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, 1995
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 12, 1996 was approximately $61,115,000 (See Item 5). Indicate the
number of shares of Common Stock outstanding as of March 12, 1996: 8,146,894.
DOCUMENTS INCORPORATED BY REFERENCE:
Comdial's 1995 Annual Report to the Stockholders is incorporated by reference
under Part II and portions of Comdial's Definitive Proxy Statement for its 1996
Annual Meeting of Stockholders, which will be filed with the Securities and
Exchange Commission within 120 days after December 31, 1995, are incorporated by
reference under Part III of this Form 10-K.
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TABLE OF CONTENTS
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Part I
Item 1. Business 4
(a) General Development of Business 4
Industry Background 4
Strategy 6
(b) Financial Information About Industry Segment 9
Product Sales Information 9
(c) Narrative Description of Business 9
Products 9
Business Systems 9
Proprietary and Specialty Terminals 12
Custom Manufacturing 13
Other 13
Sales and Marketing 13
Engineering, Research and Development 15
Manufacturing and Quality Control 15
Competition 16
Intellectual Property 16
Employees 17
Item 2. Properties 17
Item 3. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 18
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Part II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 19
Item 6. Selected Financial Data 19
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
Item 8. Financial Statements and Supplementary Data 19
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 19
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TABLE OF CONTENTS (Cont'd.)
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Part III
Item 10. Directors and Executive Officers of the Registrant 20
Item 11. Executive Compensation 20
Item 12. Security Ownership of Certain Beneficial Owners and
Management 20
Item 13. Certain Relationships and Related Transactions 20
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Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 21
<PAGE>
PART I
ITEM 1. Business
(a) GENERAL DEVELOPMENT OF BUSINESS
Comdial Corporation ("The Company") is a Delaware corporation based in
Charlottesville, Virginia. The Company is engaged in the design, development,
manufacture, distribution, and sale of advanced telecommunications products and
system solutions. The Company was originally incorporated in Oregon in 1977. In
1982, the Company was 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.
The Company'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.
The Company designs, manufactures, and markets small to medium sized
business telecommunications systems which support up to approximately 500
telephones. The Company believes that it is a leading supplier to this market,
with an installed base estimated to be approximately 250,000 telephone systems
and 2,500,000 telephones. The Company's products include digital and analog
telephone switches and telephones, as well as a wide range of product
enhancements to the Company's telephone systems. The Company's recent growth has
occurred principally as a result of digital telephone systems introduced by the
Company since 1992. These digital products provide end users with the ability to
utilize evolving telecommunications technologies, including those arising from
the convergence of telephone systems and computers, or Computer-Telephony
Integration ("CTI").
On, March 20, 1996, the Company completed the acquisitions of two
companies involved CTI applications: Key Voice Technologies, Inc. ("KVT")
and Aurora Systems, Inc. ("Aurora"). KVT located in Sarasota, Florida,
develops and sells voice mail software and related products for business
applications, including the Verbatim Voice Processing System and Small Office.
Aurora, headquartered in Acon, MAssachusetts, develops, markets, and supports
off-the-shelf software products for the CTI market, including FastCall. As a
result of the acquistions, KVT and Aurora have become wholly-owned subsidiaries
of the Company.
Industry Background
In recent years, advances in telecommunications have facilitated the
development of technologically advanced telephone systems and applications.
Spurred by the significant deregulation of the telephone industry that began in
the 1970's, electronic telephone systems began displacing the traditional
electromechanical key sets that served as the basic office telephone system
since the 1930's. New telephone applications are being introduced continuously,
permitting business users to improve communications within their organizations
and with customers by using conference calls, speakerphones, voice mail,
automated attendant, and voice processing applications, such as speech
recognition.
A telephone system consists of a telephone switch that routes calls among
individual telephones on the system and telephones that are connected to the
switch via internal telephone lines. Systems are typically described in terms of
the number of telephone lines and telephone sets that can be connected to the
switch.
In the 1970's, solid state electronic telephone systems began displacing
electromechanical systems. These original electronic telephone systems were
"analog," transmitting voice information in a continuous wave form that is
"analogous" to the original voice signal. Analog transmission is acceptable for
most voice requirements, but is not as efficient for data or video transmission.
Analog transmission is subject to attenuation, or the continual degradation of
transmission quality as the distance between sender and receiver increases. In
addition, ambient noises can be picked up and transmitted along with the
original voice transmission, leading to garbled communications.
By the late 1980's, digital telephone systems were available for
commercial use. The digitization of voice, data, and video is a general trend in
the telecommunications industry, whereby such forms of communication are
converted into binary pulses (0 and 1) that may be stored or transmitted. Within
a fully digital system, the signals are reproduced precisely with minimal
degradation of quality. Digital systems generally offer customers more features,
provide greater voice clarity, offer potential cost savings through the use of
low-cost, high-capacity T-1 transmission lines from telecommunication service
providers, enable improved video and data transmission, and offer superior
platforms for future features. Businesses with digital systems are better
positioned to take advantage of new features.
While some manufacturers have ceased producing analog systems altogether,
the Company offers a broad line of systems utilizing both analog and digital
technologies. The Company believes that current industry shipments are
approximately half digital, with the digital share growing rapidly. In addition,
the installed telephone system base remains predominantly analog, thereby
providing significant opportunities for manufacturers who continue to produce
analog systems. Such systems are purchased by end users wishing to install new
analog systems, upgrade existing systems, or add to existing systems.
A recent major industry advancement is the development of CTI. CTI
applications merge the power of modern telephone systems with that of computers
to provide integrated solutions to broad communications problems, such as proper
queuing in call communications centers, and specific vertical market
applications (such as the real estate, law firm, and food service markets). As
an example, an emergency dispatch system may use caller identification
technology in conjunction with databases in order to access information such as
the street address and profile of the emergency caller which is displayed on the
dispatcher's computer. Dispatchers can send help quickly to the correct address
and provide the information needed to respond appropriately to the situation.
This growing industry and user interest in CTI has added a new dimension to the
business telecommunications market. In addition to the proprietary products
offered by the Company and others, the acceptance of industry standards now
makes it possible for independent software developers to market applications
software geared toward solving or simplifying a myriad of common business
communications problems.
Initially, the implementation of CTI was limited to specialized
applications written to the proprietary interfaces of individual switch makers.
This yielded a small number of expensive products. With the broad acceptance of
de facto standards from Novell, Inc. ("Novell") and Microsoft Corporation
("Microsoft"), it is now possible to implement CTI on a much broader scale and
at a substantially lower cost. In a local area network ("LAN") environment,
Novell provides software instructions (service provider interfaces or "SPIs") to
telephone system manufacturers committed to producing the connectivity software
and hardware required to communicate with the telephony server. The telephone
switch effectively becomes another node on a client-server network.
For users not on a network, the desktop approach promoted by Microsoft is
a possible solution. In this case, telephone system manufacturers design special
software links to Microsoft's service provider interface ("SPI"). Telephony
software is available as an option on current Windows@TM operating systems and
is standard on Windows95@TM.
Until the late 1980s, all small and medium sized telephone systems were
"closed". If users wished to add new capabilities to their telephone systems,
they were restricted to whatever the system manufacturer chose to offer. One of
the most significant developments in recent years is the introduction of "open"
systems that permit users to customize their telephone system by adding those
applications packages suitable to their communications needs. Open systems
provide an Open Applications Interface ("OAI") through which a telephone system
can be linked to a computer. The computer can then command the telephone system
to perform certain functions, such as to answer, hold, delay, or transfer
telephone calls. The OAI is different for each switch manufacturer and useful
only if a Software Developer Kit ("SDK") is also provided to third parties by
the switch manufacturers.
Because of the technological advances that have arisen with digitization
and open systems, more flexible and useful telephone applications are being
developed to solve current communications problems. For example, a decade of
down sizing and corporate cost cutting has produced a large number of small
businesses and work-at-home employees. The industry estimates that nearly 30
million people work at least part-time out of their homes. This has created a
large market for small telephone systems, personal computers, fax machines,
modems, and other devices required by home offices. These users need products
that better integrate voice and data at the desktop level.
Changes in the telecommunications industry extend to the international
market as well. Developing countries recognize that advanced telecommuni-cations
systems and networks are essential to attract foreign investment and stimulate
local economies. In some countries, people must wait several years for basic
dial tone service. There is a large, ready demand for delivery systems that can
provide basic service in short time frames and at economical prices. Among
developed nations, there is a sustained trend toward privatization of government
telecommunications monopolies in favor of competition at all levels. The
Company, with much experience working in a competitive environment, is well
positioned to take advantage of these opportunities.
Strategy
The Company is pursuing three fundamental business strategies: (1)
maintaining a leadership position in its core business of delivering advanced
telecommunications systems to the U.S. domestic market through wholesale supply
house distribution channels, (2) achieving growth through expansion into
international markets, and (3) being a leader in the emerging market for systems
solutions based on CTI. The Company seeks to support these strategies through
the following approaches:
Maintaining a Broad and Efficient Distribution Network
The Company distributes its products through a network of approximately
7,400 independent dealers, of which approximately 1,500 have written contractual
arrangements with the Company. This enables the Company to achieve broad
geographic penetration, as well as access to some of the fastest growing markets
in the country. The Company's distribution network centers around a key group of
wholesale supply houses, through which the Company's products are made available
to dealers. These dealers market the Company's products to small and medium
sized organizations and divisions of larger organizations. The Company's
strategy enables it to virtually eliminate bad debt exposure and minimize
administration, credit checking, and sales expenses, as well as finished goods
inventory levels. Wholesale supply houses in turn are able to sell related
products such as cable, connectors, and installation tools. Dealers have the
benefits of competitive sourcing and reduced inventory carrying costs.
Targeting Small and Medium Sized Organizations
The Company has traditionally focused on organizations requiring small to
medium sized telecommunications systems, which the Company believes represents
about six million establishments in the United States, according to U.S.
government statistics. The Company's products offer this market many of the
features previously available only in large, proprietary systems that were often
not as affordable to this market.
Offering a Broad Range of Products
The Company currently offers digital and analog business telephone
systems, along with a variety of enhancements to the Company's products, CTI
applications, and several other products. Due to the fact that the software is
designed to be compatible with most of the Company's telephones, end users are
able to enhance and upgrade their systems without having to replace their
telephone equipment. The Company believes that this broad range of products
allows dealers to meet differing price and feature requirements. The Company
continuously strives to introduce new products to meet the needs of a changing
market.
Developing Strategic Alliances
The Company has developed strategic alliances with several other
companies, in order to build on the strengths of these companies and bring the
best possible products to the market at a lower cost. For example, the Company
has developed the Tracker on-site integrated paging system with Motorola, Inc.
("Motorola"), and the Scout wireless key system telephone with Uniden America
Corporation ("Uniden"). In addition, the Company has joined with Active Voice
Corporation ("Active Voice") for the Company's ExecuMail System, Novell for its
Enterprise for Telephony, KVT for its voice processing systems and Aurora for
its middleware CTI software. The Company is in the process of acquiring KVT and
Aurora.
Pursuing International Opportunities
Comdial formed a subsidiary, Comdial Telecommunications International,
Inc. ("CTii") to concentrate on identifying and developing opportunities for
international business. The Company chooses its international markets carefully,
with a preference for emerging yet stable economies with technical standards
close to those of North America (to minimize costly redesigns), and with an open
and competitive telecommunications marketplace. In 1995, international sales
were approximately $2.7 million compared to $2.5 million and $1.0 million in
1994 and 1993, respectively. This included sales to Canada, Latin America, the
Middle East, and South Africa. The Company has entered into a licensing and
original equipment manufacturer ("OEM") relationship with Corporate Telephone
Systems (Proprietary) Limited ("Teleboss"), a major South African
telecommunications manufacturer and dealer. Pursuant to this agreement, Teleboss
is serving as a distributor of specified products made by the Company, and has a
license from the Company to manufacture certain subassemblies used in those
products.
Computer Telephony Applications
Comdial formed a subsidiary in 1993, Comdial Enterprise Systems ("CES"),
to focus on designing, deploying, and marketing CTI applications and software
for the rapidly growing markets for CTI products and services. The Company is
addressing the CTI opportunity on several fronts. The Company believes that the
essential ingredients for successful CTI include (1) "open" telephone systems,
such as the Company's DXP, (2) communication links between the telephone system
and computer or computer network, (3) a telephony server (if integration is over
a LAN), and (4) applications software.
The Company believes that in order to maximize profitability in the
emerging markets for CTI, it must create the applications software for promising
vertical markets and small businesses, such as real estate, legal, and retail.
The Company's strategy is to develop applications for these vertical markets
using capabilities already available such as screen pops, directory dialing from
an existing data base, facsimile transmission from the desktop personal computer
("PC"), and unified messaging displays.
Promoting Industry Accepted Interface Standards
In order to integrate computers and telecommunications equipment, several
standards have been developed. The Company was among the first telephone
manufacturing companies to commit to the Novell standard, called Telephony
Services Application Programming Interface ("TSAPI"). The TSAPI standard
provides a stable platform for a Novell NetWare network to integrate with the
features and functionality of a telephone switch. This standard also allows
third-party developers to write applications in a non-proprietary environment,
rather than using a specific system vendor's SDK, thus decreasing development
time and application investment costs. The Company also has demonstrated a
prototype working interface device to support Microsoft's Telephony Application
Programming Interface ("TAPI") standard, that allows users to control any of the
Company's digital telephone systems through their PC and access special
telephony applications now being developed for desktop PC users. Along this same
line, the Company introduced the PATI 3000 (PC And Telephone Interface), which
is a low cost CTI product for the fast growing small business and home office
markets. The PATI 3000 links analog telephones to personal computers (PCs) that
run Microsoft Windows or Windows 95 operating systems.
Developing of Open Application Interface
The Company believes that OAI provides many advantages to systems
developers including reducing the time needed to develop new products and
providing access to a variety of applications from third-party vendors. Some
manufacturers charge high prices for the interface and software development kit.
While this has retarded growth of CTI applications, prices are now declining.
