<PAGE> 1
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 April 30, 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.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Oklahoma 73-1130045
--------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
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)
Xeta Corporation
--------------------------------------------------------------------------------
(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 June 1, 2000
---------------------------- ---------------------------
Common Stock, $.05 par value 4,199,474
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets - April 30, 2000 and October 31, 1999
Consolidated Statements of Operations - For the Three and Six months
ended April 30, 2000 and 1999
Consolidated Statement of Shareholder's Equity - November 1, 1999
through April 30, 2000
Consolidated Statements of Cash Flows - For the Three and six months
ended April, 2000 and 1999
Notes to Consolidated Financial Statements
2
<PAGE> 3
XETA TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
April 30, 2000 October 31, 1999
-------------- ----------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 278,776 $ 4,556,212
Current portion of net investment in
sales-type leases 2,808,468 2,577,141
Trade accounts receivable, net 29,090,665 4,432,647
Inventories, net 7,882,984 3,733,306
Deferred tax asset, net 898,402 622,595
Prepaid expenses and other assets 370,099 261,024
Prepaid federal and state income taxes 46,814 --
------------ ------------
Total current assets 41,376,208 16,182,925
------------ ------------
Noncurrent Assets:
Goodwill, net of amortization 20,487,618 --
Net investment in sales-type leases,
less current portion above 3,233,368 3,843,743
Purchased service and long distance contracts,
net -- 394,230
Property, plant & equipment, net 5,715,716 3,942,540
Capitalized software production costs, net of
accumulated amortization of $633,066 & $573,066 632,955 649,406
Other assets 837,108 303,633
------------ ------------
Total noncurrent assets 30,906,765 9,133,552
------------ ------------
Total assets $ 72,282,973 $ 25,316,477
============ ============
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 4,600,000 $ --
Revolving line of credit 2,100,000 --
Accounts payable 11,061,046 2,126,654
Unearned revenue 5,137,160 4,540,548
Accrued liabilities 3,396,966 1,494,737
Accrued federal and state income taxes -- --
------------ ------------
Total current liabilities 26,295,172 8,161,939
------------ ------------
Noncurrent liabilities:
Long-term debt, less current portion above 22,503,765 --
Unearned service revenue 1,567,470 1,953,222
Noncurrent deferred tax liability, net 126,859 650,024
------------ ------------
24,198,094 2,603,246
------------ ------------
Commitments
Shareholders' equity:
Preferred stock; $.10 par value; 50,000 shares
authorized, 0 issued -- --
Common stock; $.05 par value; 10,000,000
shares authorized, 4,169,474 and 3,977,308
outstanding at April 30, 2000 and October
31, 1999, respectively 233,943 231,835
Paid-in capital 8,702,694 5,373,855
Retained earnings 15,097,729 11,851,761
Less treasury stock, at cost (2,244,659) (2,906,159)
------------ ------------
Total shareholders' equity 21,789,707 14,551,292
------------ ------------
Total liabilities & shareholders' equity $ 72,282,973 $ 25,316,477
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
3
<PAGE> 4
XETA TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ending April 30, Ending April 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Commercial systems sales $ 15,886,795 $ -- $ 24,972,598 $ --
Lodging systems sales 4,343,936 4,807,978 9,709,947 7,858,661
Installation and service revenues 7,242,302 4,432,943 13,340,514 8,428,542
------------ ------------ ------------ ------------
Net sales and service revenues 27,473,033 9,240,921 48,023,059 16,287,203
------------ ------------ ------------ ------------
Cost of commercial systems 11,518,724 -- 17,901,392 --
Cost of lodging systems 2,789,434 2,750,432 6,178,708 4,524,313
Installation and services costs 5,200,729 2,895,024 9,716,759 5,418,165
------------ ------------ ------------ ------------
Total cost of sales and service 19,508,887 5,645,456 33,796,859 9,942,478
------------ ------------ ------------ ------------
Gross profit 7,964,146 3,595,465 14,226,200 6,344,725
------------ ------------ ------------ ------------
Operating expenses:
Selling, general and administrative 4,021,475 1,213,634 6,853,419 2,222,233
Engineering, research and development 261,510 125,954 474,124 228,588
Amortization 346,200 491,953 939,830 970,048
------------ ------------ ------------ ------------
Total operating expenses 4,629,185 1,831,541 8,267,373 3,420,869
------------ ------------ ------------ ------------
Income from operations 3,334,961 1,763,924 5,958,827 2,923,856
Interest expense (645,222) -- (1,011,222) --
Interest and other income 137,764 132,742 382,363 280,349
------------ ------------ ------------ ------------
Subtotal (507,458) 132,742 (628,859) 280,349
Income before provision for income
taxes 2,827,503 1,896,666 5,329,968 3,204,205
Provision for income taxes 1,102,000 741,000 2,084,000 1,252,000
------------ ------------ ------------ ------------
Net income $ 1,725,503 $ 1,155,666 $ 3,245,968 $ 1,952,205
============ ============ ============ ============
Earnings per share
Basic $ 0.42 $ 0.29 $ 0.79 $ 0.48
============ ============ ============ ============
Diluted $ 0.35 $ 0.25 $ 0.66 $ 0.42
============ ============ ============ ============
Weighted average shares outstanding 4,109,668 4,032,504 4,118,484 4,046,004
============ ============ ============ ============
Weighted average shares equivalents 4,959,021 4,610,024 4,948,953 4,621,738
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
4
<PAGE> 5
XETA TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Treasury Stock
---------------------------- --------------------------
Number of Retained
Shares Issued Par Value Shares Amount Paid-in Capital Earnings
