SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1997 Commission File Number 0-26912
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VODAVI TECHNOLOGY, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 86-0789350
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(State or other jurisdiction of (I.R.S. Employer
incorporation or Identification No.)
organization)
8300 EAST RAINTREE DRIVE
SCOTTSDALE, ARIZONA 85260
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(Address of principal executive offices) (Zip Code)
(602) 443-6000
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Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
Issuer's revenue for its most recent fiscal year: $47,674,751
At March 23, 1998, there were outstanding 4,342,238 shares of the registrant's
Common Stock, $.001 par value. The aggregate market value of Common Stock held
by nonaffiliates of the registrant (2,740,208 shares) based on the closing price
of the Common Stock as reported on the Nasdaq National Market on March 23, 1998,
was $10,618,306. For purposes of this computation, all officers, directors and
10% beneficial owners of the registrant are deemed to be affiliates. Such
determination should not be deemed an admission that such officers, directors or
10% beneficial owners are, in fact, affiliates of the registrant.
Documents incorporated by reference: Portions of the registrant's definitive
Proxy Statement for the 1998 Annual Meeting of Stockholders are incorporated by
reference into Part III of this Report.
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VODAVI TECHNOLOGY, INC.
ANNUAL REPORT ON FORM 10-K
FISCAL YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
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PART I Page
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<S> <C> <C> <C> <C>
ITEM 1. BUSINESS................................................... 1
ITEM 2. PROPERTIES................................................. 22
ITEM 3. LEGAL PROCEEDINGS.......................................... 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........ 22
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.............................. 23
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA....................... 24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...................... 25
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK................................................ 27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................ 28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE...................... 28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......... 28
ITEM 11. EXECUTIVE COMPENSATION..................................... 28
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT........................................... 28
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............. 28
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K.............................................. 29
SIGNATURES............................................................................ 32
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS............................................ F-1
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PART I
ITEM 1. BUSINESS
INTRODUCTION
The Company designs, develops, markets, and supports a broad range of
communication products, including telephone systems, commercial grade
telephones, voice processing products, and computer-telephony products for a
wide variety of business applications. The Company's telephone systems
incorporate sophisticated features, such as automatic call distribution, and its
voice processing products include interactive voice response systems, automated
attendant, and voice and fax mail. The Company's computer-telephony products
allow users to combine the functionality of telephones and desktop computers
through applications such as integrated PC telephones, desktop video
conferencing systems, call accounting systems, Unified messaging, and Internet
messaging. The Company markets its products primarily in the United States as
well as in foreign countries through a distribution network consisting of
wholesale distributors, direct dealers, and its own sales personnel.
The Company's business strategy includes (i) expanding the Company's
historical business of supplying telephone systems and commercial grade
telephones; (ii) emphasizing its new voice processing and computer-telephony
integration products for use in connection with telephone systems supplied by it
and by others; (iii) pursuing its strategic relationship with LG Electronics
Inc. ("LGE"), a member of the multi-billion dollar, Korean-based LG Group with
which management has had a long-term relationship; and (iv) expanding its
technological expertise through business acquisitions, license arrangements and
other strategic relationships, and increased internal research and development
efforts in order to enhance existing products, introduce new products, and
expand product lines.
Unless the context indicates otherwise, all references to the "Company"
refer to Vodavi Technology, Inc., its predecessors and its subsidiaries,
including Vodavi Communications Systems, Inc. ("VCS"), Enhanced Systems, Inc.
("Enhanced"), and Arizona Repair Services, Inc. ("ARSI"). The Company's
corporate headquarters are located at 8300 East Raintree Drive, Scottsdale,
Arizona 85260, and its telephone number is (602) 443-6000.
BUSINESS
Industry Overview
Virtually every business today relies upon its business communications
system as an essential tool to speed and enhance the effectiveness of
communications among employees, customers, and vendors; to contact decision
makers regardless of their location; to increase employee productivity; to
provide better customer service; and to reduce operating costs. Many factors
have stimulated the growth of the telecommunications industry, including
successive technological developments that have resulted in enhanced features
and services, advances in telephone and computer hardware and software, and
regulatory changes. These factors have resulted in continual development of
full-featured business communications systems designed for use by small- and
medium-sized businesses and offered at affordable prices.
Accelerated technological advances in recent years have enabled
telecommunications system providers to develop sophisticated systems that offer
a wide variety of applications in addition to traditional call switching
functions. Businesses of all sizes now demand affordable telecommunications
systems that provide the capacity for (i) voice and text processing systems,
which automate call answering, provide voice mail and automated call
distribution functions, and provide the capacity to manage facsimile messages;
(ii) interactive voice response, which enables businesses to provide a wide
range of additional services at lower cost by providing access to the
organization's computer system from any touchtone telephone; and (iii)
computer-telephony integration, which greatly enhances efficiency and
productivity by providing access to and control of telephone system functions
from
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individual computer terminals. Recent developments in wireless technologies,
computer-telephony integration technologies, and desktop video conferencing
technologies represent significant opportunities for sales of new product lines
and features to further increase employee mobility and efficiency. The Company
also believes that international sales of telecommunications systems that
include productivity enhancing features will increase substantially in the
future as cultural resistance to functions such as voicemail and interactive
voice response declines.
Products
The Company currently designs, develops, markets, and supports a broad
range of (i) telephony products, which include digital and electronic key
telephone systems and commercial grade telephones; (ii) voice processing
products, including interactive voice response systems, automated attendant,
automatic call distribution, voice mail and fax mail; and (iii)
computer-telephony products, including Windows-based application products (such
as PC telephones and attendant consoles), local area network ("LAN") to PBX
connection packages, unified messaging systems, Internet messaging systems, and
desktop video conferencing systems.
Key Telephone Systems
Sales of key telephone systems represented approximately 70.0% and
72.4% of the Company's revenue during 1996 and 1997, respectively. A key
telephone system consists primarily of a sophisticated switching unit located at
the user's place of business, along with the individual telephone sets and other
devices, such as facsimile machines or modems, located at individual "stations."
Telephone systems are designed to accommodate the number of "ports" (the total
number of incoming lines, or "trunks," and stations) required to handle the
communications needs of businesses of varying sizes. The switching unit routes
calls on one or more incoming trunks from the local or long distance telephone
company central office equipment to the appropriate station located within the
business. The switching unit also routes calls from one station within the
business to other stations within the business or out to the telephone company
central office for switching to other local or long distance telephone numbers.
The Company currently markets various lines of key telephone systems,
under its STARPLUS and infinite brand names, for businesses requiring as few as
two incoming trunks and four stations up to 96 trunks and 252 stations (a
348-port system). The Company sells the STARPLUS line through large wholesale
distributors known as "Supply Houses" and the infinite line through telephone
sales and installation companies known as "Direct Dealers." See Item 1,
"Business - Sales, Marketing, and Distribution." Each of the infinite telephone
systems incorporates the base platform and software of the corresponding
STARPLUS system, with certain modifications that differentiate the infinite
system from the STARPLUS system in function and cosmetic appearance.
The Company supplies several models of key telephone sets with
progressive features for use in conjunction with each of its telephone systems,
including a model with PC Interface for use with the Company's
computer-telephony integration products. Many of the feature buttons on the
Company's key telephones are user-programmable to enable users to custom-tailor
their telephone systems for maximum efficiency in specific applications.
The Company markets both fully digital and electronic (analog) key
telephone systems and related products. The Company's digital telephone systems
employ a digital architecture in order to provide digital voice transmission and
system control, while the Company's electronic telephone systems employ a
microprocessor-based architecture and solid state switching for voice
transmission and system control. Most of the Company's telephone systems feature
flexible software combined with modular hardware and card slot design, which
allow cost-effective system customization and expansion to meet the needs of
individual users. The Company's telephone systems are fully compatible with
industry-standard commercial grade telephones and contain an extensive array of
standard features that add sophistication generally found only in larger
telephone systems. The Company designs its key telephone systems to readily
permit expansion or customization for specific business applications by
installation of a variety
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of voice processing or computer-telephony integration products. See Item 1,
"Business - Products - Voice Processing Products" and Item 1, "Business -
Products - Computer-Telephony Integration Products."
The Company's digital systems enable customers to upgrade their
telephone systems as their businesses grow and as technology advances by adding
or replacing components in stages without replacing their entire systems. As a
result, it is generally more economical for the end users to expand their
STARPLUS or infinite systems than to switch to a competitor's system. In
addition, the wireless telephone systems currently offered by the Company are
designed to be incorporated with the Company's digital systems without requiring
significant modification to existing equipment. The Company believes that the
economy and flexibility provided to its customers by this migration strategy
offers a competitive advantage to the Company.
Commercial Grade Telephones
The Company markets several lines of commercial grade telephones
through Supply Houses for ultimate sale to home office or business users that
require a business telephone with multiple features; for use with PBX
installations in hotels, motels, and resorts; and for use with electronic or
digital key systems, PBX systems, or telephone company central office
("Centrex") switching systems when the customer prefers telephone sets that
provide multiple features. Sales of commercial grade telephones represented
approximately 17.7% and 15.7% of the Company's revenue during 1996 and 1997,
respectively. All of the Company's commercial grade telephones meet industry
standards for commercial telephone units and may be used with telephone systems
sold by the Company or by competing manufacturers. The Company's commercial
grade telephones offer a myriad of features, functions, and designs ranging from
simple, traditionally styled desk and wall-mounted telephones to programmable
telephones with contemporary styling. The Company's more advanced commercial
grade telephones contain a central processing unit, built-in memory, built-in
data jacks, built-in speakerphones, and the capability to utilize custom calling
features provided by local telephone companies.
Voice Processing Products
Voice processing includes functions designed to reduce labor costs
while providing faster, more efficient routing of incoming calls and speeding
and simplifying message delivery and storage. The Company designs its voice
processing products to integrate with telephone systems sold by the Company as
well as competing manufacturers and frequently markets its voice processing
products independently of its telephone systems. The Company, however,
cultivates the expansion of its existing base of telephone systems by offering
voice processing products that differentiate its products from those of its
competitors and that provide a value-added basis for increased sales and profit
margins.
Automated Attendant; Voice Mail and Fax Mail Systems; Internet Fax Delivery
The Company's telephone systems include an "automated attendant" that
routes incoming calls automatically to the intended person or department during
and after business hours by instructing the caller to press on his or her
touch-tone telephone the numbers of the recipient's extension or the letters of
the recipient's name, which provides front-end automated call processing for
small key telephone systems and PBX systems that support standard commercial
telephones. Automated attendant features ensure that each caller has the ability
to contact the intended person and enable the business to eliminate or reduce
operators or attendants or to assign other responsibilities to attendants or
operators when not answering calls. The business user also can program the
system so that callers always have the option of speaking with an operator.
Voice mail enables callers to leave detailed messages and permits
recipients to retrieve messages when they return to their offices or by dialing
into the system from remote telephones. Each voice mailbox can be customized to
the individual user's needs. Voice messages can be stored, replayed, saved, or
erased as desired by the user. The menu routing functions included in certain of
the Company's voice mail systems enable business users to
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program the systems to create custom, multi-level menus that permit callers to
automatically access organizational departments or product, service, or event
information by dialing menu choices.
During 1997, the Company introduced a new line of self-contained,
Microsoft Corp. ("Microsoft") Windows-based voice processing systems designed
for small- to medium-sized organizations. These competitively priced systems,
which work in conjunction with key telephone systems sold by the Company as well
as other manufacturers, can be expanded from two ports up to eight ports,
feature a full range of automated attendant and voice mail functions, and
include a serial port for administration via the user's laptop PC. The Company
believes that the functionality, ease of installation and use, and competitive
pricing of these products will result in a higher percentage of sales of these
voice processing systems in conjunction with sales of the Company's key
telephone systems than the Company experienced with its previous DOS-based voice
mail products.
The Company's Windows NT-based messaging systems, which provide 8 to 24
port capacities, combine traditional voice mail functions with facsimile
messaging capabilities ("fax mail") as well as the ability to share messages
with other voice messaging systems over the Internet. Fax mail provides the
ability to receive, store, retrieve, and forward facsimile messages in the same
manner that voice mail handles voice messages. The Company's fax mail system
digitizes and stores facsimile messages and notifies the user that messages have
been received. The user can retrieve and print the facsimiles from his or her
office or remote locations (such as a hotel room) and can also instruct the
system to forward facsimiles to other recipients. "Fax-on-demand" enables
callers to access information stored by a business, such as sales and marketing
brochures, technical specifications, and pricing data, and request the system to
transmit the desired information to the caller's facsimile machine.
The new Windows NT-based system also utilizes Company-developed
extensions to existing Internet e-mail protocols to enable voice messages to be
transported over the Internet or other electronic fields for efficient, low-cost
information exchange between remote systems. In addition, the Company's Windows
NT-based Internet fax delivery systems connect the user's telephone and computer
to enable the user to transmit facsimile messages or documents to conventional
facsimile machines via the Internet. These systems provide ease of use and avoid
problems associated with e-mail attachments, mismatched data encryption
techniques, or private or switched network costs. The Company's Internet fax
delivery systems provide spoken prompts that guide the user through the
transmission process and also transmit delivery confirmations to the user's
mailbox. As a result, a business with multiple offices can extend its voice
messaging system so as to permit employees in different locations to create,
receive, answer, or forward voice and facsimile messages via the Internet more
quickly, efficiently, and economically than traditional long-distance telephone
calls.
Interactive Voice Response
The Company's interactive voice response ("IVR") system connects the
business user's telephone system to the user's host computer in order to permit
the use of any touchtone telephone to access and store information in the
business's database. This interactive connectivity permits callers to conduct
transactions, such as placing orders, checking inventory, tracking order
shipments, or querying account information, from any touchtone telephone. IVR
converts callers' touchtone key presses into data for storage on the computer
system and uses synthesized human speech to give the caller instructions
regarding how to access the database and to communicate the requested
information to the caller. The open architecture design of the Company's IVR
system provides unlimited scalability by permitting users to increase the number
of ports or voice storage capacity simply by plugging in more voice cards or
disk drives and by linking multiple devices into networks to create virtually
unlimited configurations. Users may enhance the system by adding independent
off-the-shelf software modules that can be seamlessly integrated to provide
additional features, such as call routing, voice messaging, fax
store-and-forward, and audiotext.
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Automatic Call Distribution
The Company markets its ACD System Software ("ACD") and PC-based ACD
Reporting Package for use with digital key telephone systems. The automatic call
distribution functions provided by ACD enable businesses that receive a large
volume of customer calls (such as catalog sales operations) to manage incoming
calls efficiently by directly routing them to the proper person or group. ACD
reduces the number of abandoned calls by reducing the number of calls placed on
hold and by minimizing the length of time that calls are kept on hold. When all
group member telephones are busy, ACD plays a custom "hold" message for the
caller and connects the call to the first available person or sales agent. ACD
saves employee time by eliminating the necessity of continually answering and
transferring calls to the same groups. ACD enables agents with display
telephones to see the number of calls waiting in queue as well as the length of
the longest waiting call in order to speed call handling at times of heavy
calling activity. The PC-based ACD Reporting Package component of ACD provides
real-time information and comprehensive historical reports on calling activity
for review by management.
Computer-Telephony Integration Products
The Company designs, develops, and markets computer-telephony
integration ("CTI") products that combine the communications technologies of
business telephone systems with the information storage and processing
capabilities of personal computers. The Company's CTI products utilize an open
system architecture to integrate computers and telephone systems into a
user-friendly information storage, processing, and transmitting device. The
Company believes that developing more value-added CTI applications for its
telephone systems will enhance the appeal of its product lines and enable it to
sell more key telephone systems, full-featured telephones, and other software
packages and add-on peripheral products. The Company markets CTI products that
enable a user to (i) utilize the Internet to access voice, facsimile, and e-mail
messages via personal computer; (ii) incorporate telephone functions with
computer software to speed call handling and permit the user to personalize
telephone functions; (iii) identify incoming callers and immediately access
computer files relating to the caller; (iv) connect Windows-based local area
networks to the user's telephone system; and (v) quickly and inexpensively
access and analyze call accounting information.
CTI Software Products
The Company's CTI product lines include software applications designed
to operate in conjunction with Microsoft's Windows operating systems software in
order to unite personal computers and telephones to help business users better
manage their communications and information systems. The Company's current CTI
product lines provide the choice of either (i) a CTI module that connects one of
the Company's digital telephones to the user's PC, or (ii) a CTI board that
slides into the user's PC and replaces the traditional desktop telephone
altogether. The second option includes either a handset or headset that plugs
into the computer terminal for use in private conversations. After the CTI
module or board is installed, the Company's CTI software incorporates the fixed
and flexible feature buttons of the Company's digital telephones (such as the
dial pad, call status display, directory window, and dial display) onto the
computer screen. The user can then access all telephone features, place calls,
and process incoming calls from the computer, or, if a CTI module is used, the
desktop telephone. For instance, the user can click on the directory icon to
access the desired telephone directory, type in the name of the person to be
called, and click on the "dial out" icon to automatically dial the telephone
number. The system also permits the user to answer incoming calls without having
to exit a Windows application. In addition, the Company's CTI products enable
users to customize and enhance message handling efficiency by using programmable
feature buttons to create user-specific functions, such as conference calling or
speed dial numbers; permit users to access voice mail and activate voice mail
options, such as fast-forward, rewind, or delete by using the mouse, computer
keyboard, or telephone keypad; and permit users to create multiple directories
with up to 1,000 names in each directory.
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Unified Messaging
The Company's unified messaging system utilizes Microsoft's "Exchange"
technology to enable users to access e-mail, voice mail, facsimiles, and paging
messages in a single session at a personal computer. The system displays a
listing of all of the user's messages and enables the user to access and control
all of his or her messages with a click of the computer mouse.
Desktop Video Conferencing
The Company recently introduced a full-featured Windows 95-based
desktop ISDN video conferencing system that is designed to enable users to place
and receive video calls with ease. The system features a full duplex
speakerphone with echo cancellation and "picture-in-picture" to show both ends
of the call. Users can assemble video conferences with up to five parties by
using an external video conferencing service. The system also supports
application sharing and permits all parties on the call to collaborate in data
sharing.
New Product Development
The Company engages in an on-going program to develop enhancements to
its existing product lines and to develop new products that address the
increasing demands of business organizations for low-cost productivity enhancing
communications tools. The Company believes that continuous development of new
products and features will be necessary to enable it to offer telephony systems,
voice processing products, computer-telephony products, and related business
communications products that will be in greatest demand and that will provide
the best opportunities for growth and profitability of the Company on an
on-going basis. Since 1994, the Company has developed and released several new
products and product lines, including a new line of digital key telephone
systems introduced in 1997. This new digital product line utilizes hardware and
software technologies developed by the Company in conjunction with LGE. These
new technologies replace certain digital technologies for which the Company has
licenses with a third party for use in certain of its other digital products.
The Company currently is focusing its new product development efforts
on developing and refining enhancements that will deliver greater features,
sophistication, functionality, and value to its current product offerings. For
example, the Company currently is developing digital voice mail integration,
ISDN capabilities for its key telephone systems, new ACD reporting packages, a
wireless key telephone adjunct for its digital key telephone systems, and
additional enhancements to its Windows NT-based voice messaging systems and its
IVR systems. The Company may from time to time enter into strategic alliances
with third parties related to the development of new products, product lines, or
product features. For example, during 1997 the Company entered into a strategic
alliance to market a wireless key telephone system that can be connected to a
business's existing telephone system without the need for special wiring or that
can operate as a stand-alone key system with desktop and mobile telephone units.
The mobile units offer a full array of features similar to those provided by the
Company's traditional key telephone systems, but permit the user to roam up to
100 feet from stationary digital cell units that can be positioned throughout a
business's office, warehouse, or factory.
Sales, Marketing, and Distribution
The Company currently markets its products in all 50 states and Puerto
Rico through a distribution network consisting primarily of large wholesale
distributors known as "Supply Houses" and telephone sales and installation
companies known as "Direct Dealers." The Company also maintains an in-house
sales staff that makes direct sales of certain of its products to large
commercial organizations and public access providers, such as local telephone
companies and cellular telephone system providers. The Company also markets its
products on a private label basis to original equipment manufacturers ("OEMs").
The Company derived approximately 80.2%, 10.3% and 4.4% of its total revenue
from sales to Supply Houses, Direct Dealers, and OEMs, respectively, in 1997.
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Supply Houses (Wholesale Distributors)
The Company designs and markets its STARPLUS brand of products for sale
through Supply Houses. The Supply Houses resell the Company's products primarily
to small local interconnect companies and independent telephone companies, which
in turn resell the Company's products to end users, install the systems at the
end users' businesses, and provide service and technical support following the
sale. The Company provides ongoing training to Supply House employees to enable
them to sell more effectively the Company's products and to provide the
interconnects and independent telephone companies with technical assistance in
installation, maintenance, and customer support.
The Company believes that sales through Supply Houses offers several
advantages, including (i) established distribution systems and access to a large
number of customer accounts; (ii) maintenance of customer credit facilities and
an established inventory of the Company's products; (iii) prompt payment of
receivables; (iv) reduced needs for direct training by the Company; (v)
effective promotion of the Company's products at trade shows; (vi)
geographically dispersed sales forces that can reach customers more effectively
than the Company would otherwise be able to do; (vii) lower support and carrying
costs compared with the costs associated with direct sales to a large number of
Direct Dealers; and (viii) the absence of conflict with the Company's sales to
medium and larger interconnects through Direct Dealers.
The Company recently introduced its STARPLUS TRIAD line of digital
telephone systems for sale through Supply Houses to authorized TRIAD dealers.
The TRIAD product line includes a full array of digital telephone systems
ranging from 18 to 348 ports, as well as voice messaging, ACD, CTI, and other
digital products similar to the Company's infinite line of digital products. The
authorized dealers must commit to minimum purchases of TRIAD or other STARPLUS
products and will be required to be trained and certified through a formal
product and sales training program conducted by the Company. In return, the
Company will provide the authorized TRIAD dealers with preferential order
fulfillment, marketing, sales, and product support services. The Company
currently is enrolling dealers and anticipates that commercial deliveries of
TRIAD products will commence during the second or third quarter of fiscal 1998.
Supply Houses that currently resell the Company's products include
Graybar Electric Co., Inc. ("Graybar"), Alltel Supply, Inc., Sprint/North
Supply, Anixter Brothers, Inc., G.T.E. Supply Co., Famous Telephone Supply,
Power & Telephone Supply Company, Inc., and Ingram Micro, Inc. Graybar accounted
for 44% and 40% of sales during 1996 and 1997, respectively. The Company's sales
and marketing personnel stimulate demand for its products with the smaller
interconnects and independent telephone companies that purchase the Company's
products from Graybar, Alltel Supply, Inc., and other Supply Houses and install
these products at the end users' premises. These interconnects and independent
telephone companies provide the "pull through" demand for the Company's products
from Graybar and other Supply Houses. As a result, the Company believes that a
decrease in purchases by Graybar or other Supply Houses would result in only a
temporary adverse effect on the Company's operations if interconnects and
independent telephone companies would continue to demand the Company's products
from other Supply Houses, which in turn would increase their purchases of the
Company's products.
Direct Dealers
The Company developed its infinite line of telephone systems and
related products for sales to Direct Dealers. These Direct Dealers are medium
and large interconnect companies or local dealers that resell the Company's
products directly to end users. The Company believes that the principal
advantages of this distribution channel are higher gross margins on product
sales, greater visibility of the Company's product lines, and the ability to
exert additional control over factors such as pricing of the Company's products.
Sales to Direct Dealers, however, generally involve longer credit terms for the
Company, the necessity to provide increased direct marketing and technical
support, and additional costs associated with developing and training the
independent commissioned sales staff of the various Direct Dealers to enable
them to solicit purchases of the Company's products. The
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Company has increased the number of Direct Dealers that sell its infinite
products from 15 at December 31, 1992 to approximately 85 at December 31, 1997
and continues to seek additional Direct Dealers for its infinite products.
OEMs
In May 1997, the Company entered into an agreement with Paradygm
Communications, Inc. ("Paradygm") to distribute the Company's 384-port
hotel/motel switching system under the Paradygm brand name. Under the terms of
the agreement, Paradygm is responsible for the sales and marketing of the switch
to a group of Paradygm dealers, which in turn market the product to the
hospitality industry.
In August 1997, the Company entered into an agreement with Fujitsu
Business Communication Systems, Inc. ("Fujitsu") to sell its digital key
telephone systems under the Fujitsu brand name to the existing dealers of
Fujitsu's other telecommunications products. Under the terms of the agreement,
Fujitsu is responsible for the sales and marketing of these products to its
dealers, which in turn market to end users.
In-house Sales Staff
The Company maintains an in-house sales staff that makes direct sales
of certain of its products to large commercial organizations and governmental
agencies in the United States and foreign countries. The Company's in-house
sales force also develops relationships with value-added resellers, which
purchase certain of the Company's products as a base platform, enhance the
platform with specialized software that they have developed, and then resell the
combined systems.
International Sales
To date, sales of the Company's products in foreign countries have not
represented a significant portion of the Company's revenue. The Company,
however, believes that sales of its telephone systems and other products in
international markets may increase in the future as cultural resistance to
features such as voice mail and interactive voice response declines, as
touchtone technologies and cellular telephone service become more available and
other installed communications infrastructures are improved, and as regulatory
differences between countries are eliminated. All of the Company's sales in
foreign countries are denominated in United States dollars.
Research and Development; Strategic Alliances with LGE and Other Companies
The Company believes that the continued development of software that
distinguishes the functions and features of the Company's products from those of
its competitors represents a critical factor in determining the Company's
ongoing success. The Company's engineering staff consists of highly trained and
experienced software professionals who focus on providing and supporting high
quality, user-friendly business communications systems and related products. The
availability of in-house software and systems development expertise at the
Company's facilities in Arizona and Georgia provides the Company with product
control, permits faster turnaround and reaction time to changing market
conditions, and provides a solid base of maintenance and support services to end
users. The Company utilizes product and market development groups that interact
with customers in order to anticipate and respond to customer needs through
development of new product programs and enhancement of existing product lines.
The Company conducts joint development activities with LGE for the
design and development of hardware incorporated into certain of the Company's
existing or planned telephone system and commercial grade telephone product
lines. Under its joint development projects with LGE, the Company provides
market analysis, product management, functional and performance standards,
software development, quality control program development, sales and
distribution, and customer service and support, while LGE provides hardware
research, design and development, development of components such as integrated
circuits and semiconductor chips, and manufacturing
8
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and production engineering. Generally, LGE contributes the ongoing research and
development costs for the product hardware in return for an arrangement under
which LGE produces the finished goods developed under the alliance. See Item 1,
"Business - Manufacturing" and "Special Considerations - Dependence on LGE." The
Company has successfully engaged in such projects with LGE in the past and
believes that it will continue to have access to LGE's advanced hardware
research and development capabilities as the Company develops new product lines
in such areas as digital key telephone systems, digital PBX systems, large-scale
integrated circuits, multi-layer printed circuit boards, and surface mount
technologies.
