-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Mh553OlWey1a3Lo4kvckQTBcgExK7az1ySyap+Q2C9iwMkLYwIktwXl182BwydtO KmkW/67n4JQZZk4nUPz/Vg== 0000230131-96-000001.txt : 19960515 0000230131-96-000001.hdr.sgml : 19960515 ACCESSION NUMBER: 0000230131-96-000001 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960514 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMDIAL CORP CENTRAL INDEX KEY: 0000230131 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 942443673 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-09023 FILM NUMBER: 96562982 BUSINESS ADDRESS: STREET 1: 1180 SEMINOLE TRAIL STREET 2: P O BOX 7266 CITY: CHARLOTTESVILLE STATE: VA ZIP: 22906-2200 BUSINESS PHONE: 8049782200 MAIL ADDRESS: STREET 1: 1180 SEMMINOLE TRAIL STREET 2: P O BOX 7266 CITY: CHARLOTTESVILLE STATE: VA ZIP: 22906 10-Q 1 United States SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to _____________ Commission file number: 0-9023 COMDIAL CORPORATION (Exact name of Registrant as specified in its charter) Delaware 94-2443673 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) P. O. Box 7266 1180 Seminole Trail; Charlottesville, Virginia 22906-7266 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code:(804) 978-2200 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 ___ APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of latest practicable date. 8,542,191 common shares as of March 31, 1996. COMDIAL CORPORATION AND SUBSIDIARIES INDEX PAGE PART I - FINANCIAL INFORMATION ITEM 1: Financial Statements Consolidated Balance Sheets as of March 31, 1996 and December 31, 1995 3 Consolidated Statements of Operations for the Three Months ended March 31, 1996 and April 2, 1995 4 Consolidated Statements of Cash Flows for the Three Months ended March 31, 1996 and April 2, 1995 5 Notes to Consolidated Financial Statements 6-12 ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 13-21 PART II - OTHER INFORMATION ITEM 4. Submission of Matters to a Vote by Security Holders 22 ITEM 6: Exhibits and Reports on Form 8-K 23 COMDIAL CORPORATION AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION ITEM 1. Financial Statements Consolidated Balance Sheets - (Unaudited) March 31, December 31, In thousands except par value 1996 1995 Assets Current assets Cash and cash equivalents $469 $4,144 Accounts receivable - net 10,877 8,976 Inventories 18,580 17,925 Prepaid expenses and other current assets 1,992 2,695 Total current assets 31,918 33,740 Property - net 14,272 13,943 Deferred tax asset - net 7,425 6,694 Goodwill 18,873 210 Other assets 2,094 2,105 Total assets $74,582 $56,692 Liabilities and Stockholders' Equity Current liabilities Accounts payable $6,195 $7,988 Accrued payroll and related expenses 1,565 1,518 Other accrued liabilities 3,084 4,060 Current maturities of debt 7,776 1,903 Total current liabilities 18,620 15,469 Long-term debt 13,344 2,844 Deferred tax liability 2,187 2,191 Long-term employee benefit obligations 1,980 1,894 Commitments and contingent liabilities Total liabilities 36,131 22,398 Stockholders' equity Common stock ($0.01 par value) and paid-in capital (Authorized 30,000 shares; issued shares: 1996 = 8,542; 1995 = 8,132) 114,601 111,625 Other (1,018) (1,014) Accumulated deficit (75,132) (76,317) Total stockholders' equity 38,451 34,294 Total liabilities and stockholders' equity $74,582 $56,692 * Condensed from audited financial statements. The accompanying notes are an integral part of these financial statements. COMDIAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations - (Unaudited) Three Months Ended March 31, April 2, In thousands except per share amounts 1996 1995 Net sales $22,048 $22,316 Cost of goods sold 14,531 15,192 Gross profit 7,517 7,124 Operating expenses Selling, general & administrative 5,355 4,344 Engineering, research & development 1,191 1,043 Operating income 971 1,737 Other expense (income) Interest expense 247 273 Miscellaneous expense 253 194 Income before income taxes 471 1,270 Income tax expense (benefit) (714) 40 Net income 1,185 1,230 Dividends on preferred stock - 143 Net income applicable to common stock $1,185 $1,087 Earnings per common share and common equivalent share: Net income per common share $0.14 $0.15 Weighted average common shares outstanding 8,191 7,020 The accompanying notes are an integral part of these financial statements. COMDIAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows - (Unaudited) March 31, April 2, In thousands 1996 1995 Cash flows from operating activities: Cash received from customers $22,961 $21,496 Other cash received 209 236 Interest received 47 15 Cash paid to suppliers and employees (24,281) (23,088) Interest paid on debt (153) (223) Interest paid under capital lease obligations (30) (50) Net cash used by operating activities (1,247) (1,614) Cash flows from investing activities: Purchase of Key Voice Technologies (""KVT"") (8,528) - Purchase of Aurora Systems (""Aurora"") (1,901) - Acquisition costs for KVT and Aurora (14) - Capital expenditures (992) (585) Net cash used by investing activities (11,435) (585) Cash flows from financing activities: Proceeds from borrowings 5,619 - Net borrowings under revolver agreement 3,932 1,445 Proceeds from issuance of common stock 10 51 Principal payments on debt (414) (608) Principal payments under capital lease obligations (140) (163) Preferred dividends paid - (143) Net cash provided in financing activities 9,007 582 Net decrease in cash and cash equivalents (3,675) (1,617) Cash and cash equivalents at beginning of year 4,144 1,679 Cash and cash equivalents at end of period $469 $62 Reconciliation of net income to net cash provided by operating activities: Net Income $1,185 $1,230 Depreciation and amortization 1,026 915 Change in assets and liabilities net of effects from purchase of KVT and Aurora: Increase in accounts receivable (1,091) (2,244) Inventory provision 230 451 Increase in inventory (716) (948) Decrease (increase) in other assets 1,153 (675) Increase in deferred taxes (736) - Increase (decrease) in accounts payable (2,596) 652 Decrease in other liabilities (999) (1,109) KVT asset value at acquisition 1,468 - Aurora asset value at acquisition (241) - Increase in paid-in capital and other equity 70 114 Total adjustments (2,432) (2,844) Net cash used by operating activities $(1,247) $(1,614) The accompanying notes are an integral par1t of these financial statements. COMDIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED MARCH 31, 1996 - (Unaudited) Note A: CONSOLIDATED FINANCIAL STATEMENTS_______________________ The financial information included as of March 31, 1996 and for the three months ended March 31, 1996 and April 2, 1995 included herein is unaudited. The financial information reflects all normal recurring adjustments except for Statement of Financial Accounting Standards ("SFAS") No. 109 adjustments which are, in the opinion of management, necessary for a fair statement of results for such periods. Accounting policies followed by Comdial (the "Company") are described in Note 1 to the consolidated financial statements in its Annual Report to the Stockholders for the year ended December 31, 1995. The consolidated financial statements for 1996 should be read in conjunction with the 1995 financial statements, including notes thereto, contained in the Company's Annual Report to the Stockholders for the year ended December 31, 1995. Certain amounts in the 1995 consolidated financial statements have been reclassified to conform to the 1996 presentation. The results of operations for the three months ended March 31, 1996 are not necessarily indicative of the results to be expected for the full year. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Note B: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES______________ Under the Company's current cash management policy, borrowings from the revolving credit facility are used for operating purposes. The revolving credit facility is reduced by cash receipts that are deposited daily. Bank overdrafts of $1,625,000 and $1,594,000 are included in accounts payable at March 31, 1996 and December 31, 1995, respectively. Bank overdrafts are outstanding checks that have not (1) cleared the bank and (2) been funded by the revolving credit facility (see Note D). The Company considers the outstanding checks to be a bank overdraft. The Company is reporting the revolving credit facility activity on a net basis on the Consolidated Statements of Cash Flows. Note C: ACQUISITIONS____________________________________________ On March 20, 1996, the Company completed the acquisitions of two companies involved in Computer Telephone Integration ("CTI") applications: Aurora Systems, Inc. ("Aurora") and Key Voice Technologies, Inc. ("KVT"). Aurora, based in Acton, Massachusetts, is a leading provider of off-the-shelf CTI products. Aurora provides easy-to-use and affordable CTI solutions that enable companies to significantly increase productivity and enhance customer service. The Fastcall family of CTI solutions has become one of the leading CTI products. KVT, based in Sarasota, Florida, develops, assembles, markets, and sells voice processing systems and related products for business application. As a result of the acquisitions, Aurora and KVT has become wholly-owned subsidiaries of the Company. The acquisitions have been accounted for by using the purchase method and, accordingly, the results of operations of Aurora and KVT have been included with those of the Company since the date of the acquisitions. The consideration paid for the Aurora acquisition was approximately $3.3 million. The acquisition cost consisted of $1.9 million in cash, and $1.4 million of the Company's Common Stock (147,791 shares). The consideration paid for the acquisition of KVT totaled approximately $19.7 million which included the net book value of certain KVT assets as of the closing date. The acquisition cost consisted of $8.5 million in cash, $7.0 million evidenced by a promissory note, and approximately $2.2 million in the Company's Common Stock (243,097 shares). The remaining $2.0 million of the consideration is contingent upon KVT's performance after the acquisition, and may be paid at the Company's option in either cash or the Company's Common Stock. In accordance with the purchase method of accounting, the purchase price has been allocated to the underlying assets and liabilities based on their respective fair values at the date of the acquisitions. The purchase price for both acquisitions is in excess of net assets acquired of approximately $18.7 million. Such excess is being amortized on a straight-line basis over eight years. Such allocation has been based on preliminary estimates which may be revised at a later date. The Company is currently going through an asset valuation for both acquisitions. In order for the Company to acquire KVT and Aurora, the Company needed to obtain additional funds from its credit facility. The Company and Fleet Capital Corporation ("Fleet"), formerly known as Shawmut Capital Corporation and prior to that as Barclays Business Credit, Inc., have amended the Loan Agreement to permit the Company to borrow additional funds and have modified some of the existing terms and covenants. The amendment to the Loan Agreement has provided an increased borrowing capacity of $13.5 million under acquisition and equipment loans, and a revolving credit facility of $12.5 million (see Note E). Note D: INVENTORIES_____________________________________________ Inventories consisted of the following: _________________________________________________________________ March 31, December 31, In thousands 1996 1995 Finished goods $5,107 $3,808 Work-in-process 4,120 4,202 Materials and supplies 9,353 9,915 Total $18,580 $17,925 _________________________________________________________________ Note E: BORROWINGS______________________________________________ Since February 1, 1994, Fleet held substantially all of the Company's indebtedness. Long-term Debt. Long-term debt consists of the following: _________________________________________________________________ March 31, December 31, In thousands 1996 1995 Notes payable to Fleet Term notes I & II $ - $4,030 Acquisition note 8,529 - Equipment note 706 - Revolving credit 3,932 - Promissory Note 7,000 - Capitalized leases 638 717 Other debt 315 - Total debt 21,120 4,747 Less current maturities on debt 7,776 1,903 Total long-term debt $13,344 $2,844 _________________________________________________________________ On February 1, 1994, the Company and Fleet entered into a loan and security agreement ("Loan Agreement") pursuant to which Fleet agreed to provide the Company with a $6,000,000 term note ("Term Note I") and a $9,000,000 revolving credit loan facility. In April 1994, the Company borrowed an additional $1,300,000 under the term note ("Term Note II"). The Fleet Term Notes I and II carried interest rates of 1.50% over Fleet's prime rate and were payable in equal monthly principal installments of $110,334, with the balance due on February 1, 1998. The original Fleet revolving credit facility carried an interest rate of 1.00% over Fleet's prime rate. Availability under the revolving credit facility was based on eligible accounts receivable and inventory, less funds already borrowed. The Company's total indebtedness to Fleet (term notes plus revolving credit facility) could not exceed $14,000,000. Fleet's prime rate was 8.25% and 8.50% at March 31, 1996 and December 31, 1995, respectively. On March 13, 1996, the Company and Fleet amended the Loan Agreement to provide the Company with a $10,000,000 acquisition loan ("Acquisition Loan"), $3,500,000 equipment loan ("Equipment Loan"), and $12,500,000 revolving credit loan facility ("Revolver"). The remaining balance of $2,909,666 and $706,000 on Term Notes I and II, were paid by advances from the new Revolver and Equipment Loan, respectively. On March 20, 1996, the Company borrowed $8,528,536 from the Acquisition Loan which was used to purchase Aurora and KVT. The Fleet Acquisition Loan is payable in equal monthly principal installments of $142,142 starting on 4/1/96, with the balance due on February 1, 2001. The Fleet Equipment Loan is payable in equal monthly principal installments of $27,000 starting on 4/1/96, with the balance due on June 1, 1998. The Fleet Acquisition Loan, Equipment Loan, and Revolver can carry interest rates at either Fleet's prime rate or London's Interbank Offering Rate ("LIBOR"). The interest rates can be adjusted annually based on a debt to earnings ratio which will vary the rates from minus 0.50% to plus 0.50% of the Fleet Prime Rate and from plus 1.50% to 2.50% of LIBOR. As of March 31, 1996, the prime interest rate was 8.25% and LIBOR rates were 5.40% and 5.44% with approximately 80% of the loans based on LIBOR. As of March 31, 1996, the Company's borrowing rate for prime was 8.25%, and the LIBOR borrowing rates were 7.40% and 7.44%. The Fleet revolving credit facility availability is still based on eligible accounts receivable and inventory, less funds already borrowed. The Company's Promissory Note of $7,000,000, which was part of the purchase price for KVT, carry's an interest rate based on prime with yearly payments of $1,400,000 over five years starting on March 20, 1997. Capital leases are with various financing facilities which are payable based on the terms of each individual lease. Other debt consists of a mortgage acquired as part of the KVT acquisition and has a monthly mortgage payment of $2,817 which includes interest at 8.75%. The final payment is due on August 01, 2005. Scheduled maturities of Fleet Acquisition and Equipment Loans (current and long-term debt) as defined in the Loan Agreement are as follows: _________________________________________________________________ Principal In thousands Fiscal Years Installments_ Loans payable 1996 $1,522 * 1997 2,030 1998 1,845 1999 1,706 2000 2,132 __* The remaining aggregate for 1996.