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 June 30, 2000
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
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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 August 10, 2000 was 4,305,088.
<PAGE>
VODAVI TECHNOLOGY, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - June 30, 2000
and December 31, 1999. 3
Condensed Consolidated Statements of Operations - Three and
Six Months Ended June 30, 2000 and 1999. 4
Condensed Consolidated Statements of Cash Flows - Six Months
Ended June 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 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk 10
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
June 30, December 31,
2000 1999
-------- --------
(Unaudited)
CURRENT ASSETS:
Cash $ 1,328 $ 1,528
Accounts receivable, net 9,876 10,530
Inventory 7,160 6,550
Prepaids and other current assets 760 1,037
-------- --------
Total current assets 19,124 19,645
PROPERTY AND EQUIPMENT, net 2,216 2,356
GOODWILL, net 1,839 1,906
OTHER LONG-TERM ASSETS, net 1,156 1,307
-------- --------
$ 24,335 $ 25,214
======== ========
CURRENT LIABILITIES:
Accounts payable $ 3,797 $ 2,990
Accrued liabilities 1,649 1,546
Revolving credit facility 6,562 8,672
-------- --------
Total current liabilities 12,008 13,208
-------- --------
OTHER LONG-TERM OBLIGATIONS 167 186
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common Stock 5 4
Additional Paid-In Capital 13,170 12,334
Accumulated Deficit (427) (473)
Treasury Stock (588) (45)
-------- --------
12,160 11,820
-------- --------
$ 24,335 $ 25,214
======== ========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
<PAGE>
VODAVI TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
IN THOUSANDS EXCEPT PER SHARE AMOUNTS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
----------------- -----------------
2000 1999 2000 1999
------- ------- ------- -------
REVENUE, net $12,980 $12,641 $22,444 $23,948
COST OF GOODS SOLD 8,209 8,192 14,080 15,662
------- ------- ------- -------
GROSS MARGIN 4,771 4,449 8,364 8,286
OPERATING EXPENSES
Engineering and product development 427 415 818 730
Selling, general and administrative 3,475 3,519 7,091 6,515
------- ------- ------- -------
OPERATING INCOME 869 515 455 1,041
INTEREST EXPENSE 177 150 365 289
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 692 365 90 752
PROVISION FOR INCOME TAXES 266 133 44 281
------- ------- ------- -------
NET INCOME $ 426 $ 232 $ 46 $ 471
======= ======= ======= =======
BASIC EARNINGS PER SHARE $ 0.10 $ 0.05 $ 0.01 $ 0.11
======= ======= ======= =======
WEIGHTED AVERAGE SHARES
OUTSTANDING - BASIC 4,324 4,342 4,273 4,342
======= ======= ======= =======
DILUTED EARNINGS PER SHARE $ 0.10 $ 0.05 $ 0.01 $ 0.11
======= ======= ======= =======
WEIGHTED AVERAGE SHARES
OUTSTANDING - DILUTED 4,324 4,342 4,344 4,342
======= ======= ======= =======
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
<PAGE>
VODAVI TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
IN THOUSANDS
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
--------------------
2000 1999
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 46 $ 471
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation and amortization 382 299
Loss on sale of repair center division -- 95
Rent levelization (19) (9)
Changes in working capital:
Accounts receivable, net 654 (1,154)
Inventory (610) (671)
Prepaids and other current assets 277 (1,488)
Other long-term assets, net 143 8
Accounts payable 807 2,428
Accrued liabilities 103 (403)
------- -------
Net cash flows provided by (used in) operating activities 1,783 (424)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (167) (151)
Proceeds from sale of repair center division -- 100
------- -------
Net cash flows used in investing activities (167) (51)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on revolving credit facility (2,110) 155
Purchase of common stock (543) --
Stock options exercised 837 --
Payments on capital leases -- (124)
------- -------
Net cash flows (used in) provided by financing activities (1,816) 31
------- -------
DECREASE IN CASH (200) (444)
CASH, beginning of period 1,528 796
------- -------
CASH, end of period $ 1,328 $ 352
======= =======
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
<PAGE>
VODAVI TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED
JUNE 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 June 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 June 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.
(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 of the foregoing, 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. 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. The Company cannot provide assurance, however, that damages
that result in a material adverse effect on the Company's financial
position or results of operations will not be imposed in these matters.
(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.
