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 September 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 November 7, 1998 was 4,342,238.
<PAGE>
VODAVI TECHNOLOGY, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 1998
and December 31, 1997. 3
Consolidated Statements of Operations - Three and
Nine Months Ended September 30, 1998 and 1997. 4
Consolidated Statements of Cash Flows - Nine Months
Ended September 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
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VODAVI TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
In thousands
September 30, December 31,
1998 1997
------------- ------------
(Unaudited)
CURRENT ASSETS:
Cash $ 326 $ 634
Accounts Receivable, net 9,708 9,682
Inventory, net 7,674 8,286
Prepaids 458 905
-------- --------
18,166 19,507
PROPERTY AND EQUIPMENT, net 2,779 2,616
GOODWILL, net 2,281 2,395
OTHER LONG-TERM ASSETS, net 1,098 1,146
-------- --------
$ 24,324 $ 25,664
======== ========
CURRENT LIABILITIES:
Current Portion of Long-Term Debt $ 361 $ 379
Accounts Payable 3,614 4,320
Accrued Liabilities 2,446 2,416
-------- --------
6,421 7,115
-------- --------
LONG-TERM DEBT 7,625 8,934
-------- --------
STOCKHOLDERS' EQUITY:
Common Stock 4 4
Additional Paid-In Capital 12,308 12,308
Accumulated Deficit (2,034) (2,697)
-------- --------
10,278 9,615
-------- --------
$ 24,324 $ 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 and per share amounts
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
REVENUE, net $ 13,073 $ 12,731 $ 37,402 $ 36,176
COST OF GOODS SOLD 8,599 8,462 24,853 24,033
---------- ---------- ---------- ----------
GROSS MARGIN 4,474 4,269 12,549 12,143
OPERATING EXPENSES
Engineering and product
development 337 553 1,304 1,535
Selling, general and
administrative 3,219 3,029 9,599 8,572
---------- ---------- ---------- ----------
OPERATING INCOME 918 687 1,646 2,036
INTEREST EXPENSE 204 152 616 489
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 714 535 1,030 1,547
PROVISION FOR INCOME TAXES 250 114 367 514
---------- ---------- ---------- ----------
NET INCOME $ 464 $ 421 $ 663 $ 1,033
========== ========== ========== ==========
DILUTED EARNINGS PER SHARE $ 0.11 $ 0.10 $ 0.15 $ 0.24
========== ========== ========== ==========
WEIGHTED AVERAGE SHARES
OUTSTANDING - DILUTED 4,342,238 4,406,821 4,342,238 4,342,238
========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated statements.
4
<PAGE>
VODAVI TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands
(Unaudited)
Nine months ended
September 30,
-----------------
1998 1997
---- ----
OPERATING ACTIVITIES:
Net Income $ 663 $ 1,033
Adjustments:
Depreciation and amortization 558 500
Rent levelization 14 36
Changes in working capital:
Accounts receivable (26) (1,188)
Inventory 612 287
Prepaids 448 (320)
Other long-term assets 24 (287)
Accounts payable (706) (1,351)
Accrued liabilities (317) 47
Income taxes payable 346
-------- --------
NET CASH FLOWS - OPERATING ACTIVITIES 1,616 (1,243)
-------- --------
INVESTING ACTIVITIES:
Purchase of property and equipment (583) (387)
-------- --------
NET CASH FLOWS - INVESTING ACTIVITIES (583) (387)
-------- --------
FINANCING ACTIVITIES:
Payments on capital leases (284) (158)
Debt financing costs paid (68)
Borrowings from GE Capital 36,595 36,214
Payments to GE Capital (37,652) (34,307)
-------- --------
NET CASH FLOWS - FINANCING ACTIVITIES (1,341) 1,681
-------- --------
INCREASE (DECREASE) IN CASH (308) 51
CASH, beginning of period 634 1,152
-------- --------
CASH, end of period $ 326 $ 1,203
-------- --------
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
SEPTEMBER 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 September 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 September 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 SEPTEMBER 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
September 30,
------------------
1998 1997
---- ----
Revenue 100.0% 100.0%
Cost of goods sold 65.8 66.5
----- -----
Gross margin 34.2 33.5
Operating expenses:
Engineering and product development 2.6 4.3
Selling, general and administrative 24.6 23.8
----- -----
Operating income 7.0 5.4
Interest expense 1.6 1.2
----- -----
Pre-tax income 5.4 4.2
Income taxes 1.9 0.9
----- -----
Net income 3.5% 3.3%
===== =====
6
<PAGE>
REVENUE
Revenue was approximately $13.1 million in the third quarter of 1998, an
increase of approximately $340,000, or 2.7%, over the third quarter of 1997. The
Company attributes the increase to the successful launch of its new Starplus
Triad series product line, the continued success of the Company's new
entry-level voice processing products, as well as record sales of the Company's
interactive voice response 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 third quarter
of 1998 as compared with 33.5% in the third quarter of 1997. The Company
negotiated discounts with its largest suppliers in 1997 and is recognizing the
benefits of these discounts during 1998.
