SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
Commission File No. 0-26912
VODAVI TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 86-0789350
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4717 EAST HILTON AVENUE, STE. 400, PHOENIX, ARIZONA 85034
(Address of principal executive offices) (Zip Code)
(480) 443-6000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X].
The number of shares outstanding of registrant's Common Stock, $.001 par
value per share, as of April 29, 2003 was 4,349,788.
VODAVI TECHNOLOGY, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2003
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 2003 and
December 31, 2002 3
Consolidated Statements of Operations - Three Months Ended
March 31, 2003 and 2002 4
Consolidated Statements of Cash Flows - Three Months Ended
March 31, 2003 and 2002 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
Item 4. Controls and Procedures 15
PART II. OTHER INFORMATION 16
SIGNATURES 17
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VODAVI TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
IN THOUSANDS, EXCEPT SHARE AMOUNTS
March 31, 2003 December 31,
(Unaudited) 2002
-------------- ------------
CURRENT ASSETS:
Cash $ 221 $ 1,141
Accounts receivable, net of reserves for
doubtful accounts and sales returns of
$413 and $422, respectively 7,152 6,671
Inventory 5,935 5,550
Income tax receivable 300 300
Deferred income taxes 436 436
Prepaids and other current assets 685 731
--------- ---------
Total current assets 14,729 14,829
PROPERTY AND EQUIPMENT, net 1,733 1,631
GOODWILL, net 725 725
DEFERRED TAXES 160 160
OTHER LONG-TERM ASSETS 39 43
--------- ---------
$ 17,386 $ 17,388
========= =========
CURRENT LIABILITIES:
Accounts payable $ 861 $ 1,250
Accrued liabilities 1,286 1,533
Accounts payable to stockholder 4,252 3,965
Revolving credit facility 222 --
--------- ---------
Total current liabilities 6,621 6,748
--------- ---------
DEFERRED RENT OBLIGATIONS 16 18
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value;
1,000,000 shares authorized,
no shares issued -- --
Common stock, $.001 par value;
10,000,000 shares authorized;
4,668,488 shares issued 5 5
Additional paid-in capital 13,503 13,503
Accumulated deficit (2,000) (2,127)
Treasury stock, 318,700 shares at cost (759) (759)
--------- ---------
10,749 10,622
--------- ---------
$ 17,386 $ 17,388
========= =========
The accompanying notes are an integral part of these
consolidated balance sheets.
3
VODAVI TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
IN THOUSANDS EXCEPT PER SHARE AMOUNTS
(Unaudited)
Three Months Ended
March 31,
--------------------
2003 2002
-------- --------
REVENUE, net $ 9,063 $ 8,790
COST OF GOODS SOLD 5,884 5,639
-------- --------
GROSS MARGIN 3,179 3,151
-------- --------
OPERATING EXPENSES:
Engineering and product development 553 489
Selling, general and administrative 2,389 2,352
-------- --------
2,942 2,841
-------- --------
OPERATING INCOME 237 310
INTEREST EXPENSE 25 31
-------- --------
INCOME BEFORE INCOME TAXES AND CHANGE IN ACCOUNTING PRINCIPLE 212 279
INCOME TAX PROVISION 85 112
-------- --------
INCOME BEFORE CHANGE IN ACCOUNTING PRINCIPLE 127 167
CHANGE IN ACCOUNTING PRINCIPLE,
net of tax -- (1,263)
-------- --------
NET INCOME (LOSS) $ 127 $ (1,096)
======== ========
EARNINGS PER COMMON SHARE:
Basic
Income before change in accounting principle $ 0.03 $ 0.04
Change in accounting principle -- (0.30)
-------- --------
Net income (loss) $ 0.03 $ (0.26)
======== ========
Diluted
Income before change in accounting principle $ 0.03 $ 0.04
Change in accounting principle -- (0.29)
-------- --------
Net income (loss) $ 0.03 $ (0.25)
======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 4,350 4,273
======== ========
Diluted 4,445 4,317
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
4
VODAVI TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
IN THOUSANDS
(Unaudited)
Three Months Ended
March 31,
--------------------
2003 2002
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 127 $ (1,096)
Adjustments to reconcile net income (loss) to net cash
flows provided by operating activities:
Depreciation and amortization 121 175
Deferred rent obligations (2) (8)
Change in accounting principle -- 1,263
