-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DWd++lsrLM/0AMkZgfTuhZU/vOKQapnU+toTwbpSSCKhG5/Y4JcEC6xBV7KbIAGk 0RclmlJWBzZh7NjJi8RILw== 0000950134-01-000555.txt : 20010130 0000950134-01-000555.hdr.sgml : 20010130 ACCESSION NUMBER: 0000950134-01-000555 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20001031 FILED AS OF DATE: 20010129 FILER: COMPANY DATA: COMPANY CONFORMED NAME: XETA TECHNOLOGIES INC CENTRAL INDEX KEY: 0000742550 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 731130045 STATE OF INCORPORATION: OK FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-16231 FILM NUMBER: 1518139 BUSINESS ADDRESS: STREET 1: 1814 WEST TACOMA CITY: BROKEN ARROW STATE: OK ZIP: 74012 BUSINESS PHONE: 9186648200 MAIL ADDRESS: STREET 1: 1814 WEST TACOMA CITY: BROKEN ARROW STATE: OK ZIP: 74012 FORMER COMPANY: FORMER CONFORMED NAME: XETA CORP DATE OF NAME CHANGE: 19920703 10-K 1 d83418e10-k.txt FORM 10-K FOR FISCAL YEAR END OCTOBER 31, 2000 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended October 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-16231 XETA Technologies, Inc. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Oklahoma 73-1130045 - ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1814 West Tacoma, Broken Arrow, Oklahoma 74012 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number including area code: (918) 664-8200 ----------------------------- Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 par value - -------------------------------------------------------------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of December 31, 2000 (based upon the average bid and asked prices of such shares) was approximately $68,529,227. The number of shares outstanding of the registrant's Common Stock as of December 31, 2000 was 8,673,288 (excluding 1,018,788 treasury shares). Exhibit Index appears at Page 25. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement to be filed with the Securities and Exchange Commission in connection with the Annual Meeting of Shareholders to be held March 20, 2001 are incorporated into Part III, Items 11 through 13 hereof. 2 PART I ITEM 1. BUSINESS DEVELOPMENT AND DESCRIPTION OF BUSINESS XETA Technologies, Inc. (the "Company"), formerly XETA Corporation, an Oklahoma corporation formed in 1981, is a leading integrator of voice and data technologies. Fiscal 2000 represented the first year in the Company's announced three-year plan to expand beyond its traditional focus in the hospitality industry. This expansion is being fueled by changes in technology which will ultimately lead to the convergence of voice and data networking systems onto a single platform. The Company's expansion strategy includes a balanced approach of organic growth and acquisitions to: 1) establish a nation-wide commercial customer "beachhead" to deliver traditional telephony applications, 2) add complex convergence applications such as call centers, unified messaging and telephony over IP (including VoIP, or voice-over-Internet Protocol); and 3) introduce professional and consulting services. Reflecting that strategy, during fiscal 2000 the Company made two acquisitions of companies, both of which specialized in traditional voice systems with some experience in data applications. Subsequent to the close of the fiscal year, the Company acquired two more firms which bring voice and data integration capabilities to the Company. On November 30, 1999, the Company purchased 100% of the common stock of U.S. Technologies Systems, Inc. ("USTI"), then the largest dealer of Avaya Inc. ("Avaya", formerly Lucent Technologies) products in the United States. The USTI acquisition instantly gave the Company a strong sales presence in the Midwest and West, although USTI sold systems throughout the United States. On February 29, 2000, the Company purchased the assets of Advanced Communication Technologies, Inc. ("ACT"), also an Avaya dealer. ACT's operations consisted of both sales and services and were focused primarily in the Pacific Northwest. During the year, the Company established sales offices in Connecticut, serving the New York City area; Tampa, serving the Florida market; Dallas, serving north Texas; and Washington DC, serving the mid-Atlantic area. The combination of the acquisitions and internal growth largely completed the Company's first objective of creating a national presence in the voice market. On November 1, 2000, the Company made two additional acquisitions to begin its expansion into converged products and professional services. The Company purchased substantially all of the assets of PRO Networks Corporation, a Missouri-based company operating primarily in the Midwest and specializing in the sale, installation and service of data networking equipment, including Cisco's data products and virtual private networking solution as well as Avaya's data products. Simultaneously, the Company also purchased the assets of a professional services firm, Key Metrology Integration, Inc. ("KMI"). Most of KMI's employees are Microsoft Certified Systems Engineers ("MCSEs"). The Company expects to use KMI as its starting point to provide high-end LAN/WAN consulting services and unified messaging solutions. KMI's current customer base is primarily in the Pacific Northwest, but the Company plans to add consultants in major markets throughout the nation. Each of the foregoing acquisitions were funded with bank debt from a credit facility established simultaneously with the closing of the USTI transaction (see "MD&A--Liquidity and Capital Resources" for a description of this credit facility). Other developments during the year include changing the Company's name to XETA Technologies, Inc. and a two-for-one stock split. The name change was made to reflect the Company's vision to become the nation's premier voice and data integrator. On June 26, 2000, the Company reduced the par value of its common stock to $.002 and increased the authorized shares to 50 million. On June 30, 2000, the Company effected a two-for-one stock split by reducing the par value on its common stock to $.001. All share amounts reflected in this report have been restated accordingly to give effect to the stock split. The number of issued and outstanding shares (excluding treasury shares) at October 31, 2000 was 8,643,948. 2 3 COMMERCIAL PRODUCTS The Company sells Avaya telecommunications and converged products to commercial customers. The Company sells a wide range of communications servers offered by Avaya, including DEFINITY(R) Systems, MERLIN MAGIX(TM) Advanced Solutions systems and the PARTNER(R) Communications systems products. The Company also sells Avaya's INTUITY(TM) voice mail systems. Each of the products listed above have various models available depending on the feature set and size of the customer's application. In addition to selling Avaya systems, the Company enjoys a strong business selling aftermarket components such as additional phone sets, headsets, circuit packs, etc. In fiscal 2001, the Company will be selling Avaya's recently introduced new IP product line, named ECLIPS (Enterprise Class IP Solutions). The ECLIPS product line provides customers with the ability to carry voice traffic over an IP network. The ECLIPS line provides all of the features of existing communications servers while taking advantage of the cost savings to be attained by installing and maintaining one integrated network carrying both voice and data traffic. For current users of the DEFINITY(R) system, ECLIPS provides a migration path from a traditional to a converged network without having to discard an expensive capital investment. HOSPITALITY PRODUCTS Communications Systems. The Company distributes Avaya's GuestWorks(R) Systems and Hitachi's 5000(R) Series Digital Communications Systems to the hospitality industry under nationwide, non-exclusive dealer agreements with both vendors. Both of these systems are equipped with lodging specific software which integrates with nearly all aspects of the hotel's operations. The Company also offers a variety of related products such as voice mail systems, analog telephones, uninterruptible power supplies, announcement systems, etc., most of which also have some lodging specific software features. Most of these products are sold in conjunction with the sale of new communications systems and, with the exception of voice mail systems, are purchased from regional and national suppliers. Sales of communications systems to the lodging industry represented 13%, 35%, and 36% of total revenues in fiscal 2000, 1999, and 1998, respectively. Call Accounting Products. The Company markets a line of proprietary call accounting systems under the name Virtual XL(R) Series ("VXL"). Call accounting systems act as a strategic link between a hotel's communications system and its guest billing system to enable the hotel to earn revenues from guest calls. These systems capture certain telephone usage information; use that information to calculate call charges, markup and taxes; and then transmit the charges to the hotel's guest billing system. Introduced in 1998, the VXL is a PC-based system designed to operate on a hotel's local or wide area network, and if that network is connected to the Internet, the VXL can also be accessed via an Internet connection. The VXL systems are the Company's latest technology in a series of call accounting products the Company has successfully marketed since its inception. Many of the Company's earlier products remain in the field and are supported by the Company's service and technical staff. The Company also markets a proprietary answer confirmation product under the name XPERT(R). The XPERT(R) system operates on the same platform as the VXL system, but its function is to compliment the VXL by minimizing guest charges for unanswered calls and allowing hotels to charge for answered calls of short duration which would otherwise be treated as unanswered and therefore not billed. Most call accounting systems, including the Company's systems, record and bill guests for calls which exceed a designated duration. The Company's XPERT(R) systems provide confirmation of the status of the call by monitoring trunk voltages associated with outgoing calls, thereby improving the accuracy of the hotel's guest billings and reducing guest complaints for improper charges. Long Distance Services. The Company markets a variety of long distance services to hospitality customers under a joint marketing agreement with Americom Communications Services, Inc. Most of the contracts to provide long distance services began expiring over a 15-month period beginning in April of 2000 and are not being renewed. As a result, revenues from these services have continued to decline throughout fiscal 2000. 3 4 INSTALLATION AND SERVICES. Historically, the installation and continued maintenance of the Company's lodging products have been the cornerstone of the Company's success. The lodging industry is a 24 hour-per-day, demanding environment in which any significant problem with the communications equipment can quickly rise to crises status. In response, the Company built extensive remote servicing capabilities into its proprietary systems and also built a nation-wide network of Company and third party technicians. The remote service capabilities have been a critical element of the Company's products since its inception and they enable technicians at the Company's Service Center to quickly and cost effectively diagnose, and in most instances, correct system malfunctions without the need of an on-site service call. The national network of technicians has enabled the Company to cost effectively install systems and perform on-site service with a consistent quality of service. For its proprietary systems, the Company provides a one-year limited warranty, generally from the date of installation. After the warranty period, service for these products is available under service agreements that provide varying levels of service based on the customer's needs. The majority of the Company's customers purchase service agreements for the Company's proprietary products. Since the Company began selling communications systems to the lodging industry in 1994, it has sold the systems with the manufacturer's warranty or with its own one-year warranty against defects in the equipment. Labor costs associated with fulfilling the warranty requirements are generally borne by the Company. Subsequent to the warranty period, the Company offers a unique, hotel-oriented service plan. This plan includes parts and labor coverage on the communications system plus a XETA call accounting system as well as other service options designed to meet the specific needs of each customer. If the Company is to be successful in its strategy to expand to become a nation-wide integrator of voice and data systems focusing on complex applications, the installation and maintenance of those systems will be a critical factor. Prior to its acquisition by the Company, USTI outsourced most of the installations of the systems it sold. One of the synergistic aspects of the Company's acquisition of USTI was the possibility of using the Company's existing service infrastructure to perform installations of commercial systems and therefore enhance operating margins. During fiscal 2000, the Company has worked to train its existing technicians on the Avaya commercial systems product line and has rapidly expanded its technician base to be able to in-source the installation of as many of the systems sold as possible. The operating model used in the Pacific Northwest operations, which was acquired in the ACT purchase, was similar to the Company's historical model in which they installed and maintained most of systems they sold. During fiscal 2001, the Company will expand its service offering to the commercial market to include maintenance contracts and time and materials services. The goal of this effort is to capture a significant source of recurring revenues in the commercial market similar to that enjoyed by the Company in the lodging market. NETWORKING PRODUCTS AND PROFESSIONAL SERVICES. With the acquisition of PRO Networks and KMI, the Company acquired new competencies in Microsoft Exchange, data products, and IP telephony. The Company expects to use these new capabilities to expand into consulting for local area networks (LAN), wide area networks (WAN), and unified messaging (UM) networks. This consulting will include architecting, designing, implementing and monitoring these networks. In addition, the Company expects to expand into the design, implementation and support of data networks including virtual private networks using voice over IP technology. SOFTWARE AND PRODUCT DEVELOPMENT. For the past several years, the Company's development efforts have been devoted to the XPANDER(R) system, a product designed as a more cost effective way to expand the capacity of a hotel's communications system. The desire to expand these systems is being driven by guest demand to have second line access in their hotel rooms to make and receive voice calls while at the same time being hooked up to a public or private data network. A by-product of the Company's work on XPANDER(R) was the Virtual XL(R) system which has become the Company's flagship call accounting product. Sales of the XPANDER(R) system, however, have been weak as most hotels have chosen to add additional lines in their rooms by increasing the size of their communications systems. Much of this expansion occurred as hotels upgraded their systems during the Y2K upgrade cycle. Due to the lack of demand for XPANDER(R) systems, the Company significantly decreased its spending on development of the system. Most of the personnel related to the Company's development efforts have been redeployed into supporting the technology infrastructure. 4 5 MARKETING The Company markets its products and services to the commercial market through its direct sales force and through "partnering" relationships with Avaya's direct sales force. The Company targets large and mid-sized companies as its primary market. Most of its relationships with larger, "Fortune 500" firms are the result of the Company's partnering with Avaya while relationships with mid-sized, "Enterprise" customers are generally direct relationships of the Company. Under the partnering arrangements with Avaya, the Company's account executives work with Avaya National Account Managers ("NAM's") and Global Account Managers ("GAM's") to jointly meet customers' needs. The Company offers a wide variety of value-added services for the NAM's and GAM's to utilize, such as nationwide project management capabilities and skills in emerging product applications such as Customer Relationship Management, Unified Messaging, and Voice over IP. The Company's efforts to sell systems to Enterprise customers is a major area of focus in fiscal 2001 as the Company strives to build its own base of customers that it can expose to the Company's full range of products and services. The Company expects to increase the number of its account executives and support staff during fiscal 2001 as it expands its regional coverage and reaches further into the Enterprise market. In addition to hiring additional staff, the Company invests heavily in training of its sales force and promotions of its brands and products. In marketing its products and services to the hospitality industry, the Company relies heavily on its experience and reputation in the industry to build long-term relationships with the wide range of personnel that can be the key decision makers for the purchase of hotel telecommunications equipment. These decision makers range from corporate hotel chain personnel, to property management officials, industry consultants, hotel owners, and on-site financial or operating officers. The Company has relationships with nearly all hotel chains and major property management companies. These relationships are one of the keys to the Company's past and future success. Typically, the Company focuses its marketing expenditures on efforts to continue to strengthen these relationships rather than broad promotional efforts that are employed in the commercial market. However, the Company does offer a variety of sales programs to the lodging industry, the most significant of which is the XETAPLAN program. Under the XETAPLAN program, customers are provided one of the Company's call accounting products for a period of three to five years in exchange for a monthly fee paid to the Company. Service on the products is also included in the contract. For communications systems it sells to the lodging industry, the Company offers a package of value-added services including a call accounting system and a service package with a specified number of free labor hours and weekly appointments with certified technicians to correct minor malfunctions or to perform routine maintenance. The Company does not anticipate expanding its hospitality-market sales force in fiscal 2001. MAJOR CUSTOMERS During fiscal 2000, the Company did not have any single customer that comprised more than 10% of its revenues. COMPETITION Commercial. Competition in the commercial market is intense at all levels from other Avaya dealers and Avaya direct to other manufacturers and their respective distribution channels. Management believes that ultimately its integrated business model, implemented on a nation-wide basis and targeted at complex applications for multi-location customers will be a differentiated strategy that will set the Company apart from its competitors and will ultimately provide higher operating profits and growth rates than the market average. This integrated business model contains four key elements: 1) traditional product offerings (voice and data systems, messaging servers, aftermarket components), 2) traditional services (maintenance, installation, time and materials services), 3) network consulting (architecture, design, integration, and project management), and 4) emerging applications (voice over IP telephony, unified messaging, call centers, and virtual private networks). By having all the pieces in the model, the Company is able to prospect for customers on a variety of fronts, address the customer's current needs, and then gain further penetration into the customer by exposing the customer to other products and services in the model. The Company believes that technology changes that are currently underway are significantly changing the distribution channels of the major manufacturers, including Avaya. These technology changes 5 6 are requiring that channels invest heavily in training of sales and technical personnel. In addition, a national presence is of greater importance than ever before as more and more enterprise customers have multiple locations across the U.S. Hospitality. The Company believes that its most effective weapon in competing in the hospitality market is its commitment to differentiate itself by concentrating on the performance and reliability of its systems and by providing the highest level of service possible. Competition in this market is fierce and competitors range from large, well-known, well-financed companies to small, regional or local distributors, many of whom do not concentrate on the hospitality market but are simply located near the prospective customer. While the Company believes that its reputation and nation-wide presence contribute significantly to its success, there can be no assurance given that the Company will be able to continue to expand its market share in the future. MANUFACTURING The Company assembles all of its proprietary products, which include the Virtual XL(R), XPERT(R) and XPANDER(R) systems, from an inventory of components, parts and sub-assemblies obtained from various suppliers. These components are purchased from a variety of regional and national distributors at prices which fluctuate based on demand and volumes purchased. Some components, although widely distributed, are manufactured by a single, usually foreign, source and are therefore subject to shortages and price fluctuations if manufacturing is interrupted. The Company maintains adequate inventories of components to mitigate short-term shortages and believes the ultimate risk of long-term shortages is minimal. The Company's proprietary products are based on PC technology, which is continually and rapidly changing. As a result, some of the components originally designed for use in the Company's systems have been phased out of production and replaced by more advanced technology. To date, these substitutions have not forced the Company to substantially redesign its systems and there has been minimal effect on the overall system cost. There can be no assurance given, however, that future obsolescence of key components would not result in unanticipated delays in shipments of systems due to redesign and testing of assemblies. The Company uses outside contractors to assemble its proprietary printed circuit boards. The components and blank circuit boards are purchased and inventoried by the Company and supplied to the outside contractor for assembly and quality control testing. The Company performs various quality control procedures, including powering up completed systems and allowing them to "burn-in" before being assembled into a final unit for a specific customer location, and performing final testing prior to shipment. EMPLOYEES At December 31, 2000, the Company employed 400 employees, including 2 part-time employees. COPYRIGHTS, PATENTS AND TRADEMARKS The Company has never applied for patent protection on its hardware or software technology with the exception of the technology for XPANDER(R), for which the Company has a patent pending. The Company claims copyrights on all of its proprietary circuit boards and software. While the Company believes that the ownership of patents, copyrights and registered trademarks is less significant to its success than its proprietary technology, quality and type of service and technical expertise, the Company recognizes that its reputation for quality products and services gives value to its product names. Therefore, the Company has registered as United States domestic trademarks the names "XETA," "XETAXCEL," "XACT," "XPERT," "XPERT+," "XL," "XPANDER," and "Virtual XL" for use in the marketing of its services and systems. All of these marks are registered on the principal register of the United States Patent and Trademark Office ("PTO"), with the exception of XPANDER(R) which is registered on the supplemental register. 6 7 GOVERNMENT REGULATION The Federal Communications Commission (the "FCC") and state governments regulate the telecommunications industry. None of the Company's business activities, however, are directly regulated by the FCC or the states. None of the Company's products or services require approval from any governmental agency. The Company's computer products are subject to radio frequency emanation and electrical safety standards imposed by the FCC. The cost of complying with such standards, as well as with any applicable environmental laws, is immaterial. ITEM 2. PROPERTIES The Company's principal executive office and Service Center are located in a 37,000 square foot, Company-owned, single story building located in a suburban business park near Tulsa, Oklahoma. This facility also houses the Company's warehouse and assembly areas to support its hospitality sales channel. The building is located on a 13-acre tract of land. The property is subject to a mortgage held by Bank One, Oklahoma, NA, to secure the Company's credit facility. The Company's commercial channel operations are located in leased facilities in St. Louis, MO, Portland, OR, and Seattle, WA. In addition to warehouses, these facilities house sales staff and management, accounting, purchasing, repair, warehousing, and installation support personnel. The Company leases other office space throughout the U.S. for sales and technical staff. Additionally, the Company has informal office arrangements with its regional technicians to allow for some storage of spare parts. ITEM 3. LEGAL PROCEEDINGS The matter of ASSOCIATED BUSINESS TELEPHONE SYSTEMS, INC., PLAINTIFF, vs. XETA CORPORATION, DEFENDANT AND THIRD-PARTY PLAINTIFF, vs. D&P INVESTMENTS, INC. AND COMMUNICATIONS EQUIPMENT BROKERS, INC., THIRD PARTY DEFENDANTS, filed in June, 1995, is still pending before the United States District Court for the Northern District of Oklahoma. This matter arises from a 1986 distributor's agreement between the Company and D&P, pursuant to which the Company sold call accounting systems to D&P for resale, and a maintenance agreement between the Company and ABTS pursuant to which the Company furnished maintenance services for such systems. After having some of its claims dismissed by the Court, ABTS' remaining claims are based on breach of contract and tortious interference with certain customer relationships. The stated amount of damages sought by ABTS in this matter is approximately $809,000. The Company seeks in excess of $3 million in damages in its counterclaims against ABTS and third-party claims against D&P. In November, 1999, during a pretrial conference, ABTS and D&P disclosed to the Court that both of these companies had been dissolved during the pendency of this litigation, without notice to the Company. In view of this fact, and following ABTS' and D&P's failure to provide certain financial information to the Company as ordered by the Court, the Court postponed trial in this matter and granted the Company the right to conduct discovery into the financial affairs of ABTS, D&P and ABTS' related companies. The Company is currently conducting such discovery. The Company has also filed a motion to dismiss ABTS' and D&P's claims for their continued failure to disclose certain other documents requested in 1997. While the Magistrate Judge has recommended that one of ABTS' claims be stricken, the District Judge has--upon ABTS' appeal--taken this issue under advisement. On August 30, 2000, the District Court granted the Company's Motion to Amend to add the following third-party defendants: Dominic Dalia, an individual; Bernice Dalia, an individual; Michael Dalia, an individual; A.B.T.S. International Corp., f/k/a A.B.T.S. Investment Corporation, a/k/a ABTSI; Intelecable N.A., Inc.; Intelepower N.A., Inc.; Intelemedia N.A., Inc.; Intelnet Services of North America, Inc., d/b/a Hotel Digital Network, d/b/a HDN; Intelnet Services of North America, Inc. (Business I.D. No. 0100567092); Intelnet Services of North America, Inc. (Business I.D. No. 010060200); D. P. Southfield, Inc.; Telesource, Inc.; Inntraport International Corp., f/k/a Innterport International Corp. f/k/a Intelnet International Corp.; and Dalia Associates, a partnership. At this point it is not anticipated that a trial date will be reset anytime within the next nine to twelve months. The Company intends to continue to vigorously defend ABTS' claims against it and to pursue all of its counterclaims and third-party claims against ABTS, D&P, and the other third-party defendants. Since 1994, the Company has been monitoring numerous patent infringement lawsuits filed by PHONOMETRICS, Inc., a Florida company, against certain telecommunications equipment manufacturers and hotels who use such equipment. While 7 8 the Company has not been named as a defendant in any of these cases, several of its call accounting customers are named defendants. These customers have notified the Company that they will seek indemnification under the terms of their contracts with the Company. However, because there are other equipment vendors implicated along with the Company in the cases filed against its customers, the Company has never assumed the outright defense of its customers in any of these actions. Phonometrics seeks damages of an unspecified amount, based upon a reasonable royalty of the hotels' profits derived from use of the allegedly infringing equipment during a period commencing six years prior to the filing of such lawsuit and ending October 30, 1990. All of the cases filed by Phonometrics against the Company's customers were originally filed in, or transferred to, the United States District Court for the Southern District of Florida. On October 26, 1998 the Florida Court dismissed all of the cases filed against the hotels for failure to state a claim, relying on the precedent established in Phonometrics' unsuccessful patent infringement lawsuit against Northern Telecom. In its order dismissing Phonometrics' complaints, the Florida court noted that Phonometrics failed to allege that the hotels' call accounting equipment displays cumulative costs in real time as they accrue and displays these costs on a visual digital display, both of which are necessary to establish infringement of Phonometrics' patent, as determined in the Northern Telecom case. On November 13, 1998, Phonometrics appealed the Florida court's order to the United States Court of Appeals for the Federal Circuit. The Court of Appeals reversed the District Court's dismissal of the cases, but did so solely upon the basis of a procedural matter. The Appeals Court made no ruling with respect to the merits of Phonometrics' case and remanded the cases back to the Florida court for further proceedings. These cases were reopened in April, 2000 and since then Phonometrics has filed motions to disqualify the District Court judge hearing the cases. These motions have been denied. The Company will continue to monitor proceedings in these actions. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. 8 9 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock, $.001 par value, is currently traded on the over-the-counter market and is reported in the National Association of Securities Dealers Automated Quotation ("NASDAQ") System under the symbol "XETA." The high and low bid prices for the Company's Common Stock, as reported by the National Association of Securities Dealers through its NASDAQ System, for each of the quarters during the Company's two most recent fiscal years are set forth below. These prices are adjusted to give retroactive effect to a two-for-one stock split with a record date of June 30, 2000. Furthermore, these prices reflect inter-dealer prices, without adjustment for retail mark-ups, mark-downs or commissions and may not necessarily represent actual transactions.
