UNITED STATES
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, 1996
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]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 11, 1997 was approximately $46,584,000 (See Item 5). The
number of shares of Common Stock outstanding as of March 11, 1997 was 8,592,866.
DOCUMENTS INCORPORATED BY REFERENCE:
The Company's 1996 Annual Report to the Stockholders is incorporated by
reference under Part II and portions of the Company's Definitive Proxy Statement
for its 1997 Annual Meeting of Stockholders, which will be filed with the
Securities and Exchange Commission within 120 days after December 31, 1996, 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
Safe Harbor Statement 5
Industry Background 5
Strategy 8
(b) Financial Information About Industry Segment 12
Product Sales Information 12
(c) Narrative Description of Business 12
Products 12
Business Systems 13
Proprietary and Specialty Terminals 18
Custom Manufacturing 18
Sales and Marketing 18
Engineering, Research and Development 20
Manufacturing and Quality Control 21
Competition 22
Intellectual Property 23
Employees 24
Item 2. Properties 24
Item 3. Legal Proceedings 25
Item 4. Submission of Matters to a Vote of Security Holders 25
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Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 26
Item 6. Selected Financial Data 26
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 26
Item 8. Financial Statements and Supplementary Data 26
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 26
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Part III
Item 10. Directors and Executive Officers of the Registrant 27
Item 11. Executive Compensation 27
Item 12. Security Ownership of Certain Beneficial Owners and
Management 27
Item 13. Certain Relationships and Related Transactions 27
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Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 28
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, 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.
The Company's Common Stock is traded over-the-counter and is quoted on
the National Association of Security Dealers Automated Quotation National Market
System ("Nasdaq National Market") under the symbol: CMDL.
On March 20, 1996, the Company completed the acquisition of two companies
involved in Computer-Telephony Integration ("CTI") applications: Aurora Systems,
Inc. ("Aurora") and Key Voice Technologies, Inc. ("KVT"). Aurora, based in
Acton, Massachusetts, is a leading provider of off-the-shelf CTI products. KVT,
based in Sarasota, Florida, develops, assembles, markets, and sells voice
processing systems and related products for business applications. As a result
of the acquisitions, Aurora and KVT have become wholly-owned subsidiaries of the
Company (see Note 2 to the Consolidated Financial Statements).
These two acquisitions have positively affected consolidated revenues by
$9.7 million and profitability by $4.3 million (excluding any acquisition and
corporate allocation costs) for approximately nine months of 1996, and also
should enhance the Company's position for future development of related products
for the CTI market.
The Company's products accommodate organizations requiring up to approximately
500 telephones. The Company believes that it is a leading supplier to this
market, with an installed base of approximately 250,000 telephone systems and
3,000,000 telephones. The Company's products include digital and analog
telephone switches and telephones, as well as a wide range of enhancements to
the Company's telephone systems. The Company's growth has occurred principally
as a result of sales of digital telephone systems introduced by the Company
since 1992 and CTI products introduced since 1993. CTI encompasses a wide range
of products, primarily software, that enable end users to perform telephony
functions from desktop personal computers ("PCs") or PCs served by a local area
network ("LAN").
"Safe Harbor" Statement
Under the Private Securities Litigation Reform Act of 1995
Some of the statements included or incorporated by reference into the
Company's Securities and Exchange Commission filings and shareholder
communications are forward-looking statements that are subject to risks and
uncertainties, including, but not limited to, the impact of competitive
products, product demand and market acceptance risks, reliance on key strategic
alliances, fluctuations in operation results, delays in development of highly
complex products, and other risks detailed from time to time in the Company's
filings. These risks could cause the Company's actual results for 1997 and
beyond to differ materially from those expressed in any forward-looking
statement made by, or on behalf of, the Company.
Industry Background
In recent years, advances in technology and industry deregulation have
facilitated the development of technologically advanced telephone systems and
applications. Beginning in the 1970s, electronic telephone systems began
displacing the traditional electromechanical key sets that served as the basic
office telephone system since the 1930s. 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 attendants, and voice processing
applications, such as speech recognition.
The Company primarily manufactures telephone systems. A business
telephone system typically consists of (a) a central telephone switching unit
(key service unit or "KSU"), (b) telephone instruments, (c) associated wiring
and connections hardware, (d) system software, and (e) adjunct devices such as
facsimile machines and voice processing systems. Telephone systems are often
described in terms of the number of telephone lines and terminal devices that
can be supported by a KSU. The aggregate number of telephone terminals and
outside lines that can be configured as to a specific KSU is the number of
"ports."
Until recently, most 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 1980s, 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 therefore
better positioned to take advantage of new CTI application features that are
being developed by software companies.
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 primarily
digital and that the proportion of shipments of digital telephones as compared
to analog telephones will continue to increase. Although the market share of
digital telephones and CTI products is growing, the installed telephone system
base remains predominantly analog, thereby providing significant opportunities
for manufacturers who continue to produce analog systems. End users will
continue to install analog systems for various reasons such as price
considerations, expansion, replacement or repair of existing systems.
CTI is an emerging industry, consisting of connectivity and applications
software for various hardware platforms such as switching units, private branch
exchanges ("PBX") and automatic call distribution ("ACD"). CTI products and
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). Using CTI, calls
can be placed from the computer, including all call processing activities and
users can scan their computer screens for information on incoming voice and fax
messages. An example of a vertical market application is the Company's E-911
emergency dispatch systems. The E-911 system may use caller identification
technology in conjunction with databases in order to access information such as
the street address and profile of an emergency caller which is displayed on the
dispatcher's computer. Dispatchers are in a better position to send help quickly
to the correct address and provide emergency personnel caller specific
information needed to respond appropriately to the situation.
This growing industry and growing 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, 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 major computer software suppliers, 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, major computer software suppliers
provide 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
Corporation is an alternative solution. In this case, telephone system
manufacturers design special software links to Microsoft's SPI. Telephony
software is standard on Windows95 TM and Windows NT.
Until the late 1980s, all small and medium sized telephone systems were
"closed." That is, 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 application packages suitable to their communication 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 telecommunications
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 extensive 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) establishing a leadership position in the
emerging market for system solutions based on CTI products and applications, and
(3) achieving growth through expansion into international markets. The Company
seeks to support these strategies through the following approaches:
Maintaining a Broad and Efficient Distribution Network
The Company focuses its distribution of products primarily through a
network of approximately 1700 independent dealers that sell the Company's
products. This network 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. The dealers, in turn, market the Company's products to small and
medium sized organizations and divisions of larger organizations. The Company's
strategy of utilizing wholesale supply houses enables it to virtually eliminate
bad debt exposure and minimize administration, credit checking, sales expenses,
and finished goods inventory levels. Most importantly, the use of supply houses
allows the Company to extend product distribution to virtually any market in the
United States and Canada. Wholesale supply houses benefit from their
relationship with the Company by earning a margin on the sale of the Company's
products and on the sale of related products such as cable, connectors, and
installation tools. Dealers have the benefits of competitive sourcing and
reduced inventory carrying costs.
In addition to supply house distribution, the Company also markets its
products directly to national accounts, third party system developers, original
equipment manufacturing ("OEM") customers, and to the federal government via its
Government Services Administration ("GSA") schedule contract.
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 nine million establishments in the United States, based on statistics from
Dun & Bradstreet Information Services. 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, CTI applications, and other products along with a variety of product
enhancements. Due to the fact that the software and hardware are 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 all of 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, pursuant to
strategic alliances, the Company has developed the Tracker on-site integrated
paging system with Motorola, Inc. ("Motorola") as well as the Scout wireless key
system telephone with Uniden America Corporation ("Uniden").
Pursuing International Opportunities
Through its wholly-owned subsidiary, Comdial Telecommunications
International, Inc. ("CTii"), the Company concentrates 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 1996, international sales were approximately $3.7 million
compared with $2.7 million and $2.5 million in 1995 and 1994, respectively,
which includes sales to Canada, Latin America, the Middle East, and South
Africa. The Company has entered into a licensing and OEM relationship with
Corporate Telephone Systems (Proprietary) Limited ("Teleboss"), a major South
African telecommunications manufacturer and dealer, pursuant to which 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. In 1996, the Company entered into a distribution agreement with Telbit
Telecommunications for distribution of the Company's DXP telephone systems in
Israel.
Computer Telephony Applications
In 1993, the Company formed a wholly-owned subsidiary, Comdial Enterprise
Systems, Inc. ("CES"), to focus on designing, marketing, and distributing CTI
applications and software for the rapidly growing markets for CTI products and
services. The Company is addressing the CTI opportunity on several fronts by (1)
delivering "open" telephone systems, such as the Company's DXP, (2) designing
communication links between the telephone system and computer or computer
network such as the Company's E-911 system, (3) offering "shrink wrap"
integrated products for vertical markets, such as hotel/motel, and (4)
distributing applications software.
The Company believes that in order to maximize profitability in the
emerging markets for CTI it must create integrated systems, consisting of
hardware platforms and 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 Telephony Services Application
Programming Interface ("TSAPI") standard which provides a stable platform for
integrating the features and functionality of a telephone switch with certain
local area networks. This standard also allows third-party developers to write
applications in a non-proprietary environment, thus decreasing development time
and application investment costs. The Company offers several software products
for linking its DXP and DXP Plus digital switches to a local area network. In
1996, the Company began shipping wideopen.office, a universal telephony server
that links the Company's DXP digital systems to a LAN provided by various
vendors.
Developing Switching Systems with an 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
("SDK"). While this has delayed 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, 1996, 1995 and 1994,
substantially all of the Company'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 Company's 1996
Annual Report to Stockholders.
Product Sales Information
The following table presents certain relevant information concerning the
Company's principle product lines for the periods indicated:
<TABLE>
<CAPTION>
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Years Ended December 31,
(In Millions) 1996 1995 1994
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<S> <C>
Sales
Business Systems
Digital $42.8 $40.5 $28.9
DXP 17.8 13.8 9.0
CTI 20.5 7.4 6.1
Analog 16.2 22.4 25.0
----- ---- ----
Sub-total 97.3 84.1 69.0
Proprietary and Specialty Terminals 4.7 6.0 6.7
----- ---- ----
Sub-total 102.0 90.1 75.7
Custom Manufacturing 1.3 6.1 2.5
----- ---- ----
Gross Sales 103.3 96.2 78.2
Sales Discount and Allowances 1.1 1.4 1.1
----- ---- ----
Net Sales $102.2 $94.8 $77.1
====== ===== =====
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</TABLE>
(c) NARRATIVE DESCRIPTION OF BUSINESS
Products
The Company offers a variety of telephone systems, including digital
systems, DXP systems, analog systems, CTI applications, and other products and
product enhancements.
The Company's telecommunications products meet three basic criteria, and
are registered by; (1) the Federal Communications Commission ("FCC"), (2) an
independent laboratory approved by the Occupational Safety and Health Act
Commission ("OSHA") to product safety standards, (3) and a National Recognized
Test Laboratory that performs product evaluations. Selected products are also
registered with the Canadian government's Industry Canadian and are Canadian
safety certified. The Company has, or is in the process of, registering its
products in other countries.
Business Systems
Digital Systems
Impact, introduced in 1992, is a digital telephone system which can
support up to 24 lines and 48 telephones. This system includes a digital switch
and Impact digital telephones. The Impact terminals 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, introduced in 1991, are digital systems 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.
Impression, introduced in October 1996, is a digital telephone system
with modern, easy-to-use terminals, an attendant console, three digital
switching units ("DSUs") and a four-line, eight station expansion module to
accommodate system growth.
