SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _______ to _______
Commission File Number: 0-11551
EXECUTONE INFORMATION SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Virginia 86-0449210
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
478 Wheelers Farms Road
Milford, Connecticut 06460
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 876-7600
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
N/A None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
7 1/2% CONVERTIBLE SUBORDINATED DEBENTURES, DUE MARCH 15, 2011
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the common stock held by non-affiliates of the
registrant (assuming for this purpose that all executive officers and directors
of the registrant are affiliates) as of March 31, 1998 was $97,872,323, 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 31, 1998, was 49,721,084.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference into the Part of this Form
10-K indicated below:
Part II 1997 Annual Report to Shareholders
TABLE OF CONTENTS
Item Page
- ---- ----
PART I
1. Business 1
2. Properties 16
3. Legal Proceedings 16
4. Submission of Matters to a Vote of Security Holders 18
Executive Officers of the Registrant 19
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters 22
6. Selected Financial Data 22
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 22
8. Financial Statements and Supplementary Data 22
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 22
PART III
10. Directors and Executive Officers of the Registrant 23
11. Executive Compensation 24
12. Security Ownership of Certain Beneficial Owners
and Management 31
13. Certain Relationships and Related Transactions 34
PART IV
14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 36
PART I
ITEM 1. BUSINESS
General
EXECUTONE Information Systems, Inc. ("Executone" or the "Company")
develops, markets and supports voice and data communications systems. Products
and services include telephone systems, voice mail systems, in-bound and
out-bound call center systems and specialized healthcare communications systems.
The Company's UniStar Entertainment indirect subsidiary ("UniStar") has the
exclusive right to design, develop and manage the National Indian Lottery and US
Lottery (collectively, the "Lottery") offered by the Coeur d'Alene Indian Tribe
of Idaho (the "Coeur d'Alene Tribe" or the "Tribe"). Executone's products are
sold under the EXECUTONE, INFOSTAR, IDS, LIFESAVER, and INFOSTAR/ILS brand names
through a national network of independent distributors and direct sales and
service employees. (Capitalized product names used in this report are registered
or unregistered trademarks of the Company or its subsidiaries except where
specifically identified with products of an unaffiliated company.)
Executone's executive offices are located at 478 Wheelers Farms Road,
Milford, Connecticut 06460, telephone (203) 876-7600. The common stock of
EXECUTONE (the "Common Stock") is traded on the NASDAQ National Market System
under the symbol "XTON", and its Convertible Subordinated Debentures due 2011
(the "Debentures") trade on the NASDAQ system under the symbol "XTONG".
Recent Developments
On January 8, 1998, the Company announced that Alan Kessman, Chairman,
President and Chief Executive Officer of Executone, intends to retire from the
management of the day to day operations of the Company. Mr. Kessman will remain
as a member of the Board of Directors of Executone and will remain in his
current position until his successor is selected. The search firm of
Spencer Stuart is currently conducting a search for a new chief executive
officer for the Company.
The Company currently has three primary business units: computer
telephony, healthcare communications and its subsidiary UniStar, which is
engaged in the management of telephone and Internet-based national lotteries. In
December 1997 the Board of Directors of the Company appointed a Special
Committee consisting of Messrs. Blau, Moore and Rosenbloom to analyze the
possibility of a separation of the business of UniStar from the other businesses
of the Company. The Company hired Furman Selz LLC to advise the Company as to
certain financing and corporate restructuring options that may be available to
the Company to increase shareholder value and aid the fuller development of
Executone's various business units. The Company believed that the then current
market price of the Common Stock did not fairly recognize the potential of its
computer telephony and healthcare communications businesses or the growth
potential of UniStar. Furman Selz's engagement was to determine how these
potential values may be better recognized and whether each of the Company's
primary business units should remain a part of the consolidated entity, become a
stand-alone company, or be sold to a third party.
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Based upon the recommendation of the Special Committee, the Board of
Directors has determined that it is in the best interests of the shareholders to
separate the business of the Company's UniStar subsidiary from the operations of
its computer telephony and healthcare communications businesses. The Company
expects, subject to completion of further analysis and receipt of necessary
approvals, that the separation would be effected through a taxable distribution
to shareholders later this year.
Overview of Business and Strategy
The Company's revenues are derived primarily from product sales to
distributors, direct sales of healthcare communications, and direct sales to
national accounts and government customers. The Company also derives revenue
from installations, additions, changes, upgrades or relocation of previously
installed systems, maintenance contracts, and service charges to the existing
base of healthcare, national account and government customers. The Company's
products and services are marketed and sold through a national network of
independent distributors and Company direct sales and service employees.
The Company's Computer Telephony business offers value-added products
and services to the small to medium-sized business customer. The Company's
integrated digital telephone systems emphasize flexible software applications,
such as data switching and computer telephone interface, designed to enhance the
customer's ability to communicate, obtain and manage information. The Company's
telephone systems provide the platform for its other voice and data software
applications, such as automatic call distribution. Its sophisticated call center
management products integrate a computerized digital telephone system platform
with high-volume inbound, outbound and internal call processing systems,
including automatic call distribution systems, predictive dialing systems, and
scripting software to assist agents handling calls.
The Company's Healthcare Communications business provides to its
healthcare facility customers nurse and patient communication systems, the
INFOSTAR/ILS infrared locator system, and integration of voice and data between
such systems, telephone systems and hospital information systems, resulting in
increased productivity, 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 and CARE/COM II-E nurse call systems. The Company
markets software applications specific to hospital and nursing homes to help
resolve other labor intensive tasks.
On December 19, 1995, the Company acquired 100% of the common stock of
Unistar Gaming Corp., a Delaware corporation ("Unistar Gaming"). Unistar
Gaming's subsidiary, UniStar, has an exclusive five-year contract ending January
2003 to design, develop, finance, and manage the Lottery, a national lottery
authorized by federal law and by a compact between the State of Idaho and the
Coeur d'Alene Tribe. UniStar provides development and management of the
software, network design and call center applications for the Lottery's
operations. In return for providing these management services, UniStar will be
paid a fee equal to 30% of the profits of the Lottery. The Lottery has commenced
operations but is not yet profitable.
The Internet and telephone operations of the Lottery are the subject of
three pending legal proceedings. There are significant market, political and
legal risks associated with the development of the Lottery. See "LEGAL
PROCEEDINGS" and UNISTAR BUSINESS -- Government Regulation and Legislation." The
Company believes there is a national market for the Lottery based upon research
into the experience of other national lotteries and the growth of the overall
lottery market. However, there is no
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assurance that there will be acceptance of a telephone or Internet lottery.
Based upon opinions from outside legal counsel, the Company also believes that
favorable legal decisions rendered by the Coeur d'Alene Tribal Court and the
Tribal Appellate Court will be affirmed by the Idaho federal court. The Company
believes that the pending Missouri and Wisconsin cases will have similar
favorable outcomes. However, there is no assurance of such legal outcomes. In
the event that the Lottery does not attain the level of market acceptance
anticipated by the Company or if the outcome of the pending lawsuits is adverse,
the Company would have to reevaluate its investment in UniStar.
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COMPUTER TELEPHONY BUSINESS
Computer Telephony Products
The Company develops and distributes a complete line of computer
telephony (CT) products that the Company believes are easy to install, easy to
maintain and easy to use, and that create visible value for its customers.
Products include PBXs, call center management products, standards-compliant CT
applications, standalone and LAN-based applications, and wireless
communications. Markets for the Company's products range from small- to
medium-sized businesses, to call centers and national and government
organizations. The Company's telephone systems are characterized by flexible
software and a hardware design that makes them readily adaptable to evolving
technology and customer requirements. The Company attributes the market
acceptance of its systems to standards-based, cost-effective design and the
sophistication of its software options.
The Company's CT products include an integrated automated attendant
feature to answer and transfer calls quickly and efficiently without operator
intervention. The Integrated Operator Terminal has management reports
capabilities to permit the monitoring of calls and improve the efficiency of
directing calls to the appropriate extensions. The systems also support
sophisticated call center and healthcare applications, and the Company's
Integrated Locator System. The Company's LAN Card allows users access to their
organization's network, to manage the systems through their desktop PCs.
The Company has introduced a portfolio of products fully compliant with
the latest industry standards (TAPI, TSAPI, CSTA) and incorporating the most
advanced elements of computer telephony integration. The TAPI telephones support
any desktop application using the TAPI standard for computer-telephone
integration. Unified Messaging and Voice Activated Speed Dial further increase
productivity by speeding the calling process.
The Company also offers a voice mail system that can be integrated with
the IDS telephone systems and with telephone systems manufactured by others. The
INFOSTAR/VX3 voice mail system receives, records, stores, distributes, transfers
and replays messages from both external and internal callers and can supplement
other call center systems. In 1996 the Company introduced the INFOSTAR/VXC Voice
Exchange Card, a complete voice processing system built on a card that
integrates directly into the IDS switch, eliminating the need for a standalone
voice mail system.
The Company recently introduced the Eclipse CT server platform, a
centerpiece software package that enables Executone's advanced CT applications
to run on all Executone configurations, from 16 to 648 stations. The Company's
latest achievement in call processing, the Ultimate Operator, takes the
operator's console to a new level by delivering superior call handling and
reporting capabilities in a Microsoft Windows'r' environment. The Company has
also recently introduced NSS, a computer telephony networking solution that
connects multiple phone systems into a single, feature-rich network, improving
communications across multi-location organizations.
The Company's call center management products can be integrated with the
Company's computer telephone systems and with each other to provide large-volume
inbound, outbound and internal call management. Computer-telephone integration
("CTI") technology integrates the call processing function with information in a
customer's computer database. Primarily used by large incoming call centers to
automatically identify incoming callers and by outbound centers to contact and
provide records of contacts, CTI limits the amount of time that an agent spends
contacting or identifying the
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caller, thereby providing better customer service, reducing the number of
required agents and reducing telephone line and transmission expense.
The Company recently developed a promising call center application for
Internet Telephony using VocalTec's Surf&Call'tm' software in conjunction with
VocalTec's Telephony Gateway'tm', which allows an Internet user, with a simple
point-and-click, to actually speak to a live call center agent over the
Internet, without disrupting their "surfing" session. The Company also recently
introduced its Sentinel application, a server-based computer telephony software
application that provides call center supervisors with the ability to manage
from a single desktop. By providing data in a modern Windows'r' NT-based
interface, the Sentinel product eliminates the need for multiple PCs at the
supervisor workstation.
The INFOSTAR/Predictive Dialer is an automated call system designed to
boost productivity in outbound call centers. The system integrates telephone,
data collection and transaction processing functions for those customers who
require high volume contact by telephone to transact business, such as sales,
credit and collections, blood banks and fund-raising. Working with the host
computer and the IDS'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.
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.
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.
In 1997, the Company signed an agreement to distribute Active Voice
Corporation's line of voice processing and unified messaging products. Also in
1997, the Company signed an agreement with Dialogic Corporation pursuant to
which the parties expect to develop the industry's first completely open
business communications platform
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with full PBX functionality.
Computer Telephony Sales and Marketing
The Company's computer telephony distribution network consists of (1)
domestic independent distributors with approximately 186 locations operating
under exclusive and nonexclusive agreements throughout the United States and
Canada; (2) a National Accounts group that uses the sales, installation, service
and support capabilities of direct employees and the distribution network to
serve multiple offices and departments of companies; (3) a Government Systems
group that uses the distribution network to serve offices of federal, state and
local government agencies; and (4) 7 independent distributors operating in 6
other foreign countries.
