-----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, JtVFnAzo/rR2PnyLm1rYbRCWqra7fFftVyUoPO3FGJehKB8d8KEQdkaBa2dBYc+B ekaG5qhdVr9E1pwE8QNCjw== 0000916641-99-000220.txt : 19990325 0000916641-99-000220.hdr.sgml : 19990325 ACCESSION NUMBER: 0000916641-99-000220 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990324 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMDIAL CORP CENTRAL INDEX KEY: 0000230131 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 942443673 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-09023 FILM NUMBER: 99571727 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 COMDIAL CORPORATION 10-K405 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, 1998 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 9, 1999, was approximately $58,600,000 (See Item 5). The number of shares of Common Stock outstanding as of MARCH 9, 1999, was 8,860,383. DOCUMENTS INCORPORATED BY REFERENCE: Comdial's 1998 Annual Report to the Stockholders is incorporated by reference under Part II and portions of Comdial's Definitive Proxy Statement for its 1999 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1998, are incorporated by reference under Part III of this Form 10K. - ---------------------------------------------------------------- TABLE OF CONTENTS - ---------------------------------------------------------------- PART I Item 1. Business 4 (a) General Development of Business 4 Safe Harbor Statement 5 Industry Background 5 Strategy 10 (b) Financial Information About Industry Segment 12 Product Sales Information 12 (c) Narrative Description of Business 12 Products 12 Business Segment Products 13 Digital Systems 13 Solutions and Software 14 Analog and Other 17 Sales and Marketing 17 Engineering, Research and Development 19 Manufacturing and Quality Control 20 Competition 21 Intellectual Property 21 Year 2000 Issue 22 Employees 23 Item 2. Properties 23 Item 3. Legal Proceedings 24 Item 4. Submission of Matters to a Vote of Security Holders 24 - ---------------------------------------------------------------- PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 24 Item 6. Selected Financial Data 24 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 24 Item 8. Financial Statements and Supplementary Data 25 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 25 - ---------------------------------------------------------------- TABLE OF CONTENTS (Cont'd.) - ---------------------------------------------------------------- PART III Item 10. Directors and Executive Officers of the Registrant 25 Item 11. Executive Compensation 25 Item 12. Security Ownership of Certain Beneficial Owners and Management 25 Item 13. Certain Relationships and Related Transactions 25 - ---------------------------------------------------------------- PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 26 PART I ITEM 1. BUSINESS (a) GENERAL DEVELOPMENT OF BUSINESS Comdial Corporation (together with its subsidiaries, "Comdial") is a Delaware corporation based in Charlottesville, Virginia. Comdial was originally incorporated in Oregon in 1977 and was reincorporated in Delaware in 1982 when it acquired General Dynamics Telephone Systems Center, Inc. (formerly known as Stromberg-Carlson Telephone Systems, Inc.) a wholly-owned subsidiary of General Dynamics Corporation. Comdial's Common Stock is traded in the National Market(R) of the National Association of Security Dealers Automated Quotation System ("Nasdaq(R)") under Comdial's symbol, CMDL. Comdial creates integrated digital communications solutions that incorporate convergent voice and data technologies. These technologies include Comdial's traditional strength in voice switching augmented by acquisitions and partnerships in voice processing, on-site wireless communications, voice-over the Internet, and computer-telephone integration ("CTI"). Building on its base business of advanced digital switching systems for small to mid-sized businesses, Comdial is actively engaged in creating integrated voice/data solutions for businesses with special needs. The Company plans to grow by continuing to ably serve its traditional customer base while capitalizing on growth opportunities for integrated products for specific vertical market applications. In 1996, Comdial acquired Aurora Systems, Inc. ("Aurora") and Key Voice Technologies, Inc. ("KVT"), two companies involved in computer software applications and solutions which became wholly-owned subsidiaries of Comdial. Based in Sarasota, Florida, KVT develops, assembles, markets, and sells voice processing systems and related products for business applications. Aurora, originally based in Acton, Massachusetts, was a leading provider of off-the-shelf computer software products. In 1997, Aurora sold its right, title and interest in the FastCall product, Aurora's primary asset, to Spanlink Communications, Inc. (see Note 2 to the Consolidated Financial Statements). In 1998, Comdial acquired Array Telecom Inc. ("Array"). The principal asset purchased was the intellectual property associated with VOIPgate software, an Internet Protocol ("IP") based telephony software platform. With its acquisitions for the past several years, Comdial has become a leading provider of personal computer ("PC")-based voice processing systems and telephony gateways for routing voice and fax communications over the private intranet and the public internet. Comdial's products accommodate businesses that require up to approximately 500 ports. A port could be occupied by a telephone, facsimile machine, modem, or similar device. Comdial believes that it is a leading supplier to this market, with an installed base of approximately 300,000 telephone systems and 3.3 million telephones. Comdial's growth has been principally as a result of sales of digital telephone systems introduced by Comdial since 1992 and solutions and software products introduced since 1993. Comdial's application software encompasses a wide range of products that enable end users to perform telephony functions from desktop PCs or PCs served by a local area network ("LAN"). "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Some of the statements included or incorporated by reference into Comdial's Securities and Exchange Commission filings and shareholder communications are forward-looking statements that are subject to risks and uncertainties, including, but not limited to, the impact of competitive products, product demand and market acceptance, reliance on key strategic alliances, fluctuations in operating results, delays in development of highly complex products, and other risks and uncertainties detailed from time to time in Comdial's filings. These risks could cause Comdial's actual results for 1999 and beyond to differ materially from those expressed in any forward-looking statement made by, or on behalf of, Comdial. INDUSTRY BACKGROUND Comdial's primary business and product offerings fall into three categories: (1) voice switching systems for small to mid-size businesses, (2) voice processing systems, and (3) integrated voice/data solutions that incorporate voice switching and processing products with advanced computer technologies and/or internet applications. All of these businesses are highly competitive and are influenced by trends and events in technology, regulation, and the general economy. VOICE SWITCHING SYSTEMS Comdial produces digital voice switching systems that are key/hybrid systems and are the foundation of Comdial's Digital System business segment. Historically, voice switching systems have been divided between key/hybrid systems and Private Branch Exchanges ("PBXs"). Key/hybrid systems are typically purchased by small to medium-sized businesses of three to 100 employees, while larger businesses typically purchase PBXs. However, advances in the designs of key/hybrid systems and PBXs in recent years has blurred the distinctions between them. As key/hybrid systems continue to grow to accommodate more users with increasing functionality, they have begun to encroach on the domain of the traditional PBXs. Voice switching systems are measured in terms of "ports." A port is an access point on the switch to an outside line or terminal device of some type. Examples of terminal devices include telephone instruments, facsimile machines, modems, and voice mail ports. Examples of lines include standard business lines as well as higher speed integrated services digital network (ISDN), digital transmission link (T-1), and others. With the proliferation of modems, facsimile machines, and voice mail devices, the demand for greater port capacity for key/hybrid systems has been growing. A basic business telephone system consists of (a) a central telephone switching unit (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. The domestic market for key/hybrid switching systems, as projected by a leading industry consulting firm, is expected to grow by eight percent from 1998 to 1999. Comdial ranks among the top 25 percent of industry participants in this marketing segment. Significant trends in this marketing segment are (1) the continuing growth of digital systems compared with the older analog systems, (2) the growing importance of larger systems (over 40 occupied station ports) relative to smaller systems, and (3) the trend toward "open" systems that comply with industry hardware and software standards. Open systems is a term used to describe the ability to attach third party devices and software to an existing system. Before the development of digital telephone systems, electronic telephone systems were originally "analog." Voice was transmitted in a continuous wave form that is "analogous" to the original voice signal. Analog voice and data transmission is often impaired by transmission degradation and susceptibility to ambient noises. In 1992, Comdial began a transition from proprietary analog systems to larger systems employing digital transmission and offering computer integration capability via an open applications interface ("OAI"). That year, Comdial introduced the Digital Expandable ("DXP") switch. With a capacity of 224 ports, this was the largest switching product Comdial had ever produced. In 1994, the capacity of the DXP was expanded to 560 ports, making it competitive with smaller PBXs and providing access to larger businesses and organizations and the resellers that serve these larger businesses. CTI connectivity was provided via proprietary software and development tools that complied with the de facto industry standard of the time, Telephony Server Application Programming Interface ("TSAPI"). Responding to growing market interest in CTI, in 1996 and 1997 Comdial introduced connectivity software that could integrate with a broader range of network operating systems. In 1997, Comdial introduced Impact FX, a 96 port switch that allowed software applications like voice processing to be enabled electronically, rather than the conventional industry approach of installing costly peripheral equipment on site. In 1998, the Impact FX was substantially enhanced to address a broader range of applications (40 to 560 ports) and the design architecture provided a more cost-effective approach to expansion needs. New software applications were added to provide even greater functionality. Since 1992, Comdial has discontinued many of its vintage analog systems - a trend that will continue in 1999. In 1992, approximately 20 percent of Comdial's sales were attributable to digital systems. In 1998, digital systems comprised 62 percent of Comdial's sales and analog systems accounted for less than seven percent of sales. Another innovation is on-site wireless communications. These can be single cell or multi-cell and vary widely in terms of the technology used, architecture, and range provided. In 1994, Comdial introduced its first wireless device, the Tracker, an on-site call completion system, followed by two-way wireless devices, Scout and Air Impact. The cost differential between wired and wireless telephones is declining and the functionality of the wireless devices closely mimics full-featured desk phones. Voice switching systems is a mature business. The size of the market in any given year is dependent on many factors, including employment growth, the rate of new business formations and expansions, obsolescence, and new entrants. During the 1990s, business conditions for switching systems have been generally good, characterized by annual growth in excess of the general economy, few new entrants, and moderate price decreases driven by lower material costs and advances in technology. VOICE PROCESSING The ability to digitize analog voice signals gave rise to the voice processing business in the 1980s. Early systems were mainframe-based, very expensive to purchase, difficult to use, and limited in their capabilities. Early adopters were primarily very large companies and organizations. In the 1990s, costs dropped sharply, storage capacity and scalability improved, and the products became more user friendly and versatile. The advent of powerful personal computers provided an alternative platform to mainframe computers and made voice processing affordable for even small businesses. Originally, the primary voice processing feature was "voice mail." Callers could be automatically routed to the desired party and record detailed messages if the called party was not immediately available. This alleviated organizations from the cost of extensive operator and secretarial staff to answer calls and take messages. Now, voice processing is much more robust. Advances such as integrated voice response, voice/speech recognition, notification via wireless devices, PC-based administration, "follow me" features, and unified messaging have raised the popularity of voice processing. Voice processing is almost ubiquitous in larger organizations. But even now, less than half of smaller businesses have a modern voice processing system, which presents an opportunity for continued sales growth. Comdial's voice processing products are part of its Solutions and Software business segment. Comdial entered the voice processing business in 1990 via an original equipment manufacturing ("OEM") agreement with a leading producer of these products. Seeking more design control and increased profitability, in 1996 Comdial acquired KVT, a small private producer of small to mid-sized voice processing products. The association has worked well for Comdial. Sales have grown sharply and overall gross margins have improved. Products are sold to both resellers of Comdial switching products and to resellers of competitive switching products. Special integration features have been designed for a variety of popular switching systems. After a very rapid growth spurt in the early 1990s, the voice processing industry is entering a mature phase. The domestic market for voice processing products, as projected by a leading industry consulting firm, is expected to grow by approximately 25 percent from 1998 to 1999. Voice processing systems are also measured by "ports" but the term has a different meaning than with telephone systems. Basically, it refers to the number of voice processing calls that can be handled simultaneously. A 12-port system can process 12 simultaneous calls, while a four port system can handle only four calls at one time. KVT products can provide up to 64 ports of voice processing capacity. Most Comdial generated sales are in the two to eight port range, which corresponds with the small to mid-size businesses which are Comdial's primary markets. Industry shipments are measured both in terms of systems and ports. Among PC-based systems, Comdial believes that KVT is an industry leader, ranking second in terms of systems shipped. INTEGRATED VOICE/DATA SOLUTIONS One of Comdial's Solutions and Software segment strengths is its design control over three core technologies - voice switching, voice processing, and IP telephony. Comdial seeks to accelerate its sales and profit growth by marketing integrated "solutions" which incorporate two or more of these technologies via computer integrated software. The integration can be completed by resellers, who have the technical skills to accomplish voice/data integration at the user level, or by Comdial itself. A typical solution product is an intelligent call center. With outbound call centers, predictive dialing devices automatically generate outbound calls from the user's database. Answered calls are instantly connected to an available agent (based on pre-determined criteria), a data screen is "popped" providing a script, contract, or other appropriate record, and the call is promptly processed with virtually no idle time due to wrong numbers, unanswered calls, and misplaced paper files. With inbound calls, Comdial's QuickQ ACD software intelligently answers and routes the call to the appropriate agent, based on user-defined criteria, such as availability and language skills. Appropriate records are automatically produced on workstations, based on the identified calling number or user keypad entries. Additionally, Comdial has designed specialized solutions for certain vertical markets. The Avalon assisted living system offers integration with third party alarm devices, such that elderly residents experiencing an emergency condition can activate the device in their residence or on their person, sending a message to wireless devices worn by on-site caregivers. The size of the market for integrated solutions is unknown, but is believed to be large because such solutions result in lower operating costs and/or greatly improved customer service. Array, a subsidiary of Comdial, is a producer of special software that converts analog voice signals to IP data packets and routes the call over the public Internet or private networks. The advantages of IP telephony are much lower transmission costs and better utilization of network bandwidth. Array's products are sold to new generation carriers, such as prepaid calling card companies, and to private enterprises for off-loading intracompany voice and fax transmissions to reduce costs. New products, beginning with unified messaging (PC access to multimedia messages) will be introduced in 1999, with further integration opportunities to come. STRATEGY Comdial seeks to expand sales and profits at acceptable risk levels by: (1) maintaining or improving its market position in horizontal markets, (2) developing integrated solutions for fast-growing vertical markets, (3) expanding its channels of distribution and methods of product delivery to both markets, and (4) developing marketing solutions through channels best suited to maximize sales and customer satisfaction. PRODUCT OFFERINGS Comdial currently offers digital and analog business telephone systems, wired and wireless terminals, computer and telephony software applications, voice processing systems, IP gateways, and other products along with a variety of product enhancements. Comdial believes that it offers a wider range of products than most of its competitors and that this variety allows dealers to meet differing price and feature requirements. Comdial strives to introduce new products to meet the needs of a changing market. PRODUCT DEVELOPMENT Comdial's recent sales and profit growth are largely attributable to customer acceptance of its Digital Systems and Solutions and Software products. Comdial's system products are sold under the IMPACT AND IMPRESSION brands that serve customer applications from 24 to 560 ports. In 1998, Comdial introduced important enhancements such as IP telephony, which is an advanced call routing technology that automatically directs long distance voice and data traffic over the IP network. Also in 1998, Comdial introduced the Avalon-communications and security system for assisted living communities, Windows NT-based voice messaging products and the Impact FX that is scalable up to 544 ports. Comdial intends to continue to add value to its core digital switching products. Comdial believes that in order to maximize profitability in the emerging markets for integrated solutions, it must continue to develop and market higher-value applications for software and switching platforms. Comdial's IMPACT and IMPACT FXS SERIES digital switching platforms will form the basis for these solutions, augmented by software developed by Comdial's subsidiaries, (Array, Comdial Enterprises Systems, Inc., and KVT), and applications software from third parties. Comdial also intends to continue to leverage the engineering and marketing skills of KVT to produce powerful, easy-to-use voice processing products that are tightly integrated with its switching products. PRODUCT DISTRIBUTION Comdial focuses its distribution of products primarily through independent dealers that resell Comdial's products to end users. These dealers enable Comdial to achieve broad geographic coverage in a cost effective manner. Comdial's primary means of distribution is through a key group of wholesale supply houses, which stock Comdial's products and resell to independent dealers. Comdial's strategy of selling through wholesale supply houses enables it to minimize receivables exposure, reduce sales administration expenses and reduce inventory costs. Most importantly, the use of supply houses allows Comdial to extend product distribution to virtually any market in the United States ("U.S.") and Canada. Wholesale supply houses benefit from their relationship with Comdial by earning a margin on the sale of Comdial's products and on the sale of related products such as cable, connectors, and installation tools. Dealers have the benefits of competitive sourcing and reduced inventory carrying costs. In addition to supply house distribution, Comdial also markets its products directly to national accounts, third party system developers, OEM customers, and the federal government via its Government Services Administration ("GSA") schedule contract. Products produced by KVT are sold both through the supply house channel and direct to dealers. Array products are sold to private carriers, both in the U.S. and abroad. STRATEGIC ALLIANCES Comdial has developed strategic alliances with other companies in order to build on the strengths of these companies and bring the best possible products to the market at a lower cost. Examples include the Scout wireless key system telephone (Uniden America Corporation), the VVP and Small Office voice processing systems (Rhetorex and Dialogic), and the production of a particular family of products for Harris Corporation ("Harris"). (b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENT During the fiscal years ended December 31, 1998, 1997 and 1996, substantially all of Comdial's sales, net income, and identifiable net assets were attributable to the telecommunications industry. Additional information is incorporated by reference to Comdial's 1998 Annual Report to Stockholders. PRODUCT SALES INFORMATION The following table presents certain relevant information concerning Comdial's business segments for the periods indicated: Years Ended December 31, (In millions) 1998 1997 1996 BUSINESS SEGMENT SALES: Digital Systems $80,452 $70,181 $56,725 Solutions and Software 36,194 31,625 23,453 Analog and Other 12,331 16,755 22,004 ------ ------ ------ Net Sales $128,977 $118,561 $102,182 ======== ======== ======== (c) NARRATIVE DESCRIPTION OF BUSINESS PRODUCTS Comdial offers a variety of telephone systems, including Digital Systems, Solutions and Software applications, and Analog and Other products. For further clarification of Comdial's business segments see Note 12 to the Consolidated Financial Statements. Comdial's telecommunications products meet the requirements of three agencies: (1) the Federal Communications Commission ("FCC"), (2) an independent laboratory approved by the Occupational Safety and Health Act Commission ("OSHA") to produce safety standards, and (3) a nationally recognized test laboratory that performs product evaluations. Selected products are also registered with the Canadian government's Industry Canadian and are Canadian safety certified. Comdial has or is in the process of homologating certain of its products for use in certain other countries. BUSINESS SEGMENT PRODUCTS Digital Systems IMPACT DXP SYSTEM, originally introduced in 1992, has had several major upgrades since then. There are various IMPACT DXP Systems: IMPACT 24, IMPACT 48, IMPACT 224, AND IMPACT 560. The numeric suffix denotes the maximum number of ports served by the base switch, without need for any product displacement. For example, the IMPACT 24 begins at 12 ports and can be expanded to 24 ports. To go beyond 24 ports, the base unit must be replaced with the IMPACT 48 base unit. The switching platform for the Impact 224, when unassociated with terminals, is identified as the DXP. The switching platform for the IMPACT 560, when unassociated with terminals, is identified as the DXP PLUS. IMPACT FX Computer Telephony Applications Server ("FX") is Comdial's most recent switching platform and was introduced in 1997. The FX is expandable to 560 ports. The FX differs from Comdial's other switching platforms in that it is more "open" and more software-intensive. Voice processing, for example, is available in the core software, whereas it is a hardware option with other company systems. The FX is designed to popular industry standards, which makes the FX amenable to customization by Comdial and by third party integrators. IMPACT TELEPHONES were introduced in 1992. These terminals offer a variety of features, including an interactive liquid crystal display ("LCD"), programmable feature keys, three color lighted status indicators, and subdued off-hook voice announce for receiving intercom calls while on a telephone call. The phones are offered in a variety of models, distinguished by the number of programmable buttons, the presence or absence of a display, and the presence or absence of a speakerphone. IMPACT SCS was introduced in 1997. IMPACT SCS retains many of the current features of the original IMPACT telephone models but with a different physical design and distinguishing features such as a full-duplex speakerphone model, simultaneous voice and data, large screen display and adjustable viewing angle. IMPRESSION, introduced in 1996, is a brand name denoting certain digital telephone instruments and digital systems when the systems are installed with digital switches. The IMPRESSION telephones are similar to the original Impact telephones in terms of functionality and number of models offered. However, the physical design is quite different. Four IMPRESSION systems are offered: IMPRESSION 24, IMPRESSION 48, IMPRESSION 72, and IMPRESSION 224. AIR IMPACT, introduced in 1997, is a multi-cell wireless communications product for use with Comdial's (and other manufacturers') switching systems. It is designed for use within large buildings where employees are often away from their desk phones. AIR IMPACT operates over a 1.9 Gigahertz personal communications services ("PCS") band. SCOUT, introduced in 1995, is Comdial's 900 megahertz single cell wireless, multi-line feature phone. Scout extends the advantage of mobility to users of Impact systems. Like AIR IMPACT, SCOUT is designed for in-building applications. TRACKER, introduced in 1994, is an on-site integrated paging system developed in cooperation with Motorola. The purpose of this product is to help ensure that calls are quickly and efficiently completed to individuals who are at work, but not always near their telephones. TRACKER, which operates on Comdial's digital telephone systems, includes a TRACKER base station and personal pagers equipped with a LCD. The personal pagers sound an alert or vibrate to notify users of incoming calls or important messages. A user can retrieve calls by going to the nearest system phone and dialing a special code that is displayed on the LCD. A valuable feature of TRACKER is its compatibility with other products manufactured by Comdial. In 1997, Comdial enhanced the basic TRACKER product with an applications software package called QUIKTRAK. QUIKTRAK extends text-messaging capability to PC users on a local area network. Brief messages can be originated by selecting the TRACKER pager user from a Windows screen, typing the message, and clicking on the "Track" command. Solutions and Software ENTERPRISE, introduced in 1993, is Comdial's open applications interface ("OAI") software developer's tool kit. ENTERPRISE allows independent software developers to access the IMPACT, DXP, DXP PLUS, or FX system software using more than 190 commands. These tools allow Comdial to create unique applications for specific vertical markets, such as telemarketing groups, emergency services, call centers, taxi services, and multi-media centers. PCIU (PC Interface Unit), introduced in 1997, is an affordable hardware/software solution that extends computer integration across all of Comdial's digital switches, via the broadly accepted Telephone Application Programming Interface ("TAPI") standard. The hardware component is a black box with multiple connectors for a digital port off the switch, Comdial's digital display telephone, a PC serial port, and electric power. CONCIERGE, introduced in 1996, is a digital telephone system designed for hospitality applications. The system consists of an Impact 224 or Impact 560 digital switch, multi-line administration telephones, and special hospitality software. The single-line guest telephones used with the Concierge are not sold by Comdial. The system is linked to a personal computer via Comdial's Enterprise software, and allows hotel personnel to administer guest check-in/check-out and other hotel activities from the PC or specially programmed Impact LCD telephones. Concierge serves hotel properties up to approximately 400 rooms. QUICKQ ACD, introduced in 1994, is an automatic call distributor ("ACD"), designed for call center use. The system consists of an Impact 224, Impact 560, or Impact FX digital switch, voice announcing equipment, special automatic call distribution software, and a PC. The QUICKQ answers and distributes incoming calls rapidly and efficiently, helping to assure maximum call center productivity and superior customer response levels. VVP (Versatile Voice Processing), introduced in 1996, is the trade name of a PC-based voice processing system produced by KVT and sold by Comdial. The same product is sold as CORPORATE OFFICE by KVT to its own dealer network. Both products provide all standard voice processing features such as auto attendant, voice store and forward, multiple greetings, and individual voice mail boxes. Advanced features such as fax tone detection, audio text (interactive response to user touch-tone commands), and visual call management (the ability to view voice messages from a PC) are also available. VVP can be integrated with Comdial's digital telephone systems so that display messages on LCD terminals prompt user operations. KVT offers similar integration packages for telephone systems made by other companies. VVP and Corporate Office are offered in 4 to 16 port configurations. Voice storage capacity is virtually unlimited - an advantage of PC-based design. SMALL OFFICE, introduced in 1996, is a smaller and more economical version of VVP/CORPORATE OFFICE, WHICH IS also produced by KVT and sold through both Comdial's and KVT's dealer networks. SMALL OFFICE offers basically the same features as the larger model, but is designed for smaller enterprises. Maximum capacity is four ports (four simultaneous calls) and 100 mailboxes. SMALL OFFICE LITE was introduced in 1997. SMALL OFFICE LITE voice processing system features the latest advances in communications technology specially streamlined to fit the needs of small businesses. With Comdial's SMALL OFFICE LITE, even small businesses can take advantage of a voice-processing feature set that is state-of-the-art, but also affordable. In addition to automated attendant functionality, SMALL OFFICE LITE allows users to personalize their individual mailboxes with custom greetings. DEBUT was introduced in 1998 to meet the needs of small businesses seeking basic voice processing capabilities at an attractive price. VVP-NT and SMALL OFFICE-NT were introduced in the third quarter of 1998. They are user-friendly voice mail systems, with a proven design, that are easy to establish and maintain. Each system accommodates a different number of users and is built on a Windows NT(R) operating system platform. In addition, enhanced graphical screens let system supervisors quickly adjust user information and retrieve vital call processing data. AVALON, introduced in the third quarter of 1998, is the first communications systems designed specifically for assisted living communities. AVALON integrates a Comdial DXP digital switch system and telephones, wireless communications devices, wired and wireless alerting devices, and custom software. AVALON provides basic telecommunications service to residents and staff, but its most important advantage is to allow elderly residents to alert on-site caregivers of the name and location of an alarm condition. Should a resident activate a compatible in-room alerting device (such as a pull cord), dial "911," or take certain other actions indicating an alarm condition, messages are transmitted from the Avalon system to the displays of pagers or wireless phones carried by caregivers. Computer records of the emergency alert and response are also generated. AVALON is an example of Comdial's focus on integrated solutions for vertical markets. CTVOICE was introduced in the first quarter of 1998. CTVOICE gives organizations an IP telephony gateway that provides high-quality, real-time voice and fax communications over any IP network, including the public Internet and private intranets. CTVOICE is provided by Comdial's subsidiary Array which was acquired in 1998. VOIPGATE is the brand name for carrier-class IP gateways produced by Comdial's subsidiary Array. VOIPGATE interfaces with standard analog lines, ISDN, and T-1. VOIPGATE provides a broad range of network management features and is compliant with popular industry standards. Analog and Other UNISYN, introduced in 1994, is a telephone system designed to offer advanced features to small organizations. Two models are offered. One model supports up to three lines and eight telephones, and the other supports up to six lines and 16 telephones. Display model telephones offer interactive function keys to simplify feature access. Another capability of UNISYN is its optional compatibility with standard analog devices, such as single-line telephones, fax machines, and modems. EXECUTECH XE KEY SYSTEMS, introduced in 1989, can support up to 10 lines and 24 telephones. All systems support the same family of full-featured telephones. The switch is a unitized self-contained unit, making the EXECUTECH XE KEY SYSTEM economical to manufacture, easy to install, and beneficial to end users who do not have to buy additional components to add features. Other products included in the Analog and Other business segment are ATC TERMINALS, MAXPLUS, SOLO II, VOICE EXPRESS, AND CUSTOM MANUFACTURING. In 1998, the MAXPLUS product was discontinued, and in 1999, Solo II and Voice Express are scheduled to be discontinued. Comdial will continue to provide support for these products pertaining to warranty claims and replacements. SALES AND MARKETING Comdial markets its products through both direct and indirect channels. Indirect channels include both two-tiered and three-tiered distribution. Comdial's primary channel of distribution to U.S. and Canadian markets is through nine major wholesale supply houses, which in turn, resell to hundreds of independent dealers. International sales are accomplished through a network of international dealers. International dealers buy directly from Comdial, normally by letters of credit, and resell to end users or other dealers. Three supply houses each account for more than 10% of Comdial's net sales. These are ALLTEL Supply, Inc. ("ALLTEL"), Graybar Electric Company, Inc. ("Graybar"), and Sprint/North Supply, Inc. ("North Supply"). In 1998, net sales to ALLTEL, Graybar, and North Supply amounted to approximately $19.3 million (15%), $30.4 million (24%), and $24.9 million (19%), respectively. Comdial has established four classes of dealers that purchase Comdial's products from supply houses and resell to end users. These are Platinum Preferred, Preferred Gold, Preferred, and Associate Dealers. Comdial offers an attractive incentive package for Platinum Preferred, Preferred Gold, and Preferred Dealers, including exclusive access to certain products, cash rebates related to dealer purchase levels, cooperative advertising allowances, a measure of territorial protection, toll free assistance, and training. Platinum Preferred, Preferred Gold, and Preferred Dealers have sales quotas, and Comdial's sales department monitors their performance against these targets. Associate Dealers purchase Comdial's products on an as-needed basis, and are rewarded through product rebates. Associate Dealers do not have quotas but do receive benefits such as toll-free assistance, training, and other services that are offered by Comdial. Comdial supports its existing dealers and seeks to attract new dealers through national advertising in popular trade magazines, special promotional programs, sales and technical training, and participation in major industry trade shows. Each area sales manager is responsible for recruiting new dealers and training and motivating existing dealers. Dealers are supported through telephone contact with Inside Sales Representatives, direct mail, and local product seminars often organized by distributors. To stimulate demand, Field Sales Representatives make joint sales calls with dealers to end users and train dealer sales personnel in product benefits. Product specialists at Comdial are available to help engineer complex configurations and solve technical problems. All direct sales personnel earn incentive income based on sales results. Comdial's dealers are primarily responsible for selling Comdial's products to end users as well as providing support. Comdial maintains a technical support staff devoted to dealer support. Comdial also generally provides a limited warranty on elements of its products, permitting factory returns