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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 September 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  (Registrants
telephone number, including area code)
 þ o
 o þ
 o þ




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VODAVI TECHNOLOGY, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED September 30, 2005
  
 TABLE OF CONTENTS
 PagePART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsConsolidated Balance
Sheets  September 30, 2005 (unaudited) and December 31, 2004
    
    
    3Unaudited
Consolidated Statements of Operations  Three Months and Nine Months Ended September 30, 2005 and 2004
    
    
    4Unaudited
Consolidated Statements of Cash Flows  Nine Months Ended September 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
 
 ITEM 1.
    
    FINANCIAL STATEMENTS
 VODAVI TECHNOLOGY, INC.
 
 CONSOLIDATED BALANCE SHEETS  In thousands, except share and per share amounts
 (unaudited)September 30,
    
    
    December 31,2005
    
    
    2004(A)CURRENT ASSETS:Cash
    
    $
    5,561
    
    
    $
    4,000Accounts receivable, net of reserves for doubtful accounts
and sales returns of $297 and $387, respectively
    
    
    7,251
    
    
    
    7,145Inventory
    
    
    3,262
    
    
    
    4,569Deferred income taxes
    
    
    454
    
    
    
    454Prepaid and other current assets
    
    
    664
    
    
    
    519Total current assets
    
    
    17,192
    
    
    
    16,687PROPERTY AND EQUIPMENT, net
    
    
    1,327
    
    
    
    1,363GOODWILL
    
    
    725
    
    
    
    725OTHER LONG-TERM ASSETS, net
    
    
    45
    
    
    
    50$
    19,289
    
    
    $
    18,825CURRENT LIABILITIES:Trade accounts payable
    
    $
    610
    
    
    $
    497Accrued liabilities
    
    
    1,379
    
    
    
    1,352Accrued rebates
    
    
    522
    
    
    
    641Trade accounts payable to stockholder
    
    
    3,324
    
    
    
    3,990Total current liabilities
    
    
    5,835
    
    
    
    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
    
    
    2,207
    
    
    
    974Treasury stock, 76,741 and 32,402 shares at cost, respectively
    
    
    (388
    )
    
    
    (152
    )13,430
    
    
    
    12,321$
    19,289
    
    
    $
    18,825
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VODAVI TECHNOLOGY, INC.
 
 UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS  In thousands except per share amounts
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004REVENUE, net
    
    $
    12,256
    
    
    $
    11,690
    
    
    $
    32,721
    
    
    $
    32,717COST OF GOODS SOLD
    
    
    7,729
    
    
    
    7,529
    
    
    
    20,856
    
    
    
    21,232GROSS MARGIN
    
    
    4,527
    
    
    
    4,161
    
    
    
    11,865
    
    
    
    11,485OPERATING EXPENSES:Engineering and product development
    
    
    485
    
    
    
    447
    
    
    
    1,503
    
    
    
    1,460Selling, general and administrative
    
    
    2,998
    
    
    
    2,649
    
    
    
    8,440
    
    
    
    7,8603,483
    
    
    
    3,096
    
    
    
    9,943
    
    
    
    9,320OPERATING INCOME
    
    
    1,044
    
    
    
    1,065
    
    
    
    1,922
    
    
    
    2,165INTEREST (INCOME) EXPENSE
    
    
    (30
    )
    
    
    (3
    )
    
    
    (64
    )
    
    
    11INCOME BEFORE INCOME TAXES
    
    
    1,074
    
    
    
    1,068
    
    
    
    1,986
    
    
    
    2,154INCOME TAX PROVISION
    
    
    408
    
    
    
    411
    
    
    
    753
    
    
    
    828NET INCOME
    
    $
    666
    
    
    $
    657
    
    
    $
    1,233
    
    
    $
    1,326EARNINGS PER COMMON SHARE:Basic
    
    $
    0.18
    
    
    $
    0.18
    
    
    $
    0.33
    
    
    $
    0.36Diluted
    
    $
    0.16
    
    
    $
    0.16
    
    
    $
    0.30
    
    
    $
    0.32WEIGHTED AVERAGE SHARES OUTSTANDING:Basic
    
    
    3,725
    
    
    
    3,658
    
    
    
    3,725
    
    
    
    3,635Diluted
    
    
    4,071
    
    
    
    4,087
    
    
    
    4,101
    
    
    
    4,106
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VODAVI TECHNOLOGY, INC.
 
 UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS  In thousands
 Nine Months EndedSeptember 30,2005
    
    
    2004CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    1,233
    
    
    $
    1,326Adjustments to reconcile net income to net cash
flows provided by operating activities:Depreciation and amortization
    
    
    351
    
    
    
    366Tax benefit on stock option exercises
    
    
    53
    
    
    
    97Changes in working capital:Accounts receivable, net
    
    
    (106
    )
    
    
    (1,225
    )Inventory
    
    
    1,307
    
    
    
    462Prepaid and other current assets
    
    
    (145
    )
    
    
    157Other long-term assets and deferred taxes
    
    
    
    
    
    
    (3
    )Trade accounts payable
    
    
    (553
    )
    
    
    (104
    )Accrued liabilities
    
    
    (92
    )
    
    
    (98
    )Net cash flows provided by operating activities
    
    
    2,048
    
    
    
    978CASH FLOWS FROM INVESTING ACTIVITIES:Cash paid to acquire property and equipment
    
    
    (310
    )
    
    
    (290
    )Net cash flows used in investing activities
    
    
    (310
    )
    
