-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Tg6qvQuOJg2Y5OhqYvvUSFLcyKge4VBvBNccr1SvTJ2NlqKTvE/0fkkrd67MgWE+ EO77OSv7ZUbCWpuOxq74hQ== 0000230131-97-000004.txt : 19970811 0000230131-97-000004.hdr.sgml : 19970811 ACCESSION NUMBER: 0000230131-97-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970629 FILED AS OF DATE: 19970808 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMDIAL CORP CENTRAL INDEX KEY: 0000230131 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 942443673 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-09023 FILM NUMBER: 97653791 BUSINESS ADDRESS: STREET 1: 1180 SEMINOLE TRAIL STREET 2: P O BOX 7266 CITY: CHARLOTTESVILLE STATE: VA ZIP: 22906-2200 BUSINESS PHONE: 8049782200 MAIL ADDRESS: STREET 1: 1180 SEMMINOLE TRAIL STREET 2: P O BOX 7266 CITY: CHARLOTTESVILLE STATE: VA ZIP: 22906 10-Q 1 United States SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 29, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to _____________ Commission file number: 0-9023 COMDIAL CORPORATION (Exact name of Registrant as specified in its charter) Delaware 94-2443673 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) P. O. Box 7266 1180 Seminole Trail; Charlottesville, Virginia 22906-7266 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code:(804) 978-2200 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X No ___ APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of latest practicable date. 8,669,277 common shares as of June 29, 1997. COMDIAL CORPORATION AND SUBSIDIARIES INDEX PAGE PART I - FINANCIAL INFORMATION ITEM 1: Financial Statements Consolidated Balance Sheets as of June 29, 1997 and December 31, 1996 3 Consolidated Statements of Operations for the Three Months and Six Months ended June 29, 1997 and June 30, 1996 4 Consolidated Statements of Cash Flows for the Three Months and Six Months ended June 29, 1997 and June 30, 1996 5 Notes to Consolidated Financial Statements 6-11 ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 12-22 PART II - OTHER INFORMATION ITEM 6: Exhibits and Reports on Form 8-K 23 COMDIAL CORPORATION AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION ITEM 1. Financial Statements Consolidated Balance Sheets - (Unaudited) * June 29, December 31, In thousands except par value 1997 1996 Assets Current assets Cash and cash equivalents $85 $180 Accounts receivable - net 11,973 9,660 Inventories 19,889 19,586 Prepaid expenses and other current assets 1,095 1,341 Total current assets 33,042 30,767 Property - net 16,550 15,317 Goodwill 15,250 16,852 Deferred tax asset - net 7,528 7,469 Other assets 4,209 3,947 Total assets $76,579 $74,352 Liabilities and Stockholders' Equity Current liabilities Accounts payable $8,164 $8,144 Accrued payroll and related expenses 2,959 2,926 Other accrued liabilities 3,115 3,746 Current maturities of debt 7,140 5,343 Total current liabilities 21,378 20,159 Long-term debt 10,690 11,713 Deferred tax liability 2,069 2,230 Long-term employee benefit obligations 1,672 1,686 Commitments and contingent liabilities Total liabilities 35,809 35,788 Stockholders' equity Common stock ($0.01 par value) and paid-in capital (Authorized 30,000 shares; issued shares: 1997 = 8,669; 1996 = 8,580) 114,510 114,118 Other (1,045) (1,046) Accumulated deficit (72,695) (74,508) Total stockholders' equity 40,770 38,564 Total liabilities and stockholders' equity $76,579 $74,352 * Condensed from audited financial statements. The accompanying notes are an integral part of these financial statements. COMDIAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations - (Unaudited) Three Months Ended Six Months Ended June 29, June 30, June 29, June 30, 1997 1996 1997 1996 In thousands except per share amounts Net sales $29,379 $23,562 $56,234 $45,610 Cost of goods sold 17,628 15,383 33,424 29,948 Gross profit 11,751 8,179 22,810 15,662 Operating expenses Selling, general & administrative 7,424 6,464 14,643 11,778 Engineering, research & development 1,683 1,704 3,286 2,922 Operating income 2,644 11 4,881 962 Other expense Interest expense 449 499 876 726 Goodwill amortization expense 859 868 1,896 959 Miscellaneous expenses - net 90 200 303 362 Income (loss) before income taxes 1,246 (1,556) 1,806 (1,085) Income tax expense (benefit) 104 72 (7) (642) Net income (loss) applicable to common stock $1,142 ($1,628) $1,813 ($443) Earnings (loss) per common share and common equivalent share: Earnings (loss) per common share $0.13 ($0.19) $0.21 ($0.05) Weighted average common shares outstanding: Weighted average per common share 8,656 8,565 8,620 8,378 The accompanying notes are an integral part of these financial statements. COMDIAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows - (Unaudited) Six Months Ended June 29, June 30, In thousands 1997 1996 Cash flows from operating activities: Cash received from customers $56,014 $49,496 Other cash received 506 464 Interest received 4 59 Cash paid to suppliers and employees (53,510) (48,424) Interest paid on debt (1,072) (369) Interest paid under capital lease obligations (8) (56) Income taxes paid (202) (44) Net cash provided by operating activities 1,732 1,126 Cash flows from investing activities: Purchase of Key Voice Technologies ("KVT") - (8,528) Purchase of Aurora Systems ("Aurora") - (1,901) Acquisition costs for KVT and Aurora (1) (726) Proceeds from the sale of equipment - 9 Capital expenditures (2,718) (2,127) Net cash used by investing activities (2,719) (13,273) Cash flows from financing activities: Proceeds from borrowings 1,900 5,619 Net borrowings under revolver agreement 1,523 4,000 Proceeds from issuance of common stock 4 44 Principal payments on debt (2,482) (924) Principal payments under capital lease obligations (53) (281) Net cash provided in financing activities 892 8,458 Net