SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
Commission File No. 0-26912
Vodavi Technology, Inc.
(Exact name of registrant as specified in its charter)
Delaware 86-0789350
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8300 E. Raintree Drive, Scottsdale, Arizona 85260
- ------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(602) 443-6000
----------------------------------------------------
(Registrant's telephone number, including area code)
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 [ ] .
The number of shares outstanding of registrant's Common Stock, $.001 par value
per share, as of August 7, 1998 was 4,342,238.
<PAGE>
VODAVI TECHNOLOGY, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1998
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 1998
and December 31, 1997. 3
Consolidated Statements of Operations - Three and Six 4
Months Ended June 30, 1998 and 1997.
Consolidated Statements of Cash Flows - Six Months
Ended June 30, 1998 and 1997. 5
Notes to Consolidated Financial Statements. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
PART II. OTHER INFORMATION 11
SIGNATURES 12
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VODAVI TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
In thousands
June 30, December 31,
1998 1997
---- ----
(Unaudited)
CURRENT ASSETS:
Cash $ 233 $ 634
Accounts Receivable, net 9,088 9,682
Inventory, net 8,907 8,286
Prepaids 577 905
-------- --------
18,805 19,507
PROPERTY AND EQUIPMENT, net 2,688 2,616
GOODWILL, net 2,319 2,395
OTHER LONG-TERM ASSETS, net 1,150 1,146
-------- --------
$ 24,962 $ 25,664
======== ========
CURRENT LIABILITIES:
Current Portion of Long-Term Debt 361 379
Accounts Payable 4,577 4,320
Accrued Liabilities 2,222 2,416
-------- --------
7,160 7,115
-------- --------
LONG-TERM DEBT 7,989 8,934
-------- --------
STOCKHOLDERS' EQUITY:
Common Stock 4 4
Additional Paid-In Capital 12,308 12,308
Accumulated Deficit (2,499) (2,697)
-------- --------
9,813 9,615
-------- --------
$ 24,962 $ 25,664
======== ========
The accompanying notes are an integral part
of these consolidated balance sheets.
3
<PAGE>
VODAVI TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
In thousands, except share amounts
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUE, net $ 12,287 $ 11,917 $ 24,329 $ 23,445
COST OF GOODS SOLD 8,088 7,944 16,254 15,572
---------- ---------- ---------- ----------
GROSS MARGIN 4,199 3,973 8,075 7,873
OPERATING EXPENSES
Engineering and product development 465 499 1,021 982
Selling, general and administrative 3,416 2,739 6,327 5,542
---------- ---------- ---------- ----------
OPERATING INCOME 318 735 727 1,349
INTEREST EXPENSE 207 161 413 338
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 111 574 314 1,011
PROVISION FOR INCOME TAXES 39 227 116 400
---------- ---------- ---------- ----------
NET INCOME $ 72 $ 347 $ 198 $ 611
========== ========== ========== ==========
DILUTED EARNINGS PER SHARE $ 0.02 $ 0.08 $ 0.05 $ 0.14
========== ========== ========== ==========
WEIGHTED AVERAGE SHARES
OUTSTANDING - DILUTED 4,342,238 4,342,238 4,342,238 4,342,238
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part
of these consolidated statements.
4
<PAGE>
VODAVI TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands
(Unaudited)
Six months ended
June 30,
-------------------
1998 1997
---- ----
OPERATING ACTIVITIES:
Net Income $ 198 $ 611
Adjustments:
Depreciation and amortization 361 326
Rent levelization 9 25
Changes in working capital:
Accounts receivable 594 (189)
Inventory (621) 41
Prepaids 328 (148)
Other long-term assets (20) (258)
Accounts payable 257 (905)
Accrued liabilities (194) (29)
-------- --------
NET CASH FLOWS - OPERATING ACTIVITIES 912 (526)
-------- --------
INVESTING ACTIVITIES:
Purchase of property and equipment (341) (107)
-------- --------
NET CASH FLOWS - INVESTING ACTIVITIES (341) (107)
-------- --------
FINANCING ACTIVITIES:
Payments on capital leases (193) (66)
Debt financing costs paid -- (23)
Borrowings from GE Capital 23,540 23,517
Payments to GE Capital (24,319) (22,147)
-------- --------
NET CASH FLOWS - FINANCING ACTIVITIES (972) 1,281
-------- --------
INCREASE (DECREASE) IN CASH (401) 648
CASH, beginning of period 634 1,152
-------- --------
CASH, end of period $ 233 $ 1,800
-------- --------
The accompanying notes are an integral part
of these consolidated statements.
5
<PAGE>
VODAVI TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED
JUNE 30, 1998
a) Vodavi Technology, Inc. (the Company), a Delaware corporation, designs,
develops, markets, and supports a broad range of communication products,
computer-telephony products, and voice processing products for a wide variety of
commercial applications.
