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 27, 1998
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.
8,817,722 common shares as of September 27, 1998.
COMDIAL CORPORATION AND SUBSIDIARIES
INDEX
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1: Financial Statements
Consolidated Balance Sheets as of
September 27, 1998 and December 31, 1997 3
Consolidated Statements of Operations
for the Three and Nine Months ended
September 27, 1998 and September 28, 1997 4
Consolidated Statements of Cash Flows
for the Nine Months ended
September 27, 1998 and September 28, 1997 5
Notes to Consolidated Financial Statements 6-13
ITEM 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 14-21
PART II - OTHER INFORMATION
ITEM 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. 27, Dec. 31,
In thousands except par value 1998 1997 *
Assets
Current assets
Cash and cash equivalents $734 $5,673
Accounts receivable (less allowance 16,978 11,278
for doubtful accounts: 1998 - $74;
1997 - $78)
Inventories 20,202 18,487
Prepaid expenses and other current
assets 5,409 1,669
Total current assets 43,323 37,107
Property - net 17,021 16,334
Goodwill 14,784 13,142
Deferred tax asset - net 16,439 8,164
Other assets 8,107 4,517
Total assets $99,674 $79,264
_________________________________________________________________
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $10,676 $9,229
Accrued payroll and related expenses 2,730 2,659
Accrued promotional allowances 1,891 1,915
Other accrued liabilities 3,291 2,927
Current maturities of debt 11,473 3,701
Total current liabilities 30,061 20,431
Long-term debt 4,111 9,922
Deferred tax liability 2,720 2,705
Other long-term liabilities 1,460 1,371
Commitments and contingent liabilities
(see Note H) - -
Total liabilities 38,352 34,429
Stockholders' equity
Common stock ($0.01 par value) and
paid-in capital (Authorized 30,000
shares; issued shares: 1998 = 8,818;
1997 = 8,697) 115,797 114,663
Other (1,237) (1,039)
Accumulated deficit (53,238) (68,789)
Total stockholders' equity 61,322 44,835
Total liabilities and stockholders'
equity $99,674 $79,264
* 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)
In thousands except per share amounts
Three Months Ended Nine Months Ended
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
1998 1997 1998 1997
Net sales $32,031 $31,091 $92,629 $87,325
Cost of goods sold 18,644 18,569 55,139 51,993
Gross profit 13,387 12,522 37,490 35,332
Operating expenses
Selling, general &
administrative 8,582 7,210 23,742 21,853
Engineering, research
& development 1,878 1,782 4,922 5,068
In-process research
and development 529 - 529 -
Goodwill amortization
expense 1,678 855 3,024 2,751
Operating income 720 2,675 5,273 5,660
Other expense
Interest expense 321 436 869 1,312
Miscellaneous expenses
- net 212 119 406 422
Income before income taxes 187 2,120 3,998 3,926
Income tax expense
(benefit) (11,667) 118 (11,553) 111
Net income applicable
to common stock $11,854 $2,002 $15,551 $3,815
Earnings per common share and common
equivalent share:
Basic $1.34 $0.23 $1.76 $0.44
Diluted $1.31 $0.23 $1.71 $0.44
Weighted average common shares outstanding:
Basic 8,846 8,672 8,814 8,657
Diluted 9,069 8,756 9,073 8,722
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. 27, Sept. 28,
In thousands 1998 1997
Cash flows from operating activities:
Cash received from customers $90,035 $85,982
Other cash received 1,321 861
Interest received 30 5
Cash paid to suppliers and employees (94,237) (80,333)
Interest paid on debt (935) (1,344)
Interest paid under capital lease
obligations (11) (12)
Income taxes paid (537) (259)
Net cash provided by (used in)
operating activities (4,334) 4,900
Cash flows from investing activities:
Acquisition costs for KVT and Aurora - (1)
Acquisition costs for Array Telecom (170) -
Proceeds received from the sale of FastCall 290 -
Proceeds from the sale of equipment 100 18
Capital expenditures (3,055) (3,371)
Net cash used in investing activities (2,835) (3,354)
Cash flows from financing activities:
Proceeds from borrowings - 2,216
Net borrowings under revolver 8,334 (479)
Proceeds from issuance of common stock 269 18
Principal payments on debt (6,323) (3,087)
Principal payments on capital
lease obligations (50) (72)
Net cash provided by (used in)
financing activities 2,230 (1,404)
Net increase (decrease) in cash
and cash equivalents (4,939) 142
Cash and cash equivalents at
beginning of year 5,673 180
Cash and cash equivalents at end of period $734 $322
Reconciliation of net income to net cash provided by (used in)
operating activities:
Net income $15,551 $3,815
Depreciation and amortization 6,713 6,710
Increase in accounts receivable (5,700) (4,539)
Inventory provision 2,408 2,785
Increase in inventory (4,123) (1,845)
Increase in other assets (9,755) (1,356)
Increase in deferred tax asset (12,042) (219)
Increase (decrease) in accounts payable 1,447 (827)
Increase in other liabilities 500 280
Increase in paid-in capital and
other equity 667 96
Total adjustments (19,885) 1,085
Net cash provided by (used in)
operating activities ($4,334) $4,900
The accompanying notes are an integral part of these financial
statements.
COMDIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 27, 1998 - (Unaudited)
Note A: CONSOLIDATED FINANCIAL STATEMENTS_______________________
The financial information included as of September 27, 1998,
and for the three and nine months ended September 27, 1998 and
September 28, 1997 is unaudited. The financial information
reflects all normal recurring adjustments necessary for a fair
statement of results for such periods. Accounting policies
followed by Comdial Corporation (the "Company") are described in
Note 1 to the consolidated financial statements in its Annual
Report to Stockholders for the year ended December 31, 1997. The
consolidated financial statements for 1998 contained herein should
be read in conjunction with the 1997 financial statements,
including notes thereto, contained in the Company's Annual Report
to Stockholders for the year ended December 31, 1997. Certain
amounts in the 1997 consolidated financial statements have been
reclassified to conform to the 1998 presentation. The results of
operations for the nine months ended September 27, 1998, are not
necessarily indicative of results for the full year. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Note B: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES______________
The preparation of financial statements 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 27, 1998. Actual results may differ from those
estimates.
Cash and cash equivalents are defined as short-term liquid
investments with maturities, when purchased, of less than 90 days
that are readily convertible into cash. Under 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 $2.4 million and $1.9 million are
included in accounts payable at September 27, 1998 and December 31,
1997, 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 E). The Company reports
revolving credit facility activity on a net basis in the
Consolidated Statements of Cash Flows.
The Company recognizes revenue as products are shipped.
Returned products are credited against revenues as they are
received back from the customer. The only exceptions to this
policy are revenues from E911 systems and from embedded software.
E911 revenues are recognized when projects have been completed and
embedded software revenues are not recognized until the customer
requests a code from the Company enabling the software to be used.
Long-lived assets are reviewed for impairment as circumstances
change that might affect those assets. Impairment loss is not
recognized unless the carrying amount of an asset is no longer
recoverable using a test of recoverability, which is based on the
analysis of the expected future undiscounted cash flows.
Note C: ACQUISITIONS____________________________________________
On July 14, 1998, the Company acquired the internet telephony
gateway product VOIPgate.com and the related assets and business of
Array Telecom Inc. ("ATI") and Array Systems Computing Inc.
("ASCI"). ASCI is located in Toronto, Ontario, Canada. The
purchase price was approximately $5.9 million. The funds used for
the acquisition came from cash generated by operations and a
revolving credit facility. The principle asset purchased was the
intellectual property associated with VOIPgate.com software, an
internet protocol based telephony software platform.
Note D: INVENTORIES_____________________________________________
Inventories consist of the following:
_________________________________________________________________
Sept. 27, Dec. 31,
In thousands 1998 1997
Finished goods $9,563 $6,336
Work-in-process 3,139 4,101
Materials and supplies 7,500 8,050
Total $20,202 $18,487
_________________________________________________________________
The Company provides reserves to cover product obsolescence
and those reserves do impact gross margin. Future reserves will
be dependent on management's estimates of the recoverability of
costs of all inventory. Raw material obsolescence is mitigated
by the commonality of component parts and finished goods by the
low level of inventory relative to sales.
Note E: BORROWINGS______________________________________________
Since February 1, 1994, Fleet Capital Corporation ("Fleet") has
held substantially all of the Company's indebtedness. On October
22, 1998, the Company repaid all indebtedness to Fleet and entered
into a new credit agreement with NationsBank, N.A. (see Note I).