___________________________ Debt Covenants. The Company's indebtedness to Fleet is secured by liens on the Company's accounts receivable, inventories, intangibles, land, and other property. Among other restrictions, the amended Loan Agreement with Fleet also contains certain financial covenants that relate to specified levels of consolidated tangible net worth, profitability, debt service coverage ratio, and current ratio. The amended Loan Agreement also contains certain limits on additional borrowings. The Company is currently in compliance with all the covenants and terms as defined in the Loan Agreement. Note F: EARNINGS PER SHARE______________________________________ For the three months ended March 31, 1996, earnings per share were computed by dividing net income by the weighted average number of common shares outstanding. Stock options were antidulitive for the three months of 1996. For the three months ended April 2, 1995, primary earnings per share were computed by dividing income attributable to common shareholders (net income less preferred stock dividend requirements) by the weighted average number of common and common equivalent shares outstanding during the period plus (in periods in which they have a dilutive effect) the effect of common shares contingently issuable, primarily from stock options. Note G: INCOME TAXES____________________________________________ Effective January 1, 1993, the Company changed its method of accounting for income taxes from the deferred method to the liability method as required by SFAS No. 109, "Accounting for Income Taxes". As permitted under the rules of the statement, prior years' financial statements have not been restated. The components of the income tax expense (benefit) based on the liability method for the three months are as follows: _________________________________________________________________ March 31, April 2, In thousands 1996 1995 Current - Federal $ 17 $32 State 5 8 Deferred - Federal (714) - State ( 22) _-_ Total provision ($714) $40 _________________________________________________________________ The income tax provision reconciled to the tax computed at statutory rates for the months are summarized as follows: _________________________________________________________________ March 31, April 2, In thousands 1996 1995 Federal tax (benefit) at statutory rate (35% in 1996 and 1995) $165 $444 State income taxes (net of federal tax benefit) 3 5 Nondeductible charges 33 14 Alternative minimum tax 16 32 Utilization of operating loss carryover (195) (455) Adjustment of valuation allowance (736) - Income tax provision ($714) $40 _________________________________________________________________ Net deferred tax assets of $5,238,000 and $4,503,000 have been recognized in the accompanying Consolidated Balance Sheets at March 31, 1996 and December 31, 1995, respectively. The components of the net deferred tax assets are as follows: _________________________________________________________________ March 31, December 31, In thousands 1996 1995 Total deferred tax assets $27,322 $28,091 Total valuation allowance (19,897) (21,397) Total deferred tax asset - net 7,425 6,694 Total deferred tax liabilities (2,187) (2,191) Total net deferred tax asset $5,238 $4,503 _________________________________________________________________ The valuation allowance decreased $1,500,000 during the three month period ended March 31, 1996 and this decrease was primarily related to (1) the re-evaluation of the future utilization of deferred tax assets of $736,000, (2) the utilization of operating loss carryforwards of $195,000, and (3) the change in temporary differences of deferred tax assets and liabilities of $569,000. The Company periodically reviews the requirements for a valuation allowance and makes adjustments to such allowance when changes in circumstances result in changes in judgment about the future realization of deferred tax assets. Based on a re-evaluation of the valuation allowance as well as the impact of the acquisitions of Aurora and KVT, the valuation allowance was reduced and a net tax benefit of $736,000 was recognized in the quarter ended March 31, 1996. Management believes that it is more likely than not that the Company will realize this tax benefit. The Company has net operating loss carryforwards and tax credit carryovers of approximately $66,257,000 and $2,830,000, respectively, which, if not utilized, will expire at various years up until 2007. Based on the Company's interpretation of Section 382 of the Internal Revenue Code, the reduction of the valuation allowance was calculated assuming a 50% ownership change, which could limit the utilization of the tax net operating loss and tax credit carryforwards in future periods starting at the time of the change. An ownership change could occur if changes in the Company's stock ownership exceeds 50% of the value of the Company's stock during any three year period. COMDIAL CORPORATION AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion is intended to assist the reader in understanding and evaluating the financial condition and results of operations of the Company. This review should be read in conjunction with the financial statements and accompanying notes. This analysis attempts to identify trends and material changes that occurred during the periods presented. Prior years have been reclassified to conform to the 1996 reporting basis (see Note A to the Consolidated Financial Statements). General Development of the Business Comdial Corporation (The Company) is a Delaware corporation based in Charlottesville, Virginia. The Company is engaged in the design, development, manufacture, distribution, and sale of advanced telecommunications products and system solutions. The Company was originally incorporated in Oregon in 1977. In 1982, the Company was reincorporated in Delaware, and acquired substantially all of the assets, and assumed substantially all of the liabilities, of General Dynamics Telephone Systems Center, Inc., formerly known as Stromberg-Carlson Telephone Systems, Inc. (Stromberg-Carlson), a wholly owned subsidiary of General Dynamics Corporation. Stromberg-Carlson's facilities, located in Charlottesville, Virginia since 1955, had engaged in the manufacture of telephones since 1894. The Company's Common Stock is traded over-the-counter and is quoted on the National Association of Security Dealers Automated Quotation System (Nasdaq) under the symbol: CMDL. The Company designs, manufactures, and markets small to medium sized business telecommunications systems which support up to approximately 500 telephones. The Company believes that it is a leading supplier to this market, with an installed base estimated to be approximately 250,000 telephone systems and 2,500,000 telephones. The Company's products include digital and analog telephone switches and telephones, as well as a wide range of product enhancements to the Company's telephone systems. The Company's recent growth has occurred principally as a result of digital telephone systems introduced by the Company since 1992. These digital products provide end users with the ability to utilize evolving telecommunications technologies, including those arising from the convergence of telephone systems and computers, or Computer-Telephony Integration ("CTI"). In recent years, advances in telecommunications have facilitated the development of technologically advanced telephone systems and applications. Spurred by the significant deregulation of the telephone industry that began in the 1970's, electronic telephone systems began displacing the traditional electromechanical key sets that served as the basic office telephone system since the 1930's. New telephone applications are being introduced continuously, permitting business users to improve communications within their organizations and with customers by using conference calls, speaker phones, voice mail, automated attendant, and voice processing applications, such as speech recognition. In the 1970's, solid state electronic telephone systems began displacing electromechanical systems. These original electronic telephone systems were "analog," transmitting voice information in a continuous wave form that is "analogous" to the original voice signal. By the late 1980's, digital telephone systems were available for commercial use. Digital systems generally offer customers more features, provide greater voice clarity, offer potential cost savings through the use of low-cost, high-capacity T-1 transmission lines from telecommunication service providers, enable improved video and data transmission, and offer superior platforms for future features. While some manufacturers have ceased producing analog systems altogether, the Company offers a broad line of systems utilizing both analog and digital technologies. The Company believes that current industry shipments are approximately half digital, with the digital share growing rapidly. In addition, the installed telephone system base remains predominantly analog, thereby providing significant opportunities for manufacturers who continue to produce analog systems. Such systems are purchased by end users wishing to install new analog systems, upgrade existing systems, or add to existing systems. A recent major industry advancement is the development of CTI. CTI applications merge the power of modern telephone systems with that of computers to provide integrated solutions to broad communications problems, such as proper queuing in call communications centers, and specific vertical market applications (such as the real estate, law firm, and food service markets). Because of the technological advances that have arisen with digitization and open systems, more flexible and useful telephone applications are being developed to solve current communications problems. In order to integrate computers and telecommunications equipment, several standards have been developed. The Company was among the first telephone manufacturing companies to commit to the Novell standard, called Telephony Services Application Programming Interface ("TSAPI"). The TSAPI standard provides a stable platform for a Novell NetWare network to integrate with the features and functionality of a telephone switch. The Company distributes its products through a network of approximately 7,500 independent dealers, of which approximately 1,500 have written agreements with the Company. This enables the Company to achieve broad geographic penetration, as well as access to some of the fastest growing markets in the country. The Company's distribution network centers around a key group of wholesale supply houses, through which the Company's products are made available to dealers. These dealers market the Company's products to small and medium sized organizations and divisions of larger organizations. The Company's strategy enables it to virtually eliminate bad debt exposure and minimize administration, credit checking, and sales expense, as well as inventory levels. Wholesale supply houses in turn are able to sell related products such as cable, connectors, and installation tools. Dealers have the benefits of competitive sourcing and reduced inventory carrying costs. The Company is pursuing three fundamental business strategies: (1) maintaining a leadership position in its core business of delivering advanced telecommunications systems to the U.S. domestic market through wholesale supply house distribution channels, (2) achieving growth through expansion into international markets, and (3) maintaining a leadership position in the emerging market for systems solutions based on CTI. The Company seeks to support these strategies through the following approaches: (1) maintaining a broad and efficient distribution network; (2) targeting small to medium sized organizations; (3) offering a broad range of products; (4) developing strategic alliances; (5) pursuing international opportunities; (6) promoting computer telephony applications; (7) promoting industry accepted interface standards; and (8) developing open application interface ("OAI"). The market for the Company's products is highly competitive. The Company competes with approximately 20 companies, many of which, such as Lucent Technologies, Inc., Nortel Inc., and Toshiba Corp., have significantly greater resources. Key competitive factors in the sale of telephone systems and related applications include performance, features, reliability, service and support, name recognition, distribution capability, place of operation, and price. The Company believes that it competes favorably in its market with respect to the performance, features, reliability, distribution capability, and price of its systems, as well as the level of service and support that the Company provides. In marketing its telephone systems, the Company also emphasizes quality, as evidenced by its ISO 9001 certification, and high technology features. In addition, the Company often competes to attract and retain dealers for its products. The Company expects that competition will continue to be intense in the markets it serves, and there can be no assurance that the Company will be able to continue to compete successfully in the marketplace or that the Company will be able to maintain its current dealer network. During the first quarter of 1996, the Company introduced wideopen.office, the first universal CTI server designed for local area networks ("LANS") as well as standalone personal computers ("PCs"). The new server provides linkages between desktop computers and Comdial's DXP switch users and also permits interface with PC's on a LAN. Also in the first quarter, the Company announced that it has signed an agreement with Danvers, MA-based Pro CD, Inc. to market Pro CD's Select Phone for Networks. This CD-ROM data base contains over 100 million residential and business names, addresses, and phones numbers, is the only such data base available for use in a network environment. Comdial will bundle Select Phone with FastCall, a middleware product, which enables users to integrate Select Phone easily with existing data bases. On March 20, 1996, the Company completed the acquisitions of two companies involved in CTI applications: Aurora Systems, Inc. ("Aurora") and Key Voice Technologies, Inc. ("KVT"). Aurora, based in Acton, Massachusetts, is a leading provider of off-the- shelf CTI products. KVT, based in Sarasota, Florida, develops, assembles, markets, and sells voice processing systems and related products for business applications. As a result of the acquisitions, Aurora and KVT have become wholly-owned subsidiaries of the Company (see Note C to the Consolidated Financial Statements). The consideration paid for the acquisition of Aurora was approximately $3.3 million in cash and common stock. The consideration paid for the acquisition of KVT totaled approximately $19.7 million in cash, common stock, and a promissory note. The total also included the net book value of certain KVT assets as of the closing date. In accordance with the purchase method of accounting, the purchase price has been allocated to the underlying assets and liabilities based on their respective fair values at the date of the acquisitions. The purchase price for both acquisitions is in excess of assets acquired of approximately $18.7 million. Such excess is being amortized on a straight-line basis over eight years. Such allocation has been based on preliminary estimates which may be revised at a later date and both companies assets are currently being evaluated. Management anticipates that these two acquisitions will have a positive effect on revenues and profitability for the remainder of 1996 and enhance the Company's position for future development relating to the CTI market. Results of Operations Revenue and Earnings First Quarter 1996 vs 1995 The Company's performance for the first quarter of 1996 was slightly lower when compared with 1995. Even though the Company continued to show growth of its DXP and CTI products, other sales were down, such as the analog products, primarily due to the effects from bad weather and the budget related government slowdown. Income before income taxes for 1996 decreased by 63% to $471,000 as compared with $1,270,000 for the comparable period in 1995. Due to the timing of the acquisitions, Aurora and KVT had very little impact on the first quarter sales or results. Net sales for the first quarter of 1996 decreased 1% to $22,048,000, compared with $22,316,000 in the first quarter of 1995. The DXP and CTI product sales increased substantially but was offset with a drop in analog and custom manufacturing sales. The following table presents certain relevant net sales information concerning Comdial's principle product lines for the periods indicated: (Reference product information by sales category in the Company's 1995 Form 10-K). ________________________________________________________________ March 31, April 2, In thousands 1996 1995 Sales Business Systems Digital $12,886 $10,732 CTI 3,713 1,598 Analog 3,493 5,756 Enhancements 386 490 Sub-total 20,478 18,576 Proprietary and Specialty Terminals 867 1,491 Custom Manufacturing 529 2,019 Other 174 230 TOTAL $22,048 $22,316 _________________________________________________________________ Gross profit increased 6% to $7,517,000, compared with $7,124,000 in the first quarter of 1995. This increase was primarily attributable to the higher sales of digital and CTI products which have a higher product margin. Selling, general and administrative expenses increased 23% to $5,355,000, compared with $4,344,000 in the first quarter of 1995. This increase was primarily due to: (1) an increase in personnel associated with domestic and international sales, customer support, and the development and marketing of CTI products; and (2) the increased marketing efforts which resulted in increased costs for travel, telephone, and trade shows. Engineering, research and development expenses increased 14% to $1,191,000, compared with $1,043,000 in the first quarter of 1995. This increase was primarily due to the increase in engineering personnel to support additional product development. Miscellaneous expenses increased 30% to $253,000, compared with $194,000 in the first quarter of 1995. This increase was primarily due to the increase in goodwill amortization of $64,000 which relates directly to the acquisitions of Aurora and KVT. Income tax expense (benefit) in the first quarter of 1996 decreased to ($714,000) compared with $40,000 for the