| VODAVI TECHNOLOGY INC ITEM 1A RISK FACTORS You should carefully consider the following factors, in addition to those discussed elsewhere in this report, in evaluating our company and our business |
| Some of the statements and information contained in this report that are not historical facts are forward-looking statements, as such term is defined in the securities laws |
| These include statements concerning future, proposed, and anticipated activities of our company; certain trends with respect to our revenue, operating results, capital resources, and liquidity; and certain trends with respect to the markets where we compete or the telecommunications industry in general |
| Forward-looking statements, by their very nature, include risks and uncertainties, many of which are beyond our control |
| Accordingly, actual results may differ, perhaps materially, from those expressed in or implied by such forward-looking statements |
| Factors that could cause actual results to differ materially include those discussed under this Item 1A, “Risk Factors |
| ” We rely upon LGN as a strategic partner We rely on LGN to supply most of our telephone systems and voice mail products and all of our commercial grade telephones |
| We also rely on LGN’s engineering, hardware and circuit development, and manufacturing capabilities |
| We purchased approximately dlra21dtta2 million, dlra22dtta2 million, and dlra21dtta1 million of product LGN and LGITCH, constituting approximately 84prca, 88prca, and 87prca of our total purchases in 2005, 2004, and 2003, respectively |
| Additionally, we consider Nortel Networks Corporation, the controlling joint venture partner in LGN, to be a direct competitor with our company in North America |
| Although, we have a long-term manufacturing and supply agreement with LGN that expires in December 2009, we cannot be assured that LGN will continue to support our business or operations |
| LGN currently owns approximately 23prca of our outstanding common stock |
| We obtain most of our telephone systems, IP-based products, and voice mail products from LGN and obtain all of our commercial grade telephones and replacement parts for such telephones from LGICTH, an affiliate of LGN See Item 1, “Business – Manufacturing” and Item 1A “Risk Factors – We rely on LGN as a strategic partner |
| ” As a result of LGN’s direct ownership interest in us, an inherent conflict of interest exists in establishing the volume and terms and conditions of our purchases from LGN and LGICTH In order to mitigate such conflicts, all decisions with respect to such purchases are made by our officers and reviewed by directors who have no relationship with LGN Our relationship with LGN may have the effect of making more difficult or delaying attempts by others to obtain control of us, even when these attempts may be in the best interests of stockholders |
| Through LGN’s stockholder interest and business interests in our company, LGN may have significant influence over our business |
| Our stock price may be volatile |
| The trading price of our common stock in the public securities market could be subject to a variety of factors, including the following: • wide fluctuations in response to quarterly variations in our operating results or the operating results of our competitors; • actual or anticipated announcements of technological innovations or new product developments by us or our competitors; • significant actual or anticipated expenditures for property or equipment, research and development, sales and marketing activities, or other planned or unanticipated events; • changes in analysts’ estimates of our financial performance; 11 _________________________________________________________________ [45]Table of Contents • limited trading activity and a relatively small public float; • developments or disputes concerning proprietary rights; • regulatory developments; • general industry conditions; and • worldwide economic and financial conditions |
| The trading volume of our common stock in the past has been limited, which may increase the volatility of the market price for our stock and reduce the liquidity of an investment in shares of our common stock |
| During certain periods, the stock markets have experienced extreme price and volume fluctuations |
| In particular, prices for many technology stocks often fluctuate widely, frequently for reasons unrelated to the operating performance of such companies |
| These broad market fluctuations and other factors may adversely affect the market price of our common stock |
| Our reliance on our independent distribution network affects our inventory levels, the timing and predictability of our revenue, and our overall operating results |
| We currently market our products through a distribution network consisting primarily of large wholesale distributors and telephone sales and installation companies known as “direct dealers |
| ” Distributors generally maintain inventories in amounts that they consider sufficient to fill anticipated orders |
| A decline in the volume of sales made by distributors could result in their inventory levels exceeding their anticipated sales, which could delay purchases of additional products from us until the distributors’ inventories reach re-ordering levels |
| Direct dealers generally stock inventories only in quantities they deem sufficient to fill anticipated short-term orders, including orders related to support and maintenance |
| As a result, distributors and direct dealers may cancel orders and delay or change volume levels on short notice to us |
| Because the sale of telephone systems, voice processing and related products typically involves a long sales cycle, we may not be able to accurately forecast our own inventory levels |
| Our reliance on third-party distributors and dealers to sell our products could further exaggerate any inventory shortages or excesses that we might experience, particularly if our distributors or dealers are not able to give us adequate notice of anticipated changes in demand for our products |
| Additionally, we offer our distributors price protection on their inventory of our products |
| If we reduce the list price of our products, we will compensate our distributors for the respective products that remain in their inventory on the date the price adjustment becomes effective |
| If we do not have sufficient cash resources to compensate distributors on terms satisfactory to them or us, our price protection obligations may prevent us from reacting quickly to competitive market conditions |