increase (decrease) in cash and cash equivalents (95) (3,689) Cash and cash equivalents at beginning of year 180 4,144 Cash and cash equivalents at end of period $85 $455 Reconciliation of net income to net cash provided by operating activities: Net income $1,813 ($443) Depreciation and amortization 4,433 2,921 Change in assets and liabilities (for 1996, net of effects from the purchase of KVT and Aurora): Decrease (increase) in accounts receivable (2,313) 661 Inventory provision 2,079 693 Increase in inventory (2,382) (1,709) Decrease (increase) in other assets (1,069) 875 Increase in deferred tax asset (220) (736) Increase (decrease) in accounts payable 20 (1,588) Decrease in other liabilities (726) (606) KVT asset value at acquisition - 1,105 Aurora asset value at acquisition - (121) Increase in paid-in capital and other equity 97 74 Total adjustments (81) 1,569 Net cash used by operating activities $1,732 $1,126 The accompanying notes are an integral part of these financial statements. COMDIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED JUNE 29, 1997 - (Unaudited) Note A: CONSOLIDATED FINANCIAL STATEMENTS_______________________ The financial information included as of June 29, 1997 and for the six months ended June 29, 1997 and June 30, 1996 is unaudited. The financial information reflects all normal recurring adjustments, except for Statement of Financial Accounting Standards ("SFAS") No. 109 adjustments, which are, in the opinion of management, necessary for a fair statement of results for such periods. Accounting policies followed by Comdial Corporation (the "Company") are described in Note 1 to the consolidated financial statements in its Annual Report to Stockholders for the year ended December 31, 1996. The consolidated financial statements for 1997 contained herein should be read in conjunction with the 1996 financial statements, including notes thereto, contained in the Company's Annual Report to the Stockholders for the year ended December 31, 1996. Certain amounts in the 1996 consolidated financial statements have been reclassified to conform to the 1997 presentation. The results of operations for the six months ended June 29, 1997 are not necessarily indicative of the results for the full year. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Note B: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES______________ The preparation of financial statements in conformity with generally accepted accounting principles ("GAAP") requires management to make certain estimates and assumptions that affect reported amounts of assets, liabilities, revenues, and expenses. GAAP also requires disclosure of contingent assets and liabilities as of June 29, 1997. Actual results may differ from those estimates. Cash and cash equivalents are defined as short-term liquid investments that are readily convertible into cash with maturities, when purchased, of less than 90 days. Under the Company's current cash management policy, borrowings from the revolving credit facility are used for operating purposes. The revolving credit facility is reduced by cash receipts that are deposited daily. Bank overdrafts of $1.4 million and $1.9 million are included in accounts payable at June 29, 1997 and December 31, 1996, respectively. Bank overdrafts consist of outstanding checks that have not (1) cleared the bank and (2) been funded by the revolving credit facility (see Note D). The Company considers the outstanding checks to be a bank overdraft. The Company reports the revolving credit facility activity on a net basis in the Consolidated Statements of Cash Flows. Note C: INVENTORIES_____________________________________________ Inventories consist of the following: _________________________________________________________________ June 29, December 31, In thousands 1997 1996 Finished goods $5,745 $6,529 Work-in-process 3,838 3,681 Materials and supplies 10,306 9,376 Total $19,889 $19,586 _________________________________________________________________ Note D: BORROWINGS______________________________________________ Since February 1, 1994, Fleet Capital Corporation ("Fleet") has held substantially all of the Company's indebtedness. Long-term Debt. Long-term debt consists of the following: _________________________________________________________________ June 29, December 31, In thousands 1997 1996 Loans payable to Fleet Acquisition loan $6,396 $7,249 Equipment loans I & II 2,138 463 Revolving credit 3,272 1,749 Promissory note 5,600 7,000 Capitalized leases 117 284 Other debt _ 307 311 Total debt 17,830 17,056 Less current maturities on debt _7,140 5,343 Total long-term debt $10,690 $11,713 _________________________________________________________________ In 1994, the Company and Fleet entered into a loan and security agreement (the "Loan Agreement") pursuant to which Fleet agreed to provide the Company with two term loans evidenced by notes in the original principal amounts of $6.0 million and $1.3 million and a $9.0 million revolving credit loan facility. On March 13, 1996, the Company and Fleet amended the Loan Agreement to provide the Company with a $10.0 million acquisition loan ("Acquisition Loan"), $3.5 million equipment loan ("Equipment Loan"), and $12.5 million revolving credit loan facility ("Revolver"). The balance of the term loans outstanding immediately prior to the amendment totaling $3.6 million were paid with advances from the Revolver of $2.9 million and the Equipment Loan ("Equipment Loan I") of $706,000. Equipment Loan I is payable in equal monthly principal installments of $27,000, with the balance due on June 1, 1998. On March 20, 1996, the Company borrowed $8.5 million under the Acquisition Loan which was used to purchase Aurora Systems, Inc. ("Aurora") and Key Voice Technologies, Inc. ("KVT"). The