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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-16231
XETA Technologies, Inc.
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(Exact name of registrant as specified in its charter)
Oklahoma 73-1130045
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1814 West Tacoma, Broken Arrow, Oklahoma 74012
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (918) 664-8200
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 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 X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant as of December 31, 2000 (based upon the
average bid and asked prices of such shares) was approximately $68,529,227.
The number of shares outstanding of the registrant's Common Stock as of
December 31, 2000 was 8,673,288 (excluding 1,018,788 treasury shares).
Exhibit Index appears at Page 25.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement to be filed with the Securities and
Exchange Commission in connection with the Annual Meeting of Shareholders to be
held March 20, 2001 are incorporated into Part III, Items 11 through 13 hereof.
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PART I
ITEM 1. BUSINESS
DEVELOPMENT AND DESCRIPTION OF BUSINESS
XETA Technologies, Inc. (the "Company"), formerly XETA Corporation, an
Oklahoma corporation formed in 1981, is a leading integrator of voice and data
technologies. Fiscal 2000 represented the first year in the Company's announced
three-year plan to expand beyond its traditional focus in the hospitality
industry. This expansion is being fueled by changes in technology which will
ultimately lead to the convergence of voice and data networking systems onto a
single platform.
The Company's expansion strategy includes a balanced approach of organic
growth and acquisitions to: 1) establish a nation-wide commercial customer
"beachhead" to deliver traditional telephony applications, 2) add complex
convergence applications such as call centers, unified messaging and telephony
over IP (including VoIP, or voice-over-Internet Protocol); and 3) introduce
professional and consulting services. Reflecting that strategy, during fiscal
2000 the Company made two acquisitions of companies, both of which specialized
in traditional voice systems with some experience in data applications.
Subsequent to the close of the fiscal year, the Company acquired two more firms
which bring voice and data integration capabilities to the Company.
On November 30, 1999, the Company purchased 100% of the common stock of
U.S. Technologies Systems, Inc. ("USTI"), then the largest dealer of Avaya Inc.
("Avaya", formerly Lucent Technologies) products in the United States. The USTI
acquisition instantly gave the Company a strong sales presence in the Midwest
and West, although USTI sold systems throughout the United States. On February
29, 2000, the Company purchased the assets of Advanced Communication
Technologies, Inc. ("ACT"), also an Avaya dealer. ACT's operations consisted of
both sales and services and were focused primarily in the Pacific Northwest.
During the year, the Company established sales offices in Connecticut, serving
the New York City area; Tampa, serving the Florida market; Dallas, serving north
Texas; and Washington DC, serving the mid-Atlantic area. The combination of the
acquisitions and internal growth largely completed the Company's first objective
of creating a national presence in the voice market.
On November 1, 2000, the Company made two additional acquisitions to begin
its expansion into converged products and professional services. The Company
purchased substantially all of the assets of PRO Networks Corporation, a
Missouri-based company operating primarily in the Midwest and specializing in
the sale, installation and service of data networking equipment, including
Cisco's data products and virtual private networking solution as well as Avaya's
data products. Simultaneously, the Company also purchased the assets of a
professional services firm, Key Metrology Integration, Inc. ("KMI"). Most of
KMI's employees are Microsoft Certified Systems Engineers ("MCSEs"). The Company
expects to use KMI as its starting point to provide high-end LAN/WAN consulting
services and unified messaging solutions. KMI's current customer base is
primarily in the Pacific Northwest, but the Company plans to add consultants in
major markets throughout the nation.
Each of the foregoing acquisitions were funded with bank debt from a credit
facility established simultaneously with the closing of the USTI transaction
(see "MD&A--Liquidity and Capital Resources" for a description of this credit
facility).
Other developments during the year include changing the Company's name to
XETA Technologies, Inc. and a two-for-one stock split. The name change was made
to reflect the Company's vision to become the nation's premier voice and data
integrator. On June 26, 2000, the Company reduced the par value of its common
stock to $.002 and increased the authorized shares to 50 million. On June 30,
2000, the Company effected a two-for-one stock split by reducing the par value
on its common stock to $.001. All share amounts reflected in this report have
been restated accordingly to give effect to the stock split. The number of
issued and outstanding shares (excluding treasury shares) at October 31, 2000
was 8,643,948.
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COMMERCIAL PRODUCTS
The Company sells Avaya telecommunications and converged products to
commercial customers. The Company sells a wide range of communications servers
offered by Avaya, including DEFINITY(R) Systems, MERLIN MAGIX(TM) Advanced
Solutions systems and the PARTNER(R) Communications systems products. The
Company also sells Avaya's INTUITY(TM) voice mail systems. Each of the products
listed above have various models available depending on the feature set and size
of the customer's application. In addition to selling Avaya systems, the Company
enjoys a strong business selling aftermarket components such as additional phone
sets, headsets, circuit packs, etc.
In fiscal 2001, the Company will be selling Avaya's recently introduced new
IP product line, named ECLIPS (Enterprise Class IP Solutions). The ECLIPS
product line provides customers with the ability to carry voice traffic over an
IP network. The ECLIPS line provides all of the features of existing
communications servers while taking advantage of the cost savings to be attained
by installing and maintaining one integrated network carrying both voice and
data traffic. For current users of the DEFINITY(R) system, ECLIPS provides a
migration path from a traditional to a converged network without having to
discard an expensive capital investment.
HOSPITALITY PRODUCTS
Communications Systems. The Company distributes Avaya's GuestWorks(R)
Systems and Hitachi's 5000(R) Series Digital Communications Systems to the
hospitality industry under nationwide, non-exclusive dealer agreements with both
vendors. Both of these systems are equipped with lodging specific software which
integrates with nearly all aspects of the hotel's operations. The Company also
offers a variety of related products such as voice mail systems, analog
telephones, uninterruptible power supplies, announcement systems, etc., most of
which also have some lodging specific software features. Most of these products
are sold in conjunction with the sale of new communications systems and, with
the exception of voice mail systems, are purchased from regional and national
suppliers. Sales of communications systems to the lodging industry represented
13%, 35%, and 36% of total revenues in fiscal 2000, 1999, and 1998,
respectively.
Call Accounting Products. The Company markets a line of proprietary call
accounting systems under the name Virtual XL(R) Series ("VXL"). Call accounting
systems act as a strategic link between a hotel's communications system and its
guest billing system to enable the hotel to earn revenues from guest calls.
These systems capture certain telephone usage information; use that information
to calculate call charges, markup and taxes; and then transmit the charges to
the hotel's guest billing system. Introduced in 1998, the VXL is a PC-based
system designed to operate on a hotel's local or wide area network, and if that
network is connected to the Internet, the VXL can also be accessed via an
Internet connection. The VXL systems are the Company's latest technology in a
series of call accounting products the Company has successfully marketed since
its inception. Many of the Company's earlier products remain in the field and
are supported by the Company's service and technical staff.
The Company also markets a proprietary answer confirmation product under
the name XPERT(R). The XPERT(R) system operates on the same platform as the VXL
system, but its function is to compliment the VXL by minimizing guest charges
for unanswered calls and allowing hotels to charge for answered calls of short
duration which would otherwise be treated as unanswered and therefore not
billed. Most call accounting systems, including the Company's systems, record
and bill guests for calls which exceed a designated duration. The Company's
XPERT(R) systems provide confirmation of the status of the call by monitoring
trunk voltages associated with outgoing calls, thereby improving the accuracy of
the hotel's guest billings and reducing guest complaints for improper charges.
Long Distance Services. The Company markets a variety of long distance
services to hospitality customers under a joint marketing agreement with
Americom Communications Services, Inc. Most of the contracts to provide long
distance services began expiring over a 15-month period beginning in April of
2000 and are not being renewed. As a result, revenues from these services have
continued to decline throughout fiscal 2000.
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INSTALLATION AND SERVICES.
Historically, the installation and continued maintenance of the Company's
lodging products have been the cornerstone of the Company's success. The lodging
industry is a 24 hour-per-day, demanding environment in which any significant
problem with the communications equipment can quickly rise to crises status. In
response, the Company built extensive remote servicing capabilities into its
proprietary systems and also built a nation-wide network of Company and third
party technicians. The remote service capabilities have been a critical element
of the Company's products since its inception and they enable technicians at the
Company's Service Center to quickly and cost effectively diagnose, and in most
instances, correct system malfunctions without the need of an on-site service
call. The national network of technicians has enabled the Company to cost
effectively install systems and perform on-site service with a consistent
quality of service. For its proprietary systems, the Company provides a one-year
limited warranty, generally from the date of installation. After the warranty
period, service for these products is available under service agreements that
provide varying levels of service based on the customer's needs. The majority of
the Company's customers purchase service agreements for the Company's
proprietary products. Since the Company began selling communications systems to
the lodging industry in 1994, it has sold the systems with the manufacturer's
warranty or with its own one-year warranty against defects in the equipment.
Labor costs associated with fulfilling the warranty requirements are generally
borne by the Company. Subsequent to the warranty period, the Company offers a
unique, hotel-oriented service plan. This plan includes parts and labor coverage
on the communications system plus a XETA call accounting system as well as other
service options designed to meet the specific needs of each customer.
If the Company is to be successful in its strategy to expand to become a
nation-wide integrator of voice and data systems focusing on complex
applications, the installation and maintenance of those systems will be a
critical factor. Prior to its acquisition by the Company, USTI outsourced most
of the installations of the systems it sold. One of the synergistic aspects of
the Company's acquisition of USTI was the possibility of using the Company's
existing service infrastructure to perform installations of commercial systems
and therefore enhance operating margins. During fiscal 2000, the Company has
worked to train its existing technicians on the Avaya commercial systems product
line and has rapidly expanded its technician base to be able to in-source the
installation of as many of the systems sold as possible. The operating model
used in the Pacific Northwest operations, which was acquired in the ACT
purchase, was similar to the Company's historical model in which they installed
and maintained most of systems they sold. During fiscal 2001, the Company will
expand its service offering to the commercial market to include maintenance
contracts and time and materials services. The goal of this effort is to capture
a significant source of recurring revenues in the commercial market similar to
that enjoyed by the Company in the lodging market.
NETWORKING PRODUCTS AND PROFESSIONAL SERVICES.
With the acquisition of PRO Networks and KMI, the Company acquired new
competencies in Microsoft Exchange, data products, and IP telephony. The Company
expects to use these new capabilities to expand into consulting for local area
networks (LAN), wide area networks (WAN), and unified messaging (UM) networks.
This consulting will include architecting, designing, implementing and
monitoring these networks. In addition, the Company expects to expand into the
design, implementation and support of data networks including virtual private
networks using voice over IP technology.
SOFTWARE AND PRODUCT DEVELOPMENT.
For the past several years, the Company's development efforts have been
devoted to the XPANDER(R) system, a product designed as a more cost effective
way to expand the capacity of a hotel's communications system. The desire to
expand these systems is being driven by guest demand to have second line access
in their hotel rooms to make and receive voice calls while at the same time
being hooked up to a public or private data network. A by-product of the
Company's work on XPANDER(R) was the Virtual XL(R) system which has become the
Company's flagship call accounting product. Sales of the XPANDER(R) system,
however, have been weak as most hotels have chosen to add additional lines in
their rooms by increasing the size of their communications systems. Much of this
expansion occurred as hotels upgraded their systems during the Y2K upgrade
cycle. Due to the lack of demand for XPANDER(R) systems, the Company
significantly decreased its spending on development of the system. Most of the
personnel related to the Company's development efforts have been redeployed into
supporting the technology infrastructure.
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MARKETING
The Company markets its products and services to the commercial market
through its direct sales force and through "partnering" relationships with
Avaya's direct sales force. The Company targets large and mid-sized companies as
its primary market. Most of its relationships with larger, "Fortune 500" firms
are the result of the Company's partnering with Avaya while relationships with
mid-sized, "Enterprise" customers are generally direct relationships of the
Company. Under the partnering arrangements with Avaya, the Company's account
executives work with Avaya National Account Managers ("NAM's") and Global
Account Managers ("GAM's") to jointly meet customers' needs. The Company offers
a wide variety of value-added services for the NAM's and GAM's to utilize, such
as nationwide project management capabilities and skills in emerging product
applications such as Customer Relationship Management, Unified Messaging, and
Voice over IP. The Company's efforts to sell systems to Enterprise customers is
a major area of focus in fiscal 2001 as the Company strives to build its own
base of customers that it can expose to the Company's full range of products and
services. The Company expects to increase the number of its account executives
and support staff during fiscal 2001 as it expands its regional coverage and
reaches further into the Enterprise market. In addition to hiring additional
staff, the Company invests heavily in training of its sales force and promotions
of its brands and products.
In marketing its products and services to the hospitality industry, the
Company relies heavily on its experience and reputation in the industry to build
long-term relationships with the wide range of personnel that can be the key
decision makers for the purchase of hotel telecommunications equipment. These
decision makers range from corporate hotel chain personnel, to property
management officials, industry consultants, hotel owners, and on-site financial
or operating officers. The Company has relationships with nearly all hotel
chains and major property management companies. These relationships are one of
the keys to the Company's past and future success. Typically, the Company
focuses its marketing expenditures on efforts to continue to strengthen these
relationships rather than broad promotional efforts that are employed in the
commercial market. However, the Company does offer a variety of sales programs
to the lodging industry, the most significant of which is the XETAPLAN program.
Under the XETAPLAN program, customers are provided one of the Company's call
accounting products for a period of three to five years in exchange for a
monthly fee paid to the Company. Service on the products is also included in the
contract. For communications systems it sells to the lodging industry, the
Company offers a package of value-added services including a call accounting
system and a service package with a specified number of free labor hours and
weekly appointments with certified technicians to correct minor malfunctions or
to perform routine maintenance. The Company does not anticipate expanding its
hospitality-market sales force in fiscal 2001.
MAJOR CUSTOMERS
During fiscal 2000, the Company did not have any single customer that
comprised more than 10% of its revenues.
COMPETITION
Commercial. Competition in the commercial market is intense at all levels
from other Avaya dealers and Avaya direct to other manufacturers and their
respective distribution channels. Management believes that ultimately its
integrated business model, implemented on a nation-wide basis and targeted at
complex applications for multi-location customers will be a differentiated
strategy that will set the Company apart from its competitors and will
ultimately provide higher operating profits and growth rates than the market
average. This integrated business model contains four key elements: 1)
traditional product offerings (voice and data systems, messaging servers,
aftermarket components), 2) traditional services (maintenance, installation,
time and materials services), 3) network consulting (architecture, design,
integration, and project management), and 4) emerging applications (voice over
IP telephony, unified messaging, call centers, and virtual private networks). By
having all the pieces in the model, the Company is able to prospect for
customers on a variety of fronts, address the customer's current needs, and then
gain further penetration into the customer by exposing the customer to other
products and services in the model. The Company believes that technology changes
that are currently underway are significantly changing the distribution channels
of the major manufacturers, including Avaya. These technology changes
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are requiring that channels invest heavily in training of sales and technical
personnel. In addition, a national presence is of greater importance than ever
before as more and more enterprise customers have multiple locations across the
U.S.
Hospitality. The Company believes that its most effective weapon in
competing in the hospitality market is its commitment to differentiate itself by
concentrating on the performance and reliability of its systems and by providing
the highest level of service possible. Competition in this market is fierce and
competitors range from large, well-known, well-financed companies to small,
regional or local distributors, many of whom do not concentrate on the
hospitality market but are simply located near the prospective customer. While
the Company believes that its reputation and nation-wide presence contribute
significantly to its success, there can be no assurance given that the Company
will be able to continue to expand its market share in the future.
