-----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, LzHdTkWMCnYpkn1UBrO2RYuzyXLec9LvRQpEV5OxmzVL7b2BlII6kj4xZCqUJBxx EwfbXEBXU+O3IX8npjT99g== 0000916641-98-000283.txt : 19980326 0000916641-98-000283.hdr.sgml : 19980326 ACCESSION NUMBER: 0000916641-98-000283 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980325 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-K405 SEC ACT: SEC FILE NUMBER: 000-09023 FILM NUMBER: 98572946 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-K405 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _________________ Commission file number: 0-9023 COMDIAL CORPORATION (Exact name of Registrant as specified in its charter) Delaware 94-2443673 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) P. O. Box 7266 1180 Seminole Trail; Charlottesville, Virginia 22906-7266 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (804) 978-2200 Securities registered pursuant to Section 12(g) of the Act: Title of Class COMMON STOCK (Par Value $0.01 each) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 10, 1998, was approximately $94,331,000 (See Item 5). The number of shares of Common Stock outstanding as of March 10, 1998, was 8,715,853. DOCUMENTS INCORPORATED BY REFERENCE: The Company's 1997 Annual Report to the Stockholders is incorporated by reference under Part II and portions of the Company's Definitive Proxy Statement for its 1998 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1997, are incorporated by reference under Part III of this Form 10K. - -------------------------------------------------------------------------------- TABLE OF CONTENTS - -------------------------------------------------------------------------------- Part I Item 1. Business 4 (a) General Development of Business 4 Safe Harbor Statement 5 Industry Background 5 Strategy 7 (b) Financial Information About Industry Segment 10 Product Sales Information 10 (c) Narrative Description of Business 10 Products 10 Business Systems 11 Proprietary and Specialty Terminals 16 Custom Manufacturing 16 Sales and Marketing 17 Engineering, Research and Development 18 Manufacturing and Quality Control 19 Competition 20 Intellectual Property 21 Employees 22 Item 2. Properties 22 Item 3. Legal Proceedings 23 Item 4. Submission of Matters to a Vote of Security Holders 23 - ---------------------------------------------------------------- Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 23 Item 6. Selected Financial Data 23 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 23 Item 8. Financial Statements and Supplementary Data 23 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 24 - ---------------------------------------------------------------- TABLE OF CONTENTS (Cont'd.) Part III Item 10. Directors and Executive Officers of the Registrant 24 Item 11. Executive Compensation 24 Item 12. Security Ownership of Certain Beneficial Owners and Management 24 Item 13. Certain Relationships and Related Transactions 24 - ---------------------------------------------------------------- Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 25 PART I ITEM 1. Business (a) GENERAL DEVELOPMENT OF BUSINESS Comdial Corporation (the "Company") is a Delaware corporation based in Charlottesville, Virginia. The Company is engaged in the design, development, manufacture, distribution, and sale of advanced telecommunications products and system solutions. The Company was originally incorporated in Oregon in 1977. In 1982, the Company was reincorporated in Delaware. It then acquired substantially all of the assets and assumed substantially all of the liabilities of General Dynamics Telephone Systems Center, Inc., formerly known as Stromberg-Carlson Telephone Systems, Inc. ("Stromberg-Carlson"), a wholly-owned subsidiary of General Dynamics Corporation. The Company's Common Stock is traded over-the-counter and is quoted on the National Association of Security Dealers Automated Quotation National Market System ("Nasdaq National Market") under the symbol "CMDL." On March 20, 1996, the Company completed the acquisitions of Aurora Systems, Inc. ("Aurora") and Key Voice Technologies, Inc. ("KVT"), two companies involved in computer-telephony integration ("CTI") applications which became wholly-owned subsidiaries of the Company. KVT, based in Sarasota, Florida, develops, assembles, markets, and sells voice processing systems and related products for business applications. As of December 31, 1997, Aurora sold all of its rights, title and interest in the FastCall product, Aurora's primary asset, to Spanlink Communications, Inc. (see Note 2 to the Consolidated Financial Statements). The Company's products accommodate businesses that require up to approximately 500 telephones. The Company believes that it is a leading supplier to this market, with an installed base of approximately 250,000 telephone systems and 3,000,000 telephones. The Company's products include digital and analog telephone switches and telephones, voice processing systems, software to achieve computer-telephone integration ("CTI") and integrated special purpose systems comprised of the Company's switching platforms and software developed by the Company and third party suppliers. The Company has grown principally as a result of sales of digital telephone systems introduced by the Company since 1992 and CTI products introduced since 1993. CTI encompasses a wide range of products, primarily software, that enable end users to perform telephony functions from desktop personal computers ("PCs") or PCs served by a local area network ("LAN"). In early 1997, the Company established a team of people, to evaluate whether, and to what extent, the Year 2000 would impact the Company's business. The Year 2000 Team identified which of the Company's products, devices, and computerized systems that contain embedded microprocessors that require remediation or replacement because of potential Year 2000 problems. The Year 2000 Team concluded that nearly all of the Company's products are already Year 2000 compliant and those which are not will be compliant by 1999 or before. On an ongoing basis, the Company has been replacing existing systems to improve efficiency and to address the Year 2000 problem. Such replacements are projected to be complete in 1998. The Company does not expect to make any material expenditures solely to address Year 2000 issues. Management believes that the Company is properly addressing the Year 2000 problem in order to mitigate any adverse operational or financial impacts. Furthermore, the Company plans to implement a requirement beginning in 1998 that its suppliers certify that all products and services provided to the Company are Year 2000 compliant. "Safe Harbor" Statement Under the Private Securities Litigation Reform Act of 1995 Some of the statements included or incorporated by reference into the Company's Securities and Exchange Commission filings and shareholder communications are forward-looking statements that are subject to risks and uncertainties, including, but not limited to, the impact of competitive products, product demand and market acceptance risks, reliance on key strategic alliances, fluctuations in operating results, delays in development of highly complex products, and other risks detailed from time to time in the Company's filings. These risks could cause the Company's actual results for 1998 and beyond to differ materially from those expressed in any forward-looking statement made by, or on behalf of, the Company. Industry Background Advances in technology and industry deregulation have accelerated the introduction of technologically advanced telephone systems and applications. Beginning in the 1970s, electronic telephone systems began displacing traditional electromechanical key sets that had served as the basic office telephone system since the 1930s. New telephone applications permit business users to improve internal and external communications by using conference calls, speakerphones, voice mail, automated attendants, voice processing applications, "screen pops" of caller profiles, voice over the Internet, and many other enhanced capabilities. The Company primarily designs and manufactures telephone systems for small to mid-size organizations. A basic business telephone system consists of (a) a central telephone switching unit (key service unit or "KSU"), (b) telephone instruments, (c) associated wiring and connections hardware, (d) system software, and (e) adjunct devices such as facsimile machines and voice processing systems. Telephone systems are often described in terms of the number of telephone lines and terminal devices that can be supported by a KSU. The aggregate number of telephone terminals and outside lines that can be configured as to a specific KSU is the number of "ports." Electronic telephone systems were originally "analog." Voice was transmitted in a continuous wave form that is "analogous" to the original voice signal. Analog transmission is adequate for most voice requirements, but is not as efficient for data transmission. Analog transmission is subject to attenuation, or the continual degradation of transmission quality as the distance between sender and receiver increases. In addition, ambient noises can be picked up and transmitted along with the original voice transmission. By the late 1980s, digital telephone systems were available for commercial use. The digitization of voice, data, and video is a general trend in the telecommunications industry. Such forms of communication are converted into binary pulses (0 and 1) that may be stored or transmitted. Within a fully digital system, the signals are reproduced precisely with minimal degradation of quality. Digital systems generally offer customers more features, provide greater voice clarity, offer potential cost savings through the use of high-capacity T-1 transmission lines from telecommunication service providers, enable improved video and data transmission, and often offer superior platforms for future CTI applications. Businesses with digital systems are therefore better positioned to take advantage of new CTI application features that are being developed by software companies. CTI represents an important growth opportunity for the Company. CTI is not a product or a technology, but rather a set of standards and hardware and software elements, which merge the power of modern telephone systems, personal computers, and computer networks. This allows manufacturers and developers to provide integrated solutions to broad communications problems, such as proper queuing in call communications centers and specific vertical market applications, such as real estate firms, law firms, and financial business services. Using CTI, calls can be processed from the computer, users can scan their computer screens for incoming voice, electronic mail, and fax messages, and telephone representatives can more promptly serve callers. Initially, implementation of CTI was limited to specialized applications written to the proprietary interfaces of individual switch makers. This yielded a small number of expensive products. With the broad acceptance of de facto standards from major computer and network software suppliers, it is now possible to implement CTI on a much broader scale and at a substantially lower cost. One of the most significant developments in recent years is the introduction of "open" systems that permit users to customize their telephone system by adding CTI application packages suitable to their communication needs. Changes in the telecommunications industry extend to the international market as well. Developing countries recognize that advanced telecommunications systems and networks are essential to attract foreign investment and stimulate local economies. In some countries, people must wait several years for basic dial tone service. There is a large, ready demand for delivery systems that can provide basic service in short time frames and at economical prices. Among developed nations, there is a sustained trend toward privatization of government telecommunications monopolies in favor of competition at all levels. The Company, with extensive experience working in a competitive environment, is well positioned to take advantage of these opportunities. Strategy The Company seeks to expand sales and profits by: (1) extending its digital switching line to serve large applications, (2) enhancing current products with new features and capabilities, (3) expanding its channels of distribution and methods of product delivery, (4) producing higher-value integrated voice-data systems utilizing CTI tools and technologies, and (5) leveraging its strong relationships with third party vendors and key customers. Product Offerings The Company currently offers digital and analog business telephone systems, wired and wireless terminals, CTI applications, voice processing systems, and other products along with a variety of product enhancements. The Company believes that it offers a wider range of products than most of its competitors and this variety allows dealers to meet differing price and feature requirements. The Company strives to introduce new products to meet the needs of a changing market. Product Development The Company's recent sales and profit growth are largely attributable to customer acceptance of its digital switching systems. These products are sold under the Impact and Impression brands that serve customer applications from 24 to 560 ports. In 1997, the Company introduced important enhancements such as feature-rich software, compatibility with ISDN (Integrated Services Digital Network) and T-1 carrier protocols, and new wired and wireless terminals for certain of its Impact switches. Also in 1997, the Company introduced the Impact FX Series Computer-Telephony Applications Server. This product features an "open" architecture compliant with popular industry standards, an embedded PC, and other design elements that make it an ideal platform for building CTI-based vertical and horizontal market applications. The Company intends to continue to add value to its core digital switching products. The Company believes that in order to maximize profitability in the emerging markets for CTI it must continue to develop and market higher-value integrated systems. The Company's Impact and Impact FX Series digital switching platforms will form the bases for these products, augmented by software developed by the Company's subsidiary, Comdial Enterprises Systems, Inc., and applications software from third parties. The Company also intends to continue to leverage the engineering and marketing skills of its KVT subsidiary to produce powerful, easy-to-use voice processing products that are tightly integrated with its switching products. Product Distribution The Company focuses its distribution of products primarily through networks of independent dealers that resell the Company's products to end users. These networks enable the Company to achieve broad geographic coverage in a cost effective manner. The Company's primary means of distribution is through a key group of wholesale supply houses, which stock the Company's products and resell to independent dealers. The Company's strategy of selling through wholesale supply houses enables it to minimize receivables exposure and reduce sales administration and inventory costs. Most importantly, the use of supply houses allows the Company to extend product distribution to virtually any market in the United States and Canada. Wholesale supply houses benefit from their relationship with the Company by earning a margin on the sale of the Company's products and on the sale of related products such as cable, connectors, and installation tools. Dealers have the benefits of competitive sourcing and reduced inventory carrying costs. In addition to supply house distribution, the Company also markets its products directly to national accounts, third party system developers, original equipment manufacturing ("OEM") customers, and the federal government via its Government Services Administration ("GSA") schedule contract. Products produced by the Company's KVT subsidiary are sold both through the supply house channel and direct to dealers. Strategic Alliances The Company has developed strategic alliances with other companies in order to build on the strengths of these companies and bring the best possible products to the market at a lower cost. Examples include the Tracker on-site integrated paging system (Motorola, Inc.), the Scout wireless key system telephone (Uniden America Corporation), and the VVP and Small Office voice processing systems (Rhetorex and Dialogic). In October 1997, the Company announced a strategic alliance with Harris Corporation ("Harris") whereby the Company will produce a family of telephone instruments for use with switching systems manufactured by Harris. (b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENT During the fiscal years ended December 31, 1997, 1996 and 1995, substantially all of the Company's sales, net income, and identifiable net assets were attributable to the telecommunications industry. Additional information is incorporated by reference to the Company's 1997 Annual Report to Stockholders. Product Sales Information The following table presents certain relevant information concerning the Company's principle product lines for the periods indicated: - -------------------------------------------------------------------------------- Years Ended December 31, (In Millions) 1997 1996 1995 - -------------------------------------------------------------------------------- Sales Business Systems Digital $50.4 $42.8 $40.5 DXP 25.5 17.8 13.8 CTI 27.0 20.5 7.4 Analog 12.1 16.2 22.4 ----- ---- ---- Sub-total 115.0 97.3 84.1 Proprietary and Specialty Terminals 4.1 4.7 6.0 ----- ---- ---- Sub-total 119.1 102.0 90.1 Custom Manufacturing 0.7 1.3 6.1 ----- ---- ---- Gross Sales 119.8 103.3 96.2 Sales Discount and Allowances (1.2) (1.1) (1.5) ----- ---- ---- Net Sales $118.6 $102.2 $94.7 ====== ====== ===== - -------------------------------------------------------------------------------- (c) NARRATIVE DESCRIPTION OF BUSINESS Products The Company offers a variety of telephone systems, including digital systems, Digital Expandable ("DXP") systems, analog systems, CTI applications, and other products and product enhancements. The Company's telecommunications products meet three basic criteria, and are registered with: (1) the Federal Communications Commission ("FCC"), (2) an independent laboratory approved by the Occupational Safety and Health Act Commission ("OSHA") to produce safety standards, and (3) a nationally recognized test laboratory that performs product evaluations. Selected products are also registered with the Canadian government's Industry Canadian and are Canadian safety certified. The Company has, or is in the process of, registering its products in other countries. Business Systems Digital Systems Impact, introduced in 1992, is a brand name which applies to certain telephone instruments and digital telephone systems which are installed with Impact telephones. Impact products may only be sold by the Company's Dealers. There are two families of Impact telephones. Impact Telephones, were introduced in 1992. These terminals offer a variety of features, including an interactive liquid crystal display ("LCD"), programmable feature keys, three color lighted status indicators, and a subdued off-hook voice announce for receiving intercom calls while on a telephone call. The phones are offered in a variety of models, distinguished by the number of programmable buttons, the presence or absence of a display, and the presence or absence of a speakerphone. The Impact SCS was introduced in the third quarter of 1997. The Impact SCS retains many of the current features of the original Impact models but with a different physical design and distinguishing features such as a full-duplex speakerphone model, simultaneous voice and data, large screen display and adjustable viewing angle. Impression is a brand name, denoting certain digital telephone instruments and digital systems when the systems are installed with digital switches. The Impression telephones are similar to the original Impact telephones in terms of functionality and number of models offered. However, the physical design is quite different. Four Impression systems are offered: Impression 24, Impression 48, Impression 72, and Impression 224. Impression telephones and systems were introduced in October 1996. DigiTech, introduced in 1991, are digital systems with switches and telephones designed for the business market supporting up to 24 lines and 48 telephones. DigiTech offers automatic set relocation, remote programming, a replaceable software cartridge, and other sophisticated features. This product will be discontinued from production during the second quarter of 1998, but the Company will continue to provide support pertaining to warranty claims and replacements. Air Impact, introduced in 1997, is a multi-cell wireless communications product for use with the Company's (and other manufacturers') switching systems. It is designed for use within large buildings and where employees are often away from their desk phones. Air Impact operates over the 1.9 Gigahertz personal communications services ("PCS") band. Scout, introduced in 1995, is the Company's 900 megahertz single cell wireless, multi-line feature phone. Scout extends the advantage of mobility to users of Impact systems. Like Air Impact, Scout is designed for in-building applications. Tracker, introduced in 1994, is an on-site integrated paging system developed in cooperation with Motorola. The purpose of this product is to help ensure that calls are quickly and efficiently completed to individuals who are at work, but not always near their telephones. Tracker, which operates on the Company's digital telephone systems, includes a Tracker base station and personal pagers equipped with a LCD. The personal pagers sound an alert or vibrate to notify users of incoming calls or important messages. A user can retrieve calls by going to the nearest system phone and dialing a special code that is displayed on the LCD. A valuable feature of Tracker is its compatibility with other products manufactured by the Company. In 1997, Comdial enhanced the basic Tracker product with an applications software package called QuikTrak. QuikTrak extends text-messaging capability to PC users on a local area network. Brief messages can be originated by selecting the Tracker pager user from a Windows screen, typing the message, and clicking on the "Track" command. DXP - Impact Systems When Impact phones are paired with digital switching systems, the combined product is identified as an Impact System or previously referred to as a DXP system. There are five Impact Systems: Impact 24, Impact 48, Impact 224, Impact 560, and Impact FXS. The numeric suffix denotes the maximum number of ports served by the base switch, without need for any product displacement. For example, the Impact 24 begins at 12 ports. An expansion module can be added to reach 24 ports. To go beyond 24 ports, the base unit must be replaced with the Impact 48 base unit. The switching platform for the Impact 224, when unassociated with terminals, is identified as the DXP. The switching platform for the Impact 560, when unassociated with terminals, is identified as the DXP Plus. Impact FXS Computer Telephony Applications Server ("FXS") is the Company's most recent switching platform and was introduced in the third quarter of 1997. The FXS is expandable to 240 ports. Two basic models are offered with either a Windows or DOS operating system for the on-board personal computer. The FXS differs from the Company's other switching platforms in that it is more "open" and more software-intensive. Voice processing, for example, is available in the core software whereas it is a hardware option with other Company systems. The FXS is designed to popular industry standards, which makes the FXS amenable to customization by the Company and by third party integrators. Computer-Telephony Integration Products Enterprise, introduced in 1993, is the Company's open applications interface ("OAI") software developer's tool kit. Enterprise allows independent software developers to access the Impact, DXP, DXP Plus, or FXS system software using more than 190 commands. These tools allow the Company to create unique applications for specific vertical markets, such as telemarketing groups, emergency services, call centers, taxi services, and multi-media centers. One of the initial OAI applications developed using Enterprise is an Enhanced 911 ("E-911") emergency telephone system. Enterprise is a platform for the development of applications based upon the convergence of computer and telephony technologies. Wideopen.office, introduced in 1996, is a software product that provides telephony linkage between desktop computers and Impact 224, Impact 560, and FXS digital switches. Wideopen.office supports multiple applications programming interfaces and supports local area network software from Novell, Microsoft, and others, as well as stand alone PCs running Windows, Windows 95, or OS/2 operating systems. Because of this capability to provide CTI in a variety of environments, the Company views wideopen.office as a universal telephony controller. Wideopen.office can be shipped separately or paired with wideopen.call or wideopen.group applications software that provides users with popular services such as PC-based call processing, integration with contact management programs, and "screen pops" of caller information, provided the user has some type of caller identification service. PCIU, introduced in the second quarter of 1997, is an affordable hardware/software solution that extends CTI across all of the Company's digital switches, via the broadly accepted Telephony Applications Programmers Interface ("TAPI") standard. The hardware component is a black box with multiple connectors for a digital port off the switch, the Company's digital display telephone, a PC serial port, and electric power. Concierge, introduced in 1996, is a digital telephone system designed for hospitality applications. The system consists of an Impact 224 or Impact 560 digital switch, multi-line administration telephones, single-line guest telephones that are not sold by the Company, and special hospitality software. The system is linked to a personal computer via the Company's Enterprise CTI software, and allows hotel personnel to administer guest check-in/check-out and other hotel activities from the PC or specially programmed Impact LCD telephones. Concierge serves hotel properties of up to approximately 400 rooms. QuickQ ACD, introduced in 1994, is an automatic call distributor ("ACD"), designed for call center use. The system consists of an Impact 224, Impact 560, or FXS digital switch, voice announcing equipment, special automatic call distribution software, and a PC. The QuickQ answers and distributes incoming calls rapidly and efficiently, helping to assure maximum call center productivity and superior customer response levels. E-911 Systems, introduced in 1994, are specially engineered telephone systems for handling emergency ("911") telephone calls. The Company's systems deliver valuable information to emergency dispatchers using caller identification technology in conjunction with databases to access information such as the street address and profile of the emergency caller. Dispatchers are better positioned to send help swiftly to the correct address and provide information needed for emergency personnel to respond appropriately to a situation. All calls are recorded for future reference, and operators can handle multiple calls without losing valuable information. The Company's E-911 System makes extensive use of CTI. The Company contracts with municipal authorities for sale of the E-911 System to the municipality. ExecuMail, introduced in 1990, is an integrated voice processing system for use with selected telephone systems of the Company. ExecuMail is offered in a range of port and voice storage capacities, and provides both voice mail and automated attendant service. ExecuMail products are the result of a strategic alliance with Active Voice Corporation. This product will be discontinued from production during the second quarter of 1998, but the Company will continue to provide support pertaining to warranty claims and replacements. VVP, introduced in 1996, is the trade name of a PC-based voice processing system produced by KVT and sold by the Company. The same product is sold as Corporate Office by KVT to its own dealer network. Both products provide all standard voice processing features such as auto attendant, voice store and forward, multiple greetings, and individual voice mail boxes. Advanced features such as fax tone detection, audio text (interactive response to user touch-tone commands), and visual call management (the ability to view voice messages from a PC) are also available. VVP can be integrated with the Company's digital telephone systems so that display messages on LCD terminals prompt user operations. KVT offers similar integration packages for telephone systems made by other companies. VVP and Corporate Office are offered in 4 to 16 port configurations. Voice storage capacity is virtually unlimited - an advantage of PC-based design. Small Office, introduced in 1996, is a smaller and more economical version of VVP/Corporate Office, which is also produced by KVT and sold through both the Company's and KVT's dealer networks. Small Office offers basically the same features as the larger model, but is designed for smaller enterprises. Maximum capacity is four ports (four simultaneous calls) and 100 mailboxes. In 1997, KVT introduced Small Office Lite, a cost-effective voice processing system for smaller businesses. FastCall, introduced in 1994, was produced by the Company's wholly-owned subsidiary Aurora, and is a special class of CTI software that is designed to "telephony enable" existing custom data bases and programs, as well as popular personal information managers ("PIMs"). Aurora sold all its rights to the FastCall product as of December 31, 1997 (see Note 2 to the Consolidated Financial Statements). Analog Systems Unisyn, introduced in 1994, is a telephone system designed to offer advanced features to small organizations. Two models are offered, one model supports up to three lines and eight telephones, and the other supports up to six lines and 16 telephones. Display model telephones offer interactive function keys to simplify feature access. Another capability of Unisyn is its optional compatibility with standard analog devices, such as single line telephones, fax machines, and modems. ExecuTech 2000 Unitized Expandable Hybrid Systems, introduced in 1989, can support up to 24 lines and 56 telephones. Expansion modules allow end users to increase capacity in increments of four lines and 12 phones or by 16 phones with no additional lines. These systems provide subdued off-hook voice announce, built-in battery backup interface, integrated call costing, and many other features. This product will be discontinued from production during the second quarter of 1998, but the Company will continue to provide support pertaining to warranty claims and replacements. ExecuTech XE Key Systems, introduced in 1989, can support up to 10 lines and 24 telephones. All systems support the same family of full-featured telephones. The switch is a unitized self-contained unit, making the ExecuTech XE Key System economical to manufacture, easy to install, and beneficial to end users who do not have to buy additional components to add features. ExecuTech II Hybrid products, introduced in 1986, consist of models supporting up to 22 lines and 96 telephones. This product was discontinued from production during the second quarter of 1997, but the Company will continue to provide support pertaining to warranty claims and replacements. InnTouch, introduced in 1987, is a line of four analog hospitality systems, the first of which supports up to 22 lines and 128 telephones. These systems feature a front desk video display terminal, integrated call costing, and multi-featured room telephones. This product will be discontinued from production during the second quarter of 1998, but the Company will continue to provide support pertaining to warranty claims and replacements. Solo II, introduced in 1986, is offered in three and four-line models and provides a sophisticated set of features that are easy to program and cost effective. Proprietary and Specialty Terminals HoTelephone, originally introduced in 1984, is a line of single and two-line telephones specially designed for business travelers for use in hotel and motel guest rooms. The HoTelephone offers guest room travelers memory keys for one-button dialing of various services, plus a message waiting lamp, hold button, and built-in data jack for connecting portable computers and fax machines. This product was discontinued from production during the third quarter of 1997, but the Company will continue to provide support pertaining to warranty claims and replacements. Voice Express, introduced in the early 1980s, is a fully-featured multi-function display telephone that includes an integrated speakerphone, autodial, and many other standard features for use behind different types of switches. Voice Express may be optionally equipped with a two-line module for use behind a PBX or the user can add special six and ten-button modules for use with older electromechanical key telephone equipment. MaxPlus desk/wall convertible telephones range from a basic model with message waiting to a fully-featured speakerphone model with programmable soft keys for often-used PBX and Centrex features. This product was discontinued from production in the fourth quarter of 1997, but the Company will continue to provide support pertaining to warranty claims and replacements. MaxPlus II two-line telephones offer line status indicators, electronic hold and a dataport as basic features. Additional models have features such as message waiting, tap, speakerphone, and programmable soft keys. This product was discontinued from production in the fourth quarter of 1997, but the Company will continue to provide support pertaining to warranty claims and replacements. ATC Terminals are a line of single and two-line analog phones that offer advanced features at a low cost. The products are sourced by American Telecommunications Corporation ("ATC"), a wholly-owned subsidiary of the Company. Custom Manufacturing Custom manufacturing consists primarily of contract work performed for various original equipment manufacturers. Sales and Marketing The Company markets its products through both direct and indirect channels. Indirect channels include both two-tiered and three-tiered distribution. The Company's primary channel of distribution to U.S. and Canadian markets is through nine major wholesale supply houses, which in turn, resell to hundreds of independent dealers. International sales are accomplished through a network of international dealers. International dealers buy directly from the Company, normally by letters of credit, and resell to end users or other dealers. Three of the supply houses each account for more than 10% of the Company's net sales. These are Graybar Electric Company, Inc. ("Graybar"), Sprint/North Supply, Inc. ("North Supply"), a subsidiary of Sprint, and ALLTEL Supply, Inc. ("ALLTEL"). In 1997, net sales to ALLTEL, Graybar, and North Supply amounted to approximately $21.5 million (18%), $33.3 million (28%), and $26.5 million (22%), respectively. The Company has established three classes of dealers that purchase the Company's products from supply houses and resell to end users. These are Platinum Preferred, Preferred Gold, Preferred, and Associate Dealers. The Company offers an attractive incentive package for both Platinum Preferred, Preferred Gold, and Preferred Dealers, including exclusive access to certain products, cash rebates related to dealer purchase levels, cooperative advertising allowances, and a measure of territorial protection. Platinum Preferred, Preferred Gold, and Preferred Dealers have sales quotas, and the Company's sales department monitors their performance against these targets. Associate Dealers purchase the Company's products on an as-needed basis, and are rewarded through product rebates. Associate Dealers do not have quotas but do receive benefits such as toll-free assistance, training, and other services that are offered by the Company. Several thousand dealers purchase the Company's products through supply houses. The Company supports its existing dealers and seeks to attract new dealers through national advertising in popular trade magazines, special promotional programs, sales and technical training, and participation in major industry trade shows. The Company has two primary sales groups that focus on indirect sales through supply houses. One group concentrates on maximizing the Company's system sales through Platinum Preferred, Preferred Gold, and Preferred Dealers. The second sales group focuses on the Company's Associate Dealers. Sales personnel are located in major metropolitan centers and have territory assignments. Each area sales manager is responsible for recruiting new dealers and training and motivating existing dealers. Dealers are supported through telephone contact with Inside Sales Representatives, direct mail, and local product seminars often organized by distributors. To stimulate demand, Field Sales Representatives make joint sales calls with dealers to end users and train dealer sales personnel in product benefits. Product specialists in Charlottesville are available to help engineer complex configurations and solve technical problems. All direct sales personnel earn incentive income based on sales results. The Company's dealers are primarily responsible for selling the Company's products to end users as well as providing support. The Company maintains a technical support staff devoted to dealer support. The Company also generally provides a limited warranty on elements of its products, permitting factory returns within 24 months of the production date. Although the Company does not offer maintenance contracts for a majority of its systems (E911 System the exception), dealers often independently sell maintenance contracts to end users. Other indirect channels include original equipment manufacturing (OEM) relationships, international sales, and dealer direct sales. Dedicated personnel support OEM and international sales. Sales of voice processing products produced by KVT are through two channels: supply houses to dealers and direct to dealers. In recent years, the Company initiated a National Accounts Program to market its products to large multi-location end users. The program allows end users to contract with one entity (the Company) for sales and support, while achieving local installations and maintenance from the Company's network of independent dealers. This program is also a key delivery vehicle for sophisticated CTI solutions sales that often require advanced custom integration and superior knowledge and understanding of end user communications and business objectives. The National Accounts Program allows the Company to work directly with end users to assure that the best combination of the Company and, if necessary, third party products are incorporated into the final solution. The Company employs dedicated personnel to sell and support national accounts. Because the Company's sales are made under short-term sales orders issued by customers on a month-to-month basis, rather than under long-term supply contracts, backlog is not considered material to the Company's business. Engineering, Research and Development The Company believes that it must continue to introduce new products and enhance existing products to maintain a competitive position in the marketplace. The Company's engineering department, working in collaboration with the marketing and manufacturing departments, is responsible for design of new products and enhancements. A significant amount of engineering expenditures is dedicated to new product development, with the balance used for cost reductions and performance enhancements to existing products. Research and development costs for the fiscal years ended 1997, 1996, and 1995 comprise the majority of engineering, research, and development costs, which were $6,497,000, $5,771,000, and $4,186,000, respectively. The Company is unable to segregate