SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

~~[X]~~þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, ~~2004~~2005

Commission File No. 0-26912

Vodavi Technology, Inc.

(Exact name of registrant as specified in its charter)

Delaware		86-0789350
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
4717 East Hilton Avenue, Ste. 400, Phoenix, Arizona		85034
(Address of principal executive offices)		(Zip Code)

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)

Indicate by check mark whether the registrant (~~480~~1) ~~443-6000~~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 þ No o.

Indicate by check mark whether the registrant is an accelerated filer (~~Registrant’s~~as ~~telephone~~defined ~~number,~~in ~~including~~Rule 12b-2 ~~area~~of the ~~code~~Exchange Act). Yes o No þ.

~~Indicate~~The bynumber ~~check~~of ~~mark~~shares ~~whether~~outstanding ~~the~~of registrant’s ~~(1) has~~Common ~~filed~~Stock, ~~all~~$.001 ~~reports required~~par tovalue beper ~~filed~~share, byas ~~Section 13 or 15(d)~~ of ~~the Securities Exchange Act of~~ ~~1934 during the preceding 12~~April ~~months~~25, ~~(or~~2005 ~~for such shorter period that the registrant~~ was ~~required to file such reports)~~3, ~~and (2) has been subject to such filing requirements for the past 90 days~~732,812. ~~Yes X No .~~

IndicateTable by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X. Contents

~~The~~VODAVI ~~number of shares outstanding of registrant’s Common Stock~~TECHNOLOGY, $INC.~~001~~ QUARTERLY ~~par~~REPORT ~~value per~~ON ~~share,~~FORM as10-Q FOR ofTHE ~~April 27,~~QUARTER ~~2004~~ENDED ~~was~~MARCH 331,~~624,839.~~ 2005

VODAVI TECHNOLOGY, INC. QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2004

TABLE OF CONTENTS

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Unaudited Consolidated Balance Sheets – March 31, 2004 and December 31, 2003		3
	Unaudited Consolidated Balance Sheets – March 31, 2005 and December 31, 2004		3
	Unaudited Consolidated Statements of Operations – Three Months Ended March 31, 2004 and 2003		4
	Unaudited Consolidated Statements of Operations – Three Months Ended March 31, 2005 and 2004		4
	Unaudited Consolidated Statements of Cash Flows - Three Months Ended March 31, 2004 and 2003		5
	Unaudited Consolidated Statements of Cash Flows - Three Months Ended March 31, 2005 and 2004		5
	Notes to Unaudited Consolidated Financial Statements		6
Item 2.	Management’'s Discussion and Analysis of Financial Condition and Results of Operations		9
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		13
Item 4.	Controls and Procedures		1413
PART II.	OTHER INFORMATION		1514
	SIGNATURES		1615
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

VODAVI TECHNOLOGY, INC.

~~UNAUDITED~~ CONSOLIDATED BALANCE SHEETS In thousands, except share and per share amounts

In thousands, except share and per share amounts


	March 31,			December 31,
	2005			2004
CURRENT ASSETS:
Cash	$	4,061		$	4,000
Accounts receivable, net of reserves for doubtful accounts and sales returns of $383 and $387, respectively		6,450			7,145
Inventory		3,781			4,569
Deferred income taxes		454			454
Prepaid and other current assets		601			519

Total current assets		15,347			16,687

PROPERTY AND EQUIPMENT, net		1,346			1,363

GOODWILL		725			725

OTHER LONG-TERM ASSETS		45			50

	$	17,463		$	18,825


CURRENT LIABILITIES:
Trade accounts payable	$	791		$	497
Accrued liabilities		893			1,352
Accrued rebates		342			641
Trade accounts payable to stockholder		2,864			3,990

Total current liabilities		4,890			6,480


Deferred Income Taxes		24			24

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS’ EQUITY:
Preferred stock, $.001 par value; 1,000,000 shares authorized, no shares issued		—			—
Common stock, $.001 par value; 10,000,000 shares authorized; 3,773,714 and 3,747,464 shares issued respectively		4			4
Additional paid-in capital		11,579			11,495
Retained earnings		1,169			974
Treasury stock, 40,902 and 32,402 shares at cost, respectively		(203	)		(152	)

