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, 2002 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 organization) Identification No.)
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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
The aggregate market value of common stock held by nonaffiliates of the
registrant (3,258,485 shares) based on the closing price of the common stock as
reported on the Nasdaq SmallCap Market on June 28, 2002, which was the last
business day of the registrant's most recently completed second fiscal quarter,
was $6,907,988. 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.
As of March 24, 2003, there were outstanding 4,349,788 shares of the
registrant's common stock, $.001 par value, which excludes 318,700 treasury
shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
VODAVI TECHNOLOGY, INC.
ANNUAL REPORT ON FORM 10-K
FISCAL YEAR ENDED DECEMBER 31, 2002
TABLE OF CONTENTS
PAGE
----
PART I
ITEM 1. BUSINESS..................................................... 1
ITEM 2. PROPERTIES................................................... 18
ITEM 3. LEGAL PROCEEDINGS............................................ 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......... 18
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS................................ 19
ITEM 6. SELECTED FINANCIAL DATA...................................... 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.......................... 21
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK......................................................... 28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................. 28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.......................... 28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........... 29
ITEM 11. EXECUTIVE COMPENSATION....................................... 31
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS............... 36
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............... 38
ITEM 14. CONTROLS AND PROCEDURES...................................... 38
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K................................................... 39
SIGNATURES ............................................................. 41
CERTIFICATIONS ............................................................. 42
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.................................. F-1
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 2003 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 traditional and IP telephony products,
voice processing products, as well as computer telephony products that address a
wide variety of business applications. Our telecommunications solutions
incorporate sophisticated features such as automatic call distribution, scalable
networking, Internet Protocol, or IP, as well as wireless solutions. 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 website is
located at www.vodavi.com. Through our website, we make available free of charge
our annual report on Form 10-K, our proxy statement, our quarterly reports on
Form 10-Q, our current reports on Form 8-K, amendments to reports filed under
the Securities Exchange Act, and earnings press releases. 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 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
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* 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.
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, wireless offerings, and other
innovations represent significant opportunities for sales of new product lines
and applications to increase further 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 IP-based 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 2002, 74% of our revenue during 2001, and 71% during 2000. 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 line to large wholesale distributors for
resale to telephone sales and installation companies known as "dealers" or
"interconnects." We also sell our Triad line to large wholesale distributors for
resale only to authorized dealers. We sell our INFINITE line directly to
authorized dealers.
We market both digital and IP-based 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 IP-based
telephone systems utilize an IP data network for voice transmission. 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 digital 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
2
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.
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 7.5% of our
revenue during 2002, 7% of our revenue during 2001, and 8% during 2000.
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 18.5% of our revenue during
2002, 19% during 2001, and 21% during 2000.
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
3
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 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
4
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 the following:
* the XTS digital key system platform expandable from 12 to 384 ports;
* a full featured networking package to connect up to 16 customer
locations;
* the STS digital key system;
* our new Pathfinder 9.0 voice processing system that provides enhanced
client and server applications;
* a digital version of Pathfinder 9.0 allowing direct digital connection
to our Infinite and Triad key system products, which will transmit
Caller ID information to the voice processing systems providing
potential for enhanced features;
* 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; and
* a new line of digital key sets with expanded "soft key" capability.
We are currently focusing our new product development efforts on new
products and enhancements that will deliver greater features, sophistication,
and value to our current product offerings. In addition, through new
developments, we are targeting markets that we do not currently serve. Examples
of our current developments include the following:
* an expanded version of the XTS switching platform from 384 ports to
600 ports, allowing us to market larger customer applications;
* the continued IP enabling of our XTS switch with the introduction of
our networking package that operates using an IP infrastructure,
allowing up to 32 XTS systems to operate as one seamless system using
the customer's LAN/WAN infrastructure;
* a new "In Skin" PC platform that will provide a voice processing
application on the Starplus STS system;
* a new "In Skin" PC platform that will provide software applications
such as voice processing, ACD, and CTI, eliminating the need for
external computer platforms on the XTS System;
* a wireless IP product that will offer complete in-building mobility to
the XTS and Telenium telephone systems;
* new hardware and software enhancements to the Telenium IP telephone
system that will add remote worker, IP security, high speed
interfaces, SIP protocol support, and transparent networking features
to the product; and
* a Feature Server platform that will host software applications and
interface with the Telenium and XTS systems via an IP interface,
thereby reducing the requirement for specific voice cards.
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 business in March 2001. We have in
5
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 2002 2001 2000
-------------------- ---- ---- ----
Wholesale Distributors 56% 55% 65%
Direct Dealers 41% 41% 30%
Direct Sales Office 3% -- --
IVR Customers -- 4% 5%
---- ---- ----
100% 100% 100%
==== ==== ====
The following diagram illustrates the current distribution channels for our
product lines.
WHOLESALE DISTRIBUTORS
[LOGO]
VODAVI
TRIAD STARPLUS INFINITE(1)
| | |
| | ---------------------
DISTRIBUTOR DISTRIBUTOR | |
| | | |
| | | |
| | | |
AUTHORIZED DEALER AUTHORIZED |
DEALER | DEALER |
| | | |
| | | |
END USER END USER END USER END USER
(1) Infinite product is distributed direct to end users in the Phoenix
metropolitan area through our direct sales office.
We design and market our STARPLUS and Triad brands of products for sale
through wholesale distributors. These 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;
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* reduced needs for direct training;
* 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 2002, 27% in 2001, and 32% in 2000. Our second largest
distributor in each of the respective years accounted for 12% of our revenue
during 2002, 9% in 2001, and 12% during 2000.
STARPLUS DISTRIBUTORS AND DEALERS
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 sell more
effectively 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, STS, DHS, DHSE, and DHSL lines.
TRIAD DISTRIBUTORS AND DEALERS
We design and market 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, 2002.
INFINITE DIRECT DEALERS
We developed our INFINITE line of telephone systems and related products
for sales to a limited number of authorized direct dealers. These direct dealers
are medium and large interconnect companies 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, 2002, 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.
7
VODAVI DIRECT
We have a direct sales office of nine 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
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.
8
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 key telephone systems 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 $15.9
million, $13.0 million, and $16.4 million of product from LGE in 2002, 2001, and
2000, which represented 74%, 67%, and 61% 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 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 $2.6 million, $2.4 million,
and $4.2 million of product from LGST in 2002, 2001, and 2000, which represented
12%, 12%, and 15.7% 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
assure 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 assure 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.
9
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.
We currently outsource the repair and refurbishment of our products. We
believe that this arrangement enables us to continue to provide fast turn-around
time and consistent quality of repairs without the overhead and other expenses
associated with operating a repair facility.
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., Comdial Corporation, Inter-Tel, Inc., Iwatsu, NEC Corporation, Nortel
Networks Corporation, Panasonic Technologies, Inc., and Toshiba Information
Systems.
Competitors in the market for voice processing systems include Applied
Voice Technology and Key Voice as well as PBX and key system telephone
manufacturers that offer integrated voice processing systems of their own design
and under various OEM agreements. Competitors in the market for IP telephony
systems include 3Com Corporation, AltiGen Communications, Inc., Artisoft, Inc.,
and Cisco Systems, 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
We own 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
10
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 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 24, 2003, we employed a total of 109 persons, all of which are
full-time employees at our facilities in Phoenix, Arizona, and Norcross,
Georgia. Our current number of full-time employees includes 29 persons in
engineering and product development; 49 in sales, marketing, and technical
support; 15 in warehouse and distribution functions; and 16 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.
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.
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 UNDER THIS ITEM 1, "SPECIAL CONSIDERATIONS."
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. A decline
in the volume of sales made by distributors 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
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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 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 2002, 27% during 2001, and
32% during 2000. Accounts receivable from Graybar comprised approximately 23% of
total accounts receivable at December 31, 2002. Our second largest customer in
each of the respective years accounted for 12% of our sales during 2002, 9%
during 2001, and 12% during 2000. Accounts receivable from our second largest
customer comprised approximately 20% of total accounts receivable at December
31, 2002.
WE FACE RISKS ASSOCIATED WITH INTERNATIONAL MANUFACTURING SOURCES.
We currently obtain a substantial majority of our products under various
manufacturing arrangements with third-party manufacturers in South Korea,
Thailand, and Taiwan. 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:
* political instability in Asia, and in particular on the Korean
Peninsula;
* the business and financial condition of our third-party manufacturers;
* the possibility of expropriation, supply disruption, currency
controls, and exchange fluctuations;
* changes in tax laws, tariffs, and freight rates; and
* strikes, work slow downs, or lockouts at any ports where our products
arrive in the United States.
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.
12
WE DEPEND ON NEW PRODUCTS AND TECHNOLOGIES.
We operate in an industry that is characterized by fast-changing
technology. As a result, we will be required to expend substantial funds for and
commit significant resources to the conduct of continuing product development,
including research and development activities and the engagement of additional
engineering and other technical personnel. Any failure on our part to anticipate
or respond adequately to technological developments, customer requirements, or
new design and production techniques, or any significant delays in product
development or introduction, could have a material adverse effect on our
operations.
Our future operating results will depend to a significant extent on our
ability to identify, develop, and market enhancements or improvements to
existing product lines as well as to introduce new product lines that compare
favorably on the basis of time to market, 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 reputation 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 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."
13
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 RELY ON LGE AS A STRATEGIC PARTNER.
We rely on LGE to supply most of our key telephone systems and voice mail
products, all of our commercial grade telephones, as well as on LGE's
engineering, hardware and circuit development, and manufacturing capabilities.
We purchased approximately $18.5 million, $15.4 million and $20.6 million of
product from LGE and LGST, constituting approximately 86%, 79%, and 77% of our
total purchases in 2002, 2001, and 2000, respectively. 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 performance of our distributors and dealers;
* 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 rate at which end users upgrade or expand their existing telephone
systems, applications, and services;
* new product introductions by our competitors;
14
* the number, nature, and success of our competitors in a given market;
and
* general market and economic conditions.
We currently compete principally on the basis of the technical innovation and
performance of our products, including their ease of use and reliability, as
well as price, timely delivery, 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.
OUR THIRD-PARTY MANUFACTURERS 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.
15
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. We have employment agreements
with William J. Hinz, our Chairman of the Board, Gregory K. Roeper, our
President and Chief Executive Officer, David A. Husband, our Vice-President -
Finance and Chief Financial Officer, and Steven R. Francis, our Vice President -
Sales and Marketing. 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% of our outstanding common stock. We
obtain most of our digital telephone systems, IP-based products, and voice mail
products from LGE and obtain all of our commercial grade telephones 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.
16
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 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 1, 2003, we had outstanding options to acquire 1,005,500 shares
of our common stock at a weighted average exercise price of $2.66 per share. An
additional 442,000 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.
Additionally, all outstanding options become fully vested and exercisable upon a
change of control of our company. 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
17
-- 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.
