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, 2001 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)
4717 East Hilton Avenue, Suite 400
Phoenix, Arizona 85034-6402
(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. [ ]
As of March 22, 2002, there were outstanding 4,349,788 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 (3,046,035 shares) based on the closing price of the common stock as
reported on the Nasdaq SmallCap Market on March 22, 2002, was $4,721,354. 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 2002 Annual Meeting of Stockholders are incorporated by
reference into Part III of the Report.
VODAVI TECHNOLOGY, INC.
ANNUAL REPORT ON FORM 10-K
FISCAL YEAR ENDED DECEMBER 31, 2001
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......................................................... 30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA................... 30
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.......................... 30
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........... 30
ITEM 11. EXECUTIVE COMPENSATION....................................... 30
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT........................................ 30
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............... 30
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K..................................................... 31
SIGNATURES ............................................................. 33
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 2002 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 Internet messaging, 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 (CTI) products;
* emphasize sales of larger and more advanced systems through our
dealers;
* focus on the integration of existing and newly developed products to
provide complete, industry standard-based business communications
products to our customers;
* focus on IP telephony product developments allowing Voice over IP
(VoIP) connectivity for our legacy products and our 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;
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 4717 East Hilton Avenue, Suite 400,
Phoenix, 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.
INDUSTRY OVERVIEW
Virtually every business 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 influenced 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.
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.
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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; and
* 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 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 74% of our revenue
during 2001, 71% during 2000, and 70% in 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" or "interconnects."
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.
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.
2
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, built-in Caller ID, and the
capability to use custom calling features provided by local telephone companies.
Sales of commercial grade telephones represented approximately 7% of our revenue
during 2001, 8% during 2000, and 10% in 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 19% of our revenue during 2001,
21% during 2000, and 20% in 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 personal computer.
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
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
3
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.
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 computers;
* to incorporate telephone functions with computer software to speed
call handling and permit the user to personalize telephone functions;
* to 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
* to access and analyze call accounting information quickly and
inexpensively.
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 communication 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. 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 IVR systems, a new line of digital key
telephone systems, a new line of commercial grade telephones, and an IP gateway.
Recent developments include our Discovery VoIP and Express VoIP gateways
allowing IP connectivity to our current digital systems, our new XTS digital key
system platform expandable from 12 to 384 ports, a full featured networking
package to connect up to 16 customer locations, and our new Pathfinder 9.0 voice
processing system provide enhanced client and serve applications.
4
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 digital version of Pathfinder 9.0 allowing direct digital connection
to our key Infinite and Trade key system products, which will transmit
Caller ID information to the voice processing systems providing
potential for feature enhancements;
* an expanded version of our new XTS switching platform from 384 port to
600 ports allowing this product to reach a larger customer base;
* our IP telephony system, Telenium IP, providing LAN telephony from 64
stations expanding to 300 stations. We are also developing for LGE an
IP equivalent of our Pathfinder that will provide IP connectivity to
our Telenium IP system;
* a new line of digital key sets with expanded "soft key" capability;
and
* a new "In-Skin" voice mail platform utilizing our Pathfinder voice
processing application and offering direct connection into our XTS key
service cabinet.
We are expanding our strategic alliances with LGE and other third parties
related to the development of new products, product lines, or product features,
including our new Telenium IP system. We will continue to seek 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." In March 2002, through our acquisition of Dataspeak Systems,
Inc., we began distributing our products and services directly to end-users in
the Phoenix metropolitan area. We also had an in-house sales force that made
direct sales of Interactive Voice Response products to end-users. We
discontinued our interactive Voice Response products in March 2001. 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 table sets forth, for
the periods indicated, the percentage of total revenue represented by the
respective distribution channels.
YEAR ENDED DECEMBER 31,
------------------------------
DISTRIBUTION CHANNEL 2001 2000 1999
-------------------- ------ ------ ------
Wholesale Distributors 55% 65% 75%
Direct Dealers 41% 30% 19%
IVR Customers 4% 5% 6%
------ ------ ------
100% 100% 100%
====== ====== ======
5
The following diagram illustrates the current distribution channels for our
product lines.
[LOGO]
VODAVI
TRIAD STARPLUS INFINITE INTERNATIONAL
| | | |
| | | |
DISTRIBUTOR DISTRIBUTOR | INTERNATIONAL
| | | DISTRIBUTOR
| | | |
| | | |
AUTHORIZED DEALER AUTHORIZED DEALER
DEALER | DEALER |
| | | |
| | | |
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 and their dealers 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 offer several advantages,
including the following:
* established distribution systems and access to a large number of
dealer and national 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 27% of
our revenue during 2001, 32% in 2000, and 41% in 1999. Our second largest
customer in each of the respective years accounted for 9% of our revenue during
2001, 12% during 2000, and 11% in 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, Target, and other distributors that
6
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, Target, and other distributors.
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
marketing, sales, and product support services. We had approximately 150
authorized and active Triad dealers as of December 31, 2001.
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 control over the application and installation of our products
and the ability to obtain market feedback on product pricing, quality, and
technology. 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.
As of December 31, 2001, we had approximately 150 direct dealers that sell
our INFINITE products. We maintain a program to focus on selling to fewer, but
larger and better-established, dealers. We secure arrangements with
large-volume, well-qualified dealers and have discontinued sales to dealers that
have not provided a sufficient level of sales or support for our INFINITE line.
We strive to secure dealers that 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 eight 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.
VODAVI DIRECT
We have a direct sales office of six employees who sell our INFINITE line
of products and provide pre- and post- sales support services directly to
end-users in the Phoenix metropolitan area. We acquired this operation during
March 2002 through our acquisition of Dataspeak Systems, Inc.
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, advanced messaging, and
automatic call distribution increases, as touchtone technologies and cellular
telephone service become more available and other installed communications
7
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
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 systems 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 to 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. We purchased $13.0 million, $16.5 million, and $11.6 million of
product from
8
LGE in 2001, 2000, and 1999, which represented 67%, 61%, and 41% of our total
purchases, respectively. LGE currently owns approximately 20% 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
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. We
purchased $2.4 million, $4.2 million, and $11.6 million of product from LGST in
2001, 2000, and 1999, which represented 12%, 15.7%, and 41% of our total
purchases, respectively. 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 $5.0 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 to 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 1999, we operated our own repair center and performed repairs on
certain of our products. During 1999, we sold the repair center and outsourced
the repair and refurbishment of 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
9
overhead and other expenses associated with operating the repair facility. This
arrangement also provides a sales outlet for selected refurbished products.
During 2001, the repair and refurbishment agreement was cancelled when the buyer
filed for bankruptcy. We entered into a new repair and refurbishment agreement
with a third-party in 2001.
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,
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. Competitors in the
market for IP telephony systems include Cisco Systems, Inc., Artisoft, Inc.,
3Com Corporation, and AltiGen Communications, Inc., in addition to other PBX and
key system manufacturers that offer IP enabled systems.
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 our company and therefore may have greater financial resources at
their disposal.
PATENTS, TRADEMARKS, AND LICENSES
As of December 31, 2001, 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.
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
10
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 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 March 22, 2002, we employed a total of 113 persons, all of which are
full-time employees at our facilities in Phoenix, Arizona, and Norcross,
Georgia. This reflects a reduction from 123 full-time employees as of February
28, 2001. 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 24 persons in engineering and product development; 55 in sales,
marketing, and technical support; 16 in warehouse and distribution functions;
and 18 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.
EXECUTIVE OFFICERS
The following table sets forth certain information regarding our executive
officers:
NAME AGE POSITION
---- --- --------
William J. Hinz....... 56 Chairman of the Board
Gregory K. Roeper..... 41 President, Chief Executive Officer, and Director
David A. Husband...... 33 Vice President-Finance, Chief Financial Officer,
Secretary, and Treasurer
Stephen L. Borcich.... 55 Vice President - Sales and Marketing
Kent R. Burgess....... 55 Vice President - Product Development
Marc F. Niknam........ 43 Vice President - Engineering, Manufacturing, and
Technical Support
WILLIAM J. HINZ has served as our Chairman of the Board 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
served as 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.