Long-term Debt. Long-term debt consists of the following:
_________________________________________________________________
Sept. 27, Dec. 31,
In thousands 1998 1997
Loans payable to Fleet
Acquisition loan (1) $2,416 $5,543
Equipment loan I (2) - 139
Equipment loan II (3) - 1,647
Revolving credit (4) 8,334 -
Promissory note (5) 4,200 5,600
Other debt (6) 607 617
Capitalized leases (7) ____27 ____77
Total debt 15,584 13,623
Less current maturities on debt 11,473 3,701
Total long-term debt $4,111 $9,922
_________________________________________________________________
In 1994, the Company and Fleet entered into a loan and
security agreement (the "Loan Agreement") which was amended from
time to time. The Loan Agreement provided the Company with a $10.0
million acquisition loan (the "Acquisition Loan"), a $3.5 million
equipment loan (the "Equipment Loan"), and a $12.5 million
revolving credit loan facility (the "Revolver"). The Loan
Agreement was effective until February 1, 2001 and the agreement
was going to automatically renew itself for one year periods
thereafter.
(1) On March 20, 1996, the Company borrowed $8.5 million under
the Acquisition Loan which was used to acquire Aurora Systems, Inc.
("Aurora") and Key Voice Technologies ("KVT"). The Acquisition
Loan was payable in equal monthly principal installments of
$142,142, with the balance due on February 1, 2001. In 1998, the
Company paid an additional $1.8 million against the Acquisition
Loan along with the required monthly payments. The original final
payment was scheduled for February 2001.
(2) Equipment Loan I was payable in equal monthly principal
installments of $27,000, with the balance due on June 1, 1998.
(3) Equipment Loan II was payable in equal monthly principal
installments of $31,667, with the balance due on February 1, 2001.
In January 1998, the Company paid the remaining balances of
both Equipment Loan I and II of $1,786,000.
(4) Availability under the Revolver of up to $12.5 million was
based on eligible accounts receivable and inventory, less funds
already borrowed.
Loans made pursuant to the Loan Agreement had interest rates
at either Fleet's prime rate or the London Interbank Offered Rate
("LIBOR") at the Company's option. The interest rates could be
adjusted annually based on the Company's debt to earnings ratio,
which allowed the rates to vary from minus 0.50% to plus 0.50%
under or above Fleet's prime rate and from plus 1.50% to 2.50%
above LIBOR. As of September 27, 1998, Fleet's prime interest rate
was 8.50% with 100% of the loans based on prime. As of September
27, 1998, the Company's borrowing rate for loans based on prime was
8.00%. For December 31, 1997, the Company's borrowing rate for
loans based on prime and LIBOR rates were 9.00% and 8.47%,
respectively, with approximately 96% of the loans based on LIBOR.
(5) The Company's promissory note (the "Promissory Note"),
which was issued in connection with the purchase of KVT, carried an
interest rate equal to the prime rate with annual payments of $1.4
million plus accumulated interest with the balance due on March 20,
2001. As of September 27, 1998 and December 31, 1997, the interest
rate on the Promissory Note was 8.50%.
(6) Other debt consisted 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 expansion. The
mortgages required monthly payments of $2,817 and $2,869, including
interest at fixed rates of 8.75% and 9.125%, respectively. Final
payments were due on August 1, 2005 and June 27, 2007,
respectively.
(7) Capital leases are with various financing entities and are
payable based on the terms of each individual lease.
Scheduled maturities of current and long-term debt for the
Fleet Notes (as defined in the Loan Agreement), the Promissory
Note, and other debt (excluding the Revolver and leasing agreements
of $8,361,000) were as follows:
_________________________________________________________________
Principal
In thousands Fiscal Years Installments______
Notes payable 1998 * $433
1999 3,121
2000 1,700
2001 1,418
2002 19
2003 21
Beyond 2003 511
Total $7,223
* The remaining aggregate for 1998.
_________________________________________________________________
Debt Covenants
The Company's indebtedness to Fleet was secured by liens on the
Company's accounts receivable, inventories, intangibles, land, and
other property. Among other restrictions, the Loan Agreement
contained certain financial covenants that related to specified
levels of consolidated tangible net worth, profitability, and other
financial ratios. The Loan Agreement also contained certain limits
on additional borrowings.
On March 13, 1998 and June 24, 1998, the Company and Fleet
amended the Loan Agreement to modify and eliminate certain
covenants. As of September 27, 1998, the Company was in compliance
with all the covenants and terms of the Loan Agreement.
