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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2000 Commission File Number 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 Identification No.)
organization)
8300 EAST RAINTREE DRIVE
SCOTTSDALE, ARIZONA 85260
(Address of principal executive offices) (Zip Code)
(480) 443-6000
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
At March 15, 2001, there were outstanding 4,234,788 shares of the registrant's
common stock, $.001 par value, which excludes 318,700 treasury shares. The
aggregate market value of common stock held by nonaffiliates of the registrant
(3,289,010 shares) based on the closing price of the common stock as reported on
the Nasdaq National Market on March 15, 2001, was $3,815,252. For purposes of
this computation, all officers, directors, and 10% beneficial owners of the
registrant are deemed to be affiliates. Such determination should not be deemed
an admission that such officers, directors, or 10% beneficial owners are, in
fact, affiliates of the registrant.
Documents incorporated by reference: Portions of the registrant's definitive
Proxy Statement for the 2001 Annual Meeting of Stockholders are incorporated by
reference into Part III of this report.
VODAVI TECHNOLOGY, INC.
ANNUAL REPORT ON FORM 10-K
FISCAL YEAR ENDED DECEMBER 31, 2000
TABLE OF CONTENTS
Page
----
PART I
ITEM 1. BUSINESS.................................................... 1
ITEM 2. PROPERTIES.................................................. 19
ITEM 3. LEGAL PROCEEDINGS........................................... 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 20
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS................................. 21
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA........................ 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS......................... 23
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK........................................................ 26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.................. 26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE......................... 27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 27
ITEM 11. EXECUTIVE COMPENSATION...................................... 27
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT....................................... 27
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 27
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.................................................... 27
SIGNATURES ............................................................ 30
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
THE STATEMENTS CONTAINED IN THIS REPORT ON FORM 10-K THAT ARE NOT PURELY
HISTORICAL ARE FORWARDING-LOOKING STATEMENTS WITHIN THE MEANING OF APPLICABLE
SECURITIES LAWS. FORWARD-LOOKING STATEMENTS INCLUDE STATEMENTS REGARDING OUR
"EXPECTATIONS," "ANTICIPATION," "INTENTIONS," "BELIEFS," OR "STRATEGIES"
REGARDING THE FUTURE. FORWARD-LOOKING STATEMENTS ALSO INCLUDE STATEMENTS
REGARDING REVENUE, MARGINS, EXPENSES, AND EARNINGS ANALYSIS FOR FISCAL 2001 AND
THEREAFTER; TECHNOLOGICAL DEVELOPMENTS; FUTURE PRODUCTS OR PRODUCT DEVELOPMENT;
OUR PRODUCT AND DISTRIBUTION CHANNEL DEVELOPMENT STRATEGIES; POTENTIAL
ACQUISITIONS OR STRATEGIC ALLIANCES; THE SUCCESS OF PARTICULAR PRODUCT OR
MARKETING PROGRAMS; AND LIQUIDITY AND ANTICIPATED CASH NEEDS AND AVAILABILITY.
ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS REPORT ARE BASED ON INFORMATION
AVAILABLE TO US AS OF THE FILING DATE OF THIS REPORT, AND WE ASSUME NO
OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS. OUR ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS. AMONG THE FACTORS
THAT COULD CAUSE RESULTS TO DIFFER MATERIALLY ARE THE FACTORS DISCUSSED IN ITEM
1, "SPECIAL CONSIDERATIONS."
-i-
PART I
ITEM 1. BUSINESS
INTRODUCTION
We design, develop, market, and support a broad range of business
telecommunications solutions, including telephony products, voice processing
products, and computer-telephony products for a wide variety of business
applications. Our telecommunications solutions incorporate sophisticated
features, such as automatic call distribution and Internet protocol, or IP,
gateways. Our voice processing products include interactive voice response
systems, automated attendant, and voice and fax mail. Our computer-telephony
products enable users to integrate the functionality of their telephone systems
with their computer systems. We market our products primarily in the United
States as well as in foreign countries through a distribution model consisting
primarily of wholesale distributors and direct dealers.
Our goal is to develop, deliver, and support high-quality
telecommunications products and services that meet the demands of the markets we
serve. Key elements of our strategy to achieve that goal include the following:
* expand our core business of supplying telephone systems, voice
processing systems, and computer-telephony integration, or CTI,
products;
* emphasize sales through our dealer programs;
* focus on the integration of existing and newly developed products to
provide complete, industry standard-based business communications
solutions to our customers;
* focus on IP telephony product developments allowing Voice over IP
(VoIP) connectivity for Legacy products and a next generation IP LAN
telephony system;
* expand our strategic relationship with LG Electronics Inc., or LGE,
which is a member of the multi-billion dollar, Korean-based LG Group
with which we have enjoyed a long-term relationship; and
* enhance our existing products and expand our product lines by
expanding our technological expertise and distribution channels
through
-- business acquisitions, license arrangements, and other strategic
relationships, and
-- internal research and development efforts.
Our corporate offices are located at 8300 East Raintree Drive, Scottsdale,
Arizona, and our telephone number is (480) 443-6000. Our Web site, which is not
a part of this report, is located at www.vodavi.com. All references to our
business operations in this report include the operations of Vodavi Technology,
Inc. and our subsidiaries.
OUR BUSINESS
INDUSTRY OVERVIEW
Virtually every business today relies upon its business communications
system as an essential tool to speed and enhance the effectiveness of
communications among employees, customers, and vendors; to contact decision
makers regardless of their location; to increase employee productivity; to
provide better customer service; and to reduce operating costs. Many factors
have stimulated the growth of the telecommunications industry, including the
following:
* successive technological developments that have resulted in enhanced
features and services,
* advances in telephone and computer hardware and software,
* emphasis on the use of communications systems to provide
cost-effective customer service,
* development of the Internet as an alternative to traditional telephone
networks, and
* regulatory changes.
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These factors have resulted in continual development of full-featured business
communications systems designed for use by small- and medium-sized businesses
that can be offered at affordable prices.
Accelerated technological advances in recent years have enabled
telecommunications system providers to develop sophisticated systems that offer
a wide variety of applications in addition to traditional call switching
functions. Businesses of all sizes now demand affordable telecommunications
systems that provide the capacity for
* voice processing systems, which automate call answering, provide voice
mail and automated call distribution functions, and provide the
capacity to manage facsimile messages;
* computer-telephony integration, which greatly enhances efficiency and
productivity by integrating businesses' voice and data networks.
Automatic call distribution, IP telephony, and other innovations represent
significant opportunities for sales of new product lines and applications to
further increase employee mobility and efficiency. We also believe that
international sales of voice processing products will increase in the future as
demand for features such as voice mail and unified messaging increases.
OUR PRODUCTS
We currently design, develop, market, and support a broad range of
* telephony products, which include digital and analog key telephone
systems and commercial grade telephones;
* voice processing products, including IVR systems, automated attendant,
automatic call distribution, voice mail and fax mail, and unified
messaging systems; and
* computer-telephony products, including Windows-based application
products (such as PC telephones and attendant consoles), local area
network (known as LAN) to PBX connection packages, IP gateways, and
Internet messaging systems.
TELEPHONY PRODUCTS
KEY TELEPHONE SYSTEMS
Sales of key telephone systems represented approximately 71% of our revenue
during 2000 and approximately 70% during 1999. A key telephone system consists
primarily of a sophisticated switching unit located at the user's place of
business, along with the individual telephone sets and other devices, such as
facsimile machines or modems, located at individual "stations." We supply
various models of key telephone sets, several of which are CTI compatible, with
progressive features for use in conjunction with each of our key telephone
systems.
We currently market various lines of key telephone systems, under our
STARPLUS, Triad, and INFINITE brand names, for businesses requiring as few as
three incoming lines and eight stations up to 144 lines and 250 stations (a
384-port system). We sell the STARPLUS and Triad lines through large wholesale
distributors and the INFINITE line through telephone sales and installation
companies known as "direct dealers."
We market both digital and analog key telephone systems and related
products. Our digital telephone systems employ a digital architecture in order
to provide digital voice transmission and system control, while our analog
telephone systems employ a microprocessor-based architecture and solid state
switching for voice transmission and system control. Most of our telephone
systems feature flexible software combined with modular hardware and card slot
design, which allow cost-effective system customization and expansion to meet
the needs of individual users. Our telephone systems are fully compatible with
industry-standard commercial grade telephones and contain an extensive array of
standard features that add sophistication generally found only in larger
telephone systems. We design our key telephone systems to permit expansion or
customization for specific business applications by the installation of a
variety of voice processing or computer-telephony integration products.
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Our digital systems enable customers to upgrade their telephone systems as
their businesses grow and as technology advances by adding or replacing
components in stages without replacing their entire systems. As a result, it is
generally more economical for the end users to expand their STARPLUS, Triad, or
INFINITE systems than to switch to a competitor's system. We believe that the
economy and flexibility we provide our customers through this migration strategy
provides us with a competitive advantage.
COMMERCIAL GRADE TELEPHONES
We market several models of commercial grade telephones through wholesale
distributors for use with analog or digital key systems, PBX systems, or
telephone company central office, or Centrex, switching systems. Businesses, the
hospitality industry, and school districts represent the principal purchasers of
our commercial grade telephones. All of our commercial grade telephones meet
industry standards for commercial telephone units and may be used with telephone
systems sold by us or by competing manufacturers.
Our commercial grade telephones offer a myriad of features, functions, and
designs ranging from simple, traditionally styled desk and wall-mounted
telephones to programmable telephones with contemporary styling. Our more
advanced commercial grade telephones contain a central processing unit, built-in
memory, built-in data jacks, built-in speakerphones, and the capability to use
custom calling features provided by local telephone companies.
In the third quarter of 2000, we introduced our model 2706 single-line
telephone which is a two-line, Caller ID set. Our new line of commercial grade
telephones offers more advanced features, including built-in Caller ID and other
functions. Sales of commercial grade telephones represented approximately 8% of
our revenue during 2000 as compared with approximately 10% during 1999.
VOICE PROCESSING PRODUCTS
Voice processing includes functions designed to improve customer service
and reduce labor costs while providing faster, more efficient routing of
incoming calls as well as speeding up and simplifying message delivery and
storage. We design our voice processing products to integrate with the telephone
systems we sell as well as those sold by competing manufacturers. We also
cultivate the expansion of our existing base of telephone systems by offering
digitally integrated voice processing systems for our Triad and INFINITE product
lines to differentiate them from our competitors' products and to provide a
value-added basis for increased sales and profit margins. Sales of voice
processing products accounted for approximately 21% of our revenue during 2000
and approximately 20% during 1999.
VOICE MAIL SYSTEMS
Voice mail enables callers to leave detailed messages and permits
recipients to retrieve messages when they return to their offices or by dialing
into the system from remote telephones. Each voice mailbox can be customized to
the individual user's needs. Voice messages can be stored, replayed, saved, or
erased as desired by the user. The menu routing functions included in some of
our voice mail systems enable business users to program the systems to create
custom, multi-level menus that permit callers to automatically access
organizational departments or product, service, or event information by dialing
menu choices.
In addition to our larger voice processing systems, we market a line of
self-contained, competitively priced voice processing systems designed for
small- to medium-sized organizations. These systems, which work in conjunction
with key telephone systems sold by us as well as other manufacturers, can be
expanded from two ports up to eight ports, feature a full range of automated
attendant and voice mail functions, and include a serial port for administration
via the user's laptop PC.
ADVANCED MESSAGING PLATFORM
Our Microsoft(R) Windows NT-based messaging systems, which provide
virtually unlimited port capacities, combine voice mail functions with facsimile
messaging capabilities (known as fax mail) as well as the ability to share
messages with other voice messaging systems over the Internet. Fax mail provides
the ability to receive, store, retrieve, and forward facsimile messages in the
same manner that voice mail handles voice messages. Our fax mail system
digitizes and stores facsimile messages and notifies the user that messages have
been received. The user can retrieve and print the facsimiles from his or her
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office or remote locations (such as a hotel room) and can also instruct the
system to forward facsimiles to other recipients. "Fax-on-demand" enables
callers to access information stored by a business, such as sales and marketing
brochures, technical specifications, and pricing data, and request the system to
transmit the desired information to the caller's facsimile machine.
Our Windows NT-based system also uses Internet e-mail protocols to enable
voice messages to be transported over the Internet or other electronic fields
for efficient, low-cost information exchange between remote systems. In
addition, our Windows NT-based Internet fax delivery systems connect the user's
telephone and computer to enable the user to transmit facsimile messages or
documents to conventional facsimile machines via the Internet. These systems
provide ease of use and avoid problems associated with e-mail attachments,
mismatched data encryption techniques, or private or switched network costs. Our
Internet fax delivery systems provide spoken prompts that guide the user through
the transmission process and also transmit delivery confirmations to the user's
mailbox. As a result, a business with multiple offices can extend its voice
messaging system so as to permit employees in different locations to create,
receive, answer, or forward voice and facsimile messages via the Internet more
quickly, efficiently, and economically than traditional long-distance telephone
calls.
Our Windows NT-based system also uses Microsoft(R) Exchange technology to
provide unified messaging. Unified messaging enables users to access e-mail,
voice mail, facsimiles, and paging messages in a single session at a personal
computer. The system displays a listing of all of the user's messages and
enables the user to access and control all of his or her messages with a click
of the computer mouse.
INTERACTIVE VOICE RESPONSE
Our IVR system connects a business's telephone system to its host computer
in order to permit the use of any telephone to access and store certain
information in the business's database. This interactive connectivity permits
callers to conduct transactions, such as placing orders, checking inventory,
tracking order shipments, or querying account information, from any telephone.
IVR uses voice prompts to communicate the steps required to enable the caller to
input information to or retrieve information from the database and to
communicate information to the caller. The open architecture design of our IVR
system provides unlimited scalability by permitting users to increase the number
of ports or voice storage capacity simply by plugging in more voice cards or
disk drives and by linking multiple devices into networks to create virtually
unlimited configurations. Users may enhance the system by adding independent
off-the-shelf software modules that can be seamlessly integrated to provide
additional features, such as call routing, voice messaging, web-based IVR,
speech recognition, and text-to-speech capabilities.
AUTOMATIC CALL DISTRIBUTION
We market our automatic call distribution, or ACD, software systems and ACD
reporting packages for use with our digital key telephone systems. The automatic
call distribution functions enable businesses that receive customer calls to
manage incoming calls efficiently by directly routing them to the proper person
or group. Our ACD systems reduce the number of abandoned calls by reducing the
number of calls placed on hold and by minimizing the length of time that calls
are kept on hold. When all group member telephones are busy, ACD plays a custom
"hold" message for the caller and connects the call to the first available
person or sales agent. ACD saves employee time by eliminating the necessity of
continually answering and transferring calls to the same groups. ACD enables
agents with display telephones to see the number of calls waiting in queue as
well as the length of the longest waiting call in order to speed call handling
at times of heavy calling activity. Our ACD reporting package provides real-time
statistics and comprehensive reports on calling activity for review by the
user's management.
