-----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, TZQiWvwHVsa5h+RDM/AR3g0oBoE/57GMOH52/q+FAORNv/J1sF2wfSP1k07zmnYV Ya9IPryieodbpkfhv1QNKA== 0000950117-96-001039.txt : 19960830 0000950117-96-001039.hdr.sgml : 19960830 ACCESSION NUMBER: 0000950117-96-001039 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960829 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-K405/A SEC ACT: SEC FILE NUMBER: 000-11551 FILM NUMBER: 96623671 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-K405/A 1 EXECUTONE INFORMATION SYSTEMS, INC. 10K405/A FORM 10-K/A SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended December 31, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from ____________ to ________________ Commission File Number: 0-11551 EXECUTONE INFORMATION SYSTEMS, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Virginia 86-0449210 - -------------------------------------------------------------- ----------------- (State or other jurisdiction of incorporation or organization) (I.R.S. Employer 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. [ X ] The aggregate market value of the common stock held by nonaffiliates of the registrant (assuming for this purpose that all executive officers and directors of the registrant are affiliates) as of March 29, 1996 was $125,909,320, based on the last sale price for the common stock on that date. The number of shares outstanding of the registrant's only class of common stock, $.01 par value per share, as of March 29, 1996, was 51,865,163. DOCUMENTS INCORPORATED BY REFERENCE The following documents are incorporated by reference into the Part of this Form 10-K indicated below: Part II - 1995 Annual Report to Shareholders TABLE OF CONTENTS
Item Page PART I 1. Business 1 2. Properties 15 3. Legal Proceedings 15 4. Submission of Matters to a Vote of Security Holders 16 Executive Officers of the Registrant 17 PART II 5. Market for Registrant's Common Equity and Related Stockholder Matters 20 6. Selected Financial Data 20 7. Management's Discussion and Analysis of Financial Condition 20 and Results of Operations 8. Financial Statements and Supplementary Data 20 9. Changes in and Disagreements with Accountants on 20 Accounting and Financial Disclosure PART III 10. Directors and Executive Officers of the Registrant 20 11. Executive Compensation 22 12. Security Ownership of Certain Beneficial Owners and Management 28 13. Certain Relationships and Related Transactions 31 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 32
PART I ITEM 1. BUSINESS General EXECUTONE Information Systems, Inc. ("EXECUTONE" or the "Company") designs, manufactures, sells, installs and supports voice processing systems and healthcare communications systems. EXECUTONE also provides cost-effective long-distance telephone service through its INFOSTAR'r'/LD+ program. Products are sold under the EXECUTONE'r', INFOSTAR'r', IDS'tm', LIFESAVER'tm' and INFOSTAR/ILS'tm' brand names through a worldwide network of direct sales and service offices and independent distributors. EXECUTONE's executive offices are located at 478 Wheelers Farms Road, Milford, Connecticut 06460, telephone (203) 876-7600. The Common Stock of EXECUTONE is traded on the NASDAQ National Market System under the symbol "XTON", and its Convertible Subordinated Debentures due 2011 trade on the NASDAQ system under the symbol "XTONG". Recent Developments On April 10, 1996, the Company entered into an agreement to sell the Company's direct sales and service organization, including its network services division, to a new acquisition company led by Bain Capital, Inc. and including Triumph Capital Group (the "Buyer"). The purchase price will consist of $61.5 million in cash, a $5.9 million junior subordinated note due July 1, 2004, with interest at 7.5% per year, and warrants to purchase 8% of the equity issued as of the closing in the new company. The sale is expected to close on May 31, 1996, subject to the Buyer's financing and other conditions. The purchase and sale agreement also provides that the Company and the Buyer will enter into a five-year exclusive distributor agreement pursuant to which the Buyer will sell and service EXECUTONE'r' and INFOSTAR'r' telephone products to business and commercial locations that require up to 400 telephones. The sale will include the Company's National Service Center. The sale does not include the Pittsburgh direct sales and service office, which the Company has separately agreed to sell to one of its existing independent distributors for approximately $1.3 million in cash and notes. The sale also does not include any of the healthcare communications division, the call center management division, the videoconferencing division, the National Accounts or Federal Systems marketing groups or the recently acquired Unistar business. On April 10, 1996, the Company also announced that it had given notice of its intention to terminate its distribution agreement with GPT Video Systems due to failures by GPT to deliver properly functioning videoconferencing products on a timely basis. The Company has not yet finalized its plans for its videoconferencing division. 1 On December 19, 1995, the Company acquired 100% of the common stock of Unistar Gaming Corp., a Delaware corporation ("Unistar"). Unistar, through its subsidiary Unistar Entertainment, Inc., has an exclusive five-year contract to design, develop, finance, and manage the National Indian Lottery (the "NIL" or "Lottery"). The NIL will be a national telephone lottery authorized by federal law and by a compact between the State of Idaho and the Coeur d'Alene Indian Tribe of Idaho ("Coeur d'Alene Tribe"). In return for providing these management services, Unistar will be paid a fee equal to 30% of the profits of the NIL. The Registrant acquired 100% of Unistar for 3.7 million shares of Common Stock, 250,000 shares of Cumulative Convertible Preferred Stock, Series A ("Series A Preferred Stock") and 100,000 shares of Cumulative Contingently Convertible Preferred Stock, Series B ("Series B Preferred Stock"). The Series A Preferred Stock has voting rights equal to one share of Common Stock and will earn dividends equal to 18.5% of the consolidated Retained Earnings of Unistar as of the end of a fiscal period, less any dividends paid to the holders of the Series A Preferred Stock prior to such date. The Series B Preferred Stock has voting rights equal to one share of Common Stock and will earn dividends equal to 31.5% of the consolidated Retained Earnings of Unistar as of the end of a fiscal period, less any dividends paid to the holders of the Series B Preferred Stock prior to such date. All dividends on Preferred Stock are payable (I) when and as declared by the Board of Directors, (ii) upon conversion or redemption of the Series A and Series B Preferred Stock or (iii) upon liquidation. The Series A and Series B Preferred Stock is redeemable for a total of 13.3 million shares of Common Stock (Series A Preferred Stock for 4.925 million shares and Series B Preferred Stock for 8.375 million shares) at the Company's option. The Series A Preferred Stock is convertible for up to 4.925 million shares of Common Stock and the Series B Preferred Stock is contingently convertible for up to 8.375 million shares of Common Stock (a total of an additional 13.3 million shares of Common Stock) if Unistar meets certain revenue and profit parameters. Shareholder approval is required before any of the Series B Preferred Stock can be converted or redeemed. The Company intends to submit the terms of the Series B Preferred Stock to its shareholders for approval at the 1996 Annual Meeting. The telephone operations of the NIL cannot begin until the resolution of a pending legal proceeding. Certain states have attempted to block the NIL by filing letters under 18 U.S.C. Section 1084 preventing long-distance carriers from providing telephone service to the NIL based on allegations that the NIL is not legal. The Coeur d'Alene Tribe has initiated legal action to argue that the Lottery is authorized by the Indian Gaming Regulatory Act ("IGRA") passed in 1988, that IGRA preempts state and federal statutes, and that the states lack authority to issue the Section 1084 notification letters to any carrier. On February 28, 1996, the Coeur d"Alene tribal court ruled that all requirements of IGRA have been satisfied, that the Section 1084 letters are invalid, and that the long distance carrier is obligated to provide telephone service for the NIL. Although the ruling has been appealed to the tribal supreme court and will likely be appealed ultimately to U.S. Federal District Court, the Company believes, based upon consultation with and opinion rendered by outside legal counsel, that the initial ruling and the Coeur d'Alene Tribe's position will ultimately be upheld. 2 In July 1995, the Company reorganized its core business into five divisions: Computer Telephony, Healthcare Communication Systems, Call Center Management, Videoconferencing Products, and Network Services. The business of Executone, Inc. acquired by the Company in 1988 was a telephone equipment business that focused its direct selling effort on office sites with fewer than 20 phones, with an emphasis on selling additional hardware to generate revenues in the form of moves, adds and changes ("MAC") and service, mainly on a time and material basis. The average system size in the customer base at that time was in the 8-10 phone range. It was originally expected in 1988 that the MAC and service revenues generated by the customer base would be increasingly profitable as the base of customers grew. Since 1988, the Company has expanded its product line to the high-end user, with larger customers and more sophisticated products to serve customers' total communications needs. The strategy the Company is now pursuing is to focus on software solutions versus the hardware orientation of the business purchased in the 1988 acquisition. With the IDS product, a digital platform for various communications functions, which was developed after the acquisition, the Company's product lines now provide sophisticated software applications, including integrated voice mail, call center applications (ACD, IVR's and predictive dialers), infrared locator systems, nurse call systems and computer telephony interfaces that drive its telephony products. The development in the nature and complexity of our product lines has changed the way the Company has to market its products. Unlike many companies in its industry that focus on one particular product to one market, the Company provides multiple products and applications to its particular market niche. This requires the Company to have expertise in each particular market segment in which it competes because the Company's competitors are primarily one-product companies or divisions who are experts in their particular market niche. Therefore, the Company consolidated the sales, marketing and product development functions for each market segment under a divisional management structure, headed by a division president. The sales force has been restructured such that each sales person is assigned to a specific division and will sell only within that division's market segment. The specialization of the sales force included the addition of sales representatives with the necessary product and market expertise, as well as substantial retraining for the remaining sales representatives. Business Strategy EXECUTONE is a vertically integrated voice processing and healthcare communications company. The Company controls the major elements of its business, ranging from product design, manufacturing and marketing to distribution, installation, service and support. Revenues are derived from both from new installations and from the Company's existing customer base through additions, changes, upgrades or relocation of previously installed systems, maintenance contracts, service charges and sales of network services. The Company's products and services are marketed and sold through a worldwide network of Company direct sales and service offices and independent distributors. The Company is organized into five divisions focusing on different products and market segments: computer telephony, healthcare communication systems, call 3 center management, videoconferencing products, and network (voice, data and video) services. The objective of the computer telephony division is to offer value-added products and services. The Company's integrated digital telephone systems emphasize flexible software applications, such as data switching and computer telephone interface, designed to enhance the customer's ability to communicate, obtain and manage information. The Company's telephone systems provide the platform for its other voice processing software applications, such as automatic call distribution. The healthcare communications systems division provides to its healthcare facility customers integration of voice and data between nurse and patient communication systems and hospital information systems, resulting in increased flexibility and efficiency in hospital operations, and improved patient care. EXECUTONE has been a recognized name in this market for many years with its LIFESAVER'tm' and CARE/COM'r'II-E nurse call systems. The Company is also creating software applications specific to hospital and nursing homes to help resolve other labor intensive tasks. The healthcare communications division also markets the INFOSTAR/ILS'tm' locator system, released in early 1994. The INFOSTAR/ILS system can improve productivity, save time and expense for users and eliminate overhead paging by instantly locating staff and equipment in a facility. Each person or piece of equipment wears an individually coded badge that transmits infrared signals to sensors placed throughout the facility, which forward the location information to a central processing unit. The location data can be accessed on local display stations. The ILS'tm' system can be integrated with the Company's telephone systems and the LIFESAVER'tm' nurse call system to provide additional productivity improvements for hospital environments. The ILS system is also marketed by the computer telephony division for office environments. The call center management division develops and sells sophisticated telephony products that integrate a computerized digital telephone system platform with high-volume inbound, outbound and internal call processing systems. Such systems include automatic call distribution systems, predictive dialing systems, scripting software to assist agents handling calls, and interactive voice response systems. Certain of these systems also provide data interface with host or mainframe computers. These systems are sold to call center customers that have a need for systems to efficiently and cost-effectively receive or place their customer or prospect calls, distribute those calls to available live operators, obtain information from callers, record and distribute messages from callers, and produce management reports on call activity. The videoconferencing division is the exclusive distributor of products of GPT Video Systems ("GPT") in the United States. The