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 October 3, 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.
8,936,881 common shares as of October 3, 1999.
______________________________________________________________________
COMDIAL CORPORATION AND SUBSIDIARIES
INDEX
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1: Financial Statements
Consolidated Balance Sheets as of
October 3, 1999 and December 31, 1998 3
Consolidated Statements of Operations
for the Three and Nine Months ended
October 3, 1999 and September 27, 1998 4
Consolidated Statements of Cash Flows
for the Nine Months ended
October 3, 1999 and September 27, 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)
_________________________________________________________________________
Oct. 3, Dec. 31,
In thousands except par value 1999 1998
_________________________________________________________________________
Assets
Current assets
Cash and cash equivalents $2,268 $1,599
Accounts receivable (less allowance 32,026 23,006
for doubtful accounts: 1999 - $252;
1998 - $198)
Inventories 16,645 21,434
Prepaid expenses and other current
assets 5,250 4,815
____________________________________________________________________
Total current assets 56,189 50,854
Property - net 18,309 18,023
Goodwill 12,003 14,079
Deferred tax asset - net 15,125 17,257
Other assets 12,005 8,777
____________________________________________________________________
Total assets $113,631 $108,990
====================================================================
____________________________________________________________________
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $9,006 $11,034
Accrued payroll and related expenses 2,978 2,942
Accrued promotional allowances 1,803 1,877
Other accrued liabilities 2,338 3,346
Current maturities of debt 3 6
____________________________________________________________________
Total current liabilities 16,128 19,205
Long-term debt 25,968 22,140
Deferred tax liability 2,844 3,123
Other long-term liabilities 1,429 1,361
Commitments and contingent liabilities
(see Note H) - -
____________________________________________________________________
Total liabilities 46,369 45,829
Stockholders' equity
Common stock ($0.01 par value) and
paid-in capital (Authorized 30,000
shares; issued shares: 1999 = 8,937;
1998 = 8,818) 116,623 116,039
Other (1,239) (1,243)
Accumulated deficit (48,122) (51,635)
____________________________________________________________________
Total stockholders' equity 67,262 63,161
Total liabilities and stockholders'
equity $113,631 $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 Nine Months Ended
Oct. 3, Sept. 27, Oct. 3, Sept. 27,
1999 1998 1999 1998
______________________________________________________________________________
Net sales $37,423 $32,031 $105,030 $92,629
Cost of goods sold 21,103 18,644 60,354 55,139
____________________________________________________________________________
Gross profit 16,320 13,387 44,676 37,490
Operating expenses
Selling, general & administrative 9,480 8,582 28,117 23,742
Engineering, research
& development 2,654 2,407 7,078 5,451
Goodwill amortization expense 798 1,678 2,381 3,024
____________________________________________________________________________
Operating income 3,388 720 7,100 5,273
Other expense
Interest expense 399 321 1,158 869
Miscellaneous expenses (income)- net 61 212 162 406
____________________________________________________________________________
Income before income taxes 2,928 187 5,780 3,998
Income tax expense (benefits)- net 1,094 (11,667) 2,267 (11,553)
____________________________________________________________________________
Net income applicable
to common stock $1,834 $11,854 $3,513 $15,551
============================================================================
Earnings per common share and common
equivalent share:
Basic $0.20 $1.34 $0.39 $1.76
Diluted $0.20 $1.31 $0.39 $1.71
Weighted average common shares outstanding:
Basic 8,950 8,846 8,946 8,814
Diluted 8,992 9,069 8,987 9,073
_______________________________________________________________________________
The accompanying notes are an integral part of these financial statements.