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.
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 3,000 square feet of space in Norcross,
Georgia, for a term expiring in August 2006. We maintain software development
facilities, engineering and design laboratories, product development facilities,
product assembly and testing facilities.
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
From time to time we 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
Not applicable.
18
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
---- ---
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 ...................................... $1.65 $1.24
Second quarter ..................................... 2.85 1.43
Third quarter ...................................... 3.33 1.71
Fourth quarter ..................................... 2.15 1.31
2003:
First quarter (through March 24, 2003) ............. $1.95 $1.37
On March 24, 2003, the closing sales price of our common stock was $1.78
per share. As of March 24, 2003, there were 38 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.
19
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below as of and for each
of the years in the two-year period ended December 31, 2002 are derived from our
consolidated financial statements, which have been audited by Deloitte & Touche
LLP, independent auditors. The selected consolidated financial data presented
below as of and for each of the years in the three-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: 2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
Revenue ............................. $ 37,328 $ 34,153(1) $ 47,705 $ 49,811 $ 48,322
Gross margin ........................ 13,449 11,170(2) 17,503 17,886 15,802
Operating expenses .................. 12,164 13,183(3) 16,041 15,252 14,358
Operating income (loss) ............. 1,285 (2,013) 1,462 2,634 1,444
Interest expense .................... 97 406 705 676 791
-------- -------- -------- -------- --------
Income (loss) before income
taxes and change in accounting
principle ......................... 1,188 (2,419) 757 1,958 653
Provision for (benefit from)
income taxes ...................... 471 (863) 309 718 (330)
-------- -------- -------- -------- --------
Income (loss) before income
taxes and change in
accounting principle .............. 717 (1,556) 448 1,240 983
Change in accounting principle ...... (1,263) -- -- -- --
-------- -------- -------- -------- --------
Net income (loss) ................... $ (546) $ (1,556) $ 448 $ 1,240 $ 983
======== ======== ======== ======== ========
Net income (loss) per share,
diluted ........................... $ (0.13) $ (0.37) $ 0.10 $ 0.29 $ 0.23
======== ======== ======== ======== ========
Weighted average shares
outstanding, diluted .............. 4,428 4,235 4,305 4,344 4,342
======== ======== ======== ======== ========
AS OF DECEMBER 31,
------------------------------------------------------------------
(IN THOUSANDS)
BALANCE SHEET DATA: 2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
Assets:
Current assets .................... $ 14,829 $ 14,861 $ 20,959 $ 20,570 $ 17,810
Property and equipment, net ....... 1,631 1,581 2,033 2,356 2,663
Goodwill, net ..................... 725 1,638 1,772 1,906 2,244
Other, net ........................ 203 193 417 726 426
-------- -------- -------- -------- --------
$ 17,388 $ 18,273 $ 25,181 $ 25,558 $ 23,143
======== ======== ======== ======== ========
Liabilities:
Current liabilities ............... $ 6,748 $ 7,045 $ 12,176 $ 13,208 $ 12,044
Other long-term obligations ....... 18 200 421 530 500
-------- -------- -------- -------- --------
Total liabilities ................... 6,766 7,245 12,597 13,738 12,544
Stockholders' equity ................ 10,622 11,028 12,584 11,820 10,599
-------- -------- -------- -------- --------
$ 17,388 $ 18,273 $ 25,181 $ 25,558 $ 23,143
======== ======== ======== ======== ========
- ----------
(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.
20
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 reductions to revenue 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, which 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, 2002,
Graybar accounted for 23% 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 items, and
21
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.
2002 2001 2000
------ ------ ------
Revenue ..................................... 100.0% 100.0% 100.0%
Cost of goods sold .......................... 64.0 67.3 63.3
------ ------ ------
Gross margin ............................. 36.0 32.7 36.7
Operating expenses:
Engineering and product development ......... 6.3 5.9 3.6
Selling, general, and administrative ........ 26.3 32.7 30.0
------ ------ ------
32.6 38.6 33.6
Operating income (loss) ..................... 3.4 (5.9) 3.1
Interest expense, net ....................... .2 1.2 1.5
------ ------ ------
Income (loss) before taxes and
accounting change ........................ 3.2 (7.1) 1.6
Income tax expense (benefit) ................ 1.3 (2.5) 0.7
------ ------ ------
Income (loss) before accounting change ...... 1.9 (4.6) 0.9%
Change in accounting principle .............. (3.4) -- --
------ ------ ------
Net income (loss) ........................... (1.5)% (4.6)% 0.9%
====== ====== ======
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, in the first quarter of 2001, 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 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:
22
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 for each of
the years in the two-year period ended December 31, 2001: (IN THOUSANDS)
INITIAL 2001 BALANCE 2002 BALANCE
BALANCE PAYMENTS DEC. 31, 2001 PAYMENTS DEC. 31, 2002
------- -------- ------------- -------- -------------
Distributor price protection $ 281 $(195) $ 86 $ (86) $ --
Severance-related costs 168 (114) 54 (54) --
Other shut-down costs 250 (106) 144 (144) --
----- ----- ----- ----- -----
$ 699 $ 415 $ 284 $(284) $ --
===== ===== ===== ===== =====
FISCAL YEAR ENDED DECEMBER 31, 2002 COMPARED WITH FISCAL YEAR ENDED DECEMBER 31,
2001
REVENUE
Revenue during 2002 increased $3.2 million, or 9.3%, to $37.3 million from
revenue of $34.2 million in 2001. Sales to our supply house customers increased
$1.9 million, or 10.0 %, to $20.8 million, or 56% of our total revenue during
2002 compared with $18.9 million, or 55% of our total revenue in 2001. Our sales
in this channel of distribution can fluctuate significantly between periods as a
result of fluctuations in the amount of inventory supply houses carry of our
product. We estimated that during 2002, our supply house customers reduced their
inventory of our products by approximately $1.5 million compared with a
reduction of $5.8 million in 2001.
Sales through our INFINITE direct dealer program increased approximately
$700,000, or 5.0%, to $15.4 million, or 41% of our total revenue during 2002,
compared with $14.7 million, or 43% of our total revenue during 2001. The
increase in INFINITE product sales can be attributed to selling to fewer, but
larger and better established dealers who are more effective at selling our
larger systems.
Sales through our direct sales office, which we acquired in March 2002,
totaled approximately $1.0 million, after intercompany eliminations, during
2002.
Our revenue during 2002 was negatively impacted by our decision to exit our
Interactive Voice Response business in 2001. Revenue attributable to this
business totaled $135,000 during 2002 compared with revenue of $1.3 million in
2001.
GROSS MARGIN
Our gross margin was $13.5 million in 2002 compared with $11.2 million in
2001. Our gross margin as a percentage of total revenue increased to 36.0%
during 2002 compared with 32.7% in 2001. The increase in gross margin percentage
23
during 2002 is a direct result of (a) inventory impairments and price protection
obligations of $1.0 million in 2001 (b) better leverage over the fixed component
of cost of goods sold, which includes labor and other warehouse and distribution
costs; and (c) higher margins associated with our direct sales office. The
increase in gross margin percentage between periods was slightly offset by our
decision to sell certain discontinued product lines in 2002 in a bulk sale
transaction for $300,000 at no margin.
ENGINEERING AND PRODUCT DEVELOPMENT
Engineering and product development expenditures increased 16.8% to $2.3
million in 2002 compared with $2.0 million in 2001. During 2002, we incurred
additional salaries and personnel costs associated with an increase in headcount
and field trial activities. During 2002 we also engaged third-party consultants
to a greater extent than 2001 to assist in the development of some of our
products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses declined approximately $1.4
million, or 12.1%, to $9.8 million in 2002 compared with $11.2 million in 2001.
Excluding special charges of approximately $760,000 recorded in 2001, selling,
general and administrative expense declined by approximately $594,000, or 5.7%,
in 2002. The reduction is the net effect of a number of factors including (a)
the discontinuance of our Interactive Voice Response Business, (b) decreased
sales, marketing and promotional expenses, (c) a reduction in bad debt expenses;
and (d) a reduction in depreciation and amortization, including the elimination
of goodwill amortization of $134,000 associated with our adoption of SFAS No.
142. These reductions were partially offset by additional operating expenses of
our direct sales office of approximately $632,000 during 2002 compared to zero
in 2001, and the cost associated with the settlement of litigation in 2002 of
$300,000.
INTEREST EXPENSE
Interest expense decreased to approximately $97,000 in 2002 compared to
$406,000 in 2001. The decrease in interest expense is a direct result of our
debt reduction efforts during 2002 and lower borrowing costs.
INCOME TAXES
We provided for federal and state income taxes using an effective rate of
39.6% during 2002 compared with and effective rate of 35.7% in 2001. 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, 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
24
larger dealers, they were negatively impacted by the poor 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.
LIQUIDITY AND CAPITAL RESOURCES
Our net working capital position was $8.1 million at December 31, 2002
compared with $7.8 million at December 31, 2001. We had a cash balance of $1.1
million at December 31, 2002 compared to a cash balance of $340,000 at December
31, 2001. Factors that increased our cash position during 2002 included positive
cash flows from operations, the receipt of an $839,000 income tax refund, and
$3.0 million by extending our payment terms with our largest supplier from 30
days to 60 days. Factors that reduced our cash balance during 2002 included cash
payments of $624,000 to acquire DataSpeak Systems, Inc., cash payments of $2.6
million on our revolving credit facility, purchases of property and equipment of
$485,000, and other changes in working capital, including reductions in accounts
payable and accrued liabilities of $625,000.
Our days sales outstanding, calculated on quarterly sales, improved to
approximately 70 days as of December 31, 2002 compared with 71 days as of
December 31, 2001. Our days sales outstanding, and our liquidity, is
25
significantly influenced by the timing of payments received from our largest
distributors. Our two largest distributors comprised 43% of our total accounts
receivable as of December 31, 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, increased to 87 days as of December 31, 2002 compared with 84
days as of December 31, 2001. Our inventory days sales outstanding increased
slightly as a result of lower than anticipated sales in the fourth quarter of
2002.
Trade payables and accrued liabilities, including payables to third-party
and related-party manufacturers, were approximately $6.8 million as of December
31, 2002 compared with $4.5 million as of December 31, 2001. The increase in
trade payables and accrued liabilities between periods is a direct result of
extending our payment terms with our largest supplier from 30 days to 60 days.
We anticipate that our payment terms with our largest supplier will remain at 60
days for the foreseeable future.
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 3.8% as of December 31, 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. We had total borrowing
capacity of approximately $7.0 million and no outstanding borrowings under the
credit facility at December 31, 2002. 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, 2002, we were in compliance with all of the
covenants.