Acquisition Loan is payable in equal monthly principal installments of $142,142, with the balance due on February 1, 2001. On February 5, 1997, the Company borrowed an additional $1.9 million under the Equipment Loan ("Equipment Loan II") which was used to purchase surface mount technology ("SMT") equipment to further expand the Company's SMT line capacity. Equipment Loan II is payable in equal monthly principal installments of $31,667, with the balance due on February 1, 2001. Availability under the Revolver is based on eligible accounts receivable and inventory, less funds already borrowed, and may be as much as $12.5 million. On June 28, 1996, the Company and Fleet amended the Loan Agreement to adjust availability under the Revolver by establishing a special availability reserve of $4.0 million and modified certain covenants. The Acquisition Loan, Equipment Loans I and II, and the Revolver carry interest rates at either Fleet's prime rate or London's Interbank Offering Rate ("LIBOR") at the Company's option. The interest rates can be adjusted annually based on a debt to earnings ratio which will vary the rates from minus 0.50% to plus 0.50% of the Fleet prime rate and from plus 1.50% to 2.50% above LIBOR. As of June 29, 1997 and December 31, 1996, the prime interest rates were 8.50% and 8.25%, respectively. The LIBOR rate as of June 29, 1997, was 5.69% with approximately 89% of the loans based on LIBOR. The LIBOR rate as of December 31, 1996, was 5.66% with approximately 79% of the loans based on LIBOR. As of June 29, 1997, the Company's borrowing rate for prime was 9.00%, and the LIBOR borrowing rate was 8.19%. The Company's Promissory Note payable to the former shareholders of KVT of $7.0 million, related to the acquisition of KVT, carries an interest rate equal to the prime rate with annual payments of $1.4 million plus accumulated interest for five years which started on March 20, 1997. Capital leases are with various financing facilities which are payable based on the terms of each individual lease. Other debt consists of a mortgage acquired in conjunction with the acquisition of KVT. The mortgage requires a monthly payment of $2,817, including interest at a rate of 8.75%. The final payment is due on August 1, 2005. Scheduled maturities of current and long-term debt for the Fleet Loans (as defined in the Loan Agreement), the Promissory Note, and other debt (excluding the Revolver and leasing agreements) are as follows: _________________________________________________________________ Principal In thousands Fiscal Years Installments_ Loans payable 1997 $1,212 * 1998 3,632 1999 3,494 2000 3,494 2001 2,343 Beyond 2001 266 __* The remaining aggregate for 1997.___________________________ Debt Covenants. The Company's indebtedness to Fleet is secured by liens on the Company's accounts receivable, inventories, intangibles, land, and other property. Among other restrictions, the amended Loan Agreement with Fleet also contains certain financial covenants that relate to specified levels of consolidated tangible net worth, profitability, and other financial ratios. The amended Loan Agreement also contains certain limits on additional borrowings. On March 27, 1997, the Company and Fleet amended the Loan Agreement to modify certain Loan Agreement covenants. As of June 29, 1997, the Company is in compliance with all the covenants and terms as defined in the Loan Agreement. Note E: EARNINGS PER SHARE______________________________________ For the three and six month periods ended June 29, 1997 and June 30, 1996, earnings per share were computed by dividing net income by the weighted average number of common shares outstanding. Stock options were antidulitive for such three and six month periods of 1997 and 1996. Note F: INCOME TAXES____________________________________________ The components of the income tax expense (benefit) based on the liability method for the six months are as follows: _________________________________________________________________ June 29, June 30, In thousands 1997 1996 Current - Federal $100 $34 State 112 60 Deferred - Federal (214) (714) State (5) (22) Total provision ($7) ($642) _________________________________________________________________ The income tax provision reconciled to the tax computed at statutory rates for the six months are summarized as follows: _________________________________________________________________ June 29, June 30, In thousands 1997 1996 Federal tax (benefit) at statutory rate (35% in 1997 and 1996) $632 ($397) State income taxes (net of federal tax benefit) 73 39 Nondeductible charges 193 67 Alternative minimum tax 56 15 Utilization of operating loss carryover (742) 370 Adjustment of valuation allowance (219) (736) Income tax provision ($7) ($642) _________________________________________________________________ Net deferred tax assets of $5.5 million and $5.2 million have been recognized in the accompanying Consolidated Balance Sheets at June 29, 1997 and December 31, 1996, respectively. The components of the net deferred tax assets are as follows: _________________________________________________________________ June 29, December 31, In thousands 1997 1996 Total deferred tax assets $27,153 $27,709 Total valuation allowance (19,625) (20,240) Total deferred tax asset - net 7,528 7,469 Total deferred tax liabilities (2,069) (2,230) Total net deferred tax asset $5,459 $5,239 _________________________________________________________________ Management reduced the valuation allowance by $615,000 during the six month period ended June 29, 1997. This reduction was primarily related to the re-evaluation of the future utilization of deferred tax assets of $219,000, and the utilization of deferred tax assets and liabilities, and operating loss carryforwards of $396,000. The Company periodically reviews the requirements for a valuation allowance and makes adjustments to such allowance when changes in circumstances result in changes in management's judgment about the future realization of deferred tax assets. Based on a continual evaluation of the realization of the deferred tax assets, the valuation allowance was reduced and a net tax benefit of $219,000 was recognized in the quarter ended March 30, 1997. Management believes that it is more likely than not that the Company will realize these tax benefits. However, the tax benefits could be reduced in the near term if estimates of future taxable income during the carryforward periods are reduced. The Company has net operating loss carryforwards ("NOLs") and tax credit carryovers of approximately $60.7 million and $3.1 million, respectively. If not utilized, the NOLs and tax credit carryovers will expire in various years through 2007. Based on the Company's interpretation of Section 382 of the Internal Revenue Code, the reduction of the valuation allowance was calculated assuming a 50% ownership change, which could limit the utilization of the tax net operating loss and tax credit carryforwards in future periods starting at the time of the change. An ownership change could occur if changes in the Company's stock ownership exceeds 50% of the value of the Company's stock during any three year period. The amount of net operating loss carryforwards expected to be utilized resulting in the reduction of the valuation allowance of $5.5 million assumes an ownership change will take place. COMDIAL CORPORATION AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion is intended to assist the reader in understanding and evaluating the financial condition and results of operations of Comdial Corporation and its subsidiaries (the "Company"). This review should be read in conjunction with the financial statements and accompanying notes. This analysis attempts to identify trends and material changes that occurred during the periods presented. Prior years have been reclassified to conform to the 1997 reporting basis (see Note A to the Consolidated Financial Statements). General Development of the Business The Company is a Delaware corporation based in Charlottesville, Virginia. The Company was originally incorporated in Oregon in 1977. In 1982, the Company was reincorporated in Delaware. The Company's Common Stock is traded over-the-counter and is quoted on the National Association of Security Dealers Automated Quotation System ("Nasdaq National Market") under the symbol: CMDL. The Company is engaged in the design, development, manufacture, distribution, and sale of advanced telecommunications products and system solutions. The Company's products accommodate the needs of organizations requiring up to approximately 500 telephones. The Company believes that it is a leading supplier to this market, with an installed base estimated to be approximately 250,000 telephone systems and 3,000,000 telephones. The Company's products include digital and analog telephone switches and telephones, as well as a wide range of product enhancements to the Company's telephone systems. The Company's growth over the past sixteen quarters has occurred principally as a result of sales of digital telephone systems introduced by the Company since 1992 and Computer-Telephony Integration ("CTI") products introduced since 1993. CTI is an emerging industry, consisting of connectivity and applications software for various hardware platforms such as switching units, private branch exchanges ("PBX") and automatic call distributors ("ACD"). CTI products and applications merge the power of modern telephone systems with that of computers to provide integrated solutions to broad communications problems. An example of a CTI product with a vertical market application is the Company's E-911 emergency dispatch system ("E-911"). E-911 systems use caller identification technology in conjunction with computer databases in order to access information such as the street address and profile of an emergency caller. This information is displayed on the dispatcher's computer thereby putting the dispatcher in a position to send help quickly to the correct address and to provide emergency personnel with caller specific information needed to respond appropriately to the situation. This growing industry and growing user interest in CTI has added a new dimension to the business telecommunications market. In addition to the proprietary products offered by the Company and others, the acceptance of industry standards now makes it possible for independent software developers to market software applications geared toward solving or simplifying a myriad of common business communication problems. Initially, implementation of CTI was limited to specialized applications written to the proprietary interfaces of individual switch makers. This yielded a small number of expensive products. With the broad acceptance of de facto standards from major computer software suppliers, it is now possible to implement CTI on a much broader scale and at a substantially lower cost. In a local area network ("LAN") environment, major computer software suppliers provide software instructions (service provider interfaces or "SPIs") to telephone system manufacturers committed to producing the connectivity software and hardware required to communicate with the telephony server. The telephone switch effectively becomes another node on a client-server network. For users not on a network, the desktop approach promoted by Microsoft Corporation is an alternative solution. In this case, telephone system manufacturers design special software links to Microsoft's SPI. Telephony software is available as an option on current