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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
For the fiscal year ended December 31, 1998
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 February 26, 1999 was $120,326,322,
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 February 26, 1999, was 49,425,628.
DOCUMENTS INCORPORATED BY REFERENCE
None
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TABLE OF CONTENTS
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PART I
1. Business 1
2. Properties 21
3. Legal Proceedings 21
4. Submission of Matters to a Vote of Security Holders 23
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters 24
6. Selected Financial Data 24
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 25
7A. Quantitative and Qualitative Disclosures About Market Risk 34
8. Financial Statements and Supplementary Data 35
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 64
PART III
10. Directors and Executive Officers of the Registrant 65
11. Executive Compensation 69
12. Security Ownership of Certain Beneficial Owners and Management 79
13. Certain Relationships and Related Transactions 82
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 86
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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 and
workflow management systems. 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. The
Company's eLottery, Inc. subsidiary develops, provides and maintains Internet,
intranet and telephone communications, accounting, database and other
applications and services for use by the domestic and international lottery
market. 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
In 1998 the Board of Directors determined that it is in the best
interests of the shareholders of Executone to separate the business of the
Company's eLottery, Inc. subsidiary (formerly named UniStar Gaming Corp.) from
the operations of its computer telephony and healthcare communications
businesses. On March 29, 1999, the Board of Directors announced that it had been
exploring various alternatives to the previously announced spin off of
eLottery's common stock to the shareholders of Executone to accomplish the
separation of eLottery Inc. from Executone's core businesses. The Company
announced that it will divest its core telephony and healthcare businesses and
change the name of the Company to "eLottery, Inc." At the same time, the Board
of Directors announced that it had received an offer for those businesses from a
group lead by Stanley J. Kabala, Chairman and Chief Executive Officer of
Executone, and that it has formed a special committee of the Board, chaired by
outside director Louis Adler, to accomplish the divestiture. The offer from
management is in the range of $70 million and is subject to a number of
conditions including negotiation of a definitive agreement, financing, the
waiver or expiration of a pre-existing right of first offer, and approval of the
Executone shareholders. A final decision as to the method of divesting this
business has not been made by the Board of Directors. The Board of Directors
stated that its analysis of the proposed sale transaction is that it creates
more value for Executone's shareholders than the spin off of the eLottery common
stock with its tax consequences for which the Company had previously filed a
registration statement. Accordingly, the Company terminated the previously filed
registration statement. The proceeds of any sale of the core businesses will
remain in the Company to help it accelerate the achievement of eLottery's
business plans. At the conclusion of the transaction and subject to shareholder
approval, Executone Information Systems would be renamed eLottery.
On April 7, 1999, the Company announced that it had received approval
from 100% of its preferred shareholders to terminate the Share Exchange
Agreement dated
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August 12, 1998, as amended December 22, 1998, which was entered into to
facilitate the eLottery spin off. In connection with the termination of the
Share Exchange Agreement, Executone agreed to redeem its outstanding preferred
stock by converting it into common stock pursuant to its original terms. The
preferred stock was created when Executone purchased eLottery's predecessor
company, Unistar Gaming Corp., in 1995. The redemption of the preferred stock,
which will occur in the second quarter of 1999, increases the ownership
percentage of the existing common stockholders compared to the previous Share
Exchange Agreement. Under the terminated Share Exchange Agreement, preferred
holders had the right to convert their Executone preferred stock into 15% of
eLottery with the potential to reach 34% ownership upon the achievement of
certain milestones. With the redemption, the preferred holders will hold 21% of
Executone's common equity and will no longer be entitled to a preferred dividend
of 50% of eLottery's earnings.
Overview of Business and Strategy
The Company's revenues are derived primarily from product sales to
distributors and direct sales to healthcare, 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 and to smaller
locations of large commercial and governmental organizations. The Company's
integrated digital telephone systems provide the platform for other flexible
voice and data software applications, including software applications offered by
the Company that are designed to enhance the customer's ability to communicate,
obtain and manage information. The Company's 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 develops,
manufactures, sells and services nurse and patient communication systems, the
INFOSTAR/ILS infrared locator system, products that integrate voice and data
between such systems, telephone systems and healthcare information systems. The
Company's healthcare communications products are designed to increase
productivity, flexibility and efficiency in hospital operations and improve
patient care. Executone has been a recognized name in the healthcare
communications market segment 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 improve patient care and service and resolve
labor intensive tasks.
On December 19, 1995, the Company acquired 100% of the common stock of
Unistar Gaming Corp., a Delaware corporation, which was renamed eLottery, Inc.
in January 1999 ("eLottery"). eLottery's subsidiary, UniStar Entertainment, has
an exclusive five-year contract ending January 2003 to design, develop, finance,
and manage the National Indian Lottery for the Coeur d'Alene Tribe of Idaho.
UniStar Entertainment provided development and management of the software,
network design and call center applications for the National Indian Lottery's
operations until December 17, 1998, when National Indian Lottery operations were
terminated in response to an adverse legal
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decision. See" Legal Proceedings."
eLottery is pursuing opportunities to become a web-based retailer of
lottery services and to license its systems and services to state and
international lotteries. eLottery develops, provides and maintains Internet,
Intranet, telephone, communications, accounting, banking, database and other
applications and services to facilitate the electronic sale of new and existing
lottery products worldwide. Using its past experience and market-tested
products, eLottery is committed to leading the governmental lottery industry
into the eCommerce market. The Company has positioned itself to become a leader
in the area by addressing the many complex legal, political and social issues
facing governmental lotteries as they react to the significant market changes
signaled by the rapid growth in Internet sales. The Company has developed,
installed and operated Internet, Intranet, telephone, communications,
accounting, banking, database and other applications and services to facilitate
the electronic sale of new and existing lottery products worldwide.
eLottery has developed proprietary lottery technologies designed to
take advantage of the impact that the Company believes recent advances in
telecommunications and computers will have on the nature and delivery of lottery
products and the support systems necessary to administer them. eLottery believes
it is the first to develop and operate secure, integrated Internet, Intranet and
telephone lottery gaming systems. Its Internet and Intranet systems provide for
the electronic sale and support of both periodic and instant draw lottery games
and instant electronic "scratch-off" games. Using eLottery's systems, lotteries
will be able to electronically distribute lottery tickets for both periodic and
instant draw lottery games over the Internet through its website, eLottery.com,
through an Intranet, using telephony and through stand-alone custom-designed
electronic lottery terminals. eLottery believes that the electronic distribution
of lottery tickets through these systems will increase sales for lotteries
because the systems make the purchase of tickets easier and use technology to
enhance the lottery gaming experience. Subject to applicable law, the
eLottery.com website can contain links to the sites of participating lotteries
utilizing eLottery technologies to sell their lottery tickets over the Internet.
eLottery also may sell lottery tickets as an agent for certain lottery
operators. eLottery believes that its systems provide lotteries with numerous
advantages relative to traditional means of distribution including player
tracking ability, sale of tickets over the Internet and entertaining fast-play
instant games, and that the combination of the advantages of Internet commerce
and eLottery's ability to customize its systems will result in eLottery becoming
an agent and leading provider of products and services for the lottery industry.
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, standalone and LAN-based
computer telephony 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.
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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 and 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
its IDS telephone systems and with telephone systems manufactured by others and
a complete voice processing system built on a card that integrates directly into
the IDS switch. The INFOSTAR voice mail systems receive, record, store,
distribute, transfer and replay messages from both external and internal callers
and can supplement other call center systems.
In 1998, the Company 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
also offers 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 caller, thereby providing better
customer service, reducing the number of required agents and reducing telephone
line and transmission expense.
The Company 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 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,
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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 (automatic call distribution) 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 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
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.
Computer Telephony Sales and Marketing
The Company's computer telephony distribution network consists of (1)
domestic independent distributors with approximately 188 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 independent distributors 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) five independent distributors operating in
five other foreign countries.
For those distributors (approximately 30 in number) 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 American Express, Future Electronics, W. W. Grainger,
Bridgestone/Firestone, and PetsMart . 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
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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. The Company's sales to the Federal Government and its
agencies were approximately $16.4 million in 1998, or more than 10% of total
Company revenues for 1998.
Sales to Claricom, Inc. ("Claricom"), the Company's largest
distributor, decreased by $13.1 or 42% in 1998 compared to 1997. The reduced
level of sales to Claricom had a significant impact on the financial results for
1998. 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 plan
to supplement sales in the Claricom territories with additional distribution,
which over time will give the Company the ability to increase revenues by adding
alternative distribution in those territories. In the thirteen months beginning
February, 1998, the Company signed distributor agreements with 20 new
distributors and signed additional agreements with six existing distributors
covering a total of 26 territories, 18 of which were formerly exclusive Claricom
territories. Revenues from the newly signed distributor agreements were not
material in 1998.
Since Claricom accounted for more than 10% of the Company's revenues in
1998 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.
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, 1998, was $12,885,000, compared to $10,814,000 at December
31, 1997, 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, Nortel, 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 the Company'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
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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 and information systems that are used
primarily in the acute care segment of 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 healthcare 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 and staff-staff communication
throughout a facility. The HCP provides the ability to offer "seamless"
communication among hospital employees, departments and facilities in "real
time", thereby improving operational efficiency throughout a facility. In
addition, the HCP improves efficiency through the integration of Executone's
full product line, including LifeSaver, CareCom II-E, INFOSTAR/ILS, TeleSearch
and INFOSTAR/StatLink.
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 signaling
capability, emergency signaling and sophisticated features facilitate easy
handling of all calls. 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.
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 control station 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. 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.
Wireless Telephone Systems. The Healthcare Communications group
currently distributes the Ericsson Freeset wireless telephones. 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.
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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 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. 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 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, allowing customers to determine which applications will
best fit their needs.
NETWORK ILS. Network ILS, consisting of two software applications,
Patient Suite and LightBoard, is designed to provide hospital staff with real
time information on the location of groups of assets related to their area of
responsibility. Patient Suite monitors the mobility and status of patients
throughout a Healthcare facility. Patient Suite consists of three separate
applications: Patient Track, Patient View, and Patient Report. Specifically
designed for ambulatory and outpatient care facilities, Patient Suite allows the
administrator to schedule, monitor, manage wait time, discharge, and create
reports on each patient within the facility. The LightBoard application presents
a real time display of assets located at a designated set of locations
throughout a facility. Asset groups such as nurses, aides, doctors, patients,
and equipment, can be observed at a glance. Detailed information is provided and
reported in real-time, as these assets or people
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move from one area to another. Three types of reports, as well as the ability to
print a list of people or assets at any particular location, are also included.
INFOSTAR/VLS System. The INFOSTAR/VLS Voice Locator System integrates
with any PBX telephone system to enable callers from inside or outside the
facility to locate people and assets. Once the person being sought has been
located, callers may 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". Using color codes, the
system shows which patients have been "waiting too long" or "who is next".
InfoSTAT provides the speed, flexibility and efficiency that only a computerized
system can provide. At a glance, staff can check the status of treatment rooms,
room and bed assignments, hospital staff assignment and location, and patient
status and location. InfoSTAT can be configured to meet the unique needs of each
hospital and integrates with a facility's existing administrative software such
as ADT systems.
ReportStar. The ReportStar system is a management reporting package
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 is an Oracle(R)-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 designed with a user-friendly
graphical user interface to make it easy for staff to access. Reports are useful
for measuring activity, quality, efficiency and for supporting a facility's risk
management efforts.
Healthcare Sales and Marketing
The Company's healthcare communications distribution network consists
of (1) domestic independent distributors with approximately 70 locations
operating under exclusive and nonexclusive agreements throughout the United
States; (2) approximately 120 direct healthcare sales and service employees in
the United States; (3) 22 independent distributors operating in 18 foreign
countries; and (4) two National Accounts managers who work with national
purchasing groups and healthcare systems to improve penetration into additional
facilities.
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, 1998, was $18,526,000, compared to
$14,601,000 at December 31, 1997, and the Company expects virtually all of such
healthcare backlog to be filled within the current
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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, 1998, 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 1998, 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,
1998, 1997, and 1996, Company-sponsored product development and engineering
expenditures (including product management and testing) amounted to
approximately $10.1 million, $12.8 million, and 13.8 million, respectively.
Manufacturing
Most of the Company's telephone products are manufactured by the
Company directly in Poway, California , by Wong's Electronics Company, Ltd.
("Wong's") in Malaysia or China, or by Quality Telecommunication Products, also
referred to as Compania Dominicana de Telefonos ("Codetel"), in the Dominican
Republic. 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 2000 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.
The Company believes there are reasonable alternative sources for product
components necessary in its manufacturing operations.
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 facility in Poway.
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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 19 utility patents, expiring at
various times between 2007 and 2017, has six U.S. patent applications pending,
and eight patent applications pending in several foreign countries.
The Company has registered or applied to register its trademarks when
it believes registration to be important to its ongoing business operations. The
Company also generally claims copyright protection for software, circuit
designs, schematics and technical documentation used in connection with its
products, and relies upon trade secret, contract and copyright laws to protect
its proprietary rights in its software, designs and documentation.
Certain of 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.
Federal and state law regulates certain uses of outbound call
processing systems. 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, 1999, Executone employed approximately 650 persons,
directly
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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.
eLOTTERY BUSINESS
eLottery History
On December 19, 1995, the Company acquired 100% of the common stock of
eLottery. eLottery's subsidiary, UniStar Entertainment, has an exclusive
five-year contract ending January 2003 to design, develop, finance, and manage
the National Indian Lottery (the "NIL") for the Coeur d'Alene Tribe of Idaho
("CDA"). Until December 1998, UniStar Entertainment provided development and
management of the software, network design and call center applications for the
Lottery's operations. In return for providing these management services, CDA
agreed to pay UniStar Entertainment a fee equal to 30% of the profits of the
NIL. The NIL was never profitable. In December 1998, the U.S. District Court for
the District of Idaho ruled, in a case brought by AT&T, that the NIL was not
authorized by the federal Indian Gaming Regulatory Act of 1988 ("IGRA") and was
governed by state law, and the eLottery and the CDA terminated the NIL. See
"Legal Proceedings."
The CDA's initial plan was to establish a telephone lottery that could
be played by any individual of majority age, residing in one of the 37 states or
the District of Columbia that currently operates a state-run lottery. After the
Company's purchase of eLottery, the NIL business plan evolved to encompass
Internet-based instant lottery games, and, in January 1998, a local,
non-toll-free telephone and Internet-accessible weekly draw lottery. As a result
of the adverse legal decision, the Company reevaluated certain of the eLottery
assets and management determined that both the intangibles and the advances to
the NIL were impaired as of the date of the legal decision and these assets were
written down to zero, which represented the estimated fair value of the assets
as no future cash flows will be generated by the NIL.
eLottery currently plans to become a web-based retailer of lottery
products and to provide a wide array of products and services for the domestic
and international lottery markets. eLottery develops, provides and maintains
Internet, Intranet, telephone, communications, accounting, banking, database and
other applications and services to facilitate the electronic sale and
distribution of new and existing lottery products worldwide. eLottery has
developed a new generation of proprietary lottery technologies designed to take
advantage of the impact that eLottery believes recent advances in
telecommunications and computers will have on the nature and delivery of lottery
products and the support systems necessary to administer them. eLottery believes
it is the first to develop and operate secure, integrated Internet, Intranet and
telephone lottery gaming systems. Its Internet and Intranet systems provide for
the electronic sale and support of both periodic and instant draw lottery games
and instant electronic "scratch-off" games. Using eLottery's systems, lotteries
will be able to electronically distribute lottery tickets for both periodic and
instant draw lottery games over the Internet through eLottery's websites,
eLottery.com or eLotteryWorld.com, through an Intranet, using telephony and
through stand-alone custom-designed electronic lottery terminals located in
horse racing facilities, bars and other age-regulated environments. eLottery
believes that the electronic distribution of lottery tickets through these
systems will increase sales for lotteries because the systems make the purchase
of tickets easier and use technology to enhance the lottery gaming experience.
Subject to applicable law, eLottery plans for the eLottery.com website to be a
site containing links to the sites of participating lotteries
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utilizing eLottery technologies to sell their lottery tickets over the Internet.
eLottery also may sell lottery tickets as an agent for certain lottery
operators. The eLottery.com website and the lotteries will have the ability to
remain open 24 hours a day, seven days a week without incurring additional
overhead costs, and will be able to electronically distribute lottery tickets
and games and offer lottery players convenient and timely product fulfillment,
including the ability to pay prize winnings or cash credits on an overnight
delivery option for a fee via check or electronic funds transfer. eLottery
believes that its Internet lottery distribution systems will encourage lottery
patrons to play more frequently and will also attract new lottery customers.
eLottery believes that its systems provide lotteries with numerous advantages
relative to traditional means of distribution including player tracking ability,
sale of tickets over the Internet and entertaining fast-play instant games and
the combination of the advantages of Internet commerce and eLottery's ability to
customize its systems will result in eLottery becoming an agent and leading
provider of products and services for the lottery industry.
eLottery Products
eLottery develops, provides and maintains Internet, Intranet,
telephone, communications, accounting, banking, database and other applications
and services for use by the governmental lottery market. eLottery has developed
its systems to provide secure electronic production, delivery, validation,
billing and accounting for lottery games. The systems are configurable, which
allows the addition, deletion and substitution of games offered. Tickets may be
purchased through the lottery operations center using a personal computer
connected via the Internet, via custom-designed electronic lottery terminals
connected over a LAN or over the telephone.
Both the Internet and Intranet systems contain significant features and
procedures to prevent abusive play. eLottery believes that the Internet system
contains processes and procedures to protect against play by minors and to
control problem gaming and that the Intranet system as implemented will provide
protections against such play at least equal to that provided by existing
state-run lottery systems.
The key functions and components of the Company's electronic lottery
distribution system are as
follows:
Basic Operation. A customer registers, opens an account, and
receives a user identification number and password. Registration
can be through the Internet, by telephone or in person at a
lottery retail store. The customer deposits funds into the
account by debit card, cash or check. Once the account is funded,
the customer may use the available balance to purchase tickets to
play the games or other merchandise. Any prizes are credited to
the account. Customer withdrawals can be requested through the
Internet, by telephone or in person at a lottery retail store.
Card Access. The system can also be accessed using player cards.
Player cards add several dimensions to the system, particularly
from a regulatory point of view. Because these cards are issued
at controlled facilities, access to the system can be equally
controlled, enforcing, for example, age requirements, residency
requirements, use of cash and amount of play. In addition, these
lottery cards can be sold through the lotteries' existing agent
distribution channel. Several types of cards are available
including bearer cards, bonus cards, club cards and prepaid
lottery cards.
A bearer card has a unique identity (consisting of an ID and
Password embedded in the card) representing an account on the
system. These cards contain no information other than an
encrypted ID and PIN number, which are
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associated with accounts. These cards are available throughout
the hosting facility. Funds are added to the bearer cards at an
"Automated Recharge Machine" ("ARM") or at a cashier's station.
Cash can be added at any denomination at the cashier station, but
is limited to $1, $5, $10 or $20 increments at the ARM. Once a
player's card is funded (i.e., the associated account has funds
deposited), it may be used in a lottery gaming station or
custom-designed electronic lottery terminal to play games.
A bonus card is initialized with "bonus" dollars. These are
dollars that can be used to play games but cannot be cashed in.
Such cards are used as promotional cards to encourage people to
begin playing. They can be "recharged" with cash at any ARM or
cashier's station. However, the bonus dollars are consumed prior
to any cash added to the card and the bonus dollars cannot be
disbursed.
A club card is generally issued by an authorized lottery office
or authorized agent where player information can be assured
adequate protection and confidentiality. These cards are
protected with personal identification numbers or "PINs". Such
cards are to be used as members of the state "Lottery Club" and
will entitle them to various monthly promotions and other forms
of communications about the enhanced lottery games. The play
activity is tracked on these club cards and enables the player to
qualify for various club awards that may be established by the
state lotteries.
Client Server Architecture. The eLottery system is designed so
that players can access the system using several different
devices connected to the centralized server. For example, players
can use personal computers connected over the Internet;
custom-designed electronic lottery terminals connected via a LAN
or over the Internet, or a voice response unit connected by
telephone. Administrative terminals can be connected via the
Internet, thus allowing the operation and administration of the
eLottery system to be conducted from remote locations.
Centralized Accounting Server. A centralized accounting server
keeps track of all of the transactions on the system. This server
accounts for and controls transactions with customers including
registration, deposits, withdrawals, purchases of tickets or
other merchandise and the awarding of prizes. The centralized
accounting server produces a myriad of reports to monitor both
the player's activities as well as the performance of the games
according to their individual working papers.
Lottery Server. The lottery server is a centralized network of
computers controlling the essential operations of the games
including the game play, issuance of the tickets or generation of
a random event, determination of a winner and the awarding of the
prize.
Banking System. This system validates the credit card information
received from the customer with the national Visanet network. The
system is currently capable of processing 10,000 transactions per
hour in about 10 seconds each and is expandable to handle a
larger volume of transactions.
Intranet System. The Intranet system is based on the same
architecture as the Internet system using private connections
instead of the Internet.
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Lottery Stations. Lottery stations can be several different
devices. The lottery games can be played using personal computers
connected either via the Internet or direct dial. Games can be
played using custom-designed electronic lottery terminals or the
draw games can be played using a telephone. Custom-designed
electronic lottery terminals are built using standard "off the
shelf" hardware components consisting primarily of a touch screen
monitor and a standard Pentium processor networked to the central
system.
Cashier Terminals. The cashier stations can accept the player
deposits. The player presents the card, which is swiped reading
the card ID and password into the system. Funds are received from
the player and entered by the cashier. The central system then
adds the deposit to the balance of the account associated with
the card. To withdrawal balances from the card, the player again,
presents the card to the cashier, the cashier then swipes the
card and the system displays the "card" balance. The cashier
disburses the requested cash to the player.
Automatic Recharge Machines ("ARMs"). Funds can also be added
through automated recharge machines. The player inserts the card
into a reader and inserts the amount of money they wish to add
into a bill collector. The system updates the balances, the ARM
prints a receipt and returns the card.
Agent Cards. The card reader of the ARM will also identify an
authorized agent's card. This access will permit the agent to
obtain information about the machine as well as perform the
"empty" function. To empty a machine, the agent inserts their
agent card and the appropriate PIN. The agent opens the machine
and takes out the bill collection box and inserts a new bill
collection box. Once this process is completed, the agent
finishes the empty process and a receipt is printed that should
equal the balance in the box. The receipt also identifies the ARM
from which it was taken, the user ID of person emptying the
machine as well as the date and time of the process.
The components of the system can be used together or on a stand-alone
basis depending upon the specific application.
Security. eLottery believes the integrity of a lottery is essential to
its successful operation. eLottery is unaware of any practical, economically
feasible way to breach the security of its instant lottery tickets that could
result in a material loss to any of its customers, nor is it aware of any breach
thereof that has resulted in any material loss to any of its lottery customers.
eLottery constantly assesses the adequacy of its security systems, incorporating
various improvements, bar coding and additional layers of protection.
Games. The architecture of both of eLottery's Internet and Intranet
systems allow the addition, deletion and substitution of lottery games offered.
The lottery games have been designed to fall within generally accepted
definitions of a "lottery" game. Lottery games generally fall into two broad
classifications: (i) instant games or "Scratchers" in which the outcome is
predetermined and known instantly and (ii) draw games in which the outcome
depends upon a random event in the future. eLottery currently has four families
of games that are available on both the Internet system and Intranet system:
(i) Bingo; (ii) Lotto; (iii) Classics; and (iv) Draw games.
Product Development.
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eLottery's product development efforts are devoted to continual
improvement in all aspects of the systems. Software developers operating under
exclusive and proprietary development contracts supplement eLottery's staff.
These developers leverage eLottery's ability to produce games, create database
accounting and banking systems, enhance and customize system features and
provide state-of-the-art Internet design and engineering capability. eLottery
believes this an efficient low cost method to gain access to the best and latest
technologies in each of the respective areas. The system architecture is
designed to permit several developers to work independently on various modules
of the system. These games can be modified to separate key elements to run in a
secure client server environment and operate efficiently on eLottery's
electronic lottery distribution systems. This ability to modify the lottery
games allows eLottery to work with all game publishers and modify their games to
operate on the system and significantly add to the eLottery's game portfolio.
eLottery is also focused on development of new products in the
following areas:
Browser-Based Lottery Games. These are games that would play
within the players' web browser thereby facilitating the download
of the software.
Tournaments. eLottery is investigating the development of
tournament games. Players would enter the tournament and pay a
membership fee to play a lottery game of skill and win prizes
according to the outcome of the tournament.
Traditional Casino Games. eLottery has investigated a suite of
casino games including black jack, video poker, slots, roulette
and craps that can be integrated into its systems. To date,
eLottery has not engaged in further development of these games
because it has not had any agreements with entities legally
authorized to market such games.
Custom-Designed Electronic Lottery Terminals. Prototypes of
custom-designed electronic lottery terminals are operational, but
additional development is necessary prior to deployment of the
Intranet system to customer sites. Further development of the
Intranet system will involve customization to a specific
customer's specifications and only will be undertaken at such
time as such customer enters into a contract to purchase or
license eLottery's Intranet system. eLottery believes it can
complete such customization in less than six months and for less
than $500,000. Although eLottery has done no formal research
regarding the possible acceptance of the Intranet system, it has
presented the Intranet system to several state lotteries.
eLottery has spent $4.3 million on research and product development to
date, primarily related to the development of its systems, and has plans to
spend an additional $1.5 to $2.0 million over the next year.
Sales and Marketing. eLottery is pursuing the sale of its technology
and systems worldwide. eLottery is marketing (i) directly to state agencies and
other licensed entities, (ii) individually through authorized lottery services
companies and (iii) through strategic alliances with other providers of games
and gaming technology. Such marketing includes demonstrations of its electronic
lottery distribution systems and visits to eLottery's premises.
The ultimate success of eLottery's lottery platform depends on its
acceptance by lottery operators and lottery patrons. eLottery believes that,
from the point of view of lottery operators, the attractiveness of its new
electronic lottery distribution systems depends on its ability to increase
lottery sales, its ease of upgrade, maintenance and
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game change and its information management. eLottery believes that, from the
lottery patron's perspective, the attractiveness of a platform is a function of
entertainment value. eLottery's sales and marketing strategy is to generate
product sales by highlighting the advantages presented by its electronic lottery
distribution systems to lottery operators, such as the potential for increased
lottery ticket sales, and by positioning itself as a partner with lottery
operators. eLottery's marketing strategy also targets lottery players and will
focus on developing brand recognition for the eLottery.com website, which
eLottery believes can be accomplished partially through the development of
proprietary lottery games that eLottery believes deliver greater entertainment
value than games used in the traditional lottery industry.
eLottery intends to position itself as a partner with lottery operators
in establishing the next generation of lottery entertainment. eLottery is
working to develop close relationships with lottery operators, utilizing its
marketing representatives as consultants to lottery operators on methods to
increase lottery ticket sales through the use of eLottery's products. eLottery's
electronic lottery distribution systems have been designed to supplement the
sales and marketing efforts of the operating lotteries enhancing their ability
to attract new players and increase the revenue from their customer base.
Detailed play information is accumulated in the system including lottery games
played, duration of play, time of play, purchase and prize data and a host of
other data elements. When matched with other demographic data, this information
is valuable in designing promotional offers and advertising campaigns.
Specialized e-mail features provide the capability to deliver promotional
programs to specific accounts based upon the results of a contest, completion of
a survey, winning a game of chance or other similar event.
eLottery intends to build a sales and support organization to handle
sales and after-sales service to its lottery customers, and may enter into
distribution arrangements or other strategic relationships to enter additional
markets.
eLottery Website. The eLottery.com website includes basic information
about its products and provides a mechanism to obtain customer feedback. In
March 1999, eLottery expanded the website to provide a live test site to preview
games and an active game environment where all of the games can be played
without charge. eLottery believes this site will generate a community of players
interested in electronic lotteries. This player base may be a valuable resource
to provide an initial base of customers to lotteries as they go on-line for the
first time as well as an ongoing source of new customers.
Patents, Trademarks, and Copyrights
Management believes that the success of eLotterywill be affected by its
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. eLottery currently has two U.S. patent applications pending.
eLottery has registered or applied to register its trademarks when it
believes registration to be important to its ongoing business operations.
eLottery also generally claims copyright protection for its software used in
connection with its products and relies upon trade secret, contract and
copyright laws to protect its proprietary rights in its software, designs and
documentation.
Certain of the eLottery products incorporate technology and software
licensed by eLottery from independent third parties. Generally, these licenses
have required payment of a license fee for the licensed technology.
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eLottery Competition
The lottery business is highly competitive, and eLottery faces
competition from a number of domestic and foreign instant ticket manufacturers,
on-line lottery system providers and other competitors.
In particular, there are currently three primary lottery services
competitors in the United States: GTECH Corporation ("GTECH"), Automated
Wagering International, Inc. ("AWI"), a subsidiary of Powerhouse Technologies,
Inc. ("Powerhouse"), and Scientific Games Holdings Corp. ("Sci-Games"). eLottery
believes that these companies engage in vigorous competition with respect to
existing lottery technologies and services and have experienced a decline in the
growth of existing lottery operations. The objective of eLottery is to provide,
either alone or through partnerships with existing lottery services companies,
value added lottery systems and services for the domestic and international
markets. It is believed that these products, systems and services can support
new methods and styles of lottery participation, providing new growth
opportunities for established state lotteries and higher margin returns for the
providers of related technologies and services.
Internationally, there are many lottery services and product suppliers
that provide competition to eLottery, in addition to the companies listed above.
eLottery believes that it has the ability to provide technologies that support
new methods and styles of lottery participation in foreign countries. In
addition, eLottery believes that applications of its electronic lottery
distribution systems, which are based on the use of standardized components that
support a variety of hardware and software interfaces, can provide
cost-effective solutions to improve lottery operations in remote and developing
nations. eLottery anticipates that a considerable length of time will be needed
to develop an independent market presence in foreign countries other than Canada
and Mexico, and there will be substantially higher costs in pursuing these
markets. Therefore, eLottery anticipates that the marketing of its products and
services internationally will be conducted primarily through joint ventures with
existing providers of lottery services. No assurance can be given that eLottery
will develop such relationships to the point of having a significant impact on
its financial results or operations in the near future.
Both in the domestic market and internationally, factors that influence
the award of lottery contracts in addition to price are believed to include,
among others, the ability to optimize lottery revenues through game design and
technical capability, quality of the product, dependability, production
capacity, marketing experience, financial condition and reputation of the
bidder, the security and integrity of the bidder's production operations,
products and services and the satisfaction of various other requirements and
qualifications imposed by specific jurisdictions.
Management believes that it has no current competitor in the market for
the specific lottery products it has developed. Competitors have typically
either manufactured only instant tickets or provided only certain on-line
services to support conventional sales of paper lottery tickets, including
software for the management systems, marketing assistance and various other
specific duties. However, certain competitors have announced plans to market
Internet-based lottery systems. eLottery has two primary domestic and
international competitors in this regard: Powerhouse, which changed its name
from Video Lottery Technologies, Inc. in 1997, and GTECH.
eLottery is a relatively recent arrival among the developers of
technology and marketing concepts for lottery operators. In addition, eLottery's
limited experience in the industry is expected to negatively impact eLottery's
competitive position. However, in the delivery of market tested, secure,
integrated telephone, Internet and Intranet technologies
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that support new forms of lottery participation and methods of administration,
eLottery believes that its experience level is superior. As the only market
tested provider of products that have the unique capabilities of the electronic
lottery distribution systems, eLottery believes it is the only experienced
provider in its particular market niche. eLottery believes that other lottery
services and product suppliers have for several years made capital investments
intended to position themselves to participate in this market niche. However,
none has yet demonstrated the unique focus or devoted the extensive time and
resources necessary to successfully develop, customize and install an
operational integrated telephone and Internet lottery system similar to that
provided by and operated by eLottery for the NIL. In addition, to some extent,
the technological developments inherent in eLottery's electronic lottery
distribution systems have the potential to materially reduce the capital
investment required to finance secure lottery operations, which could affect the
perception that the experience and resources of competing companies are as
valuable as they have been in the past. eLottery believes that prior lottery
experience has been a factor in states' prior decisions in connection with the
award of lottery contracts. Thus, eLottery believes its prior lottery experience
will be a factor that limits the ability of eLottery's competitors to compete
with eLottery in the development of this market niche.
eLottery Government Regulation and Legislation
Lotteries are not permitted in various states or jurisdictions of the
United States unless expressly authorized by law. The ongoing operations of
authorized lotteries in the United States typically are extensively regulated.
Applicable legislation varies from jurisdiction to jurisdiction but, in addition
to authorizing the lottery and creating the applicable regulatory authority, the
lottery statutes generally dictate certain broad parameters of lottery
operation, including the percentage of lottery revenues that must be paid out in
prizes. Lottery authorities typically exercise significant control as to the
selection of vendors and award of lottery contracts, ticket prices, types of
games played and marketing strategy, all of which can affect eLottery's
operating results.
Prior to and after granting a lottery contract, governmental
authorities generally conduct an investigation of the company and its employees
pursuant to which such authorities may require removal of an employee deemed to
be unsuitable. Certain states also require extensive personal and financial
disclosure (including, among other things, submission of fingerprints, personal
financial statements and federal and state income tax returns) and background
checks of control persons and entities beneficially owning a specified
percentage (typically 5% or more) of the company's securities. The failure of
such beneficial owners to submit to such background checks and provide such
disclosure could jeopardize the award of a lottery contract to eLottery or
provide the basis for cancellation of any existing lottery contract.
The award of lottery contracts and ongoing operations of lotteries in
international jurisdictions also are extensively regulated, although this
regulation usually varies from that prevailing in the United States.
Restrictions are frequently imposed on foreign corporations seeking to do
business in such jurisdictions. Laws and regulations applicable to lotteries in
the United States and foreign jurisdictions are subject to change and the effect
of such changes on eLottery's ongoing and potential operations cannot be
predicted with certainty.
In the last session of Congress, bills were introduced that sought to
ban various forms of Internet gaming and that would have allowed state
authorization of other types of Internet gaming. None of those bills were
enacted into law. It is likely, however, that similar bills will be introduced
into the current Congress. eLottery does not know whether such bills will be
introduced, what provisions any such bills would contain, or whether
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Congress would approve those bills. If Congress were to approve a bill similar
to those pending at the end of the last session, eLottery expects to be able to
conduct the type of activities contemplated under its business plan. In the
event that one or more bills were enacted that did contain restrictions on the
use of the Internet by state sponsored lotteries, such legislation could have a
material adverse effect on eLottery.
Employees
eLottery operates primarily through the use of independent software
development contracts to improve its access to software development talent and
keep its fixed overhead to a minimum. As of March 1, 1999, eLottery employed
four general and administrative management employees, 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. Executone also leases warehouse, manufacturing and
distribution facilities in Poway, California. As of December 31, 1998, Executone
leased 15 facilities in the United States with an aggregate of approximately
295,000 square feet for its ongoing operations. The current annual rent for the
Company's leased facilities is approximately $3.4 million. The Company also
subleases from Claricom small areas of 13 former district sales offices,
aggregating approximately 12,500 square feet, for use by sales and technical
employees for approximately $200,000 per year.
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 CDA 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 CDA's NIL, to be developed and managed
by the Company's eLottery 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 were sent Section 1084 letters by states opposed to the
Lottery, stating that the NIL was illegal under state and federal laws and
prohibiting the interstate carriers from carrying "800 number" network traffic
for the NIL.
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 NIL, and (iii) that AT&T cannot
refuse service to the NIL based upon Section 1084, an allegation that the NIL is
in violation of IGRA or the federal anti-lottery statutes. This ruling and a
related order dated May 1, 1996 were subsequently affirmed by the Tribal
Appellate Court on July 2, 1997.
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, to obtain
a federal court ruling on the validity and enforceability of the Tribal Court
ruling. On December 17, 1998, that Court issued an opinion and order denying the
motions and counter-claims of the CDA and granting declaratory judgment in favor
of AT&T upholding the position of AT&T. The
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District Court ruled that not all of the NIL gaming activity was occurring on
"Indian lands," that IGRA did not apply as a result and that IGRA did not
preempt the operation of state laws with respect to the NIL. In so ruling, the
District Court overruled the prior decisions of the Tribal Courts that ruled the
NIL was legal under IGRA. In response to that decision, eLottery and the CDA
terminated operations of the NIL and the US Lottery to every state where it had
been offered. The CDA has filed a notice of appeal of the District Court
decision; however, eLottery will not participate in or fund any appeal of this
ruling.
On September 14, 1998, the CDA, eLottery and representatives of the
U.S. Department of Justice had discussions regarding a declaratory judgment to
be sought jointly from the U.S. District Court for the District of Idaho as to
whether the operation of the NIL is legal under 18 U.S.C. 'SS''SS' 1952 and
1955. Lottery was informed that the Department of Justice views such operation
to be in violation of such statutes. The Department of Justice proposed that the
parties file a joint stipulation of facts and cross-motions for summary judgment
in the declaratory judgment action. In response to the adverse decision of the
U.S. District Court in Idaho, eLottery and the CDA terminated operation of the
NIL. In light of the ruling of the U.S. District Court of Idaho, and the
termination of the NIL, eLottery has requested confirmation from the Department
of Justice that no further action will be taken.
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 CDA and
UniStar Entertainment seeking to enjoin the NIL games offered by the CDA over
the Internet. The complaint also sought civil penalties, attorneys fees and
court costs. The complaint alleged that the NIL violated Missouri anti-gambling
laws and that the marketing of the games violates the state's Merchandising
Practices Act. UniStar Entertainment and the CDA removed the case to the U.S.
District Court for the Western District of Missouri. The court also subsequently
granted a motion to dismiss the CDA from the case based on sovereign immunity.
The court denied a motion to dismiss UniStar Entertainment based on sovereign
immunity. The State of Missouri appealed the dismissal of the CDA to the Eighth
Circuit Court of Appeals.
On January 28, 1998, the State of Missouri sought to dismiss
voluntarily the existing federal case against UniStar Entertainment and the next
day filed a new action against Executone, UniStar Entertainment and two tribal
officials, with essentially the same allegations, in state court. The State
obtained a temporary restraining order from a state judge against Executone,
UniStar Entertainment and two officials of CDA enjoining the marketing of the
Internet and telephone NIL 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,. 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 appealed the denial of its motion to remand
the case to state court or, in the alternative, to grant a preliminary
injunction.
On January 6, 1999, the Eighth Circuit dismissed Missouri's appeal from
the Eastern District of Missouri. In the same opinion, the Eighth Circuit
vacated the decisions from the Western District of Missouri as to the CDA and
remanded that case to the Western District for a hearing on whether the Internet
games of the NIL are gaming activities "on Indian lands." The Eighth Circuit
also held valid Missouri's voluntary
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dismissal of UniStar Entertainment from the Western District lawsuit. In light
of the termination of the NIL, the Company anticipates seeking dismissal of the
Missouri actions.
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
Executone, UniStar Entertainment and the CDA, to permanently enjoin the US
Lottery games offered by the CDA on the Internet. The complaint alleged that the
offering of the US Lottery violated Wisconsin anti-gambling laws and that
legality of the US Lottery had 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. Executone,
UniStar Entertainment and the CDA removed the case to the U. S. District Court
in Wisconsin. On February 18, 1998, the District Court dismissed the CDA 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 Entertainment were denied. UniStar appealed the denial of its
motion to dismiss to the Seventh Circuit Court of Appeals. In light of the
termination of the NIL and the US Lottery, the Company anticipates seeking
dismissal of this action.
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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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The number of holders of record of the Company's Common Stock as of the close of
business on February 28, 1999 was approximately 1,800. The Common Stock is
traded on the NASDAQ National Market System under the symbol "XTON". As reported
by NASDAQ on February 28, 1999, the closing sale price of the Common Stock on
the NASDAQ National Market System was $2 9/16. The following table reflects in
dollars the high and low closing sale prices for EXECUTONE's Common Stock as
reported by the NASDAQ National Market System for the periods indicated:
<TABLE>
<CAPTION>
Fiscal Period High Low
------------- ---- ---
<S> <C> <C>
1998
First Quarter $2 19/32 $2 1/8
Second Quarter 2 5/8 1 23/32
Third Quarter 2 1/32 1 2/32
Fourth Quarter 2 3/32 11/16
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>
It is the present policy of the Board of Directors to retain earnings for use in
the business and the Company has not paid any dividends and does not anticipate
paying any cash dividends on the Common Stock in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The following is selected financial data for EXECUTONE for the five years ended
December 31, 1998. (In thousands, except for per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues (1) $ 133,498 $156,396 $212,022 $296,393 $291,969
========= ======== ======== ======== ========
Income (Loss) Before
Income Taxes From
Continuing Operations (2) $ (41,091) $ (358) $ 39,782 $(39,221) $ 10,041
========= ======== ======== ======== ========
Income (Loss) From
Continuing Operations $ (36,859) $ (221) $ 24,162 $(36,934) $ 6,734
Income From Discontinued
Operations, Net of Taxes (3) --- --- --- -- 757
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C> <C>
Extraordinary Item - Loss on
Extinguishment of Debt,
Net of Taxes (4) --- --- (355) --- ---
--------- -------- -------- -------- --------
Net Income (Loss) $ (36,859) $ (221) $ 23,807 $(36,934) $ 7,491
========= ======== ======== ======== ========
EARNINGS (LOSS) PER SHARE:
Continuing Operations $ (0.74) $ --- $ 0.47 $ (0.79) $ 0.15
Discontinued Operations --- --- --- --- 0.02
Extraordinary Item --- --- (0.01) --- ---
--------- -------- -------- -------- --------
Net Income (Loss) $ (0.74) $ --- $ 0.46 $ (0.79) $ 0.17
========= ======== ======== ======== ========
DILUTED EARNINGS (LOSS) PER SHARE:
Continuing Operations $ (0.74) $ --- $ 0.46 $ (0.79) $ 0.14
Discontinued Operations --- --- --- --- 0.02
Extraordinary Item --- --- (0.01) --- ---
--------- -------- -------- -------- --------
Net Income (Loss) $ (0.74) $ --- $ 0.45 $ (0.79) $ 0.16
========= ======== ======== ======== ========
Total Assets $110,305 $138,864 $152,009 $167,844 $189,481
========= ======== ======== ======== ========
Long-Term Debt $ 23,693 $ 14,643 $ 13,837 $ 29,829 $ 24,698
========= ======== ======== ========= ========
Cash Dividends Declared
Per Share (5) $ --- $ --- $ --- $ --- $ ---
========= ======== ======== ======== ========
</TABLE>
(1) The decline in revenues in subsequent to 1995 is primarily attributable to
the sale of the Company's direct sales and service organization (DSOs) in
May 1996.
(2) The 1998 financial results included an asset impairment charge of $25.5
million, special charges of $9.0 million and a non-recurring gain of $5.3
million. The 1996 financial results included a pretax gain on the sale of
the Company's DSO's of $48.9 million. The 1995 financial results included a
restructuring charge of $44.0 million.
(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 Item 5.
ITEM 7. 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 and information systems. Products and services
include telephone systems, voice mail systems, inbound and outbound call center
systems and specialized healthcare communications and workflow management
systems. 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. The Company's eLottery subsidiary (formerly named Unistar Gaming
Corp.) develops, provides and maintains Internet, intranet and telephone
communications, accounting, database and other applications and services for use
by the domestic and international lottery market. eLottery's UniStar
Entertainment subsidiary has the exclusive right to
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design, develop and manage the National Indian Lottery (NIL) of the Coeur
d'Alene Tribe of Idaho (CDA). The NIL was operational beginning in January 1998.
However, in response to an adverse legal opinion on December 17, 1998, eLottery
and the CDA terminated the operations of the NIL and US Lottery telephone and
Internet operations managed by eLottery (See "Asset Impairment and Other Related
Charges" and "eLottery").
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.
OVERVIEW
During 1998, the Company put in motion significant changes to improve its core
business processes. These improvements are designed to allow the Company to
operate more efficiently and profitably at its current sales level and better
serve its end-user customers and distribution channel partners to support
renewed revenue growth. While the Company has laid the groundwork during 1998 to
return to growth and profitability, many of these actions had negative effects
on the Company's results for the year.
Revenues for 1998 were $133.5 million, with an operating loss of $44.3 million
and a net loss of $36.9 million or ($0.74) per common share. These results
include $25.5 million in asset impairment and other charges related to the
eLottery business (see below), $9.0 million in special charges (see "Special
Charges") and a nonrecurring gain of $5.3 million, reflecting the proceeds of a
negotiated legal settlement with a former supplier of videoconferencing
equipment. Revenues for 1997 were $156.4 million, with operating income of $0.1
million and a net loss of $0.2 million or $0.00 per common share. The decrease
in revenues year over year was $22.9 million, or 14.6%. This was primarily
attributable to lower revenues generated in the Computer Telephony group through
its independent distribution channel and the Healthcare Communications group.
The sales declines had a negative effect on gross profit and, ultimately, on net
income.
The following discussion and analysis explains trends in the Company's financial
condition as of December 31, 1998 and 1997 and results of operations for each of
the three years in the period ended December 31, 1998. It is intended to help
shareholders and other readers understand the dynamics of the Company's business
and the key factors underlying its financial results. This discussion should be
read in conjunction with the consolidated financial statements and notes
included elsewhere in this Form 10-K, and with the Company's audited
consolidated financial statements and notes thereto for the year ended December
31, 1998. Management believes that certain statements in this discussion and
analysis constitute forward-looking statements within the meaning of the U.S.
Private Securities Litigation Reform Act of 1995 in that such statements are
based on current expectations, estimates and projections about the industries in
which the Company operates, management's beliefs and assumptions made by
management. Such forward-looking statements involve known and unknown risks,
uncertainties, and other factors which may cause the actual results, performance
or achievements of the Company, or industry results, to be materially different
from any future results, performance, or achievements expressed or implied by
such forward-looking statements. Such risks, uncertainties and assumptions
include, among others, the following: general economic and business conditions;
demographic changes; import protection and regulation; rapid technology
development and changes; timing of product introductions;
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the mix of products/services; industry capacity and other industry trends; and
the ability of the Company to attract and retain key employees.
1998 COMPARED TO 1997
RESULTS OF OPERATIONS
REVENUE
Revenues were $133.5 million in 1998 compared to $156.4 million for the prior
year. Revenue, by business, was distributed as follows (in millions):
<TABLE>
<CAPTION>
Inc (Dec)
---------
1998 199 $ %
---- ----------------------------
<S> <C> <C> <C>
Computer Telephony $ 98.6 $ 117.2 ($ 18.6) - 15.9%
Healthcare 34.9 39.2 ( 4.3) - 11.0%
------- ------- ---------------
$ 133.5 $ 156.4 ($ 22.9) - 14.6%
======= ======= ===============
</TABLE>
Computer Telephony
The mission of the Computer Telephony 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. Computer Telephony 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), 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 with fewer than 400 extensions at any individual location.
These products are marketed through independent distribution and direct sales,
with the direct sales effort focused on product and service sales to National
and Government Accounts.
Computer Telephony sales declined by $18.6 million from 1997 to 1998. The
revenue decline is equivalent to about 4 months of sales through the Company's
independent distribution channel. During the second half of 1998, the Company
stopped offering the distributor-focused sales incentives at the end of each
quarter, which in the past often resulted in inflated distributor inventories
and higher than necessary receivables for the Company. Management believes the
year-to-year sales decline represents inventory that is no longer in the
distributors' warehouses. Order intake for our National Accounts and Government
retail channels continued to grow, suggesting that the Company's product
features and functionality continue to be highly competitive. This also
reinforces the Company's decision to expand its independent distribution network
and focus product promotion through the independent channel by helping
distributors stimulate end-user demand to sell more of the Company's products.
