SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
Commission File No. 0-26912
Vodavi Technology, Inc.
(Exact name of registrant as specified in its charter)
DELAWARE 86-0789350
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4717 EAST HILTON AVENUE, PHOENIX, ARIZONA 85034
(Address of principal executive offices) (Zip Code)
(480) 443-6000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ].
The number of shares outstanding of registrant's Common Stock, $.001 par value
per share, as of August 12, 2002 was 4,349,788.
VODAVI TECHNOLOGY, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2002
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements
Consolidated Balance Sheets - June 30, 2002
and December 31, 2001 3
Consolidated Statements of Operations - Three and Six
Months Ended June 30, 2002 and 2001 4
Consolidated Statements of Cash Flows - Six Months
Ended June 30, 2002 and 2001 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
PART II. OTHER INFORMATION 16
SIGNATURES 17
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VODAVI TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
IN THOUSANDS, EXCEPT SHARE AMOUNTS
June 30, 2002 December 31,
(Unaudited) 2001
-------- --------
CURRENT ASSETS:
Cash $ 652 $ 340
Accounts receivable, net of reserves for doubtful
accounts and sales returns of $950 and
$730, respectively 7,263 6,996
Inventory 3,669 5,331
Income tax receivable -- 839
Prepaids and other current assets 668 574
-------- --------
Total current assets 12,252 14,080
PROPERTY AND EQUIPMENT, net 1,767 1,581
GOODWILL 734 1,638
DEFERRED TAXES 994 622
OTHER LONG-TERM ASSETS 103 193
-------- --------
$ 15,850 $ 18,114
======== ========
CURRENT LIABILITIES:
Accounts payable $ 2,962 $ 2,438
Accrued liabilities 1,654 2,014
Revolving credit facility 825 2,593
-------- --------
Total current liabilities 5,441 7,045
-------- --------
OTHER LONG-TERM OBLIGATIONS 25 41
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value; 1,000,000 shares
authorized, no shares issued -- --
Common stock, $.001 par value; 10,000,000 shares
authorized; 4,668,488 and 4,553,488 shares
issued, respectively 5 5
Additional paid-in capital 13,513 13,363
Accumulated deficit (2,375) (1,581)
Treasury stock, 318,700 shares at cost (759) (759)
-------- --------
10,384 11,028
-------- --------
$ 15,850 $ 18,114
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
3
VODAVI TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
IN THOUSANDS EXCEPT PER SHARE AMOUNTS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------- --------------------
2002 2001 2002 2001
-------- -------- -------- --------
REVENUE, net $ 9,459 $ 9,603 $ 18,249 $ 15,663
COST OF GOODS SOLD 5,996 6,161 11,634 11,069
-------- -------- -------- --------
GROSS MARGIN 3,463 3,442 6,615 4,594
-------- -------- -------- --------
OPERATING EXPENSES:
Engineering and product development 569 495 1,059 991
Selling, general and administrative 2,367 2,580 4,719 6,366
-------- -------- -------- --------
2,936 3,075 5,778 7,357
-------- -------- -------- --------
OPERATING INCOME (LOSS) 527 367 837 (2,763)
INTEREST EXPENSE 28 109 59 270
-------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES AND
CHANGE IN ACCOUNTING PRINCIPLE 499 258 778 (3,033)
INCOME TAX PROVISION (BENEFIT) 197 99 309 (1,108)
-------- -------- -------- --------
INCOME (LOSS) BEFORE CHANGE IN ACCOUNTING PRINCIPLE 302 159 469 (1,925)
CHANGE IN ACCOUNTING PRINCIPLE, net of income taxes -- -- (1,263) --
-------- -------- -------- --------
NET INCOME (LOSS) $ 302 $ 159 $ (794) $ (1,925)
======== ======== ======== ========
EARNINGS (LOSS) PER COMMON SHARE:
Basic and Diluted -
Income (loss) before change in accounting principle $ 0.07 $ 0.04 $ 0.11 $ (0.45)
Change in accounting principle -- -- (0.29) --
-------- -------- -------- --------
Net income (loss) $ 0.07 $ 0.04 $ (0.18) $ (0.45)
======== ======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 4,350 4,235 4,311 4,235
======== ======== ======== ========
Diluted 4,462 4,235 4,391 4,235
======== ======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
4
VODAVI TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
IN THOUSANDS
(Unaudited)
Six Months Ended
June 30,
------------------
2002 2001
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (794) $(1,925)
Adjustments to reconcile net loss to net cash
flows provided by operating activities:
Depreciation and amortization 352 510
Rent levelization (16) (44)
Change in accounting principle 1,263 --
Changes in working capital:
Accounts receivable, net (267) 4,657
Inventory 1,682 517
Income tax receivable 839 (1,116)
Prepaids and other current assets (85) 303
Other long-term assets and deferred taxes (9) 40
Accounts payable 523 (1,468)