------------- ----------- ----------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance-October 31, 1999 4,636,702 231,835 659,394 $(2,906,159) $ 5,373,855 $11,851,761
Treasury Stock given in acquisition -- -- (150,000) 661,500 2,638,500 --
Stock options exercised 42,166 2,108 -- -- 55,443 --
Tax benefit of stock options -- -- -- -- 634,896 --
Net Income -- -- -- -- -- 3,245,968
----------- ----------- ----------- ----------- ----------- -----------
Balance at April 30, 2000 4,678,868 $ 233,943 509,394 $(2,244,659) $ 8,702,694 $15,097,729
=========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
5
<PAGE> 6
XETA TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months
Ended April 30,
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 3,245,968 $ 1,952,205
------------ ------------
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation 345,654 189,451
Amortization 969,830 970,048
Gain on sale of assets (8,266) --
Provision for returns & doubtful accounts receivable 85,000 18,000
Provision for excess and obsolete inventory 125,000 --
Change in assets and liabilities, net of acquisition:
(Increase) in net investment in sales-type leases 379,048 (1,484,446)
Increase in trade receivables (7,217,426) (502,989)
(Increase) decrease in inventories 1,909,601 (768,402)
Increase in deferred tax asset 86,518 26,542
Increase in prepaid expenses and other assets (125,654) (259,486)
Increase in prepaid taxes (28,114) --
Increase (decrease) in accounts payable (884,567) (534,225)
Increase (decrease) in unearned revenue (1,960,401) 1,556,531
Increase in accrued income taxes 634,897 50,956
Increase (decrease) in accrued liabilities (592,243) 11,365
Decrease in deferred tax liabilities (13,165) (13,829)
------------ ------------
Total adjustments (6,294,288) (740,484)
------------ ------------
Net cash provided by (used in)
operating activities (3,048,320) 1,211,721
------------ ------------
Cash flows from investing activities:
Purchase of UST and ACT, net of cash acquired (26,448,008) --
Additions to capitalized software (43,550) (54,022)
Additions to property, plant & equipment (1,055,848) (1,332,397)
Proceeds from sale of assets 56,972 --
------------ ------------
Net cash used in
investing activities (27,490,434) (1,386,419)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of debt 26,020,432 --
Proceeds from draws on revolving line of credit 4,650,000 --
Principal payments on debt (1,916,665) --
Payments on revolving line of credit (2,550,000)
Purchase of treasury stock -- (1,158,043)
Exercise of stock options 57,551 30,000
------------ ------------
Net cash provided by (used in)
financing activities 26,261,318 (1,128,043)
------------ ------------
Net decrease in cash and
cash equivalents (4,277,436) (1,302,741)
Cash and cash equivalents, beginning of period 4,556,212 3,238,218
------------ ------------
Cash and cash equivalents, end of period $ 278,776 $ 1,935,477
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 856,178 $ 10,284
Cash paid during the period for income taxes $ 1,404,967 $ 1,170,972
Contingent consideration to be paid to UST shareholder $ 3,000,000 $ --
Contingent liabilities acquired in UST acquisition $ 2,000,000 $ --
Treasury shares given in UST acquisition $ 3,300,000 $ --
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
6
<PAGE> 7
XETA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2000
(Unaudited)
(1) BASIS OF PRESENTATION
The consolidated financial statements herein include the accounts of
XETA Technologies, Inc. (previously Xeta Corporation) 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.
At the Company's annual meeting on April 11, 2000, the shareholders
approved the Board of Directors' proposal to change the name of the Company to
XETA Technologies, Inc. This new name was chosen to better reflect both the
Company's vision as a premier voice and data integrator as well as the Company's
recent acquisitions.
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 generally accepted accounting principles, 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
filed 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. The results of the Company's newly
acquired subsidiary UST were only consolidated since December 1, 1999 and UST's
operating results have historically been subject to significant seasonal
fluctuations. On February 29, 2000, the Company purchased the assets of Advanced
Communications Technologies, Inc. ("ACT"). The results of operations of ACT were
only reflected in the Company's results since that date.
These statements should be read in conjunction with the audited
financial statements and notes thereto of XETA included in the Company's Annual
Report on Form 10K, which was filed with the SEC on January 28, 2000 and
additionally the Company's Form 8K-A filing on February 16, 2000 reflecting the
proforma operating results of the Company, including UST.
(2) ACQUISITIONS
On November 30, 1999, the Company successfully completed the
acquisition of UST, a Missouri Subchapter S corporation. The Company purchased
all of the outstanding common stock of UST for $26 million in cash plus 150,000
shares of XETA common stock. At closing, the Company paid the sellers $23
million in cash plus the common stock according to the terms and conditions of
each of
7
<PAGE> 8
the purchase agreements which were negotiated separately with the sellers. The
remaining $3 million is subject to various hold-back provisions, $2 million of
which can 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. The
transaction will be accounted for using the purchase method of accounting and
the associated goodwill will be amortized over 20 years. The accompanying
consolidated balance sheet as of April 30, 2000 includes preliminary allocations
of the purchase price and is subject to final adjustment. The accompanying
operating results represent the results of operations of the Company after
consolidating UST's results from December 1, 1999 to January 31, 2000.
