-----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, D2ys2bbnsgcQ9fi4XKkyhovgQ236lJvT+tP4IkmTw1+drf+npbCF1T1hPnkJpyeU ++tb3IjnEdqDn2RyOmLkKg== 0000950117-96-000318.txt : 19960416 0000950117-96-000318.hdr.sgml : 19960416 ACCESSION NUMBER: 0000950117-96-000318 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960415 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 SEC ACT: 1934 Act SEC FILE NUMBER: 000-11551 FILM NUMBER: 96547224 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 1 EXECUTONE INFORMATION SYSTEMS ================================================================================ FORM 10-K 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 (I.R.S. Employer or organization Identification No.) 478 Wheelers Farms Road, Milford, Connecticut 06460 --------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (203)876-7600 Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- N/A None
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $.01 PER SHARE 7 1/2% CONVERTIBLE SUBORDINATED DEBENTURES, DUE MARCH 15, 2011 -------------------------------------------------------------- (Title of Class) ================================================================================ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [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 $126,170,570, 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 51,960,163. 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 Part III- Proxy Statement for 1996 Annual Meeting of Shareholders scheduled to be held June 27, 1996. TABLE OF CONTENTS Item - ---- Page ---- PART I 1. Business 1 2. Properties 14 3. Legal Proceedings 14 4. Submission of Matters to a Vote of Security Holders 15 Executive Officers of the Registrant 16 PART II 5. Market for Registrant's Common Equity and Related Stockholder Matters 19 6. Selected Financial Data 19 7. Management's Discussion and Analysis of Financial Condition 19 and Results of Operations 8. Financial Statements and Supplementary Data 19 9. Changes in and Disagreements with Accountants on 19 Accounting and Financial Disclosure PART III 10. Directors and Executive Officers of the Registrant 19 11. Executive Compensation 19 12. Security Ownership of Certain Beneficial Owners and Management 20 13. Certain Relationships and Related Transactions 20 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 20 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 Section 1084 letters preventing long-distance carriers from providing telephone service to the NIL. 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 is likely to be appealed to the tribal supreme court and ultimately to U.S. Federal District Court, the Company believes the initial ruling and the Coeur d'Alene Tribe's position will be upheld. In July 1995, the Company reorganized its core business into five divisions: Computer Telephony, Healthcare Communication Systems, Call Center 2 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 platform, 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 center management, videoconferencing products, and network (voice, data and video) services. The objective of the computer telephony division is to offer value-added 3 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 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. 4 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 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. 5 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' II-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 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 6 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 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. 7 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. 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. 8 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 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 9 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 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. 10 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. 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 11 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 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 12 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 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. 13 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 requirements of IGRA have been satisfied, that the Section 1084 letters are 14 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. 15 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 supply company he founded in 1973. 16 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 of SAM Communications, Inc., a telecommunications research and development company which was one of the predecessors to ISOETEC; that corporation was 17 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. 18 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 See Part I for information regarding executive officers. Additional required information is incorporated by reference to the Registrant's Proxy Statement for the 1996 Annual Meeting of Shareholders scheduled to be held on July 30, 1996. ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference to the Registrant's Proxy Statement for the 1996 Annual Meeting of Shareholders scheduled to be held on July 30, 1996. 19 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated by reference to the Registrant's Proxy Statement for the 1996 Annual Meeting of Shareholders scheduled to be held on July 30, 1996. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated by reference to the Registrant's Proxy Statement for the 1996 Annual Meeting of Shareholders scheduled to be held on July 30, 1996. 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: 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. - ----------- 20 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. 3-1 Articles of Incorporation, as amended through December 18, 1995 (restated for electronic filing). Filed herewith. 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. Filed herewith. 4-10 Indenture dated March 1, 1986 with United States Trust Company of New York relating to 7 1/2% Convertible Subordinated Debentures of Vodavi Technology Corporation due March 15, 2011. Incorporated by reference to Vodavi Technology Corporation's Registration Statement on Form S-1 (as amended) (Registration No. 33-3827) filed on March 9, 1986 and amended April 1, 1986. 4-11 First Supplemental Indenture dated August 4, 1989 with United States 21 Trust Company of New York relating to 7 1/2% Convertible Subordinated Debentures due March 15, 2011. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989. 4-12 Specimen Certificate representing 7 1/2% Convertible Subordinated Debentures. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989. 10-1 1984 Employee Stock Purchase Plan of EXECUTONE Information Systems, Inc. Incorporated by reference to the Registrant's Registration Statement on Form S-8 (File No. 33-23294) declared effective by the Commission on August 23, 1988. 10-2 1986 Stock Option Plan of EXECUTONE Information Systems, Inc. Incorporated by reference to the Registrant's Registration Statement on Form S-8 (File No. 33-23294) declared effective by the Commission on August 23, 1988. 10-3 1984 Stock Option Plan of EXECUTONE Information Systems, Inc. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, as amended by Form 8 filed on August 20, 1991. 10-4 401(k) Savings Plan of Vodavi Technology Corporation dated December 27, 1985. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989. 10-5 Stock Option Bonus Credit Plan of EXECUTONE Information Systems, Inc. dated December 31, 1988. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989. 10-6 1990 Directors' Stock Option Plan. 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 22 EXECUTONE Information Systems, Inc. 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 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). Filed herewith. 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. Filed herewith. 11 Statement regarding computation of per share earnings. Filed herewith. 13 1995 Annual Report to Shareholders of EXECUTONE Information Systems, Inc. Filed herewith. 21 Subsidiaries of EXECUTONE Information Systems, Inc. Filed herewith. 23 Consent of Arthur Andersen LLP. Filed herewith. 27 Financial Data Schedule. Filed herewith. Undertakings 23 For the purposes of complying with the rules governing Form S-8 under the Securities Act of 1933, the undersigned registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into registrant's Registration Statements on the following Form S-8 filings: S-8 Reg. No. 2-91008 filed May 9, 1984 on 1983 Employee Stock Purchase Plan (650,000 shares) S-8 Reg. No. 33-959 filed October 17, 1985 on 1984 Stock Option Plan (390,000 shares) S-8 Reg. No. 33-6604 filed June 19, 1986 on 1983 Stock Option Plan (350,000 shares) S-8 Reg. No. 33-16585 filed August 24, 1987 on 1986 and 1983 Stock Option Plans (800,000 shares) S-8 Reg. No. 33-23294 filed August 3, 1988 on 1986 Stock Option Plan (7,000,000 shares) and Employee Stock Purchase Plan (500,000 shares) S-8 Reg. No. 33-42561 filed September 4, 1991 on 1984 Employee Stock Purchase Plan (350,000 shares) and Directors' Stock Option Plan (100,000 shares) S-8 Reg. No. 33-45015 filed January 2, 1992 on 1984 Employee Stock Purchase Plan (400,000 shares) S-8 Reg. No. 33-57519 filed January 31, 1995 on 1984 Employee Stock Purchase Plan (1,000,000 shares). Insofar as indemnification arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the 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. 24 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 -------------------------------------- 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 -------------------------------------- William R. Smart Director 25 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 (except with respect to the matter discussed in Note N, as to which the date is April 10, 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 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. 3-1 Articles of Incorporation, as amended through December 18,1995 (restated for electronic filing). Filed herewith. 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. Filed herewith. 4-10 Indenture dated March 1, 1986 with United States Trust Company of New York relating to 7 1/2% Convertible Subordinated Debentures of Vodavi Technology Corporation due March 15, 2011. Incorporated by reference to Vodavi Technology Corporation's Registration Statement on Form S-1 (as amended) (Registration No. 33-3827) filed on March 9, 1986 and amended April 1, 1986. 4-11 First Supplemental Indenture dated August 4, 1989 with United States Trust Company of New York relating to 7 1/2% Convertible Subordinated Debentures due March 15, 2011. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989. 4-12 Specimen Certificate representing 7 1/2% Convertible Subordinated Debentures. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989. 10-1 1984 Employee Stock Purchase Plan of EXECUTONE Information Systems, Inc. Incorporated by reference to the Registrant's Registration Statement on Form S-8 (File No. 33-23294) declared effective by the Commission on August 23, 1988. 10-2 1986 Stock Option Plan of EXECUTONE Information Systems, Inc. Incorporated by reference to the Registrant's Registration Statement on Form S-8 (File No. 33-23294) declared effective by the Commission on August 23, 1988. 10-3 1984 Stock Option Plan of EXECUTONE Information Systems, Inc. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, as amended by Form 8 filed on August 20, 1991. 10-4 401(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. 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 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). Filed herewith. 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, between the Coeur d'Alene Tribe and Unistar Entertainment, Inc. Filed herewith. 11 Statement regarding computation of per share earnings. Filed herewith. 13 1995 Annual Report to Shareholders of EXECUTONE Information Systems, Inc. Filed herewith. 21 Subsidiaries of EXECUTONE Information Systems, Inc. Filed herewith. 23 Consent of Arthur Andersen LLP. Filed herewith. 27 Financial Data Schedule. Filed herewith. STATEMENT OF DIFFERENCES The registered trademark symbol shall be expressed as ......... `r' The trademark symbol shall be expressed as .................... `tm' EX-3 2 EXHIBIT 3-1 ARTICLES OF INCORPORATION OF EXECUTONE INFORMATION SYSTEMS, INC. ARTICLE I The name of the Corporation is EXECUTONE INFORMATION SYSTEMS, INC. ARTICLE II The purpose for which the Corporation is formed is to transact any or all lawful business not required to be specifically stated in these Articles for which corporations may be incorporated under the Virginia Stock Corporation Act as amended from time to time. ARTICLE III The Corporation shall have the authority to issue 80,000,000 shares of Common Stock, par value $.01 per share, and 1,000,000 shares of Preferred Stock par value $.01 per share. The rights, preferences, voting powers and the qualifications, limitations and restrictions of the authorized stock shall be as follows: A. Voting Powers 1. Each share of Common Stock outstanding on the record date shall be entitled to one vote at the shareholders meeting for which such record date was fixed. 2. Subject to the right of the Board of Directors to condition submission of proposed amendments of these Articles, except as otherwise required in these Articles or any amendment hereto, any corporate action, except the election of directors, shall, for each voting group entitled to vote on the matter, be approved at a meeting at which a quorum of the voting group is present if, for each voting group entitled to vote on the matter, the votes cast by the voting group favoring the action exceed the votes cast by the voting group opposing the action. Directors shall be elected by a plurality of the votes cast by the shares entitled to vote in the election at a meeting at which a quorum is present. 3. Shareholder approval shall not be required for the issuance of rights, options or warrants for the purchase of shares of the Corporation to any director, officer or employee of the Corporation or any of its subsidiaries. B. Preferred Stock 1. Issuance In Series. The Preferred Stock may be issued from time to time in one or more series, with such distinctive serial designations, rights and preferences as shall be stated and expressed herein or in the resolution or resolutions providing for the issue of shares of a particular series, and in such resolution or resolutions providing for the issue of shares of such series, the Board of Directors is expressly authorized to fix: (a) the annual dividend rate for such series, the divided payment dates, the date from which dividends on all shares of such series issued shall be cumulative, and the extent of participation rights, if any; (b) the redemption price or prices, if any, for such series and other terms and conditions in which such series may be retired and redeemed; (c) the obligation, if any, of the Corporation to purchase and retire or redeem shares of such series as a sinking fund, and the provisions of any such sinking fund; (d) the designation and maximum number of shares of such series issuable; (e) the right to vote, if any, with holders of shares of any other series or class and any right to vote as a class, either generally or as a condition to specified corporate action; (f) the amount payable upon shares in event of involuntary liquidation; (g) the amount payable upon shares in event of voluntary liquidation; and (h) the rights, if any, of the holders of shares of such series to convert such shares into other classes of stock of the Corporation and the terms and conditions of such conversion. All shares of Preferred Stock of any one series shall be identical with each other in all respects except, if so determined by the Board of Directors, as to the dates from which dividends thereon shall be cumulative; and all shares of Preferred Stock shall be of equal rank with each other, regardless of series, and shall be identical with each other in all respects except as provided herein or in the resolution or resolutions providing for the issue of a particular series. In case dividends on all shares of Preferred Stock for any quarterly dividend period are not paid in full, all such shares shall participate ratably in any partial payment of dividends for such period in proportion to the full amounts of dividends for such period to which they are respectively entitled. C. Pre-emptive Rights. No holder of Common Stock or Preferred Stock shall as such holder have any pre-emptive or preferential right to purchase or subscribe to (i) any shares of any class of stock of the Corporation, whether now or hereafter authorized, (ii) any warrants, rights or options to purchase any such stock or (iii) any obligations convertible into any such stock or into warrants, rights or options to purchase any such stock. ARTICLE IV A. Board of Directors. The number of directors shall be as set forth in accordance with the Company's Bylaws, provided that any decrease in the number of directors shall not shorten an incumbent directors term or reduce any quorum or voting requirements, until such person ceases to be a director. B. Removal of Directors. Subject to the rights of the holders of any class or series of Preferred Stock then outstanding, a director may be removed by the shareholders with or without cause. ARTICLE V A. Definitions. In this Article: "applicant" means the person seeking indemnification pursuant to this Article. "expenses" includes counsel fees. "liability" means the obligation to pay a judgment, settlement, penalty, fine, including any excise tax assessed with respect to an employee benefit plan, or reasonable expenses incurred with respect to a proceeding. "party" includes an individual who was, is, or is threatened to be made a named defendant or respondent in a proceeding. "proceeding" means any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative or investigative and whether formal or informal. B. Limitation of Liability. In any proceeding brought by or in the right of the Corporation or brought by or on behalf of shareholders of the Corporation, no director or officer of the Corporation shall be liable to the Corporation or its shareholders for monetary damages with respect to any transaction, occurrence or course of conduct, whether prior or subsequent to the effective date of this Article, except for liability resulting from such person's having engaged in willful misconduct or a knowing violation of the criminal law or any federal or state securities law. C. Indemnification. To the full extent permitted by the Virginia Stock Corporation Act, as it exists on the date hereof or as hereafter amended, the Corporation shall indemnify any person who is or was a party to any proceeding, including a proceeding brought by a shareholder in the right of the Corporation or brought by or on behalf of shareholders of the Corporation, by reason of the fact that (i) he is or was a director or officer of the Corporation, or (ii) he is or was serving at the request of the Corporation as a director, trustee, partner or officer of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise against any liability incurred by him in connection with such proceeding unless he engaged in willful misconduct or a knowing violation of the criminal law. A person is considered to be serving an employee benefit plan at the Corporation's request if his duties to the Corporation also impose duties on, or otherwise involve services by him to the plan or to participants in or beneficiaries of the plan. The Board of Directors is hereby empowered, by a majority vote of a quorum of disinterested Directors, to enter into a contract to indemnify any director or officer in respect of any proceedings arising from any act or omission, whether occurring before or after the execution of such contract. D. Indemnification of Others. The Board of Directors is hereby empowered, by majority vote of a quorum of disinterested directors, to cause the Corporation to indemnify or contract to indemnify any person not specified in subsection (B) or (C) of this Article who was, is, or may become a party to any proceeding by reason of the fact that he is or was an employee, agent or consultant of the Corporation, or is or was serving at the request of the Corporation as an employee, agent or consultant of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise to the same extent as if such person were specified as one to whom idemnification is granted in subsection (C) of this Article. E. Application; Amendment. The provisions of this Article shall be applicable to all proceedings commenced after the effective date hereof arising from any act or omission, whether occurring before or after such effective date. No amendment or repeal of this Article shall have any effect on the rights provided under this Article with respect to any act or omission occurring prior to such amendment or repeal. The Corporation shall promptly take all such actions, and make all such determinations as shall be necessary or appropriate to comply with its obligation to make any indemnity under this Article and shall pay or reimburse promptly all reasonable expenses, including attorneys' fees, incurred by such director or officer in connection with such actions and determinations or proceedings of any kind arising therefrom. F. Termination of Proceeding. The termination of any proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not of itself create a presumption that the applicant did not meet the standard of conduct described in Section (B) or (C) of this Article. G. Determination of Availability. Any indemnification under Article V(C) (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the applicant is proper in the circumstances because he has met the applicable standard of conduct set forth in Section (C). The determination shall be made: 1. By the Board of Directors by a majority vote of a quorum consisting of directors not at the time parties to the proceeding: 2. If a quorum cannot be obtained under Subsection (1) of this Section, by majority vote of a committee duly designated by the Board of Directors (in which designation directors who are parties may participate), consisting solely of two or more directors not at the time parties to the proceeding: 3. By special legal counsel: (a) Selected by the Board of Directors or its committee in the manner prescribed in subsection (1) or (2) of this Section; or (b) If a quorum of the Board of Directors cannot be obtained under subsection (1) of this Section and a committee cannot be designated under subsection (2) of this Section, selected by majority vote of the full Board of Directors, in which selection directors who are parties may participate; or 4. By the Shareholders, but shares owned by or voted under the control of directors who are at the time parties to the proceeding may not be voted on the determination. Any evaluation as to reasonableness of expenses shall be made in the same manner as the determination that indemnification is appropriate, except that if the determination is made by special legal counsel, such evaluation as to reasonableness of expenses shall be made by those entitled under subsection (3) of this Section (G) to select counsel. Notwithstanding the foregoing, in the event there has been a change in the composition of a majority of the Board of Directors after the date of the alleged act or omission with respect to which indemnification is claimed, any determination as to indemnification and advancement of expenses with respect to any claim for indemnification made pursuant to this Article shall be made by special legal counsel agreed upon by the Board of Directors and the applicant. If the Board of Directors and the applicant are unable to agree upon such special legal counsel the Board of Directors and the applicant each shall select a nominee, and the nominees shall select such special legal counsel. H. Advances. 1. The Corporation may pay for or reimburse the reasonable expenses incurred by any applicant who is a party to a proceeding in advance of final disposition of the proceeding or the making of any determination under Section (G) if the applicant furnishes the Corporation: (a) a written statement of his good faith belief that he has met the standard of conduct described in Section (C); and (b) a written undertaking, executed personally or on his behalf, to repay the advance if it is ultimately determined that he did not meet such standard of conduct. 2. The undertaking required by pararagraph (b) of subsection (1) of this Section shall be an unlimited general obligation of the applicant but need not be secured and may be accepted without reference to financial ability to make repayment. 3. Authorization of payments under this section shall be made by the persons specified in Section (G). I. Insurance. The Corporation may purchase and maintain insurance to indemnify it against the whole or any portion of the liability assumed by it in accordance with this Article and may also procure insurance, in such amounts as the Board of Directors may determine, on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against any liability asserted against or incurred by him in any such capacity or arising from his status as such, whether or not the Corporation would have power to indemnify him against such liability under the provisions of this Article. J. Further Indemnity. Everv reference herein to directors, officers, trustees, partners, employees, agents or consultants shall include former directors, officers, trustees, partners, employees, agents or consultants and thier respective heirs, executors and administrators. The indemnification hereby provided and provided hereafter pursuant to the power hereby conferred by this Article on the Board of Directors shall not be exclusive of any other rights to which any person may be entitled, including any right under policies of insurance that may be purchased and maintained by the Corporation or others, with respect to claims, issues or matters in relation to which the Corporation would not have the power to indemnify such person under the provisions of this Article. Such rights shall not prevent or restrict the power of the Corporation to make or provide for any further indemnity, or provisions for determining entitlement to indemnity, pursuant to one or more indemnification agreements, bylaws, or other arrangements (including, without limitation, creation of trust funds or security interests funded by letters of credit or other means) approved by the Board of Directors (whether or not any of the directors of the Corporation shall be a party to or beneficiary of any such agreements, bylaws or arrangements); provided, however, that any provision of such agreements, bylaws or other arrangements shall not be effective if and to the extent that it is determined to be contrary to this Article or applicable laws of the Commonwealth of Virginia. K. Severability. Each provision of this Article shall be severable, and an adverse determination as to any such provision shall in no way affect the validity of any other provision. ARTICLE VI Article 14.1 of Chapter 9 of Title 13.1 of the Code of Virginia shall not apply to the Corporation. ARTICLE VII The initial registered office of the Corporation is 707 East Main Street, P.O. Box 1535, Richmond, Virginia 23212, physically located in the City of Richmond. The initial registered agent of the Corporation is Thurston R. Moore, a resident of Virginia and a member of the Virginia State Bar whose business & address is identical with that of the Corporation's initial registered office. - ------------------------------ Thurston R. Moore Incorporator EX-4 3 EXHIBIT 4-3-1 FIRST AMENDMENT TO THE SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT THIS FIRST AMENDMENT TO THE SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT (this "Amendment") is made as of this 1st day of January, 1995 by and among EXECUTONE Information Systems, Inc., a Virginia corporation with its principal place of business at 478 Wheelers Farms Road, Milford, Connecticut 06460 ("Borrower"), and Bank of America Illinois (formerly known as Continental Bank, which was, itself, formerly known as Continental Bank, N.A. an Illinois banking corporation) with an office at 231 South LaSalle Street, Chicago, Illinois 60697 ("Bank of America"), as agent for the "Lenders" (hereinafter defined) (in such capacity, the "Agent"), Fleet Bank N.A. ("Fleet"), and Bank of Boston Connecticut, a Connecticut banking corporation ("Bank of Boston"). Bank of America, Fleet and Bank of Boston are hereinafter collectively referred to as the "Lenders." W I T N E S S E T H : WHEREAS, Lenders have made loans, extensions of credit and other financial accommodations to Borrower pursuant to the Second Amended and Restated Loan and Security Agreement dated as of August 30, 1994 ("Loan Agreement") by and among the Agent, the Lenders and Borrower; WHEREAS, Borrower and the Lenders have agreed to amend Section 5.29 of the Loan Agreement, and to waive compliance with that Section 5.29 for Fiscal Year 1994, under the terms and conditions set forth herein; and NOW, THEREFORE, in consideration of the premises, and in order to induce the Lenders to amend the Loan Agreement pursuant to the terms hereof, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Definitions. Unless otherwise defined herein, and except as provided in Section 2 of this Amendment, all capitalized words and phrases used in this Amendment shall have the same meanings as are specifically set forth in the Loan Agreement. 2. Amendments to the Loan Agreement. (a) Section 5.29 to the Loan Agreement is hereby amended by changing the maximum amount of Capital Expenditures permitted under the terms and conditions of Section 5.29 for Fiscal Years 1995 through 1999 to the following:
Fiscal Year Maximum Amount ------------------------------------------- 1995 $7,500,000 1996 7,500,000 1997 7,500,000 1998 7,500,000 1999 7,500,000
(b) It is understood by all parties hereto that Continental Bank, an Illinois banking corporation, is now known as Bank of America Illinois, an Illinois banking corporation; and the Loan Agreement is amended so as to delete the defined term, "Continental", wherever that term appears therein, and in its place, insert the term, "Bank of America". 3. Waiver. Borrower hereby acknowledges and agrees that, for Fiscal Year 1994, it exceeded or permitted its Capital Expenditures to exceed the limit set forth in Section 5.29 of the Loan Agreement by approximately $3,080,000. The Lenders hereby waive Borrower's obligation to comply with Section 5.29 for Fiscal Year 1994. However, the foregoing waiver is limited to the specific matter addressed herein and for the specific time period referenced herein and shall not be deemed a waiver with respect to any other matter or time period, or otherwise restrict the exercise or to prejudice any right or remedy of the Lenders under the Loan Agreement or any other document, agreement or instrument delivered in connection therewith. 4. Acknowledgment of Borrower. Borrower hereby acknowledges and agrees that: (a) Borrower has no defense, offset or counterclaim with respect to the payment of any sum owed to the Lenders, or with respect to the performance or observance of any warranty or covenant contained in the Loan Agreement or any of the Related Agreements; and (b) the Lenders have performed all obligations and duties owed to Borrower through the date hereof. 5. Representations and Warranties of Borrower. To induce the Lenders to amend the Loan Agreement and to consider making future Loans thereunder, Borrower represents and warrants to the Lenders that: (a) Compliance with Loan Agreements. On the date hereof, and except as discussed in Section 3 of this Amendment, Borrower is in compliance with all of the terms and provisions set forth in the Loan Agreement (as modified by this Amendment) and no Event of Default or Unmatured Event of Default has occurred and is continuing. (b) Representations and Warranties. On the date hereof, and except as discussed in Section 3 of this Amendment, the representations and warranties set forth in Section 4 of the Loan Agreement are true and correct with the same effect as though such representations and warranties had been made on the date hereof, except to the extent that such representations and warranties expressly relate to an earlier date. (c) Corporate Authority. Borrower has full power and authority to consummate this Amendment, and to make the borrowings under the Loan Agreement as amended by this Amendment, and has full power and authority to incur and perform the obligations provided for under the Loan Agreement and this Amendment, all of which have been duly authorized by all proper and necessary corporate action. No consent or approval of stockholders or of any public authority or regulatory body which has not been obtained is required as a condition to the validity or enforceability of this Amendment. (d) Amendment as Binding Agreement. This Amendment constitutes the valid and legally binding obligation of Borrower fully enforceable against Borrower in accordance with its terms. (e) No Conflicting Agreements. The execution and performance by Borrower of this Amendment, and the borrowing by Borrower under the Loan Agreement, as amended, will not (i) violate any provision of law, any order of any court or other agency of government, or the Articles of Incorporation or Bylaws of Borrower; or (ii) violate any indenture, contract, agreement or other instrument to which Borrower is a party, or 2 by which any of its property is bound, or be in conflict with, result in a breach of or constitute (with due notice and or lapse of time) a default under, any such indenture, contract, agreement or other instrument; or (iii) result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any of the property or assets of Borrower, other than in favor of Agent for the benefit of the Lenders. 6. Effectiveness of This Amendment. The amendments set forth above shall become effective as of the date of this Amendment only upon the satisfaction of the following conditions precedent: (a) Receipt of Documents. Agent shall have received four (4) copies of this Amendment duly executed by Borrower and the Lenders. (b) No Material Adverse Change. No event shall have occurred which may have a material adverse effect on the financial condition or operations of the Borrower. (c) Fees and Expenses. Borrower shall have paid the amendment fee of $10,000.00 as provided in Section 8 of this Amendment. 7. Effect on Loan Agreement. Except as specifically amended hereby, the terms and provisions of the Loan Agreement are in all other respects ratified and confirmed and remain in full force and effect. No reference to this Amendment need be made in any notice, writing or other communication relating to the Loan Agreement; any such reference to the Loan Agreement shall be deemed to be a reference thereto as amended by this Amendment. 8. Fees and Expenses. Borrower hereby agrees to pay all reasonable out-of-pocket expenses incurred by the Lenders in connection with the preparation, negotiation and consummation of this Amendment, and all other documents related hereto (whether or not any borrowing under the Loan Agreement as amended shall be consummated), including, without limitation, the reasonable fees and expenses of the Lenders' counsel, and any filing fees and recordation tax required in connection with the filing of any documents necessary to consummate the provisions of this Amendment. To induce Lenders to enter into this Amendment, Borrower further agrees to pay an 3 amendment fee of $10,000.00 to Bank of America which shall be fully earned and non-refundable upon execution of this Amendment, and which shall be distributed on a pro-rata basis to each of the Lenders pursuant to Sections 2.11 and 2.14 of the Loan Agreement. 9. Governing Law. This Amendment shall be construed in accordance with and governed by the laws of the State of Illinois, without regard to the conflict of laws principles thereof. 10. Counterparts. This Amendment may be executed in any number of counterparts, each of which shall be deemed original and all of which taken together shall constitute one and the same Amendment. 11. Indemnification. Borrower hereby agrees to indemnify and hold harmless each Lender, the Agent, their respective affiliates and their respective directors, officers, employees, agents and controlling persons (each being an "Indemnified Party") from and against any and all claims, damages, liabilities and expenses (including, without limitation, reasonable fees and disbursements of counsel) that may be incurred by or asserted against such Indemnified Party in connection with the investigation of, preparation for or defense of any pending or threatened claim or any action or proceeding arising out of or relating to the Loan Documents and this Amendment, whether or not such Indemnified Party is a party hereto, provided that Borrower shall not be liable for any such claims, damages, liabilities or expenses resulting from such Indemnified Party's own gross negligence or willful misconduct. The obligations of the Borrower described in this Section are independent of all other obligations of the Borrower hereunder and under the documentation which will evidence the transactions contemplated hereunder and shall survive the expiration and termination of the Loan Agreement, and shall be payable on demand. 12. Release. In consideration of the mutual covenants herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Borrower for itself and on behalf of all present and former officers, directors, stockholders, agents, employees, predecessors, subsidiaries, affiliates, successors and assigns (all of the foregoing hereafter collectively referred to as ("Releasors") have fully and forever remised, 4 released and discharged and do hereby fully and forever remise, release and discharge the Lenders, and each and all of their respective subsidiary and affiliated corporations, companies, divisions, predecessors, successors and assigns, and each and all of its directors, officers, employees, attorneys, accountants, consultants, and other agents, of and from all manner of actions, cause and causes of action, suits, debts, sums of money, accounts, reckonings, bonds, bills, specialties, covenants, contracts, controversies, agreements, promises, judgments, executions, claims and demands of whatsoever, whether or not concealed or hidden, arising out of or relating to any matter, cause or thing whatsoever, which the Releasors, jointly or severally, have had, may have had, or now have, or which the Releasors, jointly or severally, hereafter can, shall or may have, for or by reason of any matter, cause or thing whatsoever, whenever arising, to and including the date of this Amendment. IN WITNESS WHEREOF, Borrower has caused this Amendment to be duly executed under seal by its duly authorized officer and the Lenders have caused this Amendment to be executed by their duly authorized officers, all as of the date and year first above written. EXECUTONE INFORMATION SYSTEMS, INC. a Virginia corporation By:________________________________ Name:______________________________ Its:_______________________________ BANK OF AMERICA ILLINOIS, individually, and as Agent By:________________________________ Name:______________________________ Its:_______________________________ 5 FLEET BANK N.A. By:________________________________ Name:______________________________ Its:_______________________________ BANK OF BOSTON CONNECTICUT By:________________________________ Name:______________________________ Its:_______________________________ 6 EX-4 4 EXHIBIT 4-3-2 SECOND AMENDMENT TO SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT This Second Amendment to Second Amended and Restated Loan and Security Agreement (this "Second Amendment") is made and entered into this 29th day of September, 1995, by and between EXECUTONE INFORMATION SYSTEMS, INC., a Virginia corporation ("Borrower"), BANK OF AMERICA ILLINOIS, an Illinois banking corporation ("Agent" and "Lender"), and BANK OF BOSTON CONNECTICUT and FLEET BANK, N.A. ("Lenders"); WHEREAS, Borrower and Lenders (including Continental Bank, an Illinois banking corporation as the predecessor of Bank of America Illinois) are parties to a certain Second Amended and Restated Loan and Security Agreement dated as of August 30, 1994 (the "Loan Agreement"), pursuant to which Lenders made loans and other financial accommodations to Borrower, as more particularly described therein; WHEREAS, the Loan Agreement was amended as of January 1, 1995, by that First Amendment to the Second Amended and Restated Loan Agreement by and among the parties hereto; WHEREAS, Borrower has requested that Lenders agree to further amend the Loan Agreement; and WHEREAS, Borrower and Lenders wish to enter into this Second Amendment in order to memorialize their mutual understanding regarding such amendments; NOW, THEREFORE, for and in consideration of the premises and other good and valuable consideration, the receipt and 0 sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Financial Covenants. Sections 5.27, 5.28, 5.30, 5.31, 5.32 and 5.33 are amended to read in their entirety as follows: 5.27 Consolidated Net Worth. Maintain a Consolidated Net Worth as of the last day of each fiscal quarter of each Fiscal Year as set forth below without reduction for stock repurchases by Borrower permitted under the terms hereof, in an amount equal to or greater than the corresponding amount set forth below opposite each such fiscal quarter:
Fiscal Quarter Amount - ------------------------------------ ------------- Second Fiscal Quarter of 1995 $49,000,000 Third Fiscal Quarter of 1995 $49,000,000 Fourth Fiscal Quarter of 1995 $50,000,000 First Fiscal Quarter of 1996 $53,000,000 Second Fiscal Quarter of 1996 $55,000,000 Third Fiscal Quarter of 1996 $55,000,000 Fourth Fiscal Quarter of 1996 $55,000,000 For All Fiscal Quarters Ended in 1997 $60,000,000 For All Fiscal Quarters Ended in 1998 $65,000,000 For All Fiscal Quarters Ended in 1999 $70,000,000
5.28 Interest Coverage Ratio. Not permit the ratio of Borrower's consolidated net earnings before interest expense, provision for Taxes, provision for restructuring and amortization of intangibles (including goodwill, deferred loan costs, deferred compensation, start-up costs, and acquisition costs) to interest expense, as determined at the end of each fiscal quarter of each Fiscal Year set forth below for the six consecutive month period then ended to be less than the corresponding ratio set forth below. For purposes of this Section 5.28, (i) net earnings shall not include any gains on the sale or other disposition of Investments or 1 fixed assets and any extraordinary items of income to the extent that the aggregate of all such gains and extraordinary items of income exceed the aggregate of losses on such sale or other disposition and extraordinary items, and (ii) interest expense shall include, without limitation, implicit interest expense on Capitalized Leases.