Changes in working capital:
Accounts receivable, net (481) (6)
Inventory (385) 973
Income tax receivable -- 839
Prepaids and other current assets 46 4
Other long-term assets and deferred taxes 4 (19)
Accounts payable and payables to stockholder (102) 604
Accrued liabilities (247) (422)
-------- --------
Net cash flows provided by (used in) operating
activities (919) 2,307
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid to acquire property and equipment (223) (353)
Cash paid to acquire DataSpeak Systems, Inc. -- (624)
-------- --------
Net cash flows used in investing activities (223) (977)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net advances (payments) on revolving credit facility 222 (528)
-------- --------
Net cash flows provided by (used in) financing activities 222 (528)
-------- --------
INCREASE (DECREASE) IN CASH (920) 802
CASH, beginning of period 1,141 340
-------- --------
CASH, end of period $ 221 $ 1,142
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 25 $ 31
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
5
VODAVI TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
UNAUDITED
(a) INTERIM FINANCIAL REPORTING
The accompanying unaudited Consolidated Financial Statements have been prepared
by Vodavi Technology, Inc. and subsidiaries ("Vodavi" or the "Company") pursuant
to the rules and regulations of the Securities and Exchange Commission ("SEC")
and, in the opinion of the Company, include all adjustments (consisting of
normal recurring accruals and adjustments) necessary for a fair presentation of
results of operations, financial position, and cash flows as of and for the
periods presented.
The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and revenue and expenses
during the period reported. Actual results could differ from those estimates.
Estimates are used in accounting for, among other things, customer incentive
programs, allowances for bad debts and sales returns, inventory obsolescence,
product warranty, depreciation, taxes and other contingencies. Estimates and
assumptions are reviewed periodically and the effects of revisions are reflected
in the Consolidated Financial Statements in the period they are determined to be
necessary.
The results for the three months ended March 31, 2003 are not necessarily
indicative of financial results for the full year. These financial statements
should be read in conjunction with the audited Consolidated Financial Statements
and notes thereto included in Vodavi's Annual Report on Form 10-K for the year
ended December 31, 2002.
[SPACE INTENTIONALLY LEFT BLANK]
6
(b) CALCULATION OF EARNINGS PER SHARE
In accordance with SFAS No. 128, "Earnings Per Share", the Company displays
basic and diluted earnings per share (EPS). Basic EPS is determined by dividing
net income by the weighted average number of common shares outstanding. The
basic weighted average number of common shares outstanding excludes all dilutive
securities. Diluted EPS is determined by dividing net income by the weighted
average number of common shares and dilutive securities outstanding.
A reconciliation of the numerator and denominator (weighted average number of
shares outstanding) of the basic and diluted EPS computation is as follows:
For the Quarterly Period
Ended March 31,
------------------------
2003 2002
-------- --------
Income before change in accounting principal $ 127 $ 167
Change in accounting principle -- (1,263)
-------- --------
Net income (loss) $ 127 $ (1,096)
======== ========
Weighted average common shares for basic
earnings per share 4,350 4,273
Effect of dilutive stock options (1) 95 44
-------- --------
Weighted average common shares for
diluted earnings per share 4,445 4,317
======== ========
- ----------
(1) Dilutive securities are calculated using the treasury stock method and the
average market price during the period. Options on 619,833, and 612,814
shares had an exercise price greater than the average market price during
the quarterly period ended March 31, 2003 and 2002, respectively, and
therefore did not enter into the earnings per share calculation.
(c) 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 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.
