<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 July 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-16231
XETA Technologies, Inc.
--------------------------------------------------------------------------------
(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 August 1, 2000
----------------------------- -----------------------------
Common Stock, $.001 par value 8,518,948
<PAGE> 2
PART I. FINANCIAL INFORMATION
<TABLE>
<S> <C>
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets - July 31, 2000
and October 31, 1999
Consolidated Statements of Operations - For the Three and Nine
months ended July 31, 2000 and 1999
Consolidated Statement of Shareholder's Equity - November 1,
1999 through July 31, 2000
Consolidated Statements of Cash Flows - For the Nine months
ended July 31, 2000 and 1999
Notes to Consolidated Financial Statements
</TABLE>
2
<PAGE> 3
XETA TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
July 31, 2000 October 31, 1999
---------------- ----------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 348,159 $ 4,556,212
Current portion of net investment in
sales-type leases 2,693,016 2,577,141
Trade accounts receivable, net 33,376,605 4,432,647
Inventories, net 9,419,274 3,733,306
Deferred tax asset, net 861,393 622,595
Prepaid expenses and other assets 451,769 261,024
Prepaid federal and state income taxes 363,314 --
---------------- ----------------
Total current assets 47,513,530 16,182,925
---------------- ----------------
Noncurrent Assets:
Goodwill, net of amortization 20,201,065 --
Net investment in sales-type leases,
less current portion above 2,916,678 3,843,743
Purchased service and long distance contracts,
net -- 394,230
Property, plant & equipment, net 6,107,474 3,942,540
Capitalized software production costs, net of
accumulated amortization of $663,066 & $573,066 617,955 649,406
Other assets 254,357 303,633
---------------- ----------------
Total noncurrent assets 30,097,529 9,133,552
---------------- ----------------
Total assets $ 77,611,059 $ 25,316,477
================ ================
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 4,600,000 $ --
Revolving line of credit 3,150,000 --
Accounts payable 14,774,081 2,126,654
Unearned revenue 4,500,588 4,540,548
Accrued liabilities 4,088,856 1,494,737
Accrued federal and state income taxes -- --
---------------- ----------------
Total current liabilities 31,113,525 8,161,939
---------------- ----------------
Noncurrent liabilities:
Long-term debt, less current portion above 21,353,765 --
Unearned service revenue 1,286,821 1,953,222
Noncurrent deferred tax liability, net 174,672 650,024
---------------- ----------------
22,815,258 2,603,246
---------------- ----------------
Commitments
Shareholders' equity:
Preferred stock; $.10 par value; 50,000 shares
authorized, 0 issued -- --
Common stock; $.001 par value; 50,000,000
shares authorized, 9,537,736 and 9,273,404
issued at July 31, 2000 and October
31, 1999, respectively 9,538 231,835
Paid-in capital 9,383,774 5,373,855
Retained earnings 16,533,623 11,851,761
Less treasury stock, at cost (2,244,659) (2,906,159)
---------------- ----------------
Total shareholders' equity 23,682,276 14,551,292
---------------- ----------------
Total liabilities & shareholders' equity $ 77,611,059 $ 25,316,477
================ ================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
3
<PAGE> 4
Income Statement
XETA TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ending July 31, Ending July 31,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Commercial systems sales $ 13,637,639 $ -- $ 38,610,237 $ --
Lodging systems sales 2,991,036 4,800,119 12,700,983 12,658,780
Installation and service revenues 8,951,256 4,989,077 22,291,770 13,417,619
------------ ------------ ------------ ------------
Net sales and service revenues 25,579,931 9,789,196 73,602,990 26,076,399
------------ ------------ ------------ ------------
Cost of commercial systems 9,690,638 -- 27,592,030 --
Cost of lodging systems 1,900,852 2,956,420 8,079,560 7,480,733
Installation and services costs 5,851,655 3,231,949 15,568,414 8,650,114
------------ ------------ ------------ ------------
Total cost of sales and service 17,443,145 6,188,369 51,240,004 16,130,847
------------ ------------ ------------ ------------
Gross profit 8,136,786 3,600,827 22,362,986 9,945,552
------------ ------------ ------------ ------------
Operating expenses:
Selling, general and administrative 4,572,857 1,370,227 11,426,276 3,592,460
Engineering, research and development 263,820 162,074 707,944 390,662
Amortization 346,200 415,502 1,316,030 1,385,550
------------ ------------ ------------ ------------
Total operating expenses 5,182,877 1,947,803 13,450,250 5,368,672
------------ ------------ ------------ ------------
Income from operations 2,953,909 1,653,024 8,912,736 4,576,880
Interest expense (672,671) -- (1,683,893) --