within 24 months of the production date. Other indirect channels include OEM relationships, international sales, and dealer direct sales. Selected dealers are authorized to purchase IMPACT CONCIERGE systems direct from Comdial and resell to hotels and motels. Dedicated personnel support OEM and international sales. Sales of voice processing products produced by KVT are through two channels: supply houses to dealers and direct to dealers. In recent years, Comdial initiated a National Accounts Program to market its products to large multi-location end users. The program allows end users to contract with one entity (Comdial) for sales and support, while achieving local installations and maintenance from Comdial's network of independent dealers. This program is also a key delivery vehicle for sophisticated computer telephony solutions sales that often require advanced custom integration and superior knowledge and understanding of end user communications and business objectives. The National Accounts Program allows Comdial to work directly with end users to assure that the best combination of Comdial and, if necessary, third party products, are incorporated into the final solution. Comdial employs dedicated personnel to sell and support national accounts. Because Comdial's sales are made under short-term sales orders issued by customers on a month-to-month basis, rather than under long-term supply contracts, backlog is not considered material to Comdial's business. ENGINEERING, RESEARCH AND DEVELOPMENT Comdial believes that it must continue to introduce new products and enhance existing products to maintain a competitive position in the marketplace. Comdial's engineering department, working in collaboration with the marketing and manufacturing departments, is responsible for design of new products and enhancements. A significant amount of engineering expenditures are dedicated to new product development, with the balance used for cost reductions and performance enhancements to existing products. Research and development costs for the fiscal years ended 1998, 1997, and 1996 comprise the majority of engineering, research, and development costs, which were $6.8 million, $6.5 million, and $5.8 million, respectively. Comdial is unable to segregate and quantify the amount of research and development costs from other engineering costs for such fiscal years. Some of the research and development costs associated with the development of product software have been capitalized as incurred. The accounting for such software capitalization is in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 86. The amounts capitalized in 1998, 1997, and 1996 were $2.8 million, $2.0 million, and $1.6 million, respectively. The amounts amortized for software development cost in 1998, 1997, and 1996 were approximately $1.4 million, $1.0 million, and $0.9 million, respectively. Comdial is committed to improving its existing products and developing new telecommunications equipment in order to maintain or increase its market share. MANUFACTURING AND QUALITY CONTROL Comdial's manufacturing operations organization is responsible for all activities related to production, testing, shipping, and repair of Comdial's products. Other functions that fall under manufacturing operations include maintenance of plant facilities and specialty (contract) manufacturing. One of Comdial's core competencies, along with its distribution network, is its manufacturing efficiency. With recent improvements in production equipment such as surface mount technology ("SMT") and information systems, Comdial can now turn around customer orders in days, compared to weeks or even months that may be taken by other competitors. Manufacturing is able to schedule production runs on a daily basis which provides Comdial with maximum flexibility in responding to order levels, improved product margins, and lower work-in-process and finished goods inventories. Improvements in the manufacturing function include the use of advanced Manufacturing Resource Planning ("MRP") information systems, continuous flow assembly lines, just-in-time philosophies, and continual upgrades to the two SMT lines. Comdial has been able to reduce finished goods inventory levels, as common components in various products have allowed manufacturing to stock components and subassemblies rather than finished products. Manufacturing also contributes to revenues through the sale of repair services and obsolete equipment through Comdial's wholly-owned subsidiary American Phone Centers, Inc. ("APC"), and by contracting for selective custom manufacturing assignments. Comdial monitors the quality of its manufacturing process. Individual assemblers and machine operators are trained to inspect subassemblies as the work passes through their respective areas. In addition, some automated production machines perform quality tests concurrently with assembly operations. Comdial believes that this high level of automation and vertical integration improves quality, cost, and customer satisfaction. Comdial also manufactures injection molded plastic parts, fabricated metal parts, and other components. In 1994, Comdial was certified and has maintained its certification by the International Organization for Standardization ("ISO") at the most rigorous ISO 9001 level, which provides standards for systems and procedures for manufacturing, engineering, product design, and customer service. COMPETITION The market for Comdial's products is highly competitive. Comdial competes with over 25 suppliers of small business telephone systems, many of which have significantly greater resources. Examples are Inter-Tel, Inc., Lucent Technologies, Inc., Nortel Networks, and Toshiba Corporation. Key competitive factors in the sale of telephone systems and related applications include performance, features, reliability, service and support, name recognition, distribution capability, and price. Comdial believes that it competes favorably in its market with respect to the performance, features, reliability, distribution capability, and price of its systems, as well as the level of service and support that Comdial provides. In marketing its telephone systems, Comdial also emphasizes quality, as evidenced by its ISO 9001 certification, and high technology features including CTI capability across its entire Impact line of digital switching systems. The market for voice processing systems is also competitive. Comdial believes that it is a leading supplier of PC-based voice processing systems, and that the products produced by KVT are very competitive with regard to the key factors important to end-users. These factors include reliability, memory capacity, features, ease-of-use, compliance with common industry standards, and price. Comdial expects that competition will continue to be intense in the markets it serves, and there can be no assurance that Comdial will be able to continue to compete successfully in the marketplace or that Comdial will be able to maintain its current dealer network. INTELLECTUAL PROPERTY From time to time, Comdial is subject to proceedings alleging infringement by Comdial of intellectual property rights of others. Such proceedings could require Comdial to expend significant sums in litigation, pay significant damages, develop non-infringing technology, or acquire licenses to the technology that is the subject of the asserted infringement, any of which could have a material adverse effect on Comdial's business. Moreover, Comdial relies upon copyright, trademark, and trade secret protection to protect Comdial's proprietary rights in its products. There can be no assurance that these protections will be adequate to deter misappropriation of Comdial's technologies or independent third-party development of similar technologies. The business telecommunications industry is characterized by rapid technological change. Industry participants often find it necessary to develop products and features similar to those introduced by others, with incomplete knowledge of whether patent protection may have been applied for or may ultimately be obtained by competitors or others. The telecommunications manufacturing industry has historically witnessed numerous allegations of patent infringement and considerable related litigation among competitors. Comdial itself has received claims of patent infringement from several parties which sometimes seek substantial sums. In response to prior infringement claims, Comdial has pursued and obtained nonexclusive licenses entitling Comdial to utilize certain fundamental patented functions that are widely licensed and used in the telecommunications manufacturing industry. These licenses expire upon expiration of the underlying patents. In order to assure that it currently owns or has adequate rights to utilize all material technologies relating to its products, Comdial attempts to diligently review all claims of infringement. Often Comdial's investigation of these claims is limited by claims' lack of specificity, the limited availability of factual information and documentation related to the claims and the expense of pursuing exhaustive patent reviews. As Comdial continues to develop new products and features in the future, it anticipates that it may receive additional claims of patent infringement. There can be no assurance that a license for any such infringed technology would be available to Comdial or, even if available, that the terms of any such license would be satisfactory. YEAR 2000 ISSUE In early 1997, Comdial established a team of people (the "Year 2000 Team") to evaluate whether, and to what extent, Comdial's business and products may be affected by the Year 2000 and potential problems caused by the inability of certain computers and microprocessors to distinguish between the year 2000 and the year 1900. Through a series of industry-recognized tests, the Year 2000 Team believes that it has identified which of Comdial's products, devices, and computerized systems contain embedded microprocessors that will require remediation or replacement because of potential Year 2000 issues. The Year 2000 Team has concluded that nearly all of Comdial's products are already Year 2000 compliant. Comdial expects that any non-compliant products that Comdial continues to sell will be compliant before the third quarter of 1999. Furthermore, Comdial is providing upgrades or taking other remedial steps to correct any non-compliant products that remain under warranty. Comdial does not expect to make any significant expenditures solely to address Year 2000 issues. Management believes that Comdial is properly addressing the Year 2000 issues in order to mitigate any adverse operational or financial impacts. Furthermore, Comdial has implemented a requirement that its suppliers certify that all products and services provided to Comdial are Year 2000 compliant (see Note 14 to the Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations). EMPLOYEES As of December 31, 1998, Comdial, including subsidiaries, had 919 full-time employees, of whom 564 were engaged in manufacturing, 101 in engineering, 174 in sales and support, and 80 in general management and administration. Comdial has never experienced a work stoppage and no employees are represented by labor unions. Comdial believes that its employee relations are good. ITEM 2. PROPERTIES Comdial designs, manufactures, and markets the majority of its products from a fully-integrated, approximately 500,000 square-foot manufacturing facility on a 25 acre site located in Charlottesville, Virginia. The majority of Comdial's operations and development are located at this facility, which Comdial owns. Comdial believes that its facilities are adequate both for the operation of its business as presently conducted and for expansion in the foreseeable future. KVT operates out of an approximately 6,200 square foot building, located in Sarasota, Florida. All other additional space used by Comdial and its subsidiaries is either leased or rental property. Comdial's facilities are subject to a variety of federal, state, and local environmental protection laws and regulations, including provisions relating to the discharge of materials into the environment. The cost of compliance with such laws and regulations has not had a material adverse effect upon Comdial's capital expenditures, earnings, or competitive position, and it is not anticipated to have a material adverse effect in the future. In 1988, Comdial voluntarily discontinued use of a concrete underground hydraulic oil and chlorinated solvent storage tank at its Charlottesville plant. In conjunction therewith, nearby soil and groundwater contamination was noted. As a result, Comdial developed a plan of remediation that was approved by the Virginia Water Control Board on January 31, 1989. The plan was later amended and approved by the Virginia Department of Environmental Quality, after which Comdial commenced the remediation efforts required thereunder. In October 1994, Comdial installed all required equipment in accordance with the remediation plan and started the process of pumping hydraulic oil residue from the underground water. The oil is deposited into approved containers and taken to a hazardous waste site in accordance with the corrective action plan. As of December 31, 1998, Comdial has incurred total costs of approximately $25,000 and expects the pumping process to be completed by late 1999. ITEM 3. LEGAL PROCEEDINGS Comdial is from time to time involved in routine litigation. Comdial believes that none of the litigation in which it is currently involved is material to its financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted during the fourth quarter of 1998 to a vote of Comdial's security holders. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Information is incorporated by reference on page 42 of Comdial's 1998 Annual Report to stockholders under the caption "Related Stockholders Matters." As of March 9, 1999 there were 1,475 record holders of Comdial's Common Stock. ITEM 6. SELECTED FINANCIAL DATA Information is incorporated by reference on page 42 of Comdial's 1998 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 on pages 21 through 25 of Comdial's 1998 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 on pages 27 through 44 of Comdial's 1998 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 Comdial" on pages 6 through 8 and 10 through 12 of Comdial's definitive proxy statement for the annual meeting of stockholders to be held on April 27, 1999. ITEM 11. EXECUTIVE COMPENSATION Executive compensation and management transactions information is incorporated by reference under the caption "Executive Compensation" on pages 12 through 21 of Comdial's definitive proxy statement for the annual meeting of stockholders to be held on April 27, 1999. 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 Comdial's definitive proxy statement for the annual meeting of stockholders to be held on April 27, 1999. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information is incorporated by reference under the caption "Family Relationships" and "Certain Relationships and Related Transactions" on pages 12 and 21 of Comdial's definitive proxy statement for the annual meeting of stockholders to be held on April 27, 1999. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (A)(1) The following Consolidated Financial Statements of Comdial Corporation and its Subsidiaries are incorporated in Part II, Item 8 by reference to Comdial's 1998 Annual Report to stockholders (page references are to page numbers in Comdial's Annual Report): Page Number ----------- Independent Auditors' Report 26 Report of Management 26 FINANCIAL STATEMENTS: Consolidated Balance Sheets - December 31, 1998 and 1997 27 Consolidated Statements of Operations - Years ended December 31, 1998, 1997, and 1996 28 Consolidated Statements of Stockholders' Equity - Years ended December 31, 1998, 1997, and 1996 29 Consolidated Statements of Cash Flows - Years ended December 31, 1998, 1997, and 1996 30 Notes to Consolidated Financial Statements - Years ended December 31, 1998, 1997, and 1996 31-41 2. FINANCIAL STATEMENTS - SUPPLEMENTAL SCHEDULES: All of the schedules are omitted because they are not applicable, not required, or because the required information is included in the consolidated financial statements or notes. 3. EXHIBITS INCLUDED HEREIN: (3) ARTICLES OF INCORPORATION AND BYLAWS: 3.1 Certificate of Incorporation of Comdial Corporation. (Exhibits (a) Item 3.1 to Item 6 of Registrant's Form 10-Q for the period ended July 2, 1995.)* 3.2 Certificate of Amendment of the Certificate of Incorporation of Comdial Corporation as filed with the Secretary of State of the State of Delaware on February 1, 1994. (Exhibit 3.2 to Registrant's Form 10-Q for the period ended July 2, 1995.)* 3.3 Bylaws of Comdial Corporation.(Exhibit 3.3 to Registrant's Form 10-K for the year ended December 31, 1993.)*
(10) MATERIAL CONTRACTS 10.1 Registrant's 1992 Stock Incentive Plan and 1992 Non-employee Directors Stock Incentive Plan. (Exhibits 28.1 and 28.2 of Registrant's Form S-8 dated October 21, 1992.)* 10.2 Amendment No. 1 to the Registrant's 1992 Stock Incentive Plan and 1992 Non-employee Directors Stock Incentive Plan. (Exhibit 10.1 and 10.2 of Registrant's Form 10-Q dated September 28, 1997.)* 10.3 Amendment No. 2 to the Registrant's 1992 Stock Incentive Plan and 1992 Non-employee Directors Stock Incentive Plan. (Exhibit 10.2 of Registrant's Form 10-Q dated June 30, 1996.)* 10.4 Amendment No. 3 to the Registrant's 1992 Stock Incentive Plan and 1992 Non-employee Directors Stock Incentive Plan. (Exhibit 10.3 of Registrant's Form 10-Q dated June 30, 1996.)* 10.5 Amendment to Amendment No. 3 to the Registrant's 1992 Non-employee Directors Stock Incentive Plan. (Exhibit 10.5 to Registrant's Form 10-K for the year ended December 31, 1997.)* 10.6 Amendment No. 4 to the Registrant's 1992 Stock Incentive Plan. (Exhibit 10.6 to Registrant's Form 10-K for the year ended December 31, 1997.)* 10.7 Amendment No. 4 to the Registrant's 1992 Non-employee Directors Stock Incentive Plan. (Exhibit 10.7 to Registrant's Form 10-K for the year ended December 31, 1997.)* 10.8 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.)* 10.9 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.)* 10.10 Amendment No. 1 to the Loan and Security Agreement dated March 13, 1996 among the Registrant and Fleet Capital Corporation. (Exhibit 10.1 to Registrant's Form 10-Q for the quarter ended March 31, 1996.)* 10.11 Amendment No. 2 to the Loan and Security Agreement dated June 28, 1996 among the Registrant and Fleet Capital Corporation. (Exhibit 10.1 to Registrant's Form 10-Q for the quarter ended June 30, 1996.)* 10.12 Amendment No. 3 to the Loan and Security Agreement dated September 27, 1996 among the Registrant and Fleet Capital Corporation. (Exhibit 10.1 to Registrant's Form 10-Q for the quarter ended September 29, 1996.)* 10.13 Amendment No. 4 to the Loan and Security Agreement dated September 27, 1996 among the Registrant and Fleet Capital Corporation. (Exhibit 10.2 to Registrant's Form 10-Q for the quarter ended March 30, 1997.)* 10.14 Amendment No. 5 to the Loan and Security Agreement dated March 15, 1998 among the Registrant and Fleet Capital Corporation. (Exhibit 10.1 to Registrant's Form 10-Q for the quarter ended March 29, 1998.)* 10.15 Amendment No. 6 to the Loan and Security Agreement dated June 24, 1998 among the Registrant and Fleet Capital Corporation. (Exhibit 10.1 to Registrant's Form 10-Q for the quarter ended June 28, 1998.)* 10.16 Note dated February 5, 1997 among the Registrant and Fleet Capital Corporation. (Exhibit 10.1 to Registrant's Form 10-Q for the quarter ended March 30, 1997.)* 10.17 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.)* 10.18 Amendment No. 1 to the Registrant's Executive Stock Ownership Plan dated July 31, 1997. (Exhibit 10.17 to Registrant's Form 10-K for the year ended December 31, 1997.)* 10.19 Amendment No. 2 to the Registrant's Executive Stock Ownership Plan dated January 1, 1998. (Exhibit 10.18 to Registrant's Form 10-K for the year ended December 31, 1997.)* 10.20 The Registrant's Executive Severance Plan dated August 31, 1995. (Exhibit 10.11 to Registrant's Form 10-K for the year ended December 31, 1995.)* 10.21 Amendment No. 1 to the Registrant's Executive Severance Plan dated July 31, 1997. (Exhibit 10.19 to Registrant's Form 10-K for the year ended December 31, 1997.)* 10.22 Development and Purchase Agreement dated February 21, 1997 among Registrant and Harris Corporation. (Exhibit 10.20 to Registrant's Form 10-K for the year ended December 31, 1997.)* 10.23 FastCall Purchase Agreement dated December 31, 1997 among Aurora Systems, Inc. and Spanlink Communications, Inc. (Exhibit 10.21 to Registrant's Form 10-K for the year ended December 31, 1997.)* 10.24 Asset Purchase Agreement dated July 14, 1998 among the Registrant and Array Telecom Inc. and Array Systems Computing Inc. (Exhibit 10.2 to Registrant's Form 10-Q for the quarter ended June 28, 1998.)* 10.25 Second Amendment to Comdial's 401(k) Plan dated November 29, 1998. 10.26 Credit Agreement dated October 22, 1998 among Registrant and NationsBank, N.A.
* Incorporated by reference herein. (11) SCHEDULE OF COMPUTATION OF EARNINGS PER COMMON SHARE (13) REGISTRANT'S 1998 ANNUAL REPORT TO STOCKHOLDERS (21) SUBSIDIARIES OF THE REGISTRANT The following are the subsidiaries of the Registrant and all are incorporated in the state of Delaware. American Phone Centers, Inc. American Telecommunications Corporation Array Telecom Corporation Aurora Systems, Inc. Comdial Business Communications Corporation Comdial Consumer Communications Corporation Comdial Custom Manufacturing, Inc. Comdial Enterprise Systems, Inc. Comdial Technology Corporation Comdial Telecommunications, Inc. Comdial Telecommunications International, Inc. Comdial Video Telephony, Inc. Key Voice Technologies, Inc. Telecom Technologies Inc. (formerly known as Scott Technologies Corporation) (23) INDEPENDENT AUDITORS' CONSENT Accountants consent to the incorporation by reference of their report dated January 29, 1999, appearing in this Annual Report on Form 10-K of Comdial Corporation for the year ended December 31, 1998, in certain Registration Statements. (24) POWER OF ATTORNEY (27) FINANCIAL DATA SCHEDULE (b) REPORTS ON FORM 8-K: The Registrant has not filed any reports on Form 8-K during the last quarter of 1998. 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 24th day of March, 1999. COMDIAL CORPORATION By: /s/ William G. Mustain -------------------------------- WILLIAM G. MUSTAIN Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date - --------- ----- ---- * Director March 24, 1999 ----------------- ROBERT P. COLLINS * Director March 24, 1999 - ----------------------- BARBARA PERRIER DREYER * Vice Chairman March 24, 1999 - --------------------- A. M. GLEASON * Director March 24, 1999 - --------------------- MICHAEL C. HENDERSON * Director March 24, 1999 - --------------------- JOHN W. ROSENBLUM * Director March 24, 1999 - --------------------- DIANNE C. WALKER /s/ William G. Mustain Chairman of the Board, March 24, 1999 - ---------------------- President, and WILLIAM G. MUSTAIN Chief Executive Officer /s/ M. Funke Controller March 24, 1999 - ---------------------- MANFRED FUNKE * By:/s/ William G. Mustain - ------------------------------------- WILLIAM G. MUSTAIN, ATTORNEY-IN-FACT EX-11 2 EXHIBIT 11 COMDIAL CORPORATION AND SUBSIDIARIES EXHIBIT 11 SCHEDULE OF COMPUTATION OF EARNINGS PER COMMON SHARE
Years Ended December 31, 1998 1997 1996 ----------- ---------- ---------- BASIC Net income applicable to common shares: $17,154,000 $5,719,000 $1,809,000 =========== ========== ========== Weighted average number of common shares outstanding during the period 8,794,584 8,654,466 8,478,883 Add - Contingency shares 42,017 29,324 5,388 Deferred shares 6,756 - - ----------- ---------- ---------- Weighted average number of shares used in cal- culation of basic earnings per common share 8,843,357 8,683,790 8,484,271 =========== ========== ========== Basic earnings per common share: $1.94 $0.66 $0.21 =========== ========== ========== DILUTED Net income applicable to common shares - basic $17,154,000 $5,719,000 $1,809,000 =========== ========== ========== Weighted average number of shares used in cal- culation of basic earnings per common share 8,843,357 8,683,790 8,484,271 Add (deduct) incremental shares representing: Shares issuable based on period-end market price or weighted average price: Stock options 237,713 83,563 183,370 ----------- ---------- ---------- Weighted average number of shares used in calcula- tion of diluted earnings per common share 9,081,070 8,767,353 8,667,641 =========== ========== ========== Diluted earnings per common share $1.89 $0.65 $0.21 =========== ========== ==========
EX-13 3 1998 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 ("Comdial"). This review should be read in conjunction with the financial statements and accompanying notes. This analysis attempts to identify trends and material changes that occurred during the periods presented. Prior years have been reclassified to conform to the 1998 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 1998 1997 1996 --------- --------- --------- Business Segment Sales: Digital Systems $ 80,452 $ 70,181 $ 56,725 Solutions and Software 36,194 31,625 23,453 Analog and Other 12,331 16,755 22,004 --------- --------- --------- Net Sales 128,977 118,561 102,182 Cost of sales 75,597 71,218 64,301 --------- --------- --------- Gross profit 53,380 47,343 37,881 Selling, general & administrative 34,034 29,069 25,757 Engineering, research & development 6,813 6,497 5,771 In-process R & D - Array 529 -- -- Goodwill amortization 3,806 3,567 2,674 Interest expense 1,216 1,698 1,626 Miscellaneous expense - net 565 644 762 --------- --------- --------- Income before income taxes 6,417 5,868 1,291 Income tax expense/(benefit) (10,737) 149 (518) --------- --------- --------- Net income applicable to common stock $ 17,154 $ 5,719 $ 1,809 ========= ========= ========= Earnings per common share and common equivalent share: basic $ 1.94 $ 0.66 $ 0.21 ========= ========= =========
The following table reflects the gross profit margins for the various business segments of Comdial. See Note 12 to the Consolidated Financial Statements for further clarification of business segments.
December 31, In thousands 1998 1997 1996 ------- ------- ------- Business Segment: Digital Systems $31,237 $25,175 $18,553 Solutions and Software 19,341 18,418 12,617 Analog and Other 2,802 3,750 6,711 ------- ------- ------- Gross profit margin $53,380 $47,343 $37,881 ======= ======= =======
1998 COMPARED WITH 1997 NET SALES as reported for 1998 increased by 9% to $129.0 million, compared with $118.6 million in 1997. The continued increase in net sales was primarily due to (1) greater demand for Comdial's Digital Systems segment products, (2) introduction of new Digital System products, and (3) continued growth in sales of Solutions and Software products such as voicemail systems. The voicemail product is produced by a subsidiary of Comdial, Key Voice Technologies, Inc. ("KVT"). In 1998, net sales of Digital System products increased 15% to $80.5 million, compared with $70.2 million for 1997. In 1998, net sales of Solutions and 117 Software products, including voice processing, increased 14% to $36.2 million compared with $31.6 million for 1997. Management expects sales of these two business segments to continue to grow in 1999 primarily due to (1) continued growth in Digital Systems and Solutions and Software products sold directly to end users through national accounts, (2) development of new products and new distribution channels offering integrated computer solutions, (3) growth of product sales to original equipment manufacturing ("OEM") customers such as Harris Corporation, (4) future growth of Comdial's dealer base to encompass metropolitan areas within the United States where Comdial presently has little exposure, and (5) sales of Internet Protocol ("IP") telephone gateways by Comdial's subsidiary, Array Telecom Corporation ("Array"). In 1998, net sales of the Analog and Other segment products decreased 26% to $12.3 million, compared with $16.8 million for 1997. Management expects sales of such products to continue to decrease in 1999. There is a continuing shift from analog to digital product lines as well as other rapid technological changes creating the potential for product obsolescence. The decline in sales of Comdial's Analog and Other products began in the early 1990s and can be attributed to the market's transition to and development of digital products. However, there remains a significant installed base of analog systems that will require replacements and up-grades. Analog systems also remain a viable product in situations where price as opposed to features and functionality is of paramount concern. Comdial expects to continue selling analog products for the foreseeable future but will continue to reduce the number of models offered. Comdial provides reserves to cover product obsolescence for all its products and those reserve changes impact gross margin. For the years 1998, 1997, and 1996, reserves for obsolescence totaled $2.3 million, $1.5 million, and $1.0 million, respectively. Future reserves will be dependent on management's estimates of the recoverability of inventory costs. Raw material obsolescence is mitigated by the commonality of component parts of digital and other products. Finished goods obsolescence is mitigated by the low level of inventory relative to sales. The transition to digital from analog products has positively affected Comdial's gross margin as features and functionality have grown in importance as compared to price. Gross margins have improved each year from 31% in 1993 to 41% in 1998. In 1998, international sales decreased by 4% to $4.0 million compared with $4.2 million for 1997. The decline in international sales was expected due to distribution problems, homologation issues, and economic difficulties of various countries where Comdial products are sold. Homologation is the process of securing regulatory, safety, and network compliance approvals for the sale of telecommunications equipment in foreign countries. As many countries have different standards than the United States, this typically involves engineering modifications and compliance testing. Due to the international climate, Comdial has basically suspended its efforts in developing further international markets on its own, relying on an OEM agreement with a major supplier to market its products mainly internationally. GROSS PROFIT, as a percentage of sales for 1998, was 41% compared with 40% for 1997. In 1998, gross profit increased by 13% to $53.4 million compared with $47.3 million for 1997. This increase was primarily attributable to increased sales of higher margin business segment products, such as Impact, Impact DXP, and solution products. In 1998, gross profit for Digital System products increased by 24% to $31.2 million compared with $25.2 million for 1997. Digital Systems gross profit, as a percentage of sales for 1998, was 39% compared with 36% for 1997. This increase is primarily due to the higher sales volume along with better margins from higher end products such as the DXP and FX. Comdial expects the gross margin for this segment to increase in the coming years primarily due to higher sales volume. 118 In 1998, gross profit for Solutions and Software products increased by 5% to $19.3 million compared with $18.4 million for 1997. This increase is due to a higher sales volume primarily of voicemail systems along with the increase in sales associated with Array. Solutions and Software gross profit, as a percentage of sales for 1998, was 54% compared with 58% for 1997. This decrease was primarily due to installation costs associated with National Accounts that generate lower margins. Gross profit margins for National Accounts, including installation costs, still average well over 40% and don't include any promotional allowance costs. Comdial expects volume in this business segment to continue to increase along with approximately the same margin. In 1998, gross profit for Analog and Other products decreased by 25% to $2.8 million compared with $3.8 million for 1997. This decrease is due to lower sales, primarily of analog products which are being replaced by more technologically advanced products. The Analog and Other segments gross profit, as a percentage of sales for 1998, was 23% compared with 22% for 1997. All other costs including operating expenses, goodwill amortization, interest expense, other miscellaneous expenses, and income tax expenses or benefits cannot be allocated to the three segments. Comdial does not maintain information that would allow these costs to be broken down into the various product segments and most of the costs are universal in nature. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES increased in 1998 by 17% to $34.0 million compared with $29.1 million for 1997. The primary reasons for the increase were (1) an increase in sales personnel to support the growth in national accounts and expanding computer-telephony integration ("CTI") markets, (2) higher promotional allowance costs associated with increased sales through Platinum and Preferred Dealers, and (3) the additional costs associated with the acquisition of Array in the third quarter of 1998. ENGINEERING, RESEARCH AND DEVELOPMENT EXPENSES increased in 1998 by 5% to $6.8 million compared with $6.5 million for 1997. This increase was primarily due to increased expenses associated with the Array acquisition. IN-PROCESS RESEARCH AND DEVELOPMENT EXPENSE of $529,000 relates directly to the Array acquisition for which there was no expense for the comparable period of 1997 (see Note 2 to the Consolidated Financial Statements). GOODWILL AMORTIZATION EXPENSE increased in 1998 by 7% to $3.8 million, compared with $3.6 million for 1997. This increase is due primarily to the additional amortization of goodwill associated with the Array acquisition of $256,000. INTEREST EXPENSE decreased in 1998 by 28% to $1.2 million compared with $1.7 million for 1997. This decrease is due to lower average debt levels with Fleet Capital Corporation ("Fleet") for the first six months of 1998 along with lower interest rates when compared to 1997 (see Note 6 to the Consolidated Financial Statements). In the first quarter of 1998, Comdial paid down an additional $3.5 million towards its debt with Fleet. Interest expense increased by 22% in the last half of 1998 when compared with the first half primarily due to the additional borrowings required for the Array acquisition. NET INCOME BEFORE INCOME TAXES, as a result of the foregoing, increased in 1998 by 9% to $6.4 million compared with $5.9 million in 1997. Major factors contributing to the increase in income and earnings per share for 1998 were increased sales of Digital Systems and Solutions and Software segment products that have higher margins. Management anticipates, assuming continued strength in the economy, that the factors, which have led to significant increases in sales for 1998, will continue to have a positive influence on Comdial's performance in 1999. INCOME TAX EXPENSE (BENEFIT) reflects a benefit in 1998 of $10.7 million compared with an expense of $149,000 for 1997. This change was due to recognition of a deferred tax benefit of $11.5 million for 1998 compared with 119 a benefit of $219,000 for 1997. The tax benefits, recognized in 1998 and 1997, were a result of a reduction in the valuation allowance relating to Comdial's net operating loss carryforwards ("NOLs") (see Note 7 to the Consolidated Financial Statements). This benefit recognition is primarily due to management's belief that the limitations set forth in Section 382 of the Internal Revenue Code are less likely to impair the Company's ability to utilize their NOLs. 1997 COMPARED WITH 1996 NET SALES as reported for 1997 increased by 16% to $118.6 million, compared with $102.2 million in 1996. The continued increase in net sales was primarily due to (1) greater demand for Comdial's Digital Systems, (2) introduction of new products, and (3) continued growth in sales of Solution and Software products. In 1997, gross sales of Digital System products increased 24% to $70.2 million compared with $56.7 million for 1996. This increase was primarily due to the sale of the new Impact products. In 1997, gross sales of Solutions and Software products, including voice processing, increased 35% to $31.6 million compared with $23.5 million for 1996. This increase was primarily attributable to Comdial's subsidiaries, Aurora Systems, Inc. ("Aurora") and KVT, which accounted for 48% of the increase. In 1997, gross sales of Analog and Other segment products decreased 24% to $16.8 million, compared with $22.0 million for 1996. In 1997, international sales increased by 15% to $4.2 million compared with $3.7 million for 1996. The increase in sales was due to the establishment of product sales in several countries. GROSS PROFIT, as a percentage of sales for 1997, was 40% compared with 37% for 1996. In 1997, gross profit increased by 25% to $47.3 million compared with $37.9 million for 1996. This increase was primarily attributable to increased sales of higher margin products, such as Digital Systems and Solutions and Software products. In 1997, gross profit for Digital System products increased by 36% to $25.2 million compared with $18.6 million for 1996. This increase was primarily due to the higher sales volume along with better product margins. Digital Systems gross profit, as a percentage of sales for 1997, was 36% compared with 33% for 1996. In 1997, gross profit for Solutions and Software products increased by 46% to $18.4 million compared with $12.6 million for 1996. This increase was due to a higher sales volume that was primarily due to having a full year of product sales from KVT, Comdial's subsidiary, acquired in March 1996. Solutions and Software gross profit, as a percentage of sales for 1997, was 58% compared with 54% for 1996. In 1997, gross profit for Analog and Other products decreased by 44% to $3.8 million compared with $6.7 million for 1996. This decrease was due to lower sales of analog products that were replaced in the market place with digital products. The Analog and Other segments gross profit, as a percentage of sales for 1997, was 22% compared with 30% for 1996. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES increased in 1997 by 13% to $29.1 million compared with $25.8 million for 1996. The primary reasons for the increase were (1) additional administrative, marketing, and sales expenses of $966,000 associated with KVT, (2) an increase in sales personnel to support the growth in national accounts and expanding computer integrated markets, (3) an increase in administrative costs associated with hiring two new officers, one of whom was hired at the end of the second quarter of 1997 and the other in December 1997, and (4) higher promotional allowance costs associated with increased sales through Comdial's top dealers. 120 ENGINEERING, RESEARCH AND DEVELOPMENT EXPENSES increased in 1997 by 13% to $6.5 million compared with $5.8 million for 1996. This increase was primarily due to increased expenses of $442,000 associated with KVT. GOODWILL amortization expense increased in 1997 by 33% to $3.6 million compared with $2.7 million in 1996. The increase was due to a full year of amortization expense associated with the acquisitions of Aurora and KVT, and the write-off of the remaining goodwill of $164,000 associated with an earlier acquisition. INTEREST EXPENSE increased in 1997 by 4% to $1.7 million compared with $1.6 million for 1996. This increase was primarily due to the 1996 acquisition loan Comdial obtained from Fleet to provide funding to acquire Aurora and KVT. In 1996, there were only nine months of interest expense associated with the Aurora and KVT acquisitions. Additional interest expense was incurred as a result of a promissory note issued to the original owners of KVT related to the purchase of KVT (see Note 2 to the Consolidated Financial Statements). NET INCOME BEFORE INCOME TAXES, as a result of the foregoing, increased in 1997 by 355% to $5.9 million compared with $1.3 million in 1996. Major factors contributing to the increase in income and earnings per share for 1997 were increased sales of Digital Systems and Solutions and Software products with higher margins. INCOME TAX EXPENSE (BENEFIT) reflects an expense in 1997 of $149,000 compared with a benefit of $518,000 for 1996. This change was due to recognition of a deferred tax asset benefit of $219,000 for 1997 compared with a benefit of $736,000 for 1996. The tax benefits, recognized in 1997 and 1996, were a result of a reduction in the valuation allowance relating to Comdial's NOLs. LIQUIDITY AND CAPITAL SOURCES Comdial's financial position continues to improve when compared to previous years. In 1998, Comdial entered into a new financing arrangement with NationsBank, N.A. ("NationsBank") that provides a line of credit up to $50 million. Comdial's continual improvement in its financial position along with the additional line of credit allows Comdial to make necessary and desirable capital expenditures and investments to expand into new high growth markets in the telecommunications industry. The following table sets forth Comdial's cash and cash equivalents, current maturities on debt, and working capital at the dates indicated: December 31, In thousands 1998 1997 1996 - ------------ ---- ---- ---- Cash and cash equivalents $ 1,599 $ 3,131 $ 180 Current maturities on debt 6 3,701 5,343 Working capital 31,649 16,676 10,608 All operating cash requirements were funded for the first nine months of the year through a $12.5 million revolving credit facility provided by Fleet. As of October 1998, Comdial and NationsBank signed a Credit Agreement (the "Credit Agreement") that is now funding all operational requirements as needed. Comdial reports the revolving credit facility activity on a net basis on the Consolidated Statements of Cash Flows. Comdial considers outstanding checks to be a bank overdraft. As of December 31, 1998, Comdial's CASH AND CASH equivalents were lower than December 31, 1997 by $1.5 million, due primarily to paying all of its indebtedness to Fleet and the payment for the acquisition of Array. WORKING CAPITAL at December 31, 1998, increased by $15 million when compared to 1997. This increase was primarily due to the additional sales in the latter half of the fourth quarter of 1998 and the terms of the new Revolving Credit Facility with NationsBank (see Note 6 to the Consolidated Financial Statements). 121 CAPITAL ADDITIONS for 1998 were approximately $4.5 million. Such capital additions helped Comdial introduce new products as well as improve quality and reduce costs associated with new and existing products. Capital additions were funded by cash generated from operations and borrowing from the revolver. Cash expenditures for capital additions for 1998, 1997, and 1996 amounted to $4.8 million, $3.6 million, and $3.2 million, respectively. Management anticipates that approximately $8 million will be spent on capital additions during 1999. These additions will help Comdial meet its commitments to its customers by developing new products as well as increasing its capacity to produce high-tech products for the future. Comdial plans to fund all additions primarily through cash generated by operations with use of some borrowing. Comdial has a commitment from NationsBank for the issuance of letters of credit in an aggregate amount not to exceed $5 million at any one time. At December 31, 1998, the amount of commitments under the letter of credit facility with NationsBank was $52,000. ACCOUNTS RECEIVABLE at December 31, 1998, increased by $9.2 million compared with December 31, 1997, primarily due to (1) record breaking sales in the fourth quarter of 1998, (2) a majority of those sales occurring in the latter stages of that quarter, (3) the change in Comdial's allowable cash discount for receivables from 1.25% to 0.75% which went into effect at the end of the third quarter of 1998, and (4) the addition of two new Value Added Resellers ("VAR") that tend historically to have a payment cycle longer than 30 days. INVENTORY increased in the second half of 1998 primarily due to the material and production demands for new products that were introduced such as the Impact FXS series. PREPAID EXPENSES AND OTHER CURRENT ASSETS at December 31, 1998, increased by $3.1 million compared with December 31, 1997, due to the recognition of deferred tax assets of $2.8 million that are projected to be used in 1999. The NET DEFERRED TAX ASSET at December 31, 1998, increased by $9.1 million compared with December 31, 1997. This increase was due to the recognition of all useable NOL's and tax benefits that Comdial believes it will use before they expire (see Note 7 to the Consolidated Financial Statements). OTHER ASSETS increased by $4.3 million primarily due to software development costs associated with new products and costs associated with the Array acquisition. ACCOUNTS PAYABLE at December 31, 1998, increased by $1.8 million when compared to December 31, 1997. This increase was primarily due to the timing of incoming material receipts for production. LONG-TERM DEBT, INCLUDING CURRENT MATURITIES Since February 1, 1994, Fleet held substantially all of Comdial's indebtedness. Comdial and Fleet entered into a loan and security agreement (the "Loan Agreement") which was amended from time to time. The Loan Agreement provided Comdial with a $10.0 million acquisition loan (the "Acquisition Loan"), a $3.5 million equipment loan (the "Equipment Loan"), and a $12.5 million revolving credit loan facility (the "Revolver"). The Loan Agreement was effective until February 1, 2001 and the agreement would automatically renew itself for one-year periods thereafter. On October 22, 1998, Comdial and NationsBank entered into a Credit Agreement. NationsBank agreed to provide Comdial with a $50 million revolving credit facility and a $5 million letter of credit subfacility. Comdial used $15.8 million under the revolving credit facility (the "Revolving Credit Facility") to pay off (1) all its remaining indebtedness to Fleet of $10.8 million, (2) amounts owed under Comdial's promissory note including interest to the former owners of KVT of $4.4 million, and (3) mortgages owed by KVT of $606,000. As of December 31, 1998, the current maturities on debt decreased due to the new Revolving Credit Facility that does not require a principal payment until August 31, 2003 with the option of possible credit extensions. See Note 6 to Comdial's Consolidated Financial Statements for additional information with respect to Comdial's loan agreements, long-term debt and available short-term credit lines. 122 Comdial believes that income from operations combined with amounts available from Comdial's current credit facilities will be sufficient to meet Comdial's needs for the foreseeable future. OTHER FINANCIAL INFORMATION During fiscal years 1998, 1997, and 1996, primarily all of Comdial's sales, net income, and identifiable net assets were attributable to the telecommunications industry. YEAR 2000 In early 1997, Comdial established a team (the "Year 2000 Team"), to evaluate whether, and to what extent, Comdial's products, information technology systems, facilities and production and distribution infrastructure may be affected by the Year 2000 and potential problems caused by the inability of certain computers and microprocessors to distinguish between the year 2000 and year 1900. STATE OF READINESS: Comdial believes that it has identified the Year 2000 issues that could potentially affect its business and has developed plans to address such problems. Through a series of industry-recognized tests, the Year 2000 Team believes that it has identified which of Comdial's products, devices, and computerized systems contain embedded microprocessors that will require remediation or replacement because of potential Year 2000 issues. The Year 2000 Team has concluded that nearly all of Comdial's products are already Year 2000 compliant. Comdial expects that any non-compliant products that Comdial continues to sell will be compliant before the third quarter of 1999. Futhermore, Comdial is providing upgrades or taking other remedial steps to correct any non-conpliant products that remain under warranty. In addition, Comdial's manufacturing division has performed Year 2000 testing and found all equipment to be functioning as required. Comdial continues to monitor and review any new issues that may arise concerning Year 2000. Furthermore, Comdial has implemented a requirement that its suppliers certify that all products, supplier's purchased products, and services provided to Comdial will not be adversely affected by the Year 2000. Comdial has divided its suppliers into three categories with respect to Year 2000 compliance: (1) non-critical component suppliers, (2) critical component suppliers, and (3) sole source critical component suppliers. As of the end of 1998, Comdial has received written confirmation of Year 2000 compliance for all three categories of approximately 99%. Comdial continues to follow up with suppliers to make sure they comply with Comdial's requirements and that they provide Comdial with the proper verification that they do or will comply with, Year 2000 issues. Comdial also plans to perform an on-site audits of some of the sole source suppliers that are critical to Comdial's operations which should be completed by the fourth quarter of 1999. COSTS: Comdial estimates that it will incur approximately $410,000 in additional expenses to remedy the remaining Year 2000 issues. This cost includes testing, new software, maintenance of existing software, PC replacements, and consultants. On an ongoing basis, Comdial has been replacing existing in-house systems to improve efficiency and to address the Year 2000 issue. Such replacements are projected to be complete in the first half of 1999. As of December 31, 1998, cumulative costs incurred by Comdial specifically for the Year 2000 totaled in aggregate of $121,000. RISK: There are various potential risks that could be associated with the failure of Comdial's business or the business of significant third-party suppliers of Comdial to be Year 2000 ready. The possible failure of internal information systems to be Year 2000 ready could result in some interruptions or disruptions of business. The possible failure of manufacturing facilities to be Year 2000 ready could result in impaired manufacturing processes with delays in delivery of products until non-compliant components or conditions can be remedied or replaced. Finally, risks of major failures of Comdial's products could include adverse functional impacts experienced by customers, 123 the costs and resources for Comdial to remedy such problems or replace non-compliant products under warranty and delays in delivery of new products. While Comdial believes that it is taking appropriate actions to respond to and resolve potential Year 2000 issues, there can be no assurance that Year 2000 issues will not have a material adverse affect on Comdial. CONTINGENCY PLANS: If the current sole source suppliers cannot give Comdial certification or corrective action for Year 2000 compliance, Comdial will develop and use alternative vendors. Comdial, as of December 31, 1998, has received certification that all of its major suppliers are or will be Year 2000 compliant not later than the third quarter of 1999. Management believes that Comdial is properly addressing the Year 2000 issue in order to mitigate any adverse operational or financial consequences. CURRENT PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." The new standard requires dual presentation of both basic and diluted earnings per share ("EPS") on the face of the earnings statement and requires a reconciliation of both basic and diluted EPS calculations. Comdial has adopted this statement. Also, in February 1997, FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." The new standard requires presentation disclosures about reportable operating segments of a company. The segments are based on how management is currently viewing operations. Comdial has adopted this statement. In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income." The new standard requires businesses to disclose comprehensive income and its components in their general-purpose financial statements. This standard does not have an impact on Comdial's financial statements or disclosures. In April 1998, FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." The new standard revises the required disclosures for pension and other postretirement benefit plans, but it does not change the measurement or recognition of such plans. This statement has been adopted by Comdial. In the third quarter of 1998, FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." Comdial does not have any derivatives and therefore, this statement will not affect Comdial. "SAFE HABOR" STATEMENT UNDER THE PRIVATE SECURITIES LIGITATION REFORM ACT OF 1995 Comdial'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 Comdial's filings with the Securities and Exchange Commission. These risks could cause Comdial's actual results for 1999 and beyond to differ materially from those expressed in any forward-looking statement made by, or on behalf of, Comdial. 124 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 ("Comdial") as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of Comdial's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Comdial Corporation and subsidiaries at December 31, 1998 and 1997, and the results of its operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP Richmond, Virginia January 29, 1999 125 REPORT OF MANAGEMENT Comdial Corporation's management is responsible for the integrity and objectivity of all financial data included in this Annual Report. The consolidated financial statements have been prepared in accordance with generally accepted accounting principles. Such principles are consistent in all material respects with accounting principles prescribed by the various regulatory commissions. The financial data includes amounts that are based on the best estimates and judgments of management. Comdial maintains an accounting system and related internal accounting controls designed to provide reasonable assurance that assets are safeguarded against loss or unauthorized use and that the financial records are adequate and can be relied upon to produce financial statements in accordance with generally accepted accounting principles. Deloitte & Touche LLP, Certified Public Accountants ("Independent Auditors"), have audited these consolidated financial statements, and have expressed herein their unqualified opinion. Comdial diligently strives to select qualified managers, provide appropriate division of responsibility, and assure that its policies and standards are understood throughout the organization. Comdial's Code of Conduct serves as a guide for all employees with respect to business conduct and conflicts of interest. The Audit Committee of the Board of Directors, comprised of Directors who are not employees, meets periodically with management and the Independent Auditors to review matters relating to Comdial's annual financial statements, internal accounting controls, and other accounting services provided by the Independent Auditors. /s/ William G. Mustain /s/ M. Funke WILLIAM G. MUSTAIN MANFRED FUNKE CHAIRMAN, PRESIDENT AND CONTROLLER CHIEF EXECUTIVE OFFICER 126 CONSOLIDATED BALANCE SHEETS
DECEMBER 31, In thousands except par value 1998 1997 --------- --------- ASSETS Current assets Cash and cash equivalents $ 1,599 $ 3,131 Accounts receivable - net (less allowance for 23,006 13,820 doubtful accounts: 1998 - $198; 1997 - $78) Inventories 21,434 18,487 Prepaid expenses and other current assets 4,815 1,669 --------- --------- Total current assets 50,854 37,107 --------- --------- Property - net 18,023 16,334 Net deferred tax asset 17,257 8,164 Goodwill 14,079 13,142 Other assets 8,777 4,517 --------- --------- Total assets $ 108,990 $ 79,264 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable $ 11,034 $ 9,229 Accrued payroll and related expenses 2,942 2,659 Accrued promotional allowances 1,877 1,915 Other accrued liabilities 3,346 2,927 Current maturities of debt 6 3,701 --------- --------- Total current liabilities 19,205 20,431 --------- --------- Long-term debt 22,140 9,922 Net deferred tax liability 3,123 2,705 Long-term employee benefit obligations 1,361 1,371 Commitments and contingent liabilities (see Note 13) -- -- --------- --------- Total liabilities 45,829 34,429 --------- --------- Stockholders' equity Common stock ($0.01 par value) and paid-in capital (Authorized 30,000 shares; issued shares outstanding: 1998 = 8,850; 1997 = 8,697) 116,039 114,663 Other (1,243) (1,039) Accumulated deficit (51,635) (68,789) --------- --------- Total stockholders' equity 63,161 44,835 --------- --------- Total liabilities and stockholders' equity $ 108,990 $ 79,264 ========= =========
The accompanying notes are an integral part of these financial statements. 127 CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, In thousands except per share amounts 1998 1997 1996 --------- --------- --------- Net sales $ 128,977 $ 118,561 $ 102,182 Cost of goods sold 75,597 71,218 64,301 --------- --------- --------- Gross profit 53,380 47,343 37,881 --------- --------- --------- Operating expenses Selling, general & administrative 34,034 29,069 25,757 Engineering, research & development 6,813 6,497 5,771 In-process research & development - Array Telecom Corp. 529 -- -- Goodwill amortization 3,806 3,567 2,674 --------- --------- --------- Operating income 8,198 8,210 3,679 --------- --------- --------- Other expense Interest expense 1,216 1,698 1,626 Miscellaneous expense - net 565 644 762 --------- --------- --------- Income before income taxes 6,417 5,868 1,291 Income tax expense (benefit) (10,737) 149 (518) --------- --------- --------- Net income applicable to common stock $ 17,154 $ 5,719 $ 1,809 ========= ========= ========= Earnings per common share and common equivalent share: Basic $1.94 $0.66 $0.21 ========= ========= ========= Diluted $1.89 $0.65 $0.21 ========= ========= ========= Weighted average common shares outstanding: Basic 8,843 8,684 8,484 Diluted 9,081 8,767 8,668
The accompanying notes are an integral part of these financial statements. 128 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Deferred Stock Common Stock Incentive Treasury Stock ------------------------------------- Paid-in --------------------- In thousands Shares Amount Shares Amount Capital Shares Amount - -------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------- Balance at January 1, 1996 8,226 $82 - $- $111,543 (94) ($838) 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 (3) (40) Common stock issued for acquisitions: Key Voice Tech., Inc. ("KVT") 243 2 1,469 Aurora Systems, Inc. ("Aurora") 148 2 890 Net income - -------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1996 8,678 87 - - 114,031 (97) (878) Proceeds from sale of Common Stock: Notes receivable Stock options exercised 32 165 Stock offering cost (9) Deferred stock compensation 4 Incentive stock issued 12 97 Contingency stock issued for KVT acquisition 72 1 291 Acquisition costs for KVT and Aurora (4) Net income - -------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1997 8,794 88 - - 114,575 (97) (878) Proceeds from sale of Common Stock: Notes receivable Stock options exercised 97 1 706 Treasury Stock Purchased (19) (209) Deferred stock compensation 48 Incentive stock issued 3 8 84 39 Contingency stock issued for KVT acquisition 72 498 Net income - -------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1998 8,966 $89 8 84 $115,866 (116) ($1,087) ========================================================================================================================== Notes Receivable on Sale Retained In thousands of Stock Earnings Total - ---------------------------------------------------------------------------------------- Balance at January 1, 1996 ($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 (40) Common stock issued for acquisitions: Key Voice Tech., Inc. ("KVT") 1,471 Aurora Systems, Inc. ("Aurora") 892 Net income 1,809 1,809 - ---------------------------------------------------------------------------------------- Balance at December 31, 1996 (168) (74,508) 38,564 Proceeds from sale of Common Stock: Notes receivable 7 7 Stock options exercised 165 Stock offering cost (9) Deferred stock compensation 4 Incentive stock issued 97 Contingency stock issued for KVT acquisition 292 Acquisition costs for KVT and Aurora (4) Net income 5,719 5,719 - ---------------------------------------------------------------------------------------- Balance at December 31, 1997 (161) (68,789) 44,835 Proceeds from sale of Common Stock: Notes receivable Stock options exercised 5 5 Treasury Stock Purchased 707 Deferred stock compensation (209) Incentive stock issued 48 Contingency stock issued for 123 KVT acquisition 498 Net income 17,154 17,154 - ---------------------------------------------------------------------------------------- Balance at December 31, 1998 ($156) ($51,635) $63,161 ========================================================================================
The accompanying notes are an integral part of these financial statements. 129 CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, In thousands 1998 1997 1996 --------- --------- --------- Cash flows from operating activities: Cash received from customers $ 120,967 $ 118,657 $ 106,979 Other cash received 2,398 1,219 1,022 Interest received 30 19 53 Cash paid to suppliers and employees (121,217) (108,304) (101,220) Interest paid on debt (1,376) (1,565) (876) Interest paid under capital lease obligations (11) (18) (89) Income taxes paid (824) (310) (243) --------- --------- --------- Net cash provided (used) by operating activities (33) 9,698 5,626 --------- --------- --------- Cash flows from investing activities: Purchase of Key Voice Technologies ("KVT") -- -- (8,528) Purchase of Aurora Systems ("Aurora") -- -- (1,901) Purchase of Array Telecom Corp. ("Array") (5,880) -- -- Acquisition cost for KVT and Aurora -- (4) (934) Acquisition cost for Array (246) -- -- Proceeds received from the sale of FastCall 290 -- -- Proceeds from the sale of equipment 158 22 9 Capital expenditures (4,842) (3,609) (3,179) --------- --------- --------- Net cash used by investing activities (10,520) (3,591) (14,533) --------- --------- --------- Cash flows from financing activities: Proceeds from borrowings -- 2,216 5,619 Net borrowings under revolver agreement 22,132 (1,749) 1,749 Proceeds from issuance of common stock 498 162 47 Principal payments on debt (13,546) (3,693) (1,941) Principal payments under capital lease obligations (63) (92) (531) --------- --------- --------- Net cash provided (used) by financing activities 9,021 (3,156) 4,943 --------- --------- --------- Net increase (decrease) in cash and cash equivalents (1,532) 2,951 (3,964) --------- --------- --------- Cash and cash equivalents at beginning of year 3,131 180 4,144 --------- --------- --------- Cash and cash equivalents at end of year $ 1,599 $ 3,131 $ 180 ========= ========= ========= - ----------------------------------------------------------------------------------------------------------------- Reconciliation of net income to net cash provided by operating activities: Net Income $ 17,154 $ 5,719 $ 1,809 --------- --------- --------- Depreciation and amortization 8,829 8,634 6,680 Change in assets and liabilities (for 1996 and 1998, net of effects from the purchase of KVT and Aurora, and Array, respectively) Decrease (increase) in accounts receivable (9,186) (4,160) 143 Inventory provision 2,286 1,509 1,029 Increase in inventory (5,219) (410) (2,385) Increase in other assets (5,431) (2,956) (1,888) Increase in net deferred tax assets (11,496) (220) (736) Increase (decrease) in accounts payable and bank overdrafts 1,805 1,085 (657) Increase in other liabilities 654 399 595 KVT asset value at acquisition -- -- 1,105 Aurora asset value at acquisition -- -- (121) Array asset value at acquisition (103) -- -- Increase in other equity 674 98 52 --------- --------- --------- Total adjustments (17,187) 3,979 3,817 --------- --------- --------- Net cash provided (used) by operating activities ($33) $ 9,698 $ 5,626 ========= ========= =========
The accompanying notes are an integral part of these financial statements. 130 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 1998, 1997, 1996 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Comdial Corporation and its subsidiaries ("Comdial"). All significant intercompany accounts and transactions have been eliminated. NATURE OF OPERATIONS Comdial is a United States ("U.S.") based manufacturer of business communication systems. Comdial's principal customers are small to medium sized businesses throughout the U.S. and certain international markets. The distribution network consists of three major distributors, two new distributors that began selling products in 1998, other supply houses, dealers, and independent interconnects. The dynamic, high-technology industry in which Comdial participates is very competitive. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with Generally Accepted Accounting Principles ("GAAP") requires management to make certain estimates and assumptions that affect reported amounts of assets, liabilities, revenues, expenses, and disclosure of contingent assets and liabilities at December 31, 1998. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS Cash equivalents are defined as short-term liquid investments with maturities, when purchased, of less than 90 days that are readily convertible into cash. Under Comdial's current cash management policy, borrowings from the revolving credit facility are used for normal operating purposes. The revolving credit facility is reduced by cash receipts that are not needed for daily operations. Bank overdrafts of $3.3 million and $1.9 million are included in accounts payable at December 31, 1998 and 1997, respectively. Bank overdrafts are outstanding checks that have not (1) cleared the bank or (2) been funded by the revolving credit facility. The revolving credit facility activity is reported on a net basis on the Consolidated Statements of Cash Flows. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out) or market. PROPERTY/DEPRECIATION Depreciation is computed using the straight-line method for all buildings, land improvements, machinery and equipment, and capitalized lease property over their estimated useful lives. Expenditures for maintenance and repairs of property are charged to expense. Improvements and repairs, which extend economic lives, are capitalized. In 1998, Comdial expensed certain computer hardware and software due to the rapid change in technology that has effected a need for continual replacements. Prior to 1998, all computer and software costs were capitalized or acquired through operating leases. The estimated useful lives are as follows: Buildings 30 years Land Improvements 15 years Machinery and Equipment 7 years Computer Hardware Equipment and Tooling 5 years 131 OTHER LONG-LIVED ASSETS Long-lived assets are amortized based on the assets' useful lives. Long-lived assets are reviewed for impairment as circumstances change that might effect those assets. Impairment loss is not recognized unless a portion of the carrying amount of an asset is no longer recoverable using a test of recoverability which is the sum of the expected future undiscounted cash flows. CAPITALIZED SOFTWARE DEVELOPMENT COSTS In 1998, 1997, and 1996, Comdial incurred costs associated with the develop-ment of software related to Comdial's various products. The accounting for such software costs is in accordance with SFAS No. 86 ("Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed"). The amortization period is over three years which is the short end of the product life cycle. The three year straight line method for software amortization causes greater expense for each period versus using the revenue method. The total amount of unamortized software development cost included in other assets is $4.5 million and $3.1 million at December 31, 1998 and 1997, respectively. The amounts capitalized were $2.8 million, $2.0 million, and $1.6 million, of which $1.4 million, $1.0 million, and $0.9 million were amortized in 1998, 1997, and 1996, respectively. Comdial also capitalizes costs associated with product software development performed by outside contract engineers. The total amount of unamortized outside contract development cost included in other assets is $2.1 million and $0.9 million at December 31, 1998 and 1997, respectively. The amount capitalized was $1.5 million, $0.5 million, and $1.1 million, of which $388,000, $569,000 and $157,000 was amortized in 1998, 1997 and 1996, respectively. POSTRETIREMENT BENEFITS OTHER THAN PENSION Comdial accrued estimated costs relating to health care and life insurance benefits. In 1998, 1997, and 1996, Comdial expensed $87,000, $64,000, and $41,000, respectively. REVENUE RECOGNITION Comdial recognizes revenue as products are shipped. Returned products are credited against revenues as they are received back from the customer. The only exceptions to this policy are revenues from E911 systems and from embedded software. E911 revenues are recognized when projects have been completed and embedded software revenues are not recognized until the customer requests a code from Comdial enabling the software to be used. Comdial's reporting of software revenue meets the requirements as set forth by Statement of Position 97-2 "Software Revenue Recognition." EXPENSING OF COSTS All production start-up, research and development, and engineering costs are charged to expense, except for that portion of costs which relate to product software development and outside contract development (see "Capitalized Software Development Costs"). ACCOUNTING FOR STOCK-BASED COMPENSATION Comdial accounts for stock-based compensation under Accounting Principles Board Opinion ("APB") No. 25. Comdial has disclosed in a note to the consolidated financial statements pro forma net income and earnings per share, as if Comdial had applied the fair value method (Black-Scholes) for stock options and similar equity instruments (see Note 11). INCOME TAXES Comdial uses the deferred tax liability or asset approach, which is based on the difference between the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates which will be in effect when 132 the differences reverse. Deferred tax expense is the result of changes in the liability for deferred taxes. The measurement of deferred tax assets is impacted by the amount of any tax benefits where, based on available evidence, the likelihood of realization can be established. Comdial incurred cumulative operating losses through 1991 for financial statement and tax reporting purposes and has adjusted its valuation allowance account to recognize the net deferred tax asset for future periods (see Note 7). Tax credits will be utilized to reduce current and future income tax expense and payments. EARNINGS PER COMMON SHARE AND COMMON EQUIVALENT SHARE For 1998, 1997, and 1996, earnings per common share ("EPS") were computed for both basic and diluted EPS based on Statement of Financial Accounting Standards ("SFAS") No. 128. Basic EPS for all years presented were computed by dividing net income applicable to common shares by the weighted average number of common shares outstanding and common equivalent shares including any possible contingent shares. For 1998, 1997, and 1996, diluted EPS were computed by dividing income attributable to common shareholders by the weighted average number of common and common equivalent shares outstanding during the period plus (in periods in which they had a dilutive effect) the effect of common shares contingently issuable, primarily from stock options. RECLASSIFICATIONS Amounts in the 1997 and 1996 consolidated financial statements have been reclassified to conform to the 1998 presentation. These reclassifications had no effect on previously reported consolidated net income. NOTE 2. ACQUISITIONS On March 20, 1996, Comdial completed the acquisition of Aurora Systems, Inc. ("Aurora") and Key Voice Technologies, Inc. ("KVT"), two companies involved in Computer-Telephony Integration ("CTI") applications, which became wholly-owned subsidiaries of Comdial. Aurora, based in Acton, Massachusetts, provided off-the-shelf CTI products. KVT, based in Sarasota, Florida, develops, assembles, markets, and sells voice processing systems and related products for business applications. The consideration paid for the acquisition of Aurora was approximately $2.8 million, of which $1.9 million was paid in cash and approximately $0.9 million was paid by issuance of 147,791 shares of Comdial'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 Comdial's issuance of a promissory note ("Promissory Note"), and $1.5 million was paid by the issuance of 243,097 shares of Comdial's Common Stock. Based on the purchase agreement with KVT, Comdial was obligated to issue an additional 216,086 shares of Comdial's Common Stock or the equivalent amount in cash for KVT's performance for the following three years from the acquisition date. At the beginning of the second quarter of 1998 and 1997, 72,029 shares of common stock for both periods were issued to the original principal owners of KVT. These shares were issued because KVT met its sales target for 1997 and 1996. Based on KVT's performance for 1998, the original owners are eligible for 72,030 additional shares of common stock or cash at the end of the first quarter of 1999. As the two target requirements are met by the principal owners of KVT, Comdial records the fair market value of the contingent shares and adds that amount to goodwill. This additional cost will be spread over the remaining life of the goodwill. 