Purchases by Claricom, the Company's largest independent distributor, were
approximately $13.1 million lower in 1998 than in 1997 when Claricom purchases
were influenced by the old distributor contract, which required certain purchase
levels to maintain exclusive distribution rights in its territories.
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Healthcare Communications
The mission of the Healthcare Communications (Healthcare) business is to provide
information management and communications solutions that enable healthcare
facilities to deliver high quality patient care with substantially lower
operating costs. 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.
Healthcare reported $4.3 million lower sales for 1998 compared to 1997
reflecting three primary factors. First, the healthcare sales process was
disrupted in the second and third quarters of 1998 by competitive actions in
response to the Company's efforts earlier in 1998 to offer the business for
sale. Second, the Company is changing its installation process (and the related
revenue recognition policy) to delay product shipments to the installation site
until just before the actual installation date. Phasing delivery of the
equipment in this manner makes it easier to ensure that customers receive the
most up-to-date release of the Company's products and shortens the Company's
cash conversion cycle. Finally, Healthcare changed its sales incentive practices
with the healthcare independent distributors in a similar manner as described
above for the Computer Telephony group.
GROSS PROFIT
Gross profit margin for 1998 was $41.7 million or 31.3 % of revenue, compared to
$53.0 million or 33.9% of revenue in 1997. The decrease primarily relates to the
decline in sales volume. Although pricing margins remained constant compared to
the prior year, the lower volume resulted in lower fixed cost absorption and a
reduction in gross profit margin percentage.
OPERATING EXPENSES
Excluding special charges and the eLottery asset impairment, operating expenses
were $51.5 million, a decrease of $1.4 million compared to 1997. Product
development expenses were the primary reason for the decrease, as the Company
has redirected its efforts on more focused product development priorities. This
has resulted in reduced costs and lower headcount compared to last year.
Selling, general and administrative expenses for 1998 were $41.4 million, or
31.0% of revenue, compared to $40.1 million or 25.7% of revenue for 1997. During
the last 6 months of 1998, the Company accelerated its investments in improved
business processes with its ongoing implementation of a new enterprise software
system, the purchase of a new web-based channel management system and consulting
fees incurred to reengineer its business processes. The Company also incurred
higher legal and employee-related benefit expenses than in 1997. This was offset
by a favorable variance in selling expenses, primarily due to lower commissions
on lower sales volume and reduced headcount.
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SPECIAL CHARGES
During 1998, the Company recorded $9.0 million in special charges. These charges
include $5.3 million relating to changes the Company has undertaken to
restructure its business, primarily involving separation costs related to
changes in senior management during 1998 and a provision for losses to be
incurred in subleasing a portion of the Company's leased facilities.
Also included is a $3.7 million charge to settle claims made by Lucent
Technologies (Lucent) which holds the patent rights to certain intellectual
property allegedly used in the Company's products. Under the agreement, the
Company will pay Lucent $3.7 million over the next two years to cover all past
patent obligations. In addition, the parties have agreed to execute a bilateral
patent cross-license agreement covering all of Lucent's and the Company's
current telephony-related patents, which provides for additional royalties to be
paid to Lucent.
ASSET IMPAIRMENT AND OTHER RELATED CHARGES
In response to the legal decision issued December 17, 1998 in AT&T vs. Coeur
d'Alene Tribe, eLottery and the CDA terminated operation of the NIL and the US
Lottery telephone and Internet operations managed by eLottery. As a result, the
Company reevaluated certain of its assets in accordance with the provisions of
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets." Based upon
this review, management determined that both the intangibles and the advances to
the NIL have been impaired as of the date of this legal decision. As of December
17, 1998, net intangibles and advances to NIL of $12.9 million and $11.2
million, respectively, were written down to zero, which represented the
estimated fair value of the assets, as no future cash flows will be generated by
the NIL. The Company also recorded an additional charge of $1.4 million for
shutdown costs and the write-off of certain deferred startup expenses related to
the NIL. The total NIL-related write-off included in the 1998 statement of
operations was $25.5 million.
INTEREST AND OTHER EXPENSE
Interest expense for 1998 was $2.4 million, an increase of $0.4 million from
1997. The increase is due to higher levels of bank borrowings in 1998. Other
income, net decreased compared to the same periods in 1997 due to lower interest
income on invested cash and lower royalty income. The Company also recorded a
nonrecurring gain on a negotiated settlement with a former supplier of
videoconferencing equipment totaling $5.3 million. The gain was recorded in the
fourth quarter of 1998.
INCOME TAXES
The Company accounts for income taxes in accordance with FAS No. 109,
"Accounting for Income Taxes". For the year ended December 31, 1998, the Company
recorded a tax benefit of $4.2 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, 1998, the deferred tax asset of $22.8 million
represents the expected benefits to be received from the utilization of tax
benefit carryforwards. The Company did not record a tax benefit for its fourth
quarter loss. Management believes that the deferred tax asset will more likely
than not be recognized in the carryforward periods.
SUBSEQUENT EVENT
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On March 29, 1999, the Company announced that it planned to divest its core
telephony and healthcare businesses and change the name of the Company to
eLottery, Inc. At the same time, the Executone Board of Directors announced it
had received an offer for those businesses from a group to be led by Stanley J.
Kabala, Chairman and Chief Executive Officer of Executone, and that it has
formed a special committee of the Board to accomplish that divestiture. The
offer from management is in the range of $70 million and is subject to a number
of conditions including negotiation of a definitive agreement, financing, the
waiver or expiration of a pre-existing right of first offer, and approval of the
Executone shareholders. A final decision as to the method of divesting this
business has not been made by the Board.
Under the management offer, the proceeds of the sale will remain in the public
company, eLottery, to help it accelerate the achievement of its business plans.
The Board believes this transaction creates more value for the Company's
shareholders than the spin off of the eLottery common stock, which had
potentially significant corporate and individual tax consequences. As a result,
the Company has terminated its previously filed registration statement.
On April 7, 1999, the Company announced that as part of its plan to separate its
telephony and healthcare businesses from eLottery, it had received approval from
100% of its preferred shareholders to accelerate the redemption of its Series A
and Series B preferred stock. The Company believes this transaction will
simplify its capital structure and align the interests of the former preferred
and current common shareholders.
eLOTTERY
On December 19, 1995, EXECUTONE Information Systems, Inc. ("Executone') acquired
100% of the common stock of Unistar Gaming Corp. for common and preferred stock
with a combined value of $12.7 million. In January 1999, Unistar Gaming Corp.
changed its name to eLottery, Inc. ("eLottery"). Any reference herein to
eLottery shall be deemed to include business conducted under the name Unistar
Gaming Corp. eLottery's wholly-owned subsidiary, UniStar Entertainment, Inc.
("UniStar Entertainment") has an exclusive five-year management agreement with
the CDA, which was the primary asset acquired, to provide design, development,
financial and management services to the National Indian Lottery. The NIL was
operational beginning in January 1998. However, in response to an adverse legal
opinion on December 17, 1998, eLottery and the CDA terminated the operations of
the NIL and the US Lottery telephone and Internet operations managed by eLottery
(See "Asset Impairment and Other Related Charges").
eLottery's original mission was to develop, install and manage a National Indian
Lottery accessible by telephone. eLottery developed a state-of-the-art Internet
and telephone-based system providing both instant and draw lottery games, full
player accounting and tracking and automatic credit or debit card clearance. In
early 1998, as a hedge against potential adverse legal and political decisions,
eLottery began investigating alternative applications and markets for its
technology. eLottery is now pursuing opportunities to become a web-based
retailer of lottery services and to license its systems and services to state
and international lotteries. The Company has developed and operated systems
software that enables the electronic distribution of lottery tickets over the
Internet, Intranet and via telephone. The Company believes that the electronic
distribution of lottery tickets through these systems will increase lottery
sales because they make the purchase of tickets more easily accessible and
because they make use of technology to enhance and enliven the lottery gaming
experience. With its unique and proven ability to offer lottery
30
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operators its new Internet and Intranet-based lottery products worldwide, the
Company believes it is well positioned to capitalize on the growth in
non-traditional lottery sales.
The Company has made a significant investment in eLottery, which upon
acquisition created 8% dilution to the Company's stockholders and, subsequent to
the acquisition, has required an additional $18.6 million in cash. During the
year ended December 31, 1998, the Company invested $7.3 million as part of the
cost to develop the software systems, building and other costs related to the
project, most of which were recorded as assets on the balance sheet. The
Company's cumulative investment in eLottery as of December 31, 1998 was $32.7
million, of which $24.9 million was written off during the fourth quarter of
1998. The remaining funds invested primarily relate to the computer hardware and
software systems developed to run the games. With the termination of operations
of the NIL, future expenditures will be directed toward generating future
revenues from the sale or licensing of the technology eLottery has developed to
authorized state and national lotteries.
With the termination of the NIL and US Lottery, the Company continues to face
certain legal and other risks. See Note L in the Notes to Consolidated Financial
Statements for a discussion of the legal issues and legislative proposals, which
could impact the Company and its eLottery business.
YEAR 2000
Status
The Company has completed a review of its computer systems to identify systems
that could be affected by the "Year 2000" issue. Systems that do not properly
recognize information after December 31, 1999 could generate erroneous data or
fail. Although the Company estimated the cost to resolve the Year 2000 issue
through its current software system would have been less than $0.5 million, it
decided as part of its long-term information systems plan to convert to a new
and more comprehensive software system for its information technology (IT)
infrastructure. The new system will cost approximately $2.3 million, including
installation and data conversion costs. The Company expects the new system to be
operational by the end of the second quarter of 1999. The costs for the new
system will be capitalized and depreciated over the expected service life of the
system beginning in the third quarter of 1999.
Implementation of the new system began during the third quarter of 1998. The
Company has incurred approximately $1.1 million through December 31, 1998,
primarily for the purchase of software licenses and certain system hardware,
along with installation costs. The Company has completed the system blueprint,
the first significant milestone in the project. Blueprinting is the evaluation
and documentation of system requirements on a process by process basis and
serves as the framework for the configuration of the system and the installation
process. The configuration process is now underway, along with documentation of
our business process procedures as they will be used in the new system. The
Company has also begun data conversion processes. As of December 31, 1998, it is
estimated that the installation process is approximately 40% complete.
Management believes that the conversion to new software will resolve the Year
2000 issue as it relates to its IT infrastructure. There are several peripheral
systems that will not be replaced by the new software. These systems are being
made compliant using the Company's internal resources, which have been
redeployed from other projects. The remedial effort is approximately 50%
complete and is scheduled to be 100% complete by the end of the second quarter
of 1999. The total remedial cost for these systems is approximately $50,000, of
which approximately $25,000 has been incurred as of December 31, 1998.
31
<PAGE>
<PAGE>
For non-IT systems (non-information technology that typically includes imbedded
technology such as micro-controllers), the Company has reviewed its production
and other equipment and determined that there are no significant Year 2000
issues. The Company has also begun seeking representations and assurances from
its key vendors regarding timely Year 2000 compliance. Other than such surveys
of its vendors, the Company has not made an assessment as to whether any of its
suppliers or service providers will be affected by the date change.
Risk Assessment
Although the Company believes that internal Year 2000 compliance will be
achieved by December 31, 1999, there can be no assurance that the Year 2000
problem will not have a material adverse affect on the Company's business,
financial condition and results of operations. The failure by the Company to
correct a material Year 2000 problem could result in an interruption in, or a
failure of, certain normal business activities or operations. Presently, the
Company perceives that the most reasonably likely worst case scenario related to
the Year 2000 issue is associated with potential concerns with the ability of
third party vendors to provide products used in the manufacturing process. A
significant disruption in the product manufacturing process could prevent or
delay the Company from completing new installations or system upgrades and
enhancements for its customers. This would adversely affect the Company's
results of operations, liquidity and financial condition. The Company is not
presently aware of any vendor-related Year 2000 issue that is likely to result
in such a disruption.
Contingency Plan
The Company does not yet have a contingency plan in place to deal with
unforeseen conversion failures. Such a plan is currently being developed and
will include the identification of a team of employees to be on call during the
millennium change to monitor key systems, providing for backup power sources,
data retention and recovery procedures for critical business data and
operational plans to address potential delays in product supply from vendors.
The contingency plan is expected to be in place by June 1999.
OTHER MATTERS
For the years ended December 31, 1998 and 1997, the Company had two individual
customers, each of which generated in excess of 10% of the Company's revenues.
Both customers are included in the Computer Telephony segment. One customer
accounted for $18.0 million and $31.1 million in sales for 1998 and 1997,
respectively. The second customer accounted for $16.4 million and $14.0 million
for the same periods, respectively.
FAS No. 130, "Reporting Comprehensive Income," became effective for fiscal years
beginning after December 15, 1997. This Statement does not apply to the Company
because it had no items of other comprehensive income in any of the years
presented.
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
32
<PAGE>
<PAGE>
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 $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 $2.9 million, or ($0.06) per share in 1996, excluding
the gain on the sale of the direct offices.
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 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. 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 Computer Telephony were largely stable
year over year. Repair revenue decreased approximately $2 million, primarily due
to lower Claricom activity, and sales of least cost routing (LCR) products
increased almost 50% to $1.8 million. Computer Telephony segment profit was
approximately $3.3 million during 1997. Healthcare 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. During 1997, the Healthcare
segment had a loss of $2.4 million.
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.
LIQUIDITY AND CAPITAL RESOURCES
On August 14, 1998, the Company entered into a new credit facility with Fleet
Capital Corp. The new credit facility provides a maximum overall credit line of
$30 million consisting of a revolving line of credit for direct borrowings,
along with standby and trade letters of credit. Direct borrowings and letter of
credit advances are made available pursuant to a formula based on the levels of
eligible accounts receivable and inventories. To minimize interest on the
revolving line of credit, the Company has the option to borrow based upon an
adjusted prime borrowing rate or an adjusted LIBOR rate. The credit facility is
secured by substantially all of the Company's assets and has a five-year term.
Under the terms of the new credit facility, the Company had approximately $8.8
million in borrowings available as of December 31, 1998.
The Company's liquidity is represented by cash, cash equivalents and cash
availability under its existing credit facilities. The Company's liquidity was
approximately $10 million, $28 million and $50 million as of December 31, 1998,
1997 and 1996, respectively.
33
<PAGE>
<PAGE>
At December 31, 1998 and 1997, cash and cash equivalents amounted to $1.5
million and $7.7 million, respectively, or 3% and 11% of current assets,
respectively. Cash used by total operating activities was $10.6 million in 1998,
$4.8 million more than in 1997. The primary reasons for the use of additional
cash were disbursements of $3.4 million for special charges, and the impact on
operating cash of the $9.8 million operating loss (excluding asset impairment
and special charges). This was partially offset by the release of $5.1 million
held in escrow since the sale of the direct offices in 1996.
Cash used by investing activities totaled $3.3 million for 1998, a $5.1 million
reduction compared to 1997. The reduction is due to the October 1998 receipt of
$5 million in cash as part of a negotiated a settlement with a former supplier
of the Company's videoconferencing equipment. The proceeds were used to reduce
outstanding bank borrowings.
The Company generated $7.6 million in cash from financing activities during
1998. The primary source of cash was borrowings of $8.6 million, offset by
payments on capital lease obligations and other long-term debt. During 1997, the
Company used $5.8 million in its financing activities, primarily to repurchase
the Company's common stock for $4.9 million and to repay capital lease
obligations and other long-term debt.
Total debt at December 31, 1998 was $24.5 million, an increase of $8.9 million
from $15.6 million at December 31, 1997. The increase is a result of $8.6
million in bank borrowings from the Company's credit facility, capital lease
obligations of $1.2 million incurred in connection with the acquisition of a new
computer software system and miscellaneous computer and production equipment,
and an increase to the carrying value of the convertible subordinated debentures
of $0.2 million due to accretion. Debt was reduced by the repayment of $1.1
million in capital lease obligations incurred in connection with equipment and
software acquisitions, along with other debt repayments.
On February 26, 1999, the Company received $9.3 million from Claricom as payment
in full for Claricom's outstanding $5.9 million junior subordinated note plus
interest, along with the redemption of the warrants issued to the Company as
part of the sale of the direct offices in 1996. The Company used the proceeds to
reduce outstanding bank borrowings.
Required principal payments for debt in 1999 are approximately $0.9 million. The
Company believes that borrowings under the Credit Facility and cash flow from
operations will be sufficient to meet working capital and other requirements for
1999.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information presented in the "Notes to Financial Statements" included under
Item 8 is incorporated by reference.
34
<PAGE>
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Stamford, Connecticut
February 4, 1999
35
<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,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
REVENUES $ 133,498 $ 156,396 $ 212,022
COST OF REVENUES 91,777 103,387 132,510
--------- --------- ---------
Gross Profit 41,721 53,009 79,512
--------- --------- ---------
OPERATING EXPENSES:
Product development and engineering 10,052 12,794 13,773
Selling, general and administrative 41,435 40,125 69,180
Special charges 9,028 -- --
Asset impairment and other related charges 25,486 -- --
--------- --------- ---------
86,001 52,919 82,953
--------- --------- ---------
OPERATING INCOME (LOSS) (44,280) 90 (3,441)
INTEREST EXPENSE (2,393) (1,985) (2,707)
NET GAIN ON SALE OF BUSINESSES 5,269 -- 44,060
OTHER INCOME, NET 313 1,537 1,870
--------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES (41,091) (358) 39,782
PROVISION (BENEFIT) FOR INCOME TAXES (4,232) (137) 15,620
INCOME (LOSS) BEFORE EXTRAORDINARY
ITEM (36,859) (221) 24,162
Extraordinary item - loss on extinguishment
of debt (net of income tax benefit of $238) -- -- (355)
--------- --------- ---------
NET INCOME (LOSS) $ (36,859) $ (221) $ 23,807
========= ========= =========
EARNINGS (LOSS) PER SHARE:
INCOME (LOSS) BEFORE EXTRAORDINARY
ITEM $ (0.74) $ -- $ 0.47
EXTRAORDINARY ITEM -- -- (0.01)
--------- --------- ---------
NET INCOME (LOSS) $ (0.74) $ -- $ 0.46
========= ========= =========
DILUTED EARNINGS (LOSS) PER SHARE:
INCOME (LOSS) BEFORE EXTRAORDINARY
ITEM $ (0.74) $ -- $ 0.46
EXTRAORDINARY ITEM -- -- (0.01)
--------- --------- ---------
NET INCOME (LOSS) $ (0.74) $ -- $ 0.45
========= ========= =========
AVERAGE COMMON SHARES OUTSTANDING:
BASIC 49,755 49,655 51,712
========= ========= =========
DILUTED 49,755 49,655 52,251
========= ========= =========
</TABLE>
36
<PAGE>
<PAGE>
The accompanying notes are an integral part of these consolidated statements.
37
<PAGE>
<PAGE>
EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(In thousands) Years Ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income (loss) before extraordinary item $(36,859) $ (221) $ 24,162
Adjustments to reconcile net income (loss) to net
cash used by operating activities:
Depreciation and amortization 3,545 2,969 4,242
Asset impairment and other related charges 25,486 -- --
Deferred income tax provision (benefit) (4,232) (137) 11,420
Net gain on sale of businesses (5,269) -- (44,060)
Provision for losses on accounts receivable 1,227 277 1,921
Accrual of patent infringement settlement 3,735 -- --
Other, net (155) 201 (465)
Changes in working capital items:
Accounts receivable 6,862 5,439 (8,754)
Inventories (4,464) (3,893) 1,048
Accounts payable and accruals (4,580) (8,779) (2,857)
Other working capital items, net 4,107 (1,668) 2,375
-------- -------- --------
NET CASH USED BY OPERATING ACTIVITIES (10,597) (5,812) (10,968)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (817) (1,469) (2,534)
Dispositions of businesses 5,000 -- 56,948
Investment in eLottery (7,261) (5,556) (4,182)
Other, net (184) (1,325) 298
-------- -------- --------
NET CASH (USED) PROVIDED BY
INVESTING ACTIVITIES (3,262) (8,350) 50,530
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (repayments) under revolving credit
facility 8,582 -- (15,445)
Repayments of other long-term debt (1,092) (1,182) (1,134)
Repurchase of stock (148) (4,893) (4,554)
Proceeds from issuance of stock 272 268 819
Other borrowings -- -- 356
-------- -------- --------
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES 7,614 (5,807) (19,958)
-------- -------- --------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (6,245) (19,969) 19,604
CASH AND CASH EQUIVALENTS - BEGINNING
OF YEAR 7,727 27,696 8,092
-------- -------- --------
CASH AND CASH EQUIVALENTS - END
OF YEAR $ 1,482 $ 7,727 $ 27,696
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
38
<PAGE>
<PAGE>
EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(In thousands, except for share amounts) December 31, December 31,
1998 1997
-------- ------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,482 $ 7,727
Restricted cash - 5,084
Accounts receivable, net of allowance
of $1,720 and $1,814 25,531 33,403
Inventories 24,753 20,436
Prepaid expenses and other current assets 4,966 4,091
-------- --------
Total Current Assets 56,732 70,741
PROPERTY AND EQUIPMENT, net 10,604 7,767
INTANGIBLE ASSETS, net 3,795 19,765
DEFERRED TAXES 22,811 18,577
OTHER ASSETS 16,363 22,014
-------- --------
$110,305 $138,864
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 856 $ 951
Accounts payable 18,093 23,009
Accrued payroll and related costs 3,969 3,007
Accrued liabilities 15,046 13,123
Deferred revenue and customer deposits 2,439 2,541
-------- --------
Total Current Liabilities 40,403 42,631
LONG-TERM DEBT 23,693 14,643
OTHER LONG-TERM LIABILITIES 2,445 1,092
-------- --------
Total Liabilities 66,541 58,366
-------- --------
STOCKHOLDERS' EQUITY:
Common stock: $.01 par value; 80,000,000 shares
authorized; 49,834,807 and 49,660,359 issued and
outstanding 498 497
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 71,624 71,500
Retained earnings (deficit) (35,658) 1,201
-------- --------
Total Stockholders' Equity 43,764 80,498
-------- --------
</TABLE>
39
<PAGE>
<PAGE>
<TABLE>
<S> <C> <C>
$110,305 $138,864
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
40
<PAGE>
<PAGE>
EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(In thousands, except for
share amounts)
Common Stock Preferred Stock Additional Retained Total
-------------- ----------------- Paid-In Earnings Stockholders'
Capital Shares Amount Shares Amount Capital (Deficit) Equity
- ------- ------ ------ ------ ------ --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
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
----------------------------------------------------------------------------------------
Proceeds from issuances of stock
from employee stock plans 314,448 2 150 152
Amortization of deferred
compensation 121 121
Repurchase of stock (140,000) (1) (147) (148)
Net loss (36,859) (36,859)
----------------------------------------------------------------------------------------
Balance at December 31, 1998 49,834,807 $498 350,000 $7,300 $71,624 $(35,658) $43,764
========================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
41
<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 and information systems. Products and services
include telephone systems, voice mail systems, inbound and outbound call center
systems and specialized healthcare communications and workflow management
systems. 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's eLottery subsidiary (formerly named Unistar Gaming Corp.)
develops, provides and maintains Internet, intranet and telephone
communications, accounting, database and other applications and services for use
by the domestic and international lottery market. eLottery's UniStar
Entertainment subsidiary has the exclusive right to design, develop and manage
the National Indian Lottery (NIL) of the Coeur d'Alene Tribe of Idaho (CDA). The
NIL was operational beginning in January 1998. However, in response to an
adverse legal opinion on December 17, 1998, eLottery and the CDA terminated the
operations of the NIL and US Lottery telephone and Internet operations managed
by eLottery (see Note L).
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.
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.
42
<PAGE>
<PAGE>
Earnings Per Share. Earnings per share is calculated in accordance with the
provisions of FAS No. 128, "Earnings per Share." Basic 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, 1998 and 1997:
<TABLE>
<CAPTION>
(Amounts in thousands) 1998 1997
---------------------- ---- ----
<S> <C> <C>
Raw Materials $ 2,527 $ 4,672
Finished Goods 22,226 15,764
------- -------
$24,753 $20,436
======= =======
</TABLE>
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 (see
Note L). Amortization is provided over a 40-year period. Intangible assets at
December 31, 1998 and 1997 are net of accumulated amortization of $1.3 million
and $1.1 million, respectively.
Property and Equipment. Property and equipment at December 31, 1998 and 1997
consist of the following:
<TABLE>
<CAPTION>
(Amounts in thousands) 1998 1997
---------------------- ---- ----
<S> <C> <C>
Furniture and fixtures $ 1,017 $ 887
Leasehold improvements 1,765 1,718
Machinery and equipment 20,252 16,858
-------- --------
23,034 19,463
Accumulated depreciation (12,430) (11,696)
-------- --------
Property and equipment, net $ 10,604 $ 7,767
======== ========
</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.
43
<PAGE>
<PAGE>
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, 1998 is approximately $11.5 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, 1998 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, 1998:
<TABLE>
<CAPTION>
(Amounts in thousands) 1998 1997 1996
---------------------- ---- ---- ----
<S> <C> <C> <C>
Note receivable and warrants from sale of
direct sales offices $ -- $ -- $8,100
Restricted cash received from sale of
direct sales offices -- -- 5,031
Common shares exchanged to exercise options
and warrants 230 507 549
Capital leases for equipment acquisitions 1,212 1,805 302
</TABLE>
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, 1998 and 1997:
<TABLE>
<CAPTION>
(Amounts in thousands) 1998 1997
- ---------------------- ---- ----
<S> <C> <C>
Borrowings Under Revolving Credit Facility (a) $ 8,582 $ --
Convertible Subordinated Debentures (b) 12,822 12,569
Capital Lease Obligations (c) 2,521 2,326
Other 624 699
------- -------
Total Debt 24,549 15,594
Less: Current Portion of Long-Term Debt 856 951
------- -------
Total Long-Term Debt $23,693 $14,643
======= =======
</TABLE>
(a) On August 14, 1998, the Company entered into a new revolving credit
facility (the Credit Facility) with Fleet Capital Corp. expiring in 2003.
The new Credit Facility
44
<PAGE>
<PAGE>
provides a maximum overall credit line of $30 million consisting of a
revolving line of credit for direct borrowings, along with standby and
trade letters of credit. Direct borrowings and letter of credit
advances are made available pursuant to a formula based on the levels of
eligible accounts receivable and inventories. To minimize interest
expense on the revolving line of credit, the Company has the option to
borrow money based upon an adjusted prime borrowing rate (9.0% at
December 31, 1998) or at an adjusted LIBOR rate (8.6% at December 31,
1998). Approximately $8.8 million was available at December 31, 1998
under the revolving line of credit, after giving effect to $6.9
million that was committed to cover outstanding letters of credit. The
unused portion of the line of credit has a commitment fee of 0.40%
through December 31, 1998. Beginning in 1999, the unused commitment
fee will be adjusted based upon certain financial ratios. The Company
borrowed $8.6 million as of December 31, 1998. No direct borrowings against
the revolving Credit Facility were outstanding at December 31, 1997.
The Company's average outstanding indebtedness under the revolving
line of credit for the year ended December 31, 1998 was $5.9 million, and
the average interest rate on such indebtedness was 9.40%.
The Credit Facility agreement contains certain restrictive covenants
including, among other things, minimum levels of operating cash flows and
consolidated net worth. During 1998, the Company was in compliance with all
such financial covenants or was granted a waiver of the covenant by the
lender. 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, 1998 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 $2.5 million and $2.3 million at December 31, 1998 and 1997,
respectively. Such leases have been capitalized using implicit interest
rates which range from 8% to 12%.
The following is a schedule of future maturities of long-term debt at December
31, 1998:
45
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Years Ending December 31: (Amounts in thousands)
------------------------- ---------------------
<S> <C>
1999 $ 856
2000 890
2001 891
2002 293
2003 107
Thereafter 21,512
--------
$24,549
--------
--------
</TABLE>
For the years ended December 31, 1998, 1997 and 1996, the Company made cash
payments of approximately $1.7 million, $1.8 million and $2.6 million,
respectively, for interest expense on indebtedness.
NOTE D - INCOME TAXES
The components of the provision (benefit) for income taxes applicable to income
(loss) before taxes for the three years ended December 31, 1998 are as follows:
<TABLE>
<CAPTION>
(Amounts in thousands) 1998 1997 1996
---------------------- ---- ---- ----
<S> <C> <C> <C>
Current - Federal $ -- $ -- $ 1,100
- State -- -- 3,100
- Foreign 2 6 --
------- ------ -------
2 6 4,200
------- ------ -------
Deferred - Federal (3,281) (111) 11,005
- State (953) (32) 415
------- ------ -------
(4,234) (143) 11,420
------- ------ -------
$(4,232) $ (137) $15,620
======= ====== =======
</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) before taxes for the
three years ended December 31, 1998 is as follows:
<TABLE>
<CAPTION>
(Amounts in thousands) 1998 1997 1996
- ---------------------- ---- ---- ----
<S> <C> <C> <C>
Statutory income tax provision (benefit) $(13,971) $ (122) $13,924
State income taxes, net of
federal income tax benefit (629) (21) 2,364
Tax benefit not recorded 5,980 -- --
Write off and amortization of intangible assets 4,472 45 44
Research and development credit (610) (807) (351)
Nondeductible employee compensation costs 444 -- --
</TABLE>
46
<PAGE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Other 82 768 (361)
-------- ------ -------
Reported income tax provision (benefit) $ (4,232) $ (137) $15,620
======== ======= =======
</TABLE>
The components of and changes in the net deferred tax asset are as follows:
<TABLE>
<CAPTION>
Deferred
December 31, (Expense) December 31,
(Amounts in thousands) 1997 Benefit 1998
- ---------------------- ------------- ---------- ----------
<S> <C> <C> <C>
Net operating loss and tax credit carryforwards $25,161 $ 10,520 $ 35,681
Inventory reserves 2,196 618 2,814
Accrued liabilities and restructuring costs 406 1,595 2,001
Debenture revaluation (1,437) 98 (1,339)
Other (3,005) (2,304) (5,309)
--------- -------- -------
23,321 10,527 33,848
Valuation allowance (4,744) (6,293) (11,037)
--------- -------- -------
Deferred tax asset $18,577 $ 4,234 $ 22,811
========= ======== ========
</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 $22.8 million as
of December 31, 1998, the Company will need to generate future taxable income of
approximately $62 million prior to the expiration of the NOLs and tax credit
carryforwards. During the fourth quarter of 1998, the Company did not record a
tax benefit on its pre-tax loss. This reflected the adoption of a more
conservative accounting policy and does not change the Company's evaluation of
its existing deferred tax asset. 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, 1998, 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 $67.0 million and $4.4 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: $24.6 million
in 2004; $9.7 million in 2005; $12.3 million in 2006; $0.8 million in 2010;
$13.4 million in 2012; $6.2 million in 2013.
A reconciliation of the Company's income (loss) before taxes for financial
reporting purposes to taxable income for the three years ended December 31, 1998
is as follows:
47
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
(Amounts in thousands) 1998 1997 1996
- ---------------------- ---- ---- ----
<S> <C> <C> <C>
Income (loss) before taxes and extraordinary item $(41,091) $ (358) $ 39,782
Extraordinary Item -- -- (592)
-------- -------- --------
Income (loss) before taxes for financial
reporting purposes (41,091) (358) 39,190
Differences between income (loss) before taxes for
financial reporting purposes and taxable income:
Permanent differences 14,359 (25) 124
-------- -------- --------
Book taxable income (loss) (26,732) (383) 39,314
Net changes in temporary differences 3,525 (13,002) (15,282)
-------- -------- --------
Taxable income (loss) $(23,207) $(13,385) $ 24,032
======== ======== ========
</TABLE>
The permanent differences relate to the write-off (in 1998) 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), inventory reserves and other costs accrued for book purposes, but not
deducted for tax purposes until subsequently paid.
For the years ended December 31, 1998, 1997 and 1996, the Company made cash
payments of approximately $0.1 million, $0.4 million and $1.5 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, 1998 is as follows:
<TABLE>
<CAPTION>
(in thousands, except for per share amounts)
For the year ended December 31, 1998: Income/(Loss) Shares Per Share Amount
- ------------------------------------- ------------- ------ ----------------
<S> <C> <C> <C>
Basic and Diluted Loss Per Share:
Net loss $(36,859) 49,755 $(0.74)
======== ====== ======
For the year ended December 31, 1997:
- -------------------------------------
Basic and Diluted Loss Per Share:
Net loss $ (221) 49,655 $ --
======== ====== ======
For the year ended December 31, 1996:
- -------------------------------------
</TABLE>
48
<PAGE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Basic Earnings Per Share:
Income before extraordinary item $ 24,162 51,712 $ 0.47
Stock Options and Warrants 539
-------- ------ ------
Diluted Earnings Per Share:
Income before extraordinary item $ 24,162 52,251 $ 0.46
======== ====== =======
</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, 1998. 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. Options to purchase
approximately 163,000 and 139,000 shares of common stock as of December 31, 1998
and 1997, respectively, were not included in the computation of diluted earnings
per share due to the net losses for those years. Options to purchase 1.8
million, 1.2 million and 1.0 million shares of common stock as of December 31,
1998, 1997 and 1996, respectively, 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
eLottery (See Note L) was antidilutive, at issuance, and has been excluded from
the above calculations. Subsequent to December 31, 1998, the convertible
preferred stock was redeemed (see Note Q).
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 $4.0
million, $4.2 million and $6.3 million for the years ended December 31, 1998,
1997 and 1996, 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, 1998:
<TABLE>
<CAPTION>
Years Ending December 31, (Amounts in thousands)
------------------------- ----------------------
<S> <C>
1999 $ 3,313
2000 3,233
2001 3,349
2002 3,588
2003 3,595
Thereafter 4,062
---------
$21,140
=========
</TABLE>
49
<PAGE>
<PAGE>
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 eLottery.
NOTE G - EQUITY INVESTMENT
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 to ten years. Shares available for
granting of future options under these plans total 1.4 million as of December
31, 1998.
The Company also had non-plan options outstanding at December 31, 1998, all of
which were exercisable. These options expire at various dates through March
2001.
A summary of the status of the Company's stock option plans, as well as non-plan
options, as of December 31, 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------- ---------------------- ----------------------
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 1,510,899 $2.89 1,972,485 $2.54 2,858,577 $2.18
Granted 1,407,400 $1.90 251,400 $2.32 316,875 $2.65
Exercised (138,550) $2.01 (481,786) $1.23 (761,570) $1.28
Cancelled (524,550) $2.51 (231,200) $2.71 (441,397) $2.46
--------- --------- ---------
Outstanding 12/31 2,255,199 $2.42 1,510,899 $2.89 1,972,485 $2.54
========= ========= =========
Options exercisable
12/31 994,025 $3.06 1,017,134 $3.04 1,335,402 $2.44
========= ========= =========
</TABLE>
Information relative to options outstanding at December 31, 1998 is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------ -------------------------
Weighted Weighted Weighted
<S> <C> <C> <C>
</TABLE>
50
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Shares Average Average Shares Average
Exercise Outstanding Remaining Exercise Exercisable Exercise
Prices 12/31/98 Life (yrs) Price 12/31/98 Price
-------- ------------------------------------------ -------------------------
<S> <C> <C> <C> <C> <C>
$1.13 - $ 2.00 846,600 6.0 $1.58 140,650 $1.89
$2.03 - $ 2.50 577,800 3.7 $2.30 159,551 $2.37
$2.56 - $ 3.00 239,869 2.9 $2.79 155,044 $2.85
$3.10 - $20.43 590,930 1.8 $3.58 538,780 $3.62
--------- -------
$1.13 - $20.43 2,255,199 4.0 $2.42 994,025 $3.06
========= =======
</TABLE>
The fair value of options granted during 1998, 1997 and 1996 was $1.23, $1.24
and $1.20 per share, respectively. Fair value was estimated using the
Black-Scholes option-pricing model with the following assumptions: expected
volatility ranging from 66% to 108%, a risk-free interest rate ranging from 5.4%
to 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
$0.4 million, $0.2 million and $0.1 million for 1998, 1997 and 1996,
respectively. The change in earnings per share would have been immaterial each
year.
As of December 31, 1998, the Company has warrants outstanding that permit the
holders to purchase a total of 75,000 shares of Common Stock at prices ranging
from $1.25 to $2.63 per share, expiring through November 2003. At December 31,
1998, 25,000 of these warrants were exercisable. Warrants were exercised for
50,000 and 199,431 shares of Common Stock for the years ended December 31 1997
and 1996, respectively. Such exercises were at average prices of $1.21 and $0.04
per share for the years ended December 31, 1997 and 1996, respectively. No
warrants were exercised during 1998.
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, 39,866, 63,904 and 216,504 shares of common stock were sold to
employees during the three years ended December 31, 1998, 1997 and 1996,
respectively. The weighted average fair value of these purchase rights for 1998,
1997 and 1996 was $0.86, $0.67 and $0.81 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
108%, 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
51
<PAGE>
<PAGE>
determined in accordance with FAS No. 123, the impact on net income and
earnings per share would have been immaterial for 1998, 1997 and 1996.
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 $1.7 million
and $1.6 million of such loans outstanding as of December 31, 1998 and 1997,
respectively. Beginning 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 $5.8 million
letter of credit. Participant loans guaranteed by the Company with letters of
credit as of December 31, 1998, 1997 and 1996 were $5.6 million, $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.
Based upon separation agreements with certain executives effective during 1998,
the Company agreed to repurchase 560,000 shares of Common Stock from
Participants in the Executive Plan, of which 140,000 shares were actually paid
for in 1998. In 1998, the Company recorded a $1.0 million charge, representing
the excess of the purchase price plus unpaid interest over the value of the
stock being held as collateral (see Note O). 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. The shares were repurchased because, as non-employees, the
Company could no longer guarantee the bank loans for these individuals or make
advances of interest to the Bank on their behalf. In 1996, the Company recorded
a charge of $110,000 related to these repurchases.
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, 1998, 1997 and 1996 was approximately $245,000,
$261,000 and $540,000, 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 65 former Executone, Inc. employees, including one current employee
of the Company. The Company does not provide post-retirement health or life
insurance benefits to any other employees.
52
<PAGE>
<PAGE>
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.
The change in the accumulated post-retirement benefit obligation (APBO) for 1998
and 1997, along with the funded status of the post-retirement plan as of
December 31, 1998 and 1997 are as follows (amounts in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
APBO beginning of year $3,129 $3,214
Interest cost 140 220
Actuarial gain (963) (150)
Benefits paid (181) (155)
------ ------
APBO end of year $2,125 $3,129
Funded status $2,125 $3,129
Unamortized transition obligation (1,628) (1,744)
Unrecognized net gain (loss) 707 (312)
------ ------
Accrued liability as of December 31 $1,204 $1,073
====== ======
</TABLE>
Post-retirement benefit expense for the three years ended December 31, 1998
consists of the following:
<TABLE>
<CAPTION>
(Amounts in thousands) 1998 1997 1996
- ---------------------- ---- ---- ----
<S> <C> <C> <C>
Interest on accumulated benefit obligation $140 $220 $214
Amortization of transition obligation 116 116 116
Net amortization and other 44 4 20
---- ---- ----
$300 $340 $350
==== ==== ====
</TABLE>
In determining the APBO as of December 31, 1998 and 1997, the weighted average
discount rates used were 6.75% and 7%, respectively. The Company used a
healthcare cost trend rate of approximately 10%, decreasing through 2004 and
leveling off at 5.5% thereafter. A 1% increase in the healthcare trend rate
would increase the APBO at December 31, 1998 by approximately 4% and increase
the interest cost component of the post-retirement benefit expense for 1998 by
less than $10,000.
NOTE K - OTHER INCOME, NET
Other Income, net consists of the following for the three years ended
December 31, 1998:
<TABLE>
<CAPTION>
(Amounts in thousands) 1998 1997 1996
- ---------------------- ---- ---- ----
<S> <C> <C> <C>
Interest income $ 157 $ 741 $1,117
</TABLE>
53
<PAGE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Equity in earnings of DCC 258 377 288
Other, net (102) 419 465
----- ------ ------
$ 313 $1,537 $1,870
===== ====== ======
</TABLE>
NOTE L - eLOTTERY
Acquisition
On December 19, 1995, EXECUTONE Information Systems, Inc. ("Executone') acquired
100% of the common stock of Unistar Gaming Corp. for common and preferred stock
with a combined value of $12.7 million. In January 1999, Unistar Gaming Corp.
changed its name to eLottery, Inc. ("eLottery"). Any reference herein to
eLottery shall be deemed to include business conducted under the name Unistar
Gaming Corp. eLottery's wholly-owned subsidiary, UniStar Entertainment, Inc.
("UniStar Entertainment") has an exclusive five-year management agreement with
the CDA, which was the primary asset acquired, to provide design, development,
financial and management services to the NIL. The NIL was operational beginning
in January 1998. However, in response to an adverse legal opinion on December
17, 1998, eLottery and the CDA terminated the operations of the NIL and the US
Lottery telephone and Internet operations managed by eLottery (see Impairment of
Long-Lived Assets).
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, as originally issued, was to earn dividends equal to
18.5% of the consolidated retained earnings of eLottery 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, as originally issued, was to earn dividends
equal to 31.5% of the consolidated retained earnings of eLottery 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 were
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. As of December 31, 1998, no dividends had accrued to the preferred
stockholders. The Series A and Series B Preferred Stock were 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 eLottery met certain revenue and profit
parameters, the Series A Preferred Stock was convertible for up to 4.925 million
shares of common stock and the Series B Preferred Stock was convertible for up
to 8.375 million shares of common stock (a total of 13.3 million shares of
common stock). The Company has subsequently reached agreement with the preferred
shareholders to accelerate redemption of the Series A and Series B preferred
shares (see Note Q).
Impairment of Long-Lived Assets
54
<PAGE>
<PAGE>
On December 17, 1998, the United States District Court for the District of Idaho
ruled in the case of AT&T vs. Coeur d'Alene Tribe that the orders previously
issued by the Tribal Court upholding the legality of the US Lottery were
erroneous (see Legal and Other Risks for a description of the litigation). In
response to this legal decision, eLottery and the CDA have terminated operation
of the NIL and the US Lottery in every state where it had been offered. As a
result, the Company has reevaluated certain of its assets in accordance with the
provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets.
Based upon such review, management determined that both the intangibles and the
advances to the NIL have been impaired as of the date of this legal decision. As
of December 17, 1998, net intangibles and Advances to NIL of $12.9 million and
$11.2 million, respectively, were written down to zero, which represented the
estimated fair value of the assets, as no future cash flows will be generated by
the NIL. It has also been determined that a total of $0.7 million in NIL startup
costs (primarily post-acquisition building costs) included in other assets were
also impaired. These amounts would have been written off as of January 1, 1999
with the adoption of SOP 98-5. However, due to the termination of NIL
operations, management has concluded that it should be written off during the
fourth quarter of 1998. Shutdown costs and other adjustments totaled an
additional $0.7 million, of which $0.6 million remains as a liability as of
December 31, 1998.
Legal and Other Risks
On October 16, 1995, the CDA filed an action entitled Coeur d'Alene Tribe v.
AT&T Corp. in the Tribal Court, located in Plummer, Idaho (Case No. C195-097):
(i) requesting a ruling that the NIL is legal under the federal Indian Gaming
Regulatory Act of 1988 ("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 long-distance
carrier; and (ii) seeking an injunction preventing AT&T from refusing to provide
telephone service to the NIL. The CDA took the position that all NIL gaming
activity was occurring on "Indian lands" as required by IGRA. 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 NIL; and (iii) that AT&T cannot refuse
service to the NIL. On July 2, 1997, the Tribal Appellate Court affirmed the
lower Tribal Court's May 1, 1996 ruling and analysis upholding the CDA's right
to conduct the NIL 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, to obtain a federal court ruling on the validity and
enforceability of the Tribal Court ruling. On December 17, 1998, that Court
issued an opinion and order denying the motions and counter-claims of the CDA
and granting declaratory judgment in favor of AT&T upholding the position of
AT&T and overruling the decisions of the Tribal Courts. In response to that
decision, eLottery and the CDA terminated operations of the NIL and the US
Lottery in every state where it had been offered. The CDA has filed a notice of
appeal of the District Court decision; however, eLottery will not participate in
or fund any appeal of this ruling.
On September 14, 1998, the CDA, eLottery and representatives of the U.S.
Department of Justice had discussions regarding a declaratory judgment to be
sought jointly from the U.S. District Court for the District of Idaho as to
whether the operation of the NIL is
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<PAGE>
legal under 18 U.S.C. Sections 1952 and 1955. eLottery was informed that the
Department of Justice views such operation to be in violation of such statutes.
The Department of Justice proposed that the parties file a joint stipulation of
facts and cross-motions for summary judgment in the declaratory judgment action.
On December 17, 1998, the Idaho Federal District Court issued an opinion and
order granting declaratory judgment in favor of the action styled AT&T v. Coeur
d' Alene Tribe. In response to that decision, eLottery and the CDA terminated
operation of the NIL and the US Lottery. In light of the ruling of the U.S.
District Court of Idaho and the termination of the NIL and the US Lottery,
eLottery has requested confirmation from the Department of Justice that no
further action will be taken.
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 CDA and UniStar
Entertainment seeking to enjoin the NIL games offered by the CDA over the
Internet and managed by UniStar Entertainment. The complaint also sought civil
penalties, attorneys fees and court costs. The complaint alleged that the NIL
violates Missouri anti-gambling laws and that the marketing of the games
violates the Missouri Merchandising Practices Act. UniStar Entertainment and the
CDA 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 CDA from this
case based on sovereign immunity. The court preliminarily denied a motion to
dismiss UniStar Entertainment based on sovereign immunity, although the court
indicated it might reconsider that decision. UniStar Entertainment filed a
motion for reconsideration of its motion for dismissal. The State of Missouri
has appealed the dismissal of the CDA to the Eighth Circuit Court of Appeals.
On January 28, 1998, the State of Missouri sought to dismiss voluntarily the
existing federal case against UniStar Entertainment and the next day filed a new
action against Executone, UniStar Entertainment and two tribal officials, with
essentially the same allegations, in state court. The State obtained a temporary
restraining order from a state judge against Executone, UniStar Entertainment
and two tribal officials enjoining the marketing of the NIL Internet and
telephone lotteries 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. 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 appealed to the Eighth Circuit the denial of
its motion to remand the case to state court or, in the alternative, to seek a
preliminary injunction.
On January 6, 1999, the Eighth Circuit dismissed Missouri's appeal from the
Eastern District of Missouri. In the same opinion, the Eight Circuit vacated the
decisions from the Western District of Missouri as to the CDA and remanded that
case to the Western District for a hearing on whether the Internet games of the
NIL are gaming activities "on Indian lands." The Eighth Circuit also held valid
Missouri's voluntary dismissal of UniStar Entertainment from the Western
District lawsuit. In light of the termination of the NIL and the US Lottery,
eLottery anticipates seeking dismissal of the Missouri actions.