For those distributors that have exclusive distribution rights for
specified computer telephony products, retention of such rights is subject to
satisfaction of established criteria for sales and service to customers on an
ongoing basis. The divesting of or acquisition of customer bases to or from
distributors in specific geographic territories may occur in the normal course
of the Company's business.
The Company's National Accounts group provides uniformity in pricing,
coordination, installation, billing and service for National Accounts customers
such as Airborne Express, W. W. Grainger, Bridgestone/Firestone, PetsMart and
Management Recruiters-Sales Consultants. The National Accounts division
coordinates the sales, installation, service and support functions of
independent sales offices to serve the multiple offices and departments of large
multi-site companies that seek out-sourced solutions.
The Company's Government Systems group addresses the special procurement
and administrative requirements of federal, state and local government agencies.
Sales are made through a combination of master contracts and competitively
solicited proposals for large or complex telecommunications requirements.
Government Systems coordinates the installation, service and support activities
of independent sales offices to provide ongoing support to government agency
offices nationwide.
Sales to Claricom, Inc. ("Claricom"), the Company's largest distributor,
decreased by $16 million in 1997 compared to 1996. The reduced level of sales
to Claricom had a significant impact on the financial results for 1997.
Effective April 1, 1998, Claricom became a non-exclusive distributor of the
Company's products in all parts of its territory. It is the Company's
intention to supplement sales in the Claricom territories with additional
distribution. The Company has identified other distributors to sell the
Company's products in certain parts of Claricom's territory, which over
time will give the Company the ability to increase revenues by adding
alternative distribution in Claricom's territories.
Since Claricom accounted for more than 10% of the Company's revenues in
1997 and is expected to continue to represent a large portion of the Company's
revenues, the reduction of sales to Claricom could have a material adverse
effect on the Company if the Company could not supplement the shipments to the
Claricom territories with other alternative distribution. The Company believes
that within a reasonable period of time it can establish alternative
distribution channels in Claricom's major markets to supplement the reduced
volume from Claricom. However, the Company cannot state with certainty when, or
the extent to which, such alternative distribution arrangements will be
completed or their effect on revenues.
6
Backlog of the telephony business consists primarily of products that
have been ordered and that will be shipped or installed within 30 to 60 days of
the order (other than call center orders, which have a longer lead time), or
systems the installation of which is not yet required by the customer. Backlog
as of December 31, 1997, was $10,814,000 compared to $12,921,000 at December 31,
1996, and the Company expects virtually all of such backlog to be filled within
the current fiscal year.
Computer Telephony Competition
The market segments in which the Company offers its products and
services are highly competitive. The under 400-desktop voice communications
segment in the United States, the primary market for the Company's Computer
Telephony sales channels, is served by many domestic and foreign communications
equipment and software manufacturers and distributors, including Lucent
Technologies (the former equipment business of AT&T), Nortel (formerly named
Northern Telecom), Toshiba, InterTel and Mitel, as well as numerous specialized
companies. Although the Company can be competitive on price compared to several
of these companies, many of Executone's competitors have substantially more
capital, technology and marketing resources than the Company.
The Company has not penetrated a significant portion of the call center
market. Principal competitors are EIS, Davox, Mosaix and Melita.
The Company competes by offering a full array of integrated
telecommunication products and services to its customers. The Company also
competes on the basis of the quality of its products, its customer service,
nationwide distribution and installation, and price.
HEALTHCARE COMMUNICATIONS BUSINESS
Healthcare Communication Products
The Company develops, manufactures, markets and services a line of
specialized internal communications systems that are used primarily in the
healthcare industry. These internal communications systems are
microprocessor-based patient-to-staff and staff-to-staff communication systems,
locator systems, intercoms, paging and sound equipment, and room status
indicators.
Patient Communication Systems
The INFOSTAR/HCP Healthcare Communications Platform is a communications
solution dedicated to a single platform for complete systems integration. The
HCP platform is the building block allowing for shared resources resulting in
cost efficiencies. It provides a single, digital communication fabric to
facilitate patient-staff calls and staff-staff calls. It improves efficiency
through the integration of Executone's full product line which includes
LifeSaver, CareCom II-E, INFOSTAR/ILS, PRS, TeleSearch and StatLink.
Nurse Call Systems. The Company's LifeSaver nurse call system is a fully
software-driven, digital nurse call system. The LifeSaver system is a
state-of-the-art communications network that provides routine and emergency
signaling, voice communications and data transmission. The nurse 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
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control stations, and up to eight systems can be networked for centralized
operation. The LifeSaver system integrates voice and data in one PC - based
system. With the capability to answer calls right from the patient's bedside,
this system can dramatically increase the efficiency of the nursing staff,
reduce clerical activity and improve the quality of care delivered to the
patient.
The CARE/COM II-E nurse call system brings the benefits of a totally
integrated digital communications system to the healthcare market on the
Company's IDS digital platform. The CARE/COM lI-E system provides two-way
patient-to-staff and staff-to-staff voice communication on an automatic
three-level call priority basis. Its two-way voice and tone signal capability,
emergency signaling and sophisticated features facilitate easy handling of all
calls. This new system can currently support 72 patient stations per system,
with the ability to integrate three systems together and support 216 patient
stations. A five-line LCD display Nurse Control Station allows simple call
processing and system operation. The system is highly flexible to meet the
individually defined needs of today's hospitals and long-term care facilities.
INFOSTAR/PRS Patient Reporting System. The Healthcare Communications
group also markets the INFOSTAR /PRS patient reporting system, an automated
voice storage system that allows the efficient transfer of patient information
between nurses. Nurses dictate patient information into a report "patient file"
using the telephone, like a voice-mail system. Nurses can listen to reports on
their patients, record reports at convenient times and leave messages for other
nurses, groups or staff members. Patient reports are password-protected for
confidentiality and admission, and discharge and transfer information are also
supported. The system uses standard telephone instruments and provides full
voice messaging capability. The INFOSTAR/PRS system reduces report time,
provides continuity at shift changes, and improves report quality.
Wireless Telephone Systems. The Healthcare Communications group
currently distributes the Monarch and the Ericsson Freeset wireless telephones.
The Monarch telephones utilize PCS (personal communication systems) technology,
which is an in-building wireless communications tool that provides cellular-like
mobility to a facility without expensive airtime charges. The Monarch system
operates on the 1.9GHz U-PCS bandwidth set aside by the Federal Communications
Commission ("FCC") strictly for personal communications use which means the
signal will not cause interference to or be interfered with by conventional
telemetry equipment. The Monarch system is capable of supporting two base
station antennas providing a coverage area of over 250,000 square feet in a
typical office environment, up to 32 handsets, and up to 16 simultaneous
conversations. The Ericsson Freeset system is an in-building wireless
communications system which operates on the 900MHz bandwidth. Its low power
output (.75mW) makes it ideal for the healthcare environment, which is very
sensitive to high power devices such as cellular telephones and 2-way radios
that may interfere with vital telemetry equipment. The Freeset system is
extremely flexible in providing complete coverage over a large area based on its
ability to add as many base stations as necessary to provide coverage. The
system can grow to support up to 1,500 handsets, making it the system of choice
for large installations. These wireless systems can be integrated with nurse
call systems and locator systems offered by the Healthcare business.
INFOSTAR/Statlink System. The INFOSTAR/StatLink product is designed to
provide call management and integration of EXECUTONE nurse call systems to
wireless telephones, pager devices and extension numbers. INFOSTAR/StatLink has
the flexibility to modify patient call flow based on the specific requirements
of the healthcare facility. Calls can be routed on a 4-level priority basis to
any extension, telephone or site pager configured in the database. The system is
a communications solution that can be
8
integrated with any PBX. Patient priorities and requests can be managed more
efficiently and calls can be completed on a more timely basis with less strain
on the staff and patients.
Resource Management Systems
INFOSTAR/ILS Locator Systems. The INFOSTAR/ILS locator system is an
infrared based wireless locating system that allows users to find staff,
patients and equipment quickly and easily via LAN-based PC's, EXECUTONE display
telephones, EXECUTONE nurse communication systems, or any other touch tone
telephone inside or outside the healthcare facility. The ILS is an integrated
system using infrared transmitter badges to communicate location data to sensors
installed throughout a facility. Each person or piece of equipment wears an
individually coded badge that transmits infrared signals to sensors placed
throughout the facility, which forward the location information to a central
processing unit. The badges transmit regularly at user-programmed intervals and
can be worn by staff personnel or attached to equipment. The location data is
collected by the sensors and forwarded to a central processing unit that
organizes the data so it can be accessed at one or more display stations. The
display of staff and equipment location information can be in the form of a list
or in the form of a map of the facility using icons. The display can be filtered
to show only particular staff members, groups of personnel, particular pieces of
equipment or groups of equipment. The system can be integrated with either the
IDS telephone systems, allowing the activation of features and display of
information on the telephone set, or the Company's nurse call systems, allowing
the activation of features and display of information at the nurse control
station and patient stations. The ILS system can also be integrated to other
manufacturers' PBXs. The ILS system is also marketed by the Computer Telephony
sales channels for office environments.
INFOSTAR/EPS System. The INFOSTAR/EPS Events Processing System collects
information from the ILS locator system and generates "alarms" that signal
personnel that a user defined parameter has been exceeded. The system associates
the data to logical, workable and productive real time data for a customer's
employees and assets. Specific applications include: door monitoring, wandering
patient alert, staff presence indicators, badge button press (staff assist or
emergency assist), asset management and equipment tracking. The system is
completely programmable, which allows customers to determine which applications
will best fit their needs.
INFOSTAR/VLS System. The INFOSTAR/VLS Voice Locator System integrates
with the PBX telephone system and enables facilities with EXECUTONE or
non-EXECUTONE PBX's or callers from outside the facility to locate people and
assets, and either connect the call to the nearest phone, transfer to voice mail
or obtain information about others persons presently in the location.
Software Systems
InfoSTAT. The INFOSTAR/InfoSTAT product is a software package intended
for use in emergency departments to provide complete communication of real time
events and data. Used as a daily operational tool, the InfoSTAT system provides
emergency staff with priority data and conditions affecting the department.
InfoSTAT means the end of the archaic "grease board". A flashing color shows
which patients have been "waiting too long" or "who is next". InfoSTAT provides
the speed, flexibility and efficiency that only comes with a computerized
system. Staff can check at a glance the status of treatment rooms, room and bed
assignments, hospital staff assignment and location, and patient status and
location. InfoSTAT is customized for each hospital and integrates with a
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facility's existing administrative software such as ADT systems.
ReportStar. The ReportStar feature for Microsoft Windows 95 is a
management reporting package which is designed to provide healthcare managers
with information generated from data collected by the EXECUTONE HCP Healthcare
Platform, LifeSaver, CARE/COM II-E and INFOSTAR/ILS locator systems. ReportStar
for Windows 95 is an Oracle-based program which provides users with 6 different
reports that can be viewed on screen, printed as needed or scheduled to run on
any predetermined schedule. Users can select the details of the desired report
from a simple screen which was designed with a graphical user interface to make
it easy for staff to access.
Healthcare Sales and Marketing
The Company's healthcare communications distribution network consists of
(1) domestic independent distributors with approximately 81 locations operating
under exclusive and nonexclusive agreements throughout the United States; (2)
200 direct healthcare sales and service employees in the United States; (3) the
Government Systems group, which uses the distribution network to serve
healthcare customers who are federal, state and local government agencies; and
(4) 16 independent distributors operating in 12 foreign countries.
