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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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_____________ to_____________
Commission file number: 0-9023
COMDIAL CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 94-2443673
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
106 Cattlemen Road
Sarasota, Florida 34232
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (941)922-3800
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. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 12, 2001, was approximately $12,342,293 (See Item 5).
The number of shares of Common Stock outstanding as of March 12 , 2001, was
9,196,509.
DOCUMENTS INCORPORATED BY REFERENCE:
Comdial's Definitive Proxy Statement for its 2000 Annual Meeting of
Stockholders, which will be filed with the Securities and Exchange Commission
within 120 days after December 31, 2000, is incorporated by reference under Part
III of this Form 10K.
1
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TABLE OF CONTENTS
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Part I
Item 1. Business 4
(a) General Development of Business 4
Safe Harbor Statement 6
Industry Background 6
Strategy 8
(b) Financial Information About Industry Segment 10
Product Sales Information 11
(c) Narrative Description of Business 11
Products 11
Strategic Business Unit Products 11
Sales and Marketing 14
Engineering, Research and Development 15
Manufacturing and Quality Control 15
Competition 16
Intellectual Property 16
Employees 17
Item 2. Properties 17
Item 3. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of
Security Holders 18
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Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 19
Item 6. Selected Financial Data 20
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk 30
Item 8. Financial Statements and Supplementary Data 30
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 58
2
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TABLE OF CONTENTS (Cont'd.)
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Part III
Item 10. Directors and Executive Officers
of the Registrant 59
Item 11. Executive Compensation 59
Item 12. Security Ownership of Certain Beneficial
Owners and Management 59
Item 13. Certain Relationships and Related Transactions 59
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Part IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 60
3
PART I
ITEM 1. Business
(a) GENERAL DEVELOPMENT OF BUSINESS
Comdial Corporation (together with its subsidiaries,"Comdial" or "the Company"),
is a Delaware corporation formerly based in Charlottesville, Virginia. During
the first quarter 2001, Comdial moved its corporate headquarters to Sarasota,
Florida. 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 the symbol,
"CMDL".
Comdial designs and markets sophisticated voice communications solutions for
small to medium sized businesses, government and other organizations. Comdial
also designs and markets vertical market solutions for assisted living
facilities and the hospitality industry. Comdial currently has an installed base
of approximately 350,000 telephone systems and 3.7 million telephones.
In July 1998, Comdial acquired Array Telecom Inc. ("Array"), a technology leader
in Voice over Internet Protocol (IP). Comdial now offers both an enterprise IP
solution through its distribution channels and carrier-class IP telephony
solutions through its agreement with ePHONE, Inc.
On March 31, 2000, Comdial licensed the carrier-class IP telephony solution it
acquired from Array to ePHONE Telecom, Inc. for a five-year term, with options
to extend the agreement or purchase the solution. In addition, Comdial sold the
majority of the Array fixed assets and the "3000" family of products to ePHONE.
During 2000, Comdial was comprised of four major strategic business units
("SBUs"):
1. Comdial Convergent Communications ("CCC") selling switching products;
2. Key Voice Technologies ("KVT") selling messaging products;
3. Comdial Enterprise Solutions ("CES") selling both switching and messaging
products along with specialized developed software applications tailored to
specific vertical markets, most notably the assisted living and hospitality
markets; and
4. Comdial Business Communications Corp ("CBCC"), manufacturing Comdial products
and repairing out-of-warranty products; and Array Telecom Corporation ("Array"),
producing Internet Protocol ("IP") software products (product licensed to
ePHONE).
Restructuring
During 2000, Comdial experienced declining market conditions, unfavorable
economic factors, uncompetitive product cost, and excess inventory levels. A new
CEO was appointed effective October 2, 2000. In the fourth quarter of 2000,
management and the Board approved a plan (the "Plan") to restructure the
Company. The foundation of the Plan was to outsource manufacturing in order to
return to profitability in as short a time frame as possible. The primary
objectives of the Plan were:
1. Consolidation of business units
2. Reorganization of the management team
3. Reorganization of functional departments
4. Relocation / consolidation of certain functions from Virginia to Florida
5. Outsourcing of the manufacturing operations
4
6. Sale of the Virginia manufacturing facility
7. Streamlining product lines
8. Achievement of overall cost savings and efficiencies
Consolidation, Reorganization and Relocation
During 2000, each of the four strategic business units within Comdial: CCC, KVT,
CES, and CBCC/Array, had its own engineering, finance, information technology
("IT"), marketing and administrative functions. Comdial determined that this
structure was not sufficiently effective with respect to the Company's strategic
objectives. Consequently, from a functional standpoint, CCC, KVT, and CES were
combined under the Comdial Corporate umbrella during the first quarter of 2001.
In conjunction with this combination, management and functional departments were
also reorganized to create a more efficient use of common corporate
infrastructure and elimination of redundant functions.
After approving the Plan, management immediately began to identify potential
outsourcing partners and downsize its current workforce. Pursuant to the Plan,
152 employees were terminated effective December 15, 2000. Prior to year-end,
the Company notified an additional 222 of its employees that their positions
with the Company would be terminated at various phases during 2001. (See Note 15
to the Consolidated Financial Statements).
The relocation and consolidation of functions from Virginia to Florida was
completed during the first quarter of 2001. The Company anticipates significant
cost savings during 2001 due to the consolidation of administrative, information
technology, finance, and sales and marketing functions.
Outsourcing Manufacturing Operations
In January 2001, the Company entered into an agreement with an overseas
manufacturer to produce a cost-competitive small key system to supplement the
Company's offerings.
In February 2001, the Company entered into an agreement with a domestic
manufacturer to outsource certain of its manufacturing operations. The Company
is currently transitioning its manufacturing operations to this manufacturer and
expects to largely complete this transition by mid-2001.
Sale of Virginia Facility
On March 9, 2001, the Company sold its Virginia manufacturing facility. The
Company is leasing approximately 100,000 square feet of space for low volume
board production, light assembly work, warehousing, engineering, and technical
services functions.
Streamlining Product Lines and Cost Savings
During the fourth quarter of 2000, the Company went through a rigorous analysis
of the number of telephone and circuit boards it marketed to its customers. As a
result, Comdial is significantly reducing the number of telephone models
available by discontinuing low run-rate and/or redundant items. Low-run versions
of circuit cards used in the FX and DXP systems were also eliminated. Beginning
in 2001, Comdial is in the process of streamlining the number of telephones
offered in conjunction with its digital systems from 54 models to 8. Likewise,
the number of key systems is also being reduced from three to two. The Company
believes it will realize benefits as a result of this streamlining. More volume
concentrated on fewer products is expected to reduce product cost and inventory
levels, while making the product lines easier to configure and sell.
The Company expects the above actions to result in increased efficiencies and
lower overhead costs in the future. The Company will continue to evaluate
cost-effective measures.
5
"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 risks, market fluctuations caused by general
economic conditions, the successful execution of Comdial's restructuring plan,
continued compliance with or renegotiation of applicable bank covenants,
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 2001 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 messaging
systems, and (3) computer telephony integration (CTI) applications that
incorporate voice messaging and voice 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 and markets digital voice switching systems known as key/hybrid
systems. Historically, voice-switching systems were categorized as either
key/hybrid systems or Private Branch Exchanges ("PBXs"). Key/hybrid systems are
typically purchased by small to medium-sized businesses with 3 to 500 employees,
while larger businesses typically purchase PBXs. However, design advances in
key/hybrid systems and PBXs in recent years have blurred the distinction between
the two systems. As key/hybrid systems continue to evolve, they increasingly
encroach on the domain of the traditional PBXs, and vice versa.
A basic business telephone system consists of: (a) a central switching unit, (b)
telephone instruments, (c) associated wiring and connection hardware, (d) system
software, and (e) adjunct devices such as facsimile machines and voice
processing systems. Voice switching systems are measured in terms of "ports". A
port is an access point on the switch to an outside trunk or terminal device.
Examples of terminal devices include telephones, facsimile machines, modems, and
voice mail ports. Examples of trunks include standard business lines and digital
lines such as ISDN and T-1, as well as other types of circuits provided by a
telephone company or an alternative service provider. With the proliferation of
modems, facsimile machines, and voice mail systems, the demand for port capacity
in key/hybrid systems has grown.
In 1990, Comdial began to transition from analog systems to digital systems with
the introduction of Digital Service Units ("DSU"): a digital key system
supporting up to 48 users. In 1992, Comdial introduced the Digital Expandable
("DXP(TM)") switch. In 1994, the capacity of the DXP was expanded to 560 ports,
making it competitive with small PBXs, hence enabling Comdial dealers to compete
for larger opportunities and retain existing customers that would otherwise have
outgrown Comdial's product offering. Comdial provided Computer to Telephony
6
Integration ("CTI") for the DXP via the "Enterprise" software development
tool-kit which complied with the de facto industry standards of the time:
Telephony Server Application Programming Interface ("TSAPI") and Microsoft's
Telephony Applications Programming Interface ("TAPI"). Comdial has continued to
enhance the Enterprise CTI interface to support various applications and
operating systems.
In 1997, Comdial introduced Impact FX, a 96 port switch containing an integral
PC to support software applications, such as voice processing. In 1998, the
capacity of the Impact FX was increased to 560 ports. At that time, the Impact
FX became Comdial's flagship product for larger line sizes and ongoing R&D
efforts also shifted to the Impact FX. The latest version of the product is the
FX II. Current plans call for the FX II to support IP based networking and an IP
telephone by mid 2001.
In 1992, approximately 20 percent of Comdial's sales were attributable to
digital systems. In 2000, virtually all of Comdial's voice switching system
sales were digital systems. Between 1992 and 2000, Comdial also marketed a
number of products related to its digital business phone systems, including: an
in-building pager system known as "Tracker;" an in-building wireless phone
system known as "Scout" and a second wireless phone known as "Air Impact;" a CTI
based hospitality version of the DXP known as "Concierge"; a CTI based assisted
living version of the DXP system known as "Avalon"; a CTI based automatic call
distribution ("ACD") product known as "Quick Q(TM)"; and a call and message
management system that integrates digital communications with Microsoft(R)
Outlook(R) and Microsoft Exchange(R) Server known as "Corporate Call".
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 formation and expansion, 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. As of June 2000, Comdial held a 5.3% market share in key
hybrid products; in 1999 Comdial products accounted for 28% of key hybrid sales
through the supply house channel.
The domestic demand for traditional key/hybrid and PBX switching systems, as
projected by a leading industry consulting firm, is expected to increase only
slightly from $2.4 billion in 2001 to $2.5 billion in the year 2003. Sales of
PBX systems are expected to remain largely flat during that same period, running
at about $3.4 billion each year. This is mainly due to a transition from
traditional circuit switched technology to the use of IP technology to transport
voice and further integrate related telephony applications.
Sales of IP PBX and key hybrid products are expected to increase from just over
$100 million in 2001 to $600 million by 2003, with steeper increases thereafter.
Comdial believes it is well positioned with respect to this transition by virtue
of new IP related-features and capabilities associated with the Impact FX that
will be introduced in the second and third quarters of 2001.
Voice Messaging
The ability to digitize analog voice signals gave rise to the voice processing
business in the 1980s. In the 1990s, the introduction of powerful personal
computers provided a platform to make voice processing affordable for even small
businesses.
Voice mail was the first voice-processing product; it automatically routed a
caller to the desired party and recorded a detailed message if the called party
was not immediately available. Voice mail helped organizations reduce the cost
of operator and secretarial staffs otherwise needed to answer calls and take
messages. Voice processing is now almost ubiquitous in large and small
organizations.
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 private producer of small to mid-sized voice processing
7
products. The acquisition enabled Comdial to realize a significant increase in
both sales of voice messaging and profitability. The voice processing products
are sold to resellers of Comdial switching products, to resellers of competitive
switching products and directly to end-users. Comdial's voice processing
products integrate with most major brands of business telephone systems.
After a very rapid growth spurt in the early 1990s, the voice processing
industry is now entering a mature phase. The domestic market for voice
processing products, as projected by a leading industry consulting firm, is
expected to grow just 9% between 2001 and 2003, with total sales in 2003 of $3.7
billion. According to a leading industry analyst, Comdial / Key Voice is
currently the fourth leading provider (behind Avaya, Nortel and Active Voice/
Cisco) of voice processing products.
As the market for voice processing systems has matured, a new variation known as
"unified messaging" has evolved. Unified messaging provides a means of storing
voice messages and email messages in a single location (such as the "inbox"
associated with Microsoft's Outlook (R) in-box). Unified messaging enables a
system user to play voice mail messages (using the sound capabilities of their
PC) at the same time the user is picking up their email messages. The user can
also annotate, store and forward voice messages in the same manner as e-mail
messages. Unified messaging also allows the user to listen to voice messages via
the telephone and also listen to e-mail messages via the telephone through the
use of sophisticated text to speech software. The unified messaging "in-box" is
a multimedia store for voice messages and e-mail messages. In the third quarter
of 1999, Comdial introduced iNTerchange, our unified messaging system combining
voice mail, fax, and e-mail. Comdial's iNTerchange(TM) Unified Messaging system
is available in several sizes and configurations. iNTerchange integrates with
Microsoft(R) Exchange and other popular e-mail servers. The market for unified
messaging is expected to grow from $1.0 billion in 2001 to $1.6 billion in 2003.
iNTerchange, in combination with the Debut(TM), Small Office(TM), Small Office
Lite(TM) and Corporate Office(TM) voice mail systems constitutes a complete
range of voice processing solutions. These products provide voice processing for
applications ranging in size from 2 to 64 ports. Most Comdial generated sales
are in the 2 to 8 port range, corresponding with the needs of small to mid-size
businesses that are Comdial's primary markets.
Integrated Computer Telephony Solutions
By combining switching, voice processing and CTI capabilities, Comdial has
developed products targeted at vertical markets. Two examples include: the
"Concierge" and "Avalon" products (discussed in greater detail in the following
section). Comdial has also developed sophisticated desktop software applications
designed to run in a Microsoft Windows(R) / Outlook (R) environment. Examples of
these applications include Impact Attendant(TM), Impact Group(TM), and Impact
Call(TM). All of these applications enable a PC user to visually monitor and
control (transfer, hold, etc.) phone calls. The call control capabilities of
these desktop applications are enabled by Comdial's "Enterprise" CTI link and
Wide-Open Office(TM), a server based program. The market for CTI products is
very diverse and difficult to quantify. Most of Comdial's CTI sales are
related to sales of the Company's switching and/or voice messaging products.
Strategy
Comdial seeks to expand sales and profits by:
(1) Leveraging the core competency in communications technology to develop
and introduce advanced IP telephony products and solutions
(2) Expanding unified messaging product offerings by leveraging the
existing expertise
(3) Refocusing on traditional PBX and hybrid products through the
introduction of a small key system, DX-80 and the FX II
(4) Increasing the focus on direct sales through national account programs
with large end-users
8
(5) Increasing the focus on government programs
(6) Expanding voice processing software sales in international markets; and
(7) Expanding recurring revenue opportunities through the offering of
bundled solutions to users by combining hardware and software sales with various
service offerings.
Product Offerings
Comdial currently offers digital and analog business telephone systems, wired
and wireless terminals, computer and telephony software applications, voice
processing systems, Vioce Over Internet Protocol ("VoIP"), and other products
along with a variety of product enhancements. Comdial believes that it offers a
competitive range of products enabling dealers to meet differing price and
feature requirements. Comdial strives to introduce new products that meet the
needs of a changing market.
Comdial currently provides the Impact FX, DXP and DSU switching products.
Comdial also provides three major CTI based products that work in conjunction
with the DXP and / or FX. Those products are Concierge for the hospitality
industry, Avalon for the assisted living industry and Quick Q, which provides
automatic call distributor ("ACD") functionality. Comdial also provides the
iNTerchange(TM) unified messaging product, the Corporate Office, Small Office,
Small Office(TM)Lite and Debut(TM) voice messaging systems. Sales of these
products constitute the majority of Comdial's sales revenue.
The FX is Comdial's most current and sophisticated switching platform. The FX is
expandable to 560 ports. Since its introduction in 1997, Comdial has continually
enhanced the FX. The FX differs from Comdial's other switching platforms in that
it is more "open" and more software-intensive. The FXII is a rack mountable
version of the FX platform. FXII is designed to provide a lower initial cost of
entry for customers who desire the sophisticated features and digital trunk
capabilities of the FX. The company has seen demand growing in the lower line
sizes for digital trunk interfaces. The rack mount design provides convenient
location options as most businesses require some rack mounted equipment for
other purposes. The FXII also can be wall mounted. The introduction of the FX
II, makes the FX competitive for smaller applications, thus expanding its market
opportunity, which should in turn produce increased sales. The FXII will be
expandable to 5 cabinets, and support fiber connectivity, IP networking and IP
telephones.
