------- ------------
Net Income (Loss) $ --- $ 0.46 $ (0.79)
=========== ========= =========
Diluted Earnings (Loss) Per Share:
Income (Loss) Before Extraordinary Item $ --- $ 0.46 $ (0.79)
Extraordinary Item --- (0.01) ---
------------ ---------- ------------
Net Income (Loss) $ --- $ 0.45 $ (0.79)
=========== ========= =========
Average Common Shares Outstanding:
Basic 49,655 51,712 46,919
======== ======== ========
Diluted 49,655 52,251 46,919
======== ======== ========
</TABLE>
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EXHIBIT 13
ANNUAL REPORT TO SHAREHOLDERS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
EXECUTONE Information Systems, Inc. (the Company) develops, markets and supports
voice and data communications systems. Products and services include telephone
systems, voice mail systems, inbound and outbound call center systems and
specialized healthcare communications systems. The Company's UniStar
Entertainment indirect subsidiary has the exclusive right to design, develop and
manage the National Indian Lottery (NIL). The Company's products are sold under
the EXECUTONE'r', INFOSTAR'r', IDS'tm', LIFESAVER'tm' and INFOSTAR/ILS'tm' brand
names through a national network of independent distributors and company direct
sales and service employees.
Revenues are derived from product sales to distributors, direct sales of
healthcare products, and direct sales to national accounts and 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, national account and government customers.
1997 COMPARED TO 1996
Results of Operations
On May 31, 1996, the Company sold substantially all of its direct sales and
services organization, including its long-distance reseller business
(hereinafter referred to as the "sale of the direct offices"), for consideration
valued at $69.6 million to Clarity Telecom Holdings, Inc. d/b/a Executone
Business Solutions (Clarity, subsequently known as Claricom). As a result of the
business sales and dispositions consummated during the first half of 1996,
including the sale of the direct offices, the financial results for 1997 are not
comparable to 1996, other than on certain measures of overall profitability.
During 1997, the Company generated approximately $0.1 million in operating
income compared to an operating loss of $3.4 million in 1996. The Company had a
net loss of $0.2 million, or $0.00 per share in 1997, compared to a net loss of
$2.6 million, or ($0.05) per share in 1996, excluding the gain on the sale of
the direct offices.
The 1997 results, while improved over 1996, were not in line with the Company's
expectations. Increased revenues achieved by the Healthcare Communications
business in 1997 along with the non-recurring expenses incurred in the first
half of 1996 relating to the sale of the direct sales offices were the primary
reasons for the year over year improvement. However, these favorable variances
were largely offset by the much lower than anticipated sales levels to the
Company's largest distributor.
Computer Telephony
The mission of the Computer Telephony (CT) business is to develop and distribute
telephony products that are easy to install, easy to maintain, easy to use and
create value for its customers. CT offers a complete portfolio of applications
built upon the IDS'tm' family of digital telephone systems. Products range from
PBXs for small to medium-sized businesses to standards-compliant computer
telephony applications, LAN and Internet-based applications, including voice
mail, unified messaging, automatic call distribution (ACD), callback predictive
dialing and wireless communications. This business targets the
under-400-extension market segment. Customers range from small companies with
fewer than ten employees to large national accounts and government agencies.
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CT markets its products through independent distribution and direct sales. The
direct sales effort focuses on product and service sales to National and
Government Accounts. The Company utilizes its independent distribution channel
to service and install direct company sales through a National Account Service
Arrangement with the independent channel. CT had 1997 revenues of $117.2
million, compared to $129.4 million in 1996. The decrease in revenue is due to a
$16.0 million decrease in sales to Claricom, the purchaser of the direct offices
and the Company's largest distributor during 1997. For comparability, the 1996
revenue includes sales revenue to the former direct sales and service
organization prior to the sale. Excluding Claricom, the remainder of the
independent distribution channel increased revenue by $6.4 million, or 22%,
compared to 1996. Revenues from the retail portion of CT were largely stable
year over year. Repair revenue decreased approximately $2 million, primarily due
to lower Claricom activity, and LCR revenues increased almost 50% to $1.8
million.
The reduced level of sales to Claricom, the Company's largest distributor, had a
significant impact on the financial results for 1997. Effective April 1, 1998,
Claricom became a non-exclusive distributor of the Company's products in all
parts of its territory. It is the Company's intention to supplement sales in the
Claricom territories with additional distribution. The Company has identified
other distributors to sell the Company's products in certain parts of Claricom's
territory, which will give the Company the ability over time to increase
revenues by adding alternative distribution in Claricom territories.
Since Claricom accounted for more than 10% of the Company's revenues in 1997 and
is expected to continue to represent a large portion of the Company's revenues,
the reduction of sales to Claricom could have a material adverse effect on the
Company if the Company could not supplement the shipments to the Claricom
territories with other alternative distribution. The Company believes that
within a reasonable period of time it can establish alternative distribution
channels in Claricom's major markets to supplement the reduced volume from
Claricom. However, the Company cannot state with certainty when, or the extent
to which, such alternative distribution arrangements will be completed or their
effect on revenues.
Healthcare Communications
The mission of the Healthcare Communications business is to provide a full array
of solutions that enable healthcare facilities to realize a substantial savings
in operating costs without compromising the quality of patient care. Integrated
on the scaleable Healthcare Communications Platform (HCP), healthcare products
are designed to improve patient care quality, prevent technological obsolescence
and increase staff productivity. Products range from traditional nurse call
systems, intercoms and room status indicators to more sophisticated patient
reporting systems, infrared locating systems and wireless technologies. All of
these products can be seamlessly integrated to enhance a facility's
communications and information networking. Healthcare customers include
hospitals, surgical centers, nursing homes and assisted living centers.
Revenues for 1997 were $39.0 million compared to $30.2 million in 1996 due to an
increase in new installations, system upgrades and expansions.
Other Matters
Interest expense decreased to $2.0 million in 1997 from $2.7 million in 1996 due
to a decrease in the debt outstanding during 1996 after the sale of the direct
offices. The proceeds of the sale in 1996 were used to repay the then entire
outstanding balance on the Company's revolving credit facility. Other income,
net, decreased by $0.3 million compared to 1996 primarily due to lower interest
income on invested cash.
The Company accounts for income taxes in accordance with FAS No. 109,
"Accounting for Income Taxes". For the year ended December 31, 1997, the Company
recorded a tax benefit of $0.1 million. The tax benefit for the year increased
the deferred tax asset reflecting an increase in tax benefits to be utilized in
the future. As of December 31, 1997, the deferred tax asset of $18.6 million
represents the expected benefits to be received from the utilization of tax
benefit carryforwards. The Company believes that the deferred tax asset will
more likely than not be recognized in the carryforward periods.
For the years ended December 31, 1997 and 1996, more than 10% of the Company's
revenues were derived from a single
2
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independent distributor, Claricom. Revenues, net of discounts, were $29.3
million and $31.7 million for 1997 and the seven-month period after the sale of
the direct sales and service organization in 1996, respectively. Had the sale to
Claricom taken place at the beginning of 1996, it is estimated that Claricom
revenues for 1996 would have been $45.3 million. This includes $13.6 million in
sales to the former direct sales and service organization prior to the sale to
Claricom. See "Computer Telephony" above. In 1997, the Company adopted FAS No.
128, "Earnings per Share," effective for periods ending after December 15, 1997.
As a result, the Company's reported earnings per share for prior years were
restated. The effect of this accounting change on previously reported earnings
per share data was to increase 1996 basic earnings per share by $0.01 compared
to the original calculation of primary earnings per share pursuant to APB No.
15. Earnings per share did not change for 1997 or 1995.
During 1996, the Company adopted FAS No. 123, "Accounting for Stock-Based
Compensation". In compliance with the provisions of the new statement, the
Company has elected to continue to apply APB Opinion 25 in accounting for its
stock compensation plans and, accordingly, has not recognized compensation
expense for its plans. If compensation cost had been determined in accordance
with FAS No. 123, net income would have been reduced by $0.2 million, $0.1
million and $0.3 million for 1997, 1996 and 1995, respectively. The change in
earnings per share would have been immaterial for each of the three years.
The Company has conducted a review of its computer systems to identify systems
that could be affected by the "Year 2000" issue. Systems that do not properly
recognize such information could generate erroneous data or fail. Although the
Company estimates the cost to resolve the Year 2000 issue through its current
software system is less than $0.5 million, it has decided as part of its
long-term information systems plan to convert to a new and more comprehensive
software system which will cost approximately $2 million, including installation
and data conversion costs. These costs will be capitalized and depreciated over
the expected service life of the system beginning in 1999. The Company believes
that the conversion to new software will resolve the Year 2000 issue. However,
if the conversion is not completed timely, the Year 2000 problem may have a
material impact on the operations of the Company.
Unistar
On December 19, 1995, the Company acquired 100% of the common stock of Unistar
Gaming Corporation (Unistar Gaming) for 3.7 million shares of the Company's
common stock valued at $5.4 million and 350,000 shares of newly issued preferred
stock valued at $7.3 million. Unistar Gaming was privately-held prior to the
acquisition. Its subsidiary, UniStar Entertainment, Inc. (UniStar), has an
exclusive five-year contract ending January 2003 to design, develop, finance and
manage the NIL for the Coeur d'Alene Tribe of Idaho ("CDA" or "the Tribe"). See
Note L of the Notes to Consolidated Financial Statements for the terms of the
agreement with the Tribe.
The initial goal of the investment in UniStar was to establish and manage a
telephone lottery that could be played by any individual of majority age,
residing in one of the 36 states or the District of Columbia that currently
operates a state-run lottery. In the original telephone-based lottery, it was
contemplated that calls via an 800 number would be processed with interactive
voice response equipment or live agents located on the Tribe's Reservation in
Idaho using ACD software to process nationwide lottery sales. The NIL business
plan has evolved in response to legal challenges to encompass Internet-based
instant lottery games, and as of January 1998, a local, non-toll-free telephone
and Internet-accessible weekly draw lottery. The Company has made a significant
investment in UniStar, which upon acquisition created 8% dilution to the
Company's stockholders and, subsequent to the acquisition, has totaled an
additional $11.3 million in cash. In 1997, the Company invested $6.7 million as
part of the cost to develop the software systems, building and other costs
related to the project, $5.9 million of which have been recorded as assets on
the balance sheet. The total UniStar investment as of December 31, 1997 is $25.4
million, including $15.8 million in goodwill and $8.0 million in other assets
with the remainder consisting of funded UniStar expenses. In the opinion of the
Company's management, this investment is justified based upon the potential
returns.
In an attempt to block the NIL, certain states filed letters under 18 U.S.C.
Section 1084 to prevent the long-distance carriers from providing telephone
service to the NIL. In 1995, the CDA initiated legal action against AT&T
Corporation (AT&T) to compel the long-distance carriers to provide telephone
service to the NIL. The CDA's position is that the lottery is authorized by the
Indian Gaming Regulatory Act (IGRA) passed by Congress in 1988, that IGRA
preempts state law, and that 18 U.S.C. Section 1084 is inapplicable and,
therefore, the states lack authority to issue the Section
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1084 notification letters to any carrier. On February 28, 1996, the CDA Tribal
Court ruled that CDA had satisfied all requirements of IGRA and the Section 1084
letters issued by certain state attorneys general in an effort to interfere with
the lawful operation of the NIL are invalid. In addition, the Tribal Court ruled
that the long-distance carriers cannot refuse to provide telephone service based
upon 18 U.S.C. Section 1084. On July 2, 1997, the Tribal Appellate Court
affirmed the lower Tribal Court's rulings and analysis, upholding the CDA's
right to conduct the telephone lottery. On August 22, 1997, AT&T filed a
complaint for declaratory judgment in the U.S. District Court in Idaho against
the CDA, seeking a federal court ruling as to the enforceability of the Tribal
Court's May 1, 1996 order affirming the CDA's right to conduct the telephone
lottery. The CDA has answered that complaint.