and quantify the amount of research and development costs from other engineering costs for such fiscal years. Some of the research and development costs associated with the development of product software have been capitalized as incurred. The accounting for such software capitalization is in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 86. The amounts capitalized in 1997, 1996, and 1995 were $1,956,000, $1,577,000, and $840,000, respectively. The amounts amortized for software development cost in 1997, 1996, and 1995 were approximately $1,018,000, $877,000, and $757,000, respectively. The Company is committed to improving its existing products and developing new telecommunications equipment in order to maintain or increase its market share. Manufacturing and Quality Control The Company's Manufacturing Operations organization is responsible for all activities related to production, testing, shipping, and repair of the Company's products. Other functions that fall under manufacturing operations include maintenance of plant facilities and specialty (contract) manufacturing. One of the Company's core competencies, along with its distribution network, is its manufacturing efficiency. With recent improvements in production equipment such as surface mount technology ("SMT") and information systems, the Company can now turn around customer orders in days, compared to weeks or even months taken by offshore competitors. Manufacturing is able to schedule production runs on a daily basis which provides the Company with maximum flexibility in responding to order levels, improved product margins, and lower work-in-process and finished goods inventories. Improvements in the manufacturing function include the use of advanced Manufacturing Resource Planning ("MRP") information systems, continuous flow assembly lines, just-in-time philosophies, and continual upgrades to the two SMT lines. The Company has been able to reduce finished goods inventory levels, as common components in various products have allowed manufacturing to stock components and subassemblies rather than finished products. Manufacturing also contributes to revenues through the sale of repair services and obsolete equipment through the Company's wholly-owned subsidiary American Phone Centers, Inc. ("APC"), and by contracting for selective custom manufacturing assignments. The Company also manufactures injection molded plastic parts, fabricated metal parts, and other components. The Company monitors the quality of its manufacturing process. Individual assemblers and machine operators are trained to inspect subassemblies as the work passes through their respective areas. In addition, some automated production machines perform quality tests concurrently with assembly operations. The Company believes that this high level of automation and vertical integration improves quality, cost, and customer satisfaction. In 1994, the Company was certified and has maintained its certification by the International Organization for Standardization ("ISO") at the most rigorous ISO 9001 level, which provides standards for systems and procedures for manufacturing, engineering, product design, and customer service. Competition The market for the Company's products is highly competitive. The Company competes with over 20 suppliers of small business telephone systems many of which have significantly greater resources. Examples are Lucent Technologies, Inc., Nortel Inc., and Toshiba Corporation. Key competitive factors in the sale of telephone systems and related applications include performance, features, reliability, service and support, name recognition, distribution capability, and price. The Company believes that it competes favorably in its market with respect to the performance, features, reliability, distribution capability, and price of its systems, as well as the level of service and support that the Company provides. In marketing its telephone systems, the Company also emphasizes quality, as evidenced by its ISO 9001 certification, and high technology features including CTI capability across its entire Impact line of digital switching systems. The market for voice processing systems is also competitive. The Company believes that it is a leading supplier of PC-based voice processing systems, and that the products produced by KVT are very competitive with regard to the key factors important to end users. These include reliability, memory capacity, features, ease-of-use, compliance with common industry standards, and price. The Company expects that competition will continue to be intense in the markets it serves, and there can be no assurance that the Company will be able to continue to compete successfully in the marketplace or that the Company will be able to maintain its current dealer network. Intellectual Property From time to time, the Company is subject to proceedings alleging infringement by the Company of intellectual property rights of others. Such proceedings could require the Company to expend significant sums in litigation, pay significant damages, develop non-infringing technology, or acquire licenses to the technology that is the subject of the asserted infringement, any of which could have a material adverse effect on the Company's business. Moreover, the Company relies upon copyright, trademark, and trade secret protection to protect the Company's proprietary rights in its products. There can be no assurance that these protections will be adequate to deter misappropriation of the Company's technologies or independent third-party development of similar technologies. The business telecommunications industry is characterized by rapid technological change. Industry participants often find it necessary to develop products and features similar to those introduced by others, with incomplete knowledge of whether patent protection may have been applied for or may ultimately be obtained by competitors or others. The telecommunications manufacturing industry has historically witnessed numerous allegations of patent infringement and considerable related litigation among competitors. The Company itself has received claims of patent infringement from several parties which sometimes seek substantial sums. Although the Company's investigation of some of these claims has been limited by the claims' lack of specificity, the limited availability of factual information and documentation related to the claims, and the expense of pursuing exhaustive patent reviews, the Company believes that its systems do not currently infringe valid patents of any such claimants. In response to prior infringement claims, the Company has pursued and obtained nonexclusive licenses entitling the Company to utilize certain fundamental patented functions that are widely licensed and used in the telecommunications manufacturing industry. These licenses expire upon expiration of the underlying patents. Although the Company believes that it currently owns or has adequate rights to utilize all material technologies relating to its products, as it continues to develop new products and features in the future it anticipates that it may receive additional claims of patent infringement. There can be no assurance that a license for any such infringed technology would be available to the Company or, even if available, that the terms of any such license would be satisfactory. Employees As of December 31, 1997, the Company, including Aurora and KVT, had 865 full-time employees, of whom 561 were engaged in manufacturing, 85 in engineering, 151 in sales and support, and 68 in general management and administration. The Company has never experienced a work stoppage and no employees are represented by labor unions. The Company believes that its employee relations are good. ITEM 2. Properties The Company designs, manufactures, and markets the majority of its products from a fully integrated, approximately 500,000 square-foot manufacturing facility on a 25 acre site located in Charlottesville, Virginia. The majority of the Company's operations and development are located at this facility, which the Company owns. The Company believes that its facilities are adequate both for the operation of its business as presently conducted and for expansion in the foreseeable future. In March 1996, the Company acquired KVT and Aurora (see Item 1 - General Development of Business). KVT operates out of an approximately 6,200 square foot building, located in Sarasota, Florida. During 1997, Aurora operated out of two leased suites in an office building located in Acton, Massachusetts, but will be moving to a new location that has yet to be determined. The Company's facilities are subject to a variety of federal, state, and local environmental protection laws and regulations, including provisions relating to the discharge of materials into the environment. The cost of compliance with such laws and regulations has not had a material adverse effect upon the Company's capital expenditures, earnings, or competitive position, and it is not anticipated to have a material adverse effect in the future. In 1988, the Company voluntarily discontinued use of a concrete underground hydraulic oil and chlorinated solvent storage tank at its Charlottesville plant. In conjunction therewith, nearby soil and groundwater contamination was noted. As a result, the Company developed a plan of remediation that was approved by the Virginia Water Control Board on January 31, 1989. The plan was later amended and approved by the Virginia Department of Environmental Quality, after which the Company commenced the remediation efforts required thereunder. In 1993, the Company provided a $45,000 reserve for the estimated cost to implement the remediation plan. In October 1994, the Company installed all required equipment in accordance with the remediation plan and started the process of pumping hydraulic oil residue from the underground water. The oil is deposited into approved containers and taken to a hazardous waste site in accordance with the corrective action plan. As of December 31, 1997, the Company has incurred total costs of approximately $55,000 and expects the pumping process to be completed by late 1999. ITEM 3. Legal Proceedings The Company is from time to time involved in routine litigation. The Company believes that none of the litigation in which it is currently involved is material to its financial condition or results of operations. ITEM 4. Submission of Matters to a Vote of Security Holders No matter was submitted during the fourth quarter of 1997 to a vote of the Company's security holders. PART II ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters. Information is incorporated by reference to page 46 of the Company's 1997 Annual Report to stockholders under the caption "Related Stockholders Matters." As of March 10, 1998 there were 1,602 record holders of the Company's Common Stock. ITEM 6. Selected Financial Data. Information is incorporated by reference to page 45 of the Company's 1997 Annual Report to stockholders under the caption "Five Year Financial Data." ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Information is incorporated by reference to pages 18 through 24 of the Company's 1997 Annual Report to stockholders under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations." ITEM 8. Financial Statements and Supplementary Data. Information is incorporated by reference to pages 27 through 44 of the Company's 1997 Annual Report to stockholders or filed with this Report as listed in Item 14 hereof. ITEM 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure. No information is required to be reported pursuant to this item. Part III ITEM 10. Directors and Executive Officers of the Registrant. Information concerning Directors and Executive Officers of the Registrant is incorporated by reference under the caption "Election of Directors" and "Executive Officers of the Company" on pages 6 through 8 and 10 through 13 of the Company's definitive proxy statement for the annual meeting of stockholders to be held on April 28, 1998. ITEM 11. Executive Compensation. Executive compensation and management transactions information is incorporated by reference under the caption "Executive Compensation" on pages 13 through 22 of the Company's definitive proxy statement for the annual meeting of stockholders to be held on April 28, 1998. ITEM 12. Security Ownership of Certain Beneficial Owners and Management. Information is incorporated by reference under the captions "Securities Ownership of Certain Beneficial Owners and Management" on pages 3 through 5 of the Company's definitive proxy statement for the annual meeting of stockholders to be held on April 28, 1998. ITEM 13. Certain Relationships and Related Transactions. Information is incorporated by reference under the caption "Family Relationships", "Indebtedness of Management" and "Certain Relationships and Related Transactions" on pages 13, 22, and 22 through 23 of the Company's definitive proxy statement for the annual meeting of stockholders to be held on April 28, 1998. Part IV ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) (1) The following Consolidated Financial Statements of Comdial Corporation and its Subsidiaries are incorporated in Part II, Item 8 by reference to the Company's 1997 Annual Report to stockholders (page references are to page numbers in the Company's Annual Report): Page Number ----------- Independent Auditors' Report 25 Report of Management 26 Financial Statements: Consolidated Balance Sheets - December 31, 1997 and 1996 27 Consolidated Statements of Operations - Years ended December 31, 1997, 1996, and 1995 28 Consolidated Statements of Stockholders' Equity - Years ended December 31, 1997, 1996, and 1995 29 Consolidated Statements of Cash Flows - Years ended December 31, 1997, 1996, and 1995 30 Notes to Consolidated Financial Statements - Years ended December 31, 1997, 1996, and 1995 31 - 44 2. Financial Statements - Supplemental Schedules: All of the schedules are omitted because they are not applicable, not required, or because the required information is included in the consolidated financial statements or notes. 3. Exhibits Included herein: (3) Articles of Incorporation and bylaws: 3.1 Certificate of Incorporation of Comdial Corporation. (Exhibits (a) Item 3.1 to Item 6 of Registrant's Form 10-Q for the period ended July 2, 1995.)* 3.2 Certificate of Amendment of the Certificate of Incorporation of Comdial Corporation as filed with the Secretary of State of the State of Delaware on February 1, 1994. (Exhibit 3.2 to Registrant's Form 10-Q for the period ended July 2, 1995.)* 3.3 Bylaws of Comdial Corporation. (Exhibit 3.3 to Registrant's Form 10-K for the year ended December 31, 1993.)* (10) Material contracts: 10.1 Registrant's 1992 Stock Incentive Plan and 1992 Non-employee Directors Stock Incentive Plan. (Exhibits 28.1 and 28.2 of Registrant's Form S-8 dated October 21, 1992.)* 10.2 Amendment No. 1 to the Registrant's 1992 Stock Incentive Plan and 1992 Non-employee Directors Stock Incentive Plan. (Exhibit 10.1 and 10.2 of Registrant's Form 10-Q dated September 28, 1997.)* 10.3 Amendment No. 2 to the Registrant's 1992 Stock Incentive Plan and 1992 Non-employee Directors Stock Incentive Plan. (Exhibit 10.2 of Registrant's Form 10-Q dated June 30, 1996.)* 10.4 Amendment No. 3 to the Registrant's 1992 Stock Incentive Plan and 1992 Non-employee Directors Stock Incentive Plan. (Exhibit 10.2 of Registrant's Form 10-Q dated June 30, 1996.)* 10.5 Amendment to Amendment No. 3 to the Registrant's 1992 Non-employee Directors Stock Incentive Plan. 10.6 Amendment No. 4 to the Registrant's 1992 Stock Incentive Plan and 1992 Non-employee Directors Stock Incentive Plan. 10.7 Amendment No. 4 to the Registrant's 1992 Stock Incentive Plan and 1992 Non-employee Directors Stock Incentive Plan. 10.8 Loan and Security Agreement dated February 1, 1994 among Registrant and Fleet Capital Corporation formerly Barclays Business Credit, Inc. (Exhibit 10.13 to Registrant's Form 10-K for the year ended December 31, 1993.)* 10.9 Development Agreement dated December 2, 1993 among Registrant and Motorola Inc. (Exhibit 10.16 to Registrant's Form 10-K for the year ended December 31, 1993.)* 10.10 Amendment No. 1 to the Loan and Security Agreement dated March 13, 1996 among the Registrant and Fleet Capital Corporation. (Exhibit 10.1 to Registrant's Form 10-Q for the quarter ended March 31, 1996.)* 10.11 Amendment No. 2 to the Loan and Security Agreement dated June 28, 1996 among the Registrant and Fleet Capital Corporation. (Exhibit 10.1 to Registrant's Form 10-Q for the quarter ended June 30, 1996.)* 10.12 Amendment No. 3 to the Loan and Security Agreement dated September 27, 1996 among the Registrant and Fleet Capital Corporation. (Exhibit 10.1 to Registrant's Form 10-Q for the quarter ended September 29, 1996.)* 10.13 Amendment No. 4 to the Loan and Security Agreement dated September 27, 1996 among the Registrant and Fleet Capital Corporation. (Exhibit 10.2 to Registrant's Form 10-Q for the quarter ended March 30, 1997.)* 10.14 Note dated February 5, 1997 among the Registrant and Fleet Capital Corporation. (Exhibit 10.1 to Registrant's Form 10-Q for the quarter ended March 30, 1997.)* 10.15 The Registrant's Executive Stock Ownership Plan effective January 1, 1996. (Exhibit 10.10 to Registrant's Form 10-K for the year ended December 31, 1995.)* 10.16 The Registrant's Executive Severance Plan dated August 31, 1995. (Exhibit 10.11 to Registrant's Form 10-K for the year ended December 31, 1995.)* 10.17 Amendment No. 1 to the Registrant's Executive Stock Ownership Plan dated July 31, 1997. 10.18 Amendment No. 2 to the Registrant's Executive Stock Ownership Plan dated January 1, 1998. 10.19 Amendment No. 1 to the Registrant's Executive Severance Plan dated July 31, 1997. 10.20 Development and Purchase Agreement dated February 21, 1997 among Registrant and Harris Corporation. 10.21 FastCall Purchase Agreement dated December 31, 1997 among Aurora Systems, Inc. and Spanlink Communications, Inc. * Incorporated by reference herein. - -------------------------------------------------------------------------------- (11) Schedule of Computation of Earnings Per Common Share. (13) Registrant's 1997 Annual Report to Stockholders. (21) Subsidiaries of the Registrant. The following are the subsidiaries of the Registrant and all are incorporated in the state of Delaware. American Phone Centers, Inc. American Telecommunications Corporation Aurora Systems, Inc. Comdial Business Communications Corporation Comdial Consumer Communications Corporation Comdial Custom Manufacturing, Inc. Comdial Enterprise Systems, Inc. Comdial Technology Corporation Comdial Telecommunications, Inc. Comdial Telecommunications International, Inc. Comdial Video Telephony, Inc. Key Voice Technologies, Inc. Scott Technologies Corporation (23) Independent Auditors' Consent. Accountants consent to the incorporation by reference of their report dated January 30, 1998, appearing in this Annual Report on Form 10-K of Comdial Corporation for the year ended December 31, 1997, in certain Registration Statements. (24) Power of Attorney. (27) Financial Data Schedule. (b) Reports on Form 8-K: The Registrant has not filed any reports on Form 8-K during the last quarter of 1997. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 25th day of March, 1998. COMDIAL CORPORATION By: /s/ William G. Mustain -------------------------------- William G. Mustain Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date - --------- ----- ---- * Vice Chairman March 25, 1998 - ----------------------- A. M. Gleason * Director March 25, 1998 - ----------------------- Michael C. Henderson * Director March 25, 1998 - ----------------------- John W. Rosenblum * Director March 25, 1998 - ----------------------- Dianne C. Walker /s/ William G. Mustain Chairman of the Board, March 25, 1998 - ----------------------- President, and William G. Mustain Chief Executive Officer /s/ Christian L. Becken Senior Vice President, March 25, 1998 - ----------------------- and Chief Financial Officer Christian L. Becken /s/ Wayne R. Wilver Senior Vice President, March 25, 1998 - ----------------------- Treasurer, and Secretary Wayne R. Wilver * By:/s/ Wayne R. Wilver - ----------------------- Wayne R. Wilver, Attorney-In-Fact EX-10.5 2 3RD AMEND. TO 1992 NON-EMPLOYEE DIR. ST INCEN Exhibit 10.5 THIRD AMENDMENT TO COMDIAL CORPORATION 1992 NON-EMPLOYEE DIRECTORS STOCK INCENTIVE PLAN THIS THIRD AMENDMENT to the Comdial Corporation 1992 Non-Employee Directors Stock Incentive Plan (the "Plan") is made pursuant to the authority under Section 1 of the Plan for the Board of Directors to amend the Plan. Following Section 14 of the Plan, the following three new sections are added to read as follows: "15. Deferrals of Stock. (1) A Participant may elect to defer the payment of some or all of the shares of Company Stock otherwise payable under Section 7(a)(iii) by completing a deferral election (a "Stock Deferral Election"). A Stock Deferral Election shall pertain to a Company fiscal year with respect to which a payment may be due under Section 7(a)(iii). A Stock Deferral Election must be in writing and shall be delivered to the Corporate Secretary of the Company prior to the start of the fiscal year to which the Stock Deferral Election pertains, except for an election with respect to the Company's fiscal year ending December 31, 1997 which shall be delivered within 30 days after the adoption of this Section 15 by the Board of Directors. A stock Deferral Election shall be irrevocable in respect to the fiscal year to which it pertains. A Stock Deferral Election must specify the applicable amount or percentage of the shares of Common Stock that the Participant wishes to defer. A Stock Deferral Election may be made for a single fiscal year or may be made applicable to all future fiscal years until revoked. Any revocation shall be effective with respect to the first fiscal year which begins after the revocation is made. (2) With respect to each share of Company Stock for which a Stock Deferral Election is made, the Company shall credit a Stock Unit to the Participant's Stock Unit Account. A Stock Unit shall be credited when the share of Company Stock otherwise would have been distributed to the Participant. (3) The Stock Units credited to each Participant's Stock Unit Account shall be credited with hypothetical cash dividends equal to the cash dividends that are declared and paid with respect to Company Stock. The Company shall determine as of each record date the amount of cash dividends to be paid with respect to a share of Company Stock, and on the payment date of such dividend shall credit an equal amount of hypothetical cash dividends to each Stock Unit credited to an Participant's Stock Unit Account. The total hypothetical cash dividends credited to all Stock Units shall then be converted into Stock Units by dividing such hypothetical cash dividends by the closing trading price of a share of Company Stock, as reported in The Wall Street Journal for the last trading day before the day the Company pays dividends with respect to Company Stock. (4) The Stock Units credited to each Participant's Stock Unit Account shall be credited to account for any distribution with respect to Company Stock other than cash dividends or stock dividends. The Company shall determine as of each record date the amount of the distribution to be paid with respect to a share of Company Stock, and on the payment date of such distribution shall credit an equal amount of hypothetical distribution to each Stock Unit credited to a Participant's Stock Unit Account. The total hypothetical distribution credited to all Stock Units shall then be converted into a hypothetical cash amount based on the market value of such distribution as determined by the Board. The hypothetical cash amount shall then be converted into Stock Units by dividing such hypothetical cash amount by the closing trading price of a share of Company Stock, as reported in The Wall Street Journal for the last trading day before the day the Company makes the distribution with respect to Company Stock. (5) The following definitions shall apply to the Plan. (1) Stock Unit. A hypothetical share of Company Stock. Each Stock Unit credited to a Participant's Stock Unit Account shall be deemed to have the same value, from time to time, as a share of Company Stock. Notwithstanding the foregoing, Stock Units shall not confer upon Participants any of the rights associated with Company Stock, including, without limitation, the right to vote or to receive distributions. Stock Units may not be sold, assigned, transferred, disposed of, pledged, hypothecated or otherwise encumbered. (2) Stock Unit Account. The book account established and maintained for each Participant to record the Stock Units awarded to a Participant under Section 15 of the Plan. (6) A Stock Deferral Election shall provide for payment of a Stock Unit Account at a future date or dates elected by the Participant. If a Participant is entitled to receive payment of the Participant's Stock Unit Account, the Company shall distributed to the Participant that number of whole shares of Company Stock equal to the number of Stock Units to be distributed. In addition, the Participant may elect to receive the Stock Unit Account in a single lump sum payment upon the occurrence of a Change of Control in lieu of any other form that would otherwise be payable pursuant to a prior election. The single lump sum payment shall be paid in shares of Company Stock as soon as practicable after the Change of Control occurs. Except for an election made within 30 days of the Participant's first Stock Deferral Election which shall be immediately effective, any election or revocation of an election by the Participant as to the date of payment shall be effective three months after it is made. (7) To the extent of undistributed amounts in a Participant's Stock Unit Account at the Participant's death, the Participant's beneficiary shall continue to receive payments in the form elected by the Participant absent an election by the beneficiary. A beneficiary may elect to receive the balance of any unpaid benefit in a single lump sum payment upon the occurrence of a Change of Control in lieu of the benefit that would otherwise be payable. The single lump sum payment shall be paid in shares of Company Stock as soon as practicable after the Change of Control occurs. Except for an election made within 30 days of becoming a beneficiary which shall be immediately effective, any election or revocation of an election by the beneficiary shall be efective three months after it is made. 2. Deferrals of Fees. (1) A Participant may elect to defer the payment of some or all of the Cash amounts payable to a Participant for services rendered as a director, including retainer fees, meeting fees, and committee fees, but excluding travel and other out of pocket expense reimbursements ("Fees") by completing a deferral election (a "Fee Deferral Election"). A Fee Deferral Election shall pertain to the period beginning on the date of an Annual Meeting and ending on the day before the next Annual Meeting Company (the "Deferral Year"). A Fee Deferral Election must be in writing and shall be delivered to the Corporate Secretary of the Company prior to the start of the Deferral Year to which it pertains, except for an election with respect to the Deferral Year beginning April 29, 1997 which shall be delivered within 30 days after the adoption of this Section 16 by the Board of Directors. A Fee Deferral Election shall be irrevocable in respect to the Deferral Year to which it pertains. A Fee Deferral Election must specify the applicable amount or percentage of Fees that the Participant wishes to defer. A Fee Deferral Election may be made for a single Deferral Year or may be made applicable to all future Deferral Years until revoked. Any revocation shall be effective as of the last day of the Deferral Year in which the revocation is made. (2) With respect to all amounts for which a Fee Deferral Election is made, the Company shall credit an equal deemed amount to the Participant's Fee Deferral Account. An amount shall be credited to the Fee Deferral Account when the Fees otherwise would have been payable to the Participant. Earnings shall be credited to the Fee Deferral Account established for the Participant until the entire account balance has been paid to the Participant. As of the last day of each calendar quarter, the Company shall credit each Participant's Fee Deferral Account with interest on the balance in the Fee Deferral Account. Interest shall be credited at the rate established by the Company as its cost of capital under uniform procedures consistently applied. The Company shall establish its cost of capital as of January 1 of a calendar year and shall apply that interest rate for the remainder of the calendar year. (a) For purposes of the Plan, Fee Deferral Account means a bookkeeping record established for each Participant who makes a Fee Deferral. A Fee Deferral Account shall be established only for purposes of measuring the Company's obligation to the Participant and not to segregate assets or to identify assets that may be used to satisfy the obligation. (3) A Fee Deferral Election shall provide for payment of the Participant's Fee Deferral Account at a future date or dates elected by the Participant. In addition, the Participant may elect to receive payment of the Participant's Fee Deferral Account in a single lump sum payment upon the occurrence of a Change of Control in lieu of any other form that would otherwise be payable pursuant to a prior election. The single lump sum payment shall be paid in cash as soon as practicable after the Change of Control occurs. Except for an election made within 30 days of the Participant's first Fee Deferral Election which shall be immediately effective, any election or revocation of an election by the Participant as to the date of payment shall be effective three months after it is made. (4) To the extent of undistributed amounts in a Participant's Stock Unit Account at the Participant's death, the Participant's beneficiary shall continue to receive payments in the form elected by the Participant absent an election by the beneficiary. A beneficiary may elect to receive the balance of any unpaid benefit in a single lump sum payment upon the occurrence of a Change of Control in lieu of the benefit that would otherwise be payable. The single lump sum payment shall be paid in cash as soon as practicable after the Change of Control occurs. Except for an election made within 30 days of becoming a beneficiary which shall be immediately effective, any election or revocation of an election by the beneficiary shall be effective three months after it is made. 3. Change of Control. (a) For purposes of this Plan, "Change in Control" shall mean: (i) The Acquisition of common stock of the Company by any Unrelated Person which results in such Unrelated Person's Beneficial Ownership being 40% or more of the then outstanding shares of common stock of the Company or the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors. (ii) As a result of, or in connection with, any tender or exchange offer, merger or other business combination, sale of stock or assets or contested election, or any combination of the foregoing transactions, the persons who are directors of the Company before such transaction shall cease to constitute a majority of the Board of Directors of the Company or any successor to the Company, (iii) Approval by the shareholders of the Company of a reorganization, merger or consolidation with respect to which the persons who were shareholders of the Company immediately before the transaction do not, immediately after the transaction, beneficially own more than 50% of the ten outstanding shares of common stock of the Company or the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors, or ((iv) A sale or other disposition of all or substantially all the assets of the Company, other than in the ordinary course of business. (b) For purposes of this Plan, "Beneficial Ownership" shall have the meaning given that term for purposes of Rule 13d-3 promulgated under the Securities Exchange Act of 1934. (c) For purposes of this Plan, "Unrelated Person" shall mean any person other than: (i) the Company, (ii) an employee benefit plan or trust of the Company, or (iii) a person that acquires stock of the Company pursuant to an agreement with the Company that is approved by the Board of Directors in advance of the acquisition, unless the acquisition results in a Change of Control pursuant to section 17(a)(ii), (iii) or (iv) above. A person is an individual, entity or group (as defined for purposes of Section 13(d)(3) of the Securities Exchange Act of 1934)." IN WITNESS WHEREOF, the Company has caused this Third Amendment to be the Plan to be executed as of November 6, 1997. COMDIAL CORPORATION By: /s/ Wayne R. Wilver Wayne R. Wilver Senior Vice President EX-10.6 3 4TH AMEND. TO 1992 STOCK INCENTIVE PLAN Exhibit 10.6 FOURTH AMENDMENT TO COMDIAL CORPORATION 1992 STOCK INCENTIVE PLAN THIS FOURTH AMENDMENT to the Comdial Corporation 1992 Stock Incentive Plan (the "Plan") is made pursuant to the authority under Section 12 of the Plan for the Board of Directors to amend the Plan. I. Section 2 is amended by adding at the end thereof the following new subsection: "(y) For purposes of this Plan, "Change in Control" shall mean: (i) The acquisition of common stock of the Company by an Unrelated Person which results in such Unrelated Person=s Beneficial Ownership being 40% or more of the then outstanding shares of common stock of the Company or the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors. (ii) As a result of, or in connection with, any tender or exchange offer, merger or other business combination, sale or stock or assets or contested election, or any combination of the foregoing transactions, the persons who are directors of the Company before such transaction shall cease to constitute a majority of the Board of Directors of the Company or any successor to the Company, (iii) Approval by the shareholders of the Company of a reorganization, merger or consolidation with respect to which the persons who were shareholders of the Company immediately before the transaction do not, immediately after the transaction, beneficially own more than 50% of the then outstanding shares of common stock of the Company or combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors, or (iv) A sale or other disposition of all or substantially all the assets of the Company, other than in the ordinary course of business. For purposes of this section 2(y), Beneficially Ownership" shall have the meaning given that term for purposes of Rule 13d-3 promulgated under the Securities Exchange Act of 1934. For purposes of this section 2(y), "Unrelated Person" shall mean any person other than: (A) the Company, (B) an employee benefit plan or trust of the Company, or (C) a person that acquires stock of the Company pursuant to an agreement with the Company that is approved by the Board of Directors in advance of the acquisition, unless the acquisition results in a Change of Control pursuant to section 2(y)(ii), (iii) or (iv) above. A person is an individual, entity or group (as defined for purposes of Section 13(d)(3) of the Securities Exchange Act of 1934)." IN WITNESS WHEREOF, the Company has caused this Fourth Amendment to the Plan to be executed as of February 6, 1998. COMDIAL CORPORATION By: /s/ Wayne R. Wilver Wayne R. Wilver Senior Vice President EX-10.7 4 4TH AMEND. TO 1992 NON-EMPL DIR. STCK INCEN PL Exhibit 10.7 FOURTH AMENDMENT TO COMDIAL CORPORATION 1992 NON-EMPLOYEE DIRECTORS STOCK INCENTIVE PLAN THIS FOURTH AMENDMENT to the Comdial Corporation 1992 Non-Employee Directors Stock Incentive Plan (the "Plan") is made pursuant to the authority under Section 13 of the Plan for the Board of Directors to amend the Plan. Section 16(b) of the Plan is amended by deleting the last two sentences and inserting in lieu thereof: "Interest shall be credited to the Fee Deferral Account at the six-month LIBOR rate as published in the Wall Street Journal or another nationally recognized publication selected by the Company. The Company shall determine the six-month LIBOR rate as of the first business day of a calendar year and shall apply that interest rate for the remainder of the calendar year." IN WITNESS WHEREOF, the Company has caused this Fourth Amendment to be the Plan to be executed as of February 6, 1998. COMDIAL CORPORATION By: /s/ Wayne R. Wilver EX-10.17 5 1ST AMEND. TO EXEC STOCK OWNERSHIP PLAN Exhibit 10.17 FIRST AMENDMENT TO COMDIAL CORPORATION EXECUTIVE STOCK OWNERSHIP PLAN THIS FIRST AMENDMENT (the "Amendment") to the Comdial Corporation Executive Stock Ownership Plan (the "Plan") is made as of July 31, 1997, pursuant to the authority of the Board of Directors of Comdial Corporation to amend the Plan, and shall be effective as of July 31, 1997. Capitalized terms defined in the Plan shall have the same meanings when used in this Amendment, unless otherwise defined herein or unless the context expressly requires an alternate meaning. SECTION 1. DEFINITIONS. Section 1(b) is deleted and the following is substituted in lieu thereof: "(b) 'Executive' shall mean only the individuals employed by the Company as Chief Executive Officer, President, Executive Vice President, Senior Vice President, Chief Financial Officer, and Vice President." SECTION 2. STOCK OWNERSHIP REQUIREMENT. Section 2(b) is deleted and the following is substituted in lieu thereof: "(b) if the Executive is Executive Vice President, Senior Vice President, Chief Financial Officer or Vice President of Engineering, Stock with a Value equal to 1.5 times Salary." SECTION 3. STOCK ACQUISITION REQUIREMENT. Section 3(a)(i)(B) is deleted and the following is substituted in lieu thereof: "(B) if the Executive is Executive Vice President, Senior Vice President, Chief Financial Officer or Vice President of Engineering, 10 percent of Salary, and" Except as amended hereby, all of terms of the Plan shall remain and continue in full force and effect and are hereby confirmed in all respects. COMDIAL CORPORATION By: /s/ Wayne R. Wilver Wayne R. Wilver Senior Vice President EX-10.18 6 2ND AMEND. TO EXEC. STOCK OWNERSHIP PLAN Exhibit 10.18 SECOND AMENDMENT TO COMDIAL CORPORATION EXECUTIVE STOCK OWNERSHIP PLAN THIS SECOND AMENDMENT to the Comdial Corporation Executive Stock Ownership Plan (the "Plan") is made pursuant to the authority under Section 9 of the Plan for the Compensation Committee of the Board of Directors to amend the Plan. I. Section 2(a)(i) is amended to read as follows, effective January 1, 1998: (i) a dollar amount determined as follows: (A) if the Executive is President or Chief Executive Officer, 20 percent of Salary, (B) if the Executive is Executive Vice President, Senior Vice President, Chief Financial Officer or Vice President of Engineering, 15 percent of Salary, and (C) if the Executive is any Vice President other than Vice President of Engineering, 10 percent of Salary; or IN WITNESS WHEREOF, the Company has caused this Second Amendment to the Plan to be executed as of February 2, 1998. COMDIAL CORPORATION By: /s/ Wayne R. Wilver Wayne R. Wilver Senior Vice President EX-10.19 7 1ST AMEND. TO EXEC. SEVERENCE PLAN Exhibit 10.19 FIRST AMENDMENT TO COMDIAL CORPORATION EXECUTIVE SEVERANCE PLAN THIS FIRST AMENDMENT (the "Amendment") to the Comdial Corporation Executive Severance Plan (the "Plan") is made as of July 31, 1997, pursuant to the authority under Section 13 of the Plan for the Board of Directors of Comdial Corpoation to amend the Plan, and shall be effective as of July 31,1997. Capitalized terms defined in the Plan shall have the same meanings when used in this Amendment, unless otherwise defined herein or unless the context expressly requires an alternate meaning. SECTION 1. DEFINITIONS. Section 1(h) is deleted and the following is substituted in lieu thereof: "(h) 'Executive' shall mean only the individuals employed by the Company as Chief Executive Officer, President, Executive Vice President, Senior Vice President, Chief Financial Officer, and Vice President, and any other employees specifically designated by the Committee as eligible under the Plan." Section 1(p)(ii) is deleted and the following is substituted in lieu thereof: "(ii) if the Executive is Executive Vice President, Senior Vice President, Chief Financial Officer or Vice President of Engineering, on the date 18 months thereafter," Except as amended hereby, all of terms of the Plan shall remain and continue in full force and effect and are hereby confirmed in all respects. COMDIAL CORPORATION By: /s/ Wayne R. Wilver Wayne R. Wilver Senior Vice President EX-10.20 8 DEVELOPMENT AND PURCHASING AGREEMENT Exhibit 10.20 DEVELOPMENT AND PURCHASING AGREEMENT BY AND BETWEEN COMDIAL CORPORATION AND HARRIS CORPORATION DIGITAL TELEPHONE SYSTEMS DIVISION This Development and Purchasing Agreement is made and entered into as of February 21, 1997, by and between HARRIS CORPORATION, DIGITAL TELEPHONE SYSTEMS DIVISION (hereinafter referred to as "Buyer"), a corporation organized under the laws of the State of Delaware and having its principal place of business at 300 Bel Marin Keys Boulevard, Novato, California 94949, and COMDIAL CORPORATION (hereinafter referred to as "Seller"), a corporation organized under the laws of the State of Delaware and having its principal place of business at 1180 Seminole Trail, Charlottesville, Virginia 22901. RECITALS A. Each of Seller and Buyer is engaged in the business of developing, manufacturing and selling telecommunications equipment and products. B. Seller is presently developing the Boston Product Line. C. Buyer desires to engage Seller to modify certain components of the Boston Product Line in accordance with technical specifications provided by Buyer in order to develop, engineer, manufacture and support a line of proprietary digital telephones for sale by Seller exclusively to Buyer, and Seller desires to accept such engagement, all on the terms and conditions set forth in this Agreement (which, together with the Attachments attached hereto, is referred to as the "Agreement"). AGREEMENT NOW, THEREFORE, in consideration of the premises, mutual covenants, representations, warranties and agreements set forth in this Agreement, Buyer and Seller agree as follows: 1.0 DEFINITIONS The capitalized terms used in this Agreement shall have the meanings set forth on Attachment A, unless otherwise expressly defined herein or unless the context clearly requires an alternate meaning. 