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, 1999
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 13, 2000, was approximately $150,859,000 (See Item 5).
The number of shares of Common Stock outstanding as of March 13, 2000, was
9,193,116.
DOCUMENTS INCORPORATED BY REFERENCE:
Comdial's 1999 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, 1999, are
incorporated by reference under Part III of this Form 10K.
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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 9
(b) Financial Information About Industry Segment 11
Product Sales Information 12
(c) Narrative Description of Business 12
Products 12
Business Segment Products 12
Digital Systems 12
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 25
Item 6. Selected Financial Data 25
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 25
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 26
Item 11. Executive Compensation 26
Item 12. Security Ownership of Certain Beneficial
Owners and Management 26
Item 13. Certain Relationships and Related Transactions 26
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Part IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 27
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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 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, voice-over the Internet, computer-telephone
integration ("CTI"), and on-site wireless communications .
Building on its base business of advanced digital switching systems for
small to mid-sized businesses, Comdial is actively engaged in creating specialty
applications which integrate voice/data solutions for specific vertical markets.
The Company plans to grow by continuing to ably serve its traditional customer
base while capitalizing on growth opportunities for integrated products within
these vertical markets.
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
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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.
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 has an installed base of
approximately 350,000 telephone systems and 3.7 million telephones. Comdial's
growth has been principally as a result of increased sales of digital telephone
systems and solutions and software products. 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 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 2000 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 500 employees, while
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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.
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. Examples of
terminal devices include telephones, 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, (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 six percent from 1999
to 2000. Comdial ranks among the top six of industry participants. Significant
trends in this market are (1) the continuing growth of digital 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.
In 1992, Comdial began a transition from proprietary analog systems to
larger digital systems. That year, Comdial introduced the Digital Expandable
("DXP") switch. 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").
In 1996, responding to growing market interest in CTI, Comdial introduced
connectivity software that integrated with a broader range of network operating
systems. In 1997, Comdial introduced Impact FX, a 96 port switch that allowed
software applications, such as voice processing, to be enabled electronically.
In 1998, the Impact FX was substantially enhanced to address a broader range of
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applications (40 to 560 ports) and the design architecture modified to provide a
more cost-effective approach to expansion needs. New software applications were
created to provide even greater functionality.
In 1992, approximately 20 percent of Comdial's sales were attributable to
digital systems. In 1999, digital systems comprised 60 percent of Comdial's
sales and analog systems accounted for less than eight percent of sales.
In 1994, Comdial introduced its first wireless device, the Tracker, an
on-site paging system, followed by two-way wireless telephones, 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.
Voice Processing
The ability to digitize analog voice signals gave rise to the voice
processing business in the 1980s. In the 1990s, the introduction of powerful
personal computers provided a platform to make 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.
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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
continue to grow by approximately 25 percent from 1999 to 2000. Voice processing
systems are also measured by "ports" but the term 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.
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.
In the third quarter of 1999, Comdial introduced a unified messaging system
combining voice mail, fax, and e-mail, called iNTerchange(TM). The system allows
the user to manage information by choosing the best way to respond to messages.
The system is scalable to 128 ports and integrates with over 100 different
telephone systems. The system is produced by Comdial's subsidiary, KVT.
Integrated Voice/Data Solutions
One of Comdial's Solutions and Software segment strengths is its design
control over four core technologies - voice switching, voice messaging, unified
messaging, 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
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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, or 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 Senior Housing systems offer 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 greatly improved customer
service and/or lower operating costs.
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. In 1999, Array released the Array Series 3000
line carrier class voice over IP gateway products. The Series 3000 provides
voice quality by incorporating the latest in jitter buffer management
technology. The system supports centralized deployment of IP telephony services
and offers built-in global routing software.
Strategy
Comdial seeks to expand sales and profits at acceptable risk levels by
implementing the following:
(1) leveraging expertise in core communications technology to develop and
introduce advanced solutions,
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(2) pursuing development of the next generation communications platforms
and applications by leveraging expertise in Microsoft Windows(R),
(3) developing integrated solutions for fast-growing vertical markets,
(4) expanding its channels of distribution and methods of product delivery
to both markets, and
(5) increasing direct sales through national account programs with large
end-users and vertical market accounts.
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 1999, Comdial introduced
important enhancements such as IP telephony and a Unified Messaging System that
combines voice mail, fax, and e-mail. Comdial intends to continue to add value
to its core digital switching products such as the Concierge hospitality
product. Comdial introduced various new features that the Concierge system now
offers such as wireless telephones and call costing.
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.
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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. National accounts are Comdial's direct sales through
vertical markets such as senior housing, hospitality, and new real estate.
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), and the VVP and Small Office
voice processing systems (Rhetorex and Dialogic).
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENT
During the fiscal years ended December 31, 1999, 1998 and 1997,
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 1999 Annual Report to Stockholders.
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Product Sales Information
The following table presents certain relevant information concerning
Comdial's business segments for the periods indicated:
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Years Ended December 31,
(In thousands) 1999 1998 1997
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Business Segment Sales:
Digital Systems $88,479 $80,452 $70,181
Solutions and Software 48,713 36,194 31,625
Analog and Other 10,768 12,331 16,755
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Net Sales $147,960 $128,977 $118,561
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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.
Business Segment Products
Digital Systems
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.
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Impact DXP system, originally introduced in 1992, has had several major
upgrades since then. There are various Impact DXP Systems: 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. 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 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.
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
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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
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.
Avalon, introduced in 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.
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
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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
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.
VVP-NT and Small Office-NT were introduced in 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.
Debut was introduced in 1998 to meet the needs of small businesses
seeking basic voice processing capabilities at an attractive price.
INTerchange(TM) is a unified messaging system which was introduced in
the third quarter of 1999. This system was specifically designed to meet small
and large company's needs. It is a new Windows NT(TM) based unified messaging
system that fits into any office LAN and combines voice mail, fax and e-mail
capabilities. The system provides a way to better prioritize messages with more
efficient alternatives for receiving and responding to each type of electronic
messaging.
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Ctvoice was introduced in 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.
Series 3000, introduced by Comdial's subsidiary Array, was released for
production in the third quarter of 1999. The Series 3000 IP gateway product is a
completely modular system that offers scalability from two to thousands of
ports. Its built in multi-lingual voice response (IVR) supports an infinite
number of multi-language voice prompts customizable by the end user.
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.
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.
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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. This product
was discontinued in the fourth quarter of 1999.
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
were 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 1999, net sales
to ALLTEL, Graybar, and North Supply amounted to approximately $24.4 million
(16%), $34.8 million (24%), and $25.3 million (17%), 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
Preferred Dealers, including exclusive access to certain products, cash rebates
17
<PAGE>
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 up to maximum of 24
months. Products manufactured by Comdial can be returned 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.
This program is also a key delivery vehicle for sophisticated computer telephony
solutions sales that often require advanced custom integration and superior
18
<PAGE>
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 1999, 1998, and 1996 comprise the majority of
engineering, research, and development costs, which were $9.7 million, $7.3
million, and $6.5 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 1999, 1998, and 1997 were $2.9 million, $2.8 million, and $2.0
million, respectively. The amounts of software development cost that were
amortized in 1999, 1998, and 1997 were approximately $1.8 million, $1.4 million,
and $1.0 million, respectively. Comdial is committed to improving its existing
products and developing new telecommunications equipment in order to maintain or
increase its market share.
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<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.
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<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
21
<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 will either
expire at the end of the patent license or the end an agreed-to period.
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 required remediation
or replacement because of potential Year 2000 issues. Comdial has provided
upgrades or taken other remedial steps to correct any non-compliant products
that remain under warranty. Comdial did not make any significant expenditures
solely to address Year 2000 issues.
Management believes that Comdial has properly addressed the Year 2000
issues in order to mitigate any adverse operational or financial impacts.
Furthermore, Comdial has implemented a requirement that its suppliers certify
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<PAGE>
that all products and services provided to Comdial are Year 2000 compliant (see
Note 13 to the Consolidated Financial Statements and Management's Discussion and
Analysis of Financial Condition and Results of Operations).
Employees
As of December 31, 1999, Comdial, including subsidiaries, had 922
full-time employees, of whom 553 were engaged in manufacturing, 124 in
engineering, 188 in sales and support, and 57 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
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approved by the Virginia Department of Environmental Quality ("DEQ"), the
successor administrative agency to the Sate Water Control Board, after which
Comdial commenced the remediation efforts required thereunder.
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.
DEQ also required some assessment work of the chlorinated solvents under the
Underground Storage Tank Petroleum Program, however Comdial determined in the
late 1990s that it could expedite matters by entering Virginia's Voluntary
Remediation Program (the "VRP").
In 1999, Comdial was accepted into the VRP to start the final closure
process for the assessment and clean up, if necessary, of leakage of the
petroleum and chlorinated solvents. The petroleum leakage was subsequently added
to the VRP with the chlorinated solvents in 2000. A Voluntary Remediation Report
("VRR") required under DEQ's regulations consists of a site characterization of
the horizontal and vertical extent of the contamination, a risk assessment and a
remedial action plan. The completion of the site characterization portion of the
VRR will require several new wells to determine the extent of the contamination
and some additional sampling.
Comdial has hired outside consultants to do all the necessary testing as
well as all the work required to clean up, if necessary, the contamination.
Comdial is planning on completing this process by the end of year 2000, subject
to the necessary review and approval of DEQ.
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 1999 to a vote of
Comdial's security holders.
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PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters
Information is incorporated by reference in Comdial's 1999 Annual Report
to stockholders under the caption "Related Stockholders Matters." As of March
13, 2000 there were 1,965 record holders of Comdial's Common Stock.
ITEM 6. Selected Financial Data
Information is incorporated by reference in Comdial's 1999 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 in Comdial's 1999 Annual Report to
stockholders under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
ITEM 8. Financial Statements and Supplementary Data.
Information is incorporated by reference in Comdial's 1999 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.
25
<PAGE>
Part III
ITEM 10. Directors and Executive Officers of the Registrant
Information concerning Directors and Executive Officers of the Registrant
is incorporated by reference under the caption "Election of Directors" and
"Executive Officers of Comdial" on pages 7 through 9 and 10 through 13 of
Comdial's definitive proxy statement for the annual meeting of stockholders to
be held on May 4, 2000.
ITEM 11. Executive Compensation
Executive compensation and management transactions information is
incorporated by reference under the caption "Executive Compensation" on pages 13
through 22 of Comdial's definitive proxy statement for the annual meeting of
stockholders to be held on May 4, 2000.
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 4 through 6 of
Comdial's definitive proxy statement for the annual meeting of stockholders to
be held on May 4, 2000.
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 13
and 21 of Comdial's definitive proxy statement for the annual meeting of
stockholders to be held on May 4, 2000.
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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 1999 Annual Report to
stockholders (page references are to page numbers in Comdial's
Annual Report):
Page Number
-----------
Independent Auditors' Report 22
Report of Management 22
Financial Statements:
Consolidated Balance Sheets -
December 31, 1999 and 1998 23
Consolidated Statements of Operations -
Years ended December 31, 1999, 1998, and 1997 24
Consolidated Statements of Stockholders' Equity -
Years ended December 31, 1999, 1998, and 1997 25
Consolidated Statements of Cash Flows -
Years ended December 31, 1999, 1998, and 1997 26
Notes to Consolidated Financial Statements -
Years ended December 31, 1999, 1998, and 1997 27-41
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.)*
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(10) Material Contracts:
10.1 Registrant's 1992 Stock Incentive Plan and 1992
Non-employee Directors Stock Incentive Plan. (Exhibits 28.1
and 28.2 of Registrant's Form S-8 dated October 21, 1992.)*
10.2 Amendment No. 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 The Registrant's Executive Stock Ownership Plan effective
January 1, 1996. (Exhibit 10.10 to Registrant's Form 10-K
for the year ended December 31, 1995.)*
10.9 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.)*
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10.10 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.)*
10.11 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.)*
10.12 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.)*
10.13 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.)*
10.14 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.)*
10.15 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.)*
10.16 Second Amendment to Comdial's 401(k) Plan dated November
29, 1998. (Exhibit 10.25 to Registrant's Form 10-K for the
year ended December 31, 1998.)*
10.17 Third Amendment to Comdial's 401(k) Plan dated February 8,
1999.