Accrued liabilities (398) (326)
------- -------
Net cash flows provided by operating activities 3,090 1,148
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid to acquire property and equipment (386) (59)
Cash paid to acquire DataSpeak Systems, Inc. (624) --
------- -------
Net cash flows used in investing activities (1,010) (59)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on revolving credit facility (1,768) (1,595)
------- -------
Net cash flows used in financing activities (1,768) (1,595)
------- -------
INCREASE (DECREASE) IN CASH 312 (506)
CASH, beginning of period 340 564
------- -------
CASH, end of period $ 652 $ 58
======= =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 59 $ 270
======= =======
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Common stock issued to acquire DataSpeak Systems, Inc. $ 135 $ --
======= =======
The accompanying notes are an integral part of these
consolidated financial statements.
5
VODAVI TECHNOLOGY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(a) INTERIM FINANCIAL REPORTING
The accompanying unaudited Consolidated Financial Statements have been prepared
by Vodavi Technology, Inc. and subsidiaries ("Vodavi" or the "Company") pursuant
to the rules and regulations of the Securities and Exchange Commission ("SEC")
and, in the opinion of the Company, include all adjustments necessary for a fair
presentation of results of operations, financial position, and cash flows as of
and for the periods presented.
The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States requires
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 revenue and expenses during the period
reported. Actual results could differ from those estimates. Estimates are used
in accounting for, among other things, customer incentive programs, bad debts,
sales returns, excess and obsolete inventory, 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.
The results for the six months ended June 30, 2002 are not necessarily
indicative of financial results for the full year. These financial statements
should be read in conjunction with the audited Consolidated Financial Statements
and notes thereto included in Vodavi's latest Annual Report on Form 10-K for the
year ended December 31, 2001.
(b) CALCULATION OF 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. Except for
112,000 and 80,000 dilutive securities in the three and six-month periods ended
June 30, 2002, respectively, there were no dilutive securities included in the
calculation of diluted EPS for any other period reported.
(c) SEGMENT REPORTING
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.
(d) CHANGE IN ACCOUNTING PRINCIPLE AND 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 modified accounting for business combinations after June 30, 2001 and
affected 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.
The Company has determined that upon adoption of these Statements on January 1,
2002, the entire $1.6 million carrying amount of the existing 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. Accordingly, during the first quarter of 2002, the Company recorded a
goodwill impairment of $1.3 million, net of tax. The goodwill impairment is
presented in the accompanying financial statements as a change in accounting
principle in accordance with the provisions of SFAS No. 142.
6
The following table sets forth, for the periods presented, pro forma net income
(loss) as if the Company had adopted SFAS No. 142 from the earliest period
presented:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2002 2001 2002 2001
------- ------- ------- -------
Income (loss) before change in
accounting principle, as reported $ 302 $ 159 $ 469 $(1,925)
Add back goodwill amortization, net of taxes -- 25 -- 50
------- ------- ------- -------
Adjusted net income (loss) $ 302 $ 184 $ 469 $(1,875)
======= ======= ======= =======
Except as disclosed above, the adoption of these Statements did not have a
material impact on the Company's financial condition or results of 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.
(e) RECENT ACQUISITIONS
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 valued at $135,000
based on the closing price of the Company's common stock on the date of the
acquisition. The purchase price was allocated as follows (in thousands):
Inventory $ 20
Prepaid assets 9
Property and Equipment 50
Goodwill 734
Accrued Liabilities (54)
-----
$ 759
=====
(f) 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,
discontinued its Interactive Voice Response product group, and implemented
broad-based price reductions on certain voice mail products and single-line
telephones. 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 and inventory impairments.