ENGINEERING AND PRODUCT DEVELOPMENT
Expenditures related to engineering and product development decreased
significantly in the third quarter of 1998 as compared with the third quarter of
1997, due to the elimination of several engineering and product development
positions within the Company. The Company believes the elimination of these
positions will have no effect on new product development.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses remained relatively constant during
the third quarter of 1998 as compared with the third quarter of 1997. During the
third quarter of 1998, the Company eliminated a number of selling, general, and
administrative positions, several of which were added subsequent to the third
quarter of 1997. The Company believes the elimination of these positions will
have no effect on sales and marketing efforts or customer service. These staff
reductions, together with the engineering and product development positions that
were eliminated during the third quarter of 1998 (as described above), were part
of a program intended to reduce operating expenses in the second half of the
year.
INTEREST EXPENSE
Interest expense was approximately $205,000 in the third quarter of 1998, an
increase of $50,000, or 34.2%, over the third quarter of 1997. The increase is
attributable to increased borrowings as a result of increased levels of
inventory and receivables.
INCOME TAXES
The Company has provided for income taxes using an effective rate of 35% in the
third quarter of 1998, as compared with 21.3% in the third quarter of 1997. The
effective tax rate was reduced in the third quarter of 1997 to account for the
impact of certain credits claimed for federal and state tax purposes.
7
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997:
The following table summarizes the operating results of the Company as a
percentage of sales for the periods indicated.
Nine Months Ended
September 30,
-------------
1998 1997
----- -----
Revenue 100.0% 100.0%
Cost of goods sold 66.4 66.4
----- -----
Gross margin 33.6 33.6
Operating Expenses:
Engineering and product development 3.5 4.2
Selling, general and administrative 25.7 23.7
----- -----
Operating income 4.4 5.7
Interest expense 1.6 1.4
----- -----
Pre-tax income 2.8 4.3
Income taxes 1.0 1.4
----- -----
Net income 1.8% 2.9%
===== =====
REVENUE
Revenue was approximately $37.4 million for the first nine months of 1998, an
increase of approximately $1.2 million, or 3.4%, over the first nine months of
1997. The Company attributes the increase to the successful launch of its new
Starplus Triad series product line, the continued success of the Company's new
entry-level voice processing products, as well as record sales of the Company's
interactive voice response 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 constant at 33.6% of revenue for the first nine months of
1998 as compared with the first nine months of 1997.
ENGINEERING AND PRODUCT DEVELOPMENT
Expenditures related to engineering and product development decreased slightly
in the first nine months of 1998 as compared with the first nine months of 1997
due to the elimination of several engineering and product development positions
within the Company. The Company believes the elimination of these positions will
have no effect on new product development.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased $1.0 million in the first
nine months of 1998 as compared with the first nine months of 1997. As a
percentage of revenue, selling, general and administrative expenses increased to
25.7% of revenue in the first nine months of 1998 as compared with 23.7% in the
first nine months of 1997 due to increases in personnel in sales and marketing
functions. During the third quarter of 1998, the Company eliminated a number of
selling, general, and administrative positions, several of which were added
subsequent to the third quarter of 1997. The Company believes the elimination of
these positions will have no effect on sales and marketing or customer service.
These staff reductions, together with the engineering and product development
positions that were eliminated during the third quarter of 1998 (as described
above), were part of a program intended to reduce operating expenses in the
second half of the year.
8
<PAGE>
INTEREST EXPENSE
Interest expense was approximately $615,000 in the first nine months of 1998, a
$125,000, or 26%, increase over the first nine months of 1997. The increase is
attributable to an increase in borrowings as a result of increased levels of
inventory and receivables (See Liquidity and Capital Resources).