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 133 remaining life of the original goodwill. Such allocations have been based on asset valuations performed by outside consultants. As of December 31, 1997, Aurora sold all of its rights, title and interest in the FastCall product, Aurora's primary asset, to Spanlink Communications, Inc. Aurora may receive, over a five year period, royalties totaling up to $1.1 million with a minimum guarantee of $0.6 million at the end of that period. On July 14, 1998, Comdial acquired the internet telephony gateway product VOIPgate.com and the related assets and business of Array Telecom Corporation ("Array") from Array Systems Computing Inc. ("ASCI"). ASCI is located in Toronto, Ontario, Canada. The purchase price was approximately $5.9 million. The funds used for the acquisition came from cash generated by operations and a revolving credit facility. The principal asset purchased was the intellectual property associated with VOIPgate software, an internet protocol based telephony software platform. NOTE 3. INVENTORIES Inventory consists of the following: December 31, In thousands 1998 1997 ------- ------- Finished goods $ 8,507 $ 6,336 Work-in-process 3,568 4,101 Materials and supplies 9,359 8,050 ------- ------- Total $21,434 $18,487 ======= ======= Comdial provides reserves to cover product obsolescence and those reserves impact gross margin. Future reserves will be dependent on management's estimates of the recoverability of costs of all inventory. Raw material obsolescence is mitigated by the commonality of component parts and finished goods by the low level of inventory relative to sales. NOTE 4. PROPERTY Property consists of the following: December 31, In thousands 1998 1997 -------- -------- Land $ 656 $ 656 Buildings and improvements 14,582 14,104 Machinery and equipment 33,514 30,423 Less accumulated depreciation (30,729) (28,849) -------- -------- Property - Net $ 18,023 $ 16,334 ======== ======== Depreciation expense charged to operations for the years 1998, 1997, and 1996, was $2.8 million, $2.8 million, and $2.6 million, respectively. NOTE 5. LEASE OBLIGATIONS Comdial and its subsidiaries have various capital and operating lease obligations. Future minimum lease commitments for capitalized leases and aggregate minimum rental commitments under operating lease agreements that have initial non-cancelable lease terms in excess of one year are as follows: Year Ending December 31, Operating In thousands Leases - ------------ ------- 1999 $2,200 2000 1,672 2001 523 2002 24 2003 - ------ Total minimum lease commitments $4,419 ====== 134 The remaining lease commitments for capital leases are $14,000 with $6,000 of this amount due in 1999. Assets recorded under capital leases (included in property in the accompanying Consolidated Balance Sheets) are as follows: December 31, In thousands 1998 1997 ----- ----- Machinery and equipment $ 41 $ 218 Less accumulated depreciation (24) (115) ----- ----- Property - Net $ 17 $ 103 ===== ===== During 1998 Comdial did not enter into any new capital leases. For 1997 and 1996, Comdial entered into new capital lease obligations which amounted to approximately $18,000 and $67,000, 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, 1998, 1997, and 1996, were $2.2 million, $1.9 million, and $1.7 million, respectively. NOTE 6. DEBT Since February 1, 1994, Fleet Capital Corporation ("Fleet") has held substantially all of Comdial's indebtedness. Comdial and Fleet entered into a loan and security agreement (the "Loan Agreement") which was amended from time to time. The Loan Agreement provided Comdial with a $10.0 million acquisition loan (the "Acquisition Loan"), a $3.5 million equipment loan (the "Equipment Loan"), and a $12.5 million revolving credit loan facility (the "Revolver"). The Loan Agreement was effective until February 1, 2001 and the agreement would automatically renew itself for one-year periods thereafter. On October 22, 1998, Comdial and NationsBank, N.A. ("NationsBank"), entered into a credit agreement (the "Credit Agreement"). The Credit Agreement provides Comdial with a $50 million revolving credit facility and a $5 million letter of credit subfacility. Comdial used $15.8 million under the revolving credit facility (the "Revolving Credit Facility") to pay off (1) all its indebtedness of $10.8 million to Fleet, (2) $4.4 million representing amounts owed under Comdial's promissory note including interest to the former owners of KVT, and (3) $606,000 of mortgages owed by KVT. Long-term debt consists of the following: - ------------------------------------------------------------------------------ December 31, In thousands 1998 1997 ------- ------- Notes payable Acquisition note (1) $-- $ 5,543 Equipment note I (2) -- 139 Equipment note II (3) -- 1,647 Revolving credit (4) 22,132 -- Promissory note (5) -- 5,600 Other (6) -- 617 Capitalized leases (7) 14 77 ------- ------- Total debt 22,146 13,623 Less current maturities on debt 6 3,701 ------- ------- Total long-term debt $22,140 $ 9,922 ======= ======= (1) On March 20, 1996, Comdial borrowed $8.5 million under the Acquisition Loan which was used to acquire Aurora and KVT. The Acquisition Loan was payable in equal monthly principal installments of $142,142, with the balance due on February 1, 2001. In the first quarter of 1998, Comdial paid an additional $1.8 million against the Acquisition Loan along with the required monthly payments. The original final payment was scheduled for 135 February 2001. In October 1998, Comdial paid the final balance of $2.3 million to Fleet with funds provided by the Revolving Credit Facility from NationsBank. (2) Equipment Loan I was payable in equal monthly principal installments of $27,000, with the balance due on June 1, 1998. (3) Equipment Loan II was payable in equal monthly principal installments of $31,667, with the balance due on February 1, 2001. In January 1998, Comdial paid the remaining balances of both Equipment Loan I and II of $1,786,000. (4) Availability under the Revolver of up to $12.5 million was based on eligible accounts receivable and inventory, less funds already borrowed. Effective October 1998, the availability under the Revolving Credit Facility with NationsBank is $50 million. Loans made pursuant to the Loan Agreement had interest rates at either Fleet's prime rate or the London Interbank Offered Rate ("LIBOR") at Comdial's option. The interest rates could be adjusted annually based on Comdial's debt to earnings ratio, which allowed the rates to vary 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 October 21, 1998, Comdial's borrowing rate was 7.50% with 100% of the loans based on the prime rate. For December 31, 1997, Comdial's borrowing rate for loans based on prime and LIBOR rates were 9.00% and 8.47%, respectively, with approximately 96% of the loans based on the LIBOR rate. On October 22, 1998, Comdial paid the final balance of $8.5 million to Fleet with funds provided by the Revolving Credit Facility from NationsBank. The loan made pursuant to the Credit Agreement with NationsBank carries an interest rate based on the LIBOR daily rate plus the applicable margin. The interest rate can be adjusted quarterly based on Comdial's ratio of funded debt to earnings before interest, taxes, depreciation and amortization ("EBITDA"), which allows the rates to vary from plus 0.75% to 1.50% above the LIBOR daily rate. As of December 31, 1998, Comdial's borrowing LIBOR rate was 6.30%, which included the additional applicable margin of 0.75%. This Revolving Credit Facility with NationsBank can be used by Comdial for working capital, equipment purchases, to finance permitted acquisitions, and for other general corporate purposes. The NationsBank Revolving Credit Facility (as defined in the Credit Agreement) does not require payment until August 31, 2003 with the option of possible credit extensions. (5) Comdial's promissory note (the "Promissory Note"), which was issued in connection with the purchase of KVT, carried an interest rate equal to the prime rate with annual payments of $1.4 million plus accumulated interest with the balance due on March 20, 2001. As of October 21, 1998 and December 31, 1997, the interest rate on the Promissory Note was 8.00% and 8.50%, respectively. On October 22, 1998, Comdial paid the final balance of $4.2 million plus accumulated interest of $210,000 to the owners of the Promissory Note with funds provided by the Revolving Credit Facility from NationsBank. (6) Other debt consisted of a mortgage acquired in conjunction with the acquisition of KVT and another mortgage entered into by KVT in order to acquire an adjacent building for expansion. The mortgages required monthly payments of $2,817 and $2,869, including interest at fixed rates of 8.75% and 9.125%, respectively. Final payments were due on August 1, 2005 and June 27, 2007, respectively. On October 22, 1998, Comdial paid the final mortgage balances of $606,000 with funds provided by the Revolving Credit Facility from NationsBank. (7) Capital leases are with various financing entities and are payable based on the terms of each individual lease (see Note 5). The NationsBank Credit Agreement also gives Comdial a letter of credit subfacility of $5.0 million, which is part of the Revolving Credit Facility, 136 as commitments occur. At December 31, 1998, the amount of commitments under the letter of credit facility with NationsBank was $52,000. DEBT COVENANTS Comdial's indebtedness to Fleet was secured by liens on Comdial's accounts receivable, inventories, intangibles, land, and all other property. Among other restrictions, the amended Loan Agreement contained certain financial covenants that require specified levels of consolidated tangible net worth, profitability, and other certain financial ratios. The Fleet agreement was amended from time to time. Effective October 1998, Comdial's indebtedness with NationsBank is secured by liens on all Comdial's properties and assets. The Credit Agreement with NationsBank contains certain financial covenants that relate to specified levels of consolidated net worth and other financial ratios. As of December 31, 1998, Comdial was in compliance with all the covenants and terms of NationsBank's Credit Agreement. NOTE 7. INCOME TAXES The components of the income tax expense for the years ended December 31 are as follows:
In thousands 1998 1997 1996 -------- ----- ----- Current - Federal $393 $200 $59 State 369 168 159 Deferred - Federal (9,730) (214) (714) State (1,769) (5) (22) -------- ---- ----- Total provision (benefit) ($10,737) $149 ($518) ======== ==== =====
The income tax provision reconciled to the tax computed at statutory rates for the years ended December 31 is summarized as follows: In thousands 1998 1997 1996 -------- -------- -------- Federal tax at statutory rate (35% in 1998, 1997, and 1996) $ 2,246 $ 2,054 $ 452 State income taxes (net of federal tax benefit) (924) 109 103 Nondeductible charges 411 544 329 Other adjustments 519 200 77 Utilization of operating loss carryover -- (2,539) (743 Adjustment of valuation allowance (12,989) (219) (736 -------- -------- -------- Income tax provision (benefit) ($10,737) $ 149 ($ 518 ======== ======== ======== Net deferred tax assets of $17.0 million and $5.5 million have been recognized in the accompanying Consolidated Balance Sheets at December 31, 1998 and 1997, respectively. The components of the net deferred tax assets are as follows: December 31, In thousands 1998 1997 ------- ------- Total deferred tax assets $23,045 $25,201 Total valuation allowance (2,966) (17,037) ------- ------- Total deferred tax assets - net 20,079 8,164 Total deferred tax liabilities (3,123) (2,705) ------ ------- Total $16,956 $5,459 ======= ======= The valuation allowance decreased $14.1 million during the year ended December 31, 1998. The decrease was primarily related to (1) the re-evaluation of the future utilization of net operating losses ("NOLs") of $13 million, and (2) the net change in temporary differences of deferred tax assets, deferred tax liabilities, and operating loss carryforwards of $1.1 million. Comdial periodically reviews the requirements for a valuation allowance and makes adjustments to such allowance when changes in circumstances result in changes 137 in management's judgment about the future realization of deferred tax assets. Section 382 of the Internal Revenue Code limits an organization's ability to utilize tax benefits in the event that there is change in ownership of 50% or more of the organizations during any three-year period. Since Comdial's stock offering in August 1995, which resulted in a significant change in ownership, management has been concerned that cumulative changes in ownership of Comdial could trigger the limitations set forth in Section 382 and adversely affect Comdial's ability to utilize certain tax benefits. With the passage of the third fiscal quarter of 1998, the ownership changes occasioned by the stock offerings will no longer be included in the time period measured under Section 382. Based on the re-evaluations, the valuation allowance was reduced and a tax benefit of $330,000 and $11.7 million was recognized in the quarters ending March 29, 1998 and September 27, 1998, respectively. Accordingly, management believes that it is more likely than not that Comdial will realize these tax benefits. However, the tax benefits could be reduced in the near term if estimates of future taxable income during the carryforward periods are reduced or a limitation based on section 382 occurs before NOLs expire. Comdial has net operating loss and credit carryovers of approximately $34.1 million and $1.6 million, respectively, which, if not utilized, will expire as follows: In thousands Net Operating Expiration Dates Losses Tax Credits ------- ------ 1999 $- $504 2000 17,527 66 2001 5,260 - 2002 6,486 - 2003 7 - AFTER 2003 4,862 1,038 ------- ------ TOTAL $34,142 $1,608 ======= ====== The components of the net deferred tax assets (liabilities) at December 31, 1998 and 1997 are as follows: Deferred Assets (Liabilities) Deceember 31, In thousands 1998 1997 -------- -------- Net loss carryforwards $ 12,781 $ 19,030 Tax credit carryforwards 1,608 2,856 Inventory write downs and capitalization 1,794 1,268 Pension 246 227 Postretirement 297 239 Compensation and benefits 357 318 Capitalized software development costs 438 246 Contingencies 589 29 Other deferred tax assets 82 64 Fixed asset depreciation (2,522) (2,607) Goodwill amortization 1,692 826 Research and development expenditures 3,161 -- State taxes (601) -- Other deferred tax liabilities -- -- -------- -------- Net deferred tax asset 19,922 22,496 Less: Valuation allowance (2,966) (17,037) -------- -------- Total $ 16,956 $ 5,459 ======== ======== NOTE 8: EARNINGS PER SHARE For the three years ending December 31, 1998, 1997 and 1996, earnings per common share ("EPS") were computed for both basic and diluted EPS to conform to Statement of Financial Accounting Standards ("SFAS") No. 128. Basic EPS for the three years presented were computed by dividing net income applicable to common shares by the weighted average number of common shares outstanding and common equivalent shares including any possible contingent shares. For the three years, diluted EPS were computed by dividing income attributable to 138 common shareholders by the weighted average number of common and common equivalent shares outstanding during the period plus (in periods in which they had a dilutive effect) the effect of common shares contingently issuable, primarily from stock options. The following table discloses the annual information.
- ------------------------------------------------------------------------------ Year Numerator Denominator EPS - ------------------------------------------------------------------------------ 1998 Basic EPS $17,154,000 8,843,357 $1.94 Diluted $17,154,000 9,081,070 $1.89 1997 Basic EPS $ 5,719,000 8,683,790 $0.66 Diluted $ 5,719,000 8,767,353 $0.65 1996 Basic EPS $ 1,809,000 8,484,271 $0.21 Diluted $ 1,809,000 8,667,641 $0.21
NOTE 9. PENSION AND SAVINGS PLANS Comdial 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 change in benefit obligations of the pension plans and amounts recognized in Comdial's Consolidated Balance Sheets at December 31, 1998 and 1997. In thousands 1998 1997 -------- -------- Benefit obligation at beginning of year $ 18,541 $ 14,218 Service cost 1,575 1,226 Interest cost 1,334 1,047 Actual loss 1,435 2,405 Benefits paid (453) (355) Amendments -- -- -------- -------- Benefit obligation at December 31 $ 22,432 $ 18,541 ======== ======== The following tables sets forth the change in plan assets of the pension plans and amounts recognized in Comdial's Consolidated Balance Sheets at December 31, 1998 and 1997.
In thousands 1998 1997 -------- -------- Fair value of plan assets at beginning of year $ 19,025 $ 15,551 Actual return on plan assets 1,400 2,590 Employer contribution 1,430 1,239 Benefits paid (453) (355) -------- -------- Fair value of plan assets at December 31 $ 21,402 $ 19,025 ======== ======== Funded status ($ 1,030) 484 Unrecognized transition obligation (asset) (29) (58) Unrecognized actuarial (gain) or loss 590 (875) Unrecognized prior service cost (185) (219) -------- -------- Net amount recognized ($654) ($668) ======== ========
139 Amounts recognized in the Consolidated Balance Sheets consist of: 1998 1997 ------- ------- Prepaid benefit cost ($668) ($944) Accrued benefit liability (1,417) (963) Contributions during fiscal year 1,431 1,239 ------- ------- Net amount recognized ($654) ($668) ======= ======= Assumptions used in accounting for the plans as of December 31 were as follows: 1998 1997 1996 ----- ----- ----- Discount rate 7.00% 7.00% 7.50% Expected return on plan assets 9.00% 9.00% 9.00% Rate of compensation increase 4.50% 4.00% 4.00% Net periodic pension cost for 1998, 1997, and 1996 included the following components: In thousands 1998 1997 1996 ------- ------- ------- Change in benefit obligation: Service cost $ 1,575 $ 1,226 $ 1,081 Interest cost 1,334 1,047 890 Expected return on plan assets (1,490) (1,247) (1,061) Amortization of prior service cost (63) (63) (63) Recognized actuarial loss 61 -- -- ------- ------- ------- Net periodic pension cost $ 1,417 $ 963 $ 847 ======= ======= ======= In addition to providing pension benefits, Comdial contributes to a 401(k) plan, based on an employee's contributions. Participants can contribute from 2% to 12.5% of their salary as defined in the terms of the plan. In 1998, 1997, and 1996, Comdial made matching contributions equal to 25% of a participant's contributions up to the first 10%. Effective for 1999, participants can contribute from 1% to 17% of their salary and Comdial will match contributions equal to 50% of the participant's contribution up to the first 6%. Comdial's total expense for the matching portion to the 401(k) plan for 1998, 1997, and 1996 was $411,000, $411,000, and $341,000, respectively. NOTE 10. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The effect of SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," on income from continuing operations for 1998, 1997, and 1996 was an expense of $87,000, $64,000, and $41,000, respectively. Comdial provides certain health care coverage (until age 65), which is subsidized by the retiree through insurance premiums paid to Comdial, and life insurance benefits for substantially all of its retired employees. The postretirement benefit obligation is not funded and does not include any provisions for securities, settlement, curtailment, or special termination benefits. In 1993, when SFAS No. 106 went into effect, Comdial elected to amortize the cumulative effect of this obligation over 20 years (see unrecognized transition obligation in the following table). The following table sets forth the change in postretirement benefit obligations and amounts recognized in Comdial's Consolidated Balance Sheets at December 31, 1998 and 1997. In thousands 1998 1997 ------- ------- Benefit obligation at beginning of year $ 840 $ 794 Service cost 19 22 Interest cost 68 60 Plan participants' contributions 58 47 Actual loss 186 86 Benefits paid (160) (169) Amendments -- -- ------- ------- Benefit obligation at December 31 $ 1,011 $ 840 ======= ======= 140 The following tables set forth the change in plan assets of the postretirement benefits and amounts recognized in Comdial's Consolidated Balance Sheets at December 31, 1998 and 1997. In thousands 1998 1997 ------- ------- Fair value of plan assets at beginning of year $-- $-- Actual return on plan assets -- -- Employer contribution 102 121 Plan participants' contributions 58 47 Benefits paid (160) (168) ------- ------- Fair value of plan assets at December 31 $-- $-- ======= ======= Funded status ($1,011) ($840) Unrecognized transition obligation 1,267 1,358 Unrecognized actuarial gain (944) (1,221) Unrecognized prior service cost -- -- ------- ------- Net amount recognized ($688) ($703) ======= ======= Amounts recognized in the Consolidated Balance Sheets: Prepaid benefit cost ($703) ($760) Accrued benefit liability (87) (64) Contributions during fiscal year 102 121 ------- ------- Net amount recognized ($688) ($703) ======= ======= Assumptions used in accounting for the plans as of December 31 were as follows: 1998 1997 1996 ---- ---- ---- Discount rate 7.00% 7.00% 7.50% For measurement purposes, an 8 percent annual rate of increase in the per capita cost of covered health care benefits was assumed for 1998. The rate was assumed to decrease gradually to 5.25 percent for 2005 and remain at that level thereafter. Net periodic pension cost for 1998, 1997, and 1996 included the following components: In thousands 1998 1997 1996 ----- ----- ----- Change in benefit obligation: Service cost $ 19 $ 22 $ 20 Interest cost 68 60 55 Expected return on plan assets -- -- -- Amortization of prior service cost 91 91 91 Recognized actuarial gain (91) (109) (125) ----- ----- ----- Net periodic pension cost $ 87 $ 64 $ 41 ===== ===== ===== Assumed health care cost trend rates could have a significant effect on the amounts reported for the health care plans. A one-percentage change in assumed health care cost trend rates would have the following effects: 1-Percentage- 1-Percentage In thousands Point Increase Point Decrease -------------- -------------- Effect on total of service and interest cost components $6 ($5) Effect on postretirement benefit obligation $47 ($40) 141 NOTE 11. STOCK-BASED COMPENSATION PLANS As of December 31, 1998, Comdial had two basic stock-based compensation plans. The 1992 Stock Incentive Plan (the "Stock Incentive Plan") provides for stock options to purchase shares of Common Stock which may be granted to officers, directors, and certain key employees as additional compensation. Pursuant to the terms of the 1992 Non-employee Directors Stock Incentive Plan (the "Directors Stock Incentive Plan"), each non-employee director shall be awarded 3,333 shares of Comdial's Common Stock for each fiscal year Comdial reports income. In January 1996, in accordance with the terms of the Directors Stock Incentive Plan, the Board of Directors adopted a resolution suspending 833 of the 3,333 shares of Comdial's common stock automatically awarded to non-employee directors under such circumstances. In 1998, each non-employee director was awarded 2,500 shares related to income earned by Comdial for fiscal year 1997. The plans are composed of stock options, restricted stock, nonstatutory stock, and incentive stock. Comdial's incentive plans are administered by the Compensation Committee of Comdial's Board of Directors. As of December 31, 1998, there were 1.6 million shares of Comdial's Common Stock reserved for issuance under Comdial's 1992 Stock Incentive Plan that had been approved by the stockholders in 1996. Comdial has previously accepted notes relating to the non-qualified stock options exercised by officers and employees. These notes receivable relating to stock purchases amounted to $156,000, $161,000, and $168,000 at December 31, 1998, 1997, and 1996, respectively, and have been deducted from Stockholders' Equity. Options granted for years 1998 and 1997 have a maximum term of ten years and vest over a three-year period. Options become exercisable in installments of 33% per year on each of the first through the third anniversaries of the grant date. All options granted through the Stock Incentive Plan are granted at an exercise price equal to the market price of Comdial's Common Stock on the grant date. In December 1997, Comdial granted nonstatutory stock options totaling 50,000 shares, which are outside the 1992 Stock Incentive Plan. These stock options vest over a five year period. In 1998, Comdial granted 120,000 shares of nonstatutory stock options at the current fair market value at grant date. These options were issued outside of the 1992 Stock Incentive Plan. These options vest over a four to six year period. Comdial has charged against income in 1998 and 1997, compensation expense for these stock options of $48,000 and $4,000, respectively. Comdial applies APB No. 25 and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its fixed stock option plan other than the performance based option that is part of the plan for its directors. Common Stock has been issued by Comdial to its directors for years that show positive net income. The compensation cost that has been charged against income for its director's performance-based stock was $148,000, $97,000, and $66,000 for 1998, 1997, and 1996, respectively. Information regarding stock options is summarized below:
1998 (1) 1997 (1) 1996 (1) - ------------------------------------------------------------------------------------------------------------------- Options outstanding, January 1; 859,729 $8.08 659,524 $7.95 449,241 $6.50 Granted 405,316 10.42 298,450 8.25 277,062 9.12 Exercised (96,602) 7.17 (32,216) 5.43 (52,617) 1.58 Terminated (64,230) 9.61 (66,029) 8.79 (14,162) 8.72 ------- ------- ------- Options outstanding, December 31; 1,104,213 8.93 859,729 8.08 659,524 7.95 ========= ======= ======= Options exercisable, December 31; 474,175 8.05 342,880 7.46 212,392 6.30 Per share ranges of options outstanding at December 31 $1.41-$13.50 $1.41-$11.75 $1.41-$11.75 Dates through which options outstanding at December 31, were exercisable 1/99-7/2008 1/98-12/2007 1/97-5/2006
(1) Fair value weighted-average exercise price at grant date. 142 The following table summarizes information concerning currently outstanding and exercisable options at December 31, 1998:
Options Outstanding Options Exercisable ----------------------- --------------------------------- Weighted- Number Average Weighted- Number Weighted- Range of Outstanding Remaining Average Exercisable Average Exercise at Contractual Exercise at Exercise Prices 12/31/98 Life Price 12/31/98 Price - -------------------------------------------------------------------------------------- $1.41 TO 3.00 49,275 3.7 $1.73 49,275 $1.73 5.73 TO 7.77 222,819 6.2 6.96 158,077 7.25 8.12 TO 9.38 459,127 8.1 8.86 186,716 9.15 10.50 TO 13.50 372,992 8.4 11.15 80,107 10.97 --------- ------- 1.41 TO 13.50 1,104,213 7.6 8.93 474,715 8.05 ========= =======
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: 1998 1997 1996 ---- ---- ---- Risk-free interest rate 4.72% 5.51% 6.18% Expected life 7.78 3.65 3.82 Expected volatility 68% 73% 90% Expected dividends none none none If compensation cost for Comdial's Stock Incentive Plans had been determined based on the fair value at the grant dates for awards under the plan, consistent with the method of Statement of Financial Accounting Standards ("SFAS") No. 123, Comdial's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
In thousands except per share amounts 1998 1997 1996 ------------------------------------- ------- ------ ------ Net income: As reported $17,154 $5,719 $1,809 Compensation expense 1,233 525 218 Pro forma $15,921 $5,194 $1,591 Basic earnings per share: As reported $1.94 $0.66 $0.21 Pro forma $1.80 $0.60 $0.19 Diluted earnings per share: As reported $1.89 $0.65 $0.21 Pro forma $1.75 $0.59 $0.18
NOTE 12. SEGMENT INFORMATION Effective December 31, 1998, Comdial has adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information." During 1998, 1997, and 1996, substantially all of Comdial's sales, net income, and identifiable net assets were attributable to the telecommunications industry with over 96 percent of the sales occurring in the United States. Comdial is organized into several product segments that comprise the majority of its sales to the telecommunications market. Comdial has three basic product categories that contribute ten percent or more, to net sales. The segments are Digital Systems, Solutions and Software, and Analog and Other (which includes other miscellaneous products). Each of these categories are considered a business segment, and with respect to their financial performance, the costs associated with these segments can only be quantified and identified to the gross profit level for each segment. 143 The Digital Systems segment is comprised of products such as Impact, Impression series telecommunication systems, Impact Digital Expandable Systems ("DXP"), DXP Plus and the open digital switching platforms known as the "FX Series." Digital Systems generally offer customers more features with superior quality platforms. The distinguishing characteristic of this segment is that it is designed for the small office up to 500 end users. The Solutions and Software segment is comprised of all Comdial's software and software application products. The products included are all of Comdial's vertical market products such as Impact Concierge, QuickQ, Avalon, and voice processing systems. These products are sold to specific industries such as hospitality, call centers, and assisted living centers. The Analog and Other segment is comprised of Comdial's older analog products (such as the Executech, Unisyn, ATC Terminals, and Solo), and other products such as Voice Express, MaxPlus, and Custom Manufacturing. The Analog products are aimed at the small office market, which supports only a few users. This market places more emphasis on price than features or software functionality. The information in the following tables is derived directly from the segments' internal financial reporting used for corporate management purposes. The expenses, assets and liabilities attributable to corporate activity are not allocated to the operating segments. There are no operating assets located outside the United States. Unallocated costs include operating expenses, goodwill amortization, interest expense, other miscellaneous expenses, and income tax expenses or benefits. Comdial does not maintain information that would allow these costs to be broken down into the various product segments and most of the costs are universal in nature. Unallocated assets include such items as cash, deferred tax assets, other miscellaneous assets, and goodwill. Unallocated capital expenditures and depreciation relate primarily to shared services assets. Unallocated liabilities include such items as accounts payable, debt, leases, deferred tax liabilities, and most other liabilities that do not relate to sales. The following tables show segment information for years ended December 31. Business Segment Net Revenues (Dollars in thousands) 1998 1997 1996 -------- -------- -------- Digital Systems $ 80,452 $ 70,181 $ 56,725 Solutions and Software 36,194 31,625 23,453 Analog and Other 12,331 16,755 22,004 -------- -------- -------- Net sales $128,977 $118,561 $102,182 ======== ======== ======== Business Segment Profit (Dollars in thousands) 1998 1997 1996 -------- -------- -------- Digital Systems $ 31,237 $ 25,175 $ 18,553 Solutions and Software 19,341 18,418 12,617 Analog and Other 2,802 3,750 6,711 -------- -------- -------- Gross profit 53,380 47,343 37,881 Operating expenses 45,182 39,133 34,202 Interest expense 1,216 1,698 1,626 Miscellaneous expense - net 565 644 762 -------- -------- -------- Income before income taxes $ 6,417 $ 5,868 $ 1,291 ======== ======== ======== December 31, (Dollars in thousands) 1998 1997 1996 -------- -------- -------- Business Segment Assets Digital Systems $ 43,286 $ 32,245 $ 27,354 Solutions and Software 18,124 12,978 9,233 Analog and Other 6,432 6,989 9,048 Unallocated 41,148 27,052 28,717 -------- -------- -------- Total $108,990 $ 79,264 $ 74,352 ======== ======== ========
144
Business Segment Liabilities (Dollars in thousands) 1998 1997 1996 ------- ------- ------- Digital Systems $ 1,397 $ 1,389 $ 1,257 Solutions and Software 1,750 2,306 2,382 Analog and Other 203 267 384 Unallocated 42,479 30,467 31,765 ------- ------- ------- Total $45,829 $34,429 $35,788 ======= ======= ======= Business Segment Property, Plant and Equipment December 31, (Dollars in thousands) 1998 1997 1996 ------- ------- ------- Depreciation Digital Systems $ 1,727 $ 1,721 $ 1,532 Solutions and Software 264 196 133 Analog and Other 148 206 332 Unallocated 665 628 601 ------- ------- ------- Total $ 2,804 $ 2,751 $ 2,598 ======= ======= ======= Additions Digital Systems $ 2,146 $ 2,230 $ 1,024 Solutions and Software 499 843 151 Analog and Other 194 154 34 Unallocated 1,659 695 2,207 ------- ------- ------- Total $ 4,498 $ 3,922 $ 3,416 ======= ======= =======
Comdial had sales in excess of 10% of net sales to three customers as follows:
In thousands 1998 1997 1996 ------- ------- ------- Sales: ALLTEL Supply, Inc. $19,301 $21,537 $19,472 Graybar Electric Company, Inc. 30,415 33,342 31,719 Sprint/North Supply , Inc. 24,902 26,445 22,432 Percentage of net sales: ALLTEL Supply, Inc. 15% 18% 19% Graybar Electric Company, Inc. 24% 28% 31% Sprint/North Supply , Inc. 19% 22% 22% Net sales of all three: Digital Systems $54,372 $56,831 $46,128 Solutions and Software 12,189 11,835 11,095 Analog and Other 8,057 12,658 16,400 ------- ------- ------- Net sales $74,618 $81,324 $73,623 ======= ======= =======
ALLTEL Supply, Inc., a subsidiary of ALLTEL Corporation, was a shareholder of Comdial until 1996. NOTE 13. COMMITMENTS AND CONTINGENT LIABILITIES Comdial's facilities are subject to a variety of federal, state, and local environmental protection laws and regulations, including provisions relating to the discharge of materials into the environment. The cost of compliance with such laws and regulations has not had a material adverse effect upon Comdial's capital expenditures, earnings or competitive position, and it is not anticipated to have a material adverse effect in the future. In 1988, Comdial voluntarily discontinued use of a concrete underground hydraulic oil and chlorinated solvent storage tank. In conjunction therewith, nearby soil and groundwater contamination was noted. As a result, Comdial developed a plan of remediation that was approved by the Virginia Water Control Board and later by the Virginia Department of Environmental Quality. In 1994, Comdial installed all the required equipment and started the process of pumping hydraulic oil residue from the underground water. The oil is 145 deposited into approved containers and taken to a hazardous waste site in accordance with the corrective action plan. As of December 31, 1998, Comdial has incurred total costs of approximately $25,000 and expects the pumping process to be completed by early 1999. Management does not believe that contingent losses or potential claims arising from Year 2000 issues will have a material effect on Comdial. At one time, Comdial sold certain DOS-based systems that are not Year 2000 compliant. All such systems were sold by Comdial substantially to dealers and not directly to end-users. In addition, any warranties associated with such systems have expired. Comdial has alerted all its dealers to this potential problem and has provided instructions to the dealers on how to remedy the problem. Comdial can not predict whether the failure of such systems that are not Year 2000 compliant will result in any litigation against Comdial. NOTE 14. QUARTERLY FINANCIAL DATA (UNAUDITED)
- -------------------------------------------------------------------------------------------------------------- In thousands except First Second Third Fourth per share amounts Quarter Quarter Quarter Quarter ------- ------- ------- ------- 1998 Sales $29,281 $31,317 $32,031 $36,348 Gross profit 11,887 12,216 13,387 15,890 Goodwill amortization 663 683 1,678 782 Interest expense 275 273 321 347 Net income 1,839 1,858 11,854 1,603 Net earnings per common share: Basic 0.21 0.21 1.34 0.18 - -------------------------------------------------------------------------------------------------------------- 1997 Sales $26,834 $29,400 $31,091 $31,236 Gross profit 11,038 11,772 12,522 12,011 Goodwill amortization 1,037 859 855 816 Interest expense 427 449 436 386 Net income 671 1,142 2,002 1,904 Net earnings per common share: Basic 0.08 0.13 0.23 0.22 - --------------------------------------------------------------------------------------------------------------
Previously reported quarterly information has been revised to reflect certain reclassifications. These reclassifications had no effect on previously reported consolidated net income. In the first quarter of 1998, Comdial reevaluated the future utilization of its deferred tax assets for future periods. Based on the reevaluation of the realizability of the deferred tax assets, the valuation allowance was reduced and a tax benefit of $330,000 was recognized (see Note 7). In the third quarter of 1998, Comdial acquired Array by borrowing funds from the Fleet Revolver. The effect of the acquisition was a small increase in interest expense, goodwill, in-process research and development, and additional costs associated with the Array operations amounting to approximately $1.6 million for the third and fourth quarters. In addition, Comdial recognized additional costs associated with Aurora of $891,000 and write-off of excess inventory of $700,000. Also in the third quarter, Comdial reevaluated the future utilization of its deferred tax assets for future periods. Based on the reevaluation of the realizability of the deferred tax assets, the valuation allowance was reduced and a tax benefit of $11.7 million was recognized (see Note 7). Comdial recognizes costs based on estimates throughout the fiscal year relating to inventory. The results of the physical inventory and the fiscal year-end close reflected a favorable adjustment with respect to such estimates, resulting in approximately $122,000 of additional income, which is reflected in the fourth quarter of 1998. 146 In the first quarter of 1997, Comdial reevaluated the future utilization of its deferred tax assets for future periods. Based on the reevaluation of the realizability of the deferred tax assets, the valuation allowance was reduced and a tax benefit of $219,000 was recognized (see Note 7). In the fourth quarter of 1997, Comdial revalued certain slow moving analog inventory that resulted in an additional cost of $634,000. This additional cost decreased gross margin from previous quarters from 40% to 38%. 147 FIVE YEAR FINANCIAL DATA SELECTED CONSOLIDATED STATEMENTS OF OPERATIONS DATA
In thousands except per share amounts 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------- Net Sales $128,977 $118,561 $102,182 $94,729 $77,077 Income before income taxes and extraordinary item 6,417 5,868 1,291 5,535 3,730 Net income 17,154 5,719 1,809 9,869 3,225 Earnings per common share and common equivalent share: Basic (1) 1.94 0.66 0.21 1.27 0.38 ===================================================================================================================
(1) Earnings per share prior to 1995 have been restated to reflect the onefor-three reverse stock split. SELECTED CONSOLIDATED BALANCE SHEET DATA
December 31, In thousands 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------- Current assets $50,854 $37,107 $30,767 $33,740 $26,199 Total assets 108,990 79,264 74,352 56,692 42,260 Current liabilities 19,205 20,431 20,159 15,469 14,568 Long-term debt and other long-term liabilities 26,624 13,998 15,629 6,929 6,649 Stockholders' equity 63,161 44,835 38,564 34,294 21,043 ===================================================================================================================
RELATED STOCKHOLDERS MATTERS QUARTERLY COMMON STOCK INFORMATION The following table sets forth, for the periods shown, the high and low quarterly closing sales prices in the over-the-counter market for Comdial's Common Stock, as reported by the National Association of Security Dealers Automated Quotation System ("Nasdaq(R)"). Comdial's Common Stock is traded in the National Market(R) of the Nasdaq under Comdial's symbol, CMDL.