| We depend upon independent distributors and direct dealers to sell our products to end users, to perform installation services, and to perform service and support functions after the sale |
| Other telephone system manufacturers compete intensely for the attention of the same distributors and direct dealers, most of which carry products that compete directly with our products |
| We may not be able to maintain favorable relationships with the distributors and direct dealers that currently carry our product lines in order to encourage them to promote and sell our products instead of those of our competitors |
| In addition, we may not be able to develop such relationships with additional distributors and dealers in the future |
| Accounts receivable from Graybar comprised approximately 29prca of total accounts receivable at December 31, 2005 |
| Our second largest distributor in each of the respective years accounted for 21prca of our sales during 2005, 17prca of our sales during 2004 and 14prca during 2003 |
| Accounts receivable from our second largest distributor comprised approximately 28prca of total accounts receivable at December 31, 2005 |
| We currently obtain a substantial majority of our products under various manufacturing arrangements with third-party manufacturers in South Korea and Thailand |
| We believe that production of our product lines overseas enables us to obtain these items on a cost basis that enhances our ability to market them profitably |
| Our reliance on third-party manufacturers to provide personnel and facilities in these countries and the potential imposition of quota limitations on imported goods from certain Far East countries expose us to certain economic and political risks, including the following: • political instability in Asia, and in particular on the Korean Peninsula; • the business and financial condition of our third-party manufacturers; • the possibility of expropriation, supply disruption, currency controls, and currency exchange fluctuations; • changes in tax laws, tariffs, and freight rates; and • strikes, work slow downs, or lockouts at any ports where our products arrive in the United States |
| The countries in which most of our products are manufactured also have been subject to economic problems in the past |
| Although the economic situation in Asia in recent years has not resulted in any adverse changes in our ability to obtain products or the prices that we pay for our products, an extended period of financial pressure on overseas markets or currency devaluations that result in a financial setback to our overseas manufacturers could have an adverse impact on our operations |
| Protectionist trade legislation in either the United States or foreign countries, such as a change in the current tariff structures, export compliance laws, or other trade policies, could adversely affect our ability to purchase our products from foreign suppliers or the price at which we can obtain those products |
| We depend on new products and technologies |
| We operate in an industry that is characterized by fast-changing technology |
| As a result, we will be required to expend substantial funds for and commit significant resources to the conduct of continuing product development, including research and development activities and the engagement of additional engineering and other technical personnel |
| Any failure on our part to anticipate or respond adequately to technological developments, customer requirements, or new design and production techniques, or any significant delays in product development or introduction, could have a material adverse effect on our operations |
| Our future operating results will depend to a significant extent on our ability to identify, develop, and market enhancements or improvements to existing product lines as well as to introduce new product lines that compare favorably on the basis of time to market, price, and performance with the product lines offered by our competitors, many of which have greater financial, technical, marketing distribution, and other resources than we posses |
| The success of new product lines depends on various factors, including proper market segment selection, utilization of advances in technology, innovative development of new product concepts, timely completion and delivery of new product lines, efficient and cost-effective features, and market acceptance of our products |
| Because of the complexity of the design and manufacturing processes required by our products, we may experience delays from time to time in completing the design and manufacture of improvements to existing product lines or the introduction of new product lines |
| In addition, customers or markets may not accept new product lines |
| Our failure to design and implement enhancements to existing product lines or failure to introduce new products on a timely and cost-effective basis would adversely affect our future operating results |
| Complex software programs, such as those we develop or those developed by other software sources and incorporated into our products, occasionally contain errors that are discovered only after the product has been installed and used by many different customers in a variety of business operations |
| Although we conduct extensive 13 _________________________________________________________________ [47]Table of Contents testing of the software programs included in our products, we may not successfully detect and eliminate all such errors in our products prior to shipment |
| Significant programming errors in product software could require substantial design modifications that may create delays in product introduction and shipment and that could result in an adverse impact on our reputation as well as on our operating results |
| The telecommunications industry is cyclical |
| The telecommunications industry has experienced economic downturns at various times, characterized by diminished product demand, accelerated erosion of average selling prices, and production overcapacity |
| We have sought to reduce our exposure to industry downturns by targeting our product lines towards small- and medium-sized businesses, which we believe will sustain continued growth in the near and long-term, resulting in a steadily increasing demand for enhanced and upgraded telephone systems and voice processing products |
| However, we may experience substantial period-to-period fluctuations in future operating results because of general industry conditions or events occurring in the general economy |