We are currently in the process of negotiating a replacement credit
facility, which we expect to complete before the current facility expires. While
we have not yet signed a definitive credit agreement, we have received a
commitment from a financial institution for a $5.0 million revolving credit
facility with a term of two years. Advances under the credit facility will bear
interest at the bank's prime rate. There can be no assurances that we will be
successful in obtaining a replacement facility or completing the proposed credit
agreement on the terms outlined above.
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 by 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 facilities and certain vehicles and short-term purchase
commitments to our third-party suppliers.
The following table sets forth all known commitments as of December 31,
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
---- ------ -------- ----------- ----------- -------
2003 $ 1,094 $ -- $ 5,203 $ 6,748 $13,045
2004 1,095 -- -- -- 1,095
2005 881 -- -- -- 881
2006 818 -- -- -- 818
2007 785 -- -- -- 785
Thereafter 3,142 -- -- -- 3,142
------- ------- ------- ------- -------
Total $ 7,815 $ -- $ 5,203 $ 6,748 $19,766
======= ======= ======= ======= =======
26
From time to time we 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% of our outstanding common stock. See Item 1, "Special
Considerations - We face risks associated with international manufacturing
sources."
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 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. Goodwill
amortization expense was $0, $134,000, and $134,000 for the years ended December
31, 2002, 2001, and 2000, 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. The goodwill impairment was
recognized in the first quarter of 2002 as a change in accounting principle.
Except as disclosed above, the adoption of these statements did not have a
material impact on our 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.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
SFAS No. 146 replaced EITF Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)," and will apply to exit or disposal
activities initiated after December 31, 2002. We have reviewed the requirements
of SFAS No. 146 and believe the adoption of this statement will not have a
material impact on our financial statements.
In November 2002, the FASB issued FASB Interpretation Number 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantee of the Indebtedness of Others." This Interpretation
elaborates on the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under certain guarantees that
it has issued. It also clarifies that a guarantor is required to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The initial recognition and initial
measurement provisions in this interpretation apply to guarantees issued or
27
modified after December 31, 2002. We have adopted the disclosure provisions of
this interpretation as of December 31, 2002 as presented in Note 4 to our
consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensations - A Transition and Disclosure - an Amendment to SFAS No. 123."
SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation", to
provide alternative methods of transition for an entity that voluntarily changes
to the fair market value based method of accounting for stock-based employee
compensation. It also amends the disclosure provisions of that Statement to
require prominent disclosure about the effects on reported net income of an
entity's accounting policy decisions with respect to stock-based employee
compensation. Finally, this Statement amends APB Opinion No. 28, 'Interim
Financial Reporting," to require disclosure about those effects in interim
financial information. We have adopted the disclosure requirements of SFAS No.
148 as of December 31, 2002 as presented in Note 6 to our consolidated financial
statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of December 31, 2002, we did not participate in any derivative financial
transactions or other financial and commodity transactions 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 3.80% at December 31, 2002. The principal of loans under this
line of credit is due in April 2003. At December 31, 2002, we had no outstanding
borrowings under the line of credit.
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.
28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding our directors
and executive officers:
NAME AGE POSITION
William J. Hinz (1)......... 57 Chairman of the Board
Gregory K. Roeper........... 42 President, Chief Executive Officer, and
Director
David A. Husband............ 34 Vice President-Finance, Chief Financial
Officer, Secretary, and Treasurer
Stephen L. Borcich.......... 56 Vice President - Distribution Sales
Steven R. Francis........... 51 Vice President - Dealer Sales
Jack A. Henry (2)........... 59 Director
Jong Hwa Choi............... 42 Director
Stephen A McConnell (2)..... 50 Director
Emmett E. Mitchell (1)(2)... 47 Director
Frederick M. Pakis (1)...... 49 Director
- ----------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
WILLIAM J. HINZ has served as Chairman of the Board of our company since
October 1997 and as a director of our company since April 1997. Since October
1999, Mr. Hinz has served as Group President for the Triumph Components Group,
which is a group of seven divisional companies within Triumph Group, Inc., a
publicly held company. Mr. Hinz served as President of Stolper-Fabralloy
Company, a precision aerospace engine component manufacturer that is a
subsidiary of Triumph Group, Inc., from September 1997 until October 1999 and as
Executive Vice President of Operations of Stolper-Fabralloy from March 1996
until September 1997. Mr. Hinz 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 President of our company since December
1998 and as Chief Executive Officer and a director of our company since December
1999. Mr. Roeper served as our Chief Operating Officer from June 1998 until
December 1999. Between November 1994 and June 1998, Mr. Roeper held a variety of
other executive positions with our company, including Chief Financial Officer;
Executive Vice President - Finance, Administration, and Operations; Secretary;
and Treasurer. From 1982 until 1994, Mr. Roeper was employed with Arthur
Andersen LLP.
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 - Distribution Sales
since June 2002. Prior to that, Mr. Borcich 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.
29
STEVEN R. FRANCIS has served as our Vice President - Dealer Sales since
June 2002. From March 2002, when we acquired DataSpeak Systems, Inc. to June
2002, Mr. Francis served as our Vice President - Direct Sales. Mr. Francis
served as co-founder and president of DataSpeak Systems, Inc., an Arizona-based
interconnect company from January 1998 until March 2002. Prior to that time, Mr.
Francis served as the Vice President of Sales and Marketing of Enhanced Systems,
Inc. from October 1996 until December 1997. Mr. Francis previously has served in
the communications industry in various positions including various sales and
management positions at GTE, Stromberg-Carlson, and Executone.
JACK A. HENRY has served as a director of our company since November 2001.
Mr. Henry began his career in 1966 with the international professional services
firm of Arthur Andersen LLP and held positions in the Detroit, San Jose,
Seattle, and Phoenix offices. In 2000, Mr. Henry retired as Managing Partner of
the Phoenix office and formed Sierra Blanca Ventures, LLC, a private advisory
and investment firm. Mr. Henry currently serves on the board of directors of
Simula, Inc., Harris Trust Bank of Arizona, and SOS Staffing Services, Inc. Mr.
Henry has also served in a variety of community positions including most
recently as chairman of the Arizona Chamber of Commerce from 1999 to 2000, and
chairman of Greater Phoenix Leadership from 2000 to 2001. Mr. Henry attended the
U.S. Naval Academy and holds a BBA and MBA from the University of Michigan.
JONG HWA CHOI has served as a director of our company since February 2003.
Mr. Choi has served in various capacities for LG InfoComm U.S.A., a major U.S.
mobile handset vendor and affiliate of LG Electronics, Inc. since 1987, and
since March 2000 has served as Vice President of Administration. During his
16-year tenure, Mr. Choi has managed international business planning and set up
overseas subsidiaries for various divisions of LGE. Mr. Choi's global
assignments include Italy, Russia, and the United States. Mr. Choi's experiences
in various industries include consumer electronics, semiconductors, and mobile
handsets.
STEPHEN A MCCONNELL has served as a director of our company since January
1996. Mr. McConnell currently serves as the President of Solano Ventures, an
investment fund devoted to small- to mid-sized companies. Mr. McConnell also
currently serves as Chairman of G-L Industries, LLC, a manufacturer of wood
glue-lam beams used in the construction industry. Mr. McConnell served as
Chairman of the Board of Mallco Lumber & Building Materials from September 1991
to June 1997. Mr. McConnell currently serves as a director of Capital Title
Group, Inc., Mobile Mini, Inc., and Miracor Diagnostics, Inc., all of which are
publicly held companies.
EMMETT E. MITCHELL has served as a director of our company since February
1999. Mr. Mitchell has been employed with MS Howell & Co., a NASD broker dealer
and investment banking firm, as the Executive Vice President since December
2000. Mr. Mitchell has also served as the Chief Financial Officer of ICESoft
Technologies, Inc., a privately held software company since December 2001. Prior
to this, Mr. Mitchell was employed with Paradise Valley Securities, Inc., since
October 1991, most recently as the Chairman and Chief Executive Officer.
FREDERICK M. PAKIS has served as a director of our company since November
2001. Mr. Pakis was a co-founder of JDA Software, Inc. in 1985 where he served
as Co-Chairman of the Board, President, and Co-Chief Executive Officer for
various periods of time through 1999. Since that time, Mr. Pakis formed and
serves as Managing Director of Clarendon Capital Management, LLC, a private
advisory and investment firm. Mr. Pakis previously served as a Retail Consulting
Manager with Touche Ross & Co. from 1981 to 1985, and as Director of Corporate
Planning for the Sherwin Williams Company, a home improvement specialty store
company from 1976 to 1981. Mr. Pakis also serves on the boards of several
not-for-profit entities, including Phoenix Children's Hospital and Phoenix
Country Day School. Mr. Pakis attended the U.S. Military Academy at West Point,
received a Bachelor of Science degree in Operations Research from Case Western
Reserve University , and a Master of Business Administration degree from the
London School of Business, where he studies as a Sloan Fellow.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our directors, officers, and
persons who own more than 10% of a registered class of our equity securities to
file reports of ownership and changes in ownership with the SEC. Officers,
directors, and greater than 10% stockholders are required by SEC regulations to
furnish us with copies of all Section 16(a) forms they file. Based solely upon
our review of the copies of such forms we received during the fiscal year ended
December 31, 2002, and written representations that no other reports were
required, we believe that each person who, at any time during such fiscal year,
30
was a director, officer, or beneficial owner of more than 10% of our common
stock complied with all Section 16(a) filing requirements during such fiscal
year, except that Mr. Hinz filed a late Form 4 covering two purchase
transactions.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY OF CASH AND OTHER COMPENSATION
The following table sets forth certain information with respect to the
compensation we paid to our Chief Executive Officer and four other executive
officers who received cash compensation in excess of $100,000 during fiscal
2002.
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
------------
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
-------------------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION(1) YEAR SALARY($) BONUS ($) OPTIONS(#)(2) COMPENSATION($)
- ------------------------------ ---- --------- --------- ------------- ---------------
Gregory K. Roeper.................. 2002 $ 165,000 $ 25,000 -- $ 4,329(3)
President and Chief Executive 2001 $ 155,000 $ 15,000 35,000 $ 8,451(4)
Officer 2000 $ 148,500 -- -- 6,579
David A. Husband................... 2002 $ 135,000 $ 25,000 -- $ 750(5)
Vice President - Finance, Chief 2001 $ 94,000 $ -- 75,000 $ --
Financial Officer, Secretary
and Treasurer
Stephen L. Borcich................. 2002 $ 125,000 $ -- -- $ 750(5)
Vice President - Distribution 2001 $ 125,000 $ -- -- $ 750(5)
Sales 2000 $ 134,612(6) 10,000 -- 750(5)
Kent R. Burgess.................... 2002 $ 134,000 $ -- -- $ --
Former Vice President - Product 2001 $ 125,000 $ -- -- $ --
Development 2000 $ 91,350 -- 10,000 --
Steven R. Francis.................. 2002 $ 102,000 $ -- 50,000 $ 750(5)
Vice President - Dealer Sales
- ----------
(1) We consider Messrs. Roeper, Husband, Borcich, and Francis to be our
executive officers. David A. Husband became our Chief Financial Officer
during March 2001; Mr. Francis became our Vice President - Direct Sales
during March 2002 and became our Vice President - Dealer Sales in June
2002. Mr. Burgess was our Vice President - Product Development from April
2000 until his retirement in December 2002.