Fiscal Quarter Ratio - ----------------------------------- ------------ Second Fiscal Quarter of 1995 2.00 to 1.00 Third Fiscal Quarter of 1995 2.25 to 1.00 Fourth Fiscal Quarter of 1995 2.50 to 1.00 Each Fiscal Quarter Ended in 1996 and Thereafter 3.00 to 1.00
5.30 Liabilities to Net Worth Ratio. Not permit the ratio of Borrower's consolidated total liabilities to Borrower's Consolidated Net Worth, as determined on the last day of each fiscal quarter set forth below, to exceed the corresponding ratio set forth below:
Fiscal Quarter Ratio - ------------------------------------- ------------ Second Fiscal Quarter of 1995 2.25 to 1.00 Third Fiscal Quarter of 1995 2.25 to 1.00 Fourth Fiscal Quarter of 1995 2.25 to 1.00 First Fiscal Quarter of 1996 2.25 to 1.00 Second Fiscal Quarter of 1996 & Each Fiscal Quarter Ended Thereafter 2.00 to 1.00
5.31 Earnings Before Interest, Taxes and Amortization. Not permit the amount of Borrower's consolidated net earnings before interest expenses, provision for Taxes, provision for restructuring and amortization of intangibles (including goodwill, deferred loan costs, deferred compensation, start-up costs, and acquisition costs), as determined on the last day of each fiscal quarter during each Fiscal Year set forth below for the six-month period ending on such date to be less than the corresponding minimum amount set forth below. 2
Fiscal Quarter Amount - ------------------------------------ ---------- Second Fiscal Quarter of 1995 $3,900,000 Third Fiscal Quarter of 1995 $4,750,000 Fourth Fiscal Quarter of 1995 $5,750,000 Each Fiscal Quarter Ended in 1996 and Thereafter $6,000,000
5.32 Current Ratio. Shall maintain a ratio of aggregate current assets to aggregate current liabilities, determined as of the last day of each calendar month ended in 1995, of at least 1.0 to 1.0 and determined as of the last day of each calendar month ended thereafter, of at least 1.25 to 1.00. 5.33 Fixed Charge Coverage Ratio. Not permit the ratio of Borrower's EBITDA to the sum of Borrower's (i) interest expense, (ii) Capital Expenditures net of any purchase money or Capitalized Lease obligations with respect thereto, (iii) any scheduled principal payments on Indebtedness (including the principal component of any Capitalized Lease), (iv) restructuring costs and (v) cash Taxes, determined as at the end of each fiscal quarter during each Fiscal Year set forth below for the twelve-month period ending on such date to be less than the corresponding ratio set forth below:
Fiscal Quarter Ratio - ------------------------------------- ------------ Second Fiscal Quarter of 1995 1.25 to 1.00 Third Fiscal Quarter of 1995 1.20 to 1.00 Fourth Fiscal Quarter of 1995 1.25 to 1.00 First Fiscal Quarter of 1996 1.35 to 1.00 Second Fiscal Quarter of 1996 & Each Fiscal Quarter Ended Thereafter 1.50 to 1.00
2. No Hostile Take-Over.Borrower shall not directly or indirectly use any proceeds of Loans to fund all or any part of any hostile take-over or tender offer. 3. Conditions to Effectiveness of Second Amendment. The obligations of Lenders to enter 3 into this Second Amendment are subject to Borrower's execution and delivery to Agent of the following documents, each in form and substance satisfactory to Agent: a.) Executed copies of this Second Amendment; b.) A Secretary's Certificate of Borrower certifying (i) that there have been no amendments to Borrower's Charter or by-laws since August 30, 1994, except as set forth in Borrower's proxy statement dated April 28, 1995, (ii) that resolutions adopted by Borrower's Board of Directors (attached to such certificate) authorizing the execution, delivery and performance of this Second Amendment are in full force and effect and that such resolutions have not been amended, modified or rescinded since the date of their adoption; (iii) the incumbency of the officers executing this Second Amendment on behalf of Borrower and such officers' signatures; and (iv) that Borrower is, as of the date of such certificate, in good standing in the States of Virginia and Connecticut; and c.) An amendment fee of $10,000 payable to the Agent for the ratable benefit of Lenders. 4. Representations and Warranties. To induce Lenders to make the financial accommodations to Borrower contemplated hereby, Borrower hereby restates and renews each and every representation and warranty of Borrower set forth in the Loan Agreement, including, without limitation, in Section 4 thereof, and in each of the Related Agreements to which Borrower is a party or by which it is bound (except to the extent such representations and warranties are untrue solely as a result of transactions previously consented to by Lenders in writing) and hereby further represents and warrants in favor of Lenders as follows: (a) 1 Borrower is duly authorized to execute and deliver this Second Amendment and any Related Agreements contemplated hereby and is and will continue to be authorized to obtain the loans contemplated by the Loan Agreement, as amended by this Second Amendment, and to perform its obligations under the Loan Agreement, as amended by this Second Amendment, and any Related Agreements contemplated hereby; (b) the execution, delivery and performance by Borrower of this Second Amendment and of any Related Agreements contemplated hereby do not and will not require any consent or approval of any governmental agency or authority or other Person which has not been obtained and a copy thereof delivered to Lenders; (c) the execution, delivery and performance by Borrower of this Second Amendment and any Related Agreements do not and will not conflict with (i) any provisions of law, (ii) the Charter or bylaws of Borrower, (iii) any agreement binding upon Borrower or (iv) any court or administrative order or decree applicable to Borrower, and do not and will not require, or result in, the creation or imposition of any Lien on any assets of Borrower except as provided in the Loan Agreement; (d) this Second Amendment and any Related Agreements contemplated hereby, when duly executed and delivered, will be legal, valid and binding obligations of Borrower, enforceable against Borrower in accordance with their respective terms, except as enforceability may be limited by bankruptcy, insolvency or other similar laws of general application affecting the enforcement of creditors' rights or by general principles of equity limiting the availability of equitable remedies and (e) after giving effect to the execution and delivery of this Second Amendment and the consummation of the transactions contemplated hereby, no Event of Default or Unmatured Event of Default has occurred and is continuing. 2 5. Miscellaneous. Except as set forth expressly herein, all terms of the Loan Agreement and the Related Agreements shall be and remain in full force and effect and shall constitute the legal, valid, binding and enforceable obligations of Borrower. To the extent any terms and conditions in any of the Related Agreements shall contradict or be in conflict with any terms or conditions of the Loan Agreement, after giving effect to this Second Amendment, such terms and conditions are hereby deemed modified and amended accordingly to reflect the terms and conditions of the Loan Agreement as modified and amended hereby. Each reference to the Loan Agreement in any Related Agreement shall be deemed to refer the Loan Agreement, as amended by this Second Amendment. Borrower hereby restates, ratifies and reaffirms each and every term and condition set forth in the Loan Agreement, as amended hereby, and the Related Agreements effective as of the date hereof. To induce Lenders to enter into this Second Amendment and to continue to make Revolving Loans to Borrower under the Loan Agreement, Borrower hereby acknowledges and agrees that, as of the date hereof, there exists no right of offset, defense, counterclaim or objection in favor of Borrower as against Lenders with respect to the Liabilities. This Second Amendment shall be governed by, and construed in accordance with, the laws of the State of Illinois and all applicable federal laws of the United States of America. Borrower agrees to pay on demand all costs and expenses of Lenders in connection with the preparation, execution, delivery and enforcement of this Second Amendment and any other Related Agreements executed in connection herewith, the closing hereof, and any other transactions contemplated hereby, including the fees and out-of-pocket expenses of Lenders' counsel. In the event of Borrower's failure to pay such fees on demand, such fees may be charged as Revolving Loans. 1 IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to be executed by their respective officers thereunto duly authorized, as of the date first above written. EXECUTONE INFORMATION SYSTEMS, INC. By:_______________________________ Name:__________________________ Title:______________________ BANK OF AMERICA ILLINOIS By:_______________________________ Name:__________________________ Title:______________________ BANK OF BOSTON CONNECTICUT By:_______________________________ Name:__________________________ Title:______________________ FLEET BANK, N.A. By:_______________________________ Name:__________________________ Title:______________________ BANK OF AMERICA ILLINOIS, as Agent By:_______________________________ Name:__________________________ Title:______________________ 2 EX-4 5 EXHIBIT 4-3-3 THIRD AMENDMENT TO SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT This Third Amendment to Second Amended and Restated Loan and Security Agreement (this "Third Amendment") is made and entered into this 29th day of December, 1995, by and between EXECUTONE INFORMATION SYSTEMS, INC., a Virginia corporation ("Borrower") and BANK OF AMERICA ILLINOIS, an Illinois banking corporation ("Agent" and "Lender"); WHEREAS, Borrower and Lender (including Continental Bank, an Illinois banking corporation as the predecessor of Bank of America Illinois) were parties along with Bank of Boston Connecticut and Fleet Bank, N.A. to a certain Second Amended and Restated Loan and Security Agreement dated as of August 30, 1994 (the Loan Agreement ), pursuant to which Lenders made loans and other financial accommodations to Borrower, as more particularly described therein; WHEREAS, the Loan Agreement was amended as of January 1, 1995, by that First Amendment to the Second Amended and Restated Loan Agreement by and among the parties hereto; WHEREAS, the Loan Agreement was further amended as of September 29, 1995, by that Second Amendment to the Second Amended and Restated Loan Agreement by and among the parties thereto; WHEREAS, a Waiver and Consent Agreement was entered into as of December 18, 1995 (the "Waiver and Consent"), with respect to the Loan Agreement by and among the parties thereto, which had the effect of amending certain provisions of the Loan Agreement; WHEREAS, effective December 28, 1995, Bank of America Illinois purchased the Loans, Liabilities and Commitments of Bank of Boston Connecticut and Fleet Bank N.A. under the Loan Agreement (other than the Stock Purchase Loans); WHEREAS, Borrower has requested that Lender agree to further amend the Loan Agreement; and WHEREAS, Borrower and Lender wish to enter into this Third Amendment in order to memorialize their mutual understanding regarding such amendments and -0- to restate certain matters set forth in the Waiver and Consent; NOW, THEREFORE, for and in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. All references in the Loan Agreement, as amended, to Lenders shall be deemed to refer to the singular Lender, so long as Bank of America Illinois holds all the Liabilities (other than the Stock Purchase Loans) and Commitments to make Loans under the Loan Agreement. 2. Borrower acknowledges that as of the date hereof the Liabilities (other than the Stock Purchase Loans) outstanding under the Loan Agreement held by Bank of America Illinois include the following: a) Revolving Loans in the principal amount of $18,065,625.36; and b) Letter of Credit Obligations in the amount of $11,756,637.11. 3. The term "Stock Purchase Reserve" shall be amended to read in its entirety as follows: "Stock Purchase Reserve" means, with respect to the calculation of the Borrowing Base on and after each Anniversary Date or other date specified below, an amount equal to the percentage set opposite each such Anniversary Date of the Target Stock Purchase Liabilities minus the aggregate amount by which the Stock Purchase Liabilities have been repaid or otherwise reduced since the date of the initial loan made pursuant to the Management Loan Agreement: December 18, 1995 33 % Second Anniversary Date 40% December 31, 1996 66 % December 31, 1997 100% 4. Section 5.29 of the Loan Agreement is amended to read in its entirety as follows: 5.29 Capital Expenditures. Not, and not permit any Subsidiary to make any Capital Expenditures, or commit to make any Capital Expenditures if, after giving effect to such Capital Expenditures, the aggregate amount of all Capital Expenditures made by Borrower and its Subsidiaries on a consolidated basis in -1- any Fiscal Year would exceed, in the aggregate, the maximum amount set forth opposite such Fiscal Year:
Fiscal Year Maximum Amount ---------------------- --------------- 1995 $ 7,500,000 1996 $13,500,000 1997 $ 7,500,000 1998 $ 7,500,000 1999 $ 7,500,000
5. The Terms of the Waiver and Consent are hereby affirmed and incorporated herein by reference, with the following modifications: (a) In accordance with paragraph 3, clause (v) of the Waiver and Consent the aggregate Transfers to Unistar shall not exceed Three Million Dollars ($3,000,000) until the Lenders have received a certified copy of a final, non-appealable order of a court of competent jurisdiction approving the interstate tele-lottery enterprise known as the National Indiana Lottery (the Court Approval ). However, notwithstanding paragraph 3, clause (iv) of the Waiver and Consent, the initial Three Million Dollars ($3,000,000) of Transfers to Unistar may be funded from Borrower s cash flow or from Revolving Loans under the Loan Agreement. Once a Court Approval is obtained and the Transfers from Borrower to Unistar exceed Three Million Dollars ($3,000,000) the entire amount of such Transfers must be funded with proceeds of New Subordinated Debt in accordance with the terms of the Waiver and Consent, unless the Agent shall otherwise consent. (b) Notwithstanding the terms of the Waiver and Consent, so long as the Transfers to Unistar are funded by Borrower's cash flow or proceeds of Revolving Loans, those Transfers shall be in the form of senior loans to Unistar that are not subordinated in right of payment to any other indebtedness of Unistar. 6. (a) The term Revolving Credit Amount shall be amended to read in its entirety as follows: Revolving Credit Amount shall mean $45,000,000. -2- (b) The Commitment of Bank of America Illinois (formerly known as Continental Bank) as set forth on the signature page of the Loan Agreement shall be increased to $45,000,000; and the Commitments of Fleet Bank N.A. and Bank of Boston Connecticut shall be reduced to zero. 7. Representations and Warranties. To induce Lender to make the financial accommodations to Borrower contemplated hereby, Borrower hereby restates and renews each and every representation and warranty of Borrower set forth in the Loan Agreement, including, without limitation, in Section 4 thereof, and in each of the Related Agreements to which Borrower is a party or by which it is bound (except to the extent such representations and warranties are untrue solely as a result of transactions previously consented to by Lender in writing) and hereby further represents and warrants in favor of Lender as follows: (a) Borrower is duly authorized to execute and deliver this Third Amendment and any Related Agreements contemplated hereby and is and will continue to be authorized to obtain the loans contemplated by the Loan Agreement, as amended by this Third Amendment, and to perform its obligations under the Loan Agreement, as amended by this Third Amendment, and any Related Agreements contemplated hereby; (b) the execution, delivery and performance by Borrower of this Third Amendment and of any Related Agreements contemplated hereby do not and will not require any consent or approval of any governmental agency or authority or other Person which has not been obtained and a copy thereof delivered to Lenders; (c) the execution, delivery and performance by Borrower of this Third Amendment and any Related Agreements do not and will not conflict with (i) any provisions of law, (ii) the Charter or bylaws of borrower, (iii) any agreement binding upon Borrower or (iv) any court or administrative order or decree applicable to Borrower, and do not and will not require, or result in, the creation or imposition of any Lien on any assets of Borrower except as provided in the Loan Agreement; (d) this Third Amendment and any Related Agreements contemplated hereby, when duly executed and delivered, will be legal, valid and binding obligations of Borrower, enforceable against Borrower in accordance with their respective terms, except as enforceability may be limited by bankruptcy, insolvency or other similar laws of general application affecting the enforcement of creditors rights or by general principles of entity limiting the availability of equitable -3- remedies and (e) after giving effect to the execution and delivery of this Third Amendment and the consummation of the transactions contemplated hereby, no Event of Default or Unmatured Event of Default has occurred and is continuing. 8. Miscellaneous. Except as set forth expressly herein, all terms of the Loan Agreement and the Related Agreements shall be and remain in full force and effect and shall constitute the legal, valid, binding and enforceable obligations of Borrower. To the extent any terms and conditions in any of the Related Agreements shall contradict or be in conflict with any terms or conditions of the Loan Agreement, after giving effect to this Third Amendment, such terms and conditions are hereby deemed modified and amended accordingly to reflect the terms and conditions of the Loan Agreement as modified and amended hereby. Each reference to the Loan Agreement in any Related Agreement shall be deemed to refer the Loan Agreement, as amended by this Third Amendment. Borrower hereby restates, ratifies and reaffirms each and every term and condition set forth in the Loan Agreement, as amended hereby, and the Related Agreements effective as of the date hereof. To induce Lender to enter into this Third Amendment and to continue to make Revolving Loans to Borrower under the Loan Agreement, Borrower hereby acknowledges and agrees that, as of the date hereof, there exists no right of offset, defense, counterclaim or objection in favor of Borrower as against Lender with respect to the Liabilities. This Third Amendment shall be governed by, and construed in accordance with, the laws of the State of Illinois and all applicable federal laws of the Untied States of America. Borrower agrees to pay on demand all costs and expenses of Lenders in connection with the preparation, execution, delivery and enforcement of this Third Amendment and any other Related Agreements executed in connection herewith, the closing hereof, and any other transactions contemplated thereby, including the fees and out-of-pocket expenses of Lender s counsel. In the event of Borrower s failure to pay such fees on demand, such fees may be charged as Revolving Loans. All defined terms herein shall have the meanings ascribed thereto in the Loan Agreement and in the Waiver and Consent. -4- IN WITNESS WHEREOF, the parties hereto have caused this Third Amendment to be executed by their respective officers thereunto duly authorized, as of the date first above written. EXECUTONE INFORMATION SYSTEM, INC. By: Name: Title: BANK OF AMERICA ILLINOIS By: Name: Title: BANK OF AMERICA ILLINOIS, as Agent By: Name: Title: -5- EX-4 6 EXHIBIT 4-3-4 WAIVER AND CONSENT AGREEMENT THIS WAIVER AND CONSENT AGREEMENT (this "Agreement") is made and entered into this _____ day of December, 1995 by and among EXECUTONE INFORMATION SYSTEMS, INC., a Virginia corporation ("Borrower"), BANK OF AMERICA ILLINOIS, an Illinois banking corporation ("Agent" and "Lender") and BANK OF BOSTON CONNECTICUT and FLEET BANK, N.A. ("Lenders"). WHEREAS, Borrower and Lenders (including Continental Bank, an Illinois banking corporation as the predecessor of Bank of America Illinois) are parties to a certain Second Amended and Restated Loan and Security Agreement dated as of August 30, 1994 (as from time to time amended, the "Loan Agreement"), pursuant to which the Lenders have made loans and other financial accommodations to Borrower, as more particularly described therein. WHEREAS, Borrower desires to obtain the Lenders' consent to acquire a new Subsidiary and make certain investments in that Subsidiary or in a joint venture in which that Subsidiary is a joint venturer or partner. NOW, THEREFORE, for and in consideration of the mutual covenants and conditions herein contained, the parties hereto agree as follows: 1. Borrower may acquire all of the outstanding capital stock of Unistar Gaming Corp., a Delaware corporation ("Unistar") by the issuance of up to 3,700,000 shares of common stock and up to 1,000,000 shares of convertible preferred stock of Borrower in exchange for shares of the outstanding capital stock of Unistar; provided that Borrower shall not cause or permit Unistar to be merged or consolidated with Borrower or any other Subsidiary of Borrower and the convertible preferred stock issued to acquire Unistar will pay cash dividends in an amount not to exceed fifty percent (50%) of Unistar's net income. 2. Borrower may incur subordinated debt in an aggregate principal amount of up to Fifteen Million Dollars ($15,000,000) on terms and conditions satisfactory to the Lenders and approved by the Lenders prior to the incurrence thereof and consistent with the Term Sheet provided to Borrower by Triumph Capital Group, Inc. dated December 6, 1995 (other than the redemption features set forth therein) (the "New Subordinated Debt"). 3. Borrower may make subordinated loans to Unistar in an aggregate amount not to exceed Fifteen Million Dollars ($15,000,000); provided that (i) the aggregate value as of any date of (1) all cash or other assets contributed, loaned or otherwise transferred, directly or indirectly, 0 by Borrower and any of its Subsidiaries (other than Unistar) to Unistar (or any joint venture in which Unistar is a joint venturer or partner) plus (2) the value of all debts or liabilities of Unistar (or any joint venture in which Unistar is a joint venturer or partner) for which the Borrower or any of its other Subsidiaries becomes directly or indirectly liable, whether by guarantee, express assumption of liability, operation of law or otherwise (the sum of items (1) and (2) being hereinafter referred to as "Transfers"), shall not exceed at any one time Fifteen Million Dollars ($15,000,000) in the aggregate; (ii) Borrower shall, and shall cause each of its Subsidiaries to, maintain as to Unistar (1) separate books and records, (2) separate corporate identities, (3) separate banking and other accounts, (4) separate purchasing and accounts payable, and (5) separate billing and accounts receivable ; (iii) all subordinated promissory notes or other instruments evidencing subordinated loans by Borrower to Unistar shall be acceptable to the Lenders and pledged and delivered to Agent for the benefit of the Lenders on terms satisfactory to the Agent; (iv) as of any date of determination, the aggregate Transfers to Unistar shall not exceed the principal amount of New Subordinated Debt loaned and outstanding to Borrower; and (v) until such time as the Lenders have received a certified copy of a final, non-appealable order of a court of competent jurisdiction approving the interstate tele-lottery enterprise known as the National Indian Lottery proposed to be conducted by Unistar, the aggregate Transfers to Unistar shall not exceed Three Million Dollars ($3,000,000). 4. The Stock Purchase Reserve shall be increased immediately to 33 1/3% of the Target Stock Purchase Liabilities, and shall be further increased as of the following dates as set forth below: Second Anniversary Date 40% December 31, 1996 66 2/3% December 31, 1997 100% 5. Concurrently with the execution and delivery of this Agreement and as a condition to its effectiveness, Borrower shall pay to the Agent for the ratable benefit of the Lenders a waiver fee in the amount of $75,000. 6. Notwithstanding Section 5.29 of the Loan Agreement to the contrary, the maximum amount of Capital Expenditures which Borrower and its Subsidiaries may make or commit to make during the Fiscal Year ended December 31, 1996 shall not exceed $13,500,000. 7. All defined terms herein shall have the respective meanings ascribed thereto in the Loan Agreement. Except as set forth expressly 1 herein, all terms of the Loan Agreement and the Related Agreements shall be and remain in full force and effect and shall constitute the legal, valid, binding and enforceable obligations of Borrower. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Illinois and all applicable federal laws of the United States of America. This Agreement may be signed in any number of counterparts, all of which together shall constitute one agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. EXECUTONE INFORMATION SYSTEMS, INC. By:________________________________________ Name:_______________________________ Title:________________________________ BANK OF AMERICA ILLINOIS By:________________________________________ Name:_______________________________ Title:___________________________ BANK OF BOSTON CONNECTICUT By:________________________________________ Name:_______________________________ Title:___________________________ FLEET BANK, N.A. By:________________________________________ Name:_______________________________ Title:___________________________ BANK OF AMERICAN ILLINOIS, as Agent By:________________________________________ Name:_______________________________ Title:___________________________ 1 EX-10 7 EXHIBIT 10-10-1 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 $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 $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 $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 $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 $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 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 Australia
3 Austria Belgium Bermuda Brazil Chile China Costa Rica Denmark Finland France Germany Greece Guam Country Standard Discount Economy ------- -------- -------- ------- Hong Kong 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 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 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 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 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) $_________ in Gross Monthly Volume of Service. B. Extended Pricing offer. If Reseller maintains Gross Monthly Volume of Service in excess of $_________ 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 $__________ within 60 days following execution of this Amendment by both Parties. D. FoNline 800 Service Charge. There will be a $____ monthly recurring service charge for each FONline 800 account. E. Directory Listing Charge. There will be a $_____ 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 $____ per port monthly recurring charge for Central office Connections. G. EFC Charge. There will be a $____ per port monthly recurring Entrance Facility Charge when Reseller utilizes Sprint's entrance facilities. H. Daytime Traffic Requirement. Reseller must maintain a minimum of __% 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 _________________________________________. 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 $_________ (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 $__________. The Usage Commitment Credit will equal all Usage Commitment Surcharges applied to Reseller's account during the respective Credit Period. The Credit Periods will be: May 1, 1996 to October 31, 1996; November 1, 1996 to April 30, 1997; May 1, 1997 to October 31, 1997; and November 1, 1997 to April 30, 1998. The Usage Commitment Credit will be applied as soon as possible following completion of each Credit Period. L. No Additional Discounts. No additional discounts in any form, Tariff or otherwise, will be applied to reduce the flat rate prices set forth in this Exhibit B. M. Availability of Services. Services may be purchased under the Agreement only by reseller and its majority-owned subsidiaries on behalf of Reseller, its majority-owned subsidiaries, and customers of Reseller to whom Reseller sells the service. Execution hereof in no way adversely -effects any other existing agreements between Sprint and Reseller not referenced herein, including but not limited to, the Promotional discount Agreement as presently and subsequently amended. N. Administrative Fee. If Sprint is subject to a PIC dispute ("slamming") charge as a result of Reseller's actions, Reseller shall, at the sole discretion of Sprint, pay Sprint an administrative fee (the "Administrative Feel') equal to fifteen dollars ($__) 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 8 EXHIBIT 10-10-2 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 - $ $ 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 - $ $ 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 - $ $ 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 - $ $ 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
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
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
-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
