United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 4, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to _____________
Commission file number: 0-9023
COMDIAL CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 94-2443673
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
P. O. Box 7266
1180 Seminole Trail; Charlottesville, Virginia 22906-7266
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(804) 978-2200
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the
issuer's classes of Common Stock, as of latest practicable date.
8,934,414 common shares as of July 4, 1999.
- ------------------------------------------------------------------------------
COMDIAL CORPORATION AND SUBSIDIARIES
INDEX
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1: Financial Statements
Consolidated Balance Sheets as of
July 4, 1999 and December 31, 1998 3
Consolidated Statements of Operations
for the Three and Six Months ended
July 4, 1999 and June 28, 1998 4
Consolidated Statements of Cash Flows
for the Six Months ended
July 4, 1999 and June 28, 1998 5
Notes to Consolidated Financial Statements 6-13
ITEM 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 14-21
PART II - OTHER INFORMATION
ITEM 3: Quantitative and Qualitative Disclosures
about Market Risks 22
ITEM 6: Exhibits and Reports on Form 8-K 22
- --------------------------------------------------------------------------
COMDIAL CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
ITEM 1: Financial Statements
Consolidated Balance Sheets - (Unaudited)
_________________________________________________________________________
July 4, Dec. 31,
In thousands except par value 1999 1998
_________________________________________________________________________
Assets
Current assets
Cash and cash equivalents $2,513 $1,599
Accounts receivable (less allowance 26,757 23,006
for doubtful accounts: 1999 - $445;
1998 - $198)
Inventories 18,439 21,434
Prepaid expenses and other current
assets 5,003 4,815
________________________________________________________________________
Total current assets 52,712 50,854
Property - net 18,130 18,023
Goodwill 12,801 14,079
Deferred tax asset - net 16,368 17,257
Other assets 11,445 8,777
_________________________________________________________________________
Total assets $111,456 $108,990
=========================================================================
_________________________________________________________________________
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $9,715 $11,034
Accrued payroll and related expenses 2,832 2,942
Accrued promotional allowances 1,444 1,877
Other accrued liabilities 2,191 3,346
Current maturities of debt 4 6
________________________________________________________________________
Total current liabilities 16,186 19,205
Long-term debt 25,441 22,140
Deferred tax liability 2,968 3,123
Other long-term liabilities 1,445 1,361
Commitments and contingent liabilities
(see Note H) - -
________________________________________________________________________
Total liabilities 46,040 45,829
Stockholders' equity
Common stock ($0.01 par value) and
paid-in capital (Authorized 30,000
shares; issued shares: 1999 = 8,934;
1998 = 8,818) 116,614 116,039
Other (1,242) (1,243)
Accumulated deficit (49,956) (51,635)
________________________________________________________________________
Total stockholders' equity 65,416 63,161
Total liabilities and stockholders'
equity $111,456 $108,990
========================================================================
The accompanying notes are an integral part of these financial statements.
- -------------------------------------------------------------------------------
COMDIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations - (Unaudited)
In thousands except per share amounts
______________________________________________________________________________
Three Months Ended Six Months Ended
July 4, June 28, July 4, June 28,
1999 1998 1999 1998
______________________________________________________________________________
Net sales $35,743 $31,317 $67,607 $60,598
Cost of goods sold 20,088 19,101 39,251 36,495
______________________________________________________________________________
Gross profit 15,655 12,216 28,356 24,103
Operating expenses
Selling, general & administrative 10,026 7,545 18,637 15,160
Engineering, research
& development 2,338 1,493 4,424 3,044
Goodwill amortization expense 799 683 1,583 1,346
______________________________________________________________________________
Operating income 2,492 2,495 3,712 4,553
Other expense
Interest expense 377 273 759 548
Miscellaneous expenses (income)- net (28) 14 101 194
______________________________________________________________________________
Income before income taxes 2,143 2,208 2,852 3,811
Income tax expense 852 350 1,173 114
______________________________________________________________________________
Net income applicable
to common stock $1,291 $1,858 $1,679 $3,697
==============================================================================
Earnings per common share and common
equivalent share:
Basic $0.14 $0.21 $0.19 $0.42
Diluted $0.14 $0.20 $0.19 $0.41
Weighted average common shares outstanding:
Basic 8,948 8,810 8,944 8,762
Diluted 8,986 9,125 8,985 9,037
The accompanying notes are an integral part of these financial statements.