(b) The accompanying unaudited consolidated financial statements have been
prepared by the Company without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. These financial statements reflect all
adjustments (consisting of normal recurring accruals and adjustments) which are,
in the opinion of management, necessary to fairly state the financial position
as of June 30, 1998 and the operating results and cash flows for the periods
presented. Operating results for the interim periods presented are not
necessarily indicative of the operating results that may be expected for the
entire year. These financial statements should be read in conjunction with the
Company's December 31, 1997 financial statements and accompanying notes thereto.
(c) Diluted earnings per share for the periods ended June 30, 1998 and 1997 were
determined by dividing net income by the weighted average number of common and
common equivalent shares outstanding, as outlined in Financial Accounting
Standard (SFAS) No. 128, Earnings Per Share.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Three Months Ended June 30, 1998 and 1997:
The following table summarizes the operating results of the Company as a
percentage of revenue for the periods indicated.
Three Months Ended
June 30,
-------------------------
1998 1997
---- ----
Revenue 100.0% 100.0%
Cost of goods sold 65.8% 66.7%
----- -----
Gross margin 34.2% 33.3%
Operating expenses:
Engineering and product development 3.8% 4.1%
Selling, general and administrative 27.8% 23.0%
----- -----
Operating income 2.6% 6.2%
Interest expense 1.7% 1.4%
----- -----
Pre-tax income 0.9% 4.8%
Income taxes 0.3% 1.9%
----- -----
Net income 0.6% 2.9%
===== =====
6
<PAGE>
Revenue
Revenue was approximately $12.3 million in the second quarter of 1998, an
increase of approximately $370,000, or 3.1%, over the second quarter of 1997.
The Company attributes the increase to the successful launch of its new Starplus
Triad series product line, as well as the continued success of the Company's new
entry-level voice processing products. The increase in product sales was offset
by an increase in promotional rebates and discounts related to new marketing
programs.
Gross Margin
Gross margins increased to approximately 34.2% of revenue in the second quarter
of 1998 as compared with 33.3% in the second quarter of 1997. The Company
negotiated discounts with its largest suppliers in 1997 and is beginning to
recognize the benefits of these discounts.
Engineering and Product Development
Expenditures related to engineering and product development remained relatively
constant in the second quarter of 1998 as compared with the second quarter of
1997.
Selling, General and Administrative
Selling, general and administrative expenses increased approximately $680,000
during the second quarter of 1998 as compared with the second quarter of 1997
primarily due to increases in personnel in sales and marketing functions.
Interest Expense
Interest expense was approximately $207,000 in the second quarter of 1998, an
increase of $46,000, or 28.6%, over the second quarter of 1997. The increase is
attributable to increased borrowings as a result of increased levels of
inventory.
Income Taxes
The Company has provided for income taxes using an effective rate of 35% in the
second quarter of 1998, as compared with 39.6% in the second quarter of 1997.
The decrease is the result of the Company's expected use of tax credits in 1998.
7
<PAGE>
Six Months Ended June 30, 1998 and 1997:
The following table summarizes the operating results of the Company as a
percentage of sales for the periods indicated.
Six Months Ended
June 30,
-------------------------
1998 1997
---- ----
Revenue 100.0% 100.0%
Cost of goods sold 66.8% 66.4%
----- -----
Gross margin 33.2% 33.6%
Operating Expenses:
Engineering and product development 4.2% 4.2%
Selling, general and administrative 26.0% 23.6%
----- -----
Operating income 3.0% 5.8%
Interest expense 1.7% 1.5%
----- -----
Pre-tax income 1.3% 4.3%
Income taxes 0.5% 1.7%
----- -----
Net income 0.8% 2.6%
===== =====
Revenue
Revenue was approximately $24.3 million for the first six months of 1998, an
increase of approximately $880,000, or 3.8% over the first six months of 1997.
The Company attributes the increase to the successful launch of its new Triad
series product line as well as the continued success of the Company's new
entry-level voice processing products. The increase in product sales was offset
by an increase in promotional rebates and discounts related to new marketing
programs.
Gross Margin
Gross margin remained relatively constant at 34.2% of revenue for the first six
months of 1998 as compared with 33.6% in the first six months of 1997 as the
Company is beginning to recognize the benefits of discounts negotiated with its
largest suppliers in late 1997.
Engineering and Product Development
Expenditures related to engineering and product development remained relatively
constant in the first six months of 1998 as compared with the first six
months of 1997.
Selling, General and Administrative
Selling, general and administrative expenses increased $785,000 in the first six
months of 1998 as compared with the first six months of 1997. As a percentage of
revenue, selling, general and administrative expenses increased to 26.0% of
revenue in the first six months of 1998 as compared with 23.6% in the first six
months of 1997 due to increases in personnel in sales and marketing functions.
Interest Expense
Interest expense was approximately $413,000 in the first six months of 1998, a
$75,000, or 22.2%, increase over the first six months of 1997. The increase is
attributable to an increase in borrowings as a result of increased levels of
inventory (See Liquidity and Capital Resources).
8
<PAGE>
Income Taxes
The Company has provided for income taxes using an effective rate of 36.9% in
the first six months of 1998 as compared with 39.6% in the first six months of
1997. The decrease is the result of the Company's expected use of tax credits in
1998.
