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SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2004 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 
  Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes  X  No . Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes  No  X. The number of shares outstanding of registrants Common Stock, $.001 par value
per share, as of April 27, 2004 was 3,624,839.




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VODAVI TECHNOLOGY, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2004 TABLE OF CONTENTS PagePART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsUnaudited Consolidated Balance Sheets  March 31, 2004 and December 31, 2003
    
    
    3Unaudited Consolidated Statements of Operations  Three Months Ended March 31, 2004 and 2003
    
    
    4Unaudited Consolidated Statements of Cash Flows - Three Months Ended March 31, 2004 and 2003
    
    
    5Notes to Unaudited 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
    
    
    13Item 4.
    
    Controls and Procedures
    
    
    14PART II.
    
    OTHER INFORMATION
    
    
    15SIGNATURES
    
    
    16EX-31.1EX-31.2EX-32.1EX-32.2
  2




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##### Table of Contents



PART I  FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS VODAVI TECHNOLOGY, INC. 
 UNAUDITED CONSOLIDATED BALANCE SHEETS
 In thousands, except share and per share amounts
 March 31,
    
    December 31,2004
    
    2003CURRENT ASSETS:Cash
    
    $
    2,391
    
    
    $
    2,924Accounts receivable, net of reserves for doubtful
accounts and sales returns of $322 and
$345, respectively
    
    
    6,510
    
    
    
    6,988Inventory
    
    
    3,917
    
    
    
    5,115Deferred income taxes
    
    
    445
    
    
    
    445Prepaids and other current assets
    
    
    445
    
    
    
    768Total current assets
    
    
    13,708
    
    
    
    16,240PROPERTY AND EQUIPMENT, net
    
    
    1,471
    
    
    
    1,453GOODWILL
    
    
    725
    
    
    
    725DEFERRED INCOME TAXES
    
    
    34
    
    
    
    34OTHER LONG-TERM ASSETS
    
    
    67
    
    
    
    71$
    16,005
    
    
    $
    18,523CURRENT LIABILITIES:Accounts payable
    
    $
    558
    
    
    $
    1,031Accrued liabilities
    
    
    1,258
    
    
    
    2,195Accounts payable to stockholder
    
    
    2,878
    
    
    
    4,208Current maturities of long-term debt
    
    
    200
    
    
    
    200Total current liabilities
    
    
    4,894
    
    
    
    7,634Long-term debt, net of current maturities
    
    
    650
    
    
    
    700COMMITMENTS 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; 3,943,539 and 3,929,164 shares
issued, respectively
    
    
    5
    
    
    
    4Additional paid-in capital
    
    
    11,855
    
    
    
    11,800Accumulated deficit
    
    
    (640
    )
    
    
    (856
    )Treasury stock, 318,700 shares at cost
    
    
    (759
    )
    
    
    (759
    )10,461
    
    
    
    10,189$
    16,005
    
    
    $
    18,523
 The accompanying notes are an integral part of these consolidated balance sheets. 3




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VODAVI TECHNOLOGY, INC. 
 UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
 In thousands except per share amounts
 Three Months EndedMarch 31,2004
    
    2003REVENUE, net
    
    $
    9,787
    
    
    $
    9,063COST OF GOODS SOLD
    
    
    6,407
    
    
    
    5,884GROSS MARGIN
    
    
    3,380
    
    
    
    3,179OPERATING EXPENSES:Engineering and product development
    
    
    521
    
    
    
    553Selling, general and administrative
    
    
    2,499
    
    
    
    2,3893,020
    
    
    
    2,942OPERATING INCOME
    
    
    360
    
    
    
    237INTEREST EXPENSE
    
    
    10
    
    
    
    25INCOME BEFORE INCOME TAXES
    
    
    350
    
    
    
    212INCOME TAX PROVISION
    
    
    134
    
    
    
    85NET INCOME
    
    $
    216
    
    
    $
    127EARNINGS PER COMMON SHARE:Basic
    
    $
    0.06
    
    
    $
    0.03Diluted
    
    $
    0.05
    
    
    $
    0.03WEIGHTED AVERAGE SHARES OUTSTANDING:Basic
    
    
    3,616
    
    
    
    4,350Diluted
    
    
    4,154
    
    
    
    4,445
 The accompanying notes are an integral part of these consolidated financial statements. 4




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VODAVI TECHNOLOGY, INC. 
 UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
 In thousands
 Three Months EndedMarch 31,2004
    
