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, 1998
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 9, 1999, was approximately $58,600,000 (See Item 5). The
number of shares of Common Stock outstanding as of MARCH 9, 1999, was 8,860,383.
DOCUMENTS INCORPORATED BY REFERENCE:
Comdial's 1998 Annual Report to the Stockholders is incorporated by
reference under Part II and portions of Comdial's Definitive Proxy Statement for
its 1999 Annual Meeting of Stockholders, which will be filed with the Securities
and Exchange Commission within 120 days after December 31, 1998, are
incorporated by reference under Part III of this Form 10K.
<PAGE>
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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 10
(b) Financial Information About Industry Segment 12
Product Sales Information 12
(c) Narrative Description of Business 12
Products 12
Business Segment Products 13
Digital Systems 13
Solutions and Software 14
Analog and Other 17
Sales and Marketing 17
Engineering, Research and Development 19
Manufacturing and Quality Control 20
Competition 21
Intellectual Property 21
Year 2000 Issue 22
Employees 23
Item 2. Properties 23
Item 3. Legal Proceedings 24
Item 4. Submission of Matters to a Vote of
Security Holders 24
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PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 24
Item 6. Selected Financial Data 24
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 24
Item 8. Financial Statements and Supplementary Data 25
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 25
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TABLE OF CONTENTS (Cont'd.)
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PART III
Item 10. Directors and Executive Officers
of the Registrant 25
Item 11. Executive Compensation 25
Item 12. Security Ownership of Certain Beneficial
Owners and Management 25
Item 13. Certain Relationships and Related Transactions 25
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PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 26
<PAGE>
PART I
ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
Comdial Corporation (together with its subsidiaries, "Comdial") is a
Delaware corporation based in Charlottesville, Virginia. Comdial was originally
incorporated in Oregon in 1977 and was reincorporated in Delaware in 1982 when
it acquired General Dynamics Telephone Systems Center, Inc. (formerly known as
Stromberg-Carlson Telephone Systems, Inc.) a wholly-owned subsidiary of General
Dynamics Corporation. Comdial's Common Stock is traded in the National Market(R)
of the National Association of Security Dealers Automated Quotation System
("Nasdaq(R)") under Comdial's symbol, CMDL.
Comdial creates integrated digital communications solutions that
incorporate convergent voice and data technologies. These technologies include
Comdial's traditional strength in voice switching augmented by acquisitions and
partnerships in voice processing, on-site wireless communications, voice-over
the Internet, and computer-telephone integration ("CTI").
Building on its base business of advanced digital switching systems for
small to mid-sized businesses, Comdial is actively engaged in creating
integrated voice/data solutions for businesses with special needs. The Company
plans to grow by continuing to ably serve its traditional customer base while
capitalizing on growth opportunities for integrated products for specific
vertical market applications.
In 1996, Comdial acquired Aurora Systems, Inc. ("Aurora") and Key Voice
Technologies, Inc. ("KVT"), two companies involved in computer software
applications and solutions which became wholly-owned subsidiaries of Comdial.
Based in Sarasota, Florida, KVT develops, assembles, markets, and sells voice
processing systems and related products for business applications. Aurora,
originally based in Acton, Massachusetts, was a leading provider of
off-the-shelf computer software products. In 1997, Aurora sold its right, title
and interest in the FastCall product, Aurora's primary asset, to Spanlink
Communications, Inc. (see Note 2 to the Consolidated Financial Statements). In
1998, Comdial acquired Array Telecom Inc. ("Array"). The principal asset
purchased was the intellectual property associated with VOIPgate software, an
Internet Protocol ("IP") based telephony software platform. With its
acquisitions for the past several years, Comdial has become a leading provider
of personal computer ("PC")-based voice processing systems and telephony
gateways for routing voice and fax communications over the private intranet and
the public internet.
<PAGE>
Comdial's products accommodate businesses that require up to approximately
500 ports. A port could be occupied by a telephone, facsimile machine, modem, or
similar device. Comdial believes that it is a leading supplier to this market,
with an installed base of approximately 300,000 telephone systems and 3.3
million telephones. Comdial's growth has been principally as a result of sales
of digital telephone systems introduced by Comdial since 1992 and solutions and
software products introduced since 1993. Comdial's application software
encompasses a wide range of products that enable end users to perform telephony
functions from desktop 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
Comdial'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, reliance on key strategic
alliances, fluctuations in operating results, delays in development of highly
complex products, and other risks and uncertainties detailed from time to time
in Comdial's filings. These risks could cause Comdial's actual results for 1999
and beyond to differ materially from those expressed in any forward-looking
statement made by, or on behalf of, Comdial.
INDUSTRY BACKGROUND
Comdial's primary business and product offerings fall into three
categories: (1) voice switching systems for small to mid-size businesses, (2)
voice processing systems, and (3) integrated voice/data solutions that
incorporate voice switching and processing products with advanced computer
technologies and/or internet applications. All of these businesses are highly
competitive and are influenced by trends and events in technology, regulation,
and the general economy.
VOICE SWITCHING SYSTEMS
Comdial produces digital voice switching systems that are key/hybrid
systems and are the foundation of Comdial's Digital System business segment.
Historically, voice switching systems have been divided between key/hybrid
systems and Private Branch Exchanges ("PBXs"). Key/hybrid systems are typically
purchased by small to medium-sized businesses of three to 100 employees, while
larger businesses typically purchase PBXs. However, advances in the designs of
key/hybrid systems and PBXs in recent years has blurred the distinctions between
them. As key/hybrid systems continue to grow to accommodate more users with
increasing functionality, they have begun to encroach on the domain of the
traditional PBXs.
<PAGE>
Voice switching systems are measured in terms of "ports." A port is an
access point on the switch to an outside line or terminal device of some type.
Examples of terminal devices include telephone instruments, facsimile machines,
modems, and voice mail ports. Examples of lines include standard business lines
as well as higher speed integrated services digital network (ISDN), digital
transmission link (T-1), and others. With the proliferation of modems, facsimile
machines, and voice mail devices, the demand for greater port capacity for
key/hybrid systems has been growing. A basic business telephone system 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.
The domestic market for key/hybrid switching systems, as projected by a
leading industry consulting firm, is expected to grow by eight percent from 1998
to 1999. Comdial ranks among the top 25 percent of industry participants in this
marketing segment. Significant trends in this marketing segment are (1) the
continuing growth of digital systems compared with the older analog systems, (2)
the growing importance of larger systems (over 40 occupied station ports)
relative to smaller systems, and (3) the trend toward "open" systems that comply
with industry hardware and software standards. Open systems is a term used to
describe the ability to attach third party devices and software to an existing
system.
Before the development of digital telephone systems, electronic telephone
systems were originally "analog." Voice was transmitted in a continuous wave
form that is "analogous" to the original voice signal. Analog voice and data
transmission is often impaired by transmission degradation and susceptibility to
ambient noises.
In 1992, Comdial began a transition from proprietary analog systems to
larger systems employing digital transmission and offering computer integration
capability via an open applications interface ("OAI"). That year, Comdial
introduced the Digital Expandable ("DXP") switch. With a capacity of 224 ports,
this was the largest switching product Comdial had ever produced. In 1994, the
capacity of the DXP was expanded to 560 ports, making it competitive with
smaller PBXs and providing access to larger businesses and organizations and the
resellers that serve these larger businesses. CTI connectivity was provided via
proprietary software and development tools that complied with the de facto
industry standard of the time, Telephony Server Application Programming
Interface ("TSAPI").
<PAGE>
Responding to growing market interest in CTI, in 1996 and 1997 Comdial
introduced connectivity software that could integrate with a broader range of
network operating systems. In 1997, Comdial introduced Impact FX, a 96 port
switch that allowed software applications like voice processing to be enabled
electronically, rather than the conventional industry approach of installing
costly peripheral equipment on site. In 1998, the Impact FX was substantially
enhanced to address a broader range of applications (40 to 560 ports) and the
design architecture provided a more cost-effective approach to expansion needs.
New software applications were added to provide even greater functionality.
Since 1992, Comdial has discontinued many of its vintage analog systems -
a trend that will continue in 1999. In 1992, approximately 20 percent of
Comdial's sales were attributable to digital systems. In 1998, digital systems
comprised 62 percent of Comdial's sales and analog systems accounted for less
than seven percent of sales.
Another innovation is on-site wireless communications. These can be single
cell or multi-cell and vary widely in terms of the technology used,
architecture, and range provided. In 1994, Comdial introduced its first wireless
device, the Tracker, an on-site call completion system, followed by two-way
wireless devices, Scout and Air Impact. The cost differential between wired and
wireless telephones is declining and the functionality of the wireless devices
closely mimics full-featured desk phones.
Voice switching systems is a mature business. The size of the market in
any given year is dependent on many factors, including employment growth, the
rate of new business formations and expansions, obsolescence, and new entrants.
During the 1990s, business conditions for switching systems have been generally
good, characterized by annual growth in excess of the general economy, few new
entrants, and moderate price decreases driven by lower material costs and
advances in technology.
<PAGE>
VOICE PROCESSING
The ability to digitize analog voice signals gave rise to the voice
processing business in the 1980s. Early systems were mainframe-based, very
expensive to purchase, difficult to use, and limited in their capabilities.
Early adopters were primarily very large companies and organizations. In the
1990s, costs dropped sharply, storage capacity and scalability improved, and the
products became more user friendly and versatile. The advent of powerful
personal computers provided an alternative platform to mainframe computers and
made voice processing affordable for even small businesses.
Originally, the primary voice processing feature was "voice mail." Callers
could be automatically routed to the desired party and record detailed messages
if the called party was not immediately available. This alleviated organizations
from the cost of extensive operator and secretarial staff to answer calls and
take messages. Now, voice processing is much more robust. Advances such as
integrated voice response, voice/speech recognition, notification via wireless
devices, PC-based administration, "follow me" features, and unified messaging
have raised the popularity of voice processing. Voice processing is almost
ubiquitous in larger organizations. But even now, less than half of smaller
businesses have a modern voice processing system, which presents an opportunity
for continued sales growth.
Comdial's voice processing products are part of its Solutions and Software
business segment. Comdial entered the voice processing business in 1990 via an
original equipment manufacturing ("OEM") agreement with a leading producer of
these products. Seeking more design control and increased profitability, in 1996
Comdial acquired KVT, a small private producer of small to mid-sized voice
processing products. The association has worked well for Comdial. Sales have
grown sharply and overall gross margins have improved. Products are sold to both
resellers of Comdial switching products and to resellers of competitive
switching products. Special integration features have been designed for a
variety of popular switching systems.
After a very rapid growth spurt in the early 1990s, the voice processing
industry is entering a mature phase. The domestic market for voice processing
products, as projected by a leading industry consulting firm, is expected to
grow by approximately 25 percent from 1998 to 1999. Voice processing systems are
also measured by "ports" but the term has a different meaning than with
telephone systems. Basically, it refers to the number of voice processing calls
that can be handled simultaneously. A 12-port system can process 12 simultaneous
calls, while a four port system can handle only four calls at one time.
<PAGE>
KVT products can provide up to 64 ports of voice processing capacity. Most
Comdial generated sales are in the two to eight port range, which corresponds
with the small to mid-size businesses which are Comdial's primary markets.
Industry shipments are measured both in terms of systems and ports. Among
PC-based systems, Comdial believes that KVT is an industry leader, ranking
second in terms of systems shipped.
INTEGRATED VOICE/DATA SOLUTIONS
One of Comdial's Solutions and Software segment strengths is its design
control over three core technologies - voice switching, voice processing, and IP
telephony. Comdial seeks to accelerate its sales and profit growth by marketing
integrated "solutions" which incorporate two or more of these technologies via
computer integrated software. The integration can be completed by resellers, who
have the technical skills to accomplish voice/data integration at the user
level, or by Comdial itself. A typical solution product is an intelligent call
center. With outbound call centers, predictive dialing devices automatically
generate outbound calls from the user's database. Answered calls are instantly
connected to an available agent (based on pre-determined criteria), a data
screen is "popped" providing a script, contract, or other appropriate record,
and the call is promptly processed with virtually no idle time due to wrong
numbers, unanswered calls, and misplaced paper files.
With inbound calls, Comdial's QuickQ ACD software intelligently answers
and routes the call to the appropriate agent, based on user-defined criteria,
such as availability and language skills. Appropriate records are automatically
produced on workstations, based on the identified calling number or user keypad
entries.
Additionally, Comdial has designed specialized solutions for certain
vertical markets. The Avalon assisted living system offers integration with
third party alarm devices, such that elderly residents experiencing an emergency
condition can activate the device in their residence or on their person, sending
a message to wireless devices worn by on-site caregivers.
The size of the market for integrated solutions is unknown, but is
believed to be large because such solutions result in lower operating costs
and/or greatly improved customer service.
<PAGE>
Array, a subsidiary of Comdial, is a producer of special software that
converts analog voice signals to IP data packets and routes the call over the
public Internet or private networks. The advantages of IP telephony are much
lower transmission costs and better utilization of network bandwidth. Array's
products are sold to new generation carriers, such as prepaid calling card
companies, and to private enterprises for off-loading intracompany voice and fax
transmissions to reduce costs. New products, beginning with unified messaging
(PC access to multimedia messages) will be introduced in 1999, with further
integration opportunities to come.
STRATEGY
Comdial seeks to expand sales and profits at acceptable risk levels by:
(1) maintaining or improving its market position in horizontal markets,
(2) developing integrated solutions for fast-growing vertical markets,
(3) expanding its channels of distribution and methods of product delivery
to both markets, and
(4) developing marketing solutions through channels best suited to maximize
sales and customer satisfaction.
PRODUCT OFFERINGS
Comdial currently offers digital and analog business telephone systems,
wired and wireless terminals, computer and telephony software applications,
voice processing systems, IP gateways, and other products along with a variety
of product enhancements. Comdial believes that it offers a wider range of
products than most of its competitors and that this variety allows dealers to
meet differing price and feature requirements. Comdial strives to introduce new
products to meet the needs of a changing market.
PRODUCT DEVELOPMENT
Comdial's recent sales and profit growth are largely attributable to customer
acceptance of its Digital Systems and Solutions and Software products. Comdial's
system products are sold under the IMPACT AND IMPRESSION brands that serve
customer applications from 24 to 560 ports. In 1998, Comdial introduced
important enhancements such as IP telephony, which is an advanced call routing
technology that automatically directs long distance voice and data traffic over
the IP network. Also in 1998, Comdial introduced the Avalon-communications and
security system for assisted living communities, Windows NT-based voice
messaging products and the Impact FX that is scalable up to 544 ports. Comdial
intends to continue to add value to its core digital switching products.
<PAGE>
Comdial believes that in order to maximize profitability in the emerging
markets for integrated solutions, it must continue to develop and market
higher-value applications for software and switching platforms. Comdial's IMPACT
and IMPACT FXS SERIES digital switching platforms will form the basis for these
solutions, augmented by software developed by Comdial's subsidiaries, (Array,
Comdial Enterprises Systems, Inc., and KVT), and applications software from
third parties.
Comdial also intends to continue to leverage the engineering and marketing
skills of KVT to produce powerful, easy-to-use voice processing products that
are tightly integrated with its switching products.
PRODUCT DISTRIBUTION
Comdial focuses its distribution of products primarily through independent
dealers that resell Comdial's products to end users. These dealers enable
Comdial to achieve broad geographic coverage in a cost effective manner.
Comdial's primary means of distribution is through a key group of wholesale
supply houses, which stock Comdial's products and resell to independent dealers.
Comdial's strategy of selling through wholesale supply houses enables it to
minimize receivables exposure, reduce sales administration expenses and reduce
inventory costs. Most importantly, the use of supply houses allows Comdial to
extend product distribution to virtually any market in the United States
("U.S.") and Canada. Wholesale supply houses benefit from their relationship
with Comdial by earning a margin on the sale of Comdial'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, Comdial also markets its
products directly to national accounts, third party system developers, OEM
customers, and the federal government via its Government Services Administration
("GSA") schedule contract. Products produced by KVT are sold both through the
supply house channel and direct to dealers. Array products are sold to private
carriers, both in the U.S. and abroad.
STRATEGIC ALLIANCES
Comdial has developed strategic alliances with 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. Examples include the Scout wireless key system
telephone (Uniden America Corporation), the VVP and Small Office voice
processing systems (Rhetorex and Dialogic), and the production of a particular
family of products for Harris Corporation ("Harris").
<PAGE>
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENT
During the fiscal years ended December 31, 1998, 1997 and 1996,
substantially all of Comdial's sales, net income, and identifiable net assets
were attributable to the telecommunications industry. Additional information is
incorporated by reference to Comdial's 1998 Annual Report to Stockholders.
PRODUCT SALES INFORMATION
The following table presents certain relevant information concerning
Comdial's business segments for the periods indicated:
Years Ended December 31,
(In millions) 1998 1997 1996
BUSINESS SEGMENT SALES:
Digital Systems $80,452 $70,181 $56,725
Solutions and Software 36,194 31,625 23,453
Analog and Other 12,331 16,755 22,004
------ ------ ------
Net Sales $128,977 $118,561 $102,182
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(c) NARRATIVE DESCRIPTION OF BUSINESS
PRODUCTS
Comdial offers a variety of telephone systems, including Digital Systems,
Solutions and Software applications, and Analog and Other products. For further
clarification of Comdial's business segments see Note 12 to the Consolidated
Financial Statements.
Comdial's telecommunications products meet the requirements of three
agencies: (1) the Federal Communications Commission ("FCC"), (2) an independent
laboratory approved by the Occupational Safety and Health Act Commission
("OSHA") to produce safety standards, and (3) a nationally recognized test
laboratory that performs product evaluations. Selected products are also
registered with the Canadian government's Industry Canadian and are Canadian
safety certified. Comdial has or is in the process of homologating certain of
its products for use in certain other countries.
<PAGE>
BUSINESS SEGMENT PRODUCTS
Digital Systems
IMPACT DXP SYSTEM, originally introduced in 1992, has had several major
upgrades since then. There are various IMPACT DXP Systems: IMPACT 24, IMPACT 48,
IMPACT 224, AND IMPACT 560. The numeric suffix denotes the maximum number of
ports served by the base switch, without need for any product displacement. For
example, the IMPACT 24 begins at 12 ports and can be expanded to 24 ports. To go
beyond 24 ports, the base unit must be replaced with the IMPACT 48 base unit.
The switching platform for the Impact 224, when unassociated with terminals, is
identified as the DXP. The switching platform for the IMPACT 560, when
unassociated with terminals, is identified as the DXP PLUS.
IMPACT FX Computer Telephony Applications Server ("FX") is Comdial's most
recent switching platform and was introduced in 1997. The FX is expandable to
560 ports. The FX differs from Comdial's other switching platforms in that it is
more "open" and more software-intensive. Voice processing, for example, is
available in the core software, whereas it is a hardware option with other
company systems. The FX is designed to popular industry standards, which makes
the FX amenable to customization by Comdial and by third party integrators.
IMPACT TELEPHONES were introduced in 1992. These terminals offer a variety
of features, including an interactive liquid crystal display ("LCD"),
programmable feature keys, three color lighted status indicators, and subdued
off-hook voice announce for receiving intercom calls while on a telephone call.
The phones are offered in a variety of models, distinguished by the number of
programmable buttons, the presence or absence of a display, and the presence or
absence of a speakerphone.
IMPACT SCS was introduced in 1997. IMPACT SCS retains many of the current
features of the original IMPACT telephone models but with a different physical
design and distinguishing features such as a full-duplex speakerphone model,
simultaneous voice and data, large screen display and adjustable viewing angle.
IMPRESSION, introduced in 1996, is a brand name denoting certain digital
telephone instruments and digital systems when the systems are installed with
digital switches. The IMPRESSION telephones are similar to the original Impact
telephones in terms of functionality and number of models offered. However, the
physical design is quite different. Four IMPRESSION systems are offered:
IMPRESSION 24, IMPRESSION 48, IMPRESSION 72, and IMPRESSION 224.
<PAGE>
AIR IMPACT, introduced in 1997, is a multi-cell wireless communications
product for use with Comdial's (and other manufacturers') switching systems. It
is designed for use within large buildings where employees are often away from
their desk phones. AIR IMPACT operates over a 1.9 Gigahertz personal
communications services ("PCS") band.
SCOUT, introduced in 1995, is Comdial's 900 megahertz single cell
wireless, multi-line feature phone. Scout extends the advantage of mobility to
users of Impact systems. Like AIR IMPACT, SCOUT is designed for in-building
applications.
TRACKER, introduced in 1994, is an on-site integrated paging system
developed in cooperation with Motorola. The purpose of this product is to help
ensure that calls are quickly and efficiently completed to individuals who are
at work, but not always near their telephones. TRACKER, which operates on
Comdial's digital telephone systems, includes a TRACKER base station and
personal pagers equipped with a 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 Comdial. In 1997, Comdial enhanced the basic
TRACKER product with an applications software package called QUIKTRAK. QUIKTRAK
extends text-messaging capability to PC users on a local area network. Brief
messages can be originated by selecting the TRACKER pager user from a Windows
screen, typing the message, and clicking on the "Track" command.
Solutions and Software
ENTERPRISE, introduced in 1993, is Comdial's open applications interface
("OAI") software developer's tool kit. ENTERPRISE allows independent software
developers to access the IMPACT, DXP, DXP PLUS, or FX system software using more
than 190 commands. These tools allow Comdial to create unique applications for
specific vertical markets, such as telemarketing groups, emergency services,
call centers, taxi services, and multi-media centers.
PCIU (PC Interface Unit), introduced in 1997, is an affordable
hardware/software solution that extends computer integration across all of
Comdial's digital switches, via the broadly accepted Telephone Application
Programming Interface ("TAPI") standard. The hardware component is a black box
with multiple connectors for a digital port off the switch, Comdial's digital
display telephone, a PC serial port, and electric power.
<PAGE>
CONCIERGE, introduced in 1996, is a digital telephone system designed for
hospitality applications. The system consists of an Impact 224 or Impact 560
digital switch, multi-line administration telephones, and special hospitality
software. The single-line guest telephones used with the Concierge are not sold
by Comdial. The system is linked to a personal computer via Comdial's Enterprise
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. Concierge serves hotel properties 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 an Impact 224, Impact 560,
or Impact FX digital switch, 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.
VVP (Versatile Voice Processing), introduced in 1996, is the trade name of
a PC-based voice processing system produced by KVT and sold by Comdial. 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, audio text (interactive response
to user touch-tone commands), and visual call management (the ability to view
voice messages from a PC) are also available. VVP can be integrated with
Comdial's digital telephone systems so 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, is a smaller and more economical version
of VVP/CORPORATE OFFICE, WHICH IS also produced by KVT and sold through both
Comdial's and KVT's dealer networks. 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 mailboxes.
SMALL OFFICE LITE was introduced in 1997. SMALL OFFICE LITE voice
processing system features the latest advances in communications technology
specially streamlined to fit the needs of small businesses. With Comdial's SMALL
OFFICE LITE, even small businesses can take advantage of a voice-processing
<PAGE>
feature set that is state-of-the-art, but also affordable. In addition to
automated attendant functionality, SMALL OFFICE LITE allows users to personalize
their individual mailboxes with custom greetings.
DEBUT was introduced in 1998 to meet the needs of small businesses seeking
basic voice processing capabilities at an attractive price.
VVP-NT and SMALL OFFICE-NT were introduced in the third quarter of 1998.
They are user-friendly voice mail systems, with a proven design, that are easy
to establish and maintain. Each system accommodates a different number of users
and is built on a Windows NT(R) operating system platform. In addition, enhanced
graphical screens let system supervisors quickly adjust user information and
retrieve vital call processing data.
AVALON, introduced in the third quarter of 1998, is the first
communications systems designed specifically for assisted living communities.
AVALON integrates a Comdial DXP digital switch system and telephones, wireless
communications devices, wired and wireless alerting devices, and custom
software. AVALON provides basic telecommunications service to residents and
staff, but its most important advantage is to allow elderly residents to alert
on-site caregivers of the name and location of an alarm condition. Should a
resident activate a compatible in-room alerting device (such as a pull cord),
dial "911," or take certain other actions indicating an alarm condition,
messages are transmitted from the Avalon system to the displays of pagers or
wireless phones carried by caregivers. Computer records of the emergency alert
and response are also generated. AVALON is an example of Comdial's focus on
integrated solutions for vertical markets.
CTVOICE was introduced in the first quarter of 1998. CTVOICE gives
organizations an IP telephony gateway that provides high-quality, real-time
voice and fax communications over any IP network, including the public Internet
and private intranets. CTVOICE is provided by Comdial's subsidiary Array which
was acquired in 1998.
VOIPGATE is the brand name for carrier-class IP gateways produced by
Comdial's subsidiary Array. VOIPGATE interfaces with standard analog lines,
ISDN, and T-1. VOIPGATE provides a broad range of network management features
and is compliant with popular industry standards.
<PAGE>
Analog and Other
UNISYN, introduced in 1994, is a telephone system designed to offer
advanced features to small organizations. Two models are offered. One model
supports up to three lines and eight telephones, and the other 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 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 KEY SYSTEM economical to manufacture, easy to install, and beneficial to end
users who do not have to buy additional components to add features.
Other products included in the Analog and Other business segment are ATC
TERMINALS, MAXPLUS, SOLO II, VOICE EXPRESS, AND CUSTOM MANUFACTURING. In 1998,
the MAXPLUS product was discontinued, and in 1999, Solo II and Voice Express are
scheduled to be discontinued. Comdial will continue to provide support for these
products pertaining to warranty claims and replacements.
SALES AND MARKETING
Comdial markets its products through both direct and indirect channels.
Indirect channels include both two-tiered and three-tiered distribution.
Comdial's primary channel of distribution to U.S. and Canadian markets is
through nine major wholesale supply houses, which in turn, resell to hundreds of
independent dealers. International sales are accomplished through a network of
international dealers. International dealers buy directly from Comdial, normally
by letters of credit, and resell to end users or other dealers.
Three supply houses each account for more than 10% of Comdial's net sales.
These are ALLTEL Supply, Inc. ("ALLTEL"), Graybar Electric Company, Inc.
("Graybar"), and Sprint/North Supply, Inc. ("North Supply"). In 1998, net sales
to ALLTEL, Graybar, and North Supply amounted to approximately $19.3 million
(15%), $30.4 million (24%), and $24.9 million (19%), respectively.
Comdial has established four classes of dealers that purchase Comdial's
products from supply houses and resell to end users. These are Platinum
Preferred, Preferred Gold, Preferred, and Associate Dealers. Comdial offers an
attractive incentive package for Platinum Preferred, Preferred Gold, and
<PAGE>
Preferred Dealers, including exclusive access to certain products, cash rebates
related to dealer purchase levels, cooperative advertising allowances, a measure
of territorial protection, toll free assistance, and training. Platinum
Preferred, Preferred Gold, and Preferred Dealers have sales quotas, and
Comdial's sales department monitors their performance against these targets.
Associate Dealers purchase Comdial'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 that
are offered by Comdial.
Comdial supports its existing dealers and seeks to attract new dealers
through national advertising in popular trade magazines, special promotional
programs, sales and technical training, and participation in major industry
trade shows.
Each area 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 at Comdial are
available to help engineer complex configurations and solve technical problems.
All direct sales personnel earn incentive income based on sales results.
Comdial's dealers are primarily responsible for selling Comdial's products
to end users as well as providing support. Comdial maintains a technical support
staff devoted to dealer support. Comdial also generally provides a limited
warranty on elements of its products, permitting factory returns within 24
months of the production date.
Other indirect channels include OEM relationships, international sales,
and dealer direct sales. Selected dealers are authorized to purchase IMPACT
CONCIERGE systems direct from Comdial and resell to hotels and motels. Dedicated
personnel support OEM and international sales. Sales of voice processing
products produced by KVT are through two channels: supply houses to dealers and
direct to dealers.
In recent years, Comdial initiated a National Accounts Program to market
its products to large multi-location end users. The program allows end users to
contract with one entity (Comdial) for sales and support, while achieving local
installations and maintenance from Comdial's network of independent dealers.
<PAGE>
This program is also a key delivery vehicle for sophisticated computer telephony
solutions sales that often require advanced custom integration and superior
knowledge and understanding of end user communications and business objectives.
The National Accounts Program allows Comdial to work directly with end users to
assure that the best combination of Comdial and, if necessary, third party
products, are incorporated into the final solution. Comdial employs dedicated
personnel to sell and support national accounts.
Because Comdial's sales are made under short-term sales orders issued by
customers on a month-to-month basis, rather than under long-term supply
contracts, backlog is not considered material to Comdial's business.
ENGINEERING, RESEARCH AND DEVELOPMENT
Comdial believes that it must continue to introduce new products and
enhance existing products to maintain a competitive position in the marketplace.
Comdial's engineering department, working in collaboration with the marketing
and manufacturing departments, is responsible for design of 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. Research and development costs
for the fiscal years ended 1998, 1997, and 1996 comprise the majority of
engineering, research, and development costs, which were $6.8 million, $6.5
million, and $5.8 million, respectively. Comdial 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 1998,
1997, and 1996 were $2.8 million, $2.0 million, and $1.6 million, respectively.
The amounts amortized for software development cost in 1998, 1997, and 1996 were
approximately $1.4 million, $1.0 million, and $0.9 million, respectively.
Comdial is committed to improving its existing products and developing new
telecommunications equipment in order to maintain or increase its market share.
<PAGE>
MANUFACTURING AND QUALITY CONTROL
Comdial's manufacturing operations organization is responsible for all
activities related to production, testing, shipping, and repair of Comdial's
products. Other functions that fall under manufacturing operations include
maintenance of plant facilities and specialty (contract) manufacturing.
One of Comdial'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,
Comdial can now turn around customer orders in days, compared to weeks or even
months that may be taken by other competitors. Manufacturing is able to schedule
production runs on a daily basis which provides Comdial 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 continual upgrades to the two SMT
lines. Comdial has been able to reduce finished goods inventory levels, as
common components in various products 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 Comdial's wholly-owned subsidiary American Phone Centers, Inc.
("APC"), and by contracting for selective custom manufacturing assignments.
Comdial 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.
Comdial believes that this high level of automation and vertical integration
improves quality, cost, and customer satisfaction. Comdial also manufactures
injection molded plastic parts, fabricated metal parts, and other components.
In 1994, Comdial was certified and has maintained its certification by the
International Organization for Standardization ("ISO") at the most rigorous ISO
9001 level, which provides standards for systems and procedures for
manufacturing, engineering, product design, and customer service.