The Company was the second manufacturer to equip a small to medium sized system
with an OAI, and the first to offer the interface link and SDK essentially for
free.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENT
During the fiscal years ended December 31, 1995, 1994 and 1993,
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 1995 Annual
Report to Stockholders.
Product Sales Information
The following table presents certain relevant information concerning
Comdial's principle product lines for the periods indicated:
<TABLE>
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Year Ended December 31,
(In Millions) 1995 1994 1993
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<S> <C> <C> <C>
Sales
Business Systems
Digital $51.7 $36.4 $30.9
Analog 22.2 24.9 26.0
CTI 6.9 5.2 2.8
Enhancements 2.0 1.5 1.4
---- ---- ----
Sub-total 82.8 68.0 61.1
Proprietary and Specialty Terminals 5.1 5.5 6.2
Custom Manufacturing 6.1 2.6 0.9
Other 0.8 1.0 0.9
---- ---- ----
TOTAL $94.8 $77.1 $69.1
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(c) NARRATIVE DESCRIPTION OF BUSINESS
Products
The Company offers a variety of telephone systems, including digital
systems, analog systems, enhancements to the Company's products, CTI
applications, and other products.
Comdial's telecommunications products 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.
Business Systems
Digital Systems
DXP is a digital switch, introduced in 1992, that is compatible with
virtually all of the Company's analog and digital telephones. This compatibility
allows the Company and its dealers to target larger end users while using the
same telephones as those used in the Company's smaller systems. Currently, the
DXP provides customers with an affordable system that can be expanded to support
up to 224 ports that can be configured as incoming lines or telephones. The DXP
has more call processing features than smaller systems, including automatic
route selection and an optional PC-based attendant position. The DXP may be
linked to various CTI applications using the Company's Enterprise Software
Developers Kit ("SDK"), which allows external PC-based software packages to
manage the DXP for any number of specialized applications. The Company's DXP is
also directly compatible with T-1 service lines from telecommunications
providers. A T-1 line is a digital service line that is equivalent to 24 voice
channels or can transmit data at 1.5 megabits per second.
DXP Plus, introduced in the fall of 1995, is a larger version of the
original DXP. The DXP Plus can grow to a maximum of 560 ports (combinations of
outside lines and terminal connections). Like the original DXP, the DXP Plus is
designed with OAI ports, to accommodate third party software developers. The DXP
Plus uses the same lines and station cards as the DXP and accommodates most
industry standard telephones and proprietary Comdial terminals.
Impact digital telephone systems were introduced in November 1992, and
support up to 24 lines and 48 telephones. This system includes a digital switch
and Impact digital telephones which offer a variety of features, including an
interactive liquid crystal display ("LCD"), programmable feature keys, three
color lighted status indicators, and a subdued off-hook voice announce for
receiving intercom calls while on a telephone call.
DigiTech digital systems were introduced in January 1991 with switches
and telephones designed for the business market supporting up to 24 lines and 48
telephones. DigiTech offers automatic set relocation, remote programming, a
replaceable software cartridge, and other sophisticated features.
Analog Systems
Unisyn introduced in 1994, is designed to offer advanced features to very
small organizations. Two models are offered, one of which supports up to three
lines and eight telephones, and the other which supports up to six lines and 16
telephones. Display model telephones offer interactive function keys to simplify
feature access. Another capability of Unisyn is its optional compatibility with
standard analog devices, such as single line telephones, fax machines, and
modems.
ExecuTech 2000 Unitized Expandable Hybrid Systems introduced in 1989, can
support up to 24 lines and 56 telephones. Expansion modules allow end 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.
ExecuTech XE Key Systems introduced in 1989, can support up to 10 lines
and 24 telephones. All systems support the same family of full-featured
telephones. The switch is unitized self-contained unit, making the ExecuTech XE
system economical to manufacture, easy to install, and beneficial to end users
who do not have to buy additional components to add features.
Executech II Hybrid products introduced in 1986, consist of models
supporting up to 22 lines and 96 telephones. This line of systems supports
economical ExecuTech single-line telephones and a variety of multi-line
terminals including an LCD model.
InnTouch is a line of four analog hospitality systems, the first of which
was introduced in 1987, that support up to 22 lines and 128 telephones. These
systems feature a front desk video display terminal, integrated call costing,
and multi-featured room phones.
Solo II introduced in 1986, is offered in three and four line models and
provides a sophisticated set of features that are easy to program and cost
effective.
CTI Applications
Enterprise is the Company's OAI software developer's tool kit introduced
in 1993, used with the DXP system. Enterprise allows independent 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. Enterprise is a platform for the
development of applications based upon the convergence of computer and telephony
technologies.
InnTouch DXP is a digital telephone system, introduced in 1994, designed
for hospitality applications. The system consists of a DXP, Impact multi-line
administration phones, single line guest phones, and special hospitality
software. The guest phones may be industry standard message waiting models or
the Company's own HoTelephones. InnTouch serves hotel properties requiring up to
192 telephones. InnTouch was designed in cooperation with an independent
software developer.
QuickQ ACD introduced in 1994, is an automatic call distributor ("ACD").
It is designed for call center use. The system consists of a DXP, Impact
telephones, voice announcing equipment, special automatic call distribution
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 to support up to 48 telephones in use
simultaneously. Like the InnTouch DXP, the QuickQ is a CTI product, based on the
Company's Enterprise link to the DXP operating system. QuickQ was designed in
cooperation with an independent software developer.
E911 Systems are specially engineered telephone systems, introduced in
1994, for handling emergency ("911") telephone calls. The Company's systems
deliver valuable information to emergency dispatchers using caller
identification technology in conjunction with databases to access information
such as the street address and profile of the emergency caller. Dispatchers can
send help swiftly 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. The Company's E911 system makes extensive use of CTI. The Company
contracts with municipal authorities for the purchase of the equipment.
Enterprise for Telephony Services is a line of software and documentation
products, introduced in 1995, used by dealers to integrate a DXP switch with
certain Novell NetWare based LAN networks. When installed in a network server,
PC users on the LAN can command the DXP to perform telephony functions from
their PCs and access special applications software. Several products are
available to support up to 250 users.
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.
Small Office and Verbatim are trade names of voice processing systems
produced by KVT which Comdial began distributing in December 1995. The Small
Office product will handle up to four simultaneous calls to the system while
Verbatim will accommodate up to 16. By using available random access memory
(RAM) from PCs, voice storage capacity is greatly increased over competitive
systems that rely on internal storage disks, and the cost is lower.
PATI 3000 links standard analog single line telephones to PCs that use
Windows or Windows 95 operating systems. The device includes applications
software that allows users to perform normal telephone functions and many
advanced functions from their PCs. Advanced features include the ability to log
calls, dial numbers directly from databases, automatically insert calling card
numbers, and - when installed in conjunction with caller ID service from the
telephone company - automatically bring up caller profiles on the computer
screen.
The device is compliant with TAPI, a standard developed by Microsoft.
FastCall, produced by Aurora, is a special class of CTI software that is
designed to "telephony enable" existing custom data bases and programs, as well
as popular personal information managers (PIMs). Categorized as "middleware",
FastCall is used by call centers and businesses to streamline incoming and
outgoing calls for improved customer service productivity. Examples are calling
directly from databases by "point and click," handling complex telephone
operations, such as conferencing from the PC, and automatically producing
specified screens triggered by the calling or called number. Comdial began
marketing FastCall in December 1995.
Product Enhancements
Scout is the Company's first wireless multi-line telephone. The Scout was
introduced in 1995 and developed in cooperation with Uniden, a major supplier of
wireless communications products. This telephone allows users to roam freely
within their business environments and still receive or place calls. Scout
phones offer an LCD display, multi-line access, programmable keys, an intercom,
and head-set convenience. The portable handset weighs only 8.5 ounces.
Tracker is an on-site integrated paging system introduced in 1994 and
developed in cooperation with Motorola. 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, which operates on one of the
Company's digital telephone systems, includes 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 Impact phone and dialing a special code
that is displayed on the LCD. A valuable feature of Tracker is its integration
with related products manufactured by the Company.
Proprietary and Specialty Terminals
HoTelephone, introduced in 1984, comes in a variety of models. In 1990,
the Company added models with programmable soft keys and the "Take II" model
that simulates two-line service. Specially designed for business travelers, the
HoTelephone for motel and 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.
Voice Express is a fully featured multi-function display telephone that
was introduced in the early 1980s, with integrated speakerphone, autodial and
many other standard features for use behind different types of switches. Voice
Express may be optionally equipped with a two-line module for use behind PBX's
or the user can add special six and ten button modules for use with older
electromechanical key telephone equipment.
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.
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, speakerphone, and programmable soft keys.
ATC Terminals are a line of single and two-line analog phones that offer
advanced features at a low cost. The products are sourced by American
Telecommunications Corporation ("ATC"), subsidiary of the Company.
Custom Manufacturing
Custom manufacturing consists primarily of contract work performed for
various original equipment manufacturers.
Other
Other sales consist primarily of products that have been returned and
reworked for resale.
Sales and Marketing
The Company has established an extensive two-tiered distribution network,
whereby the Company sells its products to wholesale supply houses which in turn
sell the Company's products to approximately 7,400 independent dealers.
International sales are accomplished through a network of international dealers.
International customers buy direct from the Company, normally by letters of
credit, and resell to end users or other dealers.
The Company distributes products to nine major wholesale supply houses,
three of which each account for more than 10% of the Company's net sales. These
wholesale supply houses are Graybar Electric Company, Inc. ("Graybar"), North
Supply Company, Inc. ("North Supply"), a subsidiary of Sprint, and ALLTEL
Supply, Inc. ("ALLTEL"), a subsidiary of ALLTEL Corporation, a stockholder of
the Company, which in the aggregate in 1995 accounted for approximately 74% of
the Company's sales. In 1995, sales to ALLTEL, Graybar, and North Supply
amounted to approximately $20.6 million (22%), $30.9 million (33%), and $18.4
million (19%), respectively.
The Company has two classes of dealers, Preferred and Associate Dealers.
Preferred Dealers generally have greater sales and technical skills, and are
strongly committed to the Company's products. The Company offers an attractive
incentive package for Preferred Dealers, including exclusive access to the
Company's most popular and advanced products, cash rebates related to dealer
purchase levels, cooperative advertising allowances and a measure of territorial
protection. For example, special software is required to connect the Company's
popular Impact telephones with DXP switches, which is not available from the
wholesale supply houses, but rather sold and shipped exclusively to Preferred
Dealers. Preferred Dealers have sales quotas, and the sales department monitors
their performance against these targets. By contrast, Associate Dealers do not
have quotas. They purchase Comdial products on an as-needed basis, and are
rewarded through product rebates. The Company has approximately 7,400
independent dealers, of which approximately 1,500 have written arrangements with
the Company, divided about equally between Preferred and Associate Dealers.
The Company's sales organization seeks to recruit, train, and support
individual dealers to facilitate promotion and sale of the Company's products.
For 1995 and prior, dealer and distributor sales were managed by 14 territory
managers, organized into Western and Eastern regions. Each territory manager had
a corresponding Inside Sales Representative. Field Sales Representatives
concentrated on supporting Preferred Dealers and the distributors from whom they
purchase. Within their respective territories, Field Sales Representatives are
based in large cities and work out of home offices. There are also small sales
teams focused on sales to the United States government and to international
distributors.
As of the first quarter of 1996, the Company has started the process of
expanding and restructuring its sales force. The Company will have two primary
sales groups. One group concentrates on further maximizing Comdial system sales
through associate dealers. A second sales group is chartered to support
preferred dealers, expand the Company's Value Added Reseller (VAR) channels, and
to develop a broadened customer base for the Company's newer CTI system
solutions. The second sales group is being established to meet the different
needs of the emerging markets for CTI system solutions and to help the Company's
Preferred Dealers to adapt to the new CTI products and services. There are also
small sales teams focused on national accounts, OEM customers, and federal
government customers.
Each manager is responsible for recruiting new dealers and training and
motivating existing dealers. Dealers are supported through telephone contact
with Inside Sales Representatives, direct mail, and local product seminars often
organized by distributors. To stimulate street level demand, Field Sales
Representatives make joint sales calls with dealers to end users and train
dealer sales personnel in product benefits. Product specialists in
Charlottesville are available to help engineer complex configurations and solve
technical problems. All sales personnel earn incentive income based on sales
results.
Advertising and public relations efforts are also directed to dealers
through trade magazines such as Teleconnect and Computer-Telephony. Trade shows
are a major element of the Company's marketing plans. The Company is always a
major draw at the annual Computer-Telephony conference and exposition.
E911 systems are sold directly by sales personnel, with installation
performed by Comdial and maintenance performed by qualified dealers. Comdial
brand software and bundled systems solutions are purchased through wholesale
supply houses like the Company's other products. Third-party applications
software can be purchased directly from the Company through the CT Direct
catalog.
The Company's dealers are primarily responsible for supporting end users
who purchase the Company's products. The Company does, however, provide
substantial technical support to its dealers at no additional cost to them. The
Company maintains a technical support staff devoted to dealer support which is
available on a toll free basis twelve hours per day with emergency service and
on weekends. The Company also generally provides a limited warranty on elements
of its products, permitting factory returns within 24 months after sale.
Although the Company does not offer maintenance contracts for its systems,
dealers often independently sell maintenance contracts to end users.
Because the Company'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, backlog is not considered material to the Company's business.
Engineering, Research and Development
The Company believes that it must continue to introduce new products and
enhance existing products to maintain a competitive position in the marketplace.
The Company's engineering department, working in collaboration with the
marketing and manufacturing departments, is responsible for the design of these
new products and enhancements. A significant amount of engineering expenditures
are dedicated to new product development, with the balance used for cost
reductions and performance enhancements to existing products. Early in 1993, the
Company changed the responsibilities of its engineering staff to include both
product development and support of a product through its entire life cycle. This
requires engineers to perform multiple tasks in addition to research and
development. Although research and development costs for the fiscal years ended
1995, 1994, and 1993 comprise the majority of engineering, research, and
development costs, which were $4,186,000, $3,932,000, and $3,424,000,
respectively, the Company is unable to segregate and quantify the amount of
research and development costs from other engineering costs for such fiscal
years.