    2003CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    216
    
    
    $
    127Adjustments to reconcile net income to net cash
flows used in operating activities:Depreciation and amortization
    
    
    125
    
    
    
    121Tax benefit on stock option exercises
    
    
    26
    
    
    
    Changes in working capital:Accounts receivable, net
    
    
    478
    
    
    
    (481
    )Inventory
    
    
    1,198
    
    
    
    (385
    )Prepaids and other current assets
    
    
    323
    
    
    
    46Other long-term assets and deferred taxes
    
    
    (2
    )
    
    
    4Accounts payable and payables to stockholder
    
    
    (1,803
    )
    
    
    (102
    )Accrued liabilities
    
    
    (937
    )
    
    
    (249
    )Net cash flows used in operating activities
    
    
    (376
    )
    
    
    (919
    )CASH FLOWS FROM INVESTING ACTIVITIES:Cash paid to acquire property and equipment
    
    
    (137
    )
    
    
    (223
    )Net cash flows used in investing activities
    
    
    (137
    )
    
    
    (223
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net advances on revolving credit facility
    
    
    
    
    
    
    222Repayments on term loan
    
    
    (50
    )
    
    
    Stock options exercised
    
    
    30
    
    
    
    Net cash flows provided by (used in) financing activities
    
    
    (20
    )
    
    
    222CHANGE IN CASH
    
    
    (533
    )
    
    
    (920
    )CASH, beginning of period
    
    
    2,924
    
    
    
    1,141CASH, end of period
    
    $
    2,391
    
    
    $
    221SUPPLEMENTAL CASH FLOW INFORMATION:Cash paid for interest
    
    $
    10
    
    
    $
    25
 The accompanying notes are an integral part of these consolidated financial statements. 5




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VODAVI TECHNOLOGY, INC. 
 NOTES TO UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
  (a)
    
    INTERIM FINANCIAL REPORTING The accompanying Unaudited Consolidated Financial Statements have been prepared
by Vodavi Technology, Inc. and subsidiaries (Vodavi or the Company)
pursuant to the rules and regulations of the Securities and Exchange Commission
(SEC) and, in the opinion of the Company, include all adjustments (consisting
of normal recurring accruals and adjustments) necessary for a fair presentation
of results of operations, financial position, and cash flows as of and for the
periods presented. The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and revenue and expenses
during the period reported. Actual results could differ from those estimates.
Estimates are used in accounting for, among other things, customer incentive
programs, allowances for bad debts and sales returns, inventory obsolescence,
product warranty, depreciation, taxes and other contingencies. Estimates and
assumptions are reviewed periodically and the effects of revisions are
reflected in the Consolidated Financial Statements in the period they are
determined to be necessary. The results for the three months ended March 31, 2004 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, 2003. [SPACE INTENTIONALLY LEFT BLANK] 6




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(b)
    
    CALCULATION OF EARNINGS PER SHARE  The Company displays basic and diluted earnings per share (EPS). Basic
EPS is determined by dividing net income by the weighted average number
of common shares outstanding. The basic weighted average number of
common shares outstanding excludes all dilutive securities. Diluted EPS
is determined by dividing net income by the weighted average number of
common shares and dilutive securities outstanding.  A reconciliation of the numerator and denominator (weighted average
number of shares outstanding) of the basic and diluted EPS computation is
as follows: For the Quarter EndedMarch 31,2004
    
    2003Net income
    
    $
    216
    
    
    $
    127Weighted average common shares for basic
earnings per share
    
    
    3,616
    
    
    
    4,350Effect of dilutive stock options (1)
    
    
    538
    
    
    
    95Weighted average common shares for diluted
earnings per share
    
    
    4,154
    
    
    
    4,445
  (1)
    
    Dilutive securities are calculated using the treasury stock method and
the average market price during the period. Options on 43,750, and
615,000 shares had an exercise price greater than the average market price
during the quarterly periods ended March 31, 2004 and 2003, respectively,
and therefore did not enter into the earnings per share calculation.  (c)
    