Note F: EARNINGS PER SHARE______________________________________
For the three and nine months ending September 27, 1998 and
September 28, 1997, earnings per common share ("EPS") were computed
for both basic and diluted EPS to conform to Statement of Financial
Accounting Standards ("SFAS") No. 128. Basic EPS for the three and
nine months presented were computed by dividing net income
applicable to common shares by the weighted average number of
common shares outstanding and common equivalent shares including
any possible contingent shares. For the three and nine months
ending September 27, 1998 and September 28, 1997, diluted EPS were
computed by dividing income attributable to common shareholders by
the weighted average number of common and common equivalent shares
outstanding during the period plus (in periods in which they had a
dilutive effect) the effect of common shares contingently issuable,
primarily from stock options. The following table discloses the
quarterly and annual information.
_________________________________________________________________
Numerator Denominator EPS
Three Months
1998
Basic EPS $11,854,000 8,845,792 $1.34
Diluted $11,854,000 9,069,346 $1.31
1997
Basic EPS $ 2,002,000 8,672,425 $0.23
Diluted $ 2,002,000 8,755,886 $0.23
Nine Months
1998
Basic EPS $15,551,000 8,814,373 $1.76
Diluted $15,551,000 9,073,480 $1.71
1997
Basic EPS $ 3,815,000 8,657,280 $0.44
Diluted $ 3,815,000 8,722,067 $0.44
For further detail of EPS see Exhibit 11.
___________________________________________________________________
Note G: INCOME TAXES____________________________________________
The components of the income tax expense (benefit) based on the
liability method for the nine months are as follows:
_________________________________________________________________
Sept. 27, Sept. 28,
In thousands 1998 1997
Current - Federal $263 $158
State 226 172
Deferred - Federal (11,248) (214)
State ___(794) (5)
Income tax expense (benefit) ($11,553) $111
_________________________________________________________________
The income tax provision reconciled to the tax computed at
statutory rates for the nine months are summarized as follows:
_________________________________________________________________
Sept. 27, Sept. 28,
In thousands 1998 1997
Federal tax at statutory
rate (35% in 1998 and 1997) $1,584 $1,374
State income taxes (net of federal
tax benefit) 148 112
Nondeductible charges 411 285
Alternative minimum tax 270 113
Utilization of operating loss carryover (1,924) (1,554)
Adjustment of valuation allowance (12,042) (219)
Income tax expense (benefit) ($11,553) $111
_________________________________________________________________
Net deferred tax assets of $17.5 million and $5.5 million have
been recognized in the accompanying Consolidated Balance Sheets at
September 27, 1998 and December 31, 1997, respectively. The
components of the net deferred tax assets are as follows:
_________________________________________________________________
Sept. 27, Dec. 31,
In thousands 1998 1997
Total deferred tax assets $25,032 $25,201
Total valuation allowance (4,812) (17,037)
Total deferred tax asset - net 20,220 8,164
Total deferred tax liabilities (2,720) (2,705)
Total net deferred tax asset $17,500 $5,459
_________________________________________________________________
The valuation allowance decreased by $12.2 million during the
nine month period ended September 27, 1998. This reduction was
primarily related to the re-evaluation of the future utilization of
deferred tax assets of $12.0 million, and the change in temporary
differences of deferred tax assets and liabilities and net
operating loss carryforwards ("NOLs") of $183,000. 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. Section 382 of the Internal
Revenue Code limits an organization's ability to utilize tax
benefits in the event that there is change in ownership of 50% or
more of the organizations during any three-year period. Since the
Company's stock offering in August 1995, which resulted in a
significant change in ownership of the Company, management has been
concerned that cumulative changes in ownership of the Company could
trigger the limitations set forth in Section 382 and adversely
affect the Company's ability to utilize certain tax benefits. With
the passage of the third fiscal quarter of 1998, the ownership
changes occasioned by the stock offerings will no longer be
included in the time period measured under Section 382.
Accordingly, 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 or a
limitation based on section 382 occurs before NOLs expire.
The Company has NOLs and tax credit carryovers of approximately
$38.6 million and $3.1 million, respectively. If not utilized, the
NOLs and tax credit carryovers will expire in various years through
2012.
Note H: COMMITMENTS AND CONTINGENT LIABILITIES____________________
The Company does not believe that contingent losses or
potential claims arising from Year 2000 issues will have a material
effect on the Company. At one time, the Company sold certain DOS-
based systems that are not Year 2000 compliant. All such systems
were sold by the Company substantially to dealers and not directly
to end-users. In addition, any warranties associated with such
systems have expired. The Company has alerted all its dealers to
this potential problem and has provided instructions to the dealers
on how to remedy the problem. The Company can not predict whether
the failure of such systems to be Year 2000 compliant will result
in litigation against the Company.
