-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MfP+cgX6af9TENx0uilORwXc70nHLUHewF9NRLTO0bx7pAJIN5Xzm7uPB6D6t9Ib piI5N7814pe0jFFbCroV1A== 0000725282-97-000016.txt : 19970501 0000725282-97-000016.hdr.sgml : 19970501 ACCESSION NUMBER: 0000725282-97-000016 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970430 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: EXECUTONE INFORMATION SYSTEMS INC CENTRAL INDEX KEY: 0000725282 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-TELEPHONE INTERCONNECT SYSTEMS [7385] IRS NUMBER: 860449210 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-11551 FILM NUMBER: 97590752 BUSINESS ADDRESS: STREET 1: 478 WHEELERS FARMS RD CITY: MILFORD STATE: CT ZIP: 06460 BUSINESS PHONE: 2038767600 MAIL ADDRESS: STREET 1: 478 WHEELERS FARMS RD CITY: MILFORD STATE: CT ZIP: 06460-1847 FORMER COMPANY: FORMER CONFORMED NAME: VODAVI TECHNOLOGY CORP DATE OF NAME CHANGE: 19880802 10-K/A 1 FORM 10-K/A SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended December 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from to Commission File Number: 0-11551 EXECUTONE Information Systems, Inc. (Exact name of registrant as specified in its charter) Virginia 86-0449210 (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification No.) 478 Wheelers Farms Road, Milford, Connecticut 06460 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (203)876-7600 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered N/A None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share 7 1/2% Convertible Subordinated Debentures, Due March 15, 2011 (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the common stock held by non-affiliates of the registrant (assuming for this purpose that all executive officers and directors of the registrant are affiliates) as of March 24, 1997 was $117,323,737, based on the last sale price for the common stock on that date. The number of shares outstanding of the registrant's only class of common stock, $.01 par value per share, as of March 24, 1997, was 49,471,481. DOCUMENTS INCORPORATED BY REFERENCE The following documents are incorporated by reference into the Part of this Form 10-K indicated below: Part II 1996 Annual Report to Shareholders TABLE OF CONTENTS Item Page PART I 1. Business 1 2. Properties 11 3. Legal Proceedings 11 4. Submission of Matters to a Vote of Security Holders 12 Executive Officers of the Registrant 13 PART II 5. Market for Registrant's Common Equity and Related Stockholder Matters 16 6. Selected Financial Data 16 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 16 8. Financial Statements and Supplementary Data 16 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 16 PART III 10. Directors and Executive Officers of the Registrant 17 11. Executive Compensation 18 12. Security Ownership of Certain Beneficial Owners and Management 25 13. Certain Relationships and Related Transactions 29 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 30 PART I ITEM 1. BUSINESS General EXECUTONE Information Systems, Inc. ("EXECUTONE" or the "Company") develops, markets and supports voice and data communications systems. Products and services include telephone systems, voice mail systems, in-bound and out-bound call center systems and specialized healthcare communications systems. The Company, through its Unistar Entertainment subsidiary, also has the exclusive right to design, develop and manage the National Indian Lottery (the "NIL" or the "Lottery"). Products are sold under the EXECUTONE'r', INFOSTAR'r', IDS'tm', LIFESAVER'tm', INFOSTAR/ILS'tm' and UNISTAR'tm' brand names through a worldwide network of direct sales and service employees and independent distributors. EXECUTONE's executive offices are located at 478 Wheelers Farms Road, Milford, Connecticut 06460, telephone (203) 876-7600. The Common Stock of EXECUTONE is traded on the NASDAQ National Market System under the symbol "XTON", and its Convertible Subordinated Debentures due 2011 trade on the NASDAQ system under the symbol "XTONG". Recent Developments In 1996, the Company sold its direct sales and service organization, including its network services division and the national service center, to Clarity Telecom Holdings, Inc. d/b/a/ Executone Business Solutions ("Clarity") for consideration valued at $69.6 million. The Company and Clarity also entered into a five-year exclusive distributor agreement pursuant to which Clarity sells and services EXECUTONE'r' and INFOSTAR'r' telephone products to business and commercial locations that require up to 400 telephones. The sale did not include the Pittsburgh direct sales and service office, which the Company separately sold to one of its existing independent distributors. After the sale, the Computer Telephony business consists of telephone products sales to independent distributors, of which Clarity is the largest distributor, along with the National Accounts and Federal Systems marketing groups. The Company retains its Healthcare Communications and Call Center Management businesses and the Unistar business. In April 1996, the Company rescinded its distribution agreement with GPT Video Systems due to failures by GPT to deliver properly functioning videoconferencing products on a timely basis. The Company has also commenced a legal action against GPT to recover its damages. In June 1996, the Company completed the sale of its videoconferencing division, including customer service contracts and certain inventory. On December 19, 1995, the Company acquired 100% of the common stock of Unistar Gaming Corp., a Delaware corporation ("Unistar Gaming"). Unistar Gaming, through its subsidiary Unistar Entertainment, Inc. ("Unistar"), has an exclusive five-year contract to design, develop, finance, and manage the Lottery, a national lottery 1 authorized by federal law and by a compact between the State of Idaho and the Coeur d'Alene Indian Tribe of Idaho ("Coeur d'Alene Tribe" or the "Tribe"). In return for providing these management services, Unistar will be paid a fee equal to 30% of the profits of the Lottery. The Company acquired 100% of Unistar for 3.7 million shares of Common Stock, 250,000 shares of its Cumulative Convertible Preferred Stock, Series A ("Series A Preferred Stock") and 100,000 shares of its Cumulative Contingently Convertible Preferred Stock, Series B ("Series B Preferred Stock"). The telephone operations of the Lottery may not begin until the resolution of a pending legal proceeding. Certain states have attempted to block the NIL by filing letters under 18 U.S.C. Section 1084 preventing long-distance carriers from providing telephone service to the NIL based on allegations that the NIL is not legal. The Coeur d'Alene Tribe has initiated legal action to argue that the Lottery is authorized by the Indian Gaming Regulatory Act ("IGRA") passed in 1988, that IGRA preempts state and federal statutes, that Section 1084 is inapplicable and that the states lack authority to issue the Section 1084 notification letters to any carrier. On February 28, 1996, the Coeur d'Alene Tribal Court ruled that all requirements of IGRA have been satisfied, that Section 1084 is inapplicable and that the states lack jurisdiction to interfere with the NIL which will operate in Idaho on the Reservation, and that the long distance carrier cannot refuse service to the NIL based upon Section 1084, an allegation that the NIL is in violation of IGRA or the federal anti-lottery statutes. This ruling and a related order dated May 1,1996 are being appealed to the Tribal Appellate Court and probably will be appealed ultimately to United States federal courts as well. The Company has been advised by its outside counsel, Hunton & Williams, that based upon such firm's review of the applicable statutes, regulations and case law, it believes that the National Indian Lottery is authorized under IGRA and that the favorable rulings issued by the Coeur d'Alene Tribal Court on February 28, and May 1, 1996 should be upheld on appeal. Overview of Business The Company's revenues are derived from product sales to distributors, direct sales of healthcare communications and call center products, and direct sales to national accounts and federal government customers, as well as installations, additions, changes, upgrades or relocation of previously installed systems, maintenance contracts, and service charges to the existing base of healthcare, call center, national account and federal government customers. The Company's products and services are marketed and sold through a national network of Company direct sales and service employees and independent distributors. The Computer Telephony business offers value-added products and services to the small to medium-sized business customer. The Company's integrated digital telephone systems emphasize flexible software applications, such as data switching and computer telephone interface, designed to enhance the customer's ability to communicate, obtain and manage information. The Company's telephone systems provide the platform for its other voice and data software applications, such as automatic call distribution. The Healthcare Communications business provides to its healthcare facility customers integration of voice and data between nurse and patient communication systems and hospital information systems, resulting in increased flexibility and efficiency in hospital operations, and improved patient care. EXECUTONE has been a recognized name in this market for many years with its LIFESAVER'tm' and CARE/COM'r'II-E nurse call systems. The Company markets software applications specific to hospital and nursing homes to help resolve other labor intensive tasks. The Healthcare Communications business also markets the INFOSTAR/ILS'tm' locator system, which can improve productivity, save time and expense for users and eliminate overhead paging by instantly locating staff and equipment in a facility. Each 2 person or piece of equipment wears an individually coded badge that transmits infrared signals to sensors placed throughout the facility, which forward the location information to a central processing unit. The ILS system can be integrated with the Company's telephone systems and nurse call systems to provide additional productivity improvements for hospital environments. The Call Center Management business develops and sells sophisticated telephony products that integrate a computerized digital telephone system platform with high-volume inbound, outbound and internal call processing systems. Such systems include automatic call distribution systems, predictive dialing systems, and scripting software to assist agents handling calls. Certain of these systems also provide data interface with host or mainframe computers. These systems are sold to call center customers that have a need for systems to efficiently and cost- effectively receive or place their customer or prospect calls, distribute those calls to available live operators, obtain information from callers, record and distribute messages from callers, and produce management reports on call activity. In 1995, the Company acquired Unistar. Unistar has an exclusive five-year contract with the Coeur d'Alene Tribe to design, develop, finance, and manage the Lottery, a national lottery authorized by IGRA and a compact between the State of Idaho and the Tribe. Unistar provides development and management of the software, network design and call center applications for the Lottery's operations. The telephone operations of the Lottery may not begin until resolution of a pending legal proceeding. See "Legal Proceedings" Although the Unistar legal situation is essentially unchanged, management is hopeful that the Tribe will receive a positive decision early this year in the Tribal Appellate Court, affirming the Tribal Court's rulings last year on the legality of the National Indian Lottery, and that such a decision will accelerate a federal court decision. In the meantime, Unistar is developing the business and gaming systems needed to conduct the Lottery, and plans to test these systems at an Internet test site between April and June 1997. Assuming the successful completion of these tests, Unistar plans a controlled expanded test from July to September, and assuming continued successful results, a national launch over the Internet in the fourth quarter of 1997. Computer Telephony Products The Company develops and distributes a complete line of applications-oriented computer telephony products that are easy to install, easy to maintain and easy to use, and that create visible value for its customers. The Company's complete portfolio of applications are built upon the Integrated Digital System (IDS'tm') family of digital telephone systems. Products range from PBXs to satisfy the basic voice communications needs of small- to medium-sized businesses to standards-compliant CT applications, standalone and LAN-based applications including voice mail, unified messaging, Automatic Call Distribution (ACD) and wireless communications. The Company's telephone systems are characterized by flexible software and a hardware design that makes them readily adaptable to evolving technology and customer requirements. The Company attributes the market acceptance of its systems to standards-based, cost- effective design and to the sophistication of its software options. The Company's systems include an integrated automated attendant feature to answer and transfer calls quickly and efficiently without operator intervention. The Integrated Operator Terminal and management reports capabilities permit the monitoring of calls and improve the efficiency of directing calls to the appropriate extensions. The Company's latest achievement in call processing, the Ultimate Operator, takes the operator's console to a new level by delivering superior call handling and reporting 3 capabilities in a Windows environment. The IDS systems also support sophisticated call center and healthcare applications in addition to the Company's Integrated Locator System. The recent introduction of the Company's LAN Card allows users with access to their organization's network to manage the IDS through their desktop PCs. The Company has steadily introduced a portfolio of products fully compliant with the latest industry standards (TAPI, TSAPI, CSTA) and incorporating the most advanced elements of computer telephony integration. The TAPI telephones support any desktop application using the TAPI standard for computer-telephone integration. Unified Messaging and Voice Activated Speed Dial further increase productivity by speeding the calling process. The Company also offers a voice mail system that can be integrated with the IDS telephone systems and with telephone systems manufactured by others. The INFOSTAR/VX2 voice mail system receives, records, stores, distributes, transfers and replays messages from both external and internal callers and can supplement other call center systems. In 1996 the Company introduced the INFOSTAR/VXC Voice Exchange Card, a complete voice processing system built on a card that integrates directly into the IDS switch, eliminating the need for a standalone voice mail system. In 1997, the Company signed an agreement to distribute the Active Voice line of voice processing and unified messaging products. The Company develops its application-specific software options using high-level programming languages to facilitate further enhancements and portability. EXECUTONE's software includes remote capabilities built into certain systems that enable the Company to customize and update selected features continuously, which increases the value of such systems and lengthens their useful lives. Certain of the Company's systems are capable of having service diagnostics, updates and modifications performed on a remote basis. The ability to provide such off-site servicing increases the efficiency of customer support and service. Healthcare Communication Products The Company develops, manufactures, markets and services a line of specialized internal communications systems that are used primarily in the healthcare industry. These internal communications systems are microprocessor-based patient-to-nurse communication systems, intercoms, paging and sound equipment, and room status indicators. Platform Systems. Released on January 17, 1997, the Healthcare Communications Platform (HCP) is the communications solution dedicated to a single platform technology for complete systems integration. The HCP exemplifies the Company's commitment to provide total communication capability. With the HCP system, the nurse call function is now integrated with an IDS phone system to provide the dual function at one master control center. Nurse call, locator, wireless phones, pocket pagers, patient reports, and management reports