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 September 28, 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. 8,674,201 common shares as of September
28, 1997.
COMDIAL CORPORATION AND SUBSIDIARIES
INDEX
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1: Financial Statements
Consolidated Balance Sheets as of
September 28, 1997 and December 31, 1996 3
Consolidated Statements of Operations
for the Three Months and Nine Months ended
September 28, 1997 and September 29, 1996 4
Consolidated Statements of Cash Flows
for the Three Months and Nine Months ended
September 28, 1997 and September 29, 1996 5
Notes to Consolidated Financial Statements 6-11
ITEM 2: Management's Discussion and Analysis of
Financial Condition and Results of
Operations 12-21
PART II - OTHER INFORMATION
ITEM 6: Exhibits and Reports on Form 8-K 22
COMDIAL CORPORATION AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION
ITEM 1. Financial Statements
__________________________________________________________________
Consolidated Balance Sheets - (Unaudited)
__________________________________________________________________
Sept. 28, Dec. 31,
In thousands except par value 1997 1996 *
__________________________________________________________________
Assets
Current assets
Cash and cash equivalents $322 $180
Accounts receivable - net 14,199 9,660
Inventories 18,646 19,586
Prepaid expenses and other current assets 1,294 1,341
Total current assets 34,461 30,767
Property - net 15,868 15,317
Goodwill 14,397 16,852
Deferred tax asset - net 7,798 7,469
Other assets 4,193 3,947
Total assets $76,717 $74,352
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $7,317 $8,144
Accrued payroll and related expenses 2,733 2,926
Other accrued liabilities 4,392 3,746
Current maturities of debt 5,061 5,343
Total current liabilities 19,503 20,159
Long-term debt 10,457 11,713
Deferred tax liability 2,340 2,230
Long-term employee benefit obligations 1,629 1,686
Commitments and contingent liabilities
Total liabilities 33,929 35,788
Stockholders' equity
Common stock ($0.01 par value) and paid-in
capital (Authorized 30,000 shares; issued
shares: 1997 = 8,674; 1996 = 8,580) 114,525 114,118
Other (1,044) (1,046)
Accumulated deficit (70,693) (74,508)
Total stockholders' equity 42,788 38,564
Total liabilities and
stockholders' equity $76,717 $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 Nine Months Ended
Sept. 28,Sept. 29 Sept. 28,Sept. 29,
In thousands except
per share amounts 1997 1996 1997 1996
__________________________________________________________________
Net sales $31,091 $28,849 $87,325 $74,418
Cost of goods sold 18,569 17,976 51,993 47,922
Gross profit 12,522 10,873 35,332 26,496
Operating expenses
Selling, general &
administrative 7,210 6,963 21,853 18,702
Engineering, research
& development 1,782 1,262 5,068 4,184
Operating income 3,530 2,648 8,411 3,610
Other expense
Interest expense 436 483 1,312 1,209
Goodwill amortization expense 855 855 2,751 1,814
Miscellaneous expenses - net 119 332 422 694
Income (loss) before
income taxes 2,120 978 3,926 (107)
Income tax expense (benefit) 118 70 111 (572)
Net income (loss)
applicable to common $2,002 $908 $3,815 $465
__________________________________________________________________
Earnings (loss) per common share and common equivalent share:
Earnings (loss) per
common share $0.23 $0.11 $0.44 $0.06
Weighted average common shares outstanding:
Weighted average per
common share 8,672 8,578 8,634 8,444
__________________________________________________________________
The accompanying notes are an integral part of these financial
statements.