2.0 DOCUMENTS INCLUDED 2.1. This Agreement consists of this document, all written amendments, modifications and supplements hereto, all change orders, all Purchase Orders and all Attachments listed below, each of which is integrated and made a part of the Agreement and all of which together constitute the Agreement. Attachment A Definitions Attachment B Statement of Work, dated as of February 21, 1997, approved by both Seller and Buyer Attachment C Estimated Product Requirements and Product Pricing Attachment D Form of Purchase Order Attachment E Form of Seller's New Products Release for Shipment Form Attachment F Repair Prices for Out of Warranty Repairs Attachment G Engineering Schedule Attachment H New Products Release Schedule 2.2. If a conflict or inconsistency exists among the terms and conditions of this Agreement (excluding the Statement of Work and any Purchase Orders), the Statement of Work, or any Purchase Order, the following order of precedence shall govern and control interpretation of the documents: (i) the terms of the Agreement shall prevail over the terms of both the Statement of Work and any Purchase Order, (ii) the terms of the Statement of Work shall prevail over the terms of any Purchase Order. Notwithstanding the foregoing, the parties may mutually agree in writing to a different order of precedence for any Purchase Order. 3.0 PRODUCT DEVELOPMENT AND DESIGN 3.1. Seller has previously provided to Buyer copies of the hardware specifications for the Boston Product Line entitled "Electrical Product Specification for Boston," dated October 28, 1996, and software specifications for Buyer's Impact telephones entitled "Impact Telephone Communications (8012S, 8112S, 8024S, 8124S)," dated May 29, 1996. 3.2. Buyer has provided or shall provide Seller on an ongoing basis with complete, accurate and updated technical and functional descriptions of the Products to be developed and manufactured by Seller, including all necessary deviations from or changes to the hardware and software specifications set forth in Section , all in sufficient detail to permit Seller to design and develop Products for Buyer's 20-20 product line. The statement of work attached hereto as Attachment B (the "Statement of Work") is incorporated into this Agreement. 3.2.1. Seller shall have at least ten (10) Business Days to review and accept any technical and/or functional descriptions of the Products which Buyer provides to Seller after the date of this Agreement. Buyer shall reimburse Seller for any additional NRE Expenses which Seller reasonably expects to incur as a result of incorporating such additional technical and functional requirements into the Products. 3.3. Based on the Statement of Work, Seller will be responsible for the design, development and engineering of the Products so that they meet the following requirements: 3.3.1. The Products will meet the specifications set forth in the Statement of Work, including, but not limited to, the description of functions and features, and will perform satisfactorily in accordance with the performance criteria and testing requirements set forth in the Statement of Work; and 3.3.2. The Products will be designed and developed in accordance with industry standards set forth in Statement of Work. 3.4. Buyer and Seller shall assist and cooperate with each other as reasonably necessary to develop the Products and meet their respective obligations under this Agreement and the Statement of Work. 3.5. Seller shall be responsible for design, development and engineering of all hardware associated with the modification of certain components of the Boston Product Line to comply with and conform to the Statement of Work, including the following specific tasks: 3.5.1. Manufacture plastic cases for the Products with Buyer's logo. Buyer and Seller shall mutually agree on the colors of the plastic cases that will be standard colors for purposes of this Agreement. 3.5.2. Redesign certain aspects of the hardware of the Boston Product Line as required for the Products, including redesigning the line interface and transmission characteristics required for the Products to be compatible with Buyer's PBX, redesigning the power supply to support the 44 volt to 56 volt operational range of Buyer's PBX, redesigning the microprocessor to support the download feature of Buyer's PBX, designing a liquid crystal display to support 2 X 20 LCD messages from Buyer's PBX, and, if required, redesigning the headset/handset jack interface. 3.5.3. Design new printed circuit board ("PCB") layouts for all models of the Products, but only if the PCB layouts used in the Boston Product Line will not function with Buyer's 20-20 product line. 3.5.4. Build and test prototypes of all models of the Products. 3.5.5. Provide Buyer with test data and technical information to assist Buyer in obtaining necessary governmental and other certifications and permits for the Products. 3.5.6. Provide Buyer with three (3) documentation packages containing a stock list, drawings and circuit description of the PCB assembly for each model of the Products. 3.5.7. Permit Buyer to use the Boston Firmware source code and provide Buyer with engineering support related to the Boston Product Line's speakerphone and associated software drivers for the sole purpose of allowing Buyer to develop firmware for the Novato Product Line. 3.5.8. Provide all technical changes or modifications to the Products and all required engineering support which are necessary for Buyer to obtain the approvals, licenses, certifications or permits set forth in subparagraphs and . 3.5.9. Provide limited review and comments on all firmware functional and detailed design specifications, if any, submitted by Buyer to Seller. 3.6. Upon Seller's completion of designs for all models of the Products, including drawings, schematics, circuit descriptions, mechanical product specifications, mechanical design verification/assurance test data and stock lists in accordance with the Statement of Work (collectively, the "Designs"), but prior to Seller's beginning to develop and build prototypes of the Products, Seller shall submit the Designs to Buyer for review and approval. 3.6.1. Within ten (10) Business Days of Buyer's receipt of the Designs, Buyer shall notify Seller in writing of Buyer's approval of the Designs or Buyer's requested modifications to the Designs. 3.6.2. Seller shall use reasonable efforts to amend the Designs in order to comply with Buyer's requested modifications. Buyer shall reimburse Seller for any additional NRE Expenses incurred by Seller as a result of any modifications to the Designs which are outside the scope of or exceed the requirements set forth in the Statement of Work. Prior to making any modifications to the Designs, Seller shall provide a good faith estimate to Buyer in writing of the additional NRE Expenses which Seller expects to incur in connection with the design modifications requested by Buyer. Buyer and Seller shall agree in writing which of Buyer's requested modifications will be incorporated into the Designs. 3.6.3. When Buyer approves the Designs, Seller shall commence developing and building an initial prototype of each of the Products, including designing PCB layouts for the Products, creating artwork for the PCBs, producing the PCBs, ordering parts for the Products, and building and testing actual prototypes of each of the Products. 3.7. For each of models 8501A, 8501M, 8612S, 8624S, IH24X, IHIST-A and IHIST-M, Seller shall deliver an Alpha Prototype to Buyer in accordance with the requirements and specifications set forth in this Agreement, including the Statement of Work, and according to the schedule set forth in Attachment G. Upon Seller's completion of an Alpha Prototype for each model, Seller shall submit five (5) units of such Alpha Prototype to Buyer for review and approval. 3.7.1. Within ten (10) Business Days of Buyer's receipt of an Alpha Prototype, Buyer shall notify Seller in writing of Buyer's requested modifications to such Alpha Prototype. 3.7.2. Seller shall use reasonable efforts to incorporate Buyer's requested modifications into a Beta Prototype of such Product. Buyer shall reimburse Seller for any additional NRE Expenses incurred by Seller as a result of any modifications to the Alpha Prototype requested by Buyer which are outside the scope of or exceed the requirements set forth in the Statement of Work. Prior to making any modifications to the Alpha Prototype, Seller shall provide a good faith estimate to Buyer in writing of the additional NRE Expenses which Seller expects to incur in connection with the modifications requested by Buyer. Buyer and Seller shall mutually agree on which modifications will be incorporated into the Beta Prototype of such Product. 3.8. For each of models 8501A, 8501M, 8612S, 8624S, IH24X, IHIST-A and IHIST-M, Seller shall deliver a Beta Prototype to Buyer in accordance with the requirements and specifications set forth in this Agreement, including the Statement of Work, and according to the schedule set forth in Attachment G. Upon Seller's completion of a Beta Prototype for each model, Seller shall submit five (5) units of such Beta Prototype to Buyer for review and approval. 3.8.1. Within ten (10) Business Days of Buyer's receipt of a Beta Prototype of a Product, Buyer shall notify Seller in writing of Buyer's approval of such Beta Prototype or Buyer's requested modifications to the Beta Prototype. 3.8.2. Seller shall use reasonable efforts to incorporate Buyer's requested modifications into such Beta Prototype. Buyer shall reimburse Seller for any additional NRE Expenses incurred by Seller as a result of any modifications to such Beta Prototype requested by Buyer which are outside the scope of or exceed the requirements set forth in the Statement of Work. Prior to making any modifications to a Beta Prototype, Seller shall provide a good faith estimate to Buyer in writing of the additional NRE Expenses which Seller expects to incur in connection with the modifications requested by Buyer. Buyer and Seller shall mutually agree on which modifications will be incorporated into the Beta Prototype. 3.8.3. Buyer may purchase additional units of the Alpha Prototypes and/or Beta Prototypes of each model of the Products pursuant to a separate Purchase Order under this Agreement at a price per unit which is mutually agreed by Seller and Buyer. Seller shall not submit the costs of such additional Alpha Prototypes and/or Beta Prototypes to Buyer for reimbursement as NRE Expenses. 3.9. Following Buyer's approval of the Beta Prototype of a Product, Buyer shall submit a Purchase Order to Seller for pilot models of such Product ("Product Pilot Models") for field testing to be performed by Buyer with cooperation and support from Seller, including, Seller's timely remedial action in response to problems encountered during field testing which Buyer and Seller mutually agree are Seller's responsibility. Buyer's Purchase Order shall contain a mutually agreed upon price per unit for the Product Pilot Models. Seller shall not submit the costs of the Product Pilot Models for reimbursement by Buyer as NRE Expenses. 3.10. When Buyer and Seller mutually agree that a Product Pilot Model has met all testing requirements, including field testing, and is ready for full production by Seller, Buyer and Seller shall execute a QC Release for Shipment document with respect to such Product Pilot Model, in substantially the form set forth in Attachment E hereto. Upon execution by Buyer and Seller of a QC Release for Shipment document with respect to a Product Pilot Model, Seller may begin production manufacturing of such model. 3.11. Seller shall develop validation test procedures and specifications for the Products based on Seller's demonstrated practices with respect to product testing. Such test procedures and specifications shall be submitted by Seller for review and approval by Buyer. Buyer shall have ten (10) Business Days after receipt of such procedures and specifications to approve them or recommend modifications to Seller. Seller and Buyer shall mutually agree on all validation test procedures and specifications for the Products. 3.12. Buyer shall be responsible for: 3.12.1. Designing, developing and engineering the firmware for the Products, either internally or using third-parties; 3.12.2. Integrating the Products with Buyer's PBX, including system integration testing and associated performance level testing; 3.12.3. Developing Product logos, user manuals and advertising material; 3.12.4. Obtaining, at Buyer's expense, all federal or state governmental, agency or other approvals, licenses, certifications or permits which are necessary or required in order for Buyer to distribute the Products for sale to the public in the United States, including, but not limited to, compliance with (i) registration and technical standards requirements of Part 68 of the Federal Communications Commission's Rules and Regulations, (ii) the National Electrical Code and regulations thereunder, (iii) requirements of Subpart J of Part 15 of the Federal Communications Commission's Rules and Regulations relating to suppression of radio frequency and electromagnetic radiation to specified levels and (iv) technical standards required to obtain certification from Underwriters' Laboratories. 3.12.5. Obtaining, at Buyer's expense, all European governmental, agency or other approvals, licenses, certifications or permits which are necessary or required in order for Buyer to distribute the Products for sale to the public in European countries, including, but not limited to, compliance with (i) Safety -- Low Voltage Directive 72/23/EEC as amended by Directive 93/68/EEC, EN 60 950, BS 6301, (ii) Emission/Susceptibility -- EMC Directive 89/336/EEC as amended by Directive 93/68/EEC, EN 55 022, EN 55 024, EN 50-081-1, EN 50 082-1, CISPR 22, (iii) General -- Telecom Terminal Directive 91/263/EEC as amended by Directive 93/68/EEC, and (iv) "CE" marking. 3.12.6. Coordinating and performing all field trials with reasonable support and cooperation from Seller; 3.12.7. Preparing all system level engineering documentation required for Products meeting all requirements for QC Release for Shipment; 3.12.8. Coordinating Product roll out, including, but not limited to, preparing marketing and promotional literature and providing training associated with the Products; and 3.12.9. Providing first tier technical support for the Products to Buyer's customers. 3.13. Subject to the terms of Section 3.13.5, Buyer agrees to reimburse Seller for all of Seller's non-recurring engineering and design expenses ("NRE Expenses") directly attributable to Seller's development of the Products, including without limitation, engineering time, materials costs, and travel expenses to and from Buyer's facilities, but excluding expenses incurred by Seller in connection with general design and engineering of the Boston Product Line. 3.13.1. Buyer shall make advances against Seller's NRE Expenses in five (5) installments as follows: (i) $109,800 upon execution of this Agreement, (ii) $100,000 upon Buyer's approval of the Designs, (iii) $83,000 upon Buyer's approval of the Alpha Prototypes of the Products, (iv) $36,600 upon Buyer's approval of Beta Prototypes and (v) $36,600 upon QC Release for Shipment of all models of the Products. 3.13.2. Within ten (10) Business Days of the end of each calendar month during this Agreement, Seller shall submit a status report of all NRE Expenses incurred by Seller during the prior calendar month to Buyer's Purchasing Department to the attention of the Purchasing Manager at Buyer's location in Novato, California. Within ten (10) Business Days after Buyer's receipt of Seller's status report, Buyer shall notify Seller in writing of Buyer's approval or disapproval of any NRE Expenses contained in such status report. If Buyer does not indicate any disapproval of any NRE Expenses within thirty (30) days after Buyer's receipt of Seller's status report, Buyer shall be deemed to have approved the NRE Expenses contained therein. Buyer and Seller agree to negotiate in good faith to resolve any disputes related to NRE Expenses. 3.13.3. Within thirty (30) Business Days of Seller's receipt of the first Purchase Order from Buyer following QC Release for Shipment of the Products, Seller shall submit a final report of all NRE Expenses incurred by Seller in connection with development of the Products together with itemized supporting documentation for such NRE Expenses. If Seller has incurred total actual NRE Expenses which are less than $366,000, Seller shall repay Buyer an amount equal to the difference between the actual NRE Expenses incurred by Seller and $366,000. 3.13.4. Seller agrees to notify Buyer when the NRE Expenses reach $366,000, and Buyer may approve, in Buyer's sole discretion, NRE Expenses in excess of that amount. If Buyer approves NRE Expenses in excess of $366,000 pursuant to this Agreement or if Seller incurs NRE Expenses due to Buyer's delay as set forth in Section 3.13.5, within thirty (30) days after Buyer's receipt of Seller's final report, Buyer shall remit payment to Seller for any such NRE Expenses in excess of $366,000. 3.13.5. Notwithstanding any provision to the contrary contained in this Agreement, except as provided in subsections 3.7.2, 3.8.2 and this 3.13.5, as long as Buyer and Seller comply, within a two (2) week grace period, with all requirements set forth in the development schedule attached hereto as Attachment G, Seller agrees that Buyer shall have no obligation to reimburse Seller for aggregate NRE Expenses in excess of $366,000 incurred by Seller in connection with Seller's performance of its obligations under this Agreement, including the Statement of Work. If Seller incurs additional direct and unavoidable expenses due to Buyer's failure to comply with the development schedule attached hereto as Attachment G, Buyer shall reimburse Seller for such expenses as long as Buyer's delay is not a result of a previous delay by Seller. 3.14. Each party shall retain all right, title and interest in and to any inventions, discoveries, methods, ideas, hardware and software, know-how and techniques, and all intellectual property rights therein owned or possessed by such party and/or its licensors as of the date of this Agreement ("Existing Intellectual Property"), which relate or have application to the Products and/or to the manufacture of the Products or other products generally. With respect to the Existing Intellectual Property, the following licenses are granted during the term of this Agreement: 3.14.1. With respect to Seller's Existing Intellectual Property which Seller discloses to Buyer in the performance of this Agreement, Seller grants Buyer a royalty-free, non-transferable, nonexclusive, worldwide license, sublicense, or, with Seller's consent, a license to grant a sublicense, to use Seller's Existing Intellectual Property for the limited purpose of (i) Buyer's development of firmware for the Novato Product Line as outlined in Section 3.12 hereof and (ii) installing and supporting the Novato Product Line. Notwithstanding the foregoing, Seller expressly retains at all times all right, title and interest in Seller's Existing Intellectual Property and all other technology related to the Boston Firmware which Seller provides Buyer for the limited purpose of developing firmware for the Novato Product Line. 3.14.2. With respect to Buyer's Existing Intellectual Property which Buyer discloses to Seller in the performance of this Agreement, Buyer grants Seller a royalty-free, non-transferable, nonexclusive, worldwide license or sublicense to use Buyer's Existing Intellectual Property for the limited purpose of developing the Products, manufacturing the Products and selling the Products to Buyer. All development of the Products by Seller shall occur at Seller's facility in Charlottesville, Virginia. Notwithstanding the foregoing, Buyer expressly retains at all times all right, title and interest in Buyer's Existing Intellectual Property and all other technology related to the Optic Firmware which Buyer provides Seller for the limited purpose of developing the Products, manufacturing the Products and selling the Products to Buyer. 3.15. Seller shall own all intellectual property rights in inventions, discoveries, methods, ideas, hardware, software, know-how and techniques, including, but not limited to, all technical information, schematics, source code, object code, data, designs, sketches, drawings, blueprints, patterns, models, molds, fixtures, tools and any other materials derived from or based upon the Boston Product Line, which are made, created, developed, written conceived or first reduced to practice in the course of, arising out of, or as a result of work done under this Agreement ("Seller's Developed Intellectual Property"). With respect to Seller's Developed Intellectual Property, as long as Seller is manufacturing the Products for sale to Buyer, Seller grants Buyer a nonexclusive, royalty-free, non-transferable, worldwide license to use Seller's Developed Intellectual Property for the limited purposes of (i) Buyer's development of certain components of the Novato Product Line and (ii) installing and supporting the Novato Product Line. 3.16. Buyer shall own all intellectual property rights in inventions, discoveries, methods, ideas, hardware, software, know-how and techniques, including, but not limited to, all technical information, schematics, source code, object code, data and any other materials derived from or based upon the Optic Firmware, which are made, created, developed, written conceived or first reduced to practice in the course of, arising out of, or as a result of work done under this Agreement ("Buyer's Developed Intellectual Property"). With respect to Buyer's Developed Intellectual Property, as long as Seller is manufacturing the Products for sale to Buyer, Buyer grants Seller a nonexclusive, royalty-free, non-transferable, worldwide license to use Buyer's Developed Intellectual Property for the limited purpose developing the Products, manufacturing the Products and selling the Products to Buyer. All development of the Products by Seller shall occur at Seller's facility in Charlottesville, Virginia. 3.17. Buyer and Seller shall mutually agree upon procedures, including escalation procedures and required response times, for first-tier technical support of the Products to be provided by Buyer and second-tier technical support of the Products to be provided by Seller. 3.18. Attachment G sets forth the engineering schedule for the design and development of the Products, (other than the IHIST-A and IHIST-M modules) as of the date of this Agreement. The parties recognize that with their mutual agreement, this schedule may be altered during the course of Product design and development, to reflect the occurrences of events that will have an effect on the schedule. The IHIST modules will follow the schedule for the Boston Product Line and are expected to be completed prior to the other Products. 3.19. Attachment H sets forth the Product Release Schedule for the Products, as of the date of this Agreement. The parties recognize that with their mutual agreement, this schedule may be altered during the course of Product design and development, to reflect the occurences of events that will have an effect on the schedule. 3.20. Buyer and Seller agree to conduct regularly scheduled meetings, in person or via teleconference, to exchange information, discuss development progress, respond to issues or problems and review schedules. 4.0 MANUFACTURING 4.1 During the term of this Agreement, Seller agrees to maintain its manufacturing processes in accordance with standard industry practices and ISO 9001 guidelines or equivalent standards. 4.2 All Products shall be manufactured by Seller and furnished to Buyer in strict conformity with the QC Release for Shipment version of each model of the Products. Seller's failure to deliver Products which conform to the QC Release for Shipment version of a Product model shall justify Buyer's rejection of nonconforming Products. Seller agrees to repair or replace, at Seller's expense, non-conforming Products within a reasonable period following Seller's receipt of a written notice from Buyer describing the manner in which the Products at issue do not conform with the QC Release for Shipment version of such Product. 4.3 Seller shall manufacture the Products in accordance with Seller's normal high level of quality and product reliability. Seller has in-house capability to use surface mount technology ("SMT") assembly at its Charlottesville, Virginia manufacturing facility. 4.4 Seller shall provide internal yield data and supplier performance data for the Products as reasonably requested by Buyer and which can be reasonably generated through Seller's data systems. 5.0 MANUFACTURING RIGHTS 5.1 Seller agrees that the Products and any pricing associated with the Products are PROPRIETARY to Buyer at its Novato, California location. Except as expressly permitted by this Agreement, Seller shall not use or disclose any information related to the Products or pricing of the Products to any third-party, including any of Buyer's Affiliates subsidiaries or joint venturers, without Buyer's prior written consent. 5.2 Seller shall provide complete and updated information regarding the design, manufacture and test results for the Products, including all information related to the QC Release for Shipment versions of the Products (collectively, the "Escrowed Information"), to an escrow agent upon terms and conditions which are mutually agreeable to Buyer, Seller and the escrow agent. 5.2.1 If this Agreement is terminated due to Seller's Material Breach in accordance with Article 19.0 hereof or Seller otherwise discontinues manufacture of the Products for reasons including, but not limited to, Seller's dissolution or bankruptcy, Buyer shall be entitled to obtain the Escrowed Information from the escrow agent on terms and conditions as are mutually agreed upon by Buyer and Seller in writing. If Buyer is entitled to obtain the Escrowed Information pursuant to this Subsection 5.2.1, Seller shall grant Buyer an exclusive, non-transferable, worldwide license to use the Escrowed Information for the sole purpose of enabling Buyer or a third-party designated by Buyer to manufacture the Products. Buyer and Seller agree that during the period beginning on the date of this Agreement and terminating on the fifth anniversary thereof, Buyer shall be entitled to obtain such license of the Escrowed Information on a royalty-free basis and, thereafter, shall pay such royalty as Buyer and Seller shall mutually agree. 5.2.2 The Escrowed Information shall be returned to Seller and the escrow arrangements shall terminate at such time as both Seller and Buyer agree to discontinue manufacture of the Products. 5.3 Seller agrees to give Buyer not less than six (6) months advance written notice of any plans to discontinue manufacture of the Products. Seller and Buyer shall negotiate in good faith to find an alternative means for meeting Buyer's future demand for the Products which may include, without limitation, Seller's manufacturing a sufficient supply of the Products to enable Buyer to phase the Novato Product Line out of use or Seller's transferring the Escrowed Information as described in Section . 6.0 PURCHASE OF PRODUCTS AND PRICING 6.1 Buyer shall purchase Products in accordance with the provisions of this Agreement. 6.2 Buyer's estimated annual requirements for the Products (the "Estimated Product Requirements") and Seller's pricing of the Products are set forth on Attachment C hereto. Buyer shall maintain on hand and in inventory at any given time a dollar amount of Products which is adequate to provide a reasonable level of service to Buyer's customers. 6.3 The prices set forth in Attachment C have been mutually agreed upon by Buyer and Seller but are based upon Buyer's purchase of all of the Estimated Product Requirements. If Buyer does not purchase all of the Estimated Product Requirements in any year, Buyer shall not be subject to an upward price revision and/or billback for such year. Seller may amend Attachment C and adjust the prices of the Products in any subsequent year following a material reduction in Products purchased by Buyer, provided, however, that Seller and Buyer shall mutually agree to such price adjustment taking into account Buyer's reduced requirements. 6.4 If Seller achieves a reduction in the cost of any component which is used in the Products, Seller shall make a proportionate reduction in the price of any Products which utilize such component so that such cost reduction is shared equally between Buyer and Seller. Any such price reduction shall apply to any unfilled Purchase Orders and all Purchase Orders received by Seller at its Charlottesville, Virginia offices after the effective date of the reduction in price of the component. Seller shall give Buyer a credit equal to the amount of such price decrease for all such Products held by Buyer in its inventory on the effective date of the price decrease, to be applied towards the purchase of additional Products. 6.5 Buyer and Seller shall consult every ninety (90) days after Seller commences delivery of the Products to determine whether further cost reductions for the Products can be economically achieved through design, material, process or other changes. 6.6 The benefit of any cost reductions in the Products which are achieved as a result of design or materials changes, whether initiated by Seller or jointly by Seller and Buyer, shall be shared equally between Buyer and Seller. 6.7 This Agreement does not cover Seller's support to Buyer's Affiliates, joint venturers, and/or technology transfer partners which may require subassembly supply and/or component pricing. Buyer and Seller agree to negotiate in good faith to develop separate written agreements which shall address such matters in detail. 6.8 Seller's prices do not include any taxes or other charges. All taxes, sales, use or privilege taxes, value-added taxes, excise or similar taxes or assessments, shipping, handling, insurance, brokerage, and other related charges levied by any governmental organization or pertaining to the Products (including its sale and shipment to Buyer) shall be paid by Buyer. 7.0 PURCHASE ORDERS 7.1 Buyer, or divisions or majority-owned subsidiaries of Buyer listed on Attachment C hereto, shall submit to Seller orders for Products required by an Approved Purchaser on Purchase Orders ("Purchase Order") which shall comply with the provisions set forth in Attachment D hereto, shall be in such form and contain such information as may be designated by Seller, including the appropriate Product codes, the quantity of Products ordered, the desired shipping dates, shipping method and the destinations to which the Products are to be shipped. 7.2 During any twelve (12) month period, Buyer shall submit Purchase Orders for Products in standard colors at an average rate of 2400 units per month, in accordance with Attachment C. 7.3 If Buyer submits a Purchase Order for Products in a non-standard color as defined in 3.5.1, Seller shall be entitled to purchase plastic pellets in bulk amounts which would allow Seller to produce approximately 2000 units of plastic casings for such Products in such color regardless of the number of Products actually ordered by Buyer. Seller shall store any remaining plastic pellets for use in other Products in such color which Buyer may order from time to time thereafter until such inventory is depleted. Seller shall be entitled to invoice Buyer for any additional materials costs incurred by Seller in connection with non-standard color requests and for any unused plastic pellets which Seller has in inventory for more than eighteen (18) months. 7.4 Seller is authorized to purchase raw materials against the first month of Buyer's forecasted demand beyond booked orders as set forth in the forecast to be provided by Buyer in accordance with Section hereof. Seller shall obtain written authorization from Buyer prior to procuring any components or raw materials required specifically for the Products which require long lead-time ordering or for which Buyer can obtain a volume discount for purchasing amounts in excess of the amounts set forth in the foregoing sentence. 7.5 Seller shall acknowledge all Purchase Orders within five (5) Business Days of Seller's receipt thereof. Purchase Orders containing special requests or requirements may require a longer period for Seller's response and acknowledgment. 7.6 All Purchase Orders shall be subject to and governed solely by the terms of this Agreement, notwithstanding any additional or different terms which may be contained in any document submitted by either party. 7.7 Seller will make reasonable efforts to furnish a sufficient quantity of Products to meet the resale requirements of Buyer, and Buyer shall make reasonable efforts to ensure that it orders from Seller a reasonable, level and consistent quantity of Products throughout the term of this Agreement. 7.8 At all times, Seller shall maintain a buffer inventory level of the Products equivalent to the lesser of one-twelfth of the Estimated Product Requirements or Buyer's forecasted demand for the next month as set forth in the forecast provided by Buyer pursuant to Section . At the end of the term of this Agreement, Buyer shall be responsible for any remaining inventory held by Seller in accordance with this Section 7.8 and shall issue a delivery schedule, not to exceed ninety (90) days, for such remaining inventory. 7.9 At least five (5) Business Days prior to the beginning of each calendar month during the term of this Agreement, Buyer shall supply Seller with a twenty-six (26) week forecast of Buyer's demand for each of the Products. 7.10 If Seller encounters an unforeseen shortage of parts or components ("Shortage Items") used in the manufacture of the Boston Product Line and the Novato Product Line, Seller shall apportion such Shortage Items for use in manufacturing the Boston Product Line and the Novato Product Line substantially in accordance with the ratio of Buyer's firm orders or forecasted demand for Products requiring such Shortage Items to total demand for all products requiring such Shortage Items, determined by reference to the forecast provided by Buyer pursuant to Section and Seller's internal forecast documentation, each as of the date on which the Shortage Items were originally ordered by Seller. 8.0 CANCELLATION OF PURCHASE ORDERS 8.1 Buyer may cancel any Purchase Order under this Agreement, in whole or in part, by written notice to Seller. If a Purchase Order is canceled for any reason other than a Material Breach by Seller under this Agreement, Buyer shall bear all costs and expenses for any work in process or materials in inventory (but only to the extent such materials in inventory cannot be used in other products manufactured by Seller) covered by the canceled Purchase Order. 9.0 TERMS OF PAYMENT 9.1 Seller shall invoice Buyer for each order placed by Buyer, upon shipment to Buyer of the Products so ordered. Any dispute about an invoice, including questions relating to proof of shipment, price discrepancy, quantity discrepancy, and freight charges, must be reported to Seller in writing within fifteen (15) days after Buyer's receipt of Seller's invoice. Any request to adjust an invoice that is submitted to Seller more than fifteen (15) days after Buyer's receipt of Seller's invoice may be rejected by Seller, and if so rejected, Buyer will not be entitled to the requested adjustment. 9.2 Payment of the purchase price for Products purchased pursuant to this Agreement, including taxes, costs and fees as set forth in Section hereof and any shipping costs, shall be made by Buyer within fifteen (15) days after receipt of Seller's invoice for such Products. Buyer shall be obligated to make payment to Seller in a timely fashion for Products which it purchases, regardless of whether such Products are retained in Buyer's inventory or sold to customers, and if sold, regardless of whether such customers make payments to Buyer. 9.3 Invoices not paid within the period allowed for payment thereof shall be subject to interest on the unpaid amount at the rate of twelve percent (12%) per annum or the maximum contract rate fixed by law, whichever is less, computed from the date upon which such payment is deemed to be overdue until paid. If an invoice sent to Buyer contains a discrepancy or error which Buyer asserts in writing to Seller and in good faith within the time allowed for payment thereof, the disputed items on such invoice shall not be subject to interest for late payment provided such items are paid in full within fifteen (15) Business Days after resolution of the asserted discrepancy or error. 9.4 If Buyer does not pay to or reimburse Seller for any cost or charge imposed on Buyer pursuant to this Agreement, and in addition to any other remedies it may have in law or equity, Seller may offset such amounts against any obligations of Seller to Buyer under this Agreement or otherwise. If Buyer has a credit due from Seller, Seller will issue a credit memo to Buyer, which Buyer may thereafter apply towards payment of Buyer's accounts payable to Seller. Upon request from Buyer for a return authorization, Seller agrees that it will either issue such return authorization or provide Buyer with written substantiation for the refusal to issue the return authorization within thirty (30) days of the request by Buyer. If Seller fails to issue a credit or a return authorization or provide written substantiation for the refusal, Buyer shall be entitled to offset the value of the credit or product against Buyer's accounts payable to Seller. 10.0 SHIPPING 10.1 Title and risk of loss or damage to Products purchased by Buyer shall pass to the Buyer upon delivery of such Products by Seller to a common carrier or other agency for shipment to Buyer. 10.2 All Products purchased by Buyer shall be shipped by Seller to Buyer F.O.B. Charlottesville, Virginia. Seller shall use reasonable efforts to ship Products to Buyer in accordance with Buyer's written shipping instructions. 10.3 At Buyer's request and with Seller's approval, Seller will establish a program for drop shipping Products directly to Buyer's customers or Affiliates. 