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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 March 31, 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 MARCH 31, 2006
 TABLE OF CONTENTS
 PagePART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsUnaudited Condensed Consolidated Balance Sheets  March 31, 2006
and December 31, 2005
    
    
    3Unaudited Condensed Consolidated Statements of Operations  Three
Months Ended March 31, 2006 and 2005
    
    
    4Unaudited Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2006 and 2005
    
    
    5Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    8Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    13Item 4.
    
    Controls and Procedures
    
    
    13PART II.
    
    OTHER INFORMATION
    
    
    14SIGNATURES
    
    
    15Exhibit 10.60Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 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
 March 31,
    
    
    December 31,2006
    
    
    2005CURRENT ASSETS:Cash
    
    $
    7,022
    
    
    $
    6,538Accounts receivable, net of reserves for doubtful accounts and sales returns
of $302 and $279, respectively
    
    
    5,674
    
    
    
    7,126Inventory
    
    
    3,985
    
    
    
    3,543Deferred income taxes
    
    
    446
    
    
    
    446Prepaid and other current assets
    
    
    659
    
    
    
    508Total current assets
    
    
    17,786
    
    
    
    18,161PROPERTY AND EQUIPMENT, net
    
    
    1,173
    
    
    
    1,228DEFERRED INCOME TAXES
    
    
    168
    
    
    
    168OTHER LONG-TERM ASSETS
    
    
    57
    
    
    
    45$
    19,184
    
    
    $
    19,602CURRENT LIABILITIES:Trade accounts payable
    
    $
    638
    
    
    $
    451Accrued liabilities
    
    
    910
    
    
    
    944Accrued rebates
    
    
    331
    
    
    
    453Trade accounts payable to stockholder
    
    
    3,446
    
    
    
    4,097Total current liabilities
    
    
    5,325
    
    
    
    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; 3,857,349 and
3,850,974 shares issued, respectively
    
    
    4
    
    
    
    4Additional paid-in capital
    
    
    11,836
    
    
    
    11,814Retained earnings
    
    
    2,431
    
    
    
    2,227Treasury stock, 80,999 and 76,741 shares at cost, respectively
    
    
    (412
    )
    
    
    (388
    )13,859
    
    
    
    13,657$
    19,184
    
    
    $
    19,602
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VODAVI TECHNOLOGY, INC.
 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 In thousands except per share amounts
 Three Months EndedMarch 31,2006
    
    
    2005REVENUE, net
    
    $
    10,005
    
    
    $
    9,866COST OF GOODS SOLD
    
    
    6,553
    
    
    
    6,392GROSS MARGIN
    
    
    3,452
    
    
    
    3,474OPERATING EXPENSES:Engineering and product development
    
    
    478
    
    
    
    518Selling, general and administrative
    
    
    2,699
    
    
    
    2,6543,177
    
    
    
    3,172OPERATING INCOME
    
    
    275
    
    
    
    302INTEREST INCOME
    
    
    54
    
    
    
    12INCOME BEFORE INCOME TAXES
    
    
    329
    
    
    
    314INCOME TAX PROVISION
    
    
    125
    
    
    
    119NET INCOME
    
    $
    204
    
    
    $
    195EARNINGS PER COMMON SHARE:Basic
    
    $
    0.05
    
    
    $
    0.05Diluted
    
    $
    0.05
    
    
    $
    0.05WEIGHTED AVERAGE SHARES OUTSTANDING:Basic
    
    
    3,775
    
    
    
    3,721Diluted
    
    
    4,116
    
    
    
    4,144
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VODAVI TECHNOLOGY, INC.
 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 In thousands
 Three Months EndedMarch 31,2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    204
    
    
    $
    195Adjustments to reconcile net income to net cash
flows provided by operating activities:Depreciation and amortization
    
    
    112
    
    
    
    116Tax benefit on stock option exercises
    
    
    9
    
    
    
    46Loss on sale of property and equipment
    
    
    18
    
    
    
    Changes in working capital:Accounts receivable, net
    
    
    1,452
    
    
    
    695Inventory
    
    
    (442
    )
    
    
    788Prepaid and other current assets
    
    
    (151
    )
    
    
    (82
    )Other long-term assets and deferred taxes
    
    
    (12
    )
    
    
    Trade accounts payable
    
    
    (464
    )
    
    
    (832
    )Accrued liabilities
    
    
    (156
    )
    
    
    (758
    )Net cash flows provided by operating activities
    
    
    570
    
    
    
    168CASH FLOWS FROM INVESTING ACTIVITIES:Proceeds from sale of property and equipment
    
    
    16
    
    
    
    Cash paid to acquire property and equipment
    
    
    (91
    )
    
    
    (94
    )Net cash flows used in investing activities
    
    
    (75
    )
    