		12,549			12,321

	$	17,438		$	18,825

	March 31,			December 31,
	2004			2003
CURRENT ASSETS:
Cash	$	2,391		$	2,924
Accounts receivable, net of reserves for doubtful accounts and sales returns of $322 and $345, respectively		6,510			6,988
Inventory		3,917			5,115
Deferred income taxes		445			445
Prepaids and other current assets		445			768
Total current assets		13,708			16,240
PROPERTY AND EQUIPMENT, net		1,471			1,453
GOODWILL		725			725
DEFERRED INCOME TAXES		34			34
OTHER LONG-TERM ASSETS		67			71
	$	16,005		$	18,523
CURRENT LIABILITIES:
Accounts payable	$	558		$	1,031
Accrued liabilities		1,258			2,195
Accounts payable to stockholder		2,878			4,208
Current maturities of long-term debt		200			200
Total current liabilities		4,894			7,634
Long-term debt, net of current maturities		650			700
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ 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			4
Additional paid-in capital		11,855			11,800
Accumulated 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.

VODAVI TECHNOLOGY, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS In thousands except per share amounts

In thousands except per share amounts


	Three Months Ended
	March 31,
	2005			2004
REVENUE, net	$	9,866		$	9,787

COST OF GOODS SOLD		6,392			6,407


GROSS MARGIN		3,474			3,380


OPERATING EXPENSES:
Engineering and product development		518			521
Selling, general and administrative		2,654			2,499

		3,172			3,020


OPERATING INCOME		302			360

INTEREST (INCOME) EXPENSE		(12	)		10


INCOME BEFORE INCOME TAXES		314			350

INCOME TAX PROVISION		119			134


NET INCOME	$	195		$	216


EARNINGS PER COMMON SHARE:
Basic	$	0.05		$	0.06

Diluted	$	0.05		$	0.05


WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic		3,721			3,616

Diluted		4,144			4,154

	Three Months Ended
	March 31,
	2004		2003
REVENUE, net	$	9,787	$	9,063
COST OF GOODS SOLD		6,407		5,884
GROSS MARGIN		3,380		3,179
OPERATING EXPENSES:
Engineering and product development		521		553
Selling, general and administrative		2,499		2,389
		3,020		2,942
OPERATING INCOME		360		237
INTEREST EXPENSE		10		25
INCOME BEFORE INCOME TAXES		350		212
INCOME TAX PROVISION		134		85
NET INCOME	$	216	$	127
EARNINGS PER COMMON SHARE:
Basic	$	0.06	$	0.03
Diluted	$	0.05	$	0.03
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic		3,616		4,350
Diluted		4,154		4,445

The accompanying notes are an integral part of these consolidated financial statements.

VODAVI TECHNOLOGY, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS In thousands

In thousands


	Three Months Ended
	March 31,
	2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	195		$	216
Adjustments to reconcile net income to net cash flows provided by (used in) operating activities:
Depreciation and amortization		116			125
Tax benefit on stock option exercises		46			26
Changes in working capital:
Accounts receivable, net		695			478
Inventory		788			1,198
Prepaid and other current assets		(82	)		323
Other long-term assets and deferred taxes		—			(2	)
Trade accounts payable		(832	)		(1,803	)
Accrued liabilities		(758	)		(937	)

Net cash flows provided by (used in) operating activities		168			(376	)


CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid to acquire property and equipment		(94	)		(137	)

Net cash flows used in investing activities		(94	)		(137	)


CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments on term loan		—			(50	)
Purchase of treasury stock		(51	)		—
Stock options exercised		38			30

Net cash flows used in financing activities		(13	)		(20	)


CHANGE IN CASH		61			(533	)

CASH, beginning of period		4,000			2,924


CASH, end of period	$	4,061		$	2,391


SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest	$	—		$	10

	Three Months Ended
	March 31,
	2004			2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	216		$	127
Adjustments to reconcile net income to net cash flows used in operating activities:
Depreciation and amortization		125			121
Tax 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			46
Other long-term assets and deferred taxes		(2	)		4
Accounts 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		—			222
Repayments on term loan		(50	)		—
Stock options exercised		30			—
Net cash flows provided by (used in) financing activities		(20	)		222
CHANGE IN CASH		(533	)		(920	)
CASH, beginning of period		2,924			1,141
CASH, end of period	$	2,391		$	221
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest	$	10		$	25

The accompanying notes are an integral part of these consolidated financial statements.

