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SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-Q
 þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2006
 Commission File No. 0-26912
 Vodavi Technology, Inc.
  Delaware
    
    86-0789350(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)4717 East Hilton Avenue, Ste. 400, Phoenix, Arizona
    
    85034(Address of principal executive offices)
    
    (Zip Code)
 (480) 443-6000
 
   þ o
  o o þ
  o þ




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VODAVI TECHNOLOGY, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED June 30, 2006
 TABLE OF CONTENTS
 PagePART I. FINANCIAL INFORMATIONItem 1. Financial StatementsUnaudited Condensed Consolidated Balance Sheets  June 30, 2006
and December 31, 2005
    
    
    3Unaudited Condensed Consolidated Statements of Operations  Three
Months and Six Months Ended June 30, 2006 and 2005
    
    
    4Unaudited Condensed Consolidated Statements of Cash Flows  Six Months
Ended June 30, 2006 and 2005
    
    
    5Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    9Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    14Item 4. Controls and Procedures
    
    
    14PART II. OTHER INFORMATION
    
    
    15SIGNATURES
    
    
    16EX-10.61EX-10.62EX-31.1EX-31.2EX-32.1EX-32.2
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PART I  FINANCIAL INFORMATION
 
  VODAVI TECHNOLOGY, INC.
 
 UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
 In thousands, except share and per share amounts
 June 30,
    
    
    December 31,2006
    
    
    2005CURRENT ASSETS:Cash
    
    $
    6,788
    
    
    $
    6,538Accounts receivable, net of reserves for doubtful accounts and sales returns
of $290 and $279, respectively
    
    
    6,486
    
    
    
    7,126Inventory
    
    
    3,437
    
    
    
    3,543Deferred income taxes
    
    
    446
    
    
    
    446Prepaid and other current assets
    
    
    1,103
    
    
    
    508Total current assets
    
    
    18,260
    
    
    
    18,161PROPERTY AND EQUIPMENT, net
    
    
    1,146
    
    
    
    1,228DEFERRED INCOME TAXES
    
    
    168
    
    
    
    168OTHER LONG-TERM ASSETS
    
    
    58
    
    
    
    45$
    19,632
    
    
    $
    19,602CURRENT LIABILITIES:Trade accounts payable
    
    $
    702
    
    
    $
    451Accrued liabilities
    
    
    953
    
    
    
    944Accrued rebates
    
    
    471
    
    
    
    453Trade accounts payable to stockholder
    
    
    3,326
    
    
    
    4,097Total current liabilities
    
    
    5,452
    
    
    
    5,945COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITY:Preferred stock, $.001 par value; 1,000,000 shares authorized, no shares issued
    
    
    
    
    
    
    Common stock, $.001 par value; 10,000,000 shares authorized; 3,860,849 and
3,850,974 shares issued, respectively
    
    
    4
    
    
    
    4Additional paid-in capital
    
    
    11,851
    
    
    
    11,814Retained earnings
    
    
    2,832
    
    
    
    2,227Treasury stock, 97,499 and 76,741 shares at cost, respectively
    
    
    (507
    )
    
    
    (388
    )14,180
    
    
    
    13,657$
    19,632
    
    
    $
    19,602
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VODAVI TECHNOLOGY, INC.
 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 In thousands except per share amounts
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005REVENUE, net
    
    $
    11,008
    
    
    $
    10,598
    
    
    $
    21,013
    
    
    $
    20,464COST OF GOODS SOLD
    
    
    6,995
    
    
    
    6,737
    
    
    
    13,548
    
    
    
    13,129GROSS MARGIN
    
    
    4,013
    
    
    
    3,861
    
    
    
    7,465
    
    
    
    7,335OPERATING EXPENSES:Engineering and product development
    
    
    543
    
    
    
    500
    
    
    
    1,021
    
    
    
    1,018Selling, general and administrative
    
    
    2,886
    
    
    
    2,787
    
    
    
    5,585
    
    
    
    5,4423,429
    
    
    
    3,287
    
    
    
    6,606
    
    
    
    6,460OPERATING INCOME
    
    
    584
    
    
    
    574
    
    
    
    859
    
    
    
    875INTEREST INCOME
    
    
    63
    
    
    
    21
    
    
    
    117
    
    
    
    33INCOME BEFORE INCOME TAXES
    
    
    647
    
    
    
    595
    
    
    
    976
    
    
    
    908INCOME TAX PROVISION
    
    
    246
    
    
    
    226
    
    
    
    371
    
    
    
    345NET INCOME
    
    $
    401
    
    
    $
    369
    
    
    $
    605
    
    
    $
    563EARNINGS PER COMMON SHARE:Basic
    
    $
    0.11
    
    
    $
    0.10
    
    
    $
    0.16
    
    
    $
    0.15Diluted
    
    $
    0.10
    
    
    $
    0.09
    
    
    $
    0.15
    
    
    $
    0.14WEIGHTED AVERAGE SHARES OUTSTANDING:Basic
    
    
    3,772
    
    
    