2000 1999 ---- ---- High Low High Low ---- --- ---- --- Quarter Ending: -------------- January 31 $ 22 1/16 $ 9 21/32 $ 9 7/8 $ 7 5/8 April 30 33 15/16 15 17/32 9 5/8 7 1/2 July 31 23 3/4 10 7/8 22 7/8 9 1/32 October 31 19 8 22 1/2 13 1/2
The Company has never paid cash dividends on its Common Stock. Payment of cash dividends is dependent upon the Company's earnings, capital requirements, overall financial condition and other factors deemed relevant by its Board of Directors. The Company is currently committed to reinvesting its available capital in the future growth and success of the Company. It is therefore unlikely that the Company would pay cash dividends in the foreseeable future. As of December 31, 2000, the latest practicable date for which such information is available, the Company had 169 shareholders of record. In addition, based upon information received annually from brokers holding stock in the Company on behalf of beneficial owners, the Company has approximately 7,000 beneficial shareholders. On August 11, 2000, the Company granted an individual stock purchase option for 10,000 shares of the Company's Common Stock to Mr. Patterson, the Company's Sr. Vice President of Operations, in recognition of his contribution to the Company's financial performance since his hiring. This option was contemplated by and granted in accordance with the original compensation package offered to Mr. Patterson upon his hiring by the Company. The underlying option shares are not registered, although the Company intends to register such shares in the future. The option was granted in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended, in that the grant was made pursuant to a privately negotiated transaction with one individual and did not involve a general offering to the public, and the option was granted as compensation. The option is exercisable in whole or in part on or after August 11, 2000 until the close of business on August 1, 2010, at an exercise price of $9.0625, the market price on the date of grant. The option automatically terminates to the extent not exercised if Mr. Patterson's employment is terminated by the Company due to a breach of his employment obligations. 9 10 ITEM 6. SELECTED FINANCIAL DATA. Selected financial data for the last five fiscal years is presented below. All amounts except share and per share amounts are in thousands.
For the Year Ending October 31 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- Results of Operations Commercial equipment sales 54,199 0 0 0 0 Installation and Service sales 31,220 18,766 13,220 9,355 6,888 Lodging systems sales 17,000 18,497 12,227 9,405 6,552 -------- -------- -------- -------- -------- Total Revenues 102,419 37,263 25,447 18,760 13,440 Cost of commercial equipment sales 38,606 0 0 0 0 Cost of installation and services 21,627 12,206 8,536 5,884 4,385 Cost of Lodging systems 11,172 11,067 7,916 6,074 4,072 -------- -------- -------- -------- -------- 71,405 23,273 16,452 11,958 8,457 Gross Profit 31,014 13,990 8,995 6,802 4,983 Operating expenses 18,635 7,622 4,757 4,139 3,156 Income from operations 12,379 6,368 4,238 2,663 1,827 Interest and other income (1,761) 665 671 667 662 -------- -------- -------- -------- -------- Income before taxes 10,618 7,033 4,909 3,330 2,489 Provisions for taxes 4,156 2,750 1,855 1,190 904 -------- -------- -------- -------- -------- Taxes 6,462 4,283 3,054 2,140 1,585 ======== ======== ======== ======== ======== Earnings per share - Basic $ 0.77 $ 0.53 $ 0.38 $ 0.27 $ 0.20 Earnings per share - Diluted $ 0.66 $ 0.46 $ 0.33 $ 0.23 $ 0.17 Weighted Average Common Shares Outstanding 8,350 8,021 8,120 8,024 7,884 Weighted Average Common Share Equivalents 9,762 9,254 9,372 9,460 9,336
As of October 31 2000 1999 1998 1997 1996 ------ ------ ------ ------ ------ Balance Sheet Data: Working Capital 15,366 8,021 5,122 6,944 5,435 Total Assets 74,149 25,316 18,292 14,820 12,364 Long Term Debt 18,204 0 0 0 0 Shareholders' Equity 25,565 14,551 11,185 9,337 7,071
10 11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS For the fiscal year ended October 31, 2000, the Company reported record net income and revenues of $6.5 million and $102.419 million, respectively. These results represent a 51% increase in net income and a 175% increase in revenues and reflect the first year of the Company's efforts to expand beyond its traditional focus on the lodging industry into the distribution of telecommunications products and services to commercial businesses on a nation-wide basis. As a result of this aggressive expansion strategy, many important developments occurred during fiscal 2000. These developments are discussed in detail below. The Company's strategy to expand beyond the lodging industry into the commercial market is being fueled by significant changes in technology that are beginning to occur and are expected to accelerate during the next three to five years. The most significant of these technology changes is the development of packet switching. This technology is the mechanism by which data travels over the Internet and other data networks, usually using a standard form of transmission, called IP or Internet Protocol. However, advances have now been made to enable voice traffic to be carried over these same IP networks (Voice-over-IP or VoIP) at acceptable quality. The convergence of data and voice traffic over the same networks is being driven by cost as it is more cost effective to install and maintain one integrated network than two separate networks for data and voice. As a result of these changes in technology, the distribution channels which provide traditional voice products and services are changing dramatically as well. In June, 1999, the Company announced a three phase strategy to respond to these changes and rapidly expand its business. Phase one is to establish a nation-wide commercial customer "beachhead" to deliver traditional telephony applications. Phase two of the strategy is to add complex convergence applications such as VoIP telephony, call centers and unified messaging. Finally, phase three of the strategy is to introduce professional and consulting services to design these integrated networks and complex applications as well as to audit their efficiency. Management believes that by executing these strategies, the Company will come to market with a fully integrated business model in which it can prospect for customers based on nearly any need the customer may have or may need addressed. For example, the Company may make initial contact with the customer based on a product need such as after-market components. Subsequently, the customer can be introduced to other products and services such as: network efficiency audits, traditional services (maintenance contracts, installation of upgrades, etc.), messaging systems, or complex applications such as virtual private networks. The Company is executing this strategy using a balanced approach of acquisitions and internal growth. During fiscal 2000, the Company completed the acquisition of two companies. On November 30, 1999, the Company purchased 100% of the outstanding stock of U.S. Technologies Systems, Inc. ("USTI") for $26 million in cash and 150,000 shares of XETA common stock held in treasury with a market value of $3.3 million on the date issued. The Company paid $23 million in cash at closing and the remaining $3 million was subject to various hold-back provisions. As of October 31, 2000, hold-back provisions regarding $2 million of the total were satisfied and this amount plus accrued interest was paid on November 30, 2000. On February 29, 2000, the Company purchased substantially all of the assets of Advanced Communication Technologies, Inc. ("ACT") for approximately $3.5 million in cash. Both of these companies' primary focus was in voice applications. As a result of these acquisitions and internal growth accomplished during the year, the Company was able to largely achieve phase one of its strategy in fiscal 2000. Subsequent to the close of fiscal 2000, the Company made two additional acquisitions to begin its expansion into converged products and professional services, phases two and three of its strategy, respectively. On November 1, 2000, the Company acquired substantially all of the assets of PRO Networks Corporation, a Missouri based company specializing in the sale, installation and service of data networking equipment, including Cisco's data products and virtual private networking solution as well as Avaya's data products. Simultaneously, the Company also purchased the assets of a professional services firm, Key Metrology Integration, Inc. ("KMI"). Most of KMI's employees are Microsoft Certified Systems Engineers ("MCSEs"). The Company expects to use KMI as its starting point to provide high-end LAN/WAN consulting services and unified messaging solutions. The Company paid a total of $5.5 million in cash for the assets of these two companies, and will pay up to an additional $4.5 million if various growth targets are met. Each of the four acquisitions discussed above were funded from proceeds of a $43 million credit facility which is more fully described under "Liquidity and Capital Resources" below. 11 12 On June 26, 2000, the Company reduced the par value of its common stock to $.002 and increased the authorized shares to 50 million. On June 30, 2000, the Company effected a two-for-one stock split by reducing the par value on its common stock to $.001. All share amounts reflected in this report have been restated accordingly to give effect to the stock split. The discussion below provides further analysis of the developments discussed above as well as other major factors and trends which management believes had the most impact on the results of operations for the years ended October 31, 2000 and 1999 compared to the previous years, and the financial condition of the Company for the years then ended. THE PRECEDING AND THE FOLLOWING DISCUSSIONS CONTAIN FORWARD-LOOKING STATEMENTS, WHICH ARE SUBJECT TO THE PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THESE STATEMENTS INCLUDE STATEMENTS CONCERNING EXPECTATIONS REGARDING THE COMPANY'S SALES, REVENUES, GROSS MARGINS, OPERATING MARGINS AND RESULTS OF OPERATIONS; THE COMPANY'S ABILITY TO IMPLEMENT ITS CURRENT BUSINESS PLAN AND GROWTH STRATEGY, AND TRENDS IN THE COMMUNICATIONS TECHNOLOGY INDUSTRY AND HOSPITALITY MARKETS. THESE AND OTHER FORWARD-LOOKING STATEMENTS (GENERALLY IDENTIFIED BY SUCH WORDS AS "EXPECTS," "PLANS," BELIEVES," "ANTICIPATES" AND SIMILAR WORDS OR EXPRESSIONS) ARE NOT GUARANTEES OF PERFORMANCE BUT RATHER REFLECT MANAGEMENT'S CURRENT EXPECTATIONS, ASSUMPTIONS AND BELIEFS BASED UPON INFORMATION CURRENTLY AVAILABLE TO MANAGEMENT. INVESTORS ARE CAUTIONED THAT ALL FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES WHICH ARE DIFFICULT TO PREDICT AND THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED. THESE RISKS AND UNCERTAINTIES ARE DESCRIBED UNDER THE HEADING "OUTLOOK AND RISK FACTORS" BELOW. CONSEQUENTLY, ALL FORWARD-LOOKING STATEMENTS SHOULD BE READ AS IN CONJUNCTION WITH THE RISK FACTORS DISCUSSED HEREIN AND THROUGHOUT THIS REPORT. RESULTS OF OPERATIONS Year ended October 31, 2000 compared to October 31, 1999. As stated above, net revenues for fiscal 2000 were $102.419 million, an increase of $65.1 million or 175% over the previous year. Of this increase, approximately $63.9 million represented revenues earned from companies acquired during the year. Commercial Equipment Sales. Sales of products to commercial customers were $54.2 million in fiscal 2000 and represented revenues earned from the former operations of USTI and ACT since their acquisition (11 months and 8 months, respectively). The Company is a non-exclusive dealer of Avaya voice products to the commercial market and sells Avaya's full range of communications servers as well as component parts in after-market sales. The Company focuses on two primary commercial market segments, small-of-large locations of Fortune 500 companies (the "Fortune 500 market") and the next 1000 largest enterprises (the "Enterprise" market). Sales to the Fortune 500 market are mainly generated through "partnering" arrangements with Avaya's direct sales force to sell and install communications systems to Avaya's customers. Under these partnering arrangements, the Company assists Avaya in assessing the customer's needs and in design, sale, installation and sometimes support of the applications or project. Although there is fierce competition among Avaya dealers to participate in these partnering opportunities, management believes the Company is uniquely qualified because of its nationwide project management capabilities and competencies in complex applications. The Company also focuses its efforts in the commercial market segment on the Enterprise market, representing mid-sized companies that typically have multiple locations. Generally, the revenues earned from the former USTI operations are more likely to originate from the Avaya partnering arrangements, while the revenues earned in the Pacific Northwest from the former ACT operations are more likely to originate from Enterprise customers in that region. The Company intends to aggressively grow its revenues earned from Enterprise customers during fiscal 2001 while continuing its strong relationships with the Avaya direct sales staff. Lodging Systems Sales. Sales of lodging systems declined $1.8 million or 10%. This decline consisted of a decrease in sales of call accounting systems of $2.4 million or 51% and an increase in sales of communications systems (PBX's) to the lodging market of $582,000 or 4%. Sales of call accounting products in fiscal 2000 returned to more normal levels after the surge in orders experienced in 1999, as many customers upgraded or replaced their systems in preparation for Y2K. In addition, the capital available to the lodging industry for new construction, remodeling, and investments in technology shrunk considerably in 2000, resulting in extended sales cycles and fierce competition. The Company was able to offset some of the impact of these trends through its offering of the Avaya GuestWorks PBX system. The Avaya system enabled the Company to break into new customer accounts who were not previously receptive to the Company's Hitachi 12 13 PBX offering. The Company will continue to go to the lodging market with both products, although the Company expects sales of new Avaya systems to continue to exceed sales of Hitachi systems, as was the case in fiscal 2000. Management believes that the atmosphere of limited budgets and extended sales cycles may continue for the foreseeable future or could worsen if the U.S. economy slows. Installation and Service Revenues. Installation and service revenues increased $12.4 million or 66% during fiscal 2000. Approximately $9.7 million of this increase was earned from the expansion of the Company's service capabilities into the commercial market. During fiscal 2000, the Company hired and trained additional technicians and implemented new provisioning processes and pricing strategies to address the needs of the commercial market. Revenues earned from the Company's traditional lodging installation and service activities grew approximately $2.7 million or 15%. This growth was fueled by increases in revenues earned from maintenance contracts and billable services on call accounting systems and PBX's, partially offset by decreases in installation revenues. During 2001, the Company plans to continue to expand its service and installation presence in the commercial market and believes that by offering a proprietary maintenance contract it can create a recurring stream of service revenues similar to that long enjoyed by the Company in the hospitality market. Other Revenues. Other revenues consists of revenues earned from the remaining long distance services contracts still in force and from non-recurring, low margin, sale of after-market products in which the Company acts a "broker" to facilitate the transaction for its customers. The Company is in the process of winding down its long distance services business as the remaining contracts to provide those services expire in fiscal 2001. The sale of after-market products included in this revenue caption involve transactions in which the Company procures large quantities of after-market components, typically telephone sets, for end-user customers. In these transactions, the Company typically does not take possession of the equipment, but simply has the equipment drop shipped directly to the customer's location, earning a small fee to process, bill and collect on the transaction. Gross Margins. Total gross margins earned in 2000 were 30% compared to 38% in 1999. This decline was expected as a result of a dramatic and planned change in product mix toward the commercial market for voice and data products. As the Company has executed its growth strategy through acquiring companies operating in the commercial market, the percentage of its business earned from higher-margin, specialized lodging products and services has declined as a portion of total revenues. Management expects the overall gross margins earned by its new business model to be in a range of 30%-33%, with some individual sectors of its integrated business model to earn gross margins significantly higher and some sectors to be lower than this blended rate. Generally, the Company expects its traditional voice systems to be within the blended range outlined above while the margins on data and converged products will be lower, and the margins on high-end applications and professional consulting services will be higher. The gross margins earned on commercial equipment sales in fiscal 2000 were 28.8%. The Company intends to continue to aggressively pursue the Avaya partnering opportunities that it enjoyed in fiscal 2000, although the margins earned on these sales are often lower than the Company's target for this revenue stream because of the buying power of these large, Fortune 500 customers and fierce competition for this segment of the business. In fiscal 2001, management intends to enhance its overall commercial equipment margins by selling more equipment into the Enterprise customer base and by shifting its product mix toward larger systems. The gross margins earned on lodging systems sales were 34% in fiscal 2000 compared to 39% in fiscal 1999. This decline represents a change in product mix in 2000 toward sales of more PBX systems and fewer call accounting systems as a portion of total lodging systems sales. As a proprietary product, the Company's call accounting systems earn a higher gross margin than the distributed PBX product line. Management believes the gross margins earned on lodging systems sales in fiscal 2000 are indicative of those expected to be earned in fiscal 2001. The gross margins earned on installation and service revenues in fiscal 2000 were 31% compared to 35% in fiscal 1999. Ultimately, management believes that gross margins earned on installation and service revenues will be in the range of 32% to 35% as it continues to develop the commercial sales model and leverage its nation-wide staff of technicians. Since the acquisitions of USTI and ACT, the Company has been continually working to improve both the revenues and margins earned by its installation and service activities. Specifically, the Company has or is in the process of implementing the following initiatives: First, the Company is shifting the installation of commercial systems from a third party model to an in-house model. To do this, the Company has continued throughout the year to scale up its technician capacity and 13 14 expertise in installing commercial systems. Also, the Company is implementing a new provisioning process designed to streamline commercial installations. This initiative is largely complete although the Company is continually evaluating its provisioning and logistics processes. Second, the Company implemented new job costing and pricing tools, thereby improving its margins on services still outsourced to third parties. Management is also continuing to evaluate this costing tool to ensure that these margins continue to improve. Finally, as discussed above, the Company has introduced a new commercial maintenance offering which management believes will provide a steady source of recurring revenues to offset the impact of fluctuations in installation activities and to cover the base of fixed costs. Operating Expenses. Total operating expenses, including selling, general and administrative ("SGA"), engineering, research and development ("Engineering"), and amortization were 18.2% of total revenues in fiscal 2000 compared to 20.5% of total fiscal 1999 revenues. SGA costs represented 15.7% of revenues in 2000 compared to 13.8% in 1999. These levels were satisfactory to management given the rapid growth of the Company and the complexity of its operations compared to a year ago. However, management believes that sales expenses grew at a faster rate than necessary in the last half of fiscal 2000 due to lower sales productivity, primarily related to slowdowns in the lodging, government and Pacific Northwest segments of its business. Engineering costs represented 1% of revenues in 2000 compared to 1.5% in 1999. The Company's engineering related costs have shifted dramatically in the last year to a more internal support function rather than a product-focused research and support function. Given the Company's growth and number of major locations, there is much greater need on supporting and integrating the Company's technology infrastructure. That focus will continue for the foreseeable future, and specifically in 2001, the Company intends to convert its existing variety of operating and accounting systems to one platform based on an Oracle database. Amortization expense between the two years consists of different components and is therefore not comparable. The majority of amortization expense in fiscal 1999 related to the amortization of the purchase price of the PBX service contracts purchased from Williams Communications Solutions in late 1998, while the majority of amortization expense recorded in fiscal 2000 is related to the acquisitions of USTI and ACT. Interest Expense. Interest expense consists of interest on the Company's credit facility that was used to fund the acquisitions discussed throughout this report, interest on a working capital revolver, and various commitment fees paid on the unused portion of the credit facility. Previous to the establishment of this credit facility, the Company did not have any outstanding debt. Interest and Other Income. Interest and other income consists primarily of interest income earned on XETAPLAN sales-type leases. Under these lease arrangements, the Company provides a call accounting system to its lodging customers and service on the system for a period of three to five years in exchange for a monthly or quarterly fee. Under the accounting rules followed by the Company, a portion of these payments are imputed as interest income. In fiscal 1999, interest income also included interest earned on cash investments. The decline in interest income reflects the decline in available cash balances for investments. Income Taxes. The Company recorded a provision for federal and state income taxes of $4.2 million or 39% of pre-tax income compared to $2.75 million or 39% of pre-tax income in fiscal 1999. This rate reflects the effective federal tax rate plus the estimated composite state income tax rate. Operating Margins. Net income as a percent of sales was 6.7% in fiscal 2000 compared to 11.5% in fiscal 1999. This lower operating margin reflects the Company's transition from a niche company in the small hospitality sector to a voice and data integrator in a larger and faster growing commercial voice and data integration market. Given the current environment of this new market, with its trend toward convergence utilizing internet protocol, and the accompanying changes required by the distribution channels to participate in this new environment, management believes that quickly repositioning the Company to take advantage of these two significant trends is a strategic priority. The Company has elected to be aggressive in its entry into this market and is implementing a balanced growth strategy, which includes acquisitions and internal growth. In general, the lower operating margins were expected by management and reflect the additional interest and amortization expense the Company has incurred to pursue this strategy. In the near term, as management repositions the Company to take advantage of these trends in the commercial market, management expects the Company's after-tax operating margins to range between 6% and 8%, with an expectation of the lower end of that range specifically in fiscal 2001. 