division also provides videoconferencing network services such as multipoint conferencing, network bridging and network design to its videoconferencing customers. The network services division offers cost-effective voice, data and video 4 long-distance service, least-cost routing, network design and network support services, enabling customers to make more efficient and cost-effective use of their telecommunications systems. Services are sold primarily to telephony customers in the United States. In 1995, the Company acquired Unistar. Unistar, through its subsidiary Unistar Entertainment, Inc., has an exclusive five-year contract with the Coeur d'Alene Tribe of Idaho to design, develop, finance, and manage the National Indian Lottery (the "NIL" or the "Lottery"). The NIL will be a national telephone lottery authorized by the federal Indian Gaming Regulatory Act ("IGRA") and a compact between the State of Idaho and the Coeur d'Alene Tribe. In return for providing these management services to the NIL, Unistar will be paid a fee equal to 30% of the profits of the NIL. Through Unistar, the Company will provide development and management of the network design and call center applications for the Lottery's operations. It is anticipated that calls to purchase lottery tickets will be made via 800 number lines and processed by interactive voice response systems, as well as live agents located on the Coeur d'Alene Reservation using ACD software to manage a high volume of calls. The Lottery will require an extensive telephone network to handle the anticipated call volume. The telephone operations of the NIL cannot begin until resolution of a pending legal proceeding. See "Legal Proceedings." Computer Telephony Products The Company offers a complete line of applications-oriented computer telephony systems, ranging from those satisfying the basic voice communications needs of small businesses to those capable of meeting the complex voice and data communications demands of much larger business locations that need fully featured telecommunications systems. The Company markets the IDS'tm' Integrated Digital System, along with an expanding line of software applications and features operating on that platform. The Company's largest telephone platform is the IDS'tm'/System 648 digital system, which can accommodate up to 648 nonblocking voice ports and 648 nonblocking data ports. The Company believes its installed telephone equipment base exceeds 3 million desktops. In 1996, the Company introduced its TAPI telephone, designed to support any desktop application using the TAPI standard for computer-telephone integration, in order to speed inbound and outbound call handling and increase productivity. The TAPI telephone can eliminate time spent searching for telephone numbers, looking up PBX feature codes, misdialing or searching for information to handle a call. The Company's telephone systems are characterized by flexible software and a hardware design that makes them readily adaptable to evolving technology and customer requirements. The Company attributes the market acceptance of its systems to cost-effective design and to the sophistication of its software options. The software in each system provides such features as automatic dialing, add-on conferencing, call forwarding, last number redialing, message waiting, paging capability, internal diagnostic routines and other commonly used communications features. The Company's systems also include an integrated 5 automated attendant feature to answer and transfer calls quickly and efficiently without operator intervention, and a video display terminal and management reports that permit the monitoring of calls and improve the efficiency of directing calls to the appropriate extensions. The Company's telephone systems also support sophisticated applications such as voice mail and call center products as well as the Company's locator system. The Company also offers a voice mail system that can be integrated with the IDS'tm' telephone systems and with telephone systems manufactured by others. The voice message or voice mail system receives, records, stores, distributes, transfers and replays messages from both external and internal callers and can supplement other call center systems. The Company develops its application-specific software options using high-level programming languages to facilitate further enhancements and portability. EXECUTONE's software includes remote capabilities built into certain systems that enable the Company to customize and update selected features continuously, which increases the value of such systems and lengthens their useful lives. Certain of the Company's systems are capable of having service diagnostics, updates and modifications performed on a remote basis. The ability to provide such off-site servicing increases the efficiency of customer support and service. Healthcare Communication Products The Company develops, manufactures, markets and services a line of specialized internal communications systems that are used primarily in the healthcare industry. These internal communications systems are microprocessor-based patient-to-nurse communication systems, intercoms, paging and sound equipment, and room status indicators. The Company's LIFESAVER'tm' nurse call system is an advanced system integrating voice and data communication between nurse and patient and providing enhanced self-diagnostics. The LIFESAVER'tm' system is a state-of-the- art communications network that provides routine and emergency signaling, voice communications and data transmission. The nurse console offers menu-driven functions and step-by-step user prompts. The system is highly flexible, offering many programmable features that allow customization of its operations to the hospital's needs. A single system can serve more than 300 patient beds (150 rooms) and up to eight nurse control stations, and up to eight systems can be networked for centralized operation. The CARE/COM'r' II-E nurse call system represents the first step in EXECUTONE's plan to bring the benefits of a totally integrated communications system to the healthcare market on the Company's IDS digital platform. The CARE/COM'r' lI-E system provides patient-to-staff and staff-to-staff voice communication on an automatic three-level call priority basis. This new system can currently support 72 patient stations per system, with the ability to integrate three systems together and support 216 patient stations. A three-line LCD display Nurse Control Station allows simple call processing and system operation. The 6 system is highly flexible to meet the individually defined needs of today's hospitals and long-term care facilities. The LIFESAVER'tm' nurse call system integrates with the Company's locator system. The Healthcare Division also markets the INFOSTAR'r' /PRS patient reporting system, an automated voice storage system that allows the efficient transfer of patient information between nurses. Patient reports are password- protected for confidentiality and admission, discharge and transfer information are also supported. The system uses standard telephone instruments and provides full voice messaging capability. The INFOSTAR'r'/PRS system reduces report time, provides continuity at shift changes, and improves report quality. In 1995, the Healthcare Division began marketing the Communicator system manufactured by Dialogic Communications Corporation, in which the Company has an equity investment. The Communicator product is a P.C.-based, automated callout system that rapidly locates personnel to fulfill routine or emergency staffing needs, searching multiple locations until responses are sufficient to satisfy the staffing need. The system also provides real-time management reports of employee eligibility, availability, and responses. Using the Communicator system, hospitals can improve staffing efficiency, avoid miscommunication, and enhance productivity. Locator Systems The Company's INFOSTAR/ILS'tm' locator system is an integrated system using infrared transmitter badges to communicate location data to sensors installed throughout a facility. The badges transmit regularly at user-programmed intervals and can be worn by staff personnel or attached to equipment. The location data is collected by the sensors and forwarded to a central processing unit that organizes the data so it can be accessed at one or more display stations. The display of staff and equipment location information can be in the form of a list or in the form of a map of the facility using icons. The display can be filtered to show only particular staff members, groups of personnel, particular pieces of equipment or groups of equipment. The system can be integrated with either the IDS telephone systems, allowing the activation of features and display of information on the telephone set, or the Company's nurse call systems, allowing the activation of features and display of information at the nurse control station and patient stations. The INFOSTAR/VLS'tm' version of this product allows outside callers to locate personnel within a facility, find out who the person is with, complete the call, or leave a voice message. The ILS and VLS systems can also be integrated to other manufacturers' PBXs. Nortel has now made ILS available to its dealer network for sale by its dealers in conjunction with Nortel PBXs. Call Center Management Products The Company's call center management products consist of the following systems, which can be integrated with the Company's computer telephone systems and with each other to provide large-volume inbound, outbound and 7 internal call management. Computer-telephone integration ("CTI") technology integrates the IDS'tm' call processing function with information in a customer's computer database. Primarily used by large incoming call centers to automatically identify incoming callers and by outbound centers to contact and provide records of contacts, CTI limits the amount of time that an agent spends contacting or identifying the caller, thereby providing better customer service, reducing the number of required agents and reducing telephone line and transmission expense. Predictive Dialers and Scripting Products - The INFOSTAR'r'/Predictive Dialer is an automated call system designed to boost productivity in outbound call centers. The system integrates telephone, data collection and transaction processing functions for those customers who require high volume contact by telephone to transact business, such as sales, credit and collections, blood banks and fund-raising. Working with the host computer and the IDS'tm' telephone system platform, the dialer automatically dials telephone numbers pulled from the host computer database and detects "live" calls. Available representatives receive these calls and, through CTI, can view screen information about the customer from the database immediately after the customer answers the phone. The system predicts the availability of agents in order to reduce abandoned calls and increase agent productivity, and reduces agent contact with busy signals, no answers, wrong numbers and answering machines. Management reports provide instant and historical feedback on call distribution, list management, data input integrity and file maintenance. Scripting software allows the call center to create a script to guide its agents through various call scenarios and prompt the input of desired information. Automatic Call Distribution ("ACD") - ACD systems are designed to increase responsiveness to inbound callers and increase agent productivity. ACD systems provide the capability to distribute or route incoming calls to available agents based upon management's specifications, and allow the supervisor of the call processing group to monitor call traffic on-line via a computer terminal. The Company produces ACD software for call centers of up to 500 agents in multiple shifts (225 in any single shift), in five levels of sophistication, the highest of which is "Custom Plus ACD." Custom Plus ACD provides the capability to store and retrieve call data for a limited period, print out standard call traffic reports, customize reports to the needs of a specific application, monitor traffic with color screens and graphics, and greatly enhance the ability to store and retrieve historical call data. Interactive Voice Response - The Company's interactive voice response ("IVR") systems provide businesses with automated handling of routine calls. Voice response systems allow callers to input and retrieve information into or from computers by means of the dialpads on their telephones. The caller is guided by voice prompts to input data by dialing numbers, which the IVR system converts into computer keystrokes. The IVR system can also convert computer screen information into voice prompts, allowing callers to retrieve information from computers. The voice response product provides advanced computer access applications and advanced facilities, such as ISDN, that interface with the Company's IDS'tm' family of telephone systems and other advanced voice processing applications. 