Interest and other income 84,656 170,192 467,019 450,541
------------ ------------ ------------ ------------
Subtotal (588,015) 170,192 (1,216,874) 450,541
Income before provision for income
taxes 2,365,894 1,823,216 7,695,862 5,027,421
Provision for income taxes 930,000 712,000 3,014,000 1,964,000
------------ ------------ ------------ ------------
Net income $ 1,435,894 $ 1,111,216 $ 4,681,862 $ 3,063,421
============ ============ ============ ============
Earnings per share
Basic $ 0.17 $ 0.14 $ 0.57 $ 0.38
============ ============ ============ ============
Diluted $ 0.15 $ 0.12 $ 0.48 $ 0.33
============ ============ ============ ============
Weighted average shares outstanding 8,380,035 7,948,668 8,285,005 8,043,378
============ ============ ============ ============
Weighted average shares equivalents 9,804,028 9,284,700 9,782,277 9,246,870
============ ============ ============ ============
</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 Paid-in Retained
Shares Par Value Shares Amount 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 $.05 par value 72,166 3,608 -- -- 182,693 --
Tax benefit of stock options -- -- -- -- 932,821 --
Change in par value of common stock -- (226,025) 226,025 --
Two-for-one stock split 4,708,868 -- 509,394 -- -- --
Stock options exercised $.001 par value 120,000 120 -- -- 29,880 --
Net Income -- -- -- -- -- 4,681,862
------------ ------------ ------------ ------------ ------------ ------------
Balance at July 31, 2000 9,537,736 $ 9,538 1,018,788 $ (2,244,659) $ 9,383,774 $ 16,533,623
============ ============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
5
<PAGE> 6
Cash Flow
XETA TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months
Ended July 31,
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 4,681,862 $ 3,063,421
------------ ------------
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation 574,179 311,940
Amortization 1,316,030 1,385,550
Gain on sale of assets (3,611) --
Provision for returns & doubtful accounts receivable 139,000 27,000
Provision for excess and obsolete inventory 200,000 --
Change in assets and liabilities. net of acquisition:
Decrease (Increase) in net investment in sales-type leases 1,011,047 (2,421,406)
Increase in trade receivables (11,557,366) (469,584)
(Increase) decrease in inventories 298,311 (1,349,164)
Increase in deferred tax asset 123,527 11,175
Increase in prepaid expenses and other assets (156,391) (222,251)
Increase in prepaid taxes (344,614) --
Increase in accounts payable 2,828,468 33,123
Increase(decrease) in unearned revenue (2,545,661) 2,602,246
Increase in accrued income taxes 932,822 6,692
Increase in accrued liabilities 99,647 236,368
Decrease in deferred tax liabilities 34,648 53,629
------------ ------------
Total adjustments (7,049,964) 205,318
------------ ------------
Net cash provided by (used in)
operating activities (2,368,102) 3,268,739
------------ ------------
Cash flows from investing activities:
Purchase of UST and ACT, net of cash acquired (26,477,656) --
Additions to capitalized software (58,550) (83,370)
Additions to property, plant & equipment (1,706,139) (1,467,268)
Adjustment to purchase price of service contracts -- 327,151
Proceeds from sale of assets 82,325 --
------------ ------------
Net cash used in
investing activities (28,160,020) (1,223,487)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of debt 26,020,432 --
Proceeds from draws on revolving line of credit 8,750,000 --
Principal payments on debt (3,066,664) --
Payments on revolving line of credit (5,600,000)
Purchase of treasury stock -- (1,158,043)
Exercise of stock options 216,301 52,676
------------ ------------
Net cash provided by (used in)
financing activities 26,320,069 (1,105,367)
------------ ------------
Net increase (decrease) in cash and cash equivalents (4,208,053) 939,885
Cash and cash equivalents, beginning of period 4,556,212 3,238,218
------------ ------------
Cash and cash equivalents, end of period $ 348,159 $ 4,178,103
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 1,455,661 $ 15,752
Cash paid during the period for income taxes $ 2,294,031 $ 1,899,810
Contingent consideration to be paid to UST shareholder $ 3,000,000 $ --
Contingent liabilities acquired in UST acquistion $ 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
July 31, 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 substantially all of
the net 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 10-K, 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. On June 26, 2000, the
shareholders approved a reduction in the par value of the common stock to $.002
per share and an increase in the number of authorized common shares to 50
million. All share and per share amounts have been restated to reflect the
effect of the two-for-one stock split on July 17, 2000. The stock split was
effected through a reduction in the par value of the common stock to $.001 per
share.