The FX family of products has complete networking capabilities. The networking
design allows multiple locations to share one numbering plan and feature
transparency throughout the network. This feature is important for applications
where multiple locations require total integration of the communications system.
In 2001, Comdial will release an IP networking feature. This feature allows
networking multiple sites using TCP-IP protocol. By taking advantage of the
TCP-IP protocol, users can benefit from less expensive carrier options like
frame relay to connect their locations. The same IP connection that is used for
voice can also be used for data, further enhancing the application and reducing
costs. Comdial provides for the use of multiple compression algorithms to best
suit the users application and bandwidth requirements.
The FXII supports fiber connectivity. Fiber connectivity provides a fiber optic
link between cabinets for optimal equipment placement in environments that can
benefit from multiple cabinets in the same application but separated by up to
2500 meters. Typical applications for fiber connectivity are campus environments
and multi-level buildings.
When an application involves networking of switches, management of the equipment
in disparate locations becomes complicated. Comdial is developing a network
management system that provides complete visibility of all of the network nodes
9
and the individual components at each node for management purposes. Comdial's
network management software will enable quick diagnosis and troubleshooting of
remote locations with a graphical layout of the entire network.
Product Development / New Products
Comdial currently has a number of new products and product enhancements either
in testing or scheduled for release during the first half of 2001. These
include: IP based networking and fiber connectivity for the FX, new IMAP4
protocol support for iNTerchange the IP telephone, and the DX-80 digital key
hybrid with internal voice processing.
Throughout 2001 and beyond, Comdial plans to continue to evolve IP-based
capabilities for both the switching and voice processing product lines. The
Company plans to continue to enhance new technologies and incorporate them into
existing products based on the maturity of the technology and the value they add
from Comdial's customers' perspective.
Product Distribution
The majority of Comdial's products are sold to the end-user through a network of
Comdial authorized dealers. The Company has authorized dealers in every major
metropolitan area in the U.S. These dealers purchase Comdial products from
various supply houses that serve as wholesale distributors of, and stocking
locations for, Comdial products. Use of the supply house channel enables Comdial
to minimize receivables credit risk, sales administration and inventory. The
supply house channel also makes Comdial products widely available on a same-day
or next-day basis. The supply houses benefit by earning a margin on the sale of
Comdial products. Comdial dealers benefit from having multiple sources from
which they can obtain product on short notice, which keeps down the cost of the
product to dealers and minimizes the need for dealers to maintain their own
inventory.
In addition to supply house distribution, Comdial also markets its
products directly to national accounts, vertical markets, third party system
developers, OEM customers and the federal government via its Government Services
Administration ("GSA") schedule contract. Vertical market sales include the
Avalon and Concierge products as well as the core switching and voice processing
products. Voice processing products are sold through supply houses as well as
directly to dealers and national accounts under the Key Voice brand. Some of the
more complex CTI options associated with Comdial's switching and messaging
products are also sold directly to dealers and national accounts in order to
facilitate installation and support.
Strategic Alliances
Comdial plans to continue to evaluate strategic alliances with other
companies in order to build on the strengths of these companies and bring the
best possible products to market at competitive prices.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
During the fiscal years ended December 31, 2000, 1999, and 1998,
substantially all of Comdial's sales, net income, and identifiable net assets
were attributable to the telecommunications industry. Additional information is
included in Note 12 to the consolidated financial statements.
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Product Sales Information
The following table presents certain relevant information concerning
Comdial's business segments for the periods indicated:
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Years Ended December 31,
(In thousands) 2000 1999 1998
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(as restated) (as restated)
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Business Segment Sales:
Comdial Convergent Communication $67,126 $102,206 $102,800
Comdial Enterprise Solutions 12,592 13,800 8,065
Key Voice Technologies 21,317 34,001 25,324
CBCC/Array 5,373 14,495 6,965
Inter-company elimination (6,366) (14,167) (11,319)
------- -------- --------
Net Sales $100,042 $150,335 $131,835
======== ======== ========
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(c) NARRATIVE DESCRIPTION OF BUSINESS
Products
Comdial offers a variety of communications products, including
voice-switching products, voice messaging products, software solutions and
products for national accounts and vertical markets, and other. 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 and are Canadian safety certified.
Strategic Business Unit Products
CCC Sales
- ---------
The following products comprised the majority of CCC sales:
The FX is Comdial's most current and sophisticated switching platform and is
expandable to 560 ports. Since its introduction in 1997, Comdial has continually
enhanced the FX. The FX differs from Comdial's other switching platforms in that
it is more "open" and more software-intensive. The introduction of the FX II
makes FX competitive for smaller applications, thus expanding its market
opportunity, which should in turn produce incremental sales.
The DXP(TM) system, originally introduced in 1992, has had several major
upgrades over the years. The DXP was the first Comdial digital switching
platform that expanded to 560 ports.
The DSU (Digital Service Unit) system, originally introduced in 1990, has been
the mainstay of Comdial's key system offering. The DSU has been used as the
platform for three iterations of key system products: the Impact (using
Impact(TM) phones), Impact SCS (using Impact SCS phones) and the Impression(TM).
The Impression was discontinued during first quarter of 2001.
Impact Telephones were introduced in 1992. These telephones 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
11
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, an optional display, and an optional speakerphone. Impact phones can be
used with the FX, DXP and DSU switching platforms.
Impact SCS was introduced in 1997. Impact SCS retains many of the original
Impact telephone models, but has a new design and other distinguishing
capabilities such as a full-duplex speakerphone model, simultaneous voice and
data, large screen display and adjustable viewing angle. Impact phones can be
used with the FX, DXP and DSU switching platforms.
The DX-80 is a new digital key system with advanced features including voice
mail, live call screening, auto attendant, plus others. This new system is
competitively priced to enable Comdial to increase market share in the smaller
business market segment. Comdial is in the process of a general release of
DX-80.
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 ACD answers and distributes incoming
calls rapidly and efficiently, helping to assure maximum call center
productivity and superior customer response levels.
CES Sales
The following products comprised the majority of CES sales:
Avalon(TM), introduced in 1998, is the first communications system 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 that it allows 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 - a third party device), dial
"911", or take certain other actions indicating an alarm condition, messages are
transmitted from the Avalon system to pagers or wireless phones carried by
caregivers. Computer records of the emergency alert and response are also
generated.
Concierge, introduced in 1996, is a digital telephone system designed for
hospitality applications. The system consists of a DXP multi-line administration
telephone, and special hospitality software. The system is linked to a computer
via Comdial's Enterprise software, and allows hotel personnel to administer
guest check-in/check-out and other hotel activities from PC or specially
programmed Impact LCD telephones. Concierge serves hotel properties that have up
to approximately 400 rooms.
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.
Corporate Call introduced in 2000, is a powerful communications solution that
brings superior call and message management capabilities to the desktop.
Corporate Call integrates digital communications with Microsoft(R) Outlook(R)
and Microsoft Exchange(R) Server. The resulting integrated system facilitates
dramatic improvements in the call/message handling and information retrieval
process.
12
CES also sells some of the same switching and voice processing products as CCC
and KVT, but sells them direct to corporate end-users as part of a national
account program.
KVT Sales
The following products comprised the majority of KVT sales:
VVP/Corporate Office(TM), introduced in 1996, is the trade name of a PC-based
voice processing system produced by Key Voice Technologies ("KVT") and now sold
under both the KVT and Comdial brands. The product provides 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(TM) (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 liquid crystal display (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 businesses. The
maximum capacity is four ports (four simultaneous calls) and 100 mailboxes.
Small Office Lite was introduced in 1997. The 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.
Corporate Office NT and Small Office-NT were introduced in 1998. They are
user-friendly voice mail systems, with a proven design, that are easy to install
and maintain. Each system accommodates a different number of users and is built
on the Windows NT(R) operating system platform. In addition, enhanced graphical
screens enable system supervisors to quickly adjust user information and
retrieve vital call processing data. In the fourth quarter of 2000, both
products were migrated to the Windows 2000(TM) and now are sold under the names
of Small Office 2000 and Corporate Office 2000.
Debut(TM) was introduced in 1998 to meet the needs of small businesses seeking
basic voice processing capabilities at an attractive price.
iINTerchange(TM) is a unified messaging system that was introduced in the third
quarter of 1999. This system was specifically designed to meet both small and
large company needs. It is a Windows NT(TM) based unified messaging system that
fits into any office's local area network (LAN) and combines voice mail, fax and
e-mail capabilities. The system provides a way to better prioritize messages
with more efficient alternatives for receiving and responding to each type of
electronic messaging.
CBCC Sales
The majority of CBCC sales were comprised of repair services and variations of
Array Comdial digital phones sold by CBCC to other companies for resale by those
companies under their own brands. Sales of Array IP software also contributed to
CBCC revenue.
While the above accurately reflects the sale of products by business unit,
it should be noted that products are in some instances combined as with the
13
utilization of the DXP as part of the Avalon and Concierge products. In this
example, the revenue associated with the DXP sale would be included in the
Avalon or Concierge revenue and not reported in CCC sales.
In 2001, in association with the reorganization, the Company has redefined
the segments used to analyze its business from the SBU structure to one that is
more focused on types of products such as voice switching systems, voice
messaging systems, unified messaging systems, and other products.
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 five
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 2000, net sales to ALLTEL,
Graybar, and North Supply amounted to approximately $14.6 million (15%), $24.7
million (25%), and $16.0 million (16%), 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 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
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, each area sales manager makes
joint sales calls with dealers to end-users and trains dealer sales personnel in
product benefits. Product specialists at Comdial are available to help engineer
complex configurations and solve any technical problems.
Comdial's dealers are primarily responsible for selling Comdial's products to
end-users as well as providing after-sale support. Comdial maintains a technical
staff devoted to dealer support. Comdial also generally provides a limited
warranty on elements of its products up to a maximum of 24 months.
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 the hospitality market.
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.
14
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 the bulk of 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. Significant amounts of engineering expenditures are dedicated to
new product development, with the balance used for cost reductions and
performance enhancements to existing products. Going forward, Comdial will
strive to ensure research and development resources are spent on projects that
provide the best return and have the most strategic value. This may at times
mean utilizing resources outside the Company on a contract basis for projects
that are necessary but do not provide the same value to Comdial as other higher
value projects.
Research and development costs for the fiscal years ended 2000, 1999, and 1998,
comprise the majority of engineering, research, and development costs, which
were $6.3 million, $9.7 million, and $7.3 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 2000,
1999, and 1998 were $3.1 million, $2.9 million, and $2.8 million, respectively.
The amount of software development costs that were amortized in 2000, 1999, and
1998 were $2.1 million, $1.8 million, and $1.4 million, respectively. Comdial is
committed to improving its existing products and developing new
telecommunications equipment in order to maintain and increase its market share.
Manufacturing and Quality Control
- ---------------------------------
Comdial is currently in the process of outsourcing the majority of its
manufacturing operations. This decision was made to increase efficiency, reduce
overhead and free up significant capital assets associated with the
manufacturing operations. The Company expects the outsourcing to be largely
complete by mid-2001. A reduction in unit cost on high run items is also
anticipated. Comdial is taking all necessary measures to ensure continued
quality and avoid supply chain disruption during the transition to outsourcing
of the manufacturing operations. Comdial plans to retain key personnel
associated with quality assurance and hold our suppliers to the highest quality
standards.
Comdial has recently streamlined its product offerings by eliminating products
and models that were redundant and/or low volume, thereby simplifying
15
outsourcing and reducing the associated risk. This action also has the added
benefit of concentrating more volume on the remaining models, which should have
a positive effect on cost, efficiency and quality.
Competition
- -----------
The market for Comdial's switching and voice-processing products is highly
competitive. Comdial competes with over 25 suppliers of small business telephone
systems, many of which have significantly greater resources. Examples are Avaya,
Nortel Networks, Cisco, 3Com, NEC, Inter-tel, Vodavi, AVT, 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 system expandability, quality, and
high technology features including the IP and CTI capabilities of our products.
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, patents 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 that 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 will either expire at
the end of the patent license or the end of an agreed-to period. The Company
holds certain licenses with Lucent Corporation, however, at this time the
Company has informed Lucent it is not in a position to pay Lucent fees, if any,
that may be owed under the licenses.
16
Employees
- ---------
As of December 31, 2000, Comdial, including subsidiaries, had 616 full-time
employees, of whom 324 were engaged in manufacturing, 72 in engineering, 157 in
sales and support, and 63 in general management and administration. During 2000,
Comdial initiated a restructuring plan that included outsourcing the
manufacturing of certain of its products. As result, the Company experienced a
reduction in its manufacturing workforce by 229 employees. On December 28, 2000,
pursuant to its restructuring plan, the Company notified an additional 222
employees that their positions would be terminated during 2001. Continued
assessment of cost efficiencies may necessitate additional headcount reductions.
ITEM 2. Properties
Comdial previously designed, manufactured, and marketed 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 product development were located at
this facility. In February 2001, the Company signed an agreement to outsource
the majority of its manufacturing operations. On March 9, 2001, Comdial sold the
land and building. As part of this transaction, Comdial is leasing back
approximately 100,000 square feet for some low volume board production, light
assembly work, warehousing, engineering, and technical services functions.
Effective the first quarter of 2001, the Company's corporate headquarters,
including finance, administration, information technology, and sales and
marketing was relocated to the KVT facility in Florida.
In 2000, KVT sold its building and relocated to an approximately 67,000 square
foot facility, located in Sarasota, Florida. This facility is subject to a
10-year lease. All other additional space used by Comdial is leased.
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 ("DEQ"), the
successor administrative agency to the State Water Control Board, 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 was deposited into approved containers and taken
to a permitted hazardous waste storage location in accordance with the
corrective action plan. The remediation was supervised by the DEQ under the
Virginia Underground Storage Tank/Petroleum Program until the case was
transferred from the Underground Storage Tank/Petroleum Program to the Waste
Program of the DEQ on March 27, 1998.
Assessment and remediation of the hydraulic oil was the principal focus of the
DEQ at the Charlottesville, Virginia plant under its Underground Storage Tank
Petroleum Program, however some assessment work was required regarding the
chlorinated solvent contamination. Comdial decided in 1999 to expedite further
assessment and clean up of the solvents and hydraulic oil by entering the site
17
into Virginia's Voluntary Remediation Program (the "VRP"). The chlorinated
solvent contamination was accepted under the VRP on April 19, 1999. The DEQ has
clarified that the Underground Storage Tank/Petroleum Program was requesting no
further action at the site and considers the case closed; and has further
indicated that the remaining petroleum contamination should be addressed in the
VRP.
In 1999, Comdial was accepted into the VRP to start the final site
characterization and closure process for the groundwater contamination. A Site
Characterization Report ("SCR") required under DEQ's regulations presented the
results of a site characterization of the horizontal and vertical extent of the
contamination, a baseline risk assessment, and a remedial action plan. The
completion of the site characterization required the construction of several new
wells to determine the extent of the contamination and some additional sampling.
The Site Characterization was completed in May 2000 and the SCR was submitted to
the DEQ in September 2000. DEQ has accepted the recommendations of Comdial's
consultants that the site be closed with institutional and deed restrictions.
The deed restrictions prohibit residential construction or use of the
groundwater for potable water. Additionally, an L-shaped area to the rear of the
manufacturing facility has an institutional control requiring the approval of
DEQ for any ventilation system installed in any building constructed within the
confines of this area that would be inhabited by workers. Wells will be sampled
every two years for a period of six years to determine if the remedial action of
choice, natural attenuation, is achieving the desired results. If levels have
declined to the satisfaction of the DEQ, the restrictions will be removed from
the property. Otherwise, the long-term monitoring will continue for an
additional period of time to be determined.
As of December 31, 2000, Comdial has incurred total costs of approximately
$460,000 and has substantially completed the pumping process as of year end.
The property was sold to a new owner on March 9, 2001, who has initiated the
work to proceed with the site closure process.
ITEM 3. Legal Proceedings
Comdial is from time to time involved in 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 2000 to a vote of Comdial's
security holders.