On May 28, 1997, the State of Missouri brought an action in the Missouri Circuit
Court in Kansas City against UniStar and the CDA to enjoin the NIL's US Lottery
Internet instant games offered by the CDA and managed by UniStar. The complaint
sought civil penalties, attorneys fees and court costs. The complaint alleged
that the US Lottery violates Missouri anti-gaming laws and that the marketing
and promotion of the US Lottery violate the Missouri Merchandising Practices
Act. The CDA and UniStar removed the case to the U.S. District Court for the
Western District of Missouri, which denied the State's subsequent motion to
remand the case back to the state court. The Court subsequently granted a motion
to dismiss CDA from the case based on sovereign immunity. The Court denied the
motion to dismiss UniStar based on sovereign immunity, although the Court
indicated it might reconsider that decision. UniStar filed a motion for
reconsideration of its motion for dismissal.
On January 28, 1998, the State of Missouri sought to dismiss voluntarily the
existing case against UniStar and filed the next day, a new action against the
Company, UniStar and two tribal officials, with essentially the same
allegations, in state court. The State obtained a temporary restraining order
from a state judge enjoining the marketing of the Internet and telephone lottery
in the State of Missouri. On February 5, 1998, the U. S. District Court for the
Eastern District of Missouri ruled that this second case also should be heard in
federal court, transferred the second case to the Western District of Missouri
where the original case had been filed, and dissolved the state court's
temporary restraining order, effective February 9, 1998. A motion to dismiss the
second case based on the sovereign immunity of all the defendants and a motion
to abstain in favor of the jurisdiction of the CDA Tribal Court are pending. The
state has noticed its appeal of the federal district court's rulings to the
Eighth Circuit Court of Appeals.
On September 15, 1997, the State of Wisconsin, by its Attorney General, filed an
action in the Wisconsin State Circuit Court for Dane County against the Company,
UniStar and the CDA, to permanently enjoin the US Lottery offered by the Tribe
on the Internet and managed by UniStar. The complaint alleges that the offering
of the US Lottery violates Wisconsin anti-gambling laws and that legality of the
US Lottery has been misrepresented to Wisconsin residents in violation of state
law. In addition to an injunction, the suit seeks restitution, civil penalties,
attorneys' fees and court costs. The Company, UniStar and the CDA have removed
the case to the U.S. District Court in Wisconsin. On February 18, 1998, the
District Court dismissed the Tribe from the case based on sovereign immunity and
dismissed the Company based on the State's failure to state a claim against the
Company. Motions to dismiss the case against UniStar were denied. UniStar has
filed its notice of appeal of this decision to the Seventh Circuit Court of
Appeals.
The NIL conducts business under the US Lottery trade name. The US Lottery began
test marketing its Instant ticket games on the Internet in July 1997. Through
December 31, 1997, the US Lottery generated revenues of $1.5 million. On January
20, 1998, the US Lottery launched its first Draw game, the Super6. Tickets for
the Super6 can be purchased either over the Internet or by telephone. As of
March 31, 1998, the registered base of the US Lottery was approximately 21,000
people with about 3,000 active players. Due to advertising, professional fees
and other startup costs, the NIL has yet to generate a profit. As a result,
UniStar has not recognized any revenue as of December 31, 1997.
There are market and legal risks associated with the development of the NIL. The
Company believes there is a national market for the NIL based upon research into
the experience of other national lotteries and the growth of the overall lottery
market. However, there is no assurance that there will be acceptance of a
telephone or Internet lottery. Based upon the ruling of the Tribal Appellate
Court affirming the CDA's right to conduct the telephone lottery and opinions
from outside legal counsel, the Company also believes that the legal decision
rendered by the CDA Tribal Court and affirmed by the Tribal Appellate Court will
ultimately be affirmed by the Idaho federal court. The Company believes that
UniStar also will prevail in the Missouri and Wisconsin lawsuits. However, there
is no assurance of such a legal outcome. In the event that the telephone and
Internet lotteries do not attain the level of market acceptance anticipated by
4
<PAGE>
<PAGE>
the Company or if the outcome of the pending lawsuits is adverse, the Company
would have to reevaluate its investment in UniStar.
SUBSEQUENT EVENTS
Corporate Reorganization
On January 8, 1998, the Company announced the beginning of the restructuring of
its businesses and the retirement of its Chief Executive Officer (CEO). These
announcements have resulted in several related charges which will be reflected
in the consolidated financial statements for the first quarter of 1998.
Alan Kessman, Chairman and CEO of the Company announced his intention to retire
from the management of the day-to-day operations of the Company. In accordance
with the diminishment of responsibility section of his employment continuity
agreement, Mr. Kessman will receive a severance payment of $1.3 million. The
Company will establish a reserve for this cost during the first quarter of 1998.
The Company has retained an executive search firm to find a successor for
Mr. Kessman, who has agreed to remain in his current position until his
successor is selected. The Company has incurred approximately $0.2 million
in expenses to recruit a new CEO which will be expensed as part of the
restructuring charge in the first quarter of 1998.
In addition, the Company has restructured current operations which resulted in a
workforce reduction during January and February 1998. The Company will incur
approximately $0.6 million for severance, benefits and other restructuring
charges in the first quarter of 1998.
As previously announced, Furman Selz LLC has been hired to advise the Company as
to certain financing and corporate restructuring options. Based upon advice of
Furman Selz and the recommendation of a special committee of the Board of
Directors, the Board has determined that it is in the best interests of the
shareholders of the Company to separate the business of the Company's UniStar
subsidiary from the operations of its computer telephony and healthcare
communications businesses. The Company expects, subject to completion of further
analysis and receipt of necessary approvals, that the separation would be
effected through a taxable distribution to shareholders later this year.
During the first quarter of 1998, the Company incurred approximately $0.2
million in advisory expenses related to preparation and review of corporate
restructuring options. Future expenses will be dependent upon the form and
nature of the corporate restructuring. The Company is also pursuing a plan to
retain and motivate key employees, the details of which are expected to be
concluded by the second quarter of 1998.
In total, the Company expects to record a restructuring charge of approximately
$2.3 million during the first quarter of 1998.
Amended Distributor Agreement with Claricom
On March 30, 1998, the Company entered into an Amended and Restated Distributor
Agreement with Claricom (the "Amended Agreement"). The Amended Agreement,
effective April 1, 1998 and continuing through December 31, 2001, provides,
among other things, that Claricom will be a non-exclusive distributor of the
Company's telephony products and that Claricom can market products competing
with those sold by the Company. Upon execution of the Amended Agreement,
Claricom released to the Company the $5 million plus interest being held in
escrow to satisfy potential indemnity claims under the 1996 Asset Purchase
Agreement and waived all potential contract claims under the prior distributor
agreement.
1996 COMPARED TO 1995
5
<PAGE>
<PAGE>
Results of Operations
With the sale of the direct offices and the sale of the Videoconferencing
division in 1996, the year as a whole was not comparable to 1995 other than on
overall measures of profitability such as operating or net income. In addition,
with the timing of the sale, the first half of 1996 is not comparable to the
second half of 1996 either on a financial or operational basis. For the first
six months of 1996, the primary mission of the Company, and the primary focus of
management resources, was to complete the sale of the direct offices while
transitioning the Company, adversely affecting operating results. For the second
six months of 1996, the Company operated on a post-sale standalone basis.
Excluding the gain on the sale of businesses, operating income for the
six-month period ended December 31, 1996 was $7.3 million compared to an
operating loss of $10.7 million for the first six months of 1996. Net income
for the six-month period ended December 31, 1996 was $4.4 million, or
$0.09 per share, compared to a net loss of $7.0 million, or ($0.14) per share,
for the first six months of 1996.
The Company recorded a pretax gain of $48.9 million net of transaction,
severance and other related costs of which $47.5 million was recorded during the
three-month period ended June 30, 1996. An additional $1.4 million pretax gain
was recorded during the three-month period ended December 31, 1996 reflecting
purchase price adjustments. The proceeds were used to repay the Company's bank
borrowings and the excess was invested in short-term cash investments.
In June 1996, the Company sold its Videoconferencing division to BT Visual
Images LLC for a $0.2 million note, royalties on videoconferencing revenue
through June 1998 and contingent consideration related to the sale of inventory
transferred to the buyer as part of the sale. The Company recorded a reserve for
loss of $3.9 million on the transaction during the three-month period ended
March 31, 1996. The Company has filed a legal action against GPT Video Systems,
with whom the Company terminated its distribution agreement for failure to
deliver properly functioning videoconferencing products on a timely basis, which
case is in the discovery stages.
In April 1996, the Company also sold its Inmate Calling business for $0.5
million in cash and notes and recorded a pretax loss of $1.0 million.
CT includes independent distribution, National Accounts and Government Systems.
Revenues for 1996, excluding revenues derived from the business sold, were
$129.4 million, of which $76.1 million was generated during the last six months
of 1996. Sales to Claricom totaled $31.7 million during the seven-month,
post-sale period. Healthcare revenues for 1996 were $30.2 million, of which
$17.3 million was generated during the last six months of 1996. Selling, general
and administrative costs were higher than anticipated as the transition of
post-sale administrative functions such as billing and inventory control was
more costly than planned.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity is represented by cash, cash equivalents and cash
availability under its existing credit facilities. The Company's liquidity was
approximately $28 million, $50 million and $23 million as of December 31, 1997,
1996 and 1995, respectively.
At December 31, 1997 and 1996, cash and cash equivalents amounted to $7.7
million and $27.7 million, respectively, or 11% and 32% of current assets,
respectively. The $20.0 million decrease in cash and cash equivalents was used
to repurchase $4.9 million of the Company's common stock, fund $5.8 million in
operating activities, purchase $1.5 million in capital equipment and fund $5.6
million relating to the Company's investment in UniStar. Cash used by operating
activities was $5.8 million compared to $11.0 million in 1996. The decrease in
cash used by operating activities is primarily due to the decrease in average
trade receivables due to lower revenues over the periods.
Total debt at December 31, 1997 was $15.6 million, an increase of $0.9 million
from $14.7 million at December 31, 1996. The increase in debt is due to $1.8
million in capital lease obligations incurred in connection with equipment
acquisitions and an increase to the carrying value of the convertible
subordinated debentures of $0.3 million due to accretion, offset by $1.2 million
in debt repayments on other borrowings.
6
<PAGE>
<PAGE>
Proceeds from the sale of the direct offices included $5.0 million of cash which
was held in escrow and reported on the consolidated balance sheet as of December
31, 1997 and 1996 as restricted cash. These funds were released to the Company
by Claricom on March 31, 1998.
