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
For the fiscal year ended December 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-9023
COMDIAL CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 94-2443673
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification Number)
P. O. Box 7266
1180 Seminole Trail; Charlottesville, Virginia 22906-7266
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (804) 978-2200
Securities registered pursuant to Section 12(g) of the Act:
Title of class
COMMON STOCK (Par Value $0.01 each)
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]
Aggregate market value of voting stock held by non-affiliates of the
registrant as of March 14, 1995 was approximately $25,431,000 (see Item 5).
Indicate the number of shares of Common Stock outstanding as of March 14,
1995: 21,116,842.
DOCUMENTS INCORPORATED BY REFERENCE:
Comdial's 1994 Annual Report to the Stockholders is incorporated by reference
under Part II and portions of Comdial's Definitive Proxy Statement for its
1995 Annual Meeting of Stockholders, which will be filed with the Securities
and Exchange Commission within 120 days after December 31, 1994, are
incorporated by reference under Part III of this Form 10-K.
TABLE OF CONTENTS
Part I
Item 1. Business 4
(a) General Development of Business 4
(b) Financial Information About Industry Segment 6
Product Sales Information 6
(c) Narrative Description of Business 7
Products and Services 7
Business Systems 7
Proprietary and Specialty Phones 9
Standard Electromechanical Phones 10
Custom Manufacturing 10
Strategic Alliances 10
Distribution 10
Competition 11
Backlog 11
Research and Development Costs 11
Manufacturing 11
Patents, Trademarks, and Licenses 12
Environment 12
Employees 13
Item 2. Properties 13
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Part II
Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters 14
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 8. Financial Statements and Supplementary Data 14
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 14
Part III
Item 10. Directors and Executive Officers of the Registrant 15
Item 11. Executive Compensation 15
Item 12. Security Ownership of Certain Beneficial Owners and
Management 15
Item 13. Certain Relationships and Related Transactions 15
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 16
PART I
ITEM 1. Business
(a) GENERAL DEVELOPMENT OF BUSINESS
Comdial Corporation ("Comdial") is a Delaware corporation based in
Charlottesville, Virginia. Comdial is engaged in the design, development,
manufacture, distribution, and sale of advanced telecommunications products
and system solutions. Comdial was originally incorporated in Oregon in 1977.
In 1982, Comdial reincorporated in Delaware, and acquired substantially all
of the assets, and assumed substantially all of the liabilities, of General
Dynamics Telephone Systems Center, Inc., formerly known as Stromberg-Carlson
Telephone Systems, Inc. ("Stromberg-Carlson"), a wholly-owned subsidiary of
General Dynamics Corporation. Stromberg-Carlson's facilities, located in
Charlottesville, Virginia since 1955, had engaged in the manufacture of
telephones since 1894.
Comdial's core business is designing, manufacturing, and marketing a
broad line of voice communications systems to small and medium sized
organizations. These products are sold through a network of approximately
700 Preferred Dealers, 700 Associate Dealers, and several thousand
independent interconnects and contractors, who purchase Comdial products from
authorized wholesale distributors. End users served through this channel are
typically small businesses (under 100 employees), but may also include large
businesses, government agencies and such as universities who are served by a
host PBX or telephone company supplied Centrex system. When a Comdial system
is installed behind the host system, and it is commonly configured to serve
specific departments or call centers.
In the early 1980's Comdial was known as a manufacturer and supplier of
industry standard and decorative residential telephones. In the mid-1980's,
Comdial redirected its strategic focus to the small business market. In
1992, the industry standard telephone business was sold to International
Telecommunications Asia PTE LTD., a Singapore corporation ("IT Asia"). At
that time, the sales volume of these industry standard telephones was
approximately $12 million.
Since 1993, Comdial has pursued growth opportunities through expansion
into selected international markets, and by becoming an aggressive
participant in the emerging market for system solutions based on computer-
telephony integration ("CTI") technologies. International expansion is
directed by a wholly owned subsidiary, Comdial Telecommunications
International Inc. ("CTii"). The design, development, and marketing of
computer-telephony products is directed by a wholly owned subsidiary, Comdial
Enterprise Systems, Inc. ("CES").
Starting in 1985, Comdial introduced and manufactured its first
electronic key telephone system ("ExecuTech"). In 1986, Comdial introduced
additional models of ExecuTech to broaden market coverage. Between 1987 and
1990, six new models of electronic key systems were introduced. In 1991,
Comdial began shipping DigiTech, its first digital telephone system, and
ExecuMail, its first voice processing system. The latter was a joint
development with Active Voice Corporation. In 1992, Comdial began volume
shipments of the Digital Expandable system ("DXP"), a telephone system which
could be configured as a key system, hybrid key system or private branch
exchange ("PBX"). With the DXP, Comdial could serve businesses requiring up
to 192 telephone ports, or four times the market coverage of the original
DigiTech. In 1993, Comdial commenced shipping Impact digital key telephones.
Impact instruments are stylish and functional, featuring interactive "soft"
keys, which simplify user operation. In addition, they can be used on all
Comdial digital platforms. Digital instruments now comprise nearly half of
annual telephone production. The DXP was the first Comdial telephone system
designed with an Open Application Interface ("OAI").
This OAI link permitted Comdial to become an early participant in CTI.
CTI merges the power of advanced digital telephone systems and computers
to provide integrated solutions to common communications needs (such as call
centers) and specific vertical market applications (such as real estate).
The first turnkey CTI product marketed by Comdial was an enhanced E-911
emergency telephone system. These systems are custom engineered for each
community and a Comdial DXP is at the heart of each system. Sales and
installation of E-911 systems by Comdial began in 1994.
Comdial also introduced three new products in 1994 designed around the
OAI capability of the DXP. The QuickQ Automatic Call Distributor ("ACD")
automatically answers and directs incoming calls, based on a variety of
criteria such as activity level or expertise. Detailed reports assist
management in measuring productivity and scheduling agent coverage. Common
applications are telemarketing, customer service, and credit and collections.
The InnTouch DXP includes software specifically required by hotel/motel
establishments, such as costing customer telephone calls and automatically
placing wake up calls. Tracker is Comdial's name for a premises-based paging
and telecommunications system which assures call completion. Users carry
small pagers which are data linked to Comdial's DXP. The Tracker pagers
alert users to incoming calls, and instruct, via a liquid crystal display,
how to retrieve the call from the nearest telephone. The Tracker system can
also deliver detailed messages over the pager display. The Tracker was the
result of a strategic alliance between Comdial and Motorola, Inc.
During the fourth quarter of 1994, Comdial announced two new products
which extend the power of CTI to local area network ("LAN") environments and
desktop personal computers. Enterprise for Telephony Services is a
documentation and software package for linking Comdial DXPs to Novell NetWare
(trademark of Novell Corporation) local area networks, and is now being
shipped to customers. The other new CTI product is designed for users of
desktop personal computers ("PCs") who are not on a LAN, and are typically
smaller companies. Comdial partnered with Voice Technologies Group to design
a special telephony card which can be installed in PCs using Microsoft
Windows (trademark of Microsoft Corporation) operating systems. This
product will begin shipping during 1995. These two products will enable
users to add off-the-shelf applications software to enhance productivity and
improve customer service using computer enhanced telephony services.
In October of 1994, Comdial was awarded the International Organization for
Standardization ("ISO") 9001 Certification, the highest and most
comprehensive certification of its kind. This was a significant
accomplishment for Comdial in 1994. ISO 9000 is the most recognized series
of Quality Management System standards and is now used in 74 countries. ISO
9001 is the highest level of the standards and includes manufacturing,
customer support, technical service, and product design. The certification
process concluded approximately two years of intensive efforts of analyzing
and documenting quality system procedures and company-wide personnel
training.
Comdial believes the ISO 9001 Certification will help Comdial maintain or
improve its place in the telecommunications and services marketplace, as well
as improve efficiency, productivity, and effectiveness of the business and
possibly give Comdial an important marketing edge in selling its products.
Achieving ISO 9001 Certification demonstrates Comdial's company-wide
commitment to quality.
In marketing its telephone systems, Comdial emphasizes quality backed by
the ISO-9001 certification, state-of-the-art features, competitive pricing,
commitment to customer and dealer support, and a "Made right in the USA"
theme (see Narrative Description of Business; Distribution).
Comdial's telecommunications instruments are registered with the Federal
Communications Commission ("FCC") and an Occupational Safety and Health Act
Commission ("OSHA") approved National Recognized Test Laboratory in the
normal course of Comdial's business. Selected products are also registered
with the Canadian Department of Communications and are Canadian safety
certified. Comdial has, or is in the process of, registering its products in
other countries.
Comdial's Common Stock is traded over-the-counter and is quoted on the
National Association of Security Dealers Automated Quotation System
("Nasdaq") under the symbol: CMDL.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENT
During the fiscal years ended December 31, 1994, 1993 and 1992,
substantially all of Comdial's sales, net income, and identifiable net assets
were attributable to the telecommunications industry. Any additional
information other than sales is incorporated by reference to the Registrant's
1994 Annual Report to Stockholders.
Comdial has restated prior years' sales to conform with the 1994
presentation. Comdial is currently reporting sales as a net number after
deductions for volume discounts, returns, and allowances. Comdial
reclassified for 1994 and comparable prior periods, freight expense and the
cost of certain promotional programs resulting in a reduction in sales and
increases in cost of sales, and selling, general and administrative expense,
respectively. Promotional programs include various sales incentive rebates
claimed by dealers and specific end users who buy Comdial's products direct
from distributors. Management considers these reclassifications as more
consistent with the nature of the sales costs incurred and the manner in
which such costs are managed by Comdial. For years 1994, 1993 and 1992,
reclassified freight expense was $552,000, $478,000, and $677,000, and
reclassified promotional program expense was $4,492,000, $3,538,000, and
$4,751,000, respectively. These reclassifications did not have any effect on
net income or stockholders' equity.
Prior to 1994, Comdial formed two subsidiaries, CTii and CES.
Management plans for these subsidiaries to play a major role in the future
growth of Comdial. CTii, incorporated in 1992, was formed to concentrate on
identifying and developing opportunities for international business. As of
December 31, 1994, CTii has established agreements with seventeen
distributors serving twenty-six countries. CTii sales have grown each year
from $378,000 in 1992, to $990,000 in 1993, and to $2,482,000 in 1994.
CES, incorporated in late 1993, focuses on designing, deploying, and
marketing CTI applications and software for the rapidly growing markets for
CTI products and services. Sales in the first year (1994) were $558,000.
Product Sales Information
The following table presents certain relevant information
concerning Comdial's principal product lines for the periods indicated:
Year Ended December 31,
(Millions of Dollars) 1994 1993 1992
Sales
Business Systems $68.0 $61.0 $54.1
Proprietary and Specialty Phones 5.8 6.5 8.3
Standard Electromechanical Phones* - - 6.5
Custom Manufacturing 3.3 1.6 2.0
TOTAL $77.1 $69.1 $70.9
* On July 21, 1992, Comdial sold its standard electromechanical product line
to IT Asia.
(c) NARRATIVE DESCRIPTION OF BUSINESS
Products and Services
Comdial manufactures a full line of telephone sets and systems for the
business and hospitality markets. In 1994, over 88 percent of Comdial's
revenues resulted from the sale of business systems compared with 88 percent
and 76 percent in 1993 and 1992, respectively. Telephone systems consist of
two basic hardware components: a key service unit ("KSU") and telephones. In
addition, voice mail and other peri-pheral products can be added to the
system. The KSU contains the common control intelligence and power supply
required to process calls and to operate all of the system's features.
During 1994, Comdial supplied a variety of business systems, ranging in
capacity from three central office lines and eight stations to a 224 port
system capable of supporting up to 192 stations for business and hospitality
applications.
