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
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
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<FISCAL-YEAR-END> DEC-31-1999
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