Some of the research and development costs associated with the
development of product software have been capitalized as 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 1995, 1994, and 1993 were $840,000, $717,000, and $721,000,
respectively. The amounts amortized for software development cost in 1995, 1994,
and 1993 were approximately $757,000, $858,000, and $705,000, respectively.
Comdial is committed to improving its existing products and developing new
telecommunications equipment in order to maintain or increase its market share.
At this time, the Company's new product investments are heavily directed
in three areas (1) expansion of its digital product line, (2) extending OAI
capability to a broader range of the Company's platforms, and (3)
"internationalization" of existing and new products. The efforts are not
independent of each other. For example, new digital systems would be designed to
provide an OAI and to be available in models compatible with the standards of
the Company's prime international markets.
Manufacturing and Quality Control
The Company's manufacturing process is vertically integrated and uses
advanced automated assembly and test equipment and computer controlled
sequencing machines. Beginning in 1991, the Company made further productivity
improvements by employing surface mount technology ("SMT") in the production of
predrilled printed wire boards ("PWBs"). Between 1992 and 1994, the Company
further expanded SMT productivity. Components designed for SMT production are
smaller, and allow for the 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 PWBs and connectors, thereby
providing a major improvement in quality and product reliability, a reduction in
product cost, and an improvement in profit margins. The Company believes that
approximately 10% of its costs are associated with labor expenses.
The Company also manufactures injection molded plastic parts, fabricated
metal parts, and other components. The Company's employees assemble completed
PWBs, components, plastics, and other purchased or manufactured subassemblies
into completed products. The Company has been able to utilize excess plant
capacity by contracting with third-parties to make various manufacturing parts
by using the Company's plastic molding or fabrication equipment.
The Company attempts to monitor the quality of the manufacturing 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.
The Company believes that this high level of automation and vertical integration
improves quality, cost, and customer satisfaction. In 1994, the Company was
certified by the International Organization for Standardization ("ISO") at the
most rigorous ISO 9001 level, which rates systems and procedures for
manufacturing, engineering, product design, and customer service.
Competition
The market for the Company's products is highly competitive. The Company
competes with approximately 20 companies, many of which, such as AT&T Corp.,
Nortel Inc., and Toshiba Corp., have significantly greater resources. Key
competitive factors in the sale of telephone systems and related applications
include performance, features, reliability, service and support, name
recognition, distribution capability, place of operation, and price. The Company
believes that it competes favorably in its market with respect to the
performance, features, realiability, distribution capability, and price of its
systems, as well as the level of service and support that the Company provides.
In marketing its telephone systems, the Company also emphasizes quality, as
evidenced by its ISO 9001 certification, and high technology features. In
addition, the Company often competes to attract and retain dealers for its
products. The Company expects that competition will continue to be intense in
the markets it serves, and there can be no assurance that the Company will be
able to continue to compete successfully in the marketplace or that the Company
will be able to maintain its current dealer network.
Intellectual Property
From time to time, the Company is subject to proceedings alleging
infringement by the Company of intellectual property rights of others. Such
proceedings could require the Company to expend significant sums in litigation,
pay significant damages, develop non-infringing technology, or acquire licenses
to the technology that is the subject of the asserted infringement, any of which
could have a material adverse effect on the Company's business. Moreover, the
Company relies upon copyright, trademark, and trade secret protection to protect
the Company's proprietary rights in its products. There can be no assurance that
these protections will be adequate to deter misappropriation of the Company's
technologies or independent third-party development of similar technologies.
Because the telecommunications manufacturing industry is characterized by
rapid technological change with frequent new product and feature introductions,
industry participants often find it necessary to develop products and features
similar to those introduced by others, with incomplete knowledge of whether
patent protection may have been applied for or may ultimately be obtained by
competitors or others. The telecommunications manufacturing industry has
historically witnessed numerous allegations of patent infringement and
considerable related litigation among competitors. The Company itself has
received claims of patent infringement from several parties which sometimes seek
substantial sums, including certain competitors such as Phonometrics, Inc.,
which has since licensed patented technology to the Company. Although the
Company's investigation of some of these claims has been limited by the claims'
lack of specificity, the limited availability of factual information and
documentation related to the claims, and the expense of pursuing exhaustive
patent reviews, the Company believes that its systems do not currently infringe
valid patents of any such claimants. In response to prior infringement claims,
the Company has pursued and obtained nonexclusive licenses entitling the Company
to utilize certain fundamental patented functions that are widely licensed and
used in the telecommunications manufacturing industry. These licenses expire
upon expiration of the underlying patents.
Although the Company believes that it currently owns or has adequate
rights to utilize all material technologies relating to its products, as it
continues to develop new products and features in the future, it anticipates
that it may receive additional claims of patent infringement. Such claims could
result in the Company's incurring substantial legal expenses and being required
to obtain licenses, pay damages for infringement, or cease offering products
that infringe such patents. There can be no assurance that a license for any
such infringed technology would be available to the Company or, even if
available, that the terms of any such license would be satisfactory.
Employees
As of December 31, 1995, the Company had 849 full-time employees, of whom
619 were engaged in manufacturing, 60 in engineering, 113 in sales and support,
and 57 in general management and administration. The Company has never
experienced a work stoppage and no employees are represented by labor unions.
The Company believes that its employee relations are good.
ITEM 2. Properties
The Company designs, manufactures, and markets all of its products from a
fully-integrated, approximately 500,000 square foot manufacturing facility on a
25 acre site located in Charlottesville, Virginia. All of the Company's
operations and development are located at this facility, which the Company owns.
The Company believes that its facilities are adequate both for the operation of
its business as presently conducted and for expansion in the foreseeable future.
The Company'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 effect
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 discontinued its use of a concrete
underground hydraulic oil and chlorinated solvent storage tank. In conjunction
therewith, nearby soil and groundwater contamination was noted. As a result, the
Company developed a plan of remediation that was approved by the Virginia Water
Control Board on January 31, 1989. The plan was later amended and approved by
the Virginia Department of Environmental Quality, after which the Company
commenced the remediation efforts required thereunder. In 1993, the Company
provided a $45,000 reserve for the estimated cost to implement the remediation
plan.
In October 1994, Comdial installed all the required equipment in
accordance with the remediation plan and started the process of pumping
hydraulic oil residue from the underground water. The oil is deposited into
approved containers and taken to a hazardous waste site in accordance with the
corrective action plan. As of December 31, 1995, Comdial has incurred costs of
approximately $25,000 and expects the pumping process to be completed by early
1998.
At the end of March 1996, the Company will be acquiring two companies KVT
and Aurora (see Item 1 - General Development of Business). KVT operates out of a
building, approximately 6,200 square foot, located in Sarasota, Fl. and Aurora
operates out of two leased suites within an office building located in Arron,
Ma.
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 1995 to a vote of
Comdial's security holders.
<PAGE>
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Information is incorporated by reference to page 51 of the Registrant's
1995 Annual Report to stockholders under the caption "Related Stockholders
Matters." As of March 12, 1996 there were 1,879 record holders of Comdial's
Common Stock.
ITEM 6. Selected Financial Data.
Information is incorporated by reference to page 50 of the
Registrant's 1995 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 28 through 32 of the
Registrant's 1995 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 33 through 49 of the
Registrant's 1995 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.
<PAGE>
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 the Company" on pages 5 through 8 and 10 through 11 of
Comdial's definitive proxy statement for the annual meeting of stockholders to
be held on April 30, 1996.
ITEM 11. Executive Compensation.
Executive compensation and management transactions information is
incorporated by reference under the caption "Executive Compensation" on pages 12
through 22 of Comdial's definitive proxy statement for the annual meeting of
stockholders to be held on April 30, 1996.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.
Information is incorporated by reference under the captions "Securities
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 30, 1996.
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 page 12, page 22, and pages 22 through 23 of Comdial's
definitive proxy statement for the annual meeting of stockholders to be held on
April 30, 1996.
<PAGE>
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 1995 Annual Report to stockholders (page
references are to page numbers in Comdial's Annual Report):
Page
Independent Auditors' Report 33
Report of Management 33
Financial Statements:
Consolidated Balance Sheets -
December 31, 1995 and 1994 34
Consolidated Statement of Operations-
Years ended December 31, 1995, 1994, and 1993 35
Consolidated Statement of Stockholders' Equity
Years ended December 31, 1995, 1994, and 1993 36
Consolidated Statements of Cash Flows-
Years ended December 31, 1995, 1994, and 1993 37
Notes to Consolidated Financial Statements-
Years ended December 31, 1995, 1994, and 1993 38-49
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) Item
3 to Item 6 of Registrant's Quarterly Report on Form 10-Q for the period ended
July 2, 1995.)*
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-Q for the
period ended July 2, 1995.)*
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.)*
<PAGE>
(10) Material contracts: (cont'd.)
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 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.)*
10.4 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.)*
10.5 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.)*
10.6 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.)*
10.7 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.)*
10.8 Amendment No. 2 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 2, 1995.)*
10.9 Amendment No. 3 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 July 2, 1995.)*
10.10 The Registrant's Executive Stock Ownership Plan
effective January 1, 1996.
10.11 The Registrant's Executive Severance Plan dated August
31, 1995.
(11) Schedule of Computation of Earnings Per Common Share.
(13) Registrant's 1995 Annual Report to Stockholders.
(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
Aurora Systems, Inc.
Comdial Business Communications Corporation
Comdial Consumer Communications Corporation
Comdial Custom Manufacturing, Inc.
Comdial Enterprise Systems, Inc.
Comdial Technology Corporation
Comdial Telecommunications, Inc.
Comdial Telecommunications International, Inc.
Comdial Video Telephony, Inc.
Key Voice Technologies, Inc.
Scott Technologies Corporation
(23) Independent Auditors' Consent.
Accountants consent to the incorporation by reference of their
report dated January 29, 1996, appearing in this Annual Report
on Form 10-K of Comdial Corporation for the year ended
December 31, 1995, in certain Registration Statements:
(24) Power of Attorney.
(27) Financial Data Schedule.
(b) Reports on Form 8-K:
The Registrant has not filed any reports on Form 8-K during the last
quarter of 1995.
The Registrant has filed a Form 8-K on March 25, 1996 pertaining to
the acquisitions of Key Voice Technologies, Inc. and Aurora Systems,
Inc.
- ---------------------------------------
* Incorporated by reference herein.
<PAGE>
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 22nd day of
March, 1996.
COMDIAL CORPORATION
By /s/ WILLIAM G. MUSTAIN
William G. Mustain
Chairman of the Board, 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.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
*
- ------------------------ Vice Chairman March 25, 1996
A. M. Gleason
*
- ------------------------ Director March 25, 1996
Michael C. Henderson
*
- ------------------------ Director March 25, 1996
William E. Porter
*
- ------------------------ Director March 25, 1996
John W. Rosenblum
*
- ------------------------ Director March 25, 1996
Dianne C. Walker
/s/ WILLIAM G. MUSTAIN Chairman of the Board, March 25, 1996
- ------------------------
William G. Mustain President, and
Chief Executive Officer
/s/ WAYNE R. WILVER Senior Vice President, March 25, 1996
- ------------------------
Wayne R. Wilver Chief Financial Officer,
Treasurer, and Secretary
* By: /s/ WAYNE R. WILVER
- -------------------------
Wayne R. Wilver, Attorney-In-Fact
</TABLE>
COMDIAL CORPORATION
Exhibit 10.10
EXECUTIVE STOCK OWNERSHIP PLAN
The Comdial Corporation Executive Stock Ownership Plan (the
"Plan") is hereby established by Comdial Corporation, a Delaware
corporation (the "Company"). The purpose of the Plan is to
establish minimum amounts of Company stock which should be owned by
covered executives.
1. Definitions. For purposes of this Plan:
(a) "Committee" shall mean the Compensation Committee of
the Board of Directors of the Company.
(b) "Executive" shall mean only the individuals employed
by the Company as Chief Executive Officer, President, Senior
Vice President, Chief Financial Officer, and Vice President.
(c) "Own" or "Ownership" shall mean direct ownership of
Stock by an Executive, vested shares in an account of the
Executive under any Company employee benefit plan, ownership
by members of an Executive's immediate family who share the
Executive's household, and ownership by a trust whose sole
beneficiaries are the Executive and/or members of the
Executive's immediate family. The Executive's immediate
family shall mean any child, stepchild, or spouse of the
Executive.
(d) "Salary" shall mean the Executive's annual base
salary rate on January 1 of any year.
(e) "Stock" shall mean common stock of Comdial
Corporation.
(f) "Value" shall mean the closing price of the Stock as
reported by NASDAQ on the relevant date.
2. Stock Ownership Requirement.
Subject to the further provisions of this Plan, each Executive
shall be required to Own the amount of Stock determined below (the
"Guideline Amount"):
(a) if the Executive is President or Chief Executive
Officer, Stock with a Value equal to 3.0 times Salary.
(b) if the Executive is Senior Vice President, Chief
Financial Officer or Vice President of Engineering, Stock with
a Value equal to 1.5 times Salary.
(c) if the Executive is any Vice President other than
the Vice President of Engineering, Stock with a Value equal to
.75 times Salary.
The determination of the Guideline Amount shall be based on
the Value of the Stock for the first trading day of the year and on
the Executive's Salary for that year. By January 15 of each year,
the Executive shall provide evidence to the Company of the amount
of the Executive's Stock Ownership as of January 1 of that year
which may be satisfied by furnishing copies of all SEC Forms 4 or
an SEC Form 5 for the prior year.
3. Stock Acquisition Requirement.
(a) If an Executive's Stock Ownership as of January 1 of
any year is less than the Guideline Amount, the Executive
shall be required to acquire Stock during that calendar year
with a Value (at the time of acquisition) equal to the lesser
of:
(i) a dollar amount determined as follows:
(A) if the Executive is President or Chief
Executive Officer, 15 percent of Salary,
(B) if the Executive is Senior Vice
President, Chief Financial Officer or Vice
President of Engineering, 10 percent of Salary, and
(C) if the Executive is any Vice President
other than the Vice President of Engineering, 5
percent of Salary; or
(ii) the excess of the Guideline Amount of shares
over the Executive's Stock Ownership as of January 1,
times the Value of the Stock on the first trading day of
the year.
