-----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, BsE2pzxVFwaZ/F6aIQa26xlwosQJAdcv1r3mWg/2ZAcYFC+H6sUY1c4R3r56/zrp kFVBo9TtPbSw5GTAW0EVpQ== /in/edgar/work/20000831/0000916641-00-001266/0000916641-00-001266.txt : 20000922 0000916641-00-001266.hdr.sgml : 20000922 ACCESSION NUMBER: 0000916641-00-001266 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000402 FILED AS OF DATE: 20000831 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMDIAL CORP CENTRAL INDEX KEY: 0000230131 STANDARD INDUSTRIAL CLASSIFICATION: [3661 ] IRS NUMBER: 942443673 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 000-09023 FILM NUMBER: 714683 BUSINESS ADDRESS: STREET 1: 1180 SEMINOLE TRAIL STREET 2: P O BOX 7266 CITY: CHARLOTTESVILLE STATE: VA ZIP: 22906-2200 BUSINESS PHONE: 8049782200 MAIL ADDRESS: STREET 1: 1180 SEMMINOLE TRAIL STREET 2: P O BOX 7266 CITY: CHARLOTTESVILLE STATE: VA ZIP: 22906 10-Q/A 1 0001.txt AMENDMENT NO. 1 TO FORM 10-Q United States SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QA [X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended April 2, 2000 ------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number: 0-9023 COMDIAL CORPORATION (Exact name of Registrant as specified in its charter) Delaware 94-2443673 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) P. O. Box 7266 1180 Seminole Trail; Charlottesville, Virginia 22906-7266 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code:(804) 978-2200 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of latest practicable date. 9,202,193 common shares as of April 2, 2000. COMDIAL CORPORATION AND SUBSIDIARIES The undersigned registrant hereby amends the following items of its Quarterly Report on Form 10-QA for the fiscal quarter ended April 2, 2000, as set forth in the pages attached hereto (see Note A to the Financial Statements): INDEX PAGE PART I - FINANCIAL INFORMATION ITEM 1: Financial Statements Consolidated Balance Sheets as of April 2, 2000 and December 31, 1999 (as restated) 3 Consolidated Statements of Operations for the Three Months ended April 2, 2000 and April 4, 1999 (as restated) 4 Consolidated Statements of Cash Flows for the Three Months ended April 2, 2000 and April 4, 1999 (as restated) 5 Notes to Consolidated Financial Statements 6-12 ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 13-17 ITEM 3. Quantitative and Qualitative Disclosures about Market Risks 18 PART II - OTHER INFORMATION ITEM 4: Submission of Matters to a vote by Security Holders 19 ITEM 6: Exhibits and Reports on Form 8-K 20 2 COMDIAL CORPORATION AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION ITEM 1. Financial Statements Consolidated Balance Sheets - (Unaudited) (As restated see Note A) April 2, Dec. 31, In thousands except par value 2000 1999 * - ------------------------------------------------------------------------ Assets Current assets Cash and cash equivalents $1,899 $1,917 Accounts receivable (less allowance 33,169 39,700 for doubtful accounts and reserve for returns: 2000 - $4,963; 1999 - $2,300) Inventories 25,544 22,827 Prepaid expenses and other current assets 6,109 7,633 - --------------------------------------------------------------------- Total current assets 66,721 72,077 Property - net 18,864 19,458 Goodwill 10,409 11,207 Deferred tax asset - net 15,163 11,980 Other assets 19,473 18,352 - --------------------------------------------------------------------- Total assets $130,630 $133,074 ===================================================================== - ------------------------------------------------------------------------ Liabilities and Stockholders' Equity Current liabilities Accounts payable $12,231 $15,135 Accrued payroll and related expenses 2,374 2,652 Other accrued liabilities 3,409 4,575 Current maturities of debt 1,262 471 - --------------------------------------------------------------------- Total current liabilities 19,276 22,833 Long-term debt 28,440 31,795 Deferred tax liability 2,641 2,622 Other long-term liabilities 5,949 4,216 - -------------------------------------------------------------------- Total liabilities 56,306 61,466 Commitments and contingent liabilities (see Note I) - - - --------------------------------------------------------------------- Stockholders' equity Common stock ($0.01 par value) and paid-in capital (Authorized 30,000 shares; issued shares: 2000 - 9,202; 1999 - 8,940) 119,000 116,626 Treasury Stock (1,236) (1,237) Accumulated deficit (43,440) (43,781) - --------------------------------------------------------------------- Total stockholders' equity 74,324 71,608 Total liabilities and stockholders' equity $130,630 $133,074 ===================================================================== * Condensed from audited financial statements. The accompanying notes are an integral part of these financial statements. 3 COMDIAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations - (Unaudited) In thousands except per share amounts - ----------------------------------------------------------- Three Months Ended (As restated see Note A) April 2, April 4, 2000 1999 - ----------------------------------------------------------- Net sales $31,608 $31,864 Cost of goods sold 17,651 19,163 - -------------------------------------------------------- Gross profit 13,957 12,701 Operating expenses Selling, general & administrative 10,471 8,611 Engineering, research & development 1,697 2,086 Goodwill amortization expense 799 784 - ------------------------------------------------------- Operating income 990 1,220 Other expense Interest expense 607 382 Miscellaneous expenses - net 31 129 - ------------------------------------------------------- Income before income taxes 352 709 Income tax expense 11 321 - -------------------------------------------------------- Net income $341 $388 ======================================================== Earnings per share: Basic $0.04 $0.04 Diluted $0.04 $0.04 Weighted average shares outstanding: Basic 9,099 8,939 Diluted 9,444 8,987 The accompanying notes are an integral part of these financial statements. 4 COMDIAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows - (Unaudited) Three Months Ended (As restated see Note A) April 2, April 4, In thousands 2000 1999 - ---------------------------------------------------------------------- Cash flows from operating activities: Cash received from customers $39,588 $31,197 Other cash received 2,229 167 Interest received 22 1 Cash paid to suppliers and employees (39,341) (35,524) Interest paid on debt (495) (397) Income taxes paid (54) (52) - ---------------------------------------------------------------------- Net cash provided by (used in) operating activities 1,949 (4,608) - ---------------------------------------------------------------------- Cash flows from investing activities: Acquisition costs for Array - (1) Proceeds received from ePHONE from the sale of assets 648 - Proceeds from the sale of equipment 1 - Capital expenditures (1,227) (976) - ---------------------------------------------------------------------- Net cash used in investing activities (578) (977) - ---------------------------------------------------------------------- Cash flows from financing activities: Net borrowings under revolver (3,473) 5,774 Proceeds from issuance of common stock 2,129 12 Principal payments on capital lease obligations (45) (4) - ---------------------------------------------------------------------- Net cash provided by (used in) financing activities (1,389) 5,782 - ---------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (18) 197 Cash and cash equivalents at beginning of year 1,917 1,599 - ---------------------------------------------------------------------- Cash and cash equivalents at end of period $1,899 $1,796 ====================================================================== Reconciliation of net income to net cash provided by (used in) operating activities: Net income $341 $388 - ---------------------------------------------------------------------- Depreciation and amortization 2,620 2,218 Decrease (increase) in accounts receivable 6,531 (1,362) Inventory provision 51 353 Decrease (increase) in inventory (2,768) 1,009 Increase in other assets (2,548) (2,802) Decrease (increase) in deferred tax asset (944) 140 Decrease in accounts payable (2,904) (2,688) Increase (decrease) in other liabilities 1,327 (2,264) Increase in paid-in capital and other equity 243 400 - ---------------------------------------------------------------------- Total adjustments 1,608 (4,996) - ---------------------------------------------------------------------- Net cash provided by (used in) operating activities $1,949 ($4,608) ====================================================================== The accompanying notes are an integral part of these financial statements. 5 COMDIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED APRIL 2, 2000 - (Unaudited) Note A: CONSOLIDATED FINANCIAL STATEMENTS The financial information included as of April 2, 2000, and for the three months ended April 2, 2000 and April 4, 1999 is unaudited. The financial information reflects all normal recurring adjustments necessary for a fair statement of results for such periods. Accounting policies followed by Comdial Corporation ("Comdial") are described in Note 1 to the consolidated financial statements in its Annual Report to Stockholders for the year ended December 31, 1999. The consolidated financial statements for accounting periods in 2000 contained herein should be read in conjunction with the 1999 financial statements, including notes thereto, contained in Comdial's Annual Report to Stockholders for the year ended December 31, 1999. Certain amounts in the 1999 consolidated financial statements have been reclassified to conform to the 2000 presentation. The results of operations for the three months ended April 2, 2000, are not necessarily indicative of results for the full year. Restatement Subsequent to the issuance of Comdial's financial statements as of and for the three months ended April 2, 2000, the Company's management determined that an appropriate provision for sales returns was not recorded for a special return agreement entered into in connection with a sale that occurred in the first quarter of 2000. As a result, the financial statements as of and for the three months ended April 2, 2000 have been restated from amounts previously reported to appropriately recognize such provision for sales returns. A summary of the significant effects of the restatement is as follows: - -------------------------------------------------------------------------------- As Previously Reported As Restated In thousands, except earnings per share - -------------------------------------------------------------------------------- For the three months ended April 2, 2000: Net sales $34,308 $31,608 Cost of goods sold 19,440 17,651 Income tax expense 340 11 Net income 923 341 Earnings per share: basic and diluted 0.10 0.04 As of April 2, 2000 Accounts receivable 35,869 33,169 Inventories 23,755 25,544 Prepaid expense & other current assets 8,222 6,109 Deferred tax asset - net 12,708 15,163 Accumulated deficit (42,858) (43,440) - -------------------------------------------------------------------------------- 6 Note B: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The preparation of financial statements to conform with generally accepted accounting principles ("GAAP") requires management to make certain estimates and assumptions that affect reported amounts of assets, liabilities, revenues, and expenses, as well as disclosure of contingent assets and liabilities as of April 2, 2000. Actual results may differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents are defined as short-term liquid investments with maturities, when purchased, of less than 90 days that are readily convertible into cash. Under Comdial's current cash management policy, borrowings from the revolving credit facility are used for operating purposes. The revolving credit facility is reduced at management's option by cash receipts that are deposited daily. Bank overdrafts of $3.4 million and $2.2 million are included in accounts payable as of April 2, 2000 and December 31, 1999, respectively. Bank overdrafts consist of outstanding checks that have neither (1) cleared the bank nor (2) been funded by the revolving credit facility (see Note E). The revolving credit facility activity is reported on a net basis in the Consolidated Statements of Cash Flows. Revenue Recognition The majority of Comdial's revenue is recognized when products are shipped and title has passed to the customer. Comdial's management records a provision for all anticipated returns that is constantly monitored and updated as required. This provision is recognized as a reduction of revenues. All actual returns are charged against the allowance for returns as received. National account customer revenues are not recognized until the customer takes title to the equipment, which may be either at shipment or at installation depending on the terms of the contract. Embedded software revenues are recognized when Comdial activates a code at the request of the customer enabling the software to be used. Management believes that these policies are in accordance with Staff Accounting Bulletin No. 101 ("Revenue Recognition"). Other Long-lived Assets Long-lived assets are amortized based on the assets' useful lives. Long-lived assets are reviewed for impairment as circumstances change that might impact the useful life of the asset. An impairment loss is not recognized unless a portion of the carrying amount of an asset is no longer recoverable using a test of recoverability, which is based on expected future undiscounted cash flows. 7 Note C: SALE OF FIXED ASSETS AND LICENSING AGREEMENTS On March 31, 2000, Array Telecom Corporation ("Array"), a wholly-owned subsidiary of Comdial, and Comdial entered into a Strategic Alliance agreement with ePHONE Telecom, Inc. ("ePHONE"). Pursuant to the agreement, Array sold its fixed assets, the 3000 family of products, and licensed its technology for a five-year term to ePHONE. Comdial allowed ePHONE to utilize the name "Array" and will provide ePHONE with access to its distribution channels. ePHONE paid Array on the closing date $2.7 million and will pay royalty fees to Comdial based on certain gross sales over a five-year period. Comdial will recognize the $2.7 million less any costs associated with the transaction and any proceeds received for the assets sold to ePHONE into income over a five-year period. Note D: INVENTORIES Inventories consist of the following: - ----------------------------------------------------------------- April 2, Dec. 31, In thousands 2000 1999 - ----------------------------------------------------------------- Finished goods $13,318 $8,763 Work-in-process 3,223 4,556 Materials and supplies 9,003 9,508 ----- ----- Total $25,544 $22,827 ======= ======= - ----------------------------------------------------------------- Comdial provides reserves to cover product obsolescence and those reserves impact gross margins. Such reserves are dependent on management's estimates of the recoverability of costs of all inventory, which is based on, among other things, expected obsolescence of the products. Raw material obsolescence is mitigated by the commonality of component parts and finished goods and by the low level of inventory relative to sales. Also included in inventory is the estimated amount for returns not yet received as of April 2, 2000, which is $3.0 million. Note E: BORROWINGS In the third quarter of 1998, Comdial and Bank of America, N.A. ("Bank of America"), entered into a credit agreement (the "Credit Agreement"). The Credit Agreement provides Comdial with a $50 million revolving credit facility ("the Revolver") of which $5 million is a letter of credit subfacility. Long-term debt consists of the following: - ----------------------------------------------------------------- April 2, Dec. 31, In thousands 2000 1999 - ----------------------------------------------------------------- Revolver (1) $26,123 $29,596 Capitalized leases (2) 3,579 2,670 ------ ----- Total debt 29,702 32,266 Less current maturities on debt 1,262 471 ------ ------ Total long-term debt $28,440 $31,795 ======= ======= - ----------------------------------------------------------------- (1) The Revolver, made pursuant to the Credit Agreement with Bank of America, carries an interest rate based on the LIBOR daily rate plus a specified margin. The interest rate can be adjusted quarterly based on Comdial's ratio of funded debt to earnings before interest, taxes, depreciation and amortization ("EBITDA"), which allows the rates to vary from 0.75% to 1.50% above the LIBOR daily rate. As of April 2, 2000 and December 31, 1999, Comdial's borrowing rates were 6.88% and 6.58%, respectively, which includes the additional applicable margin of 0.75% for both periods. Comdial can use the Revolver with Bank of America for working capital, equipment purchases, to finance permitted acquisitions, and for other general corporate purposes. Bank of America's Revolver (as defined in the Credit Agreement) does not require payment until August 31, 2003 with the option of possible credit extensions. (2) Capital leases are with various financing entities and are payable based on the terms of each individual lease. Debt Covenants Comdial's indebtedness to Bank of America is secured by liens on all of Comdial's properties and assets. The Credit Agreement with Bank of America contains certain financial covenants that relate to specified levels of consolidated net worth and other financial ratios. As of April 2, 2000, Comdial was in compliance with all of the covenants and terms of the Credit Agreement. Note F: EARNINGS PER SHARE Basic EPS for the three month periods presented was computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted EPS was computed by dividing net income by the weighted average number of common shares outstanding during the period plus (in periods in which they had a dilutive effect) the effect of common shares contingently issuable, primarily from stock options. The following table discloses the quarterly information for the three months ended April 2, 2000 and April 4, 1999. - ----------------------------------------------------------------- Numerator Denominator EPS - ----------------------------------------------------------------- Three Months - ------------ 2000 Basic EPS $341,000 9,098,999 $0.04 Diluted $341,000 9,443,564 $0.04 1999 Basic EPS $388,000 8,939,450 $0.04 Diluted $388,000 8,986,732 $0.04 For further detail of EPS see Exhibit 11. - ------------------------------------------------------------------- 8 Note G: INCOME TAXES The components of income tax expense based on the liability method for the three months are as follows: - ----------------------------------------------------------------- April 2, April 4, In thousands 2000 1999 - ----------------------------------------------------------------- Current - Federal $42 $58 State 50 123 Deferred - Federal (47) 191 State (34) (51) ---- ---- Income tax provision $11 $321 ==== ==== - ----------------------------------------------------------------- The income tax provision reconciled to the tax computed at statutory rates for the three months is summarized as follows: - ----------------------------------------------------------------- April 2, April 4, In thousands 2000 1999 - ----------------------------------------------------------------- Federal tax at statutory rate (35% in 2000 and 1999) $123 $239 State income taxes (net of federal tax benefit) 9 48 Nondeductible charges 7 20 Recognition of benefits for subsidiary NOLs (87) - Other adjustments (41) - Adjustment of valuation allowance - 14 ----- ----- Income tax provision $11 $321 ===== ===== - ----------------------------------------------------------------- Net deferred tax assets of $15.8 million and $14.8 million have been recognized in the accompanying Consolidated Balance Sheets as of April 2, 2000 and December 31, 1999, respectively. The components of the net deferred tax assets are as follows: - ----------------------------------------------------------------- April 2, Dec. 31, In thousands 2000 1999 - ----------------------------------------------------------------- Total deferred tax assets $18,508 $17,545 Total valuation allowance (114) (114) ---- ------ Total deferred tax asset - net 18,394 17,431 Total deferred tax liabilities (2,641) (2,622) ------ ------ Total net deferred tax asset $15,753 $14,809 ======= ======= - ----------------------------------------------------------------- Comdial periodically reviews the requirements for a valuation allowance and makes adjustments when changes in circumstances result in changes in management's judgment about the future realization of deferred tax assets. Management currently believes that it is more likely than not that the deferred tax assets will be realized. 