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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2002
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.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Oklahoma 73-1130045
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employee
incorporation or organization) Identification No.)
1814 W. Tacoma, Broken Arrow, OK 74012-1406
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
918-664-8200
----------------------------------------------------
(Registrant's telephone number, including area code)
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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
----- ------
Number of shares outstanding of each of the registrant's classes of common
stock, as of the latest practicable date.
Class Outstanding at August 31, 2002
- ----------------------------------------------------- -----------------------------------------------------
Common Stock, $.001 par value 9,602,952
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets - July 31, 2002
and October 31, 2001
Consolidated Statements of Operations - For the Three- and
Nine-months ended July 31, 2002 and 2001
Consolidated Statement of Shareholders' Equity - November 1,
2001 through July 31, 2002
Consolidated Statements of Cash Flows - For the Nine months
ended July 31, 2002 and 2001
Notes to Consolidated Financial Statements
2
XETA TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
July 31, 2002 October 31, 2001
------------- ----------------
(Unaudited)
Current Assets:
Cash and cash equivalents $ 1,062,049 $ 597,889
Current portion of net investment in
sales-type leases and other receivables 1,249,380 2,534,692
Trade accounts receivable, net 7,443,472 15,907,101
Inventories, net 6,921,629 9,008,965
Deferred tax asset, net 480,024 1,013,748
Prepaid taxes 1,939,861 662,958
Prepaid expenses and other assets 222,016 253,503
------------ ------------
Total current assets 19,318,431 29,978,856
------------ ------------
Noncurrent Assets:
Goodwill, net of accumulated amortization
of $2,502,466 & $2,502,466 25,796,356 25,944,567
Net investment in sales-type leases,
less current portion above 617,162 1,092,917
Property, plant & equipment, net 10,328,664 9,599,249
Capitalized software production costs, net of
accumulated amortization of $1,008,066 & $873,066 282,955 417,955
Other assets 198,946 251,333
------------ ------------
Total noncurrent assets 37,224,083 37,306,021
------------ ------------
Total assets $ 56,542,514 $ 67,284,877
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 3,288,337 $ 4,288,337
Revolving line of credit -- 5,350,000
Accounts payable 3,273,420 4,547,347
Unearned revenue 1,709,737 2,528,103
Accrued liabilities 1,700,251 2,051,152
Other Liabilities 122,382 --
------------ ------------
Total current liabilities 10,094,127 18,764,939
------------ ------------
Noncurrent liabilities:
Long-term debt, less current portion above 12,387,096 14,853,349
Accrued long-term liabilities 666,456 1,299,114
Unearned service revenue 274,978 454,166
Noncurrent deferred tax liability, net 1,105,653 715,883
------------ ------------
14,434,183 17,322,512
------------ ------------
Contingencies
Shareholders' equity:
Preferred stock; $.10 par value; 50,000 shares
authorized, 0 issued -- --
Common stock; $.001 par value; 50,000,000
shares authorized, 10, 621,740 and 10,256,740 issued at
July 31, 2002 and October 31, 2001, respectively 10,621 10,256
Paid-in capital 12,116,581 11,637,812
Retained earnings 22,206,069 21,794,017
Accumulated other comprehensive income (74,408) --
Less treasury stock, at cost, 1,018,788 shares at July 31,
2002 and October 31, 2001 (2,244,659) (2,244,659)
------------ ------------
Total shareholders' equity 32,014,204 31,197,426
------------ ------------
Total liabilities and shareholders' equity $ 56,542,514 $ 67,284,877
============ ============
The accompanying notes are an integral part of these consolidated statements.
3
XETA TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months For the Nine Months
Ended July 31, Ended July 31,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Systems sales $ 6,626,397 $ 12,919,202 $ 20,143,758 $ 42,544,515
Installation and service revenues 6,181,434 8,006,346 18,571,008 25,230,740
Other revenues -- 38,897 415,238 908,716
------------ ------------ ------------ ------------
Net sales and service revenues 12,807,831 20,964,445 39,130,004 68,683,971
------------ ------------ ------------ ------------
Cost of systems sales 5,774,511 9,233,287 15,220,479 29,723,223
Installation and services costs 4,540,433 5,357,135 14,090,360 18,259,801
Cost of other revenues & corporate COGS 353,683 626,296 1,506,155 2,221,117
------------ ------------ ------------ ------------
Total cost of sales and service 10,668,627 15,216,718 30,816,994 50,204,141
------------ ------------ ------------ ------------
Gross profit 2,139,204 5,747,727 8,313,010 18,479,830
------------ ------------ ------------ ------------
Operating expenses:
Selling, general and administrative 2,160,934 3,314,316 7,491,524 11,501,112
Amortization 45,000 399,000 135,000 1,210,466
------------ ------------ ------------ ------------
Total operating expenses 2,205,934 3,713,316 7,626,524 12,711,578
------------ ------------ ------------ ------------
Income from operations (66,730) 2,034,411 686,486 5,768,252
Interest expense (220,544) (535,619) (705,395) (1,821,880)
Interest and other income 499,506 108,751 697,961 382,063
------------ ------------ ------------ ------------
Subtotal 278,962 (426,868) (7,434) (1,439,817)
Income before provision for income
taxes 212,232 1,607,543 679,052 4,328,435
Provision for income taxes 83,000 630,000 267,000 1,697,000
------------ ------------ ------------ ------------
Net income $ 129,232 $ 977,543 $ 412,052 $ 2,631,435
============ ============ ============ ============
Earnings per share
Basic $ 0.01 $ 0.11 $ 0.04 $ 0.29
============ ============ ============ ============
Diluted $ 0.01 $ 0.10 $ 0.04 $ 0.27
============ ============ ============ ============
Weighted average shares outstanding 9,379,963 9,202,952 9,285,809 9,003,302
============ ============ ============ ============
Weighted average shares equivalents 9,844,573 9,795,292 9,883,830 9,729,176
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated statements.