(b) The Executive may fulfill the stock acquisition
requirement in any of the following manners:
(i) direct purchases of Stock;
(ii) acquisition of Stock in the Executive's
account in a Company-sponsored employee benefit plan to
the extent that the Stock in the account is vested;
(iii) exercise of stock options and retention of
the Stock after the exercise. For purposes of the stock
acquisition requirement, the Value of Stock acquired
through exercise of a stock option shall equal the Value
(on the day of exercise of the option) of the Stock that
is retained immediately after the exercise of the option;
or
(iv) acquisition through any other means, including
a Company-sponsored stock purchase program. For purposes
of the stock acquisition requirement, the Value of Stock
acquired through any other means shall be the Value of
the Stock on the day of acquisition.
(c) If an Executive is subject to a stock acquisition
requirement for a year, the Company shall notify the Executive
of the dollar amount of the requirement by January 31. By
January 15 of the following year, the Executive shall provide
records to the Company of all qualifying acquisitions of Stock
during the year and the Value of the Stock at the time of such
acquisitions.
4. Failure to Meet Stock Acquisition Requirement.
(a) If an Executive is subject to a stock acquisition
requirement under Section 3 and fails to acquire the required
Value of Stock during a year, the Committee, in its
discretion, may reduce the Executive's long-term incentive
grants, including stock options, for the following year. The
Committee may determine that such an Executive shall not
receive any long-term incentive grants for one or more years.
(b) The Committee, at the recommendation of management,
may grant partial or complete exceptions to the Guideline
Amount or the stock acquisition requirement for an Executive.
This authority will be exercised only in circumstances where
application of the Plan's requirements would impose an
extreme, undue hardship on the Executive.
5. Compliance with Securities Law and Company Policy.
Any acquisition of Stock by an Executive for purposes of this
Plan shall comply with all applicable requirements of the
securities laws and relevant Company policies.
6. Applicable Law.
This Plan shall be construed and interpreted pursuant to the
laws of the Commonwealth of Virginia.
7. No Employment Contract.
Nothing contained in this Plan shall be construed to be an
employment contract between an Executive and the Company.
8. Severability.
In the event any provision of this Plan is held illegal or
invalid, the remaining provisions of this Plan shall not be
affected thereby.
9. Effectiveness; Amendment and Termination.
The Plan shall be effective as of January 1, 1996. The
Committee shall have the right to amend the Plan from time to time
and may terminate the Plan at any time.
COMDIAL CORPORATION
Date: August 31, 1995
By /s/ WAYNE R. WILVER
Secretary
Attest:
/s/ JOE. D. FORD
COMDIAL CORPORATION
Exhibit 10.11
EXECUTIVE SEVERANCE PLAN
The Comdial Corporation Executive Severance Plan (the "Plan")
is hereby established by Comdial Corporation, a Delaware
corporation (the "Company") for the benefit of its eligible
executives. The purpose of the Plan is to provide security to
eligible executives in the event of a termination of employment
under defined circumstances.
1. Definitions. For purposes of this Plan:
(a) "Beneficial Ownership" shall have the meaning given
that term for purposes of Rule 13d-3 promulgated under the
Securities Exchange Act of 1934.
(b) "Beneficiary" shall mean the person or entity
designated by an Executive, by written instrument delivered to
the Company, to receive the benefits payable under this Plan
in the event of the Executive's death. If an Executive fails
to designate a Beneficiary, or if no Beneficiary survives the
Executive, such death benefits shall be paid to the
Executive's estate.
(c) "Bonus" shall mean:
(i) the average of the bonus payments which the
Executive received pursuant to the Management Defined
Incentive Plan for the lesser of (A) the last two
completed fiscal years of the Company or (B) the term of
the Executive's employment with the Company, or
(ii) for 24 months after a Change of Control, the
larger of the payment determined under (i) or the payment
under the Management Defined Incentive Plan paid for the
Company's last complete fiscal year before the Change of
Control.
(d) "Change in Control" shall mean:
(i) The acquisition by any Unrelated Person of
Beneficial Ownership of 40% or more of the then
outstanding shares of common stock of the Company or the
combined voting power of the then outstanding voting
securities of the Company entitled to vote generally in
the election of directors.
(ii) As a result of, or in connection with, any
tender or exchange offer, merger or other business
combination, sale of stock or assets or contested
election, or any combination of the foregoing
transactions, the persons who are directors of the
Company before such transaction shall cease to constitute
a majority of the Board of Directors of the Company or
any successor to the Company,
(iii) Approval by the shareholders of the
Company of a reorganization, merger or consolidation with
respect to which the persons who were shareholders of the
Company immediately before the transaction do not,
immediately after the transaction, beneficially own more
than 50% of the then outstanding shares of common stock
of the Company or the combined voting power of the then
outstanding voting securities of the Company entitled to
vote generally in the election of directors, or
(iv) A sale or other disposition of all or
substantially all the assets of the Company, other than
in the ordinary course of business.
(e) "Code" shall mean the Internal Revenue Code of 1986.
(f) "Committee" shall mean the Compensation Committee of
the Board of Directors of the Company, which shall be
responsible for the administration of the Plan.
(g) "Effective Date" means September 5, 1995, the date
of approval of the Plan by the Board of Directors of the
Company.
(h) "Executive" shall mean only the individuals employed
by the Company as Chief Executive Officer, President, Senior
Vice President, Chief Financial Officer, Vice President, and
any other employees specifically designated by the Committee
as eligible under the Plan.
(i) "Good Cause" shall mean:
(i) fraud or material misappropriation by the
Executive with respect to the business or assets of the
Company,
(ii) the persistent refusal or wilful failure of the
Executive materially to perform his duties and
responsibilities to the Company, which continues after
the Executive receives notice of such refusal or failure,
(iii) conduct by the Executive that constitutes
disloyalty to the Company, and that materially harms or
has the potential to cause material harm to the Company,
(iv) the Executive's conviction of a felony or crime
involving moral turpitude,
(v) the use of drugs or alcohol that interferes
materially with the Executive's performance of his
duties, or
(vi) the violation of any significant Company policy
or practice, including but not limited to the Company
policy prohibiting sexual harassment.
(j) "Good Reason" shall exist with respect to an
Executive if, without the Executive's express written consent:
(i) there is a significant adverse change in the
nature or the scope of the Executive's authority or in
his overall working environment after a Change of
Control;
(ii) the Executive is assigned duties materially
inconsistent with his duties, responsibilities and status
at the time of a Change of Control;
(iii) there is a reduction, which is not agreed
to by the Executive, in the Executive's rate of base
Salary or Bonus percentage as in effect at the time of a
Change of Control; or
(iv) the Company changes by 50 miles or more the
principal location in which the Executive is required to
perform services from the location at which the Executive
was employed as of the Change of Control.
(k) "Management Defined Incentive Plan" means the
Comdial Corporation Management Defined Incentive Plan as
changed from time to time.
(l) "Retirement Plan" shall mean any qualified or
supplemental employee pension benefit plan, as defined in
Section 3(2) of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), currently or hereinafter made
available by the Company in which an Executive is eligible to
participate.
(m) "Salary" shall mean the larger of the Executive's
annual base salary rate at (i) the date the Executive's
employment with the Company terminates or (ii) at the time of
a Change of Control.
(n) "Salary Continuance Benefit" shall mean the benefit
provided under Section 2(b).
(o) "Severance Benefit" shall mean the Salary
Continuance Benefit and the Welfare Continuance Benefit.
(p) "Severance Period" shall mean the period beginning
on the date an Executive's employment with the Company
terminates and ending:
(i) if the Executive is President or Chief
Executive Officer, on the date 24 months thereafter,
(ii) if the Executive is Senior Vice President,
Chief Financial Officer or Vice President of Engineering,
on the date 18 months thereafter,
(iii) if the Executive is any Vice President
other than the Vice President of Engineering, on the date
12 months thereafter, or
(iv) for any other Executive covered by the Plan,
the period established by the Committee in its
designation of the Executive as eligible under the Plan,
but no later than the date 24 months thereafter.
(q) "Unrelated Person" shall mean any person other than:
(i) the Company,
(ii) an employee benefit plan or trust of the
Company, or
(iii) a person that acquires stock of the
Company pursuant to an agreement with the Company that is
approved by the Board of Directors in advance of the
acquisition, unless the acquisition results in a Change
of Control pursuant to section 1(d)(ii), (iii) or (iv)
above. A person is an individual, entity or group (as
defined for purposes of Section 13(d)(3) of the
Securities Exchange Act of 1934).
(r) "Welfare Continuance Benefit" shall mean the benefit
provided in Section 2(e).
(s) "Welfare Plan" shall mean any health and dental
plan, disability plan, survivor income plan or life insurance
plan, as defined in Section 3(1) of ERISA, currently or
hereafter made available by the Company in which an Executive
is eligible to participate.
2. Benefits Upon Termination of Employment.
(a) Subject to the provisions of section 4, an Executive
shall be entitled to a Salary Continuance Benefit and a
Welfare Continuance Benefit if, at any time after the
Effective Date, (i) the employment of the Executive with the
Company is terminated by the Company for any reason other than
Good Cause, or (ii) the Executive terminates his employment
with the Company for Good Reason within 24 months after a
Change of Control.
(b) The Salary Continuance Benefit shall be the sum of
the Executive's Salary and Bonus payable in equal monthly
amounts for the longer of the Severance Periods based on
either (i) the Executive's position at the time of termination
of employment, or (ii) for 24 months after a Change of
Control, the Executive's position at the time of the Change of
Control.
(c) Payment of the Salary Continuance Benefit shall be
subject to the following terms and conditions:
(i) Notwithstanding anything herein to the
contrary, the Company may in its sole discretion pay the
Executive's Salary Continuance Benefit in a single lump
sum payment.
(ii) Salary Continuance Benefits shall be made net
of all required federal and state withholdings taxes and
similar required withholdings.
(iii) Payment of the Salary Continuance Benefit
shall not affect the entitlement of the Executive or his
Beneficiary, or any other person entitled to receive
benefits with respect to the Executive under any
Retirement Plan, Welfare Plan, or other plan or program
maintained by the Company in which the Executive
participates at the date of termination of employment.
(d) The Salary Continuance Benefit shall be reduced, to
the extent necessary, so that the total benefits under this
Plan, when added to any other payments made as a result of a
Change of Control that are considered "parachute payments" as
that term is defined under Code Section 280G, do not equal or
exceed 300% (or the then applicable percentage under Code
Section 280G, if less) of the Executive's "base amount" as
that term is defined under Code Section 280G.
The Company shall apply the limitations of Code
Section 280G, and regulations thereunder, in good faith using
the interpretation that is most likely to avoid the imposition
of the excise tax on the Employee and ensures the
deductibility of payments by the Company.
(e) During the Severance Period, an Executive and his
dependents will continue to be covered by all Welfare Plans in
which he and his dependents were participating immediately
prior to the date of his termination (the "Welfare Continuance
Benefit"). Any changes to any Welfare Plan during the
Severance Period shall be applicable to the Executive and his
dependents as if he continued to be an employee of the
Company. The Company will pay the costs of the Welfare
Continuance Benefit for the Executive and his dependents under
the Welfare Plans on the same basis as applicable, from time
to time, to active employees covered under the Welfare Plans.
If such participation in any one or more of the Welfare Plans
included in the Welfare Continuance Benefit is not possible
under the terms of the Welfare Plan, the Company will provide
substantially identical benefits directly or through an other
insurance arrangement. The Welfare Continuance Benefits as to
any Welfare Plan will cease if and when the Executive obtains
employment with another employer during the Severance Period,
and becomes eligible for coverage under any substantially
similar welfare plan provided by his new employer.
3. Death.
If an Executive dies while receiving a Severance Benefit, any
remaining unpaid Severance Benefit shall be paid to his
Beneficiary. The Executive's spouse and other dependents
shall continue to be covered under all applicable Welfare
Plans during the remainder of the Severance Period.
4. Release of Claims.
In consideration for and as a condition to receiving any
payments under this Plan, the Executive must execute a written
release in a form provided by the Company. In addition to any
other provisions determined by the Company, the release may
provide that the Executive agrees, for himself and his heirs,
representatives, successors and assigns, that the Executive
has finally and permanently separated from employment with the
Company, and that he waives, releases and forever discharges
the Company from any and all claims, known or unknown, that he
has or may have, including but not limited to those relating
to or arising out of his employment with the Company and the
termination thereof, including but not limited to any claims
of wrongful discharge, breach of express or implied contract,
fraud, misrepresentation, defamation, liability in tort, any
claims under Title VII of the Civil Rights Act of 1964, as
amended, the Age Discrimination in Employment Act, the
Employee Retirement Income Security Act, the Fair Labor
Standards Act, or any other federal, state or local law
relating to employment, employee benefits or the termination
of employment, excepting only any claims to vested retirement
benefits.
5. No Setoff.
Payment of a Severance Benefit shall be in addition to any
other amounts otherwise payable to the Executive, including
any accrued but unpaid vacation pay. No payments or benefits
payable to or with respect to an Executive pursuant to this
Plan shall be reduced by any amount the Executive may owe to
the Company (except for amounts owed to the Company on account
of loans, travel or standing advances, personal charges on
Company credit cards or accounts, or the value of Company
property not returned to the Company), or by any amount an
Executive may earn or receive from employment with another
employer or from any other source, except as expressly
provided in section 2(e).
6. No Assignment of Benefit.
No interest of any Executive or any Beneficiary under this
Plan, or any right to receive any payment or distribution
hereunder, shall be subject in any manner to sale, transfer,
assignment, pledge, attachment, garnishment, or other
alienation or encumbrance of any kind, nor may such interest
or right to receive a payment or distribution be taken,
voluntarily or involuntarily, for the satisfaction of the
obligations or debts of, or other claims against, the
Executive or Beneficiary, including claims for alimony,
support, separate maintenance, and claims in bankruptcy
proceedings.