9 Comdial has net operating losses ("NOLs") and tax credit carryovers of approximately $10.2 million and $1.6 million, respectively. If not utilized, the NOLs and tax credit carryovers will expire in various years through 2010. NOTE H. SEGMENT INFORMATION During the first three months of 2000 and 1999, substantially all of Comdial's sales, net income, and identifiable net assets were attributable to the telecommunications industry with over 97% of sales occurring in the United States. Comdial is organized into several product segments that comprise the majority of its sales to the telecommunications market. Comdial has three basic product categories that contribute ten percent or more, to net sales. The segments are Digital Systems, Solutions and Software, and Analog and Other (which includes other miscellaneous products). Each of these categories is considered a business segment, and with respect to their financial performance, the costs associated with these segments can only be quantified and identified to the gross profit level for each segment. The Digital Systems segment is comprised of products such as Impact, Impression series telecommunication systems, Impact Digital Expandable Systems ("DXP"), DXP Plus and the open digital switching platforms known as the "FX Series." Digital Systems generally offer customers more features with superior quality platforms. The distinguishing characteristic of this segment is that it is designed for the small office up to 500 end users. The Solutions and Software segment is comprised of all Comdial's software and software application products. The products included are all of Comdial's vertical market products such as Impact Concierge, QuickQ, Avalon, and voice processing systems. These products are sold to specific industries such as hospitality, call centers, and senior living centers. The Analog and Other segment is comprised of Comdial's older analog products (such as Unisyn), and other products such as ATC Terminals and Custom Manufacturing. The Analog products are designed for the small office market, which supports only a few users. The information in the following tables is derived directly from the segments' internal financial reporting used for management's purposes. The expenses, assets and liabilities attributable to corporate activity are not allocated to the operating segments. There are no operating assets located outside the United States. Unallocated costs include operating expenses, goodwill amortization, interest expense, other miscellaneous expenses, and income tax expenses or benefits. Comdial does not maintain information that would allow these costs to be broken down into the various product segments and most of these costs are universal in nature. Unallocated assets include such items as cash, deferred tax assets, other miscellaneous assets, and goodwill. Unallocated capital expenditures and depreciation relate primarily to shared services assets. Unallocated liabilities include such items as accounts payable, debt, leases, deferred tax liabilities, and most other liabilities that do not relate to sales. The information in the following tables is derived directly from the segments' internal financial reporting used for management's purposes. The following tables show segment information for the periods ended April 2, 2000 and April 4, 1999. - -------------------------------------------------------------------------- April 2, April 4, (Dollars in thousands) 2000 1999 - -------------------------------------------------------------------------- Business Segment Net Revenues Digital Systems $19,116 $18,503 Solutions and Software 10,846 10,413 Analog and Other 1,646 2,948 ------- ----- Net sales $31,608 $31,864 ======= ======= Business Segment Profit Digital Systems $8,307 $6,234 Solutions and Software 5,386 5,802 Analog and Other 264 665 ------ ------ Gross profit 13,957 12,701 Operating expenses 12,967 11,481 Interest expense 607 382 Miscellaneous expense - net 31 129 ------ ------ Income before income taxes $352 $709 ==== ====== ============================================================================ April 2, December 31, (Dollars in thousands) 2000 1999 - ---------------------------------------------------------------------------- Business Segment Assets Digital Systems $52,937 $54,443 Solutions and Software 25,980 27,307 Analog and Other 3,947 5,335 Unallocated 47,766 45,989 ------- ------- Total 130,630 $133,074 ======= ======== Business Segment Liabilities Digital Systems $1,314 $1,875 Solutions and Software 5,411 2,904 Analog and Other 136 202 Unallocated 49,445 56,485 ------- ------- Total $56,306 $61,466 ======= ======= - ---------------------------------------------------------------------------- 10 - -------------------------------------------------------------------------- April 2, April 4, (Dollars in thousands) 2000 1999 - -------------------------------------------------------------------------- Business Segment Property, Plant and Equipment Depreciation Digital Systems $412 $469 Solutions and Software 99 35 Analog and Other 27 39 Unallocated 240 308 ---- ---- Total $778 $851 ==== ==== Additions Digital Systems $248 $345 Solutions and Software 451 52 Analog and Other 36 49 Unallocated 80 425 ---- ---- Total $815 $871 ==== ==== - --------------------------------------------------------------------------- Note I: COMMITMENTS AND CONTINGENT LIABILITIES At this time, Comdial has not had any claims or losses relating to Year 2000 issues. Comdial cannot predict whether there will be any future litigation against Comdial due to non-compliance relating to Year 2000 issues. 11 COMDIAL CORPORATION AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion is intended to assist the reader in understanding and evaluating the financial condition and results of operations of Comdial Corporation and its subsidiaries (the "Company"). This review should be read in conjunction with the consolidated 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 2000 reporting basis (see Note A to the Consolidated Financial Statements). Comdial is a Delaware corporation based in Charlottesville, Virginia. Comdial's Common Stock is traded on the National Association of Security Dealers Automated Quotation System ("Nasdaq(R)") in the National Market(R) under the symbol, CMDL. Subsequent to the issuance of Comdial's financial statements as of and for the three months ended April 2, 2000, the Company's management determined that a provision for sales returns was not recorded for a special return agreement entered into in connection with a sale that occurred in the first quarter of 2000. As a result, the financial statements as of and for the three months ended April 2, 2000 have been restated from amounts previously reported to appropriately recognize such provision for sales returns (see Note A to the Consolidated Financial Statements). Results of Operations Selected consolidated statements of operations for the first three months of 2000 and 1999 are as follows: - ---------------------------------------------------------------------------- April 2, April 4, In thousands 2000 1999 - ---------------------------------------------------------------------------- Business Segment Sales: Digital Systems $19,116 $18,503 Solutions and Software 10,846 10,413 Analog and Other 1,646 2,948 ------ ------ Net sales 31,608 31,864 Cost of sales 17,651 19,163 ------ ------ Gross profit 13,957 12,701 Selling, general & administrative 10,471 8,611 Engineering, research & development 1,697 2,086 Goodwill amortization 799 784 Interest expense 607 382 Miscellaneous expense - net 31 129 ----- --- Income before income taxes 352 709 Income tax expense 11 321 ----- --- Net income $341 $388 ===== ===== Earnings per share: basic and diluted $0.04 $0.04 ===== ===== - ----------------------------------------------------------------------------- 12 Revenue and Earnings First Quarter 2000 vs. 1999 Comdial's net sales decreased by 1% for the first quarter of 2000 to $31.6 million, compared with $31.9 million in the first quarter of 1999. This decrease was primarily attributable to the decrease in Comdial's older analog product sales. Gross profit increased by 10% for the first quarter of 2000 to $14.0 million, compared with $12.7 million in the first quarter of 1999. Gross profit, as a percentage of sales, increased from 40% for the first quarter of 1999 to 44% for the same period of 2000. This increase was primarily due to higher sales of digital systems which produced higher margins. Selling, general and administrative expenses increased for the first quarter of 2000 by 22% to $10.5 million, compared with $8.6 million in the first quarter of 1999. This increase was due to adding sales and marketing personnel in the latter half of 1999 to support Comdial's planned future growth along with some additional costs associated with the reorganization of Comdial into new Strategic Business Units during the first quarter of 2000. Part of the reorganization included a reduction in workforce, which resulted in some severance cost of approximately $0.7 million. Engineering, research and development expenses for the first quarter of 2000 decreased by 19% to $1.7 million, compared with $2.1 million for the first quarter of 1999. This decrease was primarily due to the reduction in engineering personnel because of the new strategic businesses. All costs associated with the reduction or changes in personnel were recognized in selling, general and administrative expenses. Interest expense increased by 59% for the first quarter of 2000 to $0.6 million, compared with $0.4 million in the first quarter of 1999. This increase was due to higher interest rates of approximately 120 basis points in 2000 and an increase in capital leases, which is primarily associated with the installation of new software. Income tax expense decreased by 97% for the first quarter of 2000 to $11,000, compared with $321,000 for 1999. This reduction was due to lower taxable income and the recognition of subsidiary net operating losses ("NOLs"). Net income decreased by 12% for the first quarter of 2000 to $0.3 million, compared with $0.4 million for the same period in 1999. This decrease was primarily attributable to the decrease in sales and additional operating expenses. Income before income taxes for the first quarter of 2000 decreased to $0.4 million compared with $0.7 million for the first quarter of 1999. 13 Liquidity In 1998, Comdial entered into a new financing arrangement with Bank of America, N.A. ("Bank of America"), that provides a line of credit up to $50 million. The following table sets forth Comdial's cash and cash equivalents, current maturities on debt, and working capital at the dates indicated: - --------------------------------------------------------------------- April 2, December 31, In thousands 2000 1999 - --------------------------------------------------------------------- Cash and cash equivalents $1,899 $1,917 Current maturities on debt 1,262 471 Working capital 47,445 49,244 - --------------------------------------------------------------------- As of October 1998, Comdial and Bank of America signed a Credit Agreement (the "Credit Agreement") that is now funding all operational requirements as needed. All operating cash requirements were funded through a $50 million revolving credit facility (the "Revolver") provided by Bank of America. Comdial reports the Revolver activity on a net basis in the Consolidated Statements of Cash Flows. Comdial considers outstanding checks to be a bank overdraft. Current maturities on debt as of April 2, 2000, increased by $0.8 million due to increases in new leases of approximately $1.4 million when compared to December 31, 1999. Working capital as of April 2, 2000, decreased by $1.8 million when compared to December 31, 1999. This decrease was primarily due to the reduction of accounts receivable. Capital additions per generally accepted accounting principles ("GAAP") for the first three months of 2000 and 1999 were approximately $0.8 million and $0.9 million, respectively. Capital additions were used to help Comdial introduce new products as well as improve quality and reduce costs associated with existing products. Capital additions were funded by cash generated from operations and borrowing from the Revolver. Actual cash expenditures for capital additions for the first three months of 2000 and 1999, were $1.2 million and $1.0 million, respectively. Management anticipates that approximately $6 million will be spent on capital additions for the year 2000. These additions will help Comdial meet its commitments to its customers by developing new products as well as increasing its capacity to produce high-tech products for the future. Comdial plans to fund all additions primarily through cash generated by operations. Comdial has a commitment from Bank of America for the issuance of letters of credit in an aggregate amount not to exceed $5 million at any one time. On April 2, 2000, the amount of commitments under the letter of credit facility with Bank of America was $0.1 million. 14 Accounts payable as of April 2, 2000, decreased by $2.9 million when compared to December 31, 1999. This decrease was primarily due to the timing of incoming material receipts for production. Other accrued liabilities as of April 2, 2000, decreased by $1.2 million partially due to Comdial paying promotional costs in 2000 that were incurred in 1999. Other long-term liabilities as of April 2, 2000, increased by $1.7 million when compared to December 31, 1999. This increase was primarily due to the recognition of deferred revenue that was received from ePHONE for the five-year license agreement with Array Telecom Corporation ("Array"). Long-term Debt, Including Current Maturities As of April 2, 2000, long-term debt decreased by $3.4 million, which was a direct result of Comdial collecting receipts that related to the high level of fourth quarter sales. See Note E to Comdial's Consolidated Financial Statements for additional information with respect to Comdial's loan agreements, long-term debt and available short-term credit lines. Comdial believes that income from operations combined with amounts available from Comdial's current credit facilities will be sufficient to meet Comdial's needs for the foreseeable future. Other Financial Information During the first three months of 2000 and 1999, primarily all of Comdial's sales, net income, and identifiable net assets were attributable to the telecommunications industry. On March 17, 2000, Comdial and Lucent Technologies GRL Corporation ("Lucent-GRL") entered into a Patent License Agreement pursuant to which Lucent-GRL granted to Comdial licenses under Lucent-GRL's patents for Licensed Products (as defined in the agreement), and Comdial granted Lucent-GRL licenses under Comdial's patents for Licensed Products (as defined in the agreement). Pursuant to the agreement, Comdial paid Lucent-GRL an initial payment and agreed to pay Lucent-GRL a royalty based on Comdial's consolidated sales. The agreement extends for a period of five years. The costs associated with this agreement are future period costs. Year 2000 In early 1997, Comdial established a team (the "Year 2000 Team"), to evaluate whether, and to what extent, Comdial's products, information technology systems, facilities and production and distribution infrastructure may be affected by the Year 2000 and potential problems caused by the inability of certain computers and microprocessors to distinguish between the year 2000 and the year 1900. 15 Comdial continues to monitor and review any new issues that may arise concerning Year 2000. As of April 2, 2000, cumulative costs incurred by Comdial specifically for the Year 2000 totaled an aggregate of $0.7 million. Risks: While management believes that it has taken appropriate actions to respond to and resolve potential Year 2000 issues, there can be no assurance that Year 2000 issues will not have a material adverse affect on Comdial. Current Pronouncements In the third quarter of 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." Comdial does not participate in any financial instruments that meet the definition of a derivative or hedging activity, and therefore, it is not expected that this statement will have any affect on Comdial's financial statements. In second quarter of 2000, FASB issued SFAS No. 137 which delayed the effective date of SFAS No. 133 until December 2000. "SAFE HABOR" STATEMENT UNDER THE PRIVATE SECURITIES LIGITATION REFORM ACT OF 1995 This report contains some forward-looking statements that are subject to risks and uncertainties, including, but not limited to, the impact of competitive products, product demand and market acceptance risks, reliance on key strategic alliances, fluctuations in operating results, delays in development of highly complex products, and other risks detailed from time to time in Comdial's filings with the Securities and Exchange Commission. These risks could cause Comdial's actual results for 2000 and beyond to differ materially from those expressed in any forward-looking statement made by, or on behalf of, Comdial. 