-----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, UEHPNCLglDNXinKUCjC9+LfXVeUW0Vwu7eLM1LBdATgigLLiaryc8g9fdBmbVcFF kWnzf9Vnp2bhAwGL26KUIA== 0000950117-96-000576.txt : 19960710 0000950117-96-000576.hdr.sgml : 19960710 ACCESSION NUMBER: 0000950117-96-000576 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960604 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: EXECUTONE INFORMATION SYSTEMS INC CENTRAL INDEX KEY: 0000725282 STANDARD INDUSTRIAL CLASSIFICATION: 7385 IRS NUMBER: 860449210 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: SEC FILE NUMBER: 000-11551 FILM NUMBER: 96576705 BUSINESS ADDRESS: STREET 1: 478 WHEELERS FARMS RD CITY: MILFORD STATE: CT ZIP: 06460 BUSINESS PHONE: 2038767600 MAIL ADDRESS: STREET 1: 478 WHEELERS FARMS RD CITY: MILFORD STATE: CT ZIP: 06460-1847 FORMER COMPANY: FORMER CONFORMED NAME: VODAVI TECHNOLOGY CORP DATE OF NAME CHANGE: 19880802 10-K405/A 1 EXECUTONE INFORMATION SYSTEMS, INC. 10K405/A FORM 10-K/A SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended December 31, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from ____________ to ________________ Commission File Number: 0-11551 EXECUTONE INFORMATION SYSTEMS, INC. - - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Virginia 86-0449210 - - -------------------------------------------------------------- ----------------- (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 478 Wheelers Farms Road, Milford, Connecticut 06460 - - -------------------------------------------------------------- ----------------- (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203)876-7600 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered ------------------- ------------------------------------------ N/A None Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $.01 PER SHARE 7 1/2% CONVERTIBLE SUBORDINATED DEBENTURES, DUE MARCH 15, 2011 - - -------------------------------------------------------------------------------- (Title of Class) - - -------------------------------------------------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] The aggregate market value of the common stock held by nonaffiliates of the registrant (assuming for this purpose that all executive officers and directors of the registrant are affiliates) as of March 29, 1996 was $125,909,320, based on the last sale price for the common stock on that date. The number of shares outstanding of the registrant's only class of common stock, $.01 par value per share, as of March 29, 1996, was 51,865,163. DOCUMENTS INCORPORATED BY REFERENCE The following documents are incorporated by reference into the Part of this Form 10-K indicated below: Part II - 1995 Annual Report to Shareholders TABLE OF CONTENTS
Item Page PART I 1. Business 1 2. Properties 15 3. Legal Proceedings 15 4. Submission of Matters to a Vote of Security Holders 16 Executive Officers of the Registrant 17 PART II 5. Market for Registrant's Common Equity and Related Stockholder Matters 20 6. Selected Financial Data 20 7. Management's Discussion and Analysis of Financial Condition 20 and Results of Operations 8. Financial Statements and Supplementary Data 20 9. Changes in and Disagreements with Accountants on 20 Accounting and Financial Disclosure PART III 10. Directors and Executive Officers of the Registrant 20 11. Executive Compensation 22 12. Security Ownership of Certain Beneficial Owners and Management 28 13. Certain Relationships and Related Transactions 31 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 32
PART I ITEM 1. BUSINESS General EXECUTONE Information Systems, Inc. ("EXECUTONE" or the "Company") designs, manufactures, sells, installs and supports voice processing systems and healthcare communications systems. EXECUTONE also provides cost-effective long-distance telephone service through its INFOSTAR'r'/LD+ program. Products are sold under the EXECUTONE'r', INFOSTAR'r', IDS'tm', LIFESAVER'tm' and INFOSTAR/ILS'tm' brand names through a worldwide network of direct sales and service offices and independent distributors. EXECUTONE's executive offices are located at 478 Wheelers Farms Road, Milford, Connecticut 06460, telephone (203) 876-7600. The Common Stock of EXECUTONE is traded on the NASDAQ National Market System under the symbol "XTON", and its Convertible Subordinated Debentures due 2011 trade on the NASDAQ system under the symbol "XTONG". Recent Developments On April 10, 1996, the Company entered into an agreement to sell the Company's direct sales and service organization, including its network services division, to a new acquisition company led by Bain Capital, Inc. and including Triumph Capital Group (the "Buyer"). The purchase price will consist of $61.5 million in cash, a $5.9 million junior subordinated note due July 1, 2004, with interest at 7.5% per year, and warrants to purchase 8% of the equity issued as of the closing in the new company. The sale is expected to close on May 31, 1996, subject to the Buyer's financing and other conditions. The purchase and sale agreement also provides that the Company and the Buyer will enter into a five-year exclusive distributor agreement pursuant to which the Buyer will sell and service EXECUTONE'r' and INFOSTAR'r' telephone products to business and commercial locations that require up to 400 telephones. The sale will include the Company's National Service Center. The sale does not include the Pittsburgh direct sales and service office, which the Company has separately agreed to sell to one of its existing independent distributors for approximately $1.3 million in cash and notes. The sale also does not include any of the healthcare communications division, the call center management division, the videoconferencing division, the National Accounts or Federal Systems marketing groups or the recently acquired Unistar business. On April 10, 1996, the Company also announced that it had given notice of its intention to terminate its distribution agreement with GPT Video Systems due to failures by GPT to deliver properly functioning videoconferencing products on a timely basis. The Company has not yet finalized its plans for its videoconferencing division. 1 On December 19, 1995, the Company acquired 100% of the common stock of Unistar Gaming Corp., a Delaware corporation ("Unistar"). Unistar, through its subsidiary Unistar Entertainment, Inc., has an exclusive five-year contract to design, develop, finance, and manage the National Indian Lottery (the "NIL" or "Lottery"). The NIL will be a national telephone lottery authorized by federal law and by a compact between the State of Idaho and the Coeur d'Alene Indian Tribe of Idaho ("Coeur d'Alene Tribe"). In return for providing these management services, Unistar will be paid a fee equal to 30% of the profits of the NIL. The Registrant acquired 100% of Unistar for 3.7 million shares of Common Stock, 250,000 shares of Cumulative Convertible Preferred Stock, Series A ("Series A Preferred Stock") and 100,000 shares of Cumulative Contingently Convertible Preferred Stock, Series B ("Series B Preferred Stock"). The Series A Preferred Stock has voting rights equal to one share of Common Stock and will earn dividends equal to 18.5% of the consolidated Retained Earnings of Unistar as of the end of a fiscal period, less any dividends paid to the holders of the Series A Preferred Stock prior to such date. The Series B Preferred Stock has voting rights equal to one share of Common Stock and will earn dividends equal to 31.5% of the consolidated Retained Earnings of Unistar as of the end of a fiscal period, less any dividends paid to the holders of the Series B Preferred Stock prior to such date. All dividends on Preferred Stock are payable (I) when and as declared by the Board of Directors, (ii) upon conversion or redemption of the Series A and Series B Preferred Stock or (iii) upon liquidation. The Series A and Series B Preferred Stock is redeemable for a total of 13.3 million shares of Common Stock (Series A Preferred Stock for 4.925 million shares and Series B Preferred Stock for 8.375 million shares) at the Company's option. The Series A Preferred Stock is convertible for up to 4.925 million shares of Common Stock and the Series B Preferred Stock is contingently convertible for up to 8.375 million shares of Common Stock (a total of an additional 13.3 million shares of Common Stock) if Unistar meets certain revenue and profit parameters. Shareholder approval is required before any of the Series B Preferred Stock can be converted or redeemed. The Company intends to submit the terms of the Series B Preferred Stock to its shareholders for approval at the 1996 Annual Meeting. The telephone operations of the NIL cannot begin until the resolution of a pending legal proceeding. Certain states have attempted to block the NIL by filing letters under 18 U.S.C. Section 1084 preventing long-distance carriers from providing telephone service to the NIL based on allegations that the NIL is not legal. The Coeur d'Alene Tribe has initiated legal action to argue that the Lottery is authorized by the Indian Gaming Regulatory Act ("IGRA") passed in 1988, that IGRA preempts state and federal statutes, and that the states lack authority to issue the Section 1084 notification letters to any carrier. On February 28, 1996, the Coeur d"Alene tribal court ruled that all requirements of IGRA have been satisfied, that the Section 1084 letters are invalid, and that the long distance carrier is obligated to provide telephone service for the NIL. Although the ruling 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. 2 In July 1995, the Company reorganized its core business into five divisions: Computer Telephony, Healthcare Communication Systems, Call Center Management, Videoconferencing Products, and Network Services. The business of Executone, Inc. acquired by the Company in 1988 was a telephone equipment business that focused its direct selling effort on office sites with fewer than 20 phones, with an emphasis on selling additional hardware to generate revenues in the form of moves, adds and changes ("MAC") and service, mainly on a time and material basis. The average system size in the customer base at that time was in the 8-10 phone range. It was originally expected in 1988 that the MAC and service revenues generated by the customer base would be increasingly profitable as the base of customers grew. Since 1988, the Company has expanded its product line to the high-end user, with larger customers and more sophisticated products to serve customers' total communications needs. The strategy the Company is now pursuing is to focus on software solutions versus the hardware orientation of the business purchased in the 1988 acquisition. With the IDS product, a digital platform for various communications functions, which was developed after the acquisition, the Company's product lines now provide sophisticated software applications, including integrated voice mail, call center applications (ACD, IVR's and predictive dialers), infrared locator systems, nurse call systems and computer telephony interfaces that drive its telephony products. The development in the nature and complexity of our product lines has changed the way the Company has to market its products. Unlike many companies in its industry that focus on one particular product to one market, the Company provides multiple products and applications to its particular market niche. This requires the Company to have expertise in each particular market segment in which it competes because the Company's competitors are primarily one-product companies or divisions who are experts in their particular market niche. Therefore, the Company consolidated the sales, marketing and product development functions for each market segment under a divisional management structure, headed by a division president. The sales force has been restructured such that each sales person is assigned to a specific division and will sell only within that division's market segment. The specialization of the sales force included the addition of sales representatives with the necessary product and market expertise, as well as substantial retraining for the remaining sales representatives. Business Strategy EXECUTONE is a vertically integrated voice processing and healthcare communications company. The Company controls the major elements of its business, ranging from product design, manufacturing and marketing to distribution, installation, service and support. Revenues are derived from both from new installations and from the Company's existing customer base through additions, changes, upgrades or relocation of previously installed systems, maintenance contracts, service charges and sales of network services. The Company's products and services are marketed and sold through a worldwide network of Company direct sales and service offices and independent distributors. The Company is organized into five divisions focusing on different products and market segments: computer telephony, healthcare communication systems, call 3 center management, videoconferencing products, and network (voice, data and video) services. The objective of the computer telephony division is to offer value-added products and services. The Company's integrated digital telephone systems emphasize flexible software applications, such as data switching and computer telephone interface, designed to enhance the customer's ability to communicate, obtain and manage information. The Company's telephone systems provide the platform for its other voice processing software applications, such as automatic call distribution. The healthcare communications systems division provides to its healthcare facility customers integration of voice and data between nurse and patient communication systems and hospital information systems, resulting in increased flexibility and efficiency in hospital operations, and improved patient care. EXECUTONE has been a recognized name in this market for many years with its LIFESAVER'tm' and CARE/COM'r'II-E nurse call systems. The Company is also creating software applications specific to hospital and nursing homes to help resolve other labor intensive tasks. The healthcare communications division also markets the INFOSTAR/ILS'tm' locator system, released in early 1994. The INFOSTAR/ILS system can improve productivity, save time and expense for users and eliminate overhead paging by instantly locating staff and equipment in a facility. Each person or piece of equipment wears an individually coded badge that transmits infrared signals to sensors placed throughout the facility, which forward the location information to a central processing unit. The location data can be accessed on local display stations. The ILS'tm' system can be integrated with the Company's telephone systems and the LIFESAVER'tm' nurse call system to provide additional productivity improvements for hospital environments. The ILS system is also marketed by the computer telephony division for office environments. The call center management division develops and sells sophisticated telephony products that integrate a computerized digital telephone system platform with high-volume inbound, outbound and internal call processing systems. Such systems include automatic call distribution systems, predictive dialing systems, scripting software to assist agents handling calls, and interactive voice response systems. Certain of these systems also provide data interface with host or mainframe computers. These systems are sold to call center customers that have a need for systems to efficiently and cost-effectively receive or place their customer or prospect calls, distribute those calls to available live operators, obtain information from callers, record and distribute messages from callers, and produce management reports on call activity. The videoconferencing division is the exclusive distributor of products of GPT Video Systems ("GPT") in the United States. The division also provides videoconferencing network services such as multipoint conferencing, network bridging and network design to its videoconferencing customers. The network services division offers cost-effective voice, data and video 4 long-distance service, least-cost routing, network design and network support services, enabling customers to make more efficient and cost-effective use of their telecommunications systems. Services are sold primarily to telephony customers in the United States. In 1995, the Company acquired Unistar. Unistar, through its subsidiary Unistar Entertainment, Inc., has an exclusive five-year contract with the Coeur d'Alene Tribe of Idaho to design, develop, finance, and manage the National Indian Lottery (the "NIL" or the "Lottery"). The NIL will be a national telephone lottery authorized by the federal Indian Gaming Regulatory Act ("IGRA") and a compact between the State of Idaho and the Coeur d'Alene Tribe. In return for providing these management services to the NIL, Unistar will be paid a fee equal to 30% of the profits of the NIL. Through Unistar, the Company will provide development and management of the network design and call center applications for the Lottery's operations. It is anticipated that calls to purchase lottery tickets will be made via 800 number lines and processed by interactive voice response systems, as well as live agents located on the Coeur d'Alene Reservation using ACD software to manage a high volume of calls. The Lottery will require an extensive telephone network to handle the anticipated call volume. The telephone operations of the NIL cannot begin until resolution of a pending legal proceeding. See "Legal Proceedings." Computer Telephony Products The Company offers a complete line of applications-oriented computer telephony systems, ranging from those satisfying the basic voice communications needs of small businesses to those capable of meeting the complex voice and data communications demands of much larger business locations that need fully featured telecommunications systems. The Company markets the IDS'tm' Integrated Digital System, along with an expanding line of software applications and features operating on that platform. The Company's largest telephone platform is the IDS'tm'/System 648 digital system, which can accommodate up to 648 nonblocking voice ports and 648 nonblocking data ports. The Company believes its installed telephone equipment base exceeds 3 million desktops. In 1996, the Company introduced its TAPI telephone, designed to support any desktop application using the TAPI standard for computer-telephone integration, in order to speed inbound and outbound call handling and increase productivity. The TAPI telephone can eliminate time spent searching for telephone numbers, looking up PBX feature codes, misdialing or searching for information to handle a call. The Company's telephone systems are characterized by flexible software and a hardware design that makes them readily adaptable to evolving technology and customer requirements. The Company attributes the market acceptance of its systems to cost-effective design and to the sophistication of its software options. The software in each system provides such features as automatic dialing, add-on conferencing, call forwarding, last number redialing, message waiting, paging capability, internal diagnostic routines and other commonly used communications features. The Company's systems also include an integrated 5 automated attendant feature to answer and transfer calls quickly and efficiently without operator intervention, and a video display terminal and management reports that permit the monitoring of calls and improve the efficiency of directing calls to the appropriate extensions. The Company's telephone systems also support sophisticated applications such as voice mail and call center products as well as the Company's locator system. The Company also offers a voice mail system that can be integrated with the IDS'tm' telephone systems and with telephone systems manufactured by others. The voice message or voice mail system receives, records, stores, distributes, transfers and replays messages from both external and internal callers and can supplement other call center systems. The Company develops its application-specific software options using high-level programming languages to facilitate further enhancements and portability. EXECUTONE's software includes remote capabilities built into certain systems that enable the Company to customize and update selected features continuously, which increases the value of such systems and lengthens their useful lives. Certain of the Company's systems are capable of having service diagnostics, updates and modifications performed on a remote basis. The ability to provide such off-site servicing increases the efficiency of customer support and service. Healthcare Communication Products The Company develops, manufactures, markets and services a line of specialized internal communications systems that are used primarily in the healthcare industry. These internal communications systems are microprocessor-based patient-to-nurse communication systems, intercoms, paging and sound equipment, and room status indicators. The Company's LIFESAVER'tm' nurse call system is an advanced system integrating voice and data communication between nurse and patient and providing enhanced self-diagnostics. The LIFESAVER'tm' system is a state-of-the- art communications network that provides routine and emergency signaling, voice communications and data transmission. The nurse console offers menu-driven functions and step-by-step user prompts. The system is highly flexible, offering many programmable features that allow customization of its operations to the hospital's needs. A single system can serve more than 300 patient beds (150 rooms) and up to eight nurse control stations, and up to eight systems can be networked for centralized operation. The CARE/COM'r' II-E nurse call system represents the first step in EXECUTONE's plan to bring the benefits of a totally integrated communications system to the healthcare market on the Company's IDS digital platform. The CARE/COM'r' lI-E system provides patient-to-staff and staff-to-staff voice communication on an automatic three-level call priority basis. This new system can currently support 72 patient stations per system, with the ability to integrate three systems together and support 216 patient stations. A three-line LCD display Nurse Control Station allows simple call processing and system operation. The 6 system is highly flexible to meet the individually defined needs of today's hospitals and long-term care facilities. The LIFESAVER'tm' nurse call system integrates with the Company's locator system. The Healthcare Division also markets the INFOSTAR'r' /PRS patient reporting system, an automated voice storage system that allows the efficient transfer of patient information between nurses. Patient reports are password- protected for confidentiality and admission, discharge and transfer information are also supported. The system uses standard telephone instruments and provides full voice messaging capability. The INFOSTAR'r'/PRS system reduces report time, provides continuity at shift changes, and improves report quality. In 1995, the Healthcare Division began marketing the Communicator system manufactured by Dialogic Communications Corporation, in which the Company has an equity investment. The Communicator product is a P.C.-based, automated callout system that rapidly locates personnel to fulfill routine or emergency staffing needs, searching multiple locations until responses are sufficient to satisfy the staffing need. The system also provides real-time management reports of employee eligibility, availability, and responses. Using the Communicator system, hospitals can improve staffing efficiency, avoid miscommunication, and enhance productivity. Locator Systems The Company's INFOSTAR/ILS'tm' locator system is an integrated system using infrared transmitter badges to communicate location data to sensors installed throughout a facility. The badges transmit regularly at user-programmed intervals and can be worn by staff personnel or attached to equipment. The location data is collected by the sensors and forwarded to a central processing unit that organizes the data so it can be accessed at one or more display stations. The display of staff and equipment location information can be in the form of a list or in the form of a map of the facility using icons. The display can be filtered to show only particular staff members, groups of personnel, particular pieces of equipment or groups of equipment. The system can be integrated with either the IDS telephone systems, allowing the activation of features and display of information on the telephone set, or the Company's nurse call systems, allowing the activation of features and display of information at the nurse control station and patient stations. The INFOSTAR/VLS'tm' version of this product allows outside callers to locate personnel within a facility, find out who the person is with, complete the call, or leave a voice message. The ILS and VLS systems can also be integrated to other manufacturers' PBXs. Nortel has now made ILS available to its dealer network for sale by its dealers in conjunction with Nortel PBXs. Call Center Management Products The Company's call center management products consist of the following systems, which can be integrated with the Company's computer telephone systems and with each other to provide large-volume inbound, outbound and 7 internal call management. Computer-telephone integration ("CTI") technology integrates the IDS'tm' call processing function with information in a customer's computer database. Primarily used by large incoming call centers to automatically identify incoming callers and by outbound centers to contact and provide records of contacts, CTI limits the amount of time that an agent spends contacting or identifying the caller, thereby providing better customer service, reducing the number of required agents and reducing telephone line and transmission expense. Predictive Dialers and Scripting Products - The INFOSTAR'r'/Predictive Dialer is an automated call system designed to boost productivity in outbound call centers. The system integrates telephone, data collection and transaction processing functions for those customers who require high volume contact by telephone to transact business, such as sales, credit and collections, blood banks and fund-raising. Working with the host computer and the IDS'tm' telephone system platform, the dialer automatically dials telephone numbers pulled from the host computer database and detects "live" calls. Available representatives receive these calls and, through CTI, can view screen information about the customer from the database immediately after the customer answers the phone. The system predicts the availability of agents in order to reduce abandoned calls and increase agent productivity, and reduces agent contact with busy signals, no answers, wrong numbers and answering machines. Management reports provide instant and historical feedback on call distribution, list management, data input integrity and file maintenance. Scripting software allows the call center to create a script to guide its agents through various call scenarios and prompt the input of desired information. Automatic Call Distribution ("ACD") - ACD systems are designed to increase responsiveness to inbound callers and increase agent productivity. ACD systems provide the capability to distribute or route incoming calls to available agents based upon management's specifications, and allow the supervisor of the call processing group to monitor call traffic on-line via a computer terminal. The Company produces ACD software for call centers of up to 500 agents in multiple shifts (225 in any single shift), in five levels of sophistication, the highest of which is "Custom Plus ACD." Custom Plus ACD provides the capability to store and retrieve call data for a limited period, print out standard call traffic reports, customize reports to the needs of a specific application, monitor traffic with color screens and graphics, and greatly enhance the ability to store and retrieve historical call data. Interactive Voice Response - The Company's interactive voice response ("IVR") systems provide businesses with automated handling of routine calls. Voice response systems allow callers to input and retrieve information into or from computers by means of the dialpads on their telephones. The caller is guided by voice prompts to input data by dialing numbers, which the IVR system converts into computer keystrokes. The IVR system can also convert computer screen information into voice prompts, allowing callers to retrieve information from computers. The voice response product provides advanced computer access applications and advanced facilities, such as ISDN, that interface with the Company's IDS'tm' family of telephone systems and other advanced voice processing applications. 8 Videoconferencing Systems and Services The Videoconferencing Division markets videoconferencing equipment in the United States and provides video network services including video networking, network design, multipoint conferencing, and video network bridging. The Company provides its videoconferencing customers with a "turnkey" solution including equipment installation, network services, maintenance and customer support. Network Services The Company markets INFOSTAR'r'/LD+ long-distance telephone service to its customers. INFOSTAR'r'/LD+ provides a complete service to the Company's customers from the initial sale through billing and customer support. The Company has contracted with major carriers including Sprint, Worldcom and Teleport Communications to carry the long-distance traffic for both voice and data on their networks. The Company has also signed agreements to provide alternative local access in select cities throughout the U.S. This program offers many features including six-second billing rates, accounting codes, international service, 800 service, "T-1" access and specialized management reporting. The Company also provides the following network services: Network Designer - The Company can perform a computer-generated analysis of a customer's calling patterns in order to recommend the optimum configuration of its network. Recommendations would include the long-distance carriers and the number of lines needed. Least Cost Routing ("LCR") - LCR stores current tariff tables for the appropriate long-distance carriers employed by the customer and automatically selects the least expensive carrier for each specific call at the moment the call is placed. Data Switching - Data switching provides the capability to switch data between mainframe, minicomputers, personal computers, terminals and peripherals through the telephone systems. Centrex Capability and Applications - The Company's telephone systems can be programmed to function in conjunction with and enhance the features of Centrex services offered by the local telephone companies. Sales and Marketing Developing and maintaining a strong relationship with the end-user customer is the focus of the Company's marketing strategy. The Company's distribution network consists of (1) 70 Company-owned direct sales and service locations in the major markets in the United States; (2) domestic independent distributors with approximately 110 locations operating under exclusive and 9 nonexclusive agreements throughout the United States and Canada; (3) a National Accounts Division that uses the sales, installation, service and support capabilities of EXECUTONE's distribution network to serve multiple offices and departments of companies; (4) a Federal Systems Division that uses the distribution network to serve offices of the U. S. Government and its agencies; (5) vertical marketing organizations of the healthcare communications, call center, network and videoconferencing divisions; and (6) 20 independent distributors operating in sixteen other foreign countries. For those distributors that have exclusive distribution rights for specified products, retention of such rights is subject to satisfaction of established criteria for sales and service to customers on an ongoing basis. The divesting of or acquisition of customer bases to or from distributors in specific geographic territories may occur in the normal course of the Company's business. EXECUTONE's National Accounts Division provides uniformity in pricing, coordination, installation, billing and service for National Accounts Division customers such as Electronic Data Systems, Airborne Express, Paychex, Inc., W. W. Grainger, Home Quarters Warehouse, Inc., Bridgestone/Firestone, Carlson Companies, Fidelity Investments and TCI Cable. The Division coordinates the sales, installation, service and support functions of direct and independent sales offices to serve the multiple offices and departments of large companies. The Company's Federal Systems Division addresses the special procurement and administrative requirements of the U.S. Government. Sales are made through a combination of master contracts and competitively solicited proposals for large or complex telecommunications requirements. Federal Systems coordinates the installation, service and support activities of direct and independent sales offices to provide ongoing support to federal agency offices nationwide. Backlog consists primarily of products that have been ordered and that will be shipped or installed within 30 to 60 days of the order (other than call center and healthcare orders, which have a longer lead time), or systems the installation of which is not yet required by the customer. Backlog as of December 31, 1995, was $ 33,091,000 compared to $29,390,000 at December 31, 1994, and the Company expects virtually all of such backlog to be filled within the current fiscal year. Customer Support and Service The Company operates a National Service Center that diagnoses system problems for many of the end-user customers of its direct sales and service offices, coordinates field service personnel and programs certain corrections remotely from a centralized location at its corporate headquarters. The National Service Center helps the Company in providing consistent customer service and support while improving the productivity of the Company's technicians. All service calls received from customers are controlled from initial diagnosis to ultimate disposition through an internally-developed and maintained proprietary software package. The National Service Center maintains detailed customer records and also markets and monitors certain products and services such as maintenance 10 contracts. It is the primary point of contact for customer needs, questions or requests. Additionally, the National Service Center provides the Company with statistical data and reports regarding a product's performance, which can be used to make enhancements and improvements. This data is also available for each of the Company's locations and each of its technicians. EXECUTONE warrants parts and labor on its systems, typically for one year, and provides maintenance and service after warranty expiration either on a contract or time and materials basis. Most of the Company's products are repaired at its 56,000-square foot repair facility located in Poway, California. Product Development and Engineering As of March 1, 1996, EXECUTONE employed over 100 individuals engaged in product design and development. The Company's product development program is designed to anticipate and respond to customer needs through development of new products and enhancement of existing products. During 1995, the Company's engineering efforts focused on applications-oriented software products, including new releases of voice messaging, call center and healthcare communications software. EXECUTONE continually strives to reduce production costs by incorporating new technology into its design and manufacturing operations. For the years ended December 31, 1995, 1994, and 1993, Company-sponsored product development and engineering expenditures (including product management and testing) amounted to approximately $14.7 million, $12.2 million, and $9.9 million, respectively. Manufacturing Most of EXECUTONE's telephone products are manufactured by Wong's Electronics Company, Ltd. ("Wong's") in Hong Kong or China, by Quality Telecommunication Products, also referred to as Compania Dominicana de Telefonos ("Codetel"), in the Dominican Republic, and by the Company directly in Poway, California. Many of the printed circuit boards for the Company's products are manufactured, and many products are assembled into systems and system components, in the United States. The Company's Manufacturing Services Agreement with Wong's currently expires in February 1997 but is automatically extended each year for an additional one-year term unless either party gives notice of termination three months prior to expiration of the current term. The contract may be terminated earlier by either party in the event of a material breach by the other party. If the agreement between Wong's and EXECUTONE should be terminated for any reason, or if Wong's is unable to ship or has to reduce shipments, or if restrictions are imposed materially limiting the importation of products produced by foreign manufacturers, the Company could be affected adversely until satisfactory alternative sources are in place. The profitability of EXECUTONE's operations could be affected to the extent it is unable to reflect the direct and indirect costs of products purchased from Wong's in its pricing policies. The prices for products purchased by EXECUTONE from its suppliers are payable in U.S. 11 dollars. The majority of EXECUTONE's specialized healthcare and internal communication systems are produced in the United States at the Company's facility in Poway, California or at domestic subcontractors. The functions of repair, warehousing and distribution of the Company's products are performed at the Company's facilities in Poway. Trademarks, Patents and Copyrights Management believes that the continued success of EXECUTONE is dependent upon the ability to design, develop and market new products and new or enhanced applications. The patentability of such new products or applications is evaluated and patent applications are filed where necessary to protect unique developments. The Company currently holds eight utility patents, expiring at various times between 2007 and 2012, has 13 U.S. patent applications pending, and seven patent applications pending in numerous foreign countries. The Company has registered or applied to register its trademarks when it believes registration to be important to its ongoing business operations. The Company also generally claims copyright protection for software, circuit designs, schematics and technical documentation used in connection with its products, and relies upon trade secret, contract and copyright laws to protect its proprietary rights in its software, designs and documentation. Certain of EXECUTONE's products incorporate technology and software licensed from independent third parties. Generally, these licenses require payment of a royalty for each system sold that incorporates the licensed technology or require that the Company purchase the product from the licensor. Government Regulation Many of the Company's systems are designed to be connected to the public telecommunications network and as such are required to comply with certain rules of the Federal Communications Commission ("FCC") pertaining to telecommunications equipment. The Company's network services are generally required to be tariffed and are subject to regulation by the public utility commissions of the various states and by the FCC. The Company has not experienced any material adverse effect on its business or operations as a result of such regulation and compliance. Certain uses of outbound call processing systems are regulated by federal and state law. Among other things, the FCC has adopted rules pursuant to the Federal Telephone Consumer Protection Act to protect residential telephone subscribers' privacy rights to avoid receiving telephone solicitations to which they object. Certain states have enacted similar laws limiting access to telephone subscribers who object to receiving solicitations. Although compliance with these laws may limit the potential use of the Company's predictive dialer systems in some respects, the Company's systems can be programmed to operate 12 automatically in full compliance with these laws through the use of appropriate calling lists and calling campaign time parameters. To the extent the Company markets its products internationally, it is required to comply with applicable foreign law, including certification of its products by appropriate government regulatory organizations. Competition The market segments in which the Company offers its products and services are highly competitive. The under 300-desktop voice processing segment in the United States, the primary market for the Company's telephony division, is served by many domestic and foreign communications equipment manufacturers and distributors, including Lucent Technologies (the former equipment business of AT&T), Nortel (formerly named Northern Telecom), and the Regional Bell Operating Companies (the "RBOCs"), as well as numerous specialized software companies. The Company believes that it may be third in telephone system shipments to the under 300-desktop voice processing market, after AT&T/Lucent and Nortel, based on industry surveys of 1994 data. However, such information may not be sufficient to make an exact assessment of the Company's competitive position relative to its competitors. Similarly, the Company faces strong competition in network services, including AT&T, MCI, Sprint, and numerous long distance resellers. Although the Company can be competitive on price compared to several of these companies, many of EXECUTONE's competitors have substantially more capital, technology and marketing resources than the Company. Competition in the Company's market segments is expected to increase significantly with passage in February 1996 of the Telecommunications Act of 1996 (the "Act"). Under the Act, long-distance companies, cable companies and others will be permitted to compete with local telephone companies to offer local service. The RBOCs and other local telephone companies will be permitted to offer long-distance services if their local market meets certain criteria to measure the existence of local competition. The Company believes its call center division is in a good competitive position although to date it has not penetrated a significant portion of this market. The Company believes it is currently the only vendor that supplies inbound, outbound and administrative call processing integrated with a telephone system platform. The Company's principal competitors in healthcare communications are Hill-Rom Company, DuKane and Rauland-Borg. The Company believes it has a strong competitive position in nurse call and locator products. The Company believes that it has several competitors in videoconferencing but is not yet able to estimate its competitive position relative to such competitors. The Company competes by offering a full array of integrated 13 telecommunication products and services to its customers. The Company also competes on the basis of the quality of its products, its customer service, nationwide distribution and installation, and price. Employees As of March 1, 1996, EXECUTONE employed approximately 2,400 persons, directly and through its subsidiaries. Approximately 5% of the employees of the Company and its subsidiaries are represented by unions, all of which are represented by the International Brotherhood of Electrical Workers. Management believes that the Company's relations with its employees are good. 14 ITEM 2. PROPERTIES EXECUTONE's principal offices are located in two leased buildings in Milford, Connecticut. The Company has sales offices, warehouses, manufacturing and distribution facilities throughout the United States. As of December 31, 1995, the Company utilized 73 facilities in the United States with an aggregate of approximately 792,000 square feet for its ongoing operations. The Company's facilities are occupied under lease agreements except for one facility. This Company-owned building is approximately 15,000 square feet, and is used for a direct sales and service office. The current annual rent for the Company's facilities is approximately $9.2 million. The Company has one facility totaling approximately 14,000 square feet of space that is no longer used in ongoing operations and is subleased. The Company believes its facilities are adequate and generally suitable for its business requirements at the present time and for the immediate future. The following is a brief description of the primary facilities of the Company.