<PAGE>
COMPETITION
The market for Comdial's products is highly competitive. Comdial competes
with over 25 suppliers of small business telephone systems, many of which have
significantly greater resources. Examples are Inter-Tel, Inc., Lucent
Technologies, Inc., Nortel Networks, 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. Comdial 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 Comdial provides. In marketing its telephone systems,
Comdial also emphasizes quality, as evidenced by its ISO 9001 certification, and
high technology features including CTI capability across its entire Impact line
of digital switching systems.
The market for voice processing systems is also competitive. Comdial
believes that it is a leading supplier of PC-based voice processing systems, and
that the products produced by KVT are very competitive with regard to the key
factors important to end-users. These factors include reliability, memory
capacity, features, ease-of-use, compliance with common industry standards, and
price.
Comdial expects that competition will continue to be intense in the
markets it serves, and there can be no assurance that Comdial will be able to
continue to compete successfully in the marketplace or that Comdial will be able
to maintain its current dealer network.
INTELLECTUAL PROPERTY
From time to time, Comdial is subject to proceedings alleging infringement
by Comdial of intellectual property rights of others. Such proceedings could
require Comdial 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 Comdial's business. Moreover, Comdial relies
upon copyright, trademark, and trade secret protection to protect Comdial's
proprietary rights in its products. There can be no assurance that these
protections will be adequate to deter misappropriation of Comdial's technologies
or independent third-party development of similar technologies.
The business telecommunications industry is characterized by rapid
technological change. 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
<PAGE>
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. Comdial
itself has received claims of patent infringement from several parties which
sometimes seek substantial sums. In response to prior infringement claims,
Comdial has pursued and obtained nonexclusive licenses entitling Comdial 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.
In order to assure that it currently owns or has adequate rights to
utilize all material technologies relating to its products, Comdial attempts to
diligently review all claims of infringement. Often Comdial's investigation of
these claims is limited by claims' lack of specificity, the limited availability
of factual information and documentation related to the claims and the expense
of pursuing exhaustive patent reviews. As Comdial continues to develop new
products and features in the future, it anticipates that it may receive
additional claims of patent infringement. There can be no assurance that a
license for any such infringed technology would be available to Comdial or, even
if available, that the terms of any such license would be satisfactory.
YEAR 2000 ISSUE
In early 1997, Comdial established a team of people (the "Year 2000 Team")
to evaluate whether, and to what extent, Comdial's business and products may be
affected by the Year 2000 and potential problems caused by the inability of
certain computers and microprocessors to distinguish between the year 2000 and
the year 1900. Through a series of industry-recognized tests, the Year 2000 Team
believes that it has identified which of Comdial's products, devices, and
computerized systems contain embedded microprocessors that will require
remediation or replacement because of potential Year 2000 issues. The Year 2000
Team has concluded that nearly all of Comdial's products are already Year 2000
compliant. Comdial expects that any non-compliant products that Comdial
continues to sell will be compliant before the third quarter of 1999.
Furthermore, Comdial is providing upgrades or taking other remedial steps to
correct any non-compliant products that remain under warranty. Comdial does not
expect to make any significant expenditures solely to address Year 2000 issues.
<PAGE>
Management believes that Comdial is properly addressing the Year 2000
issues in order to mitigate any adverse operational or financial impacts.
Furthermore, Comdial has implemented a requirement that its suppliers certify
that all products and services provided to Comdial are Year 2000 compliant (see
Note 14 to the Consolidated Financial Statements and Management's Discussion and
Analysis of Financial Condition and Results of Operations).
EMPLOYEES
As of December 31, 1998, Comdial, including subsidiaries, had 919
full-time employees, of whom 564 were engaged in manufacturing, 101 in
engineering, 174 in sales and support, and 80 in general management and
administration. Comdial has never experienced a work stoppage and no employees
are represented by labor unions. Comdial believes that its employee relations
are good.
ITEM 2. PROPERTIES
Comdial 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
Comdial's operations and development are located at this facility, which Comdial
owns. Comdial believes that its facilities are adequate both for the operation
of its business as presently conducted and for expansion in the foreseeable
future.
KVT operates out of an approximately 6,200 square foot building, located
in Sarasota, Florida. All other additional space used by Comdial and its
subsidiaries is either leased or rental property.
Comdial's facilities are subject to a variety of federal, state, and local
environmental protection laws and regulations, including provisions relating to
the discharge of materials into the environment. The cost of compliance with
such laws and regulations has not had a material adverse effect upon Comdial's
capital expenditures, earnings, or competitive position, and it is not
anticipated to have a material adverse effect in the future.
In 1988, Comdial voluntarily discontinued 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, Comdial 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
Comdial commenced the remediation efforts required thereunder.
<PAGE>
In October 1994, Comdial 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, 1998, Comdial has incurred total costs of
approximately $25,000 and expects the pumping process to be completed by late
1999.
ITEM 3. LEGAL PROCEEDINGS
Comdial is from time to time involved in routine litigation. Comdial
believes that none of the litigation in which it is currently involved is
material to its financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of 1998 to a vote of
Comdial's security holders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Information is incorporated by reference on page 42 of Comdial's 1998
Annual Report to stockholders under the caption "Related Stockholders Matters."
As of March 9, 1999 there were 1,475 record holders of Comdial's Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
Information is incorporated by reference on page 42 of Comdial's 1998
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 on pages 21 through 25 of
Comdial's 1998 Annual Report to stockholders under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Information is incorporated by reference on pages 27 through 44 of
Comdial's 1998 Annual Report to stockholders or filed with this Report as listed
in Item 14 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
No information is required to be reported pursuant to this item.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning Directors and Executive Officers of the Registrant
is incorporated by reference under the caption "Election of Directors" and
"Executive Officers of Comdial" on pages 6 through 8 and 10 through 12 of
Comdial's definitive proxy statement for the annual meeting of stockholders to
be held on April 27, 1999.
ITEM 11. EXECUTIVE COMPENSATION
Executive compensation and management transactions information is
incorporated by reference under the caption "Executive Compensation" on pages 12
through 21 of Comdial's definitive proxy statement for the annual meeting of
stockholders to be held on April 27, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information is incorporated by reference under the captions "Securities
Ownership of Certain Beneficial Owners and Management" on pages 3 through 5 of
Comdial's definitive proxy statement for the annual meeting of stockholders to
be held on April 27, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information is incorporated by reference under the caption "Family
Relationships" and "Certain Relationships and Related Transactions" on pages 12
and 21 of Comdial's definitive proxy statement for the annual meeting of
stockholders to be held on April 27, 1999.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A)(1) The following Consolidated Financial Statements of Comdial
Corporation and its Subsidiaries are incorporated in Part II, Item
8 by reference to Comdial's 1998 Annual Report to stockholders
(page references are to page numbers in Comdial's Annual Report):
Page Number
-----------
Independent Auditors' Report 26
Report of Management 26
FINANCIAL STATEMENTS:
Consolidated Balance Sheets -
December 31, 1998 and 1997 27
Consolidated Statements of Operations -
Years ended December 31, 1998, 1997, and 1996 28
Consolidated Statements of Stockholders' Equity -
Years ended December 31, 1998, 1997, and 1996 29
Consolidated Statements of Cash Flows -
Years ended December 31, 1998, 1997, and 1996 30
Notes to Consolidated Financial Statements -
Years ended December 31, 1998, 1997, and 1996 31-41
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 3.1 to Item 6 of Registrant's Form 10-Q
for the period ended July 2, 1995.)*
3.2 Certificate of Amendment of 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.)*
<PAGE>
<TABLE>
<CAPTION>
(10) MATERIAL CONTRACTS
<S> <C>
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. 1 to the Registrant's 1992 Stock Incentive Plan and
1992 Non-employee Directors Stock Incentive Plan. (Exhibit 10.1 and
10.2 of Registrant's Form 10-Q dated September 28, 1997.)*
10.3 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.)*
10.4 Amendment No. 3 to the Registrant's 1992 Stock Incentive Plan and
1992 Non-employee Directors Stock Incentive Plan. (Exhibit 10.3 of
Registrant's Form 10-Q dated June 30, 1996.)*
10.5 Amendment to Amendment No. 3 to the Registrant's 1992 Non-employee
Directors Stock Incentive Plan. (Exhibit 10.5 to Registrant's Form
10-K for the year ended December 31, 1997.)*
10.6 Amendment No. 4 to the Registrant's 1992 Stock Incentive Plan.
(Exhibit 10.6 to Registrant's Form 10-K for the year ended December
31, 1997.)*
10.7 Amendment No. 4 to the Registrant's 1992 Non-employee Directors Stock
Incentive Plan. (Exhibit 10.7 to Registrant's Form 10-K for the year
ended December 31, 1997.)*
10.8 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.)*
10.9 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.)*
<PAGE>
10.10 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.)*
10.11 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.)*
10.12 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.)*
10.13 Amendment No. 4 to the Loan and Security Agreement dated September
27, 1996 among the Registrant and Fleet Capital Corporation.
(Exhibit 10.2 to Registrant's Form 10-Q for the quarter ended March
30, 1997.)*
10.14 Amendment No. 5 to the Loan and Security Agreement dated March 15,
1998 among the Registrant and Fleet Capital Corporation. (Exhibit
10.1 to Registrant's Form 10-Q for the quarter ended March 29,
1998.)*
10.15 Amendment No. 6 to the Loan and Security Agreement dated June 24,
1998 among the Registrant and Fleet Capital Corporation. (Exhibit
10.1 to Registrant's Form 10-Q for the quarter ended June 28,
1998.)*
10.16 Note dated February 5, 1997 among the Registrant and Fleet Capital
Corporation. (Exhibit 10.1 to Registrant's Form 10-Q for the quarter
ended March 30, 1997.)*
10.17 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.)*
<PAGE>
10.18 Amendment No. 1 to the Registrant's Executive Stock Ownership Plan
dated July 31, 1997. (Exhibit 10.17 to Registrant's Form 10-K for the
year ended December 31, 1997.)*
10.19 Amendment No. 2 to the Registrant's Executive Stock Ownership Plan
dated January 1, 1998. (Exhibit 10.18 to Registrant's Form 10-K for
the year ended December 31, 1997.)*
10.20 The 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.)*
10.21 Amendment No. 1 to the Registrant's Executive Severance Plan dated
July 31, 1997. (Exhibit 10.19 to Registrant's Form 10-K for the year
ended December 31, 1997.)*
10.22 Development and Purchase Agreement dated February 21, 1997 among
Registrant and Harris Corporation. (Exhibit 10.20 to Registrant's Form
10-K for the year ended December 31, 1997.)*
10.23 FastCall Purchase Agreement dated December 31, 1997 among Aurora
Systems, Inc. and Spanlink Communications, Inc. (Exhibit 10.21 to
Registrant's Form 10-K for the year ended December 31, 1997.)*
10.24 Asset Purchase Agreement dated July 14, 1998 among the Registrant and
Array Telecom Inc. and Array Systems Computing Inc. (Exhibit 10.2 to
Registrant's Form 10-Q for the quarter ended June 28, 1998.)*
10.25 Second Amendment to Comdial's 401(k) Plan dated November 29, 1998.
10.26 Credit Agreement dated October 22, 1998 among Registrant and
NationsBank, N.A.
</TABLE>
* Incorporated by reference herein.
<PAGE>
(11) SCHEDULE OF COMPUTATION OF EARNINGS PER COMMON
SHARE
(13) REGISTRANT'S 1998 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
Array Telecom 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.
Telecom Technologies Inc. (formerly known as Scott
Technologies Corporation)
(23) INDEPENDENT AUDITORS' CONSENT
Accountants consent to the incorporation by reference of their
report dated January 29, 1999, appearing in this Annual Report on
Form 10-K of Comdial Corporation for the year ended December 31,
1998, in certain Registration Statements.
(24) POWER OF ATTORNEY
(27) FINANCIAL DATA SCHEDULE
(b) REPORTS ON FORM 8-K:
The Registrant has not filed any reports on Form 8-K during the last
quarter of 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 24th day of
March, 1999.
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
- --------- ----- ----
* Director March 24, 1999
-----------------
ROBERT P. COLLINS
* Director March 24, 1999
- -----------------------
BARBARA PERRIER DREYER
* Vice Chairman March 24, 1999
- ---------------------
A. M. GLEASON
* Director March 24, 1999
- ---------------------
MICHAEL C. HENDERSON
* Director March 24, 1999
- ---------------------
JOHN W. ROSENBLUM
* Director March 24, 1999
- ---------------------
DIANNE C. WALKER
/s/ William G. Mustain Chairman of the Board, March 24, 1999
- ---------------------- President, and
WILLIAM G. MUSTAIN Chief Executive Officer
/s/ M. Funke Controller March 24, 1999
- ----------------------
MANFRED FUNKE
* By:/s/ William G. Mustain
- -------------------------------------
WILLIAM G. MUSTAIN, ATTORNEY-IN-FACT
COMDIAL CORPORATION AND SUBSIDIARIES
EXHIBIT 11
SCHEDULE OF COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
BASIC
Net income applicable to common shares: $17,154,000 $5,719,000 $1,809,000
=========== ========== ==========
Weighted average number of common
shares outstanding during the period 8,794,584 8,654,466 8,478,883
Add - Contingency shares 42,017 29,324 5,388
Deferred shares 6,756 - -
----------- ---------- ----------
Weighted average number of shares used in cal-
culation of basic earnings per common share 8,843,357 8,683,790 8,484,271
=========== ========== ==========
Basic earnings per common share: $1.94 $0.66 $0.21
=========== ========== ==========
DILUTED
Net income applicable to common shares - basic $17,154,000 $5,719,000 $1,809,000
=========== ========== ==========
Weighted average number of shares used in cal-
culation of basic earnings per common share 8,843,357 8,683,790 8,484,271
Add (deduct) incremental shares representing:
Shares issuable based on period-end market
price or weighted average price:
Stock options 237,713 83,563 183,370
----------- ---------- ----------
Weighted average number of shares used in calcula-
tion of diluted earnings per common share 9,081,070 8,767,353 8,667,641
=========== ========== ==========
Diluted earnings per common share $1.89 $0.65 $0.21
=========== ========== ==========
</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 ("Comdial"). This review should be read in
conjunction with the financial statements and accompanying notes. This analysis
attempts to identify trends and material changes that occurred during the
periods presented. Prior years have been reclassified to conform to the 1998
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>
December 31,
In thousands 1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Business Segment Sales:
Digital Systems $ 80,452 $ 70,181 $ 56,725
Solutions and Software 36,194 31,625 23,453
Analog and Other 12,331 16,755 22,004
--------- --------- ---------
Net Sales 128,977 118,561 102,182
Cost of sales 75,597 71,218 64,301
--------- --------- ---------
Gross profit 53,380 47,343 37,881
Selling, general & administrative 34,034 29,069 25,757
Engineering, research & development 6,813 6,497 5,771
In-process R & D - Array 529 -- --
Goodwill amortization 3,806 3,567 2,674
Interest expense 1,216 1,698 1,626
Miscellaneous expense - net 565 644 762
--------- --------- ---------
Income before income taxes 6,417 5,868 1,291
Income tax expense/(benefit) (10,737) 149 (518)
--------- --------- ---------
Net income applicable to common stock $ 17,154 $ 5,719 $ 1,809
========= ========= =========
Earnings per common share and common
equivalent share: basic $ 1.94 $ 0.66 $ 0.21
========= ========= =========
</TABLE>
The following table reflects the gross profit margins for the various business
segments of Comdial. See Note 12 to the Consolidated Financial Statements for
further clarification of business segments.
<TABLE>
<CAPTION>
December 31,
In thousands 1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Business Segment:
Digital Systems $31,237 $25,175 $18,553
Solutions and Software 19,341 18,418 12,617
Analog and Other 2,802 3,750 6,711
------- ------- -------
Gross profit margin $53,380 $47,343 $37,881
======= ======= =======
</TABLE>
1998 COMPARED WITH 1997
NET SALES as reported for 1998 increased by 9% to $129.0 million, compared with
$118.6 million in 1997. The continued increase in net sales was primarily due to
(1) greater demand for Comdial's Digital Systems segment products, (2)
introduction of new Digital System products, and (3) continued growth in sales
of Solutions and Software products such as voicemail systems. The voicemail
product is produced by a subsidiary of Comdial, Key Voice Technologies, Inc.
("KVT").
In 1998, net sales of Digital System products increased 15% to $80.5 million,
compared with $70.2 million for 1997. In 1998, net sales of Solutions and
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Software products, including voice processing, increased 14% to $36.2 million
compared with $31.6 million for 1997. Management expects sales of these two
business segments to continue to grow in 1999 primarily due to (1) continued
growth in Digital Systems and Solutions and Software products sold directly to
end users through national accounts, (2) development of new products and new
distribution channels offering integrated computer solutions, (3) growth of
product sales to original equipment manufacturing ("OEM") customers such as
Harris Corporation, (4) future growth of Comdial's dealer base to encompass
metropolitan areas within the United States where Comdial presently has little
exposure, and (5) sales of Internet Protocol ("IP") telephone gateways by
Comdial's subsidiary, Array Telecom Corporation ("Array").
In 1998, net sales of the Analog and Other segment products decreased 26% to
$12.3 million, compared with $16.8 million for 1997. Management expects sales of
such products to continue to decrease in 1999. There is a continuing shift from
analog to digital product lines as well as other rapid technological changes
creating the potential for product obsolescence. The decline in sales of
Comdial's Analog and Other products began in the early 1990s and can be
attributed to the market's transition to and development of digital products.
However, there remains a significant installed base of analog systems that will
require replacements and up-grades. Analog systems also remain a viable product
in situations where price as opposed to features and functionality is of
paramount concern. Comdial expects to continue selling analog products for the
foreseeable future but will continue to reduce the number of models offered.
Comdial provides reserves to cover product obsolescence for all its products and
those reserve changes impact gross margin. For the years 1998, 1997, and 1996,
reserves for obsolescence totaled $2.3 million, $1.5 million, and $1.0 million,
respectively. Future reserves will be dependent on management's estimates of the
recoverability of inventory costs. Raw material obsolescence is mitigated by the
commonality of component parts of digital and other products. Finished goods
obsolescence is mitigated by the low level of inventory relative to sales.
The transition to digital from analog products has positively affected Comdial's
gross margin as features and functionality have grown in importance as compared
to price. Gross margins have improved each year from 31% in 1993 to 41% in 1998.
In 1998, international sales decreased by 4% to $4.0 million compared with $4.2
million for 1997. The decline in international sales was expected due to
distribution problems, homologation issues, and economic difficulties of various
countries where Comdial products are sold. Homologation is the process of
securing regulatory, safety, and network compliance approvals for the sale of
telecommunications equipment in foreign countries. As many countries have
different standards than the United States, this typically involves engineering
modifications and compliance testing. Due to the international climate, Comdial
has basically suspended its efforts in developing further international markets
on its own, relying on an OEM agreement with a major supplier to market its
products mainly internationally.
GROSS PROFIT, as a percentage of sales for 1998, was 41% compared with 40% for
1997. In 1998, gross profit increased by 13% to $53.4 million compared with
$47.3 million for 1997. This increase was primarily attributable to increased
sales of higher margin business segment products, such as Impact, Impact DXP,
and solution products.
In 1998, gross profit for Digital System products increased by 24% to $31.2
million compared with $25.2 million for 1997. Digital Systems gross profit, as a
percentage of sales for 1998, was 39% compared with 36% for 1997. This increase
is primarily due to the higher sales volume along with better margins from
higher end products such as the DXP and FX. Comdial expects the gross margin for
this segment to increase in the coming years primarily due to higher sales
volume.
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In 1998, gross profit for Solutions and Software products increased by 5% to
$19.3 million compared with $18.4 million for 1997. This increase is due to a
higher sales volume primarily of voicemail systems along with the increase in
sales associated with Array. Solutions and Software gross profit, as a
percentage of sales for 1998, was 54% compared with 58% for 1997. This decrease
was primarily due to installation costs associated with National Accounts that
generate lower margins. Gross profit margins for National Accounts, including
installation costs, still average well over 40% and don't include any
promotional allowance costs. Comdial expects volume in this business segment to
continue to increase along with approximately the same margin.
In 1998, gross profit for Analog and Other products decreased by 25% to $2.8
million compared with $3.8 million for 1997. This decrease is due to lower
sales, primarily of analog products which are being replaced by more
technologically advanced products. The Analog and Other segments gross profit,
as a percentage of sales for 1998, was 23% compared with 22% for 1997.
All other costs including operating expenses, goodwill amortization, interest
expense, other miscellaneous expenses, and income tax expenses or benefits
cannot be allocated to the three segments. Comdial does not maintain information
that would allow these costs to be broken down into the various product segments
and most of the costs are universal in nature.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES increased in 1998 by 17% to $34.0
million compared with $29.1 million for 1997. The primary reasons for the
increase were (1) an increase in sales personnel to support the growth in
national accounts and expanding computer-telephony integration ("CTI") markets,
(2) higher promotional allowance costs associated with increased sales through
Platinum and Preferred Dealers, and (3) the additional costs associated with the
acquisition of Array in the third quarter of 1998.
ENGINEERING, RESEARCH AND DEVELOPMENT EXPENSES increased in 1998 by 5% to $6.8
million compared with $6.5 million for 1997. This increase was primarily due to
increased expenses associated with the Array acquisition.
IN-PROCESS RESEARCH AND DEVELOPMENT EXPENSE of $529,000 relates directly to the
Array acquisition for which there was no expense for the comparable period of
1997 (see Note 2 to the Consolidated Financial Statements).
GOODWILL AMORTIZATION EXPENSE increased in 1998 by 7% to $3.8 million, compared
with $3.6 million for 1997. This increase is due primarily to the additional
amortization of goodwill associated with the Array acquisition of $256,000.
INTEREST EXPENSE decreased in 1998 by 28% to $1.2 million compared with $1.7
million for 1997. This decrease is due to lower average debt levels with Fleet
Capital Corporation ("Fleet") for the first six months of 1998 along with lower
interest rates when compared to 1997 (see Note 6 to the Consolidated Financial
Statements). In the first quarter of 1998, Comdial paid down an additional $3.5
million towards its debt with Fleet. Interest expense increased by 22% in the
last half of 1998 when compared with the first half primarily due to the
additional borrowings required for the Array acquisition.
NET INCOME BEFORE INCOME TAXES, as a result of the foregoing, increased in 1998
by 9% to $6.4 million compared with $5.9 million in 1997. Major factors
contributing to the increase in income and earnings per share for 1998 were
increased sales of Digital Systems and Solutions and Software segment products
that have higher margins. Management anticipates, assuming continued strength in
the economy, that the factors, which have led to significant increases in sales
for 1998, will continue to have a positive influence on Comdial's performance in
1999.
INCOME TAX EXPENSE (BENEFIT) reflects a benefit in 1998 of $10.7 million
compared with an expense of $149,000 for 1997. This change was due to
recognition of a deferred tax benefit of $11.5 million for 1998 compared with
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<PAGE>
a benefit of $219,000 for 1997. The tax benefits, recognized in 1998 and 1997,
were a result of a reduction in the valuation allowance relating to Comdial's
net operating loss carryforwards ("NOLs") (see Note 7 to the Consolidated
Financial Statements). This benefit recognition is primarily due to management's
belief that the limitations set forth in Section 382 of the Internal Revenue
Code are less likely to impair the Company's ability to utilize their NOLs.
1997 COMPARED WITH 1996
NET SALES as reported for 1997 increased by 16% to $118.6 million, compared with
$102.2 million in 1996. The continued increase in net sales was primarily due to
(1) greater demand for Comdial's Digital Systems, (2) introduction of new
products, and (3) continued growth in sales of Solution and Software products.
In 1997, gross sales of Digital System products increased 24% to $70.2 million
compared with $56.7 million for 1996. This increase was primarily due to the
sale of the new Impact products. In 1997, gross sales of Solutions and Software
products, including voice processing, increased 35% to $31.6 million compared
with $23.5 million for 1996. This increase was primarily attributable to
Comdial's subsidiaries, Aurora Systems, Inc. ("Aurora") and KVT, which accounted
for 48% of the increase. In 1997, gross sales of Analog and Other segment
products decreased 24% to $16.8 million, compared with $22.0 million for 1996.
In 1997, international sales increased by 15% to $4.2 million compared with $3.7
million for 1996. The increase in sales was due to the establishment of product
sales in several countries.
GROSS PROFIT, as a percentage of sales for 1997, was 40% compared with 37% for
1996. In 1997, gross profit increased by 25% to $47.3 million compared with
$37.9 million for 1996. This increase was primarily attributable to increased
sales of higher margin products, such as Digital Systems and Solutions and
Software products.
In 1997, gross profit for Digital System products increased by 36% to $25.2
million compared with $18.6 million for 1996. This increase was primarily due to
the higher sales volume along with better product margins. Digital Systems gross
profit, as a percentage of sales for 1997, was 36% compared with 33% for 1996.
In 1997, gross profit for Solutions and Software products increased by 46% to
$18.4 million compared with $12.6 million for 1996. This increase was due to a
higher sales volume that was primarily due to having a full year of product
sales from KVT, Comdial's subsidiary, acquired in March 1996. Solutions and
Software gross profit, as a percentage of sales for 1997, was 58% compared with
54% for 1996.
In 1997, gross profit for Analog and Other products decreased by 44% to $3.8
million compared with $6.7 million for 1996. This decrease was due to lower
sales of analog products that were replaced in the market place with digital
products. The Analog and Other segments gross profit, as a percentage of sales
for 1997, was 22% compared with 30% for 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES increased in 1997 by 13% to $29.1
million compared with $25.8 million for 1996. The primary reasons for the
increase were (1) additional administrative, marketing, and sales expenses of
$966,000 associated with KVT, (2) an increase in sales personnel to support the
growth in national accounts and expanding computer integrated markets, (3) an
increase in administrative costs associated with hiring two new officers, one of
whom was hired at the end of the second quarter of 1997 and the other in
December 1997, and (4) higher promotional allowance costs associated with
increased sales through Comdial's top dealers.
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ENGINEERING, RESEARCH AND DEVELOPMENT EXPENSES increased in 1997 by 13% to $6.5
million compared with $5.8 million for 1996. This increase was primarily due to
increased expenses of $442,000 associated with KVT.
GOODWILL amortization expense increased in 1997 by 33% to $3.6 million compared
with $2.7 million in 1996. The increase was due to a full year of amortization
expense associated with the acquisitions of Aurora and KVT, and the write-off of
the remaining goodwill of $164,000 associated with an earlier acquisition.
INTEREST EXPENSE increased in 1997 by 4% to $1.7 million compared with $1.6
million for 1996. This increase was primarily due to the 1996 acquisition loan
Comdial obtained from Fleet to provide funding to acquire Aurora and KVT. In
1996, there were only nine months of interest expense associated with the Aurora
and KVT acquisitions. Additional interest expense was incurred as a result of a
promissory note issued to the original owners of KVT related to the purchase of
KVT (see Note 2 to the Consolidated Financial Statements).
NET INCOME BEFORE INCOME TAXES, as a result of the foregoing, increased in 1997
by 355% to $5.9 million compared with $1.3 million in 1996. Major factors
contributing to the increase in income and earnings per share for 1997 were
increased sales of Digital Systems and Solutions and Software products with
higher margins.
INCOME TAX EXPENSE (BENEFIT) reflects an expense in 1997 of $149,000 compared
with a benefit of $518,000 for 1996. This change was due to recognition of a
deferred tax asset benefit of $219,000 for 1997 compared with a benefit of
$736,000 for 1996. The tax benefits, recognized in 1997 and 1996, were a result
of a reduction in the valuation allowance relating to Comdial's NOLs.
LIQUIDITY AND CAPITAL SOURCES
Comdial's financial position continues to improve when compared to previous
years. In 1998, Comdial entered into a new financing arrangement with
NationsBank, N.A. ("NationsBank") that provides a line of credit up to $50
million. Comdial's continual improvement in its financial position along with
the additional line of credit allows Comdial to make necessary and desirable
capital expenditures and investments to expand into new high growth markets in
the telecommunications industry.
The following table sets forth Comdial's cash and cash equivalents, current
maturities on debt, and working capital at the dates indicated:
December 31,
In thousands 1998 1997 1996
- ------------ ---- ---- ----
Cash and cash equivalents $ 1,599 $ 3,131 $ 180
Current maturities on debt 6 3,701 5,343
Working capital 31,649 16,676 10,608
All operating cash requirements were funded for the first nine months of the
year through a $12.5 million revolving credit facility provided by Fleet. As of
October 1998, Comdial and NationsBank signed a Credit Agreement (the "Credit
Agreement") that is now funding all operational requirements as needed. Comdial
reports the revolving credit facility activity on a net basis on the
Consolidated Statements of Cash Flows. Comdial considers outstanding checks to
be a bank overdraft. As of December 31, 1998, Comdial's CASH AND CASH
equivalents were lower than December 31, 1997 by $1.5 million, due primarily to
paying all of its indebtedness to Fleet and the payment for the acquisition of
Array.
WORKING CAPITAL at December 31, 1998, increased by $15 million when compared to
1997. This increase was primarily due to the additional sales in the latter half
of the fourth quarter of 1998 and the terms of the new Revolving Credit Facility
with NationsBank (see Note 6 to the Consolidated Financial Statements).
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CAPITAL ADDITIONS for 1998 were approximately $4.5 million. Such capital
additions helped Comdial introduce new products as well as improve quality and
reduce costs associated with new and existing products. Capital additions were
funded by cash generated from operations and borrowing from the revolver. Cash
expenditures for capital additions for 1998, 1997, and 1996 amounted to $4.8
million, $3.6 million, and $3.2 million, respectively. Management anticipates
that approximately $8 million will be spent on capital additions during 1999.
These additions will help Comdial meet its commitments to its customers by
developing new products as well as increasing its capacity to produce high-tech
products for the future. Comdial plans to fund all additions primarily through
cash generated by operations with use of some borrowing.
Comdial has a commitment from NationsBank for the issuance of letters of credit
in an aggregate amount not to exceed $5 million at any one time. At December 31,
1998, the amount of commitments under the letter of credit facility with
NationsBank was $52,000.
