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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, 2005
 Commission File No. 0-26912
 Vodavi Technology, Inc.
  Delaware
    
    86-0789350(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)4717 East Hilton Avenue, Ste. 400, Phoenix, Arizona
    
    85034(Address of principal executive offices)
    
    (Zip Code)
 (480) 443-6000
 þ o
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VODAVI TECHNOLOGY, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED June 30, 2005
 TABLE OF CONTENTS
 PagePART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsUnaudited Consolidated Balance Sheets  June 30, 2005 and December 31, 2004
    
    
    3Unaudited Consolidated Statements of Operations  Three Months and Six Months Ended June 30, 2005 and 2004
    
    
    4Unaudited Consolidated Statements of Cash Flows  Six Months Ended June 30, 2005 and 2004
    
    
    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
    
    
    14Item 4.
    
    Controls and Procedures
    
    
    14PART II.
    
    OTHER INFORMATION
    
    
    16SIGNATURES
    
    
    17EX-31.1EX-31.2EX-32.1EX-32.2
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PART I  FINANCIAL INFORMATION
 
  VODAVI TECHNOLOGY, INC.
 
 UNAUDITED CONSOLIDATED BALANCE SHEETS  In thousands, except share and per share amounts
 June 30,
    
    December 31,2005
    
    2004CURRENT ASSETS:Cash
    
    $
    4,678
    
    
    $
    4,000Accounts receivable, net of reserves for doubtful accounts
and sales returns of $340 and $387, respectively
    
    
    6,946
    
    
    
    7,145Inventory
    
    
    3,515
    
    
    
    4,569Deferred income taxes
    
    
    454
    
    
    
    454Prepaid and other current assets
    
    
    840
    
    
    
    519Total current assets
    
    
    16,433
    
    
    
    16,687PROPERTY AND EQUIPMENT, net
    
    
    1,301
    
    
    
    1,363GOODWILL
    
    
    725
    
    
    
    725OTHER LONG-TERM ASSETS
    
    
    45
    
    
    
    50$
    18,504
    
    
    $
    18,825CURRENT LIABILITIES:Trade accounts payable
    
    $
    697
    
    
    $
    497Accrued liabilities
    
    
    919
    
    
    
    1,352Accrued rebates
    
    
    426
    
    
    
    641Trade accounts payable to stockholder
    
    
    3,554
    
    
    
    3,990Total current liabilities
    
    
    5,596
    
    
    
    6,480Deferred Income Taxes
    
    
    24
    
    
    
    24COMMITMENTS 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;
3,782,589 and 3,747,464 shares issued respectively
    
    
    4
    
    
    
    4Additional paid-in capital
    
    
    11,607
    
    
    
    11,495Retained earnings
    
    
    1,538
    
    
    
    974Treasury stock, 52,502 and 32,402 shares at cost, respectively
    
    
    (265
    )
    
    
    (152
    )12,884
    
    
    
    12,321$
    18,504
    
    
    $
    18,825
  3




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VODAVI TECHNOLOGY, INC.
 
 UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS  In thousands except per share amounts
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004REVENUE, net
    
    $
    10,598
    
    
    $
    11,240
    
    
    $
    20,464
    
    
    $
    21,027COST OF GOODS SOLD
    
    
    6,737
    
    
    
    7,296
    
    
    
    13,129
    
    
    
    13,704GROSS MARGIN
    
    
    3,861
    
    
    
    3,944
    
    
    
    7,335
    
    
    
    7,323OPERATING EXPENSES:Engineering and product development
    
    
    500
    
    
    
    492
    
    
    
    1,018
    
    
    
    1,013Selling, general and administrative
    
    

    2,787
    
    
    
    2,712
    
    
    
    5,442
    
    
    
    5,2093,287
    
    
    
    3,204
    
    
    
    6,460
    
    
    
    6,222OPERATING INCOME
    
    
    574
    
    
    
    740
    
    
    
    875
    
    
    
    1,101INTEREST (INCOME) EXPENSE
    
    
    (21
    )
    