(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.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 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
June 30,
-------------------
2000 1999
----- -----
Revenue 100.0% 100.0%
Cost of goods sold 63.2% 64.8%
----- -----
Gross margin 36.8% 35.2%
Operating expenses:
Engineering and product development 3.3% 3.3%
Selling, general and administrative 26.8% 27.8%
----- -----
Operating income 6.7% 4.1%
Interest expense 1.4% 1.2%
----- -----
Income before income taxes 5.3% 2.9%
Provision for income taxes 2.0% 1.1%
----- -----
Net income 3.3% 1.8%
===== =====
REVENUE
Revenue was $13.0 million in the second quarter of 2000, an increase of
$339,000, or 2.7%, from the second quarter of 1999. This increase is primarily
attributable to an increase of $2.1 million, or 99%, in INFINITE dealer-direct
revenue. The increase in INFINITE revenue is primarily due to the addition of 40
large-volume, well-qualified new dealers during the fourth quarter of 1999 and
the first quarter of 2000.
The increase in revenue for the INFINITE dealer-direct channel was partially
offset by a decrease of $1.1 million, or 12%, in the wholesale distribution
channel. This distribution channel decrease was the net effect of the planned
migration from our older digital key telephone systems and commercial grade
telephones into newer product lines, offset by growth in sales of the Triad
program. The Triad program, which is a dealer-direct program through our
wholesale distribution channel, increased $1.0 million, or 47%.
Additionally, Vodavi-CT revenue was approximately $480,000 in the second quarter
of 2000, a decrease of $477,000, or 50%, from the second quarter of 1999. This
decrease is attributable to various factors including: (a) decreases in the
Company's sales of high margin software license royalties, and (b) the Company's
efforts to develop new vertical markets that it believes are comprised of larger
accounts with a longer sales cycle. As a result of the longer sales cycle, the
Company had not yet generated revenue from these new markets.
Repair revenue decreased $210,000 compared to second quarter 1999, due to the
sale of the repair center division during the second quarter of 1999.
Total voice processing revenues for all channels increased by $84,000, or 3.5%,
to $2.5 million.
7
<PAGE>
GROSS MARGIN
Gross margin increased to 36.8% of revenue in the second quarter of 2000 as
compared with 35.2% in the second quarter of 1999. The improvement in gross
margin in the second quarter of 2000 was mainly attributable to margin
improvements for voice mail products. Sales of higher-margin voice processing
products increased from 19.1% of total revenue in second quarter 1999 to 19.3%
of total revenue in second quarter 2000. Additional improvement in gross margin
was attributable to a decrease in import duties.
ENGINEERING AND PRODUCT DEVELOPMENT
For the quarter ended June 30, 2000, expenditures related to engineering and
product development remained consistent with expenditures in the second quarter
of 1999.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses decreased by $44,000 to $3.5
million in the second quarter of 2000 as compared to the same period in 1999.
This decrease is the net effect of a number of factors including: (a) decreased
rent expense due to the sublease of the repair center facility in the third
quarter of 1999; (b) an increase in personnel-related costs; (c) an increase in
professional fees; and (d) increases in the reserve for doubtful accounts
receivable.
INTEREST EXPENSE
Interest expense increased to $177,000 in the second quarter of 2000, as
compared with $150,000 in the second quarter of 1999. The $27,000 increase is
primarily due to an increase in the interest rate on our line of credit for the
second quarter of 2000 as compared to the same period in 1999. The line of
credit bears interest at 2.5% over the 30-day commercial paper rate.
INCOME TAXES
We recorded a tax provision of $266,000, or 38.4% effective rate, for the second
quarter of 2000 as compared with a tax provision utilizing an effective rate of
36.4%, or $133,000, for the second quarter of 1999. The provision for second
quarter 2000 is slightly higher due to the utilization of research and
development credits in prior year.
SIX MONTHS ENDED JUNE 30, 2000 AND 1999:
The following table summarizes the operating results of the Company as a
percentage of sales for the periods indicated.
Six Months Ended
June 30,
-------------------
2000 1999
----- -----
Revenue 100.0% 100.0%
Cost of goods sold 62.7% 65.4%
----- -----
Gross margin 37.3% 34.6%
Operating Expenses:
Engineering and product development 3.6% 3.1%
Selling, general and administrative 31.7% 27.2%
----- -----
Operating income 2.0% 4.3%
Interest expense 1.6% 1.2%
----- -----
Income before income taxes .4% 3.1%
Provision for income taxes .2% 1.1%
----- -----
Net income .2% 2.0%
===== =====
8
<PAGE>
REVENUE
Revenue was approximately $22.4 million for the first six months of 2000, a
decrease of approximately $1.5 million, or 6.3%, over the first six months of
1999. Wholesale distribution revenue decreased by approximately $4.3 million.
This decrease is primarily due to a decision, during the first quarter of 2000,
by one of our major wholesale distribution customers to reduce its inventory
levels. Sales through this distribution channel was also impacted by our planned
migration from our older digital key telephone systems and commercial grade
telephones into newer product lines.
We sold our repair center division during the second quarter of 1999. Repair
revenue decreased by $444,000 during the first six months of 2000. The decreases
in revenue were partially offset by an increase in revenue through the INFINITE
dealer-direct channel. INFINITE revenue increased approximately $3.1 million, or
75%. Total voice processing revenue for all channels increased by 15.6% to $4.7
million.
