-----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, VnUMGdqu5o/7aS5q7JfhJf21kjdZxsFbydtjl0mPdoGGFi2qsEYgqK+y9U5fuGf1 1SduH6A1bXynEzDFCQLZqw== 0000230131-99-000003.txt : 19990818 0000230131-99-000003.hdr.sgml : 19990818 ACCESSION NUMBER: 0000230131-99-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990704 FILED AS OF DATE: 19990817 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: SEC FILE NUMBER: 000-09023 FILM NUMBER: 99694819 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 July 4, 1999 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. 8,934,414 common shares as of July 4, 1999. - ------------------------------------------------------------------------------ COMDIAL CORPORATION AND SUBSIDIARIES INDEX PAGE PART I - FINANCIAL INFORMATION ITEM 1: Financial Statements Consolidated Balance Sheets as of July 4, 1999 and December 31, 1998 3 Consolidated Statements of Operations for the Three and Six Months ended July 4, 1999 and June 28, 1998 4 Consolidated Statements of Cash Flows for the Six Months ended July 4, 1999 and June 28, 1998 5 Notes to Consolidated Financial Statements 6-13 ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 14-21 PART II - OTHER INFORMATION ITEM 3: Quantitative and Qualitative Disclosures about Market Risks 22 ITEM 6: Exhibits and Reports on Form 8-K 22 - -------------------------------------------------------------------------- COMDIAL CORPORATION AND SUBSIDIARIES PART I. FINANCIAL INFORMATION ITEM 1: Financial Statements Consolidated Balance Sheets - (Unaudited) _________________________________________________________________________ July 4, Dec. 31, In thousands except par value 1999 1998 _________________________________________________________________________ Assets Current assets Cash and cash equivalents $2,513 $1,599 Accounts receivable (less allowance 26,757 23,006 for doubtful accounts: 1999 - $445; 1998 - $198) Inventories 18,439 21,434 Prepaid expenses and other current assets 5,003 4,815 ________________________________________________________________________ Total current assets 52,712 50,854 Property - net 18,130 18,023 Goodwill 12,801 14,079 Deferred tax asset - net 16,368 17,257 Other assets 11,445 8,777 _________________________________________________________________________ Total assets $111,456 $108,990 ========================================================================= _________________________________________________________________________ Liabilities and Stockholders' Equity Current liabilities Accounts payable $9,715 $11,034 Accrued payroll and related expenses 2,832 2,942 Accrued promotional allowances 1,444 1,877 Other accrued liabilities 2,191 3,346 Current maturities of debt 4 6 ________________________________________________________________________ Total current liabilities 16,186 19,205 Long-term debt 25,441 22,140 Deferred tax liability 2,968 3,123 Other long-term liabilities 1,445 1,361 Commitments and contingent liabilities (see Note H) - - ________________________________________________________________________ Total liabilities 46,040 45,829 Stockholders' equity Common stock ($0.01 par value) and paid-in capital (Authorized 30,000 shares; issued shares: 1999 = 8,934; 1998 = 8,818) 116,614 116,039 Other (1,242) (1,243) Accumulated deficit (49,956) (51,635) ________________________________________________________________________ Total stockholders' equity 65,416 63,161 Total liabilities and stockholders' equity $111,456 $108,990 ======================================================================== The accompanying notes are an integral part of these financial statements. - ------------------------------------------------------------------------------- COMDIAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations - (Unaudited) In thousands except per share amounts ______________________________________________________________________________ Three Months Ended Six Months Ended July 4, June 28, July 4, June 28, 1999 1998 1999 1998 ______________________________________________________________________________ Net sales $35,743 $31,317 $67,607 $60,598 Cost of goods sold 20,088 19,101 39,251 36,495 ______________________________________________________________________________ Gross profit 15,655 12,216 28,356 24,103 Operating expenses Selling, general & administrative 10,026 7,545 18,637 15,160 Engineering, research & development 2,338 1,493 4,424 3,044 Goodwill amortization expense 799 683 1,583 1,346 ______________________________________________________________________________ Operating income 2,492 2,495 3,712 4,553 Other expense Interest expense 377 273 759 548 Miscellaneous expenses (income)- net (28) 14 101 194 ______________________________________________________________________________ Income before income taxes 2,143 2,208 2,852 3,811 Income tax expense 852 350 1,173 114 ______________________________________________________________________________ Net income applicable to common stock $1,291 $1,858 $1,679 $3,697 ============================================================================== Earnings per common share and common equivalent share: Basic $0.14 $0.21 $0.19 $0.42 Diluted $0.14 $0.20 $0.19 $0.41 Weighted average common shares outstanding: Basic 8,948 8,810 8,944 8,762 Diluted 8,986 9,125 8,985 9,037 The accompanying notes are an integral part of these financial statements. - -------------------------------------------------------------------------------- COMDIAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows - (Unaudited) Six Months Ended July 4, June 28, In thousands 1999 1998 ___________________________________________________________________________ Cash flows from operating activities: Cash received from customers $64,986 $58,147 Other cash received 770 493 Interest received 4 28 Cash paid to suppliers and employees (65,472) (57,831) Interest paid on