The Company obtained a new revolving credit facility (the Credit Facility) in
October 1997. The $35 million Credit Facility is unsecured and expires in
January 2000. It consists of a revolving line of credit providing for direct
borrowings and letter of credit advances, subject to availability. Direct
borrowings and letter of credit advances are made available pursuant to a
formula that measures total outstanding debt in relation to cash, accounts
receivable and earnings before interest, taxes, depreciation and amortization.
The Credit Facility agreement contains certain restrictive covenants that
include, among other things, limitations on total outstanding debt, minimum
levels of consolidated net worth and maximum levels of capital expenditures and
capitalized leases. During 1997, the Company was in compliance with all such
financial covenants. Interest rates are also subject to adjustment based upon
certain financial ratios. Refer to Note C of the Notes to Consolidated Financial
Statements.
Required principal payments for debt in 1998 are approximately $1.0 million. The
Company believes that borrowings under the Credit Facility and cash flow from
operations will be sufficient to meet working capital and other requirements for
1998.
7
<PAGE>
<PAGE>
SELECTED FINANCIAL DATA
The following is selected financial data for EXECUTONE for the five years ended
December 31, 1997. (In thousands, except for per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues (1) $156,396 $212,022 $296,393 $291,969 $271,765
======== ======== ======== ======== ========
Income (Loss) Before
Income Taxes From
Continuing Operations(2) $ (358) $ 39,782 $(39,221) $ 10,041 $ 7,580
======== ======== ======== ======== ========
Income (Loss) From
Continuing Operations $ (221) $ 24,162 $(36,934) $ 6,734 $ 4,903
Income From
Discontinued Operations,
Net of Taxes(3) --- --- --- 757 298
Extraordinary Item - Loss on
Extinguishment of Debt,
Net of Taxes(4) --- (355) --- --- ---
-------- -------- -------- -------- -------
Net Income (Loss) $ (221) $ 23,807 $(36,934) $ 7,491 $ 5,201
======== ======== ======== ======== =======
EARNINGS (LOSS) PER SHARE:
Continuing Operations $ --- $ 0.47 $ (0.79) $ 0.15 $ 0.15
Discontinued Operations --- --- --- 0.02 0.01
Extraordinary Item --- (0.01) --- --- ---
-------- -------- -------- -------- -------
Net Income (Loss) $ --- $ 0.46 $ (0.79) $ 0.17 $ 0.16
======== ======== ======== ======== =======
DILUTED EARNINGS (LOSS) PER SHARE:
Continuing Operations $ --- $ 0.46 $ (0.79) $ 0.14 $ 0.10
Discontinued Operations --- --- --- 0.02 0.01
Extraordinary Item --- (0.01) --- --- ---
-------- -------- -------- -------- -------
Net Income (Loss) $ --- $ 0.45 $ (0.79) $ 0.16 $ 0.11
======== ======== ======== ======== =======
Total Assets $138,864 $152,009 $167,844 $189,481 $175,555
======== ======== ======== ======== ========
Long-Term Debt $ 14,643 $ 13,837 $ 29,829 $ 24,698 $ 32,279
======== ======== ======== ======== ========
Cash Dividends Declared
Per Share (5) $ --- $ --- $ --- $ --- $ ---
======== ======== ======== ======== ========
</TABLE>
(1) The decline in revenues in 1997 and 1996 from prior years is attributable
to the sale of the Company's direct sales and service organization (DSOs)
in May 1996 (See Note M).
(2) The 1996 financial results included a pretax gain on the sale of the
Company's DSO's of $48.9 million (See Note M). The 1995 financial results
included a restructuring charge of $44.0 million (See Note N).
(3) Discontinued operations are presented for the Vodavi Communications Systems
Division (VCS) which was sold in March 1994.
(4) The 1996 extraordinary item relates to the write-off of deferred debt issue
costs associated with the Company's revolving credit facility repaid in
June 1996.
(5) The Company has not declared or paid any cash dividends on its Common
Stock. Refer to "Stock Data".
8
<PAGE>
<PAGE>
EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except for per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
REVENUES $156,396 $212,022 $296,393
COST OF REVENUES 103,387 132,510 173,536
--------- -------- ---------
Gross Profit 53,009 79,512 122,857
--------- -------- ---------
OPERATING EXPENSES:
Product development and engineering 12,794 13,773 14,703
Selling, general and administrative 40,125 69,180 100,520
Provision for restructuring and unusual items
(Note N) --- --- 44,042
--------- -------- ---------
52,919 82,953 159,265
--------- -------- ---------
OPERATING INCOME (LOSS) 90 (3,441) (36,408)
INTEREST EXPENSE (1,985) (2,707) (3,920)
NET GAIN ON SALE OF BUSINESSES (Note M) --- 44,060 ---
OTHER INCOME, NET 1,537 1,870 2,129
ACQUISITION COSTS (Note M) --- --- (1,022)
--------- -------- ---------
INCOME (LOSS) BEFORE INCOME TAXES (358) 39,782 (39,221)
PROVISION (BENEFIT) FOR INCOME TAXES:
Cash 6 4,200 350
Noncash (Note D) (143) 11,420 (2,637)
---------- -------- ---------
(137) 15,620 (2,287)
---------- -------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (221) 24,162 (36,934)
Extraordinary item - loss on extinguishment
of debt (net of income tax benefit of $238) --- (355) ---
---------- -------- ---------
NET INCOME (LOSS) $ (221) $ 23,807 $ (36,934)
========== ======== =========
EARNINGS (LOSS) PER SHARE:
INCOME (LOSS) BEFORE EXTRAORDINARY
ITEM $ --- $ 0.47 $ (0.79)
EXTRAORDINARY ITEM --- (0.01) ---
---------- -------- ---------
NET INCOME (LOSS) $ --- $ 0.46 $ (0.79)
========== ======== =========
DILUTED EARNINGS (LOSS) PER SHARE:
INCOME (LOSS) BEFORE EXTRAORDINARY
ITEM $ --- $ 0.46 $ (0.79)
EXTRAORDINARY ITEM --- (0.01) ---
---------- -------- ---------
NET INCOME (LOSS) $ --- $ 0.45 $ (0.79)
========== ======== =========
AVERAGE COMMON SHARES OUTSTANDING:
BASIC 49,655 51,712 46,919
========== ======== =========
DILUTED 49,655 52,251 46,919
========== ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
9
<PAGE>
<PAGE>
EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(In thousands) Years Ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income (loss) before extraordinary item $ (221) $ 24,162 $(36,934)
Adjustments to reconcile net income (loss) to net
cash used by operating activities:
Depreciation and amortization 2,969 4,242 6,093
Deferred income tax provision (benefit) (137) 11,420 (2,637)
Net gain on sale of businesses (Note M) --- (44,060) (1,087)
Provision for restructuring and unusual items
(Note N) --- --- 44,042
Provision for losses on accounts receivable 277 1,921 1,440
Other, net 201 (465) (250)
Changes in working capital items:
Accounts receivable 5,439 (8,754) (4,205)
Inventories (3,893) 1,048 (3,121)
Accounts payable and accruals (8,779) (2,857) (9,402)
Other working capital items, net (1,668) 2,375 2,177
--------- -------- --------
NET CASH USED BY OPERATING ACTIVITIES (5,812) (10,968) (3,884)
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,469) (2,534) (3,457)
Dispositions of businesses --- 56,948 125
Investment in UniStar (5,556) (4,182) ---
Proceeds from sale of VCS --- --- 1,200
Other, net (1,325) 298 822
--------- -------- --------
NET CASH (USED) PROVIDED BY
INVESTING ACTIVITIES (8,350) 50,530 (1,310)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (repayments) under revolving credit
facility --- (15,445) 4,478
Repayments of other long-term debt (1,182) (1,134) (622)
Repurchase of stock (4,893) (4,554) (810)
Proceeds from issuance of stock 268 819 1,641
Other borrowings --- 356 750
--------- -------- --------
NET CASH (USED) PROVIDED BY FINANCING
ACTIVITIES (5,807) (19,958) 5,437
--------- -------- --------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (19,969) 19,604 243
CASH AND CASH EQUIVALENTS - BEGINNING
OF YEAR 27,696 8,092 7,849
--------- -------- --------
CASH AND CASH EQUIVALENTS - END
OF YEAR $ 7,727 $ 27,696 $ 8,092
========= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
10
<PAGE>
<PAGE>
EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(In thousands, except for share amounts) December 31, December 31,
1997 1996
------------ -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 7,727 $ 27,696
Restricted cash 5,084 ---
Accounts receivable, net of allowance
of $1,814 and $2,106 33,403 38,992
Inventories 20,436 16,814
Prepaid expenses and other current assets 4,091 3,099
-------- --------
Total Current Assets 70,741 86,601
RESTRICTED CASH --- 5,031
PROPERTY AND EQUIPMENT, net 7,767 7,578
INTANGIBLE ASSETS, net (Note L) 19,765 19,893
DEFERRED TAXES 18,577 18,434
OTHER ASSETS 22,014 14,472
-------- --------
$138,864 $152,009
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 951 $ 882
Accounts payable 23,009 26,666
Accrued payroll and related costs 3,007 3,398
Accrued liabilities 13,123 17,956
Deferred revenue and customer deposits 2,541 3,164
-------- --------
Total Current Liabilities 42,631 52,066
LONG-TERM DEBT 14,643 13,837
OTHER LONG-TERM LIABILITIES 1,092 759
-------- --------
Total Liabilities 58,366 66,662
-------- --------
STOCKHOLDERS' EQUITY:
Common stock: $.01 par value; 80,000,000 shares
authorized; 49,660,359 and 51,173,755 issued and
outstanding 497 512
Preferred stock: $.01 par value; Cumulative Convertible
Preferred Stock (Series A), 250,000 shares authorized,
issued and outstanding; Cumulative Contingently
Convertible Preferred Stock (Series B), 100,000 shares
authorized, issued and outstanding 7,300 7,300
Additional paid-in capital 71,500 76,113
Retained earnings (since July 1, 1988) 1,201 1,422
-------- --------
Total Stockholders' Equity 80,498 85,347
-------- --------
$138,864 $152,009
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
11
<PAGE>
<PAGE>
EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(In thousands, except for Common Stock Preferred Stock Additional Retained Total
share amounts) ------------------ ------------------ Paid-In Earnings Stockholders'
Shares Amount Shares Amount Capital (Deficit) Equity
------ ------ ------ ------ ------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 45,647,894 $456 --- $ --- $72,303 $14,549 $87,308
Proceeds from issuances of stock
from employee stock plans 1,934,492 19 1,613 1,632
Warrants exercised for common
stock 363,549 4 (4) ---
Common and preferred stock issued
to acquire Unistar (Note L) 3,700,000 37 350,000 7,300 5,374 12,711
Common stock issued for
investment in DCC (Note G) 353,118 4 1,100 1,104
Repurchase of stock (340,561) (3) (807) (810)
Amortization of deferred
compensation 89 89
Net loss (36,934) (36,934)
-------------------------------------------------------------------------------------
Balance at December 31, 1995 51,658,492 $517 350,000 $7,300 $79,668 $(22,385) $65,100
Proceeds from issuances of stock
from employee stock plans 810,036 8 839 847
Warrants exercised for common
stock 199,431 2 7 9
Repurchase of stock (1,494,204) (15) (4,536) (4,551)
Amortization of deferred
compensation 135 135
Net income 23,807 23,807
-------------------------------------------------------------------------------------
Balance at December 31, 1996 51,173,755 $512 350,000 $7,300 $76,113 $1,422 $85,347
Proceeds from issuances of stock
from employee stock plans 323,490 3 201 204
Warrants exercised for common
stock 50,000 1 60 61
Repurchase of stock (1,886,886) (19) (4,874) (4,893)
Net loss (221) (221)
-------------------------------------------------------------------------------------
Balance at December 31, 1997 49,660,359 $497 350,000 $7,300 $71,500 $1,201 $80,498
=====================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
12
<PAGE>
<PAGE>
EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - NATURE OF THE BUSINESS AND FORMATION OF THE COMPANY
EXECUTONE Information Systems, Inc. (the Company) develops, markets and supports
voice and data communications systems. Products and services include telephone
systems, voice mail systems, inbound and outbound call center systems and
specialized healthcare communications systems. The Company's UniStar
Entertainment indirect subsidiary (UniStar) has an exclusive five-year contract
with the Coeur d'Alene Tribe of Idaho (CDA) to design, develop, finance and
manage the National Indian Lottery (NIL). Products and services are sold under
the EXECUTONE'r', INFOSTAR'r', IDS'tm', LIFESAVER'tm' and INFOSTAR/ILS'tm' brand
names through a national network of independent distributors and direct sales
and service employees. The Company's products are manufactured primarily in the
United States, Malaysia, China and the Dominican Republic.