(2) The exercise price of all stock options granted were equal to the fair
market value of our common stock on the date of grant.
(3) Represents premium payment of $3,579 for a long-term disability insurance
policy paid by our company and a 401(k) plan matching contribution in the
amount of $750.
(4) Represents premium payment of $2,234 for a long-term disability insurance
policy and $5,467 for a term life insurance policy paid by our company.
Also includes a 401(k) plan matching contribution in the amount of $750.
(5) Represents a 401(k) plan matching contribution.
(6) Includes sales commissions paid during fiscal 2000.
31
OPTION GRANTS
The following table sets forth certain information with respect to stock
options granted to the officers listed during the fiscal year ended December 31,
2002.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
--------------------------------------------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
PERCENTAGE ANNUAL RATES
NUMBER OF OF TOTAL OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM(1)
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION -----------------------
NAME GRANTED (#) FISCAL YEAR PRICE DATE 5% 10%
- ---- ----------- ----------- -------- ---------- ------- --------
Gregory K. Roeper.......... -- -- -- -- -- --
David A. Husband........... -- -- -- -- -- --
Stephen L. Borcich......... -- -- -- -- -- --
Kent R. Burgess............ -- -- -- -- -- --
Steven R. Francis.......... 50,000 60.6% $1.35 3/4/12 $42,450 $107,578
- ----------
(1) Potential gains are net of the exercise price, but before taxes associated
with the exercise. Amounts represent hypothetical gains that could be
achieved for the respective options if exercised at the end of the option
term. The assumed 5% and 10% rates of stock price appreciation are provided
in accordance with SEC rules and do not represent our estimate or
projection of the future price of our common stock. Actual gains, if any,
on stock option exercises will depend upon the future market prices of our
common stock.
OPTION HOLDINGS AND VALUES
The following table provides information on the value of unexercised
options held by the officers listed as of December 31, 2002. None of the listed
officers exercised any options during 2002.
OPTION VALUES AS OF DECEMBER 31, 2002
UNDERLYING NUMBER
OF SECURITIES VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT
AT FISCAL YEAR-END (#) FISCAL YEAR-END ($)(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
Gregory K. Roeper ...................... 171,250 51,250 $ 7,000 $21,000
David A. Husband ....................... 18,750 56,250 $13,650 $40,950
Stephen L. Borcich ..................... 33,750 11,250 $ -- $ --
Kent R. Burgess ........................ 5,000 5,000 $ -- $ --
Steven R. Francis ...................... -- 50,000 $ -- $22,000
- ----------
(1) Calculated based upon the closing price of our common stock as reported on
the Nasdaq SmallCap Market on December 31, 2002 of $1.79 per share. The
exercise price of certain of the options held by our executive officers on
December 31, 2002 were greater than $1.79 per share.
EMPLOYMENT AGREEMENTS
WILLIAM J. HINZ
Effective October 1, 1999, we entered into an employment agreement with
William J. Hinz. The agreement had an initial term through September 30, 2001,
and automatically renewed through September 30, 2002. The agreement
automatically renews for successive one-year terms unless either party
32
terminates by giving the other party at least 30 days' written notice. The
agreement provides for Mr. Hinz to serve as our Chairman of the Board and to
receive a base salary of $75,000 per annum.
The employment agreement provides for Mr. Hinz to receive his fixed
compensation to the date of termination of his employment by reason of
resignation, death, or as a result of termination of employment "for cause," as
defined the agreement. If we terminate the employment of Mr. Hinz, or if his
employment is terminated by reason of disability, the agreement provides for the
payment of fixed compensation to Mr. Hinz for the remaining term of the
agreement, payable in a lump sum within ten days of the date of termination. In
addition, Mr. Hinz's vested options as of the date of termination will remain
outstanding through the 90-day period following the then-current term of the
agreement. All unvested options as of the date of termination will be cancelled.
In the event of a "change of control" of our company, as defined in the
agreement, Mr. Hinz will receive a minimum bonus of $50,000. In addition, any
options that were granted to Mr. Hinz that remain unvested as of the date of the
change of control will become fully vested and exercisable on the effective date
of the change of control. If the employment of Mr. Hinz is terminated as a
result of a change of control, we will be required to pay Mr. Hinz, within ten
days of the date of termination, the greater of (a) his base salary and benefits
for the remaining term of the employment agreement, or (b) his annual base
salary.
GREGORY K. ROEPER
Effective October 1, 1999, we entered into an employment agreement with Mr.
Roeper. We renewed and amended the agreement effective October 1, 2002, for a
term expiring on September 30, 2003. The agreement automatically renews for
successive one-year terms unless either party terminates by giving the other
party at least 30 days' written notice. The employment agreement provides for
Mr. Roeper to serve as our President and Chief Executive Officer. The employment
agreement provides for Mr. Roeper to receive a base salary of $182,500 per annum
through September 30, 2003.
The agreement provides for Mr. Roeper to receive his fixed compensation to
the date of termination of his employment by reason of resignation, death, or as
a result of termination of employment "for cause," as defined in the agreement.
If we terminate his employment, or if his employment is terminated by reason of
disability, the agreement provides for the payment of his base salary and
benefits for a period of one year, payable in a lump sum within ten days of the
date of termination. In addition, Mr. Roeper's vested options as of the date of
termination will remain outstanding through the 120-day period following the
then-current term of the agreement. All unvested options as of the date of
termination will be cancelled.
In the event of a "change of control" of our company, as defined in the
agreement, Mr. Roeper will receive a minimum bonus of $100,000. In addition, any
options that were granted to Mr. Roeper that remain unvested as of the date of
the change of control will become fully vested and exercisable on the effective
date of the change of control. If Mr. Roeper's employment is terminated as a
result of a change of control, we will be required to pay him, within ten days
of the date of termination, his annual base salary and benefits for a period of
one year following the date of termination plus any earned bonus through the
date of termination.
DAVID A. HUSBAND
Effective January 1, 2003, we entered into an employment agreement with Mr.
Husband. The agreement has an initial term of one year. The agreement
automatically renews for successive one-year terms unless either party
terminates by giving the other party at least 30 days' written notice. The
employment agreement provides for Mr. Husband to serve as our Vice President -
Finance and Chief Financial Officer. The employment agreement provides for Mr.
Husband to receive a base salary of $135,000 per annum through December 31,
2003.
The agreement provides for Mr. Husband to receive his fixed compensation to
the date of termination of his employment by reason of resignation, death, or as
a result of termination of employment "for cause," as defined the agreement. If
we terminate Mr. Husband's employment, or if his employment is terminated by
reason of disability, we will pay Mr. Husband his base salary and benefits for a
period ranging from six to nine months, depending on his length of service to
our company. In addition, Mr. Husband's vested options as of the date of
33
termination will remain outstanding through the 120-day period following the
then-current term of the agreement. All unvested options as of the date of
termination will be cancelled.
In the event of a "change of control" of our company, as defined in the
employment agreement, Mr. Husband will receive a bonus ranging from $25,000 to
$62,500, based on the value of the transaction. In addition, any options that
were granted to Mr. Husband that remain unvested as of the date of the change of
control will become fully vested and exercisable on the effective date of the
change of control. If Mr. Husband's employment is terminated as a result of a
change of control, we will be required to pay him his base salary and benefits
for a six-month period following the date of termination plus any earned bonus
through the date of termination.
STEVEN R. FRANCIS
Effective March 1, 2002, in connection with our acquisition of DataSpeak
Systems, Inc., we entered into an employment agreement with Mr. Francis. The
agreement has an initial term through February 2004. The employment agreement
provides for Mr. Francis to serve as President of Vodavi Direct, Inc., our
wholly owned subsidiary, for a base salary of $125,000 per annum. Pursuant to
the agreement, we granted to Mr. Francis ten-year options to purchase 50,000
shares of our common stock at an exercise price per share equal to $1.35, and
25% of the options will vest and become exercisable on each of the first four
anniversaries of the date of grant. In the event of a "change of control" of our
company, as defined in the agreement, any options that were granted to Mr.
Francis that remain unvested as of the date of the change of control will become
fully vested and exercisable on the effective date of the change of control. If
Mr. Francis' employment is terminated as a result of a change of control, we
will be required to pay Mr. Francis his base salary and benefits for the
remaining term of the agreement plus any earned bonus through the date of
termination.
The agreement provides for Mr. Francis to receive his fixed compensation to
the date of termination of his employment by reason of resignation, death, or as
a result of termination of employment "for cause," as defined the agreement. If
we terminate the employment of Mr. Francis, or if his employment is terminated
by reason of disability, the agreement provides for the payment of fixed
compensation to Mr. Francis for the remaining term of the agreement. In
addition, any vested options held by Mr. Francis as of the date of termination
will remain outstanding through the 90-day period following the then-current
term of the agreement. All unvested options as of the date of termination will
be cancelled.
Each employment agreement described above provides that the executive will
be eligible to receive discretionary bonuses in amounts determined by our Board
of Directors. In addition, each employment agreement generally requires us to
* reimburse each executive for all travel, entertainment, and other
ordinary and necessary expenses incurred in connection with our
business and their duties under their respective employment
agreements; and
* provide such other fringe benefits that we make generally available to
all of our employees on a non-discriminatory basis.
Each employment agreement also contains provisions that prohibit the
executive from
* competing with us for a period of 12 months after the termination of
the executive's employment with our company,
* taking certain actions intended to solicit other persons to terminate
their business relationship with us or to terminate his or her
employment relationship with us, and
* making unauthorized use or disclosure of our trade names, fictitious
names, or confidential information.
OTHER ARRANGEMENTS
We maintain agreements with each of our other officers and employees that
prohibit such persons from disclosing confidential information obtained while
employed by us. We offer our employees medical, life, and disability insurance
34
benefits. Our executive officers and other key personnel (including directors
who also are employees of our company) are eligible to receive stock options
under our stock option plan.