    3,729
    
    
    
    3,774
    
    
    
    3,725Diluted
    
    
    4,104
    
    
    
    4,092
    
    
    
    4,110
    
    
    
    4,118
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VODAVI TECHNOLOGY, INC.
 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 In thousands
 Six Months EndedJune 30,2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    605
    
    
    $
    563Adjustments to reconcile net income to net cash
flows provided by operating activities:Depreciation and amortization
    
    
    231
    
    
    
    232Tax benefit on stock option exercises
    
    
    13
    
    
    
    53Loss on sale of property and equipment
    
    
    13
    
    
    
    Changes in operating assets and liabilities:Accounts receivable, net
    
    
    640
    
    
    
    199Inventory
    
    
    106
    
    
    
    1,054Prepaid and other current assets
    
    
    (595
    )
    
    
    (321
    )Other long-term assets and deferred taxes
    
    
    (13
    )
    
    
    Trade accounts payable
    
    
    (520
    )
    
    
    (236
    )Accrued liabilities
    
    
    27
    
    
    
    (648
    )Net cash flows provided by operating activities
    
    
    507
    
    
    
    896CASH FLOWS FROM INVESTING ACTIVITIES:Proceeds from sale of property and equipment
    
    
    16
    
    
    
    Cash paid to acquire property and equipment
    
    
    (178
    )
    
    
    (164
    )Net cash flows used in investing activities
    
    
    (162
    )
    
    
    (164
    )CASH FLOWS FROM FINANCING ACTIVITIES:Purchase of treasury stock
    
    
    (119
    )
    
    
    (113
    )Stock options exercised
    
    
    24
    
    
    
    59Net cash flows used in financing activities
    
    
    (95
    )
    
    
    (54
    )CHANGE IN CASH
    
    
    250
    
    
    
    678CASH, beginning of period
    
    
    6,538
    
    
    
    4,000CASH, end of period
    
    $
    6,788
    
    
    $
    4,678SUPPLEMENTAL CASH FLOW INFORMATION:Cash paid for interest
    
    $
    
    
    
    $
    Cash paid for income taxes
    
    $
    188
    
    
    $
    264
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VODAVI TECHNOLOGY, INC.
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 June 30, 2006
      6




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(b)
    
    CONCENTRATIONSThe Company currently obtains a substantial majority of its products under manufacturing
agreements with LG-Nortel Co. Ltd. (LGN) in South Korea and an affiliate of LGN in
Thailand. As of June 30, 2006, the Company owed LGN or its affiliate approximately $3.3
million for products purchased under these agreements.The Company also has a significant concentration of sales and accounts receivable with its
two largest distributors, Graybar Electric Company, Inc. and Target Distributing, Inc.
These distributors comprised 51% of the Companys total accounts receivable as of June 30,
2006 compared with 57% as of December 31, 2005.(c)
    
    CALCULATION OF EARNINGS PER SHAREThe Company presents 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:
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands)Net income
    
    $
    401
    
    
    $
    369
    
    
    $
    605
    
    
    $
    563Weighted average common shares:Basic
    
    
    3,772
    
    
    
    3,729
    
    
    
    3,774
    
    
    
    3,725Effect of dilutive stock options (1)
    
    
    332
    
    
    
    363
    
    
    
    336
    
    
    
    393Diluted
    
    
    4,104
    
    
    
    4,092
    
    
    
    4,110
    
    
    
    4,118Anti-dilutive stock options (2)
    
    
    66
    
    
    
    139
    
    
    
    66
    
    
    
    67
 
 (1)
    
    Dilutive securities are calculated using the treasury stock method and the average market
price during the period.(2)
    
    Options having an exercise price greater than the average market price during the reporting
period are anti-dilutive and, therefore, do not enter into the diluted earnings per share
calculation. (d)
    
    STOCK OPTION PLANS
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Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2005(In Thousands, Except Per Share Amounts)Net income:As reported
    
    $
    369
    
    
    $
    563Share-based employee compensation included
in net income
    
    
    
    
    
    
    Fair value of options granted, net of taxes
    
    
    (66
    )
    
    
    (120
    )Pro forma net income
    
    $
    303
    
    
    $
    443Earnings per share:As reported  Basic
    
    $
    0.10
    
    
    $
    0.15As reported  Diluted
    
    
    0.09
    
    
    
    0.14Pro forma  Basic
    
    
    0.08
    
    
    
    0.12Pro forma  Diluted
    
    $
    0.07
    
    
    $
    0.11
 (e)
    
    SEGMENT REPORTING
  (f)
    