The Company was formed in July 1988 through the merger of ISOETEC
Communications, Inc. (ISOETEC) with Vodavi Technology Corporation (Vodavi). The
merger of ISOETEC into Vodavi was accounted for under the purchase method of
accounting and Vodavi was deemed to have undergone a quasi-reorganization for
accounting purposes. As of July 1988, Vodavi's accumulated deficit of
approximately $49.7 million was eliminated. Executone, Inc. was acquired in 1988
from Contel Corporation (Contel) for promissory notes and cash.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The accompanying consolidated financial statements
include the accounts of the Company and its subsidiaries. In consolidating the
accompanying financial statements, all significant intercompany transactions
have been eliminated. Investments in affiliated companies owned more than 20%,
but not in excess of 50%, are recorded under the equity method. Certain prior
year amounts have been reclassified to conform to the current year's
presentation.
Use of Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition. The Company recognizes revenue on equipment sales and
software licenses to independent sales and service offices when shipped. Revenue
from equipment, software and installation contracts with end-users is recognized
when the contract or contract phase for major installations is substantially
completed. Revenue derived from the sale of service contracts is amortized
ratably over the service contract period on a straight-line basis.
Earnings Per Share. Earnings per share is calculated in accordance with the
provisions of FAS No. 128, "Earnings per Share", effective for periods ending
after December 15, 1997. Accordingly, prior year amounts have been restated.
Earnings per share is based upon the weighted average number of shares of common
stock outstanding during the period. Diluted earnings per share is based upon
the weighted average number of shares of common stock outstanding plus the
dilutive effect of stock options and warrants outstanding during the period.
Stock options and warrants, the convertible preferred stock and the convertible
debentures, which are antidilutive, have been excluded from the computations.
Cash Equivalents. Cash equivalents include short-term investments with original
maturities of three months or less.
Inventories. Inventories are stated at the lower of first-in, first-out (FIFO)
cost or market and consist of the following at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
(Amounts in thousands) 1997 1996
---------------------- ---- ----
<S> <C> <C>
Raw Materials $ 4,672 $ 3,493
Finished Goods 15,764 13,321
-------- --------
$20,436 $16,814
======= =======
</TABLE>
13
<PAGE>
<PAGE>
Intangible Assets. Intangible assets represent the excess of the purchase price
of the predecessor companies acquired over the fair value of the net tangible
assets acquired. The carrying value of intangibles is evaluated periodically in
accordance with the provisions of FAS No. 121, "Accounting for the Impairment of
Long-Lived Assets", by projecting the lowest level of future undiscounted net
cash flows of the underlying businesses. If the sum of such cash flows is less
than the book value of the long-lived assets, including intangibles, projected
future cash flows are discounted and intangibles are adjusted accordingly.
Amortization is provided over a 40-year period, except for the goodwill related
to the UniStar acquisition which will be amortized beginning in 1998 over the
five-year term of the management agreement (See Note L). Intangible assets at
December 31, 1997 and 1996 are net of accumulated amortization of $1.1 million
and $1.0 million, respectively.
Property and Equipment. Property and equipment at December 31, 1997 and 1996
consist of the following:
<TABLE>
<CAPTION>
(Amounts in thousands) 1997 1996
---------------------- ---- ----
<S> <C> <C>
Furniture and fixtures $ 887 $ 1,992
Leasehold improvements 1,718 1,813
Machinery and equipment 16,858 20,253
--------- ----------
19,463 24,058
Accumulated depreciation (11,696) (16,480)
--------- ----------
Property and equipment, net $ 7,767 $ 7,578
========= ==========
</TABLE>
Depreciation is provided on a straight-line basis over the estimated economic
useful lives of property and equipment which range from three to ten years for
equipment. Amortization, principally of leasehold improvements, is provided over
the life of the respective lease terms which range from five to ten years.
Income Taxes. The Company utilizes the liability method of accounting for income
taxes as set forth in FAS No. 109, "Accounting for Income Taxes". Under the
liability method, deferred taxes are determined based on the difference between
the financial statement and tax bases of assets and liabilities using enacted
tax rates in effect in the years in which the differences are expected to
reverse.
Product Development and Engineering. Product development and engineering costs
are expensed as incurred.
Fair Value of Financial Instruments. The fair value of the Company's Convertible
Subordinated Debentures at December 31, 1997 is approximately $14.6 million,
based upon market quotes. The carrying value of all other financial instruments
included in the accompanying consolidated financial statements approximate fair
value as of December 31, 1997 based upon current interest rates.
Noncash Investing and Financing Activities. The following noncash investing and
financing activities took place during the three years ended December 31, 1997:
<TABLE>
<CAPTION>
(Amounts in thousands) 1997 1996 1995
---------------------- ---- ---- ----
<S> <C> <C> <C>
Note Receivable and Warrants from Sale of
DSOs (Note M) $ --- $ 8,100 $ ---
Restricted Cash Received from Sale of
DSOs (Note M) --- 5,031 ---
Common and Preferred Stock issued to
acquire Unistar (Note L) --- --- 12,711
Notes receivable for 1995 disposition of direct sales
offices (Note M) --- --- 1,911
Equity investment in DCC (Note G) --- --- 1,505
Common shares exchanged to exercise options
and warrants 507 549 1,137
Capital leases for equipment acquisitions 1,805 302 437
</TABLE>
14
<PAGE>
<PAGE>
Refer to the consolidated statements of cash flows for information on
cash-related operating, investing and financing activities.
NOTE C - DEBT
The Company's debt is summarized below at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
(Amounts in thousands) 1997 1996
- ---------------------- ---- ----
<S> <C> <C>
Borrowings Under Revolving Credit Facility (a) $ --- $ ---
Convertible Subordinated Debentures (b) 12,569 12,317
Capital Lease Obligations (c) 2,326 1,499
Other 699 903
------- --------
Total Debt 15,594 14,719
Less: Current Portion of Long-Term Debt 951 882
------- --------
Total Long-Term Debt $14,643 $ 13,837
======= ========
</TABLE>
(a) The Company obtained a new revolving credit facility (the Credit Facility)
in October 1997. The $35 million Credit Facility is unsecured and expires
in January 2000. It consists of a revolving line of credit providing for
direct borrowings and letter of credit advances, subject to availability.
Direct borrowings and letter of credit advances are made available pursuant
to a formula that measures outstanding debt in relation to cash, accounts
receivable and earnings before interest, taxes, depreciation and
amortization. To minimize interest expense on the revolving line of credit,
the Company has the option to borrow money based upon an adjusted prime
borrowing rate (8.5% at December 31, 1997) or at an adjusted eurodollar
rate (8.2% at December 31, 1997). Approximately $19.8 million was available
at December 31, 1997 under the revolving line of credit, after giving
effect to $7.2 million that was committed to cover outstanding letters of
credit. The unused portion of the line of credit has a commitment fee of
0.375%. The Company repaid all amounts outstanding under the previous
revolving credit facility in June 1996. No direct borrowings against the
revolving credit facility were outstanding at December 31, 1997 and 1996.
The Company's average outstanding indebtedness under the revolving line of
credit for the year ended December 31, 1996 was $6.5 million, and the
average interest rate on such indebtedness was 7.9%.
The Credit Facility agreement contains certain restrictive covenants
including, among other things, limitations on total outstanding debt,
minimum levels of consolidated net worth and maximum levels of capital
expenditures and capitalized leases. During 1997, the Company was in
compliance with all such financial covenants. Interest rates are also
subject to adjustment based upon certain financial ratios.
(b) The Company's Convertible Subordinated Debentures (the Debentures), issued
in April 1986, are due March 15, 2011 and bear interest at 7 1/2%, payable
March 15th and September 15th. The face value of the outstanding Debentures
at December 31, 1997 was $16.4 million. The face value of the Debentures
was adjusted to fair value in connection with the Company's 1988
quasi-reorganization. The Debentures are convertible at the option of the
holder into Common Stock of the Company at any time on or before March 15,
2011, unless previously redeemed, at a conversion price of $10.625 per
share, subject to adjustment in certain events. Subject to certain
restrictions, the Debentures are redeemable in whole or in part, at the
option of the Company, at par. The Debentures are also subject to annual
sinking fund payments of $1.5 million. In January 1992, $15 million
principal amount of Debentures with a book value of $10.1 million was
exchanged for 674,865 shares of Convertible Preferred Stock and 2,999,400
Common Stock Purchase Warrants. Debentures reacquired by the Company in the
debt-for-equity exchange and in connection with Warrant exercises were
delivered in lieu of cash in satisfying sinking fund requirements. Thus, no
cash sinking fund payment will be due on the Debentures until March 2008.
(c) The Company has entered into capital lease arrangements for office
furniture, computer and test equipment with a net book value of
approximately $2.3 million and $1.5 million at December 31, 1997 and 1996,
respectively. Such leases have been capitalized using implicit interest
rates which range from 2% to 11%.
15
<PAGE>
<PAGE>
The following is a schedule of future maturities of long-term debt at December
31, 1997:
<TABLE>
<CAPTION>
Years Ending December 31: (Amounts in thousands)
------------------------ ----------------------
<S> <C>
1998 $ 951
1999 551
2000 500
2001 566
2002 261
Thereafter 12,765
-------
$15,594
=======
</TABLE>
For the years ended December 31, 1997, 1996 and 1995, the Company made cash
payments of approximately $1.8 million, $2.6 million and $3.6 million,
respectively, for interest expense on indebtedness.
NOTE D - INCOME TAXES
The components of the provision (benefit) for income taxes applicable to income
(loss) from continuing operations for the three years ended December 31, 1997
are as follows:
<TABLE>
<CAPTION>
(Amounts in thousands) 1997 1996 1995
---------------------- ---- ---- ----
<S> <C> <C> <C>
Current - Federal $ --- $ 1,100 $ 150
- State --- 3,100 200
- Foreign 6 --- ---
------ ------- -------
6 4,200 350
------ ------- -------
Deferred - Federal (111) 11,005 (1,922)
- State (32) 415 (715)
------ ------- -------
(143) 11,420 (2,637)
------ ------- -------
$ (137) $15,620 $(2,287)
====== ======= =======
</TABLE>
For the year ended December 31, 1996, the Company recorded a deferred income tax
benefit of $238,000 related to an extraordinary loss on the extinguishment of
debt.