18
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters
As of March 12, 2001 there were 1,257 record holders of Comdial's Common Stock.
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"). Comdial's Common Stock is traded in the
NASDAQ National Market(R) under Comdial's symbol, CMDL.
2000 1999
Fiscal Quarters High Low High Low
First Quarter $21.63 $9.00 $8.750 $5.938
Second Quarter 14.06 4.44 7.938 5.750
Third Quarter 5.38 2.03 9.250 6.375
Fourth Quarter 2.25 1.00 10.125 6.750
- ------------------------------------------------------------------------------
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. Prior to 1998, Comdial was prohibited
from paying dividends due to the Loan Agreement with Fleet.
19
ITEM 6. Selected Financial Data
FIVE YEAR FINANCIAL DATA
Selected Consolidated Statements of Operations Data For the Years Ended December 31
In thousands except
per share amounts 2000 1999(a) 1998(a) 1997(a) 1996(a)
- ----------------------------------------------------------------------------------------------------------------
Net Sales $100,042 $150,335 $131,835 $118,561 $102,182
Income (loss) before income taxes (47,864) 10,033 6,295 5,218 1,509
Net income (loss) (63,264) 7,343 17,032 5,069 2,027
Earnings(loss) per share:
Basic (6.89) 0.82 1.93 0.58 0.24
Diluted (6.89) 0.82 1.88 0.58 0.24
- ----------------------------------------------------------------------------------------------------------------
Selected Consolidated Balance Sheet Data
December 31,
In thousands 2000 1999(a) 1998(a) 1997(a) 1996(a)
- -------------------------------------------------------------------------------------------------------------------
Current assets $34,928 $72,077 $50,854 $37,107 $30,767
Total assets 72,954 133,074 108,990 79,264 74,352
Current liabilities 32,531 23,833 19,734 21,196 20,443
Long-term debt and other
long-term liabilities 28,908 38,633 26,624 13,998 15,629
Stockholders' equity 11,515 70,608 62,632 44,070 38,280
- -------------------------------------------------------------------------------------------------------------------
(a) As restated, see Note 18 to the Consolidated Financial Statements.
Item 7. 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 consolidated financial statements and accompanying notes.
This analysis attempts to identify trends and material changes that occurred
during the periods presented. Prior years have been reclassified to conform to
the 2000 reporting basis (see Note 1 to the Consolidated Financial Statements).
Subsequent to the issuance of the Company's consolidated financial statements
for the year ended December 31, 1999, management determined that the 1992
Incentive Stock Option Plan ("Plan"), which had previously been accounted for as
a fixed plan, had certain features which permitted option recipients to tender
shares as partial or full consideration of the exercise price, that caused the
Plan to be a variable plan. Under the fixed plan accounting, no compensation
expense was recognized for options granted to employees. Under variable plan
accounting, compensation expense is measured as of each reporting date as the
amount by which the quoted market price of the shares of the Company's stock
covered by the option grant exceeds the exercise price, and is recognized over
the options' vesting period. Changes, either increases or decreases, in the
quoted market price of the Company's shares between the date of grant and the
date of exercise result in a change in the measure of compensation expense. As a
result, the 1999 and 1998 consolidated financial statements have been restated
from amounts previously reported to account for the options granted to employees
under the Plan as variable awards. See note 18 to the consolidated financial
statements for a summary of the significant effects of the restatement.
The Management's Discussion and Analysis of Financial Condition and Results of
Operations for the years ended December 31, 1999 and 1998 presented herein have
been adjusted to reflect the restatement described above.
20
SEGMENT REPORTING
During the first quarter of 2000, Comdial was organized into Strategic Business
Units ("SBUs") which were used by management to analyze its business during 2000
(See Note 12 to the Consolidated Financial Statements).
RESULTS OF OPERATIONS
Selected consolidated statements of operations for the last three years are as
follows:
- --------------------------------------------------------------------------------------------------------------
In thousands 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------
(as restated) (as restated)
Business Segment Sales:
CCC $67,126 $102,206 $102,800
CES 12,592 13,800 8,065
KVT 21,317 34,001 25,324
CBCC/Array 5,373 14,495 6,965
Inter-company elimination (6,366) (14,167) (11,319)
-------- ------ -------
Net Sales $100,042 150,335 131,835
Cost of goods sold 77,715 85,554 79,080
-------- ------ -------
Gross profit 22,327 64,781 52,755
Selling, general & administrative 47,099 39,914 33,531
Engineering, research & development 6,283 9,735 7,342
Goodwill amortization 3,195 3,180 3,806
Restructuring 2,355 - -
Impairment of long-lived assets 7,425 - -
Interest expense 2,902 1,633 1,216
Miscellaneous expense - net 932 286 565
-------- ------ -------
Income(loss) before income taxes (47,864) 10,033 6,295
Income tax expense (benefit) 15,400 2,690 (10,737)
-------- ------ -------
Net income (loss) $(63,264) $7,343 $17,032
======== ====== =======
Earnings (loss) per share:
Basic $ (6.89) $ 0.82 $ 1.93
======== ====== =======
- --------------------------------------------------------------------------------------------------------------
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.
2000 1999 1998
-----------------------------------------------
Business Segment:
CCC $ 22,919 $37,892 $34,895
CES 3,283 4,830 3,063
KVT 10,239 18,348 13,831
CBCC/Array (14,114) 3,711 966
-------- ------ -------
Gross profit margin $ 22,327 $64,781 $52,755
======== ====== =======
- --------------------------------------------------------------------------------------------------------------
2000 Compared with 1999
- -----------------------
Net sales as reported for 2000 decreased by 33% to $100.0 million, compared with
$150.3 million in 1999. The primary factors in the decrease of sales were the
reduction of inventory levels at the supply houses and the market contraction.
Early in 2000, market conditions declined, and Comdial's sales were adversely
affected by the combined decision of Comdial and the supply houses to reduce
their inventory levels. Comdial has sought to respond to adverse sales
conditions by offering a more concise product line that is more responsive to
customer needs. Comdial believes it offers a lower-end, more price competitive
key system, which is being outsourced to an overseas manufacturer. The redefined
product line is expected to have a positive impact on gross margins.
In 2000, net sales by Comdial Convergent Communications ("CCC") decreased 34%
from $102.2 million to $67.1 million. The primary factor in this decrease was
the decrease in inventory levels at the supply houses as noted above. Although
this adversely affected Comdial's sales in the year 2000, management believes
that the inventory levels at Comdial's major supply houses, except Ingram-Micro,
are now at a level that is appropriate to meet customers' needs in the
21
foreseeable future. The Company has received notification from Ingram-Micro that
it intends to terminate its relationship with Comdial. Efforts are underway
between the companies to reduce remaining inventory at Ingram-Micro.
Sales by Comdial Enterprise Solutions, ("CES"), decreased 9% from $13.8 million
to $12.6 million. This decrease is attributable to the poor growth in the
assisted living market, as well as the overall downturn in the economy.
Key Voice Technologies ("KVT") sales decreased 37%, from $34.0 million in 1999
to $21.3 million in 2000. This decrease was predominantly tied to the decrease
in CCC sales, as KVT sells to the same supply houses and a significant number of
the same dealers as CCC.
Net sales in 2000 by CBCC/Array decreased 63% from $14.5 million in 1999 to $5.4
million. This decrease is attributable to the sale of Array in the first quarter
of 2000 and a lower demand of analog products.
Comdial provides reserves to cover product obsolescence for all its products and
changes to those reserves impact gross profit. For the years 2000 and 1999
provisions for obsolescence totaled $3.7 million and $0.5 million, respectively.
The reserve for obsolescence for 2000 was higher primarily due to increased
product discontinuance. Another factor which caused the inventory obsolescence
provision to increase was the decision to outsource manufacturing, which
rendered some raw materials and components obsolete, as they will not be
utilized by the contract manufacturer. Future reserves will be dependent on
management's estimates of the recoverability of inventory costs.
Also in 2000, Comdial established a warranty reserve in the amount of $.8
million. Prior to 2000, Comdial reserved for expected returns through the use of
an exchange authorization reserve, and it is management's best estimate that
such exchange authorization reserve covered most of the costs that the Company
incurred with respect to warranty expenses. However, as the Company upgrades its
method of tracking such information, via improved systems, management decided to
record a warranty reserve specifically for warranty claims in the consolidated
financial statements.
In 2000, international sales decreased by 38% to $1.6 million compared with $2.6
million for 1999. Due to homologation issues dealing with the sale of digital
products, Comdial has, for the time being, suspended its efforts in developing
further international markets for hardware products. 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 additional
engineering modifications and compliance testing. However, Comdial plans to
continue to expand its sales of voice mail products in the international market.
Gross profit, as a percentage of sales for 2000, was 22% compared with 43% for
1999. In 2000, gross profit decreased by 66% to $22.3 million compared with
$64.8 million for 1999. This decrease was attributable to several factors: 1)
reduced efficiency caused by the furloughs that Comdial initiated throughout the
year to reduce inventory levels within the plant as well as the supply houses;
2) the increase in the provision for inventory obsolescence; 3) pursuant to its
Restructuring Plan, Comdial charged $1.5 million to cost of sales for
discontinued product inventory in the fourth quarter of 2000; and 4) due to the
outsourcing of its manufacturing operations, Comdial recorded an additional
adjustment to cost of sales and reduced its ending inventory balances by $2.4
million to adjust inventory to the lower of cost or market.
CCC's gross margin declined from 37% to 34%. This decrease was primarily
attributable to several pricing programs that Comdial offered during the year to
stimulate sales.
The gross margin that CES realized decreased from 35% to 26%. As more of
Comdial's competitors enter the solutions and software market, Comdial has begun
experiencing significant market pressure on its pricing in certain of its
product lines, which adversely affected margins.
KVT's gross margin decreased from 54% in 1999 to 48% in 2000. Relocation of the
KVT manufacturing group to its new facility resulted in additional one-time
costs due to initial set-up.
Gross profit for CBCC/Array decreased in 2000 to a negative 263% compared to a
positeve 26% in 1999. This decrease is due primarily to the increased
obsolescence reserves and lower of cost or market adjustment of $2.4 million
taken against inventory held by CBCC.
22
During 2000, Comdial began recording installation services expense in cost of
sales, rather than as a selling expense. Amounts in the 1999 and 1998
consolidated financial statements have been reclassified to conform to the 2000
presentation. This resulted in net sales increasing $2.4 million and $2.9
million for 1999 and 1998, respectively. Cost of goods sold was increased by
$3.2 million and $3.5 million for 1999 and 1998, respectively. Selling, general
and administrative costs decreased by $0.8 million and $0.6 million for 1999 and
1998, respectively. These reclassifications had no effect on previously reported
consolidated net income.
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 into the various product segments and
most of the costs are universal in nature.
Selling, general and administrative expenses ("SG&A") increased in 2000 by 18%
to $47.1 million compared with $39.9 million for 1999. SG&A expenses, as a
percentage of sales for 2000, increased to 47% compared with 27% for 1999. The
primary reasons for the increase were (1) increase in bad debt reserves of $2.5
million, based on the deterioration of the business climate in certain markets
in which Comdial sells; (2) increased personnel costs for national accounts for
the majority of the year; and (3) increased administration costs, including
costs for consultants, investment banking services and general legal fees.
Engineering, research and development expenses decreased in 2000 by 35% to $6.3
million compared with $9.7 million for 1999. Engineering expenses, as a
percentage of sales for 2000, decreased to 6% compared with 7% for 1999. This
decrease was due to a reduction in engineering personnel, which was consistent
with other reductions the Company initiated in the first quarter of 2000.
Goodwill amortization expense in 2000 remained consistent with that of 1999. The
Company reviewed goodwill for potential impairment as of December 31, 2000, and
determined that goodwill associated with the purchase of Array was impaired. See
discussion below regarding Impairment of Long-Lived Assets.
Interest expense increased in 2000 by 81% to $2.9 million compared with $1.6
million for 1999. This increase is twofold: 1) interest expenses increased due
to higher average debt levels with Bank of America, N.A. ("Bank of America"),
coupled with higher interest rates when compared to 1999 (see Note 6 to the
Consolidated Financial Statements), and 2) interest expense associated with
capital leases increased by approximately $.3 million in 2000 based on higher
balances of capital lease debt for all of 2000. Note that the capital leases
which were recorded as of December 31, 1999 had only been in place for one to
three months of 1999. Additional capital leases in the amount of $1.3 million
were entered into in early 2000.
Miscellaneous expense increased by 200% for 2000 to $.9 million, compared with
$0.3 million for 1999. This increase was primarily due to $1.0 million of
write-offs related to investments in dealers and notes receivable from dealers.
In addition, the Company recognized a $0.4 million loss due to the curtailment
of its pension plans in September 2000.
Restructuring -- In the fourth quarter of 2000 the Board of Directors' approved
management's plan to restructure the Company (the "Plan").
Pursuant to the Plan, 152 employees were laid off effective December 15, 2000;
another 222 employees were notified prior to the end of 2000 that their
23
positions would be eliminated in fiscal 2001. As of December 31, 2000, Comdial
accrued severance of $1.9 million and related benefits of $0.5 million, for a
total restructuring cost of $2.4 million related to the Plan.
Impairments of Long-Lived Assets In accordance with SFAS No. 121, "Impairment of
Long-Lived Assets and Other Assets to Be Disposed of", the Company evaluates
long lived assets for impairment whenever events or changes in circumstance
indicate that the carrying amount of an asset may not be recoverable. In light
of the restructuring and the initiative to outsource manufacturing, the Company
identified certain of its fixed assets related to its manufacturing operations,
purchased software, capitalized software development costs, and the goodwill
related to its purchase of Array as assets that were impaired. This was based on
an analysis of discounted and undiscounted (as applicable) cash flows, which
were no longer deemed adequate to support the value of the assets associated
with the business. The impairments, included in Impairments of Long-Lived Assets
on the consolidated income statement are discussed below:
Purchased Software - In connection with the downsizing of Comdial's entire
operations, Comdial abandoned a systems implementation project that began in
1999. As a result, Comdial wrote-off purchased software and other related costs
in the amount of $3.9 million in 2000. The Company financed the purchase of the
software through a series of five-year capital lease obligations, which are a
continuing obligation of the Company.
Fixed Assets Impairment - As a result of the outsourcing of the manufacturing
operations, the majority of the manufacturing assets are expected to be sold
or otherwise disposed of. The Company determined that the projected undiscounted
cash flows related to those assets were not adequate to support the value of the
assets associated with the business. Such analysis resulted in a write-down of
fixed assets in the amount of $0.3 million as of December 31, 2000.
Other Write-offs - As part of Comdial's decision to outsource manufacturing and
reduce the number of product lines to a more appropriate level, several other
write-offs were deemed necessary. Software development costs previously
capitalized relating to product lines that are to be discontinued were written
off due to the Company's inability to realize any future benefit from these
assets. The write-off of capitalized software amounted to $.4 million.
Goodwill - The Company sold the majority of the assets of Array and entered into
a licensing agreement with ePHONE Telecom, Inc. in the beginning of fiscal 2000.
In light of the sale, the Company performed an impairment analysis on the
projected cash flows of the remaining assets and determined that the goodwill
associated with its purchase of Array, was, in fact, impaired. The impairment of
the goodwill was based on an analysis of projected undiscounted cash flows,
which were no longer deemed adequate to support the value of the goodwill
associated with the business. The Company recorded an impairment write-off of
$2.8 million related to goodwill.
Loss before income taxes, as a result of the foregoing, amounted to $47.9
million as compared with $10.0 million of income before income taxes in 1999.
Major factors contributing to the loss for 2000 include restructuring and asset
impairments, totaling $9.8 million, as described above. Other factors include
increased bad debt reserves, establishment of a warranty reserve specifically
for warranty claims, inventory write-offs due to product discontinuance, and
increased reserves for expected returns.
Income tax expense for 2000 amounted to $15.4 million, compared with $2.7
million for 1999. The tax expense recognized in 2000 was primarily due to the
provision for a full valuation allowance of $34.1 million against the deferred
tax assets. The tax expense recognized in 1999 was reduced primarily due to the
utilization of deferred tax benefits of $2.1 million that were generated from
net operating losses ("NOLs") in previous years (see Note 7 to the Consolidated
Financial Statements).
