-----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, GsvZo5lNiHlEd28opnvmpRWMZu6/axWMTwbcdhXiRG+jfFgg33wE8fC7jDWwv58f 5FnYJp5cyE7+TMJlnp4ZZA== 0000916641-97-000242.txt : 19970326 0000916641-97-000242.hdr.sgml : 19970326 ACCESSION NUMBER: 0000916641-97-000242 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970325 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMDIAL CORP CENTRAL INDEX KEY: 0000230131 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 942443673 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-09023 FILM NUMBER: 97562676 BUSINESS ADDRESS: STREET 1: 1180 SEMINOLE TRAIL STREET 2: P O BOX 7266 CITY: CHARLOTTESVILLE STATE: VA ZIP: 22906-2200 BUSINESS PHONE: 8049782200 MAIL ADDRESS: STREET 1: 1180 SEMMINOLE TRAIL STREET 2: P O BOX 7266 CITY: CHARLOTTESVILLE STATE: VA ZIP: 22906 10-K405 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _________________ Commission file number: 0-9023 COMDIAL CORPORATION (Exact name of Registrant as specified in its charter) Delaware 94-2443673 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) P. O. Box 7266 1180 Seminole Trail; Charlottesville, Virginia 22906-7266 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (804) 978-2200 Securities registered pursuant to Section 12(g) of the Act: Title of Class COMMON STOCK (Par Value $0.01 each) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 11, 1997 was approximately $46,584,000 (See Item 5). The number of shares of Common Stock outstanding as of March 11, 1997 was 8,592,866. DOCUMENTS INCORPORATED BY REFERENCE: The Company's 1996 Annual Report to the Stockholders is incorporated by reference under Part II and portions of the Company's Definitive Proxy Statement for its 1997 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1996, are incorporated by reference under Part III of this Form 10-K. - ------------------------------------------------------------------------------ TABLE OF CONTENTS - ------------------------------------------------------------------------------ Part I Item 1. Business 4 (a) General Development of Business 4 Safe Harbor Statement 5 Industry Background 5 Strategy 8 (b) Financial Information About Industry Segment 12 Product Sales Information 12 (c) Narrative Description of Business 12 Products 12 Business Systems 13 Proprietary and Specialty Terminals 18 Custom Manufacturing 18 Sales and Marketing 18 Engineering, Research and Development 20 Manufacturing and Quality Control 21 Competition 22 Intellectual Property 23 Employees 24 Item 2. Properties 24 Item 3. Legal Proceedings 25 Item 4. Submission of Matters to a Vote of Security Holders 25 - ------------------------------------------------------------------------------ Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 26 Item 6. Selected Financial Data 26 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 26 Item 8. Financial Statements and Supplementary Data 26 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 26 - ----------------------------------------------------------------------------- Part III Item 10. Directors and Executive Officers of the Registrant 27 Item 11. Executive Compensation 27 Item 12. Security Ownership of Certain Beneficial Owners and Management 27 Item 13. Certain Relationships and Related Transactions 27 - ----------------------------------------------------------------------------- Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 28 PART I ITEM 1. Business (a) GENERAL DEVELOPMENT OF BUSINESS Comdial Corporation (the "Company") is a Delaware corporation based in Charlottesville, Virginia. The Company is engaged in the design, development, manufacture, distribution, and sale of advanced telecommunications products and system solutions. The Company was originally incorporated in Oregon in 1977. In 1982, the Company was reincorporated in Delaware, acquired substantially all of the assets, and assumed substantially all of the liabilities, of General Dynamics Telephone Systems Center, Inc., formerly known as Stromberg-Carlson Telephone Systems, Inc. ("Stromberg-Carlson"), a wholly-owned subsidiary of General Dynamics Corporation. The Company's Common Stock is traded over-the-counter and is quoted on the National Association of Security Dealers Automated Quotation National Market System ("Nasdaq National Market") under the symbol: CMDL. On March 20, 1996, the Company completed the acquisition of two companies involved in Computer-Telephony Integration ("CTI") applications: Aurora Systems, Inc. ("Aurora") and Key Voice Technologies, Inc. ("KVT"). Aurora, based in Acton, Massachusetts, is a leading provider of off-the-shelf CTI products. KVT, based in Sarasota, Florida, develops, assembles, markets, and sells voice processing systems and related products for business applications. As a result of the acquisitions, Aurora and KVT have become wholly-owned subsidiaries of the Company (see Note 2 to the Consolidated Financial Statements). These two acquisitions have positively affected consolidated revenues by $9.7 million and profitability by $4.3 million (excluding any acquisition and corporate allocation costs) for approximately nine months of 1996, and also should enhance the Company's position for future development of related products for the CTI market. The Company's products accommodate organizations requiring up to approximately 500 telephones. The Company believes that it is a leading supplier to this market, with an installed base of approximately 250,000 telephone systems and 3,000,000 telephones. The Company's products include digital and analog telephone switches and telephones, as well as a wide range of enhancements to the Company's telephone systems. The Company's growth has occurred principally as a result of sales of digital telephone systems introduced by the Company since 1992 and CTI products introduced since 1993. CTI encompasses a wide range of products, primarily software, that enable end users to perform telephony functions from desktop personal computers ("PCs") or PCs served by a local area network ("LAN"). "Safe Harbor" Statement Under the Private Securities Litigation Reform Act of 1995 Some of the statements included or incorporated by reference into the Company's Securities and Exchange Commission filings and shareholder communications are forward-looking statements that are subject to risks and uncertainties, including, but not limited to, the impact of competitive products, product demand and market acceptance risks, reliance on key strategic alliances, fluctuations in operation results, delays in development of highly complex products, and other risks detailed from time to time in the Company's filings. These risks could cause the Company's actual results for 1997 and beyond to differ materially from those expressed in any forward-looking statement made by, or on behalf of, the Company. Industry Background In recent years, advances in technology and industry deregulation have facilitated the development of technologically advanced telephone systems and applications. Beginning in the 1970s, electronic telephone systems began displacing the traditional electromechanical key sets that served as the basic office telephone system since the 1930s. New telephone applications are being introduced continuously, permitting business users to improve communications within their organizations and with customers by using conference calls, speakerphones, voice mail, automated attendants, and voice processing applications, such as speech recognition. The Company primarily manufactures telephone systems. A business telephone system typically consists of (a) a central telephone switching unit (key service unit or "KSU"), (b) telephone instruments, (c) associated wiring and connections hardware, (d) system software, and (e) adjunct devices such as facsimile machines and voice processing systems. Telephone systems are often described in terms of the number of telephone lines and terminal devices that can be supported by a KSU. The aggregate number of telephone terminals and outside lines that can be configured as to a specific KSU is the number of "ports." Until recently, most telephone systems were "analog," transmitting voice information in a continuous wave form that is "analogous" to the original voice signal. Analog transmission is acceptable for most voice requirements, but is not as efficient for data or video transmission. Analog transmission is subject to attenuation, or the continual degradation of transmission quality as the distance between sender and receiver increases. In addition, ambient noises can be picked up and transmitted along with the original voice transmission, leading to garbled communications. By the late 1980s, digital telephone systems were available for commercial use. The digitization of voice, data, and video is a general trend in the telecommunications industry, whereby such forms of communication are converted into binary pulses (0 and 1) that may be stored or transmitted. Within a fully digital system, the signals are reproduced precisely with minimal degradation of quality. Digital systems generally offer customers more features, provide greater voice clarity, offer potential cost savings through the use of low-cost, high-capacity T-1 transmission lines from telecommunication service providers, enable improved video and data transmission, and offer superior platforms for future features. Businesses with digital systems are therefore better positioned to take advantage of new CTI application features that are being developed by software companies. While some manufacturers have ceased producing analog systems altogether, the Company offers a broad line of systems utilizing both analog and digital technologies. The Company believes that current industry shipments are primarily digital and that the proportion of shipments of digital telephones as compared to analog telephones will continue to increase. Although the market share of digital telephones and CTI products is growing, the installed telephone system base remains predominantly analog, thereby providing significant opportunities for manufacturers who continue to produce analog systems. End users will continue to install analog systems for various reasons such as price considerations, expansion, replacement or repair of existing systems. CTI is an emerging industry, consisting of connectivity and applications software for various hardware platforms such as switching units, private branch exchanges ("PBX") and automatic call distribution ("ACD"). CTI products and applications merge the power of modern telephone systems with that of computers to provide integrated solutions to broad communications problems, such as proper queuing in call communications centers and specific vertical market applications (such as the real estate, law firm, and food service markets). Using CTI, calls can be placed from the computer, including all call processing activities and users can scan their computer screens for information on incoming voice and fax messages. An example of a vertical market application is the Company's E-911 emergency dispatch systems. The E-911 system may use caller identification technology in conjunction with databases in order to access information such as the street address and profile of an emergency caller which is displayed on the dispatcher's computer. Dispatchers are in a better position to send help quickly to the correct address and provide emergency personnel caller specific information needed to respond appropriately to the situation. This growing industry and growing user interest in CTI has added a new dimension to the business telecommunications market. In addition to the proprietary products offered by the Company and others, the acceptance of industry standards now makes it possible for independent software developers to market applications software geared toward solving or simplifying a myriad of common business communications problems. Initially, implementation of CTI was limited to specialized applications written to the proprietary interfaces of individual switch makers. This yielded a small number of expensive products. With the broad acceptance of de facto standards from major computer software suppliers, it is now possible to implement CTI on a much broader scale and at a substantially lower cost. In a local area network ("LAN") environment, major computer software suppliers provide software instructions (service provider interfaces or "SPIs") to telephone system manufacturers committed to producing the connectivity software and hardware required to communicate with the telephony server. The telephone switch effectively becomes another node on a client-server network. For users not on a network, the desktop approach promoted by Microsoft Corporation is an alternative solution. In this case, telephone system manufacturers design special software links to Microsoft's SPI. Telephony software is standard on Windows95 TM and Windows NT. Until the late 1980s, all small and medium sized telephone systems were "closed." That is, if users wished to add new capabilities to their telephone systems they were restricted to whatever the system manufacturer chose to offer. One of the most significant developments in recent years is the introduction of "open" systems that permit users to customize their telephone system by adding those application packages suitable to their communication needs. Open systems provide an Open Applications Interface ("OAI") through which a telephone system can be linked to a computer. The computer can then command the telephone system to perform certain functions, such as to answer, hold, delay, or transfer telephone calls. The OAI is different for each switch manufacturer and useful only if a Software Developer Kit ("SDK") is also provided to third parties by the switch manufacturers. Because of the technological advances that have arisen with digitization and open systems, more flexible and useful telephone applications are being developed to solve current communications problems. For example, a decade of down-sizing and corporate cost-cutting has produced a large number of small businesses and work-at-home employees. The industry estimates that nearly 30 million people work at least part-time out of their homes. This has created a large market for small telephone systems, personal computers, fax machines, modems, and other devices required by home offices. These users need products that better integrate voice and data at the desktop level. Changes in the telecommunications industry extend to the international market as well. Developing countries recognize that advanced telecommunications systems and networks are essential to attract foreign investment and stimulate local economies. In some countries, people must wait several years for basic dial tone service. There is a large, ready demand for delivery systems that can provide basic service in short time frames and at economical prices. Among developed nations, there is a sustained trend toward privatization of government telecommunications monopolies in favor of competition at all levels. The Company, with extensive experience working in a competitive environment, is well positioned to take advantage of these opportunities. Strategy The Company is pursuing three fundamental business strategies: (1) maintaining a leadership position in its core business of delivering advanced telecommunications systems to the U.S. domestic market through wholesale supply house distribution channels, (2) establishing a leadership position in the emerging market for system solutions based on CTI products and applications, and (3) achieving growth through expansion into international markets. The Company seeks to support these strategies through the following approaches: Maintaining a Broad and Efficient Distribution Network The Company focuses its distribution of products primarily through a network of approximately 1700 independent dealers that sell the Company's products. This network enables the Company to achieve broad geographic penetration as well as access to some of the fastest growing markets in the country. The Company's distribution network centers around a key group of wholesale supply houses, through which the Company's products are made available to dealers. The dealers, in turn, market the Company's products to small and medium sized organizations and divisions of larger organizations. The Company's strategy of utilizing wholesale supply houses enables it to virtually eliminate bad debt exposure and minimize administration, credit checking, sales expenses, and finished goods inventory levels. Most importantly, the use of supply houses allows the Company to extend product distribution to virtually any market in the United States and Canada. Wholesale supply houses benefit from their relationship with the Company by earning a margin on the sale of the Company's products and on the sale of related products such as cable, connectors, and installation tools. Dealers have the benefits of competitive sourcing and reduced inventory carrying costs. In addition to supply house distribution, the Company also markets its products directly to national accounts, third party system developers, original equipment manufacturing ("OEM") customers, and to the federal government via its Government Services Administration ("GSA") schedule contract. Targeting Small and Medium Sized Organizations The Company has traditionally focused on organizations requiring small to medium sized telecommunications systems, which the Company believes represents about nine million establishments in the United States, based on statistics from Dun & Bradstreet Information Services. The Company's products offer this market many of the features previously available only in large, proprietary systems that were often not as affordable to this market. Offering a Broad Range of Products The Company currently offers digital and analog business telephone systems, CTI applications, and other products along with a variety of product enhancements. Due to the fact that the software and hardware are designed to be compatible with most of the Company's telephones, end users are able to enhance and upgrade their systems without having to replace all of their telephone equipment. The Company believes that this broad range of products allows dealers to meet differing price and feature requirements. The Company continuously strives to introduce new products to meet the needs of a changing market. Developing Strategic Alliances The Company has developed strategic alliances with several other companies in order to build on the strengths of these companies and bring the best possible products to the market at a lower cost. For example, pursuant to strategic alliances, the Company has developed the Tracker on-site integrated paging system with Motorola, Inc. ("Motorola") as well as the Scout wireless key system telephone with Uniden America Corporation ("Uniden"). Pursuing International Opportunities Through its wholly-owned subsidiary, Comdial Telecommunications International, Inc. ("CTii"), the Company concentrates on identifying and developing opportunities for international business. The Company chooses its international markets carefully, with a preference for emerging yet stable economies with technical standards close to those of North America (to minimize costly redesigns), and with an open and competitive telecommunications marketplace. In 1996, international sales were approximately $3.7 million compared with $2.7 million and $2.5 million in 1995 and 1994, respectively, which includes sales to Canada, Latin America, the Middle East, and South Africa. The Company has entered into a licensing and OEM relationship with Corporate Telephone Systems (Proprietary) Limited ("Teleboss"), a major South African telecommunications manufacturer and dealer, pursuant to which Teleboss is serving as a distributor of specified products made by the Company, and has a license from the Company to manufacture certain subassemblies used in those products. In 1996, the Company entered into a distribution agreement with Telbit Telecommunications for distribution of the Company's DXP telephone systems in Israel. Computer Telephony Applications In 1993, the Company formed a wholly-owned subsidiary, Comdial Enterprise Systems, Inc. ("CES"), to focus on designing, marketing, and distributing CTI applications and software for the rapidly growing markets for CTI products and services. The Company is addressing the CTI opportunity on several fronts by (1) delivering "open" telephone systems, such as the Company's DXP, (2) designing communication links between the telephone system and computer or computer network such as the Company's E-911 system, (3) offering "shrink wrap" integrated products for vertical markets, such as hotel/motel, and (4) distributing applications software. The Company believes that in order to maximize profitability in the emerging markets for CTI it must create integrated systems, consisting of hardware platforms and applications software for promising vertical markets and small businesses such as real estate, legal, and retail. The Company's strategy is to develop applications for these vertical markets using capabilities already available such as "screen pops", directory dialing from an existing data base, facsimile transmission from the desktop personal computer ("PC"), and unified messaging displays. Promoting Industry Accepted Interface Standards In order to integrate computers and telecommunications equipment, several standards have been developed. The Company was among the first telephone manufacturing companies to commit to the Telephony Services Application Programming Interface ("TSAPI") standard which provides a stable platform for integrating the features and functionality of a telephone switch with certain local area networks. This standard also allows third-party developers to write applications in a non-proprietary environment, thus decreasing development time and application investment costs. The Company offers several software products for linking its DXP and DXP Plus digital switches to a local area network. In 1996, the Company began shipping wideopen.office, a universal telephony server that links the Company's DXP digital systems to a LAN provided by various vendors. Developing Switching Systems with an Open Application Interface The Company believes that OAI provides many advantages to systems developers including reducing the time needed to develop new products and providing access to a variety of applications from third-party vendors. Some manufacturers charge high prices for the interface and Software Development Kit ("SDK"). While this has delayed growth of CTI applications, prices are now declining. The Company was the second manufacturer to equip a small to medium sized system with an OAI, and the first to offer the interface link and SDK essentially for free. (b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENT During the fiscal years ended December 31, 1996, 1995 and 1994, substantially all of the Company's sales, net income, and identifiable net assets were attributable to the telecommunications industry. Any additional information other than sales is incorporated by reference to the Company's 1996 Annual Report to Stockholders. Product Sales Information The following table presents certain relevant information concerning the Company's principle product lines for the periods indicated:
- ------------------------------------------------------------------------------------------------------------------- Years Ended December 31, (In Millions) 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------- Sales Business Systems Digital $42.8 $40.5 $28.9 DXP 17.8 13.8 9.0 CTI 20.5 7.4 6.1 Analog 16.2 22.4 25.0 ----- ---- ---- Sub-total 97.3 84.1 69.0 Proprietary and Specialty Terminals 4.7 6.0 6.7 ----- ---- ---- Sub-total 102.0 90.1 75.7 Custom Manufacturing 1.3 6.1 2.5 ----- ---- ---- Gross Sales 103.3 96.2 78.2 Sales Discount and Allowances 1.1 1.4 1.1 ----- ---- ---- Net Sales $102.2 $94.8 $77.1 ====== ===== ===== - -------------------------------------------------------------------------------------------------------------------
(c) NARRATIVE DESCRIPTION OF BUSINESS Products The Company offers a variety of telephone systems, including digital systems, DXP systems, analog systems, CTI applications, and other products and product enhancements. The Company's telecommunications products meet three basic criteria, and are registered by; (1) the Federal Communications Commission ("FCC"), (2) an independent laboratory approved by the Occupational Safety and Health Act Commission ("OSHA") to product safety standards, (3) and a National Recognized Test Laboratory that performs product evaluations. Selected products are also registered with the Canadian government's Industry Canadian and are Canadian safety certified. The Company has, or is in the process of, registering its products in other countries. Business Systems Digital Systems Impact, introduced in 1992, is a digital telephone system which can support up to 24 lines and 48 telephones. This system includes a digital switch and Impact digital telephones. The Impact terminals offer a variety of features, including an interactive liquid crystal display ("LCD"), programmable feature keys, three color lighted status indicators, and a subdued off-hook voice announce for receiving intercom calls while on a telephone call. DigiTech, introduced in 1991, are digital systems with switches and telephones designed for the business market supporting up to 24 lines and 48 telephones. DigiTech offers automatic set relocation, remote programming, a replaceable software cartridge, and other sophisticated features. Impression, introduced in October 1996, is a digital telephone system with modern, easy-to-use terminals, an attendant console, three digital switching units ("DSUs") and a four-line, eight station expansion module to accommodate system growth. Scout, introduced in 1995, is the Company's first wireless multi-line telephone. The Scout was developed in cooperation with Uniden, a major supplier of wireless communications products. This telephone allows users to roam freely within their business environments and still receive or place calls. Scout phones offer an LCD display, multi-line access, programmable keys, an intercom, and head-set convenience. The portable handset weighs only 8.5 ounces. Tracker, introduced in 1994, is an on-site integrated paging system developed in cooperation with Motorola. The purpose of this product is to help insure that calls are quickly and efficiently completed to individuals who are at work, but not always near their telephones. Tracker, which operates on the Company's digital telephone systems, includes a Tracker base station and personal pagers equipped with an LCD. The personal pagers sound an alert or vibrate to notify users of incoming calls or important messages. A user can retrieve calls by going to the nearest system phone and dialing a special code that is displayed on the LCD. A valuable feature of Tracker is its compatibility with other products manufactured by the Company. DXP Systems DXP, introduced in 1992, is a digital switch that is compatible with virtually all of the Company's analog and digital telephones. This compatibility allows the Company and its dealers to target larger end users while using the same telephones as those used in the Company's smaller systems. Currently, the DXP provides customers with an affordable system that can be expanded to support up to 224 ports. The DXP has more call processing features than smaller systems. The DXP may be linked to various CTI applications. The DXP is also directly compatible with T-1 service lines from telecommunications providers. A T-1 line is a digital service line that is equivalent to 24 voice channels or can transmit data at 1.5 megabits per second. DXP Plus, introduced in the fall of 1995, is a larger version of the original DXP. The DXP Plus can grow to a maximum of 560 ports (combinations of outside lines and terminal connections). Like the original DXP, the DXP Plus is designed with OAI ports to accommodate third party software developers. The DXP Plus uses the same lines and station cards as the DXP and accommodates most industry standard telephones and the Company's proprietary terminals. Computer-Telephony Integration Products Enterprise, introduced in 1993, is the Company's OAI software developer's tool kit used with the DXP systems. Enterprise allows independent software developers to access the DXP system software using more than 100 commands to create unique applications for specific vertical markets, such as telemarketing groups, emergency services, call centers, taxi services, and multimedia centers. One of the initial OAI applications developed using Enterprise is an Enhanced 911 ("E-911") emergency telephone system. Enterprise was a platform for the development of applications based upon the convergence of computer and telephony technologies. Wideopen.office, introduced in 1996, is a software product which provides telephony linkage between desktop computers and DXP digital switches. Wideopen.office supports multiple applications programming interfaces and supports local area network software from Novell, Microsoft, and others, as well as stand alone PCs running Windows, Windows 95, or OS/2 operating systems. The PC must have certain minimum memory capabilities and an unused serial port. Because of this capability to provide CTI in a variety of environments, the Company views wideopen.office as a universal telephony controller. Wideopen.office is shipped complete with wideopen.call applications software which provides users with popular services such as PC-based call processing, integration with contact management programs, and "screen pops" of caller information, provided the user has some type of caller identification service. In the fourth quarter of 1996, the Company also began shipping wideopen.group, a telephony application package for workgroups. Concierge, introduced in 1996, is a digital telephone system designed for hospitality applications. The system consists of a DXP, multi-line administration telephones, single line guest telephones, and special hospitality software. The system is linked to a personal computer via the Company's Enterprise CTI software, and allows hotel personnel to administer guest check-in/check-out and other hotel activities from the PC or specially programmed Impact LCD telephones. Guest room telephones may be industry standard message waiting models or the Company's own HoTelephones. Concierge serves hotel properties of up to approximately 400 rooms. QuickQ ACD, introduced in 1994, is an automatic call distributor ("ACD"), designed for call center use. The system consists of DXP, Impact telephones, voice announcing equipment, special automatic call distribution software, and a PC. The QuickQ answers and distributes incoming calls rapidly and efficiently, helping to assure maximum call center productivity and superior customer response levels. Up to 96 reports are provided, detailing call volume and call center performance. The QuickQ ACD has a maximum capacity of 64 outside lines to support up to 48 telephones in use simultaneously. Like Concierge, the QuickQ is a "shrink wrap" CTI product, based on the Company's Enterprise link to the DXP operating system and special call control software. QuickQ was designed in cooperation with an independent software developer. E-911 Systems, introduced in 1994, are specially engineered telephone systems for handling emergency ("911") telephone calls. The Company's systems deliver valuable information to emergency dispatchers using caller identification technology in conjunction with databases to access information such as the street address and profile of the emergency caller. Dispatchers are better positioned to send help swiftly to the correct address and provide information needed for emergency personnel to respond appropriately to a situation. All calls are recorded for future reference, and operators can handle multiple calls without losing valuable information. The Company's E-911 system makes extensive use of CTI. The Company contracts with municipal authorities for sale of the E-911 system to the municipality. ExecuMail, introduced in 1990, is an integrated voice processing system for use with selected telephone systems of the Company. ExecuMail is offered in a range of port and voice storage capacities, and provides both voice mail and automated attendant service. ExecuMail products are the result of a strategic alliance with Active Voice Corporation. Versatile Voice Processing ("VVP"), introduced in 1996, is a trade name of a PC-based voice processing system produced by the Company's wholly-owned subsidiary KVT and sold by the Company. The same product is sold as Corporate Office by KVT to its own dealer network. Both products provide all standard voice processing features such as auto attendant, voice store and forward, multiple greetings, and individual voice mail boxes. Advanced features such as fax tone detection, audiotext (interactive response to user touch-tone commands), and visual call management (the ability to view voice messages from a PC) are also available. The VVP can be integrated with the Company's digital telephone systems such that display messages on LCD terminals prompt user operations. KVT offers similar integration packages for telephone systems made by other companies. VVP and Corporate Office are offered in 4 to 16 port configurations. Voice storage capacity is virtually unlimited - an advantage of PC-based design. Small Office, introduced in 1996, also produced by KVT and sold through both the Company's and KVT's dealer networks, is a smaller and more economical version of VVP/Corporate Office. Small Office offers basically the same features as the larger model, but is designed for smaller enterprises. Maximum capacity is four ports (four simultaneous calls) and 100 mail boxes. PATI 3000, introduced in 1995, links standard analog single line telephones to PCs that use Windows or Windows 95 operating systems. The device includes applications software that allows users to perform normal telephone functions and many advanced functions from their PCs. FastCall, introduced in 1994, produced by the Company's wholly-owned subsidiary Aurora, is a special class of CTI software that is designed to "telephony enable" existing custom data bases and programs, as well as popular personal information managers ("PIMs"). Categorized as "middleware", FastCall is used by call centers and businesses to streamline incoming and outgoing calls for improved customer service productivity. Examples are calling directly from databases by "point and click," handling complex telephone operations such as conferencing from the PC, and automatically producing specified screens triggered by the calling or called number. Analog Systems Voyager, introduced in 1996, is a small integrated switching and voice processing system. Voyager will accommodate up to four telephone lines and eight terminal devices. The terminals may be standard analog telephones, fax machines, modems, or other industry standard analog devices. The product is economically priced and easy to install. Potential end users include retail shops, small service enterprises (such as restaurants, dry cleaners, etc.), and home offices. The Company purchases Voyager products from Voysys Corporation and resells the product through the Company's distributor and dealer channels. Unisyn, introduced in 1994, is designed to offer advanced features to small organizations. Two models are offered, one of which supports up to three lines and eight telephones, and the other which supports up to six lines and 16 telephones. Display model telephones offer interactive function keys to simplify feature access. Another capability of Unisyn is its optional compatibility with standard analog devices, such as single line telephones, fax machines, and modems. ExecuTech 2000 Unitized Expandable Hybrid Systems, introduced in 1989, can support up to 24 lines and 56 telephones. Expansion modules allow end users to increase capacity in increments of four lines and 12 phones or by 16 phones with no additional lines. These systems provide subdued off-hook voice announce, built-in battery backup interface, integrated call costing, and many other features. ExecuTech XE Key Systems, introduced in 1989, can support up to 10 lines and 24 telephones. All systems support the same family of full-featured telephones. The switch is a unitized self-contained unit, making the ExecuTech XE system economical to manufacture, easy to install, and beneficial to end users who do not have to buy additional components to add features. ExecuTech II Hybrid products, introduced in 1986, consist of models supporting up to 22 lines and 96 telephones. This line of systems supports economical ExecuTech single-line telephones and a variety of multi-line terminals including an LCD model. InnTouch, introduced in 1987, is a line of four analog hospitality systems, the first of which supports up to 22 lines and 128 telephones. These systems feature a front desk video display terminal, integrated call costing, and multi-featured room telephones. Solo II, introduced in 1986, is offered in three and four-line models and provides a sophisticated set of features that are easy to program and cost effective. Proprietary and Specialty Terminals HoTelephone, originally introduced in 1984, is a line of single and two-line telephones specially designed for business travelers for use in hotel and motel guest rooms. The HoTelephone offers guest room travelers memory keys for one-button dialing of various services, plus a message waiting lamp, hold button, and built-in data jack for connecting portable computers and fax machines. Voice Express, introduced in the early 1980s, is a fully-featured multi-function display telephone that includes an integrated speakerphone, autodial, and many other standard features for use behind different types of switches. Voice Express may be optionally equipped with a two-line module for use behind PBX's or the user can add special six and ten-button modules for use with older electromechanical key telephone equipment. MaxPlus desk/wall convertible telephones range from a basic model with message waiting to a fully-featured speakerphone model with programmable soft keys for often-used PBX and Centrex features. MaxPlus II two-line telephones offer line status indicators, electronic hold and a dataport as basic features. Additional models with features such as message waiting, tap, speakerphone, and programmable soft keys. ATC Terminals are a line of single and two-line analog phones that offer advanced features at a low cost. The products are sourced by American Telecommunications Corporation ("ATC"), a wholly-owned subsidiary of the Company. Custom Manufacturing Custom manufacturing consists primarily of contract work performed for various original equipment manufacturers. Sales and Marketing The Company has established an extensive two-tiered distribution network as its primary channel for serving the U.S. and Canada markets. Products are sold to wholesale supply houses which in turn sell to independent dealers. International sales are accomplished through a network of international dealers. International customers buy directly from the Company, normally by letters of credit, and resell to end users or other dealers. In the U.S., the Company distributes products to nine major wholesale supply houses, three of which each account for more than 10% of the Company's net sales. These wholesale supply houses are Graybar Electric Company, Inc. ("Graybar"), Sprint/North Supply, Inc. ("North Supply"), a subsidiary of Sprint, and ALLTEL Supply, Inc. ("ALLTEL"). In 1996, net sales to ALLTEL, Graybar, and North Supply amounted to approximately $19.5 million (19%), $31.7 million (31%), and $22.4 million (22%), respectively. The Company has three classes of dealers: Platinum Preferred, Preferred, and Associate Dealers. The Company offers an attractive incentive package for both Platinum Preferred and Preferred Dealers, including exclusive access to certain of its products, cash rebates related to dealer purchase levels, cooperative advertising allowances, and a measure of territorial protection. Platinum Preferred and Preferred Dealers have sales quotas, and the Company's sales department monitors their performance against these targets. Associate dealers purchase the Company's products on an as-needed basis, and are rewarded through product rebates. Associate Dealers do not have quotas but do receive benefits such as toll-free assistance, training, and other services which are offered by the Company. Several thousand dealers purchase the Company's products through supply houses. The Company's sales organization seeks to recruit, train, and support individual dealers to facilitate promotion and sale of its products. The Company has two primary sales groups. One group concentrates on further maximizing the Company's system sales through Associate Dealers. The second sales group focuses on the Company's Platinum and Preferred Dealers, helping them understand and effectively market new CTI products, expanding the Company's Value Added Reseller ("VAR") channels, and developing a broader customer base for the Company's advanced digital switches and newer CTI system solutions. There are also smaller sales teams focused on national accounts, OEM customers, E-911 customers, and federal government customers. Each sales manager is responsible for recruiting new dealers and training and motivating existing dealers. Dealers are supported through telephone contact with Inside Sales Representatives, direct mail, and local product seminars often organized by distributors. To stimulate demand, Field Sales Representatives make joint sales calls with dealers to end users and train dealer sales personnel in product benefits. Product specialists in Charlottesville are available to help engineer complex configurations and solve technical problems. All sales personnel earn incentive income based on sales results. Advertising and public relations efforts are also directed to dealers through trade magazines such as Teleconnect and Computer-Telephony. Trade shows are a major element of the Company's marketing plans. The Company is always a major draw at the annual Computer-Telephony conference and exposition. The Company's dealers are primarily responsible for supporting end users. The Company does maintain a technical support staff devoted to dealer support which is available on a toll-free basis twenty-four hours per day with special emergency service available on weekends and holidays. The Company also generally provides a limited warranty on elements of its products, permitting factory returns within 24 months of the production date. Although the Company does not offer maintenance contracts for its systems, dealers often independently sell maintenance contracts to end users. Because the Company's sales are made under short-term sales orders issued by customers on a month-to-month basis, rather than under long-term supply contracts, backlog is not considered material to the Company's business. Engineering, Research and Development The Company believes that it must continue to introduce new products and enhance existing products to maintain a competitive position in the marketplace. The Company's engineering department, working in collaboration with the marketing and manufacturing departments, is responsible for the design of these new products and enhancements. A significant amount of engineering expenditures are dedicated to new product development, with the balance used for cost reductions and performance enhancements to existing products. In the early 1990s, the Company changed the responsibilities of its engineering staff to include both product development and support of a product through its entire life cycle. This requires engineers to perform multiple tasks in addition to research and