Note I: SUBSEQUENT EVENT _________________________________________
On October 22, 1998, the Company and NationsBank, N.A.
("NationsBank"), entered into a credit agreement ("the Credit
Agreement"). NationsBank agreed to provide the Company with a $50
million revolving credit facility and a $5 million letter of credit
subfacility. The Company used $15.8 million under the revolving
credit facility to pay off (1) all its debt to Fleet of $10.8
million, (2) amounts owed under the Company's promissory note
including interest to the former owners of KVT of $4.4 million, and
(3) amounts of mortgages owed by KVT of $606,000. This revolving
credit facility can be used by the Company for working capital,
equipment purchases, to finance permitted acquisitions, and for
other general corporate purposes.
The Company's indebtedness to the NationsBank is secured by
liens on all the Company's properties and assets. The Credit
Agreement with the NationsBank contains certain financial covenants
that relate to specified levels of consolidated net worth and other
financial ratios.
COMDIAL CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to assist the reader in
understanding and evaluating the financial condition and results of
operations of Comdial Corporation and its subsidiaries (the
"Company"). This review should be read in conjunction with the
consolidated financial statements and accompanying notes. This
analysis attempts to identify trends and material changes that
occurred during the periods presented. Prior years have been
reclassified to conform to the 1998 reporting basis (see Note A to
the Consolidated Financial Statements).
The Company is a Delaware corporation based in Charlottesville,
Virginia. The Company's Common Stock is traded over-the-counter
and is quoted on the National Association of Security Dealers
Automated Quotation National Market System ("Nasdaq National
Market") under the symbol "CMDL."
On July 14, 1998, the Company acquired the internet telephony
gateway product VOIPgate.com and the related assets and business of
Array Telecom Inc. ("Array") and Array Systems Computing Inc.
("ASCI") which is located in Toronto, Ontario, Canada. The
purchase price was approximately $5.9 million. The funds used for
the acquisition came from cash generated by operations and the
revolving credit facility with Fleet Capital Corporation ("Fleet").
The principle asset purchased was the intellectual property
associated with VOIPgate.com software, an Internet Protocol ("IP")
based telephony software platform. In addition, the Company also
entered into a Technical Service Agreement with ASCI to continue
ongoing product development programs for approximately nine months
for a cost of approximately $450,000.
The Company has taken a one-time charge against earnings of
approximately $529,000 for the portion of the purchase price that
relates to in-process research and development. Approximately 90%
of the purchase price plus all the closing costs will be
capitalized as goodwill or as an other asset and amortized over
five to eight years. As disclosed in the Company's second quarter
Form 10-Q, the Company had originally planned to expense $4.7
million of the original purchase price, but based on recent
Security and Exchange Commission's interpretations of expensing in-
process research and development ("IPR&D") costs, the Company has
re-evaluated the amount and has revised it to $529,000.
The Company derived revenue from this product in the third
quarter of 1998. The majority of revenue is anticipated after
the newer version of this product is developed and released,
which is currently projected to be the end of 1998. Although the
Company anticipates that this project will be successful based on
its research into IP-based communications, because many of the
new design issues are very complex in nature, the success of this
project will not be certain until field testing and market
acceptance have been achieved. If the project is not successful,
the Company estimates it would incur losses of approximately $5.9
million.
Results of Operations
Revenue and Earnings
Third Quarter 1998 vs. 1997
The Company's net income increased by 492% for the third
quarter of 1998 to $11.9 million when compared with $2.0 million
for the same period in 1997. This increase is primarily
attributable to the tax benefit of $11.7 million recognized by the
Company in the third quarter of 1998. Income before income taxes
for the third quarter of 1998 decreased by 91% to $187,000 as
compared with $2.1 million for the comparable period in 1997,
partially due to costs associated with the Array acquisition.
Net sales increased by 3% for the third quarter of 1998 to
$32.0 million, compared with $31.1 million in the third quarter of
1997. Digital, Digital Expandable ("DXP"), and computer-telephony
integration ("CTI") product sales increased, but were offset
slightly with a drop in sales of analog, proprietary and specialty
terminals, and custom manufactured products.
Gross profit increased by 7% for the third quarter of 1998 to
$13.4 million, compared with $12.5 million in the third quarter
of 1997. Gross profit as a percentage of sales increased from
40% for the third quarter of 1997 to 42% for the same period of
1998.