COMPUTER-TELEPHONY INTEGRATION PRODUCTS
We design, develop, and market CTI products that use an open architecture
to integrate computer and telephone systems into a user-friendly information
processing and storage system. We believe that developing more value-added CTI
applications for our telephone systems will enhance the appeal of our product
lines and enable us to sell more key telephone systems, full-featured
telephones, and other software packages and add-on peripheral products. We
market CTI products that enable a user to use the Internet to access voice,
facsimile, and e-mail messages via personal computer; incorporate telephone
functions with computer software to speed call handling and permit the user to
personalize telephone functions; identify incoming callers and immediately
access computer files relating to the caller; connect Windows-based local area
networks to the user's telephone system; and quickly and inexpensively access
and analyze call accounting information.
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NEW PRODUCT DEVELOPMENT
We engage in an ongoing program to develop enhancements to our existing
product lines and to develop new products that address the increasing demands of
business organizations for low-cost productivity enhancing communications tools.
We believe that continuous development of new products and features will be
necessary to enable us to continue to offer telephony systems, voice processing
products, computer-telephony products, and related business communications
products that will be in greatest demand and that will provide the best
opportunities for our growth and profitability on an ongoing basis. Since 1994,
we have developed and introduced several new or enhanced products and product
lines, including new ACD reporting packages, additional enhancements to our
Windows NT-based voice messaging systems and our IVR systems, a new line of
digital key telephone systems, a new line of commercial grade telephones, and an
IP gateway.
We currently are focusing our new product development efforts on developing
and refining enhancements that will deliver greater features, sophistication,
functionality, and value to our current product offerings. For example, we
currently are developing
* a VoIP card that will enable our digital switches to network with a
business LAN and to serve as an imbedded IP gateway for connecting
with voice over IP networks and will allow users of our existing
technologies to migrate towards the benefits of IP telephony;
* a new digital switch for our Triad and INFINITE product lines, which
is scheduled for 12 to 384 ports;
* an IP switching system, which will start at 64 stations and expand to
300 stations;
* a new software release for Triad and INFINITE product lines to provide
networking connectivity between systems; and
* a new software release for Pathfinder voice processing system which
provides improved applications to include unified messaging,
networking, desk top call control, and text speech e-mail reading.
We have strategic alliances with LGE and other third parties related to the
development of new products, product lines, or product features. For example, we
are working with LGE to develop a full IP-based telecommunications solution. We
may enter into additional strategic alliances for new product development in the
future.
SALES, MARKETING, AND DISTRIBUTION
We currently market our products in all 50 states and, to a limited extent,
internationally through a distribution network consisting primarily of large
wholesale distributors and telephone sales and installation companies known as
"direct dealers." We also maintain an in-house direct sales force that makes
direct sales of our IVR products to businesses as well as an in-house sales
support staff assisting our direct dealers and distributors. We derived
approximately 65% of our total revenue in 2000 from sales to distributors, 30%
from sales to direct dealers, and 5% from direct sales to IVR customers. We have
in the past and may in the future market our products on a private label basis
to original equipment manufacturers, or OEMs. The following diagram illustrates
the current distribution channels for our product lines.
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VODAVI LOGO
TRIAD STARPLUS INFINITE IVR INTERNATIONAL
| | | | |
| | | | |
Distributor Distributor | | International
| | | | Distributor
| | | | |
| | | | |
Authorized Dealer Authorized | |
Dealer | Dealer | Dealer
| | | | |
| | | | |
End User End User End User End User End User
WHOLESALE DISTRIBUTORS
We design and market our STARPLUS and Triad brands of products for sale
through wholesale distributors. The distributors resell our products primarily
to small local interconnect companies, dealers, and independent telephone
companies. The interconnects and independent telephone companies in turn resell
our products to end users, install the systems at the end users' businesses, and
provide service and technical support following the sale. We provide ongoing
support and training to enable distributors to sell our products more
effectively and to provide the interconnects and independent telephone companies
with technical assistance they may request with respect to installation,
maintenance, and customer support.
We believe that sales through distributors offers several advantages,
including the following:
* established distribution systems and access to a large number of
customer accounts;
* maintenance of customer credit facilities and an established inventory
of our products;
* availability of products in over 600 locations throughout the United
States;
* security of receivables;
* reduced needs for direct training by us;
* effective promotion of our products at trade shows;
* geographically dispersed sales forces that can reach customers more
effectively than we would otherwise be able to do; and
* lower support and carrying costs compared with the costs associated
with direct sales to a large number of direct dealers.
Distributors that currently resell our products include Graybar Electric
Co., Inc., Alltel Supply, Inc., Sprint/North Supply, Famous Telephone Supply,
ADI, Target, and Power & Telephone Supply Company. Graybar accounted for 32% of
our sales during 2000 and 41% in 1999. Alltel accounted for 12% of our sales
during 2000 and 11% during 1999.
Our sales and marketing personnel stimulate demand for our products with
the interconnects and independent telephone companies that purchase our products
from Graybar, Alltel, and other distributors and install these products at the
end users' premises. These interconnects and independent telephone companies
provide the "pull through" demand for our products from Graybar, Alltel, and
other distributors.
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We design and market our STARPLUS brand of products for sale through
wholesale distributors. The distributors resell our products primarily to small
local interconnect companies and independent telephone companies, which in turn
resell our products to end users, install the systems at the end users'
businesses, and provide service and technical support following the sale. We
provide ongoing support and training to enable distributors to more effectively
sell our products and to provide the interconnects and independent telephone
companies with technical assistance in installation, maintenance, and customer
support. Our STARPLUS line of products consists of electronic key telephones and
STARPLUS DHS, DHSE, and DHSL lines.
TRIAD DISTRIBUTORS AND DEALERS
During 1998, we introduced our Triad line of digital telephone systems for
sale through distributors to a limited number of authorized Triad dealers. The
Triad product line includes a full array of digital telephone systems ranging
from three lines and eight stations up to 384 ports, as well as voice messaging,
ACD, CTI, and other products. The authorized Triad dealers must commit to
minimum purchases of Triad products and must be trained and certified through
our formal product and sales training program. Our goal is to encourage the
Triad dealers to promote the Triad line to their customers as the preferred line
of digital telephone systems. We provide the authorized Triad dealers with order
fulfillment, marketing, sales, and product support services. We had
approximately 136 authorized and active Triad dealers as of December 31, 2000.
INFINITE DIRECT DEALERS
We developed our INFINITE line of telephone systems and related products
for sales to direct dealers. These direct dealers are medium and large
interconnect companies or local dealers that resell our products directly to end
users. We believe that the principal advantages of this distribution channel
include greater visibility of our product lines and the ability to exert
additional control over factors such as pricing of our products. Sales to direct
dealers, however, generally involve greater credit risks, the necessity to
provide increased direct marketing and technical support, and additional costs
associated with developing and training the independent sales staff of the
various direct dealers to enable them to solicit purchases of our products.
We increased the number of direct dealers that sell our INFINITE products
from 100 at December 31, 1998 to approximately 166 at December 31, 2000. During
2000, however, we continued a program to upgrade and strengthen our dealer
network. Under this program, we focused on selling to fewer, but larger and
better-established, dealers. During 2000, we signed up approximately 44
large-volume, well-qualified new dealers and discontinued sales to approximately
40 dealers that have not provided a sufficient level of sales or support for our
INFINITE line. The new dealers maintain large customer bases and possess the
resources needed to provide quality sales presentations and support to their
customers.
IN-HOUSE SALES STAFF
We have an in-house sales support staff of nine employees who provide
dealers and distributors with order fulfillment, marketing, sales, and technical
support. We believe that our commitment to support dealers that sell our
products on a pre-sale and post-sale basis provides us with a competitive
advantage with our dealer customers.
INTERNATIONAL SALES
To date, sales of our products in foreign countries have not represented a
significant portion of our revenue. We believe, however, that sales of our voice
processing and other products in international markets may increase in the
future as demand for features such as voice mail and interactive voice response
increases, as touchtone technologies and cellular telephone service become more
available and other installed communications infrastructures are improved, and
as regulatory differences between countries are eliminated. All of our sales in
foreign countries are denominated in U.S. dollars.
RESEARCH AND DEVELOPMENT; STRATEGIC ALLIANCES WITH LGE AND OTHER COMPANIES
We believe that the continued development of software that distinguishes
the functions and features of our products from those of our competitors
represents a critical factor in determining our ongoing success. Our engineering
staff consists of highly trained and experienced software professionals who
focus on providing and supporting high-quality, user-friendly business
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communications systems and related products. The availability of in-house
software and systems development expertise at our facilities in Arizona and
Georgia provides us with product control, permits faster turnaround and reaction
time to changing market conditions, and provides a solid base of maintenance and
support services to end users. We use product and market development groups that
interact with customers in order to anticipate and respond to customer needs
through development of new product programs and enhancement of existing product
lines.
We conduct joint development activities with LGE for the design and
development of hardware incorporated into some of our existing or planned
telephone system and commercial grade telephone product lines. Under our joint
development projects with LGE, we provide market analysis, product management,
functional and performance standards, software development, quality control
program development, sales and distribution, and customer service and support,
while LGE provides hardware research, design and development, development of
components such as integrated circuits and semiconductor chips, and
manufacturing and production engineering. Generally, LGE contributes the ongoing
research and development costs for the product hardware in return for an
arrangement under which LGE produces the finished goods developed under the
alliance. As a result of this arrangement, we have been able to obtain access to
LGE's research and development expertise and resources while controlling our
capital expenditures for much of our product development efforts. In addition,
our arrangement with LGE enables us to minimize the risks inherent in making
significant investments in research and development infrastructure or personnel.
To the extent that we develop new hardware in conjunction with LGE or another
development partner, the development partner typically retains ownership rights
to the new hardware and we retain the right to sell products incorporating that
hardware throughout North America and the Caribbean. See Item 1, "Business -
Manufacturing" and Item 1, "Special Considerations - We rely on LGE as a
strategic partner." We have successfully engaged in such projects with LGE in
the past and believe that we will continue to have access to LGE's advanced
hardware research and development capabilities as we develop new product lines.
We enhance our software development expertise through acquisitions of or
licensing arrangements and other strategic alliances with independent
third-party developers. We have active strategic alliance relationships with
other companies that possess expertise in automatic call distribution, small
digital key telephone systems, computer telephony, and Internet telephony. We
believe that our strategic alliances with other companies enable us to develop
products and bring them to market more quickly and at a lower cost than we would
be able to achieve by developing the products internally. We intend to pursue
additional opportunities to enter into strategic alliances with other companies
that possess established expertise in specific technologies in order to
co-develop proprietary products, or to acquire such companies in order to
develop new products internally.
MANUFACTURING
We obtain our key telephone systems, some of our voice processing systems,
and our full-featured commercial grade telephones under manufacturing
arrangements with various third-party manufacturers, including LGE. We also
purchase certain voice processing products from third parties on an OEM basis.
Our agreements with the third-party manufacturers generally require the
manufacturers to produce our products according to our technical specifications,
to perform quality control functions or otherwise meet our quality standards for
manufacturing, and to test or inspect the products prior to shipment. Under the
manufacturing agreements, the manufacturers provide us with warranties that the
products are free of defects in material and workmanship. The agreements also
require the manufacturers to repair or replace, at their expense, products that
fail to conform with the warranties within specified periods.
We obtained a majority of our digital telephone systems, commercial grade
telephones, and voice mail products from LGE, which owns the rights to produce
this equipment. We purchase products manufactured by LGE in Korea on a purchase
order basis. During 2000, we purchased $16.5 million of product from LGE, which
represented 61% of our total purchases in 2000. LGE currently owns approximately
20.4% of our outstanding common stock. See Item 1, "Special Considerations - We
rely on LGE as a strategic partner" and "Special Considerations - Certain
conflicts of interest may arise as a result of LGE's ownership interest in our
company."
We obtained all of our analog telephone systems and commercial grade
telephones and replacement parts for such telephones from LG Srithai, Ltd., or
LGST, a joint venture between LGE and Srithai Group, a Thailand-based entity.
Under an agreement with our company, LGST granted us the right to distribute and
sell throughout the United States and Canada the products that LGST manufactures
for us in Thailand. Our agreement with LGST prohibits us from purchasing the
8
products covered by the agreement from any other manufacturer during the term of
the agreement. The agreement renews automatically for successive one-year terms
unless either party provides notice to the other of its intent to cancel the
agreement at least three months prior to the end of the then-current term. We
make all purchases pursuant to the agreement on a purchase order basis. During
2000, we purchased $4.2 million of product from LGST, which represented 15.7% of
our total purchases in 2000. See Item 1, "Special Considerations - We rely on
LGE as a strategic partner" and "Special Considerations - Certain conflicts of
interest may arise as a result of LGE's ownership interest in our company."
We also obtained some of our digital key telephone systems from Tecom Co.,
Ltd., a Republic of China company. Under an agreement with our company, Tecom
granted us the right to sell and distribute throughout all of North and South
America the products that Tecom manufactures for us. The term of the agreement
with Tecom will remain in effect until either party gives the other party at
least 120 days advance notice of termination. We make all purchases pursuant to
the agreement on a purchase order basis.
We currently maintain a $3.8 million insurance policy to cover lost revenue
in the event of significant interruptions in purchases from our overseas
manufacturers. See Item 1, "Special Considerations - We depend on third parties
for manufacturing" and Item 1, "Special Considerations - We face risks
associated with international manufacturing sources."
QUALITY CONTROL
We recognize that product quality and reliability are critical factors in
distinguishing our products from those of our competitors. We design our
products to include components meeting specified quality standards in order to
ensure reliable performance. We also require our third-party manufacturers to
comply with specified quality standards regarding materials and assembly methods
used in manufacturing our products. In addition, we maintain a rigorous quality
assurance program designed to ensure that the manufacture of our products
conforms with specified standards and to detect substandard products before
shipment. We have an inspection program in which we examine varying numbers of
our products as they arrive at our warehouse in Arizona, depending upon the
manufacturer and the type of product.
SUPPORT SERVICES
We provide limited warranties against defective materials and workmanship
on each of the products that we sell. We provide a complete support service for
all of our products by maintaining a 24-hour toll-free telephone number and
e-mail support that the dealers' or interconnects' service representatives can
contact for trouble shooting and diagnostic assistance. We also maintain a
technical support page on our Web site that includes frequently asked questions,
technical tips, and product-related notifications. We maintain an operating
set-up of each of our telephone systems, key telephone units, and peripheral
systems at our headquarters facility, supported by a staff of technicians
trained to handle service assistance calls. When a dealer or interconnect calls
with a question relating to performance malfunctions or an operational system
question, our personnel attempt to replicate any problem the user is
encountering, diagnose the cause, and provide a solution via telephone. If our
technicians cannot determine the cause of the malfunction over the telephone, we
dispatch a service representative to the user's place of business in order to
locate the source of the problem and take corrective measures.
Prior to June 24, 1999, we operated our own repair center and performed
repairs on certain of our products. On June 24, 1999, we sold the repair center
and entered into a seven-year repair and refurbishment agreement with the buyer.
Under this agreement, we appointed the buyer as the exclusive authorized repair
center for our products. We believe that this arrangement will enable us to
continue to provide fast turn-around time and consistent quality of repairs
without the overhead and other expenses associated with operating the repair
facility. This arrangement also provides a sales outlet for selected refurbished
products.