ACCOUNTS RECEIVABLE at December 31, 1998, increased by $9.2 million compared
with December 31, 1997, primarily due to (1) record breaking sales in the fourth
quarter of 1998, (2) a majority of those sales occurring in the latter stages of
that quarter, (3) the change in Comdial's allowable cash discount for
receivables from 1.25% to 0.75% which went into effect at the end of the third
quarter of 1998, and (4) the addition of two new Value Added Resellers ("VAR")
that tend historically to have a payment cycle longer than 30 days. INVENTORY
increased in the second half of 1998 primarily due to the material and
production demands for new products that were introduced such as the Impact FXS
series. PREPAID EXPENSES AND OTHER CURRENT ASSETS at December 31, 1998,
increased by $3.1 million compared with December 31, 1997, due to the
recognition of deferred tax assets of $2.8 million that are projected to be used
in 1999. The NET DEFERRED TAX ASSET at December 31, 1998, increased by $9.1
million compared with December 31, 1997. This increase was due to the
recognition of all useable NOL's and tax benefits that Comdial believes it will
use before they expire (see Note 7 to the Consolidated Financial Statements).
OTHER ASSETS increased by $4.3 million primarily due to software development
costs associated with new products and costs associated with the Array
acquisition.
ACCOUNTS PAYABLE at December 31, 1998, increased by $1.8 million when compared
to December 31, 1997. This increase was primarily due to the timing of incoming
material receipts for production.
LONG-TERM DEBT, INCLUDING CURRENT MATURITIES
Since February 1, 1994, Fleet held substantially all of Comdial's indebtedness.
Comdial and Fleet entered into a loan and security agreement (the "Loan
Agreement") which was amended from time to time. The Loan Agreement provided
Comdial with a $10.0 million acquisition loan (the "Acquisition Loan"), a $3.5
million equipment loan (the "Equipment Loan"), and a $12.5 million revolving
credit loan facility (the "Revolver"). The Loan Agreement was effective until
February 1, 2001 and the agreement would automatically renew itself for one-year
periods thereafter.
On October 22, 1998, Comdial and NationsBank entered into a Credit Agreement.
NationsBank agreed to provide Comdial with a $50 million revolving credit
facility and a $5 million letter of credit subfacility. Comdial used $15.8
million under the revolving credit facility (the "Revolving Credit Facility") to
pay off (1) all its remaining indebtedness to Fleet of $10.8 million, (2)
amounts owed under Comdial's promissory note including interest to the former
owners of KVT of $4.4 million, and (3) mortgages owed by KVT of $606,000.
As of December 31, 1998, the current maturities on debt decreased due to the new
Revolving Credit Facility that does not require a principal payment until August
31, 2003 with the option of possible credit extensions. See Note 6 to Comdial's
Consolidated Financial Statements for additional information with respect to
Comdial's loan agreements, long-term debt and available short-term credit lines.
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Comdial believes that income from operations combined with amounts available
from Comdial's current credit facilities will be sufficient to meet Comdial's
needs for the foreseeable future.
OTHER FINANCIAL INFORMATION
During fiscal years 1998, 1997, and 1996, primarily all of Comdial's sales, net
income, and identifiable net assets were attributable to the telecommunications
industry.
YEAR 2000
In early 1997, Comdial established a team (the "Year 2000 Team"), to evaluate
whether, and to what extent, Comdial's products, information technology systems,
facilities and production and distribution infrastructure may be affected by the
Year 2000 and potential problems caused by the inability of certain computers
and microprocessors to distinguish between the year 2000 and year 1900.
STATE OF READINESS: Comdial believes that it has identified the Year 2000 issues
that could potentially affect its business and has developed plans to address
such problems. Through a series of industry-recognized tests, the Year 2000 Team
believes that it has identified which of Comdial's products, devices, and
computerized systems contain embedded microprocessors that will require
remediation or replacement because of potential Year 2000 issues. The Year 2000
Team has concluded that nearly all of Comdial's products are already Year 2000
compliant. Comdial expects that any non-compliant products that Comdial
continues to sell will be compliant before the third quarter of 1999.
Futhermore, Comdial is providing upgrades or taking other remedial steps to
correct any non-conpliant products that remain under warranty. In addition,
Comdial's manufacturing division has performed Year 2000 testing and found all
equipment to be functioning as required.
Comdial continues to monitor and review any new issues that may arise concerning
Year 2000. Furthermore, Comdial has implemented a requirement that its suppliers
certify that all products, supplier's purchased products, and services provided
to Comdial will not be adversely affected by the Year 2000. Comdial has divided
its suppliers into three categories with respect to Year 2000 compliance: (1)
non-critical component suppliers, (2) critical component suppliers, and (3) sole
source critical component suppliers. As of the end of 1998, Comdial has received
written confirmation of Year 2000 compliance for all three categories of
approximately 99%. Comdial continues to follow up with suppliers to make sure
they comply with Comdial's requirements and that they provide Comdial with the
proper verification that they do or will comply with, Year 2000 issues. Comdial
also plans to perform an on-site audits of some of the sole source suppliers
that are critical to Comdial's operations which should be completed by the
fourth quarter of 1999.
COSTS: Comdial estimates that it will incur approximately $410,000 in additional
expenses to remedy the remaining Year 2000 issues. This cost includes testing,
new software, maintenance of existing software, PC replacements, and
consultants. On an ongoing basis, Comdial has been replacing existing in-house
systems to improve efficiency and to address the Year 2000 issue. Such
replacements are projected to be complete in the first half of 1999. As of
December 31, 1998, cumulative costs incurred by Comdial specifically for the
Year 2000 totaled in aggregate of $121,000.
RISK: There are various potential risks that could be associated with the
failure of Comdial's business or the business of significant third-party
suppliers of Comdial to be Year 2000 ready. The possible failure of internal
information systems to be Year 2000 ready could result in some interruptions or
disruptions of business. The possible failure of manufacturing facilities to be
Year 2000 ready could result in impaired manufacturing processes with delays in
delivery of products until non-compliant components or conditions can be
remedied or replaced. Finally, risks of major failures of Comdial's products
could include adverse functional impacts experienced by customers,
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<PAGE>
the costs and resources for Comdial to remedy such problems or replace
non-compliant products under warranty and delays in delivery of new products.
While Comdial believes that it is taking appropriate actions to respond to and
resolve potential Year 2000 issues, there can be no assurance that Year 2000
issues will not have a material adverse affect on Comdial.
CONTINGENCY PLANS: If the current sole source suppliers cannot give Comdial
certification or corrective action for Year 2000 compliance, Comdial will
develop and use alternative vendors. Comdial, as of December 31, 1998, has
received certification that all of its major suppliers are or will be Year 2000
compliant not later than the third quarter of 1999. Management believes that
Comdial is properly addressing the Year 2000 issue in order to mitigate any
adverse operational or financial consequences.
CURRENT PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share." The new standard requires dual presentation of both basic and diluted
earnings per share ("EPS") on the face of the earnings statement and requires a
reconciliation of both basic and diluted EPS calculations. Comdial has adopted
this statement.
Also, in February 1997, FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." The new standard requires presentation
disclosures about reportable operating segments of a company. The segments are
based on how management is currently viewing operations. Comdial has adopted
this statement.
In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income." The
new standard requires businesses to disclose comprehensive income and its
components in their general-purpose financial statements. This standard does not
have an impact on Comdial's financial statements or disclosures.
In April 1998, FASB issued SFAS No. 132, "Employers' Disclosures about Pensions
and Other Postretirement Benefits." The new standard revises the required
disclosures for pension and other postretirement benefit plans, but it does not
change the measurement or recognition of such plans. This statement has been
adopted by Comdial.
In the third quarter of 1998, FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." Comdial does not have any
derivatives and therefore, this statement will not affect Comdial.
"SAFE HABOR" STATEMENT UNDER THE PRIVATE SECURITIES LIGITATION REFORM ACT OF
1995
Comdial'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 Comdial's filings with the Securities and Exchange Commission. These
risks could cause Comdial's actual results for 1999 and beyond to differ
materially from those expressed in any forward-looking statement made by, or on
behalf of, Comdial.
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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 ("Comdial") as of December 31, 1998 and 1997,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of Comdial'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, 1998 and 1997, and the results of its operations
and their cash flows for each of the three years in the period ended December
31, 1998 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Richmond, Virginia
January 29, 1999
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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.
Comdial 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.
Comdial diligently strives to select qualified managers, provide appropriate
division of responsibility, and assure that its policies and standards are
understood throughout the organization. Comdial'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 Comdial's annual financial statements, internal
accounting controls, and other accounting services provided by the Independent
Auditors.
/s/ William G. Mustain /s/ M. Funke
WILLIAM G. MUSTAIN MANFRED FUNKE
CHAIRMAN, PRESIDENT AND CONTROLLER
CHIEF EXECUTIVE OFFICER
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CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
In thousands except par value 1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 1,599 $ 3,131
Accounts receivable - net (less allowance for 23,006 13,820
doubtful accounts: 1998 - $198; 1997 - $78)
Inventories 21,434 18,487
Prepaid expenses and other current assets 4,815 1,669
--------- ---------
Total current assets 50,854 37,107
--------- ---------
Property - net 18,023 16,334
Net deferred tax asset 17,257 8,164
Goodwill 14,079 13,142
Other assets 8,777 4,517
--------- ---------
Total assets $ 108,990 $ 79,264
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 11,034 $ 9,229
Accrued payroll and related expenses 2,942 2,659
Accrued promotional allowances 1,877 1,915
Other accrued liabilities 3,346 2,927
Current maturities of debt 6 3,701
--------- ---------
Total current liabilities 19,205 20,431
--------- ---------
Long-term debt 22,140 9,922
Net deferred tax liability 3,123 2,705
Long-term employee benefit obligations 1,361 1,371
Commitments and contingent liabilities (see Note 13) -- --
--------- ---------
Total liabilities 45,829 34,429
--------- ---------
Stockholders' equity
Common stock ($0.01 par value) and paid-in capital
(Authorized 30,000 shares; issued shares
outstanding: 1998 = 8,850; 1997 = 8,697) 116,039 114,663
Other (1,243) (1,039)
Accumulated deficit (51,635) (68,789)
--------- ---------
Total stockholders' equity 63,161 44,835
--------- ---------
Total liabilities and stockholders' equity $ 108,990 $ 79,264
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
127
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
In thousands except per share amounts 1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net sales $ 128,977 $ 118,561 $ 102,182
Cost of goods sold 75,597 71,218 64,301
--------- --------- ---------
Gross profit 53,380 47,343 37,881
--------- --------- ---------
Operating expenses
Selling, general & administrative 34,034 29,069 25,757
Engineering, research & development 6,813 6,497 5,771
In-process research & development -
Array Telecom Corp. 529 -- --
Goodwill amortization 3,806 3,567 2,674
--------- --------- ---------
Operating income 8,198 8,210 3,679
--------- --------- ---------
Other expense
Interest expense 1,216 1,698 1,626
Miscellaneous expense - net 565 644 762
--------- --------- ---------
Income before income taxes 6,417 5,868 1,291
Income tax expense (benefit) (10,737) 149 (518)
--------- --------- ---------
Net income applicable to common stock $ 17,154 $ 5,719 $ 1,809
========= ========= =========
Earnings per common share and common equivalent share:
Basic $1.94 $0.66 $0.21
========= ========= =========
Diluted $1.89 $0.65 $0.21
========= ========= =========
Weighted average common shares outstanding:
Basic 8,843 8,684 8,484
Diluted 9,081 8,767 8,668
</TABLE>
The accompanying notes are an integral part of these financial statements.
128
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Deferred Stock
Common Stock Incentive Treasury Stock
------------------------------------- Paid-in ---------------------
In thousands Shares Amount Shares Amount Capital Shares Amount
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 1996 8,226 $82 - $- $111,543 (94) ($838)
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 (3) (40)
Common stock issued for acquisitions:
Key Voice Tech., Inc. ("KVT") 243 2 1,469
Aurora Systems, Inc. ("Aurora") 148 2 890
Net income
- --------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 8,678 87 - - 114,031 (97) (878)
Proceeds from sale of Common Stock:
Notes receivable
Stock options exercised 32 165
Stock offering cost (9)
Deferred stock compensation 4
Incentive stock issued 12 97
Contingency stock issued for
KVT acquisition 72 1 291
Acquisition costs for KVT and Aurora (4)
Net income
- --------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 8,794 88 - - 114,575 (97) (878)
Proceeds from sale of Common Stock:
Notes receivable
Stock options exercised 97 1 706
Treasury Stock Purchased (19) (209)
Deferred stock compensation 48
Incentive stock issued 3 8 84 39
Contingency stock issued for
KVT acquisition 72 498
Net income
- --------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 8,966 $89 8 84 $115,866 (116) ($1,087)
==========================================================================================================================
<CAPTION>
Notes
Receivable
on Sale Retained
In thousands of Stock Earnings Total
- ----------------------------------------------------------------------------------------
Balance at January 1, 1996 ($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 (40)
Common stock issued for acquisitions:
Key Voice Tech., Inc. ("KVT") 1,471
Aurora Systems, Inc. ("Aurora") 892
Net income 1,809 1,809
- ----------------------------------------------------------------------------------------
Balance at December 31, 1996 (168) (74,508) 38,564
Proceeds from sale of Common Stock:
Notes receivable 7 7
Stock options exercised 165
Stock offering cost (9)
Deferred stock compensation 4
Incentive stock issued 97
Contingency stock issued for
KVT acquisition 292
Acquisition costs for KVT and Aurora (4)
Net income 5,719 5,719
- ----------------------------------------------------------------------------------------
Balance at December 31, 1997 (161) (68,789) 44,835
Proceeds from sale of Common Stock:
Notes receivable
Stock options exercised 5 5
Treasury Stock Purchased 707
Deferred stock compensation (209)
Incentive stock issued 48
Contingency stock issued for 123
KVT acquisition 498
Net income 17,154 17,154
- ----------------------------------------------------------------------------------------
Balance at December 31, 1998 ($156) ($51,635) $63,161
========================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
129
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
In thousands 1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 120,967 $ 118,657 $ 106,979
Other cash received 2,398 1,219 1,022
Interest received 30 19 53
Cash paid to suppliers and employees (121,217) (108,304) (101,220)
Interest paid on debt (1,376) (1,565) (876)
Interest paid under capital lease obligations (11) (18) (89)
Income taxes paid (824) (310) (243)
--------- --------- ---------
Net cash provided (used) by operating activities (33) 9,698 5,626
--------- --------- ---------
Cash flows from investing activities:
Purchase of Key Voice Technologies ("KVT") -- -- (8,528)
Purchase of Aurora Systems ("Aurora") -- -- (1,901)
Purchase of Array Telecom Corp. ("Array") (5,880) -- --
Acquisition cost for KVT and Aurora -- (4) (934)
Acquisition cost for Array (246) -- --
Proceeds received from the sale of FastCall 290 -- --
Proceeds from the sale of equipment 158 22 9
Capital expenditures (4,842) (3,609) (3,179)
--------- --------- ---------
Net cash used by investing activities (10,520) (3,591) (14,533)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from borrowings -- 2,216 5,619
Net borrowings under revolver agreement 22,132 (1,749) 1,749
Proceeds from issuance of common stock 498 162 47
Principal payments on debt (13,546) (3,693) (1,941)
Principal payments under capital lease obligations (63) (92) (531)
--------- --------- ---------
Net cash provided (used) by financing activities 9,021 (3,156) 4,943
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (1,532) 2,951 (3,964)
--------- --------- ---------
Cash and cash equivalents at beginning of year 3,131 180 4,144
--------- --------- ---------
Cash and cash equivalents at end of year $ 1,599 $ 3,131 $ 180
========= ========= =========
- -----------------------------------------------------------------------------------------------------------------
Reconciliation of net income to net cash provided by operating activities:
Net Income $ 17,154 $ 5,719 $ 1,809
--------- --------- ---------
Depreciation and amortization 8,829 8,634 6,680
Change in assets and liabilities (for 1996 and 1998,
net of effects from the purchase of KVT and Aurora,
and Array, respectively)
Decrease (increase) in accounts receivable (9,186) (4,160) 143
Inventory provision 2,286 1,509 1,029
Increase in inventory (5,219) (410) (2,385)
Increase in other assets (5,431) (2,956) (1,888)
Increase in net deferred tax assets (11,496) (220) (736)
Increase (decrease) in accounts payable and
bank overdrafts 1,805 1,085 (657)
Increase in other liabilities 654 399 595
KVT asset value at acquisition -- -- 1,105
Aurora asset value at acquisition -- -- (121)
Array asset value at acquisition (103) -- --
Increase in other equity 674 98 52
--------- --------- ---------
Total adjustments (17,187) 3,979 3,817
--------- --------- ---------
Net cash provided (used) by operating activities ($33) $ 9,698 $ 5,626
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
130
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1998, 1997, 1996
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Comdial
Corporation and its subsidiaries ("Comdial"). 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. Comdial'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, two new distributors that began selling
products in 1998, other supply houses, dealers, and independent interconnects.
The dynamic, high-technology industry in which Comdial participates is very
competitive.
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,
1998. 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 Comdial'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 not needed for daily operations.
Bank overdrafts of $3.3 million and $1.9 million are included in accounts
payable at December 31, 1998 and 1997, respectively. Bank overdrafts are
outstanding checks that have not (1) cleared the bank or (2) been funded by the
revolving credit facility. The revolving credit facility activity is reported 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. Expenditures for maintenance and repairs of property are
charged to expense. Improvements and repairs, which extend economic lives, are
capitalized. In 1998, Comdial expensed certain computer hardware and software
due to the rapid change in technology that has effected a need for continual
replacements. Prior to 1998, all computer and software costs were capitalized or
acquired through operating leases.
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
131
<PAGE>
OTHER LONG-LIVED ASSETS
Long-lived assets are amortized based on the assets' useful lives. Long-lived
assets are reviewed for impairment as circumstances change that might effect
those assets. Impairment loss is not recognized unless a portion of the carrying
amount of an asset is no longer recoverable using a test of recoverability which
is the sum of the expected future undiscounted cash flows.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
In 1998, 1997, and 1996, Comdial incurred costs associated with the develop-ment
of software related to Comdial's various products. The accounting for such
software costs is in accordance with SFAS No. 86 ("Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed"). The amortization
period is over three years which is the short end of the product life cycle. The
three year straight line method for software amortization causes greater expense
for each period versus using the revenue method. The total amount of unamortized
software development cost included in other assets is $4.5 million and $3.1
million at December 31, 1998 and 1997, respectively. The amounts capitalized
were $2.8 million, $2.0 million, and $1.6 million, of which $1.4 million, $1.0
million, and $0.9 million were amortized in 1998, 1997, and 1996, respectively.
Comdial also capitalizes 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 $2.1 million and $0.9
million at December 31, 1998 and 1997, respectively. The amount capitalized was
$1.5 million, $0.5 million, and $1.1 million, of which $388,000, $569,000 and
$157,000 was amortized in 1998, 1997 and 1996, respectively.
POSTRETIREMENT BENEFITS OTHER THAN PENSION
Comdial accrued estimated costs relating to health care and life insurance
benefits. In 1998, 1997, and 1996, Comdial expensed $87,000, $64,000, and
$41,000, respectively.
REVENUE RECOGNITION
Comdial recognizes revenue as products are shipped. Returned products are
credited against revenues as they are received back from the customer. The only
exceptions to this policy are revenues from E911 systems and from embedded
software. E911 revenues are recognized when projects have been completed and
embedded software revenues are not recognized until the customer requests a code
from Comdial enabling the software to be used. Comdial's reporting of software
revenue meets the requirements as set forth by Statement of Position 97-2
"Software Revenue Recognition."
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").
ACCOUNTING FOR STOCK-BASED COMPENSATION
Comdial accounts for stock-based compensation under Accounting Principles Board
Opinion ("APB") No. 25. Comdial has disclosed in a note to the consolidated
financial statements pro forma net income and earnings per share, as if Comdial
had applied the fair value method (Black-Scholes) for stock options and similar
equity instruments (see Note 11).
INCOME TAXES
Comdial uses the deferred tax liability or asset approach, which is 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
132
<PAGE>
the differences reverse. Deferred tax expense is the result of changes in the
liability for deferred taxes. The measurement of deferred tax assets is impacted
by the amount of any tax benefits where, based on available evidence, the
likelihood of realization can be established. Comdial incurred cumulative
operating losses through 1991 for financial statement and tax reporting purposes
and has adjusted its valuation allowance account to recognize 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.
EARNINGS PER COMMON SHARE AND COMMON EQUIVALENT SHARE
For 1998, 1997, and 1996, earnings per common share ("EPS") were computed for
both basic and diluted EPS based on Statement of Financial Accounting Standards
("SFAS") No. 128. Basic EPS for all years presented were computed by dividing
net income applicable to common shares by the weighted average number of common
shares outstanding and common equivalent shares including any possible
contingent shares. For 1998, 1997, and 1996, diluted EPS were computed by
dividing income attributable to common shareholders 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.
RECLASSIFICATIONS
Amounts in the 1997 and 1996 consolidated financial statements have been
reclassified to conform to the 1998 presentation. These reclassifications had no
effect on previously reported consolidated net income.
NOTE 2. ACQUISITIONS
On March 20, 1996, Comdial completed the acquisition of Aurora Systems, Inc.
("Aurora") and Key Voice Technologies, Inc. ("KVT"), two companies involved in
Computer-Telephony Integration ("CTI") applications, which became wholly-owned
subsidiaries of Comdial. Aurora, based in Acton, Massachusetts, provided
off-the-shelf CTI products. KVT, based in Sarasota, Florida, develops,
assembles, markets, and sells voice processing systems and related products for
business applications.
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 Comdial'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
Comdial's issuance of a promissory note ("Promissory Note"), and $1.5 million
was paid by the issuance of 243,097 shares of Comdial's Common Stock. Based on
the purchase agreement with KVT, Comdial was obligated to issue an additional
216,086 shares of Comdial's Common Stock or the equivalent amount in cash for
KVT's performance for the following three years from the acquisition date. At
the beginning of the second quarter of 1998 and 1997, 72,029 shares of common
stock for both periods were issued to the original principal owners of KVT.
These shares were issued because KVT met its sales target for 1997 and 1996.
Based on KVT's performance for 1998, the original owners are eligible for 72,030
additional shares of common stock or cash at the end of the first quarter of
1999. As the two target requirements are met by the principal owners of KVT,
Comdial records the fair market value of the contingent shares and adds that
amount to goodwill. This additional cost will be spread over the remaining life
of the goodwill.
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
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<PAGE>
remaining life of the original goodwill. Such allocations have been based on
asset valuations performed by outside consultants.
As of December 31, 1997, Aurora sold all of its rights, title and interest in
the FastCall product, Aurora's primary asset, to Spanlink Communications, Inc.
Aurora may receive, over a five year period, royalties totaling up to $1.1
million with a minimum guarantee of $0.6 million at the end of that period.
On July 14, 1998, Comdial acquired the internet telephony gateway product
VOIPgate.com and the related assets and business of Array Telecom Corporation
("Array") from Array Systems Computing Inc. ("ASCI"). ASCI is located in
Toronto, Ontario, Canada. The purchase price was approximately $5.9 million. The
funds used for the acquisition came from cash generated by operations and a
revolving credit facility. The principal asset purchased was the intellectual
property associated with VOIPgate software, an internet protocol based telephony
software platform.
NOTE 3. INVENTORIES
Inventory consists of the following:
December 31,
In thousands 1998 1997
------- -------
Finished goods $ 8,507 $ 6,336
Work-in-process 3,568 4,101
Materials and supplies 9,359 8,050
------- -------
Total $21,434 $18,487
======= =======
Comdial provides reserves to cover product obsolescence and those reserves
impact gross margin. Future reserves will be dependent on management's estimates
of the recoverability of costs of all inventory. Raw material obsolescence is
mitigated by the commonality of component parts and finished goods by the low
level of inventory relative to sales.
NOTE 4. PROPERTY
Property consists of the following:
December 31,
In thousands 1998 1997
-------- --------
Land $ 656 $ 656
Buildings and improvements 14,582 14,104
Machinery and equipment 33,514 30,423
Less accumulated depreciation (30,729) (28,849)
-------- --------
Property - Net $ 18,023 $ 16,334
======== ========
Depreciation expense charged to operations for the years 1998, 1997, and 1996,
was $2.8 million, $2.8 million, and $2.6 million, respectively.
NOTE 5. LEASE OBLIGATIONS
Comdial 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, Operating
In thousands Leases
- ------------ -------
1999 $2,200
2000 1,672
2001 523
2002 24
2003 -
------
Total minimum lease commitments $4,419
======
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<PAGE>
The remaining lease commitments for capital leases are $14,000 with $6,000 of
this amount due in 1999. Assets recorded under capital leases (included in
property in the accompanying Consolidated Balance Sheets) are as follows:
December 31,
In thousands 1998 1997
----- -----
Machinery and equipment $ 41 $ 218
Less accumulated depreciation (24) (115)
----- -----
Property - Net $ 17 $ 103
===== =====
During 1998 Comdial did not enter into any new capital leases. For 1997 and
1996, Comdial entered into new capital lease obligations which amounted to
approximately $18,000 and $67,000, 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, 1998, 1997,
and 1996, were $2.2 million, $1.9 million, and $1.7 million, respectively.
NOTE 6. DEBT
Since February 1, 1994, Fleet Capital Corporation ("Fleet") has held
substantially all of Comdial's indebtedness. Comdial and Fleet entered into a
loan and security agreement (the "Loan Agreement") which was amended from time
to time. The Loan Agreement provided Comdial with a $10.0 million acquisition
loan (the "Acquisition Loan"), a $3.5 million equipment loan (the "Equipment
Loan"), and a $12.5 million revolving credit loan facility (the "Revolver"). The
Loan Agreement was effective until February 1, 2001 and the agreement would
automatically renew itself for one-year periods thereafter.
On October 22, 1998, Comdial and NationsBank, N.A. ("NationsBank"), entered into
a credit agreement (the "Credit Agreement"). The Credit Agreement provides
Comdial with a $50 million revolving credit facility and a $5 million letter of
credit subfacility. Comdial used $15.8 million under the revolving credit
facility (the "Revolving Credit Facility") to pay off (1) all its indebtedness
of $10.8 million to Fleet, (2) $4.4 million representing amounts owed under
Comdial's promissory note including interest to the former owners of KVT, and
(3) $606,000 of mortgages owed by KVT.
Long-term debt consists of the following:
- ------------------------------------------------------------------------------
December 31,
In thousands 1998 1997
------- -------
Notes payable
Acquisition note (1) $-- $ 5,543
Equipment note I (2) -- 139
Equipment note II (3) -- 1,647
Revolving credit (4) 22,132 --
Promissory note (5) -- 5,600
Other (6) -- 617
Capitalized leases (7) 14 77
------- -------
Total debt 22,146 13,623
Less current maturities on debt 6 3,701
------- -------
Total long-term debt $22,140 $ 9,922
======= =======
(1) On March 20, 1996, Comdial borrowed $8.5 million under the Acquisition
Loan which was used to acquire Aurora and KVT. The Acquisition Loan was payable
in equal monthly principal installments of $142,142, with the balance due on
February 1, 2001. In the first quarter of 1998, Comdial paid an additional $1.8
million against the Acquisition Loan along with the required monthly payments.
The original final payment was scheduled for
135
<PAGE>
February 2001. In October 1998, Comdial paid the final balance of $2.3 million
to Fleet with funds provided by the Revolving Credit Facility from NationsBank.
(2) Equipment Loan I was payable in equal monthly principal installments of
$27,000, with the balance due on June 1, 1998.
(3) Equipment Loan II was payable in equal monthly principal installments
of $31,667, with the balance due on February 1, 2001.
In January 1998, Comdial paid the remaining balances of both Equipment Loan
I and II of $1,786,000.
(4) Availability under the Revolver of up to $12.5 million was based on
eligible accounts receivable and inventory, less funds already borrowed.
Effective October 1998, the availability under the Revolving Credit Facility
with NationsBank is $50 million.
Loans made pursuant to the Loan Agreement had interest rates at either Fleet's
prime rate or the London Interbank Offered Rate ("LIBOR") at Comdial's option.
The interest rates could be adjusted annually based on Comdial's debt to
earnings ratio, which allowed the rates to vary 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 October 21, 1998, Comdial's borrowing rate was 7.50% with 100% of the loans
based on the prime rate. For December 31, 1997, Comdial's borrowing rate for
loans based on prime and LIBOR rates were 9.00% and 8.47%, respectively, with
approximately 96% of the loans based on the LIBOR rate.
On October 22, 1998, Comdial paid the final balance of $8.5 million to Fleet
with funds provided by the Revolving Credit Facility from NationsBank. The loan
made pursuant to the Credit Agreement with NationsBank carries an interest rate
based on the LIBOR daily rate plus the applicable margin. The interest rate can
be adjusted quarterly based on Comdial's ratio of funded debt to earnings before
interest, taxes, depreciation and amortization ("EBITDA"), which allows the
rates to vary from plus 0.75% to 1.50% above the LIBOR daily rate. As of
December 31, 1998, Comdial's borrowing LIBOR rate was 6.30%, which included the
additional applicable margin of 0.75%.
This Revolving Credit Facility with NationsBank can be used by Comdial for
working capital, equipment purchases, to finance permitted acquisitions, and for
other general corporate purposes. The NationsBank Revolving Credit Facility (as
defined in the Credit Agreement) does not require payment until August 31, 2003
with the option of possible credit extensions.
(5) Comdial's promissory note (the "Promissory Note"), which was issued in
connection with the purchase of KVT, carried an interest rate equal to the prime
rate with annual payments of $1.4 million plus accumulated interest with the
balance due on March 20, 2001. As of October 21, 1998 and December 31, 1997, the
interest rate on the Promissory Note was 8.00% and 8.50%, respectively. On
October 22, 1998, Comdial paid the final balance of $4.2 million plus
accumulated interest of $210,000 to the owners of the Promissory Note with funds
provided by the Revolving Credit Facility from NationsBank.
(6) Other debt consisted of a mortgage acquired in conjunction with the
acquisition of KVT and another mortgage entered into by KVT in order to acquire
an adjacent building for expansion. The mortgages required monthly payments of
$2,817 and $2,869, including interest at fixed rates of 8.75% and 9.125%,
respectively. Final payments were due on August 1, 2005 and June 27, 2007,
respectively. On October 22, 1998, Comdial paid the final mortgage balances of
$606,000 with funds provided by the Revolving Credit Facility from NationsBank.
(7) Capital leases are with various financing entities and are payable
based on the terms of each individual lease (see Note 5).