    
    4
    
    
    
    (33
    )
    
    
    14INCOME BEFORE INCOME TAXES
    
    
    595
    
    
    
    736
    
    
    
    908
    
    
    
    1,087INCOME TAX PROVISION
    
    
    226
    
    
    
    283
    
    
    
    345
    
    
    
    417NET INCOME
    
    $
    369
    
    
    $
    453
    
    
    $
    563
    
    
    $
    670EARNINGS PER COMMON SHARE:Basic
    
    $
    0.10
    
    
    $
    0.12
    
    
    $
    0.15
    
    
    $
    0.18Diluted
    
    $
    0.09
    
    
    $
    0.11
    
    
    $
    0.14
    
    
    $
    0.16WEIGHTED AVERAGE SHARES OUTSTANDING:Basic
    
    
    3,729
    
    
    
    3,632
    
    
    
    3,725
    
    
    
    3,624Diluted
    
    
    4,092
    
    
    
    4,071
    
    
    
    4,118
    
    
    
    4,115
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VODAVI TECHNOLOGY, INC.
 
 UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS  In thousands
 Six Months EndedJune 30,2005
    
    2004CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    564
    
    
    $
    670Adjustments to reconcile net income to net cash
flows provided by operating activities:Depreciation and amortization
    
    
    231
    
    
    
    248Tax benefit on stock option exercises
    
    
    53
    
    
    
    65Changes in working capital:Accounts receivable, net
    
    
    199
    
    
    
    (715
    )Inventory
    
    
    1,054
    
    
    
    996Prepaid and other current assets
    
    
    (321
    )
    
    
    103Other long-term assets and deferred taxes
    
    
    
    
    
    
    (2
    )Trade accounts payable
    
    
    (236
    )
    
    
    (160
    )Accrued liabilities
    
    
    (648
    )
    
    
    (369
    )Net cash flows provided by operating activities
    
    
    896
    
    
    
    836CASH FLOWS FROM INVESTING ACTIVITIES:Cash paid to acquire property and equipment
    
    
    (164
    )
    
    
    (233
    )Net cash flows used in investing activities
    
    
    (164
    )
    
    
    (233
    )CASH FLOWS FROM FINANCING ACTIVITIES:Repayments on term loan
    
    
    
    
    
    
    (900
    )Purchase of treasury stock
    
    
    (113
    )
    
    
    (152
    )Stock options exercised
    
    
    59
    
    
    
    132Net cash flows used in financing activities
    
    
    (54
    )
    
    
    (920
    )CHANGE IN CASH
    
    
    678
    
    
    
    (317
    )CASH, beginning of period
    
    
    4,000
    
    
    
    2,924CASH, end of period
    
    $
    4,678
    
    
    $
    2,607SUPPLEMENTAL CASH FLOW INFORMATION:Cash paid for interest
    
    $
    
    
    
    $
    4
  5




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VODAVI TECHNOLOGY, INC.
 
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
 (a)
    
    INTERIM FINANCIAL REPORTING
     6




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(b)
    
    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 30,2005
    
    2004
    
    2005
    
    2004(In thousands)Net income
    
    $
    369
    
    
    $
    453
    
    
    $
    563
    

    
    $
    670Weighted average common shares:Basic
    
    
    3,729
    
    
    
    3,632
    
    
    
    3,725
    
    
    
    3,624Effect of dilutive stock options (1)
    
    
    363
    
    
    
    439
    
    
    
    393
    
    
    
    491Diluted
    
    
    4,092
    
    
    
    4,071
    
    
    
    4,118
    
    
    
    4,115Anti-dilutive stock options (2)
    
    
    139
    
    
    
    96
    
    
    
    67
    
    
    
    96
 
 (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. (c)
    
    STOCK OPTION PLANS
   7




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Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004(In Thousands, Except Per Share Amounts)Net income:As reported
    
    $
    369
    
    
    $
    453
    
    
    $
    563
    
    
    $
    670Options expense, net of taxes
    
    
    (66
    )
    