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<PAGE>
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 Executone,
UniStar Entertainment and the CDA, to permanently enjoin the NIL offered by the
CDA on the Internet. The complaint alleged that the offering of the NIL violates
Wisconsin anti-gambling laws and that legality of the NIL has been
misrepresented to Wisconsin residents in violation of state law. In addition to
an injunction, the suit sought restitution, civil penalties, attorneys' fees and
court costs. Executone, UniStar Entertainment and the CDA have removed the case
to the U.S. District Court in Wisconsin. On February 18, 1998, the District
Court dismissed the CDA from the case based on sovereign immunity and dismissed
Executone based on the State's failure to state a claim against Executone. The
State of Wisconsin appealed the dismissal of the CDA to the Seventh Circuit
Court of Appeals. A motion to dismiss the case against UniStar Entertainment on
the basis of sovereign immunity was denied. UniStar Entertainment appealed the
denial of its motion to dismiss to the Seventh Circuit Court of Appeals. In
light of the termination of the NIL and the US Lottery, eLottery anticipates
seeking dismissal of this action.
Funding of eLottery
The Company periodically evaluates the recoverability of its investment in
eLottery 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 underlying businesses. If the sum of such cash flows is not
sufficient to recover the Company's investment in eLottery, projected cash flows
would then be discounted and the carrying value of Company's investment would be
adjusted accordingly. Management determined that both the eLottery intangibles
and the advance to the NIL were impaired and were written down to zero during
the fourth quarter of 1998 (See Impairment of Long-Lived Assets).
Funding for eLottery capital expenditures, including computer hardware and
software, is being capitalized and depreciated over a five-year period. The
guaranteed monthly advance of $25,000 to the CDA, which began in January 1996,
was to be reimbursed when the NIL began making profit distributions to eLottery.
All such amounts were written off as of December 17, 1998. In addition, the
Company capitalized other fundings, consisting primarily of direct eLottery
expenses, professional fees and other expenses, which the Company believed would
be reimbursable in accordance with the terms of the management agreement. All
such amounts were written off as of December 17, 1998. Cumulative funding as
described above totals $13.4 million ($6.0 million for the year ended December
31, 1998).
The Company also funded legal and other accrued liabilities assumed as part of
the acquisition of eLottery totaling, on a cumulative basis, $3.1 million ($0.7
million for the year ended December 31, 1998). Such cash flows are included in
the investment in eLottery in the statement of cash flows. The investment in
eLottery reflected on the statement of cash flows includes the deferred charges
and assumed liabilities noted above for a cumulative total of $16.5 million
($6.7 million for the year ended December 31, 1998). Since inception, the
Company has also funded various eLottery expenses totaling $2.1 million ($0.5
million for the year ended December 31, 1998, excluding depreciation and
amortization), which are reflected in the Company's consolidated net
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income. Cumulative cash expenditures on eLottery, including eLottery expenses,
amounts paid on capital lease obligations, and approximately $0.6 million
related to the development of the enhanced lottery terminal (ELT) business,
total $18.6 million as of December 31, 1998.
eLottery's activities to date have been primarily related to the organization of
the company, developing the necessary business and gaming systems, operating a
national telephone lottery and the on-line US Lottery Internet site, and
preparing a marketing plan for selling its technology to entities licensed to
sell lottery tickets. With the termination of operations of the NIL, eLottery
expects to derive its future revenues from acting as an Internet retailer of
lottery products for legally authorized entities and the sale or licensing of
the technology it has developed. eLottery has yet to record any revenue.
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 provided project
management services overseeing the development of the software for the NIL, with
the Company contracting independently for system software development. The
Company acquired all hardware for the system without financial obligation by
either IGT or CWH. Approximately $800,000 in hardware costs were incurred as of
December 31, 1998.
The investment in IGT is being accounted for under the cost method. All hardware
costs incurred are being capitalized and depreciated over the useful life of the
assets. As of December 31, 1998, approximately $3.0 million has been spent on
software development. Such payments are being capitalized and depreciated over a
five-year period.
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 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.
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<PAGE>
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.
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.
On February 26, 1999, the Company received $9.3 million from Claricom as payment
in full for the aforementioned $5.9 million junior subordinated note plus
interest, along with the redemption of the warrants. An additional $0.3 million
is being held in escrow until March 31, 2000 by the new owner of Claricom.
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
October 1998, the Company received $5 million in cash as part of a negotiated
settlement with its former supplier of videoconferencing equipment, resulting in
a $5.3 million gain in 1998.
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.
NOTE N - SEGMENTS
In 1998, the Company adopted SFAS No. 131 "Disclosures About Segments of an
Enterprise and Related Information." The Company's reportable business segments
provide products and services which are marketed through both retail and
independent distribution channels. These businesses are managed and reported
separately because they serve distinct markets.
The Company has three reportable business segments: Computer Telephony,
Healthcare and eLottery. Computer Telephony products range from PBX's for small
to medium-sized businesses to standards-compliant computer telephony
applications, LAN and
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Internet-based applications, including voice mail, unified messaging, automatic
call distribution, 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 with fewer than 400 extensions at any individual location.
Healthcare products range from traditional nurse call systems, intercoms and
room status indicators to more sophisticated patient reporting systems, infrared
locating systems and wireless technologies. Customers include hospitals,
surgical centers, nursing homes and assisted living centers. eLottery will
provide a wide array of products and services to the domestic and international
lottery markets. It has developed and operated systems software that enables the
electronic distribution of lottery tickets over the Internet, Intranet and via
telephone.
The Company's accounting policies for segments are the same as those described
in the summary of accounting policies. For the periods reported, management has
evaluated segment performance based upon segment profit or loss. This is largely
based upon direct segment costs plus the allocation of certain shared expenses.
Corporate items are not assigned to a particular segment and include cash,
income taxes, long-term debt and other investments. Transfers between segments
are market-based. Export sales were not material.
Segment information for the years ended December 31, 1998 and 1997 is shown
below. Due to the magnitude and nature of the business transactions which took
place during 1996 (See Note M), segment information for that year has not been
presented as it would not be comparable.
<TABLE>
<CAPTION>
1997
-------------------------------------------------------------------------------
Computer
(amounts in thousands) Telephony Healthcare eLottery Corporate Totals
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue from
External Customers $98,636 $34,862 $ -- $ -- $133,498
Intersegment Revenues 8,490 10,029 -- -- 18,519
Segment Loss (1,766) (5,955) (27,403) (128) (35,252)
Interest Income -- -- -- 157 157
Interest Expense -- -- -- 2,393 2,393
Noncash Items:
Capitalized Leases -- -- -- 1,213 1,213
Depreciation and Amortization 1,852 711 982 -- 3,545
Income from Equity Investment -- -- -- 258 258
Segment Assets 43,234 23,484 6,200 37,387 110,305
Equity Investment in DCC -- -- -- 2,298 2,298
Capital Expenditures 502 233 15 69 819
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
1997
-------------------------------------------------------------------------------
Computer
(amounts in thousands) Telephony Healthcare eLottery Corporate Totals
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue from
External Customers $117,240 $39,156 $ -- $ -- $156,396
Intersegment Revenues 9,303 10,053 -- -- 19,356
Segment Income (Loss) 3,272 (2,376) (806) -- 90
Interest Income -- -- -- 741 741
Interest Expense -- -- -- 1,985 1,985
Noncash Items:
Capitalized Leases -- -- 611 1,805 2,416
Depreciation and Amortization 2,178 791 -- -- 2,969
Income from Equity Investment -- -- -- 377 377
Segment Assets 45,442 25,547 24,091 43,784 138,864
Equity Investment in DCC -- -- -- 2,038 2,038
Capital Expenditures 1,165 178 6 120 1,469
</TABLE>
The following presents a reconciliation of segment information to consolidated
amounts for the years ended
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
(Amounts in thousands) 1998 1997
---- ----
Revenues
<S> <C> <C>
Total segment revenues $152,017 $175,752
Elimination of intersegment revenues (18,519) (19,356)
-------- --------
$133,498 $156,396
======== ========
Net Loss
Total segment income (loss) $(35,252) $ 90
Patent litigation settlement (3,735) --
Special charges (5,293) --
Video litigation settlement 5,269 --
Interest and other unallocated expenses, net (2,080) (448)
Income tax benefit 4,232 137
-------- --------
$(36,859) $ (221)
======== ========
</TABLE>
For the years ended December 31, 1998 and 1997, the Company had two individual
customers, each of which generated in excess of 10% of the Company's revenues.
Both customers are included in the Computer Telephony segment. One customer
accounted
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for $18.0 million and $31.1 million in sales for 1998 and 1997, respectively.
The second customer accounted for $16.4 million and $ 14.0 million for the same
periods, respectively.
NOTE O - SPECIAL CHARGES
As a result of actions taken by the Company to improve its business processes,
including significant changes in its senior management structure, along with a
provision for a patent litigation settlement, the Company has recorded a total
of $9.0 million in reorganization and other special charges during year ended
December 31, 1998.
The charges consist of $3.0 million in severance and benefit continuation costs,
$1.0 million in loan forgiveness costs associated with the Executive Stock
Incentive Plan, and $1.3 million to reflect a charge for idle space on leased
premises and other charges. At December 31, 1998, the remaining reserve balance
associated with these charges was $1.7 million. The severance charge covered
the termination of 34 employees, all of who left the Company in 1998. In
addition, the Company also recorded a $3.7 million charge to settle claims made
by Lucent Technologies (Lucent) which holds the patent rights to certain
intellectual property allegedly used in the Company's products. Under the
agreement, the Company will pay Lucent $3.7 million over the next two years to
cover all past patent obligations. In addition, the parties have agreed to
execute a bilateral patent cross-license agreement covering all of Lucent's and
the Company's current telephony-related patents, which provides for additional
royalties to be paid to Lucent.
NOTE P - SELECTED QUARTERLY FINANCIAL DATA
The following is a summary of unaudited selected quarterly financial data for
the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------
March 31, June 30, September 30, December 31,
(In thousands, except for per share amounts) 1998 1998 1998 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $33,903 $34,707 $33,605 $31,283
Gross Profit 10,838 11,850 10,446 8,587
Loss Before Income Taxes (4,129) (2,871) (3,582) (30,509)
Net Loss (2,478) (1,723) (2,149) (30,509)
Basic and Diluted Loss Per Share (0.05) (0.03) (0.04) (0.61)
</TABLE>
<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
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C>
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>
The three months ended December 31, 1998 includes the writeoff of $25.5 million
in assets related to the termination of the NIL (See Note L) and a nonrecurring
$5.3 million gain on a negotiated settlement with a former supplier of
videoconferencing equipment. The Company also recorded nonrecurring special
charges in the three-month periods ended March 31, June 30, September 30 and
December 31, 1998 of $2.3 million, $2.1 million, $0.9 million and $3.7 million,
respectively (see Note O).
NOTE Q - SUBSEQUENT EVENTS (UNAUDITED)
On March 29, 1999, the Company announced that it planned to divest its core
telephone and healthcare businesses and change the name of the Company to
eLottery, Inc. At the same time, the Executone Board of Directors announced it
had received an offer for those businesses from a group to be led by Stanley J.
Kabala, Chairman and Chief Executive Officer of Executone, and that it has
formed a special committee of the Board to accomplish that divestiture.
The offer from management is approximately $70 million and is subject to a
number of conditions including negotiation of a definitive agreement, financing,
the waiver or expiration of a pre-existing right of first offer, and approval of
the Executone shareholders. A final decision as to the method of divesting this
business has not been made by the Board. The Company expects to recognize a gain
on the transaction, which may be deferred over some undetermined future period,
dependent upon the final terms.
The proceeds of any sale will remain in the Company to help it accelerate the
achievement of eLottery's business plans. At the conclusion of the transaction
and subject to shareholder approval, Executone would be renamed eLottery, Inc..
eLottery's activities to date have been primarily related to the organization of
the company, developing the business and gaming systems necessary to operate a
national telephone lottery and the USlottery.com Internet site and preparing a
marketing plan for selling its technology to entities licensed to sell lottery
tickets. With the termination of operations of the NIL and the divestiture of
the core telephony and healthcare businesses, eLottery expects to derive its
future revenues from acting as an Internet retailer of lottery products for
legally authorized entities and the sale of licensing of the technology it has
developed. eLottery has yet to record any revenue.
For the years ended December 31, 1998, 1997 and 1996, the eLottery segment
generated pretax losses of $27.4 million, $806,000 and $755,000, respectively.
The 1998 loss includes $25.5 million related to the shutdown of the NIL and the
resulting impairment of assets (see Note L). Net assets of eLottery at the end
of each year consisted of the following:
<TABLE>
<CAPTION>
(amounts in thousands) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current assets $1,007 $ -- $ 9
Property & equipment, net 4,210 24 17
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C>
Intangible assets, net -- 15,841 15,841
Other assets 983 8,226 2,561
Current liabilities (2,141) (912) (1,076)
Long-term debt (315) (433) --
-------- -------- -------
Net assets $3,744 $22,746 $17,352
======== ======== =======
</TABLE>
On April 7, 1999, the Company announced that, as part of its plan to separate
its telephony and healthcare businesses from eLottery, it had received approval
from 100% of its preferred shareholders to accelerate the redemption of its
Series A and Series B preferred stock. With accelerated redemption, the
preferred shares will be redeemable for 13.3 million shares of common stock, or
approximately 21% of eLottery's common stock following the separation of the
core business and will no longer be entitled to receive a total of 50% of
eLottery's retained earnings as preferred dividends.
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
DIRECTORS
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>
Stanley J. Kabala 55 Chairman of the Board, President, and Chief 1998
Executive Officer, of the Company since 1998;
Prior thereto, President and Chief Executive
Officer of Rogers Cantel Mobile Communications,
the largest wireless telephone company in
Canada, and Chief Operating Officer of its
parent Rogers Communications, Inc., from 1996 to
1997. During 1995, President and Chief Executive
Officer of Unitel Communications, Inc., Canada's
largest alternative long distance provider. From
1968 through 1994, various positions at AT&T
Corporation, most recently Vice President--Customer
Service for the Business Communications Services
Division and Vice President--AT&T 800 and Business
Applications Services.
Louis K. Adler 63 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 61 President, The Blau Group Ltd., an investment 1983
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.
John P. Hectus 54 President and Chief executive Officer, AT&T 1998
Canada Enterprises, January 1999 to
present; Vice President and Chief Financial
Officer, AT&T - Canada Enterprises, from June
1998 to the present;
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C>
from 1996 through June 1998 Senior Vice
President and Chief Financial Officer, AT&T
Canada Long Distance Services; from 1994 through
1995, regional Vice President and Chief
Financial Officer, AT&T Caribbean & Latin
America; from 1990 to 1994, Executive Vice
President & Chief Financial Officer, AT&T
Paradyne; prior thereto, various executive
positions within AT&T Corporation.
Malinda Mitchell 54 Senior Vice President and Chief Operatin 1999
Officer, UCSF Stanford Health Care, Stanford
Hospital and Clinics, a health care provider,
since November 1997; during 1997,Interim
President and Chief Executive Officer, Stanford
Hospital and Clinics, and from 1898 until
February 1997, Vice President, Operations and
Chief Operating Officer, Stanford Hospital and
Clinics; prior thereto, various nursing
management positions at Stanford Hospital. Ms.
Mitchell is also a director of Specialized
Health Products International, Inc.
Jerry M. Seslowe 53 Managing Director of Resource Holdings Ltd., an 1996
investment and financial consulting firm, since
1983.
</TABLE>
EXECUTIVE OFFICERS
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position With Company
- ---- --- ----------------------
<S> <C> <C>
Stanley J. Kabala 55 Chairman of the Board, President and
Chief Executive Officer
Edward W. Stone, Jr. 46 Senior Vice President
and Chief Financial Officer
Michael W. Yacenda 47 Executive Vice President and
President, UniStar Entertainment
Barbara C. Anderson 47 Vice President, Law and
Administration and Secretary
James E. Cooke III 51 Vice President, Sales and Operations
Israel J. Hersh 45 Vice President, Engineering and
Development
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
Robert W. Hopwood 55 Vice President and Vice
President-eLottery Operations,
Frank J. Rotatori 56 Vice President, Business
Development, International and
Strategic Alliances
</TABLE>
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<PAGE>
Stanley J. Kabala was elected Chairman of the Board, President and Chief
Executive Officer of Executone in June 1998. Prior to that, he was President and
Chief Executive Officer of Rogers Cantel Mobile Communications, the largest
wireless telephone company in Canada, and Chief Operating Officer of its parent
Rogers Communications, Inc., from 1996 to 1997. During 1995, Mr. Kabala was
President and Chief Executive Officer of Unitel Communications, Inc., Canada's
largest alternative long distance provider. From 1968 through 1994, Mr. Kabala
held various positions at AT&T Corporation, most recently Vice
President--Customer Service for the Business Communications Services Division
and Vice President--AT&T 800 and Business Applications Services.
Edward W. (Ted) Stone, Jr. has served as Senior Vice President and Chief
Financial Officer of Executone since October 1998. Prior to that time, he served
as Vice President, Finance for the Thomson Corporation Publishing International
group of The Thomson Corporation, a leading publisher of specialized
information, from 1995 to 1998. From 1993 to 1995, Mr. Stone was Vice President
and Chief Financial Officer of Krueger International, Inc., a leading
manufacturer of institutional and commercial furniture. From 1988 to 1993, he
was Controller and then Vice President, Finance for the Searle Pharmaceuticals
subsidiary of The Monsanto Company and General Manager of Searle's Animal Health
division. Earlier in his career, Mr. Stone was Chief Financial Officer for two
entrepreneurial specialty chemical companies and a Division Controller for
Pfizer, Inc. Mr. Stone holds an A. B. degree in Engineering Sciences from
Dartmouth College and an MBA from the Amos Tuck School of Business
Administration at Dartmouth.
Michael W. Yacenda has served as Executive Vice President of Executone
since January 1990, and as President of eLottery and UniStar Entertainment 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, Law and Administration and
Secretary since October 1998. Prior to that time, she was 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, Sales and Operations,
since November 1998. Prior to that time, he was Vice President, National
Accounts of the Company 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.
Israel J. Hersh has been Vice President, Engineering and Development, since
1999 and was Vice President, Software 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.
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<PAGE>
Robert W. Hopwood has been Vice President of the Company and Vice
President-Operations of its lottery and Unistar Entertainment subsidiaries 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.
Frank J. Rotatori has been Vice President, Business Development, since
April 1999. Prior thereto, he was President of the Healthcare Communications
Division 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.
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, 1998, 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 February 26, 1999, 36,000 shares had been issued upon exercise of
options granted under the original terms of the Plan, no options to purchase
shares of Common Stock were outstanding under the original terms of the Plan,
and options to purchase an additional 96,700 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
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of grant. An aggregate of up to 250,000 shares are issuable under the Plan. Each
of Messrs. Adler, Hectus and Seslowe received options to purchase 14,700 shares
under this Plan in 1998.
Each director who does not receive other direct compensation from the
Company also receives upon his or her initial election to the Board a warrant to
purchase 25,000 shares of the Company's Common Stock at the market price at the
date of grant. Each warrant vests ratably over a three-year period and has a
term of five years. Under this program, the following warrants have been granted
to current directors upon their initial election to the Board:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Name Date of Grant Warrant Price per Share
- --------------------------------------------------------------------------------
<S> <C> <C>
Jerry M. Seslowe February 1, 1996 $2.63
- --------------------------------------------------------------------------------
Louis K. Adler July 29,1997 $2.00
- --------------------------------------------------------------------------------
John J. Hectus November 18, 1998 $1.25
- --------------------------------------------------------------------------------
Malinda Mitchell March 1, 1999 $3.06
- --------------------------------------------------------------------------------
</TABLE>
The Company also reimburses directors for their travel and accommodation
expenses incurred in attending Board meetings.
70
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<PAGE>
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation by the Company of the
current Chief Executive Officer, the former Chief Executive Officer and the four
most highly compensated other executive officers of the Company in 1998, for
services in all capacities to the Company and its subsidiaries during the three
fiscal years ended December 31,1998.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
OTHER ANNUAL AWARDS OF ALL OTHER
NAME AND SALARY BONUS COMPENSATION OPTIONS/ COMPENSATION
PRINCIPAL POSITION YEAR ($) ($)) ($) SARS (#) ($) (1)
- ------------------ ---- ------ ------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Stanley J. Kabala(2) 1998 144,231 -0- 91,936 400,000 6.072
Chairman of the Board,
President and Chief
Executive Officer
Alan Kessman 1998 1,264,210 -0- -0- -0- 10,386(3)
Former Chairman of the Board, 1997 400,000 -0- -0- -0- 9,849
President and Chief 1996 400,000 63,000 -0- -0- 9,536
Executive Officer
Michael W. Yacenda 1998 262,203 -0- -0- -0- 6,072
Executive Vice President 1997 256,000 -0- -0- 5,997
1996 256,000 49,900 -0- -0- 5,935
Shlomo Shur 1998 215,700 -0- -0- -0- 5,494
Senior Vice President, 1997 215,700 -0- -0- 5,233
Advanced Technology 1996 215,700 12,393 -0- -0- 5,192
Andrew Kontomerkos 1998 214,000 -0- -0- -0- 6,241
Senior Vice President, 1997 214,000 -0- -0- 5,896
Hardware Engineering 1996 214,000 12,350 -0- -0- 5,703
and Production
Vic Northrup 1998 214,687 16,750 -0- -0- 660
Vice President and 1997 162,885 31,750 -0- 25,000 660
President, Computer 1996 137,837 64,375 -0- -0- 660
Telephony Division
</TABLE>
(1) "All Other Compensation" 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 1998: Mr. Kessman, $ 9,726; Mr.
Yacenda, $5,412; Mr. Shur, $4,834; and Mr. Kontomerkos, $ 5,581; in the
following amounts in 1997: Mr. Kessman, $9,189; Mr. Yacenda, $5,337
Mr. Shur, $4,573; and Mr. Kontomerkos, $5,236; and in the following
amounts in 1996: Mr. Kessman, $8,876; Mr. Yacenda, $5,275; Mr. Shur,
$4,532;, and Mr. Kontomerkas, $5,043.
(2) Mr. Kabala was elected Chairman, President and Chief Executive Officer
effective June 28, 1998. See the discussion of his employment agreement
below.
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<PAGE>
(3) Includes the 1998 payments under Mr. Kessman's employment continuity
agreement described immediately below.
EMPLOYMENT AGREEMENTS
The Company and Alan 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, including a diminishment
of his responsibilities, without cause or following a change in control in the
Company, including a lump sum payment equal to 2.99 times his then current base
salary plus the average of any bonuses awarded to Mr. Kessman during the two
fiscal years preceding the termination of his employment.
In June 1998, Mr. Kessman resigned as Chairman and President of the Company
and in accordance with the diminishment of responsibility provisions of his
employment continuity agreement, the Company paid Mr. Kessman approximately $1.3
million, which includes severance of approximately $1.1 million and continuation
of certain benefits for four years. As of March 31, 1999, Mr. Kessman had
indebtedness to the Company of $2.4 million relating to the Executive Stock
Incentive Plan. These obligations may remain outstanding under the terms of Mr.
Kessman's severance until December 2001; however, during 1998 Mr. Kessman
pledged 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."
In June 1998, the Company entered into an employment agreement with Stanley
J. Kabala, its Chairman of the Board, President and Chief Executive Officer, for
an initial term of one year. The employment agreement provides for a minimum
base salary of $300,000 per year, eligibility for a incentive bonus of 150,000
shares of Common Stock upon achievement of objective performance goals set by
the Board of Directors, a signing bonus of 200,000 restricted shares of Common
Stock vesting ratably over 12 months and an initial stock option covering
200,000 shares of Common Stock vesting ratably over 12 months. The agreement
further provides that in the event of the termination of Mr. Kabala's employment
by the Company without cause or his voluntary termination of employment upon
certain events, including diminution of his responsibilities or a change of
control, the Company will pay Mr. Kabala his base salary for the remainder of
the initial term, a prorated bonus and continuation of medical insurance
coverage, and his restricted stock and stock options will vest immediately.
72
<PAGE>
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth individual grants of stock options and stock
appreciation rights made during 1998 to each of the executive officers named in
the Summary Compensation Table above. There were no grants of stock appreciation
rights (SARs) to any officers in 1998.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential Realizable Value
At Assumed Annual
Rates of Stock Price
Appreciation
For Option Term
Individual Grants
% of
Number of Total
Securities Options Exercise
Underlying Granted to or Base
Options Employees Price Expiration
Name Granted (#) on Fiscal Year ($/sh) Date 5%($) 10%($)
<S> <C> <C> <C> <C> <C> <C>
Stanley J. Kabala 200,000 14% $2.00 6/30/08 $251,906 $638,581
Alan Kessman -0- -0- -- -- -- --
Michael W. Yacenda -0- -0- -- -- -- --
Andrew Kontomerkos -0- -0- -- -- -- --
Vic Northrup -0- -0- -- -- -- --
Shlomo Shur -0- -0- -- -- -- --
</TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth each exercise of stock options made during
the year ended December 31, 1998 by the current Chief Executive Officer, the
former Chief Executive Officer and the four most highly compensated other
executive officers and the fiscal year-end value of unexercised options held by
those individuals as of December 31, 1998. There were no exercises or holdings
of stock appreciation rights by any officers during 1998, and there are no
outstanding stock appreciation rights.
<TABLE>
<CAPTION>
Number of Value of Unexercised
Unexercised Options In-the Money Options at
Shares at Fiscal Year-End(#) Fiscal Year-End ($)(1)
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized ($) Unexercisable Unexercisable
<S> <C> <C> <C> <C>
Stanley J. Kabala -0- -0- 100,000/100,000 -0-/-0-
Alan Kessman -0- -0- -0-/-0- -0-/0
Michael W. -0- -0- -0-/-0- -0-/0
Yacenda
Shlomo Shur 25,000 11,725 -0-/-0- -0-/-0-
</TABLE>
73
<PAGE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Andrew 20,000 9,380 -0-/-0- -0-/-0-
Kontomerkos
Vic Northrup -0- -0- 49,644/12,500 -0-/-0-
</TABLE>
(1) Based upon the last sale price on December 31, 1998 of $1.75 per share
of Common Stock.
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
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
74
<PAGE>
<PAGE>
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, in
1997 the base salaries for the former Chief Executive Officer and the four other
highest paid executive officers were established at 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, in 1998 the Committee approved
no increase in salary for Mr. Kessman or the four other highest paid executive
officers except one officer who was initially elected as an executive officer in
1997 and a small percentage increase for another executive officer.
6. Merit increases in base salary for executives other than Mr. Kessman and Mr.
Kabala were reviewed on an individual basis by Mr. Kessman or Mr. Kabala and
increases were dependent upon a favorable evaluation by Mr. Kessman or Mr.
Kabala 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 or Mr. Kabala recommended 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
1998 bonus potential for executive officers, including the Chief Executive
Officer, the Compensation Committee reviewed recommendations by the former Chief
Executive Officer. 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 1998 pretax income targets or goals were
achieved by the Company.. The Committee also approved bonus eligibility for
division presidents that would be based on division performance without regard
to overall corporate performance. In 1998, 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. In June 1998, the Company entered into an employment agreement with Stanley
J. Kabala, its Chairman of the Board, President and Chief Executive Officer, for
an initial term of one year. The employment agreement provides for a minimum
base salary of $300,000 per year, eligibility for a incentive bonus of 150,000
shares of Common Stock upon achievement of objective performance goals set by
the Board of Directors, a signing bonus of 200,000 restricted shares of Common
Stock vesting ratably over 12 months and an initial stock option covering
200,000 shares of Common Stock vesting ratably over 12 months. The agreement
further provides that in the event of the termination of Mr. Kabala's employment
by the Company without cause or his voluntary termination of
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<PAGE>
<PAGE>
employment upon certain events, including diminution of his responsibilities or
a change of control, the Company will pay Mr. Kabala his base salary for the
remainder of the initial term, a prorated bonus and continuation of medical
insurance coverage, and his restricted stock and stock options will vest
immediately.
9. 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 1998 to Mr. Kessman or the four highest paid other
executive officers.
10. In June 1998, the Board of Directors approved a Transition and Retention
Plan (the "Transition Plan") and offered it to certain participants in the
Executive Plan including certain officers. The Transition Plan provides, in
exchange for a release of all prior claims by the participant, defined retention
and severance payments, option grants at current market value and deferral of
all loan interest to the participant. A participant in the Transition Plan will
earn, through continued employment, a retention payment of up to 110% of any
shortfall of the market value of the Common Stock purchased with the loan below
the loan's outstanding principal and interest. The amount of this retention
payment is determined, and the payment becomes payable, only if and when the
participant's employment with the Company ends. A Transition Plan participant
becomes vested in one-third of the retention payment by continuation of
employment through March 31, 1999, and becomes vested in an additional 8.33% of
the payment for each calendar quarter of continued employment thereafter. In the
event the Company terminates the participant's employment without cause, or a
change of control of the Company occurs, the retention payment becomes fully
vested and payable immediately. The Company has the option at any time to
repurchase the Purchased Shares from a Transition Plan participant at the fair
market value, in which case the participant remains liable for any loan balance
not repaid from the repurchase proceeds subject to the other terms of the
Transition Plan. Under certain circumstances, such as termination by the Company
of the participant's employment following a change of control or otherwise
without cause as defined in the Transition Plan, the participant is also
entitled to continuation of salary and benefits for nine months.
In conclusion, the Compensation Committee believes that the base salary, bonus
and stock options of the Company's former Chief Executive Officer, its new 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
JERRY M. SESLOWE
PERFORMANCE GRAPH
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<PAGE>
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, Incorporated.
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
InterVoice, Inc. 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.
Although Lucent Technologies 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 1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C>
XTON $100 $113 $ 80 $ 83 $ 76 $ 61
NASDAQ $100 $ 98 $138 $170 $209 $293
PEER GROUP $100 $ 87 $131 $156 $148 $131
</TABLE>
77
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
CUMULATIVE TOTAL RETURNS 1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C>
XTONG $100 $100 $116 $129 $143 $126
</TABLE>
[PERFORMANCE GRAPH]
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee are Louis K. Adler 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.
78
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<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, 1999, 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. 9,064,855(2) 18.19%
790 North Milwaukee Street
Milwaukee, WI 53202
Edmund H., Shea, Jr. 3,791,741(3) 7.61
655 Brea Canyon Road
Walnut Creek, CA
91789
Lawndale Capital Management LLC 3,425,604 6.87
One Sansome Street, Suite 3900
San Francisco, CA 94104
Series A Stock
Watertone Holdings, L.P.. 154,520 61.81
c/o William H. Hopson
Varner, Stephens, Humphries & White
Riverwood 100 Building, Suite 1700
3350 Riverwood Parkway
Atlanta, GA 30339
Berkshire Bancorp Inc. 78,819 31.53
160 Broadway
New York, NY 10038
Series B Stock
Watertone Holdings, L. P. 61,807 61.81
c/o William H. Hopson
Varner, Stephens, Humphries & White
Riverwood 100 Building, Suite 1700
3350 Riverwood Parkway
Atlanta, GA 30339
Berkshire Bancorp Inc. 31,528 31.53
160 Broadway
New York, NY 10038
</TABLE>
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<PAGE>
(1) With respect to the Common Stock, percentages shown are based upon
49,834,807 shares of Common Stock actually outstanding as of February 28, 1999.
In cases where the beneficial ownership of the individual or group includes
options, warrants or convertible securities, the percentage is based on
49,834,807 shares 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, 1999.
(2) Heartland Advisors shares power to vote 625,000 of such shares.
(3) Includes ownership by corporations and other entities controlled by Mr.
Shea. 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.
Mr. Shea shares the power to vote and dispose of all such shares.
The following table sets forth as of February 28, 1999, the beneficial
ownership of the Company's voting shares by all current directors and nominees
of the Company, the Chief Executive Officer, the former Chief Executive Officer,
and the four next most highly compensated executive officers in 1998, and all
current 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 229,268(2)
Stanley M. Blau 542,540 1.1
John P. Hectus 25,000(3) *
Stanley J. Kabala 436,000(4) *
Alan Kessman 1,737,337 3.4
Andrew Kontomerkos 463,284 *
Malinda Mitchell 31,800(5) *
Vic Northrup 127,537 *
Jerry M. Seslowe 509,246(6) *
Shlomo Shur 740,708 1.4
Michael W. Yacenda 857,138(7) 1.7
All Current Directors and 3,696,168(8) 7.1
Officers as a Group
(14 Persons)
Series A Stock Louis K. Adler 1,436 *
Stanley M. Blau -0-
John P. Hectus -0-
Stanley J. Kabala -0-
Alan Kessman -0-
Andrew Kontomerkos -0-
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C>
Vic Northrup -0-
Jerry M. Seslowe 4,692(9) 1.87
Shlomo Shur -0-
Michael W. Yacenda -0-
All Current Directors and 6,128 2.45
Officers as a Group
(14 Persons)
Series B Stock Louis K. Adler 575 *
Stanley M. Blau -0-
John P. Hectus -0-
Stanley J. Kabala -0-
Alan Kessman -0-
Andrew Kontomerkos -0-
Thurston R. Moore -0-
Vic Northrup -0-
Richard S. Rosenbloom -0-
Jerry M. Seslowe 1,877(10) 1.87
Shlomo Shur -0-
Michael W. Yacenda -0-
All Current Directors and 2,452 2.45
Officers as a Group
(14 Persons)
</TABLE>
* Less than 1% of the class.
(1) Information is provided as reported to the Company as of February 28, 1999
for all owners except Andrew Kontomerkos and Shlomo Shur, as to whom the
information is provided as of May 15, 1998 when their employment by the Company
terminated, Alan Kessman, as to whom the information is reported as of June 28,
1998, when his employment ended, and Vic Northrup, as to whom the information is
reported as of September 11, 1998, when his employment ended. With respect to
the Common Stock, percentages shown are based upon 49,834,807 shares of Common
Stock actually outstanding as of February 28, 1999. In cases where the
beneficial ownership of the individual or group includes options, warrants or
convertible securities, the percentage is based on 49,834,807 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, 1999. On April 7, 1999, the Company
announced an agreement with all the holders of the Preferred Stock to redeem
their shares for Common Stock pursuant to the terms of the original issuance of
the Preferred Stock.
(2) Includes 98,315 shares issuable upon exercise of options, all of which are
exercisable within 60 days of March 31, 1999, and 25,000 shares issuable
upon exercise of warrants, 8,333 of which are exercisable within 60 days of
March 31, 1999. Includes 76,445 shares of Common Stock issuable upon
redemption and conversion of the Preferred Stock owned by Mr. Adler.
81
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<PAGE>
(3) Includes 25,000 shares issuable upon exercise of warrants, none of which
are exerciable within 60 days of March 31, 1999.
(4) Includes 200,000 shares subject to options, of which 166,666 are
exercisable within 60 days of March 31, 1999.
(5) Includes 6,800 shares issuable upon exercise of options and 25,000 shares
issuable upon exercise of warrants, none of which are exercisable within 60
days of March 31, 1999.
(6) Includes 51,612 shares subject to options, and 25,000 shares subject to
warrants, all of which are exercisable within 60 days of March 31, 1999. 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. Also includes 203,756 shares of Common Stock issuable upon
redemption and conversion of the Preferred Stock owned by Mr. Seslowe and the
45,875 shares of Common Stock issuable upon redemption and conversion of the
Preferred Stock owned by Resource Holdings Associates.
(7) Includes 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.
(8) Includes 795,227 shares issuable upon exercise of options, and 75,000 shares
issuable upon exercise of warrants, of which 408,143 and 50,000, respectively,
are exercisable within 60 days of March 31, 1999, 45,176 shares issuable upon
conversion of the Company's Debentures, and 280,201 shares issuable upon
redemption and conversion of Preferred Stock.
(9) Includes 862 shares held by Resource Holdings.
(10) Includes 345 shares held by Resource Holdings.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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
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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.
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<PAGE>
In June 1998, the Board of Directors approved a Transition and
Retention Plan (the "Transition Plan") and offered it to certain participants in
the Executive Plan including certain executive officers as noted in the table
below. The Transition Plan provides, in exchange for a release of all prior
claims by the participant, defined retention and severance payments, option
grants at current market value and deferral of all loan interest to the
participant. A participant in the Transition Plan will earn, through continued
employment, a retention payment of up to 110% of any shortfall of the market
value of the Common Stock purchased with the loan below the loan's outstanding
principal and interest. The amount of this retention payment is determined, and
the payment becomes payable, only if and when the participant's employment with
the Company ends. A Transition Plan participant becomes vested in one-third of
the retention payment by continuation of employment through March 31, 1999, and
becomes vested in an additional 8.33% of the payment for each calendar quarter
of continued employment thereafter. In the event the Company terminates the
participant's employment without cause, or a change of control of the Company
occurs, the retention payment becomes fully vested and payable immediately. The
Company has the option at any time to repurchase the Purchased Shares from a
Transition Plan participant at the fair market value, in which case the
participant remains liable for any loan balance not repaid from the repurchase
proceeds subject the other terms of the Transition Plan. Under certain
circumstances, such as termination by the Company of the participant's
employment following a change of control or otherwise without cause as defined
in the Transition Plan, the participant is also entitled to continuation of
salary and benefits for nine months.
The following table contains information about borrowings in excess of
$60,000 by executive officers that were outstanding during 1998 pursuant to the
Executive Plan and that were or are guaranteed by the Company. The amounts
listed below also include the interest paid by the Company to the bank,
reimbursement of which was or 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.
In 1998 and January 1999, in connection with the termination of their
employment, Messrs. Guarascio, Kontomerkos, Northrup, and Shur surrendered to
the Company the shares purchased by them under the Executive Plan and the
Company released them from any further obligations under their Executive Plan
loans.
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<PAGE>
<TABLE>
<CAPTION>
HIGHEST AMOUNT OF UNPAID
INDEBTEDNESS BETWEEN INDEBTEDNESS
JANUARY 1, 1998 AND AT
MARCH 31, 1999, MARCH 31, 1999,
INCLUDING INCLUDING
NAME ACCRUED INTEREST ACCRUED INTEREST
- ---- -------------------------------------------------
<S> <C> <C>
Barbara C. Anderson (2) 257,621 $ 257,621
James E. Cooke III (2) 421,830 421,830
Anthony R. Guarascio (2) 574,004 -0-
Israel J. Hersh (2) 126,549 126,549
Robert W. Hopwood (2) 421,209 421,209
Alan Kessman (1) 2,466,380 1,940,953
Andrew Kontomerkos 728,092 -0-
Vic Northrup 293,518 -0-
Frank J. Rotatori (2) 253,098 253,098
Shlomo Shur 728,092 -0-
Michael W. Yacenda (2) 1,476,405 1,476,405
</TABLE>
(1) See discussion under: "Executive Compensation -- Employment Agreements"
above.
(2) Participant in Transition Plan.
Certain software development services have been provided to eLottery by The
Winston Group, one of whose principals is Robert W. Hopwood, Jr., a son of an
officer of eLottery, Robert W. Hopwood, and Rosewood Computing, one of whose
principals is Mark Hopwood, another son of Mr. Hopwood. During 1998, eLottery
incurred $567,030 and $59,619, respectively, in fees from these firms. These
contracts were entered into on terms eLottery believes are as favorable as
would have been obtained through arm's-length negotiations with an independent
third party.
85
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<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, 1998 and 1997
Consolidated Statements of Operations - Years ended December 31, 1998, 1997 and
1996
Consolidated Statements of Changes in Stockholders' Equity - Three years ended
December 31, 1998
Consolidated Statements of Cash Flows - Years ended December 31, 1998, 1997 and
1996
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:
<TABLE>
<CAPTION>
Exhibit No.
- -----------
<S> <C>
2-1 Agreement and Plan of Merger by and among EXECUTONE Information
Systems, Inc., Executone Newco, Inc., and Unistar Gaming Corp., dated
as of December 19, 1995. Incorporated by reference to the Registrant's
Current Report on Form 8-K dated January 3, 1996.
2-2 Asset Purchase Agreement among V Technology Acquisition Corporation,
EXECUTONE Information Systems, Inc. and Vodavi, Inc. dated November 5,
1993, and Amendment dated February 18, 1994. Incorporated by reference
to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1993.
2-3 Asset Purchase Agreement by and among Tone Holdings, Inc. and Tone
Acquisition Corporation, EXECUTONE Network Services, Inc. and EXECUTONE
Information Systems, Inc. dated as of April 9, 1996, and Amendment No.
1 to
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
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 between the Registrant and
Fleet. 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. Incorporated by reference to the registrant's
Annual Report on Form 10-K for the year ended December 31, 1997, filed
on April 15, 1998.
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.
</TABLE>
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<TABLE>
<S> <C>
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.
10-8 1998 Transition and Retention Plan. Filed herewith.
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. Incorporated by reference to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1997 filed on April 15, 1998.
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 Warrant to Purchase 25,000 Shares of Common Stock of the Registrant, in
favor of John P Hectus, dated November 18, 1998. Filed herewith..
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.)
Incorporated by reference to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1997 filed on April 15, 1998.
10-23 Warrant to Purchase 25,000 Shares of Common Stock of the Registrant, in
favor of Malinda Mitchell, dated March 1, 1999. Filed herewith.
21 Subsidiaries of EXECUTONE Information Systems, Inc. Filed herewith.
23.1 Consent of Arthur Andersen LLP. Filed herewith.
27 Financial Data Schedule. Filed herewith.
</TABLE>
Undertakings
88
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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, 1998.
89
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<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/ Stanley J. Kabala
___________________________________________
Stanley J. Kabala, Chairman, President
and Chief Executive Officer
April 14, 1999
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, 1999 /s/ Stanley J. Kabala
________________________________________
Stanley J. Kabala
Chairman, President and Chief Executive
Officer (Principal Executive Officer)
April 14, 1999 /s/ Louis K. Adler
________________________________________
Louis K. Adler, Director
April 14, 1999 /s/ Stanley M. Blau
________________________________________
Stanley M. Blau, Director
April 14, 1999 /s/ Edward W. Stone, Jr.
________________________________________
Edward W. Stone, Jr.
Senior Vice President, Finance,
and Chief Financial Officer
(Principal Financial and Accounting Officer)
April 14, 1999 /s/
________________________________________
John P. Hectus, Director
April 14, 1999 /s/ Malinda Mitchell
________________________________________
Malinda Mitchell, Director
April 14, 1999 /s/ Jerry M. Seslowe
________________________________________
Jerry M. Seslowe, Director
</TABLE>
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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 of EXECUTONE Information Systems, Inc. and subsidiaries'
included in this Form 10-K, and have issued our report thereon dated February 4,
1999. 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 4, 1999
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 Payments Period
- ------------ --------- -------- -------- -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1998
Deducted from Asset Accounts
Allowance for doubtful accounts $ 1,814 $ 567 -- $ (661) -0- 1,720
Allowance for uncollectible notes 2,343 218 951 -0- -0- 3,512
receivable
Special Charges Reserve 9,028 (3,604) 5,424
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
</TABLE>
* Adjustments related to sale of direct sales organization.
