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 1, 2000
---------------
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. 9,203,543 common shares as of
October 1, 2000.
<PAGE>
COMDIAL CORPORATION AND SUBSIDIARIES
INDEX
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1: Financial Statements
Consolidated Balance Sheets as of
October 1, 2000 and December 31, 1999 3
Consolidated Statements of Operations
for the Three and Nine Months ended
October 1, 2000 and October 3, 1999 4
Consolidated Statements of Cash Flows
for the Nine Months ended
October 1, 2000 and October 3, 1999 5
Notes to Consolidated Financial Statements 6-15
ITEM 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 15-21
ITEM 3: Quantitative and Qualitative Disclosures
About Market Risk 21
PART II - OTHER INFORMATION
ITEM 6: Exhibits and Reports on Form 8-K 22
<PAGE>
COMDIAL CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
ITEM 1: Financial Statements
Consolidated Balance Sheets - (Unaudited)
Oct.1, Dec. 31,
In thousands except par value 2000 1999*
-------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $1,828 $1,917
Accounts receivable (less allowance 23,337 39,700
for doubtful accounts and reserve for
returns: 2000 - $2,788; 1999 - $2,300)
Inventories 25,439 22,827
Prepaid expenses and other current
assets 7,543 7,633
--------------------------------------------------------------------
Total current assets 58,147 72,077
Property - net 18,365 19,458
Goodwill 8,810 11,207
Deferred tax asset - net 21,049 11,980
Other assets 20,581 18,352
--------------------------------------------------------------------
Total assets $126,952 $133,074
====================================================================
------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $6,255 $15,135
Accrued payroll and related expenses 1,699 2,652
Other accrued liabilities 5,138 4,575
Current maturities of debt 1,128 471
--------------------------------------------------------------------
Total current liabilities 14,220 22,833
Long-term debt 41,099 31,795
Deferred tax liability 2,641 2,622
Other long-term liabilities 6,434 4,216
------------------------------------------------------------------------
Total liabilities 64,394 61,466
Commitments and contingent liabilities - -
Stockholders' equity
Common stock ($0.01 par value) and
paid-in capital (Authorized 30,000
shares; issued shares: 2000 = 9,204;
1999 = 8,940) 119,192 116,626
Treasury stock (1,291) (1,237)
Accumulated deficit (55,343) (43,781)
--------------------------------------------------------------------
Total stockholders' equity 62,558 71,608
Total liabilities and stockholders'
equity $126,952 $133,074
====================================================================
* Condensed from audited financial statements.
The accompanying notes are an integral part of these financial statements.
3
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COMDIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations - (Unaudited)
In thousands except per share amounts
------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
Oct. 1, Oct. 3, Oct. 1, Oct. 3,
2000 1999 2000 1999
------------------------------------------------------------------------------
Net sales $27,021 $37,960 $80,586 $106,900
Cost of goods sold 19,772 21,846 55,155 62,841
------------------------------------------------------------------------------
Gross profit 7,249 16,114 25,431 44,059
Operating expenses
Selling, general & administrative 12,227 9,274 34,630 27,500
Engineering, research
& development 1,516 2,654 4,803 7,078
Goodwill amortization expense 799 798 2,396 2,381
------------------------------------------------------------------------------
Operating income (loss) (7,293) 3,388 (16,398) 7,100
Other expense
Interest expense 745 399 1,968 1,158
Miscellaneous expenses - net 199 61 228 162
-------------------------------------------------------------------------------
Income (loss) before income taxes (8,237) 2,928 (18,594) 5,780
Income tax expense (benefit) (3,082) 1,094 (7,122) 2,267
-------------------------------------------------------------------------------
Net income (loss) ($5,155) $1,834 ($11,472) $3,513
==============================================================================
Earnings per share:
Basic ($0.56) $0.20 ($1.25) $0.39
Diluted ($0.56) $0.20 ($1.25) $0.39
Weighted average shares outstanding:
Basic 9,222 8,950 9,181 8,946
Diluted 9,222 8,992 9,181 8,987
The accompanying notes are an integral part of these financial statements.