    STOCK OPTION PLANS Statement of Financial Accounting Standard (SFAS) No. 123, Accounting for
Stock-Based Compensation, encourages entities to recognize as expense over the
vesting period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 allows entities to continue to apply the provisions
of APB Opinion No. 25, Accounting for Stock Issued to Employees, and provide
pro forma earnings per share disclosures for employee stock option grants as if
the fair-value-based method as defined in SFAS No. 123 had been applied. The
Company applies the intrinsic value method under APB No. 25 and provides the
pro forma disclosure provisions of SFAS No. 123. No stock-based employee compensation cost is reflected in net income as all
options granted under the Plan had an exercise price equal to or greater than
the market price of the underlying common stock on the date of grant. If the
Company had accounted for its stock-based compensation plan using a
fair-value-based method of accounting as prescribed in SFAS No. 123, the
Companys net income and earnings per share would have been reported as
follows: 7




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For the Quarter Ended March 31,2004
    
    2003(In Thousands, Except Per Share Amounts)Net income:As reported
    
    $
    216
    
    
    $
    127Fair Value of options granted,
net of taxes
    
    
    (38
    )
    
    
    (36
    )Pro forma net income
    
    $
    178
    
    
    $
    91Earnings (loss) per share:As reported  Basic
    
    $
    0.06
    
    
    $
    0.03As reported  Diluted
    
    $
    0.05
    
    
    $
    0.03Pro forma  Basic
    
    $
    0.05
    
    
    $
    0.02Pro forma  Diluted
    
    $
    0.04
    
    
    $
    0.02
 During the quarterly period ended March 31, 2004, 38,750 options were granted
at an exercise price of $7.05. Also during the quarterly period ended March
31, 2004, 14,375 options were exercised with total proceeds of approximately
$30,000 that resulted in a tax benefit of $25,000.  (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)
    
    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. 8




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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 traditional and IP telephony products,
voice processing products, as well as computer telephony products, that address
a wide variety of business applications. Our telecommunications solutions
incorporate sophisticated features such as automatic call distribution,
scalable networking, Internet protocol, or IP, and wireless solutions. Our
voice processing products include Internet messaging, automated attendant, and
voice and fax mail. Our computer telephony products enable users to integrate
the functionality of their telephone systems with their computer systems. We
market our products primarily in the United States as well as in foreign
countries through a distribution model consisting primarily of wholesale
distributors and direct dealers. 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 historical and projected 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 two largest distributors, Graybar Electric Company, Inc.
and Target. As of March 31, 2004, Graybar accounted for 28% and Target
accounted for 25% of our total accounts receivable. If either Graybar or
Target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. 9




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Sales Returns We maintain allowances for estimated sales returns. While we have
distribution agreements with our largest distributors that limit the amount of
sales returns on active products, we generally allow unlimited returns of
products that we discontinue. Accordingly, the timing and amount of revisions
to our estimates for sales returns is largely influenced by our decisions to
discontinue product lines and our ability to predict the inventory levels of
such products at our largest distributors. Revisions to these estimates have
the effect of increasing or decreasing the reported amount of revenue in the
period in which the revisions are made. We generally do not accept product
returns from our direct dealers unless the product is damaged. Excess and Obsolete Inventory We record our inventory at the lower of cost or market value. Our
assessment of market value is determined by, among other things, historical and
forecasted sales activity, the condition of specific inventory items, and
competitive pricing considerations. When the assessed market value is less
than the historical cost, provision is made in the financial statements to
write-down the carrying amount of the respective inventory items to market
value. If actual results are less favorable than our original assumptions for
determining market value, additional inventory write-downs may be required. 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, 2003, 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 EndedMarch 31,2004
    
    2003Revenue
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold
    
    
    65.5
    
    
    
    64.9Gross margin
    
    
    34.5
    
    
    
    35.1Operating expenses:Engineering and product development
    
    
    5.3
    
    
    
    6.1Selling, general, and administrative
    
    
    25.6
    
    
    
    26.430.9
    
    
    
    32.5Operating income
    
    
    3.7
    
    
    
    2.6Interest expense, net
    
    
    0.1
    
    
    
    0.3Income before income taxes
    
    
    3.6
    
    
    
    2.3Income tax provision
    
    
    1.4
    
    
    