Business Systems
1. Impact was introduced in November 1992 and is designed to work on Comdial
digital service units ("DSU") and DXP. Impact provides a variety of
features: keys which are interactive with a liquid crystal display
("LCD"), three color LED status indicators, and subdued off hook voice
announce for receiving intercom calls while on a phone call. These
features, along with others, make the telephone easier to use.
2. DXP began shipping in 1992, and allows Comdial and its dealers to
target larger end users while using the same telephones as Comdial's
smaller systems. This provides customers with an affordable system
which can be up-graded to support up to 192 business telephones.
The DXP has more features than the smaller systems, such as
automatic route selection and a an optional PC-based attendant
position. The DXP, sold to Comdial dealers and telephone companies
through supply houses, also offers a link to CTI using the
Enterprise software package. This allows external PC-based software
packages to manage the DXP for any number of specialized
applications.
3. InnTouch DXP is a digital telephone system designed for hospitality
applications. The system consists of a DXP common control unit,
Impact model multil-line administration phones, single line guest
phones, and special hospitality software. The guest phones may be
industry standard message waiting models or Comdial's own
HoTelephones. HoTelephones provide added functionality including
programmable keys and an auxiliary jack for modem connection.
Standard system features include check-in/check-out, automatic
wake-up calls, message waiting indication, call costing, maid
status, and many other valuable hotel management features. The
optional InnTouch processing monitor is linked to the DXP via
Comdial's proprietary Enterprise CTI link, and provides full screen
display of room, telephone, and maid status. InnTouch serves hotel
properties requiring up to 192 telephones. InnTouch was designed in
partnership with an independent software developer.
4. DigiTech systems are digital KSU's and telephones designed for the
business market with up to 48 stations. DigiTech offers automatic
set relocation, remote programming, a replaceable software
cartridge, and other sophisticated features. DigiTech was
introduced in January 1991 and is sold to telecommunication dealers
through supply houses.
5. Enterprise is an OAI software tool kit used with the DXP system.
Enterprise allows software developers to access the DXP system
software using more than 100 commands to create unique applications
for specific vertical markets, such as telemarketing groups,
emergency services, call centers, taxi services, and multimedia
centers. One of the initial OAI applications developed using
Enterprise is an Enhanced 911 ("E911") emergency telephone system,
developed by 911 Systems, Inc., of Perry, Florida. In addition, CES
plans to utilize Enterprise to support Novell's Telephony Services
Application Programming Interface for NetWare. This is a platform
for the development of applications, based upon the merging of
computer and telephony technologies.
6. ExecuMail is an integrated voice processing system for use with
selected Comdial telephone systems. ExecuMail is offered in a range
of port and voice storage capacities, and provides both voice mail
and automated attendant service.
7. Unisyn is an electronic key system designed to offer advanced
features to small organizations. Two models are offered, a three
line/eight telephone version and a six line/sixteen telephone
version. Display model telephones offer interactive "soft" keys to
simplify feature access. Another capability of Unisyn is its
optional compatibility with standard interface analog devices, such
as single line telephones, fax machines, and modems.
8. QuickQ ACD is a digital telephone system designed for call center
use. The system consists of a DXP common control unit, Impact model
telephones, voice announcing equipment, special ACD software, and a
personal computer. The QuickQ answers and distributes incoming
calls rapidly and efficiently, helping to assure maximum call center
productivity and superior customer response levels. Up to 96
reports are provided, detailing call volume and call center
performance. The QuickQ ACD has a maximum capacity of 64 outside
lines and 48 agents. Like the InnTouch DXP, the QuickQ is a product
of computer/telephony integration, based on Comdial's Enterprise
link to the DXP operating system. QuickQ was designed in
partnership with an independent software developer.
9. E911 Systems are specially engineered telephone systems for handling
emergency (911) telephone calls. Comdial's systems deliver valuable
information to call takers, such as the street address and profile
of the emergency caller. Operators can swiftly dispatch help to the
correct address, and provide the information needed to respond
appropriately to the situation. All calls are recorded for future
reference, and operators can handle multiple calls without losing
valuable information. Comdial's E911 makes extensive use of
computer-telephony integration. Comdial, through CES, contracts
with municipal authorities for the purchase of the equipment. Local
dealers assist with installation and provide ongoing maintenance
support.
10. Scout is Comdial's first wireless key system telephone. Scout
telephones can be installed on DXP and DSU digital telephone
systems. These instruments allow users to roam freely within their
business environments, and still receive or place calls. Scout is a
digital phone, using 900 MHz spread-spectrum technology. This helps
assure clear and secure communications. Scout phones offer
virtually all of the features of Impact desk phones, including a
liquid crystal display, multiline access, programmable keys,
intercom, and head-set convenience. The instrument weighs only 8.5
ounces. Scout was developed in partnership with Uniden America
Corporation ("Uniden") a major supplier of wireless communications
products.
11. Tracker is a premises-based call completion system. The purpose of
the product is to help assure that calls are quickly and efficiently
completed to individuals who are at work, but not always by their
phones. Tracker consists of a Comdial digital telephone system, a
Tracker base station, and personal pagers equipped with an LCD. The
personal pagers sound an alert or vibrate to notify users of
incoming calls or important messages. A user can retrieve calls by
going to the nearest Comdial Impact and dialing a special code,
which is displayed on the LCD. A valuable feature of Tracker is its
integration with related Comdial products. Tracker was developed in
cooperation with Motorola, Inc.
12. ExecuTech 2000 Unitized Expandable Hybrid Systems include KSU's with
capacities of 612 (six lines/12 stations), 820, and 1632. Expansion
modules allow users to increase capacity in increments of four lines
and 12 phones or by 16 phones with no additional lines. These
systems provide subdued off-hook voice announce, built-in battery
backup interface, integrated call costing, and many other features.
13. ExecuTech XE Key Systems include the 308 (three lines/eight
stations), 616, and 1024 models with all systems supporting the same
family of full-featured telephones. The KSU is unitized, which
makes the ExecuTech XE system economical to manufacture, easy to
install, and beneficial to end users who do not have to buy
additional components or "extras" to add features.
14. ExecuTech II Hybrid products consist of models 1432 (14 lines/32
stations), 2232, 2264, and 2296. This line of systems supports
economical ExecuTech single-line telephones and a variety of
multi-line terminals including an LCD model.
15. InnTouch KSU Systems include four hospitality systems, which have a
built-in capacity for 22 lines and 32, 64, 96, or 128 telephones.
These systems feature a front desk video display terminal,
integrated call costing, and multi-featured room phones.
16. Solo II small business systems provide full featured key system
service, including intercom, without the use of a KSU. The Solo II
is offered in three and four line models and provides a
sophisticated set of features which are easy to program and are cost
effective.
Proprietary and Specialty Phones
1. HoTelephone comes in a variety of models. In 1990, Comdial added
models with programmable soft keys and the "Take II" model which
simulates two line service. Specially designed for business
travelers, the HoTelephone for motel/hotel guest rooms offers memory
keys for one-button dialing of various services, plus a message
waiting lamp, hold button, and built-in data jack for connecting
portable computers and fax machines.
2. Voice Express is a fully featured multi-function display telephone
with integrated speaker-phone/autodial and many standard features
for use behind Centrex or PBX. Voice Express may be optionally
equipped with a two line module or the user can add special six and
ten button modules for use as electromechanical 1A2 key telephone
equipment.
3. MaxPlus desk/wall convertible telephones range from a basic model
with message waiting to a fully featured speakerphone model with
programmable soft keys for often-used PBX and Centrex features.
4. MaxPlus II two line telephones offer line status indicators,
electronic hold, dataport as a basic feature, and additional models
with features such as message waiting, tap, a speakerphone, and
programmable soft keys.
Standard Electromechanical Phones
Before July 21, 1992, Comdial manufactured standard electromechanical
telephones which included the standard desk and wall telephones, standard
desk telephones with tap, and electromechanical 1A2 key telephones. In July
of 1992, Comdial sold this product line to IT Asia.
Custom Manufacturing
Custom manufacturing consists primarily of contract work performed for
various original equipment manufacturers.
Strategic Alliances
During 1993 and 1994, Comdial entered into several strategic alliances
with other manufacturers such as Motorola, Inc. and Uniden. These
manufacturers have developed products (1) for specific markets or (2) when
combined with existing Comdial products provide increased capabilities that
will enhance Comdial's position among its competitors.
Distribution
Comdial sells its products primarily through distributors who warehouse
and distribute a wide range of telecommunication products to dealers,
interconnects, telephone companies, and large end users. During 1994, ALLTEL
Supply, Inc. a subsidiary of ALLTEL Corporation, a shareholder of Comdial,
Graybar Electric Company, Inc., and North Supply Company, Inc. a subsidiary
of Sprint, each accounted for more than ten percent of Comdial's sales. In
the aggregate, these three customers accounted for approximately 78 percent
of Comdial's sales. For 1994, sales to ALLTEL, Graybar, and North Supply
amounted to approximately $12,370,000 or 16 percent, $31,298,000 or 41
percent, and $16,305,000 or 21 percent, respectively.
Comdial also sells its products directly to manufacturers of PBX
equipment, the U.S. Government, international distributors, the Regional Bell
Operating companies ("RBOCs"), and other major independent telephone
companies.
Competition
Approximately 25 companies compete with Comdial for a share of the
business communications market of telephone systems serving 200 or fewer
telephones. The top ten competitors have approximately 85 percent of the
market with Comdial's share at approximately seven percent. Comdial is one
of two United States based key system manufacturers. In marketing its
telephone systems, Comdial emphasizes quality (ISO 9001 certification), high
tech features, commitment to the customer, price effectiveness, dealer
support, and a "Made right in the USA" theme.
Comdial is price competitive in the marketplace. A major factor that
confronts Comdial is the rapidly changing technology in the communications
industry.
Backlog
Comdial's sales are made under short-term sales orders issued by customers
on a month-to-month basis, rather than under long-term supply contracts.
Consequently, backlog is not material to an understanding of Comdial's
business.
Research and Development Costs
Engineering, research, and development costs ("engineering") consist of
research and development costs less capitalized software development costs,
and sustaining engineering cost. Research and development make up the
majority of the engineering cost. Early in 1993, management changed the
engineering effort to provide responsibility for a product throughout its
entire life cycle. This requires engineers to be multi-tasked; and, as a
result, it is impractical to segregate the various elements of their efforts.
Some of the research and development costs associated with the development of
product software have been capitalized as they were incurred. The accounting
for such software capitalization is in accordance with the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 86. The amounts
capitalized in 1994, 1993, and 1992 were $717,000, $721,000, and $829,000,
respectively. The amounts amortized for software development cost in 1994,
1993, and 1992 were approximately $858,000, $705,000, and $591,000,
respectively. Comdial is committed to improving its existing products and
developing new telecommunications equipment in order to maintain or increase
its market share.
Manufacturing
Comdial's manufacturing process is vertically integrated. Comdial has
invested heavily in advanced automated assembly and test equipment. Computer
controlled sequencing machines, programmed from data generated by CAD/CAM
computers, automatically arrange electronic components on tape reels. These
reels are then loaded onto automated insertion machines, which insert the
electronic components into predrilled printed wire boards ("PWB"), performing
thousands of insertions per hour. Starting in 1991, Comdial made further
productivity improvements by employing surface mount technology ("SMT") in
the production of PWBs. Comdial has made significant investments in 1992
through 1994 expanding SMT productivity. Components designed for SMT
production are smaller which allows placement of more components in the same
surface area. In addition, the components are placed on the surface rather
than through the surface which allows placement of components on both sides
of the PWB. In most cases, this reduces the required number of PWB's and
connectors thereby providing (1) a major improvement in quality and product
reliability, (2) a reduction in product cost, and (3) an improvement in
profit margins.
Comdial also manufactures injection molded plastic parts, fabricated
metal parts, and other devices. Comdial employees assemble completed
PWB's, components, plastics, and other purchased or manufactured
subassemblies into completed products.