14 15 Year ended October 31, 1999 compared to October 31, 1998. For the fiscal year ended October 31, 1999, the Company reported record net income and revenues of $4.283 million and $37.263 million representing a 40% increase in net income and a 46% increase in total revenues compared to its 1998 fiscal year. The 46% increase in total revenues consisted of an increase in installation and service revenues of 42%, an increase in sales of systems of 59%, and a decrease in long distance revenues of 36%. By product line, fiscal 1999 revenues earned from communications systems (or "PBX's") related activities, including sales of new systems, installations and service, increased $8.267 million, or 45%, revenues from call accounting related activities increased $3.904 million or 63%, and revenues from the Company's long distance service offering declined $355,000 or 36%. All of the Company's revenues during fiscal 1999 were earned from the lodging market. Sales of PBX systems increased $3.860 million or 42% while revenues earned from PBX installation and service activities increased $4.407 million or 49% in fiscal 1999 compared to 1998. The growth in revenues was attributable to the continued acceptance of the Company's PBX product and service offering which included the introduction of the Lucent GuestWorks(R) communications system, and the robust U.S. economy which fueled continued new construction of hotels, significant remodeling projects and expansions of existing PBX systems to accommodate multiple phone line access in hotels. While sales of Hitachi systems still far outweighed sales of Lucent products in 1999, sales and installations of Lucent systems increased steadily during the last half of fiscal 1999 and the first quarter of fiscal 2000. During fiscal 1999, the Company experienced a surge in orders for call accounting systems that resulted in an increase in revenues from systems sold of $2.765 million or 139%. Revenues from call accounting installation and service activities increased $1.139 million or 27% during fiscal 1999. This surge in orders was primarily due to the broad market acceptance of the Company's Virtual XL(R) call accounting system. Revenues from the Company's long distance service offering declined $355,000 or 36% due to an erosion in the usage of 0+ services used by guests and customer hotels. Gross margins earned on total revenues increased to 38% in fiscal 1999 compared to 35% in fiscal 1998. The gross margins earned on installation and service revenues were unchanged in fiscal 1999 at 35% compared to fiscal 1998. However, the Company experienced pressure on the gross margins earned on installation and service revenues during fiscal 1999 and 1998, and both years' margins were lower than historical levels. The gross margins earned on systems sales increased to 39% from 33% in fiscal 1999 compared to 1998. This increase was primarily due to the favorable mix of systems sales toward higher margin call accounting systems. The gross margins earned on long distance services in fiscal 1999 were 67% compared to 59% in fiscal 1998. The gross margin earned on this revenue source during fiscal 1999 benefited from lower overall long distance revenues because the revenues were insufficient to trigger payments to the Company's marketing alliance partner. Total operating expenses, including selling, general, and administrative ("SGA"), engineering, research and development ("Engineering"), and amortization increased $2.865 million or 60% in fiscal 1999. However, of this increase, $1.555 million was attributable to an increase in amortization expense. Most of the increase in amortization was related to the Company's purchase of PBX service contracts in September, 1998 for $1.533 million, amortized over the average life of the contracts, which was approximately one year. Ignoring amortization expense, the costs of SGA and Engineering activities represented 15.2% of revenues in fiscal 1999 and 17.2% of fiscal 1998 revenues. Interest income was relatively unchanged between 1999 and 1998. The Company earned interest income from its sale-type lease contracts with customers and from cash investments. Interest income earned from additions to its sale-type lease receivables was offset by decreases in interest income earned on cash balances due to lower average cash on hand in fiscal 1999. The Company recorded a provision for federal and state income taxes of $2.750 million or 39% of pre-tax income compared to $1.855 million or 38% in fiscal 1998. The increase in the effective tax rate reflected an increase in the Company's estimated multi-state tax rate. 15 16 LIQUIDITY AND CAPITAL RESOURCES As a result of the Company's growth strategy and the related acquisitions made during the year, the capital structure of the Company changed dramatically during fiscal 2000. Concurrent with the acquisition of USTI, the Company established a $40 million credit facility to fund that transaction and provide a committed line of credit for working capital needs and to fund additional transactions. During the year, the Company expanded the working capital portion of the facility from $5 million to $8 million, thereby bringing the total available under the facility to $43 million. Borrowing under the acquisition portions of the facility is based on a multiple of EBITDA, as defined in the facility, including EBITDA of the target company. The interest rate charged on borrowings is based on a margin above LIBOR or Prime, with the margin adjusted for specific ranges of leverage as determined by the Company's debt ratio, as defined in the facility. Upon initiating the credit facility, the Company borrowed $23 million to finance the USTI acquisition. In February, 2000, the Company borrowed an additional $3.0 million to finance the acquisition of the assets of ACT. As a result of these borrowings, less the effect of scheduled principal payments, the total debt related to acquisitions at October 31, 2000 was $24.8 million. An additional $1 million was outstanding on the working capital portion of the facility. On the day following the close of the fiscal year, the Company borrowed an additional $5.5 million to complete the purchases of the assets of PRO Networks and KMI. Currently, the Company has approximately $3.5 million remaining capacity under the acquisition portion of the facility. Management believes that it has sufficient access to debt and equity capital to pursue its growth strategy, including additional acquisitions. Its evaluation of potential acquisition candidates is ongoing. These evaluations center on the target's cash flows, product and service mix, installation and service capabilities, and geographic reach. The purchase of some targets under consideration or the cumulative effect of purchasing several targets could exceed the available remaining capacity under the current credit agreement. The agreement currently in place was based upon the combined projected EBITDA (earnings before interest, taxes, depreciation and amortization) of XETA and USTI. Therefore, the Company's credit capacity, in the judgment of management, continues to increase as the Company's earnings expand. During the first quarter of fiscal 2001, the Company will be evaluating its needs for additional bank financing with a view towards securing additional capacity. While no assurances can be made, management believes that its current bank group is favorable towards expansion of the facility; however, at this time the Company has chosen not to incur the expenses required to do so. In addition to debt financing, the Company believes that a wide variety of other capital resources are available including subordinated debt, secondary equity offerings, pooling-of-interests transactions, private placements of either debt or equity instruments, and combinations of all of the above. During fiscal 2000, cash balances decreased $3.6 million. Sources of cash included cash earned from operations of $2.5 million and cash provided by financing activities of $23.0 million. Uses of cash included investing activities of $29.3 million. In addition to the investments made in the acquisitions described above, the Company invested $2.7 million in additions to property and equipment to fund expansion of its employee base and technology infrastructure. Principal payments made on the debt during the year were $4.2 million, all of which was made against the initial draw of $23 million. Beginning December 31, 2000, the acquisition draws made to fund the ACT, PRO Networks, and KMI acquisitions were converted to a term loan in accordance with the agreement and the Company will begin making principal payments accordingly. OUTLOOK AND RISK FACTORS The statements in this section entitled "Outlook and Risk Factors," as well as other statements throughout this report regarding trends or future performance or events, are based on management's current expectations. These statements are forward-looking and actual results may differ materially. All such statements should be read in conjunction with the risk factors discussed herein and elsewhere in this report. Growth Strategy and Acquisitions. Fiscal 2000 represented the first year in the Company's planned expansion beyond its traditional focus on the lodging market to become a nationwide integrator of voice and data technology serving the commercial market. Since the announcement of this strategy in June, 1999, the focus, size and capital structure of the Company has changed dramatically as is discussed in other areas of this report. These changes present a variety of risk factors to the Company including the integration of the operations and employees of new acquisitions (including possible 16 17 problems with financial control and computer system compatibility; unanticipated costs; and loss of key employees), increased and significant demands on the Company's administrative, operational, financial and management personnel, use of debt and possibly equity capital to finance the planned growth, and the successful management of a fast growing company with nation-wide sales, service and administrative operations. The failure to effectively manage these changes could have a material, adverse effect on the Company's business, operating results, or financial condition and upon the investment community's perception of the Company's ability to carry out its growth strategy. Attracting and Retaining Talented Employees. As a result of changes in technology, the Company's strategy to grow faster than the market rate, and the overall tight U.S. labor market, the ability to attract and retain qualified employees is critical to the Company's success. As the Company continues to expand into the sales, installation, and maintenance of converged networks, the need for technicians with training certifications in the specific products and applications that the Company is selling will be essential. Currently, the demand for these individuals is extremely high and very competitive and compensation for such individuals is rising much faster than general wages. Management believes that by providing opportunities for these individuals at the leading edge of this technology and through appropriate compensation and training programs, the Company can attract and retain the needed competencies for its growth plans. Such compensation programs should be designed to provide both current income and long-term equity-based compensation. Should the disfavor of technology stocks that is currently prevalent in the stock market continue or should the Company's operating performance result in disfavor of the Company's stock in particular, then those equity-based programs would likely not provide sufficient additional compensation to attract or retain key employees. In those circumstances, it is likely that wages would have to be increased, thereby lowering the expected gross margins on installation and service revenues as well as overall operating margins. A similar tension is occurring related to the hiring and retaining of qualified sales personnel. In addition to attracting new account executives with the capability of prospecting for opportunities in the new, emerging applications and converged products, all of the Company's existing account executives must undergo a personal transformation to learn these products. The Company is investing heavily in the training of its sales force and will continue to evaluate its sales compensation programs to help ensure a high retention rate for its account executives. Notwithstanding the Company's efforts in these areas, no assurance can be given that the Company will be successful in hiring, training and retaining the personnel needed to effectively execute its current business strategy. Dealer Agreements. The Company sells communications systems under dealer agreements with Avaya, Inc. (formerly Lucent Technologies) and Hitachi Telecom, (USA), Inc. The Company is a major dealer for both manufacturers and considers its relationship with both to be good. Nevertheless, if the Company's strategic relationship with Avaya, and to a lesser degree with Hitachi, were to be terminated prematurely or unexpectedly, the Company's operating results would be adversely impacted. Furthermore, in both the separate agreements that the Company has with Avaya for distribution of products to the commercial and lodging markets, respectively, and the agreement with Hitachi, the Company must meet certain volume commitments to earn the pricing structure provided in the dealer agreements. In addition, the Company's relationship with Avaya is administered through a joint agreement between the Company, Avaya, and one of Avaya's "super distributors", Voda One (formerly Inacom) through which the Company receives specified pricing from Voda One based on certain volume requirements. Should the Company fail to meet any of these requirements, future profit margins could suffer. Dependence Upon the Avaya "Business Partner Program" and Incentive Programs. As described above, the Company has built a significant portion of its commercial business from its program to work Avaya's NAM's and GAM's. Under this program, the Company partners with Avaya to design, sell, and install Avaya equipment to large Avaya customers under sales agreements negotiated by the NAM or GAM. The Company is typically engaged by Avaya because it can meet the customer's need for fast delivery and installation. Currently, the Avaya's NAM's and GAM's receive identical compensation from Avaya regardless of whether their orders are fulfilled by Avaya's direct installation team or by a dealer such as the Company. While no assurance can be given, if Avaya were to alter their NAM and GAM compensation program to favor using Avaya's direct provisioning and installation teams, the Company would likely suffer material, adverse operating results. Also, Avaya, like many major manufacturers, provides various incentive programs to support the advertising and sale of its products. The Company receives substantial rebates through these common incentive programs to offset both costs of goods sold and marketing expenses. These rebates are based on a combination of the dollar volumes of purchases of certain products, the number of units of certain products purchased, and the year-over-year growth in purchases of certain products. Historically, the requirements of these incentive programs are changed annually. While the Company does not expect such programs to be altered to the Company's detriment, there can be no assurance given that a change in these programs won't negatively impact the Company's profit margins and operating results. 17 18 New Market Entrants. Earlier in the year, Lucent Technologies (prior to the spinning off of its Enterprise business, now called Avaya), sold its Small Business Division to Expanets, a "partner entity" of Northwest Corporation. As a result of the sale, Expanets became the largest dealer of Lucent/Avaya telecommunications products in the U.S., a position previously held by the Company. While the Company and Expanets primarily target different segments of the market, there is some overlap at the lower end of the Enterprise market. This increased competition from a significantly larger and financially stronger competitor could negatively impact the Company's sales and gross margins. Competition. Although the market for voice and data technologies integrators is in its infancy, competition will be formidable and real. The Company will be competing with established telecommunications companies that have a larger or more well-established commercial customer base, and with other technology companies that have existing voice and data integration competencies. With regard to the traditional voice communications market, the competitive environment is also fierce. As a distributor of telecommunications products for Avaya and Hitachi, the Company competes not only with distributors that represent other manufacturers' products, but also with other Avaya and Hitachi distributors. Avaya has approximately 800 voice dealers nationwide and Hitachi has more than 40 distributors that the Company competes against in the hospitality sector. Credit Facility and Reliance on Debt Financing. The Company's expansion into the commercial market segment through a strategy of acquisitions and aggressive internal growth has necessitated a dramatic change in the capital structure of the Company. To date, the Company has funded this expansion through the use of bank debt. Under the terms of the credit facility, the Company is subject to various financial and operating covenants. In fiscal 2000, the Company's capital expenditures exceeded the limit provided for in the credit facility. The Company has received a waiver of this covenant for fiscal 2000. While the Company believes that it will operate within the covenants in the future, there can be no assurance given that the Company's lenders would waive additional violations should they occur. As discussed under "Liquidity and Capital Resources" above, management believes that the Company can secure sufficient debt financing to support its planned growth strategy. However, should such debt financing not be available from its current lenders, there can be no assurance given that an agreement with other banks could be secured or that other forms of capital, such as private or public placements of equity, would be available. Section 338(h)(10) Election. The acquisition of USTI was a purchase of 100% of the stock of USTI for financial reporting purposes. However, for tax purposes, all of the parties to the purchase agreement agreed to elect under the applicable Internal Revenue Code, to treat the transaction as a purchase of assets by the Company. To properly affect the appropriate elections for this desired tax treatment, the required election form was to be filed by August 15, 2000. Since this election form has not been timely filed, the Company is working with its professional advisors and the former USTI shareholders in seeking administrative relief from the IRS to accept the election form as if it had been timely filed. Based on historical precedent, it is probable that administrative relief will be granted by the IRS. However, there can be no guarantee of such an outcome. Failure to obtain administrative relief will result in a loss of significant tax deductions to the Company over the next 15 years and as a result, will increase the Company's effective tax rate on its financial statements. Lodging Industry. As a result of less capital available to the lodging industry for new construction, remodeling and investments in new technology, the Company has seen a return of longer sales cycles that had characterized the Company's experience with the industry in recent years. SEC Regulation FD and Company Guidance for Future Results. During the Company's fourth quarter of fiscal 2000, a new SEC regulation regarding fair disclosure of material company information became effective. This regulation, commonly called Reg. FD, has significantly changed the methods by which public companies, including the Company, interact with stock market analysts, shareholders, the media, and other interested parties. In an effort to comply with Reg. FD, the Company has released a press release and held an open conference call with the analysts who write financial research reports on the Company to discuss management's expectations for fiscal 2001. This guidance provided a variety of information to help the analysts and other investors to form their own forecasts of 2001 results. Management expects to continue to update this guidance as fiscal 2001 unfolds. However, although management believes that such guidance currently reflects and, when updated, will continue to reflect its then current expectations of future results, there can be no assurance given that the Company's actual results will be consistent with the guidance given or with analysts' forecasts of such results. 18 19 Pending Litigation. The Company is involved in several matters of pending litigation (See "Legal Proceedings" under Part I above). No loss contingencies, other than the estimated costs of bringing one of the cases to trial, have been recorded in the financial statements. Should the outcome of either of these matters be unfavorable, however, the Company may have to record expenses which might cause operating results to be materially lower than those expected. General Risk Factors. In addition to the specific factors discussed above, the following general factors can also impact the Company's overall performance and results of operations: the strength of the U.S. economy, the continued growth of the IP networking market, uncertainties inherent with rapidly changing technologies and customer demand, and relationships with suppliers, vendors and customers. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Market risks relating to the Company's operations result primarily from changes in interest rates. The Company did not use derivative financial instruments for speculative or trading purposes during the 2000 fiscal year. Interest Rate Risk. The Company's cash equivalents, which consist of highly-liquid, short-term investments with an average maturity of less than 51 days, are subject to fluctuating interest rates. A hypothetical 10 percent change in such interest rates would not have a material effect upon the Company's consolidated results of operations or cash flows. During fiscal year 2000, the Company entered into a $43 million credit facility, with variable interest rates based on either LIBOR or the bank's prime rate. At October 31, 2000, the Company had borrowings under the credit facility of $25.8 million. While the Company is exposed to changes in interest rates risk, a hypothetical 10% change in interest rates on its variable rate borrowings would not have a material effect on the Company's earnings or cash flow. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS OF THE COMPANY PAGE - -------------------------------------------- ---- Report of Independent Public Accountants F-1 Consolidated Financial Statements Consolidated Balance Sheets - October 31, 2000 and 1999 F-2 Consolidated Statements of Operations - For the Years Ended October 31, 2000, 1999 and 1998 F-3 Consolidated Statements of Shareholders' Equity - For the Years Ended October 31, 2000, 1999 and 1998 F-4 Consolidated Statements of Cash Flows - For the Years Ended October 31, 2000, 1999 and 1998 F-5 Notes to Consolidated Financial Statements F-6
19 20 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Xeta Technologies, Inc.: We have audited the accompanying consolidated balance sheets of Xeta Technologies, Inc. (formerly Xeta Corporation, an Oklahoma corporation) and subsidiaries as of October 31, 2000 and 1999, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended October 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Xeta Technologies, Inc. and subsidiaries as of October 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 2000, in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Tulsa, Oklahoma December 15, 2000 F-1 21 XETA TECHNOLOGIES, INC. CONSOLIDATED BALANCE SHEETS OCTOBER 31, 2000 AND 1999
2000 1999 -------------- -------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 926,330 $ 4,556,212 Current portion of net investment in sales-type leases 2,609,976 2,577,141 Trade accounts receivable, net 30,139,623 4,432,647 Inventories, net 8,135,062 3,733,306 Deferred tax asset, net 1,133,487 622,595 Prepaid expenses and other 338,828 261,024 -------------- -------------- Total current assets 43,283,306 16,182,925 -------------- -------------- NONCURRENT ASSETS: Net investment in sales-type leases, less current portion 2,505,841 3,843,743 Property, plant and equipment, net 6,854,851 3,942,540 Goodwill, net 20,579,359 -- Purchased service and long distance contracts, net of accumulated amortization of $2,557,168 and $2,162,938 -- 394,230 Capitalized software production costs, net of accumulated amortization of $693,066 and $573,066 597,956 649,406 Other 327,658 303,633 -------------- -------------- Total noncurrent assets 30,865,665 9,133,552 -------------- -------------- Total assets $ 74,148,971 $ 25,316,477 ============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt $ 8,204,088 $ -- Revolving line of credit 1,000,000 -- Accounts payable 11,750,607 2,126,654 Unearned revenue 4,513,029 4,540,548 Accrued liabilities 3,927,803 1,494,737 Accrued income taxes 125,942 -- -------------- -------------- Total current liabilities 27,917,381 8,161,939 -------------- -------------- UNEARNED SERVICE REVENUE 1,039,949 1,953,222 LONG-TERM DEBT, less current portion above 17,983,011 -- ACCRUED LONG-TERM LIABILITIES 1,299,114 -- NONCURRENT DEFERRED TAX LIABILITY, net 123,603 650,024 COMMITMENTS SHAREHOLDERS' EQUITY: Preferred stock; $.10 par value; 50,000 shares authorized, 0 issued -- -- Common stock; $.001 and $.05 par value, respectively; 50,000,000 shares authorized, 9,662,736 and 9,273,404 issued at October 31, 2000 and 1999, respectively 9,662 231,835 Paid-in capital 9,486,776 5,373,855 Retained earnings 18,313,380 11,851,761 Less- Treasury stock, at cost (2,244,659) (2,906,159) -------------- -------------- Total shareholders' equity 25,565,159 14,551,292 -------------- -------------- Total liabilities and shareholders' equity $ 74,148,971 $ 25,316,477 ============== ==============
The accompanying notes are an integral part of these consolidated balance sheets. F-2 22 XETA TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended October 31, ---------------------------------------------- 2000 1999 1998 ------------- ------------- ------------- COMMERCIAL SYSTEM SALES $ 54,198,673 $ -- $ -- INSTALLATION AND SERVICE REVENUES 31,219,629 18,766,095 13,219,687 LODGING SYSTEM SALES 17,000,599 18,496,957 12,227,545 ------------- ------------- ------------- NET SALES, INSTALLATION AND SERVICE REVENUES 102,418,901 37,263,052 25,447,232 ------------- ------------- ------------- COST OF COMMERCIAL SYSTEMS SALES 38,606,406 -- -- INSTALLATION AND SERVICE COSTS 21,627,342 12,206,057 8,535,823 COST OF LODGING SYSTEMS SALES 11,171,774 11,066,635 7,916,888 ------------- ------------- ------------- TOTAL COST OF SALES, INSTALLATION AND SERVICE 71,405,522 23,272,692 16,452,711 ------------- ------------- ------------- Gross profit 31,013,379 13,990,360 8,994,521 ------------- ------------- ------------- OPERATING EXPENSES: Selling, general and administrative 16,050,364 5,136,228 3,992,470 Engineering, research and development 997,516 550,122 383,371 Amortization 1,587,230 1,936,057 381,521 ------------- ------------- ------------- Total operating expenses 18,635,110 7,622,407 4,757,362 ------------- ------------- ------------- INCOME FROM OPERATIONS 12,378,269 6,367,953 4,237,159 INTEREST EXPENSE (2,354,793) -- -- INTEREST AND OTHER INCOME, NET 594,143 664,903 670,541 ------------- ------------- ------------- INCOME BEFORE PROVISION FOR INCOME TAXES 10,617,619 7,032,856 4,907,700 PROVISION FOR INCOME TAXES 4,156,000 2,750,000 1,855,000 ------------- ------------- ------------- NET INCOME $ 6,461,619 $ 4,282,856 $ 3,052,700 ============= ============= ============= INCOME PER SHARE - BASIC $ .77 $ .53 $ .38 ============= ============= ============= INCOME PER SHARE - DILUTED $ .66 $ .46 $ .33 ============= ============= ============= WEIGHTED AVERAGE SHARES OUTSTANDING 8,350,299 8,021,248 8,119,932 ============= ============= ============= WEIGHTED AVERAGE EQUIVALENT SHARES 9,761,703 9,254,442 9,370,160 ============= ============= =============
The accompanying notes are an integral part of these consolidated statements. F-3 23 XETA TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE THREE YEARS ENDED OCTOBER 31, 2000