4
XETA TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
Common Stock Treasury Stock
---------------------------- ----------------------------
Shares Issued Par Value Shares Amount
------------- ---------- ------- ------
Balance-October 31, 2001 10,256,740 $ 10,256 1,018,788 $ (2,244,659)
Stock options exercised $.001 par value 365,000 365 -- --
Tax benefit of stock options -- -- -- --
Components of comprehensive income:
Net income -- -- -- --
Unrealized gain/loss on hedge, net of tax of $47,974 -- -- -- --
Total comprehensive income
---------- -------- --------- ------------
Balance-July 31, 2002 10,621,740 $ 10,621 1,018,788 $ (2,244,659)
========== ======== ========= ============
Accumulated
Other
Comprehensive Retained
Paid-in Capital Income Earnings Total
--------------- ---------------- --------- ------
Balance-October 31, 2001 $ 11,637,812 $ -- $ 21,794,017 $ 31,197,426
Stock options exercised $.001 par value 90,885 -- -- 91,250
Tax benefit of stock options 387,884 -- -- 387,884
Components of comprehensive income:
Net income -- -- 412,052 412,052
Unrealized gain/loss on hedge, net of tax of $47,974 -- (74,408) -- (74,408)
------------
Total comprehensive income 337,644
------------ ---------- ------------ ------------
Balance-July 31, 2002 $ 12,116,581 $ (74,408) $ 22,206,069 $ 32,014,204
============ ========== ============ ============
The accompanying notes are an integral part of these consolidated statements.
5
XETA TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months
Ended July 31,
2002 2001
------------ ------------
Cash flows from operating activities:
Net income $ 412,052 $ 2,631,435
------------ ------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 811,311 745,030
Amortization 135,000 1,210,466
Loss on sale of assets 44,589 10,537
Provision for returns & doubtful accounts receivable (748,200) 230,000
Provision for excess and obsolete inventory 930,393 450,000
Change in assets and liabilities, net of acquisitions:
Decrease in net investment in sales-type leases & other receivables 1,761,067 1,557,098
Decrease in trade receivables 9,211,829 11,128,989
(Increase) decrease in inventories 1,156,943 (3,804,805)
(Increase) decrease in deferred tax asset 533,724 (258,465)
Decrease in prepaid expenses and other assets 83,876 9,947
(Increase) in prepaid taxes (1,276,903) (825,207)
(Decrease) in accounts payable (1,273,927) (2,376,911)
(Decrease) in unearned revenue (997,554) (2,315,183)
Increase in accrued income taxes 489,815 1,288,571
(Decrease) in accrued liabilities (983,559) (1,318,301)
Increase (decrease) in deferred tax liabilities 484,024 (106,867)
------------ ------------
Total adjustments 10,362,428 5,624,899
------------ ------------
Net cash provided by operating activities 10,774,480 8,256,334
------------ ------------
Cash flows from investing activities:
Acquisitions, net of cash acquired -- (5,595,193)
Additions to property, plant & equipment (1,627,315) (2,416,074)
Proceeds from sale of assets 42,000 700
------------ ------------
Net cash used in investing activities (1,585,315) (8,010,567)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of debt -- 5,500,000
Proceeds from draws on revolving line of credit 16,175,000 24,885,000
Principal payments on debt (3,466,255) (6,586,053)
Payments on revolving line of credit (21,525,000) (24,960,000)
Exercise of stock options 91,250 361,013
------------ ------------
Net cash used in financing activities (8,725,005) (800,040)
------------ ------------
Net increase (decrease) in cash and cash equivalents 464,160 (554,273)
Cash and cash equivalents, beginning of period 597,889 926,330
------------ ------------
Cash and cash equivalents, end of period $ 1,062,049 $ 372,057
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 989,253 $ 1,982,124
Cash paid during the period for income taxes $ 403,850 $ 1,473,813
Contingent consideration paid to target shareholder(s) $ 1,000,000 $ 2,000,000
The accompanying notes are an integral part of these consolidated statements.
6
XETA TECHNOLOGIES, INC.
JULY 31, 2002
(Unaudited)
1. BASIS OF PRESENTATION
The consolidated financial statements herein include the accounts of
XETA Technologies, Inc. and its wholly-owned subsidiaries, U.S. Technologies
Systems, Inc. ("UST") and Xetacom, Inc. (the "Company" or "XETA"). Xetacom's
operations have been insignificant to date. All significant intercompany
accounts and transactions have been eliminated.
The accompanying consolidated financial statements have been prepared
by the Company, without an audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures, normally included in annual financial statements prepared in
accordance with accounting principles generally accepted in the United States,
have been condensed or omitted pursuant to those rules and regulations. However,
the Company believes that the disclosures made are adequate to make the
information presented not misleading when read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company's latest financial statements files as part of the Company's Annual
Report on Form 10-K, Commission File No. 0-16231. Management believes that the
financial statements contain all adjustments necessary for a fair statement of
the results for the interim periods presented. All adjustments made were of a
normal recurring nature. The results of operations for the interim periods are
not necessarily indicative of the results for the entire fiscal year.
These statements should be read in conjunction with the audited financial
statements and notes thereto included in the Company's Annual Report on Form
10-K, which was filed with the SEC on January 29, 2002, reflecting the operating
results of the Company.
2. Accounts Receivable:
As a result of higher than expected collection rates on its accounts
receivable, the Company adjusted its estimated reserve for bad debts in the
third quarter of fiscal 2002. The adjustment resulted in a decrease in the bad
debt reserve and a decrease in selling, general and administrative expenses of
$700,000. At July 31, 2002, the reserve for bad debts was $327,000.
3. INVENTORIES:
Inventories are stated at the lower of cost (first-in, first-out or average) or
market and consist of the following components:
July 31, October 31,
2002 2001
------------ ------------
(Unaudited)
Finished goods and spare parts $ 7,675,325 $ 9,459,787
Raw materials 389,536 1,236,411
------------ ------------
8,064,861 10,696,198
Less- reserve for excess and obsolete inventories 1,143,232 1,687,233
------------ ------------
Total inventories, net $ 6,921,629 $ 9,008,965
============ ============
The Company maintains a reserve for obsolete and slow-moving inventory. The
amount reserved is an estimate based on the Company's analysis of its
inventories, specifically the quantities on hand in comparison to annual sales
levels and in relation to potential obsolescence due to new product releases. As
part of the Company's continuing integration of the acquisitions made in fiscal
2000 and 2001 and in response to frequent new product releases by the Company's
primary supplier, management has been evaluating its inventory on hand. At July
31, 2002, this evaluation was still ongoing; however, management
7
determined that additional reserves were needed and an entry was recorded to
increase the reserve for slow-moving and obsolete inventory and increase systems
cost of goods sold by $775,000.
