-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NQpWNe/Man3QA97XmenA3HRoolQFSHtjSwEwo0NDNgeb1Zgj6VX9nksxmwlAuYFw MygaFhYlZesBjW9v6C6z7A== 0000230131-99-000002.txt : 19990514 0000230131-99-000002.hdr.sgml : 19990514 ACCESSION NUMBER: 0000230131-99-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990404 FILED AS OF DATE: 19990513 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMDIAL CORP CENTRAL INDEX KEY: 0000230131 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 942443673 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-09023 FILM NUMBER: 99620348 BUSINESS ADDRESS: STREET 1: 1180 SEMINOLE TRAIL STREET 2: P O BOX 7266 CITY: CHARLOTTESVILLE STATE: VA ZIP: 22906-2200 BUSINESS PHONE: 8049782200 MAIL ADDRESS: STREET 1: 1180 SEMMINOLE TRAIL STREET 2: P O BOX 7266 CITY: CHARLOTTESVILLE STATE: VA ZIP: 22906 10-Q 1 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 April 4, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to _____________ Commission file number: 0-9023 COMDIAL CORPORATION (Exact name of Registrant as specified in its charter) Delaware 94-2443673 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) P. O. Box 7266 1180 Seminole Trail; Charlottesville, Virginia 22906-7266 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code:(804) 978-2200 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of latest practicable date. 8,932,413 common shares as of April 4, 1999. COMDIAL CORPORATION AND SUBSIDIARIES INDEX PAGE PART I - FINANCIAL INFORMATION ITEM 1: Financial Statements Consolidated Balance Sheets as of April 4, 1999 and December 31, 1998 3 Consolidated Statements of Operations for the Three Months ended April 4, 1999 and March 29, 1998 4 Consolidated Statements of Cash Flows for the Three Months ended April 4, 1999 and March 29, 1998 5 Notes to Consolidated Financial Statements 6-12 ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 13-19 PART II - OTHER INFORMATION ITEM 3. Quantitative and Qualitative Disclosures about Market Risks 20 ITEM 4: Submission of Matters to a vote by Security Holders 20 ITEM 6: Exhibits and Reports on Form 8-K 20 COMDIAL CORPORATION AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION ITEM 1. Financial Statements Consolidated Balance Sheets - (Unaudited) April 4, Dec. 31, In thousands except par value 1999 1998 * ______________________________________________________________ Assets Current assets Cash and cash equivalents $1,796 $1,599 Accounts receivable (less allowance 24,368 23,006 for doubtful accounts: 1999 - $210; 1998 - $198) Inventories 20,072 21,434 Prepaid expenses and other current assets 5,084 4,815 ______________________________________________________________ Total current assets 51,320 50,854 Property - net 18,044 18,023 Goodwill 17,080 17,257 Deferred tax asset - net 13,600 14,079 Other assets 10,505 8,777 ______________________________________________________________ Total assets $110,549 $108,990 ============================================================== Liabilities and Stockholders' Equity Current liabilities Accounts payable $8,346 $11,034 Accrued payroll and related expenses 3,009 2,942 Accrued promotional allowances 1,034 1,877 Other accrued liabilities 1,825 3,346 Current maturities of debt 4 6 ______________________________________________________________ Total current liabilities 14,218 19,205 Long-term debt 27,912 22,140 Deferred tax liability 3,065 3,123 Other long-term liabilities 1,394 1,361 Commitments and contingent liabilities (see Note H) - - ______________________________________________________________ Total liabilities 46,589 45,829 Stockholders' equity Common stock ($0.01 par value) and paid-in capital (Authorized 30,000 shares; issued shares: 1999 = 8,932; 1998 = 8,818) 116,527 116,039 Other (1,320) (1,243) Accumulated deficit (51,247) (51,635) ______________________________________________________________ Total stockholders' equity 63,960 63,161 Total liabilities and stockholders' equity $110,549 $108,990 ============================================================== * Condensed from audited financial statements. The accompanying notes are an integral part of these financial statements. COMDIAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations - (Unaudited) In thousands except per share amounts ___________________________________________________________ Three Months Ended April 4, March 29, 1999 1998 ___________________________________________________________ Net sales $31,864 $29,281 Cost of goods sold 19,163 17,394 ________________________________________________________ Gross profit 12,701 11,887 Operating expenses Selling, general & administrative 8,611 7,615 Engineering, research & development 2,086 1,551 Goodwill amortization expense 784 663 ________________________________________________________ Operating income 1,220 2,058 Other expense Interest expense 382 275 Miscellaneous expenses - net 129 180 ________________________________________________________ Income before income taxes 709 1,603 Income tax expense (benefit) 321 (236) _________________________________________________________ Net income applicable to common stock $388 $1,839 ======================================================== Earnings per common share and common equivalent share: Basic $0.04 $0.21 Diluted $0.04 $0.20 Weighted average common shares outstanding: Basic 8,939 8,779 Diluted 8,987 8,980 The accompanying notes are an integral part of these financial