Common Stock Treasury Stock --------------------------- -------------------------- Number of Paid-in Retained Shares Issued Par Value Shares Amount Capital Earnings ------------- ----------- ----------- ----------- ----------- ----------- BALANCE AT OCTOBER 31, 1997 2,207,285 $ 220,728 189,747 $ (259,740) $ 4,859,340 $ 4,516,205 Stock options exercised 78,999 7,900 -- -- 85,000 -- Tax benefit of stock options -- -- -- -- 191,478 -- Treasury Stock purchased -- -- 74,800 (1,488,376) -- -- Net income -- -- -- -- -- 3,052,700 ----------- ----------- ----------- ----------- ----------- ----------- BALANCE AT OCTOBER 31, 1998 2,286,284 228,628 264,547 (1,748,116) 5,135,818 7,568,905 Stock options exercised 32,067 3,207 -- -- 49,469 -- Tax benefit of stock options -- -- -- -- 188,568 -- Treasury Stock purchased -- -- 65,150 (1,158,043) -- -- Two-for-one stock split 2,318,351 -- 329,697 -- -- -- Net income -- -- -- -- -- 4,282,856 ----------- ----------- ----------- ----------- ----------- ----------- BALANCE AT OCTOBER 31, 1999 4,636,702 231,835 659,394 (2,906,159) 5,373,855 11,851,761 Treasury stock issued in acquisition -- -- (150,000) 661,500 2,638,500 -- Stock options exercised $.05 par value 72,166 3,607 -- -- 182,693 -- Tax benefit of stock options -- -- -- -- 1,004,696 -- Change in par value of common stock -- (226,025) -- -- 226,025 -- Two-for-one stock split 4,708,868 -- 509,394 -- -- -- Stock options exercised $.001 par value 245,000 245 -- -- 61,007 -- Net income -- -- -- -- -- 6,461,619 ----------- ----------- ----------- ----------- ----------- ----------- BALANCE AT OCTOBER 31, 2000 9,662,736 $ 9,662 1,018,788 $(2,244,659) $ 9,486,776 $18,313,380 =========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated statements. F-4 24 XETA TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended October 31, ----------------------------------------------- 2000 1999 1998 ------------- ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 6,461,619 $ 4,282,856 $ 3,052,700 ------------- ------------- ------------- Adjustments to reconcile net income to net cash provided by operating activities- Depreciation 819,439 430,599 299,192 Amortization 1,587,230 1,936,057 381,521 Loss on sale of assets 17,665 -- 14,577 Provision for doubtful accounts receivable 191,000 36,000 76,000 Provision for excess and obsolete inventory 325,000 496,170 -- Change in assets and liabilities- (Increase) decrease in net investment in sales-type leases 1,559,228 (3,709,850) 793,189 Increase in trade receivables (9,072,384) (907,446) (2,135,358) (Increase) decrease in inventories 1,392,523 (1,723,570) (523,508) (Increase) decrease in deferred tax asset 111,533 (47,008) (513,844) Increase in prepaid expenses and other assets (116,751) (391,144) (43,489) Decrease in prepaid taxes 18,700 -- -- Increase in accounts payable 1,104,108 379,645 1,155,187 Increase (decrease) in unearned revenue (2,834,396) 2,667,239 345,313 Increase (decrease) in accrued liabilities (97,501) 670,283 84,758 Increase in accrued income taxes 1,130,639 6,692 254,479 Increase (decrease) in deferred tax liabilities (16,421) 123,143 (24,839) ------------- ------------- ------------- Total adjustments (3,880,388) (33,190) 163,178 ------------- ------------- ------------- Net cash provided by operating activities 2,581,231 4,249,666 3,215,878 ------------- ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of USTI and ACT, net of cash acquired (26,556,154) -- -- Purchases of long distance contracts -- (156,500) (1,860,000) Additions to property, plant and equipment (2,720,054) (1,555,769) (2,497,096) Additions to capitalized software production costs (68,550) (114,036) (237,781) Proceeds from sale of assets 82,325 -- 852 ------------- ------------- ------------- Net cash used in investing activities (29,262,433) (1,826,305) (4,594,025) ------------- ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of debt 26,020,432 -- -- Proceeds from revolving line of credit 23,750,000 -- -- Principal payments on debt (4,216,664) -- -- Payments on revolving line of credit (22,750,000) -- -- Purchase of treasury stock -- (1,158,043) (1,488,376) Exercises of stock options and warrants 247,552 52,676 92,900 ------------- ------------- ------------- Net cash (used in) provided by financing activities 23,051,320 (1,105,367) (1,395,476) ------------- ------------- ------------- Net increase (decrease) in cash and cash equivalents (3,629,882) 1,317,994 (2,773,623) CASH AND CASH EQUIVALENTS, beginning of year 4,556,212 3,238,218 6,011,841 ------------- ------------- ------------- CASH AND CASH EQUIVALENTS, end of year $ 926,330 $ 4,556,212 $ 3,238,218 ============= ============= ============= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for interest $ 1,620,462 $ 18,296 $ 22,694 ============= ============= ============= Cash paid during the period for income taxes $ 2,956,054 $ 2,675,135 $ 2,116,908 ============= ============= ============= Contingent liabilities acquired in USTI acquisition $ 4,500,000 $ -- $ -- ============= ============= ============= Treasury shares issued in USTI acquisition $ 3,300,000 $ -- $ -- ============= ============= =============
The accompanying notes are an integral part of these consolidated statements. F-5 25 XETA TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED OCTOBER 31, 2000 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Business XETA Technologies, Inc., formerly Xeta Corporation, (XETA or the Company) is a nationwide integrator of voice and data technologies. The Company provides consulting, sales, engineering, project management, installation and service of Cisco data networking and IP networking solutions, Avaya voice and data systems, Microsoft Exchange, Avaya unified messaging systems, call centers, and telephony over IP solutions to the commercial market. In addition, the Company provides Hitachi and Avaya voice systems and XETA call accounting systems to the hospitality industry. XETA is an Oklahoma corporation. U.S. Technologies Systems, Inc. (USTI) is a wholly-owned subsidiary of XETA and was purchased on November 30, 1999 as part of the Company's expansion into the commercial market. Xetacom, Inc. (Xetacom), is a wholly-owned, but dormant, subsidiary of the Company. Cash and Cash Equivalents Cash and cash equivalents at October 31, 2000, consist of money market accounts and commercial bank accounts. Lease Accounting A portion of the Company's revenues have been generated using sales-type leases. The Company sells some of its call accounting systems to the lodging industry under these sales-type leases to be paid over three, four and five-year periods. Because the present value (computed at the rate implicit in the lease) of the minimum payments under these sales-type leases equals or exceeds 90 percent of the fair market value of the systems and/or the length of the lease exceeds 75 percent of the estimated economic life of the equipment, the Company recognizes the net effect of these transactions as a sale as required by accounting principles generally accepted in the United States. Interest and other income is primarily the recognition of interest income on the Company's sales-type lease receivables and income earned on short-term cash investments. Interest income from a sales-type lease represents that portion of the aggregate payments to be received over the life of the lease which exceeds the present value of such payments using a discount factor equal to the rate implicit in the underlying leases. Revenue Recognition The Company recognizes revenue from sales-type leases as discussed above under the caption "Lease Accounting." Service revenue is recognized monthly over the life of the related sales-type lease or service agreement on a straight-line basis. In fiscal year 2000, the Company changed its revenue recognition policy related to equipment sales, in order to provide better matching of revenues and expenses. Equipment revenues from call accounting and PBX systems sales are recognized upon shipment of the system. Installation revenue from system sales is recognized upon installation. Under the prior method, call accounting system sales were recognized 75 percent upon shipment with the remaining 25 percent recognized upon installation. PBX system sales were recognized 100 percent upon installation. The accounting change was not material to the financial statements. F-6 26 Property, Plant and Equipment The Company capitalizes the cost of all significant property, plant and equipment additions including equipment manufactured by the Company and installed at customer locations under PBX service agreements. Depreciation is computed over the estimated useful life of the asset or the terms of the lease for leasehold improvements, whichever is shorter, on a straight-line basis. When assets are retired or sold, the cost of the assets and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in income. Maintenance and repair costs are expensed as incurred. Research and Development and Capitalization of Software Production Costs The Company capitalizes software production costs related to a product upon the establishment of technological feasibility as defined by accounting principles generally accepted in the United States. Amortization is provided on a product-by-product basis based upon the estimated useful life of the software (generally seven years). All other research and development costs (including those related to software for which technological feasibility has not been established) are expensed as incurred. Income Taxes Several items of income and expense, including certain sales revenues under sales-type leases, are included in the financial statements in different years than they are included in the income tax returns. Deferred income taxes are recorded for the tax effect of these differences. Warranty and Unearned Revenue The Company typically provides a one-year warranty from the date of installation of its systems. The Company defers a portion of each system sale to be recognized as service revenue during the warranty period. The amount deferred is generally equal to the sales price of a maintenance contract for the type of system under warranty and the length of the warranty period. The Company also records deposits received on sales orders and prepayments for maintenance contracts as deferred revenues. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Recently Issued Accounting Pronouncements In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments of an Enterprise and Related Information," which establishes standards for reporting about operating segments in the annual financial statements and requires reporting of selected information about operating segments in interim financial reports issued to shareholders. F-7 27 In the first quarter of 2000, the Company adopted SFAS 131 in conjunction with its acquisition of USTI and the Company's internal realignment. The Company divided its operations into three reportable segments: commercial system sales, lodging system sales and installation and service. The Company defines commercial system sales as sales to the non-lodging industry. Installation and service revenues represent revenues earned from installing and maintaining systems for customers in both the commercial and lodging segments. The reporting segments follow the same accounting policies used for the Company's consolidated financial statements and described in the summary of significant accounting policies. Company management evaluates a segment's performance based upon gross margins. Assets are not allocated to the segments. Sales to customers located outside of the United States are immaterial. The following is tabulation of business segment information for 2000, 1999 and 1998. Segment information for 1999 and 1998 has been restated to conform to the current presentation.
Commercial Lodging Installation System System and Service Sales Sales Revenue Total ------------- ------------- ------------- ------------- 2000 Sales $ 54,198,673 $ 17,000,599 $ 31,219,629 $ 102,418,901 Cost of sales 38,606,406 11,171,774 21,627,342 71,405,522 Gross profit 15,592,267 5,828,825 9,592,287 31,013,379 1999 Sales -- 18,496,957 18,766,095 37,263,052 Cost of sales -- 11,066,635 12,206,057 23,272,692 Gross profit -- 7,430,322 6,560,038 13,990,360 1998 Sales -- 12,227,545 13,219,687 25,447,232 Cost of sales -- 7,916,888 8,535,823 16,452,711 Gross profit -- 4,310,657 4,683,864 8,994,521
In June 1998, the FASB issued Statement of Financial Accounting Standards 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement. Companies must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. SFAS 133, as amended by SFAS 137 is effective for fiscal years beginning after June 15, 2000. SFAS 133 cannot be applied retroactively and must be applied to (a) derivative instruments and (b) certain derivative instruments embedded in hybrid contracts that were issued, acquired or substantively modified after December 31, 1997. The Company adopted SFAS 133, effective November 1, 2000. The adoption of SFAS 133 did not have a material impact on the Company's financial statements. Reclassifications Certain reclassifications have been made to the 1999 and 1998 income statements to conform with the 2000 presentation. These reclassifications had no effect on net income. F-8 28 Change in Par Value and Stock Split On June 26, 2000, the Company reduced the par value of its common stock to $.001 and increased the authorized shares to 50 million. The Company declared a two-for-one stock split which was effective on July 17, 2000. All share and per share amounts contained in these financial statements and footnotes have been restated to reflect the stock split. Statements of Cash Flows During 1999, $483,650 of spare parts inventory acquired as part of the purchased service contracts was reclassified from purchased service and long-distance contracts to inventory. 2. ACQUISITIONS: On November 30, 1999, the Company successfully completed the acquisition of USTI, a Missouri Subchapter S corporation. The Company purchased all of the outstanding common stock of USTI for $26 million in cash plus 150,000 shares of XETA common stock held in treasury with a market value of $3.3 million on the date of issuance. At closing, the Company paid the sellers $23 million in cash plus the common stock according to the terms and conditions of each of the purchase agreements which were negotiated separately with the sellers. The remaining $3 million was subject to various hold-back provisions, $2 million of which could be satisfied through the achievement of certain growth targets with the remainder being held for two years as an indemnity against any breaches in the representations and warranties made by the owners in the sale documents. As of October 31, 2000, the growth targets associated with the hold-back were achieved and $2 million was paid on November 30, 2000, in accordance with the terms of the transaction. The transaction is being accounted for using the purchase method of accounting and the associated goodwill of $21,109,330 is being amortized over 20 years. The accompanying operating results represent the results of operations of the Company after consolidating USTI's results since December 1, 1999. The unaudited proforma information presented below consists of statement of operations data as presented if USTI's results had been consolidated from the first day of the period reported.
Proforma Year ended October 31, --------------------------------- 2000 1999 --------------- --------------- Revenues $ 106,462,887 $ 75,213,052 Net income $ 6,869,101 $ 6,694,856 Basic earnings per share $ 0.82 $ 1.27 Diluted earnings per share $ 0.70 $ 1.10
On February 29, 2000, the Company acquired substantially all of the properties and assets (the "Assets") of Advanced Communication Technologies, Inc. (ACT) pursuant to the terms of an Asset Purchase Agreement (the "Purchase Agreement") dated February 22, 2000, entered into among the Company and ACT, its parent corporation, Noram Telecommunications, Inc., an Oregon corporation, and its parent corporation, Quanta Services, Inc., a Delaware corporation. The Company also assumed all of ACT's existing liabilities as disclosed on ACT's balance sheet with the exception of inter-company liabilities and federal and state income taxes payable by ACT. The purchase price of the Assets was the sum of $250,000 plus the book value (as defined in the Purchase Agreement) of ACT. ACT's reported book value as of January 31, 2000 was $2,770,432, which amount was paid by the Company to ACT in cash at closing. The $250,000 balance of the tentative purchase price was paid into escrow as security for the indemnification by ACT of any damages incurred by the Company F-9 29 by reason of any breach of warranty or representation made by ACT to the Company in connection with the Purchase Agreement. A determination of the final purchase price and the distribution of the escrow balance is expected to be concluded in February 2001. The entire purchase price was paid by advances drawn under the Company's credit facility, which is more fully described in Note 9 below. In conjunction with the purchase, the Company recorded $442,029 of goodwill, which is being amortized over 20 years. In September 1998, the Company purchased substantially all of the Hitachi PBX service contracts from Williams Communications Solutions, LLC (WCS) for $1,533,000. The Company took responsibility for the 94 service contracts and 9 warranty customers between October 15, 1998 and December 1, 1998 based on a predetermined schedule. The Company amortized the purchase price over the estimated useful life of the contracts which was approximately one year. In addition to the service contracts, the Company also purchased WCS' spare parts inventory. 3. ACCOUNTS RECEIVABLE: Trade accounts receivable consist of the following at October 31:
2000 1999 ------------- ------------- Trade receivables $ 32,003,881 $ 4,617,815 Less- reserve for doubtful accounts 1,864,258 185,168 ------------- ------------- Net trade receivables $ 30,139,623 $ 4,432,647 ============= =============
Adjustments to the reserve for doubtful accounts consist of the following at October 31:
2000 1999 ------------- ------------- Balance, beginning of period $ 185,168 $ 168,513 Acquired at acquisition 1,642,771 -- Provision for doubtful accounts 191,000 36,000 Net write-offs (155,016) (19,345) ------------- ------------- Balance, end of period $ 1,864,258 $ 185,168 ============= =============
4. INVENTORIES: Inventories are stated at the lower of cost (first-in, first-out or average) or market and consist of the following components at October 31:
2000 1999 ------------ ------------ Raw materials $ 1,235,842 $ 1,268,635 Finished goods and spare parts 8,032,695 3,285,841 ------------ ------------ 9,268,537 4,554,476 Less- reserve for excess and obsolete inventory 1,133,475 821,170 ------------ ------------ Total inventories, net $ 8,135,062 $ 3,733,306 ============ ============
Adjustments to the reserve for excess and obsolete inventories consist of the following:
2000 1999 ------------- ------------- Balance, beginning of period $ 821,170 $ 324,998 Acquired at acquisition 136,739 -- Provision for excess and obsolete inventories 325,000 496,172 Inventories written off (149,434) -- ------------- ------------- Balance, end of period $ 1,133,475 $ 821,170 ============= =============
F-10 30 5. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment consist of the following at October 31:
Estimated Useful Lives 2000 1999 ----------- ------------ ----------- Building 20 $ 2,397,954 $ 2,397,954 Data processing and computer field equipment 3-5 4,244,213 1,694,056 Land - 611,582 611,582 Office furniture 5 958,385 438,815 Auto 5 266,668 9,486 Other 3-7 677,137 356,446 ------------ ----------- Total property, plant and equipment 9,155,939 5,508,339 Less- accumulated depreciation 2,301,088 1,565,799 ------------ ----------- Total property, plant and equipment, net $ 6,854,851 $ 3,942,540 ============ ===========
6. ACCRUED LIABILITIES: Accrued liabilities consist of the following at October 31:
2000 1999 ------------ ------------ Commissions $ 1,608,576 $ 192,463 Interest 708,750 -- Payroll 401,632 147,197 Bonuses 334,476 849,863 Vacation 294,905 126,679 Other 579,464 178,535 ------------ ------------ Total current 3,927,803 1,494,737 Noncurrent liabilities 1,299,114 -- ------------ ------------ Total accrued liabilities $ 5,226,917 $ 1,494,737 ============ ============
7. UNEARNED REVENUE: Unearned revenue consists of the following at October 31:
2000 1999 ------------ ------------ Service contracts $ 1,884,155 $ 1,575,385 Warranty service 1,001,791 1,363,187 Customer deposits 1,309,159 1,349,405 Systems shipped but not installed 196,766 123,729 Other 121,158 128,842 ------------ ------------ Total current unearned revenue 4,513,029 4,540,548 Noncurrent unearned service revenue 1,039,949 1,953,222 ------------ ------------ Total unearned revenue $ 5,552,978 $ 6,493,770 ============ ============
F-11 31 8. INCOME TAXES: Income tax expense is based on pretax financial accounting income. Deferred income taxes are computed using the asset-liability method in accordance with SFAS No. 109, "Accounting for Income Taxes" and are provided on all temporary differences between the financial basis and the tax basis of the Company's assets and liabilities. The income tax provision for the years ending October 31, 2000, 1999 and 1998, consists of the following:
2000 1999 1998 ------------- ------------- ------------- Current provision - federal $ 4,440,000 $ 2,176,000 $ 1,584,000 Deferred provision (benefit) - federal (1,037,000) 76,000 (77,000) State income taxes 753,000 498,000 348,000 ------------- ------------- ------------- Total provision $ 4,156,000 $ 2,750,000 $ 1,855,000 ============= ============= =============
The reconciliation of the statutory income tax rate to the effective income tax rate is as follows:
Year Ended October 31, ------------------------- 2000 1999 1998 ----- ----- ----- Statutory rate 34% 34% 34% State income taxes 7% 7% 7% Other (2)% (2)% (3)% ----- ----- ----- Effective rate 39% 39% 38% ===== ===== =====
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of October 31 are presented below:
2000 1999 ------------- ------------- Deferred tax assets: Prepaid service contracts $ 337,559 $ 503,983 Nondeductible reserves 1,630,311 423,069 Unamortized cost of service contracts 31,186 102,094 Other 29,224 33,124 ------------- ------------- Total deferred tax asset 2,028,280 1,062,270 ------------- ------------- Deferred tax liabilities: Tax income to be recognized on sales-type lease contracts 203,305 802,581 Unamortized capitalized software development costs 603,606 220,798 Unamortized cost of long distance and service contracts -- 66,320 Other 211,485 -- ------------- ------------- Total deferred tax liability 1,018,396 1,089,699 ------------- ------------- Net deferred tax asset (liability) $ 1,009,884 $ (27,429) ============= =============
9. CREDIT AGREEMENTS: Financing for the acquisitions described in Note 2 was provided through a $43 million credit facility with a bank. The $23 million paid at closing of the USTI transaction was funded with a 5-year term loan. The $3 million payment made at the closing of the ACT transaction was funded from the Company's acquisition facility. The remaining portion of the credit facility is an $8 million revolving line of credit. Interest on all the funded portions of the facility accrues at either a) the London Interbank Offered rate (which was 6.76% at October 31, 2000) plus 1.5% to 2.5%, as determined by the ratio of the Company's total funded debt to EBITDA (as defined in the credit facility) or b) the bank's prime rate (which was 9.75% at October 31, 2000) plus up to .75%, as determined by the ratio of the Company's total funded debt to EBITDA. Commitment fees of .20% to .45% (based on certain financial ratios) are due on any unused borrowing capacity under the credit facility. F-12 32 Long-term debt at October 31, 2000, consists of the following: $8 million bank line of credit, due November 2002 $ 1,000,000 Term note, payable in monthly installments of $50,340, due November 2005 3,020,432 Acquisition term note, payable in monthly installments of $383,334, due November 2004 19,166,667 Acquisition hold-back, payable in accordance with the purchase agreement 3,000,000 -------------- 26,187,099 Less-current maturities 8,204,088 -------------- $ 17,983,011 ==============
Maturities of long-term debt for each of the years ended October 31, are as follows: 2001 $ 8,204,088 2002 6,204,208 2003 5,204,208 2004 5,204,208 2005 1,370,387
On November 1, 2000, the Company drew an additional $5.5 million down on the acquisition portion of the credit facility to fund two acquisitions which are more fully described under Note 17. As a result, on November 30, 2000, the total $8.5 million drawn to date on the acquisition facility was converted into a new five-year term loan and the total monthly payments on the Company's term loans increased to $525,000. The Company's indebtedness is collateralized by substantially all of the Company's assets. The credit agreements require, among other things, that the Company maintains a minimum net worth, working capital and debt service coverage ratio and limits capital expenditures. At October 31, 2000, the Company was in compliance or had received waivers of violations with respect to the covenants of the credit agreements. Based on the borrowing rates currently available to the Company for bank loans with similar terms and average maturities, the fair value of the long-term debt approximates the carrying value. 10. STOCK OPTIONS: During fiscal 2000, the Company adopted a new stock option plan ("2000 Plan") for officers, directors and key employees. The 2000 Plan replaces the previous 1988 Plan, which had expired. Under the 2000 Plan, the Board of Directors or a committee thereof determine the option price, not to be less than fair market value, the date of the grant, number of options granted, and the vesting period. Although there are exceptions, generally options granted under the 2000 Plan expire 10 years from F-13 33 the date of grant, have 3-year cliff-vesting and are incentive stock options as defined under the applicable IRS tax rules. Options granted under the previous 1988 Plan generally vested 33 1/3% after a 1-year waiting period.
Outstanding Options (1988 and 2000 Plans) -------------------------------- Price Per Number Share ---------- ----------------- Balance, October 31, 1998 345,344 $ .25-8.75 Exercised (8,268) $ 3.28-8.75 ---------- ----------------- Balance, October 31, 1999 337,076 $ .25-4.375 Granted 258,400 $ 9.0625-18.125 Exercised (99,732) $ .25-4.375 Forfeited (21,100) $ 11-18.125 ---------- ----------------- Balance, October 31, 2000 474,644 $ .25-18.125 ========== =================
At October 31, 2000 and 1999, options to purchase 341,804 and 115,196 shares, respectively, are exercisable. The Company has also granted options outside the Plan to certain officers and directors. These options generally expire ten years from the date of grant and are exercisable over the period stated in each option. The table below presents information regarding options granted outside the Plan.