10.18 Credit Agreement dated October 22, 1998 among Registrant
and NationsBank, N.A. (Exhibit 10.26 to Registrant's Form
10-K for the year ended December 31, 1998.)*
29
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10.19 Comdial's Retirement Benefit Restoration Plan dated July 5,
1999.
* Incorporated by reference herein.
30
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(11) Schedule of Computation of Earnings Per Common
Share
(13) Registrant's 1999 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 28, 2000, appearing in the Annual Report on
Form 10-K of Comdial Corporation for the year ended December 31,
1999, 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
1999.
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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 29th day of
March, 2000.
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 29, 2000
- --------------------
Robert P. Collins
* Director March 29, 2000
- --------------------
Barbara J. Dreyer
* Director March 29, 2000
- --------------------
A. M. Gleason
* Director March 29, 2000
- --------------------
John W. Rosenblum
* Director March 29, 2000
- --------------------
Robert E. Spekman
* Director March 29, 2000
- --------------------
Dianne C. Walker
/s/ William G. Mustain Chairman of the Board, March 29, 2000
- ---------------------- President and Chief
William G. Mustain Executive Officer
/s/ Tara Y. Harrison Controller March 29, 2000
- --------------------
Tara Y. Harrison
* By:/s/ William G. Mustain
--------------------------
William G. Mustain, Attorney-In-Fact
32
EXHIBIT 10.17
THIRD AMENDMENT TO THE
COMDIAL CORPORATION 401(k) PLAN
THIRD 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 March 1, 1999, the first sentence of Section 3.3 of the Plan
is amended to read as follows:
The Employer shall make a Matching Contribution equal to 50% of the
Participant's Salary Reduction Contributions, up to 6% of such
Participant's Compensation for the Plan Year in which the Participant
elects to have Salary Reduction Contributions made on his behalf.
II. In all respects not amended, the Plan is hereby ratified and confirmed.
* * * * * *
To record the adoption of the Amendment set forth above, the Employer
has caused this document to be signed on this 8th day of February, 1999.
COMDIAL CORPORATION
By: \s\ William G. Mustain
-------------------------
William G. Mustain
EXHIBIT 10.19
COMDIAL CORPORATION
RETIREMENT BENEFIT RESTORATION PLAN
Amended and Restated
July 5, 1999
<PAGE>
COMDIAL CORPORATION
RETIREMENT BENEFIT RESTORATION PLAN
Purpose
The Board of Directors of Comdial Corporation determined that the
adoption of the Retirement Benefit Restoration Plan will assist it in attracting
and retaining those employees whose judgment, abilities and experience will
contribute to its continued progress. The Plan is intended to be a plan that is
unfunded and maintained primarily for the purpose of providing deferred
compensation for a "select group of management or highly compensated employees"
(as such phrase is used in the Employee Retirement Income Security Act of 1974).
The Plan must be administered and construed in a manner that is consistent with
that intent.
Article I
Definitions
As used in the Plan, the following phrases or terms shall have the
indicated meanings. Any terms not defined will have the meaning provided in the
Retirement Plan.
1.1. "Accrued Benefit" means the benefit determined under Section 3.1
payable at Normal Retirement Age under the Retirement Plan based on the
Participant's service and compensation at the date of the determination.
1.2. "Affiliate" means any entity related to the Company the employees
of which are eligible to participate in the Retirement Plan.
1.3. "Average Compensation" means the average of a Participant's
earnings from the Company for the preceding 24 calendar months, as reportable on
Form W-2 adjusted as follows:
(a) increased by any elective deferrals made by the Company at
the direction of Participant; and
(b) decreased by (i) any "Retention Bonus" received after a
"Change in Control" (both as defined in the Comdial Corporation
Executive Severance Plan) and (ii) income recognized with respect to
Company stock, including income arising from the exercise of stock
options, grants of restricted stock, or other forms of stock-based
compensation.
The 24-month period shall end on the last day of the month preceding
the Participant's termination of employment or death. If the Company has
employed the Participant for less than 24 months, the Participant's earnings for
the entire period of employment shall be averaged.
1.4. "Beneficiary" means the person, persons, entity, entities or the
estate of a Participant which, in accordance with the provisions of the
Retirement Plan, is entitled to receive a benefit under the Retirement Plan on
account of the Participant's death. If no person is entitled to receive a
benefit under the Retirement Plan on account of the Participant's death, the
Participant has no Beneficiary under the Plan.
1.5. "Cause" shall mean:
(c) fraud or material misappropriation by the Participant with
respect to the business or assets of the Company,
(d) the persistent refusal or willful failure of the
Participant materially to perform his duties and responsibilities to
the Company, which continues after the Participant receives notice of
such refusal or failure,
(e) conduct by the Participant that constitutes disloyalty to
the Company, and that materially harms or has the potential to cause
material harm to the Company,
(f) the Participant's conviction of a felony or crime
involving moral turpitude,
(g) the use of drugs or alcohol that interferes materially
with the Participant's performance of his duties, or
(h) the violation of any significant Company policy or
practice, including but not limited to the Company policy prohibiting
sexual harassment.
1.6. "Code" means the Internal Revenue Code of 1986, as amended.
1.7. "Company" means Comdial Corporation or any Affiliate.
1.8. "Compensation Committee" means the Compensation Committee of the
Board of Directors of Comdial Corporation.
1.9. "Disabled" means a condition that qualifies the Participant for a
Disability Retirement Pension under the Retirement Plan.
1.10. "Eligible Employee" means an individual (i) who is employed by
Comdial Corporation or an Affiliate, (ii) who is a member of management or a
highly compensated employee, and (iii) whose Retirement Plan benefit is reduced
or limited by Code Section 401(a)(17), Code Section 415, or both.
1.11. "Executive Officer" means an officer of the Company who is
elected by the Board and who has management responsibilities and duties.
1.12. "Lump Sum" means a single sum payment equal to the actuarial
equivalent of the Participant's Restoration Benefit and Supplemental Retirement
Benefit, if any. The actuarial equivalent shall be based on the Participant's
age at the time of the determination and shall be calculated based on an
interest rate of seven percent. All other actuarial factors shall be the same as
used in the Retirement Plan at the date of the calculation for purposes of
calculating a lump sum payment.
1.13. "Participant" means an Eligible Employee who is an Executive
Officer or who is designated by the Compensation Committee to be a Participant
under the Plan. An individual shall remain a Participant only so long as the
individual remains an Eligible Employee and his or her designation as a
Participant has not been revoked or rescinded.
1.14. "Plan" means the Comdial Corporation Retirement Benefit
Restoration Plan.
1.15. "Retirement" and "Retire" mean severance from employment with the
Company on or after attaining a vested benefit in the Retirement Plan.
1.16. "Retirement Plan" means the Comdial Corporation Employees
Retirement Plan and any successor plan, as amended from time to time.
1.17. "Severance Benefit" means a Severance Benefit as described in the
Comdial Corporation Executive Severance Plan.
1.18. "Social Security Benefit" means a monthly dollar amount that is
estimated to be available to a Participant at age 62 under the provisions of
Title II of the Social Security Act in effect at the time of the Participant's
termination of employment (or at age 62, if earlier). A Participant's Social
Security Benefit shall not be adjusted by subsequent increases in Social
Security benefits, subsequent employment or otherwise. If a Participant
terminates employment before attaining age 55, his Social Security Benefit shall
be estimated by assuming that his compensation continues until he attains age 62
at the same rate as in effect when he terminates employment. If a Participant
terminates employment on or after attaining age 55, his Social Security Benefit
shall be estimated by assuming that he has no further compensation after he
terminates employment with the Company. Estimates of the Participant's earnings
history shall be based on a salary scale, projected backward, applied to the
Participant's compensation as of the date on which the computation is made. The
salary scale shall represent the actual change in the national average wage from
one year to the next as determined by the Social Security Administration. The
Social Security Benefit of a Participant based upon estimates of earnings
history shall be adjusted if the Participant supplies documentation of actual
earnings history before payment of benefits commence under the Plan. The fact
that a Participant does not actually receive an amount from Social Security
equal to the Social Security Benefit because of failure to apply, continuance of
work, or for any other reason, shall be disregarded.
1.19. "Supplemental Participant" means a Participant who is a
Participant as of July 5, 1999 and who, as of July 5, 1999, either has attained
age 55 or has at least 15 Years of Benefit Service (as defined under the
Retirement Plan).
<PAGE>
Article II
Participation
An Eligible Employee who is an Executive Officer shall become a
Participant in the Plan as of the later of the adoption of the Plan or the
Eligible Employee's date of hire. An Eligible Employee who is not an Executive
Officer and who is designated to participate in the Plan by the Compensation
Committee shall become a Participant in the Plan as of the date specified by the
Compensation Committee. A Participant shall continue to participate in the Plan
until such date as the Compensation Committee designates that he or she is no
longer a Participant or until the date that he or she is no longer an Eligible
Employee. The rights of any individual who was a Participant and whose
designation as a Participant is revoked or rescinded by the Compensation
Committee shall cease to accrue further rights under the Plan but shall not
forfeit any rights accrued to the date when the designation is revoked except as
provided in Section 5.2.
Article III
Benefits
Except as provided in Article IV and subject to the limitations set
forth in Articles V and VI, the benefits of a Participant and his or her
Beneficiary shall be as follows:
3.1. (a) Upon Retirement, a Participant shall be entitled to a
Restoration Benefit equal to the excess, if any, of (x) over (y) below where:
(x) = the monthly benefit that would have been
payable to the Participant under the Retirement Plan
but for the application of the limits in Code
Sections 401(a)(17) and 415; and
(y) = the monthly benefit that the Participant is
entitled to receive under the Retirement Plan.
(b) Upon termination of employment, a Supplemental Participant
shall be entitled to the following additional monthly Supplemental Retirement
Benefit:
(i) If the Supplemental Participant was the Chief
Executive Officer of the Company, the Supplemental Retirement Benefit
is equal to fifty-six percent (56%) of the Supplemental Participant's
Average Compensation, reduced by the sum of (A) any monthly amounts
received as a benefit under subsection (a), above, (B) the monthly
benefit that the Supplemental Participant is entitled to receive under
the Retirement Plan, and (C) the Supplemental Participant's Social
Security Benefit.
(ii) If the Supplemental Participant was a Senior
Vice President or Vice President of the Company, the Supplemental
Retirement Benefit is equal to forty percent (40%) of the Participant's
Average Compensation, reduced by the sum of (A) any monthly amounts
received as a benefit under subsection (a), (B) the monthly benefit
that the Supplemental Participant is entitled to receive under the
Retirement Plan, and (C) the Supplemental Participant's Social Security
Benefit.
(c) If a Participant receives payment of his Supplemental
Retirement Benefit before attaining age 62, his Supplemental Retirement Benefit
shall be reduced by .25 percent (0.25%) for each full month that the payment
date precedes the Participant attaining age 62.
(d) Except as provided in subsection (e), any Restoration
Benefit or Supplemental Retirement Benefit payable under this Section 3.1 shall
be determined and begin as of the date that the Participant's retirement benefit
under the Retirement Plan is scheduled to commence. Except as provided in
subsection (e), any Restoration Benefit or Supplemental Retirement Benefit
payable under this Section 3.1 shall be computed and paid in the same form as
the Participant's retirement benefit under the Retirement Plan.