statements. COMDIAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows - (Unaudited) Three Months Ended April 4, March 29, In thousands 1999 1998 ________________________________________________________________ Cash flows from operating activities: Cash received from customers $31,197 $26,900 Other cash received 167 357 Interest received 1 27 Cash paid to suppliers and employees (35,524) (26,858) Interest paid on debt (397) (638) Income taxes paid (52) (45) _________________________________________________________________ Net cash used in operating activities (4,608) (257) Cash flows from investing activities: Acquisition costs for Array, Aurora, and Key Voice Technologies (1) (1) Proceeds received from the sale of FastCall - 80 Proceeds from the sale of equipment - 31 Capital expenditures (976) (911) ________________________________________________________________ Net cash used in investing activities (977) (801) Cash flows from financing activities: Net borrowings under revolver 5,774 1,193 Proceeds from issuance of common stock 12 56 Principal payments on debt - (5,389) Principal payments on capital lease obligations (4) (14) _________________________________________________________________ Net cash provided by (used in) financing activities 5,782 (4,154) Net increase (decrease) in cash and cash equivalents 197 (5,212) Cash and cash equivalents at beginning of year 1,599 5,673 ________________________________________________________________ Cash and cash equivalents at end of period $1,796 $461 ================================================================ Reconciliation of net income to net cash provided by (used in) operating activities: Net income $388 $1,839 ________________________________________________________________ Depreciation and amortization 2,218 1,883 Increase in accounts receivable (1,362) (3,377) Inventory provision 353 602 Decrease (increase) in inventory 1,009 (422) Increase in other assets (2,802) (249) Decrease (increase) in deferred tax asset 140 (330) Increase (decrease) in accounts payable (2,688) 437 Decrease in other liabilities (2,264) (778) Increase in paid-in capital and other equity 400 138 _________________________________________________________________ Total adjustments (4,996) (2,096) Net cash used in operating activities ($4,608) ($257) ================================================================= The accompanying notes are an integral part of these financial statements. COMDIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED APRIL 4, 1999 - (Unaudited) Note A: CONSOLIDATED FINANCIAL STATEMENTS_______________________ The financial information included as of April 4, 1999, and for the three months ended April 4, 1999 and March 29, 1998 is unaudited. The financial information reflects all normal recurring adjustments necessary for a fair statement of results for such periods. Accounting policies followed by Comdial Corporation ("Comdial") are described in Note 1 to the consolidated financial statements in its Annual Report to Stockholders for the year ended December 31, 1998. The consolidated financial statements for accounting periods in 1999 contained herein should be read in conjunction with the 1998 financial statements, including notes thereto, contained in Comdial's Annual Report to Stockholders for the year ended December 31, 1998. Certain amounts in the 1998 consolidated financial statements have been reclassified to conform to the 1999 presentation. The results of operations for the three months ended April 4, 1999, are not necessarily indicative of results for the full year. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Note B: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES______________ The preparation of financial statements to conform with generally accepted accounting principles ("GAAP") requires management to make certain estimates and assumptions that affect reported amounts of assets, liabilities, revenues, and expenses. GAAP also requires disclosure of contingent assets and liabilities as of April 4, 1999. Actual results may differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents are defined as short-term liquid investments with maturities, when purchased, of less than 90 days that are readily convertible into cash. Under Comdial's current cash management policy, borrowings from the revolving credit facility are used for operating purposes. The revolving credit facility is reduced at management's option by cash receipts that are deposited daily. Bank overdrafts of $1.8 million and $3.3 million are included in accounts payable as of April 4, 1999 and December 31, 1998, respectively. Bank overdrafts consist of outstanding checks that have not (1) cleared the bank and (2) been funded by the revolving credit facility (see Note D). The revolving credit facility activity is reported on a net basis in the Consolidated Statements of Cash Flows. Revenue Recognition Comdial recognizes revenue as products are shipped. Returned products are credited against revenues as they are received back from the customer. The only exceptions to this policy are revenues from E911 systems and from embedded software. E911 revenues are recognized when installations have been completed and embedded software revenues are not recognized until the customer requests a code from Comdial enabling the software to be activated. Comdial's reporting of software revenue meets the requirements as set forth by Statement of