Scout, introduced in 1995, is the Company's first wireless multi-line
telephone. The Scout was 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, introduced in 1994, is an on-site integrated paging system
developed in cooperation with Motorola. The purpose of this product is to help
insure that calls are quickly and efficiently completed to individuals who are
at work, but not always near their telephones. Tracker, which operates on 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 system phone and dialing a special code
that is displayed on the LCD. A valuable feature of Tracker is its compatibility
with other products manufactured by the Company.
DXP Systems
DXP, introduced in 1992, is a digital switch 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. The DXP has more call processing features than smaller systems.
The DXP may be linked to various CTI applications. The 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 the Company's proprietary terminals.
Computer-Telephony Integration Products
Enterprise, introduced in 1993, is the Company's OAI software developer's
tool kit used with the DXP systems. 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 ("E-911") emergency telephone system. Enterprise was a platform for the
development of applications based upon the convergence of computer and telephony
technologies.
Wideopen.office, introduced in 1996, is a software product which provides
telephony linkage between desktop computers and DXP digital switches.
Wideopen.office supports multiple applications programming interfaces and
supports local area network software from Novell, Microsoft, and others, as well
as stand alone PCs running Windows, Windows 95, or OS/2 operating systems. The
PC must have certain minimum memory capabilities and an unused serial port.
Because of this capability to provide CTI in a variety of environments, the
Company views wideopen.office as a universal telephony controller.
Wideopen.office is shipped complete with wideopen.call applications software
which provides users with popular services such as PC-based call processing,
integration with contact management programs, and "screen pops" of caller
information, provided the user has some type of caller identification service.
In the fourth quarter of 1996, the Company also began shipping wideopen.group, a
telephony application package for workgroups.
Concierge, introduced in 1996, is a digital telephone system designed for
hospitality applications. The system consists of a DXP, multi-line
administration telephones, single line guest telephones, and special hospitality
software. The system is linked to a personal computer via the Company's
Enterprise CTI software, and allows hotel personnel to administer guest
check-in/check-out and other hotel activities from the PC or specially
programmed Impact LCD telephones. Guest room telephones may be industry standard
message waiting models or the Company's own HoTelephones. Concierge serves hotel
properties of up to approximately 400 rooms.
QuickQ ACD, introduced in 1994, is an automatic call distributor ("ACD"),
designed for call center use. The system consists of DXP, Impact telephones,
voice announcing equipment, special automatic call distribution software, and a
PC. 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 Concierge, the QuickQ is
a "shrink wrap" CTI product, based on the Company's Enterprise link to the DXP
operating system and special call control software. QuickQ was designed in
cooperation with an independent software developer.
E-911 Systems, introduced in 1994, are specially engineered telephone
systems 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 are
better positioned to send help swiftly to the correct address and provide
information needed for emergency personnel to respond appropriately to a
situation. All calls are recorded for future reference, and operators can handle
multiple calls without losing valuable information. The Company's E-911 system
makes extensive use of CTI. The Company contracts with municipal authorities for
sale of the E-911 system to the municipality.
ExecuMail, introduced in 1990, is an integrated voice processing system
for use with selected telephone systems of the Company. ExecuMail is offered in
a range of port and voice storage capacities, and provides both voice mail and
automated attendant service. ExecuMail products are the result of a strategic
alliance with Active Voice Corporation.
Versatile Voice Processing ("VVP"), introduced in 1996, is a trade name
of a PC-based voice processing system produced by the Company's wholly-owned
subsidiary KVT and sold by the Company. The same product is sold as Corporate
Office by KVT to its own dealer network. Both products provide all standard
voice processing features such as auto attendant, voice store and forward,
multiple greetings, and individual voice mail boxes. Advanced features such as
fax tone detection, audiotext (interactive response to user touch-tone
commands), and visual call management (the ability to view voice messages from a
PC) are also available. The VVP can be integrated with the Company's digital
telephone systems such that display messages on LCD terminals prompt user
operations. KVT offers similar integration packages for telephone systems made
by other companies. VVP and Corporate Office are offered in 4 to 16 port
configurations. Voice storage capacity is virtually unlimited - an advantage of
PC-based design.
Small Office, introduced in 1996, also produced by KVT and sold through
both the Company's and KVT's dealer networks, is a smaller and more economical
version of VVP/Corporate Office. Small Office offers basically the same features
as the larger model, but is designed for smaller enterprises. Maximum capacity
is four ports (four simultaneous calls) and 100 mail boxes.
PATI 3000, introduced in 1995, 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.
FastCall, introduced in 1994, produced by the Company's wholly-owned
subsidiary 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.
Analog Systems
Voyager, introduced in 1996, is a small integrated switching and voice
processing system. Voyager will accommodate up to four telephone lines and eight
terminal devices. The terminals may be standard analog telephones, fax machines,
modems, or other industry standard analog devices. The product is economically
priced and easy to install. Potential end users include retail shops, small
service enterprises (such as restaurants, dry cleaners, etc.), and home offices.
The Company purchases Voyager products from Voysys Corporation and resells the
product through the Company's distributor and dealer channels.
Unisyn, introduced in 1994, is designed to offer advanced features to
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 a 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, introduced in 1987, is a line of four analog hospitality
systems, the first of which supports up to 22 lines and 128 telephones. These
systems feature a front desk video display terminal, integrated call costing,
and multi-featured room telephones.
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.
Proprietary and Specialty Terminals
HoTelephone, originally introduced in 1984, is a line of single and
two-line telephones specially designed for business travelers for use in hotel
and motel guest rooms. The HoTelephone offers guest room travelers 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, introduced in the early 1980s, is a fully-featured
multi-function display telephone that includes an 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 and a dataport as basic features. 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"), a wholly-owned subsidiary of the
Company.
Custom Manufacturing
Custom manufacturing consists primarily of contract work performed for
various original equipment manufacturers.
Sales and Marketing
The Company has established an extensive two-tiered distribution network
as its primary channel for serving the U.S. and Canada markets. Products are
sold to wholesale supply houses which in turn sell to independent dealers.
International sales are accomplished through a network of international dealers.
International customers buy directly from the Company, normally by letters of
credit, and resell to end users or other dealers.
In the U.S., 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"), Sprint/North Supply, Inc. ("North Supply"), a subsidiary of Sprint,
and ALLTEL Supply, Inc. ("ALLTEL"). In 1996, net sales to ALLTEL, Graybar, and
North Supply amounted to approximately $19.5 million (19%), $31.7 million (31%),
and $22.4 million (22%), respectively.
The Company has three classes of dealers: Platinum Preferred, Preferred,
and Associate Dealers. The Company offers an attractive incentive package for
both Platinum Preferred and Preferred Dealers, including exclusive access to
certain of its products, cash rebates related to dealer purchase levels,
cooperative advertising allowances, and a measure of territorial protection.
Platinum Preferred and Preferred Dealers have sales quotas, and the Company's
sales department monitors their performance against these targets. Associate
dealers purchase the Company's products on an as-needed basis, and are rewarded
through product rebates. Associate Dealers do not have quotas but do receive
benefits such as toll-free assistance, training, and other services which are
offered by the Company. Several thousand dealers purchase the Company's products
through supply houses.
The Company's sales organization seeks to recruit, train, and support
individual dealers to facilitate promotion and sale of its products.
The Company has two primary sales groups. One group concentrates on
further maximizing the Company's system sales through Associate Dealers. The
second sales group focuses on the Company's Platinum and Preferred Dealers,
helping them understand and effectively market new CTI products, expanding the
Company's Value Added Reseller ("VAR") channels, and developing a broader
customer base for the Company's advanced digital switches and newer CTI system
solutions. There are also smaller sales teams focused on national accounts, OEM
customers, E-911 customers, and federal government customers.
Each sales 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 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.
The Company's dealers are primarily responsible for supporting end users.
The Company does maintain a technical support staff devoted to dealer support
which is available on a toll-free basis twenty-four hours per day with special
emergency service available on weekends and holidays. The Company also generally
provides a limited warranty on elements of its products, permitting factory
returns within 24 months of the production date. 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. In the early
1990s, 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. Research and development costs for the fiscal years
ended 1996, 1995, and 1994 comprise the majority of engineering, research, and
development costs, which were $5,771,000, $4,186,000, and $3,932,000,
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 1996, 1995, and 1994 were $1,577,000, $840,000, and $717,000,
respectively. The amounts amortized for software development cost in 1996, 1995,
and 1994 were approximately $877,000, $757,000, and $858,000, respectively. The
Company 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 will be designed to
provide an OAI and to be available in models compatible with the standards of
the Company's primary international markets.
Manufacturing and Quality Control
The Company's Manufacturing Operations organization is responsible for
all activities having to do with production, testing, shipping, and repair of
the Company's products. Other functions that fall under manufacturing operations
include maintenance of plant facilities and specialty (contract) manufacturing.
One of the Company's core competencies, along with its distribution
network, is its manufacturing efficiency. With recent improvements in production
equipment such as surface mount technology ("SMT") and information systems, the
Company can now turn around customer orders in days, compared to weeks or even
months for offshore competitors. Manufacturing is able to schedule production
runs on a daily basis which provides the Company with maximum flexibility in
responding to order levels, improved product margins, and lower work-in-process
and finished goods inventories.
Improvements in the manufacturing function include the use of advanced
Manufacturing Resource Planning ("MRP") information systems, continuous flow
assembly lines, just-in-time philosophies, and the continual upgrades to the two
SMT lines. The Company has been able to reduce finished goods inventory levels,
as commonalties at the component levels have allowed manufacturing to stock
components and subassemblies rather than finished products. Manufacturing also
contributes to revenues through the sale of repair services and obsolete
equipment through the Company's wholly-owned subsidiary American Phone Centers,
Inc. ("APC"), and by taking on selective custom manufacturing assignments.
The Company also manufactures injection molded plastic parts, fabricated
metal parts, and other components. 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 monitors the quality of its 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 and has maintained its certification 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 have significantly
greater resources, such as Lucent Technologies, Inc., Nortel Inc., and Toshiba
Corporation. Key competitive factors in the sale of telephone systems and
related applications include performance, features, reliability, service and
support, name recognition, distribution capability, and price. The Company
believes that it competes favorably in its market with respect to the
performance, features, reliability, 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, 1996, the Company, including Aurora and KVT, had 886
full-time employees, of whom 590 were engaged in manufacturing, 87 in
engineering, 143 in sales and support, and 66 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 the majority of its
products from a fully-integrated, approximately 500,000 square foot
manufacturing facility on a 25 acre site located in Charlottesville, Virginia.
The majority 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.
In March 1996, the Company acquired KVT and Aurora (see Item 1 - General
Development of Business). KVT operates out of an approximately 6,200 square foot
building, located in Sarasota, Florida and Aurora operates out of two leased
suites within an office building located in Acton, Massachusetts.
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 at its
Charlottesville plant. 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, the Company installed all 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, 1996, the Company has incurred costs
of approximately $37,000 and expects the pumping process to be completed by
early 1998.
ITEM 3. Legal Proceedings
The Company is from time to time involved in routine litigation. The
Company 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 1996 to a vote of the
Company's security holders.
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters.
Information is incorporated by reference to page 62 of the Company's 1996
Annual Report to stockholders under the caption "Related Stockholders Matters."
As of March 11, 1997 there were 1,769 record holders of the Company's Common
Stock.
ITEM 6. Selected Financial Data.
Information is incorporated by reference to page 61 of the Company's 1996
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 34 through 40 of the
Company's 1996 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 40 through 61 of the
Company's 1996 Annual Report to stockholders or filed with this Report as listed
in Item 14 hereof.
ITEM 9. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure.