(e) In lieu of payments as described in subsection (d), a
Participant who meets one or more of the conditions in (i) - (iii) below may
elect to receive the Restoration Benefit and the Supplemental Retirement Benefit
(if any) in the form of a Lump Sum. The election to receive a Lump Sum shall be
made as provided in subsection (f).
(i) The Participant is age 55 or older at the time of
termination of employment may receive a Lump Sum payable as soon as
practicable after termination of employment.
(ii) A Participant who terminates employment prior to
attainment of age 55 may receive a Lump Sum when the Participant
attains age 55.
(iii) A Participant who is entitled to a Severance
Benefit may receive a Lump Sum payable as soon as practicable after
termination of employment.
(f) A Participant must make the election to receive a Lump Sum
as provided in subsection (e) either (i) at least six (6) months prior to the
commencement of the receipt of benefits or (ii) at least one (1) month prior to
the commencement of the receipt of benefits if the election is approved by the
Compensation Committee in its absolute discretion. Upon the denial of a
Participant's election, the Participant shall receive the benefits provided
under the Plan in the form that is otherwise payable absent the election. In
addition, any Participant may elect to receive a Lump Sum for future payments
during the period from July 5, 1999 until August 31, 1999. A Participant may
revoke a prior election to receive a Lump Sum at any time. A revocation will be
effective six (6) months after the date of the revocation unless the
Compensation Committee approves an earlier effective date in its absolute
discretion. The payment of a Lump Sum shall be full satisfaction of the Plan's
obligation to provide benefits to the affected Participants and their
Beneficiaries
3.2. If the Participant becomes Disabled prior to his or her Retirement
and during his or her employment with the Company, he shall be entitled to
receive a benefit calculated and paid in the manner set forth in Section 3.1
commencing on his or her Disability Retirement Date under the Retirement Plan.
3.3. (a) Upon the Participant's death, if the Beneficiary is entitled
to a benefit under the Retirement Plan, the Beneficiary shall be entitled to a
monthly benefit under this Plan equal to the excess, if any, of (x) over (y)
where:
(x) = the monthly benefit that would have been
payable to the Beneficiary under the Retirement Plan
but for the application of the limits in Code
Sections 401(a)(17) and 415 in the calculation of the
Participant's benefits under the Retirement Plan; and
(y) = the monthly benefit that the Beneficiary is
entitled to receive under the Retirement Plan.
(b) At the death of a Supplemental Participant, if the
Beneficiary is entitled to a benefit under the Retirement Plan, the Beneficiary
shall be entitled to the following additional benefit:
(i) If the Supplemental Participant would have been
entitled to a benefit under Section 3.1(b)(i), a monthly benefit equal
to twenty-eight percent (28%) of the Participant's Average
Compensation, reduced by the sum of (A) any monthly amounts received as
a benefit under subsection (a), above, (B) the monthly benefit that the
Supplemental Participant is entitled to receive under the Retirement
Plan, and (C) the Supplemental Participant's Social Security Benefit.
(ii) If the Supplemental Participant would have been
entitled to a benefit under Section 3.1(b)(ii), a monthly benefit equal
to twenty percent (20%) of the Participant's Average Compensation,
reduced by the sum of (A) any monthly amounts received as a benefit
under subsection (a), above, (B) the monthly benefit that the
Supplemental Participant is entitled to receive under the Retirement
Plan and (C) the Supplemental Participant's Social Security Benefit.
(c) Any amount payable under this Section 3.3 shall be
determined and begin as of the date that the Beneficiary's benefit under the
Retirement Plan is scheduled to commence. The benefit payable under this Section
3.3 shall be computed and paid in the same form as the benefit payable to the
Beneficiary under the Retirement Plan.
3.4 In the event of a distribution under this Article III, the Accrued
Benefit of the Participant or Beneficiary under the Plan shall be reduced by the
Accrued Benefit distributed, and the Company shall have no further liability
with respect to the benefit distributed.
Article IV
Guarantees
Comdial Corporation has only a contractual obligation to make payments
of the benefits described in Article III. All benefits are to be satisfied
solely out of the general corporate assets of Comdial Corporation that shall
remain subject to the claims of its creditors. No assets of Comdial Corporation
will be segregated or committed to the satisfaction of its obligations to any
Participant or Beneficiary under this Plan. If Comdial Corporation, in its sole
discretion, elects to purchase life insurance on the life of a Participant in
connection with the Plan, the Participant must submit to a physical examination,
if required by the insurer, and otherwise cooperate in the issuance of such
policy.
Title to and beneficial ownership of all benefits described in the Plan
shall at all times remain with the Company. Participation in the Plan and the
right to receive payments under the Plan shall not give a Participant or
Beneficiary any proprietary interest in the Company or any of its assets. No
trust fund may be created in connection with the Plan (other than a trust that,
under applicable law, does not affect the characterization of this Plan as an
unfunded plan), and there shall be no required funding of amounts that may
become payable under the Plan. A Participant and his Beneficiary shall, for all
purposes, be general creditors of the Company.
Article V
Termination of Employment
5.1. The Plan does not in any way limit the right of the Company at any
time and for any reason to terminate the Participant's employment or such
Participant's status as an Eligible Employee. In no event shall the Plan, by its
terms or by implication, constitute an employment contract of any nature
whatsoever between the Company and a Participant.
5.2. A Participant who ceases to be an Eligible Employee or whose
employment with the Company is terminated either with or without cause, for
reasons other than death, Retirement or Total and Permanent Disability shall
immediately cease to be a Participant under this Plan as to future accruals. If
the Participant's employment is terminated due to Cause, the Participant shall
forfeit all rights and benefits under the Plan. In all other circumstances, the
Participant shall be entitled to benefits under the Plan based on the
Participant's Accrued Benefit at termination of employment.
5.3. A Participant who ceases to be an employee of the Company and who
is subsequently reemployed by the Company shall not accrue any additional
benefits on account of such later service for periods in which he is not a
Participant.
Article VI
Termination, Amendment or Modification of Plan
6.1. Except as provided in Section 6.4, Comdial Corporation reserves
the right to terminate, amend or modify this Plan, wholly or partially, at any
time and from time to time. Such right to terminate, amend or modify the Plan
shall be exercised for Comdial Corporation by its Board of Directors.
6.2. Section 6.1 notwithstanding, no action to terminate the Plan shall
be taken except upon written notice to each Participant to be affected thereby,
which notice shall be given not less than thirty (30) days prior to such action.
6.3. Any notice which shall be or may be given under the Plan shall be
in writing and shall be mailed by United States mail, postage prepaid. If notice
is to be given to Comdial Corporation, such notice shall be addressed to their
respective corporate offices; addressed to the attention of the Corporate
Secretary. If notice is to be given to a Participant, such notice shall be
addressed to the Participant's last known address.
6.4. The rights of Comdial Corporation set forth in Section 6.1 are
subject to the condition that its Board of Directors may not take any action to
terminate or amend the Plan that would decrease the benefit that would become
payable or is payable, as the case may be, with respect to a Participant who has
earned a vested benefit under the Retirement Plan.
6.5. Except as provided in Section 6.1 and 6.4, upon the termination of
this Plan as to Comdial Corporation by its Board of Directors, the Plan shall no
longer be of any further force or effect as to Participants, and neither Comdial
Corporation nor any Participant shall have any further obligation or right under
this Plan.
Article VII
Other Benefits and Agreements
The benefits provided for a Participant and his or her Beneficiary
under the Plan are in addition to any other benefits available to such
Participant under any other plan or program of the Company for its employees,
and, except as may otherwise be expressly provided for, the Plan shall
supplement and shall not supersede, modify or amend any other plan or program of
the Company in which a Participant is participating.
Article VIII
Restrictions on Transfer of Benefits
No right or benefit under the Plan shall be subject to anticipation,
alienation, sale, assignment, pledge, encumbrance or charge, and any attempt to
do so shall be void. No right or benefit hereunder shall in any manner be liable
for or subject to the debts, contracts, liabilities, or torts of the person
entitled to such benefit. If any Participant or Beneficiary under the Plan
should become bankrupt or attempt to anticipate, alienate, sell, assign, pledge,
encumber or charge any right to a benefit hereunder, then such right or benefit,
in the discretion of the Compensation Committee, shall cease and terminate, and,
in such event, the Compensation Committee may hold or apply the same or any part
thereof for the benefit of such Participant or Beneficiary, his or her spouse,
children, or other dependents, or any of them, in such manner and in such
portion as the Compensation Committee may deem proper.
Article X
Administration of the Plan
9.1. The Compensation Committee shall administer the Plan. Subject to
the provisions of the Plan, the Compensation Committee may adopt such rules and
regulations as may be necessary to carry out the purposes hereof. The
Compensation Committee's interpretation and construction of any provision of the
Plan shall be final and conclusive.
9.2. Comdial Corporation shall indemnify and save harmless each member
of the Compensation Committee against any and all expenses and liabilities
arising out of his or her membership on such Committee with respect to the Plan,
excepting only expenses and liabilities arising out of his or her own willful
misconduct. Expenses against which a member of the Compensation Committee shall
be indemnified hereunder shall include without limitation, the amount of any
settlement or judgment, costs, counsel fees, and related charges reasonably
incurred in connection with a claim asserted, or a proceeding brought or
settlement thereof. The foregoing right of indemnification shall be in addition
to any other rights to which any such member may be entitled.
9.3. In addition to the powers specified, the Compensation Committee
shall have the power to compute and certify the amount and kind of benefits from
time to time payable to Participants and their Beneficiaries under the Plan, to
authorize all disbursements for such purposes, and to determine whether a
Participant is entitled to a benefit under Section 3.2.
9.4. To enable the Compensation Committee to perform its functions, the
Company shall supply full and timely information to the Compensation Committee
on all matters relating to the compensation of all Participants, their
retirement, death or other cause for termination of employment, and such other
pertinent facts as the Compensation Committee may require. The Compensation
Committee may delegate any of its ministerial duties under the Plan to one or
more employees of the Company.
9.5. Each Participant or Beneficiary of a deceased Participant shall be
entitled to file with the Compensation Committee a written claim for benefits
under the Plan. The Compensation Committee will review the claim, and, if the
claim is denied, in whole or in part, the Compensation Committee will furnish
the claimant, within 90 days after the Compensation Committee's receipt of the
claim (or within 180 days after such receipt, if special circumstances require
an extension of time), a written notice of denial of the claim containing the
following:
(a) Specific reasons for the denial
(b) Specific reference to the pertinent Plan provisions on
which the denial is based
(c) A description of any additional material or information
necessary for the claimant to perfect the claim, and an explanation of
why the material or information is necessary, and
(d) An explanation of the claims review procedure.
The claimant may request a review of the claim by an appeals committee
appointed by the Board of Directors. The review may be requested in writing at
any time within 90 days after the claimant receives written notice of the denial
of his claim. The appeals committee shall afford the claimant a full and fair
review of the decision denying the claim and, if so requested, shall:
(e) Permit the claimant to review any documents that are
pertinent to the claim,
(f) Permit the claimant to submit to the committee issues and
comments and writing, and
(g) Afford the claimant an opportunity to meet with a quorum
of the appeals committee as part of the review procedure.
The appeals committee's decision on review shall be made in writing and
shall be issued within 60 days following receipt of the request for review. The
period for decision may be extended to a date not later than 120 days after such
receipt if the committee determines that special circumstances require an
extension. The decision on review shall include specific reasons for the
decision and specific references to the Plan provisions on which the decision of
the appeals committee is based.
Article X
Miscellaneous
10.1. The Plan shall be binding upon Comdial Corporation and its
successors and assigns; subject to the powers set forth in Article VI, and upon
a Participant, his or her Beneficiary, and either of their assigns, heirs,
executors and administrators.
