<PAGE>
United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
---------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended July 2, 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. 9,202,543 common shares as of July
2, 2000.
<PAGE>
COMDIAL CORPORATION AND SUBSIDIARIES
------------------------------------
INDEX
-----
PAGE
----
PART I - FINANCIAL INFORMATION
---------------------
ITEM 1: Financial Statements
Consolidated Balance Sheets as of
July 2, 2000 and December 31, 1999 3
Consolidated Statements of Operations
for the Three and Six Months ended
July 2, 2000 and July 4, 1999 4
Consolidated Statements of Cash Flows
for the Six Months ended
July 2, 2000 and July 4, 1999 5
Notes to Consolidated Financial Statements 6-13
ITEM 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 14-19
ITEM 3: Quantitative and Qualitative Disclosures
About Market Risks 19
PART II - OTHER INFORMATION
-----------------
ITEM 6: Exhibits and Reports on Form 8-K 20
2
<PAGE>
COMDIAL CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
ITEM 1: Financial Statements
Consolidated Balance Sheets - (Unaudited)
<TABLE>
<CAPTION>
July 2, Dec. 31
In thousands except par value 2000 1999
--------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 2,685 $ 1,917
Accounts receivable (less allowance 20,499 39,700
for doubtful accounts and reserve for returns:
2000 - $5,529 1999 - $2,300)
Inventories 30,101 22,827
Prepaid expenses and other current
assets 7,017 7,633
------------------------------------------------ ---------- ----------
Total current assets 60,302 72,077
Property - net 19,399 19,458
Goodwill 9,608 11,207
Deferred tax asset - net 17,942 11,980
Other assets 21,181 18,352
------------------------------------------------ ---------- ----------
Total assets $ 128,432 $ 133,074
------------------------------------------------ ========== ==========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 11,383 $ 15,135
Accrued payroll and related expenses 1,687 2,652
Other accrued liabilities 2,907 4,575
Current maturities of debt 1,349 471
------------------------------------------------ ---------- ----------
Total current liabilities 17,326 22,833
Long-term debt 33,932 31,795
Deferred tax liability 2,662 2,622
Other long-term liabilities 6,810 4,216
------------------------------------------------ ---------- ----------
Total liabilities 60,730 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 = 9,202;
1999 = 8,940) 119,036 116,626
Other (1,236) (1,237)
Accumulated deficit (50,098) (43,781)
------------------------------------------------ ---------- ----------
Total stockholders' equity 67,702 71,608
--------- ----------
Total liabilities and stockholders'
equity $ 128,432 $ 133,074
------------------------------------------------ ========== ==========
</TABLE>
* Condensed from audited financial statements.
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
COMDIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations - (Unaudited)
<TABLE>
<CAPTION>
In thousands except per share amounts
-------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
July 2, July 4, July 2, July 4,
2000 1999 2000 1999
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 21,372 $ 36,351 $ 53,565 $ 68,940
Cost of goods sold 16,960 20,902 35,383 40,995
------------------------------------------- -------- -------- -------- --------
Gross profit 4,412 15,449 18,182 27,945
Operating expenses
Selling, general & administrative 12,120 9,820 22,404 18,226
Engineering, research
& development 1,589 2,338 3,286 4,424
Goodwill amortization expense 798 799 1,597 1,583
------------------------------------------- -------- -------- -------- --------
Operating income (10,095) 2,492 (9,105) 3,712
Other expense
Interest expense 616 377 1,223 759
Miscellaneous expenses (income)- net (2) (28) 29 101
------------------------------------------- -------- -------- -------- --------
Income (loss) before income taxes (10,709) 2,143 (10,357) 2,852
Income tax expense (benefit) (4,051) 852 (4,040) 1,173
------------------------------------------- -------- -------- -------- --------
Net income (loss) ($6,658) $ 1,291 ($6,317) $ 1,679
------------------------------------------- ======== ======== ======== ========
Earnings per share:
Basic ($0.72) $0.14 ($0.69) $0.19
Diluted ($0.72) $0.14 ($0.69) $0.19
Weighted average shares outstanding:
Basic 9,219 8,948 9,160 8,944
Diluted 9,286 8,986 9,374 8,985
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
COMDIAL CORPORATION AND SUBSIDIARIE
Consolidated Statements of Cash Flows - (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
July 2, July 4,
In thousands 2000 1999
-------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 73,238 $ 64,986
Other cash received 4,579 770
Interest received 68 4
Cash paid to suppliers and employees (77,989) (65,472)
Interest paid on debt (1,111) (790)
Income taxes paid (484) (215)
------------------------------------------------------------------ -------- --------
Net cash used in operating activities (1,699) (717)
------------------------------------------------------------------ -------- --------
Cash flows from investing activities:
Acquisition costs for Array Telecom Corp. - (1)
Proceeds received from ePHONE 648 -
Proceeds from the sale of equipment 544 1
Capital expenditures (1,756) (1,682)
------------------------------------------------------------------ -------- --------
Net cash used in investing activities (564) (1,682)
------------------------------------------------------------------ -------- --------