7
<PAGE> 8
(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 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 is being accounted for using the purchase method of
accounting and the associated goodwill is being amortized over 20 years. The
accompanying consolidated balance sheet as of July 31, 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 July 31,
2000.
On February 29, 2000, the Company acquired substantially 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 July 31, 2000 Nine Months Ended July 31, 2000
2000 1999 2000 1999
-------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues 25,580,000 23,202,000 82,761,000 62,837,000
Net income 1,436,000 1,246,000 5,134,000 3,602,000
Basic earnings per share $ 0.17 $ 0.15 $ 0.62 $ 0.44
Diluted earnings per share $ 0.15 $ 0.13 $ 0.52 $ 0.38
</TABLE>
8
<PAGE> 9
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 nine month periods
ending July, 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 boundary 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
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
$43 million credit facility, as expanded during the quarter, 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 an $8 million revolving line of credit. The
revolving line of credit was expanded from $5 million during the quarter.
Interest on all the funded portions of the facility accrues at either a) the
London Interbank Offered Rate (which was 6.4956% at July 31, 2000) plus 1.5% to
2.5%, as determined by the ratio of the Company's total funded debt to EBITDA
(as defined in the credit facility) or b) the bank's prime rate (which was 9.5%
at July 31, 2000) plus up to .75%, as determined by the ratio of the Company's
total funded debt to EBITDA. Commitment fees of .20% to .45% (based on certain
financial ratios) are due on any unused borrowing capacity under the credit
facility. 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 July 31, 2000, the Company had $4.85 million available
under the revolving line of credit.
(4) INVENTORIES
The following are the components of inventories:
<TABLE>
<CAPTION>
July 21, October 31,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
Raw materials $ 1,247,050 $ 1,268,635
Finished goods and spare parts 9,188,100 3,285,841
------------ ------------
10,435,150 4,554,476
Less reserve for excess and
obsolete inventory (1,015,876) (821,170)
------------ ------------
$ 9,419,274 $ 3,733,306
============ ============
</TABLE>
9
<PAGE> 10
(5) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
July 31, October 31,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
Data processing & computer field equipment $ 3,559,437 $ 1,694,056
Building 2,688,145 2,397,954
Land 611,582 611,582
Office furniture 1,233,323 486,535
Autos and Trucks 493,002 9,486
Other 522,543 308,726
------------ ------------
9,108,032 5,508,339
Less accumulated depreciation (3,000,558) (1,565,799)
------------ ------------
$ 6,107,474 $ 3,942,540
============ ============
</TABLE>
(6) UNEARNED INCOME
Unearned income consists of the following:
<TABLE>
<CAPTION>
July 31, October 31,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
Service contracts $ 1,887,946 $ 1,575,385
Warranty service 1,088,109 1,363,187
Systems shipped, but not installed 623,533 123,729
Rebates due from vendors 453,682 --
Customer deposits 313,023 1,349,405
Other deferred revenue 134,295 128,842
------------ ------------
Total current deferred revenue 4,500,588 4,540,548
Noncurrent unearned service revenues 1,286,821 1,953,222
------------ ------------
$ 5,787,409 $ 6,493,770
============ ============
</TABLE>
10
<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>
July 31, October 31,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
Deferred tax assets:
Nondeductible reserves $ 1,278,677 $ 423,069
Prepaid service contracts 375,768 503,983
Unamortized cost of service contracts 43,825 102,094
Other 29,223 33,124
------------ ------------
Total deferred tax asset 1,727,493 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 210,105 220,798
Unamortized cost of long distance and
Service contracts -- 66,320
Other 78,066 --
------------ ------------
Total deferred tax liability 1,040,772 1,089,699
------------ ------------
Net deferred tax asset (liability) $ 686,721 $ (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.
