SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 July 25, 2003 was 3,520,589.
VODAVI TECHNOLOGY, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2003
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 2003
and December 31, 2002 3
Consolidated Statements of Operations - Three and 4
Six Months Ended June 30, 2003 and 2002
Consolidated Statements of Cash Flows - Six Months
Ended June 30, 2003 and 2002 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
Item 4. Controls and Procedures 16
PART II. OTHER INFORMATION 17
SIGNATURES 18
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VODAVI TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
IN THOUSANDS, EXCEPT SHARE AMOUNTS
June 30, December 31,
2003 2002
------------ ------------
(Unaudited)
CURRENT ASSETS:
Cash $ 135 $ 1,141
Accounts receivable, net of reserves for
doubtful accounts and sales returns of
$503 and $422, respectively 7,296 6,671
Inventory 5,328 5,550
Income tax receivable -- 300
Deferred income taxes 436 436
Prepaids and other current assets 571 731
------------ ------------
Total current assets 13,766 14,829
PROPERTY AND EQUIPMENT, net 1,639 1,631
GOODWILL 725 725
DEFERRED TAXES 160 160
OTHER LONG-TERM ASSETS 81 43
------------ ------------
$ 16,371 $ 17,388
============ ============
CURRENT LIABILITIES:
Accounts payable $ 802 $ 1,250
Accrued liabilities 1,436 1,551
Accounts payable to stockholder 3,627 3,965
Current portion of long-term debt 200 --
Revolving credit facility 487 --
------------ ------------
Total current liabilities 6,552 6,766
------------ ------------
Long-term debt 800 --
------------ ------------
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; 3,839,289 and 4,668,488
shares issued 4 5
Additional paid-in capital 11,441 13,503
Accumulated deficit (1,667) (2,127)
Treasury stock, 318,700 shares at cost (759) (759)
------------ ------------
9,019 10,622
------------ ------------
$ 16,371 $ 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 Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
REVENUE, net $ 10,214 $ 9,459 $ 19,277 $ 18,249
COST OF GOODS SOLD 6,770 5,996 12,654 11,634
------------ ------------ ------------ ------------
GROSS MARGIN 3,444 3,463 6,623 6,615
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Engineering and product development 517 569 1,070 1,059
Selling, general and administrative 2,348 2,367 4,737 4,719
------------ ------------ ------------ ------------
2,865 2,936 5,807 5,778
------------ ------------ ------------ ------------
OPERATING INCOME 579 527 816 837
INTEREST EXPENSE 27 28 52 59
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES AND CHANGE IN ACCOUNTING PRINCIPLE 552 499 764 778
INCOME TAX PROVISION 219 197 304 309
------------ ------------ ------------ ------------
INCOME BEFORE CHANGE IN ACCOUNTING PRINCIPLE 333 302 460 469
CHANGE IN ACCOUNTING PRINCIPLE,
net of tax -- -- -- (1,263)
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 333 $ 302 $ 460 $ (794)
============ ============ ============ ============
EARNINGS PER COMMON SHARE:
Basic
Income before change in accounting principle $ 0.08 $ 0.07 $ 0.11 $ 0.11
Change in accounting principle -- -- -- (0.29)
------------ ------------ ------------ ------------
Net income (loss) $ 0.08 $ 0.07 $ 0.11 $ (0.18)
============ ============ ============ ============
Diluted
Income before change in accounting principle $ 0.08 $ 0.07 $ 0.10 $ 0.11
Change in accounting principle -- -- -- (0.29)
------------ ------------ ------------ ------------
Net income (loss) $ 0.08 $ 0.07 $ 0.10 $ (0.18)
============ ============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 4,193 4,350 4,271 4,311
============ ============ ============ ============
Diluted 4,354 4,462 4,407 4,391
============ ============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
4
VODAVI TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
IN THOUSANDS
(Unaudited)
Six Months Ended
June 30,
----------------------------
2003 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 460 $ (794)
Adjustments to reconcile net income (loss) to net cash
flows (used in) provided by operating activities:
Depreciation and amortization 234 352
Deferred rent obligations (4) (16)
Change in accounting principle -- 1,263
Changes in working capital:
Accounts receivable, net (625) (267)
Inventory 222 1,682
Income tax receivable 300 839