__________________________________________________________________
COMDIAL CORPORATION AND SUBSIDIARIES
__________________________________________________________________
Consolidated Statements of Cash Flows - (Unaudited)
__________________________________________________________________
Nine Months Ended
Sept. 28, Sept. 29,
In thousands 1997 1996
__________________________________________________________________
Cash flows from operating activities:
Cash received from customers $85,982 $77,850
Other cash received 861 642
Interest received 5 59
Cash paid to suppliers and employees (80,333) (74,355)
Interest paid on debt (1,344) (646)
Interest paid under capital lease obligations (12) (78)
Income taxes paid (259) (162)
Net cash provided by operating activities 4,900 3,310
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) (921)
Proceeds from the sale of equipment 18 9
Capital expenditures (3,371) (2,704)
Net cash used by investing activities (3,354) (14,045)
Cash flows from financing activities:
Proceeds from borrowings 2,216 5,619
Net borrowings under revolver agreement (479) 3,071
Proceeds from issuance of common stock 18 44
Principal payments on debt (3,087) (1,432)
Principal payments under capital
lease obligations (72) (440)
Net cash provided in financing activities (1,404) (6,862)
Net increase (decrease) in cash
and cash equivalents 142 (3,873)
Cash and cash equivalents at beginning of year 180 4,144
Cash and cash equivalents at end of period $322 $271
__________________________________________________________________
Reconciliation of net income to net cash provided by operating
activities:
Net income $3,815 $465
Depreciation and amortization 6,710 4,833
Change in assets and liabilities (for 1996, net of
effects from the purchase of KVT and Aurora):
Decrease (increase) in accounts receivable (4,539) (1,188)
Inventory provision 2,785 1,318
Increase in inventory (1,845) (1,196)
Decrease (increase) in other assets (1,356) (304)
Increase in deferred tax asset (219) (736)
Increase (decrease) in accounts payable (827) (1,456)
Decrease in other liabilities 280 536
KVT asset value at acquisition - 1,105
Aurora asset value at acquisition - (121)
Increase in paid-in capital and other equity 96 54
Total adjustments 1,085 2,845
Net cash used by operating activities $4,900 $3,310
__________________________________________________________________
The accompanying notes are an integral part of these financial
statements.
__________________________________________________________________
COMDIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 28, 1997 - (Unaudited)
Note A: CONSOLIDATED FINANCIAL STATEMENTS__________________
The financial information included as of September 28,
1997, and for the nine months ended September 28, 1997 and
September 29, 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 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 nine months
ended September 28, 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
September 28, 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 $1.7 million and $1.9 million are included in
accounts payable at September 28, 1997 and December 31,
1996, respectively. Bank overdrafts consist of outstanding
checks that have not (1) cleared the bank and (2) been
funded by 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:
____________________________________________________________
Sept. 28, Dec. 31,
In thousands 1997 1996
Finished goods $5,395 $6,529
Work-in-process 3,849 3,681
Materials and supplies 9,402 9,376
Total $18,646 $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:
____________________________________________________________
Sept. 28, Dec. 31,
In thousands 1997 1996
Loans payable to Fleet
Acquisition loan $5,970 $7,249
Equipment loans I & II 1,962 463
Revolving credit 1,270 1,749
Promissory note 5,600 7,000
Capitalized leases 96 284
Other debt 620 311
Total debt 15,518 17,056
Less current maturities on debt 5,061 5,343
Total long-term debt $10,457 $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 the London Interbank Offered 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
September 28, 1997 and December 31, 1996, the prime interest
rates were 8.50% and 8.25%, respectively. The LIBOR rate as
of September 28, 1997, was 5.66% with approximately 98% 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 September 28, 1997, the Company's prime
borrowing rate was 9.00%, and the LIBOR borrowing rate was
8.16%.
The Company's Promissory Note in the amount of $7.0
million which was issued in connection with the acquisition
of KVT and is payable to the former shareholders of KVT.
The Promissory Note 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 and another mortgage
entered into by KVT in order to acquire an adjacent building
for future expansion. The mortgages require monthly
payments of $2,817 and $2,869, including interest at a rate
of 8.75% and 9.125%, respectively. The final payments are
due on August 1, 2005 and June 27, 2007, respectively.
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 $606 *
1998 3,638
1999 3,501
2000 3,502
2001 2,351
2002 19
Beyond 2002 535
* 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 covenants. As of September 28,
1997, the Company is in compliance with all the covenants
and terms of the Loan Agreement.
