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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
Commission File No. 0-26912
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 organization) Identification No.)
8300 E. Raintree Drive, Scottsdale, Arizona 85260
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(Address of principal executive offices) (Zip Code)
(480) 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 November 13, 2000 was 4,256,588.
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<PAGE>
VODAVI TECHNOLOGY, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 2000 and December 31, 1999. 3
Condensed Consolidated Statements of Operations -
Three and Nine Months Ended September 30, 2000 and 1999. 4
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2000 and 1999. 5
Notes to Condensed Consolidated Financial Statements. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk 11
PART II. OTHER INFORMATION 12
SIGNATURES 13
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VODAVI TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
IN THOUSANDS
September 30, December 31,
2000 1999
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(Unaudited)
CURRENT ASSETS:
Cash $ 435 $ 1,528
Accounts receivable, net 11,211 10,530
Inventory 6,773 6,550
Prepaids and other current assets 759 1,037
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Total current assets 19,178 19,645
PROPERTY AND EQUIPMENT, net 2,124 2,356
GOODWILL, net 1,805 1,906
OTHER LONG-TERM ASSETS, net 1,086 1,307
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$ 24,193 $ 25,214
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CURRENT LIABILITIES:
Accounts payable $ 3,632 $ 2,990
Accrued liabilities 1,934 1,546
Revolving credit facility 5,915 8,672
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Total current liabilities 11,481 13,208
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OTHER LONG-TERM OBLIGATIONS 156 186
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock 5 4
Additional paid-in capital 13,170 12,334
Retained earnings (Accumulated deficit) 69 (473)
Treasury stock (688) (45)
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12,556 11,820
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$ 24,193 $ 25,214
======== ========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
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VODAVI TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
IN THOUSANDS EXCEPT PER SHARE AMOUNTS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- -----------------
2000 1999 2000 1999
------- ------- ------- -------
REVENUE, net $13,024 $14,033 $35,468 $37,981
COST OF GOODS SOLD 8,129 9,005 22,209 24,666
------- ------- ------- -------
GROSS MARGIN 4,895 5,028 13,259 13,315
OPERATING EXPENSES
Engineering and product development 447 411 1,266 1,141
Selling, general and administrative 3,473 3,454 10,564 9,969
------- ------- ------- -------
OPERATING INCOME 975 1,163 1,429 2,205
INTEREST EXPENSE 167 189 532 478
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 808 974 897 1,727
PROVISION FOR INCOME TAXES 311 365 355 647
------- ------- ------- -------
NET INCOME $ 497 $ 609 $ 542 $ 1,080
======= ======= ======= =======
BASIC EARNINGS PER SHARE $ 0.12 $ 0.14 $ 0.13 $ 0.25
======= ======= ======= =======
WEIGHTED AVERAGE SHARES
OUTSTANDING - BASIC 4,293 4,342 4,279 4,342
======= ======= ======= =======
DILUTED EARNINGS PER SHARE $ 0.12 $ 0.14 $ 0.13 $ 0.25
======= ======= ======= =======
WEIGHTED AVERAGE SHARES
OUTSTANDING - DILUTED 4,293 4,342 4,338 4,342
======= ======= ======= =======
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
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VODAVI TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
IN THOUSANDS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
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2000 1999
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 542 $ 1,080
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation and amortization 712 486
Loss on sale of repair center division -- 86
Rent levelization (30) (7)
Changes in working capital:
Accounts receivable, net (681) (3,764)
Inventory (223) 757
Prepaids and other current assets 278 (382)
Other long-term assets, net 69 335
Accounts payable 642 1,466
Accrued liabilities 388 286
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Net cash flows provided by operating activities 1,697 343
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (227) (254)
Cash paid for license agreement -- (500)
Proceeds from sale of repair center division -- 282
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Net cash flows used in investing activities (227) (472)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) borrowings on revolving credit facility (2,757) 1,839
Purchase of common stock (643) --
Proceeds from stock options exercised 837 --
Payments on capital leases -- (124)
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Net cash flows (used in) provided by financing activities (2,563) 1,715
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(DECREASE) INCREASE IN CASH (1,093) 1,586
CASH, beginning of period 1,528 796
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CASH, end of period $ 435 $ 2,382
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</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
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VODAVI TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED
SEPTEMBER 30, 2000
(a) Vodavi Technology, Inc., and subsidiaries (the Company), a Delaware
corporation, designs, develops, markets, and supports a broad range of
business telecommunication solutions, including telephony products, voice
processing products, and computer-telephony products, for a wide variety of
business applications. The Company markets its products primarily in the
United States as well as in foreign countries through a distribution model
consisting of wholesale distributors, direct dealers, and its own direct
sales personnel.