debt (790) (785) Income taxes paid (215) (426) ___________________________________________________________________________ Net cash used in operating activities (717) (374) Cash flows from investing activities: Acquisition costs for Array Telecom Corp. and Key Voice Technologies, Inc. (1) (4) Proceeds received from the sale of FastCall - 178 Proceeds from the sale of equipment 1 100 Capital expenditures (1,682) (2,057) ___________________________________________________________________________ Net cash used in investing activities (1,682) (1,783) Cash flows from financing activities: Net borrowings under Revolving Credit Facility 3,304 2,500 Proceeds from issuance of common stock 14 248 Principal payments on debt - (5,893) Principal payments on capital lease obligations (5) (35) ___________________________________________________________________________ Net cash provided by (used in) financing activities 3,313 (3,180) ___________________________________________________________________________ Net increase (decrease) in cash and cash equivalents 914 (5,337) Cash and cash equivalents at beginning of year 1,599 5,673 ___________________________________________________________________________ Cash and cash equivalents at end of period $2,513 $336 =========================================================================== Reconciliation of net income to net cash used in operating activities: Net income $1,679 $3,697 ___________________________________________________________________________ Depreciation and amortization 4,557 3,734 Increase in accounts receivable (3,751) (5,303) Inventory provision 918 1,293 Decrease (increase) in inventory 2,077 (85) Increase in other assets (4,583) (2,578) Decrease (increase) in deferred tax asset 756 (330) Decrease in accounts payable (1,319) (1,295) Decrease in other liabilities (1,614) (156) Increase in paid-in capital and other equity 563 649 ___________________________________________________________________________ Total adjustments (2,396) (4,071) ___________________________________________________________________________ Net cash used in operating activities ($717) ($374) =========================================================================== The accompanying notes are an integral part of these financial statements. - ------------------------------------------------------------------------------ COMDIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED JULY 4, 1999 - (Unaudited) Note A: CONSOLIDATED FINANCIAL STATEMENTS _____________________________________________________________________________ The financial information included as of July 4, 1999, and for the three and six months ended July 4, 1999 and June 28, 1998 is unaudited. The financial information reflects all normal recurring adjustments necessary for a fair statement of results for such periods. Accounting policies followed by Comdial Corporation ("Comdial") are described in Note 1 to the consolidated financial statements in its Annual Report to Stockholders for the year ended December 31, 1998. The consolidated financial statements for accounting periods in 1999 contained herein should be read in conjunction with the 1998 financial statements, including notes thereto, contained in Comdial's Annual Report to Stockholders for the year ended December 31, 1998. Certain amounts in the 1998 consolidated financial statements have been reclassified to conform to the 1999 presentation. The results of operations for the six months ended July 4, 1999, are not necessarily indicative of 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 to conform with generally accepted accounting principles ("GAAP") requires management to make certain estimates and assumptions that affect reported amounts of assets, liabilities, revenues, and expenses. GAAP also requires disclosure of contingent assets and liabilities as of July 4, 1999. Actual results may differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents are defined as short-term liquid investments with maturities, when purchased, of less than 90 days that are readily convertible into cash. Under Comdial's current cash management policy, borrowings from the revolving credit facility are used for operating purposes. The revolving credit facility is reduced at management's option by cash receipts that are deposited daily. Bank overdrafts of $3.0 million and $3.3 million are included in accounts payable as of July 4, 1999 and December 31, 1998, 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 revolving credit facility activity is reported on a net basis in the Consolidated Statements of Cash Flows. Revenue Recognition Comdial recognizes revenue as products are shipped. Returned products are credited against revenues as they are received back from the customer. The only exceptions to this policy are revenues from E911 systems and from embedded software. E911 revenues are recognized when installations have been completed and embedded software revenues are not recognized until the customer requests a code from Comdial enabling the software to be activated. Comdial's reporting of software revenue meets the requirements as set forth by Statement of Position 97-2 "Software Revenue Recognition." Other Long-lived Assets Long-lived assets are amortized based on the assets' useful lives. Long-lived assets are reviewed for impairment as circumstances change that might affect those assets. An impairment loss is not recognized unless a portion of the carrying amount of an asset is no longer recoverable using a test of recoverability that is based on expected future undiscounted cash flows. Note C: INVENTORIES __________________________________________________________________________ Inventories consist of the following: __________________________________________________________________________ July 4, Dec. 31, In thousands 1999 1998 __________________________________________________________________ Finished goods $8,748 $8,507 Work-in-process 2,620 3,568 Materials and supplies 7,071 9,359 ________________________ Total $18,439 $21,434 __________________________________________________________________________ Comdial provides reserves to cover product obsolescence and those reserves impact gross margin. Future reserves are dependent on management's estimates of the recoverability of costs of all inventory. Raw material obsolescence is mitigated by the commonality of component parts and finished goods by the low level of inventory relative to sales. Note D: BORROWINGS ________________________________________________________________________ In the third quarter of 1998, Comdial and NationsBank, N.A. ("NationsBank"), entered into a credit agreement (the "Credit Agreement"). The Credit Agreement provides Comdial with a $50 million revolving credit facility and a $5 million letter of credit subfacility. Comdial used $15.8 million under the revolving credit facility (the "Revolver") to pay off (1) its total indebtedness of $10.8 million to Fleet Capital Corporation ("Fleet"), (2) $4.4 million representing amounts owed under a promissory note including interest to the former owners of Key Voice Technologies, Inc. ("KVT"), and (3) $0.6 million of mortgages owed by KVT. Long-term Debt. Long-term debt consists of the following: _________________________________________________________________ July 4, Dec. 31, In thousands 1999 1998 _________________________________________________________________ Revolving Credit Facility (1) $25,436 $22,132 Capitalized leases (2) 9 14 __________________________ Total debt 25,445 22,146 Less current maturities on debt 4 6 __________________________ Total long-term debt $25,441 $22,140 _________________________________________________________________ (1) The Revolver made pursuant to the Credit Agreement with NationsBank carries an interest rate based on the LIBOR daily rate plus a specified margin. The interest rate can be adjusted quarterly based on Comdial's ratio of funded debt to earnings before interest, taxes, depreciation and amortization ("EBITDA"), which allows the rates to vary from 0.75% to 1.50% above the LIBOR daily rate. As of July 4, 1999 and December 31, 1998, Comdial's LIBOR based borrowing rates were 5.99% and 6.30%, respectively, which includes the additional applicable margin of 0.75%. Comdial can use the Revolver with NationsBank for working capital, equipment purchases, to finance permitted acquisitions, and for other general corporate purposes. The NationsBank Revolver (as defined in the Credit Agreement) does not require payment until August 31, 2003 with the option of possible credit extensions. (2) Capital leases are with various financing entities and are payable based on the terms of each individual lease. Debt Covenants Comdial's indebtedness to NationsBank is secured by liens on all of Comdial's properties and assets. The Credit Agreement with NationsBank contains certain financial covenants that relate to specified levels of consolidated net worth and other financial ratios. As of July 4, 1999, Comdial was in compliance with all of the covenants and terms of the Credit Agreement. Note E: EARNINGS PER SHARE _______________________________________________________________________ For the three and six months ended July 4, 1999 and June 28, 1998, earnings per common share ("EPS") were computed for both basic and diluted EPS to conform to Statement of Financial Accounting Standards ("SFAS") No. 128. Basic EPS for the three and six months presented were computed by dividing net income applicable to common shares by the weighted average number of common shares outstanding and common equivalent shares including any possible contingent shares. For the three and six months ended July 4, 1999 and June 28, 1998, diluted EPS were computed by dividing income attributable to common shareholders by the weighted average number of common and common equivalent shares outstanding during the period plus (in periods in which they had a dilutive effect) the effect of common shares contingently issuable, primarily from stock options. The following table discloses the quarterly information for the three and six months ended July 4, 1999 and June 28, 1998. _________________________________________________________________ Numerator Denominator EPS _________________________________________________________________ Three Months 1999 Basic EPS $1,291,000 8,948,304 $0.14 Diluted $1,291,000 8,985,774 $0.14 1998 Basic EPS $1,858,000 8,809,817 $0.21 Diluted $1,858,000 9,124,681 $0.20 Six Months 1999 Basic EPS $1,679,000 8,943,912 $0.19 Diluted $1,679,000 8,985,223 $0.19 1998 Basic EPS $3,697,000 8,762,139 $0.42 Diluted $3,697,000 9,037,404 $0.41 For further detail of EPS see Exhibit 11. ___________________________________________________________________ Note F: INCOME TAXES ___________________________________________________________________ The components of the income tax expense (benefit) based on the liability method for the six months are as follows: __________________________________________________________________ July 4, June 28, In thousands 1999 1998 __________________________________________________________________ Current - Federal $247 $245 State 169 199 Deferred - Federal 703 (322) State 54 (8) ___________________________ Income tax provision $1,173 $114 _________________________________________________________________ The income tax provision reconciled to the tax computed at statutory rates for the six months are summarized as follows: _________________________________________________________________ July 4, June 28, In thousands 1999 1998 _________________________________________________________________ Federal tax at statutory rate (35% in 1999 and 1998) $998 $1,334 State income taxes (net