On February 29, 2000, the Company acquired all of the properties and
assets (the "Assets") of 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 ("Quanta"). The Company also assumed all of ACT's existing
liabilities with the exception of inter-company liabilities and federal and
state income taxes payable by ACT. The purchase price for 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 with Bank One Trust Company,
National Association, as security through December 1, 2000, for the
indemnification by ACT of any damages incurred by the Company by reason of any
breach of warranty or representation made by ACT to the Company in connection
with the Purchase Agreement. The purchase price was determined as a result of
arms-length negotiations between unrelated parties. The entire purchase price
was paid by advances drawn under the Company's credit facility with Bank One,
Oklahoma, National Association, as agent.
The unaudited pro forma information presented below consists of
statement of operations data presented as if the results from acquisitions had
been consolidated from the first day of the period reported.
<TABLE>
<CAPTION>
Three Months Ended April Six Months Ended April 30,
30, 2000 2000
2000 1999 2000 1999
-------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues 27,473,000 20,413,000 57,181,000 39,635,000
Net income 1,714,000 1,388,468 3,698,000 2,357,000
Basic earnings per share $ 0.42 $ 0.33 $ 0.90 $ 0.56
Diluted earnings per share $ 0.35 $ 0.29 $ 0.75 $ 0.49
</TABLE>
Pro forma adjustments included in the amounts above primarily relate to
increased amortization and interest expense, additional general and
administrative expenses for increased compensation expense, and increased
federal and state tax expense based on the combined operations. The calculation
of basic and diluted earnings per share for the three and six month periods
ending April, 1999 assumes the issuance of 150,000 shares of common stock at the
beginning of the period reflecting the stock issued to one of the sellers in the
UST transaction.
With these acquisitions, the Company significantly extended its market
beyond its traditional boundaries of the hospitality market. This expansion is
part of the Company's strategy to grow outside the relatively small niche of the
lodging industry and to be a part of the changes expected to occur in the
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<PAGE> 9
telecommunications industry as voice and data networks converge onto one
integrated platform.
(3) CREDIT FACILITY
Financing for the acquisitions described above was provided through a
$40 million credit facility with a bank. The $23 million paid at closing of the
UST 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. There is approximatelY $9 million remaining for future
acquisitions under the facility. The remaining portion of the credit facility is
a $5 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
6.1663% at April 30, 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% at April 30, 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. The Company makes monthly payments
on the term loan of $383,333. The term loan expires on November 30, 2004. Draws
under the acquisition portion of the credit facility are converted annually into
five year term loans, except during the third year of the facility in which any
draws are converted into a four year term loan. At April 30, 2000, the Company
had $2.9 million available under the revolving line of credit.
9
<PAGE> 10
(4) INVENTORIES
The following are the components of inventories:
<TABLE>
<CAPTION>
April 30, October 31,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
Raw materials $ 1,202,496 $ 1,268,635
Finished goods and spare parts 7,770,225 3,285,841
------------ ------------
8,972,721 4,554,476
Less reserve for excess and
obsolete inventory (1,089,737) (821,170)
------------ ------------
$ 7,882,984 $ 3,733,306
============ ============
</TABLE>
(5) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
April 30, October 31,
2000 1999
----------- ------------
(Unaudited)
<S> <C> <C>
Data processing & computer field equipment $ 3,443,351 $ 1,694,056
Building 2,611,749 2,397,954
Land 611,582 611,582
Office furniture 869,877 486,535
Autos and Trucks 527,416 9,486
Other 449,703 308,726
----------- -----------
8,513,678 5,508,339
Less accumulated depreciation (2,797,962) (1,565,799)
----------- -----------
$ 5,715,716 $ 3,942,540
=========== ===========
</TABLE>
(6) UNEARNED INCOME
Unearned income consists of the following:
<TABLE>
<CAPTION>
April 30, October 31,
2000 1999
----------- ------------
(Unaudited)
<S> <C> <C>
Service contracts $1,896,751 $1,575,385
Warranty service 1,276,524 1,363,187
Systems shipped, but not installed 441,049 123,729
Rebates due from vendors 389,644 --
Customer deposits 1,002,273 1,349,405
Other deferred revenue 130,919 128,842
---------- ----------
Total current deferred revenue 5,137,160 4,540,548
Noncurrent unearned service revenues 1,567,470 1,953,222
---------- ----------
$6,704,630 $6,493,770
========== ==========
</TABLE>
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<PAGE> 11
(7) INCOME TAXES
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below:
<TABLE>
<CAPTION>
April 30, October 31,
2000 1999
----------- -----------
(Unaudited)
<S> <C> <C>
Deferred tax assets:
Nondeductible reserves $ 1,246,186 $ 423,069
Prepaid service contracts 450,407 503,983
Unamortized cost of service contracts 70,489 102,094
Other 29,224 33,124
----------- -----------
Total deferred tax asset 1,796,306 1,062,270
----------- -----------
Deferred tax liabilities:
Tax income to be recognized on sales-type
lease contracts 752,601 802,581
Unamortized capitalized software
development costs 215,205 220,798
Unamortized cost of long distance and
Service contracts -- 66,320
Other 56,957 --
----------- -----------
Total deferred tax liability 1,024,763 1,089,699
----------- -----------
Net deferred tax asset (liability) $ 771,543 $ (27,429)
=========== ===========
</TABLE>
(8) INTEREST AND OTHER INCOME
Interest and other income recorded in the accompanying financial
statements, consists primarily of interest income earned from sales-type leases
and cash investments.