Position 97-2 "Software Revenue Recognition." Other Long-lived Assets Long-lived assets are amortized based on the assets' useful lives. Long-lived assets are reviewed for impairment as circumstances change that might affect those assets. An impairment loss is not recognized unless a portion of the carrying amount of an asset is no longer recoverable using a test of recoverability which is based on expected future undiscounted cash flows. Note C: INVENTORIES_____________________________________________ Inventories consist of the following: _________________________________________________________________ April 4, Dec. 31, In thousands 1999 1998 _________________________________________________________________ Finished goods $8,851 $8,507 Work-in-process 2,997 3,568 Materials and supplies 8,224 9,359 _________________________________________________________________ Total $20,072 $21,434 _________________________________________________________________ Comdial provides reserves to cover product obsolescence and those reserves impact gross margin. Future reserves are dependent on management's estimates of the recoverability of costs of all inventory. Raw material obsolescence is mitigated by the commonality of component parts and finished goods by the low level of inventory relative to sales. Note D: BORROWINGS______________________________________________ In the third quarter of 1998, Comdial and NationsBank, N.A. ("NationsBank"), entered into a credit agreement (the "Credit Agreement"). The Credit Agreement provides Comdial with a $50 million revolving credit facility and a $5 million letter of credit subfacility. Comdial used $15.8 million under the revolving credit facility (the "Revolver") to pay off (1) its total indebtedness of $10.8 million to Fleet Capital Corporation ("Fleet"), (2) $4.4 million representing amounts owed under a promissory note including interest to the former owners of KVT, and (3) $0.6 million of mortgages owed by KVT. Long-term Debt. Long-term debt consists of the following: _________________________________________________________________ April 4, Dec. 31, In thousands 1999 1998 __________________________________________________________________ Revolver (1) $27,906 $22,132 Capitalized leases (2) 10 14 __________________________________________________________________ Total debt 27,916 22,146 Less current maturities on debt 4 6 __________________________________________________________________ Total long-term debt $27,912 $22,140 _________________________________________________________________ (1) The Revolver made pursuant to the Credit Agreement with NationsBank carries an interest rate based on the LIBOR daily rate plus a specified margin. The interest rate can be adjusted quarterly based on Comdial's ratio of funded debt to earnings before interest, taxes, depreciation and amortization ("EBITDA"), which allows the rates to vary from 0.75% to 1.50% above the LIBOR daily rate. As of April 4, 1999 and December 31, 1998, Comdial's borrowing LIBOR rates were 5.69% and 6.30%, respectively, which includes the additional applicable margin of 0.75%. Comdial can use the Revolver with NationsBank for working capital, equipment purchases, to finance permitted acquisitions, and for other general corporate purposes. The NationsBank Revolver (as defined in the Credit Agreement) does not require payment until August 31, 2003 with the option of possible credit extensions. (2) Capital leases are with various financing entities and are payable based on the terms of each individual lease. Debt Covenants Comdial's indebtedness to NationsBank is secured by liens on all of Comdial's properties and assets. The Credit Agreement with NationsBank contains certain financial covenants that relate to specified levels of consolidated net worth and other financial ratios. As of April 4, 1999, Comdial was in compliance with all of the covenants and terms of the Credit Agreement. Note E: EARNINGS PER SHARE______________________________________ For the three months ended April 4, 1999 and March 29, 1998, earnings per common share ("EPS") were computed for both basic and diluted EPS to conform to Statement of Financial Accounting Standards ("SFAS") No. 128. Basic EPS for the three months presented were computed by dividing net income applicable to common shares by the weighted average number of common shares outstanding and common equivalent shares including any possible contingent shares. For the three months ended April 4, 1999 and March 29, 1998, diluted EPS were computed by dividing income attributable to common shareholders by the weighted average number of common and common equivalent shares outstanding during the period plus (in periods in which they had a dilutive effect) the effect of common shares contingently issuable, primarily from stock options. The following table discloses the quarterly information for the three months ended April 4, 1999 and March 29, 1998. _________________________________________________________________ Numerator Denominator EPS _________________________________________________________________ Three Months 1999 Basic EPS $388,000 8,939,450 $0.04 Diluted $388,000 8,986,732 $0.04 1998 Basic EPS $1,839,000 8,779,127 $0.21 Diluted $1,839,000 8,979,630 $0.20 For further detail of EPS see Exhibit 11. ___________________________________________________________________ Note F: INCOME TAXES____________________________________________ The components