7. Benefits Unfunded.
All rights under this Plan of the Executives and
Beneficiaries, shall at all times be entirely unfunded, and no
provision shall at any time be made with respect to
segregating any assets of the Company for payment of any
amounts due hereunder. The Executives and Beneficiaries shall
have only the rights of general unsecured creditors of the
Company.
8. Applicable Law.
This Plan shall be construed and interpreted pursuant to the
laws of the Commonwealth of Virginia.
9. No Employment Contract.
Nothing contained in this Plan shall be construed to be an
employment contract between an Executive and the Company.
10. Severability.
In the event any provision of this Plan is held illegal or
invalid, the remaining provisions of this Plan shall not be
affected thereby.
11. Successors.
The Plan shall be binding upon and inure to the benefit of the
Company, the Executives and their respective heirs,
representatives and successors.
12. Litigation Expenses.
The Company shall pay the litigation expenses, including
reasonable attorneys' fees, incurred by any Executive or
Beneficiary in a suit against the Company in which such
Executive or Beneficiary successfully sues to enforce his
rights under the Plan.
13. Amendment and Termination.
The Board of Directors of the Company shall have the right to
amend the Plan from time to time and may terminate the Plan at
any time, except as provided below:
(a) No amendment may be made to the Plan and the Plan
may not be terminated for 24 months after a Change of Control,
and
(b) No amendment or termination shall reduce the
benefits payable to an Executive who is receiving a Severance
Benefit.
COMDIAL CORPORATION
Date: August 31, 1995
By /s/ WAYNE R. WILVER
Secretary
Attest:
/s/ JOE D. FORD
COMDIAL CORPORATION AND SUBSIDIARIES
EXHIBIT 11
SCHEDULE OF COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PRIMARY * *
Income applicable to common shares:
Income before extraordinary items $9,519,000 $3,037,000 $2,416,000
Extraordinary item - (389,000) -
---------- ---------- ----------
Net income $9,519,000 $2,648,000 $2,416,000
========== ========== ==========
Weighted average number of common shares
outstanding during the year 7,465,938 6,967,705 6,054,809
Add - common equivalent shares (determined
using the "treasury stock" method) representing shares issuable upon exercise
of:
stock options and warrants 231,000 267,756 884,136
Weighted average number of shares used
in calculation of primary earnings per
common share 7,696,938 7,235,461 6,939,945
========= ========= =========
Earnings per common share:
Income before extraordinary item $1.24 $0.42 $0.35
Extraordinary item - (0.05) -
----- ----- ------
Net income $1.24 $0.37 $0.35
====== ====== ======
FULLY DILUTED
Net income applicable to common shares $9,519,000 $2,648,000 $2,416,000
Adjustments for convertible securities:
Dividends paid on convertible preferred
stock 350,000 577,000 -
------- ------- --------
Net income applicable to common shares,
assuming conversion of above securities $9,869,000 $3,225,000 $2,416,000
========== ========== ==========
Weighted average number of shares used
in calculation of primary earnings per
common share 7,696,938 7,235,461 6,938,945
Add (deduct) incremental shares representing:
Shares issuable upon exercise of stock
options and warrants included in
primary calculation (231,000) (267,756) (884,136)
Shares issuable upon exercise of stock
options and warrants issuable based
on year-end market price or weighted
average price 759,788 1,156,312 1,107,207
------- --------- ---------
Weighted average number of shares used
in calculation of fully diluted earnings
per common share 8,225,726 8,124,017 7,162,016
========= ========= =========
Fully diluted earnings per common share $1.20 $0.40 $0.34
========= ========= =========
- -------------------------------------------------------------------------------------------------------------------
* The years 1994 and 1993 have been adjusted to reflect the one-for-three
reverse stock split that occurred in August 1995.
</TABLE>
EXHIBIT 13
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 1995 reporting basis (see Note 1 to the
Consolidated Financial Statements).
RESULTS OF OPERATIONS
Selected consolidated statements of operations data for the last three years are
as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
December 31,
In thousands 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $94,802 $77,145 $69,099
Gross profit 30,775 24,727 21,614
Selling, general & administrative 19,298 15,161 12,805
Engineering, research & development 4,186 3,932 3,424
Interest expense 996 1,267 2,420
Miscellaneous expense 760 637 420
Income tax expense/(benefit) (4,334) 116 129
Extraordinary item, write-off
of debt issuance cost - 389 -
Net income 9,869 3,225 2,416
Preferred dividends 350 577 -
Net income applicable to common stock 9,519 2,648 2,416
- -----------------------------------------------------------------------------------------------------------
</TABLE>
1995 COMPARED WITH 1994
NET SALES as reported for 1995 increased by 23% to $94,802,000, compared with
$77,145,000 in 1994. The continued increase in sales was primarily due to (1)
the demand for the Company's Digital Expandable System ("DXP") and Impact
products, and (2) the enhancement of the Computer Telephony Integration ("CTI")
products. Sales of digital products increased 42% to $51,693,000 compared with
$36,366,000 for 1994. Sales of CTI product increased 33% to $6,889,000 compared
with $5,179,000 for 1994. Custom manufacturing increased to $6,125,000 compared
with $2,578,000 for 1994 as a result of a one-time contract from a major
manufacturer. Sales of analog and proprietary terminals decreased 11% to
$22,136,000 and 7% to $5,110,000 compared with $24,938,000 and $5,495,000 for
1994, respectively. Management expects sales of digital business systems to
continue to grow in 1996, primarily due to (1) the continued growth in DXP
system sales driven by new CTI applications, (2) the development of new products
such as the DXP Plus, (3) the development of new strategic alliances, and (4)
the acceptance of the DXP in international markets. Management expects sales of
analog and proprietary terminals to continue to decrease in 1996. Sales in the
international market have increased by $184,000 or 7% compared with 1994, but
were lower than expected due to economic conditions in Latin America. The
Company's penetration into the international marketplace has been a deliberate
process. As the Company's products gain more exposure internationally, and more
international distributors are recruited, sales in this market are expected to
show accelerated growth.
GROSS PROFIT as a percentage of sales for 1995 was approximately 32.5% compared
with 32.1% for 1994. Gross profit increased in 1995 by 24% to $30,775,000
compared with $24,727,000 for 1994. This was primarily attributable to the
increased sales of higher margin business system products, such as the DXP and
Impact products.
SELLING, GENERAL AND ADMINISTRATION EXPENSES increased in 1995 by 27% to
$19,298,000 compared with $15,161,000 for 1994. The primary reasons for the
increase were (1) higher promotional allowance costs associated with increased
sales volume and the increase in the number of dealers, (2) an increase in sales
personnel to support the growth of the CTI and international markets, and (3) an
increase in advertising due to the emphasis on market recognition. Advertising
expenses as a percentage of net sales were approximately 20% for both 1995 and
1994. The Company formed Comdial Enterprise Systems, Inc. ("CES") in 1993 to
manage the Company's CTI business. Costs relating to CES increased by 55% to
$1,255,000 compared with $811,000 in 1994, due largely to additional personnel.
ENGINEERING, RESEARCH AND DEVELOPMENT EXPENSES increased in 1995 by 6% to
$4,186,000 compared with $3,932,000 for 1994. This increase was primarily due to
an increase in software development and support personnel.
INTEREST EXPENSE decreased in 1995 by 21% to $996,000 compared with $1,267,000
for 1994. This decrease was primarily due to (1) the continued reduction of the
Company's indebtedness and (2) the Company's ability to generate funds to
minimize its use of the revolving credit facility with Fleet Capital Corporation
("Fleet"), formerly known as Shawmut Capital Corporation and prior to that as
Barclays Business Credit, Inc.
MISCELLANEOUS EXPENSE increased by 19% to $760,000 compared with $637,000 in
1994. The increase was primarily due to cash discounts associated with the
increased sales in 1995.
INCOME TAX EXPENSE/(BENEFIT) reflects a benefit of $4,334,000 in 1995 compared
with an expense of $116,000 for 1994. This change was primarily due to the
recognition of a deferred tax asset through a reduction of the valuation
allowance. As of July 2, 1995, the valuation allowance was reduced by $4,503,000
based on management's assessment of future taxable income and management's
belief that it is "more likely than not" that the Company will realize this tax
benefit.
EXTRAORDINARY ITEM, WRITE-OFF OF DEBT ISSUANCE COST, represents debt issuance
costs that were written off during the first quarter of 1994 in connection with
the refinancing of the Company's indebtedness to PacifiCorp Credit, Inc,
("PCI").
DIVIDENDS ON PREFERRED STOCK for 1995 represent quarterly dividends payable to
the holder of the Company's Series A 7-1/2 Cumulative Convertible Redeemable
Preferred Stock ("Series A Preferred Stock"). The Company originally issued
850,000 shares of Series A Preferred Stock to PCI in February 1994, in exchange
for the cancellation of $8,500,000 of the Company's indebtedness to PCI. In
December 1994, the Company redeemed 100,000 shares of the Series A Preferred
Stock.
Dividends in 1995 decreased by 39% to $350,000 compared with $577,000 for 1994.
In August 1995, the Company redeemed the 750,000 shares with proceeds received
from a public offering of the Company's Common Stock and paid all dividends
associated with the Serires A Preferred Stock (see Note 11 to the Consolidated
Financial Statements).
NET INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM, as a result of the
foregoing, increased 48% to $5,535,000 in 1995, compared with $3,730,000 in
1994. Net income before income taxes and extraordinary item also increased as a
percentage of net sales to 6% in 1995 compared with 5% in 1994. Management
anticipates, assuming continued strength in the economy, that the factors which
have led to significant increases in sales, net income and earnings per share
for 1995 will continue to have positive influence on the Company's performance
in 1996. The Company plans to continue to improve sales by (1) introducing and
shipping new products and product enhancements; (2) introducing additional
applications of DXP, Impact, digital, and CTI products; (3) introducing new
products of the Company's in new countries; (4) expanding the sales organization
to help increase the number of dealers who sell the Company's products; and (5)
also through the acquisition of various companies.
1994 COMPARED WITH 1993
NET SALES in 1994 increased 12% to $77,145,000 compared with $69,099,000 in
1993. This increase was primarily due to the increase in sales of business
systems. Digital products sales increased 18% to $36,366,000 compared with
$30,901,000 for 1993. CTI product sales increased 88% to $5,179,000 compared
with $2,761,000 for 1993. Custom manufacturing also increased 188% to $2,578,000
compared with $894,000 for 1993. Sales of analog and proprietary stand-alone
terminals decreased 4% to $24,938,000 and 11% to $5,495,000 compared with
$25,990,000 and $6,163,000 for 1993, respectively.
GROSS PROFIT increased 14% to $24,727,000, compared with $21,614,000 in 1993.
Similarly, gross margin increased to 32% in 1994, compared with 31% in 1993.
This increase in gross margin was primarily attributable to increased sales of
higher margin products, such as DXP and Impact.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES in 1994 increased 18% to
$15,161,000, compared with $12,805,000 in 1993. The primary reasons for the
increase were (1) additional sales promotional costs associated with the higher
sales volume in 1994, (2) increased sales allowances attributed to an increase
in the number of dealers, (3) increased personnel and associated expenses for
customer support and training, and (4) a full year of operation of the Company's
CES business. Costs relating to CES were $546,000 higher in 1994 compared with
1993.
ENGINEERING, RESEARCH AND DEVELOPMENT EXPENSES increased 15% to $3,932,000
compared with $3,424,000 in 1993. The increase was due primarily to expenditures
to support development of the larger version of the DXP digital system.
INTEREST EXPENSE in 1994 decreased 48% to $1,267,000, compared with $2,420,000
in 1993. The decrease in interest expense was due to lower debt resulting from
the recapitalization, effective on February 1, 1994.
MISCELLANEOUS EXPENSE in 1994 increased 52% to $637,000, compared with $420,000
in 1993. The increase was primarily due to higher cash discounts which is a
direct result of higher sales, and the reduction of interest income which is
primarily due to the Company depositing all cash receipts to the revolver bank
account.
EXTRAORDINARY ITEM, WRITE-OFF OF DEBT ISSUANCE COSTS in 1994 was $389,000, which
represents costs in connection with the refinancing of the Company's
indebtedness to PCI.
DIVIDENDS ON PREFERRED STOCK represent quarterly dividends payable to the holder
of Series A Preferred Stock. The Company issued 850,000 shares of Series A
Preferred Stock to PCI in February 1994, in exchange for the cancellation of
$8,500,000 of the Company's indebtedness. The Company redeemed 100,000 shares of
Series A Preferred Stock from PCI in December 1994. Dividends in 1994 totaled
$577,000.
NET INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM, as a result of the
foregoing, increased 47% to $3,730,000 in 1994, compared with $2,545,000 in
1993.
LIQUIDITY AND CAPITAL SOURCES
Prior to February 1994, the Company was indebted to an affiliate of PCI in the
amount of $21,209,453. In connection with the refinancing effected in February
1994, the Company issued 850,000 shares of a newly designated Series A Preferred
Stock of the Company in exchange for the cancellation of $8,500,000 of the
Company's indebtedness to PCI. The remainder of the Company's indebtedness to
PCI was paid using $6,000,000 of cash generated from operations and $6,709,453
of cash borrowed from Fleet, pursuant to a loan and security agreement (the
"Loan Agreement") between Fleet and the Company, under which Fleet provided a
$6,000,000 term loan and a $9,000,000 revolving credit facility to the Company.
In April 1994, the Company and Fleet 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.