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<PAGE> 12
(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 No. 0-16231, filed with
the Securities and Exchange Commission on January 28, 2000. Accordingly,
reference should be made to those statements for the following:
Note Description
---- -----------
1 Business and summary of significant accounting policies
2 Accounts receivable
5 Accrued liabilities
6 Income taxes
9 Purchased Long Distance Contracts
10 Stock options
11 Earnings per share
12 Commitments
13 Major Customers and Concentration of Credit Risk
14 Employment Agreements
15 Contingency
16 Retirement plan
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The unaudited consolidated results for the period ending April 30, 2000 reflect
the operations of XETA Technologies, Inc. (the "Company" or "XETA"), the
operations of U.S. Technologies Systems, Inc. from December 1, 1999 to April 30,
2000, and the operations of the Company's Pacific Northwest operations (formerly
the operations of Advanced Communications Technologies, Inc.) ("ACT"), from
March 1, 2000 to April 30, 2000. For the quarter ending April 30, 2000, the
Company reported net income of $1.725 million or $.35 per share (diluted)
compared to net income of $1.156 million or $.25 per share (diluted) for the
second quarter of fiscal 1999, a 49% increase. Net income for the six months
ended April 30, 2000 was $3.246 million or $.66 per share (diluted) compared to
net income of $1.952 million or $.42 for the first six months of fiscal 1999, a
66% increase.
The Company announced several significant developments since the end of fiscal
1999. On November 30, 1999, the Company closed on its previously announced
acquisition of U.S. Technologies Systems, Inc. ("UST"). The purchase price paid
for UST was $26 million in cash and 150,000 shares of XETA common stock. At the
closing, the Company paid $23 million in cash plus the common stock. The
remaining $3 million is subject to various hold-back provisions, $2 million of
which can 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.
Financing for the acquisition was provided through a $40 million credit facility
which is more fully described under "Financial Condition" below.
On February 29, 2000, the Company successfully closed on the acquisition of
Advanced Communication Technologies, Inc. ("ACT"). The Company purchased
substantially all of the assets of ACT for book value plus $250,000. At the
February 29th closing, the Company paid $3 million for the estimated book value
of the assets as of January 31, 2000. A final true-up of the purchase price
based on the final book value of the assets purchased as of February 29, 2000 is
pending. The cash payment made at the closing was provided by funds from the
Company's credit facility with its bank.
The acquisitions of UST and ACT are in conjunction with the Company's strategy
to expand beyond the lodging market to become a nation-wide distribution channel
proficient in both voice and data communications products to the commercial
market. UST's operations are focused generally in the midsection of the U.S.
while ACT's primary markets were in the Pacific Northwest, primarily Washington
and Oregon. In addition, while significantly smaller and less profitable than
UST, ACT's operations included a service organization as well as expertise in
data and networking applications.
Also, the Company announced a strategic partnership with Darwin Networks to
offer high-speed Internet access to the lodging industry. Under the agreement,
XETA is a sales agent for Darwin Networks to offer a packaged system which
includes XETA's Linux-based Virtual XL(TM) call accounting system integrated
with Darwin's Linux-based high-speed DSL Internet access ("HSIA") system. Guests
staying at hotels with the XETA/Darwin system will be able to
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<PAGE> 14
access the Internet at high speeds through a plug and play connection in each
hotel room while still using the same telephone line for voice communications.
At the Company's annual meeting on April 11, 2000, the shareholders approved the
Board of Directors' proposal to change the name of the Company to XETA
Technologies, Inc. This new name was chosen to better reflect both the Company's
vision as a premier voice and data integrator as well as the Company's recent
acquisitions.
The following discussion should be read in conjunction with the Consolidated
Financial Statements and the related notes thereto included elsewhere in this
report on Form 10Q. Except for the historical information contained herein, the
matters discussed in this quarterly report on Form 10Q may be considered
"forward-looking" statements within the meaning of Section 27A of the Securities
and Exchange Act of 1933, as amended and Section 21E of the Securities Exchange
Act of 1934, as amended. Such statements include declarations regarding the
intent, belief of current expectations of the Company and its management,
statements regarding the future results of recent acquisitions, and the
Company's gross margins. Readers are cautioned that any such forward-looking
statements are not guarantees of future performance and involve a number of
risks and uncertainties. Actual results could differ materially from those
indicated by such forward-looking statements. Among the important factors that
could cause actual results to differ materially from those indicated by such
forward-looking statements are the risk factors identified in the Company's
Annual Report on Form 10K, which was filed on January 28, 2000 and those risk
factors presented below in this report.