10.4 All freight, transportation, rigging, crating, packing, demurrage, insurance, and handling charges, as well as customs duties, taxes, export licenses, and fees of the customs broker and shipping agent, shall be paid by Buyer. 11.0 QUALITY AND RELIABILITY 11.1 Seller acknowledges that Buyer expects that all Products delivered to Buyer shall be of an acceptable quality as measured at Buyer's incoming inspection. 11.2 Prior to commencing shipment of the Products to Buyer, Seller shall submit the Products to mutually agreed testing procedures developed in accordance with the Statement of Work. 11.3 Seller will be provided regular quality rating reports in accordance with Buyer's supplier management program and Buyer's procedures governing such program ("Buyer's Supplier Management Program"). Buyer's Supplier Management Program provides that if, during any calendar month during the term of this Agreement, less than ninety-six percent (96%) of the Products delivered by Seller to Buyer meet Buyer's requirements for quality, Buyer shall issue a written supplier corrective action report (a "SCAR") to Seller which specifically describes the quality defects discovered by Buyer. If, during the month immediately following the month for which the SCAR was issued, less than ninety-six percent (96%) of the Products delivered by Seller to Buyer meet Buyer's requirements for quality, Buyer and Seller shall hold an on-site meeting to discuss corrective action. If, during the three (3) months immediately following the month for which the on-site meeting was held, less than ninety-six percent (96%) of the Products delivered by Seller to Buyer meet Buyer's requirements for quality, a Material Breach of this Agreement shall be deemed to have occurred and Buyer shall be entitled to all remedies set forth in Articles .0 and .0 of this Agreement. 12.0 WARRANTY AND SERVICE 12.1 Seller warrants that Products sold to Buyer pursuant to this Agreement will perform in accordance with the QC Release for Shipment version of such Product and will be free from defects in material and workmanship for the longer of two (2) years from the date of manufacture or one (1) year from the date of delivery from Seller to Buyer (the "Warranty Period"), provided that such Products are installed in compliance with Seller's written specifications, to the extent applicable, and given normal service and maintenance by Buyer during the Warranty Period. Seller's obligation under this warranty shall be limited to repairing or replacing, at Seller's option, any part(s) that prove defective under normal and proper use and service for the Warranty Period. For such repairs and replacements, Buyer shall pay the cost for shipment to Seller's plant; and Seller shall pay the cost for shipment from its plant. This warranty shall not apply to lamps, fuses, batteries or other such items normally consumed in operation which have a normal life shorter than the Warranty Period. 12.2 THE WARRANTIES CONTAINED IN THIS ARTICLE .0 ARE IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WARRANTIES OF MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE. THESE WARRANTIES SHALL BE VOID AS TO PRODUCTS DAMAGED OR RENDERED UNSERVICEABLE OR NON-FUNCTIONAL BY NEGLIGENCE OF NON-SELLER PERSONNEL, MISUSE, THEFT, VANDALISM, FIRE, LIGHTNING, POWER SURGES, WATER OR OTHER PERIL OR ACTS OF GOD, OR BY BUYER'S FAILURE TO COMPLY WITH PUBLISHED TECHNICAL REQUIREMENTS OR BY SERVICES OR PRODUCTS OF OTHER VENDORS, INCLUDING WITHOUT LIMITATION THE LINES OF ANY LOCAL EXCHANGE TELEPHONE COMPANY. REPAIR OR ALTERATION OF PRODUCTS BY PERSONS NOT AUTHORIZED BY SELLER VOIDS THE WARRANTY. LIABILITY OF SELLER HEREUNDER IS EXPRESSLY LIMITED TO THE REPAIR OR REPLACEMENT DESCRIBED ABOVE, AND IN NO EVENT SHALL SELLER BE LIABLE FOR ANY INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES, SUCH AS LOST SALES, LOST PROFITS OR INJURY TO PROPERTY, IN RESPECT OF WARRANTY CLAIMS OR ANY OTHER ECONOMIC DAMAGES RELATING TO THE PERFORMANCE OR FUNCTIONALITY OF THE PRODUCTS, WHETHER THEY ARE ALLEGED TO ARISE IN CONTRACT OR TORT OR OTHERWISE. NO EXPRESS OR IMPLIED WARRANTY IS MADE AGAINST INTRUSIONS INTO SELLER'S VOICE PROCESSING SYSTEMS BY FRAUDULENT CALLERS OR AGAINST ANY TOLL FRAUD. SELLER MAKES NO WARRANTIES AS TO THE LAWFULNESS OF USING ANY FEATURE OF THE PRODUCTS TO MONITOR, RECORD OR FORWARD ANY ORAL, WIRE OR ELECTRONIC COMMUNICATION. 12.3 Seller shall not be liable for any warranty offered by Buyer that differs from the warranty quoted above. Seller does not warrant any Products that have been modified without Seller's prior written consent, and Buyer shall not make or permit to be made, any alterations or modifications of any Products without the prior written consent of Seller. Buyer agrees to hold harmless and indemnify Seller against claims of any kind related to any unauthorized alterations or modifications of Products made or authorized by Buyer, or related to warranties by Buyer that differ from the warranty quoted above. 13.0 RETURN OF PRODUCTS 13.1 "In warranty" defective Products shall be returned to Seller, postage or freight prepaid. Seller will, at its option, repair or replace such defective Products free of charge. Within fifteen (15) days of Seller's receipt of defective Products, Seller shall ship, at Seller's expense, repaired or replacement Products to Buyer, F.O.B. Charlottesville. All repaired defective Products will carry the original warranty period or an additional one-year warranty, whichever is greater. On a calendar quarterly basis, Seller will reimburse Buyer for the "average" return freight charges and insurance for all "in warranty" returns during such quarter. The "average" return freight charge shall be determined by the parties, by reference to "in warranty" Product returns during the first full calendar quarter of Product shipment. 13.2 "Out of warranty" defective Products may be returned to Seller, postage or freight prepaid, without prior authorization. Seller will, at its option, repair or replace the defective Products. Units are re-dated to allow for a new warranty, which is one-year. All repair work is billed at prevailing rates, which, for purposes of this Agreement only, Seller agrees not to increase more than five percent (5%) in any calendar year. Repair rates for calendar year 1997 are set forth in Attachment F, subject to change in 1998 and subsequent years in accordance with the provisions of this section. 3.1. Returned Products must be carefully packed to prevent damage. Any damage incurred during shipment will be the responsibility of the sender. All returns should be sent to: Comdial Corporation, 1180 Seminole Trail, Charlottesville, Virginia 22901, Attention: Comdial Product Services. A complete repair rate schedule is available upon request. 13.3 Seller agrees to provide repair service for all Products sold under this Agreement for a period of five (5) years after shipment of the Products unless the Products have been misused or are beyond repair. Thereafter, Seller shall determine on a year to year basis, in its sole discretion and subject to the availability of required parts, whether to provide repair service for any additional period. 14.0 REPRESENTATIONS AND WARRANTIES BY BUYER 14.1 Buyer represents and warrants to Seller that: 14.1.1 Buyer has the full power and authority to execute, deliver and perform this Agreement and to carry out the transactions contemplated hereby; 14.1.2 the execution and delivery of this Agreement by Buyer and the carrying out by Buyer of the transactions contemplated hereby have been duly authorized by all requisite corporate action, and this Agreement has been duly executed and delivered by Buyer and constitutes the legal, valid and binding obligation of Buyer, enforceable against it in accordance with the terms hereof, subject to limitations imposed by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting the enforcement of creditors' rights generally and general principles of equity; 14.1.3 to the best of Buyer's knowledge, no authorization, consent, approval or order, or notice to or registration, qualification, declaration or filing with, any governmental authority, is required for the execution, delivery and performance by such party of this Agreement or the carrying out by such party of the transactions contemplated hereby; 14.1.4 to the best of Buyer's knowledge, none of the execution, delivery and performance by Buyer of this Agreement, the compliance with the terms and provisions hereof, and the carrying out of the transactions contemplated hereby, materially conflicts or will conflict with or result in a material breach or violation of any of the terms, conditions, or provisions of any law, governmental rule or regulation or organizational document, as amended, or bylaws, as amended, of Buyer or any applicable order, writ, injunction, judgment or decree of any court or governmental authority against Buyer or by which it or any of its properties is bound, or any loan agreement, indenture, mortgage, bond, note, resolution, contract or other agreement or instrument to which such Buyer is a party or by which it or any of its properties is bound, or constitutes or will constitute a default thereunder or will result in the imposition of any third party lien upon any of its properties; and 14.1.5 there are no legal proceedings, arbitrations, administrative actions or other proceedings by or before any governmental or regulatory authority or agency, now pending or, to the knowledge of Buyer, threatened against Buyer party or any of its subsidiaries that if adversely determined, could reasonably be expected to have a material adverse effect on Buyer's ability to perform its obligations under this Agreement. 15.0 REPRESENTATIONS AND WARRANTIES BY SELLER 15.1 Seller represents and warrants to Buyer that: 15.1.1 Seller has the full power and authority to execute, deliver and perform this Agreement and to carry out the transactions contemplated hereby; 15.1.2 the execution and delivery of this Agreement by Seller and the carrying out by Seller of the transactions contemplated hereby have been duly authorized by all requisite corporate action, and this Agreement has been duly executed and delivered by Seller and constitutes the legal, valid and binding obligation of Seller, enforceable against it in accordance with the terms hereof, subject to limitations imposed by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting the enforcement of creditors' rights generally and general principles of equity; 15.1.3 to the best of Seller's knowledge, no authorization, consent, approval or order, or notice to or registration, qualification, declaration or filing with, any governmental authority, is required for the execution, delivery and performance by such party of this Agreement or the carrying out by such party of the transactions contemplated hereby; 15.1.4 to the best of Seller's knowledge, none of the execution, delivery and performance by Seller of this Agreement, the compliance with the terms and provisions hereof, and the carrying out of the transactions contemplated hereby, materially conflicts or will conflict with or result in a material breach or violation of any of the terms, conditions, or provisions of any law, governmental rule or regulation or organizational document, as amended, or bylaws, as amended, of Seller or any applicable order, writ, injunction, judgment or decree of any court or governmental authority against Seller or by which it or any of its properties is bound, or any loan agreement, indenture, mortgage, bond, note, resolution, contract or other agreement or instrument to which such Seller is a party or by which it or any of its properties is bound, or constitutes or will constitute a default thereunder or will result in the imposition of any third party lien upon any of its properties; and 15.1.5 there are no legal proceedings, arbitrations, administrative actions or other proceedings by or before any governmental or regulatory authority or agency, now pending or, to the knowledge of Seller, threatened against Seller party or any of its subsidiaries that if adversely determined, could reasonably be expected to have a material adverse effect on Seller's ability to perform its obligations under this Agreement. 16.0 INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS. 16.1 Buyer agrees to notify Seller promptly (but in no case later than ten (10) Business Days following Buyer's actual or constructive notice thereof) of any actual or threatened activity by any third party which might constitute an infringement or unauthorized or deceptive use by any person of any of Seller's copyrights, patents or other proprietary rights related to the Products. Seller reserves the sole and exclusive right to institute, maintain, and settle any proceedings for the infringement or deceptive use of the Intellectual Property. At Seller's expense, Buyer agrees to cooperate with Seller and to provide all reasonable assistance which may be requested by Seller in connection with any action which Seller may take regarding any such potential infringement or deceptive use. 16.2 Buyer agrees to notify Seller promptly in writing (but in no case later than ten (10) Business Days following Buyer's actual or constructive notice thereof) of any claim asserted by a third party that any Product infringes upon the patent, copyright, or trademark rights of others (an "Infringement Claim"). For purposes of the indemnity provisions set forth in this subparagraph , the term "Product" shall be deemed to include each component and item of equipment comprising the Product. Conditioned upon such notice and at Seller's expense, Seller shall (i) at its sole option, defend or settle such Infringement Claim, procure for Buyer the right to sell the Product, or modify the Product to avoid infringement, and (ii) indemnify and hold Buyer harmless from any resulting costs or damages, including reasonable attorneys' fees. In no event, however, shall Seller have any liability for any claim based upon the combination, operation, or use of any Product applied with equipment not approved in writing by Seller, or based upon alterations of the Products by any person other than Seller. 17.0 INDEMNIFICATION PROVISIONS 17.1 If Buyer receives a claim that a Product or any part thereof has caused damage or injury to others, Buyer shall immediately notify Seller in writing of any such claim. Seller shall defend or settle such claims and shall indemnify and hold Buyer harmless from any judgment which may be entered against Buyer as a result of a defective Product or the negligence of Seller, its agents, or its employees and all costs or expenses incurred by Buyer in connection therewith. Seller shall further indemnify and hold Buyer harmless from and against, any and all suits or claims for personal injury or property damage arising, or allegedly arising from, Seller's performance or non-performance of this Agreement. These obligations apply only if the injury or damages are due to the act, omission, fault, failure or negligence of Seller, its agents or employees. Seller agrees that Buyer may employ attorneys of its own selection to appeal and defend the claim or action on behalf ofBuyer at the expense of Seller, or, Buyer may elect to allow Seller, at Seller's expense, to employ an attorney to defend Buyer provided, however, Buyer reserves the right to approve any such attorney, and in the event of non-approval or the failure of Seller to employ an attorney, Buyer at its option, shall have the sole authority for the direction of the defense and shall be the sole judge of the acceptability of any compromise or settlement of any claims for actions against Buyer. Seller further agrees to pay the amount of any compromise or settlement. This provision for indemnification shall survive termination of the Agreement. 17.2 Buyer shall indemnify and hold harmless Seller, its employees, agents, and affiliates from and against any and all claims, actions, liabilities, losses, and damages arising out of or in connection with Buyer's sale, lease, use, and related activities pursuant to this Agreement with respect to the Products, and resulting from the failure of Buyer to comply with all applicable laws, rules and/or regulations regarding advertising, selling, licensing, or exporting the Products, as well as any warranties granted by Buyer in excess of those warranties contained in Article .0 hereof. The foregoing obligation to indemnify Seller shall include, but not be limited to indemnification against all expenses, including reasonable attorney's fees and such fees on appeal, incurred by Seller in investigating and/or defending against any claims, action, or liabilities for which indemnification is provided for herein. Buyer agrees to defend Seller against any and all claims, actions, or liabilities for which indemnification is provided for herein, whether such claims or actions are rightfully or wrongfully brought or filed with respect to the subject of indemnification herein. Buyer agrees that Seller may employ attorneys of its own selection to appeal and defend the claim or action on behalf of Seller at the expense of Buyer, or, Seller may elect to allow Buyer, at Buyer's expense, to employ an attorney to defend Seller provided, however, Seller reserves the right to approve any such attorney, and in the event of non-approval or the failure of Buyer to employ an attorney, Seller at its option, shall have the sole authority for the direction of the defense and shall be the sole judge of the acceptability of any compromise or settlement of any claims for actions against Seller. Buyer further agrees to pay the amount of any compromise or settlement. This provision for indemnification shall survive termination of the Agreement. 18.0 CONFIDENTIAL INFORMATION 18.1 Obligation: Buyer and Seller agree to maintain all Confidential Information in the strictest confidence. Without the prior written consent of the other party, Buyer and Seller agree not to disclose any Confidential Information to any third person, including, but not limited to, either party's affiliates, joint venturers, technology transfer partners, and not to make use of any Confidential Information for any purpose other than design, engineering and manufacturing the Products for sale to Buyer. 18.2 Restricted Access: Buyer and Seller agree to restrict access to all Confidential Information to only such authorized employees and other agents who have a need for access to the Confidential Information in connection with their activities as contemplated by this Agreement and take all steps necessary to ensure that such employees and agents comply with the terms of this Agreement. Buyer and Seller agree to inform all employees and agents to whom Confidential Information is disclosed or made available of the terms of this Agreement and to ensure that all such employees and agents comply with the terms of this Agreement. 18.3 Return: All Confidential Information and all materials and documents (including copies) containing Confidential Information provided by either party to the other shall remain the property of the party providing the Confidential Information and shall be returned to such party immediately upon request. 19.0 TERM AND TERMINATION 19.1 This Agreement will expire sixty (60) months from the date first written above unless earlier terminated for a Material Breach as defined in Section . Upon expiration of the term, this Agreement may be renewed by mutual consent and agreement of the parties. 19.2 Upon the occurrence and continuation of a Material Breach by either party, the non-defaulting party may terminate this Agreement by mailing a written termination notice to the defaulting party specifying a date not less than five (5) days after the date of such notice on which the Agreement shall terminate. For purposes of this Agreement, the term "Material Breach" shall mean: 19.2.1 default by Buyer in the performance or observation of any of its material obligations or responsibilities under this Agreement and the continuance of such default for ninety (90) days after Buyer's receipt of written notice from Seller specifying such default, provided, however, that in the case of any such default which is of a nature that it is not capable of being cured within such ninety (90) day period, if Buyer shall diligently commence to cure such default within such ninety (90) day period and diligently and in good faith thereafter prosecute such cure to completion, the time within which such default must be cured shall be extended for such period as is reasonably necessary to complete the curing thereof with diligence, but in no event for more than 120 days; or 19.2.2 default by Seller in the performance or observation of any of its material obligations or responsibilities under this Agreement and the continuance of such default for ninety (90) days after Seller's receipt of written notice from Buyer specifying such default, provided, however, that in the case of any such default which is of a nature that it is not capable of being cured within such ninety (90) day period, if Seller shall diligently commence to cure such default within such ninety (90) day period and diligently and in good faith thereafter prosecute such cure to completion, the time within which such default must be cured shall be extended for such period as is reasonably necessary to complete the curing thereof with diligence, but in no event for more than 120 days. 19.3 Within thirty (30) days after the termination of this Agreement by Buyer without a Material Breach by Seller, Buyer will purchase from Seller all work-in-process and inventory relating to the Products. 19.4 Notwithstanding that a date for termination of this Agreement shall have been established by notice or agreement, Seller shall be obligated to deliver and Buyer shall be obligated to accept and pay for all such Products as Buyer shall have ordered from Seller prior to such termination date. In no event shall Seller be obligated to deliver any Products ordered on or after the date of termination, provided, however, that Buyer shall not be relieved of any obligation to accept and pay for Products delivered by Seller and ordered by Buyer on or after the date of termination of this Agreement. 19.5 The acceptance of any Purchase Order from, or the sale of any Products to, Buyer after the termination of this Agreement shall not be construed as a renewal or extension thereof nor as a waiver of termination, but in the absence of a new written agreement, all such transactions shall be governed by provisions identical with the provisions of this Agreement. 19.6 Neither party hereto shall, by reason of the termination or non-renewal of this Agreement be liable to the other party for compensation, reimbursement or damages on account of the loss of prospective profits on anticipated sales, or on account of expenditures, investments, leases or commitments in connection with the business or goodwill of such other party. 19.7 Prior to Seller's commencing manufacture of the Products, if this Agreement is terminated in accordance with this Article 19.0 by Buyer due to Seller's Material Breach, Seller shall refund all NRE Expenses previously paid by Buyer to Seller. If this Agreement is terminated within such period by Seller due to Buyer's Material Breach, Buyer shall reimburse Seller for all NRE Expenses incurred by Seller up to and including the effective date of termination. 19.8 The termination of this Agreement shall not relieve Buyer or Seller of any obligations and duties which accrued prior to the termination, nor of any duties or obligations under this Agreement which are stated or necessarily implied to survive its termination. 20.0 DESIGN, PROCESS AND ENGINEERING CHANGES 20.1 If reasonably possible, Seller agrees to provide six (6) months advance notification and shall obtain written approval of Buyer of any changes in form, fit or function of the Products. Implementation of such change will depend on the nature of the change, lead time required to obtain necessary parts, tooling lead time and/or inventory on hand. Seller and Buyer agree to cooperate to expedite implementation of such changes in a timely manner. 20.2 All cost impacts and material availability issues shall be mutually reviewed and agreed upon in writing by Buyer and Seller prior to implementation. 20.3 Seller and Buyer agree that the phrase "changes in form, fit or function" shall include any change which: (a) affects Buyer software; (b) affects Buyer hardware electrical or mechanical design; (c) affects the Products' external appearance; (d) affects Buyer's user documentation; (e) affects the interchangeability of old and new versions of the Products; or (f) removes or degrades a capability described in a Product's data sheet or manual. The phrase "changes in form, fit or function" shall not include changes to remedy "bugs" or other minor deviations from the Statement of Work or the QC Release for Shipment version of the Products, changes to improve manufacturability and reliability, or changes of raw-material suppliers. 20.4 If Buyer requests a change in form, fit or function of the Products which results in Seller's having obsolete Products or materials in inventory which cannot be used by Seller in Seller's other products, Buyer shall purchase all such obsolete Products or materials from Seller at Seller's cost. Seller shall ship any obsolete Products and/or materials to Buyer at Buyer's request. Buyer shall reimburse Seller for any costs incurred by Seller in connection with shipping or disposing of obsolete inventory. 20.5 Buyer and Seller shall mutually agree upon a system for determining numerical and alpha revision changes to the Products. 21.0 DELIVERY DELAYS 21.1 Seller shall use reasonable efforts to ensure prompt delivery of all Products purchased by Buyer under this Agreement. Buyer's Supplier Management Program provides that if less than ninety-two percent (92%) of the Products delivered by Seller to Buyer during any calendar month arrive in accordance with delivery deadlines set forth in the Purchase Order for such Products, Buyer shall issue a SCAR to Seller. If, during the calendar month immediately following the month for which the SCAR was issued, less than ninety-two percent (92%) of the Products delivered by Seller to Buyer arrive in accordance with delivery deadlines set forth in the Purchase Order for such Products, Buyer and Seller shall hold an on-site meeting to discuss corrective action. If, during the three (3) months immediately following the month for which the on-site meeting was held, less than ninety-two percent (92%) of the Products delivered by Seller to Buyer arrive in accordance with delivery deadlines set forth in the Purchase Order for such Products, a Material Breach of this Agreement shall be deemed to have occurred and Buyer shall be entitled to all remedies set forth in Articles .0 and .0 hereof. 22.0 EXCUSABLE DELAYS 22.1 Seller shall be excused from timely performance and shall not be liable for failure to perform, in whole or in part, as a result of any cause beyond Seller's reasonable control, including, but not limited to, acts or inactions of government whether in its sovereign or contractual capacity, judicial action, war, epidemics, explosions, civil disturbance, insurrection, sabotage, act of a public enemy, strike, labor dispute, accident, fire, flood, rain, snow, storm, or other acts of God, provided that Seller gives Buyer prompt notice of such delay. 22.2 In the event of an excusable delay, Seller shall be entitled to relief from performance requirements for the duration of the event causing such delay, provided, however, that if such event exceeds thirty (30) days, Seller shall work with Buyer to establish an alternative method of supplying the Products until Seller is able to resume performance of its obligations under this Agreement. 23.0 COMPLIANCE WITH U.S. EXPORT REGULATIONS. 23.1 Buyer shall comply with the rules and regulations under the U.S. Export Administration Act, the U.S. Anti-Boycott provisions, and the U.S. Foreign Corrupt Practices Act, as well as all of the applicable U.S. federal, state and municipal statutes, rules and regulations. Such compliance with U.S. Export control laws and regulations shall include, without limitation, an obligation to obtain any and all applicable or required export licenses or authorizations (including licenses or permits for the re-export of any Product or component thereof) and, if so requested by Seller, the obligation to demonstrate to Seller's reasonable satisfaction that all such licenses have been obtained. 23.2 Notwithstanding the terms of Section 23.1, if Seller agrees to drop ship any Products to a destination outside of the United States pursuant to Section 10.3, Seller shall comply with the rules and regulations under the U.S. Export Administration Act, the U.S. Anti-Boycott provisions, and the U.S. Foreign Corrupt Practices Act, as well as all of the applicable U.S. federal, state and municipal statutes, rules and regulations. Such compliance with U.S. Export control laws and regulations shall include, without limitation, an obligation to obtain any and all applicable or required export licenses or authorizations (including licenses or permits for the re-export of any Product or component thereof) and, if so requested by Buyer, the obligation to demonstrate to Buyer's reasonable satisfaction that all such licenses have been obtained. 24.0 FOREIGN CORRUPT PRACTICES ACT. The parties acknowledge that they are familiar with and understand the provisions of the United States Foreign Corrupt Practices Act of 1977 (the "Act"). In connection therewith, the parties agree that neither they, nor any of their officers, directors, employees or representatives, shall do or be instructed to do any of the following: 24.1 Pay or give anything of value, either directly or indirectly, to an official of any government or any political party for the purpose of influencing an act or decision in such person's official capacity, or inducing such person to use influence with the government in order to assist them in obtaining or retaining business for or with, or directing business to, any person, or for any other purpose whatsoever; or 24.2 Use any compensation received from the other party for any purpose, nor take any action, which would constitute a violation of any law of the United States of America (including the Act) or any country or governmental authority within the Territory. 25.0 NOTIFICATION All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally, telecopied (which is confirmed) or mailed by registered or certified mail (return receipt requested) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): If to Buyer at: Harris Corporation 300 Bel Marin Keys Boulevard Novato, California 94949 Attn: Purchasing Manager Fax: (415) 382-5156 If to Seller at: Comdial Corporation 1180 Seminole Trail Charlottesville, Virginia 22906 Attn: Wayne R. Wilver, Senior Vice President Fax: (804) 978-2512 with a copy to: McGuire, Woods, Battle & Boothe, LLP P. O. Box 1288 418 East Jefferson Street Charlottesville, Virginia 22902 Attn: Robert E. Stroud, Esq. Fax: (804) 980-2272 26.0 GOVERNMENT CONTRACTS 26.1 If Products to be furnished by Buyer to Seller under this Agreement are to be used in the performance of a government contract or subcontract with the United States of America (a "U.S. Government Contract) and a U.S. Government Contract number is identified in the Purchase Order for such Products, those clauses of the applicable United States procurement regulations whose inclusion in U.S. Government Contracts is mandatory under federal statute or regulation shall be incorporated by reference in the applicable Purchase Order. 26.2 Seller agrees to comply with the following Federal Acquisition Regulation (FAR) clauses which are incorporated by reference herein: 52.220-4, Labor Surplus Area Subcontracting Program; 52.222-1, Notice to the Government of Labor Disputes; 52.222-4 Contract Work Hours and Safety Standards Act--Overtime Compensation; 52.222-26, Equal Opportunity; 52.222-35, Affirmative Action for Special Disabled and Vietnam Era Veterans; 52.222-35, Affirmative Action for Handicapped Workers; 52.222-37, Employment Reports on Special Disabled Veterans and Veterans of the Vietnam Era; 52-222-41, Service Contract Act; and 52.223-2, Clean Air and Water Act. Upon Seller's request, copies of these provisions shall be supplied by Buyer's purchasing department. 27.0 DISPUTE RESOLUTION; REMEDIES 27.1 During the term of this Agreement, if any issue, dispute or controversy ("Dispute") should arise between Buyer and Seller, the Dispute shall be referred to the responsible senior management of each party for resolution. Neither party shall seek any other means of resolving any Dispute arising in connection with this Agreement until both parties' responsible senior managements have had at least five (5) Business Days to resolve the Dispute following referral of the Dispute to such responsible senior management. If the senior management of both parties are unable to resolve the Dispute, either party may then, at any time, deliver notice to the other party of its intent to submit the Dispute to arbitration, which notice shall outline the specific issues concerning the Dispute which must be resolved (the "Arbitration Notice"). 27.2 Not more than thirty (30) days after delivery of an Arbitration Notice, either party (for purposes of this Section , the "First Party") may give notice to the other party (for purposes of this Section , the "Second Party") that it has designated an arbitrator. Within twenty (20) days of the delivery of the notice of designation, the Second Party shall be required to designate a second arbitrator and to notify the First Party of such designation. Within twenty (20) days of the designation of the second arbitrator, the two designated arbitrators shall meet and shall jointly designate a third arbitrator who shall be neutral and impartial. Arbitrators shall be qualified by education and experience in the subject matter of the Dispute and issues to be arbitrated. The arbitrator designated by the party-appointed arbitrators shall be the Chairman of the arbitration panel. A determination by a majority of the panel shall be binding upon and enforceable against each party. 27.3 If for any reason (i) the Second Party shall fails to designate an arbitrator after notice of designation is delivered by the First Party or (ii) the two party-appointed arbitrators fail to designate a third arbitrator, or the third arbitrator fails for any reason to serve, such arbitrator(s) shall be designated by the American Arbitration Association upon the demand of either Party. 27.4 Arbitration proceedings initiated by Buyer against Seller shall be held in Charlottesville, Virginia and arbitration proceedings initiated by Seller against Buyer shall be held in San Francisco, California. Buyer and Seller may mutually agree on an alternative location for any arbitration proceeding. 27.5 Buyer and Seller agree that any Dispute being resolved by arbitration shall be determined pursuant to the provisions of this Agreement and applicable commercial arbitration rules of the American Arbitration Association then in effect, but only to the extent such rules are not inconsistent with the provisions of this Agreement. 27.6 The authority of the arbitrators shall be limited to resolution of the specific Dispute and related issues in controversy as designated by the parties. 28.0 AMENDMENT OF AGREEMENT 28.1 This Agreement may be amended or altered in any of its provisions by the parties hereto only by a writing signed by both parties, and any such amendment shall become effective only when it has been signed by both parties or at such other time as such amendment may provide. 29.0 SECTION HEADINGS 29.1 The section headings contained herein shall in no way limit, extend or interpret the scope or language of this Agreement or of any particular section, and such headings are intended to be utilized only for convenient reference. 30.0 ENTIRE AGREEMENT; NO THIRD PARTY BENEFICIARIES 30.1 This Agreement (including the exhibits hereto and the documents and instruments referred to herein) (i) constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, between the parties with respect to the subject matter hereof, and (ii) is not intended to confer upon any person or entity other than the parties hereto any rights or remedies hereunder. 31.0 GOVERNING LAW 31.1 This Agreement shall be governed and construed in accordance with the laws of the Commonwealth of Virginia without regard to any applicable conflicts of law provisions thereof. 32.0 NO ASSIGNMENT 32.1 Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by either of the parties hereto (whether by operation of law or otherwise) without the prior written consent of the other party. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of, and be enforceable by the parties and their respective successors and assigns. 33.0 INTERPRETATION 33.1 Unless the context requires otherwise, all words used in this Agreement in the singular number shall extend to and include the plural, all words in the plural number shall extend to and include the singular and all words in any gender shall extend to and include all genders. All references to contracts, agreements, leases and other understandings or arrangements shall refer to oral as well as written matters. 34.0 WAIVER 34.1 The waiver by either party of a breach or violation of any term or provision of this Agreement shall not operate nor be construed as a waiver of any subsequent breach or violation. 35.0 SEVERABILITY 35.1 The invalidity or unenforceability of any provision in this Agreement shall not affect or impair the enforcement of any other provision, and this Agreement shall be construed as if such invalid or enforceable provision had not been contained in this Agreement. 36.0 COUNTERPART COPIES 36.1 This Agreement may be executed in two counterpart copies, both of which shall be considered one in the same agreement and shall become binding on the parties when a counterpart copy has been signed by each of the parties and delivered to other party, it being understood that all parties need not sign the same counterpart copy. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written by their respective officers, each duly authorized. HARRIS CORPORATION By:\s\ Jerry A. Hayes Name: Jerry A. Hayes Title: Procurement Specialist Date: March 4, 1997 COMDIAL CORPORATION By: \s\ William G. Mustain Name: William G. Mustain Title: President Date: 3-6-97 EX-10.21 9 FASTCALL PURCHASE AGREEMENT Exhibit 10.21 FASTCALL PURCHASE AGREEMENT DECEMBER 31, 1997 SPANLINK COMMUNICATIONS, INC. BUYER AND AURORA SYSTEMS, INC. SELLER TABLE OF CONTENTS ARTICLE 1. PURCHASE OF FASTCALL; ASSUMPTION OF LIABILITIES 1 1.1 Purchase of Assets from Seller 1 1.2 Royalty-Free License 2 1.3 Sales, Use and Deed Taxes 2 1.4 Assumption of Liabilities 3 1.5 Warranty Obligations 3 ARTICLE 2. PURCHASE PRICE AND PAYMENT 3 2.1 Purchase Price 3 2.2 Payment of Purchase Price 4 ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF SELLER 5 3.1 Organization 5 3.2 Qualification 5 3.3 Financial Information 6 3.4 Tax Reports, Returns and Payment 6 3.5 Title and Sufficiency of Assets 6 3.6 Trademarks 6 3.7 Patents 6 3.8 Licenses and Permits 6 3.9 Agreements, Contracts and Commitments 7 3.10 Change In Customers 7 3.11 Product Warranty Claims 7 3.12 Litigation, Adverse Claims and Related Matters 7 3.13 Laws and Regulations 7 3.14 Breaches of Contracts; Required Consents 7 3.15 Binding Obligation 8 3.16 Commissions or Finder's Fees 8 3.17 Employee Agreements 8 3.18 Completeness of Disclosure 8 ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF BUYER 8 4.1 Organization 8 4.2 Qualification 8 4.3 Corporate Authority 8 4.4 Financial Information 9 4.5 Licenses and Permits 9 4.6 Litigation, Adverse Claims and Related Matters 9 4.7 FastCall Resources 9 4.8 Breaches of Contracts; Required Consents 9 4.9 Binding Obligation 9 4.10 Commissions or Finder's Fees 9 4.11 Completeness of Disclosure 10 ARTICLE 5. CONDUCT OF BUSINESS AND TRANSACTIONS PRIOR TO CLOSING 10 5.1 Access to Information 10 5.2 Restrictions in Operation of the Business 10 5.3 No Solicitation of Other Offers 10 5.4 Confidentiality Agreement 11 5.5 Offer of Employment 13 5.6 Cash Payment 13 ARTICLE 6. CONDITIONS OF CLOSING; ABANDONMENT OF TRANSACTION 13 6.1 Conditions to Obligations of Buyer to Proceed on the Closing Date 13 6.2 Conditions to Obligation of Seller to Proceed on the Closing Date 15 6.3 Termination of Agreement 16 6.4 Consequences of Termination 16 ARTICLE 7. CLOSING 17 7.1 Closing 17 7.2 Documents to be Delivered by Seller 17 7.3 Documents Delivered by Buyer 17 ARTICLE 8. POST CLOSING OBLIGATIONS 18 8.1 Covenant Not to Compete 18 8.2 Further Documents and Assurances 18 8.3 Consulting 18 8.4 Accounts Receivable 19 8.5 Un-Invoiced Sales 19 8.6 Fleet Capital Corporation Releases 19 ARTICLE 9. INDEMNIFICATION 19 9.1 Indemnification by Seller 19 9.2 Seller's Limitation of Liability 20 9.3 Indemnification by Buyer 20 9.4 Buyer's Limitation of Liability 20 9.5 Limitations on Indemnification 20 9.6 Third Party Claims 21 ARTICLE 10. GENERAL 21 10.1 Assignment 21 10.2 Counterparts 21 10.3 Exhibits 22 10.4 Notices 22 10.5 Successors and Assigns 22 10.6 Expenses 22 10.7 Entire Agreement 22 10.8 Modification and Waiver 22 10.9 Publicity 22 10.10 Governing Law 22 10.11 Knowledge 22 10.12 Benefit 23 10.13 Comdial Corporation 23 LIST OF EXHIBITS Exhibit 1.1(a) List of Names, Assumed Names, Tradenames and Trademarks of Seller Exhibit 1.1(b) List of Patents Exhibit 1.1(d) Accounts Receivable Exhibit 1.1(c) Computer Programs and Software Exhibit 1.1(f) FastCall Licenses and Permits Exhibit 1.1(g) FastCall Contracts and Customers Exhibit 3.3 Seller Financial Information Exhibit 3.4 Tax Reports, Returns and Payments Exhibit 3.5 Seller Encumbrances on Assets Exhibit 3.8 Consents Required to Assign Licenses Exhibit 3.14 Other Required Consents Exhibit 4.4 Buyer Financial Information Exhibit 5.5 Seller Assisted Signing Bonus