S-2
STATEMENT OF DIFFERENCES
------------------------
The section symbol shall be expressed as................................... 'SS'
The trademark symbol shall be expressed as ................................ 'TM'
The registered trademark symbol shall be expressed as ..................... 'r'
<PAGE>
<PAGE>
================================================================================
FLEET CAPITAL CORPORATION, AS ADMINISTRATIVE AND
COLLATERAL AGENT
AND
FLEET CAPITAL CORPORATION, AS LENDER
AND
EXECUTONE INFORMATION SYSTEMS, INC., AS BORROWER
- --------------------------------------------------------------------------------
LOAN AND SECURITY AGREEMENT
Dated: As of August 14, 1998
$30,000,000
- --------------------------------------------------------------------------------
================================================================================
<PAGE>
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SECTION 1. CREDIT FACILITY.................................................................1
1.1. REVOLVING CREDIT LOANS..................................................................1
1.1.1. Loans and Reserves..................................................................1
1.1.2. Use of Proceeds.....................................................................1
1.2. LETTERS OF CREDIT; LC GUARANTIES........................................................2
1.2.1. Request for Letter of Credit........................................................2
1.2.2. Description of Letters of Credit....................................................2
1.2.3. Indemnification.....................................................................2
1.2.4. Agent's Instructions................................................................3
1.2.5. Disbursements.......................................................................3
1.2.6. Reimbursement Obligation............................................................3
1.2.7. Lender's Reimbursement Obligations..................................................3
1.2.8. Cash Collateral.....................................................................4
1.2.9. Waiver of Liability.................................................................4
SECTION 2. INTEREST, FEES AND CHARGES.......................................................5
2.1. INTEREST................................................................................5
2.1.1. Rates of Interest...................................................................5
2.1.2. Default Rate........................................................................5
2.1.3. Maximum Interest....................................................................5
2.2. COMPUTATION OF INTEREST AND FEES........................................................6
2.3. CLOSING FEE.............................................................................6
2.4. LETTER OF CREDIT AND LC GUARANTY FEES...................................................6
2.5. UNUSED LINE FEE.........................................................................6
2.6. REIMBURSEMENT OF EXPENSES...............................................................7
2.7. BANK CHARGES............................................................................7
SECTION 3. LOAN ADMINISTRATION..............................................................7
3.1. MANNER OF BORROWING REVOLVING CREDIT LOANS..............................................8
3.1.1. Loan Requests; Payment..............................................................8
3.1.2. Disbursement.......................................................................10
3.1.3. Authorization......................................................................11
3.1.4. Eurodollar Loans and LIBOR Rate Loans..............................................11
3.1.5. Interest Periods...................................................................11
3.1.6. Conversion of Loans................................................................11
3.1.7. Continuation of Eurodollar Loans...................................................12
3.1.8. Prepayment of Eurodollar Loans.....................................................12
3.1.9. Indemnification....................................................................12
3.1.10.Inability to Make Eurodollar Loans.................................................13
3.2. PAYMENTS...............................................................................13
3.2.1. Principal..........................................................................13
3.2.2. Interest...........................................................................13
3.2.3. Costs, Fees and Charges............................................................14
3.2.4. Other Obligations..................................................................14
3.2.5. Voluntary Prepayments..............................................................14
3.3. MANDATORY PREPAYMENTS..................................................................14
3.3.1. Proceeds of Sale, Loss, Destruction or Condemnation of Collateral; Extraordinary
Receipts..................................................................................14
3.4. APPLICATION OF PAYMENTS AND COLLECTIONS................................................15
3.5. ALL LOANS TO CONSTITUTE ONE OBLIGATION.................................................15
3.6. LOAN ACCOUNT...........................................................................15
3.7. STATEMENTS OF ACCOUNT..................................................................15
3.8. INCREASED COSTS........................................................................15
</TABLE>
i
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<PAGE>
<TABLE>
<S> <C>
3.9. BASIS FOR DETERMINING INTEREST RATE INADEQUATE OR UNFAIR...............................16
3.10. CAPITAL ADEQUACY.....................................................................17
3.10.1.Certificate........................................................................17
SECTION 4. TERM AND TERMINATION............................................................18
4.1. TERM OF AGREEMENT......................................................................18
4.2. TERMINATION............................................................................18
4.2.1. Termination by Lenders.............................................................18
4.2.2. Termination by Borrower............................................................18
4.2.3. Termination Charges................................................................18
4.2.4. Effect of Termination..............................................................18
SECTION 5. SECURITY INTERESTS..............................................................19
5.1. SECURITY INTEREST IN COLLATERAL........................................................19
5.2. LIEN PERFECTION; FURTHER ASSURANCES....................................................19
SECTION 6. COLLATERAL ADMINISTRATION.......................................................20
6.1. GENERAL................................................................................20
6.1.1. Location of Collateral.............................................................20
6.1.2. Insurance of Collateral............................................................20
6.1.3. Protection of Collateral...........................................................20
6.2. ADMINISTRATION OF ACCOUNTS.............................................................20
6.2.1. Records, Schedules and Assignments of Accounts.....................................21
6.2.2. Discounts, Allowances, Disputes....................................................21
6.2.3. Taxes..............................................................................22
6.2.4. Account Verification...............................................................22
6.2.5. Maintenance of Dominion Account....................................................22
6.2.6. Collection of Accounts, Proceeds of Collateral.....................................22
6.3. ADMINISTRATION OF INVENTORY............................................................22
6.3.1. Records and Reports of Inventory...................................................22
6.3.2. Returns of Inventory...............................................................23
6.4. ADMINISTRATION OF EQUIPMENT............................................................23
6.4.1. Records and Schedules of Equipment.................................................23
6.4.2. Dispositions of Equipment..........................................................23
6.5. PAYMENT OF CHARGES.....................................................................23
6.6. ADDITIONAL PAYMENTS....................................................................23
SECTION 7. REPRESENTATIONS AND WARRANTIES..................................................23
7.1. GENERAL REPRESENTATIONS AND WARRANTIES.................................................23
7.1.1. Organization and Qualification.....................................................24
7.1.2. Power and Authority................................................................24
7.1.3. Legally Enforceable Agreement......................................................24
7.1.4. Capital Structure..................................................................24
7.1.5. Corporate Names....................................................................25
7.1.6. Business Locations; Agent for Process..............................................25
7.1.7. Title to Properties; Priority of Liens.............................................25
7.1.8. Accounts...........................................................................25
7.1.9. Equipment..........................................................................26
7.1.10.Financial Statements; Fiscal Year..................................................26
7.1.11.Full Disclosure....................................................................27
7.1.12.Solvent Financial Condition........................................................27
7.1.13.Surety Obligations.................................................................27
7.1.14.Taxes..............................................................................27
7.1.15.Brokers............................................................................27
7.1.16.Patents, Trademarks, Copyrights and Licenses.......................................27
7.1.17.Governmental Consents..............................................................27
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7.1.18.Compliance with Laws...............................................................28
7.1.19.Restrictions.......................................................................28
7.1.20.Litigation.........................................................................28
7.1.21.No Defaults........................................................................28
7.1.22.Leases.............................................................................28
7.1.23.Pension Plans......................................................................28
7.1.24.Trade Relations....................................................................29
7.1.25.Labor Relations....................................................................29
7.1.26.O.S.H.A. and Environmental Compliance..............................................29
7.2. CONTINUOUS NATURE OF REPRESENTATIONS AND WARRANTIES....................................30
7.3. SURVIVAL OF REPRESENTATIONS AND WARRANTIES.............................................30
SECTION 8. COVENANTS AND CONTINUING AGREEMENTS.............................................30
8.1. AFFIRMATIVE COVENANTS..................................................................30
8.1.1. Visits and Inspections.............................................................30
8.1.2. Notices............................................................................30
8.1.3. Financial Statements...............................................................30
8.1.4. Landlord and Storage Agreements....................................................31
8.1.5. Credit Memoranda...................................................................32
8.1.6. Projections........................................................................32
8.1.7. Environmental Matters..............................................................32
8.1.8. License Agreements.................................................................34
8.1.9. Landlord Waivers...................................................................34
8.2. NEGATIVE COVENANTS.....................................................................35
8.2.1. Mergers; Consolidations; Acquisitions..............................................35
8.2.2. Loans..............................................................................35
8.2.3. Total Indebtedness.................................................................35
8.2.4. Affiliate Transactions.............................................................36
8.2.5. Limitation on Liens................................................................36
8.2.6. Subordinated Debt..................................................................36
8.2.7. Distributions......................................................................37
8.2.8. Capital Expenditures...............................................................37
8.2.9. Disposition of Assets..............................................................37
8.2.10.Bill-and-Hold Sales, Etc...........................................................37
8.2.11.Restricted Investment..............................................................37
8.2.12.Leases.............................................................................37
8.2.13.Tax Consolidation..................................................................37
8.2.14.Stock of Subsidiaries..............................................................37
8.3. SPECIFIC FINANCIAL COVENANTS...........................................................38
8.3.1. Minimum Net Worth..................................................................38
8.3.2. Cash Flow..........................................................................38
8.3.3. Adjusted Cash Flow.................................................................38
SECTION 9. CONDITIONS PRECEDENT............................................................38
9.1. DOCUMENTATION..........................................................................39
9.2. NO DEFAULT.............................................................................39
9.3. OTHER LOAN DOCUMENTS...................................................................39
9.4. FILINGS, REGISTRATIONS AND RECORDINGS..................................................39
9.5. PROCEEDINGS OF CORPORATE PARTIES.......................................................39
9.6. INCUMBENCY CERTIFICATES OF EACH CORPORATE PARTY........................................39
9.7. CERTIFICATES...........................................................................39
9.8. GOOD STANDING CERTIFICATES.............................................................40
9.9. LEGAL OPINION..........................................................................40
9.10. NO LITIGATION........................................................................40
9.11. INFORMATION; COLLATERAL EXAMINATION..................................................40
9.12. FEES.................................................................................40
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9.13. INSURANCE............................................................................40
9.14. PAYMENT INSTRUCTIONS.................................................................41
9.15. NO ADVERSE MATERIAL CHANGE...........................................................41
9.16. CONTRACT REVIEW......................................................................41
9.17. ENVIRONMENTAL REPORTS................................................................41
9.18. LEASEHOLD AGREEMENTS.................................................................41
9.19. CONSENTS.............................................................................41
9.20. FINANCIAL CONDITION CERTIFICATES.....................................................41
9.21. CLOSING CERTIFICATE..................................................................42
9.22. SUBSIDIARY STOCK.....................................................................42
9.23. CORPORATE STRUCTURE..................................................................42
9.24. ERISA................................................................................42
9.25. AVAILABILITY.........................................................................42
9.26. OTHER................................................................................42
9.27. CONDITIONS TO EACH LOAN..............................................................42
SECTION 10. EVENTS OF DEFAULT; RIGHTS AND REMEDIES ON DEFAULT...............................43
10.1. EVENTS OF DEFAULT....................................................................43
10.1.1.Payment of Obligations.............................................................43
10.1.2.Misrepresentations.................................................................43
10.1.3.Breach of Specific Covenants.......................................................43
10.1.4.Breach of Other Covenants..........................................................43
10.1.5.Default Under Security Documents/Other Agreements..................................44
10.1.6.Other Defaults.....................................................................44
10.1.7.Insolvency and Related Proceedings.................................................44
10.1.8.Business Disruption; Condemnation..................................................44
10.1.9.ERISA..............................................................................44
10.1.10. Challenge to Agreement..........................................................44
10.1.11. Criminal Forfeiture.............................................................45
10.1.12. Judgments.......................................................................45
10.1.13. Repudiation of or Default Under Guaranty Agreement..............................45
10.2. ACCELERATION OF THE OBLIGATIONS......................................................45
10.3. OTHER REMEDIES.......................................................................45
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10.4. REMEDIES CUMULATIVE; NO WAIVER.......................................................46
SECTION 11. REGARDING AGENT.................................................................47
11.1. APPOINTMENT.........................................................................47
11.2. NATURE OF DUTIES....................................................................47
11.3. LACK OF RELIANCE ON AGENT AND RESIGNATION...........................................48
11.4. CERTAIN RIGHTS OF AGENT.............................................................48
11.5. RELIANCE............................................................................48
11.6. NOTICE OF DEFAULT...................................................................49
11.7. INDEMNIFICATION.....................................................................49
11.8. AGENT IN ITS INDIVIDUAL CAPACITY....................................................49
11.9. DELIVERY OF DOCUMENTS...............................................................49
11.10. BORROWER'S UNDERTAKING TO AGENT.....................................................50
SECTION 12. MISCELLANEOUS..................................................................50
12.1. POWER OF ATTORNEY...................................................................50
12.2. INDEMNITY...........................................................................51
12.3. MODIFICATION OF AGREEMENT...........................................................51
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12.4. SUCCESSORS AND ASSIGNS; PARTICIPATIONS; NEW LENDERS.................................52
12.5. SEVERABILITY........................................................................54
12.6. SUCCESSORS AND ASSIGNS..............................................................54
12.7. CUMULATIVE EFFECT; CONFLICT OF TERMS................................................54
12.8. EXECUTION IN COUNTERPARTS...........................................................54
12.9. NOTICE..............................................................................54
12.10. LENDERS' CONSENT....................................................................55
12.11. CREDIT INQUIRIES....................................................................55
12.12. TIME OF ESSENCE.....................................................................55
12.13. ENTIRE AGREEMENT....................................................................55
12.14. INTERPRETATION......................................................................56
12.15. GOVERNING LAW; CONSENT TO FORUM.....................................................56
12.16. WAIVERS BY BORROWER...............................................................57
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LIST OF EXHIBITS AND SCHEDULES
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Exhibit 1.1 Revolving Note
Exhibit 1.3 Term Note
Exhibit 6.1.1 Location of Collateral
Exhibit 7.1.1 Authorization To Do Business Jurisdictions
Exhibit 7.1.4 Capital Structure of Borrower
Exhibit 7.1.5 Corporate Names
Exhibit 7.1.6 Business Locations of Borrower and Subsidiaries
Exhibit 7.1.10(b) Financial Projections
Exhibit 7.1.13 Surety Obligations
Exhibit 7.1.14 Tax Identification Numbers of Subsidiaries
Exhibit 7.1.15 Broker Commissions and Fees
Exhibit 7.1.16 Patents, Trademarks, Copyrights and Licenses
Exhibit 7.1.19 Contracts Restricting Borrower's Right to Incur Debts
Exhibit 7.1.20 Litigation
Exhibit 7.1.22(A) Capitalized Leases
Exhibit 7.1.22(B) Operating Leases
Exhibit 7.1.23 Pension Plans
Exhibit 7.1.25 Labor Contracts
Exhibit 7.1.26 Environmental Compliance
Exhibit 8.1.3 Compliance Certificate
Exhibit 8.2.4 Affiliate Transactions
Exhibit 8.2.5 Permitted Liens
Exhibit 9.10 Litigation
Exhibit 12.4 Commitment Transfer Supplement
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LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT is made as of the 14th day of August,
1998, by and among the undersigned financial institutions and the various
financial institutions which in accordance with the provisions of SECTION
12.4(iii) become Purchasing Lenders (collectively, "Lenders" and individually, a
"Lender") and FLEET CAPITAL CORPORATION ("Fleet"), a Rhode Island corporation
with an office at 200 Glastonbury Boulevard, Glastonbury, Connecticut 06033, as
administrative and collateral agent for Lenders (Fleet, in such capacity,
"Agent") and EXECUTONE INFORMATION SYSTEMS, INC. ("Borrower"), a Virginia
corporation. Capitalized terms used in this Agreement have the meanings assigned
to them in APPENDIX A, GENERAL DEFINITIONS. Accounting terms not otherwise
specifically defined herein shall be construed in accordance with GAAP
consistently applied.
SECTION 1. CREDIT FACILITY
Subject to the terms and conditions of, and in reliance upon the
representations and warranties made in, this Agreement and the other Loan
Documents, each Lender severally and not jointly agrees to make a Total Credit
Facility in an amount equal to such Lender's Commitment Percentage of up to
$30,000,000.00 available to Borrower upon request therefor, as follows:
1.1. Revolving Credit Loans.
1.1.1. Loans and Reserves. Each Lender severally and not jointly
agrees, for so long as no Default or Event of Default exists, to make Revolving
Credit Loans to Borrower from time to time, as requested by Borrower in the
manner set forth in SUBSECTIONS 3.1.1 and 3.1.4 hereof, up to a maximum
principal amount at any time outstanding equal to such Lender's Commitment
Percentage of the Borrowing Base. Notwithstanding the foregoing, Agent shall
have the right to establish reserves in such amounts and with respect to such
matters, as Agent shall deem necessary or appropriate in the exercise of its
commercially reasonable judgment, against the amount of Revolving Credit Loans
which Borrower may otherwise request hereunder, including, without limitation,
the Specified Reserve (any such sums, the "Reserves"). The Revolving Credit
Loans shall be evidenced by and subject to the terms and conditions set forth in
those certain secured promissory notes (each, a "Revolving Note" and
collectively, the "Revolving Notes"), a copy of the form of which is attached
hereto as EXHIBIT 1.1.
1.1.2. Use of Proceeds. The Revolving Credit Loans shall be used
to provide for (a) ongoing working capital requirements of Borrower in a manner
consistent with the provisions of this Agreement and all applicable laws, (b)
the general corporate purposes of Borrower in a manner consistent with the
provisions of this Agreement and all applicable laws, (c) the payment of
transaction expenses in connection herewith and (d) the Specified Capital
Contribution
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1.2. Letters of Credit; LC Guaranties. Agent agrees, for so long as no
Default or Event of Default exists and if requested by Borrower to (i) issue
its, or cause to be issued its Affiliate's, Letters of Credit for the account of
Borrower or (ii) execute LC Guaranties by which Agent or its Affiliate shall
guaranty the payment or performance by Borrower of its reimbursement obligations
with respect to Letters of Credit and letters of credit issued for Borrower's
account by other Persons in support of Borrower's obligations (other than
obligations for the repayment of Money Borrowed), provided that the Aggregate LC
Amount at any time shall not exceed $10,000,000. Any amounts paid by Agent or
Lenders under any LC Guaranty or in connection with any Letter of Credit shall
be treated as Revolving Credit Loans, shall be secured by all of the Collateral
and shall bear interest and be payable at the same rate and in the same manner
as Revolving Credit Loans.
1.2.1. Request for Letter of Credit. Borrower may request Agent
to issue or cause to be issued by Bank (or such other financial institution as
may be acceptable to Agent) a Letter of Credit by delivering to Agent the
applicable commercial letter of credit application (the "Letter of Credit
Application"), completed to the reasonable satisfaction of Agent and such other
certificates, documents and other papers and information as Agent may reasonably
request.
1.2.2. Description of Letters of Credit. Each Letter of Credit
shall, among other things, (i) provide for the payment of sight or time drafts
when presented for honor thereunder in accordance with the terms thereof and
when accompanied by the documents described therein and (ii) have an expiry date
occurring not later than the earlier of (1) sixty days prior to the last day of
the Original Term or (2)(a) for standby Letters of Credit, 12 months after such
Letter of Credit's date of issuance (subject to 12 month renewal periods) and
(b) for any Letter of Credit that is not a standby Letter of Credit, 180 days
after such Letter of Credit's date of issuance. Each Letter of Credit
Application and each Letter of Credit shall be subject to the Uniform Customs
and Practice for Documentary Credits (1993 Revision), International Chamber of
Commerce Publication No. 500, and any amendments or revision thereof and, to the
extent not inconsistent therewith, the laws of the State of New York.
1.2.3. Indemnification. In connection with the issuance or
creation of the LC Guaranties and any Letter of Credit, Borrower hereby
indemnifies, saves and holds Agent and each Lender harmless from any loss, cost,
expense or liability, including, without limitation, payments made by Agent and
each Lender, and expenses and reasonable attorneys' fees incurred by Agent and
each Lender arising out of, or in connection with the LC Guaranties and any
Letter of Credit to be issued or created for Borrower except to the extent any
loss, cost, expense or liability is attributable to Agent's or any Lender's or
the Bank's gross negligence or willful misconduct or that of its correspondents.
Borrower shall be bound by Agent's or any Lender's or any Issuing Bank's
regulations and good faith interpretations of any Letter of Credit issued or
created for Borrower's account, although this interpretation may be different
from Borrower's own, and neither Agent, any Lender, nor the Issuing Bank, nor
any of its correspondents shall be liable for any error, negligence and/or
mistakes, whether of omission or commission, in following Borrower's
instructions or those contained in the LC Guaranties or any Letter of Credit of
any modifications, amendments or supplements thereto or in creating or paying
any Letter of Credit or the LC Guaranties, except for Agent's or any Lender's
gross negligence or willful misconduct or that of its correspondents.
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1.2.4. Agent's Instructions. Borrower shall authorize and direct
Bank or any other bank or financial institution which issues a Letter of Credit
(an "Issuing Bank") to name Borrower as the "Account Party" therein and to
deliver to Agent, with a copy to Borrower, all instruments, documents, and other
writings and property received by the Issuing Bank pursuant to the Letter of
Credit and to accept and rely upon Agent's instructions and agreements with
respect to all matters arising in connection with the Letter of Credit, the
Letter of Credit Application therefor or any acceptance thereof.
1.2.5. Disbursements. Agent will notify Borrower promptly of any
demand for payment under the LC Guaranties and the presentment for payment under
a Letter of Credit, following receipt by it of notification from the Issuing
Bank of such presentment, together with notice of the date such payment was
made. All disbursements shall be deemed irrevocably to be a request by Borrower
for a Revolving Credit Loan on the date such disbursement was made.
1.2.6. Reimbursement Obligation. Borrower's obligation to
reimburse Agent for disbursements described in SUBSECTION 1.2.5 shall be
absolute and unconditional under any and all circumstances and irrespective of
any setoff, counterclaim or defense to payment which Borrower may have against
Agent, any Lender, the Issuing Bank or the beneficiary of the Letter of Credit
(except in the event of such party's gross negligence or willful misconduct),
including, without limitation, any defense based upon any draft, demand or
certificate or other document presented under the Letter of Credit proving to be
forged, fraudulent, invalid or insufficient, the failure of any disbursement or
payment by the Issuing Bank under the Letter of Credit ("Bank Payment") to
conform to the terms of the Letter of Credit (if, in the Issuing Bank's good
faith opinion such disbursement or Bank Payment is determined to be appropriate
and other than as a consequence of Agent's or the Issuing Bank's gross
negligence or willful misconduct) or any non-application or misapplication by
the beneficiary of the proceeds of such disbursement or Bank Payment or the
legality, validity, form, regularity or enforceability of the Letter of Credit.
1.2.7. Lender's Reimbursement Obligations. Each Lender shall to
the extent of the percentage amount equal to the product of such Lender's
Commitment Percentage times the aggregate amount of all disbursements made with
respect to the Letters of Credit and LC Guaranties be deemed to have irrevocably
purchased an undivided participation in each Revolving Credit Loan made as a
consequence of such disbursement. In the event that at the time a disbursement
is made the unpaid balance of Revolving Credit Loans plus the Aggregate LC
Amount exceeds or would exceed, with the making of such disbursement, the
Maximum Revolving Amount, and the amount in excess of the Maximum Revolving
Amount is not reimbursed by Borrower within two (2) Business Days, Agent shall
promptly notify each Lender and upon Agent's demand each Lender shall pay to
Agent such Lender's Commitment Percentage of such unreimbursed disbursement
together with such Lender's Commitment Percentage of Agent's unreimbursed costs
and expenses relating to such unreimbursed disbursement. Upon receipt by Agent
of a repayment from Borrower of any amount disbursed by Agent for which Agent
had already been reimbursed by Lenders, Agent shall deliver to each Lender that
Lender's Commitment Percentage of such repayment. Each Lender's participation
commitment with respect to Letters of Credit and LC Guaranties shall continue
until the last to occur of the following events: (A) Agent ceases to be
obligated to issue or cause the issuance of Letters of Credit and LC Guaranties;
(B) no Letter of Credit or LC Guaranty issued hereunder remains outstanding and
uncancelled and (C) all Persons including Agent (other
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than Borrower) have been fully reimbursed for all payments made under or
relating to Letters of Credit or LC Guaranties.
1.2.8. Cash Collateral. Upon the occurrence and during the
continuation of any Event of Default, at the option of Agent, Borrower will pay
to Agent, for the ratable benefit of Lenders, cash in an amount equal to the
undrawn face amount of the Letters of Credit. Such cash shall be held by Agent
in a cash collateral account (the "Cash Collateral Account"). The Cash
Collateral Account shall be maintained at a bank designated by Agent, which
shall be (i) any domestic commercial bank having capital and surplus in excess
of $100,000,000 or (ii) an Affiliate of Agent, if an Affiliate of Agent then
maintains a presence as a bank in the United States of America, in the name of
Agent as secured party, and shall be under the sole dominion and control of
Agent and subject to the terms of this SUBSECTION 1.2.8. Borrower hereby
pledges, and grants to Agent a security interest in, all such cash and other
amounts held in the Cash Collateral Account from time to time and all earnings
thereof and proceeds thereon, as security for the payment of all Obligations.
Amounts in the Cash Collateral Account shall be invested in securities of the
type described in clauses (iii), (iv) and (v) of the definition of Restricted
Investments, and interest and earnings on the Cash Collateral Account shall be
the property of Borrower but shall be held in the Cash Collateral Account as
Collateral, provided that Agent shall release from the Cash Collateral Account
and return to Borrower any funds remaining in the Cash Collateral Account upon
satisfaction in full of the Obligations. At such time when all Events of Default
shall have been cured or waived, Agent shall return any monies then remaining in
the Cash Collateral Account. If at any time, and from time to time, the
aggregate amount of the Cash Collateral Account exceeds the maximum liability,
fixed or contingent, of Agent with respect to the aggregate face amount of all
Letters of Credit then issued and outstanding, Agent shall return any excess to
Borrower.
1.2.9. Waiver of Liability. Borrower shall assume all risks of
the acts, omissions or misuse of any Letter of Credit by the beneficiary
thereof. None of Agent, any Lender or any Issuing Bank (except in the event of
its own gross negligence or willful misconduct) shall be responsible for:
(i) the form, validity, sufficiency, accuracy, genuineness
or legal effect of the Letter of Credit or any document submitted by any
party in connection with the application for and issuance of any 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 the 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) errors, omissions, interruptions or delays in
transmission or delivery of any messages by mail, cable, telegraph,
telex or otherwise; or
(iv) any loss or delay in the transmission or otherwise of
any document or draft required in order to make a disbursement.
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None of the foregoing shall affect, impair or prevent the vesting of any of the
rights or powers granted Agent hereunder. In furtherance, and not in limitation
or derogation of any of the foregoing, any action taken or omitted to be taken
by the Issuing Bank, Agent or any Lender in good faith in the absence of gross
negligence or willful misconduct, shall be binding upon Borrower and shall not
put the Issuing Bank, Agent or any Lender, as the case may be, under any
resulting liability therefor.
SECTION 2. INTEREST, FEES AND CHARGES
2.1. Interest.
2.1.1. Rates of Interest. Interest shall accrue on the principal
amount of Base Rate Loans outstanding at the end of each day (computed on the
actual days elapsed over a year of 360 days) at a fluctuating rate per annum
equal to the Base Rate plus the Applicable Margin. After the date hereof, the
foregoing rate of interest shall be increased or decreased, as the case may be,
by an amount equal to any increase or decrease in the Base Rate, with such
adjustments to be effective as of the opening of business on the day that any
such change in the Base Rate becomes effective. The Base Rate in effect on the
date hereof shall be the Base Rate effective as of the opening of business on
the date hereof, but if this Agreement is executed on a day that is not a
Business Day, the Base Rate in effect on the date hereof shall be the Base Rate
effective as of the opening of business on the last Business Day immediately
preceding the date hereof. Interest shall accrue on the principal amount of the
Eurodollar Loans outstanding at the end of each day (computed on the actual days
elapsed over a year of 360 days) at a fluctuating rate per annum equal to the
Eurodollar Rate plus the Applicable Margin. Interest shall accrue on the
principal amount of the LIBOR Rate Loans outstanding at the end of each day
(computed on the actual days elapsed over a year of 360 days) at a fluctuating
rate per annum equal to the LIBOR Rate plus the Applicable Margin.
2.1.2. Default Rate. Upon the occurrence of an Event of Default
and during the continuation thereof, the applicable interest rate on the
principal amount of all Loans and all Letter of Credit Fees shall increase by
2.0% per annum (the "Default Rate").
2.1.3. Maximum Interest. In no event whatsoever shall the
aggregate of all amounts deemed interest hereunder and charged or collected
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. If any provisions of this Agreement are
in contravention of any such law, such provisions shall be deemed amended to
conform thereto.
2.2. Computation of Interest and Fees. Letter of Credit and LC Guaranty
fees and unused line fees and collection charges hereunder shall be calculated
daily and shall be computed on the actual number of days elapsed over a year of
360 days. For the purpose of computing interest hereunder, all items of payment
received by Agent shall be deemed applied by Agent on account of the Obligations
(subject to final payment of such items) on the first Business Day following the
Business Day Agent receives such items in Agent's account located at Fleet
National Bank, Hartford, Connecticut, ABA #011900571, Account #936-933-7579,
Reference: Executone.
2.3. Closing Fee. Borrower shall pay to Agent for its own account and
not for the benefit of Lenders a closing fee of $150,000, which shall be fully
earned and nonrefundable on the
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Closing Date and shall be paid (a) $75,000 concurrently with the initial Loan
hereunder and (b) $75,000 on the six month anniversary date of the Closing Date.
2.4. Letter of Credit and LC Guaranty Fees. (a) Borrower shall pay to
Agent, for the account of Lenders, a letter of credit commission with respect to
each Letter of Credit (including those for which an LC Guaranty has been issued)
computed for the period from and including the date of issuance of such Letter
of Credit to the date such Letter of Credit is no longer outstanding, computed
at a rate per annum equal to (i) with respect to standby Letters of Credit, one
and three-quarters percent (1.75%) and (ii) with respect to documentary Letters
of Credit, one percent (1.0%), in each case on the average aggregate daily
amount available to be drawn under such Letter of Credit for the period as to
which payment of such commission is made, payable quarterly in arrears on each
Letter of Credit Fee Payment Date to occur while such Letter of Credit remains
outstanding and on the date such Letter of Credit expires or is cancelled.
(b) In addition to the foregoing fees and commissions,
Borrower shall pay to Agent all such normal and customary costs and expenses as
are incurred by Agent for issuing, causing the issuance of, negotiating,
effecting payment under, amending or otherwise administering any Letter of
Credit or LC Guaranty.
2.5. Unused Line Fee. Borrower shall pay to Agent for the ratable
benefit of Lenders a fee equal to .40% per annum of the average monthly amount
by which the Maximum Revolving Amount exceeds the sum of the outstanding
principal balance of the Revolving Credit Loans and the Aggregate LC Amount. The
unused line fee shall be payable quarterly in arrears commencing on the first
day of the first Fiscal Quarter following the Closing Date and on the first day
of each Fiscal Quarter thereafter and on the last day of the Original Term or
upon earlier termination of the Agreement. Commencing January 1, 1999 and as of
January 1 in each Fiscal Year thereafter, the unused line fee payable under this
SECTION 2.5 shall be subject to change and shall be fixed as set forth below for
such Fiscal Year based upon the Fixed Charge Coverage Ratio for the immediately
preceding Fiscal Year as set forth below:
<TABLE>
<CAPTION>
Fixed Charge Coverage Unused Line Fee
--------------------- ---------------
<S> <C>
Equal to or less than 1.00:1.00 .50%
-------------------------------------------- ------------------------------------------
Greater than 1.00:1.00 but less than .45%
1.25:1.00
-------------------------------------------- ------------------------------------------
Greater than or equal to 1.25:1.00 but .40%
less than 1.50:1.00
-------------------------------------------- ------------------------------------------
Greater than or equal to 1.50:1.00 but .35%
less than 2.00:1.00
-------------------------------------------- ------------------------------------------
Greater than or equal to 2.00:1.00 but .30%
less than 2.50:1.00
-------------------------------------------- ------------------------------------------
Greater than 2.50:1.00 .25%
-------------------------------------------- ------------------------------------------
</TABLE>
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2.6. Reimbursement of Expenses. If, at any time or times regardless of
whether or not an Event of Default then exists, Agent (in its capacity as Agent)
incurs legal or accounting expenses or any other costs or out-of-pocket expenses
in connection with (i)(a) the negotiation and preparation of this Agreement or
any of the other Loan Documents, (b) any amendment of or modification of this
Agreement or any of the other Loan Documents, or (c) any sale or attempted sale
of any interest herein by any Lender to a Purchasing Lender; (ii) the
administration of this Agreement or any of the other Loan Documents and the
transactions contemplated hereby and thereby; (iii) any litigation, contest,
dispute, suit, proceeding or action (whether instituted by Agent, any Lender,
Borrower or any other Person) in any way relating to the Collateral, this
Agreement or any of the other Loan Documents or Borrower's affairs; (iv) any
attempt to enforce any rights of Agent or any Lender against Borrower or any
other Person which may be obligated to Agent or any Lender by virtue of this
Agreement or any of the other Loan Documents, including, without limitation, the
Account Debtors; or (v) any attempt to inspect, verify, protect, preserve,
restore, collect, sell, liquidate or otherwise dispose of or realize upon the
Collateral; then all such legal and accounting expenses, other costs and out of
pocket expenses of Agent shall be charged to Borrower. All amounts chargeable to
Borrower under this SECTION 2.6 shall be Obligations secured by all of the
Collateral, shall be payable on demand to Agent and shall bear interest from the
date such demand is made until paid in full at the rate applicable to Base Rate
Loans from time to time. Borrower shall also reimburse Agent for expenses
incurred by Agent in its administration of the Collateral to the extent and in
the manner provided in SECTION 6 hereof.
2.7. Bank Charges. Borrower shall pay to Agent, on demand, any and all
fees, costs or expenses which Agent pays to a bank or other similar institution
arising out of or in connection with (i) the forwarding to Borrower or any other
Person on behalf of Borrower, by Agent, of proceeds of Loans made by Agent on
behalf of Lenders to Borrower pursuant to this Agreement and (ii) the depositing
for collection, by Agent, of any check or item of payment received or delivered
to Agent on account of the Obligations.
SECTION 3. LOAN ADMINISTRATION.
3.1. Manner of Borrowing Revolving Credit Loans. Borrowings under the
credit facility established pursuant to SECTION 1 hereof shall be as follows:
3.1.1. Loan Requests; Payment.
(i) A request for Revolving Credit Loans that are Base
Rate Loans shall be made, or shall be deemed to be made, in the following
manner: (1) Borrower may give Agent notice of its intention to borrow, in which
notice Borrower shall specify to Agent, the amount of the proposed borrowing and
the proposed borrowing date, no later than 11:00 A.M. New York time on the first
Business Day prior to the requested borrowing date with respect to Revolving
Credit Loans that are Base Rate Loans; provided, however, that no such request
may be made at a time when there exists an Event of Default; and (2) the
becoming due of any amount required to be paid under this Agreement, whether as
interest or for any other Obligation, shall be deemed irrevocably to be a
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request by Borrower for a Revolving Credit Loan on the due date in the amount
required to pay such interest or other Obligation. Eurodollar Rate Loans and
LIBOR Rate Loans shall be requested in accordance with subsection 3.1.4 hereof.
As an accommodation to Borrower, Agent may permit telephonic requests for Loans
and electronic transmittal of instructions, authorizations, agreements or
reports to Agent by Borrower. Unless Borrower specifically directs Agent in
writing not to accept or act upon telephonic or electronic communications from
Borrower, Agent shall have no liability to Borrower for any loss or damage
suffered by Borrower as a result of Agent's good faith honoring of any requests,
execution of any instructions, authorizations or agreements or reliance on any
reports communicated to it telephonically or electronically and purporting to
have been sent to Agent by Borrower and Agent shall have no duty to verify the
origin of any such communication or the authority of the person sending it.
(ii) Each borrowing of Revolving Credit Loans shall be
advanced according to the Commitment Percentages of Lenders.
(iii) Each payment (including each prepayment) by
Borrower on account of the principal of and interest on the Revolving Credit
Loans shall be applied first, to Base Rate Loans, then to LIBOR Rate Loans pro
rata according to the applicable Commitment Percentages of Lenders, and then to
Eurodollar Loans pro rata according to the applicable Commitment Percentages of
Lenders.
(iv) Notwithstanding anything to the contrary contained
in the immediately preceding CLAUSES (ii) AND (iii), commencing with the first
Business Day following the Closing Date, each borrowing of Revolving Credit
Loans shall be advanced by Agent and each payment by Borrower on account of
Revolving Credit Loans shall be applied first to those Revolving Credit Loans
made by Agent. On or before 11:00 A.M., New York time, on each Settlement Date
commencing with the first Settlement Date following the Closing Date, Agent and
Lenders shall make certain payments as follows: (I) if the aggregate amount of
new Revolving Credit Loans made by Agent during the preceding Week exceeds the
aggregate amount of repayments applied to outstanding Revolving Credit Loans
during such preceding Week, then each Lender shall provide Agent with funds in
an amount equal to its Commitment Percentage of the difference between (w) such
Revolving Credit Loans and (x) such repayments and (II) if the aggregate amount
of repayments applied to outstanding Revolving Credit Loans during such Week
exceeds the aggregate amount of new Revolving Credit Loans made during such
Week, then Agent shall provide each Lender with its Commitment Percentage of the
difference between (y) such repayments and (z) such Revolving Credit Loans.
(1) Each Lender shall be entitled to receive
disbursements of interest from Agent at the applicable rates of interest set
forth in SECTION 2.1. relating to outstanding Loans which it has funded.
(2) Promptly following each Settlement Date, Agent
shall submit to each Lender a certificate with respect to payments received and
Loans made during the Week immediately preceding such Settlement Date.
(v) If any Lender or Participating Lender (a "Benefited
Lender") shall at any time receive any payment of all or part of its Loans, or
interest thereon, or receive any Collateral in respect thereof (whether
voluntarily or involuntarily or by set-off) in a greater proportion than any
such
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payment to and Collateral received by any other Lender, if any, in respect of
such other Lender's Loans, or interest thereon, and such greater proportionate
payment or receipt of Collateral is not expressly permitted hereunder, such
Benefited Lender shall purchase for cash from the other Lenders such portion of
each such other Lender's Loans, or shall provide such other Lender with the
benefits of any such Collateral, or the proceeds thereof, as shall be necessary
to cause such Benefited Lender to share the excess payment or benefits of such
Collateral or proceeds ratably with each of the Lenders; provided, however, that
if all or any portion of such excess payment or benefits is thereafter recovered
from such Benefited Lender, such purchase shall be rescinded, and the purchase
price and benefits returned, to the extent of such recovery, but without
interest. Each Lender so purchasing a portion of another Lender's Loans may
exercise all rights of payment (including, without limitation, rights of
set-off) with respect to such portion as fully as if such Lender were the direct
holder of such portion.
(vi) Unless Agent shall have been notified by telephone,
confirmed in writing, by any Lender that such Lender will not make the amount
which would constitute its Commitment Percentage of the Loans available to
Agent, Agent may (but shall not be obligated to) assume that such Lender shall
make such amount available to Agent and, in reliance upon such assumption, make
available to Borrower a corresponding amount. Agent will promptly notify
Borrower of its receipt of any such notice from a Lender. If such amount is made
available to Agent on a date after a Settlement Date, such Lender shall pay to
Agent on demand an amount equal to the product of (i) the daily average Federal
Funds Rate (computed on the basis of a year of 360 days) during such period as
quoted by Agent, times (ii) such amount, times (iii) the number of days from and
including such Settlement Date to the date on which such amount becomes
immediately available to Agent. A certificate of Agent submitted to any Lender
with respect to any amounts owing under this paragraph (vi) shall be conclusive,
in the absence of manifest error. If such amount is not in fact made available
to Agent by such Lender within three (3) Business Days after such Settlement
Date, Agent shall be entitled to recover such an amount, with interest thereon
at the rate per annum then applicable to such Revolving Credit Loans hereunder,
on demand from Borrower; provided, however, that Agent's right to such recovery
shall not prejudice or otherwise adversely affect Borrower's rights (if any)
against such Lender.
(vii) (a) Notwithstanding anything to the contrary
contained herein, in the event any Lender (x) has refused (which refusal
constitutes a breach by such Lender of its obligations under this Agreement) to
make available its portion of any Loan or (y) notifies either Agent or Borrower
that it does not intend to make available its portion of any Loan (if the actual
refusal would constitute a breach by such Lender of its obligations under this
Agreement) (each, a "Lender Default"), all rights and obligations hereunder of
such Lender (a "Defaulting Lender") as to which a Lender Default is in effect
and of the other parties hereto shall be modified to the extent of the express
provisions of this SUBSECTION 3.1.1 (vii) while such Lender Default remains in
effect.
(b) Loans shall be incurred pro rata from Lenders
(the "Non-Defaulting Lenders") which are not Defaulting Lenders based on their
respective Commitment Percentages, and no Commitment Percentage of any Lender or
any pro rata share of any Loans required to be advanced by any Lender shall be
increased as a result of such Lender Default. Amounts received in respect of
principal of any type of Loans shall be applied to reduce the applicable Loans
of each Lender pro rata based on the aggregate of the outstanding Loans of that
type of all Lenders at the time of such application; provided that, such amount
shall not be applied to any Loans of a Defaulting
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Lender at any time when, and to the extent that, the aggregate amount of Loans
of any Non-Defaulting Lender exceeds such Non-Defaulting Lender's Commitment
Percentage of all Loans then outstanding.
(c) A Defaulting Lender shall not be entitled to
give instructions to Agent or to approve, disapprove, consent to or vote on any
matters relating to this Agreement and the Loan Documents. All amendments,
waivers and other modifications of this Agreement and the Loan Documents may be
made without regard to a Defaulting Lender and, solely for purposes of the
definition of "Required Lenders", a Defaulting Lender shall be deemed not to be
a Lender and not to have Loans outstanding.
(d) Other than as expressly set forth in this
SUBSECTION 3.1.1.(vii), the rights and obligations of a Defaulting Lender
(including the obligation to indemnify Agent) and the other parties hereto shall
remain unchanged. Nothing in this SUBSECTION 3.1.1(vii) shall be deemed to
release any Defaulting Lender from its obligations under this Agreement and the
Loan Documents, shall alter such obligations, shall operate as a waiver of any
default by such Defaulting Lender hereunder, or shall prejudice any rights which
Borrower, Agent or any other Lender may have against any Defaulting Lender as a
result of any default by such Defaulting Lender hereunder.
(e) In the event a Defaulting Lender retroactively
cures to the satisfaction of Agent the breach which caused a Lender to become a
Defaulting Lender, such Defaulting Lender shall no longer be a Defaulting Lender
and shall be treated as a Lender under this Agreement.
3.1.2. Disbursement. Borrower hereby irrevocably authorizes
Agent to disburse the proceeds of each Revolving Credit Loan requested, or
deemed to be requested, pursuant to this SUBSECTION 3.1.2 as follows: (i) the
proceeds of each Revolving Credit Loan requested under SUBSECTION 3.1.1(i)(1)
and SUBSECTION 3.1.4 shall be disbursed by Agent in lawful money of the United
States of America in immediately available funds, in the case of the initial
borrowing, in accordance with the terms of the written disbursement letter from
Borrower, and in the case of each subsequent borrowing, by wire transfer to such
bank account as may be agreed upon by Borrower and Agent from time to time or
elsewhere if pursuant to a written direction from Borrower and (ii) the proceeds
of each Revolving Credit Loan requested under SUBSECTION 3.1.1(i)(2) shall be
disbursed by Agent by way of direct payment of the relevant interest or other
Obligation.
3.1.3. Authorization. Borrower hereby irrevocably authorizes
Agent, in Agent's sole discretion, to advance to Borrower, and to charge to
Borrower's Loan Account hereunder as a Revolving Credit Loan, a sum sufficient
to pay all interest accrued on the Obligations and all principal coming due on
the Obligations during the immediately preceding month and to pay all costs,
fees and expenses at any time owed by Borrower to Agent and Lenders hereunder to
the extent such amounts are not paid when due.
3.1.4. Eurodollar Loans and LIBOR Rate Loans. Notwithstanding
the provisions of SUBSECTION 3.1.1, in the event Borrower desires to obtain a
Eurodollar Loan or LIBOR Rate Loan, Borrower shall give Agent prior written
irrevocable notice no later than 11:00 A.M. New York time on the 3rd Business
Day prior to the requested borrowing date specifying (i) Borrower's election to
obtain a Eurodollar Loan or a LIBOR Rate Loan, (ii) the date of the proposed
borrowing (which
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shall be a Business Day) and (iii) the amount to be borrowed, which amount shall
be in a minimum principal amount of $500,000 and may increase in integral
multiples of $100,000 and (iv) with respect to a Eurodollar Loan, the applicable
Interest Period. In no event shall Borrower be permitted to have outstanding at
any one time Eurodollar Loans with more than 4 different Interest Periods.
3.1.5. Interest Periods. Each interest period of a Eurodollar
Loan shall commence on the date such Eurodollar Loan is made and shall end on
the date which is 1 month, 2 months, 3 months or 6 months later, as may then be
requested by Borrower ("Interest Period") provided that:
(i) any Interest Period which would otherwise end
on a day which is not a Business Day shall end on the next
preceding or succeeding Business Day as is the Bank's custom in
the market to which such Eurodollar Loan relates;
(ii) there remains a minimum of 1 month in the
Original Term;
(iii) all Interest Periods of the same duration
which commence on the same date shall end on the same date; and
(iv) each Interest Period which commences before,
and would otherwise end after the last day of the Original Term
shall end on the last day of the Original Term.
3.1.6. Conversion of Loans. Provided that no Event of Default
has occurred which is then continuing, Borrower may, on any Business Day,
convert any: (i) Base Rate Loan into a Eurodollar Loan. If Borrower desires to
convert a Base Rate Loan, Borrower shall give Agent not less than three (3)
Business Days' prior written notice (prior to 11:00 A.M. New York time on such
Business Day), specifying the date of such conversion and the amount to be
converted. Each conversion into or conversion of a Eurodollar Loan shall be in a
minimum principal amount of $500,000 and may increase in integral multiples of
$100,000 in excess thereof. After giving effect to any conversion of Base Rate
Loans to Eurodollar Loans, Borrower shall not be permitted to have outstanding
at any one time Eurodollar Loans with more than 4 different Interest Periods;
and (ii) Base Rate Loan into a LIBOR Rate Loan and LIBOR Rate Loan into a Base
Rate Loan. If Borrower desires such a conversion, Borrower shall give Agent not
less than three (3) Business Days prior written notice (prior to 11:00 A.M. New
York time on such Business Day) specifying the date of such conversion and the
amount to be converted. Each conversion into or conversion of a Eurodollar Loan
shall be in a minimum principal amount of $500,000 and may increase in integral
multiples of $100,000 in excess thereof.
3.1.7. Continuation of Eurodollar Loans. Borrower shall have the
right on 3 Business Days' prior irrevocable written notice given to Agent,
subject to the provisions of SUBSECTION 3.1.8, to continue any Eurodollar Loan
into a subsequent Interest Period of the same or a different permitted duration,
in each case subject to the satisfaction of the following conditions:
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(i) in the case of a continuation of less than all
Eurodollar Loans, the Eurodollar Loans continued shall each be in
a minimum principal amount of $500,000 and may increase in
integral multiples of $100,000;
(ii) accrued interest on a Eurodollar Loan (or
portion thereof) being continued shall be paid by Borrower at the
time of continuation; and
(iii) no Eurodollar Loan (or portion thereof) may
be continued as a Eurodollar Loan if an Event of Default has
occurred which is then continuing or if, after giving effect to
such continuation, Borrower shall have outstanding more than 4
separate Eurodollar Loans in the aggregate.
If Borrower shall fail to give timely notice of its election to continue
any Eurodollar Loan or portion thereof as provided above, or if such
continuation shall not be permitted, such Eurodollar Loan or portion thereof,
unless such Eurodollar Loan shall be repaid, shall automatically be converted
into a Base Rate Loan at the end of the Interest Period then in effect with
respect to such Eurodollar Loan.
3.1.8. Prepayment of Eurodollar Loans. Subject to the provisions
of SUBSECTION 3.1.9 and SECTION 4.2, Borrower may prepay any Loan in whole at
any time or in part from time to time, without premium or penalty provided that
a Eurodollar Loan not prepaid, continued or converted on the last Business Day
of the then current Interest Period with respect thereto shall be subject to
SUBSECTION 3.1.9. Borrower shall specify the date of prepayment of Loans which
are Eurodollar Loans and the amount of Loans to be prepaid. In the event that
any prepayment of a Eurodollar Loan is made on a date other than the last
Business Day of the then current Interest Period with respect thereto, Borrower
shall indemnify Agent and Lenders therefor in accordance with SUBSECTION 3.1.9
hereof.
3.1.9. Indemnification. Borrower shall indemnify Agent and
Lenders and hold Agent and Lenders harmless from and against any and all losses
or expenses that Agent and Lenders may sustain or incur as a consequence of any
prepayment on any date other than the last Business Day of the then current
Interest Period or any default by Borrower in the payment of the principal of or
interest on any Eurodollar Loan or failure by Borrower to complete a borrowing
of, a prepayment of or conversion of or to a Eurodollar Loan after notice
thereof has been given, including (but not limited to) any interest payable by
Agent or Lenders to lenders of funds obtained by it in order to make or maintain
its Eurodollar Loans hereunder, and any other loss or expense incurred by Agent
and Lenders by reason of the liquidation or reemployment of deposits or other
funds acquired by Agent and Lenders to make, continue, convert into or maintain,
a Eurodollar Loan.
3.1.10. Inability to Make Eurodollar Loans. Notwithstanding any
other provision hereof, if any applicable law, treaty, regulation or directive,
or any change therein or in the interpretation or application thereof, shall
make it unlawful for any Lender (for purposes of this SUBSECTION 3.1.10, the
term "Lender" shall include any Lender and the office or branch where any Lender
or any corporation or bank controlling any Lender makes or maintains any
Eurodollar Loans) to make or maintain its Eurodollar Loans, or if with respect
to any Interest Period, any Lender is unable to determine the Eurodollar Rate
relating thereto, or adverse or unusual conditions
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in or changes in applicable law relating to the London interbank Eurodollar
market make it, in the reasonable judgment of any Lender, impracticable to fund
therein any of the Eurodollar Loans or LIBOR Rate Loans or make the projected
Eurodollar Rate unreflective of the actual costs of funds therefor to any
Lender, the obligation of any Lender to make Eurodollar Loans or LIBOR Rate
Loans hereunder shall forthwith be suspended during the pendency of such
circumstances and Borrower shall, if any affected Eurodollar Loans or LIBOR Rate
Loans are then outstanding, promptly upon request from any such Lender, convert
such affected Eurodollar Loans or LIBOR Rate Loans into Base Rate Loans in which
case the provisions of subsection 3.1.9 shall not apply.
3.2. Payments. Except where evidenced by notes or other instruments
issued or made by Borrower to Agent or any Lender specifically containing
payment provisions which are in conflict with this SECTION 3.2 (in which event
the conflicting provisions of said notes or other instruments shall govern and
control), the Obligations shall be payable as follows:
3.2.1. Principal. Subject to the terms of SUBSECTIONS 3.2.5 AND
3.3 hereof, principal payable on account of Revolving Credit Loans shall be
payable by Borrower to Agent immediately upon the earliest of (a) the occurrence
of an Event of Default in consequence of which Agent elects to accelerate the
maturity and payment of the Obligations, or (b) termination of this Agreement
pursuant to SECTION 4 hereof; provided, however, that if an Overadvance shall
exist at any time, with respect to Borrower, Borrower shall, on demand by Agent,
repay the Overadvance.
3.2.2. Interest. Interest accrued on the Loans shall be due on
the earliest of (i)(a) for Base Rate Loans and LIBOR Rate Loans, the first
calendar day of each month (for the immediately preceding month), computed
through the last calendar day of the preceding month and (b) for Eurodollar
Loans, on the earlier of (x) the first day of each quarter for the immediately
preceding quarter or (y) at the end of each Interest Period, (ii) the occurrence
of an Event of Default in consequence of which Agent elects to accelerate the
maturity and payment of the Obligations or (iii) termination of this Agreement
pursuant to SECTION 4 hereof.