Cash flows from financing activities:
Net borrowings under Revolving Credit Facility 1,523 3,304
Proceeds from issuance of common stock 2,131 14
Principal payments on capital
lease obligations (623) (5)
------------------------------------------------------------------ -------- --------
Net cash provided by financing activities 3,031 3,313
------------------------------------------------------------------ -------- --------
Net increase in cash
and cash equivalents 768 914
------------------------------------------------------------------ -------- --------
Cash and cash equivalents at
beginning of year 1,917 1,599
------------------------------------------------------------------ -------- --------
Cash and cash equivalents at end of period $ 2,685 $ 2,513
================================================================== ======== ========
</TABLE>
Reconciliation of net income to net cash used in operating activities:
<TABLE>
<CAPTION>
<S> <C> <C>
Net income (loss) ($ 6,317) $ 1,679
------------------------------------------------ -------- --------
Depreciation and amortization 5,464 4,557
Decrease (increase) in accounts receivable 19,201 (3,751)
Inventory provision 1,705 918
Decrease (increase) in inventory (8,979) 2,077
Increase in other assets (6,686) (4,583)
Decrease (increase) in deferred tax asset (4,691) 756
Decrease in accounts payable (3,752) (1,319)
Increase (decrease) in other liabilities 159 (1,614)
Increase in paid-in capital and other equity 280 563
------------------------------------------------ -------- --------
Total adjustments 4,618 (2,396)
------------------------------------------------ -------- --------
Net cash used in operating activities ($1,699) ($717)
================================================ ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
COMDIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JULY 2, 2000 - (Unaudited)
Note A: CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
The financial information reported as of July 2, 2000, and for the three and
six months ended July 2, 2000 and July 4, 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") 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 six months ended July
2, 2000, are not necessarily indicative of results for the full year.
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 will restate its financial statements as of and for the three months
ended April 2, 2000. Comdial intends to file an amendment to its Form 10-Q for
the first quarter of 2000 reflecting this restatement as soon as possible. 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.
Note B: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
--------------------------------------------------------------------------------
The preparation of financial statements to conform with generally accepted
accounting principles ("GAAP") requires management to make certain estimates and
assumptions that affect reported amounts of assets, liabilities, revenues, and
expenses. GAAP also requires disclosure of contingent assets and liabilities as
of July 2, 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
6
<PAGE>
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 $5.2 million and $2.2 million are included in
accounts payable as of July 2, 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
The majority of Comdial's revenue is recognized when the products are shipped
and title has passed to the customer. Comdial's management records a provision
for all anticipated returns that is constantly monitored and updated as
required. This provision 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.
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
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Inventories consist of the following:
---------------------------------------------------
July 2, Dec. 31,
In thousands 2000 1999
---------------------------- ------- --------
<S> <C> <C>
Finished goods $16,983 $ 8,763
Work-in-process 3,769 4,556
Materials and supplies 9,349 9,508
------- -------
Total $30,101 $22,827
======= =======
</TABLE>
--------------------------------------------------------------------------------
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 is based on among other
things expected obsolescence of the products. The estimated amount for returns
not yet received as of July 2, 2000, which is included in inventory is $3.1
million. Raw material obsolescence is mitigated by the commonality of component
parts, finished goods, and by the low level of inventory relative to sales.
7
<PAGE>
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"). The Credit
Agreement provides Comdial with a $50 million revolving credit facility ("the
Revolver") of which $5 million is a letter of credit subfacility. Long-term
debt consists of the following:
<TABLE>
<CAPTION>
--------------------------------------------------------
July 2, Dec. 31,
In thousands 2000 1999
----------------------------------- ------- ---------
<S> <C> <C>
Revolver (1) $31,119 $29,596
Capitalized leases (2) 4,162 2,670
------- -------
Total debt 35,281 32,266
Less current maturities on debt 1,349 471
------- -------
Total long-term debt $33,932 $31,795
======= =======
</TABLE>
--------------------------------------------------------------------------------
(1) The Revolver made pursuant to the Credit Agreement with Bank of America
carries an interest rate based on the LIBOR daily rate plus a specified margin.