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. See Item 2 "Management's Discussion and Analysis of Financial Condition
and Results of Operations" contained elsewhere in this quarterly report for more
information.
7
(g) COMMITMENTS AND CONTINGENCIES
The Company is a defendant in various lawsuits. See Part II, Item 1, "Legal
Proceedings" included elsewhere in this quarterly report for more information.
The Company has not made any provisions in its financial statements for these
lawsuits. The Company is also subject to certain asserted and unasserted claims
encountered in the normal course of business. The Company believes that the
resolution of these matters will not have a material adverse effect on its
financial position or results of operations. The Company cannot provide
assurance, however, that damages that result in a material adverse effect on its
financial position or results of operations will not be imposed in these
matters.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BUSINESS OVERVIEW
We design, develop, market, and support a broad range of business
telecommunications solutions, including telephony products, voice processing
products, and computer-telephony products for a wide variety of business
applications. Our telecommunications solutions incorporate sophisticated
features, such as automatic call distribution and Internet protocol, or IP,
gateways. Our voice processing products include interactive voice response
systems, automated attendant, and voice and fax mail. Our computer-telephony
products enable users to integrate the functionality of their telephone systems
with their computer systems. We market our products primarily in the United
States through a distribution model consisting primarily of wholesale
distributors and direct dealers.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
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 reduce our revenue to account for customer incentive programs, including
special pricing agreements, price protection for our distributors, promotions,
and other volume-related rebate programs. Such reductions to revenue are
estimates that 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 June 30, 2002,
Graybar accounted for 30.1% 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.
8
SALES RETURNS
We maintain reserves 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 the discontinuance of
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 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 included in our Annual Report on Form 10-K for the year ended December
31, 2001, which contains 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.
Three Months Ended Six Months Ended
June 30, June 30,
---------------- -----------------
2002 2001 2002 2001
------ ------ ------ ------
Revenue, net 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 63.4 64.2 63.8 70.7
------ ------ ------ ------
Gross margin 36.6 35.8 36.2 29.3
Operating expenses:
Engineering and product development 6.0 5.1 5.8 6.3
Selling, general and administrative 25.0 26.9 25.8 40.6
------ ------ ------ ------
31.0 32.0 31.6 46.9
------ ------ ------ ------
Operating income (loss) 5.6 3.8 4.6 (17.6)
Interest expense 0.3 1.1 0.3 1.7
------ ------ ------ ------
Income (loss) before income tax and
change in accounting principle 5.3 2.7 4.3 (19.3)
Income tax provision (benefit) 2.1 1.0 1.7 (7.0)
Income (loss) before change in
accounting principle 3.2 1.7 2.6 (12.3)
Change in accounting principle -- -- (6.9) --
------ ------ ------ ------
Net income (loss) 3.2% 1.7% (4.3)% (12.3)%
====== ====== ====== ======
9
THREE MONTHS ENDED JUNE 30, 2002 COMPARED WITH THE THREE MONTHS ENDED
JUNE 30, 2001
REVENUE
Revenue totaled $9.5 million in the second quarter of 2002 compared to
revenue of $9.6 million in the second quarter of 2001. Sales to our supply house
customers accounted for approximately $5.6 million, or 59.0% of our total
revenue during the second quarter of 2002 compared with $5.8 million, or 60.0%
of our total revenue in the same period of 2001. Sales through our INFINITE
direct dealer program totaled $3.6 million, or 38.0% of our total revenue for
the second quarter of 2002 compared with $3.8 million, or 39.8% of our total
revenue for the same period a year ago. Sales through our newly acquired direct
sales office totaled $466,000, or 5.0% of our total revenue during the second
quarter of 2002 compared to zero in the same period in 2001.
Revenue for the second quarter of 2002 was negatively impacted by our
decision to exit the retail Interactive Voice Response business during the first
quarter of 2001. We did not generate any revenue from this business in the
second quarter of quarter of 2002 compared to revenue of $310,000 in the same
period of 2001. Revenue during the 2002 second quarter was also negatively
impacted by our inability to fulfill approximately $400,000 of orders due to a
shortage of certain inventory items. These orders will be fulfilled in the third
quarter when our inventory is replenished.