Selling, general and administrative expenses increased by 19%
to $8.6 million, compared with $7.2 million in the third quarter of
1997. This increase was primarily due to the addition of new sales
and marketing personnel to support the Company's future growth.
In-process research and development expense of $529,000 relates
directly to the Array acquisition for which there were none for the
comparable period of 1997.
Goodwill amortization expense increased for the third quarter
of 1998 by 96% to $1.7 million, compared with $855,000 for the
third quarter of 1997. This increase is due to the full
amortization of goodwill costs associated with the Aurora
acquisition of $877,000 and the additional amortization associated
with Array of $118,000.
Interest expense decreased by 26% for the third quarter of 1998
to $321,000, compared with $436,000 in the third quarter of 1997.
This decrease is due to lower average debt levels with Fleet.
Income tax expense (benefit) reflected a benefit in the third
quarter of 1998 of $11.7 million compared with an expense of
$118,000 for the third quarter of 1997. This benefit recognition
is primarily due to management's belief that the limitations set
forth in Section 382 of the Internal Revenue Code are less likely
to impair the Company's ability to utilize net operating losses
("NOLs") (see Note G to the Consolidated Financial Statements).
.
Nine Months of 1998 vs. 1997
The Company's net income increased by 308% for the first nine
months of 1998 to $15.6 million when compared with $3.8 million for
the same period in 1997. This increase is primarily attributable
to the tax benefit of $11.7 million recognized by the Company in
the third quarter of 1998. Income before income taxes for the
first nine months of 1998 increased by 2% to $4.0 million as
compared with $3.9 million for the same period in 1997.
Net sales increased by 6% for the first nine months of 1998 to
$92.6 million, compared with $87.3 million for the same period of
1997. Digital, DXP, and CTI product sales increased substantially
but were offset slightly with declines in the sales of analog,
proprietary and specialty terminals, and custom manufactured
products.
The following table presents net sales information concerning
the Company's principal product lines for the first nine months
of 1998 and 1997.
_____________________________________________________________________
Sept. 27, Sept. 28,
In thousands 1998 1997
Sales
Business Systems
Digital $41,077 $36,370
CTI 24,284 23,002
DXP 18,521 15,952
Analog 6,512 9,147
Sub-total 90,394 84,471
Proprietary and Specialty Terminals 2,953 3,307
Custom Manufacturing ____206 ___553
Gross Sales 93,553 88,331
Sales discount and allowances ___924 ___1,006
Net Sales $92,629 $87,325
__________________________________________________________________
The decline in sales of analog products continues. However,
such products remain viable product in situations where price is
of paramount importance to the customer. A significant installed
base of analog systems remains and will continue to require
product in the form of replacements and up-grades. The Company
expects to continue selling analog product for the foreseeable
future.
Gross profit increased by 6% for the first nine months of 1998
to $37.5 million, compared with $35.3 million for the same period
of 1997. Gross profit as a percentage of sales is 40% for both
1998 and 1997.
Selling, general and administrative expenses increased by 9%
for the first nine months of 1998 to $23.7 million, compared with
$21.9 million for the same period of 1997. This increase was
primarily attributable to the addition of new sales personnel,
product advertising, and sales allowances relating to dealer
support. The personnel increase is primarily to support the growth
of sales in service application environments and national accounts,
and to further improve customer training and support.
Interest expense decreased by 34% for the first nine months of
1998 to $869,000, compared with $1.3 million for the same period of
1997. This decrease is due to lower average debt levels with
Fleet. In the first quarter of 1998, the Company paid an
additional $3.5 million towards its debt with Fleet (see Note E to
the Consolidated Financial Statements).
Income tax expense (benefit) in the first nine months of 1998
reflects a tax benefit of $11.7 million compared with an expense of
$111,000 for the same period of 1997. This decrease is primarily
due to the recognition of NOLs based on management's belief that
the Company will more likely than not use all the available NOLs.
Liquidity
Until October 22, 1998, Fleet held 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,
which had been amended from time to time. Under the Loan
Agreement, Fleet provided a $10.0 million acquisition loan (the
"Acquisition Loan"), $3.5 million equipment loan (the "Equipment
Loan"), and $12.5 million revolving credit loan facility (the
"Revolver"). For more detailed information concerning the
Company's debt refer to Note E and I to the Consolidated Financial
Statements.
The Acquisition Loan was payable in equal monthly principal
installments of $142,142, with the balance due on February 1, 2001.