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following:
Estimated
Useful July October 31,
Lives 31, 2002 2001
------------ ------------ ------------
(Unaudited)
Building 20 $ 2,397,954 $ 2,397,954
Data processing and computer field equipment 3-5 9,520,128 7,862,996
Land - 611,582 611,582
Office furniture 5 1,084,117 1,084,117
Auto 5 126,743 251,477
Other 3-7 634,213 673,538
------------ ------------
Total property, plant and equipment 14,374,737 12,881,664
Less- accumulated depreciation 4,046,073 3,282,415
------------ ------------
Total property, plant and equipment, net $ 10,328,664 $ 9,599,249
============ ============
5. ACCRUED LIABILITIES:
Accrued liabilities consist of the following:
July 31, October 31,
2002 2001
------------- --------------
(Unaudited)
Commissions $ 162,821 $ 493,915
Interest 11,054 144,138
Payroll 644,058 416,406
Bonuses 131,394 541,382
Vacation 436,228 398,100
Other 314,696 57,211
------------- -------------
Total current 1,700,251 2,051,152
Noncurrent liabilities 666,456 1,299,114
------------- -------------
Total accrued liabilities $ 2,366,707 $ 3,350,266
============= =============
The amount recorded above as a noncurrent accrued liability relates to an
acquisition related reserve that was established as part of the acquisition of
UST. The Company inherited an aggressive tax position that had been taken by UST
prior to the acquisition. The Company chose to accrue for the potential losses
to be incurred if the position was overturned. The $633,000 reduction in the
amount accrued at July 31, 2002 reflects entries to move $219,000 to current
liabilities and $414,000 to other income reflecting management's judgment, in
consultation with its tax advisors, that the risk of loss has declined.
8
6. UNEARNED REVENUE:
Unearned revenue consists of the following:
July 31, October 31,
2002 2001
-------------- ----------
(Unaudited)
Service contracts $1,074,072 $1,375,018
Warranty service 425,699 578,964
Customer deposits 37,120 370,714
Systems shipped but not installed 172,056 139,247
Other 790 64,160
---------- ----------
Total current unearned revenue 1,709,737 2,528,103
Noncurrent unearned service contract revenue 274,978 454,166
---------- ----------
Total unearned revenue $1,984,715 $2,982,269
========== ==========
7. 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 tax effect of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are presented below:
July 31, October 31,
2002 2001
------------ ---------
(Unaudited)
Deferred tax assets:
Prepaid service contracts $ 192,826 $ 247,423
Nondeductible reserves 369,507 925,917
Unamortized cost of service contracts 65,172 102,412
Other 152,375 95,599
----------- -----------
Total deferred tax asset 799,880 1,371,351
----------- -----------
Deferred tax liabilities:
Tax income to be recognized on sales-type lease contracts 206,862 394,624
Unamortized capitalized software development costs 110,918 160,495
Intangible assets 784,542 255,863
Other 303,187 262,504
----------- -----------
Total deferred tax liability 1,405,509 1,073,486
----------- -----------
Net deferred tax asset (liability) $ (625,629) $ 297,865
=========== ===========
8. CREDIT AGREEMENTS:
The Company has credit agreements with a bank syndicate including a term note,
mortgage, and a working capital revolving line of credit. At July 31, 2002 there
was $15.7 million outstanding on the credit agreements. The credit facility
requires, among other things, that the Company maintain specified minimum
amounts of net worth, and requires that certain financial ratios be maintained
related to working capital, debt service coverage, and total leverage. The
agreement also places an annual limit on capital expenditures. At July 31, 2002,
the Company's operating results were not sufficient to meet the debt service
coverage requirement, which prior to the changes discussed below was based on
trailing twelve months results. The Company's banks have waived the default and
certain changes have been made to the credit facility. These changes include a
reduction in the amount available under the working capital revolver. The amount
available will be the lesser of $2 million or a borrowing base of qualifying
accounts receivable and inventories (as defined) reduced by 25% of the Company's
unsecured term loan. Also, the revised credit
9
agreement includes a requirement that quarterly cash earnings (as defined in the
agreement) be equal to the Company's quarterly debt and interest service
requirements, which were $1.043 million for the quarter ending July 31, 2002.
The leverage ratio requirement contained in the agreement has been suspended for
the fourth quarter. At August 31, 2002 the Company did not have any borrowings
outstanding under the working capital revolver. Interest on all outstanding debt
under the credit facility accrues at either a) the London Interbank Offered Rate
(which was 1.81% at July 31, 2002) plus 3.75%, or b) the bank's prime rate
(which was 4.75% at July 31, 2002) plus 1%.
The Company has also entered into a three-year interest rate swap that allows
the Company to pay a fixed interest rate of 3.32% (before application of the
bank's pricing margin) on a portion of the Company's term note. The amount
outstanding on July 31, 2002 under the swap agreement is $8.5 million. The
interest rate on the swap agreement is based on the current rates under the
credit facility.
Statement of Financial Accounting Standards No. 133 (SFAS No. 133), "Accounting
for Derivative Instruments and Hedging Activities" as amended by SFAS No. 137
and SFAS No. 138, was adopted by the Company on November 1, 2000. SFAS No. 133
requires that all derivatives be recognized in the balance sheet as either an
asset or liability measured at its fair value. Special accounting for qualifying
hedges allows a derivative's gain and losses to offset related results on the
hedged item in the income statement. As of July 31, 2002, the Company has
recorded a net of tax cumulative loss to other comprehensive income
(Shareholders' equity section of the balance sheet) of $74,408. The amount
recorded in other comprehensive income will be relieved over time and recorded
in the income statement as the interest payments are made. Additional volatility
in earnings and other comprehensive income may occur in the future as a result
of the adoption of SFAS No. 133.