GREGORY K. ROEPER has served as our President 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 until November 1994, Mr. Roeper was employed with
Arthur Andersen LLP, most recently as a Senior Manager. Mr. Roeper is a
Certified Public Accountant in the state of Arizona.
11
DAVID A. HUSBAND has served as our Vice President - Finance, Chief
Financial Officer, Secretary, and Treasurer since March 2001. Prior to joining
our company, Mr. Husband served in various capacities with Action Performance
Companies, Inc., a publicly held company engaged in the motorsports
merchandising business, from May 1998 until December 2000, most recently as
Executive Vice President and Chief Operating Officer. Mr. Husband was employed
as an accountant with Arthur Andersen LLP from July 1992 to May 1998, where he
was primarily engaged in auditing publicly held companies. Mr. Husband is a
Certified Public Accountant in the state of Arizona.
STEPHEN L. BORCICH has served as our Vice President - Sales and Marketing
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 also served as
Vice President - Sales of Microlog Corporation from December 1990 until
September 1995.
KENT R. BURGESS has served as our Vice President - Product Development
since April 2000. Mr. Burgess was a member of the senior management team, which
launched the predecessor to our company in 1983. During this period, Mr. Burgess
served as our Executive Vice President from March 1984 until February 1986,
Senior Vice President - Business Operations from September 1987 until July 1996,
and President of Vodavi - CT from July 1996 until October 1997. From October
1997 until April 2000, Mr. Burgess served as 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.
MARC F. NIKNAM has served as our 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 Director of Engineering from April 2000 until November 2000. From July 1997
until March 2000, he served as Executive Director of Manufacturing, Quality,
Hardware Engineering, and Repair. From January 1995 until June 1997, he served
as Manufacturing Manager. From 1989 until 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.
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.
OUR RELIANCE ON OUR INDEPENDENT DISTRIBUTION NETWORK AFFECTS OUR INVENTORY
LEVELS, THE TIMING AND PREDICTABILITY OF OUR REVENUE, AND OUR OVERALL OPERATING
RESULTS.
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, including orders related to support and
maintenance. 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.
Additionally, we offer our distributors price protection on their inventory
of our products. If we reduce the list price of our products, we will compensate
our distributors for the respective products that remain in their inventory on
the date the price adjustment becomes effective. If we do not have sufficient
cash resources to
12
compensate distributors on terms satisfactory to them or us, our price
protection obligations may prevent us from reacting quickly to competitive
market conditions.
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 27% of our sales during 2001, 32% during 2000, and
41% during 1999. Accounts receivable from Graybar comprised approximately 32% of
total accounts receivable at December 31, 2001. Our second largest customer in
each of the respective years accounted for 9% of our sales during 2001, 12%
during 2000, and 11% during 1999. Accounts receivable from our second largest
customer comprised approximately 16% of total accounts receivable at December
31, 2001.
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, the size and timing of sales of our new voice processing,
IP systems, and computer-telephony products may vary from quarter to quarter to
a greater extent in
13
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 MAINTENANCE AND 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 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 expenditures required to maintain or expand
our business. 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 maintain or 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 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 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;
* 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.
14
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
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 2001, we purchased $15.4 million
of product from LGE and LGST, constituting approximately 79% of our total
purchases in 2001. During 2000, we purchased $20.6 million of product from LGE
and LGST, constituting approximately 77% of our total purchases in 2000. 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.
15
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:
* 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; and
* metals.
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
16
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.
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.
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 SMALLCAP MARKET, 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 Nasdaq. During fiscal 2001, we moved
the listing of our common stock from the Nasdaq National Market to the Nasdaq
SmallCap Market. We may be required to delist from the Nasdaq SmallCap Market if
we fail to
17
comply with those rules. Should that occur, market makers may choose to create a
market for our common stock on the over-the-counter bulletin board. If that does
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.
RIGHTS TO ACQUIRE OUR COMMON STOCK COULD RESULT IN DILUTION TO OTHER HOLDERS OF
OUR COMMON STOCK.
As of March 22, 2002, we had outstanding options to acquire 840,500 shares
of our common stock at a weighted average exercise price of $2.93 per share. An
additional 107,000 shares remain available for grant under our 1994 Stock Option
Plan. During the terms of these options, 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 may adversely affect the terms on which we can
obtain additional financing, and the holders of these options can be expected to
exercise such options 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.
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. A majority of the restricted
shares of common stock currently outstanding 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 sublease, for a ten year term expiring in December 2011, approximately
55,000 square feet of space in Phoenix, 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 sub-leased to a third party.
We also lease, for a term ending in May 2005, approximately 5,000 square feet of
office and warehouse space in Tempe, Arizona that is used in our Vodavi Direct
operation.
We believe our facilities are adequate for our reasonably anticipated
needs.
ITEM 3. LEGAL PROCEEDINGS
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,
19
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.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held our 2001 Annual Meeting of Stockholders on October 15, 2001. The
following nominees were elected to our Board of Directors to serve until the
next annual meeting of stockholders, until their successors are elected or have
been qualified, or until their earlier resignation or removal:
Nominee Votes in Favor Withheld
------- -------------- --------
William J. Hinz 3,715,150 105,423
Gregory K. Roeper 3,715,150 105,423
Stephen A McConnell 3,715,150 105,423
Emmett E. Mitchell 3,715,150 105,423
Do-Hyun Kim 3,712,225 108,348
Mr. Gilbert H. Engels, a director of our company since January 1996, did
not stand for re-election, and his term as a director expired at the annual
meeting.
20
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock was quoted in the Nasdaq National Market under the symbol
"VTEK" from October 6, 1995 to July 18, 2001, and is now listed on the Nasdaq
SmallCap Market. The following table sets forth the high and low sales prices of
our common stock on the Nasdaq National Market and the Nasdaq SmallCap Market
for the periods indicated.
HIGH LOW
----- -----
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...................................... $2.50 $1.03
Second quarter..................................... 1.19 0.63
Third quarter...................................... 1.40 0.76
Fourth quarter..................................... 1.45 0.76
2002:
First quarter (through March 22, 2002)............. $1.65 $1.24
On March 22, 2002, the closing sales price of our common stock was $1.55
per share. As of March 22, 2002, there were 37 holders of record of our common
stock.
DIVIDEND POLICY
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 the
year ended December 31, 2001 are derived from our consolidated financial
statements, which have been audited by Deloitte & Touche LLP, independent public
accounts. The selected consolidated financial data presented below as of and for
each of the years in the four-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)
STATEMENT OF OPERATIONS DATA: 2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
Revenue .................... $ 34,153(1) $ 47,705 $ 49,811 $ 48,322 $ 47,675
Gross margin ............... 11,170(2) 17,503 17,886 15,802 15,667
Operating expenses ......... 13,183(3) 16,041 15,252 14,358 14,647(4)
Operating income (loss) .... (2,013) 1,462 2,634 1,444 1,020
Interest expense ........... 406 705 676 791 663
-------- -------- -------- -------- --------
Income (loss) before income
taxes .................... (2,419) 757 1,958 653 357
Provision for (benefit from)
income taxes ............. (863) 309 718 (330) 142
-------- -------- -------- -------- --------
Net income (loss) .......... $ (1,556) $ 448 $ 1,240 $ 983 $ 215
======== ======== ======== ======== ========
Net income (loss) per share,
diluted .................. $ (0.37) $ 0.10 $ 0.29 $ 0.23 $ 0.05
======== ======== ======== ======== ========
Weighted average shares
outstanding, diluted ..... 4,235 4,305 4,344 4,342 4,342
======== ======== ======== ======== ========
AS OF DECEMBER 31,
------------------------------------------------------------
(IN THOUSANDS)
BALANCE SHEET DATA: 2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
Assets:
Current assets ........... $ 14,080 $ 19,938 $ 19,645 $ 16,766 $ 19,507
Property and equipment, net 1,581 2,033 2,356 2,663 2,616
Goodwill, net ............ 1,638 1,772 1,906 2,244 2,395
Other, net ............... 815 1,152 1,307 1,169 1,146
-------- -------- -------- -------- --------
$ 18,114 $ 24,895 $ 25,214 $ 22,842 $ 25,664
======== ======== ======== ======== ========
Liabilities:
Current liabilities ...... $ 7,045 $ 12,176 $ 13,208 $ 12,044 $ 15,743
Other long-term obligations 41 135 186 199 306
-------- -------- -------- -------- --------
Total liabilities .......... 7,086 12,311 13,394 12,243 16,049
Stockholders' equity ....... 11,028 12,584 11,820 10,599 9,615
-------- -------- -------- -------- --------
$ 18,114 $ 24,895 $ 25,214 $ 22,842 $ 25,664
======== ======== ======== ======== ========
- ----------
(1) Includes special charges of $432 related to price protection obligations.