No information is required to be reported pursuant to this item.
Part III
ITEM 10. Directors and Executive Officers of the Registrant.
Information concerning Directors and Executive Officers of the Registrant
is incorporated by reference under the caption "Election of Directors" and
"Executive Officers of the Company" on pages 6 through 7 and 10 through 11 of
the Company's definitive proxy statement for the annual meeting of stockholders
to be held on April 29, 1997.
ITEM 11. Executive Compensation.
Executive compensation and management transactions information is
incorporated by reference under the caption "Executive Compensation" on pages 12
through 20 of the Company's definitive proxy statement for the annual meeting of
stockholders to be held on April 29, 1997.
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
the Company's definitive proxy statement for the annual meeting of stockholders
to be held on April 29, 1997.
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, 20, and 21 of the Company's definitive proxy
statement for the annual meeting of stockholders to be held on April 29, 1997.
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 its Subsidiaries are incorporated in Part II,
Item 8 by reference to the Company's 1996 Annual Report to
stockholders (page references are to page numbers in the
Company's Annual Report):
Page Number
Independent Auditors' Report 40
Report of Management 41
Financial Statements:
Consolidated Balance Sheets -
December 31, 1996 and 1995 42
Consolidated Statements of Operations -
Years ended December 31, 1996, 1995, and 1994 43
Consolidated Statements of Stockholders' Equity -
Years ended December 31, 1996, 1995, and 1994 44-45
Consolidated Statements of Cash Flows -
Years ended December 31, 1996, 1995, and 1994 46
Notes to Consolidated Financial Statements -
Years ended December 31, 1996, 1995, and 1994 47-61
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 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.)*
10.2 Amendment No. 2 to the Registrant's 1992 Stock Incentive
Plan and 1992 Non-employee Directors Stock Incentive Plan.
(Exhibit 10.2 of Registrant's Form 10-Q dated June 30,
1996.)*
10.3 Amendment No. 3 to the Registrant's 1992 Stock Incentive
Plan and 1992 Non-employee Directors Stock Incentive Plan.
(Exhibit 10.2 of Registrant's Form 10-Q dated June 30,
1996.)*
10.4 Loan and Security Agreement dated February 1, 1994 among
Registrant and Fleet Capital Corporation formerly Barclays
Business Credit, Inc. (Exhibit 10.13 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 Amendment No. 1 to the Loan and Security Agreement dated
March 13, 1996 among the Registrant and Fleet Capital
Corporation. (Exhibit 10.1 to Registrant's Form 10-Q for the
quarter ended March 31, 1996.)*
10.7 Amendment No. 2 to the Loan and Security Agreement dated
June 28, 1996 among the Registrant and Fleet Capital
Corporation. (Exhibit 10.1 to Registrant's Form 10-Q for the
quarter ended June 30, 1996.)*
10.8 Amendment No. 3 to the Loan and Security Agreement dated
September 27, 1996 among the Registrant and Fleet Capital
Corporation. (Exhibit 10.1 to Registrant's Form 10-Q for the
quarter ended September 29, 1996.)*
10.9 The Registrant's Executive Stock Ownership Plan effective
January 1, 1996. (Exhibit 10.10 to Registrant's Form 10-K
for the year ended December 31, 1995.)*
10.10The Registrant's Executive Severance Plan dated August 31,
1995. (Exhibit 10.11 to Registrant's Form 10-K for the year
ended December 31, 1995.)*
(11) Schedule of Computation of Earnings Per Common Share.
(13) Registrant's 1996 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 30, 1997, appearing in this Annual Report
on Form 10-K of Comdial Corporation for the year ended
December 31, 1996, in certain Registration Statements.
(24) Power of Attorney.
(27) Financial Data Schedule.
- ---------------------------------------
* Incorporated by reference herein.
(b) Reports on Form 8-K:
The Registrant has not filed any reports on Form 8-K during the last
quarter of 1996.
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 25th day of
March, 1997.
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.
Signature Title Date
* Vice Chairman March 25, 1997
- --------------------
A. M. Gleason
* Director March 25, 1997
- --------------------
Michael C. Henderson
* Director March 25, 1997
- --------------------
William E. Porter
* Director March 25, 1997
- --------------------
John W. Rosenblum
* Director March 25, 1997
- --------------------
Dianne C. Walker
/s/ William G. Mustain Chairman of the Board, March 25, 1997
- ---------------------- President, and
William G. Mustain Chief Executive Officer
/s/ Wayne R. Wilver Senior Vice President, March 25, 1997
- ---------------------- Chief Financial Officer,
Wayne R. Wilver Treasurer, and Secretary
* By:/s/ Wayne R. Wilver
- ------------------------
Wayne R. Wilver, Attorney-In-Fact
<TABLE>
COMDIAL CORPORATION AND SUBSIDIARIES
EXHIBIT 11
SCHEDULE OF COMPUTATION OF EARNINGS PER COMMON SHARE
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
PRIMARY
Income applicable to common shares:
Income before extraordinary items $1,809,000 $9,519,000 $3,037,000
Extraordinary item - - (389,000)
---------- ---------- ----------
Net income $1,809,000 $9,519,000 $2,648,000
========== ========== ==========
Weighted average number of common shares
outstanding during the year 8,478,883 7,465,938 6,967,705
Add - common equivalent shares (determined
using the "treasury stock" method)
representing shares issuable upon
exercise of:
stock options and contingent shares 175,789 231,000 267,756
Weighted average number of shares used
in calculation of primary earnings per
common share 8,654,672 7,696,938 7,235,461
========= ========= =========
Earnings per common share:
Income before extraordinary item $0.21 $1.24 $0.42
Extraordinary item - - (0.05)
----- ----- ------
Net income $0.21 $1.24 $0.37
====== ====== ======
FULLY DILUTED
Net income applicable to common shares $1,809,000 $9,519,000 $2,648,000
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 $1,809,000 $9,869,000 $3,225,000
========== ========== ==========
Weighted average number of shares used
in calculation of primary earnings per
common share 8,654,672 7,696,938 7,235,461
Add (deduct) incremental shares representing:
Shares issuable upon exercise of stock
options and warrants included in
primary calculation (175,789) (231,000) (267,756)
Shares issuable upon exercise of stock
options and warrants issuable based
on year-end market price or weighted
average price 171,240 759,788 1,156,312
------- ------- ---------
Weighted average number of shares used
in calculation of fully diluted earnings
per common share 8,650,123 8,225,726 8,124,017
========= ========= =========
Fully diluted earnings per common share $0.21 $1.20 $0.40
========= ========= =========
- -------------------------------------------------------------------------------------------------------------------
* The year 1994 has 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 Comdial
Corporation and its subsidiaries (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 1996
reporting basis (see Note 1 to the Consolidated Financial Statements).
RESULTS OF OPERATIONS
Selected consolidated statements of operations for the last three years are as
follows:
<TABLE>
<CAPTION>
<S> <C>
- ----------------------------------------------------------------------------------------------------------
December 31,
In thousands 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
Net sales $102,229 $94,802 $77,145
Gross profit 37,818 30,775 24,727
Selling, general & administrative 25,694 19,298 15,161
Engineering, research & development 5,771 4,186 3,932
Interest expense 1,626 996 1,267
Goodwill amortization 2,674 23 23
Miscellaneous expense - net 762 737 614
Income tax expense/(benefit) (518) (4,334) 116
Extraordinary item, write-off
of debt issuance cost - - 389
Net income 1,809 9,869 3,225
Dividends on preferred stock - 350 577
Net income applicable to common stock 1,809 9,519 2,648
- ----------------------------------------------------------------------------------------------------------
</TABLE>
1996 Compared with 1995
Net sales as reported for 1996 increased by 8% to $102,229,000, compared with
$94,802,000 in 1995. The continued increase in net sales was primarily due to
(1) continued demand for the Company's Digital Expandable System ("DXP") and
Impact products, and (2) continued growth in sales of Computer Telephony
Integration ("CTI") products which was enhanced by the acquisitions of Aurora
Systems, Inc. ("Aurora") and Key Voice Technologies, Inc. ("KVT"). In 1996,
sales of DXP products increased 29% to $17,570,000 compared with $13,619,000 for
1995. In 1996, sales of CTI products, including voice processing, increased 180%
to $20,250,000 compared with $7,223,000 for 1995. Management expects sales of
digital business systems and CTI products to continue to grow in 1997, primarily
due to (1) continued growth in DXP system sales driven by new CTI applications,
(2) development of new products, (3) sales by newly acquired wholly-owned
subsidiaries Aurora and KVT which should help increase the sales of CTI related
products, and (4) acceptance of DXP and CTI products in international markets.
In 1996, sales of analog products, proprietary terminals, and custom
manufacturing revenue decreased 27% to $16,041,000, 21% to $4,693,000, and 79%
to $1,299,000, respectively, compared with $22,076,000, $5,938,000, and
$6,092,000, respectively, for 1995. The custom manufacturing decrease was
primarily due to completion in 1995 of a one-time contract with a major
customer. Management expects sales of analog and proprietary terminals to
continue to decrease in 1997. In 1996, international sales increased by 38% to
$3,670,000 compared with $2,666,000 for 1995. International sales were lower
than projected primarily due to unstable economic conditions in Latin America
and other foreign countries. As the Company's products gain more international
exposure, and the Company recruits more international distributors,
international sales are expected to grow.
Gross profit as a percentage of sales for 1996 was approximately 37% compared
with 32% for 1995. In 1996, gross profit increased by 23% to $37,818,000
compared with $30,775,000 for 1995. This increase was primarily attributable to
increased sales of higher margin business system products, such as DXP and CTI
products, and higher margins that Aurora and KVT products added to the business.
Selling, general and administrative expenses increased in 1996 by 33% to
$25,694,000 compared with $19,298,000 for 1995. The primary reasons for the
increase were (1) an increase in sales personnel to broaden our domestic network
and to support the growth of the CTI and international markets, (2) additional
administrative, marketing, and sales expenses of $2,940,000 associated with
Aurora and KVT, and (3) higher promotional allowance costs associated with
increased sales through Preferred Dealers.
Engineering, research and development expenses increased in 1996 by 38% to
$5,771,000 compared with $4,186,000 for 1995. This increase was primarily due to
(1) the addition of new software development and support personnel to further
the development of new products, develop new CTI applications, and shorten the
development cycle, and (2) increased expenses of $895,000 associated with Aurora
and KVT.
Interest expense increased in 1996 by 63% to $1,626,000 compared with $996,000
for 1995. This increase was due to the acquisition loan the Company obtained
from Fleet Capital Corporation ("Fleet") to provide funding to help acquire
Aurora and KVT. Additional interest expense was also incurred as a result of a
promissory note issued to the original owners of KVT as part of the purchase
price of KVT (see Note 2 to the Consolidated Financial Statements).
Goodwill amortization expense in 1996 increased to $2,674,000 compared with
$23,000 in 1995. The increase was due to the acquisitions of Aurora and KVT (see
Note 2 to the Consolidated Financial Statements).
Net income before income taxes, as a result of the foregoing, decreased 77% to
$1,291,000 in 1996, compared with $5,535,000 in 1995. Some of the factors which
led to the decreases in income and earnings per share for 1996 were (1)
decreased sales of analog products which were down by approximately 27%, (2)
decreased sales to the Federal Government which were down by approximately 53%,
and (3) additional costs associated with expanding the sales and engineering
organizations. Management anticipates, assuming continued strength in the
economy, that the factors which have led to significant increases in sales for
the second half of 1996 will continue to have a positive influence on the
Company's performance in 1997. The Company plans to continue to improve sales by
(1) introducing new products, product enhancements, and additional applications
of DXP, Impact, digital, and CTI products, (2) increasing sales through Aurora
and KVT, (3) increasing international sales by introducing new products and
recruiting new distributors, and (4)expanding distribution in the U.S.