same period of 1995, primarily due to the recognition of a tax benefit of $736,000. The tax benefit was a result of a reduction in the valuation allowance relating to its federal net operating loss carryforwards ("NOLS")(see Note G to the Consolidated Financial Statements). Dividends on preferred stock represent quarterly dividends payable to the holder of Series A 7 1/2% Cumulative Convertible Redeemable Preferred Stock ("Series A Preferred Stock"). Dividends for the first quarter of 1996 were zero, compared with $143,000 for the same period of 1995. On August 11, 1995, Comdial paid PacifiCorp Credit, Inc. ("PCI") all dividends associated with the Series A Preferred Stock and redeemed their remaining 750,000 shares. Comdial will no longer have any dividend payments associated with the Series A Preferred Stock. Management anticipates that the factors which have led to a sluggish first quarter in sales and net income for the first three months of 1996, may continue to impact the overall performance of the second quarter. These factors should be partially offset by the continual sales growth of digital and CTI products for the remainder of the year. The Company plans to continue to improve sales by: (1) the planned introduction of a fully-featured telephone system in the second quarter; and (2) the realignment and increased staffing of its sales, marketing, and software development organizations. Liquidity The Company is indebted to Fleet which holds substantially all of the Company's indebtedness. Prior to February 1, 1994, PCI held substantially all of the Company's indebtedness. The Company and Fleet entered into a loan and security agreement (the "Loan Agreement") on February 1, 1994. Under the Loan Agreement Fleet provided the Company with a $6,000,000 term loan (the "Term Note I") and a revolving credit loan facility in an amount up to $9,000,000 (the "Revolver") (see note E to Financial Statements). The Company and Fleet amended the original agreement in April 1994, to allow the Company to borrow an additional $1,300,000 (the "Term Note II"). The Fleet Term Notes and Revolver on the original Loan Agreement carried interest rates of 1.50% and 1.00% over Fleet's prime rate, respectively. Fleet's prime rate was 8.25% and 8.50% at March 31, 1996 and December 31, 1995, respectively. On March 13, 1996, the Company and Fleet amended the Loan Agreement to provide the Company with a $10,000,000 acquisition loan ("Acquisition Loan"), $3,500,000 equipment loan ("Equipment Loan"), and $12,500,000 revolving credit loan facility ("Revolver"). The remaining balance on Term Note I and II were paid by advances from the Revolver and Equipment Loan, respectively (see Note E to Financial Statements). On March 20, 1996, the Company borrowed $8,528,536 from the Acquisition Loan which was used to purchase Aurora and KVT. The Fleet Acquisition Loan is payable in equal monthly principal installments of $142,142 starting on 4/1/96, with the balance due on February 1, 2001. The Fleet Equipment Loan is payable in equal monthly principal installments of $27,000 starting on 4/1/96, with the balance due on June 1, 1998. The Fleet Acquisition Loan, Equipment Loan, and Revolver can carry interest rates at either Fleet's prime rate or London's Interbank Offering Rate ("LIBOR"). The interest rates can be adjusted annually based on a debt to earnings ratio which will vary the rates from minus 0.50% to plus 0.50% of the Fleet prime rate and LIBOR from plus 1.50% to 2.50%. The Fleet revolving credit facility availability is still based on eligible accounts receivable and inventory, less funds already borrowed. The Company's indebtedness to Fleet is secured by liens on the Company's assets and also contains certain financial covenants (see Note E to the Financial Statements). The Company is currently in compliance with all the covenants and terms as defined in the amended Loan Agreement. The Company's Promissory Note of $7,000,000, which was part of the purchase price for KVT, carries an interest rate based on prime with yearly payments of $1,400,000 over five years starting on March 20, 1997. Capital leases are with various financing facilities which are payable based on the terms of each individual lease. Other debt consists of a mortgage that was acquired as part of the KVT acquisition and has a monthly mortgage payment of $2,817 which includes interest at 8.75%. The final payment is due on August 01, 2005. The following table sets forth the Company's cash and cash equivalents, current maturities on debt and working capital at the dates indicated. _________________________________________________________________ In thousands October 1, 1995 December 31 ,1995 Cash and cash equivalents $469 $4,144 Current maturities on debt 7,776 1,903 Working capital 13,298 18,271 _________________________________________________________________ All operating cash requirements are currently being funded through the Fleet Revolver. Cash decreased primarily due to the acquisition of Aurora and KVT. Current maturities on debt include the Revolver balance and the current portion of the promissory note of $3,932,000 and $1,400,000, respectively, which were zero at December 31, 1995. Working capital decreased by $4,973,000 due primarily to the increase in current maturities on debt which relates directly to the acquisitions of Aurora and KVT which occurred at the end of the first quarter of 1996. Accounts receivable increased by 21% or $1,901,000, compared to December 31, 1995. This increase was primarily due to the consolidation of Aurora and KVT receivables of $810,000, and the timing of shipments by Comdial for the first quarter. Prepaid expenses and other current assets decreased by 26% or $703,000, primarily due to a miscellaneous receivable which was paid regarding custom manufacturing inventory that had been returned to the original vendor. Goodwill relates primary to the excess of purchase price over the net assets acquired of approximately $18.7 million. Such allocation has been based on preliminary estimates and be revised at a later date. Other accrued liabilities decreased by $976,000, primarily due to promotional costs paid during the first quarter of 1996 which related to 1995. During 1996 and 1995, all of the Company's sales, net income, and identifiable net assets were attributable to the telecommunications industry except sales relating to custom manufacturing. Capital Resources Capital expenditures in the first three months of 1996 and for the comparable period of 1995 were $430,000 and $519,000, respectively. Capital additions for 1996 and 1995 were provided by funds from operations, capital leasing, and borrowings from Fleet. The Company anticipates spending approximately $4,000,000 on capital expenditures during 1996 which includes equipment for manufacturing and technology. The Company plans to fund all future capital expenditure additions through working capital from Fleet and long-term lease arrangements. Management expects these sources to provide the capital assets necessary for near-term future operations and future product development. The Company has a commitment from Crestar Bank for the issuance of letters of credit in amounts not to exceed $500,000 at any one time. At March 31, 1996, the amount of available commitments under the letter of credit facility with Crestar Bank was $368,000. COMDIAL CORPORATION AND SUBSIDIARIES PART II - OTHER INFORMATION ITEM 4. Submission of Matters to a vote by Security Holders (a) On April 30, 1996, the Company held its annual meeting of shareholders in Ednam Hall at the Boar's Head Inn, Route 250 West, Charlottesville, Virginia 22905. The following matters were voted upon: 1. The following directors were elected to serve additional terms: Michael C. Henderson and Dianne C. Walker. Directors whose term of office continued after the meeting: A. M. Gleason, William G. Mustain, William E. Porter and John W. Rosenblum. 2. The amendment to the Company's 1992 Stock Incentive Plan to increase the numbers of shares of Common Stock authorized for issuance under the plan of 800,000 to 1,550,000 was approved. 3. The firm of Deloitte & Touche LLP was approved as the independent public auditors of the Company. Shares of Common Stock were voted as follows: Item 1: (Election of Board of Directors) Total Vote For Total Vote Withheld Michael C. Henderson 5,856,554 42,120 Dianne C. Walker 5,856,554 42,120 Item 2: (Amendment to the 1992 Stock Incentive Plan) For - 2,740,698 Against - 1,714,783 Abstain - 40,411 Item 3: (Selection of Independent Auditors) For - 5,866,584 Against - 13,038 Abstain - 19,051 ITEM 6. Exhibits and Reports on Form 8-K. (a) 3. Exhibits Included herein: (10) Material Contracts: 10.1 Amendment No. 1 to the Loan And Security Agreement dated March 13, 1996 among the Registrant and Fleet Capital Corporation. (11) Statement re Computation of Per Share Earnings. (27) Financial Data Schedule. (b) Reports on Form 8-K The Registrant has filed a Form 8-K on March 25, 1996 pertaining to the acquisitions of Key Voice technologies, Inc. and Aurora Systems, Inc. __________________ Items not listed if not applicable. SIGNATURES Pursuant to the requirements 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. Comdial Corporation (Registrant) Date: May 14, 1996 By: /s/ Wayne R. Wilver Wayne R. Wilver Senior Vice President, Chief Financial Officer, Treasurer and Secretary EX-27 2
5 1000 3-MOS DEC-31-1996 MAR-31-1996 $ 469 0 10,877 46 18,580 31,918 40,762 26,490 74,582 18,620 21,120 86 0 0 38,365 74,582 22,048 22,048 14,531 14,531 6,802 (3) 247 471 (714) 1,185 0 0 0 1,185 .14 .14
EX-10 3 CONSOLIDATED AMENDMENT NO. 1 Exhibit 10.1 TO LOAN AND SECURITY AGREEMENT THIS CONSOLIDATED AMENDMENT NO. 1 TO LOAN AND SECURITY AGREEMENT ("Amendment"), dated this 13th day of March, 1996, made by and between FLEET CAPITAL CORPORATION (formerly known as Shawmut Capital Corporation and successor by assignment from Barclays Business Credit, Inc.), a Connecticut corporation (the "Lender"); and COMDIAL CORPORATION ("Parent") and its wholly- owned subsidiaries AMERICAN TELECOMMUNICATIONS CORPORATION ("ATC"), AMERICAN PHONE CENTERS, INC. ("APC"), COMDIAL ENTERPRISE SYSTEMS, INC. ("CES"), COMDIAL TELECOMMUNICATIONS INTERNATIONAL, INC. ("CTII"), SCOTT TECHNOLOGIES CORPORATION ("STC"), COMDIAL CUSTOM MANUFACTURING, INC. ("CCM"), COMDIAL VIDEO TELEPHONY, INC. ("CVT"), COMDIAL TECHNOLOGY CORPORATION ("CTC"), COMDIAL TELECOMMUNICATIONS, INC. ("CTI"), and CTI's wholly-owned subsidiaries, COMDIAL BUSINESS COMMUNICATIONS CORPORATION ("CBCC"), and COMDIAL CONSUMER COMMUNICATIONS CORPORATION ("CCCC"; Parent, ATC, APC, CES, CTII, STC, CCM, CVT, CTC, CTI, CBCC and CCCC being hereinafter referred to collectively as the "Borrowers" and, individually, as a "Borrower"), each a Delaware corporation, to the Loan and Security Agreement, dated February 1, 1994 (as amended, modified, restated or supplemented from time to time, the "Loan Agreement"). All capitalized terms used herein without definition shall have the meanings ascribed to such terms in the Loan Agreement. RECITALS A. Pursuant to the Loan Agreement, the Lender has agreed to make loans and extend credit to the Borrowers secured by the Collateral and the Realty. B. The Loan Agreement was previously amended by a certain First Amendment thereto, dated April 29, 1994, by a certain Second Amendment thereto, dated January 23, 1995, and by Third Amendment thereto, dated March 31, 1995 (such previous three amendments being herein called the "Previous Amendments"). C. The Borrowers and the Lender now desire to further amend the Loan Agreement. D. The Borrowers and the Lender also desire to eliminate certain amendments to the Loan Agreement that were set forth in the Previous Amendments by omitting the same from this Amendment and to restate and consolidate in this Amendment all amendments to the Loan Agreement that are effective on and as of the date hereof. E. To accomplish the foregoing, the Borrowers and the Lender have agreed to amend the Loan Agreement as set forth herein. STATEMENT OF AGREEMENT NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby expressly acknowledged, the Borrowers and the Lender hereby agree as follows: ARTICLE I AMENDMENTS TO LOAN AGREEMENT The Loan Agreement is hereby amended as follows: 1.1. Previous Amendments. The amendments to the Loan Agreement set forth in the Previous Amendments are eliminated and terminated. 1.2. Definitions. Section 1.1, Defined Terms, is hereby amended by making the following changes: (a) The following definitions are added: Acquisition Loan Borrowing Date - the date on which all of the conditions set forth in this Agreement are satisfied and Lender makes an Acquisition Loan to Borrowers. Acquisition Loan Commitment - the sum of $10,000,000. Acquisition Loans - the aggregate of the Loans made by Lender as provided in Section 2.1(C) of this Agreement. Acquisition Note - each Acquisition Note to be executed by Borrowers on or about each Acquisition Loan Borrowing Date in favor of Lender to evidence an Acquisition Loan, which shall be in the form of Exhibit A-1 to this Agreement. Adjusted LIBOR Rate - with respect to each Interest Period for a LIBOR Rate Advance, an interest rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to the quotient of (i) the LIBOR Rate in effect for such Interest Period divided by (ii) a percentage (expressed as a decimal) equal to 100% minus Statutory Reserves (to the extent such Statutory Reserves are established by Lender or Bank or their respective bank holding company). Advance - any principal amount advanced and remaining outstanding at any time with respect to the Loans, which advance shall be made or outstanding as a Base Rate Advance or a LIBOR Rate Advance. Applicable Margin - shall mean (i) for the period from the date of the effectiveness of the First Consolidated Amendment to this Agreement to the first Reset Date, with respect to any Base Rate Advance, zero percent (0%) per annum, and in the case of any LIBOR Rate Advance, two percent (2%) per annum, and (ii) for the period from the first Reset Date through the next Reset Date, the number of percentage points as determined under the following matrix applicable to a Base Rate Advance or LIBOR Rate Advance with respect to the Total Debt/EBITDA Ratio calculated as of the end of the immediately preceding fiscal year: Applicable Margin Applicable Margin Total Debt/EBITDA Ratio for Base Rate Advances For LIBOR Rate Advances Less than 2.6 to 1.0 minus one-half percent 1.50% (.5%) 2.6 to 1.0 or greater minus one-quarter percent 1.75% less than 2.7 to 1.0 (.25%) 2.7 to 1.7 or greater but 0% 2.00% less than 2.9 to 1.0 2.9 to 1.0 or greater but .25% 2.25% less than 3.0 to 1.0 3.0 to 1.0 or greater .50% 2.50% Base Rate Advance - an Advance made or continued as a Loan or portion of a Loan bearing interest based on the Base Rate as provided in Section 3.1 of this Agreement. Board of Governors - the Board of Governors of the Federal Reserve System of the United States. Borrowers - all of the Borrowers defined in the preamble to this Agreement and each New Borrower and Borrower shall refer to one of them. Commitments - at any date, Lender's Revolving Credit Loan Commitment, Equipment Loan Commitment and Acquisition Loan Commitment. Dollar - and the sign $ shall refer to the currency of the United States of America. EBITDA - with respect to any fiscal period, the sum of (i) Consolidated Adjusted Net Earnings From Operations for such fiscal period, plus (ii) interest, income taxes, depreciation and amortization expenses of Parent and its Subsidiaries for such fiscal period which were subtracted from earnings in calculating Consolidated Adjusted Net Earnings From Operations for such fiscal period. Eligible Equipment - new or used Equipment which (i) has been purchased by a Borrower, (ii) has been delivered to and accepted by such Borrower, and (iii) is subject to Lender's duly perfected first priority Lien and no other Lien that is not a Permitted Lien. Equipment Loan Commitment - the sum of $3,500,000. Equipment Loans - the aggregate of the Loans made by Lender as provided in Section 2.1(B) of this Agreement. Equipment Note - each Equipment Note to be executed by Borrowers on or about each Equipment Loan Borrowing Date in favor of Lender to evidence an Equipment Loan, which shall be in the form of Exhibit A-2 to this Agreement. Equipment Purchase Price - the invoice price, exclusive of any applicable sales tax, inspection, installation, transportation or freight costs, of Eligible Equipment purchased by a Borrower after the effectiveness of the First Consolidated Amendment to this Agreement for which Lender, upon Borrowers' request, provides an Equipment Loan in accordance with this Agreement. Equipment Loan Borrowing Date - the date on which all of the conditions set forth in this Agreement are satisfied and Lender makes an Equipment Loan to Borrowers. Eurocurrency Liabilities - shall have the meaning ascribed thereto in Regulation D. Expiration Date - the date on which this Agreement is terminated by Lender or Borrower pursuant to 3.6 hereof. First Consolidated Amendment - the Consolidated Amendment No. 1 to this Agreement dated March 13, 1996. First Equipment Loan - the equipment loan to be made by Lender to Borrowers upon the effectiveness of the First Consolidated Amendment to this Agreement to be used to pay and satisfy in full Borrowers' $1,300,000 Term Note II, dated April 29, 1994, as amended by First Modification thereto, dated March 31, 1995, previously issued by Borrowers to Lender pursuant to this Agreement. First Equipment Note - the Equipment Note to be executed by Borrowers upon the effectiveness of the First Consolidated Amendment to this Agreement evidencing the First Equipment Loan. Interest Period - as defined in Section 3.1(C) of this Agreement. Letter of Credit - any letter of credit issued by Lender or any of Lender's Affiliates for the account of a Borrower. Letter of Credit Amount - at any time, the aggregate undrawn face amount of all Letters of Credit and Letter of Credit Guaranties then outstanding. Letter of Credit Guaranty - any guaranty issued by Lender pursuant to which Lender shall guarantee the payment or performance by a Borrower of its reimbursement obligations under a Letter of Credit. Letter of Credit Obligations - that portion of the Obligations constituting Borrowers' joint and several obligation to reimburse Lender for all amounts paid by Lender under or with respect to a Letter of Credit or Letter of Credit Guaranty. LIBOR Rate - the rate at which Dollar deposits approximately equal in principal amount to the LIBOR Rate Advance for which the LIBOR Rate is being determined and for a maturity comparable to the Interest Period for which such LIBOR Rate will apply are offered to Bank in immediately available funds in the London Interbank Market at approximately 11:00 a.m., London time, two (2) Business Days prior to the commencement of such Interest Period. LIBOR Rate Advance - an Advance made or continued as a Loan or a portion of a Loan bearing interest based on the Adjusted LIBOR Rate as provided in Section 3.1 of this Agreement. New Borrower - a Subsidiary of Parent or any of its Subsidiaries which, after the effectiveness of the First Consolidated Amendment to this Agreement, is acquired or formed as part of a Permitted Acquisition and shall become a party to this Agreement and the other Loan Documents, and be permitted to borrow hereunder, by the execution and delivery of a New Borrower Assumption Agreement. New Borrower Assumption Agreement - an Assumption Agreement substantially in the form of Exhibit U to this Agreement to be executed upon the consummation of a Permitted Acquisition by all of the then Borrowers and the New Borrower that is acquired or formed as a part of such Permitted Acquisition. New Borrower Pledge Agreement - a Pledge Agreement substantially in the form of Exhibit V to this Agreement to be executed upon the consummation of a Permitted Acquisition by the Borrower that is the owner of all of the issued and outstanding Voting Stock of the New Borrower that is acquired or formed as a part of such Permitted Acquisition. Notes - each Equipment Note and each Acquisition Note or all or any of them as the context may require. Notice of Borrowing - as defined in Section 3.2(A) of this Agreement. Notice of Conversion/Continuation - as defined in Section 3.2(C) of this Agreement. Overadvance Condition - at any date, a condition such that the principal amount of the Revolving Credit Loans outstanding to Borrowers on such date exceeds the Borrowing Base at such date. Permitted Acquisition - an acquisition by a Borrower of substantially all of the Property or the Voting Stock of a Person for which each of the conditions precedent set forth in Section 10.5 hereof are satisfied, regardless of whether an Acquisition Loan is made by Lender in connection with such acquisition. Reset Date - the first day of the month following Lender's receipt of the audited financial statements of Parent and its Subsidiaries for a fiscal year, commencing with the fiscal year ending December 31, 1996, as required to be delivered to Lender pursuant to Section 9.1(J) of this Agreement. Revolving Credit Loan Commitment - the sum of $12,500,000. Statutory Reserves - on any date, the percentage (expressed as a decimal) established by the Board of Governors which is the then stated maximum rate for all reserves (including, but not limited to, any emergency, supplemental or other marginal reserve requirements) applicable to any member bank of the Federal Reserve System in respect to Eurocurrency Liabilities (or any successor category of liabilities under Regulation D). Such reserve percentage shall include, without limitation, those imposed pursuant to Regulation D. The Statutory Reserves shall be adjusted automatically on and as of the effective date of any change in such percentage. The Statutory Reserves on the effective date to the First Consolidated Amendment to this Agreement are zero (0). Total Debt/EBITDA Ratio - with respect to any fiscal period, the ratio of (i) Indebtedness of Parent and its Subsidiaries at the end of such period calculated on a Consolidated Basis, to (ii) EBITDA for such fiscal period. (b) The definition of "Consolidated Adjusted Tangible Net Worth" is amended in its entirety to read as follows: "Consolidated Adjusted Tangible Net Worth - at any date, a sum equal to: (i) the net book value (after deducting related depreciation, obsolescence, amortization, valuation, and other proper reserves) at which the Consolidated Adjusted Tangible Assets of a Person would be shown on a balance sheet at such date in accordance with GAAP, MINUS (ii) the amount at which such Person's liabilities (other than capital stock and surplus) would be shown on such balance sheet in accordance with GAAP, and including as liabilities all reserves for contingencies and other potential liabilities that would be accrued under GAAP. PLUS (iii) the amount of Subordinated Debt shown on such balance sheet in accordance with GAAP at such date." (c) The definition of "Bank" is amended in its entirety to read as follows: "Bank - Fleet Bank Connecticut, N.A., a national banking association." (d) The definition of "Borrowing Base" is amended in its entirety to read as follows: "Borrowing Base - at any date of the determination thereof, an amount equal to the lesser of: (i) the Revolving Credit Loan Commitment less the aggregate amount of Letter of Credit Obligations outstanding at such date; or (ii) the sum of: (a) eighty-five percent (85%) of the net amount of Eligible Accounts outstanding at such date, PLUS (b) the lesser of (A) $8,500,000 or (B) the sum of forty percent (40%) of the value of Eligible Inventory at such date, calculated on the basis of lower of cost or market with cost calculated on a first-in, first-out basis, MINUS (c) the amount of any fees, costs or other charges due to Lender under any of the Loan Documents which Lender has paid and which have not become a Revolving Credit Loan. For purposes hereof, the net amount of Eligible Accounts at any time shall be the face amount of any such Eligible Accounts less any and all returns, rebates, discounts (which may, at Lender's option, be calculated on shortest terms), credits, allowances, or excise taxes of any nature at any time issued, owing, claimed by Account Debtors, granted, outstanding or payable in connection with such Accounts at such time; provided, however, for the purposes of making the foregoing calculations, (i) with respect to the Major Account Debtor Volume Discount, only such portion thereof as shall be earned and not paid by Borrowers shall be deducted from the face amount of Eligible Accounts owing by the Major Account Debtors and (ii) the Major Account Debtor Prompt Pay Discount shall not be deducted from the face amount of Eligible Accounts owing by the Major Account Debtors." (e) The definition of "Default Rate" is amended in its entirety to read as follows: "Default Rate - as defined in Section 3.1(E) of this Agreement." (f) The definition of "Eligible Inventory" is amended by deleting clauses (i), (ii) and (iii) thereof in their entirety and by substituting in lieu thereof the following: "(i) consists of raw materials, work-in-process (specifically including up to $1,000,000 of that subcategory of work-in-process Inventory denominated on the records of Borrowers as "defective products") and finished goods, (ii) is in good, new and salable condition, (iii) has not been on hand for more than twenty-four (24) months," (g) The definition of "Loans" is amended in its entirety to read as follows: "Loans - the Revolving Credit Loans, the Equipment Loans and the Acquisition Loans, and Loan shall refer to one of them." (h) The definition of "Revolving Credit Loan" is amended in its entirety to read as follows: "Revolving Credit Loans - the aggregate of the Loans made by Lender as provided in Section 2.1(A) of this Agreement." (i) The following definitions are deleted in their entirety: Average Monthly Loan Balance Environmental Reserve Loan Year Minimum Loan Balance Note Revolving Credit Facility Revolving Loan Default Rate Revolving Loan Rate Term Loan Term Loan Default Rate Term Loan Rate 1.3. Credit Facility. Section 2, Credit Facility, is amended in its entirety to read as follows: "SECTION 2. CREDIT FACILITY Subject to the terms and conditions of, and in reliance upon the representations and warranties made in, this Agreement and the other Loan Documents, Lender agrees to extend the Commitments to Borrowers as follows: 2.1. Loans. (A) Revolving Credit Loans. Lender agrees, for so long as no Default or Event of Default exists which has not been waived in writing by Lender, and subject to the provisions of Section 10 below, to make Revolving Credit Loans to Borrowers from time to time, as requested by Borrowers in the manner set forth in Section 3.2 hereof, up to a maximum principal amount at any time outstanding equal to the Borrowing Base at such time. Each Revolving Credit Loan shall, at the option of Borrowers, be made or continued as, or converted into, a Base Rate Advance or a LIBOR Rate Advance, upon the terms set forth herein. (B) Equipment Loans. Lender agrees, for so long as no Default or Event of Default exists which has not been waived by Lender in writing by Lender, and subject to the provisions of Section 10 below, to make Equipment Loans to Borrowers, as requested by Borrowers in the manner set forth in Section 3.2 hereof, so long as the aggregate amount of all Equipment Loans outstanding and the requested Equipment Loan does not exceed the Equipment Loan Commitment. Each Equipment Loan shall be evidenced by an Equipment Note, with blanks suitably filled and dated the date of the Equipment Loan Borrowing Date. Each Equipment Loan shall, at the option of Borrowers, be made or continued as, or converted into, a Base Rate Advance or a LIBOR Rate Advance, upon the terms set forth herein. (C) Acquisition Loans. Lender agrees, for so long as no Default or Event of Default exists which has not been waived in writing by Lender, and subject to the provisions of Section 10 below, to make Acquisition Loans to Borrowers, as requested by Borrowers in the manner set forth in Section 3.2 hereof, so long as the aggregate amount of all Acquisition Loans outstanding and the requested Acquisition Loan does not exceed the Acquisition Loan Commitment. Each Acquisition Loan shall be evidenced by an Acquisition Note, with blanks suitably filled and dated the date of the Acquisition Loan Borrowing Date. Each Acquisition Loan shall, at the option of Borrowers, be made or continued as, or converted into, a Base Rate Advance or a LIBOR Rate Advance, upon the terms set forth herein. 2.2. Letters of Credit; Letter of Credit Guaranties. (A) Issuance of Letters of Credit and Letter of Credit Guaranties. Lender agrees, for so long as no Default or Event of Default exists and subject to the provisions of Section 10 below, to issue its, or cause to be issued its Affiliate's, Letters of Credit and Letter of Credit Guaranties, as requested by Borrowers, provided that the Letter of Credit Amount at any time shall not exceed the sum of $500,000 and no Letter of Credit or Letter of Credit Guaranty may have an expiration date that is after the last day of the Original Term or the then applicable Renewal Term. (B) Reimbursement Obligations. All indebtedness, liabilities or obligations whatsoever arising or incurred in connection with any Letters of Credit or Letter of Credit Guaranties shall be incurred solely as an accommodation to Borrowers and for Borrowers' account. Each Borrower hereby unconditionally, jointly and severally agrees to reimburse Lender for the total amount of all sums paid by Lender on a Borrower's behalf under the terms of any Letter of Credit or Letter of Credit Guaranty, any drawing or demand under any Letter of Credit or Letter of Credit Guaranty or any additional or further liability which may accrue against Lender in connection with the same, immediately upon the date of payment by Lender. Any such sum paid by Lender in connection with any Letter of Credit or Letter of Credit Guaranty shall, if not reimbursed by Borrowers on the date paid by Lender, be treated for all purposes and shall have the same force and effect as if such amount had been loaned by Lender to Borrowers as a Revolving Credit Loan, shall be secured by all of the Collateral and shall bear interest and be payable at the same rate and in the same manner as Revolving Credit Loans. (C) Rights and Remedies. In the event that, coincident with or subsequent to the occurrence of a Default or an Event of Default, Lender becomes aware of the possibility of a draw, or enforcement of Lender's obligations, under a Letter of Credit or Letter of Credit Guaranty, Lender, at its option, may, but shall not be required to, pay Borrowers' obligations to the beneficiary or holder of such Letter of Credit or Letter of Credit Guaranty directly to such beneficiary or holder, and, in such event, the amount of any such payment made by Lender shall be treated for all purposes and shall have the same force and effect as if such amount had been loaned by Lender to Borrowers as a Revolving Credit Loan, shall be secured by all of the Collateral and shall bear interest and be payable at the same rate and in the same manner as Revolving Credit Loans. Additionally, in the event of Borrowers' failure to reimburse Lender for the total amount of all sums paid by Lender on Borrowers' behalf under the terms of any Letter of Credit or Letter of Credit Guaranty, any drawing or demand under any Letter of Credit or Letter of Credit Guaranty or any additional or further liability which may accrue against Lender in connection therewith, Lender, in addition to its rights under the Code and under this Agreement, shall be fully subrogated to the rights and remedies of the issuer of the Letter of Credit under any agreement made with a Borrower relating to the issuance of such Letter of Credit, each such agreement being incorporated herein by reference, and Lender shall be entitled to exercise all such rights and remedies thereunder and under law in such regard as fully as if it were the issuer of the Letter of Credit. If any Letter of Credit is drawn upon to discharge any obligation of a Borrower to the beneficiary of such Letter of Credit, in whole or in part, Lender shall be fully subrogated to the rights of such beneficiary with respect to the obligations of such Borrower to such beneficiary discharged with the proceeds of such Letter of Credit. (D) Indemnification. Each Borrower hereby unconditionally, jointly and severally agrees to indemnify Lender and hold Lender harmless from any and all losses, claims or liabilities arising from any transactions or occurrences relating to Letters of Credit or Letter of Credit Guaranties issued, established, opened or accepted for a Borrower's account, and any drafts or acceptances thereunder, and all Letter of Credit Obligations incurred in connection therewith. (E) Termination. In the event that this Agreement is terminated for any reason by either party as herein provided, in addition to Lender's other rights under this Agreement, unless all outstanding Letters of Credit and Letter of Credit Guaranties are terminated or cancelled and Lender and its Affiliates released from all liability thereunder, Lender shall be entitled to pay and discharge all Letter of Credit Obligations with respect to all outstanding Letters of Credit and Letter of Credit Guaranties which are not terminated or cancelled, whether such Letter of Credit Obligations are obsolete or contingent, and all sums paid by Lender in connection therewith shall be deemed to have been loaned by Lender to Borrowers as a Revolving Credit Loan, shall be secured by all of the Collateral and shall bear interest and be payable at the same rate and in the same manner as Revolving Credit Loans. 