At the Company's option, the Acquisition Loan, Equipment Loans,
and Revolver beared interest at rates based on either Fleet's prime
rate or the London Interbank Offered Rate ("LIBOR") (see Note E to
the Consolidated Financial Statements for further details). As of
September 27, 1998, the Company's borrowing rate for prime was
8.00% with 100% of the loans based on prime. As of December 31,
1997, the Company's borrowing rates for prime was 8.00% and 5.97%
for LIBOR with approximately 96% of the loans based on LIBOR.
Availability under the Revolver was based on eligible accounts
receivable and inventory, less funds already borrowed.
The Company's indebtedness to Fleet was secured by liens on
substantially all of the Company's assets. The Loan Agreement
contained certain financial covenants. The Company was in
compliance with all the covenants and terms of Fleet's Loan
Agreement.
The Company's Promissory Note of $7.0 million, which was issued
in connection with the purchase of Key Voice Technologies ("KVT"),
a subsidiary of the Company, carried an interest rate based on
prime. The Promissory Note was paid annually in the principal
amount of $1.4 million plus unpaid interest 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
consisted of two mortgages pertaining to KVT. The two mortgages
had monthly payments of $2,817 and $2,869, which includes interest
at 8.75% and 9.13%, respectively. The final payments were 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. 27, Dec. 31,
In thousands 1998 1997
Cash and cash equivalents $734 $5,673
Current maturities on debt 11,473 3,701
Working capital 13,262 16,676
_________________________________________________________________
All operating cash requirements are currently being funded
through the revolving credit facility. Cash decreased primarily
due to the additional payment made in January 1998 of $3.5 million
against the Company's debt to Fleet. Current maturities on debt
increased primarily due to the increase in the Revolver of $8.3
million, which was slightly offset by the repayment of amounts
outstanding under the Equipment Loans in January 1998 when compared
to December 31, 1997. The increase in the Revolver was primarily
attributable to funds borrowed to purchase Array. Working capital
decreased by $3.4 million primarily due to the decrease in cash for
the additional debt reduction in January 1998 and the borrowing for
Array in July 1998.
Accounts receivable increased at the end of the third quarter
of 1998 by 51% or $5.7 million, compared with December 31, 1997.
This increase was primarily due to increased sales and the timing
of related shipments.
Prepaid expenses and other current assets increased at the end
of the third quarter of 1998 by 224% or $3.7 million, compared with
December 31, 1997. This increase was due to the recognition of
additional deferred tax assets that resulted in a current portion
of $3.8 million.
Deferred tax asset increased at the end of the third quarter of
1998 by 101% or $8.3 million, compared with December 31, 1997.
This increase was primarily the Company recognizing future NOLs
which management believes will be utilized based on current facts
(see Note G to the Consolidated Financial Statements for further
details).
Other assets increased at the end of the third quarter of 1998
by 79% or 3.6 million, compared with December 31, 1997. This
increase is primarily attributable to the continued software
development costs associated with new products as well as feature
improvements for existing products and also an asset that relates
to the Array acquisition of $1.2 million.
During the nine month periods ended September 27, 1998 and
September 28, 1997, 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 additions in the first nine months of 1998 and for the
comparable period of 1997 were $2.8 million and $2.7 million,
respectively. The Company anticipates spending approximately $5.0
million on capital additions for fiscal year 1998, which includes
equipment for manufacturing and advanced technology.
Cash expenditures for capital additions for the first nine
months of 1998 and for the comparable period of 1997 were $3.1
million and $3.4 million, respectively. Capital expenditures for
1998 and 1997 were provided by funds from operations and borrowings
from Fleet. The Company plans to fund all future capital additions
through funds from operations, working capital from a revolving
credit facility, 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 27, 1998, the amount of available
commitments under the letter of credit facility with Crestar Bank
was $301,000.
Other Financial Information
In early 1997, the Company established a team, to evaluate
whether, and to what extent, the Year 2000 issue would effect the
Company's business.
State of Readiness: The Company has identified all the known
issues centered on Year 2000 and has developed plans to address and
remedy all known problems. The Year 2000 Team identified which of
the Company's products, devices, and computerized systems
containing embedded microprocessors would require remediation or
replacement because of potential Year 2000 problems. The Year 2000
Team concluded that nearly all of the Company's products are
already Year 2000 compliant and those which are not will be made
compliant before year 2000. Manufacturing has already performed
Year 2000 testing with all equipment functioning as required.