can all integrate seamlessly using a single platform fully utilizing all product benefits. Nurse Call Systems. The Company's LIFESAVER'tm' nurse call system is an advanced system integrating voice and data communication between nurse and patient and providing enhanced self-diagnostics. The LIFESAVER system is a state-of-the-art communications network that provides routine and emergency signaling, voice communications and data transmission. The nurse console offers menu-driven functions and step-by-step user prompts. The system is highly flexible, offering many programmable features that allow customization of its operations to the hospital's needs. A single system can serve more than 300 patient beds (150 rooms) and up to eight nurse 4 control stations, and up to eight systems can be networked for centralized operation. The LIFESAVER integrates with the Company's locator system. The CARE/COM II-E nurse call system represents the first step in EXECUTONE's plan to bring the benefits of a totally integrated communications system to the healthcare market on the Company's IDS digital platform. The CARE/COM lI-E system provides patient-to-staff and staff-to-staff voice communication on an automatic three-level call priority basis. This new system can currently support 72 patient stations per system, with the ability to integrate three systems together and support 216 patient stations. A five-line LCD display Nurse Control Station allows simple call processing and system operation. The system is highly flexible to meet the individually defined needs of today's hospitals and long-term care facilities. Patient Reporting Systems. The Healthcare Division also markets the INFOSTAR /PRS patient reporting system, an automated voice storage system that allows the efficient transfer of patient information between nurses. Patient reports are password-protected for confidentiality and admission, and discharge and transfer information are also supported. The system uses standard telephone instruments and provides full voice messaging capability. The INFOSTAR/PRS system reduces report time, provides continuity at shift changes, and improves report quality. Locator Systems. The Company's INFOSTAR/ILS'tm' locator system is an integrated system using infrared transmitter badges to communicate location data to sensors installed throughout a facility. The badges transmit regularly at user-programmed intervals and can be worn by staff personnel or attached to equipment. The location data is collected by the sensors and forwarded to a central processing unit that organizes the data so it can be accessed at one or more display stations. The display of staff and equipment location information can be in the form of a list or in the form of a map of the facility using icons. The display can be filtered to show only particular staff members, groups of personnel, particular pieces of equipment or groups of equipment. The system can be integrated with either the IDS telephone systems, allowing the activation of features and display of information on the telephone set, or the Company's nurse call systems, allowing the activation of features and display of information at the nurse control station and patient stations. The INFOSTAR/VLS version of this product allows outside callers using non-IDS based products to locate personnel within a facility, find out who the person is with, complete the call, or leave a voice message. The ILS and VLS systems can also be integrated to other manufacturers' PBXs. Nortel has now made ILS available to its dealer network for sale by its dealers in conjunction with Nortel PBXs. The ILS system is also marketed by the Computer Telephony sales channels for office environments. The Events Processing System collects information from the ILS system and associates the data to logical, workable and productive real time data for a customer's employees and assets. Specific applications include: door monitoring, wandering patient alert, staff presence indicators, badge button press (staff assist or emergency assist), asset management and equipment tracking. The system allows a facility to program events that will trigger alarms, lock doors, light lights, open elevator doors, and more. The system is completely programmable, which allows the customer to determine which applications will best fit their needs. Wireless Telephone Systems. The Healthcare Communications group also markets the Ericsson Freeset, an in-building wireless communications system which operates on the 900MHz bandwidth. Its low power output (.75mW) makes it ideal for the healthcare environment, which is very sensitive to high power devices such as cellular telephones and 2-way radios that may interfere with vital telemetry equipment. The Freeset system is extremely flexible in providing complete coverage over a large area 5 based on its ability to add as many base stations as necessary to provide coverage. The system can grow to support up to 600 handsets, making it the system of choice for large installations. The Company also markets the Monarch'tm' 1.9GHz Wireless Telephone System, which is an in-building wireless communications tool that provides cellular-like mobility to a facility without expensive airtime charges. The Monarch system operates on the 1.9GHz U-PCS bandwidth set aside by the FCC strictly for personal communications use which means the signal will not cause interference or be interfered with by conventional telemetry equipment. The Monarch system can support up to 2 base stations per system, providing a coverage area of over 250,000 square feet in a typical office environment. In an open warehouse environment, the coverage is much greater. Each base station allows for eight simultaneous conversations and the Monarch system can support a maximum of up to 32 handsets. Other Communication Products. The INFOSTAR 'r'/StatLink 'tm' product is designed to provide call management and integration of EXECUTONE nurse call systems to telephone numbers, wireless telephones and pager devices. INFOSTAR/StatLink has the flexibility to modify patient call flow based on the specific requirements of the healthcare facility. Calls can be routed on a 4-level priority basis to any extension, telephone or site pager configured in the database. The system is a communications solution that can be integrated with any PBX. Patient priorities and requests can be managed more efficiently and calls can be completed on a more timely basis with less strain on the staff and patients. The INFOSTAR'r'/InfoSTAT'tm' product is a software package intended for use in emergency departments to provide complete communication of real time events and data. Used as a daily operational tool, the InfoSTAT system provides emergency staff with priority data and conditions affecting the department. Staff can check at a glance the status of treatment rooms, room and bed assignments, hospital staff assignment and location, and patient status and location. InfoSTAT is customized for each hospital and integrates with a facility's existing administrative software such as ADT systems. Call Center Management Products The Company's call center management products consist of the following systems, which can be integrated with the Company's computer telephone systems and with each other to provide large-volume inbound, outbound and internal call management. Computer-telephone integration ("CTI") technology integrates the IDS'tm' call processing function with information in a customer's computer database. Primarily used by large incoming call centers to automatically identify incoming callers and by outbound centers to contact and provide records of contacts, CTI limits the amount of time that an agent spends contacting or identifying the caller, thereby providing better customer service, reducing the number of required agents and reducing telephone line and transmission expense. Predictive Dialers and Scripting Products - The INFOSTAR'r'/Predictive Dialer is an automated call system designed to boost productivity in outbound call centers. The system integrates telephone, data collection and transaction processing functions for those customers who require high volume contact by telephone to transact business, such as sales, credit and collections, blood banks and fund- raising. Working with the host computer and the IDS'tm' telephone system platform, the dialer automatically dials telephone numbers pulled from the host computer database and detects "live" calls. Available representatives receive these calls and, through CTI, can view screen information about the customer from the database immediately after the customer answers the phone. The system predicts the availability of agents in order to reduce 6 abandoned calls and increase agent productivity, and reduces agent contact with busy signals, no answers, wrong numbers and answering machines. Management reports provide instant and historical feedback on call distribution, list management, data input integrity and file maintenance. Scripting software allows the call center to create a script to guide its agents through various call scenarios and prompt the input of desired information. Automatic Call Distribution ("ACD") - ACD systems are designed to increase responsiveness to inbound callers and increase agent productivity. ACD systems provide the capability to distribute or route incoming calls to available agents based upon management's specifications, and allow the supervisor of the call processing group to monitor call traffic on-line via a computer terminal. The Company produces ACD software for call centers of up to 500 agents in multiple shifts (225 in any single shift), in five levels of sophistication, the highest of which is "Custom Plus ACD." Custom Plus ACD provides the capability to store and retrieve call data for a limited period, print out standard call traffic reports, customize reports to the needs of a specific application, monitor traffic with color screens and graphics, and greatly enhance the ability to store and retrieve historical call data. Sales and Marketing The Company's distribution network consists of (1) domestic independent distributors with approximately 180 locations operating under exclusive and nonexclusive agreements throughout the United States and Canada; (2) 138 direct healthcare and call center sales and service employees in the United States; (3) a National Accounts group that uses the sales, installation, service and support capabilities of EXECUTONE's distribution network to serve multiple offices and departments of companies; (4) a Government Systems group that uses the distribution network to serve offices of federal, state and local government agencies; and (5) 24 independent distributors operating in 17 other foreign countries. For those distributors that have exclusive distribution rights for specified products, retention of such rights is subject to satisfaction of established criteria for sales and service to customers on an ongoing basis. The divesting of or acquisition of customer bases to or from distributors in specific geographic territories may occur in the normal course of the Company's business. EXECUTONE's National Accounts business provides uniformity in pricing, coordination, installation, billing and service for National Accounts customers such as Electronic Data Systems, Airborne Express, Paychex, Inc., W. W. Grainger, Home Quarters Warehouse, Inc., Bridgestone/Firestone, Carlson Companies, PetsMart and TCI Cable. The National Accounts group coordinates the sales, installation, service and support functions of independent sales offices to serve the multiple offices and departments of large companies. The Company's Government Systems group addresses the special procurement and administrative requirements of federal, state and local government agencies. Sales are made through a combination of master contracts and competitively solicited proposals for large or complex telecommunications requirements. Government Systems coordinates the installation, service and support activities of independent sales offices to provide ongoing support to government agency offices nationwide. Although the Company offers a broad range of products through various sales channels nationwide, computer telephony product purchases by Clarity, the purchaser of the Company's direct sales and service organization and the Company's largest distributor, represented a significant portion of the Company's total revenues in 1996 and 7 are expected to continue to represent a large portion of the Company's revenues. The loss of Clarity as a customer could have a material adverse effect on the Company, assuming the Company could not replace the shipments with other alternative distribution. The Company believes that it has the means within a reasonable period of time to establish alternative distribution channels in most of Clarity's territory were that to become necessary. However, the Company does not currently believe there is any significant risk of losing Clarity as a customer because Clarity is dependent upon a continued supply of the Company's proprietary products to service and upgrade its large existing customer base. Backlog consists primarily of products that have been ordered and that will be shipped or installed within 30 to 60 days of the order (other than call center and healthcare orders, which have a longer lead time), or systems the installation of which is not yet required by the customer. Backlog as of December 31, 1996, was $23,159,000 compared to $33,091,000 at December 31, 1995, and the Company expects virtually all of such backlog to be filled within the current fiscal year. Product Maintenance EXECUTONE warrants parts and labor on its systems, typically for one year, and provides maintenance and service after warranty expiration either on a contract or time and materials basis. Most of the Company's products are repaired at its 56,000-square foot repair facility located in Poway, California. Product Development and Engineering As of March 1, 1997, EXECUTONE employed approximately 100 individuals engaged in product design and development. The Company's product development program is designed to anticipate and respond to customer needs through development of new products and enhancement of existing products. During 1996, the Company's engineering efforts focused on applications-oriented software products, including new releases of computer telephone system, call center and healthcare communications software. EXECUTONE continually strives to reduce production costs by incorporating new technology into its design and manufacturing operations. For the years ended December 31, 1996, 1995, and 1994, Company-sponsored product development and engineering expenditures (including product management and testing) amounted to approximately $13.8 million, $14.7 million, and $12.2 million, respectively. Manufacturing Most of EXECUTONE's telephone products are manufactured by Wong's Electronics Company, Ltd. ("Wong's") in Malaysia, by Quality Telecommunication Products, also referred to as Compania Dominicana de Telefonos ("Codetel"), in the Dominican Republic, and by the Company directly in Poway, California. Many of the printed circuit boards for the Company's products are manufactured, and many products are assembled into systems and system components, in the United States. The Company's Manufacturing Services Agreement with Wong's currently expires in February 1998 but is automatically extended each year for an additional one-year term unless either party gives notice of termination three months prior to expiration of the current term. The contract may be terminated earlier by either party in the event of a material breach by the other party. If the agreement between Wong's and EXECUTONE should be terminated for any reason, or if Wong's is unable to ship or has to reduce shipments, or if restrictions 8 are imposed materially limiting the importation of products produced by foreign manufacturers, the Company could be affected adversely until satisfactory alternative sources are in place. The profitability of EXECUTONE's operations could be affected to the extent it is unable to reflect the direct and indirect costs of products purchased from Wong's in its pricing policies. The prices for products purchased by EXECUTONE from its suppliers are payable in U.S. dollars. The majority of EXECUTONE's specialized healthcare and internal communication systems are produced in the United States at the Company's facility in Poway, California or at domestic subcontractors. The functions of repair, warehousing and distribution of the Company's products are performed at the Company's facilities in Poway. Trademarks, Patents and Copyrights Management believes that the continued success of EXECUTONE