2.3. Use of Proceeds of Loans. Borrowers shall use the proceeds of the Loans as follows: (A) Upon the effectiveness of the First Consolidated Amendment to this Agreement, proceeds of a Revolving Credit Loan shall be used solely for the purposes of paying and satisfying in full Borrowers' $6,000,000 Term Note, dated February 1, 1994, as amended by First Modification thereto dated March 31, 1995, previously issued by Borrowers to Lender under this Agreement. All Revolving Credit Loans made thereafter shall be used solely for Borrowers' general working capital needs in a manner consistent with the provisions of this Agreement and applicable law and for any other purposes not inconsistent with the provisions of this Agreement; (B) The proceeds of the First Equipment Loan made to Borrowers shall be used to pay and satisfy in full Borrowers' $1,300,000 Term Note II, dated April 29, 1994, as amended by First Modification thereto, dated March 31, 1995, previously issued by Borrowers to Lender under this Agreement, and the proceeds of each subsequent Equipment Loan made to Borrowers shall be used exclusively to finance up to one hundred percent (100%) of the Equipment Purchase Price paid by a Borrower for Eligible Equipment. (C) The proceeds of each Acquisition Loan made to Borrowers shall be used exclusively to pay the cash portion of the purchase price for Property acquired in a Permitted Acquisition. 2.4. Loan Account. Lender shall enter all Loans as debits to the Loan Account and shall also record in the Loan Account all payments made by Borrowers on Loans and all proceeds of Collateral which are finally paid to Lender, and may record therein, in accordance with customary accounting practice, all charges and expenses properly chargeable to Borrowers hereunder. 2.5. Joint and Several Liabilities; All Loans to Constitute One Obligation. All Loans shall constitute one joint and several obligation of each Borrower, and shall be secured by Lender's Lien upon all of the Collateral, and by all other security interests and Liens heretofore, now or at any time or times hereafter granted by any Borrower to Lender as security for the Obligations. Notwithstanding anything to the contrary contained herein, each Borrower shall be jointly and severally liable to Lender for all Obligations hereunder, regardless of whether such Obligations arise as a result of Loans or credit extensions to such Borrower, it being stipulated and agreed that Loans and credit extensions hereunder to any Borrower inure to the benefit of all Borrowers and that Lender is relying on the joint and several liability of Borrowers in making Loans and extending credit hereunder. 2.6. Cross-Guaranty; Waiver of Suretyship Defenses. (A) Each Borrower guarantees to Lender the payment in full of all of the Obligations of each other Borrower to Lender and further guarantees the due performance by each other Borrower of its respective duties and covenants made in favor of Lender hereunder and under the other Loan Documents. Each Borrower agrees that neither this cross-corporate guaranty nor the joint and several liability of Borrowers provided in Section 2.5 hereof nor Lender's Lien in any of the Collateral shall be impaired or affected by any modification, supplement, extension or amendment of any contract or agreement to which the other parties hereto may hereafter agree (other than an agreement signed by Lender specifically modifying or releasing such liability), nor by any modification, release or other alteration of any of the rights of Lender with respect to any of the Collateral, nor by any delay, extension of time, renewal, compromise or other indulgence granted by Lender to another Borrower with respect to any of the Obligations (other than an agreement signed by Lender specifically releasing such Collateral), nor by any other agreements or arrangements whatever with any other Borrower, each Borrower hereby waiving all notice of any such delay, extension, release, substitution, renewal, compromise or other indulgence, and hereby consenting to be bound thereby as fully and effectively as if it had expressly agreed thereto in advance. The liability of each Borrower hereunder is direct and unconditional as to all of the Obligations, and may be enforced without requiring Lender first to resort to any other right, remedy or security. (B) No Borrower shall have any right of subrogation, reimbursement or indemnity whatsoever, nor any right of recourse to security for any of the Obligations, and nothing shall discharge or satisfy the liability of any Borrower hereunder, until the termination of this Agreement and the full payment and performance of all of the Obligations. Any and all present and future debts and obligations of any Borrower to any other Borrower are hereby waived and postponed in favor of and subordinated to the full payment and performance of all present and future Obligations of Borrowers to Lender. (C) Notwithstanding the provisions of Section 2.6(B) above, for so long as no Default or Event of Default shall exist, each Borrower may pay to any other Borrower Accounts or Indebtedness validly owed to such other Borrower which arise in the ordinary course of such Borrower's business." 1.4. Section 3, Interest, Fees, Term and Repayment, is amended in its entirety to read as follows: "SECTION 3. INTEREST, FEES, TERM AND REPAYMENT 3.1. Interest. (A) Rate of Interest - Loans. Subject to the provisions of Section 3.1(E) of this Agreement, Borrowers agree to pay interest on the unpaid amount of the Loans outstanding from the respective dates such principal amounts are advanced until paid at a variable rate per annum equal to the applicable rate indicated below: (i) For each Base Rate Advance, the Base Rate in effect from time to time plus the Applicable Margin; or (ii) For each LIBOR Rate Advance, the relevant Adjusted LIBOR Rate for the then applicable Interest Period selected by Borrowers in conformity with this Agreement plus the Applicable Margin. (B) Computation of Interest. (i) Interest shall be calculated on a daily basis (computed on the actual number of days elapsed over a year of 360 days) on the principal balance of the Loans outstanding at any time or from time to time. The calculation of interest on the basis of a 360-day year, as opposed to a year of 365 days, results in a higher effective rate of interest hereunder. Upon determining the Adjusted LIBOR Rate for any Interest Period requested by Borrowers, Lender shall promptly notify Borrowers thereof by telephone or in writing. Such determination shall, absent manifest error, be final, conclusive and binding on all parties and for all purposes. The applicable rates of interest with respect to all Base Rate Advances shall be increased or decreased, as the case may be, by an amount equal to any increase or decrease in the Base Rate, with such adjustments to be effective as of the opening of business on the day that any such change in the Base Rate becomes effective. (ii) Interest on each Loan shall accrue from and including the date of such Loan to but excluding the date of any repayment thereof; provided, however, that if a Loan is repaid on the same day made, one day's interest shall be paid on such Loan. Accrued interest on all Loans shall be paid upon the earliest of (1) the first day of each month (for the immediately preceding month), computed through the last calendar day of the preceding month, (2) the occurrence of an Event of Default in consequence of which Lender elects to accelerate the maturity and payment of the Obligations, or (3) the Expiration Date. (C) Interest Periods. In connection with the making or continuation of, or conversion into, a LIBOR Rate Advance, Borrowers shall select an interest period (each an "Interest Period") to be applicable to such LIBOR Rate Advance, which interest period shall commence on the date such LIBOR Rate Advance is made and shall end on a numerically corresponding day in the 1st, 2nd, 3rd or 6th month thereafter; provided, however, that: (i) The initial Interest Period for a LIBOR Rate Advance shall commence on the date of such borrowing (including the date of any conversion from a Base Rate Advance); (ii) If any Interest Period would otherwise expire on a day which is not a Business Day, such Interest Period shall expire on the next succeeding Business Day, provided that if any Interest Period in respect of LIBOR Rate Advances (other than a LIBOR Rate Advance referred to in Section 3.2(C) hereof) would otherwise expire on a day which is not a Business Day but is a day of the month after which no further Business Day occurs in such month, such Interest Period shall expire on the next preceding Business Day; (iii) Any Interest Period which begins on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period shall expire on the last Business Day of such calendar month; and (iv) No Interest Period shall extend beyond the Expiration Date. (D) Interest Rate Not Ascertainable. If Lender shall determine (which determination shall, absent manifest error, be final, conclusive and binding upon all parties) that on any date for determining the Adjusted LIBOR Rate for any Interest Period, by reason of any changes affecting the London interbank market or Lender's or Bank's position in such market, adequate and fair means do not exist for ascertaining the applicable interest rate on the basis provided for in the definition of Adjusted LIBOR Rate, then, and in any such event, Lender shall forthwith give notice (by telephone confirmed in writing) to Borrowers of such determination. Until the circumstances giving rise to the suspension described herein no longer exist, the obligation of Lender to make LIBOR Rate Advances shall be suspended, and such affected Loans then outstanding shall, at the end of the then applicable Interest Period or at such earlier time as may be required by Applicable Law, bear the same interest as Base Rate Advances. (E) Default Rate of Interest. Upon the occurrence and during the continuance of an Event of Default, the principal amount of all Loans shall bear interest at a rate per annum equal to two percent (2%) above the interest rate otherwise applicable thereto (the "Default Rate"). (F) Maximum Interest. Regardless of any provision contained in this Agreement or any of the other Loan Documents, in no contingency or event whatsoever shall the aggregate of all amounts that are contracted for, charged or collected pursuant to the terms of this Agreement or any of the other Loan Documents and that are deemed interest under applicable law exceed the highest rate permissible under any applicable law. No agreements, conditions, provisions or stipulations contained in this Agreement or any of the other Loan Documents, or the exercise by Lender of the right to accelerate the payment or the maturity of all or any portion of the Obligations, or the exercise of any option whatsoever contained in any of the Loan Documents, or the prepayment by Borrowers of any of the Obligations, or the occurrence of any contingency whatsoever, shall entitle Lender to charge or receive in any event, interest or any charges, amounts, premiums or fees deemed interest by applicable law (such interest, charges, amounts, premiums and fees referred to herein collectively as "Interest") in excess of the Maximum Rate and in no event shall Borrowers be obligated to pay Interest exceeding such Maximum Rate, and all agreements, conditions or stipulations, if any, which may in any event or contingency whatsoever operate to bind, obligate or compel Borrowers to pay Interest exceeding the Maximum Rate shall be without binding force or effect, at law or in equity, to the extent only of the excess of Interest over such Maximum Rate. If any Interest is charged or received in excess of the Maximum Rate ("Excess"), each Borrower acknowledges and stipulates that any such charge or receipt shall be the result of an accident and bona fide error, and such Excess, to the extent received, shall be applied first to reduce the principal Obligations and the balance, if any, returned to Borrowers, it being the intent of the parties hereto not to enter into a usurious or otherwise illegal relationship. The right to accelerate the maturity of any of the Obligations does not include the right to accelerate any interest that has not otherwise accrued on the date of such acceleration, and Lender does not intend to collect any unearned interest in the event of any such acceleration. Borrowers recognize that, with fluctuations in the rates of interest set forth in Section 3.1 of this Agreement, and in the Maximum Rate, such an unintentional result could inadvertently occur. All monies paid to Lender hereunder or under any of the other Loan Documents, whether at maturity or by prepayment, shall be subject to rebate of unearned interest as and to the extent required by applicable law. By the execution of this Agreement, Borrowers covenant that (i) the credit or return of any Excess shall constitute the acceptance by Borrowers of such Excess, and (ii) Borrowers shall not seek or pursue any other remedy, legal or equitable, against Lender, based in whole or in part upon contracting for, charging or receiving any Interest in excess of the Maximum Rate. For the purpose of determining whether or not any Excess has been contracted for, charged or received by Lender, all interest at any time contracted for, charged or received from Borrowers in connection with any of the Loan Documents shall, to the extent permitted by applicable law, be amortized, prorated, allocated and spread in equal parts throughout the full term of the Obligations. Borrowers and Lender shall, to the maximum extent permitted under applicable law, (i) characterize any non-principal payment as an expense, fee or premium rather than as Interest and (ii) exclude voluntary prepayments and the effects thereof. The provisions of this Section shall be deemed to be incorporated into every Loan Document (whether or not any provision of this Section is referred to therein). All such Loan Documents and communications relating to any Interest owed by Borrowers and all figures set forth therein shall, for the sole purpose of computing the extent of Obligations, be automatically recomputed by Borrowers, and by any court considering the same, to give effect to the adjustments or credits required by this subsection. (G) Illegality. Notwithstanding anything to the contrary contained elsewhere in this Agreement, if (i) any change in any law or regulation or in the interpretation thereof by any governmental authority charged with the administration thereof shall make it unlawful for Lender to make or maintain a LIBOR Rate Advance or to give effect to its obligations as contemplated hereby with respect to a LIBOR Rate Advance or (ii) at any time Lender determines that the making or continuance of any LIBOR Rate Advance has become impracticable as a result of a contingency occurring after the date hereof which adversely effects the London interbank market or the position of Lender or Bank in such market, then, by written notice to Borrowers, Lender may (1) declare that LIBOR Rate Advances will not thereafter be made by Lender, whereupon any request by Borrowers for a LIBOR Rate Advance shall be deemed a request for a Base Rate Advance unless Lender's declaration shall be subsequently withdrawn; and (2) require that all outstanding LIBOR Rate Advances made by Lender be converted to Base Rate Advances, in which event all such LIBOR Rate Advances shall be automatically converted to Base Rate Advances as of the date of Borrowers' receipt of the aforesaid notice from Lender. (H) Increased Costs. If, by reason of (i) after the date hereof, the introduction of or any change (including, without limitation, any change by way of imposition or increase of Statutory Reserves or other reserve requirements) in or in the interpretation of any law or regulation, or (ii) the compliance with any guideline or request from any central bank or other governmental authority or quasi-governmental authority exercising control over banks or financial institutions generally (whether or not having the force of law): (1) Lender shall be subject to any tax, duty or other charge with respect to any LIBOR Rate Advance or its obligation to make LIBOR Rate Advances, or shall change the basis of taxation of payment to Lender of the principal of or interest on its LIBOR Rate Advances or its obligation to make LIBOR Rate Advances (except for changes in the rate of tax on the overall net income of Lender imposed by any taxing authority in the United States); or (2) any reserve (including, without limitation, any imposed by the Board of Governors of the Federal Reserve System), special deposits or similar requirement against assets of, deposits with or for the account of, or credit extended by, Lender shall be imposed or deemed applicable or any other condition affecting the LIBOR Rate Advances or the obligation of Lender to make LIBOR Rate Advances shall be imposed on Lender or the London interbank market; and as a result thereof there shall be any increase in the cost to Lender of agreeing to make or making, funding or maintaining LIBOR Rate Advances (except to the extent already included in the determination of the applicable Adjusted LIBOR Rate for LIBOR Rate Advances), or there shall be a reduction in the amount received or receivable by Lender, then Borrowers shall from time to time, upon written notice from and demand by Lender, pay to Lender, within five (5) Business Days after the date specified in such notice and demand, an additional amount sufficient to indemnify Lender against such increased cost. A certificate as to the amount of such