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
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-29-1997
<CASH> 85
<SECURITIES> 0
<RECEIVABLES> 12,083
<ALLOWANCES> 110
<INVENTORY> 19,889
<CURRENT-ASSETS> 33,042
<PP&E> 45,281
<DEPRECIATION> 28,731
<TOTAL-ASSETS> 76,579
<CURRENT-LIABILITIES> 21,378
<BONDS> 0
17,830
0
<COMMON> 87
<OTHER-SE> 40,683
<TOTAL-LIABILITY-AND-EQUITY> 76,579
<SALES> 54,078
<TOTAL-REVENUES> 56,234
<CGS> 32,691
<TOTAL-COSTS> 33,424
<OTHER-EXPENSES> 20,128
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 876
<INCOME-PRETAX> 1,806
<INCOME-TAX> (7)
<INCOME-CONTINUING> 1,813
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,813
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.21
</TABLE>
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)