Prepaids and other current assets 160 (85)
Other long-term assets and deferred taxes (38) (9)
Accounts payable and payable to stockholder (786) 523
Accrued liabilities (111) (398)
------------ ------------
Net cash flows provided by (used in) operating activities (188) 3,090
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid to acquire property and equipment (242) (386)
Cash paid to acquire DataSpeak Systems, Inc. -- (624)
------------ ------------
Net cash flows used in investing activities (242) (1,010)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net advances (payments) on revolving credit facility 487 (1,768)
Borrowings on term loan 1,000 --
Stock repurchase (2,063) --
------------ ------------
Net cash flows used in financing activities (576) (1,768)
------------ ------------
CHANGE IN CASH (1,006) 312
CASH, beginning of period 1,141 340
------------ ------------
CASH, end of period $ 135 $ 652
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 27 $ 59
============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Common stock issued to acquire DataSpeak Systems, Inc. $ -- $ 135
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
5
VODAVI TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 management, 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 six months ended June 30, 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 Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share", the Company displays basic and diluted earnings per share
(EPS). Basic EPS is determined by dividing net income (loss) 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:
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
(In thousands)
Income before change in accounting principle $ 333 $ 302 $ 460 $ 469
Change in accounting principle -- -- -- (1,263)
---------- ---------- ---------- ----------
Net income (loss) $ 333 $ 302 $ 460 $ (794)
========== ========== ========== ==========
Weighted average common shares:
Basic 4,193 4,350 4,271 4,311
Effect of dilutive stock options (1) 161 112 136 80
---------- ---------- ---------- ----------
Diluted 4,354 4,462 4,407 4,391
========== ========== ========== ==========
Anti-dilutive stock options (1) 600 603 607 606
(1) Dilutive securities are calculated using the treasury stock method and the
average market price during the period. If an option's strike price is less
than the average market price during the reporting period, the option is
dilutive. If an option's strike price is greater than the average market
price during the reporting period, the option is anti-dilutive and is not
included in the weighted average common shares calculation. All options are
anti-dilutive in reporting periods that result in a loss, excluding
extraordinary items, regardless of the average market price.
(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
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
(In Thousands, Except Per Share Amounts)
Net income (loss):
As reported $ 333 $ 302 $ 460 $ (794)
Options expense, net of taxes 29 31 61 57
---------- ---------- ---------- ----------
Pro forma net income (loss) $ 304 $ 271 $ 399 $ (851)
========== ========== ========== ==========
Earnings (loss) per share:
As reported - Basic $ 0.08 $ 0.07 $ 0.11 $ (0.18)
As reported - Diluted 0.08 0.07 0.10 (0.18)
Pro forma - Basic 0.07 0.06 0.09 (0.20)
Pro forma - Diluted $ 0.07 $ 0.06 $ 0.09 $ (0.19)
(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) CREDIT AGREEMENT
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 (4.0% as of June 30, 2003) 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 was available to the Company only for the purpose of
acquiring its common stock. Advances on the term loan bear interest at
Comerica's prime rate plus 0.5%, or 4.5% as of June 30, 2003. 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, or by June 2006.
(f) SELF TENDER OFFER - STOCK REPURCHASE
In May 2003, the Company commenced a self-tender offer to purchase up to
1,000,000 shares of its common stock for $2.40 per share. On June 13, 2003, the
Company repurchased 829,199 shares of its common stock at $2.40 per share
pursuant to the tender offer. The purchase price of approximately $2.1 million,
which includes offering costs of approximately $73,000, is recorded as
reductions to common stock and additional paid in capital in the accompanying
consolidated balance sheet as of June 30, 2003.