16 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS Comdial believes that it does not have any material exposure to market risk associated with activities in derivative financial instruments, other financial instruments and derivative commodity instruments. 17 COMDIAL CORPORATION AND SUBSIDIARIES PART II - OTHER INFORMATION ITEM 4. Submission of Matters to a Vote by Security Holders (a) On May 4, 2000, Comdial held its annual meeting of shareholders in the Customer Conference Center within its own facility located at 1180 Seminole Trail, Charlottesville, Virginia 22901. The following matters were voted upon: 1. The following director was elected to serve a three-year term: Robert P. Collins. Directors whose terms of office continued after the meeting: Barbara J. Dreyer, William G. Mustain, John W. Rosenblum, Robert E. Spekman, and Dianne C. Walker. Director whose term of office expired after the meeting and who retired from the board: A. M. Gleason. 2. An amendment to the Company's 1992 Stock Incentive Plan to increase the number of shares authorized for issuance to 2,050,000 was approved. 3. The selection of Deloitte & Touche LLP as the Company's certified public accountants and independent auditors was ratified. Shares of Common Stock were voted as follows: Item 1: (Election of Board of Director) For - 7,346,997 Withheld authority - 1,155,012 Total Vote For Total Vote Withheld -------------- ------------------- Robert P. Collins 7,346,997 1,155,012 Item 2: (Increase authorized Common Shares for 1992 Stock Incentive Plan) For - 3,701,512 Against - 1,998,201 Abstain - 51,224 Broker non-votes - 2,751,072 Item 3: (Selection of Independent Auditors) For - 8,445,398 Against - 36,342 Abstain - 20,269 18 ITEM 6. Exhibits and Reports on Form 8-K. (a) 3. Exhibits Included herein: (3) By-laws. 3.1 Bylaws of Comdial Corporation (10) Material Contracts. 10.1 Strategic Alliance Agreement dated March 31, 2000 among the Registrant and ePHONE Telecom, Inc. 10.2 Patent License Agreement dated March 17, 2000 among the Registrant and Lucent Technologies GRL Corporation (11) Statement re Computation of Per Share Earnings. (27) Financial Data Schedule. (b) Reports on Form 8-K. The Registrant has not filed any reports on Form 8-K during the quarterly period. - ------------------ Items not listed if not applicable. 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Comdial Corporation ------------------- (Registrant) Date: August 31, 2000 By: William G. Mustain ---------------- ------------------ William G. Mustain Chairman of the Board, President and Chief Executive Officer By: Paul K. Suijk ----------------- Paul K. Suijk Senior Vice President and Chief Financial Officer 20 EX-10.1 2 0002.txt STRATEGIC ALLIANCE AGREEMENT EXHIBIT 10.1 STRATEGIC ALLIANCE AGREEMENT AMONG ARRAY TELECOM CORPORATION, EPHONE TELECOM, INC. AND COMDIAL CORPORATION This Strategic Alliance Agreement (the "Agreement") is made as of March 31, 2000, between ARRAY TELECOM CORPORATION, a corporation incorporated under the laws of the State of Delaware and having its principal office at 1145 Herndon Parkway, Herndon, Virginia 20170 ("Array"), ePHONE TELECOM, INC., a corporation incorporated under the laws of the State of Florida and having its principal office at 355 Burrard Street, Suite 1000, Vancouver, British Columbia, Canada V6C 2G8 ("ePHONE"), and COMDIAL CORPORATION, a corporation incorporated under the laws of the State of Delaware and having its principal office at 1180 Seminole Trail, Charlottesville, Virginia 22906 ("Comdial"). RECITALS WHEREAS, ePHONE is in the business of providing certain telecommunications services, including international long distance services that allow users to perform phone-to-phone one step dialing via Voice over Internet Protocol; WHEREAS, Array has developed certain software products, including VoipGate, Array Version 2 and the Array 3000 family of products, and owns certain related assets; WHEREAS, Comdial owns all of the outstanding capital stock of Array; and WHEREAS, Array has agreed to sell, and ePHONE has agreed to purchase, all of Array's physical assets, and Array has agreed to grant to ePHONE a license in the form of Exhibit B to this Agreement to, among other things, VoipGate, Array Version 2 and the Array 3000 family of products. AGREEMENT NOW, THEREFORE, in consideration of the covenants, agreements and representations set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: ARTICLE 1. SALE AND PURCHASE OF ASSETS Section 1.1 Sale and Purchase of Assets. Subject to the terms and conditions of this Agreement, on the Closing Date (hereinafter defined) Array shall sell, transfer, convey and deliver to ePHONE, and on the Closing Date ePHONE shall purchase and acquire from Array, the fixed assets of Array used in its business and listed in Schedule 1 (the "Purchased Assets"). The transfer and conveyance of the Purchased Assets shall be made by a bill of sale (the "Bill of Sale") in substantially the form attached hereto as Exhibit A. Section 1.2 Excluded Assets. The Purchased Assets to be sold and purchased hereunder do not include cash, accounts receivable, intangible assets, patents or patent applications, know-how, trade secrets or any other asset of Array that is not listed in Schedule 1. Section 1.3 No Assumption of Liabilities. ePHONE shall not assume or be otherwise liable for any liabilities or obligations of Array related to the Purchased Assets or otherwise, except for obligations arising after the Closing Date under the Lease (as defined in Section 7.7). ARTICLE 2. LICENSE OF TECHNOLOGY Section 2.1 License. Array shall grant to ePHONE a license to the Intellectual Property (as such term is defined in the License Agreement) (the "Licensed Assets") pursuant to the License Agreement in substantially the form attached hereto as Exhibit B. ARTICLE 3. CONSIDERATION FOR AGREEMENT Section 3.1 Consideration for Agreement. In partial consideration for this Agreement and the transactions contemplated hereby, ePHONE shall pay to Array at the Closing in cash the amount of $2,650,000. Section 3.2 Royalty Payments. ePHONE shall make royalty payments to Comdial pursuant to the terms of the License Agreement. ARTICLE 4. REPRESENTATIONS BY ARRAY Section 4.1 Organization; Qualification. Array is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all necessary corporate power and authority to own its assets and carry on its business as it is presently being conducted. Array is duly qualified and in good standing to do business in each jurisdiction in which its business makes such qualification necessary, except in those jurisdictions where failure to be duly qualified and in good standing does not and cannot reasonably be expected to have, in the aggregate, a material adverse effect on the Purchased Assets, the Licensed Assets or its business. Array has heretofore delivered to ePHONE complete and correct copies of its Certificate of Incorporation and Bylaws currently in effect. Section 4.2 Authority Relative to this Agreement. Array has all necessary corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery by Array of this Agreement, and the consummation by it of the transactions contemplated hereby, have been duly authorized by the Board of Directors of Array and no other corporate proceedings on the part of Array are necessary with respect thereto. This Agreement has been duly executed and delivered by Array and constitutes, and the other agreements referred to herein to which Array is a party (collectively, the "Array Related Agreements"), when executed and delivered by Array, will constitute, valid and binding obligations of Array enforceable against Array in accordance with their terms, except as their terms may be limited by (i) bankruptcy, insolvency or similar laws affecting creditors' rights generally or (ii) general principles of equity, whether considered in a proceeding in equity or at law. Section 4.3 No Violation. The execution and delivery by Array of this Agreement and the Array Related Agreements does not, and the consummation of the transactions contemplated hereby and thereby, will not (i) violate or result in a breach of any provision of the Certificate of Incorporation or bylaws of Array, (ii) result in a default, or give rise to any right of termination, modification or acceleration, or the imposition of a mortgage, lien, pledge, security interest, charge, claim, restriction or other encumbrance or other defects in title (each an "Encumbrance") on any of the Purchased Assets or the Licensed Assets, under the terms or provisions of any agreement or other instrument or obligation to which Array is a party or by which Array, any of the Purchased Assets, the Licensed Assets or its business may be bound, or (iii) violate any law or regulation, or any judgment, order or decree of any court, governmental body, commission, agency or arbitrator applicable to Array, any of the Purchased Assets, the Licensed Assets or its business (other than applicable "bulk sales" laws), excluding from the foregoing clauses (ii) and (iii) such defaults and violations which do not and cannot reasonably be expected to have a material adverse effect on the Purchased Assets or the Licensed Assets, or Array or its other properties or its business. Section 4.4 Litigation. There are no actions, suits, claims, investigations or proceedings pending or, to the knowledge of Array, threatened against Array, before any court, governmental body, commission, agency or arbitrator, which have or can reasonably be expected to have a material adverse effect on the Purchased Assets or the Licensed Assets or Array or its business, or which seek to limit, in any manner, the right of ePHONE to control and use the Purchased Assets and the Licensed Assets after the consummation of the transactions contemplated in this Agreement. Furthermore, there are no judgments, orders or decrees of any such court, governmental body, commission, agency or arbitrator which have or can reasonably be expected to have any such effect. Section 4.5 Titles to Assets; Leases. Array holds good and marketable title to all of the Purchased Assets and the Licensed Assets, free and clear of any Encumbrances, and has the right to sell, transfer and assign the Purchased Assets to ePHONE and license the Licensed Assets to ePHONE. All properties held under lease by Array are held under valid, enforceable and assignable leases. Section 4.6 Consents and Approvals. Except to the extent that failure to obtain such consent or approval would not have material adverse effect on the Purchased Assets or the Licensed Assets or Array's business, and except for the consent of Bank of America under the Credit Agreement between Bank of America and Comdial dated as of October 22, 1998, which consent has been obtained, there is no requirement applicable to Array to make any filing with, or to obtain the consent or approval of, any individual, corporation, partnership, limited liability company, association, trust or other entity or organization, including any government or political subdivision, agency or instrumentality thereof (each a "Person") as a condition to the consummation of the transactions contemplated by this Agreement (other than as may be required by applicable "bulk sales" laws). ARTICLE 5. REPRESENTATIONS BY COMDIAL Section 5.1 Organization and Qualification. Comdial is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all necessary corporate power and authority to own its assets and carry on its business as it is presently being conducted. Comdial is duly qualified and in good standing to do business in each jurisdiction in which its business makes such qualification necessary, except in those jurisdictions where failure to be duly qualified and in good standing does not and cannot reasonably be expected to have, in the aggregate, a material adverse effect on its business. Section 5.2 Authority Relative to Agreement. Comdial has all necessary corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery by Comdial of this Agreement, and the consummation by it of the transactions contemplated hereby, have been duly authorized by the Board of Directors of Comdial and no other corporate proceedings on the part of Comdial are necessary with respect thereto. This Agreement has been duly executed and delivered by Comdial, and constitutes the valid and binding obligation of Comdial enforceable against Comdial in accordance with its terms except as its terms may be limited by (i) bankruptcy, insolvency or similar laws affecting creditors' rights generally or (ii) general principles of equity, whether considered in a proceeding in equity or at law. Section 5.3 No Violation. The execution and delivery by Comdial of this Agreement does not, and the consummation of the transactions contemplated hereby will not, (i) violate or result in a breach of any provision of the Certificate of Incorporation or bylaws of Comdial, or (ii) violate any law or regulation, or any judgment, order or decree of any court, governmental body, commission, agency or arbitrator applicable to Comdial or its business excluding such defaults and violations which do not and cannot reasonably be expected to have a material adverse effect on its properties or its business. ARTICLE 6. REPRESENTATIONS BY EPHONE Section 6.1 Organization and Qualification. ePHONE is a corporation duly organized, validly existing and in good standing under the laws of the State of Florida and has all necessary corporate power and authority to own its assets and carry on its business as it is presently being conducted. ePHONE is duly qualified and in good standing to do business in each jurisdiction in which its business makes such qualification necessary, except in those jurisdictions where failure to be duly qualified and in good standing does not and cannot reasonably be expected to have, in the aggregate, a material adverse effect on its properties or its business. ePHONE has heretofore delivered to Comdial complete and correct copies of its Articles of Incorporation and Bylaws currently in effect. Section 6.2 Authority Relative to Agreement. ePHONE has all necessary corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery by ePHONE of this Agreement, and the consummation by it of the transactions contemplated hereby, have been duly authorized by the Board of Directors of ePHONE and no other corporate proceedings on the part of ePHONE are necessary with respect thereto. This Agreement has been duly executed and delivered by ePHONE and constitutes, and the Related Agreements to which ePHONE is a party, when executed and delivered by ePHONE, will constitute, valid and binding obligations of ePHONE enforceable against ePHONE in accordance with their terms except as their terms may be limited by (i) bankruptcy, insolvency or similar laws affecting creditors' rights generally or (ii) general principles of equity, whether considered in a proceeding in equity or at law. Section 6.3 No Violation. The execution and delivery by ePHONE of this Agreement does not, and the consummation of the transactions contemplated hereby will not, (i) violate or result in a breach of any provision of the Articles of Incorporation or bylaws of ePHONE, or (ii) violate any law or regulation, or any judgment, order or decree of any court, governmental body, commission, agency or arbitrator applicable to ePHONE or its business as presently conducted or as contemplated to be conducted in the Business Plan of ePHONE, excluding such defaults and violations which do not and cannot reasonably be expected to have a material adverse effect on its properties or its business. Section 6.4 Consents and Approvals. Except to the extent that failure to obtain such consent or approval would not have material adverse effect on its properties or its business, there is no requirement applicable to ePHONE to make any filing with, or to obtain the consent or approval of, any Person as a condition to the consummation of the transactions contemplated by this Agreement. Section 6.5 Financial Statements. ePHONE has previously furnished Comdial with true and complete copies of (i) the audited financial statements of ePHONE for the periods ending June 30, 1999 and December 31, 1998 and 1997, including the notes thereto (the "Annual Financial Statements"), together with the reports on such statements of ePHONE's independent auditors, and (ii) unaudited interim financial statements for the eleven month period ending November 30, 1999 (the "Interim Financial Statements"). Such financial statements present fairly the financial position of ePHONE as of such dates and the results of its operations and changes in its financial position for such periods and have been prepared in accordance with generally accepted accounting principles applied on a consistent basis. Section 6.6 No Undisclosed Liabilities. Since November 30, 1999, and except as previously disclosed in writing to Comdial, there has not been any change, or development involving a prospective change, including, without limitation, any damage, destruction or loss (whether or not covered by insurance), which affects or can reasonably be expected to affect, the properties or business of ePHONE, and ePHONE has not entered into any contract which can reasonably be expected to have any such effect. Section 6.7 Absence of Certain Changes. Except as previously disclosed in writing to Comdial, ePHONE has not incurred any liabilities which are not reflected in the Interim Financial Statements other than those which were incurred subsequent to such date in the ordinary course of business and which have not and cannot reasonably be expected to have a material adverse effect on the properties or business of ePHONE. Section 6.8 Absence of Litigation. There are no actions, suits, claims, investigations or proceedings pending or, to the knowledge of ePHONE, threatened against ePHONE, before any court, governmental body, commission, agency or arbitrator, which