10.2. All benefits payable under this Plan will be reduced by any
amounts that are required to be withheld on account of income, payroll or other
required tax withholding.
10.3. To the extent not preempted by federal law, the Plan shall be
governed and construed under the laws of the Commonwealth of Virginia as in
effect at the time of their adoption and execution, respectively.
10.4. Masculine pronouns wherever used shall include feminine pronouns
and the use of the singular shall include the plural.
IN WITNESS WHEREOF, this instrument has been executed this 7th day of
July, 1999.
COMDIAL CORPORATION
By \s\ Joe D. Ford
-------------------
Joe D. Ford
<TABLE>
COMDIAL CORPORATION AND SUBSIDIARIES
EXHIBIT 11
SCHEDULE OF COMPUTATION OF EARNINGS PER COMMON SHARE
<CAPTION>
Years Ended December 31,
- ---------------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BASIC
- -----
Net income applicable to common shares: $7,854,000 $17,154,000 $5,719,000
===================================================================================================
Weighted average number of common
shares outstanding during the period 8,916,842 8,794,584 8,654,466
Add - Contingency shares 17,082 42,017 29,324
Deferred shares 13,635 6,756 -
----------------------------------------------
Weighted average number of shares used in cal-
culation of basic earnings per common share 8,947,559 8,843,357 8,683,790
===================================================================================================
Basic earnings per common share: $0.88 $1.94 $0.66
===================================================================================================
DILUTED
- -------
Net income applicable to common shares - basic: $7,854,000 $17,154,000 $5,719,000
===================================================================================================
Weighted average number of shares used in cal-
culation of basic earnings per common share 8,947,559 8,843,357 8,683,790
Add (deduct) incremental shares representing:
Shares issuable based on period-end market
price or weighted average price:
Stock options 41,521 237,713 83,563
- ---------------------------------------------------------------------------------------------------
Weighted average number of shares used in calcula-
tion of diluted earnings per common share 8,989,080 9,081,070 8,767,353
===================================================================================================
Diluted earnings per common share $0.87 $1.89 $0.65
===================================================================================================
</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 1999
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>
- -----------------------------------------------------------------------------------------
In thousands 1999 1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Business Segment Sales:
Digital Systems $88,479 $80,452 $70,181
Solutions and Software 48,713 36,194 31,625
Analog and Other 10,768 12,331 16,755
------- ------- -------
Net Sales 147,960 128,977 118,561
Cost of sales 82,353 75,597 71,218
------- ------- -------
Gross profit 65,607 53,380 47,343
Selling, general & administrative 40,229 34,034 29,069
Engineering, research & development 9,735 7,342 6,497
Goodwill amortization 3,180 3,806 3,567
Interest expense 1,633 1,216 1,698
Miscellaneous expense - net 286 565 644
------- ------- -------
Income before income taxes 10,544 6,417 5,868
Income tax expense/(benefit) 2,690 (10,737) 149
------- ------- -------
Net income applicable to common stock $7,854 $17,154 $5,719
======= ======= =======
Earnings per common share and common
equivalent share: basic $0.88 $1.94 $0.66
======= ======= =======
- -----------------------------------------------------------------------------------------
</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.
- --------------------------------------------------------------------------------
In thousands 1999 1998 1997
- --------------------------------------------------------------------------------
Business Segment:
Digital Systems $34,666 $31,237 $25,175
Solutions and Software 28,449 19,341 18,418
Analog and Other 2,492 2,802 3,750
------- ------- -------
Gross profit margin $65,607 $53,380 $47,343
======= ======= =======
- --------------------------------------------------------------------------------
1999 Compared with 1998
- -----------------------
Net sales as reported for 1999 increased by 15% to $148.0 million, compared with
$129.0 million in 1998. The continued growth in net sales was primarily due to
(1) greater demand for Comdial's Digital Systems products, (2) an increase in
Platinum Preferred Dealers (Comdial's highest dealer level) in major
metropolitan cities, (3) an increase in national account sales, and (4)
continued growth in sales of Solutions and Software products such as the senior
housing, hospitality and voice mail systems. The voice mail systems are produced
by a subsidiary of Comdial, Key Voice Technologies, Inc. ("KVT").
In 1999, net sales of Digital System products increased 10% to $88.5 million,
compared with $80.5 million for 1998. In 1999, net sales of Solutions and
Software products, including voice processing, increased 35% to $48.7 million
compared with $36.2 million for 1998. Management expects sales of these two
45
<PAGE>
business segments to continue to grow in 2000 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, and (3) continued
growth of Comdial's dealer base by recruiting larger and more sophisticated
Platinum Preferred Dealers.
In 1999, net sales of the Analog and Other segment products decreased 13% to
$10.8 million, compared with $12.3 million for 1998. Management expects sales of
such products to continue to decrease in 2000. 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. Comdial expects to
continue selling analog products for the foreseeable future primarily due to the
installed base of analog systems that will require replacements and up-grades,
but over the past several years has reduced and will continue to reduce the
number of models offered.
Comdial provides reserves to cover product obsolescence for all its products and
changes to those reserves impact gross profit. For the years 1999, 1998, and
1997, provisions for obsolescence totaled $0.5 million, $2.3 million, and $1.5
million, respectively. The reserve for obsolescence for 1999 was lower due to
less raw material and finished goods obsolescence usage than in previous years.
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 and software solutions 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 44% in 1999.
In 1999, international sales decreased by 35% to $2.6 million compared with $4.0
million for 1998. Due to the international climate, distribution problems, and
homologation issues dealing with the sale of digital products, Comdial has
basically suspended its efforts in developing further international markets on
its own. 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 additional engineering modifications and compliance
testing. Array Telecom Inc. ("Array") which was acquired in 1998, continues to
pursue the international market selling its Internet Protocol ("IP") software
products.
Gross profit, as a percentage of sales for 1999, was 44% compared with 41% for
1998. In 1999, gross profit increased by 23% to $65.6 million compared with
$53.4 million for 1998. This increase was primarily attributable to increased
sales of higher margin business segment products, such as Impact FX, Impact DXP,
and solution products such as senior housing, hospitality and voice mail
systems.
In 1999, gross profit for Digital System products increased by 11% to $34.7
million compared with $31.2 million for 1998. Digital Systems gross profit, as a
percentage of sales for 1999, was 23% compared to 24% for 1998. This decrease
was due to the special promotion on FX products at the beginning of 1999.
Comdial expects the gross margin for this segment to increase gradually in the
coming years primarily due to higher sales volume of its newer products along
with cost reduction improvements.
In 1999, gross profit for Solutions and Software products increased by 47% to
$28.4 million compared with $19.3 million for 1998. This increase is due to
higher sales volume primarily of voice mail systems along with the increase in
sales associated with national accounts. Solutions and Software gross profit, as
a percentage of sales for 1999, was 58% compared with 53% for 1998. This
increase was primarily due to higher sales of voice mail systems and software
solutions that generate higher margins. Comdial expects volume in this business
segment to continue to increase.
In 1999, gross profit for Analog and Other products decreased by 11% to $2.5
million compared with $2.8 million for 1998. This decrease is due to lower
volume of 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, was 23% for 1999 and 1998.
46
<PAGE>
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 into the various product segments and
most of the costs are universal in nature.
Selling, general and administrative expenses ("SG&A") increased in 1999 by 18%
to $40.2 million compared with $34.0 million for 1998. SG&A expenses, as a
percentage of sales for 1999, increased to 27% compared with 26% for 1998. 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) higher
marketing costs associated with advertising Comdial's products as well as the
efforts to increase Comdial's name recognition in the various business markets.
Engineering, research and development expenses increased in 1999 by 33% to $9.7
million compared with $7.3 million for 1998. Engineering expenses, as a
percentage of sales for 1999, increased to 7% compared with 6% for 1998. This
increase was due to additional engineering personnel throughout Comdial along
with the additional support costs.
Goodwill amortization expense decreased in 1999 by 16% to $3.2 million, compared
with $3.8 million for 1998. This decrease is due primarily to the elimination of
goodwill amortization expense associated with Comdial's acquisition in 1996 of
Aurora Systems, Inc. ("Aurora"). Aurora at this time is non-operational and all
goodwill associated with this acquisition has been written off.
Interest expense increased in 1999 by 34% to $1.6 million compared with $1.2
million for 1998. This increase is due to higher average debt levels with Bank
of America, N.A. ("Bank of America"), formerly known as NationsBank, N.A.,
coupled with higher interest rates when compared to 1998 (see Note 6 to the
Consolidated Financial Statements). The higher debt is primarily attributable to
higher material purchases which correlated with higher sales.
Miscellaneous expense decreased by 49% for 1999 to $0.3 million, compared with
$0.6 million for 1998. This decrease was primarily due to decreases in cash
discounts allowed by Comdial to its customers.
Net income before income taxes, as a result of the foregoing, increased in 1999
by 64% to $10.5 million compared with $6.4 million in 1998. Major factors
contributing to the increase in income for 1999 were increased sales of Digital
Systems and Solutions and Software segment products that have higher margins.
Management anticipates, assuming the continued strength in the economy, that
these factors, which have led to significant increases in sales for 1999, will
continue to have a positive influence on Comdial's performance in 2000.
Income tax expense (benefit) reflected an expense for 1999 of $2.7 million,
compared with a tax benefit of $10.7 million for 1998. The tax expense
recognized in 1999 was primarily due to the utilization of deferred tax benefits
of $2.1 million that were generated from net operating losses ("NOLs") in
previous years (see Note 7 to the Consolidated Financial Statements). Comdial
will continue to pay taxes at the alternative minimum tax rate ("AMT") for
future periods with the additional tax expense reducing Comdial's deferred tax
47
<PAGE>
asset generated by the recognition of its NOLs. 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.
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 increase in net sales for 1998 was primarily due to
greater demand for Comdial's Digital Systems segment products and continued
growth in sales of Solutions and Software products.
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
Software products, including voice processing, increased 14% to $36.2 million
compared with $31.6 million for 1997.
In 1998, net sales of the Analog and Other segment products decreased 26% to
$12.3 million, compared with $16.8 million for 1997. The decline in sales of
Comdial's Analog and Other products was due to the market's transition from
analog products to digital which began in the early 1990s.
In 1998, international sales decreased by 4% to $4.0 million compared with $4.2
million for 1997.
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.
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 voice mail systems. 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.
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.
Selling, general and administrative expenses increased in 1998 by 17% to $34.0
million compared with $29.1 million for 1997. SG&A expenses, as a percentage of
sales for 1998, increased to 26% compared with 25% for 1997. The primary reasons
for the increase were (1) an increase in sales personnel to support the growth
in national accounts and expanding 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 13% to $7.3
million compared with $6.5 million for 1997. Engineering expenses, as a
percentage of sales for 1998 and 1997, was 6%. This expense increase was
primarily due to increased expenses associated with the Array acquisition (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.
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 for the
48
<PAGE>
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
Capital Corporation ("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.
Income tax expense (benefit) reflects a benefit in 1998 of $10.7 million
compared with an expense of $0.1 million for 1997. This change was due to
recognition of a deferred tax benefit of $11.5 million for 1998 compared with a
benefit of $0.2 million for 1997. The tax benefits, recognized in 1998 and 1997,
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 1999, Comdial entered into a new financing arrangement with Bank of
America 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 finance working capital to accommodate the expected growth in
the business.
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 1999 1998 1997
- --------------------------------------------------------------------------
Cash and cash equivalents $1,917 $1,599 $3,131
Current maturities of debt 471 6 3,701
Working capital 49,244 31,649 16,676
- --------------------------------------------------------------------------
All operating cash needs were funded for 1999 through a $50 million revolving
credit facility provided by Bank of America. As of October 1998, Comdial and
Bank of America 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, 1999, Comdial's cash and cash equivalents were higher than December
31, 1998 by $0.3 million, due primarily to the timing of deposits at year end.