Distributors of the Company's healthcare communications products are
required to meet established criteria for sales and service to customers on an
ongoing basis.
No customer of the healthcare business accounts for 10% or more of its
revenue.
Healthcare backlog consists primarily of products that have been ordered
and that will be shipped or installed within 180 days of the order or systems
the installation of which is not yet required by the customer. Healthcare order
backlog as of December 31, 1997, was $14,601,000 compared to $9,583,000 at
December 31, 1996, and the Company expects virtually all of such healthcare
backlog to be filled within the current fiscal year.
The Company's principal competitors in healthcare communications are
Hill-Rom Company, DuKane and Rauland-Borg. The Company believes it has a strong
competitive position in nurse call and locator products.
The Company competes by offering innovative integrated healthcare
communications products and services to its customers. The Company also competes
on the basis of the quality of its products, its customer service, nationwide
distribution and installation, and price.
TELEPHONY AND HEALTHCARE OPERATIONS
Product Development and Engineering
As of December 31, 1997, the Company employed approximately 100
individuals engaged in computer telephony and healthcare product design and
development. The Company's product development program is designed to anticipate
and respond to customer needs through development of new products and
enhancement of existing products. During 1997, the Company's engineering efforts
focused on applications-oriented software products, including new releases of
computer telephony and healthcare communications software. The Company
continually strives to reduce production costs by incorporating new technology
into its design and manufacturing operations. For the years ended December 31,
1997, 1996, and 1995, Company-sponsored product
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development and engineering expenditures (including product management and
testing) amounted to approximately $12.8 million, $13.8 million, and $14.7
million, respectively.
Manufacturing
Most of the Company's telephone products are manufactured by Wong's
Electronics Company, Ltd. ("Wong's") in Malaysia, by Quality Telecommunication
Products, also referred to as Compania Dominicana de Telefonos ("Codetel"), in
the Dominican Republic, and by the Company directly in Poway, California. Many
of the printed circuit boards for the Company's products are manufactured, and
many products are assembled into systems and system components, in the United
States.
The Company's Manufacturing Services Agreement with Wong's currently
expires in February 1999 but is automatically extended each year for an
additional one-year term unless either party gives notice of termination three
months prior to expiration of the current term. The contract may be terminated
earlier by either party in the event of a material breach by the other party.
If the agreement between Wong's and Executone should be terminated for
any reason, or if Wong's is unable to ship or has to reduce shipments, or if
restrictions are imposed materially limiting the importation of products
produced by foreign manufacturers, the Company could be affected adversely until
satisfactory alternative sources are in place. The profitability of Executone's
operations could be affected to the extent it is unable to reflect the direct
and indirect costs of products purchased from Wong's in its pricing policies.
The prices for products purchased by Executone from its suppliers are payable in
U.S. dollars.
The majority of Executone's specialized healthcare and internal
communication systems are produced in the United States at the Company's
facility in Poway, California or at domestic subcontractors. The functions of
repair, warehousing and distribution of the Company's products are performed at
the Company's facilities in Poway.
Product Maintenance
Executone warrants parts and labor on its telephone and healthcare
systems, typically for one year, and provides maintenance and service after
warranty expiration either on a contract or time and materials basis. Most of
the Company's products are repaired at its repair facility located in Poway,
California.
Trademarks, Patents and Copyrights
Management believes that the continued success of Executone is dependent
upon the ability to design, develop and market new products and new or enhanced
applications. The patentability of such new products or applications is
evaluated and patent applications are filed where necessary to protect unique
developments. The Company currently holds 14 utility patents, expiring at
various times between 2006 and 2017, has six U.S. patent applications pending,
and six patent applications pending in several foreign countries.
The Company has registered or applied to register its trademarks when it
believes registration to be important to its ongoing business operations. The
Company also generally claims copyright protection for software, circuit
designs, schematics and technical documentation used in connection with its
products, and relies upon trade secret, contract and copyright laws to protect
its proprietary rights in its software, designs
11
and documentation.
Certain of the telephony and healthcare products incorporate technology
and software licensed from independent third parties. Generally, these licenses
require payment of a royalty for each system sold that incorporates the licensed
technology or require that the Company purchase the product from the licensor.
Government Regulation
Many of the Company's telephony and healthcare systems are designed to
be connected to the public telecommunications network and as such are required
to comply with certain rules of the FCC pertaining to telecommunications
equipment. The Company has not experienced any material adverse effect on its
business or operations as a result of such regulation and compliance.
Certain uses of outbound call processing systems are regulated by
federal and state law. Among other things, the FCC has adopted rules pursuant to
the Federal Telephone Consumer Protection Act to protect residential telephone
subscribers' privacy rights to avoid receiving telephone solicitations to which
they object. Certain states have enacted similar laws limiting access to
telephone subscribers who object to receiving solicitations. Although compliance
with these laws may limit the potential use of the Company's predictive dialer
systems in some respects, the Company's systems can be programmed to operate
automatically in full compliance with these laws through the use of appropriate
calling lists and calling campaign time parameters.
To the extent the Company markets its telephony and healthcare products
internationally, it is required to comply with applicable foreign law, including
certification of its products by appropriate government regulatory
organizations.
Employees
As of March 1, 1998, Executone employed approximately 700 persons,
directly and through its subsidiaries. Less than 3% of the employees of the
Company and its subsidiaries are represented by unions, all of which employees
are represented by the International Brotherhood of Electrical Workers.
Management believes that the Company's relations with its employees are good.
UNISTAR BUSINESS
UniStar History
On December 19, 1995, the Company acquired 100% of the common stock of
Unistar Gaming. Unistar Gaming's subsidiary, UniStar, has an exclusive five-year
contract ending January 2003 to design, develop, finance, and manage the
Lottery, a national lottery authorized by federal law and by a compact between
the State of Idaho and the Coeur d'Alene Tribe. UniStar provides development and
management of the software, network design and call center applications for the
Lottery's operations. In return for providing these management services, the
Tribe has agreed to pay UniStar a fee equal to 30% of the profits of the
Lottery. The Lottery has commenced operations but is not yet profitable. In an
attempt to block the Lottery, certain states filed letters under 18 U.S.C.
Section 1084 to prevent the long-distance carriers from providing toll-free
telephone service to the Lottery and the States of Missouri and Wisconsin have
filed suit against the Lottery. See "Legal Proceedings."
12
The Tribe's initial plan was to establish a telephone lottery that could
be played by any individual of majority age, residing in one of the 36 states or
the District of Columbia that currently operates a state-run lottery. It was
originally contemplated that customers would call an "800" number and ticket
purchases would be processed with interactive voice response equipment or live
agents in a call center located on the Tribe's Reservation in Idaho. The call
center would use ACD (automated call distribution) software to process
nationwide lottery sales.
After the Company's purchase of UniStar, the Lottery business plan
evolved, in response to legal challenges, to encompass Internet-based instant
lottery games, and, as of January 1998, a local, non-toll-free telephone and
Internet-accessible weekly draw lottery. The Company has made a significant
investment in UniStar, which initially created 8% stock dilution to the
Company's shareholders, and since the purchase has invested additional cash to
develop the software and hardware system, build the Lottery building, fund the
legal and lobbying efforts, commence the marketing and advertising campaigns,
and pay other costs related to the project.
UniStar Sales and Marketing
The US Lottery began test marketing its Instant ticket games on the
Internet in July 1997. Through December 31, 1997, the US Lottery generated
revenues of $1.5 million. On January 20, 1998 the US Lottery launched its first
draw game, the "Super6". Tickets for the Super6 can be purchased either over the
Internet or by telephone. As of March 31, 1998, the registered customer base of
the US Lottery (including the instant and the weekly games) was approximately
21,000 established accounts with about 3,000 active players. Initially,
UniStar's marketing efforts for the Lottery were confined to Internet links and
advertising on gaming-related Internet sites and on general search engines.
UniStar began direct mail advertising for the Tribe's instant US Lottery games
in November 1997. Local print and radio advertising promoting the new weekly
draw Lottery game began on a limited basis in a few small markets in January
1998. Lottery revenues were $537,000 and $1,196,000 for the quarters ending
September 30, 1997 and December 31, 1997 respectively.
Due to advertising, professional fees and other startup costs, the
Lottery has yet to generate a profit. As a result, UniStar has not recognized
any revenue as of December 31, 1997.
In addition to the legal risks, there are market risks associated with
the development of the Lottery. The Company believes there is a national market
for the Lottery 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 or Internet lottery. In
the event that the telephone and Internet Lottery games do not attain the level
of market acceptance anticipated by the Company, the Company would have to
reevaluate its investment in UniStar.
UniStar Product Development
During 1997, UniStar contracted with third parties for software
development and system architecture for the Internet and telephone-based
Lottery. The architecture of the Internet-based Lottery, particularly the
business system, data base structure and the
13
banking interface, was completed in 1997 for the Tribe's Internet instant games
and was a critical building block in UniStar's further development of the
telephone-based Lottery that the Tribe launched in January 1998.
The Lottery product portfolio consists of two product lines - instant
lottery games and draw lottery games. Instant games are modeled after state
lottery "scratch off" instant tickets. The instant game product line includes
Lotto, Bingo and Classic "scratch off" lottery games. The Lottery currently
offers four live instant games and five instant games in a "demo" mode only. The
"demo" only games are scheduled to go live in the second quarter of 1998.
The draw product line consists of the Super6 draw lottery where tickets
are available both by telephone or over the Internet. The Super6 offers a
jackpot prize of $1,000,000 which will grow as the prize pool grows. Drawings
are held Tuesdays at 1:00PM Pacific Time. The Lottery expects to announce
"Pick 3" and "Powerball" type games later in 1998.
Patents, Trademarks, and Copyrights
Management believes that the success of the Lottery, and therefore at
least initially of UniStar, 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. UniStar currently has two U.S.
patent applications pending.
UniStar 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 its software used in
connection with the Lottery and relies upon trade secret, contract and copyright
laws to protect its proprietary rights in its software, designs and
documentation.
Certain of the Lottery products incorporate technology and software
licensed by UniStar from independent third parties. Generally, these licenses
have required payment of a license fee for the licensed technology.
Competition
UniStar has little competition in the development and management of
authorized Indian gaming enterprises. The broader area of gaming entertainment
is highly competitive. The market is served by the States through
state-sponsored lotteries and by many domestic and foreign gaming companies,
including several large land-based casino companies. All of these competitors
have substantially more capital, and therefore more technology and marketing
resources, than UniStar or the Company.
Government Regulation and Legislation
The Lottery developed and managed by UniStar for the Tribe is authorized
under the federal Indian Gaming Regulatory Act of 1988 ("IGRA"). In managing the
Lottery, UniStar must observe all laws and regulations applicable to the
Lottery. IGRA defined three classes of Indian gaming. IGRA established the
jurisdictional and regulatory control for each class and created the National
Indian Gaming Commission (the "NIGC") to enforce the provisions of IGRA.
Lotteries are defined as Class III gaming. Class III gaming is governed by the
terms of the Tribe/State compact and the rules and regulations
14
of the NIGC. The Lottery is also governed by the rules and policies promulgated
by the Coeur d'Alene Tribal Council.
