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, 1999
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)
(480) 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 May 10, 1999 was 4,342,238.
<PAGE>
VODAVI TECHNOLOGY, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1999
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 1999
and December 31, 1998. 3
Consolidated Statements of Operations - Three Months
Ended March 31, 1999 and 1998. 4
Consolidated Statements of Cash Flows - Three Months
Ended March 31, 1999 and 1998. 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 10
SIGNATURES 11
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VODAVI TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
In thousands
March 31, December 31,
1999 1998
---- ----
(Unaudited)
CURRENT ASSETS:
Cash $ 697 $ 796
Accounts receivable, net 8,626 8,888
Inventory, net 5,644 6,385
Prepaid expenses and other 1,020 697
-------- --------
15,987 16,766
PROPERTY AND EQUIPMENT, net 2,568 2,663
GOODWILL, net 2,207 2,244
OTHER LONG-TERM ASSETS, net 911 1,169
-------- --------
$ 21,673 $ 22,842
======== ========
CURRENT LIABILITIES:
Current portion of long term debt $ 36 $ 124
Accounts payable 3,762 2,355
Accrued liabilities 1,912 1,854
-------- --------
5,710 4,333
-------- --------
LONG-TERM DEBT 5,125 7,910
-------- --------
STOCKHOLDERS' EQUITY:
Common stock 4 4
Additional paid-in capital 12,308 12,308
Accumulated deficit (1,474) (1,713)
-------- --------
10,838 10,599
-------- --------
$ 21,673 $ 22,842
======== ========
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,
----------------------------
1999 1998
---- ----
REVENUE, net $ 11,307 $ 12,005
COST OF GOODS SOLD 7,456 8,129
---------- ----------
GROSS MARGIN 3,851 3,876
OPERATING EXPENSES
Engineering and product development 283 555
Selling, general and administrative 3,043 2,911
---------- ----------
OPERATING INCOME 525 410
INTEREST EXPENSE 138 208
---------- ----------
INCOME BEFORE INCOME TAXES 387 202
PROVISION FOR INCOME TAXES 148 78
---------- ----------
NET INCOME $ 239 $ 124
========== ==========
DILUTED EARNINGS PER SHARE $ 0.06 $ 0.03
========== ==========
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,
-------------------------
1999 1998
---- ----
OPERATING ACTIVITIES:
Net income $ 239 $ 124
Adjustments:
Depreciation and amortization 199 186
Changes in working capital:
Accounts receivable 262 401
Inventory 742 725
Prepaid expenses and other (323) 142
Other long term assets 261 20
Accounts payable 1,407 (2,311)
Accrued liabilities 56 (110)
-------- --------
NET CASH FLOWS - OPERATING ACTIVITIES 2,843 (823)
-------- --------
INVESTING ACTIVITIES:
Purchase of fixed assets (70) (180)
-------- --------
NET CASH FLOWS - INVESTING ACTIVITIES (70) (180)
-------- --------
FINANCING ACTIVITIES:
Payments on capital leases (89) (104)
Borrowings from GE Capital 9,057 13,665
Payments to GE Capital (11,840) (12,676)
-------- --------
NET CASH FLOWS - FINANCING ACTIVITIES (2,872) 885
-------- --------
DECREASE IN CASH (99) (118)
CASH, beginning of period 796 634
-------- --------
CASH, end of period $ 697 $ 516
======== ========
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, 1999
a) Vodavi Technology, Inc. (the Company), a Delaware corporation, designs,
develops, markets, and supports a broad range of telecommunications solutions,
including digital telephone systems, voice processing systems, and
computer-telephony products for a wide variety of business 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, 1999 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, 1998 financial statements and accompanying notes thereto.
(c) Diluted earnings per share for the periods ended March 31, 1999 and 1998
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, 1999 AND 1998:
The following table summarizes the operating results of the Company as a
percentage of revenue for the periods indicated.
Three Months Ended
March 31,
-------------------
1999 1998
---- ----
Revenue 100.0% 100.0%
Cost of goods sold 65.9% 67.7%
----- -----
Gross margin 34.1% 32.3%
Operating expenses:
Engineering and product development 2.5% 4.6%
Selling, general and administrative 26.9% 24.3%
----- -----
Operating income 4.7% 3.4%
Interest expense 1.2% 1.7%
----- -----
Pre-tax income 3.5% 1.7%
Income taxes 1.3% .6%
----- -----
Net income 2.2% 1.1%
===== =====
6
<PAGE>
REVENUE
Revenue was approximately $11.3 million in the first quarter of 1999, a decrease
of approximately $700,000, or 5.8%, over the first quarter of 1998. The decrease
in revenue primarily reflects the Company's continuing effort to reduce
inventory in the wholesale distributor supply channel while focusing its sales
and marketing efforts on "pulling" the product out of the channel verses
"pushing" it into the channel through discounting.