    
    (94
    )CASH FLOWS FROM FINANCING ACTIVITIES:Purchase of treasury stock
    
    
    (24
    )
    
    
    (51
    )Stock options exercised
    
    
    13
    
    
    
    38Net cash flows used in financing activities
    
    
    (11
    )
    
    
    (13
    )CHANGE IN CASH
    
    
    484
    
    
    
    61CASH, beginning of period
    
    
    6,538
    
    
    
    4,000CASH, end of period
    
    $
    7,022
    
    
    $
    4,061SUPPLEMENTAL CASH FLOW INFORMATION:Cash paid for interest
    
    $
    
    
    
    $
    Cash paid for income taxes
    
    $
    45
    
    
    $
    113
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VODAVI TECHNOLOGY, INC.
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31, 2006
      6




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Three Months EndedMarch 31,2006
    
    
    2005(in thousands)Net income
    
    $
    204
    
    
    $
    195Weighted average common shares:Basic
    
    
    3,775
    
    
    
    3,721Effect of dilutive stock options (1)
    
    
    341
    
    
    
    423Diluted
    
    
    4,116
    
    
    
    4,144Anti-dilutive stock options (2)
    
    
    66
    
    
    
    34
 
 (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.   7




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For the Quarter EndedMarch 31, 2005(In Thousands, Except PerShare Amounts)Net income:As reported
    
    $
    195Share-based employee compensation included in
net income
    
    
    Fair value of options granted, net of taxes
    
    
    (65
    )Pro forma net income
    
    $
    130Earnings per share:As reported  Basic
    
    $
    0.05As reported  Diluted
    
    $
    0.05Pro forma  Basic
    
    $
    0.03Pro forma  Diluted
    
    $
    0.03
       
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Business Overview
  8




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Critical Accounting Policies and Estimates
   Customer Incentives
  Accounts Receivable
  Sales Returns
  Excess and Obsolete Inventory
  9




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Results of Operations
  Three Months EndedMarch 31,2006
    
    
    2005Revenue
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold
    
    
    65.5
    
    
    
    64.8Gross margin
    
    
    34.5
    
    
    
    35.2Operating expenses:Engineering and product development
    
    
    4.8
    
    
    
    5.2Selling, general, and administrative
    
    
    27.0
    
    
    
    26.931.8
    
    
    
    32.1Operating income
    
    
    2.7
    
    
    
    3.1Interest income
    
    
    0.5
    
    
    
    Income before income taxes
    
    
    3.2
    
    
    
    3.1Income tax provision
    
    
    1.2
    
    
    
    1.2Net income
    
    
    2.0
    %
    
    
    1.9
    %
 Quarter Ended March 31, 2006 Compared With Quarter Ended March 31, 2005
 Revenue
   10




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Gross Margin
  Engineering and Product Development
  Selling, General, and Administrative Expenses
  Interest Income
  Income Taxes
  Liquidity and Capital Resources
   11




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(in thousands)
 Payment due by periodContractual
    
    
    
    
    
    Less than
    
    
    
    
    
    
    
    
    
    
    More thanObligations
    
    Total
    
    
    1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    5 yearsOperating Lease
Obligations
    
    $
    4,533
    
    
    $
    804
    
    
    $
    1,570
    
    
    $
    1,570
    
    
    $
    589Other Obligations
    
    
    200
    
    
    
    100
    
    
    
    100
    
    
    
    
    
    
    
    Purchase Obligations
    
    
    5,610
    
    
    
    5,610
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    10,343
    
    
    $
    6,514
    
    
    $
    1,670
    
    
    $
    1,570
    
    
    $
    589
   International Manufacturing Sources
  12




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CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
   13




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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
    
    ProgramsJanuary 1  January 31
    
    None
    
    None
    
    NoneFebruary 1  February 28
    
    None
    
    None
    
    NoneMarch 1  March 31
    
    
    4,258
    
    
    $
    5.55
    
    
    
    4,258Total
    
    
    
    
    
    
    
    
    
    
    4,258
    
    
    $
    
 Defaults Upon Senior Securities
  Submission of Matters to a Vote of Security Holders
  Other Information
  Exhibits and Reports on Form 8-K
  10.60
    
    Second Modification to Credit Agreement, dated April 28, 2006, between Vodavi
Communications Systems, Inc. and Comerica Bank.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: May 1, 2006
    /s/ Gregory K. RoeperGregory K. RoeperPresident and Chief Executive
Officer
(Principal Executive Officer)Dated: May 1, 2006
    /s/ David A. HusbandDavid A. HusbandChief Financial Officer and Vice
President  Finance
(Principal Financial and Accounting Officer) 15




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EXHIBIT INDEX
 10.60
    
    Second Modification to Credit Agreement, dated April 28, 2006, between Vodavi
Communications Systems, Inc. and Comerica Bank.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.