have or can reasonably be expected to have a material adverse effect or its business or which seek to limit, in any manner, the right of ePHONE to control the Purchased Assets and the Licensed Assets after the consummation of the transactions contemplated in this Agreement. Furthermore, there are no judgments, orders or decrees of any such court, governmental body, commission, agency or arbitrator which have or can reasonably be expected to have any such effect. Section 6.9 Business Plan. Attached hereto as Exhibit C is the current Business Plan of ePHONE with respect to the Purchased Assets and the Licensed Assets. ARTICLE 7. OTHER AGREEMENTS Section 7.1 Support for Imbedded Base. The parties hereto acknowledge that Array's imbedded base of customers will be supported and serviced by ePHONE following the Closing. ePHONE agrees that it will use commercially reasonable efforts to support such imbedded base from and after the Closing Date. Section 7.2 Investigation of Business. From the date hereof until the Closing, each of the parties hereto will afford the other parties hereto and their respective representatives, including attorneys and accountants, full access at all reasonable times to its officers, employees, properties, contracts and books and records to enable such other party to make a full investigation of its business. Each party will also furnish each other party with such financial, operating and other information as such party may reasonably request in making such investigation. Section 7.3 Confidentiality. The information which any party acquires about any other party prior to consummation of the transactions contemplated by this Agreement as a result of the investigations permitted hereby is termed "Evaluation Material." Each party agrees that neither it, nor any of its representatives, will (i) use any such material for any purpose not related to the transactions contemplated by this Agreement nor (ii) disclose any such material to anyone except its representatives who may need such information to perform their respective duties and have been informed of its confidential nature. If the transactions contemplated by this Agreement are not consummated, each party agrees that it will return any written Evaluation Material in its possession, or will destroy and will not retain any such material, any copies thereof or any notes or memoranda made using such material. Section 7.4 Public Announcements. Prior to the Closing Date, the parties will consult with each other before issuing any press releases or making any public statements with respect to this Agreement or the transactions contemplated hereby and will not issue any such press release or make any such public statement without the prior consent of the other, except to the extent required by law. Section 7.5 Employee Matters; Customer Solicitation. Comdial and Array will not object to or interfere with any efforts by ePHONE to employ the current employees of Array. During the term of the License Agreement, neither Array nor Comdial shall directly or indirectly induce or attempt to persuade any employee of ePHONE to terminate his or her employment with ePHONE. During the term of the License Agreement, neither Array nor Comdial nor any Person affiliated with either shall directly or indirectly sell or attempt to sell (by means of solicitation or otherwise) to any customer to which ePHONE is providing or has provided Products and Services (as such terms are defined in the License Agreement) any product or service which is competitive with the Products and Services. Section 7.6 Access to Comdial Dealer Network and Direct Sales Organization. During the term of the License Agreement, Comdial (i) shall use commercially reasonable efforts to assist ePHONE in distributing products and services provided by ePHONE through its direct sales organization and (ii) shall use commercially reasonable efforts to enable ePHONE to distribute products and services through its network of independent telecommunications equipment dealers. Section 7.7 Assignment of Lease. As soon as practicable following the Closing Date, Array shall assign to ePHONE its interests as lessee under the lease to Array's business facility located at 1145 Herndon Parkway, Herndon, Virginia, from W9/LWS Real Estate Limited Partnership, as lessor, dated February 23, 1999 ("Lease"), and ePHONE shall, from and after the Closing Date, assume and discharge the obligations of Array arising after the Closing Date under the Lease. Such assignment of lease shall be made by an assignment (the "Lease Assignment") in substantially the form of Lease Assignment attached hereto as Exhibit D. ePHONE shall use commercially reasonable efforts to have Comdial released from its obligations under the lease as soon as practicable following the Closing Date. ARTICLE 8. CLOSING OF TRANSACTIONS Section 8.1 Time and Place of Closing. The closing ("Closing") shall take place at Arnold & Porter at 4:00 p.m. local time on (i) March 31, 2000, (ii) such other date as may be agreed upon by the parties (either of which dates is referred to in this Agreement as the "Closing Date"). If the Closing takes place, the Closing and all of the transactions contemplated by this Agreement shall be deemed to have occurred simultaneously and become effective at the same time on the Closing Date. Section 8.2 Deliveries by Array. At the Closing, Array shall deliver to ePHONE the following: (a) Bill of Sale substantially in the form of Exhibit A attached hereto, duly executed, transferring to ePHONE title to the Purchased Assets; (b) License Agreement substantially in the form of Exhibit B attached hereto; (c) Certified copies of the resolutions duly adopted by Array constituting all necessary corporate authorization for the consummation by Array of the transactions contemplated by this Agreement; (d) A certificate dated as of a recent date from the Delaware Secretary of State as to the good standing of Array; and (e) Such other documents, instruments, certificates and writings as reasonably may be requested by ePHONE at least three business days prior to Closing. Section 8.3 Deliveries by ePHONE. At the Closing, ePHONE shall deliver to Array or Comdial the following: (a) Immediately available funds in the amount of $2,650,000, by wire transfer to an account designated by Array; (b) License Agreement substantially in the form of Exhibit B hereto; (c) Certified copies of the resolutions duly adopted by ePHONE constituting all necessary corporate authorization for the consummation by ePHONE of the transactions contemplated by this Agreement; (d) A certificate dated as of a recent date from the Florida Secretary of State as to the good standing of ePHONE; and (e) Such other documents, instruments, certificates and writings as reasonably may be requested by Array at least three business days prior to Closing. Section 8.4 Deliveries by Comdial. At the Closing, Comdial shall deliver to ePHONE the following: (f) License Agreement substantially in the form of Exhibit B attached hereto; (g) Certified copies of the resolutions duly adopted by Comdial constituting all necessary corporate authorization for the consummation by Comdial of the transactions contemplated by this Agreement; (h) A certificate dated as of a recent date from the Delaware Secretary of State as to the good standing of Comdial; and (i) Such other documents, instruments, certificates and writings as reasonably may be requested by ePHONE at least three business days prior to Closing. ARTICLE 9. MISCELLANEOUS PROVISIONS Section 9.1 Obligations of Comdial. Comdial hereby guarantees the complete and timely performance of the obligations of Array under this Agreement. Comdial agrees that if Array defaults in any of its obligations under this Agreement, ePHONE may exercise any remedies available to it to require Comdial to satisfy such Array obligations without first being required to seek performance of such obligations from Array. Section 9.2 Notices. All notices, requests, demands, claims, and other communications hereunder shall be in writing. Any notice, request, demand, claim, or other communication hereunder shall be deemed duly given (i) upon confirmation of receipt of facsimile; (ii) one (1) business day following the date sent when sent by overnight delivery; or (iii) five (5) business days following the date mailed when mailed by registered or certified mail return receipt requested and postage prepaid to the following address: If to Array or Comdial: Comdial Corporation Attention: William G. Mustain 1180 Seminole Trail Charlottesville, Virginia 22906 Phone: (804) 978-2518 Fax: (804) 978-2512 Email: bill.mustain@comdial.com Copy to: McGuire, Woods, Battle & Boothe LLP Attention: Robert E. Stroud, Esquire Court Square Building 310 Fourth Street NE, Suite 300 Post Office Box 1288 Charlottesville, Virginia 22902-1288 Phone: (804) 977-2511 Fax: (804) 980-2272 Email: restroud@mwbb.com If to ePHONE: ePHONE Telecom, Inc. Attention: Robert G. Clarke 355 Burrard Street, Suite 1000 Vancouver, British Columbia Canada V6C 2G8 Facsimile No.: (202) 942-5999 Phone: (604) 482-6116 Fax: (604) 482-1116 Email: rclarke@ephonetel.com Copy to: Arnold & Porter Attention: Paul D. Freshour 555 Twelfth Street, N.W. Washington, D.C. 20004-1202 Phone: (202) 942-5872 Fax: (804) 942-5999 Email: paul freshour@aporter.com Section 9.3 Arbitration (a) Any dispute, controversy or claim arising under, out of or relating to the Agreement or the License Agreement (any "Dispute"), shall be solely, finally and conclusively settled by arbitration in accordance with the Commercial Arbitration Rules (the "Rules") of the American Arbitration Association (the "AAA") in force when such arbitration is commenced. The arbitration shall take place in Washington, D.C. The Dispute shall be decided in accordance with the laws of the Commonwealth of Virginia. In the event that more than one Dispute is pending at the same time, such Disputes shall be consolidated in a single arbitral proceeding. (b) In any dispute between the parties hereto, the number of arbitrators shall be three. If the parties are unable to agree on the arbitrators, the arbitrators shall be selected in accordance with the Rules. (c) The parties hereto intend that the provisions to arbitrate set forth herein be valid, enforceable and irrevocable. The arbitrator's award shall be final and binding upon the parties. The parties shall carry out the final order on the award without delay and waive their right to assert any form of recourse against, or objection or defense to such order or its enforcement insofar as such waiver can validly be made. Judgment upon the award may be entered by any court having jurisdiction thereof or having jurisdiction over the parties or their assets or application may be made for judicial acceptance of the award and an order of enforcement, as the case may be. (d) Each party to the arbitration proceeding shall pay the fees and expenses of such party's attorney's and witnesses. The fees and expenses of the arbitrator and all other expenses shall be borne by the party that loses the arbitration. The parties agree that if it becomes necessary for any party to enforce an arbitral award by a legal action or additional arbitration or judicial methods, the party against whom enforcement is sought shall pay all reasonable costs and attorneys' fees incurred by the party seeking to enforce the award. Section 9.4 Governing Law. This Agreement shall be governed in all respects, and it and the transactions contemplated hereby shall be construed and interpreted, by the laws of the Commonwealth of Virginia without regard to its choice of law rules. Section 9.5 Entire Agreement. This Agreement, including the Schedules, the Business Plan of ePHONE and the Array Related Agreements attached hereto, constitutes the entire agreement between the parties with respect to the subject matter hereof, and supersedes all other prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof. Section 9.6 Counterpart Copies. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Section 9.7 No Third Party Beneficiaries This Agreement shall not confer any rights or remedies upon any person or entity other than the parties and their respective successors and permitted assigns. Section 9.8 Succession and Assignment. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. Any of the parties hereto shall be permitted to assign this Agreement to a successor in interest of all or substantially all of its assets, or to an affiliated entity. Section 9.9 Amendments. No amendment of any provision of this Agreement shall be valid unless the amendment shall be in writing and signed by all parties hereto. Section 9.10 Waivers. No waiver by any party of any default, misrepresentation, or breach of warranty or covenant hereunder, regardless of whether intentional, shall be deemed to extend to any prior or subsequent default, misrepresentation, or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence. Section 9.11 Severability. Any term or condition of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. Section 9.12 Construction. The parties have participated mutually in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted mutually by the parties and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement. Section 9.13 Headings. The Article and Section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK; SIGNATURES ARE ON THE NEXT PAGE] IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement by its duly authorized officer as of the date first set forth above. ARRAY TELECOM CORPORATION By: /s/ William G. Mustain ---------------------------------- Name: William G. Mustain ---------------------------------- Title: Chairman ---------------------------------- ePHONE TELECOM, INC. By: /s/ JG ---------------------------------- Name: John G. Fraser ---------------------------------- Title: Director, Executive Vice President ---------------------------------- COMDIAL CORPORATION By: /s/ William G. Mustain ---------------------------------- Name: William G. Mustian ---------------------------------- Title: President/CEO ---------------------------------- EXHIBIT A FORM OF BILL OF SALE This Bill Of Sale And Assignment ("Bill of Sale") is made as of March 31, 2000, by ARRAY TELECOM CORPORATION, a corporation incorporated under the laws of the State of Delaware and having its principal office at 1145 Herndon Parkway, Herndon, Virginia 20170 ("Seller"), in favor of ePHONE TELECOM, INC., a corporation incorporated under the laws of the State of Florida and having its principal office at 355 Burrard Street, Suite 1000, Vancouver, British Columbia, Canada V6C 2G8 ("Buyer"). INTRODUCTION A. Seller and Buyer are parties to a Strategic Alliance Agreement (the "Agreement") dated as of March 31, 2000 among Seller, Buyer, and Comdial Corporation, a Delaware corporation, pursuant to which Buyer has agreed to purchase certain listed assets of the Seller. Terms which are defined in the Agreement and used in this Bill of Sale have the same meanings in this Bill of Sale as they have in the Agreement. B. The Agreement provides, among other things, that for the considerations provided therein, Seller will sell to Buyer, and Buyer will purchase from Seller, the fixed assets of Seller used in its business (the "Purchased Assets"). C. The purpose of this Bill of Sale is to effect the transfer to Buyer of the Purchased Assets. TRANSFER OF ASSETS NOW, THEREFORE, for the considerations set forth in the Agreement, the receipt and sufficiency of which is hereby acknowledged: 1. Seller hereby sells, transfers, conveys, assigns and delivers to Buyer the Purchased Assets used in the conduct of the business of Seller, listed in Schedule 1 to this Bill of Sale, and all of which comprise the Purchased Assets. 2. Seller hereby authorizes Buyer, as its assignee, to demand and receive any and all of the Purchased Assets transferred by this Bill of Sale, to give receipts and releases for and in respect of the same, or any part thereof, and to institute and prosecute any proceedings which Buyer may deem necessary for the collection, or reduction to possession, of any of the Purchased Assets, or for the enforcement of any claim or right of any kind, transferred by this Bill of Sale. 3. Seller hereby agrees that, from time to time after the delivery of this Bill of Sale, it will, at the request of Buyer and without further consideration, promptly take such further action and execute and deliver such additional assignments, bills of sale, consents or other similar instruments as may be necessary to complete the transfer of the title or possession of the Purchased Assets to, or to vest title to them in, Buyer. 