The interest rate can be adjusted quarterly based on Comdial's ratio of funded
debt to earnings before interest, taxes, depreciation and amortization
("EBITDA"), which allows the rates to vary from 0.75% to 1.50% above the LIBOR
daily rate. As of July 2, 2000 and December 31, 1999, Comdial's borrowing rates
were 6.88% and 6.58%, respectively, which includes the additional applicable
margin of 0.75% for both periods.
Comdial can use the Revolver for working capital, equipment purchases, to
finance permitted acquisitions, and for other general corporate purposes. Bank
of America's 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 July 2, 2000, Comdial
was in compliance with all of the covenants except for the ratio of funded debt
to EBITDA. Bank of America has given Comdial a waiver relating to the covenant
violation covering the current period and extending through August 30, 2000 (see
Note H).
8
<PAGE>
Note E: EARNINGS PER SHARE
--------------------------------------------------------------------------------
Basic EPS for the three and six months 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. The following table
discloses the information for the three and six months ended July 2, 2000 and
July 4, 1999.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Numerator Denominator EPS
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Three Months
------------
2000
Basic EPS ($6,658,000) 9,219,029 ($0.72)
Diluted ($6,658,000) 9,285,643 ($0.72)
1999
Basic EPS $1,291,000 8,948,304 $ 0.14
Diluted $1,291,000 8,985,774 $ 0.14
Six Months
----------
2000
Basic EPS ($6,317,000) 9,160,205 ($0.69)
Diluted ($6,317,000) 9,374,285 ($0.69)
1999
Basic EPS $1,679,000 8,943,912 $ 0.19
Diluted $1,679,000 8,985,223 $ 0.19
</TABLE>
For further detail of EPS see Exhibit 11.
--------------------------------------------------------------------------------
Note F: INCOME TAXES
--------------------------------------------------------------------------------
The components of income tax expense based on the liability method for
the first six months are as follows:
--------------------------------------------------------------------------------
July 2, July 4,
In thousands 2000 1999
--------------------------------------------------------------------------------
Current - Federal ($28) $ 247
State (3) 169
Deferred - Federal (3,644) 703
State (365) 54
------------ ----------
Income tax provision (benefit) ($4,040) $1,173
============ ==========
--------------------------------------------------------------------------------
The income tax provision, reconciled to the tax computed at statutory rates,
for the six months is summarized as follows:
9
<PAGE>
<TABLE>
<CAPTION>
----------------------------------------------------------------
July 2, July 4,
In thousands 2000 1999
-------------------------------------- ------- -------
<S> <C> <C>
Federal tax at statutory
rate (35% in 2000 and 1999) ($3,625) $ 998
State income taxes (net of federal
tax benefit) (243) 145
Nondeductible charges 37 10
Recognition of benefits for subsidiary
NOLs (174) -
Other adjustments (35) 20
Adjustment of valuation allowance - -
------- -------
Income tax provision (benefit) ($4,040) $ 1,173
======= =======
</TABLE>
--------------------------------------------------------------------------------
Net deferred tax assets of $19.5 million and $14.8 million have been
recognized in the accompanying Consolidated Balance Sheets as of July 2, 2000
and December 31, 1999, respectively. The components of the net deferred tax
assets are as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------
July 2, Dec. 31,
In thousands 2000 1999
------------------------------------ ------- -------
<S> <C> <C>
Total deferred tax assets $22,278 $17,545
Total valuation allowance (114) (114)
------- -------
Total deferred tax asset - net 22,164 17,431
Total deferred tax liabilities (2,662) (2,622)
------- -------
Total net deferred tax asset $19,502 $14,809
======= =======
</TABLE>
--------------------------------------------------------------------------------
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 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 $14.3 million and $1.4 million, respectively. If not utilized,
the NOLs and tax credit carryovers will expire in various years through 2010.
NOTE G. SEGMENT INFORMATION
-------------------------------------------------------------------------------
During the first six 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
10
<PAGE>
Enterprise Solutions, Inc. ("CES"), Key Voice Technologies, Inc. ("KVT") and
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, Impression series
telecommunication systems, 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 to national account customers. The
products included are all of Comdial's vertical market products such as Impact
Concierge, QuickQ, Avalon, and voice processing systems. These products are
sold to specific industries such as hospitality, real estate, financial and
senior housing 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 which 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.