______________________________________________________________________________
COMDIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows - (Unaudited)
___________________________________________________________________________
Nine Months Ended
Oct. 3, Sept. 27,
In thousands 1999 1998
__________________________________________________________________________
Cash flows from operating activities:
Cash received from customers $98,373 $90,035
Other cash received 890 1,321
Interest received 4 30
Cash paid to suppliers and employees (98,225) (94,237)
Interest paid on debt (1,180) (946)
Income taxes paid (265) (537)
__________________________________________________________________________
Net cash used in operating activities (403) (4,334)
Cash flows from investing activities:
Acquisition costs for Array Telecom Corporation and
Key Voice Technologies, Inc. (1) (170)
Proceeds received from the sale of FastCall - 290
Proceeds from the sale of equipment 1 100
Capital expenditures (2,767) (3,055)
__________________________________________________________________________
Net cash used in investing activities (2,767) (2,835)
Cash flows from financing activities:
Net borrowings under Revolving Credit Facility 3,831 8,334
Proceeds from issuance of common stock 14 269
Principal payments on debt - (6,323)
Principal payments on capital
lease obligations (6) (50)
__________________________________________________________________________
Net cash provided by
financing activities 3,839 2,230
__________________________________________________________________________
Net increase (decrease) in cash
and cash equivalents 669 (4,939)
Cash and cash equivalents at
beginning of year 1,599 5,673
Cash and cash equivalents at end of period $2,268 $734
==========================================================================
___________________________________________________________________________
Reconciliation of net income to net cash used in operating activities:
Net income $3,513 $15,551
__________________________________________________________________________
Depreciation and amortization 7,069 6,713
Increase in accounts receivable (9,020) (5,700)
Inventory provision 712 2,408
Decrease (increase) in inventory 4,077 (4,123)
Increase in other assets (6,202) (9,755)
Decrease (increase) in deferred tax asset 1,879 (12,042)
Increase (decrease) in accounts payable (2,028) 1,447
Increase (decrease) in other liabilities (978) 500
Increase in paid-in capital and other equity 575 667
Total adjustments (3,916) (19,885)
___________________________________________________________________________
Net cash used in operating activities ($403) ($4,334)
===========================================================================
The accompanying notes are an integral part of these financial statements.
____________________________________________________________________________
COMDIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED OCTOBER 3, 1999 - (Unaudited)
Note A: CONSOLIDATED FINANCIAL STATEMENTS
The financial information included as of October 3, 1999, and for the
three and nine months ended October 3, 1999 and September 27, 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 nine months ended
October 3, 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 lia-
bilities as of October 3, 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 con-
vertible 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 $2.6 million and $3.3 million
are included in accounts payable as of October 3, 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:
_________________________________________________________________
Oct. 3, Dec. 31,
In thousands 1999 1998
_________________________________________________________________
Finished goods $6,376 $8,507
Work-in-process 3,589 3,568
Materials and supplies 6,680 9,359
Total $16,645 $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 Bank of America, N.A. ("Bank of
America"), formerly known as NationsBank, N.A., 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 sub-
facility. 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:
_________________________________________________________________
Oct. 3, Dec. 31,
In thousands 1999 1998
_________________________________________________________________
Revolving Credit Facility (1) $25,963 $22,132
Capitalized leases (2) 8 14
Total debt 25,971 22,146
Less current maturities on debt 3 6
Total long-term debt $25,968 $22,140
_________________________________________________________________
(1) The Revolver made pursuant to the Credit Agreement with Bank of
America carries an interest rate based on the London Interbank Offered Rat
("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 October 3, 1999 and December 31, 1998, Comdial's LIBOR based borrowing
rates were 6.15% and 6.30%, respectively, which includes the additional
applicable margin of 0.75%.
Comdial can use the Revolver with Bank of America for working capital,
equipment purchases, to finance permitted acquisitions, and for other general
corporate purposes. The Bank of America 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 Bank of America is secured by liens on all of
Comdial's properties and assets. The Credit Agreement with Bank of America
contains certain financial covenants that relate to specified levels of
consolidated net worth and other financial ratios. As of October 3, 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 nine months ended October 3, 1999 and September 27,
1998, earnings per common share ("EPS") were computed for both basic and
diluted EPS in accordance with 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
ended October 3, 1999 and September 27, 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 nine months
ended October 3, 1999 and September 27, 1998.