is dependent upon the ability to design, develop and market new products and new or enhanced applications. The patentability of such new products or applications is evaluated and patent applications are filed where necessary to protect unique developments. The Company currently holds ten utility patents, expiring at various times between 2007 and 2013, has six U.S. patent applications pending, and six patent applications pending in several foreign countries. The Company has registered or applied to register its trademarks when it believes registration to be important to its ongoing business operations. The Company also generally claims copyright protection for software, circuit designs, schematics and technical documentation used in connection with its products, and relies upon trade secret, contract and copyright laws to protect its proprietary rights in its software, designs and documentation. Certain of EXECUTONE's products incorporate technology and software licensed from independent third parties. Generally, these licenses require payment of a royalty for each system sold that incorporates the licensed technology or require that the Company purchase the product from the licensor. Government Regulation Many of the Company's systems are designed to be connected to the public telecommunications network and as such are required to comply with certain rules of the Federal Communications Commission ("FCC") pertaining to telecommunications equipment. The Company has not experienced any material adverse effect on its business or operations as a result of such regulation and compliance. Certain uses of outbound call processing systems are regulated by federal and state law. Among other things, the FCC has adopted rules pursuant to the Federal Telephone Consumer Protection Act to protect residential telephone subscribers' privacy rights to avoid receiving telephone solicitations to which they object. Certain states have enacted similar laws limiting access to telephone subscribers who object to receiving solicitations. Although compliance with these laws may limit the potential use of the Company's predictive dialer systems in some respects, the Company's systems can be programmed to operate automatically in full compliance with these laws through the use of appropriate calling lists and calling campaign time parameters. To the extent the Company markets its products internationally, it is required to comply with applicable foreign law, including certification of its products by appropriate 9 government regulatory organizations. Competition The market segments in which the Company offers its products and services are highly competitive. The under 400-desktop voice communications segment in the United States, the primary market for the Company's Computer Telephony sales channels, is served by many domestic and foreign communications equipment and software manufacturers and distributors, including Lucent Technologies (the former equipment business of AT&T), Nortel (formerly named Northern Telecom), Toshiba, InterTel and Mitel, as well as numerous specialized companies. The Company believes that it may be fourth in telephone system shipments to the under 400-desktop voice communications market, after AT&T/Lucent, Nortel, and Toshiba, based on industry surveys of 1996 data. However, such information may not be sufficient to make an exact assessment of the Company's competitive position relative to its competitors. Although the Company can be competitive on price compared to several of these companies, many of EXECUTONE's competitors have substantially more capital, technology and marketing resources than the Company. The Company believes its call center products are in a good competitive position although to date it has not penetrated a significant portion of this market. Principal competitors are EIS, Davox, Mosaix and Melita. The Company's principal competitors in healthcare communications are Hill-Rom Company, DuKane and Rauland-Borg. The Company believes it has a strong competitive position in nurse call and locator products. The Company competes by offering a full array of integrated telecommunication products and services to its customers. The Company also competes on the basis of the quality of its products, its customer service, nationwide distribution and installation, and price. Employees As of March 1, 1997, EXECUTONE employed approximately 750 persons, directly and through its subsidiaries. Less than 3% of the employees of the Company and its subsidiaries are represented by unions, all of which employees are represented by the International Brotherhood of Electrical Workers. Management believes that the Company's relations with its employees are good. 10 ITEM 2. PROPERTIES EXECUTONE's principal offices are located in a leased facility in Milford, Connecticut. The Company has warehouse, manufacturing and distribution facilities in Poway, California. As of December 31, 1996, the Company utilized 4 facilities in the United States with an aggregate of approximately 273,000 square feet for its ongoing operations. The Company's facilities are occupied under lease agreements. The current annual rent for the Company's facilities is approximately $3 million. The Company also subleases from Clarity small areas of 30 former district sales offices, aggregating approximately 23,000 square feet, for use by sales and technical employees for approximately $600,000 per year. The Company has one facility totaling approximately 14,000 square feet of space that is no longer used in ongoing operations and is subleased. The Company believes its facilities are adequate and generally suitable for its business requirements at the present time and for the immediate future. The following is a brief description of the primary facilities of the Company. Use Location Approximate Size Corporate Headquarters Milford, Connecticut 150,000 and Research, Development square feet and Engineering Facility Distribution, Production & Poway, California 115,000 Repair Center and Warehouse square feet Other, including warehouses Milford, Connecticut 30,800 and subleased office space square feet ITEM 3. LEGAL PROCEEDINGS On October 16, 1996, the Coeur d'Alene Tribe filed an action entitled Coeur d'Alene Tribe v. AT&T Corp. in the Tribal Court, located in Plummer, Idaho (Case No. C195-097), requesting a ruling that the Lottery to be developed and managed by the Company's Unistar Entertainment subsidiary is legal under IGRA, that IGRA preempts state and federal laws on the subject of Indian gaming, that Section 1084 is inapplicable and that the states lack authority to issue Section 1084 notification letters to any carrier, and an injunction preventing AT&T from refusing to provide telephone service to the NIL. This action was necessary because several network carriers have been sent Section 1084 letters under the Federal Communications Act by states opposed to the NIL. These letters state that the NIL is illegal under state and federal laws and prohibit the carriers from carrying network traffic for the NIL. The telephone operations of the NIL may not begin until resolution of this proceeding and agreement of a network carrier to carry the network traffic of the NIL. On February 28, 1996, the Tribal Court ruled that all requirements of IGRA have been satisfied, that Section 1084 is inapplicable and the states lack jurisdiction to interfere with the NIL, and that AT&T cannot refuse service to the NIL based upon Section 1084, an allegation that the NIL is in violation of IGRA or the 11 federal anti-lottery statutes. This ruling and a related order dated May 1, 1996 are being appealed to the Tribal Appellate Court and probably will be appealed to the United States federal courts as well. The Company has been advised by its outside counsel, Hunton & Williams, that based upon such firm's review of the applicable statutes, regulations and case law, it believes that the Lottery is authorized under IGRA and that the favorable rulings issued by the Coeur d'Alene Tribal Court on February 28 and May 1, 1996 should be upheld on appeal. However, this litigation, as well as other litigation which could be brought by states opposed to the NIL, could delay commencement of operations, and it is impossible at this time to predict when the NIL will commence telephone operations. The Company does not believe the outcome of this litigation will have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. The Company currently is a named defendant in a number of lawsuits and is a party to a number of other proceedings that have arisen in the normal course of its business. Those lawsuits and proceedings relate primarily to the collection of indebtedness owed to the Company, the performance of products sold by the Company, and various contract disputes. In the opinion of the Company, these proceedings are not expected to have a material adverse effect on the consolidated financial position, results of operations or liquidity of the Company and, to the extent they are not covered by insurance, reserves adequate to satisfy such liabilities have been established. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders in the fourth quarter of the fiscal year covered by this report. 12 EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company are as follows: Name Age Position With Company Alan Kessman 50 Chairman of the Board, President and Chief Executive Officer Michael W. Yacenda 45 Executive Vice President and President, UniStar Entertainment Barbara C. Anderson 45 Vice President, General Counsel and Secretary James E. Cooke III 48 Vice President, National Accounts Anthony R. Guarascio 43 Vice President, Finance and Chief Financial Officer Israel J. Hersh 43 Vice President, Software Engineering Elizabeth Hinds 55 Vice President, Human Resources Robert W. Hopwood 53 Vice President and Vice President-Operations, Unistar Entertainment Andrew Kontomerkos 51 Senior Vice President, Hardware Engineering and Production Vic Northrup 40 Vice President, Computer Telephony Frank J. Rotatori 54 Vice President, Healthcare Communications Shlomo Shur 47 Senior Vice President, Advanced Technology Alan Kessman has served as Chairman and Chief Executive Officer of the Company since 1988. Prior to that, he had served as President and Chief Executive Officer of ISOETEC Communications, Inc., a predecessor of the Company ("ISOETEC"), since 1983. From 1978 to 1983, Mr. Kessman served as President of three operating subsidiaries of Rolm Corporation, and from 1981 to 1983, he served as a Corporate Vice President of Rolm Corporation, responsible for sales and service in the eastern United States. 13 Michael W. Yacenda has served as Executive Vice President of EXECUTONE since January 1990. Prior to that time, he was Vice President, Finance and Chief Financial Officer of the Company from July 1988 to January 1990. He served as a Vice President of ISOETEC from 1983 to 1988. From 1974 to 1983, Mr. Yacenda was employed by Arthur Andersen & Co., a public accounting firm. Mr. Yacenda is a certified public accountant. Barbara C. Anderson has been Vice President, General Counsel and Secretary since 1990. From 1985 to 1989, she was Corporate Counsel of United States Surgical Corporation, a manufacturer of medical devices. James E. Cooke III has served as Vice President, National Accounts since February 1996. Prior to that time, from 1992 until 1996, Mr. Cooke served as Division Manager of Operations for the Company, and from 1988 through 1991, Mr. Cooke was a District Manager for the Company. From 1985 until 1988, Mr. Cooke was the President of an interconnect company, and from 1981 to 1985, he was a General Manager and a Regional Manager of the Jarvis Corporation. For eight years prior to that time, he worked at Xerox Corporation in various sales and management positions. Anthony R. Guarascio has been Vice President, Finance and Chief Financial Officer since January 1994, and prior thereto was Vice President and Corporate Controller since January 1990. From 1984 until 1990, Mr. Guarascio was the Corporate Controller of the Company and ISOETEC. Israel J. Hersh has been Vice President, Software Engineering since February 1996. Mr. Hersh joined the Company as Director of Software Development in 1984, and was promoted to Senior Director of Software Engineering in January 1994. Prior to his employment with the Company, Mr. Hersh was a manager of the software development department for T-Bar, Inc. Mr. Hersh has a B.S. in Electrical Engineering from Tel Aviv University and a MS in Electrical Engineering from Bridgeport University. Elizabeth Hinds has been Vice President, Human Resources since January 1996. Prior to joining the Company, Ms. Hinds was Vice President, Human Resources of Chilton Company, a wholly-owned subsidiary of Capital Cities/American Broadcasting Company, Inc. ("CC/ABC"), from February 1993 until January 1996. Ms. Hinds was the Director of Human Resources for CC/ABC from June 1987 until February 1993. Robert W. Hopwood has been Vice President of the Company and Vice President-Operations of its Unistar Entertainment subsidiary since May 1996, and prior thereto served as Vice President, Customer Care of the Company from January 1990. From 1983 until 1990, Mr. Hopwood was the Director of Technical Operations of the Company and ISOETEC. Andrew Kontomerkos has been Senior Vice President, Hardware Engineering and Production since January 1994, and prior thereto was Vice President, Hardware Engineering since 1988. He served as a Vice President of ISOETEC since 1983. From 1982 to 1983, he was a Vice President and founder of SAM Communications, Inc., a telecommunications research and development company which was one of the predecessors to ISOETEC; that corporation was merged into ISOETEC in 1983. From 1979 to 1982, Mr. Kontomerkos was Director of Telecommunications Systems Development of TIE/communications, Inc., a manufacturer of telecommunications systems. 14 Vic Northrup has been Vice President of the Company since February 1997, and President of the Computer Telephony business since May 1996. Prior thereto, he was Senior Director of Sales and Operations and a district general manager of the Company. Frank J. Rotatori has been Vice President, Healthcare Communications since February 1996. Prior thereto he was Vice President, European Operations since February 1994, and prior thereto was Director of Call Center Management Products during 1992 and 1993, Vice President-Direct Sales from 1990 through 1991 and Vice President-Customer Service of the Company from 1988 to 1990. Mr. Rotatori joined ISOETEC in 1986 as a regional manager. From 1982 to 1986, he served as General Manager and Eastern Regional Manager for Rolm Corporation. For 13 years prior to that time, he worked at Xerox Corporation in various manufacturing, accounting, sales and service management positions. Shlomo Shur has been Senior Vice President, Advanced Technology since January 1994, and prior thereto was Vice President, Software Engineering since 1988. He served as a Vice President of ISOETEC from 1983 to 1988. From 1982 to 1983, he was Vice President and a founder of SAM Communications, Inc., a telecommunications research and development company which was one of the predecessors to ISOETEC; that corporation was merged into ISOETEC in 1983. From 1978 to 1982, Mr. Shur was Manager, Software Development for TIE/communications, Inc., a manufacturer of telecommunications systems. 15 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Incorporated by reference to "Stock Data" in the Registrant's 1996 Annual Report to Shareholders. ITEM 6. SELECTED FINANCIAL DATA Incorporated by reference to "Selected Financial Data" in the Registrant's 1996 Annual Report to Shareholders. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Incorporated by reference to "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Registrant's 1996 Annual Report to Shareholders. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Financial Statements are incorporated by reference to the Financial Statements in the Registrant's 1996 Annual Report to Shareholders. The Schedule appears at pages S-1 through S-2 of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 16 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The following persons are currently serving as directors and have been nominated by the Board of Directors as candidates for election as directors at the Annual Meeting of Shareholders to be held on July 29, 1997. Certain information regarding each director is set forth below, including each individual's principal occupation and business experience during the last five years, directorships in other public companies, and the year in which the individual was elected a director of the Company or one of its predecessor companies.