The Company also enhances its software development expertise through
acquisitions of or licensing arrangements and other strategic alliances with
independent third-party developers. The Company has active strategic alliance
relationships with other companies that possess expertise in automatic call
distribution, small digital key telephone systems, and digital wireless
technologies. The Company intends to pursue additional opportunities to enter
into strategic alliances with other companies that possess established expertise
in specific technologies in order to co-develop proprietary products or to
acquire such companies in order to develop new products internally.
Manufacturing
The Company obtains its key telephone systems and full-featured
commercial grade telephones under manufacturing arrangements with various
third-party manufacturers, including LGE. The Company owns a significant portion
of the tooling used by the third-party manufacturers to manufacture its
products. The Company's agreements with the third-party manufacturers generally
require the manufacturers to produce the Company's products according to the
Company's technical specifications, to perform quality control functions or
otherwise meet the Company's quality standards for manufacturing, and to test or
inspect the products prior to shipment. Pursuant to the manufacturing
agreements, the manufacturers provide the Company with warranties that the
products are free of defects in material and workmanship. The agreements also
require the manufacturers to repair or replace, at their expense, products that
fail to conform with the warranties within specified periods. The Company
performs final assembly, systems integration, and testing of certain of its
automated call distribution, voice mail, automated attendant, interactive voice
response, and computer-telephony integration products at its Arizona and Georgia
facilities.
The Company obtains certain of its electronic telephone systems and
certain of its digital telephones from LGE, which owns the rights to produce
such equipment. LGE owns approximately 18.7% of the Company's outstanding Common
Stock. Pursuant to an agreement with LGE (the "LGE Agreement"), LGE granted the
Company the right to distribute and sell throughout the United States and Canada
products covered by the agreement that LGE manufactures in South Korea. The LGE
Agreement expired on April 12, 1997. The Company continues to purchase the
products that it previously purchased pursuant to the LGE Agreement on a
purchase order basis. The Company currently is engaged in discussions with LGE
regarding entering into a new manufacturing agreement for the products that the
Company obtains from LGE. See Item 1, "Special Considerations - Dependence on
LGE" and "Special Considerations - Control by Management; Stockholders'
Agreement; Conflicts of Interest."
The Company obtains certain of its electronic telephone systems and
most of its commercial grade telephones and replacement parts for such
telephones from LG Srithai, Ltd. ("LGST"), a joint venture between LGE and
Srithai Group, a Thailand-based entity. Pursuant to an agreement with LGST (the
"LGST Agreement"), LGST granted the Company the right to distribute and sell
throughout the United States and Canada such products manufactured by LGST in
Thailand. The LGST Agreement prohibits the Company from purchasing the products
covered by the LGST Agreement from any other manufacturer during the term of the
agreement, which expires on April 12, 1998. The LGST Agreement will renew
automatically for successive one-year terms unless either party provides notice
to the other of its intent to cancel the agreement at least three months prior
to the end of the then-current term. The Company makes all purchases pursuant to
the LGST Agreement on a purchase order basis. See Item 1, "Special
Considerations - Dependence on LGE" and "Special Considerations - Control by
Management; Stockholders' Agreement; Conflicts of Interest."
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The Company currently obtains certain of its digital key telephone
systems and related digital products from Wong's Electronics Co., Ltd.
("Wongs"), a Hong Kong company, pursuant to an agreement with Wong's (the
"Wong's Agreement"). The Wong's Agreement will remain in effect until either
party gives the other party at least three months' advance notice of
termination. The Company makes all purchases pursuant to the Wong's Agreement on
a purchase order basis. Executone Information Systems, Inc. ("Executone") owns
certain rights to the products that the Company purchases pursuant to the Wong's
Agreement and licenses to the Company the right to use Executone's technology
incorporated into such products. See Item 1, "Business - Patents, Trademarks,
and Licenses."
The Company also obtains certain of its digital key telephone systems
from Tecom Co., Ltd., ("Tecom") a Republic of China company. Pursuant to an
agreement with Tecom (the "Tecom Agreement"), Tecom granted the Company the
exclusive right to sell and distribute throughout all of North and South America
such products manufactured by Tecom. The initial term of the Tecom Agreement
expires in June 1999, at which time the agreement will automatically renew and
continue until either party gives the other party not less than 120 days'
advance notice of termination. The Company makes all purchases pursuant to the
Tecom Agreement on a purchase order basis. The Tecom Agreement requires the
Company to use its best efforts to purchase from Tecom products with an
aggregate minimum purchase price of $4.25 million during 1998. In the event that
the Company fails to purchase at least 75% of such purchase obligations, Tecom
has the right to either designate the Company as a non-exclusive distributor of
the products purchased under the Tecom Agreement or increase the prices of such
products by up to 5%.
The countries in which certain of the Company's products are
manufactured have been subject to natural disasters and civil disturbances in
the past. These circumstances could affect the Company's ability to obtain
certain of its products from its overseas manufacturers. Except for a fire that
interrupted production at one plant in China during late 1993 and the first part
of 1994, the Company has not experienced any significant interruptions of
shipments to date. The termination of any of the agreements with its
manufacturers or the inability of the Company to obtain products pursuant to
such agreements, even for a relatively short period of time, could have a
material adverse effect on the Company's operations. In addition, the countries
in which certain of the Company's products are manufactured have been subject to
recent economic problems. To date, such economic difficulties have not adversely
impacted the Company's ability to obtain its products or the prices the Company
pays for its products. There can be no assurance, however, that such
difficulties will not impact the Company in the future. See Item 1, "Special
Considerations - Dependence on Third Parties for Manufacturing; International
Manufacturing Sources."
Quality Control
The Company recognizes that product quality and reliability are
critical factors in distinguishing its products from those of its competitors.
The Company designs its products to include components meeting specified quality
standards in order to ensure reliable performance. The Company also requires its
third-party manufacturers to comply with specified quality standards regarding
materials and assembly methods used in manufacturing the Company's products. See
Item 1, "Business - Manufacturing." In addition, the Company maintains a
rigorous quality assurance program designed to ensure that the manufacture of
its products conforms with specified standards and to detect substandard
products before shipment. The Company inspects products as they arrive at its
warehouse in Arizona.
Support Services
The Company provides limited warranties against defective materials and
workmanship on each of the products that it sells. The Company provides a
complete support service for all of its products by maintaining a 24-hour
toll-free telephone number that system users or their service representatives
can contact for trouble shooting and diagnostic assistance. The Company
maintains an operating set-up of each of its telephone systems, key telephone
units, and peripheral systems at its headquarters facility, supported by a staff
of technicians trained to handle service assistance calls. When a customer calls
with a question relating to performance malfunctions or an
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operational system question, the Company's personnel attempt to replicate any
problem the customer is encountering, diagnose the cause, and provide a solution
to the customer via telephone. If the Company's technicians cannot determine the
cause of the malfunction over the telephone, the Company dispatches a service
representative to the customer's place of business in order to locate the source
of the problem and take corrective measures.
The Company also operates a repair facility that performs repairs on
certain of the Company's products. The Company believes that operating its own
repair center provides it with savings on repair expenses as well as increased
customer satisfaction as a result of faster turn-around time, improved quality
of repairs, and reduced need for repeat repairs.
Competition
Markets for communications products are extremely competitive. The
Company currently competes principally on the basis of the technical innovation
and performance of its telephone systems, commercial grade telephones, and other
products, including their ease of installation and use, reliability, cost, and
the technical support both before and after sales to end users. The Company's
competitors in the sale of telephone systems and telephones include Comdial,
Nitsuko, Panasonic Communications & Systems Co., Lucent Technologies, Inc., NEC
Corp., Nortel, and Toshiba Information Systems, Inc. Competitors in the supply
of voice processing systems include Active Voice Corporation and Applied Voice
Technology as well as PBX and key system telephone manufacturers that offer
integrated voice processing systems of their own design and under various
original equipment manufacturer agreements. Competition in the interactive voice
response market includes Brite Voice Systems, Intellivoice Communications, Inc.,
and Glenayre. In the computer telephony market, the Company competes with many
of the same companies indicated above as well as large software development
companies, including Microsoft Corp., Lotus Development Corporation, and Novell,
Inc. Most of the Company's competitors are large companies that have greater
name recognition and greater financial, technical, marketing, manufacturing,
distribution, and personnel resources than the Company. The revenue,
profitability, and success of the Company depends substantially upon its ability
to compete with other providers of telephone systems and other telephony
products. No assurance can be given that the Company will continue to be able to
successfully compete with such organizations.
Certain of the Company's product lines compete with products and
services provided by the regional Bell operating companies, ("RBOCs") which
offer key telephone systems and commercial grade telephones produced by several
of the competitors named above as well as Centrex systems that provide automatic
call distribution facilities and features through equipment located in the
telephone company's central switching offices. The RBOCs from time to time have
proposed the modification or repeal of statutes and regulations, which currently
prohibit them from conducting telephone equipment manufacturing activities and
from providing certain other services that may directly compete with the
Company's product lines. There can be no assurance that such regulations will
remain in effect or unchanged indefinitely. Any modification or repeal of such
regulations that would permit the RBOCs to compete with the Company by directly
or indirectly manufacturing or distributing telephone systems and equipment
and/or "bundling" telephone equipment sales with other calling services provided
by the RBOCs may have a material adverse effect on the Company's operating
results.
Patents, Trademarks, and Licenses
As of December 31, 1997, the Company owned six United States patents
expiring on various dates beginning in 2000 and ending in 2008. The Company
intends to continue to seek patents on its inventions used in its products. The
process of seeking patent protection can be expensive and can consume
significant management resources. The Company believes that its patents
strengthen its negotiating position with respect to future disputes that may
arise regarding its technology. However, the Company believes that its continued
success depends primarily on such factors as the technological skills and
innovative abilities of its personnel rather than on its
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<PAGE>
patents. There can be no assurance that patents will issue from pending or
future applications or that any patents that are issued will provide meaningful
protection or other commercial advantage to the Company.
The Company owns a number of registered and unregistered trademarks
that it considers to be an important factor in marketing its products. The
Company's ability to compete may be enhanced by its ability to protect its
proprietary information, including the issuance of patents, copyrights, and
trademarks. The Company also has taken steps to protect its proprietary
information through a "trade secrets" program that includes copy protection of
its software programs and obtaining confidentiality agreements with its
employees. There can be no assurance, however, that such efforts will be
effective to prevent misappropriation, reverse engineering, or independent
development of the Company's proprietary information by its competitors. While
no intellectual property right of the Company has been invalidated or declared
unenforceable, there can be no assurance that such rights will be upheld in the
future. Accordingly, the Company believes that, due to the rapid pace of
technological change in the telecommunications industry, the technical and
creative skills of its engineers and other personnel will be extremely important
in determining the Company's future technological success.
Pursuant to an agreement with Executone (the "License Agreement"), the
Company possesses a non- exclusive license to use Executone's technology related
to certain of the Company's digital telephone systems. The License Agreement
prohibits the Company from modifying the technology so that the Company's
telephone systems can be used with Executone's products. The License Agreement
requires Executone to provide certain technical support necessary for the
Company to utilize the technology covered by the agreement. Pursuant to the
License Agreement, the Company purchases all of the proprietary components for
its digital telephone systems at Executone's cost plus 5%, and the Company pays
Executone a royalty fee of 5.3% of the manufactured cost of all of its products
that utilize the technology covered by the agreement. The License Agreement
expires in 2014.
The telecommunications industry is characterized by rapid technological
development and frequent introduction of new products and features. In order to
remain competitive, the Company and other telecommunications manufacturers
continually find it necessary to develop products and features that provide
functions similar to those of other industry participants, often with incomplete
knowledge of whether patent or copyright protection may have been applied for or
obtained by other parties. As a result, the Company receives notices from time
to time alleging possible infringement of patents and other intellectual
property rights of others. To date, the Company has been able to successfully
defend such claims or to negotiate settlements to such claims on terms that it
believes to be favorable. In the future, however, the defense of such claims,
fees paid in settlement of such claims, or costs associated with licensing
rights to use the intellectual property of others or to develop alternative
technology may have a material adverse impact on the Company's operations.
Government Regulation
The United States government from time to time has imposed anti-dumping
duties on certain telephone products manufactured in certain of the countries in
which the Company's products are manufactured. There can be no assurance that
similar duties will not be imposed in the future on telephone products,
including the Company's products, manufactured in these or other foreign
countries. The imposition of such additional duties on the Company's products
could have a material adverse effect on the Company's operating results.
Legislation enacted in the United States during 1997 will phase out duties that
the Company pays for products manufactured in certain other of the countries in
which the Company's products are manufactured. Provided that those countries
remain qualified under the legislation, duties on products manufactured in those
countries will be phased out through 2000. There can be no assurance, however,
that the countries that currently qualify for the phase-out of duties will
remain qualified or that duties will not be levied on products manufactured in
those countries in the future.
Employees
As of December 31, 1997, the Company employed a total of 173 persons,
consisting of 169 full-time employees and four part-time employees at its
facilities in Scottsdale, Arizona and Norcross, Georgia. This number
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includes 36 persons in engineering and product development, 77 in sales,
marketing and technical support, 14 in warehouse and distribution functions, 19
in equipment repair, and 27 in administration, including executive personnel.
The Company considers its relationship with its employees to be good, and none
of its employees currently are represented by a union in collective bargaining
with the Company.
Various third-party manufacturers provide the personnel engaged in the
manufacture and assembly of the Company's products in South Korea, Thailand,
Malaysia, Hong Kong, Republic of China, and the People's Republic of China
pursuant to the agreements between the Company and the respective manufacturers.
Executive Officers
The following table sets forth information concerning each of the
executive officers of the Company:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
William J. Hinz........... 52 Chairman of the Board
Glenn R. Fitchet.......... 50 President, Chief Executive Officer, and Director
Gregory K. Roeper......... 37 Executive Vice President - Finance,
Administration, and Operations; Chief Financial
Officer; Secretary; and Treasurer
Mark D. Fife.............. 30 Executive Vice President - Sales, Marketing, and
Support
</TABLE>
William J. Hinz has served as Chairman of the Board of the Company
since October 1997 and as a director of the Company since April 1997. Mr. Hinz
has served as Executive Vice President of Operations and a director of
Stolper-Fabralloy Company, a precision aerospace engine component manufacturer,
since March 1996. Mr. Hinz was Vice President of Global Repair and Overhaul
Operations for AlliedSignal Aerospace Company from June 1994 until March 1996.
During this period, Mr. Hinz also was responsible for aerospace aftermarket
merger and acquisition activity. Mr. Hinz served as President of European
Operations for AlliedSignal Aerospace Company from December 1991 until June 1994
and served in various other manufacturing management positions with AlliedSignal
Aerospace Company from 1968 to 1991.
Glenn R. Fitchet has served as President and a director of the Company
since April 1994 and as Chief Executive Officer of the Company since May 1996.
Mr. Fitchet was Vice President and General Manager of the Vodavi Division of
Executone from January 1990 until April 1994. Mr. Fitchet served as Vice
President Marketing and Manufacturing of Executone from July 1988 until January
1990 and as Vice President of Vodavi Technology Corporation from September 1984
to July 1988. Mr. Fitchet also served as Vice President - Sales and Marketing
for Valcom, Inc. from December 1981 to August 1984 and as National Sales Manager
for Siemens Information Systems from July 1976 until December 1981.
Gregory K. Roeper has served as the Company's Executive Vice President
- - Finance, Administration, and Operations, since December 1997; as Secretary of
the Company since October 1997; and as Chief Financial Officer and Treasurer of
the Company since November 1994. Mr. Roeper served as the Company's Vice
President Finance from November 1994 until December 1997. From 1982 to 1994, Mr.
Roeper was employed by Arthur Andersen LLP, most recently as a Senior Manager.
Mr. Roeper is a Certified Public Accountant in the state of Arizona.
Mark D. Fife has served as a Vice President of the Company since
February 1998 and as Executive Vice President - Sales, Marketing, and Support
since March 1998. From February 1997 to June 1997, Mr. Fife served as President,
Chief Executive Officer, and a director of Evergreen Internet, Inc., a provider
of turnkey Internet
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electronic commerce applications for businesses. From February 1991 to January
1997, Mr. Fife Served in various executive capacities with Insight Enterprise,
Inc., most recently as Senior Vice President - Strategic Alliances.
History of the Company
The Company was incorporated in Delaware on March 10, 1994. On April
11, 1994, the Company acquired the operating assets of the Vodavi Communications
Systems Division (the "Vodavi Division") of Executone. The Company's current
management team includes individuals who conducted the operations and
development of the Vodavi Division and its predecessor since 1983.
In July 1995, the Company, through its wholly owned subsidiary, ARSI,
acquired from an affiliate of LGE certain of the assets and liabilities of a
telecommunications equipment repair business located in Scottsdale, Arizona.
In October 1995, Enhanced merged with a wholly owned subsidiary of the
Company. Enhanced develops and markets voice processing, interactive voice
response, desktop video conferencing, and call accounting software products for
small, medium, and large businesses, universities, and government organizations
in the United States and internationally.
SPECIAL CONSIDERATIONS
Certain Factors Affecting Operating Results
The Company's operating results are affected by a wide variety of
factors that could adversely impact its net sales and profitability. These
factors, many of which are beyond the control of the Company, include the
Company's ability to identify market segments that have significant growth
potential and to successfully market its products and services to those market
segments; its ability to maintain the product design and production capabilities
necessary to design and produce innovative and desirable product lines on a
timely and cost-effective basis; the Company's success in maintaining customer
satisfaction with its products; market acceptance of new products or
technological innovations; the Company's ability to establish and maintain
strong and long-lasting relationships with the wholesale distributors and direct
dealers that distribute its products; the Company's success in encouraging its
distributors and dealers to promote the Company's products ahead of those of its
competitors; the level and timing of orders placed by customers that the Company
can complete in a quarter; customer order patterns and seasonality; changes in
product mix; the performance and reliability of the telephone systems, voice
processing systems, and computer-telephony products designed and marketed by the
Company; the life cycles of its products; the ability of the Company and its
third-party manufacturers to produce the Company's products and product
components in an efficient, timely, and high-quality manner; the availability
and cost of raw materials, equipment, and supplies; the timing of expenditures
in anticipation of orders; the cyclical nature of the businesses, industries,
and markets served by the Company; technological changes; the introduction of
new products by competitors; and competition and competitive pressures on prices
which, among other things, may decrease gross margins.
The Company's ability to increase its design capacity and enter into
manufacturing arrangements in order to meet customer demand and maintain
satisfactory delivery schedules will be an important factor in its long-term
prospects. A slowdown in demand for the Company's products as a result of
economic or other conditions in markets served by the Company or other
broad-based factors would adversely affect the Company's operating results.
Dependence on Third Parties for Manufacturing; International Manufacturing
Sources
The Company depends upon third parties to manufacture its key telephone
systems and commercial grade telephones. Although the Company owns most of the
equipment, tools, dies, and molds utilized in the manufacturing process, the
Company has limited control over the manufacturing processes. As a result, any
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<PAGE>
difficulties encountered by the third-party manufacturers that result in product
defects, production delays, cost overruns, or inability to fulfill orders on a
timely basis could have a material adverse effect on the Company.
The Company currently obtains certain of its products under various
manufacturing arrangements with third-party manufacturers in South Korea,
Thailand, Malaysia, Hong Kong, Republic of China, and the People's Republic of
China. See Item 1, "Business - Manufacturing" for a description of the material
terms of certain of these arrangements. The Company's reliance on the
third-party manufacturers to provide personnel and facilities in these
countries, the Company's maintenance of equipment and inventories abroad, and
the potential imposition of quota limitations on imported goods from certain Far
East countries expose it to certain economic and political risks, including the
business and financial condition of the third-party manufacturers; political
uncertainty; the possibility of expropriation, supply disruption, currency
controls, and exchange fluctuations; and changes in tax laws, tariffs, and
freight rates. Although the current economic situation in Asia has not resulted
in any adverse changes in the prices that the Company pays for its products, an
extended period of financial pressure on overseas markets or currency
devaluations that result in a financial setback to the Company's overseas
manufacturers could have an adverse impact on the Company's operations. Except
for a fire that interrupted production at one plant in China during late 1993
and the first part of 1994, the Company has not experienced any significant
interruptions to date in obtaining its products from third-party manufacturers.
The Company believes that production of its product lines overseas enables the
Company to obtain these items on a cost basis that enhances the ability of the
Company to market them profitably.
The Company purchased approximately $17.9 million and $18.8 million,
respectively, of key telephone systems and commercial grade telephones from LGE
and LGST, an affiliate of LGE, during 1996 and 1997, constituting approximately
69.6% and 63.5%, respectively, of total purchases of such products during these
periods. See Item 1, "Business - Manufacturing" and "Special Considerations -
Control by Management; Stockholders' Agreement; Conflicts of Interest." Although
the Company currently is engaged in discussions with LGE to enter into a new
agreement with respect to purchases from LGE, there can be no assurance that it
will be able to secure long-term manufacturing arrangements for the products it
currently obtains from LGE. The Company's operations would be adversely affected
if it lost its relationship with any of its current suppliers or if any of its
current suppliers' operations or overseas or air transportation were disrupted
or terminated even for a relatively short period of time. The Company does not
maintain an inventory of sufficient size to provide protection for any
significant period against an interruption of supply, particularly if it were
required to locate and utilize alternative sources of supply. The Company
currently maintains a $5.2 million insurance policy to cover lost revenue in the
event of certain interruptions in purchases from its overseas manufacturers.
Dependence on LGE
The Company depends on LGE, which owns approximately 18.7% of the
Company's outstanding Common Stock, for the supply of key telephone systems and
commercial grade telephones as well as on LGE's engineering, hardware and
circuit development, and manufacturing capabilities. See Item 1, "Business -
Manufacturing" and "Special Considerations - Control by Management;
Stockholders' Agreement; Conflicts of Interest." Except for certain product
supply agreements, LGE has no commitments to support the business or operations
of the Company.
Competition
The business in which the Company engages is intensely competitive and
has been characterized by price erosion, rapid technological change, and foreign
competition. The Company competes with major domestic and international
companies, many of which have greater market recognition and substantially
greater financial, technical, marketing, distribution, and other resources than
the Company possesses. Principal competitors include Comdial Corporation,
Nitsuko, Panasonic Communications & Systems Co., Lucent Technologies, Inc., NEC
Corp., Nortel, Toshiba Information Systems, Inc., Active Voice Corporation,
Applied Voice Technology, and Brite Voice Systems. The Company anticipates that
major computer software development companies, including Microsoft Corp., Lotus
Development Corporation, and Novell, Inc., may enter the market for
computer-based telephone
15
<PAGE>
products. Emerging companies also may increase their participation in the
telephone systems and peripherals markets.
The ability of the Company to compete successfully depends on a number
of factors both within and outside its control, including the quality,
performance, reliability, features, ease of use, pricing, and diversity of its
product lines; the quality of its customer services; its ability to address the
needs of its customers; its success in designing and manufacturing new products,
including those implementing new technologies; the availability of adequate
sources of raw materials, finished components, and other supplies at acceptable
prices; its efficiency of production; the rate at which end users upgrade or
expand their existing telephone systems, applications, and services; new product
introductions by the Company's competitors; the number, nature, and success of
its competitors in a given market; and general market and economic conditions.
The Company currently competes principally on the basis of the technical
innovation and performance of its telephone systems, commercial grade
telephones, voice processing products, and computer-telephony products,
including their ease of use, reliability, cost, timely introduction, delivery
schedules, and after-sale service and technical support. There is no assurance
that the Company will continue to be able to compete successfully in the future.
See Item 1, "Business - Competition."
Dependence on New Products and Technologies
The Company operates in an industry that is increasingly characterized
by fast-changing technology. As a result, the Company will be required to expend
substantial funds for and commit significant resources to the conduct of
continuing product development, including research and development activities
and the engagement of additional engineering and other technical personnel. Any
failure by the Company to anticipate or respond adequately to technological
developments, customer requirements, or new design and production techniques, or
any significant delays in product development or introduction, could have a
material adverse effect on the Company's operations.
The Company's future operating results will depend to a significant
extent on its ability to identify, develop, and market enhancements or
improvements to existing product lines as well as to introduce new product lines
that compare favorably on the basis of time to introduction, cost, and
performance with the product lines offered by competitors. The success of new
product lines depends on various factors, including proper market segment
selection, utilization of advances in technology, innovative development of new
product concepts, timely completion and delivery of new product lines, efficient
and cost-effective features, and market acceptance of its products. Because of
the complexity of the design and manufacturing processes required by the
Company's products, the Company may experience delays from time to time in
completing the design and manufacture of improvements to existing product lines
or the introduction of new product lines. In addition, there can be no assurance
that any new product lines will receive or maintain customer or market
acceptance. If the Company were unable to design and implement enhancements to
existing product lines or introduce new products on a timely and cost-effective
basis, its future operating results would be adversely affected. See Item 1,
"Business - Products."
Complex software programs, such as those developed by the Company or
other software sources and incorporated into the Company's products,
occasionally contain errors that are discovered only after the product has been
installed and used by many different customers in a variety of business
operations. Although the Company conducts extensive testing of the software
programs included in its products, there can be no assurance that the Company
will successfully detect and eliminate all such errors in its products prior to
shipment. Significant programming errors in product software could require
substantial design modifications that may create delays in product introduction
and shipment and that could result in an adverse impact on the Company's
goodwill as well as on its operating results.
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<PAGE>
Reliance on Independent Distribution Network
The Company currently markets its products through a distribution
network consisting primarily of large wholesale distributors known as "Supply
Houses" and telephone sales and installation companies known as "Direct
Dealers." Supply Houses generally maintain inventories in amounts that they
consider sufficient to fill anticipated orders for at least a two-month period
of time. A decline in the volume of sales made by Supply Houses, however, could
result in inventory levels that exceed anticipated sales, which could delay
purchases of additional products from the Company until the Supply Houses'
inventories reach re-ordering levels. Direct Dealers generally stock inventories
only in quantities deemed sufficient to fill anticipated short-term orders. As a
result, orders generally can be cancelled and volume levels changed or delayed
on short notice to the Company. The timely replacement of cancelled, delayed, or
reduced orders cannot be assured.
The Company depends upon independent Supply Houses and Direct Dealers
to sell its products to end users, to perform installation services, and to
perform service and support functions after the sale. Other telephone system
manufacturers compete intensely for the attention of the same Supply Houses and
Direct Dealers, most of which carry products that compete directly with the
Company's products. There can be no assurance that the Company will be able to
maintain favorable relationships with the Supply Houses and Direct Dealers that
currently carry its product lines in order to encourage them to promote and sell
its products instead of those of its competitors or that the Company will be
able to develop such relationships with additional distributors and dealers in
the future. See "Business - Sales, Marketing, and Distribution."