4
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COMDIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows - (Unaudited)
Nine Months Ended
Oct. 1, Oct. 3,
In thousands 2000 1999
---------------------------------------------------------------------------
Cash flows from operating activities:
Cash received from customers $98,076 $98,373
Other cash received 1,756 890
Interest received 82 4
Cash paid to suppliers and employees (106,869) (98,225)
Interest paid on debt (1,816) (1,180)
Income taxes paid (494) (265)
---------------------------------------------------------------------------
Net cash used in operating activities (9,265) (403)
---------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition costs for Array Telecom Corp. - (1)
Proceeds received from ePHONE for assets 648 -
Proceeds from the sale of equipment 952 1
Capital expenditures (2,234) (2,767)
---------------------------------------------------------------------------
Net cash used in investing activities (634) (2,767)
---------------------------------------------------------------------------
Cash flows from financing activities:
Net borrowings under Revolving Credit Facility 8,751 3,831
Proceeds from issuance of common stock 2,131 14
Principal payments on capital
lease obligations (1,072) (6)
---------------------------------------------------------------------------
Net cash provided by financing activities 9,810 3,839
---------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents (89) 669
---------------------------------------------------------------------------
Cash and cash equivalents at
beginning of year 1,917 1,599
---------------------------------------------------------------------------
Cash and cash equivalents at end of period $1,828 $2,268
===========================================================================
Reconciliation of net income to net cash used in operating activities:
Net income (loss) ($11,472) $3,513
---------------------------------------------------------------------------
Depreciation and amortization 8,406 7,069
Decrease (increase) in accounts receivable 16,363 (9,020)
Inventory provision 1,795 712
Decrease (increase) in inventory (4,407) 4,077
Increase in other assets (4,247) (6,202)
Decrease (increase) in deferred tax asset (7,568) 1,879
Decrease in accounts payable (8,880) (2,028)
Increase (decrease) in other liabilities 454 (978)
Increase in paid-in capital and other equity 291 575
---------------------------------------------------------------------------
Total adjustments 2,207 (3,916)
---------------------------------------------------------------------------
Net cash used in operating activities ($9,265) ($403)
===========================================================================
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
COMDIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED OCTOBER 1, 2000 - (Unaudited)
Note A: CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
The financial information reported as of October 1, 2000, and for the
three and nine months ended October 1, 2000 and October 3, 1999, 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" or the "Company") are described in Note 1 to
the consolidated financial statements in its Annual Report to Stockholders for
the year ended December 31, 1999. The consolidated financial statements for
accounting periods in 2000 contained herein should be read in conjunction with
the 1999 financial statements, including notes thereto, contained in Comdial's
Annual Report to Stockholders for the year ended December 31, 1999. Certain
amounts in the 1999 consolidated financial statements have been reclassified to
conform to the 2000 presentation. The results of operations for the three and
nine months ended October 1, 2000, are not necessarily indicative of results for
the full year.
Restatement
On July 27, 2000, Comdial announced it had discovered that a special return
provision in excess of the standard terms typically provided to the customer had
not been recorded for a sale that occurred in the first quarter of 2000. Comdial
restated its financial statements as of and for the three months ended April 2,
2000 and filed an amendment to its Form 10-Q for the first quarter of 2000
reflecting this restatement. In addition, the Company reclassified certain
amounts included in net sales, cost of goods sold, and selling general and
administrative expenses included in the financial statements. These
reclassifications had no effect on operating or net income.
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, as well as disclosure of contingent assets and
liabilities as of October 1, 2000. 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
6
<PAGE>
that are deposited daily. Bank overdrafts of $2.1 million and $2.2 million are
included in accounts payable as of October 1, 2000 and December 31, 1999,
respectively. Bank overdrafts consist of outstanding checks that have neither
(1) cleared the bank nor (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 records revenue in compliance with Staff Accounting Bulletin ("SAB")
No. 101, "Revenue Recognition" issued by the Securities and Exchange Commission
("SEC") in the fourth quarter of 1999. The majority of Comdial's revenue is
recognized when products are shipped and title has passed to the customer.
Comdial's management records a provision for all anticipated returns. This
provision is constantly monitored and updated as required and is recognized as a
reduction of revenues. All actual returns are charged against the allowance for
returns as received. National account customer revenues are not recognized until
the customer takes title to the equipment, which may be at shipment or at
installation depending on the terms of the contract. Embedded software revenues
are recognized when Comdial activates a code at the request of the customer
enabling the software to be used, in accordance with American Institute of
Certified Public Accountants 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 periodically reviewed for impairment as circumstances
change that might impact the useful life of the asset. An impairment loss is not
recognized unless a portion of the carrying amount of the asset is no longer
recoverable (using a test of recoverability), which is based on expected future
undiscounted cash flows.