FINANCIAL CONDITION
The Company's capital structure changed dramatically since the beginning of the
fiscal year as a result of the establishment of the new credit facility and the
acquisitions of UST and ACT. During this period, cash balances declined $4.277
million consisting of cash used by operations of $3.048 million, cash provided
by financing activities of $26.261 million and cash used in investing activities
of $27.490 million.
Concurrent with the acquisition of UST, the Company established a $40 million
credit facility with its new bank. The credit facility consists of a $23 million
term loan which was used to purchase UST, a $12 million dollar acquisition
facility available for additional acquisitions ($3 million of which was used to
fund the purchase of ACT's assets), and a $5 million revolving credit facility
for working capital needs. See Note 3 of the Notes to Consolidated Financial
Statements for a further description of the terms of the credit facility.
Management believes that it has sufficient credit capacity to pursue its growth
strategy, including additional acquisitions. The evaluation of potential
acquisition candidates is ongoing. These evaluations center on the target's cash
flows, installation and service capabilities, geographic reach, and product mix.
The purchase of some targets or the cumulative effect of purchasing several
targets could require additional capital in excess of the
14
<PAGE> 15
credit facility currently in place. While no assurance can be given, management
believes that a wide variety of capital resources are available including
additional bank debt, subordinated debt, secondary equity offerings,
pooling-of-interests transactions, and combinations of all of the above.
RESULTS OF OPERATIONS
With the expansion of the Company's strategy to market products and services
beyond the lodging market, the Company is reporting its revenues from three
major sources: sales of systems to the commercial market, sales of systems to
the lodging market and installation and service activities derived from both
markets.
Commercial Systems Sales. Sales of systems to the commercial market (defined as
sales to non-lodging customers) were $15.887 million during the second quarter
and $24.973 million for the first six months of fiscal 2000. The Company targets
two primary commercial markets, small-of-large locations of Fortune 1000
companies and the next 10,000 largest enterprises. Approximately 40% of UST's
revenues are generated from the small-of-large segment, mainly through
"partnering" with Lucent's direct sales force to sell and install communications
systems (PBX's) to Lucent customers. Under these "partnering" arrangements, UST
account executives work with Lucent National Account Managers ("NAM's") and
Global Account Managers ("GAM's") to jointly serve Lucent customers. UST adds
value to the Lucent NAM's and GAM's sales efforts by offering speed of
installation, cost-effective installation of smaller, outbound systems that may
be networked to larger, "home office" communications systems served by Lucent's
direct sales and service force, and web-based innovative solutions such as a
private inventory system, standardized implementation for multi-location
customers, consolidated invoicing and an electronic move-add-change process. The
Company's Pacific Northwest operations (formerly ACT) targets more of the
enterprise market, generating approximately 80% of its revenues from this
segment. The Company intends to grow both target markets through a balance
strategy of internal expansion and acquisitions of additional dealers.
Lodging Systems Sales. Sales of lodging systems decreased $464,000 or 10% in the
second quarter of fiscal 2000 compared to the second quarter of fiscal 1999.
This decrease resulted from an increase in sales of PBX systems during the
quarter of $748,000 partially offset by a decrease in sales of call accounting
systems of $1.1 million. For the first half of fiscal 2000, total lodging
systems sales increased $1.851 million or 24% compared to the first half of
fiscal 1999. This increase consisted of an increase in sales of PBX systems of
$2.991 million or 57% partially offset by a decrease in call accounting sales of
$911,000 or 40%. The increase in sales of PBX systems reflects the market's
continued acceptance of the Company's PBX product and service offering,
including the acceptance of the Company's new Lucent product offering to the
lodging sector. The decline in sales of call accounting systems was expected and
reflects the conclusion of the surge in orders for Virtual XL(TM) systems
experienced throughout 1999. As expected, the backlog and current order rate for
new call accounting systems has returned to historical levels. As discussed
above, the Company has partnered with Darwin Networks to provide HSIA to the
lodging industry. Under this arrangement, the Company will sell call accounting
systems and software to the hotel as part of a packaged system with Darwin.
Additional revenues may be earned from usage fees and electronic commerce
15
<PAGE> 16
conducted by guests using the system. Revenues earned from the alliance with
Darwin were insignificant in the second quarter. Included in lodging systems
sales for the second quarter and the year to date period are $33,000 and
$136,000, respectively, in revenues earned from the Company's long distance
service offering. Contracts to provide this service, which were purchased in
1997, are now expiring and most of these contracts are not expected to be
renewed by the customers. Therefore revenues from this product line are expected
to decline throughout fiscal 2000.