Pursuant to the terms of the Loan Agreement, the $6,000,000 term note and the
$1,300,000 term note have an interest rate equal to 1-1/2% above Fleet's prime
rate. The $6,000,000 term note is payable in 24 equal monthly principal
installments of $125,000, and 23 equal monthly principal installments of
$83,334, with the balance due in February 1998. The $1,300,000 term note is
payable in 44 equal monthly installments of $27,000, with the balance due in
February 1998. The revolving credit facility has an interest rate of 1% above
Fleet's prime rate. As of December 31, 1995, the Company had not borrowed any
funds under the revolving credit facility and had approximately $8,311,700 of
borrowing capacity (see Note 5 to Consolidated Financial Statements). The
Company expects to fund its 1996 total debt payments of $1,407,340 owed to Fleet
with cash generated from operations.
The Company's indebtedness under the Loan Agreement is secured by liens on the
Company's accounts receivable, inventories, intangibles, land, and all other
assets. The Loan Agreement also contains financial covenants requiring the
Company to maintain specified levels of consolidated tangible net worth,
profitability, debt service ratio, and current ratio. In addition, the Loan
Agreement limits the Company's ability to make additional borrowings and payment
of dividends except those permitted on the Series A Preferred Stock. At December
31, 1995, the Company was in compliance with all of its debt covenants.
The impact of the refinancing in 1994 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. The refinancing also
eliminated the 1996 balloon payment otherwise due under the existing PCI
indebtedness.
In December 1994, the Company purchased from PCI 100,000 shares of Series A
Redeemable Preferred Stock at the same time the Company received proceeds of
$1,000,000 from Cortelco International Inc. ("Cortelco"), for the sale of the
electromechanical product line in 1992.
In July 1995, the Company's stockholders approved an amendment to the Company's
Restated Certificate of Incorporation effecting a one-for-three reverse split of
the Company's Common Stock. In August 1995, the Company completed a public
offering of 3,000,000 shares (post-split) of Common Stock, 2,000,000 which were
owned by PCI and 1,000,000 which were new shares sold by the Company. The
Company used the net proceeds to (1) redeem the 750,000 shares of the remaining
Series A Preferred Stock held by PCI, (2) pay accumulated dividends, (3) pay the
offering costs, and (4) provide for future working capital needs. Management
believes that this has improved not only the Company's financial position, but
also increased the stockholders' value. The Company has benefited in the
following ways: (1) dividends on Series A Preferred Stock were eliminated, (2)
Stockholders' Equity has increased by the additional proceeds received from the
offering, (3) the reverse stock split has increased earnings per share by
lowering the common outstanding shares, (4) PCI's ability to dilute the Common
Stock by converting shares of the Preferred Stock to shares of Common Stock was
eliminated, and (5) the Company's shares are of sufficient value to support
higher institutional ownership and attract analyst coverage (see Note 11 to the
Consolidated Financial Statements).
The following table sets forth the Company's cash and cash equivalents, current
maturities on debt, and working capital at the dates indicated:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
December 31,
In thousands 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash and cash equivalents $ 4,144 $ 1,679 $ 5,474
Current maturities on debt 1,903 2,466 4,252
Working capital 18,271 11,631 14,943
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Cash and cash equivalents is higher by $2,465,000 in 1995 compared with 1994 due
primarily to (1) cash generated from sales and (2) the proceeds received from
the stock offering in August 1995. Current maturities on debt is lower by
$563,000 primarily due to the continued diminishment of the Company's existing
debt with Fleet. Working capital increased, primarily due to the increase in
cash, accounts receivable, and inventory at December 31, 1995.
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, 1995, the revolver balance was zero.
Accounts receivable increased by $2,339,000 primarily due to shipments made in
the last three weeks of December 1995. Prepaid expenses and other current
assets, increased in total by $1,681,000 due primarily to higher prepaid royalty
expense, prepaid rental expense, and a miscellaneous receivable for returned
inventory.
Deferred tax asset and liability relates to the Company recognizing in the
second quarter of 1995, the expected utilization of net operating losses
("NOLs") for future periods (reference Statement of Financial Accounting
Standards ("SFAS") No. 109 "Accounting for Income Taxes"). Prior to July 2,
1995, the Company did not recognize any reduction in the valuation allowance due
to the uncertainty as to whether the Company would continually generate taxable
income during the carryforward period.
Stockholders' equity at December 31, 1995, increased 63% to $34,294,000 compared
with $21,043,000 for December 31, 1994. This increase was primarily due to (1)
net income applicable to common stock of $9,519,000 and (2) the proceeds
received from the public stock offering of $11,200,000 (see Note 11 to the
Consolidated Financial Statements).
Capital additions for 1995 amounted to approximately $2,728,000. 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 were provided by funding from operations, capital
leasing, and borrowing from Fleet. Cash expenditures for capital additions for
1995, 1994, and 1993 amounted to $2,155,000, $2,116,000, and $848,000,
respectively. Management anticipates that approximately $4,000,000 will be spent
on capital additions during 1996. 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.
The Company believes that as a result of the improved capital structure
resulting from the repurchase of the Series A Preferred Stock from PCI and the
elimination of the related dividend payments, income from operations combined
with amounts available from the Company's current credit facilities, will be
sufficient to meet the Company's needs for the foreseeable future.
The Company has a commitment from Crestar Bank for the issuance of letters of
credit in amounts not to exceed $750,000 at any one time. At December 31, 1995,
the amount of available commitments under the letter of credit facility with
Crestar Bank was $697,000.
In November 1992, the Financial Accounting Standards Board ("FASB") issued 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.
In October 1995, FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." The new standard defines a fair value method of accounting for
stock options and similar equity instruments. Pursuant to the new standard,
companies can either adopt the standard or continue to account for such
transactions under Accounting Principles Board Opinion ("APBO") No. 25,
"Accounting for Stock Issued to Employees." The Company has elected to continue
to account for such transactions under APBO No. 25. The Company will be required
to disclose in a note to the financial statements, pro forma net income and
earnings per share, as if the company had applied the new method of accounting.
Complying with the new standard will have no effect on earnings or the Company's
cash flow.
During the fiscal years ended 1995, 1994, and 1993, all of the Company's sales,
net income, and identifiable net assets were attributable to the
telecommunications industry.
During the month of March 1996, the Company signed definitive agreements to
purchase Key Voice Technologies, Inc. ("KVT") and Aurora Systems, Inc.
("Aurora"). The acquisitions of KVT and Aurora are planned to be completed near
the end of March, 1996. The acquisition cost will be funded by cash, promissory
note, and the Company's Common Stock (see Note 15 to the Consolidated Financial
Statements).
______________________________________________________________________________
INDEPENDENT AUDITORS' 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, 1995 and 1994, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Comdial Corporation and
subsidiaries at December 31, 1995 and 1994, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1995 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Richmond, Virginia
January 29, 1996
- ------------------------------------------------------------------------------
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
Chairman, President and Senior Vice President and
Chief Executive Officer Chief Financial Officer
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
December 31,
In thousands except par value 1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 4,144 $ 1,679
Accounts receivable - net 8,976 6,637
Inventories 17,925 16,869
Prepaid expenses and other current assets 2,695 1,014
- -------------------------------------------------------------------------------------------------------------
Total current assets 33,740 26,199
- -------------------------------------------------------------------------------------------------------------
Property - net 13,943 13,668
Net deferred tax asset 6,694 -
Other assets 2,315 2,393
- -------------------------------------------------------------------------------------------------------------
Total assets $ 56,692 $ 42,260
=============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 7,988 $ 6,977
Accrued payroll and related expenses 1,518 1,373
Accrued promotional allowances 1,851 1,592
Other accrued liabilities 2,209 2,160
Current maturities of debt 1,903 2,466
- -------------------------------------------------------------------------------------------------------------
Total current liabilities 15,469 14,568
- -------------------------------------------------------------------------------------------------------------
Long-term debt 2,844 4,737
Net deferred tax liability 2,191 -
Long-term employee benefit obligations 1,894 1,912
Commitments and contingent liabilities (see Note 14)
- -------------------------------------------------------------------------------------------------------------
Total liabilities 22,398 21,217
- -------------------------------------------------------------------------------------------------------------
Stockholders' equity
Series A 7-1/2% preferred stock ($10.00 par value),
(Authorized shares 2,000; issued 0 shares) - 7,500
Common stock ($0.01 par value) and paid-in capital
(Authorized 30,000 shares; issued shares:
1995 = 8,132; 1994 = 6,984) 111,625 100,320
Other (1,014) (942)
Accumulated deficit (76,317) (85,835)
- -------------------------------------------------------------------------------------------------------------
Total stockholders' equity 34,294 21,043
- -------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 56,692 $ 42,260
=============================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Years Ended December 31,
In thousands except per share amounts 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $94,802 $77,145 $69,099
Cost of goods sold 64,027 52,418 47,485
- --------------------------------------------------------------------------------------------------------------
Gross profit 30,775 24,727 21,614
- --------------------------------------------------------------------------------------------------------------
Operating expenses
Selling, general & administrative 19,298 15,161 12,805
Engineering, research & development 4,186 3,932 3,424
- --------------------------------------------------------------------------------------------------------------
Operating income 7,291 5,634 5,385
- --------------------------------------------------------------------------------------------------------------
Other expense (income)
Interest expense 996 1,267 2,420
Miscellaneous expense 760 637 420
- --------------------------------------------------------------------------------------------------------------
Income before income taxes and 5,535 3,730 2,545
extraordinary item
Income tax expense/(benefit) (4,334) 116 129
- --------------------------------------------------------------------------------------------------------------
Income before extraordinary item 9,869 3,614 2,416
Extraordinary item, write-off of
debt issuance cost - 389 -
- --------------------------------------------------------------------------------------------------------------
Net income 9,869 3,225 2,416
Dividends on preferred stock 350 577 -
- --------------------------------------------------------------------------------------------------------------
Net income applicable to common stock $ 9,519 $ 2,648 $ 2,416
==============================================================================================================
Earnings per common share and common equivalent share:
Primary:
Income before extraordinary item $1.24 $0.42 $0.35
Extraordinary item - (0.05) -
- --------------------------------------------------------------------------------------------------------------
Net income per common share $1.24 $0.37 $0.35
==============================================================================================================
Fully diluted $1.20 $0.37 $0.34
==============================================================================================================
Weighted average common shares outstanding:
Primary 7,697 7,235 6,939
Fully diluted 8,226 7,235 7,162
</TABLE>
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Common Stock Preferred Stock
---------------------------------------------------- Paid-in
In thousands Shares Amount Shares Amount Capital
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1993 18,055 $181 - $ - $ 99,115
Proceeds from sale of
Common Stock:
Incentive plans (20)
Notes receivable
Stock options exercised 133 1 95
Warrants exercised 2,500 25 620
Incentive stock issued 40 30
Treasury stock purchased
Net income
- ---------------------------------------------------------------------------------------------------------------
Balance at December 31, 1993 20,728 207 - - 99,840
Proceeds from sale of
Common Stock:
Notes receivable (146)
Stock options exercised 439 4 285
Incentive stock issued 40 130
Preferred stock issued 850 8,500
Redeemed preferred stock (100) (1,000)
Treasury stock purchased
Dividend paid on preferred stock
Net income
- ---------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 21,207 211 750 7,500 100,109
Reverse stock-split 1 for 3
(August 8, 1995) (14,138) (141) 141
Proceeds from sale of
Common Stock:
Stock offering 1,000 10 11,200
Notes receivable
Stock options exercised 144 2 250
Stock offering cost (273)
Incentive stock issued 13 116
Redeemed preferred stock (750) (7,500)
Treasury stock purchased
Dividend paid on preferred stock
Net income
- ---------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 8,226 $ 82 - - $111,543
===============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Notes
Treasury Stock Receivable
------------------------ on Sale Retained
In thousands Shares Amount of Stock Earnings Total
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1993 (150) $(583) $(303) $(90,899) $7,511
Common Stock:
Incentive plans (20)
Notes receivable 74 74
Stock options exercised 96
Warrants exercised 645
Incentive stock issued 30
Treasury stock purchased (1) (2) (2)
Net income 2,416 2,416
- ---------------------------------------------------------------------------------------------------------------
Balance at December 31, 1993 (151) (585) (229) (88,483) 10,750
Proceeds from sale of
Common Stock:
Notes receivable 47 (99)
Stock options exercised 289
Incentive stock issued 130
Preferred stock issued 8,500
Redeemed preferred stock (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 (254) (760) (182) (85,835) 21,043
Reverse stock-split 1 for 3
(August 8, 1995) 169 -
Proceeds from sale of
Common Stock:
Stock offering 11,210
Notes receivable 6 6
Stock options exercised 252
Stock offering cost (273)
Incentive stock issued (1) 115
Redeemed preferred stock (7,500)
Treasury stock purchased (9) (78) (78)
Dividend paid on preferred stock (350) (350)
Net income 9,869 9,869
- ---------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 (94) $(838) $(176) $(76,317) $34,294
===============================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
In thousands 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Cash received from customers $97,156 $81,298 $74,265
Other cash received 1,355 2,305 1,236
Interest received 60 56 65
Cash paid to suppliers and employees (93,990) (75,888) (66,725)
Interest paid on debt (676) (924) (1,981)
Interest paid under capital lease obligations (174) (284) (256)
Income taxes paid (186) (200) (44)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 3,545 6,363 6,560
- ---------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from the sale of equipment 6 206 56
Proceeds received on note from Cortelco
International, Inc. - 1,000 1,000
Capital expenditures (2,155) (2,116) (848)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities (2,149) (910) 208
- ---------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from borrowings - 7,300 2,660
Proceeds from issuance of common stock 11,384 203 739
Principal payments on debt (1,824) (14,365) (3,859)
Principal payments under capital lease obligations (641) (809) (1,233)
Preferred stock redemption (7,500) (1,000) -
Preferred dividends paid (350) (577) -
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 1,069 (9,248) (1,693)
- ---------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 2,465 (3,795) 5,075
- ---------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 1,679 5,474 399
- ---------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 4,144 $ 1,679 $ 5,474
=================================================================================================================================
Reconciliation of net income to net cash provided by operating activities:
Net Income $ 9,869 $ 3,225 $ 2,416
Depreciation and amortization 3,557 4,138 3,138
Decrease (increase) in accounts receivable (2,339) (453) 689
Inventory provision 1,309 964 900
Increase in inventory (2,365) (2,989) (307)
Increase in other assets (3,277) (1,620) (958)
Increase in net deferred tax assets (4,503) - -
Increase (decrease) in accounts payable and bank
overdrafts 1,011 1,918 (639)
Increase in other liabilities 435 1,238 1,237
Increase (decrease) in other equity (152) (58) 84
- ---------------------------------------------------------------------------------------------------------------------------------
Total adjustments (6,324) 3,138 4,144
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 3,545 $ 6,363 $ 6,560
=================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1995, 1994, 1993
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.