Note C: INVENTORIES
--------------------------------------------------------------------------------
Inventories consist of the following:
-----------------------------------------------------------------
Oct. 1, Dec. 31,
In thousands 2000 1999
-----------------------------------------------------------------
Finished goods $13,023 $8,763
Work-in-process 1,262 4,556
Materials and supplies 11,154 9,508
------ -----
Total $25,439 $22,827
======= =======
-----------------------------------------------------------------
Comdial provides reserves to cover product obsolescence and those
reserves impact gross margins. Such reserves are dependent on management's
estimates of the recoverability of costs of all inventory, which are based on,
among other things, expected obsolescence of the products. The estimated amount
7
<PAGE>
for reserves included in inventory as of October 1, 2000 is $5.0 million. Raw
material obsolescence is mitigated by the commonality of component parts and
finished goods.
Note D: BORROWINGS
--------------------------------------------------------------------------------
In the third quarter of 1998, Comdial and Bank of America, N.A. ("Bank of
America"), entered into a credit agreement (the "Credit Agreement"). As of July
2, 2000, Comdial was not in compliance with the covenant in its Credit Agreement
dated October 22, 1998 relating to the ratio of Funded Debt to earnings before
interest, taxes, depreciation and amortization ("EBITDA"). As of October 1,
2000, Comdial was not in compliance with the covenant in its Credit Agreement
relating to the ratio of EBITDA to Interest Expense. Comdial has received a
series of conditional waivers from Bank of America through November 20, 2000,
with respect to the noncompliance with both covenants.
In early November, Comdial and Bank of America agreed on the terms and
conditions of a restructuring of the Credit Agreement between Comdial and the
Bank. The terms of the restructuring will include, among other things, three
modifications to the Credit Agreement. First, the revolving credit commitment
will be restructured into a working capital line and a term loan. The working
capital line will start at $21.5 million and reduce to $16.5 million by December
31, 2000 and to $15 million by March 31, 2001. The working capital line will
expire on December 31, 2001. The term loan will start at $18.5 million. Three
principal payments for $2.5 million each are scheduled for June 30, September 30
and December 31, 2001. Any proceeds from Comdial's sale of real estate and
equipment will be applied to the term loan. Sale proceeds up to $2.5 million
received on or before June 1, 2001 will be applied to the first principal
payment. Proceeds over and above $2.5 million will be applied in the reverse
order to the term loan principal payments. The term loan expires March 31, 2002.
Second, the EBITDA to Interest Expense and the EBITDA to Funded Debt
covenants have been eliminated. Two new covenants have been substituted. The
first relates to the maximum level term loan. The second is an EBITDA covenant
versus the Company's budget.
Third, the interest rate on the note was amended to be LIBOR daily
floating rates plus 3% per year. Bank of America reserves the right to increase
its rate to the default rate provided in the Credit Agreement.
These terms are in the process of being incorporated into a formal
document that Comdial expects to sign shortly.
8
<PAGE>
Long-term debt consists of the following:
-----------------------------------------------------------------
Oct. 2, Dec. 31,
In thousands 2000 1999
-----------------------------------------------------------------
Revolver (1) $38,347 $29,596
Capitalized leases (2) 3,880 2,670
------ -----
Total debt 42,227 32,266
Less current maturities on debt 1,128 471
------ ------
Total long-term debt $41,099 $31,795
======= =======
-----------------------------------------------------------------
(1) Borrowings made pursuant to the Credit Agreement with Bank of America
carry an interest rate based on the LIBOR daily rate plus three percent (3%).
Before modification of the agreement, the interest rate could be adjusted
quarterly based on Comdial's ratio of Funded Debt to EBITDA, which allowed the
rates to vary from 0.75% to 1.50% above the LIBOR daily rate. As of October 1,
2000 and December 31, 1999, Comdial's borrowing rates were 7.37% and 6.58%,
respectively, which included the additional applicable margin of 0.75% for both
periods. Pursuant to the restructured Credit Agreement, the rate increased to
3.0% above LIBOR as more fully described above.
Comdial can use the Credit Agreement borrowings for working capital,
equipment purchases, to finance permitted acquisitions, and for other general
corporate purposes.
(2) Capitalized 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.
Note E: EARNINGS PER SHARE
--------------------------------------------------------------------------------
Basic EPS for the three and nine month periods presented was computed by
dividing net income by the weighted average number of common shares outstanding
during the period. Diluted EPS was computed by dividing net income by the
weighted average number of common 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. Potentially dilutive
securities have been excluded in the table below for those calculations in which
inclusion of those securities would be antidilutive.