Graybar accounted for 44% and 40%, respectively, of sales during 1995
and 1996. Accounts receivable from Graybar comprised approximately 36% of total
accounts receivable at December 31, 1997.
Patents, Licenses, and Intellectual Property Claims
The Company's success depends in part upon its ability to protect its
proprietary technology. The Company relies on a combination of copyright,
trademark, and trade secret laws, nondisclosure and other contractual
agreements, and technical measures to protect its proprietary technology. There
can be no assurance that the steps taken by the Company to protect its
proprietary rights will be adequate to protect misappropriation of such rights
or that third parties will not independently develop equivalent or superior
technology. In addition, the Company has acquired certain patents and patent
licenses and intends to continue to seek patents on its inventions and
manufacturing processes. The process of seeking patent protection can be long
and expensive, and there can be no assurance that patents will issue from future
applications or that the Company's existing patents or any new patents that are
issued will be of sufficient scope or strength to provide meaningful protection
or any commercial advantage to the Company. The Company may be subject to or may
initiate interference proceedings in the U.S. Patent and Trademark Office, which
can demand significant financial and management resources. As is typical in the
telecommunications industry, the Company from time to time has received, and in
the future may receive, communications alleging possible infringement of patents
or other intellectual property rights of others. Based on industry practice, the
Company believes that in most cases it could obtain any necessary licenses or
other rights on commercially reasonable terms, but no assurance can be given
that licenses would be available on acceptable terms, that litigation would not
ensue, or that damages for any past infringements would not be assessed.
Litigation, which could result in substantial cost to and diversion of effort by
the Company, may be necessary to enforce patents or other intellectual property
rights of the Company or to defend the Company against claimed infringement of
the rights of others. The failure to obtain necessary licenses or other rights
or litigation arising out of infringement claims could have a material adverse
effect on the Company. See Item 1, "Business - Patents, Trademarks, and
Licenses."
Management of Growth
The Company's ability to manage its growth effectively in the future
will require it to enhance its operational, financial, and management systems;
to expand its facilities and equipment; and to successfully hire,
17
<PAGE>
train, and motivate additional employees, including the technical personnel
necessary to design the software used in the Company's telephone systems, voice
processing products, and computer-telephony products, and to integrate new
software systems with evolving hardware technologies. The failure of the Company
to manage its growth on a effective basis could have a material adverse effect
on the Company's operations.
The Company may be required to increase staffing and other expenses as
well as its capital expenditures in order to meet the demand for its products
and services. Customers, however, generally do not commit to firm purchase
orders for more than a short time in advance. The Company's profitability would
be adversely affected if the Company increases its expenditures in anticipation
of future orders that do not materialize. The development of new products or
product enhancements or unexpected customer orders also may require rapid
increases in design and production services that place excessive short-term
burdens on the Company's resources.
The Telecommunications Industry; Cyclicity and Capital Requirements
The telecommunications industry has experienced economic downturns at
various times, characterized by diminished product demand, accelerated erosion
of average selling prices, and production overcapacity. The Company has sought
to reduce its exposure to industry downturns by targeting its product lines
towards small to medium-sized businesses, which the Company believes will
sustain continued growth in the near and long term, resulting in a steadily
increasing demand for enhanced and upgraded telephone systems and voice
processing products. However, the Company may experience substantial
period-to-period fluctuations in future operating results because of general
industry conditions or events occurring in the general economy. In addition,
although the Company has not experienced significant quarterly sales
fluctuations in the past, the size and timing of sales of its new voice
processing and computer-telephony products may be expected to vary from quarter
to quarter to a greater extent. The expanding importance of these new products
could result in significant variations in the Company's overall operating
results on a quarterly basis.
To remain competitive, the Company must continue to make significant
investments in research and development, equipment, and facilities. As a result
of the increase in fixed costs and operating expenses related to these capital
expenditures, the Company's operating results may be adversely affected if its
net sales do not increase sufficiently to offset the increased costs. The
Company from time to time may seek additional equity or debt financing to
provide for the capital expenditures required to maintain or expand the
Company's design and production facilities and equipment. The timing and amount
of any such capital requirements cannot be predicted at this time. There can be
no assurance that any such financing will be available or, if available, will be
available on terms satisfactory to the Company. If such financing is not
available on satisfactory terms, the Company may be unable to expand its
business or develop new products at the rate desired and its operating results
may be adversely affected. Debt financing increases expenses and must be repaid
regardless of operating results. Equity financing could result in additional
dilution to existing stockholders. See Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."
Shortage of Raw Materials and Supplies
The principal raw materials and components used in producing the
Company's products consist of semiconductor components, unfinished printed
circuit boards, molded plastic parts, metals, and packaging materials. The
third-party manufacturers of the Company's products acquire these raw materials
primarily from Asian sources, which indirectly subjects the Company to certain
risks, including supply interruptions and currency price fluctuations.
Purchasers of these materials, including the Company and its third-party
manufacturers, experience difficulties from time to time in obtaining such
materials. The suppliers of these materials currently are adequately meeting the
requirements of the Company. The Company also believes that there are alternate
suppliers for most of these materials.
Voice processing boards that are used in certain of the Company's voice
processing and interactive voice response products currently are available from
a limited number of sources. The Company currently purchases most
18
<PAGE>
of its requirements for voice processing boards from Dialogic on a purchase
order basis. The Company's ability to deliver certain of its product lines could
be adversely affected if it is unable to obtain voice processing boards from
Dialogic at any time that alternative sources of similar components are not
readily available.
Dependence on Management and Other Key Personnel
The Company's development and operations to date have been, and its
proposed operations will be, substantially dependent upon the efforts and
abilities of its senior management and technical personnel. The Company does not
have employment agreements with any of its executive officers. The Company,
however, maintains agreements with each of its officers and employees that
prohibit such persons from disclosing confidential information obtained while
employed with the Company. The loss of existing key personnel or the failure to
recruit and retain necessary additional personnel would adversely affect the
Company's business prospects. There can be no assurance that the Company will be
able to retain its current personnel or to attract and retain necessary
additional personnel. The Company's internal growth and the expansion of its
product lines will require additional expertise in such areas as software
development, operational management, and marketing. Such growth and expansion
activities will increase further the demand on the Company's resources and
require the addition of new personnel and the development of additional
expertise by existing personnel. The failure of the Company to attract and
retain personnel with the requisite expertise or to develop internally such
expertise could adversely affect the prospects for the Company's success. The
Company currently maintains key person insurance in the amount of $1.0 million
covering Glenn R. Fitchet, its President. See Item 1, "Business - Executive
Officers."
Year 2000 Compliance
Many currently installed computer systems and software products are
coded to accept only two-digit entries to represent years in the date code
field. Computer systems and products that do not accept four-digit year entries
will need to be upgraded or replaced to accept four-digit entries to distinguish
years beginning with 2000 from prior years. The Company has initiated but has
not completed an internal system assessment to determine whether its existing
software programs are "Year 2000" compliant. The Company currently is evaluating
its entire internal computer system with respect to a proposed program to
upgrade its existing hardware and software or to install new hardware and
software systems intended to improve the content, quality, and flow of
information within the Company as well as to address any Year 2000 issues that
may exist. Although the Company has not completed the evaluation of its Year
2000 compliance issues and is not able to quantify the costs that it may incur
in order to eliminate any Year 2000 issues that may exist, the Company currently
does not believe that the total cost to the Company of addressing its Year 2000
compliance issues will have a material adverse effect on the Company's financial
condition or results of operations. The Company currently is developing a plan
to evaluate the Year 2000 issue as it relates to computer systems operated by
third parties, including suppliers and financial institutions, with which the
Company's systems interface. Any failure of the Company's computer system or the
systems of third parties to timely achieve Year 2000 compliance could have a
material adverse effect on the Company's business, financial condition, and
operating results.
The Company also is in the process of identifying which of its existing
products are not Year 2000 compliant and to determine which, if any, of those
products it intends to modify or upgrade in order to become Year 2000 compliant.
The Company believes that it will be able to pass along to its customers the
cost of upgrading installed products that are no longer covered by the Company's
product warranties.
Control by Management; Stockholders' Agreement; Conflicts of Interest
The directors, executive officers, and certain other management
personnel of the Company and their affiliates own approximately 36.9% of the
outstanding shares of Common Stock, including approximately 18.7% owned by LGE
(excluding shares issuable to such persons upon exercise of outstanding
options). The Company, LGE, Glenn R. Fitchet, Steven A. Sherman, and certain
other stockholders of the Company are parties to a stockholders' agreement (the
"Stockholders' Agreement"). At any time that the Company issues shares of its
19
<PAGE>
Common Stock in an amount representing 1% or more of its outstanding Common
Stock, the Stockholders' Agreement gives LGE the right to purchase from the
Company a sufficient number of shares as may be required to enable LGE to
maintain the percentage of ownership of Common Stock that existed immediately
prior to such issuance. The Stockholders' Agreement also requires Mr. Fitchet
and Mr. Sherman to vote their shares of Common Stock to elect as directors of
the Company that number of persons designated by LGE that comprises a percentage
of the Board of Directors equal to LGE's then percentage of ownership of the
Company's Common Stock, provided that so long as LGE owns 8% or more of the
Company's outstanding Common Stock, Messrs. Fitchet and Sherman will vote their
shares to the elect at least one designee of LGE as a director.
The Company obtains a substantial portion of the hardware utilized in
its telephone systems and commercial grade telephones from LGE and obtains
certain of its electronic telephone systems and most of its commercial grade
telephone and replacement parts for such telephones from LGST, an affiliate of
LGE. See Item 1, "Business Manufacturing" and "Special Considerations -
Dependence on LGE." As a result of LGE's ownership interest in the Company, an
inherent conflict of interest exists in establishing the volume and terms and
conditions of such purchases. In order to mitigate such conflicts, all decisions
with respect to such purchases will be made by officers of the Company and
reviewed by directors of the Company who have no relationship with LGE.
Possible Volatility of Stock Price
The trading price of the Company's Common Stock in the public
securities market could be subject to wide fluctuations in response to quarterly
variations in operating results of the Company or its competitors, actual or
anticipated announcements of technological innovations or new product
developments by the Company or its competitors, changes in analysts' estimates
of the Company's financial performance, developments or disputes concerning
proprietary rights, regulatory developments, general industry conditions,
worldwide economic and financial conditions, and other events and factors. The
trading volume of the Company's Common Stock has been limited, which may
increase the volatility of the market price for such stock or reduce the
liquidity of an investment in shares of the Company's Common Stock. During
certain periods, the stock markets have experienced extreme price and volume
fluctuations. In particular, prices for many technology stocks often fluctuate
widely, frequently for reasons unrelated to the operating performance of such
companies. These broad market fluctuations and other factors may adversely
affect the market price of the Company's Common Stock.
Rights to Acquire Shares
A total of 850,000 shares of Common Stock have been reserved for
issuance upon exercise of options granted or which may be granted under the
Company's stock option plan. Options to acquire 816,900 shares of Common Stock
at a weighted average exercise price of $4.80 per share currently are
outstanding under the stock option plan. In addition, the Company sold to the
underwriter of its initial public offering warrants to purchase 133,333 shares
of Common Stock. The warrants have an exercise price per share of $7.20 and are
exercisable until October 2000. During the terms of such options and warrants,
the holders thereof will have the opportunity to profit from an increase in the
market price of the Common Stock. The existence of such options and warrants may
adversely affect the terms on which the Company can obtain additional financing,
and the holders of such options and warrants can be expected to exercise such
options or warrants at a time when the Company, in all likelihood, would be able
to obtain additional capital by offering shares of its Common Stock on terms
more favorable to the Company than those provided by the exercise of such
options or warrants.
Shares Eligible for Future Sale
Sales of substantial amounts of Common Stock in the public market could
adversely affect prevailing market prices and could impair the Company's ability
to raise capital through the sale of its equity securities. Approximately
2,114,800 shares of Common Stock, including shares held by the Company's
directors, executive officers, and LGE, currently are eligible for sale in the
public market, subject to compliance with the requirements of Rule 144 under the
Securities Act of 1933, as amended (the "Securities Act"). Shares issued upon
the exercise
20
<PAGE>
of stock options issued under the Company's Stock Option Plan generally will be
eligible for sale in the public market. The Company also has the authority to
issue additional shares of Common Stock and shares of one or more series of
preferred stock. The issuance of such shares could result in the dilution of the
voting power of the currently outstanding shares of Common Stock and could have
a dilutive effect on earnings per share.
Change in Control Provisions
The Company's Amended Certificate of Incorporation (the "Amended
Certificate") and Bylaws and the Delaware General Corporation Law (the "Delaware
GCL") contain provisions that may have the effect of making more difficult or
delaying attempts by others to obtain control of the Company, even when these
attempts may be in the best interests of stockholders.
The Company is subject to the provisions of Section 203 of the Delaware
GCL. In general, this statute prohibits a publicly held Delaware corporation
from engaging, under certain circumstances, in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person becomes an interested stockholder, unless either
(i) prior to the date at which the stockholder became an interested stockholder,
the Board of Directors approved either the business combination or the
transaction in which the person becomes an interested stockholder, (ii) upon
consummation of the transaction in which the stockholder becomes an interested
stockholder, the stockholder owned at least 95% of the outstanding voting stock
of the corporation (excluding shares held by directors who are officers or held
in certain employee stock plans), or (iii) the business combination is approved
by the Board of Directors and by two-thirds of the outstanding voting stock of
the corporation (excluding shares held by the interested stockholder) at a
meeting of stockholders held on or subsequent to the date of the business
combination. An "interested stockholder" is a person that, together with
affiliates and associates, owns (or at any time within the prior three years did
own) 15% or more of the corporation's voting stock. Section 203 defines a
"business combination" to include, without limitation, mergers, consolidations,
stock sales and asset based transactions, and other transactions resulting in a
financial benefit to the interested stockholder.
The Company's Amended Certificate and Bylaws contain a number of other
provisions relating to corporate governance and to the rights of stockholders.
These provisions include (a) the authority of the Board of Directors to fill
vacancies on the Board of Directors; (b) the authority of the Board of Directors
to issue preferred stock in series with such voting rights and other powers as
the Board of Directors may determine; and (c) the requirement that any of the
following actions be approved by the affirmative vote of two-thirds of the
directors then in office: (1) a public offering of the capital stock of the
Company; (2) the merger with or the acquisition of another business or the
acquisition of a significant amount of the assets of another business; (3) the
sale of a significant amount of the assets of the Company; (4) the Company
entering into contracts with stockholders or directors of the Company; (5) the
assumption or acquisition by the Company of debt in excess of $1,000,000; and
(6) any amendment of the Amended Certificate of Incorporation and Bylaws of the
Company or VCS.
Lack of Dividends
The Company has never paid any cash dividends on its Common Stock and
does not anticipate that it will pay dividends in the foreseeable future.
Instead, the Company intends to retain any earnings to provide funds for use in
its business. Furthermore, the terms of the revolving line of credit facility
between VCS and GE Capital prohibit VCS from paying dividends to the Company
without the consent of General Electric Capital Corporation ("GE Capital"). This
restriction could limit the Company's ability to pay dividends in the future.
There currently are no restrictions that would prohibit Enhanced from paying
dividends to the Company.
Cautionary Statement Regarding Forward-Looking Statements
Certain statements and information contained in this Report under the
headings "Business," "Special Considerations," and "Management's Discussion and
Analysis of Financial Condition and Results of Operations"
21
<PAGE>
concerning future, proposed, and anticipated activities of the Company, certain
trends with respect to the Company's revenue, operating results, capital
resources, and liquidity or with respect to the markets in which the Company
competes or the telecommunications industry in general, and other statements
contained in this Report regarding matters that are not historical facts are
forward-looking statements, as such term is defined in the Securities Act.
Forward-looking statements, by their very nature, include risks and
uncertainties, many of which are beyond the Company's control. Accordingly,
actual results may differ, perhaps materially, from those expressed in or
implied by such forward-looking statements. Factors that could cause actual
results to differ materially include those discussed elsewhere under this Item
1, "Special Considerations."
ITEM 2. PROPERTIES
The Company leases, for a term expiring in December 2001, approximately
60,000 square feet of space in Scottsdale, Arizona, where it maintains
engineering and design laboratories, a sound engineering laboratory, software
development facilities, testing laboratories, product development facilities,
customer service support facilities, an employee training facility, warehouse
and distribution areas, sales and marketing offices, and administrative and
executive offices. The Company also leases approximately 16,200 square feet of
space in Norcross, Georgia, for a term expiring in August 2002. The Company
maintains software development facilities, engineering and design laboratories,
product development facilities, product assembly and testing facilities,
warehouse and distribution areas, and sales, marketing, and administrative
offices at this location. The Company leases, for a term ending in December
2004, approximately 19,500 square feet of space in Scottsdale, Arizona, for its
telecommunications equipment repair operations. The Company believes its
facilities are adequate for its reasonably anticipated needs.
ITEM 3. LEGAL PROCEEDINGS
On September 20, 1996, the Company and Enhanced filed a lawsuit against
Michael Mittel and Fereydoun Taslimi, former officers and directors of Enhanced,
in the United States District Court for the District of Arizona. The lawsuit
subsequently was transferred to the Northern District of Georgia, Atlanta
Division (No. 1-98-CV-18- CAM). The lawsuit alleges, among other things, that
Messrs. Mittel and Taslimi violated federal and Arizona securities laws and
engaged in fraudulent activities in connection with the Company's acquisition of
Enhanced in 1995; breached certain terms of their respective employment
contracts with Enhanced; and converted certain corporate assets of Enhanced,
breached their fiduciary duties to Enhanced, and misappropriated certain
corporate opportunities for their own benefit. The Company and Enhanced are
seeking compensatory and punitive damages against Messrs. Mittel and Taslimi. On
September 24, 1996, Messrs. Mittel and Taslimi filed a lawsuit in the United
States District Court for the Northern District of Georgia, Atlanta Division
(No. 196-CV-2563), against the Company and Enhanced. The lawsuit alleges that
Enhanced breached Messrs. Mittel's and Taslimi's respective employment
agreements by terminating their employment. Messrs. Mittel and Taslimi are
seeking damages in an amount to be determined at trial, plus costs and attorneys
fees. The parties have not yet commenced discovery in either lawsuit. The
Company intends to proceed with its lawsuit against Messrs. Mittel and Taslimi
and is vigorously defending the lawsuit filed by them against the Company and
Enhanced.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
22
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock has been quoted in the Nasdaq National
Market under the symbol "VTEK" since October 6, 1995. The following table sets
forth the high and low closing sales prices of the Company's Common Stock on the
Nasdaq National Market for the periods indicated.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
1995:
Fourth quarter (from October 6, 1995 to December 31, 1995)... $7.50 $5.25
1996:
First quarter................................................ $7.38 $5.25
Second quarter............................................... 8.88 5.88
Third quarter................................................ 8.13 5.25
Fourth quarter............................................... 5.88 2.88
1997:
First quarter................................................ $4.75 $3.30
Second quarter............................................... 5.38 2.63
Third quarter................................................ 5.50 4.13
Fourth quarter............................................... 6.00 4.13
1998:
First quarter (through March 23, 1998)....................... $4.50 $3.25
</TABLE>
On March 23, 1998, the closing sales price of the Common Stock was
$3.88 per share. As of March 23, 1998, there were 33 holders of record and
approximately 700 beneficial owners of the Company's Common Stock.
23
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table summarizes certain selected consolidated financial
data of the Company and its predecessor, the Vodavi Division. The results of
operations for the three months ended March 31, 1994 are not necessarily
indicative of the results of operations for a full fiscal year. The selected
financial information provided below should be read in conjunction with Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of the Company and related
notes thereto. No dividends were paid during the periods presented.
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Vodavi Division(1) The Company
------------------------- ---------------------------------------------------------------------
Period From
Three Inception
Months (Aug. 3, 1993)
Year Ended Ended through
December 31, March 31, December 31, Year Ended December 31,
----------- --------- ----------- ------------------------------------------------------
1993 1994 1993 1994(2) 1995 1996 1997
---- ---- ---- ------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data:
Revenue ................... $ 31,571 $ 8,587 $ -- $ 29,140 $ 39,601 $ 46,154 $ 47,675
Gross margin .............. 8,172 2,418 -- 8,613 12,404 15,312 15,667
Operating expenses ........ 6,591 1,872 7 6,291 10,399 13,749 13,828
Asset impairment and
restructuring charges ... -- -- -- -- -- 4,805 819
Operating income (loss) .. 1,581 546 (7) 2,322 2,055 (3,242) 1,020
Interest & other expenses . 11 -- 6 576 1,130 840 663
Pretax income (loss) ...... 1,570 546 (13) 1,746 875 (4,082) 357
Income taxes .............. -- -- -- 693 417 327 142
Net income (loss) ......... 1,570 546 (13) 1,053 458 (4,409) 215
Net income (loss) per
share, diluted......... N/A N/A $ (0.02) $ 0.55 $ 0.17 $ (1.02) $ 0.05
Weighted average shares
outstanding, diluted... N/A N/A 849,999 1,917,346 2,769,434 4,342,238 4,342,238
</TABLE>
<TABLE>
<CAPTION>
As of As of
December 31, March 31, As of December 31,
----------- ----------- ---------------------------------------------------------------------
1993 1994 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Assets:
Current assets .......... $ 10,544 $ 12,034 $ 130 $ 14,122 $ 17,719 $ 16,591 $ 19,507
Property and
equipment ............ 397 452 -- 635 1,731 2,465 2,616
Goodwill ................ -- -- -- 2,833 7,089 2,547 2,395
Other ................... -- -- 280 357 931 815 1,146
----------- ----------- ----------- ----------- ----------- ----------- -----------
$ 10,941 $ 12,486 $ 410 $ 17,947 $ 27,470 $ 22,418 $ 25,664
=========== =========== =========== =========== =========== =========== ===========
Liabilities:
Current liabilities ..... $ 2,390 $ 3,128 $ 406 $ 5,316 $ 5,706 $ 7,292 $ 7,115
Long-term debt .......... -- -- -- 8,574 7,884 5,588 8,752
Other long-term
obligations .......... -- -- -- -- 69 137 182
Due to parent ........... 2,444 2,705 -- -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total liabilities ......... 4,834 5,833 406 13,890 13,660 13,017 16,049
Stockholders' equity ...... 6,107 6,653 4 4,057 13,810 9,401 9,615
----------- ----------- ----------- ----------- ----------- ----------- -----------
$ 10,941 $ 12,486 $ 410 $ 17,947 $ 27,470 $ 22,418 $ 25,664
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
- ------------------
(1) Prior to the acquisition by the Company, the Vodavi Division operated as a
separate division within a publicly held company. See Item 1, "Business --
History of the Company." As a result, share information is not applicable.
(2) Excludes the results of operations of the Vodavi Division prior to April 1,
1994, the effective date of the acquisition.
24
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Annual Results
The following table summarizes the operating results of the Company for
the periods indicated. The table and the discussion below should be read in
conjunction with the Consolidated Financial Statements and Notes thereto, which
appear elsewhere in this Report.
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------------------
1995 1996 1997
----------------- ----------------- -----------------
(Dollar amounts in thousands)
$ % $ % $ %
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Revenue ..................................... $ 39,601 100.0% $ 46,154 100.0% $ 47,675 100.0%
Cost of goods sold .......................... 27,197 68.7% 30,842 66.8% 32,008 67.1%
-------- ----- -------- ----- -------- -----
Gross margin .............................. 12,404 31.3% 15,312 33.2% 15,667 32.9%
Operating expenses:
Engineering and product
development ............................. 1,942 4.9% 2,161 4.7% 2,101 4.4%
Selling, general, and administrative ...... 8,457 21.3% 11,588 25.1% 11,727 24.6%
Asset impairment and restructuring charges -- -- 4,805 10.4% 819 1.7%
-------- ----- -------- ----- -------- -----
Operating income (loss) ..................... 2,005 5.1% (3,242) (7.0)% 1,020 2.1%
Other income (expense), net ................. (1,130) 2.9% (840) 1.8% (663) (1.4)%
-------- ----- -------- ----- -------- -----
Pretax income (loss) ........................ 875 2.2% (4,082) (8.8)% 357 0.7%
Income tax expense .......................... 417 1.0% 327 0.7% 142 0.3%
-------- ----- -------- ----- -------- -----
Net income (loss) ........................... $ 458 1.2% $ (4,409) (9.5)% $ 215 0.5%
======== ===== ======== ===== ======== =====
</TABLE>
Revenue
Revenue in 1997 was approximately $47.7 million, an increase of $1.5
million, or 3.2%, over 1996 revenue of approximately $46.2 million. The increase
in 1997 can be attributed to the addition of two OEM accounts, which accounted
for approximately $1.7 million of the increased revenue. Revenue from the
Company's other channels declined approximately $200,000. The Company attributes
this decline to delays in the introduction of new products in 1997 as a result
of an emphasis on securing the OEM contracts. In an effort to reverse this
trend, the Company began adding to its outside sales force in the fourth quarter
of 1997 and began a series of programs late in the year designed to stimulate
growth.
Revenue in 1996 increased approximately $6.6 million, or 16.5%, over
revenue of approximately $39.6 million in 1995. The increase in 1996 can be
attributed to the annualized impact of the 1995 acquisitions of Enhanced and
ARSI as well as new product introductions and the addition of new customers.
Cost of Goods Sold
Gross margins decreased to approximately 32.9% of revenue in 1997 as
compared with 33.2% in 1996. The decline can be attributed to the lower margins
earned on the Company's OEM contracts as well as the impact of certain discounts
included in the programs discussed above, which are designed to stimulate
growth. The Company expects that margins will continue to be lower in the near
term while these programs continue.
The increase in gross margins in 1996 as compared to 1995 reflects the
impact of the acquisition of Enhanced, which sells products at significantly
higher margins than other products sold by the Company.
25
<PAGE>
Engineering and Product Development
Expenditures related to engineering and product development remained
relatively stable at approximately $2.1 million, $2.2 million, and $1.9 million
in 1997, 1996, and 1995, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses were
approximately $11.7 million in 1997, an increase of approximately $100,000, or
1.0%, over SG&A expenses in 1996 of approximately $11.6 million. As a percentage
of revenue, SG&A expenses declined to 24.6% in 1997 as compared with 25.1% in
1996. The recognition of the impairment loss related to Enhanced in the fourth
quarter of 1996, as described below, resulted in the elimination of goodwill
amortization of approximately $460,000 annually. After considering the impact of
this, SG&A expenses increased approximately $480,000 in 1997, primarily as a
result of additional personnel in sales and marketing functions.