Windows@TM operating systems and is standard on Windows95TM and Windows NT. The Company focuses its distribution of products primarily through a network of approximately 1700 independent dealers that sell the Company's products. This enables the Company to achieve broad geographic penetration, as well as access to some of the fastest growing markets in the country. The Company's distribution network centers around a key group of wholesale supply houses, through which the Company's products are made available to dealers. These dealers market the Company's products to small and medium sized organizations and divisions of larger organizations. The Company's strategy enables it to virtually eliminate bad debt exposure and minimize administration, credit checking, and sales expense, as well as inventory levels. Wholesale supply houses, in turn, are able to sell related products such as cable, connectors, and installation tools. Dealers have the benefits of competitive sourcing and reduced inventory carrying costs. The Company is pursuing six fundamental business strategies: (1) maintaining a leadership position in its core business of delivering advanced telecommunications systems to the U.S. domestic market through wholesale supply house distribution channels, (2) achieving growth through expansion into international markets, (3) expanding its National Accounts program, (4) introducing new products to increase sales in the hospitality market, (5) strengthening its Government Resellers program, and (6) maintaining a leadership position in the emerging market for systems solutions based on CTI. The Company seeks to support these strategies by: (1) maintaining a broad and efficient distribution network; (2) targeting small to medium sized organizations; (3) offering a broad range of products; (4) developing strategic alliances; (5) promoting CTI applications; (6) promoting industry accepted interface standards; and (7) developing open application interface ("OAI"). The market for the Company's products is highly competitive. The Company competes with approximately 20 companies, many of which, such as Lucent Technologies, Inc., Nortel Inc., and Toshiba Corp., have significantly greater resources. Key competitive factors in the sale of telephone systems and related applications include performance, features, reliability, service and support, name recognition, distribution capability, place of operation, and price. The Company believes that it competes favorably in its market with respect to the performance, features, reliability, distribution capability, and price of its systems, as well as the level of service and support that the Company provides. In marketing its telephone systems, the Company also emphasizes quality, as evidenced by its ISO 9001 certification, and high technology features. In addition, the Company often competes to attract and retain dealers for its products. The Company expects that competition will continue to be intense in the markets it serves, and there can be no assurance that the Company will be able to continue to compete successfully in the marketplace or that the Company will be able to maintain its current dealer network. During the first six months of 1997, the Company has introduced several new products such as the FX Series, the first business telephone switch designed specifically as a platform for CTI applications in employment environments of 25 to 100 employees. The FX Series is similar to a computer server pre- loaded with all the CTI application software such as voice mail, automatic call distribution, "screen pops" of caller account records, and voice over the internet. FX field trial units are presently being sent out with the anticipation of normal product shipments occurring in the middle of the second half of 1997. In addition, the Company introduced the Personal Computer Interface Unit ("PCIU") that extends CTI capability to smaller digital switches and makes the Company one of only a handful of manufacturers able to economically deliver CTI throughout an entire product family. With these smaller platforms, the Company will be able to offer CTI-based market solutions to thousands of small businesses who want an economical but sophisticated system. In the first quarter of 1996, the Company acquired two companies involved in CTI: Aurora Systems, Inc. ("Aurora") and Key Voice Technologies, Inc. ("KVT"). Aurora, based in Acton, Massachusetts, is a leading provider of off-the-shelf CTI products. KVT, based in Sarasota, Florida, develops, assembles, markets, and sells voice processing systems and related products for business applications. The purchases of Aurora and KVT have expanded the Company's CTI product base, distribution channel, and market niches. For the first six months of 1997, the acquisitions of Aurora and KVT positively affected consolidated revenues by $7.4 million and profitability by $3.3 million (excluding any acquisition and corporate allocation costs). Both companies are wholly-owned subsidiaries of the Company. Results of Operations Revenue and Earnings Second Quarter 1997 vs 1996 The Company's performance improved significantly for the second quarter of 1997 when compared with the same period in 1996. The Company continues to show growth in sales as well as improvement in gross profit margin when compared to previous quarters. Income before income taxes for the second quarter of 1997 increased to $1.2 million as compared with a loss of $1.6 million for the comparable period in 1996. Net sales increased by 25% for the second quarter of 1997 to $29.4 million, compared with $23.6 million in the second quarter of 1996. Digital, DXP, and CTI product sales increased substantially but were offset slightly with a drop in sales of analog and custom manufacturing