NATURE OF OPERATIONS
Comdial is a United States ("U.S.") based manufacturer of business communication
systems. The Company's principle customers are small to medium sized businesses
throughout the U.S. and other international markets. The distribution network
consists of three major distributors, approximately 1500 dealers and several
thousand independent interconnects. The dynamic, high technology industry in
which the Company participates is very competitive. There is an increasing shift
from analog to digital product lines as well as other rapid technological
changes creating the potential for product obsolescence.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with Generally Accepted
Accounting Principles ("GAAP") requires management to make certain estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues,
and expenses; and the disclosure of contingent assets and liabilities at
December 31, 1995. Actual results could differ from those estimates.
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 $1,594,000 and $1,099,000 are included in accounts payable at
December 31, 1995 and 1994, respectively. Bank overdrafts 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 useful lives.
The effect of this change in accounting estimate was to increase depreciation
expense and decrease income from continuing operations in 1994 by $239,000 or
$0.03 per share. 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 PER COMMON SHARE AND COMMON EQUIVALENT SHARE
For 1995, 1994, and 1993, 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 1995, 1994, and 1993, the Company incurred costs associated with the
development of software related to the Company's various products. The
accounting for such software costs is in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 86. The Company's estimate of product life is
approximately three years or more. The total amount of unamortized software
development cost included in other assets is $1,475,000 and $1,392,000 at
December 31, 1995 and 1994, respectively. The amounts capitalized were $840,000,
$717,000, and $721,000, of which $757,000, $858,000, and $705,000 were amortized
in 1995, 1994, and 1993, respectively.
POSTRETIREMENT BENEFITS OTHER THAN PENSION
The Company adopted in 1993, SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions". SFAS No. 106 requires the Company
to accrue estimated costs relating to health care and life insurance benefits.
In 1995, 1994, and 1993, the Company recognized $311,000, $289,000 and $288,000,
respectively.
INCOME TAXES
The Company adopted SFAS No. 109, "Accounting for Income Taxes", in 1993, which
specifies the asset and liability approach. Under SFAS No. 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 benefits where, based on
available evidence, the likelihood of realization can be established. The
Company has incurred prior cumulative operating losses through 1991 for
financial statement and tax reporting purposes and has adjusted its valuation
allowance account to recognize a portion of the net deferred tax asset for
future periods (see Note 6). Tax credits will be utilized to reduce current and
future income tax expense and payments.
RECLASSIFICATIONS
Amounts in the 1994 and 1993 consolidated financial statements have been
reclassified to conform to the 1995 presentation. These reclassifications had no
effect on previously reported consolidated net income.
NOTE 2. INVENTORIES
Inventory consists of the following:
- -------------------------------------------------------------------------------
December 31,
In thousands 1995 1994
- -------------------------------------------------------------------------------
Finished goods $3,808 $2,936
Work-in-process 4,202 4,455
Materials and supplies 9,915 9,478
----- -----
Total $17,925 $16,869
======= =======
- -------------------------------------------------------------------------------
NOTE 3. PROPERTY
Property consists of the following:
- -------------------------------------------------------------------------------
December 31,
In thousands 1995 1994
- -------------------------------------------------------------------------------
Land $396 $396
Buildings and improvements 11,763 11,540
Machinery and equipment 27,547 26,551
Less accumulated depreciation (25,763) (24,819)
------- -------
Property - Net $13,943 $13,668
======= =======
- ------------------------------------------------------------------------------
Depreciation expense charged to operations for the years 1995, 1994, and 1993,
was $2,422,000, $2,601,000, and $2,164,000, respectively.
NOTE 4. LEASE OBLIGATIONS
The Company and its subsidiaries have various capital and operating lease
obligations. 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
- ------------------------------------------------------------------------------
1996 $584 $1,413
1997 135 1,396
1998 107 1,338
1999 - 988
2000 - 2
---- -----
Total minimum lease commitments 826 $5,137
======
Less amounts representing interest
and other costs (109)
------
Principal portion of minimum lease
commitments at December 31, 1995 $717
====
- ------------------------------------------------------------------------------
Assets recorded under capital leases (included in property in the accompanying
Consolidated Balance Sheets) are as follows:
- -------------------------------------------------------------------------------
December 31,
In thousands 1995 1994
- -------------------------------------------------------------------------------
Machinery and equipment $1,843 $2,269
Less accumulated depreciation (690) (570)
------ -----
Property - Net $1,153 $1,699
====== ======
- -------------------------------------------------------------------------------
During 1995, 1994, and 1993, the Company entered into new capital lease
obligations which amounted to approximately $9,000, $228,000, and $1,597,000,
respectively.
Operating leases and rentals are for buildings, 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, 1995, 1994,
and 1993 was $1,262,000, $1,023,000, and $1,025,000, respectively.
NOTE 5. DEBT
As of February 1, 1994, Fleet Capital Corporation ("Fleet"), formerly known as
Shawmut Capital Corporation and prior to that 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.
LONG-TERM DEBT
- ------------------------------------------------------------------------------
December 31,
In thousands 1995 1994
- -------------------------------------------------------------------------------
Notes payable to Fleet
Term notes I and II (1) 4,030 $5,854
Revolving credit (2) - -
Capitalized leases (see Note 4) 717 1,349
----- -----
Total debt 4,747 7,203
Less current maturities on debt 1,903 2,466
Total long-term debt $2,844 $4,737
====== ======
- ------------------------------------------------------------------------------
(1) The Fleet Term Notes I and II of $7,300,000 carry interest rates of 1-1/2%
over Fleet's prime rate and are payable in equal monthly principal installments
of $152,000 for the next 2 months, and 23 equal monthly principal installments
of $110,334, with the balance due on February 1, 1998.
(2) The Fleet revolving credit facility carries an interest rate of 1% over
Fleet's 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 Fleet (term notes plus revolving credit
facility) may not exceed $14,000,000.
The Company's indebtedness with PCI was secured by liens on the Company's
accounts receivable, inventories, intangibles, land, and other assets. 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 Fleet entered into a loan and
security agreement ("Loan Agreement") pursuant to which Fleet 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 Fleet 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 International, Inc. ("Cortelco") in December 1994
relating to the sale of the electromechanical product line in 1992.
On April 29, 1994, the Company and Fleet 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 $1,300,000 term note is payable in 44 equal monthly payments of $27,000 with
the balance due on February 1, 1998.
Scheduled maturities of Fleet 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 1996 $1,407
1997 1,324
1998 1,299
- ------------------------------------------------------------------------------
DEBT COVENANTS
The Company's indebtedness to Fleet is secured by liens on the Company's
accounts receivable, inventories, intangibles, land, and other property. Among
other restrictions, the Loan Agreement with Fleet 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
made to PCI for their Series A Preferred Stock. As of December 31, 1995, 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' financial statements have not been restated. The components of the income
tax expense for the years ended December 31, are as follows:
- ------------------------------------------------------------------------------
Liability Method
In thousands 1995 1994 1993
- ------------------------------------------------------------------------------
Current - Federal $142 $88 $89
State 27 28 40
Deferred - Federal (4,374) - -
State (129) - -
----- --- --
Total provision/(benefit) $(4,334) $116 $129
======= ==== ====
- ------------------------------------------------------------------------------
The income tax provision reconciled to the tax computed at statutory rates for
the years ended December 31, is summarized as follows:
- ------------------------------------------------------------------------------
In thousands 1995 1994 1993
- ------------------------------------------------------------------------------
Federal tax at statutory rate
(35% in 1995, 1994, and 1993) $1,937 $1,306 $891
State income taxes (net of federal tax
benefit) 18 18 27
Nondeductible charges 46 34 20
Alternative minimum tax 139 84 89
Utilization of operating loss carryover (1,971) (1,326) (898)
Adjustment of valuation allowance (4,503) - -
------ ------ ----
Income tax provision/(benefit) $(4,334) $116 $129
======= ==== ====
- ------------------------------------------------------------------------------
Net deferred tax assets of $4,503,000 and $0 have been recognized in the
accompanying Consolidated Balance Sheet at December 31, 1995 and 1994. The
components of the net deferred tax assets are as follows:
- ------------------------------------------------------------------------------
In thousands 1995 1994
- ------------------------------------------------------------------------------
Total deferred tax assets $28,091 $29,852
Total valuation allowance (21,397) (27,871)
------- --------
Total deferred tax assets - net 6,694 1,981
Total deferred tax liabilities (2,191) (1,981)
------ ------
Total $4,503 $ -
====== ======
- ------------------------------------------------------------------------------
The valuation allowance decreased $6,474,000 during the year ended December 31,
1995. The decrease was primarily related to: (1) the re-evaluation of the future
utilization of net operating losses ("NOLs") of $4,503,000, and (2) the
utilization of operating loss carryforwards of $1,971,000. The Company
periodically reviews the requirements for a valuation allowance and makes
adjustments to such allowance when changes in circumstances result in changes in
judgment about the future realization of deferred tax assets. Based on a
re-evaluation of the realizability of the deferred tax assets, the valuation
allowance was reduced and a tax benefit of $4,503,000 was recognized in the
quarter ended July 2, 1995. Management believes, although realization is not
assured, that it is more likely than not that the Company will realize this tax
benefit. The amount of the deferred tax asset considered realizable, however,
could be reduced in the near term if estimates of future taxable income during
the carryforward periods are reduced.
The Company has net operating loss and credit carryovers of approximately
$66,883,000 and $3,153,000, respectively, which, if not utilized, will expire as
follows:
- ------------------------------------------------------------------------------
In thousands Net Operating
Expiration Dates Losses Tax Credits
- ------------------------------------------------------------------------------
1996 - 1997 $14 $412
1998 69 1,846
1999 19,931 504
2000 31,129 66
2001 5,260 -
AFTER 2001 10,480 _ 325
------ -----
TOTAL $66,883 $3,153
======= ======
- ------------------------------------------------------------------------------
Based on the Company's interpretation of Section 382 of the Internal Revenue
Code, the reduction of the valuation allowance was calculated assuming a 50%
ownership change, which could limit the utilization of the tax net operating
loss and tax credit carryforwards in future periods starting at the time of the
change. An ownership change could occur if changes in the Company's stock
ownership exceeds 50% of the value of the Company's stock during any three year
period.
The components of the net deferred tax assets (liabilities) at December 31, 1995
and 1994 are as follows:
- ------------------------------------------------------------------------------
Deferred Assets/(Liabilities)
In thousands 1995 1994
- ------------------------------------------------------------------------------
Net loss carryovers $22,740 $24,595
Tax credit carryovers 3,153 3,027
Inventory write downs and capitalization 1,057 1,028
Pension 354 461
Postretirement 290 189
Compensation and benefits 169 169
Capitalized software development costs 277 256
Contingencies 21 28
Other deferred tax assets 18 11
Note receivable reserve - 84
Fixed asset depreciation (2,179) (1,977)
Income reported in different periods for
financial reporting and tax purposes - -
Other deferred tax liabilities - -
------- ------
Net deferred tax asset 25,900 27,871
Less: Valuation allowance (21,397) (27,871)
------ -------
Total $4,503 $ -
====== =======
- ------------------------------------------------------------------------------
NOTE 7. PENSION AND SAVINGS PLANS
The Company currently has one pension plan which provides benefits based on
years of service and employee's compensation during the employment period. The
calculation of pension benefits prior to 1993 will be based on the provisions of
the two previous pension plans. 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. The funding policy for
the plans was to make the minimum annual contributions required by applicable
regulations. Assets of the plans are 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, 1995 and
1994.
In thousands 1995 1994
- ------------------------------------------------------------------------------
Actuarial present value of benefit obligation:
Accumulated benefit obligation (including vested
benefits of $10,499 and $8,431, respectively) $(11,473) $(9,225)
======== =======
Projected benefit obligation for service to date $(12,102) $(9,583)
Plan assets at fair value 12,345 9,041
------- ------
Plan assets more (less) than projected benefit obligation 243 (542)
Unrecognized net (gain) or loss from past experience (1,064) (1,007)
Unrecognized net (gain) or loss from prior service cost (288) (322)
Unrecognized net asset at date of implementation of
SFAS No. 87 amortized over 14 years (115) (144)
---- ----
Accrued liabilities for benefit plans at December 31 $(1,224) $(2,015)
======= =======
- ------------------------------------------------------------------------------
Net periodic pension cost for 1995, 1994, and 1993 included the following
components:
- ------------------------------------------------------------------------------
In thousands 1995 1994 1993
- ------------------------------------------------------------------------------
Service cost-benefits earned during the period $931 $982 $803
Interest cost on projected benefit obligation 751 657 548
Actual return on plan assets (2,122) 106 (1,438)
Net amortization and deferral of other items 1,199 (919) 608
----- ---- ---
Net periodic pension cost $759 $826 $521
==== ==== ====
- ------------------------------------------------------------------------------
Assumptions used in accounting for the plans were as follows:
- ------------------------------------------------------------------------------
1995 1994 1993
- ------------------------------------------------------------------------------
Discount rate 7.50% 8.00% 7.00%
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 1995,
1994, and 1993 was $278,000, $261,000, and $225,000, respectively.