VODAVI TECHNOLOGY, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, ~~2004~~2005

(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~~2005 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~~2004.

[SPACE INTENTIONALLY LEFT BLANK]

(b) CALCULATION OF EARNINGS PER SHARE The 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:

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.


	Three Months Ended
	March 31,
	2005		2004
	(in thousands)
Net income	$	195	$	216


Weighted average common shares:
Basic		3,721		3,616
Effect of dilutive stock options (1)		423		538


Diluted		4,144		4,154


Anti-dilutive stock options (2)		34		44

A(1) ~~reconciliation~~Dilutive ofsecurities ~~the~~are ~~numerator~~calculated ~~and~~using ~~denominator~~the ~~(weighted~~treasury ~~average~~stock ~~number~~method ofand ~~shares outstanding) of~~ the ~~basic~~average ~~and~~market ~~diluted~~price ~~EPS~~during ~~computation~~the ~~is as follows:~~period.

		For the Quarter Ended
(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.
		March 31,
(c)	STOCK OPTION PLANS
		2004		2003
Net income		$	216	$	127
Weighted average common shares for basic earnings per share			3,616		4,350
Effect of dilutive stock options (1)			538		95
Weighted 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.

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:

	For the Quarter Ended March 31,
	2004			2003
	2005			2004
	(In Thousands, Except Per Share Amounts)
Net income:
As reported	$	~~216~~195		$	~~127~~216
Fair Value of options granted, net of taxes		(38	)		(36	)
Fair value of options granted, net of taxes		(65	)		(38	)
Pro forma net income	$	~~178~~130		$	91178
Earnings (loss) per share:
Earnings per share:
As reported — Basic	$	0.0605		$	0.0306
As reported — Diluted	$	0.05		$	0.0305
Pro forma — Basic	$	0.0503		$	0.0205
Pro forma — Diluted	$	0.0403		$	0.0204

During the quarterly period ended March 31, ~~2004~~2005, 3842,~~750~~500 options were granted at an exercise price of $76.0556. Also during the quarterly period ended March 31, ~~2004~~2005, 1426,~~375~~250 options were exercised with total proceeds of approximately $3038,000 that resulted in a tax benefit of $2546,000.

(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.

(f)	RECENT ACCOUNTING PRONOUNCEMENTS

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment.” This Statement replaces SFAS No. 123 and supersedes APB Opinion No. 25. SFAS No. 123R requires companies to recognize the grant date fair value of stock options and other equity-based compensation issued to employees in the income statement. The statement, as amended by the Securities and Exchange Commission, becomes effective for annual periods beginning after June 15, 2005. The Company has not determined the financial impact that the adoption of SFAS No. 123R may have on its financial statements.


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~~ telecommunications solutions, including traditional, converged, and IP-based ~~telephony~~telephone ~~products, voice~~systems ~~processing~~and ~~products~~telephony applications, as well as ~~computer~~traditional ~~telephony~~and ~~products,~~IP-based commercial grade telephones that address a wide variety of business applications. Our ~~telecommunications~~telephone ~~solutions~~ systems incorporate sophisticated features such as automatic call distribution, scalable networking, Internet ~~protocol~~Protocol, or IP, ~~and~~as ~~wireless~~well as wireless solutions. Our ~~voice~~ ~~processing~~telephony ~~products~~applications include Internet messaging, automated attendant, ~~and~~ voice and fax mail. ~~Our~~and computer -telephony products that 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~~ 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~~2005, Graybar accounted for 2834% and Target accounted for 2521% of our total accounts receivable. If either Graybar or 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.

Sales Returns

~~Sales~~products ~~Returns~~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.