A reconciliation of the statutory federal income tax provision (benefit) to the
reported income tax provision (benefit) on income (loss) from continuing
operations for the three years ended December 31, 1997 is as follows:
<TABLE>
<CAPTION>
(Amounts in thousands) 1997 1996 1995
- ---------------------- ---- ---- ----
<S> <C> <C> <C>
Statutory income tax provision (benefit) $ (122) $13,924 $(13,335)
State income taxes, net of
federal income tax benefit (21) 2,364 (338)
Impairment of intangible assets --- --- 11,392
Amortization of intangible assets 45 44 171
Research and development credit (807) (351) (148)
Other 768 (361) (29)
------ ------- --------
Reported income tax provision (benefit) $ (137) $15,620 $ (2,287)
====== ======= ========
</TABLE>
16
<PAGE>
<PAGE>
The components of and changes in the net deferred tax asset are as follows:
<TABLE>
<CAPTION>
Deferred
December 31, (Expense) December 31,
(Amounts in thousands) 1996 Benefit 1997
- ---------------------- -------------- ----------- ---------
<S> <C> <C> <C>
Net operating loss and tax credit carryforwards $19,609 $ 5,552 $25,161
Inventory reserves 4,974 (2,778) 2,196
Accrued liabilities and restructuring costs 1,146 (740) 406
Debenture revaluation (1,531) 94 (1,437)
Other (1,020) (1,985) (3,005)
------- -------- -------
23,178 143 23,321
Valuation allowance (4,744) --- (4,744)
------- -------- -------
Deferred tax asset $18,434 $ 143 $18,577
======= ======== =======
</TABLE>
The deferred tax asset represents the benefits expected to be realized from the
utilization of pre- and post-acquisition tax benefit carryforwards, which
include net operating loss carryforwards (NOLs), tax credit carryforwards and
the excess of tax bases over fair value of the net assets of the Company. The
utilization of these tax benefits for financial reporting purposes will be
reflected in the provision for income taxes each year, as applicable.
In order to fully realize the remaining deferred tax asset of $18.6 million as
of December 31, 1997, the Company will need to generate future taxable income of
approximately $50 million prior to the expiration of the NOLs and tax credit
carryforwards. Although the Company believes that it is more likely than not
that the deferred tax asset will be fully realized based on current projections
of future pre-tax income, a valuation allowance has been provided for a portion
of the deferred tax asset. The amount of the deferred tax asset considered
realizable, however, could be reduced if estimates of future taxable income
during the carryforward period are reduced.
As of December 31, 1997, the Company has NOLs and tax credit carryforwards
(subject to review by the Internal Revenue Service) available to offset future
income for tax return purposes of approximately $60.5 million and $5.0 million,
respectively. A portion of the NOLs and tax credit carryforwards were generated
prior to the formation of the Company and their utilization is subject to
certain limitations imposed by the Internal Revenue Code. The NOLs expire as
follows: $25.3 million in 2004; $9.7 million in 2005; $12.3 million in 2006;
$0.8 million in 2010; $12.4 million in 2012.
A reconciliation of the Company's income (loss) before taxes for financial
reporting purposes to taxable income for the three years ended December 31, 1997
is as follows:
<TABLE>
<CAPTION>
(Amounts in thousands) 1997 1996 1995
- ---------------------- ---- ---- ----
<S> <C> <C> <C>
Income (loss) before taxes $ (358) $ 39,782 $(39,221)
Extraordinary Item --- (592) ---
--------- -------- --------
Income (loss) before taxes for financial
reporting purposes (358) 39,190 (39,221)
Differences between income (loss) before taxes for
financial reporting purposes and taxable income:
Permanent differences (28) 124 28,600
-------- -------- --------
Book taxable income (loss) (386) 39,314 (10,621)
Net changes in temporary differences (12,063) (15,282) 11,433
-------- -------- --------
Taxable income (loss) $(12,449) $ 24,032 $ 812
======== ======== ========
</TABLE>
17
<PAGE>
<PAGE>
The permanent differences relate to the write-off (in 1995) and amortization of
goodwill, which are not deductible, and other items which adjusted book income
but are not included in determining taxable income. Changes in temporary
differences principally relate to the taxable gain on the sale of businesses (in
1996), the impairment in service stock inventory (in 1995), inventory reserves
and other costs accrued for book purposes, but not deducted for tax purposes
until subsequently paid.
For the years ended December 31, 1997, 1996 and 1995, the Company made cash
payments of approximately $0.4 million, $1.5 million and $0.2 million,
respectively, for income taxes.
NOTE E - EARNINGS PER SHARE
A reconciliation of the Company's earnings (loss) per share calculations for the
three years ended December 31, 1997 is as follows:
<TABLE>
<CAPTION>
(in thousands, except for per share amounts) Income/(Loss) Shares Per Share Amount
For the year ended December 31, 1997: ------------- ------ ----------------
<S> <C> <C> <C>
Basic and Diluted Loss Per Share:
Net Loss $ (221) 49,655 $ ---
======= ====== =====
For the year ended December 31, 1996:
Basic Earnings Per Share:
Income from Continuing Operations $24,162 51,712 $0.47
=====
Stock Options and Warrants 539
------- ------
Diluted Earnings Per Share:
Income from Continuing Operations $24,162 52,251 $0.46
======= ====== =====
For the year ended December 31, 1995:
Basic and Diluted Loss Per Share:
Net Loss $(36,934) 46,919 $(0.79)
======== ====== ======
</TABLE>
The Company's Convertible Subordinated Debentures (see Note C(b)) are
convertible into approximately 1.5 million shares of common stock as of December
31, 1997. The shares issuable upon conversion of the Debentures were not
included in the computation of diluted earnings per share because they would be
antidilutive for each of the periods presented. Due to net losses for the years
ended December 31, 1997 and 1995, all stock options and warrants were
antidilutive, regardless of the exercise prices. Options to purchase
approximately 1.0 million shares of common stock as of December 31, 1996 were
not included in the computation of diluted earnings per share because the
exercise price was greater than the average market price of the shares of common
stock.
The convertible preferred stock issued in connection with the acquisition of
UniStar (See Note L) is antidilutive and has been excluded from the above
calculations.
In 1997, the Company adopted FAS No. 128, "Earnings per Share," effective for
periods ending after December 15, 1997. As a result, the Company's reported
earnings per share for prior years were restated. The effect of this accounting
change on previously reported earnings per share data was to increase 1996 basic
earnings per share by $0.01 compared to the previously reported calculation of
primary earnings per share. Earnings per share did not change for 1997 or 1995.
18
<PAGE>
<PAGE>
NOTE F - COMMITMENTS AND CONTINGENCIES
Operating Leases. The Company conducts its business operations in leased
premises under noncancellable operating lease agreements expiring at various
dates through 2005. Rental expense under operating leases amounted to $4.2
million, $6.3 million and $9.6 million for the years ended December 31, 1997,
1996 and 1995, respectively.
The following represents the future minimum rental payments due under
noncancellable operating leases that have initial or remaining lease terms in
excess of one year as of December 31, 1997:
<TABLE>
<CAPTION>
Years Ending December 31, (Amounts in thousands)
------------------------ ----------------------
<S> <C>
1998 $ 3,219
1999 3,198
2000 3,198
2001 3,323
2002 3,586
Thereafter 7,400
-------
$23,924
=======
</TABLE>
Litigation. The Company has various lawsuits, claims and contingent liabilities
arising from the conduct of business; however, in the opinion of management,
they are not expected to have a material adverse effect on the results of
operations, cash flow or financial position of the Company. See Note L for
discussion of legal issues related to UniStar.
NOTE G - RELATED PARTY TRANSACTIONS
During 1995, the Company acquired 43% of the common stock and certain other
assets of Dialogic Communications Corporation (DCC), a vendor of certain
telephony products, in exchange for 353,118 shares of the Company's common stock
and $100,000 cash. This investment is included in Other Assets and the related
equity income is included in Other Income, Net.
NOTE H - STOCK OPTIONS AND WARRANTS
The Company has established stock option plans under which it is authorized to
grant both incentive stock options and non-qualified stock options to officers
and other key employees. Options are granted at a price not less than the fair
market value on the date of the grant and generally become exercisable over a
four-year period and expire after five years. Shares available for granting of
future options under these plans total 2.3 million as of December 31, 1997.
The Company also had non-plan options outstanding at December 31, 1997, all of
which were exercisable. These options expire at various dates through March
2001. Certain options include registration rights for the shares issuable
thereunder.
19
<PAGE>
<PAGE>
A summary of the status of the Company's stock option plans, as well as non-plan
options, as of December 31, 1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------- ----------------------------- ---------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------------------------- ---------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding 1/1 1,972,485 $2.54 2,858,577 $2.18 3,977,782 $1.33
Granted 251,400 $2.32 316,875 $2.65 1,027,500 $3.05
Exercised (481,786) $1.23 (761,570) $1.28 (1,970,760) $0.92
Cancelled (231,200) $2.71 (441,397) $2.46 (175,945) $2.27
---------- ---------- -----------
Outstanding 12/31 1,510,899 $2.89 1,972,485 $2.54 2,858,577 $2.18
========= ========== ===========
Options exercisable
12/31 1,017,134 $3.04 1,335,402 $2.44 1,862,286 $1.93
========= ========== ===========
</TABLE>
Information relative to options outstanding at December 31, 1997 is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------- -------------------------
Weighted Weighted Weighted
Shares Average Average Shares Average
Exercises Outstanding Remaining Exercise Exercisable Exercise
Prices 12/31/97 Life (yrs) Price 12/31/97 Price
- ---------------- ---------------------------------------------- -------------------------
<S> <C> <C> <C> <C> <C>
$1.75 - $ 2.00 251,300 1.2 $1.96 206,300 $1.97
$2.03 - $ 2.50 288,900 4.3 $2.35 94,077 $2.38
$2.56 - $ 3.00 330,769 3.1 $2.82 200,102 $2.89
$3.10 - $20.43 639,930 2.8 $3.55 516,655 $3.64
---------- ----------
$1.75 - $20.43 1,510,899 2.9 $2.89 1,017,134 $3.04
</TABLE>
The fair value of options granted during 1997, 1996 and 1995 was $1.24, $1.20
and $1.09 per share, respectively. Fair value was estimated using the
Black-Scholes option-pricing model with the following assumptions: expected
volatility ranging from 66% to 85%, risk-free interest rate of 6.2%, an expected
option life of 5.0 years and no dividend yield.
The Company applies APB Opinion 25 in accounting for its plans. Accordingly, no
compensation cost has been recognized for its stock option plans. If
compensation cost had been determined in accordance with FAS No. 123,
"Accounting for Stock-Based Compensation," net income would have been reduced by
$0.2 million, $0.1 million and $0.3 million for 1997, 1996 and 1995,
respectively. The change in earnings per share would have been immaterial each
year.
As of December 31, 1997, the Company has warrants outstanding that permit the
holders to purchase a total of 50,000 shares of Common Stock at prices ranging
from $2.00 to $2.63 per share, expiring through July 2001. Warrants were
exercised for 50,000, 199,431 and 488,890 shares of Common Stock for the three
years ended December 31 1997, 1996 and 1995, respectively. Such exercises were
at average prices of $1.21, $0.04 and $1.00 per share for the years ended
December 31, 1997, 1996 and 1995, respectively. At December 31, 1997, 16,667
warrants were exercisable.