9
<PAGE>
The following table discloses the information for the three and nine
months ended October 1, 2000 and October 3, 1999.
-----------------------------------------------------------------
Numerator Denominator EPS
-----------------------------------------------------------------
Three Months
------------
2000
Basic EPS ($5,155,000) 9,221,543 ($0.56)
Diluted ($5,155,000) 9,221,543 ($0.56)
1999
Basic EPS $1,834,000 8,950,170 $0.20
Diluted $1,834,000 8,991,953 $0.20
Nine Months
2000
Basic EPS ($11,472,000) 9,180,640 ($1.25)
Diluted ($11,472,000) 9,180,640 ($1.25)
1999
Basic EPS $3,513,000 8,945,986 $0.39
Diluted $3,513,000 8,987,385 $0.39
For further detail of EPS see Exhibit 11.
-------------------------------------------------------------------
Note F: INCOME TAXES
--------------------------------------------------------------------------------
The components of income tax expense (benefit) based on the liability
method for the first nine months are as follows:
-----------------------------------------------------------------
Oct. 1, Oct. 3,
In thousands 2000 1999
-----------------------------------------------------------------
Current - Federal ($477) $209
State (54) 178
Deferred - Federal (5,972) 1,719
State (619) 161
------ ------
Income tax provision (benefit) ($7,122) $2,267
======= ======
10
<PAGE>
The income tax provision, reconciled to the tax computed at statutory
rates, for the six months is summarized as follows:
-----------------------------------------------------------------
Oct. 1, Oct. 3,
In thousands 2000 1999
-----------------------------------------------------------------
Federal tax at statutory
rate (34% in 2000 and 35% in 1999) ($6,322) $2,023
State income taxes (net of federal
tax benefit) (445) 220
Nondeductible charges 66 65
Recognition of benefits for
Subsidiary NOLs (325) -
Other adjustments (96) (41)
------ -----
Income tax provision (benefit) ($7,122) $2,267
======= ======
-----------------------------------------------------------------
Net deferred tax assets of $22.4 million and $14.8 million have been
recognized in the accompanying Consolidated Balance Sheets as of October 1, 2000
and December 31, 1999, respectively. The components of the net deferred tax
assets are as follows:
-----------------------------------------------------------------
Oct. 1, Dec. 31,
In thousands 2000 1999
------------------------------------------------------------------
Total deferred tax assets $25,131 $17,545
Total valuation allowance (114) (114)
------- -------
Total deferred tax asset - net 25,017 17,431
Total deferred tax liabilities (2,641) (2,622)
------- -------
Total net deferred tax asset $22,376 $14,809
======= =======
-----------------------------------------------------------------
Comdial periodically reviews the requirements for a valuation allowance
and makes adjustments when changes in circumstances result in changes in
management's judgment about the future realization of deferred tax assets.
Management believes that it is more likely than not that the deferred tax assets
will be realized.
Comdial has net operating losses ("NOLs") and tax credit carryovers of
approximately $17.2 million and $1.5 million, respectively. If not utilized, the
NOLs and tax credit carryovers will expire in various years beginning in the
year 2000 and continuing through the year 2019.
NOTE G. SEGMENT INFORMATION
--------------------------------------------------------------------------------
During the first nine months of 2000 and 1999, substantially all of
Comdial's sales, net income, and identifiable net assets were attributable to
the telecommunications industry with over 97% of sales occurring in the United
States.
Comdial is organized into several strategic business unit ("SBU") segments
that comprise the majority of its sales to the telecommunications market.
Comdial has three SBU's that contribute ten percent or more to net sales. The
SBU's are Comdial Convergent Communications Corporation ("CCC"), Comdial
Enterprise Solutions, Inc. ("CES"), Key Voice Technologies, Inc. ("KVT") and
11
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others (such as Array Telecom Corporation ("Array") and Comdial Business
Communications Corporation ("CBCC")). All of the SBU's are companies
wholly-owned by Comdial. Each of these categories is considered a business
segment, and with respect to their financial performance, the costs associated
with these segments can only be quantified and identified down to the operating
profit level.