- --------------------------------------------------------------------------------
COMDIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows - (Unaudited)
Six Months Ended
July 4, June 28,
In thousands 1999 1998
___________________________________________________________________________
Cash flows from operating activities:
Cash received from customers $64,986 $58,147
Other cash received 770 493
Interest received 4 28
Cash paid to suppliers and employees (65,472) (57,831)
Interest paid on debt (790) (785)
Income taxes paid (215) (426)
___________________________________________________________________________
Net cash used in operating activities (717) (374)
Cash flows from investing activities:
Acquisition costs for Array Telecom Corp. and
Key Voice Technologies, Inc. (1) (4)
Proceeds received from the sale of FastCall - 178
Proceeds from the sale of equipment 1 100
Capital expenditures (1,682) (2,057)
___________________________________________________________________________
Net cash used in investing activities (1,682) (1,783)
Cash flows from financing activities:
Net borrowings under Revolving Credit Facility 3,304 2,500
Proceeds from issuance of common stock 14 248
Principal payments on debt - (5,893)
Principal payments on capital
lease obligations (5) (35)
___________________________________________________________________________
Net cash provided by (used in)
financing activities 3,313 (3,180)
___________________________________________________________________________
Net increase (decrease) in cash
and cash equivalents 914 (5,337)
Cash and cash equivalents at
beginning of year 1,599 5,673
___________________________________________________________________________
Cash and cash equivalents at end of period $2,513 $336
===========================================================================
Reconciliation of net income to net cash used in operating activities:
Net income $1,679 $3,697
___________________________________________________________________________
Depreciation and amortization 4,557 3,734
Increase in accounts receivable (3,751) (5,303)
Inventory provision 918 1,293
Decrease (increase) in inventory 2,077 (85)
Increase in other assets (4,583) (2,578)
Decrease (increase) in deferred tax asset 756 (330)
Decrease in accounts payable (1,319) (1,295)
Decrease in other liabilities (1,614) (156)
Increase in paid-in capital and other equity 563 649
___________________________________________________________________________
Total adjustments (2,396) (4,071)
___________________________________________________________________________
Net cash used in operating activities ($717) ($374)
===========================================================================
The accompanying notes are an integral part of these financial statements.
- ------------------------------------------------------------------------------
COMDIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JULY 4, 1999 - (Unaudited)
Note A: CONSOLIDATED FINANCIAL STATEMENTS
_____________________________________________________________________________
The financial information included as of July 4, 1999, and for
the three and six months ended July 4, 1999 and June 28, 1998 is
unaudited. The financial information reflects all normal recurring
adjustments necessary for a fair statement of results for such
periods. Accounting policies followed by Comdial Corporation
("Comdial") are described in Note 1 to the consolidated financial
statements in its Annual Report to Stockholders for the year ended
December 31, 1998. The consolidated financial statements for
accounting periods in 1999 contained herein should be read in
conjunction with the 1998 financial statements, including notes
thereto, contained in Comdial's Annual Report to Stockholders for
the year ended December 31, 1998. Certain amounts in the 1998
consolidated financial statements have been reclassified to conform
to the 1999 presentation. The results of operations for the six
months ended July 4, 1999, are not necessarily indicative of
results for the full year. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Note B: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
________________________________________________________________________
The preparation of financial statements to conform with
generally accepted accounting principles ("GAAP") requires
management to make certain estimates and assumptions that affect
reported amounts of assets, liabilities, revenues, and expenses.
GAAP also requires disclosure of contingent assets and liabilities
as of July 4, 1999. Actual results may differ from those
estimates.
Cash and Cash Equivalents
Cash and cash equivalents are defined as short-term liquid
investments with maturities, when purchased, of less than 90 days
that are readily convertible into cash. Under Comdial's current
cash management policy, borrowings from the revolving credit
facility are used for operating purposes. The revolving credit
facility is reduced at management's option by cash receipts that
are deposited daily. Bank overdrafts of $3.0 million and $3.3
million are included in accounts payable as of July 4, 1999 and
December 31, 1998, respectively. Bank overdrafts consist of
outstanding checks that have not (1) cleared the bank and (2) been
funded by the revolving credit facility (see Note D). The
revolving credit facility activity is reported on a net basis in
the Consolidated Statements of Cash Flows.
Revenue Recognition
Comdial recognizes revenue as products are shipped. Returned
products are credited against revenues as they are received back
from the customer. The only exceptions to this policy are revenues
from E911 systems and from embedded software. E911 revenues are
recognized when installations have been completed and embedded
software revenues are not recognized until the customer requests a
code from Comdial enabling the software to be activated. Comdial's
reporting of software revenue meets the requirements as set forth
by Statement of Position 97-2 "Software Revenue Recognition."
Other Long-lived Assets
Long-lived assets are amortized based on the assets' useful
lives. Long-lived assets are reviewed for impairment as
circumstances change that might affect those assets. An impairment
loss is not recognized unless a portion of the carrying amount of
an asset is no longer recoverable using a test of recoverability
that is based on expected future undiscounted cash flows.
Note C: INVENTORIES
__________________________________________________________________________
Inventories consist of the following:
__________________________________________________________________________
July 4, Dec. 31,
In thousands 1999 1998
__________________________________________________________________
Finished goods $8,748 $8,507
Work-in-process 2,620 3,568
Materials and supplies 7,071 9,359
________________________
Total $18,439 $21,434
__________________________________________________________________________
Comdial provides reserves to cover product obsolescence and
those reserves impact gross margin. Future reserves are dependent
on management's estimates of the recoverability of costs of all
inventory. Raw material obsolescence is mitigated by the
commonality of component parts and finished goods by the low level
of inventory relative to sales.