    
    (290
    )CASH FLOWS FROM FINANCING ACTIVITIES:Repayments on term loan
    
    
    
    
    
    
    (900
    )Purchase of treasury stock
    
    
    (236
    )
    
    
    (152
    )Stock options exercised
    
    
    59
    
    
    
    227Net cash flows used in financing activities
    
    
    (177
    )
    
    
    (825
    )CHANGE IN CASH
    
    
    1,561
    
    
    
    (137
    )CASH, beginning of period
    
    
    4,000
    
    
    
    2,924CASH, end of period
    
    $
    5,561
    
    
    $
    2,787SUPPLEMENTAL CASH FLOW INFORMATION:Cash paid for interest
    
    $
    
    
    
    $
    14Cash paid for income taxes
    
    $
    514
    
    
    $
    823
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VODAVI TECHNOLOGY, INC.
 
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
 (a)
    
    INTERIM FINANCIAL REPORTING
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(b)
    
    CALCULATION OF EARNINGS PER SHARE
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(In thousands)Net income
    
    $
    666
    
    
    $
    657
    
    
    $
    1,233
    
    
    $
    1,326Weighted average common shares:Basic
    
    
    3,725
    
    
    
    3,658
    
    
    
    3,725
    
    
    
    3,635Effect of dilutive stock options (1)
    
    
    346
    
    
    
    429
    
    
    
    376
    
    
    
    471Diluted
    
    
    4,071
    
    
    
    4,087
    
    
    
    4,101
    
    
    
    4,106Anti-dilutive stock options (2)
    
    
    139
    
    
    
    111
    
    
    
    124
    
    
    
    106
 
 (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
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(In Thousands, Except Per Share Amounts)Net income:As reported
    
    $
    666
    
    
    $
    657
    
    
    $
    1,233
    
    
    $
    1,326Pro forma
compensation
expense, net of
taxes
    
    
    (12
    )
    
    
    (50
    )
    
    
    (133
    )
    
    
    (141
    )Pro forma net income
    
    $
    654
    
    
    $
    607
    
    
    $
    1,100
    
    
    $
    1,185Earnings per share:As reported  Basic
    
    $
    0.18
    
    
    $
    0.18
    
    
    $
    0.33
    
    
    $
    0.36As reported  Diluted
    
    
    0.16
    
    
    
    0.16
    
    
    
    0.30
    
    
    
    0.32Pro forma  Basic
    
    
    0.18
    
    
    
    0.17
    
    
    
    0.30
    
    
    
    0.33Pro forma  Diluted
    
    $
    0.16
    
    
    $
    0.15
    
    
    $
    0.27
    
    
    $
    0.29
  (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
    
    Nine Months EndedSeptember 30,
    
    September 30,2005
    
    2004
    
    2005
    
    2004Revenue
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold
    
    
    63.1
    
    
    
    64.4
    
    
    
    63.7
    
    
    
    64.9Gross margin
    
    
    36.9
    
    
    
    35.6
    
    
    
    36.3
    
    
    
    35.1Operating expenses:Engineering and product development
    
    
    3.9
    
    
    
    3.8
    
    
    
    4.6
    
    
    
    4.5Selling, general, and administrative
    
    
    24.5
    
    
    
    22.7
    
    
    
    25.8
    
    
    
    24.028.4
    
    
    
    26.5
    
    
    
    30.4
    
    
    
    28.5Operating income
    
    
    8.5
    
    
    
    9.1
    
    
    
    5.9
    
    
    
    6.6Interest (income) expense, net
    
    
    (0.2
    )
    
    
    0.0
    
    
    
    (0.2
    )
    
    
    0.0Pretax income
    
    
    8.7
    
    
    
    9.1
    
    
    
    6.1
    
    
    
    6.6Income tax expense
    
    
    3.3
    
    
    
    3.5
    
    
    
    2.3
    
    
    
    2.5Net income
    
    
    5.4
    %
    
    
    5.6
    %
    
    
    3.8
    %
    
    
    4.1
    %
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Quarter Ended September 30, 2005 Compared With Quarter Ended September 30, 2004
 Revenue
    Gross Margin
  Engineering and Product Development
  Selling, General, and Administrative Expenses
  Interest Expense
  Income Taxes
  11




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




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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
    
    $
    4,948
    
    
    $
    825
    
    
    $
    1,571
    
    
    $
    1,570
    
    
    $
    982Purchase Obligations
    
    
    6,882
    
    
    
    6,882
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    11,830
    
    
    $
    7,707
    
    
    $
    1,571
    
    
    $
    1,570
    
    
    $
    982
   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
 Item 1.
    
    Legal ProceedingsNot applicable.Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
 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
    
    ProgramsJuly 1 to July 31
    
    None
    
    
    N/A
    
    
    NoneAugust 1 to August 31
    
    
    2,900
    
    
    $
    5.48
    
    
    
    2,900September 1 to September 30
    
    
    21,339
    
    
    $
    5.03
    
    
    
    21,339Total
    
    
    24,239
    
    
    
    
    
    
    
    24,239
    
    
    $
    815,000
 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.
    
    Exhibits31.1
    
    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.
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SIGNATURES
  VODAVI TECHNOLOGY, INC.Dated: October 24, 2005
    /s/ Gregory K. RoeperGregory K. RoeperPresident and Chief Executive Officer
(Principal Executive Officer) Dated: October 24, 2005
    /s/ David A. HusbandDavid A. HusbandChief Financial Officer and
Vice President  Finance
(Principal Financial and Accounting Officer) 17