SG&A expenses increased approximately $3.1 million in 1996 as compared
with 1995. As a percentage of revenue, SG&A expenses increased to 25.1% in 1996
as compared to 21.3% in 1995. This increase can be attributed primarily to the
annualized impact of the acquisitions of Enhanced and ARSI (approximately $1.9
million of the increase) as well as increased sales and marketing expenses and
increased costs associated with being a publicly traded company.
Asset Impairment and Restructuring Charges
In the fourth quarter of 1997, the Company began implementing a
restructuring plan designed to increase the Company's focus and competitive
position in the industry. As part of this plan, the Company determined to
implement certain personnel reductions as well as to cancel certain product
lines. The Company has recorded a charge of $820,000 in the fourth quarter
related to severance charges for the personnel reductions as well as the costs
associated with the abandonment of the various products.
In 1996, the Company recorded a $4.2 million write-down of the goodwill
associated with the acquisition of Enhanced in accordance with Statement of
Financial Accounting Standard No. 121, Accounting for the Impairment of
Long-Lived Assets and for Assets to be Disposed Of. The Company determined that
the write-down was appropriate after evaluating the impact of several events
that occurred in the latter part of 1996, including communications from a
customer that purchase levels to which the customer had previously committed
would not be met. The write-down of the goodwill of Enhanced will result in a
reduction of goodwill amortization of approximately $460,000 annually. In 1996,
the Company also accrued approximately $600,000 in restructuring reserves
related to the operations of Enhanced. These reserves included the costs of
relocating new management to Atlanta, Georgia, costs related to the Company's
lawsuit against the former owners of Enhanced, costs related to the settlement
of an outstanding legal matter, and other expenses related to the management
change.
Other Income (Expense), Net
Other income (expense), net consists primarily of interest expense.
Interest expense was approximately $663,000, $840,000, and $1.1 million, in
1997, 1996, and 1995, respectively. The $177,000 reduction in interest expense
in 1997 is attributable to the lower interest rate obtained in connection with
the renewal of the Company's operating line of credit with GE Capital. See Item
7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources." The $260,000 reduction in
interest expense in 1996 can be attributed to a reduction in borrowings as a
result of improved asset management in 1996.
26
<PAGE>
Income Taxes
The effective rate of the Company's income tax provision was 31.6%,
(8.0)%, and 47.7% in 1997, 1996, and 1995, respectively. The Company's effective
tax rate in 1997 was favorably impacted by the utilization of a research and
development tax credit. The Company's effective tax rate in 1996 was impacted by
the asset impairment and restructuring charges taken in 1996, as described
above. The write-down of the goodwill associated with the acquisition of
Enhanced was not deductible, impacting the effective rate for 1996. In 1995, the
non-deductibility of the goodwill amortization resulted in an increase in the
effective rate.
Liquidity and Capital Resources
The Company's cash and cash equivalents were approximately $634,000 at
December 31, 1997. The Company's cash accounts are swept regularly and applied
against the Company's operating line of credit, as described below. The
Company's borrowings against its available operating line of credit at December
31, 1997 were approximately $8.6 million, which represents a $3.2 million
increase from its borrowings of $5.4 million at December 31, 1996. The increase
is attributed to the increase in current assets of approximately $2.9 million
over the same period. At December 31, 1997, the Company had approximately $2.0
million available to it under its operating line of credit.
The Company has a $12.0 million revolving line of credit with GE
Capital. In the second quarter of 1997, the Company extended the line of credit
through April 2000. The terms of the extension lowered the interest rate to 2.5%
over the 30-day commercial paper rate, which resulted in a borrowing rate of
8.35% at December 31, 1997. Available borrowings under the line of credit depend
upon the accounts receivable and inventories of VCS and are secured by
substantially all of the Company's assets. The line of credit contains certain
financial covenants that are customary for similar credit facilities and also
prohibits VCS from paying dividends to the Company without the consent of GE
Capital. See Item 1, "Special Considerations - Lack of Dividends." At December
31, 1997, the Company was in compliance with all of the covenants. An increase
in the Company's borrowings under the line of credit in 1998, along with the
associated increase in the current assets, has caused the Company to violate a
financial covenant from time to time subsequent to year end. The Company has
secured a waiver of these violations and an amendment to the financial covenant
through April 30, 1998. The amendment is intended to enable the Company to
remain in compliance with the covenant. In addition, the Company is exploring
increasing the line of credit from $12.0 million to $15.0 million.
The Company has entered into several capital lease agreements with
interest rates ranging from 9% to 13%. These agreements generally have terms of
24 months.
The Company has no significant outstanding commitments other than its
existing lease agreements and commitments under various supply and royalty
agreements, as described in the Notes to the Consolidated Financial Statements.
The Company believes that its working capital and credit facilities
will be sufficient to finance its internal growth for the foreseeable future.
Although the Company currently has no acquisition targets, it intends to
continue to explore acquisition opportunities as they arise and may be required
to seek additional financing in the future to meet such opportunities.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
27
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
Reference is made to the financial statements, the report thereon, and
the notes thereto commencing at page F-1 of this Report, which financial
statements, report, and notes are incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item relating to directors of the
Company is incorporated herein by reference to the definitive Proxy Statement to
be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") for the Company's 1998 Annual Meeting of
Stockholders. The information required by this Item relating to executive
officers of the Company is included in Item 1, "Business Executive Officers."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by
reference to the definitive Proxy Statement to be filed pursuant to Regulation
14A of the Exchange Act for the Company's 1998 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this Item is incorporated herein by
reference to the definitive Proxy Statement to be filed pursuant to Regulation
14A of the Exchange Act for the Company's 1998 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by
reference to the definitive Proxy Statement to be filed pursuant to Regulation
14A of the Exchange Act for the Company's 1998 Annual Meeting of Stockholders.
28
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) Financial Statements and Financial Statement Schedules
(1) Financial Statements are listed in the Index to Consolidated
Financial Statements on page F-1 of this Report.
(2) No Financial Statement Schedules are included because such
schedules are not applicable, are not required, or because
required information is included in the consolidated financial
statements or notes thereto.
(b) Reports on Form 8-K.
Not applicable.
(c) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
- ------ -------
<S> <C>
3.1 Amended Certificate of Incorporation of the Registrant(l)
3.2 Amended and Restated Bylaws of the Registrant(l)
4.1 Form of Certificate representing shares of Common Stock, par value $.001 per share(1)
4.2 Form of Underwriter's Warrant(l)
10.1 Credit Agreement dated as of April 11, 1994 between Vodavi Communications Systems, Inc. and General
Electric Capital Corporation(l)
10.2 Security Agreement dated as of April 11, 1994 between Vodavi Communications Systems, Inc. and
General Electric Capital Corporation(l)
10.3 Stock Pledge and Security Agreement dated as of April 11, 1994 between the Registrant and General
Electric Capital Corporation(l)
10.7 Patent Collateral Assignment Agreement dated as of April 11, 1994 between V Technology Acquisition
Corp. and General Electric Capital Corporation(l)
10.8 Trademark Security Agreement dated as of April 11, 1994 between V Technology Acquisition Corp. and
General Electric Capital Corporation(l)
10.9 Vodavi Technology, Inc. Second Amended and Restated 1994 Stock Option Plan
10.10 Stockholders' Agreement among the Registrant, V Technology Holdings Corp., GoldStar
Telecommunication Co., Ltd., The Sherman Group, The Opportunity Fund, Steven A. Sherman, and
Glenn R. Fitchet, dated March 28, 1994, and Amendment Agreement dated April 5, 1995(1)
10.11 Escrow Agreement dated as of March 28, 1994 between the Registrant, GoldStar Telecommunication Co.,
Ltd., Steven Sherman, Glenn R. Fitchet and STKK Service Company, as Escrow Agent(l)
10.12 Vodavi Key System Agreement dated April 4, 1994 between GoldStar Telecommunication Co., Ltd., and
Vodavi Communication Systems, a division of Executone Information Systems, Inc.(l)
10.13 Vodavi Single Line Telephone Agreement dated April 4,1994 between Srithai GoldStar Co., Ltd., and
Vodavi Communication Systems, Inc., a division of Executone Information Systems, Inc.(l)
10.13A Vodavi Single Line Telephone Agreement Extension dated April 4, 1997 between Vodavi Communications
Systems, Inc. and L.G. Srithai Electronics Co., Ltd.(2)
10.14 License Agreement dated as of March 31, 1994 between Executone Information Systems, Inc. and V
Technology Acquisition Corp.(l)
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
- ------ -------
<S> <C>
10.15 Assignment and Assumption Agreement dated April 11, 1994 between Executone Information Systems,
Inc. and V Technology Acquisition Corp.(l)
10.16 Supply Agreement dated December 1, 1994 between NovAtel Communications Ltd., and Vodavi
Communications Systems, Inc.(l)
10.19 OEM Agreement dated as of June 19, 1995, between Tecom Co., Ltd. and Vodavi Communications
Systems, Inc.(3)
10.20 Agreement dated June 14, 1995 between Wong's Electronics Co., Ltd. and Vodavi Communications
Systems, Inc.(3)
10.21 Master Lease Agreement dated May 31, 1996, between Matrix Funding Corporation and Vodavi
Communications Systems, Inc.(4)
10.22 Master Lease Agreement dated October 7, 1996, between Matrix Funding Corporation and Vodavi
Communications Systems, Inc.(5)
10.23 Amended and Restated Credit Agreement dated as of April 11, 1994 between Vodavi Communications
Systems, Inc. and General Electric Capital Corporation, as Amended and Restated as of June 11, 1997(2)
10.24 First Amendment to Stock Pledge and Security Agreement dated as of June 11, 1997, between Vodavi
Technology, Inc. and General Electric Capital Corporation(2)
10.25 Security Agreement dated as of June 11, 1997 between Enhanced Systems, Inc. and General Electric
Capital Corporation(2)
10.26 Security Agreement dated as of June 11, 1997 between Arizona Repair Services, Inc. and General Electric
Capital Corporation(2)
10.27 Guaranty Agreement dated as of June 11, 1997, by and among Arizona Repair Services, Inc., Enhanced
Systems, Inc., and General Electric Capital Corporation(2)
10.28 Trademark Security Agreement, dated as of June 11, 1997, by and between Vodavi Communications
Systems, Inc. and General Electric Capital Corporation(2)
10.29 Trademark Security Agreement dated as of June 11, 1997, by and between Enhanced Systems, Inc. and
General Electric Capital Corporation(2)
10.30 Strategic Alliance Agreement dated May 22, 1997 between Vodavi Communications Systems, Inc. and
Paradygm Communications, Inc.(2)
10.31 OEM Agreement dated August 15, 1997 between Vodavi Communications Systems, Inc. and Fujitsu
Business Communication Systems, Inc.(6)
10.32 OEM Purchase Agreement dated as of April 11, 1997, between Santa
Barbara Connected Systems Corporation and Enhanced Systems, Inc.
10.33 Consulting Agreement dated as of December 5, 1997 between Vodavi Technology, Inc. and Steven A.
Sherman
21 List of Subsidiaries(7)
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule
</TABLE>
- ---------------------
(1) Incorporated by reference to Registration Statement on Form S-1 (No.
33-95926) and amendments thereto which became effective on October 6, 1995.
(2) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997, as filed on August 11, 1997.
(3) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995, as filed on April 1, 1996.
(4) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1996, as filed on August 14, 1996.
(5) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996, as filed on November 14, 1996.
30
<PAGE>
(6) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997, as filed on November 14, 1997.
(7) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996, as filed on March 28, 1997.
31
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
VODAVI TECHNOLOGY, INC.
Date March 27, 1998 By: /s/ Glenn R. Fitchet
------------------------------------------------
Glenn R. Fitchet
President, Chief Executive Officer, and Director
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ WILLIAM J. HINZ Chairman of the Board March 27, 1998
- -------------------------------
William J. Hinz
/s/ GLENN R. FITCHET President, Chief Executive Officer, March 27, 1998
- ------------------------------- and Director
Glenn R. Fitchet
/s/ GREGORY K. ROEPER Vice President - Finance, March 27, 1998
- ------------------------------- Administration, and Operations;
Gregory K. Roeper Chief Financial Officer; Secretary;
and Treasurer (Principal Financial
and Accounting Officer)
Director _____ __, 1998
- -------------------------------
Nam K. Woo
/s/ STEVEN A. SHERMAN Director March 27, 1998
- -------------------------------
Steven A. Sherman
/s/ GILBERT H. ENGELS Director March 27, 1998
- -------------------------------
Gilbert H. Engels
/s/ STEPHEN A MCCONNELL Director March 27, 1998
- -------------------------------
Stephen A McConnell
</TABLE>
32
<PAGE>
VODAVI TECHNOLOGY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Public Accountants ---------------------------------- F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997 -------------- F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1995, 1996, and 1997 -------------------------------------- F-4
Consolidated Statements of Changes in Stockholders' Equity for
the Years Ended December 31, 1995, 1996, and 1997 ---------------------- F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1996, and 1997 -------------------------------------- F-6
Notes to Consolidated Financial Statements -------------------------------- F-7
F-1
<PAGE>
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Vodavi Technology, Inc.:
We have audited the accompanying consolidated balance sheets of VODAVI
TECHNOLOGY, INC. (a Delaware corporation) and subsidiaries as of December 31,
1996 and 1997, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Vodavi Technology, Inc. and
subsidiaries as of December 31, 1996 and 1997 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Phoenix, Arizona,
February 13, 1998.
F-2
<PAGE>
VODAVI TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------------
1996 1997
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,151,713 $ 634,255
Accounts receivable, net of allowances of
$234,000 in 1996 and $250,000 in 1997 7,789,832 9,681,545
Inventories, net 7,229,325 8,286,173
Prepaid expenses and other 420,455 905,451
------------ ------------
Total current assets 16,591,325 19,507,424
PROPERTY AND EQUIPMENT, net 2,465,214 2,616,320
GOODWILL, net 2,546,465 2,394,990
OTHER LONG-TERM ASSETS, net 814,620 1,145,308
------------ ------------
$ 22,417,624 $ 25,664,042
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 258,000 $ 378,931
Payable to related parties 2,291,581 1,621,547
Accounts payable 2,172,042 2,698,362
Accrued liabilities 2,276,467 2,416,218
Accrued income taxes 293,840 --
------------ ------------
Total current liabilities 7,291,930 7,115,058
------------ ------------
LONG-TERM DEBT, net 5,588,209 8,752,367
------------ ------------
OTHER LONG-TERM OBLIGATIONS 137,060 181,247
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 1,000,000 shares
authorized, no shares issued -- --
Common stock, $.001 par value, 10,000,000 shares
authorized; 4,342,238 shares issued and outstanding 4,342 4,342
Additional paid-in capital 12,307,739 12,307,739
Retained earnings (deficit) (2,911,656) (2,696,711)
------------ ------------
9,400,425 9,615,370
------------ ------------
$ 22,417,624 $ 25,664,042
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
VODAVI TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
REVENUE, net $ 39,600,726 $ 46,154,174 $ 47,674,751
COSTS OF GOODS SOLD (including
products acquired from related parties
(LGE) of $15.6 million, $17.8 million,
and $17.8 million, respectively) 27,196,571 30,842,422 32,007,992
------------ ------------ ------------
Gross margin 12,404,155 15,311,752 15,666,759
OPERATING EXPENSES:
Engineering and product development 1,941,503 2,161,306 2,100,682
Selling, general and administrative 8,457,641 11,587,971 11,726,902
Asset impairment and restructuring
charges (Note 2) -- 4,804,717 819,389
------------ ------------ ------------
OPERATING INCOME (LOSS) 2,005,011 (3,242,242) 1,019,786
INTEREST EXPENSE 1,129,604 840,830 662,828
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 875,407 (4,083,072) 356,958
PROVISION FOR INCOME TAXES 417,599 326,691 142,013
------------ ------------ ------------
NET INCOME (LOSS) $ 457,808 $ (4,409,763) $ 214,945
============ ============ ============
BASIC EARNINGS (LOSS) PER SHARE $ 0.17 $ (1.02) $ .05
============ ============ ============
DILUTED EARNINGS (LOSS) PER SHARE $ 0.17 $ (1.02) $ .05
============ ============ ============
WEIGHTED AVERAGE SHARES
OUTSTANDING - BASIC 2,690,267 4,342,238 4,342,238
============ ============ ============
WEIGHTED AVERAGE SHARES
OUTSTANDING - DILUTED 2,769,434 4,342,238 4,342,238
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
VODAVI TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
--------------------------- Additional Retained
Par Paid-in Earnings
Shares Value Capital (Deficit) Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994 1,999,993 $ 2,000 $ 3,015,000 $ 1,040,299 $ 4,057,299
Warrant conversion 187,500 187 (187) -- --
Initial public offering 1,488,083 1,488 7,293,593 -- 7,295,081
Issuance of shares to
acquire Enhanced 666,662 667 1,999,333 -- 2,000,000
Net income -- -- -- 457,808 457,808
------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1995 4,342,238 4,342 12,307,739 1,498,107 13,810,188
Net loss -- -- -- (4,409,763) (4,409,763)
------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1996 4,342,238 4,342 12,307,739 (2,911,656) 9,400,425
Net income -- -- -- 214,945 214,945
------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1997 4,342,238 $ 4,342 $ 12,307,739 $ (2,696,711) $ 9,615,370
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
VODAVI TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 457,808 $ (4,409,763) $ 214,945
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Depreciation and amortization 561,048 903,735 750,400
Asset impairment -- 4,174,717 407,776
Rent levelization 68,813 68,246 44,187
Loss on retirement of fixed assets -- 63,081 --
Changes in working capital, net of assets and liabilities
acquired in business combinations:
Accounts receivable 326,370 (1,310,669) (1,943,753)
Inventories (2,305,470) 1,302,059 (1,137,315)
Prepaid expenses and other (377,344) 380,878 (351,853)
Other long-term assets (156,742) 36,615 (450,926)
Accounts payable and payables to related parties 648,547 838,935 (143,714)
Accrued liabilities (183,170) 619,003 227,831
Accrued income taxes (109,023) (77,223) (426,983)
------------ ------------ ------------
Net cash flows (used in) provided by operating activities (1,069,163) 2,589,614 (2,809,405)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid to acquire assets through business combinations (2,351,524) -- --
Accrued acquisition costs paid (309,932) (217,894) (36,040)
Cash paid to acquire fixed assets (1,185,328) (556,664) (577,030)
------------ ------------ ------------
Net cash flows used in investing activities (3,846,784) (774,558) (613,070)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the sale of common stock 8,928,598 -- --
Equity offering costs paid (1,633,517) -- --
Repayment of notes payable (1,200,000) -- --
Financing costs paid -- -- (77,301)
Payments on capital leases -- (109,760) (259,282)
Borrowings on revolving credit facility 41,127,236 41,369,367 48,488,925
Payments on revolving credit facility (41,816,582) (43,867,070) (45,247,325)
------------ ------------ ------------
Net cash flows provided by (used in) financing activities 5,405,735 (2,607,463) 2,905,017
------------ ------------ ------------
CHANGE IN CASH AND CASH EQUIVALENTS 489,788 (792,407) (517,458)
CASH AND CASH EQUIVALENTS, beginning of period 1,454,332 1,944,120 1,151,713
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 1,944,120 $ 1,151,713 $ 634,255
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
VODAVI TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES:
Nature of Business
Vodavi Technology, Inc. (VTI), a Delaware corporation, designs, develops,
markets, and supports a broad range of telecommunications systems, commercial
grade telephones, computer-telephony products, and voice processing products,
including voice mail, fax mail, Internet messaging, and interactive voice
response systems for a wide variety of commercial applications.
Principles of Consolidation
The consolidated financial statements include the accounts of VTI and its wholly
owned subsidiaries Vodavi Communication Systems, Inc. (VCS), Arizona Repair
Services, Inc. (ARSI), and Enhanced Systems, Inc. (Enhanced) (together referred
to as the Company). All material intercompany transactions have been eliminated
in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires the Company's management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include funds on hand and short-term investments.
Inventory
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
F-7
<PAGE>
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using the
straight-line method. Property and equipment and the related useful lives
consist of the following as of December 31, 1996 and 1997, respectively:
<TABLE>
<CAPTION>
Useful Life
Type of Asset in Years 1996 1997
----------------------------------- ----------- --------- ---------
<S> <C> <C> <C>
Office and computer equipment 5 $ 671,869 $1,030,354
Furniture and fixtures 10 219,063 255,089
Tooling and manufacturing equipment 5-8 1,060,387 1,506,761
Assets under capital lease 5-12 574,982 741,226
Property and equipment in progress - 502,976 128,702
--------- ---------
3,029,277 3,662,132
Less: Accumulated depreciation (564,063) (1,045,812)
--------- ---------
$2,465,214 $2,616,320
========= =========
</TABLE>
Property and equipment in progress relates to assets under development that have
not yet been placed in service.
Goodwill
Goodwill represents the cost in excess of the estimated fair value of tangible
assets acquired in business combinations and is being amortized on the
straight-line method over the estimated life of the asset.
Income Taxes
The Company utilizes the liability method of accounting for income taxes as set
forth in Statement of Financial Accounting Standards 109, Accounting for Income
Taxes. Under the liability method, deferred taxes are provided based on the
temporary differences between the financial reporting basis and the tax basis of
the Company's assets and liabilities.
Revenue Recognition
Revenue, net of an allowance for product returns, is generally recognized upon
shipment to the customer. When the Company has an installation or other
significant obligation, revenue is recognized upon installation or substantial
completion of the Company's obligation. Revenue from extended maintenance
contracts is recognized over the lives of the respective contracts.
Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share (SFAS No. 128), which
supersedes Accounting Principles Board (APB) Opinion No. 15, the previous
authoritative guidance. SFAS No. 128 replaces the calculation of primary and
fully diluted earnings per share (EPS) with basic and diluted EPS. SFAS No. 128
is effective for financial statements for both interim and
F-8
<PAGE>
annual periods presented after December 15, 1997, and as a result, all prior
period EPS data presented has been restated. Basic EPS for the years ended
December 31, 1995, 1996 and 1997 were determined by dividing net income by the
weighted average number of common shares outstanding. The weighted average
number of common shares outstanding excludes all common stock equivalents.
Diluted EPS for the years ended December 31, 1995, 1996 and 1997 were determined
by dividing net income by the weighted average number of common and common
equivalent shares outstanding. The weighted average number of common and common
equivalent shares for the year ended December 31, 1995, assumes the exercise of
all outstanding options and the corresponding repurchase of shares using the
treasury stock method. No common equivalent shares were included in weighted
average common and common equivalent shares for the years ended December 31,
1996 and 1997.
Fair Value of Financial Instruments
The following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of Statement of Financial Accounting
Standards No. 107, Disclosures About Fair Value of Financial Instruments. The
estimated fair value amounts have been determined by the Company at December 31,
1997, using available market information. Considerable judgment is required in
interpreting market data to develop the estimates of fair value. Accordingly,
the estimates may not be indicative of the amounts that the Company could
realize in a current market exchange. The use of different market assumptions
and valuation methodologies could have a material effect on the estimated fair
value amounts.
The carrying value of cash and cash equivalents, accounts receivable, accounts
payable, payable to related party, accrued liabilities, and the revolving credit
facility approximate fair values due to the short-term maturities of these
instruments.
New Statements of Financial Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS No.
130). SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenue, gains, and losses) in a full
set of general-purpose financial statements. SFAS No. 130 requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements.
This statement is effective for fiscal years beginning after December 15, 1997.
For comparative purposes, reclassification of financial statements for earlier
periods is required. The adoption of SFAS No. 130 will not have a material
impact on the Company's financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 131, Disclosures About Segments of an
Enterprise and Related Information (SFAS No. 131), which supersedes FASB
Statement No. 14, Financial Reporting for Segments of a Business Enterprise, but
retains the requirement to report information about major customers. This
statement establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those
F-9
<PAGE>
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers.
This statement is effective for financial statements for periods beginning after
December 15, 1997. In the initial year of application, comparative information
for earlier years is to be restated. This statement need not be applied to
interim financial statements in the initial year of its application, but
comparative information for interim periods in the initial year of application
is to be reported in financial statements for interim periods in the second year
of application.
(2) ASSET IMPAIRMENTS AND RESTRUCTURING CHARGE:
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of (SFAS No. 121), which the Company
adopted in 1996. SFAS No. 121 requires that long-lived assets be reviewed for
impairment whenever events or circumstances indicate that the carrying amount of
the assets may not be recoverable. If the sum of the expected future cash flows
(undiscounted and without interest charges) from an asset to be held and used in
operations is less than the carrying value of the asset, an impairment loss must
be recognized in the amount of the difference between the carrying value and the
fair value. Assets to be disposed of must be valued at the lower of carrying
value or fair value less costs to sell.
During 1996, certain events occurred that required the Company to re-evaluate
the realizability of goodwill recorded in connection with the acquisition of
Enhanced. As a result of the impact of these events on the projected cash flows
of Enhanced, the Company concluded that the goodwill was impaired and recorded a
$4.2 million impairment loss.
During 1997, the Company recorded a restructuring charge that included a reserve
for severance payments and the write off of various assets following a review of
product strategies, which resulted in the discontinuance of certain product
lines.
(3) BUSINESS COMBINATIONS:
In July 1995, ARSI acquired certain operating assets of Goldstar Products
Company, Ltd. (GPC), an affiliate of LGE. The operations acquired consisted of a
repair facility utilized by GPC to repair telecommunications equipment primarily
sold by VCS. The purchase price was $440,000, including other direct
acquisition-related costs. The acquisition was accounted for under the purchase
method. The purchase price was allocated as follows:
Current assets $ 80,000
Fixed assets 90,000
Goodwill 270,000
--------
$440,000
========
F-10
<PAGE>
Concurrently with the Company's initial public offering (IPO) in October 1995,
Enhanced, a Norcross, Georgia-based provider of voice processing technology,
merged with a wholly owned subsidiary of the Company. The total purchase price
of Enhanced was approximately $5,250,000, including other direct
acquisition-related costs, and consisted of $3,000,000 in cash and the issuance
of 666,662 restricted shares of VTI Common Stock.
The acquisition of Enhanced was accounted for under the purchase method. The
purchase price of Enhanced was allocated as follows:
Net current assets $ 500,000
Long-term assets 250,000
Goodwill 4,500,000
----------
$5,250,000
==========
The following table presents the unaudited pro-forma results of operations for
the year ended December 31, 1995, assuming the transactions described above had
taken place as of January 1, 1994:
Revenue $41,938,000
Net income 272,000
Net income per share - diluted .08
(4) LONG-TERM DEBT:
Long-term debt consists of the following as of December 31, 1996 and 1997:
1996 1997
---------- ----------
Revolving credit facility $5,386,623 $8,628,227
Capital lease obligations 459,586 503,071
---------- ----------
5,846,209 9,131,298
Less: Current portion 258,000 378,931
---------- ----------
$5,588,209 $8,752,367
========== ==========
The Company maintains a $12.0 million revolving credit facility with a financial
institution. Borrowings under the facility, which are based on inventory and
accounts receivable, carry interest payable monthly at a variable rate based on
commercial paper plus 4-1/2% in 1996 and 2-1/2% in 1997 (10.45% and 8.03% at
December 31, 1996 and 1997, respectively). The credit facility expires in April
2000 and is secured by substantially all of the Company's assets.