1999 Compared with 1998
- -----------------------
Net sales as reported for 1999 increased by 14% to $150.3 million, compared with
$131.8 million in 1998. The continued growth in net sales was primarily due to
(1) greater demand for Comdial's Digital Systems products, (2) an increase in
Platinum Preferred Dealers (Comdial's highest dealer level) in major
24
metropolitan cities, (3) an increase in national account sales, and (4)
continued growth in sales of Solutions and Software products such as the
assisted living, hospitality and voice mail systems. The voice mail systems are
produced by a subsidiary of Comdial, Key Voice Technologies, Inc. ("KVT").
In 1999, net sales generated by Comdial Convergent Communications ("CCC")
decreased 1% to $102.2 million, compared with $102.8 million for 1998. The
slight decrease in CCC sales was partially due to Comdial's focus in 1999 on
growing the solutions and software markets.
In 1999, net sales of Comdial Enterprise Solutions ("CES") increased 70% to
$13.8 million compared with $8.1 million for 1998. The solutions and software
markets were increasingly being targeted by CES solutions during 1999.
KVT's net sales increased significantly from 1998 to 1999, increasing 34% from
$25.3 million to $34.0 million, respectively. KVT's increase in net sales was
attributable to its continued penetration in the market, and the addition of new
products during 1999.
Net Sales by CBCC/Array increased 108% from $7.0 million in 1998 to $14.5
million. This increase was attributable to an increase in the sale of digital
products, offset by a decrease in the sale of analog products.
Comdial provides reserves to cover product obsolescence for all its products and
changes to those reserves impact gross profit. For the years 1999 and 1998,
provisions for obsolescence totaled $0.5 million and $2.3 million, respectively.
The reserve for obsolescence for 1999 was lower due to less raw material and
finished goods obsolescence usage than in previous years. 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.
In 1999, international sales decreased by 35% to $2.6 million compared with $4.0
million for 1998. Due to the international climate, distribution problems, and
homologation issues dealing with the sale of digital products, Comdial
temporarily suspended its efforts in developing further international markets on
its own.
Gross profit, as a percentage of sales for 1999, was 43% compared with 40% for
1998. In 1999, gross profit, as a percentage of sales, increased by 23% to $64.8
million compared with $52.8 million for 1998. This increase was primarily
attributable to increased sales of higher margin business segment products, such
as Impact FX, Impact DXP, and solution products such as assisted living,
hospitality and voice mail systems.
CCC's gross margin increased to 37% in 1999, from 34% in 1998. This increase in
gross margin was attributable to improved efficiencies in manufacturing product
that was Comdial's mainstay business.
KVT's gross margin remained steady from 1998 to 1999, at 55% and 54%,
respectively. CES gross margin, however, decreased from 38% in 1998 to 35% in
1999. This decline was predominantly the result of new competitors entering into
the same markets as Comdial's CES, and therefore, placing pricing pressure on
CES's revenues.
Gross profit for CBCC/Array increased in 1999 to 26% compared to 14% in 1999.
This increase was due to the sale of higher margin digital products in 1999.
Selling, general and administrative expenses ("SG&A") increased in 1999 by 19%
to $39.9 million compared with $33.5 million for 1998. SG&A expenses, as a
percentage of sales for 1999, increased to 27% compared with 25% for 1998. 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) higher
marketing costs associated with advertising Comdial's products as well as the
efforts to increase Comdial's name recognition in the various business markets.
Engineering, research and development expenses increased in 1999 by 33% to $9.7
million compared with $7.3 million for 1998. Engineering expenses, as a
25
percentage of sales for 1999, increased to 7% compared with 6% for 1998. This
increase was due to additional engineering personnel throughout Comdial along
with the additional support costs.
Goodwill amortization expense decreased in 1999 by 16% to $3.2 million, compared
with $3.8 million for 1998. This decrease is due primarily to the elimination of
goodwill amortization expense associated with Comdial's acquisition in 1996 of
Aurora Systems, Inc. ("Aurora"). Aurora at this time is non-operational and all
goodwill associated with this acquisition has been written off. The Company has
determined that the remaining amount of goodwill is recoverable at December 31,
2000.
Interest expense increased in 1999 by 33% to $1.6 million compared with $1.2
million for 1998. This increase is due to higher average debt levels with Bank
of America, N.A. ("Bank of America"), formerly known as NationsBank, N.A.,
coupled with higher interest rates when compared to 1998 (see Note 6 to the
Consolidated Financial Statements). The higher debt is primarily attributable to
higher material purchases which correlated with higher sales.
Miscellaneous expense decreased by 50% for 1999 to $0.3 million, compared with
$0.6 million for 1998. This decrease was primarily due to decreases in cash
discounts allowed by Comdial to its customers.
Income before income taxes, as a result of the foregoing, increased in 1999 by
59% to $10.0 million compared with $6.3 million in 1998. A major factor
contributing to the increase in income for 1999 are increased sales of KVT's
voice processing products that have higher margins.
Income tax expense (benefit) reflected an expense for 1999 of $2.7 million,
compared with a tax benefit of $10.7 million for 1998. The tax expense
recognized in 1999 was reduced primarily due to the utilization of deferred tax
benefits of $2.1 million that were generated from net operating losses ("NOLs")
in previous years (see Note 7 to the Consolidated Financial Statements). The tax
benefit of $10.7 million in 1998 was due primarily to the reversal of valuation
allowances related to certain of the Company's deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
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 2000 1999
- -----------------------------------------------------------------------
Cash and cash equivalents $2,428 $1,917
Current maturities of debt 24,848 471
Working capital (deficiency) (5,727) 48,244
- -----------------------------------------------------------------------
Through November 22, 2000, all operating cash needs were funded through a $50
million revolving credit facility provided by Bank of America. As of November
22, 2000, Comdial and Bank of America, N.A. entered into an Amended and Restated
Credit Agreement restructuring the terms of the Credit Agreement with the Bank
dated October 22, 1998. This agreement is now funding all operational
requirements as needed. Comdial reports the 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, 2000, Comdial's
cash and cash equivalents were higher than December 31, 1999 by $0.5 million,
due primarily to the timing of deposits and payments made at year-end.
26
Accounts Receivable at December 31, 2000, decreased by $25.9 million compared
with December 31, 1999, primarily due to the decreased level of sales during the
year, as well as improved collections. Comdial also increased its bad debt
reserves by $2.5 million in the fourth quarter of 2000 due to declining economic
conditions in several of the markets in which Comdial sells its products.
Comdial has improved its days sales outstanding in each of its business units as
compared to the same period in the prior year, due to improved collection
efforts.
Inventory at December 31, 2000, decreased by $7.4 million compared with December
31, 1999, due, in part, to additional reserves for lower of cost or market
adjustments of $2.4 million, as well as additional reserves for discontinued
product lines of $1.2 million. In addition, as a result of the Company's
decision to outsource the majority of its manufacturing operation, and its plan
to restructure, the Company reduced its overall inventory levels at December 31,
2000 by approximately $5.0 million compared with December 31, 1999.
Prepaid expenses and other current assets at December 31, 2000, decreased by
$4.4 million compared with December 31, 1999, due to the provision of a
valuation allowance for deferred tax assets of $1.8 million. Management
determined that it was not "more likely than not" that the Company would realize
the benefit of the deferred tax asset as of December 31, 2000. Prepaid deposits,
rent and other expenses decreased from December 31, 1999 to December 31, 2000 by
$.8 million.
Other assets decreased by $2.3 million primarily due to the write-off of $3.9
million of purchased software. Pension assets were reduced by $.7 in a
year-over-year comparison; this decrease, however, was offset by an increase in
patent license fee costs of $.7 million. Additionally, capitalized software
development costs increased $0.6 million.
Capital additions for 2000 were approximately $3.9 million, including purchased
software acquired through capital lease obligations. 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, borrowings from the revolver, and capital
leases. Cash expenditures for capital additions for 2000, 1999, and 1998
amounted to $2.6 million, $3.9 million, and $4.8 million, respectively.
Management anticipates that approximately $0.5 million will be spent on capital
additions during 2001. The significant decrease in capital additions in the
future is the result of outsourcing manufacturing and therefore, needing less
capital equipment. In addition, Comdial has substantially reduced headcount,
therefore reducing the amount of information technology expenditures that were
previously incurred by the Company.
Accounts payable at December 31, 2000, decreased by $7.6 million when compared
to December 31, 1999. This decrease was primarily due to decreasing purchases of
raw materials intended to reduce inventory levels over the latter months of
2000.
Working capital decreased to a deficiency of $5.7 million at December 31, 2000
million when compared with working capital of $48.2 million at December 31,
1999. The Company has sold the land and building in Charlottesville on March 9,
2001. The proceeds of approximately $11.4 million will be utilized to pay down
the a portion of the Term Loan. The Company will also use proceeds of
approximately $1.0 million received from its sale of equipment and furniture to
further reduce the outstanding balance. Inventory levels, as well as accounts
payable, are expected to be further reduced as a result of outsourcing the
manufacturing operations.
27
Long-term Debt, Including Current Maturities
Since October 1998, Bank of America held substantially all of Comdial's
indebtedness. Prior to October 1998, Fleet Capital Corporation ("Fleet") had
held substantially all of Comdial's indebtedness.
On October 22, 1998, Comdial and Bank of America, N.A. ("Bank of America")
formerly NationsBank, N.A., entered into a credit agreement (the "Credit
Agreement"). The Credit Agreement provided 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) $0.6 million of mortgages owed by
KVT.
On November 22, 2000, the Credit Agreement was amended ("Amendment") to reflect
the following: (i) a reduction of the revolving credit facility to an initial
aggregate principal amount not to exceed $21.5 million, with further reductions
over time as discussed below; (ii) an $18.5 million term loan facility; and
(iii) the continued provision of $5.0 million letter of credit subfacility.
Interest on amounts outstanding under the Term Loan and the Revolving Credit
Facility are due monthly and are based on the LIBOR daily floating rate plus 3%.
The term loan requires principal installments of $2.5 million per quarter
beginning June 30, 2001, with the final principal payment of $11.0 million due
on March 31, 2002. See Note 6 to the Consolidated Financial Statements for
additional information with respect to Comdial's loan agreements, long-term debt
and available short-term credit lines.
As of December 31, 2000, Comdial was in compliance with all the covenants and
terms of the Credit Agreement except for the requirements that Comdial maintain
certain levels of working capital, and a specified debt to total capital
covenant. The working capital covenant required that Comdial maintain "eligible"
accounts receivable and inventory (as defined in the Agreement), to provide
security for loans under the Credit Agreement of at least $16.5 million. At
December 31, 2000, the total of such eligible accounts receivable and inventory
was $15.6 million.
As of April 10, 2001, Comdial and Bank of America agreed to new terms. The terms
are as follows:
The revolving credit facility will not be reduced, but will remain at $16.5
million. Comdial will also be allowed to utilize the facility provided that the
collateral is not less than $13.5 million through September 30, 2001, $14.0
million through October 31, 2001, and $16.0 million through November 30, 2001.
Furthermore, the facility's maturity has been extended until March 31, 2002.
The Term Loan principal payment of $2.5 million due September 30, 2001 will be
replaced by an amount necessary to reduce the debt to $5 million. Currently, the
outstanding balance of the term loan is $15.7 million. Comdial expects the $8.4
million note from Seminole Properties, LLC (pursuant to its sale of its land and
building on March 9, 2001) to be paid by June 1, 2001, and proceeds of
approximately $1.0 million from the April 12, 2001 equipment auction and
furniture sale to reduce the principal payment due on September 30 2001 to
approximately $1.3 million. The remaining balance of the term loan of
approximately $5.0 million will be due as follows: $2.5 million on December 20,
2001 and $2.5 million on March 31, 2002.
The funded debt to total capital ratio covenant ("Ratio") which is measured at
the end of each fiscal quarter has been waived for December 31, 2000 and March
31, 2001. The Ratio will remain a maximum of .55 to 1, but will be calculated by
adding back the deferred tax valuation allowance to total capital.
The Earnings Before Income Taxes and Depreciation and Amortization ("EBITDA")
covenant, which was effective for the first quarter of fiscal 2001, has been
waived for March 31, 2001. The replacement covenant is a minimum EBITDA for June
28
30, September 30, and December 31, 2001 equivalent to $1.9 million, $6.0
million, and $9.7 million, respectively. The EBITDA covenant is measured on a
cumulative basis from April 1, 2001.
The new ratios are based in the Company's projected financial performance for
2001. The Company believes it will be able to meet these financial projections,
however, no assurances can be given.
Capital expenditures by the Company have been limited to $0.3 million per
quarter and $1.2 million per year.
The interest rates for both the Term Loan and Revolving Facility have been
increased from LIBOR rate plus 3% to Prime rate plus 3%.
The Company will pay Bank of Amercia a $50,000 amendment fee which will be
payable by December 20, 2001. In the event the Company has not refinanced its
debt by December 31, 2001, the Company is required to pay a fee equivalent to
1.0% of the outstanding debt.
Comdial believes that income from operations combined with the proceeds from the
sale of its Charlottesville facility, and amounts available from current credit
facilities will be sufficient to meet Comdial's needs for the foreseeable
future; however, no assurance can be given that the Company's internal
operations will generate cash significant enough to fund the Company's working
capital needs.
Other Financial Information
During fiscal years 2000, 1999, and 1998, primarily all of Comdial's sales, net
income, and identifiable net assets were attributable to the telecommunications
industry.
Current Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS No. 138, which was
issued in June 2000. The Company adopted SFAS No. 133 on January 1, 2001. SFAS
No. 133 requires that all derivative instruments be recorded on the balance
sheet at their fair value. Changes in the fair value of derivatives are recorded
each period in current earnings or other comprehensive income, depending on
whether a derivative is designated as part of a hedge transaction and, if it is,
the type of hedge transaction. Comdial does not participate in any financial
instruments that meet the definition of a derivative, and therefore, adoption of
this statement did not have a material effect on Comdial's consolidated
financial statements.
In November 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin("SAB") No. 100, "Restructuring and Impairment Charges". This
SAB provides guidance on the accounting for and disclosure of certain expenses
and liabilities often reported in connection with exit activities and business
combinations (restructuring activities), and the recognition and disclosure of
asset impairment charges. The Company's accounting treatment for similar
transactions, as discussed in Note 15 and Note 16 to the consolidated financial
statements, are consistent with the requirements of this SAB.
In the fourth quarter of 1999, the SEC issued SAB No. 101, "Revenue
Recognition". Comdial adopted the SAB, which did not have a material impact on
Comdial's consolidated financial statements.
In March 2000, the FASB issued Interpretation ("FIN") No. 44, "Accounting for
Certain Transactions Involving Stock Compensation, an interpretation of
Accounting Principles Board Opinion No. 25." The requirements of FIN No. 44 are
either not applicable to the Company or are already consistent with the
Company's existing accounting policies.
In September 2000, the Emerging Issues Task Force ("EITF") reached a final
consensus on EITF Issue 00-10, "Accounting for Shipping and Handling Fees and
Costs." This consensus requires that all amounts billed to a customer in a sale
transaction related to shipping and handling, if any, represent revenue and
29
should be classified as revenue. The Company historically has classified
shipping charges to customers as revenue.
Item 7A. Quantitative and Qualitative Disclosures About Market Risks
Comdial believes that it does not have any material exposure to market risk
associated with activities in derivative financial instruments, other financial
instruments and derivative commodity instruments. The Company has debt
obligations that are sensitive to changes in the prime lending rate. The Company
estimates that an increase in interest rates of 1% would reduce income
before taxes by approximately $200,000 per year.
Item 8. Financial Statements and Supplementary Data
30
- ------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
- ------------------------------------------------------------------------------
To the Board of Directors and Stockholders of
Comdial Corporation
Charlottesville, Virginia
We have audited the accompanying consolidated balance sheets of Comdial
Corporation and subsidiaries ("Comdial") as of December 31, 2000 and 1999, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 2000.