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- EX-10 9 EXHIBIT 10-16 QTOI-95 MANUFACTURING SERVICES AGREEMENT This Manufacturing Services Agreement is entered into this 10th day of January, 1995 "COMPANIA DOMINICANA DE TELEFONOS, C. POR A. (CODETEL)", a Dominican Republic company, with principal offices at Ave. Abraham Lincoln No. 1101, Santo Domingo, Dominican Republic and EXECUTONE Information Systems, Inc., a Virginia Corporation with principal office at 478 Wheelers Farms Road, Milford, CT 06460 U.S.A. ("Buyer'). Whereas, Buyer desires to have CODETEL manufacture units of a specific product or products designed by Buyer and sell such product(s) to Buyer in accordance with the provisions of this Agreement, and Whereas, CODETEL is willing to manufacture and sell such product units to Buyer in accordance with the provisions of this Agreement. Now therefore, in consideration of the mutual representations, warranties and covenants set forth herein, Buyer and CODETEL hereby agree as follows: 1 Definition of Terms. 1.1 Throughout this Agreement, except as the context may otherwise require: (a) "Agreement" means this agreement for the manufacture and sale of the Product or Products specified in Schedule A, to be attached hereto. (b) "Bill of Material" means the list of components and materials required by CODETEL in order to manufacture the Products, together with a price list of such items, specified in Schedule E to be attached hereto. (c) "Change Order" means a written order from Buyer to CODETEL requesting any changes to the Products which Buyer may desire to make, including changes in the drawings, designs, specifications, method of shipment, and/or packing of the Products. (d) "Consigned Tooling" means the tooling, software programs and/or equipment specified in Schedule D, to be attached hereto, which Buyer shall consign to CODETEL for purposes of the manufacture and testing of the Products. (e) "Price" means the Free On Board (F.O. B.) Port (Sea - Haina, Air - Las Americas) price as set forth in Schedule B, to be attached hereto, or as may be otherwise agreed to in writing by the parties. (f) "Product" or "Products" means the product(s) to be manufactured by CODETEL as specified in Schedule A, to be attached hereto. (g) "Purchase Order" means a written purchase order issued by Buyer containing information with respect to each purchase made under this Agreement, including a description of the Products, purchase quantity, purchase delivery schedule, nominated carrier, routing instructions, destination, and confirmation of price. (h) "Quality Plan" means the Product testing and inspection procedures specified in Schedule C, to be attached hereto. (i) "Q-TEL" means CODETEL'S Quality Telecommunications Products division, a duty-free zone operation located in the ltabo Industrial Park, city of Haina, province of San Cristobal, Dominican Republic, dedicated to the Manufacturing, Assembling and Rehabilitation of Telecommunications products. 2. The Products. 2.1 Q-TEL will manufacture and sell to Buyer the Product or Products specified in Schedule A, to be attached hereto. 2.2 Additional items may be added to Schedule A and B upon the mutual agreement of Buyer and Q-TEL. In such event, the manufacture and sale of such additional items shall be made in accordance with the provisions of this Agreement. 3. Purchase Orders. 3.1 The purchase and sale of Products shall be made against specific written Purchase Orders submitted by Buyer to Seller during the term of this Agreement. All Purchase Orders for Products submitted by Buyer shall state the following: (i) Buyer's name and address; (ii) a description of the Products ordered; (iii) the quantities of Products ordered; (iv) the requested delivery dates; (v) the destination of the Products ordered; (vi) the price(s) for Products ordered, and (vii) a specific reference to this Agreement and to the contract number (if any) assigned by Q-TEL to this Agreement. 3.2 Buyer shall mail any Purchase Orders to Q-TEL and shall, on the day of dispatch of any such Purchase Order, confirm by facsimile or telex the quantity of the Products ordered and the Purchase Order number. Q-TEL shall acknowledge by facsimile or telex, the details of the Purchase Order described in any such telex received from Buyer within (14) fourteen calendar days of receiving such order. 3.3 All Purchase Orders (and any amendments thereto) issued by Buyer shall provide a minimum lead time of one-hundred and twenty (120) days for the delivery of any finished units of the Products (with a grace period of fifteen 15 days to complete the delivery of such Products). All Purchase Orders (and any amendments thereto) are subject to acceptance by Q-TEL which acceptance shall be indicated by return of a copy of Buyer's Purchase Order appropriately signed by Q-TEL so as to indicate acceptance of any such order of units of the Products. For the purposes of this Agreement , acceptance may be understood in the form of an acknowledgement document signed by the appropriate Q-TEL representative. 3.4 If any conflict arises between the terms stated in any Purchase Order and the terms and conditions of this Agreement, the provisions of this Agreement shall prevail. None of the preprinted terms and conditions stated on Buyer's Purchase Order form or on any related documents delivered or transmitted to Q-TEL shall be of any force or effect. 3.5 This Agreement is entered into by Buyer for the benefit of itself and its parent, subsidiary and affiliated companies. Buyer's parent company, subsidiaries, and/or affiliated companies, wherever located, will be entitled to place Purchase Orders with Q-TEL subject to the terms and conditions herein contained; provided, however, Q-TEL may refuse to accept any such Purchase Order unless placed directly by Buyer. 2 4. Agreement Period. 4.1 This Agreement shall commence on December 23, 1994 and, unless sooner terminated in accordance with the provisions of this Agreement, shall remain in full force and effect for an initial period of thirty-six (36) months. Expiration date is December 22, 1997. 4.2 Upon the expiration of the initial thirty-six (36) month term, this Agreement shall be automatically renewed and shall continue in full force and effect until terminated by either party for any reason by giving not less than three (3) months written notice to the other party. In the event either party provides such notice of termination, this Agreement shall terminate immediately upon the expiration of the required notice period. 5. Firm Orders and Order Forecasts. 5.1 Concurrent with the execution of this Agreement, Buyer shall provide Q-TEL with its initial schedule of purchases of the Products, specified by model number, for the seven (7) month period commencing with the expiration of the minimum lead time requirement specified in Subsection 3.3 above. Buyers schedule of purchases of the Products for this period will be only estimates of its orders of the Products during such period (the "Forecasted Orders"). 5.2 On or before the fifteenth day of each calendar month following the execution of this Agreement, Buyer shall provide Q-TEL, with: (i) a written Purchase Order updating and amending its Firm Order commitment; and (ii) an updated forecast of its Forecasted Orders during the seven (7) month period subsequent to the last delivery scheduled in the updated Purchase Order provided pursuant to clause (i) of this Subsection. 5.3 On the fifteenth day of each calendar month following the execution of this Agreement, orders forecasted for the first month of the Forecast Order period will be deemed to be zero unless confirmed by Buyer issuing a Purchase Order with respect to such month. Prior to any Forecasted Order becoming a Firm Order, Buyer may increase, decrease or cancel any such Forecasted Order. 5.4 Q-TEL shall be entitled to purchase long lead components for all Firm Orders issued by Buyer. Q-TEL's purchase of long lead time components required to satisfy Buyer's forecasted orders shall require Buyer's prior approval. 6. Pricing. 6.1 The applicable Price for any units of the Products ordered hereunder has been set forth in Schedule B, to be attached hereto. 6.2 The prices specified in Schedule B include all costs of packaging and packing, export documentation, and Dominican Republic government taxes applicable to the sale and export of the Products. Prices for the Products are exclusive of any other federal, state, or local sales, use, excise, or other similar taxes or duties, which Q-TEL may be required to collect or pay as a consequence of the sale or delivery of any units of the Products to Buyer, and Buyer shall be responsible for the payment or reimbursement of any such taxes, fees, or other charges. No taxes have been allocated as part of Q-TEL's price to Buyer on Products. No tax requirement is expected to duly-free zone operations within the Dominican Republic, 3 however, unexpected changes in the law may signify in a price adjustment if required. 6.3 The Prices specified in Schedule B are in United States Dollars and shall remain fixed, except for any price increases due to specific Product changes (as described in Section 10) Q-TEL in manufacturing and delivering the Products to Buyer because of any event or circumstance beyond Q-TEL control. Q-TEL will conduct quarterly price reviews internally and will inform Buyer of results: Price reductions, maintaining price or price increases. In any case of price variation, it will only be effective after expressly approved by both parties. 6.4 Any increase in the Price payable for any of the Products pursuant to Subsection 6.3, immediately above, shall be agreed between the parties and any such price increase will only become effective thirty (30) days after such agreement. In the absence of agreement between the parties concerning any such price increase, either party shall be entitled to terminate this Agreement, subject to the provisions of Subsection 12.3, below. 6.5 In the case where Price changes are resulting from Change Orders, special requirements from Buyer, special freight costs and/or temporary cost increase on parts and raw material in general, such changes in Prices, once approved by Buyer, must be effective to the date the situation or circumstance originating the change started or to the change implementation date. 7. Delivery. 7.1 All Products shall be delivered F.O.B., Port as indicated in 1.1 (a).Q- TEL shall deliver the Products at its own expense on the scheduled delivery date set forth in any effective Purchase Order to Buyer's nominated carrier as may be specified in such Purchase Order. The Products shall be packed and marked for shipment at Buyers expense and in accordance with Buyer's instructions set forth in such Purchase Order. In the absence of specific shipping instructions, Q-TEL shall select a carrier who shall be deemed to act as Buyers agent, notwithstanding any payment by Q-TEL of freight charges made for Buyers account. Q-TEL shall have no liability for any events occurring during shipment. Any claim for damages or loss must be filed with the nominated or selected carrier. 7.2 Risk of loss or damage to any units of the Product shall pass to Buyer upon Q-TEL delivery of such units of the Product to the nominated carrier specified by Buyer, or, in the absence of such instruction, to the qualified carrier selected by Q-TEL. Title to any units of the Product shall pass to Buyer upon Q-TEL receipt of payment in full for such units of the Product. 7.3 Buyer will be entitled to reject any units of the Product delivered more than thirty (30) days in advance of the scheduled delivery date specified in any effective Purchase Order (see 7.5 below), and to return such units of the Products to Q-TEL, at Q-TEL's expense for subsequent delivery to Buyer in conformity with the applicable Purchase Order. 7.4 Subject to the exceptions specified in Section 14. below, Q-TEL agrees that in the event it shall deliver any units of the Products more than fifteen (1 5) working days after the ex factory delivery date specified in any corresponding Purchase Order (see 7.5) issued by Buyer and accepted by Q-TEL hereunder. Q- TEL shall be responsible for the difference between the sea freight charges which would ordinarily be incurred by Buyer to deliver such units of the Products to Buyer's receiving destination in the United States and the reasonable air freight charges 4 necessarily incurred to expedite delivery of such Product units to Buyer's receiving destination. 7.5 Contract delivery dates for Products included on Purchase Orders may differ from dates stated on such Purchase Orders. In such case, an Acknowledgement must be made by Q-TEL stating the new contract delivery dates. Delivery schedules submitted by Q-TEL may also change Purchase Order's delivery dates, becoming contract delivery dates, upon the approval of Buyer. 7.6 Both parties agree that shipments will be made under mutual coordination, to fill a forty (40) foot sea freight container to at least 75% of capacity, and air containers as directed by Buyer. A twenty (20) foot container will be used at the discretion of the Buyer. Buyer will only delay shipment of a full container for reasons specified in Section 7.6 and 7.3 above. 7.7 Delays in delivering Products in accordance with Purchase Order's or later agreed dates, resulting from delays in receiving parts and components purchased by Q-TEL from Buyer, will not be under the responsibility of Q-TEL, neither the associated penalties or additional costs. In such cases Buyer will be notified and new contract delivery dates shall be agreed. 8. Inspection and Acceptance. 8.1 Q-TEL shall manufacture and inspect the Product in accordance with the Quality Plan specified in Schedule C, to be attached hereto. Buyer shall have the right to review the Quality Plan and Q-TEL manufacturing and inspection operations at any reasonable time in order to verify that the applicable standards are being satisfied. 8.2 Any proposed changes to be made to the Quality Plan or to the manufacturing process which may affect the Products shall be reviewed and approved by Buyer before such changes are implemented; Buyer agrees that any such required approval shall not be unreasonably withheld. If any changes are implemented without such prior approval, Buyer shall be entitled to reject any units of the Products manufactured during the period such unauthorized changes were in place. 8.3 Buyer may inspect and test the Products at all reasonable times and places. If such inspection or testing is made on Q-TEL's premises, Q-TEL shall provide reasonable facilities for such inspection and testing. Q-TEL shall provide adequate space for the storage of Buyer's inspection tools and test equipment in accordance with the provisions of Section 17, below. 8.4 Final inspection and acceptance of Buyer shall be conducted on delivery of the Products at its receiving destination, unless otherwise agreed in any applicable Purchase Order. Q-TEL will perform to an outgoing quality level of below 1% defect rate by using one of the following MIL - STD 105D sampling plans: (a) 0.4% AQL or equivalent on submitted lots of 250 units or less; or, (b) 0.65% AQL or equivalent on submitted lots of 251 units or greater. 8.5 Products which fail to conform to the applicable specifications and/or description contained in this Agreement may be rejected by Buyer by providing written notice thereof to Q-TEL within thirty (30) days of receipt of such Products at Buyer's receiving destination. In such event, the provisions of Subsection 9.4 below, shall apply with respect to any such rejected Products. If Buyer fails to properly 5 reject any units of the Products within such thirty (30) day period, such Product units shall be deemed accepted and may not be subsequently rejected. 9. Warranty. 9.1 Q-TEL warrants solely for the benefit of Buyer, that for a period of three (3) months from the date of acceptance of any units of the Products by Buyer, the portions of the Products which Q-TEL has agreed to produce and manufacture (hereinafter "Manufacturer Assemblies") will conform to the specifications incorporated in Schedule C, to be attached hereto, and will be free from defects in materials and workmanship under normal use and service. 9.2 As used herein, the term "Manufacturer Assemblies" shall mean only those portions of the Products for which component materials and/or subassemblies are purchased by Q-TEL and which are actually manufactured and/or assembled by Q-TEL; Manufacturer Assemblies shall not include any kitted inventory of component materials, or any subassemblies or finished products (eg., keyboards, power supplies, disk drive mechanisms, or computer software) that are produced by separate manufacturers and consigned to Q-TEL by Buyer (all such items are collectively referred to hereinafter as "Non-Q-TEL Assemblies"). 9.3 Q-TEL'S express warranty with respect to Manufacturer Assemblies shall not apply to any expendable components (eg., fuses, bulbs, etc.), nor to any Manufacturer Assemblies damaged as a result of any accident, negligence, use in any application for which the Manufacturer Assemblies were not designed or intended, modification without the prior consent of Q-TEL, any cause external to the Manufacturer Assemblies (eg., power failure or air condition failure), or by any other causes unrelated to defective materials or workmanship. 9.4 Any Products determined to be defective in materials or workmanship or not to conform to the applicable specification within the warranty period will be repaired or replaced, at Q-TEL's option, through one or more of the following methods: (I) by Q-TEL, at its expense, upon return of any defective Product units to Q-TEL; (ii) by Q-TEL's appointment of a third party contractor to correct any such discovered defects at Q-TEL's expense; or (iii) by Buyer, at its respective facilities, at a mutually agreed price to be paid by Q-TEL. (a) No return of Products will be accepted without a return material authorization number (an "RMA#") which will be promptly issued by Q-TEL, together with a statement of Q-TEL's election pursuant to this Subsection 9.4 as to the manner in which such allegedly defective Products will be repaired or replaced, within five (5) working days after Q-TEL's receipt of Buyers written request for any such RMA#. (b) Any Products returned must be in their original shipping cartons and must be complete with all packing materials. A complete description regarding the nature of any alleged defect must be included with all returned Product units. (c) If any Products returned under Q-TEL's warranty policy are found to conform to the warranties set forth herein, then the party returning such items shall promptly reimburse Q-TEL for its reasonable expenses incurred in handling and processing any such warranty claim, and such items shall be returned at the risk and expense of such party. (d) Q-TEL will perform an incoming inspection on all 6 components required for the manufacture of Buyer's products and accepts all responsibility for material defects found in Buyers product. Q-TEL agrees to reimburse Buyer, upon written notification to Q-TEL, for all reasonable costs associated with correcting product failures resulting from material or workmanship defects within the warranty period, including, without limitation, all additional labor costs, freight and manufacturing expense. 9.5 EXCEPT FOR THE EXPRESS WARRANTY SET FORTH IN SUBSECTION 9.1, ABOVE, Q-TEL MAKES NO OTHER WARRANTIES, WHETHER EXPRESSED OR IMPLIED, INCLUDING ANY IMPLIED WARRANTIES OF MERCHANTABILITY AND OF FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT TO ANY UNITS OF THE PRODUCTS AND/OR ANY MANUFACTURER ASSEMBLIES PROVIDED BY Q-TEL IN FURTHERANCE OF THIS AGREEMENT. No warranty is made concerning the operation or performance of custom equipment or with respect to any Products produced to any specifications or drawings not originating with Q-TEL. Q-TEL neither assumes nor authorizes any other person or entity to assume for Q-TEL any other liability in connection with the manufacture and/or sales of Products in furtherance of this Agreement. The exclusive remedy concerning the repair or replacement of Products set forth in Subsection 9.4, above and reimbursement pursuant to section 9.4 (d), is expressly in lieu of all other remedies which may be available to Buyer at law or in equity. 9.6 Q-TEL's liability hereunder is expressly limited to refund of the purchase price then paid to Q-TEL for any defective units of the Product and reimbursement of costs pursuant to Section 9.4(d), whether Q-TEL's liability arises from any breach of Q-TEL's express warranty, breach of any obligation arising from breach of warranty, or otherwise with respect to the manufacture and sale of any units of the Product hereunder, and whether liability is asserted in contract or tort, including negligence and strict product liability. Except as provided in Section 7.5 and Section 9.4 (d), in no event shall Q-TEL be liable for costs of procurement of substitute goods by Buyer or for any loss of profits or loss of use, or for any incidental, consequential, special, or other damages however caused, whether or not Q-TEL has been advised of the possibility of such loss or damage. 10. Product Changes. 10.1 Buyer may, by written Change Order, make changes in the drawings, designs, specifications, or packaging requirements concerning the Products, and/or request additional or diminished services from Q-TEL. 10.2 Q-TEL may recommend to Buyer at any time proposed changes in the drawings, designs, specifications, process changes, or packaging or packing requirements that are expected to result in improved Product reliability or cost reduction. Implementation of Q-TEL'S recommendations shall only be made upon receipt of authorization by Buyer in the form of Buyer's written Change Order. 10.3 Upon Q-TEL'S receipt of Buyer's Change Order, Q-TEL shall determine any cost modifications and within thirty (30) days of Q-TEL's receipt of such Change Order, Q-TEL shall provide Buyer with and appropriate statement setting forth any result cost modifications to be incurred. 10.4 After Q-TEL's statement setting out any resulting cost modifications has been accepted by Buyer, the new price shall apply to any subsequent Purchase Order with respect to which the change is effective; Schedule B, to be attached 7 hereto, shall be amended accordingly. 10.5 If any changes recommended by Q-TEL result in a decrease in the Price of any Products, Buyer and Q-TEL shall share equally the decrease in the Price. If any changes implemented by Buyer result in an increase or decrease in the Price of the Products, Buyer shall be liable for one hundred percent (100%) of any cost increase and shall enjoy one hundred percent (100%) of any cost savings. 10.6 Buyer shall reimburse Q-TEL for any authorized materials purchased by Q-TEL which are no longer required for the manufacture of the Products as a result of any implemented changes. 11. Payment and Invoices. 11.1 Buyer agrees that it shall pay for any and all units of the Products within sixty (60) days from the date of Buyer's receipt of Q-TEL's corresponding complete statement of account for any such units of the Products. Any payment due to Q-TEL shall be sent by wire transfer to such bank account as shall be designated by Q-TEL. All due invoices will be reconciled, accepted, and reflected on a statement of account and will be subject of a penalty of 1 % per month, after the above referred sixty (60) day period. 11.2 When partial shipments are made, payment shall become due in accordance with the provisions of the agreement establishing. 11.3 The payment of Q-TEL's invoices concerning units of the Products manufactured for the benefit of the Buyer and delivered to the carrier designed by Buyer, or, in the absence of such instructions, to the carrier selected by Q-TEL, shall not constitute acceptance of such Product by Buyer. 11.4 Both parties agree that invoicing will be made based on actual ship (On Board) dates as specified on carrier's Bill of Lading. 12. Termination. 12.1 Either party may terminate this Agreement if the other party violates any material provision of this Agreement and fails to correct or cure any such violation within thirty (30) days after receipt of written notice of such violation. Unless corrected or cured within such period, the termination of this Agreement shall be effective thirty (30) days after delivery of such notice. 12.2 Should either party be adjudicated to be bankrupt or insolvent, or should a receiver or liquidator be appointed for its business or assets, or should an assignment be made for the benefit of such party's creditors, or should such party file or have filed against it a petition for winding up its affairs, or should such party file or have filed against it a petition under any applicable bankruptcy statutes or regulation, or should such party attempt to assign this Agreement without the written consent of the other party being first obtained, then the other party shall be entitled to terminate this Agreement effective immediately upon delivery of notice of such election to the other party. 12.3 Any payment obligations of Buyer owed to Q-TEL shall survive the expiration or termination of this Agreement for any reason. In the event this Agreement is terminated by either of the parties in accordance with the provisions of Subsection 6.4 above, the Buyer shall nevertheless remain obligated to pay Q- TEL the contract price for all finished units of the Products which have been 8 manufactured by Q-TEL against the Firm Orders issued by the Buyer, whether such units have been delivered to the Buyer, or are in transit to the Buyer, or are in Q- TEL's inventory ready for shipment to the Buyer. In addition, the Buyer shall remain liable to pay Q-TEL for all work in process and for all component materials in Q- TEL's inventory as of the effective date of termination which work in process has been undertaken and/or component materials have been purchased by Q-TEL in order to fulfill the Firm Orders issued by the Buyer. The Buyer acknowledges and agrees that the reasonable value of the work in process shall be determined on the basis of the cost of materials plus ten percent (10%) and that the reasonable value of such component materials shall be determined on the basis of the cost of such items plus five percent (5%). Any and all payment obligations owed to Q-TEL in accordance with the provisions of this Agreement shall be resolved and paid within thirty (30) days after the effective date of termination. 13. Cancellation. 13.1 Buyer may not cancel any Purchase Order (or any part thereof within thirty (30) days prior to the scheduled Product delivery date as specified in Q- Tel's Acknowledgement. 13.2 If Buyer cancels any Purchase Order between thirty-one (31) and sixty (60) days prior to the scheduled Product delivery date as specified in the relevant Acknowledgement, Buyer shall pay Q-TEL as liquidated damages an amount equal to eighty percent (80%) of the price of the canceled portion of such Purchase Order. If Buyer cancels any Purchase Orders between sixty-one (61) and ninety (90) days prior to the scheduled Product delivery date as specified in the relevant Purchase Order, Buyer shall pay to Q-TEL as liquidated damages an amount equal to sixty-five percent (65%) of the price of the canceled portion of such Purchase Order. The liquidated damages paid by Buyer to Q-TEL in accordance with the provisions of this Subsection 13.2 shall be Q-TEL's sole and exclusive remedy with respect to any such canceled Purchase Order. 13.3 Buyer shall not be liable for cancellation of any Purchase Order more than ninety (90) days prior to the scheduled Product delivery date as specified in the relevant Acknowledgement, provided, however, Buyer shall nevertheless be liable to reimburse Q-TEL for any long lead time components purchased by Q-TEL with the approval of Buyer. 13.4 Cancellation of any Purchase Order shall be effective as of the date on which written notice of cancellation is received by Q-TEL. 14. Force Majeure. Neither party to this Agreement shall be liable for its failure to perform any of its obligations hereunder or under any Purchase Order issued in furtherance of this Agreement, or for its failure to cure any default under this Agreement or any related Purchase Order, during any period in which such performance or cure is delayed or prevented by any fire, flood, war, embargo, strike, riot, or intervention of any governmental authority, or any other circumstances (whether or not of a similar nature) beyond the control of such party; provided, however, that the party suffering such delay immediately notifies the other party in writing (by telex, or telegraphic means), of the reasons for the delay and, if possible, the duration of such delay. 15. Confidentiality and Intellectual Property. 9 15.1 In order to enable Q-TEL to manufacture the Products under this Agreement, Buyer shall disclose to Q-TEL certain information relating to the design and manufacture of the Products, which information is understood by Q-TEL to be information of a confidential nature, including, without limitation, Buyer's engineering drawings, designs, specifications, schematics, and bill of materials (collectively referred to hereinafter as the "Subject Information"). 15.2 Q-TEL acknowledges that certain of the Subject information may be considered proprietary and confidential to Buyer. Buyer shall advise Q-TEL if it considers any particular information or related materials to be trade secrets and/or confidential. Q-TEL agrees to receive and use its reasonable best efforts to maintain the confidentiality of all trade secrets and other confidential information disclosed to it by Buyer for a period of five (5) years from the date of receipt thereof, or two (2) years after the completion of this Agreement (including any extension hereof, or the earlier termination of this Agreement, whichever occurs later, and not to use the Subject Information for any purpose except as required by this Agreement. 