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~~2004, which contains accounting policies and other ~~disclosures~~ 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 Ended
	March 31,
	2004			2003
	2005			2004
Revenue		100.0	%		100.0	%
Cost of goods sold		6564.58			6465.95
Gross margin		3435.52			3534.15
Operating expenses:
Engineering and product development		5.32			65.13
Selling, general, and administrative		2526.69			2625.46
		30.9			32.5
		32.1			30.9
Operating income		3.71			23.67
Interest expense, net		0.1			0.3
Interest (income) expense, net		—			0.1
Income before income taxes		3.61			2.3.6
Income tax provision		1.42			01.94
Net income		21.29	%		12.42	%

Quarter Ended March 31, 2005 Compared With Quarter Ended March 31, 2004

Revenue

Revenue for the quarter ended March 31, 2005 totaled $9.9 million, an increase of 1.0% from revenue of $9.8 million for the same period of 2004. Sales of our telephone systems increased 6.5% to $8.6 million during the first quarter of 2005 compared to $8.1 million in the first quarter of 2004. The increase in telephone system sales is attributed to an increase in unit sales of our STS product line and the sale of larger systems within the XTS product

~~Quarter~~line. ~~Ended~~Sales ~~March 31~~of commercial grade single line telephones declined 18.2% to $451,000 during the first quarter of 2005 compared to $551,000 in 2004. ~~Compared~~During ~~With~~the ~~Quarter~~third ~~Ended~~quarter ~~March 31~~of 2004, ~~2003~~we discontinued our 2700 Series of single line telephones and introduced the 2800 Series. While unit shipments of our commercial grade single line telephones have not declined significantly, the average selling price of our 2800 series phones is significantly less than the average selling price of the 2700 series phones. We expect sales of single line telephones to accelerate in 2005, as the 2800 series becomes more accepted in the marketplace. Sales of telephony applications, including voice processing, computer technology integration, and unified messaging decreased to $728,000 from $1.3 million between the first quarters of 2005 and 2004. The decline in telephony applications is a direct result of selling more embedded voice mail applications, which are reported in telephone system sales.

~~Revenue~~ Sales through our direct sales office in the Phoenix Metropolitan area totaled $422,000 during the first three months of 2005 compared with $409,000 during the same period of 2004. The increase in sales through our direct sales office is attributable to the expansion of our sales force and the positive impact of a focused sales and marketing program.

~~Revenue~~Our ~~for~~reported ~~the~~revenue ~~three-month~~includes ~~period~~shipping ~~ended~~and ~~March 31,~~handling ~~2004~~charges ~~totaled~~and ~~$9.8 million,~~is anrecorded ~~increase~~net of ~~8.0%, from revenue of $9.1 million for the same period~~reserves ~~of 2003. Sales to our supply house customers accounted~~ for ~~approximately~~sales ~~$5.8 million~~returns, ~~during~~discounts ~~the~~and ~~2004~~customer ~~first~~incentive ~~quarter compared with $5~~programs.~~0 million~~ inThese ~~the~~items ~~2003 first~~resulted ~~quarter. The increase~~ in ~~sales~~a ~~to our supply house customers in the~~net ~~first~~reduction ~~quarter of 2004 is related principally~~ to ~~sales~~revenue of ~~our STS telephone system. The STS product line~~$303,000 ~~which we introduced~~ in ~~January 2003,~~2005 iscompared ~~a full-featured~~with ~~telephone system designed and priced to capture~~ a ~~larger~~net ~~portion of~~reduction ~~the small business telephone system market. While we introduced the STS product line during the first quarter~~ of ~~2003~~$563,000 ~~sales~~in ~~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 $3.45 million in ~~2004~~the first quarter of 2005 compared with $3.2 4 million in ~~2003~~2004. Our gross margin as a percentage of total revenue ~~decreased~~ increased to 3435.52% during 2005 ~~2004~~ from 3534.15% during ~~2003~~2004. The ~~decrease~~increase in our gross margin percentage during ~~2004~~the first quarter of 2005 is a direct result of the ~~product~~ mix of ~~sales~~product ~~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~~were torelatively consistent at $~~521~~518,000 ~~during~~ during the first quarter of ~~2004~~2005 ~~from~~compared with $~~553~~521,000 in the same period of ~~2003~~2004. ~~We continue~~As toa ~~invest~~percentage ~~in the development~~ of revenue, ~~our~~engineering ~~next~~and ~~generation~~product IPdevelopment ~~Key~~expenditures ~~Telephone System,~~decreased ~~the~~slightly ~~convergence~~to 5.2% of ~~and~~total revenue ~~enhancements~~during tothe ~~our~~first ~~existing~~quarter ~~Key~~of ~~Telephone Systems,~~2005 ~~and~~from ~~enhancements~~5.3% toduring ~~our~~the ~~voice~~first ~~processing~~quarter ~~products~~of 2004.