of federal tax benefit) 145 129 Nondeductible charges 10 66 Alternative minimum tax - 164 Utilization of operating loss carryover - (1,249) Adjustment of valuation allowance - (330) Other adjustments 20 - _______________________ Income tax provision $1,173 $114 _________________________________________________________________ Net deferred tax assets of $16.2 million and $17.0 million have been recognized in the accompanying Consolidated Balance Sheets as of July 4, 1999 and December 31, 1998, respectively. Comdial 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. Comdial has recognized the deferred tax assets, because it is management's belief that Comdial will more likely than not utilize the net operating losses ("NOLs") before they expire. Comdial has NOLs and tax credit carryovers of approximately $27.0 million and $1.8 million, respectively. If not utilized, the NOLs and tax credit carryovers will expire in various years through 2010. The components of the net deferred tax assets are as follows: ______________________________________________________________________ July 4, Dec. 31, In thousands 1999 1998 ______________________________________________________________________ Total deferred tax assets $22,133 $23,045 Total valuation allowance (2,966) (2,966) ___________________________ Total deferred tax asset - net 19,167 20,079 Total deferred tax liabilities (2,968) (3,123) ___________________________ Total net deferred tax asset $16,199 $16,956 _______________________________________________________________________ NOTE G. SEGMENT INFORMATION _________________________________________________________________________ As of December 31, 1998, Comdial adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information." This disclosure should be read in conjunction with Comdial's financial statement notes contained in its Annual Report to Stockholders for the year ended December 31, 1998. During the first six months of 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 sales occurring in the United States. There are no operating assets located outside the United States. Comdial is segmented into three product categories, each of which contributes ten percent or more to net sales. The segments are Digital Systems, Solutions and Software, and Analog and Other (which includes other miscellaneous products). Each of these categories is considered a business segment, and with respect to financial performance, the costs associated with each of these segments can only be quantified and identified to the gross profit level. The expenses, and assets and liabilities attributable to corporate activity are not allocated to the operating segments. Comdial does not maintain information that would allow these costs to be broken down into the various product segments and most of the costs are universal in nature. The Digital Systems segment is comprised of products such as Impact, Impression, Impact Digital Expandable Systems ("DXP"), DXP Plus and the "FX Series." Digital Systems' distinguishing characteristic is that they are designed for the small office (up to 500 end users) and offer additional features. The Solutions and Software segment is comprised of Comdial's software and software application products such as Impact Concierge, QuickQ, Avalon, and voice processing systems. These products are sold to specific markets such as hospitality, call centers, and assisted living. The Analog and Other segment is comprised of Comdial's older analog products (such as Executech, Unisyn, ATC Terminals, and Solo), and other products such as Voice Express, MaxPlus, and Custom Manufacturing. Analog products are aimed at the small office market and emphasize price rather than features or software functionality. The information in the following tables is derived directly from the segments' internal financial reporting used for corporate management purposes. The following tables show segment information for the periods ended July 4, 1999 and June 28, 1998. __________________________________________________________________________ July 4, June 28, (Dollars in thousands) 1999 1998 __________________________________________________________________________ Business Segment Net Revenues Digital Systems $40,002 $38,189 Solutions and Software 21,720 16,433 Analog and Other 5,885 5,976 ____________________________ Net sales $67,607 $60,598 __________________________________________________________________________ __________________________________________________________________________ July 4, June 28, (Dollars in thousands) 1999 1998 __________________________________________________________________________ Business Segment Profit Digital Systems $14,485 $13,833 Solutions and Software 12,537 9,117 Analog and Other 1,334 1,153 _____________________________ Gross profit 28,356 24,103 Operating expenses 24,644 19,550 Interest expense 759 548 Miscellaneous expense - net 101 194 ___________________________ Income before income taxes $2,852 $3,811 _________________________________________________________________________ _________________________________________________________________________ July 4, December 31, (Dollars in thousands) 1999 1998 _________________________________________________________________________ Business Segment Assets Digital Systems $45,360 $43,286 Solutions and Software 23,915 18,124 Analog and Other 5,809 6,432 Unallocated 36,372 41,148 ___________________________ Total $111,456 $108,990 Business Segment Liabilities Digital Systems $1,085 $1,397 Solutions and Software 2,169 1,750 Analog and Other 140 203 Unallocated 42,646 42,479 ___________________________ Total $46,040 $45,829 _______________________________________________________________________ _______________________________________________________________________ July 4, June 28, (Dollars in thousands) 1999 1998 _______________________________________________________________________ Business Segment Property, Plant and Equipment Depreciation Digital Systems $963 $877 Solutions and Software 158 127 Analog and Other 84 79 Unallocated 525 319 ___________________________ Total $1,730 $1,402 Capital Additions Digital Systems $630 $1,052 Solutions and Software 153 200 Analog and Other 63 68 Unallocated 965 146 __________________________ Total $1,811 $1,466 _________________________________________________________________________ Note H: COMMITMENTS AND CONTINGENT LIABILITIES _________________________________________________________________________ Management does not believe that contingent losses or potential claims arising from Year 2000 issues will have a material effect on Comdial. At one time, Comdial sold certain DOS-based systems that were not Year 2000 compliant. All systems were sold by Comdial to dealers and not directly to end-users. In addition, any warranties associated with such systems have expired. Comdial has alerted all of its dealers to this potential problem and has provided instructions to the dealers on how to remedy the problem. Comdial cannot predict whether the failure of such systems to be Year 2000 compliant will result in any litigation against Comdial. Comdial has received correspondence from Lucent Technologies, Inc. ("Lucent") inviting Comdial to negotiate a license agreement regarding Lucent's patents. Lucent has asserted that certain Comdial products infringe on certain Lucent patents. Comdial is currently assessing Lucent's claims to determine whether they have any merit. Comdial's potential liability in this matter, if any, cannot be determined at this time. If it is subsequently determined that Comdial's products do infringe on Lucent's patents, it could have a material adverse effect on Comdial's financial condition. - ------------------------------------------------------------------------- COMDIAL CORPORATION AND SUBSIDIARIES ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion is intended to assist the reader in understanding and evaluating the financial condition and results of operations of Comdial Corporation and its subsidiaries (the "Company"). This review should be read in conjunction with the consolidated financial statements and accompanying notes. This analysis attempts to identify trends and material changes that occurred during the periods presented. Prior years have been reclassified to conform to the 1999 reporting basis (see Note A to the Consolidated Financial Statements). Comdial is a Delaware corporation based in Charlottesville, Virginia. Comdial's Common Stock is traded on the National Association of Security Dealers Automated Quotation System ("Nasdaq?") in the National Market? under the symbol, CMDL. Results of Operations Selected consolidated statements of operations for the first six months of 1999 and 1998 are as follows: ______________________________________________________________________ July 4, June 28, In thousands 1999 1998 ______________________________________________________________________ Business Segment Sales: Digital Systems $40,002 $38,189 Solutions and Software 21,720 16,433 Analog and Other 5,885 5,976 _________________________ Net Sales 67,607 60,598 Cost of sales 39,251 36,495 Gross profit 28,356 24,103 Selling, general & administrative 18,637 15,160 Engineering, research & development 4,424 3,044 Goodwill amortization 1,583 1,346 Interest expense 759 548 Miscellaneous expense - net 101 194 __________________________ Income before income taxes 2,852 3,811 Income tax expense 1,173 114 __________________________ Net income applicable to common stock $1,679 $3,697 Earnings per common share and common equivalent share: basic $0.19 $0.42 ___________________________________________________________________________ Revenue and Earnings Second Quarter 1999 vs. 1998 Comdial continued to show growth in sales and gross profit margin as a percentage of sales for the second quarter of 1999. Comdial's net sales increased by 14% for the second quarter of 1999 to $35.7 million, compared with $31.3 million in the second quarter of 1998. This increase was primarily attributable to the increase in digital systems and solutions and software product sales. Gross profit increased by 28% for the second quarter of 1999 to $15.7 million, compared with $12.2 million in the second quarter of 1998. Gross profit, as a percentage of sales, increased from 39% for the second quarter of 1998 to 44% for the same period of 1999. This increase was due to (1) higher margins on Impact systems and phones (Digital segment) and (2) the continuing transition to higher margin product sales of solution and software systems. Selling, general and administrative expenses increased for the second quarter of 1999 by 33% to $10.0 million, compared with $7.5 million in the second quarter of 1998. This increase was due to additional sales and marketing personnel to support Comdial's future growth along with additional costs associated with the acquisition of Array Telecom Corporation ("Array") in the third quarter of 1998. Engineering, research and development expenses for the second quarter of 1999 increased by 57% to $2.3 million, compared with $1.5 million for the second quarter of 1998. This increase was due to additional engineering personnel and additional costs associated with Array. Goodwill amortization expense increased for the second quarter of 1999 by 17% to $0.8 million, compared with $0.7 million for the second quarter of 1998. This increase was due to the additional amortization expenses associated with the Array acquisition. Interest expense increased by 38% for the second quarter of 1999 to $0.4 million, compared with $0.3 million in the second quarter of 1998. This increase was due to higher average debt levels on Comdial's revolving credit facility. Income tax