In 1992, the Coeur d'Alene Tribe signed a Compact with the State of
Idaho (the "Compact"). The Compact specifically provides for the conduct of the
Lottery games. The Compact was approved by the Secretary of the Interior on
February 5, 1993 and notice thereof was published in the Federal Register. The
Tribe entered into a management agreement with UniStar for the conduct of the
Lottery. The Chairman of the NIGC approved the management contract and the
amendments thereto as required by law. By resolution, the Tribe has authorized
the Lottery to be conducted under the management agreement. The Coeur d'Alene
Tribe has complied with IGRA and all other applicable rules, regulations and
laws.
It is the opinion of the Tribe and UniStar that state anti-gambling laws
and regulations are not applicable to the Lottery because the entire subject of
Indian gaming is governed by federal law and therefore state laws and
regulations are preempted by IGRA. See "Legal Proceedings."
The employees of the Lottery undergo extensive background checks
including fingerprinting which is sent to the Federal Bureau of Investigation.
The Lottery also has made and will continue to make reasonable efforts to
address the issue of problem gambling and to prevent participation by minors. To
attempt to address problem gamblers, the Lottery has voluntarily established a
credit limit of $500 per month. The system requires each user to have a credit
card. To prevent access by minors, the Lottery matches the address provided on
the application to the credit card before allowing access. When verification of
the account is sent to the lawful credit card holder, any unlawful access by a
minor should be detected and end. The Lottery also regularly runs match tests
between its database of social security numbers and other databases available to
determine the age ranges of the holders by generic number sequences. The Lottery
mails all correspondence to the person and address associated with the credit
card so if a minor was playing, the adult would still be the person receiving
the correspondence. Winnings are paid only by a check issued and mailed directly
to the person and mailing address on the account.
Senate Bill 474 offered by Senator Jon Kyl (the "Kyl Bill") seeks to
amend 18 U.S.C. Sections 1081 and 1084, which currently prohibit the interstate
transmission of bets and wagers on sporting events and contests. The Kyl Bill
would remove the current limitation to sporting bets and wagers and extend
Sections 1081 and 1084 to virtually all forms of bets and wagers, as well as to
lotteries and other gaming, in an attempt to prohibit all gaming conducted over
the telephone and the Internet. The Kyl bill was proposed in 1997 but was not
voted on by the full Senate. There is a similar bill pending in the House of
Representatives. There is currently no exception in any of the proposed bills
for gaming conducted by an Indian tribe that is authorized by IGRA. The Company
is supporting efforts to have such an exception included in the bill. The Kyl
Bill and the House counterpart seek to prohibit the activities of the Lottery
and the activities of UniStar in managing the Lottery, which would have a
material adverse effect on UniStar's business.
Employees
As of March 1, 1998, UniStar employed three general and administrative
management employees, not including the customer service and technical employees
employed by the Lottery, none of whom are represented by unions.
15
ITEM 2. PROPERTIES
Executone's principal offices are located in a leased facility in
Milford, Connecticut. The Company has warehouse, manufacturing and distribution
facilities in Poway, California. As of December 31, 1997, the Company leased 8
facilities in the United States with an aggregate of approximately 283,000
square feet for its ongoing operations. The current annual rent for the
Company's leased facilities is approximately $3.2 million. The Company also
subleases from Claricom small areas of 31 former district sales offices,
aggregating approximately 24,000 square feet, for use by sales and technical
employees for approximately $600,000 per year. The Company has one facility
totaling approximately 14,000 square feet of space that is no longer used in
ongoing operations and is subleased.
The Company believes its facilities are adequate and generally suitable
for its business requirements at the present time and for the immediate future.
The following is a brief description of the primary facilities of the Company.
Use Location Approximate Size
- --- -------- -----------------
Corporate Headquarters Milford, Connecticut 150,000
and Research, Development square feet
and Engineering Facility
Distribution, Production & Poway, California 112,000
Repair Center and Warehouse square feet
Other, including warehouses Milford, Connecticut 45,000
and subleased office space and various locations square feet
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 Tribe's Lottery to be
developed and managed by the Company's UniStar subsidiary is legal under IGRA,
that IGRA preempts state laws on the subject of Indian gaming, that Section 1084
is inapplicable and that therefore the states lack authority to issue Section
1084 notification letters to any carrier, and an injunction preventing AT&T from
refusing to provide telephone service to the Lottery. This action was necessary
because several network carriers have been sent Section 1084 letters by states
opposed to the Lottery. These letters state that the Lottery is illegal under
state and federal laws and prohibit the interstate carriers from carrying "800
number" network traffic for the Lottery. Although in January 1998 the Tribe
began to offer a weekly draw Lottery for which tickets could be purchased over
the telephone, it has done so using a local telephone number, meaning that the
Lottery's customers must pay toll charges for each call. The use of an "800"
number for lottery ticket sales may not begin until resolution of this
proceeding and agreement of a network carrier to carry the network traffic of
the Lottery. On February 28, 1996, the Tribal Court ruled (i) that all
requirements of IGRA have been satisfied, (ii) that Section 1084 is inapplicable
and the states lack jurisdiction to interfere with the Lottery, and (iii) that
AT&T cannot refuse service to the Lottery based upon Section 1084, an allegation
that the Lottery is in violation of IGRA or the federal anti-lottery statutes.
This ruling and a related order dated May 1, 1996 were subsequently appealed to
the Tribal Appellate Court, which on July 2, 1997 affirmed the lower Tribal
Court's May 1, 1996 ruling and analysis upholding the
16
Tribe's right to conduct the telephone Lottery. On August 22, 1997, AT&T filed a
complaint for declaratory judgment against the Tribe in the U.S. District Court
for the District of Idaho, to obtain a federal court ruling on the validity and
enforceability of the Tribal Court ruling. The Tribe has answered the complaint.
In March 1998, the attorneys general of nineteen states filed a motion for
permission to submit a brief as amicus curiae in the case with respect to the
Tribal Court's interpretation of IGRA and in support of the position taken by
AT&T.
On May 28, 1997, the Attorney General of the State of Missouri brought
an action in the Circuit Court of Jackson County, Missouri, against the Coeur
d'Alene Tribe and UniStar seeking to enjoin the Lottery games offered by the
Tribe over the Internet and managed by UniStar. The complaint also sought civil
penalties, attorneys fees and court costs. The complaint alleges that the
Lottery violates Missouri anti-gambling laws and that the marketing of the games
violates the state's Merchandising Practices Act. UniStar and the Tribe removed
the case to the U.S. District Court for the Western District of Missouri, which
denied the State's subsequent motion to remand back to the state court. The
court also subsequently granted a motion to dismiss the Tribe from this case
based on sovereign immunity. The court denied a motion to dismiss UniStar based
on sovereign immunity, although the court indicated it might reconsider that
decision. UniStar filed a motion for reconsideration of its motion for
dismissal. The State of Missouri has filed a notice of appeal evidencing its
intent to appeal to the Eighth Circuit Court of Appeals the dismissal of the
Tribe.
On January 28, 1998, the State of Missouri sought to dismiss voluntarily
the existing federal case against UniStar and the next day filed a new action
against the Company, UniStar and two tribal officials, with essentially the same
allegations, in state court. The State obtained a temporary restraining order
from a state judge against the Company, UniStar, and two officials of CDA
enjoining the marketing of the Internet and telephone Lottery in the State of
Missouri. On February 5, 1998, the U. S. District Court for the Eastern District
of Missouri ruled that this second case also should be heard in federal court,
transferred the second case to the Western District of Missouri where the
original case had been filed, and dissolved the state court's temporary
restraining order, effective February 9, 1998. A motion to dismiss the second
case based on the sovereign immunity of all the defendants and a motion to
abstain in favor of the jurisdiction of the Coeur d'Alene Tribal Court are
pending. The State of Missouri has filed a notice of appeal evidencing its
intent to appeal the denial of its motion to remand the case to state court or,
in the alternative, to grant a preliminary injunction.
On September 15, 1997, the State of Wisconsin, by its Attorney General,
filed an action in the Wisconsin State Circuit Court for Dane County against the
Company, UniStar and the Coeur d'Alene Tribe, to permanently enjoin the US
Lottery offered by the Tribe on the Internet. The complaint alleges that the
offering of the US Lottery violates Wisconsin anti-gambling laws and that
legality of the US Lottery has been misrepresented to Wisconsin residents in
violation of state law. In addition to an injunction, the suit seeks
restitution, civil penalties, attorneys' fees and court costs. The Company,
UniStar and the Tribe have removed the case to the U. S. District Court in
Wisconsin. On February 18, 1998, the District Court dismissed the Tribe from the
case based on sovereign immunity and dismissed Executone based on the State's
failure to state a claim against Executone. Motions to dismiss the case against
UniStar were denied. UniStar has filed a notice of appeal evidencing its intent
to appeal to the Seventh Circuit Court of Appeals the denial of its motion to
dismiss.
The Company has been advised by its outside counsel, Hunton & Williams,
that based upon such firm's review of the applicable statutes, regulations and
case law, it
17
believes that the Lottery is authorized under IGRA and that the favorable
rulings issued by the Coeur d'Alene Tribal Court on February 28 and May 1, 1996
and the Tribal Appellate Court on July 2, 1997 will be affirmed by the Idaho
federal court. The Company believes UniStar will also prevail in the Missouri
and Wisconsin lawsuits. However, there is no assurance of such legal outcomes.
UniStar and the Tribe believe that the Lottery is legal and intend to defend the
right of the Tribe to offer the Lottery on the Internet and via the telephone.
Based on the anticipated outcome of the pending legal actions, 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. However, the pending litigation, as well as other litigation which
could be brought by states or others opposed to the Lottery, could delay or
suspend certain Lottery operations, and it is impossible at this time to
predict the nature or extent of any delays or suspension of operations that
might occur.
The Company currently is a named defendant in a number of other lawsuits
and is a party to a number of other proceedings that have arisen in the normal
course of its business. Those lawsuits and proceedings relate primarily to the
collection of indebtedness owed to the Company, the performance of products sold
by the Company, and various contract disputes. In the opinion of the Company,
these proceedings are not expected to have a material adverse effect on the
consolidated financial position, results of operations or liquidity of the
Company and, to the extent they are not covered by insurance, reserves adequate
to satisfy such liabilities have been established.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders in the fourth
quarter of the fiscal year covered by this report.
18
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
Name Age Position With Company
- ---- --- ---------------------
Alan Kessman 51 Chairman of the Board,
President and
Chief Executive Officer
Michael W. Yacenda 46 Executive Vice President and
President, UniStar Entertainment
Barbara C. Anderson 46 Vice President, General Counsel
and Secretary
James E. Cooke III 49 Vice President, National Accounts
Anthony R. Guarascio 44 Vice President, Finance and Administration
and Chief Financial Officer
Israel J. Hersh 44 Vice President,
Software Engineering
Robert W. Hopwood 54 Vice President and Vice
President-Operations,
Unistar Entertainment
Andrew Kontomerkos 52 Senior Vice President,
Hardware Engineering and
Production
Vic Northrup 41 Vice President, and
President, Computer Telephony
Frank J. Rotatori 55 Vice President, and
President, Healthcare Communications
Shlomo Shur 48 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. See "Recent Developments" above.
19
Michael W. Yacenda has served as Executive Vice President of Executone
since January 1990, and as President of UniStar since 1996. Prior to that time,
he was Vice President, Finance and Chief Financial Officer of the Company from
July 1988 to January 1990. He served as a Vice President of ISOETEC from 1983 to
1988. From 1974 to 1983, Mr. Yacenda was employed by Arthur Andersen & Co., a
public accounting firm. Mr. Yacenda is a certified public accountant.