9. RECENTLY ISSUED ACCOUNTING PRINCIPLES:
The Company adopted Financial Accounting Statement No. 142, "Goodwill and Other
Intangible Assets" on November 1, 2001. Under SFAS 142, goodwill recorded as a
part of a business combination is no longer amortized, but instead will be
subject to at least an annual assessment for impairment by applying a
fair-value-based test. Also, SFAS 142 requires that in future business
combinations, all acquired intangible assets should be separately stated on the
balance sheet if the benefit of the intangible asset is obtained through
contractual or other legal rights, or if the intangible asset can be sold,
transferred, licensed, rented, or exchanged, regardless of the acquirer's intent
to do so. These intangible assets will then be amortized over their useful
lives, resulting in amortization expense. The new rule does not require that
companies evaluate existing goodwill on their books for allocation into
separately recognized intangible assets. However, companies, at the time of
adoption of the new standard, are required to conduct an initial
fair-value-based goodwill impairment test to determine if the carrying value of
the goodwill on their balance sheet is impaired. In conjunction with the
adoption of the standard, the Company engaged an independent valuation expert to
conduct the initial assessment. The results of that assessment indicated that no
impairment existed in the value of recorded goodwill on the Company's books as
of November 1, 2001. As a result of the adoption of SFAS 142, the Company did
not record approximately $1,050,000 in goodwill amortization in its operating
results during the first three quarters of 2002. The Company elected to early
adopt SFAS 142 as was provided in the standard. Based on the recorded amounts of
goodwill on the Company's balance sheet, approximately $1.4 million in goodwill
amortization would have been recorded for the year ending October 31, 2002 had
the Company not adopted the new standard.
The goodwill for tax purposes associated with the acquisition of UST exceeded
the goodwill recorded on the financial statements by $1,462,000. The Company is
reducing the goodwill recorded on the financial statements for the tax effect
and the "tax-on-tax" effect of the $1,462,000 basis difference over a 15-year
period. Accrued income taxes and deferred tax liabilities are being reduced as
well. As of July 31, 2002, the Company reduced goodwill by $148,211 for the
impact of the basis difference.
10. FOOTNOTES INCORPORATED BY REFERENCE:
Certain footnotes are applicable to the consolidated financial
statements, but would be substantially unchanged from those presented in the
Company's Annual Report on Form 10-K, Commission File
10
No. 0-16231, filed with the Securities and Exchange Commission on January 29,
2002. Accordingly, reference should be made to those statements for the
following:
Note Description
---- -----------
1 Business and Summary of Significant Accounting Policies
2 Acquisitions
3 Accounts Receivable
8 Income Taxes
10 Stock Options
11 Earnings Per Share
12 Sales-type Leases
13 Major Customers and Concentration of Credit Risk
14 Employment Agreements
15 Contingencies
16 Retirement Plan
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS, WHICH ARE SUBJECT
TO THE PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THESE
STATEMENTS INCLUDE, WITHOUT LIMITATION, STATEMENTS CONCERNING EXPECTATIONS
REGARDING: THE COMPANY'S FINANCIAL POSITION INCLUDING SALES, REVENUES, GROSS
MARGINS, OPERATING MARGINS AND EXPENSES; TRENDS AND CONDITIONS IN THE U.S.
ECONOMY AND IN THE COMMUNICATIONS TECHNOLOGY INDUSTRY AND HOSPITALITY MARKETS;
AND THE COMPANY'S MANAGEMENT OF ITS CREDIT FACILITY. THESE AND OTHER
FORWARD-LOOKING STATEMENTS (GENERALLY IDENTIFIED BY SUCH WORDS AS "EXPECTS,"
"PLANS," "BELIEVES," "ANTICIPATES" "FORECASTS," "PREDICTS," 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. MANY OF THESE RISKS AND UNCERTAINTIES ARE DESCRIBED UNDER THE HEADING
"OUTLOOK AND RISK FACTORS" BELOW. CONSEQUENTLY, ALL FORWARD-LOOKING STATEMENTS
SHOULD BE READ IN CONJUNCTION WITH THE RISK FACTORS DISCUSSED HEREIN AND
THROUGHOUT THIS REPORT TOGETHER WITH THE RISK FACTORS IDENTIFIED IN THE
COMPANY'S ANNUAL REPORT ON FORM 10-K, WHICH WAS FILED ON JANUARY 29, 2002.
GENERAL
During the third quarter of fiscal 2002, the Company generated revenues of $12.8
million and earnings of $.129 million. Both of these numbers represent slight
gains from the Company's second quarter results. These improvements reflect a
possible stabilization of the market for the Company's products and services
coupled with continued close management of costs and working capital.
Management is pleased with these financial improvements as well as the Company's
continued excellent execution at the customer interface. However, management
remains cautious regarding future operating results. In general, U.S. companies
lack confidence in the future of the economy and therefore continue to delay
their technology related capital spending decisions. These delays continue to
negatively impact the Company's operating results.
Since the downturn in the Company's market and the overall U.S. economy became
evident in early 2001, management has successfully managed the Company's costs
and balance sheet to remain profitable and to continue to generate positive cash
flows. The tactics employed thus far have enabled the Company to service its
debt and retain key sales and technical personnel who possess the key
competencies necessary to differentiate the Company from its competitors. The
Company will continue to pursue this basic strategy insofar as it is prudent in
light of the debt service and revised financial covenant requirements. If
necessary, this strategy will be revised to include additional cost reductions.
There can be no assurance given that pursuing such a strategy will enable the
Company to meet its obligations under the credit facility. See "Credit Facility
and Working Capital" under "Outlook and Risk Factors" below for a further
discussion of the risks associated with the Company's credit facility.
Despite the current difficulties, management believes the Company's long-term
strategies remain sound. Two years ago, the Company chose to expand rapidly into
the commercial market primarily through acquisitions. The goal was to create a
nationwide footprint possessing the necessary design, implementation,
maintenance, and consulting capabilities to serve complex, nationwide,
integrated voice and data networks. Management believes that given the Company's
market position and reduced cost structure, it is uniquely positioned to reap
disproportionately positive results when the business climate turns for the
better.