The credit agreement contains certain financial covenants that are customary for
similar credit facilities and also prohibits the Company's operating
subsidiaries from paying dividends to the Company without the consent of the
financial institution. At December 31, 1997, the Company was in compliance with
all of the covenants. Subsequent to year end, the Company was in violation of
one financial covenant; however, a waiver was obtained from the financial
institution.
F-11
<PAGE>
The Company has entered into several capital lease agreements with interest
rates ranging from 9% to 13%. These agreements generally have terms of 24
months.
(5) COMMITMENTS AND CONTINGENCIES:
Legal Matters
The Company is currently involved in a lawsuit with the former owners of
Enhanced, who were dismissed from their positions as executive management of
Enhanced in the third quarter of 1996. In September 1996, the Company sued the
former owners alleging securities fraud, fraudulent activities, breach of
employment agreements, breach of fiduciary duties, and other charges. The former
owners countersued the Company claiming the Company breached their employment
agreements and owes them approximately $500,000. The Company intends to
vigorously pursue its action and defend against the countersuit. In connection
with the fourth quarter of 1996 charges for the asset impairment and other
restructuring charges, the Company reserved approximately $250,000 to pursue
this matter.
Operating Leases
The Company has entered into long-term lease agreements for all of its office
and warehouse facilities. Minimum payments under the Company's lease agreements
are as follows:
Total
-----------
1998 $ 1,090,731
1999 1,120,707
2000 1,160,679
2001 1,201,335
2002 311,745
Thereafter 174,720
Rent expense is recognized on a straight-line basis and was approximately
$825,000, $1,115,000, and $1,107,000 for the years ended December 31, 1995,
1996, and 1997, respectively. The difference between rent expensed and paid is
included in other long-term obligations.
Royalties
VCS acquires certain proprietary components from a third party under the terms
of a license agreement. Under the terms of the agreement, VCS will pay a 5.3%
royalty over the manufactured cost of all products utilizing the proprietary
components. Total royalties related to this agreement were $492,000, $502,000
and $449,000 in 1995, 1996, and 1997, respectively.
Supply Agreements
VCS has entered into various supply agreements with its vendors to purchase
products through 1999. Minimum required purchases in 1998 and 1999 total
approximately $9.75 million and $5.5 million, respectively.
F-12
<PAGE>
401(k) Profit Sharing Plan
In April 1994, the Company adopted a profit sharing plan (the 401(k) Plan)
pursuant to Section 401(k) of the Internal Revenue Code of 1986. The 401(k) Plan
covers substantially all full-time employees who meet the eligibility
requirements and provides for a discretionary profit sharing contribution by the
Company and an employee elective contribution with a discretionary Company
matching provision. The Company expensed discretionary contributions pursuant to
the 401(k) Plan in the amounts of approximately $40,000, $67,500, and $75,000
for the years ended December 31, 1995, 1996, and 1997, respectively.
(6) STOCKHOLDERS' EQUITY:
Warrants
In connection with the private sale of Common Stock in April 1994, the Company
issued warrants to acquire an additional 1,125,000 shares of Common Stock at
$4.00 per share. In September 1995, the Company issued 187,500 shares of its
Common Stock in a cashless exchange for these warrants.
In connection with the IPO, the Company sold to its underwriter warrants to
purchase up to 133,333 shares of its Common Stock at a price of $7.20 per share.
The warrants are exercisable during a four-year period from October 12, 1996 to
October 12, 2000.
Vodavi Technology, Inc. 1994 Stock Option Plan
The Vodavi Technology, Inc. 1994 Stock Option Plan (the Plan), as amended,
provides for the granting of options to purchase up to 850,000 shares of VTI's
Common Stock. Under the Plan, options may be issued to key personnel of the
Company. The options issued may be incentive stock options or nonqualified stock
options. If any option terminates or expires without having been exercised in
full, stock not issued under such option will again be available for the
purposes of the Plan.
To the extent that granted options are incentive stock options, the terms and
conditions of those options must be consistent with the qualification
requirements set forth in Section 422 of the Internal Revenue Code of 1986. The
maximum number of shares of Common Stock with respect to which options can be
granted to any one employee, including officers, during the term of the plan may
not exceed 50% of the shares of Common Stock covered by the Plan.
The expiration date, maximum number of shares purchasable, and the other
provisions of the options are established at the time of grant. Options may be
granted for terms of up to ten years and become exercisable in whole or in one
or more installments at such time as may be determined by the plan administrator
upon grant of the options. The exercise prices of options are determined by the
plan administrator, but may not be less than 100% (110% if the option is granted
to a stockholder who at the time the option is granted owns stock representing
more than ten percent of the total combined voting power of all classes of VTI
stock) of the fair market value of the Common Stock at the time of the grant.
F-13
<PAGE>
The following summarizes activity under the plan for the years ended:
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1996 December 31, 1997
----------------------- --------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Number Exercise Number Exercise Number Exercise
of Shares Price of Shares Price of Shares Price
--------- ------- --------- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of period: 240,000 $ 4.00 237,500 $ 4.00 498,500 $ 5.08
Granted - 295,000 6.07 380,600 4.45
Canceled (2,500) 4.00 (34,000) 6.00 (62,200) 5.13
Exercised - - - -
--------- ------- --------- ------- --------- --------
Options outstanding
at end of period 237,500 $ 4.00 498,500 $ 5.08 816,900 $ 4.80
========= ======= ========= ======= ========= ========
Options available
for grant 75,000 351,500 33,200
========= ========= =========
Exercisable at end
of period 59,375 $ 4.00 118,750 $ 4.00 178,125 $ 4.00
========= ======= ========= ======= ========= ========
Weighted average fair
value of options granted N/A $ 2.69 $ 2.93
========= ========= =========
</TABLE>
The Company has elected to account for its stock-based compensation plans under
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB Opinion No. 25). Accordingly, no compensation cost is recognized
in the accompanying financial statements for stock-based employee awards.
Entities electing to remain with the accounting in APB Opinion No. 25 must make
pro forma disclosures of net income and earnings per share, as if the fair value
based method of accounting defined in Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (SFAS No. 123) had
been applied. The Company has computed, for pro forma disclosure purposes, the
value of all options granted during 1996 and 1997, using the Black-Scholes
option pricing model with the following weighted average assumptions:
Year Ended
December 31,
--------------------
1996 1997
------ ------
Risk free interest rate 5.47% 6.16%
Expected dividend yield - -
Expected lives in years 5 5
Expected volatility 47.86% 62.47%
F-14
<PAGE>
If the Company had accounted for its stock-based compensation plan using a fair
value based method of accounting, the Company's net loss and earnings per share
would have been reported as follows:
Year Ended
December 31,
---------------------
1996 1997
---------- ---------
(in thousands, except
per share amounts)
Net loss:
Pro forma $(4,607) $(150)
Earnings per share:
Pro forma - Basic $ (1.06) $(.03)
Pro forma - Diluted (1.06) (.03)
(7) MAJOR CUSTOMERS:
The Company's sales efforts have been concentrated on major supply houses as
well as a dealer network. During 1995, 1996, and 1997, sales to the Company's
largest customer accounted for 45%, 44%, and 40% of total revenues,
respectively.
Accounts receivable from this supply house comprise 44% and 36% of total
accounts receivable at December 31, 1996 and 1997, respectively. Generally, the
Company does not require collateral from its customers. The Company believes its
credit evaluation procedures substantially reduce its credit risk.
(8) INCOME TAXES:
The Company files a consolidated federal income tax return. The income tax
provision is comprised of the following:
1995 1996 1997
---------- ---------- ----------
Current $ 531,488 $ 311,490 $ 202,753
Deferred (113,889) 15,201 (60,740)
---------- ---------- ----------
$ 417,599 $ 326,691 $ 142,013
========== ========== ==========
F-15
<PAGE>
The Company provides for deferred income taxes resulting from temporary
differences between amounts reported for financial accounting and income tax
purposes. The components of the net deferred income tax asset at December 31,
1996 and 1997, were as follows:
1996 1997
--------- ---------
Deferred tax assets:
Inventory and receivable reserves $ 180,139 $ 238,902
UNICAP adjustment 120,096 109,629
Other accruals 344,791 463,722
--------- ---------
645,026 812,253
--------- ---------
Deferred tax liabilities:
Depreciation differences (38,901) (179,433)
Amortization differences (86,882) (53,027)
--------- ---------
(125,783) (232,460)
--------- ---------
Net long-term deferred tax asset $ 519,243 $ 579,793
========= =========
The net long-term deferred tax asset is included in other long-term assets in
the accompanying consolidated balance sheet.
Reconciliation of the federal income tax rate to the Company's effective income
tax rate is as follows:
1995 1996 1997
---- ---- ----
Federal statutory tax rate 34.0% 34.0% 34.0%
State taxes, net 4.7 4.6 4.6
Non-deductible expenses and
other permanent differences 9.0 (46.6) (7.0)
---- ---- ----
47.7% (8.0)% 31.6%
==== ==== ====
The Company's effective income tax rate for 1995 and 1996 was impacted by the
acquisition of Enhanced and the subsequent asset impairment and restructuring
charges recognized in 1996, as the goodwill generated by the acquisition is
non-deductible. The Company's effective income tax rate for 1997 was impacted by
the filing of a research and development tax credit for current and prior years
which will generate a refund in 1998.
(9) RELATED PARTIES TRANSACTIONS:
LG Electronics Inc. (LGE), the Company's principal supplier, owns approximately
19.0% of the Company's outstanding Common Stock at December 31, 1997. During
1995, 1996, and 1997, the Company purchased approximately $17.4 million, $17.9
million, and $18.8 million of key telephone systems and commercial grade
telephones from LGE.
F-16
<PAGE>
(10) SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest and income taxes for the years ended December 31, 1995,
1996, and 1997, is as follows:
1995 1996 1997
----------- --------- ---------
Interest paid $ 1,130,000 $ 840,000 $ 663,000
Income taxes paid $ 435,000 $ 22,000 $ 630,000
The following information relates to business combinations made by the Company.
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Fair value of assets acquired $ 5,690,000 $ -- $ --
Value of stock issued (2,000,000) -- --
Cash paid, net of cash acquired (2,351,524) -- --
----------- ----------- -----------
Liabilities assumed or incurred $ 1,338,476 $ -- $ --
=========== =========== ===========
</TABLE>
During the years ended December 31, 1996 and 1997, the Company acquired
approximately $575,000 and $303,000 of property and equipment using capital
leases.
F-17
EXHIBIT 10.9
VODAVI TECHNOLOGY, INC.
SECOND AMENDED AND RESTATED 1994 STOCK OPTION PLAN
(As amended through October 20, 1997)
ARTICLE I
General
1.1 Purpose of Plan; Term
(a) Adoption. On December 29, 1994, the Board of Directors
(the "Board") of Vodavi Technology, Inc., a Delaware corporation (the
"Company"), adopted a stock option plan to be known as the Vodavi Technology,
Inc. Stock Option Plan (the "Original Plan"). The Original Plan was subsequently
approved the stockholders of the Company on July 12, 1995. On February 26, 1996,
the Board adopted an amended and restated 1994 Stock Option Plan (the "First
Revised Plan") whereby the Automatic Grant Program was added, additional shares
of Stock were authorized to be issued, and certain other technical changes were
made. The stockholders of the company approved the First Revised Plan on May 24,
1996. On October 20, 1997, the Board adopted a newly amended and restated 1994
Stock Option Plan (the "Second Revised Plan") whereby certain technical changes
were made. The Second Revised Plan does not require approval by the stockholders
of the Company and shall be effective as of the date of its adoption by the
Board. The Second Revised Plan shall be known as the Vodavi Technology, Inc.
Second Amended and Restated 1994 Stock Option Plan (the "Plan"). When
applicable, the term "Plan" shall include the Original Plan and/or the First
Revised Plan.
(b) Defined Terms. All initially capitalized terms used hereby
shall have the meaning set forth in Article V hereto.
(c) General Purpose. The Plan shall be divided into two
programs: the Discretionary Grant Program and the Automatic Grant Program.
(i) Discretionary Grant Program. The purpose of the
Discretionary Grant Program is to further the interests of the Company and its
stockholders by encouraging key persons associated with the Company (or Parent
or Subsidiary Corporations) to acquire shares of the Company's Stock, thereby
acquiring a proprietary interest in its business and an increased personal
interest in its continued success and progress. Such purpose shall be
accomplished by providing for the discretionary granting of options to acquire
the Company's Stock ("Discretionary Options"), the direct granting of the
Company's Stock ("Stock Awards"), the granting of stock appreciation rights
("SARs"), or the granting of other cash awards ("Cash Awards") (Stock Awards,
SARs and Cash Awards shall be collectively referred to herein as "Discretionary
Awards").
(ii) Automatic Grant Program. The purpose of the
Automatic Grant Program is to promote the interests of the Company by providing
non-employee members of the Board the opportunity to acquire a proprietary
interest, or otherwise increase their proprietary interest, in the Company and
to thereby have an increased personal interest in its continued success and
progress. Such purpose shall be accomplished by providing for the automatic
grant of options to acquire the Company's Stock ("Automatic Options").
(d) Character of Options. Discretionary Options granted under
this Plan to employees of the Company (or Parent or Subsidiary Corporations)
that are intended to qualify as
<PAGE>
"incentive stock options" as defined in Code section 422 ("Incentive Stock
Options") will be specified in the applicable stock option agreement. All other
Options granted under this Plan will be nonqualified options.
(e) Rule 16b-3 Plan. With respect to persons subject to the
reporting requirements of the Securities Exchange Act of 1934 (the "1934 Act"),
the Plan is intended to comply with all applicable conditions of Rule 16b-3 (and
all subsequent revisions thereof) promulgated under the 1934 Act. In such
instance, to the extent any provision of the Plan or action by a Plan
Administrator fails to so comply, it shall be deemed null and void, to the
extent permitted by law and deemed advisable by such Plan Administrator. In
addition, the Board may amend the Plan from time to time as it deems necessary
in order to meet the requirements of any amendments to Rule 16b-3 without the
consent of the shareholders of the Company.
(f) Duration of Plan. The term of the Plan is 10 years
commencing on the date of adoption of the Original Plan by the Board as
specified in Section 1.1(a) hereof. No Option or Award shall be granted under
the Plan unless granted within 10 years of the adoption of the Original Plan by
the Board, but Options or Awards outstanding on that date shall not be
terminated or otherwise affected by virtue of the Plan's expiration.
1.2 Stock and Maximum Number of Shares Subject to Plan.
(a) Description of Stock and Maximum Shares Allocated. The
shares of stock sub- ject to the provisions of the Plan and issuable upon the
grant of Stock Awards or upon the exercise of SARs or Options granted under the
Plan are shares of the Company's common stock, $.001 par value per share (the
"Stock"), which may be either unissued or treasury shares. The Company may not
issue more than 850,000 shares of Stock pursuant to the Plan, unless the Plan is
amended as provided in Section 1.3 or the maximum number of shares subject to
the Plan is adjusted as provided in Section 4.1.
(b) Calculation of Available Shares. The number of shares of
Stock available under the Plan shall be reduced: (i) by any shares of Stock
issued (including any shares of Stock withheld for tax withholding requirements)
upon exercise of an Option and (ii) by any shares of Stock issued (including any
shares of Stock withheld for tax withholding requirements) upon the grant of a
Stock Award or the exercise of an SAR.
(c) Restoration of Unpurchased Shares. If an Option or SAR
expires or terminates for any reason prior to its exercise in full and before
the term of the Plan expires, the shares of Stock subject to, but not issued
under, such Option or SAR shall, without further action or by or on behalf of
the Company, again be available under the Plan.
1.3 Approval; Amendments.
(a) Approval by Stockholders. The First Revised Plan was
approved by the stockholders of the Company on May 24, 1996. The date on which
such stockholder approval was obtained shall be referred to herein as the
"Effective Date."
(b) Commencement of Programs. The Discretionary Grant Program
became effective on December 29, 1994. The Automatic Grant Program became
effective on the Effective Date.
<PAGE>
(c) Amendments to Plan. The Board may, without action on the
part of the Company's stockholders, make such amendments to, changes in and
additions to the Plan as it may, from time to time, deem necessary or
appropriate and in the best interests of the Company; provided, the Board may
not, without the consent of the applicable Optionholder, take any action which
disqualifies any Discretionary Option previously granted under the Plan for
treatment as an Incentive Stock Option or which adversely affects or impairs the
rights of the Optionholder of any Discretionary Option outstanding under the
Plan, and further provided that, except as provided in Article IV hereof, the
Board may not, without the approval of the Company's stockholders, (i) increase
the aggregate number of shares of Stock subject to the Plan, (ii) reduce the
exercise price at which Discretionary Options may be granted or the exercise
price at which any outstanding Discretionary Option may be exercised, (iii)
extend the term of the Plan, (iv) change the class of persons eligible to
receive Discretionary Options or Discretionary Awards under the Plan, or (v)
materially increase the benefits accruing to participants under the Plan.
Notwithstanding the foregoing, Discretionary Options or Discretionary Awards may
be granted under this Plan to purchase shares of Stock in excess of the number
of shares then available for issuance under the Plan if (A) an amendment to
increase the maximum number of shares issuable under the Plan is adopted by the
Board prior to the initial grant of any such Option or Award and within one year
thereafter such amendment is approved by the Company's stockholders and (B) each
such Discretionary Option or Discretionary Award granted does not become
exercisable or vested, in whole or in part, at any time prior to the obtaining
of such stockholder approval.
ARTICLE II
Discretionary Grant Program
2.1 Participants; Administration.
(a) Eligibility and Participation. Discretionary Options and
Discretionary Awards may be granted only to persons ("Eligible Persons") who at
the time of grant are (i) key personnel (including officers and directors) of
the Company or Parent or Subsidiary Corporations, or (ii) consultants or
independent contractors who provide valuable services to the Company or Parent
or Subsidiary Corporations; provided that (1) if a Senior Committee exists, the
members of that Senior Committee shall be ineligible, during their tenure on the
Senior Committee, to be granted Discretionary Options or Discretionary Awards
under the Plan or to be granted or awarded equity securities of the Company
pursuant to any other plan of the Company or its affiliates except pursuant to
the Automatic Grant Program or as otherwise allowed under the 1934 Act, and (2)
Incentive Stock Options may only be granted to key personnel of the Company (and
its Parent or Subsidiary Corporation) who are also employees of the Company (or
its Parent or Subsidiary Corporation), and (3) the maximum number of shares of
Stock with respect to which Options or Awards may be granted to any employee
during the term of the Plan shall not exceed 50 percent of the shares of Stock
covered by the Plan. A Plan Administrator shall have full authority to determine
which Eligible Persons in its administered group are to receive Discretionary
Option grants under the Plan, the number of shares to be covered by each such
grant, whether or not the granted Discretionary Option is to be an Incentive
Stock Option, the time or times at which each such Discretionary Option is to
become exercisable, and the maximum term for which the Discretionary Option is
to be outstanding. A Plan Administrator shall also have full authority to
determine which Eligible Persons in such group are to receive Discretionary
Awards under the Discretionary Grant Program and the conditions relating to such
Discretionary Award.
(b) General Administration. The Eligible Persons under the
Discretionary Grant Program shall be divided into two groups and there shall be
a separate administrator for each group. One
3
<PAGE>
group will be comprised of Eligible Persons that are Affiliates. For purposes of
this Plan, the term "Affiliates" shall mean all "officers" (as that term is
defined in Rule 16a-1(f) promulgated under the 1934 Act) and directors of the
Company and all persons who own ten percent or more of the Company's issued and
outstanding equity securities. Initially, the power to administer the
Discretionary Grant Program with respect to Eligible Persons that are Affiliates
shall be vested with the Board. At any time, however, the Board may vest the
power to administer the Discretionary Grant Program with respect to Persons that
are Affiliates exclusively with a committee (the "Senior Committee") comprised
of two or more Non- Employee Directors who are appointed by the Board. The
Senior Committee, in its sole discretion, may require approval of the Board for
specific grants of Discretionary Options or Awards under the Discretionary Grant
Program. The administration of all Eligible Persons that are not Affiliates
("Non- Affiliates") shall be vested exclusively with the Board. The Board,
however, may at any time appoint a committee (the "Employee Committee") of two
or more persons who are members of the Board and delegate to such Employee
Committee the power to administer the Discretionary Grant Program with respect
to the Non-Affiliates. In addition, the Board may establish an additional
committee or committees of persons who are members of the Board and delegate to
such other committee or committees the power to administer all or a portion of
the Discretionary Grant program with respect to all or a portion of the Eligible
Persons. Members of the Senior Committee, Employee Committee or any other
committee allowed hereunder shall serve for such period of time as the Board may
determine and shall be subject to removal by the Board at any time. The Board
may at any time terminate all or a portion of the functions of the Senior
Committee, the Employee Committee, or any other committee allowed hereunder and
reassume all or a portion of powers and authority previously delegated to such
committee. The Board in its discretion may also require the members of the
Senior Committee, the Employee Committee or any other committee allowed
hereunder to be "outside directors" as that term is defined in any applicable
regulations promulgated under Code section 162(m).
(c) Plan Administrators. The Board, the Employee Committee,
Senior Committee, and/or any other committee allowed hereunder, whichever is
applicable, shall be each referred to herein as a "Plan Administrator." Each
Plan Administrator shall have the authority and discretion, with respect to its
administered group, to select which Eligible Persons shall participate in the
Discretionary Grant Program, to grant Discretionary Options or Discretionary
Awards under the Discretionary Grant Program, to establish such rules and
regulations as they may deem appropriate with respect to the proper
administration of the Discretionary Grant Program and to make such
determinations under, and issue such interpretations of, the Discretionary Grant
Program and any outstanding Discretionary Option or Discretionary Award as they
may deem necessary or advisable. Unless otherwise required by law or specified
by the Board with respect to any committee, decisions among the members of a
Plan Administrator shall be by majority vote. Decisions of a Plan Administrator
shall be final and binding on all parties who have an interest in the
Discretionary Grant Program or any outstanding Discretionary Option or
Discretionary Award.
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(d) Guidelines for Participation. In designating and selecting
Eligible Persons for participation in the Discretionary Grant Program, a Plan
Administrator shall consult with and give consideration to the recommendations
and criticisms submitted by appropriate managerial and executive officers of the
Company. A Plan Administrator also shall take into account the duties and
responsibilities of the Eligible Persons, their past, present and potential
contributions to the success of the Company and such other factors as a Plan
Administrator shall deem relevant in connection with accomplishing the purpose
of the Plan.
2.2 Terms and Conditions of Discretionary Options
(a) Allotment of Shares. A Plan Administrator shall determine
the number of shares of Stock to be optioned from time to time and the number of
shares to be optioned to any Eligible Person (the "Optioned Shares"). The grant
of a Discretionary Option to a person shall neither entitle such person to, nor
disqualify such person from, participation in any other grant of Options or
Stock Awards under this Plan or any other stock option plan of the Company.
(b) Exercise Price. Upon the grant of any Discretionary
Option, a Plan Administrator shall specify the option price per share. If the
Discretionary Option is intended to qualify as an Incentive Stock Option under
the Code, the option price per share may not be less than 100 percent of the
fair market value per share of the stock on the date the Discretionary Option is
granted (110 percent if the Discretionary Option is granted to a stockholder who
at the time the Discretionary Option is granted owns or is deemed to own stock
possessing more than 10 percent of the total combined voting power of all
classes of stock of the Company or of any Parent or Subsidiary Corporation). The
determination of the fair market value of the Stock shall be made in accordance
with the valuation provisions of Section 4.5 hereof.
(c) Individual Stock Option Agreements. Discretionary Options
granted under the Plan shall be evidenced by option agreements in such form and
content as a Plan Administrator from time to time approves, which agreements
shall substantially comply with and be subject to the terms of the Plan,
including the terms and conditions of this Section 2.2. As determined by a Plan
Administrator, each option agreement shall state (i) the total number of shares
to which it pertains, (ii) the exercise price for the shares covered by the
Option, (iii) the time at which the Options vest and become exercisable and (iv)
the Option's scheduled expiration date. The option agreements may contain such
other provisions or conditions as a Plan Administrator deems necessary or
appropriate to effectuate the sense and purpose of the Plan, including covenants
by the Optionholder not to compete and remedies for the Company in the event of
the breach of any such covenant.
(d) Option Period. No Discretionary Option granted under the
Plan that is intended to be an Incentive Stock Option shall be exercisable for a
period in excess of 10 years from the date of its grant (five years if the
Discretionary Option is granted to a shareholder who at the time the
Discretionary Option is granted owns or is deemed to own stock possessing more
than 10 percent of the total combined voting power of all classes of stock of
the Company or of any Parent or any Subsidiary Corporation), subject to earlier
termination in the event of termination of employment, retirement or death of
the Optionholder. A Discretionary Option may be exercised in full or in part at
any time or from time to time during the term of the Discretionary Option or
provide for its exercise in stated installments at stated times during the
Option's term.
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(e) Vesting; Limitations. The time at which Options may be
exercised with respect to an Optionholder shall be in the discretion of that
Optionholder's Plan Administrator. Notwithstanding the foregoing, to the extent
a Discretionary Option is intended to qualify as an Incentive Stock Option, the
aggregate fair market value (determined as of the respective date or dates of
grant) of the Stock for which one or more Options granted to any person under
this Plan (or any other option plan of the Company or its Parent or Subsidiary
Corporations) may for the first time become exercisable as Incentive Stock
Options during any one calendar year shall not exceed the sum of $100,000
(referred to herein as the "$100,000 Limitation"). To the extent that any person
holds two or more Options which become exercisable for the first time in the
same calendar year, the foregoing limitation on the exercisability as an
Incentive Stock Option shall be applied on the basis of the order in which such
Options are granted.
(f) No Fractional Shares. Options shall be exercisable only
for whole shares; no fractional shares will be issuable upon exercise of any
Discretionary Option granted under the Plan.
(g) Method of Exercise. To exercise a Discretionary Option, an
Optionholder (or in the case of an exercise after an Optionholder's death, such
Optionholder's executor, administrator, heir or legatee, as the case may be)
must take the following action:
(i) execute and deliver to the Company a written
notice of exercise signed in writing by the person exercising the Discretionary
Option specifying the number of shares of Stock with respect to which the
Discretionary Option is being exercised;
(ii) pay the aggregate Option Price in one of the
alternate forms as set forth in Section 2.2(h) below; and
(iii) furnish appropriate documentation that the
person or persons exercising the Discretionary Option (if other than the
Optionholder) has the right to exercise such Option.