Unallocated costs include corporate expenses, interest expense, other
miscellaneous expenses, and income tax expenses or benefits. Comdial does not
11
<PAGE>
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 six months ended July 2,
2000 and July 4, 1999:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
July 2, July 4,
(Dollars in thousands) 2000 1999
-------------------------------------------------------------------------------------------- --------- --------
<S> <C> <C>
Business Segment
Net Revenues
Comdial Convergent Communications $ 35,706 $ 51,142
Comdial Enterprise Solutions 6,246 6,127
Key Voice Technologies 11,522 15,867
CBCC/Array 3,485 2,306
Inter-company elimination (3,394) (6,502)
--------- --------
Net sales $ 53,565 $ 68,940
========= ========
----------------------------------------------------------------------------------------------------------------------
Gross Profit
Comdial Convergent Communications $ 13,224 $ 19,061
Comdial Enterprise Solutions 1,763 2,477
Key Voice Technologies 5,367 8,633
CBCC/Array (2,172) (2,226)
--------- --------
Gross profit $ 18,182 $ 27,945
========= ========
----------------------------------------------------------------------------------------------------------------------
Operating Profit (Loss)
Comdial Convergent Com. $ 1,380 $ 7,834
Comdial Enterprise Solutions (1,514) 298
Key Voice Technologies 877 5,700
CBCC/Array (2,880) (1,771)
--------- --------
Operating profit (loss) (2,137) 12,061
Unallocated expenses
Cost of goods sold 78 312
Operating expenses 6,890 8,037
Interest expense 1,223 759
Miscellaneous expense - net _29 101
--------- --------
Income (loss) before income taxes ($10,357) $ 2,852
========= ========
----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
July 2, December 31,
(Dollars in thousands) 2000 1999
----------------------------------------------------------- --------- --------
<S> <C> <C>
Business Segment Assets
Comdial Convergent Com. $ 9,272 $ 28,662
Comdial Enterprise Solutions 7,455 7,039
Key Voice Technologies 10,355 10,155
CBCC/Array 56,798 43,693
Unallocated 44,552 43,525
--------- --------
Total $ 128,432 $133,074
========= ========
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
July 2, December 31,
(Dollars in thousands) 2000 1999
----------------------------------------------------------- --------- --------
<S> <C> <C>
Business Segment Liabilities
Comdial Convergent Com. $ 53 $ 2,322
Comdial Enterprise Solutions 316 66
Key Voice Technologies 1,679 2,340
CBCC/Array 14,119 15,878
Unallocated 44,563 40,860
--------- --------
Total $ 60,730 $ 61,466
========= ========
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
July 2, July 4,
(Dollars in thousands) 2000 1999
----------------------------------------------------------- --------- --------
<S> <C>
Business Segment Property, Plant and Equipment
Depreciation
Comdial Convergent Com. $ 102 $ 116
Comdial Enterprise Solutions 3 1
Key Voice Technologies 134 61
CBCC/Array 1,161 1,284
Unallocated 239 268
--------- --------
Total $ 1,639 $ 1,730
========= ========
Additions
Comdial Convergent Com. $ 10 $ 49
Comdial Enterprise Solutions 38 28
Key Voice Technologies 430 25
CBCC/Array 1,199 822
Unallocated 447 887
--------- --------
Total $ 2,124 $ 1,811
========= ========
-------------------------------------------------------------------------------------
</TABLE>
NOTE H. SUBSEQUENT EVENT
--------------------------------------------------------------------------------
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
EBITDA. Comdial has received a waiver from Bank of America with respect to that
covenant that expires August 30, 2000. In return, Comdial has agreed, in
principle, to restructure the Credit Agreement into a Term loan and a Revolver,
which are to include committed facilities and an uncommitted portion. The
committed facilities are expected to reduce the funds currently available from
$50 million to $40 million, with a further reduction to $35 million on December
31, 2000. The anticipated expiration date for the Term loan is March 31, 2002,
and for the Revolver is December 31, 2001. Comdial's interest rate is expected
to increase from 0.75% above LIBOR to 3.0% above LIBOR.
13
<PAGE>
COMDIAL CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
--------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
The following discussion is intended to assist the reader in understanding
and evaluating the financial condition and results of operations of Comdial
Corporation and its subsidiaries (the "Company"). This review should be read in
conjunction with the consolidated financial statements and accompanying notes.