15.3 Q-TEL's obligation to hold Buyers Subject Information in confidence shall not apply to any information which: (i) is known by Q-TEL at the time of receiving any such disclosure from Buyer; (II) becomes known to the general public without breach of the non-disclosure obligations set forth in this Agreement; (iii) is disclosed by Buyer to third parties without restriction on disclosure; (iv) is obtained from a third party without breach of a non-disclosure obligation; (v) is independently developed by employee(s) who have not had access to the proprietary information at issue; or (vi) is required to be disclosed in connection with any suit, action, or other dispute related to this Agreement 15.4 Upon the completion of this Agreement or its earlier termination, Q- TEL shall return all Subject Information, including copies of any of such information, to (F.O.B. Port as specified in 1.1 (e)), or, if requested by Buyer, Q-TEL shall destroy all Subject information remaining in its possession and certify the destruction of all such documents and related materials. 16. Assignment and Subcontracting. 16.1 Neither party shall be entitled to assign or otherwise transfer this Agreement, or to assign any of its respective rights or delegate any of its obligations hereunder, without the prior written consent of the other party, and any attempted or purported assignment by either party without such consent shall be null and void. 16.2 Q-TEL shall not subcontract the manufacture of the Products, or any part thereof, without first obtaining the written consent of the Buyer. 16.3 Q-TEL shall not sublet Buyers Consigned Tooling, or any part thereof, without first obtaining the written consent of the Buyer. 17. Consigned Tooling. 17.1 Buyer agrees that it shall consign to Q-TEL the tooling and/or equipment specified in Schedule D, to be attached hereto. Q-TEL shall use such tooling and equipment only in the performance of its obligations in furtherance of this Agreement or as may be otherwise authorized by Buyer. 17.2 Q-TEL agrees not to remove Buyer's name as marked on any Consigned Tooling, and to store the Consigned Tooling on its premises separately from its own goods or those of any other person or entity and in a manner which 10 makes the Consigned Tooling readily identifiable as the goods of Buyer. 17.3 Any Consigned Tooling delivered to Q-TEL shall be used and handled only by employees of Q-TEL who are trained in the use of such tooling. Q- TEL agrees to maintain the Consigned Tooling in good condition, normal wear and tear expected. Buyer acknowledges that it will contract with the appropriate equipment suppliers for maintenance of any Consigned Tooling delivered to Q-TEL. 17.4 Buyer shall perform an inspection of components from each piece of the Consigned Tooling to verify that such tooling confirms with Buyer(s) engineering drawings and specifications. Prior to manufacture of the Products, Q- TEL must have received prior written approval from Buyer to use the Consigned Tooling in the manufacturing process. 17.5 Upon completion of this Agreement (including any extension hereof), or the earlier termination of this Agreement, Q-TEL shall return the Consigned Tooling in accordance with the Buyer's instructions and at Buyer's risk and expense. 17.6 Q-TEL shall construct, subcontract to have constructed, or procure from third parties, certain tooling, equipment and/or software programs as specified in Schedule F, to be attached hereto, which items shall be authorized by separate Purchase Order(s) issued by Buyer. Any such tooling, equipment, and/or software programs once completed and approved by Buyer shall become Consigned Tooling subject to the provisions of this Subsection 17. 18. Buyer's Warranty and Indemnity. 18.1 Buyer represents and warrants that: (a) It is the rightful owner of all rights, title and interests in and to the Products, including without limitation, any patents, copyright, trademarks and other intellectual property rights with respect thereto; (b) It is under no restraints arising from contractual or confidential relationships with any third party which may adversely affect or be inconsistent in any manner with the parties' respective rights and obligations thereunder; (c) The manufacture and sale of the Products to Buyer does not and will not infringe upon any patents, copyrights, or any other proprietary rights of any third party; and (d) It has neither granted any rights or licenses, nor entered into any transaction with any third party which is/are inconsistent with any of the rights, licenses, and/or obligations of Q-TEL under this Agreement or under any Purchase Order issued by Buyer in furtherance of this Agreement. 18.2 Buyer agrees to indemnify, defend and hold Q-TEL harmless from and against any and all claims, losses, liabilities, damages, costs and expenses, including reasonable legal costs and attorneys' fees, resulting from a breach or alleged breach of any of the warranties set forth in Subsection 18.1, above, or arising out of any bodily injury (including death) or property damage, by whomsoever such claim is made, which is based in whole or in part upon the manufacture, sale, or use of any of the Products manufactured by Q-TEL in conformance with the drawings, specifications, or designs furnished and/or approved by Buyer hereunder, unless due to the negligence of Q-TEL in performing the duties and/or providing the 11 manufacturing services required of it hereunder. 19. Notices. 19.1 All notices, consents and communications hereunder shall be in writing (unless otherwise stated) and in the English language signed by or on behalf of the relevant party, and may be given by cable, telex, or facsimile, subject to confirmation by letter. 19.2 Written notices by post shall be sent by registered mail or certified mail, postage prepaid, return receipt requested. Any telegraphic, telex or facsimile notice must be confirmed within three (3) days by written notice sent by post signed by an authorized agent of such party. 19.3 Notices sent by prepaid post shall be addressed to the recipient party at its address as set forth in the preamble of this Agreement, or such other address as may be specified by one party from time to time in accordance with the provisions of this Subsection 19, and shall be deemed to have been received seven (7) working days after the date of posting. 19.4 For the purpose of this Agreement, reasonable parties to receive any and all correspondence associated to it, are defined below: BUYER: EXECUTONE INFORMATION SYSTEMS, INC. 478 Wheelers Farms Road, Milford, CT 06460 Attention: Randall G. Lovin, Director - Materials Telephone: (203) 876-7600 FAX (203) 882-2869 Q-TEL: QUALITY TELECOMMUNICATIONS PRODUCTS (Q-TEL) Regular Mail: C/O GTE International 8350 N.W. 52nd Terrace, Suite 102 Miami, FL 33166 P.O. Box 527505 Miami, FL 33152 Overnight mail: Q-TEL Ave. Independencia, Centro El Cacique Santo Domingo, Republica Dominicana Attention: Carlos M. Pellerano, Manager - Sales, Marketing and Customer Support Telephones: 1-800-451-4778 / (809) 220-7308 FAX: (809) 220-7347 20. Miscellaneous. 20.1 In performing their respective obligations hereunder, each of the parties shall operate as and have the status of an independent contractor and shall not act as or be joint venturers, or an agent or employee of the other party. Neither party shall have any right or authority to assume or create any obligations of any kind or to make any representations or warranties on behalf of the other party, whether expressed or implied, or to bind the other party in any respect whatsoever. 12 20.2 Any mutually agreed terms which may be specified during the continuance of this Agreement, or any extension hereof, shall be incorporated into this Agreement in the form of an addendum hereto. 20.3 No failure or delay by either party in exercising any right, power, or remedy under this Agreement shall operate as a waiver of any such right, power, or remedy. No waiver of any provision of this Agreement shall be effective unless in writing and signed by the party against whom such waiver or modification is sought to be enforced. The express waiver of any right or default hereunder shall be effective only in the instance given and shall not operate as or imply a waiver of any similar right or default on any subsequent occasion. 20.4 Should any provision of this agreement be determined to be void, invalid or otherwise unenforceable by any court or tribunal of competent jurisdiction, such determination shall not affect the remaining provisions hereof which shall remain in full force and effect. 20.5 This Agreement shall be governed by and interpreted in accordance with the laws of the State of Virginia. 20.6 In the event of any controversy under this Agreement, the parties shall attempt in good faith to resolve such controversy by negotiation, mediation, or other informal and inexpensive methods of dispute resolution. Any controversy not successfully resolved in such a manner shall be settled by binding arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association by a panel of three (3) arbitrators. Any such arbitration shall be held in Richmond, Virginia. Judgment upon the award rendered by the Arbitrators may be entered in any court having jurisdiction thereof. The parties agree to and do hereby submit themselves to the jurisdiction of the courts of the Commonwealth of Virginia and of the United States of America located in Alexandria or Richmond, for the purpose of enforcing any award rendered by the Arbitrators. 20.7 In no event shall either party be liable to the other party for any incidental, consequential, special, or punitive damages arising in any manner out of this Agreement. 20.8 The headings to the Sections of this Agreement are for the convenience of the parties only and have no legal effect. 20.9 This Agreement constitutes the entire agreement by and between the parties with respect to the subject matter hereof, and supersedes all prior and contemporaneous agreements, negotiations and understandings, whether oral or written. The parties acknowledge and agree that the Agreement dated December 23,1991 between the Compania Dominicana de Telefonos, C. por A. (CODETEL) and Buyer is superseded by this Agreement and is hereby terminated. 20.10 All signed copies shall be deemed to be originals of this Agreement. 20.11 The persons executing this Agreement on behalf of Licensee and Licensor represent and warrant that they each have the requisite corporate authority to do so and that their execution of this Agreement is not subject to any further ratification or approval whatsoever. In witness whereof, the parties have executed this Agreement as of the day and year first written above. 13 EXECUTONE INFORMATION COMPANIA DOMINICANA DE SYSTEMS, INC. TELEFONOS, C. POR A. Name_______________________ Name_______________________ Title______________________ Title________________________ 14
EX-10 10 EXHIBIT 10-21 MANAGEMENT AGREEMENT FOR THE NATIONAL INDIAN LOTTERY PREAMBLE This Management Agreement is made and entered into by and between the Coeur d'Alene Tribe, a federally recognized Indian Tribe ("CDA" or "Owner"), and UNISTAR Entertainment, Inc., a corporation organized under the laws of the State of Colorado ("UNISTAR" or "Contract Manager"), for the formation of a self-sustaining tele-lottery gaming enterprise to be known as the National Indian Lottery (the "NIL"), pursuant to the Indian Gaining Regulatory Act of 1988 ("IGRA"), the 1992 Class III Gaming Compact by and between CDA and the State of Idaho and the Coeur d'Alene Tribal Charitable Gaming Code, Chapter 30 1.01 - 14.01. In consideration of the mutual promises and covenants contained herein, the parties hereto agree as follows: ARTICLE 1. Title This Management Agreement for the National Indian Lottery may hereinafter be referred to as "Management Agreement," or "Contract." ARTICLE 2. Recitals WHEREAS, the Coeur d'Alene Tribe is a federally recognized Indian Tribe possessing sovereign powers of self government over the Coeur d'Alene Indian Reservation; and WHEREAS, CDA desires to establish a self-sustaining tele-lottery enterprise known as "National Indian Lottery" (NIL) to increase CDA's revenues for the purpose of enhancing CDA's economic self-sufficiency and self-government and to promote the health, education and welfare of the members of the Coeur d'Alene Tribe; and WHEREAS, CDA is seeking financial and technical assistance for the development and management of the NIL in order to obtain the revenues necessary to provide essential governmental services and long-term employment for Tribal members; and WHEREAS, CDA lacks the related experience necessary to unilaterally develop and operate the NIL and CDA has determined that it must obtain the necessary additional capital, management, and operational skills by hiring UNISTAR as Contract-Manager for a period of FIVE (5) YEARS to assist in securing financing and to implement management of the operation of the NIL and to provide the necessary training and oversight necessary to employ Tribal personnel; and WHEREAS, UNISTAR is the developer of existing software systems and the unique gaming program presented to CDA as "Tele-Lottery," and this lottery is a unique and previously non-existent application of the concepts advanced under IGRA and the Charity Games Clarification Act; and WHEREAS, UNISTAR has agreed to secure financing for and manage the CDA NIL with CDA for a period of FIVE (5) YEARS in return for which UNISTAR would receive a management fee paid entirely and exclusively out of the net revenue of the NIL at the rate of THIRTY PER CENT (30%) of net revenue per year over the FIVE (5) YEAR term of this Contract; and WHEREAS, CDA has determined that the structure, duration, and fees provided for in this Contract represent the best means to accomplish CDA's objectives. ARTICLE 3. Purpose 3.1 The purpose of this Contract is to establish and operate a Tele-Lottery Enterprise known as "National Indian Lottery" or "NIL" on the Coeur d'Alene Indian Reservation ("the Reservation") for the benefit of the Coeur d'Alene Tribe and its members thereof 3.2 UNISTAR is in the business of providing technical, financial and other services required for the conduct of "NIL Operation." CDA and UNISTAR agree that CDA shall engage in and conduct lottery games under this Agreement, and that UNISTAR shall provide technical services and financing for the "NIL." 3.3 The parties understand and agree that the "lottery games" to be conducted at the Reservation under this Agreement shall be a series of "lottery games" as defined herein. ARTICLE 4. Definitions 4.1 "Act" or "IGRA," shall refer to the Indian Gaming Regulatory Act, (25 USC, Section 2701 et seq.). 4.2 "CDA" or "Tribe," means the Coeur d'Alene Tribe, its authorized officials, agents, and representatives. 4.3 "Compact," means the 1992 Class III Gaming Compact by and between the Coeur d'Alene Tribe and the State of Idaho approved by the Department of Interior as published in Federal Register, Vol. 58, No. 28, Friday, February 12, 1993, Notices. 4.4 "Computer System Network," means the unique Tele-Lottery software and hardware telecommunications-system that is the proprietary property of UNISTAR. 4.5 "Director of Gaming," means the individual selected by CDA to oversee and be in charge of all CDA gaming activities including NIL. 4.6 "External Audit," means the annual audit to be conducted by an independent CPA firm selected by the CDA. 4.7 "Financial Procedures," shall refer to the Lottery Games Procedures which establish and define the cash management system defined in Articles 6.6; 6.7; 6.1 1; 6.14; and Article 7 and the methods used to provide the protection against price duplication and to guarantee payment of prizes won. 4.8 "GAAP" means generally accepted accounting procedures. 4.9 "Games," shall refer to Lottery Games and on-line games. 4.10 "Game Parameters," shall refer to game procedures which establishes and define the prize structure: game rules and other parameters. 4.11 "Gaming Board," means the Coeur d'Alene Tribal Charitable Gaming Board. 4.12 "Indian Lands," means those lands as defined in 25 USC 2703(4) and 25 CFR 502.12. 4.13 "Internal Audit," means the quarterly audit to be conducted by a mutually agreed upon auditor. 4.14 "Lottery Games," means those games traditionally identified as non-casino type lottery games (not to be confused with pari-mutuel sports betting or bingo), including games authorized pursuant to Article 4.19.2 of the Compact and as conducted under this Management Agreement. 4.15 "Management," means the arrangement between CDA and UNISTAR for management of the NIL as contained in this Contract. 4.16 "Management Fee," shall be the contract manager's 30% of the net revenue paid for entirely and exclusively out of the net revenue. 4.17 "Net Revenue," means gross revenues of the Lottery Games less amounts paid for prizes and total gaming related operating expenses. 4.18 "NIGC," means National Indian Gaming Commission. 4.19 "NIL," means National Indian Lottery, the gaming enterprise operated under this Management Agreement and solely owned by CDA. 4.20 "UNISTAR," refers to UNISTAR Entertainment, Inc., a Colorado Corporation or its predecessor or successor entities, which is the Management Contractor under this Agreement. 4.21 "Reservation," means Indian lands. 4.22 "Reservation Operation Center," means the NIL command and control center located on the Coeur d'Alene Reservation. 4.23 "TERO," means the Tribal Employment Rights Office of the Coeur d'Alene Tribe. Its purpose is to regulate tribal employment under the authority of the TERO Code, Tribal Employment Rights adopted and enforced by the Coeur d'Alene Tribe Resolution #172(0'3) Amended 7-21-93. 4.24 "Tribal Council," means the elected Tribal Council of the Coeur d'Alene Tribe. 4.25 "Tribal Gaming Code," is used to reference the Coeur d'Alene Tribal Charitable Gaming Code adopted and approved by the Coeur d'Alene Tribal Council by Resolution #2 (89), its purpose and intent is to provide a comprehensive scheme of regulations of Tribal or Indian owned gaming on the Coeur d'Alene Indian Reservation. 4.26 "Tribal Lottery Coordinator" ("TLC"), means a CDA Tribal Member selected by the Director of Gaming to carry out assigned duties regarding day to day operations of the NIL. TLC shall act as liaison for the Tribe with the UNISTAR Account Executives of NIL Operations and Executives of UNISTAR. 4.27 Subsequent capitalized terms not defined heretofore are defined in the specific sections in which they are referenced. ARTICLE 5. Authority 5.1 Each party warrants to the other that it has full authority to execute this Contract. 5.2 UNISTAR and its employees shall at all times conduct NIL operations in accordance with IGRA and other applicable federal statutes, all applicable federal regulations, the Tribal Gaming Code, the Compact and this Contract. 5.2.1 Mr. James W. Spencer shall be the first person designated by UNISTAR to be the UNISTAR Account Executive of NIL Operations. Should Mr. Spencer resign or be removed for cause agreed upon by CDA and UNISTAR, subsequent UNISTAR Account Executives of NIL Operations shall be selected at large from a national search of personnel with related experience, integrity, and national reputation. The final selection of any successor(s) shall be agreed upon by UNISTAR and CDA. For purposes of this Article, the term "removed for cause" shall mean: a) Mr. Spencer's inability to perform his duties hereunder on a full-time basis for a period of one hundred twenty (120) consecutive days as a result of his incapacity due to a physical, mental, or emotional illness ("Disability"), the determination of such Disability to be in UNISTAR's reasonable discretion and based upon independent medical and other professional advice appropriate to the circumstances; or b) The death of Mr. Spencer; or C) The conviction of Mr. Spencer for commission of a felony; or d) Action by Mr. Spencer involving willful malfeasance, or gross negligence or failure to act by Mr. Spencer involving material nonfeasance, which, at the time of such willful malfeasance or gross negligence or material nonfeasance, has a materially adverse effect (monetarily or otherwise) on NIL; or e) Conduct involving demonstrated moral turpitude, including habitual use of alcohol or drugs; f) Failure to comply with any written directive of the Director of Gaming of the Coeur d'Alene Tribe, any conduct in violation of or contrary to approved statutes, policies, or procedures, of the Coeur d'Alene Tribe, the Gaming Board or any representation, conduct or actions deemed by the Gaming Board to be offensive or harmful to the Coeur d'Alene Tribe, provided written notice that such (i) failure to comply, or (ii) conduct or actions has been given to Mr. Spencer and he has failed to cure within ten (10) days of receipt of such notice. 5.3 For the term of this Contract, the parties shall use best efforts to accomplish the objectives hereof. 5.4 The Director of Gaming shall have direct management oversight authority over the Contract Manager and UNISTAR Account Executive of NIL Operations. The Director of Gaming shall authorize all official reports, and shall review fiscal transactions on behalf of the CDA. The Director of Gaming shall approve or disapprove all contracts or subcontracts entered into for the purposes of operating the National Indian Lottery. The Director of Gaming shall approve or disapprove all budgets as they relate to the startup and/or operation of the National Indian Lottery. Approval by the Director of Gaming of a budget is required prior to any funds released from any NIL account for that period. CDA and the Contract Manager will agree to a financial institution in which NIL will maintain its bank accounts. Two signatures will be required for disbursements in excess of $10,000.00, one signature of each duly authorized representative of the CDA and UNISTAR. Amounts less than $10,000.00 can be paid with one signature of the Contract Manager so long as said disbursement is in accordance with a previously approved budget as set forth herein. ARTICLE 6. Responsibilities CDA hereby retains and engages UNISTAR to finance, assist in the development, and provide management of the NIL. 6.1. Maintenance And Improvement of Facilities 6.1.1 The Lottery Games shall be conducted from the Reservation Operation Center. The Reservation Operation Center shall provide adequate, operational and office space for UNISTAR to conduct business. Development and construction costs of the Reservation Operation Center shall be funded by UNISTAR. UNISTAR shall employ all reasonable measures for managing the Reservation Operation Center in a professional, safe, orderly, and attractive manner. The maintenance of the Reservation Operation Center will be at the expense of the NIL. 6.1.2 Day to day maintenance will be conducted by a qualified maintenance staff supervised under the authority of UNISTAR. 6.1.3 UNISTAR intends to use state of the art facilities in the daily operation of the NIL. Capital improvements shall be itemized in the annual budget as agreed between UNISTAR and CDA. 6.1.4 CDA shall provide a mutually acceptable location where all lottery drawings shall take place before a public audience. Said location shall provide for public viewing of the lottery drawing and necessary power for television operations as required. This site shall also contain a secure location in which lottery drawing equipment may be stored. The Contract Manager shall be responsible for securing and safeguarding that portion of the premises related to NIL operations. Maintenance of lottery drawing equipment will be provided by the Contract Manager. Improvements, including equipment upgrades, shall be provided as new technology requires provided however, that any upgrades or capital improvements to the UNISTAR communications system network shall be done at UNISTAR's expense. 6.2 Operational Capital 6.2.1 UNISTAR agrees to invest not less than $12,500,000 to launch the NIL. Of such sum invested (per Article 6.2.3) the approximate amount of $8,500,000 shall constitute operating capital, as more fully set forth in the proforma attached hereto and a minimum of an additional $4,000,000 shall constitute an advance by UNISTAR to the NIL to secure the initial jackpot. The entire investment shall be non-reimbursable except for the $4,000,000 advanced to the NIL jackpot reserve account. The $4,000,000 will be returned to UNISTAR solely from NIL net revenue in five (5) equal annual installments without interest during the term of the Contract. These installments will be paid seventy (70%) percent by CDA and thirty (30%) by UNISTAR from their respective shares of net revenue. CDA shall have no obligation to repay the $4,000,000 advanced to the NIL jackpot reserve account (or any portion thereof) if net revenue is insufficient to return such amount to UNISTAR. However, the guaranteed payment of $25,000.00 to CDA will have priority over the return of the jackpot reserve. 6.2.2 Initial start-up costs and capital purchases will be specified in the development budget. The development budget shall be approved by both CDA and UNISTAR before it shall be effective for any purpose. No modifications to the development budget shall occur without the written approval of both CDA and UNISTAR. No expenditures outside the budget may be made without the written approval of the Director of Gaming. 6.2.3 Within 14 Days of written request from the CDA to UNISTAR after the occurrence of. (a) written approval by the NIGC of the Management Agreement, and (b) upon CDA's approval of the background investigations of the principles of UNISTAR, UNISTAR shall provide CDA a guaranty in form and substance acceptable to the Director of Gaming that $12,500,000 will be funded to the NIL in accordance with the development budget as set forth in paragraph 6.2.2. Upon acceptance by the Director of Gaming in writing of the guaranty, UNISTAR will immediately fund the NIL the first two (2) months requirements under said budget. Thereafter each and every thirty (30) days UNISTAR will fund the next month's requirement under the development budget. 6.2.4 Funds which have not been expended as provided for under 6.2.2 or 6.2.3 shall be transferred to the jackpot reserve account as an increase in such account and that such transferred funds shall not be subject to repayment as set out in 6.2.1. 6.3. Operating Days and Hours Except as may otherwise be mutually agreed in writing by the parties hereto and absent any technical difficulties on the part of UNISTAR, the games will be conducted at the Reservation Operation Center; twenty-four (24) hours per day, seven (7) days per week, three hundred and sixty five (365) days per year. In addition, lottery drawings shall be conducted at a time mutually agreed upon by CDA and UNISTAR. 6.4. Hiring, Firing, Training, And Promoting 6.4.1 It is a formalized policy of the CDA to create and provide meaningful employment for its members. In accordance with established Tribal policy, the NIL through its contracted manager, UNISTAR, will have exclusive authority for any and all employment and personnel matters. Every attempt will be made to give first preference to qualified members of the Coeur d'Alene Tribe for recruitment, training, employment and promotions into management and supervisory positions. A uniform employee wage classification system shall be developed in accordance with the accepted industry standard for employee pay. Its subsequent implementation will be subject to CDA and UNISTAR approval. 6.4.2 CDA shall provide names of qualified applicants and coordinate their employee interviews with the NIL's Contract Manager who shall review all Tribal recommendations for employment interviews with the NIL. UNISTAR shall make final employment decisions on all employees under the NIL. All management and supervisory employees, as required, shall be licensed by the CDA Gaming Board in accordance with the Compact and Tribal Gaming Code. 6.5. Books and Records 6.5.1 The Contract Manager shall prepare and maintain full and accurate books and records on all accounts at its office on the Reservation. These books and records shall be prepared and maintained in such a manner to allow for the preparation by the Contract Manager of financial statements in accordance with GAAP. To the extent any provisions of this Management Agreement are inconsistent with GAAP, GAAP shall supersede those provisions. 6.5.2 CDA shall at all times have full and complete access to all Contract Manager's books and records relating to NIL operations all of which shall be kept on the Reservation at all times and shall not be removed by the Contract Manager. 6.6. Financial Statements And Reports The Contract Manager will be responsible for preparing all financial statements and financial reports including, but not limited to, quarterly reviews, reconciliations, and disbursements of funds for all NIL operations. The Contract Manager shall provide the Director of the Gaming all financial statements and reports prepared and requested by the Director of Gaming, which shall include daily, weekly, monthly and other reports as designated below: The Contract Manager shall supply financial statements and reports to the Director of Gaming within the time period listed unless the Director of Gaming; upon specific request, allows an extension of time because of exceptional circumstances. 6.6.1 The Daily Financial Summary shall be provided the following work day. 6.6.2 The Weekly Financial Summary shall be provided within one (1) week of the week in question and shall include: .i Credit Card Revenue Summary; .ii Prize Pool Revenue Distribution; .iii Operating Expenses; .iv Deferred Revenue; .v Order Transaction Log; and .vi Drawing History. 6.6.3 The Lottery Drawing Report shall be provided within five (5) work days of each drawing of the Lottery Games and shall calculate and report the revenues of the Lottery Games for that drawing. 6.6.4 Monthly Financial statements, summaries, and reports shall be provided no later than forty (40) days after the end of the month in question and shall include: .i Local bank statements - all operations accounts; .ii National bank statements - all operations accounts; .iii National bank statements - all prize pool accounts; .iv 800 vendor monthly statements; .v Credit card bank monthly statements - all accounts; .vi 900 vendor monthly statements; and .vii Detailed expense report with variance. 