MANUFACTURING
The Company assembles all of its proprietary products, which include the
Virtual XL(R), XPERT(R) and XPANDER(R) systems, from an inventory of components,
parts and sub-assemblies obtained from various suppliers. These components are
purchased from a variety of regional and national distributors at prices which
fluctuate based on demand and volumes purchased. Some components, although
widely distributed, are manufactured by a single, usually foreign, source and
are therefore subject to shortages and price fluctuations if manufacturing is
interrupted. The Company maintains adequate inventories of components to
mitigate short-term shortages and believes the ultimate risk of long-term
shortages is minimal. The Company's proprietary products are based on PC
technology, which is continually and rapidly changing. As a result, some of the
components originally designed for use in the Company's systems have been phased
out of production and replaced by more advanced technology. To date, these
substitutions have not forced the Company to substantially redesign its systems
and there has been minimal effect on the overall system cost. There can be no
assurance given, however, that future obsolescence of key components would not
result in unanticipated delays in shipments of systems due to redesign and
testing of assemblies.
The Company uses outside contractors to assemble its proprietary printed
circuit boards. The components and blank circuit boards are purchased and
inventoried by the Company and supplied to the outside contractor for assembly
and quality control testing. The Company performs various quality control
procedures, including powering up completed systems and allowing them to
"burn-in" before being assembled into a final unit for a specific customer
location, and performing final testing prior to shipment.
EMPLOYEES
At December 31, 2000, the Company employed 400 employees, including 2
part-time employees.
COPYRIGHTS, PATENTS AND TRADEMARKS
The Company has never applied for patent protection on its hardware or
software technology with the exception of the technology for XPANDER(R), for
which the Company has a patent pending. The Company claims copyrights on all of
its proprietary circuit boards and software.
While the Company believes that the ownership of patents, copyrights and
registered trademarks is less significant to its success than its proprietary
technology, quality and type of service and technical expertise, the Company
recognizes that its reputation for quality products and services gives value to
its product names. Therefore, the Company has registered as United States
domestic trademarks the names "XETA," "XETAXCEL," "XACT," "XPERT," "XPERT+,"
"XL," "XPANDER," and "Virtual XL" for use in the marketing of its services and
systems. All of these marks are registered on the principal register of the
United States Patent and Trademark Office ("PTO"), with the exception of
XPANDER(R) which is registered on the supplemental register.
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GOVERNMENT REGULATION
The Federal Communications Commission (the "FCC") and state governments
regulate the telecommunications industry. None of the Company's business
activities, however, are directly regulated by the FCC or the states. None of
the Company's products or services require approval from any governmental
agency.
The Company's computer products are subject to radio frequency emanation
and electrical safety standards imposed by the FCC. The cost of complying with
such standards, as well as with any applicable environmental laws, is
immaterial.
ITEM 2. PROPERTIES
The Company's principal executive office and Service Center are located in
a 37,000 square foot, Company-owned, single story building located in a suburban
business park near Tulsa, Oklahoma. This facility also houses the Company's
warehouse and assembly areas to support its hospitality sales channel. The
building is located on a 13-acre tract of land. The property is subject to a
mortgage held by Bank One, Oklahoma, NA, to secure the Company's credit
facility.
The Company's commercial channel operations are located in leased
facilities in St. Louis, MO, Portland, OR, and Seattle, WA. In addition to
warehouses, these facilities house sales staff and management, accounting,
purchasing, repair, warehousing, and installation support personnel. The Company
leases other office space throughout the U.S. for sales and technical staff.
Additionally, the Company has informal office arrangements with its regional
technicians to allow for some storage of spare parts.
ITEM 3. LEGAL PROCEEDINGS
The matter of ASSOCIATED BUSINESS TELEPHONE SYSTEMS, INC., PLAINTIFF, vs.
XETA CORPORATION, DEFENDANT AND THIRD-PARTY PLAINTIFF, vs. D&P INVESTMENTS, INC.
AND COMMUNICATIONS EQUIPMENT BROKERS, INC., THIRD PARTY DEFENDANTS, filed in
June, 1995, is still pending before the United States District Court for the
Northern District of Oklahoma. This matter arises from a 1986 distributor's
agreement between the Company and D&P, pursuant to which the Company sold call
accounting systems to D&P for resale, and a maintenance agreement between the
Company and ABTS pursuant to which the Company furnished maintenance services
for such systems. After having some of its claims dismissed by the Court, ABTS'
remaining claims are based on breach of contract and tortious interference with
certain customer relationships. The stated amount of damages sought by ABTS in
this matter is approximately $809,000. The Company seeks in excess of $3 million
in damages in its counterclaims against ABTS and third-party claims against D&P.
In November, 1999, during a pretrial conference, ABTS and D&P disclosed to the
Court that both of these companies had been dissolved during the pendency of
this litigation, without notice to the Company. In view of this fact, and
following ABTS' and D&P's failure to provide certain financial information to
the Company as ordered by the Court, the Court postponed trial in this matter
and granted the Company the right to conduct discovery into the financial
affairs of ABTS, D&P and ABTS' related companies. The Company is currently
conducting such discovery. The Company has also filed a motion to dismiss ABTS'
and D&P's claims for their continued failure to disclose certain other documents
requested in 1997. While the Magistrate Judge has recommended that one of ABTS'
claims be stricken, the District Judge has--upon ABTS' appeal--taken this issue
under advisement. On August 30, 2000, the District Court granted the Company's
Motion to Amend to add the following third-party defendants: Dominic Dalia, an
individual; Bernice Dalia, an individual; Michael Dalia, an individual; A.B.T.S.
International Corp., f/k/a A.B.T.S. Investment Corporation, a/k/a ABTSI;
Intelecable N.A., Inc.; Intelepower N.A., Inc.; Intelemedia N.A., Inc.; Intelnet
Services of North America, Inc., d/b/a Hotel Digital Network, d/b/a HDN;
Intelnet Services of North America, Inc. (Business I.D. No. 0100567092);
Intelnet Services of North America, Inc. (Business I.D. No. 010060200); D. P.
Southfield, Inc.; Telesource, Inc.; Inntraport International Corp., f/k/a
Innterport International Corp. f/k/a Intelnet International Corp.; and Dalia
Associates, a partnership. At this point it is not anticipated that a trial date
will be reset anytime within the next nine to twelve months. The Company intends
to continue to vigorously defend ABTS' claims against it and to pursue all of
its counterclaims and third-party claims against ABTS, D&P, and the other
third-party defendants.
Since 1994, the Company has been monitoring numerous patent infringement
lawsuits filed by PHONOMETRICS, Inc., a Florida company, against certain
telecommunications equipment manufacturers and hotels who use such equipment.
While
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the Company has not been named as a defendant in any of these cases, several of
its call accounting customers are named defendants. These customers have
notified the Company that they will seek indemnification under the terms of
their contracts with the Company. However, because there are other equipment
vendors implicated along with the Company in the cases filed against its
customers, the Company has never assumed the outright defense of its customers
in any of these actions. Phonometrics seeks damages of an unspecified amount,
based upon a reasonable royalty of the hotels' profits derived from use of the
allegedly infringing equipment during a period commencing six years prior to the
filing of such lawsuit and ending October 30, 1990.
All of the cases filed by Phonometrics against the Company's customers were
originally filed in, or transferred to, the United States District Court for the
Southern District of Florida. On October 26, 1998 the Florida Court dismissed
all of the cases filed against the hotels for failure to state a claim, relying
on the precedent established in Phonometrics' unsuccessful patent infringement
lawsuit against Northern Telecom. In its order dismissing Phonometrics'
complaints, the Florida court noted that Phonometrics failed to allege that the
hotels' call accounting equipment displays cumulative costs in real time as they
accrue and displays these costs on a visual digital display, both of which are
necessary to establish infringement of Phonometrics' patent, as determined in
the Northern Telecom case. On November 13, 1998, Phonometrics appealed the
Florida court's order to the United States Court of Appeals for the Federal
Circuit. The Court of Appeals reversed the District Court's dismissal of the
cases, but did so solely upon the basis of a procedural matter. The Appeals
Court made no ruling with respect to the merits of Phonometrics' case and
remanded the cases back to the Florida court for further proceedings. These
cases were reopened in April, 2000 and since then Phonometrics has filed motions
to disqualify the District Court judge hearing the cases. These motions have
been denied. The Company will continue to monitor proceedings in these actions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock, $.001 par value, is currently traded on the
over-the-counter market and is reported in the National Association of
Securities Dealers Automated Quotation ("NASDAQ") System under the symbol
"XETA."
The high and low bid prices for the Company's Common Stock, as reported by
the National Association of Securities Dealers through its NASDAQ System, for
each of the quarters during the Company's two most recent fiscal years are set
forth below. These prices are adjusted to give retroactive effect to a
two-for-one stock split with a record date of June 30, 2000. Furthermore, these
prices reflect inter-dealer prices, without adjustment for retail mark-ups,
mark-downs or commissions and may not necessarily represent actual transactions.
2000 1999
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High Low High Low
---- --- ---- ---
Quarter Ending:
--------------
January 31 $ 22 1/16 $ 9 21/32 $ 9 7/8 $ 7 5/8
April 30 33 15/16 15 17/32 9 5/8 7 1/2
July 31 23 3/4 10 7/8 22 7/8 9 1/32
October 31 19 8 22 1/2 13 1/2
The Company has never paid cash dividends on its Common Stock. Payment of
cash dividends is dependent upon the Company's earnings, capital requirements,
overall financial condition and other factors deemed relevant by its Board of
Directors. The Company is currently committed to reinvesting its available
capital in the future growth and success of the Company. It is therefore
unlikely that the Company would pay cash dividends in the foreseeable future.
As of December 31, 2000, the latest practicable date for which such
information is available, the Company had 169 shareholders of record. In
addition, based upon information received annually from brokers holding stock in
the Company on behalf of beneficial owners, the Company has approximately 7,000
beneficial shareholders.
On August 11, 2000, the Company granted an individual stock purchase option
for 10,000 shares of the Company's Common Stock to Mr. Patterson, the Company's
Sr. Vice President of Operations, in recognition of his contribution to the
Company's financial performance since his hiring. This option was contemplated
by and granted in accordance with the original compensation package offered to
Mr. Patterson upon his hiring by the Company. The underlying option shares are
not registered, although the Company intends to register such shares in the
future. The option was granted in reliance upon the exemption from registration
provided by Section 4(2) of the Securities Act of 1933, as amended, in that the
grant was made pursuant to a privately negotiated transaction with one
individual and did not involve a general offering to the public, and the option
was granted as compensation. The option is exercisable in whole or in part on or
after August 11, 2000 until the close of business on August 1, 2010, at an
exercise price of $9.0625, the market price on the date of grant. The option
automatically terminates to the extent not exercised if Mr. Patterson's
employment is terminated by the Company due to a breach of his employment
obligations.
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ITEM 6. SELECTED FINANCIAL DATA.
Selected financial data for the last five fiscal years is presented below. All
amounts except share and per share amounts are in thousands.
For the Year Ending October 31 2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Results of Operations
Commercial equipment sales 54,199 0 0 0 0
Installation and Service sales 31,220 18,766 13,220 9,355 6,888
Lodging systems sales 17,000 18,497 12,227 9,405 6,552
-------- -------- -------- -------- --------
Total Revenues 102,419 37,263 25,447 18,760 13,440
Cost of commercial equipment sales 38,606 0 0 0 0
Cost of installation and services 21,627 12,206 8,536 5,884 4,385
Cost of Lodging systems 11,172 11,067 7,916 6,074 4,072
-------- -------- -------- -------- --------
71,405 23,273 16,452 11,958 8,457
Gross Profit 31,014 13,990 8,995 6,802 4,983
Operating expenses 18,635 7,622 4,757 4,139 3,156
Income from operations 12,379 6,368 4,238 2,663 1,827
Interest and other income (1,761) 665 671 667 662
-------- -------- -------- -------- --------
Income before taxes 10,618 7,033 4,909 3,330 2,489
Provisions for taxes 4,156 2,750 1,855 1,190 904
-------- -------- -------- -------- --------
Taxes 6,462 4,283 3,054 2,140 1,585
======== ======== ======== ======== ========
Earnings per share - Basic $ 0.77 $ 0.53 $ 0.38 $ 0.27 $ 0.20
Earnings per share - Diluted $ 0.66 $ 0.46 $ 0.33 $ 0.23 $ 0.17
Weighted Average Common Shares Outstanding 8,350 8,021 8,120 8,024 7,884
Weighted Average Common Share Equivalents 9,762 9,254 9,372 9,460 9,336
As of October 31 2000 1999 1998 1997 1996
------ ------ ------ ------ ------
Balance Sheet Data:
Working Capital 15,366 8,021 5,122 6,944 5,435
Total Assets 74,149 25,316 18,292 14,820 12,364
Long Term Debt 18,204 0 0 0 0
Shareholders' Equity 25,565 14,551 11,185 9,337 7,071
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
For the fiscal year ended October 31, 2000, the Company reported record
net income and revenues of $6.5 million and $102.419 million, respectively.
These results represent a 51% increase in net income and a 175% increase in
revenues and reflect the first year of the Company's efforts to expand beyond
its traditional focus on the lodging industry into the distribution of
telecommunications products and services to commercial businesses on a
nation-wide basis. As a result of this aggressive expansion strategy, many
important developments occurred during fiscal 2000. These developments are
discussed in detail below.
The Company's strategy to expand beyond the lodging industry into the
commercial market is being fueled by significant changes in technology that are
beginning to occur and are expected to accelerate during the next three to five
years. The most significant of these technology changes is the development of
packet switching. This technology is the mechanism by which data travels over
the Internet and other data networks, usually using a standard form of
transmission, called IP or Internet Protocol. However, advances have now been
made to enable voice traffic to be carried over these same IP networks
(Voice-over-IP or VoIP) at acceptable quality. The convergence of data and voice
traffic over the same networks is being driven by cost as it is more cost
effective to install and maintain one integrated network than two separate
networks for data and voice. As a result of these changes in technology, the
distribution channels which provide traditional voice products and services are
changing dramatically as well.
In June, 1999, the Company announced a three phase strategy to respond to
these changes and rapidly expand its business. Phase one is to establish a
nation-wide commercial customer "beachhead" to deliver traditional telephony
applications. Phase two of the strategy is to add complex convergence
applications such as VoIP telephony, call centers and unified messaging.
Finally, phase three of the strategy is to introduce professional and consulting
services to design these integrated networks and complex applications as well as
to audit their efficiency. Management believes that by executing these
strategies, the Company will come to market with a fully integrated business
model in which it can prospect for customers based on nearly any need the
customer may have or may need addressed. For example, the Company may make
initial contact with the customer based on a product need such as after-market
components. Subsequently, the customer can be introduced to other products and
services such as: network efficiency audits, traditional services (maintenance
contracts, installation of upgrades, etc.), messaging systems, or complex
applications such as virtual private networks. The Company is executing this
strategy using a balanced approach of acquisitions and internal growth.
During fiscal 2000, the Company completed the acquisition of two companies.
On November 30, 1999, the Company purchased 100% of the outstanding stock of
U.S. Technologies Systems, Inc. ("USTI") for $26 million in cash and 150,000
shares of XETA common stock held in treasury with a market value of $3.3
million on the date issued. The Company paid $23 million in cash at closing and
the remaining $3 million was subject to various hold-back provisions. As of
October 31, 2000, hold-back provisions regarding $2 million of the total were
satisfied and this amount plus accrued interest was paid on November 30, 2000.
On February 29, 2000, the Company purchased substantially all of the assets of
Advanced Communication Technologies, Inc. ("ACT") for approximately $3.5 million
in cash. Both of these companies' primary focus was in voice applications. As a
result of these acquisitions and internal growth accomplished during the year,
the Company was able to largely achieve phase one of its strategy in fiscal
2000.
Subsequent to the close of fiscal 2000, the Company made two additional
acquisitions to begin its expansion into converged products and professional
services, phases two and three of its strategy, respectively. On November 1,
2000, the Company acquired substantially all of the assets of PRO Networks
Corporation, a Missouri based company specializing in the sale, installation
and service of data networking equipment, including Cisco's data products and
virtual private networking solution as well as Avaya's data products.