This analysis attempts to identify trends and material changes that occurred
during the periods presented. Prior years have been reclassified to conform to
the 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") 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 will restate its financial statements as of and for the three months
ended April 2, 2000. Comdial intends to file an ammendment to its Form 10-Q for
the first quarter of 2000 reflecting this restatement as soon as possible. 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 organization into
Strategic Business Units ("SBUs") which are currently used by management to
analyze its business (see Note G to the Consolidated Financial Statements).
Results of Operations
Selected consolidated statements of operations for the first six months of
2000 and 1999 are as follows:
14
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
July 2, July 4,
In thousands 2000 1999
------------------------------------------ -------- -------
<S> <C> <C>
Net sales $ 53,565 $68,940
Cost of sales 35,383 40,995
-------- -------
Gross profit 18,182 27,945
Selling, general & administrative 22,404 18,226
Engineering, research & development 3,286 4,424
Goodwill amortization 1,597 1,583
Interest expense 1,223 759
Miscellaneous expense - net 29 101
-------- ---------
Income (loss) before income taxes (10,357) 2,852
Income tax expense (benefit) (4,040) 1,173
-------- ---------
Net income (loss) ($6,317) $ 1,679
======== =========
Earnings per share: basic ($0.69) $0.19
======== =========
diluted ($0.69) $0.19
</TABLE>
--------------------------------------------------------------------------------
Revenue and Earnings
Second Quarter 2000 vs. 1999
----------------------------
Comdial's sales, gross profit, and earnings declined for the second quarter
of 2000 when compared to the same period of 1999. Comdial's net sales decreased
by 41% for the second quarter of 2000 to $21.4 million, compared with $36.4
million in the second quarter of 1999. This decrease was primarily attributable
to a decrease in inventory levels at Comdial's four largest distributors.
Gross profit decreased by 71% for the second quarter of 2000 to $4.4 million,
compared with $15.4 million in the second quarter of 1999. Gross profit margin,
as a percentage of sales, decreased from 43% for the second quarter of 1999 to
21% for the same period of 2000. This decrease was due to lower sales and
special charges Comdial booked relating to discontinued products.
Selling, general and administrative expenses increased for the second quarter
of 2000 by 23% to $12.1 million, compared with $9.8 million in the second
quarter of 1999. This increase was due to the addition of sales and marketing
personnel to support Comdial's expected future growth and some additional costs
associated with restructuring the Company into Strategic Business Units during
the first quarter of 2000.
Engineering, research and development expenses for the second quarter of 2000
decreased by 32% to $1.6 million, compared with $2.3 million for the second
quarter of 1999. This decrease was primarily due to reducing engineering
personnel in the first quarter of 2000.
Interest expense increased by 63% for the second quarter of 2000 to $0.6
million, compared with $0.4 million in the second quarter of 1999. This increase
was due to higher interest rates and an increase in capital leases
15
<PAGE>
which is primarily associated with the installation of new financial and
manufacturing software.
Income tax expense decreased for the second quarter of 2000 to a tax benefit
of $4.1 million, compared with a tax expense of $0.9 million for the same
period of 1999. This tax benefit recognition was due to the reported tax loss
recognized by Comdial which management believes that more likely than not
will be recognized in future periods.
Net income decreased for the second quarter of 2000 to a loss of $6.7
million, compared with net income of $1.3 million for the same period in 1999.
The decrease was primarily attributable to decreased sales and gross margins.
First Six Months of 2000 vs. 1999
---------------------------------
Comdial's net sales decreased by 22% for the first six months of 2000 to
$53.6 million, compared with $68.9 million for the same period of 1999. This
decrease was attributable to the decrease in sales for the second quarter of
2000.
Gross profit decreased by 35% for the first six months of 2000 to $18.2
million, compared with $27.9 million for the same period of 1999. Gross profit
margin, as a percentage of sales, decreased from 41% for the first six months of
1999 to 34% 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.
Selling, general and administrative expenses increased for the first six
months of 2000 by 23% to $22.4 million, compared with $18.2 million for the same
period of 1999. This increase was due to the addition of sales and marketing
personnel to support Comdial's expected growth and some additional costs
associated with the organization of the Company.
Engineering, research and development expenses for the first six months of
2000 decreased by 26% to $3.3 million, compared with $4.4 million for the same
period of 1999. This decrease was due to reducing engineering personnel in the
first quarter of 2000.
Interest expense increased by 61% for the first six months of 2000 to $1.2
million, compared with $0.8 million in the same period of 1999. This increase
was due to higher interest rates in 2000 and an increase in capital leases.