FINANCIAL CONDITION
For the nine months ending July 31, 2002, cash flows from operations were $10.8
million reflecting primarily reductions in accounts receivables. During the
year, the Company has reduced its days sales outstanding on billed receivables
by 26 days to 44 days and has reduced the percentage of outstanding receivables
beyond 60
12
days past due to 7% compared to 26% at the beginning of the year. The Company
has used these positive cash flows to reduce its debt by $8.7 million, which
includes $2.4 million in scheduled principal payments, $1 million representing
the final payment on the subordinated debt from the acquisitions, and $5.3
million in reductions on the Company's working capital revolver. Additionally,
the Company has used its cash flows to make investments of $1.6 million in
capital expenditures, most of which is related to the Company's ERP system
implementation.
In late 1999, concurrent with the Company's expansion into the commercial market
via an acquisition strategy, the Company put in place a credit facility with a
syndicate of banks. The primary underlying evidence supporting the eventual
repayment of the advances made under the credit facility was strong cash flows
driven by profits, not hard assets such as property, plant and equipment.
Consequently, the various financial ratio requirements that were incorporated
into the credit facility as indicators of the Company's financial condition were
based primarily on cash flows generated by earnings. Since the early part of
2001, the Company's profitability has steadily declined due to the difficult
market conditions discussed throughout this report. As a result, the Company has
failed to generate sufficient cash earnings (as defined in the credit facility)
to meet two of the financial ratio requirements as of July 31, 2002. The
Company's banks have waived the default and certain changes have been made to
the credit facility. These changes include a reduction in the amount available
under the working capital revolver. The amount available will be the lesser of
$2 million or a borrowing base of qualifying accounts receivable and inventories
(as defined) reduced by 25% of the Company's unsecured term loan. Also, the
revised credit agreement includes a requirement that quarterly cash earnings (as
defined in the agreement) be equal to the Company's quarterly debt and interest
service requirements. The leverage ratio requirement contained in the agreement
has been suspended for the fourth quarter. See "Credit Facility and Working
Capital" under "Outlook and Risk Factors" below for a further discussion of the
risks associated with the Company's credit facility.
RESULTS OF OPERATIONS
For the third quarter of fiscal 2002, the Company reported earnings of $.01 per
diluted share on revenues of $12.8 million compared to earnings of $.10 per
diluted share on revenues of $21.0 million for the third quarter of fiscal 2001.
For the year to date period ending July 31, 2002, the Company reported earnings
of $.04 per diluted share on revenues of $39.1 million compared to earnings of
$.27 per diluted share on revenues of $68.7 million. These revenue and earnings
declines reflect the severe downturn in the market for the Company's products
over the past year. The discussion below will provide additional information on
the Company's revenues, gross margins, operating costs and other income for the
third quarter and year-to-date periods as compared with the prior year.
Systems Sales.
Sales of systems declined 49% in the third quarter and 53% in the year-to-date
periods compared to those periods in the prior year. However, systems sales in
the third quarter increased 7% over second quarter levels, the first increase in
sequential systems sales in seven quarters. In general, these results reflect
the continuing contraction of capital spending on new technology by U.S.
companies that began in the first quarter of fiscal 2001. While the slight
increase in third quarter systems sales is encouraging, management believes the
market for its products continues to be severely hampered by customer pessimism
about near-term profit projections and cash flows. This pessimism has caused
many U.S. companies to severely slow their capital spending, but not to the
point of canceling technology plans and related budgets. Consequently, many
companies continue to seek proposals for technology solutions, which has
increased the Company's need for pre-sales engineering and design expenses
without actual revenues being generated.
Avaya continues to execute its strategy of transitioning many of its accounts to
its dealer network and as a result the Company has entered into a long sales
cycle with several prominent Avaya customers. This sales cycle requires the
Company to introduce itself first to the Avaya account executive, then to the
Avaya customer, both of whom must get comfortable with the Company's technical
and nationwide implementation capabilities. Subsequently, the Company usually
goes through a testing phase with the customer who will give the Company one or
two projects to execute. The Company is currently in various stages of this
sales cycle with several significant Avaya customers and some orders from these
customers have been received.
13
Management believes that this strategy will ultimately produce significant
increases in revenues and gross profits. However, the Company must execute
successfully during this long sales cycle and capital spending by these
customers will have to improve before the Company realizes significantly
improved operating results.
Installation and Service Revenues.
Installation and service revenues consists of the following:
Three Months Ending Nine Months Ending
July 31, July 31,
---------------------- ------------------------
2002 2001 2002 2001
---------- ---------- ----------- -----------
Contract & Time and Materials $4,731,466 $5,784,275 $13,988,892 $16,364,061
(T&M) revenues
Commercial installations 404,796 1,276,794 1,776,985 4,655,037
Lodging installations 299,570 540,104 1,094,673 3,209,905
Consulting 745,602 405,173 1,710,458 1,001,737
---------- ---------- ----------- -----------
Total installation and
service revenue $6,181,434 $8,006,346 $18,571,008 $25,230,740
========== ========== =========== ===========
Revenues from all installation and services activities declined 23% in the third
quarter of fiscal 2002 and 26% for the year-to-date period in fiscal 2002
compared to those same periods the previous year. Contract and T&M revenues
declined 18% in the third quarter and 15% so far this year. These declines
reflect the fact that fewer customers are expanding their businesses and are
limiting their discretionary spending to only essential repair activities.
Revenues from customers under service contracts, which are mainly related to the
Company's lodging sector, are essentially unchanged from prior year levels.
Installation revenues are directly related to systems sales and therefore are
declining in roughly the same proportion as systems sales. In addition,
installation revenues have been adversely affected by a severe decline in
cabling (structured wiring) revenues, which are generally associated with new
construction or major renovations. In the nine months of fiscal 2001, cabling
revenues represented over 23% of total installation revenues compared to 10% for
the same period in fiscal 2002. Consulting represents revenues earned from the
Company's Professional Services Organization ("PSO") which designs complex voice
and data networks, and from the Company's application consulting group. PSO
revenues have increased during the year as the Company has successfully promoted
the PSO organization as a value-added key differentiator in the marketplace.