Note E: EARNINGS PER SHARE_________________________________
For the three and nine month periods ended September
28, 1997 and September 29, 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 nine 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 nine months are as
follows:
____________________________________________________________
Sept. 28, Sept. 29,
In thousands 1997 1996
Current - Federal $158 $63
State 172 101
Deferred - Federal (214) (714)
State (5) (22)
Total provision $111 ($572)
____________________________________________________________
The income tax provision reconciled to the tax computed
at statutory rates for the nine months are summarized as
follows:
____________________________________________________________
Sept. 28, Sept. 29,
In thousands 1997 1996
Federal tax (benefit) at statutory
rate (35% in 1997 and 1996) $1,374 ($38)
State income taxes (net of federal
tax benefit) 112 65
Nondeductible charges 285 45
Alternative minimum tax 113 65
Utilization of operating loss
carryover (1,554) 27
Adjustment of valuation allowance (219) (736)
Income tax provision $111 ($572)
____________________________________________________________
Net deferred tax assets of $5.5 million and $5.2
million have been recognized in the accompanying
Consolidated Balance Sheets at September 28, 1997 and
December 31, 1996, respectively. The components of the net
deferred tax assets are as follows:
____________________________________________________________
Sept. 28, Dec. 31,
In thousands 1997 1996
Total deferred tax assets $26,324 $27,709
Total valuation allowance (18,526) (20,240)
Total deferred tax asset - net 7,798 7,469
Total deferred tax liabilities (2,340) (2,230)
Total net deferred tax asset $5,458 $5,239
____________________________________________________________
Management reduced the valuation allowance by $1.7
million during the nine month period ended September 28,
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 $1.5
million. 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 first 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 $58.8
million and $3.2 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 and was reincorporated in
Delaware in 1982. 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 seventeen 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 1900
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 and other vertical
markets, (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; and (6) promoting
industry accepted interface standards.
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 nine months of 1997, the Company has
introduced several new products such as the FX and the
Impact SCS digital switching family. The FX Series is 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. The
Impact SCS digital system offers voice/data integration,
advanced technology, and voice processing access at every
configuration. FX Series and Impact SCS started shipping in
September and accounted for approximately $1.0 million of
the third quarter sales.
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 deliver CTI
economically 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 nine months of 1997, the acquisitions of Aurora and
KVT have continued to have a positive affect on consolidated
revenues by $11.0 million and profitability by $4.8 million
(excluding any taxes and acquisition and corporate
allocation costs). Both companies are wholly owned
subsidiaries of the Company.
Results of Operations
Revenue and Earnings
Third Quarter 1997 vs. 1996
The Company's performance improved significantly for
the third 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 third
quarter of 1997 increased to $2.1 million as compared with
$978,000 for the comparable period in 1996.
Net sales increased by 8% for the third quarter of 1997
to $31.1 million, compared with $28.8 million in the third
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 15% for the third quarter of
1997 to $12.5 million or 40% of sales, compared with $10.9
million or 38% of sales in the third quarter of 1996. This
increase was primarily attributable to higher sales of
digital, DXP, and CTI products which have higher product
margins, and higher margins that Aurora and KVT products
have added to the business.
Engineering, research and development expenses
increased by 41% for the third quarter of 1997 to $1.8
million, compared with $1.3 million in the third quarter of
1996. This increase was primarily attributable to the
write-off of development costs associated with one of the
older CTI products, expenses associated with field trials of
new products, and lower software capitalization.
Miscellaneous expenses, net, decreased by 64% for the
third quarter of 1997 to $119,000, compared with $332,000 in
the third 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 third
quarter of 1997 to $118,000 compared with $70,000 for the
third 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.
Nine Months 1997 vs. 1996
The Company reported a significant gain before taxes
for the first nine months of 1997 of $3.9 million as
compared with a loss of $107,000 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 17% for the first nine months of
1997 to $87.3 million, compared with $74.4 million for the
same period in 1996.
The following table presents certain relevant net sales
information concerning the Company's principal product lines
for the first nine months of 1997 and 1996.
____________________________________________________________
Sept. 28, Sept. 29,
In thousands 1997 1996
Sales
Business Systems
Digital $37,483 $31,479
CTI 19,219 13,786
DXP 18,317 12,976
Analog 9,147 12,809
Sub-total 84,166 71,050
Proprietary and Specialty Terminals 3,612 3,452
Custom Manufacturing 553 1,044
Gross Sales 88,331 75,546
Sales discount and allowances 1,006 1,128
Net Sales $87,325 $74,418
____________________________________________________________
Business system sales increased by 18% or $13.1
million, compared with the same period of 1996. Digital,
DXP, and CTI product sales increased substantially by 29%
but were slightly offset with a decline of 30% 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 and the continued development of new CTI and
digital products. Some of the most significant sales gains
were in certain market channels such as national accounts,
and international and hospitality markets. The performance
of Aurora and KVT boosted the Company's sales growth with
sales of $11.0 million for the first nine months of 1997
compared with $6.6 million for the same period of 1996,
which only included sales from March 20, 1996, to the end of
the third quarter of 1996.
Management anticipates that the factors, which led to
the positive increase in sales and net income for the first
nine months of 1997, will continue to affect the overall
performance in 1997. In addition, management believes that
sales of analog telephone systems and custom manufacturing
will continue to decrease for the remainder 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) shipment
of new products in the fourth quarter of 1997.