Income tax expense decreased for the first six months of 2000 to a tax
benefit of $4.0 million, compared with a tax expense of $1.2 million for the
same period of 1999. This tax benefit recognition was du to the reported tax
loss recognized by Comdial which management believes that more likely than not
will be recognized in future periods.
Net income decreased for the first six months of 2000 to a loss of $6.3
million, compared with net income of $1.7 million for the same period in 1999.
This decrease was attributable to the decrease in sales and gross margins.
Liquidity
In 1998, Comdial entered into a financing arrangement with Bank of America,
N.A. ("Bank of America"), that provides a line of credit up to $50 million.
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<PAGE>
Comdial's current financial position along with the additional line of credit
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:
<TABLE>
<CAPTION>
--------------------------------------------------------
July 2, December 31,
In thousands 2000 1999
------------------------------ ------- ----------
<S> <C> <C>
Cash and cash equivalents $ 2,685 $ 1,917
Current maturities on debt 1,349 471
Working capital 42,976 49,244
--------------------------------------------------------
</TABLE>
As of October 1998, Comdial and Bank of America signed a Credit Agreement
(the "Credit Agreement"), which funds operational requirements as needed. All
operating cash requirements were funded through a $50 million revolving credit
facility (the "Revolver") provided by Bank of America. 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.
Current maturities on debt as of July 2, 2000, increased by $0.9 million due
to increases in new capital leases of approximately $1.4 million when compared
to December 31, 1999.
Working capital as of July 2, 2000, decreased by $6.3 million when compared
to December 31, 1999. This decrease was primarily due to the reduction in
accounts receivable.
Capital additions, per generally accepted accounting principles ("GAAP"), for
the first six months of 2000 and 1999 were approximately $2.1 million and $1.8
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 six months of 2000 and 1999, were $1.8 million
and $1.7 million, respectively. Management anticipates that a total of
approximately $5 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 July
2, 2000, the amount of commitments under the letter of credit facility with Bank
of America was $0.1 million.
17
<PAGE>
Accounts receivable as of July 2, 2000, decreased by $19.2 million when
compared to December 1999. This decrease was due to lower sales in the second
quarter. Inventory as of July 2, 2000, increased by $7.3 million, which
resulted from a sales level that was lower than anticipated.
Deferred tax assets as of July 2, 2000, increased by $4.7 million when
compared to December 31, 1999. This increase was due to Comdial reporting a
loss for the first six months of 2000 (see Note F to the Consolidated Financial
Statements).
Accounts payable as of July 2, 2000, decreased by $3.8 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 July 2, 2000,
decreased by $1.0 million primarily due to decreases in payroll and vacation
provisions. Other accrued liabilities as of July 2, 2000, decreased by $1.7
million partially due to Comdial paying promotional costs in 2000 that were
incurred in 1999.
Other long-term liabilities as of July 2, 2000, increased by $2.6 million
when compared to December 31, 1999. This increase was primarily due to the
recognition 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").
Long-term Debt, Including Current Maturities
As of July 2, 2000, long-term debt increased by $2.1 million when compared to
December 31, 1999. This increase in debt can be directly linked to the increase
in inventory. 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.
As of July 2, 2000, Comdial was not in compliance with one of the required
covenants of the Credit Agreement with Bank of America. Bank of America has
given Comdial a waiver for the convenant non-compliance that extends through
August 30, 2000 (see Notes D and H of the Consolidated Financial Statements).
Comdial believes that income from operations combined with amounts available
from Comdial's current credit facilities will be sufficient to meet Comdial's
needs for the foreseeable future.
Other Financial Information
During the first six months of 2000 and 1999, primarily all of Comdial's
sales, net income, and identifiable net assets were attributable to the
telecommunications industry.
18
<PAGE>
Year 2000
Comdial continues to monitor and review any new issues that may arise
concerning Year 2000. As of July 2, 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 the fourth quarter of 1999, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin ("SAB") No. 101. Comdial adopted the Bulletin,
and believes that this adoption will not have a material impact 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
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 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.
19
<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.
The Registrant has not filed any reports on Form 8-K during the quarterly
period.
__________________
Items not listed if not applicable.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Comdial Corporation
-------------------
(Registrant)
Date: August 25, 2000 By: /s/ William G. Mustain
---------------- -----------------------
William G. Mustain
President and Chief
Executive Officer
By: /s/ Paul K. Suijk
------------------
Paul K. Suijk
Senior Vice President and
Chief Financial Officer
21