8
(g) CHANGE IN ACCOUNTING PRINCIPLE AND RECENT ACCOUNTING PRONOUNCEMENTS
In 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141,
ACCOUNTING FOR BUSINESS COMBINATIONS, and SFAS No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS. These statements modified accounting for business
combinations after June 30, 2001 and affected 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 indefinite lives will cease.
The Company determined that upon adoption of these statements on January 1,
2002, the $1.6 million carrying amount of the goodwill as of that date 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 applies 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.
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.
(h) 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.
9
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.
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 June 30, 2003,
Graybar accounted for 43% 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.
10
EXCESS AND OBSOLETE INVENTORY
We record our inventory at the lower of cost or market value. Our
assessment of market value is determined by, among other things, historical and
forecasted sales activity, the condition of specific inventory items, and
competitive pricing considerations. When the assessed market value is less than
the historical cost, provision is made in the financial statements to write-down
the carrying amount of the respective inventory items to market value. If actual
results are less favorable than our original assumptions for determining market
value, additional inventory write-downs may be required.
The above listing is not intended to be a comprehensive list of our
accounting policies. See our audited consolidated financial statements and notes
thereto included in our Annual Report on Form 10-K for the year ended December
31, 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 Six Months Ended
June 30, June 30,
---------------- ----------------
2003 2002 2003 2002
------ ------ ------ ------
Revenue ........................................ 100.0% 100.0% 100.0% 100.0%
Cost of goods sold ............................. 66.3 63.4 65.7 63.8
------ ------ ------ ------
Gross margin ................................... 33.7 36.6 34.3 36.2
Operating expenses:
Engineering and product development ............ 5.0 6.0 5.6 5.8
Selling, general, and administrative ........... 23.0 25.0 24.5 25.8
------ ------ ------ ------
28.0 31.0 30.1 31.6
Operating income ............................... 5.7 5.6 4.2 4.6
Interest expense, net .......................... 0.3 0.3 0.2 0.3
------ ------ ------ ------
Pretax income .................................. 5.4 5.3 4.0 4.3
Income tax expense ............................. 2.1 2.1 1.6 1.7
------ ------ ------ ------
Income before change in accounting principle ... 3.3 3.2 2.4 2.6
Change in accounting principle ................. -- -- -- (6.9)
------ ------ ------ ------
Net income (loss) .............................. 3.3% 3.2% 2.4% (4.3)%
====== ====== ====== ======
QUARTER ENDED JUNE 30, 2003 COMPARED WITH QUARTER ENDED JUNE 30, 2002
REVENUE
Revenue for the three-month period ended June 30, 2003 totaled $10.2
million, an increase of 8.0%, from revenue of $9.5 million for the same period
of 2002. Sales to our supply house customers accounted for approximately $6.3
million of our total revenue during the second quarter of 2003 compared with
$5.6 million in the 2002 second quarter. The increase in sales to our supply
house customers in 2003 is principally related to sales of our new STS telephone
system that we introduced in January 2003. The STS product line is a
full-featured telephone system designed and priced to capture a larger portion
of the small business telephone system market. 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.
11
Sales through our INFINITE direct dealer program totaled $3.7 million for
the most recent quarter compared with $3.4 million 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.
GROSS MARGIN
Our gross margin was approximately $3.4 million and $3.5 million for each
of the quarterly periods ended June 30, 2003 and 2002, respectively. Our gross
margin as a percentage of total revenue decreased to 33.7% during 2003 from
36.6% 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 percentage than most of our other products. In
addition, our gross margin percentage has declined during the first six months
of 2003 as a result of our efforts to rationalize our product lines and reduce
inventory levels.
ENGINEERING AND PRODUCT DEVELOPMENT
Engineering and product development expenditures decreased slightly to
$517,000 during the second quarter of 2003 from $569,000 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 decreased slightly to $2.3
million in the second quarter of 2003 from approximately $2.4 in the second
quarter of 2002.
INTEREST EXPENSE
Interest expense decreased slightly to $27,000 during the second quarter of
2003 from $28,000 for the same period a year ago.