GROSS MARGIN
Gross margin increased to approximately 37.3% of revenue for the first six
months of 2000 as compared with 34.6% for the first six months of 1999. The
improvement in gross margin is primarily due to changes in product mix as sales
of higher-margin voice processing products increased from 17.1% of total revenue
in 1999 to 21.1% of total revenue in 2000. Other factors include the elimination
of expenses related to our repair center division, which we sold during the
second quarter of 1999, and decreased import duties.
ENGINEERING AND PRODUCT DEVELOPMENT
Expenditures related to engineering and product development increased by $88,000
to approximately $818,000, or 3.6% of revenue, in the first six months of 2000
as compared with $730,000 or 3.1% of revenue, in the first six months of 1999.
The increase was primarily due to salaries and related personnel costs
associated with additional headcount.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased by $576,000 during the
first six months of 2000 to $7.1 million as compared to $6.5 million for the
same period in 1999. This increase is the net effect of a number of factors,
including: (a) an increase in personnel-related costs; (b) an increase in
professional fees; (c) increased efforts in our marketing and sales programs;
(d) increases in the reserve for doubtful accounts receivable; and (e) decreased
rent expense due to sublease of the repair center facility in the third quarter
of 1999.
INTEREST EXPENSE
Interest expense was approximately $365,000 in the first six months of 2000, a
$76,000, or 26.3%, increase over the first six 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, and also higher average outstanding
borrowings on our line of credit during the first six months of 2000 as compared
to the same period in 1999. Although accounts receivable collections for the
first six months of 2000 were higher than the same period in 1999, we
experienced higher cash outlays as a direct result of funding additional
operating costs discussed above and an increase in inventory of $610,000 since
December 31, 1999.
INCOME TAXES
We recorded a tax benefit of $222,000, or 37.0% effective rate for the first
quarter of 2000, and a tax provision of $266,000, or 38.4% effective rate for
the second quarter of 2000, as compared with a tax provision of $281,000, 37.4%,
in the first six months of 1999.
9
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
We had $1.3 million of cash at June 30, 2000. Our cash accounts are swept
regularly and applied against our line of credit, as described below. We had
borrowings of approximately $6.6 million against our available operating line of
credit at June 30, 2000, which represents a decrease of $2.1 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 in first six months. At June 30, 2000, amounts available for
additional borrowing totaled $3.5 million. Working capital increased to
approximately $7.1 million at June 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 9.07% at June 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 June 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. In April 2000,
the program was extended through October 2000. Financing for the buy-back is
provided through our line of credit and proceeds from option exercises. As of
June 30, 2000, we had repurchased 240,600 shares with a cumulative cost of
$588,000 under this program.
During the first quarter of 2000, net receipts from the exercise of 211,250
common stock options amounted to $837,000. There were no common stock options
exercised during the second quarter of 2000.
We are a defendant in various lawsuits. We have not made any provisions in our
financial statements for these lawsuits. The imposition of damages in any of
these matters could have a material adverse effect on our results of operations
and financial position.
From time to time we also are subject to certain asserted and unasserted claims
encountered in the normal course of business. We believe that the resolution of
these matters will not have a material adverse effect on our financial position
or results of operations. We cannot provide assurance, however, that damages
that result in a material adverse effect on our financial position or results of
operations will not be imposed in these matters.
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 June 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,
a total of 9.07% at June 30, 2000. The principal of loans under this line of
credit is due in April 2003. At June 30, 2000 we had outstanding borrowings on
the line of credit of approximately $6.6 million.
10
<PAGE>
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
<PAGE>
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
The Company's 2000 Annual Meeting of Stockholders was held on June 19,
2000. 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 3,741,214 21,274
Gregory K. Roeper 3,741,914 20,574
Jae H. Bae 3,739,914 22,574
Gilbert H. Engels 3,741,714 20,774
Stephen A McConnell 3,741,914 20,574
Emmett E. Mitchell 3,741,264 21,224
The following item was voted upon by the Company's stockholders:
a) Proposal to amend the Second Amended and Restated 1994 Stock Option
Plan.
Votes in Favor Opposed Abstained Broker Non-Vote
-------------- ------- --------- ---------------
1,640,030 156,408 27,280 1,938,770
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
12
<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 10, 2000 /s/ Gregory K. Roeper
----------------------------------------
Gregory K. Roeper
President and Chief Executive Officer
(Principal Executive Officer)
Dated: August 10, 2000 /s/ Tammy M. Powers
----------------------------------------
Tammy M. Powers
Chief Financial Officer, Vice President
- Finance, Treasurer, and Secretary
(Principal Financial and Accounting
Officer)
13