COMPETITION
Markets for communications products are extremely competitive. We currently
compete principally on the basis of the technical innovation and performance of
our products, including their ease of installation and use, reliability, cost,
and the technical support both before and after sales to end users. Our
competitors for the sale of telephone systems and telephones include Avaya,
9
Inc., Nortel Networks Corporation, Toshiba Information Systems, Inc., Comdial
Corporation, Panasonic Technologies, Inc., Iwatsu, Inter-Tel, Inc., and NEC
Corporation.
Competitors in the market for voice processing systems include Key Voice
and Applied Voice Technology as well as PBX and key system telephone
manufacturers that offer integrated voice processing systems of their own design
and under various original equipment manufacturer agreements. Competition in the
interactive voice response market includes InterVoice-Brite, Inc., Edify
Corporation, and Syntellect, Inc. Competitors in the market for IP telephony
systems include Cisco Systems, Inc., Artisoft, Inc., 3Com Corporation, and
AltiGen Communications, Inc.
In the computer telephony market, we compete with many of the same
companies indicated above. Some of our product lines compete with products and
services provided by the regional Bell operating companies, or RBOCs, which
offer key telephone systems and commercial grade telephones produced by several
of the competitors named above as well as Centrex systems that provide automatic
call distribution facilities and features through equipment located in the
telephone company's central switching offices. Many competitors listed above are
larger than the Company and therefore may have greater financial resources at
their disposal.
PATENTS, TRADEMARKS, AND LICENSES
As of December 31, 2000, we owned various U.S. patents. We intend to
continue to seek patents on our inventions used in our products. The process of
seeking patent protection can be expensive and can consume significant
management resources. We believe that our patents strengthen our negotiating
position with respect to future disputes that may arise regarding our
technology. However, we believe that our continued success depends primarily on
such factors as the technological skills and innovative abilities of our
personnel rather than on our patents. We cannot assure you that patents will
issue from our pending or future applications or that any patents that are
issued will provide meaningful protection or other commercial advantage.
We own a number of registered and unregistered trademarks that we consider
to be an important factor in marketing our products. Our ability to compete may
be enhanced by our ability to protect our proprietary information, including the
issuance of patents, copyrights, and trademarks. We also have taken steps to
protect our proprietary information through a "trade secrets" program that
includes copy protection of our software programs and obtaining confidentiality
agreements with our employees. We cannot assure you, however, that these efforts
will be effective in preventing misappropriation, reverse engineering, or
independent development of our proprietary information by our competitors. While
none of our intellectual property rights have been invalidated or declared
unenforceable, we cannot assure you that our rights will be upheld in the
future. Accordingly, we believe that, due to the rapid pace of technological
change in the telecommunications industry, the technical and creative skills of
our engineers and other personnel will be extremely important in determining our
future technological success.
During 1999, we entered into a non-exclusive licensing agreement with Santa
Barbara Connected Systems Corporation to acquire the licensing and manufacturing
rights to certain of our voice processing systems. Since 1997, we had purchased
these products from Connected Systems for private-labeled sales to our
distribution partners and customers. By acquiring the licensing rights and
having LGE manufacture these products for us, we obtained a more dependable
source and better margins for several of our more popular products.
We license from third parties the rights to the software included in
certain of our products, including certain CTI and ACD products. These licenses
generally give us a non-exclusive right to use and sell the licensed software
included in our products during the term of the applicable agreement. We pay the
licensors fees based on the number of units that we purchase from them.
The telecommunications industry is characterized by rapid technological
development and frequent introduction of new products and features. In order to
remain competitive, we and other telecommunications manufacturers continually
find it necessary to develop products and features that provide functions
similar to those of other industry participants, often with incomplete knowledge
of whether patent or copyright protection may have been applied for or obtained
by other parties. As a result, we receive notices from time to time alleging
possible infringement of patents and other intellectual property rights of
others. To date, we have been able to successfully defend these claims or to
negotiate settlements to these claims on terms we believe to be favorable. In
the future, however, the defense of such claims, fees paid in settlement of such
10
claims, or costs associated with licensing rights to use the intellectual
property of others or to develop alternative technology may have a material
adverse impact on our operations.
GOVERNMENT REGULATION
The U.S. government from time to time has imposed anti-dumping duties on
some telephone products manufactured in some of the countries where our products
are manufactured. Most recently, duties on certain of our products were phased
out between 1997 and 2000. We cannot assure you that similar duties will not be
imposed in the future on telephone products, including our products,
manufactured in these or other foreign countries. The imposition of such
additional duties on our products could have a material adverse effect our
operating results.
EMPLOYEES
As of February 28, 2001, we employed a total of 123 persons, all of which
are full-time employees at our facilities in Scottsdale, Arizona, and Norcross,
Georgia. This reflects a reduction from 143 full-time employees as of December
31, 1999. We made these reductions to allow us to have more flexibility in a
fast changing business environment. Our current number of full-time employees
includes 25 persons in engineering and product development; 41 in sales,
marketing, and technical support; 21 in warehouse and distribution functions;
and 36 in administration, including executive personnel. We consider our
relationship with our employees to be good, and none of our employees currently
are represented by a union in collective bargaining with us.
Various third-party manufacturers provide the personnel engaged in the
manufacture and assembly of our products in South Korea, Thailand, Taiwan, and
the People's Republic of China under the agreements between the respective
manufacturers and us.
EXECUTIVE OFFICERS
The following table sets forth information concerning each of our executive
officers as of March 23, 2001:
NAME AGE POSITION
---- --- --------
William J. Hinz........ 55 Chairman of the Board
Gregory K. Roeper...... 40 President, Chief Executive Officer, Chief
Financial Officer, Secretary, and Director
Stephen L. Borcich..... 54 Vice President - Sales and Marketing
Kent R. Burgess........ 54 Vice President - Product Development
Marc F. Niknam......... 42 Vice President - Engineering, Manufacturing,
and Technical Support
WILLIAM J. HINZ has served as Chairman of the Board of our company since
October 1997 and as a director of our company since April 1997. Since October
1999, Mr. Hinz has served as Group President for the Triumph Components Group,
which is a group of seven divisional companies within Triumph Group, Inc., a
publicly held company. Mr. Hinz served as President of Stolper-Fabralloy
Company, a precision aerospace engine component manufacturer that is a
subsidiary of Triumph Group, Inc., from September 1997 until October 1999, and
as Executive Vice President of Operations of Stolper-Fabralloy from March 1996
until September 1997. Mr. Hinz was Vice President of Global Repair and Overhaul
Operations for AlliedSignal Aerospace Company from June 1994 until March 1996.
During this period, Mr. Hinz also was responsible for aerospace aftermarket
merger and acquisition activity. Mr. Hinz served as President of European
Operations for AlliedSignal Aerospace Company from December 1991 until June 1994
and served in various other manufacturing management positions with AlliedSignal
Aerospace Company from 1968 to 1991.
GREGORY K. ROEPER has served as President of our company since December
1998 and as Chief Executive Officer and a director of our company since December
1999. Mr. Roeper served as our Chief Operating Officer from June 1998 until
December 1999. Between November 1994 and June 1998, Mr. Roeper held a variety of
other executive positions with our company, including Chief Financial Officer,
Executive Vice President - Finance, Administration, and Operations; Secretary;
and Treasurer. From 1982 to 1994, Mr. Roeper was employed by Arthur Andersen
LLP, most recently as a Senior Manager. Mr. Roeper is a Certified Public
Accountant in the state of Arizona.
11
STEPHEN L. BORCICH has served as Vice President - Sales and Marketing of
our company since April 1999. Mr. Borcich served as Vice President - Sales for
Voice Technologies Group, a manufacturer and distributor of digital integration
technology from August 1998 until March 1999. From February 1997 until July
1998, Mr. Borcich served as Vice President - Sales and Marketing of Q.SyS, Inc.,
a manufacturer of computer telephony applications. Mr. Borcich was Vice
President - Sales of Microlog Corporation from December 1990 until September
1995.
KENT R. BURGESS has served as Vice President - Product Development since
April 2000. He has also held the positions of Executive Vice President,
President of Vodavi-CT, and Senior Vice President - Business Operations. Prior
to joining our company, Mr. Burgess was President of the Network Services Group,
World Access, Inc., where he was responsible for the procurement, distribution,
installation, and repair of Nortel and Lucent network switching systems. Mr.
Burgess was a member of the senior management team, which launched our company
in 1983. Mr. Burgess holds a Bachelor of Science degree in Business from
Marshall University in Huntington, West Virginia.
MARC F. NIKNAM has served as Vice President - Engineering, Manufacturing,
and Technical Support since November 2000. Mr. Niknam is responsible for
hardware and software development, manufacturing, quality assurance, and
technical support. Prior to being named Vice President, he served as Executive
Director of Manufacturing, Quality, Hardware Engineering, and Repair. From 1989
to 1993, Mr. Niknam served as Operation Manager in overseas factories. Prior to
joining our company, Mr. Niknam was employed by Three Phoenix Co., Eaton corp.,
Tracor Applied Sciences Inc., and Honeywell. Mr. Niknam holds a Bachelor of
Science degree in Electrical and Computer engineering and a Master of Science
degree in Computer Science.
SPECIAL CONSIDERATIONS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS, IN ADDITION TO THOSE
DISCUSSED ELSEWHERE IN THIS REPORT, IN EVALUATING OUR COMPANY AND OUR BUSINESS.
WE RELY ON AN INDEPENDENT DISTRIBUTION NETWORK.
We currently market our products through a distribution network consisting
primarily of large wholesale distributors and telephone sales and installation
companies known as "direct dealers." Distributors generally maintain inventories
in amounts that they consider sufficient to fill anticipated orders for at least
a two-month period of time. A decline in the volume of sales made by
distributors, however, could result in their inventory levels exceeding their
anticipated sales, which could delay purchases of additional products from us
until the distributors' inventories reach re-ordering levels. Direct dealers
generally stock inventories only in quantities they deem sufficient to fill
anticipated short-term orders. As a result, distributors and direct dealers may
cancel orders and delay or change volume levels on short notice to us. Because
the sale of key telephone systems, voice processing products, and related
products typically involves a long sales cycle, we may not be able to accurately
forecast our own inventory levels. Our reliance on third-party distributors and
dealers to sell our products could further exaggerate any inventory shortages or
excesses that we might experience, particularly if our distributors or dealers
are not able to give us adequate notice of anticipated changes in demand for our
products.
We depend upon independent distributors and direct dealers to sell our
products to end users, to perform installation services, and to perform service
and support functions after the sale. Other telephone system manufacturers
compete intensely for the attention of the same distributors and direct dealers,
most of which carry products that compete directly with our products. We may not
be able to maintain favorable relationships with the distributors and direct
dealers that currently carry our product lines in order to encourage them to
promote and sell our products instead of those of our competitors. In addition,
we may not be able to develop such relationships with additional distributors
and dealers in the future.
Graybar accounted for 32% of our sales during 2000 and 41% during 1999.
Accounts receivable from Graybar comprised approximately 41% of total accounts
receivable at December 31, 2000. Alltel accounted for 12% of our sales during
2000 and 11% during 1999. Accounts receivable from Alltel comprised
approximately 9% of total accounts receivable at December 31, 2000.
12
WE DEPEND ON NEW PRODUCTS AND TECHNOLOGIES.
We operate in an industry that is characterized by fast-changing
technology. As a result, we will be required to expend substantial funds for and
commit significant resources to the conduct of continuing product development,
including research and development activities and the engagement of additional
engineering and other technical personnel. Any failure on our part to anticipate
or respond adequately to technological developments, customer requirements, or
new design and production techniques, or any significant delays in product
development or introduction, could have a material adverse effect on our
operations.
Our future operating results will depend to a significant extent on our
ability to identify, develop, and market enhancements or improvements to
existing product lines as well as to introduce new product lines that compare
favorably on the basis of time to introduction, cost, and performance with the
product lines offered by our competitors. The success of new product lines
depends on various factors, including proper market segment selection,
utilization of advances in technology, innovative development of new product
concepts, timely completion and delivery of new product lines, efficient and
cost-effective features, and market acceptance of our products. Because of the
complexity of the design and manufacturing processes required by our products,
we may experience delays from time to time in completing the design and
manufacture of improvements to existing product lines or the introduction of new
product lines. In addition, customers or markets may not accept new product
lines. Our failure to design and implement enhancements to existing product
lines or failure to introduce new products on a timely and cost-effective basis
would adversely affect our future operating results.
Complex software programs, such as those we develop or those developed by
other software sources and incorporated into our products, occasionally contain
errors that are discovered only after the product has been installed and used by
many different customers in a variety of business operations. Although we
conduct extensive testing of the software programs included in our products, we
may not successfully detect and eliminate all such errors in our products prior
to shipment. Significant programming errors in product software could require
substantial design modifications that may create delays in product introduction
and shipment and that could result in an adverse impact on our goodwill as well
as on our operating results.
THE TELECOMMUNICATIONS INDUSTRY IS CYCLICAL.
The telecommunications industry has experienced economic downturns at
various times, characterized by diminished product demand, accelerated erosion
of average selling prices, and production overcapacity. We have sought to reduce
our exposure to industry downturns by targeting our product lines towards small-
and medium-sized businesses, which we believe will sustain continued growth in
the near and long term, resulting in a steadily increasing demand for enhanced
and upgraded telephone systems and voice processing products. However, we may
experience substantial period-to-period fluctuations in future operating results
because of general industry conditions or events occurring in the general
economy. In addition, although we have not experienced significant quarterly
sales fluctuations in the past, the size and timing of sales of our new voice
processing and computer-telephony products may vary from quarter to quarter to a
greater extent in future periods. The expanding importance of these new products
could result in significant variations in our overall operating results on a
quarterly basis.
WE MUST FINANCE THE EXPANSION OF OUR BUSINESS AND THE DEVELOPMENT OF NEW
PRODUCTS.
To remain competitive, we must continue to make significant investments in
research and development, equipment, and facilities. As a result of the increase
in fixed costs and operating expenses related to these capital expenditures, our
failure to increase net sales sufficiently to offset the increased costs may
adversely affect our operating results. From time to time, we may seek
additional equity or debt financing to provide for the capital expenditures
required to maintain or expand our design and production facilities and
equipment. We cannot predict the timing and amount of any such capital
requirements. Such financing may not be available or, if available, may not be
available on terms satisfactory to us. If such financing is not available on
satisfactory terms, we may be unable to expand our business or develop new
products at the rate desired and our operating results may be adversely
affected. Debt financing increases expenses and must be repaid regardless of our
operating results. Equity financing could result in additional dilution to
13
existing stockholders. See Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources."
WE DEPEND ON THIRD PARTIES FOR MANUFACTURING.
We depend upon third parties to manufacture our products. We do not own
most of the equipment, tools, and molds used in the manufacturing process, and
we have only limited control over the manufacturing processes. As a result,
certain difficulties could have a material adverse effect on our business,
including any difficulties encountered by the third-party manufacturers that
result in
* product defects,
* production delays,
* cost overruns, or
* the inability to fulfill orders on a timely basis.