8 Videoconferencing Systems and Services The Videoconferencing Division markets videoconferencing equipment in the United States and provides video network services including video networking, network design, multipoint conferencing, and video network bridging. The Company provides its videoconferencing customers with a "turnkey" solution including equipment installation, network services, maintenance and customer support. Network Services The Company markets INFOSTAR'r'/LD+ long-distance telephone service to its customers. INFOSTAR'r'/LD+ provides a complete service to the Company's customers from the initial sale through billing and customer support. The Company has contracted with major carriers including Sprint, Worldcom and Teleport Communications to carry the long-distance traffic for both voice and data on their networks. The Company has also signed agreements to provide alternative local access in select cities throughout the U.S. This program offers many features including six-second billing rates, accounting codes, international service, 800 service, "T-1" access and specialized management reporting. The Company also provides the following network services: Network Designer - The Company can perform a computer-generated analysis of a customer's calling patterns in order to recommend the optimum configuration of its network. Recommendations would include the long-distance carriers and the number of lines needed. Least Cost Routing ("LCR") - LCR stores current tariff tables for the appropriate long-distance carriers employed by the customer and automatically selects the least expensive carrier for each specific call at the moment the call is placed. Data Switching - Data switching provides the capability to switch data between mainframe, minicomputers, personal computers, terminals and peripherals through the telephone systems. Centrex Capability and Applications - The Company's telephone systems can be programmed to function in conjunction with and enhance the features of Centrex services offered by the local telephone companies. Sales and Marketing Developing and maintaining a strong relationship with the end-user customer is the focus of the Company's marketing strategy. The Company's distribution network consists of (1) 70 Company-owned direct sales and service locations in the major markets in the United States; (2) domestic independent distributors with approximately 110 locations operating under exclusive and 9 nonexclusive agreements throughout the United States and Canada; (3) a National Accounts Division that uses the sales, installation, service and support capabilities of EXECUTONE's distribution network to serve multiple offices and departments of companies; (4) a Federal Systems Division that uses the distribution network to serve offices of the U. S. Government and its agencies; (5) vertical marketing organizations of the healthcare communications, call center, network and videoconferencing divisions; and (6) 20 independent distributors operating in sixteen other foreign countries. For those distributors that have exclusive distribution rights for specified products, retention of such rights is subject to satisfaction of established criteria for sales and service to customers on an ongoing basis. The divesting of or acquisition of customer bases to or from distributors in specific geographic territories may occur in the normal course of the Company's business. EXECUTONE's National Accounts Division provides uniformity in pricing, coordination, installation, billing and service for National Accounts Division customers such as Electronic Data Systems, Airborne Express, Paychex, Inc., W. W. Grainger, Home Quarters Warehouse, Inc., Bridgestone/Firestone, Carlson Companies, Fidelity Investments and TCI Cable. The Division coordinates the sales, installation, service and support functions of direct and independent sales offices to serve the multiple offices and departments of large companies. The Company's Federal Systems Division addresses the special procurement and administrative requirements of the U.S. Government. Sales are made through a combination of master contracts and competitively solicited proposals for large or complex telecommunications requirements. Federal Systems coordinates the installation, service and support activities of direct and independent sales offices to provide ongoing support to federal agency offices nationwide. Backlog consists primarily of products that have been ordered and that will be shipped or installed within 30 to 60 days of the order (other than call center and healthcare orders, which have a longer lead time), or systems the installation of which is not yet required by the customer. Backlog as of December 31, 1995, was $ 33,091,000 compared to $29,390,000 at December 31, 1994, and the Company expects virtually all of such backlog to be filled within the current fiscal year. Customer Support and Service The Company operates a National Service Center that diagnoses system problems for many of the end-user customers of its direct sales and service offices, coordinates field service personnel and programs certain corrections remotely from a centralized location at its corporate headquarters. The National Service Center helps the Company in providing consistent customer service and support while improving the productivity of the Company's technicians. All service calls received from customers are controlled from initial diagnosis to ultimate disposition through an internally-developed and maintained proprietary software package. The National Service Center maintains detailed customer records and also markets and monitors certain products and services such as maintenance 10 contracts. It is the primary point of contact for customer needs, questions or requests. Additionally, the National Service Center provides the Company with statistical data and reports regarding a product's performance, which can be used to make enhancements and improvements. This data is also available for each of the Company's locations and each of its technicians. EXECUTONE warrants parts and labor on its systems, typically for one year, and provides maintenance and service after warranty expiration either on a contract or time and materials basis. Most of the Company's products are repaired at its 56,000-square foot repair facility located in Poway, California. Product Development and Engineering As of March 1, 1996, EXECUTONE employed over 100 individuals engaged in product design and development. The Company's product development program is designed to anticipate and respond to customer needs through development of new products and enhancement of existing products. During 1995, the Company's engineering efforts focused on applications-oriented software products, including new releases of voice messaging, call center and healthcare communications software. EXECUTONE continually strives to reduce production costs by incorporating new technology into its design and manufacturing operations. For the years ended December 31, 1995, 1994, and 1993, Company-sponsored product development and engineering expenditures (including product management and testing) amounted to approximately $14.7 million, $12.2 million, and $9.9 million, respectively. Manufacturing Most of EXECUTONE's telephone products are manufactured by Wong's Electronics Company, Ltd. ("Wong's") in Hong Kong or China, by Quality Telecommunication Products, also referred to as Compania Dominicana de Telefonos ("Codetel"), in the Dominican Republic, and by the Company directly in Poway, California. Many of the printed circuit boards for the Company's products are manufactured, and many products are assembled into systems and system components, in the United States. The Company's Manufacturing Services Agreement with Wong's currently expires in February 1997 but is automatically extended each year for an additional one-year term unless either party gives notice of termination three months prior to expiration of the current term. The contract may be terminated earlier by either party in the event of a material breach by the other party. If the agreement between Wong's and EXECUTONE should be terminated for any reason, or if Wong's is unable to ship or has to reduce shipments, or if restrictions are imposed materially limiting the importation of products produced by foreign manufacturers, the Company could be affected adversely until satisfactory alternative sources are in place. The profitability of EXECUTONE's operations could be affected to the extent it is unable to reflect the direct and indirect costs of products purchased from Wong's in its pricing policies. The prices for products purchased by EXECUTONE from its suppliers are payable in U.S. 11 dollars. The majority of EXECUTONE's specialized healthcare and internal communication systems are produced in the United States at the Company's facility in Poway, California or at domestic subcontractors. The functions of repair, warehousing and distribution of the Company's products are performed at the Company's facilities in Poway. Trademarks, Patents and Copyrights Management believes that the continued success of EXECUTONE is dependent upon the ability to design, develop and market new products and new or enhanced applications. The patentability of such new products or applications is evaluated and patent applications are filed where necessary to protect unique developments. The Company currently holds eight utility patents, expiring at various times between 2007 and 2012, has 13 U.S. patent applications pending, and seven patent applications pending in numerous foreign countries. The Company has registered or applied to register its trademarks when it believes registration to be important to its ongoing business operations. The Company also generally claims copyright protection for software, circuit designs, schematics and technical documentation used in connection with its products, and relies upon trade secret, contract and copyright laws to protect its proprietary rights in its software, designs and documentation. Certain of EXECUTONE's products incorporate technology and software licensed from independent third parties. Generally, these licenses require payment of a royalty for each system sold that incorporates the licensed technology or require that the Company purchase the product from the licensor. Government Regulation Many of the Company's systems are designed to be connected to the public telecommunications network and as such are required to comply with certain rules of the Federal Communications Commission ("FCC") pertaining to telecommunications equipment. The Company's network services are generally required to be tariffed and are subject to regulation by the public utility commissions of the various states and by the FCC. The Company has not experienced any material adverse effect on its business or operations as a result of such regulation and compliance. Certain uses of outbound call processing systems are regulated by federal and state law. Among other things, the FCC has adopted rules pursuant to the Federal Telephone Consumer Protection Act to protect residential telephone subscribers' privacy rights to avoid receiving telephone solicitations to which they object. Certain states have enacted similar laws limiting access to telephone subscribers who object to receiving solicitations. Although compliance with these laws may limit the potential use of the Company's predictive dialer systems in some respects, the Company's systems can be programmed to operate 12 automatically in full compliance with these laws through the use of appropriate calling lists and calling campaign time parameters. To the extent the Company markets its products internationally, it is required to comply with applicable foreign law, including certification of its products by appropriate government regulatory organizations. Competition The market segments in which the Company offers its products and services are highly competitive. The under 300-desktop voice processing segment in the United States, the primary market for the Company's telephony division, is served by many domestic and foreign communications equipment manufacturers and distributors, including Lucent Technologies (the former equipment business of AT&T), Nortel (formerly named Northern Telecom), and the Regional Bell Operating Companies (the "RBOCs"), as well as numerous specialized software companies. The Company believes that it may be third in telephone system shipments to the under 300-desktop voice processing market, after AT&T/Lucent and Nortel, based on industry surveys of 1994 data. However, such information may not be sufficient to make an exact assessment of the Company's competitive position relative to its competitors. Similarly, the Company faces strong competition in network services, including AT&T, MCI, Sprint, and numerous long distance resellers. Although the Company can be competitive on price compared to several of these companies, many of EXECUTONE's competitors have substantially more capital, technology and marketing resources than the Company. Competition in the Company's market segments is expected to increase significantly with passage in February 1996 of the Telecommunications Act of 1996 (the "Act"). Under the Act, long-distance companies, cable companies and others will be permitted to compete with local telephone companies to offer local service. The RBOCs and other local telephone companies will be permitted to offer long-distance services if their local market meets certain criteria to measure the existence of local competition. The Company believes its call center division is in a good competitive position although to date it has not penetrated a significant portion of this market. The Company believes it is currently the only vendor that supplies inbound, outbound and administrative call processing integrated with a telephone system platform. The Company's principal competitors in healthcare communications are Hill-Rom Company, DuKane and Rauland-Borg. The Company believes it has a strong competitive position in nurse call and locator products. The Company believes that it has several competitors in videoconferencing but is not yet able to estimate its competitive position relative to such competitors. The Company competes by offering a full array of integrated 13 telecommunication products and services to its customers. The Company also competes on the basis of the quality of its products, its customer service, nationwide distribution and installation, and price. Employees As of March 1, 1996, EXECUTONE employed approximately 2,400 persons, directly and through its subsidiaries. Approximately 5% of the employees of the Company and its subsidiaries are represented by unions, all of which are represented by the International Brotherhood of Electrical Workers. Management believes that the Company's relations with its employees are good. 14 ITEM 2. PROPERTIES EXECUTONE's principal offices are located in two leased buildings in Milford, Connecticut. The Company has sales offices, warehouses, manufacturing and distribution facilities throughout the United States. As of December 31, 1995, the Company utilized 73 facilities in the United States with an aggregate of approximately 792,000 square feet for its ongoing operations. The Company's facilities are occupied under lease agreements except for one facility. This Company-owned building is approximately 15,000 square feet, and is used for a direct sales and service office. The current annual rent for the Company's facilities is approximately $9.2 million. The Company has one facility totaling approximately 14,000 square feet of space that is no longer used in ongoing operations and is subleased. The Company believes its facilities are adequate and generally suitable for its business requirements at the present time and for the immediate future. The following is a brief description of the primary facilities of the Company.
Use Location Approximate Size Corporate and Direct Sales Milford, Connecticut 150,000 square feet Headquarters; National Customer Service Center; and Research, Development and Engineering Facility Distribution, Production & Poway, California 115,000 square feet Repair Center and Warehouse Direct Sales and Service Major cities across U.S. 496,000 square feet Offices, including warehouses