Income tax expense (benefit) reflects a benefit of $518,000 in 1996 compared
with a benefit of $4,334,000 for 1995. This change was due to recognition of a
deferred tax asset through a reduction of the valuation allowance for both 1996
and 1995. 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 continual re-evaluation of the realization of the deferred
tax asset, the valuation allowance was reduced and a tax benefit of $736,000 was
recognized in the quarter ended March 31, 1996.
Dividends on preferred stock were zero for 1996 compared with $350,000 for 1995.
In 1995, all of the outstanding shares of the Company's Series A 7-1/2
Cumulative Convertible Redeemable Preferred Stock ("Series A Preferred Stock")
was redeemed.
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)
demand for the Company's DXP and Impact products, and (2) improved sales of CTI
products. In 1995, sales of digital products (DXP and digital) increased 43% to
$53,473,000 compared with $37,315,000 for 1994. In 1995, sales of CTI products
increased 20% to $7,223,000 compared with $5,996,000 for 1994. In 1995, custom
manufacturing increased to $6,092,000 compared with $2,578,000 for 1994 as a
result of a one-time contract from a major customer. In 1995, sales of analog
and proprietary terminals decreased 10% to $22,076,000 and 10% to $5,938,000
compared with $24,654,000 and $6,602,000, respectively, for 1994. In 1995,
international sales increased by 7% to $2,666,000 compared with $2,482,000 for
1994.
Gross profit as a percentage of sales for 1995 was approximately 32.5% compared
with 32.1% for 1994. In 1995, gross profit increased by 24% to $30,775,000
compared with $24,727,000 for 1994. These increases were primarily attributable
to increased sales of higher margin business system products, such as DXP and
Impact products.
Selling, general and administrative 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 an increased 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) 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.
Miscellaneous expense -net increased by 20% to $737,000 in 1995, compared with
$614,000 in 1994. This increase was primarily due to cash discounts associated
with the increased sales in 1995.
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.
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 the 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
refinancing 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 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 remaining 750,000 shares with proceeds
received from a public offering of the Company's Common Stock and paid all
dividends associated with the Series A Preferred Stock.
LIQUIDITY AND CAPITAL SOURCES
As of February 1, 1994, Fleet held substantially all of the Company's
indebtedness. Prior to February 1, 1994, PacifiCorp, through its indirect
subsidiary, PCI, held substantially all of the Company's indebtedness.
The Company and Fleet entered into a loan and security agreement ("Loan
Agreement") in 1994 pursuant to which Fleet provided the Company with a $6.0
million term loan represented by a note ("Term Note I") and a $9.0 million
revolving credit loan facility ("Revolver") in an aggregate amount up to $14.0
million. The term loan was used, along with other funds, to repay all of the
Company's indebtedness to PCI. On April 29, 1994, the Company and Fleet amended
the Loan Agreement which allowed the Company to borrow an additional $1.3
million represented by another note ("Term Note II") to finance the purchase of
additional surface mount technology equipment. Term Note II was payable in 44
equal monthly payments of $27,000 with the balance due on February 1, 1998.
The Term Notes and Revolver under the original Loan Agreement carried interest
rates of 1.50% and 1.00% over Fleet's prime rate, respectively. Fleet's prime
rate was 8.25% and 8.50% at December 31, 1996 and December 31, 1995,
respectively.
On March 13, 1996, the Company and Fleet amended the Loan Agreement to provide
the Company with a $10.0 million acquisition loan ("Acquisition Loan"), a $3.5
million equipment loan ("Equipment Loan"), and a $12.5 million revolving credit
loan facility ("Amended Revolver"). The remaining balances on Term Notes I and
II were paid by advances from the Amended Revolver and Equipment Loan,
respectively (see Note 6 to Consolidated Financial Statements). The Equipment
Loan is payable in equal monthly principal installments of $27,000, with the
balance due on June 1, 1998.
On March 20, 1996, the Company borrowed $8.5 million under the Acquisition Loan
which was used in connection with the purchase of Aurora and KVT. The
Acquisition Loan is payable in equal monthly principal installments of $142,142,
with the balance due on February 1, 2001.
Availability under the Amended Revolver is based on eligible accounts receivable
and inventory, less funds already borrowed. As of December 31, 1996, the Company
had borrowed funds totaling $1,749,000 under the Amended Revolver and had
approximately $8,031,000 of borrowing capacity. The Company expects to fund its
1997 total debt payments of $3,779,000 to Fleet with cash generated from
operations.
The Acquisition Loan, Equipment Loan, and Amended Revolver bear interest at
rates based on either Fleet's prime rate or the London Interbank Offered Rate
("LIBOR"). The interest rates may be adjusted annually based on the Company's
debt to earnings ratio. Depending on the ratio, the interest rates vary from
minus 0.50% to plus 0.50% under or above the Fleet prime rate and from plus
1.50% to 2.50% above LIBOR. As of December 31, 1996, the prime interest rate was
8.25% and LIBOR rate was 5.66% with approximately 79% of the loans based on
LIBOR. As of December 31, 1996, the Company's borrowing rates for loans based on
the prime and LIBOR rates were 8.25% and 7.66%, respectively.
On June 28, 1996, the Company and Fleet amended the Loan Agreement to adjust
availability under the Amended Revolver by establishing a special availability
reserve of $4.0 million and also modified certain covenants.
On September 27, 1996, the Company and Fleet amended the Loan Agreement to
modify certain covenants.
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 (see Note 6 to the
Consolidated Financial Statements). In addition, the Loan Agreement limits the
Company's ability to make additional borrowings and payment of dividends. The
Company was in compliance with all the covenants and terms of the amended Loan
Agreement as of December 31, 1996.
In addition to the Fleet indebtedness, the Company issued a promissory note
("Promissory Note") in the principal amount of $7.0 million to the former owners
of KVT, which was part of the purchase price for KVT. The Promissory Note
carries an interest rate based on prime with yearly payments of $1.4 million
over five years starting on March 20, 1997.
Capital leases with various financing entities are payable based on the terms of
each individual lease. Other debt consists of a mortgage that was acquired as
part of the KVT acquisition which has a monthly payment of $2,817 and carries an
interest rate of 8.75%. The final payment under the mortgage is due on August 1,
2005.
The following table sets forth the Company's cash and cash equivalents, current
maturities on debt, and working capital at the dates indicated:
- --------------------------------------------------------------------------------
December 31,
In thousands 1996 1995 1994
- --------------------------------------------------------------------------------
Cash and cash equivalents $180 $4,144 $1,679
Current maturities on debt 5,343 1,903 2,466
Working capital 10,608 18,271 11,631
- --------------------------------------------------------------------------------
All operating cash requirements are currently being funded through the Amended
Revolver. Cash and cash equivalents are lower by $3,964,000 as of December 31,
1996 compared with 1995, primarily due to the acquisitions of Aurora and KVT.
All available cash was used to help fund the acquisitions. Current maturities on
debt at December 31, 1996, increased by $3,440,000, primarily due to an increase
in the Amended Revolver of $1,749,000 and an increase of $1,400,000 due under
the Promissory Note. Working capital at December 31, 1996, decreased by
$7,663,000 when compared to 1995. This decrease was primarily due to the Company
drawing down its cash surplus and borrowing additional funds to acquire Aurora
and KVT which occurred at the beginning of 1996.
The Company considers outstanding checks to be a bank overdraft. Under the
Company's current cash management policy, receipts are deposited directly into
the Amended Revolver account to reduce the revolving credit balance.
Operations are funded by borrowing under the Amended revolver. The Company
reports the revolving credit facility activity on a net basis on the
Consolidated Statements of Cash Flows.
Assets, liabilities, and stockholders' equity at December 1996, increased by
$3,232,000, $1,907,000, and $1,325,000, respectively, primarily due to amounts
related to the acquisitions of Aurora and KVT (see Note 2 to the Consolidated
Financial Statements).
Prepaid expenses and other current assets at December 1996, decreased by
$1,354,000 compared with December 1995. This decrease was primarily due to a
miscellaneous receivable for returned inventory that related to a custom
manufacturing project that had been completed by the end of 1995.
Goodwill at December 1996, increased by $16,642,000 compared with December 1995.
This increase was due to the acquisitions of Aurora and KVT. The purchase price,
including acquisition costs for both companies, exceeded net assets acquired by
approximately $19,316,000. This excess is amortized on a straight-line basis
over one to eight years based on asset valuations performed by outside
consultants. The amount amortized since the acquisitions by the Company for the
year ended 1996 was $2,651,000.
Other assets at December 1996, increased by $1,842,000 compared with December
1995. This increase was primarily due to costs associated with new product
development by outside consultants, capitalized software development costs, and
the addition of Aurora and KVT assets.
Accrued payroll and related expenses at December 1996, increased by $912,000
compared with December 1995. This increase was primarily due to liabilities
relating to Aurora and KVT.
Capital additions for 1996 were approximately $3,416,000. Such capital additions
helped the Company introduce new products as well as improve quality and reduce
costs associated with new and existing products. Capital additions were provided
by funding from operations, capital leasing, and borrowing from Fleet. Cash
expenditures for capital additions for 1996, 1995, and 1994 amounted to
$3,179,000, $2,155,000, and $2,116,000, respectively. Management anticipates
that approximately $4,000,000 will be spent on capital additions during 1997.
These additions will help the Company meet its commitments to its customers by
developing new products for the future. The Company plans to fund all additions
through operations, borrowing, and long-term leases.
The Company believes that 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 an aggregate amount not to exceed $500,000 at any one time. At
December 31, 1996, the amount of available commitments under the letter of
credit facility with Crestar Bank was $116,000.
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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 ("APB") No. 25,
"Accounting for Stock Issued to Employees." The Company has elected to continue
to account for such transactions under APB No. 25. The Company has disclosed, 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 (see Note 11 to the
Consolidated Financial Statements). Since the Company is going to continue to
apply APB No. 25, complying with the new standard will have no effect on
earnings or the Company's cash flow.
During fiscal years 1996, 1995, and 1994, primarily all of the Company's sales,
net income, and identifiable net assets were attributable to the
telecommunications industry.
"SAFE HABOR" STATEMENT UNDER THE PRIVATE SECURITIES LIGITATION REFORM ACT OF
1995
The Company's Annual Report may contain some forward-looking statements that are
subject to risks and uncertainties, including, but not limited to, the impact of
competitive products, product demand and market acceptance risks, reliance on
key strategic alliances, fluctuations in operating results, delays in
development of highly complex products, and other risks detailed from time to
time in the Company's filings with the Securities and Exchange Commission. These
risks could cause the Company's actual results for 1997 and beyond to differ
materially from those expressed in any forward-looking statement made by, or on
behalf of, the Company.
- ------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
- ------------------------------------------------------------------------------
Board of Directors and Stockholders
Comdial Corporation
Charlottesville, Virginia
We have audited the accompanying consolidated balance sheets of Comdial
Corporation and its subsidiaries (the Company) as of December 31, 1996 and 1995,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1996.
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, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Richmond, Virginia
January 30, 1997
- ------------------------------------------------------------------------------
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.