_________________________________________________________________
Numerator Denominator EPS
_________________________________________________________________
Three Months
1999
Basic EPS $1,834,000 8,950,170 $0.20
Diluted $1,834,000 8,991,953 $0.20
1998
Basic EPS $11,854,000 8,845,792 $1.34
Diluted $11,854,000 9,069,346 $1.31
________________________________________________________________
Nine Months
1999
Basic EPS $3,513,000 8,945,986 $0.39
Diluted $3,513,000 8,987,385 $0.39
1998
Basic EPS $15,551,000 8,814,373 $1.76
Diluted $15,551,000 9,073,480 $1.71
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 nine months are as follows:
_________________________________________________________________
Oct. 3, Sept. 27,
In thousands 1999 1998
________________________________________________________________
Current - Federal $209 $263
State 178 226
Deferred - Federal 1,719 (11,248)
State 161 (794)
________________________________________________________________
Income tax provision $2,267 ($11,553)
________________________________________________________________
The income tax provision reconciled to the tax computed at statutory rates
for the nine months are summarized as follows:
_________________________________________________________________
Oct. 3, Sept. 27,
In thousands 1999 1998
_________________________________________________________________
Federal tax at statutory
rate (35% in 1999 and 1998) $2,023 $1,584
State income taxes (net of federal
tax benefit) 220 148
Nondeductible charges 65 411
Alternative minimum tax - 270
Utilization of operating loss carryover - (1,924)
Adjustment of valuation allowance - (12,042)
Other adjustments (41) -
Income tax provision $2,267 ($11,553)
_________________________________________________________________
Net deferred tax assets of $15.1 million and $17.0 million have been
recognized in the accompanying Consolidated Balance Sheets as of October 3,
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 $20.9 million
and $1.9 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:
_________________________________________________________________
Oct. 3, Dec. 31,
In thousands 1999 1998
_________________________________________________________________
Total deferred tax assets $20,886 $23,044
Total valuation allowance (2,966) (2,966)
Total deferred tax asset - net 17,920 20,078
Total deferred tax liabilities (2,844) (3,123)
Total net deferred tax asset $15,076 $16,955
_________________________________________________________________
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 nine 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, 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.
Digital Systems' distinguishing characteristic is that they are designed
for the small office (up to 500 end users) and offer additional features. The
Digital Systems segment is comprised of products such as Impact, Impression,
Impact Digital Expandable Systems ("DXP"), DXP Plus and the "FX Series."
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 nine months ended October
3, 1999 and September 27, 1998.
___________________________________________________________________
Oct. 3, Sept. 27,
(Dollars in thousands) 1999 1998
___________________________________________________________________
Business Segment Net Revenues
Digital Systems $62,283 $58,767
Solutions and Software 34,213 24,286
Analog and Other 8,534 9,576
Net sales $105,030 $92,629
___________________________________________________________________
__________________________________________________________________
Oct. 3, Sept. 27,
(Dollars in thousands) 1999 1998
___________________________________________________________________
Business Segment Profit
Digital Systems $22,774 $22,134
Solutions and Software 20,043 13,346
Analog and Other 1,859 2,010
Gross profit 44,676 37,490
Operating expenses 37,576 32,217
Interest expense 1,158 869
Miscellaneous expense - net 162 406
Income before income taxes $5,780 $3,998
___________________________________________________________________
___________________________________________________________________
Oct. 3, December 31,
(Dollars in thousands) 1999 1998
___________________________________________________________________
Business Segment Assets
Digital Systems $45,091 $43,286
Solutions and Software 24,047 18,124
Analog and Other 5,020 6,432
Unallocated 39,473 41,148
Total $113,631 $108,990
Business Segment Liabilities
Digital Systems $1,370 $1,397
Solutions and Software 1,189 1,750
Analog and Other 166 203
Unallocated 43,644 42,479
Total $46,369 $45,829
___________________________________________________________________
___________________________________________________________________
Oct. 3, Sept. 27,
(Dollars in thousands) 1999 1998
___________________________________________________________________
Business Segment Property, Plant and Equipment
Depreciation
Digital Systems $1,460 $1,322
Solutions and Software 263 249
Analog and Other 109 125
Unallocated 692 432
Total $2,524 $2,128
Capital Additions
Digital Systems $1,409 $1,685
Solutions and Software 541 458
Analog and Other 60 137
Unallocated 770 493
Total $2,780 $2,773
___________________________________________________________________
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 received correspondence from Lucent Technologies, Inc. ("Lucent")
in the first half of 1999, inviting Comdial to negotiate a license agreement
regarding Lucent's patents. Comdial is currently negotiating with Lucent for a
license agreement. Comdial's potential liability in this matter, if any, cannot
be determined at this time.
________________________________________________________________________________
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
otes. 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 nine months
of 1999 and 1998 are as follows:
_________________________________________________________________
Oct. 3, Sept. 27,
In thousands 1999 1998
__________________________________________________________________
Business Segment Sales:
Digital Systems $62,283 $58,767
Solutions and Software 34,213 24,286
Analog and Other 8,534 9,576
Net Sales 105,030 92,629
Cost of sales 60,354 55,139
Gross profit 44,676 37,490
Selling, general & administrative 28,117 23,742
Engineering, research & development 7,078 5,451
Goodwill amortization 2,381 3,024
Interest expense 1,158 869
Miscellaneous expense - net 162 406
Income before income taxes 5,780 3,998
Income tax expense 2,26 (11,553)
Net income applicable to common stock $3,513 $15,551
Earnings per common share and common
equivalent share: basic $0.39 $1.76
__________________________________________________________________
Revenue and Earnings
Third Quarter 1999 vs. 1998
Comdial continued to show growth in sales and gross profit margin as a
percentage of sales for the third quarter of 1999. Comdial's net sales
increased by 17% for the third quarter of 1999 to $37.4 million, compared
with $32.0 million in the third quarter of 1998. This increase was primarily
attributable to the increase in digital systems and solutions and software
product sales.