ITEM 3. LEGAL PROCEEDINGS On October 16, 1995, the Coeur d 'Alene Tribe filed an action entitled Coeur d'Alene Tribe v. AT&T Corp. in the Tribal Court, located in Plummer, Idaho (Case No. C195-097), requesting a ruling that the NIL is legal under IGRA, that IGRA preempts state laws on the subject of Indian gaming, and the NIL cannot be blocked by state action, and an injunction preventing AT&T from refusing to provide telephone service to the NIL. This action was necessary because several network carriers have been sent Section 1084 letters under the Federal Communications Act by states opposed to the NIL. These letters state that the NIL is illegal under state and federal laws and prohibit the carriers from carrying network traffic for the NIL. The telephone operations of the NIL cannot begin until resolution of this proceeding and agreement of a network carrier to carry the network traffic of the NIL. On February 28, 1996, the Tribal Court ruled that all 15 requirements of IGRA have been satisfied, that the Section 1084 letters are invalid, and that AT&T is obligated to provide telephone service for the NIL. Although AT&T has stated that it will appeal the ruling to the tribal supreme court and ultimately to U.S. federal court, the Company believes the initial ruling and the Coeur d'Alene Tribe's position will be upheld. However, this litigation, as well as other litigation which could be brought by states opposed to the NIL, could delay commencement of operations, and it is impossible at this time to predict when the NIL will commence operations. The Company does not believe the outcome of this litigation will have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. The Company currently is a named defendant in a number of lawsuits and is a party to a number of other proceedings that have arisen in the normal course of its business. Those lawsuits and proceedings relate primarily to the collection of indebtedness owed to the Company, the performance of products sold by the Company, and various contract disputes. In the opinion of the Company, these proceedings are not expected to have a material adverse effect on the consolidated financial position, results of operations or liquidity of the Company and, to the extent they are not covered by insurance, reserves adequate to satisfy such liabilities have been established. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders in the fourth quarter of the fiscal year covered by this report. 16 EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company are as follows:
Name Age Position With Company Alan Kessman 49 Chairman of the Board, President and Chief Executive Officer Stanley M. Blau 58 Vice Chairman of the Board Michael W. Yacenda 44 Executive Vice President Barbara C. Anderson 44 Vice President, General Counsel and Secretary James E. Cooke III 47 Vice President, National Accounts Anthony R. Guarascio 42 Vice President, Finance and Chief Financial Officer Israel J. Hersh 42 Vice President, Software Engineering Elizabeth Hinds 54 Vice President, Human Resources Robert W. Hopwood 52 Vice President, Customer Care Andrew Kontomerkos 50 Senior Vice President, Hardware Engineering and Production David E. Lee 49 Vice President, Business Development John T. O'Kane 66 Vice President, MIS Frank J. Rotatori 53 Vice President, Healthcare Sales Shlomo Shur 46 Senior Vice President, Advanced Technology
Alan Kessman has served as Chairman and Chief Executive Officer of the Company since 1988. Prior to that, he had served as President and Chief Executive Officer of ISOETEC Communications, Inc., a predecessor of the Company ("ISOETEC"), since 1983. From 1978 to 1983, Mr. Kessman served as President of three operating subsidiaries of Rolm Corporation, and from 1981 to 1983, he served as a Corporate Vice President of Rolm Corporation, responsible for sales and service in the eastern United States. Stanley M. Blau has served as Vice Chairman of EXECUTONE since 1988. Prior thereto, from June 1987 to July 1988, Mr. Blau was the President and Chief Executive Officer of Vodavi Technology Corporation, a predecessor of the Company ("Vodavi"). Mr. Blau was formerly the President and Chairman of the Board of Consolidated Communications, Inc., a telecommunications products 17 supply company he founded in 1973. Michael W. Yacenda has served as Executive Vice President of EXECUTONE since January 1990. Prior to that time, he was Vice President, Finance and Chief Financial Officer of the Company from July 1988 to January 1990. He served as a Vice President of ISOETEC from 1983 to 1988. From 1974 to 1983, Mr. Yacenda was employed by Arthur Andersen & Co., a public accounting firm. Mr. Yacenda is a certified public accountant. Barbara C. Anderson has been Vice President, General Counsel and Secretary since 1990. From 1985 to 1989, she was Corporate Counsel of United States Surgical Corporation, a manufacturer of medical devices. James E. Cooke III has served as Vice President, National Accounts since February 1995. Prior to that time, from 1992 until 1995, Mr. Cooke served as Division Manager of Operations for the Company, and from 1988 through 1991, Mr. Cooke was a District Manager for the Company. From 1985 until 1988, Mr. Cooke was the President of an interconnect company, and from 1981 to 1985, he was a General Manager and a Regional Manager of the Jarvis Corporation. For eight years prior to that time, he worked at Xerox Corporation in various sales and management positions. Anthony R. Guarascio has been Vice President, Finance and Chief Financial Officer since January 1994, and prior thereto was Vice President and Corporate Controller since January 1990. From 1984 until 1990, Mr. Guarascio was the Corporate Controller of the Company and ISOETEC. Israel J. Hersh has been Vice President, Software Engineering since February 1995. Mr. Hersh joined the Company as Director of Software Development in 1984, and was promoted to Senior Director of Software Engineering in January 1994. Prior to his employment with the Company, Mr. Hersh was a manager of the software development department for T-Bar, Inc. Mr. Hersh has a B.S. in Electrical Engineering from Tel Aviv University and a MS in Electrical Engineering from Bridgeport University. Elizabeth Hinds has been Vice President, Human Resources since January 1995. Prior to joining the Company, Ms. Hinds was Vice President, Human Resources of Chilton Company, a wholly-owned subsidiary of Capital Cities/American Broadcasting Company, Inc. ("CC/ABC"), from February 1993 until January 1995. Ms. Hinds was the Director of Human Resources for CC/ABC from June 1987 until February 1993. Robert W. Hopwood has served as Vice President, Customer Care since January 1990. From 1983 until 1990, Mr. Hopwood was the Director of Technical Operations of the Company and ISOETEC. Andrew Kontomerkos has been Senior Vice President, Hardware Engineering and Production since January 1994, and prior thereto was Vice President, Hardware Engineering since 1988. He served as a Vice President of ISOETEC since 1983. From 1982 to 1983, he was a Vice President and founder 18 of SAM Communications, Inc., a telecommunications research and development company which was one of the predecessors to ISOETEC; that corporation was merged into ISOETEC in 1983. From 1979 to 1982, Mr. Kontomerkos was Director of Telecommunications Systems Development of TIE/communications, Inc., a manufacturer of telecommunications systems. David E. Lee has been Vice President, Business Development since February 1995. Prior thereto, from October 1990 to February 1995, Mr. Lee was Division Manager for the Network Services Division of the Company. From 1984 until 1990, Mr. Lee held various management positions within the Company. Mr. Lee served as Director, International Finance of GTE Corporation from 1983 to 1984 and prior thereto, he held various financial management positions within GTE Corporation. John T. O'Kane has served as Vice President, MIS since January 1990. From 1988 until 1990, Mr. O'Kane was Director of MIS for the Company. Prior to that time and since 1981, he was the Vice President of MIS for Executone, Inc., a predecessor of the Company. Frank J. Rotatori has been Vice President, Healthcare Sales since February 1995. Prior thereto he was Vice President, European Operations since February 1994, and prior thereto was Director of Call Center Management Products during 1992 and 1993, Vice President-Direct Sales from 1990 through 1991 and Vice President-Customer Service of the Company from 1988 to 1990. Mr. Rotatori joined ISOETEC in 1986 as a regional manager. From 1982 to 1986, he served as General Manager and Eastern Regional Manager for Rolm Corporation. For 13 years prior to that time, he worked at Xerox Corporation in various manufacturing, accounting, sales and service management positions. Shlomo Shur has been Senior Vice President, Advanced Technology since January 1994, and prior thereto was Vice President, Software Engineering since 1988. He served as a Vice President of ISOETEC from 1983 to 1988. From 1982 to 1983, he was Vice President and a founder of SAM Communications, Inc., a telecommunications research and development company which was one of the predecessors to ISOETEC; that corporation was merged into ISOETEC in 1983. From 1978 to 1982, Mr. Shur was Manager, Software Development for TIE/communications, Inc., a manufacturer of telecommunications systems. 19 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Incorporated by reference to "Stock Data" in the Registrant's 1995 Annual Report to Shareholders. ITEM 6. SELECTED FINANCIAL DATA Incorporated by reference to "Selected Financial Data" in the Registrant's 1995 Annual Report to Shareholders. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Incorporated by reference to "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Registrant's 1995 Annual Report to Shareholders. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Financial Statements are incorporated by reference to the Financial Statements in the Registrant's 1995 Annual Report to Shareholders. The Schedule appears at pages S-1 through S-2 of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Directors The following persons are currently serving as directors and have been nominated by the Board of Directors as candidates for re-election as directors at the Annual Meeting of Shareholders to be held on July 30, 1996. Certain information regarding each director is set forth below, including each individual's principal occupation and business experience during 20 at least the last five years, other directorships in other public companies, and the year in which the individual was elected a director of the Company or one of its predecessor companies.
Director Name Age Principal Occupation Since Alan Kessman 49 President, Chief Executive Officer and 1983 Chairman of the Board of the Company since 1988; formerly President, Chief Executive Officer and Chairman of the Board of ISOETEC Communications, Inc. ("ISOETEC"), one of the Company's predecessor corporations, since 1983. From 1981 to 1983, Mr. Kessman served as a Corporate Vice President of Rolm Corporation. Stanley M. Blau 58 Vice Chairman of the Company since 1983 1988; formerly President and Chief Executive Officer of Vodavi Technology Corporation ("Vodavi"), one of the Company's predecessor corporations, from 1987 until July 1988. Thurston R. Moore 49 Partner, Hunton & Williams (Attorneys), 1990 Richmond, Virginia, since 1981. Richard S. Rosenbloom 63 David Sarnoff Professor of Business 1992 Administration, Harvard Business School, since 1980. Mr. Rosenbloom is a director of Arrow Electronics, Inc. Jerry M. Seslowe 50 Managing Director of Resource Holdings 1996 Ltd., an investment and financial consulting firm, since prior to 1991. William R. Smart 75 Senior Vice President of Cambridge 1992 Strategic Management Group in Cambridge, Massachusetts since 1984. From 1984 to 1992, Chairman of the Board, Electronic Associates, Inc. Mr. Smart is a director of National Data Computer Company and American International Petroleum Company.
Executive Officers See Part 1 for information and identification of executive officers of the 21 Company. Compliance with Section 16(a) of the Securities Exchange Act of 1934 Section 16(a) of the Securities Exchange Act of 1934 requires that the Company's directors and executive officers, and persons who own more than 10% of a registered class of the Company's equity securities, file with the Securities and Exchange Commission initial reports of ownership and reports of change in ownership of Common Stock and other equity securities of the Company. Officers, directors and greater than 10% shareholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms that they file. To the Company's knowledge, based solely on review of the copies of such reports furnished to the Company, and written representations that no other reports were required, during the fiscal year ended December 31, 1995, all Section 16(a) filing requirements applicable to its officers, directors and greater than 10% beneficial owners were complied with. ITEM 11. EXECUTIVE COMPENSATION Director Compensation Each non-employee director receives an annual retainer of $10,000, payable in equal quarterly installments, plus a fee of $1,250 for each Board meeting attended. The Company also reimburses directors for their travel and accommodation expenses incurred in attending Board meetings. In addition, each non-employee director is granted annually an option to purchase shares of the Company's Common Stock under the terms and conditions of the Company's 1990 Directors' Stock Option Plan approved by the shareholders on June 20, 1990. During June 1995, each outside director was granted a five-year option for 3,000 shares at a per share exercise price of $2.50, the closing market price on the date of grant. Each non-employee director was also granted an additional five-year option ( for 12,300 shares at $3.15 per share in the case of Mr. Seslowe, and 13,300 shares at $3.00 per share in the case of the other non-employee directors) pursuant to an amendment to the Plan approved by the Board of Directors in November 1995, subject to approval by the shareholders of the Company at the 1996 Annual Meeting. These options were granted at a price equal to 120% of the closing market price of the Common Stock on the date of grant. The number of shares granted to each director under the amended Plan is determined by reference to an annual formula designed to award each 22 director five-year options having a value of $10,000 based on the Black-Scholes option valuation model and the current price of the Company's Common Stock. As of March 31, 1996, options to purchase 39,000 shares of Common Stock were outstanding under the 1990 terms of the Plan, and options to purchase an additional 52,200 shares were outstanding under the amendment to the Directors' Stock Option Plan subject to shareholder approval of the amendment at the 1996 Annual Meeting of Shareholders. Under the Plan as amended, subject to shareholder approval, options to purchase 140,800 shares were available for future grant under the Directors' Stock Option Plan. On February 1, 1996, June 23, 1992 and September 24, 1992, Jerry M. Seslowe, Richard S. Rosenbloom and William R. Smart were each granted warrants to purchase 25,000 shares of the Company's Common Stock at $2.63, $1.25 and $1.16, respectively, the closing market prices on those dates. The warrants vest ratably over a three-year period and expire on February 1, 2001, June 23, 1997 and September 24, 1997, respectively. Messrs. Seslowe, Rosenbloom and Smart received these warrants upon being elected to serve on the Company's Board of Directors. Executive Compensation Summary Compensation Table The following table sets forth the compensation by the Company of the Chief Executive Officer and the four most highly compensated other executive officers of the Company for services in all capacities to the Company and its subsidiaries during the past three fiscal years.