Director Name Age Principal Occupation Since Alan Kessman 50 President, Chief Executive Officer, 1983 and Chairman of the Company since 1988; and of one of the Company's predecessor corporations since 1983. Stanley M. Blau 59 President, The Blau Group Ltd., an 1983 investment firm; formerly Vice Chairman of the Company from 1988 until 1996; and Chief Executive Officer of one of the Company's predecessor corporations, from 1987 until July 1988. Thurston R. Moore 50 Partner, Hunton & Williams (Attorneys), 1990 Richmond, Virginia, since 1981. Richard S. Rosenbloom 64 David Sarnoff Professor of Business 1992 Administration, Harvard Business School, since 1980. Mr. Rosenbloom is a director of Arrow Electronics, Inc. Jerry M. Seslowe 51 Managing Director of Resource Holdings 1996 Ltd., an investment and financial consulting firm, since 1983.
Executive Officers See Part I for information concerning executive officers of the Company. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934 requires that the Company's directors and executive officers, and persons who own more than 10% of a registered class of the Company's equity securities, file with the Securities and Exchange Commission initial reports of ownership and reports of change in ownership of Common Stock and other equity securities of the Company. Officers, directors and greater than 10% shareholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms that they file. 17 To the Company's knowledge, based solely on review of the copies of such reports furnished to the Company, and written representations that no other reports were required, during the fiscal year ended December 31, 1996, all Section 16(a) filing requirements applicable to its officers, directors and greater than 10% beneficial owners were complied with, except that Mr. Israel Hersh, a Vice President of the Company, failed to file a timely Report on Form 4 to report an open market sale of Common Stock. ITEM 11. EXECUTIVE COMPENSATION Director Compensation Each non-employee director receives an annual retainer of $10,000, payable in equal quarterly installments, plus a fee of $1,250 for each Board meeting attended. The Company also reimburses directors for their travel and accommodation expenses incurred in attending Board meetings. In addition, each non-employee director is granted annually an option to purchase shares of the Company's Common Stock under the terms and conditions of the Company's 1990 Directors' Stock Option Plan (the "Plan") approved by the shareholders on June 20, 1990 and amended, with the approval of the shareholders, on July 30, 1996. As of March 31, 1997, 30,000 shares had been issued upon exercise of options granted under the original terms of the Plan, options to purchase 24,000 shares of Common Stock were outstanding under the original terms of the Plan, and options to purchase an additional 77,600 shares were outstanding under the 1996 amendment to the Plan. The number of shares for which options may be granted each year are determined by reference to the Black-Scholes option pricing model to provide an option equal in value to $10,000 based upon the market price of the Common Stock at the date of grant. An aggregate of up to 250,000 shares are issuable under the Plan. Each non-employee director received options to purchase 12,900 shares in 1996. On February 1, 1996 and June 23, 1992, Jerry M. Seslowe and Richard S. Rosenbloom were each granted warrants to purchase 25,000 shares of the Company's Common Stock at $2.63 and $1.25 per share, respectively, the closing market prices on those dates. The warrants vest ratably over a three-year period and expire on February 1, 2001 and June 23, 1997, respectively. Messrs. Seslowe and Rosenbloom received these warrants upon being elected to serve on the Company's Board of Directors. 18 Summary Compensation Table The following table sets forth the compensation by the Company of the Chief Executive Officer and the four most highly compensated other executive officers of the Company for services in all capacities to the Company and its subsidiaries during the past three fiscal years.
Annual Compensation Long-Term Compensation Other Annual Awards of All Other Name and Salary Bonus Compensation Options/ Compensation Principal Position Year ($) ($) (1) ($) (2) SARs (#) ($)(3) Alan Kessman 1996 400,000 63,000 -0- -0- 9,536 Chairman of the Board, 1995 400,000 -0- -0- -0- 10,328 President and Chief 1994 391,000 100,000 8,506 -0- 8,084 Executive Officer Michael W. Yacenda 1996 256,000 49,900 -0- -0- 5,935 Executive Vice President 1995 256,000 -0- -0- -0- 6,353 1994 243,154 39,600 10,000 -0- 56,484 Shlomo Shur 1996 215,700 12,393 -0- -0- 5,192 Senior Vice President, 1995 215,700 -0- -0- -0- 5,514 Advanced Technology 1994 211,539 23,088 10,000 -0- 4,856 Andrew Kontomerkos 1996 214,000 12,350 -0- -0- 5,703 Senior Vice President, 1995 214,000 -0- -0- -0- 5,535 Hardware Engineering 1994 205,888 38,025 10,000 -0- 5,509 and Production Anthony Guarascio 1996 160,000 42,000 -0- -0- 2,993 Vice President and 1995 160,000 -0- -0- 2,919 Chief Financial 1994 155,000 14,000 -0- 23,002 Officer
(1) Includes special bonuses awarded in 1994 to certain Company employees following successful implementation of measures to overcome the effect of a fire at the facilities of one of the Company's major suppliers in China in December 1993. Special bonuses totaling $50,000, $30,000, $15,000, $20,000, and $8,000 were awarded to Messrs. Kessman, Yacenda, Shur, Kontomerkos, and Guarascio, respectively. (2) This category represents employee stock option credits that could have been used after July 1, 1993 and prior to December 31, 1994 to pay the exercise price of employee stock options held by the employee. All credits shown in this column were used to exercise stock options in 1994. See Note 3. (3) This category includes for 1994 stock option credits used to pay the exercise price of employee stock options exercised during 1994 by Mr. Yacenda in the amount of $50,549 and by Mr. Guarascio in the amount of $20,383. The credits were granted in 1988, 1992 and 1994 (see Note 2 above). The column does not include 1992 or 1994 credits used in 1994 that were reported as "Other Annual Compensation" for 1994. This category also includes for each individual a matching contribution by the Company under the Company's 401(k) plan in the amount of $660 each for each year. This column also includes premiums paid by the Company for long-term disability and life insurance for the 19 individuals in the following amounts in 1996: Mr. Kessman, $8,876; Mr. Yacenda, $5,275; Mr. Shur, $4,532; Mr. Kontomerkos, $5,043; and Mr. Guarascio, $2,333; in the following amounts in 1995: Mr. Kessman, $9,668; Mr. Yacenda, $5,693; Mr. Shur, $4,854; Mr. Kontomerkos, $4,875; and Mr. Guarascio, $2,259; and in the following amounts in 1994: Mr. Kessman, $7,424; Mr. Yacenda, $4,774; Mr. Shur, $4,196; Mr. Kontomerkos, $4,849; and Mr. Guarascio, $1,959. Employment Agreement The Company and Mr. Kessman entered into an employment continuity agreement in January 1995 that provides certain benefits to Mr. Kessman in the event of the termination of Mr. Kessman's employment following a change in control in the Company, including a lump sum payment equal to 2.99 times his then current base salary plus the average of any bonuses awarded to Mr. Kessman during the two fiscal years preceding the termination of his employment. Under the terms of the agreement, a change in control includes the acquisition of beneficial ownership of 20% of the Company's voting securities by any person or group. The agreement continues through the length of Mr. Kessman's employment with the Company. Option Grants in Last Fiscal Year There were no grants of options made to any officers during 1996. Aggregated Option Exercises in Last Fiscal Year and Fiscal Year- End Option Values The following table sets forth each exercise of stock options made during the year ended December 31, 1996 by the Chief Executive Officer and the four most highly compensated other executive officers and the fiscal year-end value of unexercised options held by those individuals as of December 31, 1996. There were no exercises or holdings of stock appreciation rights by any officers during 1996, and there are no outstanding stock appreciation rights.
Number of Value of Unexercised Unexercised Options In-the Money Options at Share at Fiscal Year-End(#) Fiscal Year-End ($) (1) Acquired on Value Exercisable/ Exercisable/ Name Exercise (#) Realized ($) Unexercisable Unexercisable Alan Kessman 65,688 $108,472 22,500/12,500 $15,938/4,688 Michael W. 35,000 83,125 50,000/8,000 38,250/3,000 Yacenda Shlomo Shur 35,000 89,688 38,750/6,250 29,531/2,344 Andrew 24,000 61,500 30,000/5,000 22,500/1,875 Kontomerkos Anthony 19,000 48,688 33,750/6,250 23,906/2,344 Guarascio
(1) Based upon the last sale price on December 31, 1996 of $2.375 per share of Common Stock. 20 COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION It is the responsibility of the Compensation Committee of the Board of Directors to administer the Company's incentive plans, review the performance of management and approve the compensation of the Chief Executive Officer and other executive officers of the Company. The Compensation Committee believes that the Company's success depends on the coordinated efforts of individual employees working as a team toward defined common goals. The objectives of the Company's compensation program are to align executive compensation with business objectives, to reward individual and team performance furthering the business objectives, and to attract, retain and reward employees who will contribute to the long-term success of the Company with competitive salary and incentive plans. Specifically, executive compensation decisions are based on the following factors: 1. The total direct compensation package for the Company's executives is made up of three elements: base salary, a short-term incentive program in the form of a performance-based bonus, and a long-term incentive program in the form of stock options and other inducements to own the Company's stock. 2. The Committee believes that the total compensation of all executives should have a large incentive element that is dependent upon overall Company performance measured against objectives established at the beginning of the fiscal year. Bonus and stock opportunities represent a significant portion of the total compensation package, in an attempt to further the Company's goal of linking compensation more closely to the Company's performance. The percentage of direct compensation that is dependent upon the Company's attainment of its objectives also generally increases as the responsibility of the officer in question for the overall corporate performance increases. 3. Total compensation levels, i.e., base salary, bonus potential, and number of stock options, are established by individual levels of responsibility and regular reference to competitive compensation levels for executives performing similar functions and having equivalent levels of responsibility. However, whether actual bonuses are paid to each executive depends upon the achievement of Company profitability goals. In the case of certain executives who have direct responsibility for individual business units, a portion of the incentive compensation for such executives may consist of bonuses tied to the performance against predetermined targets of the individual business units for which they are responsible. 4. In 1995 and 1996, the Compensation Committee did not perform a general survey of executive compensation. The Committee determined that the operating results of the Company did not support any base salary increases for officers and no changes were made to the compensation of any officers named in the Summary Compensation Table. In 1994 and in previous years, the Compensation Committee has reviewed various executive compensation data developed by the Company's Human Resources Department with an independent consultant from base salary and bonus compensation information reported in a nationally recognized independent compensation survey (the "Survey") for a group of companies in the Company's industry or similar industries and of comparable size and complexity. The Committee compared the base salary and bonus levels of the Survey group to the existing salary and bonus compensation of the Company's management. 21 5. The Committee views the 50th percentile of the Survey data as average compensation for comparable positions and believes it is the minimum level necessary for the Company to be competitive in attracting and retaining qualified executives in its industry and geographic locations. Therefore, the base salaries for the Chief Executive Officer and the four other highest paid executive officers were established in 1994 at approximately the 50th percentile for comparable positions in the Survey companies. 6. Merit increases in base salary for executives other than Mr. Kessman have been reviewed on an individual basis by Mr. Kessman and increases are dependent upon a favorable evaluation by Mr. Kessman of individual executive performance relative to individual goals, the functioning of the executive's team within the corporate structure, success in furthering the corporate strategy and goals, and individual management skills. Based upon his evaluation, Mr. Kessman recommends base salary increases to the Committee for its approval. 