The NationsBank Credit Agreement also gives Comdial a letter of credit
subfacility of $5.0 million, which is part of the Revolving Credit Facility,
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<PAGE>
as commitments occur. At December 31, 1998, the amount of commitments under the
letter of credit facility with NationsBank was $52,000.
DEBT COVENANTS
Comdial's indebtedness to Fleet was secured by liens on Comdial's accounts
receivable, inventories, intangibles, land, and all other property. Among other
restrictions, the amended Loan Agreement contained certain financial covenants
that require specified levels of consolidated tangible net worth, profitability,
and other certain financial ratios. The Fleet agreement was amended from time to
time.
Effective October 1998, Comdial's indebtedness with NationsBank is secured by
liens on all Comdial's properties and assets. The Credit Agreement with
NationsBank contains certain financial covenants that relate to specified levels
of consolidated net worth and other financial ratios. As of December 31, 1998,
Comdial was in compliance with all the covenants and terms of NationsBank's
Credit Agreement.
NOTE 7. INCOME TAXES
The components of the income tax expense for the years ended December 31 are as
follows:
<TABLE>
<CAPTION>
In thousands 1998 1997 1996
-------- ----- -----
<S> <C> <C> <C>
Current - Federal $393 $200 $59
State 369 168 159
Deferred - Federal (9,730) (214) (714)
State (1,769) (5) (22)
-------- ---- -----
Total provision (benefit) ($10,737) $149 ($518)
======== ==== =====
</TABLE>
The income tax provision reconciled to the tax computed at statutory rates for
the years ended December 31 is summarized as follows:
In thousands 1998 1997 1996
-------- -------- --------
Federal tax at statutory rate
(35% in 1998, 1997, and 1996) $ 2,246 $ 2,054 $ 452
State income taxes (net of federal tax
benefit) (924) 109 103
Nondeductible charges 411 544 329
Other adjustments 519 200 77
Utilization of operating loss carryover -- (2,539) (743
Adjustment of valuation allowance (12,989) (219) (736
-------- -------- --------
Income tax provision (benefit) ($10,737) $ 149 ($ 518
======== ======== ========
Net deferred tax assets of $17.0 million and $5.5 million have been recognized
in the accompanying Consolidated Balance Sheets at December 31, 1998 and 1997,
respectively. The components of the net deferred tax assets are as follows:
December 31,
In thousands 1998 1997
------- -------
Total deferred tax assets $23,045 $25,201
Total valuation allowance (2,966) (17,037)
------- -------
Total deferred tax assets - net 20,079 8,164
Total deferred tax liabilities (3,123) (2,705)
------ -------
Total $16,956 $5,459
======= =======
The valuation allowance decreased $14.1 million during the year ended December
31, 1998. The decrease was primarily related to (1) the re-evaluation of the
future utilization of net operating losses ("NOLs") of $13 million, and (2) the
net change in temporary differences of deferred tax assets, deferred tax
liabilities, and operating loss carryforwards of $1.1 million. Comdial
periodically reviews the requirements for a valuation allowance and makes
adjustments to such allowance when changes in circumstances result in changes
137
<PAGE>
in management's judgment about the future realization of deferred tax assets.
Section 382 of the Internal Revenue Code limits an organization's ability to
utilize tax benefits in the event that there is change in ownership of 50% or
more of the organizations during any three-year period. Since Comdial's stock
offering in August 1995, which resulted in a significant change in ownership,
management has been concerned that cumulative changes in ownership of Comdial
could trigger the limitations set forth in Section 382 and adversely affect
Comdial's ability to utilize certain tax benefits. With the passage of the third
fiscal quarter of 1998, the ownership changes occasioned by the stock offerings
will no longer be included in the time period measured under Section 382. Based
on the re-evaluations, the valuation allowance was reduced and a tax benefit of
$330,000 and $11.7 million was recognized in the quarters ending March 29, 1998
and September 27, 1998, respectively. Accordingly, management believes that it
is more likely than not that Comdial will realize these tax benefits. However,
the tax benefits could be reduced in the near term if estimates of future
taxable income during the carryforward periods are reduced or a limitation based
on section 382 occurs before NOLs expire.
Comdial has net operating loss and credit carryovers of approximately $34.1
million and $1.6 million, respectively, which, if not utilized, will expire as
follows:
In thousands Net Operating
Expiration Dates Losses Tax Credits
------- ------
1999 $- $504
2000 17,527 66
2001 5,260 -
2002 6,486 -
2003 7 -
AFTER 2003 4,862 1,038
------- ------
TOTAL $34,142 $1,608
======= ======
The components of the net deferred tax assets (liabilities) at December 31, 1998
and 1997 are as follows:
Deferred Assets (Liabilities) Deceember 31,
In thousands 1998 1997
-------- --------
Net loss carryforwards $ 12,781 $ 19,030
Tax credit carryforwards 1,608 2,856
Inventory write downs and capitalization 1,794 1,268
Pension 246 227
Postretirement 297 239
Compensation and benefits 357 318
Capitalized software development costs 438 246
Contingencies 589 29
Other deferred tax assets 82 64
Fixed asset depreciation (2,522) (2,607)
Goodwill amortization 1,692 826
Research and development expenditures 3,161 --
State taxes (601) --
Other deferred tax liabilities -- --
-------- --------
Net deferred tax asset 19,922 22,496
Less: Valuation allowance (2,966) (17,037)
-------- --------
Total $ 16,956 $ 5,459
======== ========
NOTE 8: EARNINGS PER SHARE
For the three years ending December 31, 1998, 1997 and 1996, earnings per common
share ("EPS") were computed for both basic and diluted EPS to conform to
Statement of Financial Accounting Standards ("SFAS") No. 128. Basic EPS for the
three years presented were computed by dividing net income applicable to common
shares by the weighted average number of common shares outstanding and common
equivalent shares including any possible contingent shares. For the three years,
diluted EPS were computed by dividing income attributable to
138
<PAGE>
common shareholders 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. The following table discloses the annual
information.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Year Numerator Denominator EPS
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
1998
Basic EPS $17,154,000 8,843,357 $1.94
Diluted $17,154,000 9,081,070 $1.89
1997
Basic EPS $ 5,719,000 8,683,790 $0.66
Diluted $ 5,719,000 8,767,353 $0.65
1996
Basic EPS $ 1,809,000 8,484,271 $0.21
Diluted $ 1,809,000 8,667,641 $0.21
</TABLE>
NOTE 9. PENSION AND SAVINGS PLANS
Comdial 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 change in benefit obligations of the pension
plans and amounts recognized in Comdial's Consolidated Balance Sheets at
December 31, 1998 and 1997.
In thousands 1998 1997
-------- --------
Benefit obligation at beginning of year $ 18,541 $ 14,218
Service cost 1,575 1,226
Interest cost 1,334 1,047
Actual loss 1,435 2,405
Benefits paid (453) (355)
Amendments -- --
-------- --------
Benefit obligation at December 31 $ 22,432 $ 18,541
======== ========
The following tables sets forth the change in plan assets of the pension plans
and amounts recognized in Comdial's Consolidated Balance Sheets at December 31,
1998 and 1997.
<TABLE>
<CAPTION>
In thousands 1998 1997
-------- --------
<S> <C> <C>
Fair value of plan assets at beginning of year $ 19,025 $ 15,551
Actual return on plan assets 1,400 2,590
Employer contribution 1,430 1,239
Benefits paid (453) (355)
-------- --------
Fair value of plan assets at December 31 $ 21,402 $ 19,025
======== ========
Funded status ($ 1,030) 484
Unrecognized transition obligation (asset) (29) (58)
Unrecognized actuarial (gain) or loss 590 (875)
Unrecognized prior service cost (185) (219)
-------- --------
Net amount recognized ($654) ($668)
======== ========
</TABLE>
139
<PAGE>
Amounts recognized in the Consolidated Balance Sheets consist of:
1998 1997
------- -------
Prepaid benefit cost ($668) ($944)
Accrued benefit liability (1,417) (963)
Contributions during fiscal year 1,431 1,239
------- -------
Net amount recognized ($654) ($668)
======= =======
Assumptions used in accounting for the plans as of December 31 were as
follows:
1998 1997 1996
----- ----- -----
Discount rate 7.00% 7.00% 7.50%
Expected return on plan assets 9.00% 9.00% 9.00%
Rate of compensation increase 4.50% 4.00% 4.00%
Net periodic pension cost for 1998, 1997, and 1996 included the following
components:
In thousands 1998 1997 1996
------- ------- -------
Change in benefit obligation:
Service cost $ 1,575 $ 1,226 $ 1,081
Interest cost 1,334 1,047 890
Expected return on plan assets (1,490) (1,247) (1,061)
Amortization of prior service cost (63) (63) (63)
Recognized actuarial loss 61 -- --
------- ------- -------
Net periodic pension cost $ 1,417 $ 963 $ 847
======= ======= =======
In addition to providing pension benefits, Comdial contributes to a 401(k) plan,
based on an employee's contributions. Participants can contribute from 2% to
12.5% of their salary as defined in the terms of the plan. In 1998, 1997, and
1996, Comdial made matching contributions equal to 25% of a participant's
contributions up to the first 10%. Effective for 1999, participants can
contribute from 1% to 17% of their salary and Comdial will match contributions
equal to 50% of the participant's contribution up to the first 6%. Comdial's
total expense for the matching portion to the 401(k) plan for 1998, 1997, and
1996 was $411,000, $411,000, and $341,000, respectively.
NOTE 10. 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 1998, 1997, and
1996 was an expense of $87,000, $64,000, and $41,000, respectively. Comdial
provides certain health care coverage (until age 65), which is subsidized by the
retiree through insurance premiums paid to Comdial, and life insurance benefits
for substantially all of its retired employees. The postretirement benefit
obligation is not funded and does not include any provisions for securities,
settlement, curtailment, or special termination benefits. In 1993, when SFAS No.
106 went into effect, Comdial elected to amortize the cumulative effect of this
obligation over 20 years (see unrecognized transition obligation in the
following table).
The following table sets forth the change in postretirement benefit obligations
and amounts recognized in Comdial's Consolidated Balance Sheets at December 31,
1998 and 1997.
In thousands 1998 1997
------- -------
Benefit obligation at beginning of year $ 840 $ 794
Service cost 19 22
Interest cost 68 60
Plan participants' contributions 58 47
Actual loss 186 86
Benefits paid (160) (169)
Amendments -- --
------- -------
Benefit obligation at December 31 $ 1,011 $ 840
======= =======
140
<PAGE>
The following tables set forth the change in plan assets of the postretirement
benefits and amounts recognized in Comdial's Consolidated Balance Sheets at
December 31, 1998 and 1997.
In thousands 1998 1997
------- -------
Fair value of plan assets at beginning of year $-- $--
Actual return on plan assets -- --
Employer contribution 102 121
Plan participants' contributions 58 47
Benefits paid (160) (168)
------- -------
Fair value of plan assets at December 31 $-- $--
======= =======
Funded status ($1,011) ($840)
Unrecognized transition obligation 1,267 1,358
Unrecognized actuarial gain (944) (1,221)
Unrecognized prior service cost -- --
------- -------
Net amount recognized ($688) ($703)
======= =======
Amounts recognized in the Consolidated Balance Sheets:
Prepaid benefit cost ($703) ($760)
Accrued benefit liability (87) (64)
Contributions during fiscal year 102 121
------- -------
Net amount recognized ($688) ($703)
======= =======
Assumptions used in accounting for the plans as of December 31 were as follows:
1998 1997 1996
---- ---- ----
Discount rate 7.00% 7.00% 7.50%
For measurement purposes, an 8 percent annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1998. The rate was assumed
to decrease gradually to 5.25 percent for 2005 and remain at that level
thereafter.
Net periodic pension cost for 1998, 1997, and 1996 included the following
components:
In thousands 1998 1997 1996
----- ----- -----
Change in benefit obligation:
Service cost $ 19 $ 22 $ 20
Interest cost 68 60 55
Expected return on plan assets -- -- --
Amortization of prior service cost 91 91 91
Recognized actuarial gain (91) (109) (125)
----- ----- -----
Net periodic pension cost $ 87 $ 64 $ 41
===== ===== =====
Assumed health care cost trend rates could have a significant effect on the
amounts reported for the health care plans. A one-percentage change in assumed
health care cost trend rates would have the following effects:
1-Percentage- 1-Percentage
In thousands Point Increase Point Decrease
-------------- --------------
Effect on total of service and interest
cost components $6 ($5)
Effect on postretirement benefit obligation $47 ($40)
141
<PAGE>
NOTE 11. STOCK-BASED COMPENSATION PLANS
As of December 31, 1998, Comdial 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. Pursuant to the
terms of the 1992 Non-employee Directors Stock Incentive Plan (the "Directors
Stock Incentive Plan"), each non-employee director shall be awarded 3,333 shares
of Comdial's Common Stock for each fiscal year Comdial reports income. In
January 1996, in accordance with the terms of the Directors Stock Incentive
Plan, the Board of Directors adopted a resolution suspending 833 of the 3,333
shares of Comdial's common stock automatically awarded to non-employee directors
under such circumstances. In 1998, each non-employee director was awarded 2,500
shares related to income earned by Comdial for fiscal year 1997. The plans are
composed of stock options, restricted stock, nonstatutory stock, and incentive
stock. Comdial's incentive plans are administered by the Compensation Committee
of Comdial's Board of Directors.
As of December 31, 1998, there were 1.6 million shares of Comdial's Common Stock
reserved for issuance under Comdial's 1992 Stock Incentive Plan that had been
approved by the stockholders in 1996. Comdial 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 $156,000,
$161,000, and $168,000 at December 31, 1998, 1997, and 1996, respectively, and
have been deducted from Stockholders' Equity.
Options granted for years 1998 and 1997 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 Comdial's Common Stock on the grant date. In
December 1997, Comdial granted nonstatutory stock options totaling 50,000
shares, which are outside the 1992 Stock Incentive Plan. These stock options
vest over a five year period. In 1998, Comdial granted 120,000 shares of
nonstatutory stock options at the current fair market value at grant date. These
options were issued outside of the 1992 Stock Incentive Plan. These options vest
over a four to six year period. Comdial has charged against income in 1998 and
1997, compensation expense for these stock options of $48,000 and $4,000,
respectively.
Comdial 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 Comdial 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 $148,000, $97,000,
and $66,000 for 1998, 1997, and 1996, respectively.
Information regarding stock options is summarized below:
<TABLE>
<CAPTION>
1998 (1) 1997 (1) 1996 (1)
- -------------------------------------------------------------------------------------------------------------------
Options outstanding,
<S> <C> <C> <C> <C> <C> <C>
January 1; 859,729 $8.08 659,524 $7.95 449,241 $6.50
Granted 405,316 10.42 298,450 8.25 277,062 9.12
Exercised (96,602) 7.17 (32,216) 5.43 (52,617) 1.58
Terminated (64,230) 9.61 (66,029) 8.79 (14,162) 8.72
------- ------- -------
Options outstanding,
December 31; 1,104,213 8.93 859,729 8.08 659,524 7.95
========= ======= =======
Options exercisable,
December 31; 474,175 8.05 342,880 7.46 212,392 6.30
Per share ranges of options
outstanding at December 31 $1.41-$13.50 $1.41-$11.75 $1.41-$11.75
Dates through which options
outstanding at December 31,
were exercisable 1/99-7/2008 1/98-12/2007 1/97-5/2006
</TABLE>
(1) Fair value weighted-average exercise price at grant date.
142
<PAGE>
The following table summarizes information concerning currently outstanding and
exercisable options at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------- ---------------------------------
Weighted-
Number Average Weighted- Number Weighted-
Range of Outstanding Remaining Average Exercisable Average
Exercise at Contractual Exercise at Exercise
Prices 12/31/98 Life Price 12/31/98 Price
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$1.41 TO 3.00 49,275 3.7 $1.73 49,275 $1.73
5.73 TO 7.77 222,819 6.2 6.96 158,077 7.25
8.12 TO 9.38 459,127 8.1 8.86 186,716 9.15
10.50 TO 13.50 372,992 8.4 11.15 80,107 10.97
--------- -------
1.41 TO 13.50 1,104,213 7.6 8.93 474,715 8.05
========= =======
</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:
1998 1997 1996
---- ---- ----
Risk-free interest rate 4.72% 5.51% 6.18%
Expected life 7.78 3.65 3.82
Expected volatility 68% 73% 90%
Expected dividends none none none
If compensation cost for Comdial'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 Statement of Financial Accounting Standards ("SFAS") No. 123,
Comdial's net income and earnings per share would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
In thousands except per share amounts 1998 1997 1996
------------------------------------- ------- ------ ------
<S> <C> <C> <C>
Net income: As reported $17,154 $5,719 $1,809
Compensation expense 1,233 525 218
Pro forma $15,921 $5,194 $1,591
Basic earnings per share:
As reported $1.94 $0.66 $0.21
Pro forma $1.80 $0.60 $0.19
Diluted earnings per share:
As reported $1.89 $0.65 $0.21
Pro forma $1.75 $0.59 $0.18
</TABLE>
NOTE 12. SEGMENT INFORMATION
Effective December 31, 1998, Comdial has adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information."
During 1998, 1997, and 1996, substantially all of Comdial's sales, net income,
and identifiable net assets were attributable to the telecommunications industry
with over 96 percent of the sales occurring in the United States.
Comdial is organized into several product segments that comprise the majority of
its sales to the telecommunications market. Comdial has three basic product
categories that contribute ten percent or more, to net sales. The segments are
Digital Systems, Solutions and Software, and Analog and Other (which includes
other miscellaneous products). Each of these categories are considered a
business segment, and with respect to their financial performance, the costs
associated with these segments can only be quantified and identified to the
gross profit level for each segment.
143
<PAGE>
The Digital Systems segment is comprised of products such as Impact, Impression
series telecommunication systems, Impact Digital Expandable Systems ("DXP"), DXP
Plus and the open digital switching platforms known as the "FX Series." Digital
Systems generally offer customers more features with superior quality platforms.
The distinguishing characteristic of this segment is that it is designed for the
small office up to 500 end users.
The Solutions and Software segment is comprised of all Comdial's software and
software application products. The products included are all of Comdial's
vertical market products such as Impact Concierge, QuickQ, Avalon, and voice
processing systems. These products are sold to specific industries such as
hospitality, call centers, and assisted living centers.
The Analog and Other segment is comprised of Comdial's older analog products
(such as the Executech, Unisyn, ATC Terminals, and Solo), and other products
such as Voice Express, MaxPlus, and Custom Manufacturing. The Analog products
are aimed at the small office market, which supports only a few users. This
market places more emphasis on price than features or software functionality.
The information in the following tables is derived directly from the segments'
internal financial reporting used for corporate management purposes. The
expenses, assets and liabilities attributable to corporate activity are not
allocated to the operating segments. There are no operating assets located
outside the United States.
Unallocated costs include operating expenses, goodwill amortization, interest
expense, other miscellaneous expenses, and income tax expenses or benefits.
Comdial does not maintain information that would allow these costs to be broken
down into the various product segments and most of the costs are universal in
nature.
Unallocated assets include such items as cash, deferred tax assets, other
miscellaneous assets, and goodwill. Unallocated capital expenditures and
depreciation relate primarily to shared services assets. Unallocated liabilities
include such items as accounts payable, debt, leases, deferred tax liabilities,
and most other liabilities that do not relate to sales.
The following tables show segment information for years ended December 31.
<TABLE>
Business Segment Net Revenues
(Dollars in thousands) 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Digital Systems $ 80,452 $ 70,181 $ 56,725
Solutions and Software 36,194 31,625 23,453
Analog and Other 12,331 16,755 22,004
-------- -------- --------
Net sales $128,977 $118,561 $102,182
======== ======== ========
Business Segment Profit
(Dollars in thousands) 1998 1997 1996
-------- -------- --------
Digital Systems $ 31,237 $ 25,175 $ 18,553
Solutions and Software 19,341 18,418 12,617
Analog and Other 2,802 3,750 6,711
-------- -------- --------
Gross profit 53,380 47,343 37,881
Operating expenses 45,182 39,133 34,202
Interest expense 1,216 1,698 1,626
Miscellaneous expense - net 565 644 762
-------- -------- --------
Income before income taxes $ 6,417 $ 5,868 $ 1,291
======== ======== ========
December 31,
(Dollars in thousands) 1998 1997 1996
-------- -------- --------
Business Segment Assets
Digital Systems $ 43,286 $ 32,245 $ 27,354
Solutions and Software 18,124 12,978 9,233
Analog and Other 6,432 6,989 9,048
Unallocated 41,148 27,052 28,717
-------- -------- --------
Total $108,990 $ 79,264 $ 74,352
======== ======== ========
</TABLE>
144
<PAGE>
<TABLE>
<CAPTION>
Business Segment Liabilities
(Dollars in thousands) 1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Digital Systems $ 1,397 $ 1,389 $ 1,257
Solutions and Software 1,750 2,306 2,382
Analog and Other 203 267 384
Unallocated 42,479 30,467 31,765
------- ------- -------
Total $45,829 $34,429 $35,788
======= ======= =======
<CAPTION>
Business Segment Property, Plant and Equipment December 31,
(Dollars in thousands) 1998 1997 1996
------- ------- -------
Depreciation
Digital Systems $ 1,727 $ 1,721 $ 1,532
Solutions and Software 264 196 133
Analog and Other 148 206 332
Unallocated 665 628 601
------- ------- -------
Total $ 2,804 $ 2,751 $ 2,598
======= ======= =======
Additions
Digital Systems $ 2,146 $ 2,230 $ 1,024
Solutions and Software 499 843 151
Analog and Other 194 154 34
Unallocated 1,659 695 2,207
------- ------- -------
Total $ 4,498 $ 3,922 $ 3,416
======= ======= =======
</TABLE>
Comdial had sales in excess of 10% of net sales to three customers as follows:
<TABLE>
<CAPTION>
In thousands 1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Sales:
ALLTEL Supply, Inc. $19,301 $21,537 $19,472
Graybar Electric Company, Inc. 30,415 33,342 31,719
Sprint/North Supply , Inc. 24,902 26,445 22,432
Percentage of net sales:
ALLTEL Supply, Inc. 15% 18% 19%
Graybar Electric Company, Inc. 24% 28% 31%
Sprint/North Supply , Inc. 19% 22% 22%
Net sales of all three:
Digital Systems $54,372 $56,831 $46,128
Solutions and Software 12,189 11,835 11,095
Analog and Other 8,057 12,658 16,400
------- ------- -------
Net sales $74,618 $81,324 $73,623
======= ======= =======
</TABLE>
ALLTEL Supply, Inc., a subsidiary of ALLTEL Corporation, was a shareholder of
Comdial until 1996.
NOTE 13. COMMITMENTS AND CONTINGENT LIABILITIES
Comdial's facilities are subject to a variety of federal, state, and local
environmental protection laws and regulations, including provisions relating to
the discharge of materials into the environment. The cost of compliance with
such laws and regulations has not had a material adverse effect upon Comdial's
capital expenditures, earnings or competitive position, and it is not
anticipated to have a material adverse effect in the future.
In 1988, Comdial voluntarily discontinued 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, Comdial
developed a plan of remediation that was approved by the Virginia Water Control
Board and later by the Virginia Department of Environmental Quality.
In 1994, Comdial installed all the required equipment and started the process of
pumping hydraulic oil residue from the underground water. The oil is
145
<PAGE>
deposited into approved containers and taken to a hazardous waste site in
accordance with the corrective action plan. As of December 31, 1998, Comdial has
incurred total costs of approximately $25,000 and expects the pumping process to
be completed by early 1999.
Management does not believe that contingent losses or potential claims arising
from Year 2000 issues will have a material effect on Comdial. At one time,
Comdial sold certain DOS-based systems that are not Year 2000 compliant. All
such systems were sold by Comdial substantially to dealers and not directly to
end-users. In addition, any warranties associated with such systems have
expired. Comdial has alerted all its dealers to this potential problem and has
provided instructions to the dealers on how to remedy the problem. Comdial can
not predict whether the failure of such systems that are not Year 2000 compliant
will result in any litigation against Comdial.
NOTE 14. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
In thousands except First Second Third Fourth
per share amounts Quarter Quarter Quarter Quarter
------- ------- ------- -------
1998
<S> <C> <C> <C> <C>
Sales $29,281 $31,317 $32,031 $36,348
Gross profit 11,887 12,216 13,387 15,890
Goodwill amortization 663 683 1,678 782
Interest expense 275 273 321 347
Net income 1,839 1,858 11,854 1,603
Net earnings per
common share: Basic 0.21 0.21 1.34 0.18
- --------------------------------------------------------------------------------------------------------------
1997
Sales $26,834 $29,400 $31,091 $31,236
Gross profit 11,038 11,772 12,522 12,011
Goodwill amortization 1,037 859 855 816
Interest expense 427 449 436 386
Net income 671 1,142 2,002 1,904
Net earnings per
common share: Basic 0.08 0.13 0.23 0.22
- --------------------------------------------------------------------------------------------------------------
</TABLE>
Previously reported quarterly information has been revised to reflect certain
reclassifications. These reclassifications had no effect on previously reported
consolidated net income.
In the first quarter of 1998, Comdial 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 $330,000 was recognized (see Note 7).
In the third quarter of 1998, Comdial acquired Array by borrowing funds from the
Fleet Revolver. The effect of the acquisition was a small increase in interest
expense, goodwill, in-process research and development, and additional costs
associated with the Array operations amounting to approximately $1.6 million for
the third and fourth quarters. In addition, Comdial recognized additional costs
associated with Aurora of $891,000 and write-off of excess inventory of
$700,000. Also in the third quarter, Comdial 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 $11.7 million was recognized (see Note 7).
Comdial 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 $122,000 of additional income, which is reflected in the fourth
quarter of 1998.
146
<PAGE>
In the first quarter of 1997, Comdial 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 $219,000 was recognized (see Note 7).
In the fourth quarter of 1997, Comdial revalued certain slow moving analog
inventory that resulted in an additional cost of $634,000. This additional cost
decreased gross margin from previous quarters from 40% to 38%.
147
<PAGE>
FIVE YEAR FINANCIAL DATA
SELECTED CONSOLIDATED STATEMENTS OF OPERATIONS DATA
<TABLE>
<CAPTION>
In thousands except
per share amounts 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Sales $128,977 $118,561 $102,182 $94,729 $77,077
Income before income taxes
and extraordinary item 6,417 5,868 1,291 5,535 3,730
Net income 17,154 5,719 1,809 9,869 3,225
Earnings per common share
and common equivalent share:
Basic (1) 1.94 0.66 0.21 1.27 0.38
===================================================================================================================
</TABLE>
(1) Earnings per share prior to 1995 have been restated to reflect the
onefor-three reverse stock split.
SELECTED CONSOLIDATED BALANCE SHEET DATA
<TABLE>
<CAPTION>
December 31,
In thousands 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Current assets $50,854 $37,107 $30,767 $33,740 $26,199
Total assets 108,990 79,264 74,352 56,692 42,260
Current liabilities 19,205 20,431 20,159 15,469 14,568
Long-term debt and other
long-term liabilities 26,624 13,998 15,629 6,929 6,649
Stockholders' equity 63,161 44,835 38,564 34,294 21,043
===================================================================================================================
</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 Comdial's
Common Stock, as reported by the National Association of Security Dealers
Automated Quotation System ("Nasdaq(R)"). Comdial's Common Stock is traded in
the National Market(R) of the Nasdaq under Comdial's symbol, CMDL.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1998 1997
Fiscal Quarters HIGH LOW High Low
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First Quarter 11.688 9.250 8.875 5.625
Second Quarter 13.875 10.250 8.875 5.875
Third Quarter 14.000 7.000 10.063 7.375
Fourth Quarter 9.563 7.375 13.625 9.250
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Comdial 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. Comdial was prohibited from paying
dividends due to the Loan Agreement with Fleet.
148
<PAGE>
OFFICERS
WILLIAM G. MUSTAIN
Chairman, President and Chief Executive Officer
Mr. Mustain is Chairman, President and Chief Executive Officer of Comdial. He
joined Comdial as Vice President in June 1987 and assumed his current position
in May 1989. He has served as a director of Comdial since 1989.
WILLIAM E. PORTER
Executive Vice President
Mr. Porter was elected Executive Vice President in May 1997 and is responsible
for business development and strategic planning. Mr. Porter served as a Director
of Comdial from July 1994 to April 1997. Mr. Porter resigned his position with
Comdial effective January 4, 1999.
LEIGH ALEXANDER
Senior Vice President, Marketing
Ms. Alexander was elected Senior Vice President in December 1998 and is
responsible for marketing. Prior to her appointment, Ms. Alexander was a Senior
Vice President of Paging Network, Inc., a wireless messaging and paging company.
CHRISTIAN L. BECKEN
Senior Vice President, Chief Financial Officer, Treasurer and Secretary
Mr. Becken was elected Senior Vice President and Chief Financial officer in
December 1997 and is responsible for finance. In April of 1998, the board of
directors elected him to the positions of Treasurer and Secretary. Mr.
Becken resigned his positions with Comdial effective February 10, 1999.
OVE VILLADSEN
Senior Vice President, Engineering
Mr. Villadsen was elected Vice President in May 1989 and in May of 1997 was
elected Senior Vice President. He is responsible for Comdial's product design
and engineering activities. He joined Comdial Business Communications
Corporation (CBCC), a subsidiary of Comdial, in November 1982, and between 1982
and 1989 served as Vice President of CBCC.
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 Comdial's Director of Human
Resources.
WILLIAM C. GROVER
Vice President, Sales and Services
Mr. Grover was elected a Vice President in September 1995 and is responsible for
Sales and Services. He joined Comdial in 1993 as President of Comdial Enterprise
Systems, Inc., a subsidiary of Comdial.
KEITH J. JOHNSTONE
Vice President, Operations
Mr. Johnstone was elected Vice President in May 1990 and is responsible for
Manufacturing Operations. Between 1980, when he joined Comdial, 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 of Manufacturing Operations.
149
<PAGE>
BOARD MEMBERS
WILLIAM G. MUSTAIN
Chairman
See previous page.
ROBERT P. COLLINS
Chairman of the Board of Scott Technologies
Mr. Collins retired in May 1998 as President and Chief Executive Officer of GE
Fanuc Automation, a joint venture between General Electric Co. and FANUC LTD of
Japan. He joined Comdial's board of directors in April 1998 and is a member of
the Audit Committee of the Board of Directors.
BARBARA PERRIER DREYER
Senior Vice President and Chief Financial Officer of Communications Systems
Technology Inc.