Comdial is dedicated to customer satisfaction. Comdial has taken this one
step further in 1994 by receiving the ISO 9001 certification which
exemplifies Comdial's dedication to excellence. This is accomplished by
manufacturing quality products and backing them with professional technicians
who provide customer support and service. Quality starts with superior
design, quality materials, and monitoring of the production process.
Individual assemblers and machine operators are trained to inspect
subassemblies as the work passes through their respective areas. In
addition, some automated production machines perform quality tests
concurrently with assembly operations. Comdial believes that this high level
of automation and vertical integration improves quality, cost, and customer
satisfaction.
Patents, Trademarks, and Licenses
Comdial owns patents and trademarks in connection with its telephone
equipment. Comdial believes that its success will not depend upon ownership
of patents or trademarks, but rather on the experience and creative skills of
its technical and management personnel.
Environment
Comdial's facilities are subject to a variety of federal, state, and local
environmental protection laws and regulations, including provisions relating
to the discharge of materials into the environment. The cost of compliance
with such laws and regulations has not had a material adverse affect upon
Comdial's capital expenditures, earnings or competitive position, and it is
not anticipated to have a material adverse effect in the future.
In 1988, Comdial voluntarily terminated the use of a concrete underground
storage tank for draining hydraulic oil and chlorinated solvents from machine
parts, and removed the pit. The consulting engineers engaged by Comdial
prepared an environmental site characterization report showing hydraulic oil
and chlorinated solvents contamination of the soil, and hydraulic oil
contamination of the groundwater. The soil was not tested for chlorinated
solvents. In a subsequent test, some chlorinated solvents were detected in
the ground water. A remediation plan was recommended to Comdial, which was
approved by the State of Virginia Water Control Board on January 31, 1989.
The remediation plan was expected to extend for approximately ten years.
Comdial believes that it has been, and is now, in compliance with the
approved 1989 remediation plan.
In November 1993, Comdial engaged Froehling and Robertson, Inc. ("F & R"),
an environmental engineering firm, to collect additional samples of soil and
groundwater for assessing the effect of the hydraulic oil remediation plan,
and to determine whether the chlorinated solvents had dissipated. Comdial
also requested the State of Virginia Department of Environmental Quality
("DEQ") to review the site characterization plan report for adequacy under
current environmental regulations. As a result, DEQ sent Comdial a letter on
November 30, 1993, citing certain deficiencies and requesting a site
characterization report addendum and a corrective action plan. On January
14, 1994, Comdial submitted a corrective action plan to the DEQ, which was
approved by the DEQ on July 8, 1994. F & R has advised Comdial that the cost
estimate for the remediation strategy proposed in the corrective action plan
is approximately $35,000 to $45,000. In 1993, Comdial provided a reserve in
the amount of $45,000 to cover such cost.
In October 1994, Comdial installed all the required equipment in
accordance with the remediation plan and has started the process of pumping
hydraulic oil residue from the underground water. The oil will be deposited
into approved containers and taken to a hazardous waste site in accordance
with the corrective action plan.
Employees
At December 31, 1994, Comdial had 795 full-time employees, of which 592
were engaged in manufacturing, 54 in engineering, 99 in sales, and 50 in
general management and administration. None of Comdial's employees are
represented by a labor union. Comdial has experienced no work stoppages and
believes that its employee relations are satisfactory.
ITEM 2. Properties
Comdial designs, manufactures, and markets all of its products from a
modern, fully-integrated 500,000 square foot manufacturing facility on a 25
acre site located in Charlottesville, Virginia. All of Comdial's operations
and development efforts are located at the Charlottesville facility, which
Comdial owns. Comdial believes that its facilities are adequate for the
operation of its business as presently conducted.
ITEM 3. Legal Proceedings
Comdial is from time to time involved in routine litigation. Comdial
believes that none of the litigation in which it is currently involved is
material to its financial condition or results of operations.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matter was submitted during the fourth quarter of 1994 to a vote of
Comdial's security holders.
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
Information is incorporated by reference to page 40 of the Registrant's
1994 Annual Report to stockholders under the caption "Related Stockholder
Matters". As of March 14, 1995 there were 2,140 record holders of Comdial's
Common Stock.
ITEM 6. Selected Financial Data.
Information is incorporated by reference to page 39 of the Registrant's
1994 Annual Report to stockholders under the caption "Five Year Financial
Data".
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Information is incorporated by reference to pages 18 through 21 of the
Registrant's 1994 Annual Report to stockholders under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
ITEM 8. Financial Statements and Supplementary Data.
Information is incorporated by reference to pages 23 through 38 of the
Registrant's 1994 Annual Report to stockholders or filed with this Report as
listed in Item 14 hereof.
ITEM 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
No information is required to be reported pursuant to this item.
Part III
ITEM 10. Directors and Executive Officers of the Registrant.
Information concerning Directors and Executive Officers of the Registrant
is incorporated by reference under the caption "Election of Directors" and
"Executive Officers of Comdial" on pages 6 through 8 and 11 through 12 of
Comdial's definitive proxy statement for the annual meeting of stockholders
to be held on April 27, 1995.
ITEM 11. Executive Compensation.
Executive compensation and management transactions information is
incorporated by reference under the caption "Executive Compensation" on pages
13 through 21 of Comdial's definitive proxy statement for the annual meeting
of stockholders to be held on April 27, 1995.
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management.
Information is incorporated by reference under the captions "Security
Ownership of Certain Beneficial Owners and Management" on pages 3 through 5
of Comdial's definitive proxy statement for the annual meeting of
stockholders to be held on April 27, 1995.
ITEM 13. Certain Relationships and Related Transactions.
Information is incorporated by reference under the caption "Family
Relationships", "Indebtedness of Management" and "Certain Relationships and
Related Transactions" on pages 20 through 21 and 21 through 22 of Comdial's
definitive proxy statement for the annual meeting of stockholders to be held
on April 27, 1995.
Part IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) The following consolidated financial statements of Comdial Corporation
and Subsidiaries are incorporated in Part II, Item 8 by reference to the
Comdial 1994 Annual Report to stockholders (page references are to page
numbers in Comdial's Annual Report):
Page
Independent Auditors' Report 22
Report of Management 22
Financial Statements:
Consolidated Balance Sheets -
December 31, 1994 and 1993 23
Consolidated Statements of Operations-
Years ended December 31, 1994, 1993, and 1992 24
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1994, 1993, and 1992 25
Consolidated Statements of Cash Flows-
Years ended December 31, 1994, 1993, and 1992 26
Notes to Consolidated Financial Statements-
Years ended December 31, 1994, 1993, and 1992 27-38
2. Financial Statements - Supplemental Schedules:
All of the schedules are omitted because they are not applicable,
not required, or because the required information is included in the
consolidated financial statements or notes.
3. Exhibits Included herein:
(3) Articles of Incorporation and bylaws:
3.1 Certificate of Incorporation of Comdial Corporation
(Exhibits (a) 3 to Item 6 of Registrant's Quarterly Report
on Form 10-Q for the period ended July 1, 1988.)*
3.2 Certificate of Amendment to the Certificate of
Incorporation of Comdial Corporation as filed with the
Secretary of State of the State of Delaware on February 1,
1994. (Exhibit 3.2 to Registrant's Form 10-K for the year
ended December 31, 1993.)*
3.3 Bylaws of Comdial Corporation. (Exhibit 3.3 to Registrant's
Form 10-K for the year ended December 31, 1993.)*
(10) Material contracts:
10.1 Registrant's 1979 Long Term Incentive Plan and 1982
Incentive Plan. (Exhibits 4(a) and 4(b) of Registrant's
Form S-8 dated February 7, 1984.)*
10.2 Registrant's 1992 Stock Incentive Plan and 1992
Non-employee Directors Stock Incentive Plan. (Exhibits
28.1 and 28.2 of Registrant's Form S-8 dated October 21,
1992.)
10.3 Agreement dated February 20, 1990 among Registrant and
Estech Systems Inc. (Exhibit 10.11 to Registrant's Form
10-K for the year ended December 31, 1990.)*
10.4 Loan Restructuring dated October 31, 1991 among Registrant
and Inner PacifiCorp, Inc. (Exhibit 4.1 to Registrant's
Form 10-Q for the quarter ended September 27, 1991.)*
10.5 Stock Purchase Warrant dated November 1, 1991 among
Registrant and Inner PacifiCorp, Inc. (Exhibit 4.2 to
Registrant's Form 10-Q for the quarter ended September 27,
1991.)*
10.6 Amendment No. 1 to the Loan Restructuring Agreement dated
July 31, 1992 among Registrant and PacifiCorp Holdings,
Inc. (Exhibit 10.8 to Registrant's Form 10-K for the year
ended December 31, 1992.)*
10.7 Asset Purchase Agreement dated July 21, 1992 among the
Registrant and International Telecommunication Asia PTE.
LTD. (Exhibit 10.9 to Registrant's Form 10-K for the year
ended December 31, 1992.)*
10.8 Amendment No. 2 to the Loan Restructuring Agreement dated
April 1, 1993 among Registrant and PacifiCorp Holdings,
Inc. (Exhibit 10.1 to Registrant's Form 10-Q for the
period ended March 28, 1993.)*
10.9 Amendment No. 3 to the Loan Restructuring Agreement dated
August 6, 1993 among Registrant and PacifiCorp Holdings,
Inc. (Exhibit 10.1 to Registrant's Form 10-Q for the
period ended September 26, 1993.)*
10.10 Modification Agreement dated August 23, 1993 among the
Registrant and Cortelco International, Inc. (Exhibit 10.2
to Registrant's Form 10-Q for the period ended September
26, 1993.)*
10.11 Amendment No. 4 to the Loan Restructuring Agreement dated
October 31, 1993 among Registrant and PacifiCorp Holdings,
Inc. (Exhibit 10.12 to Registrant's Form 10-K for the year
ended December 31, 1993.)*
10.12 Loan And Security Agreement dated February 1, 1994 among
Registrant and Barclays Business Credit, Inc. (Exhibit
10.13 to Registrant's Form 10-K for the year ended
December 31, 1993.)*
10.13 Equity Agreement dated December 23, 1993 among Registrant
and PacifiCorp Credit, Inc. (Exhibit 10.14 to Registrant's
Form 10-K for the year ended December 31, 1993.)*
10.14 Warrant Exchange Agreement dated October 31, 1991 among
Registrant and Inner PacifiCorp, Inc. (Exhibit 10.15 to
Registrant's Form 10-K for the year ended December 31,
1993.)*
10.15 Development Agreement dated December 2, 1993 among
Registrant and Motorola Inc. (Exhibit 10.16 to
Registrant's Form 10-K for the year ended December 31,
1993.)*
10.16 Stock Purchase Agreement dated April 2, 1985 among
Registrant and ALLTEL Corporation. (Exhibit 10.17 to
Registrant's Form 10-K for the year ended December 31,
1993.)*
10.17 Amendment No. 1 to the Loan And Security Agreement dated
April 29, 1994 among the Registrant and Barclays Business
Credit, Inc. (Exhibit 10.1 to Registrant's Form 10-Q for
the quarter ended April 3, 1994.)*
(11) Schedule of Computation of Earnings Per Common Share. (See page 20.)
(13) Registrant's 1994 Annual Report to Stockholders. (see pages 21
through 45.)
(21) Subsidiaries of the Registrant.
The following are the subsidiaries of the Registrant and all are
incorporated in the state of Delaware.
American Phone Centers, Inc.
American Telecommunications Corporation
Comdial Business Communications Corporation
Comdial Consumer Communications Corporation
Comdial Enterprise Systems, Inc.
Comdial Telecommunications, Inc.
Comdial Telecommunications International, Inc.
Scott Technologies Corporation
(23) Independent Auditors' Consent. (See page 46.)