7. In addition to base salary and merit increases, the Compensation Committee considers incentive bonuses for its executive officers, including the Chief Executive Officer, both prospectively based upon the attainment of specific performance goals, and retrospectively based upon the Committee's discretionary judgment as to the performance during the year of the Company and its executive officers or other considerations deemed appropriate at the time. Bonus potential for 1996 was the same as for 1995 and 1994 for all officers named in the Summary Compensation Table. To establish 1996 bonus potential for executive officers, including the Chief Executive Officer, the Compensation Committee reviewed recommendations by the Chief Executive Officer based on data provided by the Survey. The Committee provided that each officer would be eligible for a bonus equal to a percentage of his or her salary consistent with the Survey data if certain pre-established 1996 pretax income targets or goals were achieved by the Company. The bonus incentive was structured so that if the Company fully achieved or exceeded its predetermined 1996 goals, total cash compensation of the executive (salary and bonus) would increase to approximately the 75th percentile of the Survey salary data. Partial achievement of the pretax income goals (above 75% attainment) would result in partial bonus payments. In 1996 the pretax income from operations, excluding the gain on sale of certain businesses, for the entire year was below the 75% threshold though pre-tax operating income for the second six months of the year was on plan as adjusted for the operations remaining after the sale of the direct selling organization in May 1996. Therefore, the Compensation Committee approved payment of the quarterly portion of the bonus plan for the last two quarters of 1996 which amounted to about 2.5% of salary for each of the executives. Additionally, the Committee approved additional special bonuses for certain executives based on their successful completion of the sale of the direct selling organization and the successful implementation of the changes after the sale and the operating performance of the Company in the last six months of the year. Mr. Kessman received a $10,000 bonus in accordance with the existing plan for the last two quarters of 1996 (2.5% of base salary), plus a $25,000 bonus for the successful completion of the sale of the direct selling organization and an additional special bonus of $28,000 for the Company's performance after the sale of the direct organization. The Committee reserves the right to make discretionary bonus awards in appropriate circumstances where an executive might merit a bonus based on other considerations. 8. All executives, including the Chief Executive Officer, are eligible for annual stock option grants under the employee stock option plans applicable to employees generally, as approved by the Compensation Committee. The number of options granted to any individual depends on individual performance, salary level and competitive data. In addition, in determining the number of stock options granted to each senior executive, the Compensation Committee reviews the unvested options of each executive to determine 22 the future benefits potentially available to the executive. The number of options granted will depend in part on the total number of unvested options deemed necessary to create a long-term incentive on the part of the executive to remain with the Company in order to realize future benefits. No options were granted in 1996 to Mr. Kessman or the four highest paid other executive officers. In conclusion, the Compensation Committee believes that the base salary, bonus and stock options of the Company's Chief Executive Officer and other executives are appropriate in light of competitive pay practices and the Company's performance against short and long-term performance goals. RICHARD ROSENBLOOM JERRY SESLOWE PERFORMANCE GRAPH The graph below compares, for the last five fiscal years, the yearly percentage change in cumulative total returns (assuming reinvestment of dividends and interest) of (i) the Company's Common Stock, (ii) the Company's Debentures, (iii) the NASDAQ Stock Market and (iv) a peer group index constructed by the Company (the "Peer Group"). The Peer Group consists of the following companies: Aspect Telecommunications Corp. Inter-Tel, Inc. Boston Technology, Inc. InterVoice, Inc. Brite Voice Systems, Inc. Microlog Corporation Centigram Communications Corp. Mitel Corporation Comdial Corporation Norstan, Inc. Davox Corporation Octel Communications Corp. Digital Sound Corporation Electronic Information Systems, Inc. Syntellect, Inc. Mosaix (formerly Teknekron Communications Digital Systems International, Inc.) Systems, Inc. (TCSI) TIE/Communications, Inc., was formerly included among the Peer Group companies. It has been eliminated because it is now privately held. The Peer Group includes companies who compete with the Company in the general voice communications equipment area as well as those active in several more specialized areas, such as ACD (automatic call distribution), voice mail, interactive voice response systems, and predictive dialing systems, as well as additional general voice communications companies. The Company believes that the mix of the companies in the Peer Group accurately reflects the mix of businesses in which the Company is currently engaged and will be engaged in the foreseeable future. The Peer Group is not identical to the Survey group used to evaluate compensation of executives described in the Compensation Committee Report. The Peer Group above does not provide sufficient compensation data for the Committee's purposes, and the Survey group includes non-public entities for whom stock price data for the performance graph is unavailable. 23 Although AT&T and Northern Telcom are the Company's principal competitors in supplying voice communications equipment, software and services to the under-300-desktop market, the business in which the Company is primarily engaged, both of those companies are much larger than the Company and derive most of their revenues from other lines of business and so have not been included in the Peer Group. The returns of each Peer Group issuer have been weighted in the graph below to reflect that issuer's stock market capitalization at the beginning of each calendar year. 24 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 CAPTION> Weighted Average Cumulative Total Returns 1991 1992 1993 1994 1995 1996 XTON $100 $223 $354 $400 $285 $292 NASDAQ $100 $116 $134 $131 $185 $227 PEER GROUP $100 $134 $236 $213 $305 $382 XTONG $100 $181 $249 $248 $288 $321 [PERFORMANCE GRAPH]
Compensation Committee Interlocks and Insider Participation The members of the Compensation Committee until July 30, 1996, were Thurston Moore, Richard Rosenbloom and William Smart. The members of the Compensation Committee commencing July 30, 1996, were Richard Rosenbloom and Jerry Seslowe. No member of the Committee is a former or current officer or employee of the Company or any subsidiary, except that Mr. Moore has acted as an Assistant Secretary of the Company. Mr. Moore is a partner in the law firm of Hunton & Williams, which regularly acts as counsel to the Company. No executive officer of the Company served as a director or a member of the Compensation Committee or of the equivalent body of any entity, any one of whose executive officers serve on the Compensation Committee or the Board of Directors of the Company. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table lists any person (including any "group" as that term is used in Section 13(d)(3) of the Exchange Act) who, to the knowledge of the Company, was the beneficial owner as of March 31, 1997, of more than 5% of the outstanding voting shares of the Company. Unless otherwise noted, the owner has sole voting and dispositive power with respect to the securities.
Name and Address of Amount and Nature of Percentage Title of Class Beneficial Owner Beneficial Ownership of Class(1) Common Stock Entitles Associated with 4,557,989 (2) 9.22 Hambrecht & Quist Group One Bush Street San Francisco, CA 94104 Entities Associates with 3,245,078 (3) 6.58 Edmund H., Shea, Jr. 655 Brea Canyon Road Walnut Creek, CA 25 91789 Series A Stock Cooper Life Sciences 78,819 31.53 160 Broadway New York, NY 10038 James W. Spencer 26,265 10.65 3042 Spring Hill Road Smyrna, GA 30080 Watertone L.L.C. 127,895 51.16 730 Fifth Avenue New York, NY 10038 Series B Stock Cooper Life Sciences 31,528 31.53 160 Broadway New York, NY 10038 James W. Spencer 10,650 10.65 3042 Spring Hill Road Smyrna, GA 30080 Watertone L.L.C. 51,157 51.16 730 Fifth Avenue New York, NY 10038
(1) With respect to the Common Stock, percentages shown are based upon 49,471,481 shares of Common Stock actually outstanding as of March 31, 1997. In cases where the beneficial ownership of the individual or group includes options, warrants or convertible securities, the percentage is based on 49,471,481 shares actually outstanding, plus the number of shares issuable upon exercise or conversion of any such options, warrants or convertible securities held by the individual or group. The percentage does not reflect or assume the exercise or conversion of any options, warrants or convertible securities not owned by the individual or group in question. (2) The Hambrecht & Quist entities share power to vote and dispose of all such shares. (3) Includes 11,935 shares of Common Stock issuable upon conversion of the Company's Debentures, of which entities associated with Mr. Shea own $148,800 in principal amount, representing less than 1% of the outstanding principal amount. The Shea entities share the power to vote and dispose of all such shares. The following table sets forth as of March 31, 1997, the beneficial ownership of the Company's voting shares by all current directors and nominees of the Company, the Chief Executive Officer, and the four next most highly compensated executive officers and all directors and executive officers of the Company as a group. Unless otherwise indicated, each person listed below has sole voting and investment power over all shares beneficially owned by him or her.
Name of Amount and Nature of Percentage Title of Class Beneficial Owner Beneficial Ownership of Classs (1) Common Stock Stanley M. Blau 705,429 (2) 1.42 Anthony Guarascio 264,060 (3) * 26 Alan Kessman 1,741,336 (4) 3.52 Andrew Kontomerkos 471,732 (5) * Thurston R. Moore 124,535 (6) * Richard S. Rosenbloom 63,200 (7) * Jerry M. Seslowe 195,915 (8) * Shlomo Shur 742,055 (9) 1.52 Michael W. Yacenda 1,005,190 (10) 2.03 All Directors and 6,382,855 (11) 12.65 Officers as a Group (17 persons) Series A Stock Stanley M. Blau -0- Anthony Guarascio -0- Alan Kessman -0- Andrew Kontomerkos -0- Thurston R. Moore -0- Richard S. Rosenbloom -0- Jerry M. Seslowe 4,692 (12) 1.87 Shlomo Shur -0- Michael W. Yacenda -0- All Directors and 4,692 1.87 Officers as a Group (17 persons) Series B Stock Stanley M. Blau -0- Anthony Guarascio -0- Alan Kessman -0- Andrew Kontomerkos -0- Thurston R. Moore -0- Richard S. Rosenbloom -0- Jerry M. Seslowe 1,877 (13) 1.87 Shlomo Shur -0- Michael W. Yacenda -0- All Directors and 1,877 1.87 Officers as a Group (17 persons)
(1) With respect to the Common Stock, percentages shown are based upon 49,471,481 shares of Common Stock actually outstanding as of March 31, 1997. In cases where the beneficial ownership of the individual or group includes options, warrants or convertible securities, the percentage is based on 49,471,481 shares actually outstanding, plus the number of shares issuable upon exercise or conversion of any such options, warrants or convertible securities held by the individual or group. The percentage does not reflect or assume the exercise or conversion of any options, warrants or convertible securities not owned by the individual or group in question. (2) Includes 300,000 shares subject to options exercisable within 60 days of June 1, 1997. 27 (3) Includes 40,000 shares subject to options exercisable within 60 days of June 1, 1997 and 9,412 shares issuable upon conversion of the Company's Debentures, of which Mr. Guarascio beneficially owns $100,000 in principal amount or less than 1% of the outstanding principal amount. (4) Includes 35,000 shares subject to options exercisable within 60 days of June 1, 1997. (5) Includes 35,000 shares subject to options exercisable within 60 days of June 1, 1997. (6) Includes 38,200 shares subject to options exercisable within 60 days of June 1, 1997. (7) Includes 38,200 shares subject to options and 25,000 shares subject to warrants exercisable within 60 days of June 1, 1997. (8) Includes 37,912 shares subject to options and 25,000 shares subject to warrants, 46,245 of which are exercisable within 60 days of June 1, 1997. Also includes12,755 shares of Common Stock owned and 63,559 shares of Common Stock subject to exercisable options held by Resource Holdings Associates, of which Mr. Seslowe is a managing director and in which he holds a greater than 10% ownership interest. Does not include 203,756 shares of Common Stock contingently issuable upon conversion of the Preferred Stock owned by Mr. Seslowe or the 45,875 shares of Common Stock contingently issuable upon conversion of the Preferred Stock owned by Resource Holdings Associates. (9) Includes 45,000 shares subject to options exercisable within 60 days of June 1, 1997. (10) Includes 58,000 shares subject to options exercisable within 60 days of June 1, 1997 and 3,576 shares issuable upon conversion of the Company's Debentures, of which Mr. Yacenda beneficially owns $38,000 in principal amount or less than 1% of the outstanding principal amount. (11) Includes 903,742 shares subject to options, and 50,000 shares subject to warrants, of which 661,286 and 33,334, respectively, are exercisable within 60 days of June 1, 1997, and 45,176 shares issuable upon conversion of the Company's Debentures. (12) Includes 862 shares held by Resource Holdings. (13) Includes 345 shares held by Resource Holdings. 28 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In connection with the Company's acquisition of Unistar, the Company paid or agreed to pay Resource Holdings Ltd, a former shareholder of Unistar, accrued investment banking fees incurred by Unistar prior to the acquisition of $105,000, and total finder's fees of $320,000 based on the value of the transaction. Mr. Seslowe was elected a director of the Company after the acquisition. Both Resource Holdings and Mr. Seslowe acquired Common Stock and Preferred Stock of the Company in exchange for their shares of Unistar. Mr. Seslowe is a managing director of and owns more than 10% of Resource Holdings. The Company's management believes that the transactions with Resource Holdings were on terms as favorable to the Company as could be expected from unaffiliated third parties. The Executive Stock Incentive Plan (the "Executive Plan") approved by shareholders at the 1994 Annual Meeting was implemented in October 1994 with 30 employees participating. Under the terms of the Executive Plan, eligible employees were granted the right to purchase shares of the Company's Common Stock at a price of $3.1875 per share. Participating employees financed the purchases of these shares through loans by the Company's bank lender at the prime rate less 1/4%. The loans are fully- recourse to the participating employees but are guaranteed by letters of credit from the Company to the lending bank. The Company holds the purchased Common Stock as security for its guarantees of the repayment of the loans. The following table contains information about borrowings in excess of $60,000 by executive officers that were outstanding during 1996 pursuant to the Executive Plan that are guaranteed by the Company. No director, nominee, or beneficial owner of more than 5% of any class of voting securities is eligible for participation in the Executive Plan. Highest Amount of Unpaid Indebtedness Between Indebtedness 1/1/96 and 3/31/97, at 3/31/97 Including Including Name Accrued Interest Accrued Interest Alan Kessman $2,227,051 $2,227,051 Michael W. Yacenda 1,312,691 1,312,691 Shlomo Shur 649,557 649,557 Andrew Kontomerkos 649,557 649,557 Barbara C. Anderson 353,287 317,067 James E. Cooke III 371,175 371,175 Anthony R. Guarascio 519,645 519,645 Israel J. Hersh 111,353 111,353 Robert W. Hopwood 374,434 374,434 Vic Northrup 262,104 262,104 Frank J. Rotatori 222,705 222,705 29 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1), (a)(2) and (d). The financial statements required by this item and incorporated herein by reference are as follows: Report of Independent Public Accountants Consolidated Balance Sheets - December 31, 1996 and 1995 Consolidated Statements of Operations - Years ended December 31, 1996, 1995 and 1994 Consolidated Statements of Changes in Stockholders' Equity - Three years ended December 31, 1996 Consolidated Statements of Cash Flows - Years ended December 31, 1996, 1995 and 1994 Notes to Consolidated Financial Statements The schedules to consolidated financial statements required by this item and included in this report are as follows: Report of Independent Public Accountants on Schedule Schedule II - Valuation and Qualifying Accounts (a)(3) and (c). The exhibits required by this item and included in this report or incorporated herein by reference are as follows: Exhibit No. 2-1 Agreement and Plan of Merger by and among EXECUTONE Information Systems, Inc., Executone Newco, Inc., and Unistar Gaming Corp., dated as of December 19, 1995. Incorporated by reference to the Registrant's Current Report on Form 8-K dated January 3, 1996. 