6.6.5 Quarterly financial statements will be provided forty-five (45) days following the end of the quarter. 6.6.6 Annual financial statements and the External Audit shall be provided one hundred twenty (120) days following the end of the year. 6.7. Auditor Selection and Payment 6.7.1 CDA and UNISTAR shall confer and mutually agree upon the selection of internal auditors to conduct quarterly audits of NIL financial transactions, which audits will include a complete review of all NIL financial records. Any reported discrepancies will be reconciled by the Contract Manager prior to the issuance of the Internal Audit described in 6.6.5 above provided that the Director of Gaming shall be provided a report of all such adjusting entries and reconciliations. The internal auditors will be responsible for the certification of the capital investment accounts, and including construction/development installment payments, and calculation of the net revenue split resulting in the Contract Manager's management fee payment. The cost of these internal auditing services shall be an operating expense of NIL. 6.7.2 An external national CPA firm selected by CDA shall be engaged to conduct an independent annual audit of the Games and the financial statements, and to perform a Management Information Systems (MIS) audit to provide an extra check and balance for Game integrity. Such firm shall provide its findings to the CDA and UNISTAR. The cost of these services shall be an operating expense of NIL. 6.7.3 CDA and UNISTAR shall also mutually agree on the selection of legal counsel to represent NIL which shall be a NIL operating expense. To the extent that such mutually agreed upon legal counsel is other than the CDA Tribe's general legal counsel, all costs and fees incurred by CDA for work performed by its general legal counsel relating to the NIL shall also be a NIL operating expense. UNISTAR retains the right to employ separate legal counsel to represent its individual interests at its own expense. CDA and UNISTAR shall mutually agree upon local banks, national banks and credit card banks to be utilized by the NIL. 6.8. Security 6.8.1 This section shall constitute the security plan pursuant to the requirements of Article 6.4. 6.8.2 UNISTAR shall hire and supervise security personnel pursuant to the requirements of Article 6.4. 6.8.3 Participation i. No person who is less than eighteen (18) years of age may purchase a lottery ticket, however, this shall not prohibit the purchase of a lottery ticket for the purpose of making a gift to a minor. ii. No officer or employee of NIL or the Contract Manager or any relative living in the same household with such officer or employee may purchase a lottery ticket. iii. No officer or employee of any vendor under contract with the NIL or Contract Manager relative living in the same household with such officer or employee, immediate supervisor or such officer or employee may purchase a lottery ticket if the officer or employee is involved in the direct provision of goods or services to NIL or Contract Manager or has access to confidential information relating to NIL operations. 6.8.4 The Computer System Network and system security shall include, but not be limited to Computer System Network reliability and system integrity. The network design shall include an environment with redundancy, duplication capability and independence capability. 6.8.5 Backup The Computer System Network shall contain a backup system. Any increased frequency of backups shall be a function of the increased number of records in the database and degree of acceptable risk. Backup tapes shall be removed from the host/server location and stored separately, off-site, in a secure, fireproof environment. Backups shall be rotated on a seven (7) day basis, providing coverage on one week's data at any given time. 6.8.6 Detail Operation Security shall include but not be limited to: .i Access. Access shall be limited to authorized retailers working in the area. .ii Processing. Hard copy order flow, from mail opening through order entry, batching, shipping and storage shall be coordinated and controlled. 6.8.7 Telecommunications Tampering, Hacks, and Intruders. The Computer System Network shall not be accessible by modem. Intruders to the system at the workstation level shall be prevented by utilizing network password/code assignment(s), group assignment(s), file restriction(s), intruder lockout routines, transaction tracking and oversight by the network supervisor. 6.8.8 Network, Database, and Software Security shall provide: .i Logging On/Passwords - limiting access to the system to specifically designated personnel and work stations. .ii Rights security - controlling information that various users can access in the system. .iii Attributes security - controlling what users can do with files in the system. .iv Network server security - controlling and limiting personnel who can perform tasks at the file server level. .v Software security - controlling and limiting personnel who can perform tasks in the Tele-Lottery System. .vi Database integrity/security - controlling and limiting personnel who can perform tasks in the database system. 6.8.9 Prize Payout and Verification of Winners For all prizes of over $599.00 the winner validation system will be instituted. Such security measures shall be developed and implemented prior to the flat drawing. 6.8. 10 Ticket Security Each ticket shall be created with a unique number subject to a coding digital during the imprint process. Tickets shall be issued in varying series, each indelibly identified during the printing process. 6.8.11 Site Security Access to all server/host computer and processing areas shall be controlled by batching. In accordance with the Compact, identification badges shall be issued by the Director of Gaming. Access to all monitors, consoles, and work stations shall be limited by login/password, function, and workstation. Security systems shall be installed and at least one (1) security guard shall be on site at the server/host computer location at all times. There shall be a guard on site at any NIL facility when it is unoccupied. The drawing equipment shall be secured under lock and key when not in use. The Director of Gaming and the UNISTAR Account Executive of NIL Operations shall control access to such equipment for weekly drawings. Each shall have a key to one (1) of the two (2) locks securing the area in which the drawing equipment is stored. Both keys shall be required for access. 6.8.12 Background Checks See Article 21. 6.8.13 Lottery Drawing Procedure All drawings of the Lottery Games shall be held on the Reservation in public view and recorded an video tape, a copy of which shall be retained by UNISTAR. The televised drawing procedure shall allow for at least three (3) practice drawings to be conducted to verify the drawing equipment prior to the scheduled drawing. Depending on the equipment selected for drawings for the Lottery Games, a procedure shall be agreed upon by CDA and the Contract Manager to verify, to the greatest extent possible, that each winning number is selected randomly. The Contract Manager shall designate one(1)of its NIL employees to be present at every drawing for the Lottery Games. 6.9. Fire Protection The NIL shall comply with the applicable Tribal Code. Additionally, any computer operations site shall include a fireproof closet or vault for storage of media and backup tapes. CDA Tribe will provide initial fire protection. CDA will enter into a backup fire protection agreement with the appropriate fire district. Any fees incurred for fire protection services will be NIL operational expense, 6.10. Advertising 6.10.1 Subject to the provisions of Article 5.4 and this Article, the responsibility for setting the advertising budget, placing of advertising and making advertising and marketing decisions rests with the Contract Manager. However, no ad shall be placed without its content first being approved by the Director of Gaming. The Contract Manager shall, subject to allocation of funds, place advertising with those agencies contracted with the NIL for NIL advertising and public relation advertisements. The overall advertising/promotional theme, ad/promo strategy, ad/promo mix and plan shall not be implemented without the prior consent of the tribal Director of Gaming. 6.10.2 CDA and UNISTAR shall agree upon the selection of the TV spokesperson(s) for the NIL and the selection of advertising and public relations agencies. 6.10.3 All advertising shall advise that participants must be at least eighteen (18) years of age. 6.11. Bills And Expenses 6.1 1.1 The Contract Manager shall prepare an operating budget and present it to the Coeur d'Alene Tribe for approval prior to start up and annually at least thirty (30) days prior to start of the new fiscal year. No modifications to the budget shall occur without Coeur d'Alene Tribe approval and no expenditures outside the budget may occur without the approval of the Director of Gaming. Any and all expenses of the NIL may be reviewed by the Director of Gaming and denied as an operating expense charge of NIL. UNISTAR shall be responsible for all expenditures from the NIL operations account and the Prize Pool Account. The Coeur d'Alene Tribe shall be solely responsible for expenditures from the guaranteed Tribal Payment Account. 6.11.2. Taxes As a tribal government enterprise, no tribal tax or other charge shall be imposed upon UNISTAR, upon NIL operations, or upon any assets used in association with the NIL. CDA shall grant a waiver to UNISTAR for any new laws, ordinances, or taxes to be enacted by CDA, or any agency or body of CDA, during the term of this Contract or any extensions hereof, which would have an adverse effect on UNISTAR revenues, expenses, or the conditions under which UNISTAR manages NIL operations. Adverse effect shall be deemed to include any laws or ordinances enacted by CDA which either prevents UNISTAR from carrying out the terms of this Contract or impose taxes on activities contemplated hereunder. Any federal law or federal tax that imposes a tax on the Contract Manager's share of net revenues, shall be the responsibility of the Contract Manager. Nothing in this section shall be deemed to limit or restrict CDA's gaming regulatory authority. 6.12. Employment Practices The NIL will adopt Tribal preference provisions in all employment practices. The NIL through its Contract Manager will develop Employment Policies and Procedures Manuals including grievance and hearing procedures, a uniform employee classification wage scale system. UNISTAR shall develop training manuals to ensure that Tribal members are trained to be the best extent possible for all management positions. UNISTAR, as the Contract Manager has exclusive management/supervisory authority over all NIL employees. 6.13. Insurance 6.1'3.1 The Contract Manager shall secure and maintain public liability, bonding and full property loss and damage insurance on all operations. The exact nature and extent of such coverage shall be agreed upon by the parties. Both CDA and UNISTAR shall be named as the insured in all policies. The costs of said coverage shall be part of the cost of NIL operations. In the event any portions of the NIL facilities are destroyed, the insurance proceeds shall be used to reconstruct the facilities and commence operations. 6.11.2 CDA and UNISTAR shall mutually indemnify and hold each other free and harmless from and against all liabilities resulting directly or indirectly from the management and operation of the NIL, provided that said liabilities, injury, or death does not result from the willful misconduct, negligent act or omission of both parties or its members. 6.14. Internal Revenue (IRS) Code Compliance 6.14.1 It shall be the responsibility of UNISTAR to insure that NIL complies with all the provisions of the Internal Revenue Code of 1986, as amended, (including but not limited to (delta)1441, (delta)3402(q), (delta)6041, (delta)6051, and Chapter 35 of said Code). 6.14.2 IRS requires that twenty-eight percent (28%) of winnings of any single prize/jackpot of five thousand dollars ($5,000) or more must be withheld. UNISTAR shall require customer service personnel to acquire the social security number of such winning players. The computer system shall include a database of these winners and their social security numbers. This data shall be batched in the medium requested by the IRS. Funds dedicated to this purpose shall be identified by system software and amounts required shall be deposited from the Prize Pool Account into the IRS Withholding Account after each lottery drawing. 6.15. Public Safety The Contract Manager of the NIL shall pay all costs of any increased public safety services necessary for NIL operations. Such public safety services costs shall be treated as a NIL operating expense. 6.16. NEPA Compliance CDA shall provide the National Indian Gaming Commission (NIGC) with all information necessary for the Commission to determine compliance with the National Environmental Policy Act (NEPA). 6.17. Tribal Lottery Coordinator (TLC) The TLC shall carry out all duties assigned by the Director of Gaming, including any internal audit functions assigned. The Director of Gaming shall set the TLC's salary which shall be paid as a NIL operating expense. ARTICLE 7. Accounting 7.1 Accounting and Banking Procedures 7.1.1 Fiduciary Entity. Accounting. and Books of Account CDA and UNISTAR shall agree upon the selection of fiduciary entities to control and distribute revenues to accounts according to the predetermined percentages as provided in this Agreement. Said fiduciary entities may be a national bank, financial institution, accounting firm, or combination of these entities. 7.1.2 Banking, Account Allocation CDA and UNISTAR shall agree on all banks for the deposit and maintenance of revenue and shall establish seven (7) categories of accounts. Fifty Percent (50%) of gross revenue shall be deposited into the Prize Pool Account, unless CDA and UNISTAR agree to change the allocation to the Prize Pool Account. Separate allocation accounts shall be established, including, but not limited to, those noted below: .i Prize Pool Account .ii Guaranteed Tribal Payment Account .iii CDA Tribal Reserve Account .iv UNISTAR investor/Management Fee Account .v Operations Account (based on an annual approved budget) .vi Unclaimed Prize Account .vii IRS Withholding Account .Viii Charge Back Revenue Account 7.1.3 Prize Pool Accounts Fifty percent (50%) of gross revenues shall be deposited to the Prize Pool Account. Expenses for the Prize Pool Account shall, as required, include, but not be limited to: prize payout to winners, IRS withholding account, and payments of rollover funds returned to the jackpot according to game procedures as mutually agreed upon by CDA and UNISTAR. 7.1.4 IRS Withholding Account An IRS Withholding Account shall be established in which the amounts withheld are from the amounts won, and deposits from prize pool revenues shall be deposited according to prize payout, as determined by the weekly Prize Pool Revenue Distribution Report. The funds deposited in the IRS Withholding Account shall be paid to the IRS as required, and winners in whose name the amounts were withheld shall be identified by NIL to the IRS in accordance with the database of social security numbers maintained as provided in Article 6.14.2. 7.1.5 Charge Back Revenue Account A Charge Back Revenue Account shall be established in which 2.5% of each transaction amount shall be deposited for purposes of reimbursement of customer credit card claims. Reimbursement shall occur within one hundred twenty (120) days of the customer invoice date if the claim is confirmed. All claims shall be reconciled in the External Audit and monies remaining in the Charge Back Revenue Account shall be disbursed in accordance with Article 13. 7.1.6 The Chairman of the Tribal Council of CDA or his designee and the UNISTAR Account Executive of NIL Operation shall each sign each winner's check and such signatures shall be supplied for imprinting on these checks. Such checks shall be debited weekly against the Prize Pool Account. 7.1.7 Subject to agreement by UNISTAR and CDA on the annual approved budget UNISTAR shall issue all checks from the Operations Account. Access to all accounts shall be limited by customary protective procedures, including the requirement of dual signatures subject to the approvals described in this Management Agreement. Accounting shall be on an accrual basis in accordance with GAAP. 7.2. Accounting Controls 7.2.1 All money instrument proceeds from NIL operation shall be transferred (swept) by electronic fund transfer to fiduciary entity accounts immediately upon daily termination of business. Adequate security shall be provided in transmitting funds to such fiduciary entity. UNISTAR shall provide CDA with Daily Financial Summary revenue activity reports as described in Article 6.6.1, which shall list all revenue flow activity by time, batch, job number, dollar amount and source. An internal financial procedures control manual will be established by UNISTAR and the internal CPA firm and will identify all the checks and balances to safeguard against waste, theft and fraud. 7.2.2 Under no circumstances shall the Contract Manager pay expenses which are not within the approved budget or not connected with NIL operations and the Lottery Games as specified in this Management Agreement unless it has received prior written approval of the Director of Gaming, which shall not be unreasonably withheld or delayed. The Director of Gaming shall have authority to review any and all expenses and deny such charge to NIL if deemed appropriate. 7.2.3 No other expenses other than those specified in this Agreement can be claimed by UNISTAR. Should extenuating circumstances cause additional expenses, no payment can be made without prior written authorization of the CDA and UNISTAR and the approval of the Chairman of the NIGC. 7.2.4 The CDA Tribe will be responsible for the expense incurred by the Gaming Board. The internal governmental operations of the Tribe, and any and all expenses incurred by the Tribe for the regulation and promulgation of gaming will be provided for by the guaranteed payments to the Tribe by the Contract Manager. 7.3. Financial Statements The Internal auditors and external CPA firms shall prepare quarterly and annual financial statements in support of the annual audit report due each year. These results shall be made available to CDA and UNISTAR in accordance with Article 6.6. The accounting firm shall report any discrepancies and provide a report of any differences in the account allocations, providing for the appropriate reconciliation of differences. After accounts have been reconciled the CPA firm will certify the correct balances. The certified report will serve as the basis for the net revenue calculation and subsequent quarterly disbursement. 7.4. Audits As provided in Article 6.7 an annual audit of all accounting records shall be conducted by a national accounting firm. 7.5. No Class II Annual Gaming Fee The gaming conducted under this Agreement is Class III gaming, not Class 11. Consequently, the Class 11 annual fee pursuant to 25 CFR 514.1 is not applicable. 7.6. Permit The Calculation Of The Manager Fee 7.6.1 As Contract Manager, UNISTAR shall receive a fee of thirty percent (30%@ of the net revenue of the NIL for the 5 year term of this Contract. As owner CDA shall receive seventy percent (70%) of the net revenue of the NIL for the term of this Contract. Such amounts shall be paid quarterly or as otherwise agreed upon by the UNISTAR and CDA. 7.7. Allocation of Operating Expenses: The operating expenses of the NIL shall include but not be limited to the following: Overhead Expenses: * Salaries/Commissions/Benefits * Insurance * Utilities * Advertising/Promotions * Legal/Accounting/Building Maintenance * Supplies * Interest Expense * Service Contract Expense * Office Equipment Rental Expense * Depreciation and Amortization * Retailer Commission * Contingency * Other GAAP defined expenses 7.8 Maintenance of Accounting Systems and Procedures Consistent with the foregoing, UNISTAR shall establish and maintain accounting systems and procedures in accordance with 25 C.F.R. 531.1(c) which (a) include an adequate system of internal accounting controls, (b) are ready to audit, (c) permit the calculation and payment of the Contract Manager's Fee, and (d) provide for the allocation of shared activity expenses all in accordance with GAAP. ARTICLE 8. Reporting and Confidentiality 8.1 Reporting UNISTAR shall provide CDA such reports in accordance with Article 6.6. This requirement is satisfied by the reporting procedures set out in Article 6.6. 8.2 Confidentiality All financial information, reports, proprietary concepts, ideas, plans, methods, data, developments, inventions or other information developed during the tenure of this contract regarding the NIL operations shall be deemed confidential and proprietary information of the CDA and shall be protected from third party or public disclosure without the express written approval of the CDA. In the event any person, entity, or government requests confidential information described in this Article, by judicial process or otherwise, UNISTAR shall immediately notify CDA and provide copies of all such requests to CDA, provided, however that no such information will be provided without CDA approval. ARTICLE 9. Access UNISTAR and NIL shall provide CDA immediate access upon request to the gaming operation including its books and records. This shall include the right to verify daily gross revenues and income from the gaming operation and access to any other gaming related information the Tribe deems appropriate. The Director of Gaming, or his designees shall examine and/or monitor the physical receipts, deposits of all gross receipts, accounting, and any other element of the NIL operation to assure compliance with the Gaming Code, Compact and this Contract. ARTICLE 10. Guaranteed Payment 10.1.1 UNISTAR shall provide a guaranteed payment to CDA in a sum certain of twenty-five thousand dollars ($25,000.00) per month. This payment is due on the first month of operations, and monthly thereafter, by the 5th day of the month and shall be deducted from CDA's share of net revenue or future net revenue allocation. The guaranteed payment(s) shall have preference over the retirement of development and construction costs. ARTICLE 11. Development and Construction A Reservation Operation Center suitable for conducting all elements of the Lottery Games shall be constructed on the Reservation by NIL on an accessible road network with utility hook-ups. This Reservation Operation Center shall be constructed in compliance with industry standards for computer operations, including environmental controls, backup electrical power, uninterruptible, continuous power protection, virus protection, and security. Total construction and development costs shall not exceed seven hundred fifty thousand dollars ($750,000.00) unless the budget is modified and approved in accordance with 5.4 and 6.2.2. In addition, UNISTAR shall furnish a telecommunications system in support of the Lottery Games. ARTICLE 12. Term & Exclusivity 12. 1.1 The term of this Contract shall be for FIVE (5) YEARS from the date gaming activities under this Agreement begin, unless extended for an additional two (2) years with the formal approval of the Chairman of the NIGC. 12.1.2 At any time during the fourth year of this Contract, CDA must notify UNISTAR in writing of its intent whether or not to extend this contract as allowed in 12.1.3 upon the expiration of this Contract. Failure to so notify in writing shall be deemed to be a decision by CDA to extend the Contract, provided that such extension shall only become effective if approved by the Chairman of the NIGC upon a future request by the Tribe and UNISTAR. 12.1.3 Extension of Contract CDA may extend the terms of this contract with UNISTAR for a period of two (2) years, but at a management fee of not more than thirty percent (30%) of net revenue in the second term. The parties acknowledge that the actual percentage of the management fee for any extended term is subject to the approval of the Chairman of the NIGC at the time the request for extended term is sought. ARTICLE 13. Compensation 13.1.1 CDA shall receive seventy percent (70%) of the Net Revenue from NIL operations for the first FIVE (5) YEARS of the Contract. 13.1.2 UNISTAR shall receive thirty percent (30%) of the Net Revenue from NIL operations for the first FIVE (5) YEARS of the Contract. ARTICLE 14. Modification and Termination 14. 1. Modification The parties agree to modify this contract as may be required for approval by the Chairman of the National Indian Gaming Commission (Chairman). Once approved by the Chairman this contract may be modified only with the consent of CDA and UNISTAR and approval of the modifications by the Chairman. 14.2.1 Termination CDA may terminate this Agreement in the event that UNISTAR commits, or knowingly allows any theft or embezzlement. Either party may terminate this Contract if the other commits, or allows to be committed, any material breach of this Contract. A material breach of this Contract shall include, but not be limited to, failure of either parry to perform any duty or obligation on its part for any twenty (20) consecutive days within the 365 day period. Neither party may terminate this Contract on grounds of material breach unless it has provided written notice to the other party and the defaulting party fails to cure, or take steps to substantially cure, the default within twenty (20) days of receipt of such notice. The timely discontinuance or correction of the material breach shall constitute a cure thereof. 14.2.2 In the event of termination due to the fault of UNISTAR, CDA shall be paid all sums owed to CDA as of the date of the termination, and UNISTAR shall indemnify CDA for any damages resulting from the breach of UNISTAR. If CDA is at fault UNISTAR and CDA shall retain all moneys paid to them and UNISTAR shall be compensated for equipment and start-up costs not related to UNISTAR's Computer System Network to the extent that funds are available in NIL and such costs have not previously been paid. Any funds remaining in NIL shall be divided in accordance with the net revenue distribution provisions of this Contract. 14.2.3 It is the understanding and the intent of the parties that the establishment and operation of the NIL complies with all applicable laws. In the event this Contract is determined by a court of competent jurisdiction to no longer be lawful, the obligations of the parties shall cease, and this Contract shall be null and void. CDA and UNISTAR shall execute the appropriate releases, holding CDA harmless and indemnifying CDA for any and all claims, notices, demands, liability, liens, mechanic liens, stop notices, and similar contingencies which may follow such termination. 14.2.4 Termination of this Contract shall not require the approval of the Chairman of the National Indian Gaming Commission. ARTICLE 15. Dispute Resolution 15.1 Disputes between Management Contractor and Customers Good relations with the customers is of utmost importance to Management Contractor. All disputes between customers and UNISTAR will be resolved by the UNISTAR Account Executive of NIL Operation or his designees after affording the aggrieved customer an opportunity to be heard and consultation with the Director of Gaming. 15.2 Disputes between Management Contractor and the Coeur d'Alene Tribe 15.2.1 In the event of a dispute with regard to the interpretation of this Contract, or with respect to any consent or approval required by either party wherein it is stated that such approval shall not be unreasonably withheld, the matter shall be referred to arbitration conducted in accordance with the Rules of the American Arbitration Association, 135 W. 51st Street, New York City, New York 10020. The Arbitration shall take place on the Reservation in the State of Idaho. The decision of the arbitrator shall be enforced the same as a decree of a court having competent jurisdiction. 15.2.2 If this Contract is referred to arbitration by the parties, arbitration costs shall be borne equally by the parties; provided, however, the arbitrators shall have the authority to assess such costs disproportionately or assess all costs to one party if arbitration is required because of unreasonableness or bad faith on the part of such party. Should any party refuse arbitration, any controversy or claim resulting in litigation including, but not limited to, an action to compel arbitration and such litigation results in a judgment against the party refusing to arbitrate, such refusing party shall be liable and obligated to pay all costs of such litigation, including reasonable attorney fees and costs of trial and appeal. 15.2.3 This Contract does not constitute, nor should it be construed as a waiver of sovereign immunity of the Coeur d'Alene Tribe, except as necessary to interpret this Contract and enforce an arbitration decision as provided in this Article. Any claim for money damages against CDA shall be limited to and payable only from CDA's share of the net revenue from NIL operations and UNISTAR's unrecovered capital investment. 15.3 Disputes Between Management Contractor and the Gaming Operation Employees Good relations with the employees is essential to an efficient operation of NIL. Disputes between UNISTAR and gaming operations employees will be resolved through a grievance procedure established in the Employment Policies and Procedures Manual, which shall afford the employees notice and an opportunity to be heard. ARTICLE 16. Assignment and Subcontracting 16.1 This Contract may not be assigned without the written consent of the other party, which consent shall not be unreasonably withheld, and no assignment of this Contract shall be valid without the written approval of the Chairman of the NIGC. All proposed assignments shall include information regarding shareholders, directors, officers, investors and management personnel, as required by the Compact or the NIGC for the purpose of performing background checks. 