DIRECTOR COMPENSATION AND OTHER INFORMATION
Employees of our company do not receive compensation for serving as members
of our Board of Directors. Each independent director receives a quarterly
retainer fee of $3,750 payable on the first day of each quarter. Each
independent director also receives a $500 fee for each meeting attended by
telephone or in person and reimbursement for reasonable expenses incurred in
attending meetings of our Board of Directors, except that Mr. Hinz receives no
cash compensation for meetings attended. Mr. Hinz, the Chairman of our Board of
Directors, is compensated as pursuant to an employment agreement. See Item 11,
"Executive Compenation - Employment Agreements." During March 2003, we granted
Mr. Hinz options to purchase 15,000 shares of our common stock. Committee
members other than Mr. Hinz receive a $500 fee for attendance at committee
meetings that are held on days other than days on which a Board of Directors'
meeting is held. Non-employees who serve as directors of our company also
receive an annual automatic stock option grant to purchase 5,000 shares of stock
under our Amended and Restated 1994 Stock Option Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Performance evaluation and compensation decisions relating to 2002 were
made by the Compensation Committee of our Board of Directors, which consisted of
Messrs. Mitchell, Hinz, and Pakis. Except for our employment agreement with Mr.
Hinz, none of such persons had any contractual or other relationships with us
during fiscal 2002 except as directors. See Item 11, "Executive
Compensation--Employment Agreements."
35
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth certain information with respect to
beneficial ownership of our common stock as of December 31, 2002 by (i) each
director; (ii) the executive officers set forth in the Summary Compensation
Table under Item 11, "Executive Compensation;" (iii) all of our directors and
executive officers as a group; and (iv) each other person who is known by us to
beneficially own or to exercise voting or dispositive control over more than 5%
of our common stock.
NUMBER OF
NAME AND ADDRESS OF BENEFICIAL OWNER (1) SHARES (2) PERCENT (2)
- ---------------------------------------- ---------- -----------
DIRECTORS AND EXECUTIVE OFFICERS:
William J. Hinz....................................... 60,800(3) 1.4%
Gregory K. Roeper..................................... 210,600(4) 4.6%
David A. Husband...................................... 62,350(5) 1.4%
Stephen L. Borcich.................................... 33,750(6) *
Kent R. Burgess....................................... 5,003(7) *
Steven R. Francis..................................... 100,000(8) 2.3%
Jack A. Henry......................................... 5,900(9) *
Kyeong-Woo Lee........................................ 5,000(10) *
Stephen A McConnell................................... 56,900(11) 1.3%
Emmett E. Mitchell.................................... 30,000(12) *
Frederick M. Pakis.................................... 5,000(13) *
All directors and officers as a group (11 persons).... 575,303 12.2%
NON-MANAGEMENT 5% STOCKHOLDERS:
LG Electronics, Inc................................... 862,500(14) 19.8%
Hummingbird Management, LLC........................... 477,300(16) 11.0%
Steven A. Sherman..................................... 277,330(15) 6.3%
Anthony Silverman..................................... 263,267(17) 6.1%
- ----------
* Less than 1%
(1) Each person named in the table has sole voting and investment power with
respect to all common stock beneficially owned by him, subject to
applicable community property law, except as otherwise indicated. Except as
otherwise indicated, each person may be reached at 4717 East Hilton Avenue,
Suite 400, Phoenix, Arizona 85034.
(2) The percentages shown are calculated based upon 4,349,788 shares of our
common stock outstanding on December 31, 2002. The percentages shown
include the shares of common stock that each named stockholder has the
right to acquire within 60 days of December 31, 2002. In calculating
ownership percentage, all shares of common stock that the named stockholder
has the right to acquire upon exercise of stock options within 60 days of
December 31, 2002 are deemed to be outstanding for the purpose of computing
the percentage of common stock owned by such stockholder, but are not
deemed to be outstanding for the purpose of computing the ownership
percentage of any other stockholder. Percentages may be rounded. Includes,
when applicable, shares owned of record by such person's minor children and
spouse and by other related individuals and entities over whose shares of
common stock such person has sole or shared voting control or power of
disposition.
(3) Includes 13,300 shares of common stock and 47,500 shares of common stock
issuable upon exercise of options, but excludes 12,500 shares of common
stock issuable upon exercise of unvested stock options.
(4) Includes 35,600 shares of common stock and 175,000 shares of common stock
issuable upon exercise of options, but excludes 60,000 shares of common
stock issuable upon exercise of unvested stock options.
(5) Includes 43,600 shares of common stock and 18,750 shares of common stock
issuable upon exercise of options, but excludes 56,250 shares of common
stock issuable upon exercise of unvested stock options.
(6) Includes 33,750 shares of common stock issuable upon exercise of options,
but excludes 11,250 shares of common stock issuable upon exercise of
unvested stock options.
36
(7) Includes 3 shares of common stock and 5,000 shares of common stock issuable
upon exercise of options, but excludes 5,000 shares of common stock
issuable upon exercise of unvested stock options.
(8) Excludes 50,000 shares of common stock issuable upon exercise of unvested
stock options.
(9) Includes 900 shares of common stock and 5,000 shares of common stock
issuable upon exercise of stock options, but excludes 5,000 shares of
common stock issuable upon exercise of unvested stock options.
(10) Includes 5,000 shares of common stock issuable upon exercise of stock
options, but excludes 5,000 shares of common stock issuable upon exercise
of unvested stock options.
(11) Includes 26,900 shares of common stock and 30,000 shares issuable upon
exercise of options, but excludes 5,000 shares of common stock issuable
upon exercise of unvested stock options.
(12) Includes (a) 9,500 shares of common stock and 20,000 shares issuable upon
exercise of options held by Mr. Mitchell, and (b) 500 shares of common
stock held by Mr. Mitchell as custodian for his children, but excludes
5,000 shares of common stock issuable upon exercise of unvested stock
options held by Mr. Mitchell.
(13) Includes 5,000 shares of common stock issuable upon exercise of stock
options, but excludes 5,000 shares of common stock issuable upon exercise
of unvested stock options.
(14) Represents shares of common stock beneficially owned by LG Electronics Inc.
LGE has sole voting power and sole dispositive power over such shares. LGE
acquired the shares of our common stock in connection with the merger of
its minority owned subsidiary, LGIC, with and into LGE during September
2000. The address of LGE is LG Twin Towers, 20 Yoido-dong, Youngdungpo-gu,
Seoul 150-721, Korea.
(15) Includes 95,000 shares of common stock and 75,000 shares issuable upon
exercise of options held by Mr. Sherman; 8,000 shares held by Mr. Sherman
as custodian for certain of his children; 86,830 shares held by Sherman
Capital Group, L.L.C., of which Mr. Sherman is the managing member; and
12,500 shares held by Sherman Capital Partners, L.L.C., of which Mr.
Sherman is a managing member. Mr. Sherman disclaims beneficial ownership of
all shares held by Sherman Capital Group, L.L.C. and Sherman Capital
Partners, L.L.C. except to the extent that his individual interest in such
shares arises from his interest in each such entity. The address for Mr.
Sherman is 509 Vista Grande Drive, Colorado Springs, Colorado 80906.
(16) Represents 477,300 shares of common stock beneficially owned by Hummingbird
Management, LLC (f/k/a Morningside Value Investors, LLC), as investment
manager to The Hummingbird Value Fund, L.P. The managing member of
Hummingbird Management is Paul Sonkin, who also serves as the managing
member of HVF Capital, the general partner of The Hummingbird Value Fund
and The Hummingbird Microcap Value Fund. Hummingbird Management has sole
voting and dispositive power over the shares, and Hummingbird Management
disclaims any economic interest or beneficial ownership of the shares.
Information is based solely on a Schedule 13D filed with the Commission on
or about June 12, 2002, as amended on November 26, 2002 and January 3,
2003. The address of Hummingbird Management, LLC is 153 East 53rd Street,
New York, New York 10022.
(17) Represents 263,267 shares of common stock beneficially owned by Anthony
Silverman, who has sole voting and dispositive power of the shares.
Information is based solely on a Schedule 13D filed with the Commission on
or about August 7, 2002. The address for Mr. Silverman is 7305 E. Del Acero
Drive, Scottsdale, Arizona 85254.
37
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth information with respect to our common stock
that may be issued upon the exercise of stock options under our 1994 Stock
Option Plan as of December 31, 2002.
(c)
(a) Number of Securities (b)
Number of Securities Remaining Available for
to be Issued Upon Weighted Average Future Issuance Under
Exercise of Exercise Price of Equity Compensation Plans
Outstanding Options, Outstanding Options, (Excluding Securities
Plan Category Warrants, and Rights Warrants, and Rights Reflected in Column (a))
------------- -------------------- -------------------- ------------------------
Equity Compensation Plans
Approved by
Stockholders............... 880,500 $ 2.89 567,000
Equity Compensation Plans
Not Approved by
Stockholders............... -- -- --
--------- ------ ---------
Total...................... 880,500 $ 2.89 567,000
========= ====== =========
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
LG Electronics Inc., our principal supplier, owns approximately 20% of our
outstanding common stock. Kyeong Woo Lee, a director of our company from January
2002 until February 2003 and Jong Hwa Choi, a director of our company since
February 2003, are officers of LGE or its affiliates. We purchased approximately
$18.5 million of key telephone systems, commercial grade telephones, and voice
mail products from LGE and an affiliate of LGE during 2002. We believe that the
purchases from LGE and its affiliate approximate terms that would be offered by
non-related parties. We owed LGE and its affiliate approximately $4.0 million
for product purchases as of December 31, 2002.
We also conduct joint development activities with LGE for the design and
development of hardware incorporated into some of our 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 we obtain the right to sell
such products throughout North America and the Caribbean.
In July 2001, we entered into a development agreement with LGE under which
we will develop for LGE certain advanced voice messaging technologies. We
recorded revenue of $183,000 in 2002 and $210,000 in 2001 for work performed
under the development agreement using the percentage of completion method. As of
December 31, 2002, LGE had paid us $300,000 pursuant to the agreement.
ITEM 14. CONTROLS AND PROCEDURES
Based on their evaluation, as of a date within 90 days prior to the date of
the filing of this report, of the effectiveness of our disclosure controls and
procedures, our Chief Executive Officer and Chief Financial Officer have each
concluded that our disclosure controls and procedures are effective and
sufficient to ensure that we record, process, summarize, and report information
required to be disclosed by us in our periodic reports filed under the
Securities Exchange Act within the time periods specified by the Securities and
Exchange Commission's rules and forms.
38
Subsequent to the date of their evaluation, there have not been any
significant changes in our internal controls or in other factors that could
significantly affect these controls, including any corrective action with regard
to significant deficiencies and material weaknesses.