Note D: BORROWINGS
________________________________________________________________________
In the third quarter of 1998, Comdial and NationsBank, N.A.
("NationsBank"), entered into a credit agreement (the "Credit
Agreement"). The Credit Agreement provides Comdial with a $50
million revolving credit facility and a $5 million letter of credit
subfacility. Comdial used $15.8 million under the revolving credit
facility (the "Revolver") to pay off (1) its total indebtedness of
$10.8 million to Fleet Capital Corporation ("Fleet"), (2) $4.4
million representing amounts owed under a promissory note including
interest to the former owners of Key Voice Technologies, Inc.
("KVT"), and (3) $0.6 million of mortgages owed by KVT.
Long-term Debt. Long-term debt consists of the following:
_________________________________________________________________
July 4, Dec. 31,
In thousands 1999 1998
_________________________________________________________________
Revolving Credit Facility (1) $25,436 $22,132
Capitalized leases (2) 9 14
__________________________
Total debt 25,445 22,146
Less current maturities on debt 4 6
__________________________
Total long-term debt $25,441 $22,140
_________________________________________________________________
(1) The Revolver made pursuant to the Credit Agreement with
NationsBank carries an interest rate based on the LIBOR daily rate
plus a specified margin. The interest rate can be adjusted
quarterly based on Comdial's ratio of funded debt to earnings
before interest, taxes, depreciation and amortization ("EBITDA"),
which allows the rates to vary from 0.75% to 1.50% above the LIBOR
daily rate. As of July 4, 1999 and December 31, 1998, Comdial's
LIBOR based borrowing rates were 5.99% and 6.30%, respectively,
which includes the additional applicable margin of 0.75%.
Comdial can use the Revolver with NationsBank for working
capital, equipment purchases, to finance permitted acquisitions,
and for other general corporate purposes. The NationsBank Revolver
(as defined in the Credit Agreement) does not require payment until
August 31, 2003 with the option of possible credit extensions.
(2) Capital leases are with various financing entities and are
payable based on the terms of each individual lease.
Debt Covenants
Comdial's indebtedness to NationsBank is secured by liens on
all of Comdial's properties and assets. The Credit Agreement with
NationsBank contains certain financial covenants that relate to
specified levels of consolidated net worth and other financial
ratios. As of July 4, 1999, Comdial was in compliance with all of
the covenants and terms of the Credit Agreement.
Note E: EARNINGS PER SHARE
_______________________________________________________________________
For the three and six months ended July 4, 1999 and June 28,
1998, earnings per common share ("EPS") were computed for both
basic and diluted EPS to conform to Statement of Financial
Accounting Standards ("SFAS") No. 128. Basic EPS for the three and
six months presented were computed by dividing net income
applicable to common shares by the weighted average number of
common shares outstanding and common equivalent shares including
any possible contingent shares. For the three and six months ended
July 4, 1999 and June 28, 1998, diluted EPS were computed by
dividing income attributable to common shareholders by the weighted
average number of common and common equivalent shares outstanding
during the period plus (in periods in which they had a dilutive
effect) the effect of common shares contingently issuable,
primarily from stock options. The following table discloses the
quarterly information for the three and six months ended July 4,
1999 and June 28, 1998.
_________________________________________________________________
Numerator Denominator EPS
_________________________________________________________________
Three Months
1999
Basic EPS $1,291,000 8,948,304 $0.14
Diluted $1,291,000 8,985,774 $0.14
1998
Basic EPS $1,858,000 8,809,817 $0.21
Diluted $1,858,000 9,124,681 $0.20
Six Months
1999
Basic EPS $1,679,000 8,943,912 $0.19
Diluted $1,679,000 8,985,223 $0.19
1998
Basic EPS $3,697,000 8,762,139 $0.42
Diluted $3,697,000 9,037,404 $0.41
For further detail of EPS see Exhibit 11.
___________________________________________________________________
Note F: INCOME TAXES
___________________________________________________________________
The components of the income tax expense (benefit) based on the
liability method for the six months are as follows:
__________________________________________________________________
July 4, June 28,
In thousands 1999 1998
__________________________________________________________________
Current - Federal $247 $245
State 169 199
Deferred - Federal 703 (322)
State 54 (8)
___________________________
Income tax provision $1,173 $114
_________________________________________________________________
The income tax provision reconciled to the tax computed at
statutory rates for the six months are summarized as follows:
_________________________________________________________________
July 4, June 28,
In thousands 1999 1998
_________________________________________________________________
Federal tax at statutory
rate (35% in 1999 and 1998) $998 $1,334
State income taxes (net of federal
tax benefit) 145 129
Nondeductible charges 10 66
Alternative minimum tax - 164
Utilization of operating loss carryover - (1,249)
Adjustment of valuation allowance - (330)
Other adjustments 20 -
_______________________
Income tax provision $1,173 $114
_________________________________________________________________
Net deferred tax assets of $16.2 million and $17.0 million have
been recognized in the accompanying Consolidated Balance Sheets as
of July 4, 1999 and December 31, 1998, respectively. Comdial
periodically reviews the requirements for a valuation allowance and
makes adjustments to such allowance when changes in circumstances
result in changes in management's judgment about the future
realization of deferred tax assets. Comdial has recognized the
deferred tax assets, because it is management's belief that Comdial
will more likely than not utilize the net operating losses ("NOLs")
before they expire.