(2) Cost of goods sold includes special charges of $568 related to inventory
impairments.
(3) Includes special charges of $761 related to severance, receivable reserves,
and exit costs.
(4) Includes restructuring charges and asset impairments of $819.
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. On an on-going basis, we evaluate our estimates and
judgments, including those related to customer incentives, bad debts, sales
returns, excess and obsolete inventory, and contingencies and litigation. We
base our estimates and judgments on historical experience and on various other
factors that are reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements:
CUSTOMER INCENTIVES
We record estimated reductions to revenue for customer incentive programs,
including special pricing agreements, price protection for our distributors,
promotions, and other volume-related rebate programs. Our estimates are based on
a number of factors, including our assumptions related to customer redemption
rates, sales volumes, and inventory levels at our distributors. If actual
results differ from our original assumptions, revisions are made to our
estimates that could result in additional reductions to our reported revenue in
the period the revisions are made. Additionally, if market conditions were to
decline, we may take actions to increase the level of customer incentive
offerings that could result in an incremental reduction of revenue in the period
in which we offer the incentive.
BAD DEBTS
We maintain allowances for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments. If the financial
condition of our customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required.
Additionally, we have a significant concentration of accounts receivable with
our largest distributor, Graybar Electric Company, Inc. As of December 31, 2001,
Graybar accounted for 32% of our total accounts receivable. If Graybar's
financial condition were to deteriorate, resulting in their inability to make
payments to us, it could have a material adverse impact on our financial
condition and results of operations.
SALES RETURNS
We maintain allowances for estimated sales returns. While we have
distribution agreements with our largest distributors that limit the amount of
sales returns on active products, we generally allow unlimited returns of
products that we discontinue. Accordingly, the timing and amount of revisions to
our estimates for sales returns is largely influenced by our decisions to
discontinue product lines and our ability to predict the inventory levels of
such products at our largest distributors. Revisions to these estimates have the
effect of increasing or decreasing the reported amount of revenue in the period
in which the revisions are made. We generally do not accept product returns from
our direct dealers unless the product is damaged.
EXCESS AND OBSOLETE INVENTORY
We record our inventory at the lower of cost or market value. Our
assessment of market value is determined by, among other things, historical and
forecasted sales activity, the condition of specific inventory
23
items, and competitive pricing considerations. When the assessed market value is
less than the historical cost, provision is made in the financial statements to
write-down the carrying amount of the respective inventory items to market
value. If actual results are less favorable than our original assumptions for
determining market value, additional inventory write-downs may be required.
The above listing is not intended to be a comprehensive list of our
accounting policies. See our audited consolidated financial statements and notes
thereto, which begin on page F-1 of this Annual Report on Form 10-K, which
contain accounting policies and other disclosures required by generally accepted
accounting principles in the United States.
RESULTS OF OPERATIONS
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.
2001 2000 1999
------ ------ ------
Revenue...................................... 100.0% 100.0% 100.0%
Cost of goods sold........................... 67.3 63.3 64.0
------ ------ ------
Gross margin.............................. 32.7 36.7 36.0
Operating expenses:
Engineering and product development.......... 5.9 3.6 3.2
Selling, general, and administrative......... 32.7 30.0 27.5
------ ------ ------
38.6 33.6 30.7
Operating income (loss)...................... (5.9) 3.1 5.3
Interest expense, net........................ 1.2 1.5 1.4
------ ------ ------
Pretax income (loss)......................... (7.1) 1.6 3.9
Income tax expense (benefit)................. (2.5) 0.7 1.4
------ ------ ------
Net income (loss)............................ (4.6)% 0.9% 2.5%
====== ====== ======
2001 SPECIAL CHARGES
During the first quarter of 2001, we implemented a restructuring plan aimed
at reducing our operating expenses to coincide with our revised sales outlook.
Pursuant to the restructuring plan, we reduced our workforce, discontinued our
Interactive Voice Response product group, and implemented broad-based price
reductions on certain product lines. These actions created severance-related
obligations of $168,000, estimated shut-down costs of $265,000, and estimated
distributor price protection obligations of $432,000.
Additionally, in light of deteriorating economic and industry conditions
and planned introductions of new products, we re-evaluated the carrying amount
of certain receivables and inventory items resulting in additional accounts
receivable reserve requirements of $328,000 and inventory impairments of
$568,000.
The pre-tax financial impact of these initiatives during the first quarter
of 2001 totaled approximately $1.8 million consisting of both cash and non-cash
charges. The following table sets forth the components of these special charges
included in the accompanying consolidated statement of operations for the year
ended December 31, 2001:
24
Amount Inclusion in
($000) Statement of Operations
------ -----------------------
Non-cash Charges:
Inventory impairments $ 568 Cost of goods sold
Allowance for bad debts 328 Selling, general & administrative
expenses
Distributor price protection 151 Revenue
Property and equipment 15 Selling, general & administrative
expenses
------
1,062
------
Cash Charges:
Distributor price protection 281 Revenue
Severance-related costs 168 Selling, general & administrative
expenses
Other shut-down costs 250 Selling, general & administrative
expenses
------
699
------
$1,761
======
The following table sets forth the activity of accrued cash charges as of
December 31, 2001: (IN THOUSANDS)
Initial Balance Dec.
Balance Payments 31, 2001
------- ------- -------
Distributor price protection $ 281 $ (195) $ 86
Severance-related costs 168 (114) 54
Other shut-down costs 250 (106) 144
------- ------- -------
$ 699 $ 415 $ 284
======= ======= =======
FISCAL YEAR ENDED DECEMBER 31, 2001 COMPARED WITH FISCAL YEAR ENDED DECEMBER 31,
2000
REVENUE
Revenue during 2001 totaled $34.2 million compared with revenue of $47.7
million in 2000, a reduction of $13.5 million, or 28.4%. Sales to our supply
house customers accounted for approximately $18.9 million, or 55% of our total
revenue during 2001 compared with $31.2 million, or 65% of our total revenue in
2000, representing a year-over-year decrease of $12.3 million. The decrease in
sales to our supply house customers is attributable to (a) a $5.8 million
reduction in supply house inventory levels resulting in fewer orders to us; (b)
soft market conditions in the small- to mid-sized markets affecting our
industry; (c) our decision to reduce prices on certain of our single line
telephones and voice mail products; and (d) reduced sales of certain
discontinued products.
Revenue in 2001 was also negatively impacted by our decision to exit the
retail Interactive Voice Response business during the first quarter of 2001.
Revenue attributable to this business totaled $1.3 million during 2001 compared
with $2.4 million during 2000, a reduction of 45.8%.
Sales through our INFINITE direct dealer program totaled $14.7 million, or
43% or our total revenue during 2001 compared with $15.0 million, or 31% of our
total revenue during 2000. During 2001, we continued our program to focus on
selling to fewer, but larger and better-established, dealers. While sales
through our INFINITE channel were positively impacted by the introduction of
larger dealers, they were negatively impacted by the poor
25
economic and market conditions for small- to mid-sized businesses in the United
States and by our decision to reduce prices on certain voice mail products.
GROSS MARGIN
Our gross margin was $11.2 million during 2001 compared with $17.5 million
during 2000. Our gross margin as a percentage of total revenue declined to 32.7%
during 2001 compared with 36.7% during 2000. The reduction in our gross margin
percentage during 2001 is a direct result of (a) inventory impairments and price
protection obligations of $1.0 million recorded during the first quarter of
2001; (b) fewer sales to cover the fixed component of costs of goods sold, which
includes labor and other warehouse and distribution costs; and (c) price
reductions on certain single line telephones and voice mail products, which were
slightly offset by price concessions provided to us by our suppliers.