Simultaneously, the Company also purchased the assets of a professional services
firm, Key Metrology Integration, Inc. ("KMI"). Most of KMI's employees are
Microsoft Certified Systems Engineers ("MCSEs"). The Company expects to use KMI
as its starting point to provide high-end LAN/WAN consulting services and
unified messaging solutions. The Company paid a total of $5.5 million in cash
for the assets of these two companies, and will pay up to an additional $4.5
million if various growth targets are met.
Each of the four acquisitions discussed above were funded from proceeds of
a $43 million credit facility which is more fully described under "Liquidity and
Capital Resources" below.
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On June 26, 2000, the Company reduced the par value of its common stock to
$.002 and increased the authorized shares to 50 million. On June 30, 2000, the
Company effected a two-for-one stock split by reducing the par value on its
common stock to $.001. All share amounts reflected in this report have been
restated accordingly to give effect to the stock split.
The discussion below provides further analysis of the developments
discussed above as well as other major factors and trends which management
believes had the most impact on the results of operations for the years ended
October 31, 2000 and 1999 compared to the previous years, and the financial
condition of the Company for the years then ended.
THE PRECEDING AND THE FOLLOWING DISCUSSIONS CONTAIN FORWARD-LOOKING
STATEMENTS, WHICH ARE SUBJECT TO THE PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. THESE STATEMENTS INCLUDE STATEMENTS CONCERNING
EXPECTATIONS REGARDING THE COMPANY'S SALES, REVENUES, GROSS MARGINS, OPERATING
MARGINS AND RESULTS OF OPERATIONS; THE COMPANY'S ABILITY TO IMPLEMENT ITS
CURRENT BUSINESS PLAN AND GROWTH STRATEGY, AND TRENDS IN THE COMMUNICATIONS
TECHNOLOGY INDUSTRY AND HOSPITALITY MARKETS. THESE AND OTHER FORWARD-LOOKING
STATEMENTS (GENERALLY IDENTIFIED BY SUCH WORDS AS "EXPECTS," "PLANS," BELIEVES,"
"ANTICIPATES" AND SIMILAR WORDS OR EXPRESSIONS) ARE NOT GUARANTEES OF
PERFORMANCE BUT RATHER REFLECT MANAGEMENT'S CURRENT EXPECTATIONS, ASSUMPTIONS
AND BELIEFS BASED UPON INFORMATION CURRENTLY AVAILABLE TO MANAGEMENT. INVESTORS
ARE CAUTIONED THAT ALL FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS
AND UNCERTAINTIES WHICH ARE DIFFICULT TO PREDICT AND THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED. THESE RISKS AND UNCERTAINTIES
ARE DESCRIBED UNDER THE HEADING "OUTLOOK AND RISK FACTORS" BELOW. CONSEQUENTLY,
ALL FORWARD-LOOKING STATEMENTS SHOULD BE READ AS IN CONJUNCTION WITH THE RISK
FACTORS DISCUSSED HEREIN AND THROUGHOUT THIS REPORT.
RESULTS OF OPERATIONS
Year ended October 31, 2000 compared to October 31, 1999. As stated above,
net revenues for fiscal 2000 were $102.419 million, an increase of $65.1 million
or 175% over the previous year. Of this increase, approximately $63.9 million
represented revenues earned from companies acquired during the year.
Commercial Equipment Sales. Sales of products to commercial customers were
$54.2 million in fiscal 2000 and represented revenues earned from the former
operations of USTI and ACT since their acquisition (11 months and 8 months,
respectively). The Company is a non-exclusive dealer of Avaya voice products to
the commercial market and sells Avaya's full range of communications servers as
well as component parts in after-market sales. The Company focuses on two
primary commercial market segments, small-of-large locations of Fortune 500
companies (the "Fortune 500 market") and the next 1000 largest enterprises (the
"Enterprise" market). Sales to the Fortune 500 market are mainly generated
through "partnering" arrangements with Avaya's direct sales force to sell and
install communications systems to Avaya's customers. Under these partnering
arrangements, the Company assists Avaya in assessing the customer's needs and in
design, sale, installation and sometimes support of the applications or project.
Although there is fierce competition among Avaya dealers to participate in these
partnering opportunities, management believes the Company is uniquely qualified
because of its nationwide project management capabilities and competencies in
complex applications. The Company also focuses its efforts in the commercial
market segment on the Enterprise market, representing mid-sized companies that
typically have multiple locations. Generally, the revenues earned from the
former USTI operations are more likely to originate from the Avaya partnering
arrangements, while the revenues earned in the Pacific Northwest from the former
ACT operations are more likely to originate from Enterprise customers in that
region. The Company intends to aggressively grow its revenues earned from
Enterprise customers during fiscal 2001 while continuing its strong
relationships with the Avaya direct sales staff.
Lodging Systems Sales. Sales of lodging systems declined $1.8 million or
10%. This decline consisted of a decrease in sales of call accounting systems of
$2.4 million or 51% and an increase in sales of communications systems (PBX's)
to the lodging market of $582,000 or 4%. Sales of call accounting products in
fiscal 2000 returned to more normal levels after the surge in orders experienced
in 1999, as many customers upgraded or replaced their systems in preparation for
Y2K. In addition, the capital available to the lodging industry for new
construction, remodeling, and investments in technology shrunk considerably in
2000, resulting in extended sales cycles and fierce competition. The Company was
able to offset some of the impact of these trends through its offering of the
Avaya GuestWorks PBX system. The Avaya system enabled the Company to break into
new customer accounts who were not previously receptive to the Company's Hitachi
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PBX offering. The Company will continue to go to the lodging market with both
products, although the Company expects sales of new Avaya systems to continue to
exceed sales of Hitachi systems, as was the case in fiscal 2000. Management
believes that the atmosphere of limited budgets and extended sales cycles may
continue for the foreseeable future or could worsen if the U.S. economy slows.
Installation and Service Revenues. Installation and service revenues
increased $12.4 million or 66% during fiscal 2000. Approximately $9.7 million of
this increase was earned from the expansion of the Company's service
capabilities into the commercial market. During fiscal 2000, the Company hired
and trained additional technicians and implemented new provisioning processes
and pricing strategies to address the needs of the commercial market. Revenues
earned from the Company's traditional lodging installation and service
activities grew approximately $2.7 million or 15%. This growth was fueled by
increases in revenues earned from maintenance contracts and billable services on
call accounting systems and PBX's, partially offset by decreases in installation
revenues. During 2001, the Company plans to continue to expand its service and
installation presence in the commercial market and believes that by offering a
proprietary maintenance contract it can create a recurring stream of service
revenues similar to that long enjoyed by the Company in the hospitality market.
Other Revenues. Other revenues consists of revenues earned from the
remaining long distance services contracts still in force and from
non-recurring, low margin, sale of after-market products in which the Company
acts a "broker" to facilitate the transaction for its customers. The Company is
in the process of winding down its long distance services business as the
remaining contracts to provide those services expire in fiscal 2001. The sale of
after-market products included in this revenue caption involve transactions in
which the Company procures large quantities of after-market components,
typically telephone sets, for end-user customers. In these transactions, the
Company typically does not take possession of the equipment, but simply has the
equipment drop shipped directly to the customer's location, earning a small fee
to process, bill and collect on the transaction.
Gross Margins. Total gross margins earned in 2000 were 30% compared to 38%
in 1999. This decline was expected as a result of a dramatic and planned change
in product mix toward the commercial market for voice and data products. As the
Company has executed its growth strategy through acquiring companies operating
in the commercial market, the percentage of its business earned from
higher-margin, specialized lodging products and services has declined as a
portion of total revenues. Management expects the overall gross margins earned
by its new business model to be in a range of 30%-33%, with some individual
sectors of its integrated business model to earn gross margins significantly
higher and some sectors to be lower than this blended rate. Generally, the
Company expects its traditional voice systems to be within the blended range
outlined above while the margins on data and converged products will be lower,
and the margins on high-end applications and professional consulting services
will be higher.
The gross margins earned on commercial equipment sales in fiscal 2000 were
28.8%. The Company intends to continue to aggressively pursue the Avaya
partnering opportunities that it enjoyed in fiscal 2000, although the margins
earned on these sales are often lower than the Company's target for this revenue
stream because of the buying power of these large, Fortune 500 customers and
fierce competition for this segment of the business. In fiscal 2001, management
intends to enhance its overall commercial equipment margins by selling more
equipment into the Enterprise customer base and by shifting its product mix
toward larger systems.
The gross margins earned on lodging systems sales were 34% in fiscal 2000
compared to 39% in fiscal 1999. This decline represents a change in product mix
in 2000 toward sales of more PBX systems and fewer call accounting systems as a
portion of total lodging systems sales. As a proprietary product, the Company's
call accounting systems earn a higher gross margin than the distributed PBX
product line. Management believes the gross margins earned on lodging systems
sales in fiscal 2000 are indicative of those expected to be earned in fiscal
2001.
The gross margins earned on installation and service revenues in fiscal
2000 were 31% compared to 35% in fiscal 1999. Ultimately, management believes
that gross margins earned on installation and service revenues will be in the
range of 32% to 35% as it continues to develop the commercial sales model and
leverage its nation-wide staff of technicians. Since the acquisitions of USTI
and ACT, the Company has been continually working to improve both the revenues
and margins earned by its installation and service activities. Specifically, the
Company has or is in the process of implementing the following initiatives:
First, the Company is shifting the installation of commercial systems from a
third party model to an in-house model. To do this, the Company has continued
throughout the year to scale up its technician capacity and
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expertise in installing commercial systems. Also, the Company is implementing a
new provisioning process designed to streamline commercial installations. This
initiative is largely complete although the Company is continually evaluating
its provisioning and logistics processes. Second, the Company implemented new
job costing and pricing tools, thereby improving its margins on services still
outsourced to third parties. Management is also continuing to evaluate this
costing tool to ensure that these margins continue to improve. Finally, as
discussed above, the Company has introduced a new commercial maintenance
offering which management believes will provide a steady source of recurring
revenues to offset the impact of fluctuations in installation activities and to
cover the base of fixed costs.
Operating Expenses. Total operating expenses, including selling, general
and administrative ("SGA"), engineering, research and development
("Engineering"), and amortization were 18.2% of total revenues in fiscal 2000
compared to 20.5% of total fiscal 1999 revenues. SGA costs represented 15.7% of
revenues in 2000 compared to 13.8% in 1999. These levels were satisfactory to
management given the rapid growth of the Company and the complexity of its
operations compared to a year ago. However, management believes that sales
expenses grew at a faster rate than necessary in the last half of fiscal 2000
due to lower sales productivity, primarily related to slowdowns in the lodging,
government and Pacific Northwest segments of its business. Engineering costs
represented 1% of revenues in 2000 compared to 1.5% in 1999. The Company's
engineering related costs have shifted dramatically in the last year to a more
internal support function rather than a product-focused research and support
function. Given the Company's growth and number of major locations, there is
much greater need on supporting and integrating the Company's technology
infrastructure. That focus will continue for the foreseeable future, and
specifically in 2001, the Company intends to convert its existing variety of
operating and accounting systems to one platform based on an Oracle database.
Amortization expense between the two years consists of different components and
is therefore not comparable. The majority of amortization expense in fiscal 1999
related to the amortization of the purchase price of the PBX service contracts
purchased from Williams Communications Solutions in late 1998, while the
majority of amortization expense recorded in fiscal 2000 is related to the
acquisitions of USTI and ACT.
Interest Expense. Interest expense consists of interest on the Company's
credit facility that was used to fund the acquisitions discussed throughout this
report, interest on a working capital revolver, and various commitment fees paid
on the unused portion of the credit facility. Previous to the establishment of
this credit facility, the Company did not have any outstanding debt.
Interest and Other Income. Interest and other income consists primarily of
interest income earned on XETAPLAN sales-type leases. Under these lease
arrangements, the Company provides a call accounting system to its lodging
customers and service on the system for a period of three to five years in
exchange for a monthly or quarterly fee. Under the accounting rules followed by
the Company, a portion of these payments are imputed as interest income. In
fiscal 1999, interest income also included interest earned on cash investments.
The decline in interest income reflects the decline in available cash balances
for investments.
Income Taxes. The Company recorded a provision for federal and state income
taxes of $4.2 million or 39% of pre-tax income compared to $2.75 million or 39%
of pre-tax income in fiscal 1999. This rate reflects the effective federal tax
rate plus the estimated composite state income tax rate.
Operating Margins. Net income as a percent of sales was 6.7% in fiscal 2000
compared to 11.5% in fiscal 1999. This lower operating margin reflects the
Company's transition from a niche company in the small hospitality sector to a
voice and data integrator in a larger and faster growing commercial voice and
data integration market. Given the current environment of this new market, with
its trend toward convergence utilizing internet protocol, and the accompanying
changes required by the distribution channels to participate in this new
environment, management believes that quickly repositioning the Company to take
advantage of these two significant trends is a strategic priority. The Company
has elected to be aggressive in its entry into this market and is implementing a
balanced growth strategy, which includes acquisitions and internal growth. In
general, the lower operating margins were expected by management and reflect the
additional interest and amortization expense the Company has incurred to pursue
this strategy. In the near term, as management repositions the Company to take
advantage of these trends in the commercial market, management expects the
Company's after-tax operating margins to range between 6% and 8%, with an
expectation of the lower end of that range specifically in fiscal 2001.
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Year ended October 31, 1999 compared to October 31, 1998. For the fiscal
year ended October 31, 1999, the Company reported record net income and revenues
of $4.283 million and $37.263 million representing a 40% increase in net income
and a 46% increase in total revenues compared to its 1998 fiscal year. The 46%
increase in total revenues consisted of an increase in installation and service
revenues of 42%, an increase in sales of systems of 59%, and a decrease in long
distance revenues of 36%. By product line, fiscal 1999 revenues earned from
communications systems (or "PBX's") related activities, including sales of new
systems, installations and service, increased $8.267 million, or 45%, revenues
from call accounting related activities increased $3.904 million or 63%, and
revenues from the Company's long distance service offering declined $355,000 or
36%. All of the Company's revenues during fiscal 1999 were earned from the
lodging market.
Sales of PBX systems increased $3.860 million or 42% while revenues earned
from PBX installation and service activities increased $4.407 million or 49% in
fiscal 1999 compared to 1998. The growth in revenues was attributable to the
continued acceptance of the Company's PBX product and service offering which
included the introduction of the Lucent GuestWorks(R) communications system, and
the robust U.S. economy which fueled continued new construction of hotels,
significant remodeling projects and expansions of existing PBX systems to
accommodate multiple phone line access in hotels. While sales of Hitachi systems
still far outweighed sales of Lucent products in 1999, sales and installations
of Lucent systems increased steadily during the last half of fiscal 1999 and the
first quarter of fiscal 2000.
During fiscal 1999, the Company experienced a surge in orders for call
accounting systems that resulted in an increase in revenues from systems sold of
$2.765 million or 139%. Revenues from call accounting installation and service
activities increased $1.139 million or 27% during fiscal 1999. This surge in
orders was primarily due to the broad market acceptance of the Company's Virtual
XL(R) call accounting system.
Revenues from the Company's long distance service offering declined
$355,000 or 36% due to an erosion in the usage of 0+ services used by guests and
customer hotels.
Gross margins earned on total revenues increased to 38% in fiscal 1999
compared to 35% in fiscal 1998. The gross margins earned on installation and
service revenues were unchanged in fiscal 1999 at 35% compared to fiscal 1998.
However, the Company experienced pressure on the gross margins earned on
installation and service revenues during fiscal 1999 and 1998, and both years'
margins were lower than historical levels. The gross margins earned on systems
sales increased to 39% from 33% in fiscal 1999 compared to 1998. This increase
was primarily due to the favorable mix of systems sales toward higher margin
call accounting systems. The gross margins earned on long distance services in
fiscal 1999 were 67% compared to 59% in fiscal 1998. The gross margin earned on
this revenue source during fiscal 1999 benefited from lower overall long
distance revenues because the revenues were insufficient to trigger payments to
the Company's marketing alliance partner.