Comdial has NOLs and tax credit carryovers of approximately
$27.0 million and $1.8 million, respectively. If not utilized, the
NOLs and tax credit carryovers will expire in various years through
2010.
The components of the net deferred tax assets are as follows:
______________________________________________________________________
July 4, Dec. 31,
In thousands 1999 1998
______________________________________________________________________
Total deferred tax assets $22,133 $23,045
Total valuation allowance (2,966) (2,966)
___________________________
Total deferred tax asset - net 19,167 20,079
Total deferred tax liabilities (2,968) (3,123)
___________________________
Total net deferred tax asset $16,199 $16,956
_______________________________________________________________________
NOTE G. SEGMENT INFORMATION
_________________________________________________________________________
As of December 31, 1998, Comdial adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This disclosure should be
read in conjunction with Comdial's financial statement notes
contained in its Annual Report to Stockholders for the year ended
December 31, 1998.
During the first six months of 1999 and 1998, substantially all
of Comdial's sales, net income, and identifiable net assets were
attributable to the telecommunications industry with over 98% of
sales occurring in the United States. There are no operating
assets located outside the United States.
Comdial is segmented into three product categories, each of
which contributes ten percent or more to net sales. The segments
are Digital Systems, Solutions and Software, and Analog and Other
(which includes other miscellaneous products). Each of these
categories is considered a business segment, and with respect to
financial performance, the costs associated with each of these
segments can only be quantified and identified to the gross profit
level. The expenses, and assets and liabilities attributable to
corporate activity are not allocated to the operating segments.
Comdial does not maintain information that would allow these costs
to be broken down into the various product segments and most of the
costs are universal in nature.
The Digital Systems segment is comprised of products such as
Impact, Impression, Impact Digital Expandable Systems ("DXP"), DXP
Plus and the "FX Series." Digital Systems' distinguishing
characteristic is that they are designed for the small office (up
to 500 end users) and offer additional features.
The Solutions and Software segment is comprised of Comdial's
software and software application products such as Impact
Concierge, QuickQ, Avalon, and voice processing systems. These
products are sold to specific markets such as hospitality, call
centers, and assisted living.
The Analog and Other segment is comprised of Comdial's older
analog products (such as Executech, Unisyn, ATC Terminals, and
Solo), and other products such as Voice Express, MaxPlus, and
Custom Manufacturing. Analog products are aimed at the small
office market and emphasize price rather than features or software
functionality.
The information in the following tables is derived directly
from the segments' internal financial reporting used for corporate
management purposes. The following tables show segment information
for the periods ended July 4, 1999 and June 28, 1998.
__________________________________________________________________________
July 4, June 28,
(Dollars in thousands) 1999 1998
__________________________________________________________________________
Business Segment Net Revenues
Digital Systems $40,002 $38,189
Solutions and Software 21,720 16,433
Analog and Other 5,885 5,976
____________________________
Net sales $67,607 $60,598
__________________________________________________________________________
__________________________________________________________________________
July 4, June 28,
(Dollars in thousands) 1999 1998
__________________________________________________________________________
Business Segment Profit
Digital Systems $14,485 $13,833
Solutions and Software 12,537 9,117
Analog and Other 1,334 1,153
_____________________________
Gross profit 28,356 24,103
Operating expenses 24,644 19,550
Interest expense 759 548
Miscellaneous expense - net 101 194
___________________________
Income before income taxes $2,852 $3,811
_________________________________________________________________________
_________________________________________________________________________
July 4, December 31,
(Dollars in thousands) 1999 1998
_________________________________________________________________________
Business Segment Assets
Digital Systems $45,360 $43,286
Solutions and Software 23,915 18,124
Analog and Other 5,809 6,432
Unallocated 36,372 41,148
___________________________
Total $111,456 $108,990
Business Segment Liabilities
Digital Systems $1,085 $1,397
Solutions and Software 2,169 1,750
Analog and Other 140 203
Unallocated 42,646 42,479
___________________________
Total $46,040 $45,829
_______________________________________________________________________
_______________________________________________________________________
July 4, June 28,
(Dollars in thousands) 1999 1998
_______________________________________________________________________
Business Segment Property, Plant and Equipment
Depreciation
Digital Systems $963 $877
Solutions and Software 158 127
Analog and Other 84 79
Unallocated 525 319
___________________________
Total $1,730 $1,402
Capital Additions
Digital Systems $630 $1,052
Solutions and Software 153 200
Analog and Other 63 68
Unallocated 965 146
__________________________
Total $1,811 $1,466
_________________________________________________________________________
Note H: COMMITMENTS AND CONTINGENT LIABILITIES
_________________________________________________________________________
Management does not believe that contingent losses or potential
claims arising from Year 2000 issues will have a material effect on
Comdial. At one time, Comdial sold certain DOS-based systems that
were not Year 2000 compliant. All systems were sold by Comdial to
dealers and not directly to end-users. In addition, any warranties
associated with such systems have expired. Comdial has alerted all
of its dealers to this potential problem and has provided
instructions to the dealers on how to remedy the problem. Comdial
cannot predict whether the failure of such systems to be Year 2000
compliant will result in any litigation against Comdial.