development. Research and development costs for the fiscal years ended 1996, 1995, and 1994 comprise the majority of engineering, research, and development costs, which were $5,771,000, $4,186,000, and $3,932,000, respectively. The Company is unable to segregate and quantify the amount of research and development costs from other engineering costs for such fiscal years. Some of the research and development costs associated with the development of product software have been capitalized as incurred. The accounting for such software capitalization is in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 86. The amounts capitalized in 1996, 1995, and 1994 were $1,577,000, $840,000, and $717,000, respectively. The amounts amortized for software development cost in 1996, 1995, and 1994 were approximately $877,000, $757,000, and $858,000, respectively. The Company is committed to improving its existing products and developing new telecommunications equipment in order to maintain or increase its market share. At this time, the Company's new product investments are heavily directed in three areas, (1) expansion of its digital product line, (2) extending OAI capability to a broader range of the Company's platforms, and (3) internationalization of existing and new products. The efforts are not independent of each other. For example, new digital systems will be designed to provide an OAI and to be available in models compatible with the standards of the Company's primary international markets. Manufacturing and Quality Control The Company's Manufacturing Operations organization is responsible for all activities having to do with production, testing, shipping, and repair of the Company's products. Other functions that fall under manufacturing operations include maintenance of plant facilities and specialty (contract) manufacturing. One of the Company's core competencies, along with its distribution network, is its manufacturing efficiency. With recent improvements in production equipment such as surface mount technology ("SMT") and information systems, the Company can now turn around customer orders in days, compared to weeks or even months for offshore competitors. Manufacturing is able to schedule production runs on a daily basis which provides the Company with maximum flexibility in responding to order levels, improved product margins, and lower work-in-process and finished goods inventories. Improvements in the manufacturing function include the use of advanced Manufacturing Resource Planning ("MRP") information systems, continuous flow assembly lines, just-in-time philosophies, and the continual upgrades to the two SMT lines. The Company has been able to reduce finished goods inventory levels, as commonalties at the component levels have allowed manufacturing to stock components and subassemblies rather than finished products. Manufacturing also contributes to revenues through the sale of repair services and obsolete equipment through the Company's wholly-owned subsidiary American Phone Centers, Inc. ("APC"), and by taking on selective custom manufacturing assignments. The Company also manufactures injection molded plastic parts, fabricated metal parts, and other components. The Company has been able to utilize excess plant capacity by contracting with third-parties to make various manufacturing parts by using the Company's plastic molding or fabrication equipment. The Company monitors the quality of its manufacturing process. Individual assemblers and machine operators are trained to inspect subassemblies as the work passes through their respective areas. In addition, some automated production machines perform quality tests concurrently with assembly operations. The Company believes that this high level of automation and vertical integration improves quality, cost, and customer satisfaction. In 1994, the Company was certified and has maintained its certification by the International Organization for Standardization ("ISO") at the most rigorous ISO 9001 level, which rates systems and procedures for manufacturing, engineering, product design, and customer service. Competition The market for the Company's products is highly competitive. The Company competes with approximately 20 companies many of which have significantly greater resources, such as Lucent Technologies, Inc., Nortel Inc., and Toshiba Corporation. Key competitive factors in the sale of telephone systems and related applications include performance, features, reliability, service and support, name recognition, distribution capability, and price. The Company believes that it competes favorably in its market with respect to the performance, features, reliability, distribution capability, and price of its systems, as well as the level of service and support that the Company provides. In marketing its telephone systems, the Company also emphasizes quality, as evidenced by its ISO 9001 certification and high technology features. In addition, the Company often competes to attract and retain dealers for its products. The Company expects that competition will continue to be intense in the markets it serves, and there can be no assurance that the Company will be able to continue to compete successfully in the marketplace or that the Company will be able to maintain its current dealer network. Intellectual Property From time to time, the Company is subject to proceedings alleging infringement by the Company of intellectual property rights of others. Such proceedings could require the Company to expend significant sums in litigation, pay significant damages, develop non-infringing technology, or acquire licenses to the technology that is the subject of the asserted infringement, any of which could have a material adverse effect on the Company's business. Moreover, the Company relies upon copyright, trademark, and trade secret protection to protect the Company's proprietary rights in its products. There can be no assurance that these protections will be adequate to deter misappropriation of the Company's technologies or independent third-party development of similar technologies. Because the telecommunications manufacturing industry is characterized by rapid technological change with frequent new product and feature introductions, industry participants often find it necessary to develop products and features similar to those introduced by others, with incomplete knowledge of whether patent protection may have been applied for or may ultimately be obtained by competitors or others. The telecommunications manufacturing industry has historically witnessed numerous allegations of patent infringement and considerable related litigation among competitors. The Company itself has received claims of patent infringement from several parties which sometimes seek substantial sums, including certain competitors such as Phonometrics, Inc., which has since licensed patented technology to the Company. Although the Company's investigation of some of these claims has been limited by the claims' lack of specificity, the limited availability of factual information and documentation related to the claims, and the expense of pursuing exhaustive patent reviews, the Company believes that its systems do not currently infringe valid patents of any such claimants. In response to prior infringement claims, the Company has pursued and obtained nonexclusive licenses entitling the Company to utilize certain fundamental patented functions that are widely licensed and used in the telecommunications manufacturing industry. These licenses expire upon expiration of the underlying patents. Although the Company believes that it currently owns or has adequate rights to utilize all material technologies relating to its products, as it continues to develop new products and features in the future it anticipates that it may receive additional claims of patent infringement. Such claims could result in the Company's incurring substantial legal expenses and being required to obtain licenses, pay damages for infringement, or cease offering products that infringe such patents. There can be no assurance that a license for any such infringed technology would be available to the Company or, even if available, that the terms of any such license would be satisfactory. Employees As of December 31, 1996, the Company, including Aurora and KVT, had 886 full-time employees, of whom 590 were engaged in manufacturing, 87 in engineering, 143 in sales and support, and 66 in general management and administration. The Company has never experienced a work stoppage and no employees are represented by labor unions. The Company believes that its employee relations are good. ITEM 2. Properties The Company designs, manufactures, and markets the majority of its products from a fully-integrated, approximately 500,000 square foot manufacturing facility on a 25 acre site located in Charlottesville, Virginia. The majority of the Company's operations and development are located at this facility, which the Company owns. The Company believes that its facilities are adequate both for the operation of its business as presently conducted and for expansion in the foreseeable future. In March 1996, the Company acquired KVT and Aurora (see Item 1 - General Development of Business). KVT operates out of an approximately 6,200 square foot building, located in Sarasota, Florida and Aurora operates out of two leased suites within an office building located in Acton, Massachusetts. The Company's facilities are subject to a variety of federal, state, and local environmental protection laws and regulations, including provisions relating to the discharge of materials into the environment. The cost of compliance with such laws and regulations has not had a material adverse effect upon the Company's capital expenditures, earnings, or competitive position, and it is not anticipated to have a material adverse effect in the future. In 1988, the Company voluntarily discontinued its use of a concrete underground hydraulic oil and chlorinated solvent storage tank at its Charlottesville plant. In conjunction therewith, nearby soil and groundwater contamination was noted. As a result, the Company developed a plan of remediation that was approved by the Virginia Water Control Board on January 31, 1989. The plan was later amended and approved by the Virginia Department of Environmental Quality, after which the Company commenced the remediation efforts required thereunder. In 1993, the Company provided a $45,000 reserve for the estimated cost to implement the remediation plan. In October 1994, the Company installed all required equipment in accordance with the remediation plan and started the process of pumping hydraulic oil residue from the underground water. The oil is deposited into approved containers and taken to a hazardous waste site in accordance with the corrective action plan. As of December 31, 1996, the Company has incurred costs of approximately $37,000 and expects the pumping process to be completed by early 1998. ITEM 3. Legal Proceedings The Company is from time to time involved in routine litigation. The Company believes that none of the litigation in which it is currently involved is material to its financial condition or results of operations. ITEM 4. Submission of Matters to a Vote of Security Holders No matter was submitted during the fourth quarter of 1996 to a vote of the Company's security holders. PART II ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters. Information is incorporated by reference to page 62 of the Company's 1996 Annual Report to stockholders under the caption "Related Stockholders Matters." As of March 11, 1997 there were 1,769 record holders of the Company's Common Stock. ITEM 6. Selected Financial Data. Information is incorporated by reference to page 61 of the Company's 1996 Annual Report to stockholders under the caption "Five Year Financial Data." ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Information is incorporated by reference to pages 34 through 40 of the Company's 1996 Annual Report to stockholders under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations." ITEM 8. Financial Statements and Supplementary Data. Information is incorporated by reference to pages 40 through 61 of the Company's 1996 Annual Report to stockholders or filed with this Report as listed in Item 14 hereof. ITEM 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure. No information is required to be reported pursuant to this item. Part III ITEM 10. Directors and Executive Officers of the Registrant. Information concerning Directors and Executive Officers of the Registrant is incorporated by reference under the caption "Election of Directors" and "Executive Officers of the Company" on pages 6 through 7 and 10 through 11 of the Company's definitive proxy statement for the annual meeting of stockholders to be held on April 29, 1997. ITEM 11. Executive Compensation. Executive compensation and management transactions information is incorporated by reference under the caption "Executive Compensation" on pages 12 through 20 of the Company's definitive proxy statement for the annual meeting of stockholders to be held on April 29, 1997. ITEM 12. Security Ownership of Certain Beneficial Owners and Management. Information is incorporated by reference under the captions "Securities Ownership of Certain Beneficial Owners and Management" on pages 3 through 5 of the Company's definitive proxy statement for the annual meeting of stockholders to be held on April 29, 1997. ITEM 13. Certain Relationships and Related Transactions. Information is incorporated by reference under the caption "Family Relationships", "Indebtedness of Management" and "Certain Relationships and Related Transactions" on page 12, 20, and 21 of the Company's definitive proxy statement for the annual meeting of stockholders to be held on April 29, 1997. Part IV ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) (1) The following Consolidated Financial Statements of Comdial Corporation and its Subsidiaries are incorporated in Part II, Item 8 by reference to the Company's 1996 Annual Report to stockholders (page references are to page numbers in the Company's Annual Report): Page Number Independent Auditors' Report 40 Report of Management 41 Financial Statements: Consolidated Balance Sheets - December 31, 1996 and 1995 42 Consolidated Statements of Operations - Years ended December 31, 1996, 1995, and 1994 43 Consolidated Statements of Stockholders' Equity - Years ended December 31, 1996, 1995, and 1994 44-45 Consolidated Statements of Cash Flows - Years ended December 31, 1996, 1995, and 1994 46 Notes to Consolidated Financial Statements - Years ended December 31, 1996, 1995, and 1994 47-61 2. Financial Statements - Supplemental Schedules: All of the schedules are omitted because they are not applicable, not required, or because the required information is included in the consolidated financial statements or notes. 3. Exhibits Included herein: (3) Articles of Incorporation and bylaws: 3.1 Certificate of Incorporation of Comdial Corporation. (Exhibits (a) Item 3 to Item 6 of Registrant's Quarterly Report on Form 10-Q for the period ended July 2, 1995.)* 3.2 Certificate of Amendment to the Certificate of Incorporation of Comdial Corporation as filed with the Secretary of State of the State of Delaware on February 1, 1994. (Exhibit 3.2 to Registrant's Form 10-Q for the period ended July 2, 1995.)* 3.3 Bylaws of Comdial Corporation. (Exhibit 3.3 to Registrant's Form 10-K for the year ended December 31, 1993.)* (10) Material contracts: 10.1 Registrant's 1992 Stock Incentive Plan and 1992 Non-employee Directors Stock Incentive Plan. (Exhibits 28.1 and 28.2 of Registrant's Form S-8 dated October 21, 1992.)* 10.2 Amendment No. 2 to the Registrant's 1992 Stock Incentive Plan and 1992 Non-employee Directors Stock Incentive Plan. (Exhibit 10.2 of Registrant's Form 10-Q dated June 30, 1996.)* 10.3 Amendment No. 3 to the Registrant's 1992 Stock Incentive Plan and 1992 Non-employee Directors Stock Incentive Plan. (Exhibit 10.2 of Registrant's Form 10-Q dated June 30, 1996.)* 10.4 Loan and Security Agreement dated February 1, 1994 among Registrant and Fleet Capital Corporation formerly Barclays Business Credit, Inc. (Exhibit 10.13 to Registrant's Form 10-K for the year ended December 31, 1993.)* 10.5 Development Agreement dated December 2, 1993 among Registrant and Motorola Inc. (Exhibit 10.16 to Registrant's Form 10-K for the year ended December 31, 1993.)* 10.6 Amendment No. 1 to the Loan and Security Agreement dated March 13, 1996 among the Registrant and Fleet Capital Corporation. (Exhibit 10.1 to Registrant's Form 10-Q for the quarter ended March 31, 1996.)* 10.7 Amendment No. 2 to the Loan and Security Agreement dated June 28, 1996 among the Registrant and Fleet Capital Corporation. (Exhibit 10.1 to Registrant's Form 10-Q for the quarter ended June 30, 1996.)* 10.8 Amendment No. 3 to the Loan and Security Agreement dated September 27, 1996 among the Registrant and Fleet Capital Corporation. (Exhibit 10.1 to Registrant's Form 10-Q for the quarter ended September 29, 1996.)* 10.9 The Registrant's Executive Stock Ownership Plan effective January 1, 1996. (Exhibit 10.10 to Registrant's Form 10-K for the year ended December 31, 1995.)* 10.10The Registrant's Executive Severance Plan dated August 31, 1995. (Exhibit 10.11 to Registrant's Form 10-K for the year ended December 31, 1995.)* (11) Schedule of Computation of Earnings Per Common Share. (13) Registrant's 1996 Annual Report to Stockholders. (21) Subsidiaries of the Registrant. The following are the subsidiaries of the Registrant and all are incorporated in the state of Delaware. American Phone Centers, Inc. American Telecommunications Corporation Aurora Systems, Inc. Comdial Business Communications Corporation Comdial Consumer Communications Corporation Comdial Custom Manufacturing, Inc. Comdial Enterprise Systems, Inc. Comdial Technology Corporation Comdial Telecommunications, Inc. Comdial Telecommunications International, Inc. Comdial Video Telephony, Inc. Key Voice Technologies, Inc. Scott Technologies Corporation (23) Independent Auditors' Consent. Accountants consent to the incorporation by reference of their report dated January 30, 1997, appearing in this Annual Report on Form 10-K of Comdial Corporation for the year ended December 31, 1996, in certain Registration Statements. (24) Power of Attorney. (27) Financial Data Schedule. - --------------------------------------- * Incorporated by reference herein. (b) Reports on Form 8-K: The Registrant has not filed any reports on Form 8-K during the last quarter of 1996. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 25th day of March, 1997. COMDIAL CORPORATION By: /s/ William G. Mustain ------------------------------------- William G. Mustain Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date * Vice Chairman March 25, 1997 - -------------------- A. M. Gleason * Director March 25, 1997 - -------------------- Michael C. Henderson * Director March 25, 1997 - -------------------- William E. Porter * Director March 25, 1997 - -------------------- John W. Rosenblum * Director March 25, 1997 - -------------------- Dianne C. Walker /s/ William G. Mustain Chairman of the Board, March 25, 1997 - ---------------------- President, and William G. Mustain Chief Executive Officer /s/ Wayne R. Wilver Senior Vice President, March 25, 1997 - ---------------------- Chief Financial Officer, Wayne R. Wilver Treasurer, and Secretary * By:/s/ Wayne R. Wilver - ------------------------ Wayne R. Wilver, Attorney-In-Fact EX-11 2 COMPUTATION OF EARNINGS PER COMMON SHARE COMDIAL CORPORATION AND SUBSIDIARIES EXHIBIT 11 SCHEDULE OF COMPUTATION OF EARNINGS PER COMMON SHARE
- ------------------------------------------------------------------------------------------------------------------- Years Ended December 31, 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------- PRIMARY Income applicable to common shares: Income before extraordinary items $1,809,000 $9,519,000 $3,037,000 Extraordinary item - - (389,000) ---------- ---------- ---------- Net income $1,809,000 $9,519,000 $2,648,000 ========== ========== ========== Weighted average number of common shares outstanding during the year 8,478,883 7,465,938 6,967,705 Add - common equivalent shares (determined using the "treasury stock" method) representing shares issuable upon exercise of: stock options and contingent shares 175,789 231,000 267,756 Weighted average number of shares used in calculation of primary earnings per common share 8,654,672 7,696,938 7,235,461 ========= ========= ========= Earnings per common share: Income before extraordinary item $0.21 $1.24 $0.42 Extraordinary item - - (0.05) ----- ----- ------ Net income $0.21 $1.24 $0.37 ====== ====== ====== FULLY DILUTED Net income applicable to common shares $1,809,000 $9,519,000 $2,648,000 Adjustments for convertible securities: Dividends paid on convertible preferred stock - 350,000 577,000 --------- ------- -------- Net income applicable to common shares, assuming conversion of above securities $1,809,000 $9,869,000 $3,225,000 ========== ========== ========== Weighted average number of shares used in calculation of primary earnings per common share 8,654,672 7,696,938 7,235,461 Add (deduct) incremental shares representing: Shares issuable upon exercise of stock options and warrants included in primary calculation (175,789) (231,000) (267,756) Shares issuable upon exercise of stock options and warrants issuable based on year-end market price or weighted average price 171,240 759,788 1,156,312 ------- ------- --------- Weighted average number of shares used in calculation of fully diluted earnings per common share 8,650,123 8,225,726 8,124,017 ========= ========= ========= Fully diluted earnings per common share $0.21 $1.20 $0.40 ========= ========= ========= - ------------------------------------------------------------------------------------------------------------------- * The year 1994 has been adjusted to reflect the one-for-three reverse stock split that occurred in August 1995.
