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




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VODAVI TECHNOLOGY, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED September 30, 2006
 TABLE OF CONTENTS
 PagePART I. FINANCIAL INFORMATIONItem 1. Financial StatementsUnaudited Condensed Consolidated Balance Sheets  September 30, 2006 and December 31, 2005
    
    
    3Unaudited Condensed Consolidated Statements of Operations  Three Months and Nine Months Ended September 30, 2006 and 2005
    
    
    4Unaudited Condensed Consolidated Statements of Cash Flows  Nine Months Ended September 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-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
 September 30,
    
    
    December 31,2006
    
    
    2005CURRENT ASSETS:Cash
    
    $
    7,487
    
    
    $
    6,538Accounts receivable, net of reserves for doubtful accounts
and sales returns of $276 and $279, respectively
    
    
    6,055
    
    
    
    7,126Inventory
    
    
    4,024
    
    
    
    3,543Deferred income taxes
    
    
    446
    
    
    
    446Prepaid and other current assets
    
    
    1,064
    
    
    
    508Total current assets
    
    
    19,076
    
    
    
    18,161PROPERTY AND EQUIPMENT, net
    
    
    1,093
    
    
    
    1,228DEFERRED INCOME TAXES
    
    
    168
    
    
    
    168OTHER LONG-TERM ASSETS
    
    
    58
    
    
    
    45$
    20,395
    
    
    $
    19,602CURRENT LIABILITIES:Trade accounts payable
    
    $
    726
    
    
    $
    451Accrued liabilities
    
    
    985
    
    
    
    944Accrued rebates
    
    
    614
    
    
    
    453Trade accounts payable to stockholder
    
    
    3,689
    
    
    
    4,097Total current liabilities
    
    
    6,014
    
    
    
    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
    
    
    3,033
    
    
    
    2,227Treasury stock, 97,499 and 76,741 shares at cost, respectively
    
    
    (507
    )
    
    
    (388
    )14,381
    
    
    
    13,657$
    20,395
    
    
    $
    19,602
  3




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VODAVI TECHNOLOGY, INC.
 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
 In thousands, except share and per share amounts
 Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2006
    
    
    September 30, 20062006
    
    
    2005
    
    
    2006
    
    
    2005REVENUE, net
    
    $
    10,129
    
    
    $
    12,256
    
    
    $
    31,142
    
    
    $
    32,721COST OF GOODS SOLD
    
    
    6,700
    
    
    
    7,729
    
    
    
    20,248
    
    
    
    20,856GROSS MARGIN
    
    
    3,429
    
    
    
    4,527
    
    
    
    10,894
    
    
    
    11,865OPERATING EXPENSES:Engineering and product development
    
    
    516
    
    
    
    485
    
    
    
    1,536
    
    
    
    1,503Selling, general and administrative
    
    
    2,666
    
    
    
    2,998
    
    
    
    8,251
    
    
    
    8,4403,182
    
    
    
    3,483
    
    
    
    9,787
    
    
    
    9,943OPERATING INCOME
    
    
    247
    
    
    
    1,044
    
    
    
    1,107
    
    
    
    1,922INTEREST INCOME
    
    
    77
    
    
    
    30
    
    
    
    194
    
    
    
    64INCOME BEFORE INCOME TAXES
    
    
    324
    
    
    
    1,074
    
    
    
    1,301
    
    
    
    1,986INCOME TAX PROVISION
    
    
    123
    
    
    
    408
    
    
    
    494
    
    
    
    753NET INCOME
    
    $
    201
    
    
    $
    666
    
    
    $
    807
    
    
    $
    1,233EARNINGS PER COMMON SHARE:Basic
    
    $
    0.05
    
    
    $
    0.18
    
    
    $
    0.21
    
    
    $
    0.33Diluted
    
    $
    0.05
    
    
    $
    0.16
    
    
    $
    0.20
    
    
    $
    0.30WEIGHTED AVERAGE SHARES OUTSTANDING:Basic
    
    
    3,763
    
    
    
    3,725
    
    
    
    3,770
    
    
    
    3,725Diluted
    
    
    4,084
    
    
    
    4,071
    
    
    
    4,101
    
    
    
    4,101
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VODAVI TECHNOLOGY, INC.
 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 In thousands
 Nine Months EndedSeptember 30,2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    807
    
    
    $
    1,233Adjustments to reconcile net income to net cash
flows provided by operating activities:Depreciation and amortization
    
    
    353
    
    
    
    351Tax benefit on stock option exercises
    
    
    13
    
    
    
    53Loss on sale of property and equipment
    
    
    13
    
    
    
    Changes in operating assets and liabilities:Accounts receivable, net
    
    
    1,071
    
    
    
    (106
    )Inventory
    
    
    (481
    )
    
    
    1,307Prepaid and other current assets
    
    
    (556
    )
    
    
    (145
    )Other long-term assets and deferred taxes
    
    
    (13
    )
    
    
    Trade accounts payable
    
    
    (133
    )
    
    
    (553
    )Accrued liabilities
    
    
    201
    
    
    
    (92
    )Net cash flows provided by operating activities
    
    
    1,275
    
    
    
    2,048CASH FLOWS FROM INVESTING ACTIVITIES:Proceeds from sale of property and equipment
    
    
    16
    
    
    
    Cash paid to acquire property and equipment
    
    
    (247
    )
    