Total operating expenses, including selling, general, and administrative
("SGA"), engineering, research and development ("Engineering"), and amortization
increased $2.865 million or 60% in fiscal 1999. However, of this increase,
$1.555 million was attributable to an increase in amortization expense. Most of
the increase in amortization was related to the Company's purchase of PBX
service contracts in September, 1998 for $1.533 million, amortized over the
average life of the contracts, which was approximately one year. Ignoring
amortization expense, the costs of SGA and Engineering activities represented
15.2% of revenues in fiscal 1999 and 17.2% of fiscal 1998 revenues.
Interest income was relatively unchanged between 1999 and 1998. The Company
earned interest income from its sale-type lease contracts with customers and
from cash investments. Interest income earned from additions to its sale-type
lease receivables was offset by decreases in interest income earned on cash
balances due to lower average cash on hand in fiscal 1999.
The Company recorded a provision for federal and state income taxes of
$2.750 million or 39% of pre-tax income compared to $1.855 million or 38% in
fiscal 1998. The increase in the effective tax rate reflected an increase in the
Company's estimated multi-state tax rate.
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LIQUIDITY AND CAPITAL RESOURCES
As a result of the Company's growth strategy and the related acquisitions
made during the year, the capital structure of the Company changed dramatically
during fiscal 2000. Concurrent with the acquisition of USTI, the Company
established a $40 million credit facility to fund that transaction and provide a
committed line of credit for working capital needs and to fund additional
transactions. During the year, the Company expanded the working capital portion
of the facility from $5 million to $8 million, thereby bringing the total
available under the facility to $43 million. Borrowing under the acquisition
portions of the facility is based on a multiple of EBITDA, as defined in the
facility, including EBITDA of the target company. The interest rate charged on
borrowings is based on a margin above LIBOR or Prime, with the margin adjusted
for specific ranges of leverage as determined by the Company's debt ratio, as
defined in the facility.
Upon initiating the credit facility, the Company borrowed $23 million to
finance the USTI acquisition. In February, 2000, the Company borrowed an
additional $3.0 million to finance the acquisition of the assets of ACT. As a
result of these borrowings, less the effect of scheduled principal payments, the
total debt related to acquisitions at October 31, 2000 was $24.8 million. An
additional $1 million was outstanding on the working capital portion of the
facility. On the day following the close of the fiscal year, the Company
borrowed an additional $5.5 million to complete the purchases of the assets of
PRO Networks and KMI. Currently, the Company has approximately $3.5 million
remaining capacity under the acquisition portion of the facility.
Management believes that it has sufficient access to debt and equity
capital to pursue its growth strategy, including additional acquisitions. Its
evaluation of potential acquisition candidates is ongoing. These evaluations
center on the target's cash flows, product and service mix, installation and
service capabilities, and geographic reach. The purchase of some targets under
consideration or the cumulative effect of purchasing several targets could
exceed the available remaining capacity under the current credit agreement. The
agreement currently in place was based upon the combined projected EBITDA
(earnings before interest, taxes, depreciation and amortization) of XETA and
USTI. Therefore, the Company's credit capacity, in the judgment of management,
continues to increase as the Company's earnings expand. During the first quarter
of fiscal 2001, the Company will be evaluating its needs for additional bank
financing with a view towards securing additional capacity. While no assurances
can be made, management believes that its current bank group is favorable
towards expansion of the facility; however, at this time the Company has chosen
not to incur the expenses required to do so. In addition to debt financing, the
Company believes that a wide variety of other capital resources are available
including subordinated debt, secondary equity offerings, pooling-of-interests
transactions, private placements of either debt or equity instruments, and
combinations of all of the above.
During fiscal 2000, cash balances decreased $3.6 million. Sources of cash
included cash earned from operations of $2.5 million and cash provided by
financing activities of $23.0 million. Uses of cash included investing
activities of $29.3 million. In addition to the investments made in the
acquisitions described above, the Company invested $2.7 million in additions to
property and equipment to fund expansion of its employee base and technology
infrastructure. Principal payments made on the debt during the year were $4.2
million, all of which was made against the initial draw of $23 million.
Beginning December 31, 2000, the acquisition draws made to fund the ACT, PRO
Networks, and KMI acquisitions were converted to a term loan in accordance with
the agreement and the Company will begin making principal payments accordingly.
OUTLOOK AND RISK FACTORS
The statements in this section entitled "Outlook and Risk Factors," as well
as other statements throughout this report regarding trends or future
performance or events, are based on management's current expectations. These
statements are forward-looking and actual results may differ materially. All
such statements should be read in conjunction with the risk factors discussed
herein and elsewhere in this report.
Growth Strategy and Acquisitions. Fiscal 2000 represented the first year in
the Company's planned expansion beyond its traditional focus on the lodging
market to become a nationwide integrator of voice and data technology serving
the commercial market. Since the announcement of this strategy in June, 1999,
the focus, size and capital structure of the Company has changed dramatically as
is discussed in other areas of this report. These changes present a variety of
risk factors to the Company including the integration of the operations and
employees of new acquisitions (including possible
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problems with financial control and computer system compatibility; unanticipated
costs; and loss of key employees), increased and significant demands on the
Company's administrative, operational, financial and management personnel, use
of debt and possibly equity capital to finance the planned growth, and the
successful management of a fast growing company with nation-wide sales, service
and administrative operations. The failure to effectively manage these changes
could have a material, adverse effect on the Company's business, operating
results, or financial condition and upon the investment community's perception
of the Company's ability to carry out its growth strategy.
Attracting and Retaining Talented Employees. As a result of changes in
technology, the Company's strategy to grow faster than the market rate, and the
overall tight U.S. labor market, the ability to attract and retain qualified
employees is critical to the Company's success. As the Company continues to
expand into the sales, installation, and maintenance of converged networks, the
need for technicians with training certifications in the specific products and
applications that the Company is selling will be essential. Currently, the
demand for these individuals is extremely high and very competitive and
compensation for such individuals is rising much faster than general wages.
Management believes that by providing opportunities for these individuals at the
leading edge of this technology and through appropriate compensation and
training programs, the Company can attract and retain the needed competencies
for its growth plans. Such compensation programs should be designed to provide
both current income and long-term equity-based compensation. Should the disfavor
of technology stocks that is currently prevalent in the stock market continue or
should the Company's operating performance result in disfavor of the Company's
stock in particular, then those equity-based programs would likely not provide
sufficient additional compensation to attract or retain key employees. In those
circumstances, it is likely that wages would have to be increased, thereby
lowering the expected gross margins on installation and service revenues as well
as overall operating margins. A similar tension is occurring related to the
hiring and retaining of qualified sales personnel. In addition to attracting new
account executives with the capability of prospecting for opportunities in the
new, emerging applications and converged products, all of the Company's existing
account executives must undergo a personal transformation to learn these
products. The Company is investing heavily in the training of its sales force
and will continue to evaluate its sales compensation programs to help ensure a
high retention rate for its account executives. Notwithstanding the Company's
efforts in these areas, no assurance can be given that the Company will be
successful in hiring, training and retaining the personnel needed to effectively
execute its current business strategy.
Dealer Agreements. The Company sells communications systems under dealer
agreements with Avaya, Inc. (formerly Lucent Technologies) and Hitachi Telecom,
(USA), Inc. The Company is a major dealer for both manufacturers and considers
its relationship with both to be good. Nevertheless, if the Company's strategic
relationship with Avaya, and to a lesser degree with Hitachi, were to be
terminated prematurely or unexpectedly, the Company's operating results would be
adversely impacted. Furthermore, in both the separate agreements that the
Company has with Avaya for distribution of products to the commercial and
lodging markets, respectively, and the agreement with Hitachi, the Company must
meet certain volume commitments to earn the pricing structure provided in the
dealer agreements. In addition, the Company's relationship with Avaya is
administered through a joint agreement between the Company, Avaya, and one of
Avaya's "super distributors", Voda One (formerly Inacom) through which the
Company receives specified pricing from Voda One based on certain volume
requirements. Should the Company fail to meet any of these requirements, future
profit margins could suffer.
Dependence Upon the Avaya "Business Partner Program" and Incentive
Programs. As described above, the Company has built a significant portion of its
commercial business from its program to work Avaya's NAM's and GAM's. Under
this program, the Company partners with Avaya to design, sell, and install Avaya
equipment to large Avaya customers under sales agreements negotiated by the NAM
or GAM. The Company is typically engaged by Avaya because it can meet the
customer's need for fast delivery and installation. Currently, the Avaya's NAM's
and GAM's receive identical compensation from Avaya regardless of whether their
orders are fulfilled by Avaya's direct installation team or by a dealer such as
the Company. While no assurance can be given, if Avaya were to alter their NAM
and GAM compensation program to favor using Avaya's direct provisioning and
installation teams, the Company would likely suffer material, adverse operating
results. Also, Avaya, like many major manufacturers, provides various incentive
programs to support the advertising and sale of its products. The Company
receives substantial rebates through these common incentive programs to offset
both costs of goods sold and marketing expenses. These rebates are based on a
combination of the dollar volumes of purchases of certain products, the number
of units of certain products purchased, and the year-over-year growth in
purchases of certain products. Historically, the requirements of these incentive
programs are changed annually. While the Company does not expect such programs
to be altered to the Company's detriment, there can be no assurance given that a
change in these programs won't negatively impact the Company's profit margins
and operating results.
17
18
New Market Entrants. Earlier in the year, Lucent Technologies (prior to the
spinning off of its Enterprise business, now called Avaya), sold its Small
Business Division to Expanets, a "partner entity" of Northwest Corporation. As a
result of the sale, Expanets became the largest dealer of Lucent/Avaya
telecommunications products in the U.S., a position previously held by the
Company. While the Company and Expanets primarily target different segments of
the market, there is some overlap at the lower end of the Enterprise market.
This increased competition from a significantly larger and financially stronger
competitor could negatively impact the Company's sales and gross margins.
Competition. Although the market for voice and data technologies
integrators is in its infancy, competition will be formidable and real. The
Company will be competing with established telecommunications companies that
have a larger or more well-established commercial customer base, and with other
technology companies that have existing voice and data integration competencies.
With regard to the traditional voice communications market, the competitive
environment is also fierce. As a distributor of telecommunications products for
Avaya and Hitachi, the Company competes not only with distributors that
represent other manufacturers' products, but also with other Avaya and Hitachi
distributors. Avaya has approximately 800 voice dealers nationwide and Hitachi
has more than 40 distributors that the Company competes against in the
hospitality sector.
Credit Facility and Reliance on Debt Financing. The Company's expansion
into the commercial market segment through a strategy of acquisitions and
aggressive internal growth has necessitated a dramatic change in the capital
structure of the Company. To date, the Company has funded this expansion through
the use of bank debt. Under the terms of the credit facility, the Company is
subject to various financial and operating covenants. In fiscal 2000, the
Company's capital expenditures exceeded the limit provided for in the credit
facility. The Company has received a waiver of this covenant for fiscal 2000.
While the Company believes that it will operate within the covenants in the
future, there can be no assurance given that the Company's lenders would waive
additional violations should they occur. As discussed under "Liquidity and
Capital Resources" above, management believes that the Company can secure
sufficient debt financing to support its planned growth strategy. However,
should such debt financing not be available from its current lenders, there can
be no assurance given that an agreement with other banks could be secured or
that other forms of capital, such as private or public placements of equity,
would be available.
Section 338(h)(10) Election. The acquisition of USTI was a purchase of 100%
of the stock of USTI for financial reporting purposes. However, for tax
purposes, all of the parties to the purchase agreement agreed to elect under the
applicable Internal Revenue Code, to treat the transaction as a purchase of
assets by the Company. To properly affect the appropriate elections for this
desired tax treatment, the required election form was to be filed by August 15,
2000. Since this election form has not been timely filed, the Company is working
with its professional advisors and the former USTI shareholders in seeking
administrative relief from the IRS to accept the election form as if it had been
timely filed. Based on historical precedent, it is probable that administrative
relief will be granted by the IRS. However, there can be no guarantee of such an
outcome. Failure to obtain administrative relief will result in a loss of
significant tax deductions to the Company over the next 15 years and as a
result, will increase the Company's effective tax rate on its financial
statements.
Lodging Industry. As a result of less capital available to the lodging
industry for new construction, remodeling and investments in new technology, the
Company has seen a return of longer sales cycles that had characterized the
Company's experience with the industry in recent years.
SEC Regulation FD and Company Guidance for Future Results. During the
Company's fourth quarter of fiscal 2000, a new SEC regulation regarding fair
disclosure of material company information became effective. This regulation,
commonly called Reg. FD, has significantly changed the methods by which public
companies, including the Company, interact with stock market analysts,
shareholders, the media, and other interested parties. In an effort to comply
with Reg. FD, the Company has released a press release and held an open
conference call with the analysts who write financial research reports on the
Company to discuss management's expectations for fiscal 2001. This guidance
provided a variety of information to help the analysts and other investors to
form their own forecasts of 2001 results. Management expects to continue to
update this guidance as fiscal 2001 unfolds. However, although management
believes that such guidance currently reflects and, when updated, will continue
to reflect its then current expectations of future results, there can be no
assurance given that the Company's actual results will be consistent with the
guidance given or with analysts' forecasts of such results.
18
19
Pending Litigation. The Company is involved in several matters of pending
litigation (See "Legal Proceedings" under Part I above). No loss contingencies,
other than the estimated costs of bringing one of the cases to trial, have been
recorded in the financial statements. Should the outcome of either of these
matters be unfavorable, however, the Company may have to record expenses which
might cause operating results to be materially lower than those expected.
General Risk Factors. In addition to the specific factors discussed above,
the following general factors can also impact the Company's overall performance
and results of operations: the strength of the U.S. economy, the continued
growth of the IP networking market, uncertainties inherent with rapidly changing
technologies and customer demand, and relationships with suppliers, vendors and
customers.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risks relating to the Company's operations result primarily from
changes in interest rates. The Company did not use derivative financial
instruments for speculative or trading purposes during the 2000 fiscal year.
Interest Rate Risk. The Company's cash equivalents, which consist of
highly-liquid, short-term investments with an average maturity of less than 51
days, are subject to fluctuating interest rates. A hypothetical 10 percent
change in such interest rates would not have a material effect upon the
Company's consolidated results of operations or cash flows. During fiscal year
2000, the Company entered into a $43 million credit facility, with variable
interest rates based on either LIBOR or the bank's prime rate. At October 31,
2000, the Company had borrowings under the credit facility of $25.8 million.
While the Company is exposed to changes in interest rates risk, a hypothetical
10% change in interest rates on its variable rate borrowings would not have a
material effect on the Company's earnings or cash flow.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS OF THE COMPANY PAGE
- -------------------------------------------- ----
Report of Independent Public Accountants F-1
Consolidated Financial Statements
Consolidated Balance Sheets - October 31, 2000 and 1999 F-2
Consolidated Statements of Operations - For
the Years Ended October 31, 2000, 1999 and 1998 F-3
Consolidated Statements of Shareholders' Equity -
For the Years Ended October 31, 2000, 1999 and 1998 F-4
Consolidated Statements of Cash Flows - For the
Years Ended October 31, 2000, 1999 and 1998 F-5
Notes to Consolidated Financial Statements F-6
19
20
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Xeta Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of Xeta
Technologies, Inc. (formerly Xeta Corporation, an Oklahoma corporation) and
subsidiaries as of October 31, 2000 and 1999, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended October 31, 2000. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Xeta Technologies,
Inc. and subsidiaries as of October 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
October 31, 2000, in conformity with accounting principles generally accepted in
the United States.