Gross profit increased by 33% to $35.3 million for the
first nine months of 1997, compared with $26.5 million for
the same period of 1996. Gross profit as a percent of sales
increased to 40%, compared with 36% for the same period of
1996. This increase was primarily attributable to higher
sales of digital, DXP, and CTI products which have higher
product margins, and a higher portion of sales through
direct to user and dealer channels.
Selling, general and administrative expenses increased
by 17% for the first nine months of 1997 to $21.9 million,
compared with $18.7 million for the first nine 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 the cost reduction
programs; and (4) a one time charge associated with an
international project.
Engineering, research and development expenses
increased by 21% for the first nine months of 1997 to $5.1
million, compared with $4.2 million for the same period of
1996. This increase was primarily due to an increase in
expenses of $615,000 associated with additional engineering
staff at Aurora and KVT, an increase in product field trial
expenses associated with new product introductions, and a
write-off of development costs associated with one of the
older CTI products.
Interest Expense increased by 9% for the first nine
months of 1997 to $1.3 million compared with $1.2 million
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 52% for the
first nine months of 1997 to $2.8 million, compared with
$1.8 million for the same period of 1996. This increase was
primarily due to (1) goodwill associated with the March 20,
1996 acquisitions of Aurora and KVT and (2) the write-off of
the remaining goodwill of $164,000 associated with an
earlier acquisition.
Income tax expense (benefit) increased in the first
nine months of 1997 to a net tax expense of $111,000
compared with a net tax benefit of $572,000 for the same
period of 1996. This increase 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 nine
months of 1997 increased to $330,000 compared with $164,000
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 the London Interbank Offered
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
September 28, 1997 and December 31, 1996, the prime interest
rates were 8.50% and 8.25%, respectively. The LIBOR rate as
of September 28, 1997, was 5.66% with approximately 98% 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 September 28, 1997, the Company's borrowing
rate for prime was 9.00%, and the LIBOR borrowing rate was
8.16%.
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 of 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 two mortgages to which KVT is
subject and have monthly mortgage payments of $2,817 and
$2,869, which includes interest at 8.75% and 9.13%,
respectively. The final payments are due on August 01, 2005
and June 27, 2007, respectively.
The following table sets forth the Company's cash and
cash equivalents, current maturities on debt and working
capital at the dates indicated.
____________________________________________________________
Sept. 28, Dec. 31,
In thousands 1997 1996
Cash and cash equivalents $322 $180
Current maturities on debt 5,061 5,343
Working capital 14,958 10,608
____________________________________________________________
All operating cash requirements are currently being
funded through the Revolver. Cash increased primarily due
to the timing of receipts. Current maturities on debt
decreased primarily due to a decrease in the Revolver of
$479,000 which was slightly offset by the net changes in
Equipment Loan I and II when compared to December 31, 1996.
Working capital increased by $4.4 million primarily due to
an increase in accounts receivable of $4.5 million.
Accounts receivable increased at the end of the third
quarter of 1997 by 47% or $4.5 million, compared with
December 31, 1996. This increase was primarily due to the
increase in sales and the timing of shipments in the third
quarter of 1997.
Goodwill decreased at the end of the third quarter of
1997 by 15% or $2.5 million, compared with December 31,
1996. This decrease is due to the amortization of goodwill,
which has been slightly offset by some additional
acquisition costs of $296,000.
Other Accrued Liabilities increased at the end of the
third quarter of 1997 by 17% or $646,000, compared with
December 31, 1996. This increase is due primarily to
additional provisions for sales allowances brought about by
higher sales and federal, state, and county taxes.
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 after 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 nine months of 1997
and for the comparable period of 1996 were $2.7 million and
$2.1 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 September 28, 1997, the
amount of available commitments under the letter of credit
facility with Crestar Bank was $420,000.
"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:
(10) Material Contracts:
10.1 Amendment No. 1 to the Registrant's 1992 Stock
Incentive Plan dated July 31, 1997.
10.2 Amendment No. 1 to the Registrant's 1992 Non-
Employee Directors Stock Incentive Plan dated
July 31, 1997.