Use Location Approximate Size Corporate and Direct Sales Milford, Connecticut 150,000 square feet Headquarters; National Customer Service Center; and Research, Development and Engineering Facility Distribution, Production & Poway, California 115,000 square feet Repair Center and Warehouse Direct Sales and Service Major cities across U.S. 496,000 square feet Offices, including warehouses
ITEM 3. LEGAL PROCEEDINGS On October 16, 1995, the Coeur d 'Alene Tribe filed an action entitled Coeur d'Alene Tribe v. AT&T Corp. in the Tribal Court, located in Plummer, Idaho (Case No. C195-097), requesting a ruling that the NIL is legal under IGRA, that IGRA preempts state laws on the subject of Indian gaming, and the NIL cannot be blocked by state action, and an injunction preventing AT&T from refusing to provide telephone service to the NIL. This action was necessary because several network carriers have been sent Section 1084 letters under the Federal Communications Act by states opposed to the NIL. These letters state that the NIL is illegal under state and federal laws and prohibit the carriers from carrying network traffic for the NIL. The telephone operations of the NIL cannot begin until resolution of this proceeding and agreement of a network carrier to carry the network traffic of the NIL. On February 28, 1996, the Tribal Court ruled that all 15 requirements of IGRA have been satisfied, that the Section 1084 letters are invalid, and that AT&T is obligated to provide telephone service for the NIL. Although AT&T has stated that it will appeal the ruling to the tribal supreme court and ultimately to U.S. federal court, the Company believes the initial ruling and the Coeur d'Alene Tribe's position will be upheld. However, this litigation, as well as other litigation which could be brought by states opposed to the NIL, could delay commencement of operations, and it is impossible at this time to predict when the NIL will commence operations. The Company does not believe the outcome of this litigation will have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. The Company currently is a named defendant in a number of lawsuits and is a party to a number of other proceedings that have arisen in the normal course of its business. Those lawsuits and proceedings relate primarily to the collection of indebtedness owed to the Company, the performance of products sold by the Company, and various contract disputes. In the opinion of the Company, these proceedings are not expected to have a material adverse effect on the consolidated financial position, results of operations or liquidity of the Company and, to the extent they are not covered by insurance, reserves adequate to satisfy such liabilities have been established. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders in the fourth quarter of the fiscal year covered by this report. 16 EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company are as follows:
Name Age Position With Company Alan Kessman 49 Chairman of the Board, President and Chief Executive Officer Stanley M. Blau 58 Vice Chairman of the Board Michael W. Yacenda 44 Executive Vice President Barbara C. Anderson 44 Vice President, General Counsel and Secretary James E. Cooke III 47 Vice President, National Accounts Anthony R. Guarascio 42 Vice President, Finance and Chief Financial Officer Israel J. Hersh 42 Vice President, Software Engineering Elizabeth Hinds 54 Vice President, Human Resources Robert W. Hopwood 52 Vice President, Customer Care Andrew Kontomerkos 50 Senior Vice President, Hardware Engineering and Production David E. Lee 49 Vice President, Business Development John T. O'Kane 66 Vice President, MIS Frank J. Rotatori 53 Vice President, Healthcare Sales Shlomo Shur 46 Senior Vice President, Advanced Technology
Alan Kessman has served as Chairman and Chief Executive Officer of the Company since 1988. Prior to that, he had served as President and Chief Executive Officer of ISOETEC Communications, Inc., a predecessor of the Company ("ISOETEC"), since 1983. From 1978 to 1983, Mr. Kessman served as President of three operating subsidiaries of Rolm Corporation, and from 1981 to 1983, he served as a Corporate Vice President of Rolm Corporation, responsible for sales and service in the eastern United States. Stanley M. Blau has served as Vice Chairman of EXECUTONE since 1988. Prior thereto, from June 1987 to July 1988, Mr. Blau was the President and Chief Executive Officer of Vodavi Technology Corporation, a predecessor of the Company ("Vodavi"). Mr. Blau was formerly the President and Chairman of the Board of Consolidated Communications, Inc., a telecommunications products 17 supply company he founded in 1973. Michael W. Yacenda has served as Executive Vice President of EXECUTONE since January 1990. Prior to that time, he was Vice President, Finance and Chief Financial Officer of the Company from July 1988 to January 1990. He served as a Vice President of ISOETEC from 1983 to 1988. From 1974 to 1983, Mr. Yacenda was employed by Arthur Andersen & Co., a public accounting firm. Mr. Yacenda is a certified public accountant. Barbara C. Anderson has been Vice President, General Counsel and Secretary since 1990. From 1985 to 1989, she was Corporate Counsel of United States Surgical Corporation, a manufacturer of medical devices. James E. Cooke III has served as Vice President, National Accounts since February 1995. Prior to that time, from 1992 until 1995, Mr. Cooke served as Division Manager of Operations for the Company, and from 1988 through 1991, Mr. Cooke was a District Manager for the Company. From 1985 until 1988, Mr. Cooke was the President of an interconnect company, and from 1981 to 1985, he was a General Manager and a Regional Manager of the Jarvis Corporation. For eight years prior to that time, he worked at Xerox Corporation in various sales and management positions. Anthony R. Guarascio has been Vice President, Finance and Chief Financial Officer since January 1994, and prior thereto was Vice President and Corporate Controller since January 1990. From 1984 until 1990, Mr. Guarascio was the Corporate Controller of the Company and ISOETEC. Israel J. Hersh has been Vice President, Software Engineering since February 1995. Mr. Hersh joined the Company as Director of Software Development in 1984, and was promoted to Senior Director of Software Engineering in January 1994. Prior to his employment with the Company, Mr. Hersh was a manager of the software development department for T-Bar, Inc. Mr. Hersh has a B.S. in Electrical Engineering from Tel Aviv University and a MS in Electrical Engineering from Bridgeport University. Elizabeth Hinds has been Vice President, Human Resources since January 1995. Prior to joining the Company, Ms. Hinds was Vice President, Human Resources of Chilton Company, a wholly-owned subsidiary of Capital Cities/American Broadcasting Company, Inc. ("CC/ABC"), from February 1993 until January 1995. Ms. Hinds was the Director of Human Resources for CC/ABC from June 1987 until February 1993. Robert W. Hopwood has served as Vice President, Customer Care since January 1990. From 1983 until 1990, Mr. Hopwood was the Director of Technical Operations of the Company and ISOETEC. Andrew Kontomerkos has been Senior Vice President, Hardware Engineering and Production since January 1994, and prior thereto was Vice President, Hardware Engineering since 1988. He served as a Vice President of ISOETEC since 1983. From 1982 to 1983, he was a Vice President and founder 18 of SAM Communications, Inc., a telecommunications research and development company which was one of the predecessors to ISOETEC; that corporation was merged into ISOETEC in 1983. From 1979 to 1982, Mr. Kontomerkos was Director of Telecommunications Systems Development of TIE/communications, Inc., a manufacturer of telecommunications systems. David E. Lee has been Vice President, Business Development since February 1995. Prior thereto, from October 1990 to February 1995, Mr. Lee was Division Manager for the Network Services Division of the Company. From 1984 until 1990, Mr. Lee held various management positions within the Company. Mr. Lee served as Director, International Finance of GTE Corporation from 1983 to 1984 and prior thereto, he held various financial management positions within GTE Corporation. John T. O'Kane has served as Vice President, MIS since January 1990. From 1988 until 1990, Mr. O'Kane was Director of MIS for the Company. Prior to that time and since 1981, he was the Vice President of MIS for Executone, Inc., a predecessor of the Company. Frank J. Rotatori has been Vice President, Healthcare Sales since February 1995. Prior thereto he was Vice President, European Operations since February 1994, and prior thereto was Director of Call Center Management Products during 1992 and 1993, Vice President-Direct Sales from 1990 through 1991 and Vice President-Customer Service of the Company from 1988 to 1990. Mr. Rotatori joined ISOETEC in 1986 as a regional manager. From 1982 to 1986, he served as General Manager and Eastern Regional Manager for Rolm Corporation. For 13 years prior to that time, he worked at Xerox Corporation in various manufacturing, accounting, sales and service management positions. Shlomo Shur has been Senior Vice President, Advanced Technology since January 1994, and prior thereto was Vice President, Software Engineering since 1988. He served as a Vice President of ISOETEC from 1983 to 1988. From 1982 to 1983, he was Vice President and a founder of SAM Communications, Inc., a telecommunications research and development company which was one of the predecessors to ISOETEC; that corporation was merged into ISOETEC in 1983. From 1978 to 1982, Mr. Shur was Manager, Software Development for TIE/communications, Inc., a manufacturer of telecommunications systems. 19 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Incorporated by reference to "Stock Data" in the Registrant's 1995 Annual Report to Shareholders. ITEM 6. SELECTED FINANCIAL DATA Incorporated by reference to "Selected Financial Data" in the Registrant's 1995 Annual Report to Shareholders. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Incorporated by reference to "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Registrant's 1995 Annual Report to Shareholders. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Financial Statements are incorporated by reference to the Financial Statements in the Registrant's 1995 Annual Report to Shareholders. The Schedule appears at pages S-1 through S-2 of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Directors The following persons are currently serving as directors and have been nominated by the Board of Directors as candidates for re-election as directors at the Annual Meeting of Shareholders to be held on July 30, 1996. Certain information regarding each director is set forth below, including each individual's principal occupation and business experience during 20 at least the last five years, other directorships in other public companies, and the year in which the individual was elected a director of the Company or one of its predecessor companies.
Director Name Age Principal Occupation Since Alan Kessman 49 President, Chief Executive Officer and 1983 Chairman of the Board of the Company since 1988; formerly President, Chief Executive Officer and Chairman of the Board of ISOETEC Communications, Inc. ("ISOETEC"), one of the Company's predecessor corporations, since 1983. From 1981 to 1983, Mr. Kessman served as a Corporate Vice President of Rolm Corporation. Stanley M. Blau 58 Vice Chairman of the Company since 1983 1988; formerly President and Chief Executive Officer of Vodavi Technology Corporation ("Vodavi"), one of the Company's predecessor corporations, from 1987 until July 1988. Thurston R. Moore 49 Partner, Hunton & Williams (Attorneys), 1990 Richmond, Virginia, since 1981. Richard S. Rosenbloom 63 David Sarnoff Professor of Business 1992 Administration, Harvard Business School, since 1980. Mr. Rosenbloom is a director of Arrow Electronics, Inc. Jerry M. Seslowe 50 Managing Director of Resource Holdings 1996 Ltd., an investment and financial consulting firm, since prior to 1991. William R. Smart 75 Senior Vice President of Cambridge 1992 Strategic Management Group in Cambridge, Massachusetts since 1984. From 1984 to 1992, Chairman of the Board, Electronic Associates, Inc. Mr. Smart is a director of National Data Computer Company and American International Petroleum Company.
Executive Officers See Part 1 for information and identification of executive officers of the 21 Company. Compliance with Section 16(a) of the Securities Exchange Act of 1934 Section 16(a) of the Securities Exchange Act of 1934 requires that the Company's directors and executive officers, and persons who own more than 10% of a registered class of the Company's equity securities, file with the Securities and Exchange Commission initial reports of ownership and reports of change in ownership of Common Stock and other equity securities of the Company. Officers, directors and greater than 10% shareholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms that they file. To the Company's knowledge, based solely on review of the copies of such reports furnished to the Company, and written representations that no other reports were required, during the fiscal year ended December 31, 1995, all Section 16(a) filing requirements applicable to its officers, directors and greater than 10% beneficial owners were complied with. ITEM 11. EXECUTIVE COMPENSATION Director Compensation Each non-employee director receives an annual retainer of $10,000, payable in equal quarterly installments, plus a fee of $1,250 for each Board meeting attended. The Company also reimburses directors for their travel and accommodation expenses incurred in attending Board meetings. In addition, each non-employee director is granted annually an option to purchase shares of the Company's Common Stock under the terms and conditions of the Company's 1990 Directors' Stock Option Plan approved by the shareholders on June 20, 1990. During June 1995, each outside director was granted a five-year option for 3,000 shares at a per share exercise price of $2.50, the closing market price on the date of grant. Each non-employee director was also granted an additional five-year option ( for 12,300 shares at $3.15 per share in the case of Mr. Seslowe, and 13,300 shares at $3.00 per share in the case of the other non-employee directors) pursuant to an amendment to the Plan approved by the Board of Directors in November 1995, subject to approval by the shareholders of the Company at the 1996 Annual Meeting. These options were granted at a price equal to 120% of the closing market price of the Common Stock on the date of grant. The number of shares granted to each director under the amended Plan is determined by reference to an annual formula designed to award each 22 director five-year options having a value of $10,000 based on the Black-Scholes option valuation model and the current price of the Company's Common Stock. As of March 31, 1996, options to purchase 39,000 shares of Common Stock were outstanding under the 1990 terms of the Plan, and options to purchase an additional 52,200 shares were outstanding under the amendment to the Directors' Stock Option Plan subject to shareholder approval of the amendment at the 1996 Annual Meeting of Shareholders. Under the Plan as amended, subject to shareholder approval, options to purchase 140,800 shares were available for future grant under the Directors' Stock Option Plan. On February 1, 1996, June 23, 1992 and September 24, 1992, Jerry M. Seslowe, Richard S. Rosenbloom and William R. Smart were each granted warrants to purchase 25,000 shares of the Company's Common Stock at $2.63, $1.25 and $1.16, respectively, the closing market prices on those dates. The warrants vest ratably over a three-year period and expire on February 1, 2001, June 23, 1997 and September 24, 1997, respectively. Messrs. Seslowe, Rosenbloom and Smart received these warrants upon being elected to serve on the Company's Board of Directors. Executive Compensation Summary Compensation Table The following table sets forth the compensation by the Company of the Chief Executive Officer and the four most highly compensated other executive officers of the Company for services in all capacities to the Company and its subsidiaries during the past three fiscal years.
Annual Compensation Long-Term Compensation Other Awards Annual of All Name and Bonus ($) Compensa- Options/ Other(3) Principal Position Year Salary ($) (1) tion($) (2) SARs(#) Compensation ($) Alan Kessman 1995 400,000 -0- 1,100 -0- 10,328
23 Chairman of the Board, 1994 391,100 100,000 8,506 -0- 6,978 President and Chief 1993 374,850 150,764 -0- 50,000 263,491 Executive Officer Michael W. 1995 256,00 -0- 1,100 -0- 6,353 Yacenda Executive Vice 1994 243,154 39,600 10,000 -0- 55,597 President 1993 225,879 58,684 -0- 32,000 160,388 Stanley M. Blau 1995 197,789 -0- -0- 15,000 3,367 Vice Chairman 1994 201,738 7,713 -0- 15,000 3,276 1993 193,973 37,083 -0- 20,000 22,645 Shlomo Shur 1995 215,700 -0- -0- -0- 5,514 Senior Vice President 1994 211,539 23,088 10,000 -0- 4,199 Advanced Technology 1993 203,390 38,885 -0- 25,000 4,750 Andrew 1995 214,000 -0- -0- -0- 5,535 Kontomerkos Senior Vice 1994 205,888 28,025 10,000 -0- 4,899 President Hardware 1993 193,973 37,083 -0- 20,000 6,060 Engineering and Production (1) Includes special bonus awarded to certain Company employees following successful implementation of measures to overcome the effect of a fire at the facilities of one of the Company's major suppliers in China in December 1993. Special bonuses totalling $50,000, $30,000, $15,000 and $20,000 were awarded to Messrs. Kessman, Yacenda, Shur and Kontomerkos, respectively. 24 (2) This category represents employee stock option credits that could have been used after July 1, 1993 and prior to December 31, 1994 to pay the exercise price of employee stock options held by the employee. Stock purchased with the 1992 option credits must be held for one year. All credits shown in this column were used to exercise stock options in 1993 or 1994. See Note 3. (3) This category includes for 1994 stock option credits used to pay the exercise price of employee stock options exercised during 1994 by Mr. Yacenda in the amount of $50,549. This category includes for 1993 stock option credits used to pay the exercise price of employee stock options exercised during 1993 in the following amounts: Mr. Kessman $256,240; Mr. Yacenda, $155,250, and Mr. Blau, $19,200. The credits were granted in 1988, 1992 and 1994 (see note 2 above). The column does not include 1992 or 1994 credits used in 1993 or 1994 that were reported as "Other Annual Compensation" for 1992 or 1994. This category also includes for each individual a matching contribution by the Company under the Company's 401(k) plan in the amount of $660 each for each year. This column also includes premiums paid by the Company for long-term disability and life insurance for the individuals in the following amounts in 1995: Mr. Kessman, $9,668; Mr. Yacenda, $5,693; Mr. Shur, $4,854; Mr. Blau, $2,707; and Mr. Kontomerkos, $4,875; in the following amounts in 1994: Mr. Kessman, $7,424; Mr. Yacenda, $4,774; Mr. Shur, $4,196; Mr. Blau, $2,820; and Mr. Kontomerkos, $4,849; and in the following amounts in 1993: Mr. Kessman, $6,591; Mr. Yacenda, $4,478; Mr. Blau, $2,785; Mr. Shur, $4,090; 25 Mr. Kontomerkos, $5,400. Employment Agreement The Company and Mr. Kessman entered into an employment continuity agreement in January, 1995 that provides certain benefits to Mr. Kessman in the event of the termination of Mr. Kessman's employment following a change in control in the Company, including a lump sum payment equal to 2.99 times his then current base salary plus the average of any bonuses awarded to Mr. Kessman during the two fiscal years preceding the termination of his employment. Under the terms of the agreement, a change in control includes the acquisition of beneficial ownership of 20% of the Company's voting securities by any person or group. The agreement continues through the length of Mr. Kessman's employment with the Company. Option Grants in Last Fiscal Year The following table sets forth the individual grants of stock options made during the year ended December 31, 1995 to the Chief Executive Officer and the four most highly compensated 26 other executive officers of the Company. There were no grants of stock appreciation rights made to any officers during 1995, and there are no outstanding stock appreciation rights.
Potential Realized Value at Assumed Annual Rates of Stock Price Appreciation Individual Grants for Option Term - - ------------------------------------------------------------------------------------------------ ------------------------------- % of Total Options Exercise Granted to or Base Options Employees in Price Expiration Name Granted (#) Fiscal Year ($/Sh) Date 5% ($) 10% ($) - - ------------------------------------------------------------------------------------------------ ------------------------------- Alan Kessman 0 0 0 0 0 0 Michael W. Yacenda 0 0 0 0 0 0 Stanley M. Blau 15,000 2.5 $3.13 3/23/00 12,950 28,617 Shlomo Shur 0 0 0 0 0 0 Andrew Kontomerkos 0 0 0 0 0 0
The option reported in the above table expires in five years, and vests 25% per year over four years. Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values The following table sets forth each exercise of stock options made during the year ended December 31, 1995 by the Chief Executive Officer and the four most highly compensated other executive officers and the fiscal year-end value of unexercised options held by those individuals as of December 31, 1995. There were no exercises or holdings of stock appreciation rights by any officers during 1995, and there are no outstanding stock appreciation rights. 27
Value of Number of Unexercised Unexercised In-the-Money Options Options at Fiscal at Fiscal Year-End (#) Year-End ($) (1) --------------- ------------------- Shares Acquired Exercisable/ Exercisable/ Name on Exercise (#) Value Realized ($) Unexercisable Unexercisabl -------------- ------------------ -------------- Alan Kessman 137,500 262,500 65,688/35,000 74,097/18,438 Michael W. 158,273 302,697 66,000/27,000 60,313/16,688 Yacenda Stanley M. Blau 0 -0- 381,500/15,000 446,719/8,438 Shlomo Shur 286,930 495,854 62,500/17,500 59,219/9,219 Andrew Kontomerkos 296,425 578,660 45,250/13,750 42,078/7,109
(1) Based upon the last sale price on December 29, 1995 of $2.31 per share of Common Stock. Compensation Committee Interlocks and Insider Participation The members of the Compensation Committee in 1995 were Thurston Moore, Richard Rosenbloom, and William Smart. No member of the Committee is a former or current officer or employee of the Company or any subsidiary, except that Mr. Moore has acted as an Assistant Secretary of the Company. Mr. Moore is a partner in the law firm of Hunton & Williams, which regularly acts as counsel to the Company. 28 No executive officer of the Company served as a director or a member of the Compensation Committee or of the equivalent body of any entity, any one of whose executive officers serve on the Compensation Committee or the Board of Directors of the Company. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Ownership of Common Stock by Directors, Officers and Principal Shareholders The following table sets forth the number of shares of Common Stock beneficially owned as of March 31, 1996, by each current director of the Company, by all current directors and officers of the Company as a group and by each person known to the Company to be a beneficial owner of more than five percent of the Company's outstanding Common Stock. Unless otherwise noted, the owner has sole voting and dispositive power with respect to the securities.
Percentage Shares of Common Stock of Name of Beneficial Owner Beneficially Owned Common Stock (1) ------------------------ ----------------------- ---------------- Stanley M. Blau (2) . . . . . . . . . 753,846 1.4 Entities Associated with Hambrecht & Quist Group (3) . . . . . . . . . 4,822,989 9.3 One Bush Street San Francisco, CA 94104 Alan Kessman (4) . . . . . . . . . . 1,760,682 3.4 Thurston R. Moore (5) . . . . . . . . 108,635 * Entities Associated with Edmund H. Shea, Jr. (6). . . . . 3,249,895 6.3 655 Brea Canyon Road
29
Percentage Shares of Common Stock of Name of Beneficial Owner Beneficially Owned Common Stock (1) ------------------------ ----------------------- ---------------- Walnut Creek, CA 91789 Richard S. Rosenbloom (7) . . . . . . 50,300 * Jerry M. Seslowe (8) . . . . . . . . 69,444 * William R. Smart (9) . . . . . . . . 60,300 * All Directors and Officers as a Group (20 persons) (10) . . . . . . . . . 6,079,953 14.3
* Less than 1% (1) Based upon 51,865,163 shares of Common Stock outstanding as of March 31, 1996. In cases where the beneficial ownership of the individual or group includes options, warrants, or convertible securities, the percentage is based on the 51,865,163 shares actually outstanding plus the shares of Common Stock issuable upon exercise or conversion of any such options, warrants, or convertible securities held by the individual or group. The percentage does not reflect or assume the exercise or conversion of any options, warrants or convertible securities not owned by the individual or group in question. (2) Includes 362,750 shares subject to options exercisable within 60 days of June 3, 1996. Includes 16,250 shares subject to options not exercisable within 60 days of June 3, 1996. (3) The Hambrecht & Quist entities share power to vote and dispose of all of such shares. (4) Includes 62,500 shares subject to options exercisable within 60 days of June 3, 1996. Includes 12,500 shares subject to options not exercisable within 60 days of June 3, 1996. Includes 765,503 shares as to which voting and dispositive power is shared. Includes 187,500 shares held in a revocable trust for Mr. Kessman's children, over which Mr. Kessman has no control and as to which shares he disclaims any beneficial ownership. Includes 9,412 shares of Common Stock issuable upon conversion of the Company's Debentures (of which Mr. Kessman owns $100,000 principal amount or .5% of the principal amount outstanding). (5) Includes 28,300 shares subject to options, all of which are exercisable within 60 days of June 3, 1996. (6) Includes 11,935 shares of Common Stock issuable upon 30 conversion of the Company's Debentures, of which entities affiliated with Mr. Shea beneficially own less than 1% of the outstanding principal amount or $126,812 principal amount. The Shea entities share the power to vote and dispose of all of such shares. (7) Mr. Rosenbloom beneficially owns 50,300 shares subject to options and warrants, all of which are exercisable within 60 days of June 3, 1996. (8) Mr. Seslowe beneficially owns 37,300 shares of Common Stock subject to options and warrants, none of which are exercisable within 60 days of June 3, 1996. Includes 12,755 shares owned by Resource Holdings Associates, in which Mr. Seslowe has a greater than 10% ownership and of which he is a managing director. Does not include 203,756 shares of Common Stock contingently issuable upon conversion of the Series A Preferred Stock and the Series B Preferred Stock owned by Mr. Seslowe, or 45,874 shares of Common Stock contingently issuable upon conversion of Preferred Stock owned by Resource Holdings, none of which shares of Preferred Stock are or will become convertible within 60 days of June 3, 1996. (9) Mr. Smart beneficially owns 50,300 shares subject to options and warrants, of which 49,550 are exercisable within 60 days of June 3, 1996. (10) Includes 976,262 shares subject to options or warrants exercisable within 60 days of June 3, 1996. Includes 196,650 shares subject to options or warrants not exercisable within 60 days of June 3, 1996. Also includes 64,000 shares of Common Stock issuable upon conversion of the Company's Debentures (of which the group beneficially owns $680,000 principal amount, or 3.5% of the principal amount outstanding). Includes 924,978 shares as to which voting and dispositive power is shared and 289,445 shares as to which beneficial ownership is disclaimed. Ownership of Preferred Stock by Directors, Officers and Principal Shareholders The following table sets forth the number of shares of Convertible Cumulative Preferred Stock, Series A, and Contingently Convertible Cumulative Preferred Stock, Series B, beneficially owned as of March 31, 1996, by all current directors and officers of the Company who beneficially own any of such shares, and by each person known to the Company to be a beneficial owner of more than five percent of the Company's outstanding Preferred Stock. The table also shows 31 the percentage of each series beneficially owned, based upon 250,000 shares of Series A Stock and 100,000 shares of Series B Stock outstanding as of March 31, 1996. No other director, nominee for director or officer owns any shares of the Company's Preferred Stock. Unless otherwise noted, the owner has sole voting and dispositive power with respect to the securities.
Shares of Preferred Stock Beneficially Owned and Percent of Class Series A Stock Series B Stock Name of Beneficial Owner Cooper Life Sciences 78,819 (31.53%) 31,528 (31.53%) 160 Broadway New York, NY 10038 Jerry M. Seslowe 3,830 (1.53%) 1,532 (1.53%) James W. Spencer 26,625 (10.65%) 10,650 (10.65%) 8446 Bronze Lane Highlands Ranch, CO 80126 Watermark Investments 127,895 (51.16%) Limited 51,157 (51.16%) 730 Fifth Avenue New York, NY 10019 All Directors and Officers 3,830 (1.53%) as a Group (20 persons) 1,532 (1.53%)
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Hunton & Williams regularly acts as counsel to the Company. Mr. Moore, a director of the Company, is a 32 partner at Hunton & Williams. In connection with the Company's acquisition of Unistar, the Company paid or agreed to pay Resource Holdings Ltd, a former shareholder of Unistar, accrued investment banking fees incurred by Unistar prior to the acquisition of $105,000, and total finder's fees of $320,000 based on the value of the transaction. Mr. Seslowe was elected a director of the Company after the acquisition. Both Resource Holdings and Mr. Seslowe acquired Common Stock and Preferred Stock of the Company in exchange for their shares of Unistar. Mr. Seslowe is a managing director of and owns more than 10% of Resource Holdings. The Company's management believes that the transactions with Resource Holdings were on terms as favorable to the Company as could be expected from unaffiliated third parties. The Executive Stock Incentive Plan (the "Incentive Plan") approved by shareholders at the 1994 Annual Meeting was implemented in October 1994 with 30 employees participating. Under the terms of the Incentive Plan eligible employees were granted the right to purchase shares of the Company's Common Stock at a price of $3.1875 per share. Participating employees financed the purchases of these shares through loans by the Company's bank lenders at the prime rate less 1/4%. The loans are fully-recourse to the participating employees but are guaranteed by letters of credit from the Company to the lending banks. The Company holds the purchased Common Stock as security for the repayment of the loans. The following table contains information about borrowings in excess of $60,000 by executive officers that were outstanding during 1995 pursuant to the Incentive Plan that are guaranteed by the Company.
Unpaid Indebtedness Highest Amount of at Indebtedness Between 3/31/96 Name 1/1/95 and 3/31/96 (1) Including Accrued Interest - - ----- ---------------------- -------------------------- Alan Kessman $1,912,500 $2,097,195 Michael W. Yacenda $1,115,625 $1,223,364 Shlomo Shur $ 557,813 $ 611,682 Andrew Kontomerkos $ 557,813 $ 611,682 Barbara C. Anderson $ 318,750 $ 349,533
33 James E. Cooke III $ 318,750 $ 349,533 Anthony R. $ 446,250 $ 489,345 Guarascio Israel J. Hersh $ 95,625 $ 104,860 Robert W. Hopwood $ 318,750 $ 348,912 David E. Lee $ 318,750 $ 349,533 Frank J. Rotatori $ 191,250 $ 209,720 - - --------------------- (1) Amounts shown are exclusive of accrued interest. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1), (a)(2) and (d). The financial statements required by this item and incorporated herein by reference are as follows: Report of Independent Public Accountants Consolidated Balance Sheets - December 31, 1995 and 1994 Consolidated Statements of Operations - Years ended December 31, 1995, 1994 and 1993 Consolidated Statements of Changes in Stockholders' Equity - Three years ended December 31, 1995 Consolidated Statements of Cash Flows Years ended December 31, 1995, 1994 and 1993 Notes to Consolidated Financial Statements The schedules to consolidated financial statements required by this item and included in this report are as follows: 34 Report of Independent Public Accountants on Schedule Schedule II - Valuation and Qualifying Accounts (a)(3) and (c). The exhibits required by this item and included in this report or incorporated herein by reference are as follows:
Exhibit No. 2-1 Agreement and Plan of Merger by and among EXECUTONE Information Systems, Inc., Executone Newco, Inc., and Unistar Gaming Corp., dated as of December 19, 1995. Incorporated by reference to the Registrant's Current Report on Form 8-K dated January 3, 1996. 2-2 Asset Purchase Agreement among V Technology Acquisition Corporation, EXECUTONE Information Systems, Inc. and Vodavi, Inc. dated November 5, 1993, and Amendment dated February 18, 1994. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993. 2-3 Asset Purchase Agreement by and among Tone Holdings, Inc. and Tone Acquisition Corporation, EXECUTONE Network Services, Inc. and EXECUTONE Information Systems, Inc. dated as of April 9, 1996, and Amendment No. 1 to Asset Purchase Agreement dated as of May 31, 1996, by and among Clarity Telecom Holdings, Inc. (formerly known as Tone Holdings, Inc.), Clarity Telecom, Inc. (formerly known as Tone Acquisition Corporation), EXECUTONE Network Services, Inc. and EXECUTONE Information Systems, Inc. (Confidential portions have been omitted and filed separately with the Commission pursuant to a request for confidential treatment.) Filed herewith.
35 3-1 Articles of Incorporation, as amended through December 18, 1995 (restated for electronic filing). Previously filed. 3-2 Articles of Amendment dated and filed December 19, 1995, amending the Company's Articles of Incorporation. Incorporated by reference to the Registrant's Current Report on Form 8-K dated January 3, 1996. 3-3 Bylaws, as amended. Incorporated by reference to the Registrant's Registration Statement on Form S-3 (File No. 33-62257) filed August 30, 1995. 4-1 Second Amended and Restated Loan and Security Agreement dated as of August 30, 1994 and First Amendment thereto dated January 1, 1995, between EXECUTONE Information Systems, Inc., Continental Bank N.A. and the other Lenders named therein. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. 4-2 Loan Agreement dated as of August 30, 1994, between EXECUTONE Information Systems, Inc., certain employees thereof, and the Lenders named therein. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. 4-3 First Amendment dated January 1, 1995, Second Amendment dated September 29, 1995, and Third Amendment dated December 29, 1995, to the Second Amended and Restated Loan and Security Agreement by and among EXECUTONE Information Systems, Inc., the Financial Institutions Listed on the Signature Page Thereof, and Bank of America Illinois. Previously filed.
36 4-10 Indenture dated March 1, 1986 with United States Trust Company of New York relating to 7 1/2% Convertible Subordinated Debentures of Vodavi Technology Corporation due March 15, 2011. Incorporated by reference to Vodavi Technology Corporation's Registration Statement on Form S-1 (as amended) (Registration No. 33- 3827) filed on March 9, 1986 and amended April 1, 1986. 4-11 First Supplemental Indenture dated August 4, 1989 with United States Trust Company of New York relating to 7 1/2% Convertible Subordinated Debentures due March 15, 2011. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989. 4-12 Specimen Certificate representing 7 1/2% Convertible Subordinated Debentures. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989. 10-1 1984 Employee Stock Purchase Plan of EXECUTONE Information Systems, Inc. Incorporated by reference to the Registrant's Registration Statement on Form S-8 (File No. 33-23294) declared effective by the Commission on August 23, 1988. 10-2 1986 Stock Option Plan of EXECUTONE Information Systems, Inc. Incorporated by reference to the Registrant's Registration Statement on Form S-8 (File No. 33-23294) declared effective by the Commission on August 23, 1988. 10-3 1984 Stock Option Plan of EXECUTONE Information Systems, Inc. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31,
37 1990, as amended by Form 8 filed on August 20, 1991. 10-4 401(k) Savings Plan of Vodavi Technology Corporation dated December 27, 1985. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989. 10-5 Stock Option Bonus Credit Plan of EXECUTONE Information Systems, Inc. dated December 31, 1988. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989. 10-6 1990 Directors' Stock Option Plan. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, as amended by Form 8 filed on August 20, 1991. 10-7 1994 Executive Stock Incentive Plan. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. 10-9 Volume Purchase Agreement dated January 31, 1992, between U. S. Sprint Communications Company Limited Partnership and EXECUTONE Information Systems, Inc. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991, as amended by Form 8 filed on June 12, 1992. 10-10 Amendments dated as of April 1, 1995, and 1993 to Volume Purchase Agreement dated January 31, 1992, between U. S. Sprint Communications Company Limited Partnership and EXECUTONE Information Systems, Inc. (Confidential portions have been omitted and filed separately with the Commission pursuant to a request for confidential treatment.) Filed herewith.
38 10-12 Warrant to Purchase 143,181 shares of Common Stock of the Registrant in favor of Continental Bank N. A. (now Bank of America Illinois) dated December 28, 1990. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, as amended by Form 8 filed on August 20, 1991. 10-13 Warrant to Purchase 50,000 shares of Common Stock of the Registrant in favor of Continental Bank N. A. (now Bank of America Illinois) dated December 28, 1990. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, as amended by Form 8 filed on August 20, 1991. 10-16 Manufacturing Services Agreement dated as of January 10, 1995, between EXECUTONE Information Systems, Inc. and Compania Dominicana de Telefonos, C por A (Codetel). Previously filed. 10-17 Manufacturing Services Agreement dated February 9, 1990 between Wong's Electronics Co., Ltd. and EXECUTONE Information Systems, Inc. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, as amended by Form 8 filed on August 20, 1991. 10-19 Warrant to Purchase 25,000 Shares of Common Stock of EXECUTONE Information Systems, Inc. in favor of Richard S. Rosenbloom dated June 23, 1992. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992. 10-20 Warrant to Purchase 25,000 Shares of Common Stock of EXECUTONE
39 Information Systems, Inc. in favor of William R. Smart dated September 24, 1992. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992. 10-21 Management Agreement for the National Indian Lottery dated January 16,1995. Previously filed. 10-22 Distributor Agreement dated as of May 31, 1996, between EXECUTONE Information Systems, Inc. and Clarity Telecom, Inc. Filed herewith. 11 Statement regarding computation of per share earnings. Previously filed. 13 1995 Annual Report to Shareholders of EXECUTONE Information Systems, Inc. Filed herewith. 21 Subsidiaries of EXECUTONE Information Systems, Inc. Previously filed. 23 Consent of Arthur Andersen LLP. Previously filed. 27 Financial Data Schedule. Filed herewith.