Comdial has received correspondence from Lucent Technologies,
Inc. ("Lucent") inviting Comdial to negotiate a license agreement
regarding Lucent's patents. Lucent has asserted that certain
Comdial products infringe on certain Lucent patents. Comdial is
currently assessing Lucent's claims to determine whether they have
any merit. Comdial's potential liability in this matter, if any,
cannot be determined at this time. If it is subsequently
determined that Comdial's products do infringe on Lucent's patents,
it could have a material adverse effect on Comdial's financial
condition.
- -------------------------------------------------------------------------
COMDIAL CORPORATION AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to assist the reader in
understanding and evaluating the financial condition and results of
operations of Comdial Corporation and its subsidiaries (the
"Company"). This review should be read in conjunction with the
consolidated financial statements and accompanying notes. This
analysis attempts to identify trends and material changes that
occurred during the periods presented. Prior years have been
reclassified to conform to the 1999 reporting basis (see Note A to
the Consolidated Financial Statements).
Comdial is a Delaware corporation based in Charlottesville,
Virginia. Comdial's Common Stock is traded on the National
Association of Security Dealers Automated Quotation System
("Nasdaq?") in the National Market? under the symbol, CMDL.
Results of Operations
Selected consolidated statements of operations for the first
six months of 1999 and 1998 are as follows:
______________________________________________________________________
July 4, June 28,
In thousands 1999 1998
______________________________________________________________________
Business Segment Sales:
Digital Systems $40,002 $38,189
Solutions and Software 21,720 16,433
Analog and Other 5,885 5,976
_________________________
Net Sales 67,607 60,598
Cost of sales 39,251 36,495
Gross profit 28,356 24,103
Selling, general & administrative 18,637 15,160
Engineering, research & development 4,424 3,044
Goodwill amortization 1,583 1,346
Interest expense 759 548
Miscellaneous expense - net 101 194
__________________________
Income before income taxes 2,852 3,811
Income tax expense 1,173 114
__________________________
Net income applicable to common stock $1,679 $3,697
Earnings per common share and common
equivalent share: basic $0.19 $0.42
___________________________________________________________________________
Revenue and Earnings
Second Quarter 1999 vs. 1998
Comdial continued to show growth in sales and gross profit
margin as a percentage of sales for the second quarter of 1999.
Comdial's net sales increased by 14% for the second quarter of 1999
to $35.7 million, compared with $31.3 million in the second quarter
of 1998. This increase was primarily attributable to the increase
in digital systems and solutions and software product sales.
Gross profit increased by 28% for the second quarter of 1999 to
$15.7 million, compared with $12.2 million in the second quarter of
1998. Gross profit, as a percentage of sales, increased from 39%
for the second quarter of 1998 to 44% for the same period of 1999.
This increase was due to (1) higher margins on Impact systems and
phones (Digital segment) and (2) the continuing transition to
higher margin product sales of solution and software systems.
Selling, general and administrative expenses increased for the
second quarter of 1999 by 33% to $10.0 million, compared with $7.5
million in the second quarter of 1998. This increase was due to
additional sales and marketing personnel to support Comdial's
future growth along with additional costs associated with the
acquisition of Array Telecom Corporation ("Array") in the third
quarter of 1998.
Engineering, research and development expenses for the second
quarter of 1999 increased by 57% to $2.3 million, compared with
$1.5 million for the second quarter of 1998. This increase was due
to additional engineering personnel and additional costs associated
with Array.
Goodwill amortization expense increased for the second quarter
of 1999 by 17% to $0.8 million, compared with $0.7 million for the
second quarter of 1998. This increase was due to the additional
amortization expenses associated with the Array acquisition.
Interest expense increased by 38% for the second quarter of
1999 to $0.4 million, compared with $0.3 million in the second
quarter of 1998. This increase was due to higher average debt
levels on Comdial's revolving credit facility.
Income tax expense increased for the second quarter of 1999 to
$0.9 million, compared with $0.4 million for the second quarter of
1998. This increase in tax expense was primarily due to Comdial
recognizing a deferred tax asset expense of $0.6 million for the
second quarter of 1999, compared with nothing for the same period
of 1998.
Comdial's net income decreased by 31% for the second quarter of
1999 to $1.3 million, compared with $1.9 million for the same
period in 1998. This decrease is primarily attributable to the
additional tax expenses incurred in the second quarter of 1999.
Income before income taxes for the second quarter of 1999 decreased
by 3% to $2.1 million compared with $2.2 million for the second
quarter of 1998.
Six Months of 1999 vs. 1998
Comdial's growth continues in several important key areas such
as sales and gross profit margin as a percentage of sales. Net
sales increased by 12% for the first six months of 1999 to $67.6
million, compared with $60.6 million in the first six months of
1998. This increase was primarily attributable to the increase in
digital product sales (such as the FX Impact products) by 5% and
solutions and software products by 32%. Solutions and software
product sales increase was primarily attributable to the increase
in National Account sales.