(b) The accompanying unaudited condensed 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, 2000 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, 1999 financial statements and accompanying notes thereto.
(c) Diluted earnings per share for the periods ended September 30, 2000 and
1999 were determined by dividing net income by the weighted average number
of common shares and dilutive securities outstanding, as outlined in
Statement of Financial Accounting Standard (SFAS) No. 128, EARNINGS PER
SHARE. The number of dilutive securities for the first nine months of 2000
was 59,000 shares. There were no dilutive securities for the first nine
months of 1999 or for the third quarters of 2000 and 1999.
(d) The Company has determined that it operates one reportable segment, the
distribution of telecommunications equipment. The Company has three product
categories - telephony, voice processing, and computer-telephony; however,
each of these does not meet the segment criteria for SFAS No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. As a
result, the Company has determined that it is appropriate to present one
reportable segment consistent with the guidance in SFAS No. 131.
Accordingly, the Company has not presented separate financial information
for each product category, as the Company's consolidated financial
statements present its one reportable segment.
(e) The Company is a defendant in various lawsuits. See Item 3, "Legal
Proceedings" included in the Company's Form 10-K for the year ended
December 31, 1999. There have been no significant developments in these
lawsuits since the filing of the Company's Form 10-K. The Company has not
made any provisions in its financial statements for these lawsuits because
the Company does not believe that these lawsuits will have a material
impact on our results of operations and financial position. The imposition
of damages in any of these matters could have a material adverse effect on
the Company's results of operations and financial position. From time to
time, the Company also is subject to certain asserted and unasserted claims
encountered in the normal course of business. The Company believes that the
resolution of these matters will not have a material adverse effect on the
Company's financial position or results of operations.
(f) On December 3, 1999, the Securities and Exchange Commission staff (the
Staff) issued Staff Accounting Bulletin (SAB) 101, REVENUE RECOGNITION.
Subsequent to its issuance, the Staff elected to defer the required
implementation date. The Company will be required to adopt SAB 101 during
the fourth quarter of 2000. Management believes that the adoption of SAB
101 will not have a material impact on the Company's financial position or
results of operations.
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(g) In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133 (as amended by SFAS No. 137), ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES, which requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The issuance of SFAS
No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES -
DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133, delayed the
required effective date of SFAS No. 133 to all fiscal years beginning after
June 15, 2000. The Company will be required to adopt SFAS No. 133, as
amended, on January 1, 2001. Management does not believe that the adoption
of SFAS No. 133, as amended, will have a material impact on its results of
operations or financial position.
(h) In July 2000, the Emerging Issues Task Force (EITF) reached a consensus on
EITF Issue 00-10, related to the accounting for shipping and handling
revenues and costs and their classification in the income statement. The
consensus requires an entity to record all shipping and handling billed to
customers as revenue. It also states that the classification of shipping
and handling costs is an accounting policy decision subject to appropriate
disclosure. The Company will be required to implement EITF 00-10 concurrent
with the implementation of SAB 101 as discussed above. Management does not
believe the implementation of EITF 00-10 will have a material impact on the
Company's financial position or results of operations. However, a
reclassification of prior periods within the income statement will be
necessary to conform with the requirements of EITF 00-10.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999:
The following table summarizes the operating results of the Company as a
percentage of revenue for the periods indicated.