Accountants consent to the incorporation by reference of the
consolidated financial statements, notes, and schedules
thereto for the year ended December 31, 1994, and Comdial's
Form S-8 dated February 7, 1984.
(24) Power of Attorney. (See pages 47 through 50.)
(27) Financial Data Schedule. (See page 51.)
(b) Reports on Form 8-K:
The Registrant has not filed any reports on Form 8-K during the last
quarter of 1994.
* Incorporated by reference herein.
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 on the 27th day
of March, 1995.
COMDIAL CORPORATION
By: /s/ William G. Mustain
William G. Mustain
President and
Chief Executive Officer
Pursuant to the requirements of the Securities 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.
Signature Title Date
* Director March 28, 1995
A. M. Gleason
* Director March 28, 1995
William E. Porter
* Director March 28, 1995
John W. Rosenblum
* Director March 28, 1995
Dianne C. Walker
/s/ William G. Mustain President, Director, and March 28, 1995
William G. Mustain Chief Executive Officer
/s/ Wayne R. Wilver Senior Vice President,
Wayne R. Wilver Chief Financial Officer,
Treasurer, and Secretary
* By: /s/ Wayne R. Wilver
Wayne R. Wilver, Attorney-In-Fact
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion is intended to assist the reader in
understanding and evaluating the financial condition and results of
operations of the Company. This review should be read in conjunction with
the financial statements and accompanying notes. This analysis attempts to
identify trends and material changes which occurred during the periods
presented. Prior years have been reclassified to conform to the 1994
reporting basis (see Note 1: Reclassification to the Consolidated
Financial Statements).
RESULTS OF OPERATIONS
Selected consolidated statements of operations data for the last three
years are as follows:
December 31,
In thousands 1994 1993 1992
Net sales: (1)
As reported $77,145 $69,099 $70,897
Current product lines (2) 77,145 69,099 64,423
Gross profit (1) 24,406 21,313 20,360
Operating expenses (1) 18,739 15,928 17,288
Other expense (income) 1,937 2,840 2,175
Extraordinary item, write-off
of debt issuance cost 389 - -
Income tax expense 116 129 13
Net income 3,225 2,416 884
(1) Numbers for prior years have been restated to conform to 1994 basis.
(2) Excludes sales of electromechanical product line.
1994 Compared with 1993
For 1994 the Company reported net income before income tax expense and
extraordinary items of $3,730,000 compared with $2,545,000 for 1993. The
profit for 1994 is primarily attributable to (1) a stronger economy, (2)
the increase in sales of business systems that have a higher profit margin,
(3) the restructuring of the Company's indebtedness in February 1994, and
(4) the continuing implementation of production and expense controls.
Net sales as reported for 1994 compared with last year increased by 12%,
or $8,046,000. This increase was primarily due to the increase in sales of
business system products of $6,974,000, or 11%, that have a higher margin.
The continual increase in business systems is primarily due to the demand
for the Company's newer digital product, Digital Expandable Systems ("DXP")
and Impact. Custom manufacturing also increased by $1,797,000 or 214% when
compared with 1993. Sales of the proprietary stand-alone terminals
decreased by $725,000, or 11% when compared with 1993. Management expects
sales of business systems to continue to grow in 1995, primarily due to the
development of new products, strategic alliances, and the development of
additional international distribution channels. The Company's penetration
into the international marketplace has been, and is expected to continue,
to be a deliberate process, but as the Company's quality, high-tech
products gain more exposure, sales will increase. Management feels that
custom manufacturing sales will increase by offering other companies the
ability to have their products manufactured by an efficient and technology
advanced USA manufacturer. Sales of the proprietary stand-alone terminals
will continue to decline primarily due to competition and newer product
technology.
Gross profit as a percentage of sales for 1994 was approximately 32%
compared with 31% for 1993. The gross profit increased in 1994 by
$3,093,000, or 15% compared with 1993. This was primarily attributable to
the increased sales of higher margin business system products, such as the
DXP and Impact products.
Operating expense increased in 1994 by $2,811,000, or 18%. The primary
reasons for the increase were higher promotional costs, additional
investment in sales and engineering activities, and the emphasis on market
exposure through advertising. Because of the Company's commitment to
expand and introduce new technological products, the Company formed Comdial
Enterprise Systems, Inc. ("CES"). CES was formed to manage the Company's
computer-telephony integration business; costs relating to that segment of
the business were higher by $546,000.
Other expense (income) decreased by $903,000, or 32% primarily due to the
reduction in interest expense of $1,153,000. Interest expense was
primarily affected by the restructuring of the Company's indebtedness in
February 1994.
Extraordinary item represents write-off of prior debt issuance costs
during the first quarter for debt restructuring in connection with the
refinancing of the Company's indebtedness to PacifiCorp Credit, Inc.
("PCI"), an affiliate of the Company.
Dividends on preferred stock represent quarterly dividends payable to the
holder of Series A 7 1/2% Cumulative Convertible Redeemable Preferred Stock
("Series A Preferred Stock"). The Company issued 850,000 shares of Series
A Preferred Stock to PCI on February 1, 1994, in exchange for the
cancellation of $8,500,000 of the Company's indebtedness to PCI.
1993 Compared with 1992
For 1993, the Company reported net income before income tax expense of
$2,545,000 compared with $897,000 for 1992. The 1992 profit resulted
primarily from the $791,000 gain on the sale of the electromechanical
product line in July 1992 to International Telecommunications Asia PTE.
LTD., a Singapore corporation ("IT Asia"), an affiliate of Cortelco USA.
The profit for 1993 is primarily attributable to (1) the increase in
current product line sales of $6,925,000, or 13%, (2) favorable product
mix, and (3) continuing expense control.
Net sales as reported compared with last year decreased by less than 1%,
or $1,798,000 in 1993. This decrease was primarily due to the sale of the
electromechanical product line which accounted for $6,475,000, or 9% of
1992 sales. Sales of the proprietary stand-alone terminals also decreased
compared with 1992 by $1,809,000, or 22%. This was offset by increased
sales of business system products of $6,926,000, or 13%, which have a
higher margin. This increase was primarily due to the introduction of the
Company's new Impact product in the fourth quarter of 1992.
Gross profit as a percentage of sales for 1993 was approximately 31%
compared with 29% for 1992. The gross profit increased in 1993 by
$953,000, or 5% compared with 1992. This was primarily attributable to the
increased sales of higher margin business system products, such as the
Impact product.
Operating expense decreased in 1993 by $1,360,000, or approximately 8%.
The reduction in operating expense costs is principally due to the
favorable Impact in 1993 of the 1992 reduction in the work force, primarily
in middle management. Because of the Company's commitment to expanding its
international business, costs relating to that segment of the business were
higher by $256,000.
Other expense (income) increased by $665,000, or 31% because 1992
includes the realized net gain of $791,000 from the sale of the
electromechanical product line. Interest expense decreased by $144,000
primarily due to the additional reduction of the Company's indebtedness.
LIQUIDITY AND FINANCIAL SOURCES
Prior to February 1, 1994, the Company was indebted to PacifiCorp
Holdings, Inc. ("PHI"), then known as Inner PacifiCorp, Inc. On December
1, 1993, PHI transferred the entirety of its holdings in the Company to its
wholly-owned subsidiary, PacifiCorp Financial Services, Inc., which in turn
transferred such holdings to its wholly-owned subsidiary PCI. References
herein to PCI shall be deemed to include references to PHI, its predecessor
in interest to the indebtedness of the Company, where such references are
appropriate. (See Note 5 to Consolidated Financial Statements.)
On December 23, 1993, the Company and PCI agreed to the preliminary terms
of an agreement pursuant to which, among other things, PCI agreed to accept
850,000 shares of a newly designated Series A 7-1/2% Cumulative Convertible
Redeemable Preferred Stock of the Company in exchange for the cancellation
of $8,500,000 of the Company's existing indebtedness to PCI. The exchange
was conditioned upon, among other things, payment in full by the Company of
the balance of the indebtedness held by PCI.
At a special meeting held on February 1, 1994, the Stockholders of the
Company approved the exchange and amendments to the Company's Certificate
of Incorporation permitting the issuance of the Series A Preferred Stock.
Immediately following the meeting, the Company and Shawmut Capital
Corporation ("Shawmut") formerly known as Barclays Business Credit, Inc.,
entered into a loan and security agreement ("Loan Agreement") pursuant to
which Shawmut agreed to provide the Company with a $6,000,000 term loan and
a $9,000,000 revolving credit loan facility. The Company's principal
balance of its indebtedness on February 1, 1994 to PCI was $21,209,453,
which was paid by using cash generated from operations of $6,000,000, cash
borrowed from Shawmut of $6,709,453 and the cancellation of the remaining
debt of $8,500,000 with the issuance of Series A Preferred Stock.
The Shawmut term loan of $6,000,000 carries an interest rate 1 1/2% over
Shawmut's prime rate and is payable in 24 equal monthly principal
installments of $125,000, and 23 equal monthly principal installments of
$83,334, with the balance due on February 1, 1998. The Shawmut revolving
credit facility carries an interest rate of 1% over Shawmut's prime rate.
As of February 1, 1994, the Company had borrowed $985,042 under the
revolving credit facility and had approximately $3,401,000 of additional
borrowing capacity (see Note 5 to Consolidated Financial Statements).
The Impact of the recapitalization has improved (1) net income through
lower interest expense, (2) cash flow through lower principal and interest
payments, and (3) the Company's balance sheet through lower term debt and a
higher equity position. The total favorable Impact was to some extent
offset by the dividend payments required on the Series A Preferred Stock.
This arrangement also eliminated the 1996 balloon payment otherwise due
under the existing PCI indebtedness.
The Company's indebtedness to Shawmut is secured by liens on the
Company's accounts receivable, inventories, intangibles, land, and all
other assets. The Loan Agreement with Shawmut also contains certain
financial covenants that relate to specified levels of consolidated
tangible net worth, profitability, debt service ratio, and current ratio.
Among other restrictions, the Loan Agreement limits additional borrowings
and payment of dividends, except for dividend payments to PCI for their
Series A Preferred Stock. At December 31, 1994, the Company was in
compliance with all the covenants.
On April 29, 1994, the Company and Shawmut amended the Loan Agreement to
permit the Company to borrow an additional $1,300,000 under the Term Note
to finance the purchase of additional surface mount technology equipment.
The Company will repay the additional advance in 44 consecutive monthly
payments of $25,000 beginning on June 1, 1994 with the balance due on
February 1, 1998.
In December 1994, the Company purchased from PCI 100,000 shares of Series
A Redeemable Preferred Stock at the same time the Company received the
proceeds of $1,000,000 from Cortelco International Inc. ("Cortelco"), for
the sale of the electromechanical product line in 1992. The following table
sets forth the Company's cash and cash equivalents, current maturities on
debt and working capital at the dates indicated:
December 31,
In thousands 1994 1993 1992
Cash and cash equivalents $1,679 $5,474 $399
Current maturities on debt 2,466 4,252 2,904
Working capital 11,631 14,943 12,404
Cash and cash equivalents is lower by $3,795,000 in 1994 compared with
1993 due primarily to (1) the first quarter 1994 payment of $6,000,000 to
reduce the PCI debt, and (2) the Company currently uses the Shawmut
revolver to fund operations. At December 31, 1994, the revolver was zero
and the Company had additional cash generated by sales. Current maturities
on debt is lower by $1,786,000 primarily due to the restructuring of the
Company's indebtedness. Working capital decreased, primarily due to the
reduction in cash on hand at December 31, 1994.
The Company considers outstanding checks to be a bank overdraft. Under
the Company's current cash management policy, receipts are deposited to
reduce the revolving credit balance and operations are funded by borrowing
from the revolving credit facility. The Company reports the revolving
credit facility activity on a net basis on the Consolidated Statements of
Cash Flows. At December 31, 1994, the revolver balance was zero.