Our audits also included the financial statement schedule listed in the Index at
Item 14(a)2. These financial statements and financial statement schedule are the
responsibility of Comdial's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note 18 to the consolidated financial statements, the
accompanying consolidated balance sheet as of December 31, 1999 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended December 31, 1999 and 1998 have been restated.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Richmond, Virginia
April 10, 2001
31
- ----------------------------------------------------------------------------------------------------------------
Consolidated Balance Sheets
- ----------------------------------------------------------------------------------------------------------------
December 31,
2000 1999
(As Restated -
In thousands except par value See Note 18)
- ----------------------------------------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $2,428 $1,917
Accounts receivable (less allowance for 13,829 39,700
doubtful accounts: 2000 - $2,834; 1999 - $302)
Inventories 15,431 22,827
Prepaid expenses and other current assets 3,240 7,633
- ----------------------------------------------------------------------------------------------------------------
Total current assets 34,928 72,077
- ----------------------------------------------------------------------------------------------------------------
Property - net 16,684 19,458
Net deferred tax asset - 11,980
Goodwill 5,276 11,207
Other assets 16,066 18,352
- ----------------------------------------------------------------------------------------------------------------
Total assets $72,954 $133,074
================================================================================================================
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $7,522 $15,135
Accrued payroll and related expenses 4,391 3,652
Accrued promotional allowances 1,324 2,322
Other accrued liabilities 2,570 2,253
Current maturities of debt 24,848 471
- ----------------------------------------------------------------------------------------------------------------
Total current liabilities 40,655 23,833
- ----------------------------------------------------------------------------------------------------------------
Long-term debt 13,561 31,795
Net deferred tax liability 2,266 2,622
Long-term employee benefit obligations 4,957 4,216
Commitments and contingent liabilities (see Note 13) - -
- ----------------------------------------------------------------------------------------------------------------
Total liabilities 61,439 62,466
Stockholders' equity
Common stock, $0.01 par value
(Authorized 30,000 shares; issued shares,
outstanding: 2000 - 9,197; 1999 - 8,940) 93 91
Paid-in capital 123,427 119,199
Treasury stock (1,296) (1,237)
Accumulated deficit (110,709) (47,445)
- ----------------------------------------------------------------------------------------------------------------
Total stockholders' equity 11,515 70,608
- ----------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $72,954 $133,074
================================================================================================================
The accompanying notes are an integral part of these financial statements.
32
- --------------------------------------------------------------------------------------------------------------------------
Consolidated Statements of Operations
- --------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
2000 1999 1998
(As Restated - (As Restated -
In thousands except per share amounts See Note 18) See Note 18)
- --------------------------------------------------------------------------------------------------------------------------
Net sales $100,042 $150,335 $131,835
Cost of goods sold 77,715 85,554 79,080
- --------------------------------------------------------------------------------------------------------------------------
Gross profit 22,327 64,781 52,755
- --------------------------------------------------------------------------------------------------------------------------
Operating expenses
Selling, general & administrative 47,099 39,914 33,531
Engineering, research & development 6,283 9,735 7,342
Goodwill amortization 3,195 3,180 3,806
Restructuring 2,355
Impairments of long-lived assets 7,425
- --------------------------------------------------------------------------------------------------------------------------
Operating income (loss) (44,030) 11,952 8,076
- --------------------------------------------------------------------------------------------------------------------------
Other expense
Interest expense 2,902 1,633 1,216
Miscellaneous expense - net 932 286 565
- --------------------------------------------------------------------------------------------------------------------------
Income(loss) before income taxes (47,864) 10,033 6,295
Income tax expense (benefit) 15,400 2,690 (10,737)
- --------------------------------------------------------------------------------------------------------------------------
Net income (loss) $(63,264) $7,343 $17,032
==========================================================================================================================
Earnings (loss) per share:
Basic $ (6.89) $ 0.82 $ 1.93
==========================================================================================================================
Diluted $ (6.89) $ 0.82 $ 1.88
==========================================================================================================================
Weighted average common shares outstanding:
Basic 9,188 8,948 8,843
Diluted 9,188 8,989 9,081
The accompanying notes are an integral part of these financial statements.
33
- ------------------------------------------------------------------------------------------------------------------------------
Consolidated Statements of Stockholders' Equity
- ------------------------------------------------------------------------------------------------------------------------------
Deferred Stock
Common Stock Incentive
------------ -------------------- Paid-in
In thousands Shares Amount Shares Amount Capital
- ------------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 1998, (As restated - see Note 18) 8,794 $88 - $- $116,840
Proceeds from sale of common stock
Notes receivable
Stock options exercised 97 1 706
Treasury Stock Purchased
Deferred stock compensation 8 84 48
Incentive stock issued 3 39
Stock option compensation (As restated - see note 18) 358
Contingency stock issued for
KVT acquisition 72 498
Net income (As restated - see Note 18)
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 (As restated - see Note 18) 8,966 89 8 84 118,489
Proceeds from sale of common stock
Notes receivable
Stock options exercised 10 20
Deferred stock compensation 6 47
Incentive stock issued 8 1 53
Stock option compensation (As restated - see note 18) 41
Contingency stock issued for
KVT acquisition 72 1 303
Array acquisition 162
Net income (As restated - see Note 18)
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999, (As restated - see Note 18) 9,056 91 14 131 119,068
Proceeds from sale of common stock
Notes receivable
Stock options exercised 262 2 2,136
Treasury stock purchased
Deferred stock compensation 4 78
Incentive stock issued 11 169
Stock option compensation expense 1,845
Net loss
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 9,329 $93 18 $209 $123,218
==============================================================================================================================
Notes
Treasury Stock Receivable
-------------- on Sale Accumulated
In thousands Shares Amount of Stock Deficit Total
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 1998, (As restated - see Note 18) (97) ($878) ($161) ($71,820) $44,069
Proceeds from sale of common stock
Notes receivable 5 5
Stock options exercised 707
Treasury Stock Purchased (19) (209) (209)
Deferred stock compensation 132
Incentive stock issued 39
Stock option compensation (As restated - see note 18) 358
Contingency stock issued for
KVT acquisition 498
Net income (As restated - see Note 18) 17,032 17,032
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 (As restated - see Note 18) (116) (1,087) (156) (54,788) 62,631
Proceeds from sale of common stock
Notes receivable 6 6
Stock options exercised 20
Deferred stock compensation 47
Incentive stock issued 54
Stock option compensation (As restated - see note 18) 41
Contingency stock issued for -
KVT acquisition 304
Array acquisition 162
Net income (As restated - see Note 18) 7,343 7,343
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999, (As restated - see Note 18) (116) (1,087) (150) (47,445) 70,608
Proceeds from sale of common stock
Notes receivable (9) (149) 150 1
Stock options exercised (6) 2,132
Treasury stock purchased (7) (54) (54)
Deferred stock compensation 78
Incentive stock issued 169
Stock option compensation expense 1,845
Net loss (63,264) (63,264)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 (132) ($1,296) $0 ($110,709) $11,515
=================================================================================================================================
The accompanying notes are an integral part of these financial statements.
34
Consolidated Statements of Cash Flows
- ------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
1999 1998
(As restated - (As restated -
In thousands 2000 see Note 18) see Note 18)
- ------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $(63,264) $7,343 $17,032
Adjustments to reconcile net income (loss) to operating
cash flows
Depreciation and amortization 11,236 9,642 8,829
Impairments of long-lived assets 7,425
Deferred taxes 15,456 2,147 (11,496)
Changes in working capital components:
(Increase) decrease in accounts receivable 25,871 (16,694) (9,186)
Inventory provision 2,116 487 2,286
(Increase)decrease in inventory 5,280 (1,880) (5,219)
Increase in other assets (4,437) (11,278) (5,431)
Increase (decrease) in accounts payable (7,613) 4,101 1,805
Increase in other liabilities 443 2,387 1,184
Array asset value at acquisition - (103)
Increase in other equity 2,035 619 266
--------------------------------------------------------------------------------------------------------------------------
Net cash used by operating activities (5,452) (3,126) (33)
- ------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of Array Telecom Corp. ("Array") - - (5,880)
Acquisition cost for Array (5) (246)
Proceeds received from the sale of FastCall - - 290
Proceeds received from sale of ePHONE assets 648
Proceeds from the sale of equipment 891 1 158
Capital expenditures (2,591) (3,935) (4,842)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (1,052) (3,939) (10,520)
- ------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net borrowings under revolver agreement 5,528 7,464 22,132
Proceeds from issuance of common stock 2,136 20 498
Principal payments on debt - - (13,546)
Principal payments under capital lease obligations (649) (101) (63)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 7,015 7,383 9,021
- ------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 511 318 (1,532)
- ------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 1,917 1,599 3,131
- ------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $2,428 $1,917 $1,599
==============================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------
Supplemental information - Cash paid during the year for:
Income taxes $ 508 $ 503 $ 824
Interest 2,902 1,633 1,387
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Supplemental Schedule of Non-Cash Investing and Financing Activities:
Assets acquired through capital lease transactions $ 1,264 $ 2,800 $ -
Contingency stock issued for acquisitions - 466 498
- ------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
35
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2000, 1999, and 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Principles of Consolidation
The consolidated financial statements include the accounts of Comdial
Corporation and its subsidiaries ("Comdial" or the "Company"). All significant
intercompany accounts and transactions have been eliminated.
Nature of Operations
Comdial is a United States ("U.S.") based manufacturer of business communication
systems. Comdial's principal customers are small to medium sized businesses
throughout the U.S. and certain international markets. The distribution network
consists of four major distributors, other supply houses, dealers, other direct
channels, and independent interconnects. Beginning in fiscal 2001, the Company
has outsourced the majority of its manufacturing operations to two suppliers.
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 accounting principles
generally accepted in the United States of America ("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 the date of the financial statements and for the reporting
periods. The most significant estimates relate to the allowance for doubtful
accounts, inventory obsolescence, warranty reserves, allowance for product
returns, intangible asset valuations, employee benefit plans, and the valuation
of deferred tax assets. These estimates may be adjusted as more current
information becomes available, and any adjustment could be significant.
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 general operating purposes. The revolving credit
facility is reduced by cash receipts that are not needed for daily operations.
Bank overdrafts of $ 2.1 million and $2.2 million are included in accounts
payable at December 31, 2000 and 1999, 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
Property is recorded at cost. 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 or lease term, if
shorter. Expenditures for maintenance and repairs of property are charged to
36
expense. Improvements and repairs, which extend economic lives, are capitalized.
In 2000 and 1999, Comdial expensed certain computer hardware and software due to
the rapid change in technology that has effected a need for continual
replacements. In 2000 and 1999, some of the major expenditures for computer
hardware and software have been through operating or capital leases. 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
Other Long-lived Assets
Long-lived assets are amortized based on the assets' useful lives. The cost in
excess of net assets of consolidated business acquired is amortized over periods
ranging from 2 to 10 years. 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 net of the expected
future undiscounted cash flows.
During the fourth quarter of 2000, in light of the restructuring and initiative
to outsource manufacturing, the Company identified certain long-lived assets
that were impaired. See Note 16.
Capitalized Software Development Costs
In 2000, 1999, and 1998, Comdial incurred costs associated with the development
of software related to Comdial's various products. The accounting for such
software costs is in accordance with Statement of Financial Accounting
Standards ("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 $6.1 million and $5.5 million at
December 31, 2000 and 1999, respectively. The amounts capitalized were $3.1
million, $2.9 million, and $2.8 million, of which $2.1 million, $1.8 million,
and $1.4 million were amortized in 2000, 1999, and 1998, 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 $3.3 million both at December 31,
2000, and 1999. The amounts capitalized were $1.3 million, $1.8 million, and
$1.5 million, of which $1.2 million, $0.6 million, and $0.4 million were
amortized in 2000, 1999 and 1998, respectively.
As a result of the discontinuance of certain of its product lines in 2000, the
Company recognized an impairment on certain capitalized software development
costs associated with such product lines. See Note 16.
Postretirement Benefits Other Than Pension
Comdial accrues estimated costs relating to health care and life insurance
benefits. In 2000, Comdial recognized income of $12,000 compared to an expense
of $137,000 and $87,000 during 1999 and 1998, respectively. See Note 10.
Revenue Recognition
Comdial recognizes revenue as products are shipped and are accepted by the
customer. An estimate of returned products is reserved concurrent with the
recognition of revenue. The only exceptions to this policy are revenues from
37
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." Comdial
recognizes service revenue upon completion of repairs and installation.
The Company recognizes shipping and handling fees as revenue, and the related
expenses as a component of cost of sales. All internal handling charges are
charged to selling, general and administrative expenses.
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
("APB") Opinion No. 25. Comdial has disclosed in Note 11 to the consolidated
financial statements pro forma net income and earnings per share, as if Comdial
had applied the fair value method for stock options and similar equity
instruments, in accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation".
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
the differences reverse. 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
Earnings per common share ("EPS") is computed for both basic and diluted EPS in
accordance with SFAS No. 128. Basic EPS is computed by dividing net
income (loss) by the weighted average number of common shares outstanding.
Diluted EPS is computed by dividing income by the weighted average number of
common and potentially dilutive common shares outstanding during the period.
(Note 8)
38
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable, accounts
payable, and accrued liabilities approximate fair value due to the short-term
maturities of these assets and liabilities. The interest rates on the Company's
bank borrowings are adjusted regularly to reflect current market rates.
Accordingly, the carrying amounts of the Company's short-term and long-term
borrowings also approximate fair value.
Reclassifications
Amounts in the 1999 and 1998 consolidated financial statements have been
reclassified to conform to the 2000 presentation. These reclassifications had no
effect on previously reported consolidated net income (See Note 17).
Current Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," as amended
by SFAS No. 138, which was issued in June 2000. The Company adopted SFAS No. 133
on January 1, 2001. SFAS No. 133 requires that all derivative instruments be
recorded on the balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction. Comdial does not
participate in any financial instruments that meet the definition of a
derivative, and therefore, adoption of this statement did not have any effect on
Comdial's consolidated financial statements.
In November 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin ("SAB") No. 100, "Restructuring and Impairment Charges".
This SAB provides guidance on the accounting for and disclosure of certain
expenses and liabilities often reported in connection with exit activities and
business combinations (restructuring activities), and the recognition and
disclosure of asset impairment charges. The Company's accounting treatment for
similar transactions, as discussed in Note 15 and Note 16, is consistent with
the requirements of this SAB.
In the fourth quarter of 1999, the SEC issued SAB No. 101, "Revenue
Recognition". Comdial adopted the SAB in January 2000 which did not have a
material impact on Comdial's consolidated financial statements.
In March 2000, the FASB issued Interpretation (FIN) No. 44, "Accounting for
Certain Transactions Involving Stock Compensation, an interpretation of APB No.
25." The requirements of FIN No. 44 are either not applicable to the Company or
are already consistent with the Company's existing accounting policies.
In September 2000, the Emerging Issues Task Force ("EITF") reached a final
consensus on EITF Issue 00-10, "Accounting for Shipping and Handling Fees and
Costs." This consensus requires that all amounts billed to a customer in a sale
transaction related to shipping and handling, if any, represent revenue and
should be classified as revenue. The Company historically has classified
shipping charges to customers as revenue. With respect to the classification of
costs related to shipping and handling incurred by the seller, the EITF
determined that the classification of such costs is an accounting policy
decision that should be disclosed. The Company recognizes such costs as a
component of cost of goods sold. Adoption of this consensus did not change the
Company's existing accounting policies or disclosures.
39
NOTE 2. ACQUISITIONS & DISPOSALS
------------------------
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 was 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 which is being amortized over a range of five to eight years,associated
with VOIPgate software, an Internet protocol based telephony software platform.
On March 31, 2000, Array, a wholly owned subsidiary of Comdial, and Comdial
entered into a Strategic Alliance with ePHONE Telecom, Inc. ("ePHONE"). Pursuant
to the agreement, Array sold its fixed assets and the "3000" family of products,
and licensed its technology for a five-year term to ePHONE. Comdial allowed
ePHONE to utilize the name "Array" and will provide ePHONE with access to its
distribution channels. EPHONE paid Array $2.7 million on the closing date and
will pay royalty fees to Comdial based on certain gross sales over a five-year
period. Comdial will recognize the $2.7 million, less costs associated with the
transaction and proceeds received for the assets sold which aggregated
approximately $0.7 million, into income over a five year period. The Company
recognized $0.3 million of income during the year ended December 31, 2000.
NOTE 3. INVENTORIES
-----------
Inventory consists of the following:
- ---------------------------------------------------------------------------
December 31,
In thousands 2000 1999
- ---------------------------------------------------------------------------
Finished goods $7,064 $8,763
Work-in-process 80 4,556
Materials and supplies 8,287 9,508
------- -------
Total $15,431 $22,827
======= =======
- ---------------------------------------------------------------------------
Comdial provides reserves to cover product obsolescence and those reserves
impact gross margin. Reserves for inventory obsolescence amounted to $5.4
million and $3.2 million as of December 31, 2000 and 1999, respectively. Future
reserves will be dependent on management's estimates of the recoverability of
costs from inventory.