ENGINEERING AND PRODUCT DEVELOPMENT
Engineering and product development expenditures increased 14.7% to $2.0
million during 2001 from $1.7 million during 2000. The increase was primarily
due to salaries and related personnel costs associated with additional headcount
and field trial expenses. During 2001, we introduced seven new products to the
market and continued development efforts on our next generation IP Key Telephone
System as well as enhancements to our existing Key Telephone Systems and voice
processing products.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses were $11.2 million during
2001 compared with $14.3 million in 2000, a reduction of $3.1 million, or 21.7%.
Excluding special charges of approximately $760,000 recorded in the first
quarter of 2001, selling, general, and administrative expenses declined by $3.9
million, or 27.1%, from 2000. This decrease is the net effect of a number of
factors, including (a) headcount reductions; (b) decreased marketing and
promotional expenses; and (c) strict cost controls over discretionary spending.
INTEREST EXPENSE
Interest expense decreased to $406,000 during 2001 from $ 705,000 during
2000. During 2001, our interest expense was positively impacted by a $3.7
million reduction in our loan balance from the beginning of the year and a
reduction of our effective interest rate from 9.15% at the beginning of the year
to 4.52% at December 31, 2001.
INCOME TAXES
We provided for federal and state income taxes using an effective rate of
35.7% during 2001 compared with an effective rate of 40.8% during 2000. The
change in effective rates between periods reflects the impact of permanent
book/tax differences in loss years versus years with positive pre-tax earnings.
FISCAL YEAR ENDED DECEMBER 31, 2000 COMPARED WITH FISCAL YEAR ENDED DECEMBER 31,
1999
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
26
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 our repair center in the second quarter of 1999. Repair revenue was
approximately $327,000 in 2000 as compared to $772,000 in 1999.
GROSS MARGIN
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.
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.
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.
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.
INCOME TAXES
We provided for income taxes using an effective rate of 40.8% in 2000, as
compared with an effective rate of 36.7% in 1999. We utilized research and
development tax credits of approximately $74,000 in 2000 and $153,000 in 1999,
which favorably impacted the effective tax rate in each of those years.
LIQUIDITY AND CAPITAL RESOURCES
Our net working capital position was $7.0 million at December 31, 2001
compared with $7.8 million at December 31, 2000. We had a cash balance of
$340,000 at December 31, 2001. Changes in working capital that increased our
cash position during 2001 included reductions in accounts receivable of $4.0
million and inventory of $1.4 million. Factors that reduced our cash balance
during 2001 included a pre-tax operating loss of $2.4 million, cash payments of
$3.7 million on our revolving credit facility, purchases of property and
equipment of $172,000, and other changes in working capital, including
reductions in accounts payable and accrued liabilities of $1.5 million.
27
As a result of our net operating loss during 2001, and our ability to carry
back those losses to prior years in which we paid federal income taxes, we have
recorded an income tax receivable as of December 31, 2001 of approximately
$839,000, which we expect to receive during the second quarter of 2002.
Our days sales outstanding, calculated on quarterly sales, improved to
approximately 71 days as of December 31, 2001 compared with 90 days as of
December 31, 2000. The reduction in days sales outstanding is a result of
improved credit management as well as a more even distribution of sales during
the fourth quarter of 2001 compared with the fourth quarter of 2000. Our days
sales outstanding, and our liquidity, is significantly influenced by the timing
of payments received from our largest distributors. Our two largest distributors
comprised 48% of our total accounts receivable as of December 31, 2001 and 50%
of our total accounts receivable as of December 31, 2000.
Our inventory turnover, measured in terms of days sales outstanding on a
quarterly basis, remained relatively constant at 84 days as of December 31, 2001
compared with 80 days as of December 31, 2000.
Trade payables and accrued liabilities, including payables to third-party
and related-party manufacturers, were approximately $4.5 million as of December
31, 2001 compared with $5.9 million as of December 31, 2000. The reduction in
trade payables and accrued liabilities between periods reflects the general slow
down in our business and not a change in payment terms from our vendors. We
generally pay trade payables within 45 days from the invoice date.
We maintain a $15.0 million credit facility with General Electric Capital
Corporation that expires during April 2003. The line of credit bears interest at
2.5% over the 30-day commercial paper rate, or 4.52% as of December 31, 2001.
Advances under the line of credit are based upon eligible accounts receivable
and inventory of our wholly owned subsidiary Vodavi Communications Systems,
Inc., and are secured by substantially all of our assets. The revolving line of
credit contains covenants that are customary for similar credit facilities and
also prohibit our operating subsidiaries from paying dividends to our company
without the consent of GE Capital. As of December 31, 2001, we were in
compliance with all of the covenants.
We had total borrowing capacity of approximately $8.9 million under the
credit facility at December 31, 2001, of which $2.6 million was outstanding and
$6.3 million was unused and available.
During March 2002 we acquired substantially all of the assets and assumed
certain liabilities of DataSpeak Systems, Inc., an Arizona-based dealer of our
products. Under the terms of the purchase agreement, we paid cash of $624,000
and issued 100,000 shares of restricted common stock. The cash portion of the
acquisition was funded through proceeds available under our credit facility.
We have no special purpose entities or off balance sheet financing
arrangements, commitments, or guarantees other than certain long-term operating
lease agreements for our office and warehouse facilities and short-term purchase
commitments to our third-party suppliers.
28
The following table sets forth all known commitments as of December 31,
2001 and the year in which those commitments become due or are expected to be
settled (IN THOUSANDS):
Accounts
Payable &
Operating Credit Purchase Accrued
Year Leases Facility Commitments Liabilities Total
- ---------- -------- -------- ----------- ----------- --------
2002 $ 1,102 $ -- $ 3,715 $ 4,452 $ 9,269
2003 965 2,593 -- -- 3,558
2004 965 -- -- -- 965
2005 785 -- -- -- 785
2006 785 -- -- -- 785
Thereafter 3,927 -- -- -- 3,927
-------- -------- -------- -------- --------
Total $ 8,529 $ 2,593 $ 3,715 $ 4,452 $ 19,289
======== ======== ======== ======== ========
We are a defendant in various lawsuits. See Item 3, "Legal Proceedings." We
have not made any material provisions in our financial statements for these
lawsuits. The imposition of damages in any of these matters could have a
material adverse effect on our results of operations and financial position.
From time to time we also are subject to certain asserted and unasserted
claims encountered in the normal course of business. We believe that the
resolution of these matters will not have a material adverse effect on our
financial position or results of operations. We cannot provide assurance,
however, that damages that result in a material adverse effect on our financial
position or results of operations will not be imposed in these matters.
We believe that our working capital and credit facilities are sufficient to
fund our capital needs during the next 12 months. 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 most of our products under various manufacturing
arrangements with third-party manufacturers in Asia, including LGE who owns
approximately 20.4% of our outstanding common stock. As of the date of this
report, we do not believe that the current economic or political environment in
Asia will have any adverse impact on our operations.
IMPACT OF RECENTLY ISSUED STANDARDS
In 2001, the FASB issued Statement No. 141, ACCOUNTING FOR BUSINESS
COMBINATIONS, and Statement No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. These
statements modify accounting for business combinations after June 30, 2001 and
will affect our treatment of goodwill and other intangible assets effective
January 1, 2002. The statements require that goodwill existing at the date of
adoption be reviewed for possible impairment and that impairment tests be
performed at least annually, with impaired assets written-down to fair value.
Additionally, existing goodwill and intangible assets must be assessed and
classified consistent with the statements' criteria. Intangible assets with
estimated useful lives will continue to be amortized over those periods.
Amortization of goodwill and intangible assets with indeterminate lives will
cease. Goodwill amortization expense was $134,000, $134,000, and $141,000 for
the years ended December 31, 2001, 2000, and 1999, respectively.