    
    (52
    )
    
    
    (120
    )
    
    
    (90
    )Pro forma net income
    
    $
    303
    
    
    $
    401
    
    
    $
    443
    
    
    $
    580Earnings per share:As reported  Basic
    
    $
    0.10
    
    
    $
    0.12
    
    
    $
    0.15
    
    
    $
    0.18As reported  Diluted
    
    
    0.09
    
    
    
    0.11
    
    
    
    0.14
    
    
    
    0.16Pro forma  Basic
    
    
    0.08
    
    
    
    0.11
    
    
    
    0.12
    
    
    
    0.16Pro forma  Diluted
    
    $
    0.07
    
    
    $
    0.10
    
    
    $
    0.11
    
    
    $
    0.14
  (d)
    
    SEGMENT REPORTING
  (e)
    
    COMMITMENTS AND CONTINGENCIES
  (f)
    
    RECENT ACCOUNTING PRONOUNCEMENTS
  Accounting Changes and Error Corrections  A
Replacement of APB Opinion No. 20 and FASB Statement No. 3.
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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
  Bad Debts
  9




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Sales Returns
  Excess and Obsolete Inventory
   Results of Operations
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Revenue
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold
    
    
    63.6
    
    
    
    65.0
    
    
    
    64.2
    
    
    
    65.2Gross margin
    
    
    36.4
    
    
    
    35.0
    
    
    
    35.8
    
    
    
    34.8Operating expenses:Engineering and product development
    
    
    4.7
    
    
    
    4.4
    
    
    
    5.0
    
    
    
    4.8Selling, general, and administrative
    
    
    26.3
    
    
    
    24.1
    
    
    
    26.6
    
    
    
    24.831.0
    
    
    
    28.5
    
    
    
    31.6
    
    
    
    29.6Operating income
    
    
    5.4
    
    
    
    6.5
    
    
    
    4.2
    
    
    
    5.2Interest expense, net
    
    
    (0.2
    )
    
    
    0.0
    
    
    
    (0.2
    )
    
    
    0.1Pretax income
    
    
    5.6
    
    
    
    6.5
    
    
    
    4.5
    
    
    
    5.1Income tax expense
    
    
    2.1
    
    
    
    2.5
    
    
    
    1.7
    
    
    
    2.0Net income
    
    
    3.5
    %
    
    
    4.0
    %
    
    
    2.8
    %
    
    
    3.1
    %
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Quarter Ended June 30, 2005 Compared With Quarter Ended June 30, 2004
 Revenue
     Gross Margin
  Engineering and Product Development
  Selling, General, and Administrative Expenses
  11




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Interest Expense
  Income Taxes
  Six Months Ended June 30, 2005 Compared With Six Months Ended June 30, 2004
 Revenue
    Gross Margin
  Engineering and Product Development
  Selling, General, and Administrative Expenses
  Interest Expense
  12




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Income Taxes
  Liquidity and Capital Resources
        (in thousands)
 13




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Payment due by periodContractual
    
    
    
    
    
    Less than
    
    
    
    
    
    
    
    
    
    More thanObligations
    
    Total
    
    1 year
    
    1-3 years
    
    3-5 years
    
    5 yearsOperating Lease
Obligations
    
    $
    5,156
    
    
    $
    833
    
    
    $
    1,575
    
    
    $
    1,570
    
    
    $
    1,178Purchase Obligations
    
    
    6,681
    
    
    
    6,681
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    11,837
    
    
    $
    7,514
    
    
    $
    1,575
    
    
    $
    1,570
    
    
    $
    1,178
   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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15




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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
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SIGNATURES
  VODAVI TECHNOLOGY, INC.Dated: August 1, 2005
    /s/ Gregory K. RoeperGregory K. RoeperPresident and Chief Executive Officer
(Principal Executive Officer)Dated: August 1, 2005
    /s/ David A. HusbandDavid A. HusbandChief Financial Officer and Vice President  Finance
(Principal Financial and Accounting Officer) 17