    
    (310
    )Net cash flows used in investing activities
    
    
    (231
    )
    
    
    (310
    )CASH FLOWS FROM FINANCING ACTIVITIES:Purchase of treasury stock
    
    
    (119
    )
    
    
    (236
    )Stock options exercised
    
    
    24
    
    
    
    59Net cash flows used in financing activities
    
    
    (95
    )
    
    
    (177
    )CHANGE IN CASH
    
    
    949
    
    
    
    1,561CASH, beginning of period
    
    
    6,538
    
    
    
    4,000CASH, end of period
    
    $
    7,487
    
    
    $
    5,561SUPPLEMENTAL CASH FLOW INFORMATION:Cash paid for interest
    
    $
    
    
    
    $
    Cash paid for income taxes
    
    $
    413
    
    
    $
    514
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VODAVI TECHNOLOGY, INC.
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 September 30, 2006
          6




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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands)Net income
    
    $
    201
    
    
    $
    666
    
    
    $
    807
    
    
    $
    1,233Weighted average common shares:Basic
    
    
    3,763
    
    
    
    3,725
    
    
    
    3,770
    
    
    
    3,725Effect of dilutive stock options (1)
    
    
    321
    
    
    
    346
    
    
    
    331
    
    
    
    376Diluted
    
    
    4,084
    
    
    
    4,071
    
    
    
    4,101
    
    
    
    4,101Anti-dilutive stock options (2)
    
    
    71
    
    
    
    139
    
    
    
    109
    
    
    
    124
 
 (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.    Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2005(In Thousands, Except Per Share Amounts)Net income:As reported
    
    $
    666
    
    
    $
    1,233Share-based employee compensation included
in net income
    
    
    
    
    
    
    Fair value of options granted, net of taxes
    
    
    (12
    )
    
    
    (133
    )Pro forma net income
    
    $
    654
    
    
    $
    1,100Earnings per share:As reported  Basic
    
    $
    0.18
    
    
    $
    0.33As reported  Diluted
    
    
    0.16
    
    
    
    0.30Pro forma  Basic
    
    
    0.18
    
    
    
    0.30Pro forma  Diluted
    
    $
    0.16
    
    
    $
    0.27
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Accounting
for Uncertainty in Income Taxes Accounting for Income
Taxes
    8




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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
  Sales Returns
  9




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Excess and Obsolete Inventory
   Results of Operations
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Revenue
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold
    
    
    66.1
    
    
    
    63.1
    
    
    
    65.0
    
    
    
    63.7Gross margin
    
    
    33.9
    
    
    
    36.9
    
    
    
    35.0
    
    
    
    36.3Operating expenses:Engineering and product development
    
    
    5.1
    
    
    
    3.9
    
    
    
    4.9
    
    
    
    4.6Selling, general, and administrative
    
    
    26.3
    
    
    
    24.5
    
    
    
    26.5
    
    
    
    25.831.4
    
    
    
    28.4
    
    
    
    31.4
    
    
    
    30.4Operating income
    
    
    2.5
    
    
    
    8.5
    
    
    
    3.6
    
    
    
    5.9Interest income
    
    
    0.7
    
    
    
    0.2
    
    
    
    0.6
    
    
    
    0.2Pretax income
    
    
    3.2
    
    
    
    8.7
    
    
    
    4.2
    
    
    
    6.1Income tax expense
    
    
    1.2
    
    
    
    3.3
    
    
    
    1.6
    
    
    
    2.3Net income
    
    
    2.0
    %
    
    
    5.4
    %
    
    
    2.6
    %
    
    
    3.8
    %
 Quarter Ended September 30, 2006 Compared With Quarter Ended September 30, 2005
 Revenue
  10




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Gross Margin
  Engineering and Product Development
  Selling, General, and Administrative Expenses
  Interest Income
  Income Taxes
  Nine Months Ended September 30, 2006 Compared With Nine Months Ended September 30, 2005
 Revenue
  11




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Gross Margin
  Engineering and Product Development
  Selling, General, and Administrative Expenses
  Interest Income
  Income Taxes
  Liquidity and Capital Resources
   12




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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
    
    $
    4,164
    
    
    $
    800
    
    
    $
    1,598
    
    
    $
    1,570
    
    
    $
    196Other Obligations
    
    
    383
    
    
    
    283
    
    
    
    100
    
    
    
    
    
    
    
    Purchase Obligations
    
    
    7,036
    
    
    
    7,036
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    11,583
    
    
    $
    8,119
    
    
    $
    1,698
    
    
    $
    1,570
    
    
    $
    196
   13




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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
    
    ProgramsJuly 1 - July 31
    
    None
    
    None
    
    NoneAugust 1 - August 31
    
    None
    
    None
    
    NoneSeptember 1 - September 30
    
    None
    
    None
    
    NoneTotal
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    905,000
 Defaults Upon Senior Securities
  Submission of Matters to a Vote of Security Holders
  Other Information
  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.
 
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SIGNATURES
  VODAVI TECHNOLOGY, INC.Dated: November 13, 2006
    /s/ Gregory K. RoeperGregory K. RoeperPresident and Chief Executive Officer
(Principal Executive Officer) Dated: November 13, 2006
    /s/ David A. HusbandDavid A. HusbandChief Financial Officer and Vice President - Finance

(Principal Financial and Accounting Officer) 16