As soon as practicable after the Exercise Date, the Company will mail or deliver
to or on behalf of the Optionholder (or any other person or persons exercising a
Discretionary Option under the Plan) a certificate or certificates representing
the Stock acquired upon exercise of the Discretionary Option.
(h) Payment of Option Price. The aggregate Option Price shall
be payable in one of the alternative forms specified below:
(i) Full payment in cash or check made payable to the
Company's order; or
(ii) Full payment in shares of Stock held for the
requisite period necessary to avoid a charge to the Company's reported earnings
and valued at fair market value on the Exercise Date (as determined in
accordance with Section 4.5 hereof); or
(iii) If a cashless exercise program has been
implemented by the Board, full payment through a sale and remittance procedure
pursuant to which the Optionholder (A) shall provide irrevocable written
instructions to a designated brokerage firm to effect the immediate sale of the
Optioned Shares to be purchased and remit to the Company, out of the sale
proceeds available on the settlement date, sufficient funds to cover the
aggregate exercise price payable for the Optioned Shares to be purchased and (B)
shall concurrently provide written directives to the Company to deliver the
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certificates for the Optioned Shares to be purchased directly to such brokerage
firm in order to complete the sale transaction.
(i) Repurchase Right. The Plan Administrator may, in its sole
discretion, set forth other terms and conditions upon which the Company (or its
assigns) shall have the right to repurchase shares of Stock acquired by an
Optionholder pursuant to a Discretionary Option. Any repurchase right of the
Company shall be exercisable by the Company (or its assignees) upon such terms
and conditions as the Plan Administrator may specify in the Stock Repurchase
Agreement evidencing such right. The Plan Administrator may also in its
discretion establish as a term and condition of one or more Discretionary
Options granted under the Plan that the Company shall have a right of first
refusal with respect to any proposed sale or other disposition by the
Optionholder of any shares of Stock issued upon the exercise of such
Discretionary Options. Any such right of first refusal shall be exercisable by
the Company (or its assigns) in accordance with the terms and conditions set
forth in the Stock Repurchase Agreement.
(j) Termination of Incentive Stock Options.
(i) Termination of Service. If any Optionholder
ceases to be in Service to the Company for a reason other than permanent
disability or death, such Optionholder may, within 90 days after the date of
termination of such Service, but in no event after the Option's stated
expiration date, exercise some or all of the Incentive Stock Options that the
Optionholder was entitled to exercise on the date the Optionholder's Service
terminated; provided, that if the Optionholder is discharged for Cause or
commits acts detrimental to the Company's interests after the Service of the
Optionholder has been terminated, then the Incentive Stock Options will
thereafter be void for all purposes. "Cause" shall mean a termination of Service
based upon a finding by the applicable Plan Administrator that the Optionholder:
(i) has committed a felony involving dishonesty, fraud, theft or embezzlement;
(ii) after written notice from the Company has repeatedly failed or refused, in
a material respect, to follow reasonable policies or directives established by
the Company; (iii) after written notice from the Company, has willfully and
persistently failed to attend to material duties or obligations; (iv) has
performed an act or failed to act, which, if he were prosecuted and convicted,
would constitute a theft of money or property of the Company; or (v) has
misrepresented or concealed a material fact for purposes of securing employment
with the Company. If any Optionholder ceases to be in Service to the Company by
reason of permanent disability within the meaning of section 22(e)(3) of the
Code (as determined by the applicable Plan Administrator), the Optionholder will
have 12 months after the date of termination of Service, but in no event after
the stated expiration date of the Optionholder's Incentive Stock Options, to
exercise Incentive Stock Options that the Optionholder was entitled to exercise
on the date the Optionholder's Service terminated as a result of the disability.
(ii) Death of Optionholder. If an Optionholder dies
while in the Company's Service, any Incentive Stock Options that the
Optionholder was entitled to exercise on the date of death will be exercisable
within six months after such date or until the stated expiration date of the
Optionholder's Incentive Stock Options, whichever occurs first, by the person or
persons ("successors") to whom the Optionholder's rights pass under a will or by
the laws of descent and distribution. As soon as practicable after receipt by
the Company of the notice of exercise and of payment in full of the Option Price
as specified in Sections 2.2(g) and (h) hereof, a certificate or certificates
representing the Optioned Shares shall be registered in the name or names
specified by the successors in the written notice of exercise and shall be
delivered to the successors.
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(k) Termination of Nonqualified Options. Any Options which are
not Incentive Stock Options and which are exercisable at the time an
Optionholder ceases to be in Service to the Company shall remain exercisable for
such period of time thereafter as determined by the Plan Administrator at the
time of grant and set forth in the documents evidencing such Options. In the
absence of any provision in the documents evidencing such Option, the Option
shall remain exercisable (i) for a period of six months after termination as a
result of the Optionholder's death; (ii) for a period of 12 months if the
Optionholder ceases to be in service to the Company by reason of permanent
disability within the meaning of section 22(e)(3) of the Code); and (iii) for a
period of 90 days after termination for any other reason; provided, that no
Option shall be exercisable after the Option's stated expiration date, and
provided further, that if the Optionholder is discharged for Cause (as defined
in Section 2.2(j)(i)) or commits acts detrimental to the Company's interests
after the Service of the Optionholder has been terminated, then the Option will
thereafter be void for all purposes.
(l) Other Plan Provisions Still Applicable. If a Discretionary
Option is exercised upon the termination of Service or death of an Optionholder
under this Section 2.2, the other provisions of the Plan will continue to apply
to such exercise, including the requirement that the Optionholder or its
successor may be required to enter into a Stock Repurchase Agreement.
(m) Definition of "Service". For purposes of this Plan, unless
it is evidenced otherwise in the option agreement with the Optionholder, the
Optionholder is deemed to be in "Service" to the Company so long as such
individual renders continuous services on a periodic basis to the Company (or to
any Parent or Subsidiary Corporation) in the capacity of an employee, director,
or an independent consultant or advisor. In the discretion of the applicable
Plan Administrator, an Optionholder will be considered to be rendering
continuous services to the Company even if the type of services change, e.g.,
from employee to independent consultant. The Optionholder will be considered to
be an employee for so long as such individual remains in the employ of the
Company or one or more of its Parent or Subsidiary Corporations.
2.3 Terms and Conditions of Stock Awards
(a) Eligibility. All Eligible Persons shall be eligible to
receive Stock Awards. The Plan Administrator of each administered group shall
determine the number of shares of Stock to be awarded from time to time to any
Eligible Person in such group. Except as provided otherwise in this Plan, the
grant of a Stock Award to a person (a "Grantee") shall neither entitle such
person to, nor disqualify such person from participation in, any other grant of
options or awards by the Company, whether under this Plan or under any other
stock option or award plan of the Company.
(b) Award for Services Rendered. Stock Awards shall be granted
in recognition of an Eligible Person's services to the Company. The grantee of
any such Stock Award shall not be required to pay any consideration to the
Company upon receipt of such Stock Award, except as may be required to satisfy
any applicable corporate law, employment tax and/or income tax withholding
requirements.
(c) Conditions to Award. All Stock Awards shall be subject to
such terms, conditions, restrictions, or limitations as the applicable Plan
Administrator deems appropriate, including, by way of illustration but not by
way of limitation, restrictions on transferability, requirements of continued
employment, individual performance or the financial performance of the Company,
or payment by the recipient of any applicable employment or withholding taxes.
Such Plan Administrator may
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modify or accelerate the termination of the restrictions applicable to any Stock
Award under the circumstances as it deems appropriate.
(d) Award Agreements. A Plan Administrator may require as a
condition to a Stock Award that the recipient of such Stock Award enter into an
award agreement in such form and content as that Plan Administrator from time to
time approves.
2.4 Terms and Conditions of SARs
(a) Eligibility. All Eligible Persons shall be eligible to
receive SARs. The Plan Administrator of each administered group shall determine
the SARs to be awarded from time to time to any Eligible Person in such group.
The grant of a SAR to a person shall neither entitle such person to, nor
disqualify such person from participation in, any other grant of options or
awards by the Company, whether under this Plan or under any other stock option
or award plan of the Company.
(b) Award of SARs. Concurrently with or subsequent to the
grant of any Discretionary Option to purchase one or more shares of Stock, the
Plan Administrator may award to the Optionholder with respect to each share of
Stock underlying the Discretionary Option, a related SAR permitting the
Optionholder to be paid any appreciation on that Stock in lieu of exercising the
Option. In addition, a Plan Administrator may award to any Eligible Person a SAR
permitting the Eligible Person to be paid the appreciation on a designated
number of shares of the Stock, whether or not such Shares are actually issued.
(c) Conditions to SAR. All SARs shall be subject to such
terms, conditions, restrictions or limitations as the applicable Plan
Administrator deems appropriate, including, by way of illustration but not by
way of limitation, restrictions on transferability, requirements of continued
employment, individual performance, financial performance of the Company, or
payment by the recipient of any applicable employment or withholding taxes. Such
Plan Administrator may modify or accelerate the termination of the restrictions
applicable to any SAR under the circumstances as it deems appropriate.
(d) SAR Agreements. A Plan Administrator may require as a
condition to the grant of a SAR that the recipient of such SAR enter into a SAR
agreement in such form and content as that Plan Administrator from time to time
approves.
(e) Exercise. An Eligible Person who has been granted a SAR
may exercise such SAR subject to the conditions specified by the Plan
Administrator in the SAR agreement.
(f) Amount of Payment. The amount of payment to which the
grantee of a SAR shall be entitled upon the exercise of each SAR shall be equal
to the amount, if any, by which the fair market value of the specified shares of
Stock on the exercise date exceeds the fair market value of the specified shares
of Stock on the date the Discretionary Option related to the SAR was granted or
became effective, or, if the SAR is not related to any Option, on the date the
SAR was granted or became effective.
(g) Form of Payment. The SAR may be paid in either cash or
Stock, as determined in the discretion of the applicable Plan Administrator and
set forth in the SAR agreement. If the payment is in Stock, the number of shares
to be paid to the participant shall be determined by dividing the amount of the
payment determined pursuant to Section 2.4(f) by the fair market value of a
share of Stock on the
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exercise date of such SAR. As soon as practical after exercise, the Company
shall deliver to the SAR grantee a certificate or certificates for such shares
of Stock.
(h) Termination of Employment; Death. Section 2.2(j),
applicable to Incentive Stock Options, and Section 2.2(k), applicable to
nonqualified Options, shall apply equally to SARs issued in tandem with such
Options. Section 2.2(k) shall apply to SARs that are not issued in tandem with
any Options.
2.5 Other Cash Awards
(a) In General. The Plan Administrator of each administered
group shall have the discretion to make other awards of cash to Eligible Persons
in such group ("Cash Awards"). Such Cash Awards may relate to existing Options
or to the appreciation in the value of the Stock or other Company securities.
(b) Conditions to Award. All Cash Awards shall be subject to
such terms, conditions, restrictions or limitations as the applicable Plan
Administrator deems appropriate, and such Plan Administrator may require as a
condition to such Cash Award that the recipient of such Cash Award enter into an
award agreement in such form and content as the Plan Administrator from time to
time approves.
ARTICLE III
Automatic Grant Program
3.1 Eligible Directors under the Automatic Grant Program. The persons
eligible to participate in the Automatic Grant Program shall be limited to Board
members who are not employed by the Company, whether or not such persons are
Non-Employee Directors as defined herein ("Eligible Directors"). Persons who are
eligible under the Automatic Grant Program may also be eligible to receive
Discretionary Options or Discretionary Awards under the Discretionary Grant
Program or option grants or direct stock issuances under other plans of the
Company.
3.2 Terms and Conditions of Automatic Option Grants.
(a) Amount and Date of Grant. During the term of this Plan,
grants of Automatic Options shall be made to each Eligible Director
("Optionholder") as follows:
(i) Annual Grants. Each year on the Annual Grant Date
an Automatic Option to acquire 5,000 shares of Stock shall be granted to each
Eligible Director for so long as there are shares of Stock available under
Section 1.2 hereof. The "Annual Grant Date" shall be the date of the Company's
annual stockholders meeting commencing as of the first annual meeting occurring
after the Effective Date. Any Eligible Director that was granted an Automatic
Option under Section 3.2(a)(ii) hereof within 90 days of an Annual Grant Date
shall be ineligible to receive an Automatic Option Grant pursuant to this
Section 3.2(a)(i) on such Annual Grant Date.
(ii) Initial New Director Grants. On the Initial
Grant Date, every new member of the Board who is an Eligible Director and has
not previously received an Automatic Option grant under this Section 3.2(a)(ii)
shall be granted an Automatic Option to acquire 5,000 shares of Stock for so
long as there are shares of Stock available under Section 1.2 hereof. The
"Initial Grant Date" shall
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be the date that an Eligible Director is first appointed or elected to the
Board. Any Eligible Director that was previously granted an Automatic Option on
the Effective Date pursuant to Section 3.2(a)(iii) hereof shall be ineligible to
receive an Automatic Option grant pursuant to this Section 3.2(a)(ii).
(iii) Initial Existing Director Grants. On the
commencement date of the Automatic Grant Program, each Eligible Director was
granted an Automatic Option to acquire 5,000 shares of Stock.
(b) Exercise Price. The exercise price per share of Stock (the
"Optioned Shares") subject to each Automatic Option grant shall be equal to 100
percent of the fair market value per share of the Stock on the date the
Automatic Option was granted as determined in accordance with the valuation
provisions of Section 4.5 hereof (the "Option Price").
(c) Vesting. Each Automatic Option grant shall vest and become
exercisable on the earlier of (i) the first anniversary of the date of such
grant or (ii) the day prior to the next regularly held annual meeting of the
Company's stockholders. Each Automatic Option shall only vest and become
exercisable if the Optionholder has not ceased serving as a Board member as of
such vesting date.
(d) Method of Exercise. In order to exercise an Automatic
Option with respect to any vested Optioned Shares, an Optionholder (or in the
case of an exercise after an Optionholder's death, such Optionholder's executor,
administrator, heir or legatee, as the case may be) must take the following
action:
(i) execute and deliver to the Company a written
notice of exercise signed in writing by the person exercising the Automatic
Option specifying the number of shares of Stock with respect to which the
Automatic Option is being exercised;
(ii) pay the aggregate Option Price in one of the
alternate forms as set forth in Section 3.2(e) below; and
(iii) furnish appropriate documentation that the
person or persons exercising the Automatic Option (if other than the
Optionholder) has the right to exercise such Option.
As soon as practicable after the Exercise Date, the Company shall mail or
deliver to or on behalf of the Optionholder (or any other person or persons
exercising the Automatic Option in accordance herewith) a certificate or
certificates representing the Stock for which the Automatic Option has been
exercised in accordance with the provisions of this Plan. In no event may any
Automatic Option be exercised for any fractional shares.
(e) Payment of Option Price. The aggregate Option Price shall
be payable in one of the alternative forms specified below:
(i) full payment in cash or check made payable to the
Company's order; or
(ii) full payment in shares of Stock held for the
requisite period necessary to avoid a charge to the Company's reported earnings
and valued at fair market value on the Exercise Date (as determined in
accordance with Section 4.5 hereof); or
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(iii) if a cashless exercise program has been
implemented by the Board, full payment through a sale and remittance procedure
pursuant to which the Optionholder (A) shall provide irrevocable written
instructions to a designated brokerage firm to effect the immediate sale of the
Optioned Shares to be purchased and remit to the Company, out of the sale
proceeds available on the settlement date, sufficient funds to cover the
aggregate exercise price payable for the Optioned Shares to be purchased and (B)
shall concurrently provide written directives to the Company to deliver the
certificates for the Optioned Shares to be purchased directly to such brokerage
firm in order to complete the sale transaction.
(f) Term of Option. Each Automatic Option shall expire on the
tenth anniversary of the date on which an Automatic Option grant was made
("Expiration Date"). Except as provided in Article IV hereof, should an
Optionholder's service as a Board member cease prior to the Expiration Date for
any reason while an Automatic Option remains outstanding and unexercised, then
the Automatic Option term shall immediately be modified and the Automatic Option
shall terminate and cease to be outstanding in accordance with the following
provisions:
(i) The Automatic Option shall immediately terminate
and cease to be outstanding for any Optioned Shares which were not vested at the
time of the Optionholder's cessation of Board service.
(ii) Should an Optionholder cease, for any reason
other than death, to serve as a member of the Board, then the Optionholder shall
have 90 days measured from the date of such cessation of Board service in which
to exercise the Automatic Options which vested prior to the time of such
cessation of Board service. In no event, however, may any Automatic Option be
exercised after the Expiration Date of such Automatic Option.
(iii) Should an Optionholder die while serving as a
Board member or within 90 days after cessation of Board service, then the
personal representative of the Optionholder's estate (or the person or persons
to whom the Automatic Option is transferred pursuant to the Optionholder's will
or in accordance with the laws of descent and distribution) shall have a 90 day
period measured from the date of the Optionholder's cessation of Board service
in which to exercise the Automatic Options which vested prior to the time of
such cessation of Board service. In no event, however, may any Automatic Option
be exercised after the Expiration Date of such Automatic Option.
ARTICLE IV
Miscellaneous
4.1 Capital Adjustments. The aggregate number of shares of Stock
subject to the Plan, the number of shares of Stock covered by outstanding
Options and Awards and the price per share stated in all outstanding Options and
Awards, and the number of shares of Stock covered by unissued Automatic Options
shall be proportionately adjusted for any increase or decrease in the number of
outstanding shares of Stock of the Company resulting from a subdivision or
consolidation of shares or any other capital adjustment or the payment of a
stock dividend or any other increase or decrease in the number of such shares
effected without the Company's receipt of consideration therefor in money,
services or property.
4.2 Mergers, Etc. If the Company is the surviving corporation in any
merger or consolidation (not including a Corporate Transaction), any Option or
Award granted under the Plan shall pertain to and apply to the securities to
which a holder of the number of shares of Stock subject to the
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Option or Award would have been entitled prior to the merger or consolidation.
Except as provided in Section 4.3 hereof, a dissolution or liquidation of the
Company shall cause every Option or Award outstanding hereunder to terminate.
4.3 Corporate Transaction. In the event of stockholder approval of a
Corporate Transaction, (a) all unvested Automatic Options shall automatically
accelerate and immediately vest so that each outstanding Automatic Option shall,
one week prior to the specified effective date for the Corporate Transaction,
become fully exercisable for all of the Optioned Shares and (b) the Plan
Administrator shall have the discretion and authority, exercisable at any time,
to provide for the automatic acceleration of one or more of the outstanding
Discretionary Options or Discretionary Awards granted by it under the Plan. Upon
the consummation of the Corporate Transaction, all Options shall, to the extent
not previously exercised, terminate and cease to be outstanding.
4.4 Change in Control.
(a) Automatic Grant Program. In the event of a Change in
Control, all unvested Automatic Options shall automatically accelerate and
immediately vest so that each outstanding Automatic Option shall, immediately
prior to the effective date of such Change in Control, become fully exercisable
for all of the Optioned Shares. Thereafter, each Automatic Option shall remain
exercisable until the Expiration Date of such Automatic Option.
(b) Discretionary Grant Program. In the event of a Change in
Control, a Plan Administrator shall have the discretion and authority,
exercisable at any time, whether before or after the Change in Control, to
provide for the automatic acceleration of one or more outstanding Discretionary
Options or Discretionary Awards granted by it under the Plan upon the occurrence
of such Change in Control. A Plan Administrator may also impose limitations upon
the automatic acceleration of such Options or Awards to the extent it deems
appropriate. Any Options or Awards accelerated upon a Change in Control will
remain fully exercisable until the expiration or sooner termination of the
Option term.
(c) Incentive Stock Option Limits. The exercisability of any
Discretionary Options which are intended to qualify as Incentive Stock Options
and which are accelerated by the Plan Administrator in connection with a pending
Corporation Transaction or Change in Control shall, except as otherwise provided
in the discretion of the Plan Administrator and the Optionholder, remain subject
to the $100,000 Limitation and vest as quickly as possible without violating the
$100,000 Limitation.
4.5 Calculation of Fair Market Value of Stock. The fair market value of
a share of Stock on any relevant date shall be determined in accordance with the
following provisions:
(a) If the Stock is not at the time listed or admitted to
trading on any stock exchange but is traded in the over-the-counter market, the
fair market value shall be the mean between the highest bid and lowest asked
prices (or, if such information is available, the closing selling price) per
share of Stock on the date in question in the over-the-counter market, as such
prices are reported by the National Association of Securities Dealers through
its Nasdaq system or any successor system. If there are no reported bid and
asked prices (or closing selling price) for the Stock on the date in question,
then the mean between the highest bid price and lowest asked price (or the
closing selling price) on the last preceding date for which such quotations
exist shall be determinative of fair market value.
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(b) If the Stock is at the time listed or admitted to trading
on any stock exchange, then the fair market value shall be the closing selling
price per share of Stock on the date in question on the stock exchange
determined by the Board to be the primary market for the Stock, as such price is
officially quoted in the composite tape of transactions on such exchange. If
there is no reported sale of Stock on such exchange on the date in question,
then the fair market value shall be the closing selling price on the exchange on
the last preceding date for which such quotation exists.
(c) If the Stock at the time is neither listed nor admitted to
trading on any stock exchange nor traded in the over-the-counter market, then
the fair market value shall be determined by the Board after taking into account
such factors as the Board shall deem appropriate, including one or more
independent professional appraisals.
4.6 Use of Proceeds. The proceeds received by the Company from the sale
of Stock pursuant to the exercise of Options or Awards hereunder, if any, shall
be used for general corporate purposes.
4.7 Cancellation of Options. Each Plan Administrator shall have the
authority to effect, at any time and from time to time, with the consent of the
affected Optionholders, the cancellation of any or all outstanding Discretionary
Options granted under the Plan by that Plan Administrator and to grant in
substitution therefore new Discretionary Options under the Plan covering the
same or different numbers of shares of Stock as long as such new Discretionary
Options have an exercise price per share of Stock no less than the minimum
exercise price as set forth in Section 2.2(b) hereof on the new grant date.
4.8 Regulatory Approvals. The implementation of the Plan, the granting
of any Option or Award hereunder, and the issuance of Stock upon the exercise of
any such Option or Award shall be subject to the procurement by the Company of
all approvals and permits required by regulatory authorities having jurisdiction
over the Plan, the Options or Awards granted under it and the Stock issued
pursuant to it.
4.9 Indemnification. In addition to such other rights of
indemnification as they may have, the members of a Plan Administrator shall be
indemnified and held harmless by the Company, to the extent permitted under
applicable law, for, from and against all costs and expenses reasonably incurred
by them in connection with any action, legal proceeding to which any member
thereof may be a party by reason of any action taken, failure to act under or in
connection with the Plan or any rights granted thereunder and against all
amounts paid by them in settlement thereof or paid by them in satisfaction of a
judgment of any such action, suit or proceeding, except a judgment based upon a
finding of bad faith.
4.10 Plan Not Exclusive. This Plan is not intended to be the exclusive
means by which the Company may issue options or warrants to acquire its Stock,
stock awards or any other type of award. To the extent permitted by applicable
law, any such other option, warrants or awards may be issued by the Company
other than pursuant to this Plan without shareholder approval.
4.11 Company Rights. The grants of Options shall in no way affect the
right of the Company to adjust, reclassify, reorganize or otherwise change its
capital or business structure or to merge, consolidate, dissolve, liquidate or
sell or transfer all or any part of its business or assets.
4.12 Rights of a Stockholder. An Optionholder shall not have any of the
rights of a stockholder with respect to Optioned Shares until such individual
shall have exercised the Option and paid
14
<PAGE>
the Option Price for the Optioned Shares. No adjustment will be made for
dividends or other rights for which the record date is prior to the date of such
exercise and full payment for the Optioned Shares.
4.13 Assignment. The right to acquire Stock or other assets under the
Plan may not be assigned, encumbered or otherwise transferred by any
Optionholder except as specifically provided herein. Except as specifically
allowed by the Plan Administrator at the time of grant and as set forth in the
documents evidencing a Discretionary Option or Award, no Option or Award granted
under the Plan or any of the rights and privileges conferred thereby shall be
assignable or transferable by an Optionholder or grantee other than by will or
the laws of descent and distribution, and such Option or Award shall be
exercisable during the Optionholder's or grantee's lifetime only by the
Optionholder or grantee. The provisions of the Plan shall inure to the benefit
of, and be binding upon, the Company and its successors or assigns, and the
Optionholders, the legal representatives of their respective estates, their
respective heirs or legatees and their permitted assignees.
4.14 Securities Restrictions
(a) Legend on Certificates. All certificates representing
shares of Stock issued under the Plan shall be endorsed with a legend reading as
follows:
The shares of Common Stock evidenced by this
certificate have been issued to the registered owner
in reliance upon written representations that these
shares have been purchased solely for investment.
These shares may not be sold, transferred or assigned
unless in the opinion of the Company and its legal
counsel such sale, transfer or assignment will not be
in violation of the Securities Act of 1933, as
amended, and the rules and regulations thereunder.
(b) Private Offering for Investment Only. The Options and
Awards are and shall be made available only to a limited number of present and
future key personnel and their permitted transferees who have knowledge of the
Company's financial condition, management and its affairs. The Plan is not
intended to provide additional capital for the Company, but to encourage
ownership of Stock among the Company's key personnel or their permitted
transferees. By the act of accepting an Option or Award, each grantee or
permitted transferee agrees (i) that, any shares of Stock acquired will be
solely for investment and not with any intention to resell or redistribute those
shares and (ii) such intention will be confirmed by an appropriate certificate
at the time the Stock is acquired if requested by the Company. The neglect or
failure to execute such a certificate, however, shall not limit or negate the
foregoing agreement.
(c) Registration Statement. If a Registration Statement
covering the shares of Stock issuable under the Plan is filed under the
Securities Act of 1933, as amended, and is declared effective by the Securities
Exchange Commission, the provisions of Sections 4.14(a) and (b) shall terminate
during the period of time that such Registration Statement, as periodically
amended, remains effective.
4.15 Tax Withholding.
(a) General. The Company's obligation to deliver Stock under
the Plan shall be subject to the satisfaction of all applicable federal, state
and local income tax withholding requirements.