Annual Compensation Long-Term Compensation Other Awards Annual of All Name and Bonus ($) Compensa- Options/ Other(3) Principal Position Year Salary ($) (1) tion($) (2) SARs(#) Compensation ($) Alan Kessman 1995 400,000 -0- 1,100 -0- 10,328
23 Chairman of the Board, 1994 391,100 100,000 8,506 -0- 6,978 President and Chief 1993 374,850 150,764 -0- 50,000 263,491 Executive Officer Michael W. 1995 256,00 -0- 1,100 -0- 6,353 Yacenda Executive Vice 1994 243,154 39,600 10,000 -0- 55,597 President 1993 225,879 58,684 -0- 32,000 160,388 Stanley M. Blau 1995 197,789 -0- -0- 15,000 3,367 Vice Chairman 1994 201,738 7,713 -0- 15,000 3,276 1993 193,973 37,083 -0- 20,000 22,645 Shlomo Shur 1995 215,700 -0- -0- -0- 5,514 Senior Vice President 1994 211,539 23,088 10,000 -0- 4,199 Advanced Technology 1993 203,390 38,885 -0- 25,000 4,750 Andrew 1995 214,000 -0- -0- -0- 5,535 Kontomerkos Senior Vice 1994 205,888 28,025 10,000 -0- 4,899 President Hardware 1993 193,973 37,083 -0- 20,000 6,060 Engineering and Production (1) Includes special bonus awarded to certain Company employees following successful implementation of measures to overcome the effect of a fire at the facilities of one of the Company's major suppliers in China in December 1993. Special bonuses totalling $50,000, $30,000, $15,000 and $20,000 were awarded to Messrs. Kessman, Yacenda, Shur and Kontomerkos, respectively. 24 (2) This category represents employee stock option credits that could have been used after July 1, 1993 and prior to December 31, 1994 to pay the exercise price of employee stock options held by the employee. Stock purchased with the 1992 option credits must be held for one year. All credits shown in this column were used to exercise stock options in 1993 or 1994. See Note 3. (3) This category includes for 1994 stock option credits used to pay the exercise price of employee stock options exercised during 1994 by Mr. Yacenda in the amount of $50,549. This category includes for 1993 stock option credits used to pay the exercise price of employee stock options exercised during 1993 in the following amounts: Mr. Kessman $256,240; Mr. Yacenda, $155,250, and Mr. Blau, $19,200. The credits were granted in 1988, 1992 and 1994 (see note 2 above). The column does not include 1992 or 1994 credits used in 1993 or 1994 that were reported as "Other Annual Compensation" for 1992 or 1994. This category also includes for each individual a matching contribution by the Company under the Company's 401(k) plan in the amount of $660 each for each year. This column also includes premiums paid by the Company for long-term disability and life insurance for the individuals in the following amounts in 1995: Mr. Kessman, $9,668; Mr. Yacenda, $5,693; Mr. Shur, $4,854; Mr. Blau, $2,707; and Mr. Kontomerkos, $4,875; in the following amounts in 1994: Mr. Kessman, $7,424; Mr. Yacenda, $4,774; Mr. Shur, $4,196; Mr. Blau, $2,820; and Mr. Kontomerkos, $4,849; and in the following amounts in 1993: Mr. Kessman, $6,591; Mr. Yacenda, $4,478; Mr. Blau, $2,785; Mr. Shur, $4,090; 25 Mr. Kontomerkos, $5,400. Employment Agreement The Company and Mr. Kessman entered into an employment continuity agreement in January, 1995 that provides certain benefits to Mr. Kessman in the event of the termination of Mr. Kessman's employment following a change in control in the Company, including a lump sum payment equal to 2.99 times his then current base salary plus the average of any bonuses awarded to Mr. Kessman during the two fiscal years preceding the termination of his employment. Under the terms of the agreement, a change in control includes the acquisition of beneficial ownership of 20% of the Company's voting securities by any person or group. The agreement continues through the length of Mr. Kessman's employment with the Company. Option Grants in Last Fiscal Year The following table sets forth the individual grants of stock options made during the year ended December 31, 1995 to the Chief Executive Officer and the four most highly compensated 26 other executive officers of the Company. There were no grants of stock appreciation rights made to any officers during 1995, and there are no outstanding stock appreciation rights.
Potential Realized Value at Assumed Annual Rates of Stock Price Appreciation Individual Grants for Option Term - ------------------------------------------------------------------------------------------------ ------------------------------- % of Total Options Exercise Granted to or Base Options Employees in Price Expiration Name Granted (#) Fiscal Year ($/Sh) Date 5% ($) 10% ($) - ------------------------------------------------------------------------------------------------ ------------------------------- Alan Kessman 0 0 0 0 0 0 Michael W. Yacenda 0 0 0 0 0 0 Stanley M. Blau 15,000 2.5 $3.13 3/23/00 12,950 28,617 Shlomo Shur 0 0 0 0 0 0 Andrew Kontomerkos 0 0 0 0 0 0
The option reported in the above table expires in five years, and vests 25% per year over four years. Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values The following table sets forth each exercise of stock options made during the year ended December 31, 1995 by the Chief Executive Officer and the four most highly compensated other executive officers and the fiscal year-end value of unexercised options held by those individuals as of December 31, 1995. There were no exercises or holdings of stock appreciation rights by any officers during 1995, and there are no outstanding stock appreciation rights. 27
Value of Number of Unexercised Unexercised In-the-Money Options Options at Fiscal at Fiscal Year-End (#) Year-End ($) (1) --------------- ------------------- Shares Acquired Exercisable/ Exercisable/ Name on Exercise (#) Value Realized ($) Unexercisable Unexercisabl -------------- ------------------ -------------- Alan Kessman 137,500 262,500 65,688/35,000 74,097/18,438 Michael W. 158,273 302,697 66,000/27,000 60,313/16,688 Yacenda Stanley M. Blau 0 -0- 381,500/15,000 446,719/8,438 Shlomo Shur 286,930 495,854 62,500/17,500 59,219/9,219 Andrew Kontomerkos 296,425 578,660 45,250/13,750 42,078/7,109
(1) Based upon the last sale price on December 29, 1995 of $2.31 per share of Common Stock. Compensation Committee Interlocks and Insider Participation The members of the Compensation Committee in 1995 were Thurston Moore, Richard Rosenbloom, and William Smart. No member of the Committee is a former or current officer or employee of the Company or any subsidiary, except that Mr. Moore has acted as an Assistant Secretary of the Company. Mr. Moore is a partner in the law firm of Hunton & Williams, which regularly acts as counsel to the Company. 28 No executive officer of the Company served as a director or a member of the Compensation Committee or of the equivalent body of any entity, any one of whose executive officers serve on the Compensation Committee or the Board of Directors of the Company. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Ownership of Common Stock by Directors, Officers and Principal Shareholders The following table sets forth the number of shares of Common Stock beneficially owned as of March 31, 1996, by each current director of the Company, by all current directors and officers of the Company as a group and by each person known to the Company to be a beneficial owner of more than five percent of the Company's outstanding Common Stock. Unless otherwise noted, the owner has sole voting and dispositive power with respect to the securities.
Percentage Shares of Common Stock of Name of Beneficial Owner Beneficially Owned Common Stock (1) ------------------------ ----------------------- ---------------- Stanley M. Blau (2) . . . . . . . . . 753,846 1.4 Entities Associated with Hambrecht & Quist Group (3) . . . . . . . . . 4,822,989 9.3 One Bush Street San Francisco, CA 94104 Alan Kessman (4) . . . . . . . . . . 1,760,682 3.4 Thurston R. Moore (5) . . . . . . . . 108,635 * Entities Associated with Edmund H. Shea, Jr. (6). . . . . 3,249,895 6.3 655 Brea Canyon Road
29
Percentage Shares of Common Stock of Name of Beneficial Owner Beneficially Owned Common Stock (1) ------------------------ ----------------------- ---------------- Walnut Creek, CA 91789 Richard S. Rosenbloom (7) . . . . . . 50,300 * Jerry M. Seslowe (8) . . . . . . . . 69,444 * William R. Smart (9) . . . . . . . . 60,300 * All Directors and Officers as a Group (20 persons) (10) . . . . . . . . . 6,079,953 14.3
* Less than 1% (1) Based upon 51,865,163 shares of Common Stock outstanding as of March 31, 1996. In cases where the beneficial ownership of the individual or group includes options, warrants, or convertible securities, the percentage is based on the 51,865,163 shares actually outstanding plus the shares of Common Stock issuable upon exercise or conversion of any such options, warrants, or convertible securities held by the individual or group. The percentage does not reflect or assume the exercise or conversion of any options, warrants or convertible securities not owned by the individual or group in question. (2) Includes 362,750 shares subject to options exercisable within 60 days of June 3, 1996. Includes 16,250 shares subject to options not exercisable within 60 days of June 3, 1996. (3) The Hambrecht & Quist entities share power to vote and dispose of all of such shares. (4) Includes 62,500 shares subject to options exercisable within 60 days of June 3, 1996. Includes 12,500 shares subject to options not exercisable within 60 days of June 3, 1996. Includes 765,503 shares as to which voting and dispositive power is shared. Includes 187,500 shares held in a revocable trust for Mr. Kessman's children, over which Mr. Kessman has no control and as to which shares he disclaims any beneficial ownership. Includes 9,412 shares of Common Stock issuable upon conversion of the Company's Debentures (of which Mr. Kessman owns $100,000 principal amount or .5% of the principal amount outstanding). (5) Includes 28,300 shares subject to options, all of which are exercisable within 60 days of June 3, 1996. (6) Includes 11,935 shares of Common Stock issuable upon 30 conversion of the Company's Debentures, of which entities affiliated with Mr. Shea beneficially own less than 1% of the outstanding principal amount or $126,812 principal amount. The Shea entities share the power to vote and dispose of all of such shares. (7) Mr. Rosenbloom beneficially owns 50,300 shares subject to options and warrants, all of which are exercisable within 60 days of June 3, 1996. (8) Mr. Seslowe beneficially owns 37,300 shares of Common Stock subject to options and warrants, none of which are exercisable within 60 days of June 3, 1996. Includes 12,755 shares owned by Resource Holdings Associates, in which Mr. Seslowe has a greater than 10% ownership and of which he is a managing director. Does not include 203,756 shares of Common Stock contingently issuable upon conversion of the Series A Preferred Stock and the Series B Preferred Stock owned by Mr. Seslowe, or 45,874 shares of Common Stock contingently issuable upon conversion of Preferred Stock owned by Resource Holdings, none of which shares of Preferred Stock are or will become convertible within 60 days of June 3, 1996. (9) Mr. Smart beneficially owns 50,300 shares subject to options and warrants, of which 49,550 are exercisable within 60 days of June 3, 1996. (10) Includes 976,262 shares subject to options or warrants exercisable within 60 days of June 3, 1996. Includes 196,650 shares subject to options or warrants not exercisable within 60 days of June 3, 1996. Also includes 64,000 shares of Common Stock issuable upon conversion of the Company's Debentures (of which the group beneficially owns $680,000 principal amount, or 3.5% of the principal amount outstanding). Includes 924,978 shares as to which voting and dispositive power is shared and 289,445 shares as to which beneficial ownership is disclaimed. Ownership of Preferred Stock by Directors, Officers and Principal Shareholders The following table sets forth the number of shares of Convertible Cumulative Preferred Stock, Series A, and Contingently Convertible Cumulative Preferred Stock, Series B, beneficially owned as of March 31, 1996, by all current directors and officers of the Company who beneficially own any of such shares, and by each person known to the Company to be a beneficial owner of more than five percent of the Company's outstanding Preferred Stock. The table also shows 31 the percentage of each series beneficially owned, based upon 250,000 shares of Series A Stock and 100,000 shares of Series B Stock outstanding as of March 31, 1996. No other director, nominee for director or officer owns any shares of the Company's Preferred Stock. Unless otherwise noted, the owner has sole voting and dispositive power with respect to the securities.
Shares of Preferred Stock Beneficially Owned and Percent of Class Series A Stock Series B Stock Name of Beneficial Owner Cooper Life Sciences 78,819 (31.53%) 31,528 (31.53%) 160 Broadway New York, NY 10038 Jerry M. Seslowe 3,830 (1.53%) 1,532 (1.53%) James W. Spencer 26,625 (10.65%) 10,650 (10.65%) 8446 Bronze Lane Highlands Ranch, CO 80126 Watermark Investments 127,895 (51.16%) Limited 51,157 (51.16%) 730 Fifth Avenue New York, NY 10019 All Directors and Officers 3,830 (1.53%) as a Group (20 persons) 1,532 (1.53%)
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Hunton & Williams regularly acts as counsel to the Company. Mr. Moore, a director of the Company, is a 32 partner at Hunton & Williams. In connection with the Company's acquisition of Unistar, the Company paid or agreed to pay Resource Holdings Ltd, a former shareholder of Unistar, accrued investment banking fees incurred by Unistar prior to the acquisition of $105,000, and total finder's fees of $320,000 based on the value of the transaction. Mr. Seslowe was elected a director of the Company after the acquisition. Both Resource Holdings and Mr. Seslowe acquired Common Stock and Preferred Stock of the Company in exchange for their shares of Unistar. Mr. Seslowe is a managing director of and owns more than 10% of Resource Holdings. The Company's management believes that the transactions with Resource Holdings were on terms as favorable to the Company as could be expected from unaffiliated third parties. The Executive Stock Incentive Plan (the "Incentive Plan") approved by shareholders at the 1994 Annual Meeting was implemented in October 1994 with 30 employees participating. Under the terms of the Incentive Plan eligible employees were granted the right to purchase shares of the Company's Common Stock at a price of $3.1875 per share. Participating employees financed the purchases of these shares through loans by the Company's bank lenders at the prime rate less 1/4%. The loans are fully-recourse to the participating employees but are guaranteed by letters of credit from the Company to the lending banks. The Company holds the purchased Common Stock as security for the repayment of the loans. The following table contains information about borrowings in excess of $60,000 by executive officers that were outstanding during 1995 pursuant to the Incentive Plan that are guaranteed by the Company.