Ms. Dreyer is Senior Vice President and Chief Financial Officer
of Communications Systems Technology Inc., a company which develops wide-area
audio and data conferencing systems and software. She also serves as Treasurer
of the International Teleconferencing Association. She joined Comdial's Board of
Directors in April 1998 and is a member of the Compensation Committee of the
Board of Directors.
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. He is also a director of Tektronix, Inc. and Fred Meyer, Inc. Mr.
Gleason has served as a director of Comdial 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.
MICHAEL C. HENDERSON
Chairman of the Board of Albina Community Bancorp.
Mr. Henderson is Chairman of the Board of Albina Community Bancorp. He retired
in February, 1998 as President and Chief Executive Officer of PacifiCorp
Holdings, Inc., a PacifiCorp subsidiary which held interests in
telecommunications, energy and financial services. Mr. Henderson has served as a
director of Comdial since 1995 and is a member of the Compensation Committee 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 Corporation,
Grantham, Mayo, Van Otterloo and Company, LLC, and Cone Mills Corporation. Mr.
Rosenblum has served as a director of Comdial since 1992 and is a member of the
Audit and Nominating Committees of the Board of Directors.
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. She is also a
director of MicroAge, Inc., Arizona Public Service Company, and Microtest, Inc.
Ms. Walker has served as a director of Comdial since 1986 and is a member of the
Audit and Nominating Committees of the Board of Directors.
150
<PAGE>
TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services
New York, New York
Phone: (800) 851-9677
INDEPENDENT AUDITORS
Deloitte & Touche LLP
Richmond, Virginia
INVESTOR RELATIONS
Investor Relations
Phone: (804) 978-2200
Fax: (804) 978-2438
E-Mail: [email protected]
WORLD WIDE WEB
http://www.comdial.com
FORM 10-K
On written request, Comdial Corporation
will furnish to stockholders a copy of
its Form 10-K for the most recent year.
Address your request to Investor Relations,
Comdial Corporation, P.O. Box 7266,
Charlottesville, Virginia 22906-7266
151
EXHIBIT 10.25
SECOND AMENDMENT
TO THE
COMDIAL CORPORATION
401(k) PLAN
SECOND AMENDMENT to the Comdial Corporation 401(k) Plan, by Comdial
Corporation (the "Employer").
The Employer maintains the Comdial 401(k) Plan, originally effective as of
January 1, 1989, amended and restated effective as of January 1, 1997 (the
"Plan").
The Employer has the power to amend the Plan and now wishes to do so.
NOW, THEREFORE, the Plan is amended as follows:
I. Effective December 1, 1998, the second paragraph of the Background Section of
the Plan is amended by deleting the last sentence and replacing it with the
following:
Effective December 1, 1998, T. Rowe Price Trust Company has agreed
to serve as Trustee of the Plan.
II. Effective December 1, 1998, Section 1.2 is amended in its entirety to read
as follows:
Adjustment Date: Each December 31 and such other dates as
determined by the Plan Administrator.
III. Effective January 1, 1997, Section 1.17(a)(ii) is amended in its entirety
to read as follows:
(ii) Received Section 415 Compensation from the Employer and Related
Companies in excess of $80,000 during the preceding Plan Year and,
to the extent elected by the Employer pursuant to applicable
treasury regulations, was in the top 20% of Employees, when ranked
on the basis of Section 415 Compensation paid during the preceding
Plan Year.
IV. Effective January 1, 1997, Section 1.17(b) is amended in its entirety to
read as follows:
<PAGE>
(b) For purposes of determining the number of Employees in the top
20% of Employees described in subsection (a)(ii), the following
Employees shall be excluded:
V. Effective December 12, 1994, Section 1.18(f) is amended in its entirety to
read as follows:
(f) Notwithstanding any provisions of this Plan to the contrary,
contributions, benefits and service credit with respect to qualified
military service will be provided in accordance with the Uniformed
Services Employment and Reemployment Rights Act of 1994 ("USERRA")
and the special rules relating to veterans' reemployment rights
under USERRA pursuant to Code section 414(u).
VI. Effective January 1, 1998, Section 1.31 is amended in its entirety to read
as follows:
1.31 Section 415 Compensation: An Employee's total annual
compensation received from an Employer and Related Companies during
a Plan Year, as defined in the Treasury Regulations issued under
Code section 415. "Section 415 Compensation" includes an Employee's
wages, salaries, fees for professional services and other amounts
received for personal services actually rendered in the course of
employment with an Employer and Related Companies (including, but
not limited to, commissions paid to salesmen, compensation for
services on the basis of percentage of profits, commissions on
insurance premiums, tips and bonuses). "Section 415 Compensation"
shall include any elective deferral (as defined in Code section
402(g)(3)) and any amount contributed or deferred at the election of
the Employee that is not includible in the gross income of the
Employee by reason of Code section 125. "Section 415 Compensation"
does not include:
(i) Contributions made by an Employer or a Related Company
(other than Salary Reduction Contributions) to a plan of deferred
compensation to the extent that the contributions are not
includible in the Employee's gross income for the taxable year in
which they are contributed.
(ii) Amounts received from the exercise of a non-qualified
stock option or from restricted property.
<PAGE>
(iii) Amounts realized from the sale, exchange or other
disposition of stock acquired under a statutory stock option.
(iv) Other amounts that receive special tax benefits, such as
premiums for group term life insurance (but only to the extent that
the premiums are not includible in the gross income of the
Employee).
VII. Section 3.2 is amended by deleting the last two sentences and replacing
them with the following:
A Participant may elect to defer from 1% to 17% (in whole
percentages) of his "Salary Reduction Compensation" during a Plan
Year for purposes of making Salary Reduction Contributions. For
purposes of this Section 3.2, "Salary Reduction Compensation" shall
mean Compensation, as defined in Section 1.8, reduced by any bonus
paid to the Participant under the Comdial Cost Reduction Program or
any replacement for such program.
VIII. Effective January 1, 1995, Section 4.4(a) is amended in its entirety to
read as follows:
(a) Notwithstanding any other provisions of the plan, contributions
and other additions with respect to a Participant exceed the
limitation of Code section 415(c) if, when expressed as an Annual
Addition (within the meaning of Code section 415(c)(2)) to the
Participant's Account, such Annual Addition is greater than the
lesser of: (i) $30,000; or (ii) 25% of the Participant's 415
Compensation.
IX. Effective January 1, 1997, Section 4.8(g) is amended in its entirety to read
as follows:
(g) The leveling method of reducing an Employee's Excess
Contributions and an Employee's Aggregate Contributions means the
method of reducing the Excess Contributions and Excess Aggregate
Contributions of Highly Compensated Employees as described in Code
section 401(k)(8)(C) and 401(m)(6)(C), respectively, and the
Treasury Regulations and guidance promulgated thereunder.
X. Section 5.1(a) is amended in its entirety to read as follows:
(a) Effective January 1, 1999, subject to subsections (b) and (c)
below, for Participants who have at least one Hour of Service on or
after January 1, 1999, a Participant shall become vested in his
Employer Contributions Account according to the following schedule:
<PAGE>
Years of Service Vested Percentage
Less than 1 Year 0%
1 Year 20%
2 Years 40%
3 Years 60%
4 Years 80%
5 Years or more 100%
Participants who do not perform an Hour of Service on or after
January 1, 1999 shall become vested according to the vesting
schedule in effect on December 31, 1998.
XI. Effective January 1, 1997, Section 6.6(c) is amended in its entirety to read
as follows:
(c) Notwithstanding any provision in the Plan to the contrary, the
vested Account of a 5% Owner must begin to be distributed by the
April 1 following the calendar year in which the Participant attains
age 70 1/2. In all other cases, a Participant's Account must begin
to be distributed by no later than the April 1 following the later
of the calendar year in which the Participant (i) retires, or (ii)
attains age 70 1/2. A Participant who has attained age 70 1/2 before
January 1, 1997 shall continue to receive minimum distributions
under the provisions of Code section 401(a)(9) as in effect before
January 1, 1997 unless the Participant elects to defer distribution
of his Account until no later than April 1 following the calendar
year in which the Participant retires. The provisions of this
Section 6.6 shall be administered in accordance with applicable
Treasury Regulations and Internal Revenue Service rulings and other
releases. Distributions under this section shall be made under
uniform procedures established by the Administrator. These rules
apply notwithstanding any other provision in the Plan to the
contrary.
XII. Section 6.8(f) is deleted in its entirety.
XIII. Section 6.9(a) is amended in its entirety to read as follows:
(a) A Participant may make a withdrawal from the vested portion of
his Employer Contribution Account and Prior Plan Employee
Contribution Account as of any Adjustment Date. Notwithstanding the
preceding sentence, unless a Participant is making a withdrawal on
account of a financial hardship as described in Section 6.8(b), no
withdrawal may be made from contributions that were made to his
Employer Contribution Account: (i) during the Plan Year in which the
withdrawal request was made, or (ii) during the preceding two Plan
Years.
<PAGE>
XIV. Section 6.9(b) is amended in its entirety to read as follows:
(b) In addition to withdrawals under Section 6.8 and 6.9(a), a
Participant who has attained age 59 1/2 may make an election to
withdraw any portion of his vested Account balance in all of his
Accounts. The election must be made in writing, on the form provided
by the Plan Administrator and delivered to the Plan Administrator.
The distribution shall be made as soon as administratively
practicable after receipt of the withdrawal request.
XV. Section 6.13(b)(i) is amended by adding the following new sentence at the
end thereof:
Effective January 1, 1999, hardship withdrawals under Section 6.8(b)
are not an eligible rollover distribution.
XVI. Section 6.13(c) is amended in its entirety to read as follows:
Rollovers will be made under uniform procedures established by the
Plan Administrator.
XVII. Section 14.1(a) is amended in its entirety to read as follows:
(a) The Trustee may receive, with the consent of the Plan
Administrator, the transfer of assets previously held under a
qualified plan for the benefit of a person who is a Participant in
this Plan. The assets may be received directly from the trustee of a
qualified plan, or they may be received as a rollover contribution
from a qualified plan or from an individual retirement account. Any
plan from which assets are received must be a plan qualified under
Code Section 401 at the time of the transfer, and any rollover
individual retirement account must be an individual retirement
account within the meaning of Code Section 408 at the time of the
rollover.
XVIII. Unless otherwise provided, this Amendment shall be effective January 1,
1999.
XIX. In all respects not amended, the Plan is hereby ratified and confirmed
* * * * * *
<PAGE>
To record the adoption of the Amendment set forth above, the Employer has
caused this document to be signed on this 29th day of November, 1998.
COMDIAL CORPORATION
By: \s\ Christian L. Becken
-----------------------
Christian L. Becken
EXHIBIT 10.26
CREDIT AGREEMENT
DATED AS OF OCTOBER 22, 1998,
BY AND BETWEEN
COMDIAL CORPORATION
AND
NATIONSBANK, N.A.
<PAGE>
<TABLE>
TABLE OF CONTENTS
SECTION 1
DEFINITIONS
<S> <C> <C>
1.1 Definitions.........................................................................43
1.2 Other General Terms.................................................................18
SECTION 2
REVOLVING CREDIT FACILITY
2.1 Revolving Credit Loans..............................................................18
2.2 Optional Reduction or Termination of Commitment.....................................19
2.3 Revolving Credit Note...............................................................63
2.4 Interest Rate.......................................................................19
2.5 Notice and Manner of Borrowing......................................................20
2.6 Purpose.............................................................................64
2.7 Prepayments.........................................................................20
SECTION 3
LETTERS OF CREDIT
3.1 Letter of Credit Facility...........................................................21
3.2 Documentation.......................................................................21
3.3 Fees .............................................................................22
3.4 Reimbursement Obligations...........................................................23
3.5 Expiration of Letters of Credit.....................................................67
SECTION 4
FEES, INTEREST AND PAYMENTS
4.1 Commitment Fee......................................................................23
4.2 Unused Commitment Fee...............................................................24
4.3 Interest Rates, Payments............................................................24
4.4 Default Rate........................................................................25
4.5 Payments............................................................................26
4.6 Payment on Days Other Than Business Days............................................26
4.7 LIBOR Provisions....................................................................70
4.8 Capital Adequacy....................................................................28
4.9 Funding Losses......................................................................29
SECTION 5
REPRESENTATIONS
5.1 Subsidiaries........................................................................30
5.2 Organization and Existence..........................................................31
5.3 Authority...........................................................................31
5.4 Binding Agreements..................................................................32
5.5 Litigation..........................................................................78
<PAGE>
5.6 No Conflicting Agreements...........................................................33
5.7 Financial Condition.................................................................34
5.8 Ownership of Property...............................................................35
5.9 Intellectual Property...............................................................35
5.10 Employee Benefit Pension Plans......................................................36
5.11 Taxes .............................................................................36
5.12 Compliance with Environmental and Other Laws........................................36
5.13 Employee Relations..................................................................37
5.14 Investment Company Act; Public Utility Holding Company Act; Federal Power Act.......37
5.15 No Defaults.........................................................................38
5.16 Federal Regulations.................................................................38
5.17 Accuracy of Information.............................................................38
5.18 Year 2000 Compliance................................................................39
5.19 Survival of Representations and Warranties, Etc.....................................39
SECTION 6
CONDITIONS TO CREDIT EXTENSIONS
6.1 Conditions to Initial Credit Extensions.............................................40
6.2 Conditions to Each Credit Extension.................................................44
SECTION 7
AFFIRMATIVE COVENANTS
7.1 Financial Statements................................................................46
7.2 Inspections.........................................................................48
7.3 Year 2000 Compliance................................................................48
7.4 Taxes .............................................................................48
7.5 Payment of Obligations..............................................................49
7.6 Insurance...........................................................................49
7.7 Corporate Existence.................................................................49
7.8 Licenses and Permits................................................................49
7.9 Properties..........................................................................50
7.10 Employee Benefit Pension Plans......................................................50
7.11 Business Continuation...............................................................51
7.12 Compliance with Environmental Laws..................................................51
7.13 Compliance with Other Applicable Laws...............................................51
7.14 GAAP .............................................................................51
7.15 Additional Stock Pledges, Security Agreements and Guaranties........................51
SECTION 8
FINANCIAL COVENANTS
8.1 Funded Debt to Tangible Capital Ratio...............................................52
8.2 Funded Debt to EBITDA Ratio.........................................................53
8.3 EBITDA to Interest Expense Ratio....................................................53
<PAGE>
SECTION 9
NEGATIVE COVENANTS
9.1 Additional Borrowing................................................................53
9.2 Mortgages and Pledges...............................................................54
9.3 Merger, Consolidation, or Sale of Assets............................................55
9.4 Acquisitions........................................................................55
9.5 Contingent Liabilities..............................................................56
9.6 Loans .............................................................................56
9.7 Dissolution.........................................................................56
9.8 Conduct of Business.................................................................56
9.9 Affiliate Transactions..............................................................57
SECTION 10
EVENTS OF DEFAULT
10. Events of Default...................................................................57
SECTION 11
INDEMNIFICATION
11. Indemnification.....................................................................61
SECTION 12
MISCELLANEOUS
12.1 Costs and Expenses..................................................................62
12.2 Cumulative Rights and No Waiver.....................................................62
12.3 Independence of Covenants...........................................................62
12.4 Notices.............................................................................63
12.5 Applicable Law......................................................................64
12.6 Modifications.......................................................................64
12.7 Survivorship........................................................................64
12.8 Execution in Counterparts...........................................................65
12.9 Headings............................................................................65
12.10 Arbitration.........................................................................65
12.11 Entire Agreement....................................................................67
</TABLE>
EXHIBITS
A - Revolving Credit Note
B - Credit Line Deed of Trust
C - Security Agreement
D - Subsidiary Security Agreement
E - Pledge Agreement
F - Subsidiary Pledge Agreement
G - Guaranty Agreement
H - Commercial L/C Application
I - Standby L/C Application
J - AutoBorrow Service Agreement
<PAGE>
THIS CREDIT AGREEMENT is made as of this 22nd day of October, 1998, by
and between COMDIAL CORPORATION (the "Company"), a Delaware corporation with an
office at 1180 Seminole Trail, Charlottesville, Virginia 22901, and NATIONSBANK,
N.A. (the "Bank"), a national banking association with an office at 300 East
Main Street, Charlottesville, Virginia 22902.
The Company has requested that the Bank make available to the Company a
revolving credit facility in an aggregate principal amount not to exceed at any
time outstanding $50,000,000, the proceeds of which will be used by the Company
for working capital, to finance equipment purchases, to finance permitted
acquisitions and for other general corporate purposes (which may include the
purchase from time to time of the Company's common stock). The Company has also
requested that the Bank make available to the Company a $5,000,000 letter of
credit subfacility, pursuant to which the Bank will issue commercial and standby
letters of credit for the account of the Company as requested from time to time
by the Company. Upon the terms and subject to the conditions contained herein,
the Bank is willing to make such a revolving credit facility and letter of
credit subfacility available to the Company.
ACCORDINGLY, the Company and the Bank agree as follows:
SECTION 1
DEFINITIONS
1.1 DEFINITIONS. The following terms when used in this Agreement shall have the
meanings assigned to them below:
<PAGE>
"ADVANCE" means an advance of Revolving Credit Loans made by the Bank to
the Company under the Revolving Credit Facility as provided in Section 2.1.
"AFFILIATE" means, as to any Person, each other Person that directly or
indirectly (through one or more intermediaries or otherwise) controls, is
controlled by or is under common control with such Person. The term "control"
means (i) the power to vote twenty percent (20%) or more of the securities or
other equity interests of a Person having ordinary voting power, or (ii) the
possession, directly or indirectly, of any other power to direct or cause the
direction of the management and policies of a Person, whether through ownership
of voting securities, by contract or otherwise.
"AGREEMENT" means this Credit Agreement as amended, restated or
otherwise modified.
"APPLICABLE MARGIN" (i) means .75% through and including the first day
of the month following receipt by the Bank of consolidated financial statements
of the Company and its Subsidiaries pursuant to Section 7.1(a) as of and for the
period ending September 30, 1998, and (ii) thereafter will be determined by
reference to the Funded Debt to EBITDA Ratio in accordance with the following
table:
<PAGE>
Funded Debt to EBITDA Ratio Applicable Margin
Lower than 1.5 to 1 .75%
1.5 to 1 or higher but 1.0%
lower than 2.0 to 1
2.0 to 1 or higher but 1.25%
lower than 2.5 to 1
2.5 to 1 or higher 1.50%
The Applicable Margin will be automatically adjusted as of the first day of the
month following receipt by the Bank of consolidated financial statements of the
Company and its Subsidiaries pursuant to Section 7.1(a) or Section 7.1(b)
demonstrating to the Bank's reasonable satisfaction that there has been a change
in the Funded Debt to EBITDA Ratio which would cause a change in the Applicable
Margin in accordance with the preceding table. Any such change will apply to the
Revolving Credit Loans outstanding on such effective date or made on or after
such date.
"AUTOBORROW SERVICE AGREEMENT" means an AutoBorrow Service Agreement
between the Company and the Bank substantially in the form of Exhibit J attached
hereto with the blanks therein appropriately completed.
"BANK" means NationsBank, N.A., a national banking association, and its
successors.
"BUSINESS DAY" means (i) for all purposes other than as set forth in
clause (ii) below, any day, other than a Saturday, Sunday or legal holiday, on
which banks in Charlottesville, Virginia are open for the conduct of their
commercial banking business, and (ii) with respect to all notices and
determinations in connection with, and payments of principal and interest on,
the Revolving Credit Loans while they are bearing interest at a rate based on
LIBOR, any day that is a Business Day described in clause (i) and that is also a
day for trading by and between banks in U.S. dollar deposits in the London
interbank market.
<PAGE>
"CAPITAL LEASE" means any lease which, in accordance with GAAP, should
be capitalized on the balance sheet of the lessee.
"CAPITAL LEASE OBLIGATIONS" means the aggregate amount which, in
accordance with GAAP, should be reported as a liability on the balance sheet of
a Person with respect to Capital Leases.
"CLOSING DATE" means the date the initial Advance under the Revolving
Credit Facility is made.
"CODE" means the Internal Revenue Code of 1986, as amended from time to
time, and any successor statute, including the rules or regulations promulgated
thereunder, in each case as in effect from time to time. References to sections
of the Code shall be construed to also refer to any successor sections.
"COMMERCIAL L/C APPLICATION" shall have the meaning assigned thereto in
Section 3.2(a).
"COMPANY" means Comdial Corporation, a Delaware corporation, in its
capacity as borrower hereunder.
"CONSOLIDATED EBITDA" means, for any period and without duplication, the
sum of (i) Consolidated Net Income for such period, (ii) the aggregate amount
deducted in determining Consolidated Net Income for such period with respect to
interest, taxes, depreciation and amortization, and (iii) the aggregate amount
deducted in determining Consolidated Net Income for such period with respect to
extraordinary losses and other non-cash items which decreased Consolidated Net
Income for such period, minus the aggregate amount of extraordinary gains
included in Consolidated Net Income for such period and minus the aggregate
amount of other non-cash items which increased Consolidated Net Income for such
period.
<PAGE>
"CONSOLIDATED FUNDED DEBT" means, at any date and without duplication,
the sum of (i) all indebtedness for borrowed money of the Company and its
Subsidiaries, including, without limitation, all indebtedness of the Company and
its Subsidiaries evidenced by bonds, debentures, notes and other similar
instruments, (ii) all obligations of the Company and its Subsidiaries to pay the
deferred purchase price of property or services, other than trade payables
arising in the ordinary course of business, (iii) all Capital Lease Obligations
of the Company and its Subsidiaries and (iv) all indebtedness of any other
Person secured by any security interest or other lien on any asset of the
Company or any of its Subsidiaries or guaranteed by the Company or any of its
Subsidiaries.
"CONSOLIDATED INTEREST EXPENSE" means, for any period, the consolidated
interest expense of the Company and its Subsidiaries (including, without
limitation, the portion of any obligations under Capital Leases allocable to
interest expense) determined in accordance with GAAP for such period.
"CONSOLIDATED NET INCOME" means, for any period, the consolidated net
income of the Company and its Subsidiaries determined in accordance with GAAP
for such period.
<PAGE>
"CONSOLIDATED NET WORTH" means, at any date, the amount by which the
consolidated total assets of the Company and its Subsidiaries exceeds the
consolidated total liabilities of the Company and its Subsidiaries.
"CONSOLIDATED TOTAL CAPITAL" means, at any date, the sum of Consolidated
Net Worth and Consolidated Funded Debt.
"CONTRACT LIBOR RATE" means, for the applicable Interest Period, the
rate of interest (rounded upwards, if necessary, to the nearest 1/100 of 1%)
appearing on Telerate Page 3750 (or any successor page) as the one-month or
three-month, as applicable, London interbank offered rate for deposits in
Dollars at approximately 11:00 a.m. (London time) on the second Business Day
preceding the first day of such Interest Period, as adjusted from time to time
in the Bank's sole discretion (for its customers with loans bearing interest
based on a similar LIBOR rate generally) for then applicable reserve
requirements, deposit insurance assessment rates and other regulatory costs. If
for any reason such rate is not available, the term "Contract LIBOR Rate" means,
for the applicable Interest Period, the rate of interest equal to the one-month
or three-month, as applicable, rate of interest (rounded upwards, if necessary,
to the nearest 1/100 of 1%) appearing on Reuters Screen LIBO Page as the
one-month or three-month, as applicable, London interbank offered rate for
deposits in Dollars at approximately 11:00 a.m. (London time) on the second
Business Day preceding the first day of such Interest Period, as adjusted from
time to time in the Bank's sole discretion (for its customers with loans bearing
interest based on a similar LIBOR rate generally) for then applicable reserve
requirements, deposit insurance assessment rates and other regulatory costs;
provided that if more than one rate is specified on Reuters Screen LIBO Page,
the applicable rate will be the arithmetic mean of all such rates.
<PAGE>
"DEED OF TRUST" means the Credit Line Deed of Trust dated October 22,
1998, between Comdial Business Communications Corporation as grantor and Robert
K. Blake and Bryan F. English as trustees, substantially in the form of Exhibit
B attached hereto with the blanks therein appropriately completed, pursuant to
which Comdial Business Communications Corporation has granted the Bank a lien on
the Virginia Property to secure all obligations of the Company to the Bank up to
a maximum amount secured of $10,000,000.
"DEFAULT" means any event, act or condition which, with the giving of
notice or lapse of time, or both, would constitute an Event of Default.
"DEFAULT RATE" means (i) with respect to any Revolving Credit Loans
bearing interest based on a Contract LIBOR Rate at the time the applicable Event
of Default occurs, four and three-quarters percent (4-3/4%) in excess of the
applicable Contract LIBOR Rate as it exists from time to time, with such rate to
change as of the first day of each subsequent Interest Period, and (ii) with
respect to any Revolving Credit Loans bearing interest based on the LIBOR Daily
Floating Rate or the Prime Rate at the time the applicable Event of Default
occurs, two percent (2%) in excess of the Prime Rate, with such rate to change
as of the date of each change in the Prime Rate.
"DOLLARS" OR "$" means, unless otherwise qualified, dollars in lawful
currency of the United States.
<PAGE>
"EBITDA TO INTEREST EXPENSE RATIO" means the ratio of Consolidated
EBITDA for the four-quarter period ending on the date of measurement to
Consolidated Interest Expense for such four-quarter period; provided, however,
that, in determining the EBITDA to Interest Expense Ratio for the four-quarter
periods ending on September 30, 1998, December 31, 1998, March 31, 1999, and
June 30, 1999, up to $5,000,000 of any charge taken by the Company with respect
to the writeoff of research and development expenses associated with the
acquisition of assets by Array Telecom Corporation from Array Telecom Inc. and
Array Systems Computing Inc. will be added back to Consolidated Net Income in
the calculation of Consolidated EBITDA for each such four-quarter period.
"ENVIRONMENTAL LAWS" means any and all federal, state and local laws,
statutes, ordinances, rules, regulations, permits, licenses, approvals and
orders of courts or Governmental Authorities, relating to the protection of
human health or the environment, including, but not limited to, requirements
pertaining to the manufacture, processing, distribution, use, treatment,
storage, disposal, transportation, handling, reporting, licensing, permitting,
investigation or remediation of Hazardous Materials.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, and any successor statute, including the rules and
regulations promulgated thereunder, in each case as in effect from time to time.
References to sections of ERISA will be construed to also refer to any successor
sections.
"EVENT OF DEFAULT" shall have the meaning assigned thereto in Section
10.
<PAGE>
"FLORIDA PROPERTY" means the real property owned by KVT and located at
1919 Ivanhoe Street, Sarasota, Florida 34231 together with all improvements
thereon and appurtenances thereto.
"FUNDED DEBT TO EBITDA RATIO" means the ratio of Consolidated Funded
Debt as of the date of measurement to Consolidated EBITDA for the four-quarter
period ending on such date; provided, however, that, in determining the Funded
Debt to EBITDA Ratio as of the end of the four-quarter periods ending on
September 30, 1998, December 31, 1998, March 31, 1999, and June 30, 1999, up to
$5,000,000 of any charge taken by the Company with respect to the writeoff of
research and development expenses associated with the acquisition of assets by
Array Telecom Corporation from Array Telecom Inc. and Array Systems Computing
Inc. will be added back to Consolidated Net Income in the calculation of
Consolidated EBITDA for each such four-quarter period.
"FUNDED DEBT TO TOTAL CAPITAL RATIO" means the ratio of Consolidated
Funded Debt as of the date of measurement to Consolidated Total Capital as of
such date.
"GAAP" means generally accepted accounting principles, as recognized
from time to time by the Accounting Principles Board of the American Institute
of Certified Public Accountants and the Financial Accounting Standards Board,
consistently applied and maintained on a consistent basis for the Company and
its Subsidiaries throughout the period indicated and consistent with the prior
financial practice of the Company and its Subsidiaries.
<PAGE>
"GOVERNMENTAL AUTHORITY" means any government or political subdivision
or any court, agency, authority, department, commission, board, bureau or
instrumentality thereof.
"GUARANTIES" means the Guaranty Agreements, each dated October 22, 1998,
and each substantially in the form of Exhibit G attached hereto with the blanks
therein appropriately completed, pursuant to which the Guarantors have
unconditionally guaranteed all obligations of the Company to the Bank.
"GUARANTORS" means Comdial Telecommunications, Inc., Comdial Business
Communications Corporation, Comdial Enterprise Systems, Inc., KVT, Aurora
Systems, Inc., Array Telecom Corporation, American Phone Centers, Inc., Comdial
Telecommunications International, Inc. and each other Subsidiary of the Company
which hereafter becomes a Material Subsidiary and executes and delivers a
Guaranty to the Bank pursuant to Section 7.15.
"HAZARDOUS MATERIALS" means any substances or materials (i) which are or
become defined as hazardous wastes, hazardous substances, pollutants,
contaminants or toxic substances under any applicable Environmental Law, (ii)
which are toxic, explosive, corrosive, flammable, infectious, radioactive,
carcinogenic, mutagenic or otherwise harmful to human health or the environment
and are or become regulated by any Governmental Authority, (iii) the presence of
which require investigation or remediation under any applicable Environmental
Law, (iv) the discharge or emission or release of which requires a permit or
license under any applicable Environmental Law, (v) which are found by a court
of competent jurisdiction to constitute a nuisance or a trespass to neighboring
properties or found by any Governmental Authority of competent jurisdiction to
pose a health or safety hazard to persons, (vi) which consist of underground or
aboveground storage tanks, whether empty, filled or partially filled with any
substance of the type listed in any other part of this definition, or (vii)
which contain asbestos, polychlorinated biphenyls, urea formaldehyde foam
insulation, petroleum hydrocarbons, petroleum derived substances or waste, crude
oil, nuclear fuel, natural gas or synthetic gas in percentages or at levels
which make them subject to applicable Environmental Laws.
<PAGE>
"HEDGING AGREEMENT" means any agreement with respect to an interest rate
swap, collar, cap, floor or a forward rate agreement or other agreement
regarding the hedging of interest rate risk exposure executed in connection with
hedging the interest rate exposure of the Company under this Agreement, and any
confirming letter executed pursuant to such hedging agreement, all as amended or
modified from time to time.
"HEDGING EXPOSURE" means the maximum potential exposure of the Bank and
its Affiliates, determined by the Bank using any reasonable method, under all
Hedging Agreements and foreign exchange agreements between the Company and the
Bank or the Company and an Affiliate of the Bank.