- ------------------------------------------------------------------------------------------------------------------- 1998 1997 Fiscal Quarters HIGH LOW High Low - ------------------------------------------------------------------------------------------------------------------- First Quarter 11.688 9.250 8.875 5.625 Second Quarter 13.875 10.250 8.875 5.875 Third Quarter 14.000 7.000 10.063 7.375 Fourth Quarter 9.563 7.375 13.625 9.250 - -------------------------------------------------------------------------------------------------------------------
Comdial has never paid a dividend on its Common Stock and its Board of Directors currently intends to continue for the foreseeable future the policy of not paying cash dividends on Common Stock. Comdial was prohibited from paying dividends due to the Loan Agreement with Fleet. 148 OFFICERS WILLIAM G. MUSTAIN Chairman, President and Chief Executive Officer Mr. Mustain is Chairman, President and Chief Executive Officer of Comdial. He joined Comdial as Vice President in June 1987 and assumed his current position in May 1989. He has served as a director of Comdial since 1989. WILLIAM E. PORTER Executive Vice President Mr. Porter was elected Executive Vice President in May 1997 and is responsible for business development and strategic planning. Mr. Porter served as a Director of Comdial from July 1994 to April 1997. Mr. Porter resigned his position with Comdial effective January 4, 1999. LEIGH ALEXANDER Senior Vice President, Marketing Ms. Alexander was elected Senior Vice President in December 1998 and is responsible for marketing. Prior to her appointment, Ms. Alexander was a Senior Vice President of Paging Network, Inc., a wireless messaging and paging company. CHRISTIAN L. BECKEN Senior Vice President, Chief Financial Officer, Treasurer and Secretary Mr. Becken was elected Senior Vice President and Chief Financial officer in December 1997 and is responsible for finance. In April of 1998, the board of directors elected him to the positions of Treasurer and Secretary. Mr. Becken resigned his positions with Comdial effective February 10, 1999. OVE VILLADSEN Senior Vice President, Engineering Mr. Villadsen was elected Vice President in May 1989 and in May of 1997 was elected Senior Vice President. He is responsible for Comdial's product design and engineering activities. He joined Comdial Business Communications Corporation (CBCC), a subsidiary of Comdial, in November 1982, and between 1982 and 1989 served as Vice President of CBCC. 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 Comdial's Director of Human Resources. WILLIAM C. GROVER Vice President, Sales and Services Mr. Grover was elected a Vice President in September 1995 and is responsible for Sales and Services. He joined Comdial in 1993 as President of Comdial Enterprise Systems, Inc., a subsidiary of Comdial. KEITH J. JOHNSTONE Vice President, Operations Mr. Johnstone was elected Vice President in May 1990 and is responsible for Manufacturing Operations. Between 1980, when he joined Comdial, and 1990, Mr. Johnstone held a number of management positions, including Director of Materials and Director of Customer Service. LAWRENCE K. TATE Vice President, 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 of Manufacturing Operations. 149 BOARD MEMBERS WILLIAM G. MUSTAIN Chairman See previous page. ROBERT P. COLLINS Chairman of the Board of Scott Technologies Mr. Collins retired in May 1998 as President and Chief Executive Officer of GE Fanuc Automation, a joint venture between General Electric Co. and FANUC LTD of Japan. He joined Comdial's board of directors in April 1998 and is a member of the Audit Committee of the Board of Directors. BARBARA PERRIER DREYER Senior Vice President and Chief Financial Officer of Communications Systems Technology Inc. Ms. Dreyer is Senior Vice President and Chief Financial Officer of Communications Systems Technology Inc., a company which develops wide-area audio and data conferencing systems and software. She also serves as Treasurer of the International Teleconferencing Association. She joined Comdial's Board of Directors in April 1998 and is a member of the Compensation Committee of the Board of Directors. A.M. GLEASON Vice Chairman, President of the Port of Portland Mr. Gleason retired in May 1995 as Vice Chairman and a director of PacifiCorp, a diversified public utility. He currently serves as President of the Port of Portland. He is also a director of Tektronix, Inc. and Fred Meyer, Inc. Mr. Gleason has served as a director of Comdial since 1981 and as Vice Chairman of the Board of Directors since April 1995 and is a member of the Compensation and Nominating Committees of the Board of Directors. MICHAEL C. HENDERSON Chairman of the Board of Albina Community Bancorp. Mr. Henderson is Chairman of the Board of Albina Community Bancorp. He retired in February, 1998 as President and Chief Executive Officer of PacifiCorp Holdings, Inc., a PacifiCorp subsidiary which held interests in telecommunications, energy and financial services. Mr. Henderson has served as a director of Comdial since 1995 and is a member of the Compensation Committee 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 Corporation, Grantham, Mayo, Van Otterloo and Company, LLC, and Cone Mills Corporation. Mr. Rosenblum has served as a director of Comdial since 1992 and is a member of the Audit and Nominating Committees of the Board of Directors. DIANNE C. WALKER Independent Consultant Ms. Walker is an independent consultant. Prior to January 1995, she was a consultant to Bear Stearns & Co. Inc., an investment banking firm. She is also a director of MicroAge, Inc., Arizona Public Service Company, and Microtest, Inc. Ms. Walker has served as a director of Comdial since 1986 and is a member of the Audit and Nominating Committees of the Board of Directors. 150 TRANSFER AGENT AND REGISTRAR ChaseMellon Shareholder Services New York, New York Phone: (800) 851-9677 INDEPENDENT AUDITORS Deloitte & Touche LLP Richmond, Virginia INVESTOR RELATIONS Investor Relations Phone: (804) 978-2200 Fax: (804) 978-2438 E-Mail: invest@comdial.com WORLD WIDE WEB http://www.comdial.com FORM 10-K On written request, Comdial Corporation will furnish to stockholders a copy of its Form 10-K for the most recent year. Address your request to Investor Relations, Comdial Corporation, P.O. Box 7266, Charlottesville, Virginia 22906-7266 151 EX-10 4 EXHIBIT 10.25 EXHIBIT 10.25 SECOND AMENDMENT TO THE COMDIAL CORPORATION 401(k) PLAN SECOND AMENDMENT to the Comdial Corporation 401(k) Plan, by Comdial Corporation (the "Employer"). The Employer maintains the Comdial 401(k) Plan, originally effective as of January 1, 1989, amended and restated effective as of January 1, 1997 (the "Plan"). The Employer has the power to amend the Plan and now wishes to do so. NOW, THEREFORE, the Plan is amended as follows: I. Effective December 1, 1998, the second paragraph of the Background Section of the Plan is amended by deleting the last sentence and replacing it with the following: Effective December 1, 1998, T. Rowe Price Trust Company has agreed to serve as Trustee of the Plan. II. Effective December 1, 1998, Section 1.2 is amended in its entirety to read as follows: Adjustment Date: Each December 31 and such other dates as determined by the Plan Administrator. III. Effective January 1, 1997, Section 1.17(a)(ii) is amended in its entirety to read as follows: (ii) Received Section 415 Compensation from the Employer and Related Companies in excess of $80,000 during the preceding Plan Year and, to the extent elected by the Employer pursuant to applicable treasury regulations, was in the top 20% of Employees, when ranked on the basis of Section 415 Compensation paid during the preceding Plan Year. IV. Effective January 1, 1997, Section 1.17(b) is amended in its entirety to read as follows: (b) For purposes of determining the number of Employees in the top 20% of Employees described in subsection (a)(ii), the following Employees shall be excluded: V. Effective December 12, 1994, Section 1.18(f) is amended in its entirety to read as follows: (f) Notwithstanding any provisions of this Plan to the contrary, contributions, benefits and service credit with respect to qualified military service will be provided in accordance with the Uniformed Services Employment and Reemployment Rights Act of 1994 ("USERRA") and the special rules relating to veterans' reemployment rights under USERRA pursuant to Code section 414(u). VI. Effective January 1, 1998, Section 1.31 is amended in its entirety to read as follows: 1.31 Section 415 Compensation: An Employee's total annual compensation received from an Employer and Related Companies during a Plan Year, as defined in the Treasury Regulations issued under Code section 415. "Section 415 Compensation" includes an Employee's wages, salaries, fees for professional services and other amounts received for personal services actually rendered in the course of employment with an Employer and Related Companies (including, but not limited to, commissions paid to salesmen, compensation for services on the basis of percentage of profits, commissions on insurance premiums, tips and bonuses). "Section 415 Compensation" shall include any elective deferral (as defined in Code section 402(g)(3)) and any amount contributed or deferred at the election of the Employee that is not includible in the gross income of the Employee by reason of Code section 125. "Section 415 Compensation" does not include: (i) Contributions made by an Employer or a Related Company (other than Salary Reduction Contributions) to a plan of deferred compensation to the extent that the contributions are not includible in the Employee's gross income for the taxable year in which they are contributed. (ii) Amounts received from the exercise of a non-qualified stock option or from restricted property. (iii) Amounts realized from the sale, exchange or other disposition of stock acquired under a statutory stock option. (iv) Other amounts that receive special tax benefits, such as premiums for group term life insurance (but only to the extent that the premiums are not includible in the gross income of the Employee). VII. Section 3.2 is amended by deleting the last two sentences and replacing them with the following: A Participant may elect to defer from 1% to 17% (in whole percentages) of his "Salary Reduction Compensation" during a Plan Year for purposes of making Salary Reduction Contributions. For purposes of this Section 3.2, "Salary Reduction Compensation" shall mean Compensation, as defined in Section 1.8, reduced by any bonus paid to the Participant under the Comdial Cost Reduction Program or any replacement for such program. VIII. Effective January 1, 1995, Section 4.4(a) is amended in its entirety to read as follows: (a) Notwithstanding any other provisions of the plan, contributions and other additions with respect to a Participant exceed the limitation of Code section 415(c) if, when expressed as an Annual Addition (within the meaning of Code section 415(c)(2)) to the Participant's Account, such Annual Addition is greater than the lesser of: (i) $30,000; or (ii) 25% of the Participant's 415 Compensation. IX. Effective January 1, 1997, Section 4.8(g) is amended in its entirety to read as follows: (g) The leveling method of reducing an Employee's Excess Contributions and an Employee's Aggregate Contributions means the method of reducing the Excess Contributions and Excess Aggregate Contributions of Highly Compensated Employees as described in Code section 401(k)(8)(C) and 401(m)(6)(C), respectively, and the Treasury Regulations and guidance promulgated thereunder. X. Section 5.1(a) is amended in its entirety to read as follows: (a) Effective January 1, 1999, subject to subsections (b) and (c) below, for Participants who have at least one Hour of Service on or after January 1, 1999, a Participant shall become vested in his Employer Contributions Account according to the following schedule: Years of Service Vested Percentage Less than 1 Year 0% 1 Year 20% 2 Years 40% 3 Years 60% 4 Years 80% 5 Years or more 100% Participants who do not perform an Hour of Service on or after January 1, 1999 shall become vested according to the vesting schedule in effect on December 31, 1998. XI. Effective January 1, 1997, Section 6.6(c) is amended in its entirety to read as follows: (c) Notwithstanding any provision in the Plan to the contrary, the vested Account of a 5% Owner must begin to be distributed by the April 1 following the calendar year in which the Participant attains age 70 1/2. In all other cases, a Participant's Account must begin to be distributed by no later than the April 1 following the later of the calendar year in which the Participant (i) retires, or (ii) attains age 70 1/2. A Participant who has attained age 70 1/2 before January 1, 1997 shall continue to receive minimum distributions under the provisions of Code section 401(a)(9) as in effect before January 1, 1997 unless the Participant elects to defer distribution of his Account until no later than April 1 following the calendar year in which the Participant retires. The provisions of this Section 6.6 shall be administered in accordance with applicable Treasury Regulations and Internal Revenue Service rulings and other releases. Distributions under this section shall be made under uniform procedures established by the Administrator. These rules apply notwithstanding any other provision in the Plan to the contrary. XII. Section 6.8(f) is deleted in its entirety. XIII. Section 6.9(a) is amended in its entirety to read as follows: (a) A Participant may make a withdrawal from the vested portion of his Employer Contribution Account and Prior Plan Employee Contribution Account as of any Adjustment Date. Notwithstanding the preceding sentence, unless a Participant is making a withdrawal on account of a financial hardship as described in Section 6.8(b), no withdrawal may be made from contributions that were made to his Employer Contribution Account: (i) during the Plan Year in which the withdrawal request was made, or (ii) during the preceding two Plan Years. XIV. Section 6.9(b) is amended in its entirety to read as follows: (b) In addition to withdrawals under Section 6.8 and 6.9(a), a Participant who has attained age 59 1/2 may make an election to withdraw any portion of his vested Account balance in all of his Accounts. The election must be made in writing, on the form provided by the Plan Administrator and delivered to the Plan Administrator. The distribution shall be made as soon as administratively practicable after receipt of the withdrawal request. XV. Section 6.13(b)(i) is amended by adding the following new sentence at the end thereof: Effective January 1, 1999, hardship withdrawals under Section 6.8(b) are not an eligible rollover distribution. XVI. Section 6.13(c) is amended in its entirety to read as follows: Rollovers will be made under uniform procedures established by the Plan Administrator. XVII. Section 14.1(a) is amended in its entirety to read as follows: (a) The Trustee may receive, with the consent of the Plan Administrator, the transfer of assets previously held under a qualified plan for the benefit of a person who is a Participant in this Plan. The assets may be received directly from the trustee of a qualified plan, or they may be received as a rollover contribution from a qualified plan or from an individual retirement account. Any plan from which assets are received must be a plan qualified under Code Section 401 at the time of the transfer, and any rollover individual retirement account must be an individual retirement account within the meaning of Code Section 408 at the time of the rollover. XVIII. Unless otherwise provided, this Amendment shall be effective January 1, 1999. XIX. In all respects not amended, the Plan is hereby ratified and confirmed * * * * * * To record the adoption of the Amendment set forth above, the Employer has caused this document to be signed on this 29th day of November, 1998. COMDIAL CORPORATION By: \s\ Christian L. Becken ----------------------- Christian L. Becken EX-10 5 EXHIBIT 10.26 EXHIBIT 10.26 CREDIT AGREEMENT DATED AS OF OCTOBER 22, 1998, BY AND BETWEEN COMDIAL CORPORATION AND NATIONSBANK, N.A. TABLE OF CONTENTS SECTION 1 DEFINITIONS 1.1 Definitions.........................................................................43 1.2 Other General Terms.................................................................18 SECTION 2 REVOLVING CREDIT FACILITY 2.1 Revolving Credit Loans..............................................................18 2.2 Optional Reduction or Termination of Commitment.....................................19 2.3 Revolving Credit Note...............................................................63 2.4 Interest Rate.......................................................................19 2.5 Notice and Manner of Borrowing......................................................20 2.6 Purpose.............................................................................64 2.7 Prepayments.........................................................................20 SECTION 3 LETTERS OF CREDIT 3.1 Letter of Credit Facility...........................................................21 3.2 Documentation.......................................................................21 3.3 Fees .............................................................................22 3.4 Reimbursement Obligations...........................................................23 3.5 Expiration of Letters of Credit.....................................................67 SECTION 4 FEES, INTEREST AND PAYMENTS 4.1 Commitment Fee......................................................................23 4.2 Unused Commitment Fee...............................................................24 4.3 Interest Rates, Payments............................................................24 4.4 Default Rate........................................................................25 4.5 Payments............................................................................26 4.6 Payment on Days Other Than Business Days............................................26 4.7 LIBOR Provisions....................................................................70 4.8 Capital Adequacy....................................................................28 4.9 Funding Losses......................................................................29 SECTION 5 REPRESENTATIONS 5.1 Subsidiaries........................................................................30 5.2 Organization and Existence..........................................................31 5.3 Authority...........................................................................31 5.4 Binding Agreements..................................................................32 5.5 Litigation..........................................................................78 5.6 No Conflicting Agreements...........................................................33 5.7 Financial Condition.................................................................34 5.8 Ownership of Property...............................................................35 5.9 Intellectual Property...............................................................35 5.10 Employee Benefit Pension Plans......................................................36 5.11 Taxes .............................................................................36 5.12 Compliance with Environmental and Other Laws........................................36 5.13 Employee Relations..................................................................37 5.14 Investment Company Act; Public Utility Holding Company Act; Federal Power Act.......37 5.15 No Defaults.........................................................................38 5.16 Federal Regulations.................................................................38 5.17 Accuracy of Information.............................................................38 5.18 Year 2000 Compliance................................................................39 5.19 Survival of Representations and Warranties, Etc.....................................39 SECTION 6 CONDITIONS TO CREDIT EXTENSIONS 6.1 Conditions to Initial Credit Extensions.............................................40 6.2 Conditions to Each Credit Extension.................................................44 SECTION 7 AFFIRMATIVE COVENANTS 7.1 Financial Statements................................................................46 7.2 Inspections.........................................................................48 7.3 Year 2000 Compliance................................................................48 7.4 Taxes .............................................................................48 7.5 Payment of Obligations..............................................................49 7.6 Insurance...........................................................................49 7.7 Corporate Existence.................................................................49 7.8 Licenses and Permits................................................................49 7.9 Properties..........................................................................50 7.10 Employee Benefit Pension Plans......................................................50 7.11 Business Continuation...............................................................51 7.12 Compliance with Environmental Laws..................................................51 7.13 Compliance with Other Applicable Laws...............................................51 7.14 GAAP .............................................................................51 7.15 Additional Stock Pledges, Security Agreements and Guaranties........................51 SECTION 8 FINANCIAL COVENANTS 8.1 Funded Debt to Tangible Capital Ratio...............................................52 8.2 Funded Debt to EBITDA Ratio.........................................................53 8.3 EBITDA to Interest Expense Ratio....................................................53 SECTION 9 NEGATIVE COVENANTS 9.1 Additional Borrowing................................................................53 9.2 Mortgages and Pledges...............................................................54 9.3 Merger, Consolidation, or Sale of Assets............................................55 9.4 Acquisitions........................................................................55 9.5 Contingent Liabilities..............................................................56 9.6 Loans .............................................................................56 9.7 Dissolution.........................................................................56 9.8 Conduct of Business.................................................................56 9.9 Affiliate Transactions..............................................................57 SECTION 10 EVENTS OF DEFAULT 10. Events of Default...................................................................57 SECTION 11 INDEMNIFICATION 11. Indemnification.....................................................................61 SECTION 12 MISCELLANEOUS 12.1 Costs and Expenses..................................................................62 12.2 Cumulative Rights and No Waiver.....................................................62 12.3 Independence of Covenants...........................................................62 12.4 Notices.............................................................................63 12.5 Applicable Law......................................................................64 12.6 Modifications.......................................................................64 12.7 Survivorship........................................................................64 12.8 Execution in Counterparts...........................................................65 12.9 Headings............................................................................65 12.10 Arbitration.........................................................................65 12.11 Entire Agreement....................................................................67
EXHIBITS A - Revolving Credit Note B - Credit Line Deed of Trust C - Security Agreement D - Subsidiary Security Agreement E - Pledge Agreement F - Subsidiary Pledge Agreement G - Guaranty Agreement H - Commercial L/C Application I - Standby L/C Application J - AutoBorrow Service Agreement THIS CREDIT AGREEMENT is made as of this 22nd day of October, 1998, by and between COMDIAL CORPORATION (the "Company"), a Delaware corporation with an office at 1180 Seminole Trail, Charlottesville, Virginia 22901, and NATIONSBANK, N.A. (the "Bank"), a national banking association with an office at 300 East Main Street, Charlottesville, Virginia 22902. The Company has requested that the Bank make available to the Company a revolving credit facility in an aggregate principal amount not to exceed at any time outstanding $50,000,000, the proceeds of which will be used by the Company for working capital, to finance equipment purchases, to finance permitted acquisitions and for other general corporate purposes (which may include the purchase from time to time of the Company's common stock). The Company has also requested that the Bank make available to the Company a $5,000,000 letter of credit subfacility, pursuant to which the Bank will issue commercial and standby letters of credit for the account of the Company as requested from time to time by the Company. Upon the terms and subject to the conditions contained herein, the Bank is willing to make such a revolving credit facility and letter of credit subfacility available to the Company. ACCORDINGLY, the Company and the Bank agree as follows: SECTION 1 DEFINITIONS 1.1 DEFINITIONS. The following terms when used in this Agreement shall have the meanings assigned to them below: "ADVANCE" means an advance of Revolving Credit Loans made by the Bank to the Company under the Revolving Credit Facility as provided in Section 2.1. "AFFILIATE" means, as to any Person, each other Person that directly or indirectly (through one or more intermediaries or otherwise) controls, is controlled by or is under common control with such Person. The term "control" means (i) the power to vote twenty percent (20%) or more of the securities or other equity interests of a Person having ordinary voting power, or (ii) the possession, directly or indirectly, of any other power to direct or cause the direction of the management and policies of a Person, whether through ownership of voting securities, by contract or otherwise. "AGREEMENT" means this Credit Agreement as amended, restated or otherwise modified. "APPLICABLE MARGIN" (i) means .75% through and including the first day of the month following receipt by the Bank of consolidated financial statements of the Company and its Subsidiaries pursuant to Section 7.1(a) as of and for the period ending September 30, 1998, and (ii) thereafter will be determined by reference to the Funded Debt to EBITDA Ratio in accordance with the following table: Funded Debt to EBITDA Ratio Applicable Margin Lower than 1.5 to 1 .75% 1.5 to 1 or higher but 1.0% lower than 2.0 to 1 2.0 to 1 or higher but 1.25% lower than 2.5 to 1 2.5 to 1 or higher 1.50% The Applicable Margin will be automatically adjusted as of the first day of the month following receipt by the Bank of consolidated financial statements of the Company and its Subsidiaries pursuant to Section 7.1(a) or Section 7.1(b) demonstrating to the Bank's reasonable satisfaction that there has been a change in the Funded Debt to EBITDA Ratio which would cause a change in the Applicable Margin in accordance with the preceding table. Any such change will apply to the Revolving Credit Loans outstanding on such effective date or made on or after such date. "AUTOBORROW SERVICE AGREEMENT" means an AutoBorrow Service Agreement between the Company and the Bank substantially in the form of Exhibit J attached hereto with the blanks therein appropriately completed. "BANK" means NationsBank, N.A., a national banking association, and its successors. "BUSINESS DAY" means (i) for all purposes other than as set forth in clause (ii) below, any day, other than a Saturday, Sunday or legal holiday, on which banks in Charlottesville, Virginia are open for the conduct of their commercial banking business, and (ii) with respect to all notices and determinations in connection with, and payments of principal and interest on, the Revolving Credit Loans while they are bearing interest at a rate based on LIBOR, any day that is a Business Day described in clause (i) and that is also a day for trading by and between banks in U.S. dollar deposits in the London interbank market. "CAPITAL LEASE" means any lease which, in accordance with GAAP, should be capitalized on the balance sheet of the lessee. "CAPITAL LEASE OBLIGATIONS" means the aggregate amount which, in accordance with GAAP, should be reported as a liability on the balance sheet of a Person with respect to Capital Leases. "CLOSING DATE" means the date the initial Advance under the Revolving Credit Facility is made. "CODE" means the Internal Revenue Code of 1986, as amended from time to time, and any successor statute, including the rules or regulations promulgated thereunder, in each case as in effect from time to time. References to sections of the Code shall be construed to also refer to any successor sections. "COMMERCIAL L/C APPLICATION" shall have the meaning assigned thereto in Section 3.2(a). "COMPANY" means Comdial Corporation, a Delaware corporation, in its capacity as borrower hereunder. "CONSOLIDATED EBITDA" means, for any period and without duplication, the sum of (i) Consolidated Net Income for such period, (ii) the aggregate amount deducted in determining Consolidated Net Income for such period with respect to interest, taxes, depreciation and amortization, and (iii) the aggregate amount deducted in determining Consolidated Net Income for such period with respect to extraordinary losses and other non-cash items which decreased Consolidated Net Income for such period, minus the aggregate amount of extraordinary gains included in Consolidated Net Income for such period and minus the aggregate amount of other non-cash items which increased Consolidated Net Income for such period. "CONSOLIDATED FUNDED DEBT" means, at any date and without duplication, the sum of (i) all indebtedness for borrowed money of the Company and its Subsidiaries, including, without limitation, all indebtedness of the Company and its Subsidiaries evidenced by bonds, debentures, notes and other similar instruments, (ii) all obligations of the Company and its Subsidiaries to pay the deferred purchase price of property or services, other than trade payables arising in the ordinary course of business, (iii) all Capital Lease Obligations of the Company and its Subsidiaries and (iv) all indebtedness of any other Person secured by any security interest or other lien on any asset of the Company or any of its Subsidiaries or guaranteed by the Company or any of its Subsidiaries. "CONSOLIDATED INTEREST EXPENSE" means, for any period, the consolidated interest expense of the Company and its Subsidiaries (including, without limitation, the portion of any obligations under Capital Leases allocable to interest expense) determined in accordance with GAAP for such period. "CONSOLIDATED NET INCOME" means, for any period, the consolidated net income of the Company and its Subsidiaries determined in accordance with GAAP for such period. "CONSOLIDATED NET WORTH" means, at any date, the amount by which the consolidated total assets of the Company and its Subsidiaries exceeds the consolidated total liabilities of the Company and its Subsidiaries. "CONSOLIDATED TOTAL CAPITAL" means, at any date, the sum of Consolidated Net Worth and Consolidated Funded Debt. "CONTRACT LIBOR RATE" means, for the applicable Interest Period, the rate of interest (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on Telerate Page 3750 (or any successor page) as the one-month or three-month, as applicable, London interbank offered rate for deposits in Dollars at approximately 11:00 a.m. (London time) on the second Business Day preceding the first day of such Interest Period, as adjusted from time to time in the Bank's sole discretion (for its customers with loans bearing interest based on a similar LIBOR rate generally) for then applicable reserve requirements, deposit insurance assessment rates and other regulatory costs. If for any reason such rate is not available, the term "Contract LIBOR Rate" means, for the applicable Interest Period, the rate of interest equal to the one-month or three-month, as applicable, rate of interest (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on Reuters Screen LIBO Page as the one-month or three-month, as applicable, London interbank offered rate for deposits in Dollars at approximately 11:00 a.m. (London time) on the second Business Day preceding the first day of such Interest Period, as adjusted from time to time in the Bank's sole discretion (for its customers with loans bearing interest based on a similar LIBOR rate generally) for then applicable reserve requirements, deposit insurance assessment rates and other regulatory costs; provided that if more than one rate is specified on Reuters Screen LIBO Page, the applicable rate will be the arithmetic mean of all such rates. "DEED OF TRUST" means the Credit Line Deed of Trust dated October 22, 1998, between Comdial Business Communications Corporation as grantor and Robert K. Blake and Bryan F. English as trustees, substantially in the form of Exhibit B attached hereto with the blanks therein appropriately completed, pursuant to which Comdial Business Communications Corporation has granted the Bank a lien on the Virginia Property to secure all obligations of the Company to the Bank up to a maximum amount secured of $10,000,000. "DEFAULT" means any event, act or condition which, with the giving of notice or lapse of time, or both, would constitute an Event of Default. "DEFAULT RATE" means (i) with respect to any Revolving Credit Loans bearing interest based on a Contract LIBOR Rate at the time the applicable Event of Default occurs, four and three-quarters percent (4-3/4%) in excess of the applicable Contract LIBOR Rate as it exists from time to time, with such rate to change as of the first day of each subsequent Interest Period, and (ii) with respect to any Revolving Credit Loans bearing interest based on the LIBOR Daily Floating Rate or the Prime Rate at the time the applicable Event of Default occurs, two percent (2%) in excess of the Prime Rate, with such rate to change as of the date of each change in the Prime Rate. "DOLLARS" OR "$" means, unless otherwise qualified, dollars in lawful currency of the United States. "EBITDA TO INTEREST EXPENSE RATIO" means the ratio of Consolidated EBITDA for the four-quarter period ending on the date of measurement to Consolidated Interest Expense for such four-quarter period; provided, however, that, in determining the EBITDA to Interest Expense Ratio for the four-quarter periods ending on September 30, 1998, December 31, 1998, March 31, 1999, and June 30, 1999, up to $5,000,000 of any charge taken by the Company with respect to the writeoff of research and development expenses associated with the acquisition of assets by Array Telecom Corporation from Array Telecom Inc. and Array Systems Computing Inc. will be added back to Consolidated Net Income in the calculation of Consolidated EBITDA for each such four-quarter period. "ENVIRONMENTAL LAWS" means any and all federal, state and local laws, statutes, ordinances, rules, regulations, permits, licenses, approvals and orders of courts or Governmental Authorities, relating to the protection of human health or the environment, including, but not limited to, requirements pertaining to the manufacture, processing, distribution, use, treatment, storage, disposal, transportation, handling, reporting, licensing, permitting, investigation or remediation of Hazardous Materials. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and any successor statute, including the rules and regulations promulgated thereunder, in each case as in effect from time to time. References to sections of ERISA will be construed to also refer to any successor sections. "EVENT OF DEFAULT" shall have the meaning assigned thereto in Section 10. "FLORIDA PROPERTY" means the real property owned by KVT and located at 1919 Ivanhoe Street, Sarasota, Florida 34231 together with all improvements thereon and appurtenances thereto. "FUNDED DEBT TO EBITDA RATIO" means the ratio of Consolidated Funded Debt as of the date of measurement to Consolidated EBITDA for the four-quarter period ending on such date; provided, however, that, in determining the Funded Debt to EBITDA Ratio as of the end of the four-quarter periods ending on September 30, 1998, December 31, 1998, March 31, 1999, and June 30, 1999, up to $5,000,000 of any charge taken by the Company with respect to the writeoff of research and development expenses associated with the acquisition of assets by Array Telecom Corporation from Array Telecom Inc. and Array Systems Computing Inc. will be added back to Consolidated Net Income in the calculation of Consolidated EBITDA for each such four-quarter period. "FUNDED DEBT TO TOTAL CAPITAL RATIO" means the ratio of Consolidated Funded Debt as of the date of measurement to Consolidated Total Capital as of such date. "GAAP" means generally accepted accounting principles, as recognized from time to time by the Accounting Principles Board of the American Institute of Certified Public Accountants and the Financial Accounting Standards Board, consistently applied and maintained on a consistent basis for the Company and its Subsidiaries throughout the period indicated and consistent with the prior financial practice of the Company and its Subsidiaries. "GOVERNMENTAL AUTHORITY" means any government or political subdivision or any court, agency, authority, department, commission, board, bureau or instrumentality thereof. "GUARANTIES" means the Guaranty Agreements, each dated October 22, 1998, and each substantially in the form of Exhibit G attached hereto with the blanks therein appropriately completed, pursuant to which the Guarantors have unconditionally guaranteed all obligations of the Company to the Bank. "GUARANTORS" means Comdial Telecommunications, Inc., Comdial Business Communications Corporation, Comdial Enterprise Systems, Inc., KVT, Aurora Systems, Inc., Array Telecom Corporation, American Phone Centers, Inc., Comdial Telecommunications International, Inc. and each other Subsidiary of the Company which hereafter becomes a Material Subsidiary and executes and delivers a Guaranty to the Bank pursuant to Section 7.15. "HAZARDOUS MATERIALS" means any substances or materials (i) which are or become defined as hazardous wastes, hazardous substances, pollutants, contaminants or toxic substances under any applicable Environmental Law, (ii) which are toxic, explosive, corrosive, flammable, infectious, radioactive, carcinogenic, mutagenic or otherwise harmful to human health or the environment and are or become regulated by any Governmental Authority, (iii) the presence of which require investigation or remediation under any applicable Environmental Law, (iv) the discharge or emission or release of which requires a permit or license under any applicable Environmental Law, (v) which are found by a court of competent jurisdiction to constitute a nuisance or a trespass to neighboring properties or found by any Governmental Authority of competent jurisdiction to pose a health or safety hazard to persons, (vi) which consist of underground or aboveground storage tanks, whether empty, filled or partially filled with any substance of the type listed in any other part of this definition, or (vii) which contain asbestos, polychlorinated biphenyls, urea formaldehyde foam insulation, petroleum hydrocarbons, petroleum derived substances or waste, crude oil, nuclear fuel, natural gas or synthetic gas in percentages or at levels which make them subject to applicable Environmental Laws. "HEDGING AGREEMENT" means any agreement with respect to an interest rate swap, collar, cap, floor or a forward rate agreement or other agreement regarding the hedging of interest rate risk exposure executed in connection with hedging the interest rate exposure of the Company under this Agreement, and any confirming letter executed pursuant to such hedging agreement, all as amended or modified from time to time. "HEDGING EXPOSURE" means the maximum potential exposure of the Bank and its Affiliates, determined by the Bank using any reasonable method, under all Hedging Agreements and foreign exchange agreements between the Company and the Bank or the Company and an Affiliate of the Bank. "INTEREST PERIOD" means, with respect to any portion of the Revolving Credit Loans bearing interest at a rate based on a Contract LIBOR Rate, successive interest periods of one or three months (at the option of the Company), with the first such interest period beginning on the date a Contract LIBOR Rate becomes effective and ending one month or three months thereafter (at the option of the Company) and with each subsequent such interest period beginning on the last day of the preceding interest period and ending one month or three months thereafter (at the option of the Company); provided that (i) any applicable Interest Period which would otherwise end on a day which is not a Business Day shall be extended to the next succeeding Business Day unless such Business Day falls in another calendar month, in which case such Interest Period shall end on the preceding Business Day, (ii) any applicable Interest Period which begins on a day for which there is no numerically corresponding day in the calendar month during which such Interest Period is to end shall (subject to clause (i) hereof) end on the last day of such calendar month, and (iii) no Interest Period shall extend beyond the Revolving Credit Termination Date. There will be no more than two (2) Interest Periods in effect with respect to the Revolving Credit Loans at any one time. "KVT" means Key Voice Technologies, Inc., a Delaware corporation and wholly-owned Subsidiary of the Company. "L/C APPLICATION" means a Commercial L/C Application or a Standby L/C Application. "L/C FEE" means one and one-half percent (1-1/2%) per annum. "L/C OBLIGATIONS" means, at any time, an amount equal to the sum of (i) the aggregate undrawn and unexpired amount of the then outstanding Letters of Credit, and (ii) the aggregate amount of drawings under Letters of Credit which have not then been reimbursed pursuant to Section 3.4. "LETTERS OF CREDIT" shall have the meaning assigned thereto in Section 3.1. "LIBOR" means the LIBOR Daily Floating Rate and/or the applicable Contract LIBOR Rate, as the context may indicate. "LIBOR DAILY FLOATING RATE" means, for any day, the rate of interest (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on Telerate Page 3750 (or any successor page) as the one-month London interbank offered rate for deposits in Dollars at approximately 11:00 a.m. (London time) on such day (or, if such day is not a Business Day, on the preceding Business Day), as adjusted from time to time in the Bank's sole discretion (for its customers with loans bearing interest based on the LIBOR Daily Floating Rate generally) for then applicable reserve requirements, deposit insurance assessment rates and other regulatory costs. If for any reason such rate is not available, the term "LIBOR Daily Floating Rate" means, for any day, the rate of interest equal to the one-month rate of interest (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on Reuters Screen LIBO Page as the one-month London interbank offered rate for deposits in Dollars at approximately 11:00 a.m. (London time) on such day (or, if such day is not a Business Day, on the preceding Business Day), as adjusted from time to time in the Bank's sole discretion (for its customers with loans bearing interest based on the LIBOR Daily Floating Rate generally) for then applicable reserve requirements, deposit insurance assessment rates and other regulatory costs; provided that if more than one rate is specified on Reuters Screen LIBO Page, the applicable rate will be the arithmetic mean of all such rates. "LOAN DOCUMENTS" means this Agreement, the Revolving Credit Note, the Deed of Trust, the Security Agreement, the Subsidiary Security Agreements, the Pledge Agreement, the Subsidiary Pledge Agreement, the Guaranties, the L/C Applications, any AutoBorrow Service Agreement in effect and each other document, agreement and instrument executed and delivered by the Company or any of its Subsidiaries in connection with this Agreement or otherwise referred to herein or contemplated hereby, all as they may be amended, restated or otherwise modified. "MATERIAL ADVERSE EFFECT" means a material adverse effect upon (i) the business, assets, properties, liabilities, condition (financial or otherwise), results of operations or business prospects of the Company or the Company and its Subsidiaries taken as a whole, (ii) the ability of the Company to perform any obligation under this Agreement or any other Loan Document to which it is a party, (iii) the legality, validity, binding effect or enforceability of any Loan Document, or (iv) the ability of the Bank to enforce any material rights or remedies under or in connection with any Loan Document. "MATERIAL SUBSIDIARY" means Comdial Telecommunications, Inc., Comdial Business Communications Corporation, Comdial Enterprise Systems, Inc., KVT, Aurora Systems, Inc., Array Telecom Corporation, American Phone Centers, Inc., Comdial Telecommunications International, Inc. and any other Subsidiary now owned or hereafter acquired by the Company which now or hereafter has total assets (determined in accordance with GAAP) which exceed $1,000,000. "PBGC" means the Pension Benefit Guaranty Corporation as created under ERISA, or any successor thereto under ERISA. "PERSON" means an individual, corporation, limited liability company, partnership, association, trust, business trust, joint venture, joint stock company, pool, syndicate, sole proprietorship, unincorporated organization, Governmental Authority or any other form of entity or group thereof. "PLEDGE AGREEMENT" means the Pledge Agreement dated October 22, 1998, between the Company and the Bank, substantially in the form of Exhibit E attached hereto with the blanks therein appropriately completed, pursuant to which the Company has pledged to the Bank the capital stock of each Material Subsidiary existing as of the Closing Date (other than Comdial Business Communications Corporation) to secure all obligations of the Company to the Bank. "PRIME RATE" means the rate which the Bank establishes from time to time as its prime rate, with any change of interest resulting from a change in the Prime Rate being effective on the effective date of each change therein. The Company acknowledges and agrees that the Prime Rate is a reference used in determining interest rates on certain loans by the Bank and is not intended to be the lowest rate of interest charged on any extension of credit to any customer. "REGULATION D" means Regulation D of the Board of Governors of the Federal Reserve System of the United States, as it may be amended from time to time. "REGULATION U" means Regulation U of the Board of Governors of the Federal Reserve System of the United States, as it may be amended from time to time. "REVOLVING CREDIT FACILITY" means the revolving credit facility established pursuant to Section 2. "REVOLVING CREDIT COMMITMENT" means Fifty Million Dollars ($50,000,000), as such commitment may be reduced from time to time pursuant to Section 2.2. "REVOLVING CREDIT LOANS" shall have the meaning assigned thereto in Section 2.1. "REVOLVING CREDIT NOTE" shall have the meaning assigned thereto in Section 2.3. "REVOLVING CREDIT TERMINATION DATE" means the earlier to occur of (i) August 31, 2003, and (ii) the date on which the Revolving Credit Commitment is terminated pursuant to Section 2.2 or Section 10. "SEC" means the Securities and Exchange Commission and any successor thereto. "SECURITY AGREEMENT" means the Security Agreement dated October 22, 1998, between the Company and the Bank, substantially in the form of Exhibit C attached hereto with the blanks therein appropriately completed, pursuant to which the Company has granted the Bank a security interest in all of the Company's accounts, inventory, equipment, general intangibles and other personal property to secure all obligations of the Company to the Bank. "STANDBY L/C APPLICATION" shall have the meaning assigned thereto in Section 3.2(b). "SUBSIDIARY" means, as to any Person, any corporation, partnership, limited liability company or other entity of which more than fifty percent (50%) of the outstanding capital stock or other ownership interests having ordinary voting power to elect a majority of the board of directors or other managers of such corporation, partnership, limited liability company or other entity is at the time, directly or indirectly, owned by such Person (irrespective of whether, at the time, capital stock or other ownership interests of any other class or classes of such corporation or other entity shall have or might have voting power by reason of the happening of any contingency). Unless otherwise qualified, references to "Subsidiary" or "Subsidiaries" herein shall refer to those of the Company. "SUBSIDIARY PLEDGE AGREEMENT" means the Subsidiary Pledge Agreement dated October 22, 1998, between Comdial Telecommunications, Inc. and the Bank, substantially in the form of Exhibit F attached hereto with the blanks therein appropriately completed, pursuant to which Comdial Telecommunications, Inc. has pledged to the Bank the capital stock of Comdial Business Communications Corporation to secure all obligations of the Company to the Bank. "SUBSIDIARY SECURITY AGREEMENTS" means the Subsidiary Security Agreements, each dated October 22, 1998, and each substantially in the form of Exhibit D attached hereto with the blanks therein appropriately completed, pursuant to which each Material Subsidiary existing as of the Closing Date has granted the Bank a security interest in such Material Subsidiary's accounts, inventory, equipment, general intangibles and other personal property to secure all obligations of the Company to the Bank. "UNUSED COMMITMENT FEE PERCENTAGE" (i) means .125% through and including the first day of the month following receipt by the Bank of consolidated financial statements of the Company and its Subsidiaries pursuant to Section 7.1(a) as of and for the period ending September 30, 1998, and (ii) thereafter will be determined by reference to the Funded Debt to EBITDA Ratio in accordance with the following table: Unused Commitment Funded Debt to EBITDA Ratio Fee Percentage Lower than 1.5 to 1 .125% 1.5 to 1 or higher but .15% lower than 2.0 to 1 2.0 to 1 or higher but .175% lower than 2.5 to 1 2.5 to 1 or higher .20% The Unused Commitment Fee Percentage will be automatically adjusted as of the first day of the month following receipt by the Bank of consolidated financial statements of the Company and its Subsidiaries pursuant to Section 7.1(a) or Section 7.1(b) demonstrating to the Bank's reasonable satisfaction that there has been a change in the Funded Debt to EBITDA Ratio which would cause a change in the Unused Commitment Fee Percentage in accordance with the preceding table. Except as otherwise provided in Section 4.2(b), at all times after and during the continuance of a Default or an Event of Default, the Unused Commitment Fee Percentage will be .25%. "VIRGINIA PROPERTY" means the real property owned by Comdial Business Communications Corporation and located at 1180 Seminole Trail, Charlottesville, Virginia 22901, together with all improvements thereon and appurtenances thereto. "WRITTEN" or "IN WRITING" means any form of written communication, including communication by means of telefacsimile, telex, telecopier, telegraph or cable. 1.2 OTHER GENERAL TERMS. (A) SECTION REFERENCES, ETC. Unless otherwise specified, a reference in this Agreement to a particular section, subsection, schedule or exhibit is a reference to that section, subsection, schedule or exhibit of this Agreement. Wherever from the context it appears appropriate, each term stated in either the singular or the plural will include the singular and plural. (B) DEFINED TERMS. Unless otherwise defined herein, all capitalized terms defined in this Agreement will have the defined meanings when used in this Agreement, the Revolving Credit Note, the other Loan Documents or any certificate, report or other document made or delivered pursuant to this Agreement. (C) OTHER REFERENCES. The words "hereof," "herein," and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. (D) ACCOUNTING TERMS. Except as otherwise expressly provided herein, all accounting terms not specifically defined or specified herein shall have the meanings generally attributed to such terms under GAAP. SECTION 2 REVOLVING CREDIT FACILITY 2.1 REVOLVING CREDIT LOANS. Upon the terms and subject to the conditions contained in this Agreement, the Bank agrees to make loans (herein referred to collectively as the "Revolving Credit Loans") to the Company from time to time during the period from the date of this Agreement until the Revolving Credit Termination Date; provided that the aggregate principal amount of all outstanding Revolving Credit Loans does not at any time exceed the Revolving Credit Commitment minus the sum of the L/C Obligations and the Hedging Exposure. 2.2 OPTIONAL REDUCTION OR TERMINATION OF COMMITMENT. The Company may at any time and from time to time upon at least three (3) Business Days' prior notice to the Bank reduce or terminate in its entirety the Revolving Credit Commitment, without penalty or premium except as provided in Section 4.9; provided that the aggregate amount of any such reduction shall be in the amount of One Million Dollars ($1,000,000) or an integral multiple of One Million Dollars ($1,000,000) in excess thereof. Such notice of reduction may be in writing or by telephone if promptly confirmed in writing. From the effective date of any such reduction or termination, the obligations of the Company to pay the unused commitment fee under Section 4.2 will thereupon correspondingly be reduced or cease. 2.3 REVOLVING CREDIT NOTE. The obligation of the Company to repay the Revolving Credit Loans will be evidenced by the Company's promissory note (the "Revolving Credit Note") payable to the order of the Bank at its office at 300 East Main Street, Charlottesville, Virginia 22902, or such other place as the holder may from time to time designate, in substantially the form of Exhibit A attached hereto with the blanks therein appropriately completed, dated as of the date of the initial Revolving Credit Loan and payable on the Revolving Credit Termination Date, on which date the entire unpaid principal balance of the Revolving Credit Loans and all interest accrued thereon will be due and payable in full. 2.4 INTEREST RATE. The outstanding principal amount of the Revolving Credit Loans as it exists from time to time will bear interest, and accrued interest will be due and payable, as provided in Section 4. 2.5 NOTICE AND MANNER OF BORROWING. Unless there is an AutoBorrow Service Agreement in effect between the Company and the Bank (in which case it will govern the mechanics of Advances under the Revolving Credit Facility), the Company will give the Bank notice of each Advance under the Revolving Credit Commitment (which notice may be in writing or by telephone if promptly confirmed in writing), not later than 12:00 noon (Eastern time) on the date of such Advance. Each such notice of borrowing shall specify the requested funding date (which shall be a Business Day) and the amount of the proposed Advance. On the borrowing date specified in such notice, the Bank shall make the Advance by crediting the amount thereof to the general deposit account of the Company maintained with the Bank or as otherwise directed by the Company. 2.6 PURPOSE. The Company will use the proceeds of Advances under the Revolving Credit Facility for working capital, to finance equipment purchases, to finance permitted acquisitions and for other general corporate purposes (which may include the purchase from time to time of the Company's common stock). 2.7 PREPAYMENTS. (A) MANDATORY. If, at any time, the aggregate principal amount of all outstanding Revolving Credit Loans exceeds the Revolving Credit Commitment minus the sum of the L/C Obligations and the Hedging Exposure, the Company will immediately prepay the Revolving Credit Loans in an amount sufficient to eliminate such excess and pay the Bank any amount due under Section 4.9 in connection therewith. (B) VOLUNTARY. The Company may prepay all or any part of the Revolving Credit Loans at any time and from time to time without premium or penalty except as provided in Section 4.9. SECTION 3 LETTERS OF CREDIT 3.1 LETTER OF CREDIT FACILITY. Upon the terms and subject to the conditions contained in this Agreement and in the applicable L/C Applications, the Bank agrees to issue irrevocable letters of credit (herein referred to collectively as the "Letters of Credit") for the account of the Company or any Material Subsidiary from time to time during the period from the date of this Agreement through but excluding the Revolving Credit Termination Date, in an aggregate stated amount which, when added to the aggregate unpaid reimbursement obligations under the L/C Applications, will not exceed at any time outstanding the lesser of (i) $5,000,000, and (ii) the Revolving Credit Commitment minus the sum of the aggregate principal amount of all outstanding Revolving Credit Loans and the Hedging Exposure. 3.2 DOCUMENTATION. (A) COMMERCIAL LETTERS OF CREDIT. Not less than three (3) Business Days prior to the date a commercial Letter of Credit is to be issued for its account, the Company (and the applicable Material Subsidiary, if applicable) will complete, execute and deliver to the Bank an Application and Agreement for Commercial Letter of Credit (each, a "Commercial L/C Application"), each substantially in the form of Exhibit H attached hereto with the blanks therein appropriately completed, and such other documents as the Bank may reasonably require in connection therewith. Each commercial Letter of Credit issued by the Bank will be subject to the terms and conditions of the Commercial L/C Application pursuant to which it is issued as well as the terms and conditions of this Agreement. In the event of a conflict between the provisions of a Commercial L/C Application and the provisions of this Agreement, the provisions of this Agreement will govern. (B) STANDBY LETTERS OF CREDIT. Not less than five (5) Business Days prior to the date a standby Letter of Credit is to be issued for its account, the Company (and the applicable Material Subsidiary, if applicable) will complete, execute and deliver to the Bank an Application and Agreement for Standby Letter of Credit (each, a "Standby L/C Application"), each substantially in the form of Exhibit I attached hereto with the blanks therein appropriately completed, and such other documents as the Bank may reasonably require in connection therewith. Each standby Letter of Credit issued by the Bank will be subject to the terms and conditions of the Standby L/C Application pursuant to which it is issued as well as the terms and conditions of this Agreement. In the event of a conflict between the provisions of the Standby L/C Application and the provisions of this Agreement, the provisions of this Agreement will govern. 3.3 FEES. For each Letter of Credit issued under the terms of this Agreement, the Company will pay or cause the applicable Material Subsidiary to pay to the Bank at the time of issuance a fee computed on the amount of such Letter of Credit at the rate equal to the applicable L/C Fee. Such fee will be fully earned at the time such Letter of Credit is issued and nonrefundable. The Company will also pay or cause the applicable Material Subsidiary to pay the Bank when due its customary administrative fees as they may be established or altered from time to time for issuing Letters of Credit and for honoring drafts thereunder and, if applicable, for transferring, amending or extending such Letters of Credit. Nothing contained herein, however, shall obligate the Bank to transfer, amend or extend beyond its original maturity date any Letter of Credit. 3.4 REIMBURSEMENT OBLIGATIONS. The Company will pay or cause the applicable Material Subsidiary to pay to the Bank promptly upon demand any and all amounts paid by the Bank under any Letter of Credit, as provided in the applicable L/C Application, together with interest on such amount from the date such amount was paid by the Bank to the date it receives payment in federal or other immediately available funds at the LIBOR Daily Floating Rate plus the Applicable Margin, with such rate to be reset on each day on which there is a change to the LIBOR Daily Floating Rate and on the effective date of each change in the Applicable Margin. Such interest shall be computed for the actual number of days elapsed over a year of 360 days. 3.5 EXPIRATION OF LETTERS OF CREDIT. Unless the Bank shall otherwise agree, each commercial Letter of Credit issued under the provisions of this Agreement shall expire not later than six (6) months after its date of issuance, each standby Letter of Credit issued under the provisions of this Agreement shall expire not later than one (1) year after its date of issuance and in any event all Letters of Credit shall expire on or before August 31, 2003. SECTION 4 FEES, INTEREST AND PAYMENTS 4.1 COMMITMENT FEE. The Company will pay to the Bank, on or before the Closing Date, a commitment fee with respect to the Revolving Credit Facility equal to Fifty Thousand Dollars ($50,000.00), which commitment fee will be fully earned and non-refundable once paid. 4.2 UNUSED COMMITMENT FEE. (a) The Company will also pay to the Bank, on December 31, 1998, and quarterly in arrears thereafter on the last day of each calendar quarter occurring prior to the Revolving Credit Termination Date and on the Revolving Credit Termination Date, an unused commitment fee with respect to the Revolving Credit Facility. Each installment of such unused commitment fee will be equal to the product of (i) the Unused Commitment Fee Percentage in effect on the date such installment is due, multiplied by (ii) the daily average amount during the immediately preceding fiscal quarter or other applicable period by which (x) the Revolving Credit Commitment exceeded (y) the sum of the aggregate principal amount of all outstanding Revolving Credit Loans and the L/C Obligations, multiplied by (iii) a fraction, the numerator of which is the number of days in the immediately preceding fiscal quarter or other applicable period and the denominator of which is 360. (b) In the event that (i) an Event of Default has occurred and is continuing, (ii) the outstanding Revolving Credit Loans are bearing interest at the Default Rate, and (iii) as a result of such Event of Default and/or the Bank's actions in response thereto, the Bank is not required to maintain any capital or other reserves in connection with the unfunded portion of the Revolving Credit Facility, the Company will not be required to pay an unused commitment fee hereunder with respect to any period during which the conditions specified in clauses (i), (ii) and (iii) above are true. 4.3 INTEREST RATES, PAYMENTS. (a) Except as provided in Section 4.3(b), the outstanding principal amount of the Revolving Credit Loans as it exists from time to time will bear interest at an annual rate equal to the LIBOR Daily Floating Rate plus the Applicable Margin, with such rate to be initially set by the Bank on the Closing Date and with such rate to be reset on each day on which there is a change to the LIBOR Daily Floating Rate and on the effective date of each change in the Applicable Margin. (b) In the event that the Company and the Bank (or an Affiliate of the Bank) enter into a Hedging Agreement covering the Revolving Credit Facility or any portion thereof, from and including the effective date of the transaction described in the Hedging Agreement, the portion of the outstanding principal amount of the Revolving Credit Loans which corresponds to the amount of the Revolving Credit Commitment covered by such Hedging Agreement will bear interest at an annual rate equal to the applicable Contract LIBOR Rate plus the Applicable Margin, with such rate to be initially set by the Bank on the effective date of the transaction described in the Hedging Agreement and with such rate to be reset as of the first day of each subsequent Interest Period and on the effective date of each change in the Applicable Margin. (c) Interest on the Revolving Credit Loans will be computed on the basis of the actual number of days elapsed over a year of 360 days. Accrued interest on the Revolving Credit Loans bearing interest based on the LIBOR Daily Floating Rate or the Prime Rate will be due and payable on the first day of each month, when the Revolving Credit Loans are paid in full, and on the Revolving Credit Termination Date; and accrued interest on the Revolving Credit Loans bearing interest based on a Contract LIBOR Rate will be due and payable on the last day of each Interest Period, when the Revolving Credit Loans are paid in full and on the Revolving Credit Termination Date. 4.4 DEFAULT RATE. Upon the occurrence and during the continuance of an Event of Default, at the discretion of the Bank, the Revolving Credit Loans will bear interest at the Default Rate, with such Default Rate to be effective on the first date as of which the applicable Event of Default occurs notwithstanding the fact that such Event of Default may not be reported or otherwise discovered until a subsequent date. 4.5 PAYMENTS. The disbursement of the Revolving Credit Loans hereunder and each payment of the principal of and interest on the Revolving Credit Note shall be made in federal or other immediately available funds. For purposes of this provision, collected funds on deposit with the Bank are immediately available funds. 4.6 PAYMENT ON DAYS OTHER THAN BUSINESS DAYS. Whenever any payment to be made hereunder or under the Revolving Note shall be stated to be due on a day other than a Business Day, such payment may be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of interest to be paid on such date. 4.7 LIBOR PROVISIONS. (A) INCREASED COSTS. If either (i) the introduction of or any change by any central bank or other Governmental Authority (whether or not having the force of law) (including, without limitation, any change by way of imposition or increase of reserve requirements other than those included in the computation of LIBOR but excluding any income tax on the overall income of the Bank) in or in the interpretation of any law or regulation by any central bank or other Governmental Authority (whether or not having the force of law), or (ii) the compliance by the Bank with any guideline or directive from any central bank or other Governmental Authority (whether or not having the force of law), shall result in any actual increase in the cost to the Bank of maintaining the Revolving Credit Loans bearing interest at a rate based on LIBOR or reduce the amount receivable by the Bank on any such Revolving Credit Loans, the Company will from time to time, upon demand by the Bank, pay to the Bank additional amounts sufficient to indemnify the Bank against such increased cost actually incurred or reduction in amount actually received. A certificate in reasonable detail as to the amount of such increased cost or reduction in amount received and method of calculation shall be submitted to the Company by the Bank and shall be conclusive, absent manifest error. (B) LIBOR DEPOSITS UNAVAILABLE. If, by reason of circumstances affecting the London interbank market generally, deposits in Dollars are not being offered to the Bank, the Bank may forthwith give notice thereof to the Company, whereupon (a) the obligation of the Bank to make Revolving Credit Loans bearing interest at a rate based on LIBOR will be suspended and (b) any Revolving Credit Loans bearing interest at a rate based on LIBOR will automatically be converted into Revolving Credit Loans bearing interest at a rate based on the Prime Rate (unless the Company and the Bank shall have agreed on an alternative method of determining the interest rate for the Revolving Credit Loans), with such conversion being effective at the end of any applicable Interest Period in the case of Revolving Credit Loans then bearing interest based on a Contract LIBOR Rate. (C) CHANGES IN LAW RENDERING A LIBOR LOAN UNLAWFUL. If, after the date of this Agreement, the introduction of, or any change in, any applicable law, rule or regulation or in the interpretation or administration thereof by any Governmental Authority charged with the interpretation or administration thereof, or compliance by the Bank with any guideline or directive (whether or not having the force of law) of any such Governmental Authority, shall make it unlawful or impossible for the Bank to make, maintain or fund any Revolving Credit Loan which bears interest at a rate based on LIBOR, the Bank shall promptly notify the Company, and the obligation of the Bank to make Revolving Credit Loans which bear interest at a rate based on LIBOR shall forthwith be suspended for the duration of such illegality or impossibility. Upon such notice, unless the Company and the Bank shall have agreed on an alternative method of determining the interest rate for the Revolving Credit Loans, (i) any Revolving Credit Loans then bearing interest based on the LIBOR Daily Floating Rate will immediately begin to bear interest at a rate based on the Prime Rate, and (ii) any Revolving Credit Loans then bearing interest based on a Contract LIBOR Rate will begin to bear interest at the Prime Rate (x) on the last day of the then current Interest Period if the Bank may lawfully continue to maintain such Revolving Credit Loans at a rate based on a Contract LIBOR Rate to such day, and (y) immediately if the Bank may not lawfully continue to maintain such Revolving Credit Loans at a rate based on a Contract LIBOR Rate to such day. If while any Revolving Credit Loans bear interest at a rate based on a Contract LIBOR Rate, the interest rate is changed to a rate based on the Prime Rate pursuant to clause (ii) of this Section 4.7(c) on a day other than the last day of an Interest Period, the Company will pay to the Bank any amount due under Section 4.9. (D) PRIME RATE. If, as a result of the application of paragraphs (b) or (c) above, the Revolving Credit Loans are to bear interest at a rate based on the Prime Rate, unless the Bank otherwise agrees, they will bear interest at the Prime Rate. 4.8 CAPITAL ADEQUACY. If the Bank determines that any applicable law, rule, regulation, guideline or request relating to capital adequacy adopted after the date of this Agreement, or any interpretation or administration thereof by any Governmental Authority, central bank or comparable agency or any change therein, or any interpretation or administration of any existing rule, regulation, guideline or request which is adopted or issued after the date of this Agreement, has or will have the effect of increasing the amount of capital required or expected to be maintained by the Bank based on the existence of the Revolving Credit Commitment, or its obligations hereunder, then upon demand by the Bank the Company will pay to the Bank such additional amounts as are necessary to compensate for the increased costs to the Bank as a result of such increase of capital. In determining such additional amounts, the Bank will act reasonably and in good faith and will use averaging and attribution methods which are reasonable, and the Bank's determination of compensation shall be conclusive, absent manifest error. Upon determining that any increased costs will be payable pursuant to this Section 4.8, the Bank will give prompt written notice thereof to the Company, which notice will show the basis for calculation of such increased costs, although the failure to give any such notice shall not release or diminish any of the Company's obligations to pay such increased costs to the Bank. 4.9 FUNDING LOSSES. If any repayment or prepayment of Revolving Credit Loans bearing interest based on a Contract LIBOR Rate occurs for any reason on a day which is not the last day of an Interest Period applicable thereto, upon demand by the Bank, the Company will pay to the Bank such amount or amounts as shall be sufficient (in the reasonable opinion of the Bank) to compensate the Bank for any loss, cost, expense or liability incurred by the Bank as a result of such repayment or prepayment, including, without limitation, the excess of (i) the interest which would have been received from the Company on the amount so repaid or prepaid during the remaining portion of the Interest Period in question had the Company not repaid or prepaid the applicable Revolving Credit Loans, over (ii) the amount of interest which would have accrued on such repaid or prepaid amount if the Bank had placed such amount on deposit with a prime bank in the London interbank market from the date of such repayment or prepayment until the end of such Interest Period, discounted in each case to present value using the interest rate then existing on U.S. Treasury obligations maturing as of the end of such Interest Period, as reasonably determined by the Bank. For purposes of calculating any amounts due from the Company to the Bank under this Section 4.9, it will be assumed that the Bank actually funded or committed to fund the applicable Revolving Credit Loans through the purchase of an underlying deposit in an amount, at an interest rate and for a term comparable to the amount, interest rate and Interest Period applicable to such Revolving Credit Loans. A certificate in reasonable detail as to the amount of any loss, cost, expense or liability due from the Company hereunder and the method of calculation shall be submitted to the Company by the Bank and shall be conclusive, absent manifest error. SECTION 5 REPRESENTATIONS In order to induce the Bank to enter into this Agreement and to make the Revolving Credit Loans and to issue the Letters of Credit, the Company represents and warrants to the Bank (which representations and warranties will survive the execution of the Revolving Credit Note, the making of Advances under the Revolving Credit Facility and the issuance of Letters of Credit) that: 5.1 SUBSIDIARIES. On the Closing Date, the Company has the following Material Subsidiaries and no others: Comdial Telecommunications, Inc. Comdial Business Communications Corporation Comdial Enterprise Systems, Inc. Key Voice Technologies, Inc. Aurora Systems, Inc. Array Telecom Corporation American Phone Centers, Inc. Comdial Telecommunications International, Inc. 5.2 ORGANIZATION AND EXISTENCE. Each of the Company and its Subsidiaries (i) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, (ii) has all requisite corporate or other power and authority and all licenses and permits necessary to own or lease and operate its properties and to carry on its business as now being conducted and as hereafter proposed to be conducted unless its failure to have any license or permit would not reasonably be expected, in any particular case or in the aggregate, to have a Material Adverse Effect, and (iii) is duly qualified and authorized to do business and is in good standing in each jurisdiction in which the character of its properties or the nature of its business requires such qualification or authorization unless its failure to qualify or be authorized would not reasonably be expected, in any particular case or in the aggregate, to have a Material Adverse Effect. 