CCC is comprised of products such as Impact, Impact Digital Expandable
Systems ("DXP"), DXP Plus and the open digital switching platforms known as the
"FX Series." The products are sold through various supply house channels, which
in turn sell to various dealers that sell and install Comdial products. This
distribution channel comprises more than 65% of Comdial's net sales for any
given period.
CES is comprised of all Comdial's software solutions and application
products that are sold through vertical markets and national account customers.
The products included are Comdial's vertical market products such as Impact
Concierge, Avalon, Power Broker, and voice processing systems. These products
are sold to specific industries such as hospitality, real estate, financial, and
assisted living centers.
KVT provides voice processing products to the other SBU's as well as
selling directly to dealers and end users. Based in Sarasota, Florida, KVT
develops, assembles, markets, and sells voice processing systems and related
products for business applications. KVT products can provide up to 64 ports of
voice processing capacity. Most Comdial generated sales are in the two to eight
port range, which corresponds with the small to mid-size businesses that are
Comdial's primary markets. Industry shipments are measured both in terms of
systems and ports. Among PC-based systems, Comdial believes that KVT is an
industry leader, ranking second in terms of systems shipped.
The other segments are CBCC, which manufactures Comdial products, repairs
out-of-warranty products and engages in contract manufacturing, and Array, which
produced Internet Protocol ("IP") software products (product licensed to ePHONE
Telecom Inc. ("ePHONE")).
The information in the following tables is derived directly from the
segments' internal financial reporting used for corporate management purposes.
The expenses, assets and liabilities attributable to corporate activities are
not allocated to the operating segments. Corporate allocation costs that have
been transferred to KVT and other business segments have not been included in
operating income. Management does not include these costs when analyzing the
various business segments' performance. There are no operating assets located
outside the United States.
12
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Unallocated costs include corporate expenses, interest expense, other
miscellaneous expenses, and income tax expenses or benefits. Comdial does not
maintain information that would allow these costs to be broken down into the
various business segments, and most of the costs are universal in nature.
Unallocated assets include such items as cash, deferred tax assets and
miscellaneous assets. Unallocated capital expenditures and depreciation relate
primarily to shared assets. Unallocated liabilities include such items as
accounts payable, debt, leases, deferred tax liabilities, and most other
liabilities that do not relate to sales.
The following tables show segment information for the nine months ended
October 1, 2000 and October 3, 1999:
-----------------------------------------------------------------
Oct. 1, Oct. 3,
(Dollars in thousands) 2000 1999
-----------------------------------------------------------------
Business Segment
Net Revenues
Comdial Convergent Communications $53,834 $71,094
Comdial Enterprise Solutions 10,188 8,641
Key Voice Technologies 17,123 21,582
CBCC/Array 4,513 13,782
Inter-company elimination (5,072) (8,199)
------- --------
Net sales $80,586 $106,900
======= ========
-----------------------------------------------------------------
Gross Profit
Comdial Convergent Communications $20,300 $26,640
Comdial Enterprise Solutions 3,037 3,200
Key Voice Technologies 8,164 11,617
CBCC/Array (6,070) 2,602
------- --------
$25,431 $44,059
======= ========
-----------------------------------------------------------------
Operating Profit (Loss)
Comdial Convergent Com. $1,756 $9,833
Comdial Enterprise Solutions (2,035) (329)
Key Voice Technologies 1,588 7,070
CBCC/Array (6,827) 1,207
------- --------
Operating profit (loss) (5,518) 17,781
Unallocated expenses
Cost of goods sold 118 351
Operating expenses 10,762 10,330
Interest expense 1,968 1,158
Miscellaneous expense - net 228 162
------- --------
Income (loss) before income taxes ($18,594) $5,780
======= ========
13
<PAGE>
------------------------------------------------------------------
Oct. 1, Dec. 31,
(Dollars in thousands) 2000 1999
------------------------------------------------------------------
Business Segment Assets
Comdial Convergent Com. $14,564 $28,662
Comdial Enterprise Solutions 7,328 7,039
Key Voice Technologies 8,956 10,155
CBCC/Array 52,079 43,693
Unallocated 44,025 43,525
-------- --------
Total $126,952 $133,074
======== ========
Business Segment Liabilities
Comdial Convergent Com. $1,414 $2,322
Comdial Enterprise Solutions 697 66
Key Voice Technologies 615 2,340
CBCC/Array 15,096 15,878
Unallocated 46,572 40,860
------- -------
Total $64,394 $61,466
======= =======
-------------------------------------------------------------------
Oct. 1, Oct. 3,
(Dollars in thousands) 2000 1999
-------------------------------------------------------------------
Business Segment Property, Plant and Equipment
Depreciation
Comdial Convergent Com. $150 $116
Comdial Enterprise Solutions 4 1
Key Voice Technologies 178 82
CBCC/Array 2,141 2,057
Unallocated 32 268
------ ------
Total $2,505 $2,524
====== ======
Additions
Comdial Convergent Com. $10 $49
Comdial Enterprise Solutions 38 28
Key Voice Technologies 484 53
CBCC/Array 1,647 1,763
Unallocated 447 887
------ ------
Total $2,626 $2,780
====== ======
----------------------------------------------------------------
NOTE H. SUBSEQUENT EVENT
--------------------------------------------------------------------------------
On November 2, 2000, Comdial announced its decision to outsource the
majority of its manufacturing operations and that it was in discussions with
several contract manufacturers. The proposals Comdial is considering include an
outsourcing arrangement whereby the contract manufacturer would use Comdial's
existing manufacturing facility and employ some of Comdial's production
personnel. It is anticipated that outsourcing its production will save the
Company approximately $10 million per year. As a result of the decision to
outsource, as many as 350 of the Company's production-related personnel may be
affected. The Company expects to take a restructuring charge in the fourth
quarter associated with the outsourcing decision.