20
<PAGE>
<PAGE>
NOTE I - STOCK PURCHASE PLAN
A total of 2,750,000 shares of Common Stock are authorized for issuance under
the Company's employee stock purchase plan (the "Employee Plan"). The Employee
Plan permits eligible employees to purchase up to 1,000 shares of Common Stock
at the lower of 85% of the fair market value of the Common Stock at the
beginning or at the end of each six-month offering period. Pursuant to the
Employee Plan, 63,904, 216,504 and 229,636 shares of common stock were sold to
employees during the three years ended December 31, 1997, 1996 and 1995,
respectively. The weighted average fair value of these purchase rights for 1997,
1996 and 1995 was $0.67, $0.81 and $0.97 per share, respectively. Fair value was
estimated using the Black-Scholes option pricing model with the following
assumptions used for all three years: expected volatility ranging from 66% to
85%, risk-free interest rate of 6.0%, an expected term of six months and no
dividend yield.
The Company applies APB Opinion 25 in accounting for the Employee Plan and,
accordingly, no compensation cost has been recognized. If compensation cost had
been determined in accordance with FAS No. 123, the impact on net income and
earnings per share would have been immaterial for 1997, 1996 and 1995.
In 1994, the Company's shareholders adopted the 1994 Executive Stock Incentive
Plan (the "Executive Plan"), which enabled officers and other key employees to
purchase a total of up to 3,000,000 shares of the Company's Common Stock. During
1995 and 1994, the Participants purchased 140,000 and 2,745,000 shares of Common
Stock, respectively, at fair market value, which were financed through
individual bank borrowings at market interest rates by each Participant from
Bank of America Illinois (the "Bank"), payable over five years. In December
1997, the Company agreed, subject to obtaining the agreement of the Bank, that
it would allow the loans to remain outstanding until December 2001. The Company
lends each Participant 85% of the interest due to the Bank, with $1,569,000 and
$980,000 of such loans outstanding as of December 31, 1997 and 1996,
respectively. In December 1997, the Company also loaned each participant the 15%
of the interest that would otherwise have been currently payable. The Company
guarantees the Participant borrowings under a $6.4 million letter of credit.
Participant loans guaranteed by the Company with letters of credit as of
December 31, 1997 and 1996 were $6.1 million and $6.5 million, respectively.
Shares acquired under the Executive Plan are held by the Company as security for
the guarantees under a loan and pledge agreement. Sales of such shares by
Participants are subject to certain restrictions, and, generally, they may not
be sold for five years.
During 1996, the Company repurchased 820,000 shares of Common Stock from
Participants in the Executive Plan who were no longer employees of the Company,
primarily due to the sale of the direct offices (see Note M). The shares were
repurchased because, as nonemployees, the Company could no longer guarantee the
bank loans for these individuals or make advances of interest to the Bank on
their behalf. The Company accepted the stock being held as collateral as payment
in full for the purchase price plus all of the unpaid interest and satisfied the
indebtedness to the Bank on behalf of these individuals. In those instances
where the value of the common stock held as collateral was not sufficient to
cover the purchase price plus all of the unpaid interest, the Company recorded
an aggregate amount of $110,000 in compensation expense for these individuals
during the year.
NOTE J - SAVINGS AND POST-RETIREMENT BENEFIT PLANS
The Company has a 401(k) Savings Plan under which it matches employee
contributions at the discretion of the Company's Board of Directors. The
Company's matching contribution, consisting of shares of its Common Stock
purchased in the open market, is equal to 25% of each employee's contribution,
up to a maximum of $660 per employee. The expense for the matching contribution
for the years ended December 31, 1997, 1996 and 1995 was approximately $261,000,
$540,000 and $687,000, respectively.
The Company has an obligation remaining from the acquisition of Executone, Inc.
to provide post-retirement health and life insurance benefits for a group of
fewer than 75 former Executone, Inc. employees, including two current employees
of the Company. The Company does not provide post-retirement health or life
insurance benefits to any other employees. Effective January 1, 1993, the
Company adopted FAS No. 106, "Employers' Accounting For Postretirement Benefits
Other Than Pensions". This standard requires that the expected cost of these
benefits must be charged to expense during the years that employees render
services. The Company adopted the new standard prospectively and is amortizing
the transition obligation over a 20-year period.
21
<PAGE>
<PAGE>
Post-retirement benefit expense for the three years ended December 31, 1997
consists of the following:
<TABLE>
<CAPTION>
(Amounts in thousands) 1997 1996 1995
- ---------------------- ---- ---- ----
<S> <C> <C> <C>
Interest on accumulated benefit obligation $220 $214 $219
Amortization of transition obligation 116 116 116
Net amortization and other 4 20 20
---- ---- ----
$340 $350 $355
==== ==== ====
</TABLE>
The status of the plan at December 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
(Amounts in thousands) 1997 1996
- ---------------------- ---- ----
<S> <C> <C>
Accumulated post-retirement benefit obligation (APBO):
Retirees $2,765 $2,875
Active Employees 364 339
------ ------
3,129 3,214
Unamortized transition obligation (1,744) (1,861)
Unrecognized net loss (312) (466)
------ ------
Accrued liability $1,073 $ 887
====== ======
</TABLE>
In determining the APBO as of December 31, 1997 and 1996, the weighted average
discount rate used was 7%. The Company used a healthcare cost trend rate of
approximately 11%, decreasing through 2007 and leveling off at 6% thereafter. A
1% increase in the healthcare trend rate would increase the APBO at December 31,
1997 by approximately 3% and increase the interest cost component of the
post-retirement benefit expense for 1997 by less than $10,000.
NOTE K - OTHER INCOME, NET
Other Income, Net consists of the following for the three years ended December
31, 1997:
<TABLE>
<CAPTION>
(Amounts in thousands) 1997 1996 1995
- ---------------------- ---- ---- ----
<S> <C> <C> <C>
Interest income $ 741 $1,117 $ 285
Equity in earnings of DCC (Note G) 377 288 401
Gain on sale of two direct sales offices --- --- 1,213
Other, net 419 465 230
------ ------ ------
$1,537 $1,870 $2,129
====== ====== ======
</TABLE>
NOTE L - UNISTAR
On December 19, 1995, the Company acquired 100% of the common stock of Unistar
Gaming Corporation (Unistar Gaming) for 3.7 million shares of the Company's
common stock valued at $5.4 million and 350,000 shares of newly issued preferred
stock valued at $7.3 million. Unistar Gaming's subsidiary, UniStar
Entertainment, Inc. (UniStar), has an exclusive five-year contract to design,
develop, finance and manage the National Indian Lottery (NIL) for the Coeur
d'Alene Tribe of Idaho (CDA). The NIL comprises a national telephone lottery
authorized by federal law and a compact between the State of Idaho and CDA, as
well as Internet-based lottery games. In return for providing these management
services to the NIL, UniStar will be paid a fee equal to 30% of the profits of
the NIL. UniStar did not have any assets or operations other than the NIL
contract prior to its acquisition by the Company.
The purchase price was approximately $12.7 million and was based upon the
determination by an investment banking firm of the value assigned to the common
and the preferred stock issued in the transaction. The common stock valuation
was based upon the value of the common stock issued at the closing date,
discounted for restrictions on the sale of the
22
<PAGE>
<PAGE>
shares, which range from six to twenty-six months. The preferred stock was
valued based upon the number of shares of common stock into which it was
estimated that the preferred shares may be converted at some future date. The
excess of the purchase price over the value of the net liabilities assumed has
been included in intangible assets and will be amortized over the five-year term
of the contract commencing in the first quarter of 1998.
The preferred stock consists of 250,000 shares of Cumulative Convertible
Preferred Stock, Series A (Series A Preferred Stock) and 100,000 shares of
Cumulative Contingently Convertible Preferred Stock, Series B (Series B
Preferred Stock). The Series A Preferred Stock has voting rights equal to one
share of common stock and will earn dividends equal to 18.5% of the consolidated
retained earnings of UniStar as of the end of a fiscal period, less any
dividends paid to the holders of the Series A Preferred Stock prior to such
date. The Series B Preferred Stock has voting rights equal to one share of
common stock and will earn dividends equal to 31.5% of the consolidated retained
earnings of UniStar as of the end of a fiscal period, less any dividends paid to
the holders of the Series B Preferred Stock prior to such date. All dividends on
Preferred Stock are payable (i) when and as declared by the Board of Directors,
(ii) upon conversion or redemption of the Series A and Series B Preferred Stock
or (iii) upon liquidation. The Series A and Series B Preferred Stock is
redeemable for a total of 13.3 million shares of common stock (Series A
Preferred Stock for 4.925 million shares and Series B Preferred Stock for 8.375
million shares) at the Company's option. In the event that UniStar meets certain
revenue and profit parameters, the Series A Preferred Stock is convertible for
up to 4.925 million shares of common stock and the Series B Preferred Stock is
convertible for up to 8.375 million shares of common stock (a total of an
additional 13.3 million shares of common stock). Liquidation preferences for all
shares of Series A and Series B preferred stock total $7.3 million as of
December 31, 1997. Liquidation preference is based upon fair market value of the
Series A and Series B preferred stock as determined by the investment banking
firm engaged by the Company, plus any dividends in arrears. As of December 31,
1997, no dividends have accrued to the preferred stockholders.
In an attempt to block the NIL, certain states filed letters under 18 U.S.C.
Section 1084 to prevent the long-distance carriers from providing telephone
service to the NIL. In 1995, the CDA initiated legal action against AT&T
Corporation (AT&T) to compel the long-distance carriers to provide telephone
service to the NIL. The CDA's position is that the lottery is authorized by the
Indian Gaming Regulatory Act (IGRA) passed by Congress in 1988, that IGRA
preempts state law, that 18 U.S.C. Section 1084 is inapplicable and, therefore,
that the states lack authority to issue the Section 1084 notification letters to
any carrier. On February 28, 1996, the NIL was ruled lawful by the CDA Tribal
Court. The CDA Tribal Court found that all requirements of IGRA have been
satisfied and the Section 1084 letters issued by certain state attorneys general
in an effort to interfere with the lawful operation of the NIL are invalid. In
addition, the Tribal Court found that the long-distance carriers cannot refuse
to provide the service requested in the action based upon 18 U.S.C. Section
1084. This ruling and a related order dated May 1, 1996 were subsequently
appealed to the Tribal Appellate Court, which on July 2, 1997 affirmed the lower
Tribal Court's May 1, 1996 ruling and analysis upholding the CDA's right to
conduct the telephone lottery. On August 22, 1997, AT&T filed a complaint for
declaratory judgment against the CDA in the U.S. District Court for the District
of Idaho. The CDA has answered that complaint. In March 1998, the attorneys
general of nineteen states filed a motion for permission to submit a brief as
amicus curiae in the case with respect to the Tribal Court's interpretation of
IGRA and in support of the position taken by AT&T.