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:
7
For the Quarterly Period
Ended March 31,
------------------------
2003 2002
-------- --------
(In Thousands,
Except Per Share Amounts)
Net income (loss):
As reported $ 127 $ (1,096)
Fair Value of options granted,
net of taxes (36) (28)
-------- --------
Pro forma $ 91 $ (1,124)
======== ========
Earnings (loss) per share:
As reported - Basic $ 0.03 $ (0.26)
As reported - Diluted $ 0.03 $ (0.25)
Pro forma - Basic and Diluted $ 0.02 $ (0.26)
(d) SEGMENT REPORTING
The Company operates in one reportable segment, the distribution of business
telecommunications equipment. Accordingly, the Company has only presented
financial information for its one reportable segment.
(e) CHANGE IN ACCOUNTING PRINCIPLE AND RECENT ACCOUNTING PRONOUNCEMENTS
In 2001, the FASB issued Statement No. 141, ACCOUNTING FOR BUSINESS
COMBINATIONS, and Statement No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. These
statements modified accounting for business combinations after June 30, 2001 and
affected the Company's treatment of goodwill and other intangible assets
effective January 1, 2002. The Statements require that goodwill existing at the
date of adoption be reviewed for possible impairment and that impairment tests
be performed at least annually, with impaired assets written-down to fair value.
Additionally, existing goodwill and intangible assets must be assessed and
classified consistent with the Statements' criteria. Intangible assets with
estimated useful lives will continue to be amortized over those periods.
Amortization of goodwill and intangible assets with indeterminate lives will
cease.
The Company determined that upon adoption of these Statements on January 1,
2002, the entire $1.6 million carrying amount of the goodwill was impaired. The
goodwill impairment was recognized in 2002 as a change in accounting principle,
net of $375,000 of income taxes.
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. The requirements of SFAS No. 146
will not be required unless and until the company has a future exit or disposal
activity.
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
8
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.
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.
(f) COMMITMENTS AND CONTINGENCIES
The Company is subject to certain asserted and unasserted claims encountered in
the normal course of business. The Company believes that the resolution of these
matters will not have a material adverse effect on its financial position or
results of operations. The Company cannot provide assurance, however, that
damages that result in a material adverse effect on its financial position or
results of operations will not be imposed by these matters.
(g) SUBSEQUENT EVENTS
In April 2003, the Company entered into a credit agreement with Comerica
Bank-California ("Comerica"), which established a $5.0 million revolving line of
credit facility and a $1.0 million term loan (the "Credit Facility"). Advances
under the Credit Facility are based upon eligible accounts receivable and
inventory of the Company's wholly owned subsidiary Vodavi Communications
Systems, Inc. and are secured by substantially all of the Company's assets. The
Credit Facility contains covenants that are customary for similar credit
facilities and also prohibits our operating subsidiaries from paying dividends
to our company without the consent of Comerica.
The $5.0 million revolving line of credit bears interest at Comerica's prime
rate and requires monthly payments of interest only with all unpaid principal
and accrued interest due at its expiration in April 2005. If the Company is
unable to reduce the principal balance on the line of credit to zero for at
least thirty consecutive days during any fiscal year, then any remaining balance
will be converted into a term loan, or term balance, as defined in the
agreement. In addition to interest on the term balance, the Company will be
required to make monthly payments of principal in an amount sufficient to fully
amortize the term balance over a thirty-six month period.
The $1.0 million term loan is available to the Company only for the purpose of
acquiring its common stock. The term loan must be advanced on or before
September 30, 2003 unless extended by Comerica. Advances on the term loan will
bear interest at Comerica's prime rate plus 0.5%. In addition to interest on the
term loan, the Company will be required to make monthly payments of principal in
an amount sufficient to fully amortize the term loan over a sixty-month period
with all unpaid principal and accrued interest due in thirty-six months.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BUSINESS OVERVIEW
We design, develop, market, and support a broad range of business
telecommunications solutions, including telephony products, voice
processing products, and computer-telephony products for a wide variety of
business applications. Our telecommunications solutions incorporate
sophisticated features, such as automatic call distribution and Internet
protocol, or IP, gateways. Our voice processing products include
interactive voice response systems, automated attendant, and voice and fax
mail. Our computer-telephony products enable users to integrate the
functionality of their telephone systems with their computer systems. We
market our products primarily in the United States as well as in foreign
countries through a distribution model consisting primarily of wholesale
distributors and direct dealers.