Unpaid Indebtedness Highest Amount of at Indebtedness Between 3/31/96 Name 1/1/95 and 3/31/96 (1) Including Accrued Interest - ----- ---------------------- -------------------------- Alan Kessman $1,912,500 $2,097,195 Michael W. Yacenda $1,115,625 $1,223,364 Shlomo Shur $ 557,813 $ 611,682 Andrew Kontomerkos $ 557,813 $ 611,682 Barbara C. Anderson $ 318,750 $ 349,533
33 James E. Cooke III $ 318,750 $ 349,533 Anthony R. $ 446,250 $ 489,345 Guarascio Israel J. Hersh $ 95,625 $ 104,860 Robert W. Hopwood $ 318,750 $ 348,912 David E. Lee $ 318,750 $ 349,533 Frank J. Rotatori $ 191,250 $ 209,720 - --------------------- (1) Amounts shown are exclusive of accrued interest. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1), (a)(2) and (d). The financial statements required by this item and incorporated herein by reference are as follows: Report of Independent Public Accountants Consolidated Balance Sheets - December 31, 1995 and 1994 Consolidated Statements of Operations - Years ended December 31, 1995, 1994 and 1993 Consolidated Statements of Changes in Stockholders' Equity - Three years ended December 31, 1995 Consolidated Statements of Cash Flows Years ended December 31, 1995, 1994 and 1993 Notes to Consolidated Financial Statements The schedules to consolidated financial statements required by this item and included in this report are as follows: 34 Report of Independent Public Accountants on Schedule Schedule II - Valuation and Qualifying Accounts (a)(3) and (c). The exhibits required by this item and included in this report or incorporated herein by reference are as follows:
Exhibit No. 2-1 Agreement and Plan of Merger by and among EXECUTONE Information Systems, Inc., Executone Newco, Inc., and Unistar Gaming Corp., dated as of December 19, 1995. Incorporated by reference to the Registrant's Current Report on Form 8-K dated January 3, 1996. 2-2 Asset Purchase Agreement among V Technology Acquisition Corporation, EXECUTONE Information Systems, Inc. and Vodavi, Inc. dated November 5, 1993, and Amendment dated February 18, 1994. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993. 2-3 Asset Purchase Agreement by and among Tone Holdings, Inc. and Tone Acquisition Corporation, EXECUTONE Network Services, Inc. and EXECUTONE Information Systems, Inc. dated as of April 9, 1996, and Amendment No. 1 to Asset Purchase Agreement dated as of May 31, 1996, by and among Clarity Telecom Holdings, Inc. (formerly known as Tone Holdings, Inc.), Clarity Telecom, Inc. (formerly known as Tone Acquisition Corporation), EXECUTONE Network Services, Inc. and EXECUTONE Information Systems, Inc. (Confidential portions have been omitted and filed separately with the Commission pursuant to a request for confidential treatment.) Previously filed.
35 3-1 Articles of Incorporation, as amended through December 18, 1995 (restated for electronic filing). Previously filed. 3-2 Articles of Amendment dated and filed December 19, 1995, amending the Company's Articles of Incorporation. Incorporated by reference to the Registrant's Current Report on Form 8-K dated January 3, 1996. 3-3 Bylaws, as amended. Incorporated by reference to the Registrant's Registration Statement on Form S-3 (File No. 33-62257) filed August 30, 1995. 4-1 Second Amended and Restated Loan and Security Agreement dated as of August 30, 1994 and First Amendment thereto dated January 1, 1995, between EXECUTONE Information Systems, Inc., Continental Bank N.A. and the other Lenders named therein. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. 4-2 Loan Agreement dated as of August 30, 1994, between EXECUTONE Information Systems, Inc., certain employees thereof, and the Lenders named therein. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. 4-3 First Amendment dated January 1, 1995, Second Amendment dated September 29, 1995, and Third Amendment dated December 29, 1995, to the Second Amended and Restated Loan and Security Agreement by and among EXECUTONE Information Systems, Inc., the Financial Institutions Listed on the Signature Page Thereof, and Bank of America Illinois. Previously filed.
36 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,
37 1990, as amended by Form 8 filed on August 20, 1991. 10-4 401(k) Savings Plan of Vodavi Technology Corporation dated December 27, 1985. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989. 10-5 Stock Option Bonus Credit Plan of EXECUTONE Information Systems, Inc. dated December 31, 1988. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989. 10-6 1990 Directors' Stock Option Plan. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, as amended by Form 8 filed on August 20, 1991. 10-7 1994 Executive Stock Incentive Plan. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. 10-9 Volume Purchase Agreement dated January 31, 1992, between U. S. Sprint Communications Company Limited Partnership and EXECUTONE Information Systems, Inc. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991, as amended by Form 8 filed on June 12, 1992. 10-10 Amendments dated as of April 1, 1995, and 1993 to Volume Purchase Agreement dated January 31, 1992, between U. S. Sprint Communications Company Limited Partnership and EXECUTONE Information Systems, Inc. (Confidential portions have been omitted and filed separately with the Commission pursuant to a request for confidential treatment.) Filed herewith.
38 10-12 Warrant to Purchase 143,181 shares of Common Stock of the Registrant in favor of Continental Bank N. A. (now Bank of America Illinois) dated December 28, 1990. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, as amended by Form 8 filed on August 20, 1991. 10-13 Warrant to Purchase 50,000 shares of Common Stock of the Registrant in favor of Continental Bank N. A. (now Bank of America Illinois) dated December 28, 1990. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, as amended by Form 8 filed on August 20, 1991. 10-16 Manufacturing Services Agreement dated as of January 10, 1995, between EXECUTONE Information Systems, Inc. and Compania Dominicana de Telefonos, C por A (Codetel). Previously filed. 10-17 Manufacturing Services Agreement dated February 9, 1990 between Wong's Electronics Co., Ltd. and EXECUTONE Information Systems, Inc. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, as amended by Form 8 filed on August 20, 1991. 10-19 Warrant to Purchase 25,000 Shares of Common Stock of EXECUTONE Information Systems, Inc. in favor of Richard S. Rosenbloom dated June 23, 1992. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992. 10-20 Warrant to Purchase 25,000 Shares of Common Stock of EXECUTONE
39 Information Systems, Inc. in favor of William R. Smart dated September 24, 1992. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992. 10-21 Management Agreement for the National Indian Lottery dated January 16,1995. Previously filed. 10-22 Distributor Agreement dated as of May 31, 1996, between EXECUTONE Information Systems, Inc. and Clarity Telecom, Inc. Previously filed. 11 Statement regarding computation of per share earnings. Previously filed. 13 1995 Annual Report to Shareholders of EXECUTONE Information Systems, Inc. Previously filed. 21 Subsidiaries of EXECUTONE Information Systems, Inc. Previously filed. 23 Consent of Arthur Andersen LLP. Previously filed. 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) 40 S-8 Reg. No. 33-6604 filed June 19, 1986 on 1983 Stock Option Plan (350,000 shares) S-8 Reg. No. 33-16585 filed August 24, 1987 on 1986 and 1983 Stock Option Plans (800,000 shares) S-8 Reg. No. 33-23294 filed August 3, 1988 on 1986 Stock Option Plan (7,000,000 shares) and Employee Stock Purchase Plan (500,000 shares) S-8 Reg. No. 33-42561 filed September 4, 1991 on 1984 Employee Stock Purchase Plan (350,000 shares) and Directors' Stock Option Plan (100,000 shares) S-8 Reg. No. 33-45015 filed January 2, 1992 on 1984 Employee Stock Purchase Plan (400,000 shares) S-8 Reg. No. 33-57519 filed January 31, 1995 on 1984 Employee Stock Purchase Plan (1,000,000 shares). Insofar as indemnification arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to the court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. Reports on Form 8-K The Registrant filed no reports on Form 8-K during the quarter ended December 31, 1995. 41 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 12, 1996 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 12, 1996 /s/ Alan Kessman ----------------------------- Alan Kessman Chairman, President and Chief Executive Officer (Principal Executive Officer) April 12, 1996 /s/ Stanley M. Blau ---------------------------- Stanley M. Blau Vice Chairman of the Board of Directors April 12, 1996 /s/ Anthony R. Guarascio ----------------------------- Anthony R. Guarascio Vice President-Finance and Chief Financial Officer (Principal Financial and Accounting Officer) April 12, 1996 /s/ Thurston R. Moore ------------------------------- 42 Thurston R. Moore Director April 12, 1996 /s/ Richard S. Rosenbloom -------------------------- Richard S. Rosenbloom Director April 12, 1996 /s/ Jerry M. Seslowe --------------------------- Jerry M. Seslowe Director April 12, 1996 /s/ William R. Smart ---------------------------- William R. Smart Director 43 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of EXECUTONE Information Systems, Inc.: We have audited in accordance with generally accepted auditing standards, the financial statements included in EXECUTONE Information Systems, Inc. and subsidiaries' annual report to stockholders incorporated by reference in this Form 10-K, and have issued our report thereon dated January 26, 1996. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in Item 14 is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Stamford, Connecticut January 26, 1996 44 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (Amounts in Thousands)
Additions Deductions --------------------------------------------- -------------- Charged Net Balance at (Credited) (Credited) Writeoffs of Balance at Beginning to Costs and to Other Uncollectible End of Description of Period Expenses Accounts Accounts Period ----------- --------- -------------- ---------- ------------- ----------- Year ended December 31, 1995 Deducted from asset accounts: Allowance for doubtful accounts $ 1,335 $ 1,872 -- ($1,492) $ 1,715 Allowance for uncollectible notes receivable 691 (432) -- -- 259 Year ended December 31, 1994 Deducted from asset accounts: Allowance for doubtful accounts 1,017 1,381 -- (1,063) 1,335 Allowance for uncollectible notes receivable 1,084 (393) -- -- 691 Year ended December 31, 1993 * Deducted from asset accounts: Allowance for doubtful accounts 1,046 1,285 -- (1,314) 1,017 Allowance for uncollectible notes receivable 1,604 (440) (80) -- 1,084
* Restated to reflect the disposition of the VCS Division, which was sold as of March 1994. S-2 EXECUTONE INFORMATION SYSTEMS, INC. EXHIBITS TO 1995 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. (Confidential portions have been omitted and filed separately with the Commission pursuant to a request for confidential treatment.) Previously filed. 3-1 Articles of Incorporation, as amended through December 18, 1995 (restated for electronic filing). Preiously filed. 3-2 Articles of Amendment dated and filed December 19, 1995, amending the Company's Articles of Incorporation. Incorporated by reference to the Registrant's Current Report on Form 8-K dated January 3, 1996.
45 3-3 Bylaws, as amended. Incorporated by reference to the Registrant's Registration Statement on Form S-3 (File No. 33-62257) filed August 30, 1995. 4-1 Second Amended and Restated Loan and Security Agreement dated as of August 30, 1994 and First Amendment thereto dated January 1, 1995, between EXECUTONE Information Systems, Inc., Continental Bank N.A. and the other Lenders named therein. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. 4-2 Loan Agreement dated as of August 30, 1994, between EXECUTONE Information Systems, Inc., certain employees thereof, and the Lenders named therein. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. 4-3 First Amendment dated January 1, 1995, Second Amendment dated September 29, 1995, and Third Amendment dated December 29, 1995, to the Second Amended and Restated Loan and Security Agreement by and among EXECUTONE Information Systems, Inc., the Financial Institutions Listed on the Signature Page Thereof, and Bank of America Illinois. Previously filed. 4-10 Indenture dated March 1, 1986 with United States Trust Company of New York relating to 7 1/2% Convertible Subordinated Debentures of Vodavi Technology Corporation due March 15, 2011. Incorporated by reference to Vodavi Technology Corporation's Registration Statement on Form S-1 (as amended) (Registration No. 33- 3827) filed on March 9, 1986 and amended April 1, 1986.
46 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.