GROSS MARGIN
Gross margin increased to approximately 34.1% of revenue in the first quarter of
1999 as compared with 32.3% in the first quarter of 1998. The improvement in
gross margin in the first quarter of 1999 is primarily attributable to decreased
discounts provided to wholesale customers during that period as compared with
discounts given during the first quarter of 1998. Gross margin also improved
slightly during the first quarter of 1999 as a result of a decrease of
approximately $81,000 for import duties and a decrease of approximately $41,000
for royalties expense.
ENGINEERING AND PRODUCT DEVELOPMENT
Expenditures related to engineering and product development decreased to
approximately $283,000, or 2.5% of revenue, in the first quarter of 1999 as
compared with approximately $555,000, or 4.6% of revenue, in the first quarter
of 1998. The decrease was due to the elimination of several engineering and
product development positions within the Company during fiscal 1998. 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 flat during the
first quarter of 1999 as compared with the first quarter of 1998.
INTEREST EXPENSE
Interest expense was approximately $138,000 in the first quarter of 1999, a
decrease of $70,000, or 33.7%, over the first quarter of 1998. The decrease is
attributable to a decrease in average borrowings as a result of reduced
inventory levels.
INCOME TAXES
The Company has provided for income taxes using an effective rate of 38.2% in
the first quarter of 1999, as compared with 38.6% in the first quarter of 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash of approximately $697,000 at March 31, 1999. 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, 1999, were approximately $4.9 million,
which represents a decrease of $2.8 million from its borrowings of $7.7 million
at December 31, 1998. At March 31, 1999, availability was $4.1 million, with
$200,000 reserved for standby letters of credit and $1.25 million reserved for
maintaining the minimum availability covenant, with a net available of $2.7
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 7.35% at March
30, 1999. Advances under the line of credit are based upon the accounts
receivable and inventory balances 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
7
<PAGE>
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 March 31, 1999, the Company was in compliance with all of the
covenants.
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, 1999, the net remaining balance under these leases is approximately
$36,000.
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 systems, including software 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 75 to 85% complete. The Company currently plans to test the
upgrades to this system in May 1999. The Company estimates that the cost of
these upgrades will be approximately $25,000.
The Company has been advised that certain of the computer processing platforms
and networks and certain 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. 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. As part of this assessment, all of the manufacturers have advised the
Company that their processes and systems are Year 2000 compliant.
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
development of upgrades or modifications to those products that will enable them
to process Year 2000 dates without malfunctioning. The Company believes that it
will be able to pass along to its customers costs related
8
<PAGE>
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 $15,000 in costs associated with the development of Year 2000
compliance upgrades. The inability of the Company to develop and provide on a
timely basis product modifications that may be required 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 evaluating 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. The 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 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, 1998, as filed
with the Securities and Exchange Commission.
9
<PAGE>
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Not applicable.
Item 2. CHANGES IN SECURITIES
On February 4, 1999, the Company entered into an agreement with
Continental Capital & Equity Corporation ("CCEC") under which CCEC
will provide investor relations services to the Company. Under that
agreement, the Company agreed to issue to CCEC five-year warrants to
purchase an aggregate of 122,500 shares of the Company's common stock
at the following exercise prices:
* 22,500 shares at an exercise price of $4.00 per share;
* 20,000 shares at an exercise price of $4.50 per share;
* 20,000 shares at an exercise price of $5.00 per share;
* 20,000 shares at an exercise price of $5.50 per share;
* 20,000 shares at an exercise price of $6.00 per share; and
* 20,000 shares at an exercise price of $6.50 per share.
The Company issued the warrants without registration under the
Securities Act of 1933 in reliance on Section 4(2) of the Securities
Act.
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 27.1 Financial Data Schedule
b) Reports on Form 8-K
Not applicable
10
<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 10, 1999 /s/ Gregory K. Roeper
---------------------------------------
Gregory K. Roeper
President, Chief Operating Officer
Executive Vice President Finance,
Administration and Operations;
Chief Financial Officer; Secretary; and
Treasurer (Principal Financial and
Accounting Officer)
<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, 1999, 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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