Gross profit increased by 22% for the third quarter of 1999 to $16.3
million, compared with $13.4 million in the third quarter of 1998. Gross
profit, as a percentage of sales, increased from 42% for the third 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 soft-
ware systems.
Selling, general and administrative expenses increased for the third
quarter of 1999 by 10% to $9.5 million, compared with $8.6 million in the
third quarter of 1998. This increase was due to adding 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 third quarter of
1999 increased by 10% to $2.7 million, compared with $2.4 million for the third
quarter of 1998. This increase was due to additional engineering personnel.
Goodwill amortization expense decreased for the third quarter of 1999 by 52%
to $0.8 million, compared with $1.7 million for the third quarter of 1998. This
decrease was due to the additional amortization expense recognized in the third
quarter of 1998 that was associated with the 1996 acquisition of Aurora Systems,
Inc ("Aurora").
Interest expense increased by 24% for the third quarter of 1999 to $0.4
million, compared with $0.3 million in the third quarter of 1998. This increase
was due to higher average debt levels on Comdial's revolving credit facility.
Income tax expense increased for the third quarter of 1999 to $1.1 million,
compared with a tax benefit of $11.7 million for the third quarter of 1998.
This increase in tax expense was primarily due to Comdial recognizing a deferred
tax asset expense of $1.1 million for the third quarter of 1999, compared with a
tax benefit of $11.7 million for the same period of 1998.
Comdial's net income decreased by 85% for the third quarter of 1999 to $1.8
million, compared with $11.9 million for the same period in 1998. This decrease
is primarily attributable to the additional tax expenses incurred in the third
quarter of 1999. Income before income taxes for the third quarter of 1999
increased to $2.9 million compared with $0.2 million for the third quarter of
1998.
Nine Months of 1999 vs. 1998
Comdial's growth continues in several key areas such as sales and gross
profit margin as a percentage of sales. Net sales increased by 13% for the
first nine months of 1999 to $105.0 million, compared with $92.6 million in the
first nine months of 1998. This increase was primarily attributable to the
increase in digital product sales (such as the FX Impact products) and solutions
and software products. The solutions and software product sales increase was
attributable to the increase in voicemail sales primarily sold through Comdial's
wholly-owned subsidiary Key Voice Technologies, Inc. ("KVT").
Gross profit increased by 19% for the first nine months of 1999 to $44.7
million, compared with $37.5 million in the first nine months of 1998. Gross
profit, as a percentage of sales, increased from 40% for the first nine months
of 1998 to 43% 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 18% to $28.1
million, compared with $23.7 million in the first nine 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 nine months of
1999 increased by 30% to $7.1 million compared with $5.5 million for the first
nine months of 1998. This increase was due to additional engineering personnel
and additional costs associated with Array.
Goodwill amortization expense decreased for the first nine months of 1999
by 21% to $2.4 million, compared with $3.0 million for the first nine months of
1998. This decrease was due to a reduction in amortization expense associated
with the Aurora acquisition.
Interest expense increased by 33% for the first nine months of 1999 to
$1.2 million compared with $0.9 million in the first nine 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 60% for the first nine months of 1999
to $0.2 million, compared with $0.4 million for the first nine 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 nine months of 1999
of $2.3 million, compared with a tax benefit of $11.6 million for the first nine
months of 1998. This increase in tax expense was primarily due to Comdial
recognizing all the 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 for the first nine months of 1999 to $3.5
million, compared with $15.6 million for the same period in 1998. This
decrease was primarily attributable to the tax benefit recognized in 1998 of
$12.0 million. Income before income taxes for the first nine months of 1999
increased by 45% to $5.8 million, as compared with $4.0 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 Bank of
America, N.A. ("Bank of America"), formerly known as NationsBank, N.A., 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:
__________________________________________________________________________
Oct. 3, December 31,
In thousands 1999 1998
__________________________________________________________________________
Cash and cash equivalents $2,268 $1,599
Current maturities on debt 3 6
Working capital 40,061 31,649
__________________________________________________________________________
For the first nine months of 1999, all operating cash requirements were
funded through a $50 million revolving credit facility provided by Bank of
America 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 October 3, 1999,
Comdial's cash and cash equivalents were slightly higher than December 31, 1998
by $0.7 million, due to the timing of the deposits received at the end of the
period that were not applied against the Revolver.