PART IV
ITEM 15. 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)
10.13A Vodavi Single Line Telephone Agreement Extension dated April 4, 1997
between Vodavi Communications Systems, Inc. and L.G. Srithai
Electronics Co., Ltd. (2)
10.19 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 (4)
10.36 License Agreement dated May 17, 1999, between Santa Barbara Connected
Systems Corporation and Vodavi Technology, Inc. (4)
10.37 Object Code Software License Agreement dated May 24, 1999, between D2
Technologies, Inc. and Vodavi Technology, Inc. (4)
10.38 Fourth Amendment to Credit Agreement between Vodavi Communications
Systems, Inc. and General Electric Capital Corporation (5)
10.40 Employment Agreement dated October 1, 1999, between William J. Hinz
and Vodavi Technology, Inc. (6)
10.42 Second Amendment to Amended and Restated Credit Agreement dated
October 31, 1999, between Vodavi Communications Systems, Inc. and
General Electric Capital Corporation (6)
10.43 Third Amendment to Amended and Restated Credit Agreement dated October
9, 2000, between Vodavi Communications Systems, Inc. and General
Electric Capital Corporation (7)
10.44 Waiver and Amendment of Credit Agreement dated May 11, 2001, between
Vodavi Communications Systems, Inc. and General Electric Capital
Corporation (8)
39
10.47 Sublease Agreement dated August 8, 2001, between Vodavi Communications
Systems, Inc. and SpeedFam-IPEC, Inc. (9)
10.48 Employment Agreement, effective October 1, 2001, between Gregory K.
Roeper and Vodavi Technology, Inc. (10)
10.49 Second Amended and Restated 1994 Stock Option Plan (amended through
May 13, 2002) (11)
10.50 Fourth Amendment to Amended and Restated Credit Agreement dated March
4, 2002, between Vodavi Communications Systems, Inc. and General
Electric Capital Corporation
10.51 Employment Agreement, effective January 1, 2003, between David A.
Husband and Vodavi Technology, Inc.
10.52 Employment Agreement, effective October 1, 2003, between Gregory K.
Roeper and Vodavi Technology, Inc.
21 List of Subsidiaries
23.1 Consent of Deloitte and Touche LLP
23.2 Statement regarding consent of Arthur Andersen LLP
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.
- ----------
(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 Quarterly Report on Form 10-Q
for the quarter ended June 30, 1999, as filed on August 16, 1999.
(5) 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.
(6) 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.
(7) 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.
(8) 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.
(9) 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.
(10) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 2002, as filed on March 29, 2002.
(11) Incorporated by reference to Registration Statement on Form S-8 (No.
333-98819) as filed by the Registrant on August 27, 2002.
40
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 24, 2003 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 24, 2003
- --------------------------
William J. Hinz
/s/ Gregory K. Roeper President, Chief Executive March 24, 2003
- -------------------------- Officer, and Director
Gregory K. Roeper (Principal Executive Officer)
/s/ David A. Husband Vice President - Finance, Chief March 24, 2003
- -------------------------- Financial Officer, Secretary,
David A. Husband and Treasurer (Principal Financial
and Accounting Officer)
/s/ Jack A. Henry Director March 24, 2003
- --------------------------
Jack A. Henry
/s/ Jong Hwa Choi Director March 24, 2003
- --------------------------
Jong Hwa Choi
/s/ Stephen A McConnell Director March 24, 2003
- --------------------------
Stephen A McConnell
/s/ Emmett E. Mitchell Director March 24, 2003
- --------------------------
Emmett E. Mitchell
/s/ Frederick M. Pakis Director March 24, 2003
- --------------------------
Frederick M. Pakis
41
CERTIFICATION
I, Gregory K. Roeper, certify that:
1. I have reviewed this annual report on Form 10-K of Vodavi Technology,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations, and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize, and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 24, 2003
/s/ Gregory K. Roeper
----------------------------------------
Gregory K. Roeper
Chief Executive Officer
42
CERTIFICATION
I, David A. Husband, certify that:
1. I have reviewed this annual report on Form 10-K of Vodavi Technology,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations, and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize, and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 24, 2003
/s/ David A. Husband
----------------------------------------
David A. Husband
Chief Financial Officer
43
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, 2002 and 2001.................F-4
Consolidated Statements of Operations for the Years Ended
December 31, 2002, 2001, and 2000..........................................F-5
Consolidated Statements of Changes in Stockholders' Equity for
the Years Ended December 31, 2002, 2001, and 2000..........................F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002, 2001, and 2000..........................................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 sheets of Vodavi
Technology, Inc. and subsidiaries as of December 31, 2002 and 2001, and the
related consolidated statements of operations, changes in stockholders' equity,
and cash flows for the years 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 audits. The Company's
consolidated financial statements for the year ended December 31, 2000 were
audited by other auditors who have ceased operations. Those auditors expressed
an unqualified opinion on those consolidated financial statements in their
report dated February 2, 2001.
We conducted our audits 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 audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 2002 and
2001, and the results of their operations and their cash flows for the years
then ended in conformity with accounting principles generally accepted in the
United States of America.
As discussed above, the consolidated financial statements of the Company for the
year ended December 31, 2000 were audited by other auditors who have ceased
operations. As described in Note 1, these financial statements have been revised
to include the transitional disclosures required by Statement of Financial
Accounting Standards No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS (SFAS 142),
which was adopted by the Company as of January 1, 2002. Our audit procedures
with respect to the disclosures in Note 1 with respect to 2000 included (1)
comparing the previously reported net income to the previously issued financial
statements and the adjustments to reported net income representing amortization
expense (including any related tax effects) recognized in those periods related
to goodwill, intangible assets that are no longer being amortized, deferred
credits related to an excess over cost, equity method goodwill, and changes in
amortization periods for intangible assets that will continue to be amortized as
a result of initially applying SFAS 142 (including any related tax effects) to
the Company's underlying analysis obtained from management, and (2) testing the
mathematical accuracy of the reconciliation of adjusted net income to reported
net income and the related earnings-per-share amounts. In our opinion, the
disclosures for 2000 in Note 1 are appropriate. However, we were not engaged to
audit, review, or apply any procedures to the 2000 financial statements of the
Company other than with respect to such disclosures and, accordingly, we do not
express an opinion or any other form of assurance on the 2000 financial
statements taken as a whole.
DELOITTE & TOUCHE LLP
Phoenix, Arizona
February 14, 2003
F-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
THIS REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS IS A COPY OF A REPORT
PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP AND HAS NOT BEEN REISSUED BY ARTHUR
ANDERSEN LLP.
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,
------------------------
ASSETS 2002 2001
---------- ----------
Current Assets
Cash $ 1,141 $ 340
Accounts receivable, net of reserves for doubtful accounts
and sales returns of $422 in 2002 and $730 in 2001 6,671 6,996
Inventories 5,550 5,331
Income tax receivable 300 839
Deferred income taxes 436 781
Prepaid expenses and other 731 574
---------- ----------
Total current assets 14,829 14,861
Property and equipment, net 1,631 1,581
Goodwill, net 725 1,638
Deferred Income Taxes 160 --
Other Long-Term Assets, net 43 193
---------- ----------
$ 17,388 $ 18,273
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,250 $ 1,454
Accrued liabilities 969 1,437
Accrued rebates 564 577
Accounts payable to stockholder 3,965 984
Revolving credit facility borrowings -- 2,593
---------- ----------
Total current liabilities 6,748 7,045
Deferred Income Taxes -- 159
Other Long-Term Obligations 18 41
Commitments and Contingencies (Note 5)
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;
4,668,488 and 4,553,488 shares issued at December 31, 2002
and 2001, respectively 5 5
Additional paid-in capital 13,503 13,363
Accumulated deficit (2,127) (1,581)
Treasury stock, at cost; 318,700 shares at December 31, 2002 and 2001 (759) (759)
---------- ----------
10,622 11,028
---------- ----------
$ 17,388 $ 18,273
========== ==========
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,
--------------------------------------
2002 2001 2000
---------- ---------- ----------
Revenue, net $ 37,328 $ 34,153 $ 47,705
Cost of Goods Sold 23,879 22,983 30,202
---------- ---------- ----------
Gross Margin 13,449 11,170 17,503
Operating Expenses:
Engineering and product development 2,333 1,998 1,742
Selling, general and administrative 9,831 11,185 14,299
---------- ---------- ----------
12,164 13,183 16,041
---------- ---------- ----------
Operating Income (Loss) 1,285 (2,013) 1,462
Interest Expense 97 406 705
---------- ---------- ----------
Income (Loss) Before Income Taxes and Change
in Accounting Principle 1,188 (2,419) 757
Provision for (Benefit from) Income Taxes 471 (863) 309
---------- ---------- ----------
Income (Loss) Before Change in Accounting Principle 717 (1,556) 448
Change in Accounting Principle, net of taxes (1,263) -- --
---------- ---------- ----------
Net Income (Loss) $ (546) $ (1,556) $ 448
========== ========== ==========
Basic earnings per share:
Income (loss) before change in accounting principle $ 0.16 $ (0.37) $ 0.10
Change in accounting principle (0.29) -- --
---------- ---------- ----------
Net Income (Loss) $ (0.13) $ (0.37) $ 0.10
========== ========== ==========
Diluted earnings per share:
Income (loss) before change in accounting principle $ 0.16 $ (0.37) $ 0.10
Change in accounting principle (0.29) -- --
---------- ---------- ----------
Net Income (Loss) $ (0.13) $ (0.37) $ 0.10
========== ========== ==========
Weighted Average Shares Outstanding:
Basic Average Shares Outstanding 4,331 4,235 4,273
========== ========== ==========
Diluted Average Shares Outstanding 4,428 4,235 4,305
========== ========== ==========
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, 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
Net loss -- -- -- (546) -- -- (546)
Common stock issued 115,000 -- 150 -- -- -- 150
Tax effect of expired warrants -- -- (10) -- -- -- (10)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 2002 4,668,488 $ 5 $ 13,503 $ (2,127) (318,700) $ (759) $ 10,622
========== ========== ========== ========== ========== ========== ==========
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,
--------------------------------------
2002 2001 2000
---------- ---------- ----------
Cash flows from Operating Activities:
Net income (loss) $ (546) $ (1,556) $ 448
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 635 988 940
Change in accounting principle 1,263 -- --
Tax benefit on stock option exercises -- -- 193
Provision for doubtful accounts and sales
returns 256 839 628
Deferred taxes 397 16 154
Rent equalization (23) (94) (51)
Changes in working capital:
Accounts receivable 69 3,962 (2,362)
Inventories (199) 1,376 196
Income tax receivable 539 (839) --
Prepaid expenses and other (148) 296 167
Other long-term assets 3 (6) (191)
Accounts payable (204) 80 32
Accounts payable to stockholder 2,981 (1,398) 734
Accrued liabilities and accrued rebates (520) (50) 615
---------- ---------- ----------
Net cash flows provided by
operating activities 4,503 3,614 1,503
---------- ---------- ----------
Cash flows from Investing Activities:
Cash paid to acquire property and equipment (485) (172) (291)
Cash paid to acquire DataSpeak Systems, Inc. (624) -- --
Cash received on notes receivable -- -- 114
---------- ---------- ----------
Net cash flows used in investing
activities (1,109) (172) (177)
---------- ---------- ----------
Cash Flows from Financing Activities:
Payments on revolving credit facility, net (2,593) (3,666) (2,413)
Purchase of common stock -- -- (714)
Stock options exercised -- -- 837
---------- ---------- ----------
Net cash flows used in financing
activities (2,593) (3,666) (2,290)
---------- ---------- ----------
Change in Cash 801 (224) (964)
Cash, beginning of period 340 564 1,528
---------- ---------- ----------
Cash, end of period $ 1,141 $ 340 $ 564
========== ========== ==========
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, 2002, 2001 and 2000
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. NATURE OF BUSINESS
Vodavi Technology, Inc., a Delaware corporation, and subsidiaries (the
Company), designs, develops, markets, and supports a broad range of
business telecommunications solutions, including digital and IP-based
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 8).
b. CUSTOMER CONCENTRATIONS
Sales to the Company's largest distributor, Graybar Electric Company, Inc.,
accounted for 27%, 27%, and 32% of total revenues during 2002, 2001 and
2000, respectively. During the same periods, sales to the Company's second
largest distributor accounted for an additional 12%, 9%, and 12% of total
revenues, respectively. Accounts receivable from the two largest
distributors comprise 43% and 48% of total accounts receivable as of
December 31, 2002 and 2001, 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), Vodavi Direct, Inc., 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 2). As a result of the discontinuance of
the business operations of Vodavi-CT in 2001, this entity was merged into
its parent company in January 2003 and no longer exists. 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.