Gross Margins.
The gross margins earned on net systems sales were 16.7% in the third quarter of
fiscal 2002 compared to 27.4% in the third quarter of last year. For the nine
months ending July 31, 2002, gross margins on net systems sales were 21.2% in
fiscal 2002 compared to 26.9% in fiscal 2001. These results include declines in
both gross margins on systems sales and installation and services and are more
fully discussed below.
Gross margins on systems sales for the third quarter of fiscal 2002 were 12.9%
compared to 28.5% in the third quarter of fiscal 2001. Gross margins on systems
sales for the year-to-date periods were 24.4% in fiscal 2002 compared to 30.1%
earned for the first nine months of fiscal 2001. The primary reason for the
lower gross margins earned on systems sales in the third quarter was an increase
in systems cost of goods sold of $775,000 to increase the reserve for obsolete
and slow-moving inventory. This adjustment is more fully discussed in Note 3 to
the Consolidated Financial Statements. Without this adjustment, systems sales
gross margins would have been 24.6% for the three month and 28.3% for the ninth
periods ending July 31, 2002. The remaining portion of the decline in gross
margins is due to several issues including product mix, customer mix, and
increasing competitive pressures. The Company's gross margins on sales of
systems is dependent upon a variety of factors: 1) The Company sells a wide
variety of products, some of which generate gross margins in excess of 50% and
some of which earn gross margins of less than 20%; 2) The Company sells to
several different customer sets, some of which have pre-negotiated discounts
with Avaya which result in lower margins to the Company; and 3) As a
distributor, the Company purchases products and receives various forms of price
support from its suppliers which can vary based on special promotions, the
products being purchased, the end-user customer, seasonality, etc. All of these
factors contribute to unpredictability in its gross margins on systems sold.
Management believes that the lower gross margins
14
earned in fiscal 2002, without the effect of the reserve adjustment discussed
above, primarily reflect the heightened competitive market due to the poor
economic conditions and expects that it will continue to experience pressure on
its gross margins until the overall economy improves and as it continues to
increase its sales to larger customers formerly served by Avaya and who have
pre-negotiated discount rates.
Gross margins earned on installation and service revenues were 26.5% in the
third quarter of fiscal 2002, compared to 33.1% in the third quarter of fiscal
2001 and were 24.1% for the first nine months of this year compared to 27.6% for
the first nine months of last year. Gross margins on installation and service
revenues have improved throughout fiscal 2002 as the Company has continued to
refine its processes and strategically consolidate its technician workforce. For
margins to improve to historical levels, sales of systems will have to increase
driving installation revenues higher to cover the costs of maintaining an
installation and pre-sales technical workforce. Both of these groups of highly
trained technicians and engineers represent valuable competencies that the
Company has acquired and developed over the past 2 years. These competencies,
such as the design of complex, networked voice, data and converged applications,
separate the Company from its competitors and represent a key component in the
Company's growth strategy. As such, the Company has elected not to adjust its
staffing levels in this valuable area of its business to current revenue
run-rates in the hopes that the Company will have the ability to out-perform its
competitors and realize growth in its revenues.
A final component to the Company's gross margins are the margins earned on other
revenues and its corporate cost of goods sold expenses. Other revenues represent
sales and cost of goods sold on equipment outside the Company's normal
provisioning processes. Corporate cost of goods sold represents the cost of the
Company's material logistics and purchasing functions.
Operating Expenses. Operating expenses were $2.2 million or 17.2% of revenues
for the third quarter of fiscal 2002 compared to $3.7 million or 17.7% of
revenues in the prior year. For the nine-month period ending July 31, operating
expenses were $7.6 million or 19.5% of revenues in fiscal 2002 compared to $12.7
million or 18.5% of revenues in fiscal 2001. The decrease in operating expenses
reflects: 1) a decrease in the reserve for bad debts of $700,000 which is
discussed in Note 2 to the Consolidated Financial Statements, 2) cost reductions
undertaken by the Company to adjust to the Company's declining revenue base, 3)
reduced commissions expense reflecting the decrease in gross profits, and 4)
reduced amortization expense due to the Company's adoption of Statement of
Financial Accounting Standard No. 142 regarding the accounting for intangible
assets including goodwill. Since April of 2001, the Company has reduced its
operating expenses by carefully managing its employee headcount and tight
controls over discretionary expenditures. Management believes that its revenue
run-rates could grow substantially with only modest increases in operating
expenses, significantly increasing the Company's profitability.
Interest Expense and Other Income. Interest expense for the third quarter was
$220,000 compared to $536,000 in the prior year. Interest expense for the nine
months ending July 31, 2002 was $705,000 compared to $1.8 million in the prior
year. These decreases reflect lower average debt for the quarter and interest
costs of $66,000 and $180,000 for the third quarter and year-to-date periods
capitalized as part of the Company's Oracle implementation capital investment.
Other income in the second quarter was $500,000 compared to $108,000 in the
prior year. This increase was due primarily to the partial reversal of an
acquisition related accrual of $414,000. As part of the Company's purchase of
UST stock in November, 1999, the Company inherited an aggressive tax position
taken by UST. At the time of the acquisition, the Company chose to accrue for
the potential losses to be incurred if the position was overturned. Management,
in consultation with its tax advisors, has monitored this matter and believes it
is appropriate to reduce the accrual. It is likely that a similar entry will be
made in the Company's fourth quarter.
Tax Provision. The Company has recorded a combined federal and state tax
provision of 39% in all periods presented reflecting the effective federal tax
rate plus the estimated composite state income tax rate.
Operating Margins. Net income as a percent of revenues was 1% for the third
quarter and year to date period compared to 5% and 4%, respectively, for the
same periods last year. Management believes that the Company's current business
model and current debt levels will support a target operating margin of 8%.
However, the Company will have to realize sustained growth in systems sales to
reach that target.