Accounts Receivable at December 31, 1999, increased by $16.7 million compared
with December 31, 1998, primarily due to (1) record breaking sales in the fourth
quarter of 1999, (2) a majority of those sales occurring in the latter stages of
that quarter, and (3) the addition of two new Value Added Resellers ("VAR") that
tend historically to have payment cycles longer than 30 days.
Prepaid expenses and other current assets at December 31, 1999, increased by
$2.8 million compared with December 31, 1998, due to the recognition of
additional deferred tax assets of $2.6 million that are projected to be used in
2000. The net deferred tax asset at December 31, 1999, decreased by $5.3 million
compared with December 31, 1998. This decrease was due to the use of NOL's in
1999 and the reclass to current mentioned above (see Note 7 to the Consolidated
Financial Statements). Other assets increased by $9.6 million primarily due to
software development costs associated with new products, new software purchased
for operations, and the additional asset relating to a new non qualified pension
plan that was initiated in 1999.
49
<PAGE>
Capital additions for 1999 were approximately $4.7 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 1999, 1998, and 1997 amounted to $3.9
million, $4.8 million, and $3.6 million, respectively. Management anticipates
that approximately $6 million will be spent on capital additions during 2000.
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.
Accounts payable at December 31, 1999, increased by $4.1 million when compared
to December 31, 1998. This increase was primarily due to the timing of incoming
material receipts for production.
Working capital at December 31, 1999, increased by $17.6 million when compared
to 1998. This increase was primarily due to the additional sales in the latter
half of the fourth quarter of 1999 which increased accounts receivable by 73%.
Comdial has a commitment from Bank of America for the issuance of letters of
credit in an aggregate amount not to exceed $5 million at any one time. At
December 31, 1999, there were no commitments under the letter of credit facility
with Bank of America.
Long-term Debt, Including Current Maturities
Since October 1998, Bank of America held substantially all of Comdial's
indebtedness. Prior to October 1998, Fleet held substantially all of Comdial's
indebtedness. Comdial and Fleet in 1994 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").
On October 22, 1998, Comdial and Bank of America entered into a Credit
Agreement. Bank of America 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 $0.6
million.
The Revolving Credit Facility 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.
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 1999, 1998, and 1997, primarily all of Comdial's sales, net
income, and identifiable net assets were attributable to the telecommunications
industry.
50
<PAGE>
Year 2000
In early 1998, 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. This
team reported to management as well as the audit committee on a quarterly basis
as to events and items of interest that related to Year 2000 issues. The latest
Year 2000 report was presented to both the audit committee and management in
February 2000. Management believes that Comdial has properly addressed the Year
2000 issue in order to mitigate any adverse operational or financial
consequences. At this time, there have not been any material effects or issues
specifically dealing with the Year 2000. Comdial continues to monitor and review
any new issues that may arise concerning Year 2000.
During 1999, Comdial 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 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. Comdial had received written confirmation of Year
2000 compliance for all three categories. Comdial also during 1999 performed
on-site audits of some of the sole source suppliers that are critical to
Comdial's operations.
Costs: As of December 31, 1999, cumulative costs incurred by Comdial
specifically for the Year 2000 in aggregate totaled $0.6 million. This cost
includes testing, new software, maintenance of existing software, PC
replacements, and consultants. Comdial management believes that all issues and
associated costs have been addressed.
Risk: There were various potential risks 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 have resulted in some interruptions or
disruptions of business. The possible failure of manufacturing facilities to be
Year 2000 ready could have resulted in impaired manufacturing processes with
delays in delivery of products until non-compliant components or conditions can
be remedied or replaced. While Comdial believes that none of these situations
has or will take place, there can be no assurance that there will not be a Year
2000 issue that may surface at a later date.
Contingency Plans: Comdial had various contingency plans in place to provide
solutions for several possible Year 2000 issues. Based on management's knowledge
to date, none of the contingency plans will be necessary.
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.
51
<PAGE>
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 1998, FASB issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." Comdial does not participate in any financial instruments
that meet the definition of a derivative or hedging activity, and therefore, it
is not expected that this statement will have any affect on Comdial's financial
statements.
"SAFE HABOR" STATEMENT UNDER THE PRIVATE SECURITIES LIGITATION REFORM ACT OF
1995
Comdial's Annual Report contains 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 2000 and beyond to differ
materially from those expressed in any forward-looking statement made by, or on
behalf of, Comdial.
52
<PAGE>
- -------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
- -------------------------------------------------------------------------------
To the Board of Directors and Stockholders of
Comdial Corporation
Charlottesville, Virginia
We have audited the accompanying consolidated balance sheets of Comdial
Corporation and its subsidiaries ("Comdial") as of December 31, 1999 and 1998,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1999.
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 as of December 31, 1999 and 1998, and the results of its operations
and their cash flows for each of the three years in the period ended December
31, 1999 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Richmond, Virginia
January 28, 2000
53
<PAGE>
- ------------------------------------------------------------------------------
REPORT OF MANAGEMENT
- ------------------------------------------------------------------------------
Comdial Corporation's management is responsible for the integrity and
objectivity of all financial data included in this Annual Report. The
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles. Such principles are consistent in all
material respects with accounting principles prescribed by the various
regulatory commissions. The financial data includes amounts that are based on
the best estimates and judgments of management.
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/ Tara Y. Harrison
William G. Mustain Tara Y. Harrison
Chairman, President and Controller
Chief Executive Officer
54
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Consolidated Balance Sheets
- -------------------------------------------------------------------------------------------------
December 31,
In thousands except par value 1999 1998
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $1,917 $1,599
Accounts receivable - net (less allowance for 39,700 23,006
doubtful accounts: 1999 - $302; 1998 - $198)
Inventories 22,827 21,434
Prepaid expenses and other current assets 7,633 4,815
- -------------------------------------------------------------------------------------------------
Total current assets 72,077 50,854
- -------------------------------------------------------------------------------------------------
Property - net 19,458 18,023
Net deferred tax asset 11,980 17,257
Goodwill 11,207 14,079
Other assets 18,352 8,777
- -------------------------------------------------------------------------------------------------
Total assets $133,074 $108,990
=================================================================================================
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $15,135 $11,034
Accrued payroll and related expenses 2,652 2,942
Accrued promotional allowances 2,322 1,877
Other accrued liabilities 2,253 3,346
Current maturities of debt 471 6
- -------------------------------------------------------------------------------------------------
Total current liabilities 22,833 19,205
- -------------------------------------------------------------------------------------------------
Long-term debt 31,795 22,140
Net deferred tax liability 2,622 3,123
Long-term employee benefit obligations 4,216 1,361
Commitments and contingent liabilities (see Note 13) - -
- -------------------------------------------------------------------------------------------------
Total liabilities 61,466 45,829
- -------------------------------------------------------------------------------------------------
Stockholders' equity
Common stock ($0.01 par value) and paid-in capital
(Authorized 30,000 shares; issued shares
outstanding: 1999 = 8,940; 1998 = 8,850) 116,626 116,039
Other (1,237) (1,243)
Accumulated deficit (43,781) (51,635)
- -------------------------------------------------------------------------------------------------
Total stockholders' equity 71,608 63,161
- -------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $133,074 $108,990
=================================================================================================
The accompanying notes are an integral part of these financial statements.
</TABLE>
55
<PAGE>
<TABLE>
Consolidated Statements of Operations
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Years Ended December 31,
In thousands except per share amounts 1999 1998 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $147,960 $128,977 $118,561
Cost of goods sold 82,353 75,597 71,218
- ---------------------------------------------------------------------------------------------------
Gross profit 65,607 53,380 47,343
- ---------------------------------------------------------------------------------------------------
Operating expenses
Selling, general & administrative 40,229 34,034 29,069
Engineering, research & development 9,735 7,342 6,497
Goodwill amortization 3,180 3,806 3,567
- ---------------------------------------------------------------------------------------------------
Operating income 12,463 8,198 8,210
- ---------------------------------------------------------------------------------------------------
Other expense
Interest expense 1,633 1,216 1,698
Miscellaneous expense - net 286 565 644
- ---------------------------------------------------------------------------------------------------
Income before income taxes 10,544 6,417 5,868
Income tax expense (benefit) 2,690 (10,737) 149
- ---------------------------------------------------------------------------------------------------
Net income applicable to common stock $7,854 $17,154 $5,719
===================================================================================================
Earnings per common share and common equivalent share:
Basic $0.88 $1.94 $0.66
===================================================================================================
Diluted $0.87 $1.89 $0.65
===================================================================================================
Weighted average common shares outstanding:
Basic 8,948 8,843 8,684
Diluted 8,989 9,081 8,767
The accompanying notes are an integral part of these financial statements.
</TABLE>
56
<PAGE>
<TABLE>
- ----------------------------------------------------------------------------------------------------------------
Consolidated Statements of Stockholders' Equity
- ----------------------------------------------------------------------------------------------------------------
<CAPTION>
Deferred Stock
-----------------------------------------
Common Stock Incentive Paid-in
In thousands Shares Amount Shares Amount Capital
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997 8,678 $87 - $- $114,031
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
Common stock issued for acquisitions:
Key Voice Tech., Inc. ("KVT") 72 1 291
Aurora Systems, Inc. ("Aurora") (4)
Net income
- ----------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 8,794 88 - - 114,575
Proceeds from sale of
Common Stock:
Notes receivable
Stock options exercised 97 1 706
Treasury Stock Purchased
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
Proceeds from sale of
Common Stock:
Notes receivable
Stock options exercised 10 20
Deferred stock compensation 7 6
Incentive stock issued 8 1 53
Contingency stock issued for :
KVT acquisition 72 1 303
Array acquisition 203
Net income
Balance at December 31, 1999 9,056 $91 15 90 $116,445
================================================================================================================
Notes
Treasury Stock Receivable
---------------------- on Sale Retained
In thousands Shares Amount of Stock Earnings Total
- -------------------------------------------------------------------------------------------------------------------
Balance at January 1, 1997 (97) ($878) ($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
Common stock issued for acquisitions:
Key Voice Tech., Inc. ("KVT") 292
Aurora Systems, Inc. ("Aurora") (4)
Net income 5,719 5,719
- -------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 (97) (878) (161) (68,789) 44,835
Proceeds from sale of
Common Stock:
Notes receivable 5 5
Stock options exercised 707
Treasury Stock Purchased (19) (209) (209)
Deferred stock compensation 48
Incentive stock issued 123
Contingency stock issued for
KVT acquisition 498
Net income 17,154 17,154
- -------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 (116) (1,087) (156) (51,635) 63,161
Proceeds from sale of
Common Stock:
Notes receivable 6 6
Stock options exercised 20
Deferred stock compensation 6
Incentive stock issued 54
Contingency stock issued for :
KVT acquisition 304
Array acquisition 203
Net income 7,854 7,854
Balance at December 31, 1999 (116) ($1,087) ($150) ($43,781) $71,608
===================================================================================================================
The accompanying notes are an integral part of these financial statements.