Undertakings For the purposes of complying with the rules governing Form S-8 under the Securities Act of 1933, the undersigned registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into registrant's Registration Statements on the following Form S-8 filings: S-8 Reg. No. 2-91008 filed May 9, 1984 on 1983 Employee Stock Purchase Plan (650,000 shares) S-8 Reg. No. 33-959 filed October 17, 1985 on 1984 Stock Option Plan (390,000 shares) 40 S-8 Reg. No. 33-6604 filed June 19, 1986 on 1983 Stock Option Plan (350,000 shares) S-8 Reg. No. 33-16585 filed August 24, 1987 on 1986 and 1983 Stock Option Plans (800,000 shares) S-8 Reg. No. 33-23294 filed August 3, 1988 on 1986 Stock Option Plan (7,000,000 shares) and Employee Stock Purchase Plan (500,000 shares) S-8 Reg. No. 33-42561 filed September 4, 1991 on 1984 Employee Stock Purchase Plan (350,000 shares) and Directors' Stock Option Plan (100,000 shares) S-8 Reg. No. 33-45015 filed January 2, 1992 on 1984 Employee Stock Purchase Plan (400,000 shares) S-8 Reg. No. 33-57519 filed January 31, 1995 on 1984 Employee Stock Purchase Plan (1,000,000 shares). Insofar as indemnification arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to the court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. Reports on Form 8-K The Registrant filed no reports on Form 8-K during the quarter ended December 31, 1995. 41 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. EXECUTONE Information Systems, Inc. By: /s/ Alan Kessman -------------------------- Alan Kessman, Chairman, President and Chief Executive Officer April 12, 1996 Milford, Connecticut Pursuant to the requirements of the Securities and Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. April 12, 1996 /s/ Alan Kessman ----------------------------- Alan Kessman Chairman, President and Chief Executive Officer (Principal Executive Officer) April 12, 1996 /s/ Stanley M. Blau ---------------------------- Stanley M. Blau Vice Chairman of the Board of Directors April 12, 1996 /s/ Anthony R. Guarascio ----------------------------- Anthony R. Guarascio Vice President-Finance and Chief Financial Officer (Principal Financial and Accounting Officer) April 12, 1996 /s/ Thurston R. Moore ------------------------------- 42 Thurston R. Moore Director April 12, 1996 /s/ Richard S. Rosenbloom -------------------------- Richard S. Rosenbloom Director April 12, 1996 /s/ Jerry M. Seslowe --------------------------- Jerry M. Seslowe Director April 12, 1996 /s/ William R. Smart ---------------------------- William R. Smart Director 43 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of EXECUTONE Information Systems, Inc.: We have audited in accordance with generally accepted auditing standards, the financial statements included in EXECUTONE Information Systems, Inc. and subsidiaries' annual report to stockholders incorporated by reference in this Form 10-K, and have issued our report thereon dated January 26, 1996. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in Item 14 is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Stamford, Connecticut January 26, 1996 44 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (Amounts in Thousands)
Additions Deductions --------------------------------------------- -------------- Charged Net Balance at (Credited) (Credited) Writeoffs of Balance at Beginning to Costs and to Other Uncollectible End of Description of Period Expenses Accounts Accounts Period ----------- --------- -------------- ---------- ------------- ----------- Year ended December 31, 1995 Deducted from asset accounts: Allowance for doubtful accounts $ 1,335 $ 1,872 -- ($1,492) $ 1,715 Allowance for uncollectible notes receivable 691 (432) -- -- 259 Year ended December 31, 1994 Deducted from asset accounts: Allowance for doubtful accounts 1,017 1,381 -- (1,063) 1,335 Allowance for uncollectible notes receivable 1,084 (393) -- -- 691 Year ended December 31, 1993 * Deducted from asset accounts: Allowance for doubtful accounts 1,046 1,285 -- (1,314) 1,017 Allowance for uncollectible notes receivable 1,604 (440) (80) -- 1,084
* Restated to reflect the disposition of the VCS Division, which was sold as of March 1994. S-2 EXECUTONE INFORMATION SYSTEMS, INC. EXHIBITS TO 1995 ANNUAL REPORT ON FORM 10-K
Exhibit No. 2-1 Agreement and Plan of Merger by and among EXECUTONE Information Systems, Inc., Executone Newco, Inc., and Unistar Gaming Corp., dated as of December 19, 1995. Incorporated by reference to the Registrant's Current Report on Form 8-K dated January 3, 1996. 2-2 Asset Purchase Agreement among V Technology Acquisition Corporation, EXECUTONE Information Systems, Inc. and Vodavi, Inc. dated November 5, 1993, and Amendment dated February 18, 1994. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993. 2-3 Asset Purchase Agreement by and among Tone Holdings, Inc. and Tone Acquisition Corporation, EXECUTONE Network Services, Inc. and EXECUTONE Information Systems, Inc. dated as of April 9, 1996, and Amendment No. 1 to Asset Purchase Agreement dated as of May 31, 1996, by and among Clarity Telecom Holdings, Inc. (formerly known as Tone Holdings, Inc.), Clarity Telecom, Inc. (formerly known as Tone Acquisition Corporation), EXECUTONE Network Services, Inc. and EXECUTONE Information Systems, Inc. (Confidential portions have been omitted and filed separately with the Commission pursuant to a request for confidential treatment.) Filed herewith. 3-1 Articles of Incorporation, as amended through December 18, 1995 (restated for electronic filing). Preiously filed. 3-2 Articles of Amendment dated and filed December 19, 1995, amending the Company's Articles of Incorporation. Incorporated by reference to the Registrant's Current Report on Form 8-K dated January 3, 1996.
45 3-3 Bylaws, as amended. Incorporated by reference to the Registrant's Registration Statement on Form S-3 (File No. 33-62257) filed August 30, 1995. 4-1 Second Amended and Restated Loan and Security Agreement dated as of August 30, 1994 and First Amendment thereto dated January 1, 1995, between EXECUTONE Information Systems, Inc., Continental Bank N.A. and the other Lenders named therein. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. 4-2 Loan Agreement dated as of August 30, 1994, between EXECUTONE Information Systems, Inc., certain employees thereof, and the Lenders named therein. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. 4-3 First Amendment dated January 1, 1995, Second Amendment dated September 29, 1995, and Third Amendment dated December 29, 1995, to the Second Amended and Restated Loan and Security Agreement by and among EXECUTONE Information Systems, Inc., the Financial Institutions Listed on the Signature Page Thereof, and Bank of America Illinois. Previously filed. 4-10 Indenture dated March 1, 1986 with United States Trust Company of New York relating to 7 1/2% Convertible Subordinated Debentures of Vodavi Technology Corporation due March 15, 2011. Incorporated by reference to Vodavi Technology Corporation's Registration Statement on Form S-1 (as amended) (Registration No. 33- 3827) filed on March 9, 1986 and amended April 1, 1986.
46 4-11 First Supplemental Indenture dated August 4, 1989 with United States Trust Company of New York relating to 7 1/2% Convertible Subordinated Debentures due March 15, 2011. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989. 4-12 Specimen Certificate representing 7 1/2% Convertible Subordinated Debentures. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989. 10-1 1984 Employee Stock Purchase Plan of EXECUTONE Information Systems, Inc. Incorporated by reference to the Registrant's Registration Statement on Form S-8 (File No. 33-23294) declared effective by the Commission on August 23, 1988. 10-2 1986 Stock Option Plan of EXECUTONE Information Systems, Inc. Incorporated by reference to the Registrant's Registration Statement on Form S-8 (File No. 33-23294) declared effective by the Commission on August 23, 1988. 10-3 1984 Stock Option Plan of EXECUTONE Information Systems, Inc. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, as amended by Form 8 filed on August 20, 1991. 10-4 401(k) Savings Plan of Vodavi Technology Corporation dated December 27, 1985. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989. 10-5 Stock Option Bonus Credit Plan of EXECUTONE Information Systems, Inc. dated December 31, 1988.
47 Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989. 10-6 1990 Directors' Stock Option Plan. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, as amended by Form 8 filed on August 20, 1991. 10-7 1994 Executive Stock Incentive Plan. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. 10-9 Volume Purchase Agreement dated January 31, 1992, between U. S. Sprint Communications Company Limited Partnership and EXECUTONE Information Systems, Inc. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991, as amended by Form 8 filed on June 12, 1992. 10-10 Amendments dated as of April 1, 1995, and 1993 to Volume Purchase Agreement dated January 31, 1992, between U. S. Sprint Communications Company Limited Partnership and EXECUTONE Information Systems, Inc. (Confidential portions have been omitted and filed separately with the Commission pursuant to a request for confidential treatment.) Filed herewith. 10-12 Warrant to Purchase 143,181 shares of Common Stock of the Registrant in favor of Continental Bank N. A. (now Bank of America Illinois) dated December 28, 1990. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, as amended by Form 8 filed on August 20, 1991. 10-13 Warrant to Purchase 50,000 shares of Common Stock of the Registrant in favor of Continental Bank N. A. (now
48 Bank of America Illinois) dated December 28, 1990. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, as amended by Form 8 filed on August 20, 1991. 10-16 Manufacturing Services Agreement dated as of January 10, 1995, between EXECUTONE Information Systems, Inc. and Compania Dominicana de Telefonos, C por A (Codetel). Previously filed. 10-17 Manufacturing Services Agreement dated February 9, 1990 between Wong's Electronics Co., Ltd. and EXECUTONE Information Systems, Inc. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, as amended by Form 8 filed on August 20, 1991. 10-19 Warrant to Purchase 25,000 Shares of Common Stock of EXECUTONE Information Systems, Inc. in favor of Richard S. Rosenbloom dated June 23, 1992. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992. 10-20 Warrant to Purchase 25,000 Shares of Common Stock of EXECUTONE Information Systems, Inc. in favor of William R. Smart dated September 24, 1992. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992. 10-21 Management Agreement for the National Indian Lottery dated January 16, 1995. Previously filed. 10-22 Distributor Agreement dated as of May 31, 1996, between EXECUTONE Information Systems, Inc. and Clarity Telecom, Inc. Filed herewith
49 11 Statement regarding computation of per share earnings. Previously filed. 13 1995 Annual Report to Shareholders of EXECUTONE Information Systems, Inc. Filed herewith. 21 Subsidiaries of EXECUTONE Information Systems, Inc. Previously filed. 23 Consent of Arthur Andersen LLP. Previously filed. 27 Financial Data Schedule. Filed herewith.
50 STATEMENT OF DIFFERENCES The trademark symbol shall be expressed as ............... 'tm' The registered trademark symbol shall be expressed as .....'r' The section symbol shall be expressed as ................. 'ss' EX-2 2 EXHIBIT 2.3 ASSET PURCHASE AGREEMENT by and among TONE HOLDINGS, INC. AND TONE ACQUISITION CORPORATION, EXECUTONE NETWORK SERVICES, INC. AND EXECUTONE INFORMATION SYSTEMS, INC. TABLE OF CONTENTS
Page ---- ARTICLE I DEFINITIONS 1.1 Accounts Receivable.............................................................................1 1.2 Affiliate.......................................................................................2 1.3 Agreement.......................................................................................2 1.4 Assets..........................................................................................2 1.5 Assignment and Assumption Agreement.............................................................3 1.6 Assumed Liabilities.............................................................................3 1.7 Audited Financial Statements....................................................................4 1.8 Authorized Products.............................................................................4 1.9 Authorized Software.............................................................................4 1.10 Balance Sheet...................................................................................4 1.11 Bank............................................................................................4 1.12 Bank Accounts...................................................................................4 1.13 Bank Borrowings.................................................................................4 1.14 Bank Financing..................................................................................4 1.15 Bank Loan Agreement.............................................................................5 1.16 Bill of Sale....................................................................................5 1.17 Books and Records...............................................................................5 1.18 Buyer...........................................................................................5 1.19 Closing.........................................................................................5 1.20 Closing Balance Sheet...........................................................................5 1.21 Closing Date....................................................................................5 1.22 Code............................................................................................6 1.23 Company.........................................................................................6 1.24 Contracts.......................................................................................6 1.25 Customer Base...................................................................................6 1.26 DSO Business....................................................................................6 1.27 Distributor Agreement...........................................................................6 1.28 Employee Benefit Plan...........................................................................6 1.29 ENS.............................................................................................7 1.30 ERISA...........................................................................................7 1.31 Escrow Agent....................................................................................7 1.32 Escrow Agreement................................................................................7 1.33 Excluded Assets.................................................................................7 1.34 Excluded Business...............................................................................7 1.35 Excluded Claims.................................................................................8
-i- 1.36 Excluded Customers..............................................................................8 1.37 Final Net Asset Statement.......................................................................8 1.38 Financial Statements............................................................................8 1.39 Financing Commitments...........................................................................8 1.40 Final Cash Price................................................................................8 1.41 Fixed Assets....................................................................................8 1.42 GAAP............................................................................................9 1.43 Holdings........................................................................................9 1.44 Initial Cash Price..............................................................................9 1.45 Inventory.......................................................................................9 1.46 Junior Subordinated Note........................................................................9 1.47 Knowledge of Buyer..............................................................................9 1.48 Knowledge of Sellers............................................................................9 1.49 Law.............................................................................................9 1.50 Leased Premises................................................................................10 1.51 Leases.........................................................................................10 1.52 MAC Business...................................................................................10 1.53 Material Adverse Effect........................................................................10 1.54 National Account...............................................................................10 1.55 Net Assets.....................................................................................10 1.56 Network Resale Business........................................................................11 1.57 Opinion of Buyer's Counsel.....................................................................11 1.58 Opinion of Sellers' Counsel....................................................................11 1.59 Ordinary Course of Business....................................................................11 1.60 PBX............................................................................................11 1.61 Permits........................................................................................11 1.62 Permitted Liens................................................................................11 1.63 Person.........................................................................................11 1.64 Prepaid Expenses...............................................................................12 1.65 Real Property..................................................................................12 1.66 Required Consents..............................................................................12 1.67 Retained Liabilities...........................................................................12 1.68 Sales Contracts................................................................................13 1.69 Sellers........................................................................................13 1.70 Service Contracts..............................................................................13 1.71 Shared Assets..................................................................................14 1.72 Sprint Contract................................................................................14 1.73 Stockholders Agreement.........................................................................14 1.74 Stock Put Agreement............................................................................14 1.75 Sublease/HQ....................................................................................14 1.76 Tax or Taxes...................................................................................14 1.77 Tax Return.....................................................................................15 1.78 Telephone Numbers..............................................................................15
-ii- 1.79 Territory......................................................................................15 1.80 Transitional Services Term Sheet...............................................................15 1.81 Unaudited Interim Financial Statements.........................................................15 1.82 Unistar Business...............................................................................15 1.83 Warrants.......................................................................................15 ARTICLE II PURCHASE AND SALE 2.1 Purchase and Sale; Assignment and Assumption...................................................16 2.2 [Reserved].....................................................................................16 2.3 Deliveries at Closing..........................................................................16 2.4 Final Net Asset Statement......................................................................18 2.5 Transfer or Sales Taxes........................................................................20 ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLERS 3.1 Organization of Sellers........................................................................20 3.2 Authorization; Enforceability..................................................................20 3.3 No Violation or Conflict.......................................................................21 3.4 Title to Assets................................................................................22 3.5 All Assets Necessary to Conduct Business.......................................................22 3.6 No Litigation..................................................................................23 3.7 Contracts......................................................................................23 3.8 Accounts Receivable............................................................................24 3.9 Financial Statements...........................................................................24 3.10 Permits........................................................................................25 3.11 Real Property..................................................................................26 3.12 Fees and Expenses of Brokers and Others........................................................27 3.13 Inventory......................................................................................27 3.14 Books and Records..............................................................................28 3.15 Tax Matters....................................................................................28 3.16 Compliance with Law............................................................................29 3.17 Employment Agreements and Benefits.............................................................29 3.18 Labor Matters..................................................................................30 3.19 Insurance......................................................................................31 3.20 No Adverse Change..............................................................................32 3.21 Absence of Questionable Payments...............................................................34 3.22 Absence of Undisclosed Liabilities.............................................................34 3.23 Certain Transactions...........................................................................34 3.24 Subsidiaries and Affiliates....................................................................35 3.25 Product Liability..............................................................................36
-iii- 3.26 Product Warranty...............................................................................36 3.27 Investment Representations.....................................................................36 3.28 Consents.......................................................................................38 3.29 Distributor Agreement..........................................................................38 3.30 Territory......................................................................................38 3.31 International Call Back........................................................................38 3.32 Accounts; Funds, etc...........................................................................38 3.33 ENS Assets.....................................................................................39 3.34 Disclosure.....................................................................................39 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BUYER 4.1 Organization of Buyer..........................................................................39 4.2 Authorization; Enforceability..................................................................39 4.3 No Violation or Conflict.......................................................................40 4.4 No Broker......................................................................................40 4.5 No Litigation..................................................................................40 4.6 Financing Commitments..........................................................................41 4.7 Capitalization.................................................................................41 ARTICLE V CERTAIN MATTERS PENDING THE CLOSING 5.1 Carry on in Regular Course.....................................................................42 5.2 Indebtedness...................................................................................42 5.3 Compensation...................................................................................42 5.4 Compliance with Law............................................................................43 5.5 Access.........................................................................................43 5.6 Cooperation....................................................................................44 5.7 Publicity......................................................................................44 5.8 Confidentiality................................................................................44 5.9 Exclusivity....................................................................................45 5.10 Updated Financial Information..................................................................46 5.11 Title Insurance and Surveys....................................................................46 5.12 [Reserved].....................................................................................46 5.13 Additional Territories.........................................................................46 ARTICLE VI CONDITIONS PRECEDENT TO THE OBLIGATIONS OF BUYER 6.1 Accuracy of Representations and Warranties.....................................................47 6.2 Proceedings and Instruments Satisfactory.......................................................47
-iv- 6.3 No Litigation..................................................................................47 6.4 Consents.......................................................................................48 6.5 Lien Waivers and Estoppel Certificates.........................................................48 6.6 Due Diligence..................................................................................48 6.7 Environmental Due Diligence....................................................................48 6.8 Financing......................................................................................48 6.9 Financial Statements...........................................................................49 6.10 Customer Review................................................................................49 6.11 Sellers' Performance...........................................................................49 6.12 No Material Adverse Change.....................................................................49 6.13 Title to Real Estate...........................................................................49 ARTICLE VII CONDITIONS PRECEDENT TO THE OBLIGATIONS OF SELLERS 7.1 Accuracy of Representations and Warranties.....................................................50 7.2 Proceedings and Instruments Satisfactory.......................................................50 7.3 No Litigation..................................................................................50 7.4 Buyer's Performance............................................................................50 ARTICLE VIII INDEMNITIES AND ADDITIONAL COVENANTS 8.1 Indemnification................................................................................51 8.2 Employment Matters.............................................................................57 8.3 Bulk Sales Compliance..........................................................................60 8.4 Post-Closing Agreements........................................................................60 8.5 Certain Employee Obligations...................................................................62 8.6 Additional Instruments; Cooperation............................................................62 8.7 Use of Name....................................................................................62 8.8 Allocation of Purchase Price...................................................................63 8.9 Access to Books and Records....................................................................64 8.10 Best Efforts...................................................................................65 8.11 Sales Agency...................................................................................66 8.12 Non-Competition................................................................................67 8.13 Non-Solicitation of Employees..................................................................68 8.14 Rights of First Offer..........................................................................68 8.15 Sellers' Confidentiality Covenant..............................................................70 8.16 Additional Financial Information...............................................................71 8.17 Shared Assets..................................................................................72 8.18 Video Conferencing Equipment...................................................................73 8.19 Notification of Certain Hires..................................................................74 -v-
ARTICLE IX TERMINATION 9.1 Termination....................................................................................74 9.2 Rights on Termination; Waiver..................................................................76 ARTICLE X MISCELLANEOUS 10.1 Entire Agreement; Amendment....................................................................78 10.2 Expenses.......................................................................................79 10.3 Governing Law..................................................................................79 10.4 Assignment.....................................................................................79 10.5 Notices........................................................................................79 10.6 Counterparts; Headings.........................................................................80 10.7 Interpretation.................................................................................80 10.8 Severability...................................................................................81 10.9 No Reliance....................................................................................82 10.10 Parties in Interest............................................................................82 10.11 Specific Performance...........................................................................82
-vi- EXHIBITS EXHIBIT DESCRIPTION 1.5 Assignment and Assumption Agreement 1.7 Application of GAAP 1.12 Bank Accounts 1.16 Bill of Sale 1.24 Contracts 1.27 Distributor Agreement 1.32 Escrow Agreement 1.33 Excluded Assets 1.35 Excluded Claims 1.46 Junior Subordinated Note 1.50 Leased Premises 1.51 Leases 1.54 National Account List 1.57 Opinion of Buyer's Counsel 1.58 Opinion of Sellers' Counsel 1.61 Permits 1.62 Permitted Liens 1.65 Real Property Description 1.71 Shared Assets 1.73 Stockholders Agreement 1.74 Stock Put Agreement 1.78 Telephone Numbers 1.79 Territory 1.80 Transitional Services Term Sheet 1.83 Form of Warrants 2.4 Net Asset Calculations 3.1 Sellers Qualifications and Licenses To Do Business 3.6 Pending Litigation 3.7 Material Contracts 3.9 Financial Statements 3.10(a) Material Permits 3.10(b) Tariffs and Filings 3.11(a) Real Property Leases 3.11(b) Real Property Exceptions 3.17 Employment Agreements and Benefits 3.18 Labor Matters 3.19 Insurance 3.20 Adverse Changes, Etc. -vii- 3.24 Subsidiaries and Affiliates 3.26 Product and Service Warranties 3.28 Required Consents 3.30 Territory Exception 3.31 International Callback Customers 3.33 ENS Asset 4.4 Buyer's Broker 6.6 Reviewed Materials 6.10 Customer Review 8.2 Employment Matters 8.4(d) Terms of Use of Executone Name 8.8 Allocation of Purchase Price 8.13 DSO Liason 8.17 Division of Mainframe Computers -viii- ASSET PURCHASE AGREEMENT ASSET PURCHASE AGREEMENT, made as of April 9, 1996, by and among TONE HOLDINGS, INC., a Delaware corporation ("Holdings"), and its wholly-owned subsidiary TONE ACQUISITION CORPORATION, a Delaware corporation ("Tone") (Tone, together with Holdings, the "Buyer"), EXECUTONE INFORMATION SYSTEMS, INC., a Virginia corporation (the "Company"), and its wholly-owned subsidiary EXECUTONE NETWORK SERVICES, INC., a Virginia corporation ("ENS") (the Company and ENS collectively referred to herein as the "Sellers"). In consideration of the mutual covenants, conditions and agreements set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, it is hereby agreed that: ARTICLE I DEFINITIONS When used in this Agreement, the following terms shall have the meanings specified: 1.1 Accounts Receivable. "Accounts Receivable" shall mean all accounts receivable of Sellers arising out of the DSO Business, together with all security and associated rights related thereto (including, without limitation, all security deposits, letters of credit and security interests in collateral). 1.2 Affiliate. "Affiliate" shall mean, as to any person, any other person or entity that, directly or indirectly through one or more intermediaries, controls, is controlled by or is under common control with such person. 1.3 Agreement. "Agreement" shall mean this Asset Purchase Agreement. 1.4 Assets. "Assets" shall mean (a) all assets reflected on the Balance Sheet and all assets of the DSO Business of the same nature as those reflected on the Balance Sheet that have been acquired in the Ordinary Course of Business since the date of the Balance Sheet (other than assets reflected on such Balance Sheet that have been disposed of in the Ordinary Course of Business since the date of the Balance Sheet) including, without limitation: (i) the Real Property, and all improvements, fixtures and fittings thereon, easements, rights-of way, and other appurtenant rights thereto (such as appurtenant rights in and to public streets); (ii) the Fixed Assets; (iii) the Inventory; (iv) all Accounts Receivable (net of reserves), notes receivable (net of reserves), securities, Prepaid Expenses and other current assets of the DSO Business; (b) all rights under the Leases; (c) all rights of the Sellers under the Permits; (d) originals and all copies of customer and mailing lists of the DSO Business (including copies embodied or stored electronically); (e) all rights of the Sellers under the Contracts; (f) all claims, deposits, prepayments, refunds, causes of action, choses in action, rights of recovery, rights of set off and rights of recoupment of the DSO Business (other than Excluded Claims); (g) all Books and Records; (h) the Bank Accounts; (i) the Telephone Numbers; (j) subject to Sections 8.6 and 8.11, all right, title and interest in the names and marks ULTRASTAR LD and UNTRASTAR 800, and all goodwill associated therewith; (k) the Customer Base; (l) all other assets of the Sellers of every kind and description, tangible or intangible, used primarily -2- in the DSO Business, other than the Excluded Assets and other than the tangible personal property components of the Shared Assets as provided in Section 8.17; (m) except as provided in Section 8.11, all right, title and interest in the long distance products Infostar'r' LD+, Infostar 'r' 800 and Infostar 'r' Calling Card. 1.5 Assignment and Assumption Agreement. "Assignment and Assumption Agreement" shall mean the Assignment and Assumption Agreement between Sellers and Buyer in the form of Exhibit 1.5 attached hereto. 1.6 Assumed Liabilities. "Assumed Liabilities" shall mean (a) all liabilities of the Sellers set forth on the face of the Balance Sheet (rather than in any notes thereto), excluding amounts payable to Sellers and further excluding liabilities discharged prior to Closing; (b) all liabilities of the Sellers incurred after the date of the Balance Sheet in the Ordinary Course of Business that would, if incurred during the last fiscal year, be required in accordance with GAAP to be set forth on the face of the Balance Sheet (rather than any notes thereto), excluding amounts payable to Sellers; (c) all liabilities and obligations of the Sellers under the Leases; (d) all liabilities and obligations under the Contracts other than under Service Contracts to the extent assigned to Buyer; (e) all liabilities under Service Contracts to the extent reserved therefor on the Closing Balance Sheet; (e) liabilities and obligations to the extent listed in Part II of Exhibit 8.2 hereof; and (f) additional liabilities not described in clauses (a) through (e) above incurred by the DSO Business in the Ordinary Course of Business in an aggregate amount not exceeding $200,000. "Assumed Liabilities" shall not include the Retained Liabilities, except to the extent, if any, that liabilities or obligations -3- otherwise included in clause (vi) of the definition of Retained Liabilities are subsumed in clause (f) of this Section 1.6. 1.7 Audited Financial Statements. "Audited Financial Statements" shall mean the balance sheet and related statements of income and cash flows of the DSO Business as of and for the fiscal year ended December 31, 1995 prepared in accordance with GAAP on a basis consistent throughout the periods covered thereby (applied in accordance with the practices and methodologies set forth on Exhibit 1.7), audited by Arthur Andersen LLP, the Company's independent public accountants and delivered to Buyer on or before May 15, 1996. 1.8 Authorized Products. "Authorized Products" shall have the meaning set forth in the Distributor Agreement. 1.9 Authorized Software. "Authorized Software" shall have the meaning set forth in the Distributor Agreement. 1.10 Balance Sheet. "Balance Sheet" shall mean the balance sheet contained in the Financial Statements. 1.11 Bank. "Bank" shall mean Bank of America Illinois, N.A. 1.12 Bank Accounts. "Bank Accounts" shall mean the bank and lock-box accounts described in Exhibit 1.12 attached hereto. 1.13 Bank Borrowings. "Bank Borrowings" shall mean borrowings by Sellers from the Bank under the Bank Loan Agreement. 1.14 Bank Financing. "Bank Financing" shall mean the proposed senior credit facilities in an aggregate principal amount of up to $60 million, to be provided to Buyer by a syndicate of banks arranged by NationsBanc Capital Markets, Inc. -4- 1.15 Bank Loan Agreement. "Bank Loan Agreement" shall mean the Second Amended and Restated Loan and Security Agreement between the Bank and the Company, dated as of August 30, 1994, as amended on January 11, 1995, September 29, 1995 and December 29, 1995. 1.16 Bill of Sale. "Bill of Sale" shall mean the Bill of Sale from Sellers to Buyer in the form of Exhibit 1.16 attached hereto. 1.17 Books and Records. "Books and Records" shall mean all business and financial books, records, files, data, billing systems, ledgers, plans, documents, correspondence, lists, notebooks, marketing materials produced by or for the DSO Business or ordered by or for the DSO Business prior to the Closing, reports, maintenance and service records, and other information of Sellers relating principally to the DSO Business, in each case whether written or electronically stored or otherwise recorded including, without limitation, all customer lists, financial and accounting records, purchase orders and invoices, sales orders and sales order log books, credit and collection records, correspondence and miscellaneous records. 1.18 Buyer. "Buyer" shall have the meaning set forth in the preamble above. 1.19 Closing. "Closing" shall mean the meeting of the parties to be held at 10:00 a.m., local time, on the Closing Date, at such time and place as the parties may mutually agree in writing. 1.20 Closing Balance Sheet. "Closing Balance Sheet" shall have the meaning set forth in Section 2.4(a). 1.21 Closing Date. "Closing Date" shall mean May 30, 1996 or such other date as the parties may mutually agree. -5- 1.22 Code. "Code" shall mean the Internal Revenue Code of 1986, as amended, and any successor thereto. 1.23 Company. "Company" shall have the meaning set forth in the preamble above. 1.24 Contracts. "Contracts" shall mean (a) the Leases, (b) the Service Contracts, (c) the Sales Contracts and (d) those other contracts, agreements, purchase orders, leases, license agreements, relationships and commitments related to the DSO Business that are specifically listed on Exhibit 1.24 attached hereto. 1.25 Customer Base. "Customer Base" shall mean the past and present customers of the DSO Business (other than the Excluded Customers), including, without limitation, all of Sellers' rights under and interests in all associated customer lists, the Sales Contracts, the Service Contracts and the MAC Business related to such customers. 1.26 DSO Business. "DSO Business" shall mean the business of Sellers of selling, leasing, installing, servicing and maintaining telephone and related products (including, but not limited to key and PBX systems and voice mail) and other telephony products and software (including, but not limited to, the MAC Business), to and for end-user customers located within the Territory other than Excluded Customers and the Excluded Business and acting as sales agent or reseller of long-distance and local exchange services and related services. 1.27 Distributor Agreement. "Distributor Agreement" shall mean the Distributor Agreement in the form attached hereto as Exhibit 1.27. 1.28 Employee Benefit Plan. "Employee Benefit Plan" shall mean an "employee benefit plan" as defined in Sections 3(1), 3(2) and 3(3) of ERISA that provides compensation or other benefits to any present or former employee of the DSO Business, or any dependent or -6- beneficiary thereof, and any other plans that provide compensation or other benefits, whether or not subject to ERISA, to any present or former employee of the DSO Business, or any dependent or beneficiary thereof or any material benefit plan or program. 1.29 ENS. "ENS" shall have the meaning set forth in the preamble above. 1.30 ERISA. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. 1.31 Escrow Agent. "Escrow Agent" shall mean Brown Brothers Harriman and Co. or, if it is not willing or able to act in such capacity, such other institution as the parties may agree to. 1.32 Escrow Agreement. "Escrow Agreement" shall mean the Escrow Agreement, dated as of the date hereof, by and among the Company, Buyer and Escrow Agent, in the form attached hereto as Exhibit 1.32. 1.33 Excluded Assets. "Excluded Assets" shall mean all Sales Contracts and Service Contracts with Excluded Customers, Excluded Claims, assets related to or used in connection with the Excluded Business, business licenses, deferred taxes, cash on hand on the Closing Date, and all other assets and contracts specifically identified on Exhibit 1.33 attached hereto. 1.34 Excluded Business. "Excluded Business" shall mean the (i) manufacturing, research and development, technical support and training businesses conducted by Sellers, (ii) the Unistar Business, (iii) the sale, installation, service and maintenance of products to and for Excluded Customers, except as provided in the Distributor Agreement, (iv) the international call back business and (v) the business of providing pay phones and network services to inmates of correctional instititions. -7- 1.35 Excluded Claims. "Excluded Claims" shall mean those items of Accounts Receivable and other claims against customers of the DSO Business listed in Exhibit 1.35 attached hereto. 1.36 Excluded Customers. "Excluded Customers" shall mean all of Sellers' existing National Accounts, video conferencing customers, healthcare customers, international call back customers (to the extent such international call back customers require services or products which are otherwise part of the Excluded Business), call center customers, United States federal government customers and customers located outside the Territory. 