ARTHUR ANDERSEN LLP
Tulsa, Oklahoma
December 15, 2000
F-1
21
XETA TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 2000 AND 1999
2000 1999
-------------- --------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 926,330 $ 4,556,212
Current portion of net investment in sales-type leases 2,609,976 2,577,141
Trade accounts receivable, net 30,139,623 4,432,647
Inventories, net 8,135,062 3,733,306
Deferred tax asset, net 1,133,487 622,595
Prepaid expenses and other 338,828 261,024
-------------- --------------
Total current assets 43,283,306 16,182,925
-------------- --------------
NONCURRENT ASSETS:
Net investment in sales-type leases, less current portion 2,505,841 3,843,743
Property, plant and equipment, net 6,854,851 3,942,540
Goodwill, net 20,579,359 --
Purchased service and long distance contracts, net of accumulated
amortization of $2,557,168 and $2,162,938 -- 394,230
Capitalized software production costs, net of accumulated
amortization of $693,066 and $573,066 597,956 649,406
Other 327,658 303,633
-------------- --------------
Total noncurrent assets 30,865,665 9,133,552
-------------- --------------
Total assets $ 74,148,971 $ 25,316,477
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 8,204,088 $ --
Revolving line of credit 1,000,000 --
Accounts payable 11,750,607 2,126,654
Unearned revenue 4,513,029 4,540,548
Accrued liabilities 3,927,803 1,494,737
Accrued income taxes 125,942 --
-------------- --------------
Total current liabilities 27,917,381 8,161,939
-------------- --------------
UNEARNED SERVICE REVENUE 1,039,949 1,953,222
LONG-TERM DEBT, less current portion above 17,983,011 --
ACCRUED LONG-TERM LIABILITIES 1,299,114 --
NONCURRENT DEFERRED TAX LIABILITY, net 123,603 650,024
COMMITMENTS
SHAREHOLDERS' EQUITY:
Preferred stock; $.10 par value; 50,000 shares authorized, 0 issued -- --
Common stock; $.001 and $.05 par value, respectively; 50,000,000 shares
authorized, 9,662,736 and 9,273,404 issued at October 31, 2000 and
1999, respectively 9,662 231,835
Paid-in capital 9,486,776 5,373,855
Retained earnings 18,313,380 11,851,761
Less- Treasury stock, at cost (2,244,659) (2,906,159)
-------------- --------------
Total shareholders' equity 25,565,159 14,551,292
-------------- --------------
Total liabilities and shareholders' equity $ 74,148,971 $ 25,316,477
============== ==============
The accompanying notes are an integral part of these consolidated balance
sheets.
F-2
22
XETA TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years
Ended October 31,
----------------------------------------------
2000 1999 1998
------------- ------------- -------------
COMMERCIAL SYSTEM SALES $ 54,198,673 $ -- $ --
INSTALLATION AND SERVICE REVENUES 31,219,629 18,766,095 13,219,687
LODGING SYSTEM SALES 17,000,599 18,496,957 12,227,545
------------- ------------- -------------
NET SALES, INSTALLATION AND SERVICE REVENUES
102,418,901 37,263,052 25,447,232
------------- ------------- -------------
COST OF COMMERCIAL SYSTEMS SALES 38,606,406 -- --
INSTALLATION AND SERVICE COSTS 21,627,342 12,206,057 8,535,823
COST OF LODGING SYSTEMS SALES 11,171,774 11,066,635 7,916,888
------------- ------------- -------------
TOTAL COST OF SALES, INSTALLATION AND SERVICE
71,405,522 23,272,692 16,452,711
------------- ------------- -------------
Gross profit 31,013,379 13,990,360 8,994,521
------------- ------------- -------------
OPERATING EXPENSES:
Selling, general and administrative 16,050,364 5,136,228 3,992,470
Engineering, research and development 997,516 550,122 383,371
Amortization 1,587,230 1,936,057 381,521
------------- ------------- -------------
Total operating expenses 18,635,110 7,622,407 4,757,362
------------- ------------- -------------
INCOME FROM OPERATIONS 12,378,269 6,367,953 4,237,159
INTEREST EXPENSE (2,354,793) -- --
INTEREST AND OTHER INCOME, NET 594,143 664,903 670,541
------------- ------------- -------------
INCOME BEFORE PROVISION FOR INCOME TAXES
10,617,619 7,032,856 4,907,700
PROVISION FOR INCOME TAXES 4,156,000 2,750,000 1,855,000
------------- ------------- -------------
NET INCOME $ 6,461,619 $ 4,282,856 $ 3,052,700
============= ============= =============
INCOME PER SHARE - BASIC $ .77 $ .53 $ .38
============= ============= =============
INCOME PER SHARE - DILUTED $ .66 $ .46 $ .33
============= ============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING 8,350,299 8,021,248 8,119,932
============= ============= =============
WEIGHTED AVERAGE EQUIVALENT SHARES 9,761,703 9,254,442 9,370,160
============= ============= =============
The accompanying notes are an integral part of these consolidated statements.
F-3
23
XETA TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE YEARS ENDED OCTOBER 31, 2000
Common Stock Treasury Stock
--------------------------- --------------------------
Number of Paid-in Retained
Shares Issued Par Value Shares Amount Capital Earnings
------------- ----------- ----------- ----------- ----------- -----------
BALANCE AT OCTOBER 31, 1997 2,207,285 $ 220,728 189,747 $ (259,740) $ 4,859,340 $ 4,516,205
Stock options exercised 78,999 7,900 -- -- 85,000 --
Tax benefit of stock options -- -- -- -- 191,478 --
Treasury Stock purchased -- -- 74,800 (1,488,376) -- --
Net income -- -- -- -- -- 3,052,700
----------- ----------- ----------- ----------- ----------- -----------
BALANCE AT OCTOBER 31, 1998 2,286,284 228,628 264,547 (1,748,116) 5,135,818 7,568,905
Stock options exercised 32,067 3,207 -- -- 49,469 --
Tax benefit of stock options -- -- -- -- 188,568 --
Treasury Stock purchased -- -- 65,150 (1,158,043) -- --
Two-for-one stock split 2,318,351 -- 329,697 -- -- --
Net income -- -- -- -- -- 4,282,856
----------- ----------- ----------- ----------- ----------- -----------
BALANCE AT OCTOBER 31, 1999 4,636,702 231,835 659,394 (2,906,159) 5,373,855 11,851,761
Treasury stock issued in acquisition -- -- (150,000) 661,500 2,638,500 --
Stock options exercised $.05 par value 72,166 3,607 -- -- 182,693 --
Tax benefit of stock options -- -- -- -- 1,004,696 --
Change in par value of common stock -- (226,025) -- -- 226,025 --
Two-for-one stock split 4,708,868 -- 509,394 -- -- --
Stock options exercised $.001 par value 245,000 245 -- -- 61,007 --
Net income -- -- -- -- -- 6,461,619
----------- ----------- ----------- ----------- ----------- -----------
BALANCE AT OCTOBER 31, 2000 9,662,736 $ 9,662 1,018,788 $(2,244,659) $ 9,486,776 $18,313,380
=========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated statements.
F-4
24
XETA TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years
Ended October 31,
-----------------------------------------------
2000 1999 1998
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,461,619 $ 4,282,856 $ 3,052,700
------------- ------------- -------------
Adjustments to reconcile net income to net cash provided by
operating activities-
Depreciation 819,439 430,599 299,192
Amortization 1,587,230 1,936,057 381,521
Loss on sale of assets 17,665 -- 14,577
Provision for doubtful accounts receivable 191,000 36,000 76,000
Provision for excess and obsolete inventory 325,000 496,170 --
Change in assets and liabilities-
(Increase) decrease in net investment in sales-type leases 1,559,228 (3,709,850) 793,189
Increase in trade receivables (9,072,384) (907,446) (2,135,358)
(Increase) decrease in inventories 1,392,523 (1,723,570) (523,508)
(Increase) decrease in deferred tax asset 111,533 (47,008) (513,844)
Increase in prepaid expenses and other assets (116,751) (391,144) (43,489)
Decrease in prepaid taxes 18,700 -- --
Increase in accounts payable 1,104,108 379,645 1,155,187
Increase (decrease) in unearned revenue (2,834,396) 2,667,239 345,313
Increase (decrease) in accrued liabilities (97,501) 670,283 84,758
Increase in accrued income taxes 1,130,639 6,692 254,479
Increase (decrease) in deferred tax liabilities (16,421) 123,143 (24,839)
------------- ------------- -------------
Total adjustments (3,880,388) (33,190) 163,178
------------- ------------- -------------
Net cash provided by operating activities 2,581,231 4,249,666 3,215,878
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of USTI and ACT, net of cash acquired (26,556,154) -- --
Purchases of long distance contracts -- (156,500) (1,860,000)
Additions to property, plant and equipment (2,720,054) (1,555,769) (2,497,096)
Additions to capitalized software production costs (68,550) (114,036) (237,781)
Proceeds from sale of assets 82,325 -- 852
------------- ------------- -------------
Net cash used in investing activities (29,262,433) (1,826,305) (4,594,025)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt 26,020,432 -- --
Proceeds from revolving line of credit 23,750,000 -- --
Principal payments on debt (4,216,664) -- --
Payments on revolving line of credit (22,750,000) -- --
Purchase of treasury stock -- (1,158,043) (1,488,376)
Exercises of stock options and warrants 247,552 52,676 92,900
------------- ------------- -------------
Net cash (used in) provided by financing activities 23,051,320 (1,105,367) (1,395,476)
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents (3,629,882) 1,317,994 (2,773,623)
CASH AND CASH EQUIVALENTS, beginning of year 4,556,212 3,238,218 6,011,841
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, end of year $ 926,330 $ 4,556,212 $ 3,238,218
============= ============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 1,620,462 $ 18,296 $ 22,694
============= ============= =============
Cash paid during the period for income taxes $ 2,956,054 $ 2,675,135 $ 2,116,908
============= ============= =============
Contingent liabilities acquired in USTI acquisition $ 4,500,000 $ -- $ --
============= ============= =============
Treasury shares issued in USTI acquisition $ 3,300,000 $ -- $ --
============= ============= =============
The accompanying notes are an integral part of these consolidated statements.
F-5
25
XETA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2000
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Business
XETA Technologies, Inc., formerly Xeta Corporation, (XETA or the Company) is a
nationwide integrator of voice and data technologies. The Company provides
consulting, sales, engineering, project management, installation and service of
Cisco data networking and IP networking solutions, Avaya voice and data systems,
Microsoft Exchange, Avaya unified messaging systems, call centers, and telephony
over IP solutions to the commercial market. In addition, the Company provides
Hitachi and Avaya voice systems and XETA call accounting systems to the
hospitality industry. XETA is an Oklahoma corporation.
U.S. Technologies Systems, Inc. (USTI) is a wholly-owned subsidiary of XETA and
was purchased on November 30, 1999 as part of the Company's expansion into the
commercial market. Xetacom, Inc. (Xetacom), is a wholly-owned, but dormant,
subsidiary of the Company.
Cash and Cash Equivalents
Cash and cash equivalents at October 31, 2000, consist of money market accounts
and commercial bank accounts.
Lease Accounting
A portion of the Company's revenues have been generated using sales-type leases.
The Company sells some of its call accounting systems to the lodging industry
under these sales-type leases to be paid over three, four and five-year periods.
Because the present value (computed at the rate implicit in the lease) of the
minimum payments under these sales-type leases equals or exceeds 90 percent of
the fair market value of the systems and/or the length of the lease exceeds 75
percent of the estimated economic life of the equipment, the Company recognizes
the net effect of these transactions as a sale as required by accounting
principles generally accepted in the United States.
Interest and other income is primarily the recognition of interest income on the
Company's sales-type lease receivables and income earned on short-term cash
investments. Interest income from a sales-type lease represents that portion of
the aggregate payments to be received over the life of the lease which exceeds
the present value of such payments using a discount factor equal to the rate
implicit in the underlying leases.
Revenue Recognition
The Company recognizes revenue from sales-type leases as discussed above under
the caption "Lease Accounting." Service revenue is recognized monthly over the
life of the related sales-type lease or service agreement on a straight-line
basis. In fiscal year 2000, the Company changed its revenue recognition policy
related to equipment sales, in order to provide better matching of revenues and
expenses. Equipment revenues from call accounting and PBX systems sales are
recognized upon shipment of the system. Installation revenue from system sales
is recognized upon installation. Under the prior method, call accounting system
sales were recognized 75 percent upon shipment with the remaining 25 percent
recognized upon installation. PBX system sales were recognized 100 percent upon
installation. The accounting change was not material to the financial
statements.
F-6
26
Property, Plant and Equipment
The Company capitalizes the cost of all significant property, plant and
equipment additions including equipment manufactured by the Company and
installed at customer locations under PBX service agreements. Depreciation is
computed over the estimated useful life of the asset or the terms of the lease
for leasehold improvements, whichever is shorter, on a straight-line basis. When
assets are retired or sold, the cost of the assets and the related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
included in income. Maintenance and repair costs are expensed as incurred.
Research and Development and Capitalization of Software Production Costs
The Company capitalizes software production costs related to a product upon the
establishment of technological feasibility as defined by accounting principles
generally accepted in the United States. Amortization is provided on a
product-by-product basis based upon the estimated useful life of the software
(generally seven years). All other research and development costs (including
those related to software for which technological feasibility has not been
established) are expensed as incurred.
Income Taxes
Several items of income and expense, including certain sales revenues under
sales-type leases, are included in the financial statements in different years
than they are included in the income tax returns. Deferred income taxes are
recorded for the tax effect of these differences.
Warranty and Unearned Revenue
The Company typically provides a one-year warranty from the date of installation
of its systems. The Company defers a portion of each system sale to be
recognized as service revenue during the warranty period. The amount deferred is
generally equal to the sales price of a maintenance contract for the type of
system under warranty and the length of the warranty period.
The Company also records deposits received on sales orders and prepayments for
maintenance contracts as deferred revenues.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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 the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 131 (SFAS 131), "Disclosures about
Segments of an Enterprise and Related Information," which establishes standards
for reporting about operating segments in the annual financial statements and
requires reporting of selected information about operating segments in interim
financial reports issued to shareholders.
F-7
27
In the first quarter of 2000, the Company adopted SFAS 131 in conjunction with
its acquisition of USTI and the Company's internal realignment. The Company
divided its operations into three reportable segments: commercial system sales,
lodging system sales and installation and service. The Company defines
commercial system sales as sales to the non-lodging industry. Installation and
service revenues represent revenues earned from installing and maintaining
systems for customers in both the commercial and lodging segments.
The reporting segments follow the same accounting policies used for the
Company's consolidated financial statements and described in the summary of
significant accounting policies. Company management evaluates a segment's
performance based upon gross margins. Assets are not allocated to the segments.
Sales to customers located outside of the United States are immaterial.
The following is tabulation of business segment information for 2000, 1999 and
1998. Segment information for 1999 and 1998 has been restated to conform to the
current presentation.
Commercial Lodging Installation
System System and Service
Sales Sales Revenue Total
------------- ------------- ------------- -------------
2000
Sales $ 54,198,673 $ 17,000,599 $ 31,219,629 $ 102,418,901
Cost of sales 38,606,406 11,171,774 21,627,342 71,405,522
Gross profit 15,592,267 5,828,825 9,592,287 31,013,379
1999
Sales -- 18,496,957 18,766,095 37,263,052
Cost of sales -- 11,066,635 12,206,057 23,272,692
Gross profit -- 7,430,322 6,560,038 13,990,360
1998
Sales -- 12,227,545 13,219,687 25,447,232
Cost of sales -- 7,916,888 8,535,823 16,452,711
Gross profit -- 4,310,657 4,683,864 8,994,521
In June 1998, the FASB issued Statement of Financial Accounting Standards 133
(SFAS 133), "Accounting for Derivative Instruments and Hedging Activities." SFAS
133 establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement. Companies must formally document, designate and
assess the effectiveness of transactions that receive hedge accounting. SFAS
133, as amended by SFAS 137 is effective for fiscal years beginning after June
15, 2000. SFAS 133 cannot be applied retroactively and must be applied to (a)
derivative instruments and (b) certain derivative instruments embedded in hybrid
contracts that were issued, acquired or substantively modified after December
31, 1997. The Company adopted SFAS 133, effective November 1, 2000. The adoption
of SFAS 133 did not have a material impact on the Company's financial
statements.