Inventory increased by $2,025,000 primarily due to additional inventory
required to support the higher production line rates for the Impact product
and custom manufacturing. Prepaid expenses and other current assets,
decreased in total by $785,000 due primarily to the payment on the notes
receivable of $1,000,000 from Cortelco for the sale of the electro-
mechanical product line.
Accounts payable increased primarily due to the increased demand on
production to meet existing sales. Current and long-term debt dropped
primarily due to the restructuring of the Company's indebtedness on
February 1, 1994. The required debt payment to Shawmut of $1,824,000 and
capital lease payments of approximately $807,000 for 1995 will be funded by
cash generated from operations. Other accrued current liabilities
increased by $505,000, primarily due to additional accruals relating to
pension costs. Accrued promotional allowances increased primarily due to
the increase in sales to distributors (see Note 12 to Consolidated
Financial Statements).
Capital additions for 1994 amounted to approximately $2,367,000. The
capital additions help provide the Company with new products to introduce
to the marketplace as well as for quality and cost reduction improvements
for existing products. Capital additions for 1994 were provided by funding
from operations, capital leasing, and borrowing from Shawmut. Cash
expenditures for capital additions for 1994, 1993, and 1992 amounted to
$2,116,000, $848,000, and $1,776,000, respectively. Management anticipates
that approximately $3,000,000 will be spent on capital additions during
1995. These additions will help the Company meet its commitment to its
customers by developing new products for the future. The Company plans to
fund all additions through operations and long-term leases.
In November 1992, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 112,
"Employers Accounting for Postemployment Benefits." The Company
implemented this standard in 1994. This standard had no effect on earnings
or financial position primarily due to the Company's policies regarding
postemployment benefits.
During the fiscal years ended 1994, 1993, and 1992, all of the Company's
sales, net income, and identifiable net assets were attributable to the
telecommunications industry.
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
Comdial Corporation
Charlottesville, Virginia
We have audited the accompanying consolidated balance sheets of Comdial
Corporation and subsidiaries as of December 31, 1994 and 1993, and the
related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31,
1994. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Comdial Corporation and
subsidiaries at December 31, 1994 and 1993, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1994, in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Richmond, Virginia
January 30, 1995
<PAGE>
REPORT OF MANAGEMENT
Comdial Corporation's management is responsible for the integrity and
objectivity of all financial data included in this Annual Report. The
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles. Such principles are consistent
in all material respects with accounting principles prescribed by the
various regulatory commissions. The financial data includes amounts that
are based on the best estimates and judgments of management.
The Company maintains an accounting system and related internal
accounting controls designed to provide reasonable assurance that assets
are safeguarded against loss or unauthorized use and that the financial
records are adequate and can be relied upon to produce financial statements
in accordance with generally accepted accounting principles. Deloitte &
Touche LLP, Certified Public Accountants ("Independent Auditors"), have
audited these consolidated financial statements, and have expressed herein
their unqualified opinion.
The Company diligently strives to select qualified managers, provide
appropriate division of responsibility, and assure that its policies and
standards are understood throughout the organization. The Company's Code
of Conduct serves as a guide for all employees with respect to business
conduct and conflicts of interest.
The Audit Committee of the Board of Directors, comprised of Directors
who are not employees, meets periodically with management and the
Independent Auditors to review matters relating to the Company's annual
financial statements, internal accounting controls, and other accounting
services provided by the Independent Auditors.
William G. Mustain Wayne R. Wilver
President and Senior Vice President and
Chief Executive Officer Chief Financial Officer
<PAGE>
<TABLE>
Consolidated Balance Sheets
December 31,
In thousands except par value 1994 1993
<S>
Assets
Current assets <C> <C>
Cash and cash equivalents $1,679 $5,474
Accounts receivable - net 6,637 6,184
Inventories 16,869 14,844
Prepaid expenses and other current assets 1,014 1,799
Total current assets 26,199 28,301
Property - net 13,668 14,187
Other assets 2,393 2,315
Total assets $42,260 $44,803
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $6,977 $5,059
Accrued payroll and related expenses 1,373 1,222
Accrued promotional allowances 1,592 1,170
Other accrued liabilities 2,160 1,655
Current maturities of debt 2,466 4,252
Total current liabilities 14,568 13,358
Long-term debt 4,737 18,943
Long-term employee benefit obligations 1,912 1,700
Other long-term liabilities 0 52
Commitments and contingent liabilities (see Note 13)
Total liabilities 21,217 34,053
Stockholders' equity
Series A 7-1/2% preferred stock ($10.00 par value), (Authorized
shares 2,000; issued 750 shares) 7,500 0
Common stock ($0.01 par value) and paid-in capital (Authorized
30,000 shares; issued shares: 1994 = 20,953; 1993 = 20,577) 100,320 100,047
Other (942) (814)
Accumulated deficit (85,835) (88,483)
Total stockholders' equity 21,043 10,750
Total liabilities and stockholders' equity $42,260 $44,803
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
Consolidated Statements of Operations
Years Ended December 31,
In thousands except per share amounts 1994 1993 1992
<S> <C> <C> <C>
Net sales $77,145 $69,099 $70,897
Cost of goods sold 52,739 47,786 50,537
Gross profit 24,406 21,313 20,360
Operating expenses
Selling, general & administrative 14,807 12,504 13,504
Engineering, research & development 3,932 3,424 3,784
Operating income 5,667 5,385 3,072
Other expense (income)
Interest expense 1,267 2,420 2,564
Miscellaneous expense 670 420 402
Gain on the sale of product line 0 0 (791)
Income before income taxes and extraordinary item 3,730 2,545 897
Income tax expense 116 129 13
Income before extraordinary item 3,614 2,416 884
Extraordinary item, write-off of debt issuance cost 389 0 0
Net income 3,225 2,416 884
Dividends on preferred stock 577 0 0
Net income applicable to common stock $2,648 $2,416 $884
Earnings per common share and common
equivalent share:
Primary:
Income before extraordinary item $0.14 $0.12 $0.04
Extraordinary item (0.02) 0.00 0.00
Net income per common share $0.12 $0.12 $0.04
Fully diluted $0.12 $0.11 $0.04
Weighted average common shares outstanding:
Primary 21,706 20,817 20,225
Fully diluted 21,706 21,486 20,225
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
Consolidated Statements of Stockholders' Equity
Notes
Receivable
Common Stock Preferred Stock Paid-in Treasury Stock on Sale Retained
In thousands Shares Amount Shares Amount Capital Shares Amount of Stock Earnings Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1992 18,055 $181 0.00 $0 $99,151 (150) ($583) ($623) ($91,783) $6,343
Proceeds from sale of
Common Stock:
Incentive plans (36) (36)
Notes receivable 4 4
Reclassification of notes receivable 316 316
Net Income 884 884
Balance at December 31, 1992 18,055 181 0 0 99,115 (150) (583) (303) (90,899) 7,511
Proceeds from sale of
Common Stock:
Incentive plans (20) (20)
Notes receivable 74 74
Stock options exercised 133 1 95 96
Warrants exercised 2,500 25 620 645
Incentive stock issued 40 30 30
Treasury stock purchased (1) (2) (2)
Net income 2,416 2,416
Balance at December 31, 1993 20,728 207 0 0 99,840 (151) (585) (229) (88,483) 10,750
Proceeds from sale of
Common Stock:
Notes receivable (146) 47 (99)
Stock options exercised 439 4 285 289
Incentive stock issued 40 130 130
Preferred stock issued 850 8,500 8,500
Redeemed preferred stock (100) (1,000) (1,000)
Treasury stock purchased (103) (175) (175)
Dividend paid on preferred stock (577) (577)
Net income 3,225 3,225
Balance at December 31, 1994 21,207 $211 750 $7,500 $100,109 (254) ($760) ($182) ($85,835) $21,043
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
Consolidated Statements of Cash Flows
Years Ended December 31,
<S>
In thousands 1994 1993 1992
Cash flows from operating activities: <C> <C> <C>
Cash received from customers $81,298 $74,265 $72,525
Other cash received 2,305 1,236 1,083
Interest received 56 65 89
Cash paid to suppliers and employees (75,888) (66,725) (68,994)
Interest paid on debt (924) (1,981) (2,161)
Interest paid under capital lease obligations (284) (256) (354)
Income taxes paid (200) (44) (13)
Net cash provided by operating activities 6,363 6,560 2,175
Cash flows from investing activities:
Proceeds from the sale of equipment 206 56 1,010
Proceeds received on note from Cortelco International, Inc. 1,000 1,000 0
Capital expenditures (2,116) (848) (1,776)
Net cash provided (used) by investing activities (910) 208 (766)
Cash flows from financing activities:
Proceeds from borrowings 7,300 2,660 1,972
Proceeds from issuance of common stock 203 739 0
Principal payments on debt (14,365) (3,859) (3,800)
Principal payments under capital lease obligations (809) (1,233) (1,978)
Preferred stock redemption (1,000) 0 0
Preferred dividends paid (577) 0
Net cash used in financing activities (9,248) (1,693) (3,806)
Net increase (decrease) in cash and cash equivalents (3,795) 5,075 (2,397)
Cash and cash equivalents at beginning of year 5,474 399 2,796
Cash and cash equivalents at end of year $1,679 $5,474 $399
Reconciliation of net income to net cash provided by operating activities:
Net Income $3,225 $2,416 $884
Depreciation and amortization 4,138 3,138 2,974
Decrease (increase) in accounts receivable (453) 689 (1,462)
Inventory provision 964 900 1,497
Decrease (increase) in inventory (2,989) (307) 170
Increase in other assets (1,620) (958) (3,982)
Increase (decrease) in accounts payable and bank overdrafts 1,918 (639) 1,889
Increase (decrease) in other liabilities 1,238 1,237 (79)
Increase (decrease) in paid-in capital and other equity (58) 84 284
Total adjustments 3,138 4,144 1,291
Net cash provided by operating activities $6,363 $6,560 $2,175
The accompanying notes are an integral part of these financial statements.
</TABLE>
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1994, 1993, 1992
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Comdial
Corporation and its subsidiaries (the "Company"). All significant
intercompany accounts and transactions have been eliminated.
Cash and Cash Equivalents
Cash equivalents are defined as short-term liquid investments with
maturities when purchased of less than 90 days that are readily convertible
into cash. Under the Company's current cash management policy, borrowings
from the revolving credit facility are used for normal operating purposes.
The revolving credit facility is reduced by cash receipts that are
deposited daily. Bank overdrafts of $1,099,000 are included in Accounts
Payable at December 31, 1994, which are outstanding checks that have not
(1) cleared the bank and (2) been funded by the revolving credit facility
(see Note 5). The Company considers the outstanding checks to be a bank
overdraft. The Company is reporting the revolving credit facility activity
on a net basis on the Consolidated Statements of Cash Flows.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market.
Property/Depreciation
Depreciation is computed using the straight-line method for all buildings,
land improvements, machinery and equipment, and capitalized lease property
over their estimated useful lives. Effective January 1, 1994 the Company
revised the estimated useful lives of certain computer hardware equipment
from seven to five years to more closely reflect expected remaining
business lives. The effect of this change in accounting estimate was to
increase depreciation expense and decrease income from continuing
operations by $239,000 or $0.01 per share. Management believes this change
is warranted due to the continuing advances in computer technology.
Expenditures for maintenance and repairs of property are charged to
expense. Improvements and renewals which extend economic lives are
capitalized
The estimated useful lives are as follows:
Buildings 30 years
Land Improvements 15 years
Machinery and Equipment 7 years
Computer Hardware Equipment and Tooling 5 years
Expensing of Costs
All production start-up, research and development, and engineering costs
are charged to expense, except for that portion of costs which relate to
product software development (see "Capitalized Software Development
Costs"). Earnings (Loss) per Common Share and Common Equivalent Share
For 1994, 1993, and 1992, earnings per common share were computed by
dividing net income applicable to common shares by the weighted average
number of common shares outstanding and common equivalent shares. Fully
diluted earnings per share assumes the conversion of preferred stock and
adds back the preferred stock dividends paid to net income. The effect of
the preferred stock conversion was antidilutive for the year ended 1994.