Gross profit increased by 18% for the first six months of 1999
to $28.4 million, compared with $24.1 million in the first six
months of 1998. Gross profit, as a percentage of sales, increased
from 40% for the first six months of 1998 to 42% for the same
period of 1999. This increase was primarily due to higher volume
of sales of solutions and software products that contain higher
margins.
Selling, general and administrative expenses increased by 23%
to $18.6 million, compared with $15.2 million in the first six
months of 1998. This increase was due to additional costs of: (1)
sales personnel to support Comdial's future growth in National
Accounts, (2) marketing personnel to help promote Comdial's
products through additional advertising and product promotions, (3)
a national advertising agency to promote Comdial and its products,
and (4) personnel and associated expenses related to the 1998
acquisition of Array.
Engineering, research and development expenses for the first
six months of 1999 increased by 45% to $4.4 million compared with
$3.0 million for the first six months of 1998. This increase was
due to additional engineering personnel and additional costs
associated with Array.
Goodwill amortization expense increased for the first six
months of 1999 by 18% to $1.6 million, compared with $1.3 million
for the first six months of 1998. This increase was due to the
additional amortization expenses associated with the Array
acquisition.
Interest expense increased by 39% for the first six months of
1999 to $0.8 million compared with $0.5 million in the first six
months of 1998. This increase was due to higher average debt
levels on Comdial's revolving credit facility (the "Revolver").
The increase in the Revolver is primarily attributable to the
additional borrowing associated with the Array acquisition.
Miscellaneous expense decreased by 48% for the first six
months of 1999 to $0.1 million, compared with $0.2 million for the
first six months of 1998. This decrease was primarily due to
decreases in cash discounts allowed by Comdial to its customers.
Income tax expense reflected an expense for the first six
months of 1999 of $1.2 million compared with $0.1 million for the
first six months of 1998. This increase in tax expense was
primarily due to Comdial recognizing all of its tax benefits of net
operating losses ("NOLs") in the third quarter of 1998 (see Note F
to the Consolidated Financial Statements). Comdial's tax expense
will continue to be recognized at a normal tax rate of
approximately 40%. Comdial will continue to pay taxes at the
alternative minimum tax rate ("AMT") for all of 1999 with the
additional tax expense reducing Comdial's deferred tax asset
generated by the recognition of its NOLs.
Comdial's net income decreased by 55% for the first six months
of 1999 to $1.7 million, compared with $3.7 million for the same
period in 1998. This decrease was primarily attributable to the
increase in income tax expense and operating expenses. Income
before income taxes for the first six months of 1999 decreased by
25% to $2.9 million, as compared with $3.8 million for the
comparable period in 1998.
Liquidity
Comdial's financial position continues to improve when compared
to previous years. In 1998, Comdial entered into a new financing
arrangement with NationsBank, N.A. ("NationsBank") that provides a
line of credit up to $50 million. Comdial's continual improvement
in its financial position, along with the additional line of
credit, allows Comdial to make necessary and desirable capital
expenditures and investments to expand into new high growth markets
in the telecommunications industry.
The following table sets forth Comdial's cash and cash
equivalents, current maturities on debt, and working capital at the
dates indicated:
_____________________________________________________________________
July 4, December 31,
In thousands 1999 1998
_____________________________________________________________________
Cash and cash equivalents $2,513 $1,599
Current maturities on debt 4 6
Working capital 36,526 31,649
_____________________________________________________________________
For the first six months of 1999, all operating cash
requirements were funded through a $50 million revolving credit
facility provided by NationsBank Credit Agreement (the "Credit
Agreement"). Comdial reports the Revolver activity on a net basis
in the Consolidated Statements of Cash Flows. Comdial considers
outstanding checks to be a bank overdraft. As of July 4, 1999,
Comdial's cash and cash equivalents were slightly higher than
December 31, 1998 by $0.9 million, due to the timing of the
deposits received at end of the period that were not applied
against the Revolver.
Working capital as of July 4, 1999, increased by $4.9 million
when compared to December 31, 1998. This increase was primarily
due to increases in accounts receivable and the reduction of
accounts payable and other accrued liabilities.
Capital additions for the first six months of 1999 were
approximately $1.8 million, compared with $1.5 million for the same
period of 1998. Capital additions were used to help Comdial
introduce new products as well as improve quality and reduce costs
associated with new and existing products. Capital additions were
funded by cash generated from operations and borrowing from the
revolver. Cash expenditures for capital additions for the first
six months of 1999 and 1998, were $1.7 million and $2.1 million,
respectively. Management anticipates that approximately $8 million
will be spent on capital additions during 1999. These additions
will help Comdial meet its commitments to its customers by
developing new products as well as increasing its capacity to
produce high-tech products for the future. Comdial plans to fund
all additions primarily through cash generated by operations along
with some borrowing from the Revolver.