15
<PAGE>
(b) Shares to Pay for Withholding. The Board may, in its
discretion and in accordance with the provisions of this Section 4.15(b) and
such supplemental rules as it may from time to time adopt, provide any or all
Optionholders or Grantees with the right to use shares of Stock in satisfaction
of all or part of the federal, state and local income tax liabilities incurred
by such Optionholders or Grantees in connection with the receipt of Stock
("Taxes"). Such right may be provided to any such Optionholder or Grantee in
either or both of the following formats:
(i) Stock Withholding. An Optionholder or Grantee may
be provided with the election, which may be subject to approval by the Plan
Administrator, to have the Company withhold, from the Stock otherwise issuable,
a portion of those shares of Stock with an aggregate fair market value equal to
the percentage (not to exceed 100 percent) of the applicable Taxes designated by
the Optionholder or Grantee.
(ii) Stock Delivery. The Board may, in its
discretion, provide the Optionholder or Grantee with the election to deliver to
the Company, at the time the Option is exercised or Stock is awarded, one or
more shares of Stock previously acquired by such individual (other than pursuant
to the transaction triggering the Taxes) with an aggregate fair market value
equal to the percentage (not to exceed 100 percent) of the taxes incurred in
connection with such Option exercise or Stock Award designated by the
Optionholder or Grantee.
4.16 Governing Law. The Plan shall be governed by and all questions
hereunder shall be determined in accordance with the laws of the State of
Arizona.
ARTICLE V
Definitions
The following capitalized terms used in this Plan shall have the
meaning described below:
"Affiliates" shall mean all "officers" (as that term is defined in Rule
16a-1(f) promulgated under the 1934 Act) and directors of the Company and all
persons who own ten percent or more of the Company's issued and outstanding
Stock.
"Annual Grant Date" shall mean the date of the Company's annual
stockholder meeting.
"Automatic Grant Program" shall mean that program set forth in Article
III of this Plan pursuant to which non-employee members of the Board are
automatically granted Options upon certain events.
"Automatic Option Grant" shall mean those automatic option grants made
on the Annual Grant Date, on the Initial Grant Date, and on the commencement
date of the Automatic Grant Program.
"Automatic Options" shall mean those Options granted pursuant to the
Automatic Grant Program.
"Awards" shall mean Discretionary Awards.
"Board" shall mean the Board of Directors of the Company.
16
<PAGE>
"Cash Award" shall mean an award to be paid in cash and granted under
Section 2.5 hereunder.
"Change in Control" shall mean and include the following transactions
or situations:
(i) A sale, transfer, or other disposition by the Company
through a single transaction or a series of transactions of securities of the
Company representing 30 percent or more of the combined voting power of the
Company's then outstanding securities to any "Unrelated Person" or "Unrelated
Persons" acting in concert with one another. For purposes of this definition,
the term "Person" shall mean and include any individual, partnership, joint
venture, association, trust corporation, or other entity (including a "group" as
referred to in Section 13(d)(3) of the 1934 Act). For purposes of this
definition, the term "Unrelated Person" shall mean and include any Person other
than the Company, a wholly-owned subsidiary of the Company, or an employee
benefit plan of the Company.
(ii) A sale, transfer, or other disposition through a single
transaction or a series of transactions of all or substantially all of the
assets of the Company to an Unrelated Person or Unrelated Persons acting in
concert with one another.
(iii) A change in the ownership of the Company through a
single transaction or a series of transactions such that any Unrelated Person or
Unrelated Persons acting in concert with one another become the "Beneficial
Owner," directly or indirectly, of securities of the Company representing at
least 30 percent of the combined voting power of the Company's then outstanding
securities. For purposes of this definition, the term "Beneficial Owner" shall
have the same meaning as given to that term in Rule 13d-3 promulgated under the
1934 Act, provided that any pledgee of voting securities is not deemed to be the
Beneficial Owner thereof prior to its acquisition of voting rights with respect
to such securities.
(iv) Any consolidation or merger of the Company with or into
an Unrelated Person, unless immediately after the consolidation or merger the
holders of the common stock of the Company immediately prior to the
consolidation or merger are the Beneficial Owners of securities of the surviving
corporation representing at least 50 percent of the combined voting power of the
surviving corporation's then outstanding securities.
(v) During any period of two years, individuals who, at the
beginning of such period, constituted the Board of Directors of the Company
cease, for any reason, to constitute at least a majority thereof, unless the
election or nomination for election of each new director was approved by the
vote of at least two-thirds of the directors then still in office who were
directors at the beginning of such period.
(vi) A change in control of the Company of a nature that would
be required to be reported in response to Item 6(e) of Schedule 14A of
Regulation 14A promulgated under the 1934 Act, or any successor regulation of
similar import, regardless of whether the Company is subject to such reporting
requirement.
Notwithstanding any provision hereof to the contrary, the filing of a
proceeding for the reorganization of the Company under Chapter 11 of the General
Bankruptcy Code or any successor or other statute of similar import shall not be
deemed to be a Change of Control for purposes of this Plan.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
17
<PAGE>
"Company" shall mean Vodavi Technology, Inc., a Delaware corporation.
"Corporate Transaction" shall mean (a) a merger or consolidation in
which the Company is not the surviving entity, except for a transaction the
principal purposes of which is to change the state in which the Company is
incorporated; (b) the sale, transfer of or other disposition of all or
substantially all of the assets of the Company and complete liquidation or
dissolution of the Company, or (c) any reverse merger in which the Company is
the surviving entity but in which the securities possessing more than 50 percent
of the total combined voting power of the Company's outstanding securities are
transferred to a person or persons different from those who held such securities
immediately prior to such merger.
"Discretionary Award" shall mean a Stock Award, SAR or Cash Award under
the Discretionary Grant Program.
"Discretionary Grant Program" shall mean the program described in
Article II of this Plan pursuant to which certain Eligible Persons are granted
Options or Awards in the discretion of the Plan Administrator.
"Discretionary Options" shall mean options granted under the
Discretionary Grant Program.
"Effective Date" shall mean May 24, 1996, the date that the First
Revised Plan was approved by the Company's stockholders.
"Eligible Directors" shall mean, with respect to the Automatic Grant
Program, those Board members who are not employed by the Company, whether or not
such members are Non-Employee Directors as defined herein.
"Eligible Persons" shall mean (a) with respect to the Discretionary
Grant Program, those persons who, at the time that the Discretionary Option or
Discretionary Award is granted, are (i) key personnel (including officers and
directors) of the Company or Parent or Subsidiary Corporations, or (ii)
consultants or independent contractors who provide valuable services to the
Company or Parent or Subsidiary Corporations; provided that if a Senior
Committee is formed pursuant to Section 2.1(b) hereof, the members of that
committee shall not be included as "Eligible Persons" under the Discretionary
grant Program during their tenure on the Senior Committee; and (b) with respect
to the Automatic Grant Program, the Eligible Directors.
"Employee Committee" shall mean that committee appointed by the Board
to administer the Plan with respect to the Non-Affiliates and comprised of one
or more persons who are members of the Board.
"Exercise Date" shall be the date on which written notice of the
exercise of an Option and payment of the Option Price is delivered to the
Company in accordance with the requirements of the Plan.
"Expiration Date" shall be the 10-year anniversary of the date on which
an Automatic Option Grant was made.
"Grantee" shall mean an Eligible Person or Eligible Director that has
received an Award.
18
<PAGE>
"Incentive Stock Option" shall mean a Discretionary Option that is
intended to qualify as an "incentive stock option" under Code section 422.
"Initial Grant Date" shall mean the date that an Eligible Director is
first appointed or elected to the Board.
"Non-Affiliates" shall mean all persons who are not Affiliates.
"Non-Employee Directors" shall mean those directors of the Company who
satisfy the definition of "Non-Employee Directors" under Rule 16b-3(b)(3)(i)
promulgated under the 1934 Act.
"$100,000 Limitation" shall mean the limitation pursuant to which the
aggregate fair market value (determined as of the respective date or dates of
grant) of the Stock for which one or more Options granted to any person under
this Plan (or any other option plan of the Company or any Parent or Subsidiary
Corporation) may for the first time be exercisable as Incentive Stock Options
during any one calendar year shall not exceed the sum of $100,000.
"Optionholder" shall mean an Eligible Person or Eligible Director to
whom Options have been granted.
"Optioned Shares" shall be those shares of Stock to be optioned from
time to time to any Eligible Person or Eligible Directors.
"Option Price" shall mean (i) with respect to Discretionary Options,
the exercise price per share as specified by the Plan Administrator pursuant to
Section 2.2(b) hereof, and (ii) with respect to Automatic Options, the exercise
price per share as specified by Section 3.2(b) hereof.
"Options" shall mean options to acquire Stock granted under the Plan.
"Parent Corporation" shall mean any corporation in the unbroken chain
of corporations ending with the employer corporation, where, at each link of the
chain, the corporation and the link above owns at least 50 percent of the
combined total voting power of all classes of the stock in the corporation in
the link below.
"Plan" shall mean this stock option plan for Vodavi Technology, Inc.
"Plan Administrator" shall mean (a) either the Board, the Senior
Committee, or any other committee, whichever is applicable, with respect to the
administration of the Discretionary Grant Program as it relates to Affiliates
and (b) either the Board, the Employee Committee, or any other committee,
whichever is applicable, with respect to the administration of the Discretionary
Grant Program as it relates to Non-Affiliates.
"SAR" shall mean stock appreciation rights granted pursuant to Section
2.4 hereof.
"Senior Committee" shall mean that committee appointed by the Board to
administer the Discretionary Grant Program with respect to the Affiliates and
comprised of two or more Non-Employee Directors.
19
<PAGE>
"Service" shall have the meaning set forth in Section 2.2(n) hereof.
"Stock" shall mean shares of the Company's common stock, $.001 par
value per share, which may be unissued or treasury shares, as the Board may from
time to time determine.
"Stock Awards" shall mean Stock directly granted under the
Discretionary Grant Program.
"Subsidiary Corporation" shall mean any corporation in the unbroken
chain of corporations starting with the employer corporation, where, at each
link of the chain, the corporation and the link above owns at least 50 percent
of the combined voting power of all classes of stock in the corporation below.
20
<PAGE>
EXECUTED as of the 20th day of October, 1997.
VODAVI TECHNOLOGY, INC.
By:
------------------------
Name: Glenn R. Fitchet
Its: President
ATTESTED BY:
- ---------------------------
Secretary
21
OEM PURCHASE AGREEMENT
This OEM Purchase Agreement ("Agreement") is made effective as of April 11,
1997, by and between Santa Barbara Connected Systems Corporation, DBA Connected
Systems, ("Connected Systems"), located at 126 West Figueroa St., Santa Barbara,
California 93101 and Enhanced Systems Inc., of 6961 Peachtree Industrial Blvd,
Norcross, Georgia 30092 ("Buyer").
WHEREAS, Connected Systems offers the products described in Exhibit D
(collectively "Product") for resale directly or indirectly to current and future
customers; and
WHEREAS, Buyer desires to purchase such Product and services, including those
described in Section 8, and any future products and services offered by
Connected Systems during the term of this Agreement for Buyer's use;
WHEREAS, Buyer is in the business of providing such Products to customers as
Buyer determines;
NOW, THEREFORE, in consideration of the promises set forth below, and for other
good and valuable consideration, the parties hereby agree as follows:
1. PURCHASE AND RESALE
1.1 During the term of this Agreement, Connected Systems agrees to
sell to Buyer and Buyer agrees to purchase from Connected
Systems Product and options as stated in Exhibit D. Product
pricing is shown in Exhibit A and shall be based on Buyer's
estimated purchase quantities based on the Buyer's best
efforts sales activity. Exhibit A shall be replaced by updated
price lists or product descriptions as agreed by Buyer and
Connected Systems during the term of this Agreement. Successor
products which replace or supersede products named in Exhibit
A shall be incorporated herein upon notice by Connected
Systems of their availability. Buyer shall issue a
non-cancelable initial purchase order of 500 units for
Product, to be delivered in minimum quantities of 250 units
each during the first two quarters of the first Contract Year.
The initial Purchase Order shall be issued upon signing of the
Agreement. Buyer shall issue a second purchase order for 1000
units upon signing of the Agreement. The delivery dates for
this order shall be established within six months of signing
of the Agreement. Connected Systems and Buyer agree that the
both purchase orders are dependent upon satisfactory technical
performance and the product successfully passing Buyer's
evaluation that hardware and software meet the specification
in Exhibit A. Both parties also agree that Buyer's obligations
under the second purchase order is subject to acceptable
product performance and competitive product pricing and
features.
1.2 Connected Systems grants to Buyer the non-exclusive right to
resell, lease, distribute and otherwise dispose of Products
purchased hereunder in any country throughout the world either
directly to end users or indirectly through third parties,
including resellers, distributors, prime contractors and/or
joint venture companies.
OEM Purchase Agreement -C- Page 1 Connected Systems Corporation
Proprietary and Confidential
<PAGE>
1.3 Connected Systems further grants to Buyer a non-exclusive,
paid-up, worldwide license to modify, translate, reproduce,
and distribute copies of Connected Systems' user
documentation, service and maintenance manuals, training
materials, and promotional and advertising materials for the
Products in connection with the use, marketing, distribution
and support of the Products by Buyer and its end users,
resellers and authorized service representatives. Seller
agrees to update documentation on an as needed basis.
2. ORDERS
2.1 Buyer will place orders for the delivery of Products using a
purchase order with terms as stated in this Agreement.
Connected Systems will confirm its acceptance of Buyer's
orders in writing within seven (7) days after receipt. Each
such purchase order shall set the product types, release
dates, and shipping method of Products required to be
purchased under this Agreement and shall be accompanied by a
rolling 12-month forecast of Buyer's need for Products.
2.2 Any terms or conditions of any purchase order or other
document submitted by Buyer or any acknowledgment, invoice or
other document submitted by Connected Systems which conflict
with or purport to amend or supplement any of the terms and
conditions of this Agreement shall be of no force or effect
unless agreed upon in writing by Buyer and Connected Systems.
2.3 All orders placed for non-recurring engineering charges shall
be due and payable thirty days after the completion of the
requested work, without regard to other obligations of
Connected Systems under this Agreement.
3. DELIVERY AND ACCEPTANCE
3.1 Connected Systems will ship the Products any time within the
Contract Year one hundred twenty (120) days following receipt
of Buyer's order. Connected Systems will provide a written
acknowledgement of Buyers order within ten (10) working days
of receipt. Buyer will have the ability to change or cancel
the purchase orders if Connected Systems cannot meet the 120
day delivery date. If shipment is delayed past the
acknowledged on-board date, then Connected Systems will be
liable to pay the difference between ground/sea freight and
air freight if requested by Buyer. If requested by Buyer,
Connected Systems will make reasonable efforts to ship
Products sooner than the lead time specified in this Section
and to accommodate revised purchase orders involving increases
in volume or changes in type of Products ordered. Buyer agrees
to reimburse any charges incurred by Connected Systems in
accepting such requests from Buyer if approved in writing by
Buyer. After delivery of the first 500 units, the minimum
purchase release under this agreement shall be fifty (50)
items or $25,000 per shipment, whichever is greater.
OEM Purchase Agreement -C- Page 2 Connected Systems Corporation
Proprietary and Confidential
<PAGE>
3.2 All shipments by Connected Systems under this Agreement shall
be delivered F.O.B. Connected Systems' manufacturing facility.
Title and risk of loss shall pass to Buyer at the point of
shipment. Products will be packed for shipment in a manner
reasonably designed to prevent damage during normal surface
transport. Charges for any special packaging will be paid by
Buyer. Products will be shipped in accordance with shipping
instructions provided by Buyer or to Buyer at its address
stated above in the absence of shipping instructions.
3.3 Buyer may perform an incoming inspection of the Products
within twenty (20) days of receipt of Product. If Buyer
determines as a result of such inspection that a Product is
defective, Buyer may reject the Product and return the
rejected Product to Connected Systems. Connected Systems shall
use its best efforts to replace the rejected Product within
ten (10) working days of its return to Connected Systems.
Connected Systems will pay the shipping charges for any
defective products returned to Connected Systems. Payment
shall not affect Buyer's right to reject a defective Product.
All other Product returns shall be handled under the warranty
procedures in this agreement.
3.4 Any products determined to be defective in materials or
workmanship and not to conform to the applicable
specifications upon receipt at Buyer will be repaired or
replaced, at Connected Systems option, through one or more of
the following options: (i) by Connected Systems, at its
expense, upon return of any defective products to Connected
Systems; (ii) by Connected Systems appointment of a third
party contractor to correct any such discovered defects at
Connected Systems expense; (iii) by Buyer, at its respective
facilities, at a mutually agreed upon price to be paid by
Connected Systems.
3.5 If requested by Connected Systems, Buyer shall acknowledge
acceptance of each shipment in writing, via facsimile, within
two (2) days of receipt of each such shipment. Each acceptance
shall state the quantity received, and reference the Purchase
Order issued by Buyer. Such acceptance represents the
confirmation of the delivery of the Product(s) stated in the
associated invoice, but shall not affect the Buyer's right to
reject such Product due any defects found.
4. RESCHEDULING AND CANCELLATION
4.1 Upon written notice to Connected Systems and at least ninety
(90) days prior to the scheduled date of shipment, Buyer may
reschedule the delivery of any Products ordered by Buyer
without charge. Rescheduling of delivery on shorter notice may
be subject to a fee not to exceed 20% of the selling price to
Buyer (after discount). If any inventory for such Products
will not be used in the normal course of Connected Systems'
business within one hundred and eighty days, Connected Systems
may additionally invoice Buyer for the cost of the unsold
material, which shall become the property of Buyer.
OEM Purchase Agreement -C- Page 3 Connected Systems Corporation
Proprietary and Confidential
<PAGE>
5. PRICES AND DISCOUNT DETERMINATION
5.1 The initial prices for the Products are set forth in the price
list attached as Exhibit A. Such prices shall not be increased
during the first Contract Year of this Agreement. Thereafter,
Connected Systems prices may be amended upon one hundred
twenty (120) days prior written notice to Buyer. No increase
in prices will apply to items for which orders have been
accepted by Connected Systems before the effective date of the
change.
5.2 Buyer will have the benefit of any reduction in published
prices or increase in published discounts for orders accepted
but not shipped before the effective date of such change.
6. TAXES
6.1 Buyer will pay any sales, use, import or similar taxes which
may be levied upon the sale, License, or transfer of the
Products from Connected Systems to Buyer and which are
separately itemized on Connected Systems' invoice, except for
any tax assessed upon Connected Systems' income. Buyer shall
also pay any such taxes which may be levied against the
Products or the ownership or use thereof following the sale
thereof to Buyer.
6.2 Connected Systems will be responsible for import duties for
product shipped to a United States location.
7. PAYMENT
7.1 Connected Systems shall invoice Buyer for Product not earlier
than the date of shipment. Buyer shall pay amounts due within
thirty (30) days of invoice date.
7.2 Buyer shall pay invoices according to the payment instructions
on such invoices or other written instructions signed by an
officer of the Connected Systems.
8. NON RECURRING ENGINEERING CHARGES
8.1 A Non Recurring Engineering Charge of not more than $30,000,
subject to review when custom specifications are complete,
shall be charged to adapt the Product to Buyer's requirements
and support testing and production startup. Connected Systems
will also provide system integration support of Buyer's
porting efforts. Payments shall be made upon the following
schedule:
<TABLE>
<S> <C> <C>
Event Amount Target Date
Letter of Intent none March 11,1997
</TABLE>
OEM Purchase Agreement -C- Page 4 Connected Systems Corporation
Proprietary and Confidential
<PAGE>
<TABLE>
<S> <C> <C>
One diskless, two disk-based standalone Dolphin cost price April 14, 1997
systems delivered for internal Buyer test
Custom specifications for Dolphin board and EVP $10,000 April 22, 1997
software integrated into Vodavi V.xxx complete
Field trial analog standalone systems ready for none to be determined
delivery by Connected Systems ----------------
Sample Dolphin digital standalone systems $10,000 to be determined
delivered for internal Buyer test ----------------
Field trial completion of digital standalone systems $10,000 to be determined
----------------
</TABLE>
Note that the price of Field Trial systems will be higher than the
prices in Exhibit A.
9. PRODUCT MODIFICATION AND DISCONTINUANCE
9.1 Connected Systems shall give Buyer written notice of Connected
Systems' intent to discontinue or modify any Product as soon
as is reasonably practicable and in any event at least six (6)
months in advance of any Product discontinuance and at least
three (3) months in advance of any Product modification.
Within sixty (60) days after receiving such notice, Buyer may
order the Product being discontinued or in its unmodified
form, as the case may be, in quantities of Buyer's choosing up
to 100% of Buyer's purchases of such Product during the six
(6) month period prior to receipt of such notice. In the event
Buyer requests the right to purchase in excess of such amount
or to continue purchasing the Product being discontinued or in
its unmodified form, the parties shall negotiate in good faith
applicable terms, conditions and prices.
9.2 Notwithstanding any termination or expiration of this
Agreement, Connected Systems shall make available to Buyer
spare parts and maintenance services as set forth herein for a
period of three (3) years from the date of discontinuance of
Products on a model-by-model basis or for a period of one (1)
year from the date of termination or expiration of this
Agreement, whichever occurs first.
9.3 Upon sixty (60) days prior written notice to Buyer, Connected
Systems may make changes in the Products that do not affect
the form, fit or function (including interoperability) of the
Products, or as required by law or concerns of safety;
provided, however, that if Connected Systems makes changes
required by law or concerns of safety and such changes affect
the form, fit or function of the Products, then Buyer may
cancel any orders for such Products without liability. No
notice period shall be required for changes requested by
Buyer.
9.4 Buyer may propose Product modifications or changes by means of
written requests to Connected Systems. Connected Systems
agrees to consider such requests in good faith and to respond
thereto in writing, including estimated development time and
cost if applicable, within a reasonable time after receipt of
the request. Any modifications or
OEM Purchase Agreement -C- Page 5 Connected Systems Corporation
Proprietary and Confidential
<PAGE>
changes that are agreed to between the parties will be subject
to execution of a written agreement setting forth the details
of the financial arrangements, development schedules, and
other applicable terms and conditions.
10. SOFTWARE LICENSE
10.1 Computer programs provided by Connected Systems constituting
or incorporated in Products, together with updates,
enhancements, and new releases or versions thereof provided
hereunder (collectively "Software"), are provided to Buyer
under a non-exclusive worldwide license subject to the
following terms:
10.2 Buyer shall have the right to use the Software in connection
with the Products for internal purposes including maintenance
of the Products, and to authorize end users, resellers and
authorized service representatives to use the Software for
maintenance of the Products.
10.3 Buyer shall have the right to use the Software to demonstrate
and market the Products and to distribute copies of the
Software to end users in object form either directly or
indirectly through others as part of the Products. Buyer shall
require that such end users agree to protect Connected
Systems' intellectual property rights in the software
substantially as set forth in this Agreement. Connected
Systems will provide Buyer with an approved form to be signed
by end users providing such protection.
10.4 Buyer shall have the right to reproduce the Software for
distribution with Products and to make a reasonable number of
copies of the Software for backup or archival purposes.
10.5 Buyer shall not have the right to modify, reverse engineer,
decompile, or make other translations of the Software except
as permitted by applicable law and shall not have the right to
disclose the Software except as permitted herein.
10.6 Buyer shall have the right to transfer a licensed copy of the
Software to a third party provided Buyer does not retain any
copies of such licensed copy and the third party agrees to
abide by the terms and conditions of this license. All
Software must be transferred upon a change in title of any
hardware in which it was installed.
10.7 Buyer shall comply with the terms of software sub-licenses by
Connected Systems from third parties. Connected Systems has
licensed, and may continue to license, software from third
parties and Buyer acknowledges this Agreement governs Buyer's
usage of any and all third party software. Copies of
sub-licenses for third-party software will be available to
Buyer at Buyer's request.
10.8 The Software may be copyrighted and is licensed (not sold) to
Buyer and ownership is not transferred. Buyer agrees that
Connected Systems or Connected Systems' licensors retain the
entire right and title to the Software.
10.9 Notwithstanding any termination or expiration of this
Agreement, Buyer's end user customers shall be permitted the
continued and uninterrupted use of the Software
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Proprietary and Confidential
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pursuant to the terms of their sublicenses, and Buyer and its
resellers and authorized service representative shall retain
the right to use the Software to support end user customers
and to distribute error corrections and other updates to the
Software provided as part of post-termination support
hereunder.
10.10 Connected Systems and all third party software providers
DISCLAIM ALL WARRANTIES WITH RESPECT TO THE USE OF ANY THIRD
PARTY SOFTWARE INCLUDING (WITHOUT LIMITATION) ANY WARRANTIES
OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE and the
liability allowed by any third party software provider is
limited to that amount which the end user paid for the third
party software.
11. REPRESENTATIONS AND WARRANTIES
11.1 Connected Systems represents and warrants to Buyer that:
11.2 Connected Systems has the full right and power to enter into
this Agreement and to grant the rights and licenses set forth
herein;
11.3 Connected Systems provides absolute representation that title
to all Products delivered to Buyer under this Agreement shall
be free and clear of all liens, encumbrances and other claims,
and there are no claims or judicial or governmental
determinations that the Products infringe any patent rights
copyrights, trade secrets or intellectual property rights of
any third party;
11.4 The Products, when delivered, will comply with all applicable
laws and regulations of the United States and other countries
specified in the product specification governing the Products
and the use thereof, including without limitation laws and
regulation governing radio frequency emissions, safety, and
connection to telecommunications facilities. If any Product
does not comply with such laws and regulations, Connected
Systems will promptly modify such Product so that it complies
or replace it with a Product that does comply at no charge to
Buyer; and
11.5 Connected Systems has obtained or will obtain homologation
approval for the Products in the countries identified in
Exhibit B. For countries in which Connected Systems has not
yet obtained homologation approval, Connected Systems agrees
to obtain homologation approval at Buyer's sole expense in
response to Buyer's reasonable request and forecast and within
a reasonable time. Connected Systems agrees to make any
Product modifications that may be required to obtain such
approval. Buyer agrees to provide reasonable logistical
support. Connected Systems agrees to extend to Buyer all
rights of homologation obtained by Connected Systems.
Connected Systems and Buyer agree that homologation approval
may necessitate an increase in Product costs due to changes in
hardware, components or other substantial modifications.
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12. QUALITY AND INTEROPERABILITY
12.1 Connected Systems agrees to comply with its internal quality
standards as communicated to Buyer and updated from time to
time, to maintain a functioning quality system for the
specification, design, manufacture and test of Products
supplied hereunder, to maintain objective evidence of
compliance with its quality system, and to supply such
evidence to Buyer upon request. Upon reasonable notice and
during normal business hours, Buyer may conduct an on-site
quality system audit of Connected Systems' quality system at
Buyer's expense.
12.2 During the term of this Agreement, Buyer and Connected Systems
agree to work together to ensure interoperability among their
products and their successors as applicable.