In the fourth quarter of 2000, the Company decided to outsource the majority of
its manufacturing operations. As a result, the Company recorded a lower of cost
or market adjustment of its inventory in the amount of $2.4 million to reduce
the carrying value of its materials inventory.
NOTE 4. PROPERTY
--------
Property consists of the following:
- ------------------------------------------------------------------------------
December 31,
In thousands 2000 1999
- ------------------------------------------------------------------------------
Land $624 $656
Buildings and improvements 14,471 15,035
Machinery and equipment 37,833 37,517
Less accumulated depreciation (36,244) (33,750)
------- -------
Property - Net $16,684 $19,458
======= =======
- ------------------------------------------------------------------------------
Depreciation expense charged to operations for the years 2000, 1999, and 1998,
was $3.5 million, $3.3 million, and $2.8 million, respectively.
40
Due to the Company's decision to begin outsourcing the majority of its
manufacturing operations, management determined through an impairment analysis
that certain of its fixed assets associated with manufacturing were impaired.
Accordingly, the Company recognized a $0.3 million write-down on its fixed
assets in fiscal 2000 (See Note 16).
NOTE 5. LEASE OBLIGATIONS
-----------------
Comdial has various capital and operating lease obligations. Future minimum
lease commitments for capitalized leases and aggregate minimum rental
commitments under operating lease agreements that have initial non-cancelable
lease terms in excess of one year are as follows:
- ------------------------------------------------------------------------------
Year Ending December 31, Capital Operating
In thousands Leases Leases
- ------------------------------------------------------------------------------
2001 $1,009 $2,356
2002 1,006 1,837
2003 1,006 1,173
2004 859 1,015
2005 62 645
thereafter - 1,987
------ ------
Total minimum lease commitments 3,942 $9,013
======
Less amounts representing interest
and other costs (657)
------
Principal portion of minimum lease
commitments at December 31, 2000 $3,285
======
- ------------------------------------------------------------------------------
Assets recorded under capital leases (included in other assets in the
accompanying Consolidated Balance Sheets) are as follows:
- ------------------------------------------------------------------------------
December 31,
In thousands 2000 1999
- ------------------------------------------------------------------------------
Capitalized software $669 $2,757
Less accumulated amortization (77) (59)
---- ------
Capitalized software - Net $592 $2,698
==== ======
- ------------------------------------------------------------------------------
For 2000 and 1999, Comdial entered into new capital lease obligations which
amounted to approximately $1.3 million and $2.8 million, respectively. All
capital lease balances as of December 31, 2000 and 1999, are for assets such as
software. During the fourth quarter of 2000, the Company determined that certain
assets associated with these capital lease obligations were impaired (See Note
16). The capital lease amounts associated with the impaired assets continue to
remain an obligation of the Company.
Operating leases 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, 2000, 1999, and 1998, were
$3.7 million, $2.7 million, and $2.2 million, respectively.
NOTE 6. DEBT
----
On October 22, 1998, Comdial and Bank of America, N.A. ("Bank of America")
formerly NationsBank, N.A., entered into a credit agreement (the "Credit
Agreement"). The Credit Agreement provided 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.
41
Long-term debt consists of the following:
- ------------------------------------------------------------------------------
December 31,
In thousands 2000 1999
- ------------------------------------------------------------------------------
Revolving credit facility (1) $16,624 $29,596
Term loan 18,500
Capitalized leases (2) 3,285 2,670
------- -------
Total debt 38,409 32,266
Less current maturities on debt 24,848 471
------ -------
Total long-term debt 13,561 $31,795
====== =======
- ------------------------------------------------------------------------------
(1) On October 22, 1998, Comdial borrowed $15.8 million under the Revolving
Credit Facility from Bank of America, which was used to pay off other existing
loans. The loan made pursuant to the Credit Agreement with Bank of America
carries an interest rate based on the LIBOR daily rate plus the applicable
margin and does not require monthly principal payments. 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.
On November 22, 2000, the Credit Agreement was amended ("Amendment") to reflect
the following: (i) a reduction of the revolving credit facility to an initial
aggregate principal amount not to exceed $21.5 million with further reductions
over time as discussed below; (ii) an $18.5 million term loan facility; and
(iii) the continued provision of the $5.0 million letter of credit subfacility.
Interest on amounts outstanding under the Term Loan and the Revolving Credit
Facility are due monthly and are based on the LIBOR daily floating rate plus 3%.
As of December 31, 2000 and 1999, Comdial's borrowing LIBOR rates were 9.64% and
6.58%, respectively, which includes the additional margin of 3.0% and 0.75%,
respectively. On April 10, 2001, the Credit Agreement was again amended. On
April 10, 2001, the credit agreement was again amended.
Revolving Credit Facility
The Amendment dated April 10, 2001 provides that the revolving credit facility
will not be reduced from amounts then currently outstanding, but will remain at
$16.5 million. Comdial will also be allowed to utilize the facility provided
that the collateral is maintained (see "Debt Covenants"). Furthermore, the
facility's maturity has been extended until March 31, 2002.
Proceeds of advances under the revolving credit facility can be used for working
capital and other general corporate purposes.
Term Loan
The Amendment dated November 22, 2000 provided for a term loan in the amount of
$18.5 million which Comdial received on November 30, 2000. Principal
installments on the term loan are due as follows:
June 30, 2001 $ 2,500,000
September 30, 2001 2,500,000
December 31, 2001 2,500,000
March 31, 2002 11,000,000
The April 10, 2001 amendment states that principal payment of $2.5 million due
September 30, 2001 will be replaced by an amount necessary to reduce the debt to
$5 million. As of March 9, 2001, the outstanding balance of the term loan is
$15.7 million. Comdial expects the proceeds from the $8.4 million note
receivable from Seminole Properties, LLC (pursuant to its sale of its land and
building on March 9, 2001 - see Note 19) to be collected by June 1, 2001, and
proceeds of $1.0 million from the April 12, 2001 equipment auction and furniture
sale to reduce the principal payment due September 30, 2001. The remaining
balance of the Term Loan will be due as follows: $2.5 million on December 20,
2001 and $2.5 million on March 31, 2002.
42
The Bank of America Credit Agreement also gives Comdial a letter of credit
subfacility of $5.0 million, which is part of the Revolving Credit Facility, as
commitments occur. At December 31, 2000 and 1999, there were no commitments
under the letter of credit facility with Bank of America.
The Company will pay Bank of America a $50,000 amendment fee which will be
payable by December 20, 2001. In the event Comdial has not refinanced its debt
by December 31, 2001, the Company is required to pay a fee equivalent to 1.0% of
the outstanding debt.
(2) Capital leases are with various financing entities and are payable based on
the terms of each individual lease (see Note 5).
Debt Covenants
As of December 31, 2000, Comdial was in compliance with all the covenants and
terms of the Credit Agreement except for the requirement that Comdial maintain
certain levels of working capital and the funded debt to total capital covenant.
The working capital covenant required that Comdial maintain "eligible" accounts
receivable and inventory (as defined in the Agreement), to provide security for
loans under the Credit Agreement of at least $16.5 million. At December 31,
2000, the total of such eligible accounts receivable and inventory was $15.6
million. The Company was also not in compliance with the funded debt to total
capital covenant.
The Amendment dated April 10, 2001 sets forth certain changes to the covenants
as follows:
The funded debt to total capital ratio covenant ("Ratio"), which is measured at
the end of each fiscal quarter, was waived for December 31, 2000 and March 31,
2001. The Ratio will remain at a maximum of .55 to 1, but will be calculated by
adding back the deferred tax valuation allowance to total capital.
The Amendment also provides that Comdial maintain "eligible" accounts receivable
and inventory (as defined in the Agreement), to provide security under the
Credit Agreement of not less than $13.5 million through September 30, 2001,
$14.0 million through October 31, 2001, and $16.0 million through November 30,
2001.
The Earnings Before Income Taxes and Depreciation and Amortization ("EBITDA")
covenant which was effective for the first quarter of 2001, has been waived for
March 31, 2001. The replacement covenant is a minimum EBITDA for June 30,
September 30, and December 31, 2001 equivalent to $1.9 million, $6.0 million,
and $9.7 million, respectively. The EBITDA covenant is measured on a cumulative
basis from April 1, 2001.
Capital expenditures by the Company have been limited to $0.3 million per
quarter and $1.2 million per year.
The interest rates for both the Term Loan and Revolving Facility have been
increased from the LIBOR rate plus 3% to Prime rate plus 3%.
As a result of the revised Credit Agreement and related restrictive covenants,
$11.0 million of the outstanding indebtedness as of December 31, 2000 has been
excluded from current liabilities.
43
NOTE 7. INCOME TAXES
------------
The components of the income tax expense (benefit) for the years ended December
31 are as follows:
- -------------------------------------------------------------------------------
In thousands 2000 1999 1998
- -------------------------------------------------------------------------------
Current - Federal ($40) $410 $393
State (16) 133 369
Deferred - Federal 14,200 1,573 (9,730)
State 1,256 574 (1,769)
------- ------ --------
Total provision (benefit) $15,400 $2,690 ($10,737)
======= ====== ========
- -------------------------------------------------------------------------------
The income tax provision reconciled to the tax computed at statutory rates for
the years ended December 31, is summarized as follows:
- --------------------------------------------------------------------------------
In thousands 2000 1999 1998
- --------------------------------------------------------------------------------
Federal tax at statutory rate
(35% in 2000, 1999, and 1998) ($16,752) $3,512 $2,203
State income taxes (net of federal tax
benefit) 806 764 (924)
Nondeductible charges 40 707 411
Other adjustments 197 (124) 519
Expiring business credits 66 504 -
Adjustment of valuation allowance 31,043 (2,673) (12,946)
------- ------ --------
Income tax provision (benefit) $15,400 $2,690 $(10,737)
======= ====== ========
- --------------------------------------------------------------------------------
Net deferred tax assets of $0 and $14.8 million have been recognized in the
accompanying Consolidated Balance Sheets at December 31, 2000 and 1999,
respectively. The components of the net deferred tax assets (liabilities) at
December 31, 2000 and 1999 are as follows:
- -------------------------------------------------------------------------------
Deferred Assets (Liabilities) December 31,
In thousands 2000 1999
- -------------------------------------------------------------------------------
Net loss carryforwards $13,918 $4,984
Tax credit carryforwards 1,411 1,513
Inventory write downs and capitalization 3,274 1,937
Pension 128 26
Postretirement 287 280
Compensation and benefits 1,818 409
Capitalized software development costs 2,838 1,033
Other deferred tax assets 1,510 197
Goodwill amortization 5,151 2,405
Research and development expenditures 4,515 5,218
Allowance for bad debts 1,067 88
------- -------
Total deferred tax assets 35,917 18,090
Contingencies - (359)
Fixed asset depreciation (1,776) (2,216)
State taxes (406)
------- -------
Total deferred tax liabilities (1,776) (2,981)
Net deferred tax asset 34,141 15,109
Less: Valuation allowance (34,141) (300)
------- -------
Total $ - $14,809
======= =======
- -------------------------------------------------------------------------------
Comdial periodically reviews the requirements for a valuation allowance and
makes adjustments to such allowances when changes in circumstances result in
changes in management's judgement about the future realization of deferred tax
assets. Due to changes in estimates of future taxable income, management no
longer believes that it is more likely than not that Comdial will realize its
tax benefits.
Accordingly, the Company reserved a valuation allowance equal to its deferred
tax assets of $34.1 million for the year ended December 31, 2000.
Comdial has net operating loss and credit carryovers of approximately $37.5
million and $1.4 million, respectively, which, if not utilized, will expire as
follows:
- ------------------------------------------------------------------------------
In thousands Net Operating
Expiration Dates Losses Tax Credits
- ------------------------------------------------------------------------------
2001 2,898 $ -
2002 6,486 -
2003 7 -
After 2003 28,138 1,411
------ ------
Total $37,529 $1,411
======= ======
- -----------------------------------------------------------------------------
44
NOTE 8: EARNINGS PER SHARE
------------------
For the years ended December 31, 2000, 1999 and 1998, earnings per common share
("EPS") were computed for both basic and diluted EPS in accordance with SFAS
No. 128. Basic EPS is computed by dividing net income (loss) by the weighted
average number of common shares outstanding. Diluted EPS is computed by dividing
income (loss) by the weighted average number of common and potentially dilutive
common shares outstanding during the period. In 2000, 190,417 potentially
dilutive common shares were excluded from the computation of diluted earnings
per share because their effect would have been antidilutive. The following table
discloses the annual earnings per share information would have been:
- ------------------------------------------------------------------------------
Year Numerator Denominator EPS
In thousands, except EPS
- ------------------------------------------------------------------------------
2000 Basic EPS $(63,264) 9,188 $(6.89)
Diluted $(63,264) 9,188 $(6.89)
1999 Basic EPS $7,343 8,948 $0.82
Diluted $7,343 8,989 $0.82
1998 Basic EPS $17,032 8,843 $1.93
Diluted $17,032 9,081 $1.88
- ------------------------------------------- ---------------- -------------
NOTE 9. PENSION AND SAVINGS PLANS
-------------------------
Comdial currently has two pension plans that provide benefits based on years of
service and an employee's compensation during the employment period. One plan is
a qualified plan for all the employees of Comdial and the other, which was
initiated in April 1999, is a non-qualified plan ("Retirement Benefit
Restoration Plan"). The non-qualified plan is strictly for executive officers
and/or highly compensated employees who are designated as a participant of the
plan by the Compensation Committee of Comdial. The non-qualified plan is not
funded.
45
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.
In July 2000, the Company froze the Retiremant Benefit Restoration Plan, and in
September 2000, the Company froze the qualified pension plan, thereby
eliminating any further benefit accrual by employees in the plans. This action
by the Company resulted in a one-time curtailment loss of $0.5 million. In
addition, the Company recognized a settlement gain of $0.1 million on the
payment of lump-sum retirement benefits to certain of its employees under the
Retirement Benefit Restoration Plan.
The following table sets forth the change in projected benefit obligations of
the pension plans during 2000 and 1999.
- ------------------------------------------------------------------------------
In thousands 2000 1999
- ------------------------------------------------------------------------------
Benefit obligation at beginning of year $25,786 $22,432
Service cost 1,051 1,758
Interest cost 1,938 1,692
Actuarial loss (gain) 1,019 (3,101)
Benefits paid (1,776) (543)
Curtailment adjustment (2,559) -
Settlement adjustment 144 -
Amendments - 3,548
------- -------
Benefit obligation at end of year $25,603 $25,786
======= =======
- ------------------------------------------------------------------------------
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,
2000 and 1999.
- -------------------------------------------------------------------------------
In thousands 2000 1999
- -------------------------------------------------------------------------------
Fair value of plan assets at beginning of year $24,080 $21,402
Actual return on plan assets 907 1,704
Employer contribution 1,959 1,517
Benefits paid (1,776) (543)
------- -------
Fair value of plan assets at end of year $25,170 $24,080
======= =======
Funded status ($ 433) ($1,706)
Unrecognized actuarial gain (71) (2,507)
Unrecognized prior service cost - 3,210
------- -------
Net amount recognized ($ 504) ($1,003)
======= =======
Amounts recognized in the Consolidated Balance
Sheets consist of:
Prepaid benefit cost $1,678 -
Intangible asset - 2,400
Accrued benefit liability (2,182) (3,403)
------- -------
Net amount recognized ($ 504) ($1,003)
======= =======
- -------------------------------------------------------------------------------
46
Assumptions used in accounting for the plans as of December 31 were as
follows:
2000 1999 1998
- --------------------------------------------------------------------------
Discount rate 7.50% 8.00% 7.00%
Expected return on plan assets 9.00% 9.00% 9.00%
Rate of compensation increase 4.50% 4.50% 4.50%
- --------------------------------------------------------------------------
Net periodic pension cost for 2000, 1999, and 1998 included the following
components:
- --------------------------------------------------------------------------------
In thousands 2000 1999 1998
- --------------------------------------------------------------------------------
Service cost $1,051 $1,758 $1,575
Interest cost 1,938 1,692 1,334
Expected return on plan assets (2,050) (1,777) (1,490)
Amortization of prior service cost 186 124 (63)
Settlement gain (112) - -
Curtailment loss 464 - -
Recognized actuarial loss (gain) (17) 68 61
------ ------ ------
Net periodic pension cost $1,460 $1,865 $1,417
====== ====== ======
- --------------------------------------------------------------------------------
In addition to providing pension benefits, Comdial contributes to a 401(k) plan,
based on an employee's contributions. 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%. Prior to 1998, Participants could
contribute from 2% to 12.5% of their salary as defined in the terms of the plan
and Comdial would match contributions equal to 25% of the participant's
contributions up to the first 10%. Comdial's total expense for the matching
portion to the 401(k) plan for 2000, 1999, and 1998 was $0.6 million, $0.6
million, and $0.4 million, respectively.