Three Months Ended
September 30,
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2000 1999
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Revenue, net 100.0% 100.0%
Cost of goods sold 62.4% 64.2%
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Gross margin 37.6% 35.8%
Operating expenses:
Engineering and product development 3.4% 2.9%
Selling, general and administrative 26.7% 24.6%
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Operating income 7.5% 8.3%
Interest expense 1.3% 1.4%
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Income before income taxes 6.2% 6.9%
Provision for income taxes 2.4% 2.6%
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Net income 3.8% 4.3%
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REVENUE
Revenue was $13.0 million in the third quarter of 2000, a decrease of $1.0
million, or 7.2%, from the third quarter of 1999. This decrease is primarily
attributable to a decrease of $1.8 million in the wholesale distribution
channel, a decrease in other revenue of $233,000, an increase in rebates of
$102,000, which were partially offset by an increase of $1.2 million in INFINITE
revenue. We believe the overall decrease was primarily due to soft market
conditions in the small- to mid-sized markets affecting our industry, and the
planned migration of our customers from our older digital key telephone systems
into newer product lines. These decreases were partially offset by the expansion
of our dealer-focused channels.
The wholesale distribution channel decrease of $1.8 million, or 17%, was the net
effect of the planned product migration discussed above, offset by growth in
sales of the Triad program. Sales of the Starplus digital product decreased by
$1.7 million, or 82%, in the third quarter of 2000 as compared to the comparable
prior year period. Additionally, sales of Starplus analog product were $507,000,
or 35%, lower than third quarter of 1999. The Triad program, which is a focused
dealer program through our wholesale distribution channel, increased $658,000,
or 25%.
The decrease in the wholesale distribution channel was partially offset by an
increase of $1.2 million, or 46%, in INFINITE revenue. The increase in INFINITE
revenue is primarily due to the continued addition, beginning in fourth quarter
of 1999, of large-volume, well-qualified new dealers.
Total voice processing revenue for all channels of $2.7 million remained
consistent with the third quarter of 1999. As a percentage of total revenue,
voice-processing revenue comprised 20.5% of revenue for third quarter 2000 as
compared to 19.8% for the same period in 1999.
GROSS MARGIN
Gross margin increased to 37.6% of revenue in the third quarter of 2000 compared
with 35.8% of revenue in the third quarter of 1999. The improvement in gross
margin in the third quarter of 2000 was mainly attributable to margin
improvements for voice mail products. Additional improvement in gross margin was
attributable to a decrease in import duties.
8
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ENGINEERING AND PRODUCT DEVELOPMENT
For the quarter ended September 30, 2000, expenditures related to engineering
and product development increased $36,000 to $447,000 as compared to the same
period in 1999. This increase is mainly due to two additional temporary
engineers.
SELLING, GENERAL AND ADMINISTRATIVE
For the quarter ended September 30, 2000, selling, general and administrative
expenses remained consistent with expenditures in the third quarter of 1999.
INTEREST EXPENSE
Interest expense decreased to $167,000 in the third quarter of 2000, compared
with $189,000 in the third quarter of 1999. The $22,000 decrease is primarily
due to a decrease in the average loan balances from $9.3 million for third
quarter 1999 to $7.0 million for third quarter 2000. The line of credit bears
interest at 2.5% over the 30-day commercial paper rate.
INCOME TAXES
We recorded a tax provision of $311,000, or 38.5% effective rate, for the third
quarter of 2000 as compared with a tax provision utilizing an effective rate of
37.5%, or $365,000, for the third quarter of 1999. The provision for third
quarter 2000 is slightly higher due to greater utilization of research and
development tax credits during 1999.
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999:
The following table summarizes the operating results of the Company as a
percentage of revenue for the periods indicated.