Installation and Service Revenues. Installation and service revenues increased
$2.8 million or 63% in the second quarter of fiscal 2000 compared to the second
quarter of fiscal 1999 and increased $4.9 million or 58% for the year to date
period. For the second quarter, $201,000 of the increase was from lodging
division related activities, representing a 5% increase. The remainder of the
increase in the quarter, $2.6 million, was earned from the Company's recently
acquired commercial operations. For the year to date period, approximately
$1.653 million of the increase was generated by the lodging division with the
remaining $3.258 million earned by the acquired commercial operations. Increases
in installation and service revenues earned from lodging customers generally
represent increases in revenues from maintenance contracts and from
installations of new systems. However, the Company experienced a decline in
installation revenues in the second quarter due to lower call accounting sales
and communication (i.e., PBX) systems that were shipped in April, but not
scheduled to install until the third quarter. Unlike the lodging division,
installation and maintenance revenues earned from commercial customers are
dominated by installation revenue. In most cases, under the partnering
arrangements with Lucent discussed under "Commercial Systems Sales" above,
Lucent, not the Company, offers a maintenance contract to the end-user. As a
result, at the present time, the Company's recurring maintenance revenue earned
from commercial customers is less than 30% of the installation and maintenance
revenues. Management believes that it can build the base of commercial contract
revenues by slowly shifting its target customer base to mid-sized ("Enterprise")
firms. The first step toward that goal was achieved through the acquisition of
the assets of ACT which currently serves the Enterprise market in the Pacific
Northwest.
Gross Margins. Total gross margins earned during the second quarter of fiscal
2000 were 29% compared to 39% in the second quarter of fiscal 1999 and were 30%
for the year to date period in fiscal 2000 compared to 39% for the year to date
period in fiscal 1999. This decline in overall gross margins is largely the
result of a dramatic and planned change in product mix. The Company made a
strategic decision in fiscal 1999 to enter the much larger and faster growing
commercial market for voice and data products. As a result, sales of the
Company's higher margin proprietary products were expected to decrease
significantly as a percent of overall sales toward lower margin communication
systems products. Management expects this new business model to produce overall
gross margins of approximately 30%-33% as the Company delivers its trademark
value propositions of speed and quality, deploys its unique offering of
e-business solutions, expands its commercial services capacity and service
offerings, and introduces more complex software-oriented applications such as
call centers and unified messaging.
16
<PAGE> 17
Gross margins earned on commercial systems sales were 28% in the second quarter
and were 28% for the six months ending April 30, 2000. These margins are
slightly below the historical margins earned by the commercial division prior to
their purchase by the Company. During the second quarter, the Company revised
its previous estimate in the accrual rate for certain rebates that it receives
from the manufacturer of its products. The rebate is based on the number of
systems purchased and the Company had over-accrued the benefit of the rebate
through an error in the forecast of systems to be purchased during the year.
Gross margins earned on lodging systems sales were 36% in the second quarter and
36% for the first six months of fiscal 2000 compared to 43% and 42%,
respectively, for the same periods in fiscal 1999. This decline reflects the
higher proportion of sales of PBX systems in the first quarter of 2000 compared
to 1999. As discussed above, the Company enjoyed a surge in orders during 1999
for its Virtual XL(TM) system, which as a proprietary product, earns a higher
margin than the Company's communication systems product line. This trend is
expected to continue during fiscal 2000, but could be offset somewhat by sales
of systems under the newly announced HSIA project.
Gross margins earned on installation and maintenance activities were 28% in the
second quarter and 27% for the first six months of fiscal 2000 compared to 35%
and 36%, respectively, for the same periods in fiscal 1999. Total installation
and service margins have been lowered from historical levels by the Company's
entry into the commercial voice and data market. However, management believes
that installation and service margins in the commercial segment will improve in
time and be in line with service margins in the lodging segment after the
Company has achieved the proper scale and experience with the new technology
presented by its rapid growth into the commercial market. Specifically,
management expects these margins to improve as it implements the following
initiatives: First, the Company is in the process of shifting the installation
of commercial systems from a third-party model to an in-house model. During the
second quarter, the Company experienced a geographic imbalance in demand for
such new installation services as it scaled up its technician capacity to
install on a national basis. To improve this expected imbalance, the Company
continues to implement a new provisioning process designed to streamline
commercial installations. Management believes that by the end of the current
fiscal year, 80% of the targeted commercial system installations will be
performed by in-house Company technicians. Second, as the Company has begun
utilizing new job costing and pricing tools, its third-party services margins,
including those earned on wiring installations, have improved. Management
expects these improvements to continue. Finally, management believes that the
gross margins on installation and maintenance activities will improve as the
Company introduces new commercial service offerings, including several
maintenance offerings. While no assurance can be given, management believes that
further progress can be made in each of these areas and that overall
installation and services gross margins of 32%-35% can be attained.
Operating Expenses. Excluding amortization expense, operating expenses were
15.6% of total revenues in the second quarter compared to 14.5% in the same
period of fiscal 1999. For the first half of fiscal 2000, operating expenses
were 15.3% of total revenues compared to 15% for the same period in fiscal 1999.
While higher than 1999 levels, management is pleased with operating expenses as
a percent of revenues given the rapid growth of the Company and the complexity
of its operations compared to a year ago. While no assurance
17
<PAGE> 18
can be given, management believes that operating costs (as a percent of
revenues) can be held at or near present levels. Amortization expense between
the two periods consists of different components and is therefore not
comparable. The majority of amortization expense recorded 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 the
amortization expense recorded in fiscal 2000 is related to the acquisitions of
UST and ACT. Note however, that the Company did record additional amortization
expense of $208,000 in the first quarter of fiscal 2000 to write-off the
remainder of its investment in the long distance contracts purchased in fiscal
1997. See discussion regarding "Lodging Systems Sales" above.
Interest Expense. Interest expense consists of interest on the Company's term
loan facility that was used to fund the acquisitions made during the periods
presented and other commitment fees due on the unused portion of the facility.