Capitalized Software Development Costs
In 1994, 1993, and 1992, the Company incurred costs associated with
development of software related to the Company's various products. The
accounting for such software costs is in accordance with Generally Accepted
Accounting Principles ("GAAP") and Statement of Financial Accounting
Standards ("SFAS") No. 86. The Company's estimate of useful life is three
years. The total amount of unamortized software development cost included
in other assets is $1,392,000 at December 31, 1994. The amounts
capitalized for 1994, 1993, and 1992 were $717,000, $721,000, and $829,000,
respectively, of which $858,000, $705,000, and $591,000 were amortized in
1994, 1993, and 1992, respectively.
Postretirement Benefits Other Than Pension
The Company adopted in 1993, SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Penions". SFAS No. 106 requires the
Company to accrue estimated cost relating to health care and life insurance
benefits. In 1994 and 1993, the Company recognized $289,000 and $288,000,
resepectively.
Income Taxes
The Company adopted SFAS No. 109, "Accounting for Income Taxes", in 1993,
which specifies the asset and liability approach. Under SFAS 109, the
deferred tax liability or asset is determined based on the difference
between the financial statement and tax bases of assets and liabilities as
measured by the enacted tax rates which will be in effect when the
differences reverse. Deferred tax expense is the result of changes in the
liability for deferred taxes. The measurement of deferred tax assets is
reduced by the amount of any tax benenfits where, based on available
evidence, the likelihood of realization cannot be established. The Company
has incurred prior cumulative operating losses through 1991 for financial
statement and tax reporting purposes (see Note 6). Tax credits will be
utilized to reduce current and future income taxes.
Reclassifications
Amounts in the 1993 and 1992 consolidated financial statements have been
reclassified to conform to the 1994 presentation. The Company is currently
reporting sales as a net number that includes deductions for volume
discounts, returns, and allowances. The Company has reclassified freight
expense and the cost of certain promotional programs resulting in a
reduction in sales, and an increase in cost of sales and selling, general
and administrative expense, respectively, for 1994 and the comparable prior
periods. Promotional programs include various sales incentive rebates
claimed by dealers and specific end users who buy the Company's products
direct from distributors. Management considers these reclassifications as
more consistent with the nature of the sales costs incurred, and the manner
in which such costs are managed by the Company. For the years 1994, 1993,
and 1992, reclassified freight expense was $552,000, $478,000, and
$677,000, and reclassified promotional program expense was $4,492,000,
$3,538,000, and $4,751,000, respectively. These reclassifications had no
effect on previously reported consolidated net income.
NOTE 2. INVENTORIES
Inventories consist of the following:
December 31,
In thousands 1994 1993
Finished goods $2,936 $3,972
Work-in-process 4,455 2,485
Materials and supplies 9,478 8,387
Total $16,869 $14,844
NOTE 3. PROPERTY
Property consists of the following:
December 31,
In thousands 1994 1993
Land $396 $396
Buildings and improvements 11,540 11,864
Machinery and equipment 26,551 25,126
Less accumulated depreciation (24,819) (23,199)
Property - Net $13,668 $14,187
Depreciation expense charged to operations for the years 1994, 1993,
and 1992, was $2,601,000, $2,164,000, and $1,970,000, respectively.
NOTE 4. LEASE OBLIGATIONS
The Company and its subsidiaries have various capital and operating lease
obliga-tions. Future minimum lease commitments for capitalized leases and
aggregate minimum rental commitments under operating lease agreements that
have initial non-cancelable lease terms in excess of one year are as
follows:
Year Ending December 31, Capital Operating
In thousands Leases Leases
1995 $807 $1,218
1996 565 1,182
1997 131 1,165
1998 104 1,131
1999 - 1,021
Total minimum lease commitments 1,607 $5,717
Less amounts representing interest and
other cost (260)
Principal portion of minimum lease
commitments at December 31, 1994 $1,347
Assets recorded under capital leases (included in property in the
accompanying Consolidated Balance Sheets) are as follows:
December 31,
In thousands 1994 1993
Machinery and equipment $2,269 $3,430
Less accumulated depreciation (570) (706)
Property - Net $1,699 $2,724
During 1994, 1993, and 1992, the Company entered into new capital
lease obligations which amounted to approximately $228,000, $1,597,000, and
$692,000, respectively.
Operating leases and rentals are for buildings, and factory and office
equipment. The total rent expense for operating leases, including rentals
which are cancelable on short-term notice, for the years ended December 31,
1994, 1993, and 1992 was $1,023,000, $1,025,000, and $1,149,000,
respectively.
NOTE 5. DEBT
As of February 1, 1994, Shawmut Capital Corporation ("Shawmut"), formerly
known as Barclays Business Credit,Inc., held substantially all of the
Company's indebtedness. Prior to February 1, 1994, PacifiCorp, through its
indirect subsidiary, PacifiCorp Credit, Inc. ("PCI"), held substantially
all of the Company's indebtedness. Before December 1993, substantially all
the Company's indebtedness was held by PacifiCorp Holdings, Inc. ("PHI"),
formerly known as Inner PacifiCorp, Inc. On December 1, 1993, PHI
transferred the entirety of its holdings in the Company to its wholly-owned
subsidiary, PacifiCorp Financial Services, Inc., which in turn transferred
such holdings to its wholly-owned subsidiary, PCI. References herein to
PCI shall be deemed to include references to PHI, its predecessor in
interest to the indebtedness of the Company, where such references are
appropriate.
Long-term Debt
Long-term debt consisted of the following:
December 31,
In thousands 1994 1993
Notes payable to PCI (1)
Term note $- $19,191
Optional advance note - 2,074
Notes payable to Shawmut
Term notes I and II (2) 5,854 -
Revolving credit (3) - -
Capitalized leases (see Note 4) 1,349 1,930
Total debt 7,203 23,195
Less current maturities on debt 2,466 4,252
Total long-term debt $4,737 $18,943
(1) The term note was payable in fifty-nine equal monthly principal
installments of $150,000 with the balance due on November 1, 1996. The
optional advance note was payable in thirty-six equal monthly principal
installments of $59,000 beginning on December 1, 1993. Interest was
payable monthly on both notes.
In July 1992, the Company sold its standard electromechanical product
line to International Telecommunication Asia PTE. LTD., a Singapore
corporation ("IT Asia"), which was assigned to Cortelco International, Inc.
("CII"), an affiliate of IT Asia, in August 1993. In connection with the
sale, IT Asia delivered to the Company its non-interest bearing promissory
note in the principal amount of $2,000,000 (the "IT Asia Note"). The
Company agreed to apply the proceeds received from CII to the outstanding
balance of the PCI term note. In August 1993, CII made the $1,000,000
principal payment to the Company on the IT Asia Note. The Company used the
proceeds from CII to repay a portion of the term note held by PCI.
The Company's indebtedness was secured by liens on the Company's
accounts receivable, inventories, intangibles, land, and other property.
Prior to February 1, 1994, these loans accrued interest at an annual rate
equal to 3 1/2% above the prime rate of interest established by Morgan
Guaranty Trust Company (the "Morgan
Guaranty Prime Rate"). The Morgan Guaranty Prime Rate was 5 1/2% at
February 1, 1994 and December 31, 1993, respectively.
On December 23, 1993, the Company and PCI entered into an agreement
(the "Equity Agreement"), pursuant to which, among other things, PCI agreed
to accept 850,000 shares of a newly designated Series A 7 1/2% Cumulative
Convertible Redeemable Preferred Stock ("Series A Preferred Stock") of the
Company in exchange for the cancellation of $8,500,000 of the Company's
existing indebtedness to PCI (which was a non-cash transaction).
At a special meeting held on February 1, 1994, the Stockholders of the
Company approved the exchange and amendments to the Company's Certificate
of Incorporation permitting the issuance of the Series A Preferred Stock.
Immediately following the meeting, the Company and Shawmut entered into a
loan and security agreement ("Loan Agreement") pursuant to which Shawmut
agreed to provide the Company with a $6,000,000 term loan ("Term Note I")
and a $9,000,000 revolving credit loan facility. The Company's principal
balance of its indebtedness on February 1, 1994 to PCI was $21,209,453,
which was paid by using cash generated from operations of $6,000,000, cash
borrowed from Shawmut of $6,709,453, and the cancellation of the remaining
debt of $8,500,000 with the issuance of Preferred Stock. The Company
purchased from PCI 100,000 shares of the Redeemable Preferred Stock at the
time the Company received the proceeds of $1,000,000 from Cortelco in
December 1994 relating to the sale of the electromechanical product line in
1992.
On April 29, 1994, the Company and Shawmut amended the Loan Agreement
to permit the Company to borrow an additional $1,300,000 under the Term
Note ("Term Note II") to finance the purchase of additional surface mount
technology equipment. The Company will repay the additional advance in 44
consecutive monthly payments of $27,000 beginning on June 1, 1994 with the
balance due on February 1, 1998.
(2) The Shawmut Term Notes I and II of $7,300,000 carry interest rates
of 1 1/2% over the Shawmut's prime rate and are payable in equal monthly
principal installments of $152,000 for the next 14 months, and 23 equal
monthly principal installments of $110,334, with the balance due on
February 1, 1998.
(3) The Shawmut revolving credit facility carries an interest rate of
1% over Shawmuts' prime rate. Availability under the revolving credit
facility is based on eligible accounts receivable and inventory, less funds
already borrowed. The Company's total indebtedness to Shawmut (term notes
plus revolving credit facility) may not exceed $14,000,000.
Scheduled maturities of Shawmut Term Notes (current and long-term
debt) as defined in the Loan Agreement are as follows:
Principal
In thousands Fiscal Years Installments
Term Notes payable 1995 $1,824
1996 1,407
1997 1,324
1998 1,299
Debt Covenants
The Company's indebtedness to Shawmut is secured by liens on the
Company's accounts receivable, inventories, intangibles, land, and other
property. Among other restrictions, the Loan Agreement with Shawmut also
contains certain financial covenants that relate to specified levels of
consolidated tangible net worth, profitability, debt service ratio, and
current ratio. The Loan Agreement also limits additional borrowings and
payment of dividends, except for payments to PCI for their Series A
Preferred Stock. As of December 31, 1994, the Company was in compliance
with the Loan Agreement terms as defined in the Loan Agreement.
NOTE 6. INCOME TAXES
Effective January 1, 1993, the Company changed its method of accounting for
income taxes from the deferred method to the liability method as required
by SFAS No. 109, "Accounting for Income Taxes". As permitted under the
rules, prior years' finan-cial statements have not been restated. The
components of the income tax expense for the years ended December 31, are
as follows:
Liability Deferred
Method Method
In thousands 1994 1993 1992
Current - Federal $88 $89 $10
State 28 40 3
Deferred - - -
Total provision $116 $129 $13
The income tax provision reconciled to the tax computed at statutory
rates for the years ended December 31, are summarized as follows:
In thousands 1994 1993 1992
Federal tax (benefit) at statutory rate
(35% in 1994 and 1993, 34% in 1992) $1,306 $891 $295
State income taxes (net of federal tax
benefit) 18 27 30
Nondeductible charges 34 20 19
Alternative minimum tax 84 89 13
Utilization of operating loss carryover (1,326) (898) (344)
Income tax provision $116 $129 $13
There is no tax benefit of the extraordinary item due to the presence of
tax operating loss carryovers.