increased cost, submitted to Borrowers by Lender, shall, except for manifest error, be final, conclusive and binding for all purposes. If Lender shall advise Borrowers at any time that, because of the circumstances described in this Section 3.1(H) or any other circumstances affecting Lender or the London interbank market or Lender's or Bank's position in such market, the Adjusted LIBOR Rate, as determined by Lender, will not adequately and fairly reflect the cost to Lender of funding LIBOR Rate Advances, then, and in any such event: (1) Lender shall forthwith give notice (by telephone confirmed in writing) to Borrowers of such advice; (2) Borrowers' right to request and Lender's obligation to make LIBOR Rate Advances shall be immediately suspended and Borrowers' right to continue a LIBOR Rate Advance as such beyond the then applicable Interest Period shall also be suspended; and (3) Lender shall make an Advance as part of the requested borrowing of LIBOR Rate Advances as a Base Rate Advance, which Base Rate Advance shall, for all purposes, be considered part of such borrowing. For purposes of this Section 3.1(H), all references to Lender shall be deemed to include any bank holding company or bank parent of Lender. (I) Capital Adequacy. If after the date hereof Lender determines that (a) the adoption of any applicable law, rule or regulation regarding capital requirements for banks or bank holding companies or the subsidiaries thereof, (b) any change in the interpretation or administration of any such law, rule or regulation by any governmental authority, central bank, or comparable agency charged with the interpretation or administration thereof, or (c) compliance by Lender or its holding company with any request or directive of any such governmental authority, central bank or comparable agency regarding capital adequacy (whether or not having the force of law), has the effect of reducing the return on Lender's capital to a level below that which Lender could have achieved (taking into consideration Lender's and its holding company's policies with respect to capital adequacy immediately before such adoption, change or compliance and assuming that Lender's capital was fully utilized prior to such adoption, change or compliance) but for such adoption, change or compliance as a consequence of Lender's commitment to make the Loans pursuant hereto by any amount deemed by Lender, in its reasonable determination, to be material: (i) Lender shall promptly, after Lender's determination of such occurrence, give notice thereof to Borrowers; and (ii) Borrowers shall pay to Lender, as an additional fee from time to time, on demand, such amount as Lender certifies to be the amount that will compensate Lender for such reduction. A certificate of Lender claiming entitlement to compensation as set forth above will be conclusive in the absence of manifest error. Such certificate will set forth the nature of the occurrence giving rise to such compensation, the additional amount or amounts to be paid to Lender, and the method by which such amounts were determined. In determining such amount, Lender may use any reasonable averaging and attribution method. For purposes of this Section 3.1(I), all references to Lender shall be deemed to include any bank holding company or bank parent of Lender. (J) Funding Losses. Borrowers shall compensate Lender, upon Lender's written request (which request shall set forth the basis for requesting such amounts and which request shall, absent manifest error, be final, conclusive and binding upon all of the parties hereto), for all losses, expenses and liabilities (including, without limitation, any interest paid by Lender to lenders of funds borrowed by Lender to make or carry its LIBOR Rate Advances to the extent not recovered by Lender in connection with the re-employment of such funds), which Lender may sustain: (i) if for any reason (other than by reason of any acts or failure to act by Lender) a borrowing of, or conversion to or continuation of, LIBOR Rate Advances does not occur on the date specified therefor in a Notice of Borrowing or Notice of Conversion/ Continuation (whether or not withdrawn), (ii) if any repayment (including any conversions pursuant to Section 3.2(C) hereof) of any LIBOR Rate Advances occurs on a date that is not the last day of an Interest Period applicable thereto, or (iii) if, for any reason, Borrowers default in their obligation to repay LIBOR Rate Advances when required by the terms of this Agreement. For purposes of this Section 3.1(J), all references to Lender shall be deemed to include any bank holding company or bank parent of Lender. 3.2. Manner of Borrowing Loans and Disbursements. Borrowings of LIBOR Rate Advances and Base Rate Advances shall be made and funded as follows: (A) Whenever Borrowers desire to borrow pursuant to this Agreement (other than a borrowing resulting from a conversion or continuation pursuant to Section 3.2(C) below), Borrowers shall give Lender prior written notice (or telephonic notice promptly confirmed in writing) of such borrowing request (a "Notice of Borrowing"). Such Notice of Borrowing shall be given by Borrowers no later than 12:00 noon Charlotte, North Carolina time at the office of Lender designated by Lender from time to time (i) on the Business Day of the requested date of such borrowing in the case of all Base Rate Advances, and (ii) at least three (3) Business Days prior to the requested date of such borrowing in the case of LIBOR Rate Advances. Notices received after 12:00 noon shall be deemed received on the next Business Day. Each Notice of Borrowing shall be irrevocable and shall specify (i) the principal amount of the borrowing (which, in the case of (x) a LIBOR Rate Advance shall be at least $2,000,000 (or $500,000 increments thereof), (y) an Acquisition Loan shall be at least $500,000, and (z) an Equipment Loan shall be at least $50,000, (ii) the date of borrowing (which shall be a Business Day), (iii) whether the borrowing is to consist of Base Rate Advances or LIBOR Rate Advances and the amount of each such Advance, and (iv) in the case of LIBOR Rate Advances, the duration of the Interest Period to be applicable thereto. Borrower may not request any LIBOR Rate Advances if a Default or Event of Default has occurred and is continuing. (B) Unless payment is otherwise timely made by Borrowers, the becoming due of any amount required to be paid under this Agreement or any of the other Loan Documents as principal, accrued interest, fees or other charges shall be deemed irrevocably to be a request by Borrowers for a Revolving Credit Loan on the due date of, and in an aggregate amount required to pay, such principal, accrued interest, fees or other charges, and the proceeds of each such Revolving Credit Loan may be disbursed by Lender by way of direct payment of the relevant Obligation and shall bear interest as a Base Rate Advance. (C) Whenever Borrowers desire to convert all or a portion of an outstanding Base Rate Advance or LIBOR Rate Advance into one or more Advances of another type, or to continue outstanding a LIBOR Rate Advance for a new Interest Period, Borrowers shall give Lender written notice (or telephonic notice promptly confirmed in writing) at least one (1) Business Day before the conversion into a Base Rate Advance and at least thee (3) Business days before the conversion into or continuation of a LIBOR Rate Advance. Such notice (a "Notice of Conversion/Continuation") shall be given prior to 12:00 noon, Charlotte, North Carolina time on the date specified. Each such Notice of Conversion/Continuation shall be irrevocable and shall specify the aggregate principal amount of the Advance to be converted or continued, the date of such conversion or continuation, whether the Advance is being converted into or continued as a LIBOR Rate Advance (and, if so, the duration of the Interest Period to be applicable thereto) or a Base Rate Advance. If, upon the expiration of any Interest Period in respect of any LIBOR Rate Advance, Borrowers shall have failed, or pursuant to the following sentence be unable, to deliver the Notice of Conversion/Continuation, Borrowers shall be deemed to have elected to convert such LIBOR Rate Advance to a Base Rate Advance. So long as any Default or Event of Default shall have occurred and be continuing, no Advance may be converted into or continued as (upon expiration of the current Interest Period) a LIBOR Rate Advance. No conversion of any LIBOR Rate Advance shall be permitted except on the last day of the Interest Period in respect thereof. (D) As an accommodation to Borrowers, Lender may permit telephonic requests for borrowings and electronic transmittal of instructions, authorizations, agreements or reports to Lender by Borrowers. Unless Borrowers specifically direct Lender in writing not to accept or act upon telephonic or electronic communications from Borrowers, Lender shall have no liability to Borrowers for any loss or damage suffered by Borrowers as a result of Lender's honoring of any requests, execution of any instructions, authorizations or agreements or reliance on any reports communicated to it telephonically or electronically and purporting to have been sent to Lender by Borrowers and Lender shall have no duty to verify the origin of any such communication or the authority of the person sending it. (E) In no event shall the number of LIBOR Rate Advances outstanding to Borrowers at any time exceed six (6). (F) Borrowers hereby irrevocably authorize Lender to disburse the proceeds of each Revolving Credit Loan requested by Borrower, or deemed to be requested, pursuant to Section 3.2 as follows: (i) the proceeds of each Revolving Credit Loan requested under subsection 3.2(A) shall be disbursed by Lender in lawful money of the United States of America in immediately available funds, by wire transfer to such bank account as may be agreed upon by Borrowers and Lender from time to time or elsewhere if pursuant to a written direction from Borrowers; and (ii) the proceeds of each Revolving Credit Loan requested under Section 3.2(B) shall be disbursed by Lender by way of direct payment of the relevant interest or other Obligation. 3.3. Payments. Except where evidenced by notes or other instruments issued or made by Borrowers to Lender specifically containing payment provisions which are in conflict with this Section 3.3 (in which event the conflicting provisions of said notes or other instruments shall govern and control), the Obligations shall be payable as follows: (A) Repayment of Revolving Credit Loans. Borrowers' obligation to pay the principal of, and interest on, the Revolving Credit Loans shall be evidenced by the records of Lender and all outstanding principal amounts and accrued interest with respect to the Revolving Credit Loans shall be due and payable as follows: (i) Any portion of the Revolving Credit Loans consisting of the principal amount of Base Rate Advances shall be paid by Borrowers to Lender immediately upon the earliest of (1) subject to the provisions of Section 5.4(B) hereof, the receipt by Lender or Borrowers of any proceeds of any of the Accounts or the Inventory, to the extent of such proceeds, (2) the occurrence of an Event of Default in consequence of which Lender elects to accelerate the maturity and payment of such Revolving Credit Loans, or (3) the Expiration Date. Interest accrued on the principal amount of Base Rate Advances outstanding from time to time shall be calculated and paid as provided in Section 3.1 hereof. (ii) Any portion of the Revolving Credit Loans consisting of the principal amount of LIBOR Rate Advances outstanding shall be paid by Borrowers to Lender, unless converted to a Base Rate Advance or continued as a LIBOR Rate Advance in accordance with the terms of this Agreement, upon the earliest of (1) the last day of the Interest Period applicable thereto, (2) the occurrence of an Event of Default in consequence of which Lender elects to accelerate the maturity and payment of the Revolving Credit Loans, or (3) the Expiration Date. In no event shall Borrowers be authorized to pay any LIBOR Rate Advance prior to the last day of the Interest Period applicable thereto unless (1) otherwise agreed in writing by Lender, or (2) Borrowers are otherwise expressly authorized or required by any other provision of this Agreement to pay any LIBOR Rate Advance outstanding on a date other than the last day of the Interest Period applicable thereto. Interest accrued on the principal amount of each LIBOR Rate Advance shall be calculated and paid as provided in Section 3.1 hereof. (iii) Notwithstanding anything to the contrary contained elsewhere in this Agreement, if an Overadvance Condition shall exist, Borrowers shall, without the necessity of a demand, repay the outstanding Revolving Credit Loans bearing interest as Base Rate Advances in an amount sufficient to reduce the aggregate unpaid principal amount of all such Revolving Credit Loans by an amount equal to such excess; and, if such payment of Base Rate Advances is not sufficient to cure the Overadvance Condition, then Borrowers, at their option, shall immediately either (1) deposit with Lender, for application to any outstanding Revolving Credit Loans bearing interest as LIBOR Rate Advances as the same become due and payable at the end of the applicable Interest Periods, cash in an amount sufficient to cure such Overadvance Condition and any such cash shall be held by Lender, pending disbursement of same to Lender, in such interest bearing account or accounts as Lender may select, or (2) pay the Revolving Credit Loans that bear interest as LIBOR Rate Advances to the extent necessary to cure such Overadvance Condition and also pay to Lender any and all amounts required by Section 3.1(J) hereof to be paid by reason of the prepayment of a LIBOR Rate Advance prior to the last day of the Interest Period applicable thereto. (B) Repayment of Equipment Loans. Borrowers' obligation to pay the principal of, and interest on, each Equipment Loan shall be evidenced by an Equipment Note dated as of the Equipment Loan Borrowing Date for such Equipment Loan, except for the First Equipment Note which shall be dated as of the date of the First Consolidated Amendment to this Agreement. Each Equipment Loan shall be payable in consecutive monthly installments of principal, commencing on the first day of the month following the making of such Equipment Loan, each in the amount of 1/60th of the amount of such Equipment Loan with a final maturity on the last day of the Original Term, except that the First Equipment Loan shall be payable in consecutive monthly installments of principal, commencing on the first day of the month following the date of the First Consolidated Amendment to this Agreement, each in the amount of $27,000 until such First Equipment Loan is paid in full. Interest on each Equipment Loan shall be payable at the rate specified in Section 3.1 hereof on the first day of each month, commencing on the first day of the month following the making of such Equipment Loan. (C) Repayment of Acquisition Loans. Borrowers' obligation to pay the principal of, and interest on, each Acquisition Loan shall be evidenced by an Acquisition Note dated as of the Acquisition Loan Borrowing Date for such Acquisition Loan. Each Acquisition Loan shall be payable in consecutive monthly installments of principal, commencing on the first day of the month following the making of such Acquisition Loan, each in the amount of 1/60th of the amount of such Acquisition Loan with a final maturity on the last day of the Original Term. Interest on each Acquisition Loan shall be payable at the rate specified in Section 3.1 hereof on the first day of each month, commencing on the first day of the month following the making of such Acquisition Loan. 3.3.4 Costs, Fees and Charges. Costs, fees and charges payable pursuant to this Agreement shall be payable by Borrowers as and when provided in this Agreement to Lender or to any other Person designated by Lender in writing. 3.3.5 Other Obligations. The balance of the Obligations requiring the payment of money, if any, shall be payable by Borrowers to Lender as and when provided in this Agreement and the other Loan Documents. 3.4 Fees. (A) Unused Line Fee. During the Original Term and each Renewal Term of this Agreement, Borrowers shall pay Lender an unused line fee equal to the per annum rate of one- quarter of one percent (0.25%) multiplied by the difference between $9,000,000 and the average daily principal amount of the Revolving Credit Loans outstanding. Such unused line fee shall begin to accrue on the Closing Date, shall be calculated on the basis of a 360-day year for the actual number of days elapsed and shall be payable monthly in arrears on the first day of each month during the Original Term and each Renewal Term, or, if this Agreement is earlier terminated, any shorter period for which this Agreement shall be effective. (B) Letter of Credit Fees. As additional consideration for Lender's causing to be issued its Affiliate's Letters of Credit for a Borrower's account or for issuing its Letter of Credit Guaranties at a Borrower's request pursuant to Section 2.2 hereof, Borrowers agree to pay for each Letter of Credit and Letter of Credit Guaranty the then prevailing fees and commissions of Bank and Lender for the issuance thereof. All such fees shall be deemed fully earned upon the issuance of each Letter of Credit or a Letter of Credit Guaranty, shall be due and payable in advance upon the issuance of each Letter of Credit or Letter of Credit Guaranty and shall not be subject to rebate or proration upon the termination of this Agreement for any reason. 