FASTCALL PURCHASE AGREEMENT DATE: December 31, 1997 PARTIES: Spanlink Communications, Inc. 7125 Northland Terrace Brooklyn Park, MN 55428 ("Buyer") Aurora Systems, Inc. 33 Nagog Park Acton, MA 01720 ("Seller") RECITALS: A. Seller has developed and is distributing and selling a computer telephone integration product known as FastCall ("FastCall") which provides a personal computer with Windows desktop-based screen pops, and an NT server-based version of FastCall which provides call functionality, known as FastCall Central ("FastCall Central"). FastCall and FastCall Central are sometimes referred to collectively as the "FastCall Products." B. The parties mutually desire that Seller shall sell to Buyer and the Buyer shall purchase from the Seller the FastCall Products and related business assets, upon the terms and subject to the conditions set forth in this Agreement. AGREEMENT: In consideration of the mutual provisions, representations, warranties, covenants and agreements contained herein, the parties hereto agree as follows: ARTICLE 1. PURCHASE OF FASTCALL; ASSUMPTION OF LIABILITIES 1.1 Purchase of Assets from Seller: Subject to the terms and conditions hereof, Seller agrees on the Closing Date (as hereinafter defined) to assign, sell, transfer, convey and deliver or license to Buyer, and Buyer agrees on the Closing Date to purchase or otherwise acquire from Seller, the FastCall Products and all of the intangible personal property, business records, customer lists, contract rights and goodwill of Seller related to the FastCall Products, wherever the same may be located (collectively referred to as the "Purchased Assets"), including, without limitation, the following: (a) All names and assumed names under which Seller develops, markets and sells the FastCall Products, all tradenames, trademark or service mark registrations and applications, common law trademarks, including but not limited to those identified on Exhibit hereto, and all goodwill associated therewith (the "FastCall Trademarks"); (b) Subject to the provisions of Section hereof, all domestic and foreign letters patent, patent applications, and patent and know-how licenses, including but not limited to those identified on Exhibit hereto but excluding the license agreement between Seller and Syntellect Technology Corp. effective as of February 12, 1996 (the "Syntellect License") ("Patents"), together with copies of Seller's legal files and other background information relating to any such Patents; (c) All technology, know-how, trade secrets, designs, computer source code, copyrights (including all registrations and applications therefor), related to the FastCall Products, including all documentary evidence thereof, and the computer programs and software (the "Computer Programs") listed on Exhibit (the "FastCall Technology"); (d) All rights to accounts receivable from sales of the FastCall Products invoiced in the calendar quarter commencing October 1, 1997 and ending December 31, 1997 (the "Fourth Quarter"), which are in excess of One Hundred Ninety Thousand Two Hundred Fifty Three Dollars and Fifty Cents ($190,253.50) (the "Excess Accounts Receivable"), but no rights to the other accounts receivable of Seller whether or not invoiced in the Fourth Quarter. (e) All rights to payment for sales of the FastCall Products in the Fourth Quarter which have not been invoiced to customers as of the Closing (the "Un-Invoiced Sales"), including the un-invoiced sale to Lucent Technologies (NJ) identified on Exhibit 1.1(d). (f) All permits, licensing approvals and notifications, governmental or otherwise, relating to the FastCall Products (the "FastCall Licenses and Permits"), including those listed on Exhibit ; and (g) All contract rights (except any real estate leases and personal property leases) relating to the FastCall Products (the "FastCall Contracts"), including those rights pursuant to the contracts described in Exhibit . 1.2 Royalty-Free License. At the Closing, Buyer shall grant to Seller and Comdial Corporation a royalty-free non-exclusive license to use the Patents for any purposes that do not conflict with the express provisions of this Agreement. 1.3 Sales, Use and Deed Taxes. Seller shall be responsible for payment of any sales, use or deed taxes assessable with respect to the transfer of the Purchased Assets contemplated herein. 1.4 Assumption of Liabilities. Buyer agrees to assume the obligations of Seller which arise from and after the Closing under the FastCall Licenses and Permits, including those listed on Exhibit , and under the FastCall Contracts, including those listed on Exhibit . 1.5 Warranty Obligations. Buyer agrees to assume the remainder of the Seller's existing warranty obligations arising in the normal course of Seller's business with respect to the FastCall Products sold by it prior to the Closing. ARTICLE 2 PURCHASE PRICE AND PAYMENT 2.1 Purchase Price. The purchase price for the Purchased Assets ("Purchase Price") shall be paid as royalties computed with reference to sales revenue invoiced by Buyer from the sale, distribution or licensing of the FastCall Products and all enhancements, upgrades, modifications and improvements thereto or derivatives thereof and including replacement products developed by Buyer (collectively the "Royalty Products"), and shall be determined as follows: (a) Calculation of Purchase Price. Buyer shall pay to Seller as and for the actual Purchase Price an amount of royalties ("Royalties") based on sales revenue invoiced by Buyer from sales of the Royalty Products ("FastCall Revenues"). The Purchase Price shall be equal to twenty-five percent (25%) of all FastCall Revenues (i) invoiced by Buyer during the period commencing on the Closing Date and ending December 31, 2000, and (ii) invoiced or received by Buyer from Excess Accounts Receivable pursuant to Section 1.1(d) and from Un-Invoiced Sales pursuant to Section , plus fifteen percent (15%) of all FastCall Revenues invoiced by Buyer during the period commencing on January 1, 2001 and ending December 31, 2002. (b) Minimum and Maximum Limits of Purchase Price. The total Purchase Price shall be no less than Six Hundred Thousand Dollars ($600,000) (the "Minimum Purchase Price") and no greater than One Million One Hundred Thousand Dollars ($1,100,000) (the "Maximum Purchase Price"). (c) Allocation of Sales Revenue. The parties acknowledge and agree that the FastCall Products may be integrated with other products ("Replacement Products") sold by Buyer in the generation of FastCall Revenues. In such event Buyer shall determine the portion of the total sales revenue from each Replacement Product that is properly allocable to the FastCall Products and shall provide Seller with information regarding the amount and method of such allocation. (i) Except in the case set forth in clause (ii) below, the revenue from each such Replacement Product allocated to the FastCall Products (the "Allocated Revenue") shall be at least eighty percent (80%) of the lowest price at which Buyer invoiced sales of the FastCall Products on a stand alone basis during the twelve (12) month period (the "Look Back Period") preceding the sale of each such Replacement Product. In the event there are no sales of the FastCall Products during the relevant Look Back Period, the Allocated Revenue for the sale of Replacement Products shall be deemed to be an amount equal to the last calculated Allocated Revenue immediately preceding the Look Back Period. (ii) In case the value of the FastCall Products integrated into a Replacement Product is less than forty percent (40%) of the value of the Replacement Product, the Allocated Revenue with respect to such Replacement Product shall be at least forty percent (40%) of the lowest price at which Buyer invoiced sales of the FastCall Products on a stand alone basis during the Look Back Period. In the event there are no sales of the FastCall Products during the relevant Look Back Period, the Allocated Revenue for the sale of Replacement Products shall be deemed to be an amount equal to the last calculated Allocated Revenue immediately preceding the Look Back Period. (iii) Nothing herein shall give Seller any right, express or implied, to set sales prices or royalty rates with respect to the Royalty Products, all of such rights being reserved to Buyer, in Buyer's sole discretion. (d) In determining the FastCall Revenue during each calendar quarter, Buyer shall be entitled to reduce such revenue by returns and sales allowances that are recorded on Buyer's books or records as a reduction of sales during such calendar quarter in the ordinary course of business and in accordance with generally accepted accounting principles, but only to the extent previously included in FastCall Revenues on which Royalties have been paid to the Seller. 2.2 Payment of Purchase Price. The Purchase Price shall be paid as follows: (a) Cash Payment. Buyer shall deliver to Seller at the Closing an advance payment to be applied to the Purchase Price of One Hundred Thousand Dollars ($100,000), less the amount of any payments or credits due to Buyer from Seller at the Closing, by wire transfer to a bank account designated by Seller. (b) Payment of Balance of the Purchase Price. The balance of the Purchase Price remaining after the credit of One Hundred Thousand Dollars ($100,000) arising out of the cash payment made pursuant to Section 2.2(a) shall be paid in quarterly installments, paid within thirty (30) days after the end of each calendar quarter in which FastCall Revenues were invoiced, in accordance with the following: (i) The first of such payments shall be made with respect to the calendar quarter ending March 31, 1998 and the last of such payments shall be made with respect to the calendar quarter ending December 31, 2002 (the "Payment Period"). (ii) Each quarterly payment shall be in the amount of the specified percentage of the aggregate FastCall Revenues invoiced in such calendar quarter, except that the credit of One Hundred Thousand Dollars ($100,000) arising out of the cash payment made pursuant to Section 2.2(a) shall be applied to the payment of that portion of the Purchase Price between Five Hundred Thousand Dollars ($500,000) and Six Hundred Thousand Dollars ($600,000). (iii) In the event the aggregate amount of the payments made towards the Purchase Price during the Payment Period (the "Total Payment Amount") is less than the Minimum Purchase Price, the Buyer will pay to Seller promptly at the end of the Payment Period an amount equal to the difference between the Minimum Purchase Price and the Total Payment Amount. (iv) The Payment Period shall terminate upon full payment of the Maximum Purchase Price. (c) Records Inspection. Seller shall have the right, at reasonable times and upon reasonable notice, for its employees or agents to inspect the records of the Buyer with respect to the Royalty Products, for the purpose of verifying any allocations of sales revenue made by the Buyer and the determinations of FastCall Revenues and Royalties. ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF SELLER Seller makes the following representations and warranties to Buyer with the intention that Buyer may rely upon the same and acknowledges that the same shall be true on the date hereof and as of the Closing Date (as if made at the Closing) and shall survive the Closing of this transaction for a period of twelve (12) months after the Closing Date. 3.1 Organization. Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, has all requisite power and authority, corporate and otherwise, to own its properties and assets and to conduct its business as it is now conducted. 3.2 Qualification. Seller is qualified to do business and is in good standing as a foreign corporation in all states in which qualification is required by the nature of its business and in which the failure to so qualify and be in good standing would have a material adverse effect on the Purchased Assets. 3.3 Financial Information. To the best knowledge of Seller, Seller has furnished Buyer with the financial information attached hereto as Exhibit , which is true and complete. In addition, Seller agrees to furnish to Buyer within sixty (60) days of Closing audited financial statements of Aurora Systems, Inc. for periods required by the rules and regulations of the Securities and Exchange Commission (the "SEC") or as reasonably required by Buyer's independent certified public accountants based on their interpretation of the SEC requirements. The cost to provide such audited financial statements or other financial information will be divided equally between Buyer and Seller. 3.4 Tax Reports, Returns and Payment. To the best knowledge of Seller, Seller (or Comdial Corporation on behalf of Seller, through consolidated tax returns) has accurately prepared and timely filed all federal and applicable state, local, and foreign tax or assessment reports and returns of every kind required to be filed by Seller with relation to its business, including, without limitation, income tax, sales and use tax, real estate tax, personal property tax and unemployment tax, and has duly paid all taxes and other charges (including interest and penalties) due to or claimed to be due by any taxing authorities, except as disclosed in Exhibit attached hereto. Where required, timely estimated payments or installment payments of tax liabilities have been made to all governmental agencies in amounts sufficient to avoid underpayment penalties or late payment penalties applicable thereto. 3.5 Title and Sufficiency of Assets. Seller holds title to the Purchased Assets free and clear of all liens, encumbrances, licenses or leases, except for the liens and security interests (the "Fleet Liens") disclosed in Exhibit . The Purchased Assets are sufficient for Buyer to market, sell, service and support the FastCall Products as marketed and sold at the Closing, except to the extent, if any, the Syntellect License is required or necessary to make this representation true and correct. 3.6 Trademarks. Seller has good title to the assumed names and the FastCall Trademarks listed on Exhibit , free and clear of all liens and encumbrances, except as disclosed in Exhibit . Such FastCall Trademarks are not licensed to or licensed from any other person or entity. 3.7 Patents. Seller has good title to the Patents listed on Exhibit hereto, free and clear of all liens and encumbrances except as set forth on Exhibit . 3.8 Licenses and Permits. Seller possesses all permits, licenses, approvals and notifications, governmental or otherwise, the absence of which would have a material adverse effect on the Purchased Assets. Buyer acknowledges that it is not taking an assignment of the Syntellect License, which is one of the licenses that Seller possesses. Seller makes no representation as to whether the absence of the Syntellect License would have a material adverse effect on the Purchased Assets. Except as disclosed on Exhibit , all of such licenses and permits are freely assignable and transferable to Buyer at the Closing and will continue to be in full force and effect after such transfer. 3.9 Agreements, Contracts and Commitments. Except as disclosed on Exhibit or on other Exhibits attached hereto, Seller is not a party to or bound by any written agreement relating to the Purchased Assets, nor does Seller have any knowledge of any claims made by parties to the FastCall Contracts. 3.10 Change In Customers. To Seller's best knowledge, no significant customer, including but not limited to those customers listed in Exhibit , intends to cease doing business with Seller or materially alter the amount of business with Seller. 3.11 Product Warranty Claims. The FastCall Products have been merchantable and free from material defects in material or workmanship for the term and under the conditions set forth in Seller's standard written limited product warranty for its FastCall Products. Except for product warranty claims in the ordinary course of business, during the last three (3) years Seller has not received any claims based upon an alleged breach of product warranty arising from Seller's sale of its FastCall Products (hereafter collectively referred to as "Product Warranty Claims"). Seller has no reasonable grounds to believe that future Product Warranty Claims with respect its FastCall Products prior to the Closing Date will be different from Seller's past experience with respect thereto as set forth herein. 3.12 Litigation, Adverse Claims and Related Matters. There is no pending litigation (nor, to Seller's knowledge, any threatened litigation or any claim which may lead to a threat of litigation), proceeding, or investigation (including any environmental, building or safety investigation) relating to any material aspect of the Purchased Assets, nor is Seller subject to any existing judgment, order or decree which would prevent, impede, or make illegal the consummation of the transactions contemplated in this Agreement or which would have a material adverse effect on the Purchased Assets. 3.13 Laws and Regulations. Seller has complied, and is in compliance on the Closing Date, with all applicable laws, statutes, orders, rules, regulations and requirements promulgated by governmental or other authorities relating to the Purchased Assets, the failure of which would have a material adverse effect on the Purchased Assets. Seller has not received any notice of any sort of alleged violation of any such statute, order, rule, regulation or requirement. 3.14 Breaches of Contracts; Required Consents. Neither the execution and delivery of this Agreement by Seller, nor compliance by Seller with the terms and provisions of this Agreement will, except as otherwise disclosed herein or in any Exhibit attached hereto: (a) Conflict with or result in a breach of (i) any of the terms, conditions or provisions of the Certificate of Incorporation, Bylaws or other governing instruments of Seller, (ii) any judgment, order, decree or ruling to which Seller is a party, (iii) any injunction of any court or governmental authority to which Seller is subject, or (iv) any agreement, contract or commitment which is material to the Purchased Assets; or (b) Except as disclosed in Exhibit hereto, require the affirmative consent or approval of any third party, the absence of which would have a material adverse effect on the Purchased Assets. 3.15 Binding Obligation. This Agreement constitutes the legal, valid and binding obligation of Seller in accordance with the terms hereof. Seller has all requisite corporate power and authority, including the approval of its Shareholders and Board of Directors, to execute perform, carry out the provisions of and consummate the transactions contemplated in this Agreement. 3.16 Commissions or Finder's Fees. Seller has not engaged any broker or finder in connection with the transaction contemplated herein. 3.17 Employee Agreements. Seller has no knowledge that any current or former employee of Seller has violated any confidentiality agreements. 3.18 Completeness of Disclosure. To Seller's knowledge, no representation in this Article contains any untrue statement of a material fact or omits to state any material fact the omission of which would be misleading. ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF BUYER Buyer makes the following representations and warranties to Seller, with the intention that Seller may rely upon the same, and acknowledges that the same shall be true as of the Closing Date (as if made at the Closing) and shall survive the Closing of this transaction for a period of twelve (12) months after the Closing Date.. 4.1 Organization. Buyer is a corporation, duly organized, validly existing in good standing under the laws of the State of Minnesota, and has all requisite power and authority, corporate and otherwise, to own its properties and assets and conduct its business as it is now conducted. 4.2 Qualification. Buyer is qualified to do business and is good standing as a foreign corporation in all states in which qualification is required by the nature of its business and in which the failure to so qualify and be in good in standing would have a material adverse effect on its business. 4.3 Corporate Authority. Buyer has all requisite power and authority, including the approval of its Board of Directors, to execute, perform, carry out the provisions in this Agreement. 4.4 Financial Information. Buyer has furnished Seller with the financial information attached hereto as Exhibit , true and complete. 4.5 Licenses and Permits. Buyer possesses, or from and after the Closing Date will possess, all permits, licenses, approvals and notifications, governmental or otherwise, the absence of which would have a material adverse effect on its business after consummation of the transactions contemplated in this Agreement. 4.6 Litigation, Adverse Claims and Related Matters. There is no pending litigation (nor, to Buyer's knowledge, any threatened litigation or any claim which may lead to a threat of litigation), proceeding, or investigation (including any environmental, building or safety investigation) relating to any material aspect of Buyer's business, nor is Buyer subject to any existing judgement, order or decree which would prevent, impede, or make illegal the consummation of the transactions contemplated in this Agreement or which would have a material adverse effect on Buyer's business. 4.7 FastCall Resources. Buyer has sufficient resources to market and sell the Royalty Products, and will use all reasonable efforts in light of market conditions generally prevailing from time to time to generate revenues from the sale, distribution or licensing of Royalty Products. 4.8 Breaches of Contracts; Required Consents. Neither the execution and delivery of this Agreement by Buyer, nor compliance by Buyer with the terms and provisions of this Agreement, will: (a) Conflict with or result in a breach of: (i) any of the terms, conditions or provisions of the Articles of Incorporation, Bylaws or other governing instruments of Buyer, (ii) any judgment, order, decree or ruling to which Buyer is a party, (iii) any injunction of any court or governmental authority to which it is subject, or (iv) any agreement, contract or commitment which is material to the financial condition of Buyer; or (b) Require the affirmative consent or approval of any third party. 4.9 Binding Obligation. This Agreement constitutes the legal, valid and binding obligation of Buyer in accordance with the terms hereof. Buyer is not subject to any charter, mortgage, lien, lease, agreement, contract, instrument, law, rule, regulation, order, judgment or decree, or any other restriction of any kind or character, which would prevent the consummation of the transactions contemplated in this Agreement. 4.10 Commissions or Finder's Fees. Buyer has not engaged any broker or finder in connection with the transactions contemplated herein. 4.11 Completeness of Disclosure. No representation in this Article contains any untrue statement of a material fact or omits to state any material fact the omission of which would be misleading. ARTICLE 5 CONDUCT OF BUSINESS AND TRANSACTIONS PRIOR TO CLOSING 5.1 Access to Information. During the period prior to the Closing, Seller shall give to Buyer and its attorneys, accountants or other authorized representatives, full access to all of the property, books, contracts, commitments and records relating to the Purchased Assets and shall furnish to Buyer during such period all such information concerning the Purchased Assets as Buyer reasonably may request. Buyer shall have the right to contact Seller's employees regarding the Purchased Assets for the purposes of gathering information about the Purchased Assets and of discussing employment opportunities with Buyer. 5.2 Restrictions in Operation of the Business. Seller represents and covenants that during the period from the date of this Agreement to the Closing (except as Buyer otherwise has consented or may consent in writing): (a) The Seller's business will be conducted only in the usual and ordinary manner insofar as it relates to the Purchased Assets. (b) Seller will not sell, dispose, transfer, assign or otherwise remove any of the Purchased Assets except inventory in the ordinary course of business and at regular prices. (c) Seller will timely pay and discharge all bills and monetary obligations and timely and properly perform all of its obligations and commitments under all existing contracts and agreements pertaining to the Purchased Assets, except as to amounts or obligations which Seller contests in good faith. (d) Seller shall use its best efforts to preserve its business organization and the Purchased Assets and to keep available to Buyer the services of Seller's present employees, and not to impair relationships with suppliers, customers and others having business relations with the Purchased Assets. 5.3 No Solicitation of Other Offers. Seller agrees that, prior to the Closing Date or the termination of this Agreement pursuant to Section 6.3, neither Seller nor any of Seller's representatives will enter into any negotiations with or solicit any offer, inquiry or proposal from any other person with respect to the sale or other acquisition of the Purchased Assets. 5.4 Confidentiality Agreement. (a) Definition of Confidential Information. For purposes of this Section, "Confidential Information" means any information or compilation of information not generally known, which is proprietary to a business, and includes, without limitation, trade secrets, inventions, and information pertaining to development, marketing, sales, accounting and licensing of the business' products and services, customer information, customer lists, and any customer information contained in customer records, working papers or correspondence files and all financial information, including financial statements, notes thereto and information contained in federal and state tax returns. Information shall be treated as Confidential Information irrespective of its source and all information which is identified as being "confidential", "trade secret", or is identified or marked with any similar reference shall be presumed to be Confidential Information. (b) Covenants by Parties. Buyer, on the one hand, and Seller, on the other, each agree and covenant with respect to all Confidential Information of the other received or learned by either of them as follows: (i) It will treat as confidential all Confidential Information made available to it or any of its employees, agents or representatives; (ii) It will maintain the same in a secure place and limit access to the Confidential Information to those employees, agents and representatives to whom it is necessary to disclose the Confidential Information in furtherance of the transactions contemplated by this Agreement; (iii) It and its employees, agents and representatives will not copy any Confidential Information, disclose any Confidential Information to any unauthorized party, or use any Confidential Information for any purpose including competition with the other party or solicitation of the other party's customers; and (iv) It will take reasonable steps to insure that its employees, agents or representatives who have access to Confidential Information will maintain the confidentiality of such information. (c) Applicability; Limitations. (i) The obligations imposed by this Section shall apply (x) to Buyer forever with respect to any Confidential Information relating to the business or operations of Seller other than the Purchased Assets, and until the Closing with respect to the Purchased Assets or, if such Closing does not occur, forever with respect to the Purchased Assets, and (y) to Seller forever with respect to the operations of Buyer and forever with respect to the Purchased Assets after the Closing except in connection with actions expressly provided or permitted to Seller herein; provided, however, that the obligations imposed by this Section 5.4 shall not apply to any Confidential Information: (aa) which was known to the receiving party prior to receipt from the disclosing party; (bb) which was publicly divulged prior to receipt from the disclosing party; (cc) which, through no act on the part of the receiving party, thereafter becomes publicly divulged; (dd) which was received in good faith by the receiving party from any third party without breach of any obligations of confidentiality; or (ee) which was independently developed (without access to or use of any Confidential Information of the other party) by an employee or agent of the receiving party subsequent to receipt of the Confidential Information under this Agreement. (ii) The obligations imposed by this Section 5.4 on Seller shall not apply to the Comdial Corporation "Quick Q" call center product, including enhancements, upgrades, modifications and improvements thereto or derivatives thereof, and including replacement products developed by Comdial Corporation. (d) Injunctive Relief. The parties agree that the non-breaching party would not have an adequate remedy at law for any breach or nonperformance of the terms of this Section 5.4 by the other party or any of its employees, agents and representatives and that this Agreement, therefore, may be enforced in equity by specific performance, temporary restraining order and/or injunction. The non-breaching party's right to such equitable remedies shall be in addition to all other rights and remedies which the non-breaching party may have hereunder or under applicable law, including a right to damages. (e) Unconditional Obligation. The obligations set forth in this Section 5.4 to maintain the confidentiality of and not wrongfully use the Confidential Information are unconditional and shall not be excused by any conduct on the part of a party except as specifically set forth in Section 5.4(c). 5.5 Offer of Employment. During the period prior to the Closing, Buyer may negotiate with and offer employment to current employees of Seller. In the event that any current employee of Seller accepts employment with Buyer on terms reasonably satisfactory to Buyer, then and in that event Seller will pay Buyer at Closing the amount of Seller Assisted Signing Bonus designated for such employee on Exhibit . In the event an employee who receives payment of a Seller Assisted Signing Bonus terminates employment with Buyer within four (4) months after the Closing Date, Buyer will promptly reimburse Seller a pro rata portion of that employee's Seller Assisted Signing Bonus, determined by multiplying the amount thereof by a fraction, the numerator of which is the number of whole and partial months remaining to a date four (4) months after the Closing Date, and the denominator of which is four (4). Seller will terminate the employment of any employee hired by Buyer and the employment of such employee by Buyer shall be a new employment relationship. Notwithstanding the foregoing or any other provision of this Agreement, Seller acknowledges and agrees that Buyer has no obligation to employ any current employees of Seller and that Seller will be solely responsible for any vacation pay and any other obligations to such employees arising out of their employment with Seller. 5.6 Cash Payment. Seller will pay to Buyer at the Closing Twenty Thousand Dollars ($20,000) to assist the Buyer in effecting a transfer of the FastCall Products from Seller to Buyer. ARTICLE 6 CONDITIONS OF CLOSING; ABANDONMENT OF TRANSACTION 6.1 Conditions to Obligations of Buyer to Proceed on the Closing Date. The obligations of Buyer to proceed on the Closing Date shall be subject (at its discretion) to the satisfaction, on or prior to the Closing, of all of the following conditions: (a) Truth of Representations and Warranties and Compliance with Obligations. The representations and warranties of Seller herein shall be true in all material respects on the Closing Date with the same effect as though made at such time. Seller shall have performed all material obligations and complied with all material covenants and conditions prior to or as of the Closing Date. (b) Opinion of Counsel. Buyer shall have received a duly executed opinion letter from Seller's legal counsel dated as of the Closing Date, in form and substance reasonably satisfactory to Buyer and its counsel, to the effect that: (i) Seller is a corporation duly organized and validly existing and in good standing in the State of Delaware; has all necessary corporate power to own its properties and assets and to conduct its business as it is now conducted; and is qualified to do business in all states in which qualification is required by the nature of the its business and where the failure to so qualify would have a material adverse effect on the Purchased Assets; (ii) This Agreement and all collateral documents have been duly and validly authorized, executed and delivered by Seller, constitute the valid and binding obligations of Seller and are enforceable in accordance with their terms, except as limited by bankruptcy and insolvency laws and by other laws affecting the rights of creditors generally; (iii) To the best of such counsel's knowledge, after reasonable inquiry, no suit, action, arbitration, legal or administrative proceeding is pending against the Purchased Assets; and (iv) Neither the execution nor delivery of this Agreement, nor the consummation of the transactions contemplated in this Agreement, will constitute a violation of Seller's Certificate of Incorporation or Bylaws, or, to the best of such counsel's knowledge, a default under, or violation or breach of, any material agreement listed on an Exhibit to this Agreement. In giving such opinion, such counsel may rely, as to matters of fact, upon certificates of officers of Seller or public officials, and as to matters of law solely upon the laws of the State of Delaware. (c) Required Consents. All required consents shall have been received from governmental agencies whose approval is required to consummate the transaction contemplated herein and from each person or entity listed on Exhibit . (d) Delivery of Documents. Seller shall have executed and delivered to Buyer documents assigning all of its right, title and interest in and to the Purchased Assets; and Seller shall have delivered all documents required to be delivered at Closing pursuant to Section 7.2 hereof. (e) Litigation Affecting Closing. No suit, action or other proceeding shall be pending or threatened by or before any court or governmental agency in which it is sought to restrain or prohibit or to obtain damages or other relief in connection with this Agreement or the consummation of the transaction contemplated by this Agreement, and no investigation that may result in any such suit, action or other proceeding shall be pending or threatened. (f) Legislation. No statute, rule, regulation or order shall have been enacted, entered or deemed applicable by any domestic or foreign government or governmental or administrative agency or court which would make the transaction contemplated by this Agreement illegal or otherwise materially adversely affect the Purchased Assets or their use and operation in the hands of Buyer. (g) Review of Records of the Business. Buyer shall have had the opportunity prior to the Closing Date to review the business records of the Seller relating to the Purchased Assets and to take such other actions as specified in Section 5.1. Buyer shall not have discovered during such review any substantial liabilities relating to the Purchased Assets which were not previously disclosed to Buyer in the this Agreement (including its Exhibits) or otherwise by Seller. 6.2 Conditions to Obligation of Seller to Proceed on the Closing Date. The obligation of Seller to proceed on the Closing Date shall be subject (at its discretion) to the satisfaction, on or before the Closing, of the following conditions: (a) Truth of Representations and Warranties and Compliance with Obligations. The representations and warranties of Buyer herein contained shall be true in all material respects on the Closing Date with the same effect as though made at such time. Buyer shall have performed all material obligations and complied with all material covenants and conditions prior to or as of the Closing Date. (b) Opinion of Counsel. Seller shall have received a duly executed opinion letter from Buyer's legal counsel dated as of the Closing Date, in form and substance reasonably satisfactory to Seller and its counsel, to the effect that: (i) Buyer is a corporation duly organized and validly existing and in good standing in the State of Minnesota and has all necessary corporate power to own its properties and assets and to conduct its business as it is now conducted; (ii) This Agreement and all collateral documents have been duly and validly authorized, executed and delivered by Buyer, constitute the valid and binding obligations of Buyer, and are enforceable in accordance with their terms, except as limited by bankruptcy and insolvency laws and by other laws affecting the rights of creditors generally; (iii) To the best of such counsel's knowledge, after reasonable inquiry, no suit, action, arbitration, legal or administrative proceeding, or any governmental investigation, is pending or threatened against Buyer, or any of their businesses or properties; and (iv) Neither the execution nor delivery of this Agreement, nor the consummation of the transactions contemplated in this Agreement, will constitute a violation of the Articles of Incorporation or Bylaws of Buyer, or, to the best of such counsel's knowledge, after reasonable inquiry, a default under, or violation or breach of, any indenture, license, lease, mortgage, instrument, or other agreement to which Buyer is a party, or by which its properties may be bound. In giving such opinion, such counsel may rely, as to matters of fact, upon certificates of officers of Buyer or public officials. (c) Delivery of Documents. Buyer shall have delivered all documents required to be delivered at Closing pursuant to Section 7.3 hereof. (d) Litigation Affecting Closing. No suit, action or other proceeding shall be pending or threatened by or before any court or governmental agency in which it is sought to restrain or prohibit or to obtain damages or other relief in connection with this Agreement or the consummation of the transaction contemplated by this Agreement, and no investigation that might eventuate in any such suit, action or other proceeding shall be pending or threatened. (e) Legislation. No statute, rule, regulation or other shall have been enacted, entered or deemed applicable by any domestic or foreign government or governmental or administrative agency or court which would make the transaction contemplated by this Agreement illegal. 6.3 Termination of Agreement. This Agreement and the transactions contemplated herein may be terminated at or prior to the Closing Date as follows: (a) By mutual written consent of all parties. (b) By Buyer pursuant to written notice delivered at or prior to the Closing if Seller has failed in any material respect to satisfy all of the conditions to Closing set forth in Section 6.1. (c) By Seller pursuant to written notice delivered at or prior to the Closing if Buyer has failed in any material respect to satisfy the conditions set forth in Section 6.2. 