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On November 2, 2000, Comdial also announced it had signed a Letter of
Intent with an overseas manufacturer to produce a new telecommunications system
for the Company. Comdial is preparing to launch the Integrated Communications
Exchange (ICX) system that was created to meet the needs of small business
customers. The Company anticipates this new system will be available to its
dealers in the first quarter of 2001.
--------------------------------------------------------------------------------
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 ("Comdial" or 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 year financial
statements have been reclassified to conform to the 2000 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(R)") under the symbol "CMDL".
Restatement
On July 27, 2000, Comdial announced it had discovered that a provision
for sales returns of $2.7 million was not recorded for a special return
agreement entered into in connection with a sale that occurred in the first
quarter. Comdial restated its financial statements as of and for the three
months ended April 2, 2000 and filed an amendment to its Form 10-Q for the first
quarter of 2000 reflecting this restatement. In addition, the Company has
reclassified certain amounts included in net sales, cost of goods sold, and
selling, general and administrative expenses included in the financial
statements. These reclassifications had no effect on operating or net income.
Segment Reporting
During the first quarter of 2000, Comdial initiated reorganization into
Strategic Business Units ("SBUs") which are currently used by management to
analyze its business (see Note G to the Consolidated Financial Statements).
15
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Results of Operations
Selected consolidated statements of operations for the first nine months
of 2000 and 1999 are as follows:
-------------------------------------------------------------------------
Oct. 1, Oct. 3,
In thousands 2000 1999
-------------------------------------------------------------------------
Net sales $80,586 $106,900
Cost of sales 55,155 62,841
------- --------
Gross profit 25,431 44,059
Selling, general & administrative 34,630 27,500
Engineering, research & development 4,803 7,078
Goodwill amortization 2,396 2,381
Interest expense 1,968 1,158
Miscellaneous expense - net 228 162
------- --------
Income (loss) before income taxes (18,594) 5,780
Income tax expense (benefit) (7,122) 2,267
------- --------
Net income (loss) ($11,472) $3,513
======= ========
Earnings per share: basic ($1.25) $0.39
======= ========
diluted ($1.25) $0.39
======= ========
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Revenue and Earnings
Third Quarter 2000 vs. 1999
---------------------------
Comdial's sales, gross profit, and earnings declined for the third
quarter of 2000 when compared to the same period of 1999, as Comdial took steps,
including a furlough program, to reduce its inventory levels. Comdial's net
sales decreased by 29% for the third quarter of 2000 to $27.0 million, compared
with $38.0 million in the third quarter of 1999. This decrease was primarily
attributable to a decrease in inventory levels at Comdial's four largest
distributors.
Gross profit decreased by 55% for the third quarter of 2000 to $7.2
million, compared with $16.1 million in the third quarter of 1999. Gross profit
margin, as a percentage of sales, decreased from 42% for the third quarter of
1999 to 27% for the same period of 2000. This decrease was due to the effects of
reducing inventory and a very limited production schedule.
Selling, general and administrative expenses increased for the third
quarter of 2000 by 32% to $12.2 million, compared with $9.3 million in the third
quarter of 1999. This increase was due to an increase in sales personnel and
associated expenses and several one-time charges associated with severance
packages and legal costs.