11
<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 July 31, 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 July 31,
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 July 31, 2000. For the quarter ending July 31, 2000, the
Company reported net income of $1.436 million or $.15 per share (diluted)
compared to net income of $1.111 million or $.12 per share (diluted) for the
third quarter of fiscal 1999, a 29% increase. Net income for the nine months
ended July 31, 2000 was $4.682 million or $.48 per share (diluted) compared to
net income of $3.063 million or $.33 per share for the first nine months of
fiscal 1999, a 53% increase. Note that all share and per share amounts have been
restated to reflect the two-for-one stock split on July 17, 2000.
In mid-1999, the Company announced an aggressive growth strategy to expand
beyond its traditional boundary of the lodging industry to become a nationwide
provider of voice and data communications products. This growth strategy is
being pursued through selective acquisitions and internal growth. During fiscal
2000, the Company has completed two acquisitions in pursuit of this strategy. On
November 30, 1999, the Company acquired 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. It is likely that growth targets associated with
the $2 million portion of the hold-back will be satisfied by the end of the
fiscal year and therefore that portion of the hold-back will likely be released.
On February 29, 2000, the Company acquired substantially all of the net assets
of Advanced Communication Technologies, Inc. ("ACT") for book value plus
$250,000. At closing, the Company paid $3 million for the estimated book value
of the net assets as of January 31, 2000. A final true-up of the purchase price
based on the final book value of the net assets purchased as of February 29,
2000 is pending. Financing for these acquisitions was provided through a credit
facility established with the Company's bank, which is more fully described
under "Financial Condition" below. The Company's relationship with its bank is
strong and management believes that additional senior debt capacity is available
to fund future acquisitions beyond the amount available in the current facility.
13
<PAGE> 14
In conjunction with its new focus as a voice and data integrator and the
acquisitions, the Company changed its name to XETA Technologies, Inc.
Also, in February, 2000, 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. In August, the Company and Darwin announced they had been
selected to provide call accounting and in-room high-speed Internet access
systems in 102 Lodgian, Inc. hotels. Installation of these systems has not been
scheduled and significant revenues from this contract are not expected until
fiscal 2001.
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 10-Q. Except for the historical information contained herein, the
matters discussed in this quarterly report on Form 10-Q 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,and are generally identified by such words as "expects,"
"plans," "believes," "anticipates" and similar words or expressions. 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 10-K, 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 $4.208
million consisting of cash used by operations of $2.368 million, cash provided
by financing activities of $26.320 million and cash used in investing activities
of $28.160 million.
Concurrent with the acquisition of UST, the Company established a new credit
facility with its bank. During the most recent quarter, the Company expanded the
facility from $40 million to $43 million by increasing the amount available on
the revolving line of credit. The credit facility now 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 net assets), and an $8 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.
14
<PAGE> 15
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, product and service mix, installation and service capabilities, and
geographic reach. The purchase of some targets or the cumulative effect of
purchasing several targets could require additional capital in excess of the
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, private placements of either debt or equity
instruments, and combinations of all of the above.
15
<PAGE> 16
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 equipment to the commercial market, sales of systems to
the lodging market and installation and service activities derived from both
markets.
Commercial Equipment Sales. Sales of equipment to the commercial market (defined
as sales to non-lodging customers) were $13.638 million during the third quarter
and $38.610 million since the acquisition of UST, or 8 months. The two primary
commercial markets are small-of-large locations of Fortune 1000 companies and
the next 10,000 largest enterprises. Approximately 40% of the Company's
commercial equipment sales 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, Company account executives work with Lucent National Account
Managers ("NAM's") and Global Account Managers ("GAM's") to jointly serve Lucent
customers. The Company 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) primarily focuses on the enterprise market, generating approximately 80% of
its revenues from this segment. The Company intends to grow both target markets
through a balanced strategy of internal expansion and acquisitions of additional
dealers.
Lodging Systems Sales. Sales of lodging systems decreased $1.8 million or 38% in
the third quarter of fiscal 2000 compared to the third quarter of fiscal 1999.
This decrease resulted from decreases in both the sales of lodging PBX systems
(29%) and call accounting systems (58%). For the first nine months of fiscal
2000, total lodging systems sales were relatively flat, increasing $42,000.