    0.9Net income
    
    
    2.2
    %
    
    
    1.4
    %
 10




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Quarter Ended March 31, 2004 Compared With Quarter Ended March 31, 2003 Revenue Revenue for the three-month period ended March 31, 2004 totaled $9.8
million, an increase of 8.0%, from revenue of $9.1 million for the same period
of 2003. Sales to our supply house customers accounted for approximately $5.8
million during the 2004 first quarter compared with $5.0 million in the 2003
first quarter. The increase in sales to our supply house customers in the
first quarter of 2004 is related principally to sales of our STS telephone
system. The STS product line, which we introduced in January 2003, is a
full-featured telephone system designed and priced to capture a larger portion
of the small business telephone system market. While we introduced the STS
product line during the first quarter of 2003, sales of this product did not
begin to accelerate until the latter part of 2003 and into the first quarter of
2004. Sales of the STS telephone system has also had the effect of reducing
the level of sales of similar products that we sell through supply houses. Sales through our direct dealer program totaled $3.9 million in each of
the first quarters of 2004 and 2003. During the first quarter of 2004, our
direct dealers also purchased approximately $380,000 of our STS product line
directly from our supply house customers compared to zero during the first
quarter of 2003. Sales through our direct sales office in the Phoenix Metropolitan area
totaled $409,000 during the first three months of 2004 compared with $261,000
during the same period of 2003. Our revenue is reported net of reserves for sales returns, discounts,
customer incentive programs, inter-company eliminations, and shipping and
handling charges. These items resulted in a net reduction to revenue of
$277,000 in the 2004 period compared with a reduction of $103,000 in the 2003
period. Gross Margin Our gross margin was approximately $3.4 million in 2004 compared with $3.2
million in 2003. Our gross margin as a percentage of total revenue decreased
to 34.5% during 2004 from 35.1% during 2003. The decrease in our gross margin
percentage during 2004 is a direct result of the product mix of sales to our
supply house customers with higher sales of our STS telephone system, which
generates a lower overall gross margin than our other products. Engineering and Product Development Engineering and product development expenditures decreased to $521,000
during the first quarter of 2004 from $553,000 in the same period of 2003. 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 increased to $2.5 million
compared to $2.4 million for the quarters of 2004 and 2003. Interest Expense Interest expense decreased to $10,000 for the first three months of 2004
from $25,000 for the same period a year ago. Income Taxes We provided for federal and state income taxes using an effective rate of
38.5% during the first quarter of 2004 compared to 40.1% in 2003. Our
effective tax rate in 2004 is expected to be consistent with our effective tax
rate that we reported for the 2003 fiscal year. Liquidity and Capital Resources Our net working capital position was approximately $8.8 million at March
31, 2004 compared to $8.6 million at December 31, 2003. We had a cash balance
of $2.4 million at March 31, 2004 compared with a cash balance of $2.9 million
at December 31, 2003. Factors that decreased our cash position during the
first three 11




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months of 2004 included the pay down of accounts payable and accrued
liabilities of $1.8 million and $937,000, respectively. We also used
approximately $137,000 during the first quarter of 2004 for the purchase of
property and equipment primarily related to new computers and other
enhancements to our computer network and $50,000 of principal payments on our
term loan. Factors that increased our cash position during the quarter included
positive income from operations, decreases in inventory of $1.2 million and
accounts receivable of $478,000 and $30,000 from the exercise of stock options. Our accounts receivable days sales outstanding, calculated on a quarterly
basis, were approximately 61 days as of March 31, 2004 compared to 59 days as
of December 31, 2003. The timing of payments received from our largest
distributors and the linearity of our revenue streams during the quarter
significantly influenced our days sales outstanding and our liquidity. 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 two largest distributors accounted for 53% of our total
accounts receivable as of March 31, 2004 and 51% as of December 31, 2003. Our inventory turnover, measured in terms of days outstanding on a
quarterly basis, was 56 days as of March 31, 2004 compared to 67 days as of
December 31, 2003. The decrease in inventory days outstanding is a direct
result of our efforts to rationalize our product lines. Trade payables and accrued liabilities, including payables to third-party
and related-party manufacturers, were approximately $4.7 million as of March
31, 2004 compared with $7.4 million as of December 31, 2003. The level of our
trade payables and accrued liabilities between periods is largely influenced by
the timing of payments we make to our largest suppliers for inventory items and
payments to cover payroll, income taxes, 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 us without the consent of
GE Capital. In April 2003, we entered into a credit agreement with Comerica
Bank-California (Comerica) of a size that is more reflective of the current
capital requirements of our business. The credit agreement established a $5.0
million revolving line of credit and a $1.0 million term loan. Advances under
the credit facility are based upon eligible accounts receivable and inventory
of our wholly owned subsidiary, Vodavi Communications Systems, Inc., and are
secured by substantially all of our assets. The credit facility contains
covenants that are customary for similar credit facilities and also prohibits
our operating subsidiaries from paying dividends to us without the consent of
Comerica. As of March 31, 2004, we had no outstanding borrowings on our line
of credit and $4.2 million available for future advances. The $5.0 million revolving line of credit bears interest at Comericas
prime rate, or 4.0% at March 31, 2004, 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 30 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. Borrowings on the term loan bear interest at
Comericas prime rate plus 0.5%, or 4.5% at March 31, 2004. In addition to
interest on the term loan, we are required to make monthly payments of
principal in an amount sufficient to fully amortize the term loan over a
60-month period with all unpaid principal and accrued interest due in 36
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 12