4. The provisions of this Bill of Sale are for the benefit of Buyer, its successors and assigns, and all rights hereby granted Buyer may be exercised by Buyer, its successors or assigns. IN WITNESS WHEREOF, Seller has executed this Bill of Sale to by its duly authorized officere as of the date first set forth above. ARRAY TELECOM CORPORATION By : /s/ William G. Mustain ------------------------------ Name: William G. Mustain ------------------------------ Title: Chairman ------------------------------ \\COR\21329.2 EXHIBIT B FORM OF LICENSE AGREEMENT AMONG ARRAY TELECOM CORPORATION, ePHONE TELECOM, INC. AND COMDIAL CORPORATION This License Agreement (this "Agreement") is made as of March 31, 2000, by and among ARRAY TELECOM CORPORATION, a corporation incorporated under the laws of the State of Delaware and having its principal office at 1145 Herndon Parkway, Herndon, Virginia 20170 ("Array"), ePHONE TELECOM, INC., a corporation incorporated under the laws of the State of Florida and having its principal office at 355 Burrard Street, Suite 1000, Vancouver, British Columbia, Canada V6C 2G8 ("ePHONE"), and COMDIAL CORPORATION, a corporation incorporated under the laws of the State of Delaware and having its principal office at 1180 Seminole Trail, Charlottesville, Virginia 22906 ("Comdial"). RECITALS A. This Agreement is executed in conjunction with the Strategic Alliance Agreement dated March 31, 2000, by and among Array, ePHONE, and Comdial (the "Strategic Alliance Agreement"), pursuant to which, among other things, ePHONE purchased certain of the assets of Array, excluding intellectual property assets. B. Array is willing to grant ePHONE a license to Array's Intellectual Property, as hereinafter defined, on the terms and conditions set forth herein. C. Array is a wholly owned subsidiary of Comdial. Comdial is willing to assist ePHONE with marketing the Products and Services, as hereinafter defined, through Comdial's existing distribution channels, which include over 2000 independent telecommunications equipment dealers. AGREEMENT NOW, THEREFORE, in consideration of the covenants, agreements, and representations set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: ARTICLE 1 DEFINITIONS For purposes of this Agreement: Section 1.1 "Copyrights" means any work containing copyrightable subject matter that Array owns or has the right to license to others relating to Products and Services, including without limitation works registered with the United States Copyright Office or works for which an application to register the work with the United States Copyright Office has been filed. Section 1.2 "Intellectual Property" means the entire right, title, and interest in and to all proprietary rights encompassed within the categories of Copyrights, Know-How, and Patents, and the Mark. Section 1.3 "Know-How" means unpatented technology, inventions, designs, drawings, processes, recipes, formulae, data, technical information, and other industrial, commercial property that: (i) are known to Array as of the Effective Date; (ii) are secret, in the sense that they are not generally known or easily accessible to others; and (iii) relate to the Products and Services. A list of Know-How licensed hereunder is attached to this Agreement as Schedule 2 and incorporated by reference herein. Section 1.4 "Mark" means the common law trademark and service mark "ARRAY". Section 1.5 "Patents" means the United States patents and design patents that had been issued as of the Effective Date as well as United States patent applications filed as of the Effective Date. A list of Patents licensed hereunder is attached to this Agreement as Schedule 1 and incorporated by reference herein. Section 1.6 "Products and Services" means: (i) VoipGate, Array Version 2, Array Series 3000, and any products developed from the foregoing; and (ii) international long distance telecommunications services that allow users to perform phone-to-phone dialing via Voice Over Internet Protocol, and related services. Section 1.7 Any capitalized term contained in this Agreement that is not expressly defined herein shall be deemed to have the meaning ascribed to it by the Strategic Alliance Agreement. ARTICLE 2 EFFECTIVE DATE AND TERM Section 2.1 Effective Date. This Agreement shall be effective as of the date first set forth above (the "Effective Date"). Section 2.2 Term. This Agreement and the licenses granted herein shall become effective as of the Effective Date and shall remain in effect for an initial term of five (5) years. Section 2.3 ePHONE's Option to Renew the Agreement or to Purchase the Intellectual Property. Upon the conclusion of the initial term of this Agreement, ePHONE, in its sole discretion, may elect: (i) to allow the Agreement to expire; (ii) to renew the Agreement under the identical terms and conditions set forth hereunder for an additional term of five (5) years; or (iii) to terminate the Agreement by purchasing the Intellectual Property. (a) In order to exercise its option to purchase the Intellectual Property, ePHONE must give Array and Comdial notice of its election to exercise such option within six (6) months prior to the end of the initial term of this Agreement. In the event ePHONE elects to exercise its option to purchase the Intellectual Property, ePHONE shall be entitled to purchase the Intellectual Property for the fair market value of the Intellectual Property, determined at the time ePHONE exercises its option to purchase the Intellectual Property. For this purpose, the fair market value of the Intellectual Property shall be determined by two investment bankers, one selected by Array or Comdial and the other selected by ePHONE. If the two investment bankers are not able to agree upon the fair market value of the Intellectual Property, the investment bankers shall choose a third investment banker and the average of the values asserted by the two investment bankers who assert the two amounts closest in value shall be deemed the fair market value of the Intellectual Property. (b) In the event ePHONE exercises its option to purchase the Intellectual Property, ePHONE agrees to grant Comdial and Array, and their successors and affiliates, a nonexclusive, irrevocable, royalty free license to the Intellectual Property. ARTICLE 3 LICENSE TO INTELLECTUAL PROPERTY Section 3.1 Grant of Patent License. Subject to the terms and conditions of this Agreement, Array grants to ePHONE, and ePHONE accepts, an exclusive right and license to the Patents to make, have made, use, and sell the Products and Services, on a worldwide basis. ePHONE shall be entitled to sublicense, assign, or transfer the rights granted herein without the prior written consent of Array. The license granted herein shall terminate upon the expiration or termination of this Agreement. (a) Patent License Territory. ePHONE acknowledges that the Patents cover only the United States; practicing the technology covered by the Patents outside of the United States will be at ePHONE's sole risk and discretion. (b) Patent License Term. Notwithstanding anything to the contrary provided herein, the license to the Patents granted herein shall terminate upon the conclusion of the term of the relevant Patent, unless sooner terminated pursuant to the terms of this Agreement. (c) Notice. When utilizing the Patents, ePHONE agrees that where reasonable and practical, any patented designs, devices, objects of manufacture, or any other patented items shall bear the appropriate patent notice. (d) Prosecution of Patent Applications. ePHONE shall make all reasonable efforts to assist Array or Comdial with the prosecution of any patent applications encompassed within the definition of the Patents licensed hereunder, including executing any necessary documents and providing such evidence and expert assistance as ePHONE may have within its control. Section 3.2 Grant of Know-How License. Subject to the terms and conditions of this Agreement, Array grants to ePHONE, and ePHONE accepts, an exclusive right and license to the Know-How to make, have made, use, and sell the Products and Services, on a worldwide basis. ePHONE shall be entitled to sublicense, assign, or transfer the rights granted herein without the prior written consent of Array. The license granted herein shall terminate upon the expiration or termination of this Agreement. Section 3.3 Grant of Copyright License. Subject to the terms and conditions of this Agreement, Array hereby grants ePHONE an exclusive right and license to the Copyrights for use in connection with selling, manufacturing, marketing or rendering of Products and Services, on a worldwide basis. ePHONE shall be entitled to sublicense, assign or transfer the rights granted herein without the prior written consent of Array. The license granted herein shall terminate upon the expiration or termination of this Agreement. (a) Notice. When using the Copyrights, ePHONE agrees that where reasonable and practicable, use of the Copyrights shall be accompanied by the symbol (C), the date of copyright, and the name of the copyright owner. Section 3.4 Grant of Mark License. Subject to the terms and conditions of this Agreement, Array grants to ePHONE, and ePHONE accepts, an exclusive right and license to the Mark as necessary to produce, promote, and sell Products and Services, on a worldwide basis. ePHONE acknowledges and agrees that its use of the Mark shall inure to Array's benefit. ePHONE shall be entitled to sublicense, assign, or transfer the rights granted herein without the prior written consent of Array. The license granted herein shall terminate upon the expiration or termination of this Agreement. (a) Quality Control. ePHONE agrees that all Products to which the Mark is affixed shall be formulated, manufactured, promoted, and sold or provided in a first rate manner and all Services with which the Mark is associated shall be rendered in a first rate manner. ePHONE understands and agrees that Array has the right to and will monitor the quality of Products and Services provided under the Mark. Upon written request from Array or Comdial, ePHONE shall provide to Array and Comdial either: (i) a reasonable number of samples of the Products to which the Mark is affixed, or (ii) a reasonable written description of the Services that ePHONE provides under the Mark and the manner in which the Mark is used in connection with such Services, so that Array and Comdial may monitor the quality of such Products or Services and otherwise protect and maintain Array's rights in the Mark. Upon written notice to ePHONE, representatives of Array or Comdial may visit and inspect ePHONE's facilities in order to monitor the quality of the Products and Services. In the event Array or Comdial reasonably determines that the Products sold or Services provided by ePHONE under the Mark are not of a sufficiently high quality, Array or Comdial shall so notify ePHONE in writing and ePHONE shall have thirty (30) days in which to (i) reassure Array and Comdial that the quality of the Products or Services is in fact commensurate with the specified standard or (ii) take steps to improve the quality of the Products or Services to meet such standard. If, at the end of such thirty (30) day period, Array or Comdial is not reasonably satisfied that the quality of the Products sold or Services provided by ePHONE under the Mark meets the specified standard, Array or Comdial may terminate this Agreement upon thirty (30) days' written notice to ePHONE. (b) Trademark and Service Mark Notices. When affixing the Mark to Products, ePHONE agrees that where reasonable and practicable, the Mark shall be accompanied by the symbol (TM) on labels, packaging, and advertising and promotional materials. When using the Mark in connection with Services, ePHONE agrees that where reasonable and practicable, the Mark shall be accompanied by the symbol (sm) on advertising and promotional materials. Section 3.5 Retention of Ownership Rights and Right to License or Assign. Nothing in this Agreement or in ePHONE's use of the Intellectual Property shall grant ePHONE any rights in or to the Intellectual Property other than the rights expressly licensed hereunder. The licenses granted herein are exclusive as between Array and unrelated third parties. Nonetheless, Array shall retain all rights in and to the Intellectual Property, including the right to license or assign the Intellectual Property, in whole or in part, to Comdial, to any majority owned subsidiary of Comdial, or to any successor to Comdial's business, provided that such license or assignment shall have no detrimental effect on ePHONE's rights and obligations hereunder. Notwithstanding the foregoing or anything to the contrary contained herein, neither Array nor Comdial, nor any successor or affiliate thereof, shall be entitled to use the Mark in connection with products or services that are marketed in direct competition with the Products and Services. ARTICLE 4 ROYALTIES Section 4.1 Royalty Payments. In partial consideration for the licenses to Intellectual Property granted herein and for the transactions contemplated under the Strategic Alliance Agreement, ePHONE shall pay Array, or such other entity as Array may designate, a royalty equal to two percent (2%) (the "Royalty Rate") of ePHONE's Consolidated Gross Sales, as hereinafter defined. (a) The royalty amounts set forth herein shall accrue upon the recognition by ePHONE of revenues for transactions that would be included in Consolidated Gross Sales and shall be paid by ePHONE on a calendar quarterly basis. For each of the first three (3) quarters of each calendar year, such quarterly royalty amount shall be calculated at the Royalty Rate applied to Consolidated Gross Sales during such quarter, and shall be paid not later than forty-five (45) days after the end of such quarter. For the fourth quarter of each calendar year, such quarterly royalty amount shall be an amount equal to the Royalty Rate applied to Consolidated Gross Sales for the calendar year, less the quarterly royalty payment amounts made for the prior three (3) quarters of that year, and shall be paid not later than ninety (90) days after the end of such calendar year. (b) For purposes of determining the royalty to be paid by ePHONE, the term "Consolidated Gross Sales" shall mean all sales resulting from ePHONE's business activities, as reflected in ePHONE's Business Plan. (c) Each royalty payment hereunder shall be accompanied by a written report describing the calculation of such payment. Furthermore, ePHONE agrees to maintain complete and accurate records sufficient to substantiate the calculation of payments made hereunder. Array or its designee may, from time to time, inspect such records to verify the accuracy of payments made hereunder; provided, however, that ePHONE shall receive at least thirty (30) days written notice of such inspections and such inspections shall take place at ePHONE's offices during ePHONE's regular business hours. Array or its designee shall bear all costs of such inspections, unless an inspection reveals a discrepancy of more than three percent (3%) in ePHONE's favor between the royalty actually paid and the royalty that should have been paid, based on ePHONE's Consolidated Gross Sales, in which case ePHONE shall bear all costs of the inspection that revealed the discrepancy. (d) Notwithstanding the foregoing, ePHONE shall pay to Array or its designee the following minimum royalty amounts: (i) During the first year of the term of this Agreement, ePHONE shall pay a minimum annual royalty amount of $180,000 (the "First Year Minimum Royalty"). In the event Consolidated Gross Sales for the first year are less than $9,000,000, ePHONE shall pay such additional royalty amounts as shall be necessary to cause the total royalty amount paid for such year to be at least equal to the First Year Minimum Royalty. Such amounts shall be paid not later than the due date for the first quarterly royalty payment due after the close of the first year. (ii) For each calendar quarter after the first year of the term of this Agreement, ePHONE shall pay a minimum quarterly royalty amount of $125,000 (the "Quarterly Minimum Royalty"). In the event Consolidated Gross Sales during any quarter are less than $6,250,000, ePHONE shall pay such additional royalty amounts as shall be necessary to cause the total royalty amount paid for such quarter to be at least equal to the Quarterly Minimum Royalty. In the event any calendar quarter shall be less than three (3) months, the Quarterly Minimum Royalty for such quarter shall be prorated on a daily or other appropriate basis. Section 4.2 Non-Payment of Royalty Amounts. In the event ePHONE is unable, after exhausting all of its consolidated cash and cash equivalent assets, to pay Array or its designee the full amount of any royalty payment at the time the payment is due, the following provisions shall be applicable. (a) ePHONE shall give Array or its designee notice of ePHONE's inability to pay any portion of any royalty payment, which notice shall be accompanied by a written statement by ePHONE's principal lenders and credit facilities confirming ePHONE's inability to make such payment and the fact that ePHONE has exhausted all of its consolidated cash and cash equivalent assets. (b) The total unpaid amount of any royalty payment (the "Delinquent Payment") shall accrue interest at the annual rate of ten percent (10%) during the first year after the Delinquent Payment was due. For each three (3) month period thereafter, for so long as any portion of the Delinquent Payment remains unpaid, the interest rate applicable to the Delinquent Payment will increase by one (1) percentage point for each such three (3) month period. (c) In its sole discretion, Array or its designee may elect to accept ePHONE stock in lieu of the Delinquent Payment and accrued interest thereon. If Array or its designee exercises this option, Array or its designee shall be entitled to receive an amount of ePHONE stock equivalent in value to the Delinquent Payment, calculated at a twenty percent (20%) discount from the average of the closing prices of such stock on the five (5) trading days prior to the date on which Array or its designee elects to exercise this option. The equivalent value so determined may be paid to Array or its designee either in ePHONE common stock or in warrants for the purchase of ePHONE common stock, the terms of which are reasonably satisfactory to Array or its designee, and which provide for an exercise price of not more than one cent ($0.01) per share. ePHONE agrees to provide Array or its designee demand and piggy back registration rights for registration on an established stock exchange or on the Nasdaq national market for its shares, or for the warrants and the warrant shares to be issued upon exercise of the warrants, and to assist in the registration process. Array shall have at least two (2) demand registration rights for each year so long as any of such shares, or such warrants or warrant shares, remain unregistered. Within sixty (60) days after the Closing Date, as defined in the Strategic Alliance Agreement, the parties agree to negotiate in good faith to execute a registration rights agreement with terms and conditions that are consistent with the terms of this Agreement and that are customary and usual with respect to such agreements. (d) Notwithstanding any of the provisions of this Agreement, in the event any royalty payment or portion thereof remains unpaid for one (1) year, or Array or its designee accept warrants for such payment and the warrants are not registered within such year, then ePHONE's license to the Intellectual Property shall no longer be exclusive and Array shall be entitled to license the Intellectual Property to third parties other than ePHONE. ARTICLE 5 OWNERSHIP AND PROTECTION OF INTELLECTUAL PROPERTY Section 5.1 Ownership. Nothing in this Agreement or in ePHONE's use of the Intellectual Property shall grant ePHONE any rights in or to the Intellectual Property other than the rights expressly licensed hereunder. ePHONE acknowledges Array's rights in the Intellectual Property. ePHONE shall not commit, or cause any third party to commit, any act challenging, contesting, or in any way impairing or attempting to impair Array's rights in and to the Intellectual Property. Section 5.2 Infringement by Third Parties. If ePHONE learns of any activity by a third party that might constitute infringement of Array's rights in any of the Intellectual Property, or if any third party asserts that ePHONE's use of the Intellectual Property constitutes unauthorized use or infringement, ePHONE shall so notify