Engineering, research and development expenses for the third quarter of
2000 decreased by 43% to $1.5 million, compared with $2.7 million for the third
quarter of 1999. This decrease was due to a first quarter reorganization of the
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engineering department to focus on development of new products, resulting in a
reduction of engineering personnel.
Interest expense increased by 87% for the third quarter of 2000 to $0.7
million, compared with $0.4 million in the third quarter of 1999. This increase
was due to higher interest rates, increased borrowing under the credit
agreement, and an increase in capital leases primarily associated with the
installation of new enterprise-wide software.
Income tax expense decreased for the third quarter of 2000 to a tax benefit
of $3.1 million, compared with a tax expense of $1.1 million for the same period
of 1999. This tax benefit recognition was due to the reported tax loss
recognized by Comdial which management believes will more likely than not be
utilized in future periods.
Net income decreased for the third quarter of 2000 to a loss of $5.2
million, compared with net income of $1.8 million for the same period in 1999.
The decrease was primarily attributable to decreased sales and gross margins and
one-time charges in the third quarter of this year.
First Nine Months of 2000 vs. 1999
Comdial's net sales decreased by 25% for the first nine months of 2000 to
$80.6 million, compared with $106.9 million for the same period of 1999. This
decrease was primarily attributable to a decrease in inventory levels at
Comdial's four largest distributors.
Gross profit decreased by 42% for the first nine months of 2000 to $25.4
million, compared with $44.1 million for the same period of 1999. Gross profit
margin, as a percentage of sales, decreased from 41% for the first nine months
of 1999 to 32% for the same period of 2000. This decrease was primarily due to
lower sales and special charges (such as additional inventory reserves) relating
to discontinued products, the effects of reducing inventory, and a very limited
production schedule.
Selling, general and administrative expenses increased for the first nine
months of 2000 by 26% to $34.6 million, compared with $27.5 million for the same
period of 1999. This increase was due to the increase of sales personnel,
one-time charges associated with severance packages, legal costs, and costs
associated with the organization of the Company into Strategic Business Units in
the first quarter of 2000.
Engineering, research and development expenses for the first nine months
of 2000 decreased by 32% to $4.8 million, compared with $7.1 million for the
same period of 1999. This decrease was due to a first quarter reorganization of
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<PAGE>
the engineering department to focus on development of new products, resulting in
a reduction of engineering personnel.
Interest expense increased by 70% for the first nine months of 2000 to
$2.0 million, compared with $1.2 million in the same period of 1999. This
increase was due to higher interest rates in 2000, increased borrowing under the
credit agreement, and an increase in capital leases primarily associated with
the installation of new enterprise-wide software.
Income tax expense decreased for the first nine months of 2000 to a tax
benefit of $7.1 million, compared with a tax expense of $2.3 million for the
same period of 1999. This tax benefit recognition was due to the reported tax
loss recognized by Comdial which management believes will more likely than not
be utilized in future periods.
Net income decreased for the first nine months of 2000 to a loss of $11.5
million, compared with net income of $3.5 million for the same period in 1999.
This decrease was attributable to the decrease in sales and gross margins and
special charges taken in the first nine months of 2000 relating to product
obsolescence and severance.
Liquidity
In 1998, Comdial entered into a financing arrangement with Bank of America,
N.A. ("Bank of America). Comdial's current financial position allows Comdial to
finance working capital to accommodate the expected growth in the business.
The following table sets forth Comdial's cash and cash equivalents,
current maturities on debt, and working capital as of the dates indicated:
-----------------------------------------------------------------
Oct. 1, December 31,
In thousands 2000 1999
-----------------------------------------------------------------
Cash and cash equivalents $1,828 $1,917
Current maturities on debt 1,128 471
Working capital 43,927 49,244
-----------------------------------------------------------------
All operating cash requirements were funded through a credit facility
provided by Bank of America that provides a line of credit as amended, of up to
$40 million. Comdial reports borrowing activity on a net basis in the
Consolidated Statements of Cash Flows. Comdial considers outstanding checks to
be a bank overdraft.
Current maturities on debt as of October 1, 2000, increased by $0.7
million due to increases in new capital leases of approximately $1.4 million
when compared to December 31, 1999.
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Working capital as of October 1, 2000, decreased by $5.3 million when
compared to December 31, 1999. This decrease was primarily due to the reduction
in accounts receivable, offset in part by a reduction in accounts payable.