"INTEREST PERIOD" means, with respect to any portion of the Revolving
Credit Loans bearing interest at a rate based on a Contract LIBOR Rate,
successive interest periods of one or three months (at the option of the
Company), with the first such interest period beginning on the date a Contract
LIBOR Rate becomes effective and ending one month or three months thereafter (at
the option of the Company) and with each subsequent such interest period
beginning on the last day of the preceding interest period and ending one month
or three months thereafter (at the option of the Company); provided that (i) any
applicable Interest Period which would otherwise end on a day which is not a
Business Day shall be extended to the next succeeding Business Day unless such
Business Day falls in another calendar month, in which case such Interest Period
shall end on the preceding Business Day, (ii) any applicable Interest Period
which begins on a day for which there is no numerically corresponding day in the
calendar month during which such Interest Period is to end shall (subject to
clause (i) hereof) end on the last day of such calendar month, and (iii) no
Interest Period shall extend beyond the Revolving Credit Termination Date. There
will be no more than two (2) Interest Periods in effect with respect to the
Revolving Credit Loans at any one time.
<PAGE>
"KVT" means Key Voice Technologies, Inc., a Delaware corporation and
wholly-owned Subsidiary of the Company.
"L/C APPLICATION" means a Commercial L/C Application or a Standby L/C
Application.
"L/C FEE" means one and one-half percent (1-1/2%) per annum.
"L/C OBLIGATIONS" means, at any time, an amount equal to the sum of (i)
the aggregate undrawn and unexpired amount of the then outstanding Letters of
Credit, and (ii) the aggregate amount of drawings under Letters of Credit which
have not then been reimbursed pursuant to Section 3.4.
"LETTERS OF CREDIT" shall have the meaning assigned thereto in Section
3.1.
"LIBOR" means the LIBOR Daily Floating Rate and/or the applicable
Contract LIBOR Rate, as the context may indicate.
<PAGE>
"LIBOR DAILY FLOATING RATE" means, for any day, the rate of interest
(rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on
Telerate Page 3750 (or any successor page) as the one-month London interbank
offered rate for deposits in Dollars at approximately 11:00 a.m. (London time)
on such day (or, if such day is not a Business Day, on the preceding Business
Day), as adjusted from time to time in the Bank's sole discretion (for its
customers with loans bearing interest based on the LIBOR Daily Floating Rate
generally) for then applicable reserve requirements, deposit insurance
assessment rates and other regulatory costs. If for any reason such rate is not
available, the term "LIBOR Daily Floating Rate" means, for any day, the rate of
interest equal to the one-month rate of interest (rounded upwards, if necessary,
to the nearest 1/100 of 1%) appearing on Reuters Screen LIBO Page as the
one-month London interbank offered rate for deposits in Dollars at approximately
11:00 a.m. (London time) on such day (or, if such day is not a Business Day, on
the preceding Business Day), as adjusted from time to time in the Bank's sole
discretion (for its customers with loans bearing interest based on the LIBOR
Daily Floating Rate generally) for then applicable reserve requirements, deposit
insurance assessment rates and other regulatory costs; provided that if more
than one rate is specified on Reuters Screen LIBO Page, the applicable rate will
be the arithmetic mean of all such rates.
"LOAN DOCUMENTS" means this Agreement, the Revolving Credit Note, the
Deed of Trust, the Security Agreement, the Subsidiary Security Agreements, the
Pledge Agreement, the Subsidiary Pledge Agreement, the Guaranties, the L/C
Applications, any AutoBorrow Service Agreement in effect and each other
document, agreement and instrument executed and delivered by the Company or any
of its Subsidiaries in connection with this Agreement or otherwise referred to
herein or contemplated hereby, all as they may be amended, restated or otherwise
modified.
<PAGE>
"MATERIAL ADVERSE EFFECT" means a material adverse effect upon (i) the
business, assets, properties, liabilities, condition (financial or otherwise),
results of operations or business prospects of the Company or the Company and
its Subsidiaries taken as a whole, (ii) the ability of the Company to perform
any obligation under this Agreement or any other Loan Document to which it is a
party, (iii) the legality, validity, binding effect or enforceability of any
Loan Document, or (iv) the ability of the Bank to enforce any material rights or
remedies under or in connection with any Loan Document.
"MATERIAL SUBSIDIARY" means Comdial Telecommunications, Inc., Comdial
Business Communications Corporation, Comdial Enterprise Systems, Inc., KVT,
Aurora Systems, Inc., Array Telecom Corporation, American Phone Centers, Inc.,
Comdial Telecommunications International, Inc. and any other Subsidiary now
owned or hereafter acquired by the Company which now or hereafter has total
assets (determined in accordance with GAAP) which exceed $1,000,000.
"PBGC" means the Pension Benefit Guaranty Corporation as created under
ERISA, or any successor thereto under ERISA.
"PERSON" means an individual, corporation, limited liability company,
partnership, association, trust, business trust, joint venture, joint stock
company, pool, syndicate, sole proprietorship, unincorporated organization,
Governmental Authority or any other form of entity or group thereof.
<PAGE>
"PLEDGE AGREEMENT" means the Pledge Agreement dated October 22, 1998,
between the Company and the Bank, substantially in the form of Exhibit E
attached hereto with the blanks therein appropriately completed, pursuant to
which the Company has pledged to the Bank the capital stock of each Material
Subsidiary existing as of the Closing Date (other than Comdial Business
Communications Corporation) to secure all obligations of the Company to the
Bank.
"PRIME RATE" means the rate which the Bank establishes from time to time
as its prime rate, with any change of interest resulting from a change in the
Prime Rate being effective on the effective date of each change therein. The
Company acknowledges and agrees that the Prime Rate is a reference used in
determining interest rates on certain loans by the Bank and is not intended to
be the lowest rate of interest charged on any extension of credit to any
customer.
"REGULATION D" means Regulation D of the Board of Governors of the
Federal Reserve System of the United States, as it may be amended from time to
time.
"REGULATION U" means Regulation U of the Board of Governors of the
Federal Reserve System of the United States, as it may be amended from time to
time.
"REVOLVING CREDIT FACILITY" means the revolving credit facility
established pursuant to Section 2.
"REVOLVING CREDIT COMMITMENT" means Fifty Million Dollars ($50,000,000),
as such commitment may be reduced from time to time pursuant to Section 2.2.
<PAGE>
"REVOLVING CREDIT LOANS" shall have the meaning assigned thereto in
Section 2.1.
"REVOLVING CREDIT NOTE" shall have the meaning assigned thereto in
Section 2.3.
"REVOLVING CREDIT TERMINATION DATE" means the earlier to occur of (i)
August 31, 2003, and (ii) the date on which the Revolving Credit Commitment is
terminated pursuant to Section 2.2 or Section 10.
"SEC" means the Securities and Exchange Commission and any successor
thereto.
"SECURITY AGREEMENT" means the Security Agreement dated October 22,
1998, between the Company and the Bank, substantially in the form of Exhibit C
attached hereto with the blanks therein appropriately completed, pursuant to
which the Company has granted the Bank a security interest in all of the
Company's accounts, inventory, equipment, general intangibles and other personal
property to secure all obligations of the Company to the Bank.
"STANDBY L/C APPLICATION" shall have the meaning assigned thereto in
Section 3.2(b).
"SUBSIDIARY" means, as to any Person, any corporation, partnership,
limited liability company or other entity of which more than fifty percent (50%)
of the outstanding capital stock or other ownership interests having ordinary
voting power to elect a majority of the board of directors or other managers of
such corporation, partnership, limited liability company or other entity is at
the time, directly or indirectly, owned by such Person (irrespective of whether,
at the time, capital stock or other ownership interests of any other class or
classes of such corporation or other entity shall have or might have voting
power by reason of the happening of any contingency). Unless otherwise
qualified, references to "Subsidiary" or "Subsidiaries" herein shall refer to
those of the Company.
<PAGE>
"SUBSIDIARY PLEDGE AGREEMENT" means the Subsidiary Pledge Agreement
dated October 22, 1998, between Comdial Telecommunications, Inc. and the Bank,
substantially in the form of Exhibit F attached hereto with the blanks therein
appropriately completed, pursuant to which Comdial Telecommunications, Inc. has
pledged to the Bank the capital stock of Comdial Business Communications
Corporation to secure all obligations of the Company to the Bank.
"SUBSIDIARY SECURITY AGREEMENTS" means the Subsidiary Security
Agreements, each dated October 22, 1998, and each substantially in the form of
Exhibit D attached hereto with the blanks therein appropriately completed,
pursuant to which each Material Subsidiary existing as of the Closing Date has
granted the Bank a security interest in such Material Subsidiary's accounts,
inventory, equipment, general intangibles and other personal property to secure
all obligations of the Company to the Bank.
"UNUSED COMMITMENT FEE PERCENTAGE" (i) means .125% through and including
the first day of the month following receipt by the Bank of consolidated
financial statements of the Company and its Subsidiaries pursuant to Section
7.1(a) as of and for the period ending September 30, 1998, and (ii) thereafter
will be determined by reference to the Funded Debt to EBITDA Ratio in accordance
with the following table:
<PAGE>
Unused Commitment
Funded Debt to EBITDA Ratio Fee Percentage
Lower than 1.5 to 1 .125%
1.5 to 1 or higher but .15%
lower than 2.0 to 1
2.0 to 1 or higher but .175%
lower than 2.5 to 1
2.5 to 1 or higher .20%
The Unused Commitment Fee Percentage will be automatically adjusted as of the
first day of the month following receipt by the Bank of consolidated financial
statements of the Company and its Subsidiaries pursuant to Section 7.1(a) or
Section 7.1(b) demonstrating to the Bank's reasonable satisfaction that there
has been a change in the Funded Debt to EBITDA Ratio which would cause a change
in the Unused Commitment Fee Percentage in accordance with the preceding table.
Except as otherwise provided in Section 4.2(b), at all times after and during
the continuance of a Default or an Event of Default, the Unused Commitment Fee
Percentage will be .25%.
"VIRGINIA PROPERTY" means the real property owned by Comdial Business
Communications Corporation and located at 1180 Seminole Trail, Charlottesville,
Virginia 22901, together with all improvements thereon and appurtenances
thereto.
"WRITTEN" or "IN WRITING" means any form of written communication,
including communication by means of telefacsimile, telex, telecopier, telegraph
or cable.
<PAGE>
1.2 OTHER GENERAL TERMS.
(A) SECTION REFERENCES, ETC. Unless otherwise specified, a reference in this
Agreement to a particular section, subsection, schedule or exhibit is a
reference to that section, subsection, schedule or exhibit of this Agreement.
Wherever from the context it appears appropriate, each term stated in either the
singular or the plural will include the singular and plural.
(B) DEFINED TERMS. Unless otherwise defined herein, all capitalized terms
defined in this Agreement will have the defined meanings when used in this
Agreement, the Revolving Credit Note, the other Loan Documents or any
certificate, report or other document made or delivered pursuant to this
Agreement.
(C) OTHER REFERENCES. The words "hereof," "herein," and "hereunder" and words of
similar import when used in this Agreement shall refer to this Agreement as a
whole and not to any particular provision of this Agreement.
(D) ACCOUNTING TERMS. Except as otherwise expressly provided herein, all
accounting terms not specifically defined or specified herein shall have the
meanings generally attributed to such terms under GAAP.
SECTION 2
REVOLVING CREDIT FACILITY
2.1 REVOLVING CREDIT LOANS. Upon the terms and subject to the conditions
contained in this Agreement, the Bank agrees to make loans (herein referred to
collectively as the "Revolving Credit Loans") to the Company from time to time
during the period from the date of this Agreement until the Revolving Credit
Termination Date; provided that the aggregate principal amount of all
outstanding Revolving Credit Loans does not at any time exceed the Revolving
Credit Commitment minus the sum of the L/C Obligations and the Hedging Exposure.
<PAGE>
2.2 OPTIONAL REDUCTION OR TERMINATION OF COMMITMENT. The Company may at any time
and from time to time upon at least three (3) Business Days' prior notice to the
Bank reduce or terminate in its entirety the Revolving Credit Commitment,
without penalty or premium except as provided in Section 4.9; provided that the
aggregate amount of any such reduction shall be in the amount of One Million
Dollars ($1,000,000) or an integral multiple of One Million Dollars ($1,000,000)
in excess thereof. Such notice of reduction may be in writing or by telephone if
promptly confirmed in writing. From the effective date of any such reduction or
termination, the obligations of the Company to pay the unused commitment fee
under Section 4.2 will thereupon correspondingly be reduced or cease.
2.3 REVOLVING CREDIT NOTE. The obligation of the Company to repay the Revolving
Credit Loans will be evidenced by the Company's promissory note (the "Revolving
Credit Note") payable to the order of the Bank at its office at 300 East Main
Street, Charlottesville, Virginia 22902, or such other place as the holder may
from time to time designate, in substantially the form of Exhibit A attached
hereto with the blanks therein appropriately completed, dated as of the date of
the initial Revolving Credit Loan and payable on the Revolving Credit
Termination Date, on which date the entire unpaid principal balance of the
Revolving Credit Loans and all interest accrued thereon will be due and payable
in full.
<PAGE>
2.4 INTEREST RATE. The outstanding principal amount of the Revolving Credit
Loans as it exists from time to time will bear interest, and accrued interest
will be due and payable, as provided in Section 4.
2.5 NOTICE AND MANNER OF BORROWING. Unless there is an AutoBorrow Service
Agreement in effect between the Company and the Bank (in which case it will
govern the mechanics of Advances under the Revolving Credit Facility), the
Company will give the Bank notice of each Advance under the Revolving Credit
Commitment (which notice may be in writing or by telephone if promptly confirmed
in writing), not later than 12:00 noon (Eastern time) on the date of such
Advance. Each such notice of borrowing shall specify the requested funding date
(which shall be a Business Day) and the amount of the proposed Advance. On the
borrowing date specified in such notice, the Bank shall make the Advance by
crediting the amount thereof to the general deposit account of the Company
maintained with the Bank or as otherwise directed by the Company.
2.6 PURPOSE. The Company will use the proceeds of Advances under the Revolving
Credit Facility for working capital, to finance equipment purchases, to finance
permitted acquisitions and for other general corporate purposes (which may
include the purchase from time to time of the Company's common stock).
2.7 PREPAYMENTS.
(A) MANDATORY. If, at any time, the aggregate principal amount of all
outstanding Revolving Credit Loans exceeds the Revolving Credit Commitment minus
the sum of the L/C Obligations and the Hedging Exposure, the Company will
immediately prepay the Revolving Credit Loans in an amount sufficient to
eliminate such excess and pay the Bank any amount due under Section 4.9 in
connection therewith.
<PAGE>
(B) VOLUNTARY. The Company may prepay all or any part of the Revolving Credit
Loans at any time and from time to time without premium or penalty except as
provided in Section 4.9.
SECTION 3
LETTERS OF CREDIT
3.1 LETTER OF CREDIT FACILITY. Upon the terms and subject to the conditions
contained in this Agreement and in the applicable L/C Applications, the Bank
agrees to issue irrevocable letters of credit (herein referred to collectively
as the "Letters of Credit") for the account of the Company or any Material
Subsidiary from time to time during the period from the date of this Agreement
through but excluding the Revolving Credit Termination Date, in an aggregate
stated amount which, when added to the aggregate unpaid reimbursement
obligations under the L/C Applications, will not exceed at any time outstanding
the lesser of (i) $5,000,000, and (ii) the Revolving Credit Commitment minus the
sum of the aggregate principal amount of all outstanding Revolving Credit Loans
and the Hedging Exposure.
3.2 DOCUMENTATION.
(A) COMMERCIAL LETTERS OF CREDIT. Not less than three (3) Business Days
prior to the date a commercial Letter of Credit is to be issued for its account,
the Company (and the applicable Material Subsidiary, if applicable) will
complete, execute and deliver to the Bank an Application and Agreement for
Commercial Letter of Credit (each, a "Commercial L/C Application"), each
substantially in the form of Exhibit H attached hereto with the blanks therein
appropriately completed, and such other documents as the Bank may reasonably
require in connection therewith. Each commercial Letter of Credit issued by the
Bank will be subject to the terms and conditions of the Commercial L/C
Application pursuant to which it is issued as well as the terms and conditions
of this Agreement. In the event of a conflict between the provisions of a
Commercial L/C Application and the provisions of this Agreement, the provisions
of this Agreement will govern.
<PAGE>
(B) STANDBY LETTERS OF CREDIT. Not less than five (5) Business Days
prior to the date a standby Letter of Credit is to be issued for its account,
the Company (and the applicable Material Subsidiary, if applicable) will
complete, execute and deliver to the Bank an Application and Agreement for
Standby Letter of Credit (each, a "Standby L/C Application"), each substantially
in the form of Exhibit I attached hereto with the blanks therein appropriately
completed, and such other documents as the Bank may reasonably require in
connection therewith. Each standby Letter of Credit issued by the Bank will be
subject to the terms and conditions of the Standby L/C Application pursuant to
which it is issued as well as the terms and conditions of this Agreement. In the
event of a conflict between the provisions of the Standby L/C Application and
the provisions of this Agreement, the provisions of this Agreement will govern.
3.3 FEES. For each Letter of Credit issued under the terms of this Agreement,
the Company will pay or cause the applicable Material Subsidiary to pay to the
Bank at the time of issuance a fee computed on the amount of such Letter of
Credit at the rate equal to the applicable L/C Fee. Such fee will be fully
earned at the time such Letter of Credit is issued and nonrefundable. The
Company will also pay or cause the applicable Material Subsidiary to pay the
Bank when due its customary administrative fees as they may be established or
altered from time to time for issuing Letters of Credit and for honoring drafts
thereunder and, if applicable, for transferring, amending or extending such
Letters of Credit. Nothing contained herein, however, shall obligate the Bank to
transfer, amend or extend beyond its original maturity date any Letter of
Credit.
<PAGE>
3.4 REIMBURSEMENT OBLIGATIONS. The Company will pay or cause the applicable
Material Subsidiary to pay to the Bank promptly upon demand any and all amounts
paid by the Bank under any Letter of Credit, as provided in the applicable L/C
Application, together with interest on such amount from the date such amount was
paid by the Bank to the date it receives payment in federal or other immediately
available funds at the LIBOR Daily Floating Rate plus the Applicable Margin,
with such rate to be reset on each day on which there is a change to the LIBOR
Daily Floating Rate and on the effective date of each change in the Applicable
Margin. Such interest shall be computed for the actual number of days elapsed
over a year of 360 days.
3.5 EXPIRATION OF LETTERS OF CREDIT. Unless the Bank shall otherwise agree, each
commercial Letter of Credit issued under the provisions of this Agreement shall
expire not later than six (6) months after its date of issuance, each standby
Letter of Credit issued under the provisions of this Agreement shall expire not
later than one (1) year after its date of issuance and in any event all Letters
of Credit shall expire on or before August 31, 2003.
<PAGE>
SECTION 4
FEES, INTEREST AND PAYMENTS
4.1 COMMITMENT FEE. The Company will pay to the Bank, on or before the Closing
Date, a commitment fee with respect to the Revolving Credit Facility equal to
Fifty Thousand Dollars ($50,000.00), which commitment fee will be fully earned
and non-refundable once paid.
4.2 UNUSED COMMITMENT FEE. (a) The Company will also pay to the Bank, on
December 31, 1998, and quarterly in arrears thereafter on the last day of each
calendar quarter occurring prior to the Revolving Credit Termination Date and on
the Revolving Credit Termination Date, an unused commitment fee with respect to
the Revolving Credit Facility. Each installment of such unused commitment fee
will be equal to the product of (i) the Unused Commitment Fee Percentage in
effect on the date such installment is due, multiplied by (ii) the daily average
amount during the immediately preceding fiscal quarter or other applicable
period by which (x) the Revolving Credit Commitment exceeded (y) the sum of the
aggregate principal amount of all outstanding Revolving Credit Loans and the L/C
Obligations, multiplied by (iii) a fraction, the numerator of which is the
number of days in the immediately preceding fiscal quarter or other applicable
period and the denominator of which is 360.
(b) In the event that (i) an Event of Default has occurred and is continuing,
(ii) the outstanding Revolving Credit Loans are bearing interest at the Default
Rate, and (iii) as a result of such Event of Default and/or the Bank's actions
in response thereto, the Bank is not required to maintain any capital or other
reserves in connection with the unfunded portion of the Revolving Credit
Facility, the Company will not be required to pay an unused commitment fee
hereunder with respect to any period during which the conditions specified in
clauses (i), (ii) and (iii) above are true.
<PAGE>
4.3 INTEREST RATES, PAYMENTS. (a) Except as provided in Section 4.3(b), the
outstanding principal amount of the Revolving Credit Loans as it exists from
time to time will bear interest at an annual rate equal to the LIBOR Daily
Floating Rate plus the Applicable Margin, with such rate to be initially set by
the Bank on the Closing Date and with such rate to be reset on each day on which
there is a change to the LIBOR Daily Floating Rate and on the effective date of
each change in the Applicable Margin.
(b) In the event that the Company and the Bank (or an Affiliate of the Bank)
enter into a Hedging Agreement covering the Revolving Credit Facility or any
portion thereof, from and including the effective date of the transaction
described in the Hedging Agreement, the portion of the outstanding principal
amount of the Revolving Credit Loans which corresponds to the amount of the
Revolving Credit Commitment covered by such Hedging Agreement will bear interest
at an annual rate equal to the applicable Contract LIBOR Rate plus the
Applicable Margin, with such rate to be initially set by the Bank on the
effective date of the transaction described in the Hedging Agreement and with
such rate to be reset as of the first day of each subsequent Interest Period and
on the effective date of each change in the Applicable Margin.
(c) Interest on the Revolving Credit Loans will be computed on the basis of the
actual number of days elapsed over a year of 360 days. Accrued interest on the
Revolving Credit Loans bearing interest based on the LIBOR Daily Floating Rate
or the Prime Rate will be due and payable on the first day of each month, when
the Revolving Credit Loans are paid in full, and on the Revolving Credit
Termination Date; and accrued interest on the Revolving Credit Loans bearing
interest based on a Contract LIBOR Rate will be due and payable on the last day
of each Interest Period, when the Revolving Credit Loans are paid in full and on
the Revolving Credit Termination Date.
<PAGE>
4.4 DEFAULT RATE. Upon the occurrence and during the continuance of an Event of
Default, at the discretion of the Bank, the Revolving Credit Loans will bear
interest at the Default Rate, with such Default Rate to be effective on the
first date as of which the applicable Event of Default occurs notwithstanding
the fact that such Event of Default may not be reported or otherwise discovered
until a subsequent date.
4.5 PAYMENTS. The disbursement of the Revolving Credit Loans hereunder and each
payment of the principal of and interest on the Revolving Credit Note shall be
made in federal or other immediately available funds. For purposes of this
provision, collected funds on deposit with the Bank are immediately available
funds.
4.6 PAYMENT ON DAYS OTHER THAN BUSINESS DAYS. Whenever any payment to be made
hereunder or under the Revolving Note shall be stated to be due on a day other
than a Business Day, such payment may be made on the next succeeding Business
Day, and such extension of time shall in such case be included in the
computation of interest to be paid on such date.
<PAGE>
4.7 LIBOR PROVISIONS.
(A) INCREASED COSTS. If either (i) the introduction of or any change by
any central bank or other Governmental Authority (whether or not having the
force of law) (including, without limitation, any change by way of imposition or
increase of reserve requirements other than those included in the computation of
LIBOR but excluding any income tax on the overall income of the Bank) in or in
the interpretation of any law or regulation by any central bank or other
Governmental Authority (whether or not having the force of law), or (ii) the
compliance by the Bank with any guideline or directive from any central bank or
other Governmental Authority (whether or not having the force of law), shall
result in any actual increase in the cost to the Bank of maintaining the
Revolving Credit Loans bearing interest at a rate based on LIBOR or reduce the
amount receivable by the Bank on any such Revolving Credit Loans, the Company
will from time to time, upon demand by the Bank, pay to the Bank additional
amounts sufficient to indemnify the Bank against such increased cost actually
incurred or reduction in amount actually received. A certificate in reasonable
detail as to the amount of such increased cost or reduction in amount received
and method of calculation shall be submitted to the Company by the Bank and
shall be conclusive, absent manifest error.
(B) LIBOR DEPOSITS UNAVAILABLE. If, by reason of circumstances affecting
the London interbank market generally, deposits in Dollars are not being offered
to the Bank, the Bank may forthwith give notice thereof to the Company,
whereupon (a) the obligation of the Bank to make Revolving Credit Loans bearing
interest at a rate based on LIBOR will be suspended and (b) any Revolving Credit
Loans bearing interest at a rate based on LIBOR will automatically be converted
into Revolving Credit Loans bearing interest at a rate based on the Prime Rate
(unless the Company and the Bank shall have agreed on an alternative method of
determining the interest rate for the Revolving Credit Loans), with such
conversion being effective at the end of any applicable Interest Period in the
case of Revolving Credit Loans then bearing interest based on a Contract LIBOR
Rate.
<PAGE>
(C) CHANGES IN LAW RENDERING A LIBOR LOAN UNLAWFUL. If, after the date
of this Agreement, the introduction of, or any change in, any applicable law,
rule or regulation or in the interpretation or administration thereof by any
Governmental Authority charged with the interpretation or administration
thereof, or compliance by the Bank with any guideline or directive (whether or
not having the force of law) of any such Governmental Authority, shall make it
unlawful or impossible for the Bank to make, maintain or fund any Revolving
Credit Loan which bears interest at a rate based on LIBOR, the Bank shall
promptly notify the Company, and the obligation of the Bank to make Revolving
Credit Loans which bear interest at a rate based on LIBOR shall forthwith be
suspended for the duration of such illegality or impossibility. Upon such
notice, unless the Company and the Bank shall have agreed on an alternative
method of determining the interest rate for the Revolving Credit Loans, (i) any
Revolving Credit Loans then bearing interest based on the LIBOR Daily Floating
Rate will immediately begin to bear interest at a rate based on the Prime Rate,
and (ii) any Revolving Credit Loans then bearing interest based on a Contract
LIBOR Rate will begin to bear interest at the Prime Rate (x) on the last day of
the then current Interest Period if the Bank may lawfully continue to maintain
such Revolving Credit Loans at a rate based on a Contract LIBOR Rate to such
day, and (y) immediately if the Bank may not lawfully continue to maintain such
Revolving Credit Loans at a rate based on a Contract LIBOR Rate to such day. If
while any Revolving Credit Loans bear interest at a rate based on a Contract
LIBOR Rate, the interest rate is changed to a rate based on the Prime Rate
pursuant to clause (ii) of this Section 4.7(c) on a day other than the last day
of an Interest Period, the Company will pay to the Bank any amount due under
Section 4.9.
<PAGE>
(D) PRIME RATE. If, as a result of the application of paragraphs (b) or
(c) above, the Revolving Credit Loans are to bear interest at a rate based on
the Prime Rate, unless the Bank otherwise agrees, they will bear interest at the
Prime Rate.
4.8 CAPITAL ADEQUACY. If the Bank determines that any applicable law, rule,
regulation, guideline or request relating to capital adequacy adopted after the
date of this Agreement, or any interpretation or administration thereof by any
Governmental Authority, central bank or comparable agency or any change therein,
or any interpretation or administration of any existing rule, regulation,
guideline or request which is adopted or issued after the date of this
Agreement, has or will have the effect of increasing the amount of capital
required or expected to be maintained by the Bank based on the existence of the
Revolving Credit Commitment, or its obligations hereunder, then upon demand by
the Bank the Company will pay to the Bank such additional amounts as are
necessary to compensate for the increased costs to the Bank as a result of such
increase of capital. In determining such additional amounts, the Bank will act
reasonably and in good faith and will use averaging and attribution methods
which are reasonable, and the Bank's determination of compensation shall be
conclusive, absent manifest error. Upon determining that any increased costs
will be payable pursuant to this Section 4.8, the Bank will give prompt written
notice thereof to the Company, which notice will show the basis for calculation
of such increased costs, although the failure to give any such notice shall not
release or diminish any of the Company's obligations to pay such increased costs
to the Bank.
<PAGE>
4.9 FUNDING LOSSES. If any repayment or prepayment of Revolving Credit Loans
bearing interest based on a Contract LIBOR Rate occurs for any reason on a day
which is not the last day of an Interest Period applicable thereto, upon demand
by the Bank, the Company will pay to the Bank such amount or amounts as shall be
sufficient (in the reasonable opinion of the Bank) to compensate the Bank for
any loss, cost, expense or liability incurred by the Bank as a result of such
repayment or prepayment, including, without limitation, the excess of (i) the
interest which would have been received from the Company on the amount so repaid
or prepaid during the remaining portion of the Interest Period in question had
the Company not repaid or prepaid the applicable Revolving Credit Loans, over
(ii) the amount of interest which would have accrued on such repaid or prepaid
amount if the Bank had placed such amount on deposit with a prime bank in the
London interbank market from the date of such repayment or prepayment until the
end of such Interest Period, discounted in each case to present value using the
interest rate then existing on U.S. Treasury obligations maturing as of the end
of such Interest Period, as reasonably determined by the Bank. For purposes of
calculating any amounts due from the Company to the Bank under this Section 4.9,
it will be assumed that the Bank actually funded or committed to fund the
applicable Revolving Credit Loans through the purchase of an underlying deposit
in an amount, at an interest rate and for a term comparable to the amount,
interest rate and Interest Period applicable to such Revolving Credit Loans. A
certificate in reasonable detail as to the amount of any loss, cost, expense or
liability due from the Company hereunder and the method of calculation shall be
submitted to the Company by the Bank and shall be conclusive, absent manifest
error.
<PAGE>
SECTION 5
REPRESENTATIONS
In order to induce the Bank to enter into this Agreement and to make the
Revolving Credit Loans and to issue the Letters of Credit, the Company
represents and warrants to the Bank (which representations and warranties will
survive the execution of the Revolving Credit Note, the making of Advances under
the Revolving Credit Facility and the issuance of Letters of Credit) that:
5.1 SUBSIDIARIES. On the Closing Date, the Company has the following Material
Subsidiaries and no others:
Comdial Telecommunications, Inc.
Comdial Business Communications Corporation
Comdial Enterprise Systems, Inc.
Key Voice Technologies, Inc.
Aurora Systems, Inc.
Array Telecom Corporation
American Phone Centers, Inc.
Comdial Telecommunications International, Inc.