Our operations would be adversely affected if we were to lose our relationship
with any of our suppliers, if any of our suppliers' operations were interrupted
or terminated, or if overseas or air transportation services were disrupted even
for a relatively short period of time. We do not maintain an inventory of
sufficient size to provide protection for any significant period against an
interruption of supply, particularly if we were required to locate and use
alternative sources of supply.
WE FACE RISKS ASSOCIATED WITH INTERNATIONAL MANUFACTURING SOURCES.
We currently obtain some of our products under various manufacturing
arrangements with third-party manufacturers in South Korea, Thailand, Taiwan,
and the People's Republic of China. We believe that production of our product
lines overseas enables us to obtain these items on a cost basis that enhances
our ability to market them profitably. Our reliance on third-party manufacturers
to provide personnel and facilities in these countries, our maintenance of
equipment and inventories abroad, and the potential imposition of quota
limitations on imported goods from certain Far East countries expose us to
certain economic and political risks, including the following:
* the business and financial condition of our third-party manufacturers;
* political and economic conditions abroad;
* the possibility of expropriation, supply disruption, currency
controls, and exchange fluctuations; and
* changes in tax laws, tariffs, and freight rates.
The countries in which some of our products are manufactured have been
subject to natural disasters and civil disturbances in the past. These
circumstances could affect our ability to obtain some of our products from our
overseas manufacturers. Except for a fire that interrupted production at one
plant in China during late 1993 and the first part of 1994, we have not
experienced any significant shipment interruptions to date. The termination of
any of the arrangements with our manufacturers or our inability to obtain
products pursuant to such arrangements, even for a relatively short period of
time, could have a material adverse effect on our operations.
The countries in which most of our products are manufactured also have been
subject to economic problems in the past. Although the economic situation in
Asia in recent years has not resulted in any adverse changes in our ability to
obtain products or the prices that we pay for our products, an extended period
of financial pressure on overseas markets or currency devaluations that result
in a financial setback to our overseas manufacturers could have an adverse
impact on our operations.
Protectionist trade legislation in either the United States or foreign
countries, such as a change in the current tariff structures, export compliance
laws, or other trade policies, could adversely affect our ability to purchase
our products from foreign suppliers or the price at which we can obtain those
products. In November 1999, the United States and China signed an agreement that
will lift trade barriers between the two countries and that advances China's
efforts to join the World Trade Organization. Special interest groups have
raised objections to these efforts, and we cannot be certain whether or to what
extent trade relations with China will continue to improve. Any developments
14
that adversely affect trade relations between the United States and China in the
future could impact our ability to obtain some of our products from our
manufacturers in China.
WE RELY ON LGE AS A STRATEGIC PARTNER.
We rely on LGE to supply some of our key telephone systems, commercial
grade telephones, and voice mail products as well as on LGE's engineering,
hardware and circuit development, and manufacturing capabilities. We purchase a
significant portion of our key telephone systems and commercial grade telephones
from LGE and LGST, an affiliate of LGE. During 2000, we purchased $20.7 million
of product from LGE and LGST, constituting approximately 76.7% of our total
purchases in 2000. During 1999, we purchased $18.4 million of product from LGE
and LGST, constituting approximately 65% of our total purchases in 1999. We
currently obtain products from LGE and LGST on a purchase order basis and cannot
provide assurance that we will be able to secure long-term manufacturing
arrangements for the products we currently obtain from LGE and LGST. LGE has no
formal commitments to support our business or operations.
MARKETS FOR OUR PRODUCTS ARE INTENSELY COMPETITIVE, AND WE CANNOT ASSURE YOU
THAT WE WILL BE ABLE TO COMPETE SUCCESSFULLY IN THE FUTURE.
We engage in an intensely competitive business that has been characterized
by price erosion, rapid technological change, and foreign competition. We
compete with major domestic and international companies. Many of our competitors
have greater market recognition and substantially greater financial, technical,
marketing, distribution, and other resources than we possess. Emerging companies
also may increase their participation in the telephone systems and peripherals
markets. Our ability to compete successfully depends on a number of factors both
within and outside our control, including the following:
* the quality, performance, reliability, features, ease of use, pricing,
and diversity of our product lines;
* the quality of our customer services;
* our ability to address the needs of our customers;
* our success in designing and manufacturing new products, including
those implementing new technologies;
* the availability of adequate sources of raw materials, finished
components, and other supplies at acceptable prices;
* our suppliers' efficiency of production;
* the performance of our distributors and dealers;
* the rate at which end users upgrade or expand their existing telephone
systems, applications, and services;
* new product introductions by our competitors;
* the number, nature, and success of our competitors in a given market;
and
* general market and economic conditions.
We currently compete principally on the basis of the technical innovation and
performance of our telephone systems, voice processing products,
computer-telephony products, and commercial grade telephones, including their
ease of use, reliability, cost, timely introduction, delivery schedules, and
after-sale service and technical support. We may not continue to be able to
compete successfully in the future.
WE FACE RISKS ASSOCIATED WITH PATENTS, LICENSES, AND INTELLECTUAL PROPERTY.
Our success depends in part upon our ability to protect our proprietary
technology. We rely on a combination of copyright, trademark, and trade secret
laws, nondisclosure and other contractual agreements, and technical measures to
protect our proprietary technology. We have acquired certain patents and patent
licenses, and we intend to continue to seek patents on our inventions and
manufacturing processes. We face risks associated with our intellectual
property, including the following:
15
* the steps we have taken to protect our proprietary rights may be
inadequate to protect misappropriation of such rights;
* third parties may independently develop equivalent or superior
technology;
* the process of seeking patent protection can be long and expensive,
and patents may not issue from future applications;
* existing patents or any new patents that are issued may not be of
sufficient scope or strength to provide us meaningful protection or
any commercial advantage;
* we may be subject to or may initiate interference proceedings in the
U.S. Patent and Trademark Office, which can demand significant
financial and management resources; and
* we may commence litigation to enforce patents or other intellectual
property rights, or to defend us against claimed infringement of the
rights of others, which could result in substantial cost to us and
diversion of our management's attention.
As is typical in the telecommunications industry, we have received from
time to time, and in the future may receive, allegations of possible
infringement of patents or other intellectual property rights of others. Based
on industry practice, we believe that in most cases we could obtain any
necessary licenses or other rights on commercially reasonable terms. In the
event that a third party alleges that we are infringing its rights, we may not
be able to obtain licenses on commercially reasonable terms from the third
party, if at all, or the third party may commence litigation against us. The
failure to obtain necessary licenses or other rights or the occurrence of
litigation arising out of such claims could materially and adversely affect us,
our result of operations, or prospects.
WE MAY EXPERIENCE SHORTAGES OF RAW MATERIALS AND SUPPLIES.
The principal raw materials and components used in producing our products
consist of
* semiconductor components,
* unfinished printed circuit boards,
* molded plastic parts,
* metals, and
* packaging materials.
The third-party manufacturers of our products acquire these raw materials
primarily from Asian sources, which indirectly subjects us to certain risks,
including supply interruptions and currency price fluctuations. Purchasers of
these materials, including our third-party manufacturers and us, from time to
time experience difficulties in obtaining these materials. The suppliers of
these materials currently are adequately meeting our requirements. We also
believe that there are alternate suppliers for most of these materials.
WE DEPEND ON MANAGEMENT AND OTHER KEY PERSONNEL.
Our development and operations to date have been, and our proposed
operations will be, substantially dependent upon the efforts and abilities of
our senior management and technical personnel. Although we have employment
agreements with William J. Hinz, our Chairman of the Board, and Gregory K.
Roeper, our President and Chief Executive Officer, we do not have employment
agreements with any of our other executive personnel. However, we maintain
agreements with each of our officers and employees that prohibit them from
disclosing confidential information obtained while employed with us. The loss of
existing key personnel or the failure to recruit and retain necessary additional
personnel would adversely affect our business prospects. We cannot provide
assurance that we will be able to retain our current personnel or that we will
be able to attract and retain necessary additional personnel. Our internal
growth and the expansion of our product lines will require additional expertise
in such areas as software development, operational management, and sales and
marketing. Such growth and expansion activities will increase further the demand
on our resources and require the addition of new personnel and the development
of additional expertise by existing personnel. Our failure to attract and retain
personnel with the requisite expertise or to develop internally such expertise
could adversely affect the prospects for our success.
16
CERTAIN CONFLICTS OF INTEREST MAY ARISE AS A RESULT OF LGE'S OWNERSHIP INTEREST
IN OUR COMPANY.
LGE currently owns approximately 20.4% of our outstanding common stock. We
obtain some of our digital telephone systems, commercial grade telephones, and
voice mail products from LGE and obtain some of our analog telephone systems and
most of our commercial grade telephone and replacement parts for such telephones
from LGST, an affiliate of LGE. See Item 1, "Business - Manufacturing" and
"Special Considerations -We rely on LGE as a strategic partner." As a result of
LGE's direct ownership interest in us, an inherent conflict of interest exists
in establishing the volume and terms and conditions of our purchases from LGE
and LGST. In order to mitigate such conflicts, all decisions with respect to
such purchases will be made by our officers and reviewed by our directors who
have no relationship with LGE.
We, LGE, and some of our other stockholders are parties to a stockholders'
agreement. At any time that we issue shares of our common stock in an amount
representing 1% or more of our outstanding common stock, the stockholders'
agreement gives LGE the right to purchase a sufficient number of shares from us
as may be required to enable LGE to maintain the percentage of ownership of our
common stock that existed immediately prior to such issuance.
OUR STOCK PRICE MAY BE VOLATILE.
The trading price of our common stock in the public securities market could
be subject to a variety of factors, including the following:
* wide fluctuations in response to quarterly variations in our operating
results or the operating results of our competitors,
* actual or anticipated announcements of technological innovations or
new product developments by us or our competitors,
* significant actual or anticipated expenditures for property or
equipment, research and development, sales and marketing activities,
or other planned or unanticipated events,
* changes in analysts' estimates of our financial performance,
* developments or disputes concerning proprietary rights,
* regulatory developments,
* general industry conditions, and
* worldwide economic and financial conditions.
The trading volume of our common stock in the past has been limited, which may
increase the volatility of the market price for our stock and reduce the
liquidity of an investment in shares of our common stock. During certain
periods, the stock markets have experienced extreme price and volume
fluctuations. In particular, prices for many technology stocks often fluctuate
widely, frequently for reasons unrelated to the operating performance of such
companies. These broad market fluctuations and other factors may adversely
affect the market price of our common stock.
THE ABSENCE OF AN ACTIVE TRADING MARKET, WHICH MAY OCCUR IF WE ARE REQUIRED TO
DELIST OUR SHARES FROM NASDAQ, WOULD LIKELY MAKE OUR COMMON STOCK AN ILLIQUID
INVESTMENT.
The Nasdaq Stock Market has certain rules that must be met in order for a
listed company to maintain its listing on the National Market System. We may be
required to delist from Nasdaq if we fail to comply with those rules. If such
events occur, we could apply for listing on the Nasdaq Small Cap Market if we
meet the requirements of that market. Alternatively, market makers may choose to
create a market for our common stock on the over-the-counter bulletin board. If
that did not occur, our stock could be traded in the "pink sheets" maintained by
the National Quotation Bureau. As a result, investors would likely find it
significantly more difficult to dispose of, or to obtain accurate quotations as
to the value of, our shares.
17
RIGHTS TO ACQUIRE OUR COMMON STOCK COULD RESULT IN DILUTION TO OTHER HOLDERS OF
OUR COMMON STOCK.
As of March 15, 2001, we had outstanding options to acquire 725,000 shares
of our common stock at a weighted average exercise price of $3.68 per share. An
additional 375,000 shares remain available for grant under our 1994 Stock Option
Plan. In February 1999, we issued warrants to acquire an aggregate of 122,500
shares of common stock to the Company's former investor relations firm. Those
warrants have exercise prices ranging from $4.00 to $6.50 per share. The Company
terminated the agreement with the firm in November 2000, and the warrants will
expire six months after that date in accordance with the terms of the original
marketing agreement. During the terms of these options and warrants, the holders
thereof will have the opportunity to profit from an increase in the market price
of the common stock. The existence of these options and warrants may adversely
affect the terms on which we can obtain additional financing, and the holders of
these options and warrants can be expected to exercise such options or warrants
at a time when we, in all likelihood, would be able to obtain additional capital
by offering shares of our common stock on terms more favorable to us than those
provided by the exercise of these options or warrants.
SALES OF ADDITIONAL SHARES OF OUR COMMON STOCK COULD HAVE A NEGATIVE EFFECT ON
THE MARKET PRICE OF OUR COMMON STOCK.
Sales of substantial amounts of our common stock in the public market could
adversely affect prevailing market prices and could impair our ability to raise
capital through the sale of our equity securities. Approximately 1,273,330
restricted shares of common stock currently are eligible for sale in the public
market, subject to compliance with the requirements of Rule 144 under the
securities laws. Shares issued upon the exercise of stock options granted under
our stock option plan generally will be eligible for sale in the public market.
We also have the authority to issue additional shares of common stock and shares
of one or more series of preferred stock. The issuance of such shares could
dilute the voting power of the currently outstanding shares of our common stock
and could dilute earnings per share.
IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US, EVEN IF THE ACQUISITION
WOULD BE IN THE BEST INTEREST OF STOCKHOLDERS.
We are subject to provisions under Delaware corporate law that would
require us to obtain certain approvals from our board of directors or
stockholders in order to engage in a business combination with an interested
stockholder under certain circumstances. Our Amended Certificate of
Incorporation and Bylaws also contain a number of other provisions relating to
corporate governance and to the rights of stockholders. These provisions
* authorize our board of directors to fill vacancies on our board of
directors;
* authorize our board of directors to issue preferred stock in series
with such voting rights and other powers as our board of directors may
determine; and
* require the affirmative vote of two-thirds of the directors then in
office to approve:
-- a public offering of our capital stock;
-- the merger with or the acquisition of another business or the
acquisition of a significant amount of the assets of another
business;
-- the sale of a significant amount of our assets;
-- our entering into contracts with our stockholders or directors;
-- our assumption or acquisition of debt in excess of $1.0 million;
and
-- any amendment of our Amended Certificate of Incorporation and
Bylaws of our wholly owned subsidiary Vodavi Communications
Systems, Inc.
These provisions in our Amended Certificate of Incorporation and Bylaws and
Delaware corporate law may have the effect of making more difficult or delaying
attempts by others to obtain control of us, even when these attempts may be in
the best interests of stockholders.
18
WE DO NOT PAY CASH DIVIDENDS.
We have never paid any cash dividends on our common stock and do not
anticipate that we will pay dividends in the foreseeable future. Instead, we
intend to retain any earnings to provide funds for use in our business.
Furthermore, the terms of the revolving line of credit facility between our
wholly owned subsidiary Vodavi Communications Systems, Inc. and General Electric
Capital Corporation prohibit our subsidiary from paying dividends to us without
the consent of GE Capital. This restriction could limit our ability to pay
dividends in the future.
OUR OPERATING RESULTS COULD DIFFER MATERIALLY FROM THE FORWARD-LOOKING
STATEMENTS INCLUDED IN THIS REPORT.