</TABLE>
57
<PAGE>
<TABLE>
Consolidated Statements of Cash Flows
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Years Ended December 31,
In thousands 1999 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Cash received from customers $134,502 $120,967 $118,657
Other cash received 1,286 2,398 1,219
Interest received 58 30 19
Cash paid to suppliers and employees (136,836) (121,217) (108,304)
Interest paid on debt (1,579) (1,376) (1,565)
Interest paid under capital lease obligations (54) (11) (18)
Income taxes paid (503) (824) (310)
- --------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities (3,126) (33) 9,698
- --------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of Array Telecom Corp. ("Array") - (5,880) -
Acquisition cost for Key Voice Technologies - - (4)
Acquisition cost for Array (5) (246) -
Proceeds received from the sale of FastCall - 290 -
Proceeds from the sale of equipment 1 158 22
Capital expenditures (3,935) (4,842) (3,609)
- --------------------------------------------------------------------------------------------------------
Net cash used by investing activities (3,939) (10,520) (3,591)
- --------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from borrowings - - 2,216
Net borrowings under revolver agreement 7,464 22,132 (1,749)
Proceeds from issuance of common stock 20 498 162
Principal payments on debt - (13,546) (3,693)
Principal payments under capital lease obligations (101) (63) (92)
- --------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 7,383 9,021 (3,156)
- --------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 318 (1,532) 2,951
- --------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 1,599 3,131 180
- --------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $1,917 $1,599 $3,131
========================================================================================================
Reconciliation of net income to net cash provided by
operating activities:
Net Income $7,854 $17,154 $5,719
- --------------------------------------------------------------------------------------------------------
Depreciation and amortization 9,642 8,829 8,634
Change in assets and liabilities (for 1998, net of
effect from the purchase of Array)
Increase in accounts receivable (16,694) (9,186) (4,160)
Inventory provision 487 2,286 1,509
Increase in inventory (1,880) (5,219) (410)
Increase in other assets (11,278) (5,431) (2,956)
Decrease (increase) in net deferred tax assets 2,147 (11,496) (220)
Increase in accounts payable and bank overdrafts 4,101 1,805 1,085
Increase (decrease) in other liabilities 1,917 654 399
Array asset value at acquisition - (103) -
Increase in other equity 578 674 98
- --------------------------------------------------------------------------------------------------------
Total adjustments (10,980) (17,187) 3,979
- --------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities ($3,126) $(33) $9,698
========================================================================================================
The accompanying notes are an integral part of these financial statements.
</TABLE>
58
<PAGE>
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1999, 1998, and 1997
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 four major distributors, other supply houses, dealers, other direct
channels, 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,
1999. 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 general operating purposes. The revolving credit
facility is reduced by cash receipts that are not needed for daily operations.
Bank overdrafts of $2.2 million and $3.3 million are included in accounts
payable at December 31, 1999 and 1998, 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
Property is recorded at cost. 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 1999 and 1998, Comdial
expensed certain computer hardware and software due to the rapid change in
technology that has effected a need for continual replacements. In 1999, some of
the major expenditures for computer hardware and software have been through
operating or capital leases. 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
59
<PAGE>
Other Long-lived Assets
Long-lived assets are amortized based on the assets' useful lives. The cost in
excess of net assets of consolidated business acquired is amortized over periods
ranging from 5 to 8 years. 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 net of the expected
future undiscounted cash flows.
Capitalized Software Development Costs
In 1999, 1998, and 1997, 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 $5.5 million and $4.5
million at December 31, 1999 and 1998, respectively. The amounts capitalized
were $2.9 million, $2.8 million, and $2.0 million, of which $1.8 million, $1.4
million, and $1.0 million were amortized in 1999, 1998, and 1997, 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 $3.3 million and $2.1
million at December 31, 1999 and 1998, respectively. The amount capitalized was
$1.8 million, $1.5 million, and $0.5 million, of which $0.6 million, $0.4
million, and $0.6 million was amortized in 1999, 1998 and 1997, respectively.
Postretirement Benefits Other Than Pension
Comdial accrues estimated costs relating to health care and life insurance
benefits. In 1999, 1998, and 1997, Comdial expensed $137,000, $87,000, and
$64,000, 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).
60
<PAGE>
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
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 1999, 1998, and 1997, 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 1999, 1998, and 1997, 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 1998 and 1997 consolidated financial statements have been
reclassified to conform to the 1999 presentation. These reclassifications had no
effect on previously reported consolidated net income.
NOTE 2. ACQUISITIONS & DISPOSALS
On December 31, 1997, Aurora Systems Inc. ("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 was 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 1999 1998
- -----------------------------------------------------------------------------
Finished goods $8,763 $8,507
Work-in-process 4,556 3,568
Materials and supplies 9,508 9,359
----- -----
Total $22,827 $21,434
======= =======
- -----------------------------------------------------------------------------
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 from inventory. Raw material obsolescence is
mitigated by the commonality of component parts and finished goods by the low
level of inventory relative to sales.
61
<PAGE>
NOTE 4. PROPERTY
Property consists of the following:
- ------------------------------------------------------------------------------
December 31,
In thousands 1999 1998
- ------------------------------------------------------------------------------
Land $656 $656
Buildings and improvements 15,035 14,582
Machinery and equipment 37,517 33,514
Less accumulated depreciation (33,750) (30,729)
------- -------
Property - Net $19,458 $18,023
======= =======
- ------------------------------------------------------------------------------
Depreciation expense charged to operations for the years 1999, 1998, and 1997,
was $3.3 million, $2.8 million, and $2.8 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, Capital Operating
In thousands Leases Leases
- ------------------------------------------------------------------------------
2000 $689 $3,445
2001 689 2,211
2002 685 1,716
2003 685 1,250
2004 and thereafter 538 3,858
------ -------
Total minimum lease commitments 3,286 $12,480
=======
Less amounts representing interest
and other costs (616)
------
Principal portion of minimum lease
commitments at December 31, 1999 $2,670
======
- ------------------------------------------------------------------------------
Assets recorded under capital leases (included in property in the accompanying
Consolidated Balance Sheets) are as follows:
- ------------------------------------------------------------------------------
December 31,
In thousands 1999 1998
- ------------------------------------------------------------------------------
Machinery and equipment $- $41
Less accumulated depreciation (-) (24)
-- ---
Property - Net $- $17
== ===
- ------------------------------------------------------------------------------
For 1999 and 1997, Comdial entered into new capital lease obligations which
amounted to approximately $2.8 million and $18,000, respectively. During 1998
Comdial did not enter into any new capital leases. All capital lease balances as
of December 31, 1999, are for intangible assets such as software.
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, 1999, 1998,
and 1997, were $2.6 million, $2.2 million, and $1.9 million, respectively.
NOTE 6. DEBT
Prior to October 1998, Fleet Capital Corporation ("Fleet") had 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
62
<PAGE>
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 Bank of America, N.A. ("Bank of America")
formerly NationsBank, N.A., 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 1999 1998
- ------------------------------------------------------------------------------
Revolving credit facility (1) $29,596 $22,132
Capitalized leases (2) 2,670 14
------ ------
Total debt 32,266 22,146
Less current maturities on debt 471 6
------- -------
Total long-term debt $31,795 $22,140
======= =======
- ------------------------------------------------------------------------------
(1) On October 22, 1998, Comdial borrowed $15.8 million under the Revolving
Credit Facility from Bank of America which was used to pay off other existing
loans. The loan made pursuant to the Credit Agreement with Bank of America
carries an interest rate based on the LIBOR daily rate plus the applicable
margin and does not require monthly principal payments. 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, 1999 and 1998, Comdial's borrowing LIBOR rates were 6.58% and
6.30%, which includes an additional applicable margin of 0.75% for both years.
This Revolving Credit Facility with Bank of America can be used by Comdial for
working capital, equipment purchases, to finance permitted acquisitions, and for
other general corporate purposes. The Bank of America Revolving Credit Facility
(as defined in the Credit Agreement) does not require payment until August 31,
2003 with the option of possible credit extensions.
(2) Capital leases are with various financing entities and are payable
based on the terms of each individual lease (see Note 5).
The Bank of America Credit Agreement also gives Comdial a letter of credit
subfacility of $5.0 million, which is part of the Revolving Credit Facility, as
commitments occur. At December 31, 1999 and 1998, the amount of commitments
under the letter of credit facility with Bank of America was $0 and $52,000,
respectively.
Debt Covenants
Prior to October 1998, 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 Bank of America is secured
by liens on all Comdial's properties and assets. The Credit Agreement with Bank
of America contains certain financial covenants that relate to specified levels
of consolidated net worth and other financial ratios. As of December 31, 1999,
Comdial was in compliance with all the covenants and terms of Bank of America's
Credit Agreement.
63
<PAGE>
NOTE 7. INCOME TAXES
The components of the income tax expense for the years ended December 31 are as
follows:
- -------------------------------------------------------------------------------
In thousands 1999 1998 1997
- -------------------------------------------------------------------------------
Current - Federal $410 $393 $200
State 133 369 168
Deferred - Federal 1,573 (9,730) (214)
State 574 (1,769) (5)
------ ------ --
Total provision (benefit) $2,690 ($10,737) $149
====== ======= ====
- -------------------------------------------------------------------------------
The income tax provision reconciled to the tax computed at statutory rates for
the years ended December 31, is summarized as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
In thousands 1999 1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal tax at statutory rate
(35% in 1999, 1998, and 1997) $3,691 $2,246 $2,054
State income taxes (net of federal tax
benefit) 764 (924) 109
Nondeductible charges 707 411 544
Other adjustments (124) 519 200
Utilization of operating loss carryover - - (2,539)
Expiring business credits 504 - -
Adjustment of valuation allowance (2,852) (12,989) (219)
------ ------- ----
Income tax provision (benefit) $2,690 ($10,737) $149
====== ======= ====
- -----------------------------------------------------------------------------------------
</TABLE>
Net deferred tax assets of $14.8 million and $17.0 million have been recognized
in the accompanying Consolidated Balance Sheets at December 31, 1999 and 1998,
respectively. The components of the net deferred tax assets are as follows:
- ------------------------------------------------------------------------------
December 31,
In thousands 1999 1998
- ------------------------------------------------------------------------------
Total deferred tax assets $17,545 $23,045
Total valuation allowance (114) (2,966)
---- ------
Total deferred tax assets - net 17,431 20,079
Total deferred tax liabilities (2,622) (3,123)
------ ------
Total $14,809 $16,956
======= =======
- ------------------------------------------------------------------------------
The valuation allowance decreased $2.9 million during the year ended December
31, 1999. The decrease was primarily related to (1) the re-evaluation of the
future utilization of net operating losses ("NOLs"), and (2) the expiration of
tax credits. Comdial periodically reviews the requirements for a valuation
allowance and makes adjustments to such allowance when changes in circumstances
result in changes 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 was 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. Accordingly, management believes that it is more likely than not
that Comdial will realize its 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 are utilized.
64
<PAGE>
Comdial has net operating loss and credit carryovers of approximately $13.8
million and $1.5 million, respectively, which, if not utilized, will expire as
follows:
- ------------------------------------------------------------------------------
In thousands Net Operating
Expiration Dates Losses Tax Credits
- ------------------------------------------------------------------------------
2000 $- $66
2001 2,107 -
2002 6,486 -
2003 7 -
2004 2,200 -
After 2004 2,970 1,447
------ ------
Total $13,770 $1,513
======= ======
- -----------------------------------------------------------------------------
The components of the net deferred tax assets (liabilities) at December 31, 1999
and 1998 are as follows:
- -------------------------------------------------------------------------------
Deferred Assets (Liabilities) Deceember 31,
In thousands 1999 1998
- --------------------------------------------------------------------------------
Net loss carryforwards $4,984 $12,781
Tax credit carryforwards 1,513 1,608
Inventory write downs and capitalization 1,937 1,794
Pension 26 246
Postretirement 280 297
Compensation and benefits 409 357
Capitalized software development costs 1,033 438
Contingencies (359) 589
Other deferred tax assets 99 82
Fixed asset depreciation (2,216) (2,522)
Goodwill amortization 2,405 1,692
Research and development expenditures 5,218 3,161
State taxes (406) (601)
Other deferred tax liabilities - -
------- -------
Net deferred tax asset 14,923 19,922
Less: Valuation allowance (114) (2,966)
------- -------
Total $14,809 $16,956
======= =======
- -------------------------------------------------------------------------------
NOTE 8: EARNINGS PER SHARE
For the three years ending December 31, 1999, 1998 and 1997, 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 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.