16.2 CDA and UNISTAR agree that UNISTAR may engage subcontractors to supply certain necessary services in connection with the efficient operation and security of the NIL, and each agreement to be entered into with any subcontractor shall provide, among other items, that the agreement will be subject to the operative provisions of IGRA and the rules of the NIGC, and shall be approved by the Director of Gaming. Neither UNISTAR nor any of its officers, directors or shareholders shall have any financial interest in or receive any compensation from any subcontractor engaged by UNISTAR. ARTICLE 17. Ownership Interests CDA is the sole owner of the NIL. Upon termination of this Contract, all equipment, Reservation facilities, mailing lists or other assets developed or purchased with NIL proceeds shall become the sole property of CDA. UNISTAR shall retain ownership of its unique Tele-Lottery Enterprise concept and related software programs. Any change or changes which separately or cumulatively result in a change of five percent (5%) or more in the ownership of UNISTAR shall require the advance written approval of the CDA, which approval shall not be unreasonably withheld. At no time shall UNISTAR acquire any ownership in any real property or lottery games owned by the CDA. Coeur d'Alene shall have the right, subject to NIGC requirements and approvals to continue using the UNISTAR Computer System Network after termination of the Management Agreement (whether after five (5) years or seven (7) years for an indefinite period, provided than an annual royalty payment be made to UNISTAR in a percentage of net revenue for use of the system to be mutually agreed upon by UNISTAR and CDA and approved by the Chairman of NIGC of not more than five percent (5%). Should CDA elect not to utilize the UNISTAR Computer System Network at the expiration of the initial or extended term of this contract, or during the royalty payment period, CDA shall give UNISTAR six (6) months notice thereof wherein UNISTAR shall make every effort to accommodate the design and development of a new NIL system that may operate parallel to the UNISTAR system during transition. ARTICLE 18. No Conveyances or Transfers This Contract is not a lease and does not convey any interest in land or other real property. ARTICLE 19. Entire Contract This Contract, constitutes the entire agreement. There are no other understandings between the parties other than those contained herein. The parties expressly reserve all rights not granted, recognized, or settled by this Contract. ARTICLE 20. Conflict of Interest 20.1 No member of the Coeur d'Alene Tribal Council or Coeur d'Alene Tribal Charitable Gaming Board, nor any spouse or other with whom they are living in a similar way, may be employed by UNISTAR nor may they hold any financial interest in UNISTAR. 20.2 No payment or other value has been or will be offered by UNISTAR or any employee or agent of UNISTAR, to any member of the Tribal government of CDA, to any relative of any Tribal official, or to any Tribal government employee, for the purpose of obtaining any special privilege, gain, advantage, or consideration for UNISTAR in this Contract. 20.3 UNISTAR shall not directly or indirectly interfere with, become involved in, or attempt to influence, the internal affairs of CDA. Any attempt by UNISTAR, its officers, agents, or employees, to influence any member of CDA to circulate or vote on any initiative or recall petition shall constitute an interference in Tribal affairs and shall be grounds for termination of this Contract as provided in Article 14. 20.4 UNISTAR shall devote its best efforts to the fulfillment of its duties in this Contract. UNISTAR agrees that during the term of this Contract, neither UNISTAR nor any person or entity having any substantial ownership or controlling interest in UNISTAR, shall be engaged directly or indirectly in any form, fashion, or manner, as partner, officer, director, stockholder, shareholder, investor, advisor, or in any other form or capacity, in any lottery similar to the one described herein, without the written approval of CDA. CDA agrees to allow UNISTAR the exclusive right to manage the NIL during the term and any authorized extension of this Contract. ARTICLE 21. Background Investigations Background investigations shall be conducted in accordance with Article 10 of the Compact and the Management Contract Requirements and Procedures under IGRA; 25 C.F.R., 502.17, 502.18, 502.19 and 537. All individuals handling money instruments shall be bonded prior to working for the NIL. ARTICLE 22. Approval 22.1 The signatures below constitute approval of the terms of this document. 22.2 This contract shall be considered fully executed within the meaning of 25 CFR 533.2 only after the Coeur d'Alene Tribal Council has reviewed and given its final approval by Resolution to the required background investigations and to this Management Agreement. 22.3 Prior to submission of this Contract to the National Indian Gaming Commission (NIGC) for approval, UNISTAR shall submit to CDA, a detailed Business Plan for management of the NIL. The Business Plan shall include, but not be limited to the following mandatory elements: goals, objectives, financial plans, and related matters. 22.4 UNISTAR certifies that it has provided CDA with a complete list of all names, addresses, telephone numbers, occupations, social security numbers, and background check information required by 25 CFR 537.1 regarding all persons and entities as set out in 25 CFR 502.17, 502.18 or 502.19 including, but not limited to: .1 All of UNISTAR management level personnel, corporate officers and directors. .2 All persons owning a beneficial interest in UNISTAR and in any corporations holding such interests, whether direct or indirect. .3 All persons who shall be directly or indirectly investors of NIL. .4 Those persons who shall sign the Contract on behalf of UNISTAR. .5 All employees who shall have day-to-day responsibilities for NIL. 22.5 UNISTAR shall pay the cost of all background investigations and all fees required by 25 CFR 537.3. 22.6 UNISTAR warrants that every person whose name will appear on the list is of good moral character, never convicted of any felony, nor any misdemeanor involving moral turpitude. The list shall be updated by UNISTAR on a monthly basis. 22.7 This Contract shall be submitted to the NIGC for its review and approval immediately upon final approval by CDA Council Resolution and signing. The parties agree to make any changes requested by the Commission. ARTICLE 23. Duplicate Originals This Contract is being executed in eight (8) duplicate originals, one to be retained by NIGC, three (3) to be retained by UNISTAR, and four (4) to be retained by CDA. All are equally valid. ARTICLE 24. Notices Any notice required to be given pursuant to this Contract shall be delivered by certified mail, return receipt requested, delivery prepaid, and addressed to: CDA: Ernest L. Stensgar, Chairman Coeur d'Alene Tribe Tribal Headquarters Plummer, Idaho 83851 UNISTAR: Jim Spencer Unistar Entertainment, Inc. 6000 Greenwood Plaza Boulevard, Suite 202 Englewood, Colorado 80111 ARTICLE 25. Effective Date This Contract shall not be effective unless and until it is approved by the Chairman of the National Indian Gaming Commission, dates of the signatures of the parties notwithstanding. Provided however, that the five (5) year term of this Contract shall not begin to run until the gaming authorized by this Contract has actually begun. COEUR D'ALENE TRIBE DATED: 1/16/95 BY: Ernest L. Stensgar, Chairman Coeur d'Alene Tribe Tribal Headquarters Plummer, Idaho 83851 Attested Hereto: Marjorie E. Zarate Secretary EX-11 11 EXHIBIT 11 EXHIBIT 11 EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS (In Thousands, Except Per Share Amounts)
Years Ended December 31, ------------------------------------- 1995 1994 1993 ------------------------------------- Income (Loss) From Continuing Operations $(36,934) $6,734 $4,903 Discontinued Operatations: Income from Operations, Net of Taxes --- 153 298 Gain on Disposal, Net of Taxes --- 604 --- ------------------------------------- Net Income (Loss) $(36,934) $7,491 $5,201 ------------------------------------- ------------------------------------- Weighted Average Number of Common Shares Outstanding 46,919 43,705 32,926 Common Stock Equivalent Shares Assumed to be Issued for Dilutive Stock Options and Warrants --- 3,992 15,357 ------------------------------------- Total Weighted Average Common and Common Equivalent Shares Outstanding 46,919 47,697 48,283 ------------------------------------- ------------------------------------- Earnings (Loss) per Common Share: Continuing Operations $ (0.79) $ 0.14 $ 0.10 Discontinued Operations 0.00 0.02 0.01 ------------------------------------- Net Income (Loss) $ (0.79) $ 0.16 $ 0.11 ------------------------------------- -------------------------------------
EX-13 12 EXHIBIT 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION The Company's revenues are primarily derived from sales of its products and services through a worldwide network of direct and independent sales and service offices. The Company's end-user revenues are derived from two primary sources: (1) sales of systems to new customers, which include sales of application-specific software options ("product revenues"), and (2) servicing the end-user base through the upgrade, expansion, enhancement (which includes sales of application-specific software options), and maintenance of previously installed systems, as well as revenues from the INFOSTAR`r'/LD+ program ("base revenues"). Base revenues usually generate higher operating income margin than initial sales of systems, since the Company's selling expenses for base revenues are lower than those for initial system sales. Sales of the Company's application-specific software options and related services generally produce a higher operating income margin than both system sales and base revenues due to the added performance value and relatively low production costs of such proprietary software and services. During the year, the Company reorganized its business into divisions, with each division focusing on different products and market segments. The discussion which follows under the heading "Company Restructuring" will detail the change in the Company's strategy which led to the restructuring, the resulting impairment of long-lived assets and other restructuring charges, along with an overview of each division's operating performance in 1995 (comparative data is not available on a divisional basis). COMPANY RESTRUCTURING Change in business strategy In July 1995, the Company reorganized its business into five divisions: Computer Telephony, Healthcare Communications Systems, Call Center Management ("CCM"), Videoconferencing Products, and Network Services. The current strategic focus is toward larger systems and software application-oriented products and away from hardware-oriented telephone systems. The business that was acquired in 1988 was a telephone equipment company 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 move, 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. After the acquisition, the Company began to develop more advanced products which incorporated digital technology and more software-oriented applications and expanded its product line to the high-end user, with larger customers and more sophisticated products to serve customers' total communications needs. After a thorough review and analysis, it was determined that the smaller, hardware-oriented portion of the telephony business was not profitable. This led to a definitive change in the Company's business strategy which was announced on July 11, 1995. The strategy the Company is now pursuing is to focus on software solutions. With the Integrated Digital System platform (Systems 108, 228, 432 and 648), which was developed post-acquisition, the Company's product lines now provide sophisticated software applications, including Integrated Voice Mail, Call Center Applications (ACD, IVR's and Predictive Dialers), Locating Devices, Nurse Call and Computer Telephony Interfaces which drive the computer telephony products, videoconferencing equipment and network services. The change in the nature and complexity of the Company's product lines has changed the way it has to market its products. Unlike many companies in this industry that focus on one particular product to one market, the Company provides multiple products and applications to its particular markets. This requires expertise in each particular market segment because the Company's competitors are primarily one-product companies who are experts in their particular market niche. Therefore, the Company has 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 products associated with that division. 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. Impairment of goodwill and related service stock Once the Company decided to restructure and focus on sophisticated systems in the computer telephony division, it reevaluated the realizability of goodwill and the related service stock using the recently issued FAS No. 121, "Accounting for the Impairment of Long-Lived Assets," issued in March 1995. FAS No. 121 requires the Company to project the lowest level of identifiable future cash flows for purposes of determining whether there has been an impairment in long-lived assets. The business acquired in 1988 would not generate future cash flows sufficient to realize the goodwill and service stock on the Company's balance sheet. Prior to the second quarter of 1995 and the issuance of FAS No. 121, the Company periodically reviewed the realizability of goodwill on the basis of whether the goodwill was fully recoverable from projected, undiscounted net cash flows for the business as a whole, which included both the smaller hardware-oriented systems and the larger, sophisticated software-application telephony systems. Undiscounted cash flows for the business as a whole were used because the general rule under APB 17 was that goodwill and similar intangible assets could not be disposed of apart from the enterprise as a whole, unless the Company sold or otherwise liquidated a large segment or separable group of assets of the acquired company. Based upon this valuation, goodwill was not determined to be impaired. The management decision discussed above to focus on the high end of the telephony market caused the impairment of long-lived assets, which was measured using the criteria of FAS No. 121. Computer Telephony The computer telephony division provides 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 voice messaging systems and ACD. The computer telephony division remains the Company's largest contributor to revenues and profits. Revenues for 1995 were $233 million, unchanged from the prior year. The Company's base revenues, especially MAC and service, continued their historical growth offset by a lower level of new installations during the year. In addition, the division incurred transition costs related to the restructuring which increased its operating expenses in 1995. Healthcare Communications The healthcare communications division provides to its hospital customers integration of the flow of voice and data between nurse and patient, increased flexibility and efficiency in hospital operations, and the means to improve patient care. Healthcare division revenues increased almost 15% during 1995 to $29 million. Although there has been revenue growth due to the divisionalization of this business in the beginning of 1995, the introduction of new products lowered margins due to higher introductory manufacturing costs. The Company has transitioned the nurse call product line in 1995 with the development of the LifeSaver`tm' and CareCom`r' IIE products. The higher 1995 manufacturing costs were due to the fact that offshore production was delayed due to the fire at the Company's production facility. These products were scheduled for transfer from the Company's pre-production facility in Poway, California, but the fire caused a delay in that transfer for almost one year. These products are now offshore and higher margins are anticipated, commencing in the first quarter of 1996. CCM The CCM 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 dialers, scripting software to assist agents handling calls, and interactive voice response systems. In 1995, the Company established the divisional management structure and made product improvements which are hoped to increase revenues in 1996 along with improving profit margins. During 1995, the Company issued the latest release of the predictive dialer product, which is a more competitive product from a price and feature standpoint than its predecessor. In addition, the IVR product, which had previously been produced by a third party, has been replaced with a Company-manufactured product which should result in higher gross profit margins. Backlog at the end of 1995 was at a record level which should translate into a strong first half of 1996. Videoconferencing Products The videoconferencing division provides videoconferencing network services such as multipoint conferencing, network bridging and network design to its customers. 1995 was a startup year for the videoconferencing division. In addition to the costs incurred to build a management team and sales force, divisional revenues did not grow as quickly as anticipated because of delays by suppliers in providing a competitively-priced product until the fourth quarter of 1995. The process of establishing demo sites and hiring a dedicated sales force has almost been completed. Network Services The network services division offers cost-effective voice, data and video 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. Revenues were $24 million in 1995, a decrease from the previous year, but profits increased due to a negotiated rate reduction from the carrier. Revenues are down due to competitive pressures in the marketplace. The Company has met this challenge with a division president and, with changes to incentive compensation plans, has made long-distance sales as important to the Company's sales managers as selling equipment. There are now 35 dedicated sales representatives and 4 regional sales managers to work with the equipment sales representatives to package network and equipment sales properly. As a result, bookings at the end of 1995 were at their highest level for the entire year, which are expected to translate into higher revenues in 1996. 1995 COMPARED TO 1994 Results of Operations Total revenues for the year ended December 31, 1995 were $296.4 million, a $4.4 million increase over the comparable 1994 period. Base revenues increased 2% compared to 1994, primarily due to increases in system upgrades and expansions and increased revenue from maintenance contracts, partially offset by lower volume generated by the INFOSTAR`r'/LD+ program. Product revenues increased 1% compared to 1994, as the increase in new installations of healthcare products and in shipments to the independent sales and service offices were partially offset by a decrease in new telephony installations. Gross profit, as a percentage of revenues, decreased slightly from 41.9% during 1994 to 41.5% during 1995 due to a combination of factors including product mix, higher introductory manufacturing costs for the healthcare products and a lower absorption of fixed cost overhead. Operating income, excluding the provision for restructuring, decreased $4.9 million compared to 1994 and, as a percentage of revenues, was 2.6% compared to 4.3% in 1994. The decrease in operating income is primarily due to increased operating expenses during 1995. Product development and engineering increased $2.5 million during 1995 as the Company continues to accelerate its investment in engineering for new product development and application-specific software products. Selling, general and administrative expenses increased $2.8 million during the year, primarily representing the full year cost impact of the divisional supporting management and sales structure. Interest and other expenses, net decreased $0.7 million during 1995. The net decrease is primarily a result of the 1995 gains on the sales of the customer bases in Wisconsin and Iowa and the related direct sales offices, totaling $1.2 million. This was partially offset by an increase in interest expense during 1995 due to higher average borrowing levels on the revolving credit facility and increases in the Company's prime borrowing rate during 1995. During the first quarter of 1995, the Company was involved in extensive negotiations to acquire the Dictaphone division of Pitney Bowes ("Dictaphone"). In April 1995, the acquisition was awarded to another bidder. The Company incurred approximately $1 million in fees and expenses related to the attempted acquisition which were recognized during the second and third quarters of 1995. The Company accounts for income taxes in accordance with FAS No. 109, "Accounting for Income Taxes." For the year ended December 31, 1995, the Company recorded a net tax benefit of $2.3 million. This is comprised of $4.2 million of tax benefit recognized as a result of the non-goodwill related portion of the restructuring provision, partially offset by the $1.9 million tax provision on earnings, excluding the restructuring provision. No tax benefit was recognized on the goodwill portion of the provision for restructuring since it is not deductible for tax purposes. The net tax benefit for the year was recorded as an increase to the deferred tax asset reflecting additional tax benefits to be utilized in the future. As of December 31, 1995, the deferred tax asset of $29.6 million represents the expected benefits to be received from the utilization of tax benefit carryforwards which will result in the payment of minimal taxes in the near future. The Company believes that the deferred tax asset will more likely than not be recognized in the carryforward period. The Company had no significant tax liability for the year ended December 31, 1995. In October 1995, the FASB issued Statement No. 123, "Accounting for Stock-Based Compensation." The Company will adopt the new pronouncement in fiscal year 1996 and has yet to decide whether it will record compensation cost or provide pro forma disclosure. Acquisition of Unistar Gaming Corporation On December 19, 1995, the Company acquired 100% of the common stock of Unistar Gaming Corporation ("Unistar") for 3.7 million shares of the Company's common stock and 350,000 shares of newly issued preferred stock. Unistar, privately-held prior to the acquisition, has an exclusive five-year contract to design, develop, finance, and manage the National Indian Lottery ("NIL"). See Note L of the Notes to Consolidated Financial Statements for the terms of the agreement. Management believes the Unistar business is a natural extension of its telephony and call center business. Calls via an 800 number will be processed with Interactive Voice Response ("IVR") equipment or live agents located on the Coeur d'Alene Indian Tribe of Idaho ("CDA") Reservation using ACD software to process nationwide wagering activity. The Company has made a significant investment in Unistar, which initially creates 8% dilution to the Company's shareholders and will require possibly $2 million to $3 million of cash prior to the resolution of the pending legal issues discussed below. However, in the opinion of the Company's management, this investment is justified based upon the potential returns. In an attempt to block the NIL, certain states filed Section 1084 letters to prevent the long-distance carriers from providing telephone service to the NIL. The CDA initiated legal action to compel the long-distance carriers to provide telephone service to the NIL. The CDA's position is that the lottery is authorized by the Indian Gaming Regulatory Act ("IGRA") passed by Congress in 1988, that the 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 NIL was ruled lawful by the CDA Tribal Court. The CDA Tribal Court found that all requirements of the IGRA have been satisfied and the Section 1084 letters issued by certain state attorneys general in an effort to interfere with the lawful operation of the NIL are invalid. In addition, the Court found that the long-distance carriers are obligated to provide the service requested in the action. The Company expects this ruling will be appealed, but believes that the CDA's position will be upheld. Other than legal costs related to an appeal of the CDA Tribal Court ruling or other actions by the states, if any, the Company estimates that the additional costs to become operational may run between $5-10 million. The Company believes it will be able to obtain additional financing for these costs. The Company believes there is a national market for the NIL based upon research into the experience of other national lotteries and the growth of the overall lottery market. However, there is no assurance that there will be acceptance of a telephone lottery. Subsequent Events On April 10, 1996, the Company entered into an agreement to sell substantially all of the Direct Sales and Services Group, including its long-distance reseller business and National Service Center, for $67.4 million to an acquisition company led by Bain Capital, Inc. The purchase price will consist of $61.5 million in cash, a $5.9 million note and warrants to purchase 8% of the common stock of the new company, issued as of the closing, for $1.1 million, exercisable for three years. The sale is expected to close on May 31, 1996, subject to the buyer's financing and other conditions. The Company expects a gain on the sale. The agreement also provides that the Company and the buyer will enter into a five-year exclusive distribution agreement under which the buyer will sell and service the Company's telephony equipment to those businesses and commercial locations that require up to 400 telephones. 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 Company will retain its Healthcare Communications and Call Center Management businesses, along with its National Accounts and Federal Systems marketing groups. In addition, the Company will continue to make telephony product sales to its independent distributors, along with retaining the recently acquired Unistar business. In 1995, the Direct Sales and Services Group, including the long-distance reseller business, had revenues of $191 million. On a pro forma basis, after giving effect to the transaction, the Company's 1995 revenues would be approximately $157 million. This includes $42 million in sales to the Direct Sales and Services Group which were eliminated in the 1995 Statement of Operations. 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. 