9
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 March 31, 2003,
Graybar accounted for 31% 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
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.
10
The above listing is not intended to be a comprehensive list of our
accounting policies. See our audited consolidated financial statements and notes
thereto included in our Annual Report on Form 10-K for the year ended December
31, 2002, which contains accounting policies and other disclosures required by
generally accepted accounting principles in the United States of America.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated the percentage of
total revenue represented by certain revenue and expense items. The table and
the discussion below should be read in conjunction with the consolidated
financial statements and notes thereto that appear elsewhere in this report.
Three Months Ended
March 31,
------------------
2003 2002
------ ------
Revenue ................................................ 100.0% 100.0%
Cost of goods sold ..................................... 64.9 64.2
------ ------
Gross margin ........................................... 35.1 35.8
Operating expenses:
Engineering and product development .................... 6.1 5.6
Selling, general, and administrative ................... 26.4 26.7
------ ------
32.5 32.3
Operating income (loss) ................................ 2.6 3.5
Interest expense, net .................................. 0.3 0.3
------ ------
Pretax income (loss) ................................... 2.3 3.2
Income tax expense (benefit) ........................... 0.9 1.3
------ ------
Income (loss) before change in accounting principle .... 1.4 1.9
Change in accounting principle ......................... -- (14.4)
------ ------
Net income (loss) ...................................... 1.4% (12.5)%
====== ======
QUARTERLY PERIOD ENDED MARCH 31, 2003 COMPARED WITH QUARTERLY PERIOD ENDED
MARCH 31, 2002
REVENUE
Revenue for the three-month period ended March 31, 2003 totaled $9.1
million, an increase of 3.1%, from revenue of $8.8 million for the same period
of 2002. Sales to our supply house customers accounted for approximately $5.0
million, or 54.9% of our total revenue during the 2003 first quarter compared
with $4.8 million, or 54.5% of our total revenue in the 2002 first quarter. The
increase in sales to our supply house customers in the 2003 first quarter is
principally related to sales of our new STS digital telephone system that we
introduced in January 2003. While the STS telephone system has been accepted
well into the marketplace, sales of this product have had the effect of reducing
the level of sales of similar products that we sell through supply houses. We
expect this trend to continue as we focus our marketing efforts on the STS.
Sales through our INFINITE direct dealer program totaled $3.9 million, or
43.3% of our total revenue for the first quarter of 2003 compared with $3.7
million, or 42.0% of our total revenue for the same period a year ago. During
2003, we continued our program to focus on selling to fewer, but larger and
better-established, dealers who are more effective at selling our larger
systems.
11
GROSS MARGIN
Our gross margin was approximately $3.2 million for each of the quarterly
periods ended March 31, 2003 and 2002. Our gross margin as a percentage of total
revenue decreased to 35.1% during 2003 from 35.8% during 2002. The decrease in
our gross margin percentage during 2003 is a direct result of the product mix of
sales to our supply house customers with a heavier emphasis of sales of our new
STS telephone system, which generates a lower overall gross margin than our
other products.
ENGINEERING AND PRODUCT DEVELOPMENT
Engineering and product development expenditures increased slightly to
$553,000 during the first quarter of 2003 from $489,000 in the same period of
2002. We continue to invest in the development of our next generation IP Key
Telephone System, the convergence of and enhancements to our existing Key
Telephone Systems, and enhancements to our voice processing products.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses were approximately $2.4
million for each of the first quarters of 2003 and 2002.
INTEREST EXPENSE
Interest expense decreased to $25,000 for the first three months of 2003
from $31,000 for the same period a year ago. Our interest expense for the
current period was positively impacted by a reduction in both the average
outstanding balance and the applicable borrowing rate from a year ago.