These results reflect an increase in sales of lodging PBX systems of $1.990
million or 23which is a considerably smaller increase than in the first two
quarters of this fiscal year, decreases in sales of call accounting systems of
$1.6 million or 46%, and decreases in revenues earned from long distance
services of $342,000 or 64%. The year-to-date 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 Lucentproduct
offering to the lodging sector. Overall, however, the Company has faced more
difficult conditions in the marketing and sales of its products to the lodging
sector this fiscal year, especially in contrast to the unusual sales activity in
fiscal 1999 which was inflated in large part due to the desire by many customers
to upgrade or replace their PBX systems prior to end of calendar year 1999 in
preparation for the Year 2000. As expected, following this surge in orders for
both PBX systems and the Company's Virtual XL(TM) call accounting systems, the
lodging industry has returned to its more traditional purchasing practices.
16
<PAGE> 17
In addition, the capital available to the lodging industry for new construction,
remodeling, and investments in technology in 2000 has shrunk considerably,
resulting in extended sales cycles and fierce competition. Management believes
that this atmosphere will continue for the foreseeable future; however, the
Company plans to continue to aggressively pursue the opportunities available for
sales of call accounting products related to high-speed internet services to
hotels and will continue marketing of its PBX product and service. Revenues
earned from the Company's long distance service offering have declined
throughout fiscal 2000 and will continue to do so. 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.
Installation and Service Revenues. Installation and service revenues increased
$3.962 million or 79% in the third quarter of fiscal 2000 compared to the third
quarter of fiscal 1999 and increased $8.874 million or 66% for the year to date
period. For the third quarter, $523,000 of the increase was from lodging
division related activities, representing a 10% increase. The remainder of the
increase in the quarter, $3.439 million, was earned from the Company's recently
acquired commercial operations. For the year to date period, approximately
$2.177 million of the increase was generated by the lodging division with the
remaining $6.697 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 as the Company
continues to enjoy an increase in customers retained under maintenance
agreements. Part of the Company's strategy for entering the Commercial market is
to leverage its nationwide network of technicians to build a base of customers
under maintenance contracts providing recurring revenues. Management intends to
embark on this strategy in fiscal 2001 by marketing a proprietary maintenance
offering to its target base of mid-sized ("Enterprise") firms.
Gross Margins. Total gross margins earned during the third quarter of fiscal
2000 were 32% compared to 37% in the third quarter of fiscal 1999 and were 30%
for the year to date period in fiscal 2000 compared to 38% 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.
17
<PAGE> 18
Gross margins earned on commercial equipment sales were 29% in the third quarter
and were 29% for the nine months ending July 31, 2000. Although slightly below
the historical gross margins earned by UST and ACT, the margins earned in the
third quarter are generally in line with expectations based on current product
mix. As part of its overall strategy, the Company plans to add more complex
software applications and professional consulting services to its Commercial
product mix to augment margins.
Gross margins earned on lodging systems sales were 36% in the third quarter and
36% for the first nine months of fiscal 2000 compared to 38% and 41%,
respectively, for the same periods in fiscal 1999. This decline in year-to-date
margins 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.
Gross margins earned on installation and maintenance activities were 35% in the
third quarter and 30% for the first nine 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, the increase in
installation and service margins earned in the third quarter as compared to the
first two quarters of this fiscal year are the result of specific actions taken
by the Company to bring the margins earned on Commercial installation and
service activities in line with service margins earned in the lodging segment.
Specifically, management has or is in the process of implementing the following
initiatives: First, the Company is shifting the installation of commercial
systems from a third-party model to an in-house model. The Company continues to
scale up its technician capacity to be able to install Commercial systems on a
national basis. As part of this process, the Company is implementing 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. The margins earned
in the third quarter are at the top end of management's expectations for gross
margins on this revenue stream. In addition to the improvements made in the
margins earned on Commercial service related activities, the margins earned on
lodging service activities were assisted during the quarter by two unusually
large, emergency service projects. Therefore, no assurance can be given that
these margins will be sustained in the immediate future. However, management
does expect gross margins of 32% to 35% to be earned on these revenues as
implementation of the initiatives discussed above mature.
Operating Expenses. Excluding amortization expense, operating expenses were
18.9% of total revenues in the third quarter compared to 15.7% in the same
period of fiscal 1999. For the first nine months of fiscal 2000, operating
expenses, excluding amortization, were 16.5% of total revenues compared to 15.3%
for the same period in fiscal 1999. The year-to-date operating expense levels
are satisfactory to management given the rapid growth of the Company
18
<PAGE> 19
and the complexity of its operations compared to a year ago. However, the level
of operating expenses as a percent of sales in the third quarter is beyond the
target range that management has set during the rapid expansion of its business.