EX-13 3 ANNUAL REPORT EXHIBIT 13 Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion is intended to assist the reader in understanding and evaluating the financial condition and results of operations of Comdial Corporation and its subsidiaries (the "Company"). This review should be read in conjunction with the financial statements and accompanying notes. This analysis attempts to identify trends and material changes which occurred during the periods presented. Prior years have been reclassified to conform to the 1996 reporting basis (see Note 1 to the Consolidated Financial Statements). RESULTS OF OPERATIONS Selected consolidated statements of operations for the last three years are as follows:
- ---------------------------------------------------------------------------------------------------------- December 31, In thousands 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------- Net sales $102,229 $94,802 $77,145 Gross profit 37,818 30,775 24,727 Selling, general & administrative 25,694 19,298 15,161 Engineering, research & development 5,771 4,186 3,932 Interest expense 1,626 996 1,267 Goodwill amortization 2,674 23 23 Miscellaneous expense - net 762 737 614 Income tax expense/(benefit) (518) (4,334) 116 Extraordinary item, write-off of debt issuance cost - - 389 Net income 1,809 9,869 3,225 Dividends on preferred stock - 350 577 Net income applicable to common stock 1,809 9,519 2,648 - ----------------------------------------------------------------------------------------------------------
1996 Compared with 1995 Net sales as reported for 1996 increased by 8% to $102,229,000, compared with $94,802,000 in 1995. The continued increase in net sales was primarily due to (1) continued demand for the Company's Digital Expandable System ("DXP") and Impact products, and (2) continued growth in sales of Computer Telephony Integration ("CTI") products which was enhanced by the acquisitions of Aurora Systems, Inc. ("Aurora") and Key Voice Technologies, Inc. ("KVT"). In 1996, sales of DXP products increased 29% to $17,570,000 compared with $13,619,000 for 1995. In 1996, sales of CTI products, including voice processing, increased 180% to $20,250,000 compared with $7,223,000 for 1995. Management expects sales of digital business systems and CTI products to continue to grow in 1997, primarily due to (1) continued growth in DXP system sales driven by new CTI applications, (2) development of new products, (3) sales by newly acquired wholly-owned subsidiaries Aurora and KVT which should help increase the sales of CTI related products, and (4) acceptance of DXP and CTI products in international markets. In 1996, sales of analog products, proprietary terminals, and custom manufacturing revenue decreased 27% to $16,041,000, 21% to $4,693,000, and 79% to $1,299,000, respectively, compared with $22,076,000, $5,938,000, and $6,092,000, respectively, for 1995. The custom manufacturing decrease was primarily due to completion in 1995 of a one-time contract with a major customer. Management expects sales of analog and proprietary terminals to continue to decrease in 1997. In 1996, international sales increased by 38% to $3,670,000 compared with $2,666,000 for 1995. International sales were lower than projected primarily due to unstable economic conditions in Latin America and other foreign countries. As the Company's products gain more international exposure, and the Company recruits more international distributors, international sales are expected to grow. Gross profit as a percentage of sales for 1996 was approximately 37% compared with 32% for 1995. In 1996, gross profit increased by 23% to $37,818,000 compared with $30,775,000 for 1995. This increase was primarily attributable to increased sales of higher margin business system products, such as DXP and CTI products, and higher margins that Aurora and KVT products added to the business. Selling, general and administrative expenses increased in 1996 by 33% to $25,694,000 compared with $19,298,000 for 1995. The primary reasons for the increase were (1) an increase in sales personnel to broaden our domestic network and to support the growth of the CTI and international markets, (2) additional administrative, marketing, and sales expenses of $2,940,000 associated with Aurora and KVT, and (3) higher promotional allowance costs associated with increased sales through Preferred Dealers. Engineering, research and development expenses increased in 1996 by 38% to $5,771,000 compared with $4,186,000 for 1995. This increase was primarily due to (1) the addition of new software development and support personnel to further the development of new products, develop new CTI applications, and shorten the development cycle, and (2) increased expenses of $895,000 associated with Aurora and KVT. Interest expense increased in 1996 by 63% to $1,626,000 compared with $996,000 for 1995. This increase was due to the acquisition loan the Company obtained from Fleet Capital Corporation ("Fleet") to provide funding to help acquire Aurora and KVT. Additional interest expense was also incurred as a result of a promissory note issued to the original owners of KVT as part of the purchase price of KVT (see Note 2 to the Consolidated Financial Statements). Goodwill amortization expense in 1996 increased to $2,674,000 compared with $23,000 in 1995. The increase was due to the acquisitions of Aurora and KVT (see Note 2 to the Consolidated Financial Statements). Net income before income taxes, as a result of the foregoing, decreased 77% to $1,291,000 in 1996, compared with $5,535,000 in 1995. Some of the factors which led to the decreases in income and earnings per share for 1996 were (1) decreased sales of analog products which were down by approximately 27%, (2) decreased sales to the Federal Government which were down by approximately 53%, and (3) additional costs associated with expanding the sales and engineering organizations. Management anticipates, assuming continued strength in the economy, that the factors which have led to significant increases in sales for the second half of 1996 will continue to have a positive influence on the Company's performance in 1997. The Company plans to continue to improve sales by (1) introducing new products, product enhancements, and additional applications of DXP, Impact, digital, and CTI products, (2) increasing sales through Aurora and KVT, (3) increasing international sales by introducing new products and recruiting new distributors, and (4)expanding distribution in the U.S. Income tax expense (benefit) reflects a benefit of $518,000 in 1996 compared with a benefit of $4,334,000 for 1995. This change was due to recognition of a deferred tax asset through a reduction of the valuation allowance for both 1996 and 1995. The Company periodically reviews the requirements for a valuation allowance and makes adjustments to such allowance when changes in circumstances result in changes in judgment about the future realization of deferred tax assets. Based on a continual re-evaluation of the realization of the deferred tax asset, the valuation allowance was reduced and a tax benefit of $736,000 was recognized in the quarter ended March 31, 1996. Dividends on preferred stock were zero for 1996 compared with $350,000 for 1995. In 1995, all of the outstanding shares of the Company's Series A 7-1/2 Cumulative Convertible Redeemable Preferred Stock ("Series A Preferred Stock") was redeemed. 1995 Compared with 1994 Net sales as reported for 1995 increased by 23% to $94,802,000, compared with $77,145,000 in 1994. The continued increase in sales was primarily due to (1) demand for the Company's DXP and Impact products, and (2) improved sales of CTI products. In 1995, sales of digital products (DXP and digital) increased 43% to $53,473,000 compared with $37,315,000 for 1994. In 1995, sales of CTI products increased 20% to $7,223,000 compared with $5,996,000 for 1994. In 1995, custom manufacturing increased to $6,092,000 compared with $2,578,000 for 1994 as a result of a one-time contract from a major customer. In 1995, sales of analog and proprietary terminals decreased 10% to $22,076,000 and 10% to $5,938,000 compared with $24,654,000 and $6,602,000, respectively, for 1994. In 1995, international sales increased by 7% to $2,666,000 compared with $2,482,000 for 1994. Gross profit as a percentage of sales for 1995 was approximately 32.5% compared with 32.1% for 1994. In 1995, gross profit increased by 24% to $30,775,000 compared with $24,727,000 for 1994. These increases were primarily attributable to increased sales of higher margin business system products, such as DXP and Impact products. Selling, general and administrative expenses increased in 1995 by 27% to $19,298,000 compared with $15,161,000 for 1994. The primary reasons for the increase were (1) higher promotional allowance costs associated with increased sales volume and an increased number of dealers, (2) an increase in sales personnel to support the growth of the CTI and international markets, and (3) an increase in advertising due to the emphasis on market recognition. Advertising expenses as a percentage of net sales were approximately 20% for both 1995 and 1994. The Company formed Comdial Enterprise Systems, Inc. ("CES") in 1993 to manage the Company's CTI business. Costs relating to CES increased by 55% to $1,255,000 compared with $811,000 in 1994, due largely to additional personnel. Engineering, research and development expenses increased in 1995 by 6% to $4,186,000 compared with $3,932,000 for 1994. This increase was primarily due to an increase in software development and support personnel. Interest expense decreased in 1995 by 21% to $996,000 compared with $1,267,000 for 1994. This decrease was primarily due to (1) continued reduction of the Company's indebtedness, and (2) the Company's ability to generate funds to minimize its use of the revolving credit facility with Fleet. Miscellaneous expense -net increased by 20% to $737,000 in 1995, compared with $614,000 in 1994. This increase was primarily due to cash discounts associated with the increased sales in 1995. Net income before income taxes and extraordinary item, as a result of the foregoing, increased 48% to $5,535,000 in 1995, compared with $3,730,000 in 1994. Net income before income taxes and extraordinary item also increased as a percentage of net sales to 6% in 1995 compared with 5% in 1994. Income tax expense(benefit) reflects a benefit of $4,334,000 in 1995 compared with an expense of $116,000 for 1994. This change was primarily due to the recognition of a deferred tax asset through a reduction of the valuation allowance. As of July 2, 1995, the valuation allowance was reduced by $4,503,000 based on management's assessment of future taxable income and management's belief that it is "more likely than not" that the Company will realize the tax benefit. Extraordinary item, write-off of debt issuance cost, represents debt issuance costs that were written off during the first quarter of 1994 in connection with refinancing the Company's indebtedness to PacifiCorp Credit, Inc. ("PCI"). Dividends on preferred stock for 1995 represent quarterly dividends payable to the holder of the Company's Series A Preferred Stock. The Company originally issued 850,000 shares of Series A Preferred Stock to PCI in February 1994, in exchange for the cancellation of $8,500,000 of the Company's indebtedness to PCI. In December 1994, the Company redeemed 100,000 shares of the Series A Preferred Stock. Dividends in 1995 decreased by 39% to $350,000 compared with $577,000 for 1994. In August 1995, the Company redeemed the remaining 750,000 shares with proceeds received from a public offering of the Company's Common Stock and paid all dividends associated with the Series A Preferred Stock. LIQUIDITY AND CAPITAL SOURCES As of February 1, 1994, Fleet held substantially all of the Company's indebtedness. Prior to February 1, 1994, PacifiCorp, through its indirect subsidiary, PCI, held substantially all of the Company's indebtedness. The Company and Fleet entered into a loan and security agreement ("Loan Agreement") in 1994 pursuant to which Fleet provided the Company with a $6.0 million term loan represented by a note ("Term Note I") and a $9.0 million revolving credit loan facility ("Revolver") in an aggregate amount up to $14.0 million. The term loan was used, along with other funds, to repay all of the Company's indebtedness to PCI. On April 29, 1994, the Company and Fleet amended the Loan Agreement which allowed the Company to borrow an additional $1.3 million represented by another note ("Term Note II") to finance the purchase of additional surface mount technology equipment. Term Note II was payable in 44 equal monthly payments of $27,000 with the balance due on February 1, 1998. The Term Notes and Revolver under the original Loan Agreement carried interest rates of 1.50% and 1.00% over Fleet's prime rate, respectively. Fleet's prime rate was 8.25% and 8.50% at December 31, 1996 and December 31, 1995, respectively. On March 13, 1996, the Company and Fleet amended the Loan Agreement to provide the Company with a $10.0 million acquisition loan ("Acquisition Loan"), a $3.5 million equipment loan ("Equipment Loan"), and a $12.5 million revolving credit loan facility ("Amended Revolver"). The remaining balances on Term Notes I and II were paid by advances from the Amended Revolver and Equipment Loan, respectively (see Note 6 to Consolidated Financial Statements). The Equipment Loan is payable in equal monthly principal installments of $27,000, with the balance due on June 1, 1998. On March 20, 1996, the Company borrowed $8.5 million under the Acquisition Loan which was used in connection with the purchase of Aurora and KVT. The Acquisition Loan is payable in equal monthly principal installments of $142,142, with the balance due on February 1, 2001. Availability under the Amended Revolver is based on eligible accounts receivable and inventory, less funds already borrowed. As of December 31, 1996, the Company had borrowed funds totaling $1,749,000 under the Amended Revolver and had approximately $8,031,000 of borrowing capacity. The Company expects to fund its 1997 total debt payments of $3,779,000 to Fleet with cash generated from operations. The Acquisition Loan, Equipment Loan, and Amended Revolver bear interest at rates based on either Fleet's prime rate or the London Interbank Offered Rate ("LIBOR"). The interest rates may be adjusted annually based on the Company's debt to earnings ratio. Depending on the ratio, the interest rates vary from minus 0.50% to plus 0.50% under or above the Fleet prime rate and from plus 1.50% to 2.50% above LIBOR. As of December 31, 1996, the prime interest rate was 8.25% and LIBOR rate was 5.66% with approximately 79% of the loans based on LIBOR. As of December 31, 1996, the Company's borrowing rates for loans based on the prime and LIBOR rates were 8.25% and 7.66%, respectively. On June 28, 1996, the Company and Fleet amended the Loan Agreement to adjust availability under the Amended Revolver by establishing a special availability reserve of $4.0 million and also modified certain covenants. On September 27, 1996, the Company and Fleet amended the Loan Agreement to modify certain covenants. The Company's indebtedness under the Loan Agreement is secured by liens on the Company's accounts receivable, inventories, intangibles, land, and all other assets. The Loan Agreement also contains financial covenants requiring the Company to maintain specified levels of consolidated tangible net worth, profitability, debt service ratio, and current ratio (see Note 6 to the Consolidated Financial Statements). In addition, the Loan Agreement limits the Company's ability to make additional borrowings and payment of dividends. The Company was in compliance with all the covenants and terms of the amended Loan Agreement as of December 31, 1996. In addition to the Fleet indebtedness, the Company issued a promissory note ("Promissory Note") in the principal amount of $7.0 million to the former owners of KVT, which was part of the purchase price for KVT. The Promissory Note carries an interest rate based on prime with yearly payments of $1.4 million over five years starting on March 20, 1997. Capital leases with various financing entities are payable based on the terms of each individual lease. Other debt consists of a mortgage that was acquired as part of the KVT acquisition which has a monthly payment of $2,817 and carries an interest rate of 8.75%. The final payment under the mortgage is due on August 1, 2005. The following table sets forth the Company's cash and cash equivalents, current maturities on debt, and working capital at the dates indicated: - -------------------------------------------------------------------------------- December 31, In thousands 1996 1995 1994 - -------------------------------------------------------------------------------- Cash and cash equivalents $180 $4,144 $1,679 Current maturities on debt 5,343 1,903 2,466 Working capital 10,608 18,271 11,631 - -------------------------------------------------------------------------------- All operating cash requirements are currently being funded through the Amended Revolver. Cash and cash equivalents are lower by $3,964,000 as of December 31, 1996 compared with 1995, primarily due to the acquisitions of Aurora and KVT. All available cash was used to help fund the acquisitions. Current maturities on debt at December 31, 1996, increased by $3,440,000, primarily due to an increase in the Amended Revolver of $1,749,000 and an increase of $1,400,000 due under the Promissory Note. Working capital at December 31, 1996, decreased by $7,663,000 when compared to 1995. This decrease was primarily due to the Company drawing down its cash surplus and borrowing additional funds to acquire Aurora and KVT which occurred at the beginning of 1996. The Company considers outstanding checks to be a bank overdraft. Under the Company's current cash management policy, receipts are deposited directly into the Amended Revolver account to reduce the revolving credit balance. Operations are funded by borrowing under the Amended revolver. The Company reports the revolving credit facility activity on a net basis on the Consolidated Statements of Cash Flows. Assets, liabilities, and stockholders' equity at December 1996, increased by $3,232,000, $1,907,000, and $1,325,000, respectively, primarily due to amounts related to the acquisitions of Aurora and KVT (see Note 2 to the Consolidated Financial Statements). Prepaid expenses and other current assets at December 1996, decreased by $1,354,000 compared with December 1995. This decrease was primarily due to a miscellaneous receivable for returned inventory that related to a custom manufacturing project that had been completed by the end of 1995. Goodwill at December 1996, increased by $16,642,000 compared with December 1995. This increase was due to the acquisitions of Aurora and KVT. The purchase price, including acquisition costs for both companies, exceeded net assets acquired by approximately $19,316,000. This excess is amortized on a straight-line