F-8
e. INVENTORIES
Inventories consist of purchased finished products from a stockholder and
other 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 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 upon shipment from the
manufacturer.
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, 2002 and 2001, respectively.
USEFUL LIFE
TYPE OF ASSET IN YEARS 2002 2001
------------- -------- -------- --------
($000) ($000)
Office and computer equipment 5 $ 2,975 $ 2,825
Furniture and fixtures 10 570 409
Tooling and manufacturing equipment 5-8 1,670 1,662
-------- --------
5,215 4,896
Less - accumulated depreciation (3,584) (3,315)
-------- --------
$ 1,631 $ 1,581
======== ========
Depreciation expense was $485,000, $627,000, and $614,000, for the years
ended December 31, 2002, 2001, and 2000, respectively.
g. GOODWILL
Goodwill represents the cost in excess of the estimated fair values of
assets and liabilities acquired. Goodwill was being amortized on the
straight-line method over 20 years. Amortization expense was $0, $134,000,
and $134,000, for the years ended December 31, 2002, 2001, and 2000,
respectively. Accumulated amortization was $0, and $1,037,000 at December
31, 2002 and 2001, respectively. On January 1, 2002, the Company changed
its method of accounting for goodwill. See note below.
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 was being amortized utilizing a useful life of
three years. Amortization expense related to this asset was $125,000,
$167,000 and $167,000 for the years ended December 31, 2002, 2001 and 2000,
respectively. As of December 31, 2002, all licensing-related assets were
fully amortized.
F-9
i. IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets, excluding goodwill and other intangible 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.
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 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 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. The goodwill impairment was recognized in 2002 as a
change in accounting principle, net of $375,000 of income taxes.
The following table sets forth, for the periods presented, pro forma net
income (loss) as if we had adopted SFAS Nos. 141 and 142 from the earliest
period presented: ($000's except per share amounts)
YEAR ENDED DECEMBER 31,
2002 2001 2000
----------------- ------------------ -----------------
Amount EPS Amount EPS Amount EPS
------- ------- ------- ------- ------- -------
Income (loss) before change in
accounting principle, as
reported $ 717 $ 0.16 $(1,556) $ (0.37) $ 448 $ 0.10
Add back goodwill amortization,
net of taxes -- -- 100 0.02 100 0.02
------- ------- ------- ------- ------- -------
Adjusted net income (loss) $ 717 $ 0.16 $(1,456) $ (0.35) $ 548 $ 0.12
======= ======= ======= ======= ======= =======
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.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires
companies to recognize costs associated with exit or disposal activities
when they are incurred rather than at the date of a commitment to an exit
or disposal plan. SFAS No. 146 replaced EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a Restructuring),"
and will apply to exit or disposal activities initiated after December 31,
2002. We have reviewed the requirements of SFAS No. 146 and believe the
adoption of this statement will not have a material impact on our financial
statements.
F-10
In November 2002, the FASB issued FASB Interpretation Number 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantee of the Indebtedness of Others". This
Interpretation elaborates on the disclosures to be made by a guarantor in
its interim and annual financial statements about its obligations under
certain guarantees that it has issued. It also clarifies that a guarantor
is required to recognize, at the inception of a guarantee, a liability for
the fair value of the obligation undertaken in issuing the guarantee. The
initial recognition and initial measurement provisions in this
interpretation apply to guarantees issued or modified after December 31,
2002. We have adopted the disclosure provisions of this interpretation as
of December 31, 2002 as presented in Note 4.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensations - A Transition and Disclosure - an Amendment to SFAS No.
123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation", to provide alternative methods of transition for an entity
that voluntarily changes to the fair value based method of accounting for
stock-based employee compensation. It also amends the disclosure provisions
of that Statement to require prominent disclosure about the effects on
reported net income of an entity's accounting policy decisions with respect
to stock-based employee compensation. Finally, this Statement amends APB
Opinion No. 28, "Interim Financial Reporting", to require disclosure about
those effects in interim financial information. We have adopted the
disclosure requirements of SFAS No. 148 as of December 31, 2002 as
presented in Note 6.
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 reasonably assured 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. Revenues are recorded net of discounts, allowances for sales
returns and volume rebates.
m. ENGINEERING AND PRODUCT DEVELOPMENT
All costs associated with internal engineering and product development
activities are expensed as incurred.
n. 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 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
F-11
in SFAS No. 123 had been applied. The Company applies the intrinsic value
method under APB No. 25 and provides the pro forma disclosure provisions of
SFAS No. 123.
The Company has computed, for pro forma disclosure purposes, the value of
all options granted during 2002, 2001, and 2000, using the Black-Scholes
option pricing model with the following weighted average assumptions:
Years Ended December 31,
----------------------------
2002 2001 2000
---- ---- ----
Risk free interest rate 3.05% 5.03% 6.14%
Expected dividends None None None
Expected lives in years 5.0 5.0 4.9
Expected volatility 76.1% 79.0% 78.1%
No stock-based employee compensation cost is reflected in net income as all
options granted under the Plan had an exercise price equal to or greater
than the market price of the underlying common stock on the date of grant.
If the Company had accounted for its stock-based compensation plan using a
fair value based method of accounting as prescribed in SFAS No. 123, the
Company's net income and earnings per share would have been reported as
follows:
Years Ended December 31,
-----------------------------
2002 2001 2000
------- ------- -------
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
Net income (loss):
As reported $ (546) $(1,556) $ 448
Fair Value of options granted,
net of taxes (131) (126) (158)
------- ------- -------
Pro forma $ (677) $(1,682) $ 290
======= ======= =======
Earnings (loss) per share:
As reported - basic and diluted $ (0.13) $ (0.37) $ 0.10
Pro forma - basic and diluted $ (0.16) $ (0.40) $ 0.07
o. 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:
F-12
2002 2001 2000
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Income (loss) before change in accounting
principal $ 717 $ (1,556) $ 448
Change in accounting principal (1,263) -- --
--------- --------- ---------
Net income (loss $ (546) $ (1,556) $ 448
========= ========= =========
Weighted average common shares for basic
earnings per share 4,331 4,235 4,273
Effect of dilutive stock options(1) 97 -- 32
--------- --------- ---------
Weighted average common shares for diluted
earnings per share 4,428 4,235 4,305
========= ========= =========
Basic earnings per share:
Income before change in accounting principle $ 0.16 $ (0.37) $ 0.10
Change in accounting principle (0.29) -- --
--------- --------- ---------
Net Income (loss) $ (0.13) $ (0.37) $ 0.10
========= ========= =========
Diluted earnings per share:
Income before change in accounting principle $ 0.16 $ (0.37) $ 0.10
Change in accounting principle (0.29) -- --
--------- --------- ---------
Net Income (loss) $ (0.13) $ (0.37) $ 0.10
========= ========= =========
(1) Dilutive securities are calculated using the treasury stock method and the
average market price during the period. Options on 625,000, 646,500, and
328,000 shares had an exercise price greater than the average market price
during the years ended December 31, 2002, 2001, and 2000, respectively, and
therefore did not enter into the earnings per share calculation.
p. 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.
q. 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.
r. RECLASSIFICATIONS
Certain reclassifications have been made to the financial statements for
the year ended December 31, 2001 to conform to the current year's
presentation.
2. 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):
F-13
Inventory $ 20
Prepaid assets 9
Property and equipment 50
Deferred Taxes 9
Goodwill 725
Accrued liabilities (54)
----
$759
====
3. 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-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, in the first quarter of 2001 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 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 for
each of the years in the two-year period ended December 31, 2002: (IN
THOUSANDS)
Balance Balance
Initial 2001 Dec. 31, 2002 Dec. 31,
Balance Payments 2001 Payments 2002
------- -------- ----- -------- -----
Distributor price protection $ 281 $(195) $ 86 $ (86) $ --
Severance-related costs 168 (114) 54 (54) --
Other shut-down costs 250 (106) 144 (144) --
----- ----- ----- ----- -----
$ 699 $(415) $ 284 $(284) --
===== ===== ===== ===== =====
F-14
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)
Year Ended December 31,
--------------------------------
2002 2001 2000
------- ------- -------
Revenue $ 135 $ 1,331 $ 2,420
Operating income (loss) 73 (359) (186)
4. REVOLVING CREDIT FACILITY
As of December 31, 2002, VCS 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 of VCS. Advances of the
credit facility are secured by substantially all of the Company's assets.
Vodavi Technology, Inc. and Vodavi Direct, Inc. are guarantors under the
credit facility. Interest is payable monthly at a variable rate based on
the 30-day commercial paper rate plus 2.50% (3.80% and 4.52% at December
31, 2002 and 2001, respectively). The credit facility expires in April
2003. At December 31, 2002, there were no outstanding borrowings on the
revolving credit facility and $7.0 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, 2002 and 2001, the
Company was in compliance with these financial covenants.
5. COMMITMENTS AND CONTINGENCIES
a. LEGAL MATTERS
The Company was involved in a legal dispute with Paradygm Communications,
Inc. and R.C. Patel related to a strategic alliance agreement. In October
2002, the parties settled the dispute. As a result, the Company paid
Paradygm and Patel $250,000 and incurred an additional $50,000 of legal
fees. The financial impact of the settlement is included in the
consolidated financial statements for the year ended December 31, 2002.