5.2 ORGANIZATION AND EXISTENCE. Each of the Company and its Subsidiaries (i) is
duly organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation, (ii) has all requisite corporate or other
power and authority and all licenses and permits necessary to own or lease and
operate its properties and to carry on its business as now being conducted and
as hereafter proposed to be conducted unless its failure to have any license or
permit would not reasonably be expected, in any particular case or in the
aggregate, to have a Material Adverse Effect, and (iii) is duly qualified and
authorized to do business and is in good standing in each jurisdiction in which
the character of its properties or the nature of its business requires such
qualification or authorization unless its failure to qualify or be authorized
would not reasonably be expected, in any particular case or in the aggregate, to
have a Material Adverse Effect.
<PAGE>
5.3 AUTHORITY. The Company has full corporate power and authority to enter into
this Agreement and the other Loan Documents to which it is a party, to make the
borrowings hereunder, to execute and deliver the Revolving Credit Note and to
incur the obligations provided for herein and therein, all of which have been
duly authorized by all necessary corporate action. Each of the Company and any
applicable Material Subsidiary has or will have full corporate power and
authority to execute and deliver each L/C Application at the time it is
delivered and to incur the obligations provided for therein, all of which have
been or at the time of such delivery will have been duly authorized by all
necessary corporate action. Each of the Material Subsidiaries existing on the
Closing Date has full corporate power and authority to execute and deliver the
Subsidiary Security Agreement and the Guaranty to which it is a party (and the
Deed of Trust in the case of Comdial Business Communications Corporation) and to
incur the obligations provided for therein, all of which have been duly
authorized by all necessary corporate action. Comdial Telecommunications, Inc.
has full corporate power and authority to execute and deliver the Subsidiary
Pledge Agreement and to incur the obligations provided for therein, all of which
have been duly authorized by all necessary corporate action. Other than those
that have previously been obtained, no consent or approval of stockholders or
consent or approval of, notice to or filing with any Governmental Authority is
required as a condition to the validity or enforceability of this Agreement, the
Revolving Credit Note or any of the other Loan Documents.
<PAGE>
5.4 BINDING AGREEMENTS. This Agreement constitutes, and the Revolving Credit
Note, each L/C Application and each other Loan Document to which the Company is
a party when executed and delivered pursuant hereto for value received will
constitute, the valid and legally binding obligations of the Company enforceable
in accordance with their respective terms, except to the extent such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization and moratorium laws and similar laws relating generally to the
enforcement of creditors' rights. Each Subsidiary Security Agreement, each
Guaranty and each L/C Application (and the Deed of Trust in the case of Comdial
Business Communications Corporation) when executed and delivered pursuant hereto
for value received will constitute the valid and legally binding obligation of
the applicable Material Subsidiary enforceable in accordance with its terms,
except to the extent such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization and moratorium laws and similar laws
relating generally to the enforcement of creditors' rights. The Subsidiary
Pledge Agreement when executed and delivered pursuant hereto for value received
will constitute the valid and legally binding obligation of Comdial
Telecommunications, Inc. enforceable in accordance with its terms, except to the
extent such enforceability may be limited by applicable bankruptcy, insolvency,
reorganization and moratorium laws and similar laws relating generally to the
enforcement of creditors' rights.
<PAGE>
5.5 LITIGATION. There are no proceedings pending or, to the knowledge of the
Company, threatened before any court or administrative agency that would
reasonably be expected, in any particular case or in the aggregate, to have a
Material Adverse Effect.
5.6 NO CONFLICTING AGREEMENTS. There is no charter, bylaw or preference stock
provision of the Company and no provision of any existing mortgage, indenture,
contract or agreement binding on the Company or affecting its property that
would conflict with or in any way prevent the execution, delivery or carrying
out of the terms of this Agreement, the Revolving Credit Note, any L/C
Application or any other Loan Document to which the Company is a party. There is
no charter, bylaw or preference stock provision of any Material Subsidiary
existing on the Closing Date and no provision of any existing mortgage,
indenture, contract or agreement binding on such Material Subsidiary or
affecting its property that would conflict with or in any way prevent the
execution, delivery or carrying out of the terms of the Subsidiary Security
Agreement or Guaranty to which such Material Subsidiary is a party or any L/C
Application to which such Material Subsidiary becomes a party (or the Deed of
Trust in the case of Comdial Business Communications Corporation). There is no
charter, bylaw or preference stock provision of Comdial Telecommunications, Inc.
existing on the Closing Date and no provision of any existing mortgage,
indenture, contract or agreement binding on Comdial Telecommunications, Inc. or
affecting its property that would conflict with or in any way prevent the
execution, delivery or carrying out of the terms of the Subsidiary Pledge
Agreement.
<PAGE>
5.7 FINANCIAL CONDITION. The audited consolidated balance sheet of the Company
and its Subsidiaries as of December 31, 1997, and the related consolidated
statements of income, retained earnings and cash flows for the period then
ended, certified by Deloitte & Touche, L.L.P., heretofore delivered to the Bank,
are complete and correct in all material respects and fairly present the
consolidated financial condition of the Company and its Subsidiaries and the
results of their operations and changes in their financial position as of the
date and for the period referred to therein and have been prepared in accordance
with GAAP. The unaudited consolidated balance sheet of the Company and its
Subsidiaries as of June 30, 1998, and the related consolidated statements of
income, retained earnings and cash flows for the period then ended, heretofore
delivered to the Bank, are complete and correct in all material respects and
fairly present the consolidated financial condition of the Company and its
Subsidiaries and the results of their operations and changes in their financial
position as of the date and for the period referred to therein and have been
prepared in accordance with GAAP, subject to year-end adjustments and the
addition of footnotes. Other than liabilities associated with the acquisition of
Array Telecom Corporation (which do not exceed $10,000,000 in the aggregate),
there are no material liabilities, direct or indirect, fixed or contingent, of
the Company or any of its Subsidiaries as of the dates of such balance sheets
that are not reflected therein or in the notes thereto. There has been no
material adverse change in the financial condition or operations of the Company
or any of its Subsidiaries since the dates of such balance sheets, and there has
been no other material adverse change in the Company or any of its Subsidiaries.
5.8 OWNERSHIP OF PROPERTY. Each of the Company and its Subsidiaries has good and
valid fee simple or leasehold interests in all land and other real estate, and
has good and valid title to all other properties and assets, it purports to own,
including those referred to in the financial statements referred to in Section
5.7, except for defects in title which would not reasonably be expected, in any
particular case or in the aggregate, to have a Material Adverse Effect. Each of
the Company and its Subsidiaries enjoys full, peaceful and undisturbed
possession under all leases necessary in any material respect for the operation
of its business or properties. All such leases are valid and subsisting and are
in full force and effect and, to the knowledge of the Company, no default or
event of default exists thereunder.
<PAGE>
5.9 INTELLECTUAL PROPERTY. Without limiting the generality of Section 5.8, each
of the Company and its Subsidiaries owns and possesses rights to use all
franchises, licenses, copyrights, copyright applications, patents, patent rights
or licenses, patent applications, trademarks, trademark rights, trade names,
trade name rights, copyrights and other intellectual property rights which are
required to conduct its business, except in cases in which a failure to own or
possess any such rights would not reasonably be expected, in any particular case
or in the aggregate, to have a Material Adverse Effect. No event has occurred
which permits, or after notice or lapse of time, or both, would permit, the
revocation or termination of any such rights, and neither the Company nor any of
its Subsidiaries is liable to any Person for infringement under any applicable
law with respect to any such rights as a result of its business operations,
except in cases in which any such revocation, termination or liability would not
reasonably be expected, in any particular case or in the aggregate, to have a
Material Adverse Effect.
5.10 EMPLOYEE BENEFIT PENSION PLANS. No fact, including, but not limited to, any
Reportable Event as defined in Section 4043 of ERISA, exists in connection with
any employee benefit plan of the Company or any of its Subsidiaries covered by
ERISA (including any plan of any member of a controlled group of corporations
and all trades and businesses (whether or not incorporated) under common control
which, together with the Company or any of its Subsidiaries, are treated as a
single employer, under Section 414 of the Code), which could constitute grounds
for the termination of any such plan by the PBGC or for the appointment of any
trustee to administer such plan by the appropriate United States District Court.
<PAGE>
5.11 TAXES. Each of the Company and its Subsidiaries has filed or caused to be
filed all tax returns which are required to be filed by it pursuant to
applicable law. Each of the Company and its Subsidiaries has paid, or made
provisions for the payment of, all taxes, assessments, fees and other
governmental charges which have or may have become due pursuant to those returns
or otherwise, or pursuant to any assessment received by the Company or such
Subsidiary, except such taxes that are being contested in good faith and by
appropriate proceedings and as to which adequate reserves (determined in
accordance with GAAP) have been provided, and no tax liens have been filed and,
to the knowledge of the Company, no claims are being asserted against the
Company or any Subsidiary with respect to any such taxes, fees or other charges.
5.12 COMPLIANCE WITH ENVIRONMENTAL AND OTHER LAWS. Each of the Company and its
Subsidiaries is in compliance with all applicable laws, including but not
limited to all Environmental Laws, the failure to comply with which would
reasonably be expected, in any particular case or in the aggregate, to have a
Material Adverse Effect. There are no past or present events, conditions,
circumstances, activities, practices, incidents, actions or plans which would
reasonably be expected to interfere with or prevent continued compliance, or
which would reasonably be expected to give rise to any common law or statutory
liability, under, relating to or in connection with any Environmental Law, or
otherwise form the basis of any claim, action, suit, proceeding, hearing or
investigation under applicable law based on or related to the manufacture,
processing, distribution, use, treatment, storage, transport or handling, or the
release or threatened release into the environment, of any Hazardous Material
with respect to the Company or any of its Subsidiaries or their respective
businesses which would reasonably be expected, in any particular case or in the
aggregate, to have a Material Adverse Effect.
<PAGE>
5.13 EMPLOYEE RELATIONS. As of the Closing Date, neither the Company nor any of
its Subsidiaries is a party to any collective bargaining agreement nor has any
labor union been recognized as the representative of any employees of the
Company or any of its Subsidiaries. The Company is not aware of any pending,
threatened or contemplated strikes, work stoppages or other collective labor
disputes involving its employees or those of any of its Subsidiaries.
5.14 INVESTMENT COMPANY ACT; PUBLIC UTILITY HOLDING COMPANY ACT; FEDERAL POWER
ACT. Neither the Company nor any of its Subsidiaries is required to register
under the provisions of the Investment Company Act of 1940, as amended, and
neither the entering into or performance by the Company of this Agreement or any
other Loan Documents, or the issuance of the Revolving Credit Note, violates any
provisions of such Act or requires any consent, approval, or authorization of,
or registration with, any Governmental Authority pursuant to any of the
provisions of such Act. Neither the Company nor any of its Subsidiaries is (i) a
"holding company" or a "subsidiary company" of a "holding company," as such
terms are defined in the Public Utility Holding Company Act of 1935, as amended,
or (ii) a "public utility," as such term is defined in the Federal Power Act, as
amended.
<PAGE>
5.15 NO DEFAULTS. Neither the Company nor any of its Subsidiaries is in default
in the payment of the principal of or any interest on any indebtedness for
borrowed money and, to the knowledge of the Company, neither the Company nor any
of its Subsidiaries is otherwise in default under any instrument under or
subject to which any such indebtedness has been incurred, and no event has
occurred under the provisions of any such instrument which, with the giving of
notice or the lapse of time, or both, would constitute an event of default
thereunder.
5.16 FEDERAL REGULATIONS. No part of the proceeds of any of the Revolving Credit
Loans and no Letter of Credit has been or will be used by the Company for
"purchasing" or "carrying" any "margin stock" within the respective meanings of
each of the quoted terms under Regulation U or for any other purpose which
violates the provisions of the Regulations of the Board of Governors of the
Federal Reserve System. If requested by the Bank, the Company will furnish to
the Bank a statement to the foregoing effect in conformity with the requirements
of Federal Reserve Form U-1 referred to in Regulation U.
5.17 ACCURACY OF INFORMATION. To the best knowledge of the Company, no written
information, exhibit or report furnished by an officer of the Company to the
Bank in connection with the negotiation of this Agreement or any of the other
Loan Documents contains any material misstatement of fact or omits to state any
material fact necessary to make the statement contained therein not misleading,
and the Company has no knowledge of any fact that the Company has not disclosed
to the Bank in writing that would reasonably be expected to result in a Material
Adverse Effect.
<PAGE>
5.18 YEAR 2000 COMPLIANCE. (a) The Company has (i) begun analyzing the
operations of the Company and its Subsidiaries and Affiliates that could be
adversely affected by failure to become Year 2000 compliant (that is, that
computer applications, imbedded microchips and other systems will be able to
perform date-sensitive functions prior to and after December 31, 1999); and (ii)
developed a plan for becoming Year 2000 compliant in a timely manner, the
implementation of which is on schedule in all material respects. The Company
reasonably believes that it will become Year 2000 compliant for its operations
and those of its Subsidiaries and Affiliates on a timely basis except to the
extent that a failure to do so would not reasonably be expected to have a
Material Adverse Effect.
(b) Based on certificates received by the Company, the Company
reasonably believes any suppliers and vendors that are material to the
operations of the Company or its Subsidiaries and Affiliates will be Year 2000
compliant for their own computer applications except to the extent that a
failure to do so would not reasonably be expected to have a Material Adverse
Effect.
5.19 SURVIVAL OF REPRESENTATIONS AND WARRANTIES, ETC. All representations and
warranties set forth in this Section 5 and all representations and warranties
contained in any certificate or any of the other Loan Documents (including but
not limited to any such representation or warranty made in or in connection with
any amendment thereto) shall constitute representations and warranties made
under this Agreement. All representations and warranties made under this
Agreement shall be made or deemed to be made at and as of the Closing Date,
shall survive the Closing Date and shall not be waived by the execution and
delivery of this Agreement, any investigation made by or on behalf of the Bank
or any extension of credit hereunder.
<PAGE>
SECTION 6
CONDITIONS TO CREDIT EXTENSIONS
6.1 CONDITIONS TO INITIAL CREDIT EXTENSIONS. The obligation of the Bank to make
the initial Advance under the Revolving Credit Facility is subject to each of
the following conditions precedent, or if any such condition is waived by the
Bank as a condition to the making of such initial Advance, such condition shall,
at the option of the Bank, be a condition to the making of subsequent Advances
under the Revolving Credit Facility or the issuance of Letters of Credit:
(A) APPROVAL OF BANK'S COUNSEL. All legal matters incident to this Agreement,
including without limitation all documents and opinions, shall be satisfactory
to counsel for the Bank.
(B) CERTIFICATES, EVIDENCE OF CORPORATE ACTION BY COMPANY, ETC. The Company
shall have delivered to the Bank such closing and officer's certificates as may
be reasonably requested by the Bank, along with a certified copy of the
Company's articles of incorporation and bylaws, an incumbency certificate
relating to its officer(s) who will be executing on its behalf this Agreement
and the other Loan Documents to which the Company is a party, a certified copy
of the resolutions of its board of directors authorizing and approving the
transactions described herein (and any other papers evidencing corporate action
taken by the Company relating to this Agreement), and a good standing
certificate related to the Company of recent date from the Delaware Secretary of
State.
<PAGE>
(C) CERTIFICATE, EVIDENCE OF CORPORATE ACTION BY MATERIAL SUBSIDIARIES. The
Company shall have caused each of the Material Subsidiaries existing on the
Closing Date to deliver to the Bank such closing and officer's certificates as
may be reasonably requested by the Bank, along with a certified copy of its
articles of incorporation and bylaws, an incumbency certificate relating to its
officer(s) who will be executing on its behalf the Loan Documents to which it is
a party, a certified copy of the resolutions of its board of directors
authorizing and approving such Loan Documents and the transactions described
therein (and all other papers evidencing corporate action taken by such Material
Subsidiary relating to such Loan Documents), and a good standing certificate
relating to such Material Subsidiary of recent date from the applicable
Governmental Authority.
(D) OPINION OF COUNSEL. The Company shall have delivered to the Bank a favorable
opinion of counsel or opinions of counsel for the Company and the Material
Subsidiaries, dated as of the Closing Date and satisfactory in form and
substance to the Bank.
(E) DEED OF TRUST. Comdial Business Communications Corporation shall have
executed and delivered to the Bank the Deed of Trust, along with a recording
receipt indicating to the Bank's satisfaction that the Deed of Trust has been
properly recorded in the Clerk's Office of the Circuit Court of the County of
Albemarle, Virginia.
(F) SECURITY AGREEMENT. The Company shall have executed and delivered to the
Bank the Security Agreement, along with financing statements in form
satisfactory to the Bank receipted to show that they have been filed in the
appropriate filing offices to perfect the security interests granted to the Bank
in the Security Agreement.
<PAGE>
(G) SUBSIDIARY SECURITY AGREEMENTS. Each of the Material Subsidiaries existing
on the Closing Date shall have executed and delivered to the Bank its Subsidiary
Security Agreement, along with financing statements in form satisfactory to the
Bank receipted to show that they have been filed in the appropriate filing
offices to perfect the security interests granted to the Bank in such Subsidiary
Security Agreement.
(H) PLEDGE AGREEMENTS. The Company shall have executed and delivered to the Bank
the Pledge Agreement, along with the original stock certificates and other
instruments evidencing all of the stock pledged to the Bank thereunder and
appropriate stock powers relating thereto in form and substance satisfactory to
the Bank, and Comdial Telecommunications, Inc. shall have executed and delivered
to the Bank the Subsidiary Pledge Agreement, along with the original stock
certificates and other instruments evidencing all of the stock pledged to the
Bank thereunder and appropriate stock powers relating thereto in form and
substance satisfactory to the Bank.
(I) GUARANTIES. Each of the Guarantors shall have executed and delivered to the
Bank its Guaranty.
(J) MORTGAGEE TITLE INSURANCE. The Bank shall have received (i) a policy of
mortgagee title insurance insuring the lien of the Deed of Trust as a first
priority deed of trust on the Virginia Property in the amount of $10,000,000,
issued by a title insurance company acceptable to the Bank, without exception
for possible filed or unfiled mechanics' and materialmen's liens, containing
only such exceptions to title as are acceptable to the Bank, and containing such
endorsements and affirmative coverage as are requested by the Bank, and (ii) a
title opinion, owner's title insurance policy or other evidence reasonably
satisfactory to the Bank demonstrating that the Florida Property is free and
clear of liens and encumbrances securing indebtedness (other than liens and
encumbrances which secure indebtedness which will be paid in full on or promptly
after the Closing Date and which will be released and terminated promptly after
the Closing Date) and other liens and encumbrances not acceptable to the Bank.
<PAGE>
(K) SURVEY. The Company shall have delivered to the Bank a current survey of the
Virginia Property satisfactory to the Bank, showing no encroachments and
prepared and certified by a certified land surveyor (using certification
language satisfactory to the Bank), which survey shall designate, without
limitation, (i) the dimensions of the Virginia Property, (ii) the dimensions and
location of the buildings and other improvements constructed or to be
constructed thereon, (iii) the dimensions of the parking areas as well as the
total number of on-site parking spaces, (iv) the location of all easements of
record affecting the Virginia Property, specifying the holder of each such
easement and the pertinent recordation information, (v) any and all building
restrictions and/or setback liens, and (vi) means of ingress and egress.
(L) ENVIRONMENTAL REPORT. The Company shall have delivered to the Bank a report
from a qualified environmental engineer or consultant acceptable to the Bank
with respect to an environmental investigation and audit of the Virginia
Property (the scope of which will be defined by the Bank), showing no
contamination of the Virginia Property (other than as previously disclosed to
the Bank in writing) by Hazardous Materials and that no portion of the Virginia
Property constitutes "wetlands" under any Environmental Law.
<PAGE>
(M) UCC SEARCH REPORTS. The Company shall have delivered to the Bank uniform
commercial code search reports acceptable to the Bank covering the Company or
the applicable Material Subsidiary, as applicable, for each filing office in
which a financing statement in favor of the Bank has been filed to perfect the
security interests granted to the Bank in the Security Agreement or any
Subsidiary Security Agreement and for each filing office otherwise specified by
the Bank, which show only such financing statements as are acceptable to the
Bank.
(N) EVIDENCE OF INSURANCE. The Company shall have delivered to the Bank evidence
satisfactory to the Bank that all insurance required by the terms of this
Agreement and the other Loan Documents is in full force and effect.
(O) OTHER DOCUMENTS. The Company shall have delivered to the Bank such other
documents and information as may have been reasonably requested by the Bank.
6.2 CONDITIONS TO EACH CREDIT EXTENSION. The obligation of the Bank to make each
Advance under the Revolving Credit Facility (including, without limitation the
first such Advance) and to issue each Letter of Credit is subject to each of the
following additional conditions precedent:
(A) NOTICES; APPLICATIONS. With respect to any Advance under the Revolving
Credit Facility, unless an AutoBorrow Service Agreement is in effect, the
Company shall have given the notice of borrowing as required by Section 2.5;
and, with respect to any Letter of Credit, the Company (and the applicable
Material Subsidiary, if applicable) shall have executed and delivered to the
Bank an appropriate L/C Application as required by Section 3.2(a) or Section
3.2(b), as applicable.
<PAGE>
(B) COMPLIANCE. The Company shall have complied and shall then be in compliance
in each case in all material respects with all of the terms, covenants and
conditions of this Agreement and the other Loan Documents to which the Company
is a party.
(C) NO EVENT OF DEFAULT. No Default shall have occurred and be continuing, no
Event of Default shall exist, and no Default or Event of Default would result
from the making of such Advance or the issuance of such Letter of Credit, as
applicable.
(D) REPRESENTATIONS AND WARRANTIES. The representations and warranties contained
in Section 5 shall, except to the extent that they relate solely to an earlier
date and except to the extent that the Bank has consented in writing to any
change in the nature of the business or operations of the Company or any
Subsidiary which would render any such representation or warranty untrue, be
true in all material respects with the same effect as though such
representations and warranties had been made at the time of the making of such
Advance or the issuance of such Letter of Credit, as applicable.
(E) NO INJUNCTION, ETC. No action, proceeding, investigation, regulation or
legislation shall have been instituted, threatened or proposed before any
Governmental Authority to enjoin, restrain or prohibit, or to obtain substantial
damages with respect to, or which is related to or arises out of, this Agreement
or any of the other Loan Documents or the consummation of the transactions
contemplated hereby or thereby, or which in the Bank's reasonable discretion,
would make it inadvisable to make such Advance or issue such Letter of Credit,
as applicable.
<PAGE>
SECTION 7
AFFIRMATIVE COVENANTS
So long as the Company may borrow under the Revolving Credit Facility or
request that the Bank issue Letters of Credit or any Letter of Credit is
outstanding and until payment in full of the Revolving Credit Loans and payment
and performance of all other obligations of the Company hereunder and under the
other Loan Documents, the Company will:
7.1 FINANCIAL STATEMENTS. Furnish to the Bank:
(a) as soon as available, but in no event more than forty-five (45) days after
the end of each of the Company's fiscal quarters, a consolidated balance sheet
of the Company and its Subsidiaries as of the end of such quarter and a
consolidated income statement of the Company and its Subsidiaries to the end of
such quarter, each in reasonable detail and in form and substance satisfactory
to the Bank, prepared in accordance with GAAP and certified by the chief
financial officer of the Company, provided that the Company may deliver, in lieu
of the foregoing quarterly financial statements, the quarterly report of the
Company for the applicable fiscal quarter on Form 10-Q filed with the SEC, but
only as long as the financial statements contained in such quarterly report are
substantially the same in content as the financial statements referred to above
in this Section 7.1(a); with each such quarterly financial statements to be
accompanied by (i) consolidating balance sheets and consolidating income
statements with respect to Material Subsidiaries for which there has been any
material financial activity during the applicable quarter, prepared in the
ordinary course of the Company's business, and (ii) a compliance certificate, in
form and detail satisfactory to the Bank and signed by the chief financial
officer of the Company, which provides a detailed calculation of the financial
covenants contained herein as of the applicable fiscal quarter end and a
statement as to whether the Company is in compliance with all of the terms and
conditions of this Agreement;
<PAGE>
(b) as soon as available, but in no event more than one hundred twenty (120)
days after the end of each of the Company's fiscal years, a copy of the annual
consolidated financial statements of the Company and its Subsidiaries in
reasonable detail and in form and substance satisfactory to the Bank, prepared
in accordance with GAAP and audited by certified public accountants of national
standing or otherwise satisfactory to the Bank, which financial statements shall
include a consolidated balance sheet of the Company and its Subsidiaries as of
the end of such fiscal year, a consolidated statement of income and retained
earnings of the Company and its Subsidiaries for such fiscal year, a
consolidated statement of cash flows for the Company and its Subsidiaries for
such fiscal year, a reconciliation of net worth, and all normal and reasonable
financial notes, provided that the Company may deliver, in lieu of the foregoing
annual financial statements, the annual report of the Company for the applicable
fiscal year on Form 10-K filed with the SEC, but only as long as the financial
statements contained in such annual report are substantially the same in content
as the financial statements referred to above in this Section 7.1(b); with each
such annual financial statements to be accompanied by a compliance certificate,
in form and detail satisfactory to the Bank and signed by the chief financial
officer of the Company, which provides a detailed calculation of the financial
covenants contained herein as of the applicable fiscal year end and a statement
as to whether the Company is in compliance with all of the terms and conditions
of this Agreement;
<PAGE>
(c) promptly upon distribution thereof, copies of all other financial
statements, proxy statements, notices and reports, if any, which the Company
sends to its stockholders and copies of all registration statements (without
exhibits and other than on Form S-8) and all reports (other than reports on
Forms 3, 4 or 5) which the Company files with the SEC;
(d) as soon as available, but in no event later than February 15 of each year, a
copy of the annual budget for the Company and its Subsidiaries for that year
(including a proforma consolidated balance sheet, income statement and statement
of cash flows) signed by the chief financial officer of the Company and
substantially in the form of the budget prepared for calendar year 1998, a copy
of which has been delivered to the Bank;
(e) as soon as possible, but in no event more that five (5) days after the
Company obtains knowledge of a Default or an Event of Default, a certificate of
the chief financial officer of the Company setting forth the details of such
Default or Event of Default and the action the Company has taken or proposes to
take with respect thereto; and
(f) with reasonable promptness, such additional information, reports and
statements concerning the Company, any Subsidiary or any of their respective
businesses or properties as the Bank may from time to time reasonably request.
<PAGE>
7.2 INSPECTIONS. Permit, and cause each of its Subsidiaries to permit, the Bank
and its representatives to inspect its books and records during normal business
hours and to discuss its affairs with its officers.
7.3 YEAR 2000 COMPLIANCE. Promptly notify the Bank in the event the Company
determines that any computer application which is material to the operations of
the Company, any of its Subsidiaries or Affiliates or any of its material
vendors or suppliers will not be fully Year 2000 compliant on a timely basis,
except to the extent that such failure would not reasonably be expected to have
a Material Adverse Effect.
7.4 TAXES. Pay and discharge, and cause each of its Subsidiaries to pay and
discharge, all taxes, assessments, and governmental charges upon it, its income,
and its properties prior to the date on which penalties are attached thereto,
unless and to the extent only that (i) such taxes, assessments, and governmental
charges are being contested by the Company or such Subsidiary, as the case may
be, in good faith and by appropriate proceedings, and (ii) the Company or such
Subsidiary, as the case may be, has established on its books adequate reserves
with respect to such tax, assessment or charge so contested in accordance with
GAAP.
7.5 PAYMENT OF OBLIGATIONS. Pay and discharge, and cause each of its
Subsidiaries to pay and discharge, at or before their maturity all indebtedness
and other obligations and liabilities of the Company and its Subsidiaries,
except when (i) the same may be contested by the Company or such Subsidiary, as
the case may be, in good faith and by appropriate proceedings, and (ii) the
Company or such Subsidiary, as the case may be, has established on its books
adequate reserves with respect to such indebtedness, obligation or liability in
accordance with GAAP.
<PAGE>
7.6 INSURANCE. Maintain, and cause each of its Subsidiaries to maintain,
adequate insurance with responsible companies reasonably satisfactory to the
Bank in such amounts and against such risks as are customarily carried by owners
of similar businesses and property. The covenant contained in this Section 7.6
shall be in addition to any covenants relating to insurance in the other Loan
Documents.
7.7 CORPORATE EXISTENCE. Maintain, and cause each of its Subsidiaries to
maintain, its corporate existence in good standing, except as otherwise
permitted by Section 9.3.
7.8 LICENSES AND PERMITS. Maintain, and cause each of its Subsidiaries to
maintain, all permits, licenses, authorizations, approvals and intellectual
property required to own and operate the businesses and properties of the
Company and its Subsidiaries, except where a failure to maintain any such
permit, license, authorization, approval or intellectual property would not
reasonably be expected, in a particular case or in the aggregate, to have a
Material Adverse Effect.
7.9 PROPERTIES. Maintain, preserve, and protect, and cause each of its
Subsidiaries to maintain, preserve and protect, all franchises and trade names
and preserve all the remainder of its property used or useful in the conduct of
its business and keep the same in good repair, working order, and condition, and
from time to time make or cause to be made all needful and proper repairs,
renewals, replacements, betterments, and improvements thereto so that the
business carried on in connection therewith may be properly and advantageously
conducted at all times, and permit the Bank and its agents to enter upon and
inspect such properties during normal business hours upon reasonable notice;
provided, however, that nothing contained in this Section 7.9 shall prohibit the
Company or any Subsidiary from selling or disposing of property in the ordinary
course of business which the Company or such Subsidiary determines in its
reasonable business judgment to be no longer useful in the conduct of its
business.
<PAGE>
7.10 EMPLOYEE BENEFIT PENSION PLANS. Promptly during each year, pay, and cause
each of its Subsidiaries to pay, contributions that in the judgment of the chief
financial officer of the Company after reasonable inquiry are believed adequate
to meet at least the minimum funding standards set forth in Sections 302 through
305 of ERISA with respect to each employee benefit pension plan of the Company
and its Subsidiaries, if any, covered by ERISA (including any plan of any member
of a controlled group of corporations and all trades and businesses (whether or
not incorporated) under common control which, together with the Company or any
Subsidiary, are treated as a single employer, under Section 414 of the Code);
file, and cause each of its Subsidiaries to file, each annual report required to
be filed pursuant to Section 103 of ERISA in connection with each such plan for
each year; and notify the Bank within ten (10) days of the occurrence of a
Reportable Event (as defined in Section 4043 of ERISA) that might constitute
grounds for termination of any such plan by the PBGC or for the appointment by
the appropriate United States District Court of a trustee to administer any such
plan.