Reclassifications
Certain reclassifications have been made to the 1999 and 1998 income statements
to conform with the 2000 presentation. These reclassifications had no effect on
net income.
F-8
28
Change in Par Value and Stock Split
On June 26, 2000, the Company reduced the par value of its common stock to $.001
and increased the authorized shares to 50 million.
The Company declared a two-for-one stock split which was effective on July 17,
2000. All share and per share amounts contained in these financial statements
and footnotes have been restated to reflect the stock split.
Statements of Cash Flows
During 1999, $483,650 of spare parts inventory acquired as part of the purchased
service contracts was reclassified from purchased service and long-distance
contracts to inventory.
2. ACQUISITIONS:
On November 30, 1999, the Company successfully completed the acquisition of
USTI, a Missouri Subchapter S corporation. The Company purchased all of the
outstanding common stock of USTI for $26 million in cash plus 150,000 shares of
XETA common stock held in treasury with a market value of $3.3 million on the
date of issuance. At closing, the Company paid the sellers $23 million in cash
plus the common stock according to the terms and conditions of each of the
purchase agreements which were negotiated separately with the sellers. The
remaining $3 million was subject to various hold-back provisions, $2 million of
which could be satisfied through the achievement of certain growth targets with
the remainder being held for two years as an indemnity against any breaches in
the representations and warranties made by the owners in the sale documents. As
of October 31, 2000, the growth targets associated with the hold-back were
achieved and $2 million was paid on November 30, 2000, in accordance with the
terms of the transaction. The transaction is being accounted for using the
purchase method of accounting and the associated goodwill of $21,109,330 is
being amortized over 20 years. The accompanying operating results represent the
results of operations of the Company after consolidating USTI's results since
December 1, 1999.
The unaudited proforma information presented below consists of statement of
operations data as presented if USTI's results had been consolidated from the
first day of the period reported.
Proforma
Year ended October 31,
---------------------------------
2000 1999
--------------- ---------------
Revenues $ 106,462,887 $ 75,213,052
Net income $ 6,869,101 $ 6,694,856
Basic earnings per share $ 0.82 $ 1.27
Diluted earnings per share $ 0.70 $ 1.10
On February 29, 2000, the Company acquired substantially all of the properties
and assets (the "Assets") of Advanced Communication Technologies, Inc. (ACT)
pursuant to the terms of an Asset Purchase Agreement (the "Purchase Agreement")
dated February 22, 2000, entered into among the Company and ACT, its parent
corporation, Noram Telecommunications, Inc., an Oregon corporation, and its
parent corporation, Quanta Services, Inc., a Delaware corporation. The Company
also assumed all of ACT's existing liabilities as disclosed on ACT's balance
sheet with the exception of inter-company liabilities and federal and state
income taxes payable by ACT. The purchase price of the Assets was the sum of
$250,000 plus the book value (as defined in the Purchase Agreement) of ACT.
ACT's reported book value as of January 31, 2000 was $2,770,432, which amount
was paid by the Company to ACT in cash at closing. The $250,000 balance of the
tentative purchase price was paid into escrow as security for the
indemnification by ACT of any damages incurred by the Company
F-9
29
by reason of any breach of warranty or representation made by ACT to the Company
in connection with the Purchase Agreement. A determination of the final purchase
price and the distribution of the escrow balance is expected to be concluded in
February 2001. The entire purchase price was paid by advances drawn under the
Company's credit facility, which is more fully described in Note 9 below. In
conjunction with the purchase, the Company recorded $442,029 of goodwill, which
is being amortized over 20 years.
In September 1998, the Company purchased substantially all of the Hitachi PBX
service contracts from Williams Communications Solutions, LLC (WCS) for
$1,533,000. The Company took responsibility for the 94 service contracts and 9
warranty customers between October 15, 1998 and December 1, 1998 based on a
predetermined schedule. The Company amortized the purchase price over the
estimated useful life of the contracts which was approximately one year. In
addition to the service contracts, the Company also purchased WCS' spare parts
inventory.
3. ACCOUNTS RECEIVABLE:
Trade accounts receivable consist of the following at October 31:
2000 1999
------------- -------------
Trade receivables $ 32,003,881 $ 4,617,815
Less- reserve for doubtful accounts 1,864,258 185,168
------------- -------------
Net trade receivables $ 30,139,623 $ 4,432,647
============= =============
Adjustments to the reserve for doubtful accounts consist of the following at
October 31:
2000 1999
------------- -------------
Balance, beginning of period $ 185,168 $ 168,513
Acquired at acquisition 1,642,771 --
Provision for doubtful accounts 191,000 36,000
Net write-offs (155,016) (19,345)
------------- -------------
Balance, end of period $ 1,864,258 $ 185,168
============= =============
4. INVENTORIES:
Inventories are stated at the lower of cost (first-in, first-out or average) or
market and consist of the following components at October 31:
2000 1999
------------ ------------
Raw materials $ 1,235,842 $ 1,268,635
Finished goods and spare parts 8,032,695 3,285,841
------------ ------------
9,268,537 4,554,476
Less- reserve for excess and obsolete inventory 1,133,475 821,170
------------ ------------
Total inventories, net $ 8,135,062 $ 3,733,306
============ ============
Adjustments to the reserve for excess and obsolete inventories consist of the
following:
2000 1999
------------- -------------
Balance, beginning of period $ 821,170 $ 324,998
Acquired at acquisition 136,739 --
Provision for excess and obsolete inventories 325,000 496,172
Inventories written off (149,434) --
------------- -------------
Balance, end of period $ 1,133,475 $ 821,170
============= =============
F-10
30
5. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following at October 31:
Estimated
Useful
Lives 2000 1999
----------- ------------ -----------
Building 20 $ 2,397,954 $ 2,397,954
Data processing and computer field equipment 3-5 4,244,213 1,694,056
Land - 611,582 611,582
Office furniture 5 958,385 438,815
Auto 5 266,668 9,486
Other 3-7 677,137 356,446
------------ -----------
Total property, plant and equipment 9,155,939 5,508,339
Less- accumulated depreciation 2,301,088 1,565,799
------------ -----------
Total property, plant and equipment, net $ 6,854,851 $ 3,942,540
============ ===========
6. ACCRUED LIABILITIES:
Accrued liabilities consist of the following at October 31:
2000 1999
------------ ------------
Commissions $ 1,608,576 $ 192,463
Interest 708,750 --
Payroll 401,632 147,197
Bonuses 334,476 849,863
Vacation 294,905 126,679
Other 579,464 178,535
------------ ------------
Total current 3,927,803 1,494,737
Noncurrent liabilities 1,299,114 --
------------ ------------
Total accrued liabilities $ 5,226,917 $ 1,494,737
============ ============
7. UNEARNED REVENUE:
Unearned revenue consists of the following at October 31:
2000 1999
------------ ------------
Service contracts $ 1,884,155 $ 1,575,385
Warranty service 1,001,791 1,363,187
Customer deposits 1,309,159 1,349,405
Systems shipped but not installed 196,766 123,729
Other 121,158 128,842
------------ ------------
Total current unearned revenue 4,513,029 4,540,548
Noncurrent unearned service revenue 1,039,949 1,953,222
------------ ------------
Total unearned revenue $ 5,552,978 $ 6,493,770
============ ============
F-11
31
8. INCOME TAXES:
Income tax expense is based on pretax financial accounting income. Deferred
income taxes are computed using the asset-liability method in accordance with
SFAS No. 109, "Accounting for Income Taxes" and are provided on all temporary
differences between the financial basis and the tax basis of the Company's
assets and liabilities.
The income tax provision for the years ending October 31, 2000, 1999 and 1998,
consists of the following:
2000 1999 1998
------------- ------------- -------------
Current provision - federal $ 4,440,000 $ 2,176,000 $ 1,584,000
Deferred provision (benefit) - federal (1,037,000) 76,000 (77,000)
State income taxes 753,000 498,000 348,000
------------- ------------- -------------
Total provision $ 4,156,000 $ 2,750,000 $ 1,855,000
============= ============= =============
The reconciliation of the statutory income tax rate to the effective income tax
rate is as follows:
Year Ended
October 31,
-------------------------
2000 1999 1998
----- ----- -----
Statutory rate 34% 34% 34%
State income taxes 7% 7% 7%
Other (2)% (2)% (3)%
----- ----- -----
Effective rate 39% 39% 38%
===== ===== =====
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities as of October 31 are
presented below:
2000 1999
------------- -------------
Deferred tax assets:
Prepaid service contracts $ 337,559 $ 503,983
Nondeductible reserves 1,630,311 423,069
Unamortized cost of service contracts 31,186 102,094
Other 29,224 33,124
------------- -------------
Total deferred tax asset 2,028,280 1,062,270
------------- -------------
Deferred tax liabilities:
Tax income to be recognized on sales-type lease contracts 203,305 802,581
Unamortized capitalized software development costs 603,606 220,798
Unamortized cost of long distance and service contracts -- 66,320
Other 211,485 --
------------- -------------
Total deferred tax liability 1,018,396 1,089,699
------------- -------------
Net deferred tax asset (liability) $ 1,009,884 $ (27,429)
============= =============
9. CREDIT AGREEMENTS:
Financing for the acquisitions described in Note 2 was provided through a $43
million credit facility with a bank. The $23 million paid at closing of the USTI
transaction was funded with a 5-year term loan. The $3 million payment made at
the closing of the ACT transaction was funded from the Company's acquisition
facility. The remaining portion of the credit facility is an $8 million
revolving line of credit. Interest on all the funded portions of the facility
accrues at either a) the London Interbank Offered rate (which was 6.76% at
October 31, 2000) plus 1.5% to 2.5%, as determined by the ratio of the Company's
total funded debt to EBITDA (as defined in the credit facility) or b) the bank's
prime rate (which was 9.75% at October 31, 2000) plus up to .75%, as determined
by the ratio of the Company's total funded debt to EBITDA. Commitment fees of
.20% to .45% (based on certain financial ratios) are due on any unused borrowing
capacity under the credit facility.
F-12
32
Long-term debt at October 31, 2000, consists of the following:
$8 million bank line of credit, due November 2002 $ 1,000,000
Term note, payable in monthly installments of $50,340, due November
2005 3,020,432
Acquisition term note, payable in monthly installments of $383,334,
due November 2004 19,166,667
Acquisition hold-back, payable in accordance with the purchase
agreement 3,000,000
--------------
26,187,099
Less-current maturities 8,204,088
--------------
$ 17,983,011
==============
Maturities of long-term debt for each of the years ended October 31, are as
follows:
2001 $ 8,204,088
2002 6,204,208
2003 5,204,208
2004 5,204,208
2005 1,370,387
On November 1, 2000, the Company drew an additional $5.5 million down on the
acquisition portion of the credit facility to fund two acquisitions which are
more fully described under Note 17. As a result, on November 30, 2000, the total
$8.5 million drawn to date on the acquisition facility was converted into a new
five-year term loan and the total monthly payments on the Company's term loans
increased to $525,000.
The Company's indebtedness is collateralized by substantially all of the
Company's assets.
The credit agreements require, among other things, that the Company maintains a
minimum net worth, working capital and debt service coverage ratio and limits
capital expenditures. At October 31, 2000, the Company was in compliance or had
received waivers of violations with respect to the covenants of the credit
agreements.
Based on the borrowing rates currently available to the Company for bank loans
with similar terms and average maturities, the fair value of the long-term debt
approximates the carrying value.
10. STOCK OPTIONS:
During fiscal 2000, the Company adopted a new stock option plan ("2000 Plan")
for officers, directors and key employees. The 2000 Plan replaces the previous
1988 Plan, which had expired. Under the 2000 Plan, the Board of Directors or a
committee thereof determine the option price, not to be less than fair market
value, the date of the grant, number of options granted, and the vesting period.
Although there are exceptions, generally options granted under the 2000 Plan
expire 10 years from
F-13
33
the date of grant, have 3-year cliff-vesting and are incentive stock options as
defined under the applicable IRS tax rules. Options granted under the previous
1988 Plan generally vested 33 1/3% after a 1-year waiting period.
Outstanding Options
(1988 and 2000 Plans)
--------------------------------
Price Per
Number Share
---------- -----------------
Balance, October 31, 1998 345,344 $ .25-8.75
Exercised (8,268) $ 3.28-8.75
---------- -----------------
Balance, October 31, 1999 337,076 $ .25-4.375
Granted 258,400 $ 9.0625-18.125
Exercised (99,732) $ .25-4.375
Forfeited (21,100) $ 11-18.125
---------- -----------------
Balance, October 31, 2000 474,644 $ .25-18.125
========== =================
At October 31, 2000 and 1999, options to purchase 341,804 and 115,196 shares,
respectively, are exercisable.
The Company has also granted options outside the Plan to certain officers and
directors. These options generally expire ten years from the date of grant and
are exercisable over the period stated in each option. The table below presents
information regarding options granted outside the Plan.
Outstanding Options
-----------------------------
Price Per
Number Share
----------- ------------
Balance, October 31, 1998 1,720,000 $ .25-.3875
Granted 800,000 $ 5.94
Exercised (120,000) $ .25
----------- ------------
Balance, October 31, 1999 2,400,000 $ .25-5.94
Granted 40,000 $ 15.53
Exercised (289,600) $ .25
----------- ------------
Balance, October 31, 2000 2,150,400 $ .25-15.53
=========== ============
Accounting for stock options issued to employees is governed by Statement of
Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock Based
Compensation." Generally, SFAS 123 requires companies to record in their
financial statements the compensation expense, if any, related to stock options
issued to employees. Under an alternative accounting method adopted by the
Company, SFAS 123 allows the Company to only disclose the impact of issued stock
options as if the expense had been recorded in the financial statements. Had the
Company recorded compensation
F-14
34
expense related to its stock option plans in accordance with SFAS 123, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below:
For the Year Ended October 31,
---------------------------------------------
2000 1999 1998
------------- ------------- -------------
NET INCOME:
As reported $ 6,461,619 $ 4,282,856 $ 3,052,700
Pro forma $ 5,797,629 $ 4,088,298 $ 2,945,408
EARNINGS PER SHARE:
As reported - Basic $ .77 $ .53 $ .38
As reported - Diluted $ .66 $ .46 $ .33
Pro forma - Basic $ .69 $ .51 $ .37
Pro forma - Diluted $ .59 $ .44 $ .32
The fair value of the options granted was estimated at the date of grant using
the Modified Black-Scholes European pricing model with the following
assumptions: risk free interest rate (5.38% to 6.46%), dividend yield (0.00%),
expected volatility (78.16% to 107.47%), and expected life (6 years).
11. EARNINGS PER SHARE:
All earnings per share amounts disclosed herein have been calculated under the
provisions of Statement of Financial Accounting Standards No. 128 (SFAS 128),
"Earnings Per Share," effective December 31, 1997. All basic earnings per common
share were computed by dividing net income by the weighted average number of
shares of common stock outstanding during the reported period. A reconciliation
of net income and weighted average shares used in computing basic and diluted
earnings per share is as follows:
For the Year Ended October 31, 2000
---------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------- ------------- -------------
Basic EPS
Net income $ 6,461,619 8,350,299 $ .77
============= =============
Dilutive effect of stock options 1,411,404
-------------
Diluted EPS
Net income $ 6,461,619 9,761,703 $ .66
============= ============ =============
For the Year Ended October 31, 1999
---------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------- ------------- -------------
Basic EPS
Net income $ 4,282,856 8,021,248 $ .53
============= =============
Dilutive effect of stock options 1,233,194
-------------
Diluted EPS
Net income $ 4,282,856 9,254,442 $ .46
============= ============= =============
F-15
35
For the Year Ended October 31, 1998
---------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------- ------------- -------------
Basic EPS
Net income $ 3,052,700 8,119,932 $ .38
============= =============
Dilutive effect of stock options 1,250,228
-------------
Diluted EPS
Net income $ 3,052,700 9,370,160 $ .33
============= ============= =============
12. COMMITMENTS:
Minimum future annual payments to be received under various leases are as
follows:
Sales-Type
Lease Payments
October 31, Receivable
---------------
2001 $ 3,036,965
2002 1,850,654
2003 388,147
2004 79,124
2005 2,464
------------
5,357,354
Less- imputed interest 495,698
------------
Present value of minimum payments $ 4,861,656
============
On October 30, 1997, the Company's Board of Directors adopted a stock buy-back
program in which management was authorized to spend up to one-third of net
income for fiscal 1997 and for each subsequent fiscal quarter thereafter until
the program is terminated. During fiscal 1999, the percentage of each quarter's
net income allocated to the buy-back program was increased to one-half plus a
one-time allocation of $500,000. During fiscal 1998, the Company purchased
299,200 shares at an average price of $4.98. During fiscal 1999, the Company
purchased 260,600 shares at an average price of $4.45. While the buy-back
program remains in place, the Company did not repurchase any shares in fiscal
2000. In addition, the Company's new credit agreement (See Note 9) places limits
on the amount of shares that could be repurchased under the buy-back plan.