13. PRODUCT WARRANTY
13.1 Connected Systems warrants to Buyer and Buyer's customers that
the Product will be free from defects in materials and
workmanship and that the Software will conform to Connected
Systems' documentation for a period of sixteen (16) months
from the date of delivery to Buyer. This warranty excludes
damage incurred in shipment or caused by misuse, unauthorized
alteration, power quality, lightning, improper repair,
maintenance, assembly, packing by Buyer or otherwise out of
the control of Connected Systems. Connected Systems does not
warrant that the operation of the Software will be
uninterrupted or error-free. Buyer may add options designated
by Connected Systems using Connected Systems' then current
guidelines and procedures, which if followed, shall not void
Connected Systems' warranty. Connected Systems shall not be
responsible for any costs, including diagnostic costs related
to any Buyer installed options.
13.2 If Buyer upon inspection notifies Connected Systems of a
defect rate in a hardware Product that exceeds a mutually
agreed level, Buyer shall at Connected Systems' option, either
return the whole lot (in which this defect rate was found),
or, after screening the whole lot at Connected Systems
expense, return just the defective units of Product.
13.3 Upon notification to Connected Systems of a Software error in
a Product within the warranty period, Connected Systems will
correct the error and deliver corrected Software to Buyer in
accordance with Exhibit C of this Agreement.
14. EXCLUSIONS AND LIABILITY LIMITATIONS
14.1 THE WARRANTIES CONTAINED IN THIS AGREEMENT ARE IN LIEU OF ALL
OTHER WARRANTIES WITH RESPECT TO THE PRODUCTS, WHETHER
EXPRESS, IMPLIED OR STATUTORY, INCLUDING, WITHOUT LIMITATION,
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THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE.
14.2 IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR ANY SPECIAL,
INCIDENTAL, INDIRECT, OR CONSEQUENTIAL DAMAGES, OR FOR LOST
PROFITS OR REVENUES, OR FOR LOSS OF DATA FROM ANY CAUSE,
WHETHER OR NOT SUCH PARTY HAS NOTICE OF THE POSSIBILITY OF
SUCH DAMAGES OR LOSSES.
15. TRADEMARKS AND TRADE NAMES
15.1 Connected Systems does not grant to Buyer and Buyer's
resellers the right to use the trademarks and/or trade names
of the Products in connection with the sale, offer for sale,
and support of the Products. Buyer shall have the right in its
discretion to private label or co-label the Products with
trademarks and/or trade names of Buyer's choosing.
16. INTELLECTUAL PROPERTY INFRINGEMENT
16.1 Connected Systems will, at its own expense, defend Buyer
against any suit brought against Buyer based on the grounds
that the Product infringes any patent, trade secret or other
intellectual property right of any third party ("Buyer
Indemnified Right"), and will pay all damages and costs that a
court or arbitration awards against Connected Systems as a
result of such claim and all amounts paid in settlement of
such claim, provided that Buyer gives Connected Systems (i)
prompt written notice of such claim, (ii) the sole right to
defend and/or settle the claim, and (iii) all reasonable
information and assistance (at Connected Systems' expense)
excluding time spent by employees or consultants of Buyer) to
handle the defense and settlement thereof. Should the Product
become the subject of a claim of infringement of a Buyer
Indemnified Right, Connected Systems shall, at its option,
either: (a) procure for Buyer the right to continue using such
Product or (b) modify such Product to make it non-infringing.
16.2 Buyer will, at its own expense, defend Connected Systems
against any suit brought against Connected Systems based on
the grounds that Buyer's modifications to the Product infringe
any patent, trade secret or other Intellectual Property Right
of any third party ("Connected Systems Indemnified Right"),
and will pay all damages and costs that a court or arbitration
awards against Connected Systems as a result of such claim and
all amounts paid in settlement of such claim, provided that
Connected Systems gives Buyer (i) the sole right to defend
and/or settle the claim, and (ii) all reasonable information
and assistance (at Buyer's expense) excluding time spent by
employees or consultants of Connected Systems) to handle the
defense and settlement thereof (iii) prompt written notice of
any claims.
16.3 Connected Systems hereby represents that the licensed programs
and developed programs do not infringe any patent, copyright,
trade secret or other Intellectual Property Right of any third
party.
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16.4 Connected Systems is not by this agreement or by selling
Product to Buyer granting any license of any rights to any
patents or trade secrets for applications of Connected
Systems' Products.
16.5 Buyer will indemnify and hold Connected Systems harmless from
any loss, damage, or liability arising in connection with
Buyer's improper or unauthorized use of Product.
17. CONFIDENTIAL INFORMATION
17.1 Each party acknowledges that in the course of conducting
business under this Agreement, it may obtain information from
the other party which is of a confidential and proprietary
nature ("Confidential Information"). Provided such
Confidential Information is clearly marked as confidential
when disclosed, or if orally disclosed is identified as
confidential when disclosed and is summarized in writing
within twenty (20) days after disclosure, such Confidential
Information shall be subject to the terms of this Section 17.
Confidential Information may include, but is not limited to,
trade secrets, know-how, inventions, techniques, processes,
programs, schematics, data, customers lists, financial
information and sales and marketing plans.
17.2 For a period of three (3) years following the date of
disclosure, the receiving party agrees that it will take
reasonable steps to avoid disclosure of Confidential
Information or use of documents containing Confidential
Information without the prior written consent of the
disclosing party, except (i) as permitted by this Agreement,
and (ii) to operate, maintain, and support the Products and
have such activities performed by others. Neither party shall
disclose Confidential Information to any person except those
of its employees, resellers, consultants and authorized
service representatives who need to know such Confidential
Information and who have agreed in writing to protect such
Confidential Information as required by this Agreement.
Promptly upon request following the termination of this
Agreement, each party shall return all documents provided by
the disclosing party that contain Confidential Information and
all copies thereof, except that Buyer may retain such copies
of the Connected Systems' Confidential Information as are
reasonably necessary to enable Buyer and its resellers,
consultants and authorized service representatives to operate,
maintain, or support Products purchased under this Agreement.
17.3 Neither party shall publicly disclose the existence of this
Agreement without the consent of the other party, and neither
party shall disclose the specific terms and conditions of this
Agreement except by written agreement between the parties or
as required by law or court order.
17.4 The obligations of confidentiality set forth in this Agreement
shall not apply to information which (i) becomes publicly
available through no act of the recipient; (ii) is required to
be disclosed by law or court order; (iii) was previously known
at the time of its receipt without similar restrictions; (iv)
is released from the provisions of this Agreement by the
disclosing party; (v) is provided to a third party without
similar restrictions on disclosure; or (vi) is independently
developed by the receiving party.
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Proprietary and Confidential
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18. TERM AND TERMINATION
18.1 The initial term of this Agreement shall expire after two (2)
Contract Years, unless sooner terminated as provided herein.
Thereafter this Agreement shall renew automatically for
additional terms of one (1) year each unless terminated by
notice as set forth herein not less than one hundred eighty
(180) days prior to the expiration date of the initial or any
additional term or unless otherwise terminated as provided
herein.
18.2 Either party may terminate this Agreement by written notice to
the other party upon the occurrence of any of the following
events: (i) the other party files a voluntary petition in
bankruptcy or for similar relief; (ii) an involuntary petition
in bankruptcy is filed against the other party and is not
dismissed within sixty (60) days of filing; (iii) a receiver
is appointed for the other party, and if involuntarily
appointed is not dismissed within sixty (60) days; or (iv) the
other party makes an assignment for the benefit of creditors.
18.3 Either party may terminate this Agreement by written notice if
the other party fails to substantially comply with any
material terms or conditions of this Agreement and fails to
cure such default within sixty (60) days after receipt of
written notice from the non-defaulting party specifying the
nature of the default and stating an intent to terminate if
the default is not cured within such time period. This right
of termination shall be without prejudice to any other right
or remedy available to the non-defaulting party.
18.4 Neither party shall be liable to the other or to any third
party by reason of the rightful termination or expiration of
this Agreement as provided herein.
18.5 In the event Connected Systems accepts any order for Products
after the termination or expiration of this Agreement, the
terms and conditions of this Agreement will apply to such
order as if it were still in effect.
18.6 Upon termination or expiration of this Agreement, Buyer shall
have the right to dispose of any inventory of Products then in
Buyer's possession and to license any associated Software for
use in connection therewith as provided herein.
18.7 Termination or expiration of this Agreement shall not relieve
either party of such obligations as are intended to survive
termination or expiration, including but not limited to
Sections 9.2, 10.9, 11, 13, 14, 15, 16, 17, 18.5, 18.6, 21,
and 22, which will survive termination or expiration for any
reason.
19. MAINTENANCE SERVICES
19.1 Connected Systems agrees to provide maintenance and support
services to Buyer with respect to the Products pursuant to the
separate maintenance and support agreement executed
concurrently herewith attached hereto as Exhibit C.
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20. TRAINING
20.1 Connected Systems shall make available to Buyer appropriate
technical and sales training courses and materials relating to
the Products. Training courses shall be held at Buyer's
location in the continental United States, unless otherwise
agreed, at mutually agreed dates and times, and shall
comprehensively address the demonstration, sales, installation
and support of the Product and such other aspects of the
Product and Connected Systems and Buyer shall mutually agree.
Buyer shall bear all expenses incurred by Buyer's personnel to
attend such training. Buyer has no obligation to create
training courses as a result of this agreement.
20.2 All training subsequent to the initial training will be made
at Connected Systems' then current rates.
21. ESCROW
21.1 Connected Systems agrees to place the Manufacturing drawings
and Source Code for the Software in escrow. Buyer shall have
the right to obtain within 10 days written notice the drawings
or source code from escrow pursuant to the escrow agreement
and to use the drawings or source code for the purpose of
manufacturing the product and supporting and maintaining the
Software and enhancing the Software as necessary. Connected
Systems shall have no obligation to deposit into escrow
technology owned by other parties.
22. ARBITRATION
22.1 In the event of any controversy under this Agreement, the
parties shall attempt in good faith to resolve such
controversy by negotiation, mediation, or other informal and
inexpensive methods of dispute resolution. Any controversy not
successfully resolved in such a manner shall be settled by
binding arbitration in accordance with the Commercial
Arbitration Rules of the American Arbitration Association by a
panel of three (3) arbitrators. Any such arbitration shall be
held in Santa Barbara, California. Judgement upon the award
rendered by the Arbitrators may be entered in any court having
jurisdiction thereof.
23. EXPORT
23.1 Buyer agrees to comply with all applicable export control laws
and regulations of the United States Government and to obtain
any required export licenses in connection with the export of
Products or technical data supplied by Connected Systems.
Connected Systems agrees to provide such assistance as Buyer
reasonably requests to enable Buyer to obtain any required
export licenses.
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24. FORCE MAJEURE
24.1 Each party shall be excused for delays or failures in
performance of this Agreement to the extent that such delays
or failures result from any cause beyond the reasonable
control of such party, including, by way of example and not
limitation, delays caused by the other party, acts of God,
strikes and other labor disputes, Government regulations,
public disorder, and catastrophes such as fire, flood or
explosion
25. GENERAL
25.1 Neither party may assign this Agreement or any rights herein
without the prior written consent of the other party except to
a subsidiary or to a company with which it merges or
consolidates or which acquires more than 50% of its assets.
25.2 Failure or delay on the part of either party to exercise any
right, power or privilege or remedy hereunder shall not
constitute a waiver thereof. A waiver of default shall not
operate as a waiver of ANY other default or of the same type
of default on future occasions.
25.3 All notices and other communications pertaining to this
Agreement shall be in writing and shall be deemed to have been
given by a party hereto if personally delivered to the other
party or if sent by certified mail, return receipt requested,
postage prepaid or by overnight courier with restricted
delivery. A notice sent by certified mail shall be deemed to
be given on the fifth business day after the mailing date; a
notice sent by overnight delivery shall be deemed given when
delivery is confirmed to the party below. Either party may
change its address from time to time by giving notice to that
effect as provided herein. Notices shall be addressed as
follows and if two addresses are shown below, notices must be
made to both addresses:
To Connected Systems:
Connected Systems Corporation
126 West Figueroa St
Santa Barbara CA 93101
Attention: Chief Financial Officer
With an additional copy to:
Michael Pfau
Reiker, Cough, Pfau & Pyle LLP
1421 State St
PO Box 14470
Santa Barbara, CA 93102-1470
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To Buyer:
Enhanced Systems, Inc.
6961 Peachtree Industrial Blvd
Norcross Georgia 30092
Attn.: President
25.4 If any portion of this Agreement is held invalid, the parties
agree that such invalidity shall not affect the validity of
the remaining portions of this Agreement, and the parties
further agree to make reasonable efforts to substitute for the
invalid provision a mutually-agreed provision that most
closely approximates the intent of the invalid provision.
25.5 Neither party is an agent or employee of the other party, and
neither party has any authority to bind the other party to any
agreement or obligation. Each party shall indemnify and hold
the other party harmless from any and all claims, actions,
suits, costs, damages and liabilities, including attorneys'
fees, arising out of actions or failure to act by the
indemnifying party, including without limitation any violation
of federal, state or local laws, ordinances, or regulations.
25.6 This Agreement and the rights and obligations of the parties
hereunder shall be governed in all respects by the laws of the
State of California, U.S.A., as such laws are applied to
contracts between California residents entered into and to be
performed entirely within California. The state courts located
in Santa Barbara County, California and the federal courts of
the Central District of California shall have exclusive
jurisdiction over any disputes arising out of or in connection
with this Agreement, and both parties hereby submit to the
jurisdiction of such courts.
25.7 No action, regardless of form, arising out of the transactions
under this Agreement, may be brought by either party more than
two (2) years after the cause of action occurs. The prevailing
party in any action or proceeding arising out of or related to
this Agreement shall be entitled to recover its costs and
expenses incurred therein, including without limitation court
costs and attorneys' fees.
25.8 Paragraph headings are included in this Agreement for
reference only and shall not be considered part of, or be used
in interpreting, this Agreement.
25.9 This Agreement including the Exhibits hereto constitutes the
entire agreement between the parties with respect to the
subject matter hereof and supersede all previous agreements
and all proposals, oral or written, all previous negotiations,
and all previous communications between the parties with
respect thereto. The terms of this Agreement may not be
waived, amended or supplemented except in a writing signed by
an authorized representative of the party to be bound thereby.
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25.10 This Agreement may be executed in two or more counterparts,
each of which shall be deemed an original and all of which
taken together shall constitute one and the same Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by
their duly authorized representatives as of the date first set forth above.
("Connected Systems") ("Buyer")
SANTA BARBARA CONNECTED SYSTEMS ENHANCED SYSTEMS, INC
CORPORATION
By: /s/ Robert A. Dolan By: /s/ Kent R. Burgess
------------------------ ---------------------------
(Authorized Signature) (Authorized Signature)
Name: Robert A. Dolan Name: Kent R. Burgess
Title: President Title: President
Date: 4/11, 1997 Date: 4/10, 1997
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Proprietary and Confidential
CONSULTING AGREEMENT
AGREEMENT made this 5th day of December, 1997, by and between Vodavi
Technology, Inc., a Delaware corporation (hereinafter called "Company") and
Steven A. Sherman (hereinafter called "Consultant").
W I T N E S S E T H:
Company desires to engage Consultant and Consultant desires to accept
such engagement, all on the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants set forth in this Agreement, the parties hereto agree as follows:
1. Engagement.
(a) The Engagement. Company hereby engages Consultant and
Consultant hereby accepts such engagement as an independent contractor to
perform the duties set forth in this Agreement.
(b) Duties of Consultant. During Consultant's engagement by
Company pursuant to this Agreement, Consultant shall render such advice and
recommendations to Company as requested by the Chairman of the Board of
Directors of the Company.
2. Extent of Duties. Consultant shall devote such of Consultant's
business time, attention and efforts as are reasonably necessary to the
performance of Consultant's duties under this Agreement, and shall perform such
duties faithfully and diligently.
3. Compensation.
(a) Fixed Compensation. Company shall pay to Consultant as
full compensation for the duties performed by Consultant during Consultant's
engagement under this Agreement, a fee at a rate of $10,000 per month payable
within five business days of the beginning of each month.
(b) Warrant. Company shall provide Consultant with a warrant,
in the form attached hereto, to acquire 75,000 share of the Company's common
stock at a price of $5.50 per share.
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The warrant will be 100% vested at the completion of the full term of this
agreement and will be exercisable during a five-year window period beginning
October 20, 1988.
(c) Reimbursement. Company shall reimburse Consultant for all
travel and entertainment expenses and other ordinary and necessary business
expenses incurred by Consultant in connection with the business of Company in
carrying out specifically requested assignments under the terms of this
agreement. The term "business expenses" shall not include any item not
deductible by Company for federal income tax purposes. To obtain reimbursement,
Consultant shall submit to Company receipts, bills or sales slips for the
expenses incurred. Reimbursements shall be made by Company monthly within ten
(10) days of presentation by Consultant of evidence of the expenses incurred.
4. Term of Engagement.
(a) Engagement Term. The term of Consultant's engagement
hereunder shall commence on December 5, 1997 and shall continue until May 30,
1998.
(b) Termination Under Certain Circumstances. Notwithstanding
anything to the contrary herein contained:
(i) Consultant's engagement shall be automatically
terminated, without notice, effective upon the date of Consultant's death;
(ii) If Consultant shall fail, for a period of more
than thirty (30) consecutive days, or for thirty (30) days within any sixty (60)
day period, to perform any of Consultant's duties under this Agreement as the
result of illness or other incapacity, Company may, at its option, upon notice
to Consultant, terminate Consultant's engagement effective on the date of that
notice;
(iii) If Consultant shall breach or violate any of
the provisions of this Agreement, or fail to perform in a manner reasonably
satisfactory to Company any of the duties required of Consultant and such
breach, violation or failure shall continue for a period of ten (10) days after
Company shall have given Consultant written notice specifying the nature thereof
in reasonable detail, Company may, at its option, upon notice to Consultant,
terminate Consultant's engagement effective on the date of that notice.
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5. Competition and Confidential Information.
(a) Non-Competition. During the period of Consultant's
engagement by Company and the period ending twelve (12) months after the
termination of Consultant's engagement by Company, regardless of the reason
therefor, Consultant shall not (whether directly or indirectly, as owner,
principal, agent, stockholder, director, officer, manager, employee, partner,
participant, or in any other capacity) perform any duties for or engage or
become financially interested in any competitive business conducted within the
United States of America. As used herein, competitive business shall mean any
business which sells or provides or attempts to sell or provide products or
services the same as or substantially similar to the products or services sold
or provided by Company.
(b) Confidential Information. Consultant shall maintain in
strict secrecy all confidential or trade secret information, whether patentable
or not, relating to the business of Company (the "Confidential Information")
obtained by Consultant in the course of Consultant's engagement, and Consultant
shall not, unless first authorized in writing by Company, disclose to, or use
for Consultant's benefit or for the benefit of any person, firm or entity at any
time either during or subsequent to the term of Consultant's engagement, any
Confidential Information, except as required in the performance of Consultant's
duties on behalf of Company. For purposes hereof, Confidential Information shall
include without limitation any engineering, drawings or other reproductions or
materials of any kind; any trade secrets, knowledge or information with respect
to processes, inventions, formulae, machinery, manufacturing techniques or
know-how; any business methods or forms; any names or addresses of customers or
data on customers or suppliers; and any business policies or other information
relating to or dealing with the purchasing, production, sales or distribution
policies or practices of Company.
6. Non-Disparagement. Neither party hereto shall publicly disparage the
other party hereto or any of the other party's directors, officers, employees,
agents, representatives, family members, heirs, successors, or assigns, or take
any action that might reasonably be expected to cause any adverse publicity or
embarrassment to any of such persons or to otherwise injure or impair the
business reputation or
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prospects of any such person. Consultant shall refrain from communications
regarding Company with (a) any employee of Company other than it's directors and
senior executives; (b) any lender or potential lender to Company; or (c) any
investment banking, brokerage, or other financial firm or institution, in each
case except without the specific written consent of Company, and shall direct
any communications regarding Company received by him to one or more of Company's
executive officers.
7. Mutual Release. Except for the provisions of this Agreement ,
Company hereby releases Consultant and Consultant hereby releases Company from
any and all actions, causes of action, suits, debts, controversies, contracts,
agreements, promises, and claims that Company or Consultant ever had, now has,
or may hereafter have against the other arising out of events or omissions
occurring on or before the date of this agreement. As used in this Section,
Company shall include all subsidiaries and affiliates of Company.
8. Miscellaneous.
(a) Notices. All notices, requests, demands and other
communications required or permitted under this Agreement shall be in writing
and shall be deemed to have been duly given, made and received when delivered
against receipt or when deposited in the United States mails, first class
postage prepaid, addressed as set forth below:
(i) If to Company:
Mr. Gregory K. Roeper
Executive Vice-President
Vodavi Technology, Inc.
86300 E. Raintree Drive, Scottsdale AZ, 85260
(ii) If to Consultant:
Mr. Steven A. Sherman
5707 N. 55th Place
Paradise Valley, AZ, 85253
Either party may alter the address to which communications or copies are to be
sent by giving notice of such change of address in conformity with the
provisions of this paragraph for the giving of notice.
(b) Indulgences. Neither any failure nor any delay on the part
of either party to exercise any right, remedy, power or privilege under this
Agreement shall operate as a waiver thereof, nor
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shall any single or partial exercise of any right, remedy, power or privilege
preclude any other or further exercise of the same or of any other right,
remedy, power or privilege, nor shall any waiver of any right, remedy, power or
privilege with respect to any occurrence be construed as a waiver of such right,
remedy, power or privilege with respect to any other occurrence.
(c) Controlling Law. This Agreement and all questions relating
to its validity, interpretation, performance and enforcement, shall be governed
by and construed in accordance with the laws of the State of Arizona,
notwithstanding any other conflict-of-interest provisions to the contrary.
(d) Binding Nature of Agreement. This Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
heirs, personal representatives, successors and assigns except that no party may
assign or transfer such party's rights or obligations under this Agreement
without the prior written consent of the other party.
(e) Execution in Counterparts. This Agreement may be executed
in any number of counterparts, each of which shall be deemed to be an original
as against any party whose signature appears thereon, and all of which shall
together constitute one and the same instrument. This Agreement shall become
binding when one or more counterparts hereof, individually or taken together,
shall bear the signatures of the parties reflected hereon as the signatories.
(f) Provisions Separable. The provisions of this Agreement are
independent of and separable from each other, and no provision shall be affected
or rendered invalid or unenforceable by virtue of the fact that for any reason
any other or others of them may be invalid or unenforceable in whole or in part.
(g) Entire Agreement. Except for the Warrant to acquire shares
of common stock attached hereto, this Agreement contains the entire
understanding between the parties hereto with respect to the subject matter
hereof, and supersedes all prior and contemporaneous agreements and
understandings, inducements and conditions, express or implied, oral or written,
except as herein contained. The express terms hereof control and supersede any
course of performance and/or usage of the trade inconsistent with any of the
terms hereof. This Agreement may not be modified or amended other than by an
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agreement in writing.
(h) Paragraph Headings. The paragraph headings in this
Agreement are for convenience only; they form no part of this Agreement and
shall not affect its interpretation.
(i) Gender. Words used herein, regardless of the number and
gender specifically used, shall be deemed and construed to include any other
number, singular or plural, and any other gender, masculine, feminine or neuter,
as the context requires.
(j) Number of Days. In computing the number of days for
purposes of this Agreement, all days shall be counted, including Saturdays,
Sundays and holidays; provided, however, that if the final day of any time
period falls on a Saturday, Sunday or holiday, then the final day shall be
deemed to be the next day which is not a Saturday, Sunday or holiday.
7
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement
on the date first above written.
Vodavi Technology, Inc.
By: /s/ Gregory K. Roeper
-------------------------------------------------
Gregory K. Roeper, Executive Vice President and
Corporate Secretary
/s/ Steven A. Sherman
----------------------------------------------------
Steven A. Sherman, Consultant
8
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed
Registration Statement on Form S-8 (No. 333-08437).
Phoenix, Arizona
March 26, 1998.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Exhibit contains summary financial information extracted from the
Registrant's consolidated financial statements for the period ended December 31,
1997 and is qualified in its entirety by reference to such financial statements.
This Exhibit shall not be deemed filed for purposes of Section 11 of the
Securities Act of 1933 and Section 18 of the Securities Act of 1934, or
otherwise subject to the liability of such Sections, nor shall it be deemed a
part of any other filing which incorporates this report by reference, unless
such other filing expressly incorporates this Exhibit by reference.
</LEGEND>
<CIK> 949491
<NAME> Vodavi Technology, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollar
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 634
<SECURITIES> 0
<RECEIVABLES> 9,932
<ALLOWANCES> 250
<INVENTORY> 8,286
<CURRENT-ASSETS> 19,507
<PP&E> 3,662
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<TOTAL-ASSETS> 25,664
<CURRENT-LIABILITIES> 7,115
<BONDS> 8,934
0
0
<COMMON> 4
<OTHER-SE> 9,611
<TOTAL-LIABILITY-AND-EQUITY> 25,664
<SALES> 47,675
<TOTAL-REVENUES> 47,675
<CGS> 32,008
<TOTAL-COSTS> 32,008
<OTHER-EXPENSES> 14,647
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 663
<INCOME-PRETAX> 357
<INCOME-TAX> 142
<INCOME-CONTINUING> 215
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
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<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Exhibit contains summary financial information extracted from the
Registrant's consolidated financial statements for the period ended December 31,
1996, as subsequently restated, and is qualified in its entirety by reference to
such financial statements. This Exhibit shall not be deemed filed for purposes
of Section 11 of the Securities Act of 1933 and Section 18 of the Securities Act
of 1934, or otherwise subject to the liability of such Sections, nor shall it be
deemed a part of any other filing which incorporates this report by reference,
unless such other filing expressly incorporates this Exhibit by reference.
</LEGEND>
<CIK> 949491
<NAME> Vodavi Technology, Inc.
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollar
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 1,152
<SECURITIES> 0
<RECEIVABLES> 8,024
<ALLOWANCES> 234
<INVENTORY> 7,229
<CURRENT-ASSETS> 16,591
<PP&E> 3,029
<DEPRECIATION> 564
<TOTAL-ASSETS> 22,418
<CURRENT-LIABILITIES> 7,291
<BONDS> 5,725
0
0
<COMMON> 4
<OTHER-SE> 9,396
<TOTAL-LIABILITY-AND-EQUITY> 22,418
<SALES> 46,154
<TOTAL-REVENUES> 46,154
<CGS> 30,842
<TOTAL-COSTS> 30,842
<OTHER-EXPENSES> 18,554
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 841
<INCOME-PRETAX> (4,083)
<INCOME-TAX> 327
<INCOME-CONTINUING> (4,410)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,410)
<EPS-PRIMARY> (1.02)
<EPS-DILUTED> (1.02)
</TABLE>