3.5 Term of Agreement. Subject to Lender's right to cease making Loans to Borrowers at any time upon the occurrence and during the continuance of a Default or an Event of Default, this Agreement shall be in effect until February 1, 2001 ("Original Term"), and this Agreement shall automatically renew itself for one (1) year periods thereafter ("Renewal Terms"), unless terminated as provided in Section 3.6 hereof. 3.6 Termination. (A) Upon at least one hundred twenty (120) days prior written notice to Lender, Borrowers may, at their option, terminate this Agreement; provided, however, no such termination shall be effective until Borrowers have paid all of the Obligations in immediately available funds and all Letters of Credit and Letter of Credit Guaranties have expired or have been cash collateralized to Lender's satisfaction. Any notice of termination given by Borrowers shall be irrevocable unless Lender otherwise agrees in writing, and Lender shall have no obligation to make any Loans or issue any Letters of Credit or Letter of Credit Guaranties on or after the termination date stated in such notice. Borrowers may elect to terminate this Agreement in its entirety only. No section of this Agreement or type of Loan available hereunder may be terminated singly. (B) Lender may terminate this Agreement at the end of the Original Term or any Renewal Term upon ninety (90) days prior written notice to Borrowers, or at any time without demand, notice or legal process of any kind, upon the occurrence of an Event of Default. (C) All of the Obligations, including, without limitation, the Loans, shall be forthwith due and payable upon any termination of this Agreement. No termination (regardless of cause or procedure) of this Agreement or any of the other Loan Documents shall in any way affect or impair the rights, powers or privileges of Lender or the obligations, duties or liabilities of Borrowers in any way relating to (i) any transaction or event occurring prior to the effective date of such termination or (ii) any of the undertakings, agreements, covenants, warranties or representations of Borrowers contained in this Agreement or any of the other Loan Documents. All such undertakings, agreements, covenants, warranties and representations of Borrowers shall survive such termination and Lender shall retain its Liens in the Collateral and all of its rights and remedies under this Agreement and the other Loan Documents notwithstanding such termination until all of the Obligations have been paid in full, in immediately available funds. 3.7 Application of Payments and Collections. Borrowers irrevocably waive the right to direct the application of any and all payments and collections at any time or times hereafter received by Lender from or on behalf of any Borrower, and Borrowers do hereby irrevocably agree that Lender shall have the continuing exclusive right to apply and reapply any and all such payments and collections received at any time or times hereafter by Lender or its agent against the Obligations, in such manner as Lender may deem advisable, notwithstanding any entry by Lender upon any of its books and records. If as the result of collections of Accounts as authorized by Section 5.4 hereof a credit balance exists in the Loan Account, such credit balance shall not accrue interest in favor of Borrowers, but shall be available to Borrowers at any time or times for so long as no Default or Event of Default exists and has not been waived in writing by Lender. 3.8. Statements of Account. Lender will account to Borrowers monthly with a statement of Loans, charges and payments made pursuant to this Agreement, and such account rendered by Lender shall be deemed final, binding and conclusive upon Borrowers unless Lender is notified by Borrowers in writing to the contrary within sixty (60) days after the date each account is mailed to Borrowers. Such notice shall only be deemed an objection to those items specifically objected to therein. 3.9. Prepayments on Loans. (A) Mandatory Prepayments. In the event any Borrower, with the prior written consent of Lender or as otherwise authorized by the terms of this Agreement, sells any of its Property other than its Inventory, such Borrower shall pay to Lender a sum equal to the net proceeds received by Borrower from such sale, except as otherwise set forth in Section 7.4 hereof. All such proceeds received by any Borrower from the sale of Equipment or the Realty shall, in the case of a sale of Equipment be applied first, to the Equipment Loans, second, to the Acquisition Loans, and third, to such other Obligations as Lender, in its sole discretion, may determine, and, in the case of proceeds from the sale of the Realty, first, to the Acquisition Loans, second, to the Equipment Loans, and third, to such other Obligations as Lender, in its sole discretion, may determine. All such proceeds received by any Borrower from the sale of any other Property shall be applied to such Obligations as Lender, in its sole discretion, may determine. (B) Voluntary Prepayments. Subject to the provisions of Section 3.1(J), Borrowers shall have the right during the Original Term of this Agreement to prepay in whole at any time or in part from time to time the outstanding principal balances of the Equipment Loans and the Acquisition Loans. (C) Application of Prepayments. All prepayments, whether mandatory or voluntary, which are applied to the Equipment Loans or the Acquisition Loans shall be applied against the last maturing installments of principal as provided under the terms of the Notes evidencing such Loans." 1.5 Collection of Accounts. Section 5.4 is amended by adding the following sentence at the end thereof: "If as a result of payments received in the Dominion Account for application on account of the Obligations, a credit balances exists in the Loan Account, such credit balance shall not accrue interest in favor of Borrowers, but shall be available to Borrowers at any time or times for so long as no Default of Event of Default exists and has not been waived in writing by Lender." 1.6 Mergers; Consolidations; Acquisitions. Section 9.2(A) is amended in its entirety to read as follows: "(A) Mergers, Consolidations, Acquisitions. Merge or consolidate, or permit any Subsidiary to merge or consolidate, with any Person, except a consolidation or merger involving one Borrower with another Borrower; nor acquire all or any substantial part of the Property of any Person other than a Borrower; provided, however, that the foregoing restrictions shall not apply to a Permitted Acquisition." 1.7 Subordinated Debt. Section 9.2(I) is amended to provide that the restrictions set forth therein shall not prohibit Parent from issuing its capital stock on behalf of any Borrower or any Subsidiary as a prepayment repurchase, redemption or retirement of Subordinated Debt prior to maturity. 1.8 Subsidiaries. Section 9.2(K) is amended in its entirety to read as follows: "(K) Subsidiaries. Hereafter create any Subsidiary without Lender's prior written consent, which consent Lender shall not unreasonably withhold; or divest itself of any material assets by transferring them to any Subsidiary other than to a Borrower; provided, however, the foregoing restriction shall not apply to the creation of a Subsidiary in connection with the consummation of a Permitted Acquisition, provided that upon the closing of such Permitted Acquisition, such Subsidiary becomes a Borrower hereunder and each of the other conditions precedent set forth in Section 10.4 below are satisfied regardless of whether Lender makes an Acquisition Loan in connection with such Permitted Acquisition." 1.9 Business Locations. Section 9.2(M) is amended by deleting in line 5 thereof the phrase "as set forth on Exhibit B hereto" and by substituting in lieu thereof the phrase "as set forth on Exhibit B hereto as amended from time to time by each New Borrower Assumption Agreement". 1.10 Capital Expenditures. Section 9.2(L) is amended in its entirety to read as follows: "(L) Capital Expenditures. Make Capital Expenditures (including, without limitation, by way of capitalized leases) which, in the aggregate, as to all Borrowers and their Subsidiaries, exceed $4,000,000 during any fiscal year." 1.11 Stock of Subsidiary, Etc. Section 9.2(V) is amended in its entirety to read as follows: "(V) Stock of Subsidiary, Etc. Sell or otherwise dispose of any shares of capital stock of any Subsidiary, except in connection with the transaction permitted under Sections 9.2(A) and 9.2(O), or permit any Subsidiary to issue any additional shares of its capital stock except if issued to Parent or another Borrower and, if the shares of capital stock of such Subsidiary had been originally pledged to Lender under a New Borrower Pledge Agreement as required by Section 10.5(A)(x) hereof as part of the Permitted Acquisition involving such Subsidiary, delivered to Lender pursuant to such New Borrower Pledge Agreement with duly executed blank stock powers to be held as additional security for the Obligations." 1.12 Leases. Section 9.2(W) is amended in its entirety to read as follows: "(W) Leases. Become a lessee under any operating lease (other than the lease under which such Borrower is lessor) of Property if the aggregate Rentals payable during any current or future period of twelve (12) consecutive months under the lease in question and all other operating leases under which Borrowers are lessees would exceed $2,250,000. The term "Rentals" means, as of the date of determination, all payments the lessee is required to make by the terms of any lease." 1.13 Minimum Consolidated Adjusted Tangible Net Worth. Section 9.3(A) is amended in its entirety to read as follows: "(A) Minimum Consolidated Adjusted Tangible Net Worth. Maintain a Consolidated Adjusted Tangible Net Worth of not less than the amount shown below at all times during the period corresponding thereto: Consolidated Adjusted Period Tangible Net Worth First fiscal quarter of fiscal year $21,500,000 ending December 31, 1996 Second fiscal quarter of fiscal year $22,700,000 ending December 31, 1996 Third fiscal quarter of fiscal year $24,200,000 ending December 31, 1996 Fourth fiscal quarter of fiscal year $24,700,000 ending December 31, 1996 First fiscal quarter of fiscal year $24,950,000 ending December 31, 1997 Second fiscal quarter of fiscal year $26,500,000 ending December 31, 1997 Third fiscal quarter of fiscal year $28,300,000 ending December 31, 1997 Fourth fiscal quarter of fiscal year $28,750,000 ending December 31, 1997 First fiscal quarter of fiscal year $29,000,000 ending December 31, 1998 Consolidated Adjusted Period Tangible Net Worth Second fiscal quarter of fiscal year $30,500,000 ending December 31, 1998 Third fiscal quarter of fiscal year $32,350,000 ending December 31, 1998 Fourth fiscal quarter of fiscal year $32,750,000 ending December 31, 1998 and at all times thereafter" 1.14 Profitability. Section 9.3(B) is amended in its entirety to read as follows: "(B) Profitability. Achieve a Consolidated Adjusted Earnings From Operations of not less than the amount shown below for the period corresponding thereto: Consolidated Adjusted Period Earnings From Operations First fiscal quarter of fiscal year ($1,000,000) ending December 31, 1996 First and second fiscal quarters of $1,275,000 fiscal year ending December 31, 1996 First, second and third fiscal quarters $3,425,000 of fiscal year ending December 31, 1996 Fiscal year ending December 31, 1996 $4,025,000 First fiscal quarter of fiscal year ending $ 350,000 December 31, 1997 and first quarter of each fiscal year thereafter First and second fiscal quarters of fiscal $2,250,000 year ending December 31, 1997 and the first and second fiscal quarters of each fiscal year thereafter Consolidated Adjusted Period Earnings From Operations First, second and third fiscal quarters of $4,500,000 fiscal year ending December 31, 1997 and the first, second and third fiscal quarters of each fiscal year thereafter Fiscal year ending December 31, 1997 and $5,000,000 each fiscal year thereafter 1.15 Consolidated Debt Service Coverage Ratio. Section 9.2(C) is amended in its entirety to read as follows: "(C) Consolidated Debt Service Coverage Ratio. Maintain a Consolidated Debt Service Coverage Ratio of not less than the ratio shown below for the period corresponding thereto: Consolidated Debt Period Service Coverage Ratio First fiscal quarter of fiscal year ending .75 to 1.0 December 31, 1997 and first fiscal quarter of each fiscal year thereafter First and second fiscal quarters of fiscal 1.25 to 1.0 year ending December 31, 1996 and the first and second fiscal quarters of each fiscal year thereafter First, second and third fiscal quarters of 1.7 to 1.0 fiscal year ending December 31, 1996 and the first, second and third fiscal quarters of each fiscal year thereafter Fiscal year ending December 31, 1996 and 1.6 to 1.0 each fiscal year thereafter 1.16 Debt/EBITDA. A new Section 9.3(E) is added as follows: "(E) Debt/EBITDA. Maintain for each period of four (4) consecutive fiscal quarters, commencing with the fiscal quarter ending September 30, 1996, a ratio of (a) Indebtedness for Money Borrowed of Parent and its Subsidiaries at the end of such period calculated on a Consolidated basis to (b) the sum of (i) EBITDA for such period less (ii) the greater of the amount of Capital Expenditures made by Parent and its Subsidiaries during such period or $1,500,000, of not greater than the ratio shown below for the period corresponding thereto: Four (4) Consecutive Fiscal Quarters Ending With Debt/EBITDA Ratio Third fiscal quarter of fiscal year ending 3.5 to 1.0 December 31, 1996 Fourth fiscal quarter of fiscal year ending 3.5 to 1.0 December 31, 1996 First fiscal quarter of fiscal year ending 3.45 to 1.0 December 31, 1997 Second fiscal quarter of fiscal year ending 3.2 to 1.0 December 31, 1997 Third fiscal quarter of fiscal year ending 3.0 to 1.0 December 31, 1997 Fourth fiscal quarter of fiscal year ending 3.0 to 1.0 December 31, 1997 First fiscal quarter of fiscal year ending 2.9 to 1.0 December 31, 1998 and each fiscal year thereafter Second fiscal quarter of fiscal year ending 2.75 to 1.0 December 31, 1998 and each fiscal year thereafter Third fiscal quarter of fiscal year ending 2.5 to 1.0 December 31, 1998 and each fiscal year thereafter Fourth fiscal quarter of fiscal year ending 2.5 to 1.0 December 31, 1998 and each fiscal year thereafter 1.17 Conditions Precedent to All Loans. The first nine lines of Section 10.2 immediately preceding Section 10.2(A) are amended in their entirety to read as follows: "Notwithstanding any of the provisions of this Agreement or the other Loan Documents, and without affecting in any manner the rights of Lender under the other Sections of this Agreement, it is understood and agreed that Lender will have no obligation to make any Loan (including the initial Loan) or issue any Letter of Credit or Letter of Credit Guaranty unless and until, in addition to the conditions set forth in Sections 10.1, 10.2, 10.4 and 10.5 hereof, each of the following conditions has been and continues to be satisfied, all in form and substance satisfactory to Lender and its counsel:" 1.18 Waiver of Conditions Precedent. Section 10.3 is amended by deleting in the third line thereof the references to "Sections 10.1 and 10.2 hereof" and by substituting in lieu thereof references to "Sections 10.1, 10.2, 10.4 and 10.5 hereof". 