7.11 BUSINESS CONTINUATION. Continue, and cause each of its Subsidiaries to
continue, to operate its business substantially as currently operated.
<PAGE>
7.12 COMPLIANCE WITH ENVIRONMENTAL LAWS. Comply, and cause each of its
Subsidiaries to comply, in all material respects with all Environmental Laws.
7.13 COMPLIANCE WITH OTHER APPLICABLE LAWS. Comply, and cause each of its
Subsidiaries to comply, with all other applicable laws, rules, regulations and
orders of any Governmental Authority having jurisdiction over it, except where a
failure to comply would not reasonably be expected, in any particular case or in
the aggregate, to have a Material Adverse Effect.
7.14 GAAP. Maintain, and cause each of its Subsidiaries to maintain, its books
and records in accordance with GAAP.
7.15 ADDITIONAL STOCK PLEDGES, SECURITY AGREEMENTS AND GUARANTIES. Provide the
Bank prompt written notice of the creation, formation or acquisition of any
Material Subsidiary which has not previously executed and delivered a Subsidiary
Security Agreement and a Guaranty to the Bank (and of the fact that a Subsidiary
which was not previously a Material Subsidiary and which has not previously
executed and delivered a Subsidiary Security Agreement and a Guaranty to the
Bank has become a Material Subsidiary); and, as soon as possible and in any
event within thirty (30) days after such notice, (i) execute and deliver to the
Bank a pledge agreement, substantially in the form attached hereto as Exhibit F
with the blanks therein appropriately completed, pursuant to which the Company
pledges to the Bank the capital stock of such new Material Subsidiary, (ii)
cause such new Material Subsidiary to execute and deliver to the Bank a security
agreement, substantially in the form attached hereto as Exhibit E with the
blanks therein appropriately completed, pursuant to which such new Material
Subsidiary grants the Bank a security interest in all of its accounts,
inventory, equipment, general intangibles and other personal property to secure
all obligations of the Company to the Bank, and a guaranty agreement,
substantially in the form attached hereto as Exhibit G with the blanks therein
appropriately completed, pursuant to which such new Material Subsidiary
guarantees all obligations of the Company to the Bank, and (iii) deliver or
cause to be delivered to the Bank in connection therewith all stock certificates
and stock powers, financing statements, UCC search reports, resolutions,
opinions and other documents that the Bank may reasonably request.
<PAGE>
SECTION 8
FINANCIAL COVENANTS
So long as the Company may borrow under the Revolving Credit Facility or
request that the Bank issue Letters of Credit or any Letter of Credit is
outstanding and until payment in full of all of the Revolving Credit Loans and
payment and performance of all other obligations of the Company hereunder and
under the other Loan Documents:
8.1 FUNDED DEBT TO TOTAL CAPITAL RATIO. The Company will not permit the Funded
Debt to Total Capital Ratio, measured as of the end of each fiscal quarter of
the Company, to exceed .55 to 1.
8.2 FUNDED DEBT TO EBITDA RATIO. The Company will not permit the Funded Debt to
EBITDA Ratio, measured as of the end of each fiscal quarter of the Company, to
exceed 3.0 to 1.
8.3 EBITDA TO INTEREST EXPENSE RATIO. The Company will maintain the EBITDA to
Interest Expense Ratio, measured as of the end of each fiscal quarter of the
Company, at not less than 3.0 to 1.
<PAGE>
SECTION 9
NEGATIVE COVENANTS
So long as the Company may borrow under the Revolving Credit Facility or request
that the Bank issue Letters of Credit or any Letter of Credit is outstanding and
until payment in full of all of the Revolving Credit Loans and payment and
performance of all other obligations of the Company hereunder and under the
other Loan Documents, without the prior written consent of the Bank, the Company
will not:
9.1 ADDITIONAL BORROWING. Create, incur, assume, or suffer to exist, or permit
any Subsidiary to create, incur, assume or suffer to exist, in any manner any
indebtedness for borrowed money, deferred payment obligation for the purchase of
assets, or other indebtedness, except (i) indebtedness owing to the Bank, (ii)
indebtedness owing from the Company to a Material Subsidiary, from a Material
Subsidiary to the Company, or from a Material Subsidiary to another Material
Subsidiary, (iii) trade accounts payable arising in the ordinary course of
business and payable on customary terms, and (iv) additional indebtedness
(including guaranteed indebtedness and other contingent liabilities) of the
Company and its Subsidiaries which does not exceed $5,000,000 in the aggregate
at any time outstanding.
9.2 MORTGAGES AND PLEDGES. Create, incur, assume, or suffer to exist, or permit
any Subsidiary to create, incur, assume or suffer to exist, any mortgage,
pledge, lien, or other encumbrance of any kind upon, or any security interest
in, the Virginia Property, the Florida Property or any of the Company's or such
Subsidiary's other property or assets, whether now owned or hereafter acquired,
except (i) liens for taxes not yet delinquent or being contested in good faith
and by appropriate proceedings, (ii) liens in connection with workers'
compensation, unemployment insurance, or other social security obligations,
(iii) mechanic's, worker's, materialman's, landlord's, carrier's, or other like
liens arising in the ordinary course of business with respect to obligations
that are not due or that are being contested in good faith and by appropriate
proceedings, (iv) mortgages, pledges, liens, and encumbrances in favor of the
Bank, (v) any mortgage, encumbrance or other lien upon, or security interest in,
any property hereafter acquired by the Company or a Subsidiary created
contemporaneously with such acquisition to secure or provide for the payment or
financing of any part of the purchase price thereof, provided that the
indebtedness of the Company and its Subsidiaries secured by all such purchase
money mortgages, encumbrances, liens and security interests will not exceed
$3,000,000 in the aggregate at any time outstanding, and provided further that
each such mortgage, encumbrance, lien or security interest shall attach only to
the property so acquired and fixed improvements thereon, (vi) zoning
restrictions, easements, licenses, restrictions on the use of real property or
minor irregularities in the title thereto, which do not, in the opinion of the
Company or such Subsidiary, as the case may be, materially impair the use of
such property in the operation of the business of the Company or such
Subsidiary, as the case may be, or the value of such property for the purposes
of such business, and (vii) attachment, judgment and other non-tax liens if
stayed and bonded off pending appeal.
<PAGE>
9.3 MERGER, CONSOLIDATION, OR SALE OF ASSETS. Enter into any merger,
consolidation or similar combination with any other Person, or sell, transfer,
lease, assign, or otherwise dispose of (in one transaction or a series of
transactions) all or any substantial part of its assets, or permit any
Subsidiary to do so, except (i) the Company or any Material Subsidiary may,
subject to Section 9.4, merge with any corporation provided (a) the Company or
such Material Subsidiary, as the case may be, is the surviving corporation, and
(b) immediately prior to and after giving effect to such merger no Default or
Event of Default exists or would exist, (ii) any Subsidiary may merge or
consolidate with the Company (provided that the Company is the surviving
corporation) or with any other Subsidiary, (iii) any Subsidiary may sell,
transfer, lease, assign or otherwise dispose of any of its assets to the Company
or any Material Subsidiary, and (iv) the Company and its Subsidiaries may sell,
transfer, lease, assign and otherwise dispose of assets as long as the aggregate
amount of all such assets sold, transferred, leased, assigned or otherwise
disposed of during any fiscal year of the Company does not exceed $1,000,000.
9.4 ACQUISITIONS. Acquire, or permit any Subsidiary to acquire, in one
transaction or a series of transactions, all or any substantial part of the
capital stock (or other ownership interests) or assets of any other Person,
unless (i) in the case of an acquisition with a total purchase price of less
than $20,000,000, the Company has provided to the Bank prior written notice of
such acquisition and proforma financial statements giving effect to such
acquisition and demonstrating to the Bank's reasonable satisfaction that, after
giving effect to such acquisition, the Company will be and remain in compliance
with the financial covenants and other terms of this Agreement, and (ii) in the
case of an acquisition with a total purchase price of $20,000,000 or more, the
Company has provided to the Bank proforma financial statements giving effect to
such acquisition and demonstrating to the Bank's reasonable satisfaction that,
after giving effect to such acquisition, the Company will be and remain in
compliance with the financial covenants and other terms of this Agreement, and
the Company has obtained the prior written consent of the Bank to such
acquisition, which written consent of the Bank will not be unreasonably
withheld.
<PAGE>
9.5 CONTINGENT LIABILITIES. Assume, guarantee, endorse, or otherwise become
surety for or upon the obligation of any Person, except by the endorsement of
negotiable instruments for deposit or collection in the ordinary course of
business, or permit any Subsidiary to do so, if the aggregate amount of such
obligations assumed, guaranteed or endorsed by the Company and its Subsidiaries
would cause the Company and its Subsidiaries to exceed the $5,000,000 limit set
forth in Section 9.1(iv).
9.6 LOANS. Make, or permit any Subsidiary to make, any loans or advances to any
Person, except loans and advances made by the Company and its Subsidiaries which
do not exceed $1,000,000 in the aggregate at any time outstanding.
9.7 DISSOLUTION. Dissolve or liquidate in whole or in part, or permit any
Material Subsidiary to dissolve or liquidate in whole or in part.
9.8 CONDUCT OF BUSINESS. Engage, or permit any Subsidiary to engage, in any
business other than the manufacture, distribution and sale of telecommunications
equipment and services, voice processing equipment and services, computer
software development, data transmission equipment and services and any business
reasonably related thereto.
9.9 AFFILIATE TRANSACTIONS. Enter into, or permit any of its Subsidiaries to
enter into, any transaction with an Affiliate (other than a Material
Subsidiary), or sell, transfer, lease, assign or otherwise dispose of any of its
properties or assets to an Affiliate (other than a Material Subsidiary), other
than on terms and conditions substantially as favorable to the Company or such
Subsidiary, as the case may be, as could be obtained by the Company or such
Subsidiary at the time in a comparable arm's-length transaction with a Person
other than an Affiliate.
<PAGE>
SECTION 10
EVENTS OF DEFAULT
If one or more of the following events of default (each, an "Event of
Default") shall occur:
10.1 Default shall be made by the Company in the payment of any interest due on
the Revolving Credit Loans when such interest is due and payable, and such
default shall continue unremedied for a period of fifteen (15) days after the
sending of written notice of such default to the Company; or
10.2 Default shall be made by the Company in the payment of any principal of the
Revolving Credit Loans, when and as the same becomes due and payable, whether at
the stated maturity thereof, by mandatory prepayment, by acceleration, demand or
otherwise; or
10.3 Default shall be made by the Company in the due observance of performance
of any covenant or agreement contained in Section 8.1, Section 8.2 or Section
8.3; or
10.4 Default shall be made by the Company in the due observance or performance
of any other term, covenant, or agreement contained in this Agreement, and such
default shall continue unremedied for a period of thirty (30) days after the
sending of written notice of such default to the Company; or
<PAGE>
10.5 Any representation or warranty made by the Company herein or any statement
or representation made in any certificate, report, or opinion delivered pursuant
hereto shall prove to have been incorrect in any material respect when made; or
10.6 The Company or any Material Subsidiary shall be generally not paying its
debts as such debts become due, shall become insolvent or unable to meet its
obligations as they mature, shall make an assignment for the benefit of
creditors, shall consent to the appointment of a trustee or a receiver, or shall
admit in writing its inability to pay its debts as they mature; or
10.7 A trustee, receiver or custodian shall be appointed for the Company, any
Material Subsidiary or for a substantial part of any of their respective
properties; or
10.8 Any case in bankruptcy shall be commenced, or any reorganization,
arrangement, insolvency, or liquidation proceedings shall be instituted, by or
against the Company or any Material Subsidiary and, if commenced or instituted
against it, be consented to by the Company or such Material Subsidiary, as the
case may be, or remain undismissed for a period of thirty (30) days; or
10.9 Any default shall be made in the performance of any other obligation
incurred in connection with any indebtedness for borrowed money of the Company
or any Material Subsidiary aggregating $1,000,000 or more, if the effect of such
default is to permit the holder of such indebtedness (or a trustee on behalf of
such holder) to cause it to become due prior to its stated maturity or to do so
with the giving of notice or passage of time, or both, or any such indebtedness
becomes due prior to its stated maturity or shall not be paid when due; or
<PAGE>
10.10 One or more final judgments for the payment of money aggregating in excess
of $1,000,000 which is or are not adequately insured or indemnified against
shall be rendered at any time against the Company or any Material Subsidiary and
the same shall remain undischarged for a period of thirty (30) days during which
time execution shall not be effectively stayed; or
10.11 Any substantial part of the properties of the Company or any Material
Subsidiary shall be sequestered or attached and shall not have been returned to
the possession of the Company or such Material Subsidiary, as the case may be,
or released from such attachment within thirty (30) days; or
10.12 The occurrence of a Reportable Event as defined in Section 4043 of ERISA
which might constitute grounds for termination of any employee benefit plan of
the Company or any Subsidiary covered by ERISA by the PBGC or grounds for the
appointment by the appropriate United States District Court of a trustee to
administer any such plan; or
10.13 A default or an event of default shall have occurred under any of the
other Loan Documents; provided, however, that no such default shall constitute
an Event of Default hereunder if the default is remedied to the Bank's
satisfaction within any applicable grace or cure period; or
10.14 Any person or group of persons (within the meaning of Section 13(d) of the
Securities Exchange Act of 1934, as amended) shall obtain ownership or control
of (i) twenty percent (20%) or more of the common stock or twenty percent (20%)
or more of the voting power of the Company in a single transaction, or (ii)
thirty percent (30%) or more of the common stock or thirty percent (30%) or more
of the voting power of the Company in a single transaction or a series of
transactions; or
<PAGE>
10.15 Any Guarantor shall deny its liability under the Guaranty to which it is a
party or take any action to terminate its liability thereunder, or any event
shall have occurred or condition shall exist which in the opinion of the Bank
might result in the Bank not being able to enforce the obligation of any
Guarantor under the Guaranty to which it is a party, unless such Guarantor
reaffirms its obligations under such Guaranty in writing in a manner
satisfactory to the Bank and its counsel within fifteen (15) days of its receipt
of a written request from the Bank to do so; then; (A) upon the occurrence of an
Event of Default described in Section 10.8 relating to the Company, (i) the
Revolving Credit Commitment and the Bank's obligation to make any further
Advances thereunder shall automatically and immediately terminate, (ii) the
entire outstanding principal balance of the Revolving Credit Note and all
accrued interest thereon and all other amounts payable by the Company to the
Bank shall automatically and immediately become due and payable without
presentment, demand, protest or any notice of any kind, or any other action by
or on behalf of the Bank, all of which are hereby waived, anything contained
herein or in the Revolving Credit Note to the contrary notwithstanding, and
(iii) the Bank may proceed to enforce payment of the Revolving Credit Note and
to exercise any and all of its rights hereunder, under the Revolving Credit
Note, under the other Loan Documents or otherwise available to the Bank; and (B)
at any time after the occurrence of any Event of Default (other than an Event of
Default described in Section 10.8 relating to the Company), the Bank may, if it
deems appropriate, by written notice to the Company, take any or all of the
following actions, at the same or different
<PAGE>
times: (i) terminate forthwith the Revolving Credit Commitment and its
obligation to make any further Advances thereunder, (ii) declare the Revolving
Credit Note and all other amounts payable by the Company to the Bank to be
forthwith due and payable, whereupon the Revolving Credit Note and all such
other amounts shall be forthwith due and payable, both as to principal and
interest, without presentment, demand, protest, or any other notice of any kind,
all of which are hereby expressly waived, anything contained herein or in the
Revolving Credit Note to the contrary notwithstanding, and/or (iii) proceed to
enforce payment of the Revolving Credit Note and to exercise any and all of its
rights hereunder, under the Revolving Credit Note, under the other Loan
Documents or otherwise available to the Bank.
SECTION 11
INDEMNIFICATION
From and at all times after the date of this Agreement, and in addition
to all of the Bank's other rights and remedies, the Company agrees to hold the
Bank harmless from, and to indemnify the Bank against, all losses, damages,
costs and expenses (including, without limitation, reasonable attorneys' fees,
costs and expenses) incurred by the Bank from and after the date hereof, whether
direct, indirect or consequential, as a result of or arising from or relating to
any suit, action or proceeding by any Person, whether threatened or initiated,
asserting a claim for any legal or equitable remedy against the Bank or any
other Person under any statute or regulation, including, without limitation, any
federal or state securities laws, or under any common law or equitable cause or
otherwise, arising from or in connection with the negotiation, preparation,
execution or performance of, or the financing transactions contemplated by, this
Agreement or any of the other Loan Documents, or the Bank's lending of funds or
other extensions of credit to the Company hereunder; provided, however, that the
foregoing indemnification shall not protect the Bank from any loss, damage, cost
or expense directly attributable to the Bank's gross negligence or willful
misconduct. All of the indemnified losses, damages, costs and expenses described
above shall be payable by the Company upon demand by the Bank, and the payment
thereof shall be secured by any collateral now or hereafter provided by or on
behalf of the Company to the Bank and shall be an obligation of the Company
guaranteed by the Guarantors pursuant to the Guaranties.
<PAGE>
SECTION 12
MISCELLANEOUS
12.1 COSTS AND EXPENSES. The Company hereby agrees that it will pay all
out-of-pocket expenses incurred by the Bank in connection with the negotiation
and preparation of this Agreement and the other Loan Documents (whether or not
the transactions hereby contemplated shall be consummated), the waiver of any
provision hereof or thereof, any amendments to or other modifications of any of
the provisions hereof or thereof, the making of Advances under the Revolving
Credit Facility, the issuance of the Letters of Credit and the enforcement of
the rights of the Bank in connection with this Agreement and the other Loan
Documents, including but not limited to, the reasonable fees and disbursements
of counsel for the Bank.
12.2 CUMULATIVE RIGHTS AND NO WAIVER. Each and every right granted to the Bank
hereunder or under any other document delivered hereunder or in connection
herewith, or allowed it by law or equity, shall be cumulative and may be
exercised from time to time. No failure on the part of the Bank to exercise, and
no delay in exercising, any right shall operate as a waiver thereof, nor shall
any single or partial exercise by the Bank of any right preclude any other or
future exercise thereof or the exercise of any other right.
<PAGE>
12.3 INDEPENDENCE OF COVENANTS. Each covenant and agreement of the Company
contained herein is independent of each other covenant and agreement of the
Company contained herein. The fact that the operation of any such covenant or
agreement permits a particular action to be taken or condition to exist does not
mean that such action or condition is not prohibited, restricted or conditioned
by operation of another such covenant or agreement.
12.4 NOTICES. All notices, requests and other communications to either party
hereunder will be in writing and will be given to such party at its address or
telefacsimile number set forth below or such other address or telefacsimile
number as such party may hereafter specify in writing for this purpose by notice
to the other party:
If to the Company:
Comdial Corporation
1180 Seminole Trail
Charlottesville, Virginia 22901
Attention: Christian L. Becken
Telefacsimile: (804) 978-2512
With a copy to:
Kurt J. Krueger, Esquire
McGuire, Woods, Battle & Boothe, L.L.P.
Court Square Building
418 East Jefferson Street
Charlottesville, Virginia 22902
Telefacsimile: (804) 980-2222
<PAGE>
If to the Bank:
NationsBank, N.A.
300 East Main Street
Charlottesville, Virginia 22902
Attention: David T. Paulson
Telefacsimile: (804) 977-2333
With a copy to:
Jeffrey M. Gill, Esquire
Mays & Valentine, L.L.P.
NationsBank Center - 21st Floor
1111 East Main Street
Richmond, Virginia 23219
Telefacsimile: (804) 697-1339
Each such notice, request or other communication will be effective (i) if given
by telefacsimile, when receipt is confirmed by telephone, (ii) if given by mail,
three (3) Business Days after it is deposited in the U.S. mail with first class
postage prepaid, addressed as provided above, or (iii) if given by any other
means, when delivered at the applicable address as provided above.
12.5 APPLICABLE LAW. This Agreement and the Revolving Credit Note shall be
construed in accordance with and governed by the laws of the Commonwealth of
Virginia.
12.6 MODIFICATIONS. No modification, amendment or waiver of any provision of
this Agreement, nor consent to any departure by the Company therefrom shall in
any event be effective unless the same shall be in writing and signed by the
Bank and then such waiver or consent shall be effective only in the specific
instance and for the purpose for which given. No notice to or demand upon the
Company in any case shall entitle the Company to any other or further notice or
demand in the same or similar circumstances.
<PAGE>
12.7 SURVIVORSHIP. All covenants, agreements, representations and warranties
made herein and in the certificates delivered pursuant hereto shall survive the
making of the Advances under the Revolving Credit Facility, the execution and
delivery of the Revolving Credit Note and the issuance of any Letters of Credit
and shall continue in full force and effect so long as the Company may borrow
hereunder or any Letter of Credit is outstanding or any portion of the Revolving
Credit Note or any obligation hereunder or under any other Loan Document is
outstanding and unpaid. Whenever in this Agreement either of the parties hereto
is referred to, such reference shall be deemed to include the successors and
assigns of such party, and all covenants, promises and agreements by or on
behalf of the Company which are contained in this Agreement shall bind the
successors and assigns of the Company and inure to the benefit of the successors
and assigns of the Bank. The Company shall not have the right to assign any of
its rights or obligations hereunder
12.8 EXECUTION IN COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each of
which when so executed and delivered shall be deemed to be an original and all
of which taken together shall constitute but one and the same instrument.
12.9 HEADINGS. Section and subsection headings in this Agreement are included
herein for convenience of reference only and shall not constitute a part of this
Agreement for any other purpose.
12.10 ARBITRATION. Any controversy or claim between the parties hereto including
but not limited to those arising out of or relating to this Agreement or any
related agreements or instruments, including any claim based on or arising from
an alleged tort, shall be determined by binding arbitration in accordance with
the Federal Arbitration Act (or if not applicable, applicable state law), the
rules of practice and procedure for the arbitration of commercial disputes of
Judicial Arbitration and Mediation Services, Inc./Endispute (J.A.M.S.), and the
"special rules" set forth below. In the event of any inconsistency, the special
rules shall control. Judgment upon any arbitration award may be entered in any
court having jurisdiction. Either party to this Agreement may bring an action,
including a summary or expedited proceeding, to compel arbitration of any
controversy or claim to which this Agreement applies in any court having
jurisdiction over such action.
<PAGE>
The arbitration shall be conducted in Charlottesville, Virginia and
administered by J.A.M.S. who will appoint an arbitrator; if J.A.M.S. is unable
or legally precluded from administering the arbitration, then the American
Arbitration Association will serve. All arbitration hearings will be commenced
within ninety (90) days of the demand for arbitration; further, the arbitrator
shall only, upon a showing of cause, be permitted to extend the commencement of
such hearing for up to an additional sixty (60) days.
Nothing in this Agreement shall be deemed to (i) limit the applicability
of any otherwise applicable statute of limitation or repose or any waivers
contained in this agreement; or (ii) be a waiver by the Bank of the protection
afforded to it by 12 U.S.C. Sec. 91 or any substantially equivalent state law;
or (iii) limit the right of the Bank (a) to exercise self help remedies such as
(but not limited to) setoff, or (b) to foreclose against any real or personal
property collateral, or (c) to obtain from a court provisional or ancillary
remedies such as (but not limited to) injunctive relief, writ of possession or
the appointment of a receiver. The Bank may exercise such self help rights,
foreclose upon such property, or obtain such provisional or ancillary remedies
before, during or after the pendency of any arbitration proceeding brought
pursuant to this Agreement. Neither this exercise of self help remedies nor the
institution or maintenance of an action for foreclosure or provisional or
ancillary remedies shall constitute a waiver of the right of any party,
including the claimant in any such action, to arbitrate the merits of the
controversy or claim occasioning resort to such remedies.
<PAGE>
12.11 ENTIRE AGREEMENT. This Agreement and the other Loan Documents constitute
the entire agreement of the Company and the Bank with respect to the subject
matter hereof and supersede all prior or contemporaneous agreements, whether
oral or written.
<PAGE>
IN WITNESS WHEREOF, the Company and the Bank have caused this Agreement
to be duly executed by their duly authorized officers, all as of the day and
year first above written.
COMDIAL CORPORATION
By: \s\ Christian L. Becken
------------------------
Christian L. Becken
Its: Sr. VP and CFO
------------------------
NATIONSBANK, N.A.
By: \s\ David T. Paulson
------------------------
David T. Paulson
Its: Vice President
------------------------
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 29,
1999, appearing in this Annual Report on Form 10-K of Comdial Corporation for
the year ended December 31, 1998.
/s/ Deloitte & Touche LLP
- -------------------------
DELOITTE & TOUCHE LLP
Richmond, Virginia
March 24, 1999
152
EXHIBIT 24
POWER OF ATTORNEY
I, Robert P. Collins, a duly elected Director of COMDIAL CORPORATION, a Delaware
corporation, do hereby constitute and appoint William G. Mustain and Manfred
Funke, or either of them, my true and lawful attorneys-in-fact, each with full
power of substitution, for me and in my name, place and stead, in any and all
capacities (including without limitation, as Director of Comdial), to sign
Comdial's Annual Report on Form 10-K for the year ended December 31, 1998, which
is to be filed with the Securities and Exchange Commission, with all exhibits
thereto, and any and all documents in connection therewith, hereby granting unto
said attorney-in-fact and agent full power and authority to do and perform any
and all acts and things requisite and necessary to be done, and hereby ratifying
and confirming all that said attorney-in-fact and agent may do or cause to be
done by virtue hereof. This power of attorney shall not terminate upon my
disability.
Dated: 02/8/99
/s/ Robert P. Collins
- ---------------------
Robert P. Collins
153
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
I, Barbara Perrier Dreyer, a duly elected Director of COMDIAL CORPORATION, a
Delaware corporation, do hereby constitute and appoint William G. Mustain and
Manfred Funke, or either of them, my true and lawful attorneys-in-fact, each
with full power of substitution, for me and in my name, place and stead, in any
and all capacities (including without limitation, as Director of Comdial), to
sign Comdial's Annual Report on Form 10-K for the year ended December 31, 1998,
which is to be filed with the Securities and Exchange Commission, with all
exhibits thereto, and any and all documents in connection therewith, hereby
granting unto said attorney-in-fact and agent full power and authority to do and
perform any and all acts and things requisite and necessary to be done, and
hereby ratifying and confirming all that said attorney-in-fact and agent may do
or cause to be done by virtue hereof. This power of attorney shall not terminate
upon my disability.
Dated: 02/8/99
/s/ Barbara Perrier Dreyer
- --------------------------
Barbara Perrier Dreyer
154
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
I, A. M. Gleason, a duly elected Director of COMDIAL CORPORATION, a Delaware
corporation, do hereby constitute and appoint William G. Mustain and Manfred
Funke, or either of them, my true and lawful attorneys-in-fact, each with full
power of substitution, for me and in my name, place and stead, in any and all
capacities (including without limitation, as Director of Comdial), to sign
Comdial's Annual Report on Form 10-K for the year ended December 31, 1998, which
is to be filed with the Securities and Exchange Commission, with all exhibits
thereto, and any and all documents in connection therewith, hereby granting unto
said attorney-in-fact and agent full power and authority to do and perform any
and all acts and things requisite and necessary to be done, and hereby ratifying
and confirming all that said attorney-in-fact and agent may do or cause to be
done by virtue hereof. This power of attorney shall not terminate upon my
disability.
Dated: 02/8/99
/s/ A. M. Gleason
- -----------------
A. M. Gleason
155
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
I, Michael C. Henderson, a duly elected Director of COMDIAL CORPORATION, a
Delaware corporation, do hereby constitute and appoint William G. Mustain and
Manfred Funke, or either of them, my true and lawful attorneys-in-fact, each
with full power of substitution, for me and in my name, place and stead, in any
and all capacities (including without limitation, as Director of Comdial), to
sign Comdial's Annual Report on Form 10-K for the year ended December 31, 1998,
which is to be filed with the Securities and Exchange Commission, with all
exhibits thereto, and any and all documents in connection therewith, hereby
granting unto said attorney-in-fact and agent full power and authority to do and
perform any and all acts and things requisite and necessary to be done, and
hereby ratifying and confirming all that said attorney-in-fact and agent may do
or cause to be done by virtue hereof. This power of attorney shall not terminate
upon my disability.
Dated: 02/8/99
/s/ Michael C. Henderson
- ------------------------
Michael C. Henderson
156
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
I, John W. Rosenblum, a duly elected Director of COMDIAL CORPORATION, a Delaware
corporation, do hereby constitute and appoint William G. Mustain and Manfred
Funke, or either of them, my true and lawful attorneys-in-fact, each with full
power of substitution, for me and in my name, place and stead, in any and all
capacities (including without limitation, as Director of Comdial), to sign
Comdial's Annual Report on Form 10-K for the year ended December 31, 1998, which
is to be filed with the Securities and Exchange Commission, with all exhibits
thereto, and any and all documents in connection therewith, hereby granting unto
said attorney-in-fact and agent full power and authority to do and perform any
and all acts and things requisite and necessary to be done, and hereby ratifying
and confirming all that said attorney-in-fact and agent may do or cause to be
done by virtue hereof. This power of attorney shall not terminate upon my
disability.
Dated: 02/8/99
/s/ John W. Rosenblum
- ---------------------
John W. Rosenblum
157
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
I, Dianne C. Walker, a duly elected Director of COMDIAL CORPORATION, a Delaware
corporation, do hereby constitute and appoint William G. Mustain and Manfred
Funke, or either of them, my true and lawful attorneys-in-fact, each with full
power of substitution, for me and in my name, place and stead, in any and all
capacities (including without limitation, as Director of Comdial), to sign
Comdial's Annual Report on Form 10-K for the year ended December 31, 1998, which
is to be filed with the Securities and Exchange Commission, with all exhibits
thereto, and any and all documents in connection therewith, hereby granting unto
said attorney-in-fact and agent full power and authority to do and perform any
and all acts and things requisite and necessary to be done, and hereby ratifying
and confirming all that said attorney-in-fact and agent may do or cause to be
done by virtue hereof. This power of attorney shall not terminate upon my
disability.
Dated: 02/8/99
/s/ Dianne C. Walker
- --------------------
Dianne C. Walker
158
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
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<RECEIVABLES> 23,204
<ALLOWANCES> 198
<INVENTORY> 21,434
<CURRENT-ASSETS> 50,854
<PP&E> 48,752
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0
0
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<SALES> 118,958
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<INCOME-TAX> (10,737)
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