Selling, General, and Administrative Expenses

Selling, general, and administrative expenses increased to $2.57 million compared towith $2.4 5 million for the first quarters of 2005 and 2004, respectively. Factors that increased our expenses include increased compensation, training, and ~~2003~~marketing and promotional activity. As a percentage of revenue, selling, general and administrative expenses increased to 26.9% compared with 25.6% in 2004.

Interest (Income) Expense

Interest (income) expense, ~~decreased~~net towas ($1012,000) ~~for~~during the first ~~three~~quarter ~~months~~ of ~~2004 from~~2005 compared with $2510,000 ~~for~~during the same period of 2004. The reduction in interest expense is a ~~year~~direct ~~ago~~result of the elimination of interest-bearing debt in the first half of 2004.

Income Taxes

We provided for federal and state income taxes using an effective rate of 38.50% ~~during~~in ~~the first quarter of 2004~~ 2005 compared towith 4038.15% infor ~~2003.~~the ~~Our effective~~same ~~tax~~period ~~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 $810.85 million at March 31, ~~2004~~2005 compared to $810.62 million at December 31, ~~2003~~2004. We had a cash balance of $2.4.1 million at March 31, ~~2004~~ 2005 compared with a cash ~~balance of $2.9 million~~ ~~at December 31, 2003. Factors that decreased our cash position during the~~ ~~first three~~

~~months~~balance of ~~2004~~$4.0 million ~~included~~at ~~the~~December 31, ~~pay~~2004. ~~down~~Sources of ~~accounts~~cash ~~payable~~included positive income from operations, and ~~accrued liabilities~~a ofreduction ~~$1.8 million~~in ~~and~~accounts receivable of $~~937~~695,000, ~~respectively.~~and Weinventory ~~also~~of ~~used approximately~~ $~~137~~788,000. ~~during~~Uses of cash during the first quarter of ~~2004~~2005 ~~for~~included ~~the~~an ~~purchase~~increase in other current assets of ~~property~~ $82,000 and ~~equipment~~the ~~primarily~~pay ~~related~~down of totrade ~~new~~accounts ~~computers~~payable and ~~other enhancements~~accrued toliabilities ~~our~~of ~~computer~~$832,000 ~~network~~ and $50758,000, ofrespectively. ~~principal~~We ~~payments on our~~also ~~term~~used ~~loan.~~approximately ~~Factors~~of ~~that~~$94,000 ~~increased~~in ~~our cash position during~~ the first quarter ~~included positive~~of ~~income~~2005 ~~from~~for ~~operations,~~the ~~decreases~~purchase ~~in inventory~~ of ~~$1.2 million~~property and ~~accounts receivable of $478~~equipment,~~000~~ and $3051,000 ~~from~~to ~~the~~repurchase ~~exercise~~8,500 shares of ~~stock~~our ~~options~~common stock.

Our accounts receivable days sales outstanding, calculated on a quarterly basis, were approximately 6159 days asat of March 31, ~~2004~~2005 ~~compared~~and ~~to 59 days as of~~ December 31, ~~2003~~2004. 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~~greatly ~~has~~influences ~~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~~comprised ~~for 53~~55% of our total accounts receivable as of March 31, ~~2004~~2005 and 5157% as of December 31, ~~2003~~2004.