of the income tax expense (benefit) based on the liability method for the three months are as follows: _________________________________________________________________ April 4, March 29, In thousands 1999 1998 _________________________________________________________________ Current - Federal $58 $35 State 123 59 Deferred - Federal 191 (322) State (51) (8) _________________________________________________________________ Income tax provision (benefit) $321 ($236) _________________________________________________________________ The income tax provision reconciled to the tax computed at statutory rates for the nine months are summarized as follows: _________________________________________________________________ April 4, March 29, In thousands 1999 1998 _________________________________________________________________ Federal tax at statutory rate (35% in 1999 and 1998) $239 $561 State income taxes (net of federal tax benefit) 48 38 Nondeductible charges 20 33 Alternative minimum tax - 52 Utilization of operating loss carryover - (590) Adjustment of valuation allowance 14 (330) _______________________________________________________________ Income tax provision (benefit) $321 ($236) _________________________________________________________________ Net deferred tax assets of $16.8 million and $17.0 million have been recognized in the accompanying Consolidated Balance Sheets as of April 4, 1999 and December 31, 1998, respectively. The components of the net deferred tax assets are as follows: _________________________________________________________________ April 4, Dec. 31, In thousands 1999 1998 _________________________________________________________________ Total deferred tax assets $22,846 $23,045 Total valuation allowance (2,966) (2,966) _________________________________________________________________ Total deferred tax asset - net 19,880 20,079 Total deferred tax liabilities (3,065) (3,123) _________________________________________________________________ Total net deferred tax asset $16,815 $16,956 _________________________________________________________________ Comdial periodically reviews the requirements for a valuation allowance and makes adjustments to such allowance when changes in circumstances result in changes in management's judgment about the future realization of deferred tax assets. Comdial has net operating losses ("NOLs") and tax credit carryovers of approximately $31.5 million and $1.7 million, respectively. If not utilized, the NOLs and tax credit carryovers will expire in various years through 2010. NOTE G. SEGMENT INFORMATION_____________________________________ As of December 31, 1998, Comdial adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information." This disclosure should be read in conjunction with Comdial's financial statement notes contained in its Annual Report to Stockholders for the year ended December 31, 1998. During the first three months of 1999 and 1998, substantially all of Comdial's sales, net income, and identifiable net assets were attributable to the telecommunications industry with over 97% of sales occurring in the United States. There are no operating assets located outside the United States. Comdial is segmented into three product categories, each of which contributes ten percent or more to net sales. The segments are Digital Systems, Solutions and Software, and Analog and Other (which include other miscellaneous products). Each of these categories is considered a business segment, and with respect to financial performance, the costs associated with each of these segments can only be quantified and identified to the gross profit level. The expenses, and assets and liabilities attributable to corporate activity are not allocated to the operating segments. Comdial does not maintain information that would allow these costs to be broken down into the various product segments and most of the costs are universal in nature. The Digital Systems segment is comprised of products such as Impact, Impression, Impact Digital Expandable Systems ("DXP"), DXP Plus and the "FX Series." Digital Systems' distinguishing characteristic is that they are designed for the small office up to 500 end users and offer additional features. The Solutions and Software segment is comprised of Comdial's software and software application products such as Impact Concierge, QuickQ, Avalon, and voice processing systems. These products are sold to specific industries such as hospitality, call centers, and assisted living centers. The Analog and Other segment is comprised of Comdial's older analog products (such as the Executech, Unisyn, ATC Terminals, and Solo), and other products such as Voice Express, MaxPlus, and Custom Manufacturing. Analog products are aimed at the small office market and emphasize price rather than features and software functionality. The information in the following tables is derived directly from the segments' internal financial reporting used for corporate management purposes. The following tables show segment information for the periods ended April 4, 1999 and March 29, 1998. ___________________________________________________________________ April 4, March 29, (Dollars in thousands) 1999 1998 ___________________________________________________________________ Business Segment Net Revenues Digital Systems $18,503 $18,455 Solutions and Software 10,413 8,037 Analog and Other 2,948 2,789 ___________________________________________________________________ Net sales $31,864 $29,281 ___________________________________________________________________ ___________________________________________________________________ April 4, March 29, (Dollars in thousands) 1999 1998 Business Segment Profit Digital Systems $6,234 $6,792 Solutions and Software 5,802 4,461 Analog and Other 665 634 Gross profit 12,701 11,887 Operating expenses 11,481 9,829 Interest expense 382 275 Miscellaneous expense - net 129 180 Income before income taxes $709 $1,603 ___________________________________________________________________ ___________________________________________________________________ April 4, December 31, (Dollars in thousands) 1999 1998 Business Segment Assets Digital Systems $41,706 $43,286 Solutions and Software 21,370 18,124 Analog and Other 5,575 6,432 Unallocated 41,898 41,148 Total $110,549 $108,990 =================================================================== Business Segment Liabilities Digital Systems $718 $1,397 Solutions and Software 2,238 1,750 Analog and Other 115 203 Unallocated 43,518 42,479 Total $46,589 $45,829 =================================================================== ___________________________________________________________________ ___________________________________________________________________ April 4, March 29, (Dollars in thousands) 1999 1998 Business Segment Property, Plant and Equipment Depreciation Digital Systems $469 $479 Solutions and Software 35 70 Analog and Other 39 39 Unallocated 308 184 Total $851 $772 ================================================================== Additions Digital Systems $345 $247 Solutions and Software 52 27 Analog and Other 49 16 Unallocated 425 76 Total $871 $366 =================================================================== ___________________________________________________________________ Note H: COMMITMENTS AND CONTINGENT LIABILITIES____________________ Management does not believe that contingent losses or potential claims arising from Year 2000 issues will have a material effect on Comdial. At one time, Comdial sold certain DOS-based systems that were not Year 2000 compliant. All systems were sold by Comdial substantially to dealers and not directly to end-users. In addition, any warranties associated with such systems have expired. Comdial has alerted all of its dealers to this potential problem and has provided instructions to the dealers on how to remedy the problem. Comdial cannot predict whether the failure of such systems to be Year 2000 compliant will result in any litigation against Comdial. COMDIAL CORPORATION AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion is intended to assist the reader in understanding and evaluating the financial condition and results of operations of Comdial Corporation and its subsidiaries (the "Company"). This review should be read in conjunction with the consolidated financial statements and accompanying notes. This analysis attempts to identify trends and material changes that occurred during the periods presented. Prior years have been reclassified to conform to the 1999 reporting basis (see Note A to the Consolidated Financial Statements). Comdial is a Delaware corporation based in Charlottesville, Virginia. Comdial's Common Stock is traded on the National Association of Security Dealers Automated Quotation System ("Nasdaq?") in the National Market? under the symbol, CMDL. Results of Operations Selected consolidated statements of operations for the first three months of 1999 and 1998 are as follows: _________________________________________________________________ April 4, March 29, In thousands 1999 1998 _________________________________________________________________ Business Segment Sales: Digital Systems $18,503 $18,455 Solutions and Software 10,413 8,037 Analog and Other 2,948 2,789 Net Sales 31,864 29,281 Cost of sales 19,163 17,394 Gross profit 12,701 11,887 Selling, general & administrative 8,611 7,615 Engineering, research & development 2,086 1,551 Goodwill amortization 784 663 Interest expense 382 275 Miscellaneous expense - net 129 180 Income before income taxes 709 1,603 Income tax expense (benefit) 321 (236) Net income applicable to common stock $388 $1,839 Earnings per common share and common equivalent share: basic $0.04 $0.21 __________________________________________________________________ Revenue and Earnings First Quarter 1999 vs. 1998 Comdial's net income decreased by 79% for the first quarter of 1999 to $0.4 million when compared with $1.8 million for the same period in 1998. This decrease is primarily attributable to the additional operating expenses incurred in the first quarter of 1999. Income before income taxes for the first quarter of 1999 decreased by 56% to $0.7 million, as compared with $1.6 million for the comparable period in 1998. Net sales increased by 9% for the first quarter of 1999 to $31.9 million, compared with $29.3 million in the first quarter of 1998. This increase was primarily attributable to the increase in solutions and software product sales. Gross profit increased by 7% for the first quarter of 1999 to $12.7 million, compared with $11.9 million in the first quarter of 1998. Gross profit, as a percentage of sales, decreased slightly from 41% for the first quarter of 1998 to 40% for the same period of 1999. This decrease was due to (1) lower margins on the Impact FXS product (Digital segment), which was introduced at the