5.3 AUTHORITY. The Company has full corporate power and authority to enter into this Agreement and the other Loan Documents to which it is a party, to make the borrowings hereunder, to execute and deliver the Revolving Credit Note and to incur the obligations provided for herein and therein, all of which have been duly authorized by all necessary corporate action. Each of the Company and any applicable Material Subsidiary has or will have full corporate power and authority to execute and deliver each L/C Application at the time it is delivered and to incur the obligations provided for therein, all of which have been or at the time of such delivery will have been duly authorized by all necessary corporate action. Each of the Material Subsidiaries existing on the Closing Date has full corporate power and authority to execute and deliver the Subsidiary Security Agreement and the Guaranty to which it is a party (and the Deed of Trust in the case of Comdial Business Communications Corporation) and to incur the obligations provided for therein, all of which have been duly authorized by all necessary corporate action. Comdial Telecommunications, Inc. has full corporate power and authority to execute and deliver the Subsidiary Pledge Agreement and to incur the obligations provided for therein, all of which have been duly authorized by all necessary corporate action. Other than those that have previously been obtained, no consent or approval of stockholders or consent or approval of, notice to or filing with any Governmental Authority is required as a condition to the validity or enforceability of this Agreement, the Revolving Credit Note or any of the other Loan Documents. 5.4 BINDING AGREEMENTS. This Agreement constitutes, and the Revolving Credit Note, each L/C Application and each other Loan Document to which the Company is a party when executed and delivered pursuant hereto for value received will constitute, the valid and legally binding obligations of the Company enforceable in accordance with their respective terms, except to the extent such enforceability may be limited by applicable bankruptcy, insolvency, reorganization and moratorium laws and similar laws relating generally to the enforcement of creditors' rights. Each Subsidiary Security Agreement, each Guaranty and each L/C Application (and the Deed of Trust in the case of Comdial Business Communications Corporation) when executed and delivered pursuant hereto for value received will constitute the valid and legally binding obligation of the applicable Material Subsidiary enforceable in accordance with its terms, except to the extent such enforceability may be limited by applicable bankruptcy, insolvency, reorganization and moratorium laws and similar laws relating generally to the enforcement of creditors' rights. The Subsidiary Pledge Agreement when executed and delivered pursuant hereto for value received will constitute the valid and legally binding obligation of Comdial Telecommunications, Inc. enforceable in accordance with its terms, except to the extent such enforceability may be limited by applicable bankruptcy, insolvency, reorganization and moratorium laws and similar laws relating generally to the enforcement of creditors' rights. 5.5 LITIGATION. There are no proceedings pending or, to the knowledge of the Company, threatened before any court or administrative agency that would reasonably be expected, in any particular case or in the aggregate, to have a Material Adverse Effect. 5.6 NO CONFLICTING AGREEMENTS. There is no charter, bylaw or preference stock provision of the Company and no provision of any existing mortgage, indenture, contract or agreement binding on the Company or affecting its property that would conflict with or in any way prevent the execution, delivery or carrying out of the terms of this Agreement, the Revolving Credit Note, any L/C Application or any other Loan Document to which the Company is a party. There is no charter, bylaw or preference stock provision of any Material Subsidiary existing on the Closing Date and no provision of any existing mortgage, indenture, contract or agreement binding on such Material Subsidiary or affecting its property that would conflict with or in any way prevent the execution, delivery or carrying out of the terms of the Subsidiary Security Agreement or Guaranty to which such Material Subsidiary is a party or any L/C Application to which such Material Subsidiary becomes a party (or the Deed of Trust in the case of Comdial Business Communications Corporation). There is no charter, bylaw or preference stock provision of Comdial Telecommunications, Inc. existing on the Closing Date and no provision of any existing mortgage, indenture, contract or agreement binding on Comdial Telecommunications, Inc. or affecting its property that would conflict with or in any way prevent the execution, delivery or carrying out of the terms of the Subsidiary Pledge Agreement. 5.7 FINANCIAL CONDITION. The audited consolidated balance sheet of the Company and its Subsidiaries as of December 31, 1997, and the related consolidated statements of income, retained earnings and cash flows for the period then ended, certified by Deloitte & Touche, L.L.P., heretofore delivered to the Bank, are complete and correct in all material respects and fairly present the consolidated financial condition of the Company and its Subsidiaries and the results of their operations and changes in their financial position as of the date and for the period referred to therein and have been prepared in accordance with GAAP. The unaudited consolidated balance sheet of the Company and its Subsidiaries as of June 30, 1998, and the related consolidated statements of income, retained earnings and cash flows for the period then ended, heretofore delivered to the Bank, are complete and correct in all material respects and fairly present the consolidated financial condition of the Company and its Subsidiaries and the results of their operations and changes in their financial position as of the date and for the period referred to therein and have been prepared in accordance with GAAP, subject to year-end adjustments and the addition of footnotes. Other than liabilities associated with the acquisition of Array Telecom Corporation (which do not exceed $10,000,000 in the aggregate), there are no material liabilities, direct or indirect, fixed or contingent, of the Company or any of its Subsidiaries as of the dates of such balance sheets that are not reflected therein or in the notes thereto. There has been no material adverse change in the financial condition or operations of the Company or any of its Subsidiaries since the dates of such balance sheets, and there has been no other material adverse change in the Company or any of its Subsidiaries. 5.8 OWNERSHIP OF PROPERTY. Each of the Company and its Subsidiaries has good and valid fee simple or leasehold interests in all land and other real estate, and has good and valid title to all other properties and assets, it purports to own, including those referred to in the financial statements referred to in Section 5.7, except for defects in title which would not reasonably be expected, in any particular case or in the aggregate, to have a Material Adverse Effect. Each of the Company and its Subsidiaries enjoys full, peaceful and undisturbed possession under all leases necessary in any material respect for the operation of its business or properties. All such leases are valid and subsisting and are in full force and effect and, to the knowledge of the Company, no default or event of default exists thereunder. 5.9 INTELLECTUAL PROPERTY. Without limiting the generality of Section 5.8, each of the Company and its Subsidiaries owns and possesses rights to use all franchises, licenses, copyrights, copyright applications, patents, patent rights or licenses, patent applications, trademarks, trademark rights, trade names, trade name rights, copyrights and other intellectual property rights which are required to conduct its business, except in cases in which a failure to own or possess any such rights would not reasonably be expected, in any particular case or in the aggregate, to have a Material Adverse Effect. No event has occurred which permits, or after notice or lapse of time, or both, would permit, the revocation or termination of any such rights, and neither the Company nor any of its Subsidiaries is liable to any Person for infringement under any applicable law with respect to any such rights as a result of its business operations, except in cases in which any such revocation, termination or liability would not reasonably be expected, in any particular case or in the aggregate, to have a Material Adverse Effect. 5.10 EMPLOYEE BENEFIT PENSION PLANS. No fact, including, but not limited to, any Reportable Event as defined in Section 4043 of ERISA, exists in connection with any employee benefit plan of the Company or any of its Subsidiaries covered by ERISA (including any plan of any member of a controlled group of corporations and all trades and businesses (whether or not incorporated) under common control which, together with the Company or any of its Subsidiaries, are treated as a single employer, under Section 414 of the Code), which could constitute grounds for the termination of any such plan by the PBGC or for the appointment of any trustee to administer such plan by the appropriate United States District Court. 5.11 TAXES. Each of the Company and its Subsidiaries has filed or caused to be filed all tax returns which are required to be filed by it pursuant to applicable law. Each of the Company and its Subsidiaries has paid, or made provisions for the payment of, all taxes, assessments, fees and other governmental charges which have or may have become due pursuant to those returns or otherwise, or pursuant to any assessment received by the Company or such Subsidiary, except such taxes that are being contested in good faith and by appropriate proceedings and as to which adequate reserves (determined in accordance with GAAP) have been provided, and no tax liens have been filed and, to the knowledge of the Company, no claims are being asserted against the Company or any Subsidiary with respect to any such taxes, fees or other charges. 5.12 COMPLIANCE WITH ENVIRONMENTAL AND OTHER LAWS. Each of the Company and its Subsidiaries is in compliance with all applicable laws, including but not limited to all Environmental Laws, the failure to comply with which would reasonably be expected, in any particular case or in the aggregate, to have a Material Adverse Effect. There are no past or present events, conditions, circumstances, activities, practices, incidents, actions or plans which would reasonably be expected to interfere with or prevent continued compliance, or which would reasonably be expected to give rise to any common law or statutory liability, under, relating to or in connection with any Environmental Law, or otherwise form the basis of any claim, action, suit, proceeding, hearing or investigation under applicable law based on or related to the manufacture, processing, distribution, use, treatment, storage, transport or handling, or the release or threatened release into the environment, of any Hazardous Material with respect to the Company or any of its Subsidiaries or their respective businesses which would reasonably be expected, in any particular case or in the aggregate, to have a Material Adverse Effect. 5.13 EMPLOYEE RELATIONS. As of the Closing Date, neither the Company nor any of its Subsidiaries is a party to any collective bargaining agreement nor has any labor union been recognized as the representative of any employees of the Company or any of its Subsidiaries. The Company is not aware of any pending, threatened or contemplated strikes, work stoppages or other collective labor disputes involving its employees or those of any of its Subsidiaries. 5.14 INVESTMENT COMPANY ACT; PUBLIC UTILITY HOLDING COMPANY ACT; FEDERAL POWER ACT. Neither the Company nor any of its Subsidiaries is required to register under the provisions of the Investment Company Act of 1940, as amended, and neither the entering into or performance by the Company of this Agreement or any other Loan Documents, or the issuance of the Revolving Credit Note, violates any provisions of such Act or requires any consent, approval, or authorization of, or registration with, any Governmental Authority pursuant to any of the provisions of such Act. Neither the Company nor any of its Subsidiaries is (i) a "holding company" or a "subsidiary company" of a "holding company," as such terms are defined in the Public Utility Holding Company Act of 1935, as amended, or (ii) a "public utility," as such term is defined in the Federal Power Act, as amended. 5.15 NO DEFAULTS. Neither the Company nor any of its Subsidiaries is in default in the payment of the principal of or any interest on any indebtedness for borrowed money and, to the knowledge of the Company, neither the Company nor any of its Subsidiaries is otherwise in default under any instrument under or subject to which any such indebtedness has been incurred, and no event has occurred under the provisions of any such instrument which, with the giving of notice or the lapse of time, or both, would constitute an event of default thereunder. 5.16 FEDERAL REGULATIONS. No part of the proceeds of any of the Revolving Credit Loans and no Letter of Credit has been or will be used by the Company for "purchasing" or "carrying" any "margin stock" within the respective meanings of each of the quoted terms under Regulation U or for any other purpose which violates the provisions of the Regulations of the Board of Governors of the Federal Reserve System. If requested by the Bank, the Company will furnish to the Bank a statement to the foregoing effect in conformity with the requirements of Federal Reserve Form U-1 referred to in Regulation U. 5.17 ACCURACY OF INFORMATION. To the best knowledge of the Company, no written information, exhibit or report furnished by an officer of the Company to the Bank in connection with the negotiation of this Agreement or any of the other Loan Documents contains any material misstatement of fact or omits to state any material fact necessary to make the statement contained therein not misleading, and the Company has no knowledge of any fact that the Company has not disclosed to the Bank in writing that would reasonably be expected to result in a Material Adverse Effect. 5.18 YEAR 2000 COMPLIANCE. (a) The Company has (i) begun analyzing the operations of the Company and its Subsidiaries and Affiliates that could be adversely affected by failure to become Year 2000 compliant (that is, that computer applications, imbedded microchips and other systems will be able to perform date-sensitive functions prior to and after December 31, 1999); and (ii) developed a plan for becoming Year 2000 compliant in a timely manner, the implementation of which is on schedule in all material respects. The Company reasonably believes that it will become Year 2000 compliant for its operations and those of its Subsidiaries and Affiliates on a timely basis except to the extent that a failure to do so would not reasonably be expected to have a Material Adverse Effect. (b) Based on certificates received by the Company, the Company reasonably believes any suppliers and vendors that are material to the operations of the Company or its Subsidiaries and Affiliates will be Year 2000 compliant for their own computer applications except to the extent that a failure to do so would not reasonably be expected to have a Material Adverse Effect. 5.19 SURVIVAL OF REPRESENTATIONS AND WARRANTIES, ETC. All representations and warranties set forth in this Section 5 and all representations and warranties contained in any certificate or any of the other Loan Documents (including but not limited to any such representation or warranty made in or in connection with any amendment thereto) shall constitute representations and warranties made under this Agreement. All representations and warranties made under this Agreement shall be made or deemed to be made at and as of the Closing Date, shall survive the Closing Date and shall not be waived by the execution and delivery of this Agreement, any investigation made by or on behalf of the Bank or any extension of credit hereunder. SECTION 6 CONDITIONS TO CREDIT EXTENSIONS 6.1 CONDITIONS TO INITIAL CREDIT EXTENSIONS. The obligation of the Bank to make the initial Advance under the Revolving Credit Facility is subject to each of the following conditions precedent, or if any such condition is waived by the Bank as a condition to the making of such initial Advance, such condition shall, at the option of the Bank, be a condition to the making of subsequent Advances under the Revolving Credit Facility or the issuance of Letters of Credit: (A) APPROVAL OF BANK'S COUNSEL. All legal matters incident to this Agreement, including without limitation all documents and opinions, shall be satisfactory to counsel for the Bank. (B) CERTIFICATES, EVIDENCE OF CORPORATE ACTION BY COMPANY, ETC. The Company shall have delivered to the Bank such closing and officer's certificates as may be reasonably requested by the Bank, along with a certified copy of the Company's articles of incorporation and bylaws, an incumbency certificate relating to its officer(s) who will be executing on its behalf this Agreement and the other Loan Documents to which the Company is a party, a certified copy of the resolutions of its board of directors authorizing and approving the transactions described herein (and any other papers evidencing corporate action taken by the Company relating to this Agreement), and a good standing certificate related to the Company of recent date from the Delaware Secretary of State. (C) CERTIFICATE, EVIDENCE OF CORPORATE ACTION BY MATERIAL SUBSIDIARIES. The Company shall have caused each of the Material Subsidiaries existing on the Closing Date to deliver to the Bank such closing and officer's certificates as may be reasonably requested by the Bank, along with a certified copy of its articles of incorporation and bylaws, an incumbency certificate relating to its officer(s) who will be executing on its behalf the Loan Documents to which it is a party, a certified copy of the resolutions of its board of directors authorizing and approving such Loan Documents and the transactions described therein (and all other papers evidencing corporate action taken by such Material Subsidiary relating to such Loan Documents), and a good standing certificate relating to such Material Subsidiary of recent date from the applicable Governmental Authority. (D) OPINION OF COUNSEL. The Company shall have delivered to the Bank a favorable opinion of counsel or opinions of counsel for the Company and the Material Subsidiaries, dated as of the Closing Date and satisfactory in form and substance to the Bank. (E) DEED OF TRUST. Comdial Business Communications Corporation shall have executed and delivered to the Bank the Deed of Trust, along with a recording receipt indicating to the Bank's satisfaction that the Deed of Trust has been properly recorded in the Clerk's Office of the Circuit Court of the County of Albemarle, Virginia. (F) SECURITY AGREEMENT. The Company shall have executed and delivered to the Bank the Security Agreement, along with financing statements in form satisfactory to the Bank receipted to show that they have been filed in the appropriate filing offices to perfect the security interests granted to the Bank in the Security Agreement. (G) SUBSIDIARY SECURITY AGREEMENTS. Each of the Material Subsidiaries existing on the Closing Date shall have executed and delivered to the Bank its Subsidiary Security Agreement, along with financing statements in form satisfactory to the Bank receipted to show that they have been filed in the appropriate filing offices to perfect the security interests granted to the Bank in such Subsidiary Security Agreement. (H) PLEDGE AGREEMENTS. The Company shall have executed and delivered to the Bank the Pledge Agreement, along with the original stock certificates and other instruments evidencing all of the stock pledged to the Bank thereunder and appropriate stock powers relating thereto in form and substance satisfactory to the Bank, and Comdial Telecommunications, Inc. shall have executed and delivered to the Bank the Subsidiary Pledge Agreement, along with the original stock certificates and other instruments evidencing all of the stock pledged to the Bank thereunder and appropriate stock powers relating thereto in form and substance satisfactory to the Bank. (I) GUARANTIES. Each of the Guarantors shall have executed and delivered to the Bank its Guaranty. (J) MORTGAGEE TITLE INSURANCE. The Bank shall have received (i) a policy of mortgagee title insurance insuring the lien of the Deed of Trust as a first priority deed of trust on the Virginia Property in the amount of $10,000,000, issued by a title insurance company acceptable to the Bank, without exception for possible filed or unfiled mechanics' and materialmen's liens, containing only such exceptions to title as are acceptable to the Bank, and containing such endorsements and affirmative coverage as are requested by the Bank, and (ii) a title opinion, owner's title insurance policy or other evidence reasonably satisfactory to the Bank demonstrating that the Florida Property is free and clear of liens and encumbrances securing indebtedness (other than liens and encumbrances which secure indebtedness which will be paid in full on or promptly after the Closing Date and which will be released and terminated promptly after the Closing Date) and other liens and encumbrances not acceptable to the Bank. (K) SURVEY. The Company shall have delivered to the Bank a current survey of the Virginia Property satisfactory to the Bank, showing no encroachments and prepared and certified by a certified land surveyor (using certification language satisfactory to the Bank), which survey shall designate, without limitation, (i) the dimensions of the Virginia Property, (ii) the dimensions and location of the buildings and other improvements constructed or to be constructed thereon, (iii) the dimensions of the parking areas as well as the total number of on-site parking spaces, (iv) the location of all easements of record affecting the Virginia Property, specifying the holder of each such easement and the pertinent recordation information, (v) any and all building restrictions and/or setback liens, and (vi) means of ingress and egress. (L) ENVIRONMENTAL REPORT. The Company shall have delivered to the Bank a report from a qualified environmental engineer or consultant acceptable to the Bank with respect to an environmental investigation and audit of the Virginia Property (the scope of which will be defined by the Bank), showing no contamination of the Virginia Property (other than as previously disclosed to the Bank in writing) by Hazardous Materials and that no portion of the Virginia Property constitutes "wetlands" under any Environmental Law. (M) UCC SEARCH REPORTS. The Company shall have delivered to the Bank uniform commercial code search reports acceptable to the Bank covering the Company or the applicable Material Subsidiary, as applicable, for each filing office in which a financing statement in favor of the Bank has been filed to perfect the security interests granted to the Bank in the Security Agreement or any Subsidiary Security Agreement and for each filing office otherwise specified by the Bank, which show only such financing statements as are acceptable to the Bank. (N) EVIDENCE OF INSURANCE. The Company shall have delivered to the Bank evidence satisfactory to the Bank that all insurance required by the terms of this Agreement and the other Loan Documents is in full force and effect. (O) OTHER DOCUMENTS. The Company shall have delivered to the Bank such other documents and information as may have been reasonably requested by the Bank. 6.2 CONDITIONS TO EACH CREDIT EXTENSION. The obligation of the Bank to make each Advance under the Revolving Credit Facility (including, without limitation the first such Advance) and to issue each Letter of Credit is subject to each of the following additional conditions precedent: (A) NOTICES; APPLICATIONS. With respect to any Advance under the Revolving Credit Facility, unless an AutoBorrow Service Agreement is in effect, the Company shall have given the notice of borrowing as required by Section 2.5; and, with respect to any Letter of Credit, the Company (and the applicable Material Subsidiary, if applicable) shall have executed and delivered to the Bank an appropriate L/C Application as required by Section 3.2(a) or Section 3.2(b), as applicable. (B) COMPLIANCE. The Company shall have complied and shall then be in compliance in each case in all material respects with all of the terms, covenants and conditions of this Agreement and the other Loan Documents to which the Company is a party. (C) NO EVENT OF DEFAULT. No Default shall have occurred and be continuing, no Event of Default shall exist, and no Default or Event of Default would result from the making of such Advance or the issuance of such Letter of Credit, as applicable. (D) REPRESENTATIONS AND WARRANTIES. The representations and warranties contained in Section 5 shall, except to the extent that they relate solely to an earlier date and except to the extent that the Bank has consented in writing to any change in the nature of the business or operations of the Company or any Subsidiary which would render any such representation or warranty untrue, be true in all material respects with the same effect as though such representations and warranties had been made at the time of the making of such Advance or the issuance of such Letter of Credit, as applicable. (E) NO INJUNCTION, ETC. No action, proceeding, investigation, regulation or legislation shall have been instituted, threatened or proposed before any Governmental Authority to enjoin, restrain or prohibit, or to obtain substantial damages with respect to, or which is related to or arises out of, this Agreement or any of the other Loan Documents or the consummation of the transactions contemplated hereby or thereby, or which in the Bank's reasonable discretion, would make it inadvisable to make such Advance or issue such Letter of Credit, as applicable. SECTION 7 AFFIRMATIVE COVENANTS So long as the Company may borrow under the Revolving Credit Facility or request that the Bank issue Letters of Credit or any Letter of Credit is outstanding and until payment in full of the Revolving Credit Loans and payment and performance of all other obligations of the Company hereunder and under the other Loan Documents, the Company will: 7.1 FINANCIAL STATEMENTS. Furnish to the Bank: (a) as soon as available, but in no event more than forty-five (45) days after the end of each of the Company's fiscal quarters, a consolidated balance sheet of the Company and its Subsidiaries as of the end of such quarter and a consolidated income statement of the Company and its Subsidiaries to the end of such quarter, each in reasonable detail and in form and substance satisfactory to the Bank, prepared in accordance with GAAP and certified by the chief financial officer of the Company, provided that the Company may deliver, in lieu of the foregoing quarterly financial statements, the quarterly report of the Company for the applicable fiscal quarter on Form 10-Q filed with the SEC, but only as long as the financial statements contained in such quarterly report are substantially the same in content as the financial statements referred to above in this Section 7.1(a); with each such quarterly financial statements to be accompanied by (i) consolidating balance sheets and consolidating income statements with respect to Material Subsidiaries for which there has been any material financial activity during the applicable quarter, prepared in the ordinary course of the Company's business, and (ii) a compliance certificate, in form and detail satisfactory to the Bank and signed by the chief financial officer of the Company, which provides a detailed calculation of the financial covenants contained herein as of the applicable fiscal quarter end and a statement as to whether the Company is in compliance with all of the terms and conditions of this Agreement; (b) as soon as available, but in no event more than one hundred twenty (120) days after the end of each of the Company's fiscal years, a copy of the annual consolidated financial statements of the Company and its Subsidiaries in reasonable detail and in form and substance satisfactory to the Bank, prepared in accordance with GAAP and audited by certified public accountants of national standing or otherwise satisfactory to the Bank, which financial statements shall include a consolidated balance sheet of the Company and its Subsidiaries as of the end of such fiscal year, a consolidated statement of income and retained earnings of the Company and its Subsidiaries for such fiscal year, a consolidated statement of cash flows for the Company and its Subsidiaries for such fiscal year, a reconciliation of net worth, and all normal and reasonable financial notes, provided that the Company may deliver, in lieu of the foregoing annual financial statements, the annual report of the Company for the applicable fiscal year on Form 10-K filed with the SEC, but only as long as the financial statements contained in such annual report are substantially the same in content as the financial statements referred to above in this Section 7.1(b); with each such annual financial statements to be accompanied by a compliance certificate, in form and detail satisfactory to the Bank and signed by the chief financial officer of the Company, which provides a detailed calculation of the financial covenants contained herein as of the applicable fiscal year end and a statement as to whether the Company is in compliance with all of the terms and conditions of this Agreement; (c) promptly upon distribution thereof, copies of all other financial statements, proxy statements, notices and reports, if any, which the Company sends to its stockholders and copies of all registration statements (without exhibits and other than on Form S-8) and all reports (other than reports on Forms 3, 4 or 5) which the Company files with the SEC; (d) as soon as available, but in no event later than February 15 of each year, a copy of the annual budget for the Company and its Subsidiaries for that year (including a proforma consolidated balance sheet, income statement and statement of cash flows) signed by the chief financial officer of the Company and substantially in the form of the budget prepared for calendar year 1998, a copy of which has been delivered to the Bank; (e) as soon as possible, but in no event more that five (5) days after the Company obtains knowledge of a Default or an Event of Default, a certificate of the chief financial officer of the Company setting forth the details of such Default or Event of Default and the action the Company has taken or proposes to take with respect thereto; and (f) with reasonable promptness, such additional information, reports and statements concerning the Company, any Subsidiary or any of their respective businesses or properties as the Bank may from time to time reasonably request. 7.2 INSPECTIONS. Permit, and cause each of its Subsidiaries to permit, the Bank and its representatives to inspect its books and records during normal business hours and to discuss its affairs with its officers. 7.3 YEAR 2000 COMPLIANCE. Promptly notify the Bank in the event the Company determines that any computer application which is material to the operations of the Company, any of its Subsidiaries or Affiliates or any of its material vendors or suppliers will not be fully Year 2000 compliant on a timely basis, except to the extent that such failure would not reasonably be expected to have a Material Adverse Effect. 7.4 TAXES. Pay and discharge, and cause each of its Subsidiaries to pay and discharge, all taxes, assessments, and governmental charges upon it, its income, and its properties prior to the date on which penalties are attached thereto, unless and to the extent only that (i) such taxes, assessments, and governmental charges are being contested by the Company or such Subsidiary, as the case may be, in good faith and by appropriate proceedings, and (ii) the Company or such Subsidiary, as the case may be, has established on its books adequate reserves with respect to such tax, assessment or charge so contested in accordance with GAAP. 7.5 PAYMENT OF OBLIGATIONS. Pay and discharge, and cause each of its Subsidiaries to pay and discharge, at or before their maturity all indebtedness and other obligations and liabilities of the Company and its Subsidiaries, except when (i) the same may be contested by the Company or such Subsidiary, as the case may be, in good faith and by appropriate proceedings, and (ii) the Company or such Subsidiary, as the case may be, has established on its books adequate reserves with respect to such indebtedness, obligation or liability in accordance with GAAP. 7.6 INSURANCE. Maintain, and cause each of its Subsidiaries to maintain, adequate insurance with responsible companies reasonably satisfactory to the Bank in such amounts and against such risks as are customarily carried by owners of similar businesses and property. The covenant contained in this Section 7.6 shall be in addition to any covenants relating to insurance in the other Loan Documents. 7.7 CORPORATE EXISTENCE. Maintain, and cause each of its Subsidiaries to maintain, its corporate existence in good standing, except as otherwise permitted by Section 9.3. 7.8 LICENSES AND PERMITS. Maintain, and cause each of its Subsidiaries to maintain, all permits, licenses, authorizations, approvals and intellectual property required to own and operate the businesses and properties of the Company and its Subsidiaries, except where a failure to maintain any such permit, license, authorization, approval or intellectual property would not reasonably be expected, in a particular case or in the aggregate, to have a Material Adverse Effect. 