Barbara C. Anderson has been Vice President, General Counsel and
Secretary since 1990. From 1985 to 1989, she was Corporate Counsel of United
States Surgical Corporation, a manufacturer of medical devices.
James E. Cooke III has served as Vice President, National Accounts since
February 1996. Prior to that time, from 1992 until 1996, Mr. Cooke served as
Division Manager of Operations for the Company, and from 1988 through 1991, Mr.
Cooke was a District Manager for the Company. From 1985 until 1988, Mr. Cooke
was the President of an interconnect company, and from 1981 to 1985, he was a
General Manager and a Regional Manager of the Jarvis Corporation. For eight
years prior to that time, he worked at Xerox Corporation in various sales and
management positions.
Anthony R. Guarascio has been Vice President, Finance and Chief
Financial Officer since January 1994, and prior thereto was Vice President and
Corporate Controller since January 1990. From 1984 until 1990, Mr. Guarascio was
the Corporate Controller of the Company and ISOETEC.
Israel J. Hersh has been Vice President, Software Engineering since
February 1996. Mr. Hersh joined the Company as Director of Software
Development in 1984, and was promoted to Senior Director of Software
Engineering in January 1994. Prior to his employment with the Company, Mr.
Hersh was a manager of the software development department for T-Bar, Inc.
Mr. Hersh has a B.S. in Electrical Engineering from Tel Aviv University and a
MS in Electrical Engineering from Bridgeport University.
Robert W. Hopwood has been Vice President of the Company and Vice
President-Operations of its UniStar subsidiary since May 1996, and prior thereto
served as Vice President, Customer Care of the Company from January 1990. From
1983 until 1990, Mr. Hopwood was the Director of Technical Operations of the
Company and ISOETEC.
Andrew Kontomerkos has been Senior Vice President, Hardware Engineering
and Production since January 1994, and prior thereto was Vice President,
Hardware Engineering since 1988. He served as a Vice President of ISOETEC since
1983. From 1982 to 1983, he was a Vice President and founder of SAM
Communications, Inc., a telecommunications research and development company
which was one of the predecessors to ISOETEC; that corporation was merged into
ISOETEC in 1983. From 1979 to 1982, Mr. Kontomerkos was Director of
Telecommunications Systems Development of TIE/communications, Inc., a
manufacturer of telecommunications systems.
20
Vic Northrup has been Vice President of the Company since February 1997,
and President of the Computer Telephony business since May 1996. Prior thereto,
he was Senior Director of Sales and Operations and a district general manager of
the Company.
Frank J. Rotatori has been Vice President, Healthcare Communications
since February 1996. Prior thereto he was Vice President, European Operations
since February 1994, and prior thereto was Director of Call Center Management
Products during 1992 and 1993, Vice President-Direct Sales from 1990 through
1991 and Vice President-Customer Service of the Company from 1988 to 1990. Mr.
Rotatori joined ISOETEC in 1986 as a regional manager. From 1982 to 1986, he
served as General Manager and Eastern Regional Manager for Rolm Corporation. For
13 years prior to that time, he worked at Xerox Corporation in various
manufacturing, accounting, sales and service management positions.
Shlomo Shur has been Senior Vice President, Advanced Technology since
January 1994, and prior thereto was Vice President, Software Engineering since
1988. He served as a Vice President of ISOETEC from 1983 to 1988. From 1982 to
1983, he was Vice President and a founder of SAM Communications, Inc., a
telecommunications research and development company which was one of the
predecessors to ISOETEC; that corporation was merged into ISOETEC in 1983. From
1978 to 1982, Mr. Shur was Manager, Software Development for TIE/communications,
Inc., a manufacturer of telecommunications systems.
21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Incorporated by reference to "Stock Data" in the Registrant's 1997
Annual Report to Shareholders.
ITEM 6. SELECTED FINANCIAL DATA
Incorporated by reference to "Selected Financial Data" in the
Registrant's 1997 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 1997 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 1997 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.
22
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following persons are currently serving as directors of the Company. Certain
information regarding each director is set forth below, including each
individual's principal occupation and business experience during the last five
years, directorships in other public companies, and the year in which the
individual was elected a director of the Company or one of its predecessor
companies.
NAME AGE PRINCIPAL OCCUPATION DIRECTOR SINCE
- ---- --- -------------------- --------------
Alan Kessman 51 President, Chief Executive Officer, 1983
and Chairman of the Company
since 1988; and of one of the
Company's predecessor corporations
since 1983.
Louis K. Adler 62 Private Investor; President and Director, 1997
Bancshares, Inc., Houston, Texas,
since 1973; former director of
Unistar Gaming Corporation, prior to
its acquisition by the Company.
Mr. Adler is also a director of Hospitality
Worldwide Services, Inc.
Stanley M. Blau 60 President, The Blau Group Ltd., an 1983
investment firm; formerly Vice
Chairman of the Company from 1988
until 1996; and Chief Executive
Officer of one of the Company's predecessor
corporations, from 1987 until July 1988.
Thurston R. Moore 51 Partner, Hunton & Williams (Attorneys), 1990
Richmond, Virginia, since 1981.
Richard S. Rosenbloom 65 David Sarnoff Professor of Business 1992
Administration, Harvard Business School,
since 1980. Mr. Rosenbloom is a director
of Arrow Electronics, Inc.
Jerry M. Seslowe 52 Managing Director of Resource Holdings 1996
Ltd., an investment and financial consulting
firm, since 1983.
EXECUTIVE OFFICERS
See Part I for information concerning executive officers of the Company.
23
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires that the Company's
directors and executive officers, and persons who own more than 10% of a
registered class of the Company's equity securities, file with the Securities
and Exchange Commission initial reports of ownership and reports of change in
ownership of Common Stock and other equity securities of the Company. Officers,
directors and greater than 10% shareholders are required by SEC regulation to
furnish the Company with copies of all Section 16(a) forms that they file.
To the Company's knowledge, based solely on review of the copies of such reports
furnished to the Company, and written representations that no other reports were
required, during the fiscal year ended December 31, 1997, all Section 16(a)
filing requirements applicable to its officers, directors and greater than 10%
beneficial owners were complied with.
ITEM 11. EXECUTIVE COMPENSATION
DIRECTOR COMPENSATION
Each director who does not receive other direct compensation from the
Company receives an annual retainer of $10,000, payable in equal quarterly
installments, plus a fee of $1,250 for each Board meeting attended,
$1,250 for each three telephone conference call meetings, and $1,250 for
each Committee meeting held separately from a Board meeting. In addition,
each such director is granted annually an option to purchase shares of the
Company's Common Stock under the terms and conditions of the Company's 1990
Directors' Stock Option Plan (the "Plan") approved by the shareholders on
June 20, 1990 and amended, with the approval of the shareholders, on
July 30, 1996.
As of March 31, 1998, 36,000 shares had been issued upon exercise of
options granted under the original terms of the Plan, options to purchase 18,000
shares of Common Stock were outstanding under the original terms of the Plan,
and options to purchase an additional 132,400 shares were outstanding under the
1996 amendment to the Plan. The number of shares for which options may be
granted each year are determined by reference to the Black-Scholes option
pricing model to provide an option equal in value to $10,000 based upon the
market price of the Common Stock at the date of grant. An aggregate of up to
250,000 shares are issuable under the Plan. Each of Messrs. Adler, Moore,
Rosenbloom and Seslowe received options to purchase 13,700 shares under this
Plan in 1997.
On February 1, 1996 and July 29,1997, Jerry M. Seslowe and Louis K.
Adler, respectively, were each granted warrants to purchase 25,000 shares of the
Company's Common Stock at $2.63 and $2.00 per share, respectively, the closing
market prices on those dates. The warrants vest ratably over a three-year period
and expire on February 1, 2001 and July 29, 2002, respectively. Messrs. Seslowe
and Adler received these warrants upon being elected to serve on the Company's
Board of Directors.
The Company also reimburses directors for their travel and accommodation
expenses incurred in attending Board meetings.
24
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation by the Company of the
Chief Executive Officer and the four most highly compensated other executive
officers of the Company for services in all capacities to the Company and its
subsidiaries during the past three fiscal years.
LONG-TERM COMPENSATION
ANNUAL COMPENSATION ----------------------
OTHER ANNUAL AWARDS OF ALL OTHER
NAME AND SALARY BONUS COMPENSATION OPTIONS/ COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($) SARs(#) ($) (1)
- ----------------- ----- -------- ----- ------------ --------- ------------
Alan Kessman 1997 400,000 -0- -0- -0- 9,849(2)
Chairman of the Board, 1996 400,000 63,000 -0- -0- 9,536
President and Chief 1995 400,000 -0- -0- -0- 10,328
Executive Officer
Michael W. Yacenda 1997 256,000 -0- -0- -0- 5,997
Executive Vice President 1996 256,000 49,900 -0- -0- 5,935
1995 256,000 -0- -0- -0- 6,353
Shlomo Shur 1997 215,700 -0- -0- -0- 5,233
Senior Vice President, 1996 215,700 12,393 -0- -0- 5,192
Advanced Technology 1995 215,700 -0- -0- -0- 5,514
Andrew Kontomerkos 1997 214,000 -0- -0- -0- 5,896
Senior Vice President, 1996 214,000 12,350 -0- -0- 5,703
Hardware Engineering 1995 214,000 -0- -0- -0- 5,535
and Production
Vic Northrup 1997 162,885 31,750 -0- -0- 660
Vice President and 1996 137,837 64,375 -0- 25,000 660
President, Computer 1995 126,223 83,353 -0- -0- 660
Telephony Division
(1) This category includes for each individual a matching contribution by the
Company under the Company's 401(k) plan in the amount of $660 each for each
year. This column also includes premiums paid by the Company for long-term
disability and life insurance for the following individuals in the following
amounts in 1997: Mr. Kessman, $9,189; Mr. Yacenda, $5,337; Mr. Shur, $4,573;
and Mr. Kontomerkos, $5,236; in the following amounts in 1996: Mr. Kessman,
$8,876; Mr. Yacenda, $5,275; Mr. Shur, $4,532; and Mr. Kontomerkos, $5,043;
and in the following amounts in 1995: Mr. Kessman, $9,668; Mr. Yacenda,
$5,693; Mr. Shur, $4,854; and Mr. Kontomerkos, $4,875.
(2) Does not include the payment of approximately $1,300,000 accrued under Mr.
Kessman's employment continuity agreement described immediately below.
EMPLOYMENT CONTINUITY 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 without cause or following
a change in control in the Company, including a lump sum payment equal to 2.99
times his then
25
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.
In January 1998, Mr. Kessman announced his intention to retire from the
management of the day-to-day operations of the Company. Mr. Kessman is
remaining in his current position until his successor is selected.
In accordance with the diminishment of responsibility provisions
of his employment continuity agreement, the Company will pay Mr.
Kessman approximately $1.3 million, which includes severance of approximately
$1.1 million and continuation of certain benefits for four years. The Company
will incur this cost during the first quarter of 1998. As of March 31, 1997,
Mr. Kessman had indebtedness to the Company of $2.4 million relating to the
Executive Stock Incentive Plan. These obligations will remain outstanding until
December 2001 notwithstanding Mr. Kessman's retirement; however, during 1998 Mr.
Kessman will pledge an additional 500,000 shares of Common Stock to the Company
as security for the loan and guarantee and after 1998 will pay 100% of the
interest accrued on the loan as it becomes due. See "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS."