1994 COMPARED TO 1993 Results of Operations Total revenues for the year ended December 31, 1994 were 7% higher than the comparable 1993 period. Base revenues for 1994 increased 12% over 1993 primarily due to volume increases generated by the INFOSTAR`r'/LD+ program, increased sales of system upgrades and expansions and increased revenue from maintenance contracts. Product revenues for 1994 increased 3% over 1993 primarily due to increased sales of voice processing products and sales decreases in non-voice processing applications and healthcare revenue. Gross profit increased $11.5 million compared to 1993, with the gross profit as a percentage of total revenues increasing to 41.9% from 40.9%. The increases were a result of the continuing favorable product mix of increased base revenue and voice processing products. Voice processing and base revenues in 1994 accounted for 71% of the sales volume compared to 64% in 1993, indicating the Company's shifting emphasis to market value-added products to the customer base and increase sales of application-specific software products. Operating income increased $1.4 million during 1994 and, as a percentage of total revenues, was 4.3% compared to 4.1% for 1993. The increase in operating income as a percentage of total revenues was primarily related to the increase in gross profit margin, partially offset by continuing investments in the sales force and sales support personnel, technical marketing support and product development and engineering expenses for the development and sale of the new higher margin products. Interest and other expenses, net for the year ended December 31, 1994 was $1.0 million lower than the corresponding 1993 period, primarily due to the favorable impact of a lower level of bank borrowings. For the year ended December 31, 1994, the Company recorded a provision for income taxes of $3.3 million. Approximately 88% or $2.9 million of the total tax provision was recorded as a reduction of the deferred tax asset to reflect the utilization of tax benefits. As a result of the utilization of these benefits, the Company had no significant tax liability for the year ended December 31, 1994. In addition, the Company recorded a provision for income taxes of $0.5 million, relating to discontinued operations, which also reduced the deferred tax asset. During 1994, the Company adjusted its valuation allowance, resulting in an increase in the deferred tax asset of $6.5 million, $5.2 million of which was a reduction of goodwill as it related to pre-acquisition tax benefits and $1.3 million of which reduced the 1994 provision for income taxes. The basis for the adjustment of the valuation allowance was a significant increase in pre-tax income from $7.6 million in 1993 to $10.0 million in 1994. In December 1993, a fire occurred at the Company's main subcontractor's production facility in Shinzen, China, causing inventory shortages during the first six months of 1994. The production problems were largely alleviated by the Company's ability to increase its own production and find alternative manufacturing sources. In July 1994, the Company recovered $4 million from its insurance carrier for additional direct costs related to the emergency production situation. As of March 31, 1994, the Company sold its Vodavi Communications Systems Division ("VCS"), which sold telephone equipment to supply houses and dealers, a different class of customer from continuing operations, under the brand names STARPLUS`r' and INFINITE`tm', for approximately $10.9 million. Proceeds of the sale consisted of approximately $9.7 million in cash, received in April 1994, and a $1.2 million note, the proceeds of which were received in September 1995. The proceeds were used to reduce borrowings under the Company's revolving credit facility. The sale resulted in an after-tax gain of $604,000 (net of income tax provision of $403,000). Consolidated financial statements for the years ended December 31, 1994 and 1993 present VCS as a discontinued operation. LIQUIDITY AND CAPITAL RESOURCES The Company's liquidity is represented by cash, cash equivalents and cash availability under its existing credit facilities. The Company's liquidity was $23 million, $30 million and $29 million as of December 31, 1995, 1994 and 1993, respectively. At December 31, 1995 and 1994, cash and cash equivalents amounted to $8.1 million and $7.8 million, respectively, or 8% of current assets. During the year ended December 31, 1995, net cash was used to fund $3.9 million of operating activities, purchase $3.5 million of capital equipment, repay $0.6 million of debt and for other payments of $0.8 million. Cash was generated through $5.2 million of additional borrowings, $1.6 million in proceeds from the issuance of stock, receipt of a $1.2 million note payment from the sale of VCS and $0.8 million in other proceeds. Cash used in operating activities during 1995 included $14.3 million in funding of working capital, primarily due to the high level of accounts payable at the end of 1994 generated by inventory purchases during the last quarter of 1994. The decrease in cash generated by operating activities compared to 1994 is primarily due to the decrease in operating income, excluding the provision for restructuring, the funding of $1.0 million in cash expenses relating to the attempted acquisition of Dictaphone and additional interest payments of $0.8 million. Total debt at December 31, 1995 was $30.8 million, an increase of $5.3 million from $25.5 million at December 31, 1994. The increase in debt is due to $4.5 million in higher bank borrowings, $0.8 million in other borrowings, a $0.4 million capital lease obligation incurred in connection with equipment acquisitions and an increase to the carrying value of the convertible subordinated debentures of $0.2 million due to accretion. The additional borrowings in 1995 were used to reduce the high level of accounts payable at the end of 1994 generated by inventory purchases during the last quarter of 1994. During the year, the Company made long-term debt and capital lease repayments of $0.6 million. The Company's secured credit facility (the "Credit Facility") was amended in December 1995. The $45 million Credit Facility expires in August 1999 and consists of a revolving line of credit providing for direct borrowings and up to $15 million in letters of credit. Direct borrowings and letter of credit advances are made available pursuant to a formula based on the levels of eligible accounts receivable and inventories. The Credit Facility agreement contains certain restrictive covenants which include, among other things, a prohibition on the declaration or payment of any cash dividends on common stock, minimum ratios of operating income to interest and fixed charges, and a maximum ratio of total liabilities to net worth as well as certain restrictions on start-up expenditures relating to Unistar and the NIL. Interest rates are also subject to adjustment based upon certain financial ratios. During 1995, the Company was in compliance with all such financial covenants. The Credit Facility is secured by substantially all of the assets of the Company. Refer to Note D of the Notes to Consolidated Financial Statements. As of February 16, 1996, there were $13.4 million of direct borrowings and $14.9 million of letters of credit outstanding and $15.2 million of additional borrowings available under the Credit Facility. Required principal payments for debt in 1996 are $0.9 million. The Company believes that borrowings under the Credit Facility and cash flow from operations will be sufficient to meet working capital and other requirements for 1996. SELECTED FINANCIAL DATA The following is selected financial data for EXECUTONE for the five years ended December 31, 1995. (In thousands, except for per share amounts)
Years Ended December 31, ------------------------------------------------------------------ 1995 1994 (1) 1993 (1) 1992 (1) 1991 (1) ------------------------------------------------------------------ Revenues $296,393 $291,969 $271,765 $253,024 $243,616 ======== ======== ======== ======== ======== Income (Loss) Before Income Taxes From Continuing Operations $(39,221) $ 10,041 $ 7.580 $ 4,320 $ 2,327 ======== ======== ======== ======== ======== Income (Loss) From Continuing Operations $(36,934) $ 6,734 $ 4,903 $ 2,222 $ 1,146 Income (Loss) From Discontinued Operations, Net of Taxes --- 757 298 (157) (129) Extraordinary Item - Gain on Extinguishment of Debt, Net of Taxes (2) --- --- --- 1,267 --- -------- -------- -------- -------- -------- Net Income (Loss) $(36,934) $ 7,491 $ 5,201 $ 3,332 $ 1,017 ======== ======== ======== ======== ======== EARNINGS (LOSS) PER SHARE: Continuing Operations$ (0.79) $ 0.14 $ 0.10 $ 0.05 $ 0.03 Discontinued Operations --- 0.02 0.01 --- --- Extraordinary Item --- --- --- 0.03 --- -------- -------- -------- -------- -------- Net Income (Loss) $ (0.79) $ 0.16 $ 0.11 $ 0.08 $ 0.03 ======== ======== ======== ======== ======== Total Assets $167,844 $189,481 $175,555 $179,294 $177,602 ======== ======== ======== ======== ======== Long-Term Debt (3) $ 29,829 $ 24,698 $ 32,279 $ 43,752 $ 56,271 ======== ======== ======== ======== ======== Cash Dividends Declared Per Share (4) $ --- $ --- $ --- $ --- $ --- ======== ======== ======== ======== ========
(1) Discontinued operations are presented for VCS which was sold in March 1994. Refer to Note L of the Notes to Consolidated Financial Statements. (2) The extraordinary item relates to the 1992 exchange of debentures for Preferred Stock and Common Stock Purchase Warrants. Refer to Note D (b) of the Notes to Consolidated Financial Statements. (3) Includes capitalized leases. (4) The Company has not declared or paid any cash dividends on its Common Stock. Refer to "Stock Data". EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except for per share amounts)
Years Ended December 31, 1995 1994 1993 ---- ---- ---- REVENUES: Product $138,752 $137,752 $134,209 Base 157,641 154,217 137,556 --------- --------- --------- 296,393 291,969 271,765 COST OF REVENUES 173,536 169,497 160,745 --------- ---------- ---------- Gross Profit 122,857 122,472 111,020 --------- ---------- ---------- OPERATING EXPENSES: Product development and engineering 14,703 12,222 9,852 Selling, general and administrative 100,520 97,755 90,122 Provision for restructuring and unusual items (Note B) 44,042 --- --- --------- ---------- ---------- 159,265 109,977 99,974 --------- ---------- ---------- OPERATING INCOME (LOSS) (36,408) 12,495 11,046 INTEREST AND OTHER EXPENSES, NET 1,791 2,454 3,466 ACQUISITION COSTS (Note L) 1,022 --- --- --------- ---------- ---------- INCOME (LOSS) BEFORE INCOME TAXES FROM CONTINUING OPERATIONS (39,221) 10,041 7,580 PROVISION (BENEFIT) FOR INCOME TAXES: Cash 350 400 335 Noncash (Note E) (2,637) 2,907 2,342 --------- ---------- ---------- (2,287) 3,307 2,677 --------- ---------- ---------- INCOME (LOSS) FROM CONTINUING OPERATIONS (36,934) 6,734 4,903 Income from discontinued operations (net of income tax provision of $102 and $158 ) --- 153 298 Gain on disposal of discontinued operations (net of income tax provision of $403) --- 604 --- --------- ---------- ---------- NET INCOME (LOSS) $ (36,934) $ 7,491 $ 5,201 ========= ========== ========== EARNINGS (LOSS) PER SHARE: CONTINUING OPERATIONS $ (0.79) $ 0.14 $ 0.10 DISCONTINUED OPERATIONS --- 0.02 0.01 --------- ---------- ---------- NET INCOME (LOSS) $ (0.79) $ 0.16 $ 0.11 ======== ========== ========== WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK AND EQUIVALENTS OUTSTANDING 46,919 47,697 48,283 =========== =========== ===========
The accompanying notes are an integral part of these consolidated statements. EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) Years Ended December 31, 1995 1994 1993 ---- ----- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Income (loss) from continuing operations $(36,934) $ 6,734 $ 4,903 Adjustments to reconcile net income (loss) to net cash (used) provided by operating activities: Depreciation and amortization 6,093 7,463 7,469 Deferred income tax provision (benefit) (2,637) 2,907 2,342 Provision for restructuring and unusual items (Note B) 44,042 --- --- Provision for losses on accounts receivable 1,440 893 725 Gains on sales of two direct sales offices (1,087) --- --- Other, net (521) 1,251 270 Changes in working capital items: Accounts receivable (4,205) (9,346) (4,337) Inventories (3,121) (13,049) 4,073 Accounts payable and accruals (9,131) 10,497 2,732 Other working capital items, net 2,177 (552) (1,440) -------- --------- -------- NET CASH (USED) PROVIDED BY CONTINUING OPERATIONS (3,884) 6,798 16,737 -------- --------- -------- Cash flows from discontinued operations --- (449) (209) -------- --------- -------- NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES (3,884) 6,349 16,528 -------- --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment, net (3,457) (6,091) (2,119) Dispositions (acquisitions) of direct sales offices 125 (1,298) (750) Proceeds from sale of VCS 1,200 9,700 --- Other, net 822 (436) 8 -------- --------- -------- NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES (1,310) 1,875 (2,861) -------- --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings (repayments) under revolving credit facility 4,478 (4,199) (3,524) Repayments of term note under credit facility --- (3,750) (1,250) Repayments of GTE/Contel promissory note --- --- (4,000) Repayments of other long-term debt (622) (1,781) (2,355) Repurchase of stock (810) (8,450) (3,100) Proceeds from issuance of stock 1,641 10,399 564 Other borrowings 750 --- --- -------- --------- -------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 5,437 (7,781) (13,665) -------- --------- -------- INCREASE IN CASH AND CASH EQUIVALENTS 243 443 2 CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 7,849 7,406 7,404 -------- --------- -------- CASH AND CASH EQUIVALENTS - END OF YEAR $ 8,092 $ 7,849 $ 7,406 ======== ========= ========
The accompanying notes are an integral part of these consolidated statements. EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(In thousands, except for share amounts) December 31, December 31, 1995 1994 ----------- ----------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 8,092 $ 7,849 Accounts receivable, net of allowance of $1,715 and $1,335 48,531 46,675 Inventories (Note B) 32,765 40,300 Prepaid expenses and other current assets 6,584 7,358 -------- -------- Total Current Assets 95,972 102,182 PROPERTY AND EQUIPMENT, net 18,462 18,967 INTANGIBLE ASSETS, net (Notes B and L) 20,022 38,415 DEFERRED TAXES 29,616 26,979 OTHER ASSETS 3,772 2,938 -------- -------- $167,844 $189,481 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt $ 932 $ 777 Accounts payable 30,676 39,369 Accrued payroll and related costs 6,870 7,026 Accrued liabilities 11,851 9,192 Deferred revenue and customer deposits 19,781 18,757 -------- -------- Total Current Liabilities 70,110 75,121 LONG-TERM DEBT 29,829 24,698 LONG-TERM DEFERRED REVENUE 2,805 2,354 -------- -------- Total Liabilities 102,744 102,173 -------- -------- STOCKHOLDERS' EQUITY: Common stock: $.01 par value; 80,000,000 shares authorized; 51,658,492 and 45,647,894 issued and outstanding 517 456 Preferred stock: $.01 par value; Cumulative Convertible Preferred Stock (Series A), 250,000 shares authorized, issued and outstanding; Cumulative Contingently Convertible Preferred Stock (Series B), 100,000 shares authorized, issued and outstanding 7,300 --- Additional paid-in capital 79,668 72,303 Retained earnings (deficit) (since July 1, 1988) (22,385) 14,549 -------- -------- Total Stockholders' Equity 65,100 87,308 -------- -------- $167,844 $189,481 ======== ========
The accompanying notes are an integral part of these consolidated balance sheets. EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock Preferred Stock Additiona Retained Total (In thousands, except for ------------- --------------- Paid-In Earnings Stockholders' share amounts) Shares Amount Shares Amount Capital (Deficit) Equity ------ ------ ------ ------ ------- ------- -------- Balance at December 31, 1992 30,873,495 $309 674,865 $6,149 $60,721 $1,857 $69,036 Proceeds from issuances of stock from employee stock plans 1,307,805 13 1,247 1,260 Proceeds from common stock purchase warrants exercised through bond conversion 1,418,300 14 971 985 Conversion of note payable into preferred stock 200,000 1,909 365 2,274 Conversion of preferred stock into common stock 8,748,650 88 (874,865) (8,058) 7,970 --- Repurchase of stock (1,142,752) (12) (3,088) (3,100) Amortization of deferred compensation 89 89 Net income 5,201 5,201 ------------------------------------------------------------------------ Balance at December 31, 1993 41,205,498 $412 --- $ --- $68,275 $7,058 $75,745 Proceeds from issuances of stock from employee stock plans 5,716,651 57 11,303 11,360 Proceeds from common stock purchase warrants exercised through bond conversion 1,507,000 15 1,056 1,071 Repurchase of stock (2,781,255) (28) (8,422) (8,450) Amortization of deferred compensation 91 91 Net income 7,491 7,491 ------------------------------------------------------------------------ Balance at December 31, 1994 45,647,894 $456 --- $ --- $72,303 $14,549 $87,308 Proceeds from issuances of stock from employee stock plans 1,934,492 19 1,613 1,632 Warrants exercised for common stock 363,549 4 (4) --- Common and preferred stock issued to acquire Unistar (Note L) 3,700,000 37 350,000 7,300 5,374 12,711 Common stock issued for investment in DCC (Note G) 353,118 4 1,100 1,104 Repurchase of stock (340,561) (3) (807) (810) Amortization of deferred compensation 89 89 Net loss (36,934) (36,934) ------------------------------------------------------------------------ Balance at December 31, 1995 51,658,492 $517 350,000 $7,300 $79,668 $(22,385) $65,100 ========================================================================
The accompanying notes are an integral part of these consolidated statements. EXECUTONE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - NATURE OF THE BUSINESS AND FORMATION OF THE COMPANY EXECUTONE Information Systems, Inc. (the "Company") designs, manufactures, sells, installs, supports and services voice processing systems and provides cost-effective long-distance telephone service and videoconferencing services. The Company is also a leading supplier of specialized hospital communications equipment. 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 and independent sales and service offices. The Company's products are manufactured primarily in the United States, Hong Kong, China and the Dominican Republic. The Company was formed in July 1988 through the merger of ISOETEC Communications, Inc. ("ISOETEC") with Vodavi Technology Corporation ("Vodavi"). The merger of ISOETEC into Vodavi was accounted for under the purchase method of accounting and Vodavi was deemed to have undergone a quasi-reorganization for accounting purposes. As of July 1988, Vodavi's accumulated deficit of approximately $49.7 million was eliminated. Executone, Inc. was acquired in 1988 from Contel Corporation ("Contel") for promissory notes and cash. NOTE B - PROVISION FOR RESTRUCTURING In July 1995, the Company reorganized its business into five divisions: Computer Telephony, Healthcare Communications Systems, Call Center Management, Videoconferencing Products, and Network Services and changed its business strategy in the Computer Telephony division. The current strategic focus is on software applications in the communications market. The business that was acquired in 1988 was a telephone equipment hardware company focused on customers with small systems, with an emphasis on selling additional hardware and service to generate add-on revenue. Under the current strategy, the business acquired in 1988 is being de-emphasized. The Company adopted FAS No. 121, "Accounting for the Impairment of Long-Lived Assets," which was issued in March 1995, requiring impairment to be measured by projecting the lowest level of identifiable future cash flows. The Company concluded there was an impairment. As a result, the Company recorded a $44.0 million provision for restructuring consisting of a $33.5 million goodwill impairment, an $8.8 million writedown of inventory, primarily service stock relating to the impaired assets and other non-recurring inventory adjustments, $0.9 million related to the shutdown of the Company's Scottsdale, Arizona facility and $0.8 million of other unusual items. In accordance with the provisions of FAS No. 121, the Company prepared projections of future operating cash flows relating to the telephony business acquired in 1988 based upon the Company's new strategic direction. These projections indicated that this business would not generate sufficient operating cash flows to realize goodwill and the related service stock. The amount of impairment of the telephony goodwill was $33.5 million as of June 30, 1995. The write-off of inventory, primarily service stock, consisted of $1.3 million of raw materials inventory and $7.5 million of finished goods inventory. These amounts were determined based upon a review of specific inventory parts along with current and projected usage, incorporating the strategic direction of the Company. The Company will continue to maintain adequate levels of service stock for the telephony hardware customer base which will be amortized over the estimated product/service life of the related systems. NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation. The consolidated financial statements include the accounts of the Company and its subsidiaries. In consolidating the accompanying financial statements, all significant intercompany transactions have been eliminated. Investments in affiliated companies owned more than 20%, but not in excess of 50%, are recorded on the equity method. Certain prior year amounts have been reclassified to conform to the current year's presentation. Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Revenue Recognition. The Company recognizes revenue on equipment sales and software licenses to independent sales and service offices when shipped. Revenue from equipment, software and installation contracts with end-users is recognized when the contract or contract phase for major installations is substantially completed. Revenue derived from the sale of service contracts is amortized ratably over the service contract period on a straight-line basis. Earnings Per Share. Earnings per share is based on the weighted average number of shares of common stock and dilutive common stock equivalents (which include stock options and warrants) outstanding during the period. Common stock equivalents and the convertible debentures which are antidilutive have been excluded from the computations. Cash Equivalents. Cash equivalents include short-term investments with original maturities of three months or less. Inventories. Inventories are stated at the lower of first-in, first-out ("FIFO") cost or market and consist of the following at December 31, 1995 and 1994:
(Amounts in thousands) 1995 1994 ---------------------- ---- ---- Raw Materials $ 4,783 $ 3,082 Finished Goods 27,982 37,218 ------- ------- $32,765 $40,300 ======= =======
Finished goods include service stock which is amortized over the estimated product/service life of the related systems. Intangible Assets. Intangible assets represent the excess of the purchase price of the predecessor companies acquired over the fair value of the net tangible assets acquired. Effective April 1, 1995, the carrying value of intangibles is evaluated periodically in accordance with the provisions of FAS No. 121 by projecting the lowest level of future undiscounted net cash flows of the underlying businesses. If the sum of such cash flows is less than the book value of the long-lived assets, including intangibles, projected future cash flows are discounted and intangibles are adjusted accordingly. Prior to April 1, 1995, the carrying value of intangibles was evaluated in accordance with the provisions of APB 17, and was based upon aggregate cash flows of the business as a whole. Amortization is provided over periods ranging from 10 to 40 years. Intangible assets at December 31, 1995 and 1994 are net of accumulated amortization of $0.8 million and $13.6 million, respectively. Property and Equipment. Property and equipment at December 31, 1995 and 1994 consist of the following:
(Amounts in thousands) 1995 1994 ---------------------- ---- ---- Land and building $ 1,364 $ 1,961 Furniture and fixtures 7,052 7,626 Leasehold improvements 2,828 2,620 Machinery and equipment 38,093 34,269 --------- --------- 49,337 46,476 Accumulated depreciation (30,875) (27,509) --------- --------- Property and equipment, net $ 18,462 $ 18,967 ========= =========
Depreciation is provided on a straight-line basis over the estimated economic useful lives of property and equipment which range from three to ten years for equipment and thirty years for a building. Amortization, principally of leasehold improvements, is provided over the life of the respective lease terms which range from three to ten years. Income Taxes. The Company utilizes the liability method of accounting for income taxes as set forth in FAS No. 109, "Accounting for Income Taxes." Under the liability method, deferred taxes are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Product Development and Engineering. Product development and engineering costs are expensed as incurred. Fair Value of Financial Instruments. The fair value of the Company's Convertible Subordinated Debentures at December 31, 1995 is approximately $14.3 million, based upon market quotes. The carrying value of all other financial instruments included in the accompanying financial statements approximate fair value as of December 31, 1995 based upon current interest rates. Noncash Investing and Financing Activities. The following noncash investing and financing activities took place during the three years ended December 31, 1995:
(Amounts in thousands) 1995 1994 1993 ---------------------- ---- ---- ---- Common and Preferred Stock issued to acquire Unistar (Note L) $12,711 $ --- $ --- Notes receivable for disposition of direct sales offices (Note L) 1,911 --- --- Equity investment in DCC (Note G) 1,505 --- --- Capital leases for equipment acquisitions 437 686 1,791 Note receivable for disposition of VCS division (Note L) --- 1,200 --- Common stock purchase warrants exercised through bond conversion --- 1,071 985 Utilization of credits under a special stock option incentive plan --- 737 696 Conversion of Preferred Stock into Common Stock --- --- 8,058 Conversion of Note Payable into Preferred Stock --- --- 2,274
Refer to the consolidated statements of cash flows for information on cash-related operating, investing and financing activities. NOTE D - DEBT The Company's debt is summarized below at December 31, 1995 and 1994:
(Amounts in thousands) 1995 1994 - ---------------------- ---- ---- Borrowings Under Revolving Credit Facility (a) $15,445 $10,967 Convertible Subordinated Debentures (b) 12,098 11,855 Capital Lease Obligations (c) 2,412 2,408 Other 806 245 ------- ------- Total Debt 30,761 25,475 Less: Current Portion of Long-Term Debt 932 777 ------- ------- Total Long-Term Debt $29,829 $24,698 ======= =======
(a) The Company's Credit Facility was amended in December 1995. The amended $45 million Credit Facility consists of a revolving line of credit providing for direct borrowings and up to $15 million in letters of credit. Direct borrowings and letter of credit advances are made available pursuant to a formula based on the levels of eligible accounts receivable and inventories. To minimize interest on the revolving line of credit, the Company has the option to borrow money based upon an adjusted prime borrowing rate (9.0% at December 31, 1995) or at an adjusted eurodollar rate (8.2% at December 31, 1995). The Company had $11.0 million and $8.0 million outstanding subject to the adjusted eurodollar rate at December 31, 1995 and 1994, respectively, with the balance at the adjusted prime borrowing rate. Prior to August 1994, interest on amounts outstanding under the revolving line of credit were based upon the lender's prime rate. The revolving line of credit expires in August 1999. Approximately $14.7 million was available at December 31, 1995 under the revolving line of credit, including approximately $14.9 million which was committed to cover outstanding letters of credit. The unused portion of the line of credit has a commitment fee of 0.375%. The Company's average outstanding indebtedness under the revolving line of credit for the years ended December 31, 1995 and 1994 was $17.4 million and $13.1 million, respectively, and the average interest rate on such indebtedness was 8.5% and 7.1%, respectively. The Credit Facility agreement contains certain restrictive covenants which include, among other things, a prohibition on the declaration or payment of any cash dividends on common stock, minimum ratios of operating income to interest and fixed charges, and a maximum ratio of total liabilities to net worth as well as certain restrictions on start-up expenditures relating to Unistar and the NIL (Refer to Note L). Interest rates are also subject to adjustment based upon certain financial ratios. The Company was in compliance with all covenants in 1995. The Credit Facility is secured by substantially all of the assets of the Company. (b) The Company's Convertible Subordinated Debentures (the "Debentures"), issued in April 1986, are due March 15, 2011 and bear interest at 7 1/2%, payable March 15th and September 15th. The face value of the outstanding Debentures at December 31, 1995 was $16.5 million. The face value of the Debentures was adjusted to fair value in connection with the Company's 1988 quasi-reorganization. The Debentures are convertible at the option of the holder into Common Stock of the Company at any time on or before March 15, 2011, unless previously redeemed, at a conversion price of $10.625 per share, subject to adjustment in certain events. Subject to certain restrictions, the Debentures are redeemable in whole or in part, at the option of the Company, at par in 1996. The Debentures are also subject to annual sinking fund payments of $1.5 million beginning March 15, 1997. In January 1992, $15 million principal amount of Debentures with a book value of $10.1 million was exchanged for 674,865 shares of Convertible Preferred Stock and 2,999,400 Common Stock Purchase Warrants. Debentures converted in the debt-for-equity exchange and in connection with Warrant exercises were delivered in lieu of cash in satisfying sinking fund requirements. Thus, no cash sinking fund payment will be due until March 2008. (c) The Company has entered into capital lease arrangements for office furniture and data processing and test equipment with a net book value of approximately $2.3 million and $2.4 million at December 31, 1995 and 1994, respectively. Such leases have been capitalized using implicit interest rates which range from 8% to 14%. The following is a schedule of future maturities of long-term debt at December 31, 1995:
Years Ending December 31: (Amounts in thousands) ------------------------ --------------------- 1996 $ 932 1997 842 1998 640 1999 15,742 2000 155 Thereafter 12,450 ------- $30,761 =======
NOTE E - INCOME TAXES The components of the provision (benefit) for income taxes applicable to income (loss) from continuing operations for the three years ended December 31, 1995 are as follows:
(Amounts in thousands) 1995 1994 1993 ---------------------- ---- ---- ---- Current - Federal $ 150 $ 200 $ 145 - State 200 200 190 ------- ------ ------ 350 400 335 ------- ------ ------ Deferred - Federal (1,922) 2,363 1,842 - State (715) 544 500 ------- ------ ------ (2,637) 2,907 2,342 ------- ------ ------ $(2,287) $3,307 $2,677 ======== ====== ======
For the years ended December 31, 1994 and 1993, the Company recorded a deferred income tax provision of $505,000 and $158,000, respectively, related to discontinued operations. A reconciliation of the statutory federal income tax provision (benefit) to the reported income tax provision (benefit) on income (loss) from continuing operations for the three years ended December 31, 1995 is as follows:
(Amounts in thousands) 1995 1994 1993 - ---------------------- ---- ---- ---- Statutory income tax provision (benefit) $(13,335) $3,415 $2,577 State income taxes, net of federal income tax benefit (338) 676 526 Impairment of intangible assets 11,392 --- --- Amortization of intangible assets 171 457 476 Adjustment of valuation allowance --- (1,252) (800) Research and development credit (148) (250) (196) Other (29) 261 94 -------- ------ ------ Reported income tax provision (benefit) $ (2,287) $3,307 $2,677 ======== ====== ======
The components of and changes in the net deferred tax asset are as follows:
Deferred December 31, (Expense) December 31, (Amounts in thousands) 1994 Benefit 1995 - ---------------------- ----------- ---------- --------- Net operating loss and tax credit carryforwards $29,175 $(1,631) $27,544 Inventory reserves 5,405 2,800 8,205 Accrued liabilities and restructuring costs 1,446 (864) 582 Debenture revaluation (1,715) 90 (1,625) Other (2,540) 2,194 (346) ------- ------- ------- 31,771 2,589 34,360 Valuation allowance (4,792) 48 (4,744) ------- ------- ------- Deferred tax asset $26,979 $ 2,637 $29,616 ======= ====== =======