Outstanding Options ----------------------------- Price Per Number Share ----------- ------------ Balance, October 31, 1998 1,720,000 $ .25-.3875 Granted 800,000 $ 5.94 Exercised (120,000) $ .25 ----------- ------------ Balance, October 31, 1999 2,400,000 $ .25-5.94 Granted 40,000 $ 15.53 Exercised (289,600) $ .25 ----------- ------------ Balance, October 31, 2000 2,150,400 $ .25-15.53 =========== ============
Accounting for stock options issued to employees is governed by Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock Based Compensation." Generally, SFAS 123 requires companies to record in their financial statements the compensation expense, if any, related to stock options issued to employees. Under an alternative accounting method adopted by the Company, SFAS 123 allows the Company to only disclose the impact of issued stock options as if the expense had been recorded in the financial statements. Had the Company recorded compensation F-14 34 expense related to its stock option plans in accordance with SFAS 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
For the Year Ended October 31, --------------------------------------------- 2000 1999 1998 ------------- ------------- ------------- NET INCOME: As reported $ 6,461,619 $ 4,282,856 $ 3,052,700 Pro forma $ 5,797,629 $ 4,088,298 $ 2,945,408 EARNINGS PER SHARE: As reported - Basic $ .77 $ .53 $ .38 As reported - Diluted $ .66 $ .46 $ .33 Pro forma - Basic $ .69 $ .51 $ .37 Pro forma - Diluted $ .59 $ .44 $ .32
The fair value of the options granted was estimated at the date of grant using the Modified Black-Scholes European pricing model with the following assumptions: risk free interest rate (5.38% to 6.46%), dividend yield (0.00%), expected volatility (78.16% to 107.47%), and expected life (6 years). 11. EARNINGS PER SHARE: All earnings per share amounts disclosed herein have been calculated under the provisions of Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share," effective December 31, 1997. All basic earnings per common share were computed by dividing net income by the weighted average number of shares of common stock outstanding during the reported period. A reconciliation of net income and weighted average shares used in computing basic and diluted earnings per share is as follows:
For the Year Ended October 31, 2000 --------------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ------------- ------------- ------------- Basic EPS Net income $ 6,461,619 8,350,299 $ .77 ============= ============= Dilutive effect of stock options 1,411,404 ------------- Diluted EPS Net income $ 6,461,619 9,761,703 $ .66 ============= ============ =============
For the Year Ended October 31, 1999 --------------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ------------- ------------- ------------- Basic EPS Net income $ 4,282,856 8,021,248 $ .53 ============= ============= Dilutive effect of stock options 1,233,194 ------------- Diluted EPS Net income $ 4,282,856 9,254,442 $ .46 ============= ============= =============
F-15 35
For the Year Ended October 31, 1998 --------------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ------------- ------------- ------------- Basic EPS Net income $ 3,052,700 8,119,932 $ .38 ============= ============= Dilutive effect of stock options 1,250,228 ------------- Diluted EPS Net income $ 3,052,700 9,370,160 $ .33 ============= ============= =============
12. COMMITMENTS: Minimum future annual payments to be received under various leases are as follows:
Sales-Type Lease Payments October 31, Receivable --------------- 2001 $ 3,036,965 2002 1,850,654 2003 388,147 2004 79,124 2005 2,464 ------------ 5,357,354 Less- imputed interest 495,698 ------------ Present value of minimum payments $ 4,861,656 ============
On October 30, 1997, the Company's Board of Directors adopted a stock buy-back program in which management was authorized to spend up to one-third of net income for fiscal 1997 and for each subsequent fiscal quarter thereafter until the program is terminated. During fiscal 1999, the percentage of each quarter's net income allocated to the buy-back program was increased to one-half plus a one-time allocation of $500,000. During fiscal 1998, the Company purchased 299,200 shares at an average price of $4.98. During fiscal 1999, the Company purchased 260,600 shares at an average price of $4.45. While the buy-back program remains in place, the Company did not repurchase any shares in fiscal 2000. In addition, the Company's new credit agreement (See Note 9) places limits on the amount of shares that could be repurchased under the buy-back plan. 13. MAJOR CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK: Marriott International/Marriott Host (Marriott) is a major customer of the Company. The Company has systems installed at various Marriott owned or managed hotels under the brands "Marriott," "Residence Inn by Marriott," "Courtyard by Marriott," and "Fairfield Inn by Marriott." Revenues from Marriott represented 22 percent of the Company's revenues for the year 1999 and 1998. Marriott has been a major customer of the Company since 1986 and management considers its relationship with Marriott to be good. During fiscal 1998, revenues earned from Starwood Hotels and Resorts and from Prime Hospitality were 11 percent and 10 percent, respectively. Both of these companies are relatively new customers to the Company. The Company considers its relationship with both to be good. During fiscal 2000, no single customer represented 10 percent or more of revenues. F-16 36 The Company extends credit to its customers in the normal course of business, including under its sales-type lease program. As a result, the Company is subject to changes in the economic and regulatory environments or other conditions, which, in turn, may impact the Company's overall credit risk. However, the Company sells to a wide variety of customers, and except for its hospitality customers, does not focus its sales and marketing efforts on any particular industry. Management considers the Company's credit risk to be satisfactorily diversified and believes that the allowance for doubtful accounts is adequate to absorb estimated losses at October 31, 2000 and 1999. 14. EMPLOYMENT AGREEMENTS: The Board of Directors adopted a new bonus plan for fiscal 2000 to replace the plan previously in place. Under the 2000 plan, bonuses were to be paid to executives and key employees based on targeted financial results, which reflected the Company's annual operating plan. Those targeted results were not fully achieved in fiscal 2000; however, the Company elected to pay partial bonuses of approximately $120,000 to key employees. In fiscal years 1999 and 1998, $1,114,000 and $793,000, respectively, were paid under the previous bonus plan. 15. CONTINGENCIES: Litigation The matter of Associated Business Telephone Systems, Inc.(ABTS), plaintiff, vs. XETA Corporation, defendant and third-part plaintiff, vs. D&P Investments, Inc. (D&P) and Communications Equipment Brokers, Inc., third-party defendants, filed in June 1995, is still pending before the United Stated District Court for the Northern District of Oklahoma. This matter arises from a 1986 distributor's agreement between the Company and D&P, pursuant to which the Company sold call accounting systems to D&P for resale, and a maintenance agreement between the Company and ABTS pursuant to which the Company furnished maintenance services for such systems. After having some of its claims dismissed by the Court, ABTS' remaining claims are based on breach of contract and tortious interference with certain customer relationships. The stated amount of damages sought by ABTS in this matter is approximately $809,000. The Company seeks in excess of $3 million in damages in its counterclaims against ABTS and third-party claims against D&P. In November 1999, during a pretrial conference, ABTS and D&P disclosed to the Court that both of these companies had been dissolved during the pendency of this litigation, without notice to the Company. In view of this fact, and following ABTS' and D&P's failure to provide certain financial information to the Company as ordered by the Court, the Court postponed trial in this matter and granted the Company the right to conduct discovery into the financial affairs of ABTS, D&P and ABTS' related companies. The Company is currently conducting such discovery. The Company has also filed a motion to dismiss ABTS' and D&P's claims for their continued failure to disclose certain other documents requested in 1997. While the Magistrate Judge has recommended that one of ABTS' claims be stricken, the District Judge has - upon ABTS' appeal - taken this issue under advisement. On August 30, 2000, the District Court granted the Company's Motion to Amend to add the following third-party defendants: Dominic Dalia, an individual; Bernice Dalia, an individual; Michael Dalia, an individual; A.B.T.S. International Corp., f/k/a A.B.T.S. Investment Corporation, a/k/a ABTSI; Intelecable N.A., Inc.; Intelepower N.A., Inc.; Intelemedia N.A., Inc.; Intelnet Services of North America, Inc., d/b/a Hotel Digital Network, d/b/a HDN; Intelnet Services of North America, Inc. (Business I.D. No. 0100567092); Intelnet Services of North America, Inc. (Business I.D. No. 010060200); D.P. Southfield, Inc.; Telesource Inc.; Inntraport International Corp., f/k/a Innterport International Corp. f/k/a Intelnet International Corp.; and Dalia Associates, a partnership. At this point, the Company does not anticipate that a trial date will be set anytime within the next nine to twelve months. The Company intends to continue to vigorously defend ABTS' claims against it and to pursue all of its counterclaims and third-party claims against ABTS, D&P, and the other third-party defendants. F-17 37 Since 1994, the Company has been monitoring numerous patent infringement lawsuits filed by Phonometrics, Inc. (Phonometrics), a Florida company, against certain telecommunications equipment manufacturers and hotels who use such equipment. While the Company has not been named as a defendant in any of these cases, several of its call accounting customers are named defendants. These customers have notified the Company that they will seek indemnification under the terms of their contracts with the Company. However, because there are other equipment vendors implicated along with the Company in the cases filed against its customers, the Company has never assumed the outright defense of its customers in any of these actions. Phonometrics seeks damages of an unspecified amount, based upon a reasonable royalty of the hotels' profits derived from use of the allegedly infringing equipment during a period commencing six years prior to the filing of such lawsuit and ending October 30, 1990. All of the cases filed by Phonometrics against the Company's customers were originally filed in, or transferred to, the United States District Court for the Southern District of Florida. On October 26, 1998, the Florida Court dismissed all of the cases filed against the hotels for failure to state a claim, relying on the precedent established in Phonometrics' unsuccessful patent infringement lawsuit against Northern Telecom. In its order dismissing Phonometrics' complaints, the Florida court noted that Phonometrics failed to allege that the hotels' call accounting equipment displays cumulative costs in real time as they accrue and displays these costs on a visual digital display, both of which are necessary to establish infringement of Phonometrics' patent, as determined in the Northern Telecom case. On November 13, 1998, Phonometrics appealed the Florida court's order to the Untied States Court of Appeals for the Federal Circuit. The Court of Appeals reversed the District Court's dismissal of the cases, but did so solely upon the basis of a procedural matter. The Appeals Court made no ruling with respect to the merits of Phonometrics' case and remanded the cases back to the Florida court for further proceedings. These cases were reopened in April 2000 and since then Phonometrics has filed motions to disqualify the District Court judge hearing the cases. These motions have been denied. The Company will continue to monitor proceedings in these actions. Other Matter The acquisition of USTI was a purchase of 100% of the stock of USTI for financial reporting purposes. However, for tax purposes, all of the parties to the purchase agreement agreed to elect under the applicable provisions of the Internal Revenue Code rules, to treat the transaction as a purchase of assets by Xeta. To properly affect the appropriate elections for this desired tax treatment, the required election form was to be filed by August 15, 2000. Since this election form filing has not been timely filed, the Company is working with its professional advisors and the former USTI shareholders in seeking administrative relief from the IRS to accept the election form as if it had been timely filed. Based on historical precedence, it is probable that administrative relief will be granted by the IRS. However, there can be no guarantee of such an outcome. Failure to obtain administrative relief will result in the loss of significant tax deductions to the Company over the next 15 years and as a result, will increase the Company's effective tax rate on its future financial statements. 16. RETIREMENT PLAN: The Company has had a 401(k) retirement plan ("Plan") since 1994. In conjunction with the acquisition of USTI, the Company merged its Plan with the USTI 401(k) retirement plan. In addition to employee contributions, the Company makes discretionary matching and profit sharing contributions to the Plan based on percentages set by the Board of Directors. Contributions made by the Company to the Plan were $355,000, $167,689 and $160,000 for the years ending October 31, 2000, 1999 and 1998, respectively. F-18 38 17. SUBSEQUENT EVENT: On November 1, 2000, the Company made two acquisitions to continue its expansion into voice and data integrated networks and services. The Company acquired substantially all of the assets of PRO Networks Corporation, a Missouri based company specializing in the sale, installation and service of data networking equipment. Simultaneously, the Company also purchased the assets of a professional services firm, Key Metrology Integration, Inc. (KMI). The Company paid a total of $5.5 million in cash for the assets of these two companies, and will pay up to an additional $4.5 million if various growth targets are met. Financing for these transactions was provided by the Company's credit facility which is more fully described in Note 9 above. 18. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED): The following quarterly financial data has been prepared from the financial records of the Company without an audit, and reflects all adjustments which, in the opinion of management, were of a normal, recurring nature and necessary for a fair presentation of the results of operations for the interim periods presented.
For the Fiscal Year Ended October 31, 2000 ------------------------------------------------- Quarter Ended ------------------------------------------------- January 31, April 30, July 31, October 31, 2000 2000 2000 2000 ---------- ---------- ---------- ---------- (in thousands, except per share data) Net sales $ 20,550 $ 27,473 $ 25,580 $ 28,816 Gross profit 6,262 7,964 8,137 8,650 Operating income 2,624 3,335 2,954 3,465 Net income 1,520 1,726 1,436 1,780 Basic EPS $ 0.19 $ 0.21 $ 0.17 $ 0.21 Diluted EPS $ 0.16 $ 0.17 $ 0.15 $ 0.18
For the Fiscal Year Ended October 31, 1999 ------------------------------------------------- Quarter Ended ------------------------------------------------- January 31, April 30, July 31, October 31, 1999 1999 1999 1999 ---------- ---------- ---------- ---------- (in thousands, except per share data) Net sales $ 7,046 $ 9,241 $ 9,789 $ 11,187 Gross profit 2,749 3,595 3,601 4,045 Operating income 1,160 1,764 1,653 1,791 Net income 797 1,156 1,111 1,219 Basic EPS $ 0.10 $ 0.14 $ 0.14 $ 0.15 Diluted EPS $ 0.09 $ 0.13 $ 0.12 $ 0.13
F-19 39 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT. The directors, executive officers and significant employees of the Company are set forth below. All officers and members of the Board of Directors serve for a term of one year or until their successors are duly elected and qualified. Directors may be removed by holders of 66 2/3% of the Company's outstanding voting shares.
NAME AND AGE POSITIONS WITH COMPANY ------------ ---------------------- Jack R. Ingram Chairman of the Board and Chief Executive Age 57 Officer Jon A. Wiese Chief Operating Officer, President and Age 44 Director Robert B. Wagner Chief Financial Officer, Secretary and Age 39 Director Larry N. Patterson Senior Vice President Operations Age 44 Donald E. Reigel Regional Vice President of Sales Age 46 James J. Burke Regional Vice President of Sales Age 56 Sandra J. Connor Regional Vice President of Sales Age 36 Ron B. Barber Director Age 46 Donald T. Duke Director Age 51 Dr. Robert D. Hisrich Director Age 56 Mark A. Martin Director Age 41 Ronald L. Siegenthaler Director Age 57
A brief account of the business experience for the past five years of the individuals listed above follows. MR. INGRAM has been the Company's Chief Executive Officer since August 1999. He served as the Company's President from July 1990 until August 2, 1999, and has been a director of the Company since March 1989. Mr. Ingram's 20 40 business experience prior to joining the Company was concentrated in the oil and gas industry. Mr. Ingram holds a Bachelor of Science Degree in Petroleum Engineering from the University of Tulsa. MR. WIESE joined the Company on August 2, 1999 as President. Prior to joining the Company, Mr. Wiese was employed by Lucent Technologies, Inc. since 1989 where he held various executive offices since 1990, including President and Corporate Officer of Lucent's International Division based in Brussels. From 1997 until taking the position with the Company, he served as Vice President and Corporate Officer at Lucent and was responsible for its USA sales and service division where he had full P&L responsibility and managed twelve Vice Presidents and 17,000 Lucent employees. His functional responsibilities in this division included marketing, sales, service, human resources, finance, information technology, and order and asset management. Mr. Wiese holds a Bachelor of Science degree in finance and a Master of Business Administration degree in marketing from Oklahoma State University. He is also a 1994 graduate of the Cultural Transformation Program at the London School of Business. MR. WAGNER has been the Company's Vice President of Finance and Chief Financial Officer since March 1989. He has been with the Company since July, 1988 and became a member of the Board of Directors in March 1996. Mr. Wagner is a Certified Public Accountant licensed in Oklahoma and received his Bachelor of Science Degree in Accounting from Oklahoma State University. MR. PATTERSON joined the Company in March 2000 as Senior Vice President, Operations. Prior to his employment with the Company, Mr. Patterson worked for Exxon Corporation and held various executive positions in Europe, Asia and Latin America with Exxon Company, International. He is a member of the American Management Association and is active in Organizational Development, Leadership Development and Investment Management activities. Mr. Patterson received his Bachelor of Science Degree in Engineering from Oklahoma State University. MR. REIGEL joined the Company in June 1993 as PBX Product Sales Manager. He was promoted to Vice President of Marketing and Sales in June 1995; became Vice President of Hospitality Sales in December, 1999; and is currently the Regional Vice President of Sales with responsibility over the Northwest region and lodging. Prior to his employment with the Company, Mr. Reigel served as a national accounts sales manager for WilTel Communications Systems. Mr. Reigel received his Bachelor of Science Degree in Business from the University of Colorado. MR. BURKE joined the Company in November 1999 in conjunction with the acquisition of USTI and is currently the Regional Vice President of Sales for the Southwest region. Prior to his employment with the Company, he had been employed by USTI since August 1990 and served as the Western Region Sales Director and National Sales Director. Mr. Burke received his Bachelor of Science Degree in Business from Niagara University. MS. CONNOR joined the Company in September 2000 as a Regional Vice President of Sales with responsibility for the Eastern region and government sales. Prior to her employment with the Company, Ms. Connor served in various sales and sales operations assignments at Lucent Technologies, most recently as Area Sales Vice President for the New England Region - Enterprise Networks Division. Ms. Connor received her Bachelor of Science Degree in Management from the University of Massachusetts, Lowell. MR. BARBER has been a director of the Company since March 1987. He has been engaged in the private practice of law since October 1980 and is a shareholder in the law firm of Barber & Bartz, a Professional Corporation, in Tulsa, Oklahoma, which serves as counsel to the Company. Mr. Barber is also a Certified Public Accountant licensed in Oklahoma. He received his Bachelor of Science Degree in Business Administration (Accounting) from the University of Arkansas and his Juris Doctorate Degree from the University of Tulsa. MR. DUKE has been a director of the Company since March 1991. He is President of Duke Energy Co. L.L.C., an oil and gas consulting and investment firm. Mr. Duke has been in senior management in the oil and gas industry since 1980, including time as President and Chief Operating Officer of Hadson Petroleum (USA), Inc., a domestic oil and gas subsidiary of Hadson Corporation, where he was responsible for all phases of exploration and production, land, accounting, operations, product marketing and budgeting and planning. Mr. Duke has a Bachelor of Science Degree in Petroleum Engineering from the University of Oklahoma. DR. HISRICH has been a director of the Company since March 1987. He occupies the A. Malachi Mixon III Chair in Entrepreneurial Studies and is Professor of Marketing and Policy Studies at the Weatherhead School of Management at 21 41 Case Western Reserve University in Cleveland, Ohio. Prior to assuming such positions, he occupied the Bovaird Chair of Entrepreneurial Studies and Private Enterprise and was Professor of Marketing at the College of Business Administration for the University of Tulsa. He is also a marketing and management consultant. He is a member of the Board of Directors of Jameson Inn, Inc. and Noteworthy Medical Systems, Inc., a member of the Editorial Boards of the Journal of Venturing and the Journal of Small Business Management, and a member of the Board of Directors of Enterprise Development, Inc. Dr. Hisrich received his Bachelor of Arts Degree in English and Science from DePaul University and his Master of Business Administration Degree (Marketing) and Ph.D. in Business Administration (Marketing, Finance, and Quantitative Methods) from the University of Cincinnati. Mr. MARTIN has been a director of the Company since April 2000. He co-founded U.S. Technologies Systems, Inc. ("USTI") in 1986 and continually served in different executive positions with USTI, including President, CEO and Chairman of the Board, until USTI was acquired by the Company in November 1999. Mr. Martin holds a Bachelor of Science Degree in Business Administration from St. Louis University. MR. SIEGENTHALER has been a director of the Company since its incorporation. He also served as its Executive Vice President from July 1990 until March 1999. Since 1974, through SEDCO Investments, a partnership in which Mr. Siegenthaler is a partner, and as an individual, Mr. Siegenthaler has been involved as partner, shareholder, officer, director, or sole proprietor of a number of business entities with significant involvement in fabrication and marketing of steel, steel products and other raw material, real estate, oil and gas, and telecommunications. Mr. Siegenthaler received his Bachelor's Degree in Liberal Arts from Oklahoma State University. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Based solely upon a review of (i) Forms 3 and 4 and amendments thereto furnished to the Company during its most recent fiscal year, (ii) Forms 5 and amendments thereto furnished to the Company with respect to its most recent fiscal year, and (iii) written representations made to the Company by its directors and officers, the Company knows of no director, officer, or beneficial owner of more than ten percent of the Company's Common Stock who has failed to file on a timely basis reports of beneficial ownership of the Company's Common Stock as required by Section 16(a) of the Securities Exchange Act of 1934, as amended, except as follows: Mr. Burke and Ms. Connor were late in filing their Initial Statement of Beneficial Ownership of Securities on Form 3. ITEM 11. EXECUTIVE COMPENSATION. That portion of the Company's definitive Proxy Statement appearing under the caption "Executive Compensation," to be filed with the Securities and Exchange Commission pursuant to Regulation 14A on or before February 28, 2001 and to be used in connection with the Company's Annual Meeting of Shareholders to be held March 20, 2001 is hereby incorporated by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. That portion of the Company's definitive Proxy Statement appearing under the caption "Security Ownership of Certain Beneficial Owners and Management," to be filed with the Securities and Exchange Commission pursuant to Regulation 14A on or before February 28, 2001 and to be used in connection with the Company's Annual Meeting of Shareholders to be held March 20, 2001 is hereby incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. That portion of the Company's definitive Proxy Statement appearing under the caption "Related Transactions," to be filed with the Securities and Exchange Commission pursuant to Regulation 14A on or before February 28, 2001 and to be used in connection with the Company's Annual Meeting of Shareholders to be held March 20, 2001 is hereby incorporated by reference. 22 42 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) (1) Financial Statements - See Index to Financial Statements at Page 19 of this Form 10-K. (2) Financial Statement Schedule - None. (3) Exhibits - See Exhibit Index at Page 25 of this Form 10-K. (b) The Company filed no report on Form 8-K during the last quarter of the fiscal year ended October 31, 2000. (c) See Exhibit Index at Page 25 of this Form 10-K. (d) See Index to Financial Statements at Page 19 of this Form 10-K. 23 43 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. XETA CORPORATION JANUARY 26, 2001 BY: /s/ Jack R. Ingram ----------------------------------------- JACK R. INGRAM, CHIEF EXECUTIVE OFFICER Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. JANUARY 26, 2001 /s/ Jack R. Ingram -------------------------------------------- JACK R. INGRAM, CHIEF EXECUTIVE OFFICER AND DIRECTOR JANUARY 26, 2001 /s/ Jon A. Wiese -------------------------------------------- JON A. WIESE, PRESIDENT JANUARY 26, 2001 /s/ Robert B. Wagner -------------------------------------------- ROBERT B. WAGNER, CHIEF FINANCIAL OFFICER, VICE PRESIDENT OF FINANCE, AND DIRECTOR JANUARY 25, 2001 /s/ Donald T. Duke -------------------------------------------- DONALD T. DUKE, DIRECTOR JANUARY 24, 2001 /s/ Ronald L. Siegenthaler -------------------------------------------- RONALD L. SIEGENTHALER, DIRECTOR 24 44 EXHIBIT INDEX
SEC No. Description - ------- ----------- (2) PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR SUCCESSION - *2.1 Asset Purchase Agreement by and among Quanta Services, Inc., Noram Telecommunications, Inc., Advanced Communication Technologies, Inc. and XETA Corporation dated as of February 22, 2000 - Incorporated by reference to Exhibit 2.3 to the Registrant's Form 10-Q for the quarter ended April 30, 2000, filed on June 14, 2000 (File No. 0-16231). *2.2 Asset Purchase Agreement dated as of October 31, 2000, by and among PRO Networks Corporation, as Seller, its shareholders The John Gerard Sargent Revocable Living Trust and The Nancy Rhea Sargent Revocable Living Trust, XETA Technologies, Inc., as Purchaser, and John Gerard Sargent and Nancy Rhea Sargent, individually - Incorporated by reference to Exhibit 2.1 to the Registrant's Form 8-K filed on November 15, 2000 (File No. 0-16231). (3) (i) ARTICLES OF INCORPORATION - *(a) Amended and Restated Certificate of Incorporation of the Registrant -- Incorporated by reference to Exhibits 3.1 and 3.2 to the Registrant's Registration Statement on Form S-1, filed on June 17, 1987 (File No. 33-7841). *(b) Amendment No. 1 to Amended and Restated Certificate of Incorporation -- Incorporated by reference to Exhibit 4.2 to the Registrant's Post-Effective Amendment No. 1 to Registration Statement on Form S-8, filed on July 28, 1999 (File No. 33-62173). *(c) Amendment No. 2 to Amended and Restated Certificate of Incorporation - Incorporated by reference to Exhibit 3(i)(c) to the Registrant's Form 10-Q for the quarter ended April 30, 2000, filed on June 14, 2000 (File No. 0-16231). *(d) Amendment No. 3 to Amended and Restated Certificate of Incorporation - Incorporated by reference to Exhibit 4.4 to the Company's Post-Effective Amendment No. 2 to the Registration Statement Form S-8, filed on June 28, 2000 (File No. 33-62173). (ii) BYLAWS - *(a) Amended and Restated Bylaws of the Registrant, First Amendment and Second Amendment - Incorporated by reference to Exhibit 3(ii) to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended October 31, 1994, filed on January 30, 1995 (File No. 0-16231). *(b) Third Amendment to Amended and Restated Bylaws - Incorporated by reference to Exhibit 4.4 to the Registrant's Post-Effective Amendment No. 1 to Registration Statement on Form S-8 filed on July 28, 1999 (File No. 33-62173). (4) INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES - None other than the Amended and Restated Certificate of Corporation of the Registrant, as amended, and Amended and Restated Bylaws of the Registrant, as amended, as identified in Exhibit 3(i) and 3(ii) to this report.