NOTE 10. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
-------------------------------------------
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 effect of
SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions," on operating income for 2000 was income of $12,000 compared to an
expense for 1999 and 1998 of $137,000 and $87,000, respectively. 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).
During fiscal 2000, Comdial eliminated the accrual of certain postretirement
benefits previously accounted for under the program in accordance with SFAS No.
106. The postretirement benefit obligation was reduced by $0.7 million with a
corresponding decrease to the unrecognized transition obligation. The effects of
this transaction on current year earnings are negligible.
47
The following table sets forth the change in postretirement benefit obligations
and amounts recognized in Comdial's Consolidated Balance Sheets at December 31,
2000 and 1999.
- ------------------------------------------------------------------------------
In thousands 2000 1999
- ------------------------------------------------------------------------------
Benefit obligation at beginning of year $1,074 $1,011
Service cost 4 37
Interest cost 27 74
Plan participants' contributions 13 16
Actuarial loss/(gain) 17 (16)
Benefits paid (40) (48)
Curtailment effect (707) -
Benefit obligation at December 31 $388 $1,074
==== ======
- ------------------------------------------------------------------------------
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, 2000 and 1999.
- ------------------------------------------------------------------------------
In thousands 2000 1999
- ------------------------------------------------------------------------------
Fair value of plan assets at beginning of year $ - $ -
Employer contribution 27 32
Plan participants' contributions 13 16
Benefits paid (40) (48)
---- ---
Fair value of plan assets at December 31 $ - $ -
==== ====
Funded status ($ 388) ($1,074)
Unrecognized transition obligation 438 1,182
Unrecognized actuarial gain (812) (902)
Unrecognized prior service cost - -
---- -----
Accrued benefit cost ($ 762) ($794)
====== =====
- ------------------------------------------------------------------------------
Assumptions used in accounting for the plans as of December 31 were as follows:
- -----------------------------------------------------------------
2000 1999 1998
- -----------------------------------------------------------------
Discount rate 7.50% 8.00% 7.00%
- -----------------------------------------------------------------
For measurement purposes, a 7.00% annual rate of increase in the per capita cost
of covered health care benefits was assumed for 2000. The rate was assumed to
decrease gradually to 5.25% for 2005 and remain at that level thereafter.
Net periodic postretirement (benefit) cost for 2000, 1999, and 1998, included
the following components:
- ------------------------------------------------------------------------------
In thousands 2000 1999 1998
- ------------------------------------------------------------------------------
Service cost $ 4 $37 $19
Interest cost 27 74 68
Amortization of unrecognized
transition obligation 37 91 91
One-time curtailment income (6)
Recognized actuarial gain (74) (65) (91)
---- --- ---
Net postretirement
(benefit) cost ($12) $137 $87
==== ==== ===
- ------------------------------------------------------------------------------
48
Assumed health care cost trend rates could have a significant effect on the
amounts reported for the health care plans. A one-percentage point change in
assumed health care cost trend rates would have the following effects:
- ------------------------------------------------------------------------------
In thousands
One-percentage One-percentage
Point Increase Point Decrease
Effect on total of service and interest $1 ($1)
cost components
Effect on postretirement benefit obligation $23 ($22)
- ------------------------------------------------------------------------------
NOTE 11. STOCK-BASED COMPENSATION PLANS
------------------------------
As of December 31, 2000, Comdial had two basic stock-based compensation plans.
The 1992 Stock Incentive Plan (the " 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 1997, 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 2000, each non-employee director was awarded 2,500 shares
related to income earned by Comdial for fiscal year 1999. 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, 2000, there were 2.0 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 $0, $150,000, and
$156,000 at December 31, 2000, 1999, and 1998, respectively, and have been
deducted from Stockholders' Equity.
Options granted for years 2000 and 1999 have a maximum term of ten years and
vest over a three-year period. Options issued in 2000 become exercisable in
installments of 50%, 25% and 25% per year on each of the first through the third
anniversaries of the grant date. Options issued in 1999 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 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 applies APB No. 25 and related interpretations in accounting for its
plans.
The 1992 Stock Incentive Plan has features which permitted option recipients to
tender shares as partial or full consideration of the exercise price, that
caused the Plan to be a variable plan. Under variable plan accounting,
compensation expense is measured, as of each reporting date, as the amount by
which the quoted market price of the shares of the Company's stock covered by
the option grant exceeds the exercise price and is recognized, over the options'
vesting period. Changes, either increases or decreases, in the quoted market
price of the Company's shares between the date of grant and the date of exercise
result in a change in the measure of compensation expense.
The other option plans are accounted for as fixed plans. Accordingly, no
compensation cost has been recognized for its fixed stock option plans other
than the performance based option that is part of the plan for its directors.
49
Accordingly, the Company recognized compensation expense in the amount of
$847,000, $511,000 and $122,000 for its variable stock option plan for the years
ended December 31, 2000, 1999 and 1998, respectively. In addition, the Company
records compensation expense related to 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 $130,000, $85,000, and $148,000 for 2000, 1999, and 1998 respectively.
Information regarding stock options is summarized below:
- --------------------------------------------------------------------------------------------------------------------
2000 (1) 1999 (1) 1998 (1)
- --------------------------------------------------------------------------------------------------------------------
Options outstanding,
January 1; 1,079,788 $8.66 1,104,213 $8.93 859,729 $8.08
Granted 728,500 3.34 220,433 7.51 405,316 10.42
Exercised (262,040) 8.15 (8,228) 2.34 (96,602) 7.17
Terminated (494,595) 8.21 (236,630) 9.08 (64,230) 9.61
--------- -------- -------
Options outstanding,
December 31; 1,051,653 5.31 1,079,788 8.66 1,104,213 8.93
========= ========= =========
Options exercisable,
December 31; 265,755 8.96 598,468 8.57 474,175 8.05
Per share ranges of options outstanding
at December 31 $1.41 - $13.50 $1.41-$13.50 $1.41-$13.50
Dates through which options outstanding
at December 31,
were exercisable 1/2001-12/2010 1/2000-12/2009 1/1999-12/2008
(1) Weighted-average exercise price at grant date.
- --------------------------------------------------------------------------------------------------------------------
The following table summarizes information concerning currently outstanding and
exercisable options at December 31, 2000:
- ------------------------------------------------------------------------------
Options Outstanding Options Exercisable
------------------------ -----------------------
Weighted-
Number Average Weighted- Number Weighted-
Range of Outstanding Remaining Average Exercisable Average
Exercise at Contractual Exercise at Exercise
Prices 12/31/00 Life Price 12/31/00 Price
- ------------------------------------------------------------------------------
$ 1.41 to 3.00 608,283 9.6 $ 1.88 16,560 $ 2.37
5.12 to 7.77 113,929 6.7 7.47 59,748 7.41
8.12 to 10.94 212,808 5.2 9.95 176,066 9.79
11.25 to 13.50 116,633 9.0 12.58 13,381 13.06
--------- -------
1.41 to 13.50 1,051,653 8.3 5.31 265,755 8.96
========= =======
- ------------------------------------------------------------------------------
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:
- ------------------------------------------------------------------------------
2000 1999 1998
- ------------------------------------------------------------------------------
Risk-free interest rate 6.03% 5.15% 4.72%
Expected life 5.10 6.5 7.78
Expected volatility 87% 65% 68%
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 prescribed by
50
SFAS No. 123, Comdial's net income (loss) and earnings (loss) per share
would have been reduced to the pro forma amounts indicated below:
- --------------------------------------------------------------------------------
In thousands except per share amounts 2000 1999 1998
Net income(loss): As reported ($63,264) $7,343 $17,032
Additional
Compensation
expense 1,360 1,327 1,573
Pro forma ($64,624) $6,016 $15,459
Basic earnings (loss) per share:
As reported ($6.89) $0.82 $1.93
Pro forma ($7.03) $0.67 $1.75
Diluted earnings (loss) per share:
As reported ($6.89) $0.82 $1.88
Pro forma ($7.03) $0.67 $1.70
- ------------------------------------------------------------------------------
The weighted average fair value of options granted in which the option price
equaled the fair market value of the Company's stock on the date of grant is
$2.74, $6.14, and $7.66 for the years ending December 31, 2000, 1999, and 1998,
respectively. During fiscal 1998, the Company issued options with exercise
prices that were greater than the fair market value of the Company's stock at
date of grant. The weighted average fair value of such options was $8.49. All
other options issued during fiscal years 2000, 1999, and 1998 had an exercise
price equal to the fair market value of the Company stock at the date of grant,
as disclosed above.
NOTE 12. SEGMENT INFORMATION
-------------------
Effective December 31, 1998, Comdial has adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information".
During 2000, 1999, and 1998, substantially all of Comdial's sales, net income,
and identifiable net assets were attributable to the telecommunications industry
with over 98% of the sales occurring in the United States.
Comdial is organized into several strategic business unit ("SBU") segments that
comprise the majority of its sales to the telecommunications market. Comdial has
three SBU's that contribute ten percent or more to net sales. The SBU's are
Comdial Convergent Communications Corporation ("CCC"), Comdial Enterprise
Solutions, Inc. ("CES"), Key Voice Technologies, Inc. ("KVT") and others
(including Array Telecom Corporation ("Array") and Comdial Business
Communications Corporation ("CBCC")). All of the SBU's are companies wholly
owned by Comdial. Each of these categories is considered a business segment, and
with respect to their financial performance, the costs associated with these
segments can only be quantified and identified down to the operating profit
level.
CCC is comprised of products such as Impact, Impact Digital Expandable Systems
("DXP"), DXP Plus and the open digital switching platforms known as the "FX
Series." The products are sold through various supply house channels, which in
turn sell to various dealers that sell and install Comdial products. This
distribution channel comprises more than 65% of Comdial's net sales for any
given period.
CES is comprised of all Comdial's software solutions and application products
that are sold through vertical markets and national account customers. The
products included are Comdial's vertical market products such as Impact
Concierge, Avalon, Power Broker, and voice processing systems. These products
are sold to specific industries such as hospitality, real estate, financial, and
assisted living centers.
KVT provides voice-processing products to the other SBU's as well as selling
directly to dealers and end users. Based in Sarasota, Florida, KVT develops,
assembles, markets, and sells voice-processing systems and related products for
business applications. 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 that are
51
Comdial's primary markets. Industry shipments are measured both in terms of
systems and ports.
The other segments are CBCC, which manufactures Comdial products, repairs
out-of-warranty products and engages in contract manufacturing, and Array, which
produces Internet Protocol ("IP") software products (product licensed to ePHONE
Telecom Inc. ("ePHONE")).
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 activities are not
allocated to the operating segments. Corporate allocation costs that have been
transferred to KVT and other business segments have not been included in
operating income. Management does not include these costs when analyzing the
various business segments' performance. There are no operating assets located
outside the United States.
Unallocated costs include corporate expenses, 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 business segments, and most of the costs are universal in nature.
Unallocated assets include such items as cash, deferred tax assets and
miscellaneous assets. Unallocated capital expenditures and depreciation relate
primarily to shared 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
(In thousands) 2000 1999 1998
- --------------------------------------------------------------------------------
Comdial Convergent Communications $67,126 $102,206 $102,800
Comdial Enterprise Solutions 12,592 13,800 8,065
Key Voice Technologies 21,317 34,001 25,324
CBCC/Array 5,373 14,495 6,965
Inter-company elimination (6,366) (14,167) (11,319)
-------- -------- --------
Net sales $100,042 $150,335 $131,835
======== ======== ========
- --------------------------------------------------------------------------------
Business Segment Profit
(In thousands) 2000 1999 1998
- --------------------------------------------------------------------------------
Comdial Convergent Communications $22,919 $37,892 $34,895
Comdial Enterprise Solutions 3,283 4,830 3,063
Key Voice Technologies 10,239 18,348 13,831
CBCC/Array (14,114) 3,711 966
-------- ------- ------
Gross profit 22,327 64,781 52,755
Operating expenses 56,577 52,829 44,679
Restructuring 2,355 - -
Impairment of long-lived assets 7,425
Interest expense 2,902 1,633 1,216
Miscellaneous expense - net 932 286 565
-------- ------- ------
Income (loss) before
income taxes $(47,864) $10,033 $6,295
======== ======= ======
- --------------------------------------------------------------------------------
52
- ----------------------------------------------------------------------------------------------------------
December 31,
(In thousands) 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------
Business Segment Assets
Comdial Convergent Communications $7,191 $28,662 $17,823
Comdial Enterprise Solutions 6,650 7,039 1,369
Key Voice Technologies 8,166 10,155 7,099
CBCC/Array 39,039 43,693 39,538
Unallocated 11,908 43,525 43,161
------- -------- --------
Total $72,954 $133,074 $108,990
======= ======== ========
Business Segment Liabilities
Comdial Convergent Communications $518 $2,322 $109
Comdial Enterprise Solutions - 66 -
Key Voice Technologies 1,190 2,340 1,296
CBCC/Array 15,664 15,878 14,041
Unallocated 44,067 41,860 30,913
------- ------- -------
Total $61,439 $62,466 $46,359
======= ======= =======
- ----------------------------------------------------------------------------------------------------------
Business Segment Property, Plant and Equipment
December 31,
(In thousands) 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------
Depreciation
Comdial Convergent Communications $241 $242 $233
Comdial Enterprise Solutions 5 2 5
Key Voice Technologies 251 127 99
CBCC/Array 2,926 2,894 2,411
Unallocated 43 42 56
------ ------ ------
Total $3,466 $3,307 $2,804
====== ====== ======
Additions
Comdial Convergent Communications $143 $104 $445
Comdial Enterprise Solutions - 29 3
Key Voice Technologies 538 365 240
CBCC/Array 1,488 2,809 2,540
Unallocated 422 1,405 1,270
------ ------ ------
Total $2,591 $4,712 $4,498
====== ====== ======
- ----------------------------------------------------------------------------------------------------------
Comdial had sales in excess of 10% of net sales to three customers as follows:
- ----------------------------------------------------------------------------------------------------------
In thousands 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------
Sales:
ALLTEL Supply, Inc. $14,563 $24,393 $19,301
Graybar Electric Company, Inc. 24,683 34,750 30,415
Sprint/North Supply , Inc. 16,035 25,323 24,902
Percentage of net sales:
ALLTEL Supply, Inc. 15% 16% 15%
Graybar Electric Company, Inc. 25% 23% 23%
Sprint/North Supply , Inc. 16% 17% 19%
Net sales of all three:
Comdial Convergent Communications $49,894 $75,517 $66,483
Comdial Enterprise Solutions - - -
Key Voice Technologies 5,387 8,949 8,135
------- ------- -------
Net sales $55,281 $84,466 $74,618
======= ======= =======
- ----------------------------------------------------------------------------------------------------------
53
NOTE 13. COMMITMENTS AND CONTINGENT LIABILITIES
--------------------------------------
Comdial maintains its operations in material compliance with all applicable
environmental, health and safety laws and regulations, including those regarding
permits. Comdial began conducting annual environmental audits of its
Charlottesville, Virginia facility in 1995 to assure continued compliance.
Comdial's facility has two permits. The first is a connection permit to
discharge wastewater to the Rivanna Water and Sewer Authority, a publicly
operated treatment works. The second is an air permit exemption letter from the
Virginia Department of Environmental Quality ("DEQ").
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 DEQ. DEQ has also required some assessment work of the
chlorinated solvents under the underground storage tank ("UST") Program, however
Comdial determined that it could expedite matters by entering the site into
Virginia's Voluntary Remediation Program (the "VRP").
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 was deposited into approved containers and taken
to a permitted hazardous waste storage location in accordance with the
corrective action plan.
In 1999, Comdial was accepted into the VRP to start the final site
characterization and closure process for the groundwater contamination. A Site
Characterization Report ("SCR") required under DEQ's regulations presented the
results of a site characterization of the horizontal and vertical extent of the
contamination, a baseline risk assessment, and a remedial action plan. The
completion of the site characterization required the construction of several new
wells to determine the extent of the contamination and some additional sampling.