13. MAJOR CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK:
Marriott International/Marriott Host (Marriott) is a major customer of the
Company. The Company has systems installed at various Marriott owned or managed
hotels under the brands "Marriott," "Residence Inn by Marriott," "Courtyard by
Marriott," and "Fairfield Inn by Marriott." Revenues from Marriott represented
22 percent of the Company's revenues for the year 1999 and 1998. Marriott has
been a major customer of the Company since 1986 and management considers its
relationship with Marriott to be good.
During fiscal 1998, revenues earned from Starwood Hotels and Resorts and from
Prime Hospitality were 11 percent and 10 percent, respectively. Both of these
companies are relatively new customers to the Company. The Company considers its
relationship with both to be good.
During fiscal 2000, no single customer represented 10 percent or more of
revenues.
F-16
36
The Company extends credit to its customers in the normal course of business,
including under its sales-type lease program. As a result, the Company is
subject to changes in the economic and regulatory environments or other
conditions, which, in turn, may impact the Company's overall credit risk.
However, the Company sells to a wide variety of customers, and except for its
hospitality customers, does not focus its sales and marketing efforts on any
particular industry. Management considers the Company's credit risk to be
satisfactorily diversified and believes that the allowance for doubtful accounts
is adequate to absorb estimated losses at October 31, 2000 and 1999.
14. EMPLOYMENT AGREEMENTS:
The Board of Directors adopted a new bonus plan for fiscal 2000 to replace the
plan previously in place. Under the 2000 plan, bonuses were to be paid to
executives and key employees based on targeted financial results, which
reflected the Company's annual operating plan. Those targeted results were not
fully achieved in fiscal 2000; however, the Company elected to pay partial
bonuses of approximately $120,000 to key employees.
In fiscal years 1999 and 1998, $1,114,000 and $793,000, respectively, were paid
under the previous bonus plan.
15. CONTINGENCIES:
Litigation
The matter of Associated Business Telephone Systems, Inc.(ABTS), plaintiff, vs.
XETA Corporation, defendant and third-part plaintiff, vs. D&P Investments, Inc.
(D&P) and Communications Equipment Brokers, Inc., third-party defendants, filed
in June 1995, is still pending before the United Stated District Court for the
Northern District of Oklahoma. This matter arises from a 1986 distributor's
agreement between the Company and D&P, pursuant to which the Company sold call
accounting systems to D&P for resale, and a maintenance agreement between the
Company and ABTS pursuant to which the Company furnished maintenance services
for such systems. After having some of its claims dismissed by the Court, ABTS'
remaining claims are based on breach of contract and tortious interference with
certain customer relationships. The stated amount of damages sought by ABTS in
this matter is approximately $809,000. The Company seeks in excess of $3 million
in damages in its counterclaims against ABTS and third-party claims against D&P.
In November 1999, during a pretrial conference, ABTS and D&P disclosed to the
Court that both of these companies had been dissolved during the pendency of
this litigation, without notice to the Company. In view of this fact, and
following ABTS' and D&P's failure to provide certain financial information to
the Company as ordered by the Court, the Court postponed trial in this matter
and granted the Company the right to conduct discovery into the financial
affairs of ABTS, D&P and ABTS' related companies. The Company is currently
conducting such discovery. The Company has also filed a motion to dismiss ABTS'
and D&P's claims for their continued failure to disclose certain other documents
requested in 1997. While the Magistrate Judge has recommended that one of ABTS'
claims be stricken, the District Judge has - upon ABTS' appeal - taken this
issue under advisement. On August 30, 2000, the District Court granted the
Company's Motion to Amend to add the following third-party defendants: Dominic
Dalia, an individual; Bernice Dalia, an individual; Michael Dalia, an
individual; A.B.T.S. International Corp., f/k/a A.B.T.S. Investment Corporation,
a/k/a ABTSI; Intelecable N.A., Inc.; Intelepower N.A., Inc.; Intelemedia N.A.,
Inc.; Intelnet Services of North America, Inc., d/b/a Hotel Digital Network,
d/b/a HDN; Intelnet Services of North America, Inc. (Business I.D. No.
0100567092); Intelnet Services of North America, Inc. (Business I.D. No.
010060200); D.P. Southfield, Inc.; Telesource Inc.; Inntraport International
Corp., f/k/a Innterport International Corp. f/k/a Intelnet International Corp.;
and Dalia Associates, a partnership. At this point, the Company does not
anticipate that a trial date will be set anytime within the next nine to twelve
months. The Company intends to continue to vigorously defend ABTS' claims
against it and to pursue all of its counterclaims and third-party claims against
ABTS, D&P, and the other third-party defendants.
F-17
37
Since 1994, the Company has been monitoring numerous patent infringement
lawsuits filed by Phonometrics, Inc. (Phonometrics), a Florida company, against
certain telecommunications equipment manufacturers and hotels who use such
equipment. While the Company has not been named as a defendant in any of these
cases, several of its call accounting customers are named defendants. These
customers have notified the Company that they will seek indemnification under
the terms of their contracts with the Company. However, because there are other
equipment vendors implicated along with the Company in the cases filed against
its customers, the Company has never assumed the outright defense of its
customers in any of these actions. Phonometrics seeks damages of an unspecified
amount, based upon a reasonable royalty of the hotels' profits derived from use
of the allegedly infringing equipment during a period commencing six years prior
to the filing of such lawsuit and ending October 30, 1990.
All of the cases filed by Phonometrics against the Company's customers were
originally filed in, or transferred to, the United States District Court for the
Southern District of Florida. On October 26, 1998, the Florida Court dismissed
all of the cases filed against the hotels for failure to state a claim, relying
on the precedent established in Phonometrics' unsuccessful patent infringement
lawsuit against Northern Telecom. In its order dismissing Phonometrics'
complaints, the Florida court noted that Phonometrics failed to allege that the
hotels' call accounting equipment displays cumulative costs in real time as they
accrue and displays these costs on a visual digital display, both of which are
necessary to establish infringement of Phonometrics' patent, as determined in
the Northern Telecom case. On November 13, 1998, Phonometrics appealed the
Florida court's order to the Untied States Court of Appeals for the Federal
Circuit. The Court of Appeals reversed the District Court's dismissal of the
cases, but did so solely upon the basis of a procedural matter. The Appeals
Court made no ruling with respect to the merits of Phonometrics' case and
remanded the cases back to the Florida court for further proceedings. These
cases were reopened in April 2000 and since then Phonometrics has filed motions
to disqualify the District Court judge hearing the cases. These motions have
been denied. The Company will continue to monitor proceedings in these actions.
Other Matter
The acquisition of USTI was a purchase of 100% of the stock of USTI for
financial reporting purposes. However, for tax purposes, all of the parties to
the purchase agreement agreed to elect under the applicable provisions of the
Internal Revenue Code rules, to treat the transaction as a purchase of assets by
Xeta. To properly affect the appropriate elections for this desired tax
treatment, the required election form was to be filed by August 15, 2000. Since
this election form filing has not been timely filed, the Company is working with
its professional advisors and the former USTI shareholders in seeking
administrative relief from the IRS to accept the election form as if it had been
timely filed. Based on historical precedence, it is probable that administrative
relief will be granted by the IRS. However, there can be no guarantee of such an
outcome. Failure to obtain administrative relief will result in the loss of
significant tax deductions to the Company over the next 15 years and as a
result, will increase the Company's effective tax rate on its future financial
statements.
16. RETIREMENT PLAN:
The Company has had a 401(k) retirement plan ("Plan") since 1994. In conjunction
with the acquisition of USTI, the Company merged its Plan with the USTI 401(k)
retirement plan. In addition to employee contributions, the Company makes
discretionary matching and profit sharing contributions to the Plan based on
percentages set by the Board of Directors. Contributions made by the Company to
the Plan were $355,000, $167,689 and $160,000 for the years ending October 31,
2000, 1999 and 1998, respectively.
F-18
38
17. SUBSEQUENT EVENT:
On November 1, 2000, the Company made two acquisitions to continue its expansion
into voice and data integrated networks and services. The Company acquired
substantially all of the assets of PRO Networks Corporation, a Missouri based
company specializing in the sale, installation and service of data networking
equipment. Simultaneously, the Company also purchased the assets of a
professional services firm, Key Metrology Integration, Inc. (KMI). The Company
paid a total of $5.5 million in cash for the assets of these two companies, and
will pay up to an additional $4.5 million if various growth targets are met.
Financing for these transactions was provided by the Company's credit facility
which is more fully described in Note 9 above.
18. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
The following quarterly financial data has been prepared from the financial
records of the Company without an audit, and reflects all adjustments which, in
the opinion of management, were of a normal, recurring nature and necessary for
a fair presentation of the results of operations for the interim periods
presented.
For the Fiscal Year Ended October 31, 2000
-------------------------------------------------
Quarter Ended
-------------------------------------------------
January 31, April 30, July 31, October 31,
2000 2000 2000 2000
---------- ---------- ---------- ----------
(in thousands, except per share data)
Net sales $ 20,550 $ 27,473 $ 25,580 $ 28,816
Gross profit 6,262 7,964 8,137 8,650
Operating income 2,624 3,335 2,954 3,465
Net income 1,520 1,726 1,436 1,780
Basic EPS $ 0.19 $ 0.21 $ 0.17 $ 0.21
Diluted EPS $ 0.16 $ 0.17 $ 0.15 $ 0.18
For the Fiscal Year Ended October 31, 1999
-------------------------------------------------
Quarter Ended
-------------------------------------------------
January 31, April 30, July 31, October 31,
1999 1999 1999 1999
---------- ---------- ---------- ----------
(in thousands, except per share data)
Net sales $ 7,046 $ 9,241 $ 9,789 $ 11,187
Gross profit 2,749 3,595 3,601 4,045
Operating income 1,160 1,764 1,653 1,791
Net income 797 1,156 1,111 1,219
Basic EPS $ 0.10 $ 0.14 $ 0.14 $ 0.15
Diluted EPS $ 0.09 $ 0.13 $ 0.12 $ 0.13
F-19
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS; COMPLIANCE WITH SECTION 16(a) OF THE
EXCHANGE ACT.
The directors, executive officers and significant employees of the Company
are set forth below. All officers and members of the Board of Directors serve
for a term of one year or until their successors are duly elected and qualified.
Directors may be removed by holders of 66 2/3% of the Company's outstanding
voting shares.
NAME AND AGE POSITIONS WITH COMPANY
------------ ----------------------
Jack R. Ingram Chairman of the Board and Chief Executive
Age 57 Officer
Jon A. Wiese Chief Operating Officer, President and
Age 44 Director
Robert B. Wagner Chief Financial Officer, Secretary and
Age 39 Director
Larry N. Patterson Senior Vice President Operations
Age 44
Donald E. Reigel Regional Vice President of Sales
Age 46
James J. Burke Regional Vice President of Sales
Age 56
Sandra J. Connor Regional Vice President of Sales
Age 36
Ron B. Barber Director
Age 46
Donald T. Duke Director
Age 51
Dr. Robert D. Hisrich Director
Age 56
Mark A. Martin Director
Age 41
Ronald L. Siegenthaler Director
Age 57
A brief account of the business experience for the past five years of the
individuals listed above follows.
MR. INGRAM has been the Company's Chief Executive Officer since August
1999. He served as the Company's President from July 1990 until August 2, 1999,
and has been a director of the Company since March 1989. Mr. Ingram's
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40
business experience prior to joining the Company was concentrated in the oil and
gas industry. Mr. Ingram holds a Bachelor of Science Degree in Petroleum
Engineering from the University of Tulsa.
MR. WIESE joined the Company on August 2, 1999 as President. Prior to
joining the Company, Mr. Wiese was employed by Lucent Technologies, Inc. since
1989 where he held various executive offices since 1990, including President and
Corporate Officer of Lucent's International Division based in Brussels. From
1997 until taking the position with the Company, he served as Vice President and
Corporate Officer at Lucent and was responsible for its USA sales and service
division where he had full P&L responsibility and managed twelve Vice Presidents
and 17,000 Lucent employees. His functional responsibilities in this division
included marketing, sales, service, human resources, finance, information
technology, and order and asset management. Mr. Wiese holds a Bachelor of
Science degree in finance and a Master of Business Administration degree in
marketing from Oklahoma State University. He is also a 1994 graduate of the
Cultural Transformation Program at the London School of Business.
MR. WAGNER has been the Company's Vice President of Finance and Chief
Financial Officer since March 1989. He has been with the Company since July,
1988 and became a member of the Board of Directors in March 1996. Mr. Wagner is
a Certified Public Accountant licensed in Oklahoma and received his Bachelor of
Science Degree in Accounting from Oklahoma State University.
MR. PATTERSON joined the Company in March 2000 as Senior Vice President,
Operations. Prior to his employment with the Company, Mr. Patterson worked for
Exxon Corporation and held various executive positions in Europe, Asia and Latin
America with Exxon Company, International. He is a member of the American
Management Association and is active in Organizational Development, Leadership
Development and Investment Management activities. Mr. Patterson received his
Bachelor of Science Degree in Engineering from Oklahoma State University.
MR. REIGEL joined the Company in June 1993 as PBX Product Sales Manager. He
was promoted to Vice President of Marketing and Sales in June 1995; became Vice
President of Hospitality Sales in December, 1999; and is currently the Regional
Vice President of Sales with responsibility over the Northwest region and
lodging. Prior to his employment with the Company, Mr. Reigel served as a
national accounts sales manager for WilTel Communications Systems. Mr. Reigel
received his Bachelor of Science Degree in Business from the University of
Colorado.
MR. BURKE joined the Company in November 1999 in conjunction with the
acquisition of USTI and is currently the Regional Vice President of Sales for
the Southwest region. Prior to his employment with the Company, he had been
employed by USTI since August 1990 and served as the Western Region Sales
Director and National Sales Director. Mr. Burke received his Bachelor of Science
Degree in Business from Niagara University.
MS. CONNOR joined the Company in September 2000 as a Regional Vice
President of Sales with responsibility for the Eastern region and government
sales. Prior to her employment with the Company, Ms. Connor served in various
sales and sales operations assignments at Lucent Technologies, most recently as
Area Sales Vice President for the New England Region - Enterprise Networks
Division. Ms. Connor received her Bachelor of Science Degree in Management from
the University of Massachusetts, Lowell.
MR. BARBER has been a director of the Company since March 1987. He has been
engaged in the private practice of law since October 1980 and is a shareholder
in the law firm of Barber & Bartz, a Professional Corporation, in Tulsa,
Oklahoma, which serves as counsel to the Company. Mr. Barber is also a Certified
Public Accountant licensed in Oklahoma. He received his Bachelor of Science
Degree in Business Administration (Accounting) from the University of Arkansas
and his Juris Doctorate Degree from the University of Tulsa.