6.4 Consequences of Termination. In the event of termination of this Agreement, each party will return to the other all documents and materials obtained from the other in connection with the transaction contemplated by this Agreement and will not use and will keep confidential all Confidential Information about the other party obtained pursuant to this Agreement pursuant to the terms of Section 5.4 hereof. ARTICLE 7. CLOSING 7.1 Closing. The closing of the transaction contemplated by this Agreement ("Closing") shall be held at [the offices of Buyer] on December 31, 1997, at 1:00 p.m., or at such other date or time as the parties may mutually agree upon in writing. Such date of Closing is referred to herein as the Closing Date. 7.2 Documents to be Delivered by Seller. Seller agrees to deliver the following documents, duly executed as appropriate, to Buyer at the Closing: (a) Certified copies of corporate resolutions of Seller authorizing it to enter into this Agreement and to consummate the transactions contemplated herein. (b) A Bill of Sale for the assignment and transfer of the Purchased Assets. (c) Appropriate assignment documents assigning Seller's title and interest in and to the Purchased Assets. (d) Opinion of Seller's Counsel as required under Section 6.1(b). (e) Documentation of receipt of consents from all persons listed on Exhibit , except as waived by Buyer. (f) Copies in hardcopy and machine readable code of all software comprising the FastCall Products, and the Computer Programs. (g) Such other documents as Buyer may reasonably request for the purpose of assigning, transferring, granting, conveying, and confirming to Buyer or reducing to its possession all of the Purchased Assets. 7.3 Documents Delivered by Buyer. Buyer agrees to deliver the following documents, duly executed as appropriate, to Seller at the Closing: (a) Certified copies of corporate resolutions of Buyer authorizing it to enter into this Agreement and to consummate the transactions contemplated herein. (b) Wire transfer of the net amount of funds described in Section 2.2(a). (c) Royalty-free non-exclusive License for Seller to use the Patents. (d) Opinion of Buyer's counsel as required under Section 6.2(b). (e) An assumption of the obligations identified in Exhibit and . (f) Such other documents as Seller reasonably may request to carry out the transactions contemplated under this Agreement. ARTICLE 8. POST CLOSING OBLIGATIONS 8.1 Covenant Not to Compete. Seller and Comdial Corporation ("Comdial") covenant and agree (the "Covenant Not to Compete") that from and after the Closing, without the prior written consent of Buyer, neither Seller nor Comdial (for itself and its controlled subsidiaries) will develop, market or sell desktop-based screen pop products in competition with the Royalty Products sold for use as middleware in connection with telephone systems including key systems, private branch exchanges (PBX's) and automatic call distribution (ACD's) ("Protected Products") by the Buyer, in accordance with and subject to the following provisions: (a) The term "Protected Products" shall not include products used in connection with telephone systems including key systems, PBX's and ACD's sold by Comdial or its subsidiaries, or marketed under the Comdial(R) name. (b) The term "Protected Products" shall not include visual call products developed, marketed or sold by Key Voice Technologies, Inc., a subsidiary of Comdial, or by any other subsidiary of Comdial, such as the Key Voice Visual Call management products and their derivatives or replacements. (c) The Covenant Not to Compete shall expire five (5) years after the Closing Date. 8.2 Further Documents and Assurances. At any time and from time to time after the Closing Date, each party shall, upon request of another party, execute, acknowledge and deliver all such further and other assurances and documents, and will take such action consistent with the terms of this Agreement, as may be reasonably requested to carry out the transactions contemplated herein and to permit each party to enjoy its rights and benefits hereunder. If requested by Buyer, each of Seller and Comdial further agree to prosecute or otherwise enforce in its own name for the benefit of Buyer any claim, right or benefit transferred by this Agreement that may require prosecution or enforcement in Seller's or Comdial's name. Any prosecution or enforcement of claims, rights, or benefits under this provision shall be solely at Buyer's expense, unless the prosecution or enforcement is made necessary by a breach of this Agreement on the part of Seller or Comdial. 8.3 Consulting. For a period of ninety (90) days after the Closing Date Seller or Comdial will make available to Buyer up to fifty (50) hours of consulting services each from Paul M. Gasparro and, to the extent she does not become an employee of Buyer, Sandra Scheer. Such consulting services shall be at no cost to Buyer, except that Buyer will be responsible for any necessary travel expenses incurred at Buyer's request. Notwithstanding the foregoing, the obligation of Seller and Comdial to provide consulting services from Paul M. Gasparro and Sandra Scheer shall be contingent upon their continued employment, respectively, with Seller or Comdial. 8.4 Accounts Receivable. Seller shall use its normal business efforts to collect the Excess Accounts Receivable for the benefit of Buyer, and remit to Buyer all payments received thereon as and when collected. The Seller shall not be obligated to institute legal proceedings to collect the Excess Accounts Receivable. At any time at the written request of Buyer, and on March 31, 1998 in any event, Seller will assign the uncollected Excess Accounts Receivable to Buyer and Seller shall have no further obligation to Buyer with respect thereto. 8.5 Un-Invoiced Sales. Buyer may invoice customers for amounts owing to Seller on account of the Un-Invoiced Sales and may collect the same. Seller shall have no obligation to Buyer with respect thereto. 8.6. Fleet Capital Corporation Releases. Within 20 days after the Closing Date, Seller and its parent company, Comdial Corporation, agree to obtain releases of the Fleet Liens against the Purchased Assets as set forth on Exhibit 3.5 hereto, including, but not limited to, partial releases for the original financing statements filed by Fleet Capital Corporation against Seller in Massachusetts and Virginia as well as a partial release of the Security Agreement-Intellectual Property to release the patents, trademarks and copyrights identified on Exhibits 1.1(a) and 1.1(b) of this Agreement. Such releases shall be in recordable form and otherwise reasonably acceptable to Purchaser. ARTICLE 9. INDEMNIFICATION 9.1 Indemnification by Seller. Subject to the limitations set forth in Section 9.2, Seller and Comdial shall indemnify and hold Buyer harmless at all times from and after the date of this Agreement against and in respect of all damages, losses, costs and expenses (including reasonable attorneys' fees) which Buyer may suffer or incur in connection with any of the following matters: (a) Any claim, demand, action or proceeding asserted by a creditor of Seller under the provisions of any applicable Bulk Transfer Act or asserted by any other person respecting any liabilities of Seller which are not expressly assumed by Buyer under this Agreement. (b) A material breach by Seller of any of its representations, warranties or covenants in this Agreement. 9.2 Seller's Limitation of Liability. (a) Buyer shall assert any claim under Section 9.1(b) within twelve (12) months from the Closing Date or be forever barred from asserting such claim. (b) The rights of Buyer with respect to any claims arising under Section 9.1 shall be limited to recovery of actual losses, costs and expenses (including reasonable attorneys' fees). Buyer hereby waives any remedy or right of rescission arising on the basis of such claims. 9.3 Indemnification by Buyer. Buyer shall indemnify and hold Seller and Comdial harmless at all times from and after the date of this Agreement, against and in respect of all losses, damages, costs and expenses (including reasonable attorneys' fees) which Seller or Comdial may suffer or incur in connection with any of the following matters: (a) A material breach by Buyer of any representations, warranties or covenants in this Agreement. (b) Any claim, demand, action or proceeding asserted by any person against Seller or Comdial or any of its subsidiaries relating to any obligation or liability imposed on or assumed by Buyer hereunder or to any obligation or liability relating to the Royalty Products incurred after the Closing. 9.4 Buyer's Limitation of Liability. (a) Seller or Comdial shall assert any such claim under Section 9.2(a) within twelve (12) months of the Closing Date or be forever barred from asserting such claim. (b) The rights of Seller or Comdial with respect to any claims arising under Section 9.3 shall be limited to recovery of actual losses, costs and expenses (including reasonable attorney's fees). Seller and Comdial hereby waive any remedy or right of recision arising on the basis of such claims. 9.5 Limitations on Indemnification. Notwithstanding the foregoing provisions of this Article, neither Seller nor Comdial shall be liable to Buyer under Section 9.1 unless and until the aggregate amount of liability under such Section exceeds [$17,500], and thereafter Buyer shall be entitled to indemnification thereunder only for the aggregate amount of such liability in excess of [$17,500]. Buyer shall not be liable to Seller or Comdial under Section 9.3 unless and until the aggregate amount of liability under such Section exceeds [$17,500], and thereafter Seller and Comdial shall be entitled to indemnification thereunder only for the aggregate amount of such liability in excess of [$17,500]. In no event shall either Buyer's liability or Seller's or Comdial's liability under Sections 9.1 and 9.3 exceed the Purchase Price. 9.6 Third Party Claims. If a claim by a third party is made against any of the indemnified parties, and if any of the indemnified parties intends to seek indemnity with respect to such claim under this Article, such indemnified party shall promptly notify the indemnifying party of such claim. The indemnifying party shall have thirty (30) days after receipt of the above-mentioned notice to undertake, conduct and control, through counsel of such party's own choosing (subject to the consent of the indemnified party, such consent not to be unreasonably withheld) and at such party's expense, the settlement or defense of it, and the indemnified party shall cooperate with the indemnifying party in connection with such efforts; provided that: (i) the indemnifying party shall not by this Agreement permit to exist any lien, encumbrance or other adverse charge upon any asset of any indemnified party, (ii) the indemnifying party shall permit the indemnified party to participate in such settlement or defense through counsel chosen by the indemnified party, provided that the fees and expenses of such counsel shall be borne by the indemnified party, and (iii) the indemnifying party shall agree promptly to reimburse the indemnified party for the full amount of any loss resulting from such claim and all related expense incurred by the indemnified party pursuant to this Article. So long as the indemnifying party is reasonably contesting any such claim in good faith, the indemnified party shall not pay or settle any such claim. If the indemnifying party does not notify the indemnified party within thirty (30) days after receipt of the indemnified party's notice of a claim of indemnity under this Article that such party elects to undertake the defense of such claim, the indemnified party shall have the right to contest, settle or compromise the claim in the exercise of the indemnified party's exclusive discretion at the expense of the indemnifying party. ARTICLE 10. GENERAL 10.1 Assignment. This Agreement may be assigned by the Buyer, and the Royalty Products sold or transferred by the Buyer, without the prior written consent of Seller only on the following terms: (a) The Buyer shall pay to Seller the amount, if any, by which the Minimum Purchase Price exceeds the Total Payment Amount as of the date of such assignment, sale or transfer; and (b) The assignee of or purchaser from the Buyer agrees in writing and for the benefit of Seller to be bound by the terms of this Agreement to the same extent as the Buyer, and Buyer furnishes Seller with an appropriate written agreement to this effect duly signed and delivered by such assignee or purchaser. 10.2 Counterparts. This Agreement may be executed in counterparts and by different parties on different counterparts with the same effect as if the signatures thereto were on the same instrument. This Agreement shall be effective and binding upon all parties hereto as of when all parties have executed a counterpart of this Agreement. 10.3 Exhibits. Each Exhibit delivered pursuant to the terms of this Agreement shall be in writing and shall constitute a part of this Agreement. 10.4 Notices. Any notice or other communication required or permitted hereunder shall be in writing and shall be deemed to have been given, when received, if delivered by hand, telegram, telex or telecopy, and, when deposited, if placed in the mails for delivery by air mail, postage prepaid, addressed to the appropriate party as specified on the first page of this Agreement. Addresses may be changed by written notice given pursuant to this section, provided that any such notice shall not be effective, if mailed, until three (3) working days after depositing in the mails or when actually received, whichever occurs first. 10.5 Successors and Assigns. Neither Seller nor Buyer shall assign or transfer any of its rights or obligations hereunder without the prior written consent of the other party which consent shall not be unreasonably withheld. 10.6 Expenses. Except as otherwise provided herein, each party hereto shall bear and pay for its own costs and expenses incurred by it or on its behalf in connection with the transactions contemplated hereby, including, without limitation, all fees and disbursements of attorneys, accountants and financial consultants incurred through the Closing Date. 10.7 Entire Agreement. This Agreement, together with the Exhibits and the related written agreements specifically referred to herein, represents the only agreement among the parties concerning the subject matter hereof and supersedes all prior agreements whether written or oral, relating thereto. 10.8 Modification and Waiver. No purported amendment, modification or waiver of any provision hereof shall be binding unless set forth in a written document signed by all parties (in the case of amendments or modifications) or by the party to be charged thereby (in the case of waivers). Any waiver shall be limited to the circumstance or event specifically referenced in the written waiver document and shall not be deemed a waiver of any other term hereof or of the same circumstance or event upon any recurrence thereof. 10.9 Publicity. Seller and Buyer each represent and warrant that it will make no announcement to public officials or the press in any way relating to the transaction described herein without the prior written consent of all parties. 10.10 Governing Law. This Agreement and the legal relations between the parties shall be governed by and construed in accordance with the laws of the State of Minnesota. 10.11 Knowledge. Knowledge, as used in this Agreement or the instruments, certificates or other documents required under this Agreement, means actual knowledge of a fact or constructive knowledge if a reasonably prudent person in a like position would have known, or should have known, the fact. 10.12 Benefit. Nothing in this Agreement, expressed or implied, is intended to confer on any person other than the parties to this Agreement or their permitted successors or assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement. 10.13 Comdial Corporation. Comdial executes this Agreement for the sole purposes of (a) evidencing its obligations expressly set forth in Articles and hereof, (b) confirming that the financial information attached hereto as Exhibit is true and correct, and (c) confirming that it has accurately prepared and timely filed the tax returns described in Section , and has paid the taxes due thereon except as disclosed in Exhibit . IN WITNESS WHEREOF, each of the parties hereto has caused this FastCall Purchase Agreement to be executed in the manner appropriate to each, to be effective as of the day and year first above written. SPANLINK COMMUNICATIONS, INC. ("Buyer") By \s\ T. E. Briggs Its Chief Financial Officer AURORA SYSTEMS, INC. ("Seller") By \s\ Linda P. Falconer Its Assistant Secretary COMDIAL CORPORATION By \s\ Linda P. Falconer Its Assistant Secretary EX-11 10 COMPUTATION OF EARNINGS PER COMMON SHARE COMDIAL CORPORATION AND SUBSIDIARIES EXHIBIT 11 SCHEDULE OF COMPUTATION OF EARNINGS PER COMMON SHARE
- ------------------------------------------------------------------------------------------------------------------- Years Ended December 31, 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------- BASIC Net Income $5,719,000 $1,809,000 $9,869,000 Dividends - - (350,000) --------- ---------- ---------- Net income applicable to common shares $5,719,000 $1,809,000 $9,519,000 ========== ========== ========== Weighted average number of common shares outstanding during the year 8,654,466 8,478,883 7,465,938 Add - contingent shares 29,324 5,388 - --------- ---------- ---------- Weighted average number of shares used in calculation of basic earnings per common share 8,683,790 8,484,271 7,465,938 ========= ========= ========= Basic earnings per common share $0.66 $0.21 $1.27 ====== ====== ====== DILUTED Net income applicable to common shares - basic $5,719,000 $1,809,000 $9,519,000 Adjustments for convertible securities: Dividends paid on convertible preferred stock - - 350,000 --------- ---------- ---------- Net income applicable to common shares, assuming conversion of above securities $5,719,000 $1,809,000 $9,869,000 ========== ========== ========== Weighted average number of shares used in calculation of basic earnings per common share 8,683,790 8,484,271 7,465,938 Add incremental shares representing: Shares issuable upon exercise of stock options and warrants issuable based on weighted average price: Convertible preferred stock - - 527,082 Stock options 83,563 183,370 216,836 --------- ---------- ---------- Weighted average number of shares used in calculation of diluted earnings per common share 8,767,353 8,667,641 8,209,856 ========= ========= ========= Diluted earnings per common share $0.65 $0.21 $1.20 ========= ========= ========= - -------------------------------------------------------------------------------------------------------------------
EX-13 11 ANNUAL REPORT EXHIBIT 13 Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion is intended to assist the reader in understanding and evaluating the financial condition and results of operations of Comdial Corporation and its subsidiaries (the "Company"). This review should be read in conjunction with the financial statements and accompanying notes. This analysis attempts to identify trends and material changes that occurred during the periods presented. Prior years have been reclassified to conform to the 1997 reporting basis (see Note 1 to the Consolidated Financial Statements). RESULTS OF OPERATIONS Selected consolidated statements of operations for the last three years are as follows:
- ---------------------------------------------------------------------------------------------------------- December 31, In thousands 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------- Net sales $118,561 $102,182 $94,729 Gross profit 47,343 37,881 30,702 Selling, general & administrative 29,069 25,757 19,225 Engineering, research & development 6,497 5,771 4,186 Interest expense 1,698 1,626 996 Goodwill amortization 3,567 2,674 23 Miscellaneous expense - net 644 762 737 Income before income taxes 5,868 1,291 5,535 Income tax expense/(benefit) 149 (518) (4,334) Net income 5,719 1,809 9,869 Dividends on preferred stock - - 350 Net income applicable to common stock 5,719 1,809 9,519 - ----------------------------------------------------------------------------------------------------------
1997 Compared with 1996 Net sales as reported for 1997 increased by 16% to $118,561,000, compared with $102,182,000 in 1996. The continued increase in net sales was primarily due to (1) greater demand for the Company's Digital Expandable System ("DXP") and Digital products, (2) introduction of new products such as Impact SCS, the new open digital switching platform known as "the FX Series," and various other new products, and (3) continued growth in sales of Computer Telephone Integration ("CTI") products such as the Small Office product (voicemail system). This product is produced by a subsidiary of the Company, Key Voice Technologies, Inc. ("KVT"). The following table presents certain relevant information concerning the Company's principle product lines for the periods indicated:
- -------------------------------------------------------------------------------------------------------------- December 31, In thousands 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------- Business Systems Digital $50,387 $42,811 $40,486 CTI 26,971 20,458 7,338 DXP 25,527 17,750 13,835 Analog 12,117 16,206 22,426 -------- -------- ------- Sub-total 115,002 97,225 84,085 Proprietary and specialty terminals 4,101 4,741 6,032 Custom manufacturing 736 1,299 6,092 -------- -------- ------- Gross sales 119,839 103,265 96,209 Sales discount and allowances (1,278) (1,083) (1,480) -------- -------- ------- Net sales $118,561 $102,182 $94,729 ======== ======== ======= - ------------------------------------------------------------------------------
In 1997, gross sales of digital and DXP products increased 18% and 44% to $50,387,000 and $25,527,000 compared with $42,811,000 and $17,750,000 for 1996, respectively. In 1997, gross sales of CTI products, including voice processing, increased 32% to $26,971,000 compared with $20,458,000 for 1996. Management expects sales of digital business systems to continue to grow in 1998 primarily due to (1) continued growth in digital systems and CTI sales sold directly to end users, (2) development of new products and new distribution channels offering integrated CTI solutions, and (3) growth of product sales to original equipment manufacturing ("OEM") customers such as the agreement the Company has with Harris Corporation. In 1997, gross sales of analog products, proprietary terminals, and custom manufacturing revenue decreased 25% to $12,117,000, 13% to $4,101,000, and 43% to $736,000, respectively, compared with $16,206,000, $4,741,000, and $1,299,000, respectively, for 1996. Management expects sales of analog and proprietary terminals to continue to decrease in 1998. In 1997, international sales increased by 15% to $4,220,000 compared with $3,670,000 for 1996. The growth in international sales was less than anticipated primarily due to distribution and homologation issues. Homologation is the process of securing regulatory, safety, and network compliance approvals for the sale of telecommunications equipment in foreign countries. As many countries have different standards than the United States, this typically involves engineering modifications and compliance testing. As the international distributors gain more experience with the Company's products, international sales are expected to continue to grow. Gross profit, as a percentage of sales for 1997, was 40% compared with 37% for 1996. In 1997, gross profit increased by 25% to $47,343,000 compared with $37,881,000 for 1996. This increase was primarily attributable to increased sales of higher margin business system products, such as DXP and CTI products. Selling, general and administrative expenses increased in 1997 by 13% to $29,069,000 compared with $25,757,000 for 1996. The primary reasons for the increase were (1) additional administrative, marketing, and sales expenses of $966,000 associated with KVT, (2) an increase in sales personnel to support the growth in national accounts and expanding CTI markets, (3) an increase in administrative costs associated with hiring two new officers, one of whom was hired at the end of the second quarter of 1997 and the other in December 1997, and (4) higher promotional allowance costs associated with increased sales through Platinum and Preferred Dealers. Engineering, research and development expenses increased in 1997 by 13% to $6,497,000 compared with $5,771,000 for 1996. This increase was primarily due to increased expenses of $442,000 associated with KVT. Interest expense increased in 1997 by 4% to $1,698,000 compared with $1,626,000 for 1996. This increase was primarily due to the 1996 acquisition loan the Company obtained from Fleet Capital Corporation ("Fleet") to provide funding to acquire Aurora Systems, Inc. ("Aurora") and KVT. In 1996, there were only nine months of interest expense associated with the Aurora and KVT acquisitions. Additional interest expense was incurred as a result of a promissory note issued to the original owners of KVT related to the purchase of KVT (see Note 2 to the Consolidated Financial Statements). The interest expense associated with the 1996 acquisitions will decline in 1998 as the Company continues to pay down these loans. Goodwill amortization expense increased in 1997 by 33% to $3,567,000 compared with $2,674,000 in 1996. The increase was due to a full year of amortization expense associated with the acquisitions of Aurora and KVT and the write-off of the remaining goodwill of $164,000 associated with an earlier acquisition. Net income before income taxes, as a result of the foregoing, increased in 1997 by 355% to $5,868,000 compared with $1,291,000 in 1996. Major factors contributing to the increase in income and earnings per share for 1997 were increased sales of business systems with higher margins. Management anticipates, assuming continued strength in the economy, that the factors, which have led to significant increases in sales for 1997, will continue to have a positive influence on the Company's performance in 1998. Income tax expense (benefit) reflects an expense in 1997 of $149,000 compared with a benefit of $518,000 for 1996. This change was due to recognition of a deferred tax asset benefit of $219,000 for 1997 compared with a benefit of $736,000 for 1996. The tax benefits, recognized in 1997 and 1996, were a result of a reduction in the valuation allowance relating to the Company's federal net operating loss carryforwards ("NOLS") (see Note 7 to the Consolidated Financial Statements). The Company periodically reviews the requirements for a valuation allowance and makes adjustments to such allowance when changes in circumstances result in changes in judgment about the future realization of deferred tax assets. Based on a continual re-evaluation of the realization of the deferred tax asset, the valuation allowance was reduced and a tax benefit of $219,000 was recognized in the quarter ended March 30, 1997. Tax expense for 1997 increased to $368,000 compared with $218,000 for 1996. This increase is due to the higher taxable income for 1997 versus 1996. 1996 Compared with 1995 Net sales as reported for 1996 increased by 8% to $102,182,000, compared with $94,729,000 in 1995. The increase in net sales was primarily due to (1) demand for the Company's DXP and Digital products, and (2) growth in sales of CTI products, which was enhanced by the acquisitions of Aurora and KVT. In 1996, gross sales of DXP products increased 28% to $17,750,000 compared with $13,835,000 for 1995. In 1996, gross sales of CTI products, including voice processing, increased 179% to $20,458,000 compared with $7,338,000 for 1995. In 1996, sales of analog products, proprietary terminals, and custom manufacturing revenue decreased 28% to $16,206,000, 21% to $4,741,000, and 79% to $1,299,000, respectively, compared with $22,426,000, $6,032,000, and $6,092,000, respectively, for 1995. The custom manufacturing decrease was primarily due to completion in 1995 of a one-time contract with a major customer. In 1996, international sales increased by 38% to $3,670,000 compared with $2,666,000 for 1995. Gross profit, as a percentage of sales for 1996, was approximately 37% compared with 32% for 1995. In 1996, gross profit increased by 23% to $37,881,000 compared with $30,702,000 for 1995. This increase was primarily attributable to increased sales of higher margin business system products, such as DXP and CTI products, and higher margins that Aurora and KVT products added to the business. Selling, general and administrative expenses increased in 1996 by 34% to $25,757,000 compared with $19,225,000 for 1995. The primary reasons for the increase were (1) an increase in sales personnel to broaden the Company's domestic network and to support the growth of the CTI and international markets, (2) additional administrative, marketing, and sales expenses of $2,940,000 associated with Aurora and KVT, and (3) higher promotional allowance costs associated with increased sales through Preferred Dealers. Engineering, research and development expenses increased in 1996 by 38% to $5,771,000 compared with $4,186,000 for 1995. This increase was primarily due to (1) the addition of new software development and support personnel to further the development of new products, develop new CTI applications, and shorten the development cycle, and (2) increased expenses of $895,000 associated with Aurora and KVT. Interest expense increased in 1996 by 63% to $1,626,000 compared with $996,000 for 1995. This increase was due to the acquisition loan the Company obtained from Fleet to provide funding to help acquire Aurora and KVT. Additional interest expense was also incurred as a result of a promissory note issued to the original owners of KVT related to of the purchase of KVT. Goodwill amortization expense in 1996 increased to $2,674,000 compared with $23,000 in 1995. The increase was due to the acquisitions of Aurora and KVT. Net income before income taxes, as a result of the foregoing, decreased in 1996 by 77% to $1,291,000 compared with $5,535,000 in 1995. Some of the factors which led to the decreases in income and earnings per share for 1996 were (1) decreased sales of analog products which were down by approximately 27%, (2) decreased sales to the Federal Government which were down by approximately 53%, and (3) additional costs associated with expanding the sales and engineering organizations. Income tax expense (benefit) reflected a benefit of $518,000 in 1996 compared with a benefit of $4,334,000 for 1995. This change was due to recognition of a deferred tax asset through a reduction of the valuation allowance for both 1996 and 1995. Based on a continual re-evaluation of the realization of the deferred tax asset, the valuation allowance was reduced and a tax benefit of $736,000 was recognized in the quarter ended March 31, 1996. Dividends on preferred stock were zero for 1996 compared with $350,000 for 1995. In 1995, all of the outstanding shares of the Company's Series A 7-1/2% Cumulative Convertible Redeemable Preferred Stock ("Series A Preferred Stock") were redeemed. LIQUIDITY AND CAPITAL SOURCES The Company's financial position continues to improve when compared to previous years. In 1997, the Company's cash flow provided by operations increased by 118% to $12,240,000 compared with $5,626,000 for 1996. This increase was primarily attributable to increased sales for 1997. This continued improvement in financial position allows the Company to make necessary and desirable capital expenditures and to expand into new high growth markets in the telecommunications industry. The following table sets forth the Company's cash and cash equivalents, current maturities on debt, and working capital at the dates indicated:
- ---------------------------------------------------------------------------------------------------------------- December 31, In thousands 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------- Cash and cash equivalents $5,673 $180 $4,144 Current maturities on debt 3,701 5,343 1,903 Working capital 16,676 10,608 18,271 - ----------------------------------------------------------------------------------------------------------------
All operating cash requirements are funded through a $12.5 million revolving credit facility provided by Fleet and any excess cash is put into short term, highly liquid investments. The Company reports the revolving credit facility activity on a net basis on the Consolidated Statements of Cash Flows. The Company considers outstanding checks to be a bank overdraft. As of December 31, 1997, the Company's cash and cash equivalents were higher by $5,493,000, due to significantly improved operating performance. Management anticipates using some of the available cash to help lower the Company's existing debt, which would result in lower interest expense for future periods. Working capital at December 31, 1997, increased by $6,068,000 when compared to 1996. This increase was primarily due to the additional cash the Company generated from operations for 1997. Capital additions for 1997 were approximately $3,922,000. Such capital additions helped the Company introduce new products as well as improve quality and reduce costs associated with new and existing products. Capital additions were funded by cash generated from operations and borrowing from Fleet. Cash expenditures for capital additions for 1997, 1996, and 1995 amounted to $3,609,000, $3,179,000, and $2,155,000, respectively. Management anticipates that approximately $5,000,000 will be spent on capital additions during 1998. These additions will help the Company meet its commitments to its customers by developing new products for the future. The Company plans to fund all additions primarily through cash generated by operations with some of the funding coming from borrowing and long-term leases. The Company has a commitment from Crestar Bank for the issuance of letters of credit in an aggregate amount not to exceed $500,000 at any one time. At December 31, 1997, the amount of commitments under the letter of credit facility with Crestar Bank was $52,000. Accounts Receivable at December 31, 1997, increased by $1,618,000 primarily due to the increased sales in the latter part of the fourth quarter of 1997. Prepaid expenses and other current assets at December 31, 1997, increased by $328,000 primarily due to the receivable associated with Aurora's sale of the FastCall product to Spanlink Communications, Inc. (see Note 2 to the Consolidated Financial Statements). Goodwill at December 31, 1997, decreased by $3,710,000 compared with December 31, 1996. This decrease was due to the amortization of costs associated with the acquisitions of Aurora and KVT and the write-off of goodwill costs associated with the sale of the Fastcall product. Other accrued liabilities at December 31, 1997, increased by $1,084,000 compared with December 31, 1996. This increase was primarily due to liabilities relating to 1997 sales commissions and income incentives. Long-term Debt, Including Current Maturities As of February 1, 1994, Fleet held substantially all of the Company's indebtedness. The Company and Fleet entered into a loan and security agreement ("Loan Agreement") in 1994 pursuant to which Fleet provided the Company with a $6.0 million term loan represented by a note ("Term Note I") and a $9.0 million revolving credit loan facility ("Revolver") in an aggregate amount up to $14.0 million On March 13, 1996, the Company and Fleet amended the Loan Agreement to provide the Company with a $10.0 million acquisition loan ("Acquisition Loan"), a $3.5 million equipment loan ("Equipment Loan"), and a $12.5 million revolving credit loan facility ("Amended Revolver"). On March 20, 1996, the Company borrowed $8.5 million under the Acquisition Loan, which was used, in connection with the purchase of KVT and Aurora. In addition to the Fleet indebtedness, the Company issued a promissory note ("Promissory Note") for $7.0 million to the former owners of KVT, as part of the purchase price. From time to time, the Company and Fleet have amended the Loan Agreement. On February 5, 1997, the Company borrowed an additional $1.9 million under the Equipment Loan ("Equipment Loan II") which was used to purchase surface mount technology ("SMT") equipment to further expand its SMT line capacity. On March 27, 1997, the Company and Fleet amended the Loan Agreement to modify certain financial covenants. Current maturities on debt at December 31, 1997, decreased by $1.6 million, primarily due to the Amended Revolver, which the Company currently is not using due to excess cash. Availability under the Amended Revolver is based on eligible accounts receivable and inventory, less funds already borrowed. As of December 31, 1997, the Company had paid all the borrowed funds under the Amended Revolver and had approximately $8.5 million of borrowing capacity. The Company expects to fund its 1998 total debt payments of $2.2 million to Fleet with cash generated from operations. See Note 6 to the Company's Consolidated Financial Statements for additional information with respect to the Company's loan agreements, long-term debt and available short-term credit lines. The Company believes that income from operations combined with amounts available from the Company's current credit facilities will be sufficient to meet the Company's needs for the foreseeable future. Other Financial Information During fiscal years 1997, 1996, and 1995, primarily all of the Company's sales, net income, and identifiable net assets were attributable to the telecommunications industry. In October 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." The new standard defines a fair value method of accounting for stock options and similar equity instruments. Pursuant to the new standard, companies can either adopt the standard or continue to account for such transactions under Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees." The Company has continued to account for such transactions under APB No. 25. The Company has disclosed, in a note to the financial statements, pro forma net income and earnings per share, as if the Company had applied the new method of accounting (see Note 11 to the Consolidated Financial Statements). Since the Company has continued to apply APB No. 25, complying with the standard has had no effect on earnings or the Company's cash flow. In February 1997, FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." The new standard requires presentation disclosures about reportable operating segments of the Company. This statement will be effective for the Company's 1998 fiscal year. This new requirement is being discussed by management to determine how best to meet this new disclosure requirement. In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income." The new standard requires businesses to disclose comprehensive income and its components in their general-purpose financial statements. This statement will be effective for the Company's 1998 fiscal year. This standard will not have an impact on the Company's disclosures. In early 1997, the Company established a team of people, to evaluate whether, and to what extent, the Year 2000 would impact the Company's business. The Year 2000 Team identified which of the Company's products, devices, and computerized systems that contain embedded microprocessors, that require remediation or replacement because of potential Year 2000 problems. The Year 2000 Team concluded that nearly all of the Company's products are already Year 2000 compliant and those which are not will be compliant by 1999 or before. On an ongoing basis, the Company has been replacing existing systems to improve efficiency and to address the Year 2000 problem. Such replacements are projected to be complete in 1998. The Company does not expect to make any material expenditures solely to address Year 2000 issues. Management believes that the Company is properly addressing the Year 2000 problem in order to mitigate any adverse operational or financial impacts. Furthermore, the Company plans to implement a requirement beginning in 1998 that its suppliers certify that all products and services provided to the Company are Year 2000 compliant. "SAFE HABOR" STATEMENT UNDER THE PRIVATE SECURITIES LIGITATION REFORM ACT OF 1995 The Company's Annual Report may contain some forward-looking statements that are subject to risks and uncertainties, including, but not limited to, the impact of competitive products, product demand and market acceptance risks, reliance on key strategic alliances, fluctuations in operating results, delays in development of highly complex products, and other risks detailed from time to time in the Company's filings with the Securities and Exchange Commission. These risks could cause the Company's actual results for 1998 and beyond to differ materially from those expressed in any forward-looking statement made by, or on behalf of, the Company. - ------------------------------------------------------------------------------ INDEPENDENT AUDITORS' REPORT - ------------------------------------------------------------------------------ Board of Directors and Stockholders Comdial Corporation Charlottesville, Virginia We have audited the accompanying consolidated balance sheets of Comdial Corporation and its subsidiaries (the "Company") as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Comdial Corporation and subsidiaries at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP Richmond, Virginia January 30, 1998 - ------------------------------------------------------------------------------ REPORT OF MANAGEMENT - ------------------------------------------------------------------------------ Comdial Corporation's management is responsible for the integrity and objectivity of all financial data included in this Annual Report. The consolidated financial statements have been prepared in accordance with generally accepted accounting principles. Such principles are consistent in all material respects with accounting principles prescribed by the various regulatory commissions. The financial data includes amounts that are based on the best estimates and judgments of management. The Company maintains an accounting system and related internal accounting controls designed to provide reasonable assurance that assets are safeguarded against loss or unauthorized use and that the financial records are adequate and can be relied upon to produce financial statements in accordance with generally accepted accounting principles. Deloitte & Touche LLP, Certified Public Accountants ("Independent Auditors"), have audited these consolidated financial statements, and have expressed herein their unqualified opinion. The Company diligently strives to select qualified managers, provide appropriate division of responsibility, and assure that its policies and standards are understood throughout the organization. The Company's Code of Conduct serves as a guide for all employees with respect to business conduct and conflicts of interest. The Audit Committee of the Board of Directors, comprised of Directors who are not employees, meets periodically with management and the Independent Auditors to review matters relating to the Company's annual financial statements, internal accounting controls, and other accounting services provided by the Independent Auditors. /s/ William G. Mustain /s/ Christian L. Becken William G. Mustain Christian L. Becken Chairman, President and Senior Vice President and Chief Executive Officer Chief Financial Officer - ------------------------------------------------------------------------------------------------------------------------------ Consolidated Balance Sheets