15
OUTLOOK AND RISK FACTORS
The following discussion is an update to the "Outlook and Risk Factors"
discussed in the Company's Annual Report on Form 10-K for the year ended October
31, 2001. The discussions in the report regarding "Dealer Agreements",
"Dependence Upon Avaya", "Dependence Upon a Few Suppliers", "Hiring and
Retaining Key Personnel", "Competition", "Lodging Industry", and "Stock Market
Volatility" are still considered current and should be given equal consideration
together with the matters discussed below.
U.S. Economy. The market for the Company's products continues to be
unpredictable. Overall, customer behavior indicates that pessimism regarding
near term economic conditions remains very high and continues to negatively
impact capital spending decisions. Management has no prediction as to when such
pessimism might wane and therefore the Company has not expressed any forecast of
revenues or operating results for the fourth quarter or next fiscal year. It is
likely that if the present sales levels continue or decline, management would
likely implement additional cuts in operating expenses that might inhibit the
Company's ability to design, install and maintain its products, especially those
more complex products that management believes are likely to be the Company's
major growth drivers of the future.
Credit Facility and Working Capital. Although the Company has met all payment
requirements in its credit facility, it is in default of certain of the
covenants in the agreement due to its failure to generate sufficient levels of
net income. The Company's lenders have waived the default. However, as the
Company's net income has declined over the past year, the lenders have continued
to reduce the Company's access to working capital. Under the waiver agreement,
which is more fully described under Note 8 of the Consolidated Financial
Statements, the Company's availability under the working capital revolver has
been reduced to a maximum of $2 million and a new covenant has been formulated
requiring the Company to generate quarterly cash earnings (as defined in the
agreement) equal to the Company's quarterly principal and interest payments. In
an effort to meet this requirement, the Company is aggressively reviewing its
operating expenses for further potential expense reductions and is evaluating
possible ways to raise additional capital in the form of convertible debt,
convertible preferred stock, or equity. It is likely that if the Company raises
additional capital, the ownership of present common stockholders would be
diluted; however, it is impossible to estimate the amount of dilution at this
time. No assurance can be given that the Company can raise additional capital at
acceptable costs or dilutions levels or at all. Should the Company be unable to
meet the covenant described above, it is likely that the Company's lenders would
take additional actions to reduce their exposure to potential future payment
default. These actions could include reduction or elimination of the working
capital revolver, accelerated principal payments, or calling for the note to be
paid in full immediately. In such a case, it is likely that management would be
forced to pursue more drastic tactics which might include selling equity at a
substantial discount to current market prices, delaying payments to vendors,
laying off key technical and managerial personnel, and possibly seeking
bankruptcy protection.
Dependence Upon Avaya. In addition to the risk factors discussed in the Annual
Report on Form 10-K regarding the Company's dependence upon Avaya, the Company,
throughout fiscal 2002, has devoted substantial sales efforts and resources into
its partnering arrangement with Avaya to serve Avaya's customer base as Avaya
transforms its distribution model from a primarily direct to a primarily
indirect sales model using its dealer network. In this regard, the Company has
been marketing itself to the Avaya account executive community who, in turn,
have been increasingly inviting the Company to make joint sales calls with Avaya
on some of these large accounts. To date, the Company has experienced very long
sales cycles and significant up front expenses with this process and although
quoting activity and sales funnels have built to record levels in the first half
of the year, actual orders for new systems have not been produced in significant
enough quantities to improve or even maintain the Company's operating results.
Management strongly believes that its strategy of partnering with Avaya to serve
these major accounts is the correct strategy and will eventually produce strong
revenue growth. However, most of the customer accounts involved are very large
enterprises with long relationships with Avaya. There can be no assurance that
these accounts will agree to allow an Avaya business partner to service their
equipment fulfillment needs without long trial periods or at all. Should this
sales strategy fail or take much longer to materialize than management expects,
it is likely that the Company's operating results would be materially and
negatively impacted.
Viability of the Company's Operating Model. As discussed under "Results of
Operations" above, management has targeted operating margins of 8% for the
Company under its present capital structure.
16
Reaching this level of operating margins requires several key developments to
occur including: significantly increasing revenues; holding manpower levels and
other selling, general and administrative costs close to the levels achieved in
the third quarter while increasing revenues; and significantly improving the
gross margins earned on service revenues. Due to the various reasons described
throughout this report, there is uncertainty whether or not the Company can
realize the increased revenues that are needed to meet its operating margin
target. Until such revenues materialize, management believes that if revenues
stay constant with third quarter levels, it is reasonable to expect operating
results to stay constant as well.
Technology Infrastructure and Information Systems. Since early 2001, the Company
has been consolidating four legacy information technology systems into one newly
installed ERP platform. This consolidation is a key final step of integration of
the Company's acquired businesses into one operating unit. However, due to the
Company's need to conserve cash flows and limits on capital expenditures placed
on the Company by its lenders, the Company has substantially reduced the work it
is performing to complete the new platform. If the Company's financial
performance does not improve substantially, it is possible that the Company will
be forced to completely halt all activities surrounding the new ERP system and
that the value of its investment will erode, never be realized, or be
substantially written-down in value.
Other Risk Factors. In addition to the specific risk factors discussed above,
the following general factors can also impact the Company's overall performance
and results of operations: the threat of additional acts of terrorism within the
United States and the impact of those threats on the overall economy, financial
markets and customer spending attitudes; future growth of the IP networking
market; uncertainties inherent with rapidly changing technologies and customer
demand; the cost and effects of legal claims and proceedings; and relationships
with suppliers; vendors and customers.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to the Company's operations result primarily from changes
in interest rates. In November 2001, the Company entered into interest rate swap
agreements with each of its banking partners for the purpose of hedging against
future increases in interest rates. The interest rate swap agreements allow the
Company to pay a fixed interest rate of 3.32% (before application of the bank's
pricing margin) on a portion of its outstanding debt. At July 31, 2002, the
Company had $7.175 million of outstanding debt subject to interest rate
fluctuations. 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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Regarding the PHONOMETRICS' litigation, which the Company is monitoring,
Phonometrics' appeal of the Final Judgment order entered by the Florida District
Court for the Defendant Hotel companies against Phonometrics' is currently
pending with the Federal Circuit Court of Appeals. During the Quarter for with
this report is being made, the Florida District Court has issued orders awarding
attorneys' fees and costs to the Defendant Hotel companies. Phonometrics' has
filed an appeal of those awards with the Federal Circuit Court of Appeals. A
detailed description of the Phonometrics' cases is contained in the Company's
Annual Report on Form 10-K for the fiscal year ended October 31, 2001 filed with
the Commission on January 29, 2002, the Company's Quarterly Report on Form 10-Q
for the first quarter ended January 31, 2002, filed with the Commission on March
18, 2002, and the Company's Quarterly Report on Form 10-Q for the second quarter
ended April 30, 2002, filed with the Commission on June 12, 2002.