The deferred tax asset represents the benefits expected to be realized from the utilization of pre- and post-acquisition tax benefit carryforwards, which include net operating loss carryforwards ("NOLs"), tax credit carryforwards and the excess of tax bases over fair value of the net assets of the Company. The utilization of these tax benefits for financial reporting purposes will not be reflected in the statement of operations, but will be reflected as a reduction of the deferred tax asset. In order to fully realize the remaining deferred tax asset of $29.6 million as of December 31, 1995, the Company will need to generate future taxable income of approximately $80 million prior to the expiration of the NOLs and tax credit carryforwards. Although the Company believes that it is more likely than not that the deferred tax asset will be fully realized based on current projections of future pre-tax income, a valuation allowance has been provided for a portion of the deferred tax asset. There was no significant adjustment to the valuation allowance in 1995. During 1994, the Company adjusted its valuation allowance by $6.5 million, $5.2 million of which was a reduction of goodwill as it related to pre-acquisition tax benefits and $1.3 million of which reduced the 1994 provision for income taxes. During 1993, the Company adjusted its valuation allowance by $4.8 million, $4.0 million of which was a reduction of goodwill as it related to pre-acquisition tax benefits and $0.8 million of which reduced the 1993 provision for income taxes. The basis for the adjustments in 1994 and 1993 was a significant increase in pre-tax income from $4.3 million in 1992 to $10.0 million in 1994. Accordingly, historical earnings supported the realization of the larger deferred tax asset. The amount of the deferred tax asset considered realizable, however, could be reduced if estimates of future taxable income during the carryforward period are reduced. As of December 31, 1995, the Company has NOLs and tax credit carryforwards (subject to review by the Internal Revenue Service) available to offset future income for tax return purposes of approximately $69.3 million and $3.2 million, respectively. A portion of the NOLs and tax credit carryforwards were generated prior to the formation of the Company and their utilization is subject to certain limitations imposed by the Internal Revenue Code. The NOLs expire as follows:
(Amounts in millions) 2002 2003 2004 2005 2006 - --------------------- ---- ---- ---- ---- ---- $0.5 $20.8 $26.0 $9.7 $12.3
A reconciliation of the Company's income (loss) before taxes for financial reporting purposes to taxable income for the three years ended December 31, 1995 is as follows:
(Amounts in thousands) 1995 1994 1993 - ---------------------- ---- ---- ---- Income (loss) before taxes from continuing operations $(39,221) $10,041 $ 7,580 Discontinued operations --- 1,262 456 -------- ------- ------- Income (loss) before taxes for financial reporting purposes (39,221) 11,303 8,036 Differences between income (loss) before taxes for financial reporting purposes and taxable income: Permanent differences 28,587 1,070 1,570 -------- ------- ------- Book taxable income (loss) (10,634) 12,373 9,606 Net changes in temporary differences 11,113 (5,016) (7,830) -------- ------- ------- Taxable income $ 479 $ 7,357 $ 1,776 ======== ======= =======
The permanent differences relate to the write-off (in 1995) and amortization of goodwill, which are not deductible. Changes in temporary differences principally relate to the impairment in service stock inventory (in 1995), inventory reserves and other costs accrued for book purposes, but not deducted for tax purposes until subsequently paid. For the years ended December 31, 1995, 1994 and 1993, the Company made cash payments of approximately $214,000, $485,000 and $96,000, respectively, for income taxes. NOTE F - COMMITMENTS AND CONTINGENCIES Operating Leases. The Company conducts its business operations in leased premises under noncancellable operating lease agreements expiring at various dates through 2005. Rental expense under operating leases amounted to $9.6 million, $10.1 million and $9.7 million for the years ended December 31, 1995, 1994 and 1993, respectively. The following represents the future minimum rental payments due under noncancellable operating leases that have initial or remaining lease terms in excess of one year as of December 31, 1995:
Years Ending December 31, (Amounts in thousands) ------------------------- --------------------- 1996 $ 8,761 1997 7,724 1998 7,025 1999 5,435 2000 3,941 Thereafter 3,374 ------- $36,260 Litigation. The Company has various lawsuits, claims and contingent liabilities arising from the conduct of business; however, in the opinion of management, they are not expected to have a material adverse effect on the results of operations, cash flow or financial position of the Company. NOTE G - RELATED PARTY TRANSACTIONS During 1995, the Company acquired 43% of the common stock and certain other assets of Dialogic Communications Corporation ("DCC"), a vendor which supplies the Company with certain call center products, in exchange for 353,118 shares of the Company's common stock and $100,000 cash. This investment is included in Other Assets and the related equity income is included in Interest and Other Expenses, Net. NOTE H - STOCK OPTIONS AND WARRANTS Information relative to the Company's stock option plans at December 31, 1995 is as follows:
Shares Per Share Range -------- --------------- Total shares originally authorized 11,290,000 Options exercised/expired since inception of plans (7,074,104) ---------- Remaining shares reserved for issuance 4,215,896 Options outstanding 2,083,560 $0.69-3.25 ---------- Shares available for granting of future options 2,132,336 ========== Options exercisable 1,124,469 $0.69-3.19 Options exercised - Year ended December 31, 1995 1,970,760 $0.63-1.91 Year ended December 31, 1994 1,979,340 $0.63-2.88 Year ended December 31, 1993 1,144,395 $0.63-1.25
Option prices under the Company's plans are equal to the market value of the Common Stock on the dates the options are granted. The Company has non-plan options outstanding at December 31, 1995 for 357,030 shares at prices ranging from $1.13 to $20.43 per share. These include options for 300,000 shares granted to an officer by a predecessor company at a price of $1.13 per share. Deferred compensation of $0.9 million was recorded for the excess of the fair value over the exercise price at the date of grant and is being amortized over 10 years ending in 1997. At December 31, 1995, all of the non-plan options were exercisable. These options expire at various dates through November 2000. Certain options include registration rights for the shares issuable thereunder. As of December 31, 1995, the Company has warrants outstanding which permit the holder to purchase a total of 56,250 shares of Common Stock at prices ranging from $1.06 to $1.25 per share, expiring through September 1997. At December 31, 1995, 39,584 warrants were exercisable. Certain options and warrants have been exercised using pyramiding during the years ended December 31, 1995, 1994 and 1993. In October 1995, the FASB issued Statement No. 123, "Accounting for Stock-Based Compensation." The Company will adopt the new pronouncement in fiscal year 1996 and has yet to decide whether it will record compensation cost or provide pro forma disclosure. NOTE I - EMPLOYEE STOCK PURCHASE PLAN A total of 2,750,000 shares of Common Stock are authorized for issuance under the Company's employee stock purchase plan. The plan permits eligible employees to purchase up to 1,000 shares of Common Stock at the lower of 85% of the fair market value of the Common Stock at the beginning or at the end of each six-month offering period. Pursuant to such plan, 229,636, 209,512 and 168,097 shares were sold to employees during the three years ended December 31, 1995, 1994 and 1993, respectively. In 1994, the Company's shareholders adopted the 1994 Executive Stock Incentive Plan, which enabled officers and other key employees to purchase a total of up to 3,000,000 shares of the Company's Common Stock. During 1995 and 1994, participants purchased 140,000 and 2,745,000 shares of Common Stock, respectively, at fair market value, which were financed through individual bank borrowings at market interest rates by each participant, payable over five years. The Company lends the employee 85% of the interest due to the bank, with $759,000 of such loans outstanding as of December 31, 1995. There were no amounts outstanding as of December 31, 1994. The Company guarantees the individual borrowings under a $9.4 million letter of credit which has a minimal impact on the Company's borrowing capability. Employee loans guaranteed by the Company with letters of credit as of December 31, 1995 and 1994 were $9.2 million and $8.7 million, respectively. These shares are held by the Company as security for the borrowings under a loan and pledge agreement. Sales of such shares by participants are subject to certain restrictions, and, generally, they may not be sold for five years. NOTE J - SAVINGS AND POST-RETIREMENT BENEFIT PLANS The Company has a 401(k) Savings Plan under which it matches employee contributions subject to the discretion of the Company's Board of Directors. The Company's matching contribution, consisting of shares of its Common Stock purchased in the open market, is equal to 25% of each employee's contribution, up to a maximum of $660 per employee. The expense for the matching contribution for the years ended December 31, 1995, 1994 and 1993 was approximately $687,000, $500,000 and $372,000, respectively. The Company has an obligation remaining from the acquisition of Executone, Inc. to provide post-retirement health and life insurance benefits for a group of fewer than 75 former Executone, Inc. employees, including seven current employees of the Company. The Company does not provide post-retirement health or life insurance benefits to any other employees. Effective January 1, 1993, the Company adopted FAS No. 106, a standard on accounting for post-retirement benefits other than pensions. This standard requires that the expected cost of these benefits must be charged to expense during the years that employees render services. The Company adopted the new standard prospectively and is amortizing the transition obligation over a 20-year period. Post-retirement benefit expense for the three years ended December 31, 1995 consists of the following:
(Amounts in thousands) 1995 1994 1993 - ---------------------- ---- ---- ---- Interest on accumulated benefit obligation $219 $217 $190 Amortization of transition obligation 116 116 116 Amortization of unrecognized actuarial loss 20 23 --- ---- ---- ---- $355 $356 $306 ==== ==== ====
The status of the plan at December 31, 1995 and 1994 is as follows:
(Amounts in thousands) 1995 1994 - ---------------------- ---- ---- Accumulated post-retirement benefit obligation ("APBO"): Retirees $2,779 $2,707 Active Employees 330 321 ------ ------ 3,109 3,028 Unamortized transition obligation (1,977) (2,093) Unrecognized net loss (486) (559) ------ ------ Accrued liability $ 646 $ 376 ====== ======
In determining the APBO as of December 31, 1995 and 1994, the weighted average discount rate used was 7%. The Company used a healthcare cost trend rate of approximately 11%, decreasing through 2006 and leveling off at 6% thereafter. A 1% increase in the healthcare trend rate would increase the APBO at December 31, 1995 by approximately 2% and increase the interest cost component of the post-retirement benefit expense for 1995 by less than $10,000. NOTE K - INTEREST AND OTHER EXPENSES, NET Interest and other expenses, net consists of the following for the three years ended December 31, 1995:
(Amounts in thousands) 1995 1994 1993 - ---------------------- ---- ---- ---- Interest expense $3,920 $3,089 $3,556 Interest income (285) (287) (252) Equity in earnings of DCC (Note G) (401) --- --- Gains on sales of direct sales offices (1,213) --- --- Other, net (230) (348) 162 ------ ------ ------ $1,791 $2,454 $3,466 ====== ====== ======
For the years ended December 31, 1995, 1994 and 1993, the Company made cash payments of approximately $3.6 million, $2.8 million and $4.2 million, respectively, for interest expense on indebtedness. NOTE L - ACQUISITIONS/DISPOSITIONS During the fourth quarter of 1995, the Company sold its customer bases in Wisconsin and Iowa and the net assets of the related direct sales offices for a total of $2.1 million, consisting of $125,000 cash, a $1.8 million note, the proceeds of which were received in February 1996 and a $150,000 note due in installments by November 2001. These sales generated a gain of approximately $1.2 million, which is included in Interest and Other Expenses, Net for the year ended December 31, 1995. On December 19, 1995, the Company acquired 100% of the common stock of Unistar Gaming Corporation ("Unistar") for 3.7 million shares of the Company's common stock and 350,000 shares of newly issued preferred stock. Unistar, privately-held prior to the acquisition, has an exclusive five-year contract to design, develop, finance, and manage the National Indian Lottery ("NIL"). The NIL will be a national telephone lottery authorized by federal law and a compact between the State of Idaho and the Coeur d'Alene Indian Tribe of Idaho ("CDA"). 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. The purchase price was approximately $12.7 million. The excess of the purchase price over the value of the net liabilities assumed has been allocated to the management agreement with the CDA and will be amortized over the five-year term of the contract commencing with the first significant lottery revenues. The preferred stock consists of 250,000 shares of Cumulative Convertible Preferred Stock, Series A ("Series A Preferred Stock") and 100,000 shares of Cumulative Contingently Convertible Preferred Stock, Series B ("Series B Preferred Stock"). The Series A Preferred Stock has voting rights equal to one share of common stock and will earn dividends equal to 18.5% of the consolidated retained earnings of Unistar as of the end of a fiscal period, less any dividends paid to the holders of the Series A Preferred Stock prior to such date. The Series B Preferred Stock has voting rights equal to one share of common stock and will earn dividends equal to 31.5% of the consolidated retained earnings of Unistar as of the end of a fiscal period, less any dividends paid to the holders of the Series B Preferred Stock prior to such date. All dividends on Preferred Stock are payable (i) when and as declared by the Board of Directors, (ii) upon conversion or redemption of the Series A and Series B Preferred Stock or (iii) upon liquidation. The Series A and Series B Preferred Stock is redeemable for a total of 13.3 million shares of common stock (Series A Preferred Stock for 4.925 million shares and Series B Preferred Stock for 8.375 million shares) at the Company's option. In the event that Unistar meets certain revenue and profit parameters, the Series A Preferred Stock is convertible for up to 4.925 million shares of common stock and the Series B Preferred Stock is contingently convertible for up to 8.375 million shares of common stock (a total of an additional 13.3 million shares of common stock). Shareholder approval is required before any of the Series B Preferred Stock can be converted or redeemed. Liquidation preferences for all Series A and Series B preferred shares total $7.3 million as of December 31, 1995. As of December 31, 1995, no dividends have accrued to the preferred stockholders. The preferred stock had no impact on earnings per share in 1995. In an attempt to block the NIL, certain states filed Section 1084 letters to prevent the long-distance carriers from providing telephone service to the NIL. The CDA initiated legal action to compel the long-distance carriers to provide telephone service to the NIL. The CDA's position is that the lottery is authorized by the Indian Gaming Regulatory Act ("IGRA") passed by Congress in 1988, that the 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 NIL was ruled lawful by the CDA Tribal Court. The CDA Tribal Court found that all requirements of the IGRA have been satisfied and the Section 1084 letters issued by certain state attorneys general in an effort to interfere with the lawful operation of the NIL are invalid. In addition, the Court found that the long-distance carriers are obligated to provide the service requested in the action. The Company expects this ruling will be appealed but believes the CDA's position will be upheld. Other than legal costs related to an appeal of the CDA Tribal Court ruling or other actions by the states, if any, the Company estimates that the additional costs to become operational may run between $5-10 million. The Company believes it will be able to obtain additional financing for these costs. The Company believes there is a national market for the NIL based upon research into the experience of other national lotteries and the growth of the overall lottery market. However, there is no assurance that there will be acceptance of a telephone lottery. During the first quarter of 1995, the Company was involved in extensive negotiations to acquire the Dictaphone division of Pitney Bowes. In April 1995, the acquisition was awarded to another bidder. The Company incurred approximately $1 million in fees and expenses related to the attempted acquisition which were recognized during the second and third quarters of 1995. In 1990, the Company acquired all the outstanding shares of Isoetec Texas, Inc., an independent distributor of the Company's products. The transaction has been accounted for by the purchase method. The purchase price was based upon a multiple of 1989 pre-tax earnings of Isoetec Texas, Inc., subject to adjustment. The purchase price originally recorded was based on cash payments to the former owners of approximately $900,000, $250,000 of notes, 325,000 shares of common stock and liabilities assumed of approximately $900,000. The Company brought an action against the former owners of Isoetec Texas, Inc. alleging breach of contract and fraud with respect to the calculation of 1989 pre-tax earnings and the purchase price. In November 1991, pursuant to the purchase contract, an arbitrator ruled that 1989 pre-tax earnings should be reduced by an amount that resulted in a reduction of the purchase price by approximately $2 million. This reduction was assumed in the original purchase price calculation and, as such, did not result in an adjustment to the recorded purchase price. However, the arbitrator also awarded damages of approximately $1.2 million to the former owners as additional purchase price. At that time, the Company did not adjust its purchase price calculation since it believed that the arbitrator went beyond its authority and decided to pursue the matter in court. In 1994, after an appeal to the Fifth Circuit U.S. Court of Appeals, the Company was required to pay $1.2 million as additional purchase price and interest of $400,000. In addition, the Company was required to issue an additional 78,866 shares of common stock to settle all remaining claims. These payments were adjustments to the recorded purchase price. As of March 31, 1994, the Company sold its Vodavi Communications Systems Division ("VCS"), which sold telephone equipment to supply houses and dealers, a different class of customer from continuing operations, under the brand names STARPLUS(R) and INFINITE(TM), for approximately $10.9 million. Proceeds of the sale consisted of approximately $9.7 million in cash, received in April 1994, and a $1.2 million note, the proceeds of which were received in September 1995. The proceeds were used to reduce borrowings under the Company's credit facility. The sale resulted in an after-tax gain of $604,000 (net of income tax provision of $403,000). Consolidated financial statements for the years ended December 31, 1994 and 1993 present VCS as a discontinued operation. Net revenues of the discontinued operation for the years ended December 31, 1994 (through the date of sale) and 1993 were $8.6 million and $31.6 million, respectively. NOTE M - SELECTED QUARTERLY FINANCIAL DATA The following is a summary of unaudited selected quarterly financial data for the years ended December 31, 1995 and 1994:
Three Months Ended --------------------------------------------------------- March 31, June 30, September 30, December 31, (In thousands, except for per share amounts) 1995 1995 1995 1995 -------- --------- ------------- ------------- Revenues $70,808 $78,417 $74,164 $73,004 Gross Profit 28,349 32,021 30,504 31,983 Income (Loss) Before Income Taxes 200 (44,225) 2,205 2,599 Net Income (Loss) 120 (39,936) 1,323 1,559 Earnings (Loss) Per Share --- (0.86) 0.03 0.04
Three Months Ended -------------------------------------------------------------- March 31, June 30, September 30, December 31, (In thousands, except for per share amounts) 1994 1994 1994 1994 ---------- --------- ------------ ------------- Revenues $65,307 $76,612 $76,547 $73,503 Gross Profit 26,267 32,138 32,105 31,962 Income Before Income Taxes from Continuing Operations 143 4,024 3,312 2,562 Income from Continuing Operations 86 2,414 1,986 2,248 Discontinued Operations 757 --- --- ----- Net Income 843 2,414 1,986 2,248 Earnings Per Share: Continuing Operations --- 0.05 0.04 0.05 Discontinued Operations 0.02 --- --- -----
The three months ended June 30, 1995 includes a provision for restructuring of $44,042 (See Note L) and acquisition expenses of $1.0 million (See Note L). The three months ended March 31, 1994 includes income of $757 from the discontinuance and sale of the VCS division (See Note L). NOTE N - SUBSEQUENT EVENTS On April 10, 1996, the Company entered into an agreement to sell substantially all of the Direct Sales and Services Group, including its long-distance reseller business and National Service Center, for $67.4 million to an acquisition company led by Bain Capital, Inc. The purchase price will consist of $61.5 million in cash, a $5.9 million note and warrants to purchase 8% of the common stock of the new company, issued as of the closing, for $1.1 million, exercisable for three years. The sale is expected to close on May 31, 1996, subject to the buyer's financing and other conditions. The Company expects a gain on the sale. The agreement also provides that the Company and the buyer will enter into a five-year exclusive distribution agreement under which the buyer will sell and service the Company's telephony equipment to those businesses and commercial locations that require up to 400 telephones. 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 Company will retain its Healthcare Communications and Call Center Management businesses, along with its National Accounts and Federal Systems marketing groups. In addition, the Company will continue to make telephony product sales to its independent distributors, along with retaining the recently acquired Unistar business. In 1995, the Direct Sales and Services Group, including the long-distance reseller business, had revenues of $191 million. On a pro forma basis, after giving effect to the transaction, the Company's 1995 revenues would be approximately $157 million. This includes $42 million in sales to the Direct Sales and Services Group which were eliminated in the 1995 Statement of Operations. 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. STOCK DATA The number of holders of record of the Company's Common Stock as of the close of business on January 31, 1996 was approximately 2,100. The Common Stock is traded on the NASDAQ National Market System under the symbol "XTON". As reported by NASDAQ on February 16, 1996, the closing sale price of the Common Stock on the NASDAQ National Market System was $2 7/16. The following table reflects in dollars the high and low closing sale prices for EXECUTONE's Common Stock as reported by the NASDAQ National Market System for the periods indicated:
Fiscal Period High Low ------------- ---- --- 1995 First Quarter $3 7/16 $2 15/16 Second Quarter 3 3/8 2 1/8 Third Quarter 2 7/8 2 1/8 Fourth Quarter 2 7/8 2 1/8 1994 First Quarter $2 15/16 $2 3/16 Second Quarter 2 13/16 2 1/2 Third Quarter 3 5/16 2 1/2 Fourth Quarter 3 9/16 3
The Company's Debentures are quoted on the NASDAQ System under the symbol "XTONG". On February 16, 1996, the average of the closing bid and asked prices per $1,000 principal amount of Debentures, as reported on the NASDAQ System, was $850. The following table reflects in dollars the high and low average closing sale prices for the Debentures, as reported by the NASDAQ System, for the periods indicated:
Fiscal Period High Low ------------- ---- ---- 1995 First Quarter $824 $808 Second Quarter 824 788 Third Quarter 815 805 Fourth Quarter 850 815 1994 First Quarter $900 $863 Second Quarter 854 786 Third Quarter 810 779 Fourth Quarter 815 775
It is the present policy of the Board of Directors to retain earnings for use in the business and the Company does not anticipate paying any cash dividends on the Common Stock in the foreseeable future. The Company's current bank credit agreement contains provisions prohibiting the payment of dividends on the Common Stock. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of EXECUTONE Information Systems, Inc.: We have audited the accompanying consolidated balance sheets of EXECUTONE Information Systems, Inc. (a Virginia corporation) and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of EXECUTONE Information Systems, Inc. and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Stamford, Connecticut January 26, 1996 (except with respect to the matter discussed in Note N, as to which the date is April 10, 1996) STOCKHOLDER INFORMATION CORPORATE HEADQUARTERS INDEPENDENT PUBLIC ACCOUNTANTS EXECUTONE Information Systems, Inc. Arthur Andersen LLP 478 Wheelers Farms Road Champion Plaza Milford, Connecticut 06460 400 Atlantic Street (203) 876-7600 Stamford, Connecticut 06912-0021 STOCK AND WARRANT TRANSFER AGENT OUTSIDE COUNSEL American Stock Transfer and Trust Company Hunton & Williams 40 Wall Street Riverfront Plaza New York, New York 10005 951 East Byrd Street Richmond, Virginia 23219 BOND TRANSFER AGENT U.S. Trust Company of New York ADDITIONAL INFORMATION 114 West 47th Street A copy of EXECUTONE's Annual New York, New York 10036-1532 Report on Form 10-K, which is filed with the Securities and Exchange Commission, is available without charge by writing to: DAVID KRIETZBERG Treasurer/Investor Relations Corporate Headquarters DIRECTORS AND OFFICERS BOARD OF DIRECTORS - -------------------------------------------------------------------------------- ALAN KESSMAN JERRY M. SESLOWE 1, 2 Chairman of the Board Managing Director Resource Holdings, Ltd. STANLEY M. BLAU Vice Chairman WILLIAM R. SMART 1 Senior Vice President THURSTON R. MOORE Cambridge Strategic Management Partner Group Hunton & Williams RICHARD S. ROSENBLOOM 1, 2 David Sarnoff Professor of Business Administration Harvard Business School 1 COMPENSATION COMMITTEE MEMBER 2 AUDIT COMMITTEE MEMBER OFFICERS - ----------------------------------------------------------------------------------------------------------------------------------- ALAN KESSMAN ANTHONY R. GUARASCIO DAVID E. LEE President and Chief Executive Officer Vice President, Finance and Vice President, Business Chief Financial Officer Development STANLEY M. BLAU ISRAEL J. HERSH JOHN T. O'KANE Vice Chairman Vice President, Software Engineering Vice President, MIS MICHAEL W. YACENDA ELIZABETH HINDS FRANK J. ROTATORI Executive Vice President Vice President, Human Resources Vice President, Healthcare Sales BARBARA C. ANDERSON ROBERT W. HOPWOOD SHLOMO SHUR Vice President, General Counsel and Vice President, Customer Care Senior Vice President, Advanced Technology Secretary JAMES E. COOKE III ANDREW KONTOMERKOS Vice President, National Accounts Senior Vice President, Hardware Engineering and Production
EX-21 13 EXHIBIT 21 SUBSIDIARIES OF EXECUTONE INFORMATION SYSTEMS, INC.
JURISDICTION OF % Name INCORPORATION OWNERSHIP BUSINESS - ------------------------------------------------------------ --------------- --------- --------------- Blaser Industries, Inc. California 80.5% Inactive INFOSTAR Technologies, Inc. Virginia 100% Inactive Executone Network Virginia 100% Sale of Network Services, Inc. Executone Europe, Ltd. United Kingdom 100% Marketing in Eurpoe Executone Systems Canada, Inc. Canada 100% Marketing in Canada Unistar Gaming Corporation Delaware 100% National Indian Telephone Lottery System Unistar Entertainment, Inc. Colorado 100% National Indian Telephone Lottery System Lottery Satellite Network, Inc. Colorado 100% National Indian Telephone Lottery System
1 EX-23 14 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included or incorporated by reference in this Form 10-K into the Company's previously filed Registration Statements File Nos. 33-45015, 33-42561, 33-23294, 33-16585, 33-6604, 33-959, 2-91008, 33-40623, 33-46874, 33-46875, 33-50628, 33-57519 and 33-63637. ARTHUR ANDERSEN LLP Stamford, Connecticut April 12, 1996 EX-27 15 EXHIBIT 27
5 This schedule contains summary financial information extracted from the consolidated balance sheet of EXECUTONE Information Systems, Inc. and subsidiaries as of December 31, 1995 and the related consolidated statement of operations for the year ended December 31, 1995 and is qualified in its entirety by reference to such financial statements (see Exhibit 13). 1000 YEAR DEC-31-1995 DEC-31-1995 8,092 0 50,246 1,715 32,765 95,972 49,337 30,875 167,844 70,110 29,829 517 0 7,300 57,283 167,844 296,393 296,393 173,536 173,536 160,287 0 1,791 (39,221) (2,287) (36,934) 0 0 0 (36,934) (0.79) (0.79) -----END PRIVACY-ENHANCED MESSAGE-----