1.37 Final Net Asset Statement. "Final Net Asset Statement" shall mean the statement of Net Assets as of the Closing Date, prepared and delivered in accordance with Section 2.4 hereof. 1.38 Financial Statements. "Financial Statements" shall mean the unaudited balance sheet and related unaudited statement of income of the DSO Business as of and for the year ended December 31, 1995. 1.39 Financing Commitments. "Financing Commitments" shall mean the written commitments to loan money to or subscribe for equity of Buyer to consummate the transactions contemplated herein and to operate the DSO Business after the Closing, copies of which have heretofore been provided by Buyer to Sellers. 1.40 Final Cash Price. "Final Cash Price" shall mean the Initial Cash Price, adjusted to reflect any adjustment payment required pursuant to Section 2.4. 1.41 Fixed Assets. "Fixed Assets" shall mean all tangible personal property used in connection with the DSO Business, including, without limitation, all fixed assets, chattels, -8- machines, machinery, equipment, vehicles, leasehold improvements, computer hardware, fixtures, furniture, furnishings, handling equipment, implements, parts, supplies, tools and accessories of all kinds. 1.42 GAAP. "GAAP" shall mean generally accepted accounting principles in the United States as promulgated by the Financial Standards Accounting Board of the American Institute of Certified Public Accountants or its committees as of the date hereof. 1.43 Holdings. "Holdings" shall have the meaning set forth in the preamble above. 1.44 Initial Cash Price. "Initial Cash Price" shall mean $61.5 million. 1.45 Inventory. "Inventory" shall mean all of Sellers' inventories of Authorized Products, spare parts and supplies held by or for use or sale in the DSO Business. 1.46 Junior Subordinated Note. Junior Subordinated Note shall mean the promissory note issued to the Company by Holdings at the Closing in the principal amount of $5,870,000 in the form of Exhibit 1.46 hereto. 1.47 Knowledge of Buyer. "Knowledge of Buyer" shall mean actual knowledge of Buyer, after due inquiry. For purposes of this Section 1.47, "due inquiry" shall mean inquiry in a manner reasonably appropriate to determine the truth of the applicable statement. 1.48 Knowledge of Sellers. "Knowledge of Sellers" shall mean the actual knowledge of Sellers, after due inquiry. For purposes of this Section 1.48, "due inquiry" shall mean inquiry in a manner reasonably appropriate to determine the truth of the applicable statement. 1.49 Law. "Law" shall mean any U.S., state, province, local or other constitution, law or governmental requirement of any kind, and the rules, regulations and orders promulgated thereunder. -9- 1.50 Leased Premises. "Leased Premises" shall mean the premises leased by Sellers and used in the DSO Business as set forth on Exhibit 1.50. 1.51 Leases. "Leases" shall mean all rights with respect to leasehold interests and subleases (i) related to the Real Property, Leased Premises and Fixed Assets, which Leases are listed on Exhibit 1.51 attached hereto or (ii) relating to copiers, postage meters and other customary office equipment located and used at Leased Premises and the Real Property in the Ordinary Course of Business. 1.52 MAC Business. "MAC Business" shall mean the moves, adds and changes business associated with the DSO Business. 1.53 Material Adverse Effect. "Material Adverse Effect" shall mean, with respect to any Person or business, any change or effect, which, singly or in the aggregate with related changes or effects, is materially adverse to the business, operations, assets, prospects or condition, financial or otherwise, of such Person or business, considered as a whole with any wholly-owned subsidiaries of any such Person. 1.54 National Account. "National Account" shall mean a corporate customer or prospect of Sellers that has 40 or more locations, including one or more locations within the Territory, and is, on or before the Closing Date, on the National Account List, a copy of which is attached hereto as Exhibit 1.54. 1.55 Net Assets. "Net Assets" shall mean the Assets (less intangibles) transferred to Buyer at Closing less Assumed Liabilities assumed by Buyer at Closing, all as derived from the Closing Balance Sheet and the procedures described in Exhibit 2.4. -10- 1.56 Network Resale Business. "Network Resale Business" shall mean that segment of the DSO Business whereby Sellers market, sell and provide to customers long-distance telephone service products and resell long-distance network services except and excluding Sellers' international call back business. 1.57 Opinion of Buyer's Counsel. "Opinion of Buyer's Counsel" shall mean the opinion of Ropes & Gray, counsel to Buyer, in the form attached hereto as Exhibit 1.57. 1.58 Opinion of Sellers' Counsel. "Opinion of Sellers' Counsel" shall mean the opinion of Hunton & Williams, counsel to Sellers, in the form attached hereto as Exhibit 1.58. 1.59 Ordinary Course of Business. "Ordinary Course of Business" shall mean the ordinary course of the DSO Business consistent with the Sellers' past custom and practice (including with respect to quantity and frequency). 1.60 PBX. "PBX" shall mean private branch exchange. 1.61 Permits. "Permits" shall mean all governmental approvals, authorizations, registrations, permits and licenses or any pending applications relating to the foregoing, including, without limitation, those listed on Exhibit 1.61 attached hereto. 1.62 Permitted Liens. "Permitted Liens" shall mean those liens affecting the Assets that are specifically listed on Exhibit 1.62 hereto as modified at Closing pursuant to Section 6.13 hereof. 1.63 Person. "Person" shall mean any natural person, partnership, corporation, trust, association, unincorporated organization, governmental entity, joint venture or other legal entity. -11- 1.64 Prepaid Expenses. "Prepaid Expenses" shall mean all deposits under the Contracts and prepaid expenses related to the DSO Business. 1.65 Real Property. "Real Property" shall mean, collectively, the real property and improvements related thereto owned and used by Sellers in connection with the operation of the DSO Business and described in the legal descriptions attached as Exhibit 1.65 attached hereto. 1.66 Required Consents. "Required Consents" shall mean all consents or approvals, including those of the Bank (with respect to the Bank Loan Agreement) and state and federal governmental agencies, that are necessary or required in order to transfer the Assets from Sellers to Buyer and to give effect to the transactions contemplated herein. 1.67 Retained Liabilities. "Retained Liabilities" shall mean: (i) any liability or obligation related to or arising out of the Excluded Claims, (ii) any and all of the Sellers' liabilities and obligations not related to or arising out of the DSO Business, (iii) any liability or obligation of the Sellers for Taxes, (iv) any liability or obligation of the Sellers for product warranty for products sold by the Sellers prior to the Closing Date, and (v) any and all of the Sellers' liabilities and obligations (to the extent not included in the Assumed Liabilities): (a) to indemnify any person (including either of the Sellers) for events occurring prior to the Closing Date; (b) arising as a result of any legal or equitable action or judicial or administrative proceeding initiated at any time in respect of anything done, suffered to be done or omitted to be done by such Sellers or any of their directors, officers, employees or agents prior to the Closing (including, without limitation, those arising out of the matters described on Exhibit 3.6 and Exhibit 3.18); (c) for costs and expenses incurred in connection with this Agreement, -12- the making or performance of this Agreement and the transactions contemplated hereby; (d) under this Agreement or under any side agreement between any of the Sellers on the one hand and the Buyer on the other hand entered into between Sellers and Buyer on or before the Closing Date; (e) for services rendered by Sellers prior to the Closing Date pursuant to Service Contracts in excess of the amount reserved therefor on the Closing Balance Sheet; (f) arising out of any Employee Benefit Plan established or maintained by the Sellers or to which the Sellers contributes or any liability for the termination of any such plan (except to the extent, if any, otherwise provided in Section 8.2); (g) for making payments or providing benefits of any kind to their employees or former employees including workers compensation, medical care or long-term disability care or arising out of any agreements providing for payments upon consummation of the transactions contemplated hereby (other than as provided in Section 8.2 hereof); (h) for indebtedness for money borrowed; (i) pertaining to the Sellers or their respective businesses and arising out of or resulting from noncompliance prior to the Closing Date with any Laws; (j) under any leases, contracts, or agreements which are not Contracts; and (k) of a type excluded in the calculation of Net Assets pursuant to the procedures set forth in Exhibit 2.4. 1.68 Sales Contracts. "Sales Contracts" shall mean all those contracts for the sale of products and software to customers included in the Customer Base. 1.69 Sellers. "Sellers" shall have the meaning set forth in the preamble hereto. 1.70 Service Contracts. "Service Contracts" shall mean all those contracts for the maintenance and service of products and software to customers included in the Customer Base. -13- 1.71 Shared Assets. "Shared Assets" shall mean the assets listed on Exhibit 1.71 attached hereto. 1.72 Sprint Contract. "Sprint Contract" shall mean the Volume Purchase Agreement between US Sprint Communications Company L.P. and the Company, dated as of January 31, 1992, as amended in 1993 and further amended as of April 1, 1995. 1.73 Stockholders Agreement. "Stockholders Agreement" shall mean the Stockholders Agreement of Holdings substantially in the form of Exhibit 1.73 attached hereto. 1.74 Stock Put Agreement. "Stock Put Agreement" means the Stock Put Agreement between the Company and Holdings for the purchase and sale of shares of Class A Common Stock of Holdings and Class L Common Stock of Holdings representing 8% of the outstanding shares of each such Class at Closing, substantially in the form of Exhibit 1.74 attached hereto. 1.75 Sublease/HQ. "Sublease/HQ" shall mean that sublease to be entered into between Sellers and Buyer pursuant to Section 8.4 hereof, relating to portions of Sellers' headquarters or other facilities on the terms described on the Transition Services Term Sheet. 1.76 Tax or Taxes. "Tax" or "Taxes" means any federal, state, local, or foreign income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental (including taxes under Code 'ss'. 59A), customs duties, capital stock, franchise, profits, withholding, social security (or similar, including FICA), unemployment, disability, real property, personal property, sales, use, transfer, registration, value added, alternative or add-on minimum, estimated, or other tax of any kind whatsoever, including any interest, penalty, or addition thereto, whether disputed or not. -14- 1.77 Tax Return. "Tax Return" means any return, declaration, report, claim for refund, or information return or statement relating to Taxes, including any schedule or attachment thereto, and including any amendment thereof. 1.78 Telephone Numbers. "Telephone Numbers" shall mean Sellers' rights in and to the "800" and other telephone numbers used in the DSO Business, which numbers are listed in Exhibit 1.78 attached hereto. 1.79 Territory. "Territory" shall mean the geographic areas described in Exhibit 1.79 attached hereto and any additional geographic areas as to which the Company and the Buyer shall agree will be included in the Territory pursuant to Section 5.13 hereto. 1.80 Transitional Services Term Sheet. "Transitional Services Term Sheet" shall mean the term sheet attached as Exhibit 1.80 with respect to the agreement or agreements to be entered into pursuant to Section 8.4 hereof providing for shared services between Buyer and the Company following the Closing Date. 1.81 Unaudited Interim Financial Statements. "Unaudited Interim Financial Statements" shall mean the balance sheet and the related statement of income of the DSO Business as of and for the three month period ended March 31, 1996. 1.82 Unistar Business. "Unistar Business" shall mean the business of developing, marketing and managing the National Indian Lottery, and other gaming activities. 1.83 Warrants. "Warrants" shall mean warrants to purchase 28,985 shares of Class A Common Stock of Holdings and 5,797 shares of Class L Common Stock of Holdings representing 8% of the outstanding shares of each such class at Closing (other than shares -15- issued to lenders as contemplated by the Financing Commitments), in the form attached hereto as Exhibit 1.83. ARTICLE II PURCHASE AND SALE 2.1 Purchase and Sale; Assignment and Assumption. (a) Sellers hereby agree that, upon all of the terms and subject to the conditions of this Agreement, Sellers shall sell, convey, transfer and deliver to Buyer the Assets, free and clear of any pledge, lien, claim, mortgage, option, security interest, charge or encumbrance of any kind except for Permitted Liens. (b) Buyer hereby agrees, upon all of the terms and subject to all of the conditions of this Agreement, to purchase from Sellers the Assets and to assume from Sellers the Assumed Liabilities. 2.2 [Reserved]. 2.3 Deliveries at Closing. (a) By Sellers to Buyer. At the Closing, Sellers shall deliver, or cause to be delivered, duly executed counterparts of the following items to Buyer: (i) the Assignment and Assumption Agreement; (ii) the Bill of Sale; (iii) the deed relating to the Real Property; (iv) the Distributor Agreement; (v) the Sublease/HQ; (vi) the agreements contemplated by the Transitional Services Term Sheet; (vii) the Opinion of Sellers' Counsel; (viii) the Escrow Agreement; (ix) such instruments of transfer, conveyance and assignment as may reasonably be requested by Buyer and its counsel; (x) a certificate of the corporate secretary of each of the Company and ENS as to such matters as may reasonably be requested by Buyer and its counsel; (xi) a FIRPTA certificate; (xii) the Stock Put Agreement; (xiii) the -16- Stockholders Agreement; and (xiv) various certificates, instruments and documents referred to in Article VI. (b) By Buyer to Sellers. Buyer shall deliver, or cause to be delivered at Closing: (i) to ENS, (A) $1,000 in cash payable by wire transfer of funds in accordance with written instruction of ENS given to the Buyer at least two business days prior to the Closing Date and (B) the Warrants; (ii) to the Escrow Agent, $7.5 million in cash (the "Escrowed Funds") payable by wire transfer of funds in accordance with written instructions of the Escrow Agent given to the Buyer at least two business days prior to the Closing Date, to be held in escrow pursuant to the terms of the Escrow Agreement; and (iii) to the Company (A) an amount of cash equal to the Initial Cash Price minus the amounts paid pursuant to clauses (i) and (ii) of this Section 2.3(b), by wire transfer of funds in accordance with written instructions of the Company given to the Buyer at least two business days prior to the Closing Date, and (B) duly executed counterparts of the following items: (1) the Assignment and Assumption Agreement; (2) the Distributor Agreement; (3) the Junior Subordinated Note; (4) the Stock Put Agreement; (5) the Sublease/HQ; (6) the agreements contemplated by the Transitional Services Term Sheet; (7) the Opinion of Buyer's Counsel; (8) a certificate of the corporate secretary of Buyer as to such matters as may reasonably be requested by Sellers and their counsel; (9) the Escrow Agreement; (10) -17- the Stockholders Agreement; and (11) various certificates, instruments and documents referred to in Article VII. 2.4 Final Net Asset Statement. (a) Within 60 days after the Closing Date, Buyer shall cause its independent accounting firm to prepare and deliver to Sellers (i) a balance sheet of the DSO Business as of the Closing Date prepared in accordance with GAAP applied in accordance with the practices and methodologies set forth on Exhibit 1.7 (the "Closing Balance Sheet") and which shall be audited by Buyer's certified public accountants and (ii) a draft Final Net Asset Statement derived from the Closing Balance Sheet in the manner set forth in Exhibit 2.4. Seller will reimburse Buyer for one-half of the reasonable out-of-pocket expenses incurred in connection with the audit contemplated by this Section 2.4(a) up to a maximum reimbursement obligation of Seller for said audit of $80,000. (b) If Sellers do not object to the draft Final Net Asset Statement within 30 days following delivery thereof, such draft shall constitute the Final Net Asset Statement. If Sellers have any objections to the draft Final Net Asset Statements, Sellers will deliver a detailed written statement describing its objections to Buyer within 30 days after delivery thereof. Any objections shall be limited to arithmetic error or the failure of the Closing Balance Sheet to comply with GAAP applied in accordance with the practices and methodologies set forth on Exhibit 1.7 or the methodology prescribed in Exhibit 2.4. Buyer and Sellers will use their reasonable best efforts to resolve any such objections. If a final resolution is not obtained within 10 days after Buyer has received the statement of objections, Buyer and Sellers will select certified public accountants mutually acceptable to them to -18- resolve any remaining objections. If Buyer and Sellers are unable to agree on the choice of certified public accountants, they will select a "big six" nationally-recognized accounting firm by lot after excluding Price Waterhouse LLP and Arthur Anderson LLP. (c) Buyer will revise the draft Final Net Asset Statement, as required, to reflect the resolution of all objections (as agreed upon by the parties or directed by such accounting firm) and deliver the revised draft Final Net Asset Statement to Sellers within 5 days after the resolution of such objections. Such draft Final Net Asset Statement if revised as provided above or if not objected to by Sellers shall constitute the Final Net Asset Statement. (d) Within 5 days after agreement upon the Final Net Asset Statement, Buyer and Sellers shall adjust the Initial Cash Price in accordance with this subsection. If Net Assets as set forth on the Final Net Asset Statement are equal to or greater than $7,045,000, then the Initial Cash Price shall not be adjusted. If the Net Assets are less than $7,045,000 then the Escrow Agent shall remit to Buyer a portion of the Escrow Amount (as defined in the Escrow Agreement) equal to the amount by which the Net Assets are less than $7,045,000. (e) If any unresolved objections are submitted to an accounting firm for resolution as provided above, Sellers shall bear one-half of the fees and expenses of such accounting firm and the Buyer shall bear the other half of such fees and expenses. (f) Upon reasonable request, each of Buyer and Sellers shall provide the other (and such other's advisors and representatives) with access (including copies if so requested) to all working papers related to the draft Final Net Asset Statement, and to all books and records related to the DSO Business that are required to verify the accuracy of the -19- draft Final Net Asset Statement. Buyer and Sellers shall otherwise fully cooperate with each other in connection with finalization of the draft Final Net Asset Statement. 2.5 Transfer or Sales Taxes. Sellers will pay all sales, stamp, recordation and transfer Taxes arising out of, or related to, the transactions contemplated by this Agreement. ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLERS Each of the Sellers hereby jointly and severally represents and warrants to Buyer that: 3.1 Organization of Sellers. Each of the Sellers is a corporation duly organized, validly existing and in good standing under the laws of the Commonwealth of Virginia. Each of the Sellers has full corporate power to carry on its business as now being conducted and to own, operate and hold under lease the Assets as, and in the places where, such Assets now are owned, operated or held. Each of the Sellers is duly qualified or licensed as a foreign corporation, and is in good standing, in each jurisdiction in which the assets held or used by it or the nature of its business requires such qualification. Exhibit 3.1 lists each jurisdiction where either of the Sellers is qualified or licensed to do business as a foreign corporation and is in good standing in connection with the DSO Business. 3.2 Authorization; Enforceability. The execution, delivery and performance by each of the Sellers of this Agreement, the Escrow Agreement, the Distributor Agreement, the Stock Put Agreement, the Stockholders Agreement and the other documents and instruments contemplated hereby and the consummation of the transactions contemplated herein to which either of the Sellers is a party are within the corporate powers of Sellers and have been duly authorized by all necessary corporate actions of Sellers. The sale of the Assets by Sellers to -20- Buyer pursuant to this Agreement does not require the approval of the shareholders of the Company. This Agreement has been duly executed and delivered by each of the Sellers. This Agreement is, and the other documents and instruments required hereby to which either of the Sellers is a party, including, without limitation, the Escrow Agreement, the Distributor Agreement, the Stock Put Agreement and the Stockholders Agreement, when executed and delivered by the parties thereto, will be the valid and binding obligations of each of the Sellers, enforceable against Sellers in accordance with their respective terms. 3.3 No Violation or Conflict. Subject to obtaining the Required Consents, the execution, delivery and performance by Sellers of this Agreement, the Escrow Agreement, the Distributor Agreement, the Stock Put Agreement, the Stockholders Agreement and all of the other documents and instruments contemplated hereby to which either of the Sellers is a party, do not and will not (a) conflict with or violate any Law, judgment, injunction, ruling, order or decree binding on Sellers or any of their respective assets, (b) conflict with, result in a breach of, constitute a default under, result in the acceleration of, create the right in any party to accelerate, terminate, modify or cancel or require any notice under any Contract or other contract, license, lease, instrument, arrangement or agreement to which either of the Sellers is a party or by which either is bound or to which any of their respective assets are subject, or (c) conflict with or violate the Articles of Incorporation or Bylaws of Sellers. Except for the Required Consents, no consent of any other person, and no notice to, filing or registration with, or authorization, consent or approval of, any governmental, regulatory or self-regulatory agency is necessary or is required to be made or obtained by Sellers in connection with the execution and delivery of this Agreement, the Escrow Agreement, the Distributor Agreement, -21- the Stock Put Agreement, the Stockholders Agreement or the consummation of the transactions contemplated hereby. 3.4 Title to Assets. Each of the Sellers, as applicable, owns good, valid and marketable title to, or a valid leasehold interest in, all of the Assets, free and clear of any and all mortgages, liens, encumbrances, charges, claims, restrictions, pledges, security interests or impositions except for Permitted Liens and except for liens on the Assets securing Bank Borrowings, which liens will be released at or prior to Closing. Upon delivery of the Assets to Buyer at the Closing and upon Buyer's payment of the purchase consideration therefor, good, valid and marketable title to the Assets, free and clear of all mortgages, liens, encumbrances, charges, claims, restrictions, pledges, security interests or impositions, except for Permitted Liens, will pass to Buyer. 3.5 All Assets Necessary to Conduct Business. The Assets and the rights under the Distributor Agreement, the services contemplated by the Transitional Services Term Sheet and by Section 8.11 and the Shared Assets comprise all of the assets, properties, rights and services of every type and description, real, personal, tangible and intangible (other than the senior executive management function performed by the Company's chief executive officer, chief financial officer and chief operating officer) (i) used by Sellers to generate the revenues and income reflected in the income statement included in the Financial Statements, (ii) reflected on the balance sheet which will be included in the Audited Financial Statements and (iii) necessary to the conduct of the DSO Business (including the Network Resale Business) as currently conducted by Sellers. -22- 3.6 No Litigation. Except as set forth in Exhibit 3.6 attached hereto, there is no litigation, arbitration, proceeding, governmental investigation, citation or action of any kind pending or, to the Knowledge of Sellers, proposed or threatened, nor any basis therefor (a) relating to the DSO Business, the Assets, the Contracts or any of the Assumed Liabilities, or (b) that seeks restraint, prohibition, damages or other relief in connection with this Agreement or the consummation of the transactions contemplated hereby or that questions the validity of this Agreement or any action to be taken in connection herewith. 3.7 Contracts. Exhibit 3.7(a) attached hereto is a true and complete list of all Contracts pursuant to which Sellers have any continuing obligations that constitute: (a) a lease of any real or personal property with aggregate annual rental payments in excess of $75,000; (b) an agreement to purchase or sell a capital asset for a price in excess of $50,000; or (c) any other agreement involving an obligation or contractual liability in excess of $75,000 in the aggregate; (d) confidentiality or noncompetition agreements relating to the DSO Business; (e) any agreement under which a security interest or lien has been or may be imposed upon the Assets or the Distributor Agreement other than Leases; and (f) any Sales Contract or Service Contract that differs materially from the forms of Sales Contract and Service Contract delivered to Buyer prior to the date hereof. Each Contract listed on Exhibit 3.7(a) and Exhibit 1.23 is and, to the Knowledge of Sellers, each other Contract is, in full force and effect and enforceable in accordance with its terms. Except as set forth on Exhibit 3.6 with respect to alleged defaults, Sellers have performed each term, covenant and condition that is required to be performed by it at or before the date hereof under each of the Contracts listed on Exhibit 3.7(a) and Exhibit 1.23 and, to the Knowledge of Sellers, under each of the other Contracts. -23- Except as set forth in Exhibit 3.7(b), no event has occurred that would, with the passage of time or compliance with any applicable notice requirements, constitute a default by Sellers or, to the Knowledge of Sellers, any other party under any of the Contracts, and, to the Knowledge of Sellers, no party to any of the Contracts intends to cancel, terminate or exercise any option under any of the Contracts. Except as set forth on Exhibit 3.7(c), Sellers have made no prior assignment of the Contracts or any of their rights or obligations thereunder. 3.8 Accounts Receivable. All Accounts Receivable and notes receivable of the DSO Business are reflected properly on the Books and Records in accordance with GAAP, are valid receivables, arose from bona fide transactions in the Ordinary Course of Business and are not subject to any setoffs or counterclaims except as recorded as accounts payable. Since December 31, 1995 there has been no material adverse change in the composition of accounts receivable of the DSO Business in terms of aging and no event has occurred that would, under GAAP applied in accordance with the practices and methodologies set forth on Exhibit 1.7, require an increase in the ratio of the reserve for uncollectible accounts receivable to total accounts receivable for the DSO Business. 3.9 Financial Statements. Attached hereto as Exhibit 3.9 are the Financial Statements. The Financial Statements are true and correct in all material respects, fairly present the financial condition and results of operations of the DSO Business as of and for the period indicated and were prepared in accordance with GAAP applied on a basis consistent throughout the periods covered thereby (applied in accordance with the practices and methodologies set forth on Exhibit 1.7) and are consistent with the books and records of Sellers. The Audited Financial Statements and Unaudited Interim Financial Statements will be -24- true and correct in all material respects, fairly present the financial condition and results of operations of the DSO Business as of and for the periods indicated and be prepared in accordance with GAAP applied on a basis consistent throughout the periods covered thereby (applied in accordance with the practices and methodologies set forth on Exhibit 1.7) and be consistent with the books and records of Sellers. The Unaudited Interim Financial Statements will include all adjustments (including normal recurring adjustments) which in the opinion of Sellers' management are necessary for a fair presentation of the results for the interim period covered thereby. 3.10 Permits. (a) The Company possesses all Permits necessary to conduct the DSO Business as it is currently operated by Sellers and the business proposed to be conducted by the Company pursuant to the Distributor Agreement. All such Permits are in full force and effect and are being complied with in all respects. Exhibit 3.10(a) is a true and complete list of all Permits (including without limitation all Permits required in connection with distribution by the Company of long distance and local exchange products and related services) necessary for or material to the conduct of the DSO Business as it is currently operated by Sellers and the business proposed to be conducted by the Company pursuant to the Distributor Agreement. No representation is made as to the transferability of any Permits specified in Exhibit 3.10(a). (b) The Sellers have made all filings, including without limitation all tariffs, required by the Federal Communications Commission (the "FCC") and all states having jurisdiction over the business of Sellers relating to the DSO Business. Exhibit 3.10(b) is a true and complete list of all tariffs (and similar filings) filed with the FCC or such states by the -25- Company or ENS, as applicable. All such tariffs (and similar filings) are in full force and effect and are being complied with in all respects. 3.11 Real Property. Except as set forth on Exhibit 3.11, the Real Property and the Leased Premises constitute all real property owned or leased by Sellers and used in the DSO Business. Exhibit 3.11(a) includes a list of all leases pertaining to the Leased Premises. With respect to each such parcel of Real Property or Leased Premises, except as set forth on Exhibit 3.11(b) and except for Permitted Liens: (a) neither of Sellers has received any notice of any, and to the Knowledge of Sellers there are no, threatened, condemnation proceedings, lawsuits or administrative actions relating to the parcel or other matters affecting adversely the current use, occupancy or value thereof; (b) there are no leases, subleases, licenses, concessions or other agreements, written or oral, granting to any Person the right of use or occupancy of any portion of the parcel; (c) there are no outstanding options or rights of first refusal to purchase the parcel, or any portion thereof or interest therein; (d) all facilities on such parcel have received all approvals of governmental authorities (including Permits) required in connection with the ownership or operation thereof and have been operated and maintained in material accordance with applicable Laws; (e) there are no Persons (other than Sellers) in possession of such parcel; (f) any Leases in connection therewith are legal, valid, binding and enforceable against each party thereto and in full force and effect and, subject to obtaining -26- Required Consents, will continue to be legal, valid, binding and enforceable against all parties thereto, and in full force and effect on identical terms following the consummation of the transaction contemplated hereby; (g) Sellers are not in breach or default of any Leases of such parcel and, to the Knowledge of Sellers, no party to such Leases is in breach or default and no event has occurred which, with notice or lapse of time, would constitute a breach or default or permit termination, modification, or acceleration thereunder; and (h) there are no disputes or oral agreements in effect as to the Leases or subleases or Real Property. 3.12 Fees and Expenses of Brokers and Others. Neither of the Sellers is committed to any liability for any brokers' or finders' fees or any similar fees in connection with the transactions contemplated by this Agreement, including the conveyance of the Assets to Buyer, and neither has retained any broker or other intermediary to act on its behalf in connection with the transactions contemplated by this Agreement. All other fees and expenses (including attorneys' and accountants' fees) of Sellers in connection with the transactions contemplated herein shall be paid in full by Sellers. 3.13 Inventory. The Inventory consists of supplies, purchased parts, finished goods, and repaired and returned goods. All Inventory is merchantable and fit or suitable and usable for sale or use in the Ordinary Course of Business, and none of the Inventory is slow-moving, obsolete, below standard quality, damaged, or defective, subject only to the reserve for Inventory set forth on the face of the Balance Sheet (rather than in any notes thereto) as adjusted for the passage of time through the Closing Date in accordance with GAAP applied in -27- accordance with the practices and methodologies set forth on Exhibit 1.7. Inventory of returned goods that is subject to repair is reflected in such reserve for Inventory. Inventory reflected in the Balance Sheet and in the Books and Records is valued at the lower of cost (on a first-in, first-out basis) or market in accordance with GAAP applied in accordance with the practices and methodologies set forth on Exhibit 1.7, consistently applied. Since the date of the Balance Sheet, no Inventory has been sold or disposed of except through sales or use in the Ordinary Course of Business. 3.14 Books and Records. The Books and Records are complete and correct. 3.15 Tax Matters. (i) Each of the Sellers has filed all Tax Returns relating to the DSO Business that it was required to file, (ii) no claim has ever been made by an authority in a jurisdiction where either of the Sellers does not file Tax Returns that it is subject to taxation by that jurisdiction with respect to the DSO Business, (iii) neither of the Sellers has in effect any waiver of any statute of limitations in respect of Taxes relating to the DSO Business or agreed to any extension of time with respect to any outstanding Tax assessment or deficiency relating to the DSO Business, (iv) none of the Assumed Liabilities is an excise Tax under Code Section 4999 or an obligation to make any payments that will not be deductible under Code Section 280G or will be subject to the excise Tax of Code Section 4999, (v) other than inchoate liens for Taxes not yet due and payable and sales and use Taxes collected but not yet due and payable, there are no unpaid Taxes payable by Sellers that are or could become a lien on any Asset or a liability of Buyer as a result of its purchase of the Assets, and (vi) the value of the Assets (excluding money) of the Company to be sold hereunder is less than two-thirds in -28- fair market value of all of the Company's assets (excluding money) used in trades or businesses carried on by the Company within the meaning of Code Section 279(b)(1)(B). 3.16 Compliance with Law. Except as set forth in Exhibit 3.18 attached hereto, the DSO Business, as conducted by Sellers, and Sellers' use of the Assets and performance under the Contracts does not violate or conflict with, and has not violated or conflicted with, any Law. Except as set forth on Exhibits 3.6 and 3.18, Sellers are not aware of any proposed laws, rules, regulations, ordinances, orders, judgments, decrees, governmental takings, condemnations or other proceedings which would be applicable to the Assets or the DSO Business and which might adversely affect the Assets or the DSO Business. 3.17 Employment Agreements and Benefits. Exhibit 3.17 attached hereto is a true and complete list of all agreements relating to the compensation and other benefits of present and former employees, salesmen, consultants and other agents of the DSO Business, including, without limitation, collective bargaining agreements and pension, retirement, bonus, stock option, profit sharing, health, disability, life insurance, hospitalization, education or other similar plans or arrangements (whether or not subject to ERISA), true and complete copies of which have been delivered by Sellers to Buyer. Except as set forth in Exhibit 3.17, Sellers do not and have not contributed to or maintained a "multiemployer plan" (as defined in ERISA Section 3(37)). The provisions of each Employee Benefit Plan and the administration of each such plan are in all material respects in compliance with its terms and applicable Law, and Sellers have not received any notice alleging to the contrary with respect to any such plan. There is no action, claim or demand of any kind (other than routine claims for benefits) that has been brought (or, to the Knowledge of Sellers, is proposed or threatened) against any plan -29- described in Exhibit 3.17 or the assets thereof, or against the fiduciary of any such plan. No circumstance exists and no event (including any action or failure to do any act) has occurred with respect to any employee benefit plan (as defined in Section 3(3) of ERISA) maintained or formerly maintained by Sellers or to which Sellers are or have been required to contribute, that could subject Buyer to liability, or the assets of the DSO Business to any lien, under ERISA or the Code, nor will the transactions contemplated by this Agreement give rise to any such liability or lien. Except as described in Exhibit 3.17 attached hereto and other than as required under Section 601 et seq. of ERISA, no such plan that is an employee welfare benefit plan (as defined in Section 3(1) of ERISA) provides benefits or coverage following retirement or other termination of employment. No provision of any such plan would result in any limitation on the ability of Sellers to terminate the plan with respect to employees of the DSO Business. 3.18 Labor Matters. Except as set forth in Exhibit 3.18, with respect to all employees of the DSO Business, there is no grievance or litigation, arbitration proceeding, governmental investigation, citation or action of any kind pending (or, to the Knowledge of Sellers, proposed or threatened) against Sellers relating to employment, employment practices, terms and conditions of employment or wages and hours. Except as set forth in Exhibit 3.18, Sellers have no information that any executive, key employee, or group of employees of the DSO Business has any plans to terminate employment with Sellers. The DSO Business has not experienced any labor disputes or work stoppage due to labor disagreements. Except as set forth in Exhibit 3.18, with respect to the DSO Business, Sellers are in compliance with all applicable Laws respecting employment and employment practices, terms and conditions of -30- employment and wages and hours and have not been and are not engaged in any unfair labor practice as defined in the National Labor Relations Act, as amended. There is no unfair labor practice charge or complaint against any of Sellers relating to the DSO Business pending or threatened before the National Labor Relations Board. Except as disclosed in Exhibit 3.18, no collective bargaining agreement of any of the Company and its subsidiaries restricts the DSO Business from relocating or closing any of its operations. The only employees of the Sellers subject to the collective bargaining agreements listed on Exhibit 1.24 are employees engaged in the DSO Business. 3.19 Insurance. Exhibit 3.19 attached hereto sets forth the following information with respect to each insurance policy (including policies providing property, casualty, liability and workers' compensation coverage and bond and surety arrangements) to which Sellers have been a party, a named insured or otherwise the beneficiary of coverage at any time within the past two years in connection with the conduct of the DSO Business: (a) the name, address and telephone number of the agent; (b) the name of the insurer, the name of the policyholder and the name of each covered insured; and (c) the policy number and the period of coverage. Exhibit 3.19 attached hereto accurately and completely describes any self-insurance arrangements affecting the DSO Business. With respect to each such insurance policy: (a) the policy is legal, valid, binding, enforceable, and in full force and effect; (b) Sellers are not in breach or default and no event has occurred which, with notice or the lapse of time, would constitute such a breach or default -31- by Sellers, or permit termination, modification, or acceleration, under the policy; and (c) complete copies of all policies and related indemnity or premium payment agreements have been delivered to Buyer. All such policies provide adequate coverage for all normal risks incident to the Company's assets, properties and business operations and are in character and amount at least equivalent to that carried by Persons engaged in a business subject to the same or similar risks, perils or hazards. 3.20 No Adverse Change. Except as set forth in Exhibit 3.20 attached hereto, since December 31, 1995, the DSO Business has been operated in the Ordinary Course of Business and substantially in the same manner as previously conducted, and there has been no change in, and, to the Knowledge of Sellers, no fact or condition exists or is contemplated or threatened (other than general economic or industry conditions) which might cause such a change in, the condition or prospects of the DSO Business, financial or otherwise, which could be adverse to the DSO Business. Without limiting the foregoing, since December 31, 1995, except as set forth in Exhibit 3.20 there has not been: (a) any loss, damage, condemnation or destruction to any of the Assets (whether covered by insurance or not); (b) any borrowings by Sellers related to the DSO Business other than Bank Borrowings and trade payables arising in the Ordinary Course of Business; (c) any mortgage, pledge, lien or encumbrance made on any of the Assets, except for (i) Permitted Liens and (ii) liens securing Bank Borrowings which liens will be released at or prior to Closing; (d) any sale, transfer or other disposition of the Assets, other than sales of inventory in the Ordinary Course of the Business or as contemplated by this Agreement; (e) any distribution agreement entered into in the Territory with a third party; (f) any contract, agreement, lease or license involving payments or -32- commitments to pay in excess of $75,000 entered into in connection with the DSO Business other than Sales Contracts and Service Contracts entered into in the Ordinary Course of Business; (g) any acceleration, termination, modification or cancellation (other than a non-renewal) of any agreement, contract, lease or license in connection with the DSO Business involving payment or a commitment to pay in excess of $50,000 in the aggregate; (h) any capital expenditures in excess of $1,000,000 in the aggregate made or committed nor any single capital expenditure in excess of $50,000 made or committed nor any capitalized lease obligation entered into in connection with the DSO Business; (i) any note, bond or other debt security issued or any indebtedness for borrowed money created, assumed or guaranteed other than Bank Borrowings in the Ordinary Course of Business; (j) any delay or postponement of payments of accounts payable or other liabilities outside the Ordinary Course of Business; (k) any acceleration of the payment of any accounts receivable or notes receivable, or any provision of discounts or other incentive for early payment, or any special cash collection programs established with respect to the DSO Business; (l) any termination or threatened termination by one or more customers material to the DSO Business of their respective business relationships with the DSO Business or any agreement by any such customers not to do business with the DSO Business on terms and conditions at least as favorable as provided to Sellers on the date of the Balance Sheet, and to the Knowledge of Sellers, there are no facts which would form the basis therefor; (m) any modification, change or increase in the compensation or employment terms of any of the officers or employees of the DSO Business other than in the Ordinary Course of Business; (n) any payment pursuant to any employee benefit plan, incentive, severance, bonus or other plan, contract or commitment for the benefit -33- of any employee of the DSO Business other than in the Ordinary Course of Business; (o) any termination of any number of employees of DSO Business which in the aggregate could be adverse to the DSO Business, except as set forth in Exhibit 8.2; or (p) any commitment made to do any of the foregoing. 