end of the fourth quarter of 1998 at introductory rates and (2) software activation on the Impact FXS was slower than anticipated. Selling, general and administrative expenses increased by 13% to $8.6 million, compared with $7.6 million in the first quarter of 1998. This increase was due to additional sales and marketing personnel to support Comdial's future growth along with additional costs associated with the acquisition of Array Telecom Corporation ("Array") in the third quarter of 1998. Engineering, research and development expenses for the first quarter of 1999 increased by 34% to $2.1 million compared with $1.6 million for the first quarter of 1998. This increase was due to additional engineering personnel and additional costs associated with Array. Goodwill amortization expense increased for the first quarter of 1999 by 18% to $0.8 million, compared with $0.7 million for the first quarter of 1998. This increase was due to the additional amortization expenses associated with the Array acquisition. Interest expense increased by 39% for the first quarter of 1999 to $0.4 million compared with $0.3 million in the first quarter of 1998. This increase was due to higher average debt levels on Comdial's revolving credit facility. Miscellaneous expense decreased by 28% for the first quarter of 1999 to $0.1 million, compared with $0.2 million for the first quarter of 1999. This decrease was primarily due to decreases in cash discounts allowed by Comdial to its customers. Income tax expense (benefit) reflected an expense for the first quarter of 1999 of $0.3 million compared with a tax benefit of $0.2 million for the first quarter of 1998. This increase in tax expenses was primarily due to Comdial recognizing all its tax benefits of net operating losses ("NOLs") in the third quarter of 1998 (see Note F to the Consolidated Financial Statements). In the future, Comdial's tax expense will track with its income at a normal tax rate. Comdial will continue to pay taxes at the alternative minimum tax rate ("AMT") for all of 1999 with the additional tax expense reducing Comdial's deferred tax asset generated by the recognition of its NOLs. Liquidity Comdial's financial position continues to improve when compared to previous years. In 1998, Comdial entered into a new financing arrangement with NationsBank, N.A. ("NationsBank") that provides a line of credit up to $50 million. Comdial's continual improvement in its financial position along with the additional line of credit allows Comdial to make necessary and desirable capital expenditures and investments to expand into new high growth markets in the telecommunications industry. The following table sets forth Comdial's cash and cash equivalents, current maturities on debt, and working capital at the dates indicated: _________________________________________________________________ April 4, December 31, In thousands 1999 1998 _________________________________________________________________ Cash and cash equivalents $1,796 $1,599 Current maturities on debt 4 6 Working capital 37,102 31,649 _________________________________________________________________ For the first three months of 1999, all operating cash requirements were funded through a $50 million revolving credit facility (the "Revolver") provided by NationsBank Credit Agreement (the "Credit Agreement"). Comdial reports the revolver activity on a net basis in the Consolidated Statements of Cash Flows. Comdial considers outstanding checks to be a bank overdraft. As of April 4, 1999, Comdial's cash and cash equivalents were slightly higher than December 31, 1998 by $0.2 million, due to the timing of the deposits received at end of the period. Working capital as of April 4, 1999, increased by $5.5 million when compared to December 31, 1998. This increase was primarily due to increases in accounts receivable and the reduction of accounts payable and other liabilities. Capital additions for the first three months of 1999 were approximately $0.9 million. Capital additions were used to help Comdial introduce new products as well as improve quality and reduce costs associated with new and existing products. Capital additions were funded by cash generated from operations and borrowing from the revolver. Cash expenditures for capital additions for the first three months of 1999 and 1998, were $1.0 million and $0.9 million, respectively. Management anticipates that approximately $8 million will be spent on capital additions during 1999. These additions will help Comdial meet its commitments to its customers by developing new products as well as increasing its capacity to produce high-tech products for the future. Comdial plans to fund all additions primarily through cash generated by operations along with some borrowing from the Revolver. Comdial has a commitment from NationsBank for the issuance of letters of credit in an aggregate amount not to exceed $5 million at any one time. On April 4, 1999, the amount of commitments under the letter of credit facility with NationsBank was $0.1 million. Accounts Receivable as of April 4, 1999, increased by $1.4 million compared with December 31, 1998, primarily due to (1) record breaking sales in the first quarter of 1999 and (2) the majority of those sales occurring in the latter stages of the quarter. Inventory decreased in the first quarter of 1999 by $1.4 million due to the additional shipments for product sales at the end of the quarter and