On May 28, 1997, the State of Missouri brought an action in the Missouri Circuit
Court in Kansas City against UniStar and the CDA to enjoin the NIL's US Lottery
Internet instant games offered by the CDA and managed by UniStar. The complaint
also seeks civil penalties, attorney's fees and court costs. The complaint
alleged that the US Lottery violates Missouri anti-gaming laws and that the
marketing and promotion of the US Lottery violate the Missouri Merchandising
Practices Act. The CDA and UniStar removed the case to the U.S. District Court
for the Western District of Missouri, which denied the State's subsequent motion
to remand the case back to the state court. The Court also subsequently granted
a motion to dismiss by CDA based on sovereign immunity. The Court denied the
motion to dismiss UniStar based on sovereign immunity, although the Court
indicated it might reconsider that decision. UniStar filed a motion for
reconsideration of its motion for dismissal. The State of Missouri has filed a
notice of appeal evidencing its intent to appeal to the Eighth Circuit Court of
Appeals, the dismissal of the CDA.
On January 28, 1998, the State of Missouri sought to dismiss voluntarily the
existing case against UniStar and filed the next day, a new action against the
Company, UniStar and two tribal officials, with essentially the same
allegations, in a state court in a different district. The State obtained a
temporary restraining order from a state judge enjoining the marketing of the
Internet and telephone lottery in the State of Missouri. On February 5, 1998,
the U.S. District Court for the Eastern District of Missouri ruled that this
second case also should be heard in federal court, transferred the second
23
<PAGE>
<PAGE>
case to the Western District of Missouri, where the original case had been
filed, and dissolved the state court's temporary restraining order, effective
February 9, 1998. A motion to dismiss the second case based on the sovereign
immunity of all the defendants and a motion to abstain in favor of the
jurisdiction of the CDA Tribal Court are pending. The State of Missouri has
filed a notice of appeal evidencing its intent to appeal the denial of its
motion to remand the case to State Court or in the alternative to grant a
preliminary injunction.
On September 15, 1997, the State of Wisconsin, by its Attorney General, filed an
action in the Wisconsin State Circuit Court for Dane County against the Company,
UniStar and the CDA, to permanently enjoin the US Lottery offered by the Tribe
on the Internet and managed by UniStar. The complaint alleges that the offering
of the US Lottery violates Wisconsin anti-gambling laws and that legality of the
US Lottery has been misrepresented to Wisconsin residents in violation of state
law. In addition to an injunction, the suit seeks restitution, civil penalties,
attorneys' fees and court costs. The Company, UniStar and the CDA have removed
the case to the U.S. District Court in Wisconsin. On February 18, 1998, the
District Court dismissed the Tribe from the case based on sovereign immunity and
dismissed the Company based on the State's failure to state a claim against the
Company. Motions to dismiss the case against UniStar were denied. UniStar has
filed a notice of appeal evidencing its intent to appeal to the Seventh Circuit
Court of Appeals the denial of its motion to dismiss.
The Company believes, based on consultation with and opinions rendered by
outside legal counsel, that the favorable rulings of the tribal courts will be
affirmed by the Idaho federal court. The Company believes that UniStar also will
prevail in the Missouri and Wisconsin lawsuits. However, there is no assurance
of such a legal outcome. The Company accrued $1 million in 1995 to cover
estimated legal costs through the possible appeal to the U.S. District Court. If
the matter is appealed beyond the U.S. District Court or if additional court
challenges are brought by states opposed to the NIL, the Company estimates that
additional legal costs could be in the range of $1 million to $2 million.
Funding for UniStar capital expenditures, including the computers and software
to build the telecommunications system, will be capitalized and depreciated over
the life of the management agreement. The guaranteed monthly advance of $25,000
to the CDA, which began in January 1996, will be reimbursed when the NIL is
operational and making profit distributions to UniStar. In addition, the Company
has capitalized other fundings, consisting primarily of direct UniStar expenses,
professional fees and other expenses, which the Company believes are
reimbursable in accordance with the terms of the management agreement.
Cumulative funding as described above totals $8.0 million ($5.9 million for the
year ended December 31, 1997) and is reflected in non-current other assets.
The Company has also funded legal and other accrued liabilities assumed as part
of the acquisition of UniStar totaling, on a cumulative basis, $2.4 million
($0.3 million for the year ended December 31, 1997). Such cash flows, which were
previously reflected as part of the change in working capital items, are now
reflected as part of the investment in UniStar in the statement of cash flows.
Prior year amounts have been reclassified to conform to the current year's
presentation. The investment in UniStar reflected on the statement of cash flows
includes the deferred charges and assumed liabilities noted above (net of $0.6
million in capital lease obligations) for a cumulative total of $9.7 million
($5.6 million for the year ended December 31, 1997). Since inception, the
Company has also funded various UniStar expenses totaling $1.6 million, which
are reflected in the Company's consolidated net income. Cumulative cash
expenditures on UniStar, including UniStar expenses, total $11.3 million as of
December 31, 1997.
Other than legal costs related to an appeal of the CDA Tribal Court ruling or
other actions by the states, if any, the Company estimates that it will invest
an additional $2 million to $4 million by June 1998. The costs include capital
expenditures for computers and software to build the telecommunications system,
funds to complete the building on the CDA reservation which will be the
operations center for the lottery, and various start-up and operating expenses
including personnel-related costs and advertising expenses. The Company is also
required to make a guaranteed payment of $300,000 per year to the CDA, which is
included in the above estimates. The Company expects it will be able to obtain
additional financing for these costs, if necessary.
In February 1997, the Company signed agreements with Virtual Gaming Technologies
(formerly Internet Gaming Technologies (IGT)) and CasinoWorld Holdings, Ltd.
(CWH). The agreements required the Company to invest $700,000 in IGT common
stock in September 1996 under a previous agreement. In addition, the Company was
granted a 200,000-share, five-year option set at 15% more than the price per
share on the initial investment, or $3.45 per share. CWH is to provide project
management services overseeing the development of the software for the NIL, with
the
24
<PAGE>
<PAGE>
Company contracting independently for system software development. Such charges
are not to exceed $2 million. The Company will acquire all hardware for the
system without financial obligation by either IGT or CWH. Approximately $600,000
in hardware costs were incurred as of December 31, 1997. All of these system
development costs are included in the above estimate for expenditures through
June 1998.
The investment in IGT is being accounted for under the cost method. All hardware
costs incurred will be capitalized and depreciated over the useful life of the
assets, beginning when the assets are placed in service. As of December 31,
1997, $1.5 million in progress payments have been made toward the software
system. Such payments are being deferred until completion of the system and will
be capitalized and depreciated over the life of the asset or term of the
management agreement, whichever is shorter.
There are market and legal risks associated with the development of the NIL. The
Company believes there is a national market for the NIL based upon research into
the experience of other national lotteries and the growth of the overall lottery
market. In the event that the telephone and Internet lotteries do not attain the
level of market acceptance anticipated by the Company or if the outcome of the
pending lawsuits is adverse, the Company would have to reevaluate its investment
in UniStar.
The Company periodically evaluates the recoverability of this investment in
UniStar in accordance with the provisions of FAS No. 121, "Accounting for the
Impairment of Long-Lived Assets" by projecting future undiscounted net cash
flows for the telephone and Internet lotteries. If the sum of such cash flows is
not sufficient to recover the Company's investment in UniStar, projected cash
flows would then be discounted and the Company's investment would be adjusted
accordingly.
NOTE M - SALE OF BUSINESSES AND OTHER ACQUISITIONS/DISPOSITIONS
On May 31, 1996, the Company sold its direct sales and service organization,
including its Network Services division to Clarity Telecom Holdings, Inc. d/b/a
Executone Business Solutions (Clarity, subsequently renamed Claricom), a new
acquisition company formed for the acquisition by Bain Capital, Inc. The Company
received $61.5 million in cash, a $5.9 million junior subordinated note due July
1, 2004, with interest at 7.5% per year, and warrants to purchase 8% of the
equity issued as of the closing in the new company for $1.1 million, exercisable
for three years. After recording the notes and the warrants at their fair market
value, the total value of the consideration received was $69.6 million. The
Company and Claricom also entered into a five-year exclusive distributor
agreement pursuant to which Claricom will sell and service 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 sold to one of its existing independent distributors for
approximately $1.3 million in cash and notes in May 1996, resulting in no gain
or loss. The sale of the direct offices (including the separate sale of the
Pittsburgh office) related primarily to the retail distribution channel of the
Computer Telephony division and included the Network Services division.
The Company recorded a pretax gain of $48.9 million on the sale to Claricom net
of transaction, severance and other costs related to the sale. The proceeds were
used to repay the Company's bank borrowings, and the excess was invested in
short-term cash investments.
The cash proceeds of $61.5 million included $5.0 million which was held in
escrow and reported on the consolidated balance sheet as of December 31, 1997
and 1996 as restricted cash. These funds were released to the Company, by
Claricom on March 31, 1998.
For the years ended December 31, 1997 and 1996, more than 10% of the Company's
revenues were derived from a single independent distributor, Claricom. Revenues,
net of discounts, were $29.3 million and $31.7 for 1997 and for the seven-month
post-sale period in 1996, respectively.
25
<PAGE>
<PAGE>
In June 1996, the Company sold its Videoconferencing division to BT Visual
Images LLC for a $0.2 million note, royalties on videoconferencing revenue
through June 1998 and contingent consideration related to the sale of equipment
inventory. The Company recorded a loss of $3.9 million on the transaction.
In April 1996, the Company also sold its Inmate Calling business for $0.5
million in cash and notes and recorded a pretax loss of $1.0 million. Neither
the Pittsburgh direct sales office, the Videoconferencing division, nor the
Inmate Calling business constituted a material portion of the Company's assets,
revenues or net income prior to sale.
During the fourth quarter of 1995, the Company sold its customer bases in
Wisconsin and Iowa and the net assets of the related direct sales offices for a
total of $2.1 million, consisting of $125,000 cash, a $1.8 million note, the
proceeds of which were received in February 1996, and a $150,000 note due in
installments by November 2001. These sales generated a gain of approximately
$1.2 million, which is included in Other Income, Net for the year ended December
31, 1995.
During the first quarter of 1995, the Company was involved in extensive
negotiations to acquire the Dictaphone division of Pitney Bowes. In April 1995,
the acquisition was awarded to another bidder. The Company incurred
approximately $1 million in fees and expenses related to the attempted
acquisition which were recognized during 1995.
NOTE N - PROVISION FOR RESTRUCTURING
In July 1995, the Company reorganized its then-existing business into five
divisions: Computer Telephony, Healthcare Communications Systems, Call Center
Management, Videoconferencing Products, and Network Services, and changed its
business strategy in the Computer Telephony division to focus on software
applications in the communications market. The business that was acquired in
1988 was a telephone equipment hardware company focused on customers with small
systems, with an emphasis on selling additional hardware and service to generate
add-on revenue. As a result of the change in strategy, the business acquired in
1988 was de-emphasized. The Company adopted FAS No. 121, requiring impairment to
be measured by projecting the lowest level of identifiable future cash flows.
The Company concluded there was an impairment. As a result, the Company recorded
a $44.0 million provision for restructuring consisting of a $33.5 million
goodwill impairment, an $8.8 million write-down of inventory, primarily service
stock relating to the impaired assets and other non-recurring inventory
adjustments, $0.9 million related to the shutdown of the Company's Scottsdale,
Arizona facility and $0.8 million of other unusual items.