3.21 Absence of Questionable Payments. To the Knowledge of Sellers, neither of Sellers, nor any director, officer, agent, employee or other Person acting on Sellers' behalf has, in connection with the DSO Business, (a) used any corporate or other funds for unlawful contributions, payments, gifts or entertainment, or made any unlawful expenditures relating to political activity to government officials or others or established or maintained any unlawful or unrecorded funds in violation of Section 30A of the Securities Exchange Act of 1934, as amended, or any other applicable foreign, federal or state Law; or (b) accepted or received any unlawful contributions, payments, expenditures or gifts. 3.22 Absence of Undisclosed Liabilities. Neither of Sellers has, with respect to the DSO Business, any liabilities or obligations of any kind, whether absolute, accrued, asserted or unasserted, contingent or otherwise, that would have been required to be disclosed on a balance sheet of the DSO Business or included in the notes thereto prepared as of the date hereof, in accordance with GAAP, except liabilities, obligations or contingencies that are accrued or reserved against in the Balance Sheet or reflected in the notes thereto, or that were incurred after the date of the Balance Sheet in the Ordinary Course of Business and consistent with past practices. 3.23 Certain Transactions. None of the directors or officers of Sellers or any affiliate of such directors or officers and no affiliate of Sellers is currently a party to any -34- transaction related to the DSO Business (other than for services as employees, officers and directors), including, without limitation, any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from, any such Person, or to or from any corporation, partnership, trust or other entity in which any such Person owns in excess of five percent of the outstanding equity interest. The pricing for services and transactions between the Company and the DSO Business (i) is based upon application of the discounts set forth in the Company's 1996 Distribution Price Book to OEM list prices and (ii) is reflected in the Financial Statements, the Unaudited Interim Financial Statements and the Books and Records of the DSO Business at the discounts reflected in Exhibit 1.7(B) and (A) in respect of the Unaudited Interim Financial Statements and the 1996 Books and Records upon prices which are set forth in the 1996 Distribution Price Book or (B) in the case of the Financial Statements on prices which are not materially different from those on the 1996 Distribution Price Book. Sellers have delivered to Buyer a true and correct copy of the 1996 Distribution Price Book. 3.24 Subsidiaries and Affiliates. Exhibit 3.24 attached hereto sets forth a list of all corporations, partnerships, joint ventures or other business organizations or entities in which the Company holds an ownership interest. No subsidiary of the Company, other than ENS, conducts any business similar to, has any agreement or arrangement with or is involved in any way with, the DSO Business or any of its assets. Other than ENS, no subsidiary of the Company has any direct or indirect ownership interest in any of the Assets. -35- 3.25 Product Liability. To the Knowledge of the Sellers, except as set forth in Exhibit 3.6, neither of the Sellers has any liability relating to the DSO Business (whether asserted or unasserted, whether absolute or contingent, whether accrued or unaccrued, whether liquidated or unliquidated, and whether due or to become due) arising out of any injury to individuals or property as a result of the ownership, possession, or use of any product sold, leased, or delivered by the DSO Business. 3.26 Product Warranty. Substantially all of the products and services sold, leased and delivered by Sellers in connection with the DSO Business have conformed in all material respects with all applicable contractual commitments and all express and implied warranties, and neither of the Sellers, with respect to the DSO Business, has any material liability (whether known or unknown, whether asserted or unasserted, whether absolute or contingent, whether accrued or unaccrued, whether liquidated or unliquidated and whether due or to become due) for replacement or repair thereof or other damages in connection therewith, subject only to the reserve for product warranty and service claims set forth on the face of the Balance Sheet (rather than in any notes thereto) as adjusted for operations and transactions in accordance with GAAP through the Closing Date. Substantially all of the products and services manufactured, sold, leased and delivered by the DSO Business are subject to standard terms and conditions of sale, service or lease. Exhibit 3.26 includes copies of the standard terms and conditions of sale or leases for the DSO Business (containing applicable guaranty, warranty and indemnity provisions). 3.27 Investment Representations. -36- (a) The Company acknowledges that the Junior Subordinated Note has not been and will not be registered under any state or federal securities laws and that the Junior Subordinated Note is not and will not be transferable in the absence of registration under such laws or the availability of an exemption from the registration requirements thereof. The Company is acquiring the Junior Subordinated Note solely for its own account for the purpose of investment and not with a view to the distribution thereof. The Company is a sophisticated investor with knowledge and experience in business and financial matters, has received all information concerning the Buyer which it deems appropriate with respect to its acquisition of the Junior Subordinated Note and has had the opportunity to obtain additional information as desired in order to evaluate the merits and the risks inherent in holding the Junior Subordinated Note. The Company is able to bear the economic risk and lack of liquidity inherent in holding the Junior Subordinated Note, and is an accredited investor as defined in Regulation D promulgated under the Securities Act of 1933, as amended. (b) ENS acknowledges that the Warrants have not been and the shares of capital stock issuable pursuant to the Warrants or the Stock Put Agreement (the "Shares") will not be registered under any state or federal securities laws and that the Shares will not be transferable in the absence of registration under such laws or the availability of an exemption from the registration requirements thereof. ENS is acquiring the Warrants and will acquire the Shares solely for its own account for the purpose of investment and not with a view to the distribution thereof. ENS is a sophisticated investor with knowledge and experience in business and financial matters, -37- has received all information concerning the Buyer which it deems appropriate with respect to its acquisition of the Warrants and the Shares and has had the opportunity to obtain additional information as desired in order to evaluate the merits and the risks inherent in holding the Warrants and the Shares. ENS is able to bear the economic risk and lack of liquidity inherent in holding the Warrants and Shares, and is an accredited investor as defined in Regulation D promulgated under the Securities Act of 1933, as amended. 3.28 Consents. Exhibit 3.28 sets forth a true, correct and complete list of any Required Consent and the Person and subject matter or contract to which such consent relates. 3.29 Distributor Agreement. The form, terms and provisions of the Distributor Agreement attached hereto as Exhibit 1.27 are at least as favorable to the Buyer as to price, payment, discount, support, warranty and delivery terms as any other distribution agreements between the Company and any third party distributor. 3.30 Territory. Except as set forth in Exhibit 3.30, the Territory represents the entire geographic area of the United States in which the Sellers currently conduct or at any time since January 1, 1996 have conducted the DSO Business, other than the Network Resale Business, which is conducted throughout the United States. 3.31 International Call Back. Exhibit 3.31 sets forth a true, correct and complete list of all international call back customers included within the definition of Excluded Customers. 3.32 Accounts; Funds, etc. Exhibit 1.12 identifies all bank accounts or similar accounts for the deposit of cash or securities maintained by or on behalf of the DSO Business. -38- At and after the Closing, all monies and accounts arising out of, relating to or established for the DSO Business shall be held by, and accessible only to, Buyer. 3.33 ENS Assets. Exhibit 3.33 sets forth a full and accurate description of the assets of ENS to be transferred hereunder, together with Sellers' best estimate of the value of such assets. 3.34 Disclosure. No representation or warranty of Sellers contained herein, and no statement contained in the Exhibits hereto or any certificate furnished by Sellers pursuant to the provisions hereof, contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary to make the statements contained herein or therein, in light of the circumstances under which they were made, not misleading in any material respect. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BUYER Each of Holdings and Tone hereby represents and warrants to Sellers that: 4.1 Organization of Buyer. Each of Holdings and Tone is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. 4.2 Authorization; Enforceability. The execution, delivery and performance by Buyer of this Agreement, the Escrow Agreement, the Distributor Agreement, the Stock Put Agreement, the Warrants, the Junior Subordinated Note, the Stockholders Agreement and all of the other documents and instruments contemplated hereby to which such Buyer is a party are within the corporate power of Buyer and have been duly authorized by all necessary corporate action of Buyer. This Agreement is, and the other documents and instruments -39- required hereby to which such Buyer is a party including, without limitation, the Escrow Agreement, the Distributor Agreement, the Stock Put Agreement, the Warrants, the Junior Subordinated Note, the Stockholders' Agreement will be, when executed and delivered by such Buyer, the valid and binding obligations of Buyer, enforceable against Buyer in accordance with their respective terms. 4.3 No Violation or Conflict. The execution, delivery and performance by Buyer of this Agreement, the Escrow Agreement, the Distributor Agreement, the Stock Put Agreement, the Warrants, the Junior Subordinated Note, the Stockholders Agreement and all of the other documents and instruments contemplated hereby to which Buyer is a party do not and will not conflict with or violate any Law, judgment, order or decree binding on Buyer or the Certificate of Incorporation or Bylaws of Buyer or any contract or agreement to which Buyer is a party or by which it is bound. No consent of any other person, and no notice to, filing or registration with, or authorization, consent or approval of, any governmental, regulatory or self-regulatory agency is necessary or is required to be made or obtained by Buyer in connection with the transactions contemplated in this Agreement. 4.4 No Broker. Buyer has not had any dealings, negotiations or communications with any broker or other intermediary in connection with the transactions contemplated by this Agreement, except as set forth on Exhibit 4.4. 4.5 No Litigation. There is no litigation, arbitration, proceeding, governmental investigation, citation or action of any kind pending (or, to the Knowledge of Buyer, proposed or threatened) against Buyer relating to this Agreement or the transactions contemplated hereby. -40- 4.6 Financing Commitments. Attached hereto as Exhibit 4.6 are true, complete and correct copies of each Financing Commitment. 4.7 Capitalization. The authorized capital stock of Holdings consists of 9,915,000 shares of Class A Common Stock, $.001 par value per share and 85,000 shares of Class L Common Stock, $.001 par value per share. As of the Closing, there will be issued and outstanding: (a) shares of Class A Common Stock in an amount equal to 333,333 plus the amount of shares of Class A Common Stock issued to lenders as contemplated by the Financing Commitments, and (b) 66,667 shares of Class L Common Stock; and upon the Closing all such shares will be validly issued, fully paid and nonassessable. As of the Closing, Holdings will have reserved, for issuance in accordance with the Warrants and the Stock Put Agreement, the shares issuable thereunder. As of the Closing, the shares of Class A Common Stock and Class L Common Stock issuable pursuant to the Warrants or the Stock Put Agreement shall represent 8% of the number of outstanding shares of the Class A Common Stock and the Class L Common Stock (other than shares, if any, issued to lenders as contemplated by the Financing Commitments, respectively, and Holdings shall have reserved such Shares for issuance pursuant to the Warrants or the Stock Put Agreement. As of the Closing, except for warrants to purchase shares of Class L Common Stock and Class A Common Stock issuable to lenders who are providing financing for the transactions contemplated by this Agreement and for options issued to management of Buyer and options, if any, issued to the Person listed on Exhibit 4.4, and except as provided in the Certificate of Incorporation of Holdings or in the Stockholders Agreement, there will be no outstanding options, warrants or other rights to purchase or acquire shares of Class A Common Stock or -41- Class L Common Stock of Holdings. Except as set forth in the Warrants, the Stock Put Agreement, the Stockholders Agreement or as imposed by applicable securities laws, there are no restrictions on the transfer or voting of the Shares. ARTICLE V CERTAIN MATTERS PENDING THE CLOSING The parties agree as follows: 5.1 Carry on in Regular Course. Sellers shall cause the DSO Business to be conducted in the Ordinary Course of Business and in accordance with past practice and to use its reasonable best efforts to preserve its properties, business and relationships with its suppliers and customers. Sellers will advise Buyer promptly in writing of any event that would constitute a breach of any representation or warranty contained in Article III or that could have a Material Adverse Effect on the DSO Business. 5.2 Indebtedness. Neither of Sellers shall, with respect to the DSO Business, (a) create, incur or assume any indebtedness for borrowed money, except for Bank Borrowings consistent with past practice, (b) mortgage, pledge or otherwise encumber any of its properties or assets, except for Permitted Liens and except for liens securing Bank Borrowings, which liens will be released at or prior to Closing or (c) create or assume any other indebtedness except accounts payable and other liabilities incurred in the Ordinary Course of Business. 5.3 Compensation. Neither of Sellers shall, with respect to the DSO Business or the employees of the DSO Business, grant any increases, except for increases in the Ordinary Course of Business, in the rate of pay of any of such employees. Without the prior written consent of Buyer, neither of Sellers shall institute any new Employee Benefit Plan, amend, -42- alter or terminate, in whole or in part, any Employee Benefit Plan of Sellers or assume, enter into, amend, alter or terminate any labor or collective bargaining agreement which affects any employees of the DSO Business, except in any such case as required by Law (in respect of which Sellers shall provide Buyer with prior notice), the terms of any existing Employee Benefit Plan or as otherwise expressly contemplated by this Agreement. 5.4 Compliance with Law. Sellers shall cause the DSO Business to be conducted in compliance in all material respects with all applicable Laws, and with all orders of any court or of any federal, state, municipal or other governmental department binding upon Sellers (except for any such orders which are being contested by Sellers in good faith by appropriate proceedings which Sellers have disclosed to Buyer). 5.5 Access. At Buyer's expense, Buyer and its authorized agents, officers and representatives shall have, and from the date hereof through the Closing Date Sellers shall provide, reasonable access to the employees of the DSO Business, customers in the Customer Base (as provided in Section 6.10 hereof), Books and Records, Contracts and the Real Property and Leased Premises to conduct such examinations and investigations of the Assets as Buyer deems necessary; provided, however, that such examinations and investigations: (a) shall be conducted during Sellers' normal business hours; and (b) shall not unreasonably interfere with Sellers' operations and activities. Sellers shall cooperate, and shall cause their employees, counsel, independent auditors and financial advisors to cooperate, in all reasonable respects with Buyer's examinations and investigations and shall afford Buyer, upon Buyer's request, joint access to the suppliers of the DSO Business and customers included in the Customer Base. -43- 5.6 Cooperation. Buyer and Sellers will cooperate in all respects in connection with the giving of any notices to any governmental authority, and will cooperate and use their best efforts to secure the permission, approval, determination, consent or waiver of any governmental authority required by Law and any third party, including the Required Consents in connection with the transfer of the Assets from Sellers to Buyer. 5.7 Publicity. All general notices, releases, statements and communications to the employees of the DSO Business, suppliers and customers included in the Customer Base and to the general public and the press relating to the transactions covered by this Agreement shall be made only at such times and in such manner as may be mutually agreed upon by Buyer and Sellers; provided, however, that either Sellers or Buyer shall be entitled to make a public announcement of the proposed transaction if, in the opinion of its legal counsel, such announcement is required to comply with Law provided that such party required to make such disclosure shall provide prior notice to the other party. Sellers agree that, without the prior consent of Buyer, Sellers shall not publicly disclose or refer to any Person who has committed to provide financing to Buyer or any affiliate thereof without the prior written consent of Buyer. 5.8 Confidentiality. Notwithstanding any other provision of this Agreement to the contrary, Buyer agrees that, unless and until the transactions contemplated herein are consummated, Buyer shall remain subject to all of the terms and conditions of the Confidentiality Agreement, dated January 21, 1996, between Sellers and Canton Communications Capital, Inc. ("CCCI"), for itself and on behalf of its Affiliates and partners (the "Confidentiality Agreement"), the terms of which Confidentiality Agreement are -44- incorporated herein by reference, except that such Confidentiality Agreement is hereby modified to include all of Buyer's potential financing sources in the group of persons to whom Buyer may furnish the "Confidential Information" (as defined in the Confidentiality Agreement) pursuant to the terms of such Confidentiality Agreement. 5.9 Exclusivity. Sellers will not, and will not permit any officer, director, investment banker or other representative of any Sellers to, directly or indirectly (i) solicit, initiate or encourage the submission of any proposal or offer from any Person, firm or corporation, relating to, or participate in the negotiation of, agree to, recommend or consummate any (a) merger or consolidation involving the DSO Business, (b) acquisition or purchase of the Assets or the DSO Business, or (c) similar transaction or business combination involving the DSO Business or (ii) solicit, initiate or encourage the submission of any proposal or offer from any Person, firm or corporation or engage in any discussions relating to (a) merger or consolidation, sale of substantial assets, sale of shares of capital stock (including without limitation by way of a tender offer) or similar transactions involving the Company or (b) agree to, recommend or approve any such transaction; provided, however, that nothing contained in this Subsection (ii) shall prevent the Board of Directors of the Company from considering, negotiating, approving and recommending to the stockholders of the Company a bona fide transaction of a type described in Subsection (ii) not solicited in violation of this Agreement provided that the Board of Directors of the Company determines in good faith (upon advice of independent counsel) that it is required to do so in order to discharge properly its fiduciary duties. Sellers will promptly notify Buyer if any Person makes any proposal, offer, inquiry or contract with respect to any of the foregoing. -45- 5.10 Updated Financial Information. Sellers will promptly provide Buyer with the Audited Financial Statements and the Unaudited Interim Financial Statements on or prior to May 15, 1996 and April 30, 1996, respectively. 5.11 Title Insurance and Surveys. Buyer will obtain title insurance commitments, policies and riders and a current survey with respect to Real Property in form and substance, and from an insurance company, satisfactory to Buyer. Sellers will reimburse Buyer for one-half of the reasonable expenses incurred in connection with obtaining such commitments and binders (including but not limited to costs of conducting surveys). It is understood that from and after Closing Buyer shall be responsible for paying premiums with respect to such title insurance. 5.12 [Reserved] 5.13 Additional Territories. Sellers agree that if, from the date hereof through the Closing Date, an authorized distributor ceases to have exclusive rights to sell and license the Company's telephony products in any area of the United States not included in the Territory or is otherwise terminated or ceases to act as an independent distributor in such area, then the Company shall offer to Buyer the right to negotiate with the Company to include such area within the Territory, including the right to include such area within the Distributor's Area as defined in the Distributor Agreement. The Company agrees that it shall not require distribution terms and conditions for such area less favorable to Buyer than that offered to third party distributors in similar areas for similar products. -46- ARTICLE VI CONDITIONS PRECEDENT TO THE OBLIGATIONS OF BUYER Each and every obligation of Buyer to be performed on the Closing Date shall be subject to the satisfaction prior to or at the Closing of the following express conditions precedent: 6.1 Accuracy of Representations and Warranties. The representations and warranties of Sellers set forth in this Agreement shall have been true and correct and shall be true and correct in all material respects as of the Closing Date as if made as of such time. 6.2 Proceedings and Instruments Satisfactory. All proceedings, corporate or other, to be taken by Sellers in connection with the transactions contemplated by this Agreement, and all documents incident thereto, shall be substantially in the form shown on any Exhibit hereto, or, if a form of any such document is not so shown, then it shall be reasonably satisfactory in form and substance to Buyer and Buyer's counsel, and Sellers shall have made available to Buyer for examination the originals or true and correct copies of all available documents that Buyer may reasonably request in connection with the transactions contemplated by this Agreement. 6.3 No Litigation. No investigation, suit, action or other proceeding shall be threatened or pending before any court or governmental agency that seeks restraint, prohibition, damages or other relief in connection with the Agreement or the consummation of the transactions contemplated hereby or causes any of the transactions contemplated by this Agreement to be rescinded following consummation and no such injunction, judgment, order, decree, ruling or charge shall be in effect. -47- 6.4 Consents. All Required Consents shall have been obtained (other than governmental regulatory consents, approvals and waivers related to the transfer of the Sprint Contract and the approvals relating thereto of regulatory agencies in respect of the resale of long-distance and local exchange services) and such Required Consents shall be in full force and effect. 6.5 Lien Waivers and Estoppel Certificates. Each of Sellers shall have used its reasonable good faith efforts to deliver to Buyer: (a) waivers of any statutory landlord or lessor liens with respect to the Leased Premises and (b) estoppel certificates, reasonably satisfactory in form and substance to Buyer, from each landlord of the Leased Premises. 6.6 Due Diligence. Prior to the Closing Date, Sellers shall have granted Buyer and its representatives adequate access to the Books and Records, the Contracts and the employees of the DSO Business, any other documents, resources and personnel relating to the DSO Business and Buyer shall have completed and be reasonably satisfied with the results of its due diligence investigation; (it being understood that Buyer has been granted access to the materials listed in Exhibit 6.6 attached hereto). 6.7 Environmental Due Diligence. Buyer shall have completed its due diligence review of environmental matters related to the DSO Business, including, without limitation, an environmental audit of the Real Property and Leased Premises and the results of such review shall be reasonably satisfactory to Buyer. 6.8 Financing. Buyer shall have obtained the Bank Financing, substantially in accordance with the terms set forth in the applicable Financing Commitment. -48- 6.9 Financial Statements. Sellers shall have delivered to Buyer the Audited Financial Statements and the Unaudited Interim Financial Statements and the Audited Financial Statements shall not be materially different from the Financial Statements. 6.10 Customer Review. Using customer information supplied by Sellers, Buyer shall have conducted a statistical sampling of the customers included in the Customer Base by means of a customer survey, using procedures and methodology described in Exhibit 6.10, and Buyer shall have determined to its reasonable satisfaction that a reasonable percentage of the customers so surveyed are bona fide ongoing customers of the DSO Business. 6.11 Sellers' Performance. Each of the obligations of Sellers to be performed or complied with on or before the Closing Date pursuant to the terms of this Agreement, including, without limitation, the Closing deliveries required by Section 2.3(a), shall have been duly performed or complied with, in all material respects, on or before the Closing Date. 6.12 No Material Adverse Change. Since December 31, 1995, there shall not have occurred any material adverse change in the financial condition, results of operation or business of the DSO Business or of the Company. 6.13 Title to Real Estate. Seller shall have obtained the title insurance commitment and current survey satisfactory to Buyer as provided in Section 5.11 hereof and upon Closing the exceptions to title delineated thereon shall be deemed Permitted Liens for purposes hereof. -49- ARTICLE VII CONDITIONS PRECEDENT TO THE OBLIGATIONS OF SELLERS Each and every obligation of Sellers to be performed on the Closing Date shall be subject to the satisfaction prior to or at the Closing of the following express conditions precedent: 7.1 Accuracy of Representations and Warranties. The representations and warranties of Buyer set forth in this Agreement shall have been true and correct and shall be true and correct in all material respects as of the Closing Date as if made as of such time. 7.2 Proceedings and Instruments Satisfactory. All proceedings, corporate or other, to be taken by Buyer in connection with the transactions contemplated by this Agreement, and all documents incident thereto, shall be substantially in the form shown on any Exhibit hereto, or, if a form of any such documents is not so shown, then it shall be reasonably satisfactory in form and substance to Sellers and its counsel, and Buyer shall have made available to Sellers for examination the originals or true and correct copies of all available documents that Sellers may reasonably request in connection with the transactions contemplated by this Agreement. 7.3 No Litigation. No investigation, suit, action or other proceeding shall be threatened or pending before any court or governmental agency that seeks restraint, prohibition, damages or other relief in connection with the Agreement or the consummation of the transactions contemplated hereby or cause any of the transactions contemplated by this Agreement to be rescinded following consummation and no such injunction, judgment, order, decree, ruling or charge shall be in effect. 7.4 Buyer's Performance. Each of the obligations of Buyer to be performed or complied with on or before the Closing Date pursuant to the terms of this Agreement, -50- including, without limitation, the Closing deliveries required by Section 2.3(b), shall have been duly performed or complied with, in all material respects, on or before the Closing Date. ARTICLE VIII INDEMNITIES AND ADDITIONAL COVENANTS 8.1 Indemnification. (a) Survival of Representations and Warranties. The representations and warranties of Sellers and Buyer shall survive the execution of and delivery of this Agreement and the consummation of the transactions contemplated hereby and shall be effective until the relevant time limitation for making any indemnity claim in respect of such representations and warranties under Section 8.1 shall have been reached and no longer, regardless of any investigation that may have been made at any time by or on behalf of the party to which such representations and warranties are made. (b) Indemnity by Sellers. Sellers hereby agree to indemnify, defend and hold harmless Buyer and its directors, officers and Affiliates against and in respect of any and all damages, liabilities, obligations, claims, demands, judgments, liens, injunctions, charges, orders, decrees, rulings, dues, assessments, Taxes, losses, fines, penalties, fees, amounts paid in settlement, costs and expenses, including, without limitation, reasonable attorneys' fees and expert witness fees and disbursements in connection with investigating, defending or settling any action or threatened action, arising out of any claim, damages, complaint, demand, cause of action, audit, investigation, hearing, action, suit or other proceeding asserted or initiated or otherwise existing in respect of any matter (hereinafter referred to collectively as the -51- "Losses"), which any such party may at any time suffer, sustain or become subject to, in connection with, incident to, resulting from or arising out of or in any way relating to or by or incur, or become subject to, as a result of or in connection with: (i) the inaccuracy of any representation or warranty made by Sellers herein (other than in Sections 3.1, 3.2 and 3.4), or any misrepresentation or breach of any such representation or warranty or breach of the covenants contained in Section 5.1, 5.3, 5.4, 5.5, 5.6 and 5.10; (ii) the inaccuracy of any representation or warranty made by Sellers in Sections 3.1, 3.2, and 3.4 or any misrepresentation or breach of the representations and warranties made by Sellers in Sections 3.1, 3.2 and 3.4 or any nonfulfillment or breach of any covenant or agreement on the part of Sellers under this Agreement (other than the covenant contained in Section 5.1, 5.3, 5.4, 5.5, 5.6 and 5.10) or under any of the documents and instruments delivered by Sellers pursuant to this Agreement including, without limitation, the failure by Sellers to satisfy, perform and discharge all Retained Liabilities; and (iii) claims by third parties against Buyer relating to any liability of Sellers that is not an Assumed Liability (including any liability of Sellers that becomes a liability of Buyer under any bulk transfer law of any jurisdiction, under any common law doctrine of de facto merger or successor liability, or otherwise by operation of law); provided, however, that the right to such indemnification, defense and reimbursement shall only be available with respect to any claim enumerated in the following chart if such -52- right is asserted (whether or not such Losses have actually been incurred) on or before the respective dates set forth below: For Representations and Warranties Set Forth All Claims Must be in the Following Sections Asserted by: ------------------------- ------------ Section 3.15................... 20 days after expiration date of applicable statute of limitations or any extensions thereof required by any applicable taxing authority relating to the Tax giving rise to the Loss Sections 3.1, 3.2 and 3.4 ..... No time limitation Sections 3.8 and 3.13 ......... Expiration of the period provided under Section 2.4 for determination of the Final Net Asset Statement Other representations and warranties ................... April 10, 1998 Claims based on fraud or the breach of any covenant may be asserted at any time. For purposes of determining the amount of Losses of the types referred to in subsections 8.1(b)(i) and (ii), representations and warranties shall be read as if all references to materiality were deleted therefrom. The foregoing limitations regarding time periods and the provisions of Section 8.1(c) shall not affect the rights and obligations of the parties hereto in respect of the other provisions of this Agreement, including without limitation, Sellers' obligations to indemnify Buyer with respect to Losses of the types described in Sections 8.1(b)(ii) and 8.1(b)(iii). Buyer shall provide Sellers written notice for any claim made in respect of the indemnification provided in this Section 8.1(b), whether or not arising out of a claim by a third party. -53- (c) Basket; Indemnity Cap. Sellers shall not be required to indemnify Buyer pursuant to Section 8.1(b)(i) unless and to the extent that the amount of Losses for which indemnification is sought exceeds $400,000; provided, that the aggregate maximum liability of Sellers to Buyer pursuant to Section 8.1(b)(i) shall not exceed $15,000,000; and provided further, that with respect to any breach or inaccuracy of the representation set forth in Section 3.15(vi), the liability of Sellers shall be limited to Losses resulting from the non-deductibility to Buyer of interest payable on the Junior Subordinated Note by reason of the application of Code Section 279. (d) Indemnity by Buyer. Buyer hereby agrees to indemnify, defend and hold harmless Sellers and their respective directors, officers and Affiliates against and in respect of all Losses which any such party may at any time suffer, sustain or become subject to, in connection with, incident to, resulting from or arising out of or in any way relating to or by or incur, or become subject to, as a result of or in connection with: (i) the inaccuracy of any representation or warranty made by Buyer herein (other than in Section 4.1 and 4.2), or any misrepresentation or breach of any such representation or warranty; (ii) the inaccuracy of any representation or warranty made by Buyer in Section 4.1 and 4.2 or any misrepresentation or breach of the representations and warranties made by Buyer in Section 4.1 and 4.2 or any nonfulfillment or breach of any covenant or agreement on the part of Buyers under this Agreement or under any of the documents and instruments delivered by Buyer pursuant to this Agreement including, without limitation, the failure by Buyer to satisfy, perform and discharge all Assumed Liabilities; and (iii) claims by third parties against Sellers relating to any Assumed Liability; provided, however, that the right to such indemnification, defense and -54- reimbursement shall only be available with respect to any claim enumerated in the following chart if such right is asserted (whether or not such Losses have actually been incurred) on or before the respective dates set forth below: For Representations and Warranties Set Forth All Claims Must be in the Following Sections Asserted by: ------------------------- ------------ Sections 4.1 and 4.2 .......... No time limitation Other representations and warranties .................... April 1, 1998 Claims based on fraud or the breach of any covenant may be asserted at any time. (e) Matters Involving Third Parties. (i) If any third party shall notify any Party (the "Indemnified Party") with respect to any matter (a "Third Party Claim") which may give rise to a claim for indemnification against any other Party (the "Indemnifying Party") under this Section 8.1, then the Indemnified Party shall promptly notify each Indemnifying Party thereof in writing; provided, however, that no delay on the part of the Indemnified Party in notifying any Indemnifying Party shall relieve the Indemnifying Party from any obligation hereunder unless (and then solely to the extent) the Indemnifying Party thereby is prejudiced. (ii) Any Indemnifying Party will have the right to defend the Indemnified Party against the Third Party Claim with counsel of its choice reasonably satisfactory to the Indemnified Party so long as (A) the Indemnifying Party notifies the Indemnified Party in writing that the Indemnifying Party will Indemnify the Indemnified Party from and against the entirety of any Losses the Indemnified Party may suffer resulting from, arising out of, relating to, in the nature of, or caused by the Third Party Claim, (B) the -55- Indemnifying Party provides the Indemnified Party with evidence acceptable to the Indemnified Party that the Indemnifying Party will have the financial resources to defend against the Third Party Claim and fulfill its indemnification obligations hereunder, (C) the Third Party Claim involves only money damages and does not seek an injunction or other equitable relief, (D) settlement of, or an adverse judgment with respect to, the Third Party Claim is not, in the good faith judgment of the Indemnified Party, likely to establish a precedential custom or practice adverse to the continuing business interests of the Indemnified Party, and (E) the Indemnifying Party conducts the defense of the Third Party Claim actively and diligently. (iii) So long as the Indemnifying Party is conducting the defense of the Third Party Claim in accordance with this Section 8.1(e), (A) the Indemnified Party may retain separate co-counsel at its sole cost and expense and participate in the defense of the Third Party Claim; provided, however, that to the extent the notification given by the Indemnifying Party pursuant to Section 8.1(e)(ii)(A) (the "Indemnifying Notice") is given more than 15 days after the Indemnified Party provided the required notice of the Third Party Claim (the "15-day Period"), costs and expenses of counsel to be borne by the Indemnified Party pursuant to this clause (A) shall exclude such costs and expenses incurred after the 15-day Period and prior to the Indemnifying Notice, in which event such costs and expenses shall be borne by the Indemnifying Party, (B) the Indemnified Party will not consent to the entry of any judgment or enter into any settlement with respect to the Third Party Claim without the prior written consent of the Indemnifying Party (which consent shall not unreasonably be withheld), and (C) the Indemnifying Party will not consent to the entry of any judgment or enter into any -56- settlement with respect to the Third Party Claim unless written agreement is obtained releasing the Indemnified party from all liability thereunder. (iv) In the event any of the conditions in this Section 8.1(e) is or becomes unsatisfied, however, (A) the Indemnified Party may defend against, and consent to the entry of any judgment or enter into any settlement with respect to, the Third Party Claim in any manner it may deem appropriate after consultation with the Indemnifying Party, (B) the Indemnifying Party will reimburse the Indemnified Party promptly and periodically for the costs of defending the Third Party Claim (including attorneys' fees and expenses), and (C) the Indemnifying Party will remain responsible for any Losses the Indemnified Party may suffer resulting from, arising out of, relating to, in the nature of, or caused by the Third Party Claim to the fullest extent provided in this Section 8.1. (f) Sole Remedy. This Section 8.1 shall be each party's sole remedy (except for termination pursuant to Article IX), at law or in equity, against the other party with respect to losses incurred as a result of the breach of, or any inaccuracy in, any representation or warranty contained in this Agreement. 8.2 Employment Matters. (a) As of the Closing Date, Sellers shall terminate the employment of the employees of the DSO Business that Buyer shall specify to Sellers (the "Designated Employees") prior to Closing. The parties agree that the individual named on Exhibit 8.13 will not be a Designated Employee, it being the Company's intent to continue employing such individual as the person responsible for the group within the Company supporting the Buyer under the Distributor Agreement. Buyer agrees to offer employment to such Designated -57- Employees at Closing and to grant credit to the Designated Employees for unused vacation to the extent accrued in the Ordinary Course of Business and reflected on the Closing Balance Sheet. [ Confidential Treatment Requested ] (b) [ Confidential Treatment Requested ] (c) Buyer agrees to establish a 401(k) savings plan for the benefit of Buyer's employees. Under Buyer's 401(k) savings plan, Buyer's employees who are former employees of the Company may, subject to the terms and conditions of the Company's 401(k) plan, roll any assets distributed by the Company pursuant to the Company's 401(k) plan into the Buyer's 401(k) savings plan on a tax-free basis under Section 401(a)(31) of the Code. -58- (d) Buyer agrees to provide commercially reasonable health care coverage to certain of Buyer's employees who are former employees of the Company and who have pre-existing medical conditions on the Closing Date or, in the event that commercially reasonable health care coverage is unavailable for such employees, the Company will provide such employees notice of their COBRA continuation coverage and shall provide such COBRA continuation coverage through the expiration thereof. Buyer agrees to promptly reimburse the Company for the amounts actually paid by the Company pursuant to this Section 8.2(d) up to a maximum of $450,000. 8.3 Bulk Sales Compliance. Buyer hereby waives compliance by Sellers with the provisions of the bulk sales law of any U.S. jurisdiction, and Sellers covenant and agree to pay and discharge when due all claims of any governmental entities and creditors of Sellers and its subsidiaries that could be asserted against Buyer by reason of such non-compliance. Sellers agree to indemnify and hold Buyer harmless from and against and shall on demand reimburse Buyer for any and all losses, damages, costs, expenses, liabilities, obligations and claims of any kind, including, without limitation, reasonable attorneys' fees and other legal costs and expenses, suffered by Buyer by reason of Sellers' failure to pay and discharge any such claims. 