INCOME TAXES
We provided for federal and state income taxes using an effective rate of
39.7% during the most recent quarter compared with an effective rate of 39.5% in
the same period in 2002.
SIX MONTHS ENDED JUNE 30, 2003 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2002
REVENUE
Revenue for the six-month period ended June 30, 2003 totaled $19.3 million,
an increase of 5.6%, from revenue of $18.2 million for the same period of 2002.
Sales to our supply house customers accounted for approximately $11.3 million of
our total revenue during the first half of 2003 compared with $10.4 million in
the same period of 2002. The increase in sales to our supply house customers in
2003 is principally related to sales of our new STS telephone system that we
introduced in January 2003. The STS product line is a full-featured telephone
system designed and priced to capture a larger portion of the small business
telephone system market. 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 $7.6 million for
the first six months of 2003 compared with $7.1 million the same period of 2002.
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.
GROSS MARGIN
Our gross margin was approximately $6.6 million for each of the six-month
periods ended June 30, 2003 and 2002. Our gross margin as a percentage of total
revenue decreased to 34.4% during 2003 from 36.2% during 2002. The decrease in
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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 percentage
than most our other products. In addition, our gross margin percentage has
declined during the first six months of 2003 as a result of our efforts to
rationalize our product lines and reduce inventory levels.
ENGINEERING AND PRODUCT DEVELOPMENT
Engineering and product development expenditures were approximately $1.1
million in the first six months of 2003 and 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 also remained constant at
$4.7 million for the respective six months periods of 2003 and 2002.
INTEREST EXPENSE
Interest expense decreased slightly to $52,000 for the first six months of
2003 from $59,000 for the same period a year ago.
INCOME TAXES
We provided for federal and state income taxes using an effective rate of
39.8% during the first half of 2003 compared with 39.7% for the same period of
2002.
LIQUIDITY AND CAPITAL RESOURCES
Our net working capital position was approximately $7.2 million at June 30,
2003 compared with $8.1 million at December 31, 2002. We had a cash balance of
$135,000 at June 30, 2003 compared with a cash balance of $1.1 million at
December 31, 2002. Factors that decreased our cash position during the first six
months of 2003 included an increase in accounts receivable of $625,000 and the
pay down of accounts payable and accrued liabilities of $786,000 and $111,000,
respectively. We also used approximately $242,000 during the first six months of
2003 for the purchase of property and equipment and spent approximately $2.1
million for the repurchase of stock pursuant to our self-tender offer. Sources
of cash included positive income from operations, reductions in inventory of
$222,000 and other current assets of $160,000, and the receipt of a $300,000
income tax refund. During the first six months of 2003, we also borrowed
$487,000 on our revolving line of credit and $1.0 million on our term loan.
Our accounts receivable days sales outstanding, calculated on a quarterly
basis, were approximately 64 days as of June 30, 2003 compared to 70 days as of
December 31, 2002. The timing of payments received from our largest distributors
and the linearity of our revenue streams during the quarter significantly
influence our days sales outstanding and our liquidity. Our two largest
distributors comprised 57% of our total accounts receivable as of June 30, 2003
and 43% as of December 31, 2002. An increase in concentration from our two
largest distributors generally has the effect of increasing our days sales
outstanding while a more linear revenue stream during the quarter has the effect
of reducing our receivable days sales outstanding.
Our inventory turnover, measured in terms of days sales outstanding on a
quarterly basis, was 71 days as of June 30, 2003 compared to 87 days as of
December 31, 2002. The decrease in inventory days outstanding is a direct result
of a higher volume of sales in the second quarter 2003 compared with the fourth
quarter of 2002 and our efforts to rationalize our product lines. 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 $5.9 million as of June 30,
2003 compared with $6.8 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
13
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. 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 also prohibited
our operating subsidiaries from paying dividends to our Company without the
consent of GE Capital.