Management believes that selling expenses grew faster than revenues in the third
quarter due largely to lower sales production primarily related to slowdowns in
the lodging and government markets. 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 decreased $86,000 in the
third quarter compared to the same period a year ago and increased $16,000 in
the first nine months of fiscal 2000 compared to the same period in fiscal 1999.
The decrease in other income earned in the third quarter reflects a small
adjustment of commission income earned on the sale of certain third party
maintenance contracts. The Company earns interest income primarily on Xetaplan
sales-type lease receivables.
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 Margins. Net income as a percent of sales was 5.6% in the third
quarter and 6.4% for the first nine months of fiscal 2000 compared to 11.3% and
11.7%, 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. In general, the lower operating margins were
expected by management and reflect the additional interest and amortization
expense the Company has incurred to pursue this strategy. In the near term, as
management repositions the Company to take
19
<PAGE> 20
advantage of these trends in the commercial market, management expects the
Company's after tax operating margins to range between 6%-8%. However, the
operating margins earned in the third quarter were lower than expected due to
softness in the lodging and government sectors of the Company's business and
higher selling expenses as discussed above.
OUTLOOK AND RISK FACTORS
This report on Form 10Q includes "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of historical facts included in this announcement regarding the
Company's financial position, business strategy, plans and objectives of
management of the Company for future operations, and industry conditions, are
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to be correct. 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, 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 be finalized in September, 2000. and the new
company, named Avaya, has been operated by a new management team since the
announcement of the divestiture. Avaya is the product source for the Company's
PBX products sold through the commercial channel and partially through the
lodging channel. The Company has received assurances from Avaya management that
significant resources will be spent to establish the Avaya brand name in the
marketplace and that there will be no significant changes in their distribution
strategy. However, should the divestiture cause a disruption in the
manufacturing, development or marketing of Avaya products, such disruption would
likely have a material, adverse affect on the Company's business.
Dependence Upon Avaya "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 Avaya's NAM's
and GAM's. Under this program, the Company sells and installs Avaya equipment to
large Avaya customers under sales agreements negotiated by the NAM or GAM. The
Company is typically engaged by Avaya because it can meet the customer's need
for fast delivery and installation. Currently, the Avaya NAM's and GAM's receive
identical compensation from Avaya regardless of whether their orders are
fulfilled by Avaya's direct installation team or by a dealer such as the
Company. While no assurance can be given, if Avaya were to alter their NAM and
GAM compensation program to favor using Avaya's direct provisioning and
installation teams, the Company would likely suffer material, adverse operating
results. Also, Avaya, like many major manufacturers provides various incentive
programs to support the advertising and sale of its
20
<PAGE> 21
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.
Competitive Pressure from New Market Entrants. Earlier in the year, Lucent sold
its Small Business Division to Expanets, a "partner entity" of Northwest
Corporation. As a result of the sale, Expanets became the largest dealer of
Lucent telecommunications products in the United States, a position previously
held by the Company. While the Company and Expanets primarily target different
segments of the market, there is some overlap at the lower end of the Enterprise
market. This increased competition from a significantly larger and financially
stronger competitor could negatively impact the Company's sales and gross
margins.
Attracting and Retaining Talented Employees. As the Company continues to
transform itself from a small, niche player selling proprietary equipment and
distributed PBX systems to the lodging market into a premier, nationwide voice
and data integrator specializing in complex, networked solutions, the need for
talented and well-trained employees is critical. Currently, the market is highly
competitive for the technically trained and product certified individuals needed
to design, install and maintain the voice and data networks that will become the
Company's primary product line over time, and the compensation for such
individuals is rising much faster than general wages. Management believes that
by providing opportunities at the leading edge of this technology and through
appropriate compensation programs that provide both current income and long-term
equity-based compensation, the Company can attract and retain the needed
competencies for its growth plans. Should overall stock market conditions or the
Company's operating performance result in a depressed market for the Company's
common stock, those equity-based programs would likely not provide sufficient
additional compensation to key employees. In those circumstances, it is likely
that wages would have to be increased, thereby lowering the expected gross
margins on installation and service revenues as well as overall operating
margins.
Stock Market Volatility. The Company's stock is subject to extreme price and
volume trading volatility. This volatility is sometimes tied to overall market
conditions and may or may not reflect the operating performance of the Company.
These fluctuations could adversely affect the market price of the Company's
common stock.