3.2.3. Costs, Fees and Charges. Costs, fees and charges payable
pursuant to this Agreement shall be payable by Borrower as and when provided in
SECTION 2 hereof, to Agent or to any other Person designated by Agent in
writing.
3.2.4. Other Obligations. The balance of the Obligations
requiring the payment of money, if any, shall be payable by Borrower to Agent as
and when provided in this Agreement, the Other Agreements or the Security
Documents, or on demand, whichever is later.
3.2.5. Voluntary Prepayments. Borrower shall have the right to
prepay Loans in whole or in part, without penalty or fee except as otherwise
provided in this Agreement, at any time and from time to time on the following
terms and conditions: (i) Borrower shall give Agent written notice (or
telephonic notice promptly confirmed in writing) (each such notice, a "Notice of
Prepayment") of the intent to prepay Loans prior to 11:00 A.M. (New York time)
(a) for Base Rate Loans and LIBOR Rate Loans, at least one (1) Business Day
prior to the date of such prepayment and (b) for Eurodollar Loans, at least
three (3) Business Days prior to the date of such prepayment, the amount of such
prepayment, in the case of Eurodollar Loans, the specific borrowing(s) pursuant
to which such Eurodollar Loans were made; (ii) all partial prepayments shall be
in a minimum
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principal amount of $250,000 or an integral multiple of $250,000 in excess
thereof; and (iii) subject to SECTION 3.1.8, prepayment of Eurodollar Loans
pursuant to this SUBSECTION 3.2.5 shall only be made the last day of the
Interest Period applicable thereto. Any such prepayment shall be applied by
Agent to Revolving Credit Advances and second, to the remaining Obligations in
such order as Agent may determine, subject to Borrower's ability to reborrow
Revolving Credit Loans in accordance with the terms hereof. Notwithstanding
anything contained in this SUBSECTION 3.2.5 to the contrary, Borrower shall be
permitted to prepay the Revolving Credit Loans at any time and in any amounts.
3.3. Mandatory Prepayments.
3.3.1. Proceeds of Sale, Loss, Destruction or Condemnation of
Collateral; Extraordinary Receipts. Except as provided in SUBSECTION 6.4.2
hereof, when Borrower, or any of Borrower's Subsidiaries sells or otherwise
disposes of any Collateral (other than Inventory in the ordinary course of
business), or if any of the Collateral is lost or destroyed or taken by
condemnation or if Borrower receives any Extraordinary Receipts, Borrower shall
repay the Loans in an amount equal to the net proceeds of such sale or other
disposition (i.e., gross proceeds less the reasonable costs of such sales or
other dispositions), loss, destruction or condemnation or the amount of
Extraordinary Receipts, as applicable, such repayments to be made promptly but
in no event more than one (1) Business Day following receipt of such net
proceeds, and until the date of payment, such proceeds shall be held in trust
for Agent. The foregoing shall not be deemed to be implied consent to any such
sale otherwise prohibited by the terms and conditions hereof. Any such
prepayment shall be applied by Agent to the remaining Loans in such order as
Agent may determine, subject to Borrower's ability to reborrow Revolving Credit
Loans in accordance with the terms hereof.
3.4. Application of Payments and Collections. All items of payment
received by Agent by 12:00 noon, New York City time, on any Business Day shall
be deemed received on that Business Day. All items of payment received after
12:00 noon, New York City time, on any Business Day shall be deemed received on
the following Business Day. Subject to the terms of SUBSECTIONS 3.2.5 AND 3.3,
Borrower irrevocably waives the right to direct the application of any and all
payments and collections at any time or times hereafter received by Agent from
or on behalf of Borrower, and Borrower does hereby irrevocably agree that Agent
shall have the continuing exclusive right to apply and reapply any and all such
payments and collections received at any time or times hereafter by Agent or its
agent against the Obligations, in such manner as Agent may deem advisable.
3.5. All Loans to Constitute One Obligation. The Loans shall constitute
one general Obligation of Borrower, and shall be secured by Agent's Lien upon
all of the Collateral.
3.6. Loan Account. Agent shall enter all Loans as debits to an account
evidencing such Loans ("Loan Account") and shall also record in Borrower's Loan
Account all payments made by Borrower on any Obligations and all proceeds of
Collateral which are finally paid to Agent, and may record therein, in
accordance with customary accounting practice, other debits and credits,
including interest and all charges and expenses properly chargeable to Borrower.
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3.7. Statements of Account. Agent will account to Borrower monthly with
a statement of Loans, charges and payments made pursuant to this Agreement, and
such account rendered by Agent shall be deemed final, binding and conclusive
upon Borrower absent manifest error or unless Agent is notified by Borrower in
writing to the contrary within 30 days of the date each accounting is mailed to
Borrower. Such notice shall only be deemed an objection to those items
specifically objected to therein.
3.8. Increased Costs. In the event that any change, after the date of
this Agreement, in any applicable law or treaty, or in the interpretation or
application thereof, or compliance by Agent or any Lender with any new request
or directive (whether or not having the force of law) from any central bank or
other financial, monetary or other regulatory authority (other than those in
effect on the date hereof), shall:
(i) (1) subject Agent or any Lender to any tax with
respect to this Agreement (other than (a) any tax based on or measured
by net income or otherwise in the nature of a net income tax, including,
without limitation, any franchise tax or any similar tax based on
capital, net worth or comparable basis for measurement and (b) any tax
collected by a withholding on payments and which either is computed by
reference to the net income of the payee or is in the nature of an
advance collection of a tax based on or measured by the net income of
the payee) or (2) change the basis of taxation of payments to Agent or
any Lender of principal, fees, interest or any other amount payable
hereunder or under any Loan Documents (other than in respect of (a) any
tax based on or measured by net income or otherwise in the nature of a
net income tax, including, without limitation, any franchise tax or any
similar tax based on capital, net worth or comparable basis for
measurement and (b) any tax collected by a withholding on payments and
which either is computed by reference to the net income of the payee or
is in the nature of an advance collection of a tax based on or measured
by the net income of the payee);
(i) impose, modify or hold applicable any reserve (except
any reserve taken into account in the determination of the applicable
Eurodollar Rate), special deposit, assessment or similar requirement
against assets held by, or deposits in or for the account of, advances
or loans by, or other credit extended by, any office of Agent or any
Lender, including (without limitation) pursuant to Regulation D of the
Board of Governors of the Federal Reserve System; or
(ii) impose on Agent or any Lender or the London interbank
Eurodollar market any other condition with respect to any Loan Document;
and the result of any of the foregoing is to increase the cost to Agent or any
Lender of making, renewing or maintaining its Loans hereunder by an amount that
Agent or such Lender deems to be material or to reduce the amount of any payment
(whether of principal, interest or otherwise) in respect of any of the Loans by
an amount that Agent or such Lender deems to be material, then, in any such
case, Borrower shall pay Agent or such Lender, upon its demand and certification
not later than sixty (60) days following its receipt of notice of the imposition
of such increased costs, such additional amount as will compensate Agent or such
Lender for such additional cost or such reduction, as the case may be, to the
extent Agent or such Lender has not otherwise been compensated, with respect to
a
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particular Loan, for such increased cost as a result of an increase in the
Base Rate, Eurodollar Rate or LIBOR Rate. An officer of Agent or such Lender
shall determine the amount of such additional cost or reduced amount using
reasonable averaging and attribution methods and shall certify the amount of
such additional cost or reduced amount to Borrower, which certification shall
include a written explanation of such additional cost or reduction to Borrower.
Such certification shall be conclusive absent manifest error. If Agent or any
Lender claims any additional cost or reduced amount pursuant to this SECTION
3.8, then Agent or such Lender shall use reasonable efforts (consistent with
legal and regulatory restrictions) to designate a different lending office or to
file any certificate or document reasonably requested by Borrower if the making
of such designation or filing would avoid the need for, or reduce the amount of,
any such additional cost or reduced amount and would not, in the sole discretion
of Agent or such Lender, be otherwise disadvantageous to Agent or such Lender.
3.9. Basis For Determining Interest Rate Inadequate or Unfair. In the
event that Agent or the Required Lenders shall have determined that:
(i) reasonable means do not exist for ascertaining the
LIBOR Rate or the Eurodollar Rate for any Interest Period; or
(ii) Dollar deposits in the relevant amount and for the
relevant maturity are not available in the London interbank Eurodollar
market with respect to a proposed Eurodollar Loan, or a proposed
conversion of a Base Rate Loan into a Eurodollar Loan;
Agent shall give Borrower prompt written, telephonic or telegraphic notice of
the determination of such effect. If such notice is given, (i) any such
requested Eurodollar Loan or LIBOR Rate Loan shall be made as a Base Rate Loan,
unless Borrower shall notify Agent no later than 10:00 A.M. (New York City time)
three (3) Business Days prior to the date of such proposed borrowing that the
request for such borrowing shall be canceled or made as an unaffected type of
Eurodollar Loan or LIBOR Rate Loan, and (ii) any Base Rate Loan which was to
have been converted to an affected type of Eurodollar Loan or LIBOR Rate Loan
shall be continued as or converted into a Base Rate Loan, or, if Borrower shall
notify Agent, no later than 10:00 A.M. (New York City time) three (3) Business
Days prior to the proposed conversion, shall be maintained as an unaffected type
of Eurodollar Loan or LIBOR Rate Loan.
3.10. Capital Adequacy. In the event that Agent or any Lender shall have
determined that any change in applicable law or guideline regarding capital
adequacy, or any change in the interpretation or administration thereof by any
governmental authority, central bank or comparable agency charged with the
interpretation or administration thereof, or compliance by Agent or any Lender
with any new request or directive regarding capital adequacy (whether or not
having the force of law) of any such authority, central bank or comparable
agency not in effect on the date hereof, has or would have the effect of
reducing the rate of return on Agent's or any Lender's capital as a consequence
of its obligations hereunder to a level below that which Agent or any Lender
could have achieved but for such adoption, change or compliance (taking into
consideration Agent's and each Lender's policies with respect to capital
adequacy) by an amount deemed by Agent or any Lender to be material, then, from
time to time, upon written demand not later than sixty (60) days following such
Lender's or Agent's making such determination (which demand shall be accompanied
by a certification demonstrating the calculation of such amounts in reasonable
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detail) by Agent or such Lender, Borrower shall pay to Agent or such Lender such
additional amount or amounts as will compensate Agent or such Lender for such
reduction. In determining such amount or amounts, Agent or such Lender may use
any reasonable averaging or attribution methods. The protection of this SECTION
3.10 shall be available to Agent or any Lender regardless of any possible
contention of invalidity or inapplicability with respect to the applicable law
or condition.
3.10.1. Certificate. A certificate of an officer of Agent or
such Lender setting forth such amount or amounts as shall be necessary to
compensate Agent or such Lender pursuant to SECTION 3.10 hereof and the reasons
therefor when delivered to Borrower shall be conclusive absent manifest error.
SECTION 4. TERM AND TERMINATION.
4.1. Term of Agreement. Subject to Lenders' right to cease making Loans
to Borrower upon or after the occurrence of a Default or Event of Default, this
Agreement shall be in effect for a period of five (5) years from the date
hereof, through and including August 13, 2003 (the "Original Term") unless
terminated as provided in SECTION 4.2 hereof.
4.2. Termination.
4.2.1. Termination by Lenders. Required Lenders may terminate
this Agreement (without notice thereof to Borrower) upon or after the occurrence
and during the continuance of an Event of Default.
4.2.2. Termination by Borrower. Upon at least ninety (90) days
prior written notice to Agent, Borrower may, at its option, terminate this
Agreement; provided, however, no such termination shall be effective until
Borrower has paid all of the Obligations in immediately available funds and all
Letters of Credit and LC Guaranties have expired or have been cash
collateralized to Agent's satisfaction. Any notice of termination given by
Borrower shall be irrevocable unless Required Lenders otherwise agree in
writing, and Lenders shall have no obligation to make any Loans or issue or
procure any Letters of Credit or LC Guaranties on or after the termination date
stated in such notice. Borrower may elect to terminate this Agreement in its
entirety only. No section of this Agreement or type of Loan available hereunder
may be terminated singly.
4.2.3. Termination Charges. At the effective date of termination
of this Agreement for any reason, Borrower shall pay to Agent for its own
account (in addition to the then outstanding principal, accrued interest and
other charges owing under the terms of this Agreement and any of the other Loan
Documents) as liquidated damages for the loss of the bargain and not as a
penalty, an amount equal to two percent (2.0%) of the average outstanding Loans
and Letters of Credit during such year if termination occurs during the first
Loan Year and one percent (1.0%) of the average outstanding Loans and Letters of
Credit during such year if termination occurs during the second Loan Year. If
Borrower shall terminate this Agreement after the second Loan Year, all charges
under this Section 4.2.3 shall be waived.
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4.2.4. Effect of Termination. All of the Obligations shall be
immediately due and payable upon the termination date stated in any notice of
termination of this Agreement. All undertakings, agreements, covenants,
warranties and representations of Borrower contained in the Loan Documents shall
survive any such termination and Agent shall retain its Liens in the Collateral
and all of its rights and remedies under the Loan Documents notwithstanding such
termination until Borrower has paid the Obligations to Agent, in full, in
immediately available funds, together with the applicable termination charge, if
any. Notwithstanding the payment in full of the Obligations, Agent shall not be
required to terminate its security interests in the Collateral unless, with
respect to any loss or damage Agent or Lenders may incur as a result of
dishonored checks or other items of payment received by Agent or Lenders from
Borrower or any Account Debtor and applied to the Obligations, Agent shall, at
its option, (i) have received a written agreement, executed by Borrower and by
any Person whose loans or other advances to Borrower are used in whole or in
part to satisfy the Obligations, indemnifying Agent and Lenders from any such
loss or damage; or (ii) have retained such monetary reserves and Liens on the
Collateral for such period of time as Agent, in its reasonable discretion, may
deem necessary to protect Agent and Lenders from any such loss or damage.
SECTION 5. SECURITY INTERESTS
5.1. Security Interest in Collateral. To secure the prompt payment and
performance to Lenders of the Obligations, Borrower hereby grants to Agent for
the ratable benefit of Lenders a continuing security interest and Lien upon all
of Borrower's assets, including all of the following Property and interests in
Property of Borrower, whether now owned or existing or hereafter created,
acquired or arising and wheresoever located:
(i) Accounts;
(ii) Inventory;
(iii) Equipment;
(iv) General Intangibles;
(v) All monies and other Property of any kind now or at
any time or times hereafter in the possession or under the control of
Agent or any Lender or a bailee or Affiliate of Agent or any Lender;
(vi) All Investment Property (as defined in the Code);
(vii) All accessions to, substitutions for and all
replacements, products and cash and non-cash proceeds of (i) through
(vi) above, including, without limitation, proceeds of and unearned
premiums with respect to insurance policies insuring any of the
Collateral; and
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(viii) All books and records (including, without
limitation, customer lists, credit files, computer programs, print-outs,
and other computer materials and records) of Borrower pertaining to any
of (i) through (vii) above.
5.2. Lien Perfection; Further Assurances. Borrower shall execute such
UCC-1 financing statements as are required by the Code and such other
instruments, assignments or documents as are requested by Agent and reasonably
necessary to perfect Agent's Lien upon any of the Collateral and shall take such
other action as may be reasonably required to perfect or to continue the
perfection of Agent's Lien upon the Collateral. Unless prohibited by applicable
law, Borrower hereby authorizes Agent to execute and file any such financing
statement on Borrower's behalf. The parties agree that a carbon, photographic or
other reproduction of this Agreement shall be sufficient as a financing
statement and may be filed in any appropriate office in lieu thereof. At Agent's
request, Borrower shall also promptly execute or cause to be executed and shall
deliver to Agent any and all documents, instruments and agreements deemed
reasonably necessary by Agent to give effect to or carry out the terms or intent
of the Loan Documents.
SECTION 6. COLLATERAL ADMINISTRATION
6.1. General.
6.1.1. Location of Collateral. All Collateral, other than
Inventory in transit and motor vehicles, will at all times be kept by Borrower
at one or more of the business locations set forth in Exhibit 6.1.1 hereto and
shall not, without the prior written approval of Agent, be moved therefrom
except, prior to an Event of Default and Agent's acceleration of the maturity of
the Obligations in consequence thereof, for (i) sales of Inventory in the
ordinary course of business; and (ii) removals in connection with dispositions
of Equipment that are authorized by SUBSECTION 6.4.2 hereof.
6.1.2. Insurance of Collateral. Borrower shall maintain and pay
for insurance to the extent available at commercially reasonable rates upon all
Collateral which is customarily insured wherever located and with respect to
Borrower's business, covering casualty, hazard, public liability and such other
customary risks in such amounts, with such insurance companies as are reasonably
satisfactory to Agent. Borrower shall deliver copies of such policies to Agent
with satisfactory lender's loss payable endorsements, naming Agent as loss
payee, assignee or additional insured, as appropriate. Each policy of insurance
or endorsement shall contain a clause requiring the insurer to give not less
than 30 days prior written notice to Agent in the event of cancellation of the
policy for any reason whatsoever and a clause specifying that the interest of
Agent shall not be impaired or invalidated by any act or neglect of Borrower or
the owner of the Property or by the occupation of the premises for purposes more
hazardous than are permitted by said policy. If Borrower fails to provide and
pay for such insurance, Agent may, at its option, but shall not be required to,
procure the same and charge Borrower therefor. Borrower agrees to deliver to
Agent, promptly as rendered, true copies of all reports made in any reporting
forms to insurance companies.
6.1.3. Protection of Collateral. All expenses of protecting,
storing, warehousing, insuring, handling, maintaining and shipping the
Collateral, any and all excise, property, sales, and
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use taxes imposed by any state, federal, or local authority on any of the
Collateral or in respect of the sale thereof shall be borne and paid by
Borrower. If Borrower fails to promptly pay any portion thereof when due, Agent
may, at its option, but shall not be required to, pay the same and charge
Borrower therefor. Neither Agent nor any Lender shall be liable or responsible
(except for reasonable care in the custody thereof while any Collateral is in
Agent's or any Lender's actual possession or under their actual control) in any
way for the safekeeping of any of the Collateral or for any loss or damage
thereto or for any diminution in the value thereof, or for any act or default of
any warehouseman, carrier, forwarding agency, or other person whomsoever, but
the same shall be at Borrower's sole risk.
6.2. Administration of Accounts.
6.2.1. Records, Schedules and Assignments of Accounts. Borrower
shall keep accurate and complete records of its Accounts and all payments and
collections thereon and shall submit to Agent on such periodic basis as Agent
shall request a sales and collections report for the preceding period, in form
satisfactory to Agent. On or before the fifteenth day of each month from and
after the date hereof, Borrower shall deliver to Agent, in form acceptable to
Agent, accounts payable schedules and a summary aged trial balance of all
Accounts existing as of the last day of the preceding month, specifying the
names of each Account Debtor obligated on an Account so listed and the aggregate
outstanding balance of Accounts so listed ("Schedule of Accounts"), and, in the
event Availability is less than $3,000,000 and upon Agent's request therefor,
copies of proof of delivery and the original copy of all documents, including,
without limitation, repayment histories and present status reports relating to
the Accounts so scheduled and such other matters and information relating to the
status of then existing Accounts as Agent shall reasonably request. In addition,
if Accounts in an aggregate face amount in excess of $250,000 become ineligible
because they fall within one of the specified categories of ineligibility set
forth in the definition of Eligible Accounts or otherwise established by Agent,
Borrower shall notify Agent of such occurrence on the first Business Day
following such occurrence and the Borrowing base shall thereupon be adjusted to
reflect such occurrence. In the event Availability is less than $3,000,000 and
if requested by Agent, Borrower shall execute and deliver to Agent formal
written assignments of all of its Accounts weekly or daily, which shall include
all Accounts that have been created since the date of the last assignment,
together with copies of invoices or invoice registers related thereto.
6.2.2. Discounts, Allowances, Disputes. If Borrower grants any
discounts, allowances or credits that are not shown on the face of the invoice
for the Account involved, Borrower shall report such discounts, allowances or
credits, as the case may be, to Agent as part of the next required Schedule of
Accounts. If any amounts due and owing in excess of $250,000 are in dispute
between Borrower and any Account Debtor, Borrower shall provide Agent with
written notice thereof at the time of submission of the next Schedule of
Accounts, explaining in detail the reason for the dispute, all claims related
thereto and the amount in controversy. Upon and after the occurrence and during
the continuance of an Event of Default, Agent shall have the right to settle or
adjust all disputes and claims directly with the Account Debtor and to
compromise the amount or extend the time for payment of the Accounts upon such
terms and conditions as Agent may deem advisable, and to charge the
deficiencies, costs and expenses thereof, including attorney's fees, to
Borrower.
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6.2.3. Taxes. If an Account includes a charge for any tax
payable by Borrower to any governmental taxing authority, Agent is authorized,
in its sole discretion, to pay the amount thereof to the proper taxing authority
for the account of the Borrower and to charge Borrower's Account therefor,
unless it is (1) being contested in good faith and adequate reserves have been
set aside in accordance with GAAP, and (2) none of the Collateral has become
subject to forfeiture or loss as a result of such contest and (3) Agent has not
advised Borrower in writing that Agent reasonably believes that non-payment is
reasonably likely to have or result in a Material Adverse Effect, provided,
however that Agent shall not be liable for any taxes to any governmental taxing
authority that may be due by Borrower. The Agent shall promptly notify the
Borrower of the payment of any such amounts.
6.2.4. Account Verification. Whether or not a Default or an
Event of Default has occurred, any of Agent's officers, employees or agents
shall have the right, at any time or times hereafter, in the name of Agent, any
designee of Agent or Borrower, to verify the validity, amount or any other
matter relating to any Accounts by mail, telephone, telegraph or otherwise.
Borrower shall cooperate fully with Agent in an effort to facilitate and
promptly conclude any such verification process.
6.2.5. Maintenance of Dominion Account. On or prior to November
15, 1998, Borrower shall establish and maintain a Dominion Account pursuant to a
lockbox arrangement acceptable to Agent with such banks as may be selected by
Borrower and be acceptable to Agent. Borrower shall issue to any such banks an
irrevocable letter of instruction directing such banks to deposit all payments
or other remittances received in the lockbox to the Dominion Account for
application on account of the Obligations. All funds deposited in the Dominion
Account shall immediately become the property of Agent and Borrower shall obtain
the agreement by such banks in favor of Agent to waive any offset rights against
the funds so deposited. Agent assumes no responsibility for such lockbox
arrangement, including, without limitation, any claim of accord and satisfaction
or release with respect to deposits accepted by any bank thereunder.
6.2.6. Collection of Accounts, Proceeds of Collateral. To
expedite collection, Borrower shall endeavor in the first instance to make
collection of its Accounts for Agent. All remittances received by Borrower on
account of Accounts, together with the proceeds of any other Collateral, shall
be held as Agent's property by Borrower as trustee of an express trust for
Agent's benefit and Borrower shall immediately deposit same in kind in the
Dominion Account. Agent retains the right at all times after the occurrence of a
Default or an Event of Default, if continuing, to notify Account Debtors that
Accounts have been assigned to Agent and to collect Accounts directly in its own
name and to charge the collection costs and expenses, including attorneys' fees
to Borrower.
6.3. Administration of Inventory.
6.3.1. Records and Reports of Inventory. Borrower shall keep
accurate and complete records of its inventory. Borrower shall furnish to Agent
Inventory reports in form and detail satisfactory to Agent at such times as
Agent may request, but at least once each month, not later than the twentieth
day of such month. Borrower shall conduct a physical inventory annually and
shall provide to Agent a report based on each such physical inventory promptly
thereafter, together with such supporting information as Agent shall request.
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6.3.2. Returns of Inventory. If at any time or times hereafter
any Account Debtor returns any Inventory to Borrower the shipment of which
generated an Account on which such Account Debtor is obligated in excess of
$250,000, Borrower shall immediately notify Agent of the same, specifying the
reason for such return and the location, condition and intended disposition of
the returned Inventory.
6.4. Administration of Equipment.
6.4.1. Records and Schedules of Equipment. Borrower shall keep
accurate records itemizing and describing the kind, type, quality, quantity and
value of its Equipment and all dispositions made in accordance with SUBSECTION
6.4.2 hereof, and shall furnish Agent with a current schedule containing the
foregoing information on at least an annual basis and more often if requested by
Agent. Immediately on request therefor by Agent, Borrower shall deliver to Agent
any and all evidence of ownership, if any, of any of the Equipment.
6.4.2. Dispositions of Equipment. Borrower will not sell, lease
or otherwise dispose of or transfer any of the Equipment or any part thereof
without the prior written consent of Agent; provided, however, that the
foregoing restriction shall not apply, for so long as no Default or Event of
Default exists, to (i) dispositions of Equipment which, in the aggregate during
any consecutive twelve-month period, has a fair market value or book value,
whichever is less, of $250,000 or less, provided that all proceeds thereof are
remitted to Agent for application to the Loans, or (ii) replacements of
Equipment that is substantially worn, damaged or obsolete with Equipment of like
kind, function and value, provided that the replacement Equipment shall be
acquired prior to or concurrently with any disposition of the Equipment that is
to be replaced, the replacement Equipment shall be subject to the Liens of Agent
and shall be free and clear of all other Liens other than Permitted Liens that
are not Purchase Money Liens, and Borrower shall have given Agent at least 5
days prior written notice of such disposition.
6.5. Payment of Charges. All amounts chargeable to Borrower under
SECTION 6 hereof shall be Obligations secured by all of the Collateral, shall be
payable on demand and shall bear interest from the date such advance was made
until paid in full at the rate applicable to Base Rate Loans from time to time.
6.6. Additional Payments. Any sums expended by Agent or any Lender due
to Borrower's failure to perform or comply with its obligations under this
Agreement or any other Loan Document may be charged to Borrower's account as a
Revolving Credit Loan and added to the Obligations.
SECTION 7. REPRESENTATIONS AND WARRANTIES
7.1. General Representations and Warranties. To induce Agent and Lenders
to enter into this Agreement and to make advances hereunder, Borrower warrants,
represents and covenants to Agent and Lenders that:
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7.1.1. Organization and Qualification. It is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation. It is duly qualified and is authorized to do
business and is in good standing in all states and jurisdictions where the
character of its Properties or the nature of its activities make such
qualification necessary, except where the failure to be so qualified would not
have a Material Adverse Effect. Exhibit 7.1.1 sets forth all states or
jurisdictions where Borrower or any Subsidiary is qualified and authorized to do
business as of the Closing Date.
7.1.2. Power and Authority. It is duly authorized and empowered
to enter into, execute, deliver and perform this Agreement and each of the other
Loan Documents to which it is a party. The execution, delivery and performance
of this Agreement and each of the other Loan Documents have been duly authorized
by all necessary corporate action and do not and will not (i) require any
consent or approval of its shareholders; (ii) contravene its charter, articles
or certificate of incorporation or by-laws; (iii) violate, or cause it to be in
default under, any provision of any law, rule, regulation, order, writ,
judgment, injunction, decree, determination or award in effect having
applicability to it which violation or default would likely have a Material
Adverse Effect; (iv) result in a breach of or constitute a default under any
indenture or loan or credit agreement or any other agreement, lease or
instrument to which it is a party or by which it or its Properties may be bound
or affected which violation or default would likely have a Material Adverse
Effect; or (v) result in, or require, the creation or imposition of any Lien
(other than Permitted Liens) upon or with respect to any of the Properties now
owned or hereafter acquired by it.
7.1.3. Legally Enforceable Agreement. This Agreement is, and
each of the other Loan Documents when delivered under this Agreement will be, a
legal, valid and binding obligation of the Borrower enforceable against it in
accordance with its respective terms; except as may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
creditors' rights generally and by general equitable principles (whether
enforcement is sought by proceeding in equity or at law).
7.1.4. Capital Structure. Exhibit 7.1.4 hereto states (i) the
correct name of Borrower and each of Borrower's Subsidiaries, its jurisdiction
of incorporation and the percentage of its stock owned by each Person listed
thereon, (ii) the name of the corporate or joint venture Affiliates of Borrower
and of each Subsidiary of Borrower, and the nature of the affiliation, and (iii)
the number, nature and holder of all outstanding stock of Borrower and of each
Subsidiary of Borrower, in each case as of the Closing Date. Borrower has good
title to all shares of stock it purports to own of each Subsidiary of Borrower,
free and clear in each case of any Lien other than Permitted Liens. All such
shares of stock have been duly issued and are fully paid and non-assessable.
Except as set forth on Exhibit 7.1.4, there are (i) no outstanding options to
purchase, or any rights or warrants to subscribe for, or any commitments or
agreements to issue or sell, or any Securities, stock or obligations convertible
into, or any powers of attorney relating to, shares of the capital stock of
Borrower and (ii) no outstanding agreements or instruments binding upon any
stockholders of Borrower or any Subsidiary of Borrower relating to the ownership
of its shares of capital stock.
7.1.5. Corporate Names. Since 1988, neither Borrower nor any
Subsidiary of Borrower has been known as or used any corporate, fictitious or
trade names except those listed on Exhibit 7.1.5 hereto. Except as set forth on
Exhibit 7.1.5, since 1988 Borrower has not been the
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surviving entity of a merger or consolidation or acquired all or substantially
all of the assets of any Person.
7.1.6. Business Locations; Agent for Process. The chief
executive office and other places of business of Borrower and each Subsidiary of
Borrower are as listed on Exhibit 7.1.6 hereto. During the preceding one-year
period, neither Borrower nor any Subsidiary of Borrower has had an office, place
of business or agent for service of process other than as listed on Exhibit
7.1.6. Except as shown on Exhibit 7.1.6, no Inventory is stored with a bailee,
warehouseman or similar party, nor is any Inventory consigned to any Person.
7.1.7. Title to Properties; Priority of Liens. Borrower and each
Subsidiary of Borrower has good, indefeasible and marketable title to and fee
simple ownership of, or valid and subsisting leasehold interests in, all of its
real Property, and good title to all of the Collateral and all of its other
Property, in each case, free and clear of all Liens except Permitted Liens.
Borrower has paid or discharged all lawful claims which, if unpaid, might become
a Lien against any of its Properties that is not a Permitted Lien. The Liens
granted to Agent for the ratable benefit of Lenders under SECTION 5 hereof are
first priority Liens, subject only to Permitted Liens.
7.1.8. Accounts. Agent may rely, in determining which Accounts
are Eligible Accounts, on all statements and representations made by Borrower
with respect to any Account or Accounts. Unless otherwise indicated in writing
to Agent, with respect to each Account:
(i) It is genuine and in all respects what it purports to
be, and it is not evidenced by a judgment;
(ii) It arises out of a completed, bona fide sale and
delivery of goods or rendition of services by Borrower in the ordinary
course of its business and in accordance with the terms and conditions
of all purchase orders, contracts or other documents relating thereto
and forming a part of the contract between Borrower and the Account
Debtor;
(iii) It is for a liquidated amount payable on the date
stated in the duplicate invoice covering such sale or rendition of
services, a copy of which has been furnished or is available to Agent;
(iv) Such Account, and Agent's security interest therein,
is not subject to any offset, Lien, deduction, defense, dispute,
counterclaim or any other adverse condition except where the amount in
controversy is deemed by Agent to be immaterial, and each such Account
is absolutely owing to Borrower and is not contingent in any respect or
for any reason;
(v) Borrower has not made any agreement with any Account
Debtor thereunder for any extension, compromise, settlement or
modification of any such Account or any deduction therefrom, except for
discounts or allowances which are granted by Borrower in the ordinary
course of its business and which are reflected in the calculation of the
net amount of each respective invoice related thereto and are reflected
in the Schedules of Accounts submitted to Agent pursuant to SUBSECTION
6.2.1 hereof or such other extensions, compromises,
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settlements or modifications of any Account or any deduction therefrom
disclosed in writing by Borrower to Agent and consented thereto in
writing by Agent;
(vi) To the best of Borrower's knowledge, the Account
Debtor thereunder (1) had the capacity to contract at the time any
contract or other document giving rise to the Account was executed and
(2) such Account Debtor was at such time Solvent; and
(vii) To the best of Borrower's knowledge at the time such
Account arose, there were no proceedings or actions which are threatened
or pending against any Account Debtor thereunder which might result in
any material adverse change in such Account Debtor's financial condition
or the collectability of such Account.
7.1.9. Equipment. Any Equipment used for the operation of the
Borrower's business is in good operating condition and repair, and all necessary
replacements of and repairs thereto shall be made so that the value and
operating efficiency of the Equipment shall be maintained and preserved,
reasonable wear and tear excepted. Borrower will not permit any of the Equipment
to become affixed to any real Property leased to Borrower so that an interest
arises therein under the real estate laws of the applicable jurisdiction unless
the landlord of such real Property has executed a landlord waiver or consented
to a leasehold mortgage in favor of and in form acceptable to Lender, and
Borrower will not permit any of the Equipment to become an accession to any
personal Property other than Equipment that is subject to first priority (except
for Permitted Liens) Liens in favor of Agent for the benefit of Lenders.
7.1.10. Financial Statements; Fiscal Year. (a) The balance
sheets of Borrower on a Consolidated Basis as of December 31, 1997 and the
related statements of income, changes in stockholder's equity, and changes in
financial position for the periods ended on such dates, have been prepared in
accordance with GAAP, and present fairly the financial position of Borrower on a
Consolidated Basis at such dates and the results of Borrower's operations for
such periods, subject to normally occurring year-end audit adjustments. Since
June 30, 1998, there has been no event or condition having a Material Adverse
Effect and no change in the aggregate value of Equipment (except in connection
with reasonable wear and tear of such Equipment) owned by Borrower.
(b) Projections of Borrower on a Consolidated Basis with respect to Fiscal Years
1998 and 1999, copies of which are annexed hereto as Exhibit 7.1.10 (b), were
prepared by Borrower and reviewed by its chief financial officer, treasurer or
controller and, as of the Closing Date, are based on underlying assumptions
which provide a reasonable basis for the Projections contained therein and
reflect Borrower's judgment based on present circumstances of the most likely
set of conditions and course of action for the projected period.
7.1.11. Full Disclosure. The financial statements referred to in
SUBSECTION 7.1.10 hereof do not, nor does this Agreement or any other written
statement delivered by Borrower to Agent or any Lender in connection herewith,
contain any untrue statement of a material fact or omit a material fact
necessary to make the statements contained therein or herein not materially
misleading. There is no fact which Borrower has failed to disclose to Agent in
writing which would likely have a Material Adverse Effect.
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7.1.12. Solvent Financial Condition. Borrower and each Guarantor
is now and, after giving effect to the Transactions, will be, Solvent.
7.1.13. Surety Obligations. Neither Borrower nor any Subsidiary
of Borrower is obligated as surety or indemnitor under any surety or similar
bond or other contract issued or entered into any agreement to assure payment,
performance or completion of performance of any undertaking or obligation of any
Person.
7.1.14. Taxes. Borrower's federal tax identification number is
as set forth on Exhibit 7.1.14. The federal tax identification number of each
Subsidiary of Borrower is shown on Exhibit 7.1.14 hereto. Borrower and each
Subsidiary of Borrower has filed all federal, state and local tax returns and
other reports it is required by law to file and has paid, or made provision for
the payment of, all taxes, assessments, fees, levies and other governmental
charges upon it, its income and Properties shown in such returns to be due and
payable or assessed against them by any governmental authority, unless and to
the extent any such amounts are being actively contested in good faith and by
appropriate proceedings and Borrower and each Subsidiary of Borrower, as
applicable, maintains reasonable reserves on their books therefor. The provision
for taxes on the books of Borrower and each Subsidiary of Borrower are adequate
for all years not closed by applicable statutes, and for its current fiscal year
and, for all tax years thereafter which are not closed by applicable statutes,
the provisions for taxes on the books of Borrower and each Subsidiary of
Borrower will be adequate.
7.1.15. Brokers. There are no claims for brokerage commissions,
finder's fees or investment banking fees in connection with the transactions
contemplated by this Agreement
7.1.16. Patents, Trademarks, Copyrights and Licenses. Borrower
and each Subsidiary of Borrower owns, possesses or has the right to use all the
patents, trademarks, service marks, trade names, copyrights and licenses
necessary for the present and planned future conduct of its business without any
known conflict with the rights of others. All such patents, trademarks, service
marks, tradenames, copyrights, licenses and other similar rights are listed on
Exhibit 7.1.16 hereto.
7.1.17. Governmental Consents. Borrower and each Subsidiary of
Borrower has, and is in good standing with respect to, all governmental
consents, approvals, licenses, authorizations, permits, certificates,
inspections and franchises materially necessary to continue to conduct its
business as heretofore or proposed to be conducted by it and to own or lease and
operate its Properties as now owned or leased by it.
7.1.18. Compliance with Laws. Borrower and each Subsidiary of
Borrower has duly complied, and its Properties, business operations and
leaseholds are in compliance in all material respects, with the provisions of
all federal, state and local laws, rules and regulations applicable to it as
applicable, its Properties or the conduct of its business and there have been no
citations, notices or orders of noncompliance issued to Borrower or any
Subsidiary of Borrower under any such law, rule or regulation. Borrower and each
Subsidiary of Borrower has established and maintains an adequate monitoring
system to insure that it remains in compliance with all federal, state and local
laws, rules and regulations applicable to it. No Inventory produced by Borrower
has been produced in violation of the Fair Labor Standards Act (29 U.S.C. 'SS'
201 et seq.), as amended.
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7.1.19. Restrictions. Neither Borrower nor any Subsidiary of
Borrower is a party or subject to any contract, agreement, or charter or other
corporate restriction, which solely as a result of the terms thereof could
reasonably be expected to have a Material Adverse Effect. Neither Borrower nor
any Subsidiary of Borrower is a party or subject to any contract or agreement
which restricts its right or ability to incur Indebtedness, other than as set
forth on Exhibit 7.1.19 hereto, none of which prohibit the execution of or
compliance with this Agreement or the other Loan Documents by Borrower or any
Subsidiary of Borrower, as applicable.
7.1.20. Litigation. Except as set forth on Exhibit 7.1.20
hereto, there are no actions, suits, proceedings or investigations pending or,
to the knowledge of Borrower, threatened, against or affecting Borrower or any
Subsidiary of Borrower, or the business, operations, Properties, prospects,
profits or condition of Borrower or any Subsidiary of Borrower, which could
reasonably be expected to have a Material Adverse Effect. Neither Borrower nor
any Subsidiary of Borrower is in default with respect to any order, writ,
injunction, judgment, decree or rule of any court, governmental authority or
arbitration board or tribunal which would likely have a Material Adverse Effect.
7.1.21. No Defaults. No event has occurred and no condition
exists which would, upon or after the execution and delivery of this Agreement
and the other Loan Documents or Borrower's performance hereunder or thereunder,
constitute a Default or an Event of Default. Neither Borrower nor any of its
Subsidiaries is in default with respect to any order, writ, injunction,
judgment, decree or rule of any court, governmental authority or arbitration
board or tribunal.
7.1.22. Leases. Exhibit 7.1.22(A) hereto is a complete listing
of all capitalized leases of Borrower and Exhibit 7.1.22(B) hereto is a complete
listing of all operating leases of Borrower. Borrower is in compliance with all
of the terms of each of its respective capitalized and operating leases.
7.1.23. Pension Plans. Except as disclosed on Exhibit 7.1.23
hereto, neither Borrower nor any Subsidiary of Borrower has any Plan. Borrower
and each Subsidiary of Borrower is in full compliance with the requirements of
ERISA and the regulations promulgated thereunder with respect to each Plan. No
fact or situation that would likely have a Material Adverse Effect exists in
connection with any Plan. Neither Borrower nor any Subsidiary of Borrower has
any withdrawal liability in connection with a Multiemployer Plan.
7.1.24. Trade Relations. There exists no actual or threatened
termination, cancellation or limitation of, or any modification or change in,
the business relationship between Borrower and any customer or any group of
customers of Borrower, the absence of whose purchases individually or in the
aggregate would likely have a Material Adverse Effect, or with any material
supplier of Borrower, the absence of whose products or services would likely
have a Material Adverse Effect. There exists no present condition or state of
facts or circumstances which would have a Material Adverse Effect on Borrower or
prevent Borrower from conducting its business after the consummation of the
transaction contemplated by this Agreement in substantially the same manner in
which it has heretofore been conducted.
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7.1.25. Labor Relations. Except as described on Exhibit 7.1.25
hereto, neither Borrower nor any Subsidiary of Borrower is a party to any
collective bargaining agreement. There are no material grievances, disputes or
controversies with any union or any other organization of Borrower's or any
Subsidiary of Borrower's employees or threats of strikes, work stoppages or any
asserted pending demands for collective bargaining by any union or organization.
7.1.26. O.S.H.A. and Environmental Compliance. Except as set
forth on Exhibit 7.1.26:
(a) Borrower and each Subsidiary of Borrower has duly complied with, and its
facilities, business, assets, property, leaseholds and Equipment are in
compliance in all material respects with, the provisions of the Federal
Occupational Safety and Health Act, the Environmental Protection Act, RCRA and
all other Environmental Laws; there have been no outstanding citations, notices
or orders of non-compliance issued to Borrower or any Subsidiary of Borrower or
relating to its business, assets, property, leaseholds or Equipment under any
such laws, rules or regulations that would have a Material Adverse Effect.
(b) Borrower and each Subsidiary of Borrower has been issued all material
federal, state and local licenses, certificates or permits relating to all
applicable Environmental Laws.
(c) (i) There are no visible signs of releases, spills, discharges, leaks or
disposals (collectively referred to as "Releases") of Hazardous Substances at,
upon, under or within any real Property or any premises leased by Borrower or
any Subsidiary of Borrower that would have a Material Adverse Effect; (ii) to
Borrower's knowledge there are no underground storage tanks or polychlorinated
biphenyls on the real Property or any premises leased by Borrower or any
Subsidiary of Borrower; (iii) Borrower has not used the real Property or any
premises leased by Borrower or any Subsidiary of Borrower as a treatment,
storage or disposal facility of Hazardous Waste; and (iv) no Hazardous
Substances are used on the real Property or any premises leased by Borrower or
any Subsidiary of Borrower, excepting such quantities as are handled in
accordance with all applicable manufacturer's instructions and governmental
regulations and in proper storage containers and as are necessary for the
operation of the commercial business of Borrower or any Subsidiary of Borrower
or of its tenants.
7.2. Continuous Nature of Representations and Warranties. Each
representation and warranty contained in this Agreement and the other Loan
Documents shall be continuous in nature and shall remain accurate, complete and
not misleading at all times during the term of this Agreement, except for those
representations and warranties which are expressly limited by their terms to a
specific date and taking into account any amendments to the Schedules and
Exhibits hereto as a result of any disclosures made by Borrower to Agent after
the Closing Date.
7.3. Survival of Representations and Warranties. All representations and
warranties of Borrower contained in this Agreement or any of the other Loan
Documents shall survive the execution, delivery and acceptance thereof by Agent
and Lenders and the parties thereto and the closing of the transactions
described therein or related thereto.
SECTION 8. COVENANTS AND CONTINUING AGREEMENTS
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8.1. Affirmative Covenants. During the term of this Agreement, and
thereafter for so long as there are any Obligations to Agent or Lenders,
Borrower covenants that it shall:
8.1.1. Visits and Inspections. Permit representatives of Agent,
from time to time, as often as may be reasonably requested, but only during
normal business hours, to visit and inspect the Properties of Borrower and each
of its Subsidiaries, inspect, audit and make extracts from its books and
records, and discuss with its officers, its employees and its independent
accountants, Borrower's and each of its Subsidiaries' business, assets,
liabilities, financial condition, business prospects and results of operations.
8.1.2. Notices. Promptly notify Agent in writing of the
occurrence of any event or the existence of any fact which renders any
representation or warranty in this Agreement or any of the other Loan Documents
inaccurate, incomplete or misleading in any material respect.
8.1.3. Financial Statements. Keep, and cause each Subsidiary to
keep, adequate records and books of account with respect to its business
activities in which proper entries are made in accordance with GAAP reflecting
all its financial transactions; and cause to be prepared and furnished to Agent
and Lenders the following (all to be prepared in accordance with GAAP applied on
a consistent basis, unless Borrower's certified public accountants concur in any
change therein and such change is disclosed to Agent and is consistent with
GAAP):
(i) not later than 90 days after the close of each Fiscal Year of
Borrower, audited financial statements of Borrower on a Consolidated
Basis as of the end of such Fiscal Year, reported on by a firm of
independent certified public accountants of recognized standing selected
by Borrower but acceptable to Agent (the "Accountants");
(ii) not later than thirty (30) days after the end of each Fiscal Month
hereafter, including the last Fiscal Year of Borrower's Fiscal Year
unaudited interim financial statements of Borrower as of the end of such
period and of the portion of Borrower's Fiscal Year then elapsed, on a
Consolidated Basis and consolidating basis, certified by the principal
financial officer of Borrower as prepared in accordance with GAAP and
fairly presenting the consolidating and consolidated financial position
and results of operations of Borrower for such period subject only to
changes from audit and year-end adjustments and except that such
statements need not contain notes;
(iii) promptly after the sending or filing thereof, as the case may be,
copies of any proxy statements or financial statements which Borrower or
any Subsidiary of Borrower has made available to its shareholders and
copies of any regular, periodic and special reports or registration
statements which Borrower or any Subsidiary of Borrower files with the
Securities and Exchange Commission or any governmental authority which
may be substituted therefor, or any national securities exchange;
(iv) promptly after the filing thereof, copies of any annual report to
be filed with the Pension Benefit Guaranty Corporation (the "PBGC") in
connection with each Plan; and
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(v) such other data and information (financial and otherwise) as Agent
or any Lender, from time to time, may reasonably request, bearing upon
or related to the Collateral or Borrower's, any Subsidiary of Borrower's
or any of their respective Subsidiaries' financial condition or results
of operations.
Concurrently with the delivery of the financial statements described in clause
(i) of this SUBSECTION 8.1.3, Borrower shall forward to Agent a copy of the
accountants' letter to Borrower's management or board of directors that is
prepared in connection with such financial statements and also shall cause to be
prepared and shall furnish to Agent a certificate of the aforesaid certified
public accountants certifying that, based upon their examination of the
financial statements of Borrower and its respective Subsidiaries performed in
connection with their examination of said financial statements, they are not
aware of any Default or Event of Default or, if they are aware of such Default
or Event of Default, specifying the nature thereof, and acknowledging, in a
manner satisfactory to Agent, that they are aware that Agent and Lenders are
relying on such financial statements in making their decisions with respect to
the Loans. Concurrently with the delivery of the financial statements described
in clauses (i) and (ii) of this SUBSECTION 8.1.3, or more frequently if
requested by Agent, Borrower shall cause to be prepared and furnished to Agent a
Compliance Certificate in the form of Exhibit 8.1.3 hereto executed by the chief
financial officer, treasurer or controller of Borrower.
8.1.4. Landlord and Storage Agreements. Provide Agent with
copies of all agreements between Borrower, each Subsidiary of Borrower or any of
their respective Subsidiaries and any landlord or warehouseman which owns any
premises at which any Inventory may, from time to time, be kept.
8.1.5. Credit Memoranda. Issue and process credit memoranda with
respect to credits, discounts or other allowances taken by Account Debtors in
the ordinary course of Borrower's business, but in no event shall such credit
memoranda be issued and processed later than three (3) months after the taking
of the applicable credit, discount or other allowance.