products. Gross profit increased by 44% for the second quarter of 1997 to $11.8 million or 40% of sales, compared with $8.2 million or 35% of sales in the second quarter of 1996. This increase was primarily attributable to higher sales of digital, DXP, and CTI products which have a higher product margin, and higher margins that Aurora and KVT products have added to the business. Selling, general and administrative expenses increased by 15% for the second quarter of 1997 to $7.4 million, compared with $6.5 million in 1996. This increase was primarily due to: (1) higher promotional costs of $483,000 associated with increased sales through Preferred Dealers, and (2) higher administrative, marketing, and sales expenses of $170,000 associated with Aurora and KVT. Miscellaneous expenses, net, decreased by 55% for the second quarter of 1997 to $90,000, compared with $200,000 in the second quarter of 1996. This decrease was primarily attributable to funds received from various companies to perform non-recurring engineering development work. Income tax expense (benefit) increased in the second quarter of 1997 to $104,000 compared with $72,000 for the second quarter of 1996. This increase is primarily due to the higher quarterly tax expense estimate the Company calculated which was based on anticipated year end results for both 1997 and 1996. Six Months 1997 vs 1996 The Company reported a significant gain before taxes for the first six months of 1997 of $1.8 million as compared with a loss of $1.1 million for the comparable period in 1996. The stronger performance of the Company was primarily attributable to the continued growth of the Company's digital, DXP, and CTI products. Net sales increased by 23% for the first six months of 1997 to $56.2 million, compared with $45.6 million for the same period in 1996. Business system sales increased by 25% or $10.7 million, compared with the same period of 1996. Digital, DXP, and CTI product sales increased substantially by 35% but were slightly offset with a decline of 24% in sales of analog products and custom manufacturing which the Company expected. The continued sales growth across the board reflects the consistent growth in the Company's distribution channels. Some of the most significant sales gains were in certain market channels such as national accounts, and international and hospitality markets. The acquisitions of Aurora and KVT boosted the Company's sales growth with sales of $7.4 million for the first half of 1997 compared with $3.3 million for the same period of 1996, which covered only sales from March 20, 1996 to the end of the second quarter. Management anticipates that the factors which led to the positive increase in sales and net income for the first six months of 1997, will continue to affect the overall performance of the second half of 1997. In addition, management believes that sales of analog telephone systems and custom manufacturing will continue to decrease for the second half of 1997 when compared with 1996. The Company plans to continue to improve sales by (1) continual growth in digital, DXP, and CTI product sales, (2) ongoing growth in national accounts, and international and hospitality markets, and (3) introduction of new products which are scheduled to begin shipping in the third and fourth quarters of 1997. The following table presents certain relevant net sales information concerning the Company's principal product lines for the first six months of 1997 and 1996. _______________________________________________________________________ June 29, June 30, In thousands 1997 1996 Sales Business Systems Digital $23,431 $19,390 DXP 11,640 8,041 CTI 12,912 8,151 Analog 6,032 7,766 Sub-total 54,015 43,348 Proprietary and Specialty Terminals 2,463 2,123 Custom Manufacturing 404 763 Gross Sales 56,882 46,234 Sales discount and allowances 648 624 Net Sales $56,234 $45,610 ______________________________________________________________________ Gross profit increased by 46% to $22.8 million for the first six months of 1997, compared with $15.7 million for the same period of 1996. Gross profit as a percent of sales increased to 41%, compared with 34% for the same period of 1996. This increase was primarily attributable to higher sales of digital, DXP, and CTI products which have a higher product margin, and a higher portion of sales through direct to user and dealer channels. Selling, general and administrative expenses increased by 24% for the first six months of 1997 to $14.6 million, compared with $11.8 million for the first six months of 1996. This increase was primarily due to: (1) an increase in expenses of $1.1 million associated with Aurora and KVT; (2) higher promotional costs associated with increased sales through Preferred Dealers, (3) additional expenses associated with the implementation of new cost reduction programs, (4) costs associated with hiring a new executive officer, and (5) a one time charge of $312,000 associated with an international project. Engineering, research and development expenses increased by 12% for the first six months of 1997 to $3.3 million, compared with $2.9 million for the same period of 1996. This increase was primarily due to an increase in expenses of $441,000 associated with additional engineering staff from Aurora and KVT. Interest Expense increased by 21% for the first six months of 1997 to $876,000, compared with $726,000 for the same period of 1996. This increase is primarily due to the additional interest expense of $200,000 for the first three months of 1997 when compared with the same period of 1996. The first quarter differences were a direct result of the March 20, 1996 acquisitions of Aurora and KVT (see Note D to the Consolidated Financial Statements). Goodwill amortization expense increased by 98% for the