INCOME TAXES
We provided for federal and state income taxes using an effective rate of
40.1% during the first quarter of 2003 and 2002.
LIQUIDITY AND CAPITAL RESOURCES
Our net working capital position was approximately $8.1 million at March
31, 2003 and December 31, 2002. We had a cash balance of $221,000 at March 31,
2003 compared with a cash balance of $1.1 million at December 31, 2002. Factors
that decreased our cash position during the first three months of 2003 included
increases in inventory of $385,000 and accounts receivable of $481,000 and the
pay down of accounts payable and accrued liabilities of $102,000 and $247,000,
respectively. We also used approximately $223,000 during the first quarter of
2003 for the purchase of property and equipment primarily related to tooling of
our new products. Sources of cash included positive operating cash flow and
advances of $222,000 on our revolving line of credit.
Our accounts receivable days sales outstanding, calculated on a quarterly
basis, was approximately 71 days as of March 31, 2003 compared to 70 days as of
December 31, 2002. The timing of payments received from our largest distributors
significantly influences our days sales outstanding and our liquidity. Our two
largest distributors comprised 48% of our total accounts receivable as of March
31, 2002 and 43% of our total accounts receivable as of December 31, 2002.
Our inventory turnover, measured in terms of days sales outstanding on a
quarterly basis, was 91 days as of March 31, 2003 compared to 87 days as of
December 31, 2002. The increase in inventory days outstanding is a direct result
of carrying more product lines in our inventory, including our new STS telephone
system. We expect our inventory turnover to improve as we continue to
rationalize our product lines.
Trade payables and accrued liabilities, including payables to third-party
and related-party manufacturers, were approximately $6.4 million as of March 31,
2003 compared with $6.7 million as of December 31, 2002. The level of our trade
payables and accrued liabilities between periods is largely influenced by the
timing of payments we make to our largest suppliers for inventory items and
payments to cover payroll and customer rebates. We generally pay trade payables
within 45 days from the invoice date, except for payments to our largest
supplier, which are 60 days from the invoice date.
We had a $15.0 million credit facility with General Electric Capital
Corporation that expired in April 2003. The line of credit bore interest at 2.5%
over the 30-day commercial paper rate, or 3.75% as of March 31, 2003. Advances
under the line of credit were based upon eligible accounts receivable and
inventory of our wholly owned subsidiary Vodavi Communications Systems, Inc.,
and were secured by substantially all of our assets. The revolving line of
credit contained covenants that are customary for similar credit facilities and
12
also prohibited our operating subsidiaries from paying dividends to our company
without the consent of GE Capital. As of March 31, 2003, we were in compliance
with all of the covenants.
In April 2003, we entered into a credit agreement with Comerica
Bank-California, which established a $5.0 million revolving line of credit and a
$1.0 million term loan. Advances under the credit facility are based upon
eligible accounts receivable and inventory of our wholly owned subsidiary Vodavi
Communications Systems, Inc. and are secured by substantially all of our assets.
The credit facility contains covenants that are customary for similar credit
facilities and also prohibits our operating subsidiaries from paying dividends
to our company without the consent of Comerica.
The $5.0 million revolving line of credit bears interest at Comerica's
prime rate and requires monthly payments of interest only with all unpaid
principal and accrued interest due at its expiration in April 2005. If we are
unable to reduce the principal balance on the line of credit to zero for at
least thirty consecutive days during any fiscal year, then any remaining balance
will be converted into a term loan, or term balance, as defined in the
agreement. In addition to interest on the term balance, we will be required to
make monthly payments of principal in an amount sufficient to fully amortize the
term balance over a thirty-six month period.
The $1.0 million term loan is available to us only for the purpose of
acquiring our common stock. It must be drawn upon on or before September 30,
2003 unless extended by Comerica. Advances on the term loan will bear interest
at Comerica's prime rate plus 0.5%. In addition to interest on the term loan, we
will be required to make monthly payments of principal in an amount sufficient
to fully amortize the term loan over a sixty-month period with all unpaid
principal and accrued interest due in thirty-six months.