- ------------------------------------------------------------------------------------------------------------------------------ December 31, In thousands except par value 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------ Assets Current assets Cash and cash equivalents $5,673 $180 Accounts receivable - net 11,278 9,660 Inventories 18,487 19,586 Prepaid expenses and other current assets 1,669 1,341 - ------------------------------------------------------------------------------------------------------------------------------ Total current assets 37,107 30,767 - ------------------------------------------------------------------------------------------------------------------------------ Property - net 16,334 15,317 Net deferred tax asset 8,164 7,469 Goodwill 13,142 16,852 Other assets 4,517 3,947 - ------------------------------------------------------------------------------------------------------------------------------ Total assets $79,264 $74,352 ============================================================================================================================== Liabilities and Stockholders' Equity Current liabilities Accounts payable $9,229 $8,144 Accrued payroll and related expenses 2,659 2,926 Accrued promotional allowances 1,915 1,903 Other accrued liabilities 2,927 1,843 Current maturities of debt 3,701 5,343 - ------------------------------------------------------------------------------------------------------------------------------ Total current liabilities 20,431 20,159 - ------------------------------------------------------------------------------------------------------------------------------ Long-term debt 9,922 11,713 Net deferred tax liability 2,705 2,230 Long-term employee benefit obligations 1,371 1,686 Commitments and contingent liabilities (see Note 12) - - - ------------------------------------------------------------------------------------------------------------------------------ Total liabilities 34,429 35,788 - ------------------------------------------------------------------------------------------------------------------------------ Stockholders' equity Common stock ($0.01 par value) and paid-in capital (Authorized 30,000 shares; issued shares: 1997 = 8,697; 1996 = 8,580) 114,663 114,118 Other (1,039) (1,046) Accumulated deficit (68,789) (74,508) - ------------------------------------------------------------------------------------------------------------------------------ Total stockholders' equity 44,835 38,564 - ------------------------------------------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity $79,264 $74,352 ============================================================================================================================== The accompanying notes are an integral part of these financial statements. Consolidated Statements of Operations - ------------------------------------------------------------------------------------------------------------------ Years Ended December 31, In thousands except per share amounts 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------ Net sales $118,561 $102,182 $94,729 Cost of goods sold 71,218 64,301 64,027 - ------------------------------------------------------------------------------------------------------------------ Gross profit 47,343 37,881 30,702 - ------------------------------------------------------------------------------------------------------------------ Operating expenses Selling, general & administrative 29,069 25,757 19,225 Engineering, research & development 6,497 5,771 4,186 - ------------------------------------------------------------------------------------------------------------------ Operating income 11,777 6,353 7,291 - ------------------------------------------------------------------------------------------------------------------ Other expense Interest expense 1,698 1,626 996 Goodwill amortization 3,567 2,674 23 Miscellaneous expense - net 644 762 737 - ------------------------------------------------------------------------------------------------------------------ Income before income taxes 5,868 1,291 5,535 Income tax expense/(benefit) 149 (518) (4,334) - ------------------------------------------------------------------------------------------------------------------ Net income 5,719 1,809 9,869 Dividends on preferred stock - - 350 - ------------------------------------------------------------------------------------------------------------------ Net income applicable to common stock $5,719 $1,809 $9,519 ================================================================================================================== Earnings per common share and common equivalent share: Basic $0.66 $0.21 $1.27 ================================================================================================================== Diluted $0.65 $0.21 $1.20 ================================================================================================================== Weighted average common shares outstanding: Basic 8,684 8,484 7,466 Diluted 8,767 8,668 8,210 The accompanying notes are an integral part of these financial statements. Consolidated Statements of Stockholders' Equity - ------------------------------------------------------------------------------------------------------------------ Common Stock Preferred Stock ---------------------------------------------- Paid-in In thousands Shares Amount Shares Amount Capital - ------------------------------------------------------------------------------------------------------------------ Balance at January 1, 1995 21,207 $211 750 $7,500 $100,109 Reverse stock-split 1 for 3 (August 8, 1995) (14,138) (141) 141 Proceeds from sale of Common Stock: Stock offering 1,000 10 11,200 Notes receivable Stock options exercised 144 2 250 Stock offering cost (273) Incentive stock issued 13 116 Redeemed preferred stock (750) (7,500) Treasury stock purchased Dividend paid on preferred stock Net income - ------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1995 8,226 82 - - 111,543 Proceeds from sale of Common Stock: Notes receivable Stock options exercised 53 1 82 Stock offering cost (26) Incentive stock issued 8 73 Treasury stock purchased Common stock issued for acquisitions Key Voice Tech., Inc. ("KVT") 243 2 1,469 Aurora Systems, Inc. ("Aurora") 148 2 890 Net income - ------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1996 8,678 87 - - 114,031 Proceeds from sale of Common Stock: Notes receivable Stock options exercised 32 165 Stock offering cost (9) Deferred stock compensation 4 Incentive stock issued 12 97 Contingency stock issued for KVT acquisition 72 1 291 Acquisition costs for KVT and Aurora (4) Net income - ------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1997 8,794 $88 - - $114,575 ================================================================================================================== Notes Receivable Treasury Stock on Sale Retained ----------------------- In thousands Shares Amount of Stock Earnings Total - ----------------------------------------------------------------------------------------------------------------------- Balance at January 1, 1995 (254) ($760) ($182) ($85,835) $21,043 Reverse stock-split 1 for 3 (August 8, 1995) 169 Proceeds from sale of - Common Stock: - Stock offering 11,210 Notes receivable 6 6 Stock options exercised 252 Stock offering cost (273) Incentive stock issued (1) 115 Redeemed preferred stock (7,500) Treasury stock purchased (9) (78) (78) Dividend paid on preferred stock (350) (350) Net income 9,869 9,869 - ----------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1995 (94) (838) (176) (76,317) 34,294 Proceeds from sale of Common Stock: Notes receivable 8 8 Stock options exercised 83 Stock offering cost (26) Incentive stock issued 73 Treasury stock purchased (3) (40) (40) Common stock issued for acquisitions Key Voice Tech., Inc. ("KVT") 1,471 Aurora Systems, Inc. ("Aurora") 892 Net income 1,809 1,809 - ----------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1996 (97) (878) (168) (74,508) 38,564 Proceeds from sale of Common Stock: Notes receivable 7 7 Stock options exercised 165 Stock offering cost (9) Deferred stock compensation 4 Incentive stock issued 97 Contingency stock issued for KVT acquisition 292 Acquisition costs for KVT and Aurora (4) Net income 5,719 5,719 - ----------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1997 (97) ($878) ($161) ($68,789) $44,835 ======================================================================================================================= The accompanying notes are an integral part of these financial statements. Consolidated Statements of Cash Flows - --------------------------------------------------------------------------------------------------------------------------------- Years Ended December 31, In thousands 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Cash received from customers $121,199 $106,979 $97,156 Other cash received 1,219 1,022 1,355 Interest received 19 53 60 Cash paid to suppliers and employees (108,304) (101,220) (93,990) Interest paid on debt (1,565) (876) (676) Interest paid under capital lease obligations (18) (89) (174) Income taxes paid (310) (243) (186) - --------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 12,240 5,626 3,545 - --------------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Purchase of Key Voice Technologies ("KVT") - (8,528) - Purchase of Aurora Systems ("Aurora") - (1,901) - Acquisition cost for KVT and Aurora (4) (934) - Proceeds from the sale of equipment 22 9 6 Capital expenditures (3,609) (3,179) (2,155) - --------------------------------------------------------------------------------------------------------------------------------- Net cash used by investing activities (3,591) (14,533) (2,149) - --------------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Proceeds from borrowings 2,216 5,619 - Net borrowings under revolver agreement (1,749) 1,749 - Proceeds from issuance of common stock 162 47 11,384 Principal payments on debt (3,693) (1,941) (1,824) Principal payments under capital lease obligations (92) (531) (641) Preferred stock redemption - - (7,500) Preferred dividends paid - - (350) - --------------------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by financing activities (3,156) 4,943 1,069 - --------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 5,493 (3,964) 2,465 - --------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at beginning of year 180 4,144 1,679 - --------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $5,673 $180 $4,144 ================================================================================================================================= Reconciliation of net income to net cash provided by operating activities: Net Income $5,719 $1,809 $9,869 - --------------------------------------------------------------------------------------------------------------------------------- Depreciation and amortization 8,634 6,680 3,557 Change in assets and liabilities (for 1996, net of effects from the purchase of KVT and Aurora): Decrease (increase) in accounts receivable (1,618) 143 (2,339) Inventory provision 1,509 1,029 1,309 Increase in inventory (410) (2,385) (2,365) Increase in other assets (2,956) (1,888) (3,277) Increase in net deferred tax assets (220) (736) (4,503) Increase (decrease) in accounts payable and bank overdrafts 1,085 (657) 1,011 Increase in other liabilities 399 595 435 KVT asset value at acquisition - 1,105 - Aurora asset value at acquisition - (121) - Increase (decrease) in other equity 98 52 (152) - --------------------------------------------------------------------------------------------------------------------------------- Total adjustments 6,521 3,817 (6,324) - --------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities $12,240 $5,626 $3,545 ================================================================================================================================= The accompanying notes are an integral part of these financial statements.
Notes to Consolidated Financial Statements For the Years Ended December 31, 1997, 1996, 1995 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of Comdial Corporation and its subsidiaries (the "Company"). All significant intercompany accounts and transactions have been eliminated. Nature of Operations Comdial is a United States ("U.S.") based manufacturer of business communication systems. The Company's principal customers are small to medium sized businesses throughout the U.S. and certain international markets. The distribution network consists of three major distributors, other supply houses, dealers, and independent interconnects. The dynamic, high technology industry in which the Company participates is very competitive. There is an increasing shift from analog to digital product lines as well as other rapid technological changes creating the potential for product obsolescence. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with Generally Accepted Accounting Principles ("GAAP") requires management to make certain estimates and assumptions that affect reported amounts of assets, liabilities, revenues, expenses, and disclosure of contingent assets and liabilities at December 31, 1997. Actual results could differ from those estimates. Cash and Cash Equivalents Cash equivalents are defined as short-term liquid investments with maturities, when purchased, of less than 90 days that are readily convertible into cash. Under the Company's current cash management policy, borrowings from the revolving credit facility are used for normal operating purposes. The revolving credit facility is reduced by cash receipts that are deposited daily. Currently, the Company has generated from operations additional cash over and above the required amount to completely fund the revolving credit facility (see Note 6). Bank overdrafts of $1,904,000 and $1,935,000 are included in accounts payable at December 31, 1997 and 1996, respectively. Bank overdrafts are outstanding checks that have not (1) cleared the bank or (2) been funded by the revolving credit facility. The Company is reporting the revolving credit facility activity on a net basis on the Consolidated Statements of Cash Flows. Inventories Inventories are stated at the lower of cost (first-in, first-out) or market. Property/Depreciation Depreciation is computed using the straight-line method for all buildings, land improvements, machinery and equipment, and capitalized lease property over their estimated useful lives. Expenditures for maintenance and repairs of property are charged to expense. Improvements and renewals which extend economic lives are capitalized. The estimated useful lives are as follows: Buildings 30 years Land Improvements 15 years Machinery and Equipment 7 years Computer Hardware Equipment and Tooling 5 years Expensing of Costs All production start-up, research and development, and engineering costs are charged to expense, except for that portion of costs which relate to product software development and outside contract development (see "Capitalized Software Development Costs"). Earnings per Common Share and Common Equivalent Share For 1997, 1996, and 1995, earnings per common share ("EPS") were computed for both basic and diluted EPS to conform to the new Statement of Financial Accounting Standards ("SFAS") No. 128. Basic EPS for all years presented were computed by dividing net income applicable to common shares by the weighted average number of common shares outstanding and common equivalent shares including any possible contingent shares. For 1997 and 1996, there were no preferred stock dividends paid or earned. For 1997, 1996, and 1995, diluted EPS were computed by dividing income attributable to common shareholders (net income plus preferred stock dividends paid) by the weighted average number of common and common equivalent shares outstanding during the period plus (in periods in which they had a dilutive effect) the effect of common shares contingently issuable, primarily from stock options. Diluted EPS assumes the conversion of preferred stock and adds back the preferred stock dividends paid to net income. Capitalized Software Development Costs In 1997, 1996, and 1995, the Company incurred costs associated with development of software related to the Company's various products. The accounting for such software costs is in accordance with SFAS No. 86. The Company's estimate of product life is approximately three years or more. The total amount of unamortized software development cost included in other assets is $3,068,000 and $2,297,000 at December 31, 1997 and 1996, respectively. The amounts capitalized were $1,956,000, $1,577,000, and $840,000, of which $1,018,000, $877,000, and $757,000 were amortized in 1997, 1996, and 1995, respectively. The Company also capitalized costs associated with product software development performed by outside contract engineers. The total amount of unamortized outside contract development cost included in other assets is $949,000 and $988,000 at December 31, 1997 and 1996, respectively. The amount capitalized was $530,000 and $1,145,000, of which $569,000 and $157,000 was amortized in 1997 and 1996, respectively. For the year 1995 there was no capitalized costs or amortization expense that related to outside contract development cost. Postretirement Benefits Other Than Pension The Company accrued estimated costs relating to health care and life insurance benefits. In 1997, 1996, and 1995, the Company expensed $64,000, $41,000, and $311,000, respectively. Income Taxes The Company uses the deferred tax liability or asset approach, which is based on the difference between the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates which will be in effect when the differences reverse. Deferred tax expense is the result of changes in the liability for deferred taxes. The measurement of deferred tax assets is impacted by the amount of any tax benefits where, based on available evidence, the likelihood of realization can be established. The Company incurred cumulative operating losses through 1991 for financial statement and tax reporting purposes and has adjusted its valuation allowance account to recognize a portion of the net deferred tax asset for future periods (see Note 7). Tax credits will be utilized to reduce current and future income tax expense and payments. Accounting for Stock-Based Compensation The Company accounts for stock-based compensation under Accounting Principles Board Opinion ("APB") No. 25. The Company has disclosed in a note to the financial statements pro forma net income and earnings per share, as if the Company had applied the fair value method for stock options and similar equity instruments (see Note 11). Reclassifications Amounts in the 1996 and 1995 consolidated financial statements have been reclassified to conform to the 1997 presentation. These reclassifications had no effect on previously reported consolidated net income. NOTE 2. ACQUISITIONS On March 20, 1996, the Company completed the acquisition of Aurora Systems, Inc. ("Aurora") and Key Voice Technologies, Inc. ("KVT"), two companies involved in Computer-Telephony Integration ("CTI") applications which became wholly-owned subsidiaries of the Company. Aurora, based in Acton, Massachusetts, provided off-the-shelf CTI products. KVT, based in Sarasota, Florida, develops, assembles, markets, and sells voice processing systems and related products for business applications. The consideration paid for the acquisition of Aurora was approximately $2.8 million, of which $1.9 million was paid in cash and approximately $0.9 million was paid by issuance of 147,791 shares of the Company's Common Stock. The consideration paid for the acquisition of KVT totaled approximately $19.0 million, of which $8.5 million was paid in cash, $7.0 million was paid by the Company's issuance of a promissory note ("Promissory Note"), and $1.5 million was paid by the issuance of 243,097 shares of the Company's Common Stock. Depending on KVT's performance during the three years following the acquisition, the Company may be obligated to pay an additional $2.0 million which, at the Company's option, may be paid in cash or by the issuance of up to 216,086 shares of the Company's Common Stock. At the beginning of the second quarter of 1997, 72,029 shares of common stock were issued to the original principal owners of KVT. These shares were issued because KVT met its sales target for 1996. Based on KVT's performance for 1997, the original owners are eligible for additional shares of common stock of 72,029 shares or cash at the end of the first quarter of 1998. In accordance with the purchase method of accounting, the purchase price of the two companies has been allocated to the underlying assets and liabilities based on their respective fair values at the date of the acquisitions. Any excess of purchase price over the value of the net assets is allocated to goodwill. The purchase price, including acquisition costs, for both companies exceeded net assets acquired by approximately $19.3 million. Such excess is being amortized on a straight-line basis over one to eight years. The cost associated with the contingent shares, based on their respective fair values at the time of issuance, will be added to goodwill and amortized over the remaining life of the original goodwill. Such allocations have been based on asset valuations performed by outside consultants. To complete the acquisitions of Aurora and KVT, the Company obtained additional funds from its credit facility. The Company and Fleet Capital Corporation ("Fleet") amended the Loan Agreement to permit the Company to borrow additional funds and modify some of its terms and covenants. The amendment to the Loan Agreement provided an increased borrowing capacity of $13.5 million under acquisition and equipment loans, and a revolving credit facility of $12.5 million (see Note 6). As of December 31, 1997, Aurora sold all of its rights, title and interest in the Fastcall product, Aurora's primary asset, to Spanlink Communications, Inc. Aurora may receive, over a five year period, royalties totaling up to $1.1 million with a minimum guarantee of $0.6 million at the end of that period. NOTE 3. INVENTORIES Inventory consists of the following: - ----------------------------------------------------------------------------- December 31, In thousands 1997 1996 - ----------------------------------------------------------------------------- Finished goods $6,336 $6,529 Work-in-process 4,101 3,681 Materials and supplies 8,050 9,376 ----- ----- Total $18,487 $19,586 ======= ======= - ----------------------------------------------------------------------------- NOTE 4. PROPERTY Property consists of the following: - ---------------------------------------------------------------------------- December 31, In thousands 1997 1996 - ---------------------------------------------------------------------------- Land $656 $556 Buildings and improvements 14,104 13,555 Machinery and equipment 30,423 28,759 Less accumulated depreciation (28,849) (27,553) ------- ------- Property - Net $16,334 $15,317 ======= ======= - ---------------------------------------------------------------------------- Depreciation expense charged to operations for the years 1997, 1996, and 1995, was $2,751,000, $2,598,000, and $2,422,000, respectively. NOTE 5. LEASE OBLIGATIONS The Company and its subsidiaries have various capital and operating lease obligations. Future minimum lease commitments for capitalized leases and aggregate minimum rental commitments under operating lease agreements that have initial non-cancelable lease terms in excess of one year are as follows: - ------------------------------------------------------------------------------- Year Ending December 31, Operating In thousands Leases - ------------------------------------------------------------------------------- 1998 $2,018 1999 1,752 2000 1,449 2001 151 2002 25 ----- Total minimum lease commitments $5,395 ====== - ------------------------------------------------------------------------------- The remaining lease commitments for capital leases is $77,000 with $64,000 of that to be paid off in 1998. Assets recorded under capital leases (included in property in the accompanying Consolidated Balance Sheets) are as follows: - ------------------------------------------------------------------------------- December 31, In thousands 1997 1996 - ------------------------------------------------------------------------------- Machinery and equipment $218 $823 Less accumulated depreciation (115) (431) ---- ---- Property - Net $103 $392 ==== ==== - ------------------------------------------------------------------------------- During 1997, 1996, and 1995, the Company entered into new capital lease obligations which amounted to approximately $18,000, $67,000, and $9,000, respectively. Operating leases and rentals are for office space, and factory and office equipment. Total rent expense for operating leases, including rentals which are cancelable on short-term notice, for the years ended December 31, 1997, 1996, and 1995, were $1,929,000, $1,721,000, and $1,262,000, respectively. NOTE 6. DEBT Long-term debt consists of the following: - ------------------------------------------------------------------------------- December 31, In thousands 1997 1996 - ------------------------------------------------------------------------------- Notes payable to Fleet Acquisition note (1) $5,543 $7,249 Equipment note I (2) 139 463 Equipment note II (3) 1,647 - Revolving credit (4) - 1,749 Promissory note (5) 5,600 7,000 Other (6) 617 311 Capitalized leases (7) 77 284 ------ ------- Total debt 13,623 17,056 Less current maturities on debt 3,701 5,343 ------ ------- Total long-term debt $9,922 $11,713 ====== ======= - ------------------------------------------------------------------------------- The Company and Fleet entered into a loan and security agreement ("Loan Agreement") in 1994 pursuant to which Fleet provided the Company with a $6.0 million term loan represented by a note ("Term Note I"), and a $9.0 million revolving credit loan facility ("Revolver") in an aggregate amount up to $14.0 million. On April 29, 1994, the Company and Fleet amended the Loan Agreement to permit the Company to borrow an additional $1.3 million represented by another note ("Term Note II") to finance the purchase of additional surface mount technology equipment. On March 13, 1996, the Company and Fleet amended the Loan Agreement to provide the Company with a $10.0 million acquisition loan ("Acquisition Loan"), $3.5 million equipment loan ("Equipment Loan"), and $12.5 million revolving credit loan facility ("Amended Revolver"). The remaining balances of $2,909,666 and $706,000 on Term Notes I and II were paid by advances from the Amended Revolver and Equipment Loan, respectively. (1) On March 20, 1996, the Company borrowed $8.5 million under the Acquisition Loan which was used to acquire Aurora and KVT. The Acquisition Loan is payable in equal monthly principal installments of $142,142, with the balance due on February 1, 2001. (2) The Equipment Loan I is payable in equal monthly principal installments of $27,000, with the balance due on June 1, 1998. (3) On February 5, 1997, the Company borrowed an additional $1.9 million under the Equipment Loan ("Equipment Loan II") which was used to purchase surface mount technology ("SMT") equipment to further expand the Company's SMT line capacity. Equipment Loan II is payable in equal monthly principal installments of $31,667, with the balance due on February 1, 2001. (4) Availability under the Amended Revolver of up to $12.5 million is based on eligible accounts receivable and inventory, less funds already borrowed. On June 28, 1996, the Company and Fleet amended the Loan Agreement to adjust availability under the Amended Revolver by establishing a special availability reserve of $4.0 million and modified certain covenants. The Acquisition Loan, Equipment Loan, and Amended Revolver carry interest rates at either Fleet's prime rate or the London Interbank Offered Rate ("LIBOR") at the Company's option. The interest rates can be adjusted annually based on the Company's debt to earnings ratio which will vary the rates from minus 0.50% to plus 0.50% under or above Fleet's prime rate and from plus 1.50% to 2.50% above LIBOR. As of December 31, 1997, Fleet's prime interest rate was 8.50% and the LIBOR rate was 5.97% with approximately 96% of the loans based on LIBOR. As of December 31, 1997, the Company's borrowing rate for loans based on the prime and LIBOR rates was 9.00% and 8.47%, respectively. For December 31, 1996, the Company's borrowing rate for loans based on the prime and LIBOR rates were 8.25% and 7.66%, respectively, with approximately 79% of the loans based on LIBOR. (5) The Promissory Note, which was part of the purchase price of KVT, carries an interest rate equal to the prime rate with annual payments of $1.4 million plus accumulated interest payments with the balance due on March 20, 2001. As of December 31, 1997 and 1996, the Company's borrowing rate based on the prime rate was 8.50% and 8.25%, respectively. (6) Other debt consists of a mortgage acquired in conjunction with the acquisition of KVT and another mortgage entered into by KVT in order to acquire an adjacent building for future expansion. The mortgages require monthly payments of $2,817 and $2,869, including interest at fixed rates of 8.75% and 9.125%, respectively. The final payments are due on August 1, 2005 and June 27, 2007, respectively. (7) Capital leases are with various financing entities and are payable based on the terms of each individual lease (see Note 5). Scheduled maturities of current and long-term debt for the Fleet Notes (as defined in the Loan Agreement), the Promissory Note, and other debt (excluding the Amended Revolver and leasing agreements) are as follows: - -------------------------------------------------------------------------------- Principal In thousands Fiscal Years Installments - -------------------------------------------------------------------------------- Notes payable 1998 $3,638 1999 3,501 2000 3,502 2001 2,351 2002 19 Beyond 2002 535 - -------------------------------------------------------------------------------- Debt Covenants The Company's indebtedness to Fleet is secured by liens on the Company's accounts receivable, inventories, intangibles, land, and all other property. Among other restrictions, the amended Loan Agreement contains certain financial covenants that require specified levels of consolidated tangible net worth, profitability, and other certain financial ratios. On June 28, 1996, the Company and Fleet amended the Loan Agreement to adjust availability under the Amended Revolver by establishing a special availability reserve of $4.0 million and also modified certain covenants. On September 27, 1996, the Company and Fleet amended the Loan Agreement to modify certain covenants. The amended Loan Agreement also contains certain limits on additional borrowings. On March 27, 1997, the Company and Fleet amended the Loan Agreement to modify certain financial covenants. As of December 31, 1997, the Company was in compliance with the terms of the Loan Agreement. NOTE 7. INCOME TAXES The components of the income tax expense for the years ended December 31 are as follows: - ------------------------------------------------------------------------- Liability Method In thousands 1997 1996 1995 - ------------------------------------------------------------------------- Current - Federal $200 $59 $142 State 168 159 27 Deferred - Federal (214) (714) (4,374) State (5) (22) (129) ---- ----- ------- Total provision/(benefit) $149 ($518) ($4,334) ==== ===== ======= - ------------------------------------------------------------------------- The income tax provision reconciled to the tax computed at statutory rates for the years ended December 31 is summarized as follows: - ------------------------------------------------------------------------------ In thousands 1997 1996 1995 - ------------------------------------------------------------------------------ Federal tax at statutory rate (35% in 1997, 1996, and 1995) $2,054 $452 $1,937 State income taxes (net of federal tax benefit) 109 103 18 Nondeductible charges 544 329 46 Alternative minimum tax 200 77 139 Utilization of operating loss carryover (2,539) (743) (1,971) Adjustment of valuation allowance (219) (736) (4,503) ----- ---- ------ Income tax provision/(benefit) $149 ($518) ($4,334) ==== ===== ======= - ------------------------------------------------------------------------------ Net deferred tax assets of $5,459,000 and $5,239,000 have been recognized in the accompanying Consolidated Balance Sheets at December 31, 1997 and 1996, respectively. The components of the net deferred tax assets are as follows: - -------------------------------------------------------------------------------- In thousands 1997 1996 - -------------------------------------------------------------------------------- Total deferred tax assets $25,201 $27,709 Total valuation allowance (17,037) (20,240) ------- ------- Total deferred tax assets - net 8,164 7,469 Total deferred tax liabilities (2,705) (2,230) ------ ------ Total $5,459 $5,239 ====== ====== - -------------------------------------------------------------------------------- The valuation allowance decreased $3,203,000 during the year ended December 31, 1997. The decrease was primarily related to (1) the re-evaluation of the future utilization of net operating losses ("NOLs") of $219,000, and (2) the net change in temporary differences of deferred tax assets, deferred tax liabilities, and operating loss carryforwards of $2,984,000. The Company periodically reviews the requirements for a valuation allowance and makes adjustments to such allowance when changes in circumstances result in changes in judgment about the future realization of deferred tax assets. Based on a continual re-evaluation of the realization of the deferred tax assets, the valuation allowance was reduced and a tax benefit of $219,000 was recognized in the quarter ended March 30, 1997. Management believes, although realization is not assured, that it is more likely than not that the Company will realize this tax benefit. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward periods are reduced. The Company has net operating loss and credit carryovers of approximately $55,971,000 and $2,856,000, respectively, which, if not utilized, will expire as follows: - ------------------------------------------------------------------------------ In thousands Net Operating Expiration Dates Losses Tax Credits - ------------------------------------------------------------------------------ 1998 $ - $1,846 1999 11,405 504 2000 27,762 66 2001 5,260 - 2002 6,486 - After 2002 5,058 440 ------ ----- Total $55,971 $2,856 ======= ====== - ------------------------------------------------------------------------------ Based on the Company's interpretation of Section 382 of the Internal Revenue Code, the determination 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 a three year look back period. The components of the net deferred tax assets (liabilities) at December 31, 1997 and 1996 are as follows: - -------------------------------------------------------------------------------- Deferred Assets/(Liabilities) In thousands 1997 1996 - -------------------------------------------------------------------------------- Net loss carryforwards $19,030 $22,095 Tax credit carryforwards 2,856 3,075 Inventory write downs and capitalization 1,268 1,068 Pension 227 265 Postretirement 239 304 Compensation and benefits 318 196 Capitalized software development costs 246 266 Contingencies 29 37 Other deferred tax assets 64 46 Fixed asset depreciation (2,607) (2,230) Goodwill amortization 826 358 Income reported in different periods for financial reporting and tax purposes - - Other deferred tax liabilities - - ------ ------ Net deferred tax asset 22,496 25,480 Less: Valuation allowance (17,037) (20,241) ------ ------- Total $5,459 $5,239 ====== ====== - -------------------------------------------------------------------------------- NOTE 8. PENSION AND SAVINGS PLANS The Company currently has one pension plan which provides benefits based on years of service and an employee's compensation during the employment period. The calculation of pension benefits prior to 1993 was based on provisions of two previous pension plans. One plan provided pension benefits based on years of service and an employee's compensation during the employment period. The other plan provided benefits based on years of service only. The funding policy for the plans was to make the minimum annual contributions required by applicable regulations. Assets of the plans are generally invested in equities and fixed income instruments. The following table sets forth the funded status of the plans and amounts recognized in the Company's Consolidated Balance Sheets at December 31, 1997 and 1996.