8.1.6. Projections. No later than 60 days after to the end of
each fiscal year of Borrower, deliver to Agent Projections of Borrower on a
Consolidated Basis for the forthcoming 3 years, year by year, and for the
forthcoming fiscal year, month by month.
8.1.7. Environmental Matters. (a) Borrower shall and shall cause
each Subsidiary of Borrower to ensure that the real Property remains in material
compliance with all applicable Environmental Laws and they shall not place or
permit to be placed any Hazardous Substances on any real Property in violation
of any applicable law or governmental regulations.
(b) Borrower shall and shall cause each Subsidiary of Borrower to establish and
maintain a system to assure and monitor continued compliance with all applicable
Environmental Laws which system shall include periodic reviews of such
compliance.
(c) Borrower shall and shall cause each Subsidiary of Borrower to (i) employ in
connection with the use of the real Property appropriate technology necessary to
maintain compliance with any applicable Environmental Laws and (ii) to the
extent necessary, dispose of any and all Hazardous Waste generated at the real
Property only at facilities and with carriers that maintain valid permits
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under RCRA and any other applicable Environmental Laws. Borrower shall and shall
cause each Subsidiary of Borrower to use its best efforts to obtain certificates
of disposal, if required, such as hazardous waste manifest receipts, from all
treatment, transport, storage or disposal facilities or operators employed by
Borrower or any Subsidiary of Borrower in connection with the transport or
disposal of any Hazardous Waste generated at the real Property.
(d) In the event Borrower or any Subsidiary of Borrower (i) obtains, gives or
receives notice of any Release or threat of Release of a reportable quantity of
any Hazardous Substances at the real Property (any such event being hereinafter
referred to as a "Hazardous Discharge") or (ii) receives any notice of
violation, request for information or notification that it is potentially
responsible for investigation or cleanup of environmental conditions at the real
Property, demand letter or complaint, order, citation, or other written notice
with regard to any Hazardous Discharge or violation of Environmental Laws having
a Material Adverse Effect on the real Property or Borrower's or any Subsidiary
of Borrower's interest therein from any state or local agency responsible in
whole or in part for environmental matters in the state in which the real
Property is located or the United States Environmental Protection Agency (any
such person or entity hereinafter, the "Authority") (any of the foregoing is
referred to herein as an "Environmental Complaint"), then Borrower shall
promptly give written notice of same to Agent detailing facts and circumstances
of which Borrower or any Subsidiary of Borrower is aware giving rise to the
Hazardous Discharge or Environmental Complaint. Such information is to be
provided to allow Agent to protect its security interest in the Collateral and
is not intended to create nor shall it create any obligation upon Agent or any
Lender with respect thereto.
(e) Borrower shall and shall cause each Subsidiary of Borrower to promptly
forward to Agent copies of any request for information, notification of
potential liability, demand letter relating to potential responsibility with
respect to the investigation or cleanup of Hazardous Substances at any other
site owned, operated or used by Borrower or any Subsidiary of Borrower to
dispose of Hazardous Substances and shall continue to forward copies of
correspondence between Borrower or any Subsidiary of Borrower and the Authority
regarding such claims to Agent until the claim is settled. Borrower shall and
shall cause each Subsidiary of Borrower to promptly forward to Agent copies of
all documents and reports concerning a Hazardous Discharge at the real Property
that Borrower or any Subsidiary of Borrower is required to file under any
applicable Environmental Laws. Such information is to be provided solely to
allow Agent to protect Agent's security interest in the Collateral.
(f) Borrower shall and shall cause each Subsidiary of Borrower to respond
promptly to any Hazardous Discharge or Environmental Complaint and take all
actions reasonably required by applicable Environmental Laws in order to
safeguard the health of any Person and to avoid subjecting the Collateral or
real Property to any Lien. If Borrower or any Subsidiary of Borrower shall fail
to respond promptly to any Hazardous Discharge or Environmental Complaint or
Borrower or any Subsidiary of Borrower shall fail to comply with any of the
requirements of any applicable Environmental Laws, Agent on behalf of Lenders
may, but without the obligation to do so, for the sole purpose of protecting
Agent's interest in Collateral: (A) give such notices or (B) enter onto the real
Property (or authorize third parties to enter onto the real Property) and take
such actions as Agent (or such third parties as directed by Agent) deem
reasonably necessary or advisable, to clean up, remove, mitigate or otherwise
deal with any such Hazardous Discharge or Environmental Complaint. All
reasonable costs and expenses incurred by Agent and Lenders (or such third
parties) in the exercise of any such rights, including any sums paid in
connection with any judicial or administrative investigation
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or proceedings, fines and penalties, together with interest thereon from the
date expended at the Default Rate for Base Rate Loans, shall be paid upon demand
by Borrower, and until paid shall be added to and become a part of the
Obligations secured by the Liens created by the terms of this Agreement or any
other agreement between Agent, any Lender, Borrower and any Subsidiary of
Borrower.
(g) At any time following any Hazardous Discharge or Environmental Complaint
Borrower shall and shall cause each Subsidiary of Borrower, as applicable, to
provide Agent, at Borrower's expense, with any environmental site assessment or
environmental audit report prepared by an environmental engineering firm
acceptable in the reasonable opinion of Agent, to assess with a reasonable
degree of certainty the existence of a Hazardous Discharge and if an abatement,
cleanup or removal is required under applicable Environmental Laws, the
potential costs in connection with abatement, cleanup and removal of any
Hazardous Substances found on, under, at or within the real Property. Any report
or investigation of such Hazardous Discharge proposed and acceptable to an
appropriate Authority that is charged to oversee the clean-up of such Hazardous
Discharge shall be acceptable to Agent. If such estimates, individually or in
the aggregate, exceed $100,000, Agent shall have the right to require Borrower
or any Subsidiary of Borrower, as applicable, to post a bond, letter of credit
or other security reasonably satisfactory to Agent to secure payment of these
costs and expenses.
(h) Borrower shall and shall cause each Subsidiary of Borrower to defend and
indemnify Agent and Lenders and hold Agent, Lenders and their respective
employees, agents, directors and officers harmless from and against all loss,
liability, damage and expense, claims, costs, fines and penalties, including
reasonable attorney's fees, suffered or incurred by Agent or Lenders under or on
account of any Environmental Laws, including, without limitation, the assertion
of any Lien thereunder, with respect to any Hazardous Discharge, the presence of
any Hazardous Substances affecting the real Property, whether or not the same
originates or emerges from the real Property or any contiguous real estate,
except to the extent such loss, liability, damage and expense is attributable to
any Hazardous Discharge resulting from actions on the part of Agent or any
Lender. Borrower's and each Subsidiary of Borrower's obligations under this
Section 8.1.7 shall arise upon the discovery of the presence of any Hazardous
Substances at the real Property, whether or not any federal, state, or local
environmental agency has taken or threatened any action in connection with the
presence of any Hazardous Substances. Borrower's and each Subsidiary of
Borrower's obligation and the indemnifications hereunder shall survive the
termination of this Agreement.
(i) For purposes of Sections 8.1.7 and 7.1.26, all references to real Property
shall be deemed to include all of Borrower's and each Subsidiary of Borrower's
right, title and interest in and to its owned and leased premises.
8.1.8. License Agreements. (a) On or prior to September 15,
1998, provide Agent copies of all license agreements to which Borrower is a
party and (b) use its best efforts to cause those licensors under such license
agreements as Agent shall specify to deliver to Agent on or prior to thirty (30)
days after Agent's request therefor (the "Specified Period") a licensor consent
letter, acceptable to Agent, pursuant to which such licensor, among other
things, consents to Agent's sale of Inventory with all licensed marks covered by
the applicable license agreement. Borrower acknowledges that in the event Agent
requests a licensor consent letter from a licensor under any of the
aforementioned license agreements and Agent shall not have received such
licensor consent letter executed by Borrower and such licensor on or prior to
the end of the Specified Period, then until such
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time as Agent shall have received such licensor consent letter the Inventory
covered by such license agreement shall not be deemed Eligible Inventory
hereunder.
8.1.9. Landlord Waivers. Use its best efforts to cause each of
Borrower's landlords to deliver to Agent on or prior to November 15, 1998 a
landlord waiver acceptable to Agent. Borrower acknowledges that in the event
Agent shall not have received fully executed landlord waivers acceptable to
Agent for all locations where Collateral is located on or prior to November 15,
1998, then Agent may establish a Reserve in an amount equal to three months rent
for all such locations with respect to which Agent has not received a fully
executed landlord waiver acceptable to Agent.
8.1.10. Withdrawal Liability. On or prior to November 15, 1998,
deliver to Agent a statement from the applicable trustees of each of the
Borrower's Multiemployer Plans specifying whether Borrower is subject to any
withdrawal liability under any such Multiemployer Plan.
8.2. Negative Covenants. During the term of this Agreement, and
thereafter for so long as there are any Obligations to Lenders, Borrower
covenants that, it will not:
8.2.1. Mergers; Consolidations; Acquisitions.
(i) Merge or consolidate, or permit any Subsidiary of Borrower
to merge or consolidate, with any Person; or
(ii) Acquire, or permit any of its Subsidiaries to acquire, all
or substantially all of the Properties of any Person.
8.2.2. Loans. Make, or permit any Subsidiary of Borrower to
make, any loans or other advances of money (other than (a) loans to employees of
Borrower in connection with Borrower's 1994 Executive Stock Incentive Plan, (b)
Specified Permitted Investments, (c) for salary, (d) travel advances, (e)
advances against commissions and other similar advances in the ordinary course
of business) to any Person.
8.2.3. Total Indebtedness. Create, incur, assume, or suffer to
exist, or permit any Subsidiary of Borrower to create, incur or suffer to exist,
any Indebtedness, except:
(i) Obligations owing to Agent and/or Lenders;
(ii) Subordinated Debt existing on the date of this Agreement;
(iii) Indebtedness of Borrower to any Subsidiary of Borrower;
(iv) accounts payable to trade creditors and current operating expenses
(other than for Money Borrowed) which are not aged more than 90 days
from billing date or more than 30 days from the due date, in each case
incurred in the ordinary course of business and paid within such time
period, unless the same are being actively contested in good faith and
by appropriate and lawful proceedings; and Borrower or such Subsidiary
shall have set aside such reserves, if
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any, with respect thereto as are required by GAAP and deemed adequate by
Borrower or such Subsidiary and its independent accountants;
(v) Obligations to pay Rentals permitted by subsection 8.2.12;
(vi) Purchase Money Indebtedness in an aggregate amount not to exceed
$200,000 (excluding capitalized leases);
(vii) contingent liabilities arising out of endorsements of checks and
other negotiable instruments for deposit or collection in the ordinary
course of business; and
(viii) Indebtedness not included in paragraphs (i) through (vii) above
which does not exceed at any time, in the aggregate, the sum of
$1,000,000.
8.2.4. Affiliate Transactions. Enter into, or be a party to, or
permit any Subsidiary of Borrower to enter into or be a party to, any
transaction with any Affiliate of Borrower or any Subsidiary, except (a) in the
ordinary course of and pursuant to the reasonable requirements of Borrower's or
such Subsidiary's business and upon fair and reasonable terms which are fully
disclosed to Agent and are no less favorable to Borrower or such Subsidiary than
would obtain in a comparable arm's length transaction with a Person not an
Affiliate or stockholder of Borrower or such Subsidiary and so long as no
Default or Event of Default shall then be in existence (b) capital contributions
made by Borrower to UniStar, not to exceed an aggregate amount equal to (i)
$3,000,000 during the period commencing on July 1, 1998 and ending on December
31, 1998 and (ii) $6,000,000, upon consummation of the Spinoff.
8.2.5. Limitation on Liens. Create or suffer to exist, or permit
any Subsidiary of Borrower or any Guarantor to create or suffer to exist, any
Lien upon any of its Property (including the Subsidiary Stock and the capital
stock of Borrower), income or profits, whether now owned or hereafter acquired,
except:
(i) Liens at any time granted in favor of Agent for the benefit of
Lenders;
(ii) Liens for taxes (excluding any Lien imposed pursuant to any of the
provisions of ERISA) not yet due, or being contested in the manner
described in SUBSECTION 7.1.14 hereto, but only if in Agent's judgment
such Lien does not adversely affect Agent's rights or the priority of
Agent's Lien in the Collateral;
(iii) Liens arising in the ordinary course of business by operation of
law or regulation, but only if payment in respect of any such Lien is
not at the time required or if such payment is being contested in good
faith by appropriate proceedings diligently conducted, and such Liens do
not (1) have any material effect on the priority of the Liens in favor
of the Agent for the benefit of Lenders or (2) in the aggregate,
materially detract from the value of the Property or materially impair
the use thereof in the operation of Borrower's or any Subsidiary's
business;
(iv) Purchase Money Liens securing Purchase Money Indebtedness permitted
under SUBSECTION 8.2.3(vi) hereof;
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(v) Liens securing Indebtedness of Borrower's or a Subsidiary of
Borrower to Borrower or another such Subsidiary; and
(vi) such other Liens as appear on Exhibit 8.2.5 hereto.
8.2.6. Subordinated Debt. Make, or permit any Subsidiary of
Borrower to make, any payment or prepayment of any part or all of any
Subordinated Debt except as permitted by the terms of the Indenture.
8.2.7. Distributions. Except in connection with rights to
purchase capital stock of UniStar distributed to Borrower's shareholders in
connection with the Spinoff, declare, pay or make any distribution on shares of
its capital stock or apply any of its funds, property or assets to the purchase,
redemption or other retirement of any shares of its capital stock, or of any
options to purchase or acquire any capital stock of Borrower.
8.2.8. Capital Expenditures. Make Capital Expenditures
(including, without limitation, by way of capitalized leases) which, in the
aggregate, as to Borrower and its Subsidiaries, exceed (a) during the period
commencing on July 1, 1998 and ending on December 31, 1998, $3,000,000 and (b)
$5,000,000 during any fiscal year of Borrower thereafter.
8.2.9. Disposition of Assets. Sell, lease or otherwise dispose
of any of its Properties, including any disposition of Property as part of a
sale and leaseback transaction, to or in favor of any Person, except (i) sales
of Inventory in the ordinary course of business, (ii) a transfer of Property to
Borrower by a Subsidiary of Borrower, (iii) dispositions expressly authorized by
this Agreement or (iv) so long as no Default or Event of Default shall then be
in existence, Borrower shall be permitted to consummate the Spinoff.
8.2.10. Bill-and-Hold Sales, Etc. Make a sale to any customer on
a bill-and-hold, guaranteed sale, sale and return, sale on approval or
consignment basis, or any sale on a repurchase or return basis.
8.2.11. Restricted Investment. Make or have, or permit any
Subsidiary of Borrower to make or have, any Restricted Investment.
8.2.12. Leases. Become, or permit any of its Subsidiaries to
become, a lessee under any operating lease (other than a lease under which
Borrower or any of its Subsidiaries is lessor) of Property if the aggregate
Rentals payable during any current or future period of 12 consecutive months
under the lease in question and all other leases under which Borrower or any of
its Subsidiaries is then lessee would exceed $6,000,000. The term "Rentals"
means, as of the date of determination, all payments which the lessee is
required to make by the terms of any lease.
8.2.13. Tax Consolidation. File or consent to the filing of any
Consolidated income tax return with any Person other than a Subsidiary of
Borrower.
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8.2.14. Stock of Subsidiaries. Permit any of its Subsidiaries to
issue any additional shares of its capital stock except director's qualifying
shares.
8.3. Specific Financial Covenants. During each period commencing on the
day Availability is less than $7,500,000 and ending on the last day of the first
Fiscal Quarter thereafter during which Availability has been greater than or
equal to $7,500,000 during each day of such Fiscal Quarter, and for so long as
there are any Obligations to Lenders, Borrower covenants that, unless otherwise
consented to by Lenders in writing, it shall:
8.3.1. Minimum Net Worth. Maintain a Net Worth of Borrower on a
Consolidated Basis as of the end of each Fiscal Year of not less than (i)
$60,000,000 for the Fiscal Year ending December 31, 1998 (the "Base Amount") and
(ii) for each Fiscal Year thereafter the sum of (a) the Base Amount and (b) 75%
of the positive Adjusted Net Earnings from Operations of Borrower for each such
Fiscal Year. For purposes of calculating the Base Amount under this SUBSECTION
8.3.1, upon consummation of the Spinoff, the Base Amount shall be decreased by
an amount equal to the net adjustment to Borrower's equity as reflected on
Borrower's Statement of Shareholders Equity for the Fiscal Year in which the
Spinoff occurs.
8.3.2. Cash Flow. Maintain Cash Flow of not less than (a)
negative $2,000,000 for the five months ending December 31, 1998, (b) negative
$1,000,000 for the eight months ending March 31, 1999 and (c) for each fiscal
quarter end, commencing with the fiscal quarter ending June 30, 1999 and each
fiscal quarter end thereafter (calculated in each case on a rolling four quarter
basis) the amounts indicated below.
<TABLE>
<CAPTION>
Period Amount
- ------ ------
<S> <C>
Four quarters ending June 30, 1999 ($ 500,000)
Four quarters ending September 30, 1999 $ 500,000
Four quarters ending December 31, 1999 and each
four quarter period ending thereafter $1,000,000
</TABLE>
8.3.3. Adjusted Cash Flow.
Maintain for each fiscal quarter end set forth below an Adjusted Cash Flow of
not less than (a) negative $2,250,000 for the five months ending December 31,
1998, (b) negative $1,250,000 for the eight months ending March 31, 1999 and (c)
for each fiscal quarter end, commencing with the fiscal quarter ending June 30,
1999 and each fiscal quarter ending thereafter (calculated in each case on a
rolling four quarter basis) the amounts indicated below.
<TABLE>
<CAPTION>
Period Amount
------ ------
<S> <C>
Four quarters ending June 30, 1999 ($750,000)
Four quarters ending September 30, 1999 $250,000
Four quarters ending December 31, 1999 and each
four quarter period ending thereafter $500,000
</TABLE>
SECTION 9. CONDITIONS PRECEDENT
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Notwithstanding any other provision of this Agreement or any of the
other Loan Documents, and without affecting in any manner the rights of Agent
and Lenders under the other sections of this Agreement, Lenders shall not be
required to make the initial Loans under this Agreement unless and until each of
the following conditions has been and continues to be satisfied or has been
waived in writing by Required Lenders:
9.1. Documentation. Agent shall have received, in form and substance
satisfactory to Agent and its counsel and its local counsel, a duly executed
copy of this Agreement and the other Loan Documents, together with such
additional documents, instruments and certificates as Lenders and their counsel
shall require in connection therewith from time to time, all in form and
substance satisfactory to Lenders and their counsel.
9.2. No Default. No Default or Event of Default shall exist.
9.3. Other Loan Documents. Each of the conditions precedent set forth in
the other Loan Documents shall have been satisfied.
9.4. Filings, Registrations and Recordings. Each document (including,
without limitation, any Uniform Commercial Code financing statement) required by
this Agreement, any related agreement or under law or reasonably requested by
Agent to be filed, registered or recorded in order to create, in favor of Agent,
a perfected security interest in or lien upon the Collateral shall have been
properly filed, registered or recorded in each jurisdiction in which the filing,
registration or recordation thereof is so required or requested, and Agent shall
have received an acknowledgment copy, or other evidence satisfactory to it, of
each such filing, registration or recordation and satisfactory evidence of the
payment of any necessary fee, tax or expense relating thereto.
9.5. Proceedings of Corporate Parties. Agent shall have received a copy
of the resolutions in form and substance reasonably satisfactory to Agent, of
the Board of Directors of Borrower authorizing, as applicable (i) the execution,
delivery and performance of this Agreement, and any other Loan Documents
(collectively the "Documents") and (ii) the granting by Borrower of the security
interests in and liens upon the Collateral certified by the Secretary or an
Assistant Secretary of the applicable party as of the Closing Date; and, such
certificate shall state that the resolutions thereby certified have not been
amended, modified, revoked or rescinded as of the date of such certificate.
9.6. Incumbency Certificates of Each Corporate Party. Agent shall have
received a certificate of the Secretary or an Assistant Secretary of Borrower,
dated the Closing Date, as to the incumbency and signature of the officers of
Borrower executing this Agreement or any other Loan Document, any certificate or
other documents to be delivered by it pursuant hereto, together with evidence of
the incumbency of such Secretary or Assistant Secretary.
9.7. Certificates. Agent shall have received a copy of the Articles or
Certificate of Incorporation of Borrower, and all amendments thereto, certified
by the Secretary of State or other appropriate official of its jurisdiction of
formation together with copies of the By-laws of Borrower and all agreements of
Borrower's shareholders certified as accurate and complete by the Secretary or
Assistant Secretary of Borrower and all such agreements shall be satisfactory to
Agent.
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9.8. Good Standing Certificates. Agent shall have received good standing
certificates for Borrower dated not more than 30 days prior to the Closing,
issued by the Secretary of State or other appropriate official of Borrower's
jurisdiction of formation and each jurisdiction where the conduct of Borrower's
business activities or the ownership of its properties necessitates
qualification.
9.9. Legal Opinion. Agent shall have received the executed legal opinion
of Hunton & Williams in form and substance satisfactory to Agent which shall
cover such matters incident to the transactions contemplated by this Agreement,
the Transactions and related agreements as Agent may reasonably require.
9.10. No Litigation. Except as described on Exhibit 9.10, (i) no
litigation, investigation or proceeding before or by any arbitrator or
governmental body shall be continuing or threatened against Borrower, any
Subsidiary of Borrower or against the officers or directors of Borrower or any
Subsidiary of Borrower (A) in connection with the Loan Documents or the
Acquisition Agreement or any of the transactions contemplated hereby or thereby
and which, in the reasonable opinion of Agent, is deemed material or (B) which
if adversely determined, could, in the reasonable opinion of Agent, have a
Material Adverse Effect; (ii) no injunction, writ, restraining order or other
order of any nature materially adverse to Borrower or any Subsidiary of Borrower
or the conduct of its business or inconsistent with the due consummation of the
transactions shall have been issued by any governmental body and (iii) no
material adverse change has occurred in the financial status of Borrower or its
Subsidiaries from the information previously disclosed to Agent in writing prior
to the Closing Date.
9.11. Information; Collateral Examination. Agent shall have received all
financial, business, and other information regarding Borrower, its Subsidiaries
and their respective Properties as Agent shall have reasonably requested. Agent
shall have completed Collateral examinations and received appraisals, the
results of which shall be satisfactory in form and substance to Lenders, of the
Receivables, Inventory, General Intangibles and Equipment of Borrower and all
books and records in connection therewith.
9.12. Fees. Agent shall have received payment of all fees and expenses
of Agent and the Lenders on or prior to the Closing Date pursuant to this
Agreement.
9.13. Insurance. Agent shall have received in form and substance
satisfactory to Agent certified copies of Borrower's casualty insurance
policies, together with loss payable endorsements on Agent's standard form of
loss payee endorsement naming Agent as loss payee, and certified copies of
Borrower's liability insurance policies, together with endorsements naming Agent
as a co-insured.
9.14. Payment Instructions. Agent shall have received written
instructions from Borrower directing the application of proceeds of the initial
Loans made pursuant to this Agreement.
9.15. No Adverse Material Change. (i) Since June 30, 1998, there shall
have occurred (x) no event or condition having a Material Adverse Effect, (y) no
material damage or destruction to any of the Collateral nor any material
depreciation in the value thereof and (z) no event, condition
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or state of facts which could reasonably be expected to have a Material Adverse
Effect and (ii) no representations made or information supplied to Agent shall
have been proven to be inaccurate or misleading in any material respect.
9.16. Contract Review. Agent shall have reviewed all material contracts
of Borrower including, without limitation, leases, union contracts, labor
contracts, vendor supply contracts, license agreements and distributorship
agreements and such contracts and agreements shall be reasonably satisfactory in
all material respects to Agent.
9.17. Environmental Reports. Agent shall have received all environmental
studies and reports prepared by independent environmental engineering firms with
respect to all real Property owned or leased by Borrower and Agent shall have
received evidence satisfactory to Agent (i) that the operations of Borrower and
its Subsidiaries comply with applicable Environmental Laws; (ii) that such
operations are not the subject of any federal, state or local investigation
evaluating the need for remedial action, involving a material expenditure, to
respond to a release or threatened release of any toxic or hazardous waste or
substance into the environment; (iii) that neither the Borrower nor the
Guarantor has or could reasonably be expected to have any contingent liability
deemed material by the Lenders in connection with any release of any toxic or
hazardous waste or substance into the environment.
9.18. Leasehold Agreements. Agent shall have received landlord,
mortgagee or warehouseman agreements satisfactory to Agent with respect to all
premises leased by Borrower at which material amounts of Inventory are located.
9.19. Consents. Agent shall have received any and all Consents necessary
to permit the effectuation of the Transactions and all other transactions
contemplated by this Agreement and the other Loan Documents (without the
imposition of any conditions that are not acceptable to Agent or Lenders); and,
Agent shall have received such Consents and waivers of such third parties as
might assert claims with respect to the Collateral, as Agent and its counsel
shall deem necessary.
9.20. Financial Condition Certificates. Agent shall have received
executed Officer's Certificates satisfactory in form and substance to it,
certifying that Borrower on a Consolidated Basis is Solvent immediately prior to
and after giving effect to the Transactions and the Indebtedness contemplated
hereby and as to the financial resources of Borrower on a Consolidated Basis and
its ability to meet its obligations and liabilities as they become due.
9.21. Closing Certificate. Agent shall have received a closing
certificate signed by an authorized officer of Borrower dated as of the date
hereof, stating that (i) all representations and warranties set forth in this
Agreement and the other Loan Documents are true and correct in all material
respects immediately prior to and after giving effect to the making of the
initial Loans hereunder, (ii) Borrower is on such date in compliance with all
the terms and provisions set forth in this Agreement and the other Loan
Documents and (iii) on such date no Default or Event of Default has occurred or
is continuing.
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<PAGE>
9.22. Subsidiary Stock. Agent shall have received evidence that all
issued and outstanding capital stock of each of Borrower's Subsidiaries shall be
owned by Borrower or one or more of Borrower's Subsidiaries.
9.23. Corporate Structure. Agent shall be satisfied with the corporate
and legal structure and capitalization of Holdings, Borrower and its
Subsidiaries including, each class of capital stock of such Person and each
instrument or agreement relating to such structure or capitalization.
9.24. ERISA. Agent shall be satisfied that (i) Borrower and its
Subsidiaries will be able to meet their respective obligations under all
employee and retiree welfare plans, (ii) the employee benefit plans of Borrower
and its Subsidiaries are, in all material respects, funded in accordance with
the minimum statutory requirements, (iii) no material "reportable event" (as
defined in ERISA, but excluding events for which reporting has been waived) has
occurred as to any such employee benefit plan and (iv) no termination of, or
withdrawal from, any such employee benefit plan has occurred or is contemplated
that could reasonably be expected to result in a material liability.
9.25. Availability. Agent shall have determined that after giving effect
to the Transactions (including, without limitation, the initial Loans, Letters
of Credit and LC Guaranties contemplated hereby), and the payment of all closing
costs incurred in connection with the Transactions, Closing Availability shall
not be less than $9,000,000.
9.26. Other. All corporate and other proceedings, and all documents,
instruments and other legal matters in connection with the Transactions shall be
satisfactory in form and substance to Agent and its counsel.
9.27. Conditions to Each Loan. The agreement of Lenders to make any
Loans or cause to be opened any Letters of Credit requested to be made or opened
on any date (including, without limitation, the initial Loans), is subject to
the satisfaction of the following conditions precedent as of the date such Loan
is made or Letter of Credit opened:
(i) Representations and Warranties. Each of the representations and
warranties made by Borrower in or pursuant to this Agreement and any related
agreements to which it is a party, and each of the representations and
warranties contained in any certificate, document or financial or other
statement furnished at any time under or in connection with this Agreement or
any related agreement shall be true and correct in all material respects on and
as of such date as if made on and as of such date, except for those
representations and warranties limited by their terms to a specified date.
(ii) No Default. No Event of Default or Default shall have occurred and
be continuing on such date, or would exist after giving effect to the Loans
requested to be made, on such date and, in the case of the initial Loan, after
giving effect to the consummation of the transaction contemplated by the
Acquisition Agreement; provided, however, that Agent in its sole discretion, may
continue to make Loans notwithstanding the existence of an Event of Default or
Default and that any Loans so made shall not be deemed a waiver of any such
Event of Default or Default; and
(iii) Maximum Loans. In the case of any Loans requested to be made,
after giving effect thereto, the aggregate Loans shall not exceed the maximum
Loans permitted under this Agreement.
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Each request for a Loan by Borrower hereunder shall constitute a representation
and warranty by Borrower as of the date of such Loan that the conditions
contained in this subsection shall have been satisfied.
SECTION 10. EVENTS OF DEFAULT; RIGHTS AND REMEDIES ON DEFAULT
10.1. Events of Default. The occurrence of one or more of the following
events shall constitute an "Event of Default":
10.1.1. Payment of Obligations. Borrower shall fail to pay any
of the Obligations on the due date thereof (whether due at stated maturity, on
demand, upon acceleration or otherwise).
10.1.2. Misrepresentations. Any representation, warranty or
other statement made or furnished to Agent or any Lender by or on behalf of
Borrower or any Subsidiary of Borrower in this Agreement, any of the other Loan
Documents or any instrument, certificate or financial statement furnished in
compliance with or in reference thereto proves to have been false or misleading
in any material respect when made or furnished or when reaffirmed pursuant to
SECTION 7.2 hereof.
10.1.3. Breach of Specific Covenants. Borrower shall fail or
neglect to perform, keep or observe any covenant contained in SECTIONS 5.2,
6.1.1, 6.2, 6.3, 8.1.1, 8.1.3, 8.2 OR 8.3 hereof on the date that Borrower is
required to perform, keep or observe such covenant.
10.1.4. Breach of Other Covenants. Borrower or any Subsidiary of
Borrower shall fail or neglect to perform, keep or observe any covenant
contained in this Agreement (other than a covenant which is dealt with
specifically elsewhere in SECTION 10.1 hereof) and the breach of such other
covenant is not cured to Agent's satisfaction within fifteen (15) days after the
sooner to occur of Borrower's or Subsidiary of Borrower's receipt of notice of
such breach from Agent or the date on which such failure or neglect first
becomes known to any senior officer of Borrower or Subsidiary of Borrower.
10.1.5. Default Under Security Documents/Other Agreements. Any
event of default shall occur under, or Borrower or any Subsidiary of Borrower
shall default in the performance or observance of any term, covenant, condition
or agreement contained in, any of the Security Documents or the Other Agreements
and such default shall continue beyond any applicable grace period.
10.1.6. Other Defaults. There shall occur any default or event
of default on the part of Borrower under any agreement, document or instrument
to which Borrower is a party or by which Borrower or any of its Property is
bound, creating or relating to any Indebtedness in excess of $100,000 if the
payment or maturity of such Indebtedness is accelerated in consequence of such
event of default or demand for payment of such Indebtedness is made.
10.1.7. Insolvency and Related Proceedings. Borrower or any
Subsidiary of Borrower shall cease to be Solvent or shall suffer the appointment
of a receiver, trustee, custodian
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or similar fiduciary, or shall make an assignment for the benefit of creditors,
or any petition for an order for relief shall be filed by or against Borrower or
any Subsidiary of Borrower under the Bankruptcy Code (if against Borrower, the
continuation of such proceeding for more than 30 days), or Borrower or any
Subsidiary of Borrower shall make any offer of settlement, extension or
composition to its unsecured creditors generally.
10.1.8. Business Disruption; Condemnation. There shall occur a
cessation of a substantial part of the business of Borrower for a period which
significantly affects Borrower's capacity to continue its business, on a
profitable basis; or Borrower shall suffer the loss or revocation of any license
or permit now held or hereafter acquired by Borrower which is necessary to the
continued or lawful operation of Borrower's business; or Borrower shall be
enjoined, restrained or in any way prevented by court, governmental or
administrative order from conducting all or any material part of its business
affairs; or any material lease or agreement pursuant to which Borrower leases,
uses or occupies any Property shall be canceled or terminated prior to the
expiration of its stated term; or any part of the Collateral shall be taken
through condemnation or the value of such Property shall be impaired through
condemnation.
10.1.9. ERISA. A Reportable Event shall occur which Agent, in
its sole discretion, shall determine in good faith constitutes grounds for the
termination by the PBGC of any Plan or for the appointment by the appropriate
United States district court of a trustee for any Plan, or any Plan shall be
terminated or any such trustee shall be requested or appointed, or if Borrower
or any Subsidiary of Borrower is in "default" (as defined in Section 4219(c)(5)
of ERISA) with respect to payments to a Multiemployer Plan resulting from
Borrower's or such Subsidiary's complete or partial withdrawal from such Plan.
10.1.10. Challenge to Agreement. Borrower or any Subsidiary of
Borrower, or any Affiliate of any of them, shall challenge or contest in any
action, suit or proceeding the validity or enforceability of this Agreement or
any of the other Loan Documents, the legality or enforceability of any of the
Obligations or the perfection or priority of any Lien granted to Agent for the
benefit of Lenders.
10.1.11. Criminal Forfeiture. Borrower shall be criminally
indicted or convicted under any law that could lead to a forfeiture of any
material Property of Borrower.
10.1.12. Judgments. Any money judgment, writ of attachment or
similar process is filed against Borrower or any Subsidiary of Borrower, or any
of their respective Property, if the amount thereof not covered by insurance is
in excess of $250,000 and such judgment, attachment or process remains unstayed,
unpaid, undischarged or unbonded (but only to the extent the issuance of such
bond stays all related judgment enforcement proceedings) for 30 consecutive
days.
10.1.13. Repudiation of or Default Under Guaranty Agreement. Any
Guarantor shall revoke or attempt to revoke any Guaranty Agreement signed by
such Guarantor, or shall repudiate such Guarantor's liability hereunder or
thereunder or shall be in default under the terms thereof.
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10.2. Acceleration of the Obligations. Without in any way limiting the
right of Agent or the Lenders to demand payment of any portion of the
Obligations payable on demand in accordance with SECTION 3.2 hereof, upon or at
any time after the occurrence of an Event of Default, all or any portion of the
Obligations shall, at the option of the Required Lenders and without
presentment, demand, protest or further notice by Agent or any Lender, become at
once due and payable and Borrower shall forthwith pay to Agent for the ratable
benefit of Lenders, the full amount of such Obligations, provided, that upon the
occurrence of an Event of Default specified in SUBSECTION 10.1.7 hereof, all of
the Obligations shall become automatically due and payable without declaration,
notice or demand by Agent or any Lender.
10.3. Other Remedies. Upon the occurrence of an Event of Default, Agent
shall have and may exercise from time to time the following rights and remedies:
10.3.1. All of the rights and remedies of a secured party under
the Code or under other applicable law, and all other legal and equitable rights
to which Agent may be entitled, all of which rights and remedies shall be
cumulative and shall be in addition to any other rights or remedies contained in
this Agreement or any of the other Loan Documents, and none of which shall be
exclusive.
10.3.2. The right to take immediate possession of the
Collateral, and to (i) require Borrower to assemble the Collateral, at
Borrower's expense, and make it available to Agent and Lenders at a place
designated by Agent which is reasonably convenient to both parties, and (ii)
enter any premises where any of the Collateral shall be located and to keep and
store the Collateral on said premises until sold (and if said premises be the
Property of Borrower, Borrower agrees not to charge Agent or any Lender for
storage thereof).
10.3.3. The right to sell or otherwise dispose of all or any
Collateral in its then condition, or after any further manufacturing or
processing thereof, at public or private sale or sales, with such notice as may
be required by law, in lots or in bulk, for cash or on credit, all as Agent, in
its sole discretion, may deem advisable. Borrower agrees that ten (10) days
written notice to Borrower of any public or private sale or other disposition of
Collateral shall be reasonable notice thereof, and such sale shall be at such
locations as Agent may designate in said notice. Agent shall have the right to
conduct such sales on Borrower's premises, without charge therefor, and such
sales may be adjourned from time to time in accordance with applicable law.
Agent shall have the right to sell, lease or otherwise dispose of the
Collateral, or any part thereof, in a commercially reasonable manner, for cash,
credit or any combination thereof, and Agent or any Lender may purchase all or
any part of the Collateral at public or, if permitted by law, private sale and,
in lieu of actual payment of such purchase price, may set off the amount of such
price against the Obligations. The proceeds realized from the sale of any
Collateral may be applied, after allowing two (2) Business Days for collection,
first to the costs, expenses and attorneys' fees incurred by Agent in collecting
the Obligations, in enforcing the rights of Agents and Lenders under the Loan
Documents and in collecting, retaking, completing, protecting, removing,
storing, advertising for sale, selling and delivering any Collateral, second to
the interest due upon any of the Obligations; and third, to the principal of the
Obligations. If any deficiency shall arise, Borrower shall remain liable to
Agent and Lenders therefor.
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10.3.4. Agent is hereby granted a license or other right to use,
without charge, Borrower's labels, patents, copyrights, rights of use of any
name, trade secrets, tradenames, trademarks and advertising matter, or any
Property of a similar nature, as it pertains to the Collateral, in advertising
for sale and selling any Collateral and Borrower's rights under all licenses and
all franchise agreements shall inure to Agent's benefit.
10.3.5. Agent may, at its option, require Borrower to deposit
with Agent funds equal to the Aggregate LC Amount and, if Borrower fails to
promptly make such deposit, Lenders may advance such amount as a Revolving
Credit Loan (whether or not an Overadvance is created thereby). Any such deposit
or advance shall be held by Agent as a reserve to fund future payments on
outstanding LC Guaranties and future drawings against outstanding Letters of
Credit. At such time as all LC Guaranties have been paid or terminated and all
Letters of Credit have been drawn upon or expired, any amounts remaining in such
reserve shall be applied against any outstanding Obligations, or, if all
Obligations have been indefeasibly paid in full, returned to Borrower.
10.4. Remedies Cumulative; No Waiver. All covenants, conditions, provisions,
warranties, guaranties, indemnities, and other undertakings of Borrower
contained in this Agreement and the other Loan Documents, or in any document
referred to herein or contained in any agreement supplementary hereto or in any
schedule given to Agent or Lenders or contained in any other agreement between
or among Agent, Lenders and Borrower, heretofore, concurrently, or hereafter
entered into, shall be deemed cumulative to and not in derogation or
substitution of any of the terms, covenants, conditions, or agreements of
Borrower herein contained. The failure or delay of Agent or any Lender to
require strict performance by Borrower of any provision of this Agreement or to
exercise or enforce any rights, Liens, powers, or remedies hereunder or under
any of the aforesaid agreements or other documents or security or Collateral
shall not operate as a waiver of such performance by Borrower, and all such
requirements, Liens, rights, powers, and remedies shall continue in full force
and effect until all Loans and all other Obligations owing or to become owing
from Borrower to Agent or Lenders shall have been fully satisfied. None of the
undertakings, agreements, warranties, covenants and representations of Borrower
contained in this Agreement or any of the other Loan Documents and no Event of
Default by Borrower under this Agreement or any other Loan Documents shall be
deemed to have been suspended or waived by Agent or any Lender, unless such
suspension or waiver is by an instrument in writing specifying such suspension
or waiver and is signed by a duly authorized representative of Agent (with the
consent of Lenders or Required Lenders, as applicable, in accordance with the
terms of SUBSECTION 12.3) and directed to Borrower.
SECTION 11. REGARDING AGENT
11.1. Appointment. Each Lender hereby designates Fleet to act as Agent
for such Lender under this Agreement and the other Loan Documents. Each Lender
hereby irrevocably authorizes Agent to take such action on its behalf under the
provisions of this Agreement and the other Loan Documents and to exercise such
powers and to perform such duties hereunder and thereunder as are specifically
delegated to or required of Agent by the terms hereof and thereof and such other
powers as are reasonably incidental thereto and Agent shall hold all Collateral,
payments of principal and interest, fees (except the fees set forth in SECTION
2.3), charges and collections (without giving effect
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to any collection days) received pursuant to this Agreement, for the ratable
benefit of Lenders. Agent may perform any of its duties hereunder by or through
its agents or employees. As to any matters not expressly provided for by this
Agreement, Agent shall not be required to exercise any discretion or take any
action, but shall be required to act or to refrain from acting (and shall be
fully protected in so acting or refraining from acting) upon the instructions of
the Required Lenders, and such instructions shall be binding; provided, however,
that Agent shall not be required to take any action which exposes Agent to
liability or which is contrary to this Agreement or the other Loan Documents or
applicable law unless Agent is furnished with an indemnification reasonably
satisfactory to Agent with respect thereto.
11.2. Nature of Duties. Agent shall have no duties or responsibilities
except those expressly set forth in this Agreement and the other Loan Documents.
Neither Agent nor any of its officers, directors, employees or agents shall be
(i) liable for any action taken or omitted by them as such hereunder or in
connection herewith, unless caused by their gross negligence (but not mere
negligence) or willful misconduct or (ii) responsible in any manner for any
recitals, statements, representations or warranties made by Borrower or any
officer thereof contained in this Agreement or in any other Loan Documents or in
any certificate, report, statement or other document referred to or provided for
in, or received by Agent under or in connection with, this Agreement or any of
the other Loan Documents or for the value, validity, effectiveness, genuineness,
enforceability or sufficiency of this Agreement or any of the other Loan
Documents or for any failure of Borrower to perform its obligations hereunder or
thereunder. Agent shall not be under any obligation to any Lender to ascertain
or to inquire as to the observance or performance of any of the agreements
contained in, or conditions of, this Agreement or any of the other Loan
Documents, or to inspect the properties, books or records of Borrower. The
duties of Agent as respects the Loans to Borrower shall be mechanical and
administrative in nature; Agent shall not have by reason of this Agreement a
fiduciary relationship in respect of any Lender; and nothing in this Agreement,
expressed or implied, is intended to or shall be so construed as to impose upon
Agent any obligations in respect of this Agreement except as expressly set forth
herein.
11.3. Lack of Reliance on Agent and Resignation. Independently and
without reliance upon Agent or any other Lender, each Lender has made and shall
continue to make (i) its own independent investigation of the financial
condition and affairs of Borrower in connection with the making and the
continuance of the Loans hereunder and the taking or not taking of any action in
connection herewith, and (ii) its own appraisal of the creditworthiness of
Borrower. Agent shall have no duty or responsibility, either initially or on a
continuing basis, to provide any Lender with any credit or other information
with respect thereto, whether coming into its possession before making of the
Loans or at any time or times thereafter except as shall be provided by Borrower
pursuant to the terms hereof. Agent shall not be responsible to any Lender for
any recitals, statements, information, representations or warranties herein or
in any agreement, document, certificate or a statement delivered in connection
with or for the execution, effectiveness, genuineness, validity, enforceability,
collectability or sufficiency of this Agreement or any of the other Loan
Documents, or of the financial condition of Borrower, or be required to make any
inquiry concerning either the performance or observance of any of the terms,
provisions or conditions of this Agreement or any of the other Loan Documents or
the financial condition of Borrower, or the existence of any Event of Default or
any Default.
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Agent may resign on sixty (60) days' written notice to each of Lenders and
Borrower. The Required Lenders will promptly designate a successor Agent which
in the absence of an Event of Default shall be reasonably satisfactory to
Borrower; provided that such resignation shall not be effective until a
successor Agent has been designated and approved by Borrower, which such
approval shall not be unreasonably withheld.
Any such successor Agent shall succeed to the rights, powers and duties of
Agent, and the term "Agent" shall mean such successor agent effective upon its
appointment, and the former Agent's rights, powers and duties as Agent shall be
terminated, without any other or further act or deed on the part of such former
Agent. After any Agent's resignation as Agent, the provisions of this SECTION 11
shall inure to its benefit as to any actions taken or omitted to be taken by it
while it was Agent under this Agreement.
11.4. Certain Rights of Agent. If Agent shall request instructions from
Lenders with respect to any act or action (including failure to act) in
connection with this Agreement, any Other Agreement or any Security Document,
Agent shall be entitled to refrain from such act or taking such action unless
and until Agent shall have received instructions from the Required Lenders; and
Agent shall not incur liability to any Person by reason of so refraining.
Without limiting the foregoing, Lenders shall not have any right of action
whatsoever against Agent as a result of its acting or refraining from acting
hereunder in accordance with the instructions of the Required Lenders.
11.5. Reliance. Agent shall be entitled to rely, and shall be fully
protected in relying, upon any note, writing, resolution, notice, statement,
certificate, telex, teletype or telecopier message, cablegram, order or other
document or telephone message believed in good faith by it to be genuine and
correct and to have been signed, sent or made by the proper person or entity,
and, with respect to all legal matters pertaining to this Agreement and the
other Loan Documents and its duties hereunder, upon advice of counsel selected
by it. Agent may employ agents and attorneys-in-fact and shall not be liable for
the default or misconduct of any such agents or attorneys-in-fact selected by
Agent with reasonable care.
11.6. Notice of Default. Agent shall not be deemed to have knowledge or
notice of the occurrence of any Default or Event of Default hereunder or under
the other Loan Documents, unless Agent has received notice from a Lender or
Borrower referring to this Agreement or the other Loan Documents, describing
such Default or Event of Default and stating that such notice is a "notice of
default". In the event that Agent receives such a notice, Agent shall give
notice thereof to Lenders. Agent shall take such action with respect to such
Default or Event of Default as shall be reasonably directed by the Required
Lenders; provided, that, unless and until Agent shall have received such
directions, Agent may (but shall not be obligated to) take such action, or
refrain from taking such action, with respect to such Default or Event of
Default as it shall deem advisable in the best interests of Lenders.
11.7. Indemnification. To the extent Agent is not reimbursed and
indemnified by Borrower, each Lender will reimburse and indemnify Agent in
proportion to its respective portion of the Loans (or, if no Loans are
outstanding, according to its Commitment Percentage), from and against any and
all liabilities, obligations, losses, damages, penalties, actions, judgments,
suits,
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costs, expenses or disbursements of any kind or nature whatsoever which
may be imposed on, incurred by or asserted against Agent in performing its
duties hereunder, or in any way relating to or arising out of this Agreement or
any other Loan Document; provided that, Lenders shall not be liable for any
portion of such liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements resulting from Agent's gross
negligence (but not mere negligence) or willful misconduct.
11.8. Agent in its Individual Capacity. With respect to the obligation
of Agent to lend under this Agreement, the Loans made by it shall have the same
rights and powers hereunder as any other Lender and as if it were not performing
the duties as Agent specified herein; and the term "Lender" or any similar term
shall, unless the context clearly otherwise indicates, include Agent in its
individual capacity as a Lender. Agent may engage in business with Borrower
("Other Transactions") as if it were not performing the duties specified herein,
and may accept fees and other consideration from Borrower for services in
connection with this Agreement or otherwise without having to account for the
same to Lenders; provided, however, Agent shall not exercise any rights of
set-off under this Agreement with respect to Borrower's obligations to Agent
arising out of any Other Transactions.
11.9. Delivery of Documents. To the extent Agent receives documents and
information from Borrower pursuant to the terms of this Agreement, Agent will
promptly furnish such documents and information to Lenders.
11.10. Borrower's Undertaking to Agent. Without prejudice to its
obligations to the Lenders under the other provisions of this Agreement,
Borrower hereby undertakes with Agent to pay to Agent from time to time on
demand all amounts from time to time due and payable by it for the account of
Agent or the Lenders or any of them pursuant to this Agreement to the extent not
already paid. Any payment made pursuant to any such demand shall pro tanto
satisfy Borrower's obligations to make payments for the account of the Lenders
or the relevant one or more of them pursuant to this Agreement.