GROSS MARGIN
Our gross margin was $3.5 million during the second quarter of 2002
compared with $3.4 million during the same period of 2001. Our gross margin as a
percentage of total revenue increased to 36.6% during 2002 compared with 35.8%
during the comparable period of 2001. The improvement in our gross margin
percentage is attributable to our newly acquired direct sales office, which
generates higher gross margins than our other channels of distribution.
ENGINEERING AND PRODUCT DEVELOPMENT
Engineering and product development expenditures increased approximately
$75,000 to $0.6 million from $0.5 million a year ago. We continue to invest in
the 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 $2.4 million during the
second quarter of 2002 compared with $2.6 million in the same period in 2001, a
reduction of approximately $200,000. This decrease is the net effect of a number
of factors, including (a) decreased sales and marketing expenses; (b) the
discontinuance of our IVR business; and (c) strict cost controls over
discretionary spending. These expense reductions were slightly offset by the
additional operating expenses associated with our newly acquired direct sales
office and higher provisions for bad debts.
INTEREST EXPENSE
Interest expense decreased to $28,000 for the second quarter of 2002 from
$109,000 for the same period a year ago. Our interest expense for the current
period was positively impacted by a sharp reduction in both the average
outstanding balance and the applicable borrowing rate from a year ago.
INCOME TAXES
We provided for federal and state income taxes using an effective rate of
39.5% for the 2002 second quarter compared with an effective rate of 38.4%
during 2001. The change in effective rates between periods reflects the impact
of permanent book/tax differences.
10
SIX MONTHS ENDED JUNE 30, 2002 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2001
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 shutdown 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 six
months ended June 30, 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 June
30, 2002: (IN THOUSANDS)
Balance Balance
Dec. 31, Jun. 30,
2001 Payments 2002
-------- -------- -------
Distributor price protection $ 86 $ (86) $ --
Severance-related costs 54 (54) --
Other shut-down costs 144 (121) 23
----- ----- -----
$ 284 $(261) $ 23
===== ===== =====
REVENUE
Revenue for the six-month period ended June 30, 2002 totaled $18.3 million,
an increase of $2.6 million, or 16.5%, from revenue of $15.7 million for the
same period of 2001. Sales to our supply house customers accounted for
approximately $10.4 million, or 57.0% of our total revenue during the first six
months of 2002 compared with $8.1 million, or 52.0% of our total revenue in the
same period of 2001, representing a year-to-date increase of $2.3 million, from
the same period in 2001. The increase in sales to our supply house customers in
the first two quarters of 2002 is principally related to inventory reductions at
the supply houses in the first six months of 2001, the magnitude of which we did
not experience in the first half of 2002.
Sales through our INFINITE direct dealer program totaled $7.1 million, or
39.0% of our total revenue for the first six months of 2002 compared with $7.3
million, or 46.5% of our total revenue for the same period a year ago. During
2002, we continued our program to focus on selling to fewer, but larger and
better-established, dealers. Sales through our newly acquired direct sales
office totaled $610,000 or 3.3% of our total revenue during the first half of
2002 compared to zero in the same period of 2001.
11
Revenue in first six months of 2002 was 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 $135,000 during the first
six months of 2002 compared with $671,000 during the first six months of 2001.
Revenue during the first half of 2002 was also negatively impacted by our
inability to fulfill approximately $400,000 of orders on June 30, 2002, due to a
shortage of certain inventory items. These orders will be fulfilled in the third
quarter when our inventory is replenished.
GROSS MARGIN
Our gross margin was $6.6 million during the first six months of 2002
compared with $4.6 million during the same period of 2001. Our gross margin as a
percentage of total revenue increased to 36.2% during 2002 compared with 29.3%
during the comparable period of 2001. The increase in our gross margin
percentage during 2002 is a direct result of (a) inventory impairments and price
protection obligations of $1.0 million recorded during the first quarter of
2001, which we did not experience in the first six months of 2002; (b) improved
leverage over the fixed component of costs of goods sold, which includes labor
and other warehouse and distribution costs; (c) increased sales of larger
systems, which typically carry higher profit margins; and (d) higher gross
margins generated by our direct sales office.