Hotel Industry. While the overall U.S. economy remains strong, the hotel
industry has lost some appeal to the capital markets compared to recent years.
As a result, less capital is available to hotel operators for new construction,
remodeling and investments in new technology. As a result, the Company has seen
a return of longer sales cycles that had characterized the Company's experience
with the industry prior to the last two years.
21
<PAGE> 22
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 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 third 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. The Company has a
$43 million credit facility in place (see Note 3 to the Consolidated Financial
Statements for details of the Company's long-term debt) to finance the expansion
of its business pursuant to its balanced growth strategy of internal expansion
and selective acquisitions. 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.
22
<PAGE> 23
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
ASSOCIATED BUSINESS TELEPHONE SYSTEMS, INC., PLAINTIFF VS. XETA CORPORATION,
DEFENDANT AND THIRD-PARTY PLAINTIFF, VS. D&P INVESTMENTS, INC., THIRD-PARTY
DEFENDANT - On August 30, 2000, the Court entered an order denying a motion by
ABTS to strike certain damage claims by the Company; granting the Company an
award of attorneys fees and costs in the amount of $36,575.91 as sanctions
against ABTS for expenses incurred in conducting discovery relating to ABTS'
claim for damages; and granting the Company the right to amend its counterclaims
to add as additional parties certain principals of ABTS, individuals and
affiliated companies to the lawsuit. On September 6, 2000, ABTS filed an appeal
of the Court's order. A complete description of the subject matter of this
lawsuit is contained in the Company's Annual Report on Form 10-K for the 1999
fiscal year, filed with the Commission on January 28, 2000, Commission File No.
0-16231.
During the fiscal quarter for which this report is filed, there were no material
developments of which the Company is aware in the PHONOMETRICS' litigation,
which the Company is monitoring. 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, 1999 filed with the Commission on January 28, 2000.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On June 1, 2000, pursuant to the terms of a Stock Purchase Option which
was previously granted by the Company upon the hiring of its current President
as part of such individual's executive compensation package, the Company sold
10,000 shares of its Common Stock upon exercise by such individual of a portion
of the option. The shares were sold for $11.25 per share, the exercise price of
the option. The shares, which were not registered with the Commission, were sold
in reliance upon the exemption from registration provided by Section 4(2) of the
Securities Act of 1933, as amended, in that the sale was made pursuant to a
privately negotiated transaction with one individual and did not involve a
general offering to the public; and the purchaser purchased the shares for
investment purposes only and not with a view toward the distribution thereof.
ITEM 3 has been omitted because it is 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 a
special meeting of shareholders on June 26, 2000, at which the following two
matters were submitted to a vote of the shareholders and approved.
The first matter was an amendment to the Company's Amended and Restated
Certificate of Incorporation, to increase the authorized shares of Common Stock
to 50,000,000 and to change the par value of the Common Stock to $0.002 per
share. This proposal passed by a vote of 3,284,581 shares For, 169,635 shares
Against, and 5,274 shares Abstaining.
The second matter, which was contingent upon approval of the first
matter, was also an amendment to the Company's Amended and Restated Certificate
of Incorporation to further reduce the par value of the
<PAGE> 24
Common Stock to $0.001 per share in order to effect a two-for-one forward stock
split for shareholders of record on June 30, 2000, as previously declared by the
Board of Directors subject to shareholder approval of this amendment. This
proposal passed by a vote of 3,430,603 shares For, 25,955 shares Against, and
2,932 shares Abstaining.
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, 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 CORPORATION
(Registrant)
Dated: September 13, 2000 By: /s/ JACK R. INGRAM
-----------------------------------
Jack R. Ingram
Chief Executive Officer
Dated: September 13, 2000 By: /s/ ROBERT B. WAGNER
-----------------------------------
Robert B. Wagner
Chief Financial Officer
<PAGE> 25
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
(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, Reg. No.
33-62173, filed on June 28, 2000.
(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.
</TABLE>
<PAGE> 26
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
(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 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 - 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).
</TABLE>
<PAGE> 27
<TABLE>
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EXHIBIT
NUMBER DESCRIPTION
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<S> <C>
*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 - 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).
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.
*10.11 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).
(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
23.1 Consent of Arthur Andersen LLP
(24) POWER OF ATTORNEY - None.
(27) FINANCIAL DATA SCHEDULE
(99) ADDITIONAL EXHIBITS - None.
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* Previously filed.