The Site Characterization was completed in May 2000 and the SCR was submitted to
VDEQ in September 2000. VDEQ has accepted the recommendations of Comdial's
consultants that the site be closed with institutional and deed restrictions.
The deed restrictions would prohibit residential construction or use of the
groundwater for potable water. Additionally, an L-shaped area to the rear of the
manufacturing facility has an institutional control requiring the approval of
VDEQ for any ventilation system installed in any building constructed within the
confines of this area that would be inhabited by workers. Wells will be sampled
every two years for a period of six years to determine if the remedial action of
choice, natural attenuation, is achieving the desired results. If levels have
declined to the satisfaction of VDEQ, the restrictions will be removed from the
property. Otherwise, the long-term monitoring will continue for an additional
period of time to be determined.
As of December 31, 2000, Comdial has incurred total costs of approximately
$.5 million and has substantially completed the pumping process as of year-end.
Comdial sold the land and building on March 9, 2001 (See Note 19). The new owner
has initiated the work to proceed with the site closure process.
54
NOTE 14. QUARTERLY FINANCIAL DATA (UNAUDITED)
------------------------------------
The quarterly financial data presented below has been restated to reflect the
recognition of compensation expense associated with variable accounting for the
Company's 1992 Stock Option Plan (See Note 18).
- ------------------------------------------------------------------------------
In thousands except First First Second Second
per share amounts Quarter Quarter Quarter Quarter
(As Previously (As (As Previously (As
Reported) Restated) Reported) Restated)
- ------------------------------------------------------------------------------------------------------------------
2000
Net Sales $32,193 $32,193 $21,372 $21,372
Gross profit 13,770 13,770 4,412 4,412
Goodwill amortization 799 799 798 798
Interest expense 607 607 616 616
Net income (loss) 341 (2,333) (6,658) (4,848)
Net earnings(loss) per
common share: Basic .04 (.26) (.72) (.53)
Diluted .04 (.26) (.72) (.53)
- ------------------------------------------------------------------------------------------------------------------
1999
Net Sales $32,589 $32,589 $36,351 $36,351
Gross profit 12,495 12,495 15,449 15,449
Goodwill amortization 784 784 799 799
Interest expense 382 382 377 377
Net income 388 717 1,291 1,261
Net earnings per
common share: Basic 0.04 0.08 0.14 0.14
Diluted 0.04 0.08 0.14 0.14
- ------------------------------------------------------------------------------------------------------------------
In thousands except Third Third Fourth
per share amounts Quarter Quarter Quarter
(As Previously (As
Reported) Restated)
- ------------------------------------------------------------------------------------------------------------------
2000
Net Sales $27,021 $27,021 $19,456
Gross profit 7,249 7,249 (3,104)
Goodwill amortization 799 799 799
Interest expense 745 745 934
Net income (loss) (5,155) (5,137) (50,946)
Net earnings (loss) per
common share: Basic (.56) (.56) (5.53)
Diluted (.56) (.56) (5.53)
- ------------------------------------------------------------------------------------------------------------------
Third Third Fourth Fourth
Quarter Quarter Quarter Quarter
(As Previously (As (As Previously (As
Reported) Restated) Reported) Restated)
1999
Net Sales $37,960 $37,960 $43,435 $43,435
Gross profit 16,114 16,114 20,723 20,723
Goodwill amortization 798 798 799 799
Interest expense 399 399 475 475
Net income 1,834 1,824 4,341 3,541
Net earnings per
common share: Basic 0.20 0.20 0.48 0.39
Diluted 0.20 0.20 0.48 0.39
- ------------------------------------------------------------------------------------------------------------------
Previously reported quarterly information has been revised to reflect certain
reclassifications. These reclassifications had no effect on previously reported
consolidated net income.
55
During the fourth quarter of 2000, Comdial began to implement its restructuring
plan and recognized $2.4 million in restructuring charges and additional charges
of $7.4 relating to the impairment of long-lived assets including goodwill, as
well as other write-offs as discussed in Note 16.
NOTE 15. RESTRUCTURING
-------------
Due to declining market conditions, unfavorable economic factors, uncompetitive
product costs, and excess inventory levels, the Board of Directors and
management deemed it necessary to develop a plan to restructure the Company.
This plan was approved by the Board of Directors during the fourth quarter of
2000.
Significant terms of the restructuring plan ("Plan") included outsourcing the
manufacturing operations and thereby significantly downsizing the workforce. In
addition, the Company is moving its corporate headquarters to Florida where its
wholly owned subsidiary Key Voice Technologies is located. This impacts the
administrative, finance, information technology, and sales and marketing
departments. Pursuant to the Plan, 152 employees were laid off effective
December 15, 2000; another 222 employees were notified as of December 28, 2000
that their positions would be eliminated in fiscal 2001.
As of December 31, 2000, Comdial accrued severance and related benefits in the
amount of $2.4 million related to the Plan. These amounts are included in
accrued payroll and related expenses in the accompanying consolidated financial
statements. No amounts for severance related to the restructuring plan have been
paid out during fiscal year 2000.
NOTE 16. IMPAIRMENT OF LONG-LIVED ASSETS
-------------------------------
In the fourth quarter of 2000, Comdial recorded asset impairments and
write-offs, including goodwill, of $7.4 million. Asset impairments of $0.3
million were required to write-down the net book value of the manufacturing
equipment that is expected to be disposed of during the first half of fiscal
2001 as a result of the outsourcing of a certain portion of the Company's
manufacturing operations. The asset impairment was measured by the excess of the
carrying value of the assets over the fair value of the assets. Fair value of
the assets was determined by independent appraisals and quoted market prices.
In addition, $3.9 million of purchased software that will no longer be utilized
due to the downsizing was written off. Other write-offs consisted of capitalized
software development costs in the amount of $0.4 million related to discontinued
products. The write-off of these assets was based on an analysis of the
projected undiscounted cash flows as compared to the carrying value of these
assets.
In March 2000, the Company sold the assets of its wholly owned subsidiary,
Array. Pursuant to the sale of the assets, the Company licensed its technology
to ePHONE. The Company is to receive royalty fees based on certain gross sales
over a five-year period. The Company determined that the present value of the
future cash flows related to the licensing agreement was less than the carrying
value of the goodwill. Accordingly, the Company recorded a $2.8 million
write-off of goodwill.
NOTE 17. RECLASSIFICATIONS
-----------------
During fiscal 2000, The Company began recording installation costs as a cost of
goods sold rather than as selling, general & administrative costs as was done in
previous years. Also in 2000, the Company began recording repair revenue and
related costs on a gross basis rather than on a net basis as was done in
previous years. Prior to 2000, repair services revenue, net of expenses, was
recorded as a selling, general and administrative cost.
The Company has reclassified the above referenced amounts in the 1999 and 1998
consolidated financial statements so as to conform to the 2000 presentation.
This resulted in net sales increasing $2.4 million and $2.9 million for 1999 and
56
1998, respectively. Cost of goods sold was increased by $3.2 million and $3.5
million for 1999 and 1998, respectively. Selling, general and administrative
costs decreased by $0.8 million and $0.6 million for 1999 and 1998,
respectively. These reclassifications had no effect on operating or net income.
NOTE 18. RESTATEMENT
-----------
Subsequent to the issuance of the Company's consolidated financial statements
for the period ended December 31, 1999, management determined that the 1992
Incentive Stock Option Plan ("Plan"), which had previously been accounted for as
a fixed plan, had certain features, which permitted option recipients to tender
shares as partial or full consideration of the exercise price, that caused the
Plan to be a variable plan. Under the fixed plan accounting, no compensation
expense was recognized for options granted to employees. Under variable plan
accounting, compensation expense is measured as of each reporting date, as the
amount by which the quoted market price of the shares of the Company's stock
covered by the option grant exceeds the exercise price and is recognized over
the options' vesting period. Changes, either increases or decreases, in the
quoted market price of the Company's shares between the date of grant and the
date of exercise result in a change in the measure of compensation expense. As a
result, the 1999 and 1998 consolidated financial statements contained herein
have been restated from amounts previously reported to account for the stock
option plan as a variable plan.
A summary of the significant effects of the restatements on the 1999 and 1998
financial statements and on the beginning stockholders' equity as of January 1,
1998 is as follows:
December 31, 1999
-----------------
As Previously
Reported As Restated
-------- -----------
As of December 31, 1999
- ------------------------
Accrued payroll and related
expenses $ 2,652 $ 3,652
Paid-in-capital 116,535 119,199
Accumulated deficit (43,781) (47,445)
Total stockholders' equity 71,608 70,608
For the year ended December 31, 1999:
- -------------------------------------
Selling, general & administrative
expenses 40,229 40,740
Net income applicable to common stock 7,854 7,343
Earnings per share:
Basic $0.88 $0.82
Diluted $0.87 $0.82
As Previously
Reported As Restated
-------- -----------
As of December 31, 1998
- ------------------------
Paid-in-capital $115,950 $118,573
Accumulated deficit (51,635) (54,788)
Total stockholders' equity 63,161 62,631
For the year ended December 31, 1998:
- -------------------------------------
Selling, general & administrative
expenses 34,034 34,156
Net income applicable to common stock 17,154 17,032
Earnings per share:
Basic $1.94 $1.93
Diluted $1.89 $1.88
As of January 1, 1998
- ---------------------
Paid-in-capital 114,575 116,840
Accumulated deficit (68,789) (71,820)
Total stockholders' equity 44,835 44,069
The above referenced restated amounts for selling, general & administrative
expenses are exclusive of certain reclassifications made to the 1999 and 1998
consolidated financial statements to conform to the 2000 presentation (See Note
17).
57
NOTE 19. SUBSEQUENT EVENT
----------------
The Company sold its facility in Charlottesville, Virginia on March 9, 2001 for
$11.4 million. A payment of $3.0 million was made on the closing date with the
remaining balance due by June 1, 2001. Comdial is leasing a portion of the
building from the closing date through August 30, 2003 for low volume board
production, light assembly, engineering, and technical services functions. The
Company estimates it will recognize a gain of approximately $4.0 million from
the sale. A portion of the proceeds of the sale will be used to pay down the
outstanding balance of the Term Loan (see Note 6).
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
58
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" of Comdial's definitive proxy statement for the
annual meeting of stockholders.
ITEM 11. Executive Compensation
Executive compensation and management transactions information is incorporated
by reference under the caption "Executive Compensation" of Comdial's definitive
proxy statement for the annual meeting of stockholders.
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" of Comdial's definitive
proxy statement for the annual meeting of stockholders.
ITEM 13. Certain Relationships and Related Transactions
Information is incorporated by reference under the caption "Family
Relationships" and "Certain Relationships and Related Transactions" of Comdial's
definitive proxy statement for the annual meeting of stockholders.
59
Part IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)
1. Audited Consolidated Financial Statements of Comdial Corporation and its
Subsidiaries
Independent Auditors' Report
Financial Statements:
Consolidated Balance Sheets -
December 31, 2000 and 1999 (As restated)
Consolidated Statements of Operations -
Years ended December 31, 2000, 1999 (As restated),
and 1998 (As restated)
Consolidated Statements of Stockholders' Equity -
Years ended December 31, 2000, 1999 (As restated),
and 1998 (As restated)
Consolidated Statements of Cash Flows -
Years ended December 31, 2000, 1999 (As restated),
and 1998 (As restated)
Notes to Consolidated Financial Statements -
Years ended December 31, 2000, 1999, and 1998
2. Financial Statements - Supplemental Schedules:
Schedule II - Valuation and Qualifying Accounts
All other 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.)*
60
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 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.)*
10.9 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.)*
10.10 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.)*
10.11 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.)*
10.12 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.)*
10.13 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.)*
10.14 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.)*
10.15 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.)*
10.16 Second Amendment to Comdial's 401(k) Plan dated November
29, 1998. (Exhibit 10.25 to Registrant's Form 10-K for the
year ended December 31, 1998.)*
10.17 Third Amendment to Comdial's 401(k) Plan dated February 8,
1999.(Exhibit 10.17 to Registrant's Form 10-K for the year
ended December 31, 1999)*
61
10.18 Credit Agreement dated October 22, 1998 among Registrant
and NationsBank, N.A. (Exhibit 10.26 to Registrant's Form
10-K for the year ended December 31, 1998.)*
10.19 Comdial's Retirement Benefit Restoration Plan (Exhibit
10.19 to Registrant's Form 10-K for the year ended December
31, 1999)*
10.20 Strategic Alliance Agreement dated March 31, 2000 between
the Registrant and ePHONE Telecom, Inc. (Exhibit 10.1 to
Registrant's Form 10-Q for the quarter ended April 2,
2000)*
10.21 Patent License Agreement dated March 17, 2000 between the
Registrant and Lucent Technologies GRL Corporation (Exhibit
10.2 to Registrant's Form 10-Q for the quarter ended April
2, 2000)*
10.22 Amendment No. 5 to the Registrant's 1992 Stock Incentive
Plan (Exhibit 99.1 to Registrant's Form S-8 dated November
15, 2000)*
10.23 Amended and Restated Credit Agreement dated November 22,
2000
10.24 Agreement of Sale and Purchase dated March 9, 2001 between
the Registrant and Seminole Trail Properties, LLC (Exhibit
3.1 to Registrant's Form 8-K filed March 26, 2001)*
10.25 Deed of Lease dated March 9, 2001 between Seminole Trail
Properties, LLC and the Registrant (Exhibit 10.1 to
Registrant's Form 8-K filed March 26, 2001)*
10.26 Amended and Restated Credit Agreement dated April 10, 2001
- ------------------------
* Incorporated by reference herein.
62
(11) Schedule of Computation of Earnings Per Common Share
(21) Subsidiaries of the Registrant
The following are the subsidiaries of the Registrant and
all are incorporated in the state of Delaware, except as
otherwise indicated:
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 Real Estate Co., Inc.(incorporated in the State
of Maryland)
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
(24) Power of Attorney
(b) Reports on Form 8-K:
The Registrant has filed the following report on Form 8-K during the fourth
quarter of the year ending December 31, 2000:
Form 8-K dated October 5, 2000:
Item 5. Other Events - Waiver of credit agreement covenant and appointment
of Nick Branica as President and Chief Executive Officer.
Item 7. Financial Statements and Exhibits - Exhibit 10.1 Conditional
Waiver Agreement and Exhibit 10.2 Press release relating to appointment of
Nick Branica as President and Chief Executive Officer of Comdial
Corporation.
63
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 17th day of
April, 2001.
COMDIAL CORPORATION
By:\s\ Paul K. Suijk
----------------------------------
Paul K. Suijk
Senior Vice President and
Chief Financial 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 April 17, 2001
- --------------------
Robert P. Collins
* Director April 17, 2001
- --------------------
Barbara J. Dreyer
* Director April 17, 2001
- --------------------
John W. Rosenblum
* Director April 17, 2001
- --------------------
Robert E. Spekman
* Director April 17, 2001
- --------------------
Nickolas A. Branica
* Chairman of the Board April 17, 2001
- --------------------
Dianne C. Walker
64
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
COMDIAL CORPORATION
DECEMBER 31, 2000
- -----------------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- -----------------------------------------------------------------------------------------------------------------------------------
Additions
Balance at Charged to Charged to Balance at
Beginning Costs and Other Accounts - Deductions - End of
Description of Period Expenses Describe Describe Period
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 2000:
Deducted from asset accounts:
Allowance for doubtful accounts $302 $2,793 ($261)* $2,834
Reserve for sales returns 418 2,029 - 2,447
Reserve for obsolescence 3,239 3,734 (1,618)** 5,355
----------------------------------- -----------------------------------
Total $3,959 $8,556 ($1,879) $10,636
=================================== ===================================
Year Ended December 31, 1999:
Deducted from asset accounts:
Allowance for doubtful accounts $198 $194 (90)* $302
Reserve for sales returns 401 17 - 418
Reserve for obsolescence 3,362 487 (610)** 3,239
----------------------------------- -----------------------------------
Total $3,961 $698 ($700) $3,959
=================================== ===================================
Year Ended December 31, 1998:
Deducted from asset accounts:
Allowance for doubtful accounts $78 $188 (68)* $198
Reserve for sales returns 213 188 - 401
Reserve for obsolescence 2,482 2,286 (1,406)** 3,362
----------------------------------- -----------------------------------
Total $2,773 $2,662 ($1,474) $3,961
=================================== ===================================
* Writeoff uncollectable accounts
** Writeoff obsolete inventory