2-2 Asset Purchase Agreement among V Technology Acquisition Corporation, EXECUTONE Information Systems, Inc. and Vodavi, Inc. dated November 5, 1993, and Amendment dated February 18, 1994. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993. 2-3 Asset Purchase Agreement by and among Tone Holdings, Inc. and Tone Acquisition Corporation, EXECUTONE Network Services, Inc. and EXECUTONE 30 Information Systems, Inc. dated as of April 9, 1996, and Amendment No. 1 to Asset Purchase Agreement dated as of May 31, 1996, by and among Clarity Telecom Holdings, Inc. (formerly known as Tone Holdings, Inc.), Clarity Telecom, Inc. (formerly known as Tone Acquisition Corporation), EXECUTONE Network Services, Inc. and EXECUTONE Information Systems, Inc. Incorporated by reference to the Registrant's Annual Report on Form 10-K/A for the year ended December 31, 1995 filed on June 4, 1996. 3-1 Articles of Incorporation, as amended through December 18, 1995. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 filed on April 15, 1996. 3-2 Articles of Amendment dated and filed December 19, 1995, amending the Company's Articles of Incorporation. Incorporated by reference to the Registrant's Current Report on Form 8-K dated January 3, 1996. 3-3 Bylaws, as amended. Incorporated by reference to the Registrant's Registration Statement on Form S-3 (File No. 33- 62257) filed August 30, 1995. 4-1 Second Amended and Restated Loan and Security Agreement dated as of August 30, 1994 and First Amendment thereto dated January 1, 1995, between EXECUTONE Information Systems, Inc., Continental Bank N.A. and the other Lenders named therein. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. 4-2 Loan Agreement dated as of August 30, 1994, between EXECUTONE Information Systems, Inc., certain employees thereof, and the Lenders named therein. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. 4-3 First Amendment dated January 1, 1995, Second Amendment dated September 29, 1995, and Third Amendment dated December 29, 1995, to the Second Amended and Restated Loan and Security Agreement by and among EXECUTONE Information Systems, Inc., the Financial Institutions Listed on the Signature Page Thereof, and Bank of America Illinois. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 filed on April 15, 1996. 4-10 Indenture dated March 1, 1986 with United States Trust Company of New York relating to 7 1/2% Convertible Subordinated Debentures of Vodavi Technology Corporation due March 15, 2011. Incorporated by reference to Vodavi Technology Corporation's Registration Statement on Form S-1 (as amended) (Registration No. 33-3827) filed on March 9, 1986 and amended April 1, 1986. 4-11 First Supplemental Indenture dated August 4, 1989 with United States Trust Company of New York relating to 7 1/2% Convertible Subordinated Debentures due March 15, 2011. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989. 4-12 Specimen Certificate representing 7 1/2% Convertible Subordinated Debentures. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989. 10-1 1984 Employee Stock Purchase Plan of EXECUTONE Information Systems, Inc. Incorporated by reference to the Registrant's Registration Statement on Form S-8 (File No. 33- 23294) declared effective by the Commission on August 23, 1988. 31 10-2 1986 Stock Option Plan of EXECUTONE Information Systems, Inc. Incorporated by reference to the Registrant's Registration Statement on Form S-8 (File No. 33-23294) declared effective by the Commission on August 23, 1988. 10-3 1984 Stock Option Plan of EXECUTONE Information Systems, Inc. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, as amended by Form 8 filed on August 20, 1991. 10-4 401(k) Savings Plan of Vodavi Technology Corporation dated December 27, 1985. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989. 10-5 Stock Option Bonus Credit Plan of EXECUTONE Information Systems, Inc. dated December 31, 1988. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989. 10-6 1990 Directors' Stock Option Plan as amended July 30, 1996. Previously filed. 10-7 1994 Executive Stock Incentive Plan. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. 10-9 Volume Purchase Agreement dated January 31, 1992, between U. S. Sprint Communications Company Limited Partnership and EXECUTONE Information Systems, Inc. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991, as amended by Form 8 filed on June 12, 1992. 10-10 Amendments dated as of April 1, 1995, and 1993 to Volume Purchase Agreement dated January 31, 1992, between U. S. Sprint Communications Company Limited Partnership and EXECUTONE Information Systems, Inc. Incorporated by reference to the Registrant's Annual Report on Form 10-K/A for the year ended December 31, 1995 filed on August 29, 1996. 10-16 Manufacturing Services Agreement dated as of January 10, 1995, between EXECUTONE Information Systems, Inc. and Compania Dominicana de Telefonos, C por A (Codetel). Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 filed on April 15, 1996. 10-17 Manufacturing Services Agreement dated February 9, 1990 between Wong's Electronics Co., Ltd. and EXECUTONE Information Systems, Inc. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, as amended by Form 8 filed on August 20, 1991. 10-19 Warrant to Purchase 25,000 Shares of Common Stock of EXECUTONE Information Systems, Inc. in favor of Richard S. Rosenbloom dated June 23, 1992. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992. 10-20 Warrant to Purchase 25,000 Shares of Common Stock of the Registrant, in favor or Jerry M. Seslowe, dated February 1, 1996. Filed herewith. 10-21 Management Agreement for the National Indian Lottery dated January 16,1995. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 filed on April 15, 1996. 32 10-22 Distributor Agreement dated as of May 31, 1996, between EXECUTONE Information Systems, Inc. and Clarity Telecom, Inc. Incorporated by reference to the Registrant's Annual Report on Form 10-K/A for the year ended December 31, 1995 filed on June 4, 1996. 11 Statement regarding computation of per share earnings. Previously filed. 13 1996 Annual Report to Shareholders of EXECUTONE Information Systems, Inc. Previously filed. 21 Subsidiaries of EXECUTONE Information Systems, Inc. Filed herewith. 23.1 Consent of Arthur Andersen LLP. Filed herewith. 23.2 Consent of Hunton & Williams. Filed herewith. 27 Financial Data Schedule. Previously filed. Undertakings For the purposes of complying with the rules governing Form S-8 under the Securities Act of 1933, the undersigned registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into registrant's Registration Statements on the following Form S-8 filings: S-8 Reg. No. 2-91008 filed May 9, 1984 on 1983 Employee Stock Purchase Plan (650,000 shares) S-8 Reg. No. 33-959 filed October 17, 1985 on 1984 Stock Option Plan (390,000 shares) S-8 Reg. No. 33-6604 filed June 19, 1986 on 1983 Stock Option Plan (350,000 shares) S-8 Reg. No. 33-16585 filed August 24, 1987 on 1986 and 1983 Stock Option Plans (800,000 shares) S-8 Reg. No. 33-23294 filed August 3, 1988 on 1986 Stock Option Plan (7,000,000 shares) and Employee Stock Purchase Plan (500,000 shares) S-8 Reg. No. 33-42561 filed September 4, 1991 on 1984 Employee Stock Purchase Plan (350,000 shares) and Directors' Stock Option Plan (100,000 shares) S-8 Reg. No. 33-45015 filed January 2, 1992 on 1984 Employee Stock Purchase Plan (400,000 shares) S-8 Reg. No. 33-57519 filed January 31, 1995 on 1984 Employee Stock Purchase Plan (1,000,000 shares). Insofar as indemnification arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the 33 registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to the court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. Reports on Form 8-K The Registrant filed no reports on Form 8-K during the quarter ended December 31, 1996. 34 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. EXECUTONE Information Systems, Inc. By: __/s/ Alan Kessman___________________ Alan Kessman, Chairman, President and Chief Executive Officer April 28, 1997 Milford, Connecticut Pursuant to the requirements of the Securities and Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. April 28, 1997 __/s/ Alan Kessman______________ Alan Kessman Chairman, President and Chief Executive Officer (Principal Executive Officer) April 28, 1997 ______________________________ Stanley M. Blau Director April 28, 1997 __/s/ Anthony Guarascio__________ Anthony R. Guarascio Vice President-Finance, and Chief Financial Officer (Principal Financial and Accounting Officer) April 28, 1997 ___/s/ Thurston R. Moore___________ Thurston R. Moore Director April 28, 1997 ___/s/ Richard S. Rosenbloom___ Richard S. Rosenbloom Director April 28, 1997 ______________________________ Jerry M. Seslowe Director 35 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of EXECUTONE Information Systems, Inc.: We have audited in accordance with generally accepted auditing standards, the financial statements included in EXECUTONE Information Systems, Inc. and subsidiaries' annual report to stockholders incorporated by reference in this Form 10-K, and have issued our report thereon dated January 31, 1997. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in Item 14 is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Stamford, Connecticut January 31, 1997 S-1 SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS (Amounts in Thousands) Additions Deductions Charged Charged Net Balance at (Credited) (Credited) Writeoffs Balance at Beginning to Costs to Other Uncollectible End of of Period and Expenses Accounts Accounts Period Year ended December 31, 1996 Deducted from asset accounts: Allowance for doubtful accounts $1,715 $1,921 $(551)* $(979) $2,106 Allowance for uncollectible notes receivable 259 (82) 2,039* ---- 2,216 Year ended December 31, 1995 Deducted from asset accounts: Allowance for doubtful accounts 1,335 1,872 ------ (1,492) 1,715 Allowance for uncollectible notes receivable 691 (432) ------ ----- 259 Year ended December 31, 1994 Deducted from asset accounts: Allowance for doubtful accounts 1,017 1,381 ------ (1,063) 1,335 Allowance for uncollectible notes receivable 1,084 (393) ------ ------- 691 * Adjustments related to sale of direct sales organization
S-2 EXECUTONE INFORMATION SYSTEMS, INC. EXHIBITS TO 1996 ANNUAL REPORT ON FORM 10-K Exhibit No. 2-1 Agreement and Plan of Merger by and among EXECUTONE Information Systems, Inc., Executone Newco, Inc., and Unistar Gaming Corp., dated as of December 19, 1995. Incorporated by reference to the Registrant's Current Report on Form 8-K dated January 3, 1996. 2-2 Asset Purchase Agreement among V Technology Acquisition Corporation, EXECUTONE Information Systems, Inc. and Vodavi, Inc. dated November 5, 1993, and Amendment dated February 18, 1994. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993. 2-3 Asset Purchase Agreement by and among Tone Holdings, Inc. and Tone Acquisition Corporation, EXECUTONE Network Services, Inc. and EXECUTONE Information Systems, Inc. dated as of April 9, 1996, and Amendment No. 1 to Asset Purchase Agreement dated as of May 31, 1996, by and among Clarity Telecom Holdings, Inc. (formerly known as Tone Holdings, Inc.), Clarity Telecom, Inc. (formerly known as Tone Acquisition Corporation), EXECUTONE Network Services, Inc. and EXECUTONE Information Systems, Inc. Incorporated by reference to the Registrant's Annual Report on Form 10-K/A for the year ended December 31, 1995 filed on June 4, 1996. 3-1 Articles of Incorporation, as amended through December 18, 1995. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 filed on April 15, 1996. 3-2 Articles of Amendment dated and filed December 19, 1995, amending the Company's Articles of Incorporation. Incorporated by reference to the Registrant's Current Report on Form 8-K dated January 3, 1996. 3-3 Bylaws, as amended. Incorporated by reference to the Registrant's Registration Statement on Form S-3 (File No. 33- 62257) filed August 30, 1995. 4-1 Second Amended and Restated Loan and Security Agreement dated as of August 30, 1994 and First Amendment thereto dated January 1, 1995, between EXECUTONE Information Systems, Inc., Continental Bank N.A. and the other Lenders named therein. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. 4-2 Loan Agreement dated as of August 30, 1994, between EXECUTONE Information Systems, Inc., certain employees thereof, and the Lenders named therein. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. 4-3 First Amendment dated January 1, 1995, Second Amendment dated September 29, 1995, and Third Amendment dated December 29, 1995, to the Second Amended and Restated Loan and Security Agreement by and among EXECUTONE Information Systems, Inc., the Financial Institutions Listed on the Signature Page Thereof, and Bank of America Illinois. Incorporated by reference E-1 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 filed on April 15, 1996. 