Comdial has a commitment from NationsBank for the issuance of
letters of credit in an aggregate amount not to exceed $5 million
at any one time. On July 4, 1999, the amount of commitments under
the letter of credit facility with NationsBank was $0.2 million.
Accounts Receivable as of July 4, 1999, increased by $3.8
million compared with December 31, 1998, primarily due to (1)
record breaking sales in the second quarter of 1999 and (2) the
fact that the majority of those sales occurred in the latter stages
of the quarter.
Inventory decreased at the end of the second quarter of 1999 by
$3.0 million due to the additional shipments for product sales at
the end of the quarter and the timing of incoming production
material receipts.
Other assets increased by $2.7 million due to software
development costs associated with new products, Array product
development and the purchase of additional engineering development
software.
Accounts payable as of July 4, 1999, decreased by $1.3 million
when compared to December 31, 1998. This decrease was primarily
due to the timing of incoming material receipts for production.
Accrued promotional allowances as of July 4, 1999, decreased by
$0.4 million when compared to December 31, 1998. This decrease was
primarily due to Comdial paying the volume discount earned by its
major distributors for 1998 sales. Other accrued liabilities as of
July 4, 1999, decreased by $1.2 million partially due to Comdial
paying costs in 1999 associated with 1998 annual incentives awarded
to its directors and officers.
Long-term Debt, Including Current Maturities
In the third quarter of 1998, Comdial and NationsBank entered
into the Credit Agreement. NationsBank agreed to provide Comdial
with a $50 million revolving credit facility and a $5 million
letter of credit subfacility. Comdial used $15.8 million under the
Revolver to pay off (1) its remaining indebtedness to Fleet Capital
Corporation of $10.8 million, (2) amounts owed under Comdial's
promissory note including interest to the former owners of KVT of
$4.4 million, and (3) mortgages owed by KVT of $0.6 million.
As of July 4, 1999, long-term debt increased by $3.3 million
due to paying liabilities that related to 1998 along with an
increase in accounts receivable. See Note D to Comdial's
Consolidated Financial Statements for additional information with
respect to Comdial's loan agreements, long-term debt and available
short-term credit lines.
Comdial believes that income from operations combined with
amounts available from Comdial's current credit facilities will be
sufficient to meet Comdial's needs for the foreseeable future.
Other Financial Information
During the first six months of 1999 and 1998, primarily all of
Comdial's sales, net income, and identifiable net assets were
attributable to the telecommunications industry.
Year 2000
In early 1997, Comdial established a team (the "Year 2000
Team"), to evaluate whether, and to what extent, Comdial's
products, information technology systems, facilities and production
and distribution infrastructure may be affected by the Year 2000
and potential problems caused by the inability of certain computers
and microprocessors to distinguish between the year 2000 and the
year 1900.
State of Readiness: Comdial believes it has identified the Year
2000 issues that could potentially affect its business and has
developed plans to address such problems. Through a series of
industry-recognized tests, the Year 2000 Team believes that it has
identified all of Comdial's products, devices, and computerized
systems containing embedded microprocessors that will require
remediation or replacement because of potential Year 2000 issues.
The Year 2000 Team has concluded that nearly all of Comdial's
products are already Year 2000 compliant. Comdial expects that any
non-compliant products that Comdial continues to sell will be
compliant by the third quarter of 1999. Furthermore, Comdial is
providing upgrades, or taking other remedial steps, to correct any
non-compliant products that remain under warranty. In addition,
Comdial's manufacturing division has performed Year 2000 testing
and found all equipment to be functioning as required.
Comdial continues to monitor and review any new issues that may
arise concerning Year 2000. Furthermore, Comdial has implemented
a requirement that its suppliers certify that all products,
supplier's purchased products, and services provided to Comdial
will not be adversely affected by the Year 2000. Comdial has
divided its suppliers into three categories with respect to Year
2000 compliance: (1) non-critical component suppliers, (2)
critical component suppliers, and (3) sole source critical
component suppliers. As of the end of the second quarter of 1999,
Comdial received written confirmation of Year 2000 compliance for
approximately 99% of all three categories. Comdial continues to
follow-up with suppliers to ensure they comply with Comdial's
requirements and that they provide Comdial with the proper
verification. Comdial also plans to perform on-site audits of some
of the sole source suppliers that are critical to Comdial's
operations, which should be completed by the fourth quarter of
1999.
Costs: Comdial estimates that it will incur approximately $0.4
million in additional expenses to remedy the remaining Year 2000
issues. This cost includes testing, new software, maintenance of
existing software, PC replacements, and consultants. On an ongoing
basis, Comdial has been replacing existing in-house systems to
improve efficiency and to address the Year 2000 issue. Such
replacements are projected to be complete by the end of the third
quarter of 1999. As of July 4, 1999, cumulative costs incurred by
Comdial specifically for the Year 2000 totaled an aggregate of $0.2
million.
Risks: There are various potential risks that could be associated
with the failure of Comdial's business or the business of
significant third-party suppliers of Comdial to be Year 2000 ready.