47 Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989. 10-6 1990 Directors' Stock Option Plan. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, as amended by Form 8 filed on August 20, 1991. 10-7 1994 Executive Stock Incentive Plan. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. 10-9 Volume Purchase Agreement dated January 31, 1992, between U. S. Sprint Communications Company Limited Partnership and EXECUTONE Information Systems, Inc. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991, as amended by Form 8 filed on June 12, 1992. 10-10 Amendments dated as of April 1, 1995, and 1993 to Volume Purchase Agreement dated January 31, 1992, between U. S. Sprint Communications Company Limited Partnership and EXECUTONE Information Systems, Inc. (Confidential portions have been omitted and filed separately with the Commission pursuant to a request for confidential treatment.) Filed herewith. 10-12 Warrant to Purchase 143,181 shares of Common Stock of the Registrant in favor of Continental Bank N. A. (now Bank of America Illinois) dated December 28, 1990. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, as amended by Form 8 filed on August 20, 1991. 10-13 Warrant to Purchase 50,000 shares of Common Stock of the Registrant in favor of Continental Bank N. A. (now
48 Bank of America Illinois) dated December 28, 1990. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, as amended by Form 8 filed on August 20, 1991. 10-16 Manufacturing Services Agreement dated as of January 10, 1995, between EXECUTONE Information Systems, Inc. and Compania Dominicana de Telefonos, C por A (Codetel). Previously filed. 10-17 Manufacturing Services Agreement dated February 9, 1990 between Wong's Electronics Co., Ltd. and EXECUTONE Information Systems, Inc. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, as amended by Form 8 filed on August 20, 1991. 10-19 Warrant to Purchase 25,000 Shares of Common Stock of EXECUTONE Information Systems, Inc. in favor of Richard S. Rosenbloom dated June 23, 1992. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992. 10-20 Warrant to Purchase 25,000 Shares of Common Stock of EXECUTONE Information Systems, Inc. in favor of William R. Smart dated September 24, 1992. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992. 10-21 Management Agreement for the National Indian Lottery dated January 16, 1995. Previously filed. 10-22 Distributor Agreement dated as of May 31, 1996, between EXECUTONE Information Systems, Inc. and Clarity Telecom, Inc. Previously filed.
49 11 Statement regarding computation of per share earnings. Previously filed. 13 1995 Annual Report to Shareholders of EXECUTONE Information Systems, Inc. Previously filed. 21 Subsidiaries of EXECUTONE Information Systems, Inc. Previously filed. 23 Consent of Arthur Andersen LLP. Previously filed. 27 Financial Data Schedule. Previously filed.
50 STATEMENT OF DIFFERENCES The trademark symbol shall be expressed as ............... 'tm' The registered trademark symbol shall be expressed as .....'r' The section symbol shall be expressed as ................. 'ss' EX-10 2 EXHIBIT 10-10-1 [EXHIBIT 10-10 CONTAINS MATERIAL THAT IS THE SUBJECT OF A REQUEST FOR CONFIDENTIAL TREATMENT PURSUANT TO RULE 24b-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934] SECOND AMENDMENT TO VOLUME PURCHASE AGREEMENT THIS SECOND AMENDMENT (the "Amendment") is made effective this 1st day of April, 1995 to the Volume Purchase Agreement entered into an January 31, 1992, and the Amendment to the Agreement entered into on ________________, 1993 (collectively the "Agreement") by SPRINT COMMUNICATIONS COMPANY L.P. and EXECUTONE INFORMATION SYSTEMS, INC. ("Reseller"). Sprint and Reseller are "Parties" hereto. In consideration of the mutual promises contained herein, the Parties amend the Agreement as follows: 1. Subparagraph 5(a) is stricken in its entirety and a new Subparagraph 5(a) is added to read as follows: a) Except as otherwise provided herein, the initial term of this Agreement (the "Initial Term") shall commence on the date first written above and terminate May 3, 1998. At the end of the Initial Term the Agreement will remain in full force and effect until terminated by either Party upon ninety days written notice to the other Party. The agreement entered into between Sprint and Reseller regarding Carrier Identification Code ("CIC") and release of Sprint's name for the purpose of providing Reseller's customers with a fulfillment piece will also continue in effect for the duration of the Agreement. 2. Exhibit B to the Agreement is stricken in its entirety and a new Exhibit B is added to read as follows: EXHIBIT B PRICING 1. PRICING FOR DOMESTIC INTERSTATE SERVICES. The following interstate Services will be priced as set forth below. As used herein, "Peak" period pricing applies to traffic defined as "day" usage, and "Off-Peak" pricing applies to "evening" and "night/weekend" usage, as defined in Sprint's FCC Tariff No. 2, Section 5.1.A. The following interstate flat rates will apply to traffic originating and terminating in the 48 contiguous states only. Tariff rates will apply to traffic originating and/or terminating in Alaska, Hawaii, Puerto Rico and the U.S. Virgin Islands. DIAL 1 WATS
Gross Monthly Volume of Service Peak Off Peak ------------------------------- ---- -------- $0 to $2,499,999 [CONFIDENTIAL MATERIAL OMITTED] $2,500,000 to $2,999,999 $3,000,000 to $3,499,999 $3,500,000 and above FONLINE 800 Gross Monthly Volume of Service Peak Off Peak ------------------------------- ---- -------- $0 to $2,499,999 [CONFIDENTIAL MATERIAL OMITTED] $2,500,000 to $2,999 999 $3,000,000 to $3,499:999 $3,500,000 and above ULTRA WATS NETWORK EXTENSION Gross Monthly Volume of Service Peak Off Peak ------------------------------- ---- -------- $0 to $2,499,999 [CONFIDENTIAL MATERIAL OMITTED] $2,500,000 to $2,999,999 $3,000,000 to $3,499,999 $3,500,000 and above ULTRA 800 NETWORK EXTENSION Gross Monthly Volume of Service Peak Off Peak ------------------------------- ---- -------- $0 to $2,499,999 [CONFIDENTIAL MATERIAL OMITTED] $2,500 000 to $2,999 999 $3,000,000 to $3,499:999 $3,500,000 and above
2 FONCARD
Gross Monthly - ------------- Volume of Service Peak Off Peak Surchg - ----------------- ---- -------- ------ $0 to $2,499,999 [CONFIDENTIAL MATERIAL OMITTED] $2,500,000 to $2,999,999 $2,000,000 to $3,499,999 $3,500,000 and above
2. PRICING FOR INTRASTATE SERVICES. A monthly credit based on intrastate usage in the following jurisdictions will be applied to the amount invoiced for Reseller's interstate usage (the "Interstate Adjustment"). The Interstate Adjustment will equal the difference between (a) Sprint's Tariff price for Reseller's intrastate usage of the following Service and (b) such Sex-vice priced at the following rates for all time periods:
Ultra Dial 1 WATS FONline 800 State WATS Net Ext 800 Net Ext - ----- ------ ------- ------- ------- New York [CONFIDENTIAL MATERIAL OMITTED] N.Carolina Florida Texas Penn. California (Intrastate) California (IntraLATA) Virginia
The Interstate Adjustment will not exceed the amount invoiced for interstate usage on the invoice to which the Adjustment is applied. 3. PRICING FOR INTERNATIONAL SERVICES. The following international Services will be priced as set forth below. Billing increments are the first thirty seconds and each six-second period thereafter. A) ULTRAWATS NETWORK EXTENSION
Country Standard Discount Economy ------- -------- -------- ------- Argentina [CONFIDENTIAL MATERIAL OMITTED] Australia
3 Austria Belgium Bermuda Brazil Chile China Costa Rica Denmark Finland France Germany Greece Guam Country Standard Discount Economy ------- -------- -------- ------- Hong Kong [CONFIDENTIAL MATERIAL OMITTED] Hungary India Ireland Israel Italy Japan Malaysia Mexico Netherlands New Zealand Nicaragua Norway Poland Portugal Saudi Arabia Singapore South Africa South Korea Spain Sweden Switzerland Taiwan Thailand UAE United Kingdom Venezuela
Dial 1 WATS
Country Standard Discount Economy ------- -------- -------- ------- Argentina [CONFIDENTIAL MATERIAL OMITTED] Australia Austria Belgium Bermuda
4 Brazil Chile China Costa Rica Denmark Finland France Germany Greece Guam Hong Kong Hungary India Ireland Country Standard Discount Economy ------- -------- -------- ------- Israel [CONFIDENTIAL MATERIAL OMITTED] Italy Japan Malaysia Mexico Netherlands New Zealand Nicaragua Norway Poland Portugal Saudi Arabia Singapore South Africa South Korea Spain Sweden Switzerland Taiwan Thailand UAE United Kingdom Venezuela
Canadian Terminating Traffic. The following special per minute rates will apply to Canadian terminating traffic:
Service Day Evening Night - ------- --- ------- ----- Ultra WATS Network Extension [CONFIDENTIAL MATERIAL OMITTED] Dial 1 WATS
5 Canadian originating Traffic. The following special per minute rates will apply to Canadian originating traffic:
Service Day Evening Night ------- --- ------- ----- FONline 800 [CONFIDENTIAL MATERIAL OMITTED] Ultra 800 Network Extension
4. GENERAL PRICING PROVISIONS A. Forward Pricing. From April 1, 1995 to March 31, 1996, services will be priced under the Agreement as though Reseller generated the greater of (a) its actual Gross Monthly Volume of Service or (b) $[confidential material omitted] in Gross Monthly Volume of Service. B. Extended Pricing offer. If Reseller maintains Gross Monthly Volume of Service in excess of $[confidential material omitted] for a period of three consecutive months, Sprint will propose an addendum to the Agreement to include special pricing for Gross Monthly Volume of Service over the $5,000,000 level. C. Signing Credit. Sprint shall apply a one-time credit to Reseller's account in the amount of $[confidential material omitted] within 60 days following execution of this Amendment by both Parties. D. FoNline 800 Service Charge. There will be a $[confidential material omitted] monthly recurring service charge for each FONline 800 account. E. Directory Listing Charge. There will be a $[confidential material omitted] monthly recurring charge for 800 numbers (FONline 800 and Ultra 800) that require 800 toll-free directory assistance listing. F. COC Charge. There will be a $[confidential material omitted] per port monthly recurring charge for Central office Connections. G. EFC Charge. There will be a $[confidential material omitted] per port monthly recurring Entrance Facility Charge when Reseller utilizes Sprint's entrance facilities. H. Daytime Traffic Requirement. Reseller must maintain a minimum of [confidential material omitted]% daytime traffic to 6 receive the flat rate pricing provided in this Agreement. For every percentage point that Reseller's daytime traffic falls below 851, the per-minute flat rates for daytime traffic will increase by [confidential material omitted]. This increase will apply one month in arrears to all daytime rates. Reseller's compliance with this requirement will be measured on a quarterly basis. I.Primary Carrier Requirement. Reseller must use Sprint as its primary underlying carrier for interexchange telecommunications services and will routs at least 90% of its interstate Dial I WATS and Ultra WATS Network Extension traffic to Sprint during the term of the Agreement. Reseller will provide Sprint with the following information in a format mutually acceptable to the Parties: (i) quarterly summaries of Reseller's customer invoices for interstate Dial 1 WATS and Ultra WATS Network Extension services; and (ii) an annual audited summary of such invoices prepared by Reseller's independent outside auditor. This minimum usage requirement will cease to apply if all of the following conditions are satisfied: (a) Reseller obtains bonafide offers from two major, nationwide interexchange carriers to provide Dial I WATS and Ultra WATS Network Extension service (the "offers"); and (b) the Offers to provide Dial I WATS and Ultra WATS Network Extension service for at least one year at prices averaging at least $0.01 per minute better than the day/evening/night/weekend prices for such services provided under the-Agreement; and (c) Sprint fails to match the offer within 90 days after receiving notice thereof. J. Usage Commitment. Beginning may 1, 1996, Reseller will generate each month usage sufficient to result in a monthly net invoiced amount ("Net Monthly Usage") of at least $[confidential material omitted] (the "Usage Commitment"). Reseller will pay a surcharge (the "Usage Commitment Surcharge") any month that it fails to meet the Usage Commitment. The Usage Commitment Surcharge will equal ten percent of the difference between the actual Net Monthly Usage and the Usage Commitment. The Usage Commitment Surcharge will be applied to Reseller's invoice one month in arrears. K. Usage Commitment Credit. Beginning May 1, 1996, Reseller will receive a credit (the "Usage 7 Commitment Credit") for each period of six consecutive months (a "Credit Period") that Reseller's total Net Monthly Usage equals at least $[confidential material omitted]. The Usage Commitment Credit will equal all Usage Commitment Surcharges applied to Reseller's account during the respective Credit Period. The Credit Periods will be: May 1, 1996 to October 31, 1996; November 1, 1996 to April 30, 1997; May 1, 1997 to October 31, 1997; and November 1, 1997 to April 30, 1998. The Usage Commitment Credit will be applied as soon as possible following completion of each Credit Period. L. No Additional Discounts. No additional discounts in any form, Tariff or otherwise, will be applied to reduce the flat rate prices set forth in this Exhibit B. M. Availability of Services. Services may be purchased under the Agreement only by reseller and its majority-owned subsidiaries on behalf of Reseller, its majority-owned subsidiaries, and customers of Reseller to whom Reseller sells the service. Execution hereof in no way adversely -effects any other existing agreements between Sprint and Reseller not referenced herein, including but not limited to, the Promotional discount Agreement as presently and subsequently amended. N. Administrative Fee. If Sprint is subject to a PIC dispute ("slamming") charge as a result of Reseller's actions, Reseller shall, at the sole discretion of Sprint, pay Sprint an administrative fee (the "Administrative Feel') equal to fifteen dollars ($15) for each ANI involved in the PIC dispute. The Administrative Fee is assessed to partially defray Sprint's expenses associated with the handling of PIC disputes. The Administrative Fee will be calculated and applied in six month intervals from the commencement of the Agreement. 0. Transaction Fees. Reseller must pay Sprint the following fees (the "Transaction Fees"), which will be measured and applied in six month intervals from commencement of the Agreement: a) If ANIs on the Sprint network make up over 15% of the ANIs Reseller submits for activation during any six month period, Reseller must pay Sprint 8 a Transaction Fee of $25 for each ANI in excess of the 15% threshold; and b) Reseller must pay Sprint a Transaction Fee of $2,500 per T-1 ($1,500 per DAL) for T-1s that it submits for activation that are connected to an existing Sprint account at the time the order is submitted. P. Contributory and Eligible Table. The following table shows the usage and products, both domestic and international, that contribute to the Gross Monthly Volume of Service in the flat rate pricing tables. All usage under the Agreement of Reseller and its majority-owned subsidiaries will be both contributory and eligible in the following tables.