/s/ William G. Mustain /s/ Wayne R. Wilver
William G. Mustain Wayne R. Wilver
Chairman, President and Senior Vice President and
Chief Executive Officer Chief Financial Officer
<TABLE>
<CAPTION>
<S> <C>
Consolidated Balance Sheets
- --------------------------------------------------------------------------------- --------------------------------
December 31,
In thousands except par value 1996 1995
- ------------------------------------------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $180 $4,144
Accounts receivable - net 9,660 8,976
Inventories 19,586 17,925
Prepaid expenses and other current assets 1,341 2,695
- ------------------------------------------------------------------------------------------------------------------
Total current assets 30,767 33,740
- ------------------------------------------------------------------------------------------------------------------
Property - net 15,317 13,943
Net deferred tax asset 7,469 6,694
Goodwill 16,852 210
Other assets 3,947 2,105
- ------------------------------------------------------------------------------------------------------------------
Total assets $74,352 $56,692
==================================================================================================================
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $8,144 $7,988
Accrued payroll and related expenses 2,926 2,014
Accrued promotional allowances 1,903 1,851
Other accrued liabilities 1,843 1,713
Current maturities of debt 5,343 1,903
- ------------------------------------------------------------------------------------------------------------------
Total current liabilities 20,159 15,469
- ------------------------------------------------------------------------------------------------------------------
Long-term debt 11,713 2,844
Net deferred tax liability 2,230 2,191
Long-term employee benefit obligations 1,686 1,894
Commitments and contingent liabilities (see Note 13) - -
- ------------------------------------------------------------------------------------------------------------------
Total liabilities 35,788 22,398
- ------------------------------------------------------------------------------------------------------------------
Stockholders' equity
Common stock ($0.01 par value) and paid-in capital
(Authorized 30,000 shares; issued shares:
1996 = 8,580; 1995 = 8,132) 114,118 111,625
Other (1,046) (1,014)
Accumulated deficit (74,508) (76,317)
- ------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 38,564 34,294
- ------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $74,352 $56,692
==================================================================================================================
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
Consolidated Statements of Operations
- ----------------------------------------------------------------------------------------------------------------
Years Ended December 31,
In thousands except per share amounts 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
Net sales $102,229 $94,802 $77,145
Cost of goods sold 64,411 64,027 52,418
- ----------------------------------------------------------------------------------------------------------------
Gross profit 37,818 30,775 24,727
- ----------------------------------------------------------------------------------------------------------------
Operating expenses
Selling, general & administrative 25,694 19,298 15,161
Engineering, research & development 5,771 4,186 3,932
- ----------------------------------------------------------------------------------------------------------------
Operating income 6,353 7,291 5,634
- ----------------------------------------------------------------------------------------------------------------
Other expense
Interest expense 1,626 996 1,267
Goodwill amortization 2,674 23 23
Miscellaneous expense - net 762 737 614
- ----------------------------------------------------------------------------------------------------------------
Income before income taxes and 1,291 5,535 3,730
extraordinary item
Income tax expense/(benefit) (518) (4,334) 116
- ----------------------------------------------------------------------------------------------------------------
Income before extraordinary item 1,809 9,869 3,614
Extraordinary item, write-off of
debt issuance cost - - 389
- ----------------------------------------------------------------------------------------------------------------
Net income 1,809 9,869 3,225
Dividends on preferred stock - 350 577
- ----------------------------------------------------------------------------------------------------------------
Net income applicable to common stock $1,809 $9,519 $2,648
================================================================================================================
Earnings (loss) per common share and common
equivalent share:
Earnings per common share $0.21 - -
================================================================================================================
Primary:
Income before extraordinary item - $1.24 $0.42
Extraordinary item - - (0.05)
- ----------------------------------------------------------------------------------------------------------------
Net income per common share - $1.24 $0.37
================================================================================================================
Fully diluted - $1.20 $0.37
================================================================================================================
Weighted average common shares outstanding:
Weighted average per common share 8,479 - -
Primary - 7,697 7,235
Fully diluted - 8,226 7,235
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Consolidated Statements of Stockholders' Equity
<S> <C>
- ------------------------------------------------------------------------------------------------------------------
Common Stock Preferred Stock
----------------------------------------------------- Paid-in
In thousands Shares Amount Shares Amount Capital
- ------------------------------------------------------------------------------------------------------------------
Balance at January 1, 1994 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
Proceeds from sale of
Common Stock:
Notes receivable
Stock options exercised 53 1 82
Stock offering cost (26)
Incentive stock issued 8 73
Treasury stock purchased
Common stock issued for acquisitions
Key Voice Tech., Inc. 243 2 1,469
Aurora Systems, Inc. 148 2 890
Net income
- ------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 8,678 $87 - - $114,031
==================================================================================================================
<CAPTION>
-----------------------------------------------------------------------
Notes
Treasury Stock Receivable
------------------------ on Sale Retained
In thousands Shares Amount of Stock Earnings Total
- -----------------------------------------------------------------------------------------------------------------
Balance at January 1, 1994 (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
Proceeds from sale of
Common Stock:
Notes receivable 8 8
Stock options exercised 83
Stock offering cost (26)
Incentive stock issued 73
Treasury stock purchased (3) (40) (40)
Common stock issued for acquisitions
Key Voice Tech., Inc. 1,471
Aurora Systems, Inc. 892
Net income 1,809 1,809
- -----------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 (97) $(878) $(168) $(74,508) $38,564
=================================================================================================================
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
Consolidated Statements of Cash Flows
- ----------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
In thousands 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Cash received from customers $106,979 $97,156 $81,298
Other cash received 1,022 1,355 2,305
Interest received 53 60 56
Cash paid to suppliers and employees (101,220) (93,990) (75,888)
Interest paid on debt (876) (676) (924)
Interest paid under capital lease obligations (89) (174) (284)
Income taxes paid (243) (186) (200)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 5,626 3,545 6,363
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of Key Voice Technologies ("KVT") (8,528) - -
Purchase of Aurora Systems ("Aurora") (1,901) - -
Acquisition cost for KVT and Aurora (934) - -
Proceeds from the sale of equipment 9 6 206
Proceeds received on note from Cortelco
International, Inc. - - 1,000
Capital expenditures (3,179) (2,155) (2,116)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (14,533) (2,149) (910)
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from borrowings 5,619 - 7,300
Net borrowings under revolver agreement 1,749 - -
Proceeds from issuance of common stock 47 11,384 203
Principal payments on debt (1,941) (1,824) (14,365)
Principal payments under capital lease obligations (531) (641) (809)
Preferred stock redemption - (7,500) (1,000)
Preferred dividends paid - (350) (577)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 4,943 1,069 (9,248)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (3,964) 2,465 (3,795)
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 4,144 1,679 5,474
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $180 $4,144 $1,679
==================================================================================================================================
Reconciliation of net income to net cash provided by operating activities:
Net Income $1,809 $9,869 $3,225
- ----------------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization 6,680 3,557 4,138
Change in assets and liabilities (for 1996, net
of effects from the purchase of KVT and Aurora):
Decrease (increase) in accounts receivable 143 (2,339) (453)
Inventory provision 1,029 1,309 964
Increase in inventory (2,385) (2,365) (2,989)
Increase in other assets (1,888) (3,277) (1,620)
Increase in net deferred tax assets (736) (4,503) -
Increase (decrease) in accounts payable and
bank overdrafts (657) 1,011 1,918
Increase in other liabilities 595 435 1,238
KVT asset value at acquisition 1,105 - -
Aurora asset value at acquisition (121) - -
Increase (decrease) in other equity 52 (152) (58)
- ----------------------------------------------------------------------------------------------------------------------------------
Total adjustments 3,817 (6,324) 3,138
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $5,626 $3,545 $6,363
==================================================================================================================================
The accompanying notes are an integral part of these financial statements.
</TABLE>
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1996, 1995, 1994
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 principal customers are small to medium sized businesses
throughout the U.S. and certain international markets. The distribution network
consists of three major distributors, other supply houses, approximately 1700
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. The
Company, at this time, does not perceive an obsolescence problem with respect to
any of its products.
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 reported amounts of assets, liabilities, revenues,
expenses, and disclosure of contingent assets and liabilities at December 31,
1996.
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 $1,935,000 and $1,594,000 are included in accounts payable at
December 31, 1996 and 1995, respectively. Bank overdrafts are outstanding checks
that have not (1) cleared the bank and (2) been funded by the revolving credit
facility (see Note 6). 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 and outside contract development (see "Capitalized Software
Development Costs").
Earnings per Common Share and Common Equivalent Share
For 1996, 1995, and 1994, 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. During 1996, there were no
preferred stock dividends paid or earned, and stock options and other common
equivalent shares were antidilutive. For the years 1995 and 1994, primary
earnings per share were computed by dividing income attributable to common
shareholders (net income less preferred stock dividend requirements) by the
weighted average number of common and common equivalent shares outstanding
during the period plus (in periods in which they had a dilutive effect) the
effect of common shares contingently issuable, primarily from stock options.
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 1996, 1995, and 1994, the Company incurred costs associated with development
of software related to the Company's various products. The accounting for such
software costs is in accordance with 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 $2,297,000 and $1,475,000 at December 31, 1996 and
1995, respectively. The amounts capitalized were $1,577,000, $840,000, and
$717,000, of which $877,000, $757,000, and $858,000 were amortized in 1996,
1995, and 1994, respectively. The Company also capitalized costs associated with
product software development performed by outside contract engineers. The total
amount of unamortized outside contract development cost included in other assets
is $988,000 at December 31, 1996. The amount capitalized was $1,145,000, of
which $157,000 was amortized in 1996. For the years 1995 and 1994, there were no
capitalized costs or amortization expense that related to outside contract
development cost.
Postretirement Benefits Other Than Pension
SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions" requires the Company to accrue estimated costs relating to health care
and life insurance benefits. In 1996, 1995, and 1994, the Company expensed
$41,000, $311,000 and $289,000, respectively.
Income Taxes
In accordance with SFAS No. 109, "Accounting for Income Taxes," this statement
specifies the asset and liability approach. The deferred tax liability or asset
is determined based on the difference between the financial statement and tax
basis 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
7). Tax credits will be utilized to reduce current and future income tax expense
and payments.
Accounting for Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board ("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 ("APB") No. 25, "Accounting for Stock Issued to
Employees." The Company has elected to continue to account for such transactions
under APB No. 25. The Company has disclosed 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 (see Note 11).
Reclassifications
Amounts in the 1995 and 1994 consolidated financial statements have been
reclassified to conform to the 1996 presentation. These reclassifications had no
effect on previously reported consolidated net income.
NOTE 2. ACQUISITIONS
On March 20, 1996, the Company completed the acquisitions of two companies
involved in CTI applications: Aurora Systems, Inc. ("Aurora") and Key Voice
Technologies, Inc. ("KVT"). Aurora, based in Acton, Massachusetts, is a leading
provider of off-the-shelf CTI products. KVT, based in Sarasota, Florida,
develops, assembles, markets, and sells voice processing systems and related
products for business applications. As a result of the acquisitions, Aurora and
KVT have become wholly-owned subsidiaries of the Company. The operating results
of Aurora and KVT from March 20, 1996 to December 31, 1996 have been included in
the Company's consolidated results of operations.
The consideration paid for the acquisition of Aurora was approximately $2.8
million, of which $1.9 million was paid in cash and approximately $0.9 million
was paid by issuance of 147,791 shares of the Company's Common Stock. The
consideration paid for the acquisition of KVT totaled approximately $19.0
million, of which $8.5 million was paid in cash, $7.0 million was paid by the
Company's issuance of a promissory note ("Promissory Note"), and $1.5 million
was paid by the issuance of 243,097 shares of the Company's Common Stock.
Depending on KVT's performance during the three years following the acquisition,
the Company may be obligated to pay an additional $2.0 million which, at the
Company's option, may be paid in cash or evidenced by the issuance of up to
216,086 shares of the Company's Common Stock.