8.4 Post-Closing Agreements. (a) For a period of time equal to the remaining term of the applicable Lease, Buyer shall grant a license to Sellers to use certain space located at each of the Leased Premises for the use of Sellers' employees engaged in sales of products and services to Excluded Customers. Sellers shall have the right to use at each Leased Premises an amount of space equal to 160 square feet for each employee of Sellers working at such Leased -59- Premises. Sellers shall pay a rental rate for such space equal to the rent per square foot paid by Buyer for the Leased Premises in which such space is located, multiplied by the number of Sellers' employees working at such Leased Premises, determined as of the beginning of each month during the term of such license. Such arrangements shall be subject to the additional terms and conditions set forth on the Transition Services Term Sheet and otherwise on mutually acceptable terms. (b) Sellers shall grant a sublease to Buyer to use the space located at its Milford, Connecticut, headquarters required for Buyer to conduct the portion of the DSO Business conducted from such facility at a rental rate equal to $20.00 per square foot on the terms and subject to the conditions described in the Transitional Services Term Sheet. (c) For the period following the Closing Date, Sellers agree to provide to Buyer certain management information, financial management and human resources services in connection with Buyer's conduct of the DSO Business following the Closing Date in accordance with the terms and conditions specified in the Transitional Services Term Sheet. (d) Effective on the Closing, the Company hereby (i) grants Buyer a non-exclusive, perpetual, royalty-free license to (A) use the name "EXECUTONE" to service the Customer Base (other than to use such name as its corporate name or trade name (i.e. "Executone of __________") except as provided in the Distributor Agreement) and (B) use and relicense Authorized Software in connection with servicing the Customer Base, (ii) agrees to provide to Buyer for a period ending seven years after the discontinuance of the manufacture of the applicable product or software, Authorized Products and Authorized Software (including upgrades) for sale to the Customer Base so that Buyer can continue to service the Customer -60- Base, and (iii) agrees to provide Buyer for the same period spare parts, replacement equipment, replacement copies of Authorized Software and related documentation (and upgrades thereto) and all other equipment, software and diagnostics (and upgrades thereto) required to continue to service and maintain the Authorized Products and Authorized Software and related documentation and manuals (and upgrades thereto) so that the Buyer can continue to service and maintain its end-user customers. The foregoing grant and agreements shall be subject to the conditions set forth on Exhibit 8.4(d) and shall continue irrespective of whether the Distributor Agreement continues to be in force and effect. 8.5 Certain Employee Obligations. The Company agrees that, in respect of the employees covered by the collective bargaining contract covering Philadelphia employees (the "Union Employees") with the Local Union 1448 International Brotherhood of Electrical Workers dated May 2, 1994 (the "Union Contract"), the Company will provide notice to all such Union Employees of their COBRA continuation coverage and shall provide such COBRA continuation coverage through a period ending on the earlier of the expiration of the Union Contract and the expiration of the COBRA continuation coverage. Buyer agrees to promptly reimburse the Company for the amounts actually paid by Sellers pursuant to this Section 8.5. 8.6 Additional Instruments; Cooperation. At any time and from time to time after the Closing, at either party's request and without further consideration, Sellers or Buyer, as the case may be, shall execute and deliver such other instruments of sale, transfer, conveyance, assignment and confirmation and take such other action as Sellers or Buyer may reasonably deem necessary or desirable in order to more effectively transfer, convey and assign to Buyer, and to confirm Buyer's title to and interest in, the Assets and the Contracts -61- and the consummation of the transactions contemplated herein. Without limiting the generality of the foregoing, Sellers will, at the time of transfer of the Network Resale Business as contemplated by Section 8.11, assign and transfer to Buyer all right, title and interest in and to the products known as "ULTRASTAR LD" and "ULTRASTAR 800" including all names and marks associated therewith together with all goodwill associated with such marks. 8.7 Use of Name. (a) Buyer agrees that without Sellers' consent it will not, nor will it permit the DSO Business after the Closing Date to, make any use of any trade name or service mark held by Sellers in any manner other than as specifically provided in this Agreement or in the Distributor Agreement; provided, however, that during any period commencing thirty (30) days after any material disruption (whether by reason of cessation of the telephone and related software business or otherwise) in the Sellers' supply to Buyer of Authorized Products (as defined in the Distributor Agreement) and throughout the period in which such material disruption is continuing, at a time when Buyer is entitled, under the terms of this Agreement or the Distributor Agreement, to purchase and distribute such products and does not have sufficient inventory in stock to satisfy purchase orders and maintenance requirements of its customers, the Buyer shall be permitted to use (subject to the conditions set forth on Exhibit 8.4(d)) the name "EXECUTONE" in combination with one or more distinctive marks to produce telephony and software products to service Buyer's customers. The Seller agrees to execute and deliver such documents and take such actions as may reasonably be requested by Buyer to give effect to the foregoing. 8.8 Allocation of Purchase Price. The parties agree that the purchase consideration for the Assets shall be allocated among the Assets in accordance with their relative fair market -62- values as set forth on Exhibit 8.8 attached hereto. The parties further agree that the relative fair market values of the Assets (to the extent required to be taken into account for Tax purposes) may be adjusted in accordance with an appraisal to be obtained by Buyer at its expense to establish a final allocation prior to the filing of the applicable Tax Returns of Buyer and Sellers. Sellers and Buyer shall use such final allocation for all book and Tax purposes, including filing IRS Form 8594 and their respective Tax Returns and no party shall take a position inconsistent with said final allocation except to the extent required by law. 8.9 Access to Books and Records. The Company may retain a single set of copies of any books and records of the DSO Business which the Company reasonably believes will be required by it for the purpose of (i) performing any of the Company's accounting, tax or financing reporting obligations, (ii) complying with any audit conducted by any taxing authority and (iii) complying with discovery requests arising in litigation currently pending against the Sellers or otherwise conducting Sellers' defense in such actions. From and after the Closing, Buyer will authorize and permit the Company and its representatives to have access during normal business hours, upon reasonable notice and for reasonable purposes and in such manner as will not unreasonably interfere with the conduct of Buyer's business, to all of the books and records that the Company did not retain a copy of and which are related, directly or indirectly, to the Sellers' business to the extent necessary for the purpose set forth in the preceding sentence. From and after the Closing, Sellers will authorize and permit Buyer and its representatives to have access during normal business hours, upon reasonable notice and for reasonable purposes and in such manner as will not unreasonably interfere with the conduct of Sellers' business, to all books, records, files, documents and correspondence -63- related, directly or indirectly, to the DSO Business which Sellers retain in their possession for the purpose of performing any of the Buyer's accounting, tax or financial reporting obligations or complying with any audit conducted by any taxing authority. Buyer and Sellers agree to maintain after the Closing Date all books and records in accordance with their respective normal document retention practices. The Buyer or the Company, as the case may be, shall reimburse the other party for the reasonable out-of-pocket expenses incurred by it in performing the covenants contained in this Section 8.9. Sellers shall protect and accord confidential treatment to the information disclosed pursuant to this Section 8.9 as provided in Section 8.15. Notwithstanding anything to the contrary contained in this Section 8.9, Sellers will not be permitted to copy or otherwise retain any Books and Records or any portion thereof, including without limitation any customer lists or other proprietary information (except to the extent set forth in the first sentence of Section 8.9 or as required for provision of services contemplated by the Transition Services Term Sheet; and to the extent a copy of such Books and Records are retained by Sellers, the Sellers shall (a) use all reasonable efforts to safeguard and not disclose the information contained therein and (b) promptly upon request of Buyer deliver to Buyer or destroy such Books and Records containing customer information or other proprietary information relating to the DSO Business). 8.10 Best Efforts. Subject to the terms and conditions herein provided, each of the parties hereto agrees to use its best efforts to take, or cause to be taken, all action, and to do, or cause to be done, all things necessary, proper and advisable under applicable Law, to obtain the consents of all third parties necessary to consummate and make effective the transactions contemplated by this Agreement and to effect the replacement, renewal or transfer to Buyer of -64- the Permits. In case at any time after the Closing, any further action is necessary or desirable to carry out the purposes of this Agreement, including, without limitation; entering into subleases or subcontracts, the proper officers and directors of each party to this Agreement shall take all such necessary action. Buyer and Sellers will execute any additional instruments necessary to consummate the transactions contemplated hereby. Seller shall cooperate and use its best efforts to assist Buyer in obtaining the consent and approvals of all third parties, including without limitation the consent of Sprint, the local exchange carriers and the state regulatory authorities, necessary for Buyer to sell or resell long distance service and local exchange service and access. 8.11 Sales Agency. (a) Buyer and Sellers acknowledge that the transfer of the Network Resale Business requires, among other things, the approval of certain governmental agencies and long distance and local access carriers. Sellers agree that, from the Closing until such time as the transfer of the Network Resale Business to Buyer has been effected, Sellers will enter into a sales agency agreement with Buyer, in substantially the form attached to the Distributor Agreement as Exhibit B-1, which will provide for Buyer to resell, as Sellers' agent, the products and services that are the subject of the Network Resale Business. Such sales agency agreement will provide that Buyer will enjoy the economic benefits and bear the economic burdens of the Sprint Contract in full and shall remain in effect until the earlier to occur of (i) the assignment of the Sprint Contract to Buyer, (ii) Buyer entering into a replacement contract with U. S. Sprint or another long-distance carrier, or (iii) the expiration or termination of the Sprint Contract. Sellers will use their reasonable best efforts to maintain the Sprint Contract and any local area contracts for the Buyer's benefit until the Buyer notifies -65- the Company that Buyer no longer requires the Sprint Contract or any of such local area contracts to remain in effect. Sellers agree that, upon the request of Buyer, Sellers shall terminate the Sprint Contract and any of such local area contracts as soon as practicable under the terms of such agreements. Buyer covenants that, while such sales agency agreement is in place, Buyer will comply with all tariffs and regulatory and contractual requirements and restrictions applicable to Sellers in connection with the Sprint Contract and the Network Resale Business, and Buyer acknowledges and agrees that Sellers will have no obligation to renew or extend the Sprint Contract. (b) Following the transfer of the Network Resale Business to Buyer as contemplated hereby, the Company agrees that it will not sell, directly or indirectly, long distance and local exchange and access telephone services other than pursuant to a sales agency agreement with Buyer pursuant to an agreement substantially in the form of Exhibit B-1 to the Distributor Agreement which will provide that the Company will act as Buyer's agent for such services and will include Buyer's agreement to provide such service to the Company at prices at least as low as that provided to any other resale agent of Buyer and shall pay the Company a commission of fifteen percent (15%). The Company shall not be permitted to act as an agent for a third party provider of long distance and local exchange and access telephone services during the period that the Buyer is required by the Company to sell exclusively Authorized Products within the Territory under the Distributor Agreement. (c) Sellers hereby grant Buyer, effective from and after the Closing Date, a non-exclusive, perpetual royalty-free license to use the names and marks "INFOSTAR'r' CALLING -66- CARD" and "INFOSTAR'r' 800" for use with network services products in the Network Resale Business. 8.12 Non-Competition. Sellers agree that, for a period expiring five years following the Closing Date, Sellers will not engage in the DSO Business as it exists on the Closing Date within the Territory; provided, however, that this restriction shall not limit Sellers' ability to create dual distribution, to sell directly in the Territory, to terminate the Distributor Agreement, or otherwise exercise any of its rights, all pursuant to the terms of the Distributor Agreement; provided, further, however, that Sellers agree not to engage in the business of providing long distance service and related local exchange access and service other than through the sales agency agreement pursuant to and as otherwise provided in Section 8.11(b) above. 8.13 Non-Solicitation of Employees. Sellers agree that, for a period of two years following the Closing Date, Sellers will not hire, or attempt to hire, for employment in any business venture, any person who is a Designated Employee as contemplated hereby; provided, however, that the Company shall be permitted to hire any Designated Employee who is hired by Buyer if Buyer subsequently terminates the employment of such Designated Employee; and provided further that the Company shall be permitted to hire any Designated Employee who either declines employment with Buyer or who after accepting such employment subsequently resigns if, and only if, such Designated Employee initiates (without direct or indirect solicitation by either Seller other than general newspaper publication of job offerings) contact with the Company regarding such employment with the Company at a time not less than forty-five (45) days after the later of the Closing Date or the date of such -67- employee's resignation. It is understood that the person listed on Exhibit 8.13 hereof will not be a Designated Employee. 8.14 Rights of First Offer. The Seller shall not at any time prior to the termination of the Distributor Agreement directly or indirectly transfer, assign or otherwise dispose of, whether by sale, merger, consolidation or other transaction ("Transfer") its telephone equipment and related software business (the "Subject Business") to any Person other than the Buyer unless the Seller first (i) gives the Buyer not less than sixty (60) days prior written notice of its intent to Transfer the Subject Business (the "Offer Notice") which notice shall set forth the principal terms of the proposed Transfer, including the transaction structure, purchase price and other principal business terms, identity of any proposed transferee (if known) and any other material term of the proposed transaction and (ii) offers to Transfer the Subject Business to the Buyer (or, at the Buyer's option, to any Affiliate of the Buyer which the Buyer may designate) on the terms set forth in such Offer Notice (or, in the case of a Transfer of all or a portion of the consideration for which would consist of non-cash items, at the Buyer's option, for cash in an amount equal to the fair market value of the total consideration proposed to be received in respect of the Subject Business). The Buyer (or its designee) may elect to purchase the Subject Business on the terms specified in the Offer Notice by delivering written notice of such election to the Seller within thirty (30) days after receipt by the Buyer of the Offer Notice. If the Buyer (or such designee) has elected to purchase the Subject Business from the Seller, such Transfer will be consummated as soon as practical after the delivery of such election notice. If the Buyer (or such designee) has not elected to purchase the Subject Business within such 30-day period, the Seller may, within 120 days -68- thereafter, enter into a binding agreement to Transfer the Subject Business at a price no less than 95% of the price specified in the Offer Notice and on other terms which are not, taken as a whole, materially more favorable to the transferee(s) than those offered to the Buyer in the Offer Notice. In the event that such binding agreement to Transfer the Subject Business is not entered into within 150 days following the date of the Offer Notice with the Transfer being consummated within a reasonable time thereafter, the Seller and the Subject Business shall again become subject to the restrictions on Transfer contained in this Section 8.14. Notwithstanding any contrary terms of the foregoing provisions of this Section 8.14, in the event the Company receives an unsolicited offer to acquire all or any significant portion of the Subject Business, Seller shall (a) notify Buyer of all material terms of such offer, (b) grant Buyer a reasonable amount of time to match such offer or any increased offer made by such a third party, (c) if Buyer agrees to match such offer which is not then increased by such third party, sell the Subject Business to Buyer on such terms and (d) at all stages of such process keep Buyer reasonably informed as to the status of negotiations and provide an opportunity (including at least as much time as may be offered to the Person making such unsolicited offer and any other competing bidders) to match the offer and thereby purchase the Subject Business. Notwithstanding the provisions of this Section 8.14, Sellers may determine not to sell the Subject Business to any Person. 8.15 Sellers' Confidentiality Covenant. After Closing, Sellers will, and will cause their subsidiaries and Affiliates to: (i) treat and hold confidential and not disclose confidential information concerning the DSO Business and its affairs (including but not limited to information concerning the Assets and the Assumed Liabilities) to the extent not generally -69- known in the public (the "Confidential Information"), (ii) refrain from using any of the Confidential Information except in connection with this Agreement, and (iii) deliver promptly to the Buyer or destroy, at the request and option of the Buyer, all tangible embodiments (and all copies) of the Confidential Information which are in its possession. In the event that Sellers are requested or required (by oral question or request for information or documents in any legal proceeding, interrogatory, subpoena, civil investigative demand, or similar process) to disclose any Confidential Information, Sellers will notify the Buyer promptly of such request or requirement so that the Buyer may seek an appropriate protective order or waive compliance with the provisions of this Section. If, in the absence of a protective order or the receipt of a waiver hereunder, the Sellers are, on the advice of counsel, compelled to disclose any Confidential Information to any tribunal, Sellers shall use their best efforts to obtain, at the request of the Buyer, an order or other assurance that confidential treatment will be accorded to such portion of the Confidential Information required to be disclosed as the Buyer shall designate. 8.16 Additional Financial Information. Sellers shall furnish or shall cause the Company's independent accountants to furnish not later than May 15, 1996 audited financial statements for the DSO Business for the years ended December 31, 1995, December 31, 1994 and December 31, 1993 prepared in accordance with GAAP applied consistently throughout the periods covered thereby (and applied in accordance with the practices and methodologies as set forth on Exhibit 1.7) in a form meeting the requirements of Regulation S-X of the Securities Act of 1933, as amended (the "Securities Act"), and the consent of the Company's independent accountants to the inclusion of their reports on such financial statements in any -70- registration statement of the Buyer under the Securities Act and any amendments thereto; and for the purposes of assisting Buyer with any such registration statement and subsequent reporting requirements under the Securities Exchange Act of 1934, as amended, the Sellers will deliver to Buyer (i) unaudited income statements and balance sheets of the DSO Business for each 1996 calendar quarter completed prior to or on the Closing Date, (ii) unaudited income statements and balance sheets of the DSO Business for each 1995 calendar quarter and (iii) an unaudited income statement and balance sheet of the DSO Business for the period from January 1, 1996 through the Closing Date. The financial statements and schedules described in clauses (i) and (ii) above for the first quarter of 1996 and 1995, respectively, will be provided by April 30, 1996. Each subsequent 1996 quarter's financial statements and schedules (together with the corresponding 1995 quarter's financial statements described in clause (ii) above) shall be delivered to Buyer by Sellers within 60 days after the last day of such quarter, and the financial statements described in clause (iii) above shall be delivered to Buyer by Sellers within 90 days after the Closing Date; provided that Sellers shall use reasonable best efforts to promptly cause the delivery of such audited financial statements as soon as practicable after the execution of this Agreement. The Parties acknowledge and agree that time is of the essence in the performance of the provisions of this Section 8.16 and Sellers shall provide Buyer unaudited financial information with respect to the DSO Business for the years 1992 and 1991 meeting the requirements of item 301 of Regulation S-K (Selected Financial Data) of the Securities Act by September 30, 1996. If the Closing occurs, the Buyer shall reimburse Sellers for one-half the reasonable out-of-pocket expenses incurred by them in preparing the Audited Financial Statements delivered pursuant to Section 5.10 and the -71- additional financial information delivered pursuant to this Section 8.16, up to a maximum reimbursement of $150,000. 8.17 Shared Assets. All computer software and other intangible property included within the Shared Assets will be transferred by Sellers to Buyer at Closing. Buyer agrees to, and, effective upon the Closing and the transfer to Buyer of such property hereby does, grant to Sellers a perpetual, non-exclusive, royalty-free license to use, copy and modify, to the extent required by Sellers to operate their continuing businesses or to provide the services contemplated by the Transition Services Term Sheet, the computer software identified on Exhibit 1.71. Any modifications or enhancements to such software made by Sellers after Closing shall be the sole property of Sellers. The tangible personal property, if any, included within the Shared Assets will be subject to joint-ownership pursuant to arrangements which grant each of the Company and Buyer a right of first refusal with respect to disposition of any such Shared Assets and which provide for equal sharing of the proceeds of any such disposition; provided, however, that the mainframe computers located at the Company's Milford facility will be jointly-owned and shared until such time as such mainframe computers can be separated without jeopardizing their ability to support the DSO Business and Sellers' remaining businesses, respectively, at which time ownership of such mainframe computers will be divided as indicated on Exhibit 8.17. Sellers and Buyer will negotiate and execute at Closing license agreements and/or other documentation reasonably required or appropriate to give effect to the foregoing understandings. 8.18 Video Conferencing Equipment. The parties agree that from and after the Closing the Sellers will provide access to and permit Buyer to use the video conferencing -72- equipment located in offices of the DSO Business, including reasonable access to such equipment to employees of the Buyer. Sellers agree that, in the event Sellers remove the video conferencing equipment from Buyer's offices after Closing, Sellers shall refurbish and repair such offices to Buyer's reasonable satisfaction to return Buyer's offices to a commercially reasonable appearance and function (or, upon Buyer's election, reimburse Buyer for its reasonable expenses for such actions). 8.19 Notification of Certain Hires. After Closing, Buyer will notify the Company prior to hiring any Person who is, after Closing, an officer, director or manager of the Company after Closing. ARTICLE IX TERMINATION 9.1 Termination. This Agreement may be terminated and the transactions contem plated hereby may be abandoned as follows: (a) the parties may terminate this Agreement at any time prior to the Closing Date by mutual written agreement of Sellers and Buyer; (b) the Buyer may terminate this Agreement by giving written notice to the Company at any time prior to the Closing (i) in the event the Sellers have breached any representation, warranty, or covenants contained in this Agreement in any material respect, the Buyer has notified the Sellers of the breach, and the breach has continued without cure for a period of 30 days after the notice of breach or (ii) if the Closing shall not have occurred on or before June 30, by reason of the failure of any condition precedent under Article VI hereto -73- (unless the failure results primarily from the Buyer thereunder breaching any representation, warranty, or covenants contained in this Agreement); (c) the Sellers may terminate this Agreement by giving written notice to the Buyer at any time prior to the Closing (i) in the event the Buyer has breached any representation, warranty, or covenant contained in the Agreement in any material respect, the Company has notified the Buyer of the breach, and the breach has continued without cure for a period of 30 days after the notice of breach or (ii) if the Closing shall not have occurred on or before June 30, by reason of the failure of any condition precedent under Article VII hereof (unless the failure results primarily from the Sellers themselves breaching any representation, warranty, or covenant contained in this Agreement); (d) by Buyer in the event that (i) any person (or group of persons) acquires or enters into one or more agreements to acquire more than 25% of the outstanding capital stock of the Company, whether from the Company or pursuant to a tender offer or exchange offer or otherwise, (ii) the Company or any Subsidiary thereof enters into one or more agreements with respect to a merger or other business combination involving the Company pursuant to which any person (or group of persons) acquires more than 25% of the outstanding capital stock of the Company or the entity surviving such merger or business combination, (iii) one or more agreements are entered into with respect any other transaction pursuant to which any person (or group of persons) acquires or would acquire control of assets (including for this purpose the Assets and the outstanding capital stock of the Company and the entity surviving any merger or combination including any of them) of the Company equal to the lesser of the fair market value of the Assets or 25% of the fair market value of all the assets of the Company -74- immediately prior to such transaction, (iv) the Board of Directors of the Company shall have approved any transaction described in (i), (ii) or (iii) above, or (v) a tender offer or exchange offer for more than 25% of the outstanding common stock of the Company or a proxy context challenging the transactions contemplated hereby is commenced; (e) by Seller or Buyer in the event that the Board of Directors of the Company determines to withdraw, modify or change its approval of the Agreement or the transactions contemplated hereby in a manner adverse to Buyer or shall have resolved to do so other than following an event which entitles Sellers to terminate this Agreement pursuant to Section 9.1(c); (f) by Buyer in the event the condition set forth in Section 6.3 will not be or has not been satisfied. 9.2 Rights on Termination; Waiver. (a) If this Agreement is terminated pursuant to Section 9.1, all further obligations of the parties under or pursuant to this Agreement shall terminate without further liability of either party to the other, except as otherwise provided in Section 9.2(b), 9.2(c), or 9.2(d) hereof; provided, that no termination pursuant to Section 9.1(b) or (c) shall relieve any party of any liability arising from or relating to any breach prior to such termination; and provided further that the obligations contained in the Confidentiality Agreement shall survive any such termination. (b) In the event this Agreement is terminated by Buyer pursuant to Section 9.1(d) hereof, Sellers shall promptly (and upon the occurrence of an event specified in 9.1(d)(i), (ii), (iii), (iv) or (v) within one business day) pay to Buyer $2.1 million plus Buyer's fees and expenses (i) relating to the transactions contemplated by this Agreement and payable to -75- Persons other than Bain Capital, Inc. and its Affiliates (including, without limitation, attorneys', accountants', financial advisors', consultants' and commitment fees related to the financing for the transaction) or (ii) payable under the Financing Commitments, whether or not payable to Bain Capital, Inc. or any of its Affiliates (all such fees and expenses being referred to herein as the "Expenses"), the payment of which shall be in lieu of the payment of any damages otherwise incurred by Buyer as a result thereof. (c) In the event this Agreement is terminated by Buyer pursuant to Section 9.1(e) thereof, Sellers shall promptly pay to Buyer $3.5 million plus the Expenses, the payment of which shall be in lieu of the payment of any damages otherwise incurred by Buyer as a result thereof. (d) In the event this Agreement is terminated by Buyer after 120 days of an event which entitles Buyer to terminate the Agreement pursuant to Section 9.1(f) hereof (the "Waiting Period"), Seller shall promptly (i) pay Buyer the Expenses (ii) deliver to Buyer the number of shares of Common Stock of the Company determined by dividing $1,000,000 by the average of the closing price of the Company's Common Stock as reported on Nasdaq National Market for the 30 trading days prior to such termination which shares shall be entitled to be registered with the Securities and Exchange Commission for resale by Buyer on terms reasonably acceptable to Buyer and (iii) pay Buyer $500,000. In the event this Agreement is terminated by Buyer after 30 days of an event which entitles Buyer to terminate the Agreement pursuant to Section 9.1(f) and before the expiration of the Waiting Period, the Company shall promptly pay Buyer one-half of the Expenses. In the event this Agreement is terminated to Buyer pursuant to Section 9.1(f) as a result of an action, suit or proceeding -76- pursuant to which an injunction, order, judgment or ruling has been issued which prohibits the consummation of the transactions contemplated this Agreement or would require the transactions contemplated by this Agreement to be rescinded, the Company shall promptly pay Buyer the Expenses. Any amounts paid to Buyer pursuant to this Section 9.2(d) shall be in lieu of payment of any damages otherwise incurred by Buyer as a result of any such termination. (e) If any of the conditions set forth in Article VI of this Agreement have not been satisfied, Buyer may nevertheless elect to waive such conditions and proceed with the consummation of the transactions contemplated hereby. If any of the conditions set forth in Article VII of this Agreement have not been satisfied, Sellers may nevertheless elect to waive such conditions and proceed with the consummation of the transactions contemplated hereby. (f) Sellers will not terminate this Agreement at any time during the 125-day period commencing at the time Buyer is first entitled to terminate this Agreement pursuant to Section 9.1(f). ARTICLE X MISCELLANEOUS 10.1 Entire Agreement; Amendment. This Agreement and the documents referred to herein and to be delivered pursuant hereto constitute the entire agreement between the parties pertaining to the subject matter hereof, and supersede all prior and contemporaneous agreements, understandings, negotiations and discussions of the parties, whether oral or written, and there are no warranties, representations or other agreements between the parties -77- in connection with the subject matter hereof, except as specifically set forth herein or therein. No amendment, supplement, modification, waiver or termination of this Agreement shall be binding unless executed in writing by the party to be bound thereby. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision of this Agreement, whether or not similar, nor shall such waiver constitute a continuing waiver unless otherwise expressly provided. The representations and warranties of each party hereto shall be deemed to be material and to have been relied upon by the other party, notwithstanding any investigation heretofore or hereafter made by the other party. 10.2 Expenses. Except as otherwise specifically provided herein, each of the parties hereto shall pay the fees and expenses of their respective counsel, accountants and other experts and the other expenses incident to the negotiation and preparation of this Agreement and consummation of the transactions contemplated hereby. 10.3 Governing Law. This Agreement shall be construed and interpreted according to the laws of the State of New York, without regard to the conflicts of law rules thereof. 10.4 Assignment. This Agreement and each party's respective rights hereunder may not be assigned, by operation of Law or otherwise, without the prior written consent of the other party; provided, however, that Buyer may assign its rights hereunder, without the consent of Sellers, to any lender providing a Financing Commitment. 10.5 Notices. All communications, notices and disclosures required or permitted by this Agreement shall be in writing and shall be deemed to have been given at the earlier of the date (a) when delivered personally or by messenger or by reputable overnight delivery service to an officer of the other party, (b) the third day after mailing when mailed by registered or -78- certified United States mail, postage prepaid, return receipt requested, or (c) when received via telecopy, telex or other electronic transmission, in all cases addressed to the person for -79- whom it is intended at his address set forth below or to such other address as a party shall have designated by notice in writing to the other party in the manner provided by this Section: If to Sellers: EXECUTONE Information Systems, Inc. 478 Wheelers Farms Road Milford, Connecticut 06460 Attention: Mr. Alan Kessman, President and Chief Executive Officer With a copy to: Hunton & Williams Riverfront Plaza, East Tower 951 East Byrd Street Richmond, Virginia 23219-4074 Attention: Thurston R. Moore, Esq. If to Buyer: Tone Holdings, Inc. c/o Bain Capital, Inc. Two Copley Place Boston, MA 02116 Attention: Mr. Jonathan Lavine With a copy to: Ropes & Gray One International Place Boston, MA 02116 Attention: Lauren I. Norton, Esq. 10.6 Counterparts; Headings. This Agreement may be executed in several counterparts, each of which shall be deemed an original, but such counterparts shall together constitute but one and the same Agreement. The Table of Contents and Article and Section headings in this Agreement are inserted for convenience of reference only and shall not constitute a part hereof. 10.7 Interpretation. Unless the context requires otherwise, all words used in this Agreement in the singular number shall extend to and include the plural, all words in the -80- plural number shall extend to and include the singular and all words in any gender shall extend to and include all genders. All references to contracts, agreements, leases or other understandings or arrangements shall refer to oral as well as written matters. The specificity of any representation or warranty contained herein shall not be deemed to limit the generality of any other representation or warranty contained herein. The parties hereto intend that each representation, warranty and covenant contained herein shall have independent significance. If any party has breached any representation, warranty or covenant contained herein in any respect, the fact that there exists any other representation, warranty or covenant relating to the same subject matter (regardless of the relative levels of specificity) which the party has not breached shall not detract from or mitigate the fact that such party is in breach of the first representation, warranty or covenant. Neither the listing nor description of any item, matter or document in any Exhibit hereto nor the furnishing or availability for review of any document shall be construed to modify, qualify or disclose an exception to any representation or warranty of any party made herein or in connection herewith, except to the extent that such representation or warranty specifically refers to such Exhibit and such modification, qualification or exception is described with reasonable specificity in such Exhibit. 10.8 Severability. In the event that any provision hereof (including, without limitation, any of the provisions of Sections 8.12 and 8.13 hereof) would, under applicable law, be invalid or unenforceable in any respect, such provision shall (to the extent permitted under applicable law) be construed by modifying or limiting it so as to be valid and enforceable to the maximum extent compatible with, and possible under, applicable -81- law. The provisions hereof (including, without limitation, each of the provisions of Sections 8.12 and 8.13 hereof) are severable, and in the event any provision hereof should be held invalid or unenforceable in any respect, it shall not invalidate, render unenforceable or otherwise affect any other provision hereof. 10.9 No Reliance. No third party is entitled to rely on any of the representations, warranties and agreements contained in this Agreement. Buyer and Sellers assume no liability to any third party because of any reliance on the representations, warranties and agreements of Buyer or Sellers contained in this Agreement. 10.10 Parties in Interest. This Agreement shall be binding upon and inure solely to the benefit of each party hereto, and nothing in this Agreement, express or implied, is intended to or shall confer upon any other person any rights, benefits or remedies of any nature whatsoever under or by reason of this Agreement. 10.11 Specific Performance. The parties hereto agree that irreparable damage would occur in the event any of the provisions of this Agreement were not performed in accordance with the terms hereof and that the parties shall be entitled to specific performance of the terms hereof, in addition to any other remedy at law or equity. -82- IN WITNESS WHEREOF, each party hereto has caused this Asset Purchase Agreement to be executed in its name by a duly authorized officer as of the day and year first above written. TONE HOLDINGS, INC. ------------------------------------------------- By:______________________________________________ Its:_____________________________________________ TONE ACQUISITION CORPORATION ------------------------------------------------- By:______________________________________________ Its:_____________________________________________ EXECUTONE INFORMATION SYSTEMS, INC. ------------------------------------------------- By:______________________________________________ Its:_____________________________________________ EXECUTONE NETWORK SERVICES, INC. ------------------------------------------------- By:______________________________________________ Its:_____________________________________________ [ Exhibits Deleted ] -83- Amendment No. 1 to Asset Purchase Agreement This Amendment No.1 (the "Amendment") is made as of this 31st day of May 1996 to the Asset Purchase Agreement dated as of April 9, 1996 (the "Agreement") by and among Clarity Telecom Holdings, Inc., a Delaware corporation formerly known as Tone Holdings, Inc. ("Holdings"), Clarity Telecom, Inc. a Delaware corporation formerly known as Tone Acquisition Corporation ("Clarity Telecom," and, together with Holdings, the "Buyer"), EXECUTONE Network Services, Inc., a Virginia corporation (the "ENS") and EXECUTONE Information Systems, Inc. ("the Company" and, together with the ENS the "Sellers"). Capitalized terms used and not otherwise defined in this Amendment are used herein as defined in the Agreement. WHEREAS, the Sellers and the Buyer have entered into the Agreement and such parties have determined that it is in their mutual best interests to amend and modify the Agreement in certain respects as set forth below; NOW, THEREFORE, in consideration of the premises and the mutual covenants, conditions and agreements set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, it is hereby agreed that: 1. Employee Matters. 1.1. Union Employees. The fifth sentence of Section 8.2(a) of the Agreement is hereby amended and restated as follows: [ Confidential Treatment Requested ] [ Confidential Treatment Requested ] Section 8.2 of the Agreement is hereby amended by adding the following paragraph immediately following section 8.2(d): "(e) Sellers' agree from and after the Closing to be governed by the collective bargaining agreements resulting from Seller-union negotiations, which negotiations and dealings will comply with applicable law with respect to the employees listed on Exhibit 8.2A. The renegotiated collective bargaining agreements will contain terms and conditions substantially similar to those listed on Exhibit 8.2B. Employees listed on Exhibit 8.2A are currently subject to the collective bargaining agreements listed on Exhibit 8.2B and are not Designated Employees. Until such collective bargaining agreements have been negotiated, Sellers' will operate in conformity with the terms and conditions contained in the collective bargaining agreements listed on Exhibit 8.2B in respect of the employees listed on Exhibit 8.2A." 1.2. [ Confidential Treatment Requested ] Section 8.2 is hereby amended by adding the following paragraph immediately following paragraph (e) above: "(f) Sellers agree to promptly reimburse Buyer for all severance costs (to the extent of the comparable severance package utilized for the employees referred to in Section 8.2(b)) of Buyer and any of its subsidiaries relating to the termination on or before January 31, 1997 of employees providing service to the Company's Healthcare Customers (as defined in the Distributor Agreement) which the Company notifies Buyer by December 31, 1996 that it does not intend to hire. Notwithstanding Section 8.13 of the Agreement, Seller will have the right to offer employment to any such employees following the Closing Date." -2- 1.3. Employee Benefits. Section 8.2 is hereby amended by adding the following paragraph immediately following paragraph (f) above: "(g) Sellers and Buyer understand and agree that Sun Life of Canada, the Company's current medical stop loss insurance carrier, will, after the Closing, provide continuous coverage to the employees of the Company and the employees of Buyer and its subsidiaries, as if the transactions contemplated hereby had not occurred provided that the Company and Buyer continue to pay the applicable stop loss premiums through December 31, 1996. Accordingly, each of the Company and Buyer agree to pay the premium allocable to their respective employees through December 31, 1996. The Company agrees to amend the stated policyholder under such stop loss policy to "EXECUTONE Information Systems, Inc. and Affiliated Companies" and to list "Clarity Telecom Holdings, Inc., and its subsidiaries, including Clarity Telecom, Inc." as Affiliated Companies under such policy and not to terminate Sellers' participation in such stop loss policy prior to December 31, 1996." 