We have no special purpose entities or off balance sheet financing
arrangements, commitments, or guarantees other than certain long-term operating
lease agreements for our office and warehouse facilities and short-term purchase
commitments to our third-party suppliers. The following table sets forth all
known commitments as of March 31, 2003 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 $ 821 $ 222 $ 5,171 $ 6,399 $ 12,613
2004 1,095 -- -- -- 1,095
2005 881 -- -- -- 881
2006 818 -- -- -- 818
2007 785 -- -- -- 785
Thereafter 3,142 -- -- -- 3,142
-------- -------- -------- -------- --------
Total $ 7,542 $ 222 $ 5,171 $ 6,399 $ 19,334
======== ======== ======== ======== ========
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.
13
INTERNATIONAL MANUFACTURING SOURCES
We currently obtain a substantial majority of our products under various
manufacturing arrangements with third-party manufacturers in Asia, including LGE
who owns approximately 20% of our outstanding common stock. As of the date of
this report, we do not believe that the current economic or political
environment in Asia will have any adverse impact on our operations. However, we
do face risks associated with international manufacturing sources. For a more
detailed discussion of these risks, please see Item 1, "Special Considerations"
included in our annual report on form 10-K for the year ended December 31, 2002.
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 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 determined that upon adoption of these Statements on January 1,
2002, the entire $1.6 million carrying amount of the goodwill was impaired. The
goodwill impairment was recognized in 2002 as a change in accounting principle,
net of $375,000 of income taxes.
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. The requirements of SFAS No. 146
will not be required unless and until the Company has a future exit or disposal
activity.
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.
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.
14
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
This report contains forward-looking statements, including statements regarding
our business strategies, our business, and the industry in which we operate.
These forward-looking statements are based primarily on our expectations and are
subject to a number of risks and uncertainties, some of which are beyond our
control. Actual results could differ materially from the forward-looking
statements as a result of numerous factors, including those set forth in our
Form 10-K for the year ended December 31, 2002, as filed with the Securities and
Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not participate in any activities involving derivative financial
instruments or other financial and commodity instruments. 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
facility. We incur interest on loans made under a revolving line of credit at
variable interest rates of 2.5% over the 30-day commercial paper rate, a total
of 3.75% at March 31, 2003. The principal of loans under this line of credit
were paid in full when the credit facility expired on April 11, 2003. At March
31, 2003 we had outstanding borrowings on the line of credit of approximately
$222,000.
ITEM 4. 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.
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.
15
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Not applicable.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
Item 5. OTHER INFORMATION
Not applicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
10.53 Credit Agreement dated as of April 10, 2003 by and between Vodavi
Communication Systems, Inc. and Comerica Bank - California.
99.1 Certification of the Chief Executive Officer of the Registrant,
pursuant to 18 U.S.C Section 135, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of the Chief Financial Officer of the Registrant,
pursuant to 18 U.S.C. Section of 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Reports on Form 8-K:
Not applicable
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VODAVI TECHNOLOGY, INC.
Dated: April 29, 2003 /s/ Gregory K. Roeper
----------------------------------------------------
Gregory K. Roeper
President and Chief Executive Officer
(Principal Executive Officer)
Dated: April 29, 2003 /s/ David A. Husband
----------------------------------------------------
David A. Husband
Chief Financial Officer and Vice President - Finance
(Principal Financial and Accounting Officer)
17
CERTIFICATION
I, Gregory K. Roeper, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Vodavi Technology,
Inc.;
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 we 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 quarterly 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
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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 function):
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
quarterly 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: April 29, 2003
/s/ Gregory K. Roeper
-----------------------------------------------------
Gregory K. Roeper
Chief Executive Officer and President
18
CERTIFICATION
I, David A. Husband, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Vodavi Technology,
Inc.;
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 we 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 quarterly 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
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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 function):
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
quarterly 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: April 29, 2003
/s/ David A. Husband
-----------------------------------------------------
David A. Husband
Chief Financial Officer and Vice President -- Finance
19