Some of the statements and information contained in this Report that are
not historical facts are forward-looking statements, as such term is defined in
the securities laws. These include statements concerning future, proposed, and
anticipated activities of our company; certain trends with respect to our
revenue, operating results, capital resources, and liquidity; and certain trends
with respect to the markets where we compete or the telecommunications industry
in general. Forward-looking statements, by their very nature, include risks and
uncertainties, many of which are beyond our control. Accordingly, actual results
may differ, perhaps materially, from those expressed in or implied by such
forward-looking statements. Factors that could cause actual results to differ
materially include those discussed elsewhere under this Item 1, "Special
Considerations."
ITEM 2. PROPERTIES
We lease, for a term expiring in December 2001, approximately 60,000 square
feet of space in Scottsdale, Arizona, where we maintain engineering and design
laboratories, a sound engineering laboratory, software development facilities,
testing laboratories, product development facilities, customer service support
facilities, an employee training facility, warehouse and distribution areas,
sales and marketing offices, and administrative and executive offices.
We also lease approximately 16,200 square feet of space in Norcross,
Georgia, for a term expiring in August 2002. We maintain software development
facilities, engineering and design laboratories, product development facilities,
product assembly and testing facilities, warehouse and distribution areas, and
sales, marketing, and administrative offices at this location.
We lease, for a term ending in December 2004, approximately 19,500 square
feet of space in Scottsdale, Arizona. This space is in turn sub-leased to a
third party.
We believe our facilities are adequate for our reasonably anticipated
needs.
ITEM 3. LEGAL PROCEEDINGS
On September 20, 1996, we and our subsidiary, Vodavi-CT, filed a lawsuit
against Michael Mittel and Fereydoun Taslimi, former officers and directors of
Vodavi-CT. The lawsuit alleged, among other things, that Messrs. Mittel and
Taslimi violated federal and Arizona securities laws and engaged in fraudulent
activities in connection with our acquisition of Vodavi-CT in 1995; breached
certain terms of their respective employment contracts with Vodavi-CT; converted
certain corporate assets of Vodavi-CT; breached their fiduciary duties to
Vodavi-CT; and misappropriated certain corporate opportunities for their own
benefit. On September 24, 1996, Messrs. Mittel and Taslimi filed a lawsuit
against Vodavi-CT and our company. The lawsuit alleged that Vodavi-CT breached
Messrs. Mittel's and Taslimi's respective employment agreements by terminating
their employment.
On September 27, 1999, the court entered an order granting the motion of
our company and Vodavi-CT for summary judgment as to the claims of Messrs.
Mittel and Taslimi for breach of their respective employment agreements. In
addition, the court denied Messrs. Mittel's and Taslimi's motions for summary
judgment as to the claims of our company and Vodavi-CT with respect to
fraudulent misrepresentation and/or nondisclosure, negligent misrepresentation,
conversion or misappropriation of corporate assets, breach of contract, breach
of implied covenant of good faith and fair dealing, breach of fiduciary duty,
constructive fraud, and misappropriation of corporate assets. The court granted
the motion of Messrs. Mittel and Taslimi for summary judgment as to the claims
of our company and Vodavi-CT with respect to unjust enrichment and constructive
trust.
19
In January 2000, we entered into a settlement agreement with Messrs. Mittel
and Taslimi. Under the agreement, the parties executed mutual releases and we
repurchased 210,000 shares of our common stock from Messrs. Mittel and Taslimi
for an aggregate of $499,800.
On February 16, 2000, Messrs. Mittel and Taslimi filed a lawsuit in the
United States District Court for the Northern District of Georgia, Atlanta
Division, against our company and Gregory K. Roeper, our President and Chief
Executive Officer (Case No. 1-00-CV-0410). The plaintiffs alleged that our
company and Mr. Roeper violated federal securities laws, made false
representations and omitted material facts, and breached fiduciary duties to the
plaintiffs in connection with the repurchase of their shares of our common stock
in the settlement described above. The plaintiffs were seeking an unspecified
amount of compensatory and punitive damages as well as their expenses of
litigation. In March 2000, we and Mr. Roeper filed responses denying the
plaintiffs' allegations and asserting various affirmative defenses. We also
filed motions to dismiss the complaint. In March 2001, all of the plaintiff's
claims were dismissed by the court and we were given leave to amend our
complaint and to assert claims against Mittel and Taslimi for breach of the
agreement and for fraud.
On November 9, 1998, Paradygm Communications, Inc. and R.C. Patel filed a
lawsuit against our subsidiary, Vodavi Communications Systems, Inc., or VCS in
the United States District Court, Northern District of Georgia, Atlanta Division
(Civil Action File No. 1:98-CV-3637-WBH). The complaint alleges that VCS (i)
breached its strategic alliance agreement with Paradygm, as well as its warranty
of product fitness under the strategic alliance agreement; (ii) failed to
provide reasonable technical and sales training assistance to Paradygm's
employees to support Paradygm in its efforts to sell products under the
agreement; and (iii) engaged in conduct that constitutes intentional or
negligent misrepresentation. The complaint requests compensatory, punitive,
incidental, and consequential damages, attorneys' fees, plus any additional
relief. VCS answered the complaint denying the foregoing allegations, asserting
that the complaint fails to state a claim and, for various reasons, the relief
sought by Paradygm and Patel is barred. VCS also has filed a counterclaim
against Paradygm alleging that Paradygm breached the agreement because of its
failure to meet its payment obligations to VCS. The counterclaim requests
amounts due pursuant to the strategic alliance agreement, the costs of
litigation, and reasonable attorneys' fees. Since filing the initial complaint,
Paradygm has been permitted to add Vodavi-CT, Inc., an affiliate of our company,
alleging that Vodavi-CT participated in the alleged fraudulent inducement of Mr.
Patel. On March 24, 1999, the plaintiffs filed an amended compliant to add our
subsidiary Vodavi-CT as an additional defendant. The amended complaint alleges
claims against Vodavi-CT similar to those alleged in the original complaint. On
July 28, 1999, Vodavi-CT filed an answer and denied those allegations on the
same basis as VCS' original answer. The parties currently are conducting
discovery. We are vigorously defending this lawsuit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
20
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock has been quoted in the Nasdaq National Market under the
symbol "VTEK" since October 6, 1995. The following table sets forth the high and
low sales prices of our common stock on the Nasdaq National Market for the
periods indicated.
HIGH LOW
---- ---
1998:
First quarter........................................... $4.50 $3.25
Second quarter.......................................... 3.97 2.75
Third quarter........................................... 3.25 1.75
Fourth quarter.......................................... 3.50 1.81
1999:
First quarter........................................... $3.63 $2.06
Second quarter.......................................... 3.13 2.25
Third quarter........................................... 3.00 2.16
Fourth quarter.......................................... 3.19 1.94
2000:
First quarter........................................... $7.31 $2.75
Second quarter.......................................... 4.50 1.00
Third quarter........................................... 3.78 2.00
Fourth quarter.......................................... 2.44 1.00
2001:
First quarter (through March 15, 2001).................. $2.50 $1.06
On March 15, 2001, the closing sales price of our common stock was $1.16
per share. As of March 15, 2001, there were 31 holders of record of our common
stock.
We have not declared or paid any cash dividends on our common stock and do
not intend to declare or pay any cash dividends in the foreseeable future. In
addition, our credit facility with GE Capital restricts our ability to pay cash
dividends.
21
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below as of and for each
of the years in the five-year period ended December 31, 2000 are derived from
our consolidated financial statements, which have been audited by Arthur
Andersen LLP, independent public accountants. The selected consolidated
financial information provided below should be read in conjunction with Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of our company and related
notes thereto. No dividends were paid during the periods presented.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
STATEMENT OF OPERATIONS DATA:
Revenue ......................................... $47,705 $49,811 $48,322 $47,675 $46,154
------- ------- ------- ------- -------
Gross margin .................................... 17,503 17,886 15,802 15,667 15,312
Operating expenses .............................. 16,041 15,252 14,358 13,828 13,749
Asset impairment and restructuring charges ...... -- -- -- 819 4,805
------- ------- ------- ------- -------
Operating income (loss) ......................... 1,462 2,634 1,444 1,020 (3,242)
Interest expense ................................ 705 676 791 663 840
------- ------- ------- ------- -------
Income (loss) before income taxes ............... 757 1,958 653 357 (4,082)
Provision for (benefit from) income taxes ....... 309 718 (330) 142 327
------- ------- ------- ------- -------
Net income (loss) ............................... $ 448 $ 1,240 $ 983 $ 215 $(4,409)
======= ======= ======= ======= =======
Net income (loss) per share, diluted............. $ 0.10 $ 0.29 $ 0.23 $ 0.05 $ (1.02)
======= ======= ======= ======= =======
Weighted average shares outstanding, diluted..... 4,305 4,344 4,342 4,342 4,342
======= ======= ======= ======= =======
AS OF DECEMBER 31,
-------------------------------------------------------
(IN THOUSANDS)
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
BALANCE SHEET DATA:
Assets:
Current assets ................................ $19,938 $19,645 $16,766 $19,507 $16,591
Property and equipment, net.................... 2,033 2,356 2,663 2,616 2,465
Goodwill, net ................................. 1,772 1,906 2,244 2,395 2,547
Other, net .................................... 1,152 1,307 1,169 1,146 815
------- ------- ------- ------- -------
$24,895 $25,214 $22,842 $25,664 $22,418
======= ======= ======= ======= =======
Liabilities:
Current liabilities ........................... $12,176 $13,208 $12,044 $15,743 $12,627
Other long-term obligations.................... 135 186 199 306 391
------- ------- ------- ------- -------
Total liabilities ............................... 12,311 13,394 12,243 16,049 13,018
Stockholders' equity ............................ 12,584 11,820 10,599 9,615 9,400
------- ------- ------- ------- -------
$24,895 $25,214 $22,842 $25,664 $22,418
======= ======= ======= ======= =======
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
ANNUAL RESULTS
The following table sets forth, for the periods indicated, the percentage
of total revenue represented by certain revenue and expense items. The table and
the discussion below should be read in conjunction with the Consolidated
Financial Statements and Notes thereto that appear elsewhere in this Report.
2000 1999 1998
------ ------ ------
% % %
------ ------ ------
Revenue....................................... 100.0% 100.0% 100.0%
Cost of goods sold............................ 63.3% 64.0% 67.3%
------ ------ ------
Gross margin............................... 36.7% 36.0% 32.7%
Operating expenses:
Engineering and product development........... 3.6% 3.2% 3.7%
Selling, general, and administrative.......... 30.0% 27.5% 26.0%
------ ------ ------
Operating income.............................. 3.1% 5.3% 3.0%
Other expense, net............................ (1.5)% (1.4)% (1.7)%
------ ------ ------
Pretax income................................. 1.6% 3.9% 1.3%
Income tax expense (benefit).................. 0.7% 1.4% (0.7)%
------ ------ ------
Net income.................................... 0.9% 2.5% 2.0%
====== ====== ======
REVENUE
Revenue in 2000 was approximately $47.7 million, a decrease of $2.1
million, or 4.2%, as compared to 1999 revenue of approximately $49.8 million.
Sales for the INFINITE product line accounted for an increase of approximately
$5.5 million, a 58% increase in sales of those products over 1999. 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. Triad
revenue, our dealer focused channel through our wholesale distribution channel,
increased 25% to $11.5 million for 2000 as compared to $9.2 million for 1999.
Approximately $1.3 million of the increase in INFINITE sales is
attributable to voice mail sales. Sales of our voice mail products increased due
to the introduction of digital voice mail in early 1999 and sales incentives
that we offered throughout 2000. These sales incentives encouraged the purchase
of voice mail with key telephone systems, or bundling. Revenue for all of our
voice processing products through all of our distribution channels increased by
$418,000, or 4.3%, in 2000 to approximately $10.2 million.
The decrease in total revenue during 2000 was partially due to the
migration from our older digital key telephone systems, which we discontinued in
January 2000, to our newer Triad and STARPLUS DHS systems, and the migration of
our commercial grade telephones to the new 2700 series of commercial grade
telephones, which replaced our 2600 series beginning in June 1999. Other factors
included (a) a decision, during the first quarter of 2000, by one of our major
wholesale distribution customers to reduce its inventory levels; (b) soft market
conditions in the small- to mid-sized markets affecting our industry; and (c)
the sale of repair center in the second quarter of 1999. Repair revenue was
approximately $327,000 in 2000 as compared to $772,000 in 1999.
Revenue in 1999 was approximately $49.8 million, an increase of $1.5
million, or 3.1%, over 1998 revenue of approximately $48.3 million. Sales for
INFINITE product line accounted for an increase of approximately $1.9 million, a
25% increase in sales of those products over 1998. Approximately $1.5 million of
the increase in INFINITE sales is attributable to voice mail sales. Revenue for
all of our voice processing products through all of our distribution channels
increase by $2.8 million, or 40%, in 1999 to approximately $9.7 million.
The increase in total revenue during 1999 was partially offset by the
migration from our older digital key telephone systems, which we discontinued in
January 2000, to our newer Triad and DHS systems, as well as the migration of
23
our commercial grade telephone to the 2700 series of commercial grade
telephones, which replaced our 2600 series beginning in June 1999. These product
migrations had a negative impact on our revenue. In addition, we sold our repair
center in the second quarter of 1999. Repair revenue was approximately $772,000
in 1999 as compared with $1.5 million in 1998.
COST OF GOODS SOLD
Gross margins increased to 36.7% of revenue in 2000 as compared with 36.0%
in 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 to 21.3% of total revenue in 2000 from 19.5%
of total revenue in 1999.
Gross margins increased to 36.0% of revenue in 1999 as compared with 32.7
in 1998. The improvement in gross margin in 1999 was attributable to a number of
factors, including changes in product mix as sales of higher-margin voice
processing products increased to 19.5% of total revenue in 1999 from 14.4% of
total revenue in 1998. Other factors include the elimination of expenses related
to our repair center division, which we sold during the second quarter of 1999,
negotiated discounts from our vendors, a decrease in import duties, decreased
discounts provided to wholesale distributors, and increased participation in
rebate programs provided by our vendors. During 1999, margins were also
favorably impacted by our acquisition of the licensing and manufacturing rights
to our "Talkpath" and "Dispatch" voice processing product lines from Connected
Systems in May 1999.
ENGINEERING AND PRODUCT DEVELOPMENT
Engineering and product development expenditures increased to approximately
$1.7 million in 2000 as compared with $1.6 million in 1999. The increase was
primarily due to salaries and related personnel costs associated with additional
headcount and field trial expenses.
Engineering and product development expenditures decreased to approximately
$1.6 million in 1999 from $1.8 million in 1998. This decrease was due to the
elimination of several engineering and product development positions within our
company during fiscal 1998 as a result of the termination of a PBX development
project.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses increased to approximately
$14.3 million in 2000 as compared with $13.7 million 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) an increase 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.
Selling, general, and administrative expenses increased to approximately
$13.7 million in 1999 as compared with $12.5 million in 1998. This increase is
primarily a result of the addition of several new sales personnel and the
completion of our executive management team. The increase can also be attributed
to increased efforts in our marketing and sales programs.
INTEREST EXPENSE
Interest expense remained relatively stable in 2000 as compared to 1999.