Array. Any action or litigation resulting from any claim of infringement arising hereunder shall be handled by Array or Comdial. ePHONE shall make all reasonable efforts to assist Array or Comdial with any such action or litigation, including providing such evidence and expert assistance as ePHONE may have within its control. Section 5.3 Rights in Improvements, Developments, Enhancements, Modifications, and Inventions. (a) CTVoice Release 2A. Within thirty (30) days following the Effective Date, ePHONE shall deliver to Array the source code for the product CTVoice Release 2A, which product shall have the same functionality and all of the capabilities of the product Array Series 3000. Array, or such other entity as Array may designate, shall own all rights in such source code, including without limitation all intellectual property rights. The source code shall be included within the definition of Intellectual Property for purposes of this Agreement, and it shall be licensed to ePHONE pursuant to the terms and conditions hereunder. (i) Until the first anniversary of the Effective Date, ePHONE shall provide to Array or its designee any improvements, developments, enhancements, modifications, or inventions that resolve any functional problems or other technological difficulties with the CTVoice Release 2A product ("Bug Fixes"). ePHONE shall own all rights in the Bug Fixes, including without limitation all intellectual property rights. Nonetheless, by providing Array or its designee with the Bug Fixes, ePHONE shall be deemed to have granted Array or its designee, and such parties' successors and affiliates, a nonexclusive, irrevocable, royalty free license to the Bug Fixes. (ii) After the first anniversary of the Effective Date, ePHONE and Array or its designee agree to negotiate in good faith regarding the terms and conditions under which any Bug Fixes developed, invented, or created by employees or agents of ePHONE after the first anniversary of the Effective Date may be licensed to Array or its designee. ePHONE shall charge Array or its designee rates at least as low as the lowest rates charged to third parties not affiliated with ePHONE for such licenses. (b) Improvements, Developments, Enhancements, Modifications, and Inventions other than CTVoice Release 2A. (i) If any of the employees or agents of ePHONE improves, develops, enhances, modifies, or invents technology, works, or other intangible property, related to or arising from the Intellectual Property licensed hereunder, ePHONE shall own all rights in such technology, works, or other intangible property, including without limitation all intellectual property rights. (ii) If any of the employees or agents of Array or Comdial improves, develops, enhances, modifies, or invents technology, works, or other intangible property, related to or arising from the Intellectual Property licensed hereunder, Array or Comdial, as appropriate, shall own all rights in such technology, works, or other intangible property, including without limitation all intellectual property rights. (iii) The parties agree to negotiate in good faith regarding the terms and conditions under which any improvements, developments, enhancements, modifications, or inventions encompassed by this Section 5.3(b) may be licensed to the other parties. The parties shall charge rates at least as low as the lowest rates charged by the parties to unaffiliated third parties for such licenses. ARTICLE 6 WARRANTIES, DISCLAIMERS, INDEMNIFICATION, AND LIMITATION OF LIABILITY Section 6.1 Warranties. ePHONE represents and warrants that it shall use the Intellectual Property only in accordance with the terms and conditions of this Agreement. Section 6.2 Representations and Disclaimers. (a) Array and Comdial each represent and warrant that the Patents set forth on Schedule 1 and the Know-How set forth on Schedule 2 accurately list all of the Intellectual Property owned by Array that has been duly registered with, filed in, or issued by, as the case may be, the United States Patent and Trademark Office. Array owns the entire right, title, and interest in and to the Patents and the Know-How, including without limitation the exclusive right to use and license the same. To the knowledge of Array, no Person, as defined in the Strategic Alliance Agreement, is infringing upon any of the Patents or the Know-How. (b) The Intellectual Property constitutes all of the intellectual property necessary to conduct the business and operations of Array as conducted as of the Effective Date. To the knowledge of Array, there is no basis for any claim of infringement by any Person, as defined in the Strategic Alliance Agreement, with regard to any of the Intellectual Property. (c) Notwithstanding the foregoing, neither Array nor Comdial represents or warrants that: (i) the Intellectual Property is suitable for use in connection with Products or Services; (ii) use of the Intellectual Property will enable ePHONE to obtain specific results; (iii) the Intellectual Property does not infringe the rights of third parties; or (iv) use of the Intellectual Property will not cause any loss, damage, or injury. ePHONE will use the Intellectual Property at its own risk and neither Array nor Comdial shall be responsible for any Products or Services provided through the use of the Intellectual Property or for any other exploitation of the Intellectual Property. Section 6.3 Indemnification. (a) ePHONE agrees to be solely responsible for, and to defend, indemnify, and hold Array and Comdial, and any of their successors or affiliates, harmless against any and all claims, actions, suits, liabilities, demands, expenses (including reasonable attorneys' fees and disbursements), losses, costs, or damages asserted against or incurred by Array, Comdial, or any of their successors or affiliates, arising out of or in connection with (i) Products produced or Services rendered by ePHONE, (ii) the use of the Intellectual Property by ePHONE, or (iii) any breach of ePHONE's obligations hereunder. (b) Array and Comdial, jointly and severally, agree to be solely responsible for, and to defend, indemnify, and hold ePHONE, and any of its successors or affiliates, harmless against any and all claims, actions, suits, liabilities, demands, expenses (including reasonable attorneys' fees and disbursements), losses, costs, or damages asserted against or incurred by ePHONE, or any of its successors or affiliates, arising out of or in connection with (i) any failure of the representations and warranties set forth in Section 6.2 of this Agreement to be true and correct or (ii) any breach of Array's or Comdial's obligations hereunder. Section 6.4 Limitation of Liability. No party to this Agreement shall under any circumstances be liable for any special, incidental, consequential, indirect, or punitive damages arising from breach of warranty, breach of contract, negligence, or any other legal theory arising from or related to this Agreement, even if such party or its agents or employees have been advised of the possibility of such damages. ARTICLE 7 DEFAULT AND TERMINATION Section 7.1 Events of Default. Any one of the following shall constitute an Event of Default by ePHONE: (a) ePHONE defaulting in the performance of any covenant, agreement, term, or provision under this Agreement, and such default continuing for a period of thirty (30) days after written notice thereof by Array or Comdial to ePHONE; (b) ePHONE filing a voluntary petition for bankruptcy, reorganization, or an arrangement under any bankruptcy or insolvency law, or an involuntary petition under any such law being filed against ePHONE and not dismissed within ninety (90) days; or (c) ePHONE making an assignment for the benefit of its creditors. Section 7.2 Remedies. Without limiting other remedies available to Array or Comdial at law or equity, upon the occurrence of an Event of Default by ePHONE, either Array or Comdial may, at their option, terminate this Agreement by giving written notice to ePHONE. Section 7.3 Discontinuation of Use. Following the expiration or termination of this Agreement, for any reason other than ePHONE's election of its option to purchase the Intellectual Property pursuant to Section 2.3, ePHONE shall immediately cease use of the Intellectual Property licensed under this Agreement. ARTICLE 8 CONFIDENTIALITY Section 8.1 ePHONE's Confidentiality Obligations. The parties acknowledge that, during the ordinary course of business, ePHONE will be required to disclose confidential and proprietary information to its customers and other parties. During the term of this Agreement and thereafter, ePHONE agrees that it will enter into confidentiality agreements or nondisclosure agreements with usual and customary terms and conditions prior to disclosing the Know-How and all other technology, inventions, software, hardware, designs, drawings, processes, recipes, formulae, data, technical information and the like, which are disclosed by Array or Comdial to ePHONE or received by ePHONE's personnel under this Agreement. Section 8.2 Array's and Comdial's Confidentiality Obligations. The parties acknowledge that, during the ordinary course of business, Array and Comdial will be required to disclose confidential and proprietary information to its customers and other parties. During the term of this Agreement and thereafter, Array and Comdial agree that they, jointly or individually, will enter into confidentiality agreements or nondisclosure agreements with usual and customary terms and conditions prior to disclosing all technology, inventions, software, hardware, designs, drawings, processes, recipes, formulae, data, technical information and the like, which are disclosed by ePHONE to Array or Comdial or received by Array or Comdial's personnel under this Agreement. Section 8.3 Exceptions to Confidentiality Obligations. The confidentiality obligations set forth in this Article 8 shall not apply to any information that: (i) is or becomes generally available to the public other than as a result of disclosure by one of the parties or the parties' agents, employees, representatives, or advisors; (ii) is rightfully disclosed to either of the parties by a third party without any breach of the confidentiality obligations hereunder. Any of the parties may disclose the other parties' confidential information to its personnel and independent contractors, including, without limitation, lawyers, accountants, and consultants, when the course of their employment necessitates such disclosure; provided, however, that the disclosing party shall take appropriate measures to maintain the confidentiality of all confidential information disclosed to or obtained by such party's personnel or independent contractors. Section 8.4 Return of Confidential Information. Upon the expiration or termination of this Agreement, for any reason other than ePHONE's election of its option to purchase the Intellectual Property pursuant to Section 2.3, each party hereto shall return to the other parties, as applicable, all materials or items that contain, embody, or relate to any confidential information belonging to the other parties, including, without limitation, documents, drawings, software, hardware, databases, electronic information, storage media, samples, and models. Each party shall return all such materials to the other parties within fifteen (15) days of the date of expiration or termination. ARTICLE 9 TECHNICAL ASSISTANCE Section 9.1 Technical Assistance Services. ePHONE shall use commercially reasonable efforts to make its employees and agents available to Array and Comdial to provide technical assistance with the Intellectual Property, any improvements, developments, enhancements, modifications, or inventions related thereto, or any other technical matters related to ePHONE's business. ePHONE shall charge Array and Comdial rates at least as low as the lowest rates charged to third parties not affiliated with ePHONE for such technical assistance services. ARTICLE 10 GENERAL PROVISIONS Section 11.1 No Third Party Beneficiaries. This Agreement shall not confer any rights or remedies upon any person or entity other than the parties and their respective successors and permitted assigns. Section 11.2 Succession and Assignment. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. Any of the parties hereto shall be permitted to assign this Agreement and its rights and obligations hereunder to a successor in interest of all or substantially all of its assets, or to an affiliated entity. Section 11.3 Amendments. No amendment of any provision of this Agreement shall be valid unless the amendment shall be in writing and signed by all parties hereto. Section 11.4 Waivers. No waiver by any party of any default, misrepresentation, or breach of warranty or covenant hereunder, regardless of whether intentional, shall be deemed to extend to any prior or subsequent default, misrepresentation, or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence. Section 11.5 Severability. Any term or condition of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. Section 11.6 Construction. The parties have participated mutually in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted mutually by the parties and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement. Section 11.7 Notices. All notices, requests, demands, claims, and other communications hereunder shall be in writing. Any notice, request, demand, claim, or other communication hereunder shall be deemed duly given (i) upon confirmation of receipt of facsimile or electronic mail; (ii) one (1) business day following the date sent when sent by overnight delivery; or (iii) five (5) business days following the date mailed when mailed by registered or certified mail return receipt requested and postage prepaid to the following address: If to Array or Comdial: Comdial Corporation 1180 Seminole Trail Charlottesville, Virginia 22906 Attention: William G. Mustain Tel: (804) 978-2518 Fax: (804) 978-2512 E-mail: bill.mustain@comdial.com Copy to: McGuire, Woods, Battle & Boothe LLP 310 4th Street NE, Suite 300 P. O. Box 1288 Charlottesville, Virginia 22902-1288 Attention: Robert E. Stroud, Esquire Tel: (804) 977-2511 Fax: (804) 980-2272 E-mail: restroud@mwbb.com If to ePHONE: ePHONE Telecom, Inc. 355 Burrard Street, Suite 1000 Vancouver, British Columbia, Canada V6C 2G8 Attention: Robert G. Clarke Tel: (604) 482-6116 Fax: (604) 482-1116 E-mail: rclarke@ephonetel.com Copy to: Arnold & Porter 555 Twelfth Street NW Washington, D.C. 20004-1202 Attention: Paul D. Freshour, Esquire Tel: (202) 942-5872 Fax: (202) 942-5999 E-mail: paul freshour@aporter.com Section 11.8 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. Section 11.9 Headings. The Article and Section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement. Section 11.10 Entire Agreement. The Strategic Alliance Agreement, this Agreement, and the other Agreements referred to and incorporated by reference in the Strategic Alliance Agreement shall constitute the entire agreement between the parties and supersede any prior understandings, agreements, covenants, warranties, or representations by or between the parties, written or oral. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK; SIGNATURES ARE ON THE NEXT PAGE] IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first set forth above. ARRAY TELECOM, INC. By: /s/ William G. Mustain ------------------------------------- Name: William G. Mustain ------------------------------------- Title: Chairman ------------------------------------- ePHONE TELECOM, INC. By: /s/ JG ------------------------------------- Name: John G. Fraser ------------------------------------- Title: Director, Executive Vice President ------------------------------------- COMDIAL CORPORATION By: /s/ William G. Mustain ------------------------------------- Name: William G. Mustain ------------------------------------- Title: President/CEO ------------------------------------- EX-10.2 3 0003.txt PATENT LICENSE AGREEMENT Exhibit 10.2 PATENT LICENSE AGREEMENT between LUCENT TECHNOLOGIES GRL CORPORATION and COMDIAL CORPORATION Effective as of January 1, 2000 Relating to Business Communication Systems PATENT LICENSE AGREEMENT TABLE OF CONTENTS ARTICLE I - GRANTS OF LICENSES 1.01 Grant 1.02 Duration 1.03 Scope 1.04 Ability to Provide Licenses 1.05 Joint Inventions 1.06 Publicity ARTICLE II - ROYALTY AND PAYMENTS 2.01 Royalty Calculation 2.02 Records and Adjustments 2.03 Reports and Payments ARTICLE III - TERMINATION 3.01 Term 3.02 Breach 3.03 Voluntary Termination 3.04 Survival ARTICLE IV - MISCELLANEOUS PROVISIONS 4.01 Disclaimer 4.02 Assignability 4.03 Addresses 4.04 Taxes 4.05 Choice of Law 4.06 Integration 4.07 Outside the United States 4.08 Dispute Resolution 4.09 Releases 4.10 Severability 4.11 Modification APPENDIX A - DEFINITIONS APPENDIX B - CUSTOMER RELATIONSHIP MANAGEMENT PATENTS PATENT LICENSE AGREEMENT This Patent License Agreement ("Agreement") is between the following Parties: LUCENT TECHNOLOGIES GRL CORPORATION, a Delaware corporation ("LUCENT-GRL"), having an office at Suite 105, 14645 N.W. 77th Avenue, Miami Lakes, Florida 33014, and COMDIAL CORPORATION, a Delaware corporation ("COMDIAL"), having an office at 1180 Seminole Trail, Charlottesville, Virginia 22906. This Agreement is effective on January 1, 2000 (the "Effective Date"). The Parties agree as follows:* ARTICLE I GRANTS OF LICENSES 1.01 Grant (a) LUCENT-GRL grants to COMDIAL under LUCENT-GRL's PATENTS personal, worldwide, nonexclusive and non-transferable (except as otherwise provided for in Section 4.02) licenses for: LICENSED PRODUCTS The licenses granted to COMDIAL under this Agreement do not include any licenses for VOICE PROCESSING PRODUCTS, SPECIALIZED. (b) COMDIAL grants to LUCENT-GRL under COMDIAL's PATENTS personal, nonexclusive, worldwide, royalty-free and non-transferable (except as otherwise provided for in Section 4.02) licenses for: LICENSED PRODUCTS 1.02 Duration All licenses granted herein under any patent shall terminate at the earlier of: (i) termination of such licenses pursuant to Article III; or (ii) the expiration of the entire unexpired term of such patent. However, upon commencement of the LIMITED PERIOD or at the time of earliest filing specified in the definition of LUCENT-GRL's PATENTS or COMDIAL's PATENTS (as the case may be), the grantor has no rights, or less than full rights, with respect to any of its patents included - -------- *Any term in capital letters which is defined in the APPENDIX A - DEFINITIONS shall have the meaning specified therein. within such definition, the license granted herein under such patent shall be for as much of such term as, and to the maximum extent that, the grantor has the right to grant, subsequent to commencement of the LIMITED PERIOD, at or after such time of earliest filing. 