In accordance with the purchase method of accounting, the purchase price
of the two companies has been allocated to the underlying assets and liabilities
based on their respective fair values at the date of the acquisitions. Any
excess of purchase price over the value of the net assets is allocated to
goodwill. The purchase price, including acquisition costs, for both companies
exceeded net assets acquired by approximately $19.3 million. Such excess is
being amortized on a straight-line basis over one to eight years. The cost
associated with the contingent shares, based on their respective fair values at
the time of issuance, will be added to goodwill and amortized over the remaining
life of the original goodwill. Such allocations have been based on asset
valuations performed by outside consultants.
To complete the acquisitions of Aurora and KVT, the Company obtained additional
funds from its credit facility. The Company and Fleet Capital Corporation
("Fleet") amended the Loan Agreement to permit the Company to borrow additional
funds and modified some of its terms and covenants. The amendment to the Loan
Agreement provided an increased borrowing capacity of $13.5 million under
acquisition and equipment loans, and a revolving credit facility of $12.5
million (see Note 6).
Had the Aurora and KVT acquisitions been made at the beginning of the year prior
to the acquisitions, the Company's pro forma unaudited results would have been
the following at December 31:
- ------------------------------------------------------------------------------
In thousands except per share amounts 1996 1995
- ------------------------------------------------------------------------------
Net sales $104,606 $102,346
Net income $1,391 $6,802
Earnings per share $0.16 -
Earnings per share fully diluted - $0.79
- ------------------------------------------------------------------------------
The unaudited pro forma information is presented for comparative purposes only
and is not necessarily indicative of the results that would have occurred had
the acquisitions been consummated at the beginning of the periods presented, nor
is it necessarily indicative of future operating results.
NOTE 3. INVENTORIES
Inventory consists of the following:
- --------------------------------------------------------------------------
December 31,
In thousands 1996 1995
- --------------------------------------------------------------------------
Finished goods $6,529 $3,808
Work-in-process 3,681 4,202
Materials and supplies 9,376 9,915
----- -----
Total $19,586 $17,925
======= =======
- --------------------------------------------------------------------------
NOTE 4. PROPERTY
Property consists of the following:
- -------------------------------------------------------------------------
December 31,
In thousands 1996 1995
- -------------------------------------------------------------------------
Land $556 $396
Buildings and improvements 13,555 11,763
Machinery and equipment 28,759 27,547
Less accumulated depreciation (27,553) (25,763)
------- -------
Property - Net $15,317 $13,943
======= =======
- -------------------------------------------------------------------------
Depreciation expense charged to operations for the years 1996, 1995, and 1994,
was $2,598,000, $2,422,000, and $2,601,000, respectively.
NOTE 5. 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
- ------------------------------------------------------------------------------
1997 $184 $1,811
1998 136 1,682
1999 3 1,144
2000 - 154
2001 - 114
---- ------
Total minimum lease commitments 323 $4,905
======
Less amounts representing interest
and other costs (39)
----
Principal portion of minimum lease
commitments at December 31, 1996 $284
====
- ------------------------------------------------------------------------------
Assets recorded under capital leases (included in property in the accompanying
Consolidated Balance Sheets) are as follows:
- -----------------------------------------------------------------------
December 31,
In thousands 1996 1995
- -----------------------------------------------------------------------
Machinery and equipment $823 $1,843
Less accumulated depreciation (431) (690)
---- -----
Property - Net $392 $1,153
==== ======
- -----------------------------------------------------------------------
During 1996, 1995, and 1994, the Company entered into new capital lease
obligations which amounted to approximately $67,000, $9,000, and $228,000,
respectively.
Operating leases and rentals are for office space, and factory and office
equipment. Total rent expense for operating leases, including rentals which are
cancelable on short-term notice, for the years ended December 31, 1996, 1995,
and 1994, was $1,721,000, $1,262,000, and $1,023,000, respectively.
NOTE 6. DEBT
Long-term debt consists of the following:
- ------------------------------------------------------------------------------
December 31,
In thousands 1996 1995
- ------------------------------------------------------------------------------
Notes payable to Fleet
Term notes I and II (1) $ - $4,030
Acquisition note (2) 7,249 -
Equipment note (3) 463 -
Revolving credit (4) 1,749 -
Promissory note (5) 7,000 -
Other (6) 311 -
Capitalized leases (7) 284 717
------- ------
Total debt 17,056 4,747
Less current maturities on debt 5,343 1,903
------- ------
Total long-term debt $11,713 $2,844
======= ======
- ------------------------------------------------------------------------------
The Company and Fleet entered into a loan and security agreement ("Loan
Agreement") in 1994 pursuant to which Fleet provided the Company with a $6.0
million term loan represented by a note ("Term Note I"), and a $9.0 million
revolving credit loan facility ("Revolver") in an aggregate amount up to $14.0
million. On April 29, 1994, the Company and Fleet amended the Loan Agreement to
permit the Company to borrow an additional $1.3 million represented by another
note ("Term Note II") to finance the purchase of additional surface mount
technology equipment. Term Note II was payable in 44 equal monthly payments of
$27,000, with the balance due on February 1, 1998.
(1) Term Notes I and II aggregating $7,300,000 carried interest rates of 1-1/2%
over Fleet's prime rate and were payable in equal monthly principal installments
of $110,334, with the balance due on February 1, 1998. Fleet's prime rate was
8.25% and 8.50% at March 31, 1996 and December 31, 1995, respectively.
On March 13, 1996, the Company and Fleet amended the Loan Agreement to provide
the Company with a $10.0 million acquisition loan ("Acquisition Loan"), $3.5
million equipment loan ("Equipment Loan"), and $12.5 million revolving credit
loan facility ("Amended Revolver"). The remaining balances of $2,909,666 and
$706,000 on Term Notes I and II were paid by advances from the Amended Revolver
and Equipment Loan, respectively.
(2) On March 20, 1996, the Company borrowed $8.5 million under the Acquisition
Loan which was used to acquire Aurora and KVT. The Acquisition Loan is payable
in equal monthly principal installments of $142,142, with the balance due on
February 1, 2001.
(3) The Equipment Loan is payable in equal monthly principal installments of
$27,000, with the balance due on June 1, 1998.
(4) Availability under the amended Revolver of up to $12.5 million is based on
eligible accounts receivable and inventory, less funds already borrowed. On June
28, 1996, the Company and Fleet amended the Loan Agreement to adjust
availability under the Amended Revolver by establishing a special availability
reserve of $4.0 million and modified certain covenants. The original Revolver
carried an interest rate of 1.00% over Fleet's prime rate with availability
based on eligible accounts receivable and inventory.
The Acquisition Loan, Equipment Loan, and Amended Revolver carry interest rates
at either Fleet's prime rate or the London Interbank Offered Rate ("LIBOR") at
the Company's option. The interest rates can be adjusted annually based on the
Company's debt to earnings ratio which will vary the rates from minus 0.50% to
plus 0.50% under or above Fleet's prime rate and from plus 1.50% to 2.50% above
LIBOR. As of December 31, 1996, Fleet's prime interest rate was 8.25% and the
LIBOR rate was 5.66% with approximately 79% of the loans based on LIBOR. As of
December 31, 1996, the Company's borrowing rate for loans based on the prime and
LIBOR rates was 8.25% and 7.66%, respectively.
(5) The Promissory Note in the principal amount of $7.0 million, which was part
of the purchase price of KVT, carries an interest rate equal to the prime rate
with annual payments of $1.4 million plus accumulated interest for five years
starting on March 20, 1997.
(6) Other debt consists of a mortgage acquired in conjunction with the KVT
acquisition which requires a monthly mortgage payment of $2,817, including
interest at a rate of 8.75%. The final payment is due on August 1, 2005.
(7) Capital leases are with various financing entities and are payable based on
the terms of each individual lease (see Note 5).
Scheduled maturities of current and long-term debt for the Fleet Notes (as
defined in the Loan Agreement), the Promissory Note, and other debt (excluding
the Amended Revolver and leasing agreements) are as follows:
- --------------------------------------------------------------------------------
Principal
In thousands Fiscal Years Installments
- --------------------------------------------------------------------------------
Notes payable 1997 $3,437
1998 3,252
1999 3,114
2000 3,115
2001 1,836
Beyond 2001 269
- --------------------------------------------------------------------------------
Debt Covenants
The Company's indebtedness to Fleet is secured by liens on the Company's
accounts receivable, inventories, intangibles, land, and all other property.
Among other restrictions, the amended Loan Agreement contains certain financial
covenants that require specified levels of consolidated tangible net worth,
profitability, and other certain financial ratios.
On June 28, 1996, the Company and Fleet amended the Loan Agreement to adjust
availability under the Amended Revolver by establishing a special availability
reserve of $4.0 million and also modified certain covenants.
On September 27, 1996, the Company and Fleet amended the Loan Agreement to
modify certain covenants. The amended Loan Agreement also contains certain
limits on additional borrowings. As of December 31, 1996, the Company was in
compliance with the terms of the Loan Agreement.
NOTE 7. INCOME TAXES
The components of the income tax expense for the years ended December 31 are as
follows:
- ---------------------------------------------------------------------------
Liability Method
In thousands 1996 1995 1994
- ---------------------------------------------------------------------------
Current - Federal $59 $142 $88
State 159 27 28
Deferred - Federal (714) (4,374) -
State (22) (129) -
---- ------ ---
Total provision/(benefit) $(518) $(4,334) $116
===== ======= ====
- ---------------------------------------------------------------------------
The income tax provision reconciled to the tax computed at statutory rates for
the years ended December 31 is summarized as follows:
- ------------------------------------------------------------------------------
In thousands 1996 1995 1994
- ------------------------------------------------------------------------------
Federal tax at statutory rate
(35% in 1996, 1995, and 1994) $452 $1,937 $1,306
State income taxes (net of federal tax
benefit) 103 18 18
Nondeductible charges 329 46 34
Alternative minimum tax 77 139 84
Utilization of operating loss carryover (743) (1,971) (1,326)
Adjustment of valuation allowance (736) (4,503) -
----- ------ ----
Income tax provision/(benefit) $(518) $(4,334) $116
===== ======= ====
- ------------------------------------------------------------------------------
Net deferred tax assets of $5,239,000 and $4,503,000 have been recognized in the
accompanying Consolidated Balance Sheets at December 31, 1996 and 1995,
respectively. The components of the net deferred tax assets are as follows:
- ------------------------------------------------------------------------------
In thousands 1996 1995
- ------------------------------------------------------------------------------
Total deferred tax assets $27,709 $28,091
Total valuation allowance (20,240) (21,397)
------ ------
Total deferred tax assets - net 7,469 6,694
Total deferred tax liabilities (2,230) (2,191)
------ ------
Total $5,239 $4,503
====== ======
- ------------------------------------------------------------------------------
The valuation allowance decreased $1,157,000 during the year ended December 31,
1996. The decrease was primarily related to (1) the re-evaluation of the future
utilization of net operating losses ("NOLs") of $736,000, and (2) the net change
in temporary differences of deferred tax assets, deferred tax liabilities, and
operating loss carryforwards of $421,000. 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 continual re-evaluation of the
realization of the deferred tax assets, the valuation allowance was reduced and
a tax benefit of $736,000 was recognized in the quarter ended March 31, 1996.