25 45 (9) VOTING TRUST AGREEMENT - None. (10) MATERIAL CONTRACTS - *10.1 Dealer Agreement Among Lucent Technologies, Inc.; Distributor, Inacom Communications, Inc.; and XETA Corporation for Business Communications Systems--Incorporated by reference to Exhibit 10.1 to the Registrant's Form 10-Q for the quarter ended April 30, 1999, filed on June 11, 1999 (File No. 0-16231). *10.2 Stock Purchase Option dated June 17, 1999 granted to Jon A. Wiese --Incorporated by reference to Exhibit 10.2 to the Registrant's Form 10-Q for the quarter ended July 31, 1999, filed on September 14, 1999 (File No. 0-16231). *10.3 Stock Purchase Agreement dated as of August 1, 1999, between Mark A. Martin, individually, and Mark A. Martin, Trustee under Living Trust of Mark A. Martin dated April 4, 1994, and XETA Corporation -Incorporated by reference to Exhibit 2.1 to the Registrant's Form 8-K filed on December 15, 1999 (File No. 0-16231). *10.4 Stock Purchase Agreement dated as of August 1, 1999, between Lawrence J. Hopp, individually, and Lawrence J. Hopp, Trustee under Living Trust of Lawrence J. Hopp dated October 13, 1994, and XETA Corporation -Incorporated by reference to Exhibit 2.2 to the Registrant's Form 8-K filed on December 15, 1999 (File No. 0-16231). *10.5 Credit Agreement dated as of November 30, 1999 among XETA Corporation, the Lenders, the Agent and the Arranger--Incorporated by reference to Exhibit 2.3 to the Registrant's Form 8-K filed on December 15, 1999 (File No. 16231). *10.6 Real Estate Mortgage on the Registrant's Broken Arrow, Oklahoma property--Incorporated by reference to Exhibit 2.5 to the Registrant's Form 8-K filed on December 15, 1999 (File No. 0-16231). *10.7 Pledge and Security Agreement relating to November 30, 1999 Credit Agreement - Incorporated by reference to Exhibit 2.4 to the Registrant's Form 8-K filed on December 15, 1999 (File No. 0-16231). *10.8 Subsidiary Guaranty by U.S. Technologies Systems, Inc. of November 30, 1999 Credit facility - Incorporated by reference to Exhibit 2.6 to the Registrant's Form 8-K filed on December 15, 1999 (File No. 0-16231). *10.9 Employment Agreement dated November 30, 1999 between Mark A. Martin and the Company - Incorporated by reference to Exhibit 99.1 to the Registrant's Form 8-K filed on December 15, 1999 (File No. 0-16231). *10.10 Stock Purchase Option dated February 1, 2000 granted to Larry N. Patterson - Incorporated by reference to Exhibit 10.9 to the Registrant's Form 10-Q for the quarter ended April 30, 2000, filed on June 14, 2000 (File No. 0-16231). *10.11 Amendment to Dealer Agreement Among Lucent Technologies, Inc. Distributor, Inacom Communications, Inc.; and XETA Corporation, for Business Communications Systems, dated effective March 19, 2000 - Incorporated by reference to Exhibit 10.10 to the Registrant's Form 10-Q for the quarter ended April 30, 2000, filed on June 14, 2000 (File No. 0-16231).
26 46 *10.12 XETA Technologies 2000 Stock Option Plan - Incorporated by reference to Exhibit 10.11 to the Registrant's Form 10-Q for the quarter ended April 30, 2000, filed on June 14, 2000 (File No. 0-16231). 10.13 HCX 5000(R) Authorized Distributor Agreement dated April 1, 2000 between Hitachi Telecom (USA), Inc. and XETA Corporation--Omitted as substantially identical to the Authorized Distributor Agreement dated April 8, 1993 between Hitachi America, Ltd. and XETA Corporation which was previously filed as Exhibit 10.1 to the Company's Annual Report on Form 10-KSB for the fiscal year ended October 31, 1993 (File No. 0-16231). 10.14 Stock Purchase Option dated August 11, 2000 granted to Larry N. Patterson. 10.15 First Amendment to Credit Agreement dated August 21, 2000 among XETA Technologies, Inc., the Lenders, the Agent and the Arranger. 10.16 Notice of Assignment by Lucent Technologies Inc. dated September 14, 2000 of all contracts with XETA Technologies, Inc. (including the Dealer Agreement) to Avaya Inc. 10.17 Asset Purchase Agreement dated as of October 31, 2000, by and among Key Metrology Integration, Inc. as Seller, its principal shareholder The Douglas Wendell Myers Revocable Living Trust, XETA Technologies, Inc., as Purchaser, and Douglas Wendell Myers, individually. The Schedules and Exhibits to the Asset Purchase Agreement, each of which are listed below, have been omitted from this report and will be furnished to the Securities and Exchange Commission upon request. Informational Schedules 2.2(a) Seller's Wire Transfer Instructions 4.4 Employees Receiving Options 8.9.3 Restricted Key Employees 8.9.4 Key Contractors/Consultants 8.9.6 Client List Seller's Disclosure Schedules 5.1 Certificate of Incorporation, Good Standing & Bylaws 5.2 Joint Memorandum of Action by Shareholders and Sole Director 5.6 Financial Statements 5.8 Accounts & Notes Receivable 5.9 Inventory 5.10 Material Contracts 5.11 Tangible Personal Property 5.12 Permits - none 5.13 Intangible Personal Property 5.14 Real Property 5.17 Trade Restrictions 5.18 Employee Compensation 5.19.1 Pension Plan(s) 5.19.2 Welfare Plan(s) - none 5.28 Locations 5.30 Officers, Directors & Shareholders
27 47 Purchaser's Disclosure Schedules 6.1 Certificate of Incorporation, Good Standing & Bylaws 6.2 Resolutions of Purchaser's Board of Directors Exception Schedules 2.1 Excluded Assets 2.5 Excluded Liabilities 5.4 Agreements Violated by the Asset Purchase - none 5.5 Governmental Consents - none required 5.7 Title Exceptions - none 5.11 Title Exceptions (Tangible Personal Property) - none 5.15 Environmental Matters - none 5.16 Labor Claims & Disputes - none 5.19.5 Cobra Exceptions - none 5.20 Litigation - none of significance or perceived merit 5.21 Tax Matters - none 5.23 Name Changes 5.29 Warranty Claims - none Exhibits 4.1 Douglas W. Myers Employment Agreement 8.9.3 Form of Employee Nondisclosure/Noncompetition and Employment Agreement (Key Employees) 8.9.4 Form Independent Contractor Agreement 8.9.6 Form of Consulting Agreement 8.9.7 Bill of Sale 8.9.10 Seller's Closing Certificate 9.4.4 Purchaser's Closing Certificate (11) STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS - Inapplicable. (12) STATEMENT RE: COMPUTATION OF RATIOS - Inapplicable. (13) ANNUAL REPORT TO SECURITY HOLDERS, FORM 10-Q OR QUARTERLY REPORT TO SECURITY HOLDERS - Inapplicable. (18) LETTER RE: CHANGE IN ACCOUNTING PRINCIPLES - Inapplicable. (21) SUBSIDIARIES OF THE REGISTRANT (22) PUBLISHED REPORT REGARDING MATTERS SUBMITTED TO A VOTE OF SECURITY HOLDERS - None. (23) CONSENTS OF EXPERTS AND COUNSEL 23.1 Consent of Arthur Andersen LLP (24) POWER OF ATTORNEY - None. (99) ADDITIONAL EXHIBITS - None.
* Previously filed. 28 EX-10.14 2 d83418ex10-14.txt STOCK PURCHASE OPTION TO LARRY PATTERSON 1 EXHIBIT 10.14 STOCK OPTION GRANT (Non-Qualified Stock Option) THIS STOCK OPTION GRANT is made as of the 11th day of August, 2000 (the "EFFECTIVE DATE"), by XETA TECHNOLOGIES, INC., an Oklahoma corporation (the "COMPANY"), to LARRY N. PATTERSON (the "GRANTEE"). GRANT For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and the Company hereby agrees with the Grantee as follows: 1. OPTION. The Company hereby grants to the Grantee a non-qualified stock option (the "OPTION") to purchase 10,000 shares of the Company's shares of $0.001 par value common stock (the "OPTION SHARES"), subject to the terms and conditions set forth herein. 2. OPTION PRICE. The price per share payable for the Option Shares shall be $9.0625 per share (the "EXERCISE PRICE"). 3. EXERCISE. Subject to the conditions set forth herein, this Option shall be exercisable, in whole or in part, on or after August 11, 2000 (the "VESTING DATE"). The Option shall be exercised by delivering to the Company at its principal offices at 1814 West Tacoma, Broken Arrow, Oklahoma 74012, together with the Exercise Price, a written notice on or before October 31, 2010, stating (x) the Grantee's election to exercise the Option, (y) the number of options being exercised, and (z) that all conditions to exercise have been satisfied. 4. PAYMENT. Full payment of the Exercise Price shall payable in cash or by shares of the Company's common stock held by the Grantee for more than six (6) months at the time of exercise, or by any combination thereof; PROVIDED that if all or any portion of the Exercise Price shall be paid by delivery of stock, the Company shall issue a replacement option ("REPLACEMENT OPTION") in exchange for such stock, which Replacement Option shall (i) cover the number of shares of stock surrendered to pay the aggregate Exercise Price of the original option, (ii) have an aggregate Exercise Price equal to 100% of the fair market value of such stock on the date the Replacement Option is granted, (iii) become exercisable no sooner than six (6) months after the date of grant of the Replacement Option, and (iv) expire on the Expiration Date of the original option. No certificates for Option Shares purchased by exercise of this Option shall be issued until full payment therefor has been received by the Company, and the Grantee shall have none of the rights of a shareholder associated with such Option Shares until such certificates have been so issued. 5. ASSIGNMENT. This Option is personal to the Grantee and is not transferable or assignable, in whole or in part, except by will or by the laws of descent and distribution upon the death of Grantee. 6. TERMINATION. To the extent not exercised, this Option shall terminate at the close of business on August 1, 2010. Furthermore, if Grantee's employment is terminated by the Company for breach of any provision of the letter agreement dated of even date herewith 2 between Grantee and the Company, the Option shall terminate and all of Grantee's rights hereunder shall be forfeited. 7. ADJUSTMENT. In the event the outstanding shares of common capital stock of the Company as a whole are increased, decreased, changed into, or exchanged for a different number or kind of the Company's shares or securities, whether through stock dividend, stock split, reclassification, merger, or the like, an approximate and proportionate adjustment shall be made in the number, kind and per share exercise price of shares subject to any unexercised portion of the Option. Any such adjustment shall be made without a change in the total price applicable to the unexercised portion of the Option, but with a corresponding adjustment in the price for each share covered by the Option. EXECUTED in Broken Arrow, Oklahoma, on and as of the Effective Date. "Grantor" XETA TECHNOLOGIES, INC. /s/ JON A. WIESE -------------------------------- Jon A. Wiese, President Accepted as of the 11th day of August, 2000. /s/ LARRY N. PATTERSON - -------------------------------------------- LARRY N. PATTERSON -2- EX-10.15 3 d83418ex10-15.txt 1ST AMENDMENT TO CREDIT AGREEMENT 1 EXHIBIT 10.15 FIRST AMENDMENT TO CREDIT AGREEMENT THIS FIRST AMENDMENT TO CREDIT AGREEMENT ("Amendment") is made and entered into as of August 21, 2000 (the "Amendment Date"), by and among XETA Technologies, Inc., an Oklahoma corporation, formerly known as Xeta Corporation (the "Borrower"), Bank One, Oklahoma NA, and First Star Bank, N.A., formerly known as Mercantile Bank, N.A., as Lenders under the Credit Agreement referred to below (the "Lenders"), and Bank One, Oklahoma, NA, as Agent (in such capacity, the "Agent"), with reference to the following: A. The Borrower, the Lenders, the Agent and Banc One Capital Markets, Inc., as Lead Arranger and Sole Book Runner, are parties to that certain Credit Agreement dated as of November 30, 1999 (the "Credit Agreement"), pursuant to which the Lenders severally agreed to make Loans to the Borrower under three (3) Credit Facilities therein described. B. The Borrower has requested that the Lenders increase the Aggregate Revolving Commitment (and correspondingly, the amount available under the Revolving Credit Facility) from $5,000,000 to $8,000,000. C. The Lenders have agreed to the requested increase in the Aggregate Revolving Credit Commitment, but only upon the terms and conditions set forth in this Amendment. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements herein contained, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereby amend the Credit Agreement, effective as of the Amendment Date, as follows: 1. DEFINITIONS. Capitalized terms used herein (including capitalized terms used in the recitals above) but not otherwise defined have the respective meanings assigned to them in the Credit Agreement. 2. INCREASE IN REVOLVING CREDIT COMMITMENTS. The Revolving Credit Commitment of Bank One, Oklahoma, NA is hereby increased from $2,750,000 to $4,400,000, and the Revolving Credit Commitment of Firstar Bank, N.A. is hereby increased from $2,250,000 to $3,600,000. As a result of the foregoing increases, the parties acknowledge and agree (i) that the Aggregate Revolving Credit Commitment is increased from $5,000,000 to $8,000,000, (ii) the term "Obligations" as used in the Credit Agreement and any other Loan Documents will include all Loans from time to time outstanding under the Revolving Credit Facility (as increased hereby), and (ii) from and after the Amendment Date, the commitment fee payable under Section 2.5 of the Credit Agreement will be based on the daily unused portion of each Lender's Revolving Credit Commitment (as increased hereby) and Acquisition Loan Commitment. In order to evidence the foregoing increases, the Borrower agrees to make, execute and deliver to each Lender a replacement Revolving Note (collectively, the "Replacement Revolving Notes"), substantially in the form attached hereto as Exhibit "E-1A" (with appropriate insertions), in increase and replacement of and substitution for the Revolving Notes delivered at the Closing. 2 3. CHANGE OF CORPORATE NAME. The parties acknowledge that the corporate name of the Borrower was changed effective April 11, 2000, to XETA Technologies, Inc. The Borrower agrees to execute such amendments to financing statement or new financing statements as may be necessary or advisable to reflect such name change and to reimburse the Agent for all costs and expenses, including reasonable attorney's fees and filing fees, that the Agent may incur in causing the same to be prepared, executed and filed of record. 4. CONDITIONS PRECEDENT. This Amendment shall become effective as of the Amendment Date, subject to the Borrower's satisfaction of the following conditions precedent (in addition to the conditions precedent set forth in Article IV of the Credit Agreement): A. Execution of Documents. This Amendment and the Replacement Revolving Notes shall have been duly and validly authorized, executed and delivered to the Agent and the Lenders by the Borrower. B. Resolutions. The Bank shall have received a copy of the resolutions of the Board of Directors of the Borrower authorizing the increase in the Revolving Credit Facility and the execution, delivery and performance of this Amendment, the Credit Agreement (as amended by this Amendment) and the Replacement Revolving Notes. C. Accuracy of Representations and Warranties. All representations and warranties made by the Borrower in the Credit Agreement and the other Loan Documents and in Section 5 hereof shall be true and correct in all material respects as of the Amendment Date (except to the extent any of such representations and warranties with respect to the financial condition of the Borrower refer to an earlier specified date). D. No Default. There shall not have occurred any Default or Unmatured Default as of the Amendment Date, and the Borrower shall be current in payment of all principal, interest and fees due and owing to the Agent or the Lenders as of the Amendment Date. E. Commitment Fee. The Borrower shall have paid to the Agent for the account of each Lender, in accordance with each Lender's Pro Rata Share, a commitment fee of $6,000 (which amount is 0.20% of the increase in the Aggregate Revolving Credit Commitment). 5. REPRESENTATIONS AND WARRANTIES. All representations and warranties of Borrower contained in Article V of the Credit Agreement are hereby remade and restated as the date hereof and shall survive the execution and delivery of this Amendment. The Borrower further represents and warrants as follows: A. Authority. The Borrower has all requisite power and authority and has been duly authorized to increase the amount of the Aggregate Revolving Credit Commitment, to borrow under the Revolving Credit Facility (as increased hereby), and to execute, deliver and perform its obligations under this Amendment, the Credit Agreement (as amended by this Amendment) and the Replacement Revolving Notes. 3 B. Binding Obligations; Enforceability. This Amendment, the Credit Agreement (as amended by this Amendment) and the Replacement Revolving Notes are valid and legally binding obligations of the Borrower, enforceable in accordance with their respective terms, except as limited by applicable bankruptcy, insolvency or other laws affecting the enforcement of creditors' rights generally. C. No Conflict; Government Consent. Neither the execution and delivery by the Borrower of this Amendment and the Replacement Revolving Notes, nor the consummation of the transactions therein contemplated, nor compliance with the provisions thereof, will violate (i) any law, rule, regulation, order, writ, judgment, injunction, decree or award binding on the Borrower or any of its Subsidiaries, or (ii) the Borrower's or any Subsidiary's articles or certificate of incorporation, partnership agreement, certificate of partnership, articles or certificate of organization, by-laws, or operating or other management agreement, as the case may be, or (iii) the provisions of any indenture, instrument or agreement to which the Borrower or any of its Subsidiaries is a party or is subject, or by which it, or its Property, is bound, or conflict with or constitute a default thereunder, or result in, or require, the creation or imposition of any Lien in, of or on the Property of the Borrower or any of its Subsidiaries pursuant to the terms of any such indenture, instrument or agreement. No order, consent, adjudication, approval, license, authorization, or validation of, or filing, recording or registration with, or exemption by, or other action in respect of any governmental or public body or authority, or any subdivision thereof, which has not been obtained by the Borrower or any of its Subsidiaries, is required to be obtained by the Borrower or any of its Subsidiaries in connection with the execution and delivery of this Amendment or the Replacement Revolving Note, the borrowings under the Credit Agreement (as amended hereby), the payment and performance by the Borrower of the Obligations, or the legality, validity, binding effect or enforceability of this Amendment, the Credit Agreement (as amended by this Amendment) or the Replacement Revolving Notes. D. No Material Adverse Change. Since April 30, 2000 (the date of the latest financial statements of the Borrower which have been delivered to the Agent and the Lenders), there has been no adverse change in the business, Property, prospects, condition (financial or otherwise) or results of operations of the Borrower and its Subsidiaries which could reasonably be expected to have a Material Adverse Effect. 6. MISCELLANEOUS. A. Effect of Amendment. The terms of this Amendment shall be incorporated into and form a part of the Credit Agreement. Except as amended, modified and supplemented by this Amendment, the Credit Agreement shall continue in full force and effect in accordance with its original stated terms, all of which are hereby reaffirmed in every respect as of the date hereof. In the event of any irreconcilable inconsistency between the terms of this Amendment and the terms of the Credit Agreement, the terms of this Amendment shall control and govern, and the agreements shall be interpreted so as to carry out and give full effect to the intent of this Amendment. All references to the "Credit Agreement" appearing in any of the Loan Documents shall hereafter be deemed references to the Credit Agreement as amended, modified and supplemented by this Amendment, and all references to the "Revolving Notes" appearing in the 4 Credit Agreement and any of the other Loan Documents shall hereafter be deemed references to the Replacement Revolving Notes. B. Exhibits. The form of Replacement Revolving Note attached hereto as Exhibit E-1A is hereby substituted for Exhibit E-1 to the Credit Agreement and incorporated therein by this reference. C. Descriptive Headings. The descriptive headings of the several sections of this Amendment are inserted for convenience only and shall not be used in the construction of the content of this Amendment. D. Governing Law. This Amendment shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of Oklahoma. E. Reimbursement of Expenses. The Borrower agrees to pay the reasonable fees and out-of-pocket expenses of Crowe & Dunlevy, counsel to the Agent, incurred in connection with the preparation of this Amendment and the consummation of the transactions contemplated hereby. IN WITNESS WHEREOF, the Borrower, the Lenders and the Agent have executed this Amendment as of the Amendment Date. XETA TECHNOLOGIES, INC., formerly known as Xeta Corporation By: /s/ ROBERT B. WAGNER ------------------------------------- Name: Robert B. Wagner ----------------------------------- Title: VP Finance ----------------------------------- BANK ONE, OKLAHOMA, NA, Individually and as Agent By: /s/ TIMOTHY T. KOSKI ------------------------------------- Name: Timothy T. Koski ----------------------------------- Title: Vice President ----------------------------------- FIRST STAR BANK, N.A., formerly known as Mercantile Bank, N.A. By: /s/ GREG VATTEROTT ------------------------------------- Name: Greg Vatterott ----------------------------------- Title: Vice President ----------------------------------- 5 CONSENT OF GUARANTOR The undersigned hereby (i) acknowledges and consents to the execution and delivery of the above and foregoing First Amendment to Credit Agreement, (ii) confirms that the Subsidiary Guaranty of the undersigned will continue in full force and effect as security for payment and performance of all of the "Guaranteed Obligations," as such term is used in the Subsidiary Guaranty, including all Loans from time to time outstanding under the Revolving Credit Facility (as increased by the above and foregoing First Amendment to Credit Agreement), and (iii) ratifies and reaffirms the Subsidiary Guaranty. No inference shall be drawn from the undersigned's execution of this Consent that consent or approval of the undersigned is required for this or any future modification or amendment of or supplement to the Credit Agreement or other Loan Document, or for this or any future increase, extension or renewal of the Guaranteed Obligations. Capitalized terms used in this Consent and not otherwise defined have the respective meanings assigned to them in the Credit Agreement referred to in the above and foregoing First Amendment to Credit Agreement. U.S. TECHNOLOGIES SYSTEMS, INC. By: /s/ ROBERT B. WAGNER ------------------------------------- Name: Robert B. Wagner ----------------------------------- Title: VP Finance CFO ----------------------------------- 6 REVOLVING NOTE $4,400,000 August 21, 2000 XETA Technologies, Inc., an Oklahoma corporation, formerly known as Xeta Corporation (the "Borrower"), promises to pay to the order of Bank One, Oklahoma, NA (the "Lender"), the aggregate unpaid principal amount of all Revolving Loans made by the Lender to the Borrower pursuant to Section 2.1.1 of the Agreement (as hereinafter defined), in immediately available funds at the main office of Bank One, Oklahoma, NA, Tulsa, Oklahoma, as Agent, together with interest on the unpaid principal amount hereof at the rates and on the dates set forth in the Agreement. The Borrower shall pay the principal of and accrued and unpaid interest on the Revolving Loans in full on the Revolving Credit Facility Termination Date and shall make such mandatory payments as are required to be made under the terms of Article II of the Agreement. The Lender shall, and is hereby authorized to, record on the schedule attached hereto, or to otherwise record in accordance with its usual practice, the date and amount of each Revolving Loan and the date and amount of each principal payment hereunder. This Note is one of the Revolving Notes issued pursuant to, and is entitled to the benefits of, the Credit Agreement dated as of November 30, 1999, as amended by the First Amendment to Credit Agreement dated as of August 21, 2000 (which, as it may be further amended or modified and in effect from time to time, is herein called the "Agreement"), among the Borrower, the lenders party thereto, including the Lender, and Bank One, Oklahoma, NA, as Agent. Capitalized terms used herein and not otherwise defined herein are used with the meanings attributed to them in the Agreement. Reference is made to the Agreement for a statement of the terms and conditions governing this Note, including the terms and conditions under which this Note may be prepaid or its maturity date accelerated. This Note is secured pursuant to the Collateral Documents, as more specifically described in the Agreement, and reference is made thereto for a statement of the terms and provisions thereof. This Note is made, executed and delivered by the Borrower and delivered to the Lender in increase and replacement of and substitution for that certain Revolving Note dated as of November 30, 1999, executed by the Borrower payable to the order of the Lender in the stated principal amount of $2,750,000 (the "Prior Note"). All liens and security interests in Property securing payment of the Prior Note shall continue in full force and effect, uninterrupted and unabated, as security for payment of this Note. XETA TECHNOLOGIES, INC., an Oklahoma corporation By: /s/ ROBERT B. WAGNER ----------------------------------- Print Name: Robert B. Wagner --------------------------- Title: VP Finance -------------------------------- 7 SCHEDULE OF LOANS AND PAYMENTS OF PRINCIPAL TO REVOLVING NOTE OF XETA TECHNOLOGIES, INC. DATED AUGUST 21, 2000