In accordance with the provisions of FAS No. 121, the Company prepared
projections of future operating cash flows relating to the telephony business
acquired in 1988 based upon the Company's change in strategic direction. These
projections indicated that this business would not generate sufficient operating
cash flows to realize goodwill and the related service stock. The amount of
impairment of the telephony goodwill was $33.5 million as of June 30, 1995.
The write-off of inventory, primarily service stock, consisted of $1.3 million
of raw materials inventory and $7.5 million of finished goods inventory. These
amounts were determined based upon a review of specific inventory parts along
with projected usage, incorporating the strategic direction of the Company.
NOTE O - SUBSEQUENT EVENTS (UNAUDITED)
Corporate Reorganization. On January 8, 1998, the Company announced the
beginning of the restructuring of its businesses and the retirement of its Chief
Executive Officer (CEO). These announcements have resulted in several related
charges which will be reflected in the consolidated financial statements for the
first quarter of 1998.
Alan Kessman, Chairman and CEO of the Company announced his intention to retire
from the management of the day-to-day operations of the Company. In accordance
with the diminishment of responsibility section of his employment continuity
agreement, Mr. Kessman will receive a severance payment of $1.3 million. The
Company will establish a reserve for this cost during the first quarter of 1998.
The Company has retained an executive search firm to find a successor for Mr.
Kessman, who has agreed to remain in his current position until his successor
is selected. The Company has incurred
26
<PAGE>
<PAGE>
approximately $0.2 million in expenses to recruit a new CEO which will be
expensed as part of the restructuring charge in the first quarter of 1998.
In addition, the Company has restructured current operations which resulted in a
workforce reduction during January and February 1998. The Company will incur
approximately $0.6 million for severance, benefits and other restructuring
charges in the first quarter of 1998.
As previously announced, Furman Selz LLC has been hired to advise the Company as
to certain financing and corporate restructuring options. Based upon advice of
Furman Selz and the recommendation of a special committee of the Board of
Directors, the Board has determined that it is in the best interests of the
shareholders of the Company to separate the business of the Company's UniStar
subsidiary from the operations of its computer telephony and healthcare
communications businesses. The Company expects, subject to completion of further
analysis and receipt of necessary approvals, that the separation would be
effected through a taxable distribution to shareholders later this year.
During the first quarter of 1998, the Company incurred approximately $0.2
million in advisory expenses related to preparation and review of corporate
restructuring options. Future expenses will be dependent upon the form and
nature of the corporate restructuring. The Company is also pursuing a plan to
retain and motivate key employees, the details of which are expected to be
concluded by the second quarter of 1998.
In total, the Company expects to record a restructuring charge of approximately
$2.3 million during the first quarter of 1998.
Amended Distributor Agreement with Claricom. On March 30, 1998, the Company
entered into an Amended and Restated Distributor Agreement with Claricom (the
"Amended Agreement"). The Amended Agreement, effective April 1, 1998 and
continuing through December 31, 2001, provides, among other things, that
Claricom will be a non-exclusive distributor of the Company's telephony products
and that Claricom can market products competing with those sold by the Company.
Upon execution of the Amended Agreement, Claricom released to the Company the $5
million plus interest being held in escrow to satisfy potential indemnity claims
under the 1996 Asset Purchase Agreement and waived all potential contract claims
under the prior distributor agreement.
27
<PAGE>
<PAGE>
NOTE P - SELECTED QUARTERLY FINANCIAL DATA
The following is a summary of unaudited selected quarterly financial data for
the years ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------
March 31, June 30, September 30, December 31,
(In thousands, except for per share amounts) 1997 1997 1997 1997
---------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues $39,019 $34,777 $42,936 $39,664
Gross Profit 14,120 9,899 14,892 14,098
Income (Loss) Before Income Taxes 854 (3,942) 1,321 1,409
Net Income (Loss) 512 (2,371) 793 845
Basic and Diluted Earnings (Loss) Per Share 0.01 (0.05) 0.02 0.02
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------
March 31, June 30, September 30, December 31,
(In thousands, except for per share amounts) 1996 1996 1996 1996
------------ --------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues $66,966 $51,982 $44,791 $48,283
Gross Profit 26,520 18,969 16,458 17,565
Income (Loss) Before Income Taxes
and Extraordinary Item (8,969) 39,820 3,535 5,396
Income (Loss) Before Extraordinary Item (5,358) 23,860 2,124 3,536
Net Income (Loss) (5,358) 23,860 2,124 3,181
Earnings (Loss) Per Share:
Income (Loss) Before Extraordinary Item (0.10) 0.46 0.04 0.07
Extraordinary Item --- --- --- (0.01)
Diluted Earnings (Loss) Per Share:
Income (Loss) Before Extraordinary Item (0.10) 0.44 0.04 0.07
Extraordinary Item --- --- --- (0.01)
</TABLE>
The three months ended March 31, 1996 includes a loss of $4.9 million relating
to the sale of the Videoconferencing and Inmate Calling businesses (see Note M).
The three months ended June 30 and December 31, 1996 include a pretax gain on
the sale of businesses (See Note M) of $47.5 million and $1.4 million,
respectively.
STOCK DATA
The number of holders of record of the Company's Common Stock as of the close of
business on February 28, 1998 was approximately 2,000. The Common Stock is
traded on the NASDAQ National Market System under the symbol "XTON". As reported
by NASDAQ on February 23, 1998, the closing sale price of the Common Stock on
the NASDAQ National Market System was $2 3/8. The following table reflects in
dollars the high and low closing sale prices for EXECUTONE's Common Stock as
reported by the NASDAQ National Market System for the periods indicated:
<TABLE>
<CAPTION>
Fiscal Period High Low
------------- ---- ---
<S> <C> <C>
1997
First Quarter $2 13/16 $2 7/16
Second Quarter 2 3/4 1 11/16
Third Quarter 2 1/8 1 11/16
Fourth Quarter 2 3/4 1 7/8
</TABLE>
28
<PAGE>
<PAGE>
<TABLE>
<S> <C> <C>
1996
First Quarter $3 7/16 $2 3/16
Second Quarter 3 3/4 2 5/8
Third Quarter 3 1/4 2 5/16
Fourth Quarter 3 1/16 2 3/8
</TABLE>
It is the present policy of the Board of Directors to retain earnings for use in
the business and the Company does not anticipate paying any cash dividends on
the Common Stock in the foreseeable future.
29
<PAGE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
EXECUTONE Information Systems, Inc.:
We have audited the accompanying consolidated balance sheets of EXECUTONE
Information Systems, Inc. (a Virginia corporation) and subsidiaries as of
December 31, 1997 and 1996, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of EXECUTONE Information Systems,
Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Stamford, Connecticut
February 7, 1998
30
<PAGE>
<PAGE>
STOCKHOLDER INFORMATION
<TABLE>
<S> <C>
CORPORATE HEADQUARTERS INDEPENDENT PUBLIC ACCOUNTANTS
EXECUTONE Information Systems, Inc. Arthur Andersen LLP
478 Wheelers Farms Road Champion Plaza
Milford, Connecticut 06460 400 Atlantic Street
(203) 876-7600 Stamford, Connecticut 06912-0021
http://www.executone.com
OUTSIDE COUNSEL
STOCK AND WARRANT TRANSFER AGENT Hunton & Williams
American Stock Transfer and Trust Company Riverfront Plaza
40 Wall Street 951 East Byrd Street
New York, New York 10005 Richmond, Virginia 23219
BOND TRANSFER AGENT ADDITIONAL INFORMATION
U.S. Trust Company of New York A copy of EXECUTONE's Annual Report on Form 10-K,
114 West 47th Street which is filed with the Securities and Exchange Commission,
New York, New York 10036-1532 is available without charge by writing to:
DAVID KRIETZBERG
Treasurer/Investor Relations
Corporate Headquarters
DIRECTORS AND OFFICERS
BOARD OF DIRECTORS
- ---------------------------------------------------------------------------------------------------------------------------------
ALAN KESSMAN JERRY M. SESLOWE 2
Chairman of the Board Managing Director
Resource Holdings, Ltd.
STANLEY M. BLAU 1
Vice Chairman LOUIS K. ADLER 2
Private Investor
THURSTON R. MOORE 1
Partner
Hunton & Williams
RICHARD S. ROSENBLOOM 2
David Sarnoff Professor of Business Administration
Harvard Business School
1 AUDIT COMMITTEE MEMBER
2 COMPENSATION COMMITTEE MEMBER
OFFICERS
- ---------------------------------------------------------------------------------------------------------------------------------
ALAN KESSMAN ANTHONY R. GUARASCIO VIC NORTHRUP
President and Chief Executive Officer Vice President, Finance & Administration Vice President
Chief Financial Officer President, Computer Telephony
MICHAEL W. YACENDA
Executive Vice President ISRAEL J. HERSH FRANK J. ROTATORI
President, UniStar Vice President, Software Engineering Vice President
President, Healthcare Communications
BARBARA C. ANDERSON ROBERT W. HOPWOOD
Vice President, General Counsel and Vice President SHLOMO SHUR
Secretary Vice President - Operations, UniStar Senior Vice President,
Advanced Technology
JAMES E. COOKE III ANDREW KONTOMERKOS
Vice President, National Accounts Senior Vice President, Hardware
Engineering and Production
</TABLE>
31
<PAGE>
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF EXECUTONE INFORMATION SYSTEMS, INC.
<TABLE>
<CAPTION>
JURISDICTION OF %
NAME INCORPORATION OWNERSHIP BUSINESS
<S> <C> <C> <C>
Unistar Gaming Corporation Delaware 100% Holding Company
UniStar Entertainment, Inc. Idaho 100% Lottery Management
</TABLE>
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>
<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 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 15, 1998
<PAGE>
<PAGE>
EXHIBIT 23.2
April 14, 1998
EXECUTONE Information Systems, Inc.
478 Wheelers Farms Road
Milford, CT 06460
ANNUAL REPORT ON FORM 10-K FOR THE
FISCAL YEAR ENDED DECEMBER 31, 1997
(FILE NO. 000-11551)
-------------------
Gentlemen:
This firm has reviewed the information set forth in the fifth paragraph under
"Overview of Business and Strategy" under Item 1., Business, and the information
set forth in the fifth paragraph under Item 3, Legal Proceedings, of the Annual
Report on Form 10-K for the fiscal year ended December 31, 1997 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
Annual Report on Form 10-K.
Very truly yours,
HUNTON & WILLIAMS
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet of Executone Information Systems, Inc. and
subsidiaries as of December 31, 1997 and the related consolidated statement
of operations for the year ended December 31, 1997 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 7,727
<SECURITIES> 0
<RECEIVABLES> 35,217
<ALLOWANCES> 1,814
<INVENTORY> 20,436
<CURRENT-ASSETS> 70,741
<PP&E> 19,463
<DEPRECIATION> 11,696
<TOTAL-ASSETS> 138,864
<CURRENT-LIABILITIES> 42,631
<BONDS> 14,643
<COMMON> 497
0
7,300
<OTHER-SE> 72,701
<TOTAL-LIABILITY-AND-EQUITY> 138,864
<SALES> 156,396
<TOTAL-REVENUES> 156,396
<CGS> 103,387
<TOTAL-COSTS> 103,387
<OTHER-EXPENSES> 52,919
<LOSS-PROVISION> 277
<INTEREST-EXPENSE> 1,985
<INCOME-PRETAX> (358)
<INCOME-TAX> (137)
<INCOME-CONTINUING> (221)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (221)
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
<PAGE>