1.4. Company Options. Section 8.2 of the Agreement is hereby amended to add the following paragraph immediately following paragraph (g) above: "(h) Sellers agree that effective as of the Closing, all stock options of the Company previously granted to employees of the Company who are Designated Employees shall become fully vested and that such stock options shall thereafter be exercisable in accordance with their terms; provided, however, that, for those stock options that would have vested pursuant to their original terms on or before May 31, 1998, stock purchased thereunder will be restricted as to resale, and the stock certificates therefor shall be held by the Company, until May 31, 1997, and, for those stock options that would have vested pursuant to their original terms after May 31, 1998, stock purchased thereunder will be restricted as to resale, and the stock certificates therefor shall be held by the Company, until May 31, 1998". 2. Transitional Services. Section 8.4(c) is hereby amended and restated in its entirety as follows: "(c) For the period beginning on the Closing Date and ending 60 days thereafter, Sellers agree to (i) reimburse Buyer for certain finance services and (ii) provide certain MIS, payroll processing, -3- accounts payable and benefits administration services in each case in connection with Buyer's conduct of the DSO Business following the Closing Date, and Buyer agrees to provide certain sales and use tax services in accordance with the terms and conditions specified in the Transitional Services Agreement dated the date hereof by and among the Company and Clarity Telecom." 3. Government Contracts. 3.1 Outstanding Bids Section 1.4 of the Agreement is hereby amended by inserting immediately after Section 1.4(m) the following: "; and (n) rights of the Sellers to enter into a contract and perform the services under the terms of each of the outstanding bids provided to state and local governments and government agencies set forth on Exhibit 1.4(n) to this Agreement if such outstanding bids were awarded to Buyer after the Closing Date." Article III is hereby amended by inserting after Section 3.34 the following: "3.35. Government Contracts. Exhibit 1.4(n) sets forth a true, correct and complete list of all outstanding bids of the Sellers for sales and service contracts relating to the DSO Business and responses to requests for proposals in respect of which the Company has outstanding applicable bid bonds. As of the Closing Date, these outstanding bids have not been awarded or performed in any respect by Sellers and no payments have been received by Sellers in respect of such outstanding bids. All such outstanding bids require bid bonds to be purchased in connection therewith and a true and accurate list of such bid bonds is set forth on Exhibit 1.4(n) hereto." 3.2 Outstanding Contracts. Article VIII is hereby amended by inserting after Section 8.19 the following: "8.20 Government Contracts. Buyer agrees to provide at the direction of Seller, the maintenance services called for in the outstanding state and local government Sales Contracts and Service Contracts of Seller relating to the DSO Business set forth on Exhibit 8.20A to this Agreement. Section 8.1 is hereby amended by inserting after paragraph (f) the following: -4- "(g) Bid and Performance Bonds. Buyer will indemnify and hold harmless Sellers for (i) liability under the bid bonds identified on Exhibit 1.4(n) to this Agreement and for (ii) liability under performance bonds to the extent that Seller incurs liability under such performance bonds as a result of a breach by Buyer of the obligation to provide services in respect of the customer Contract relating to such performance bond as contemplated in Section 8.20. 4. Required Consents. The Sellers and Buyers acknowledge that notwithstanding the terms of the Agreement, all of the Required Consents were not obtained on or prior to the Closing. Accordingly, Section 8.1 is hereby amended by adding the following: "(g) Sellers agree to indemnify and hold harmless Buyer and its directors, officers and Affiliates in respect of any Losses which any such party may at any time suffer, sustain or become subject to in connection with, incident to, resulting from or arising out of or in any way relating to or by or incur or become subject to, as a result of or in connection with the failure to obtain the Required Consents prior to Closing other than the excluded consents listed on Exhibit 8.1(g) (such Required Consents other than the excluded consents listed on Exhibit 8.1(g) being hereinafter to be referred to as the "Post-Closing Required Consent") where such failure results in: (i) the failure of the other party to the applicable Contract to recognize Buyer as the party entitled to performance, possession or the benefits (as applicable) under such Contract or (ii) the exercise by the other party to the applicable Contract of any rights or remedies thereunder. Buyer agrees that Sellers shall have no obligation to indemnify Buyer under this Section 8.1(g) in the event a Post- Closing Required Consent is obtained prior to Buyer suffering any Losses. In addition, Buyer agrees that Sellers shall have no obligation to indemnify Buyer under this Section 8.1(g) upon the expiration of the current term of any Contracts requiring Post-Closing Required Consent." Section 8.6 is hereby amended by adding the following sentence immediately following the last sentence: "Without limiting the generality of the foregoing, Buyer and Sellers will, following Closing, cooperate with each other and use their best efforts to obtain the Post-Closing Required Consents, including the execution and delivery of additional agreements, documents and certificates reasonably required by such third party providing such consent." -5- 5. Network Resale Business. Article III is hereby amended by adding immediately following Section 3.35 above the following: "3.36 Network Resale Business. Attached hereto as Exhibit 3.36A are true and correct copies of all of the Company's resale or sales agency agreements for long distance or local access services and regional bell operating companies agency or marketing agreements. Except as set forth in Exhibit 3.36B, none of such agreements have been or are in default with respect to the obligations of the Company, or to the knowledge of Sellers, with respect to the obligations of any third party and no event has occurred that would, with the passage of time or compliance with any applicable notice requirements, constitute a default or a right of the Company, or to the knowledge of the Sellers, any third party to such agreements, to cancel, terminate or exercise any option, nor has the Company failed to meet minimum volume commitments in any such agreements and, to the knowledge of Sellers, there is no basis therefore." Section 8.11 is hereby amended by adding immediately following paragraph (c) the following: "(d) Notwithstanding any provision contained in this Agreement to the contrary, in connection with the transfer of the Network Resale Business to Buyer, other than with respect to the Sprint Contract which shall be governed by the Network Addendum between the Company and Buyer dated May 31, 1996, Buyer shall prior to November 30, 1996 determine the agreements set forth on Exhibit 3.36A which it will request Sellers to assign to Buyer. If such agreements are not determined by Buyer to be assigned to Buyer, Sellers shall promptly terminate such agreements when requested by Buyer." 6. Representations and Warranties. 6.1 Clause (c) of Section 3.7 is hereby amended and restated in its entirety as follow: "(c) any other agreement involving an obligation or contractual liability in excess of $125,000 in the aggregate," -6- 6.2. Exhibit 3.7(a) is hereby amended by adding the list set forth in Attachment A hereto and designating it as "Sales Contracts and Service Contracts differing from the form of Sales Contract and Service Contract included in Exhibit 3.26". 6.3 Exhibit 3.28 is hereby amended by adding the list set forth in Attachment A hereto. 6.4 Exhibits 1.24, 3.17 and 3.28 are hereby amended by adding the following to the section entitled "Collective Bargaining Agreements": "San Diego Local Union No. 569 International Brotherhood of Electrical Workers and Executone Information Systems, Inc. June 1, 1994 - June 30, 1997" 6.5 Exhibits 3.1 and 3.28 are hereby amended to reflect that, as of the effective date of the Agreement, the Company was not qualified to do business as a foreign corporation in Rhode Island and South Dakota, and was not in good standing in Tennessee, and that, as of May 31, 1996, the Company is not so qualified in Rhode Island, and is not in good standing in Tennessee; and, further, that ENS is so qualified only in California and New York. -7- 6.6 Exhibits 1.24, 3.7 and 3.28 are hereby modified by adding the following contracts: "Network Services Marketing Agreement dated February 19, 1996, between Bell Atlantic Network Services, Inc. and EXECUTONE Information Systems, Inc. (Pennsylvania office). Program Enrollment Terms Agreement dated October 20, 1995 by and between WORLDCOM Network Services, Inc., d/b/a WilTel, and EXECUTONE Information Systems, Inc. Voice Mail Marketing Agreement dated April 1, 1995 by and between Pacific Bell and EXECUTONE Information Systems, Inc. TRW Business Credit Services Agreement dated August 6, 1994, by and between TRW and EXECUTONE Information Systems, Inc. Software License and Database Subscription Agreement dated March 31, 1993, between Vertex, Inc. and EXECUTONE Information Systems, Inc." by amending the reference to the Network Services Marketing Agreements with Pacific Bell to read: "Network Services Marketing Agreements dated January 17, 1996, and March 6, 1996 by and between Pacific Bell and EXECUTONE Information Systems, Inc. (Sacramento and San Francisco respectively)" by amending the reference to the Network Services Marketing Agreements with Bell Atlantic Network Services, Inc. to read: "Network Services Marketing Agreements between Bell Atlantic Network Services, Inc. and EXECUTONE Information Systems, Inc. (Maryland and Virginia, both expiring 3/31/96.)" by amending the reference to the Agent Marketing Sales Agency Agreements with U.S. West Communications, Inc. to read: "Agent Marketing Sales Agency Agreements dated January 6, 1994 and February 25, 1994, by and between U.S. West Communications, Inc. and EXECUTONE Information Systems, Inc. (Colorado and Arizona, respectively)." by amending the reference to the agreements with NYNEX to read: -8- "Agreements for Sale of Services and Account Management effective as of February 1, 1996, between NYNEX and EXECUTONE Information Systems, Inc. (Boston and New York) (signed by Company, returned copies not signed by NYNEX)." and by deleting the following contract: "Home Purchase Service Agreement dated August 6, 1993, between Americorp Relocation Management, Inc. and EXECUTONE Information Systems, Inc." 6.7. Exhibits 1.24 and 3.7 are hereby modified by adding the following contract: "Service Agreement dated October 13, 1995, by and between Computer Output Systems, Inc. and EXECUTONE Information Systems, Inc." 7. Credits. Article VIII is hereby amended by adding the following immediately following Section 8.20: "8.21 Credits and Pricing. Company agrees to provide Buyer the following credits and pricing for the term of the Distributor Agreement: (i) Company will provide Buyer up to $ [ Confidential Treatment Requested ] per year in credits to be earned and credited upon Buyer's purchases (at the Standard Distributor Agreement pricing) of any combination of T-1 digital kit (PN 15510K) (a credit of $ [ Confidential Treatment Requested ] each), ECVM (PN 21640) (a credit of $ [ Confidential Treatment Requested ] each) and the initial LCR download (a credit of $ [Confidential Treatment Requested] each), which are installed pursuant to any "Hammer-It-Home" promotional contract having at least a three-year term and for which a signed copy of such contract is provided to Company with the applicable order; (ii) after utilization of the credits provided for in subsection (i) above for any given year, Company will sell Buyer the T-1 kit (PN 15510K) at an actual purchase price of $ [Confidential Treatment Requested] each and all LCR downloads at $ [ Confidential Treatment Requested ] per download; and (iii) Company will provide free LCR updates for all customers of Buyer identified in writing to the Company prior to June 30, 1996, who were provided LCR at no cost pursuant to a Hammer-It-Home contract prior to May 31, 1996, for the remaining terms of such contracts. (iv) Buyer will pay Company the then current full OEM price for any T-1's sold by Distributor pursuant to a "Hammer-It-Home" contract that is terminated and for which the end-user customer is required to pay retail price pursuant to such -9- contract. Within 30 days after the end of each six-month period ending June 30 and December 31, Distributor shall provide Company with a report of all "Hammer-it-Home" contract terminations during the previous six-month period, and pay the required OEM price therefor (less any amounts previously paid pursuant to subsection (ii) hereof for the same units)." 8. Software Products. Article VIII is hereby amended by adding immediately following Section 8.21 above the following: "8.22. [ Confidential Treatment Requested ] 9. Tax Exemption Certificates. Article VIII is hereby amended by inserting after Section 8.22 above the following: "8.23. Sales and Use Taxes. Buyer agrees that, as soon as reasonably practical following the Closing Date, it shall procure and deliver to Sellers resale tax exemption certificates relating to the sale by Sellers to Buyer of Inventory pursuant to this Agreement for each applicable state in which Sellers are subject to sales and use taxes in connection with the sale of the Assets pursuant to this Agreement." 10. Counterparts; Headings. This amendment may be executed in several counterparts, each of which shall be deemed an original, but such counterparts shall together constitute but one and the same instrument and be deemed a part of the Agreement. The Section headings in this amendment are inserted for convenience of reference only and shall not constitute a part hereof. -10- IN WITNESS WHEREOF, each party hereto has caused this Amendment to be executed in its name by a duly authorized officer as of the date first written above. Clarity Telecom Holdings, Inc. By_______________________ Name: Title: Clarity Telecom, Inc. By_______________________ Name: Title: EXECUTONE Information Systems, Inc. By_______________________ Name: Title: EXECUTONE Network Services, Inc. By_______________________ Name: Title: [ Exhibits Deleted ] -11- EX-10 3 EXHIBIT 10-10-1 [EXHIBIT 10-10 CONTAINS MATERIAL THAT IS THE SUBJECT OF A REQUEST FOR CONFIDENTIAL TREATMENT PURSUANT TO RULE 24b-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934] SECOND AMENDMENT TO VOLUME PURCHASE AGREEMENT THIS SECOND AMENDMENT (the "Amendment") is made effective this 1st day of April, 1995 to the Volume Purchase Agreement entered into an January 31, 1992, and the Amendment to the Agreement entered into on ________________, 1993 (collectively the "Agreement") by SPRINT COMMUNICATIONS COMPANY L.P. and EXECUTONE INFORMATION SYSTEMS, INC. ("Reseller"). Sprint and Reseller are "Parties" hereto. In consideration of the mutual promises contained herein, the Parties amend the Agreement as follows: 1. Subparagraph 5(a) is stricken in its entirety and a new Subparagraph 5(a) is added to read as follows: a) Except as otherwise provided herein, the initial term of this Agreement (the "Initial Term") shall commence on the date first written above and terminate May 3, 1998. At the end of the Initial Term the Agreement will remain in full force and effect until terminated by either Party upon ninety days written notice to the other Party. The agreement entered into between Sprint and Reseller regarding Carrier Identification Code ("CIC") and release of Sprint's name for the purpose of providing Reseller's customers with a fulfillment piece will also continue in effect for the duration of the Agreement. 2. Exhibit B to the Agreement is stricken in its entirety and a new Exhibit B is added to read as follows: EXHIBIT B PRICING 1. PRICING FOR DOMESTIC INTERSTATE SERVICES. The following interstate Services will be priced as set forth below. As used herein, "Peak" period pricing applies to traffic defined as "day" usage, and "Off-Peak" pricing applies to "evening" and "night/weekend" usage, as defined in Sprint's FCC Tariff No. 2, Section 5.1.A. The following interstate flat rates will apply to traffic originating and terminating in the 48 contiguous states only. Tariff rates will apply to traffic originating and/or terminating in Alaska, Hawaii, Puerto Rico and the U.S. Virgin Islands. DIAL 1 WATS
Gross Monthly Volume of Service Peak Off Peak ------------------------------- ---- -------- $0 to $2,499,999 $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 4 EXHIBIT 10-10-2 [EXHIBIT 10-10 CONTAINS MATERIAL THAT IS THE SUBJECT OF A REQUEST FOR CONFIDENTIAL TREATMENT PURSUANT TO RULE 24b-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934] AMENDMENT TO AGREEMENT THIS AMENDMENT (the "Amendment') is made effective this _______ day of ___________, 1993 to that certain Volume Purchase Agreement dated January 31, 1992, ("the Agreement") by and between Sprint Communications Company L.P. ("Sprint"), and Executone Information Systems, Inc. ("Reseller"). Sprint and Reseller are referred to herein collectively as "Parties," and individually as a "Party." In consideration for the mutual promises contained in the Agreement and this Amendment, the Parties hereby amend the Agreement as follows: 1. Subparagraph 1(a) is hereby stricken in its entirety and a new Subparagraph 1(a) is added to the Agreement to read as follows: 1. Definitions a) "Eligible Services" means: (1) services listed in Gross Monthly Volume Contributory and Eligible Table in Exhibit B which are eligible for the discounts provided herein; and (2) international services listed in the Gross International Monthly Volume Contributory and Eligible Table attached hereto which are eligible for the discounts provided herein. 2. Subparagraphs 1(f), 1(g), and 1(h) are hereby added to the Agreement to read as follows: 1. Definitions f) "Gross Monthly Volume" means the charges for Services provided under this Agreement priced at Tariff rates net of all credits or adjustments provided by Tariff. g) "Gross International Monthly Volume" means the charges for international Services provided under this Agreement priced at Tariffed rates net of all credits or adjustments provided by Tariff less Network WATS charges or credit. h) "Net Invoice" means the charges for Services priced in accordance with the discounts or special pricing provided for in this Agreement net of all credits or adjustments provided by Tariff or under this Agreement. 3. Subparagraph 3(g) is hereby added to the Agreement to read as follows: 3. The Transaction -1- g) If Reseller provides network access for Ultra WATS and Ultra 800 Service, then Reseller shall provide, at Reseller's expense, all access to the Sprint Point of Presence, or to the Service Wire Center (SWC). If Reseller provides access only to the SWC, then Reseller will be assessed both Non-Recurring Charges (NRC) and Monthly Recurring Charges (MRC) for Central Office Connection (COC) and Entrance Facility Cost (EFC). If Reseller elects to provide access to Sprint's Point of Presence (POP), only NRC and MRC charges for COC will apply, and Reseller must not use Sprint's leased SWC-to-POP entrance facilities. 4. Ultra WATS/Ultra 800 (Sprint Provided and Customer Provided Access) pricing is added to Exhibit B to replace existing pricing and reads as follows: Ultra Wats'r' (Sprint Provided Access)
Flat Rate Price Gross Monthly Volume Peak Off Peak - - -------------------------------------------------------------------------------------- $ 0 - $ $ 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 5 EXHIBIT 10.22 EXHIBIT 10-22 EXECUTONE INFORMATION SYSTEMS, INC. DISTRIBUTOR AGREEMENT - - -------------------------------------------------------------------------------- AGREEMENT dated as of May 31, 1996, between EXECUTONE INFORMATION SYSTEMS, INC. and Clarity Telecom, Inc., a Delaware corporation ("Distributor"). WHEREAS, Company (as defined in Section 26 below) wants to appoint Distributor as the Authorized Distributor within the Districts described in Exhibit A to this Agreement ("Distributor's Area") of the products described in Exhibit B to this Agreement (the "Authorized Products"), including spare parts therefor, and as a licensee of any software imbedded therein or otherwise an integral part thereof described in Exhibit B (the "Authorized Software"); WHEREAS, Distributor wants to be appointed to promote the sale and service of the Authorized Products and to license the use of the Authorized Software in conjunction with the sale of the Authorized Products in Distributor's Area; and WHEREAS, the execution and delivery of this Agreement is a condition to Distributor's Purchase of the Company's DSO Business as defined in the Purchase Agreement pursuant to an Asset Purchase Agreement by and among the Company, EXECUTONE Network Services, Inc., Clarity Telecom Holdings, Inc. (formerly known as Tone Holdings, Inc.) and the Distributor dated April 9, 1996 (the "Purchase Agreement"). NOW, THEREFORE, in consideration of the mutual promises in this Agreement and other good and valuable consideration, the parties agree as follows: 1. AUTHORIZED DISTRIBUTOR. Distributor is hereby granted the exclusive and non-exclusive rights as provided in Section 12 hereof, to sell, service and maintain the Authorized Products and to license the Authorized Software in Distributor's Area; provided that Distributor shall not have the right to sell to National Accounts and Company Accounts in the Distributor's Area. In consideration for Company's grant to Distributor of the rights to sell and service the Authorized Products and to license the Authorized Software in Distributor's Area, Distributor agrees to purchase the quantities of Authorized Products and license the quantities of Authorized Software required by Distributor's Quota as defined in Section 7 of this Agreement, and not to sell or promote Competing Products in Distributor's Area, as that term is defined in Exhibit C and except as provided in Exhibit C or in Section 12(e) hereof, without the express prior written consent of Company. 2. COMPANY SUPPORT OF DISTRIBUTOR. The Company shall: (a) refer to Distributor a portion of the leads for Authorized Products and Authorized Software in the Distributor's Area of which Company becomes aware, in the same proportion as the Distributor's purchases of Authorized Products and Authorized Software for the District bear to all purchases of Authorized Products and Authorized Software for the District; (b) make available promotional programs from time to time at Company's discretion subject to Company's normal charges for such programs; (c) sell, at special prices or terms, an assortment of the Authorized Products to be used by Distributor to demonstrate those products to customers and to train personnel; (d) make available courses and materials for training Distributor's personnel at Company's normal charges; (e) make available technical and service support, including installation and technical manuals, subject to Company's normal charges for such support; 2 (f) market the Authorized Products directly to National Accounts, Cross-Territorial Accounts and Company Accounts in accordance with the National Accounts Policy set forth as Exhibit D (the "NAP") , the Cross-Territorial Policy set forth as Exhibit E (the "CTP") and the Company Accounts Policy set forth as Exhibit F (the "Company Accounts Policy"), respectively, all of which Company expressly reserves the right to amend (except as provided therein) from time to time when Company in its reasonable discretion determines such amendment to be desirable; (g) utilize its best efforts to provide to Distributor Authorized Products that are competitive in the marketplace in function, features and price. Distributor and Company recognize that, from time to time, Company will develop and introduce new products bearing the Authorized Trademarks and which Company believes to be competitive with Competing Products available in the marketplace. Company shall make such new Authorized Products available to Distributor for sale and license in Distributor's Area on the same exclusive or non-exclusive basis as applies to the Authorized Products hereunder and thereafter such new Authorized Products shall be Authorized Products as defined in this Agreement; (h) use its best efforts to have Distributor elected to Company's Independent Distributor Advisory Board; and (i) as soon as available after the end of each fiscal year, deliver to Distributor financial statements consisting of balance sheet, income statement and, at Distributor's request, a statement of sources and uses of funds for such year prepared in accordance with generally accepted accounting principles and reviewed by a certified public accountant. 3. TRADEMARK LICENSE AND USE. In order to promote and protect the Company's trademark rights, the parties agree that: 3 (a) AUTHORIZED USES. Company grants to Distributor a nonexclusive, non-transferrable license to use the trademarks described in Exhibit C (the "Authorized Trademarks"): (i) only in connection with the sale and service, and promotion of sale and service, of the Authorized Products; (ii) only in the Distributor's Area in which Distributor is authorized to sell and service the related Authorized Products; (iii) only during the term of this Agreement or to service products installed prior to the termination of this Agreement; (iv) only in the manner described in this Section and Exhibit C; and (v) as provided in the Purchase Agreement. (b) PROHIBITED USES. Distributor is not granted any license or right to use the mark or name EXECUTONE INFORMATION SYSTEMS, EISI, OR EIS, or any comparable derivative thereof. Except as expressly authorized in Exhibit C (the "Authorized Name"), Distributor shall not use the Authorized Trademarks as part of Distributor's trade or corporate name, nor shall Distributor otherwise trade under the Authorized Trademarks or any derivative thereof. (c) NONTRANSFERABILITY. Distributor shall not assign or sublicense its rights to use the Authorized Trademarks or Authorized Name to any other person or entity except as otherwise permitted by this Agreement. (d) DISTRIBUTOR'S COVENANTS. Distributor hereby agrees that Distributor: (i) shall use the Authorized Trademarks only as expressly authorized and only in conjunction with the R or TM symbol as appropriate; (ii) shall not use the Authorized Trademarks in any disparaging way or in any way that might confuse other products with the Authorized Products in a manner which would jeopardize the Company's interests in the Authorized Trademark; and (iii) shall not challenge or contest in any way the validity of the Authorized Trademarks, their registration or their ownership by the Company. (e) PRODUCT ALTERATIONS. Distributor may affix to the back of any Authorized Product or copy of Authorized Software a legend in the following form: 4 For Sales and Service (Name of Distributor) (Address of Distributor) (Local Telephone Number of Distributor) (Installation Date) For 24-Hour Emergency Service Call: (Telephone Number) However, Distributor shall not remove, change, obscure, or add to the labels, markings, names or trademarks that Company has affixed to any Authorized Product. 4. DISTRIBUTOR'S SALES RESPONSIBILITIES. In order to develop the market for the Authorized Products in Distributor's Area, Distributor shall: (a) promote the sale of the Authorized Products throughout Distributor's Area and maintain accurate records with respect to sales of the Authorized Products (which records are acknowledged to be the proprietary business information of Distributor); (b) make sales of Authorized Products to customers in Distributor's Area sufficient to meet Distributor's Quota as provided in Section 7; (c) maintain a sufficient inventory of the Authorized Products to meet the demand in Distributor's Area; (d) timely install the Authorized Products in a workmanlike and professional manner in accordance with instructions and specifications; (e) properly train customer's personnel in the operation and use of the Authorized Products, as reasonably requested by customers; 5 (f) maintain a trained sales force of sufficient size to serve Distributor's Area and meet Distributor's Quota; (g) avoid doing anything that might materially and adversely affect the sales potential for the Authorized Products except as otherwise permitted under this Agreement; (h) except as specifically provided for in Sections 4(i) and (k) herein, refrain from selling the Authorized Products to any entity other than to end-users located in Distributor's Area; (i) refrain from selling the Authorized Products and spare parts therefor outside of Distributor's Area except as specifically authorized by the NAP, the CTP or the Company Accounts Policy, each of which Company expressly reserves the right to amend (except as provided therein) from time to time when Company in its reasonable discretion determines such amendment to be desirable, or as otherwise specifically authorized in writing; (j) refrain from selling the Authorized Products to former authorized Distributors of Authorized Products and to secondary market resellers identified to Distributor by the Company. The Company will assist Distributor in the sale of Distributor's excess inventory of Authorized Product to other Authorized Distributors by coordinating an exchange program between Distributors or any other entity which Company authorizes for the purchase of Distributor's inventory of Authorized Product; (k) Company and Distributor recognize exchange between Distributors will be necessary from time to time for emergency service requirements and Company agrees that Distributor may sell Authorized Products to other Authorized Distributors for this purpose. Distributor agrees that such sales of Authorized Products will be of an incidental nature for emergency purposes. Company and Distributor recognize that 6 such incidental sales between Distributors are in the best interest of the Company and its Distributors in order to facilitate quick response to service outages; however, Distributor and Company specifically agree that it is not the intent of this Section 4(k) for Distributor to become a source of product supply to any other Distributor in breach of its financial obligations to Company and/or for Distributor to purchase the Authorized Products in bulk from the Company to take advantage of Company's volume purchase discounts and resell portions of such bulk purchases to another Authorized Distributor; (l) obtain at Distributor's expense all state, local, and other licenses and permits necessary for operation of the Distributorship, and furnish Company with Distributor's local sales tax license number; and (m) utilize its reasonable best efforts to market Authorized Products within its assigned territory to assist Company in the attainment of its market share objectives provided to the Distributor. 5. DISTRIBUTOR'S SERVICE RESPONSIBILITIES. In order to service adequately customers in Distributor's Area and to ensure consistent nationwide service of the Authorized Products, Distributor shall: (a) install and service, subject to Distributor's customary charges and credit criteria, all Authorized Products and Other Company Products, as defined in Exhibit F, installed in Distributor's Area, regardless of whether they were sold by Distributor but subject to the Company Accounts Policy, the NAP and the CTP; (b) except to the extent faster response times are reasonably required by Company for National Accounts, Cross-Territorial Accounts or Company Accounts, respond: (i) within 4 hours to all Emergency Service Requests, defined as all requests to remedy problems that are not isolated failures of a minority of station 7 instruments and/or a minority of trunks and/or system components not required for normal processing of voice, video and/or data communications; (ii) within 48 hours to 95% of all non-Emergency Service Requests; and (iii) within ten (10) business days to 100% of customers' requests for routine adds, moves or changes of equipment, subject to availability of product from Company. It is the intent of this Section that Distributor utilize its best efforts to achieve these goals on a consistent basis. Occasional failures and/or delays will not be a Material Breach of this Agreement. (c) make available emergency service 24 hours a day, 365 days a year, for all of its customers, and all National Accounts, Cross-Territorial Accounts and Company Accounts in Distributor's Area; (d) as requested by Company, make available installation and service to National Accounts, Cross-Territorial Accounts and Company Accounts in Distributor's Area as required by and subject to the Company Accounts Policy, NAP or CTP; (e) maintain trained personnel, spare parts, and equipment sufficient to service all Authorized Products and Other Company Products in Distributor's Area; provided, however, that Distributor shall not be required to maintain any spare parts for Call Center Products; and (f) maintain complete records of all service requests and service calls, including: the name of the customer; the date(s) and time(s) of the request, response, and correction of the problem; the nature of the problem; any parts used; any charges; and whether the service was performed under warranty. 8 6. DISTRIBUTOR'S FINANCIAL AND REPORTING RESPONSIBILITIES. (a) FINANCIAL CONDITION. Distributor shall maintain a financial condition adequate to perform its obligations as an authorized distributor. (b) REPORTING RESPONSIBILITIES. Distributor shall submit to Company: (i) as soon as available after the end of each fiscal year, financial statements consisting of balance sheet, income statement, and at Company's request, a statement of sources and uses of funds, for such year prepared in accordance with generally accepted accounting principles and reviewed by a certified public accountant; (ii) at Company's request, a list of all persons and entities having an ownership interest in Distributor, and the nature and percentage of each such ownership interest; and (iii) within thirty (30) days of the end of each quarter Distributor will complete and send to Company a summary report of retail sales of Authorized Products and service activity performed by Distributor within Distributor's Area. The information required may be modified from time to time as required by changes in the market or within the industry. The information provided by Distributor will be analyzed by Company and consolidated on a national and regional basis and reported back to Distributor. (iv) within 15 days after the end of each month, to the extent required by the agreement between the Company and Oracle Corporation, a third party software licensor of software contained in or sold with ILS(TM)Authorized Products that contain the management reports feature or licensed with Authorized Software relating to such Authorized Products, the names and addresses of sublicensees of such software sublicensed by Distributor within the preceding month, the date of purchase and installation, the specific Authorized Product and Authorized Software installed, including the make 9 or model designation and the software release number of the software programs licensed, and the maximum number of users per system. Company agrees to maintain the confidentiality of and not to use such information in any manner whatsoever, except to the extent it is required to provide such information to Oracle, without the prior written consent of the Distributor. 7. PURCHASE, PAYMENT, SALES AND SHIPMENTS. (a) PURCHASE AND PAYMENT BY DISTRIBUTOR. (i) FORECASTS. In order to assist Company in scheduling the production and delivery of the Authorized Products, Distributor will deliver and update during the term of this Agreement a rolling six-month forecast of its purchases. Distributor's initial forecast is attached hereto as Exhibit G. On or before the first day of each calendar month, Distributor shall deliver an updated forecast in the form attached hereto as Exhibit G. Each such forecast shall cover the succeeding six calendar months. Such forecasts are nonbinding and for advisory or planning purposes only. (ii) QUOTA. Quota is defined as the minimum dollar volume of Authorized Product and Authorized Software listed in Exhibit B, that Company requires Distributor to purchase or license from Company during each calendar year of this Agreement. The Quota for any calendar quarter of any year (a "Quarter") is one-quarter of the annual Quota unless otherwise stated on Exhibit H. Attached as Exhibit H are the Quotas that the Company and Distributor have mutually agreed upon for the initial Term. For any extension period of this Agreement, the Quotas shall be as mutually agreed between Company and Distributor. For purposes of Quota performance measurement, Company will calculate Distributor's purchases based upon the then current Distributor Net Price, defined as the price at which Company sells the Authorized Products to its lowest volume distributor. Following the 10 end of each Quarter, Company will provide Distributor with a report of Distributor's Quota performance. (iii) PURCHASE ORDERS. Orders for the purchase of the Authorized Products shall be made by Distributor by purchase orders, specifying the quantity and description of Authorized Products desired. Any term or condition of such purchase orders that is inconsistent with any term or condition of this Agreement shall be of no force and effect whatsoever, and any additional term or condition of such purchase order shall be construed so as to be consistent with the intent of this Agreement. (iv) PAYMENT. Subject to subsection 7(b), payment by Distributor to Company for each order of Authorized Products shall be made in cash, or by check or wire transfer. Until the earlier of third anniversary hereof and such time as 60-day terms are no longer required by Distributor's banks, payment by Distributor shall be made within the longer of (i) sixty days of invoice date and (ii) the most favorable payment terms provided to the Company's other distributors. Thereafter, payment by Distributor shall be made within thirty days of invoice date for the balance of the term of this Agreement. Distributor shall pay each invoice in full subject to appropriate credits and offsets. Distributor must notify Company in writing within 30 days of the date of the invoice or the date of receipt of product ordered, whichever is longer, of any disputed invoice amount along with an explanation of the reason of the dispute. (b) SALES AND SHIPMENTS BY COMPANY. (i) PRICES AND TERMS. Company will sell at prices and on terms determined by Company from time to time, as reflected in the Company's Authorized Product Price Book. At all times during the period or periods in which Distributor is not in Material Breach of this Agreement, Company agrees to sell to Distributor at the most favorable terms and conditions, including without limitation prices and discount level, made available to any other 11 authorized distributor for a territory located in the United States for the same products, excluding sales to the Federal Government. Company agrees to promptly notify Distributor in writing if the Company has or has entered into an agreement with any other authorized distributor which contains terms and provisions which are more favorable to such other authorized distributor than those contained herein. Company shall, upon the request of Distributor, amend this Agreement to reflect such more favorable provisions. All prices are exclusive of all taxes (except taxes on Company's income) including federal, state, and local sales, use, value-added or similar taxes. Distributor will pay all such taxes unless Distributor has given Company a valid exemption resale certificate prior to shipment. Company expressly reserves the right to change prices with not less than forty-five days notice to Distributor, and Company also reserves the right to change credit terms at any time if in Company's opinion Distributor's financial condition or payment record so warrants. If Distributor becomes materially delinquent in the payment of any material sum due to Company, Company may suspend performance under this Agreement and may require Distributor to make payment in advance of any subsequent shipments of Authorized Products. By exercising the foregoing right, Company is in no way waiving any of its other rights and remedies at law or under this Agreement. Distributor hereby grants and Company reserves a purchase money security interest in each Authorized Product in respect of which the Company has not been paid pursuant to a purchase order, and any proceeds thereof, for the amount of the purchase price. At Company's request, Distributor will sign any documents required to perfect such security interest. Full payment of the purchase price of the Authorized Product will release the security interest on that Product. (ii) SHIPMENT. Except as otherwise provided herein, Company will ship to the locations designated in Distributor's purchase order within Distributor's Area in accordance with Company's published shipping schedules in effect at the time of shipment. Company will provide Authorized Products and 12 Authorized Software to Distributor in an amount at least equal to the Distributor's forecasts provided to the Company pursuant to Section 7(a)(i). At all times during the period or periods in which Distributor is not in Material Breach and in which Distributor has the exclusive right to sell, license, service and maintain the Authorized Products and Authorized Software as provided in Section 12, the Company shall provide Distributor priority in shipment of Authorized Products and Authorized Software over other authorized distributors of the same products. Company shall not be liable for any failures to ship or delays in shipping caused by circumstances described in Section 19. Company shall use its best efforts to maintain sufficient inventory in stock to meet Distributor's purchase orders and needs. Risk of loss shall pass to Distributor F.O.B. Company dock, but Company will assist Distributor in tracking shipments and processing claims related to lost or damaged goods. Title to each shipment of Authorized Products shall pass to Distributor upon receipt by Company of payment for such shipment as provided in Section 7(a)(iv) herein with the exception of Software, title to which shall remain vested in Company at all times as provided by the Software License contained in Section 15. Company may, in its sole discretion, honor Distributor's requests to drop ship to installation locations within Distributor's Area and to expedite shipments, but Company reserves the right to pass on to Distributor any additional costs incurred as a result of such requests. Company reserves the right to refuse shipment of Authorized Products if Distributor has failed to make timely payment for prior shipments as required by Section 7(a)(iv). In the event that Company elects to exercise its right not to ship Authorized Products by reason of Distributor's failure to make timely payments for prior shipments, or otherwise places Distributor on credit hold, it shall immediately notify Distributor as soon as such election is made. 13 (c) EXPORTS TO AND FROM DISTRIBUTOR'S AREA. (i) Distributor shall not export or reexport Authorized Products without such valid export or reexport authorization as may be required, or otherwise violate any export or reexport restriction imposed by authorities in the country of origin of such Authorized Products or by other authorities concerned. (ii) Company shall, where applicable, issue Certificates of Origin for Authorized Products shipped under this Agreement, duly verified by the authorities concerned. 