SECTION 12. MISCELLANEOUS
12.1. Power of Attorney. Borrower hereby irrevocably designates, makes,
constitutes and appoints Agent (and all Persons designated by Agent) as
Borrower's true and lawful attorney (and agent-in-fact) and Agent, or Agent's
agent, may, without notice to Borrower and in Borrower's or Agent's name, but at
the cost and expense of Borrower:
12.1.1. At such time or times upon the occurrence and during the
continuance of an Event of Default as Agent or said agent, in its sole
discretion, may determine, endorse Borrower's name on any checks, notes,
acceptances, drafts, money orders or any other evidence of payment or proceeds
of the Collateral which come into the possession of Agent or any Lender or under
Agent's or any Lender's control.
12.1.2. At such time or times upon the occurrence and during the
continuance of an Event of Default as Agent in its sole discretion may
determine: (a) demand payment of the
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Accounts from the Account Debtors, enforce payment of the Accounts by legal
proceedings or otherwise, and generally exercise all of Borrower's rights and
remedies with respect to the collection of the Accounts; (b) settle, adjust,
compromise, discharge or release any of the Accounts or other Collateral or any
legal proceedings brought to collect any of the Accounts or other Collateral;
(c) sell or assign any of the Accounts and other Collateral upon such terms, for
such amounts and at such time or times as Agent deems advisable; (d) take
control, in any manner, of any item of payment or proceeds relating to any
Collateral; (e) prepare, file and sign Borrower's name to a proof of claim in
bankruptcy or similar document against any Account Debtor or to any notice of
lien, assignment or satisfaction of lien or similar document in connection with
any of the Collateral; (f) receive, open and dispose of all mail addressed to
Borrower and to notify postal authorities to change the address for delivery
thereof to such address as Agent may designate; (g) endorse the name of Borrower
upon any of the items of payment or proceeds relating to any Collateral and
deposit the same to the account of Agent on account of the Obligations; (h)
endorse the name of Borrower upon any chattel paper, document, instrument,
invoice, freight bill, bill of lading or similar document or agreement relating
to the Accounts, Inventory and any other Collateral; (i) use Borrower's
stationery and sign the name of Borrower to verifications of the Accounts and
notices thereof to Account Debtors; (j) use the information recorded on or
contained in any data processing equipment and computer hardware and software
relating to the Accounts, Inventory, Equipment and any other Collateral; (k)
make and adjust claims under policies of insurance; and (l) do all other acts
and things necessary, in Agent's determination, to fulfill Borrower's
obligations under this Agreement.
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12.2. Indemnity. Borrower will indemnify and hold harmless Agent, each
Lender and each of their Affiliates and their officers, directors, employees,
agents and advisors (each an "Indemnified Party") from and against any and all
claims, damages, losses, liabilities and expenses (including, without
limitation, reasonable fees and expenses of counsel) that may be incurred by or
asserted or awarded against any Indemnified Party, in each case arising out of
or in connection with or by reason of, or in connection with the preparation for
a defense of, any investigation, litigation or proceeding arising out of,
related to or in connection with (a) the Transactions and any of the other
transactions contemplated by this Agreement, (b) any acquisition or proposed
acquisition or similar business combination or proposed business combination by
Borrower or any Subsidiary of Borrower or any of their Subsidiaries or
Affiliates of all or any portion of the shares of capital stock or substantially
all of the Property and assets of any other Person, (c) the Loans and any use
made or proposed to be made with the proceeds thereof or (d) the actual or
alleged presence of Hazardous Materials on any Property of Borrower or any
Subsidiary of Borrower or any of their Subsidiaries or any environmental action
or proceeding relating in any way to Borrower or any Subsidiary of Borrower or
any of their Subsidiaries or any of their respective Properties, in each case,
whether or not such investigation, litigation or proceeding is brought by
Borrower or any Subsidiary of Borrower or any of their shareholders or creditors
or an Indemnified Party, or an Indemnified Party is otherwise a party thereto
and whether or not the Transactions are consummated, except to the extent such
claim, damage, loss, liability or expense is found in a final, nonappealable
judgment by a court of competent jurisdiction to have resulted from such
Indemnified Party's gross (not mere) negligence or willful misconduct. Borrower
further agrees that no Indemnified Party will have any liability (whether direct
or indirect, in contract or tort or otherwise) to Borrower or any Subsidiary of
Borrower or any of their respective security holders or creditors arising out
of, related to or in connection with the Transactions, except for direct (as
opposed to consequential) damages determined in a final nonappealable judgment
by a court of competent jurisdiction to have resulted from such Indemnified
Party's gross (not mere) negligence or willful misconduct. Notwithstanding any
contrary provision in this Agreement, the obligation of Borrower under this
SECTION 12.2 shall survive the payment in full of the Obligations and the
termination of this Agreement.
12.3. Modification of Agreement. The Required Lenders and Borrower may,
subject to the provisions of this SECTION 12.3, from time to time enter into
written supplemental agreements to this Agreement or the other Loan Documents
executed by Borrower, for the purpose of adding or deleting any provisions or
otherwise changing, varying or waiving in any manner the rights of the Lenders,
the Agent or Borrower thereunder or the conditions, provisions or terms thereof
or waiving any Event of Default thereunder, but only to the extent specified in
such written agreements; provided, however, that no such supplemental agreement
shall without the consent of all the Lenders:
(i) increase the Commitment Percentage of any Lender.
(ii) extend the final maturity of any Note or any scheduled installment
due date under SECTION 1.3 hereof, or decrease the rate of interest or reduce
any fee payable by Borrower to any such Lender pursuant to this Agreement.
(iii) alter the definition of the term Required Lenders or alter, amend
or modify this SECTION 12.3.
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(iv) release any Collateral during any calendar year having an aggregate
value in excess of $100,000.
(v) change the rights and duties of Agent.
(vi) increase the Total Credit Facility.
Any such supplemental agreement shall apply equally to each of the Lenders and
shall be binding upon Borrower, the Lenders and the Agent and all future holders
of the Obligations. In the case of any waiver, Borrower, the Agent and the
Lenders shall be restored to their former positions and rights, and any Event of
Default waived shall be deemed to be cured and not continuing, but no waiver of
a specific Event of Default shall extend to any subsequent Event of Default
(whether or not the subsequent Event of Default is the same as the Event of
Default which was waived), or impair any right resulting from such subsequent
Event of Default.
12.4. Successors and Assigns; Participations; New Lenders.
(i) This Agreement shall be binding upon and inure to the benefit of
Borrower, Agent, each Lender, all future holders of the Notes and their
respective successors and assigns, except that Borrower may not assign or
transfer any of its rights or obligations under this Agreement without the prior
written consent of Agent and each Lender.
(ii) Borrower acknowledges that in the regular course of commercial
banking business one or more Lenders may at any time and from time to time sell
participating interests in the Loans to other financial institutions (each such
transferee or purchaser of a participating interest, a "Transferee"). Each
Lender shall provide written notice to Agent and Borrower of any sales of
participating interests made by each Lender. Each Transferee may exercise all
rights of payment (including without limitation rights of set-off) with respect
to the portion of such Loans held by it or other Obligations payable hereunder
as fully as if such Transferee were the direct holder thereof provided that
Borrower shall not be required to pay to any Transferee more than the amount
which it would have been required to pay to Lender which granted an interest in
its Loans or other Obligations payable hereunder to such Transferee had such
Lender retained such interest in the Loans hereunder or other Obligations
payable hereunder and in no event shall Borrower be required to pay any such
amount arising from the same circumstances and with respect to the same Loans or
other Obligations payable hereunder to both such Lender and such Transferee.
Borrower hereby grants to any Transferee a continuing security interest in any
deposits, moneys or other property actually or constructively held by such
Transferee as security for the Transferee's interest in the Loans. No such
participation shall create a direct contractual relationship between Borrower
and such participant, and no participant shall be given (i) the right to
instruct the Lender to take or to refrain from taking any action hereunder, or
(ii) any voting rights hereunder (other than for reductions or postponements of
any amounts payable hereunder or the release of all or substantially all of the
Collateral).
(iii) Any Lender may sell, assign or transfer its rights under this
Agreement and the other Loan Documents to one or more additional banks or
financial institutions reasonably acceptable to Agent and Borrower (such
acceptance not to be unreasonably withheld or delayed) which additional
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banks or financial institutions may commit to make Loans hereunder (each
a "Purchasing Lender"), pursuant to a Commitment Transfer Supplement,
executed by a Purchasing Lender, the transferor Lender, and Agent in the
form annexed hereto as Exhibit 12.4 and delivered to Agent for recording
provided, however, that any transfer of less than all of any Lender's rights
hereunder or any transfer to a Person who is not a Lender hereunder shall be in
minimum amounts of not less than $2,500,000. Upon such execution, delivery,
acceptance and recording, from and after the transfer effective date determined
pursuant to such Commitment Transfer Supplement, (i) Purchasing Lender
thereunder shall be a party hereto and, to the extent provided in such
Commitment Transfer Supplement, have the rights and obligations of a Lender
thereunder with a Commitment Percentage as set forth therein, and (ii) the
transferor Lender thereunder shall, to the extent provided in such Commitment
Transfer Supplement, be released from its obligations under this Agreement, the
Commitment Transfer Supplement creating a novation for that purpose. Such
Commitment Transfer Supplement shall be deemed to amend this Agreement to the
extent, and only to the extent, necessary to reflect the addition of such
Purchasing Lender and the resulting adjustment of the Commitment Percentages
arising from the purchase by such Purchasing Lender of all or a portion of the
rights and obligations of such transferor Lender under this Agreement and the
other Loan Documents. Borrower hereby consents to the addition of such
Purchasing Lender and the resulting adjustment of the Commitment Percentages
arising from the purchase by such Purchasing Lender in accordance with the terms
of SUBSECTION 12.4(iii) of all or a portion of the rights and obligations of
such transferor Lender under this Agreement and the other Loan Documents.
Borrower shall execute and deliver such further documents and do such further
acts and things in order to effectuate the foregoing at such transferring
Lender's expense.
(iv) Agent shall maintain at its address a copy of each Commitment
Transfer Supplement delivered to it and a register (the "Register") for the
recordation of the names and addresses of each Lender from time to time. The
entries in the Register shall be conclusive, in the absence of manifest error,
and Borrower, Agent and Lenders may treat each Person whose name is recorded in
the Register as the owner of the Loan recorded therein for the purposes of this
Agreement. The Register shall be available for inspection by Borrower or any
Lender at any reasonable time and from time to time upon reasonable prior
notice. Agent shall receive a fee in the amount of $3,000 payable by the
applicable Purchasing Lender upon the effective date of each transfer or
assignment to such Purchasing Lender.
(v) Borrower authorizes each Lender to disclose to any Transferee or
Purchasing Lender and any prospective Transferee or Purchasing Lender any and
all financial information in such Lender's possession concerning Borrower which
has been delivered to such Lender by or on behalf of Borrower pursuant to this
Agreement or in connection with such Lender's credit evaluation of Borrower,
subject to such prospective Transferee's agreeing to maintain the
confidentiality of such information pursuant to an agreement reasonably
acceptable to Borrower.
(vi) Borrower agrees to take all actions that Agent may reasonably
request in attempting to sell, transfer or assign any of its rights or interest
under this Agreement. Such actions include, but are not limited to, (a) Borrower
causing senior management and representatives of Borrower and its Subsidiaries
to be available to participate in information meetings with prospective
Purchasing Lenders at such times and places as Agent may reasonably request, (b)
Borrower using its reasonable efforts to ensure that Agent's attempt to sell,
transfer or assign any of its rights or interest under this Agreement benefit
from Borrower lending relationships and (c) Borrower providing Agent with all
information reasonably requested by Agent in order to accomplish such sale,
transfer or assignment.
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(vii) Notwithstanding anything to the contrary in this Section 12.4,
without Agent's prior written consent, no Lender (other than Fleet) may assign
or sell any of its rights or interests hereunder, provided, however, any Lender
hereunder may assign all or any of its rights hereunder without the consent of
Borrower or Agent to (a) the Federal Reserve Bank as collateral or (b) any
Affiliate of such Lender.
(viii) Upon at least 60 days prior written notice to Agent, any Lender
may terminate its commitment to make Loans hereunder as of the last day of the
Original Term.
12.5. Severability. Wherever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be prohibited by or
invalid under applicable law, such provision shall be ineffective only to the
extent of such prohibition or invalidity, without invalidating the remainder of
such provision or the remaining provisions of this Agreement.
12.6. Successors and Assigns. This Agreement, the Other Agreements and
the Security Documents shall be binding upon and inure to the benefit of the
successors and assigns of Borrower and Lenders permitted under SECTION 12.4
hereof.
12.7. Cumulative Effect; Conflict of Terms. The provisions of the Other
Agreements and the Security Documents are hereby made cumulative with the
provisions of this Agreement. Except as otherwise provided in SECTION 3.2 hereof
and except as otherwise provided in any of the other Loan Documents by specific
reference to the applicable provision of this Agreement, if any provision
contained in this Agreement is in direct conflict with, or inconsistent with,
any provision in any of the other Loan Documents, the provision contained in
this Agreement shall govern and control.
12.8. Execution in Counterparts. This Agreement may be executed in any
number of counterparts and by different parties hereto in separate counterparts,
each of which when so executed and delivered shall be deemed to be an original
and all of which counterparts taken together shall constitute but one and the
same instrument.
12.9. Notice. Except as otherwise provided herein, all notices, requests
and demands to or upon a party hereto, to be effective, shall be in writing and
shall be sent by certified or registered mail, return receipt requested, by
personal delivery against receipt, by overnight courier or by facsimile and,
unless otherwise expressly provided herein, shall be deemed to have been validly
served, given or delivered immediately when delivered against receipt, one (1)
Business Day after deposit in the mail, postage prepaid, or with an overnight
courier or, in the case of facsimile notice, when sent, addressed as follows:
If to Agent: FLEET CAPITAL CORPORATION
200 Glastonbury Boulevard
Glastonbury, Connecticut 06033
Attention: Northeast Loan Administrator
Facsimile No.: (860) 657-7759
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With a copy to: HAHN & HESSEN LLP
350 Fifth Avenue
New York, New York 10118
Attention: Daniel J. Krauss, Esq.
Facsimile No.: (212) 594-7167
If to Borrower: Executone Information Systems, Inc.
478 Wheelers Farm Road
Milford, Connecticut
Attention: Chief Financial Officer and
General Counsel
Facsimile No.: (203) 882-2729
or to such other address as each party may designate for itself by notice given
in accordance with this SECTION 12.9; provided, however, that any notice,
request or demand to or upon Agent pursuant to SUBSECTION 3.1.1 OR 4.2.2 hereof
shall not be effective until received by Agent.
12.10. Lenders' Consent. Whenever Agent's, Required Lenders' or Lenders'
consent is required to be obtained under this Agreement, any of the Other
Agreements or any of the Security Documents as a condition to any action,
inaction, condition or event, Agent, Required Lenders and Lenders, as the case
may be, shall be authorized to give or withhold such consent in their sole and
absolute discretion and to condition its consent upon the giving of additional
collateral security for the Obligations, the payment of money or any other
matter.
12.11. Credit Inquiries. Borrower and each Subsidiary of Borrower hereby
authorize and permit Agent and Lenders to respond to usual and customary credit
inquiries from third parties concerning Borrower or any Subsidiary of Borrower.
12.12. Time of Essence. Time is of the essence of this Agreement, the
Other Agreements and the Security Documents.
12.13. Entire Agreement. This Agreement and the other Loan Documents,
together with all other instruments, agreements and certificates executed by the
parties in connection therewith or with reference thereto, embody the entire
understanding and agreement between the parties hereto and thereto with respect
to the subject matter hereof and thereof and supersede all prior agreements,
understandings and inducements, whether express or implied, oral or written.
12.14. Interpretation. No provision of this Agreement or any of the
other Loan Documents shall be construed against or interpreted to the
disadvantage of any party hereto by any court or other governmental or judicial
authority by reason of such party having or being deemed to have structured or
dictated such provision.
12.15. GOVERNING LAW; CONSENT TO FORUM. THIS AGREEMENT HAS BEEN
NEGOTIATED, EXECUTED AND DELIVERED AT AND SHALL BE DEEMED TO HAVE BEEN MADE IN
NEW YORK, NEW YORK. THIS AGREEMENT SHALL BE
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GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK:
PROVIDED, HOWEVER, THAT IF ANY OF THE COLLATERAL SHALL BE LOCATED IN ANY
JURISDICTION OTHER THAN NEW YORK, THE LAWS OF SUCH JURISDICTION SHALL GOVERN THE
METHOD, MANNER AND PROCEDURE FOR FORECLOSURE OF LENDERS' LIEN UPON SUCH
COLLATERAL AND THE ENFORCEMENT OF LENDERS' OTHER REMEDIES IN RESPECT OF SUCH
COLLATERAL TO THE EXTENT THAT THE LAWS OF SUCH JURISDICTION ARE DIFFERENT FROM
OR INCONSISTENT WITH THE LAWS OF NEW YORK. AS PART OF THE CONSIDERATION FOR NEW
VALUE RECEIVED, AND REGARDLESS OF ANY PRESENT OR FUTURE DOMICILE OR PRINCIPAL
PLACE OF BUSINESS OF BORROWER OR LENDERS, BORROWER HEREBY CONSENTS AND AGREES
THAT ANY FEDERAL OR STATE COURT SITTING IN THE STATE OF NEW YORK SHALL HAVE
EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN
BORROWER AND LENDERS PERTAINING TO THIS AGREEMENT OR TO ANY MATTER ARISING OUT
OF OR RELATED TO THIS AGREEMENT. BORROWER EXPRESSLY SUBMITS AND CONSENTS IN
ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT,
AND BORROWER HEREBY WAIVES ANY OBJECTION WHICH BORROWER MAY HAVE BASED UPON LACK
OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS AND HEREBY
CONSENTS TO THE GRANTING OF SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED
APPROPRIATE BY SUCH COURT. BORROWER HEREBY WAIVES PERSONAL SERVICE OF THE
SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND
AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINT AND OTHER PROCESS MAY BE MADE BY
REGISTERED OR CERTIFIED MAIL ADDRESSED TO BORROWER AT THE ADDRESS SET FORTH IN
THIS AGREEMENT AND THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE
EARLIER OF BORROWER'S ACTUAL RECEIPT THEREOF OR 3 DAYS AFTER DEPOSIT IN THE U.S.
MAILS, PROPER POSTAGE PREPAID. NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR
OPERATE TO AFFECT THE RIGHT OF LENDER TO SERVE LEGAL PROCESS IN ANY OTHER MANNER
PERMITTED BY LAW, OR TO PRECLUDE THE ENFORCEMENT BY LENDERS OF ANY JUDGMENT OR
ORDER OBTAINED IN SUCH FORUM OR THE TAKING OF ANY ACTION UNDER THIS AGREEMENT TO
ENFORCE SAME IN ANY OTHER APPROPRIATE FORUM OR JURISDICTION.
12.16. WAIVERS BY BORROWER. BORROWER WAIVES (i) THE RIGHT TO TRIAL BY
JURY (WHICH AGENT AND LENDERS HEREBY ALSO WAIVE) IN ANY ACTION, SUIT, PROCEEDING
OR COUNTERCLAIM OF ANY KIND ARISING OUT OF OR RELATED TO ANY OF THE LOAN
DOCUMENTS, THE OBLIGATIONS OR THE COLLATERAL: (ii) OTHER THAN NOTICES EXPRESSLY
PROVIDED TO BE GIVEN TO BORROWER HEREIN, PRESENTMENT, DEMAND AND PROTEST AND
NOTICE OF PRESENTMENT, PROTEST, DEFAULT, NON PAYMENT, MATURITY, RELEASE,
COMPROMISE, SETTLEMENT, EXTENSION OR RENEWAL OF ANY OR ALL COMMERCIAL PAPER,
ACCOUNTS, CONTRACT RIGHTS, DOCUMENTS, INSTRUMENTS CHATTEL PAPER AND GUARANTIES
AT ANY TIME HELD BY
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<PAGE>
LENDERS ON WHICH ANY LOAN PARTY MAY IN ANY WAY BE LIABLE AND HEREBY RATIFIES AND
CONFIRMS WHATEVER LENDERS MAY DO IN THIS REGARD; (iii) NOTICE PRIOR TO TAKING
POSSESSION OR CONTROL OF THE COLLATERAL OR ANY BOND OR SECURITY WHICH MIGHT BE
REQUIRED BY ANY COURT PRIOR TO ALLOWING LENDERS TO EXERCISE ANY OF LENDERS'
REMEDIES; (iv) THE BENEFIT OF ALL VALUATION, APPRAISEMENT AND EXEMPTION LAWS;
AND (v) NOTICE OF ACCEPTANCE HEREOF. BORROWER ACKNOWLEDGES THAT THE FOREGOING
WAIVERS ARE A MATERIAL INDUCEMENT TO LENDERS' ENTERING INTO THIS AGREEMENT AND
THAT LENDERS ARE RELYING UPON THE FOREGOING WAIVERS IN ITS FUTURE DEALINGS WITH
BORROWER. BORROWER WARRANTS AND REPRESENTS THAT IT HAS REVIEWED THE FOREGOING
WAIVERS WITH ITS LEGAL COUNSEL AND HAS KNOWINGLY AND VOLUNTARILY WAIVED ITS JURY
TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF
LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE
COURT.
[SIGNATURE LINES ON FOLLOWING PAGE]
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<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed on the
day and year specified at the beginning of this Agreement.
EXECUTONE INFORMATION SYSTEMS, INC.
By:________________________________
Name:______________________________
Title:_____________________________
FLEET CAPITAL CORPORATION
("Agent" and "Lender")
By:________________________________
Name:______________________________
Title:_____________________________
Commitment Percentage: 100%
<PAGE>
<PAGE>
APPENDIX A
GENERAL DEFINITIONS
When used in the Loan and Security Agreement dated as of August
14, 1998, by and among the financial institutions party thereto and the various
financial institutions which become parties thereto ("Lenders"), Fleet Capital
Corporation as administrative and collateral agent for Lenders (in such
capacity, "Agent") and Execution Information Systems, Inc. ("Borrower"), the
following terms shall have the following meanings (terms defined in the singular
to have the same meaning when used in the plural and vice versa):
Account Debtor - any Person who is or may become obligated under
or on account of an Account.
Accounts - all accounts, contract rights, chattel paper,
instruments and documents, whether now owned or hereafter created or acquired by
Borrower or in which Borrower now has or hereafter acquired any interest.
Adjusted Cash Flow - for any fiscal period, means (i) Adjusted
Net Earnings From Operations for such period, plus (ii) depreciation and
amortization and any other non-cash expenses of Borrower (iii) plus increases
and minus decreases in deferred taxes of Borrower for such period, all as
determined in accordance with GAAP less (iv) non-financed Capital Expenditures,
less (v) the sum of the aggregate payments of regularly scheduled principal with
respect to Indebtedness for Money Borrowed (other than the Revolving Credit
Loans) made during such period and less (vi) the sum of the aggregate Specified
Permitted Investments made during such period.
Adjusted Net Earnings From Operations - with respect to any
fiscal period, means the net earnings (or loss) after provision for income taxes
for such fiscal period of Borrower on a Consolidated Basis, as reflected on the
Consolidated financial statement of Borrower supplied to Agent pursuant to
SUBSECTION 8.1.3 of the Agreement, but excluding:
(i) any gain or loss arising from the sale of capital
assets;
(ii) any gain arising from any write-up of assets;
(iii) earnings or losses of any Subsidiary of Borrower
accrued prior to the date it became a Subsidiary;
(iv) earnings or losses of any corporation or Person,
substantially all the assets of which have been acquired in any manner by
Borrower, realized by such corporation or Person prior to the date of such
acquisition;
(v) net earnings of any business entity (other than a
Subsidiary of Borrower) in which Borrower has an ownership interest unless such
net earnings shall have actually been received by Borrower in the form of cash
distributions;
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(vi) any portion of the net earnings of any Subsidiary of
Borrower which for any reason is unavailable for payment of dividends to
Borrower;
(vii) the earnings or losses of any Person (other than an
Affiliate of Borrower) to which any assets of Borrower shall have been sold,
transferred or disposed of, or into which Borrower shall have merged, or been a
party to any consolidation or other form of reorganization, prior to the date of
such transaction;
(viii) any gain arising from the acquisition of any
Securities of Borrower; and
(ix) any gain or non cash loss arising from extraordinary
items.
Affiliate - a 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, a Person; (ii) which
beneficially owns or holds 5% or more of any class of the Voting Stock of a
Person; or (iii) 5% or more of the Voting Stock (or in the case of a Person
which is not a corporation, 5% or more of the equity interest) of which is
beneficially owned or held by a Person or a Subsidiary of a Person.
Aggregate LC Amount - at any time, without duplication, the
aggregate undrawn face amount of all Letters of Credit and LC Guaranties then
outstanding.
Agreement - the Loan and Security Agreement referred to in the
first sentence of this Appendix A, all Exhibits thereto and this Appendix A.
Applicable Margin - On the Closing Date the rate per annum set
forth under the relevant column heading below:
<TABLE>
<CAPTION>
Base Rate Loans Eurodollar Loans and
- --------------- LIBOR Rate Loans
----------------
<S> <C>
1.25% 3.00%
</TABLE>
provided the Applicable Margin shall be subject to change as of the first day of
each Fiscal Quarter based upon the Fixed Charge Coverage Ratio for the preceding
four (4) Fiscal Quarters commencing with the four (4) Fiscal Quarters ended as
of March 31, 1999 following the delivery of the financial statements of Borrower
on a Consolidated Basis for the Fiscal Quarter then ended (so long as (i) such
statements are delivered on or before the Required Delivery Date therefor and
(ii) no Event of Default shall have occurred and be continuing) to the rates set
forth below under the relevant column heading:
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<TABLE>
<CAPTION>
EURODOLLAR LOANS AND BASE RATE LOANS
LIBOR RATE LOANS
Fixed Charge Ratio
<S> <C> <C> <C> <C>
Less than 1.0x 3.50% 1.75%
- --------------------------------------------------------------------------------
Greater than or equal to
1.0x but less than 1.25x 3.25% 1.50%
- --------------------------------------------------------------------------------
Greater than or equal to
1.25x but less than 1.50x 3.00% 1.25%
- --------------------------------------------------------------------------------
Greater than or equal to
1.50x but less than 2.0x 2.75% 1.00%
- --------------------------------------------------------------------------------
Greater than or equal to
2.00x but less than 2.50x 2.50% .75%
- --------------------------------------------------------------------------------
Greater than 2.5x 2.25% .50%
- --------------------------------------------------------------------------------
</TABLE>
Availability - the amount of money which Borrower is entitled to
borrow from time to time as Revolving Credit Loans, such amount being the
difference derived when the sum of the principal amount of Revolving Credit
Loans then outstanding (including any amounts which Agent may have paid for the
account of Borrower pursuant to any of the Loan Documents and which have not
been reimbursed by Borrower) and the LC Amount is subtracted from the Borrowing
Base. If the amount outstanding is equal to or greater than the Borrowing Base,
Availability is 0.
Bank - Fleet National Bank.
Base Rate - a rate per annum equal to the higher of (i) the
Federal Funds Rate in effect on such day plus 1/2 of 1% or (ii) the rate of
interest announced or quoted by Bank from time to time as its prime rate for
commercial loans, whether or not such rate is the lowest rate charged by Bank to
its most preferred borrowers; and, if such prime rate for commercial loans is
discontinued by Bank as a standard, a comparable reference rate designated by
Bank as a substitute therefor shall be the Base Rate.
Base Rate Loans - any Loans bearing interest computed by
reference to the Base Rate.
Borrower -Executone Information Systems, Inc., a Virginia
corporation.
Borrowing Base - as at any date of determination thereof, an
amount equal to the lesser of:
(i) an amount equal to:
(a) the Maximum Revolving Amount;
MINUS
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(b) the Aggregate LC Amount;
MINUS
(c) Reserves; or
(ii) an amount equal to:
(a) up to 85% ("Accounts Advance Rate") of the net
amount of Eligible Accounts of Borrower;
PLUS
(b) the lesser of (1) $13,000,000 or (2) up to 50%
("Inventory Advance Rate") of the value of Eligible Inventory of Borrower
calculated on the basis of the lower of cost or market calculated on a first-in,
first-out basis;
MINUS
(c) Reserves.
For purposes hereof, the net amount of Eligible Accounts at any
time shall be the face amount of such Eligible Accounts less any and all
returns, rebates, discounts (which may, at Agent's option, be calculated on
shortest terms), credits, allowances or excise taxes of any nature at any time
issued, owing, claimed by Account Debtors, granted, outstanding or payable in
connection with such Accounts at such time.
Business Day - means, with respect to Eurodollar Loans, any day
on which commercial banks are open for domestic and international business
including dealings in Dollar deposits in London, England and New York, New York
and with respect to all other Loans, any day excluding Saturday, Sunday and any
day which is a legal holiday under the laws of the State of New York or is a day
on which banking institutions located in such state are closed.
Capital Expenditures - expenditures made or liabilities incurred
by Borrower for the acquisition of any fixed assets or improvements,
replacements, substitutions or additions thereto which have a useful life of
more than one year and capitalized under GAAP, including, with duplication, the
total principal portion of Capitalized Lease Obligations.
Capitalized Lease Obligation - any Indebtedness represented by
the principal portion of obligations under a lease that is required to be
capitalized for financial reporting purposes in accordance with GAAP.
Cash Flow - for any fiscal period, means (i) Adjusted Net
Earnings From Operations for such period, plus (ii) depreciation and
amortization and any other non-cash expenses of Borrower (iii) plus increases
and minus decreases in deferred taxes of Borrower for such period, all as
determined in accordance with GAAP less (iv) non-financed Capital Expenditures
and less (v)
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the sum of the aggregate payments of regularly schedule principal with respect
to Indebtedness for Money Borrowed (other than the Revolving Credit Loans) made
during such period.
CERCLA - shall mean the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, 42 U.S.C. 'SS''SS'9601
et seq.
Closing Availability - Availability minus all sums then due and
owing by Borrower to trade creditors beyond normal trade terms.
Closing Date - the date on which all of the conditions precedent
in SECTION 9 of the Agreement are satisfied and the initial Loan is made or the
initial Letter of Credit or LC Guaranty is issued under the Agreement.
Code - the Uniform Commercial Code as adopted and in force in the
State of New York, as from time to time in effect.
Collateral - all of the Property and interests in Property
described in SECTION 5 of the Agreement, and all other Property and interests in
Property that now or hereafter secure the payment and performance of any of the
Obligations.
Commitment Percentage - of any Lender means the percentage set
forth below such Lender's name on the signature page of the Agreement as same
may be adjusted upon any assignment by a Lender pursuant to SECTION 12.4
thereof.
Commitment Transfer Supplement - a document in the form of
Exhibit 12.4 hereto, properly completed and otherwise in form and substance
satisfactory to Agent by which the Purchasing Lender purchases and assumes a
portion of the obligation of Lenders to make Loans under the Agreement.
Consents - all material filings and all material licenses,
permits, consents, approvals, authorizations, qualifications and orders of
governmental authorities and other third parties, domestic or foreign, necessary
to carry on Borrower's business, including, without limitation, any Consents
required under all applicable federal, state or other applicable law.
Consolidated Basis - the consolidation in accordance with GAAP of
the accounts or other items of Borrower and its Subsidiaries.
Consolidated Interest Expense - shall mean, for any period to the
extent actually paid, the interest expense (net of interest income) of Borrower
on a Consolidated Basis during such period determined in accordance with GAAP
consistently applied, and shall in any event include, without limitation,
interest on Capitalized Lease Obligations and shall exclude original issue
discount amortization to the extent it is required to be included in accordance
with GAAP.
Current Assets - at any date means the amount at which all of the
current assets of a Person would be properly classified as current assets shown
on a balance sheet at such date in
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accordance with GAAP except that amounts due from Affiliates and investments in
Affiliates shall be excluded therefrom.
Default - an event or condition the occurrence of which would,
with the lapse of time or the giving of notice, or both, become an Event of
Default.
Default Rate - as defined in SUBSECTION 2.1.2 of the Agreement.
Dividend Payment - as defined in subsection 8.2.7 of the
Agreement.
Dollar - and the sign $ shall mean lawful money of the United
States of America.
Dominion Account - a special account of Agent established by
Borrower pursuant to the Agreement at a bank selected by Borrower, but
acceptable to Agent in its reasonable discretion, and over which Agent shall
have sole and exclusive access and control for withdrawal purposes.
EBITDA - with respect to any fiscal period, means the sum of
Adjusted Net Earnings From Operations before interest expense, taxes,
depreciation and amortization for said period as determined in accordance with
GAAP of Borrower on a Consolidated Basis.
Eligible Account - an Account arising in the ordinary course of
Borrower's business from the sale of goods or rendition of services which Agent,
in its sole credit judgment, deems to be an Eligible Account. Without limiting
the generality of the foregoing, no Account shall be an Eligible Account if:
(i) it arises out of a sale made by Borrower to a
Subsidiary or an Affiliate of Borrower or to a Person controlled by an Affiliate
of Borrower; or
(ii) it is unpaid for more than (a) with respect to
Accounts from Account Debtors other than the United States of America or any
state or municipality thereof or Account Debtors invoiced by Borrower's
healthcare division (the "Specified A Account Debtors"), 60 days after the
original due date shown on the invoice and (b) with respect to Accounts from the
United States of America or any state or municipality thereof or Accounts from
Account Debtors invoiced by Borrower's healthcare division (the "Specified B
Account Debtors"), 90 days after the original due date shown on the invoice,
provided that the aggregate amount of Eligible Accounts under this clause "(b)"
shall not exceed $1,500,000 at any time; or
(iii) it is due or unpaid more than (a) with respect to
Accounts from Specified A Account Debtors, 90 days after the original invoice
date and (b) with respect to Accounts from Specified B Account Debtors, 120 days
after the original invoice date, provided that the aggregate amount of Eligible
Accounts under this clause "(b)" shall not exceed $1,500,000 at any time; or
(iv) 50% or more of the Accounts from the Account Debtor
are not deemed Eligible Accounts hereunder; or
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(v) (a) the total unpaid Accounts of the Account Debtor
(other than Claricom, Inc.) exceed 15% of the net amount of all Eligible
Accounts, to the extent of such excess or (b) the total unpaid Accounts of
Claricom, Inc. exceed 25% of the amount of all Accounts, to the extent of such
excess; or
(vi) any covenant, representation or warranty contained in
the Agreement with respect to such Account has been breached to the extent it
affects the collectability of such Account ; or
(vii) the Account Debtor is also Borrower's creditor or
supplier, or the Account Debtor has disputed liability with respect to such
Account, or the Account Debtor has made any claim with respect to any other
Account due from such Account Debtor to Borrower, or the Account otherwise is or
may become subject to any right of setoff by the Account Debtor to the extent
such amount owed is, subject to set-off by or disputed with such Account Debtor;
or
(viii) the Account Debtor has commenced a voluntary case
under the federal bankruptcy laws, as now constituted or hereafter amended, or
made an assignment for the benefit of creditors, or a decree or order for relief
has been entered by a court having jurisdiction in the premises in respect of
the Account Debtor in an involuntary case under the federal bankruptcy laws, as
now constituted or hereafter amended, or any other petition or other application
for relief under the federal bankruptcy laws has been filed against the Account
Debtor, or if the Account Debtor has failed, suspended business, ceased to be
Solvent, or consented to or suffered a receiver, trustee, liquidator or
custodian to be appointed for it or for all or a significant portion of its
assets or affairs; or
(ix) it arises from a sale to an Account Debtor outside
the United States to the extent the aggregate amount of such Accounts exceeds
$25,000, unless the sale is on letter of credit, guaranty or acceptance terms,
in each case acceptable to Agent in its sole discretion; or
(x) it arises from a sale to the Account Debtor on a
bill-and-hold, guaranteed sale, sale-or-return, sale-on-approval, consignment or
any other repurchase or return basis; or
(xi) the Account Debtor is the United States of America or
any department, agency or instrumentality thereof unless Borrower assigns its
right to payment of such Account to Agent, in a manner satisfactory to Agent, so
as to comply with the Assignment of Claims Act of 1940 (31 U.S.C. 'SS'.203 et
seq., as amended); or
(xii) the Account is subject to a Lien other than a
Permitted Lien; or
(xiii) the goods giving rise to such Account have not been
delivered to and accepted by the Account Debtor or the services giving rise to
such Account have not been performed by Borrower and accepted by the Account
Debtor or the Account otherwise does not represent a final sale; or
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(xiv) the Account is evidenced by chattel paper or an
instrument of any kind, or has been reduced to judgment; or
(xv) Borrower has made any agreement with the Account
Debtor for any deduction therefrom, except for discounts or allowances which are
made in the ordinary course of business and which discounts or allowances are
reflected in the calculation of the face value of each invoice related to such
Account.
Eligible Inventory - such Inventory of Borrower (other than
packaging materials and supplies) which Agent, in its sole credit judgment,
deems to be Eligible Inventory. Without limiting the generality of the
foregoing, no Inventory shall be Eligible Inventory if:
(i) it is not finished goods or raw materials;
(ii) it is not in good, new and saleable condition; or
(iii) it is slow-moving, obsolete or unmerchantable; or
(iv) it does not meet all material standards imposed by
any governmental agency or authority; or
(v) it does not conform in all respects to the warranties
and representations set forth in the Agreement,
(vi) it is not at all times subject to Agent's duly
perfected, first priority security interest and no other Lien except a Permitted
Lien; or
(vii) it is not situated at a location in compliance with
the Agreement or is in transit.
Environmental Complaint - shall have the meaning set forth in
Section 8.1.7(d) hereof.
Environmental Laws - shall mean all federal, state and local
environmental, land use, zoning, health, chemical use, safety and sanitation
laws, statutes, ordinances and codes relating to the protection of the
environment and/or governing the use, storage, treatment, generation,
transportation, processing, handling, production or disposal of Hazardous
Substances and the rules, regulations, policies, guidelines, interpretations,
decisions, orders and directives of federal, state and local governmental
agencies and authorities with respect thereto.
Equipment - with respect to Borrower, all machinery, apparatus,
equipment, fittings, furniture, fixtures, motor vehicles and other tangible
personal Property (other than Inventory) of every kind and description used in
Borrower's operations or owned by Borrower, or in which Borrower has an
interest, whether now owned or hereafter acquired by Borrower and wherever
located, and all parts, accessories and special tools and all increases and
accessions thereto and substitutions and replacements therefor.
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ERISA - the Employee Retirement Income Security Act of 1974, as
amended, and all rules and regulations from time to time promulgated thereunder.
Eurodollar Loan - any Loan bearing interest computed by reference
to the Eurodollar Rate.
Eurodollar Rate - for any Eurodollar Loan, for the then current
Interest Period relating thereto, the rate per annum equal to the quotient of
(a) LIBOR, divided by (b) a number equal to 1.00 minus the aggregate of the
rates (expressed as a decimal) of reserve requirements current on the day that
is two (2) Business Days prior to the beginning of the Interest Period
(including without limitation basic, supplemental, marginal and emergency
reserves) under any regulation promulgated by the Board of Governors of the
Federal Reserve System (or any other governmental authority having jurisdiction
over the Bank) as in effect from time to time, dealing with reserve requirements
prescribed for Eurocurrency funding including any reserve requirements with
respect to "Eurocurrency liabilities" under Regulation D of the Board of
Governors of the Federal Reserve System.
Event of Default - as defined in SECTION 10.1 of the Agreement.
Extraordinary Receipts - means the net proceeds received by
Borrower in connection with (a) the sale of the capital stock of Borrower or (b)
a public offering of securities issued by Borrower.
Federal Funds Rate shall mean, for any day, 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 (or
if such day is not a Business Day, for the next preceding Business Day) by the
Federal Reserve Bank of New York, or if such rate is not so published for any
day which is a Business Day, the average of quotations for such day on such
transactions received by the Bank from three Federal funds brokers of recognized
standing selected by the Bank.
Financial Statement - the audited financial statements of
Borrower on a Consolidated Basis for each Fiscal Year.
Fiscal Month - each monthly accounting period during any Fiscal
Year.
Fiscal Quarter - each quarterly accounting period during any
Fiscal Year.
Fiscal Year - the accounting period beginning on January 1 of
each year and ending on December 31 of each year.
Fixed Charge Coverage - means, for any period, the ratio of (i)
(A) EBITDA of Borrower on a Consolidated Basis for such period minus (B) actual
unfinanced Capital Expenditures of Borrower during such period minus (C) cash
taxes actually paid during such period to (ii) the sum of
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the aggregate of payments of interest and regularly scheduled principal with
respect to Indebtedness for Money Borrowed (other than the Revolving Credit
Loans) made during such period.
General Intangibles - with respect to Borrower all general
intangibles and other personal property of Borrower (including things in action)
other than goods, Accounts, chattel paper, documents, instruments and money,
whether now owned or hereafter created or acquired by Borrower, including,
without limitation, all choses in action, causes of action, corporate or other
business records, inventions, designs, patents, patent applications, equipment
formulations, manufacturing procedures, quality control procedures, trademarks,
service marks, trade secrets, goodwill, copyrights, design rights,
registrations, licenses, franchises, customer lists, tax refunds, tax refund
claims, computer programs, all claims under guaranties, security interests or
other security held by or granted to Borrower to secure payment of any of the
Accounts by an Account Debtor all rights of indemnification, all deposit
accounts of Borrower and all other intangible property of every kind and nature.
Guarantor - means each Person that shall execute and deliver a
Guaranty to Agent.
Guaranty - means the guaranty of the obligations of Borrower
executed by each Guarantor in favor of Agent and Lenders and each related
guaranty security agreement, as applicable.
Hazardous Discharge - shall have the meaning set forth in Section
4.19(d) hereof.
Hazardous Substance - shall mean, without limitation, any
flammable explosives, radon, radioactive materials, asbestos, urea formaldehyde
foam insulation, polychlorinated biphenyls, petroleum and petroleum products,
methane, hazardous materials, Hazardous Wastes, hazardous or toxic substances or
related materials as defined in CERCLA, the Hazardous Materials Transportation
Act, as amended (49 U.S.C. Sections 1801, et seq.), RCRA, or any other
applicable Environmental Law and in the regulations adopted pursuant thereto.
Hazardous Wastes - shall mean all waste materials subject to
regulation under CERCLA, RCRA or applicable state law, and any other applicable
Federal and state laws now in force or hereafter enacted relating to hazardous
waste disposal.
Indebtedness - as applied to a Person means, without duplication
(i) all items which in accordance with GAAP would be
included in determining total liabilities as shown on the liability side of a
balance sheet of such Person as at the date as of which Indebtedness is to be
determined, including, without limitation, Capitalized Lease Obligations,
(ii) all obligations of other Persons which such Person
has guaranteed,
(iii) all reimbursement obligations in connection with
letters of credit or letter of credit guaranties issued for the account of such
Person, and
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(iv) in the case of Borrower, the Obligations.
Indenture - the Indenture dated as of March 1, 1986 between
Borrower (f/k/a Vodavi Technology Corporation) and United States Trust Company
of New York, as Trustee, as in effect on the Closing Date.
Interest Period - as defined in SUBSECTION 3.1.5.
Inventory - with respect to Borrower, all of Borrower's
inventory, whether now owned or hereafter acquired including, but not limited
to, all goods intended for sale or lease by Borrower, or for display or
demonstration; all work in process; all raw materials and other materials and
supplies of every nature and description used or which might be used in
connection with the manufacture, printing, packing, shipping, advertising,
selling, leasing or furnishing of such goods or otherwise used or consumed in
Borrower's business; and all documents evidencing and General Intangibles
relating to any of the foregoing, whether now owned or hereafter acquired by
Borrower.
Issuing Bank - as defined in section 1.2.4.
LC Guaranty - any guaranty pursuant to which Agent or any
Affiliate of Agent shall guaranty the payment or performance by Borrower of its
reimbursement obligation under any letter of credit.
Lender and Lenders - the meaning ascribed to such terms in the
Preamble to the Agreement and each person which is a transferee, successor or
assign of any Lender.
Letter of Credit - any letter of credit issued by Agent or any of
Agent's Affiliates for the account of Borrower.
Letter of Credit Fee Payment Date - the last Business Day of each
March, June, September and December and on the last day of the Original Term.
LIBOR - for any Eurodollar Loan for the then current Interest
Period, the rate of interest equal to the average (rounded upwards, if necessary
to the nearest 1/16 of 1%) of the rates per annum at which Dollar deposits in
immediately available funds are offered to the Bank in the London interbank
eurodollar market as at 11:00 A.M. London time two (2) Business Days prior to
the beginning of such Interest Period, for delivery on the first day of such
Interest Period, and in an amount approximately equal to the amount of such
Eurodollar Loan for a period approximately equal to such Interest Period.
LIBOR Rate - the rate per annum for the one month LIBOR rate as
published in The Wall Street Journal, averaged monthly on a calendar month
basis.
LIBOR Rate Loan - a Revolving Credit Loan at any time that bears
interest based on the LIBOR Rate.
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Lien - any interest in Property securing an obligation owed to,
or a claim by, a Person other than the owner of the Property, whether such
interest is based on common law, statute or contract. The term "Lien" shall also
include reservations, exceptions, encroachments, easements, rights-of-way,
covenants, conditions, restrictions, leases and other title exceptions and
encumbrances affecting Property. For the purpose of the Agreement, Borrower
shall be deemed to be the owner of any Property which it has acquired or holds
subject to a conditional sale agreement or other arrangement pursuant to which
title to the Property has been retained by or vested in some other Person for
security purposes.
Loan Account - the loan account established on the books of Agent
pursuant to and as defined in SECTION 3.6 of the Agreement.
Loan Documents - the Agreement, the Other Agreements and the
Security Documents.
Loan Year - the applicable year during the Term calculated
initially from the Closing Date (i.e. the Closing Date through the day prior to
the one year anniversary of the Closing Date, "Loan Year 1", the one year
anniversary date through the day prior to the two year anniversary of the
Closing Date, "Loan Year 2", etc.)
Loans - all loans and advances of any kind made by Lenders
pursuant to the Agreement.
Material Adverse Effect - a material adverse effect on (a) the
condition (financial or otherwise), operations, performance, properties, assets
or business of Borrower and its Subsidiaries, taken as a whole, (b) Borrower's
or any Subsidiary of Borrower's ability to pay or perform the Obligations in
accordance with the terms thereof, (c) the value of the Collateral, the Liens on
the Collateral or the priority of any such Lien, (d) the practical realization
of the benefits of Agent's or any Lender's rights and remedies under this
Agreement or the other Loan Documents or (e) any of the Transactions.
Maximum Revolving Amount - $30,000,000
Money Borrowed - means (i) Indebtedness arising from the lending
of money by any Person to Borrower; (ii) Indebtedness, whether or not in any
such case arising from the lending by any Person of money to Borrower, (A) which
is represented by notes payable or drafts accepted that evidence extensions of
credit, (B) which constitutes obligations evidenced by bonds, debentures, notes
or similar instruments, or (C) upon which interest charges are customarily paid
(other than accounts payable) or that was issued or assumed as full or partial
payment for Property; (iii) Indebtedness that constitutes a Capitalized Lease
Obligation; (iv) reimbursement obligations with respect to letters of credit or
guaranties of letters of credit and (v) Indebtedness of Borrower under any
guaranty of obligations that would constitute Indebtedness for Money Borrowed
under clauses (i) through (iii) hereof, if owed directly by Borrower.