- -------------------------------------------------------------------------------
Year Numerator Denominator EPS
- -------------------------------------------------------------------------------
1999 Basic EPS $7,854,000 8,947,559 $0.88
Diluted $7,854,000 8,989,080 $0.87
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
- -------------------------------------------------------------------------------
NOTE 9. PENSION AND SAVINGS PLANS
Comdial currently has two pension plans that provide benefits based on years of
service and an employee's compensation during the employment period. One plan is
65
<PAGE>
a qualified plan for all the employees of Comdial and the other, which was
initiated in April of 1999, is a non-qualified plan ("Retirement Benefit
Restoration Plan"). The non-qualified plan is strictly for executive officers
and/or highly compensated employees who are designated as a participant of the
plan by the Compensation Committee of Comdial. The non-qualified plan is not
funded.
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
qualified pension plans and amounts recognized in Comdial's Consolidated Balance
Sheets at December 31, 1999 and 1998.
- ------------------------------------------------------------------------------
In thousands 1999 1998
Benefit obligation at beginning of year $22,432 $18,541
Service cost 1,758 1,575
Interest cost 1,692 1,334
Actuarial loss (gain) (3,101) 1,435
Benefits paid (543) (453)
Amendments 3,548 -
------- -------
Benefit obligation at December 31 $25,786 $22,432
======= =======
- ------------------------------------------------------------------------------
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,
1999 and 1998.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
In thousands 1999 1998
- -----------------------------------------------------------------------------------
<S> <C> <C>
Fair value of plan assets at beginning of year $21,402 $19,025
Actual return on plan assets 1,704 1,400
Employer contribution 1,517 1,430
Benefits paid (543) (453)
------- -------
Fair value of plan assets at December 31 $24,080 $21,402
======= =======
Funded status ($1,706) ($1,030)
Unrecognized transition obligation (asset) - (29)
Unrecognized actuarial (gain) or loss (2,507) 590
Unrecognized prior service cost 3,210 (185)
----- ----
Net amount recognized ($1,003) ($654)
======= =====
Amounts recognized in the Consolidated Balance Sheets
consist of:
Prepaid benefit cost ($654) ($668)
Intangible asset 2,400 -
Accrued benefit liability (4,265) (1,417)
Contributions during fiscal year 1,516 1,431
------- -----
Net amount recognized ($1,003) ($654)
======= =====
- -----------------------------------------------------------------------------------
</TABLE>
Assumptions used in accounting for the plans as of December 31 were as
follows:
1999 1998 1997
- ----------------------------------------------------------------------------
Discount rate 8.00% 7.00% 7.00%
Expected return on plan assets 9.00% 9.00% 9.00%
Rate of compensation increase 4.50% 4.50% 4.00%
- ----------------------------------------------------------------------------
66
<PAGE>
Net periodic pension cost for 1999, 1998, and 1997 included the following
components:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
In thousands 1999 1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Change in benefit obligation:
Service cost $1,758 $1,575 $1,226
Interest cost 1,692 1,334 1,047
Expected return on plan assets (1,777) (1,490) (1,247)
Amortization of prior service cost 124 (63) (63)
Recognized actuarial loss 68 61 -
------ ------ ----
Net periodic pension cost $1,865 $1,417 $963
====== ====== ====
- -------------------------------------------------------------------------------------
</TABLE>
In addition to providing pension benefits, Comdial contributes to a 401(k) plan,
based on an employee's contributions. Effective for 1998, 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%. Prior to
1998, Participants could contribute from 2% to 12.5% of their salary as defined
in the terms of the plan and Comdial would match contributions equal to 25% of
the participant's contributions up to the first 10%. Comdial's total expense for
the matching portion to the 401(k) plan for 1999, 1998, and 1997 was $0.6
million, $0.4 million, and $0.4 million, 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 1999, 1998, and
1997 was an expense of $137,000, $87,000, and $64,000, 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,
1999 and 1998.
- ------------------------------------------------------------------------------
In thousands 1999 1998
Benefit obligation at beginning of year $1,011 $840
Service cost 37 19
Interest cost 74 68
Plan participants' contributions 16 58
Actuarial loss/(gain) (16) 186
Benefits paid (48) (160)
Amendments - -
------ ------
Benefit obligation at December 31 $1,074 $1,011
====== ======
- ------------------------------------------------------------------------------
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, 1999 and 1998.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
In thousands 1999 1998
- ------------------------------------------------------------------------------------
<S> <C> <C>
Fair value of plan assets at beginning of year $ - $ -
Actual return on plan assets - -
Employer contribution 32 102
Plan participants' contributions 16 58
Benefits paid (48) (160)
---- ----
Fair value of plan assets at December 31 $ - $ -
==== ====
67
<PAGE>
Funded status ($1,074) ($1,011)
Unrecognized transition obligation 1,182 1,267
Unrecognized actuarial gain (902) (944)
Unrecognized prior service cost - -
----- -----
Net amount recognized ($794) ($688)
===== =====
Amounts recognized in the Consolidated Balance Sheets:
Prepaid benefit cost ($688) ($703)
Accrued benefit liability (137) (87)
Contributions during fiscal year 31 102
----- -----
Net amount recognized ($794) ($688)
===== =====
- ------------------------------------------------------------------------------------
</TABLE>
Assumptions used in accounting for the plans as of December 31 were as follows:
- -------------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------
Discount rate 8.00% 7.00% 7.50%
- -------------------------------------------------------------------
For measurement purposes, an 7.50% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1999. The rate was assumed
to decrease gradually to 5.25% for 2005 and remain at that level thereafter.
Net periodic pension cost for 1999, 1998, and 1997 included the following
components:
- ------------------------------------------------------------------------------
In thousands 1999 1998 1997
- ------------------------------------------------------------------------------
Change in benefit obligation:
Service cost $37 $19 $22
Interest cost 74 68 60
Expected return on plan assets - - -
Amortization of prior service cost 91 91 91
Recognized actuarial gain (65) (91) (109)
---- --- ----
Net periodic pension cost $137 $87 $64
==== === ===
- ------------------------------------------------------------------------------
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:
- ------------------------------------------------------------------------------
One-percentage- One-percentage-
In thousands Point Increase Point Decrease
- ------------------------------------------------------------------------------
Effect on total of service and interest
cost components $ 9 ($7)
Effect on postretirement benefit obligation $58 ($51)
- ------------------------------------------------------------------------------
NOTE 11. STOCK-BASED COMPENSATION PLANS
As of December 31, 1999, 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 1997, 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 1999, each non-employee director was awarded 2,500
shares related to income earned by Comdial for fiscal year 1998. 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.
68
<PAGE>
As of December 31, 1999, 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 $150,000,
$156,000, and $161,000 at December 31, 1999, 1998, and 1997, respectively, and
have been deducted from Stockholders' Equity.
Options granted for years 1999 and 1998 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
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 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 $85,000, $148,000,
and $97,000 for 1999, 1998, and 1997, respectively.
Information regarding stock options is summarized below:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
1999 (1) 1998 (1) 1997 (1)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
January 1; 1,104,213 $8.93 859,729 $8.08 659,524 $7.95
Granted 220,433 7.51 405,316 10.42 298,450 8.25
Exercised (8,228) 2.34 (96,602) 7.17 (32,216) 5.43
Terminated (236,630) 9.08 (64,230) 9.61 (66,029) 8.79
--------- --------- -------
Options outstanding,
December 31; 1,079,788 8.66 1,104,213 8.93 859,729 8.08
========= ========= =======
Options exercisable,
December 31; 598,468 8.57 474,175 8.05 342,880 7.46
Per share ranges of options outstanding
at December 31 $1.41-$13.50 $1.41-$13.50 $1.41-$11.75
Dates through which options outstanding
at December 31,
were exercisable 1/2000-12/2009 1/99-12/2008 1/98-12/2007
(1) Fair value weighted-average exercise price at grant date.
- --------------------------------------------------------------------------------------------------------------------
The following table summarizes information concerning currently outstanding and
exercisable options at December 31, 1999:
- ---------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
----------------------- -----------------------
Weighted-
Number Average Weighted- Number Weighted-
Range of Outstanding Remaining Average Exercisable Average
Exercise at Contractual Exercise at Exercise
Prices 12/31/99 Life Price 12/31/99 Price
- ---------------------------------------------------------------------------------------------------
$1.41 to 3.00 42,436 2.0 $1.78 42,436 $1.78
5.73 to 7.77 339,259 6.8 7.41 142,357 7.31
8.12 to 9.38 433,304 6.6 8.83 284,235 9.06
10.50 to 13.50 264,789 6.7 11.07 129,440 11.09
--------- -------
1.41 to 13.50 1,079,788 6.5 8.66 598,468 8.57
========= =======
- ---------------------------------------------------------------------------------------------------
</TABLE>
69
<PAGE>
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:
- ------------------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------
Risk-free interest rate 5.15% 4.72% 5.51%
Expected life 6.50 7.78 3.65
Expected volatility 65% 68% 73%
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:
- -----------------------------------------------------------------------------
In thousands except per share amounts 1999 1998 1997
- -----------------------------------------------------------------------------
Net income: As reported $7,854 $17,154 $5,719
Compensation expense 139 1,233 525
Pro forma $7,715 $15,921 $5,194
Basic earnings per share:
As reported $0.88 $1.94 $0.66
Pro forma $0.86 $1.80 $0.60
Diluted earnings per share:
As reported $0.87 $1.89 $0.65
Pro forma $0.86 $1.75 $0.59
- -----------------------------------------------------------------------------
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 1999, 1998, and 1997, substantially all of Comdial's sales, net income,
and identifiable net assets were attributable to the telecommunications industry
with over 98% 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.
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, and Inntouch), and other products such as Voice
Express, ATC Terminals, 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
70
<PAGE>
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>
<CAPTION>
- ---------------------------------------------------------------------------------
Business Segment Net Revenues
(In thousands) 1999 1998 1997
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Digital Systems $88,479 $80,452 $70,181
Solutions and Software 48,713 36,194 31,625
Analog and Other 10,768 12,331 16,755
-------- -------- --------
Net sales $147,960 $128,977 $118,561
======== ======== ========
- ---------------------------------------------------------------------------------
Business Segment Profit
(In thousands) 1999 1998 1997
- ---------------------------------------------------------------------------------
Digital Systems $34,666 $31,237 $25,175
Solutions and Software 28,449 19,341 18,418
Analog and Other 2,492 2,802 3,750
------- ------ ------
Gross profit 65,607 53,380 47,343
Operating expenses 53,144 45,182 39,133
Interest expense 1,633 1,216 1,698
Miscellaneous expense - net 286 565 644
------- ------ ------
Income before income taxes $10,544 $6,417 $5,868
======= ====== ======
- ---------------------------------------------------------------------------------
December 31,
(In thousands) 1999 1998 1997
- ---------------------------------------------------------------------------------
Business Segment Assets
Digital Systems $54,443 $43,286 $32,245
Solutions and Software 27,307 18,124 12,978
Analog and Other 5,335 6,432 6,989
Unallocated 45,989 41,148 27,052
-------- -------- -------
Total $133,074 $108,990 $79,264
======== ======== =======
Business Segment Liabilities
Digital Systems $1,875 $1,397 $1,389
Solutions and Software 2,904 1,750 2,306
Analog and Other 202 203 267
Unallocated 56,485 42,479 30,467
------- ------- -------
Total $61,466 $45,829 $34,429
======= ======= =======
- ---------------------------------------------------------------------------------
Business Segment Property, Plant
and Equipment
December 31,
(In thousands) 1999 1998 1997
- ---------------------------------------------------------------------------------
Depreciation
Digital Systems $1,920 $1,727 $1,721
Solutions and Software 363 264 196
Analog and Other 144 148 206
Unallocated 880 665 628
------ ------ ------
Total $3,307 $2,804 $2,751
====== ====== ======
71
<PAGE>
Additions
Digital Systems $1,584 $2,146 $2,230
Solutions and Software 883 499 843
Analog and Other 73 194 154
Unallocated 2,172 1,659 695
------ ------ -- ---
Total $4,712 $4,498 $3,922
====== ====== ======
- ---------------------------------------------------------------------------------
Comdial had sales in excess of 10% of net sales to three customers as follows:
- ---------------------------------------------------------------------------------
In thousands 1999 1998 1997
- ---------------------------------------------------------------------------------
Sales:
ALLTEL Supply, Inc. $24,393 $19,301 $21,537
Graybar Electric Company, Inc. 34,750 30,415 33,342
Sprint/North Supply , Inc. 25,323 24,902 26,445
Percentage of net sales:
ALLTEL Supply, Inc. 16% 15% 18%
Graybar Electric Company, Inc. 24% 24% 28%
Sprint/North Supply , Inc. 17% 19% 22%
Net sales of all three:
Digital Systems $64,389 $54,372 $56,831
Solutions and Software 12,595 12,189 11,835
Analog and Other 7,482 8,057 12,658
------- ------- -------
Net sales $84,466 $74,618 $81,324
======= ======= =======
- ---------------------------------------------------------------------------------
</TABLE>
NOTE 13. COMMITMENTS AND CONTINGENT LIABILITIES
Comdial maintains its operations in material compliance with all applicable
environmental, health and safety laws and regulations, including those regarding
permits. Comdial began conducting annual environmental audits of the facility in
1995 to assure continued compliance. Comdial's facility in Charlottesville,
Virginia has two permits. The first is a connection permit to discharge
wastewater to the Rivanna Water and Sewer Authority, a publicly operated
treatment works. The second is an air permit exemption letter from the Virginia
Department of Environmental Quality ("DEQ").