| In addition, the size and timing of sales of our new voice processing, IP systems, and computer-telephony products may vary from quarter to quarter to a greater extent in future periods |
| The expanding importance of these new products could result in significant variations in our overall operating results on a quarterly basis |
| We must finance the maintenance and expansion of our business and the development of new products |
| To remain competitive, we must continue to make significant investments in research and development, equipment, and facilities |
| As a result of the increase in fixed costs and operating expenses related to these expenditures, our failure to increase net sales sufficiently to offset the increased costs may adversely affect our operating results |
| From time to time, we may seek additional equity or debt financing to provide for the expenditures required to maintain or expand our business |
| We cannot predict the timing and amount of any such capital requirements |
| Such financing may not be available or, if available, may not be available on terms satisfactory to us |
| If such financing is not available on satisfactory terms, we may be unable to maintain or expand our business or develop new products at the rate desired and our operating results may be adversely affected |
| Debt financing increases expenses and must be repaid regardless of our operating results |
| Equity financing could result in additional dilution to existing stockholders |
| ” We depend on third parties for manufacturing |
| We depend upon third parties to manufacture our products |
| We do not own most of the equipment, tools, and molds used in the manufacturing process, and we have only limited control over the manufacturing processes |
| As a result, certain difficulties could have a material adverse effect on our business, including any difficulties encountered by the third-party manufacturers that result in • product defects; • production delays; • cost overruns; or • the inability to fulfill orders on a timely basis |
| Our operations would be adversely affected if we were to lose our relationship with any of our suppliers, if any of our suppliers’ operations were interrupted or terminated, or if overseas or air transportation services were disrupted even for a relatively short period of time |
| We do not maintain an inventory of sufficient size to provide protection for any significant period against an interruption of supply, particularly if we were required to locate and use alternative sources of supply |
| Markets for our products are intensely competitive, and we cannot assure you that we will be able to compete successfully in the future |
| We engage in an intensely competitive business that has been characterized by price erosion, rapid technological change, and foreign competition |
| We compete with major domestic and international companies |
| 14 _________________________________________________________________ [48]Table of Contents Many of our competitors have greater market recognition and substantially greater financial, technical, marketing, distribution, and other resources than we possess |
| Emerging companies also may increase their participation in the telephone systems and peripherals markets |
| Our ability to compete successfully depends on a number of factors both within and outside our control, including the following: • the quality, performance, reliability, features, ease of use, pricing, and diversity of our product lines; • the performance of our distributors and dealers; • the quality of our customer services; • our ability to address the needs of our customers; • our success in designing and manufacturing new products, including those implementing new technologies; • the availability of adequate sources of raw materials, finished components, and other supplies at acceptable prices; • our suppliers’ efficiency of production; • the rate at which end users upgrade or expand their existing telephone systems, applications, and services; • new product introductions by our competitors; • the number, nature, and success of our competitors in a given market; and • general market and economic conditions |
| We currently compete principally on the basis of the technical innovation and performance of our products, including their ease of use and reliability, as well as price, timely delivery, and after-sale service and technical support |
| We may not continue to be able to compete successfully in the future |
| We face risks associated with patents, licenses, and intellectual property |
| Our success depends in part upon our ability to protect our proprietary technology |
| We rely on a combination of copyright, trademark, and trade secret laws, nondisclosure and other contractual agreements, and technical measures to protect our proprietary technology |
| We have acquired certain patents and patent licenses, and we intend to continue to seek patents on our inventions |
| We face risks associated with our intellectual property, including the following: • the steps we have taken to protect our proprietary rights may be inadequate to protect misappropriation of such rights; • third parties may independently develop equivalent or superior technology; • the process of seeking patent protection can be long and expensive, and patents may not issue from future applications; • existing patents or any new patents that are issued may not be of sufficient scope or strength to provide us meaningful protection or any commercial advantage; 15 _________________________________________________________________ [49]Table of Contents • we may be subject to or may initiate interference proceedings in the US Patent and Trademark Office, which can demand significant financial and management resources; and • we may commence litigation to enforce patents or other intellectual property rights, or to defend us against claimed infringement of the rights of others, which could result in substantial cost to us and diversion of our management’s attention |
| As is typical in the telecommunications industry, we have received from time to time, and in the future may receive, allegations of possible infringement of patents or other intellectual property rights of others |
| Based on industry practice, we believe that in most cases we could obtain any necessary licenses or other rights on commercially reasonable terms |
| In the event that a third party alleges that we are infringing its rights, we may not be able to obtain licenses on commercially reasonable terms from the third party, if at all, or the third party may commence litigation against us |