first six months of 1997 to $1.9 million, compared with $1.0 million for the same period of 1996. This increase was primarily due to (1) goodwill associated with the acquisitions of Aurora and KVT of $773,000 and (2) the write-off of the remaining goodwill of $164,000 associated with an earlier acquisition. Income tax expense (benefit) decreased in the first six months of 1997 to a net tax benefit of ($7,000) compared with a net tax benefit of ($642,000) for the same period of 1996. This decrease was primarily due to the recognition of a tax benefit of $219,000 for 1997 compared with 736,000 for 1996. The tax benefits, recognized in 1997 and 1996, were a result of a reduction in the valuation allowance relating to the Company's federal net operating loss carryforwards ("NOLS") (see Note F to the Consolidated Financial Statements). Tax expense for the first six months of 1997 increased to $212,000 compared with $94,000 for the same period of 1996. This increase is primarily due to the higher quarterly tax expense estimate the Company calculated which was based on anticipated year end results for both 1997 and 1996. Liquidity The Company is indebted to Fleet Capital Corporation ("Fleet") which holds substantially all of the Company's indebtedness. The Company and Fleet entered into a loan and security agreement (the "Loan Agreement") on February 1, 1994. Under the Loan Agreement, Fleet provided the Company with term loans aggregating $7.3 million and a revolving credit loan facility in an amount up to $9.0 million. On March 13, 1996, the Company and Fleet amended the Loan Agreement to provide the Company with a $10.0 million acquisition loan ("Acquisition Loan"), $3.5 million equipment loan ("Equipment Loan"), and $12.5 million revolving credit loan facility ("Revolver"). The term loan balances outstanding immediately prior to the amendment were paid with advances from the Revolver and the Equipment Loan ("Equipment Loan I"), respectively (see Note D to the Consolidated Financial Statements). Equipment Loan I is payable in equal monthly principal installments of $27,000, with the balance due on June 1, 1998. On March 20, 1996, the Company borrowed $8.5 million under the Acquisition Loan which was used to purchase Aurora and KVT. The Acquisition Loan is payable in equal monthly principal installments of $142,142, with the balance due on February 1, 2001. On February 5, 1997, the Company borrowed an additional $1.9 million under the Equipment Loan ("Equipment Loan II") which was used to purchase surface mount technology ("SMT") equipment to further expand its SMT line capacity. Equipment Loan II is payable in equal monthly principal installments of $31,667, with the balance due on February 1, 2001. At the Company's option, the Acquisition Loan, Equipment Loans, and Revolver bear interest at rates based on either Fleet's prime rate or London's Interbank Offering Rate ("LIBOR"). The interest rates can be adjusted annually based on the Company's debt to earnings ratio which will vary the rates from minus 0.50% to plus 0.50% of the Fleet Prime Rate and from plus 1.50% to 2.50% above LIBOR. As of June 29, 1997 and December 31, 1996, the prime interest rates were 8.50% and 8.25%, respectively. The LIBOR rate as of June 29, 1997, was 5.69% with approximately 89% of the loans based on LIBOR. The LIBOR rate as of December 31, 1996, was 5.66% with approximately 79% of the loans based on LIBOR. As of June 29, 1997, the Company's borrowing rate for prime was 9.00%, and the LIBOR borrowing rate was 8.19%. Availability under the Revolver is based on eligible accounts receivable and inventory, less funds already borrowed. The Company's indebtedness to Fleet is secured by liens on substantially all of the Company's assets and the Loan Agreement contains certain financial covenants (see Note D to the Consolidated Financial Statements). From time to time, the Company and Fleet have amended both covenants and terms of the Loan Agreement. The Company is currently in compliance with all the covenants and terms set forth in the amended Loan Agreement. The Company's Promissory Note of $7.0 million, which was part of the purchase price for KVT, carries an interest rate based on prime. The Promissory Note is paid yearly in the amount of $1.4 million over five years with the final payment due on March 20, 2001. Capital leases are with various financing facilities which are payable based on the terms of each individual lease. Other debt consists of a mortgage that was acquired as part of the KVT acquisition and has a monthly mortgage payment of $2,817 which includes interest at 8.75%. The final payment is due on August 01, 2005. The following table sets forth the Company's cash and cash equivalents, current maturities on debt and working capital at the dates indicated. _________________________________________________________________ In thousands June 29, 1997 December 31 ,1996 Cash and cash equivalents $85 $180 Current maturities on debt 7,140 5,343 Working capital 11,664 10,608 _________________________________________________________________ All operating cash requirements are currently being funded through the Revolver. Cash decreased primarily due to the timing of receipts. Current maturities on debt increased primarily due to an increase in the Revolver of $1.5 million and the portion relating to Equipment Loan II of $348,000 when compared to December 31, 1996. Working capital increased by $1.1 million primarily due to an increase in accounts receivable. Accounts receivable increased at the end of the second quarter of 1997 by 24% or $2.3 million, compared to December 31, 1996. This increase was primarily due to the increase in sales and the timing of shipments in the second quarter of 1997. Prepaid expenses and other current assets