4-10 Indenture dated March 1, 1986 with United States Trust Company of New York relating to 7 1/2% Convertible Subordinated Debentures of Vodavi Technology Corporation due March 15, 2011. Incorporated by reference to Vodavi Technology Corporation's Registration Statement on Form S-1 (as amended) (Registration No. 33-3827) filed on March 9, 1986 and amended April 1, 1986. 4-11 First Supplemental Indenture dated August 4, 1989 with United States Trust Company of New York relating to 7 1/2% Convertible Subordinated Debentures due March 15, 2011. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989. 4-12 Specimen Certificate representing 7 1/2% Convertible Subordinated Debentures. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989. 10-1 1984 Employee Stock Purchase Plan of EXECUTONE Information Systems, Inc. Incorporated by reference to the Registrant's Registration Statement on Form S-8 (File No. 33- 23294) declared effective by the Commission on August 23, 1988. 10-2 1986 Stock Option Plan of EXECUTONE Information Systems, Inc. Incorporated by reference to the Registrant's Registration Statement on Form S-8 (File No. 33-23294) declared effective by the Commission on August 23, 1988. 10-3 1984 Stock Option Plan of EXECUTONE Information Systems, Inc. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, as amended by Form 8 filed on August 20, 1991. 10-4 401(k) Savings Plan of Vodavi Technology Corporation dated December 27, 1985. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989. 10-5 Stock Option Bonus Credit Plan of EXECUTONE Information Systems, Inc. dated December 31, 1988. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989. 10-6 1990 Directors' Stock Option Plan as amended on July 30, 1996. Previously filed. 10-7 1994 Executive Stock Incentive Plan. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. 10-9 Volume Purchase Agreement dated January 31, 1992, between U. S. Sprint Communications Company Limited Partnership and EXECUTONE Information Systems, Inc. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991, as amended by Form 8 filed on June 12, 1992. 10-10 Amendments dated as of April 1, 1995, and 1993 to Volume Purchase Agreement dated January 31, 1992, between U. S. Sprint Communications Company Limited Partnership and EXECUTONE Information Systems, Inc. Incorporated by reference to the Registrant's Annual Report on Form 10-K/A for the year ended December 31, 1995 filed on August 29, 1996. E-2 10-16 Manufacturing Services Agreement dated as of January 10, 1996, between EXECUTONE Information Systems, Inc. and Compania Dominicana de Telefonos, C por A (Codetel). Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 filed on April 15, 1996. 10-17 Manufacturing Services Agreement dated February 9, 1990 between Wong's Electronics Co., Ltd. and EXECUTONE Information Systems, Inc. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, as amended by Form 8 filed on August 20, 1991. 10-19 Warrant to Purchase 25,000 Shares of Common Stock of EXECUTONE Information Systems, Inc. in favor of Richard S. Rosenbloom dated June 23, 1992. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992. 10-20 Warrant to Purchase 25,000 Shares of Common Stock of the Registrant, in favor or Jerry M. Seslowe, dated February 1, 1996. Filed herewith. 10-21 Management Agreement for the National Indian Lottery dated January 16,1995. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 filed on April 15, 1996. 10-22 Distributor Agreement dated as of May 31, 1996, between EXECUTONE Information Systems, Inc. and Clarity Telecom, Inc. Incorporated by reference to the Registrant's Annual Report on Form 10-K/A for the year ended December 31, 1995 filed on June 4, 1996. 11 Statement regarding computation of per share earnings. Previously filed. 13 1996 Annual Report to Shareholders of EXECUTONE Information Systems, Inc. Previously filed. 21 Subsidiaries of EXECUTONE Information Systems, Inc. Filed herewith. 23.1 Consent of Arthur Andersen LLP. Filed herewith. 23.2 Consent of Hunton & Williams. Filed herewith. 27 Financial Data Schedule. Previously filed. E-3 EX-10 2 EXHIBIT 10-20 EXHIBIT 10-20 NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (the "Act"). NEITHER THIS WARRANT NOR SUCH SHARES MAY BE SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED EXCEPT AS PROVIDED IN SECTION 4 OF THE WARRANT TO PURCHASE COMMON STOCK OF THE COMPANY EXPIRING FEBRUARY 1, 2001, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE COMPANY. Issued as of Void after February 1, 2001 February 1, 1996 WARRANT TO PURCHASE 25,000 SHARES OF COMMON STOCK OF EXECUTONE INFORMATION SYSTEM, INC. (incorporated under the Laws of the Commonwealth of Virginia) THIS IS TO CERTIFY THAT, JERRY M. SESLOWE ("Seslowe") or his permitted registered assigns (Seslowe and such assigns sometimes hereinafter being referred to as the "Holder"), is entitled, subject to the terms and conditions set forth herein, and further subject to an adjustment as hereinafter provided, to purchase from EXECUTONE INFORMATION SYSTEMS, INC., a Virginia corporation (the "Company"), an aggregate of Twenty-Five Thousand (25,000) fully paid and nonassessable shares (the "Underlying Shares") of the common stock of the Company, $0.01 par value ("Common Stock"), upon payment of the purchase price of SIXTY-FIVE THOUSAND SEVEN HUNDRED FIFTY DOLLARS ($65,750.00) or TWO DOLLARS AND SIXTY-THREE CENTS ($2.63) per Underlying Share (the "Purchase Price"), and also is entitled to exercise the other appurtenant rights, powers and privileges hereinafter set forth at any time from and after 9:00 a.m. (Eastern Standard Time) February 1, 1996 and on or before 5:00 p.m. (Eastern Standard Time), on February 1, 2001. This Warrant (the "Warrant") entitles the Holder hereof to purchase up to an aggregate of 25,000 shares of Common Stock, which right shall vest ratably over a period of three (3) years, one-third on February 1, 1997, one-third on February 1, 1998 and one-third on February 1, 1999; provided, however, that if Seslowe ceases to be a director of the Company, either voluntarily or because he has not been reelected by the Shareholders of the Company, then Seslowe's vesting of rights shall terminate as of the date he is no longer a director of the Company. THE EXERCISE AND TRANSFER OF THIS WARRANT ARE RESTRICTED BY THE PROVISIONS OF SECTION 4 HEREOF 1. Exercise of Warrant. This Warrant may be exercised in whole or in part by the Holder hereof, by delivery to the Company at its principal office at 478 Wheelers Farms Road, Milford, CT 06460 of (a) a written notice to the Holder, in substantially the form of the Subscription Notice attached hereto as Exhibit "A", of such Holder's election to exercise this Warrant, which notice shall specify the number of Underlying Shares to be purchased, (b) a check payable to the Company in an amount equal to the aggregate Current Price (as defined below) of the number of shares of Common Stock being purchased and (c) this Warrant. The Company shall, as soon as reasonably practicable, execute and deliver or cause to be delivered to Holder, in accordance with such notice, one or more certificates representing the aggregate number of shares of Common Stock specified in such notice. The stock certificate(s) so delivered shall be issued in the name of the Holder or such other name as shall be designated in such notice. Such certificate(s) shall be deemed to have been issued and the Holder or any other person so designated to be named therein shall be deemed for all purposes to have become a Holder of record of such Underlying Shares as of the date such notice is received by the Company. If this Warrant shall have been exercised only in part, the Company shall, at the time of delivery of said certificate(s), deliver to the Holder a new Warrant evidencing the rights of the Holder to purchase the remaining shares of Common Stock called for by this Warrant (stated in Shares), which new Warrant shall in all other respects be identical to this Warrant, or, at the request of the Holder, appropriate notation may be made on this Warrant and the same returned to the Holder. 2. Fractional Shares. This Warrant is only exercisable with respect to whole Underlying Shares and not fractions thereof unless the Company otherwise agrees. Accordingly, the Company shall not be required to issue certificates representing fractions of Underlying Shares upon any exercise of this Warrant; provided, however, in respect of any final fraction of a share it may, at its sole option, in lieu of delivering a fractional share, make a payment in cash based upon the then fair market value of such fraction of the Underlying Shares. 3. Transfer, Division and Combination. No Warrant granted under this Agreement shall be transferable by Seslowe otherwise than by Will or the laws of descent and distribution and, during the lifetime of Seslowe, shall not be exercisable by any other person, but only by him. The Company agrees to maintain at its principal office in Milford, Connecticut, books for the registration and transfer of the Warrants and, subject to the provisions of this paragraph and Section 4 hereof, this Warrant and all rights hereunder are transferable ONLY with respect to (i) Seslowe's heirs and devisees, or (ii) Seslowe's Estate in whole or in part, on such books upon surrender of this Warrant at such office, together with a written assignment of this Warrant duly executed by the Holder hereof or his agent or attorney, and with funds sufficient to pay any stock transfer taxes payable upon the making of such transfer. Upon surrender and payment, the Company shall execute and deliver a new Warrant(s) in the name of the assignee of Holder and in the denominations specified in such instrument of assignment, and this Warrant shall be canceled promptly. If and when this Warrant is assigned in blank, the Company may, but shall not be obligated to, treat the bearer hereof as the absolute owner of this Warrant for all purposes and the Company shall not be affected by any notice to the contrary. A warrant may be exercised by a Holder for the purchase of shares of Common Stock without having a new Warrant issued. The Company shall pay all expenses, taxes (other than stock transfer taxes and any of Holder's income taxes, if any, incurred as a result of the transfer) and other charges payable in connection with the preparation, issue and delivery of Warrants hereunder. 4. Restriction on Exercise and Transfer of Warrants and Transfer of Warrants and Common Stock. Except as otherwise provided herein, this Warrant and the certificates representing the Underlying Shares shall be stamped or otherwise imprinted with a legend substantially in the following form: "Neither this Warrant nor the shares of Common Stock issuable upon exercise of this Warrant have been registered under the Securities Act of 1933, as amended (the "Act"). Neither this Warrant nor such Shares may be sold, transferred, pledged or hypothecated except as provided in Section 4 of the Warrant to purchase Common Stock of the Company expiring February 1, 2001, a copy of which is on file at the principal office of the Company." This Warrant shall be exercisable (1) only if the issue of Underlying Shares issuable upon exercise is exempt from the requirements of registration under the Securities Act of 1933, as amended (the "Act") (or any similar statute then in effect) and any applicable state securities law or (2) upon registration of such Underlying Shares in compliance therewith. This Warrant shall be transferable only (i) with the prior written consent of the Company, or (ii) by will or the laws of descent and distribution, and in either event only if the Warrant is registered or the transfer is exempt from the requirements of registration under the Act (or any similar statute then in effect) and any applicable state securities law. 5. Acknowledgment by the Holder of Restrictions. The Holder of this Warrant and certificates representing the Underlying Shares, by acceptance hereof and thereof, acknowledges and agrees that: (a) the Warrant and the Underlying Shares have not been registered under the Act in reliance upon exemptions from the registration provisions of the Act set forth therein, or in the rules and regulations promulgated thereunder (and there is no obligation on the part of the Company to register the Warrant or the Underlying Shares under the Act); and (b) the Warrant and the Underlying Shares will not be freely tradeable. The Holder represents that he fully understands the restrictions on his ability to transfer this Warrant and the Underlying Shares. Without limiting the foregoing and by way of illustration only, the Holder understands that if he presently desired to sell Underlying Shares pursuant to the exemption from the registration provisions of the Act contained in Rule 144 (the "Rule") promulgated under the Act, as presently constituted, such Underlying Shares might be sold by him pursuant to the Rule only after a minimum holding period of two (2) years (computed in accordance with the Rule) and, thereafter, only in the limited amounts, in the manner and under the limited circumstances prescribed by the Rule. 6. Change in Control. The Warrant that is outstanding on a Control Change Date, as hereinafter defined, shall be exercisable in whole or in part on that date and thereafter during the remainder of the Warrant period stated in this Warrant Agreement (the "Agreement"). A Change in Control occurs if, after the date of this Agreement, (i) any person, including a "group" as defined in Section 13(d)(3) of the Securities and Exchange Act of 1934 (the "Exchange Act"), becomes the owner or beneficial owner of Company securities having twenty percent (20%) or more of the combined voting power of the then outstanding Company securities that may be cast for the election of the Company's directors (other than as a result of an issuance of securities initiated by the Company, or open market purchases approved in advance by the board, as long as the majority at the time the purchases are made are directors who were members of the Board immediately prior to the purchases being made and approved such purchases); or (ii) as the direct or indirect result of, or in connection with, a cash tender or exchange offer, a merger or other business combination, a sale of assets, a contested election, or any combination of these transactions, the persons who were directors of the Company before such transactions cease to constitute a majority of the Company's Board, or any successor's board, within two (2) years of the last of such transactions. For purposes of this Agreement, the Control Change Date is the date on which an event described in (i) or (ii) occurs. If a Change in Control occurs on account of a series of transactions, the Control Change Date is the date of the last of such transactions. 