    COMMITMENTS AND CONTINGENCIES
  (g)
    
    EQUITY TRANSACTIONS
  (h)
    
    RECENT ACCOUNTING PRONOUNCEMENTS
 Accounting
for Uncertainty in Income Taxes Accounting for Income
Taxes
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
 Business Overview
  Critical Accounting Policies and Estimates
   Customer Incentives
  Accounts Receivable
  9




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Sales Returns
  Excess and Obsolete Inventory
   Results of Operations
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenue
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold
    
    
    63.5
    
    
    
    63.6
    
    
    
    64.5
    
    
    
    64.2Gross margin
    
    
    36.5
    
    
    
    36.4
    
    
    
    35.5
    
    
    
    35.8Operating expenses:Engineering and product development
    
    
    4.9
    
    
    
    4.7
    
    
    
    4.8
    
    
    
    5.0Selling, general, and administrative
    
    
    26.3
    
    
    
    26.3
    
    
    
    26.6
    
    
    
    26.631.2
    
    
    
    31.0
    
    
    
    31.4
    
    
    
    31.6Operating income
    
    
    5.3
    
    
    
    5.4
    
    
    
    4.1
    
    
    
    4.2Interest income
    
    
    0.5
    
    
    
    0.2
    
    
    
    0.6
    
    
    
    0.2Income before income taxes
    
    
    5.8
    
    
    
    5.6
    
    
    
    4.7
    
    
    
    4.5Income tax provision
    
    
    2.2
    
    
    
    2.1
    
    
    
    1.8
    
    
    
    1.7Net income
    
    
    3.6
    %
    
    
    3.5
    %
    
    
    2.9
    %
    
    
    2.8
    %
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Quarter Ended June 30, 2006 Compared With Quarter Ended June 30, 2005
 Revenue
    Gross Margin
  Engineering and Product Development
  Selling, General, and Administrative Expenses
  Interest Income
  11




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Income Taxes
  Six Months Ended June 30, 2006 Compared With Six Months Ended June 30, 2005
 Revenue
    Gross Margin
  Engineering and Product Development
  Selling, General, and Administrative Expenses
  Interest Income
  12




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Income Taxes
  Liquidity and Capital Resources
       (in
thousands)
 Payment due by periodContractual
    
    
    
    
    
    Less than
    
    
    
    
    
    
    
    
    
    
    More thanObligations
    
    Total
    
    
    1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    5 yearsOperating Lease
Obligations
    
    $
    4,521
    
    
    $
    792
    
    
    $
    1,570
    
    
    $
    1,570
    
    
    $
    589Other Obligations.
    
    
    567
    
    
    
    467
    
    
    
    100Purchase Obligations
    
    
    7,114
    
    
    
    7,114
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    12,202
    
    
    $
    8,373
    
    
    $
    1,670
    
    
    $
    1,570
    
    
    $
    589
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International Manufacturing Sources
  CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
   14




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PART II  OTHER INFORMATION
 Legal Proceedings
  Board Authorization to Repurchase up to $1.0 million of the Companys Common Stock .
 ISSUER PURCHASES OF EQUITY SECURITIES
 Maximum Number (orTotal Number of
    
    Approximate Dollar Value)Total
    
    
    
    
    
    Shares
    
    of Shares thatNumber of
    
    
    
    
    
    Purchased as Part of
    
    May Yet Be PurchasedShares
    
    Average
    
    Publicly Announced
    
    Under the Plans orPeriod
    
    Purchased
    
    Price Paid per Share
    
    Plans or Programs
    
    ProgramsApril 1  April 30
    
    None
    
    None
    
    NoneMay 1 May 31
    
    
    9,300
    
    
    $
    5.72
    
    
    
    9,300June 1  June 30
    
    
    7,200
    
    
    $
    5.73
    
    
    
    7,200Total
    
    
    
    
    
    
    
    
    
    
    16,500
    
    
    $
    905,000
 Defaults Upon Senior Securities
  Submission of Matters to a Vote of Security Holders
  Other Information
  Exhibits and Reports on Form 8-K
  10.61
    
    Employment Agreement, effective January 1, 2006, between Gregory K. Roeper and Vodavi
Technology, Inc.10.62
    
    Employment Agreement, effective January 1, 2006, between David A. Husband and Vodavi
Technology, Inc.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.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.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
2002.32.2
    
    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.(b)  Reports on Form 8-K:Not applicable
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SIGNATURES
  VODAVI TECHNOLOGY, INC.Dated: August 1, 2006
    /s/ Gregory K. RoeperGregory K. RoeperPresident and Chief Executive Officer
(Principal Executive Officer) Dated: August 1, 2006
    /s/ David A. HusbandDavid A. HusbandChief Financial Officer and Vice
President  Finance
(Principal Financial and Accounting Officer) 16