Working capital as of October 3, 1999, increased by $8.4 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 nine months of 1999 and 1998 were
approximately $2.8 million. Capital additions were used to help Comdial
introduce new products as well as improve quality and reduce costs associated
with existing products. Capital additions were funded by cash generated from
operations and borrowing from the Revolver. Cash expenditures for capital
additions for the first nine months of 1999 and 1998, were $2.8 million and $3.1
million, respectively. Management anticipates that approximately $2 million
will be spent on capital additions during the fourth quarter of 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, leasing and some borrowing from the Revolver.
Comdial has a commitment from Bank of America for the issuance of letters
of credit in an aggregate amount not to exceed $5 million at any one time. On
October 3, 1999, the amount of commitments under the letter of credit facility
with Bank of America was $0.2 million.
Accounts Receivable as of October 3, 1999, increased by $9.0 million
compared with December 31, 1998, primarily due to (1) record breaking sales in
the third 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 third quarter of 1999 by $4.8 million
due to the additional shipments of products at the end of the quarter, and the
timing of incoming production material receipts.
Other assets increased by $3.2 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 October 3, 1999, decreased by $2.0 million when
compared to December 31, 1998. This decrease was primarily due to the timing of
incoming material receipts for production. Other accrued liabilities as of
October 3, 1999, decreased by $1.0 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 Bank of America entered into the
Credit Agreement. Bank of America 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 October 3, 1999, long-term debt increased by $3.8 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 nine 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 Year 2000 issues that
could potentially affect its business and has developed plans to address these
problems. Through a series of industry-recognized tests, the Year 2000 Team
believes 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 any non-compliant products that Comdial continues to sell will
be compliant by the fourth 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 the Year 2000. Furthermore, Comdial is requiring that all suppliers
certify that their 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 third quarter of 1999, Comdial received written confirmation of Year
2000 compliance from 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 performed on-site audits of some of the sole source suppliers that
are critical to Comdial's operations, and all the vendors audited were in
compliance with Year 2000 requirements.
Costs: Comdial estimates that it will incur approximately $0.3 million in
additional expenses to remedy the remaining Year 2000 issues. This cost
includes testing, new software, maintenance of existing software, PC replace-
ments, 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 completed during the fourth
quarter of 1999. As of October 3, 1999, cumulative costs incurred by Comdial
specifically for the Year 2000 totaled an aggregate of $0.3 million.
Risks: There are various potential risks that could be associated with the
failure of Comdial's business or the business of a significant third-party
supplier of Comdial to be Year 2000 ready. The possible failure of internal
information systems 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 its 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 can not be
determined at this time. While management 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 October 3, 1999, has
received certification that all of its major suppliers are or will be Year
2000 compliant. Management believes that Comdial is properly addressing the
Year 2000 issue 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
This report contains 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 develop-
ment 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: November 15, 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 Nine Months Ended
Oct. 3, Sept. 27, Oct. 3, Sept. 27,
1999 1998 1999 1998
_______________________________________________________________________________
BASIC
Net income applicable to
common shares: $1,834 $11,854 $3,513 $15,551
Weighted average number of common
shares outstanding during
the period 8,936,170 8,816,560 8,909,727 8,776,739
Add - Deferred and contingency
shares 14,000 29,232 36,259 37,634
Weighted average number of shares
used in calculation of basic
earnings per common share 8,950,170 8,845,792 8,945,986 8,814,373
Basic earnings per common shares $0.20 $1.34 $0.39 $1.76
===============================================================================
DILUTED
Net income applicable to common
shares - basic $1,834 $11,854 $3,513 $15,551
Weighted average number of shares
used in calculation of basic
earnings per common share 8,950,170 8,845,792 8,945,986 8,814,373
Add incremental shares representing:
Shares issuable based on
weighted average price:
Stock options 41,783 223,554 41,399 259,107
Weighted average number of shares
used in calculation of diluted
earnings per common share 8,991,953 9,069,346 8,987,385 9,073,480
Diluted earnings per common share $0.20 $1.31 $0.39 $1.71
===============================================================================
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