OPTION GRANTS IN LAST FISCAL YEAR
There were no grants of options made to any officers during 1997.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth each exercise of stock options made
during the year ended December 31, 1997 by the Chief Executive Officer and the
four most highly compensated other executive officers and the fiscal year-end
value of unexercised options held by those individuals as of December 31, 1997.
There were no exercises or holdings of stock appreciation rights by any officers
during 1997, and there are no outstanding stock appreciation rights.
Number of Value of Unexercised
Unexercised Options In-the Money Options at
Shares at FiscalYear-End(#) Fiscal Year-End($)(1)
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized ($) Unexercisable Unexercisable
Alan Kessman 10,000 $7,500 25,000/-0- 4,700/0
Michael W 26,000 23,556 32,000/-0- 6,016/0
Yacenda
Shlomo Shur 20,000 18,120 25,000/-0- 4,700/0
Andrew 15,000 13,590 20,000/-0- 3,670/0
Kontomerkos
Vic Northrup -0- -0- 34,108/28,036 -0/0-
(1) Based upon the last sale price on December 31, 1997 of $2.188 per
share of Common Stock.
26
COMPENSATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION
It is the responsibility of the Compensation Committee of the Board of Directors
to administer the Company's incentive plans, review the performance of
management and approve the compensation of the Chief Executive Officer and other
executive officers of the Company.
The Compensation Committee believes that the Company's success depends on the
coordinated efforts of individual employees working as a team toward defined
common goals. The objectives of the Company's compensation program are to align
executive compensation with business objectives, to reward individual and team
performance furthering the business objectives, and to attract, retain and
reward employees who will contribute to the long-term success of the Company
with competitive salary and incentive plans.
Specifically, executive compensation decisions are based on the following
factors:
1. The total direct compensation package for the Company's executives is made up
of three elements: base salary, a short-term incentive program in the form of a
performance-based bonus, and a long-term incentive program in the form of stock
options and other inducements to own the Company's stock.
2. The Committee believes that the total compensation of all executives should
have a large incentive element that is dependent upon overall Company
performance measured against objectives established at the beginning of the
fiscal year. Bonus and stock opportunities represent a significant portion of
the total compensation package, in an attempt to further the Company's goal of
linking compensation more closely to the Company's performance. The percentage
of direct compensation that is dependent upon the Company's attainment of its
objectives also generally increases as the responsibility of the officer in
question for the overall corporate performance increases.
3. Total compensation levels, i.e., base salary, bonus potential, and number of
stock options, are established by individual levels of responsibility and
regular reference to competitive compensation levels for executives performing
similar functions and having equivalent levels of responsibility. However,
whether actual bonuses are paid to each executive depends upon the achievement
of Company profitability goals. In the case of certain executives who have
direct responsibility for individual business units, a portion of the incentive
compensation for such executives may consist of bonuses tied to the performance
against predetermined targets of the individual business units for which they
are responsible.
4. In 1997, the Compensation Committee reviewed executive compensation data
reported in a nationally recognized independent compensation survey (the
"Survey") for a group of companies in the Company's industry or similar
industries and of comparable size and complexity. The Committee compared the
base salary and bonus levels of the Survey group to the existing salary and
bonus compensation of the Company's management.
5. The Committee views the 50th percentile of the Survey data as average
compensation for comparable positions and believes it is the minimum level
necessary for the Company to be competitive in attracting and retaining
qualified executives in its industry and geographic locations. Therefore, since
1994 the base salaries for the Chief Executive Officer and the four other
highest paid executive officers have been established at
27
approximately the 50th percentile for comparable positions in the Survey
companies. In 1997, the Committee approved setting each executive's total cash
compensation at approximately the median for the comparable position in the
benchmark population of companies included in the Survey. As a result, the
Committee approved no increase in salary for Mr. Kessman or any of the four
other highest paid executive officers except one officer who was initially
elected as an executive officer in 1997.
6. Merit increases in base salary for executives other than Mr. Kessman have
been reviewed on an individual basis by Mr. Kessman and increases are dependent
upon a favorable evaluation by Mr. Kessman of individual executive performance
relative to individual goals, the functioning of the executive's team within the
corporate structure, success in furthering the corporate strategy and goals, and
individual management skills. Based upon his evaluation, Mr. Kessman recommends
base salary increases to the Committee for its approval.
7. In addition to base salary and merit increases, the Compensation Committee
considers incentive bonuses for its executive officers, including the Chief
Executive Officer, both prospectively based upon the attainment of specific
performance goals, and retrospectively based upon the Committee's discretionary
judgment as to the performance during the year of the Company and its executive
officers or other considerations deemed appropriate at the time. To establish
1997 bonus potential for executive officers, including the Chief Executive
Officer, the Compensation Committee reviewed recommendations by the Chief
Executive Officer based on data provided by the Survey. The Committee provided
that each officer would be eligible for a bonus equal to a percentage of his or
her salary consistent with the Survey data if certain pre-established 1997
pretax income targets or goals were achieved by the Company. Partial achievement
of the pretax income goals (above 74% attainment) would result in partial bonus
payments. The Committee also approved bonus eligibility for division presidents
that would be based on division performance without regard to overall corporate
performance. In 1997, the pretax income from operations for the year was below
the applicable threshold. Therefore, the Committee approved no bonus payments to
Mr. Kessman or any of the four other highest paid executive officers for 1997
except bonuses paid to one of the four other highest paid executive officers
based on his division's performance.
The Committee reserves the right to make discretionary bonus awards in
appropriate circumstances where an executive might merit a bonus based on other
considerations.
8. All executives, including the Chief Executive Officer, are eligible for
annual stock option grants under the employee stock option plans applicable to
employees generally, as approved by the Compensation Committee. The number of
options granted to any individual depends on individual performance, salary
level and competitive data. In addition, in determining the number of stock
options granted to each senior executive, the Compensation Committee reviews the
unvested options of each executive to determine the future benefits potentially
available to the executive. The number of options granted will depend in part on
the total number of unvested options deemed necessary to create a long-term
incentive on the part of the executive to remain with the Company in order to
realize future benefits.
No options were granted in 1997 to Mr. Kessman or the four highest paid other
executive officers.
9. In December 1997, the Board of Directors on the recommendation of the
Committee approved certain modifications and waivers under the 1994 Executive
Stock Incentive Plan. The Board of Directors approved the extension of the
participant loans and the
28
Company's guarantee of those loans from August 1999 until December 2001, subject
to the approval of the lending bank, and deferred the interest payment (15% of
the bank interest accrued in 1997) that would have otherwise been due from each
participant to the Company in January 1998. The Board of Directors also decided
to waive restrictions in the Plan to allow participants to sell a portion or all
of their Plan stock in 1998, subject to applicable legal requirements and to
repayment of the loan with the proceeds of the shares sold.
In conclusion, the Compensation Committee believes that the base salary, bonus
and stock options of the Company's Chief Executive Officer and other executives
are appropriate in light of competitive pay practices and the Company's
performance against short and long-term performance goals.
LOUIS K. ADLER
RICHARD ROSENBLOOM
JERRY SESLOWE
PERFORMANCE GRAPH
The graph below compares, for the last five fiscal years, the yearly percentage
change in cumulative total returns (assuming reinvestment of dividends and
interest) of (i) the Company's Common Stock, (ii) the Company's Debentures,
(iii) the NASDAQ Stock Market and (iv) a peer group index constructed by the
Company (the "Peer Group").
The Peer Group consists of the following companies:
Aspect Telecommunications Corp. Inter-Tel, Inc.
Boston Technology, Inc. InterVoice, Inc.
Brite Voice Systems, Inc. Microlog Corporation
Centigram Communications Corp. Mitel Corporation
Comdial Corporation Mosaix
Davox Corporation Norstan, Inc.
Digital Sound Corporation Syntellect, Inc.
Electronic Information Systems, Inc. Teknekron Communications
Systems, Inc.(TCSI)
The Peer Group includes companies who compete with the Company in the general
voice communications equipment area as well as those active in several more
specialized areas, such as ACD (automatic call distribution), voice mail,
interactive voice response systems, and predictive dialing systems, as well as
additional general voice communications companies. The Company believes that the
mix of the companies in the Peer Group accurately reflects the mix of businesses
in which the Company is currently engaged and will be engaged in the foreseeable
future.
The Peer Group is not identical to the Survey group used to evaluate
compensation of executives described in the Compensation Committee Report. The
Peer Group above does not provide sufficient compensation data for the
Committee's purposes, and the Survey group includes non-public entities for whom
stock price data for the performance graph is unavailable.
29
Although AT&T and Nortel are the Company's principal competitors in supplying
voice communications equipment, software and services to the under-300-desktop
market, the business in which the Company is primarily engaged, both of those
companies are much larger than the Company and derive most of their revenues
from other lines of business and so have not been included in the Peer Group.
The returns of each Peer Group issuer have been weighted in the graph below to
reflect that issuer's stock market capitalization at the beginning of each
calendar year.
COMPARISON OF FIVE-YEAR CUMULATIVE RETURN
AMONG EXECUTONE, INCLUDING THE COMMON
STOCK ("XTON") AND THE DEBENTURES ("XTONG"),
THE NASDAQ (US) INDEX AND THE COMPANY'S
PEER GROUP
WEIGHTED AVERAGE
CUMULATIVE TOTAL RETURNS 1992 1993 1994 1995 1996 1997
XTON $100 $159 $179 $128 $131 $121
NASDAQ $100 $115 $112 $159 $195 $240
PEER GROUP $100 $190 $179 $252 $327 $306
XTONG $100 $138 $137 $160 $178 $198
[PERFORMANCE GRAPH]
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee are Louis K. Adler, Richard
Rosenbloom and Jerry Seslowe.
No member of the Committee is a former or current officer or employee of
the Company or any subsidiary.
No executive officer of the Company served as a director or a member of
the Compensation Committee or of the equivalent body of any entity, any one of
whose executive officers serve on the Compensation Committee or the Board of
Directors of the Company.
30
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table lists any person (including any "group" as that term
is used in Section 13(d)(3) of the Exchange Act) who, to the knowledge of the
Company, was the beneficial owner as of February 28, 1998, of more than 5% of
the outstanding voting shares of the Company. Unless otherwise noted, the owner
has sole voting and dispositive power with respect to the securities.
Name and Address of Amount and Nature of
Title of Class Beneficial Owner Beneficial Ownership Percent of Class(1)
Common Stock Heartland Advisors, Inc. 9,213,455(2) 18.60%
790 North Milwaukee Street
Milwaukee, WI 53202
Entities Associated with 3,245,078(3) 6.56
Edmund H., Shea, Jr.
655 Brea Canyon Road
Walnut Creek, CA
91789
Series A Stock Cooper Life Sciences 78,819 31.53
160 Broadway
New York, NY 10038
Watertone Holdings, L.P. 154,160 61.81
and Watertone Investments L.L.C.
730 Fifth Avenue
New York, NY 10038
Series B Stock Cooper Life Sciences 31,528 31.53
160 Broadway
New York, NY 10038
Watertone Holdings, L.P. 61,807 61.81
and Watertone Investments L.L.C.
730 Fifth Avenue
New York, NY 10038
(1) With respect to the Common Stock, percentages shown are based upon
49,716,084 shares of Common Stock actually outstanding as of February 28, 1998.