Interest expense increased by $29,000 to $705,000 as compared to $676,000 in
1999.
Interest expense decreased to approximately $676,000 in 1999 as compared
with $791,000 in 1998. The $115,000 decrease can be attributed to decreased
average borrowings during 1999 as a result of reduced levels of inventory
throughout the year.
24
INCOME TAXES
We have provided for income taxes using an effective rate of 40.8% in 2000,
as compared with an effective rate of 36.7% in 1999 and a tax benefit of
$330,000, or 50.5% in 1998. We utilized research and development tax credits of
approximately $74,000 in 2000, $153,000 in 1999, and $509,000 in 1998, which
favorably impacted the effective tax rate in each of those years.
LIQUIDITY AND CAPITAL RESOURCES
We had cash of approximately $564,000 at December 31, 2000. Our cash
accounts are swept regularly and applied against our line of credit with GE
Capital. Effective September 30, 1999, we negotiated an increase in our line of
credit from $12.0 million to $15.0 million. The line of credit expires in April
2003 and bears interest at 2.5% over the 30-day commercial paper rate, a total
of 9.15% at December 31, 2000. Advances under the line of credit are based upon
eligible accounts receivable and inventory of our wholly owned subsidiary, VCS,
and are secured by substantially all of our assets. We had borrowings of
approximately $6.3 million against our available operating line of credit at
December 31, 2000, which represents a decrease of $2.4 million from borrowings
of $8.7 million at December 31, 1999. At December 31, 2000, our eligible
additional borrowing availability under the line of credit was approximately
$4.2 million.
The revolving line of credit contains covenants that are customary for
similar credit facilities and also prohibits our operating subsidiaries from
paying dividends to our company without the consent of GE Capital. At December
31, 2000, we were in compliance with these covenants.
Working capital increased to approximately $7.8 million at December 31,
2000 from approximately $6.5 million at December 31, 1999. This increase was
attributable to (a) an increase in accounts receivable; (b) a decrease in line
of credit; offset by (c) an increase in accounts payable; and (d) an increase in
accrued liabilities. Our current ratio was 1.6 for 2000 as compared with 1.5 for
1999.
During May 1999, we entered into a non-exclusive licensing agreement with
Santa Barbara Connected Systems Corporation to acquire the licensing and
manufacturing rights to our "Talkpath" and "Dispatch" voice processing product
lines. Since 1997, we had purchased these products from Connected Systems for
private-labeled sales to distribution partners and customers. Under the
agreement, we paid Connected Systems $500,000 during 1999. No additional
payments are due under this agreement. The purchase of this technology has
allowed us to contract directly with the end manufacturer, which has resulted in
significant cost savings on these products.
On June 24, 1999, we sold our repair center division's net inventory,
property, and other assets with a net book value of approximately $531,000. The
buyer paid to us consideration of $100,000 in cash, a note receivable of
$200,000 that the buyer paid on July 31, 1999, and a note receivable of
approximately $195,000 with monthly payments of approximately $16,000 for 12
months commencing August 1, 1999. All payments on the note were received by
December 31, 2000. We also incurred liabilities of approximately $50,000 in
connection with this transaction, which we paid in the fourth quarter of 1999.
As part of this transaction, we entered into a seven-year repair and
refurbishment agreement with the buyer. Under this agreement, we appointed the
buyer as the exclusive authorized repair center for our products.
In October 1999, our board of directors approved the repurchase of up to
400,000 shares of our outstanding common stock over a six-month period, which
was subsequently extended through June 2001. Financing for the repurchase is
provided through our line of credit and proceeds from option exercises, as
amended on October 31, 1999. During October 2000, we negotiated, with General
Electric Capital Corporation, an extension to the stock repurchase period to
June 30, 2001. As of December 31, 2000, we had repurchased 318,700 shares at a
total cost of $759,000. This amount includes the repurchase of 210,000 shares of
common stock in connection with the settlement of a lawsuit in early 2000. We
have not made any further repurchases as of the filing date of this report. We
are accounting for the repurchase program under the cost method.
We are a defendant in various lawsuits. See Item 3, "Legal Proceedings." 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.
25
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.
INTERNATIONAL MANUFACTURING SOURCES
We currently obtain some of our products under various manufacturing
arrangements with third-party manufacturers in Asia. As of the date of this
report, we do not believe that the current economic situations in Asia will have
any adverse impact on our operations.
IMPACT OF RECENTLY ISSUED STANDARDS
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 has adopted SAB 101 during the fourth quarter
of 2000, effective January 1, 2000. The adoption of SAB 101 did not have a
material impact on the Company's financial position or results of operations.
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 was required to
adopt SFAS No. 133, as amended, on January 1, 2001. The adoption of SFAS No.
133, as amended, did not have an impact on the Company's results of operations
or financial position.
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
has adopted EITF 00-10 concurrent with SAB 101 as discussed above. Additionally,
a reclassification of 1999 and 1998 amounts within the income statement has been
made to conform with the requirements of EITF 00-10.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 31, 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 prime
rate, a total of 9.15% at December 31, 2000. The principal of loans under this
line of credit is due in April 2003. At December 31, 2000, we had outstanding
borrowings on the line of credit of approximately $6.3 million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
Reference is made to the financial statements, the report thereon, and the
notes thereto commencing at page F-1 of this Report, which financial statements,
report, and notes are incorporated herein by reference.
26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item relating to our directors is
incorporated herein by reference to the definitive Proxy Statement to be filed
pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended,
for our 2001 Annual Meeting of Stockholders. The information required by this
Item relating to our executive officers is included in Item 1, "Business -
Executive Officers."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference
to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the
Exchange Act for our 2001 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference
to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the
Exchange Act for our 2001 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference
to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the
Exchange Act for our 2001 Annual Meeting of Stockholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
(1) Financial Statements are listed in the Index to Consolidated Financial
Statements on page F-1 of this Report.
(2) Financial Statement Schedules: Schedule II, Valuation and Qualifying
Accounts is set forth on page S-2 of this Report.
(b) REPORTS ON FORM 8-K.
None
(c) EXHIBITS
EXHIBIT
NUMBER EXHIBIT
- ------ -------
3.1 Amended Certificate of Incorporation of the Registrant(l)
3.2 Amended and Restated Bylaws of the Registrant(l)
4.1 Form of Certificate representing shares of Common Stock, par value
$.001 per share(1)
4.3 Common Stock Purchase Warrant dated February 22, 1999, issued to
Continental Capital & Equity Corporation (4)
10.2 Security Agreement dated as of April 11, 1994 between Vodavi
Communications Systems, Inc. and General Electric Capital
Corporation(l)
27
10.3 Stock Pledge and Security Agreement dated as of April 11, 1994 between
the Registrant and General Electric Capital Corporation(l)
10.7 Patent Collateral Assignment Agreement dated as of April 11, 1994
between V Technology Acquisition Corp. and General Electric Capital
Corporation(l)
10.8 Trademark Security Agreement dated as of April 11, 1994 between V
Technology Acquisition Corp. and General Electric Capital
Corporation(l)
10.9 Vodavi Technology, Inc. Second Amended and Restated 1994 Stock Option
Plan(4)
10.10 Stockholders' Agreement among the Registrant, V Technology Holdings
Corp., GoldStar Telecommunication Co., Ltd., The Sherman Group, The
Opportunity Fund, Steven A. Sherman, and Glenn R. Fitchet, dated March
28, 1994, and Amendment Agreement dated April 5, 1995(1)
10.12 Vodavi Key System Agreement dated April 4, 1994 between GoldStar
Telecommunication Co., Ltd., and Vodavi Communication Systems, a
division of Executone Information Systems, Inc.(l)
10.13 Vodavi Single Line Telephone Agreement dated April 4,1994 between
Srithai GoldStar Co., Ltd., and Vodavi Communication Systems, Inc., a
division of Executone Information Systems, Inc.(l)
10.13A Vodavi Single Line Telephone Agreement Extension dated April 4, 1997
between Vodavi Communications Systems, Inc. and L.G. Srithai
Electronics Co., Ltd.(2)
10.15 Assignment and Assumption Agreement dated April 11, 1994 between
Executone Information Systems, Inc. and V Technology Acquisition
Corp.(l)
10.19 OEM Agreement dated as of June 19, 1995, between Tecom Co., Ltd. and
Vodavi Communications Systems, Inc.(3)
10.23 Amended and Restated Credit Agreement dated as of April 11, 1994
between Vodavi Communications Systems, Inc. and General Electric
Capital Corporation, as Amended and Restated as of June 11, 1997(2)
10.24 First Amendment to Stock Pledge and Security Agreement dated as of
June 11, 1997, between Vodavi Technology, Inc. and General Electric
Capital Corporation(2)
10.25 Security Agreement dated as of June 11, 1997 between Enhanced Systems,
Inc. and General Electric Capital Corporation(2)
10.28 Trademark Security Agreement, dated as of June 11, 1997, by and
between Vodavi Communications Systems, Inc. and General Electric
Capital Corporation(2)
10.29 Trademark Security Agreement dated as of June 11, 1997, by and between
Enhanced Systems, Inc. and General Electric Capital Corporation(2)
10.33 Consulting Agreement dated as of December 5, 1997 between Vodavi
Technology, Inc. and Steven A. Sherman(4)
10.34 Bill of Sale and Assignment dated June 24, 1999, between Vodavi
Communications Systems, Inc. and Aztec International LLC.(5)
10.35 Repair and Refurbishment Agreement dated June 24, 1999, between Vodavi
Communication Systems, Inc. and Aztec International LLC(5)
10.36 License Agreement dated May 17, 1999, between Santa Barbara Connected
Systems Corporation and Vodavi Technology, Inc.(5)
10.37 Object Code Software License Agreement dated May 24, 1999, between D2
Technologies, Inc. and Vodavi Technology, Inc.(5)
10.38 Fourth Amendment to Credit Agreement between Vodavi Communications
Systems, Inc. and General Electric Capital Corporation(6)
10.40 Employment Agreement dated October 1, 1999, between William J. Hinz
and Vodavi Technology, Inc.(7)
10.41 Employment Agreement dated October 1, 1999, between Gregory K. Roeper
and Vodavi Technology, Inc.(7)
10.42 Second Amendment to Amended and Restated Credit Agreement dated
October 31, 1999, between Vodavi Communications Systems, Inc. and
General Electric Capital Corporation(7)
10.43 Third Amendment to Amended and Restated Credit Agreement dated October
9, 2000, between Vodavi Communications Systems, Inc. and General
Electric Capital Corporation(8)
21 List of Subsidiaries
23.1 Consent of Arthur Andersen LLP
- ----------
(1) Incorporated by reference to Registration Statement on Form S-1 (No.
33-95926) and amendments thereto which became effective on October 6, 1995.
(2) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997, as filed on August 11, 1997.
28
(3) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995, as filed on April 1, 1996.
(4) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997, as filed on March 31, 1998 and
as amended on Form 10-K/A filed on April 30, 1998.
(5) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1999, as filed on August 16, 1999.
(6) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1999, as filed on November 12, 1999.
(7) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1999, as filed on March 27, 2000.
(8) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2000, as filed on November 14, 2000.