INCOME TAXES
The Company has provided for income taxes using an effective rate of 35.6% in
the first nine months of 1998 as compared with 33.2% in the first nine months of
1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash of approximately $326,000 at September 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 September 30, 1998, were approximately
$7.5 million, which represents a decrease of $1.1 million from its borrowings of
$8.6 million at December 31, 1997. At September 30, 1998, availability was $3.0
million, with $200,000 reserved for standby letters of credit and $1,250,000
reserved for maintaining the minimum availability covenant, with a net
availability of $1.6 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 a total of
8.02% at September 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 September 30, 1998, the Company
was in violation of a financial covenant related to intercompany loans. A waiver
has been obtained for this violation.
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
September 30, 1998, the net remaining balance under these leases is
approximately $284,000.
The Company believes that its working capital and credit facilities are
sufficient to finance its internal growth in the near term. 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. As of the
date of this report, the Company does not believe that the current economic
situation in Asia will have any adverse impact on the Company's operations.
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 yet completed an internal system assessment to determine whether its
existing computer hardware and software systems are "Year 2000" compliant.
The Company currently is evaluating its entire internal computer system and has
engaged a third-party consultant in connection with the upgrade of certain of
its existing financial and accounting software systems, including software
9
<PAGE>
related to order entry, inventory management, materials planning, and accounts
payable and receivable. These upgrades are 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. As of the filing date of this Report, these
projects are approximately 25% completed. The estimated cost of these upgrades
will be approximately $20,000.
The Company has been advised that certain of the computer processing platforms
and networks and software systems used in connection with its operations, other
than the financial and accounting systems described above, may not be Year 2000
compliant. The Company currently is assessing the extent of such non-compliance
and intends to develop a program to bring those systems into Year 2000
compliance during calendar 1999. A failure of its computer systems as a result
of Year 2000 issues could have a material adverse effect on the Company's
operations.
A significant portion of the Company's business communications systems products
is manufactured by third parties in Asia. The Company has initiated but has not
yet completed an assessment of the Year 2000 risks associated with the inability
of those manufacturers to bring their production processes and other
computer-based systems into Year 2000 compliance. The Company and certain of its
third-party manufacturers have identified a number of Year 2000 issues. Because
the manufacturing processes utilized do not rely upon date-related information,
the Company currently believes that a failure on the part of its overseas
manufacturers to bring their processes and equipment into Year 2000 compliance
does not represent a material risk to the Company's ability to obtain its
products on a timely basis.
Certain of the Company's products contain software and hardware that perform
functions based upon date-related information. 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 costs related to upgrading installed products that are no
longer covered by the Company's product warranties. The Company also believes
that the costs related to upgrading installed products that remain under the
Company's product warranties would be relatively insignificant. To date, the
Company has incurred approximately $50,000 in costs associated with the
development of Year 2000 compliance upgrades. The inability of the Company to
develop and provide product modifications on a timely basis could result in a
material adverse effect on the Company, including increased warranty costs,
customer satisfaction issues, and potential litigation.
The Company is unable to fully assess the impact of the Year 2000 issue as of
the filing date of this Report. The Company currently is developing a plan to
evaluate the Year 2000 issue as it relates to computer systems operated by all
of the third-parties, including manufacturers, 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. As of the filing
date of this Report, the Company has not formulated a contingency plan with
respect to the Year 2000 compliance issues described above.
- --------------------------------------------------------------------------------
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
Not applicable.
Item 5. OTHER INFORMATION
Not applicable.
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: November 11, 1998 /s/ Glenn R. Fitchet
------------------------------------------------
Glenn R. Fitchet
President and Chief Executive Officer
(Principal Executive Officer)
Dated: November 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
SEPTEMBER 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> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 326
<SECURITIES> 0
<RECEIVABLES> 10,459
<ALLOWANCES> 751
<INVENTORY> 7,674
<CURRENT-ASSETS> 18,166
<PP&E> 4,246
<DEPRECIATION> 1,467
<TOTAL-ASSETS> 24,324
<CURRENT-LIABILITIES> 6,421
<BONDS> 7,625
0
0
<COMMON> 4
<OTHER-SE> 10,274
<TOTAL-LIABILITY-AND-EQUITY> 24,324
<SALES> 37,402
<TOTAL-REVENUES> 37,402
<CGS> 24,853
<TOTAL-COSTS> 24,853
<OTHER-EXPENSES> 10,903
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