1.03 Scope (a) The licenses granted herein are licenses to (i) make, have made, use, lease, sell and import LICENSED PRODUCTS; (ii) make, have made, use and import machines, tools, materials and other instrumentalities, insofar as such machines, tools, materials and other instrumentalities are involved in or incidental to the development, manufacture, testing or repair of LICENSED PRODUCTS which are or have been made, used, leased, owned, sold or imported by the grantee of such license; and (iii) convey to any CUSTOMER of the grantee, with respect to any LICENSED PRODUCT which is sold or leased by such grantee to such CUSTOMER, rights to use and resell such LICENSED PRODUCTS as sold or leased by such grantee (whether or not as part of a larger combination); provided, however, that no rights may be conveyed to NON END-USER CUSTOMERS with respect to any invention which covers (1) a combination of such LICENSED PRODUCT (as sold or leased) with any other product unless the LICENSED PRODUCT embodies a significant portion of the invention and the LICENSED PRODUCT has a fair market value of at least seventy-five percent (75%) of the total fair market value of the combination as resold by such a NON END-USER CUSTOMER, (2) a method or process which is other than the inherent use of such LICENSED PRODUCT itself (as sold or leased), or (3) a method or process involving the use of a LICENSED PRODUCT to manufacture (including associated testing) any other product. (b) Except as otherwise expressly provided in this Agreement, licenses granted herein are not to be construed either (i) as consent by the grantor to any act which may be performed by the grantee, or (ii) to include licenses to contributorily infringe or induce infringement under U.S. law or a foreign equivalent thereof. (c) Except as otherwise expressly provided in Section 4.02(c) of this Agreement, the grant of each license by the grantor hereunder includes the right to grant sublicenses within the scope of such license to a Party's RELATED COMPANIES for so long as they remain its RELATED COMPANIES. Any such sublicense may be made effective retroactively, but not prior to the Effective Date hereof, nor prior to the sublicensees becoming a RELATED COMPANY of such Party. (d) Notwithstanding Section 1.03(c), no right is given to COMDIAL, without the written consent of LUCENT-GRL, to grant a sublicense to a RELATED COMPANY of COMDIAL under certain or all of LUCENT-GRL'S PATENTS, if said RELATED COMPANY was a licensee under said certain or all LUCENT-GRL'S PATENTS for LICENSED PRODUCTS at any time within a two (2)-year period prior to said company becoming a RELATED COMPANY unless, however, said RELATED COMPANY ceased to be such a licensee solely due to the termination of the relevant license agreement by lapse of time (as opposed to voluntary termination or termination by breach). 1.04 Ability to Provide Licenses (a) It is recognized that certain actions of the Parties to this Agreement may limit their ability to provide licenses hereunder without constituting a breach. In particular, (i) prior to the earliest filing of a patent application disclosing an invention of a Party or its RELATED COMPANY, such Party or RELATED COMPANY may assign to a third party the title to patents on such invention, or (ii) prior to the execution of this Agreement, a Party or its RELATED COMPANY may have limited by contract its ability to provide licenses hereunder with respect to certain patents or technologies. (b) A Party's failure to meet any obligation hereunder, due to the assignment of title to any invention or patent, or the granting of any licenses, to the United States Government or any agency or designee thereof pursuant to a statute or regulation of, or contract with, such Government or agency, shall not constitute a breach of this Agreement. (c) Each Party represents and warrants that it has all rights (or rights from third parties) necessary to enter into this Agreement and the power to grant the rights described in this Agreement. (d) Either Party may submit to the other Party no more than two (2) inquiries in writing per calendar year, each inquiry requesting whether up to ten (10) specifically identified patents fall within the definitions of this Agreement. The Party to whom such an inquiry is submitted shall, within twenty (20) business days, respond in writing as to whether each identified patent is included within COMDIAL's PATENTS (if the recipient of the inquiry is COMDIAL) or LUCENT-GRL's PATENTS (if the recipient of the inquiry is LUCENT-GRL). 1.05 Joint Inventions (a) There are countries (not including the United States) which require the express consent of all inventors or their assignees to the grant of licenses or rights under patents issued in such countries for joint inventions. (b) Each Party shall give such consent, or shall obtain such consent from its RELATED COMPANIES, its employees or employees of any of its RELATED COMPANIES, as required to make full and effective any such licenses and rights respecting any joint invention granted to the grantee hereunder by such Party and by another licensor of such grantee. (c) Each Party shall take steps which are reasonable under the circumstances to obtain from third parties whatever other consents are necessary to make full and effective such licenses and rights respecting any joint invention purported to be granted by it hereunder. If, in spite of such reasonable efforts, such Party is unable to obtain the requisite consents from such third parties, the resulting inability of such Party to make full and effective its purported grant of such licenses and rights shall not be considered to be a breach of this Agreement. 1.06 Publicity Nothing in this Agreement shall be construed as conferring upon either Party or its RELATED COMPANIES or sublicensees any right to include in advertising, packaging or other commercial activities related to a LICENSED PRODUCT, any reference to the other Party (or any of its RELATED COMPANIES or sublicensees), its trade names, trademarks or service marks in a manner which would be likely to cause confusion or to indicate that such LICENSED PRODUCT is in any way certified by the other Party hereto or its RELATED COMPANIES or sublicensees. ARTICLE II ROYALTY AND PAYMENTS 2.01 Royalty Calculation (a) In part payment for the grant of rights hereunder by LUCENT-GRL to COMDIAL and in addition to the fees specified in Section 2.01(b), COMDIAL shall pay to LUCENT-GRL a non-refundable sum of six hundred fifty thousand United States dollars (U.S. $650,000.00) of which only one hundred fifty thousand United States dollars (U.S. $150,000.00) is creditable with respect to royalties owed under Sections 2.01(b) and 2.03(b) for the calendar year 2000. This payment is due to LUCENT-GRL prior to thirty (30) days after the EXECUTION DATE. (b) In partial consideration for the licenses and rights exchanged herein for the LUCENT-GRL'S PATENTS and for the convenience of the Parties, COMDIAL has elected to and shall pay to LUCENT-GRL in United States dollars for each calendar year beginning January 1, 2000, a royalty amount calculated at a royalty rate of three hundred seventy-five thousandths of one percent (0.375%) of the consolidated sales of COMDIAL and its RELATED COMPANIES ("Consolidated Sales") during such calendar year (or portion thereof) during which this Agreement is in effect, as reported in its Form 10-K for such calendar year filed with the Securities and Exchange Commission ("SEC"). As an example, Consolidated Sales for the year 1998 as reported in the SEC Form 10K-405 filed on March 24, 1999 were one hundred twenty-eight million nine hundred seventy-seven thousand U.S. dollars ($128,977,000.00 U.S.). Obligations to pay accrued royalties shall survive termination of licenses and rights pursuant to Article III. (c) When a company ceases to be a RELATED COMPANY of COMDIAL, royalties which have accrued with respect to such company, but which have not been paid, shall become payable with COMDIAL's next scheduled royalty payment. (d) Notwithstanding any other provisions hereunder, royalties shall accrue and be payable only to the extent that enforcement of COMDIAL's obligation to pay such royalty would not be prohibited by applicable law. 2.02 Records and Adjustments (a) LUCENT-GRL will credit to COMDIAL the amount of any overpayment of royalties made in error which is identified and fully explained in a written notice to LUCENT-GRL delivered within two (2) years after the due date of the payment which included such alleged overpayment, provided that LUCENT-GRL is able to verify the existence and extent of the overpayment. (b) No refund, credit or other adjustment of royalty payments shall be made by LUCENT-GRL except as provided in this Section 2.02. Rights conferred by this Section 2.02 shall not be affected by any statement appearing on any check or other document, except to the extent that any such right is expressly waived or surrendered by a Party having such right and signing such statement. (c) Upon termination of this Agreement or of all the rights and licenses granted to COMDIAL herein, accrued royalties shall be paid within thirty (30) days of the date of termination. LUCENT-GRL shall have the right through its accredited auditors to make an examination, during normal business hours, of those records that are, under recognized accounting practices, used in the preparation of SEC filings and that bear upon the amount of royalty payable hereunder. Adjustment shall be made within sixty (60) days of the completion of such audit to compensate for any errors or omissions disclosed by such examination. If the adjustment, if any, reflects an underpayment by COMDIAL in excess of ten percent (10%) of the amount of royalty payable as determined by such auditors, COMDIAL shall pay the costs of such audit. Otherwise, the audit shall be at LUCENT-GRL's expense. 2.03 Reports and Payments (a) COMDIAL shall furnish to LUCENT-GRL, simultaneously with its filing with the SEC, a copy of each Form 10-Q and each Form 10-K filed during the term of this Agreement. Such copy shall be sent by first class mail, postage prepaid, to LUCENT-GRL at the address specified in Section 4.03. (b) The annual royalty amount set forth in Section 2.01(b) shall accrue upon the recognition of revenues by COMDIAL and/or any of its RELATED COMPANIES for transactions that would be included in Consolidated Sales and shall be payable quarterly. Such quarterly royalty amount shall be paid by COMDIAL in United States dollars to LUCENT-GRL at the address specified in Section 4.03 on or before the date on which COMDIAL files with the SEC its quarterly report on Form 10-Q (as to the first three (3) quarters of each calendar year) and its annual report as to the last quarter of each calendar year, beginning with the Form 10-Q filed by COMDIAL with respect to the second quarter of the calendar year 2000. For the first three (3) quarters of each calendar year, such quarterly royalty amount shall be calculated at a royalty rate of three hundred seventy-five thousandths of one percent (0.375%) of the Consolidated Sales during such quarter, as reported in the respective Form 10-Q filed by COMDIAL with the SEC for such quarter. For the fourth quarter of each calendar year, such quarterly royalty amount shall be an amount equal to a royalty rate of three hundred seventy-five thousandths of one percent (0.375%) of the Consolidated Sales during such calendar year, as reported in the respective Form 10-K filed by COMDIAL with the SEC, less the quarterly royalty payments made for the prior three (3) quarters of that calendar year. However, the Parties agree that for their convenience the quarterly royalty payment for the first quarter of calendar year 2000 shall be one hundred fifty thousand United States dollars ($150,000.00 U.S.). (c) Any conversion to United States dollars shall be at the prevailing rate for bank cable transfers as quoted for the last day of such quarterly period by leading United States banks in New York City dealing in the foreign exchange market. (d) Overdue payments hereunder shall be subject to a late payment charge for the period of time such payment is delinquent calculated at an annual rate of one percentage point (1%) over the prime rate or successive prime rates in effect in New York City during delinquency. If the amount of such charge exceeds the maximum permitted by law, such charge shall be reduced to such maximum. ARTICLE III TERMINATION 3.01 Term This Agreement shall terminate upon termination of the LIMITED PERIOD unless otherwise terminated pursuant to this Article III. Any partial termination of rights under this Article III will not affect payments due under Section 2.01. 3.02 Breach In the event of a breach of this Agreement by either Party, the other Party may, in addition to any other remedies that it may have, at any time terminate any or all licenses and rights granted by it hereunder by not less than two (2) months written notice specifying such breach, unless within the period of such notice all breaches specified therein shall have been remedied. Exercise of the right of either Party to terminate any or all rights and licenses pursuant to this Section 3.02 shall be subject to challenge in accordance with Section 4.08, in which case the effectiveness of such termination shall be suspended (and the Parties' obligations shall continue) until determined by the Dispute Resolution process provided for in Section 4.08 provided, however, that should the breaching Party fail to meet its royalty obligations, such termination shall be effective as of such prior written notice of breach. 3.03 Voluntary Termination By written notice to the other Party, either Party may voluntarily terminate all or a specified portion of the licenses and rights granted to it hereunder. Such notice shall specify the effective date (not more than six (6) months from the giving of said notice) of such termination and shall clearly specify any affected patent, invention or product. 3.04 Survival (a) If a company ceases to be a RELATED COMPANY of a Party, licenses and rights granted hereunder with respect to patents of such company that are included in LUCENT-GRL's PATENTS or COMDIAL's PATENTS (as the case may be) shall not be affected by such cessation. (b) Any termination of licenses and rights of a Party under the provisions of this Article III shall not affect such Party's licenses, rights and obligations with respect to any LICENSED PRODUCT made prior to such termination, and shall not affect the other Party's licenses and rights (and obligations related thereto) hereunder. ARTICLE IV MISCELLANEOUS PROVISIONS 4.01 Disclaimer Neither Party nor any of its RELATED COMPANIES makes any representations, extends any warranties of any kind, assumes any responsibility or obligations whatever, or confers any right or license by implication, estoppel or otherwise, other than the licenses, rights and warranties herein expressly granted. 4.02 Assignability (a) Each Party has entered into this Agreement in contemplation of personal performance by the other Party and it is each Party's intention that a transfer of its grantee's licenses or rights not occur, except as provided for in this Section 4.02, without the grantor's express written consent. (b) Except as otherwise provided for in this Agreement, neither this Agreement nor any licenses or rights hereunder, in whole or in part, shall be assignable or transferable by either Party (by operation of law or otherwise) without the other Party's express written consent. Any such purported assignment or transfer of this Agreement or licenses or rights hereunder by either Party without the other Party's necessary consent shall be void (without affecting any other licenses or rights hereunder). (c) Notwithstanding Sections 4.02(a) and (b), any or all of LUCENT-GRL's rights, title and interest in this Agreement and any or all licenses and rights granted to it hereunder may be assigned without COMDIAL's consent to any of its RELATED COMPANIES at any time and for any reason or to SPINCO (before or after its divestiture from Lucent Technologies Inc.) or to any successor to all or a portion of its business that is the subject matter of this Agreement. If LUCENT-GRL so assigns its rights, the terms of this Agreement shall remain the same and be enforceable by COMDIAL. If Lucent Technologies Inc. divests a portion of its business and such divested business continues operation as a separately identifiable business, then the licenses granted hereunder to LUCENT-GRL may be sublicensed to such divested separate business without the consent of COMDIAL, but only (i) until the termination of this Agreement pursuant to Article III; (ii) to the extent and for the time the divested business functions as a separately identifiable business, and (iii) for products and services of the kind provided by the divested business prior to its divestiture and not to any products or services of any entity which acquires the divested business. This Section 4.02(c) shall apply regardless of whether the business is divested by a sale of assets or as a sale of a legal entity (e.g., sale of a RELATED COMPANY). The sublicensing rights specified herein shall include any business whose acquisition is after the Effective Date of this Agreement, provided the acquisition of such business was not a sham for the purpose of extending rights to the acquired (and then divested) business. In particular, the licenses granted hereunder to LUCENT-GRL shall be, solely at LUCENT-GRL's option, sublicensed to SPINCO upon its divestiture from Lucent Technologies Inc. provided, however, that the sublicense to SPINCO will not include those ones of COMDIAL's PATENTS that issue on any application filed (except those applications having a priority date prior to the EXECUTION DATE) in any or all countries of the world at any time subsequent to the EXECUTION DATE. (d) Notwithstanding Sections 4.02(a) and (b), COMDIAL may assign all of its rights (except as provided herein) and obligations existing or arising under this Agreement to any successor to all or a portion of its business that is the subject matter of this Agreement as the result of an acquisition or merger, with no further right to assign, which successor shall thereafter be deemed substituted for, and in lieu of, COMDIAL as a Party hereto, subject to written acceptance by the assignee, provided that COMDIAL may so assign upon written notice to LUCENT-GRL if: (i) LUCENT-GRL determines that such assignment, if made, or anticipation of such assignment, would have or had no effect on a license arrangement between itself and such successor (or any entities relating to such successor) in effect at any time within a two (2)-year period prior to such assignment, (ii) only products made by or for COMDIAL prior to the acquisition or merger will be licensed under this Agreement and not products of the acquiring entity, except those products of the acquiring entity, its parent company, and such parent company's other SUBSIDIARIES that are equivalent to those products made by or for COMDIAL prior to such acquisition or merger, and (iii) solely for purposes of Section 1.05(b), 1.06, 3.04(a), and the definition of COMDIAL's PATENTS, RELATED COMPANIES of COMDIAL shall be deemed to include any parent company of which the acquiring entity is a SUBSIDIARY and such parent company's other SUBSIDIARIES as of the effective date of the assignment. If COMDIAL so assigns its rights, the terms of this Agreement shall remain the same and be enforceable by LUCENT-GRL. The rights so assigned by COMDIAL will not include any and all rights and licenses under CUSTOMER RELATIONSHIP MANAGEMENT PATENTS granted to COMDIAL pursuant to this Agreement. (e) In the event that COMDIAL assigns such rights and obligations to any acquiring entity pursuant to Section 4.02(d) ("Assignee"), the provisions of Sections 2.01(b), 2.02(c) and 2.03(a) and (b) shall not apply and shall be replaced with the following provisions. The term "Reportable Product" shall mean (i) any COMDIAL product identical to or equivalent to products whose sale was included in Consolidated Sales prior to such acquisition or merger and (ii) any product of the Assignee, of its RELATED COMPANIES, of any parent company of which the Assignee is a SUBSIDIARY, and of such parent company's other SUBSIDIARIES, that is equivalent to any such COMDIAL product, whether or not such a product meets the definition of LICENSED PRODUCT. The term "Assignee Gross Revenues" shall mean those gross revenues recognized for any and all Reportable Products. 