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 23, 2001 By: /s/ Gregory K. Roeper
------------------------------------
Gregory K. Roeper
President, Chief Executive Officer,
Chief Financial Officer, and
Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ William J. Hinz Chairman of the Board March 23, 2001
- -------------------------
William J. Hinz
/s/ Gregory K. Roeper President, Chief Executive Officer, March 23, 2001
- ------------------------- Chief Financial Officer, Secretary,
Gregory K. Roeper and Director (Principal Executive
Officer)
/s/ Tai Hyun Director March 23, 2001
- -------------------------
Tai Hyun
/s/ Gilbert H. Engels Director March 23, 2001
- -------------------------
Gilbert H. Engels
/s/ Stephen A McConnell Director March 23, 2001
- -------------------------
Stephen A McConnell
/s/ Emmett E. Mitchell Director March 23, 2001
- -------------------------
Emmett E. Mitchell
30
VODAVI TECHNOLOGY, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Page
----
Report of Independent Public Accountants.................................. F-2
Consolidated Balance Sheets as of December 31, 2000 and 1999.............. F-3
Consolidated Statements of Operations for the Years Ended
December 31, 2000, 1999, and 1998....................................... F-4
Consolidated Statements of Changes in Stockholders' Equity for
the Years Ended December 31, 2000, 1999 and 1998........................ F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 1999 and 1998........................................ F-6
Notes to Consolidated Financial Statements................................ F-7
Report of Independent Public Accountants.................................. S-1
Schedule II -- Valuation and Qualifying Accounts.......................... S-2
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Vodavi Technology, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Vodavi
Technology, Inc. (a Delaware corporation) and Subsidiaries as of December 31,
2000 and 1999, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Vodavi Technology, Inc. and
Subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
/s/ Arthur Andersen LLP
Phoenix, Arizona
February 2, 2001 (except with respect
to the matter discussed in Note 9, as
to which the date is March 13, 2001)
F-2
VODAVI TECHNOLOGY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
IN THOUSANDS EXCEPT SHARE AMOUNTS
December 31,
-----------------------
2000 1999
-------- --------
Assets
Current Assets:
Cash $ 564 $ 1,528
Accounts receivable, net of reserves for doubtful accounts
and sales returns of $1,582 in 2000 and $1,239 in 1999 11,797 10,177
Inventories 6,707 6,903
Prepaid expenses and other 870 1,037
-------- --------
Total current assets 19,938 19,645
Property and Equipment, net 2,033 2,356
Goodwill, net 1,772 1,906
Other Long-Term Assets, net 1,152 1,307
-------- --------
$ 24,895 $ 25,214
======== ========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 1,374 $ 1,342
Accrued liabilities 1,302 1,074
Accrued rebates 859 472
Payable to related parties 2,382 1,648
Revolving credit facility borrowings 6,259 8,672
-------- --------
Total current liabilities 12,176 13,208
-------- --------
Other Long-Term Obligations 135 186
-------- --------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, $.001 par value, 1,000,000 shares authorized;
no shares issued or outstanding -- --
Common stock, $.001 par value, 10,000,000 shares authorized;
4,553,488 and 4,342,238 shares issued at December 31, 2000
and 1999, respectively 5 4
Additional paid-in capital 13,363 12,334
Accumulated deficit (25) (473)
Treasury stock, at cost; 318,700 and 16,800 shares
at December 31, 2000 and 1999, respectively (759) (45)
-------- --------
12,584 11,820
-------- --------
$ 24,895 $ 25,214
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
VODAVI TECHNOLOGY, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
IN THOUSANDS EXCEPT PER SHARE AMOUNTS
Years Ended December 31,
--------------------------------------
2000 1999 1998
-------- -------- --------
Revenue, net $ 47,705 $ 49,811 $ 48,322
Cost of Goods Sold (including products acquired
from related parties (LGE) of $20,600, $18,800,
and $18,000, respectively) 30,202 31,925 32,520
-------- -------- --------
Gross margin 17,503 17,886 15,802
Operating Expenses:
Engineering and product development 1,742 1,568 1,816
Selling, general and administrative 14,299 13,684 12,542
-------- -------- --------
Operating Income 1,462 2,634 1,444
Interest Expense 705 676 791
-------- -------- --------
Income Before Income Taxes 757 1,958 653
Provision for (Benefit from) Income Taxes 309 718 (330)
-------- -------- --------
Net Income $ 448 $ 1,240 $ 983
======== ======== ========
Basic Earnings per Share $ .10 $ .29 $ .23
======== ======== ========
Diluted Earnings per Share $ .10 $ .29 $ .23
======== ======== ========
Weighted Average Shares Outstanding - Basic 4,273 4,340 4,342
======== ======== ========
Weighted Average Shares Outstanding - Diluted 4,305 4,344 4,342
======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
VODAVI TECHNOLOGY, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
IN THOUSANDS EXCEPT SHARE AMOUNTS
Common Stock Additional Treasury Stock
---------------------- Paid-In Accumulated ----------------
Shares Issued Amount Capital Deficit Shares Value Total
------------- ------ ------- ------- ------ ----- -----
Balance, December 31, 1997 4,342,238 $ 4 $12,308 $(2,696) -- $ -- $ 9,616
Net income -- -- -- 983 -- -- 983
--------- ---- ------- ------- -------- ----- -------
Balance, December 31, 1998 4,342,238 4 12,308 (1,713) -- -- 10,599
Net income -- -- -- 1,240 -- -- 1,240
Purchase of common stock -- -- -- -- (16,800) (45) (45)
Warrants issued -- -- 26 -- -- -- 26
--------- ---- ------- ------- -------- ----- -------
Balance, December 31, 1999 4,342,238 4 12,334 (473) (16,800) (45) 11,820
Net income -- -- -- 448 -- -- 448
Purchase of common stock -- -- -- -- (301,900) (714) (714)
Options exercised 211,250 1 836 -- -- -- 837
Tax benefit on stock option exercises -- -- 193 -- -- -- 193
--------- ---- ------- ------- -------- ----- -------
Balance, December 31, 2000 4,553,488 $ 5 $13,363 $ (25) (318,700) $(759) $12,584
========= ==== ======= ======= ======== ===== =======
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
VODAVI TECHNOLOGY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
IN THOUSANDS
Years Ended December 31,
---------------------------------------
2000 1999 1998
--------- --------- ---------
Cash Flows from Operating Activities:
Net income $ 448 $ 1,240 $ 983
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 940 830 765
Tax benefit on stock option exercises 193 -- --
Provision for doubtful accounts 628 589 451
Deferred taxes 154 (162) 163
Rent equalization (51) (13) 17
Loss on sale of repair center division -- 86 --
Changes in working capital:
Accounts receivable, net (2,362) (1,898) 475
Inventories 196 (627) 1,769
Prepaid expenses and other 167 (338) 209
Other long-term assets (191) 462 (219)
Accounts payable and payables to related parties 766 635 (1,965)
Accrued liabilities and accrued rebates 615 (307) (562)
--------- --------- ---------
Net cash flows provided by operating activities 1,503 497 2,086
--------- --------- ---------
Cash Flows from Investing Activities:
Cash paid for license agreement -- (500) --
Cash paid to acquire property and equipment (291) (387) (629)
Net proceeds from disposition of repair center
division -- 50 --
Cash received on notes receivable 114 281 --
--------- --------- ---------
Net cash flows used in investing activities (177) (556) (629)
--------- --------- ---------
Cash Flows from Financing Activities:
Net borrowings (payments) on revolving credit facility (2,413) 961 (917)
Payments on capital leases -- (125) (378)
Purchase of common stock (714) (45) --
Stock options exercised 837 -- --
--------- --------- ---------
Net cash flows provided by (used in) financing activities (2,290) 791 (1,295)
--------- --------- ---------
Change in Cash (964) 732 162
Cash, beginning of period 1,528 796 634
--------- --------- ---------
Cash, end of period $ 564 $ 1,528 $ 796
========= ========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
VODAVI TECHNOLOGY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. NATURE OF BUSINESS
Vodavi Technology, Inc., a Delaware corporation, and subsidiaries (the
Company), designs, develops, markets, and supports a broad range of
business telecommunications solutions, including digital telephone systems,
voice processing systems, 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 network consisting of wholesale distributors, direct dealers,
and its own sales personnel. The Company's sales efforts have been
concentrated on major wholesale distributors as well as a direct dealer
network. During 2000, 1999, and 1998, sales to the Company's largest
distributor accounted for 32%, 41%, and 39% of total revenues,
respectively. During 2000, 1999, and 1998, sales to the Company's second
largest customer accounted for an additional 12%, 11%, and 12% of total
revenues, respectively. Accounts receivable from these two largest
distributors comprise 50% and 45% of total accounts receivable as of
December 31, 2000 and 1999, respectively.
The Company currently obtains most of its products from manufacturers
located in South Korea, Thailand, Taiwan, and the People's Republic of
China. While the Company believes that production of its product lines
overseas enhances its profitability, these arrangements expose the Company
to certain economic and political risks. Certain of these purchases are
made from related parties (see Note 6).
b. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Vodavi
Technology, Inc. and its wholly owned subsidiaries Vodavi Communications
Systems, Inc. (VCS), and Vodavi-CT, Inc. (Vodavi-CT), formerly known as
Enhanced Systems, Inc. (together herein referred to as the Company). All
material intercompany transactions have been eliminated in consolidation.
c. USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires the Company's
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates.
d. INVENTORIES
Inventories consist primarily of purchased products from manufacturers and
are stated at the lower of cost (first-in, first-out method) or market. For
these items, the Company takes title to products when they are finished
goods. The tooling and manufacturing equipment included within property and
equipment below is owned by the Company and used by third party
manufacturers.
e. IMPAIRMENT OF LONG-LIVED ASSETS
Statement of Financial Accounting Standards (SFAS) No. 121, ACCOUNTING FOR
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED
OF, requires that long-lived assets be reviewed for impairment whenever
events or circumstances indicate that the carrying amount of the assets may
not be recoverable. If the sum of the expected future cash flows
(undiscounted and without interest charges) from an asset to be held and
used in operations is less than the carrying value of the asset, an
F-7
impairment loss must be recognized in the amount of the difference between
the carrying value and the fair value. Assets to be disposed of must be
valued at the lower of carrying value or fair value less costs to sell.
f. PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method. Property and equipment and the related useful
lives consist of the following as of December 31, 2000 and 1999,
respectively.
Useful Life
Type of Asset in Years 2000 1999
------------- -------- --------- ---------
Office and computer equipment 5 $ 2,741 $ 2,423
Furniture and fixtures 10 346 345
Tooling and manufacturing equipment 5-8 1,693 1,636
Property and equipment in progress -- -- 85
--------- ---------
4,780 4,489
Less - accumulated depreciation (2,747) (2,133)
--------- ---------
$ 2,033 $ 2,356
========= =========
Depreciation expense was $614,000, $604,000, and $582,000, for the years
ended December 31, 2000, 1999, and 1998, respectively.
g. GOODWILL
Goodwill represents the cost in excess of the estimated fair values of
tangible assets and liabilities acquired. Goodwill is being amortized on
the straight-line method over 20 years. Amortization expense was $134,000,
$141,000, and $151,000, for the years ended December 31, 2000, 1999, and
1998, respectively. Accumulated amortization was $903,000 and $769,000 at
December 31, 2000 and 1999, respectively.
h. OTHER LONG TERM ASSETS
Included in other long-term assets is a licensing agreement the Company
entered into in 1999 to acquire the licensing and manufacturing rights to
certain product lines for $500,000. This agreement is being amortized
utilizing a useful life of three years. Amortization expense related to
this asset was $167,000 and $42,000 for the years ended December 31, 2000
and 1999 respectively.
The remaining balance in other long-term assets is comprised of deferred
tax assets and various other assets which are being amortized over their
remaining useful lives.
i. INCOME TAXES
The Company utilizes the asset and liability method of accounting for
income taxes as set forth in SFAS No. 109, ACCOUNTING FOR INCOME TAXES.
Under the asset and liability method, deferred taxes are provided based on
the estimated future tax consequences attributable to differences between
the financial reporting basis and the tax basis of the Company's assets and
liabilities.
j. REVENUE RECOGNITION
The Company recognizes revenue when persuasive evidence of an arrangement
exists, delivery has occurred, the fee is fixed or determinable and
collectibility is probable. Generally, all of these conditions are met at
the time the Company ships products to customers. Additionally, revenue
from custom software is recognized upon substantial completion of the
Company's obligation. Revenue from extended maintenance contracts is
recognized over the lives of the respective contracts, generally twelve
months.
F-8
k. EARNINGS PER SHARE
In accordance with SFAS No. 128, EARNINGS PER SHARE, the Company displays
basic and diluted earnings per share (EPS). Basic EPS is determined by
dividing net income by the weighted average number of common shares
outstanding. The basic weighted average number of common shares outstanding
excludes all dilutive securities. Diluted EPS is determined by dividing net
income by the weighted average number of common shares and dilutive
securities outstanding.
A reconciliation of the numerator and denominator (weighted average number
of shares outstanding) of the basic and diluted EPS computation is as
follows:
2000 1999 1998
------- ------- -------
(in thousands, except per share data)
Net Income $ 448 $ 1,240 $ 983
======= ======= =======
Weighted average common shares for
basic earnings per share 4,273 4,340 4,342
Effect of dilutive stock options(1) 32 4 --
------- ------- -------
Weighted average common shares for
diluted earnings per share 4,305 4,344 4,342
======= ======= =======
Basic earnings per share $ 0.10 $ 0.29 $ 0.23
======= ======= =======
Diluted earnings per share $ 0.10 $ 0.29 $ 0.23
======= ======= =======
(1) Dilutive securities are calculated using the treasury stock method and
the average market price during the period. Options on 328,000,
537,300 and 592,400 shares had an exercise price greater than the
average market price during the years ended December 31, 2000, 1999
and 1998, respectively, and therefore did not enter into the earnings
per share calculation.
l. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash, accounts receivable, accounts payable, payable
to related parties, and accrued liabilities approximate fair values due to
the short-term maturities of these instruments. As the revolving credit
facility bears a variable interest rate at 2.5% over the 30 day commercial
paper rate, the carrying value approximates fair value.
m. SEGMENTS
Effective January 1, 1998, the Company adopted SFAS No. 131, DISCLOSURES
ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, which established
revised standards for the reporting of financial and descriptive
information about operating segments in financial statements.
The Company has determined that it operates in 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.
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.
n. RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
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 has adopted SAB 101 during the fourth
F-9
quarter of 2000, effective January 1, 2000. The adoption of SAB 101 did not
have a material impact on the Company's financial position or results of
operations.
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 was required to adopt SFAS No. 133, as amended,
on January 1, 2001. The adoption of SFAS No. 133, as amended, did not have
an impact on the Company's results of operations or financial position.
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 has adopted EITF 00-10 concurrent with SAB 101 as
discussed above. Additionally, a reclassification of 1999 and 1998 amounts
within the income statement has been made to conform with the requirements
of EITF 00-10. The Company has elected to account for shipping and handling
costs as a component of costs of goods sold.
2. REVOLVING CREDIT FACILITY
As of December 31, 2000, the Company had a $15.0 million revolving credit
facility with a financial institution. Available borrowings under the
facility are based on inventory and accounts receivable. Interest is
payable monthly at a variable rate based on commercial paper plus 2.5%
(9.15% and 8.05% at December 31, 2000 and 1999, respectively). The credit
facility expires in April 2003 and is secured by substantially all of the
Company's assets. At December 31, 2000, $6.3 million was outstanding on the
revolving credit facility with an additional $4.2 million available for
use.
The credit agreement contains certain financial 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 the financial institution. At December 31, 2000, the Company was
in compliance with these financial covenants.
3. COMMITMENTS AND CONTINGENCIES
a. LEGAL MATTERS
On September 20, 1996, the Company and its subsidiary, Vodavi-CT, filed a
lawsuit against Michael Mittel and Fereydoun Taslimi, former officers and
directors of Vodavi-CT. The lawsuit alleged, 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 Vodavi-CT in 1995; breached certain terms of their
respective employment contracts with Vodavi-CT; converted certain corporate
assets of Vodavi-CT; breached their fiduciary duties to Vodavi-CT; and
misappropriated certain corporate opportunities for their own benefit. On
September 24, 1996, Messrs. Mittel and Taslimi filed a lawsuit against
Vodavi-CT and the Company. The lawsuit alleged that Vodavi-CT breached
Messrs. Mittel's and Taslimi's respective employment agreements by
terminating their employment.
On September 27, 1999, the court entered an order granting the motion of
the Company and Vodavi-CT for summary judgment as to the claims of Messrs.
Mittel and Taslimi for breach of their respective employment agreements. In
addition, the court denied Messrs. Mittel's and Taslimi's motions for
summary judgment as to the claims of the Company and Vodavi-CT with respect
to fraudulent misrepresentation and/or nondisclosure, negligent
misrepresentation, conversion or misappropriation of corporate assets,
breach of contract, breach of implied covenant of good faith and fair
dealing, breach of fiduciary duty, constructive fraud, and misappropriation
F-10
of corporate assets. The court granted the motion of Messrs. Mittel and
Taslimi for summary judgment as to the claims of the Company and Vodavi-CT
with respect to unjust enrichment and constructive trust.
In January 2000, the Company entered into a settlement agreement with
Messrs. Mittel and Taslimi. Under the agreement, the parties executed
mutual releases and the Company repurchased 210,000 shares of its common
stock from Messrs. Mittel and Taslimi for an aggregate of $499,800.
On February 16, 2000, Messrs. Mittel and Taslimi filed a lawsuit in the
United States District Court for the Northern District of Georgia, Atlanta
Division, against the Company and Gregory K. Roeper, its President and
Chief Executive Officer (Case No. 1-00-CV-0410). The plaintiffs alleged
that the Company and Mr. Roeper violated federal securities laws, made
false representations and omitted material facts, and breached fiduciary
duties to the plaintiffs in connection with the repurchase of their shares
of the Company's common stock in the settlement described above. The
plaintiffs were seeking an unspecified amount of compensatory and punitive
damages as well as their expenses of litigation. In March 2000, the Company
and Mr. Roeper filed responses denying the plaintiffs' allegations and
asserting various affirmative defenses. We also filed motions to dismiss
the complaint. On March 13, 2001, all of the plaintiff's claims were
dismissed by the court and we were given leave to amend our complaint and
to assert claims against Mittel and Taslimi for breach of the agreement and
for fraud (see Note 9).
On November 9, 1998, Paradygm Communications, Inc. (Paradygm) and R.C.
Patel (Patel) filed a lawsuit against the Company's wholly owned subsidiary
VCS in the Superior Court of Gwinnett County, Georgia (Case No. 98A87446).
The complaint alleges that VCS (i) breached its strategic alliance
agreement with Paradygm, as well as its warranty of product fitness under
the strategic alliance agreement; (ii) failed to provide reasonable
technical and sales training assistance to Paradygm's employees to support
Paradygm in its efforts to sell products under the agreement; and (iii)
engaged in conduct that constitutes intentional or negligent
misrepresentation. The complaint requests compensatory, punitive,
incidental, and consequential damages, attorneys' fees, plus any additional
relief. VCS answered the compliant denying the foregoing allegations,
asserting that the compliant fails to state a claim and, for various
reasons, the relief sought by Paradygm and Patel is barred. VCS also has
filed a counterclaim against Paradygm alleging that Paradygm breached the
agreement because of its failure to meet its payment obligations to VCS.