ENGINEERING AND PRODUCT DEVELOPMENT
Engineering and product development expenditures increased approximately
$67,000 to $1.1 million from $1.0 million for each of the respective periods. We
continue to invest in the 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 $4.7 million during the
first six months of 2002 compared with $6.4 million in the same period in 2001,
a reduction of $1.7 million. Excluding special charges of approximately $760,000
recorded in the first quarter of 2001, selling, general, and administrative
expenses in the first half of 2002 declined by $887,000, or 15.8%, from the same
period a year ago. This decrease is the net effect of a number of factors,
including (a) headcount reductions; (b) decreased marketing and promotional
expenses; (c) the discontinuance of our IVR business; (d) strict cost controls
over discretionary spending; and (e) approximately $66,000 of goodwill
amortization during the first half of 2001, which was eliminated in 2002 upon
our adoption of FASB No. 142.
INTEREST EXPENSE
Interest expense decreased to $59,000 for the first six months of 2002 from
$270,000 for the same period a year ago. Our interest expense for the current
period was positively impacted by a sharp reduction in both the average
outstanding balance and the applicable borrowing rate from a year ago.
INCOME TAXES
We provided for federal and state income taxes using an effective rate of
39.7% for the first six months of 2002 compared with an effective rate of 36.5%
for the same period in 2001. The change in effective rates between periods
reflects the impact of permanent book/tax differences.
LIQUIDITY AND CAPITAL RESOURCES
Our net working capital position was $6.8 million at June 30, 2002 compared
with $7.0 million at December 31, 2001. We had a cash balance of $652,000 at
June 30, 2002. Changes in working capital that increased our cash position
during the first six months of 2002 included a reduction in inventory of $1.7
million and the receipt of an income tax refund of $843,000. Factors that
12
reduced our cash balance during the first six months of 2002 included cash
payments of $1.8 million on our revolving credit facility, $386,000 for
purchases of property and equipment, and $624,000 for the acquisition of
DataSpeak Systems, Inc.
Our days sales outstanding, calculated on quarterly sales, were
approximately 69 days as of June 30, 2002 compared to 71 days at December 31,
2001. 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 42% of our total accounts receivable as of June
30, 2002 and 48% of our total accounts receivable as of December 31, 2001.
Our inventory turnover measured in terms of days sales outstanding on a
quarterly basis, improved to 55 days as of June 30, 2002 from 84 days as of
December 31, 2001. The improvement in inventory turnover reflects our ongoing
efforts to enhance the procurement process to coincide with our sales forecast
and our efforts to reduce the levels of slow moving inventory.
Trade payables and accrued liabilities, including payables to third-party
and related-party manufacturers, were approximately $4.6 million as of June 30,
2002 compared with $4.5 million as of December 31, 2001. The level of our trade
payables and accrued liabilities between periods is largely influenced by the
timing of payments we make to our largest suppliers for inventory items and
payments to cover payroll. 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 4.27% as of June 30, 2002.
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,
including a minimum fixed charges coverage ratio and inventory turnover ratio.
The credit agreement also prohibits our operating subsidiaries from paying
dividends to our company without the consent of GE Capital. As of June 30, 2002,
we were in compliance with all of the covenants.
We had total borrowing capacity of approximately $8.0 million, based on
eligible accounts receivable and inventory, under the credit facility at June
30, 2002, of which $0.8 million was outstanding and $7.2 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 valued at $135,000. 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.
13
The following table sets forth all known commitments as of June 30, 2002
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 $ 517 $ -- $ 4,945 $ 4,616 $10,078
2003 1,008 825 -- -- 1,833
2004 1,009 -- -- -- 1,009
2005 831 -- -- -- 831
2006 814 -- -- -- 814
Thereafter 3,927 -- -- -- 3,927
------- ------- ------- ------- -------
Total $ 8,106 $ 825 $ 4,945 $ 4,616 $18,492
======= ======= ======= ======= =======
We are a defendant in various lawsuits. See Part II, Item 1, "Legal
Proceedings". We have not made any provisions in our financial statements for
these lawsuits. The imposition of damages in any of these matters could have a
material adverse effect on our results of operations and financial position.
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 for
such opportunities.