In April 2003, we entered into a credit agreement with Comerica
Bank-California of a size that is more reflective of the current capital
requirements of our business. The credit agreement establishes 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, or 4.0% at June 30, 2003, 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 was available to us only for the purpose of
acquiring our common stock. Advances on the term loan bear interest at
Comerica's prime rate plus 0.5%, or 4.5% at June 30, 2003. 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, or by June 2006.
In May 2003, we commenced a self-tender offer to purchase up to 1,000,000
shares of our common stock for $2.40 per share. On June 13, 2003, we repurchased
829,199 shares of our common stock at $2.40 per share pursuant to the tender
offer. The purchase price of approximately $2.1 million, which includes offering
costs of approximately $73,000, is recorded as reductions to common stock and
additional paid in capital in the accompanying consolidated balance sheet as of
June 30, 2003. The repurchase was funded through advances on our revolving line
of credit and term loan.
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 June 30, 2003 and the year in which those commitments
become due or are expected to be settled (IN THOUSANDS):
Accounts
Credit Payable &
Operating Facility and Purchase Accrued
Year Leases Term Loan Commitments Liabilities Total
---------- ---------- ----------- ----------- ----------
2003 $ 548 $ 587 $ 5,391 $ 5,865 $ 12,391
2004 1,095 200 -- -- 1,295
2005 881 200 -- -- 1,081
2006 818 500 -- -- 1,318
2007 785 -- -- -- 785
Thereafter 3,142 -- -- -- 3,142
---------- ---------- ---------- ---------- ----------
Total $ 7,269 $ 1,487 $ 5,391 $ 5,865 $ 20,012
========== ========== ========== ========== ==========
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
14
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 a substantial majority of our products under various
manufacturing arrangements with third-party manufacturers in South Korea and
Thailand, including LGE who owns approximately 25% of our outstanding common
stock. We 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 SFAS No. 141, ACCOUNTING FOR BUSINESS COMBINATIONS, and
SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. These statements modified
accounting for business combinations after June 30, 2001 and affected 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 indefinite lives will cease.
The Company determined that upon adoption of these statements on January 1,
2002, the $1.6 million carrying amount of the goodwill as of that date 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 applies 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.
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
15
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.
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 at a variable rate of prime on advances made under
our revolving line of credit and prime plus 0.5% on our term loan. At June 30,
2003 we had a term loan balance of $1.0 million and had outstanding borrowings
on the line of credit of approximately $487,000.
ITEM 4. CONTROLS AND PROCEDURES
We have evaluated, with the participation of our Chief Executive Officer and
Chief Financial Officer, the effectiveness of our disclosure controls and
procedures as of June 30, 2003. Based on this evaluation, our Chief Executive
Officer and Chief Financial Officer have each concluded that our disclosure
controls and procedures are effective to ensure that we record, process,
summarize, and report information required to be disclosed by us in our
quarterly reports filed under the Securities Exchange Act within the time
periods specified by the Securities and Exchange Commission's rules and forms.
During the quarterly period covered by this report, there have not been any
changes in our internal controls over financial reporting that have materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
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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:
Exhibit 31.1 -- Certification of Chief Executive Officer pursuant to
Rule 13a-14(a) and Rule 15d-14(a), promulgated under
the Securities Exchange Act of 1934, as amended.
Exhibit 31.2 -- Certification of Chief Financial Officer pursuant to
Rule 13a-14(a) and Rule 15d-14(a), promulgated under
the Securities Exchange Act of 1934, as amended.
Exhibit 32.1 -- Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
Exhibit 32.2 -- Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
Reports on Form 8-K:
On April 29, 2003, the Registrant filed a Form 8-K reporting the financial
results of its first quarter of fiscal 2003.
17
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: July 25, 2003 /s/ Gregory K. Roeper
----------------------------------------
Gregory K. Roeper
President and Chief Executive Officer
(Principal Executive Officer)
Dated: July 25, 2003 /s/ David A. Husband
----------------------------------------
David A. Husband
Chief Financial Officer and Vice
President - Finance (Principal Financial
and Accounting Officer)
18