ITEMS 2 - 5 have been omitted because they are not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits - See Exhibit Index page.
17
(b) Reports on Form 8-K - During the quarter for which this report is filed, the
Company filed no reports on Form 8-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
XETA Technologies, Inc.
(Registrant)
Dated: September 13, 2002 By: /s/ Jack R. Ingram
---------------------------------
Jack R. Ingram
Chief Executive Officer
Dated: September 13, 2002 By: /s/ Robert B. Wagner
---------------------------------
Robert B. Wagner
Chief Financial Officer
18
PRINCIPAL EXECUTIVE OFFICER CERTIFICATION
I, Jack R. Ingram, certify that:
1. I have reviewed this quarterly report on Form 10-Q of XETA
Technologies, Inc;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report.
Date: September 13, 2002
/s/ Jack R. Ingram
- ------------------------------------
Jack R. Ingram
Chief Executive Officer
EXPLANATORY NOTE REGARDING CERTIFICATIONS: Representations 4, 5 and 6 of the
certifications as set forth in Form 10-Q have been omitted, consistent with the
Transition Provisions of SEC Exchange Act Release No. 34-46427, because this
Quarterly Report on Form 10-Q covers a period ending before August 29, 2002, the
Effective Date of Rules 13a-14 and 15d-14.
19
PRINCIPAL FINANCIAL OFFICER CERTIFICATION
I, Robert B. Wagner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of XETA
Technologies, Inc;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report.
Date: September 13, 2002
/s/ Robert B. Wagner
- ------------------------------------
Robert B. Wagner
Chief Financial Officer
EXPLANATORY NOTE REGARDING CERTIFICATIONS: Representations 4, 5 and 6 of the
Certifications as set forth in Form 10-Q have been omitted, consistent with the
Transition Provisions of SEC Exchange Act Release No. 34-46427, because this
Quarterly Report on Form 10-Q covers a period ending before August 29, 2002, the
Effective Date of Rules 13a-14 and 15d-14.
20
EXHIBIT INDEX
SEC No. Description
- ------- -----------
(2) PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR
SUCCESSION - None.
(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 -
Incorporated by reference to Exhibit 3(ii)(a) to the
Registrant's Form 10-Q for the quarter ended April 30,
2001, filed on July 14, 2001 (File No. 0-16231).
(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 identified in Exhibit 3(i) and 3(ii) to this report.
(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 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).
21
*10.3 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).
*10.4 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).
*10.5 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).
*10.6 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).
*10.7 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).
*10.8 Stock Purchase Option dated August 11, 2000 granted to Larry
N. Patterson - Incorporated by reference to Exhibit 10.14 to
the Registrant's Annual Report on Form 10-K for the year ended
October 31, 2000, filed on January 29, 2001. (File No.
0-16231).
*10.9 First Amendment to Credit Agreement dated August 21, 2000
among XETA Technologies, Inc., the Lenders, the Agent and the
Arranger - Incorporated by reference to Exhibit 10.15 to the
Registrant's Annual Report on Form 10-K for the year ended
October 31, 2000, filed on January 29, 2001. (File No.
0-16231).
*10.10 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. -
Incorporated by reference to Exhibit 10.16 to the Registrant's
Annual Report on Form 10-K for the year ended October 31,
2000, filed on January 29, 2001. (File No. 0-16231).
*10.11 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 - Incorporated by reference to Exhibit
10.17 to the Registrant's Annual Report on Form 10-K for the
year ended October 31, 2000, filed on January 29, 2001. (File
No. 0-16231).
*10.12 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 -
22
Incorporated by reference to Exhibit 2.1 to the Registrant's
Form 8-K filed on November 15, 2000 (File No. 0-16231).
*10.13 Second Amendment to Credit Agreement dated June 8, 2001 among
XETA Technologies, Inc., the Lenders, the Agent and the
Arranger - Incorporated by reference to Exhibit 10.19 to the
Registrant's Form 10-Q for the quarter ended July 31, 2001,
filed on September 14, 2001 (File No. 0-16231).
*10.14 Amended and Restated Credit Agreement dated October 31, 2001
among XETA Technologies, Inc., the Lenders and the Agent -
Incorporated by reference to Exhibit 10.15 to the Registrant's
Annual Report on Form 10-K for the year ended October 31,
2001, filed on January 29, 2002 (File No. 0-16231).
*10.15 HCX 5000/HCX 5000i(R) Authorized Distributor Agreement for
2002 dated January 1, 2002 between Hitachi Telecom (USA), Inc.
and XETA Corporation - Incorporated by reference to Exhibit
10.15 to the Registrant's Form 10-Q for the quarter ended
January 31, 2002, filed on March 18, 2002 (File No. 0-16231).
(11) STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS - Inapplicable.
(15) LETTER RE: UNAUDITED INTERIM FINANCIAL INFORMATION - Inapplicable.
(18) LETTER RE: CHANGE IN ACCOUNTING PRINCIPLES - Inapplicable.
(19) REPORT FURNISHED TO SECURITY HOLDERS - None.
(22) PUBLISHED REPORT REGARDING MATTERS SUBMITTED TO A VOTE OF SECURITY
HOLDERS - None.
(23) CONSENTS OF EXPERTS AND COUNSEL - None
(24) POWER OF ATTORNEY - None.
(99) ADDITIONAL EXHIBITS -
99.1 Certification of the Company's Chief Executive Officer, Jack
R. Ingram, pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
99.2 Certification of the Company's Chief Financial Officer, Robert
B. Wagner, pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
* Previously filed.
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