basis over one to eight years based on asset valuations performed by outside consultants. The amount amortized since the acquisitions by the Company for the year ended 1996 was $2,651,000. Other assets at December 1996, increased by $1,842,000 compared with December 1995. This increase was primarily due to costs associated with new product development by outside consultants, capitalized software development costs, and the addition of Aurora and KVT assets. Accrued payroll and related expenses at December 1996, increased by $912,000 compared with December 1995. This increase was primarily due to liabilities relating to Aurora and KVT. Capital additions for 1996 were approximately $3,416,000. Such capital additions helped the Company introduce new products as well as improve quality and reduce costs associated with new and existing products. Capital additions were provided by funding from operations, capital leasing, and borrowing from Fleet. Cash expenditures for capital additions for 1996, 1995, and 1994 amounted to $3,179,000, $2,155,000, and $2,116,000, respectively. Management anticipates that approximately $4,000,000 will be spent on capital additions during 1997. These additions will help the Company meet its commitments to its customers by developing new products for the future. The Company plans to fund all additions through operations, borrowing, and long-term leases. The Company believes that income from operations combined with amounts available from the Company's current credit facilities will be sufficient to meet the Company's needs for the foreseeable future. The Company has a commitment from Crestar Bank for the issuance of letters of credit in an aggregate amount not to exceed $500,000 at any one time. At December 31, 1996, the amount of available commitments under the letter of credit facility with Crestar Bank was $116,000. In October 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." The new standard defines a fair value method of accounting for stock options and similar equity instruments. Pursuant to the new standard, companies can either adopt the standard or continue to account for such transactions under Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees." The Company has elected to continue to account for such transactions under APB No. 25. The Company has disclosed, in a note to the financial statements, pro forma net income and earnings per share, as if the Company had applied the new method of accounting (see Note 11 to the Consolidated Financial Statements). Since the Company is going to continue to apply APB No. 25, complying with the new standard will have no effect on earnings or the Company's cash flow. During fiscal years 1996, 1995, and 1994, primarily all of the Company's sales, net income, and identifiable net assets were attributable to the telecommunications industry. "SAFE HABOR" STATEMENT UNDER THE PRIVATE SECURITIES LIGITATION REFORM ACT OF 1995 The Company's Annual Report may contain some forward-looking statements that are subject to risks and uncertainties, including, but not limited to, the impact of competitive products, product demand and market acceptance risks, reliance on key strategic alliances, fluctuations in operating results, delays in development of highly complex products, and other risks detailed from time to time in the Company's filings with the Securities and Exchange Commission. These risks could cause the Company's actual results for 1997 and beyond to differ materially from those expressed in any forward-looking statement made by, or on behalf of, the Company. - ------------------------------------------------------------------------------ INDEPENDENT AUDITORS' REPORT - ------------------------------------------------------------------------------ Board of Directors and Stockholders Comdial Corporation Charlottesville, Virginia We have audited the accompanying consolidated balance sheets of Comdial Corporation and its subsidiaries (the Company) as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Comdial Corporation and subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP Richmond, Virginia January 30, 1997 - ------------------------------------------------------------------------------ REPORT OF MANAGEMENT - ------------------------------------------------------------------------------ Comdial Corporation's management is responsible for the integrity and objectivity of all financial data included in this Annual Report. The consolidated financial statements have been prepared in accordance with generally accepted accounting principles. Such principles are consistent in all material respects with accounting principles prescribed by the various regulatory commissions. The financial data includes amounts that are based on the best estimates and judgments of management. The Company maintains an accounting system and related internal accounting controls designed to provide reasonable assurance that assets are safeguarded against loss or unauthorized use and that the financial records are adequate and can be relied upon to produce financial statements in accordance with generally accepted accounting principles. Deloitte & Touche LLP, Certified Public Accountants ("Independent Auditors"), have audited these consolidated financial statements, and have expressed herein their unqualified opinion. The Company diligently strives to select qualified managers, provide appropriate division of responsibility, and assure that its policies and standards are understood throughout the organization. The Company's Code of Conduct serves as a guide for all employees with respect to business conduct and conflicts of interest. The Audit Committee of the Board of Directors, comprised of Directors who are not employees, meets periodically with management and the Independent Auditors to review matters relating to the Company's annual financial statements, internal accounting controls, and other accounting services provided by the Independent Auditors. /s/ William G. Mustain /s/ Wayne R. Wilver William G. Mustain Wayne R. Wilver Chairman, President and Senior Vice President and Chief Executive Officer Chief Financial Officer
Consolidated Balance Sheets - --------------------------------------------------------------------------------- -------------------------------- December 31, In thousands except par value 1996 1995 - ------------------------------------------------------------------------------------------------------------------ Assets Current assets Cash and cash equivalents $180 $4,144 Accounts receivable - net 9,660 8,976 Inventories 19,586 17,925 Prepaid expenses and other current assets 1,341 2,695 - ------------------------------------------------------------------------------------------------------------------ Total current assets 30,767 33,740 - ------------------------------------------------------------------------------------------------------------------ Property - net 15,317 13,943 Net deferred tax asset 7,469 6,694 Goodwill 16,852 210 Other assets 3,947 2,105 - ------------------------------------------------------------------------------------------------------------------ Total assets $74,352 $56,692 ================================================================================================================== Liabilities and Stockholders' Equity Current liabilities Accounts payable $8,144 $7,988 Accrued payroll and related expenses 2,926 2,014 Accrued promotional allowances 1,903 1,851 Other accrued liabilities 1,843 1,713 Current maturities of debt 5,343 1,903 - ------------------------------------------------------------------------------------------------------------------ Total current liabilities 20,159 15,469 - ------------------------------------------------------------------------------------------------------------------ Long-term debt 11,713 2,844 Net deferred tax liability 2,230 2,191 Long-term employee benefit obligations 1,686 1,894 Commitments and contingent liabilities (see Note 13) - - - ------------------------------------------------------------------------------------------------------------------ Total liabilities 35,788 22,398 - ------------------------------------------------------------------------------------------------------------------ Stockholders' equity Common stock ($0.01 par value) and paid-in capital (Authorized 30,000 shares; issued shares: 1996 = 8,580; 1995 = 8,132) 114,118 111,625 Other (1,046) (1,014) Accumulated deficit (74,508) (76,317) - ------------------------------------------------------------------------------------------------------------------ Total stockholders' equity 38,564 34,294 - ------------------------------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity $74,352 $56,692 ================================================================================================================== The accompanying notes are an integral part of these financial statements.
Consolidated Statements of Operations - ---------------------------------------------------------------------------------------------------------------- Years Ended December 31, In thousands except per share amounts 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------- Net sales $102,229 $94,802 $77,145 Cost of goods sold 64,411 64,027 52,418 - ---------------------------------------------------------------------------------------------------------------- Gross profit 37,818 30,775 24,727 - ---------------------------------------------------------------------------------------------------------------- Operating expenses Selling, general & administrative 25,694 19,298 15,161 Engineering, research & development 5,771 4,186 3,932 - ---------------------------------------------------------------------------------------------------------------- Operating income 6,353 7,291 5,634 - ---------------------------------------------------------------------------------------------------------------- Other expense Interest expense 1,626 996 1,267 Goodwill amortization 2,674 23 23 Miscellaneous expense - net 762 737 614 - ---------------------------------------------------------------------------------------------------------------- Income before income taxes and 1,291 5,535 3,730 extraordinary item Income tax expense/(benefit) (518) (4,334) 116 - ---------------------------------------------------------------------------------------------------------------- Income before extraordinary item 1,809 9,869 3,614 Extraordinary item, write-off of debt issuance cost - - 389 - ---------------------------------------------------------------------------------------------------------------- Net income 1,809 9,869 3,225 Dividends on preferred stock - 350 577 - ---------------------------------------------------------------------------------------------------------------- Net income applicable to common stock $1,809 $9,519 $2,648 ================================================================================================================ Earnings (loss) per common share and common equivalent share: Earnings per common share $0.21 - - ================================================================================================================ Primary: Income before extraordinary item - $1.24 $0.42 Extraordinary item - - (0.05) - ---------------------------------------------------------------------------------------------------------------- Net income per common share - $1.24 $0.37 ================================================================================================================ Fully diluted - $1.20 $0.37 ================================================================================================================ Weighted average common shares outstanding: Weighted average per common share 8,479 - - Primary - 7,697 7,235 Fully diluted - 8,226 7,235 The accompanying notes are an integral part of these financial statements.
Consolidated Statements of Stockholders' Equity - ------------------------------------------------------------------------------------------------------------------ Common Stock Preferred Stock ----------------------------------------------------- Paid-in In thousands Shares Amount Shares Amount Capital - ------------------------------------------------------------------------------------------------------------------ Balance at January 1, 1994 20,728 $207 - $- $99,840 Proceeds from sale of Common Stock: Notes receivable (146) Stock options exercised 439 4 285 Incentive stock issued 40 130 Preferred stock issued 850 8,500 Redeemed preferred stock (100) (1,000) Treasury stock purchased Dividend paid on preferred stock Net income - ------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1994 21,207 211 750 7,500 100,109 Reverse stock-split 1 for 3 (August 8, 1995) (14,138) (141) 141 Proceeds from sale of Common Stock: Stock offering 1,000 10 11,200 Notes receivable Stock options exercised 144 2 250 Stock offering cost (273) Incentive stock issued 13 116 Redeemed preferred stock (750) (7,500) Treasury stock purchased Dividend paid on preferred stock Net income - ------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1995 8,226 82 - - 111,543 Proceeds from sale of Common Stock: Notes receivable Stock options exercised 53 1 82 Stock offering cost (26) Incentive stock issued 8 73 Treasury stock purchased Common stock issued for acquisitions Key Voice Tech., Inc. 243 2 1,469 Aurora Systems, Inc. 148 2 890 Net income - ------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1996 8,678 $87 - - $114,031 ================================================================================================================== ----------------------------------------------------------------------- Notes Treasury Stock Receivable ------------------------ on Sale Retained In thousands Shares Amount of Stock Earnings Total - ----------------------------------------------------------------------------------------------------------------- Balance at January 1, 1994 (151) $(585) $(229) $(88,483) $10,750 Proceeds from sale of Common Stock: Notes receivable 47 (99) Stock options exercised 289 Incentive stock issued 130 Preferred stock issued 8,500 Redeemed preferred stock (1,000) Treasury stock purchased (103) (175) (175) Dividend paid on preferred stock (577) (577) Net income 3,225 3,225 - ----------------------------------------------------------------------------------------------------------------- Balance at December 31, 1994 (254) (760) (182) (85,835) 21,043 Reverse stock-split 1 for 3 (August 8, 1995) 169 - Proceeds from sale of Common Stock: Stock offering 11,210 Notes receivable 6 6 Stock options exercised 252 Stock offering cost (273) Incentive stock issued (1) 115 Redeemed preferred stock (7,500) Treasury stock purchased (9) (78) (78) Dividend paid on preferred stock (350) (350) Net income 9,869 9,869 - ----------------------------------------------------------------------------------------------------------------- Balance at December 31, 1995 (94) (838) (176) (76,317) 34,294 Proceeds from sale of Common Stock: Notes receivable 8 8 Stock options exercised 83 Stock offering cost (26) Incentive stock issued 73 Treasury stock purchased (3) (40) (40) Common stock issued for acquisitions Key Voice Tech., Inc. 1,471 Aurora Systems, Inc. 892 Net income 1,809 1,809 - ----------------------------------------------------------------------------------------------------------------- Balance at December 31, 1996 (97) $(878) $(168) $(74,508) $38,564 ================================================================================================================= The accompanying notes are an integral part of these financial statements.
Consolidated Statements of Cash Flows - ---------------------------------------------------------------------------------------------------------------------------------- Years Ended December 31, In thousands 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Cash received from customers $106,979 $97,156 $81,298 Other cash received 1,022 1,355 2,305 Interest received 53 60 56 Cash paid to suppliers and employees (101,220) (93,990) (75,888) Interest paid on debt (876) (676) (924) Interest paid under capital lease obligations (89) (174) (284) Income taxes paid (243) (186) (200) - ---------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 5,626 3,545 6,363 - ---------------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Purchase of Key Voice Technologies ("KVT") (8,528) - - Purchase of Aurora Systems ("Aurora") (1,901) - - Acquisition cost for KVT and Aurora (934) - - Proceeds from the sale of equipment 9 6 206 Proceeds received on note from Cortelco International, Inc. - - 1,000 Capital expenditures (3,179) (2,155) (2,116) - ---------------------------------------------------------------------------------------------------------------------------------- Net cash used by investing activities (14,533) (2,149) (910) - ---------------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Proceeds from borrowings 5,619 - 7,300 Net borrowings under revolver agreement 1,749 - - Proceeds from issuance of common stock 47 11,384 203 Principal payments on debt (1,941) (1,824) (14,365) Principal payments under capital lease obligations (531) (641) (809) Preferred stock redemption - (7,500) (1,000) Preferred dividends paid - (350) (577) - ---------------------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by financing activities 4,943 1,069 (9,248) - ---------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (3,964) 2,465 (3,795) - ---------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at beginning of year 4,144 1,679 5,474 - ---------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $180 $4,144 $1,679 ================================================================================================================================== Reconciliation of net income to net cash provided by operating activities: Net Income $1,809 $9,869 $3,225 - ---------------------------------------------------------------------------------------------------------------------------------- Depreciation and amortization 6,680 3,557 4,138 Change in assets and liabilities (for 1996, net of effects from the purchase of KVT and Aurora): Decrease (increase) in accounts receivable 143 (2,339) (453) Inventory provision 1,029 1,309 964 Increase in inventory (2,385) (2,365) (2,989) Increase in other assets (1,888) (3,277) (1,620) Increase in net deferred tax assets (736) (4,503) - Increase (decrease) in accounts payable and bank overdrafts (657) 1,011 1,918 Increase in other liabilities 595 435 1,238 KVT asset value at acquisition 1,105 - - Aurora asset value at acquisition (121) - - Increase (decrease) in other equity 52 (152) (58) - ---------------------------------------------------------------------------------------------------------------------------------- Total adjustments 3,817 (6,324) 3,138 - ---------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities $5,626 $3,545 $6,363 ================================================================================================================================== The accompanying notes are an integral part of these financial statements.