Our inventory turnover, measured in terms of days outstanding on a quarterly basis, was 56 53 days as of March 31, ~~2004~~2005 compared towith 6759 days as of December 31, ~~2003~~2004. 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 $4.79 million as of March 31, ~~2004~~2005 compared with $76.45 million as of December 31, ~~2003~~2004. 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~~ 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.

WeIn ~~had~~April 2003, awe ~~$15.0 million~~entered into a credit ~~facility~~agreement with ~~General~~Comerica ~~Electric~~Bank ~~Capital Corporation~~(Comerica). ~~that~~The ~~expired~~credit agreement inestablished ~~April 2003~~a $5.0 million ~~The~~revolving line of credit ~~bore~~and ~~interest~~a ~~at 2~~$1.5%0 million ~~over~~term ~~the 30-day commercial paper rate~~loan. Advances under the ~~line~~credit offacility ~~credit were~~are based upon eligible accounts receivable and inventory of our wholly owned subsidiary, Vodavi Communications Systems, Inc., and ~~were~~are secured by substantially all of our assets. The ~~revolving~~credit ~~line~~facility ofcontains ~~credit contained~~ covenants that are customary for similar credit facilities and also ~~prohibited~~ prohibits our operating subsidiaries from paying dividends to us without the consent of Comerica. As of March 31, 2005, we had no outstanding borrowings on our line of credit GEand ~~Capital~~$5.0 million available for future advances.

~~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~~bears ainterest ~~$1.0 million~~at ~~term~~Comerica’s ~~loan.~~prime ~~Advances~~rate, ~~under the~~or ~~credit~~5.50% ~~facility are based upon eligible accounts receivable and inventory~~at ~~of our wholly owned subsidiary~~March 31, ~~Vodavi Communications Systems~~2005, ~~Inc.,~~ and ~~are secured~~requires bymonthly ~~substantially~~payments ~~all~~ of ~~our~~interest ~~assets.~~only ~~The~~with ~~credit~~all ~~facility~~unpaid ~~contains covenants~~principal ~~that are customary for similar credit facilities~~ and ~~also prohibits~~ ~~our~~accrued ~~operating~~interest ~~subsidiaries~~due ~~from~~at ~~paying~~its ~~dividends~~expiration toin ~~us without the consent of Comerica. As of March~~April ~~31, 2004, we had no outstanding borrowings on our line of credit and $4~~2006.~~2 million available for future advances.~~

The $51.0 million ~~revolving~~term ~~line~~loan ofwas ~~credit~~available ~~bears~~to ~~interest~~us atonly ~~Comerica’s prime~~for ~~rate,~~the orpurpose ~~4.0% at March 31, 2004, and requires monthly payments~~ of ~~interest~~ ~~only~~acquiring ~~with~~our ~~all unpaid principal and accrued interest due at its~~common ~~expiration in April 2005~~stock. IfBorrowings weon ~~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, orbore ~~term balance,~~interest asat ~~defined~~Comerica’s inprime ~~the~~rate ~~agreement~~plus 0.5%. In ~~addition to interest on the term~~April ~~balance~~2004, we ~~will~~repaid bethe ~~required to make monthly payments of principal in an~~ amount ~~sufficient~~ tooutstanding ~~fully~~on ~~amortize~~our ~~the~~ term ~~balance over a thirty-six month period~~loan.

~~The~~We ~~$1.0 million~~have ~~term~~no ~~loan~~special ~~was~~purpose ~~available~~entities toor usoff ~~only~~balance ~~for~~sheet ~~the~~financing ~~purpose~~arrangements, ofcommitments, ~~acquiring~~or ~~our~~guarantees ~~common~~other ~~stock.~~than ~~Borrowings~~certain ~~on the~~ long-term ~~loan~~operating ~~bear~~lease ~~interest~~agreements ~~at Comerica’s~~for ~~prime~~our ~~rate~~office ~~plus~~and ~~0.5%,~~warehouse facilities orand ~~4.5%~~short-term atpurchase ~~March 31,~~commitments ~~2004. In addition~~ to ~~interest~~ onour ~~the~~third-party ~~term~~suppliers. ~~loan,~~The wefollowing ~~are~~table sets ~~required~~forth toall ~~make~~known ~~monthly~~commitments ~~payments~~as of ~~principal~~ inMarch 31, an2005 ~~amount~~and ~~sufficient to fully amortize~~ the ~~term~~year ~~loan~~in ~~over~~which athose commitments ~~60-month~~become ~~period~~due ~~with~~or ~~all~~are ~~unpaid~~expected ~~principal~~to ~~and~~be ~~accrued~~settled ~~interest due~~ (in 36thousands): ~~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