Principal Maturity Principal Amount of of Interest Amount Unpaid Date Loan Period Paid Balance - -------------------- --------------- ----------------- ----------------- --------- Balance Forward
EX-10.16 4 d83418ex10-16.txt NOTICE OF ASSIGNMENT BY LUCENT TECHNOLOGIES 1 EXHIBIT 10.16 [LUCENT TECHNOLOGIES LOGO] September 14, 2000 Jack Ingram XETA Technologies, Inc. 1814 W. Tacoma Broken Arrow, OK 74012 RE: NOTICE OF ASSIGNMENT As you know, Lucent Technologies Inc. ("Lucent") announced on March 1, 2000 plans to spin off its PBX, SYSTIMAX(R) structured cabling and LAN-based data business (collectively referred to as "Enterprise Networks Group") to shareowners, forming a separate company that will focus directly and independently on the enterprise networking market.* The new company known as Avaya Inc., will commence operations with revenues of approximately $8 billion per year and a customer list that includes more than ninety percent of the Fortune 500 companies. Avaya will be a wholly owned subsidiary of Lucent immediately prior to the spin-off which is expected to occur on October 1, 2000. The purpose of this letter is to provide formal notice that all contracts and agreements previously entered into between your company and Lucent for products and services from the Enterprise Networks Group are assigned from Lucent to Avaya, effective immediately prior to the spin-off on October 1, 2000. Though our name has changed, we continue to be committed to serving our global markets and to providing the same quality products and customer service with the same professionalism and integrity you have come to know and expect. All of us at Avaya look forward to serving your communication networking needs as we move forward as an exciting, fully independent business. /s/ JAN BURTON Jan Burton National Sales Vice President - ---------- *The Enterprise Networks Group's PBX and voice messaging businesses were included in Lucent's former Business Communications Systems business unit. The SYSTIMAX(R) business was formerly included in Lucent's Network Systems business unit. EX-10.17 5 d83418ex10-17.txt ASSET PURCHASE AGREEMENT WITH KEY METROLOGY 1 EXHIBIT 10.17 ASSET PURCHASE AGREEMENT THIS ASSET PURCHASE AGREEMENT ("AGREEMENT") is made and entered into effective as of October 31, 2000 ("EFFECTIVE DATE") by and between XETA TECHNOLOGIES, INC., an Oklahoma corporation ("PURCHASER"), and KEY METROLOGY INTEGRATION, INC., a Washington corporation ("SELLER") and DOUGLAS WENDELL MYERS, INDIVIDUALLY, AND AS TRUSTEE OF THE DOUGLAS WENDELL MYERS REVOCABLE LIVING TRUST (the "PRINCIPAL SHAREHOLDER"). RECITALS A. Seller is in the business of providing LAN, WAN and unified messaging, consulting and project implementation, and other professional services for enterprise customers. B. Seller desires to sell the Business to Purchaser as a going concern and in connection therewith sell substantially all of Seller's assets to Purchaser, and Purchaser desires to purchase such Business and assets, and to assume certain of Seller's liabilities relating thereto, upon the terms and conditions set forth in this Agreement (the "ASSET PURCHASE"). AGREEMENT NOW, THEREFORE, in consideration of the foregoing premises, and for other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, Seller and Purchaser agree as follows: ARTICLE I TERMS AND INTERPRETATION 1.1 Definitions. Capitalized terms used in this Agreement shall have the following meanings: 1.1.1 "AFFILIATE" of, or "AFFILIATED" with, a specified person or entity means a person or entity that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the specified person or entity. 1.1.2 "ASSETS" has the meaning set forth in Section 2.1. 1.1.3 "ASSUMED LIABILITIES" means the liabilities and obligations of the Seller or relating to the Seller's business or operations to be assumed by Purchaser at the Closing in accordance with Section 2.5. 1.1.4 "CLOSING" has the meaning set forth in Section 3.1. 1.1.5 "CLOSING DATE" has the meaning set forth in Section 3.1. 2 1.1.6 "CLOSING DATE BALANCE SHEET" has the meaning set forth in Section 2.3. 1.1.7 "CLOSING EQUITY CERTIFICATE" has the meaning set forth in Section 2.3. 1.1.8 "CLOSING EQUITY VALUE" has the meaning set forth in Section 2.3. 1.1.9 "CODE" means the Internal Revenue Code of 1986, as amended. 1.1.10 "DAMAGES" has the meaning set forth in Section 10.2. 1.1.11 "EARNOUT" has the meaning set forth in Section 2.2(c). 1.1.12 "EBITDA" has the meaning set forth in Section 2.2(c). 1.1.13 "EMPLOYMENT AGREEMENT" has the meaning set forth in Section 4.1. 1.1.14 "ENCUMBRANCES" means all liens, encumbrances, mortgages, pledges, security interests, conditional sales agreements, charges, options, preemptive rights, rights of first refusal, reservations, restrictions or other encumbrances or material defects in title. 1.1.15 "ENVIRONMENTAL, HEALTH AND SAFETY LAWS" means any federal, state or local Law, including, without limitation, any judicial or administrative interpretation thereof, any judicial or administrative order, consent decree or judgment, or agreement with any Governmental Authority, relating to (a) pollution, exposure to oil, pollutants, contaminants, hazardous or toxic materials or waste, (b) the protection, preservation or restoration of the environment, including laws relating to exposures to, or emissions, discharges, releases or threatened releases of oil, pollutants, contaminants, hazardous or toxic materials or wastes into ambient air, surface water, ground water or land surface or subsurface strata or (c) the manufacture, processing, labeling, distribution, use, treatment, storage, transport, handling or disposal of oil, pollutants, contaminants, hazardous or toxic materials or wastes or relating to the environment, plant and animal life, natural resources or health, safety or any Hazardous Substance, in each case as amended from time to time prior to the Closing Date. "ENVIRONMENTAL, HEALTH AND SAFETY LAWS" include, without limitation, (i) the Federal Comprehensive Environmental Response Compensation and Liability Act of 1980 (CERCLA), 42 U.S.C. Sections 9601 et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Sections 6901 et seq., the Federal Water Pollution Control Act, 33 U.S.C. Sections 1251 et seq., the Toxic Substances Control Act, 15 U.S.C. Sections 2601 et seq., the Clean Air Act, 42 U.S.C. Sections 7401 et seq., the Safe Drinking Water Act, 42 U.S.C. Sections 300f et seq., the Hazardous Materials Transportation Act, 49 U.S.C. Sections 5101 et seq., the Atomic Energy Act, 42 U.S.C. Sections 2011 et seq., the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. Sections 136 et seq., and the Occupational Safety and Health Act, 29 U.S.C. Sections 651 et seq., in each case as amended from time to time prior to the Closing Date, and any other federal, state or local Laws now or hereafter relating to any of the foregoing, and (ii) any common law or equitable doctrine (including, without limitation, injunctive relief and tort doctrines such as 2 3 negligence, nuisance, trespass and strict liability) that may impose liability or obligations for injuries or damages due to, or threatened as a result of, the presence of, effects of or exposure to any Hazardous Substance. 1.1.16 "EQUITY DETERMINATION PERIOD" has the meaning set forth in Section 2.3. 1.1.17 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. 1.1.18 "EXCLUDED ASSETS" has the meaning set forth in Section 2.1. 1.1.19 "EXCLUDED LIABILITIES" has the meaning set forth in Section 2.5. 1.1.20 "FINAL DETERMINATION" has the meaning set forth in Section 10.7. 1.1.21 "FINANCIAL STATEMENTS" has the meaning set forth in Section 5.6. 1.1.22 "GAAP" means generally accepted accounting principles consistently applied for all periods involved. 1.1.23 "GOVERNMENTAL AUTHORITY" means any federal, state, local or foreign government, political subdivision or governmental or regulatory authority, agency, board, bureau, commission, instrumentality or court or quasi-governmental authority. 1.1.24 "HAZARDOUS SUBSTANCES" means any substance presently listed, defined, designated or classified as hazardous, toxic, radioactive or dangerous, or otherwise regulated, under any Environmental, Health and Safety Law. The term "Hazardous Substances" includes, without limitation, any substance to which exposure is regulated by any Governmental Authority or any Environmental, Health and Safety Law including, without limitation, any toxic waste, pollutant, contaminant, hazardous substance, toxic substance, hazardous waste, special waste, industrial substance or petroleum or any derivative or by-product thereof, radon, radioactive material, asbestos or asbestos containing material, urea formaldehyde foam insulation, lead or polychlorinated biphenyls. 1.1.25 "INDEMNIFIED PARTY" has the meaning set forth in Section 10.5. 1.1.26 "INDEMNIFICATION PERIOD" has the meaning set forth in Section 10.1. 1.1.27 "INDEMNIFYING PARTY" has the meaning set forth in Section 10.5. 1.1.28 "LAW" or "LAWS" means any and all federal, state, local or foreign statutes, laws, ordinances, proclamations, codes, regulations, licenses, permits, authorizations, approvals, consents, legal doctrines, published requirements, orders, decrees, judgments, injunctions and rules of any Governmental Authority, including, without limitation, those covering environmental, Tax, energy, safety, health, 3 4 transportation, bribery, record keeping, zoning, discrimination, antitrust and wage and hour matters, in each case as amended and in effect from time to time. 1.1.29 "LEASES" means all leases for facilities leased by the Seller. 1.1.30 "LETTER OF INTENT" means that certain letter of intent dated September 22, 2000 by and between Purchaser and Seller. 1.1.31 "LOSS" or "LOSSES" means all liabilities, losses, claims, damages, actions, suits, proceedings, demands, assessments, adjustments, fees, costs and expenses (including specifically, but without limitation, reasonable attorneys' fees and costs and expenses of investigation), net of (i) income Tax effects with respect thereto (including, without limitation, income Tax benefits recognized in connection therewith and income Taxes upon any indemnification recovery thereof) and (ii) insurance proceeds. 1.1.32 "MATERIAL CONTRACTS" has the meaning set forth in Section 5.10. 1.1.33 "OPTION PLAN" has the meaning set forth in Section 4.4. 1.1.34 "PENSION PLAN" means and includes each "EMPLOYEE PENSION BENEFIT PLAN" maintained by the Company (within the meaning of Section 3(2)(A) of ERISA). 1.1.35 "PERMITS" has the meaning set forth in Section 5.12. 1.1.36 "PERMITTED DISTRIBUTIONS" means withdrawals of cash, securities and personal items, at the Principal Shareholder's discretion, which do not reduce Seller's total stockholders' equity to an amount which is less than the Required Minimum Equity. 1.1.37 "PERMITTED ENCUMBRANCES" means (a) any Encumbrances reserved against in the Financial Statements, (b) Encumbrances for property or ad valorem Taxes not yet due and payable or which are being contested in good faith and by appropriate proceedings and (c) obligations under operating and capital leases which are listed in Schedule 5.10. 1.1.38 "PRORATED TAXES" has the meaning assigned in Section 3.6. 1.1.39 "TAXES" means all taxes, charges, fees, levies or other assessments including, without limitation, income, gross receipts, excise, property, sales, withholding, social security, unemployment, occupation, use, service, service use, license, payroll, franchise, transfer and recording taxes, fees and charges, imposed by the United States or any state, local or foreign government or subdivision or agency thereof, whether computed on a separate, consolidated, unitary, combined or any other basis; and such term shall include any interest, fines, penalties or additional amounts attributable to or imposed with respect to any such taxes, charges, fees, levies or other assessments. 4 5 1.1.40 "UCC" means the Uniform Commercial Code as the same is in force in the jurisdiction implicated in any particular reference herein. 1.1.41 "WELFARE PLAN" means and includes each "EMPLOYEE WELFARE BENEFIT PLAN" maintained by Seller (within the meaning of Section 3(1) of ERISA). 1.2. Interpretation. For all purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise requires: (a) The terms defined in Article I and elsewhere in this Agreement include the plural as well as the singular; (b) Words of the masculine gender in this Agreement shall be deemed and construed to include correlative words of the feminine and neuter genders and words of the neuter gender shall be deemed and construed to include correlative words of the masculine and feminine genders; (c) The words "herein," "hereof," and "hereunder" and other words of similar import refer to this Agreement as a whole, including all Schedules and Exhibits, and not to any particular Article, Section or other subdivision; (d) The terms "include," "includes" and "including" are not limiting and the term "or" has, except where otherwise indicated, the inclusive meaning represented by the phrase "and/or;" (e) The term "material" shall mean, or an event shall be deemed to be "material," if its existence produces an effect or variance of Fifty Thousand dollars ($50,000) or more; and (f) Whenever a statement of any party is qualified by that party's knowledge, "knowledge" means and includes the actual personal knowledge of the person making such statement at the time or times that such statement is made, and a knowledge or awareness of facts, circumstances or other matters contained or referred to in such statements of which the person making the statement would or should be aware with the exercise of reasonable care. If the statement is made by a corporation, the knowledge of the corporation's officers and directors shall be imputed to the corporation. ARTICLE II PLAN OF ACQUISITION 2.1 Acquisition of the Assets. Upon the terms and subject to the conditions of this Agreement, at the Closing, the Seller agrees to sell, convey, transfer, assign and deliver to Purchaser, and Purchaser agrees to purchase from Seller, all of Seller's assets, properties, businesses, franchises, goodwill and rights of every kind and character, tangible or intangible, real or personal, whether owned or leased, other than the Excluded Assets (collectively, the 5 6 "ASSETS"), free and clear of all Encumbrances other than Permitted Encumbrances. Without limiting the generality of the foregoing, the Assets shall consist of: (a) all accounts and notes receivable of Seller; (b) all inventory (including, without limitation, spare parts inventory) and work-in-progress of Seller; (c) all customer lists, sales records, credit data and other information relating to customers of Seller; (d) all rights, title and interest of Seller in, to and under all existing contracts, leases and agreements, written and verbal to which the Seller is a party; (e) all right, title and interest of the Seller in computer equipment and hardware used exclusively by the Seller, including, without limitation, all central processing units, terminals, disk drives, tape drives, electronic memory units, printers, keyboards, screens, peripherals (and other input/output devices), modems and other communication controllers, networking equipment, and any and all parts and appurtenances thereto, together with all software and intellectual property with such computer equipment and hardware; (f) all of the furniture, fixtures, equipment, machinery, tools, appliances, telephone systems, copy machines, fax machines, implements, spare parts, supplies and all other tangible personal property of every kind and description owned by Seller; (g) all motor vehicles and other transportation equipment of Seller; (h) all right, title and interest of Seller in and to and under all licenses, franchises, permits, and other governmental authorizations; (i) all right, title and interest of Seller in, to and under all intangible property of Seller, all goodwill associated therewith, and all rights and privileges used in the conducting of the Business and the right to recover for infringement thereon; (j) the name "Key Metrology Integration, Inc." and any trade names or other assumed names under which Seller operates; (k) copies of Seller's books, records, papers and instruments of whatever nature and wherever located that relate to the Business or the Assets or which are required or necessary for Purchaser to conduct the Business from and after the Closing in the manner in which it was being conducted before the Closing; 6 7 (l) all insurance proceeds and insurance claims of Seller that relate exclusively to the Business or to all or any part of the Assets and, to the extent transferable, the benefit of and the right to enforce the covenants and warranties, if any, that the Seller is entitled to enforce with respect to the Assets against its predecessors in title, if any; (m) all right, title and interest of the Seller in, to and under all rights, privileges, claims, causes of action, and options relating or pertaining exclusively to the Business or the Assets; and (n) all other or additional privileges, rights, interests, properties and assets of Seller of every kind and description and wherever located, that are exclusively used or intended for the exclusive use in connection with the Business as presently being conducted. The "EXCLUDED ASSETS" are the assets of the Seller listed in Schedule 2.1. 2.2 Purchase Price. The purchase price for the Assets shall be equal to the sum of the following: (a) $1,500,000 to be paid in cash at Closing; (b) Subject to Sections 2.3 and 2.4 below, the amount, if any, by which Seller's total stockholders' equity on the Closing Balance Sheet exceeds $100,000, to be paid in cash to Seller within ten (10) days after the close of the Equity Determination Period; provided, however, that should Purchaser determine Seller's Closing Balance Sheet equity to be less than $100,000, Seller shall promptly refund to Purchaser the amount of such deficiency; and (c) Up to an additional $500,000 as an "EARNOUT" based upon Seller's earnings before interest, taxes, depreciation and amortization ("EBITDA") for FY2001, such that Seller will be paid $3.90625 for each dollar of EBITDA produced by the Purchased Business during FY2001 in excess of $442,000 (adjusted to reflect a change from cash to accrual basis accounting), payable on or before February 1, 2002. For purposes of this provision, EBITDA will be calculated consistent with Seller's past policies and practices, adjusted to reflect a change from cash to accrual basis accounting, but excluding any allocation to the Purchased Business of Purchaser's post-acquisition overhead, and FY2001 shall mean the period running from January 1, 2001, and ending on December 31, 2001. 2.3 Equity Determination. Seller shall perform and certify a physical count of its inventory as of the Closing Date at which Purchaser and its duly authorized representatives shall be entitled to be present. A balance sheet for Seller as of the Closing Date ("CLOSING DATE BALANCE SHEET") shall be delivered by Seller to Purchaser at or within fifteen (15) days after the 7 8 Closing, and Purchaser shall have thirty (30) days following such delivery ("EQUITY DETERMINATION PERIOD") to review the Closing Balance Sheet to complete Purchaser's verification that Seller's receivables are collectible and that there have been no material changes in the assets or liabilities of Seller since August 31, 2000 (other than the Permitted Distributions). At the end of the Equity Determination Period, Purchaser shall deliver to the Seller a certificate ("CLOSING EQUITY CERTIFICATE") signed by an officer of Purchaser indicating its determination of the amount of Seller's total stockholder's equity of the Closing Date ("CLOSING EQUITY VALUE") as determined by Purchaser in good faith, and, subject to Section 2.4 below, Purchaser shall pay the Seller an amount equal to the excess of Seller's Closing Equity Value over the amount paid to the Seller pursuant to Section 2.2(b); provided that if Seller's Closing Equity Value is less than $100,000, Seller shall reimburse Purchaser to the extent of such deficit. Seller's books shall be closed as of the Closing Date consistent with past practice in accordance with GAAP. 2.4 Disagreement Regarding Equity Determination. Notwithstanding Section 2.3 above, Seller and its representatives shall have the right for a period of thirty (30) days after receiving the Closing Equity Certificate to review its books and records as of the Closing Date and, if Seller desires, to have an independent public accountant examine such book and records, for up to an additional sixty (60) days (ninety (90) days in all), to verify Purchaser's calculation of the Closing Equity Value. If Seller does not agree with Purchaser's calculation of Closing Equity Value, the parties shall negotiate in good faith to agree upon such value and allocation, and to the extent that the Closing Equity Value is found to have been less than $100,000, Seller shall reimburse Purchaser the amount of such deficiency with in ten (10) days after delivery of such independent evaluation. If the independent evaluation established a Closing Equity Value which is 110% or more of the value determined by Purchaser as set forth in the Closing Equity Certificate, Purchaser shall pay all costs incurred by Seller in connection with such independent evaluation. 2.5 Assumed Liabilities. As further consideration for Asset Purchase, Purchaser shall assume and discharge all liabilities and obligations of Seller properly shown and adequately reserved for in the Financial Statements except those liabilities listed in Schedule 2.5 ("EXCLUDED LIABILITIES"). 2.6 Allocation of Purchase Price. The parties to this Agreement shall allocate the Purchase Price among the Assets in accordance with the book value of Seller's assets as reflected in the Closing Date Balance Sheet. The parties agree to file any and all applicable tax returns and other required related tax schedules in accordance with such allocation and Section 1060 of the Internal Revenue Code and will not adopt or otherwise assert tax positions inconsistent therewith. Purchaser and Seller shall each prepare and file its Form 8594 for the taxable year in which the Closing takes place, consistent with the requirements set forth in this Section 2.6. ARTICLE III THE CLOSING 3.1 Closing Time and Place. The consummation of the Asset Purchase and the other transactions contemplated by this Agreement (the "CLOSING") shall take place as soon as 8 9 reasonably practicable after each party to this Agreement shall have indicated to the other that it has satisfied or stands ready to satisfy all conditions of Closing for which it is responsible, or at such other time and place as Seller and Purchaser shall mutually agree, but not later than November 1, 2000, which date shall be referred to as the "CLOSING DATE." The Closing shall take place at the offices of Purchaser's counsel, Barber & Bartz, P.C., 525 South Main, Tulsa, Oklahoma 74103-4511. 3.2 Seller's Deliveries. At the Closing, Seller will deliver to Purchaser all of the items described in Section 8.10 hereof, including the Bill of Sale referred to therein conveying to Purchaser all of Seller's right, title and interest in and to all of the Assets. At or after the Closing, Seller shall execute and deliver to Purchaser such other instruments of transfer as shall be reasonably necessary or appropriate to vest in Purchaser good title to the Assets, free and clear of all Encumbrances other than Permitted Encumbrances and to comply with the purposes and intent of this Agreement. 3.3 Purchaser's Deliveries. At the Closing, Purchaser will deliver to Seller all of the items described in Section 9.4 hereof. 