We have determined that upon adoption of these statements on January 1,
2002, the entire $1.6 million carrying amount of the goodwill was impaired. This
determination was based principally on the total market value of our issued and
outstanding common stock on January 1, 2002 of $5.5 million compared with our
book value on December 31, 2001 of $11.0 million. In accordance with SFAS No.
142, early adoption is not permitted. Therefore, the goodwill impairment will be
recognized in the first quarter of 2002 as a change in accounting principle.
Except as disclosed above, the adoption of these statements is not expected to
have a material impact on our financial condition or results from operations.
29
In October 2001, the FASB issued SFAS No. 144 "Accounting for Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This statement
also extends the reporting requirements to report separately, as discontinued
operations, components of an entity that have either been disposed of or are
classified as held-for-sale. We adopted the provisions of SFAS No. 144 effective
January 1, 2002. The adoption of this statement did not have any impact on our
financial condition or results from operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of December 31, 2001, 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 2.50% over the 30 day commercial paper
rate, a total of 4.52% at December 31, 2001. The principal of loans under this
line of credit is due in April 2003. At December 31, 2001, we had outstanding
borrowings on the line of credit of approximately $2.6 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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item relating to directors of our company
is incorporated herein by reference to the definitive Proxy Statement to be
filed pursuant to Regulation 14A of the Securities Exchange Act of 1934 for our
2002 Annual Meeting of Stockholders. The information required by this Item
relating to our executive officers is included in Item 1, "Our 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 2002 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 2002 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 2002 Annual Meeting of Stockholders.
30
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-3 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)
10.9 Vodavi Technology, Inc. Second Amended and Restated 1994 Stock Option
Plan (4)
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)
10.35 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)
31
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)
10.44 Waiver and Amendment of Credit Agreement dated May 11, 2001, between
Vodavi Communications Systems, Inc. and General Electric Capital
Corporation (9)
10.45 Sublease Agreement dated August 8, 2001, between Vodavi Communications
Systems, Inc. and SpeedFam-IPEC, Inc. (10)
10.46 Employment Agreement, effective October 1, 2001, between Gregory K.
Roeper and Vodavi Technology, Inc.
21 List of Subsidiaries
23.1 Consent of Deloitte and Touche LLP
23.2 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.
(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.
(9) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2001, as filed on May 15, 2001.
(10) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2001, as filed on November 13, 2001.
32
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 27, 2002 By: /s/ Gregory K. Roeper
-------------------------------------
Gregory K. Roeper
President and Chief Executive Officer
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 27, 2002
- ----------------------------
William J. Hinz
/s/ Gregory K. Roeper President, Chief Executive March 27, 2002
- ---------------------------- Officer, and Director
Gregory K. Roeper (Principal Executive Officer)
/s/ David A. Husband Vice President - Finance, March 27, 2002
- ---------------------------- Chief Financial Officer,
David A. Husband and Secretary (Principal
Financial and Accounting
Officer)
/s/ Jack A. Henry Director March 27, 2002
- ----------------------------
Jack A. Henry
/s/ Kyeong-Woo Lee Director March 27, 2002
- ----------------------------
Kyeong-Woo Lee
/s/ Stephen A McConnell Director March 27, 2002
- ----------------------------
Stephen A McConnell
/s/ Emmett E. Mitchell Director March 27, 2002
- ----------------------------
Emmett E. Mitchell
/s/ Frederick M. Pakis Director March 27, 2002
- ----------------------------
Frederick M. Pakis
33
VODAVI TECHNOLOGY, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Page
----
Independent Auditors' Report - Deloitte & Touche LLP.........................F-2
Report of Independent Public Accountants - Arthur Andersen LLP...............F-3
Consolidated Balance Sheets as of December 31, 2001 and 2000.................F-4
Consolidated Statements of Operations for the Years Ended
December 31, 2001, 2000, and 1999..........................................F-5
Consolidated Statements of Changes in Stockholders' Equity for
the Years Ended December 31, 2001, 2000, and 1999..........................F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2001, 2000, and 1999..........................................F-7
Notes to Consolidated Financial Statements...................................F-8
Independent Auditors' Report on Schedules - Deloitte & Touche LLP............S-1
Report of Independent Public Accounts - Arthur Andersen LLP..................S-2
Schedule II -- Valuation and Qualifying Accounts.............................S-3
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Vodavi Technology, Inc.
We have audited the accompanying consolidated balance sheet of Vodavi
Technology, Inc. and subsidiaries as of December 31, 2001, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Vodavi Technology, Inc. and subsidiaries as
of December 31, 2001, and the results of their operations and their cash flows
for the year then ended, in conformity with accounting principles generally
accepted in the United States of America.
DELOITTE & TOUCHE LLP
Phoenix, Arizona
February 8, 2002
(March 4, 2002 as to Note 10)
F-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Vodavi Technology, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheet of Vodavi
Technology, Inc. (a Delaware corporation) and Subsidiaries as of December 31,
2000, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the two 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 the results of their operations and
their cash flows for each of the two years in the period ended December 31,
2000, in conformity with accounting principles generally accepted in the United
States.
ARTHUR ANDERSEN LLP
Phoenix, Arizona
February 2, 2001
F-3
VODAVI TECHNOLOGY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
IN THOUSANDS EXCEPT SHARE AMOUNTS
December 31,
--------------------
2001 2000
-------- --------
Assets
Current Assets
Cash $ 340 $ 564
Accounts receivable, net of reserves for doubtful accounts and sales
returns of $730 in 2001 and $1,582 in 2000 6,996 11,797
Inventories 5,331 6,707
Income tax receivable 839 --
Prepared expenses and other 574 870
-------- --------
Total current assets 14,080 19,938
Property and Equipment, net 1,581 2,033
Goodwill, net 1,638 1,772
Deferred Income Taxes 622 735
Other-Long-Term Assets, net 193 417
-------- --------
$ 18,114 $ 24,895
======== ========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 1,454 $ 1,374
Accrued liabilities 1,437 1,302
Accrued rebates 577 859
Accounts payable to stockholder 984 2,382
Revolving credit facility borrowings 2,593 6,259
-------- --------
Total current liabilities 7,045 12,176
-------- --------
Other Long-Term Obligations 41 135
-------- --------
Commitments and Contingencies (Note 4)
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 shares issued at December 31, 2001 and 2000 5 5
Additional paid-in capital 13,363 13,363
Accumulated deficit (1,581) (25)
Treasury stock, at cost; 318,700 shares at December 31, 2001 and 2000 (759) (759)
-------- --------
11,028 12,584
-------- --------
$ 18,114 $ 24,895
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
VODAVI TECHNOLOGY, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
IN THOUSANDS EXCEPT PER SHARE AMOUNTS
Years Ended December 31,
-------------------------------
2001 2000 1999
-------- -------- --------
Revenue, Net $ 34,153 $ 47,705 $ 49,811
Cost of Goods Sold 22,983 30,202 31,925
-------- -------- --------
Gross Margin 11,170 17,503 17,886
Operating Expenses:
Engineering and product development 1,998 1,742 1,568
Selling, general and administrative 11,185 14,299 13,684
-------- -------- --------
13,183 16,041 15,252
-------- -------- --------
Operating Income (Loss) (2,013) 1,462 2,634
Interest Expense 406 705 676
-------- -------- --------
Income (Loss) Before Income Taxes (2,419) 757 1,958
Provision for (Benefit from) Income Taxes (863) 309 718
-------- -------- --------
Net Income (Loss) $ (1,556) $ 448 $ 1,240
======== ======== ========
Basic Earnings (Loss) per Share $ (0.37) $ 0.10 $ 0.29
======== ======== ========
Diluted Earnings (Loss) per Share $ (0.37) $ 0.10 $ 0.29
======== ======== ========
Weighted Average Shares Outstanding - Basic 4,235 4,273 4,340
======== ======== ========
Weighted Average Shares Outstanding - Diluted 4,235 4,305 4,344
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
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, 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
Net loss -- -- -- (1,556) -- -- (1,556)
--------- --------- --------- --------- --------- --------- ---------
Balance, December 31, 2001 4,553,488 $ 5 $ 13,363 $ (1,581) (318,700) $ (759) $ 11,028
========= ========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
VODAVI TECHNOLOGY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
IN THOUSANDS
Years ended December 31,
-----------------------------
2001 2000 1999
------- ------- -------
Cash flows from Operating Activities:
Net income (loss) $(1,556) $ 448 $ 1,240
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 988 940 830
Tax benefit on stock option exercises -- 193 --
Provision for doubtful accounts and sales
returns 839 628 589
Deferred taxes 113 154 (162)
Rent equalization (94) (51) (13)
Loss on sale of repair center division -- -- 86
Changes in working capital:
Accounts receivable 3,962 (2,362) (1,898)
Inventories 1,376 196 (627)
Income tax receivable (839) -- --
Prepaid expenses and other 296 167 (338)
Other long-term assets (6) (191) 462
Accounts payable and accounts payable to
stockholder (1,318) 766 635
Accrued liabilities and accrued rebates (147) 615 (307
------- ------- -------
Net cash flows provided by
operating activities 3,614 1,503 497
------- ------- -------
Cash flows from Investing Activities:
Cash paid for license agreement -- -- (500)
Cash paid to acquire property and equipment (172) (291) (387)
Net proceeds from disposition of repair
center division -- -- 50
Cash received on notes receivable -- 114 281
------- ------- -------
Net cash flows used in investing
activities (172) (177) (556)
------- ------- -------
Cash Flows from Financing Activities:
Net borrowings (payments) on revolving
credit facility (3,666) (2,413) 961
Payments on capital leases -- -- (125)
Purchase of common stock -- (714) (45)
Stock options exercised -- 837 --
------- ------- -------
Net cash flows provided by (used in)
financing activities (3,666) (2,290) 791
------- ------- -------
Change in Cash (224) (964) 732
Cash, beginning of period 564 1,528 796
------- ------- -------
Cash, end of period $ 340 $ 564 $ 1,528
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
VODAVI TECHNOLOGY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
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 through a distribution network consisting of
wholesale distributors, direct dealers, and its own sales personnel.