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 and certain vehicles. Minimum
payments under the Company's lease agreements are as follows:
F-15
Years Ending
December 31, Operating Leases
------------ ----------------
(IN THOUSANDS)
2003 $ 1,094
2004 1,095
2005 881
2006 818
2007 785
Thereafter 3,142
-------
Total minimum lease commitments 7,815
Total minimum noncancellable sublease rentals (374)
-------
$ 7,441
=======
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 $1.2 million for the year ended
December 31, 2002, and $1.1 million for each of the years ended December
31, 2001, and 2000, respectively. The difference between rent expensed and
rent paid ("rent equalization") was $23,000, $94,000, and $51,000 for the
years ended December 31, 2002, 2001, and 2000, 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 $64,000, $63,000, and $76,000, for the years
ended December 31, 2002, 2001, and 2000, respectively.
6. 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
deemed attractive. As of December 31, 2002, the Company had purchased
318,700 shares at an aggregate cost of $759,000.
b. 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 July 2002,
shareholders approved an increase in the number of shares that may be
issued under the plan from 1,100,000 to 1,600,000. 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.
F-16
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 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, 2002 December 31, 2001 December 31, 2000
---------------------- ---------------------- ------------------------
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 804,500 $ 3.08 725,000 $ 3.68 779,800 $ 4.03
Granted 112,500 1.70 188,000 1.04 179,500 2.72
Forfeited (36,500) 3.42 (108,500) 3.49 (81,800) 4.30
Exercised -- -- -- -- (152,500)(1) 4.00
-------- -------- -------- -------- -------- --------
Options outstanding at end
of period 880,500 $ 2.89 804,500 $ 3.08 725,000 $ 3.68
======== ======== ======== ======== ======== ========
Options available for grant 567,000 143,000 222,500
======== ======== ========
Exercisable at end of
period 530,875 $ 3.52 407,375 $ 4.11 334,125 $ 4.60
======== ======== ======== ======== ======== ========
Weighted average fair
value of options granted $ 1.08 $ .69 $ 1.80
======== ======== ========
(1) Excludes the exercise of 58,750 options that were not a part of the Plan.
Options Outstanding Options Exercisable
------------------------------------------------------- -----------------------------------
Weighted-Average
Number Remaining Number
Range of Outstanding at Contractual Life Weighted-Average Exercisable at Weighted-Average
Exercise Prices December 31, 2002 (in years) Exercise Price December 31, 2002 Exercise Price
- --------------- ----------------- ---------- -------------- ----------------- --------------
$0.99 - $2.78 619,000 7.7 $ 2.01 286,875 $ 2.29
$2.79 - $4.58 102,500 4.5 $ 3.98 102,500 $ 3.98
$4.59 - $7.00 159,000 2.3 $ 5.63 141,500 $ 5.68
-------- ------ -------- ------
880,500 $ 2.89 530,875 $ 3.52
======== ====== ======== ======
7. INCOME TAXES
The Company files a consolidated federal income tax return. The income tax
provision (benefit) is comprised of the following:
F-17
2002 2001 2000
------ ------ ------
(IN THOUSANDS)
Current $ 74 $ (879) $ 463
Deferred 397 16 (154)
------ ------ ------
$ 471 $ (863) $ 309
====== ====== ======
The Company provides for deferred income taxes resulting from temporary
differences between amounts reported for financial accounting and income
tax purposes. The components of deferred income taxes at December 31, 2002
and 2001, were as follows:
2002 2001
--------- ---------
(IN THOUSANDS)
Current deferred tax assets:
Receivable reserves $ 73 $ 226
UNICAP adjustment 79 84
Other accruals 200 372
Research and development credits 84 99
--------- ---------
$ 436 $ 781
========= =========
Long-term deferred tax assets (liabilities):
State net operating losses $ 68 $ 82
Depreciation and amortization differences 92 (241)
--------- ---------
$ 160 $ (159)
========= =========
A reconciliation of the federal income tax rate to the Company's effective
income tax rate is as follows:
2002 2001 2000
------ ------ ------
Federal statutory tax rate 34.0% (34.0)% 34.0%
State taxes, net 3.3 (3.3) 3.3
Research and development tax credits (2.8) (3.1) (13.9)
Non-deductible expenses and other permanent
differences 5.1 4.7 17.4
------ ------ ------
39.6% (35.7)% 40.8%
====== ====== ======
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.
8. RELATED PARTY TRANSACTIONS
LG Electronics Inc. (LGE), the Company's principal supplier, owned
approximately 20% of the Company's outstanding common stock at December 31,
2002 and has a designated member on the Company's board of directors. The
Company purchased approximately $18.5 million, $15.4 million, and $20.6
million of key telephone systems, commercial grade telephones, and voice
mail products from LGE and an affiliate of LGE during 2002, 2001, and 2000,
respectively. The Company owed LGE and its affiliate a total of $3,965,000
and $984,000 for product purchases at December 31, 2002 and 2001,
respectively. During 2002, the Company's payment terms with LGE and its
affiliate were changed from 30 days to 60 days after 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.
F-18
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. The Company recorded revenue of $183,000 during
2002 and $210,000 during 2001 for work performed under the development
agreement using the percentage of completion method. As of December 31,
2002, LGE had made cash payments to the Company of $300,000 pursuant to the
agreement.
9. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes for the years ended December 31,
2002, 2001, and 2000 was as follows:
2002 2001 2000
---- ---- ----
(IN THOUSANDS)
Interest $ 97 $406 $705
Income taxes $401 $ -- $368
Supplemental schedule of non-cash activities: 2002
----
(IN THOUSANDS)
Common Stock issued to acquire DataSpeak Systems, Inc. $135
Common Stock issued in lieu of employee cash bonus $ 15
Tax effect of expired warrants $(10)
There were no non-cash activities during the years ended December 31, 2001
or 2000.
F-19
10. SUMMARY OF QUARTERLY RESULTS (UNAUDITED): (IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
-------- -------- -------- -------- --------
2002
Revenue, net $ 8,790 $ 9,459 $ 10,541 $ 8,538 $ 37,328
Gross margin 3,151 3,463 3,941 2,894 13,449
Income (loss) before income taxes
and change in accounting principle 279 499 366 44 1,188
Provision (benefit) for income taxes 112 197 145 17 471
Income before change in accounting
principle 167 302 221 27 717
Change in accounting principle (1,263) -- -- -- (1,263)
Net income (loss) $ (1,096) $ 302 $ 221 $ 27 $ (546)
Diluted earnings (loss) per share $ (0.26) $ 0.07 $ 0.05 $ 0.01 $ (0.13)
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 and
change in accounting principle (3,291) 258 422 192 (2,419)
Provision (benefit) for income taxes (1,207) 99 169 76 (863)
Income before change in accounting
principle (2,084) 159 253 116 (1,556)
Change in accounting principle -- -- -- -- --
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)
F-20
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, 2002 and 2001 and for the
years then ended, and have issued our report thereon dated February 14, 2003;
such financial statements and report are included elsewhere in this annual
report on Form 10-K of Vodavi Technology, Inc. and subsidiaries. Our audits also
included the consolidated financial statement schedules for 2002 and 2001 of
Vodavi Technology, Inc. and subsidiaries, listed in the Index to Consolidated
Financial Statements and Schedule. The financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, such 2002 and 2001 consolidated
financial statement schedules, when considered in relation to the basic 2002 and
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 14, 2003
S-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
THIS REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS IS A COPY OF A REPORT PREVIOUSLY
ISSUED BY ARTHUR ANDERSEN LLP AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP.
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, 2002, 2001, AND 2000
IN THOUSANDS
2002 2001 2000
------- ------- -------
Reserves for doubtful accounts and sales returns:
Balance at beginning of year $ 730 $ 1,582 $ 1,239
Provision charged to expense 256 839 628
Write-offs (564) (1,691) (285)
------- ------- -------
Balance at end of year $ 422 $ 730 $ 1,582
======= ======= =======
Restructuring reserve:
Balance at beginning of year $ 284 $ -- $ --
Provision charged to expense -- 699 --
Payments (284) (415) --
------- ------- -------
Balance at end of year $ -- $ 284 $ --
======= ======= =======
Reserves for excess and obsolete inventory:
Balance at beginning of year $ 621 $ 741 $ 433
Provision charged to expense 290 1,027 331
Write-offs (567) (1,147) (23)
------- ------- -------
Balance at end of year $ 344 $ 621 $ 741
======= ======= =======
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)
10.13A Vodavi Single Line Telephone Agreement Extension dated April 4, 1997
between Vodavi Communications Systems, Inc. and L.G. Srithai
Electronics Co., Ltd. (2)
10.19 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 (4)
10.36 License Agreement dated May 17, 1999, between Santa Barbara Connected
Systems Corporation and Vodavi Technology, Inc. (4)
10.37 Object Code Software License Agreement dated May 24, 1999, between D2
Technologies, Inc. and Vodavi Technology, Inc. (4)
10.38 Fourth Amendment to Credit Agreement between Vodavi Communications
Systems, Inc. and General Electric Capital Corporation (5)
10.40 Employment Agreement dated October 1, 1999, between William J. Hinz
and Vodavi Technology, Inc. (6)
10.42 Second Amendment to Amended and Restated Credit Agreement dated
October 31, 1999, between Vodavi Communications Systems, Inc. and
General Electric Capital Corporation (6)
10.43 Third Amendment to Amended and Restated Credit Agreement dated October
9, 2000, between Vodavi Communications Systems, Inc. and General
Electric Capital Corporation (7)
10.44 Waiver and Amendment of Credit Agreement dated May 11, 2001, between
Vodavi Communications Systems, Inc. and General Electric Capital
Corporation (8)
10.47 Sublease Agreement dated August 8, 2001, between Vodavi Communications
Systems, Inc. and SpeedFam-IPEC, Inc. (9)
10.48 Employment Agreement, effective October 1, 2001, between Gregory K.
Roeper and Vodavi Technology, Inc. (10)
10.49 Second Amended and Restated 1994 Stock Option Plan (amended through
May 13, 2002) (11)
10.50 Fourth Amendment to Amended and Restated Credit Agreement dated March
4, 2002, between Vodavi Communications Systems, Inc. and General
Electric Capital Corporation
10.51 Employment Agreement, effective January 1, 2003, between David A.
Husband and Vodavi Technology, Inc.
10.52 Employment Agreement, effective October 1, 2003, between Gregory K.
Roeper and Vodavi Technology, Inc.
21 List of Subsidiaries
23.1 Consent of Deloitte and Touche LLP
23.2 Statement regarding consent of Arthur Andersen LLP
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.
- ----------
(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 Quarterly Report on Form 10-Q
for the quarter ended June 30, 1999, as filed on August 16, 1999.
(5) 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.
(6) 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.
(7) 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.
(8) 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.
(9) 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.
(10) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 2002, as filed on March 29, 2002.
(11) Incorporated by reference to Registration Statement on Form S-8 (No.
333-98819) as filed by the Registrant on August 27, 2002.