decreased by 18% or $246,000, primarily due to the decrease in miscellaneous receivables and various prepaid accounts. Other accrued liabilities decreased by 17% or $631,000, primarily due to promotional costs paid during the first quarter of 1997 which related to 1996. In October 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." The new standard defines a fair value method of accounting for stock options and similar equity instruments. Pursuant to the new standard, companies can either adopt the standard or continue to account for such transactions under Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees." The Company has elected to continue to account for such transactions under APB No. 25. The Company has disclosed in its 1996 Annual Report pro forma net income and earnings per share as if the Company had applied the new method of accounting. Since the Company is going to continue to apply APB No. 25, complying with the new standard will have no effect on earnings or the Company's cash flow. In February 1997, FASB issued SFAS No. 128, "Earnings Per Share." The new standard requires dual presentation of both basic and diluted earnings per share ("EPS") on the face of the earnings statement and requires a reconciliation of both basic and diluted EPS calculations. This statement is effective for financial statements for both interim and annual periods ending December 15, 1997. This statement will be effective for the Company's 1997 fiscal year. Basic EPS will not be materially different from diluted EPS since potential common shares in the form of stock options are not materially dilutive. During 1997 and 1996, all of the Company's sales, net income, and identifiable net assets were attributable to the telecommunications industry except sales relating to custom manufacturing. Capital Resources Capital expenditures in the first six months of 1997 and for the comparable period of 1996 were $2.7 million and $1.5 million, respectively. Capital additions for 1997 and 1996 were provided by funds from operations, and borrowings from Fleet. The Company anticipates spending approximately $4.5 million on capital expenditures for fiscal year 1997 which includes equipment for manufacturing and advanced technology. The Company plans to fund all future capital expenditure additions through working capital from Fleet and long-term lease arrangements. Management expects these sources to provide the capital assets necessary for near-term future operations and future product development. The Company has a commitment from Crestar Bank for the issuance of letters of credit in an aggregate amount not to exceed $500,000 at any one time. At June 29, 1997, the amount of available commitments under the letter of credit facility with Crestar Bank was $366,000. "Safe Harbor" Statement Under The Private Securities Litigation Reform Act Of 1995 The Company's Form 10-Q may contain some forward-looking statements that are subject to risks and uncertainties, including, but not limited to, the impact of competitive products, product demand and market acceptance risks, reliance on key strategic alliances, fluctuations in operating results, delays in development of highly complex products, and other risks detailed from time to time in the Company's filings with the Securities and Exchange Commission. These risks could cause the Company's actual results for 1997 and beyond to differ materially from those expressed in any forward-looking statement made by, or on behalf of, the Company. COMDIAL CORPORATION AND SUBSIDIARIES PART II - OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K. (a) 3. Exhibits Included herein: (11) Statement re Computation of Per Share Earnings. (27) Financial Data Schedule. (b) Reports on Form 8-K The Registrant has not filed any reports on Form 8-K during the quarterly period. __________________ Items not listed if not applicable. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Comdial Corporation (Registrant) Date: August 8, 1997 By: /s/ Wayne R. Wilver Wayne R. Wilver Senior Vice President, Chief Financial Officer, Treasurer and Secretary EX-27 2
5 1,000 6-MOS DEC-31-1997 JUN-29-1997 85 0 12,083 110 19,889 33,042 45,281 28,731 76,579 21,378 0 17,830 0 87 40,683 76,579 54,078 56,234 32,691 33,424 20,128 0 876 1,806 (7) 1,813 0 0 0 1,813 0.21 0.21
EX-11 3 COMDIAL CORPORATION AND SUBSIDIARIES Exhibit 11 Statement re Computation of Per Share Earnings Three Months Ended Six Months Ended June 29, June 30, June 29, June 30, 1997 1996 1997 1996 PRIMARY Net income $1,142,000 ($1,628,000) $1,813,000 ($443,000) Weighted average number of common shares outstanding during the period 8,655,664 8,564,754 8,619,813 8,377,765 Add - common equivalent shares (determined using the "treasury stock" method) representing shares issuable upon exercise of: Stock options 128,376 165,177 64,903 152,585 Weighted average number of shares used in calculation of primary earnings per common share 8,784,040 8,729,931 8,684,716 8,530,350 Earnings per common share: $0.13 ($0.19) $0.21 ($0.05) FULLY DILUTED Net income applicable to common shares $1,142,000 ($1,628,000) $1,813,000 ($443,000) Weighted average number of shares used in calculation of primary earnings per common share 8,784,040 8,729,931 8,684,716 8,530,350 Add (deduct) incremental shares representing: Shares issuable upon exercise of stock options included in primary calculation (128,376) (165,177) (64,903) (152,585) Shares issuable based on period-end market price or weighted average price: Stock options 98,961 165,704 98,359 153,482 Weighted average number of shares used in calcula- tion of fully diluted earnings per common share 8,754,625 8,730,458 8,718,172 8,531,247 Fully diluted earnings per common share $0.13 ($0.19) $0.21 ($0.05) -----END PRIVACY-ENHANCED MESSAGE-----