Previous to the establishment of the credit facility in conjunction with the UST
acquisition, the Company did not have any outstanding debt.
Interest and Other Income. Interest and other income increased $5,000 in the
second quarter compared to the same period a year ago and increased $102,000 in
the first half of fiscal 2000 compared to the same period in fiscal 1999. The
increase in interest income experienced in the first quarter was related to
increased interest income from Xetaplan sales-type receivables and some one-time
other income earned during that quarter.
Tax Expense. The Company has recorded a combined federal and state tax provision
of 39% of income before taxes in both periods being presented. This rate
reflects the effective federal tax rate plus the estimated composite state
income tax rate.
Operating Margin. Net income as a percent of sales was 6.3% in the second
quarter and 6.7% for the first six months of fiscal 2000 compared to 12.5% and
12%, respectively, for the same periods in fiscal 1999. These lower operating
margins reflect 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 recent shift in Lucent's distribution strategy (see "Lucent Divestiture"
under "Outlook and Risk Factors," below), 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. 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%-8%.
18
<PAGE> 19
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 10K for the year ended October
31, 1999. The discussions in that report regarding "Growth Strategy and
Acquisitions", "Dealer Agreements", "Dependence on Key Personnel and
Recruiting", and the "U.S. Economy" are still considered current and should be
given equal consideration to the matters discussed below.
Lucent Divestiture. On March 1, 2000, Lucent Technologies, Inc. announced that
it would spin-off its PBX business (along with two other operating units) into a
new company. The transaction will not be finalized until around September, 2000.
However, the new company (as yet unnamed) will be operated by a new management
team immediately. This portion of Lucent is the product source for the Company's
PBX products sold through the commercial channel and partially through the
lodging channel. Management believes that on balance, this is a good development
for the Company. There are no changes in distribution strategy expected and no
changes in products expected. While no assurance can be given, management does
not expect Lucent's divestiture of its PBX business to have a material, negative
impact on the Company's operating results.
Dependence Upon Lucent "Business Partner Program" and Incentive Programs. As
described under "Commercial Systems Sales" above, the Company has enjoyed a
surge in sales of new PBX systems from its program to work with Lucent NAM's and
GAM's. Under this program, the Company sells and installs Lucent equipment to
large Lucent customers under sales agreements negotiated by the NAM or GAM. The
Company is typically engaged by Lucent because it can meet the customer's need
for fast delivery and installation. Currently, the Lucent NAM's and GAM's
receive identical compensation from Lucent regardless of whether their orders
are fulfilled by Lucent's direct installation team or by a dealer such as the
Company. While no assurance can be given, if Lucent were to alter their NAM and
GAM compensation program to favor using Lucent's direct provisioning and
installation teams, the Company would likely suffer material, adverse operating
results. Also, Lucent, 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.
Year 2000 Issues. Between the middle of 1997 and December 31, 1999, the Company
spent considerable effort to assess the potential impact of the year 2000
("Y2K") on its business. These actions included evaluating the Y2K readiness of
its proprietary products, its distributed products as well as its internal
systems. Based on those evaluations, the Company developed and implemented
appropriate remedial procedures, including the notification of its customers as
necessary, and took measured actions to prepare for potential unforeseen
problems on and immediately after December 31, 1999. Like most businesses who
had prepared diligently for Y2K, the Company experienced no
19
<PAGE> 20
significant problems with either its products or internal systems and none of
its operations were interrupted in any way as a result of Y2K issues.
Pending Litigation. The Company is involved in two matters of pending litigation
with a third matter recently dismissed. See "Legal Proceedings" under Part II
below for a further discussion of this litigation.
ITEM 3. 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 second quarter of fiscal 2000.
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. On November 30,
1999, the Company established a $40 million credit facility (see Note 3 to the
Consolidated Financial Statements for details of the Company's long-term debt).
The Company is exposed to market risk from changes in interest rates related to
this credit facility which is based upon either LIBOR or the bank's prime rate.
20
<PAGE> 21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material developments in the matter of ASSOCIATED BUSINESS
TELEPHONE SYSTEMS, INC., PLAINTIFF VS. XETA CORPORATION, DEFENDANT AND
THIRD-PARTY PLAINTIFF, VS. D&P INVESTMENTS, INC., THIRD-PARTY DEFENDANT, since
this case was last reported on in the Company's Annual Report on Form 10-K for
the fiscal year ended October 31, 1999 filed with the Commission on January 28,
2000.
Since February 9th, 2000, when the United States Court of Appeals remanded the
PHONOMETRICS' litigation to the United States Court for the Southern District of
Florida for further proceedings, Phonometrics' has initiated discovery
proceedings in this matter. A more detailed description of these cases is
contained in the Company's Annual Report on Form 10-K for the fiscal year ended
October 31, 1999 filed with the Commission on January 28, 2000. The Company will
continue to monitor these proceedings.
Items 2 and 3 have been omitted because they are not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SHAREHOLDERS.
During the fiscal period for which this report is filed, the Company held its
annual meeting of shareholders on April 11, 2000, at which the following four
matters were submitted to a vote of the shareholders and approved.
