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 March 31, 1998
Commission File No. 0-26912
Vodavi Technology, Inc.
-----------------------
(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 organization) Identification No.)
8300 E. Raintree Drive, Scottsdale, Arizona 85260
- ------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(602) 443-6000
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(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 April 30, 1998 was 4,342,238.
<PAGE>
VODAVI TECHNOLOGY, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1998
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 1998
and December 31, 1997. 3
Consolidated Statements of Operations - Three Months 4
Ended March 31, 1998 and 1997.
Consolidated Statements of Cash Flows - Three Months
Ended March 31, 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 9
SIGNATURES 10
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VODAVI TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
In thousands
March 31, December 31,
1998 1997
---- ----
(Unaudited)
CURRENT ASSETS:
Cash $ 516 $ 634
Accounts Receivable, net 9,280 9,682
Inventory, net 7,562 8,286
Prepaids 630 905
-------- --------
17,988 19,507
PROPERTY AND EQUIPMENT, net 2,661 2,616
GOODWILL, net 2,357 2,395
OTHER LONG-TERM ASSETS, net 1,117 1,146
-------- --------
$ 24,123 $ 25,664
======== ========
CURRENT LIABILITIES:
Current Portion of Long-Term Debt $ 361 $ 379
Accounts Payable 2,008 4,320
Accrued Liabilities 2,173 2,416
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4,542 7,115
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LONG-TERM DEBT 9,842 8,934
-------- --------
STOCKHOLDERS' EQUITY:
Common Stock 4 4
Additional Paid-In Capital 12,308 12,308
Accumulated Deficit (2,573) (2,697)
-------- --------
9,739 9,615
-------- --------
$ 24,123 $ 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)
Three Months Ended March 31,
1998 1997
---- ----
REVENUE, net $ 12,005 $ 11,528
COST OF GOODS SOLD 8,129 7,628
---------- ----------
GROSS MARGIN 3,876 3,900
OPERATING EXPENSES
Engineering and product development 555 483
Selling, general and administrative 2,911 2,803
---------- ----------
OPERATING INCOME 410 614
INTEREST EXPENSE 208 178
---------- ----------
INCOME BEFORE INCOME TAXES 202 436
PROVISION FOR INCOME TAXES 78 174
---------- ----------
NET INCOME $ 124 $ 262
========== ==========
DILUTED EARNINGS PER SHARE $ 0.03 $ 0.06
========== ==========
WEIGHTED AVERAGE SHARES
OUTSTANDING - DILUTED 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)
Three months ended
March 31,
---------
1998 1997
---- ----
OPERATING ACTIVITIES
Net income $ 124 $ 262
Adjustments:
Depreciation and amortization 186 184
Changes in working capital:
Accounts receivable 401 695
Inventory 725 314
Prepaid expenses 142 14
Other long term assets 20 (37)
Accounts payable (2,311) (1,043)
Accrued liabilities (110) (30)
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NET CASH FLOWS - OPERATING ACTIVITIES (823) 359
-------- --------
INVESTING ACTIVITIES:
Purchase of fixed assets (180) (95)
-------- --------
NET CASH FLOWS - INVESTING ACTIVITIES (180) (95)
-------- --------
FINANCING ACTIVITIES:
Payments on capital leases (104) (84)
Borrowings from GE Capital 13,665 11,800
Payments to GE Capital (12,676) (12,124)
-------- --------
NET CASH FLOWS - FINANCING ACTIVITIES 885 (408)
-------- --------
DECREASE IN CASH (118) (144)
CASH, beginning of period 634 1,152
-------- --------
CASH, end of period $ 516 $ 1,008
======== ========
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
MARCH 31, 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 March 31, 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 March 31, 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 March 31, 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
March 31,
---------
1998 1997
Revenue 100.0% 100.0%
Cost of goods sold 67.7% 66.2%
------ ------
Gross margin 32.3% 33.8%
Operating expenses:
Engineering and product development 4.6% 4.2%
Selling, general and administrative 24.3% 24.3%
------ ------
Operating income 3.4% 5.3%
Interest expense 1.7% 1.5%
------ ------
Pre-tax income 1.7% 3.8%
Income taxes 0.6% 1.5%
------ ------
Net income 1.1% 2.3%
====== ======
6
<PAGE>
Revenue
Revenue was approximately $12.0 million in the first quarter of 1998, an
increase of approximately $500,000, or 4.1%, over the first quarter of 1997. The
Company attributes the increase to new marketing programs designed to increase
its dealers' sales as well as the successful launch of its new voice-processing
platform. The increase in product sales was offset by an increase in promotional
rebates and discounts related to the marketing programs.
Gross Margin
Gross margins decreased to approximately 32.3% of revenue in the first quarter
of 1998 as compared with 33.8% in the first quarter of 1997. The Company
negotiated discounts with its largest vendors in 1997 and is beginning to
recognize the benefits of these discounts. The promotional rebates discussed
above however, offset the effect of the discounts obtained on product cost.
Engineering and Product Development
Expenditures related to engineering and product development remained relatively
constant in the first quarter of 1998 as compared with the first quarter of
1997.
Selling, General and Administrative
Selling, general and administrative expenses remained relatively flat during the
first quarter of 1998 as compared with the first quarter of 1997, but declined
significantly from the fourth quarter of 1997. The Company attributes the
decline from the fourth quarter of 1997 to the impact of the restructuring plan
adopted at the end of 1997.
Interest Expense
Interest expense was approximately $208,000 in the first quarter of 1998, an
increase of $30,000, or 16.9%, over the first quarter of 1997. The increase is
attributable to an increase in borrowings as a result of the Company's decision
to begin taking advantage of early payment discounts from its largest vendor, LG
Electronics, Inc. (LGE).
Income Taxes
The Company has provided for income taxes using an effective rate of 38.6% in
the first quarter of 1998, as compared with 39.9% in the first quarter 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 $516,000 at March 31,
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 March 31, 1998, were approximately
$9.6 million, which represents an increase of $1.0 million from its borrowings
of $8.6 million at December 31, 1997. The increase is attributed to the
prepayments to LGE, as described above. As a result of this, the Company
violated a minimum availability covenant requiring the Company to maintain no
less than $1.25 million in availability. In addition, the Company violated a
covenant covering intercompany loan balances during the first quarter of 1998.
The Company has obtained a waiver that decreased the minimum availability
covenant to $100,000 through September 30, 1998 and modifies the intercompany
loan covenant through September 30, 1998. At March 31, 1998, availability was
$1.3 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 $1.0 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 8.02% at
7
<PAGE>
April 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.
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
March 31, 1998, the net remaining balance under these leases is approximately
$400,000.
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.
- --------------------------------------------------------------------------------
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.
8
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On September 20, 1996, the Company and Enhanced Systems, Inc. (Enhanced), a
wholly owned subsidiary of the Company, 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 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 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 cost and attorneys fees. The parties have recently commenced written
discovery in both lawsuits. 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 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
9
<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: May 13 , 1998 /s/Glenn R. Fitchet
-- -------------------
Glenn R. Fitchet
President and Chief Executive Officer
(Principal Executive Officer)
Dated: May 13, 1998 /s/Gregory K. Roeper
-- --------------------
Gregory K. Roeper
Executive Vice President Finance, Administration
and Operations; Chief Financial Officer;
Secretary; and Treasurer (Principal Financial and
Accounting Officer)
10
<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 March 31, 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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