7. Change in Management. Notwithstanding any specified vesting or applicable early exercise Warrant prices, if this Warrant is outstanding on the date Seslowe's directorship with the Company is terminated or constructively terminated (as described herein) as a direct or indirect result of the occurrence of one of the events specified in subsections (i) or (ii) of this paragraph, this Warrant shall be exercisable, in whole or in part, at the lowest Warrant price available during the term of the Warrant, on that date and thereafter during the remainder of the Warrant period stated herein. Such exercisability will occur if after the date of the Agreement, (i) any person, including a "group" as defined in Section 13(d)(3) of the Exchange Act, becomes the owner or beneficial owner of Company securities having twenty percent (20%) or more of the combined voting power of the then outstanding Company securities that may be cast for the election of the Company's directors (other than as a result of an issuance of securities initiated by the Company); or (ii) the Company is the subject of a successful cash tender or exchange offer, is a party to a merger or other business combination, sells a substantial portion of its assets, experiences a change in management brought about by a contested election or participates in any combination of these transactions. For purposes of this paragraph, the Transaction Date is the date on which an event described in subsections (i) or (ii) hereof occurs. The date upon which Seslowe is no longer a member of the Board of Directors of the Company either through resignation, a majority of the shareholders of the Company not voting for Seslowe as a director or voting for his earlier removal with or without cause or through his removal by a majority of the members of the Board of Directors shall constitute a constructive termination of Seslowe's directorship with the Company within the meaning of this paragraph. In the event Seslowe's service as a director of the Company terminates for any other reason or due to any other cause, including death, or a resignation or removal that is not a direct or indirect result of the events described above, then this Warrant shall be exercisable, to the same extent it was exercisable at the date of termination, for a period of seven months following the date of termination, provided that in no event shall this Warrant be exercisable after February 1, 2001. 8. Current Price: Adjustments. As used in this Warrant, "Current Price" (per share of Underlying Stock) at any date shall mean the amount equal to the quotient resulting from dividing (i) the purchase price per Share provided herein by (ii) the number of shares (including any fractional share) of Underlying Shares comprising a Share on such date. A "Share" shall consist initially of one share of Common Stock of the Company as such stock is constituted on the date of this Agreement. The Purchase Price of a Share shall be Two Dollars and Sixty-Three Cents ($2.63). In the event that the outstanding Common Stock of the Company is hereafter changed by reason of reorganization, merger, consolidation, recapitalization, reclassification, stock split-up, combination of Shares, stock dividends or the like, an appropriate adjustment shall be made by the Board of Directors in the aggregate number of Underlying Shares available under this Warrant and in the number of Underlying Shares and price per Underlying Share subject to outstanding Warrants. If the Company shall be reorganized, consolidated or merged with another corporation, or if all or substantially all of the assets of the Company shall be sold or exchanged, the Holder of the Warrant shall, at the time of issuance of the stock under such corporate event, be entitled to receive upon the exercise of the Holder's Warrant the same number and kind of shares of stock or the same amount of property, cash or securities as the Holder would have been entitled to receive upon the happening of any such corporate event as if the Holder had been, immediately prior to such event, the Holder of the number of Underlying Shares covered by the Holder's Warrant. Any adjustment in the number of Underlying Shares shall apply proportionately to only the unexercised portion of the Warrant granted hereunder. If a fraction of a share would result from any such adjustment, the adjustment shall be revised to the next lower whole number of Underlying Shares. 9. Reservation of Shares. The Company covenants and agrees that (a) so long as this Warrant is outstanding, it has or will reserve and keep available out of its authorized but unissued Common Stock, solely for the purpose of issuing Underlying Shares from time to time upon the exercise of this Warrant, an adequate number of Shares of Common Stock for delivery at the times and in the manner provided herein upon exercise of this Warrant; (b) the Underlying Shares delivered upon exercise of this Warrant shall be validly issued and outstanding and fully paid and nonassessable shares of Common Stock, free from any preemptive rights; and (c) it will pay when due any and all Federal and state original issue taxes which may be payable with respect to the issuance of the Warrant or of any Shares of Common Stock upon exercise of the Warrant. The Company shall not, however, be required (i) to pay any transfer tax which may be payable with respect to any transfer of the Warrant, the issuance of certificates of Common Stock in a name other than that of the Holder or any transfer of Underlying Shares or (ii) to pay any Federal or state income taxes of Holder which may occur as a result of the exercise of the Warrant or (iii) to issue or deliver the Warrant or any certificate for Underlying Shares until any such taxes shall have been paid by the Holder. 10. No Rights of Shareholders; Limitation of Liability. No Holder shall, based on being a holder of this Warrant, be entitled to vote or receive dividends or be deemed the holder of Common Stock or any other security of the Company which may at any time be issuable on the exercise hereof for any purpose, nor shall anything contained herein be construed to confer upon the Holder, as such, any of the rights of a shareholder of the Company or any right to vote for the election of directors or upon any matter submitted to shareholders at any meeting thereof, or to give or withhold consent to any corporate action (whether upon any recapitalization, issue of stock, reclassification of stock, change to or of par value, consolidation, merger, conveyance or otherwise) or to receive notice of meetings, or to receive dividends or subscription rights or otherwise until this Warrant shall have been exercised in accordance with Section 1 hereof. No provisions hereof, in the absence of affirmative action by the Holder hereof to purchase shares of Common Stock, and no mere enumeration herein of rights or privileges of the Holder hereof, shall give rise to any liability of such Holder for the purchase price or as a shareholder of the Company, whether such liability is asserted by the Company, creditors of the Company or others. 11. Replacement of Securities. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of any certificates evidencing ownership of this Warrant and in the event of any such loss, theft or destruction upon delivery of an indemnity agreement or, if the Holder so elects, a surety bond reasonably satisfactory to the Company or, in the case of any such mutilation, upon surrender and cancellation of any such certificate, the Company shall forthwith execute and deliver in lieu thereof a new Warrant of like tenor. 12. Negotiability. Every Holder of this Warrant, by accepting the same, consents and agrees with the Company that (a) this Warrant is transferable, in whole or in part, only upon compliance with the conditions set forth herein by the registered holder hereof in person or by an attorney duly authorized in writing by the Holder at the office of the Company as provided herein; (b) this Warrant may be transferred by the Holder only with respect to that portion of the Warrant to which the Holder is vested at the time of such transfer; and (c) the Company may deem and treat the person in whose name this Warrant is registered as the absolute, true and lawful owner for all purposes whatsoever, and the Company shall not be affected by any notice to the contrary. 13. Change; Waiver; Applicable Law. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against whom enforcement of such change, waiver, discharge or termination is sought. This Warrant shall be construed and enforced in accordance with the laws of the Commonwealth of Virginia. 14. Notices. Any notice to be given to the Company under the terms hereof shall be addressed to the Company in care of its President at 478 Wheelers Farms Road, Milford, Connecticut 06820, and any notice to the Holder shall be addressed to his address as reflected on the records of the Company, or at such other address as the Company, the Holder and his successors or assigns may hereafter designate in writing to the other. Any such notice shall have been deemed given upon personal delivery or on the third business day after being enclosed in a properly sealed envelope or wrapper properly addressed, registered or certified and deposited (postage and registry or certification fee prepaid) in post office or branch post office regularly maintained by the United States Government. 15. Forms of Election to Exercise or Transfer Warrant. The form to be used in the event the Holder hereof desires to exercise or transfer the Warrant is attached hereto as Exhibit "A". IN WITNESS WHEREOF, the Company has caused this Warrant to be signed in its name by its President or a duly authorized Vice President. DATED this______ day of ___________, 19___ COMPANY: EXECUTONE INFORMATION SYSTEMS, INC., a Virginia corporation By________________________ Alan Kessman Its President [CORPORATE SEAL] ATTEST: ____________________________________ Barbara C. Anderson Vice President, General Counsel and Secretary HOLDER: By __________________________ Jerry M. Seslowe EXHIBIT "A" SUBSCRIPTION NOTICE The undersigned, the Holder of the foregoing Warrant, hereby elects to exercise purchase rights represented by such Warrant for, and to purchase thereunder,______________________________________ (_____________________) shares of the Common Stock covered by such Warrant and herewith makes payment in full therefor in the amount of __________________________ Dollars ($________________) in cash or check made payable to the Company, and requests that one or more certificates for such shares (and any securities or property deliverable upon such exercise) be issued in the name of and delivered to _______________________________________________________, whose address is ___________________________________________. The undersigned agrees that, in the absence of an effective registration statement with respect to Common Stock issued upon this exercise, the undersigned is acquiring such Common Stock for investment and not with a view to distribution thereof and that the certificate or certificates representing such Common Stock may bear a legend substantially as follows: "Neither this Warrant nor the Shares of Common Stock issuable upon exercise of this Warrant have been registered under the Securities Act of 1933, as amended (the "Act"). Neither this Warrant nor such Shares may be sold, transferred, pledged or hypothecated in the absence of an effective registration statement for the shares under the Act or otherwise in compliance with the Act." The undersigned further agrees that the shares represented by this Warrant may not be transferred except as provided in Sections 3 and 4 of the Warrant to purchase Common Stock of the Company expiring February 1, 2001, a copy of which is on file at the principal office of the Company. DATED:_______________ __________________________ Jerry M. Seslowe Address: ASSIGNMENT FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto ___________________________________________, the rights represented by the foregoing Warrant of EXECUTONE Information Systems, Inc. and appoints ____________________________________, attorney to transfer said rights on the books of said corporation, with full power of substitution in the premises. DATED:____________________ ________________________ Jerry M. Seslowe NOTICE: The signature to this assignment must correspond with the name as written upon the face of the within Warrant in every particular, without alteration or enlargement or any change whatsoever. EX-21 3 EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF EXECUTONE INFORMATION SYSTEMS, INC. JURISDICTION OF % NAME INCORPORATION OWNERSHIP BUSINESS Unistar Gaming Corporation Delaware 100% Holding Company 478 Wheelers Farms Road Milford, CT 06460-1847 Unistar Entertainment, Inc. Idaho 100% Lottery Management 478 Wheelers Farms Road Milford, CT 06460-1847 All listed subsidiaries do business only under their corporate names listed above. Certain inactive and immaterial subsidiaries, which if considered in the aggregate as a single subsidiary would not constitute a "significant subsidiary" as defined in Rule 1-02(w) of the Commission as of December 31, 1997, are not listed. EX-23 4 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included or incorporated by reference in this Form 10-K/A into the Company's previously filed Registration Statements File Nos. 33-45015, 33-42561, 33-23294, 33-16585, 33-6604, 33-959, 2-91008, 33-40623, 33-46874, 33-46875, 33-50628, 33-57519, 33-63637, 333-7279 and 33-62257. ARTHUR ANDERSEN LLP Stamford, Connecticut April 29, 1997 EX-23 5 EXHIBIT 23.2 EXHIBIT 23.2 April 28 , 1997 EXECUTONE Information Systems, Inc. 478 Wheelers Farms Road Milford, CT 06460 Annual Report on Form 10-K/A for the Fiscal Year Ended December 31, 1996 (File No. 000-11551) Gentlemen: This firm has reviewed the information set forth in the seventh paragraph under "Recent Developments" under Item 1., Business, and the information set forth in the first paragraph under Item 3, Legal Proceedings, of the Annual Report on Form 10-K/A for the fiscal year ended December 31, 1996 of EXECUTONE Information Systems, Inc. (the "Company"). We understand that the information set forth therein as it relates to the issue of the authorization of the National Indian Lottery under 25 U.S.C. 2701 et seg. is based upon the advice provided to the Company by this firm. We consent to the summarization of such advice and the reference to us in the prospectus. Very truly yours, HUNTON & WILLIAMS -----END PRIVACY-ENHANCED MESSAGE-----