The counterclaim requests amounts due pursuant to the strategic alliance
agreement, the costs of litigation, and reasonable attorneys' fees. Since
filing the initial complaint, Paradygm has been permitted to add Vodavi-CT
alleging that Vodavi-CT participated in the alleged fraudulent inducement
of Mr. Patel.
On December 21, 1998, the case was removed from the Superior Court to the
United States District Court for the Northern District of Georgia - Atlanta
Division. On July 28, 1999, Vodavi-CT filed an answer and denied those
allegations on the same basis as VCS' original answer. The parties are
currently conducting discovery. The Company is vigorously defending this
lawsuit. As the Company cannot reasonably estimate the likelihood or amount
of any potential ultimate exposure with respect to this matter, no
provision has been made in its consolidated financial statements.
From time to time the Company is subject to certain asserted and unasserted
claims encountered in the normal course of business. It is the Company's
belief that the resolution of these matters will not have a material
adverse effect on our financial position or results of operations, however,
we cannot provide assurance that damages that result in a material adverse
effect on our financial position or results of operations will not be
imposed in these matters.
F-11
b. OPERATING LEASES
The Company has entered into long-term operating lease agreements for all
of its office and warehouse facilities. Minimum payments under the
Company's lease agreements are as follows:
Years Ending
December 31, Operating Leases
------------ ----------------
(in thousands)
2001 $ 1,206
2002 317
2003 179
2004 179
--------
Total Minimum lease commitments 1,881
Total minimum noncancellable sublease rentals (738)
--------
$ 1,143
========
Certain of the Company's lease agreements provide for initial periods of
free or discounted rental payments, therefore the rent expense, prior to
sub-lease rentals, is recognized on a straight-line basis and was
$1,112,000, $1,112,000, and $1,107,000 for the years ended December 31,
2000, 1999, and 1998, respectively. The difference between rent expensed
and paid is included in other long-term obligations.
c. ROYALTIES
VCS acquires certain proprietary components from a third party under the
terms of a license agreement which expires in 2014. Under the terms of the
agreement, VCS will pay a 5.3% royalty over the manufactured cost of all
products utilizing the proprietary components. Total royalties related to
this agreement were $41,000, $161,000, and $264,000 for the years ended
December 31, 2000, 1999, and 1998, respectively. The Company has
discontinued manufacturing the line of products that use this licensed
technology.
d. 401(k) PROFIT SHARING PLAN
The Company sponsors a profit sharing plan (the 401(k) Plan) pursuant to
Section 401(k) of the Internal Revenue Code of 1986. The 401(k) Plan covers
substantially all full-time employees who meet the eligibility requirements
and provides for a discretionary profit sharing contribution by the Company
and an employee elective contribution with a discretionary Company matching
provision. The Company expensed discretionary contributions pursuant to the
401(k) Plan in the amounts of $76,000, $68,000, and $70,000, for the years
ended December 31, 2000, 1999 and 1998, respectively.
4. STOCKHOLDERS' EQUITY
a. TREASURY STOCK
In the fourth quarter of 1999, the Company began acquiring shares of its
common stock in connection with a stock repurchase program authorized by
the Company's Board of Directors in October 1999. That program authorized
the Company to purchase up to 400,000 common shares over a six-month
period, which was subsequently extended through June 2001, on the open
market or pursuant to negotiated transactions at price levels the Company
deems attractive. As of December 31, 2000, 318,700 shares (including those
discussed in Note 3) had been repurchased at an aggregate cost of $759,000.
b. WARRANTS
In February 1999, pursuant to a marketing agreement with its former
investor relations firm, the Company issued warrants for 122,500 shares of
the Company's common stock at prices between $4.00-$6.50 per share. The
Company valued these warrants at $26,000 utilizing the Black-Scholes option
F-12
pricing model, and amortized this amount to expense over the 12-month
period of the initial agreement. The Company terminated their agreement
with the firm in November 2000 and the warrants will expire six months
after that date in accordance with the terms of the original marketing
agreement.
c. VODAVI TECHNOLOGY, INC. 1994 STOCK OPTION PLAN
The Vodavi Technology, Inc. 1994 Stock Option Plan (the Plan), as amended,
provides for the granting of (a) options to purchase shares of the
Company's common stock, (b) stock appreciation rights, (c) shares of the
Company's common stock, or (d) other cash awards related to the value of
the Company's common stock. Under the Plan, options and other awards may be
issued to key personnel of the Company. The options issued may be incentive
stock options or nonqualified stock options. The Plan also includes an
automatic program under which nonqualified options are automatically
granted to the Company's nonemployee directors. If any options terminate or
expire without having been exercised in full, the stock underlying such
options will again be available for grant under the Plan. In June 2000,
shareholders approved an increase in the number of shares that may be
issued under the plan from 850,000 to 1,100,000. The Plan expires in 2004.
To the extent that granted options are incentive stock options, the terms
and conditions of those options must be consistent with the qualification
requirements set forth in Section 422 of the Internal Revenue Code of 1986.
The maximum number of shares of common stock that can be granted to any one
employee, including officers, during the term of the Plan may not exceed
50% of the shares of common stock covered by the Plan.
The expiration date, maximum number of shares purchasable, and the other
provisions of the options are established at the time of grant. Options may
be granted for terms of up to ten years and become exercisable in whole or
in one or more installments at such time as may be determined by the plan
administrator, but may not be less than 100% (110% if the option is granted
to a stockholder who at the time the option is granted owns stock
representing more than ten percent of the total combined voting power of
all classes of the Company's stock) of the fair market value of the common
stock at the time of the grant.
The following summarizes activity under the Plan for the years ended:
December 31, 2000 December 31, 1999 December 31, 1998
--------------------- --------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Number Exercise Number Exercise Number Exercise
of Options Price Options Price of Options Price
--------- ------- --------- ------- --------- -------
Options outstanding at
beginning of period 779,800 $ 4.03 592,400 $ 4.88 816,900 $ 4.80
Granted 179,500 2.72 267,500 2.62 157,500 3.90
Forfeited (81,800) 4.30 (80,100) 4.95 (382,000) 4.42
Exercised (152,500) 4.00 -- -- -- --
--------- ------- --------- ------- --------- -------
Options outstanding at
end of period 725,000 $ 3.68 779,800 $ 4.03 592,400 $ 4.88
========= ======= ========= ======= ========= =======
Options available for
grant 375,000 70,200 257,600
========= ========= =========
Exercisable at end of
period 334,125 $ 4.60 384,100 $ 4.83 327,325 $ 4.99
========= ======= ========= ======= ========= =======
Weighted average fair
value of options
granted $ 1.80 $ 1.69 $ 2.43
======= ======= =======
F-13
Options Outstanding Options Exercisable
---------------------------------------- -------------------------
Weighted
Average
Number Remaining Weighted Number Weighted
Outstanding at Contractual Average Exercisable at Average
December 31, Life (in Exercise December 31, Exercise
Range of Exercise Prices 2000 years) Price 2000 Price
------------------------ ----------- ---------- -------- ----------- --------
$1.16 - $2.88 397,000 8.80 $2.57 70,000 $2.57
$3.00 - $4.75 153,000 6.55 $4.12 99,125 $3.99
$5.03 - $7.00 175,000 6.16 $5.79 165,000 $5.83
The Company has elected to account for its stock-based compensation plans
under APB Opinion (APB) No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES."
Accordingly, no compensation cost is recognized in the accompanying
financial statements for stock-based employee awards. Entities electing to
account for options under APB No. 25 must make pro forma disclosures of net
income and earnings per share, as if the fair value based method of
accounting defined in SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, had been applied. The Company has computed, for pro forma
disclosure purposes, the value of all options granted during 2000, 1999 and
1998, using the Black-Scholes option pricing model with the following
weighted average assumptions:
Years Ended December 31,
----------------------------------
2000 1999 1998
-------- -------- --------
Risk free interest rate 6.14% 5.23% 5.50%
Expected dividends none none none
Expected lives in years 4.9 4.8 5
Expected volatility 78.09% 71.62% 70.09%
If the Company had accounted for its stock-based compensation plan using a
fair value based method of accounting, the Company's net income and
earnings per share would have been reported as follows:
Years Ended December 31,
----------------------------------
2000 1999 1998
-------- -------- --------
(in thousands, except per share amounts)
Net income:
Pro forma $ 479 $ 1,035 $ 806
-------- -------- --------
Earnings per share:
Pro forma - basic .11 .24 .19
Pro forma - diluted .11 .24 .19
Pursuant to a separation agreement, on February 20, 1998, the Company
issued options for 58,750 shares of the Company's common stock at $4.00 per
share. The options were exercised in full in the first quarter of 2000.
5. INCOME TAXES
The Company files a consolidated federal income tax return. The income tax
provision (benefit) is comprised of the following:
2000 1999 1998
-------- -------- --------
(in thousands)
Current $ 463 $ 808 $ (167)
Deferred (154) (90) (163)
-------- -------- --------
$ 309 $ 718 $ (330)
======== ======== ========
F-14
The Company provides for deferred income taxes resulting from temporary
differences between amounts reported for financial accounting and income
tax purposes. The components of the net deferred income tax asset at
December 31, 2000 and 1999, were as follows:
2000 1999
-------- -------
(in thousands)
Deferred tax assets:
Receivable reserves $ 268 $ 205
UNICAP adjustment 84 88
Other accruals 472 413
Research and development credit 197 219
-------- -------
1,021 925
Deferred tax liabilities:
Depreciation and amortization differences (286) (344)
-------- -------
Net deferred tax asset $ 735 $ 581
======== =======
Reconciliation of the federal income tax rate to the Company's effective
income tax rate is as follows:
2000 1999 1998
------ ------ ------
Federal statutory tax rate 34.0% 34.0% 34.0%
State taxes, net 3.3 3.0 4.6
Research and development tax credits (13.9) (10.0) (93.4)
Non-deductible expenses and other
permanent differences 17.4 9.7 4.3
------ ------ ------
40.8% 36.7% (50.5)%
====== ====== ======
The Company has estimated that it generated $74,000 in research and
development tax credits during 2000. A portion of the federal tax credit is
not available for cash flow purposes until after October 1, 2001. The
realization of these deferred tax assets will depend on future income. The
Company believes that operating income will more likely than not be
sufficient to fully realize the net deferred tax asset at December 31, 2000
of $735,000.
The Company has estimated that it generated $153,000 in research and
development tax credits during 1999. Upon completion of the current
research and development tax credit analysis, the Company plans to amend
its 1999 tax return to reflect the benefit of the research and development
credit.
6. RELATED PARTIES TRANSACTIONS
LG Electronics Inc. (LGE), the Company's principal supplier, owned
approximately 20.4% of the Company's outstanding common stock at December
31, 2000. The Company purchased approximately $20.7 million, $18.4 million,
and $16.3 million of key telephone systems, commercial grade telephones,
and voice mail products from LGE and an affiliate of LGE during 2000, 1999,
and 1998, respectively. Management believes that the purchases from LGE and
its affiliate approximate terms which would be charged to non-related
parties.
7. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes for the years ended December 31,
2000, 1999, and 1998 was as follows:
2000 1999 1998
------- ------- -------
(in thousands)
Interest $ 705 $ 676 $ 791
Income taxes 368 677 58
On June 24, 1999, the Company sold its repair center division's net
inventory, property, and other assets with a net book value of $531,000.
The buyer paid consideration of $100,000 cash, a note receivable of
$200,000 (paid on July 31, 1999) and a note receivable of $195,000 with
F-15
monthly payments of approximately $16,000 for twelve months commencing
August 1, 1999. This note was paid in full, according to the terms, as of
December 31, 2000. The Company also incurred liabilities of $50,000 in
connection with this transaction, which were paid in the fourth quarter of
1999. The Company recorded a loss of $86,000 in connection with the sale.
As part of this transaction, the Company entered into a seven-year repair
and refurbishment agreement with the buyer. Under this agreement, the
Company appointed the buyer as the exclusive authorized repair center for
the Company's products.
Supplemental schedule of non-cash activities for the sale of the repair
center division is as follows:
1999
--------
(in thousands)
Carrying amount of net assets sold $ 531
Notes receivable from buyer (395)
Loss on sale (86)
--------
Net cash proceeds from disposition
of repair center division $ 50
========
The Company also issued warrants to an investor relations firm during 1999,
which were valued utilizing the Black-Scholes option pricing model. This
calculation resulted in a value of $26,000, which was amortized over twelve
months.
8. SUMMARY OF QUARTERLY RESULTS (UNAUDITED):
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- -------
(thousands, except per share amounts)
2000
Revenue, net $ 9,603 $13,158 $13,190 $11,754 $47,705
Gross margin 3,593 4,771 4,895 4,244 17,503
Income (loss) before
income taxes (603) 692 808 (140) 757
Provision for (benefit
from) income taxes (222) 266 311 (46) 309
Net income (loss) (381) 426 497 (94) 448
Diluted earnings (loss)
per share (0.09) 0.10 0.12 (0.02) 0.10
F-16
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- -------
(thousands, except per share amounts)
1999
Revenue, net $11,434 $12,758 $14,161 $11,458 $49,811
Gross margin 3,838 4,449 5,028 4,571 17,886
Income before income
taxes 388 365 974 231 1,958
Provision for income
taxes 149 133 365 71 718
Net income 239 232 609 160 1,240
Diluted earnings
per share 0.06 0.05 0.14 0.04 0.29
9. SUBSEQUENT EVENTS
In March 2001, all of Mittel's and Taslimi's claims (as discussed in Note
3) were dismissed by the court and the Company was given leave to amend its
complaint and to assert claims against Mittel and Taslimi for breach of the
agreement and for fraud.
F-17
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Vodavi Technology, Inc. and subsidiaries:
We have audited, in accordance with auditing standards generally accepted in the
United States, the consolidated financial statements of Vodavi Technology, Inc.
and Subsidiaries (the Company) included in this Form 10-K, and have issued our
report thereon dated February 2, 2001 (except with respect to the matter
discussed in Note 9, as to which the date is March 13, 2001). Our audits were
made for the purpose of forming an opinion on those statements taken as a whole.
The schedule included at page S-2 is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the
audits of the basic financial statements and, in our opinion, fairly states in
all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
Phoenix, Arizona
February 2, 2001
S-1
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
IN THOUSANDS
2000 1999 1998
------- ------- -------
Reserve for doubtful accounts and sales returns:
Balance at beginning of year $ 1,239 $ 674 $ 249
Provision 628 589 451
Write-offs (285) (24) (26)
------- ------- -------
Balance at end of year $ 1,582 $ 1,239 $ 674
======= ======= =======
Restructuring reserve:
Balance at beginning of year $ -- $ 94 $ 702
Provision -- -- --
Payments -- (94) (608)
------- ------- -------
Balance at end of year $ -- $ -- $ 94
======= ======= =======
S-2