expense increased for the second quarter of 1999 to $0.9 million, compared with $0.4 million for the second quarter of 1998. This increase in tax expense was primarily due to Comdial recognizing a deferred tax asset expense of $0.6 million for the second quarter of 1999, compared with nothing for the same period of 1998. Comdial's net income decreased by 31% for the second quarter of 1999 to $1.3 million, compared with $1.9 million for the same period in 1998. This decrease is primarily attributable to the additional tax expenses incurred in the second quarter of 1999. Income before income taxes for the second quarter of 1999 decreased by 3% to $2.1 million compared with $2.2 million for the second quarter of 1998. Six Months of 1999 vs. 1998 Comdial's growth continues in several important key areas such as sales and gross profit margin as a percentage of sales. Net sales increased by 12% for the first six months of 1999 to $67.6 million, compared with $60.6 million in the first six months of 1998. This increase was primarily attributable to the increase in digital product sales (such as the FX Impact products) by 5% and solutions and software products by 32%. Solutions and software product sales increase was primarily attributable to the increase in National Account sales. Gross profit increased by 18% for the first six months of 1999 to $28.4 million, compared with $24.1 million in the first six months of 1998. Gross profit, as a percentage of sales, increased from 40% for the first six months of 1998 to 42% for the same period of 1999. This increase was primarily due to higher volume of sales of solutions and software products that contain higher margins. Selling, general and administrative expenses increased by 23% to $18.6 million, compared with $15.2 million in the first six months of 1998. This increase was due to additional costs of: (1) sales personnel to support Comdial's future growth in National Accounts, (2) marketing personnel to help promote Comdial's products through additional advertising and product promotions, (3) a national advertising agency to promote Comdial and its products, and (4) personnel and associated expenses related to the 1998 acquisition of Array. Engineering, research and development expenses for the first six months of 1999 increased by 45% to $4.4 million compared with $3.0 million for the first six months of 1998. This increase was due to additional engineering personnel and additional costs associated with Array. Goodwill amortization expense increased for the first six months of 1999 by 18% to $1.6 million, compared with $1.3 million for the first six months of 1998. This increase was due to the additional amortization expenses associated with the Array acquisition. Interest expense increased by 39% for the first six months of 1999 to $0.8 million compared with $0.5 million in the first six months of 1998. This increase was due to higher average debt levels on Comdial's revolving credit facility (the "Revolver"). The increase in the Revolver is primarily attributable to the additional borrowing associated with the Array acquisition. Miscellaneous expense decreased by 48% for the first six months of 1999 to $0.1 million, compared with $0.2 million for the first six months of 1998. This decrease was primarily due to decreases in cash discounts allowed by Comdial to its customers. Income tax expense reflected an expense for the first six months of 1999 of $1.2 million compared with $0.1 million for the first six months of 1998. This increase in tax expense was primarily due to Comdial recognizing all of its tax benefits of net operating losses ("NOLs") in the third quarter of 1998 (see Note F to the Consolidated Financial Statements). Comdial's tax expense will continue to be recognized at a normal tax rate of approximately 40%. Comdial will continue to pay taxes at the alternative minimum tax rate ("AMT") for all of 1999 with the additional tax expense reducing Comdial's deferred tax asset generated by the recognition of its NOLs. Comdial's net income decreased by 55% for the first six months of 1999 to $1.7 million, compared with $3.7 million for the same period in 1998. This decrease was primarily attributable to the increase in income tax expense and operating expenses. Income before income taxes for the first six months of 1999 decreased by 25% to $2.9 million, as compared with $3.8 million for the comparable period in 1998. Liquidity Comdial's financial position continues to improve when compared to previous years. In 1998, Comdial entered into a new financing arrangement with NationsBank, N.A. ("NationsBank") that provides a line of credit up to $50 million. Comdial's continual improvement in its financial position, along with the additional line of credit, allows Comdial to make necessary and desirable capital expenditures and investments to expand into new high growth markets in the telecommunications industry. The following table sets forth Comdial's cash and cash equivalents, current maturities on debt, and working capital at the dates indicated: _____________________________________________________________________ July 4, December 31, In thousands 1999 1998 _____________________________________________________________________ Cash and cash equivalents $2,513 $1,599 Current maturities on debt 4 6 Working capital 36,526 31,649 _____________________________________________________________________ For the first six months of 1999, all operating cash requirements were funded through a $50 million revolving credit facility provided by NationsBank Credit Agreement (the "Credit Agreement"). Comdial reports the Revolver activity on a net basis in the Consolidated Statements of Cash Flows. Comdial considers outstanding checks to be a bank overdraft. As of July 4, 1999, Comdial's cash and cash equivalents were slightly higher than December 31, 