No deferred taxes have been recognized in the accompanying
Consolidated Balance Sheet at December 31, 1994 and 1993. The components
are as follows:
In thousands 1994 1993
Total deferred tax liabilities $(1,981) $(2,137)
Total deferred tax assets 29,852 30,631
Total valuation allowance (27,871) (28,494)
$ - $ -
The valuation allowance decreased $623,000 during the year ended
December 31, 1994 and was primarily related to benefits arising from the
utilization of operating loss carryforwards. The Company periodically
reviews the requirements for a valuation allowance and makes adjustments to
such allowance when changes in circumstances result in changes in judgement
about the future realization of deferred tax assets.
The Company has net operating loss and credit carryovers of
approximately $72,336,000 and $3,027,000, respectively, which, if not
utilized, will expire as follows:
In thousands Net Operating
Expiration Dates Losses Tax Credits
1996 - 1997 $ - $412
1998 - 1,846
1999 25,454 504
2000 31,129 66
2001 5,260 -
After 2001 10,493 199
$72,336 $3,027
Certain provisions of the tax law may limit the net operating loss and
credit carryforwards available for use in any given year in the event of a
significant change in ownership interest. If changes in the Company's
stock ownership exceed 50% of the value of the Company's stock during any
three year period, the utilization of the tax net operating loss and tax
credit carryforwards would be severely limited beginning with the year of
ownership change.
The components of the net deferred tax asset (liabilities) at December
31, 1994 and 1993 are as follows:
Deferred Asset/(Liability)
In thousands 1994 1993
Net loss carryovers $24,595 $26,111
Tax credit carryovers 3,027 2,830
Inventory write downs and capitalization 1,028 876
Pension 461 177
Postretirement 189 98
Compensation and benefits 169 164
Capitalized software development costs 256 174
Contingencies 28 49
Other deferred tax assets 11 64
Note receivable reserve 84 88
Fixed asset depreciation (1,977) (1,981)
Income reported in different periods for
financial reporting and tax purposes - (104)
Other deferred tax liabilities - (52)
Net deferred tax asset 27,871 28,494
Less: Valuation allowance (27,871) (28,494)
Total $ - $ -
NOTE 7. PENSION AND SAVINGS PLANS
The Company formerly sponsored two non-contributory pension plans that
together covered all employees. One plan provided pension benefits based
on years of service and employee's compensation during the employment
period. The other plan provided benefits based on years of service.
Effective January 1, 1992, the Company merged the two pension plans into a
single plan which provides benefits based on years of service and
employee's compensation during the employment period. The calculation of
pension benefits prior to 1992 will be based on the provisions of the old
plans. The funding policy for both plans was to make the minimum annual
contributions required by applicable regulations. Assets of the plans were
generally invested in equities and fixed income instruments.
The following table sets forth the funded status of the plans and
amounts recognized in the Company's Consolidated Balance Sheets at December
31, 1994 and 1993.
In thousands 1994 1993
Actuarial present value of benefit obligation:
Accumulated benefit obligation (including vested
benefits of $8,431 and $8,320, respectively) $(9,225) $(9,226)
Projected benefit obligation for service to date $(9,583) $(9,557)
Plan assets at fair value 9,041 9,230
Plan assets less than projected benefit obligation (542) (327)
Unrecognized net (gain) or loss from past experience (1,007) (556)
Unrecognized net (gain) or loss from prior service cost (322) (354)
Unrecognized net asset at date of implementation of
SFAS No. 87 amortized over 15 years (144) (172)
Accrued liabilities for benefit plans at December 31 $(2,015) $(1,409)
Net periodic pension cost for 1994, 1993, and 1992 included the following
components:
In thousands 1994 1993 1992
Service cost-benefits earned during the period $982 $803 $785
Interest cost on projected benefit obligation 657 548 495
Actual return on plan assets 106 (1,438) (1,282)
Net amortization and deferral of other items (919) 608 630
Net periodic pension cost $826 $521 $628
Assumptions used in accounting for the plans were as follows:
1994 1993 1992
Discount rate 8.00% 7.00% 8.50%
Rate of increase in future compensation levels 4.00% 4.00% 4.00%
Expected long-term rate of return on assets 9.00% 9.00% 9.00%
In addition to providing pension benefits, the Company contributes to
a 401(k) plan, based on the employee's contributions. Participants can
contribute from 2% to 10% of their salary as defined in the terms of the
plan. The Company makes matching contributions equal to 25% of a
participant's contributions. The Company's total expense for the matching
portion to the 401(k) plan for 1994, 1993, and 1992 was $261,000, $225,000,
and $178,000, respectively.
NOTE 8. POSTRETIREMENT BENEFITS OTHER THAN PENSION
As of January 1, 1993, the Company adopted SFAS No. 106. The effect of
adopting SFAS No. 106 on income from continuing operations for 1994 and
1993 was an expense of $289,000 and $288,000, respectively.
The Company provides certain health care coverage (until age 65) which
is subsidized by the retiree through insurance premiums paid to the
Company, and life insurance benefits for substantially all of its retired
employees. In 1992, the
Company recognized $160,000 as an expense for postretirement health care
and life insurance benefits. The Company's postretirement health care
benefits are not currently funded. The status of the postretirement
benefits are as follows:
Accumulated postretirement benefit obligation at January 1, 1994 and
1993:
In thousands 1994 1993
Retirees $398 $222
Actives eligible to retire 628 435
Other active participants ineligible to retire 972 676
Total $1,998 $1,333
Net postretirement benefit cost for years ended December 31, consisted
of the following components:
In thousands 1994 1993
Service cost $59 $46
Interest cost 139 151
Actual return on assets - -
Amortization of the unrecognized transition obligation 91 91
Amortization of (gain) or loss - -
Amortization of prior service cost - -
Total $289 $288
The following table sets forth funded status of the plans and amounts
recognized in the Company's Consolidated Balance Sheet at December 31, 1994
and 1993.
In thousands 1994 1993
Plan assets at fair value $ - $ -
Accumulated postretirement benefit obligation
Retirees (394) (639)
Fully eligible participants (604) (523)
Other active participants (874) (874)
Unrecognized prior service cost - -
Unrecognized net (gain) or loss (316) 26
Unrecognized transition obligation 1,631 1,722
Accrued liabilities for benefit plans at December 31 $(557) $(288)
The assumed health care cost trend rate used in measuring the
accumulated postretirement benefit obligation as of January 1, 1994 was 13%
for 1994, the trend rate decreasing each successive year until it reaches 5
1/4% in 2005 after which it remains constant. The discount rate used in
determining the accumulated postretire-ment benefit obligation cost was 7%.
A 1-percentage-point increase in the assumed health care cost trend rate
for each year would increase the accumulated postretire-ment benefit
obligation as of January 1, 1994 and net postretirement health care cost by
approximately $140,000 and service cost plus interest cost by approximately
$18,000. The postretirement benefit obligation is not funded and does not
include any provisions for securities, settlement, curtailment, or special
termination benefits.
NOTE 9. WARRANTS
A summary of warrants issued and outstanding is as follows:
1994 1993 1992
Warrants outstanding, January 1; - 2,500,000 2,500,000
Issued - - -
Exercised - (2,500,000) -
Canceled - - -
Warrants outstanding, December 31; - - 2,500,000
Price per share ranges of warrants
outstanding at December 31 - - $0.01-$1.2
Dates through which warrants
outstanding at December 31
were exercisable (*) (*) (*)
(*) The warrants were held by PCI and a bank group which held the majority
of the Company's indebtedness prior to October 1991. On November 1, 1993,
the bank group exercised warrants and acquired in the aggregate 500,000
shares of the Company's Common Stock, at an exercise price of $1.25 per
share. On December 9, 1993, PCI exercised its Replacement Warrant and
acquired 2,000,000 shares of the Company's Common Stock, at an exercise
price of $0.01 per share.
NOTE 10. PREFERRED STOCK
On December 23, 1993, the Company and PCI entered into the Equity
Agreement, pursuant to which, among other things, PCI agreed to accept
850,000 shares of a newly designated Series A 7 1/2% Cumulative Convertible
Redeemable Preferred Stock of the Company in exchange for the cancellation
of $8,500,000 of the Company's existing indebtedness to PCI (which was a
non-cash transaction). Dividends are paid each quarter at an annual rate of
return of 7 1/2% which totaled $577,000 for 1994.
Each share of Series A Preferred Stock is convertible at the option of
PCI into fully paid and nonassessable shares of Common Stock. Under the
terms of the Equity Agreement, the Company was required to redeem 100,000
shares of the Series A Preferred Stock at the time the Company received
$1,000,000 in 1994 from CII, relating to the sale of the electromechanical
product line in 1992 (see Note 5). In December 1994, the Company received
the $1,000,000 payment from CII, which was used to redeem the 100,000
shares (par value $10.00) of Series A Preferred Stock. The Series A
Preferred Stock is redeemable at the option of the Company. In the event
that four consecutive quarterly dividend payments on Series A Preferred
Stock are in arrears and unpaid, PCI shall have the exclusive right, voting
separately as a class, to elect two members of the Board of Directors or
such greater number of members as is necessary to equal at least 40% of the
total number of members of the Board of Directors at all times thereafter.
NOTE 11. STOCK OPTIONS AND AWARDS
The Company's plans include stock options to purchase Common Stock and may
be granted to officers, directors, consultants, and certain key employees
as additional compensation. The plans are composed of both stock options,
restricted stock, nonstatutory stock, and incentive stock. The plan awards
to each Director 10,000 shares of the Company's Common Stock for each
fiscal year the Company reports income. The Company's incentive plans are
administered by the Compensation Committee of the Company's Board of
Directors.
The Company's incentive plans reserve 3,000,000 shares of the
Company's Common Stock for issuance at December 31, 1994, 1993, and 1992.
The Company has previously accepted notes relating to the non-qualified
stock options exercised by officers and employees. These notes receivable
relating to the stock purchases, amounting to $182,000, $229,000, and
$303,000 at December 31, 1994, 1993, and 1992, respectively, have been
deducted from Stockholders' equity.
Information regarding stock options is summarized below:
1994 1993 1992
Options outstanding, January 1; 1,354,131 1,748,000 1,229,908
Granted 276,000 43,000 1,021,532
Exercised (439,673) (132,869) -
Terminated (100,941) (304,000) (503,440)
Options outstanding, December 31; 1,089,517 1,354,131 1,748,000
Per share ranges of options
outstanding at December 31 $.47-$3.53 $.47-$2.06 $.47-$1.00
Dates through which options
outstanding at December 31,
were exercisable 1/95-10/2004 1/94-10/2003 1/93-10/2002
Options exercisable, December 31; 523,798 534,451 684,414
NOTE 12. SEGMENT INFORMATION
During 1994, 1993, and 1992, substantially all of the Company's sales, net
income, and identifiable net assets were attributable to the
telecommunications industry.
The Company had sales in excess of 10% of net sales to three customers
as follows:
In thousands 1994 1993 1992
Sales:
ALLTEL Supply, Inc. $12,370 $15,908 $12,695
Graybar Electric Company, Inc. 31,298 24,494 26,217
North Supply Company, Inc. 16,305 14,984 13,598
Percentage of net sales:
ALLTEL Supply, Inc. 16% 23% 18%
Graybar Electric Company, Inc. 41% 35% 37%
North Supply Company, Inc. 21% 22% 19%
ALLTEL Supply, Inc.,a subsidiary of ALLTEL Corporation, a share holder of
the Company, has accounts receivable with the Company of $588,000 and
$808,000 for the periods ending December 31, 1994 and 1993, respectively.
NOTE 13. COMMITMENTS AND CONTINGENT LIABILITIES
The Company facilities are subject to a variety of federal, state, and
local environmental protection laws and regulations, including provisions
relating to the discharge of materials into the environment. The cost of
compliance with such laws and regulations has not had a material adverse
affect upon the Company's capital expenditures, earnings or competitive
position and it is not anticipated to have a material adverse effect in the
future.