(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: November 10, 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-29-1997
<CASH> 322
<SECURITIES> 0
<RECEIVABLES> 14,311
<ALLOWANCES> 112
<INVENTORY> 18,646
<CURRENT-ASSETS> 34,461
<PP&E> 45,225
<DEPRECIATION> 29,357
<TOTAL-ASSETS> 76,717
<CURRENT-LIABILITIES> 19,503
<BONDS> 15,518
0
0
<COMMON> 88
<OTHER-SE> 42,700
<TOTAL-LIABILITY-AND-EQUITY> 76,717
<SALES> 84,286
<TOTAL-REVENUES> 87,325
<CGS> 51,013
<TOTAL-COSTS> 51,993
<OTHER-EXPENSES> 30,064
<LOSS-PROVISION> 30
<INTEREST-EXPENSE> 1,312
<INCOME-PRETAX> 3,926
<INCOME-TAX> 111
<INCOME-CONTINUING> 3,815
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,815
<EPS-PRIMARY> 0.44
<EPS-DILUTED> 0.44
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
COMDIAL CORPORATION AND SUBSIDIARIES
Exhibit 11
________________________________________________________________________________
Statement re Computation of Per Share Earnings
Three Months Ended Nine Months Ended
Sept. 28, Sept. 29, Sept. 28, Sept. 29,
1997 1996 1997 1996
________________________________________________________________________________
PRIMARY
Net income $2,002,000 $908,000 $3,815,000 $465,000
Weighted average number of common
shares outstanding during the period 8,672,425 8,577,667 8,634,169 8,444,399
Add - common equivalent shares
(determined using the "treasury
stock" method) representing shares
issuable upon exercise of:
Stock options 83,461 58,760 64,787 113,137
Weighted average number of shares used
in calculation of primary earnings
per common share 8,755,886 8,636,427 8,698,956 8,557,536
Earnings per common share: $0.23 $0.11 $0.44 $0.05
FULLY DILUTED
Net income applicable to
common shares $2,002,000 $908,000 $3,815,000 $465,000
Weighted average number of shares
used in calculation of primary
earnings per common share 8,755,886 8,636,427 8,698,956 8,557,536
Add (deduct) incremental shares representing:
Shares issuable upon exercise of
stock optionsincluded in primary
calculation (83,461) (58,760) (64,787) (113,137)
Shares issuable based on period-end
market price or weighted average price:
Stock options 110,042 57,474 109,203 112,100
Weighted average number of shares
used in calculation of fully diluted
earnings per common share 8,782,467 8,635,141 8,743,372 8,556,499
Fully diluted earnings per common share $0.23 $0.11 $0.44 $0.05
</TABLE>
Exhibit 10.1
FIRST AMENDMENT
TO
COMDIAL CORPORATION 1992 STOCK INCENTIVE PLAN
THIS FIRST AMENDMENT to the Comdial Corporation 1992
Stock Incentive Plan (the "Plan") is made effective as of
February 15, 1995, pursuant to the authority under Section
12 of the Plan for the Board of Directors to amend the
Plan.
Section 2(h)(ii) of the Plan is amended by deleting
the entirety thereof and substituting the following:
"(ii) if the Company Stock is traded on the over-the-
counter market, the closing price of the Company Stock as
reported by Nasdaq."
IN WITNESS WHEREOF, the Company has caused this
amendment to the Plan to be executed as of March 23, 1995.
COMDIAL CORPORATION
By: /S/ Wayne R. Wilver_______
Wayne R. Wilver
Senior Vice President
Exhibit 10.2
FIRST AMENDMENT
TO
COMDIAL CORPORATION 1992 NON-EMPLOYEE DIRECTORS
STOCK INCENTIVE PLAN
THIS FIRST AMENDMENT to the Comdial Corporation 1992
Stock Non-Employee Directors Stock Incentive Plan (the
"Plan") is made effective as of January 1, 1995, pursuant
to the authority under Section 13 of the Plan for the Board
of Directors to amend the Plan.
Section 7(a)(iii) of the Plan is amended by adding
the following at the end:
"At any time and from time to time, the Board may
take specific action by resolution to suspend all or any
part of the automatic award of the 10,000 shares of Company
Stock. Any such suspension of all or a part of the
automatic award shall continue for all future years until
specific action is taken by the Board by resolution to
increase, reduce or eliminate the amount of the
suspension."
IN WITNESS WHEREOF, the Company has caused this
amendment to the Plan to be executed as of March 23, 1995.
COMDIAL CORPORATION
By: /s/ Wayne R. Wilver_____
Wayne R. Wilver
Senior Vice President