Capital additions, per generally accepted accounting principles ("GAAP"),
for the first nine months of 2000 and 1999 were approximately $2.6 million and
$2.8 million, respectively. 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 borrowings from the Revolver. Actual cash expenditures for
capital additions for the first nine months of 2000 and 1999, were $2.2 million
and $2.8 million, respectively. Management anticipates that a total of
approximately $3 million will be spent on capital additions during 2000. These
additions will help Comdial meet its commitments to customers by developing new
products as well as increasing its capacity to produce high-tech products for
the future. Comdial expects to fund all additions primarily through cash
generated by operations.
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 1, 2000, the amount of commitments under the letter of credit facility
with Bank of America was $0.1 million.
Accounts receivable as of October 1, 2000, decreased by $16.4 million
when compared to December 1999. This decrease was due to acceleration of
collections primarily in the first quarter. Inventory as of October 1, 2000, was
up by $2.6 million compared to the end of the year, but down approximately $5.5
million from its peak level earlier in the year, as the Company initiated a
furlough program in the third quarter. Few raw materials or supplies were
purchased during the third quarter of 2000.
Deferred tax assets as of October 1, 2000, increased by $9.1 million when
compared to December 31, 1999. This increase was due to Comdial reporting a loss
for the first nine months of 2000 (see Note F to the Consolidated Financial
Statements).
Accounts payable as of October 1, 2000, decreased by $8.9 million when
compared to December 31, 1999. This decrease was due to lower incoming material
receipts for production. Accrued payroll and related expenses as of October 1,
2000, decreased by $1.0 million primarily due to decreases in payroll and
vacation provisions. Other accrued liabilities as of October 1, 2000, increased
by $.6 million due to accruals related to one-time charges and higher deferred
sales revenue, offset in part by reduced promotional cost accruals.
Other long-term liabilities as of October 1, 2000, increased by $2.2
million when compared to December 31, 1999. This increase was primarily due to
the recording of deferred revenue that was received from ePHONE Telecom Inc.
("ePHONE") related to the five-year license agreement to use the software
developed by Array Telecom Corporation ("Array").
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Long-term Debt, Including Current Maturities
As of October 1, 2000, long-term debt increased by $9.3 million when
compared to December 31, 1999. This increase in debt is the result of, among
other things, a reduction in accounts payable due the furlough program. In early
November, Comdial and Bank of America agreed on the terms and conditions of a
restructuring of the Credit Agreement between Comdial and the Bank. 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 2000 and 1999, primarily all of Comdial's
sales, net income, and identifiable net assets were attributable to the
telecommunications industry.
Year 2000
Comdial continues to monitor and review any new issues that may arise
concerning Year 2000. As of October 1, 2000, cumulative costs incurred by
Comdial specifically for the Year 2000 totaled an aggregate of $0.8 million.
Risks: While management believes that it has taken appropriate actions, there
can be no assurance that a Year 2000 issue will not affect Comdial.
Current Pronouncements
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 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 expected that this statement will have no affect on Comdial's
financial statements.
In the fourth quarter of 1999, the SEC issued SAB No. 101. Comdial
adopted the Bulletin, and believes that this adoption will not have a material
impact on Comdial's financial statements.
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<PAGE>
"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
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 2000 and beyond to differ
materially from those expressed in any forward-looking statement made by, or on
behalf of, Comdial.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
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.
21
<PAGE>
COMDIAL CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.
(a)
3. Exhibits Included herein:
(11) Statement re Computation of Per Share Earnings.
(27) Financial Data Schedule.
(b) Reports on Form 8-K.
On August 31, 2000, the Registrant filed a report on Form 8-K disclosing that
Bank of America, N.A. had extended its conditional waiver of the Registrant's
non-compliance with a covenant in the Registrant's Credit Agreement with the
Bank.
On September 15, 2000, the Registrant filed a report on Form 8-K disclosing that
Bank of America, N.A. had further extended its conditional waiver of the
Registrant's non-compliance with a covenant in the Registrant's Credit Agreement
with the Bank.
------------------
Items not listed if not applicable.
22
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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, 2000 By: /s/ Nickolas A. Branica
------------------ ------------------------
Nickolas A. Branica
President and Chief
Executive Officer
By: /s/ Paul K. Suijk
------------------
Paul K. Suijk
Senior Vice President and
Chief Financial Officer
23