In 1988, the Company voluntarily terminated the use of a concrete
underground storage tank for draining hydraulic oil and chlorinated
solvents from machine parts, and removed the tank. The consulting
engineers engaged by the Company prepared an environmental site
characterization report showing hydraulic oil and chlorinated solvents
contamination of the soil, and hydraulic oil contamination of the
groundwater. A remediation plan was recommended to the Company, which was
approved by the State of Virginia Water Control Board on January 31, 1989.
The remediation plan was expected to extend for approximately 10 years.
The Company believes that it has been, and is now, in compliance with the
1989 remediation plan.
In November 1993, the Company engaged Froehling and Robertson, Inc.
("F & R"), an environmental engineering firm, to collect additional samples
of soil and groundwater for assessing the effect of the hydraulic oil
remediation plan, and to determine whether the chlorinated solvents had
dissipated. The Company also requested the State of Virginia Department of
Environmental Quality ("DEQ") to review the site characterization plan
report for adequacy under current environmental regulations. As a result,
DEQ sent the Company a letter on November 30, 1993, citing certain
deficiencies and requesting a site characterization report addendum and a
corrective action plan. On January 14, 1994, the Company submitted a
corrective action plan to the DEQ, which was approved by the DEQ on July 8,
1994. F & R has advised the Company that the cost estimate for the
remediation strategy proposed in the corrective action plan is
approximately $35,000 to $45,000. In 1993, the Company provided a reserve
in the amount of $45,000 to cover such cost.
In October 1994, the Company installed all the required equipment in
accordance with the remediation plan and has started the process of pumping
hydraulic oil residue from the underground water. The oil will be
deposited into approved containers and taken to a hazardous waste site in
accordance with the corrective action plan.
NOTE 14. QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth
In thousands except share data Quarter Quarter Quarter Quarter
1994
Sales $17,639 $19,019 $20,660 $19,827
Gross profit 5,791 6,045 6,297 6,273
Interest expense 392 319 301 255
Income before extraordinary item 615 942 1,245 812
Net income 226 942 1,245 812
Dividends on preferred stock 106 161 162 148
Net earnings per common share: Primary 0.01 0.04 0.05 0.02
<TABLE>
<S> <C> <C> <C> <C> <C>
1993
Sales $14,435 $14,010 $19,192 $21,462 $69,099
Gross profit 4,108 3,813 5,950 7,442 21,313
Interest expense 589 615 619 597 2,420
Net income (loss) 237 (486) 1,014 1,651 2,416
Net earnings per common share: Primary 0.01 (0.03) 0.05 0.09 .12
</TABLE>
Previously reported quarterly information has been revised to reflect
certain reclassifications. These reclassifications had no effect on
previously reported consolidated net income (see Note 1 -
Reclassifications).
In the first quarter of 1994 (February 1, 1994), the Company
restructured its indebtedness to PCI by using cash generated from
operations and cash borrowed from Shawmut (see Note 5). The major impact
on operations was the reduction of interest expense for 1994 and the write-
off of prior debt issuance cost of $389,000.
Certain interim inventory estimates are recognized throughout the
fiscal year relating to shrinkage, obsolescence, and product mix. The
results of the physical inventory and the fiscal year-end close reflected a
favorable adjustment with respect to such estimates, resulting in
approximately $224,000 of additional income, which is reflected in the
fourth quarter of 1994.
FIVE YEAR FINANCIAL DATA
Selected Consolidated Statements of Operations
Data
In thousands except
per share amounts 1994 1993 1992 1991 1990
Net sales:
As reported (1) $77,145 $69,099 $70,897 $66,914 $83,957
Current product lines (2) 77,145 69,099 64,423 55,731 70,167
Income (loss) before income taxes
and extraordinary item 3,730 2,545 897 (871) 1,331
Net income (loss) 3,225 2,416 884 (871) 1,014
Earnings (loss) per common share
and common equivalent share:
Primary: 0.12 0.12 0.04 (0.05) 0.05
(1) Prior years have been reclassified to conform to 1994 presentation.
(2) Excludes sales of the electromechanical product line
Selected Consolidated Balance Sheet
Data
In thousands 1994 1993 1992 1991 1990
Current assets $26,199 $28,301 $24,389 $25,779 $28,519
Total assets 42,260 44,803 41,747 41,412 44,163
Current liabilities 14,568 13,358 11,985 11,852 20,020
Long term debt and other
long term liabilities 6,649 20,695 22,251 23,217 17,149
Stockholders' equity 21,043 10,750 7,511 6,343 6,994
RELATED STOCKHOLDERS MATTERS
Quarterly Common Stock Information
The following table sets forth, for the periods shown, the high and low
quarterly closing sales prices in the over-the-counter market for the
Company's Common Stock, as reported by National Association of Security
Dealers Automated Quotation System ("Nasdaq"). The Company's Common Stock
qualified to trade as a Nasdaq/National Market System Tier 1 Stock in 1982.
1994 1993
Fiscal Quarters High Low High Low
First Quarter 4 1/8 2 9/16 1 1/16 1/2
Second Quarter 3 3/8 1 7/8 1 1/8 13/16
Third Quarter 3 1/8 1 15/16 1 3/4
Fourth Quarter 3 7/16 1 13/16 3 5/8 3/4
The Company has never paid a dividend on its Common Stock and its
Board of Directors currently intends to continue for the foreseeable future
the policy of not paying cash dividends on Common Stock. The Company is
prohibited from paying dividends due to the Loan Agreement with Shawmut
except on Series A Preferred Stock. (see Note 5 to Consolidated Financial
Statements).
The Company's Common Stock trades on the The Nasdaq Stock Market under
the symbol: CMDL.
OFFICERS &
DIRECTORS
Corporate Officers Directors
William G. Mustain William G. Mustain
President and
Chief Executive Officer A. M. Gleason Vice Chairman of PacifiCorp
Wayne R. Wilver William E. Porter Vice President, Project Future
Senior Vice President, of Trigon Blue Cross Blue Shield
Chief Financial Officer,
Treasurer, and Secretary
John W. Rosenblum Tayloe Murphy Professor of
Business Adminitration,
Stephen C. Ayers Darden Graduate School of
Vice President, Sales and Business Administration,
Marketing University of Virginia
Keith J. Johnstone Dianne C. Walker Consultant
Vice President, Manufacturing
Larry K. Tate
Vice President, Quality
Ove Villadsen
Vice President, Engineering
Transfer Agent and Registrar Form 10-K
Chemical Bank On written request, Comdial Corporation
New York, New York will furnish to stockholders a copy of
its Form 10-K for the most recent year.
Independent Auditors Address your request to Linda Falconer,
Deloitte & Touche LLP Comdial Corporation, P.O. Box 7266,
Richmond, Virginia Charlottesville, Virginia 22906-7266
EXHIBIT 11
SCHEDULE OF COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
Years Ended December 31,
1994 1993 1992
PRIMARY
<S> <C> <C> <C>
Income applicable to common shares:
Income before extraordinary items $3,037,000 $2,416,000 $884,000
Extraordinary item 389,000 - -
Net income $2,648,000 $2,416,000 $884,000
Weighted average number of common shares
outstanding during the year 20,903,115 18,164,426 17,904,571
Add - common equivalent shares (determined
using the "treasury stock" method) repre-
senting shares issuable upon exercise of:
stock options and warrants 803,267 2,652,409 2,320,148
Weighted average number of shares used
in calculation of primary earnings per
common share 21,706,382 20,816,835 20,224,719
Earnings per common share:
Income before extraordinary item $0.14 $0.12 $0.04
Extraordinary item (0.02) - -
Net income $0.12 $0.12 $0.04
FULLY DILUTED
Net income applicable to common shares $2,648,000 $2,416,000 $884,000
Adjustments for convertible securities:
Dividends paid on convertible preferred
stock 577,000 - -
Net income applicable to common shares,
assuming conversion of above securities $3,225,000 $2,416,000 $884,000
Weighted average number of shares used
in calculation of primary earnings per
common share 21,706,382 20,816,835 20,224,719
Add (deduct) incremental shares representing:
Shares issuable upon exercise of stock
options and warrants included in
primary calculation (803,267) (2,652,409) (2,320,148)
Shares issuable upon exercise of stock
options and warrants issuable based
on year-end market price or weighted
average price 3,468,936 3,321,620 2,320,148
Weighted average number of shares used
in calculation of fully diluted earnings
per common share 24,372,051 21,486,046 20,224,719
Fully diluted earnings per common share $0.13 $0.11 $0.04
</TABLE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference of our report dated January 30,
1995, appearing in this Annual Report on Form 10-K of Comdial Corporation for
the year ended December 31, 1994, in the following Registration Statements:
Registration
Form: Number:
S-8 2-89330
S-8 33-53562
S-3 33-77140
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Richmond, Virginia
March 27, 1995
EXHIBIT 24
POWER OF ATTORNEY
I hereby appoint William G. Mustain and Wayne R. Wilver, or either of them, my
true and lawful attorneys-in-fact, each with full power of substitution, to
Comdial Corporation's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994 on my behalf in my capacity as a director of Comdial
Corporation, and to sign on my behalf in such capacity any and all amendments to
such Annual Report which either such attorneys-in-fact, or their respective
substitutes, may deem appropriate or necessary.
Dated: 02/16/95
/s/ A. M. Gleason
A. M. Gleason
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
I hereby appoint William G. Mustain and Wayne R. Wilver, or either of them, my
true and lawful attorneys-in-fact, each with full power of substitution, to
Comdial Corporation's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994 on my behalf in my capacity as a director of Comdial
Corporation, and to sign on my behalf in such capacity any and all amendments to
such Annual Report which either such attorneys-in-fact, or their respective
substitutes, may deem appropriate or necessary.
Dated: 02/16/95
/s/ William E. Porter
William E. Porter
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
I hereby appoint William G. Mustain and Wayne R. Wilver, or either of them, my
true and lawful attorneys-in-fact, each with full power of substitution, to
Comdial Corporation's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994 on my behalf in my capacity as a director of Comdial
Corporation, and to sign on my behalf in such capacity any and all amendments to
such Annual Report which either such attorneys-in-fact, or their respective
substitutes, may deem appropriate or necessary.
Dated: 02/16/95
/s/ John W. Rosenblum
John W. Rosenblum
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
I hereby appoint William G. Mustain and Wayne R. Wilver, or either of them, my
true and lawful attorneys-in-fact, each with full power of substitution, to
Comdial Corporation's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994 on my behalf in my capacity as a director of Comdial
Corporation, and to sign on my behalf in such capacity any and all amendments to
such Annual Report which either such attorneys-in-fact, or their respective
substitutes, may deem appropriate or necessary.
Dated: 02/16/95
/s/ Dianne C. Walker
Dianne C. Walker
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> $1,679
<SECURITIES> 0
<RECEIVABLES> 6,637
<ALLOWANCES> 42
<INVENTORY> 16,869
<CURRENT-ASSETS> 26,199
<PP&E> 38,487
<DEPRECIATION> 24,819
<TOTAL-ASSETS> 42,260
<CURRENT-LIABILITIES> 14,568
<BONDS> 7,203
<COMMON> 0
7,500
211
<OTHER-SE> 13,332
<TOTAL-LIABILITY-AND-EQUITY> 42,260
<SALES> 77,145
<TOTAL-REVENUES> 77,145
<CGS> 52,739
<TOTAL-COSTS> 52,739
<OTHER-EXPENSES> 19,506
<LOSS-PROVISION> (97)
<INTEREST-EXPENSE> 1,267
<INCOME-PRETAX> 3,730
<INCOME-TAX> 116
<INCOME-CONTINUING> 3,614
<DISCONTINUED> 0
<EXTRAORDINARY> 389
<CHANGES> 0
<NET-INCOME> 3,225
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.12
</TABLE>