INTERNATIONAL MANUFACTURING SOURCES
We currently obtain most of our products under various manufacturing
arrangements with third party and related-party manufacturers in Asia, a
majority of which we purchase from LGE who owns approximately 20% 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.
Our operations are dependent on a continued source of supply of these
products from Asia. These products are transported to the United States aboard
container ships, which dock primarily in the Los Angeles, California area. All
unloading of these containers involves union workers and the current West Coast
union agreement expired on July 1, 2002. Negotiations are underway for a new
contract, but there can be no assurance that an agreement will be reached
without a shutdown of ports on the West Coast. A strike, work slow down, or a
lockout at any of the West Coast ports would disrupt the flow of our products
and would likely have a material adverse impact on our sales and earnings.
IMPACT OF RECENTLY ISSUED STANDARDS
In 2001, the FASB issued SFAS No. 141, ACCOUNTING FOR BUSINESS
COMBINATIONS, and SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. These
Statements modified accounting for business combinations after June 30, 2001 and
affected 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.
We have determined that upon adoption of these Statements on January 1,
2002, the entire $1.6 million carrying amount of the existing 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 to our book value on December 31, 2001 of $11.0 million. Accordingly,
during the first quarter of 2002, we recorded a goodwill impairment of $1.3
million, net of tax. The goodwill impairment is presented in the accompanying
14
financial statements as a change in accounting principle in accordance with the
provisions of SFAS No. 142.
The following table sets forth, for the periods presented, pro forma net
income (loss) as if we had adopted SFAS Nos. 142 and 141 from the earliest
period presented:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2002 2001 2002 2001
------- ------- ------- -------
Income (loss) before change in accounting
principle, as reported $ 302 $ 159 $ 469 $(1,925)
Add back goodwill amortization, net of taxes -- 25 -- 50
------- ------- ------- -------
Adjusted net income (loss) $ 302 $ 184 $ 469 $(1,875)
======= ======= ======= =======
Except as disclosed above, the adoption of these Statements did not have a
material impact on our financial condition or results of 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 of operations.
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
This report contains forward-looking statements, including statements
regarding our business strategies, our business, and the industry in which we
operate. These forward-looking statements are based primarily on our
expectations and are subject to a number of risks and uncertainties, some of
which are beyond our control. Actual results could differ materially from the
forward-looking statements as a result of numerous factors, including those set
forth in our Form 10-K for the year ended December 31, 2001, as filed with the
Securities and Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not participate in any activities involving derivative financial
instruments or other financial and commodity instruments for which fair value
disclosure would be required.
We do not hold investment securities that would require disclosure of
market risk. Our market risk exposure is limited to interest rate risk
associated with our credit instruments. We incur interest on loans made under a
revolving line of credit at variable interest rates of 2.5% over the 30-day
commercial paper rate, a total of 4.27% at June 30, 2002. The principal of loans
under this line of credit is due in April 2003. At June 30, 2002 we had
outstanding borrowings on the line of credit of approximately $0.8 million.
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PART II - OTHER INFORMATION
Item 1. 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 complaint to add our
subsidiary Vodavi-CT as an additional defendant. The amended complaint alleges
claims against Vodavi-CT similar to those alleged in the original complaint. On
July 28, 1999, Vodavi-CT filed an answer and denied those allegations on the
same basis as VCS' original answer. The parties have completed discovery and are
currently waiting for the court to schedule a trial date, which we anticipate
will be during the third or fourth quarter of 2002. We are vigorously defending
this lawsuit.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
Item 5. OTHER INFORMATION
Not applicable
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
99.1 Certification of the Chief Executive Officer of the
Registrant, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of the Chief Financial Officer of the
Registrant, pursuant to 18 U.S.C. Section of 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
REPORTS ON FORM 8-K:
Not applicable
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VODAVI TECHNOLOGY, INC.
Dated: August 12, 2002 /s/ Gregory K. Roeper
----------------------------------------
Gregory K. Roeper
President and Chief Executive Officer
(Principal Executive Officer)
Dated: August 12, 2002 /s/ David A. Husband
----------------------------------------
David A. Husband
Chief Financial Officer and Vice
President - Finance
(Principal Financial and Accounting
Officer)
17