Nine Months Ended
September 30,
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2000 1999
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Revenue, net 100.0% 100.0%
Cost of goods sold 62.6% 64.9%
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Gross margin 37.4% 35.1%
Operating Expenses:
Engineering and product development 3.6% 3.0%
Selling, general and administrative 29.8% 26.3%
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Operating income 4.0% 5.8%
Interest expense 1.5% 1.3%
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Income before income taxes 2.5% 4.5%
Provision for income taxes 1.0% 1.7%
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Net income 1.5% 2.8%
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REVENUE
Revenue was approximately $35.5 million for the first nine months of 2000, a
decrease of approximately $2.5 million, or 6.6%, over the first nine months of
1999. Wholesale distribution revenue decreased by approximately $6.1 million.
This decrease is the net effect of a number of factors, including (a) a
decision, during the first quarter of 2000, by one of our major wholesale
distribution customers to reduce its inventory levels; (b) our planned migration
from our older digital key telephone systems and commercial grade telephones
into newer product lines;(c) soft market conditions in the small- to mid-sized
markets affecting our industry during the third quarter of 2000; and (d) a
partial offset due to the expansion of our dealer focused channels (INFINITE and
Triad).
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Triad revenue, our dealer focused channel through our wholesale distribution
channel, increased 28% to $8.3 million for the first nine months of 2000.
Additionally, INFINITE revenue, generated through our INFINITE dealer direct
channel, increased approximately $4.4 million, or 64%. The increase in INFINITE
revenue is primarily due to the continued addition, beginning in fourth quarter
of 1999, of large-volume, well-qualified new dealers.
We sold our repair center division during the second quarter of 1999. Repair
revenue decreased by $405,000 during the first nine months of 2000. Total voice
processing revenue for all channels increased by $538,000, or 7.8%, to $7.4
million.
GROSS MARGIN
Gross margin increased to approximately 37.4% of revenue for the first nine
months of 2000 compared with 35.1% for the first nine months of 1999. The
improvement in gross margin is primarily due to the enhanced margins associated
with our voice processing products and decreased import duties. The voice mail
margin improvements are a direct result of the acquisition of the voice mail
technology rights in early 1999 and the movement of the manufacturing overseas
in late 1999. Additionally, sales of higher margin voice processing products
increased from 18.1% of total revenue in 1999 to 20.9% of total revenue in 2000.
ENGINEERING AND PRODUCT DEVELOPMENT
Expenditures related to engineering and product development increased by
$125,000 to approximately $1.3 million, or 3.6% of revenue, in the first nine
months of 2000 compared with $1.1 million or 3.0% of revenue, in the first nine
months of 1999. The increase was primarily due to salaries and related personnel
costs associated with additional headcount and field trial expenses.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased by $595,000 during the
first nine months of 2000 to $10.6 million compared with $10.0 million for the
same period in 1999. This increase is the net effect of a number of factors,
including (a) continued investment in our sales force beginning in the second
quarter of 1999; (b) an increase in professional fees; (c) increases in the
reserve for doubtful accounts receivable; (d) increased efforts in our marketing
and sales programs; and (e) decreased expenses due to the sale of our repair
center during second quarter of 1999.
INTEREST EXPENSE
Interest expense was approximately $532,000 in the first nine months of 2000, a
$54,000, or 11.3%, increase over the first nine months of 1999. The increase is
attributable to an increase in the interest rate, which is calculated at 2.5%
over the 30-day commercial paper rate. The average interest rate during the
first nine months in 2000 was 8.61%, while the average interest rate during the
first nine months in 1999 was 7.54%.
INCOME TAXES
We recorded a tax provision of $355,000 or 39.6% effective rate for the first
nine months of 2000 compared with a tax provision utilizing an effective rate of
37.5%, or $647,000 for the same period in 1999. The provision for the first nine
months of 2000 is slightly higher due to greater utilization of research and
development tax credits during 1999.
LIQUIDITY AND CAPITAL RESOURCES
We had $435,000 of cash at September 30, 2000. The decrease in cash from the end
of the year is primarily due to a cash receipt in excess of $900,000 on a
receivable balance that did not sweep against our line of credit at the end of
the year. Accordingly, this balance was reflected in cash at December 31, 1999.