| The failure to obtain necessary licenses or other rights or the occurrence of litigation arising out of such claims could materially and adversely affect us, our result of operations, or prospects |
| Our third-party manufacturers may experience shortages of raw materials and supplies |
| The principal raw materials and components used in producing our products consist of • semiconductor components; • unfinished printed circuit boards; • molded plastic parts; and • metals |
| The third-party manufacturers of our products acquire these raw materials primarily from Asian sources, which indirectly subjects us to certain risks, including supply interruptions and currency price fluctuations |
| We and our third-party manufacturers from time to time experience difficulties in obtaining these materials |
| The suppliers of these materials currently are adequately meeting our requirements and those of our third-party manufacturers |
| We also believe that there are alternate suppliers for most of these materials |
| We depend on management and other key personnel |
| Our development and operations to date have been, and our proposed operations will be, substantially dependent upon the efforts and abilities of our senior management and technical personnel |
| We have employment agreements with Gregory K Roeper, our President and Chief Executive Officer; and David A Husband, our Vice-President – Finance and Chief Financial Officer |
| We maintain agreements with each of our officers and employees that prohibit them from disclosing confidential information obtained while employed with us |
| The loss of existing key personnel or the failure to recruit and retain necessary additional personnel would adversely affect our business prospects |
| We cannot provide assurance that we will be able to retain our current personnel or that we will be able to attract and retain necessary additional personnel |
| Our internal growth and the expansion of our product lines will require additional expertise in such areas as software development, operational management, and sales and marketing |
| Such growth and expansion activities will increase further the demand on our resources and require the addition of new personnel and the development of additional expertise by existing personnel |
| Our failure to attract and retain personnel with the requisite expertise or to develop internally such expertise could adversely affect the prospects for our success |
| Rights to acquire our common stock could result in dilution to other holders of our common stock |
| As of March 29, 2006, we had outstanding options to acquire 663cmam490 shares of our common stock at a weighted average exercise price of dlra3dtta08 per share |
| An additional 447cmam500 shares remain available for grant under our 2003 Incentive Compensation Plan |
| During the terms of these options, the holders thereof will have the opportunity to profit from an increase in the market price of the common stock |
| The existence of these options may adversely affect the terms on which we can obtain additional financing, and the holders of these options can be expected to exercise such options at a time when we, in all likelihood, would be able to obtain additional capital by 16 _________________________________________________________________ [50]Table of Contents offering shares of our common stock on terms more favorable to us than those provided by the exercise of these options |
| Sales of additional shares of our common stock could have a negative effect on the market price of our common stock |
| Sales of substantial amounts of our common stock in the public market could adversely affect prevailing market prices and could impair our ability to raise capital through the sale of our equity securities |
| Most shares of common stock currently outstanding are eligible for sale in the public market, subject in certain cases to compliance with the requirements of Rule 144 under the securities laws |
| Shares issued upon the exercise of stock options granted under our stock option plan generally will be eligible for sale in the public market |
| We also have the authority to issue additional shares of common stock and shares of one or more series of preferred stock |
| The issuance of such shares could dilute the voting power of the currently outstanding shares of our common stock and could dilute earnings per share |
| It may be difficult for a third party to acquire us, even if the acquisition would be in the best interest of stockholders |
| We are subject to provisions under Delaware corporate law that would require us to obtain certain approvals from our board of directors or stockholders in order to engage in a business combination with an interested stockholder under certain circumstances |
| Our Amended Certificate of Incorporation and Bylaws also contain a number of other provisions relating to corporate governance and to the rights of stockholders |
| These provisions • authorize our board of directors to fill vacancies on our board of directors; • authorize our board of directors to issue preferred stock in series with such voting rights and other powers as our board of directors may determine; and • require the affirmative vote of two-thirds of the directors then in office to approve: -- a public offering of our capital stock; -- the merger with or the acquisition of another business or the acquisition of a significant amount of the assets of another business; -- the sale of a significant amount of our assets; -- our entering into contracts with our stockholders or directors; -- our assumption or acquisition of debt in excess of dlra1dtta0 million; and -- any amendment of our Amended Certificate of Incorporation and Bylaws of our wholly owned subsidiary Vodavi Communications Systems, Inc |
| These provisions in our Amended Certificate of Incorporation and Bylaws and Delaware corporate law may have the effect of making more difficult or delaying attempts by others to obtain control of us, even when these attempts may be in the best interests of stockholders |
| We do not pay cash dividends |
| We have never paid any cash dividends on our common stock |
| Our board of directors reviews our dividend policy from time to time and may elect to pay dividends on our common stock in the future |
| However, the terms of the revolving line of credit facility between our wholly owned subsidiary Vodavi Communications Systems, Inc |
| and Comerica Bank prohibit our subsidiary from paying dividends to us without the consent of Comerica |
| This restriction could limit our ability to pay dividends in the future |