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 DEQ. DEQ has also required some assessment work of the
chlorinated solvents under the underground storage tank ("UST") Program, however
Comdial determined that it could expedite matters by entering the site into
Virginia's Voluntary Remediation Program (the "VRP").
In 1999, Comdial was accepted into the VRP to start the final closure process
for the clean up of leakage of the petroleum and chlorinated solvents. A
Voluntary Remediation Report was required to be completed to assess
contamination along with a risk assessment and remedial action plan. The
completion of the VRP will require several new wells at an approximate cost of
$164,000.
In 1994, Comdial installed all the required equipment and started the process of
pumping hydraulic oil residue from the underground water. In 1999, Comdial
started the process of removing chlorinated solvents which will be completed by
outside consultants hired by Comdial. The oil and solvents are deposited into
approved containers and taken to a hazardous waste site in accordance with the
corrective action plan. As of December 31, 1999, Comdial has incurred total
costs of approximately $106,000 and expects the pumping process for both
projects to be completed in 2000.
72
<PAGE>
At this time, management does not believe that contingent losses or potential
claims arising from Year 2000 issues will have any effect on Comdial. Comdial
cannot predict whether there will be any future litigation against Comdial due
to non-compliance relating to Year 2000 issues.
NOTE 14. QUARTERLY FINANCIAL DATA (UNAUDITED)
- ------------------------------------------------------------------------------
In thousands except First Second Third Fourth
per share amounts Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------
1999
Sales $31,864 $35,743 $37,423 $42,930
Gross profit 12,701 15,655 16,320 20,931
Goodwill amortization 784 799 798 799
Interest expense 382 377 399 475
Net income 388 1,291 1,834 4,341
Net earnings per
common share: Basic 0.04 0.14 0.20 0.48
- ------------------------------------------------------------------------------
1998
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
- ------------------------------------------------------------------------------
Previously reported quarterly information has been revised to reflect certain
reclassifications. These reclassifications had no effect on previously reported
consolidated net income.
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 $0.6 million and $0.1 million of additional income, which is
reflected in the fourth quarters of 1999 and 1998, respectively.
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 $0.3 million was recognized.
In the third quarter of 1998, Comdial acquired Array. 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 $0.9 million and write-off of excess inventory of $0.7 million. 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).
NOTE 15. SUBSEQUENT EVENT
On March 16, 2000, Comdial and ePhone Telecom, Inc. ("ePhone") entered into
a Memorandum of Understanding regarding a Strategic Alliance pursuant to
which Array, a wholly owned subsidiary, would sell its fixed assets to ePhone
and license its technology to ePhone, and Comdial would allow ePhone to utilize
the name "Array" and provide ePhone with access through Comdial to its
distribution channels, and the companies would agree on the terms of a joint
development effort. In addition to an initial payment to Array, ePhone would pay
royalties based on certain gross sales. The transaction is subject to the
parties negotiating a mutually satisfactory definitive agreement extending for a
five year term.
On March 17, 2000, Comdial and Lucent Technologies GRL Corporation
("Lucent-GRL") entered into a Patent License Agreement pursuant to which
Lucent-GRL granted to Comdial licenses under Lucent-GRL's patents for Licensed
73
<PAGE>
Products (as defined in the agreement), and Comdial granted Lucent-GRL licenses
under Comdial's patents for Licensed Products (as defined in the agreement).
Pursuant to the agreement, Comdial paid Lucent-GRL an initial payment and agreed
to pay Lucent-GRL a royalty based on Comdial's consolidated sales. The agreement
extends for a period of five years. The costs associated with this agreement are
future period costs. Such agreements are done in the normal course of business.
- ------------------------------------------------------------------------------
FIVE YEAR FINANCIAL DATA
Selected Consolidated Statements of Operations Data
<TABLE>
<CAPTION>
In thousands except
per share amounts 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Sales $147,960 $128,977 $118,561 $102,182 $94,729
Income before income taxes
and extraordinary item 10,544 6,417 5,868 1,291 5,535
Net income 7,854 17,154 5,719 1,809 9,869
Earnings per common share
and common equivalent share:
Basic (1) 0.88 1.94 0.66 0.21 1.27
- -------------------------------------------------------------------------------------------------
(1) Earnings per share prior to 1995 have been restated to reflect the one-
for-three reverse stock split.
Selected Consolidated Balance Sheet Data
December 31,
<CAPTION>
In thousands 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------
Current assets $72,077 $50,854 $37,107 $30,767 $33,740
Total assets 133,074 108,990 79,264 74,352 56,692
Current liabilities 22,833 19,205 20,431 20,159 15,469
Long-term debt and other
long-term liabilities 38,633 26,624 13,998 15,629 6,929
Stockholders' equity 71,608 63,161 44,835 38,564 34,294
- -----------------------------------------------------------------------------------------------
</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"). Comdial's Common Stock is traded in the
Nasdaq National Market(R) under Comdial's symbol, CMDL.
- ----------------------------------------------------------------------------
1999 1998
Fiscal Quarters High Low High Low
- ----------------------------------------------------------------------------
First Quarter 8.750 5.938 11.688 9.25
Second Quarter 7.938 5.750 13.875 10.250
Third Quarter 9.000 6.375 14.000 7.000
Fourth Quarter 10.125 6.750 9.563 7.375
- ----------------------------------------------------------------------------
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. Prior to 1998, Comdial was prohibited
from paying dividends due to the Loan Agreement with Fleet.
74
<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.
Leigh Alexander
- ---------------
Senior Vice President
Ms. Alexander was elected Senior Vice President in December 1998 and was
responsible for marketing. In January 2000, Ms. Alexander was appointed
President of Comdial Enterprise Solutions, Inc., a subsidiary of Comdial. Prior
to her appointment, Ms. Alexander was a Senior Vice President of Paging Network,
Inc., a wireless messaging and paging company.
William C. Grover
- -----------------
Senior Vice President
Mr. Grover was elected a Vice President in September 1995 and was responsible
for Sales and Services. In January 2000, Mr. Grover was appointed President of
Comdial Convergent Communications, a subsidiary of Comdial. He joined Comdial in
1993 as President of Comdial Enterprise Systems, Inc., a subsidiary of Comdial.
Ove Villadsen
- -------------
Senior Vice President
Mr. Villadsen was elected Vice President in May 1989 and in May of 1998 was
elected Senior Vice President. 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. Mr. Villadsen retired from Comdial on
January 3, 2000.
John Baird
- ----------
Vice President and Chief Technology Officer
Mr. Baird was elected Vice President on November 30, 1999. He is responsible for
new product research. Between February 1999 and December 1999, he served as
Director of Business Planning and prior to that was Managing Director of Comdial
Enterprise Systems, Inc.
Joe D. Ford
- -----------
Vice President
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.
Keith J. Johnstone
- ------------------
Vice President
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
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.
75
<PAGE>
BOARD MEMBERS
William G. Mustain
- ------------------
Chairman
See previous page.
Robert P. Collins
- -----------------
Mr. Collins is the Chairman of the Board of Directors of Scott Technologies,
Inc., a designer and manufacturer of air breathing and oxygen systems and
instrument products for health, safety and aircraft applications. 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 J. Dreyer
- -----------------
Ms. Dreyer is the Chief Operating Officer of SpeakOut.com, a web site for
Internet activism providing news and feedback tools on hot issues of the day.
From 1996 to 1999, she was Senior Vice President and Chief Financial Officer of
Communications Systems Technology, Inc. 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
- ------------
Mr. Gleason retired in May 1995 from PacifiCorp, a diversified public utility,
after having served as President, CEO, Vice Chairman and as a Director. He is
also a director of Tektronix, Inc. and Rite Aid. 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.
John W. Rosenblum
- -----------------
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,
Cone Mills Corporation, and Grantham, Mayo, Van Otterloo and Company, LLC. 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.
Robert E. Spekman
- -----------------
Mr. Spekman is a Tayloe Murphy Professor of Business Administration at the
Darden Graduate School at the University of Virginia. Mr. Spekman has taught at
the Darden School since 1992 and has held positions at the University of
Southern California. He is also an active consultant to many Fortune 500
companies. Mr. Spekman has served as a director of Comdial since April 1999, and
is a member of the Compensation Committee of the Board of Directors.
Dianne C. Walker
- ----------------
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.
76
<PAGE>
Transfer Agent and Registrar
- ----------------------------
ChaseMellon Shareholder Services
New York, New York
Phone: (800) 851-9677
World Wide Web: http://www.chasemellon.com
Independent Auditors
- --------------------
Deloitte & Touche LLP
Richmond, Virginia
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
77
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 28,
2000, appearing in the Annual Report on Form 10-K of Comdial Corporation for the
year ended December 31, 1999.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Richmond, Virginia
March 24, 2000
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 Tara Y.
Harrison, 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, 1999, 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: 02/1/00
/s/ Robert P. Collins
---------------------
Robert P. Collins
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
I, Barbara J. Dreyer, a duly elected Director of COMDIAL CORPORATION, a Delaware
corporation, do hereby constitute and appoint William G. Mustain and Tara Y.
Harrison, 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, 1999, 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: 02/2/00
/s/ Barbara J. Dreyer
---------------------
Barbara J. Dreyer
<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 Tara Y.
Harrison, 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: 02/1/00
/s/ A. M. Gleason
-----------------
A. M. Gleason
<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 Tara Y.
Harrison, 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, 1999, 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: 02/1/00
/s/ John W. Rosenblum
---------------------
John W. Rosenblum
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
I, Robert E. Spekman, a duly elected Director of COMDIAL CORPORATION, a Delaware
corporation, do hereby constitute and appoint William G. Mustain and Tara Y.
Harrison, 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: 02/1/00
/s/ Robert E. Spekman
---------------------
Robert E. Spekman
<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 Tara Y.
Harrison, 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, 1999, 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: 02/2/00
/s/ Dianne C. Walker
--------------------
Dianne C. Walker
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