The comparable cash receipt, also in excess of $1.0 million, received during the
third quarter of 2000 had swept against the line of credit, and is reflected as
a reduction to the cash balance and the credit facility at September 30, 2000.
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We had borrowings of approximately $5.9 million against our available operating
line of credit at September 30, 2000, which represents a decrease of $2.8
million from borrowings of $8.7 million at December 31, 1999. This decrease is
primarily due to the timing of payments received on accounts receivable balances
from customers, payments on accounts payable balances to vendors, and cash flow
generated the first nine months. At September 30, 2000, amounts available for
additional borrowing totaled $5.5 million. Working capital increased to
approximately $7.7 million at September 30, 2000 from approximately $6.4 million
at December 31, 1999.
We maintain a $15.0 million credit facility with General Electric Capital
Corporation that expires in April 2003. The line of credit bears interest at
2.5% over the 30-day commercial paper rate, or 8.98% at September 30, 2000.
Advances under the line of credit are based upon eligible accounts receivable
and inventory of our wholly owned subsidiary Vodavi Communications Systems,
Inc., and are secured by substantially all of our assets. The revolving line of
credit contains covenants that are customary for similar credit facilities and
also prohibit our operating subsidiaries from paying dividends to our company
without the consent of GE Capital. At September 30, 2000, we were in compliance
with all of the covenants.
In October 1999, our Board of Directors approved a buy-back of up to 400,000
shares of our outstanding common stock over a six-month period, which was
subsequently extended through June 2001. During October 2000, the Company
negotiated, with General Electric Capital Corporation, an extension to the stock
repurchase period to June 30, 2001. Financing for the buy-back is provided
through our line of credit and proceeds from option exercises. As of September
30, 2000, we had repurchased 282,000 shares with a cumulative cost of $688,000
under this program.
During the first quarter of 2000, net proceeds from the exercise of 211,250
common stock options amounted to $837,000. There were no common stock options
exercised during the second or third quarters of 2000.
We believe that our working capital and credit facilities are sufficient to
finance our internal growth in the near term. Although we currently have no
acquisition targets, we intend 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At September 30, 2000, we did not participate in any derivative financial
instruments or other financial and commodity instruments for which fair value
disclosure would be required under Statement of Financial Accounting Standards
No. 107. We do not hold investment securities that would require disclosure of
market risk.
Our market risk exposure is limited to interest rate risk associated with our
credit instruments. We incur interest on loans made under a revolving line of
credit at variable interest rates of 2.5% over the 30-day commercial paper rate,
or 8.98% at September 30, 2000. The principal of loans under this line of credit
is due in April 2003. At September 30, 2000 we had outstanding borrowings on the
line of credit of approximately $5.9 million.
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This report contains forward-looking statements, including statements regarding
our business, strategies, and the industry in which we operate. These
forward-looking statements are based primarily on our expectations and are
subject to a number of risks and uncertainties, some of which are beyond our
control. Actual results could differ materially from the forward-looking
statements as a result of numerous factors, including those set forth in our
Form 10-K for the year ended December 31, 1999, as filed with the Securities and
Exchange Commission.
11
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
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 10.43 - Third Amendment to Amended and Restated Credit
Agreement dated October 9, 2000, between Vodavi
Communications Systems, Inc. and General Electric
Capital Corporation.
Exhibit 27 - Financial Data Schedule
b) Reports on Form 8-K
Not applicable
12
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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 13, 2000 /s/ Gregory K. Roeper
---------------------------------------
Gregory K. Roeper
President and Chief Executive Officer
(Principal Executive Officer)
Dated: November 13, 2000 /s/ Tammy M. Powers
---------------------------------------
Tammy M. Powers
Chief Financial Officer, Vice President
- Finance, Treasurer, and Secretary
(Principal Financial and Accounting
Officer)
13