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approximately $73,000, is recorded as a reduction to common stock and
additional paid in capital in the accompanying consolidated balance sheets.
The repurchase was funded through advances on our revolving line of credit and
term loan. As of March 31, 2004, there were no amounts outstanding on our
revolving line of credit and $850,000 outstanding on our term loan. In April
2004 , we repaid the amount outstanding on our term loan with currently
available funds. We have no special purpose entities or off balance sheet financing
arrangements, commitments, or guarantees other than certain long-term operating
lease agreements for our office and warehouse facilities and short-term
purchase commitments to our third-party suppliers. The following table sets
forth all known commitments as of March 31, 2004 and the year in which those
commitments become due or are expected to be settled (in thousands): Payment due by periodContractual
    
    
    
    
    
    Less than
    
    
    
    
    
    
    
    
    
    More thanObligations
    
    Total
    
    1 year
    
    1-3 years
    
    3-5 years
    
    5 yearsLong-Term Debt Obligations
    
    $
    850
    
    
    $
    200
    
    
    $
    650
    
    
    $
    
    
    
    $
    Operating Lease Obligations
    
    
    6,447
    
    
    
    1,050
    
    
    
    1,666
    
    
    
    1,570
    
    
    
    2,161Purchase Obligations
    
    
    5,732
    
    
    
    5,732
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    13,029
    
    
    $
    6,982
    
    
    $
    2,316
    
    
    $
    1,570
    
    
    $
    2,161
 From time to time we are subject to certain asserted and unasserted claims
encountered in the normal course of business. We believe that the resolution
of these matters will not have a material adverse effect on our financial
position or results of operations. We cannot provide assurance, however, that
damages that result in a material adverse effect on our financial position or
results of operations will not be imposed in these matters. We believe that our working capital and credit facilities are sufficient
to fund our capital needs during the next 12 months. Although we currently
have no acquisition targets, we intend to continue to explore acquisition
opportunities as they arise and may be required to seek additional financing in
the future to meet such opportunities. International Manufacturing Sources We currently obtain a substantial majority of our products under various
manufacturing arrangements with third-party manufacturers in South Korea and
Thailand, including LGE, which owns approximately 24% 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, Business  -
Risk Factors  We face risks associated with international manufacturing
sources included in our annual report on Form 10-K for the year ended December
31, 2003. 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, 2003, 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 March
31, 2004 we had a term loan balance of $850,000 and had no outstanding
borrowings on the line of credit. In April 2004, we repaid the amount
outstanding on our term loan with currently available funds. 13




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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 March 31, 2004. 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. Subsequent to the date of their evaluation, there have not been any
significant changes in our internal controls or in other factors that could
significantly affect these controls, including any corrective action with
regard to significant deficiencies and material weaknesses. 14




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##### Table of Contents



PART II  OTHER INFORMATION Item 1.
    
    Legal ProceedingsNot applicable.Item 2.
    
    Changes In Securities and Use of ProceedsNot applicable.Item 3.
    
    Defaults Upon Senior SecuritiesNot applicable.Item 4.
    
    Submission of Matters to a Vote of Security HoldersNot applicable.Item 5.
    
    Other InformationNot applicable.Item 6.
    
    Exhibits and Reports on Form 8-K(a) Exhibits:
 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
 15




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. VODAVI TECHNOLOGY, INC.Dated: April 27, 2003
    /s/ Gregory K. RoeperGregory K. RoeperPresident and Chief Executive Officer
(Principal Executive Officer) Dated: April 27, 2003
    /s/ David A. HusbandDavid A. HusbandChief Financial Officer and Vice President  Finance
(Principal Financial and Accounting Officer) 16