the timing of incoming production material receipts. Other assets increased by $1.7 million due to software development costs associated with new products and costs associated with the Array product development. Accounts payable as of April 4, 1999, decreased by $2.7 million when compared to December 31, 1998. This decrease was primarily due to the timing of incoming material receipts for production. Accrued promotional allowances as of April 4, 1999, decreased by $0.8 million when compared to December 31, 1998. This decrease was primarily due to Comdial paying the volume discount earned by its major distributors for 1998 sales. Other accrued liabilities as of April 4, 1999, decreased by $1.5 million partially due to Comdial paying costs associated with 1998 annual incentives awarded to its directors and officers. Long-term Debt, Including Current Maturities In the third quarter of 1998, Comdial and NationsBank entered into the Credit Agreement. NationsBank agreed to provide Comdial with a $50 million revolving credit facility and a $5 million letter of credit subfacility. Comdial used $15.8 million under the Revolver to pay off (1) its remaining indebtedness to Fleet Capital Corporation of $10.8 million, (2) amounts owed under Comdial's promissory note including interest to the former owners of KVT of $4.4 million, and (3) mortgages owed by KVT of $0.6 million. As of April 4, 1999, long-term debt increased by $5.8 million due to paying liabilities that related to 1998 along with an increase in accounts receivable. See Note D to Comdial's Consolidated Financial Statements for additional information with respect to Comdial's loan agreements, long-term debt and available short-term credit lines. Comdial believes that income from operations combined with amounts available from Comdial's current credit facilities will be sufficient to meet Comdial's needs for the foreseeable future. Other Financial Information During the first three months of 1999 and 1998, primarily all of Comdial's sales, net income, and identifiable net assets were attributable to the telecommunications industry. Year 2000 In early 1997, Comdial established a team (the "Year 2000 Team"), to evaluate whether, and to what extent, Comdial's products, information technology systems, facilities and production and distribution infrastructure may be affected by the Year 2000 and potential problems caused by the inability of certain computers and microprocessors to distinguish between the year 2000 and the year 1900. State of Readiness: Comdial believes it has identified the Year 2000 issues that could potentially affect its business and has developed plans to address such problems. Through a series of industry-recognized tests, the Year 2000 Team believes that it has identified which of Comdial's products, devices, and computerized systems contain embedded microprocessors will require remediation or replacement because of potential Year 2000 issues. The Year 2000 Team has concluded that nearly all of Comdial's products are already Year 2000 compliant. Comdial expects that any non- compliant products that Comdial continues to sell will be compliant by the third quarter of 1999. Furthermore, Comdial is providing upgrades, or taking other remedial steps, to correct any non- compliant products that remain under warranty. In addition, Comdial's manufacturing division has performed Year 2000 testing and found all equipment to be functioning as required. Comdial continues to monitor and review any new issues that may arise concerning Year 2000. Furthermore, Comdial has implemented a requirement that its suppliers certify that all products, supplier's purchased products, and services provided to Comdial will not be adversely affected by the Year 2000. Comdial has divided its suppliers into three categories with respect to Year 2000 compliance: (1) non-critical component suppliers, (2) critical component suppliers, and (3) sole source critical component suppliers. As of the end of the first quarter of 1999, Comdial received written confirmation of Year 2000 compliance for all three categories of approximately 99%. Comdial continues to follow-up with suppliers to ensure they comply with Comdial's requirements and that they provide Comdial with the proper verification. Comdial also plans to perform on-site audits of some of the sole source suppliers that are critical to Comdial's operations, which should be completed by the fourth quarter of 1999. Costs: Comdial estimates that it will incur approximately $0.4 million in additional expenses to remedy the remaining Year 2000 issues. This cost includes testing, new software, maintenance of existing software, PC replacements, and consultants. On an ongoing basis, Comdial has been replacing existing in-house systems to improve efficiency and to address the Year 2000 issue. Such replacements are projected to be complete in the first half of 1999. As of April 4, 1999, cumulative costs incurred by Comdial specifically for the Year 2000 totaled an aggregate of $0.1 million. Risks: There are various potential risks that could be associated with the failure of Comdial's business or the business of significant third-party suppliers of Comdial to be Year 2000 ready. The possible failure of internal information systems to be Year 2000 ready could result in some interruptions or disruptions of business. The possible failure of manufacturing facilities to be Year 2000 ready could result