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
$64,986,000 and $3,075,000, respectively, which, if not utilized, will expire as
follows:
- -------------------------------------------------------------------------------
In thousands Net Operating
Expiration Dates Losses Tax Credits
- -------------------------------------------------------------------------------
1997 $18 $412
1998 - 1,846
1999 21,359 504
2000 27,762 66
2001 5,260 -
After 2001 10,587 247
------ -----
Total $64,986 $3,075
======= ======
- -------------------------------------------------------------------------------
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 amount of net operating loss carryforwards expected to be utilized
resulting in the reduction of the valuation allowance of $5,239,000 assumes an
ownership change will take place.
The components of the net deferred tax assets (liabilities) at December 31, 1996
and 1995 are as follows:
- ---------------------------------------------------------------------------
Deferred Assets/(Liabilities)
In thousands 1996 1995
- ----------------------------------------------------------------------------
Net loss carryovers $22,095 $22,740
Tax credit carryovers 3,075 3,153
Inventory write downs and capitalization 1,068 1,057
Pension 265 354
Postretirement 304 290
Compensation and benefits 196 169
Capitalized software development costs 266 277
Contingencies 37 21
Other deferred tax assets 46 18
Fixed asset depreciation (2,230) (2,179)
Goodwill amortization 358 -
Income reported in different periods for
financial reporting and tax purposes - -
Other deferred tax liabilities - -
------- ------
Net deferred tax asset 25,480 25,900
Less: Valuation allowance (20,241) (21,397)
------ -------
Total $5,239 $4,503
====== ======
- ---------------------------------------------------------------------------
NOTE 8. PENSION AND SAVINGS PLANS
The Company currently has one pension plan which provides benefits based on
years of service and an employee's compensation during the employment period.
The calculation of pension benefits prior to 1993 was based on provisions of two
previous pension plans. One plan provided pension benefits based on years of
service and an employee's compensation during the employment period. The other
plan provided benefits based on years of service only. 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, 1996 and
1995.
<TABLE>
<CAPTION>
<S> <C>
- ------------------------------------------------------------------------------------------
In thousands 1996 1995
- ------------------------------------------------------------------------------------------
Actuarial present value of benefit obligation:
Accumulated benefit obligation (including vested
benefits of $12,313 and $10,499, respectively) $(13,391) $(11,473)
======== ========
Projected benefit obligation for service to date $(14,218) $(12,102)
Plan assets at fair value 15,679 12,345
------- -------
Plan assets more than projected benefit obligation 1,461 243
Unrecognized net gain from past experience (2,065) (1,064)
Unrecognized net gain from prior service cost (254) (288)
Unrecognized net asset at date of implementation of
SFAS No. 87 amortized over 14 years (86) (115)
------- -------
Accrued liabilities for benefit plans at December 31 $(944) $(1,224)
======= =======
- ------------------------------------------------------------------------------------------
</TABLE>
Net periodic pension cost for 1996, 1995, and 1994 included the following
components:
<TABLE>
<CAPTION>
<S> <C>
- ---------------------------------------------------------------------------------------
In thousands 1996 1995 1994
- ---------------------------------------------------------------------------------------
Service cost-benefits earned during the period $1,081 $931 $982
Interest cost on projected benefit obligation 890 751 657
Actual (return) or loss on plan assets (2,634) (2,122) 106
Net amortization and deferral of other items 1,510 1,199 (919)
----- ----- ----
Net periodic pension cost $847 $759 $826
==== ==== ====
- ---------------------------------------------------------------------------------------
</TABLE>
Assumptions used in accounting for the plans were as follows:
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Discount rate 7.50% 7.50% 8.00%
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 an 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 1996,
1995, and 1994 was $341,000, $278,000, and $261,000, respectively.
NOTE 9. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The effect of SFAS No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions," on income from continuing operations for 1996, 1995, and
1994 was an expense of $41,000, $311,000, and $289,000, 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 following table sets forth the amounts of the accumulated postretirement
benefit obligation at January 1, 1996, 1995, and 1994:
<TABLE>
<CAPTION>
<S> <C>
- ----------------------------------------------------------------------------------------
In thousands 1996 1995 1994
- ----------------------------------------------------------------------------------------
Retirees $137 $354 $398
Actives eligible to retire 415 653 628
Other active participants ineligible to retire 208 922 972
--- ----- -----
Total $760 $1,929 $1,998
==== ====== =====
- ----------------------------------------------------------------------------------------
</TABLE>
Net postretirement benefit cost for years ended December 31 consisted of the
following components:
- ------------------------------------------------------------------------------
In thousands 1996 1995 1994
- ------------------------------------------------------------------------------
Service cost $20 $75 $59
Interest cost 55 156 139
Actual return on assets - - -
Amortization of the unrecognized transition
obligation 91 91 91
Amortization of gain (125) (11) -
Amortization of prior service cost - - -
--- --- ----
Total $41 $311 $289
=== ==== ====
- ------------------------------------------------------------------------------
The following table sets forth funded status of the plans and amounts recognized
in the Company's Consolidated Balance Sheets at December 31, 1996 and 1995.
- ------------------------------------------------------------------------------
In thousands 1996 1995
- ------------------------------------------------------------------------------
Plan assets at fair value $ - $ -
Accumulated postretirement benefit obligation
Retirees (137) (379)
Fully eligible participants (415) (699)
Other active participants (208) (996)
Unrecognized prior service cost - -
Unrecognized net gain (1,583) (320)
Unrecognized transition obligation 1,449 1,540
----- -----
Accrued liabilities for benefit plans at December 31 $(894) $(854)
===== ======
- ------------------------------------------------------------------------------
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation as of January 1, 1996 was 10% for 1996, the
trend rate decreasing each successive year until it reaches 5.25% in 2004 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, 1996 and net
postretirement health care cost by approximately $4,000 and service cost plus
interest cost by approximately $9,000. The postretirement benefit obligation is
not funded and does not include any provisions for securities, settlement,
curtailment, or special termination benefits.
NOTE 10. 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 major
portion of the proceeds were used to redeem all of the remaining 750,000 shares
of Series A Preferred Stock ("Preferred Stock") held by PCI, pay accumulated
dividends on the Preferred Stock to PCI, 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 net effect of the Offering and the
reverse stock split was a decrease in the number of outstanding shares of Common
Stock 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 for periods prior to the third quarter of 1995 have
been retroactively restated to reflect the one-for-three reverse stock split.
NOTE 11. STOCK-BASED COMPENSATION PLANS
As of December 31, 1996, the Company had two basic stock-based compensation
plans. The 1992 Stock Incentive Plan (the "Stock Incentive Plan"), provides for
stock options to purchase shares of Common Stock which may be granted to
officers, directors, and certain key employees as additional compensation. Under
the 1992 Non-employee Directors Stock Incentive Plan (the "Directors Stock
Incentive Plan"), each non-employee director was awarded 1,666 shares of the
Company's Common Stock for each fiscal year the Company reports income. As of
January 1996, the Directors Stock Incentive Plan was amended to award each
non-employee director 2,500 shares of the Company's Common Stock under such
circumstances. In 1996, each non-employee director was awarded 1,666 shares
related to income earned by the Company for fiscal year 1995. The plans are
composed of stock options, restricted stock, nonstatutory stock, and incentive
stock. The Company's incentive plans are administered by the Compensation
Committee of the Company's Board of Directors.
. On April 30, 1996, the Company's stockholders approved a resolution to
increase the number of shares of Common Stock under the Company's 1992 Stock
Incentive Plan from 800,000 to 1,550,000. As of December 31, 1996, all options
issued under the Company's 1982 Stock Incentive Plan have either been exercised
or have expired. The Company has previously accepted notes relating to the
non-qualified stock options exercised by officers and employees. These notes
receivable relating to stock purchases amounted to $168,000, $176,000, and
$182,000 at December 31, 1996, 1995, and 1994, respectively, and have been
deducted from Stockholders' Equity.
Options granted for years 1996 and 1995 have a maximum term of ten years and
vest over a three year period. Options become exercisable in installments of 33%
per year on each of the first through the third anniversaries of the grant date.
All options granted through the Stock Incentive Plan are granted at an exercise
price equal to the market price of the Company's Common Stock on the grant date.
The Company applies APB No. 25 and related interpretations in accounting for its
plans. Accordingly, no compensation cost has been recognized for its fixed stock
option plan other than the performance based option that is part of the plan for
its directors. Common Stock has been issued by the Company to its directors for
years that show positive net income. The compensation cost that has been charged
against income for its director's performance-based stock was $66,000, $116,000,
and $130,000 for 1996, 1995, and 1994, respectively.
Information regarding stock options is summarized below:
<TABLE>
<CAPTION>
<S> <C>
- --------------------------------------------------------------------------------------------------------------
1996 (1) 1995 (1) 1994 (1),(2)
- --------------------------------------------------------------------------------------------------------------
Options outstanding,
January 1; 449,241 $6.50 363,172 $3.68 451,377 $1.84
Granted 277,062 9.12 268,073 7.95 92,000 9.80
Exercised (52,617) 1.58 (157,044) 2.13 (146,558) 1.98
Terminated (14,162) 8.72 (24,960) 7.00 (33,647) 3.09
------- ------- -------
Options outstanding,
December 31; 659,524 7.95 449,241 6.50 363,172 3.68
======= ======= =======
Options exercisable,
December 31; 212,392 6.30 160,403 5.07 174,599 1.88
Per share ranges of
options outstanding
at December 31 $1.41-$11.75 $1.41-$11.75 $1.41-$10.59
Dates through which options
outstanding at December 31,
were exercisable 1/97-5/2006 1/96-11/2005 1/95-10/2004
(1) Fair value weighted-average exercise price at grant date.
(2) 1994 has been restated to reflect the one-for-three reverse stock split.
- --------------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information concerning currently outstanding and
exercisable options at December 31, 1996:
<TABLE>
<CAPTION>
<S> <C>
- ------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
------------------- -------------------
Range of Number Weighted-Average Number
Exercise Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Prices at 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price
- ------------------------------------------------------------------------------------------------------------
$1.41 to 3.00 70,012 5.8 $1.64 70,012 $1.64
5.73 to 7.77 252,198 8.5 7.39 85,563 7.38
8.82 to 9.38 256,835 9.1 9.34 9,113 8.98
10.50 to 11.75 80,479 7.5 10.75 47,704 10.68
------ ------
1.41 to 11.75 659,524 8.3 7.95 212,392 6.30
======= =======
- ------------------------------------------------------------------------------------------------------------
</TABLE>
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
- ------------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------------
Risk-free interest rate 6.18% 6.90%
Expected life 3.82 3.02
Expected volatility 90% 101%
Expected dividends None None
- ------------------------------------------------------------------------------
If compensation cost for the Company's Stock Incentive Plans had been determined
based on the fair value at the grant dates for awards under the plan, consistent
with the method of FASB Statement No. 123, the Company's net income and earnings
per share would have been reduced to the pro forma amounts indicated below:
- ------------------------------------------------------------------------------
In thousands except per share amounts 1996 1995
- ------------------------------------------------------------------------------
Net income: As reported $1,809 $9,519
Compensation expense 218
Pro forma $1,591 $9,519
Earnings per common share: As reported $0.21 -
Pro forma $0.19 -
Primary earnings per share: As reported - $1.24
Pro forma - $1.24
Fully diluted earnings per share:
As reported - $1.20
Pro forma - $1.20
- ------------------------------------------------------------------------------
The Company would not have recognized any compensation expense for 1995 because
the 1995 options were not vested until 1996.
NOTE 12. SEGMENT INFORMATION
During 1996, 1995, and 1994, substantially all of the Company's sales, net
income, and identifiable net assets were attributable to the telecommunications
industry.