Monthly Financial Statement - the monthly consolidated financial
statements of Borrower with respect to each Fiscal Month.
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Multiemployer Plan - has the meaning set forth in Section
4001(a)(3) of ERISA.
Net Income - for any period, shall mean, the net income of
Borrower on a Consolidated Basis for such period as determined in accordance
with GAAP as of the Closing Date.
Net Worth - at a particular date, all amounts which would be
included under shareholders' equity (including preferred stock whether or not
categorized as part of shareholders' equity in accordance with GAAP) on a
balance sheet of Borrower on a Consolidated Basis determined in accordance with
GAAP as at such date.
Notes - the Revolving Notes.
Obligations - all Loans and all other advances, debts,
liabilities, obligations, covenants and duties, together with all interest, fees
and other charges thereon, owing, arising, due or payable from Borrower to Agent
or Lenders of any kind or nature, present or future, whether or not evidenced by
any note, guaranty or other instrument, arising under the Agreement or any of
the other Loan Documents whether direct or indirect, absolute or contingent,
primary or secondary, due or to become due, now existing or hereafter arising
and however created.
Original Term - as defined in SECTION 4.1 of the Agreement.
Other Agreements - any and all agreements, instruments and
documents (other than the Agreement and the Security Documents), heretofore, now
or hereafter executed by Borrower, any Subsidiary of Borrower, any Guarantor or
any other third party and delivered to Agent and Lenders in respect of the
Transactions.
Overadvance - as to Borrower, the amount, if any, by which the
outstanding principal amount of Revolving Credit Loans plus the LC Amount
exceeds the Borrowing Base.
Participating Lender - each Person who shall be granted the right
by any Lender to participate in any of the Loans described in the Agreement and
who shall have entered into a participation agreement in form and substance
satisfactory to Lenders.
Permitted Liens - any Lien of a kind specified in SUBSECTION
8.2.5 of the Agreement.
Person - an individual, partnership, corporation, limited
liability company, joint stock company, land trust, business trust, or
unincorporated organization, or a government or agency or political subdivision
thereof.
Plan - an employee benefit plan now or hereafter maintained for
employees of Borrower that is covered by Title IV of ERISA.
Projections - Borrower's forecasted Consolidated and
consolidating (a) balance sheets, (b) profit and loss statements, (c) cash flow
statements (d) capitalization statements and (e) Accounts and Inventory
valuations all prepared on a consistent basis with Borrower's historical
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financial statements, together with appropriate supporting details and a
statement of underlying assumptions.
Property - any interest in any kind of property or asset, whether
real, personal or mixed, or tangible or intangible.
Purchase Money Indebtedness - means and includes (i) Indebtedness
(including Capitalized Lease Obligations) (other than the Obligations) for the
payment of all or any part of the purchase price of any fixed assets, (ii) any
Indebtedness (including Capitalized Lease Obligations) (other than the
Obligations) incurred at the time of or within 10 days prior to or after the
acquisition of any fixed assets for the purpose of financing all or any part of
the purchase price thereof, and (iii) any renewals, extensions or refinancings
thereof, but not any increases in the principal amounts thereof outstanding at
the time.
Purchase Money Lien - a Lien upon fixed assets which secures
Purchase Money Indebtedness, but only if such Lien shall at all times be
confined solely to the fixed assets the purchase price of which was financed
through the incurrence of the Purchase Money Indebtedness secured by such Lien
including Liens securing Capitalized Lease Obligations.
Purchasing Lender - as defined in SECTION 12.4(III) of the
Agreement.
Quarterly Financial Statement - the quarterly consolidated
financial statements of Borrower with respect to each Fiscal Quarter.
RCRA - shall mean the Resource Conservation and Recovery Act, 42
U.S.C. 'SS''SS'6901 et seq., as same may be amended from time to time.
Rentals - as defined in SUBSECTION 8.2.12 of the Agreement.
Reportable Event - any of the events set forth in Section 4043(b)
of ERISA.
Required Lenders - Lenders holding at least fifty-one percent
(51%) of the Loans as of the most recent Settlement Date and, if no Loans are
then outstanding, Lenders holding at least fifty-one percent (51%) of the
Commitment Percentages.
Required Delivery Date - each date of required delivery of a
Financial Statement or a Monthly Financial Statement.
Reserves - as defined in SUBSECTION 1.1.1 of the Agreement.
Restricted Investment - any investment made in cash or by
delivery of Property to any Person, whether by acquisition of stock,
Indebtedness or other obligation or Security, or by loan, advance or capital
contribution, or otherwise, or in any Property except the following:
(i) investments in one or more Subsidiaries of Borrower to
the extent existing on the Closing Date;
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(ii) rights to payment arising from the sale of goods and
services in the ordinary course of business of Borrower and its Subsidiaries;
(iii) investments in direct obligations of the United
States of America, or any agency thereof or obligations guaranteed by the United
States of America, provided that such obligations mature within one year from
the date of acquisition thereof;
(iv) investments in certificates of deposit maturing
within one year from the date of acquisition issued by a bank or trust company
organized under the laws of the United States or any state thereof having
capital surplus and undivided profits aggregating at least $100,000,000;
(v) investments in commercial paper given the highest
rating by a national credit rating agency and maturing not more than 270 days
from the date of creation thereof; and
(vi) Specified Permitted Investments.
Revolving Credit Loan - a Loan made by any Lender as provided in
SECTION 1.1 of the Agreement including, without limitation, Special Advances.
Revolving Notes - shall have the meaning set forth in SUBSECTION
1.1.1.
Schedule of Accounts - as defined in SUBSECTION 6.2.1 of the
Agreement.
Security - shall have the same meaning as in Section 2(1) of the
Securities Act of 1933, as amended.
Security Documents - all instruments and agreements now or at any
time hereafter securing the whole or any part of the Obligations.
Settlement Date - the Closing Date and thereafter on the first
day of each Week unless such day is not a Business Day in which case it shall be
the next succeeding Business Day; provided, however, if Agent so elects in its
discretion, Settlement Date shall mean each Business Day of the Week.
Solvent - as to any Person, such Person (i) owns Property whose
fair saleable value is greater than the amount required to pay all of such
Person's Indebtedness (including contingent debts, which will be computed at the
amount which, in light of all the facts and circumstances existing at such time,
represents the amount that can reasonably be expected to become an actual or
matured liability), (ii) is able to pay all of its Indebtedness as such
Indebtedness matures, (iii) has capital sufficient to carry on its business and
transactions and all business and transactions in which it is about to engage
and (iv) does not intend to, and does not believe it will, incur debts or
liabilities beyond its ability to pay as such debts and liabilities mature.
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Specified Capital Contribution - each capital contribution made
by Borrower to UniStar in accordance with the terms of SUBSECTION 8.2.4(B)
hereof
Specified Permitted Investments - loans made by Borrower to or
investments made by Borrower in one or more entities acting as distributors of
Borrower's products, not to exceed an aggregate amount outstanding at any time
in excess of $6,000,000.
Specified Reserve - a reserve in the amount of $6,000,000 against
the amount of Revolving Credit Loans which Borrower may request under the
Agreement, which such reserve shall be reduced to zero ($0) upon Borrower's
making of the Specified Capital Contribution upon consummation of the Spinoff.
Spinoff - the distribution of capital stock of UniStar to and/or
the rights to purchase capital stock of UniStar by Borrower's shareholders.
Subordinated Debt - Indebtedness of Borrower that is subordinated
to the Obligations in a manner satisfactory to Lenders.
Subsidiary - any corporation or limited liability company of
which a Person owns, directly or indirectly through one or more intermediaries,
more than 50% of the Voting Stock at the time of determination and each direct
and indirect Subsidiary of such Person.
Subsidiary Stock - all of the issued and outstanding shares of
stock owned by Borrower or any Subsidiary of Borrower of any of its
Subsidiaries.
Transactions - means the transactions contemplated by the
Agreement
Total Credit Facility - $30,000,000.
Transferee - as defined in SECTION 12.4(II) of the Agreement.
UniStar - UniStar Gaming Corporation, a Delaware corporation.
Voting Stock - Securities of any class or classes of a
corporation or membership interests of a limited liability company, the holders
of which are ordinarily, in the absence of contingencies, entitled to elect a
majority of the corporate directors with respect to a corporation or entitled to
elect the managers with respect to a limited liability company (or Persons
performing similar functions).
Week - the time period commencing with a Monday and ending on the
following Monday.
Other Terms. All other terms contained in the Agreement shall
have, when the context so indicates, the meanings provided for by the Code to
the extent the same are used or defined therein.
A-16
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Certain Matters of Construction. The terms "herein", "hereof" and
"hereunder" and other words of similar import refer to the Agreement as a whole
and not to any particular section, paragraph or subdivision. Any pronoun used
shall be deemed to cover all genders. The section titles, table of contents and
list of exhibits appear as a matter of convenience only and shall not affect the
interpretation of the Agreement. All references to statutes and related
regulations shall include any amendments of same and any successor statutes and
regulations. All references to any of the Loan Documents shall include any and
all modifications thereto and any and all extensions or renewals thereof.
A-17
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WAIVER
AND
AMENDMENT NO. 1
TO
LOAN AND SECURITY AGREEMENT
THIS WAIVER AND AMDENDMENT NO. 1 ("Amendment") is entered into as of
March 29, 1999, by and between EXECUTONE INFORMATION SYSTEMS, INC., a Virginia
corporation having its principal place of business at 478 Wheelers Farms Road,
Milford, Connecticut ("Borrower") and FLEET CAPITAL CORPORATION, as lender
("Lender") and as administrative and collateral agent ("Agent").
BACKGROUND
Borrower, Agent and Lender are parties to a Loan and Security Agreement
dated as of August 14, 1998 (as amended, supplemented or otherwise modified from
time to time, the "Loan Agreement") pursuant to which Lender provides Borrower
certain financial accommodations.
Borrower has requested that Agent and Lender waive and amend certain
provisions of the Loan Agreement and Agent and Lender are willing to do so on
the terms and conditions hereafter set forth.
NOW, THERFORE, in consideration of any loan or advance or grant of
credit heretofore or hereafter made to or for the account of Borrower by Lender,
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto hereby agree as follows:
1. Definitions. All capitalized terms not otherwise defined herein shall
have the meanings given to them in the Loan Agreement.
2. Amendment to Loan Agreement. Subject to satisfaction of the conditions
precedent set forth in Section 4 below, the Loan Agreement is hereby
amended as follows:
(a) Section 8.3.2. of the Loan Agreement is amended in its entirety
to provide as follows:
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"8.3.2. Cash Flow. Maintain Cash Flow of not less than (a)
negative $2,000,000 for the five months ended December 31, 1998,
(b) negative $3,500,000 for the three months ended March 31,
1999, (c) negative $5,250,000 for the six months ended June 30,
1999, (d) negative $3,000,000 for the nine months ended
September 30, 1999, and (e) $750,000 for the twelve months ended
December 31, 1999 and on the last day of each Fiscal Quarter
thereafter calculated on a rolling four-quarter basis."
(b) Section 8.3.3 of the Loan Agreement is amended in its entirety
to provide as follows:
8.3.3 Adjusted Cash Flow. Maintain for each Fiscal Quarter end
set forth below an Adjusted Cash Flow of not less than (a)
negative $2,250,000 for the five months ended December 31, 1998,
(b) negative $3,500,000 for the three months ended March 31,
1999, (c) negative $5,250,000 for the six months ended June 30,
1999, (d) negative $3,000,000 for the nine months ended
September 30, 1999, and (e) $750,000 for the twelve months ended
December 31, 1999 and on the last day of each Fiscal Quarter
thereafter calculated on a rolling four-quarter basis.
3. Waiver. Subject to satisfaction of the conditions precedent set forth in
Section 4 below, Agent and Lender hereby waive the Events of Default
which have occurred solely as a result of Borrower's violations of (a)
Section 8.3.2 of the Loan Agreement for the five months ended December
31, 1998 and (b) Section 8.3.3 of the Loan Agreement for the five months
ended December 31, 1998.
4. Conditions of Effectiveness. This Amendment shall become effective upon
satisfaction of the following conditions precedent: Agent shall have
received (i) four (4) copies of this Amendment executed by Borrower,
(ii) an amendment fee in an amount equal to $10,000, which fee Agent may
charge to Borrower's loan account and (iii) such other certificates,
instruments, documents, agreements and opinions of counsel as may be
required by Agent or its counsel, each of which shall be in form and
substance satisfactory to Agent and its counsel.
5. Representations and Warranties. Borrower hereby represents and warrants
as follows:
(a) This Amendment and the Loan Agreement, as amended hereby,
constitute legal, valid and binding obligations of Borrower and
are enforceable against Borrower in accordance with their
respective terms.
(b) Upon the effectiveness of this Amendment, Borrower hereby
reaffirms all convents, representations and warranties made in
the Loan Agreement to the extent the same are not amended hereby
and agree that all such covenants, representations and
warranties shall be deemed to have been remade as of the
effective date of this Amendment.
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(c) No Event of Default or Default has occurred and is continuing or
would exist after giving effect to this Amendment.
(d) Borrower has no defense, counterclaim or offset with respect to
the Loan Agreement.
6. Effect on the Loan Agreement.
(a) Upon the effectiveness of Section 2 hereof, each reference in
the Loan Agreement to "this Agreement," "hereunder," "hereof",
"herein" or words of like import shall mean and be a reference
to the Loan Agreement as amended hereby.
(b) Except as specifically amended herein, the Loan Agreement, and
all other documents, instruments and agreements executed and/or
delivered in connection therewith, shall remain in full force
and effect, and are hereby ratified and confirmed.
(c) The execution, delivery and effectiveness of this Amendment
shall not, except as expressly provided in Section 3 hereof,
operate as a waiver of any right, power or remedy of Agent or
Lender, nor constitute a waiver of any provision of the Loan
Agreement, or any other documents, instruments or agreements
executed and/or delivered under or in connection therewith.
7. Governing Law. This Amendment shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and
assigns and shall be governed by and construed in accordance with the
laws of the State of New York.
8. Headings. Section headings in this Amendment are included herein for
convenience of reference only and shall not constitute a part of this
Amendment for any other purpose.
9. Counterparts. This Amendment may be executed by the parties hereto in
one or more counterparts, each of which shall be deemed an original and
all of which when taken together shall constitute one and the same
agreement.
IN WITNESS WHEREOF, this Amendment has been duly executed as of the day and year
first written above.
EXECUTONE INFORMAITON SYSTEMS, INC.,
As Borrower
By:
Name: Edward W. Stone
Title: Sr. VP and CFO
FLEET CAPITAL CORPORATION,
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As Agent and Lender
By:
Name: Howard Hanoman
Title: Sr. VP
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EXHIBIT 10-8
EXECUTONE Information Systems, Inc.
Transition and Retention Plan
The Board of Directors of EXECUTONE recognizes the current uncertainty
associated with the succession in chief executive leadership in the Company and
the board's announced consideration of a possible corporate restructuring that
would be intended to (1) enhance shareholder value, (2) more efficiently
allocate corporate resources and (3) channel management focus. The Board also
recognizes that senior management of the Company has made a significant,
debt-financed financial investment in the Company and its future through the
EXECUTONE 1994 Executive Stock Incentive Plan (the "Stock Plan") and that
management expects, and is committed to, playing a leadership role in
implementing the Company's business plans in order to protect and enhance the
value of their investment in the Company and that of all shareholders.
The Board has determined, due to the substantial changes in the
Company's business plan and focus since the date the Stock Plan was adopted and
due to the further substantial changes currently being considered for the
Company's business focus and leadership, to offer a retention and incentive
program ("Transition and Retention Plan") for key employees of the Company who
currently are participating in the Stock Plan, who are selected by the Board as
being eligible to participate and who agree to the terms and conditions
discussed below (the "Participating Employees").
1. Employment Commitment. Each Participating Employee who enrolls in the
Transition and Retention Plan and who discharges his or her employment duties
diligently in support of the business plans, unity and harmony of the Company,
will become entitled to the benefits described below as they vest according to
the terms of this Plan.
2. Extension of Loan Maturity Date. The maturity date on each
Participating Employee's Loan (as defined in the following section) will be the
earlier of March 31, 2001 or the date the Participating Employee ceases to be
employed by the Company. All interest due under a Loan will accrue, but will not
be payable by the Participating Employee until the maturity date of the Loan.
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3. Free Transferability. Shares purchased by Participating Employees
under the Stock Plan ("Plan Shares") will be freely transferable, subject to
applicable securities laws, Company policy and the pledge of such shares to the
Company as collateral for the Company's guarantee of the employee's loan (a
"Loan") from Bank of America National Trust and Savings Association (the "Bank")
and the advance of interest on the Loans by the Company for the employee's
benefit. (The collective amount owed to the Bank and the Company for principal
and interest outstanding on a Loan at any given time is referred to hereafter as
the "Loan Balance".) Any shortfall between the portion of a Loan attributable to
any Plan Shares that are sold and the application of the net sales proceeds
against the Loan Balance will continue to be an outstanding obligation of the
Participating Employee, subject to being offset by a Retention Payment as
described in paragraph 5 below.
4. Purchase Option. The Company will have the right, but not the
obligation, to purchase Plan Shares from a participating Employee, at the market
price therefor, at any time on or before March 31, 2001. The purchase price will
be paid in each case by first offsetting any Loan Balance, with any remaining
proceeds being delivered to the Participating Employee. To the extent the net
proceeds from the exercise of such purchase option are not sufficient to offset
fully the Loan Balance, the Participating Employee will remain liable for the
Loan Balance under the Loan (which will continue to have the same maturity date
and other provisions described herein), subject to the right to earn a Retention
Payment and the other provisions of this plan.
5. Retention Payment. Each Participating Employee will be given the
opportunity to earn a Retention Payment, as defined below. A Retention Payment
will be deemed earned and vested ratably on a quarterly basis from March 31,
1999 until March 31, 2001, through continued employment of the Participating
Employee as provided herein, as follows: on March 31, 1999, 33 1/3%; and 8.333%
at the end of each calendar quarter thereafter until March 31, 2001. The
Retention Payment earned by a Participating Employee will be paid in one
installment on the maturity date (as defined in paragraph 2 above) of the
Participating Employee's Loan.
6. Determination of Retention Payment Amount. The Retention Payment
shall be that amount as shall be equal to 110% of the excess of the Loan Balance
of the Participating Employee's Loan
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over (1) the purchase price paid for the Participating Employee's Plan Shares if
the Company exercises its option under paragraph 4 and purchases any or all of
the Participating Employee's Plan Shares, and/or (2) the closing market price of
the Participating Employee's Plan Shares still owned as of the maturity date of
the Participating Employee's Loan (either March 31, 2001, or as of the date of
an earlier termination of employment as provided herein). The Retention Payment
will be applied against a Participating Employee's Loan Balance, and any excess
after the Loan Balance has been paid in full will be paid in cash, subject to
any applicable withholding requirements, at the time the Retention Payment is
paid.
7. Acceleration of Vesting. A Retention Payment will be deemed fully
earned, vested and payable prior to March 31, 2001, if the Participating
Employee has remained continuously employed by the Company since the date of
this Plan and dies, becomes incapacitated, is terminated without cause, or if a
"change in control" of the Company occurs. In each case, the Retention Payment
will be deemed fully earned, vested and payable as of the date of the qualifying
occurrence.
For purposes of this Plan, a "change in control" shall be deemed to have
occurred if, (i) any person, including a "group" as defined in Section 13(d)(3)
of the Securities Exchange Act of 1934, becomes the owner or beneficial owner of
all or substantially all of the Company's assets or of Company securities having
50% 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 by the Board, as long as the majority of the Board of
Directors approving the purchases is the majority at the time the purchases are
made); 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
one year of the last of such transactions. For purpose of this Plan, 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. Neither the spin-off
of Unistar, nor the sale of all
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or a portion of the assets of the Company's Healthcare division, nor the
combination of those two events, shall constitute a Change in Control for the
purposes of this plan.
8. Application of Proceeds. The net proceeds from any sales of Plan
Shares, whether a full or partial sale in the market or a full or partial
purchase by the Company under paragraph 4, and any Retention Payment earned by a
Participating Employee will in each case be applied first against any Loan
Balance then due the Bank or the Company, with any excess proceeds or remaining
Retention Payment being payable to the Participating Employee. Unlike under the
Stock Plan, employees participating in the Transition and Retention Plan will
not be required to apply 25% of any bonus earned toward repayment of the Loan
Balance.
9. Examples. The following examples illustrate the application of the
Retention Payment in certain cases. These examples are given for illustrative
purposes only and reflect a few, but not all, potential circumstances. The
actual definition of the Retention Payment set forth above, as interpreted by
the Board of Directors, shall determine the computation and application of a
Retention Payment in each specific case.
Example (a). Assume a Participating Employee works until March
31, 2001; the Participating Employee's Loan comes due on March 31, 2001; the
Participating Employee's Plan Shares are contemporaneously sold in the market
for $2.50 a share with the net proceeds delivered to the Bank and the Company;
the Loan Balance equals $4.90 a share on the date the Plan Shares are sold and
the proceeds delivered to the Bank or the Company, as the case may be.
The Retention Payment is $2.64 [1.10 x ($4.90-2.50)] a share. The
Participating Employee would have discharged fully his or her liability to the
Company and the Bank on the Loan and would receive $0.24 a share in cash.
Example (b). A Participating Employee voluntarily quits on July
1, 1999; the Participating Employee's Loan comes due on the date employment is
terminated; the Participating Employee's Plan Shares are sold in the market for
$2.50 a share and the proceeds applied against the Loan Balance to the Bank and
the Company; the Loan Balance equals $4.37 a share at the time of sale and
delivery of proceeds. The Participating Employee is 41.67% vested in the maximum
Retention Payment.
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The Retention Payment is $0.86 [($4.37 - $2.50) x 1.10 x .4167] a
share. The Participating Employee remains liable for the remaining Loan Balance
of $1.01 a share ($4.37 - $2.50 - $0.86), which is then due and payable.
Example (c). The Participating Employee sells Plan Shares on
August 15, 1998 for $3.00 a share and continues to be employed; the Loan Balance
at the time of sale and delivery of proceeds equals $4.05 a share; the sales
proceeds are applied against the Loan Balance.
No Retention Payment is yet due and payable. The Retention
Payment that can be earned, as determined by the difference between the Loan
Balance and the net sales proceeds of the Plan Shares that were sold, is $1.16*
a share [1.10 x $1.05] for each share sold. The Retention Payment is still
subject to being earned and vested for the Participating Employee's account as
the Participating Employee's employment continues. So, for example, the
Participating Employee continues to be obligated for $1.05* a share plus
interest, but that amount will be offset and reduced ratably to zero, and the
Participating Employee will become entitled to receive any excess by the vesting
of the Retention Payment as each quarter passes towards March 31, 2001.
Example (d). A Participating Employee sells Plan Shares on June
15, 1999 for $5.00 a share and continues to be employed; the Loan Balance at the
time of sale and delivery of proceeds equals $4.37 a share; the sales proceeds
fully liquidates the Loan Balance to the Bank and the Company.
The Participating Employee retains $0.63 a share and receives no
Retention Payment under the Plan.
10. Stock Option. Each Participating Employee will be granted incentive
stock options in an amount equal to one option share for each two Plan Shares
originally purchased by the employee under the Stock Plan. The options will have
a five year life and will vest as follows: 25% on each of March 31, 1999, March
31, 2000, March 31, 2001 and March 31, 2002. The options will be granted as of
the date
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* These amounts will be increased by any interest that continues to
accrue on the Loan Balance, or is imputed for federal income tax purposes.
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the Participating Employee opts into this plan. The exercise price of the
options will be the fair market value of a share of Company common stock on the
date of grant.
11. Separation Payment and Benefits. The Company will pay each
Participating Employee, in addition to any Retention Payment, a separation
payment equal to nine months of the Participating Employee's base salary as of
the date of the Participating Employee's termination of employment (payable over
the succeeding nine months), if the Participating Employee has remained
continuously employed by the Company since the date of this Plan and the
Participating Employee dies, becomes incapacitated or is terminated without
cause at anytime after enrolling in the Transition and Retention Plan.
For purposes of the Transition and Retention Plan, termination for cause
shall include termination based on the following acts or omissions: theft,
embezzlement or fraud; acts of moral turpitude or other acts which tend to
disparage the reputation and good name of the Company; conviction of a felony;
willful or reckless disregard of the Company's policies, practices or best
interests; breach of the duties of confidentiality or loyalty; breach of a
fiduciary duty to the shareholders; the deliberate or negligent failure to
discharge one's duties in a zealous and good faith manner; the deliberate or
negligent failure to make good faith efforts to contribute to the spirit of
teamwork and internal harmony sought by EXECUTONE; and the deliberate or
negligent failure to make good faith efforts to support the current CEO, or any
interim or succeeding CEO, in the discharge of his or her duties. Determining
whether any of the above-described causes for termination exist lies within the
exclusive discretion of the Board. Before reaching a final determination
regarding a termination for cause, however, the Board will allow the affected
employee an opportunity to appear before designated members of the Board to
discuss his or her situation.
For purposes of the Transition and Retention Plan, a termination
otherwise without cause which results from a change in control or a downsizing
shall be considered a termination without cause. However, any Participating
Employee offered comparable employment with a purchaser of all or part of the
Company's business (e.g., Unistar), shall not be considered to have been
terminated for purposes of this Plan.
Nothing herein shall be construed as restricting the Company's right, in
its sole discretion, to change or reassign the duties and responsibilities for
which each Participating Employee is responsible in
<PAGE>
<PAGE>
the future. Resignation by a Participating Employee shall not be considered a
termination without cause for purposes of this Plan; however, if the base salary
of a Participating Employee is reduced by greater than five percent in a single
year, the Participating Employee will be allowed to resign and accept one month
severance plus a Retention Payment computed at 100% of the Loan Balance deficit
(rather than the 110% provided in paragraph 6 above) which will be applied
against the Participating Employee's Loan Balance. The Participating Employee
shall not be entitled to separation benefits if his or her salary is reduced
pursuant to a salary reduction imposed upon all managers or officers of a
similar classification or status.
The Company will continue to provide benefits covered by COBRA in
accordance therewith. The Company will also provide, for the applicable
separation period, participation in the same or comparable employee benefit
plans that were generally available to employees of the Company and in which the
Participating Employee was participating on the date of termination, on the same
basis as the employee was then participating.
12. Voluntary Participation. Participation in the Transition and
Retention Plan is voluntary. Any employee who does not elect to become a
Participating Employee in the Transition and Retention Plan may (1) elect to
terminate his or her employment with the Company now and receive the Retention
Payment (computed at 100% of the Loan Balance deficit rather than 110% provided
in paragraph 6 above, and to be applied against their Loan Balance) and a one
month separation payment in lieu of any and all other rights or claims, or (2)
continue to hold his or her Plan Shares in accordance with the current terms,
conditions, maturity date and interest payment requirements of the Stock Plan.
The maturity date for Stock Plan Loans has previously been extended by the Board
of Directors to December 31, 2001. The Company will continue to advance 85% of
the interest payments due on a Loan for the account of employees in the Stock
Plan who do not elect to become Participating Employees under the Transition and
Retention Plan for the years ending December 31, 1998 and December 31, 1999
(with the employee continuing to be liable for all such interest advanced). For
employees who do not elect to become Participating Employees under the
Transition and Retention Plan, all other provisions of the Stock Plan,
including, without limitation, the employee's obligation for all (i) accrued but
unpaid interest, (ii) to fund
<PAGE>
<PAGE>
directly 15% of interest due under a Loan with respect to 1998 and 1999 and 100%
of such interest thereafter as it becomes due, and (iii) to repay the Loan and
all accrued but unpaid interest upon maturity of the Loan (including early
maturity as a result of termination of employment) shall remain in effect.
13. Distributions on Plan Shares. Plan Shares, as used herein, shall
include any shares of Unistar or other property that may be distributed with
respect to Plan Shares. Any dividends or other distributions with respect to
Plan Shares will be first applied against any Loan Balance.
14. General. Any arrearages in interest payments or otherwise with
respect to an employee's obligation to fund or curtail Loan interest, or any
unpaid installments or required curtailments of principal, that arose prior to
January 1, 1998, must be cured immediately for an employee to participate in the
Transition and Retention Plan. The grant of the payment rights and options
proposed by this plan will be in lieu of (a) any and all other rights or claims
a Participating Employee may have prior hereto for incentive, retention,
separation or similar payments or rights, whether relating to the Stock Plan,
Loans, the change in leadership of the Company, any proposed restructuring of
the Company, or otherwise, as well as (b) all claims arising from the employee's
employment prior to the effective date of the Plan, and shall be so confirmed as
the Company requires; provided, however, that this plan will not (i) affect
options already granted and outstanding or written incentive plans already
issued; or (ii) preclude the grant of other options or performance and incentive
awards from time to time as part of any other key employee option or incentive
program the Company may adopt in the future. Participating Employees shall be
responsible for any and all income taxes attributable to any of the payments or
benefits received or receivable by them hereunder. Participation in this program
will be solely for incentive purposes and will not be deemed an entitlement to
employment for a minimum term or otherwise change the at-will nature of each
Participating Employee's employment. All rights and obligations hereunder, as
well as those set forth in the accompanying Transition Plan Acknowledgment and
Waiver, are subject to obtaining the Bank's consent to implement the plan. The
Company's obligations under this plan will be unfunded and subject to being
diluted by or subordinated to the general claims of creditors of the Company
that exist today or that may arise in the future. The Board shall have the full
discretion to interpret any and all terms
<PAGE>
<PAGE>
and provisions of this plan and its decisions as to the meaning, intent and
application of any term or provision hereof shall be final and conclusive.
EXECUTONE INFORMATION SYSTEMS, INC.
By: ________________________________
Alan S. Kessman
Interim Chief Executive Officer
<TABLE>
<S> <C> <C>
I acknowledge receipt of the TRP Plan ________________________ _________________
Signature Date
I choose to accept participation in the TRP ________________________ _________________
Plan Signature Date
I choose not to accept participation in the
TRP Plan _________________________ _________________
Signature Date
As part of my choice not to participate in the
TRP Plan, I have chosen the alternative
described in paragraph 12 to either:
(1) terminate my employment with the
Company, or _________________________ _________________
Signature Date
(2) continue to hold my Plan shares in
accordance with the terms described _________________________ _________________
Signature Date
</TABLE>
<PAGE>
<PAGE>
EXHIBIT 10-21
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 NOVEMBER 18, 2003,
A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE COMPANY.
Issued as of
Void after November 18, 2003
November 18, 1998
WARRANT TO PURCHASE 25,000 SHARES
OF COMMON STOCK
OF
EXECUTONE INFORMATION SYSTEM, INC.
(incorporated under the Laws of the
Commonwealth of Virginia)
THIS IS TO CERTIFY THAT, JOHN P. HECTUS ("Hectus") or his permitted
registered assigns (Hectus 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
THIRTY ONE THOUSAND TWO HUNDRED FIFTY DOLLARS ($31,250) or ONE and 25/100
DOLLARS ($1.25) 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) November 18, 1998 and on or before 5:00 p.m. (Eastern Standard Time), on
November 18, 2003.
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 November 18, 1999, one-third on
November 18, 2000 and one-third on November 18, 2001; provided, however, that if
Hectus ceases to be a director of the Company, either voluntarily or because he
has not been reelected by the Shareholders of the Company, then Hectus'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.
1. Exercise of Warrant.
This Warrant may be exercised in whole or in part by the Holder
hereof, by delivery to the
<PAGE>
<PAGE>
Company at its principal office at 478 Wheelers Farms Road, Milford, CT 06460
of (a) a written notice to the Holder, in substantially the form of the
Subscription Notice attached hereto as Exhibit "A", of such Holder's election to
exercise this Warrant, which notice shall specify the number of Underlying
Shares to be purchased, (b) a check payable to the Company in an amount equal to
the aggregate Current Price (as defined below) of the number of shares of Common
Stock being purchased and (c) this Warrant. The Company shall, as soon as
reasonably practicable, execute and deliver or cause to be delivered to Holder,
in accordance with such notice, one or more certificates representing the
aggregate number of shares of Common Stock specified in such notice. The stock
certificate(s) so delivered shall be issued in the name of the Holder or such
other name as shall be designated in such notice. Such certificate(s) shall be
deemed to have been issued and the Holder or any other person so designated to
be named therein shall be deemed for all purposes to have become a Holder of
record of such Underlying Shares as of the date such notice is received by the
Company. If this Warrant shall have been exercised only in part, the Company
shall, at the time of delivery of said certificate(s), deliver to the Holder a
new Warrant evidencing the rights of the Holder to purchase the remaining shares
of Common Stock called for by this Warrant (stated in Shares), which new Warrant
shall in all other respects be identical to this Warrant, or, at the request of
the Holder, appropriate notation may be made on this Warrant and the same
returned to the Holder.
2. Fractional Shares.
This Warrant is only exercisable with respect to whole Underlying
Shares and not fractions thereof unless the Company otherwise agrees.
Accordingly, the Company shall not be required to issue certificates
representing fractions of Underlying Shares upon any exercise of this Warrant;
provided, however, in respect of any final fraction of a share it may, at its
sole option, in lieu of delivering a fractional share, make a payment in cash
based upon the then fair market value of such fraction of the Underlying Shares.
3. Transfer, Division and Combination.
No Warrant granted under this Agreement shall be transferable by
Hectus otherwise than by Will or the laws of descent and distribution and,
during the lifetime of Hectus, 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) Hectus' heirs
and devisees, or (ii) Hectus' 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
<PAGE>
<PAGE>
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 not 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 November 18, 2003, a copy of which is on file at the
principal office of the Company."
This Warrant shall be exercisable (1) only if the issue of
Underlying Shares issuable upon exercise is exempt from the requirements of
registration under the Securities Act of 1933, as amended (the "Act") (or any
similar statute then in effect) and any applicable state securities law or (2)
upon registration of such Underlying Shares in compliance therewith. This
Warrant shall be transferable only (i) with the prior written consent of the
Company, or (ii) by will or the laws of descent and distribution, and in either
event only if the Warrant is registered or the transfer is exempt from the
requirements of registration under the Act (or any similar statute then in
effect) and any applicable state securities law.
5. Acknowledgment by the Holder of Restrictions.
The Holder of this Warrant and certificates representing the
Underlying Shares, by acceptance hereof and thereof, acknowledges and agrees
that: (a) the Warrant and the Underlying Shares have not been registered under
the Act in reliance upon exemptions from the registration provisions of the Act
set forth therein, or in the rules and regulations promulgated thereunder (and
there is no obligation on the part of the Company to register the Warrant or the
Underlying Shares under the Act); and (b) the Warrant and the Underlying Shares
will not be freely tradeable. The Holder represents that he fully understands
the restrictions on his ability to transfer this Warrant and the Underlying
Shares. Without limiting the foregoing and by way of illustration only, the
Holder understands that if he presently desired to sell Underlying Shares
pursuant to the exemption from the registration provisions of the Act contained
in Rule 144 (the "Rule") promulgated under the Act, as presently constituted,
such Underlying Shares might be sold by him pursuant to the Rule only after a
minimum holding period of two (2) years (computed in accordance with the Rule)
and, thereafter, only in the limited amounts, in the manner and under the
limited circumstances prescribed by the Rule.
6. Change in Control.
The Warrant that is outstanding on a Control Change Date, as
hereinafter defined, shall be exercisable in whole or in part on that date and
thereafter during the remainder of the Warrant period stated in this Warrant
Agreement (the "Agreement"). A Change in Control occurs if, after the date of
this Agreement, (i) any person, including a "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.
<PAGE>
<PAGE>
7. Change in Management.
Notwithstanding any specified vesting or applicable early exercise
Warrant prices, if this Warrant is outstanding on the date Hectus' 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 Hectus 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 Hectus 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 Hectus' directorship with the Company within the meaning of this
paragraph.
In the event Hectus' 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 November 18, 2003.
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 One and 25/100 Dollars ($1.25).
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.
<PAGE>
<PAGE>
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 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.
<PAGE>
<PAGE>
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 06460, 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______ day of ___________, 19___
COMPANY:
EXECUTONE INFORMATION SYSTEMS, INC., a
Virginia corporation
By________________________________
Stanley Kabala
Its President and Chief Executive Officer
[CORPORATE SEAL] ATTEST:
____________________________________
Barbara C. Anderson
Vice President, Law and Administration
HOLDER:
By________________________________
John P. Hectus
<PAGE>
<PAGE>
EXHIBIT "A"
SUBSCRIPTION NOTICE
The undersigned, the Holder of the foregoing Warrant, hereby elects to
exercise purchase rights represented by such Warrant for, and to purchase
thereunder,______________________________________________(_____________________)
shares of the Common Stock covered by such Warrant and herewith makes payment in
full therefor in the amount of __________________________________________Dollars
($________________) in cash or check made payable to the Company, and requests
that one or more certificates for such shares (and any securities or property
deliverable upon such exercise) be issued in the name of and delivered to
____________________________________________________________, whose address is
____________________________________________________________.
The undersigned agrees that, in the absence of an effective registration
statement with respect to Common Stock issued upon this exercise, the
undersigned is acquiring such Common Stock for investment and not with a view to
distribution thereof and that the certificate or certificates representing such
Common Stock may bear a legend substantially as follows: "Neither this Warrant
nor the Shares of Common Stock issuable upon exercise of this Warrant have been
registered under the Securities Act of 1933, as amended (the "Act"). Neither
this Warrant nor such Shares may be sold, transferred, pledged or hypothecated
in the absence of an effective registration statement for the shares under the
Act or otherwise in compliance with the Act." The undersigned further agrees
that the shares represented by this Warrant may not be transferred except as
provided in Sections 3 and 4 of the Warrant to purchase Common Stock of the
Company expiring November 18, 2003, a copy of which is on file at the principal
office of the Company.
DATED:_______________ ____________________________
John P. Hectus
Address: 55 Lowther Avenue
Toronto, Ontario
Canada M5R 1C5
<PAGE>
<PAGE>
ASSIGNMENT
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto
___________________________________________, the rights represented by the
foregoing Warrant of EXECUTONE Information Systems, Inc. and appoints
_____________________________________________, attorney to transfer said rights
on the books of said corporation, with full power of substitution in the
premises.
DATED:____________________ ____________________________
John P. Hectus
NOTICE: The signature to this assignment must correspond with the name as
written upon the face of the within Warrant in every particular, without
alteration or enlargement or any change whatsoever.
<PAGE>
<PAGE>
EXHIBIT 10-23
NEITHER THER WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE
OF THER WARRANT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (the "Act"). NEITHER THER 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 MARCH 1, 2004, A
COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE COMPANY.
Issued as of
Void after March 1, 2004
March 1, 1999
WARRANT TO PURCHASE 25,000 SHARES
OF COMMON STOCK
OF
EXECUTONE INFORMATION SYSTEM, INC.
(incorporated under the Laws of the
Commonwealth of Virginia)
THER IS TO CERTIFY THAT, MALINDA MITCHELL ("Mitchell") or her permitted
registered assigns (Mitchell 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
SEVENTY SIX THOUSAND FIVE HUNDRED DOLLARS ($76,500) or THREE and 6/100 DOLLARS
($3.06) 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) March 1, 1999
and on or before 5:00 p.m. (Eastern Standard Time), on March 1, 2004.
The 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 March 1, 2000, one-third on March
1, 2001 and one-third on March 1, 2002; provided, however, that if Mitchell
ceases to be a director of the Company, either voluntarily or because she has
not been reelected by the Shareholders of the Company, then Mitchell's vesting
of rights shall terminate as of the date she is no longer a director of the
Company.
THE EXERCISE AND TRANSFER OF THER WARRANT ARE RESTRICTED
BY THE PROVISIONS OF SECTION 4 HEREOF.
1. Exercise of Warrant.
The Warrant may be exercised in whole or in part by the Holder
hereof, by delivery to the
<PAGE>
<PAGE>
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 the 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) the 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 the Warrant shall have been exercised only in part, the Company
shall, at the time of delivery of said certificate(s), deliver to the Holder a
new Warrant evidencing the rights of the Holder to purchase the remaining shares
of Common Stock called for by the Warrant (stated in Shares), which new Warrant
shall in all other respects be identical to the Warrant, or, at the request of
the Holder, appropriate notation may be made on the Warrant and the same
returned to the Holder.
2. Fractional Shares.
The 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 the 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 the Agreement shall be transferable by
Mitchell otherwise than by Will or the laws of descent and distribution and,
during the lifetime of Mitchell, shall not be exercisable by any other person,
but only by her. 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 the paragraph and Section 4 hereof, the
Warrant and all rights hereunder are transferable ONLY with respect to (i)
Mitchell's heirs and devisees, or (ii) Mitchell's Estate in whole or in part, on
such books upon surrender of the Warrant at such office, together with a written
assignment of the Warrant duly executed by the Holder hereof or her 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 the Warrant
shall be canceled promptly. If and when the Warrant is assigned in blank, the
Company may, but shall not be obligated to, treat the bearer hereof as the
absolute owner of the 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, the Warrant and the
certificates representing the
<PAGE>
<PAGE>
Underlying Shares shall be stamped or otherwise imprinted with a legend
substantially in the following form:
"Neither the Warrant nor the shares of Common Stock issuable upon
exercise of the Warrant have been registered under the Securities Act
of 1933, as amended (the "Act"). Neither the Warrant not 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 March 1, 2004, a copy of which is on file at the principal
office of the Company."
The 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. The 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 the 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 she fully understands
the restrictions on her ability to transfer the Warrant and the Underlying
Shares. Without limiting the foregoing and by way of illustration only, the
Holder understands that if she 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 her 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 the Warrant
Agreement (the "Agreement"). A Change in Control occurs if, after the date of
the 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 the 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.
<PAGE>
<PAGE>
7. Change in Management.
Notwithstanding any specified vesting or applicable early
exercise Warrant prices, if the Warrant is outstanding on the date Mitchell'
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 the paragraph, the 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 the paragraph, the
Transaction Date is the date on which an event described in subsections (i) or
(ii) hereof occurs. The date upon which Mitchell 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 Mitchell as a director or voting for
her earlier removal with or without cause or through her removal by a majority
of the members of the Board of Directors shall constitute a constructive
termination of Mitchell' directorship with the Company within the meaning of the
paragraph.
In the event Mitchell' 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 the 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 the Warrant
be exercisable after March 1, 2004.
8. Current Price: Adjustments.
As used in the 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 the Agreement. The
Purchase Price of a Share shall be Three and 6/100 Dollars ($3.06).
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 the
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.
<PAGE>
<PAGE>
9. Reservation of Shares.
The Company covenants and agrees that (a) so long as the 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 the Warrant, an adequate number of Shares
of Common Stock for delivery at the times and in the manner provided herein upon
exercise of the Warrant; (b) the Underlying Shares delivered upon exercise of
the 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 the 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 the 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 the 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 the Warrant, by accepting the same, consents and
agrees with the Company that (a) the Warrant is transferable, in whole or in
part, only upon compliance with the conditions set forth herein by the
registered holder hereof in person or by an attorney duly authorized in writing
by the Holder at the office of the Company as provided herein; (b) the 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 the 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.
<PAGE>
<PAGE>
The 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. The 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 06460, and any notice to the Holder shall be
addressed to her address as reflected on the records of the Company, or at such
other address as the Company, the Holder and her 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 the Warrant to be
signed in its name by its President or a duly authorized Vice President.
DATED the______ day of ___________, 19___
COMPANY:
EXECUTONE INFORMATION SYSTEMS, INC., a
Virginia corporation
By________________________________
Stanley Kabala
Its President and Chief Executive Officer
[CORPORATE SEAL] ATTEST:
____________________________________
Barbara C. Anderson
Vice President, Law and Administration
HOLDER:
By________________________________
Malinda Mitchell
<PAGE>
<PAGE>
EXHIBIT "A"
SUBSCRIPTION NOTICE
The undersigned, the Holder of the foregoing Warrant, hereby elects to
exercise purchase rights represented by such Warrant for, and to purchase
thereunder,______________________________________________(_____________________)
shares of the Common Stock covered by such Warrant and herewith makes payment in
full therefor in the amount of __________________________________________Dollars
($________________) in cash or check made payable to the Company, and requests
that one or more certificates for such shares (and any securities or property
deliverable upon such exercise) be issued in the name of and delivered to
____________________________________________________________, whose address is
____________________________________________________________.
The undersigned agrees that, in the absence of an effective registration
statement with respect to Common Stock issued upon the exercise, the undersigned
is acquiring such Common Stock for investment and not with a view to
distribution thereof and that the certificate or certificates representing such
Common Stock may bear a legend substantially as follows: "Neither the Warrant
nor the Shares of Common Stock issuable upon exercise of the Warrant have been
registered under the Securities Act of 1933, as amended (the "Act"). Neither the
Warrant nor such Shares may be sold, transferred, pledged or hypothecated in the
absence of an effective registration statement for the shares under the Act or
otherwise in compliance with the Act." The undersigned further agrees that the
shares represented by the Warrant may not be transferred except as provided in
Sections 3 and 4 of the Warrant to purchase Common Stock of the Company expiring
March 1, 2004, a copy of which is on file at the principal office of the
Company.
DATED:_______________ ____________________________
Malinda Mitchell
Address: 7 Odell Place
Atherton, CA 94027
<PAGE>
<PAGE>
ASSIGNMENT
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto
___________________________________________, the rights represented by the
foregoing Warrant of EXECUTONE Information Systems, Inc. and appoints
_____________________________________________, attorney to transfer said rights
on the books of said corporation, with full power of substitution in the
premises.
DATED:____________________ ____________________________
Malinda Mitchell
NOTICE: The signature to the assignment must correspond with the name as written
upon the face of the within Warrant in every particular, without alteration or
enlargement or any change whatsoever.
<PAGE>
<PAGE>
Exhibit 21
SUBSIDIARIES OF EXECUTONE INFORMATION SYSTEMS, INC.
<TABLE>
<CAPTION>
JURISDICTION OF %
NAME INCORPORATION OWNERSHIP BUSINESS
<S> <C> <C> <C>
eLottery, Inc. Delaware 100% Lottery Services and Systems
UniStar Entertainment, Inc. Idaho 100% Lottery Management
Executone Systems Canada Inc. Canada 100% Marketing in Canada
</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, 1998, 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, 33-50628,
33-57519, 33-63637, 333-7279 and 33-62257.
ARTHUR ANDERSEN LLP
Stamford, Connecticut
April 14, 1999
<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, 1998 AND THE RELATED CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,482
<SECURITIES> 0
<RECEIVABLES> 27,251
<ALLOWANCES> 1,720
<INVENTORY> 24,753
<CURRENT-ASSETS> 56,732
<PP&E> 23,034
<DEPRECIATION> 12,430
<TOTAL-ASSETS> 110,305
<CURRENT-LIABILITIES> 40,403
<BONDS> 23,693
0
7,300
<COMMON> 498
<OTHER-SE> 35,966
<TOTAL-LIABILITY-AND-EQUITY> 110,305
<SALES> 133,498
<TOTAL-REVENUES> 133,498
<CGS> 91,777
<TOTAL-COSTS> 91,777
<OTHER-EXPENSES> 86,001
<LOSS-PROVISION> 1,227
<INTEREST-EXPENSE> 2,393
<INCOME-PRETAX> (41,091)
<INCOME-TAX> (4,232)
<INCOME-CONTINUING> (36,859)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (36,859)
<EPS-PRIMARY> (0.74)
<EPS-DILUTED> (0.74)
<PAGE>