1998 by $0.9 million, due to the timing of the deposits received at end of the period that were not applied against the Revolver. Working capital as of July 4, 1999, increased by $4.9 million when compared to December 31, 1998. This increase was primarily due to increases in accounts receivable and the reduction of accounts payable and other accrued liabilities. Capital additions for the first six months of 1999 were approximately $1.8 million, compared with $1.5 million for the same period of 1998. Capital additions were used to help Comdial introduce new products as well as improve quality and reduce costs associated with new and existing products. Capital additions were funded by cash generated from operations and borrowing from the revolver. Cash expenditures for capital additions for the first six months of 1999 and 1998, were $1.7 million and $2.1 million, respectively. Management anticipates that approximately $8 million will be spent on capital additions during 1999. These additions will help Comdial meet its commitments to its customers by developing new products as well as increasing its capacity to produce high-tech products for the future. Comdial plans to fund all additions primarily through cash generated by operations along with some borrowing from the Revolver. Comdial has a commitment from NationsBank for the issuance of letters of credit in an aggregate amount not to exceed $5 million at any one time. On July 4, 1999, the amount of commitments under the letter of credit facility with NationsBank was $0.2 million. Accounts Receivable as of July 4, 1999, increased by $3.8 million compared with December 31, 1998, primarily due to (1) record breaking sales in the second quarter of 1999 and (2) the fact that the majority of those sales occurred in the latter stages of the quarter. Inventory decreased at the end of the second quarter of 1999 by $3.0 million due to the additional shipments for product sales at the end of the quarter and the timing of incoming production material receipts. Other assets increased by $2.7 million due to software development costs associated with new products, Array product development and the purchase of additional engineering development software. Accounts payable as of July 4, 1999, decreased by $1.3 million when compared to December 31, 1998. This decrease was primarily due to the timing of incoming material receipts for production. Accrued promotional allowances as of July 4, 1999, decreased by $0.4 million when compared to December 31, 1998. This decrease was primarily due to Comdial paying the volume discount earned by its major distributors for 1998 sales. Other accrued liabilities as of July 4, 1999, decreased by $1.2 million partially due to Comdial paying costs in 1999 associated with 1998 annual incentives awarded to its directors and officers. Long-term Debt, Including Current Maturities In the third quarter of 1998, Comdial and NationsBank entered into the Credit Agreement. NationsBank agreed to provide Comdial with a $50 million revolving credit facility and a $5 million letter of credit subfacility. Comdial used $15.8 million under the Revolver to pay off (1) its remaining indebtedness to Fleet Capital Corporation of $10.8 million, (2) amounts owed under Comdial's promissory note including interest to the former owners of KVT of $4.4 million, and (3) mortgages owed by KVT of $0.6 million. As of July 4, 1999, long-term debt increased by $3.3 million due to paying liabilities that related to 1998 along with an increase in accounts receivable. See Note D to Comdial's Consolidated Financial Statements for additional information with respect to Comdial's loan agreements, long-term debt and available short-term credit lines. Comdial believes that income from operations combined with amounts available from Comdial's current credit facilities will be sufficient to meet Comdial's needs for the foreseeable future. Other Financial Information During the first six months of 1999 and 1998, primarily all of Comdial's sales, net income, and identifiable net assets were attributable to the telecommunications industry. Year 2000 In early 1997, Comdial established a team (the "Year 2000 Team"), to evaluate whether, and to what extent, Comdial's products, information technology systems, facilities and production and distribution infrastructure may be affected by the Year 2000 and potential problems caused by the inability of certain computers and microprocessors to distinguish between the year 2000 and the year 1900. State of Readiness: Comdial believes it has identified the Year 2000 issues that could potentially affect its business and has developed plans to address such problems. Through a series of industry-recognized tests, the Year 2000 Team believes that it has identified all of Comdial's products, devices, and computerized systems containing embedded microprocessors that will require remediation or replacement because of potential Year 2000 issues. The Year 2000 Team has concluded that nearly all of Comdial's products are already Year 2000 compliant. Comdial expects that any non-compliant products that Comdial continues to sell will be compliant by the third quarter of 1999. Furthermore, Comdial is providing upgrades, or taking other remedial steps, to correct any non-compliant products that remain under warranty. In addition, Comdial's manufacturing division has performed Year 2000 testing and found all equipment to be functioning as required. Comdial continues to monitor and review any new issues that may arise concerning Year 2000. Furthermore, Comdial has implemented a requirement that its suppliers certify that all products, supplier's purchased products, and services provided to Comdial will not be adversely affected by the Year 2000. Comdial has divided its suppliers into three categories with respect to Year 2000 compliance: (1) non-critical component suppliers, (2) critical component suppliers, and (3) sole source critical component suppliers. As of the end of the second quarter of 1999, Comdial received written confirmation of Year 2000 compliance for approximately 99% of all three categories. Comdial continues to follow-up with suppliers to ensure they comply with Comdial's requirements and that they provide Comdial with the proper verification. Comdial also plans to perform on-site audits of some of the sole source suppliers that are critical to Comdial's operations, which should be completed by the fourth quarter of 1999. Costs: Comdial estimates that it will incur approximately $0.4 million in additional expenses to remedy the remaining Year 2000 issues. This cost includes testing, new software, maintenance of existing software, PC replacements, and consultants. On an ongoing basis, Comdial has been replacing existing in-house systems to improve efficiency and to address the Year 2000 issue. Such replacements are projected to be complete by the end of the third quarter of 1999. As of July 4, 1999, cumulative costs incurred by Comdial specifically for the Year 2000 totaled an aggregate of $0.2 million. Risks: There are various potential risks that could be associated with the failure of Comdial's business or the business of significant third-party suppliers of Comdial to be Year 2000 ready. The possible failure of internal information systems to be Year 2000 ready could result in some interruptions or disruptions of business. The possible failure of manufacturing facilities to be Year 2000 ready could result in impaired manufacturing processes with delays in delivery of products until non-compliant components or conditions can be remedied or replaced. Finally, risks of major failures of Comdial's products could include adverse functional impacts experienced by customers, the costs and resources for Comdial to remedy such problems or replace non-compliant products under warranty and delays in delivery of new products. While Comdial believes that it is taking appropriate actions to respond to and resolve potential Year 2000 issues, there can be no assurance that Year 2000 issues will not have a material adverse affect on Comdial. Contingency Plans: If the current sole source suppliers cannot give Comdial certification or corrective action for Year 2000 compliance, Comdial plans to develop and use alternative vendors. Comdial, as of July 4, 1999, has received certification that all of its major suppliers are or will be Year 2000 compliant not later than the third quarter of 1999. Management believes that Comdial is properly addressing the Year 2000 issue in order to mitigate any adverse operational or financial consequences. Current Pronouncements In the third quarter of 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." Comdial does not participate in any financial instruments that meet the definition of a derivative or hedging activity, and therefore, it is not expected that this statement will have any affect on Comdial's financial statements. "SAFE HABOR" STATEMENT UNDER THE PRIVATE SECURITIES LIGITATION REFORM ACT OF 1995 Comdial's report may contain some forward-looking statements that are subject to risks and uncertainties, including, but not limited to, the impact of competitive products, product demand and market acceptance risks, reliance on key strategic alliances, fluctuations in operating results, delays in development of highly complex products, and other risks detailed from time to time in Comdial's filings with the Securities and Exchange Commission. These risks could cause Comdial's actual results for 1999 and beyond to differ materially from those expressed in any forward- looking statement made by, or on behalf of, Comdial. - ------------------------------------------------------------------------ COMDIAL CORPORATION AND SUBSIDIARIES PART II - OTHER INFORMATION ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS Comdial believes that it does not have any material exposure to market risk associated with activities in derivative financial instruments, other financial instruments and derivative commodity instruments. 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 17, 1999 By: /s/ Manfred Funke Manfred Funke Acting Chief Financial Officer EX-11 2 COMDIAL CORPORATION AND SUBSIDIARIES EXHIBIT 11 SCHEDULE OF COMPUTATION OF EARNINGS PER COMMON SHARE (Dollars in thousands except share amounts) Three Months Ended Six Months Ended July 4, June 28, July 4, June 28, 1999 1998 1999 1998 _______________________________________________________________________________ BASIC Net income applicable to common shares: $1,291 $1,858 $1,679 $3,697 Weighted average number of common shares outstanding during the period 8,933,304 8,802,317 8,896,595 8,756,176 Add - Deferred and contingency shares 15,000 7,500 47,317 5,963 Weighted average number of shares used in calculation of basic earnings per common share 8,948,304 8,809,817 8,943,912 8,762,139 Basic earnings per common shares $0.14 $0.21 $0.19 $0.42 DILUTED Net income applicable to common shares - basic $1,291 $1,858 $1,679 $3,697 Weighted average number of shares used in calculation of basic earnings per common share 8,948,304 8,809,817 8,943,912 8,762,139 Add incremental shares representing: Shares issuable based on weighted average price: Stock options 37,470 314,864 41,311 275,265 Weighted average number of shares used in calculation of diluted earnings per common share 8,985,774 9,124,681 8,985,223 9,037,404 Diluted earnings per common share $0.14 $0.20 $0.19 $0.41 EX-27 3
5 1,000 6-MOS DEC-31-1999 JUL-04-1999 0.00001 2,513 0 27,202 445 18,439 52,712 50,335 32,205 111,456 16,186 25,441 0 0 91 65,325 111,456 61,170 67,607 36,709 39,251 24,361 384 759 2,852 1,173 1,679 0 0 0 1,679 0.19 0.19
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