Notes to Consolidated Financial Statements For the Years Ended December 31, 1996, 1995, 1994 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of Comdial Corporation and its subsidiaries (the "Company"). All significant intercompany accounts and transactions have been eliminated. Nature of Operations Comdial is a United States ("U.S.") based manufacturer of business communication systems. The Company's principal customers are small to medium sized businesses throughout the U.S. and certain international markets. The distribution network consists of three major distributors, other supply houses, approximately 1700 dealers, and several thousand independent interconnects. The dynamic, high technology industry in which the Company participates is very competitive. There is an increasing shift from analog to digital product lines as well as other rapid technological changes creating the potential for product obsolescence. The Company, at this time, does not perceive an obsolescence problem with respect to any of its products. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with Generally Accepted Accounting Principles ("GAAP") requires management to make certain estimates and assumptions that affect reported amounts of assets, liabilities, revenues, expenses, and disclosure of contingent assets and liabilities at December 31, 1996. Actual results could differ from those estimates. Cash and Cash Equivalents Cash equivalents are defined as short-term liquid investments with maturities when purchased of less than 90 days that are readily convertible into cash. Under the Company's current cash management policy, borrowings from the revolving credit facility are used for normal operating purposes. The revolving credit facility is reduced by cash receipts that are deposited daily. Bank overdrafts of $1,935,000 and $1,594,000 are included in accounts payable at December 31, 1996 and 1995, respectively. Bank overdrafts are outstanding checks that have not (1) cleared the bank and (2) been funded by the revolving credit facility (see Note 6). The Company is reporting the revolving credit facility activity on a net basis on the Consolidated Statements of Cash Flows. Inventories Inventories are stated at the lower of cost (first-in, first-out) or market. Property/Depreciation Depreciation is computed using the straight-line method for all buildings, land improvements, machinery and equipment, and capitalized lease property over their estimated useful lives. Effective January 1, 1994, the Company revised the estimated useful lives of certain computer hardware equipment from seven to five years to more closely reflect expected remaining useful lives. The effect of this change in accounting estimate was to increase depreciation expense and decrease income from continuing operations in 1994 by $239,000 or $0.03 per share. Expenditures for maintenance and repairs of property are charged to expense. Improvements and renewals which extend economic lives are capitalized. The estimated useful lives are as follows: Buildings 30 years Land Improvements 15 years Machinery and Equipment 7 years Computer Hardware Equipment and Tooling 5 years Expensing of Costs All production start-up, research and development, and engineering costs are charged to expense, except for that portion of costs which relate to product software development and outside contract development (see "Capitalized Software Development Costs"). Earnings per Common Share and Common Equivalent Share For 1996, 1995, and 1994, earnings per common share were computed by dividing net income applicable to common shares by the weighted average number of common shares outstanding and common equivalent shares. During 1996, there were no preferred stock dividends paid or earned, and stock options and other common equivalent shares were antidilutive. For the years 1995 and 1994, primary earnings per share were computed by dividing income attributable to common shareholders (net income less preferred stock dividend requirements) by the weighted average number of common and common equivalent shares outstanding during the period plus (in periods in which they had a dilutive effect) the effect of common shares contingently issuable, primarily from stock options. Fully diluted earnings per share assumes the conversion of preferred stock and adds back the preferred stock dividends paid to net income. The effect of the preferred stock conversion was antidilutive for the year ended 1994. Capitalized Software Development Costs In 1996, 1995, and 1994, the Company incurred costs associated with development of software related to the Company's various products. The accounting for such software costs is in accordance with Statement of Financial Accounting Standards ("SFAS") No. 86. The Company's estimate of product life is approximately three years or more. The total amount of unamortized software development cost included in other assets is $2,297,000 and $1,475,000 at December 31, 1996 and 1995, respectively. The amounts capitalized were $1,577,000, $840,000, and $717,000, of which $877,000, $757,000, and $858,000 were amortized in 1996, 1995, and 1994, respectively. The Company also capitalized costs associated with product software development performed by outside contract engineers. The total amount of unamortized outside contract development cost included in other assets is $988,000 at December 31, 1996. The amount capitalized was $1,145,000, of which $157,000 was amortized in 1996. For the years 1995 and 1994, there were no capitalized costs or amortization expense that related to outside contract development cost. Postretirement Benefits Other Than Pension SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" requires the Company to accrue estimated costs relating to health care and life insurance benefits. In 1996, 1995, and 1994, the Company expensed $41,000, $311,000 and $289,000, respectively. Income Taxes In accordance with SFAS No. 109, "Accounting for Income Taxes," this statement specifies the asset and liability approach. The deferred tax liability or asset is determined based on the difference between the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates which will be in effect when the differences reverse. Deferred tax expense is the result of changes in the liability for deferred taxes. The measurement of deferred tax assets is reduced by the amount of any tax benefits where, based on available evidence, the likelihood of realization can be established. The Company has incurred prior cumulative operating losses through 1991 for financial statement and tax reporting purposes and has adjusted its valuation allowance account to recognize a portion of the net deferred tax asset for future periods (see Note 7). Tax credits will be utilized to reduce current and future income tax expense and payments. Accounting for Stock-Based Compensation In October 1995, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123, "Accounting for Stock-Based Compensation." The new standard defines a fair value method of accounting for stock options and similar equity instruments. Pursuant to the new standard, companies can either adopt the standard or continue to account for such transactions under Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees." The Company has elected to continue to account for such transactions under APB No. 25. The Company has disclosed in a note to the financial statements pro forma net income and earnings per share, as if the Company had applied the new method of accounting (see Note 11). Reclassifications Amounts in the 1995 and 1994 consolidated financial statements have been reclassified to conform to the 1996 presentation. These reclassifications had no effect on previously reported consolidated net income. NOTE 2. ACQUISITIONS On March 20, 1996, the Company completed the acquisitions of two companies involved in CTI applications: Aurora Systems, Inc. ("Aurora") and Key Voice Technologies, Inc. ("KVT"). Aurora, based in Acton, Massachusetts, is a leading provider of off-the-shelf CTI products. KVT, based in Sarasota, Florida, develops, assembles, markets, and sells voice processing systems and related products for business applications. As a result of the acquisitions, Aurora and KVT have become wholly-owned subsidiaries of the Company. The operating results of Aurora and KVT from March 20, 1996 to December 31, 1996 have been included in the Company's consolidated results of operations. The consideration paid for the acquisition of Aurora was approximately $2.8 million, of which $1.9 million was paid in cash and approximately $0.9 million was paid by issuance of 147,791 shares of the Company's Common Stock. The consideration paid for the acquisition of KVT totaled approximately $19.0 million, of which $8.5 million was paid in cash, $7.0 million was paid by the Company's issuance of a promissory note ("Promissory Note"), and $1.5 million was paid by the issuance of 243,097 shares of the Company's Common Stock. Depending on KVT's performance during the three years following the acquisition, the Company may be obligated to pay an additional $2.0 million which, at the Company's option, may be paid in cash or evidenced by the issuance of up to 216,086 shares of the Company's Common Stock. In accordance with the purchase method of accounting, the purchase price of the two companies has been allocated to the underlying assets and liabilities based on their respective fair values at the date of the acquisitions. Any excess of purchase price over the value of the net assets is allocated to goodwill. The purchase price, including acquisition costs, for both companies exceeded net assets acquired by approximately $19.3 million. Such excess is being amortized on a straight-line basis over one to eight years. The cost associated with the contingent shares, based on their respective fair values at the time of issuance, will be added to goodwill and amortized over the remaining life of the original goodwill. Such allocations have been based on asset valuations performed by outside consultants. To complete the acquisitions of Aurora and KVT, the Company obtained additional funds from its credit facility. The Company and Fleet Capital Corporation ("Fleet") amended the Loan Agreement to permit the Company to borrow additional funds and modified some of its terms and covenants. The amendment to the Loan Agreement provided an increased borrowing capacity of $13.5 million under acquisition and equipment loans, and a revolving credit facility of $12.5 million (see Note 6). Had the Aurora and KVT acquisitions been made at the beginning of the year prior to the acquisitions, the Company's pro forma unaudited results would have been the following at December 31: - ------------------------------------------------------------------------------ In thousands except per share amounts 1996 1995 - ------------------------------------------------------------------------------ Net sales $104,606 $102,346 Net income $1,391 $6,802 Earnings per share $0.16 - Earnings per share fully diluted - $0.79 - ------------------------------------------------------------------------------ The unaudited pro forma information is presented for comparative purposes only and is not necessarily indicative of the results that would have occurred had the acquisitions been consummated at the beginning of the periods presented, nor is it necessarily indicative of future operating results. NOTE 3. INVENTORIES Inventory consists of the following: - -------------------------------------------------------------------------- December 31, In thousands 1996 1995 - -------------------------------------------------------------------------- Finished goods $6,529 $3,808 Work-in-process 3,681 4,202 Materials and supplies 9,376 9,915 ----- ----- Total $19,586 $17,925 ======= ======= - -------------------------------------------------------------------------- NOTE 4. PROPERTY Property consists of the following: - ------------------------------------------------------------------------- December 31, In thousands 1996 1995 - ------------------------------------------------------------------------- Land $556 $396 Buildings and improvements 13,555 11,763 Machinery and equipment 28,759 27,547 Less accumulated depreciation (27,553) (25,763) ------- ------- Property - Net $15,317 $13,943 ======= ======= - ------------------------------------------------------------------------- Depreciation expense charged to operations for the years 1996, 1995, and 1994, was $2,598,000, $2,422,000, and $2,601,000, respectively. NOTE 5. LEASE OBLIGATIONS The Company and its subsidiaries have various capital and operating lease obligations. Future minimum lease commitments for capitalized leases and aggregate minimum rental commitments under operating lease agreements that have initial non-cancelable lease terms in excess of one year are as follows: - ------------------------------------------------------------------------------ Year Ending December 31, Capital Operating In thousands Leases Leases - ------------------------------------------------------------------------------ 1997 $184 $1,811 1998 136 1,682 1999 3 1,144 2000 - 154 2001 - 114 ---- ------ Total minimum lease commitments 323 $4,905 ====== Less amounts representing interest and other costs (39) ---- Principal portion of minimum lease commitments at December 31, 1996 $284 ==== - ------------------------------------------------------------------------------ Assets recorded under capital leases (included in property in the accompanying Consolidated Balance Sheets) are as follows: - ----------------------------------------------------------------------- December 31, In thousands 1996 1995 - ----------------------------------------------------------------------- Machinery and equipment $823 $1,843 Less accumulated depreciation (431) (690) ---- ----- Property - Net $392 $1,153 ==== ====== - ----------------------------------------------------------------------- During 1996, 1995, and 1994, the Company entered into new capital lease obligations which amounted to approximately $67,000, $9,000, and $228,000, respectively. Operating leases and rentals are for office space, and factory and office equipment. Total rent expense for operating leases, including rentals which are cancelable on short-term notice, for the years ended December 31, 1996, 1995, and 1994, was $1,721,000, $1,262,000, and $1,023,000, respectively. NOTE 6. DEBT Long-term debt consists of the following: - ------------------------------------------------------------------------------ December 31, In thousands 1996 1995 - ------------------------------------------------------------------------------ Notes payable to Fleet Term notes I and II (1) $ - $4,030 Acquisition note (2) 7,249 - Equipment note (3) 463 - Revolving credit (4) 1,749 - Promissory note (5) 7,000 - Other (6) 311 - Capitalized leases (7) 284 717 ------- ------ Total debt 17,056 4,747 Less current maturities on debt 5,343 1,903 ------- ------ Total long-term debt $11,713 $2,844 ======= ====== - ------------------------------------------------------------------------------ The Company and Fleet entered into a loan and security agreement ("Loan Agreement") in 1994 pursuant to which Fleet provided the Company with a $6.0 million term loan represented by a note ("Term Note I"), and a $9.0 million revolving credit loan facility ("Revolver") in an aggregate amount up to $14.0 million. On April 29, 1994, the Company and Fleet amended the Loan Agreement to permit the Company to borrow an additional $1.3 million represented by another note ("Term Note II") to finance the purchase of additional surface mount technology equipment. Term Note II was payable in 44 equal monthly payments of $27,000, with the balance due on February 1, 1998. (1) Term Notes I and II aggregating $7,300,000 carried interest rates of 1-1/2% over Fleet's prime rate and were payable in equal monthly principal installments of $110,334, with the balance due on February 1, 1998. Fleet's prime rate was 8.25% and 8.50% at March 31, 1996 and December 31, 1995, respectively. On March 13, 1996, the Company and Fleet amended the Loan Agreement to provide the Company with a $10.0 million acquisition loan ("Acquisition Loan"), $3.5 million equipment loan ("Equipment Loan"), and $12.5 million revolving credit loan facility ("Amended Revolver"). The remaining balances of $2,909,666 and $706,000 on Term Notes I and II were paid by advances from the Amended Revolver and Equipment Loan, respectively. (2) On March 20, 1996, the Company borrowed $8.5 million under the Acquisition Loan which was used to acquire Aurora and KVT. The Acquisition Loan is payable in equal monthly principal installments of $142,142, with the balance due on February 1, 2001. (3) The Equipment Loan is payable in equal monthly principal installments of $27,000, with the balance due on June 1, 1998. (4) Availability under the amended Revolver of up to $12.5 million is based on eligible accounts receivable and inventory, less funds already borrowed. On June 28, 1996, the Company and Fleet amended the Loan Agreement to adjust availability under the Amended Revolver by establishing a special availability reserve of $4.0 million and modified certain covenants. The original Revolver carried an interest rate of 1.00% over Fleet's prime rate with availability based on eligible accounts receivable and inventory. The Acquisition Loan, Equipment Loan, and Amended Revolver carry interest rates at either Fleet's prime rate or the London Interbank Offered Rate ("LIBOR") at the Company's option. The interest rates can be adjusted annually based on the Company's debt to earnings ratio which will vary the rates from minus 0.50% to plus 0.50% under or above Fleet's prime rate and from plus 1.50% to 2.50% above LIBOR. As of December 31, 1996, Fleet's prime interest rate was 8.25% and the LIBOR rate was 5.66% with approximately 79% of the loans based on LIBOR. As of December 31, 1996, the Company's borrowing rate for loans based on the prime and LIBOR rates was 8.25% and 7.66%, respectively. (5) The Promissory Note in the principal amount of $7.0 million, which was part of the purchase price of KVT, carries an interest rate equal to the prime rate with annual payments of $1.4 million plus accumulated interest for five years starting on March 20, 1997. (6) Other debt consists of a mortgage acquired in conjunction with the KVT acquisition which requires a monthly mortgage payment of $2,817, including interest at a rate of 8.75%. The final payment is due on August 1, 2005. (7) Capital leases are with various financing entities and are payable based on the terms of each individual lease (see Note 5). Scheduled maturities of current and long-term debt for the Fleet Notes (as defined in the Loan Agreement), the Promissory Note, and other debt (excluding the Amended Revolver and leasing agreements) are as follows: - -------------------------------------------------------------------------------- Principal In thousands Fiscal Years Installments - -------------------------------------------------------------------------------- Notes payable 1997 $3,437 1998 3,252 1999 3,114 2000 3,115 2001 1,836 Beyond 2001 269 - -------------------------------------------------------------------------------- Debt Covenants The Company's indebtedness to Fleet is secured by liens on the Company's accounts receivable, inventories, intangibles, land, and all other property. Among other restrictions, the amended Loan Agreement contains certain financial covenants that require specified levels of consolidated tangible net worth, profitability, and other certain financial ratios. On June 28, 1996, the Company and Fleet amended the Loan Agreement to adjust availability under the Amended Revolver by establishing a special availability reserve of $4.0 million and also modified certain covenants. On September 27, 1996, the Company and Fleet amended the Loan Agreement to modify certain covenants. The amended Loan Agreement also contains certain limits on additional borrowings. As of December 31, 1996, the Company was in compliance with the terms of the Loan Agreement. NOTE 7. INCOME TAXES The components of the income tax expense for the years ended December 31 are as follows: - --------------------------------------------------------------------------- Liability Method In thousands 1996 1995 1994 - --------------------------------------------------------------------------- Current - Federal $59 $142 $88 State 159 27 28 Deferred - Federal (714) (4,374) - State (22) (129) - ---- ------ --- Total provision/(benefit) $(518) $(4,334) $116 ===== ======= ==== - --------------------------------------------------------------------------- The income tax provision reconciled to the tax computed at statutory rates for the years ended December 31 is summarized as follows: - ------------------------------------------------------------------------------ In thousands 1996 1995 1994 - ------------------------------------------------------------------------------ Federal tax at statutory rate (35% in 1996, 1995, and 1994) $452 $1,937 $1,306 State income taxes (net of federal tax benefit) 103 18 18 Nondeductible charges 329 46 34 Alternative minimum tax 77 139 84 Utilization of operating loss carryover (743) (1,971) (1,326) Adjustment of valuation allowance (736) (4,503) - ----- ------ ---- Income tax provision/(benefit) $(518) $(4,334) $116 ===== ======= ==== - ------------------------------------------------------------------------------ Net deferred tax assets of $5,239,000 and $4,503,000 have been recognized in the accompanying Consolidated Balance Sheets at December 31, 1996 and 1995, respectively. The components of the net deferred tax assets are as follows: - ------------------------------------------------------------------------------ In thousands 1996 1995 - ------------------------------------------------------------------------------ Total deferred tax assets $27,709 $28,091 Total valuation allowance (20,240) (21,397) ------ ------ Total deferred tax assets - net 7,469 6,694 Total deferred tax liabilities (2,230) (2,191) ------ ------ Total $5,239 $4,503 ====== ====== - ------------------------------------------------------------------------------ The valuation allowance decreased $1,157,000 during the year ended December 31, 1996. The decrease was primarily related to (1) the re-evaluation of the future utilization of net operating losses ("NOLs") of $736,000, and (2) the net change in temporary differences of deferred tax assets, deferred tax liabilities, and operating loss carryforwards of $421,000. The Company periodically reviews the requirements for a valuation allowance and makes adjustments to such allowance when changes in circumstances result in changes in judgment about the future realization of deferred tax assets. Based on a continual re-evaluation of the realization of the deferred tax assets, the valuation allowance was reduced and a tax benefit of $736,000 was recognized in the quarter ended March 31, 1996. Management believes, although realization is not assured, that it is more likely than not that the Company will realize this tax benefit. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward periods are reduced. The Company has net operating loss and credit carryovers of approximately $64,986,000 and $3,075,000, respectively, which, if not utilized, will expire as follows: - ------------------------------------------------------------------------------- In thousands Net Operating Expiration Dates Losses Tax Credits - ------------------------------------------------------------------------------- 1997 $18 $412 1998 - 1,846 1999 21,359 504 2000 27,762 66 2001 5,260 - After 2001 10,587 247 ------ ----- Total $64,986 $3,075 ======= ====== - ------------------------------------------------------------------------------- Based on the Company's interpretation of Section 382 of the Internal Revenue Code, the reduction of the valuation allowance was calculated assuming a 50% ownership change, which could limit the utilization of the tax net operating loss and tax credit carryforwards in future periods starting at the time of the change. An ownership change could occur if changes in the Company's stock ownership exceeds 50% of the value of the Company's stock during any three year period. The amount of net operating loss carryforwards expected to be utilized resulting in the reduction of the valuation allowance of $5,239,000 assumes an ownership change will take place. The components of the net deferred tax assets (liabilities) at December 31, 1996 and 1995 are as follows: - --------------------------------------------------------------------------- Deferred Assets/(Liabilities) In thousands 1996 1995 - ---------------------------------------------------------------------------- Net loss carryovers $22,095 $22,740 Tax credit carryovers 3,075 3,153 Inventory write downs and capitalization 1,068 1,057 Pension 265 354 Postretirement 304 290 Compensation and benefits 196 169 Capitalized software development costs 266 277 Contingencies 37 21 Other deferred tax assets 46 18 Fixed asset depreciation (2,230) (2,179) Goodwill amortization 358 - Income reported in different periods for financial reporting and tax purposes - - Other deferred tax liabilities - - ------- ------ Net deferred tax asset 25,480 25,900 Less: Valuation allowance (20,241) (21,397) ------ ------- Total $5,239 $4,503 ====== ====== - --------------------------------------------------------------------------- NOTE 8. PENSION AND SAVINGS PLANS The Company currently has one pension plan which provides benefits based on years of service and an employee's compensation during the employment period. The calculation of pension benefits prior to 1993 was based on provisions of two previous pension plans. One plan provided pension benefits based on years of service and an employee's compensation during the employment period. The other plan provided benefits based on years of service only. The funding policy for the plans was to make the minimum annual contributions required by applicable regulations. Assets of the plans are generally invested in equities and fixed income instruments. The following table sets forth the funded status of the plans and amounts recognized in the Company's Consolidated Balance Sheets at December 31, 1996 and 1995.
- ------------------------------------------------------------------------------------------ In thousands 1996 1995 - ------------------------------------------------------------------------------------------ Actuarial present value of benefit obligation: Accumulated benefit obligation (including vested benefits of $12,313 and $10,499, respectively) $(13,391) $(11,473) ======== ======== Projected benefit obligation for service to date $(14,218) $(12,102) Plan assets at fair value 15,679 12,345 ------- ------- Plan assets more than projected benefit obligation 1,461 243 Unrecognized net gain from past experience (2,065) (1,064) Unrecognized net gain from prior service cost (254) (288) Unrecognized net asset at date of implementation of SFAS No. 87 amortized over 14 years (86) (115) ------- ------- Accrued liabilities for benefit plans at December 31 $(944) $(1,224) ======= ======= - ------------------------------------------------------------------------------------------
Net periodic pension cost for 1996, 1995, and 1994 included the following components:
- --------------------------------------------------------------------------------------- In thousands 1996 1995 1994 - --------------------------------------------------------------------------------------- Service cost-benefits earned during the period $1,081 $931 $982 Interest cost on projected benefit obligation 890 751 657 Actual (return) or loss on plan assets (2,634) (2,122) 106 Net amortization and deferral of other items 1,510 1,199 (919) ----- ----- ---- Net periodic pension cost $847 $759 $826 ==== ==== ==== - ---------------------------------------------------------------------------------------
Assumptions used in accounting for the plans were as follows: - -------------------------------------------------------------------------------- 1996 1995 1994 - -------------------------------------------------------------------------------- Discount rate 7.50% 7.50% 8.00% Rate of increase in future compensation levels 4.00% 4.00% 4.00% Expected long-term rate of return on assets 9.00% 9.00% 9.00% - -------------------------------------------------------------------------------- In addition to providing pension benefits, the Company contributes to a 401(k) plan, based on an employee's contributions. Participants can contribute from 2% to 10% of their salary as defined in the terms of the plan. The Company makes matching contributions equal to 25% of a participant's contributions. The Company's total expense for the matching portion to the 401(k) plan for 1996, 1995, and 1994 was $341,000, $278,000, and $261,000, respectively. NOTE 9. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The effect of SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," on income from continuing operations for 1996, 1995, and 1994 was an expense of $41,000, $311,000, and $289,000, respectively. The Company provides certain health care coverage (until age 65), which is subsidized by the retiree through insurance premiums paid to the Company, and life insurance benefits for substantially all of its retired employees. The Company's postretirement health care benefits are not currently funded. The following table sets forth the amounts of the accumulated postretirement benefit obligation at January 1, 1996, 1995, and 1994:
- ---------------------------------------------------------------------------------------- In thousands 1996 1995 1994 - ---------------------------------------------------------------------------------------- Retirees $137 $354 $398 Actives eligible to retire 415 653 628 Other active participants ineligible to retire 208 922 972 --- ----- ----- Total $760 $1,929 $1,998 ==== ====== ===== - ----------------------------------------------------------------------------------------
Net postretirement benefit cost for years ended December 31 consisted of the following components: - ------------------------------------------------------------------------------ In thousands 1996 1995 1994 - ------------------------------------------------------------------------------ Service cost $20 $75 $59 Interest cost 55 156 139 Actual return on assets - - - Amortization of the unrecognized transition obligation 91 91 91 Amortization of gain (125) (11) - Amortization of prior service cost - - - --- --- ---- Total $41 $311 $289 === ==== ==== - ------------------------------------------------------------------------------ The following table sets forth funded status of the plans and amounts recognized in the Company's Consolidated Balance Sheets at December 31, 1996 and 1995. - ------------------------------------------------------------------------------ In thousands 1996 1995 - ------------------------------------------------------------------------------ Plan assets at fair value $ - $ - Accumulated postretirement benefit obligation Retirees (137) (379) Fully eligible participants (415) (699) Other active participants (208) (996) Unrecognized prior service cost - - Unrecognized net gain (1,583) (320) Unrecognized transition obligation 1,449 1,540 ----- ----- Accrued liabilities for benefit plans at December 31 $(894) $(854) ===== ====== - ------------------------------------------------------------------------------ The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation as of January 1, 1996 was 10% for 1996, the trend rate decreasing each successive year until it reaches 5.25% in 2004 after which it remains constant. The discount rate used in determining the accumulated postretirement benefit obligation cost was 7.75%. A one percentage-point increase in the assumed health care cost trend rate for each year would increase the accumulated postretirement benefit obligation as of January 1, 1996 and net postretirement health care cost by approximately $4,000 and service cost plus interest cost by approximately $9,000. The postretirement benefit obligation is not funded and does not include any provisions for securities, settlement, curtailment, or special termination benefits. NOTE 10. PUBLIC STOCK OFFERING In August 1995, the Company completed a public offering of 3,000,000 shares of Common Stock (the "Offering") at $12.00 per share. Of the 3,000,000 shares of Common Stock, 2,000,000 were offered by PCI and 1,000,000 were newly issued shares by the Company. The net proceeds to the Company from the Offering were $11,200,000. A major portion of the proceeds were used to redeem all of the remaining 750,000 shares of Series A Preferred Stock ("Preferred Stock") held by PCI, pay accumulated dividends on the Preferred Stock to PCI, and pay the costs of the Offering. The remaining proceeds were used for general corporate and working capital purposes. Concurrent with the Offering, the Company declared a one-for-three reverse stock split of the Company's Common Stock. The net effect of the Offering and the reverse stock split was a decrease in the number of outstanding shares of Common Stock from approximately 21.3 million to 8.1 million. All references in the financial statements to number of shares, per share amounts and market prices of the Company's Common Stock for periods prior to the third quarter of 1995 have been retroactively restated to reflect the one-for-three reverse stock split. NOTE 11. STOCK-BASED COMPENSATION PLANS As of December 31, 1996, the Company had two basic stock-based compensation plans. The 1992 Stock Incentive Plan (the "Stock Incentive Plan"), provides for stock options to purchase shares of Common Stock which may be granted to officers, directors, and certain key employees as additional compensation. Under the 1992 Non-employee Directors Stock Incentive Plan (the "Directors Stock Incentive Plan"), each non-employee director was awarded 1,666 shares of the Company's Common Stock for each fiscal year the Company reports income. As of January 1996, the Directors Stock Incentive Plan was amended to award each non-employee director 2,500 shares of the Company's Common Stock under such circumstances. In 1996, each non-employee director was awarded 1,666 shares related to income earned by the Company for fiscal year 1995. The plans are composed of stock options, restricted stock, nonstatutory stock, and incentive stock. The Company's incentive plans are administered by the Compensation Committee of the Company's Board of Directors. . On April 30, 1996, the Company's stockholders approved a resolution to increase the number of shares of Common Stock under the Company's 1992 Stock Incentive Plan from 800,000 to 1,550,000. As of December 31, 1996, all options issued under the Company's 1982 Stock Incentive Plan have either been exercised or have expired. The Company has previously accepted notes relating to the non-qualified stock options exercised by officers and employees. These notes receivable relating to stock purchases amounted to $168,000, $176,000, and $182,000 at December 31, 1996, 1995, and 1994, respectively, and have been deducted from Stockholders' Equity. Options granted for years 1996 and 1995 have a maximum term of ten years and vest over a three year period. Options become exercisable in installments of 33% per year on each of the first through the third anniversaries of the grant date. All options granted through the Stock Incentive Plan are granted at an exercise price equal to the market price of the Company's Common Stock on the grant date. The Company applies APB No. 25 and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its fixed stock option plan other than the performance based option that is part of the plan for its directors. Common Stock has been issued by the Company to its directors for years that show positive net income. The compensation cost that has been charged against income for its director's performance-based stock was $66,000, $116,000, and $130,000 for 1996, 1995, and 1994, respectively. Information regarding stock options is summarized below:
- -------------------------------------------------------------------------------------------------------------- 1996 (1) 1995 (1) 1994 (1),(2) - -------------------------------------------------------------------------------------------------------------- Options outstanding, January 1; 449,241 $6.50 363,172 $3.68 451,377 $1.84 Granted 277,062 9.12 268,073 7.95 92,000 9.80 Exercised (52,617) 1.58 (157,044) 2.13 (146,558) 1.98 Terminated (14,162) 8.72 (24,960) 7.00 (33,647) 3.09 ------- ------- ------- Options outstanding, December 31; 659,524 7.95 449,241 6.50 363,172 3.68 ======= ======= ======= Options exercisable, December 31; 212,392 6.30 160,403 5.07 174,599 1.88 Per share ranges of options outstanding at December 31 $1.41-$11.75 $1.41-$11.75 $1.41-$10.59 Dates through which options outstanding at December 31, were exercisable 1/97-5/2006 1/96-11/2005 1/95-10/2004 (1) Fair value weighted-average exercise price at grant date. (2) 1994 has been restated to reflect the one-for-three reverse stock split. - --------------------------------------------------------------------------------------------------------------
The following table summarizes information concerning currently outstanding and exercisable options at December 31, 1996:
- ------------------------------------------------------------------------------------------------------------ Options Outstanding Options Exercisable ------------------- ------------------- Range of Number Weighted-Average Number Exercise Outstanding Remaining Weighted-Average Exercisable Weighted-Average Prices at 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price - ------------------------------------------------------------------------------------------------------------ $1.41 to 3.00 70,012 5.8 $1.64 70,012 $1.64 5.73 to 7.77 252,198 8.5 7.39 85,563 7.38 8.82 to 9.38 256,835 9.1 9.34 9,113 8.98 10.50 to 11.75 80,479 7.5 10.75 47,704 10.68 ------ ------ 1.41 to 11.75 659,524 8.3 7.95 212,392 6.30 ======= ======= - ------------------------------------------------------------------------------------------------------------
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: - ------------------------------------------------------------------------------ 1996 1995 - ------------------------------------------------------------------------------ Risk-free interest rate 6.18% 6.90% Expected life 3.82 3.02 Expected volatility 90% 101% Expected dividends None None - ------------------------------------------------------------------------------ If compensation cost for the Company's Stock Incentive Plans had been determined based on the fair value at the grant dates for awards under the plan, consistent with the method of FASB Statement No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below: - ------------------------------------------------------------------------------ In thousands except per share amounts 1996 1995 - ------------------------------------------------------------------------------ Net income: As reported $1,809 $9,519 Compensation expense 218 Pro forma $1,591 $9,519 Earnings per common share: As reported $0.21 - Pro forma $0.19 - Primary earnings per share: As reported - $1.24 Pro forma - $1.24 Fully diluted earnings per share: As reported - $1.20 Pro forma - $1.20 - ------------------------------------------------------------------------------ The Company would not have recognized any compensation expense for 1995 because the 1995 options were not vested until 1996. NOTE 12. SEGMENT INFORMATION During 1996, 1995, and 1994, substantially all of the Company's sales, net income, and identifiable net assets were attributable to the telecommunications industry. The Company had sales in excess of 10% of net sales to three customers as follows: - ------------------------------------------------------------------------------ In thousands 1996 1995 1994 - ------------------------------------------------------------------------------ Sales: ALLTEL Supply, Inc. $19,471 $20,575 $12,370 Graybar Electric Company, Inc. 31,719 30,857 31,298 Sprint/North Supply , Inc. 22,433 18,357 16,305 Percentage of net sales: ALLTEL Supply, Inc. 19% 22% 16% Graybar Electric Company, Inc. 31% 33% 41% Sprint/North Supply , Inc. 22% 19% 21% - ------------------------------------------------------------------------------ ALLTEL Supply, Inc., a subsidiary of ALLTEL Corporation, was a shareholder of the Company until 1996. As of December 31, 1995 and 1994, ALLTEL had accounts receivable with the Company of $1,415,000 and $588,000, respectively. NOTE 13. COMMITMENTS AND CONTINGENT LIABILITIES The Company's facilities are subject to a variety of federal, state, and local environmental protection laws and regulations, including provisions relating to the discharge of materials into the environment. The cost of compliance with such laws and regulations has not had a material adverse effect upon the Company's capital expenditures, earnings or competitive position, and it is not anticipated to have a material adverse effect in the future. In 1988, the Company voluntarily discontinued its use of a concrete underground hydraulic oil and chlorinated solvent storage tank. In conjunction therewith, nearby soil and groundwater contamination was noted. As a result, the Company developed a plan of remediation that was approved by the Virginia Water Control Board in January 1989. The plan was later amended and approved by the Virginia Department of Environmental Quality, after which the Company commenced the remediation efforts required thereunder. In 1993, the Company provided a $45,000 reserve for the estimated cost to implement the remediation plan. In October 1994, the Company installed all the required equipment in accordance with the remediation plan and started the process of pumping hydraulic oil residue from the underground water. The oil is deposited into approved containers and taken to a hazardous waste site in accordance with the corrective action plan. As of December 31, 1996, the Company has incurred costs of approximately $37,000 and expects the pumping process to be completed by early 1998. NOTE 14. QUARTERLY FINANCIAL DATA (UNAUDITED) Net earnings per share for quarters prior to the third quarter of 1995 have been restated to reflect the one-for-three reverse stock split.