8. LIMITED WARRANTY AND RESTRICTION ON ALTERATION. (a) LIMITED WARRANTY. Company warrants that all Authorized Products sold to Distributor pursuant to this Agreement will perform in accordance with Company's written specifications therefor and will be free from defects in material and workmanship for the period from the date of shipment F.O.B., Company specified in Exhibit B (the "Warranty Period"), provided that such Authorized Products are installed in compliance with Company's written installation specifications, to the extent applicable, and given normal service and maintenance by Distributor during the Warranty Period. Company warrants that the Authorized Software will be free from any defect that causes a material nonconformity between its performance as described in the Related Documentation accompanying the Authorized Software, as specified in Exhibit B, and actual performance during the Warranty Period for the Authorized Product in which the Authorized Software is imbedded or otherwise an integral part. Company's obligation under this warranty shall be limited to repair or replace, at Company's option, any part(s) or Authorized Software that may prove defective under normal and proper use and service for the Warranty Period. For such repairs and replacements, Distributor shall pay the cost for shipment to Company's plant; and Company shall pay the cost for shipment from Company's plant. Company agrees to use its best efforts to ship any repaired or 14 replacement Authorized Product within thirty (30) days of the date Company shall have received the defective Authorized Product. This warranty shall not apply to lamps, fuses, batteries or other such items normally consumed in operation which have a normal life shorter than the Warranty Period. (b) DISCLAIMERS. THE WARRANTIES CONTAINED IN THIS SECTION ARE IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WARRANTIES OF MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE. THESE WARRANTIES SHALL BE VOID AS TO PRODUCT DAMAGED OR RENDERED UNSERVICEABLE OR NONFUNCTIONAL BY NEGLIGENCE OF NON-COMPANY PERSONNEL, MISUSE, THEFT, VANDALISM, FIRE, LIGHTNING, POWER SURGES, WATER OR OTHER PERIL, OR ACTS OF GOD, BY FAILURE OF DISTRIBUTOR TO COMPLY WITH PUBLISHED TECHNICAL REQUIREMENTS OR BY SERVICES OR PRODUCTS OF OTHER VENDORS, INCLUDING WITHOUT LIMITATION THE LINES OF ANY LOCAL EXCHANGE TELEPHONE COMPANY. REPAIR, RELOCATION OR ALTERATION OF THE PRODUCT BY PERSONS NOT AUTHORIZED BY COMPANY VOIDS THE WARRANTY. LIABILITY OF COMPANY HEREUNDER IS EXPRESSLY LIMITED TO THE REPAIR OR REPLACEMENT DESCRIBED ABOVE, AND IN NO EVENT SHALL COMPANY BE LIABLE FOR ANY INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES, SUCH AS LOST SALES, LOST PROFITS OR INJURY TO PROPERTY, IN RESPECT OF WARRANTY CLAIMS OR ANY OTHER ECONOMIC DAMAGES RELATING TO THE PERFORMANCE OR FUNCTIONALITY OF THE AUTHORIZED PRODUCTS OR AUTHORIZED SOFTWARE, WHETHER THEY ARE ALLEGED TO ARISE IN CONTRACT OR TORT OR OTHERWISE. NO EXPRESS OR IMPLIED WARRANTY IS MADE AGAINST INTRUSIONS INTO THE COMPANY'S VOICE PROCESSING SYSTEMS BY FRAUDULENT CALLERS OR AGAINST ANY 15 TOLL FRAUD. COMPANY MAKES NO WARRANTIES AS TO THE LAWFULNESS OF USING ANY FEATURE OF THE AUTHORIZED PRODUCTS TO MONITOR, RECORD OR FORWARD ANY ORAL, WIRE OR ELECTRONIC COMMUNICATION. (c) RESTRICTION ON ALTERATION. Company shall not be liable for any warranty offered by Distributor that differs from the warranty quoted above. Company does not warrant any Authorized Products that have been modified without Company's prior written consent, and Distributor shall not make or permit to be made, any alterations or modifications of any Authorized Products without the prior written consent of Company. Distributor agrees to hold harmless and indemnify Company against claims of any kind related to any unauthorized alterations or modifications of Authorized Products made or authorized in writing by Distributor, or related to warranties by Distributor that differ from the warranty quoted above. (d) SURVIVAL. This Section 8 shall survive the termination or expiration of this Agreement. 9. POST-WARRANTY PERIOD REPAIRS. After the Warranty Period has expired, Company shall provide repair and replacement service for Authorized Products at Distributor's expense in accordance with the charges therefor specified in Company's Authorized Product Price Book. For such repairs and replacements, Distributor shall pay the cost of shipment to Company's plant; Company shall pay the cost for shipment from Company's plant. Distributor shall adhere to the return procedure described in Company's Authorized Product Price Book and shall adhere to such other return procedures as Company shall reasonably require from time to time. Distributor shall not return any defective Authorized Product unless Distributor has properly completed the return forms described in Company's Authorized Product Price Book. Company agrees to use its best efforts to ship repaired or refurbished Authorized Products to Distributor within thirty (30) days of the date Company shall have received the defective Authorized Products at its plant. If 16 Company has not shipped the repaired or refurbished Authorized Product within forty (40) days of the date Company shall have received the defective Authorized Product at its plant, the repair charge shall be reduced as specified in Company's Authorized Product Price Book. Under no circumstances shall Company be liable for any consequential or other damages resulting from failure to ship repaired or refurbished Authorized Products within thirty (30) days, other than any direct damages to Distributor arising from failure of Company to ship repaired or refurbished Authorized Products within sixty (60) days of receipt by Company. Notwithstanding the foregoing, if Distributor is in Material Breach of any of its payment obligations to Company, Company reserves the right to require Distributor to make payment for post-Warranty Period Repairs before Company ships repaired or replacement Authorized Products. By exercising the foregoing right, Company is in no way waiving any of its other rights and remedies at law or under this Agreement. This Section 9 shall survive the termination or expiration of this Agreement. 10. COMPANY'S RESERVATION OF RIGHTS. Company reserves the right at any time to: (a) discontinue, modify or upgrade existing Authorized Products; provided, however, that Company shall notify Distributor ninety (90) days in advance of any product discontinuance, shall directly or indirectly provide factory repairs for such product to Authorized Distributors for a period of seven (7) years from its discontinuance, and shall directly or indirectly provide spare parts, replacement parts, Authorized Software and Related Documentation and all other equipment, software, diagnostics and manuals required to service and maintain the Authorized Products, Authorized Software and Related Documentation for such product to Distributor, for a period of five (5) years from its discontinuance; (b) nondiscriminatorily sell to Distributor any Authorized Products, of the Authorized Trademark brand(s) of which Distributor is an Authorized Distributor, based upon Distributor's ability to sell, install, or service the same; and 17 (c) make Distributor's rights under this Agreement subject to the NAP, CTP and Company Accounts Policy, each of which Company reserves the right to amend from time to time whenever Company in its reasonable discretion determines such amendment to be advisable. 11. SALES AND SERVICE OUTSIDE DISTRIBUTOR'S AREA. Distributor is an authorized distributor of Authorized Products only in Distributor's Area, except as specifically provided otherwise in this Agreement. In the event that Distributor sells any Authorized Products for installation outside Distributor's Area, Distributor shall comply with the CTP regarding such sale and the related installation and service requirements in effect at the time of the sale. Nothing contained herein shall limit or restrict Distributor's ability to sell other products and services, including Competing Products, outside Distributor's Area. Company shall provide Distributor prior written notice of any customer that requires service outside Distributor's Area and that is not subject to the Cross-Territorial Policy set forth in Exhibit E and an opportunity to demonstrate to Company that Distributor is able to service such customer. In the event that Distributor elects not to service such customer or is unable to provide service to such customer on the terms set forth herein, Company shall be entitled to directly or indirectly provide such service to such customer. 12. EXCLUSIVITY; EXPANSION AREAS AND PRODUCTS. (a) Except as otherwise specified in this Section 12, Distributor shall have the exclusive right to sell, license, service, and maintain the Authorized Products and Authorized Software in Distributor's Area, subject to termination of such exclusive rights as provided in this Section 12. Upon termination by the Company of Distributor's exclusive rights to sell, license, service and maintain the Authorized Products and Authorized Software pursuant to this Section 12, Distributor shall have the non-exclusive right to sell, license, service and maintain the Authorized Products and Authorized Software to the extent that the Company shall be entitled 18 to appoint one other distributor in each District, if any of the following events occurs and is not cured within 90 days after Distributor's receipt of notice from Company; provided, however, that Distributor may again have exclusive rights if after 90 days it cures the event and Company has not at the time of such cure appointed another distributor in the Distributor's Area. (i) The dollar amount of Distributor's aggregate actual purchases (based on prices actually paid and not Distributor Net Price) of Authorized Products and Authorized Software during the last four full Quarters, measured as of January 1 and July 1 of each year, has been less than the amounts ("Adjusted Quota") set forth in Exhibit H; or (ii) Distributor is in Material Breach of this Agreement, as defined in Section 16. In the event of a termination of exclusivity as provided in this Section 12, Company agrees that in each District in Distributor's Area listed in Exhibit A, it will establish only one alternative distributor for the Authorized Products and Authorized Software that were sold by Distributor on an exclusive basis immediately preceding such termination. (b) Distributor acknowledges and agrees that (i) Company intends to reserve to itself the rights to sell and license INFOSTAR/ILS'tm' and Telesearch'tm' products directly or indirectly in Distributor's Area as it has done in other areas and that notwithstanding anything to the contrary herein Distributor has only non-exclusive rights to sell or license those products in any market or geographic area, (ii) Distributor has only non-exclusive rights to sell and license the Authorized Products and Authorized Software in the counties within the sales territory of the Albuquerque, New Mexico; Birmingham, Alabama; New York; Vermont; Chicago, Illinois; Cleveland, Ohio; Connecticut; and Seattle in each case as specified in Exhibit A, (iii) Distributor has limited exclusivity in the Boston District pursuant to a three-year supplemental agreement currently in effect with 19 another independent distributor, which Company agrees to enforce to protect Distributor's rights and not to renew or extend at the end of its term. (c) Distributor agrees that Company shall have the right to sell and license (i) Other Company Products, as defined in Exhibit F, directly or indirectly in any market or geographic area, (ii) Authorized Products and Authorized Software directly in Distributor's Area to its National Accounts, Federal Systems, Healthcare, Call Center, and Videoconferencing Customers, as defined in Exhibits D and F. (d) Company agrees that if another authorized distributor ceases to have exclusive rights to sell and license the Authorized Products and Authorized Software in any area of the United States not included in Distributor's Area or has been terminated as a distributor in such area ("Expansion Area"), then the Company shall offer to Distributor the right to negotiate with Company and Company shall negotiate with Distributor in good faith for a period of 30 days a Quota for the Authorized Products and Authorized Software in the Expansion Area in order that Company may expand Distributor's Area to include the Expansion Area. Company further agrees that if a quota is agreed to with respect to the Expansion Area within such period, then Distributor's rights in the Expansion Area shall be exclusive (i) to the extent possible given Company's then existing contractual obligations and (ii) provided Distributor is at such time entitled to maintain its exclusive rights under this Section 12. Company agrees that it shall not require terms and conditions, including a Quota for the Expansion Area, less favorable to the Distributor than that offered to third party distributors in similar areas for similar products. (e) Distributor shall be permitted to sell, market, service, maintain and license Competing Products in Distributor's Area in the event there is a Material Breach by Company. 20 (f) Company agrees that if the Company determines to appoint a third party distributor to sell (i) products and software other than Authorized Products and Authorized Software, including Other Company Products (defined in Exhibit D) or (ii) any products and software to a National Account or Company Account, then Company shall offer Distributor the right to negotiate with Company and Company shall negotiate with Distributor in good faith for a period of 30 days in order that Company may expand Distributor's products or customers to include such products and/or customers. Company further agrees that if an agreement is reached with respect to such products and/or customers, then Distributor's rights in Distributor's Area with respect to such products and/or customers shall be exclusive (i) to the extent possible given Company's then existing contractual obligations and (ii) provided Distributor is at such time entitled to maintain its exclusive rights under Section 12. (g) Company agrees that if Company receives notice from a third party distributor of a change of control of such third party distributor, Company will provide Distributor prompt notice thereof. Company shall not purchase the third party distributor unless it first offers Distributor 30 days in which Distributor may negotiate to purchase the third party distributor. (h) Notwithstanding any other provision contained in this Agreement, Distributor agrees that in the event Distributor sells Competing Products in Distributor's Area, Company shall be permitted to sell directly or indirectly a product of the type of which Company is a seller or manufacturer in the same Product Line. As used herein, "Product Line" means a product designed for telephone switches for one of the following segments: (i) between 1-25 lines; (ii) between 26-50 lines; (iii) between 51 to 250 lines; and (iv) between 251 to 400 lines. 21 13. CONSENT OF COMPANY REQUIRED. (a) Distributor shall not, without the prior express written consent of Company, which consent shall not be unreasonably withheld: (i) assign, delegate, sell or transfer this Agreement or any rights or obligations created by it with respect to any one or more Districts, except (A) in connection with a sale or transfer of the business of selling to and servicing the customer base in such District or Districts or in connection with the sale of Distributor, (B) to any lender providing financing to the Distributor as contemplated by the Purchase Agreement or any refinancing thereof, pursuant to security arrangements entered into in connection with such financings or refinancings or (C) to any transferee of any such lender upon exercise of any of such lender's remedies pursuant to security arrangements contemplated in (B) above; or (ii) appoint any sub-distributor or dealer for Authorized Products in any District. (b) Distributor shall not, unless Company has given its prior written consent, which may be withheld in Company's sole discretion, offer, agree to or permit any sale (including any merger on consolidation) of Distributor or of substantially all of its business or assets to (i) any of AT&T Corporation, Lucent Technologies, Nortel or any of their successors or direct or indirect majority-owned subsidiaries, during the one year immediately following the date of this Agreement, or (ii) Intertel Corporation or Mitel Corporation, or any of their successors or direct or indirect majority-owned subsidiaries, during the three years immediately following the date of this Agreement; provided, however, that the provisions of this subsection (b) shall automatically terminate upon an initial public offering of common stock of Distributor. 22 14. CONFIDENTIALITY. (a) NONDISCLOSURE. Without the prior express written consent of Company, Distributor shall not disclose to any third party, or use for any purpose other than performance of this Agreement, any confidential business information or trade secrets of Company including but not limited to: product design information, product technical manuals, product technical bulletins, or Company pricing. Company and Distributor recognize the necessity of disseminating selected information included in the above documents to customers or prospective customers in the sales process. Company agrees that Distributor may provide such necessary information to customers and prospective customers in the sales process without Company's prior express written consent and Distributor agrees to use its best efforts to protect the confidentiality of this information. (b) NO REVERSE ENGINEERING. Distributor shall not engage in, cause to be engaged in, or permit any reverse engineering of Authorized Products or Authorized Software. Reverse engineering is defined as attempting through analysis of component parts and/or software of the Authorized Products to define the functionality of the components or software, and thereby gain the ability to alter or reproduce that functionality. (c) SOFTWARE. Distributor hereby acknowledges that the Authorized Software and Related Documentation specifically listed in Exhibit B and all technical manuals relating to the Authorized Products are proprietary to Company and constitute trade secrets of Company. All applicable rights to patents, copyrights, trademarks, and trade secrets of the Company are and shall remain in Company. Distributor agrees to use utmost reasonable diligence to protect the confidentiality and proprietary rights of Company in the Authorized Software and Related Documentation, and not to disclose the Authorized Software or Related Documentation to any third party. Distributor shall also promote compliance with the terms and conditions of this 23 Agreement by employees and agrees to place the software sublicense language in Exhibit H in its sales contracts with its customers. Distributor agrees to maintain records of these software sublicense agreements and to represent Company's interest in the protection of its rights to the Authorized Software and Related Documentation. In the event that Company has reason to believe Distributor's customer has violated the software sublicense agreement, Distributor will make available to Company these records on a customer specific basis. (d) SURVIVAL. Distributor's obligations under this confidentiality provision shall survive termination or nonrenewal of this Agreement. 15. SOFTWARE LICENSE. (a) LICENSE. The Company owns, or has licensed from the owner, the Authorized Software and any other proprietary interests in the Authorized Products and related materials and has the right to license such Authorized Software and proprietary interests to Distributor and to end-users. Subject to the terms and conditions contained herein, Company grants Distributor a non-exclusive license to use, in object code form, all Authorized Software and Related Documentation as contemplated by this Agreement. This grant shall be limited to use in connection with the sale and service of the Authorized Products as contemplated by this Agreement. This license shall continue until the license is terminated in accordance with this Agreement, or for the useful life of the Authorized Product in which the Authorized Software is imbedded or of which the Authorized Software is an integral part, or for the useful life of the Authorized Software, whichever is longer. Removal of the Authorized Software from the United States, service by any unauthorized person, use of the Authorized Software on any Authorized Product other than that for which it was obtained or authorized, or on any non-Authorized Product, shall constitute a breach of this Section 15 by Distributor. Except as provided in the 24 Purchase Agreement or as provided in Section 10, the software license will terminate on expiration or termination of this Agreement. (b) MODIFICATION AND COPIES. Distributor may not modify or copy the Authorized Software or Related Documentation without prior written consent of Company. Distributor agrees to refrain from taking any steps, including without limitation reverse engineering, reverse assembly or reverse compilation, to derive a source or object code equivalent of the Authorized Software, or for any other purpose. (c) INDEMNIFICATION. Company agrees that, if notified promptly and given sole control of the defense and all related settlement negotiations, it will indemnify and defend Distributor or its customers who have executed a software sublicense against any claim based on an allegation the Authorized Software infringes a U.S. patent, copyright or trademark. Company shall have no obligations under this Section in the case of claims resulting from modifications to the Authorized Software made by Distributor, end-users, or others, or combinations with software or equipment provided by others. If any Authorized Software becomes, or in Company's opinion is likely to become, the subject of such claim of infringement, Company will, at its expense, either, at its option, procure rights for Distributor and its customers who have executed a software sublicense to continue using the Authorized Software, or replace or modify the Authorized Software to provide noninfringing software that performs substantially similar functions to the original Authorized Software. Upon failure of the foregoing provisions of this subsection (c), Company will refund the purchase price of the Authorized Product or license fee for the Authorized Software less a reasonable allowance for use. THIS SECTION STATES THE ENTIRE LIABILITY OF COMPANY FOR INFRINGEMENT BY ANY AUTHORIZED SOFTWARE PROVIDED HEREUNDER. 25 16. TERMINATION OF AGREEMENT; REMEDIES FOR BREACH. (a) This Agreement will expire on May 30, 2001, unless earlier terminated for Material Breach as defined in subsection (b) of this Section 16. Upon expiration of the term, this Agreement may be renewed upon the mutual agreement of the parties. (b) This Agreement may be terminated by either party for Material Breach no less than 90 days after mailing written notice of termination to the other party as provided in (c) below. Material Breach of this Agreement shall mean: (i) failure of Distributor to purchase at least 50% of the applicable Adjusted Quota set forth in Exhibit H for any period of four consecutive full Quarters; (ii) material breach of Section 3, 4 (other than under Section 4(b)), 5, 11, 13, 14 or 15 of this Agreement by Distributor; (iii) material breach of Section 2, 7(b), 8(a) or 12 of this Agreement by the Company; (iv) assignment of this Agreement by Distributor (except as provided in Section 13) without the prior written consent required by this Agreement; (v) failure of Company to provide products that are competitive in the marketplace in function, features and price for a period of six consecutive months; or (vi) sale or license by Distributor of Competing Products (as defined in Exhibit C) in Distributor's Area except as provided in Exhibit C or in Section 12(e) of this Agreement. (c) In the event that either party contends the other party is in Material Breach of any of its obligations to the other party under this Agreement, the party claiming Material Breach will provide written notice by certified mail that specifically itemizes each and every obligation of which the party contends the other party is in substantial and 26 Material Breach. In the event that the nonterminating party fails to cure the breach within ninety (90) days of receipt of such notice, the termination shall become effective. 17. DISTRIBUTOR'S OBLIGATIONS UPON TERMINATION. In the event of termination of this Agreement, whether by non-renewal or for Material Breach, Distributor shall: (a) immediately pay all obligations for Authorized Products and Authorized Software delivered to Distributor prior to termination when such payments are due and payable to Company; (b) except as provided in the Purchase Agreement, immediately insofar as reasonably possible discontinue any and all uses of the Authorized Trademarks and Authorized Name, as defined in Exhibit C, if any, including: (i) cancel all governmental certificates or licenses reserving or registering Distributor's use of the Authorized Trademarks or Authorized Name, if any; (ii) remove the Authorized Trademarks or Authorized Name, if any, from its premises, vehicles, sales proposals, stationery, telephone directory listing, and other advertising and promotional material; and (iii) change its corporate and trade name to delete any use of the Authorized Trademarks, Authorized Name, or any name likely to cause confusion with any Authorized Trademarks. (c) not adopt the use of any mark or name deceptively similar to any Authorized Trademarks, other than as provided in the Purchase Agreement; and (d) execute any documents or take any other reasonable steps that will help transfer to Company ownership of all goods repurchased, free and clear of any liens, encumbrances, or security interest. It is understood and agreed that (i) in the event of a Material Breach of this Agreement by Distributor solely pursuant to Section 16(b)(i), the Company's sole remedy is to terminate this Agreement in accordance with the terms and procedures hereof and that Distributor shall have no 27 obligations under this Agreement (and the Company shall have no claims against Distributor) arising from such Material Breach of this Agreement pursuant to Section 16(b)(i) other than provided in this Section 17 above and (ii) in the event the Company has terminated this Agreement in accordance with its terms, Distributor shall have no obligations under this Agreement for purchases of Authorized Products and Authorized Software in respect of the Quota or the Adjusted Quota. 18. COMPANY'S OBLIGATIONS AND DISTRIBUTOR'S OPTIONS UPON TERMINATION. (a) In the event of termination of this Agreement, Company: (i) may at Company's option cancel all unfilled orders except those for such Authorized Products that have been sold previously by Distributor to customers, as evidenced by signed customers' orders submitted by Distributor to Company at least twenty (20) days prior to the effective termination date; (ii) may within thirty (30) days after written notification by Distributor of its existing inventory, purchase from Distributor at Distributor's cost less a reasonable allowance for use or damage, if any, plus freight, either for cash or by set off against debt or trade receivables, any or all of the Authorized Products. In the event that Distributor elects to sell its inventory of Authorized Products and Company elects to purchase this inventory, Distributor will allow Company to inspect this inventory; (iii) shall continue to directly or indirectly provide to Distributor factory repairs for a period not to exceed seven (7) years from the effective date at which the Authorized Products are discontinued for new system sales, or indefinitely in the case of Authorized Products not yet discontinued, so that Distributor can continue to service its end-user customers; and (iv) shall continue to directly or indirectly provide to Distributor at its request necessary spare parts, replacement parts, replacement copies of Authorized Software and Related Documentation and all other equipment, software, diagnostics and manuals required to continue to service and maintain the Authorized Products, Authorized Software and Related Documentation, for 28 a period not to exceed five (5) years from the effective date at which the Authorized Products are discontinued for new system sales, or indefinitely in the case of Authorized Products that are not yet discontinued, so that Distributor can continue to service and maintain its end-user customers. (v) purchase orders for factory repairs, spare parts, replacement equipment and software, and Related Documentation must be placed with Company at least 30 days in advance of the requested shipment date. The order must be paid in full prior to shipment. Prices will be the weighted average of the then current prices paid by the Company's distributors for such products. (b) Company's obligations upon termination and Distributor's options set forth in this Section 18 are specifically conditioned upon Distributor's compliance with its obligations upon termination set forth in Section 17 above, and with Sections 3, 14, and 15, and all other provisions of this Agreement that are applicable following termination. In the event Distributor breaches any provision of Sections 3, 14, 15, or 17, or any other applicable provision of this Agreement after receipt of written notice of nonrenewal or termination from Company, and Distributor fails or refuses to cure such breach within any stated cure period, Company may, at its sole option, provide written notice to Distributor that any and all rights of Distributor set forth in Section 18 are thereby forfeited, and all of Company's obligations under this Section 18 shall immediately cease as of (1) the date set forth in such notice, or (2) the date by which such breach(es) must be cured and the same remains uncured, whichever date is sooner. 19. FORCE MAJEURE. Either party may be excused from timely performance hereunder if and to the extent such performance is delayed or prevented by fire, flood, earthquake or other Act of God, strike, lock-out or labor dispute not involving the party, act of war, civil disturbance or any similar event or occurrence beyond the reasonable control of the party delaying or preventing its performance. Performance shall be resumed as soon as reasonably possible after the event or occurrence has been remedied. If performance is delayed or suspended for 29 more than 90 days, and such delay or nonperformance would be a Material Breach except for the provisions of this Section, then the party entitled to the performance shall have the rights set forth in Section 16. 20. COMPLETE AGREEMENT AND NO ORAL MODIFICATION. This Agreement constitutes the complete agreement between the parties, and supersedes all previous agreements between the parties other than notes, credit, loan, shareholder, lease, sublease or security agreements. The headings of sections of this Agreement are included merely for the convenience of the parties, and shall not be construed as part of the Agreement. This Agreement may be modified only by a written agreement signed by both parties. 21. CHOICE OF LAW AND FORUM. This Agreement shall be governed by, and construed in accordance with, the laws of the Commonwealth of New York. Any dispute arising under this Agreement that cannot be resolved by agreement shall, whenever diversity or subject matter jurisdiction exists, be submitted to the United States District Court in the Southern District of New York, and the parties consent and submit to the personal jurisdiction of such court. The prevailing party in any litigation, arbitration, or other proceedings arising out of this Agreement shall be reimbursed for all reasonable costs and expenses incurred in such proceedings, including reasonable attorneys' fees. 22. NO WAIVER. A waiver of any breach or default of this Agreement shall not be deemed to constitute a waiver of any subsequent breach or default. 23. SEVERABILITY. If any of the terms or provisions of this Agreement or the application thereof to any person or circumstance shall, for any reason or to any extent, be held or determined to be invalid or unenforceable, the remainder of this Agreement and the application of such provisions to other persons or circumstances shall not be affected thereby, but rather shall be enforced to the greatest extent permitted by law. 30 24. NOTICE. Any notice required by this Agreement shall be made in writing, signed by a duly authorized agent of the party giving the notice, and deposited in the United States mail, first class, postage prepaid, addressed to the last known address of the addressee, unless specifically required to be by certified mail. 25. RELATIONSHIP OF PARTIES. Distributor is an independent contractor. Nothing in this Agreement shall be construed to mean that Distributor is an agent, employee, franchisee or subcontractor of Company. This Agreement shall not be construed to create any rights or obligations of any person or entity other than the parties. 26. CONSTRUCTION; DEFINITION. For purposes of this Agreement, including all exhibits hereto, the Company shall mean EXECUTONE Information Systems, Inc., a Virginia corporation, its subsidiaries and any person that directly or indirectly controls, is controlled by or is under common control thereof and any successors and assigns thereof. 31 27. AUTHORIZATION AND EXECUTION. The parties and the persons signing this Agreement represent and warrant that those persons are fully authorized to enter into the terms and conditions of, and to execute, this Agreement on behalf of the respective parties. COMPANY: DISTRIBUTOR: EXECUTONE INFORMATION SYSTEMS, INC. CLARITY TELECOM, INC. By:_____________________________________ By:_____________________________ Title:__________________________________ Title: _________________________ (Corporate Seal) 32 EX-11 6 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 7 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 direct selling of 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. As a result of the change in strategy and based upon the requirements of FAS No. 121 (see section entitled "Impairment of goodwill and related service stock" which follows), 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. 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 evaluation, 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 approximately $0.8 million 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 half of 1996. Although the nurse call product line was transitioned in 1995, the Company estimates that there is a customer base of approximately 8,500 systems. Taking into account historical usage, the Company believes it has appropriate levels of inventory on hand to support the servicing of the previously installed products. CCM The Call Center 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 Interactive Voice Response ("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 and data 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. Cost of revenues consists of direct manufacturing costs, indirect installation and service costs and other costs such as warehousing, software manufacturing and quality inspection. Direct manufacturing costs are the primary component of cost of revenues and are accounted for as direct costs related to specific base and product revenues. Those costs other than direct manufacturing costs are treated as fixed cost overhead and are not allocated specifically to base or product categories. Therefore, changes in gross profit can be measured based upon the pricing margin (revenue less direct manufacturing costs) on a product line basis and by the overall level of fixed cost overhead relative to total revenue. 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 expense increased during 1995 due to higher average borrowing levels on the revolving credit facility and increases in the Company's prime borrowing rate during 1995. Other income, net increased primarily as 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. 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 in 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 businesses. Calls via an 800 number will be processed with 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 created 8% dilution to the Company's shareholders and will require possibly up to $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 letters under 18 U.S.C. Section 1084 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 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 IGRA have been satisfied and that 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 cannot refuse to provide the service requested in the action based upon 18 U.S.C. Section 1084. Any appeal of this ruling must be filed by May 31, 1996. 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 amount to between $5-10 million. Operational capital includes capital expenditures for computers and software to build the telecommunications system, funds to complete the building on the CDA reservation which will be the operations center for the lottery, and various start-up expenses including personnel-related costs and advertising expenses. The Company is also required to make a guaranteed payment of $300,000 per year to the CDA. The estimate of operating capital does not include a $4 million jackpot reserve which could be required dependent upon certain conditions. If the Company ultimately must fund a jackpot reserve, it will be repaid to Unistar solely from NIL net revenues in equal installments over the term of the contract. The Company expects it will be able to obtain additional financing for these costs, if necessary. 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 9, 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. (See Note N of the Notes to Consolidated Financial Statements for the terms of the agreement.) The sale is expected to close on May 31, 1996, subject to the buyer's financing and other conditions. 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 Company will retain its Healthcare Communications and Call Center Management businesses, along with its National Accounts and Federal Systems marketing groups and the recently acquired Unistar business. In addition, the Company will continue to make telephony product sales to its independent distributors, of which the newly-formed Bain company will be the largest distributor. 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 announced that it had given notice of its termination of its distribution agreement with GPT Video Systems due to failures by GPT to deliver properly-functioning videoconferencing products on a timely basis. The Company is negotiating an agreement with a third party to sell its videoconferencing business. Terms of the contract have yet to be finalized. 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. The decrease in interest expense during 1994 was 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. Net revenues of the discontinued operation for 1994, through the date of sale, and 1993 were $8.6 million and $31.6 million, respectively. 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 EXPENSE 3,920 3,089 3,556 OTHER INCOME, NET (2,129) (635) (90) 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 (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 Additional 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 --- --- Common shares exchanged to exercise options and warrants 1,137 455 8 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
(d) 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 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 --------- -------- --------
(Amounts in thousands) 1995 1994 1993 ---------------------- ---- ---- ---- 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 Other Income, 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. Warrants were exercised during the year ended December 31, 1994 for 860,919 shares of Common Stock at prices ranging from $0.01 to $1.00 per share. Warrants were exercised during the year ended December 31, 1993 for 9,700 shares of Common Stock at $1.00 per share. At December 31, 1995, 39,584 warrants were exercisable. 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 - OTHER INCOME, NET Other Income, Net consists of the following for the three years ended December 31, 1995:
(Amounts in thousands) 1995 1994 1993 - - ---------------------- ---- ---- ---- 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 --------- ------ ------ $(2,129) $(635) $ (90) ======= ===== ======
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 Other Income, 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. Unistar did not have any assets or operations other than the NIL contract prior to its acquisition by the Company. The purchase price was approximately $12.7 million and was based upon the determination by an investment banking firm of the value assigned to the common and preferred stock. The common stock valuation was based upon the value of the shares issued at the closing date, discounted for restrictions on the sale of the shares, which range from six to twenty-six months. The preferred stock was valued based upon the number of common shares which it was estimated that the preferred shares may be converted into at some future date. 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. Liquidation preference is based upon fair market value of the Series A and Series B preferred shares as determined by the investment banking firm engaged by the Company, plus any dividends in arrears. 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 letters under 18 U.S.C. Section 1084 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 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 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 cannot refuse to provide the service requested in the action based upon 18 U.S.C. Section 1084. Any appeal of this ruling must be filed by May 31, 1996. The Company expects this ruling will be appealed but believes the CDA's position will be upheld. In recording the purchase, the Company has accrued $1 million to cover the legal costs which it anticipates are probable of being incurred to resolve these issues. Depending on the outcome of the litigation, it is possible that additional costs may be incurred. 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 amount to between $5-10 million. Operational capital includes capital expenditures for computers and software to build the telecommunications system, funds to complete the building on the CDA reservation which will be the operations center for the lottery, and various start-up expenses including personnel-related costs and advertising expenses. The Company is also required to make a guaranteed payment of $300,000 per year to the CDA. The estimate of operating capital does not include a $4 million jackpot reserve which could be required dependent upon certain conditions. If the Company ultimately must fund a jackpot reserve, it will be repaid to Unistar solely from NIL net revenues in equal installments over the term of the contract. The Company expects it will be able to obtain additional financing for these costs, if necessary. 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 9, 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 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 and the recently acquired Unistar business. In addition, the Company will continue to make telephony product sales to its independent distributors, of which the newly-formed Bain company will be the largest distributor. 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 announced that it had given notice of its termination of its distribution agreement with GPT Video Systems due to failures by GPT to deliver properly-functioning videoconferencing products on a timely basis. The Company is negotiating an agreement with a third party to sell its videoconferencing business. Terms of the contract have yet to be finalized. 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 Report on Form 10-K, New York, New York 10036-1532 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 Group Partner 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 Vice Chairman Israel J. Hersh John T. O'Kane Vice President, Software Engineering Vice President, MIS Michael W. Yacenda Executive Vice President Elizabeth Hinds Frank J. Rotatori Vice President, Human Resources Vice President, Healthcare Sales Barbara C. Anderson Vice President, General Counsel and Robert W. Hopwood Shlomo Shur Secretary Vice President, Customer Care Senior Vice President, Advanced Technology James E. Cooke III Andrew Kontomerkos Vice President, National Accounts Senior Vice President, Hardware Engineering and Production
EX-27 8 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 3,920 (39,221) (2,287) (36,934) 0 0 0 (36,934) (0.79) (0.79) -----END PRIVACY-ENHANCED MESSAGE-----