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. The Company does not own most of
the equipment, tools and molds used in the manufacturing process and has
only limited control over the manufacturing of its products. A majority of
these purchases are made from a stockholder (see Note 7).
b. CUSTOMER CONCENTRATIONS
Sales to the Company's largest distributor, Graybar Electric Company, Inc.,
accounted for 27%, 32%, and 41% of total revenues during 2001, 2000 and
1999, respectively. During the same periods, sales to the Company's second
largest distributor accounted for an additional 9%, 12%, and 11% of total
revenues, respectively. Accounts receivable from the two largest
distributors comprise 48% and 50% of total accounts receivable as of
December 31, 2001 and 2000, respectively. No other customers accounted for
more than 10% of the Company's revenues.
c. 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). In
February 2002, Vodavi Direct, Inc. was formed as a wholly owned subsidiary
of VCS (see Note 10). All material intercompany transactions have been
eliminated in consolidation.
d. 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.
Estimates are used in accounting for, among other things, customer
incentive programs, allowances for doubtful accounts and sales returns,
price protection, reserves for excess inventory and obsolescence, and
contingencies and litigation. Estimates and assumptions are reviewed
periodically and the effects of revisions are reflected in the consolidated
financial statements in the period they are determined to be necessary.
e. INVENTORIES
Inventories consist of purchased finished products from third-party
manufacturers and are stated at the lower of cost (first-in, first-out
method) or market. The Company's assessment of market value is determined
by, among other things, historical and forecasted sales activity, the
condition of specific
F-8
inventory items, and competitive pricing considerations. When the assessed
market value is less than the historical cost, provision is made in the
financial statements to reduce the carrying amount of the respective
inventory items to market value.
The Company generally takes title to inventory when it is shipped.
f. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the respective assets. Leasehold improvements are amortized
on the straight-line method over the shorter of the estimated useful lives
of the assets or the term of the lease. When property or equipment is sold
or otherwise disposed of, the cost and related accumulated depreciation are
removed from the accounts and any resulting gain or loss is reflected in
operations for the period.
Property and equipment and the related useful lives consist of the
following as of December 31, 2001 and 2000, respectively.
Useful Life
Type of Asset In Years 2001 2000
------------- -------- -------- --------
($000) ($000)
Office and computer equipment 5 $ 2,825 $ 2,741
Furniture and fixtures 10 409 346
Tooling and manufacturing equipment 5-8 1,662 1,693
-------- --------
4,896 4,780
Less - accumulated depreciation (3,315) (2,747)
-------- --------
$ 1,581 $ 2,033
======== ========
Depreciation expense was $627,000, $614,000, and $604,000, for the years
ended December 31, 2001, 2000, and 1999, 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,
$134,000, and $141,000, for the years ended December 31, 2001, 2000, and
1999, respectively. Accumulated amortization was $1,037,000 and $903,000 at
December 31, 2001 and 2000, respectively.
h. OTHER LONG TERM ASSETS
Other long-term assets consists principally of acquired licensing rights,
including a licensing agreement the Company entered into in 1999 to acquire
the licensing and manufacturing rights to certain voice mail products for
$500,000. This agreement is being amortized utilizing a useful life of
three years. Amortization expense related to this asset was $167,000 for
each of the years ended December 31, 2001 and 2000 and $42,000 for the year
ended December 31, 1999. The various other licensing-related assets are
being amortized over their remaining useful lives.
i. IMPAIRMENT OF LONG-LIVED ASSETS
Goodwill and other long-lived assets are reviewed for impairment whenever
events or circumstances indicate that the carrying amount of the assets may
not be recoverable. If events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable, the Company compares
the carrying value of the assets to the sum of the expected future cash
flows (undiscounted and without interest charges) to be generated by the
assets and their ultimate disposition. If the sum of the undiscounted cash
flows is less then the carrying value, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds
the fair value of the assets. Assets to be disposed are valued at the lower
of carrying value or fair value, less costs to sell.
F-9
j. RECENT ACCOUNTING PRONOUNCEMENTS
In 2001, the FASB issued Statement No. 141, ACCOUNTING FOR BUSINESS
COMBINATIONS, and Statement No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS.
These Statements modify accounting for business combinations after June 30,
2001 and will affect the Company's treatment of goodwill and other
intangible assets effective January 1, 2002. The Statements require that
goodwill existing at the date of adoption be reviewed for possible
impairment and that impairment tests be performed at least annually, with
impaired assets written-down to fair value. Additionally, existing goodwill
and intangible assets must be assessed and classified consistent with the
Statements' criteria. Intangible assets with estimated useful lives will
continue to be amortized over those periods. Amortization of goodwill and
intangible assets with indeterminate lives will cease. Goodwill
amortization expense was $134,000, $134,000, and $141,000 for the years
ended December 31, 2001, 2000, and 1999, respectively.
The Company has determined that upon adoption of these Statements on
January 1, 2002, the entire $1.6 million carrying amount of the goodwill
was impaired. This determination was based principally on the total market
value of the Company's issued and outstanding common stock on January 1,
2002 of $5.5 million compared to the Company's book value on December 31,
2001 of $11.0 million. In accordance with SFAS No. 142, early adoption is
not permitted. Therefore, the goodwill impairment will be recognized in the
first quarter of 2002 as a change in accounting principle.
Except as disclosed above, the adoption of these Statements is not expected
to have a material impact on the Company's financial condition or results
from operations.
In October 2001, the FASB issued SFAS No. 144 "Accounting for Impairment or
Disposal of Long-Lived Assets". SFAS No. 144 addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. This
statement also extends the reporting requirements to report separately, as
discontinued operations, components of an entity that have either been
disposed of or are classified as held-for-sale. We adopted the provisions
of SFAS No. 144 effective January 1, 2002. The adoption of this statement
did not have any impact on our financial condition or results from
operations.
k. INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax basis, and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. A valuation allowance is recorded
against deferred tax assets if it is unlikely that some or all of the
deferred tax assets will be realized.
l. REVENUE RECOGNITION
The Company recognizes revenue when persuasive evidence of an arrangement
exists, delivery has occurred, the fee is fixed and determinable and
collectibility is probable. Generally, all of these conditions are met at
the time the Company ships products to customers. Additionally, revenues
from software sales were recognized when delivery had occurred, the license
fee was fixed and determinable, collectibility was probable and evidence of
an arrangement existed. Software maintenance and support revenues were
recognized ratably over the term of the contract, generally twelve months.