The Company had sales in excess of 10% of net sales to three customers as
follows:
- ------------------------------------------------------------------------------
In thousands 1996 1995 1994
- ------------------------------------------------------------------------------
Sales:
ALLTEL Supply, Inc. $19,471 $20,575 $12,370
Graybar Electric Company, Inc. 31,719 30,857 31,298
Sprint/North Supply , Inc. 22,433 18,357 16,305
Percentage of net sales:
ALLTEL Supply, Inc. 19% 22% 16%
Graybar Electric Company, Inc. 31% 33% 41%
Sprint/North Supply , Inc. 22% 19% 21%
- ------------------------------------------------------------------------------
ALLTEL Supply, Inc., a subsidiary of ALLTEL Corporation, was a shareholder of
the Company until 1996. As of December 31, 1995 and 1994, ALLTEL had accounts
receivable with the Company of $1,415,000 and $588,000, respectively.
NOTE 13. 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, 1996, the Company has incurred costs of
approximately $37,000 and expects the pumping process to be completed by early
1998.
NOTE 14. 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>
<S> <C>
- ------------------------------------------------------------------------------------------------------------
First Second Third Fourth
In thousands except per share amounts Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------
1996
Sales $22,048 $23,562 $28,874 $27,745
Gross profit 7,483 8,147 10,861 11,327
Interest expense 227 499 483 417
Goodwill amortization 91 868 855 860
Net income 1,185 (1,628) 908 1,344
Net earnings per common share: 0.14 (0.19) 0.11 0.16
- ------------------------------------------------------------------------------------------------------------
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
Goodwill amortization 23 - - -
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
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Previously reported quarterly information has been revised to reflect certain
reclassifications. These reclassifications had no effect on previously reported
consolidated net income.
For all quarters of 1996, the net earnings per common and equivalent shares were
antidilutive.
In the first quarter of 1996, the Company acquired Aurora and KVT by
restructuring its indebtedness to Fleet and borrowing additional funds (see Note
2 and Note 6). The major impact on operations was an increase of interest
expense for the last three quarters of 1996 of $949,000 and recognition of
goodwill amortization of $2,651,000. All costs associated with the acquisitions
were offset by the increase in revenues and income (excluding acquisition and
corporate allocation costs) produced by the new subsidiaries of $9,671,000 and
$4,342,000, respectively. Also in the first quarter of 1996, the Company
reevaluated the future utilization of its deferred tax assets for future
periods. Based on the reevaluation of the realizability of the deferred tax
assets, the valuation allowance was reduced and a tax benefit of $736,000 was
recognized (see Note 7).
The Company recognizes costs based on estimates throughout the fiscal year
relating to inventory. The results of the physical inventory and the fiscal
year-end close reflected a favorable adjustment with respect to such estimates,
resulting in approximately $289,000 of additional income, which is reflected in
the fourth quarter of 1996. In the second quarter of 1995, the Company
re-evaluated 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 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 (see Note
7).
In the third quarter of 1995, the Company completed a public stock offering with
a concurrent one-for-three reverse stock split (see Note 10).
For the fourth quarter of 1995, net earnings per common share was antidilutive
for the period. Both fully diluted and primary earnings per share were $0.06 for
the fourth quarter of 1995. 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.
<TABLE>
<CAPTION>
<S> <C>
- -----------------------------------------------------------------------------------------------------------------
FIVE YEAR FINANCIAL DATA
Selected Consolidated Statements of Operations Data
- -----------------------------------------------------------------------------------------------------------------
In thousands except
per share amounts 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------
Net sales:
As reported (1) $102,229 $94,802 $77,145 $69,099 $70,897
Current product lines (2) 102,229 94,802 77,145 69,099 64,423
Income before income taxes
and extraordinary item 1,291 5,535 3,730 2,545 897
Net income 1,809 9,869 3,225 2,416 884
Earnings per common share
and common equivalent share:
Primary: (3) 0.21 1.24 0.37 0.35 0.13
- -----------------------------------------------------------------------------------------------------------------
(1) Prior years have been reclassified to conform to 1996 presentation.
(2) Excludes sales of the electromechanical product line.
(3) Earnings per share prior to 1995 have been restated to reflect the one-
for-three reverse stock split. 1996 is anti-dilutive.
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Selected Consolidated Balance Sheet Data
- -----------------------------------------------------------------------------------------------------------------
In thousands 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------
Current assets $30,767 $33,740 $26,199 $28,301 $24,389
Total assets 74,352 56,692 42,260 44,803 41,747
Current liabilities 20,159 15,469 14,568 13,358 11,985
Long-term debt and other
long-term liabilities 15,629 6,929 6,649 20,695 22,251
Stockholders' equity 38,564 34,294 21,043 10,750 7,511
- -----------------------------------------------------------------------------------------------------------------
</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 the 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 under the Company's
symbol, CMDL. The following common stock information has been restated to
reflect the one-for-three reverse stock split.
<TABLE>
<CAPTION>
<S> <C>
- -----------------------------------------------------------------------------------------------------------------
1996 1995
Fiscal Quarters High Low High Low
- -----------------------------------------------------------------------------------------------------------------
First Quarter 11 3/8 8 - 9 - 6 3/4
Second Quarter 12 1/2 9 1/4 15 3/8 7 7/8
Third Quarter 9 - 6 - 14 13/16 11 1/4
Fourth Quarter 7 7/8 5 7/8 13 7/8 7 3/4
- -----------------------------------------------------------------------------------------------------------------
</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 6 to Consolidated Financial Statements).
The Company's Common Stock trades on The Nasdaq Stock Market under the symbol:
CMDL.
OFFICERS
William G. Mustain, Chairman, President and Chief Executive Officer
Mr. Mustain is Chairman, President and Chief Executive Officer of the Company.
He joined the Company as Vice President in June 1987 and assumed his current
position in May 1989. He has served as a director of the Company since 1989 and
is a member of the Nominating Committee of the Board of Directors.
William C. Grover, Senior Vice President, Sales and Marketing
Mr. Grover was elected Senior Vice President in September, 1995 and is
responsible for Sales and Marketing. He joined the Company as President of
Comdial Enterprise Systems, Inc., a subsidiary of the Company.
Wayne R. Wilver, Senior Vice President, Chief Financial Officer, Treasurer, and
Secretary
Mr. Wilver was elected Senior Vice President in May, 1989. He joined the Company
as Vice President, Chief Financial Officer, Treasurer, and Secretary in July,
1986.
Joe D. Ford, Vice President, Human Resources
Mr. Ford was elected Vice President in May 1995 and is responsible for Human
Resources. Between 1982 and May 1995, he served as the Company's Director of
Human Resources.
Keith J. Johnstone, Vice President, Manufacturing
Mr. Johnstone was elected Vice President in May, 1990 and is responsible for
Manufacturing Operations. Between 1980, when he joined the Company, and 1990,
Mr. Johnstone held a number of management positions, including Director of
Materials and Director of Customer Service.
Lawrence K. Tate, Vice President, Quality
Mr. Tate was elected Vice President in November 1982 and is responsible for
Quality. Between 1969 and 1982, he held various management positions, including
Vice President-Manufacturing Operations.
Ove Villadsen, Vice President, Engineering
Mr. Villadsen was elected Vice President in May, 1989 and is responsible for the
Company's product design and engineering activities. He joined Comdial Business
Communications Corporation (CBCC), a subsidiary of the Company, in November,
1982, and between 1982 and 1989 served as Vice President of CBCC.
BOARD MEMBERS
William G. Mustain, Chairman - See previous page.
A.M. Gleason, Vice Chairman, President of the Port of Portland
Mr. Gleason retired in May 1995 as Vice Chairman and a director of PacifiCorp, a
diversified public utility. He currently serves as President of the Port of
Portland. Mr. Gleason has served as a director of the Company since 1981 and as
Vice Chairman of the Board of Directors since April 1995 and is a member of the
Compensation and Nominating Committees of the Board of Directors.
William E. Porter, President of Interactive Consumer, Inc.
Mr. Porter is President, Interactive Consumer, Inc. Between December 1995 and
January 1997, Mr. Porter has served in several executive positions with Trigon
Blue Cross Blue Shield (formerly Blue Cross Blue Shield of Virginia). Mr. Mr.
Porter has served as a director of the Company since July, 1994 and is a member
of the Compensation and Nominating Committees of the Board of Directors.
Michael C. Henderson, President and Chief Executive Officer of PacifiCorp
Holdings, Inc.
Mr. Henderson is President and Chief Executive Officer of PacifiCorp Holdings,
Inc., a PacifiCorp subsidiary which owns Pacific Telecom, Inc., PacifiCorp
Generation Company ("P.G."), Powercor, and PacifiCorp Financial Services, Inc.
("PFS"). He is also President and Chief Executive Officer of PFS, a diversified
financial services company. Mr. Henderson serves as Chairman of the Board of
Albina Community Bancorp. Mr. Henderson has served as a director of the Company
since 1995 and is a member of the Audit Committee.
Dianne C. Walker, Independent Consultant
Ms. Walker is an independent consultant. Prior to January 1995, she was a
consultant to Bear Stearns & Co. Inc., an investment banking firm. Ms. Walker
has served as a director of the Company since 1986 and is a member of the Audit
and Pension Committees of the Board of Directors.
John W. Rosenblum, Dean of the Jepson School of Leadership Studies at the
University of Richmond
Mr. Rosenblum is Dean of the Jepson School of Leadership Studies at the
University of Richmond. Prior to serving at the University of Richmond, Mr.
Rosenblum was a Tayloe Murphy Professor of Business Administration at the Darden
Graduate School of Business Administration at the University of Virginia. He is
also a director of Chesapeake Corporation, Cadmus Communications Corp., T. Rowe
Price Associates, and Cone Mills Corporation. Mr. Rosenblum has served as a
director of the Company since 1992 and is a member of the Audit, Compensation,
and Pension Committees of the Board of Directors.
Transfer Agent and Registrar Form 10-K
ChaseMellon Shareholder Services 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 Web
Dick Bucci - Director, http://www.comdial.com
Investor Relations
Phone: (804) 978-2525
Fax: (804) 978-2438
E-Mail: [email protected]
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-53562 of Comdial Corporation on Form S-8 of our report dated January 30,
1997, appearing in this Annual Report on Form 10-K of Comdial Corporation for
the year ended December 31, 1996.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Richmond, Virginia
March 24, 1997
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, 1996 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: 02/4/97
/s/ A. M. Gleason
A. M. Gleason
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, 1996 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: 02/4/97
/s/ Michael C. Henderson
Michael C. Henderson
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, 1996 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: 02/4/97
/s/ William E. Porter
William E. Porter
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, 1996 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: 02/4/97
/s/ John W. Rosenblum
John W. Rosenblum
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, 1996 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: 02/4/97
/s/ Dianne C. Walker
Dianne C. Walker
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 180
<SECURITIES> 0
<RECEIVABLES> 9,660
<ALLOWANCES> 89
<INVENTORY> 19,586
<CURRENT-ASSETS> 30,767
<PP&E> 42,870
<DEPRECIATION> 27,553
<TOTAL-ASSETS> 74,352
<CURRENT-LIABILITIES> 20,159
<BONDS> 17,056
0
0
<COMMON> 87
<OTHER-SE> 38,477
<TOTAL-LIABILITY-AND-EQUITY> 74,352
<SALES> 100,959
<TOTAL-REVENUES> 102,229
<CGS> 64,311
<TOTAL-COSTS> 64,411
<OTHER-EXPENSES> 34,904
<LOSS-PROVISION> (3)
<INTEREST-EXPENSE> 1,626
<INCOME-PRETAX> 1,291
<INCOME-TAX> (518)
<INCOME-CONTINUING> 1,809
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,809
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.21
</TABLE>