Liquidity and Capital Resources
The Company's cash and cash equivalents were approximately $233,000 at June 30,
1998. The Company's cash accounts are swept regularly and applied against the
Company's line of credit, as described below. The Company's borrowings against
its available operating line of credit at June 30, 1998, were approximately $7.8
million, which represents a decrease of $800,000 from its borrowings of $8.6
million at December 31, 1997. At June 30, 1998, availability was $3.9 million,
with $200,000 reserved for standby letters of credit and $100,000 reserved for
maintaining the minimum availability covenant, with a net available of $3.6
million.
The Company maintains a $12.0 million line of credit with General Electric
Capital Corporation (GE Capital) which expires in April 2000. The line of credit
bears interest at 2.5% over the 30-day commercial paper rate or 8% at June 30,
1998. Advances under the line of credit are based upon the accounts receivable
and inventories of Vodavi Communications Systems, Inc. (VCS), a wholly owned
subsidiary of the Company, and are secured by substantially all of the assets of
the Company. The revolving line of credit contains 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 GE
Capital. At June 30, 1998, the Company was in violation of two financial
covenants related to (i) intercompany loans and (ii) number of days of inventory
maintained by the Company. The Company has secured a waiver of these violations.
The Company has financed approximately $800,000 in capital expenditures with
third-party leasing companies. The terms of these financings generally provide
for interest rates at approximately 13% with 24-month repayment periods. As of
June 30, 1998, the net remaining balance under these leases is approximately
$310,000.
While the Company believes that its working capital and credit facilities are
sufficient to finance its internal growth in the near term, the Company is
currently negotiating an expansion of its credit facility to $15 million as well
as term financing relative to its fixed asset additions. 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.
International Manufacturing Sources
The Company currently obtains certain of its products under various
manufacturing arrangements with third-party manufacturers in Asia. The current
economic situation in Asia is not expected to have any adverse impact on the
Company's operations.
Year 2000 Compliance
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 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, customers, 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.
9
<PAGE>
The Company has identified those of its existing products that are not Year 2000
compliant and has completed a schedule to ensure that upgrades or modifications
for its products will be available by January 1999. 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.
- --------------------------------------------------------------------------------
This report contains forward-looking statements, including statements regarding
the Company's business strategies, the Company's business, and the industry in
which the Company operates. These forward-looking statements are based primarily
on the Company's expectations and are subject to a number of risks and
uncertainties, some of which are beyond the Company's control. Actual results
could differ materially from the forward-looking statements as a result of
numerous factors, including those set forth in the Company's Form 10-K for the
year ended December 31, 1997, as filed with the Securities and Exchange
Commission.
10
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to the disclosure included under this Item in the
Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1998, as filed on May 14, 1998.
Item 2. Changes In Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
The Company's 1998 Annual Meeting of Stockholders was held on
June 29, 1998. The following nominees were elected to the
Company's Board of Directors, to serve until their successors
are elected or have been qualified, or until their earlier
resignation or removal:
Nominee Votes in Favor Withheld
------- -------------- --------
William J. Hinz 3,864,522 390,503
Glenn R. Fitchet 3,864,522 390,503
Nam Woo 3,864,522 390,503
Gilbert H. Engels 3,854,522 400,503
Stephen A. McConnell 3,875,772 379,253
The following item was voted upon by the Company's
stockholders:
a) Proposal to ratify the appointment of Arthur Andersen
LLP as the independent auditors of the Company for
the fiscal year ending December 31, 1998.
Votes in Favor Opposed Abstained Broker Non-Vote
-------------- ------- --------- ---------------
4,238,775 16,250 0 0
Item 5. Other Information
Pursuant to Rule 14a-4 under the Securities Exchange Act of
1934, as amended, the Company intends to retain discretionary
authority to vote proxies with respect to shareholder
proposals for which the proponent does not seek inclusion of
the proposed matter in the Company's proxy statement for the
annual meeting to be held during calendar 1999, except in
circumstances where (i) the Company receives notice of the
proposed matter no later than April 14, 1999, and (ii) the
proponent complies with the other requirements set forth in
Rule 14a-4.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit 27. Financial Data Schedule
b) Reports on Form 8-K
Not applicable
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Vodavi Technology, Inc.
Dated: August 11, 1998 /s/ Glenn R. Fitchet
---------------- ------------------------------------
Glenn R. Fitchet
President and Chief Executive Officer
(Principal Executive Officer)
Dated: August 11, 1998 /s/ Gregory K. Roeper
---------------- ------------------------------------
Gregory K. Roeper
Chief Operating Officer, Chief Financial Officer,
Secretary, and Treasurer
(Principal Financial and Accounting Officer)
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Exhibit contains summary financial information extracted from the
Registrant's unaudited consolidated financial statements for the period
ended June 30, 1998, 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 Exchange 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>
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
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<CASH> 233
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<RECEIVABLES> 9,629
<ALLOWANCES> 541
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0
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