The Company continues to monitor and review any new issues that
may arise concerning Year 2000. Furthermore, the Company has
implemented a requirement that its suppliers certify that all
products, supplier's purchased products, and services provided to
the Company will not be adversely affected by the Year 2000. The
Company has divided its suppliers into three categories with
respect to Year 2000 compliance: (1) non-critical component
suppliers, (2) critical component suppliers, and (3) sole source
critical component suppliers. As of the end of the third quarter,
the Company has received confirmation of Year 2000 compliance for
the three categories of approximately 99% for (1), 98% for (2), and
92% for (3). The Company continues to follow up with suppliers to
make sure they comply with the Company's requirements and provide
the Company the proper verification that they do or will comply
with Year 2000 issues. The Company plans to audit some of the sole
source suppliers in 1999 that are critical to the Company's
operation.
Costs: The Company estimates that it will incur approximately
$725,000 in additional expenses to fix the remaining Year 2000
issues. This cost includes testing, new software, maintenance of
existing software, PC replacements, and consultants. On an ongoing
basis, the Company has been replacing existing in-house systems to
improve efficiency and to address the Year 2000 issue. Such
replacements are projected to be complete in the first half of
1999.
Risk: The only risk at this time as perceived by management is
the sole source supplier issue. The Company can not be assured
that the vendor certifications will resolve all Year 2000 issues.
The Company is attempting to stay in a state of readiness as new
issues arise concerning Year 2000, but this does not guarantee that
all the issues will be resolved without some effect on the Company.
It is more probable that all other issues will be resolved.
Contingency Plans: If the current sole source suppliers can
not give the Company certification or corrective action for Year
2000 non-compliance, the Company will develop and use alternative
vendors. The Company plans to identify these critical suppliers
early in 1999, to allow enough time to identify replacement
suppliers. Management believes that the Company is properly
addressing the Year 2000 issue in order to mitigate any adverse
operational or financial consequences.
In February 1997, Financial Accounting Standards Board ("FASB")
issued of Financial Accounting Standards ("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 was effective for
financial statements for both interim and annual periods ending
after December 15, 1997.
In June 1997, FASB issued SFAS No. 130, "Reporting
Comprehensive Income." The new standard requires businesses to
disclose comprehensive income and its components in their general-
purpose financial statements. This statement will be effective for
the Company's 1998 fiscal year. This standard will not have an
impact on the Company's disclosures.
In February 1997, FASB issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information." The new
standard requires presentation disclosures about reportable
operating segments of the Company. This statement will be
effective for the Company's 1998 fiscal year. Management is
currently evaluating the standard to determine how best to meet
this new disclosure requirement.
In April 1998, FASB issued SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." The
new standard revises the required disclosures for employee benefit
plans, but it does not change the measurement or recognition of
such plans. This statement will be effective for the Company's
1998 fiscal year.
In the third quarter of 1998, FASB issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities."
The Company does not have any derivatives so this statement will
not effect the Company.
"Safe Harbor" Statement Under The Private Securities Litigation
Reform Act Of 1995
The Company's Form 10-Q may contain 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 1998 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: November 10, 1998 By: /s/ Christian L. Becken
Christian L. Becken
Senior Vice President,
Chief Financial Officer,
Treasurer and Secretary
COMDIAL CORPORATION AND SUBSIDIARIES
Exhibit 11
SCHEDULE OF COMPUTATION OF EARNINGS PER COMMON SHARE
________________________________________________________________________________
Three Months Ended Nine Months Ended
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
1998 1997 1998 1997
________________________________________________________________________________
BASIC
Net income applicable to
common shares: $11,854,000 $2,002,000 $15,551,000 $465,000
Weighted average number of
common shares outstanding
during the period 8,816,560 8,672,425 8,776,739 8,634,169
Add - Deferred shares 7,500 - 6,486 -
Contingency shares 21,732 - 31,148 -
Weighted average number of shares used
in calculation of basic earnings
per common share 8,845,792 8,672,425 8,814,373 8,657,280
Basic earnings per common share: $1.34 $0.23 $1.76 $0.44
DILUTED
Net income applicable to
common shares - basic $11,854,000 $2,002,000 $15,551,000 $465,000
Weighted average number of shares
used in calculation of basic
earnings per common share 8,845,792 8,672,425 8,814,373 8,657,280
Add incremental shares representing:
Shares issuable based on weighted
average price:
Stock options 223,554 83,461 259,107 64,787
Weighted average number of shares
used in calculation of diluted
earnings per common share 9,069,346 8,755,886 9,037,480 8,722,067
Diluted earnings per common share $1.31 $0.23 $1.71 $0.44
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