in impaired manufacturing processes with delays in delivery of products until non-compliant components or conditions can be remedied or replaced. Finally, risks of major failures of Comdial's products could include adverse functional impacts experienced by customers, the costs and resources for Comdial to remedy such problems or replace non-compliant products under warranty and delays in delivery of new products. While Comdial believes that it is taking appropriate actions to respond to and resolve potential Year 2000 issues, there can be no assurance that Year 2000 issues will not have a material adverse affect on Comdial. Contingency Plans: If the current sole source suppliers cannot give Comdial certification or corrective action for Year 2000 compliance, Comdial plans to develop and use alternative vendors. Comdial, as of April 4, 1999, has received certification that all of its major suppliers are or will be Year 2000 compliant not later than the third quarter of 1999. Management believes that Comdial is properly addressing the Year 2000 issue in order to mitigate any adverse operational or financial consequences. Current Pronouncements In the third quarter of 1998, Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." Comdial does not participate in any financial instruments that it considers to meet the definition of a derivative or hedging activity, and therefore, it is not expected that this statement will have any affect on Comdial's financial statements. "SAFE HABOR" STATEMENT UNDER THE PRIVATE SECURITIES LIGITATION REFORM ACT OF 1995 Comdial's report may contain some forward-looking statements that are subject to risks and uncertainties, including, but not limited to, the impact of competitive products, product demand and market acceptance risks, reliance on key strategic alliances, fluctuations in operating results, delays in development of highly complex products, and other risks detailed from time to time in Comdial's filings with the Securities and Exchange Commission. These risks could cause Comdial's actual results for 1999 and beyond to differ materially from those expressed in any forward- looking statement made by, or on behalf of, Comdial. 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." COMDIAL CORPORATION AND SUBSIDIARIES PART II - OTHER INFORMATION ITEM 4. Submission of Matters to a vote by Security Holders (a) On April 27, 1999, Comdial held its annual meeting of shareholders in the Customer Conference Center within its own facility located at 1180 Seminole Trail, Charlottesville, Virginia 22901. The following matters were voted upon: 1. The following directors were elected to serve three year terms: Barbara Perrier Dreyer, Robert E. Spekman and Dianne C. Walker. Directors whose term of office continued after the meeting: Robert P. Collins, A. M. Gleason, William G. Mustain and John W. Rosenblum. 2. The firm of Deloitte & Touche LLP was approved as the independent public auditors of Comdial. Shares of Common Stock were voted as follows: Item 1: (Election of Board of Directors) For - 6,873,383 Against - 109,837 Abstain - - Not Voted - 1,877,163 Total Vote For Total Vote Withheld Barbara P. Dreyer 6,841,718 141,503 Robert E. Spekman 6,868,211 115,010 Dianne C. Walker 6,787,738 195,483 Item 2: (Selection of Independent Auditors) For - 6,926,261 Against - 49,038 Abstain - 7,921 Not Voted - 1,877,163 ITEM 6. Exhibits and Reports on Form 8-K. (a) 3. Exhibits Included herein: (11) Statement re Computation of Per Share Earnings. (27) Financial Data Schedule. (b) Reports on Form 8-K The Registrant has not filed any reports on Form 8-K during the quarterly period. __________________ Items not listed if not applicable. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Comdial Corporation (Registrant) Date: May 13, 1999 By: /s/ Manfred Funke Manfred Funke Controller and Acting Chief Financial Officer EX-11 2 COMDIAL CORPORATION AND SUBSIDIARIES Exhibit 11 SCHEDULE OF COMPUTATION OF EARNINGS PER COMMON SHARE (Dollars in thousands except share amounts) Three Months End April 4, March 29, 1999 1998 BASIC Net income applicable to common shares: $388 $1,839 =================================================================== Weighted average number of common shares outstanding during the period 8,859,302 8,707,098 Add - contingency shares 68,600 72,029 deferred shares 11,548 - Weighted average number of shares used in cal-culation of basic earnings per common share 8,939,450 8,779,127 =================================================================== Basic earnings per common share: $0.04 $0.21 DILUTED Net income applicable to common shares - basic $388 $1,839 =================================================================== Weighted average number of shares used in cal-culation of basic earnings per common share 8,939,450 8,779,127 Add (deduct) incremental shares representing: Shares issuable based on period-end Market price or weighted average price: Stock options 47,282 200,503 Weighted average number of shares used in calculation of diluted earnings per common share 8,986,732 8,979,630 =================================================================== Diluted earnings per common share $0.04 $0.20 EX-27 3
5 1,000 3-MOS DEC-31-1999 APR-04-1999 1,796 0 24,578 210 20,072 51,320 49,493 31,449 110,549 14,218 27,916 0 0 90 63,870 110,549 29,098 31,864 17,995 19,163 11,610 0 382 709 321 388 0 0 0 388 0.04 0.04
-----END PRIVACY-ENHANCED MESSAGE-----