- ------------------------------------------------------------------------------------------------------------ First Second Third Fourth In thousands except per share amounts Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------------------------------------ 1996 Sales $22,048 $23,562 $28,874 $27,745 Gross profit 7,483 8,147 10,861 11,327 Interest expense 227 499 483 417 Goodwill amortization 91 868 855 860 Net income 1,185 (1,628) 908 1,344 Net earnings per common share: 0.14 (0.19) 0.11 0.16 - ------------------------------------------------------------------------------------------------------------ 1995 Sales $22,316 $25,442 $25,235 $21,809 Gross profit 7,124 8,254 8,054 7,343 Interest expense 273 282 242 199 Goodwill amortization 23 - - - Net income 1,230 6,349 1,804 486 Dividends on preferred stock 143 142 65 - Net earnings per common share: Primary 0.15 0.85 0.22 0.06 - ------------------------------------------------------------------------------------------------------------
Previously reported quarterly information has been revised to reflect certain reclassifications. These reclassifications had no effect on previously reported consolidated net income. For all quarters of 1996, the net earnings per common and equivalent shares were antidilutive. In the first quarter of 1996, the Company acquired Aurora and KVT by restructuring its indebtedness to Fleet and borrowing additional funds (see Note 2 and Note 6). The major impact on operations was an increase of interest expense for the last three quarters of 1996 of $949,000 and recognition of goodwill amortization of $2,651,000. All costs associated with the acquisitions were offset by the increase in revenues and income (excluding acquisition and corporate allocation costs) produced by the new subsidiaries of $9,671,000 and $4,342,000, respectively. Also in the first quarter of 1996, the Company reevaluated the future utilization of its deferred tax assets for future periods. Based on the reevaluation of the realizability of the deferred tax assets, the valuation allowance was reduced and a tax benefit of $736,000 was recognized (see Note 7). The Company recognizes costs based on estimates throughout the fiscal year relating to inventory. The results of the physical inventory and the fiscal year-end close reflected a favorable adjustment with respect to such estimates, resulting in approximately $289,000 of additional income, which is reflected in the fourth quarter of 1996. In the second quarter of 1995, the Company re-evaluated the future utilization of its deferred tax assets and decided it was more likely than not that the Company will realize a tax benefit. Based on the re-evaluation of the realizability of the deferred tax assets, the valuation allowance was reduced and a tax benefit of $4,503,000 was recognized (see Note 7). In the third quarter of 1995, the Company completed a public stock offering with a concurrent one-for-three reverse stock split (see Note 10). For the fourth quarter of 1995, net earnings per common share was antidilutive for the period. Both fully diluted and primary earnings per share were $0.06 for the fourth quarter of 1995. Certain interim inventory estimates are recognized throughout the fiscal year relating to shrinkage, obsolescence, and product mix. The results of the physical inventory and the fiscal year-end close reflected a favorable adjustment with respect to such estimates, resulting in approximately $295,000 of additional income, which is reflected in the fourth quarter of 1995.
- ----------------------------------------------------------------------------------------------------------------- FIVE YEAR FINANCIAL DATA Selected Consolidated Statements of Operations Data - ----------------------------------------------------------------------------------------------------------------- In thousands except per share amounts 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------------------------------------------- Net sales: As reported (1) $102,229 $94,802 $77,145 $69,099 $70,897 Current product lines (2) 102,229 94,802 77,145 69,099 64,423 Income before income taxes and extraordinary item 1,291 5,535 3,730 2,545 897 Net income 1,809 9,869 3,225 2,416 884 Earnings per common share and common equivalent share: Primary: (3) 0.21 1.24 0.37 0.35 0.13 - ----------------------------------------------------------------------------------------------------------------- (1) Prior years have been reclassified to conform to 1996 presentation. (2) Excludes sales of the electromechanical product line. (3) Earnings per share prior to 1995 have been restated to reflect the one- for-three reverse stock split. 1996 is anti-dilutive. - ----------------------------------------------------------------------------------------------------------------- Selected Consolidated Balance Sheet Data - ----------------------------------------------------------------------------------------------------------------- In thousands 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------------------------------------------- Current assets $30,767 $33,740 $26,199 $28,301 $24,389 Total assets 74,352 56,692 42,260 44,803 41,747 Current liabilities 20,159 15,469 14,568 13,358 11,985 Long-term debt and other long-term liabilities 15,629 6,929 6,649 20,695 22,251 Stockholders' equity 38,564 34,294 21,043 10,750 7,511 - -----------------------------------------------------------------------------------------------------------------
RELATED STOCKHOLDERS MATTERS Quarterly Common Stock Information The following table sets forth, for the periods shown, the high and low quarterly closing sales prices in the over-the-counter market for the Company's Common Stock, as reported by the National Association of Security Dealers Automated Quotation System ("Nasdaq"). The Company's Common Stock is traded in the National Market System of the Nasdaq Stock Market under the Company's symbol, CMDL. The following common stock information has been restated to reflect the one-for-three reverse stock split.
- ----------------------------------------------------------------------------------------------------------------- 1996 1995 Fiscal Quarters High Low High Low - ----------------------------------------------------------------------------------------------------------------- First Quarter 11 3/8 8 - 9 - 6 3/4 Second Quarter 12 1/2 9 1/4 15 3/8 7 7/8 Third Quarter 9 - 6 - 14 13/16 11 1/4 Fourth Quarter 7 7/8 5 7/8 13 7/8 7 3/4 - -----------------------------------------------------------------------------------------------------------------
The Company has never paid a dividend on its Common Stock and its Board of Directors currently intends to continue for the foreseeable future the policy of not paying cash dividends on Common Stock. The Company is prohibited from paying dividends due to the Loan Agreement with Fleet except on Series A Preferred Stock (see Note 6 to Consolidated Financial Statements). The Company's Common Stock trades on The Nasdaq Stock Market under the symbol: CMDL. OFFICERS William G. Mustain, Chairman, President and Chief Executive Officer Mr. Mustain is Chairman, President and Chief Executive Officer of the Company. He joined the Company as Vice President in June 1987 and assumed his current position in May 1989. He has served as a director of the Company since 1989 and is a member of the Nominating Committee of the Board of Directors. William C. Grover, Senior Vice President, Sales and Marketing Mr. Grover was elected Senior Vice President in September, 1995 and is responsible for Sales and Marketing. He joined the Company as President of Comdial Enterprise Systems, Inc., a subsidiary of the Company. Wayne R. Wilver, Senior Vice President, Chief Financial Officer, Treasurer, and Secretary Mr. Wilver was elected Senior Vice President in May, 1989. He joined the Company as Vice President, Chief Financial Officer, Treasurer, and Secretary in July, 1986. Joe D. Ford, Vice President, Human Resources Mr. Ford was elected Vice President in May 1995 and is responsible for Human Resources. Between 1982 and May 1995, he served as the Company's Director of Human Resources. Keith J. Johnstone, Vice President, Manufacturing Mr. Johnstone was elected Vice President in May, 1990 and is responsible for Manufacturing Operations. Between 1980, when he joined the Company, and 1990, Mr. Johnstone held a number of management positions, including Director of Materials and Director of Customer Service. Lawrence K. Tate, Vice President, Quality Mr. Tate was elected Vice President in November 1982 and is responsible for Quality. Between 1969 and 1982, he held various management positions, including Vice President-Manufacturing Operations. Ove Villadsen, Vice President, Engineering Mr. Villadsen was elected Vice President in May, 1989 and is responsible for the Company's product design and engineering activities. He joined Comdial Business Communications Corporation (CBCC), a subsidiary of the Company, in November, 1982, and between 1982 and 1989 served as Vice President of CBCC. BOARD MEMBERS William G. Mustain, Chairman - See previous page. A.M. Gleason, Vice Chairman, President of the Port of Portland Mr. Gleason retired in May 1995 as Vice Chairman and a director of PacifiCorp, a diversified public utility. He currently serves as President of the Port of Portland. Mr. Gleason has served as a director of the Company since 1981 and as Vice Chairman of the Board of Directors since April 1995 and is a member of the Compensation and Nominating Committees of the Board of Directors. William E. Porter, President of Interactive Consumer, Inc. Mr. Porter is President, Interactive Consumer, Inc. Between December 1995 and January 1997, Mr. Porter has served in several executive positions with Trigon Blue Cross Blue Shield (formerly Blue Cross Blue Shield of Virginia). Mr. Mr. Porter has served as a director of the Company since July, 1994 and is a member of the Compensation and Nominating Committees of the Board of Directors. Michael C. Henderson, President and Chief Executive Officer of PacifiCorp Holdings, Inc. Mr. Henderson is President and Chief Executive Officer of PacifiCorp Holdings, Inc., a PacifiCorp subsidiary which owns Pacific Telecom, Inc., PacifiCorp Generation Company ("P.G."), Powercor, and PacifiCorp Financial Services, Inc. ("PFS"). He is also President and Chief Executive Officer of PFS, a diversified financial services company. Mr. Henderson serves as Chairman of the Board of Albina Community Bancorp. Mr. Henderson has served as a director of the Company since 1995 and is a member of the Audit Committee. Dianne C. Walker, Independent Consultant Ms. Walker is an independent consultant. Prior to January 1995, she was a consultant to Bear Stearns & Co. Inc., an investment banking firm. Ms. Walker has served as a director of the Company since 1986 and is a member of the Audit and Pension Committees of the Board of Directors. John W. Rosenblum, Dean of the Jepson School of Leadership Studies at the University of Richmond Mr. Rosenblum is Dean of the Jepson School of Leadership Studies at the University of Richmond. Prior to serving at the University of Richmond, Mr. Rosenblum was a Tayloe Murphy Professor of Business Administration at the Darden Graduate School of Business Administration at the University of Virginia. He is also a director of Chesapeake Corporation, Cadmus Communications Corp., T. Rowe Price Associates, and Cone Mills Corporation. Mr. Rosenblum has served as a director of the Company since 1992 and is a member of the Audit, Compensation, and Pension Committees of the Board of Directors. Transfer Agent and Registrar Form 10-K ChaseMellon Shareholder Services On written request, Comdial Corporation New York, New York will furnish to stockholders a copy of its Form 10-K for the most recent year. Independent Auditors Address your request to Linda Falconer, Deloitte & Touche LLP Comdial Corporation, P.O. Box 7266, Richmond, Virginia Charlottesville, Virginia 22906-7266 Investor Relations World Wide Web Dick Bucci - Director, http://www.comdial.com Investor Relations Phone: (804) 978-2525 Fax: (804) 978-2438 E-Mail: dbucci@comdial.com EX-23 4 INDEPENDENT AUDITORS' REPORT EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 33-53562 of Comdial Corporation on Form S-8 of our report dated January 30, 1997, appearing in this Annual Report on Form 10-K of Comdial Corporation for the year ended December 31, 1996. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP Richmond, Virginia March 24, 1997 EX-24 5 POWER OF ATTORNEY EXHIBIT 24 POWER OF ATTORNEY I hereby appoint William G. Mustain and Wayne R. Wilver, or either of them, my true and lawful attorneys-in-fact, each with full power of substitution, to Comdial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 on my behalf in my capacity as a director of Comdial Corporation, and to sign on my behalf in such capacity any and all amendments to such Annual Report which either such attorneys-in-fact, or their respective substitutes, may deem appropriate or necessary. Dated: 02/4/97 /s/ A. M. Gleason A. M. Gleason EXHIBIT 24 POWER OF ATTORNEY I hereby appoint William G. Mustain and Wayne R. Wilver, or either of them, my true and lawful attorneys-in-fact, each with full power of substitution, to Comdial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 on my behalf in my capacity as a director of Comdial Corporation, and to sign on my behalf in such capacity any and all amendments to such Annual Report which either such attorneys-in-fact, or their respective substitutes, may deem appropriate or necessary. Dated: 02/4/97 /s/ Michael C. Henderson Michael C. Henderson EXHIBIT 24 POWER OF ATTORNEY I hereby appoint William G. Mustain and Wayne R. Wilver, or either of them, my true and lawful attorneys-in-fact, each with full power of substitution, to Comdial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 on my behalf in my capacity as a director of Comdial Corporation, and to sign on my behalf in such capacity any and all amendments to such Annual Report which either such attorneys-in-fact, or their respective substitutes, may deem appropriate or necessary. Dated: 02/4/97 /s/ William E. Porter William E. Porter EXHIBIT 24 POWER OF ATTORNEY I hereby appoint William G. Mustain and Wayne R. Wilver, or either of them, my true and lawful attorneys-in-fact, each with full power of substitution, to Comdial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 on my behalf in my capacity as a director of Comdial Corporation, and to sign on my behalf in such capacity any and all amendments to such Annual Report which either such attorneys-in-fact, or their respective substitutes, may deem appropriate or necessary. Dated: 02/4/97 /s/ John W. Rosenblum John W. Rosenblum EXHIBIT 24 POWER OF ATTORNEY I hereby appoint William G. Mustain and Wayne R. Wilver, or either of them, my true and lawful attorneys-in-fact, each with full power of substitution, to Comdial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 on my behalf in my capacity as a director of Comdial Corporation, and to sign on my behalf in such capacity any and all amendments to such Annual Report which either such attorneys-in-fact, or their respective substitutes, may deem appropriate or necessary. Dated: 02/4/97 /s/ Dianne C. Walker Dianne C. Walker EX-27 6 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1996 DEC-31-1996 180 0 9,660 89 19,586 30,767 42,870 27,553 74,352 20,159 17,056 0 0 87 38,477 74,352 100,959 102,229 64,311 64,411 34,904 (3) 1,626 1,291 (518) 1,809 0 0 0 1,809 0.21 0.21
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