2.01(b) For the licenses and rights exchanged herein under LUCENT-GRL'S PATENTS and for the convenience of the Parties, Assignee has elected to and shall pay to LUCENT-GRL in United States Dollars a sum calculated at a royalty rate of three hundred seventy-five thousandths of one percent (0.375%) applied to quarterly Assignee Gross Revenues recognized for each quarterly period during which this Agreement is effective for any time, beginning with the quarterly period during which the assignment of this Agreement by COMDIAL to Assignee occurs. Royalty shall accrue upon the invoicing of the sale or lease for any and all such Reportable Products. Upon termination of this Agreement or of all the rights and licenses granted to COMDIAL herein, accrued royalties shall be paid within thirty (30) days of the date of termination. 2.02(c) Assignee shall keep full, clear and accurate records with respect to Assignee Gross Revenues and shall furnish any information which LUCENT-GRL may reasonably prescribe from time to time to enable LUCENT-GRL to ascertain the proper royalty due hereunder. Assignee shall retain such records with respect to Assignee Gross Revenues for at least seven (7) years from the invoicing of the sale or lease for any and all such Reportable Products. LUCENT-GRL shall have the right through its accredited auditors to make an examination, during normal business hours, of all records and accounts bearing upon the amount of royalty payable to it hereunder. Adjustment shall be made within sixty (60) days of the completion of such audit to compensate for any errors or omissions disclosed by such examination. If the adjustment, if any, reflects an underpayment by COMDIAL in excess of ten percent (10%) of the amount of royalty payable as determined by such auditors, COMDIAL shall pay the costs of such audit. Otherwise, the audit shall be at LUCENT-GRL's expense. 2.03(a) Within thirty (30) days after the end of each quarterly period ending on March 31st, June 30th, September 30th, or December 31st during which this Agreement is effective for any time, commencing with the quarterly period during which the assignment of this Agreement by COMDIAL to Assignee occurs, Assignee shall furnish to LUCENT-GRL at the address specified in Section 4.03 a statement certified by a responsible official of Assignee showing, in a manner acceptable to LUCENT-GRL, Assignee Gross Revenues. 2.03(b) Within such thirty (30) days, Assignee shall pay in United States dollars to LUCENT-GRL at the address specified in Section 4.03 the royalties payable in accordance with such statement. 4.03 Addresses (a) Any notice or other communication hereunder shall be sufficiently given to COMDIAL when sent by certified mail addressed to Comdial Corporation, 1180 Seminole Trail, Charlottesville, Virginia 22906, Attention: President, with a copy to Robert E. Stroud, c/o McGuire, Woods, Battle & Boothe LLP, Court Square Building, 310 Fourth Street, N.E., Suite 300, Charlottesville, Virginia 22902 or to LUCENT-GRL when sent by certified mail addressed to Contract Administrator, Intellectual Property Organization, Lucent Technologies GRL Corporation, Suite 105, 14645 N.W. 77th Avenue, Miami Lakes, Florida 33014, United States of America. Changes in such addresses may be specified by written notice. (b) Payments by COMDIAL shall be made to LUCENT-GRL at Lucent Technologies GRL Corporation, General Post Office, P.O. Box 6219, New York, New York, 10087-6219, United States of America. Alternatively, payments to LUCENT-GRL may be made by bank wire transfers to LUCENT-GRL's account at Chase Manhattan Bank: Lucent Technologies GRL Corporation, Account No. 323857752, Swift Code: CHASUS33, ABA Code: 021000021. Changes in such address or account may be specified by written notice. 4.04 Taxes (a) In anticipation of payments being received from a U.S. corporation and under current law as of the Effective Date, the Parties do not contemplate that any taxes (except income taxes), duties, levies, or similar charges will be imposed as a result of the existence or operation of this Agreement. However, in the event such charges are imposed, COMDIAL agrees that it shall bear all such charges (and any related interest and penalties), however designated, imposed as a result of the existence or operation of this Agreement, except (i) any tax imposed upon LUCENT-GRL in a jurisdiction other than the United States if such tax is allowable as a credit against the United States income taxes of LUCENT-GRL; and (ii) any net income tax imposed upon LUCENT-GRL by the United States or any governmental entity within the United States (the fifty (50) states and the District of Columbia). In order for the exception contained in (i) to apply, COMDIAL must furnish LUCENT-GRL with evidence issued by the taxing authority in such jurisdiction that such tax has been paid. The evidence must be furnished within thirty (30) days of issuance by the taxing authority and must be sufficient to satisfy United States taxing authorities that such tax has been paid. (b) If COMDIAL is required to bear a tax, duty, levy or similar charge pursuant to Section 4.04(a) above, COMDIAL shall pay such tax, duty, levy or similar charge and any additional amounts as are necessary to ensure that the net amounts received by LUCENT-GRL hereunder after all such payments or withholdings equal the amounts to which LUCENT-GRL is otherwise entitled under this Agreement as if such tax, duty, levy or similar charge did not apply. 4.05 Choice of Law The Parties are familiar with the principles of New York law, and desire and agree that the law of New York (exclusive of its conflict of laws provision) shall apply in any dispute arising with respect to this Agreement. 4.06 Integration This Agreement, together with a letter of assurance by Lucent Technologies Inc. and a letter of assurance by COMDIAL, set forth the entire agreement and understanding between the Parties as to the subject matter hereof and merges all prior discussions between them. However, the Parties agree that nothing herein or in such letters of assurance is intended to bind Lucent Technologies Inc. in any manner, except as to the truth of the statements in its such letter. Lucent Technologies Inc. has no obligations or duties pursuant to the letters of assurance, this Agreement, and the subject matter hereof. Neither of the Parties shall be bound by any warranties, understandings or representations with respect to such subject matter other than as expressly provided herein or in a writing signed with or subsequent to execution hereof by an authorized representative of the Party to be bound thereby. 4.07 Outside the United States (a) There are countries in which the owner of an invention is entitled to compensation, damages or other monetary award for another's unlicensed manufacture, sale, lease, use or importation involving such invention prior to the date of issuance of a patent for such invention but on or after a certain earlier date, hereinafter referred to as the invention's "protection commencement date" (e.g., the date of publication of allowed claims or the date of publication or "laying open" of the filed patent application). In some instances, other conditions precedent must also be fulfilled (e.g., knowledge or actual notification of the filed patent application). The Parties agree that (i) an invention which has a protection commencement date in any such country may be used in such country pursuant to the terms of this Agreement on and after any such date, and (ii) all such conditions precedent are deemed satisfied by this Agreement. There may be countries in which a Party hereto may have, as a consequence of this Agreement, rights against infringers of the other Party's patents licensed hereunder. Each Party hereby waives any such right it may have by reason of any third party's infringement or alleged infringement of such patents. (b) COMDIAL hereby agrees to register or cause to be registered, to the extent required by applicable law, and without expense to LUCENT-GRL or any of its RELATED COMPANIES, any agreements wherein sublicenses are granted by it under LUCENT-GRL's PATENTS. COMDIAL hereby waives any and all claims or defenses, arising by virtue of the absence of such registration, that might otherwise limit or affect its obligations to LUCENT-GRL. (c) LUCENT-GRL hereby agrees to register or cause to be registered, to the extent required by applicable law, and without expense to COMDIAL or any of its RELATED COMPANIES, any agreements wherein sublicenses are granted by it under COMDIAL'S PATENTS. LUCENT-GRL hereby waives any and all claims or defenses, arising by virtue of the absence of such registration, that might otherwise limit or affect its obligations to COMDIAL. 4.08 Dispute Resolution (a) If a dispute arises out of or relates to this Agreement, or the breach, termination or validity thereof, the Parties agree to submit the dispute to a sole mediator selected by the Parties or, at any time at the option of a Party, to mediation by the American Arbitration Association ("AAA"). If not thus resolved, it shall be referred to a sole arbitrator selected by the Parties within thirty (30) days of the mediation, or in the absence of such selection, to AAA arbitration which shall be governed by the Federal Arbitration Act. (b) Any award made (i) shall be a bare award limited to a holding for or against a Party and affording such remedy as is deemed equitable, just and within the scope of the Agreement; (ii) shall be without findings as to issues (including but not limited to patent validity and/or infringement) or a statement of the reasoning on which the award rests; (iii) may in appropriate circumstances (other than patent disputes) include injunctive relief; (iv) shall be made within four (4) months of the appointment of the arbitrator; (v) may be entered in any court; and (vi) shall be binding. (c) The requirement for mediation and arbitration shall not be deemed a waiver of any right of termination under this Agreement but the exercise of such right is subject to the provisions of Section 3.02. The arbitrator is not empowered to act or make any award other than based solely on the rights and obligations of the Parties prior to any such termination. (d) The arbitrator shall be knowledgeable in the legal and technical aspects of this Agreement and shall determine issues of arbitrability but may not limit, expand or otherwise modify the terms of this Agreement. (e) The place of mediation and arbitration shall be Washington, D.C. (f) Each Party shall bear its own expenses, except those related to the compensation and expenses of the mediator and arbitrator which shall be borne equally. (g) A request by a Party to a court for interim measures shall not be deemed a waiver of the obligation to mediate and arbitrate. (h) The arbitrator shall not have authority to award punitive or other damages in excess of compensatory damages and each Party irrevocably waives any claim thereto. (i) The Parties, their representatives, other participants and the mediator and arbitrator shall hold the existence, content and result of mediation and arbitration in confidence. 4.09 Releases (a) Subject to Section 4.09(c) and to the receipt by LUCENT-GRL of the payment by COMDIAL pursuant to Section 2.01(a), LUCENT-GRL, for itself and for its present RELATED COMPANIES (i.e., RELATED COMPANIES as of the Effective Date), hereby releases COMDIAL and its present RELATED COMPANIES, all of the present and former officers and directors of COMDIAL and its present RELATED COMPANIES, and all CUSTOMERS under any claim that solely LUCENT-GRL or any of its present RELATED COMPANIES has for patent infringement arising prior to the Effective Date for which the rights and licenses expressly granted under this Agreement to COMDIAL and its present RELATED COMPANIES would be a complete defense to such claim had this Agreement been in effect at the time such patent infringement arose. (b) Subject to Section 4.09(c), COMDIAL, for itself and for its present RELATED COMPANIES, hereby releases LUCENT-GRL and its present RELATED COMPANIES, all of the present and former officers and directors of LUCENT-GRL and its present RELATED COMPANIES, and all CUSTOMERS under any claim that solely COMDIAL or any of its present RELATED COMPANIES has for patent infringement arising prior to the Effective Date for which the rights and licenses expressly granted under this Agreement to LUCENT-GRL and its present RELATED COMPANIES would be a complete defense to such claim had this Agreement been in effect at the time such patent infringement arose. For the purposes of this Section 4.09(b), RELATED COMPANIES of LUCENT-GRL also includes Lucent Technologies Inc. and its SUBSIDARIES as they formerly existed as part of AT&T Corp. (c) The releases in Sections 4.09(a) and (b) shall not operate to release any CUSTOMER of COMDIAL or any of its RELATED COMPANIES who is a party to any lawsuit involving allegations of patent infringement, patent invalidity or patent unenforceability in which LUCENT-GRL or any of its RELATED COMPANIES is an adverse party as of two weeks prior to the EXECUTION DATE. 4.10 Severability If any paragraph or provision of this Agreement shall be deemed void or invalid as a matter of law, the remaining paragraphs or provisions of this Agreement shall nevertheless remain in full force and effect and be interpreted to the extent possible to effect the overall intention of the Parties at the EXECUTION DATE of this Agreement. 4.11 Modification This Agreement may not be amended, modified or altered in any way, except in a writing identified as such and signed by both Parties hereto. IN WITNESS WHEREOF, each of the Parties has caused this Agreement to be executed in duplicate originals by its duly authorized representatives on the respective dates entered below. LUCENT TECHNOLOGIES GRL CORPORATION By: /s/ G. G. Partlow ------------------------------- G. G. Partlow Chairman of the Board Date: March 17, 2000 -------------------------------- COMDIAL CORPORATION By: /s/ William G. Mustain -------------------------------------- Name: William G. Mustain -------------------------------------- Title: Chairman/President/CEO -------------------------------------- Date: March 22, 2000 -------------------- THIS AGREEMENT DOES NOT BIND OR OBLIGATE EITHER PARTY IN ANY MANNER UNLESS DULY EXECUTED BY AUTHORIZED REPRESENTATIVES OF BOTH PARTIES. EX-11 4 0004.txt SCHEDULE OF COMPUTATION OF PER SHARE EARNINGS COMDIAL CORPORATION AND SUBSIDIARIES Exhibit 11 SCHEDULE OF COMPUTATION OF PER SHARE EARNINGS - ----------------------------------------------------------------------------------- (Dollars in thousands except share amounts) Three Months Ended ------------------ April 2, April 4, 2000 1999 - ----------------------------------------------------------------------------------- BASIC Net income: $341 $388 =================================================================================== Weighted average number of common shares outstanding during the period 9,082,380 8,859,302 Add - contingency shares - 68,600 deferred shares 16,619 11,548 ----------------------------- Weighted average number of shares used in cal- culation of basic earnings per common share 9,098,999 8,939,450 =================================================================================== Basic earnings per common share: $0.04 $0.04 =================================================================================== DILUTED Net income - basic $341 $388 =================================================================================== Weighted average number of shares used in cal- culation of basic earnings per common share 9,098,999 8,939,450 Add (deduct) incremental shares representing: Shares issuable based on period-end market price or weighted average price: Stock options 344,565 47,282 - ----------------------------------------------------------------------------------- Weighted average number of shares used in calcula- tion of diluted earnings per common share 9,443,564 8,986,732 =================================================================================== Diluted earnings per common share $0.04 $0.04 ===================================================================================
EX-27 5 0005.txt FINANCIAL DATA SCHEDULE
5 1000 3-MOS DEC-31-2000 APR-02-2000 1,899 0 33,480 311 25,544 66,721 53,182 34,318 130,630 19,276 29,702 0 0 98 74,226 130,630 24,485 31,608 13,360 17,651 13,004 (6) 607 352 11 341 0 0 0 341 0.04 0.04
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