Revenues from professional services for customization of software are
generally recognized under two methods, depending on contractual terms.
Under the time and materials method, revenue is based on a fee-per-hour
basis and is recognized as hours are completed. Under the fixed contract
method, a pre-set fee is agreed upon for a project, and revenue is
recognized proportionately to the percentage completion of the project.
m. STOCK OPTION PLANS
Statement of Financial Accounting Standard (SFAS) No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, encourages entities to recognize as expense over
the vesting period the fair value of all stock-based awards
F-10
on the date of grant. Alternatively, SFAS No. 123 allows entities to
continue to apply the provisions of APB Opinion No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES, and provide pro forma earnings per share
disclosures for employee stock option grants as if the fair-value-based
method as defined in SFAS No. 123 had been applied. The Company applies the
recognition provisions of APB No. 25 and provides the pro forma disclosure
provisions of SFAS No. 123 (see Note 5).
n. 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:
2001 2000 1999
------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net Income (loss) $(1,556) $ 448 $ 1,240
======= ======= =======
Weighted average common shares for
basic earnings per share 4,235 4,273 4,340
Effect of dilutive stock options(1) -- 32 4
------- ------- -------
Weighted average common shares for
diluted earnings per share 4,235 4,305 4,344
======= ======= =======
Basic earnings per share $ (0.37) $ 0.10 $ 0.29
======= ======= =======
Diluted earnings per share $ (0.37) $ 0.10 $ 0.29
======= ======= =======
(1) Dilutive securities are calculated using the treasury stock method and
the average market price during the period. Options on 646,500,
328,000 and 537,300 shares had an exercise price greater than the
average market price during the years ended December 31, 2001, 2000,
and 1999, respectively, and therefore did not enter into the earnings
per share calculation.
o. 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.
p. SEGMENTS
The Company operates in one reportable segment, the distribution of
business telecommunications equipment. Accordingly, the Company has only
presented financial information for its one reportable segment.
2. SPECIAL CHARGES
During the first quarter of 2001, the Company implemented a restructuring
plan aimed at reducing its operating expenses to coincide with its then
current sales outlook. Pursuant to the restructuring plan, the Company
reduced its workforce by approximately 20 percent, discontinued its
Interactive Voice Response product group, and implemented broad-based price
reductions on certain voice mail products and single-
F-11
line telephones. These actions created severance-related obligations of
$168,000, estimated shut-down costs of $265,000, and estimated distributor
price protection obligations of $432,000.
Additionally, in light of deteriorating economic and industry conditions
and planned introductions of new products, the Company re-evaluated the
carrying amount of certain receivables and inventory items resulting in
additional accounts receivable reserve requirements of $328,000 and
inventory impairments of $568,000.
The pre-tax financial impact of these initiatives during the first quarter
of 2001 totaled approximately $1.8 million consisting of both cash and
non-cash charges. The following table sets forth the components of these
special charges included in the accompanying consolidated statement of
operations for the year ended December 31, 2001:
Amount Inclusion in
($000) Statement of Operations
------ -----------------------
Non-cash Charges:
Inventory impairments $ 568 Cost of goods sold
Allowance for bad debts 328 Selling, general & administrative
expenses
Distributor price protection 151 Revenue
Property and equipment 15 Selling, general & administrative
expenses
------
1,062
------
Cash Charges:
Distributor price protection 281 Revenue
Severance-related costs 168 Selling, general & administrative
expenses
Other shut-down costs 250 Selling, general & administrative
expenses
------
699
------
$1,761
======
The following table sets forth the activity of accrued cash charges as of
December 31, 2001: (IN THOUSANDS)
Initial Balance
Balance Payments Dec. 31, 2001
------- ------- -------------
Distributor price protection $ 281 $ (195) $ 86
Severance-related costs 168 (114) 54
Other shut-down costs 250 (106) 144
------- ------- -------
$ 699 $ 415 $ 284
======= ======= =======
The remaining balance of $284,000 is included in current liabilities in the
accompanying consolidated balance sheet at December 31, 2001 and is
expected to be paid in 2002.
The following table sets forth for the periods presented the total revenue
and operating income (loss) contributed by the Interactive Voice Response
product group that was discontinued in the first quarter of 2001: (IN
THOUSANDS)
2001 2000 1999
------- ------- -------
Revenue $ 1,331 $ 2,420 $ 2,960
Operating income (loss) (359) (186) (210)
3. REVOLVING CREDIT FACILITY
As of December 31, 2001, the Company had a $15.0 million revolving credit
facility with a financial institution. Available borrowings under the
facility are based on eligible inventory and accounts receivable and are
secured by substantially all of the Company's assets. Interest is payable
monthly at a variable rate based on the 30-day commercial paper rate plus
2.50% (4.52% and 9.15% at December 31, 2001 and 2000,
F-12
respectively). The credit facility expires in April 2003. At December 31,
2001, $2.6 million was outstanding on the revolving credit facility with an
additional $6.3 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, 2001, the Company was
in compliance with these financial covenants.
4. COMMITMENTS AND CONTINGENCIES
a. LEGAL MATTERS
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. No provision has been made in the 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.
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)
2002 $ 1,102
2003 965
2004 965
2005 785
2006 785
Thereafter 3,927
-------
Total Minimum lease commitments 8,529
Total minimum noncancellable sublease rentals (558)
-------
$ 7,971
=======
F-13
Certain of the Company's lease agreements provide for initial periods of
free or discounted rental payments. Rent expense is recognized on a
straight-line basis and was approximately $1,112,000 for each of the years
ended December 31, 2001, 2000, and 1999, respectively. The difference
between rent expensed and rent paid ("rent equalization") was $94,000,
$51,000, and $13,000 for the years ended December 31, 2001, 2000, and 1999,
respectively.
c. 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 $63,000, $76,000, and $68,000, for the years
ended December 31, 2001, 2000, and 1999, respectively.
5. 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, 2001, the Company had purchased
318,700 shares 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
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. The warrants expired unexercised in 2001.
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 the exercise price 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
F-14
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 table sets forth the activity under the Plan for each of the
years presented:
December 31, 2001 December 31, 2000 December 31, 1999
----------------------- ----------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Options Price Options Price Options Price
--------- --------- --------- --------- --------- ---------
Options outstanding at beginning
of period 725,000 $ 3.68 779,800 $ 4.03 592,400 $ 4.88
Granted 188,000 1.04 179,500 2.72 267,500 2.62
Forfeited (108,500) 3.49 (81,800) 4.30 (80,100) 4.95
Exercised -- -- (152,500) 4.00 -- --
--------- --------- --------- --------- --------- ---------
Options outstanding at end of
period 804,500 $ 3.08 725,000 $ 3.68 779,800 $ 4.03
========= ========= ========= ========= ========= =========
Options available for grant 143,000 222,500 70,200
========= ========= =========
Exercisable at end of period 407,375 $ 4.11 334,125 $ 4.60 384,100 $ 4.83
========= ========= ========= ========= ========= =========
Weighted average fair value of
options granted $ 0.69 $ 1.80 $ 1.69
========= ========= =========
Options Outstanding Options Exercisable
--------------------------------------------- -------------------------
Weighted-
Number Average Weighted- Number Weighted-
Outstanding at Remaining Average Exercisable at Average
Range of December 31, Contractual Exercise December Exercise
Exercise Prices 2001 Life (in years) Price 31, 2001 Price
- --------------- -------------- --------------- -------- -------------- --------
$0.80 - $2.65 516,750 8.4 $ 2.07 147,125 $ 2.59
$2.66 - $4.51 120,000 5.6 $ 3.86 102,500 $ 3.93
$4.52 - $7.00 167,750 3.4 $ 5.65 157,750 $ 5.64
--------- -------- --------- --------
804,500 $ 3.08 407,375 $ 4.11
========= ======== ========= ========
The Company has computed, for pro forma disclosure purposes, the value of
all options granted during 2001, 2000 and 1999, using the Black-Scholes
option pricing model with the following weighted average assumptions:
Years Ended December 31,
----------------------------
2001 2000 1999
------ ------ ------
Risk free interest rate 5.03% 6.14% 5.23%
Expected dividends None None None
Expected lives in years 5.0 4.9 4.8
Expected volatility 79.0% 78.1% 71.6%
F-15
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,
-----------------------------------
2001 2000 1999
------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net income (loss):
As reported $(1,556) $ 448 $ 1,240
Pro forma $(1,682) $ 290 $ 1,035
Earnings (loss) per share:
As reported - basic and diluted $ (0.37) $ 0.10 $ 0.29
Pro forma - basic and diluted $ (0.40) $ 0.07 $ 0.24
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.