MR. DUKE has been a director of the Company since March 1991. He is
President of Duke Energy Co. L.L.C., an oil and gas consulting and investment
firm. Mr. Duke has been in senior management in the oil and gas industry since
1980, including time as President and Chief Operating Officer of Hadson
Petroleum (USA), Inc., a domestic oil and gas subsidiary of Hadson Corporation,
where he was responsible for all phases of exploration and production, land,
accounting, operations, product marketing and budgeting and planning. Mr. Duke
has a Bachelor of Science Degree in Petroleum Engineering from the University of
Oklahoma.
DR. HISRICH has been a director of the Company since March 1987. He
occupies the A. Malachi Mixon III Chair in Entrepreneurial Studies and is
Professor of Marketing and Policy Studies at the Weatherhead School of
Management at
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Case Western Reserve University in Cleveland, Ohio. Prior to assuming such
positions, he occupied the Bovaird Chair of Entrepreneurial Studies and Private
Enterprise and was Professor of Marketing at the College of Business
Administration for the University of Tulsa. He is also a marketing and
management consultant. He is a member of the Board of Directors of Jameson Inn,
Inc. and Noteworthy Medical Systems, Inc., a member of the Editorial Boards of
the Journal of Venturing and the Journal of Small Business Management, and a
member of the Board of Directors of Enterprise Development, Inc. Dr. Hisrich
received his Bachelor of Arts Degree in English and Science from DePaul
University and his Master of Business Administration Degree (Marketing) and
Ph.D. in Business Administration (Marketing, Finance, and Quantitative Methods)
from the University of Cincinnati.
Mr. MARTIN has been a director of the Company since April 2000. He
co-founded U.S. Technologies Systems, Inc. ("USTI") in 1986 and continually
served in different executive positions with USTI, including President, CEO and
Chairman of the Board, until USTI was acquired by the Company in November 1999.
Mr. Martin holds a Bachelor of Science Degree in Business Administration from
St. Louis University.
MR. SIEGENTHALER has been a director of the Company since its
incorporation. He also served as its Executive Vice President from July 1990
until March 1999. Since 1974, through SEDCO Investments, a partnership in which
Mr. Siegenthaler is a partner, and as an individual, Mr. Siegenthaler has been
involved as partner, shareholder, officer, director, or sole proprietor of a
number of business entities with significant involvement in fabrication and
marketing of steel, steel products and other raw material, real estate, oil and
gas, and telecommunications. Mr. Siegenthaler received his Bachelor's Degree in
Liberal Arts from Oklahoma State University.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely upon a review of (i) Forms 3 and 4 and amendments thereto
furnished to the Company during its most recent fiscal year, (ii) Forms 5 and
amendments thereto furnished to the Company with respect to its most recent
fiscal year, and (iii) written representations made to the Company by its
directors and officers, the Company knows of no director, officer, or beneficial
owner of more than ten percent of the Company's Common Stock who has failed to
file on a timely basis reports of beneficial ownership of the Company's Common
Stock as required by Section 16(a) of the Securities Exchange Act of 1934, as
amended, except as follows: Mr. Burke and Ms. Connor were late in filing their
Initial Statement of Beneficial Ownership of Securities on Form 3.
ITEM 11. EXECUTIVE COMPENSATION.
That portion of the Company's definitive Proxy Statement appearing under
the caption "Executive Compensation," to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A on or before February 28, 2001
and to be used in connection with the Company's Annual Meeting of Shareholders
to be held March 20, 2001 is hereby incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
That portion of the Company's definitive Proxy Statement appearing under
the caption "Security Ownership of Certain Beneficial Owners and Management," to
be filed with the Securities and Exchange Commission pursuant to Regulation 14A
on or before February 28, 2001 and to be used in connection with the Company's
Annual Meeting of Shareholders to be held March 20, 2001 is hereby incorporated
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
That portion of the Company's definitive Proxy Statement appearing under
the caption "Related Transactions," to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A on or before February 28, 2001 and to be
used in connection with the Company's Annual Meeting of Shareholders to be held
March 20, 2001 is hereby incorporated by reference.
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42
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements - See Index to Financial Statements at Page
19 of this Form 10-K.
(2) Financial Statement Schedule - None.
(3) Exhibits - See Exhibit Index at Page 25 of this Form 10-K.
(b) The Company filed no report on Form 8-K during the last quarter of the
fiscal year ended October 31, 2000.
(c) See Exhibit Index at Page 25 of this Form 10-K.
(d) See Index to Financial Statements at Page 19 of this Form 10-K.
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43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
XETA CORPORATION
JANUARY 26, 2001 BY: /s/ Jack R. Ingram
-----------------------------------------
JACK R. INGRAM, CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
JANUARY 26, 2001 /s/ Jack R. Ingram
--------------------------------------------
JACK R. INGRAM, CHIEF EXECUTIVE OFFICER AND
DIRECTOR
JANUARY 26, 2001 /s/ Jon A. Wiese
--------------------------------------------
JON A. WIESE, PRESIDENT
JANUARY 26, 2001 /s/ Robert B. Wagner
--------------------------------------------
ROBERT B. WAGNER, CHIEF FINANCIAL OFFICER,
VICE PRESIDENT OF FINANCE, AND DIRECTOR
JANUARY 25, 2001 /s/ Donald T. Duke
--------------------------------------------
DONALD T. DUKE, DIRECTOR
JANUARY 24, 2001 /s/ Ronald L. Siegenthaler
--------------------------------------------
RONALD L. SIEGENTHALER, DIRECTOR
24
44
EXHIBIT INDEX
SEC No. Description
- ------- -----------
(2) PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR
SUCCESSION -
*2.1 Asset Purchase Agreement by and among Quanta Services, Inc.,
Noram Telecommunications, Inc., Advanced Communication
Technologies, Inc. and XETA Corporation dated as of February 22,
2000 - Incorporated by reference to Exhibit 2.3 to the
Registrant's Form 10-Q for the quarter ended April 30, 2000,
filed on June 14, 2000 (File No. 0-16231).
*2.2 Asset Purchase Agreement dated as of October 31, 2000, by and
among PRO Networks Corporation, as Seller, its shareholders The
John Gerard Sargent Revocable Living Trust and The Nancy Rhea
Sargent Revocable Living Trust, XETA Technologies, Inc., as
Purchaser, and John Gerard Sargent and Nancy Rhea Sargent,
individually - Incorporated by reference to Exhibit 2.1 to the
Registrant's Form 8-K filed on November 15, 2000 (File No.
0-16231).
(3) (i) ARTICLES OF INCORPORATION -
*(a) Amended and Restated Certificate of Incorporation of the
Registrant -- Incorporated by reference to Exhibits 3.1 and
3.2 to the Registrant's Registration Statement on Form S-1,
filed on June 17, 1987 (File No. 33-7841).
*(b) Amendment No. 1 to Amended and Restated Certificate of
Incorporation -- Incorporated by reference to Exhibit 4.2 to
the Registrant's Post-Effective Amendment No. 1 to
Registration Statement on Form S-8, filed on July 28, 1999
(File No. 33-62173).
*(c) Amendment No. 2 to Amended and Restated Certificate of
Incorporation - Incorporated by reference to Exhibit 3(i)(c)
to the Registrant's Form 10-Q for the quarter ended April
30, 2000, filed on June 14, 2000 (File No. 0-16231).
*(d) Amendment No. 3 to Amended and Restated Certificate of
Incorporation - Incorporated by reference to Exhibit 4.4 to
the Company's Post-Effective Amendment No. 2 to the
Registration Statement Form S-8, filed on June 28, 2000
(File No. 33-62173).
(ii) BYLAWS -
*(a) Amended and Restated Bylaws of the Registrant, First
Amendment and Second Amendment - Incorporated by reference
to Exhibit 3(ii) to the Registrant's Annual Report on Form
10-KSB for the fiscal year ended October 31, 1994, filed on
January 30, 1995 (File No. 0-16231).
*(b) Third Amendment to Amended and Restated Bylaws -
Incorporated by reference to Exhibit 4.4 to the Registrant's
Post-Effective Amendment No. 1 to Registration Statement on
Form S-8 filed on July 28, 1999 (File No. 33-62173).
(4) INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES
- None other than the Amended and Restated Certificate of Corporation
of the Registrant, as amended, and Amended and Restated Bylaws of the
Registrant, as amended, as identified in Exhibit 3(i) and 3(ii) to
this report.
25
45
(9) VOTING TRUST AGREEMENT - None.
(10) MATERIAL CONTRACTS -
*10.1 Dealer Agreement Among Lucent Technologies, Inc.;
Distributor, Inacom Communications, Inc.; and XETA
Corporation for Business Communications
Systems--Incorporated by reference to Exhibit 10.1 to
the Registrant's Form 10-Q for the quarter ended
April 30, 1999, filed on June 11, 1999 (File No.
0-16231).
*10.2 Stock Purchase Option dated June 17, 1999 granted to
Jon A. Wiese --Incorporated by reference to Exhibit
10.2 to the Registrant's Form 10-Q for the quarter
ended July 31, 1999, filed on September 14, 1999
(File No. 0-16231).
*10.3 Stock Purchase Agreement dated as of August 1, 1999,
between Mark A. Martin, individually, and Mark A.
Martin, Trustee under Living Trust of Mark A. Martin
dated April 4, 1994, and XETA Corporation
-Incorporated by reference to Exhibit 2.1 to the
Registrant's Form 8-K filed on December 15, 1999
(File No. 0-16231).
*10.4 Stock Purchase Agreement dated as of August 1, 1999,
between Lawrence J. Hopp, individually, and Lawrence
J. Hopp, Trustee under Living Trust of Lawrence J.
Hopp dated October 13, 1994, and XETA Corporation
-Incorporated by reference to Exhibit 2.2 to the
Registrant's Form 8-K filed on December 15, 1999
(File No. 0-16231).
*10.5 Credit Agreement dated as of November 30, 1999 among
XETA Corporation, the Lenders, the Agent and the
Arranger--Incorporated by reference to Exhibit 2.3 to
the Registrant's Form 8-K filed on December 15, 1999
(File No. 16231).
*10.6 Real Estate Mortgage on the Registrant's Broken
Arrow, Oklahoma property--Incorporated by reference
to Exhibit 2.5 to the Registrant's Form 8-K filed on
December 15, 1999 (File No. 0-16231).
*10.7 Pledge and Security Agreement relating to November
30, 1999 Credit Agreement - Incorporated by reference
to Exhibit 2.4 to the Registrant's Form 8-K filed on
December 15, 1999 (File No. 0-16231).
*10.8 Subsidiary Guaranty by U.S. Technologies Systems,
Inc. of November 30, 1999 Credit facility -
Incorporated by reference to Exhibit 2.6 to the
Registrant's Form 8-K filed on December 15, 1999
(File No. 0-16231).
*10.9 Employment Agreement dated November 30, 1999 between
Mark A. Martin and the Company - Incorporated by
reference to Exhibit 99.1 to the Registrant's Form
8-K filed on December 15, 1999 (File No. 0-16231).
*10.10 Stock Purchase Option dated February 1, 2000 granted
to Larry N. Patterson - Incorporated by reference to
Exhibit 10.9 to the Registrant's Form 10-Q for the
quarter ended April 30, 2000, filed on June 14, 2000
(File No. 0-16231).
*10.11 Amendment to Dealer Agreement Among Lucent
Technologies, Inc. Distributor, Inacom
Communications, Inc.; and XETA Corporation, for
Business Communications Systems, dated effective
March 19, 2000 - Incorporated by reference to Exhibit
10.10 to the Registrant's Form 10-Q for the quarter
ended April 30, 2000, filed on June 14, 2000 (File
No. 0-16231).
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46
*10.12 XETA Technologies 2000 Stock Option Plan -
Incorporated by reference to Exhibit 10.11 to the
Registrant's Form 10-Q for the quarter ended April
30, 2000, filed on June 14, 2000 (File No. 0-16231).
10.13 HCX 5000(R) Authorized Distributor Agreement dated
April 1, 2000 between Hitachi Telecom (USA), Inc. and
XETA Corporation--Omitted as substantially identical
to the Authorized Distributor Agreement dated April
8, 1993 between Hitachi America, Ltd. and XETA
Corporation which was previously filed as Exhibit
10.1 to the Company's Annual Report on Form 10-KSB
for the fiscal year ended October 31, 1993 (File No.
0-16231).
10.14 Stock Purchase Option dated August 11, 2000 granted
to Larry N. Patterson.
10.15 First Amendment to Credit Agreement dated August 21,
2000 among XETA Technologies, Inc., the Lenders, the
Agent and the Arranger.
10.16 Notice of Assignment by Lucent Technologies Inc.
dated September 14, 2000 of all contracts with XETA
Technologies, Inc. (including the Dealer Agreement)
to Avaya Inc.
10.17 Asset Purchase Agreement dated as of October 31,
2000, by and among Key Metrology Integration, Inc. as
Seller, its principal shareholder The Douglas Wendell
Myers Revocable Living Trust, XETA Technologies,
Inc., as Purchaser, and Douglas Wendell Myers,
individually.
The Schedules and Exhibits to the Asset Purchase
Agreement, each of which are listed below, have been
omitted from this report and will be furnished to the
Securities and Exchange Commission upon request.
Informational Schedules
2.2(a) Seller's Wire Transfer Instructions
4.4 Employees Receiving Options
8.9.3 Restricted Key Employees
8.9.4 Key Contractors/Consultants
8.9.6 Client List
Seller's Disclosure Schedules
5.1 Certificate of Incorporation, Good
Standing & Bylaws
5.2 Joint Memorandum of Action by
Shareholders and Sole Director
5.6 Financial Statements
5.8 Accounts & Notes Receivable
5.9 Inventory
5.10 Material Contracts
5.11 Tangible Personal Property
5.12 Permits - none
5.13 Intangible Personal Property
5.14 Real Property
5.17 Trade Restrictions
5.18 Employee Compensation
5.19.1 Pension Plan(s)
5.19.2 Welfare Plan(s) - none
5.28 Locations
5.30 Officers, Directors & Shareholders
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47
Purchaser's Disclosure Schedules
6.1 Certificate of Incorporation, Good
Standing & Bylaws
6.2 Resolutions of Purchaser's Board of
Directors
Exception Schedules
2.1 Excluded Assets
2.5 Excluded Liabilities
5.4 Agreements Violated by the Asset
Purchase - none
5.5 Governmental Consents - none
required
5.7 Title Exceptions - none
5.11 Title Exceptions (Tangible Personal
Property) - none
5.15 Environmental Matters - none
5.16 Labor Claims & Disputes - none
5.19.5 Cobra Exceptions - none
5.20 Litigation - none of significance
or perceived merit
5.21 Tax Matters - none
5.23 Name Changes
5.29 Warranty Claims - none
Exhibits
4.1 Douglas W. Myers Employment
Agreement
8.9.3 Form of Employee
Nondisclosure/Noncompetition and
Employment Agreement (Key
Employees)
8.9.4 Form Independent Contractor
Agreement
8.9.6 Form of Consulting Agreement
8.9.7 Bill of Sale
8.9.10 Seller's Closing Certificate
9.4.4 Purchaser's Closing Certificate
(11) STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS -
Inapplicable.
(12) STATEMENT RE: COMPUTATION OF RATIOS - Inapplicable.
(13) ANNUAL REPORT TO SECURITY HOLDERS, FORM 10-Q OR QUARTERLY
REPORT TO SECURITY HOLDERS - Inapplicable.
(18) LETTER RE: CHANGE IN ACCOUNTING PRINCIPLES - Inapplicable.
(21) SUBSIDIARIES OF THE REGISTRANT
(22) PUBLISHED REPORT REGARDING MATTERS SUBMITTED TO A VOTE OF
SECURITY HOLDERS - None.
(23) CONSENTS OF EXPERTS AND COUNSEL
23.1 Consent of Arthur Andersen LLP
(24) POWER OF ATTORNEY - None.
(99) ADDITIONAL EXHIBITS - None.
* Previously filed.
28