The possible failure of internal information systems to be Year
2000 ready could result in some interruptions or disruptions of
business. The possible failure of manufacturing facilities to be
Year 2000 ready could result in impaired manufacturing processes
with delays in delivery of products until non-compliant components
or conditions can be remedied or replaced. Finally, risks of major
failures of Comdial's products could include adverse functional
impacts experienced by customers, the costs and resources for
Comdial to remedy such problems or replace non-compliant products
under warranty and delays in delivery of new products. While
Comdial believes that it is taking appropriate actions to respond
to and resolve potential Year 2000 issues, there can be no
assurance that Year 2000 issues will not have a material adverse
affect on Comdial.
Contingency Plans: If the current sole source suppliers cannot
give Comdial certification or corrective action for Year 2000
compliance, Comdial plans to develop and use alternative vendors.
Comdial, as of July 4, 1999, has received certification that all of
its major suppliers are or will be Year 2000 compliant not later
than the third quarter of 1999. Management believes that Comdial
is properly addressing the Year 2000 issue in order to mitigate any
adverse operational or financial consequences.
Current Pronouncements
In the third quarter of 1998, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities." Comdial does not participate in any
financial instruments that meet the definition of a derivative or
hedging activity, and therefore, it is not expected that this
statement will have any affect on Comdial's financial statements.
"SAFE HABOR" STATEMENT UNDER THE PRIVATE SECURITIES LIGITATION
REFORM ACT OF 1995
Comdial's report may contain some forward-looking statements
that are subject to risks and uncertainties, including, but not
limited to, the impact of competitive products, product demand and
market acceptance risks, reliance on key strategic alliances,
fluctuations in operating results, delays in development of highly
complex products, and other risks detailed from time to time in
Comdial's filings with the Securities and Exchange Commission.
These risks could cause Comdial's actual results for 1999 and
beyond to differ materially from those expressed in any forward-
looking statement made by, or on behalf of, Comdial.
- ------------------------------------------------------------------------
COMDIAL CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISKS
Comdial believes that it does not have any material exposure to
market risk associated with activities in derivative financial
instruments, other financial instruments and derivative commodity
instruments.
ITEM 6: Exhibits and Reports on Form 8-K.
(a)
3. Exhibits Included herein:
(11) Statement re Computation of Per Share Earnings.
(27) Financial Data Schedule.
(b) Reports on Form 8-K
The Registrant has not filed any reports on Form 8-K
during the quarterly period.
__________________
Items not listed if not applicable.
- ------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Comdial Corporation
(Registrant)
Date: August 17, 1999 By: /s/ Manfred Funke
Manfred Funke
Acting Chief Financial Officer
COMDIAL CORPORATION AND SUBSIDIARIES
EXHIBIT 11
SCHEDULE OF COMPUTATION OF EARNINGS PER COMMON SHARE
(Dollars in thousands except share amounts)
Three Months Ended Six Months Ended
July 4, June 28, July 4, June 28,
1999 1998 1999 1998
_______________________________________________________________________________
BASIC
Net income applicable to
common shares: $1,291 $1,858 $1,679 $3,697
Weighted average number of common
shares outstanding during
the period 8,933,304 8,802,317 8,896,595 8,756,176
Add - Deferred and contingency
shares 15,000 7,500 47,317 5,963
Weighted average number of shares
used in calculation of basic
earnings per common share 8,948,304 8,809,817 8,943,912 8,762,139
Basic earnings per common shares $0.14 $0.21 $0.19 $0.42
DILUTED
Net income applicable to common
shares - basic $1,291 $1,858 $1,679 $3,697
Weighted average number of shares
used in calculation of basic
earnings per common share 8,948,304 8,809,817 8,943,912 8,762,139
Add incremental shares representing:
Shares issuable based on
weighted average price:
Stock options 37,470 314,864 41,311 275,265
Weighted average number of shares
used in calculation of diluted
earnings per common share 8,985,774 9,124,681 8,985,223 9,037,404
Diluted earnings per common share $0.14 $0.20 $0.19 $0.41
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUL-04-1999
<EXCHANGE-RATE> 0.00001
<CASH> 2,513
<SECURITIES> 0
<RECEIVABLES> 27,202
<ALLOWANCES> 445
<INVENTORY> 18,439
<CURRENT-ASSETS> 52,712
<PP&E> 50,335
<DEPRECIATION> 32,205
<TOTAL-ASSETS> 111,456
<CURRENT-LIABILITIES> 16,186
<BONDS> 25,441
0
0
<COMMON> 91
<OTHER-SE> 65,325
<TOTAL-LIABILITY-AND-EQUITY> 111,456
<SALES> 61,170
<TOTAL-REVENUES> 67,607
<CGS> 36,709
<TOTAL-COSTS> 39,251
<OTHER-EXPENSES> 24,361
<LOSS-PROVISION> 384
<INTEREST-EXPENSE> 759
<INCOME-PRETAX> 2,852
<INCOME-TAX> 1,173
<INCOME-CONTINUING> 1,679
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,679
<EPS-BASIC> 0.19
<EPS-DILUTED> 0.19
</TABLE>