6. INCOME TAXES
The Company files a consolidated federal income tax return. The income tax
provision (benefit) is comprised of the following:
2001 2000 1999
------ ------ ------
(IN THOUSANDS)
Current $ (839) $ 463 $ 808
Deferred (24) (154) (90)
------ ------ ------
$ (863) $ 309 $ 718
====== ====== ======
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, 2001 and 2000, were as follows:
2001 2000
------ ------
(IN THOUSANDS)
Current deferred tax assets:
Receivable reserves $ 226 $ 268
UNICAP adjustment 84 84
Other accruals 372 472
Research and development credit 99 197
------ ------
781 1,021
Long-term deferred tax assets (liabilities):
State net operating losses 82 --
Depreciation and amortization differences (241) (286)
------ ------
(159) (286)
Net deferred tax asset $ 622 $ 735
====== ======
F-16
Reconciliation of the federal income tax rate to the Company's effective
income tax rate is as follows:
2001 2000 1999
------ ------ ------
Federal statutory tax rate (34.0)% 34.0% 34.0%
State taxes, net (3.3) 3.3 3.0
Research and development tax credits (3.1) (13.9) (10.0)
Non-deductible expenses and other permanent
differences 4.7 17.4 9.7
------ ------ ------
(35.7)% 40.8% 36.7%
====== ====== ======
During 2001, the Company generated approximately $2.4 million in state net
operating loss carryforwards. These losses can only be carried forward to
offset income in future years.
7. RELATED PARTY TRANSACTIONS
LG Electronics Inc. (LGE), the Company's principal supplier, owned
approximately 20.4% of the Company's outstanding common stock at December
31, 2001 and has a designated member on the Company's board of directors.
The Company purchased approximately $15.4 million, $20.6 million, and $18.4
million of key telephone systems, commercial grade telephones, and voice
mail products from LGE and an affiliate of LGE during 2001, 2000, and 1999,
respectively. Management believes that the purchases from LGE and its
affiliate approximate terms that would be offered by non-related parties.
The Company owed LGE and its affiliate a total of $984,000 and $2,382,000
for product purchases at December 31, 2001 and 2000, respectively. Payment
terms are generally 30 days after products are placed on board for
shipment. Current balances are non-interest bearing.
The Company conducts joint development activities with LGE for the design
and development of hardware incorporated into some of the Company's
existing and planned telephone systems and commercial grade telephones.
Generally, LGE contributes the ongoing research and development costs for
the product hardware and produces the finished goods developed under the
alliance, and the Company obtains the right to sell such products
throughout North America and the Caribbean.
In July 2001, the Company entered into a development agreement with LGE
under which the Company will develop for LGE certain advanced voice
messaging technologies. During 2001, the Company recorded revenue of
$210,000 for work performed under the development agreement using the
percentage of completion method. LGE made cash payments to the Company
during 2001 of $150,000 pursuant to the agreement.
8. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes for the years ended December 31,
2001, 2000, and 1999 was as follows:
2001 2000 1999
------ ------ ------
(IN THOUSANDS)
Interest $ 406 $ 705 $ 676
Income taxes -- 368 677
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
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. During 2001, the Repair and
F-17
refurbishment agreement was cancelled when the buyer filed for bankruptcy
and the Company entered into a new agreement with a third-party.
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
======
9. SUMMARY OF QUARTERLY RESULTS (UNAUDITED): (IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
-------- -------- -------- -------- --------
2001
Revenue, net $ 6,060 $ 9,603 $ 9,664 $ 8,826 $ 34,153
Gross margin 1,152 3,442 3,473 3,103 11,170
Income (loss) before
income taxes (3,291) 258 422 192 (2,419)
Provision (benefit) for
income taxes (1,207) 99 169 76 (863)
Net income (loss) (2,084) 159 253 116 (1,556)
Diluted earnings (loss)
per share (0.49) 0.04 0.06 0.03 (0.37)
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
10. SUBSEQUENT EVENTS
On March 4, 2002, the Company, through its wholly owned subsidiary Vodavi
Direct, Inc., acquired substantially all of the assets and assumed certain
liabilities of DataSpeak Systems, Inc., an Arizona-based dealer of the
Company's products. Under the terms of the purchase agreement, the Company
paid cash of $624,000 and issued 100,000 shares of restricted common stock.
F-18
INDEPENDENT AUDITORS' REPORT ON SCHEDULES
To the Board of Directors and Stockholders of
Vodavi Technology, Inc.
Phoenix, Arizona
We have audited the consolidated financial statements of Vodavi Technology, Inc.
and subsidiaries (the "Company") as of December 31, 2001 and for the year then
ended, and have issued our report thereon dated February 8, 2002 (March 4, 2002
as to Note 10); such financial statements and report are included elsewhere in
this annual report on Form 10-K of Vodavi Technology, Inc. and subsidiaries. Our
audit also included the consolidated financial statement schedules for 2001 of
Vodavi Technology, Inc. and subsidiaries, listed in item 14. The financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audit. In our opinion, such
2001 consolidated financial statement schedules, when considered in relation to
the basic 2001 consolidated financial statements taken as a whole, present
fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Phoenix, Arizona
February 8, 2002
(March 4, 2002 as to Note 10)
S-1
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) as of December 31, 2000 and for each of the two
years in the period ended December 31, 2000, included in this Form 10-K, and
have issued our report thereon dated February 2, 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-3 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, for the two years ended December 31, 2000, 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.
ARTHUR ANDERSEN LLP
Phoenix, Arizona
February 2, 2001
S-2
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
IN THOUSANDS
2001 2000 1999
------- ------- -------
Reserves for doubtful accounts and sales returns:
Balance at beginning of year $ 1,582 $ 1,239 $ 674
Provision charged to expense 839 628 589
Write-offs (1,691) (285) (24)
------- ------- -------
Balance at end of year $ 730 $ 1,582 $ 1,239
======= ======= =======
Restructuring reserve:
Balance at beginning of year $ -- $ -- $ 94
Provision charged to expense 699 -- --
Payments (415) -- (94)
------- ------- -------
Balance at end of year $ 284 $ -- $ --
======= ======= =======
Reserves for excess and obsolete inventory:
Balance at beginning of year $ 741 $ 433 $ 426
Provision charged to expense 1,027 331 157
Write-offs (1,147) (23) (150)
------- ------- -------
Balance at end of year $ 621 $ 741 $ 433
======= ======= =======
S-3
EXHIBIT INDEX
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)
10.9 Vodavi Technology, Inc. Second Amended and Restated 1994 Stock Option
Plan (4)
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)
10.35 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)
10.39 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)
10.44 Waiver and Amendment of Credit Agreement dated May 11, 2001, between
Vodavi Communications Systems, Inc. and General Electric Capital
Corporation (9)
10.47 Sublease Agreement dated August 8, 2001, between Vodavi Communications
Systems, Inc. and SpeedFam-IPEC, Inc. (10)
10.48 Employment Agreement, effective October 1, 2001, between Gregory K.
Roeper and Vodavi Technology, Inc.
21 List of Subsidiaries
23.1 Consent of Deloitte and Touche LLP
23.2 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.
(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.
(9) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2001, as filed on May 15, 2001.
(10) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2001, as filed on November 13, 2001.