The first matter concerned the election of Directors. The following
persons were elected to the Board of Directors without contest as follows:
<TABLE>
<CAPTION>
Nominee For Withhold
------- --- --------
<S> <C> <C>
Ron B. Barber 3,358,037 110,753
Donald T. Duke 3,358,037 110,753
Robert D. Hisrich 3,358,037 110,753
Jack R. Ingram 3,358,037 110,753
Mark A. Martin 3,358,037 110,753
Ronald L. Siegenthaler 3,358,037 110,753
Robert B. Wagner 3,358,037 110,753
Jon A. Wiese 3,358,037 110,753
</TABLE>
The second matter concerned an Amendment to the Company's Certificate
of Incorporation to change the name of the Company from "XETA Corporation" to
"XETA Technologies, Inc." This proposal was passed as follows:
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C>
3,463,670 4,245 875
</TABLE>
21
<PAGE> 22
The third matter voted upon concerned the adoption of the XETA
Technologies 2000 Stock Option Plan, which was approved by the following vote:
<TABLE>
<CAPTION>
For Against Abstain Not Voted
--- ------- ------- ---------
<S> <C> <C> <C>
1,975,827 287,914 6,064 1,198,985
</TABLE>
The last matter involved the ratification of the Board of Directors'
selection of Arthur Andersen, LLP as the independent public accountants to audit
the Company's financial statements for the fiscal year ending October 31, 2000.
This selection was ratified by the shareholders as follows:
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C>
3,462,632 1,957 4,201
</TABLE>
Item 5 has been omitted because it is not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits - See Exhibit Index page.
(b) Reports on Form 8-K - During the quarter for which this report is filed, a
voluntary 8-K filing was made with the Commission on March 15, 2000 relating to
the Company's acquisition on February 29, 2000, of all of the properties and
assets of Advanced Communications Technologies, Inc., an Oregon corporation. No
financial statements were filed with such report.
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 CORPORATION
(Registrant)
Dated: June 12, 2000 By: /s/Jack R. Ingram
--------------------------------------
Jack R. Ingram
Chief Executive Officer
Dated: June 12, 2000 By: /s/Robert B. Wagner
--------------------------------------
Robert B. Wagner
Chief Financial Officer
22
<PAGE> 23
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEC No. Description
------- -----------
<S> <C> <C> <C> <C>
(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 -
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 (the "Commission")
upon request.
Schedule 2.1 Excluded Assets
Schedule 2.2 Wiring Instructions
Schedule 2.3 Liabilities Excluded from the
Assumed Liabilities
Schedule 3.2 Contracts Requiring Third-Party
Consents
Schedule 3.4 Accounts (including aging) and
Notes Receivable
Schedule 3.5 Title Exceptions
Schedule 3.6 Contracts, Leases, and Agreements
Schedule 3.7 Permits
Schedule 3.8 Exceptions to Environmental
Warranties
Schedule 3.9 Employment and Labor Disputes
Schedule 3.10 Non-Competition, Confidentiality,
and Non-Solicitation Agreements
Schedule 3.11 Pending or Threatened Legal
Actions and Exceptions to Legal
Compliance
Schedule 3.12 Tax Filing and Payment Exceptions
Schedule 3.13 Intangible Property
Schedule 3.16 Unserviceable Equipment and
Inventory
(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 -
</TABLE>
23
<PAGE> 24
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEC No. Description
------- -----------
<S> <C> <C> <C> <C>
(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.
(10) MATERIAL CONTRACTS -
*10.1 HCX 5000(R) Authorized Distributor Agreement dated
April 1, 1999 between Hitachi Telecom (USA), Inc. and
XETA Corporation--Incorporated by reference to
Exhibit 10 to the Registrant's Form 10-QSB for the
quarter ended April 30, 1998, filed on June 15, 1998
(File No. 0-16231).
*10.2 Asset Purchase Agreement dated September 18, 1998
between Williams Communications Solutions, LLC and
XETA Corporation--Incorporated by reference to
Exhibit (2) to the Registrant's Form 8-K, filed on
October 2, 1998 (File No. 0-16231).
*10.3 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).
*10.4 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).
*10.5 Credit Agreement dated as of November 30, 1999 among
XETA Corporation, the Lenders, the Agent and the
Arranger--Incorporated by
</TABLE>
24
<PAGE> 25
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEC No. Description
------- -----------
<S> <C> <C> <C> <C>
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 Stock Purchase Option dated February 1, 2000 granted
to Larry N. Patterson -
10.10 Amendment to Dealer Agreement Among Lucent
Technologies, Inc. Distributor, Inacom
Communications, Inc.; and XETA Corporation, For
Business Communications Systems, dated effective
March 19, 2000 -
PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED
PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT. SUCH PORTIONS HAVE BEEN FILED
SEPARATELY WITH THE COMMISSION WITH THE
APPLICATION FOR CONFIDENTIAL TREATMENT.
The following Appendix to the Amendment has
been omitted from this report and will be
furnished to the Commission upon request:
Appendix: Area.
10.11 XETA Technologies 2000 Stock Option Plan -
(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.
</TABLE>
25
<PAGE> 26
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEC No. Description
------- -----------
<S> <C> <C> <C>
(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.
(27) FINANCIAL DATA SCHEDULE
(99) ADDITIONAL EXHIBITS - None.
</TABLE>
* Previously filed.
26