NOTE 8. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
As of January 1, 1993, the Company adopted SFAS No. 106. The effect of adopting
SFAS No. 106 on income from continuing operations for 1995, 1994, and 1993 was
an expense of $311,000, $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. 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, 1995, 1994, and
1993:
- -------------------------------------------------------------------------------
In thousands 1995 1994 1993
- ------------------------------------------------------------------------------
Retirees $354 $398 $222
Actives eligible to retire 653 628 435
Other active participants ineligible to retire 922 972 676
--- ----- -----
Total $1,929 $1,998 $1,333
====== ====== =====
- ------------------------------------------------------------------------------
Net postretirement benefit cost for years ended December 31, consisted of the
following components:
- ------------------------------------------------------------------------------
In thousands 1995 1994 1993
- ------------------------------------------------------------------------------
Service cost $75 $59 $46
Interest cost 156 139 151
Actual return on assets - - -
Amortization of the unrecognized transition
obligation 91 91 91
Amortization of (gain) or loss (11) - -
Amortization of prior service cost - - -
---- ---- ----
Total $311 $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, 1995 and 1994.
- ------------------------------------------------------------------------------
In thousands 1995 1994
- ------------------------------------------------------------------------------
Plan assets at fair value $ - $ -
Accumulated postretirement benefit obligation
Retirees (379) (394)
Fully eligible participants (699) (604)
Other active participants (996) (874)
Unrecognized prior service cost - -
Unrecognized net (gain) or loss (320) (316)
Unrecognized transition obligation 1,540 1,631
----- -----
Accrued liabilities for benefit plans at December 31 $ (854) $ (557)
===== ======
- ------------------------------------------------------------------------------
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation as of January 1, 1995 was 8% for 1995, the
trend rate decreasing each successive year until it reaches 5.3% in 2005 after
which it remains constant. The discount rate used in determining the accumulated
postretirement benefit obligation cost was 7.75%. A one percentage-point
increase in the assumed health care cost trend rate for each year would increase
the accumulated postretirement benefit obligation as of January 1, 1995 and net
postretirement health care cost by approximately $147,000 and service cost plus
interest cost by approximately $19,000. The postretirement benefit obligation is
not funded and does not include any provisions for securities, settlement,
curtailment, or special termination benefits.
NOTE 9. WARRANTS
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 166,667 shares of the
Company's Common Stock, at an exercise price of $3.75 per share. On December 9,
1993, PCI exercised its Replacement Warrant and acquired 666,667 shares of the
Company's Common Stock, at an exercise price of $0.03 per share. No other
warrants have been issued by the Company.
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 were paid each quarter at an annual rate of return of 7 1/2% which
totaled for 1995 and 1994, $350,000 and $577,000, respectively.
Each share of Series A Preferred Stock was convertible at the option of PCI into
fully paid and non-assessable 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 Cortelco, which related 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 Cortelco, which was used to redeem the 100,000 shares (par value
$10.00) of the Series A Preferred Stock. In the event that four consecutive
quarterly dividend payments on Series A Preferred Stock had been in arrears and
unpaid, PCI had 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. The remaining 750,000 shares of Series A Preferred Stock were
redeemed in August 1995 (see Note 11).
NOTE 11. PUBLIC STOCK OFFERING
In August 1995, the Company completed a public offering of 3,000,000 shares of
Common Stock (the "Offering") at $12.00 per share. Of the 3,000,000 shares of
Common Stock, 2,000,000 were offered by PCI and 1,000,000 were newly issued
shares by the Company.
The net proceeds to the Company from the Offering were $11,200,000. A portion of
the proceeds were used to redeem all of the Series A Preferred Stock, pay
accumulated dividends, and pay the costs of the offering. The remaining proceeds
were used for general corporate and working capital purposes.
Concurrent with the Offering, the Company declared a one-for-three reverse stock
split of the Company's Common Stock. The effect of the Offering and the reverse
stock split decreased the number of outstanding shares from approximately 21.3
million to 8.1 million. All references in the financial statements to number of
shares, per share amounts and market prices of the Company's Common Stock have
been retroactively restated to reflect the one-for-three reverse stock split.
NOTE 12. STOCK OPTIONS AND AWARDS
The Company's plans include stock options to purchase Common Stock and may be
granted to officers, directors, 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 1,666
shares of the Company's Common Stock for each fiscal year the Company reports
income. In 1995, each Director was awarded 3,334 shares. The Company's incentive
plans are administered by the Compensation Committee of the Company's Board of
Directors.
The Company's incentive plans, adjusted for the one-for-three stock split,
reserve 1,000,000 shares of the Company's Common Stock for issuance at December
31, 1995, 1994, and 1993. 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 $176,000, $182,000, and
$229,000 at December 31, 1995, 1994, and 1993, respectively, have been deducted
from Stockholders' Equity.
Information regarding stock options is summarized below:
<TABLE>
<CAPTION>
_______________________________________________________________________________________________________________
1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Options outstanding, January 1; 363,172 451,377 582,667
Granted 268,073 92,000 14,333
Exercised (157,044) (146,558) (44,290)
Terminated (24,960) (33,647) (101,333)
------- ------- --------
Options outstanding, December 31; 449,241 363,172 451,377
======= ======= =======
Per share ranges of options
outstanding at December 31 $1.47-$11.75 $1.41-$10.59 $1.41-$6.18
Dates through which options
outstanding at December 31,
were exercisable 1/96-11/2005 1/95-10/2004 1/94-10/2003
Options exercisable, December 31; 160,403 174,599 178,150
Years prior to 1995 have been restated to reflect the one-for-three reverse
stock split.
_______________________________________________________________________________________________________________
</TABLE>
NOTE 13. SEGMENT INFORMATION
During 1995, 1994, and 1993, 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:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
In thousands 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales:
ALLTEL Supply, Inc. $20,575 $12,370 $15,908
Graybar Electric Company, Inc. 30,857 31,298 24,494
North Supply Company, Inc. 18,357 16,305 14,984
Percentage of net sales:
ALLTEL Supply, Inc. 22% 16% 23%
Graybar Electric Company, Inc. 33% 41% 35%
North Supply Company, Inc. 19% 21% 22%
____________________________________________________________________________________________________________
</TABLE>
ALLTEL Supply, Inc., a subsidiary of ALLTEL Corporation, a shareholder of the
Company, has accounts receivable with the Company of $1,415,000 and $588,000 for
the periods ending December 31, 1995 and 1994, respectively.
NOTE 14. COMMITMENTS AND CONTINGENT LIABILITIES
The Company'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 effect 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 discontinued its use of a concrete underground
hydraulic oil and chlorinated solvent storage tank. In conjunction therewith,
nearby soil and groundwater contamination was noted. As a result, the Company
developed a plan of remediation that was approved by the Virginia Water Control
Board in January 1989. The plan was later amended and approved by the Virginia
Department of Environmental Quality, after which the Company commenced the
remediation efforts required thereunder. In 1993, the Company provided a $45,000
reserve for the estimated cost to implement the remediation plan.
In October 1994, the Company installed all the required equipment in
accordance with the remediation plan and started the process of pumping
hydraulic oil residue from the underground water. The oil is deposited into
approved containers and taken to a hazardous waste site in accordance with the
corrective action plan. As of December 31, 1995, Comdial has incurred costs of
approximately $25,000 and expects the pumping process to be completed by early
1998.
NOTE 15. SUSEQUENT EVENTS
Subsequent to its year end, the Company entered into definitive agreements
regarding acquisition of Key Voice Technologies, Inc. ("KVT") and Aurora
Systems, Inc. ("Aurora"). Both acquisitions are expected to be completed by the
end of March, 1995.
The consideration for the acquisition of KVT aggregates approximately $18.3
million plus the net book value of certain KVT accounts as of the closing date.
The consideration will consist of $7.0 million in cash, $7.0 million evidenced
by a promissory note, and approximately $2.3 million in the Company's Common
Stock. The remaining $2.0 million of the consideration is contingent upon KVT's
performance after the acquisition, and may be paid at the Company's option in
either cash or the Company's Common Stock.
The consideration for the Aurora acquisition is approximately $2.8 million. This
consideration will consist of $1.5 million in cash, and $1.3 million of the
Company's Common Stock.
In order for the Company to acquire KVT and Aurora, the Company will need to
obtain additional funds from its credit facility. The Company and Fleet have
agreed to amend the Loan Agreement to permit the Company to borrow additional
funds as well as to modify some of the existing terms and covenants. The
amendment to the Loan Agreement will provide an increased borrowing capacity
under a $13.5 million term note, and a revolving credit facility of $12.5
million.
NOTE 16. QUARTERLY FINANCIAL DATA (UNAUDITED)
Net earnings per share for quarters prior to the third quarter of 1995 have been
restated to reflect the one for three reverse stock split.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
First Second Third Fourth
In thousands except per share amounts Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1995
Sales $22,316 $25,442 $25,235 $21,809
Gross profit 7,124 8,254 8,054 7,343
Interest expense 273 282 242 199
Net income 1,230 6,349 1,804 486
Dividends on preferred stock 143 142 65 -
Net earnings per common share: Primary 0.15 0.85 0.22 0.06
- ------------------------------------------------------------------------------------------------------------
1994
Sales $17,639 $19,019 $20,660 $19,827
Gross profit 5,866 6,122 6,383 6,356
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 0.02 0.11 0.15 0.09
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Previously reported quarterly information has been revised to reflect certain
reclassifications. These reclassifications had no effect on previously reported
consolidated net income.
In the first quarter of 1994, the Company restructured its indebtedness to PCI
by using cash generated from operations and cash borrowed from Fleet (see Note
5). The major impact on operations was the reduction of interest expense for
1994 and 1995, and the write-off of prior debt issuance cost of $389,000 in
1994.
In the second quarter of 1995, the Company reevaluated the future utilization of
its deferred tax assets and decided it was more likely than not that the Company
will realize a tax benefit. Based on the reevaluation of the realizability of
the deferred tax assets, the valuation allowance was reduced and a tax benefit
of $4,503,000 was recognized (see Note 6).
In the third quarter of 1995, the Company completed a public stock offering with
a concurrent one-for-three reverse stock split (see Note 11).
For the fourth quarter of 1995, the earnings per share was antidilutive but the
net earnings per common shares and equivalent shares were the same for both
antidilutive and primary earnings per share. 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 $295,000 of additional income, which is reflected in the fourth
quarter of 1995.
FIVE YEAR FINANCIAL DATA
SELECTED CONSOLIDATED STATEMENTS OF OPERATIONS DATA
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
In thousands except
per share amounts 1995 1994 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales:
As reported (1) $94,802 $77,145 $69,099 $70,897 $66,914
Current product lines (2) 94,802 77,145 69,099 64,423 55,731
Income (loss) before income taxes
and extraordinary item 5,535 3,730 2,545 897 (871)
Net income (loss) 9,869 3,225 2,416 884 (871)
Earnings (loss) per common share
and common equivalent share:
Primary: (3) 1.24 0.37 0.35 0.13 (0.15)
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Prior years have been reclassified to conform to 1995 presentation.
(2) Excludes sales of the electromechanical product line.
(3) Earnings per share have been restated to reflect the one-for-three
reverse stock split.
SELECTED CONSOLIDATED BALANCE SHEET DATA
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
In thousands 1995 1994 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Current assets $33,740 $26,199 $28,301 $24,389 $25,779
Total assets 56,692 42,260 44,803 41,747 41,412
Current liabilities 15,469 14,568 13,358 11,985 11,852
Long term debt and other
long term liabilities 6,929 6,649 20,695 22,251 23,217
Stockholders' equity 34,294 21,043 10,750 7,511 6,343
=================================================================================================================
</TABLE>
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 is traded in the
National Market System of the Nasdaq Stock Market in which the Company's symbol
is CMDL. The following common stock information has been restated to reflect the
one-for-three reverse stock split.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
1995 1994
Fiscal Quarters HIGH LOW High Low
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First Quarter 9 - 6 3/4 12 3/8 7 11/16
Second Quarter 15 3/8 7 7/8 10 1/8 5 5/8
Third Quarter 14 13/16 11 1/4 9 3/8 5 13/16
Fourth Quarter 13 7/8 7 3/4 10 5/16 5 7/16
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
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 Fleet except on Series A Preferred
Stock (see Note 5 to Consolidated Financial Statements).
The Company's Common Stock trades on The Nasdaq Stock Market under the symbol:
CMDL.
OFFICERS & DIRECTORS
<TABLE>
<CAPTION>
CORPORATE OFFICERS DIRECTORS
<S> <C> <C>
William G. Mustain William G. Mustain Chairman
President and
Chief Executive Officer A. M. Gleason President of Port of
Portland
Michael C. Henderson Vice Chariman, President
Wayne R. Wilver of PacifiCorp
Senior Vice President, Financial Services, Inc.
Chief Financial Officer,
Treasurer, and Secretary William E. Porter Senior Vice President of
Strategic Planning-Trigon
Joe Ford Blue Cross Blue Shield
Vice President, Human
Resources John W. Rosenblum Tayloe Murphy Professor of
Business Administration,
William C. Grover Darden Graduate School of
Vice President, Sales and Business Administration,
Marketing University of Virginia
Keith J. Johnstone Dianne C. Walker Consultant
Vice President, Manufacturing
Lawrence K. Tate
Vice President, Quality
Ove Villadsen
Vice President, Engineering
</TABLE>
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
INVESTOR RELATIONS WORLD WIDE WEBB
Dick Bucci - Director, http://www.comdial.com
Investor Relations
Phone: (804) 978-2525
Fax: (804) 978-2512
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference of our report dated January 29,
1996, appearing in this Annual Report on Form 10-K of Comdial Corporation for
the year ended December 31, 1995, in the following Registration Statements:
Registration
Form: Number:
S-8 2-89330
S-8 33-53562
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Richmond, Virginia
March 19, 1996
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, 1995 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: 02/6/96
/s/ A. M. GLEASON
A. M. Gleason
<PAGE>
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, 1995 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: 02/6/96
/s/ MICHAEL C. HENDERSON
Michael C. Henderson
<PAGE>
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, 1995 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: 02/6/96
/s/ WILLIAM E. PORTER
William E. Porter
<PAGE>
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, 1995 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: 02/6/96
/s/ JOHN W. ROSENBLUM
John W. Rosenblum
<PAGE>
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, 1995 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: 02/6/96
/s/ DIANNE C. WALKER
Dianne C. Walker
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