	Payment due by period
Contractual			Less than						More than
Obligations	Total		1 year		1-3 years		3-5 years		5 years
Operating Lease Obligations	$	5,375	$	844	$	1,586	$	1,570	$	1,375
Purchase Obligations		6,097		6,097		—		—		—

Total	$	11,472	$	6,941	$	1,586	$	1,570	$	1,375

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.

~~approximately~~ We ~~$73,000,~~believe isthat ~~recorded~~our ascash aflows ~~reduction~~from tooperations, ~~common~~working ~~stock~~capital, and ~~additional~~ ~~paid~~credit infacilities ~~capital in the accompanying consolidated balance sheets.~~are ~~The~~sufficient ~~repurchase~~to ~~was~~fund ~~funded through advances on~~ our ~~revolving~~capital ~~line~~needs ofduring ~~credit~~the ~~and term~~next ~~loan~~12 months. AsAlthough ofwe ~~March 31,~~currently ~~2004,~~have ~~there were~~ no ~~amounts outstanding on our~~ ~~revolving~~acquisition ~~line~~targets, ofwe ~~credit~~intend ~~and~~to ~~$850,000~~continue ~~outstanding~~to onexplore ~~our~~acquisition ~~term~~opportunities ~~loan.~~as Inthey ~~April~~arise and ~~2004~~may ,be werequired ~~repaid~~to ~~the~~seek ~~amount~~additional ~~outstanding~~financing onin ~~our~~the ~~term~~future ~~loan~~to ~~with~~meet ~~currently available~~such ~~funds~~opportunities.

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 period
Contractual			Less than						More than
Obligations	Total		1 year		1-3 years		3-5 years		5 years
Long-Term Debt Obligations	$	850	$	200	$	650	$	—	$	—
Operating Lease Obligations		6,447		1,050		1,666		1,570		2,161
Purchase Obligations		5,732		5,732		—		—		—
Total	$	13,029	$	6,982	$	2,316	$	1,570	$	2,161

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~~ manufacturing arrangements with third-party manufacturers in South Korea and Thailand, including LGE, which owns approximately 2423% 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~~2004.

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~~2004, 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~~ our revolving line of credit and prime plus 0.5% on our term loan. At March 31, ~~2004~~2005, we had ~~a term loan balance of $850,000 and had~~ no ~~outstanding~~ outstanding borrowings on the line of credit. Inor ~~April 2004, we repaid the amount outstanding on our~~ term loan ~~with currently available funds~~.

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~~2005. 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 isare 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.

1413

PART II — OTHER INFORMATION


Item 1.		Legal Proceedings
		Not applicable.

Item 2.		Changes In Securities and Use of Proceeds
		Not applicable.

Item 3.		Defaults Upon Senior Securities
		Not applicable.

Item 4.		Submission of Matters to a Vote of Security Holders
		Not applicable.

Item 5.		Other Information
		Not 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

1514

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.~~		VODAVI TECHNOLOGY, INC.
Dated: April 27, 2003	/s/ Gregory K. Roeper
Dated:		April 27, 2005	/s/ Gregory K. Roeper
	~~Gregory K. Roeper~~		Gregory K. Roeper
	President and Chief Executive Officer (Principal Executive Officer)
			President and Chief Executive Officer
			(Principal Executive Officer)
Dated:		April 27, 2005	/s/ David A. Husband
			David A. Husband
			Chief Financial Officer and Vice President – Finance
			(Principal Financial and Accounting Officer)

Dated: April 27, 2003	/s/ David A. Husband
	David A. Husband
	Chief Financial Officer and Vice President – Finance (Principal Financial and Accounting Officer)

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Filing Compare · VODAVI TECHNOLOGY INC