Usage Contributory Eligible Neither - ----- ------------ -------- ------- Interstate X X - Intrastate X X - International X X - Directory Assistance - - X Operator Service - - X Location Fees - - X Channel Banks - - X Line Charges - - X Access Flow-through - - X Nonrecurring Charges - - X Taxes - - X
Products Contributory Eligible Neither - -------- ------------ -------- ------- Dial 1 WATS X X - Ultra WATS X X - FONcard Surcharge X X - Usage X X - FONline 800 X X - Ultra 800 X X -
3. Intrastate special rates are stated in Peak and-Off-Peak pricing. Peak period pricing will be applicable to traffic defined as "DAY" usage and Off-Peak pricing will be applicable to traffic defined as "EVENING" and "NIGHT/WEEKEND" in Sprint's FCC Tariff No. 2, Section 5.1.A. 9 4. Sprint will continue to waive Reseller's Sprint T-1 installation charges for the remaining term of the Agreement as stated in a memorandum dated September 13, 1994. Sprint will continue to provide a 20% discount off of the monthly recurring charge for T-1 access as provided in a memorandum dated September 13, 1994. 5. All other terms and conditions of the Agreement shall remain in full force and effect. 6. The offer to amend the Agreement as provided in this Amendment will be withdrawn if this Amendment is not executed by both Parties on or before August 31, 1995. EXECUTED by the undersigned effective the first day of April, 1995. EXECUTONE INFORMATION SPRINT COMMUNICATIONS SYSTEMS, INC. COMPANY L.P. By: ________________________ By:______________________ 10 EX-10 3 EXHIBIT 10-10-2 [EXHIBIT 10-10 CONTAINS MATERIAL THAT IS THE SUBJECT OF A REQUEST FOR CONFIDENTIAL TREATMENT PURSUANT TO RULE 24b-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934] AMENDMENT TO AGREEMENT THIS AMENDMENT (the "Amendment') is made effective this _______ day of ___________, 1993 to that certain Volume Purchase Agreement dated January 31, 1992, ("the Agreement") by and between Sprint Communications Company L.P. ("Sprint"), and Executone Information Systems, Inc. ("Reseller"). Sprint and Reseller are referred to herein collectively as "Parties," and individually as a "Party." In consideration for the mutual promises contained in the Agreement and this Amendment, the Parties hereby amend the Agreement as follows: 1. Subparagraph 1(a) is hereby stricken in its entirety and a new Subparagraph 1(a) is added to the Agreement to read as follows: 1. Definitions a) "Eligible Services" means: (1) services listed in Gross Monthly Volume Contributory and Eligible Table in Exhibit B which are eligible for the discounts provided herein; and (2) international services listed in the Gross International Monthly Volume Contributory and Eligible Table attached hereto which are eligible for the discounts provided herein. 2. Subparagraphs 1(f), 1(g), and 1(h) are hereby added to the Agreement to read as follows: 1. Definitions f) "Gross Monthly Volume" means the charges for Services provided under this Agreement priced at Tariff rates net of all credits or adjustments provided by Tariff. g) "Gross International Monthly Volume" means the charges for international Services provided under this Agreement priced at Tariffed rates net of all credits or adjustments provided by Tariff less Network WATS charges or credit. h) "Net Invoice" means the charges for Services priced in accordance with the discounts or special pricing provided for in this Agreement net of all credits or adjustments provided by Tariff or under this Agreement. 3. Subparagraph 3(g) is hereby added to the Agreement to read as follows: 3. The Transaction -1- g) If Reseller provides network access for Ultra WATS and Ultra 800 Service, then Reseller shall provide, at Reseller's expense, all access to the Sprint Point of Presence, or to the Service Wire Center (SWC). If Reseller provides access only to the SWC, then Reseller will be assessed both Non-Recurring Charges (NRC) and Monthly Recurring Charges (MRC) for Central Office Connection (COC) and Entrance Facility Cost (EFC). If Reseller elects to provide access to Sprint's Point of Presence (POP), only NRC and MRC charges for COC will apply, and Reseller must not use Sprint's leased SWC-to-POP entrance facilities. 4. Ultra WATS/Ultra 800 (Sprint Provided and Customer Provided Access) pricing is added to Exhibit B to replace existing pricing and reads as follows: Ultra Wats'r' (Sprint Provided Access)
Flat Rate Price Gross Monthly Volume Peak Off Peak - -------------------------------------------------------------------------------------- $ 0 - $ [CONFIDENTIAL MATERIAL OMITTED] $ 100,000 - $ $ 500,000 - $ $ 750,000 - $ $ 1,000,000 - $ $ 2,000,000 - $ $ 3,000,000 + $
Ultra 800 (Sprint Provided Access)
Flat Rate Price Gross Monthly Volume Peak Off Peak ---------------------------------------------------------------------------- $ 0 - $ [CONFIDENTIAL MATERIAL OMITTED] $ 100,000 - $ $ 500,000 - $ $ 750,000 - $ $ 1,000,000 - $ $ 2,000,000 - $ $ 3,000,000 + $
-2- Ultra Wats'r' (Customer Provided Access)
Flat Rate Price Gross Monthly Volume Peak Off Peak --------------------------------------------------------------------------- $ 0 - $ [CONFIDENTIAL MATERIAL OMITTED] $ 100,000 - $ $ 500,000 - $ $ 750,000 - $ $ 1,000,000 - $ $ 2,000,000 - $ $ 3,000,000 + $
Ultra 800 (Customer Provided Access)
Flat Rate Price Gross Monthly Volume Peak Off Peak -------------------------------------------------------------------------- $ 0 - $ [CONFIDENTIAL MATERIAL OMITTED] $ 100,000 - $ $ 500,000 - $ $ 750,000 - $ $ 1,000,000 - $ $ 2,000,000 - $ $ 3,000,000 + $
At least eighty percent (80%) of all Ultra WATS usage under this Agreement shall terminate in a Regional Bell Operating Company ("RBOC") NPA-NXX. At least eighty percent (80%) of all Ultra 800 usage under this Agreement shall originate in an RBOC NPA-NXX. If either of the above conditions are not satisfied then Sprint may, at its option, apply a $0.05 per minute surcharge to all traffic that fails to meet either condition. For Ultra WATS/Ultra 800 Service (Sprint Provided and Customer Provided Access) there is no minimum daytime requirement. 5. A new Paragraph 2 is added to Exhibit to read as follows: 2. International Pricing -3- A. General Provisions 1) The total dollar amount of the discounts provided for in this Paragraph 2 shall be applied as a credit against the amount Reseller is invoiced for interstate usage, so long as the net amount invoiced for interstate usage exceeds the total dollar amount of such credit. 2) Discounts shall apply to Standard, Discount and Economy international calling periods. 3) Discounts are applied 1 month in arrears - net of Network WATS 4) Reseller will receive Network WATS as prescribed in Sprint's Tariff No. 2 for International traffic (__ discounts on Standard, Discount and Economy calling periods). B. Additive Discount Schedule 1) Group 1 - Australia, Guam, Hong Kong, India, Japan, New Zealand, Singapore, Taiwan, United Kingdom.
Gross International Monthly Volume ---------------------------------------------------------------- $200K $150K - 200K $75K - 150K $10K - 75K [CONFIDENTIAL MATERIAL OMITTED]
2) Group 2 - Austria, Canada, Denmark, Finland, France, Germany, Hungary, Korea (South), Norway, Sweden, Switzerland, Venezuela.
Gross International Monthly Volume ---------------------------------------------------------------- $200K $150K - 200K $75K - 150K $10K - 75K [CONFIDENTIAL MATERIAL OMITTED]
3) Group 3 - Argentina, Belgium, Bermuda, Ireland, Kuwait, Malaysia, Saudia Arabia, South Africa, Spain, United Arab Emirates.
Gross International Monthly Volume ---------------------------------------------------------------- $200K $150K - 200K $75K - 150K $10K - 75K [CONFIDENTIAL MATERIAL OMITTED]
-4- 4) Group 4 - Brazil, Chile, China, Costa Rica, Greece, Israel, Italy, Mexico, Poland, Portugal, Thailand
Gross International Monthly Volume ------------------------------------------------------------------ $200K $150K - 200K $75K - 150K $10K - 75K [CONFIDENTIAL MATERIAL OMITTED]
C. Gross International Monthly Volume Contributory and Eligible Table The following table shows the type of usage- and product types that will contribute to the Gross International Monthly Volume levels and will be eligible for the Additive Discounts on international traffic. CONTRIBUTORY ELIGIBLE NEITHER TYPE OF USAGE: Interstate - - X Intrastate - - X International X* X** - Directory Assistance - - X Operator Services - - X Location Fees - - X Channel Banks - - X Line Charges - - X Access Flow-through - - X Nonrecurring Charges - - X Taxes - - X PRODUCTS: Dial I WATS X X - FONCARD Surcharge X - - Usage X X - FONLINE 800 X - - Ultra WATS'r' X X - Ultra 800 X - - * All countries ** Eligible Countries listed in Paragraph 2.B. of this Exhibit -5- 6. It is understood and agreed that the Ultra WATS and Ultra 800 products provided for in Exhibit B herein shall not be eligible for the special Customer Appreciation Promotion provided for in that certain Sprint Customer Appreciation Program - Letter Agreement entered into by and between Sprint and Reseller on March 4, 1993. 7. All other terms and conditions of the Agreement and the Amendment shall remain in full force and effect. EXECUTED effective the date first above written. EXECUTONE INFORMATION SPRINT COMMUNICATIONS SYSTEMS, INC. COMPANY L.P. By: _________________________________ By: ______________________________ Name: _______________________________ Name: Daniel L. Pearce Title: ______________________________ Title: Vice President & Gen. Mgr.DBG Date: _______________________________ Date: _______________________________ -6- -----END PRIVACY-ENHANCED MESSAGE-----