7.9 PROPERTIES. Maintain, preserve, and protect, and cause each of its Subsidiaries to maintain, preserve and protect, all franchises and trade names and preserve all the remainder of its property used or useful in the conduct of its business and keep the same in good repair, working order, and condition, and from time to time make or cause to be made all needful and proper repairs, renewals, replacements, betterments, and improvements thereto so that the business carried on in connection therewith may be properly and advantageously conducted at all times, and permit the Bank and its agents to enter upon and inspect such properties during normal business hours upon reasonable notice; provided, however, that nothing contained in this Section 7.9 shall prohibit the Company or any Subsidiary from selling or disposing of property in the ordinary course of business which the Company or such Subsidiary determines in its reasonable business judgment to be no longer useful in the conduct of its business. 7.10 EMPLOYEE BENEFIT PENSION PLANS. Promptly during each year, pay, and cause each of its Subsidiaries to pay, contributions that in the judgment of the chief financial officer of the Company after reasonable inquiry are believed adequate to meet at least the minimum funding standards set forth in Sections 302 through 305 of ERISA with respect to each employee benefit pension plan of the Company and its Subsidiaries, if any, covered by ERISA (including any plan of any member of a controlled group of corporations and all trades and businesses (whether or not incorporated) under common control which, together with the Company or any Subsidiary, are treated as a single employer, under Section 414 of the Code); file, and cause each of its Subsidiaries to file, each annual report required to be filed pursuant to Section 103 of ERISA in connection with each such plan for each year; and notify the Bank within ten (10) days of the occurrence of a Reportable Event (as defined in Section 4043 of ERISA) that might constitute grounds for termination of any such plan by the PBGC or for the appointment by the appropriate United States District Court of a trustee to administer any such plan. 7.11 BUSINESS CONTINUATION. Continue, and cause each of its Subsidiaries to continue, to operate its business substantially as currently operated. 7.12 COMPLIANCE WITH ENVIRONMENTAL LAWS. Comply, and cause each of its Subsidiaries to comply, in all material respects with all Environmental Laws. 7.13 COMPLIANCE WITH OTHER APPLICABLE LAWS. Comply, and cause each of its Subsidiaries to comply, with all other applicable laws, rules, regulations and orders of any Governmental Authority having jurisdiction over it, except where a failure to comply would not reasonably be expected, in any particular case or in the aggregate, to have a Material Adverse Effect. 7.14 GAAP. Maintain, and cause each of its Subsidiaries to maintain, its books and records in accordance with GAAP. 7.15 ADDITIONAL STOCK PLEDGES, SECURITY AGREEMENTS AND GUARANTIES. Provide the Bank prompt written notice of the creation, formation or acquisition of any Material Subsidiary which has not previously executed and delivered a Subsidiary Security Agreement and a Guaranty to the Bank (and of the fact that a Subsidiary which was not previously a Material Subsidiary and which has not previously executed and delivered a Subsidiary Security Agreement and a Guaranty to the Bank has become a Material Subsidiary); and, as soon as possible and in any event within thirty (30) days after such notice, (i) execute and deliver to the Bank a pledge agreement, substantially in the form attached hereto as Exhibit F with the blanks therein appropriately completed, pursuant to which the Company pledges to the Bank the capital stock of such new Material Subsidiary, (ii) cause such new Material Subsidiary to execute and deliver to the Bank a security agreement, substantially in the form attached hereto as Exhibit E with the blanks therein appropriately completed, pursuant to which such new Material Subsidiary grants the Bank a security interest in all of its accounts, inventory, equipment, general intangibles and other personal property to secure all obligations of the Company to the Bank, and a guaranty agreement, substantially in the form attached hereto as Exhibit G with the blanks therein appropriately completed, pursuant to which such new Material Subsidiary guarantees all obligations of the Company to the Bank, and (iii) deliver or cause to be delivered to the Bank in connection therewith all stock certificates and stock powers, financing statements, UCC search reports, resolutions, opinions and other documents that the Bank may reasonably request. SECTION 8 FINANCIAL COVENANTS So long as the Company may borrow under the Revolving Credit Facility or request that the Bank issue Letters of Credit or any Letter of Credit is outstanding and until payment in full of all of the Revolving Credit Loans and payment and performance of all other obligations of the Company hereunder and under the other Loan Documents: 8.1 FUNDED DEBT TO TOTAL CAPITAL RATIO. The Company will not permit the Funded Debt to Total Capital Ratio, measured as of the end of each fiscal quarter of the Company, to exceed .55 to 1. 8.2 FUNDED DEBT TO EBITDA RATIO. The Company will not permit the Funded Debt to EBITDA Ratio, measured as of the end of each fiscal quarter of the Company, to exceed 3.0 to 1. 8.3 EBITDA TO INTEREST EXPENSE RATIO. The Company will maintain the EBITDA to Interest Expense Ratio, measured as of the end of each fiscal quarter of the Company, at not less than 3.0 to 1. SECTION 9 NEGATIVE COVENANTS So long as the Company may borrow under the Revolving Credit Facility or request that the Bank issue Letters of Credit or any Letter of Credit is outstanding and until payment in full of all of the Revolving Credit Loans and payment and performance of all other obligations of the Company hereunder and under the other Loan Documents, without the prior written consent of the Bank, the Company will not: 9.1 ADDITIONAL BORROWING. Create, incur, assume, or suffer to exist, or permit any Subsidiary to create, incur, assume or suffer to exist, in any manner any indebtedness for borrowed money, deferred payment obligation for the purchase of assets, or other indebtedness, except (i) indebtedness owing to the Bank, (ii) indebtedness owing from the Company to a Material Subsidiary, from a Material Subsidiary to the Company, or from a Material Subsidiary to another Material Subsidiary, (iii) trade accounts payable arising in the ordinary course of business and payable on customary terms, and (iv) additional indebtedness (including guaranteed indebtedness and other contingent liabilities) of the Company and its Subsidiaries which does not exceed $5,000,000 in the aggregate at any time outstanding. 9.2 MORTGAGES AND PLEDGES. Create, incur, assume, or suffer to exist, or permit any Subsidiary to create, incur, assume or suffer to exist, any mortgage, pledge, lien, or other encumbrance of any kind upon, or any security interest in, the Virginia Property, the Florida Property or any of the Company's or such Subsidiary's other property or assets, whether now owned or hereafter acquired, except (i) liens for taxes not yet delinquent or being contested in good faith and by appropriate proceedings, (ii) liens in connection with workers' compensation, unemployment insurance, or other social security obligations, (iii) mechanic's, worker's, materialman's, landlord's, carrier's, or other like liens arising in the ordinary course of business with respect to obligations that are not due or that are being contested in good faith and by appropriate proceedings, (iv) mortgages, pledges, liens, and encumbrances in favor of the Bank, (v) any mortgage, encumbrance or other lien upon, or security interest in, any property hereafter acquired by the Company or a Subsidiary created contemporaneously with such acquisition to secure or provide for the payment or financing of any part of the purchase price thereof, provided that the indebtedness of the Company and its Subsidiaries secured by all such purchase money mortgages, encumbrances, liens and security interests will not exceed $3,000,000 in the aggregate at any time outstanding, and provided further that each such mortgage, encumbrance, lien or security interest shall attach only to the property so acquired and fixed improvements thereon, (vi) zoning restrictions, easements, licenses, restrictions on the use of real property or minor irregularities in the title thereto, which do not, in the opinion of the Company or such Subsidiary, as the case may be, materially impair the use of such property in the operation of the business of the Company or such Subsidiary, as the case may be, or the value of such property for the purposes of such business, and (vii) attachment, judgment and other non-tax liens if stayed and bonded off pending appeal. 9.3 MERGER, CONSOLIDATION, OR SALE OF ASSETS. Enter into any merger, consolidation or similar combination with any other Person, or sell, transfer, lease, assign, or otherwise dispose of (in one transaction or a series of transactions) all or any substantial part of its assets, or permit any Subsidiary to do so, except (i) the Company or any Material Subsidiary may, subject to Section 9.4, merge with any corporation provided (a) the Company or such Material Subsidiary, as the case may be, is the surviving corporation, and (b) immediately prior to and after giving effect to such merger no Default or Event of Default exists or would exist, (ii) any Subsidiary may merge or consolidate with the Company (provided that the Company is the surviving corporation) or with any other Subsidiary, (iii) any Subsidiary may sell, transfer, lease, assign or otherwise dispose of any of its assets to the Company or any Material Subsidiary, and (iv) the Company and its Subsidiaries may sell, transfer, lease, assign and otherwise dispose of assets as long as the aggregate amount of all such assets sold, transferred, leased, assigned or otherwise disposed of during any fiscal year of the Company does not exceed $1,000,000. 9.4 ACQUISITIONS. Acquire, or permit any Subsidiary to acquire, in one transaction or a series of transactions, all or any substantial part of the capital stock (or other ownership interests) or assets of any other Person, unless (i) in the case of an acquisition with a total purchase price of less than $20,000,000, the Company has provided to the Bank prior written notice of such acquisition and proforma financial statements giving effect to such acquisition and demonstrating to the Bank's reasonable satisfaction that, after giving effect to such acquisition, the Company will be and remain in compliance with the financial covenants and other terms of this Agreement, and (ii) in the case of an acquisition with a total purchase price of $20,000,000 or more, the Company has provided to the Bank proforma financial statements giving effect to such acquisition and demonstrating to the Bank's reasonable satisfaction that, after giving effect to such acquisition, the Company will be and remain in compliance with the financial covenants and other terms of this Agreement, and the Company has obtained the prior written consent of the Bank to such acquisition, which written consent of the Bank will not be unreasonably withheld. 9.5 CONTINGENT LIABILITIES. Assume, guarantee, endorse, or otherwise become surety for or upon the obligation of any Person, except by the endorsement of negotiable instruments for deposit or collection in the ordinary course of business, or permit any Subsidiary to do so, if the aggregate amount of such obligations assumed, guaranteed or endorsed by the Company and its Subsidiaries would cause the Company and its Subsidiaries to exceed the $5,000,000 limit set forth in Section 9.1(iv). 9.6 LOANS. Make, or permit any Subsidiary to make, any loans or advances to any Person, except loans and advances made by the Company and its Subsidiaries which do not exceed $1,000,000 in the aggregate at any time outstanding. 9.7 DISSOLUTION. Dissolve or liquidate in whole or in part, or permit any Material Subsidiary to dissolve or liquidate in whole or in part. 9.8 CONDUCT OF BUSINESS. Engage, or permit any Subsidiary to engage, in any business other than the manufacture, distribution and sale of telecommunications equipment and services, voice processing equipment and services, computer software development, data transmission equipment and services and any business reasonably related thereto. 9.9 AFFILIATE TRANSACTIONS. Enter into, or permit any of its Subsidiaries to enter into, any transaction with an Affiliate (other than a Material Subsidiary), or sell, transfer, lease, assign or otherwise dispose of any of its properties or assets to an Affiliate (other than a Material Subsidiary), other than on terms and conditions substantially as favorable to the Company or such Subsidiary, as the case may be, as could be obtained by the Company or such Subsidiary at the time in a comparable arm's-length transaction with a Person other than an Affiliate. SECTION 10 EVENTS OF DEFAULT If one or more of the following events of default (each, an "Event of Default") shall occur: 10.1 Default shall be made by the Company in the payment of any interest due on the Revolving Credit Loans when such interest is due and payable, and such default shall continue unremedied for a period of fifteen (15) days after the sending of written notice of such default to the Company; or 10.2 Default shall be made by the Company in the payment of any principal of the Revolving Credit Loans, when and as the same becomes due and payable, whether at the stated maturity thereof, by mandatory prepayment, by acceleration, demand or otherwise; or 10.3 Default shall be made by the Company in the due observance of performance of any covenant or agreement contained in Section 8.1, Section 8.2 or Section 8.3; or 10.4 Default shall be made by the Company in the due observance or performance of any other term, covenant, or agreement contained in this Agreement, and such default shall continue unremedied for a period of thirty (30) days after the sending of written notice of such default to the Company; or 10.5 Any representation or warranty made by the Company herein or any statement or representation made in any certificate, report, or opinion delivered pursuant hereto shall prove to have been incorrect in any material respect when made; or 10.6 The Company or any Material Subsidiary shall be generally not paying its debts as such debts become due, shall become insolvent or unable to meet its obligations as they mature, shall make an assignment for the benefit of creditors, shall consent to the appointment of a trustee or a receiver, or shall admit in writing its inability to pay its debts as they mature; or 10.7 A trustee, receiver or custodian shall be appointed for the Company, any Material Subsidiary or for a substantial part of any of their respective properties; or 10.8 Any case in bankruptcy shall be commenced, or any reorganization, arrangement, insolvency, or liquidation proceedings shall be instituted, by or against the Company or any Material Subsidiary and, if commenced or instituted against it, be consented to by the Company or such Material Subsidiary, as the case may be, or remain undismissed for a period of thirty (30) days; or 10.9 Any default shall be made in the performance of any other obligation incurred in connection with any indebtedness for borrowed money of the Company or any Material Subsidiary aggregating $1,000,000 or more, if the effect of such default is to permit the holder of such indebtedness (or a trustee on behalf of such holder) to cause it to become due prior to its stated maturity or to do so with the giving of notice or passage of time, or both, or any such indebtedness becomes due prior to its stated maturity or shall not be paid when due; or 10.10 One or more final judgments for the payment of money aggregating in excess of $1,000,000 which is or are not adequately insured or indemnified against shall be rendered at any time against the Company or any Material Subsidiary and the same shall remain undischarged for a period of thirty (30) days during which time execution shall not be effectively stayed; or 10.11 Any substantial part of the properties of the Company or any Material Subsidiary shall be sequestered or attached and shall not have been returned to the possession of the Company or such Material Subsidiary, as the case may be, or released from such attachment within thirty (30) days; or 10.12 The occurrence of a Reportable Event as defined in Section 4043 of ERISA which might constitute grounds for termination of any employee benefit plan of the Company or any Subsidiary covered by ERISA by the PBGC or grounds for the appointment by the appropriate United States District Court of a trustee to administer any such plan; or 10.13 A default or an event of default shall have occurred under any of the other Loan Documents; provided, however, that no such default shall constitute an Event of Default hereunder if the default is remedied to the Bank's satisfaction within any applicable grace or cure period; or 10.14 Any person or group of persons (within the meaning of Section 13(d) of the Securities Exchange Act of 1934, as amended) shall obtain ownership or control of (i) twenty percent (20%) or more of the common stock or twenty percent (20%) or more of the voting power of the Company in a single transaction, or (ii) thirty percent (30%) or more of the common stock or thirty percent (30%) or more of the voting power of the Company in a single transaction or a series of transactions; or 10.15 Any Guarantor shall deny its liability under the Guaranty to which it is a party or take any action to terminate its liability thereunder, or any event shall have occurred or condition shall exist which in the opinion of the Bank might result in the Bank not being able to enforce the obligation of any Guarantor under the Guaranty to which it is a party, unless such Guarantor reaffirms its obligations under such Guaranty in writing in a manner satisfactory to the Bank and its counsel within fifteen (15) days of its receipt of a written request from the Bank to do so; then; (A) upon the occurrence of an Event of Default described in Section 10.8 relating to the Company, (i) the Revolving Credit Commitment and the Bank's obligation to make any further Advances thereunder shall automatically and immediately terminate, (ii) the entire outstanding principal balance of the Revolving Credit Note and all accrued interest thereon and all other amounts payable by the Company to the Bank shall automatically and immediately become due and payable without presentment, demand, protest or any notice of any kind, or any other action by or on behalf of the Bank, all of which are hereby waived, anything contained herein or in the Revolving Credit Note to the contrary notwithstanding, and (iii) the Bank may proceed to enforce payment of the Revolving Credit Note and to exercise any and all of its rights hereunder, under the Revolving Credit Note, under the other Loan Documents or otherwise available to the Bank; and (B) at any time after the occurrence of any Event of Default (other than an Event of Default described in Section 10.8 relating to the Company), the Bank may, if it deems appropriate, by written notice to the Company, take any or all of the following actions, at the same or different times: (i) terminate forthwith the Revolving Credit Commitment and its obligation to make any further Advances thereunder, (ii) declare the Revolving Credit Note and all other amounts payable by the Company to the Bank to be forthwith due and payable, whereupon the Revolving Credit Note and all such other amounts shall be forthwith due and payable, both as to principal and interest, without presentment, demand, protest, or any other notice of any kind, all of which are hereby expressly waived, anything contained herein or in the Revolving Credit Note to the contrary notwithstanding, and/or (iii) proceed to enforce payment of the Revolving Credit Note and to exercise any and all of its rights hereunder, under the Revolving Credit Note, under the other Loan Documents or otherwise available to the Bank. SECTION 11 INDEMNIFICATION From and at all times after the date of this Agreement, and in addition to all of the Bank's other rights and remedies, the Company agrees to hold the Bank harmless from, and to indemnify the Bank against, all losses, damages, costs and expenses (including, without limitation, reasonable attorneys' fees, costs and expenses) incurred by the Bank from and after the date hereof, whether direct, indirect or consequential, as a result of or arising from or relating to any suit, action or proceeding by any Person, whether threatened or initiated, asserting a claim for any legal or equitable remedy against the Bank or any other Person under any statute or regulation, including, without limitation, any federal or state securities laws, or under any common law or equitable cause or otherwise, arising from or in connection with the negotiation, preparation, execution or performance of, or the financing transactions contemplated by, this Agreement or any of the other Loan Documents, or the Bank's lending of funds or other extensions of credit to the Company hereunder; provided, however, that the foregoing indemnification shall not protect the Bank from any loss, damage, cost or expense directly attributable to the Bank's gross negligence or willful misconduct. All of the indemnified losses, damages, costs and expenses described above shall be payable by the Company upon demand by the Bank, and the payment thereof shall be secured by any collateral now or hereafter provided by or on behalf of the Company to the Bank and shall be an obligation of the Company guaranteed by the Guarantors pursuant to the Guaranties. SECTION 12 MISCELLANEOUS 12.1 COSTS AND EXPENSES. The Company hereby agrees that it will pay all out-of-pocket expenses incurred by the Bank in connection with the negotiation and preparation of this Agreement and the other Loan Documents (whether or not the transactions hereby contemplated shall be consummated), the waiver of any provision hereof or thereof, any amendments to or other modifications of any of the provisions hereof or thereof, the making of Advances under the Revolving Credit Facility, the issuance of the Letters of Credit and the enforcement of the rights of the Bank in connection with this Agreement and the other Loan Documents, including but not limited to, the reasonable fees and disbursements of counsel for the Bank. 12.2 CUMULATIVE RIGHTS AND NO WAIVER. Each and every right granted to the Bank hereunder or under any other document delivered hereunder or in connection herewith, or allowed it by law or equity, shall be cumulative and may be exercised from time to time. No failure on the part of the Bank to exercise, and no delay in exercising, any right shall operate as a waiver thereof, nor shall any single or partial exercise by the Bank of any right preclude any other or future exercise thereof or the exercise of any other right. 12.3 INDEPENDENCE OF COVENANTS. Each covenant and agreement of the Company contained herein is independent of each other covenant and agreement of the Company contained herein. The fact that the operation of any such covenant or agreement permits a particular action to be taken or condition to exist does not mean that such action or condition is not prohibited, restricted or conditioned by operation of another such covenant or agreement. 12.4 NOTICES. All notices, requests and other communications to either party hereunder will be in writing and will be given to such party at its address or telefacsimile number set forth below or such other address or telefacsimile number as such party may hereafter specify in writing for this purpose by notice to the other party: If to the Company: Comdial Corporation 1180 Seminole Trail Charlottesville, Virginia 22901 Attention: Christian L. Becken Telefacsimile: (804) 978-2512 With a copy to: Kurt J. Krueger, Esquire McGuire, Woods, Battle & Boothe, L.L.P. Court Square Building 418 East Jefferson Street Charlottesville, Virginia 22902 Telefacsimile: (804) 980-2222 If to the Bank: NationsBank, N.A. 300 East Main Street Charlottesville, Virginia 22902 Attention: David T. Paulson Telefacsimile: (804) 977-2333 With a copy to: Jeffrey M. Gill, Esquire Mays & Valentine, L.L.P. NationsBank Center - 21st Floor 1111 East Main Street Richmond, Virginia 23219 Telefacsimile: (804) 697-1339 Each such notice, request or other communication will be effective (i) if given by telefacsimile, when receipt is confirmed by telephone, (ii) if given by mail, three (3) Business Days after it is deposited in the U.S. mail with first class postage prepaid, addressed as provided above, or (iii) if given by any other means, when delivered at the applicable address as provided above. 12.5 APPLICABLE LAW. This Agreement and the Revolving Credit Note shall be construed in accordance with and governed by the laws of the Commonwealth of Virginia. 12.6 MODIFICATIONS. No modification, amendment or waiver of any provision of this Agreement, nor consent to any departure by the Company therefrom shall in any event be effective unless the same shall be in writing and signed by the Bank and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice to or demand upon the Company in any case shall entitle the Company to any other or further notice or demand in the same or similar circumstances. 12.7 SURVIVORSHIP. All covenants, agreements, representations and warranties made herein and in the certificates delivered pursuant hereto shall survive the making of the Advances under the Revolving Credit Facility, the execution and delivery of the Revolving Credit Note and the issuance of any Letters of Credit and shall continue in full force and effect so long as the Company may borrow hereunder or any Letter of Credit is outstanding or any portion of the Revolving Credit Note or any obligation hereunder or under any other Loan Document is outstanding and unpaid. Whenever in this Agreement either of the parties hereto is referred to, such reference shall be deemed to include the successors and assigns of such party, and all covenants, promises and agreements by or on behalf of the Company which are contained in this Agreement shall bind the successors and assigns of the Company and inure to the benefit of the successors and assigns of the Bank. The Company shall not have the right to assign any of its rights or obligations hereunder 12.8 EXECUTION IN COUNTERPARTS. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument. 12.9 HEADINGS. Section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. 12.10 ARBITRATION. Any controversy or claim between the parties hereto including but not limited to those arising out of or relating to this Agreement or any related agreements or instruments, including any claim based on or arising from an alleged tort, shall be determined by binding arbitration in accordance with the Federal Arbitration Act (or if not applicable, applicable state law), the rules of practice and procedure for the arbitration of commercial disputes of Judicial Arbitration and Mediation Services, Inc./Endispute (J.A.M.S.), and the "special rules" set forth below. In the event of any inconsistency, the special rules shall control. Judgment upon any arbitration award may be entered in any court having jurisdiction. Either party to this Agreement may bring an action, including a summary or expedited proceeding, to compel arbitration of any controversy or claim to which this Agreement applies in any court having jurisdiction over such action. The arbitration shall be conducted in Charlottesville, Virginia and administered by J.A.M.S. who will appoint an arbitrator; if J.A.M.S. is unable or legally precluded from administering the arbitration, then the American Arbitration Association will serve. All arbitration hearings will be commenced within ninety (90) days of the demand for arbitration; further, the arbitrator shall only, upon a showing of cause, be permitted to extend the commencement of such hearing for up to an additional sixty (60) days. Nothing in this Agreement shall be deemed to (i) limit the applicability of any otherwise applicable statute of limitation or repose or any waivers contained in this agreement; or (ii) be a waiver by the Bank of the protection afforded to it by 12 U.S.C. Sec. 91 or any substantially equivalent state law; or (iii) limit the right of the Bank (a) to exercise self help remedies such as (but not limited to) setoff, or (b) to foreclose against any real or personal property collateral, or (c) to obtain from a court provisional or ancillary remedies such as (but not limited to) injunctive relief, writ of possession or the appointment of a receiver. The Bank may exercise such self help rights, foreclose upon such property, or obtain such provisional or ancillary remedies before, during or after the pendency of any arbitration proceeding brought pursuant to this Agreement. Neither this exercise of self help remedies nor the institution or maintenance of an action for foreclosure or provisional or ancillary remedies shall constitute a waiver of the right of any party, including the claimant in any such action, to arbitrate the merits of the controversy or claim occasioning resort to such remedies. 12.11 ENTIRE AGREEMENT. This Agreement and the other Loan Documents constitute the entire agreement of the Company and the Bank with respect to the subject matter hereof and supersede all prior or contemporaneous agreements, whether oral or written. IN WITNESS WHEREOF, the Company and the Bank have caused this Agreement to be duly executed by their duly authorized officers, all as of the day and year first above written. COMDIAL CORPORATION By: \s\ Christian L. Becken ------------------------ Christian L. Becken Its: Sr. VP and CFO ------------------------ NATIONSBANK, N.A. By: \s\ David T. Paulson ------------------------ David T. Paulson Its: Vice President ------------------------ EX-23 6 INDEPENDENT AUDITORS' CONSENT EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 33-53562 of Comdial Corporation on Form S-8 of our report dated January 29, 1999, appearing in this Annual Report on Form 10-K of Comdial Corporation for the year ended December 31, 1998. /s/ Deloitte & Touche LLP - ------------------------- DELOITTE & TOUCHE LLP Richmond, Virginia March 24, 1999 152 EX-24 7 POWER OF ATTORNEY EXHIBIT 24 POWER OF ATTORNEY I, Robert P. Collins, a duly elected Director of COMDIAL CORPORATION, a Delaware corporation, do hereby constitute and appoint William G. Mustain and Manfred Funke, or either of them, my true and lawful attorneys-in-fact, each with full power of substitution, for me and in my name, place and stead, in any and all capacities (including without limitation, as Director of Comdial), to sign Comdial's Annual Report on Form 10-K for the year ended December 31, 1998, which is to be filed with the Securities and Exchange Commission, with all exhibits thereto, and any and all documents in connection therewith, hereby granting unto said attorney-in-fact and agent full power and authority to do and perform any and all acts and things requisite and necessary to be done, and hereby ratifying and confirming all that said attorney-in-fact and agent may do or cause to be done by virtue hereof. This power of attorney shall not terminate upon my disability. Dated: 02/8/99 /s/ Robert P. Collins - --------------------- Robert P. Collins 153 EXHIBIT 24 POWER OF ATTORNEY I, Barbara Perrier Dreyer, a duly elected Director of COMDIAL CORPORATION, a Delaware corporation, do hereby constitute and appoint William G. Mustain and Manfred Funke, or either of them, my true and lawful attorneys-in-fact, each with full power of substitution, for me and in my name, place and stead, in any and all capacities (including without limitation, as Director of Comdial), to sign Comdial's Annual Report on Form 10-K for the year ended December 31, 1998, which is to be filed with the Securities and Exchange Commission, with all exhibits thereto, and any and all documents in connection therewith, hereby granting unto said attorney-in-fact and agent full power and authority to do and perform any and all acts and things requisite and necessary to be done, and hereby ratifying and confirming all that said attorney-in-fact and agent may do or cause to be done by virtue hereof. This power of attorney shall not terminate upon my disability. Dated: 02/8/99 /s/ Barbara Perrier Dreyer - -------------------------- Barbara Perrier Dreyer 154 EXHIBIT 24 POWER OF ATTORNEY I, A. M. Gleason, a duly elected Director of COMDIAL CORPORATION, a Delaware corporation, do hereby constitute and appoint William G. Mustain and Manfred Funke, or either of them, my true and lawful attorneys-in-fact, each with full power of substitution, for me and in my name, place and stead, in any and all capacities (including without limitation, as Director of Comdial), to sign Comdial's Annual Report on Form 10-K for the year ended December 31, 1998, which is to be filed with the Securities and Exchange Commission, with all exhibits thereto, and any and all documents in connection therewith, hereby granting unto said attorney-in-fact and agent full power and authority to do and perform any and all acts and things requisite and necessary to be done, and hereby ratifying and confirming all that said attorney-in-fact and agent may do or cause to be done by virtue hereof. This power of attorney shall not terminate upon my disability. Dated: 02/8/99 /s/ A. M. Gleason - ----------------- A. M. Gleason 155 EXHIBIT 24 POWER OF ATTORNEY I, Michael C. Henderson, a duly elected Director of COMDIAL CORPORATION, a Delaware corporation, do hereby constitute and appoint William G. Mustain and Manfred Funke, or either of them, my true and lawful attorneys-in-fact, each with full power of substitution, for me and in my name, place and stead, in any and all capacities (including without limitation, as Director of Comdial), to sign Comdial's Annual Report on Form 10-K for the year ended December 31, 1998, which is to be filed with the Securities and Exchange Commission, with all exhibits thereto, and any and all documents in connection therewith, hereby granting unto said attorney-in-fact and agent full power and authority to do and perform any and all acts and things requisite and necessary to be done, and hereby ratifying and confirming all that said attorney-in-fact and agent may do or cause to be done by virtue hereof. This power of attorney shall not terminate upon my disability. Dated: 02/8/99 /s/ Michael C. Henderson - ------------------------ Michael C. Henderson 156 EXHIBIT 24 POWER OF ATTORNEY I, John W. Rosenblum, a duly elected Director of COMDIAL CORPORATION, a Delaware corporation, do hereby constitute and appoint William G. Mustain and Manfred Funke, or either of them, my true and lawful attorneys-in-fact, each with full power of substitution, for me and in my name, place and stead, in any and all capacities (including without limitation, as Director of Comdial), to sign Comdial's Annual Report on Form 10-K for the year ended December 31, 1998, which is to be filed with the Securities and Exchange Commission, with all exhibits thereto, and any and all documents in connection therewith, hereby granting unto said attorney-in-fact and agent full power and authority to do and perform any and all acts and things requisite and necessary to be done, and hereby ratifying and confirming all that said attorney-in-fact and agent may do or cause to be done by virtue hereof. This power of attorney shall not terminate upon my disability. Dated: 02/8/99 /s/ John W. Rosenblum - --------------------- John W. Rosenblum 157 EXHIBIT 24 POWER OF ATTORNEY I, Dianne C. Walker, a duly elected Director of COMDIAL CORPORATION, a Delaware corporation, do hereby constitute and appoint William G. Mustain and Manfred Funke, or either of them, my true and lawful attorneys-in-fact, each with full power of substitution, for me and in my name, place and stead, in any and all capacities (including without limitation, as Director of Comdial), to sign Comdial's Annual Report on Form 10-K for the year ended December 31, 1998, which is to be filed with the Securities and Exchange Commission, with all exhibits thereto, and any and all documents in connection therewith, hereby granting unto said attorney-in-fact and agent full power and authority to do and perform any and all acts and things requisite and necessary to be done, and hereby ratifying and confirming all that said attorney-in-fact and agent may do or cause to be done by virtue hereof. This power of attorney shall not terminate upon my disability. Dated: 02/8/99 /s/ Dianne C. Walker - -------------------- Dianne C. Walker 158 EX-27 8 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1998 DEC-31-1998 1,599 0 23,204 198 21,434 50,854 48,752 30,729 108,990 19,205 22,146 0 0 89 63,072 108,990 118,958 128,977 71,413 75,597 45,627 120 1,216 6,417 (10,737) 17,154 0 0 0 17,154 1.94 1.89
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