1.19 Conditions Precedent to Equipment Loans. An additional Section 10.4 is added as follows: "10.4 Conditions Precedent to Equipment Loans. Notwithstanding any of the provisions of this Agreement or the other Loan Documents, and without affecting in any manner the rights of Lender under the other Sections of this Agreement, it is understood and agreed that Lender will have no obligation to make any Equipment Loan on any Equipment Loan Borrowing Date, unless and until, in addition to the conditions set forth in Sections 10.1 and 10.2 hereof, each of the following conditions has been and continues to be satisfied: (a) Documentation. Lender shall have received the following documents, each to be in form and substance satisfactory to Lender and its counsel: (i) An Equipment Note executed by Borrowers; (ii) A copy of all purchase orders issued by Borrowers pertaining, in whole or in part, to the Eligible Equipment financed by the proceeds of the requested Equipment Loan, together with a copy of the invoice from the vendor(s) thereof indicating that the amount set forth on such invoice is the full amount owing to such vendor(s) with respect to such Eligible Equipment; (iii) A certificate signed by an officer of Borrowers, dated as of the Equipment Loan Borrowing Date, stating that (a) the representations and warranties set forth in Section 8 hereof are true and correct in all material respects on and as of such date except for any changes in the nature of any Borrower's business or operations which have occurred in the ordinary course of business that would render the information contained in any exhibit attached to this Agreement either inaccurate or incomplete in any material respect so long as (1) Lender has consented to such changes, (2) such changes are not expressly prohibited by this Agreement, or (3) with respect to matters Borrowers are required to notify Lender of pursuant to Sections 4.9(E) or 9.1(K) of this Agreement, Borrowers have given notice as required by such sections, (b) Borrowers are on such date in compliance in all material respects with all the terms and provisions set forth in this Agreement and the other Loan Documents and (c) on such date, no Default or Event of Default has occurred and is continuing; and (iv) Such other documents, certificates, opinions or assurances as Lender or its counsel may reasonably request in connection with the making of such Equipment Loan or to evidence or confirm compliance by Borrowers with the conditions of this Agreement. (b) Title to Eligible Equipment. A Borrower shall have or acquire upon the payment of the Equipment Purchase Price, good, indefeasible and merchantable title to the Eligible Equipment being acquired with the proceeds of such Equipment Loan, free and clear of all Liens, except those held by Lender and Permitted Liens other than a Purchase Money Lien, and the Liens of Lender therein shall be and remain a first Lien therein as security for all Obligations of Borrowers to Lender. (c) Location of Eligible Equipment. Upon the disbursement of the requested Equipment Loan, the Eligible Equipment being acquired with the proceeds of such Equipment Loan shall be located at one of the permitted locations of Collateral as set forth in Exhibit B attached hereto. (d) Appraisal. Lender's internal appraisal department shall have appraised the Eligible Equipment to be acquired with the requested Equipment Loan and such appraisal shall reflect a value acceptable to Lender. (e) Amount of Equipment Loan. The amount of the requested Equipment Loan shall not exceed one hundred percent (100%) of the Equipment Purchase Price of the Eligible Equipment being financed with the proceeds of such Equipment Loan. 1.20 Conditions Precedent to Acquisition Loans. An additional Section 10.5 is added as follows: "10.5 Conditions Precedent to Acquisition Loans. Notwithstanding any of the provisions of this Agreement or the other Loan Documents, and without affecting in any manner the rights of Lender under the other Sections of this Agreement, it is understood and agreed that Lender will have no obligation to make any Acquisition Loan on any Acquisition Loan Borrowing Date, unless and until, in addition to the conditions set forth in Sections 10.1 and 10.2 hereof, each of the following conditions has been and continues to be satisfied: (A) Documentation. Lender shall have received the following documents, each to be in form and substance satisfactory to Lender and its counsel: (i) An Acquisition Note executed by the existing Borrowers and the New Borrower; (ii) A copy of the agreement by which the Permitted Acquisition that is being financed by such Acquisition Loan is being consummated; (iii) A Certificate signed by an officer of Borrowers, dated as of the Acquisition Loan Borrowing Date, stating that (a) the representations and warranties set forth in Section 8 hereof are true and correct in all material respects on and as of such date except for any changes in the nature of any Borrower's business or operations which have occurred in the ordinary course of business that would render the information contained in any exhibit attached to the Loan Agreement either inaccurate or incomplete in any material respect so long as (1) Lender has consented to such changes, (2) such changes are not expressly prohibited by this Agreement, or (3) with respect to matters Borrowers are required to notify Lender of pursuant to Sections 4.9(E) or 9.1(K) of this Agreement, Borrowers have given notice as required by such sections, (b) Borrowers are on such date in compliance in all material respects with the terms and provisions set forth in this Agreement and the other Loan Documents and (c) on such date, no Default or Event of Default has occurred and is continuing; (iv) Evidence of insurance (including all endorsements thereto) required to be maintained by the New Borrower pursuant to Section 4.7 of this Agreement; (v) Copies of all filing receipts or acknowledgments issued by any governmental authority to evidence any filing or recordation necessary to perfect the Liens of Lender in the Collateral of such New Borrower and evidence in a form acceptable to Lender that such Liens constitute valid and perfected first priority Liens, subject only to those permitted Liens which are expressly stated to have priority over the Liens of Lender; (vi) Copies of the Articles of Incorporation of such New Borrower, and all amendments thereto, certified by the Secretary of State or other appropriate official of its jurisdiction of incorporations; (vii) Good standing certificates for such New Borrower issued by the Secretary of State or other appropriate official of Borrower's jurisdiction of incorporation of such New Borrower's jurisdiction of incorporation and each jurisdiction where the conduct of such New Borrower's business activities or the ownership of its Property necessitates qualification; (viii) The favorable, written opinion of counsel to such New Borrower as to its good standing, authority to enter into and become a party to this Agreement and the other Loan Documents and to grant the Liens in all of its Collateral as security for the Obligations, and such other matters with respect thereto as Lender or its counsel may reasonably require; (ix) The New Borrower Assumption Agreement duly executed by such New Borrower and each of the other Borrowers; (x) The New Borrower Pledge Agreement, duly executed by the Borrower that is the owner of all of the issued and outstanding Voting Stock of such New Borrower, together with delivery to Lender of all of the stock certificates for the shares of stock of the New Borrower pledged thereunder and stock powers executed in blank; and (xi) Such other documents, certificates, opinions or assurances as Lender or its counsel may reasonably request in connection with the making of such Acquisition Loan or to evidence or confirm compliance by Borrowers with the conditions of this Agreement. (B) Availability. At the close of business on the date immediately preceding the Acquisition Loan Borrowing Date, Borrowers shall have Availability of not less than $1,000,000. (C) Liens. Lender shall be satisfied that upon the consummation of the Permitted Acquisition, the New Borrower Assumption Agreement will create, as security for the Obligations, a valid and enforceable perfected first priority Lien upon all of the Collateral of the New Borrower in favor of Lender, subject to no other Lien other than Permitted Liens. (D) Permitted Acquisition. Prior to or simultaneously with the making of the Acquisition Loan, the Permitted Acquisition shall be consummated." 1.21 Exhibits. The exhibits to the Loan Agreement are amended as follows: (a) Exhibit A is deleted and in lieu thereof is substituted Exhibits A-1 and A-2 attached to this Amendment; (b) Exhibits B, C, D, E, F, K, L, N, O, S and T are each amended to include the information with respect to a New Borrower set forth on a New Borrower Assumption Agreement upon the execution and delivery thereof by the parties thereto; (c) Exhibit U (New Borrower Assumption Agreement) attached hereto is made Exhibit U to the Loan Agreement; and (d) Exhibit V (New Borrower Pledge Agreement) attached hereto is made Exhibit V to the Loan Agreement. ARTICLE II REPRESENTATIONS AND WARRANTIES Each Borrower hereby represents and warrants to the Lender that: 2.1. Compliance with the Loan Agreement and Other Loan Documents. As of the execution of this Amendment, each Borrower is in compliance with all of the terms and provisions set forth in the Loan Agreement and in the other Loan Documents to be observed or performed by such Borrower, except where the failure of the Borrower to comply has been waived in writing by the Lender. 2.2. Representations in Loan Agreement and other Loan Documents. The representations and warranties of each Borrower set forth in the Loan Agreement and the other Loan Documents are true and correct in all material respects except for any changes in the nature of any Borrower's business or operations which have occurred in the ordinary course of business that would render the information contained in any exhibit attached to the Loan Agreement either inaccurate or incomplete in any material respect, so long as (a) Lender has consented to such changes, (b) such changes are not expressly prohibited by the Loan Agreement, or (c) with respect to matters Borrowers are required to notify Lender of pursuant to Sections 4.9(E) or 9.1(A), Borrowers have given notice as required by such sections. 2.3. No Event of Default. No Default or Event of Default exists. ARTICLE III MODIFICATION OF LOAN DOCUMENTS 3.1. Loan Documents. The Loan Agreement and each of the other Loan Documents are amended to provide that any reference to the Loan Agreement in the Loan Agreement or any of the other Loan Documents shall mean the Loan Agreement as amended by this Amendment, and as it is further amended, restated, supplemented or modified from time to time. 3.2 Conditions Precedent. This Amendment shall become effective and be deemed effective as of the date hereof upon the satisfaction or waiver by the Lender of the following conditions precedent: (a) Receipt by Lender of this Amendment, duly executed by Borrowers; (b) Receipt by Lender of a Third Amendment to the Deed of Trust, duly executed by CBCC, in form and substance satisfactory to Lender and its counsel, duly recorded, with all fees and taxes, if any, thereon paid; (c) Receipt by Lender of an endorsement to the mortgagee policy of title insurance number MM 1441705 issued by Old Republic National Title Insurance Company, updating the effective date of such policy to the recordation date of the Third Amendment to the Deed of Trust, with all premiums thereon paid, and insuring that such Deed of Trust, as amended, continues to constitute a valid, enforceable first priority Lien upon the Realty encumbered thereby, free and clear of all title defects and encumbrances whatsoever other than the Permitted Liens applicable thereto; (d) Receipt by Lender of a favorable, written opinion of counsel to Borrowers, in form and substance satisfactory to Lender and its counsel; (e) Certificate of the secretary or an assistant secretary of each Borrower certifying (i) that attached thereto is true and complete copy of the resolutions adopted by the Board of Directors of such Borrower, authorizing the execution, delivery and performance of this Amendment and the other documents contemplated hereby, and (ii) as to the incumbency and genuineness of the signature of each officer of such Borrower executing this Amendment or any of the other documents executed in connection herewith; and (f) Receipt by Lender of such other documents, instruments and agreements as Lender and its counsel may reasonably request. ARTICLE IV GENERAL 4.1. Full Force and Effect. As expressly amended hereby, the Loan Agreement shall continue in full force and effect in accordance with the provisions thereof. As used in the Loan Agreement, "hereinafter", "hereto", "hereof" or words of similar import, shall, unless the context otherwise requires, mean the Loan Agreement as amended by this Amendment. 4.2 Applicable Law. This Amendment shall be governed by and construed in accordance with the internal laws and judicial decisions of the State of North Carolina. 4.3 Counterparts. This Amendment may be executed in one or more counterparts, each of which shall constitute an original, but all of which when taken together shall constitute but one and the same instrument. 4.4 Expenses. Borrowers shall reimburse the Lender for all reasonable fees and expenses (legal or otherwise) incurred by the Lender in connection with the preparation, negotiation, execution and delivery of this Amendment and all other agreements and documents or contemplated hereby. 4.5. Headings. The headings in this Amendment are for the purpose of reference only and shall not affect the construction of this Amendment. 4.6 Waiver of Jury Trial. TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, EACH BORROWER AND THE LENDER EACH WAIVES THE RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT, PROCEEDING OR COUNTERCLAIM OF ANY KIND ARISING OUT OF OR RELATED TO THIS AMENDMENT, THE LOAN AGREEMENT OR THE OTHER LOAN DOCUMENTS OR THE TRANSACTIONS RELATED HERETO OR THERETO. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed and delivered on the date first above written. BORROWERS: ATTEST: COMDIAL CORPORATION _/s/ Linda P. Falconer_ By: __/s/ Wayne R. Wilver__________ Linda P. Falconer, Assistant Secretary Wayne R. Wilver, Senior Vice President [CORPORATE SEAL] [Signatures continued on next page] ATTEST: AMERICAN TELECOMMUNICATIONS CORPORATION _/s/ Linda P. Falconer__________ By: __/s/ Wayne R. Wilver_ Linda P. Falconer, Assistant Secretary Wayne R. Wilver, Senior Vice President [CORPORATE SEAL] ATTEST: AMERICAN PHONE CENTERS, INC. _/s/ Linda P. Falconer_____ By: __/s/ Wayne R. Wilver Linda P. Falconer, Assistant Secretary Wayne R. Wilver, Senior Vice President [CORPORATE SEAL] ATTEST: COMDIAL ENTERPRISE SYSTEMS, INC. _/s/ Linda P. Falconer____________ By: __/s/ Wayne R. Wilver Linda P. Falconer, Assistant Secretary Wayne R. Wilver, Senior Vice President [CORPORATE SEAL] ATTEST: COMDIAL TELECOMMUNICATIONS INTERNATIONAL, INC. _/s/ Linda P. Falconer____________ By: __/s/ Wayne R. Wilver Linda P. Falconer, Assistant Secretary Wayne R. Wilver, Senior Vice President [CORPORATE SEAL] ATTEST: SCOTT TECHNOLOGIES CORPORATION _/s/ Linda P. Falconer____________ By: __/s/ Wayne R. Wilver Linda P. Falconer, Assistant Secretary Wayne R. Wilver, Senior Vice President [CORPORATE SEAL] (Signatures continued on next page) ATTEST: COMDIAL CUSTOM MANUFACTURING, INC. _/s/ Linda P. Falconer____________ By: __/s/ Wayne R. Wilver Linda P. Falconer, Assistant Secretary Wayne R. Wilver, Senior Vice President [CORPORATE SEAL] ATTEST: COMDIAL VIDEO TELEPHONY, INC. _/s/ Linda P. Falconer____________ By: __/s/ Wayne R. Wilver Linda P. Falconer, Assistant Secretary Wayne R. Wilver, Senior Vice President [CORPORATE SEAL] ATTEST: COMDIAL TECHNOLOGY CORPORATION _/s/ Linda P. Falconer____________ By: __/s/ Wayne R. Wilver Linda P. Falconer, Assistant Secretary Wayne R. Wilver, Senior Vice President [CORPORATE SEAL] ATTEST: COMDIAL TELECOMMUNICATIONS, INC. _/s/ Linda P. Falconer____________ By: __/s/ Wayne R. Wilver_ Linda P. Falconer, Assistant Secretary Wayne R. Wilver, Senior Vice President [CORPORATE SEAL] ATTEST: COMDIAL BUSINESS COMMUNICATIONS CORPORATION _/s/ Linda P. Falconer____________ By: __/s/ Wayne R. Wilver Linda P. Falconer, Assistant Secretary Wayne R. Wilver, Senior Vice President [CORPORATE SEAL] (Signatures continued on next page) ATTEST: COMDIAL CONSUMER COMMUNICATIONS CORPORATION _/s/ Linda P. Falconer____________ By: __/s/ Wayne R. Wilver Linda P. Falconer, Assistant Secretary Wayne R. Wilver, Senior Vice President [CORPORATE SEAL] LENDER: FLEET CAPITAL CORPORATION By: /s/ Jimmy G. Ramsey_____ Title:_Vice President____ ?? 72 EX-11 4 COMDIAL CORPORATION AND SUBSIDIARIES Exhibit 11 Statement re Computation of Per Share Earnings Three Months Ended March 31, April 2, 1996 1995 (1) PRIMARY Net income applicable to common shares: $1,185,000 $1,087,000 Weighted average number of common shares outstanding during the period 8,191,299 7,018,022 Add - common equivalent shares (determined using the "treasury stock" method) representing shares issuable upon exercise of: Stock options 137,951 201,522 Weighted average number of shares used in calculation of primary earnings per common share 8,329,250 7,219,544 Earnings per common share: Net income $0.14 $0.15 FULLY DILUTED Net income applicable to common shares $1,185,000 $1,087,000 Adjustments for convertible securities: Dividends paid on convertible preferred stock - 143,000 Net income applicable to common shares, assuming conversion of above securities $1,185,000 $1,230,000 Weighted average number of shares used in calculation of primary earnings per common share 8,329,250 7,219,544 Add (deduct) incremental shares representing: Shares issuable upon exercise of stock options included in primary calculation (137,951) (201,522) Shares issuable based on period-end market price or weighted average price: Convertible preferred stocks - 856,927 Stock options 124,342 203,504 Weighted average number of shares used in calculation of fully diluted earnings per common share 8,315,641 8,078,453 Fully diluted earnings per common share $0.14 $0.15 (1) 1995 has been restated to reflect the one-for-three stock split. -----END PRIVACY-ENHANCED MESSAGE-----