In cases where the beneficial ownership of the individual or group includes
options, warrants or convertible securities, the percentage is based on
49,716,084 shares actually outstanding, plus the number of shares issuable upon
exercise or conversion of any such options, warrants or convertible securities
held by the individual or group. The percentage does not reflect or assume the
exercise or conversion of any options,
31
warrants or convertible securities not owned by the individual or group in
question. In the case of the Series A and Series B Preferred Stock, percentages
shown are based on 250,000 and 100,000 shares, respectively, actually
outstanding as of February 28, 1998.
(2) Heartland Advisors shares power to vote 625,000 of such shares.
(3) Includes 11,935 shares of Common Stock issuable upon conversion of the
Company's Debentures, of which entities associated with Mr. Shea own $148,800 in
principal amount, representing less than 1% of the outstanding principal amount.
The Shea entities share the power to vote and dispose of all such shares.
The following table sets forth as of February 28, 1998, the beneficial
ownership of the Company's voting shares by all current directors and nominees
of the Company, the Chief Executive Officer, and the four next most highly
compensated executive officers and all directors and executive officers of the
Company as a group. Unless otherwise indicated, each person listed below has
sole voting and investment power over all shares beneficially owned by him or
her.
Name of Amount and Nature of
Title of Class Beneficial Owner Beneficial Ownership Percentage of Class (1)
Common Stock Louis K. Adler 138,123(2)
Stanley M. Blau 543,193 1.05
Alan Kessman 1,737,337(3) 3.35
Andrew Kontomerkos 463,284(4) *
Thurston R. Moore 135,235(5) *
Vic Northrup 127,537(6) *
Richard S. Rosenbloom 76,900(7) *
Jerry M. Seslowe 209,615(8) *
Shlomo Shur 740,708(9) 1.43
Michael W. Yacenda 990,360(10) 1.91
All Directors and 6,349,422(11) 12.25
Officers as a Group
(17 Persons)
Series A Stock Louis K. Adler 1,436 *
Stanley M. Blau -0-
Alan Kessman -0-
Andrew Kontomerkos -0-
Thurston R. Moore -0-
Vic Northrup -0-
Richard S. Rosenbloom -0-
Jerry M. Seslowe 4,692(12) 1.87
Shlomo Shur -0-
Michael W. Yacenda -0-
All Directors and 6,128 2.45
Officers as a Group
(17 Persons)
32
Series B Stock Louis K. Adler 575 *
Stanley M. Blau -0-
...........................Alan Kessman -0-
Andrew Kontomerkos -0-
Thurston R. Moore -0-
Vic Northrup -0-
Richard S. Rosenbloom -0-
Jerry M. Seslowe 1,877(13) 1.87
Shlomo Shur -0-
Michael W. Yacenda -0-
All Directors and 2,452 2.45
Officers as a Group
(17 Persons)
* Less than 1%.
(1) With respect to the Common Stock, percentages shown are based upon
49,716,084 shares of Common Stock actually outstanding as of February 28, 1998.
In cases where the beneficial ownership of the individual or group includes
options, warrants or convertible securities, the percentage is based on
49,716,084 shares actually outstanding, plus the number of shares issuable upon
exercise or conversion of any such options, warrants or convertible securities
held by the individual or group. The percentage does not reflect or assume the
exercise or conversion of any options, warrants or convertible securities not
owned by the individual or group in question. In the case of the Series A and
Series B Preferred Stock, percentages shown are based on 250,000 and 100,000
shares, respectively, actually outstanding as of February 28, 1998.
(2) Includes 83,615 shares issuable upon exercise of options and 25,000 shares
issuable upon exercise of warrants, 91,918 of which are exercisable within 60
days of June 1, 1998. Does not include 76,445 shares of Common Stock
contingently issuable upon conversion of the Preferred Stock owned by
Mr. Adler.
(3) Includes 25,000 shares subject to options exercisable within 60 days of June
1, 1998.
(4) Includes 20,000 shares subject to options exercisable within 60 days of June
1, 1998.
(5) Includes 48,900 shares subject to options exercisable within 60 days of June
1, 1998.
(6) Includes 56,494 shares subject to options, of which 34,108 are exercisable
within 60 days of June 1, 1998.
(7) Includes 48,900 shares subject to options exercisable within 60 days of June
1, 1998.
(8) Includes 51,612 shares subject to options, all of which are exercisable, and
25,000 shares subject to warrants, 16,666 of which are exercisable within 60
days of June 1, 1998. Also includes 12,755 shares of Common Stock owned and
63,559 shares of Common Stock subject to exercisable options held by Resource
Holdings Associates, of which Mr. Seslowe is a managing director and in which he
holds a greater than 10% ownership interest. Does not include 203,756 shares of
Common Stock contingently issuable upon conversion of the Preferred Stock owned
by Mr. Seslowe or the 45,875 shares of Common Stock contingently issuable upon
conversion of the Preferred Stock owned by Resource Holdings Associates.
33
(9) Includes 25,000 shares subject to options exercisable within 60 days of June
1, 1998.
(10) Includes 32,000 shares subject to options exercisable within 60 days of
June 1, 1998 and 3,576 shares issuable upon conversion of the Company's
Debentures, of which Mr. Yacenda beneficially owns $38,000 in principal amount
or less than 1% of the outstanding principal amount.
(11) Includes 903,742 shares subject to options, and 50,000 shares subject to
warrants, of which 462,327 and 16,666, respectively, are exercisable within 60
days of June 1, 1998, and 45,176 shares issuable upon conversion of the
Company's Debentures.
(12) Includes 862 shares held by Resource Holdings.
(13) Includes 345 shares held by Resource Holdings.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the Company's acquisition of Unistar Gaming, in 1995 and
1996 the Company paid Resource Holdings Ltd, a former shareholder of Unistar
Gaming, accrued investment banking fees incurred by Unistar Gaming 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 in 1996 as
a nominee of the holders of the Preferred Stock.. Both Resource Holdings and Mr.
Seslowe acquired Common Stock and Preferred Stock of the Company in exchange for
their shares of Unistar Gaming. 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 1994 Executive Stock Incentive Plan (the "Executive Plan"), approved by
shareholders at the 1994 Annual Meeting, was implemented in October 1994 with 30
employees participating. Under the terms of the Executive Plan, eligible key
employees were granted the right to purchase shares of the Company's Common
Stock at the market price, which was $3.1875 per share at the time of purchase.
Participating employees financed the purchases of these shares through loans by
the Company's bank lender at the prime rate less 1/4%, payable over five years.
The loans are fully-recourse to the participating employees but are guaranteed
by letters of credit from the Company to the lending bank. The Company lends the
employee 85% of the interest due to the bank. The Company holds the purchased
Common Stock as security for its guarantees of the repayment of the loans. Sales
of the shares purchased under the Plan are subject to certain restrictions.
In December 1997, the Compensation Committee of the Board of Directors of
the Company agreed, subject to the Company obtaining the agreement of the
lending bank, that it would allow the participant loans to remain outstanding
until December 2001 instead of requiring repayment in August 1999, and that it
would defer collection from each participant of the 15% of the 1997 interest on
the loans that would otherwise have been currently payable to the Company. The
Committee also decided to waive certain restrictions in the Plan to allow
participants to sell a portion or all of their Plan stock in 1998, subject to
applicable legal requirements and to repayment of the loan with the proceeds of
the shares sold.
34
The following table contains information about borrowings in excess of
$60,000 by executive officers that were outstanding during 1997 pursuant to the
Executive Plan and that are guaranteed by the Company. The amounts listed below
also include the interest paid by the Company to the bank, reimbursement of
which is owed by the individual to the Company. No director, nominee, or
beneficial owner of more than 5% of any class of voting securities is eligible
for participation in the Executive Plan.
HIGHEST AMOUNT OF UNPAID
INDEBTEDNESS BETWEEN INDEBTEDNESS
JANUARY 1, 1997 AND MARCH 31, 1998, AT MARCH 31, 1998
INCLUDING INCLUDING
NAME ACCRUED INTEREST ACCRUED INTEREST
- ---- ----------------------------------- -----------------
Alan Kessman $2,382,242 $2,353,992
Michael W. Yacenda 1,389,641 1,389,641
Shlomo Shur 694,821 694,821
Andrew Kontomerkos 694,821 694,821
Barbara C. Anderson 322,490 243,758
James E. Cooke III 397,040 397,040
Anthony R. Guarascio 555,857 555,857
Israel J. Hersh 119,112 119,112
Robert W. Hopwood 396,420 396,420
Vic Northrup 280,209 280,209
Frank J. Rotatori 238,224 238,224
35
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, 1997 and 1996
Consolidated Statements of Operations - Years ended December 31, 1997, 1996
and 1995
Consolidated Statements of Changes in Stockholders' Equity - Three years ended
December 31, 1997
Consolidated Statements of Cash Flows - Years ended December 31, 1997, 1996 and
1995
Notes to Consolidated Financial Statements
The schedule to consolidated financial statements required by this item and
included in this report is as follows:
Report of Independent Public Accountants on Schedule
Schedule II - Valuation and Qualifying Accounts
(a)(3) and (c). The exhibits required by this item and included in this report
or incorporated herein by reference are as follows:
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
36
Asset Purchase Agreement dated as of May 31, 1996, by and among Clarity
Telecom Holdings, Inc. (formerly known as Tone Holdings, Inc.), Clarity
Telecom, Inc. (formerly known as Tone Acquisition Corporation),
EXECUTONE Network Services, Inc. and EXECUTONE Information Systems, Inc.
Incorporated by reference to the Registrant's Annual Report on Form
10-K/A for the year ended December 31, 1995 filed on June 4, 1996.
3-1 Articles of Incorporation, as amended through December 18, 1995.
Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1995 filed on April 15, 1996.
3-2 Articles of Amendment dated and filed December 19, 1995, amending the
Company's Articles of Incorporation. Incorporated by reference to the
Registrant's Current Report on Form 8-K dated January 3, 1996.
3-3 Bylaws, as amended. Incorporated by reference to the Registrant's
Registration Statement on Form S-3 (File No. 33-62257) filed August 30,
1995.
4-1 Revolving Credit Agreement dated as of October 31, 1997 between the
Registrant and Bank Of America National Trust And Savings Association.
Filed herewith.
4-2 Amended and Restated Loan Agreement dated as of July 22, 1996, between
EXECUTONE Information Systems, Inc., certain employees thereof, and the
Lenders named therein. Filed herewith.
4-10 Indenture dated March 1, 1986 with United States Trust Company of New
York relating to 7 1/2% Convertible Subordinated Debentures of Vodavi
Technology Corporation due March 15, 2011. Incorporated by reference to
Vodavi Technology Corporation's Registration Statement on Form S-1 (as
amended) (Registration No. 33-3827) filed on March 9, 1986 and amended
April 1, 1986.
4-11 First Supplemental Indenture dated August 4, 1989 with United States
Trust Company of New York relating to 7 1/2% Convertible Subordinated
Debentures due March 15, 2011. Incorporated by reference to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1989.
4-12 Specimen Certificate representing 7 1/2% Convertible Subordinated
Debentures. Incorporated by reference to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1989.
10-1 1984 Employee Stock Purchase Plan of EXECUTONE Information Systems,
Inc. Incorporated by reference to the Registrant's Registration
Statement on Form S-8 (File No. 33-23294) declared effective by the
Commission on August 23, 1988.
10-2 1986 Stock Option Plan of EXECUTONE Information Systems, Inc.
Incorporated by reference to the Registrant's Registration Statement on
Form S-8 (File No. 33-23294) declared effective by the Commission on
August 23, 1988.
10-3 1984 Stock Option Plan of EXECUTONE Information Systems, Inc.
Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1990, as amended by Form 8 filed on
August 20, 1991.
10-5 Stock Option Bonus Credit Plan of EXECUTONE Information Systems,
Inc. dated
37
December 31, 1988. Incorporated by reference to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1989.
10-6 1990 Directors' Stock Option Plan as amended July 30, 1996. Incorporated
by reference to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1996, filed on March 31, 1997.
10-7 1994 Executive Stock Incentive Plan. Incorporated by reference to
the Registrant's Annual Report on Form 10-K for the year ended December
31, 1994.
10-16 Manufacturing Services Agreement dated as of January 10, 1995, between
EXECUTONE Information Systems, Inc. and Compania Dominicana de
Telefonos, C por A (Codetel). Incorporated by reference to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1995 filed on April 15, 1996.
10-17 Manufacturing Services Agreement dated February 9, 1990 between Wong's
Electronics Co., Ltd. and EXECUTONE Information Systems, Inc.
Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1990, as amended by Form 8 filed on
August 20, 1991.
10-19 Warrant to Purchase 25,000 Shares of Common Stock of EXECUTONE
Information Systems, Inc. in favor of Louis K. Adler dated July 29,
1997. Filed herewith.
10-20 Warrant to Purchase 25,000 Shares of Common Stock of the Registrant, in
favor of Jerry M. Seslowe, dated February 1, 1996. Incorporated by
reference to the Registrant's Annual Report on Form 10-K/A for the year
ended December 31, 1996 filed on April 30, 1997.
10-21 Management Agreement for the National Indian Lottery dated January
16, 1995. Incorporated by reference to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1995 filed on April 15, 1996.
10-22 Amended and Restated Distributor Agreement dated as of April 1, 1998,
between EXECUTONE Information Systems, Inc. and Claricom, Inc. d/b/a/
Executone Business Solutions (formerly Clarity Telecom, Inc.).
(Confidential portions have been omitted and filed separately with the
Commission pursuant to a request for confidential treatment.) Filed
herewith.
11 Statement regarding computation of per share earnings. Filed
herewith. Please see Note E to the Consolidated Financial Statements
in the Registrant's 1997 Annual Report to Shareholders.
13 1997 Annual Report to Shareholders of EXECUTONE Information
Systems, Inc. Filed herewith.
21 Subsidiaries of EXECUTONE Information Systems, Inc. Filed herewith.
23.1 Consent of Arthur Andersen LLP. Filed herewith.
23.2 Consent of Hunton & Williams. Filed herewith.
27 Financial Data Schedule. Filed herewith.
38
Undertakings
For the purposes of complying with the rules governing Form S-8 under the
Securities Act of 1933, the undersigned registrant hereby undertakes as follows,
which undertaking shall be incorporated by reference into registrant's
Registration Statements on the following Form S-8 filings:
S-8 Reg. No. 2-91008 filed May 9, 1984 on 1983 Employee Stock Purchase Plan
(650,000 shares)
S-8 Reg. No. 33-959 filed October 17, 1985 on 1984 Stock Option Plan (390,000
shares)
S-8 Reg. No. 33-6604 filed June 19, 1986 on 1983 Stock Option Plan (350,000
shares)
S-8 Reg. No. 33-16585 filed August 24, 1987 on 1986 and 1983 Stock Option
Plans (800,000 shares)
S-8 Reg. No. 33-23294 filed August 23, 1988 on 1986 Stock Option Plan
(7,000,000 shares) and Employee Stock Purchase Plan (500,000 shares)
S-8 Reg. No. 33-42561 filed September 4, 1991 on 1984 Employee Stock Purchase
Plan (350,000 shares) and Directors' Stock Option Plan (100,000 shares)
S-8 Reg. No. 33-45015 filed January 2, 1992 on 1984 Employee Stock Purchase
Plan (400,000 shares)
S-8 Reg. No. 33-57519 filed January 31, 1995 on 1984 Employee Stock Purchase
Plan (1,000,000 shares).
Insofar as indemnification arising under the Securities Act of 1933 (the "Act")
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to the court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
Reports on Form 8-K
The Registrant filed no reports on Form 8-K during the quarter ended December
31, 1997.
39
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 14, 1998
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 14, 1998 /s/ Alan Kessman
------------------------------
Alan Kessman
Chairman, President and Chief Executive
Officer (Principal Executive Officer)
April 14, 1998 /s/ Louis K. Adler
------------------------------
Louis K. Adler, Director
April 14, 1998 /s/ Stanley M. Blau
------------------------------
Stanley M. Blau, Director
April 14, 1998 /s/ Anthony R. Guarascio
-------------------------------
Anthony R. Guarascio
Vice President, Finance and Administration,
and Chief Financial Officer
(Principal Financial and Accounting Officer)
April 14, 1998 /s/ Thurston R. Moore
------------------------------
Thurston R. Moore, Director
April 14, 1998 /s/ Richard S. Rosenbloom
------------------------------
Richard S. Rosenbloom, Director
April 14, 1998 /s/ Jerry M. Seslowe
------------------------------
Jerry M. Seslowe, Director
40
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 February 7, 1998. Our audit
was made for the purpose of forming an opinion on those statements taken as a
whole. The schedule listed in Item 14 is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and are not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Stamford, Connecticut
February 7, 1998
S-1
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(Amounts in Thousands)
Additions Deductions
------------------------------------- ------------------------
Charged Charged Net
Balance at (Credited) (Credited) Writeoffs of Balance at
Beginning to Costs and to Other Uncollectible End of
Description of Period Expenses Accounts Accounts Period
-------------- ------------ ------------- ---------- ------------- ----------
Year ended December 31, 1997
Deducted from asset accounts:
Allowance for doubtful accounts 2,106 150 --- (442) 1,814
Allowance for uncollectible notes
receivable 2,216 127 --- --- 2,343
Year ended December 31, 1996
Deducted from asset accounts:
Allowance for doubtful accounts $1,715 $1,921 $ (551)* $ (979) $2,106
Allowance for uncollectible notes
receivable 259 (82) 2,039* --- 2,216
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
* Adjustments related to sale of direct sales organization.
S-2
STATEMENT OF DIFFERENCES
The trademark symbol shall be expressed as..................................'tm'
The registered trademark symbol shall be expressed as....................... 'r'
EXECUTONE INFORMATION SYSTEMS, INC.
EXHIBITS TO 1997 ANNUAL REPORT ON FORM 10-K
Exhibit No.
- -----------
2-1 Agreement and Plan of Merger by and among EXECUTONE Information Systems,
Inc., Executone Newco, Inc., and Unistar Gaming Corp., dated as of
December 19, 1995. Incorporated by reference to the Registrant's Current
Report on Form 8-K dated January 3, 1996.
2-2 Asset Purchase Agreement among V Technology Acquisition Corporation,
EXECUTONE Information Systems, Inc. and Vodavi, Inc. dated November 5,
1993, and Amendment dated February 18, 1994. Incorporated by reference
to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1993.
2-3 Asset Purchase Agreement by and among Tone Holdings, Inc. and Tone
Acquisition Corporation, EXECUTONE Network Services, Inc. and EXECUTONE
Information Systems, Inc. dated as of April 9, 1996, and Amendment No. 1
to Asset Purchase Agreement dated as of May 31, 1996, by and among
Clarity Telecom Holdings, Inc. (formerly known as Tone Holdings, Inc.),
Clarity Telecom, Inc. (formerly known as Tone Acquisition Corporation),
EXECUTONE Network Services, Inc. and EXECUTONE Information Systems, Inc.
Incorporated by reference to the Registrant's Annual Report on Form
10-K/A for the year ended December 31, 1995 filed on June 4, 1996.
3-1 Articles of Incorporation, as amended through December 18, 1995.
Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1995 filed on April 15, 1996.
3-2 Articles of Amendment dated and filed December 19, 1995, amending the
Company's Articles of Incorporation. Incorporated by reference to the
Registrant's Current Report on Form 8-K dated January 3, 1996.
3-3 Bylaws, as amended. Incorporated by reference to the Registrant's
Registration Statement on Form S-3 (File No. 33-62257) filed August 30,
1995.
4-1 Revolving Credit Agreement dated as of October 31, 1997 between the
Registrant and Bank Of America National Trust And Savings Association.
Filed herewith.
4-2 Amended and Restated Loan Agreement dated as of July 22, 1996, between
EXECUTONE Information Systems, Inc., certain employees thereof, and the
Lenders named therein. Filed herewith.
4-10 Indenture dated March 1, 1986 with United States Trust Company of New
York relating to 7 1/2% Convertible Subordinated Debentures of Vodavi
Technology Corporation due March 15, 2011. Incorporated by reference to
Vodavi Technology Corporation's Registration Statement on Form S-1 (as
amended) (Registration No. 33-3827) filed on March 9, 1986 and amended
April 1, 1986.
4-11 First Supplemental Indenture dated August 4, 1989 with United States
Trust Company of New York relating to 7 1/2% Convertible Subordinated
Debentures due March 15, 2011. Incorporated by reference to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1989.
4-12 Specimen Certificate representing 7 1/2% Convertible Subordinated
Debentures. Incorporated by
E-3
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.
10-5 Stock Option Bonus Credit Plan of EXECUTONE Information Systems, Inc.
dated December 31, 1988. Incorporated by reference to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1989.
10-6 1990 Directors' Stock Option Plan as amended July 30, 1996. Incorporated
by reference to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1996, filed on March 31, 1997.
10-7 1994 Executive Stock Incentive Plan. Incorporated by reference to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1994.
10-16 Manufacturing Services Agreement dated as of January 10, 1995, between
EXECUTONE Information Systems, Inc. and Compania Dominicana de
Telefonos, C por A (Codetel). Incorporated by reference to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1995 filed on April 15, 1996.
10-17 Manufacturing Services Agreement dated February 9, 1990 between Wong's
Electronics Co., Ltd. and EXECUTONE Information Systems, Inc.
Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1990, as amended by Form 8 filed on
August 20, 1991.
10-19 Warrant to Purchase 25,000 Shares of Common Stock of EXECUTONE
Information Systems, Inc. in favor of Louis K. Adler dated July 29,
1997. Filed herewith.
10-20 Warrant to Purchase 25,000 Shares of Common Stock of the Registrant, in
favor of Jerry M. Seslowe, dated February 1, 1996. Incorporated by
reference to the Registrant's Annual Report on Form 10-K/A for the year
ended December 31, 1996 filed on April 30, 1997.
10-21 Management Agreement for the National Indian Lottery dated January
16,1995. Incorporated by reference to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1995 filed on April 15, 1996.
10-22 Amended and Restated Distributor Agreement dated as of April 1, 1998,
between EXECUTONE Information Systems, Inc. and Claricom, Inc. d/b/a/
Executone Business Solutions (formerly Clarity Telecom, Inc.).
(Confidential portions have been omitted and filed separately with the
Commission pursuant to a request for confidential treatment.) Filed
herewith.
11 Statement regarding computation of per share earnings. Filed herewith.
Please see Note E to the Consolidated Financial Statements in the
Registrant's 1997 Annual Report to Shareholders.
E-3
13 1997 Annual Report to Shareholders of EXECUTONE Information Systems,
Inc. Filed herewith.
21 Subsidiaries of EXECUTONE Information Systems, Inc. Filed herewith.
23.1 Consent of Arthur Andersen LLP. Filed herewith.
23.2 Consent of Hunton & Williams. Filed herewith.
27 Financial Data Schedule. Filed herewith.
E-3