- ---------------------------------------------------------------------------------------- In thousands 1997 1996 - ---------------------------------------------------------------------------------------- Actuarial present value of benefit obligation: Accumulated benefit obligation (including vested benefits of $15,950 and $12,313, respectively) ($17,308) ($13,391) ======== ======== Projected benefit obligation for service to date ($18,541) ($14,218) Plan assets at fair value 19,025 15,679 ------- ------- Plan assets more than projected benefit obligation 484 1,461 Unrecognized net gain from past experience (875) (2,065) Unrecognized net gain from prior service cost (219) (254) Unrecognized net asset at date of implementation of SFAS No. 87 amortized over 14 years (58) (86) ------ ------ Accrued liabilities for benefit plans at December 31 ($668) ($944) ====== ====== - ---------------------------------------------------------------------------------------- Net periodic pension cost for 1997, 1996, and 1995 included the following components: - --------------------------------------------------------------------------------------------------------------- In thousands 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------- Service cost-benefits earned during the period $1,227 $1,081 $931 Interest cost on projected benefit obligation 1,047 890 751 Actual (return) or loss on plan assets (2,590) (2,634) (2,122) Net amortization and deferral of other items 1,279 1,510 1,199 ----- ----- ----- Net periodic pension cost $963 $847 $759 ==== ==== ==== - --------------------------------------------------------------------------------------------------------------- Assumptions used in accounting for the plans were as follows: - --------------------------------------------------------------------------------------------------------------- 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------- Discount rate 7.00% 7.50% 7.50% Rate of increase in future compensation levels 4.00% 4.00% 4.00% Expected long-term rate of return on assets 9.00% 9.00% 9.00% - ---------------------------------------------------------------------------------------------------------------
In addition to providing pension benefits, the Company contributes to a 401(k) plan, based on an employee's contributions. Participants can contribute from 2% to 10% of their salary as defined in the terms of the plan. The Company makes matching contributions equal to 25% of a participant's contributions. The Company's total expense for the matching portion to the 401(k) plan for 1997, 1996, and 1995 was $411,000, $341,000, and $278,000, respectively. NOTE 9. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The effect of SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," on income from continuing operations for 1997, 1996, and 1995 was an expense of $64,000, $41,000, and $311,000, respectively. The Company provides certain health care coverage (until age 65), which is subsidized by the retiree through insurance premiums paid to the Company, and life insurance benefits for substantially all of its retired employees. The Company's postretirement health care benefits are not currently funded. The following table sets forth the amounts of the accumulated postretirement benefit obligation at January 1, 1997, 1996, and 1995:
- ---------------------------------------------------------------------------------------------------------------- In thousands 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------- Retirees $162 $137 $354 Actives eligible to retire 480 415 653 Other active participants ineligible to retire 198 208 922 --- ----- ----- Total $840 $760 $1,929 ==== ==== ===== - ---------------------------------------------------------------------------------------------------------------- Net postretirement benefit cost for years ended December 31 consisted of the following components: - ---------------------------------------------------------------------------------------------------------------- In thousands 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------- Service cost $22 $20 $75 Interest cost 60 55 156 Actual return on assets - - - Amortization of the unrecognized transition obligation 91 91 91 Amortization of gain (109) (125) (11) Amortization of prior service cost - - - - --- ---- Total $64 $41 $311 === === ==== - ---------------------------------------------------------------------------------------------------------------- The following table sets forth funded status of the plans and amounts recognized in the Company's Consolidated Balance Sheets at December 31, 1997 and 1996. - ---------------------------------------------------------------------------------------------------------------- In thousands 1997 1996 - ---------------------------------------------------------------------------------------------------------------- Plan assets at fair value $ - $ - Accumulated postretirement benefit obligation: Retirees (162) (137) Fully eligible participants (480) (415) Other active participants (198) (208) Unrecognized prior service cost - - Unrecognized net gain (1,221) (1,583) Unrecognized transition obligation 1,358 1,449 ----- ----- Accrued liabilities for benefit plans at December 31 ($703) ($894) ===== ===== - ----------------------------------------------------------------------------------------------------------------
The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation as of January 1, 1997 was 9% for 1997, the trend rate decreasing each successive year until it reaches 5.25% in 2004 after which it remains constant. The discount rate used in determining the accumulated postretirement benefit obligation cost was 7.75%. A one percentage-point increase in the assumed health care cost trend rate for each year would increase the accumulated postretirement benefit obligation as of January 1, 1997 and net postretirement health care cost by approximately $5,000 and service cost plus interest cost by approximately $9,000. The postretirement benefit obligation is not funded and does not include any provisions for securities, settlement, curtailment, or special termination benefits. NOTE 10. STOCK-BASED COMPENSATION PLANS As of December 31, 1997, the Company had two basic stock-based compensation plans. The 1992 Stock Incentive Plan (the "Stock Incentive Plan"), provides for stock options to purchase shares of Common Stock which may be granted to officers, directors, and certain key employees as additional compensation. Pursuant to the terms of the 1992 Non-employee Directors Stock Incentive Plan (the "Directors Stock Incentive Plan"), each non-employee director shall be awarded 3,333 shares of the Company's Common Stock for each fiscal year the Company reports income. In January 1996, in accordance with the terms of the Directors Stock Incentive Plan, the Board of Directors adopted a resolution suspending 833 of the 3,333 shares of the Company's common stock automatically awarded to non-employee directors under such circumstances. In 1997, each non-employee director was awarded 2,500 shares related to income earned by the Company for fiscal year 1996. The plans are composed of stock options, restricted stock, nonstatutory stock, and incentive stock. The Company's incentive plans are administered by the Compensation Committee of the Company's Board of Directors. On April 30, 1996, the Company's stockholders approved a resolution to increase the number of shares of Common Stock under the Company's 1992 Stock Incentive Plan from 800,000 to 1,550,000. As of December 31, 1997, all options issued under the Company's 1982 Stock Incentive Plan have either been exercised or have expired. The Company has previously accepted notes relating to the non-qualified stock options exercised by officers and employees. These notes receivable relating to stock purchases amounted to $161,000, $168,000, and $176,000 at December 31, 1997, 1996, and 1995, respectively, and have been deducted from Stockholders' Equity. Options granted for years 1997 and 1996 have a maximum term of ten years and vest over a three year period. Options become exercisable in installments of 33% per year on each of the first through the third anniversaries of the grant date. All options granted through the Stock Incentive Plan are granted at an exercise price equal to the market price of the Company's Common Stock on the grant date. In December 1997, the Company granted some nonstatutory stock options totaling 50,000 shares, which are outside the 1992 Stock Incentive Plan. These stock options vest over a five year period and will be registered at a later date. The Company has charged against income in 1997, compensation expense of $4,000 for these stock options. The Company applies APB No. 25 and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its fixed stock option plan other than the performance based option that is part of the plan for its directors. Common Stock has been issued by the Company to its directors for years that show positive net income. The compensation cost that has been charged against income for its director's performance-based stock was $97,000, $66,000, and $116,000 for 1997, 1996, and 1995, respectively. Information regarding stock options is summarized below:
- ---------------------------------------------------------------------------------------------------------------- 1997 (1) 1996 (1) 1995 (1) - ---------------------------------------------------------------------------------------------------------------- Options outstanding, January 1; 659,524 $7.95 449,241 $6.50 363,172 $3.68 Granted 298,450 8.25 277,062 9.12 268,073 7.95 Exercised (32,216) 5.43 (52,617) 1.58 (157,044) 2.13 Terminated (66,029) 8.79 (14,162) 8.72 (24,960) 7.00 ------- ------- ------- Options outstanding, December 31; 859,729 8.08 659,524 7.95 449,241 6.50 ======= ======= ======= Options exercisable, December 31; 342,880 7.46 212,392 6.30 160,403 5.07 Per share ranges of options outstanding at December 31 $1.41-$11.75 $1.41-$11.75 $1.41-$11.75 Dates through which options outstanding at December 31, were exercisable 1/98-12/2007 1/97-5/2006 1/96-10/2005 (1) Fair value weighted-average exercise price at grant date. - ---------------------------------------------------------------------------------------------------------------- The following table summarizes information concerning currently outstanding and exercisable options at December 31, 1997: - ------------------------------------------------------------------------------------------------- Options Outstanding Options Exercisable ---------------------------------------------------- ---------------------------------- Range of Number Weighted-Average Number Exercise Outstanding Remaining Weighted-Average Exercisable Weighted-Average Prices at 12/31/97 Contractual Life Exercise Price at 12/31/97 Exercise Price - ---------------------------------------------------------------------------------------------------------------- $1.41 to 3.00 58,906 4.8 $1.68 58,906 $1.68 5.73 to 7.77 298,195 8.1 7.07 138,778 7.36 8.56 to 9.38 386,001 8.5 9.04 86,073 9.31 10.50 to 11.75 116,627 8.0 10.71 59,123 10.73 ------- ------ 1.41 to 11.75 859,729 8.0 8.08 342,880 7.46 ======= ======= - ----------------------------------------------------------------------------------------------------------------
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: - ------------------------------------------------------------------------------ 1997 1996 1995 - ------------------------------------------------------------------------------ Risk-free interest rate 5.51% 6.18% 6.90% Expected life 3.65 3.82 3.02 Expected volatility 73% 90% 101% Expected dividends none none none - ------------------------------------------------------------------------------ If compensation cost for the Company's Stock Incentive Plans had been determined based on the fair value at the grant dates for awards under the plan, consistent with the method of FASB Statement No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
- ---------------------------------------------------------------------------------------------------------------- In thousands except per share amounts 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------- Net income: As reported $5,719 $1,809 $9,519 Compensation expense 525 218 - ------ ------ ------ Pro forma $5,194 $1,591 $9,519 ====== ====== ====== Basic earnings per share: As reported $0.66 $0.21 $1.27 Pro forma $0.60 $0.19 $1.27 Diluted earnings per share: As reported $0.65 $0.21 $1.20 Pro forma $0.59 $0.18 $1.20 - ---------------------------------------------------------------------------------------------------------------- The Company would not have recognized any compensation expense for 1995 because the 1995 options were not vested until 1996. NOTE 11. SEGMENT INFORMATION During 1997, 1996, and 1995, substantially all of the Company's sales, net income, and identifiable net assets were attributable to the telecommunications industry. The Company had sales in excess of 10% of net sales to three customers as follows: - ------------------------------------------------------------------------------------------------------------- In thousands 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------- Sales: ALLTEL Supply, Inc. $21,537 $19,472 $20,575 Graybar Electric Company, Inc. 33,342 31,719 30,857 Sprint/North Supply , Inc. 26,445 22,432 18,357 Percentage of net sales: ALLTEL Supply, Inc. 18% 19% 22% Graybar Electric Company, Inc. 28% 31% 33% Sprint/North Supply , Inc. 22% 22% 19% - -------------------------------------------------------------------------------------------------------------
ALLTEL Supply, Inc., a subsidiary of ALLTEL Corporation, was a shareholder of the Company until 1996. As of December 31, 1995, ALLTEL had accounts receivable with the Company of $1,415,000. NOTE 12. COMMITMENTS AND CONTINGENT LIABILITIES The Company's facilities are subject to a variety of federal, state, and local environmental protection laws and regulations, including provisions relating to the discharge of materials into the environment. The cost of compliance with such laws and regulations has not had a material adverse effect upon the Company's capital expenditures, earnings or competitive position, and it is not anticipated to have a material adverse effect in the future. In 1988, the Company voluntarily discontinued use of a concrete underground hydraulic oil and chlorinated solvent storage tank. In conjunction therewith, nearby soil and groundwater contamination was noted. As a result, the Company developed a plan of remediation that was approved by the Virginia Water Control Board in January 1989. The plan was later amended and approved by the Virginia Department of Environmental Quality, after which the Company commenced the remediation efforts required thereunder. In 1993, the Company provided a $45,000 reserve for the estimated cost to implement the remediation plan. In October 1994, the Company installed all the required equipment in accordance with the remediation plan and started the process of pumping hydraulic oil residue from the underground water. The oil is deposited into approved containers and taken to a hazardous waste site in accordance with the corrective action plan. As of December 31, 1997, the Company has incurred total costs of approximately $55,000 and expects the pumping process to be completed by early 1999. NOTE 13. QUARTERLY FINANCIAL DATA (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------ First Second Third Fourth In thousands except per share amounts Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------------------------------------ 1997 Sales $26,855 $29,379 $31,091 $31,236 Gross profit 11,059 11,751 12,522 12,011 Interest expense 427 449 436 386 Goodwill amortization 1,037 859 855 816 Net income 671 1,142 2,002 1,904 Net earnings per common share: Basic 0.08 0.13 0.23 0.22 - ------------------------------------------------------------------------------------------------------------ 1996 Sales $22,027 $23,542 $28,849 $27,764 Gross profit 7,464 8,159 10,873 11,385 Interest expense 227 499 483 417 Goodwill amortization 91 868 855 860 Net income 1,185 (1,628) 908 1,344 Net earnings per common share: Basic 0.14 (0.19) 0.11 0.16 - ------------------------------------------------------------------------------------------------------------
Previously reported quarterly information has been revised to reflect certain reclassifications. These reclassifications had no effect on previously reported consolidated net income. Earnings per common share have been restated to conform to FAS No. 128, "Earnings Per Share." In the first quarter of 1997, the Company reevaluated the future utilization of its deferred tax assets for future periods. Based on the reevaluation of the realizability of the deferred tax assets, the valuation allowance was reduced and a tax benefit of $219,000 was recognized (see Note 7). In the fourth quarter of 1997, the Company revalued certain slow moving analog inventory that resulted in an additional cost of $634,000. This additional cost dropped the gross margin from previous quarters of 40% to 38%. In the first quarter of 1996, the Company acquired Aurora and KVT by restructuring its indebtedness to Fleet and borrowing additional funds (see Note 2 and Note 6). The major impact on operations was an increase of interest expense for the last three quarters of 1996 of $949,000 and recognition of goodwill amortization of $2,651,000. All costs associated with the acquisitions were offset by the increase in revenues and income (excluding acquisition and corporate allocation costs) produced by the new subsidiaries of $9,671,000 and $4,342,000, respectively. Also in the first quarter of 1996, the Company reevaluated the future utilization of its deferred tax assets for future periods. Based on the reevaluation of the realizability of the deferred tax assets, the valuation allowance was reduced and a tax benefit of $736,000 was recognized (see Note 7). The Company recognizes costs based on estimates throughout the fiscal year relating to inventory. The results of the physical inventory and the fiscal year-end close reflected a favorable adjustment with respect to such estimates, resulting in approximately $289,000 of additional income, which is reflected in the fourth quarter of 1996. - ----------------------------------------------------------------------------------------------------------------- FIVE YEAR FINANCIAL DATA
Selected Consolidated Statements of Operations Data In thousands except per share amounts 1997 1996 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------- Net sales: As reported (1) $118,561 $102,182 $94,729 $77,077 $68,996 Income before income taxes and extraordinary item 5,868 1,291 5,535 3,730 2,545 Net income 5,719 1,809 9,869 3,225 2,416 Earnings per common share and common equivalent share: Basic (2) 0.66 0.21 1.27 0.38 0.40 - ----------------------------------------------------------------------------------------------------------------- (1) Prior years have been reclassified to conform to 1997 presentation. (2) Earnings per share prior to 1995 have been restated to reflect the one- for-three reverse stock split. - ----------------------------------------------------------------------------------------------------------------- Selected Consolidated Balance Sheet Data In thousands 1997 1996 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------- Current assets $37,107 $30,767 $33,740 $26,199 $28,301 Total assets 79,264 74,352 56,692 42,260 44,803 Current liabilities 20,431 20,159 15,469 14,568 13,358 Long-term debt and other long-term liabilities 13,998 15,629 6,929 6,649 20,695 Stockholders' equity 44,835 38,564 34,294 21,043 10,750 - ----------------------------------------------------------------------------------------------------------------- RELATED STOCKHOLDERS MATTERS Quarterly Common Stock Information The following table sets forth, for the periods shown, the high and low quarterly closing sales prices in the over-the-counter market for the Company's Common Stock, as reported by the National Association of Security Dealers Automated Quotation System ("Nasdaq"). The Company's Common Stock is traded in the National Market System of the Nasdaq Stock Market under the Company's symbol, CMDL. - ----------------------------------------------------------------------------------------------------------------- 1997 1996 Fiscal Quarters High Low High Low - ----------------------------------------------------------------------------------------------------------------- First Quarter 8 7/8 5 5/8 11 3/8 8 3/8 Second Quarter 8 7/8 5 7/8 12 1/2 9 1/4 Third Quarter 10 1/16 7 3/8 9 - 6 - Fourth Quarter 13 5/8 9 1/4 7 7/8 5 7/8 - -----------------------------------------------------------------------------------------------------------------
The Company has never paid a dividend on its Common Stock and its Board of Directors currently intends to continue for the foreseeable future the policy of not paying cash dividends on Common Stock. The Company is prohibited from paying dividends due to the Loan Agreement with Fleet except on Series A Preferred Stock (see Note 6 to Consolidated Financial Statements). The Company's Common Stock trades on The Nasdaq Stock Market under the symbol: CMDL. OFFICERS William G. Mustain Chairman, President and Chief Executive Officer - ----------------------------------------------- Mr. Mustain is Chairman, President and Chief Executive Officer of the Company. He joined the Company as Vice President in June 1987 and assumed his current position in May 1989. He has served as a director of the Company since 1989 and is a member of the Nominating Committee of the Board of Directors. William E. Porter Executive Vice President - ------------------------ Mr. Porter was elected Executive Vice President in May 1997 and is responsible for business development and strategic planning. Mr. Porter served as a Director of the Company from July 1994 to May 1997. Christian L. Becken Senior Vice President and Chief Financial Officer - ------------------------------------------------- Mr. Becken was elected Senior Vice President and Chief Financial officer in December 1997 and is responsible for finance. Prior to his appointment, Mr. Becken, was a Vice President and Treasurer of Turner Broadcasting System, Inc., a diversified media and entertainment company, for 10 years. William C. Grover Senior Vice President, Sales and Marketing - ------------------------------------------ Mr. Grover was elected Senior Vice President in September 1995 and is responsible for Sales and Marketing. He joined the Company in 1993 as President of Comdial Enterprise Systems, Inc., a subsidiary of the Company. Wayne R. Wilver Senior Vice President, Treasurer, and Secretary - ----------------------------------------------- Mr. Wilver was elected Senior Vice President in May 1989 and was the Chief Financial Officer until December 1997. He joined the Company as Vice President, Chief Financial Officer, Treasurer, and Secretary in July 1986. Ove Villadsen Senior Vice President, Engineering - ---------------------------------- Mr. Villadsen was elected Senior Vice President in 1997. He is responsible for the Company's product design and engineering activities. He joined Comdial Business Communications Corporation (CBCC), a subsidiary of the Company, in November 1982, and between 1982 and 1989 served as Vice President of CBCC. Joe D. Ford Vice President, Human Resources - ------------------------------- Mr. Ford was elected Vice President in May 1995 and is responsible for Human Resources. Between 1982 and May 1995, he served as the Company's Director of Human Resources. Keith J. Johnstone Vice President, Manufacturing - ----------------------------- Mr. Johnstone was elected Vice President in May 1990 and is responsible for Manufacturing Operations. Between 1980, when he joined the Company, and 1990, Mr. Johnstone held a number of management positions, including Director of Materials and Director of Customer Service. Lawrence K. Tate Vice President, Quality - ----------------------- Mr. Tate was elected Vice President in November 1982 and is responsible for Quality. Between 1969 and 1982, he held various management positions, including Vice President-Manufacturing Operations. BOARD MEMBERS William G. Mustain Chairman - -------- See previous page. A.M. Gleason Vice Chairman, President of the Port of Portland - ------------------------------------------------ Mr. Gleason retired in May 1995 as Vice Chairman and a director of PacifiCorp, a diversified public utility. He currently serves as President of the Port of Portland. He is also a director of Tektronix, Inc. and Fred Meyer, Inc. Mr. Gleason has served as a director of the Company since 1981 and as Vice Chairman of the Board of Directors since April 1995 and is a member of the Compensation and Nominating Committees of the Board of Directors. Michael C. Henderson Chairman of the Board of Albina Community Bancorp. - -------------------------------------------------- Mr. Henderson is Chairman of the Board of Albina Community Bancorp. He retired in February, 1998 as President and Chief Executive Officer of PacifiCorp Holdings, Inc., a PacifiCorp subsidiary which held interests in telecommunications, energy and financial services. Mr. Henderson has served as a director of the Company since 1995 and is a member of the Audit, and Compensation Committees of the Board of Directors. John W. Rosenblum Dean of the Jepson School of Leadership Studies at the University of Richmond - ----------------------------------------------------------------------------- Mr. Rosenblum is Dean of the Jepson School of Leadership Studies at the University of Richmond. Prior to serving at the University of Richmond, Mr. Rosenblum was a Tayloe Murphy Professor of Business Administration at the Darden Graduate School of Business Administration at the University of Virginia. He is also a director of Chesapeake Corporation, Cadmus Communications Corp., T. Rowe Price Associates, and Cone Mills Corporation. Mr. Rosenblum has served as a director of the Company since 1992 and is a member of the Audit, Compensation, and Pension Committees of the Board of Directors. Dianne C. Walker Independent Consultant - ---------------------- Ms. Walker is an independent consultant. Prior to January 1995, she was a consultant to Bear Stearns & Co. Inc., an investment banking firm. She is also a director of Satelite Technology Management, Inc. Arizona Public Service Company, and Microtest, Inc. Ms. Walker has served as a director of the Company since 1986 and is a member of the Audit, Nominating, and Pension Committees of the Board of Directors. Transfer Agent and Registrar - ---------------------------- ChaseMellon Shareholder Services New York, New York Independent Auditors - -------------------- Deloitte & Touche LLP Richmond, Virginia Investor Relations - ------------------ Dick Bucci - Director, Investor Relations Phone: (804) 978-2525 Fax: (804) 978-2438 E-Mail: dbucci@comdial.com World Wide Web - -------------- http://www.comdial.com Form 10-K - --------- On written request, Comdial Corporation will furnish to stockholders a copy of its Form 10-K for the most recent year. Address your request to Linda Falconer, Comdial Corporation, P.O. Box 7266, Charlottesville, Virginia 22906-7266 EX-23 12 INDEPENDENT AUDITORS' CONSENT EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 33-53562 of Comdial Corporation on Form S-8 of our report dated January 30, 1998, appearing in this Annual Report on Form 10-K of Comdial Corporation for the year ended December 31, 1997. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP Richmond, Virginia March 25, 1998 EX-24 13 POWER OF ATTORNEY EXHIBIT 24 POWER OF ATTORNEY I, A. M. Gleason, a duly elected Director of COMDIAL CORPORATION, a Delaware corporation, do hereby constitute and appoint William G. Mustain and Wayne R. Wilver, or either of them, my true and lawful attorneys-in-fact, each with full power of substitution, for me and in my name, place and stead, in any and all capacities (including without limitation, as Director of the Company), to sign the Company's Annual Report on Form 10-K for the year ended December 31, 1997, which is to be filed with the Securities and Exchange Commission, with all exhibits thereto, and any and all documents in connection therewith, hereby granting unto said attorney-in-fact and agent full power and authority to do and perform any and all acts and things requisite and necessary to be done, and hereby ratifying and confirming all that said attorney-in fact and agent may do or cause to be done by virtue hereof. Dated: 02/7/98 /s/ A. M. Gleason A. M. Gleason EXHIBIT 24 POWER OF ATTORNEY I, Michael C. Henderson, a duly elected Director of COMDIAL CORPORATION, a Delaware corporation, do hereby constitute and appoint William G. Mustain and Wayne R. Wilver, or either of them, my true and lawful attorneys-in-fact, each with full power of substitution, for me and in my name, place and stead, in any and all capacities (including without limitation, as Director of the Company), to sign the Company's Annual Report on Form 10-K for the year ended December 31, 1997, which is to be filed with the Securities and Exchange Commission, with all exhibits thereto, and any and all documents in connection therewith, hereby granting unto said attorney-in-fact and agent full power and authority to do and perform any and all acts and things requisite and necessary to be done, and hereby ratifying and confirming all that said attorney-in fact and agent may do or cause to be done by virtue hereof. Dated: 02/1/98 /s/ Michael C. Henderson Michael C. Henderson EXHIBIT 24 POWER OF ATTORNEY I, John W. Rosenblum, a duly elected Director of COMDIAL CORPORATION, a Delaware corporation, do hereby constitute and appoint William G. Mustain and Wayne R. Wilver, or either of them, my true and lawful attorneys-in-fact, each with full power of substitution, for me and in my name, place and stead, in any and all capacities (including without limitation, as Director of the Company), to sign the Company's Annual Report on Form 10-K for the year ended December 31, 1997, which is to be filed with the Securities and Exchange Commission, with all exhibits thereto, and any and all documents in connection therewith, hereby granting unto said attorney-in-fact and agent full power and authority to do and perform any and all acts and things requisite and necessary to be done, and hereby ratifying and confirming all that said attorney-in fact and agent may do or cause to be done by virtue hereof. Dated: 01/30/98 /s/ John W. Rosenblum John W. Rosenblum EXHIBIT 24 POWER OF ATTORNEY I, Dianne C. Walker, a duly elected Director of COMDIAL CORPORATION, a Delaware corporation, do hereby constitute and appoint William G. Mustain and Wayne R. Wilver, or either of them, my true and lawful attorneys-in-fact, each with full power of substitution, for me and in my name, place and stead, in any and all capacities (including without limitation, as Director of the Company), to sign the Company's Annual Report on Form 10-K for the year ended December 31, 1997, which is to be filed with the Securities and Exchange Commission, with all exhibits thereto, and any and all documents in connection therewith, hereby granting unto said attorney-in-fact and agent full power and authority to do and perform any and all acts and things requisite and necessary to be done, and hereby ratifying and confirming all that said attorney-in fact and agent may do or cause to be done by virtue hereof. Dated: 02/1/98 /s/ Dianne C. Walker Dianne C. Walker EX-27 14 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1997 DEC-31-1997 $5,673 0 11,356 78 18,487 37,107 45,183 28,849 79,264 20,431 13,623 0 0 88 44,747 79,264 114,654 118,561 69,916 71,218 30,064 122 1,698 5,868 149 5,719 0 0 0 5,719 0.66 0.65
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