3.4 Further Assurances. Seller and Purchaser agree that they shall, at any time and from time to time after the Closing, upon request of the other party, do, execute, acknowledge and deliver, or will cause to be done, executed, acknowledged and delivered, all such further acts, deeds, assignments, transfers, conveyances, powers of attorney and assurances as may be required to carry out the purposes and intents of this Agreement. No action taken or document executed pursuant to this section shall increase the liability of Seller or Purchaser beyond that contemplated by any other provision of this Agreement. 3.5 Consents. To the extent that the assignment or transfer of any contract or right to be assigned or transferred to Purchaser as provided in this Agreement shall require the consent of the other party thereto, this Agreement shall not constitute an agreement to assign or transfer the same if any attempted assignment would constitute a breach thereof. Seller agrees that it will use its best efforts to obtain the consent of the other parties to all Material Contracts to the assignment or transfer thereof to Purchaser. Seller shall have no liability to Purchaser for failure to obtain any such third party consent provided Seller complies with its obligations under this section. Purchaser agrees that it will cooperate with and assist Seller in its efforts to obtain any such consents. If Seller is unable to obtain any necessary consent to an assignment or transfer to Purchaser of any Material Contract, Purchaser shall have the right to terminate this Agreement pursuant to Section 11.1 without liability to any party under this Agreement. 3.6 Prorations. Any paid or unpaid taxes or governmental charges or assessments which are levied or assessed based solely on time periods (e.g., property taxes but not sales or income taxes), relating to the Assets for the periods during which the Closing occurs ("PRORATED TAXES"), shall not be deemed to be part of the Assumed Liabilities or Assets to be acquired by Purchaser, but shall be prorated between Seller and Purchaser, as of the Closing Date, with Purchaser bearing only that portion of such expense that the number of days after the Closing Date bears to the total number of days in the applicable period and Seller bearing only that portion of such expense that the number of days prior to the Closing Date bears to the total number of days in 9 10 the applicable period. To the extent not adjusted in cash at Closing, all requests for payment of taxes properly attributable to one party that are received by the other will be promptly forwarded to the other party, which shall promptly pay the same. 3.7 Cooperation and Assistance. Subsequent to the Closing, Purchaser agrees that, upon written notice to Purchaser, the Principal Shareholder and other appropriate employees of Purchaser who were employees of Seller prior to Closing, shall be permitted to assist Seller with the resolution of the Excluded Liabilities; provided, however, that such assistance shall not unreasonably interfere with such employees' performance of their duties for Purchaser nor materially interfere with or materially adversely affect Purchaser's relationships with its customers, suppliers, licensors, licensees, consultants or employees. ARTICLE IV EMPLOYMENT MATTERS 4.1 Employees to be Hired. Except as expressly provided in the following sentence and elsewhere in this Article IV, neither Purchaser nor any of its Affiliates shall have any obligation to offer employment to, or employ, any employee of Seller, and neither Purchaser nor any of its Affiliates shall have any liability in respect of any salary, severance, health, welfare, retirement, or any other benefits relating to employment of such employees with Seller or its predecessors. Purchaser shall offer employment effective immediately after the Closing Date to Douglas W. Myers in accordance with the provisions of the employment agreement attached as Exhibit 4.1 ("EMPLOYMENT AGREEMENT"). Purchaser, at its option, may offer employment as of the Closing Date to other employees of Seller, and Seller shall cooperate with Purchaser in the latter's efforts to employ any such employees. 4.2 Medical Coverage. Seller shall retain responsibility for and continue to pay in accordance with its applicable employee plans all hospital, medical, life insurance, disability and other employee welfare benefit plan expenses and benefits for each Seller employee hired by Purchaser to the extent of Seller's responsibility to employees and their covered dependents (or the applicable requirements under COBRA) for the period prior to the Closing Date. 4.3 Indemnification. Seller shall, defend, indemnify and hold harmless Purchaser, its corporate affiliates, and their respective directors, officers and employees, successors and assigns against and in respect of: (i) any claim for wrongful discharge or breach of any written employment contract or written plan or policy arising from any termination of the employment of any employee by Seller; (ii) any claim for severance benefits or termination pay or continued employment arising out of or resulting from any employee's employment by Seller, including, without limitation, any claims relating to Purchaser's obligations as a successor; (iii) any claims relating to Purchaser's obligations as a "successor" to the Business and claims for withdrawal liability, each with respect to any multi-employer pension plans; and (iv) any liability that may arise as a result of Seller or any of its subsidiaries being a member of a "controlled group" or an "affiliated service group" (within the meaning of Sections 414(b), (c), (m) or (o) of the Code), or being under "common control" (within the meaning of Section 4001 of ERISA). 10 11 4.4 Stock Options. Purchaser will set aside for grant under the terms of the XETA Technologies 2000 Stock Option Plan (the "OPTION PLAN"), immediately after the closing, options for the purchase of 25,000 shares of Purchaser common stock by the key employees of Seller as Purchaser named in Schedule 4.4. Consistent with the Plan, these options will have an option price equal to the market value per share on the date of the grant, will vest three (3) years after the date of grant conditioned upon the grantee's continued employment with Purchaser on the vesting date, and will be exercisable for ten (10) years after date of grant. ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE PRINCIPAL SHAREHOLDER AND THE SELLER The Principal Shareholder and Seller represent and warrant to Purchaser as follows: 5.1 Organization and Qualification. Seller is a corporation duly organized, validly existing and in good standing under the Laws of the State of Washington and is duly authorized and qualified to do business under all applicable Laws and to carry on its business in the places and in the manner as now conducted. Attached as Schedule 5.1 are true, correct, and complete copies of Seller's Certificate of Incorporation and Bylaws, and all amendments thereto, and a Certificate of Seller's Good Standing from the Secretary of State of Washington dated within ten (10) days of the Closing Date. Seller has the requisite power and authority to own, lease and operate its assets and properties and to carry on its business as such business is currently being conducted. Seller is in good standing in each jurisdiction in which the operation of its business requires it to be registered to do business unless the failure to be so registered would not have a material adverse effect on Seller. 5.2 Authority. Seller has the requisite power and authority to enter into this Agreement and to effect the transactions contemplated hereby. The Principal Shareholder has the full legal right, power and authority to enter into this Agreement. The execution, delivery and performance of this Agreement have been approved by Seller's Board of Directors and Seller's shareholders. Attached as Schedule 5.2 are true and correct copies of the Resolutions adopted and approved by all of Seller's Directors and all of its shareholders by unanimous written consent authorizing the transactions to be effected pursuant to this Agreement. No additional corporate proceedings on the part of Seller is necessary to authorize the execution and delivery of this Agreement and the consummation by Seller of the transactions contemplated hereby. 5.3 Enforceability. This Agreement has been duly and validly executed and delivered by Seller and the Principal Shareholder, and, assuming the due authorization, execution and delivery hereof by Purchaser, constitutes a valid and binding agreement of Seller and the Principal Shareholder, enforceable against each of them in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally and subject, as to enforceability, to general principles of equity. 11 12 5.4 Non-Contravention. The execution and delivery of this Agreement by Seller and the Principal Shareholder do not, and the consummation by Seller and the Principal Shareholder of the transactions contemplated hereby will not, (i) violate or result in a breach of any provision of, or constitute a default under, (ii) result in the termination of, (iii) accelerate the performance required by, (iv) result in a right of termination or acceleration under, or result in the creation of any Encumbrances upon any of the Assets under any of the terms, conditions or provisions of, (X) Seller's Articles of Incorporation or Bylaws, (Y) any Laws applicable to Seller or any of the Assets, or (Z) except as set forth in Schedule 5.4, any material instrument or agreement which Seller is now a party or by which Seller or any of the Assets may be bound or affected. 5.5 Consents. No declaration, filing or registration with, or notice to, or authorization, consent or approval of, any Governmental Authority or third party is necessary for the execution and delivery of this Agreement by Seller and the Principal Shareholder or the consummation by Seller and the Principal Shareholder of the transactions contemplated hereby except as set forth in Schedule 5.5 and such actions or filings which, if not made or obtained, as the case may be, would not have a material adverse affect. 5.6 Financial Statements. Seller has delivered to Purchaser copies of Seller's internally generated financial statements for the twelve (12) months ended December 31, 1998, and December 31, 1999 and the eight-month period ended as of August 31, 2000 and the nine-month period ended September 30, 2000 (collectively, the "FINANCIAL STATEMENTS"), true and correct copies of which are hereto attached as Schedule 5.6. The Financial Statements have been prepared in accordance with GAAP applied on a consistent basis and fairly and accurately present all of Seller's assets and liabilities as of the date thereof and the results of operations for the periods covered thereby. 5.7 Assets. Except as set forth in Schedule 5.7, Seller has good and marketable title to all of the Assets or, in the case of leased Assets, valid leasehold interests whether real, personal, mixed, tangible or intangible. All the owned Assets and the Seller's interest in the other Assets are free and clear of restrictions on or conditions to transfer or assignment, and free and clear of Encumbrances other than Permitted Encumbrances. The Assets are all the assets and properties necessary to permit the Seller to operate the Business as currently operated. The Assets are in good working order and condition, ordinary wear and tear excepted. 5.8 Accounts and Notes Receivable. Schedule 5.8 sets forth an accurate list of the accounts and notes receivable of the Seller as of October 31, 2000. Receivables from and advances to employees, Seller, its shareholders or any entities or persons related to or Affiliates of Seller or its shareholders are separately identified in Schedule 5.8. Schedule 5.8 also sets forth an accurate aging of all accounts and notes receivable as of the October 31, 2000, showing amounts due in 30-day aging categories. The trade and other accounts receivable of the Seller are bona fide receivables, arising from the sale of goods or services in the ordinary course of business and were recorded correctly in the books and records of Seller in accordance with GAAP and to the knowledge of the Seller and the Principal Shareholders are collectible in the amounts shown on Schedule 5.8 net of reserves reflected in the Financial Statements, provided that the foregoing is not a guarantee of the collectibility of such receivables. 12 13 5.9 Inventories. Except as stated in Schedule 5.9, the items of inventory being sold under this Agreement exist in fact, are current, were purchased in the ordinary course of business and are in the aggregate valued at the lesser of cost or fair market value. 5.10 Contracts. Set forth in Schedule 5.10 is a list of all material contracts, agreements, instruments, leases and licenses to which the Seller is a party or to which any of the Assets is subject, all of which ("MATERIAL CONTRACTS") are valid and binding obligations of Seller and, to the best of Seller's knowledge, of the other parties thereto in accordance with their respective terms and conditions. True and correct copies of all documents described in any exhibit attached to this Agreement have been made available or delivered to Purchaser. Except as otherwise indicated in Schedule 5.4 or Schedule 5.10 hereto, (i) neither the Seller nor, to the Seller's knowledge, any other party to any such Material Contract has given notice of termination or taken any action inconsistent with the continuance of, is now in violation or breach of, or in default in complying with, any material provision thereof and (ii) the consent of any other party to such contract, agreement, instrument, lease or license is not required to validly effect the assignment, transfer or conveyance thereof from Seller to Purchaser. 5.11 Tangible Personal Property. Attached as Schedule 5.11 is a true, complete and accurate list of all material tangible personal property of Seller included in the Assets, and Seller owns all such property free and clear of all liens, claims, charges, encumbrances and security interests of any kind or nature, except as stated in Schedule 5.11. Except as otherwise set forth in Schedule 5.11, such tangible personal property is adequate for the conduct of the Business as presently conducted. At Closing, Purchaser will receive all such tangible personal property free and clear of all liens, claims, charges, encumbrances and security interests of any kind or nature, except as set forth in Schedule 5.11. To the best of Seller's knowledge, all such tangible personal property is in good operating condition and repair (ordinary wear and tear excluded), is useable in the Business as presently conducted and has been maintained and repaired in accordance with customary industry practices, except as may otherwise be noted in Schedule 5.11. 5.12 Permits. Schedule 5.12 contains an accurate list of all material licenses, franchises, permits and other governmental authorizations held by Seller (the "PERMITS"). The Permits are valid, and Seller has not received any written notice that any Governmental Authority intends to cancel, terminate or decline to renew any such Permit. The Permits are all the permits that are required by Law for the operation of the businesses of Seller as currently conducted and the ownership of the Assets except any Permit the failure to have which would not have a material adverse effect. The Seller has conducted and is conducting the Business in substantial compliance with the requirements, standards, criteria and conditions set forth in the Permits. 5.13 Intangible Personal Property. Attached as Schedule 5.13 is a true, complete and accurate list of all material intangible personal property of Seller (other than Permits) as related to the Business, including all material patents, patent applications, trademarks, trademark applications and registrations therefor, options to purchase property of others and any licenses (including but not limited to software licenses as licensee) and other agreements or arrangements providing for the right to use the property of others in the conduct of the Business. Seller is not a licensor in respect of any patents, trade secrets, technical data, inventions, know-how, trademarks, trade names, 13 14 copyrights or applications therefor, relating to the Business, except as stated in Schedule 5.13. Except as disclosed in Schedule 5.13, Seller owns or possesses adequate licenses or other rights to use all patents, trade secrets, technical data, trademarks, trade names or copyrights necessary to conduct the Business as now operated, and have not received notice that its use of such patents, trade secrets, technical data, trademarks, trade names or copyrights infringes the rights of others. Except as set forth in Schedule 5.13 , there are no adverse claims, liens, encumbrances, or security interests upon or affecting the items of intangible property described and, Seller is the owner of all right, title and interest in and to such intangible property. 5.14 Real Property. Attached as Schedule 5.14 is a true, complete and accurate description of all interests in real property owned, used by or leased to Seller. Seller has valid leases, not in default, as to such real property leased by it, all free and clear of all liens, mortgages, charges or encumbrances of any nature whatsoever, except as described in Schedule 5.14 and except for (a) liens for current state and local property taxes or general or special assessments not in default, and such liens, encumbrances, easements, rights of way, building and use restrictions, exceptions, reservations and limitations as do not in any material respect detract from the value of the property subject thereto or interfere with or impair the present and continued use thereof in the usual and normal conduct of the Business. 5.15 Environmental Matters. Except as set forth in Schedule 5.15, (a) Seller is in compliance, in all material respects, with all Environmental, Health and Safety Laws, including, without limitation, Environmental, Health and Safety Laws; (b) Seller has obtained and complied, in all material respects, with all necessary permits and other approvals necessary to treat, transport, store, dispose of and otherwise handle Hazardous Substances; (c) to Seller's knowledge, there has been no "release" or threat of "release" (as defined in any Environmental, Health and Safety Law) at, from, in or on any property owned or operated by the Seller relating to the Assets and (d) to Seller's knowledge, there is no pending claim against it based on any Environmental, Health and Safety Law and no such claim has been threatened in a writing to Seller. 5.16 Labor Relations. Seller is not bound by or subject to any arrangement with any labor union, and no employees of Seller are represented by any labor union or covered by any collective bargaining agreement nor, to Seller's or the Principal Shareholder's knowledge, is any campaign to establish such representation in progress. There is no pending nor, to Seller's or the Principal Shareholder's knowledge, threatened labor dispute involving Seller or any group of Seller's employees nor has Seller experienced any significant labor interruptions over the past five (5) years. Except as set forth on Schedule 5.16, Seller nor the Principal Shareholder has no knowledge of any claims made by or disputes with any of its employees. 5.17 Trade Restrictions and Confidentiality Agreements. Schedule 5.17 sets forth all agreements containing covenants not to compete or solicit employees or to maintain the confidentiality of information to which Seller is bound or under which Seller has any rights or obligations. 5.18 Employee Compensation. Schedule 5.18 contains a description of all salary and other compensation arrangements which Seller has with its employees and contains a complete list 14 15 of the names and current salary rates of and bonus commitments to each person currently employed by Seller whose annual salary exceeds Thirty Thousand Dollars ($30,000). 5.19 Employee Benefit Plans. To the knowledge of Seller and the Principal Shareholder, Seller is in compliance in all material respects with all reporting and disclosure requirements applicable to it and its Pension Plans and Welfare Plans under the Code, ERISA, and all Department of Labor and Internal Revenue Service regulations promulgated thereunder. No civil or criminal action brought pursuant to the provisions of Title I, Subtitle B, Part 5 of ERISA or any other federal or state law is pending or, to Seller's or the Principal Shareholder's knowledge threatened, against any fiduciary of the Pension Plans or the Welfare Plans. To the Seller's and the Principal Shareholder's knowledge, no Pension or Welfare Plan, nor any fiduciary thereof, has been, or is currently, the direct or indirect subject of an audit, investigation or examination by any Governmental Authority. 5.19.1 Pension Plan; Claims. Every Pension Plan or similar arrangement maintained by Seller, whether written or oral, is listed and described in Schedule 5.19.1. There are no outstanding liabilities of Seller to the Pension Plan (other than payroll deduction contributions not yet remitted to the Plan Trustee), and neither the Seller nor the Principal Shareholder knows of any potential liabilities in connection therewith. There is no action, suit or claim pending (other than for benefits in the normal course), pending or to the knowledge of Seller or the Principal Shareholder threatened, and neither the Seller nor the Principal Shareholder has any knowledge of any facts which could give rise to any action, suit or claim, against the Pension Plan or Seller, which might subject Seller to any material liability. 5.19.2 Welfare Plans; Claims. Every Welfare Plan or similar arrangement maintained by Seller or to which it makes employer contributions with respect to its employees, whether by written or oral agreement, are listed in Schedule 5.19.2. There is no action, suit or claim (other than for benefits in the ordinary course) pending or to the knowledge of Seller or the Principal Shareholder threatened, and neither Seller nor the Principal Shareholder has any knowledge of any facts which could give rise to any action, suit or claim against any of the Welfare Plans or Seller, which might subject Seller to any material liability. 5.19.3 Prohibited Transactions. To Seller's and the Principal Shareholder's knowledge, none of the Welfare Plans or the Pension Plan, nor any of their related trusts, nor Seller or any trustee, administrator or other "PARTY IN INTEREST" or "DISQUALIFIED PERSON" (within the meaning of Section 3(14) of ERISA or Section 4975(e)(2) of the Code, respectively) with respect to the Pension Plan or any Welfare Plan, has engaged in any non-exempt "PROHIBITED TRANSACTION" (within the meaning of Section 406 of ERISA or Section 4975(c) of the Code, respectively) with respect to Seller's participation therein, which could subject the Pension Plan or any of the Welfare Plans, their related trusts, trustees, administrators or other fiduciaries, Seller, Purchaser, or any other party dealing with the Pension Plan or the Welfare Plans, to the penalties or excise tax imposed on prohibited transactions by Section 502 of ERISA or Section 4975 of the Code or which could have a material adverse effect on the assets, business or financial condition of Seller. 15 16 5.19.4 Compliance. To the knowledge of Seller and the Principal Shareholder, (a) the Pension Plan and each of the Welfare Plans complies currently, and has complied in the past, both as to form and operation and in all material respects, with its own terms and with the provisions of ERISA and the Code, and all other applicable laws, rules and regulations; (b) all necessary governmental approvals and determinations for the Pension Plan have been obtained, including where applicable, a favorable determination as to its qualification under Sections 401(a), and 501(a) of the Code; and (c) nothing has occurred since the date of each such determination or recognition letter that would adversely affect such qualification. To the knowledge of the Seller and the Seller, all amounts that are currently owing to plan participants, or contributions required to be made to the Pension Plan or any of the Welfare Plans have been paid or contributed with respect to all periods prior to the Closing Date or have been provided for by adequate reserves in the Financial Statements. 5.19.5 COBRA. To the knowledge of Seller and the Principal Shareholder, except as set forth in Schedule 5.19.5, Seller has complied in all material respects with the "CONTINUATION COVERAGE REQUIREMENTS OF GROUP HEALTH PLANS" provided in Section 4980B of the Code, Sections 601 et. seq. of ERISA, the Family and Medical Leave Act of 1994, and all regulations promulgated thereunder. 5.19.6 401(k) Plan. The Seller's 401(k) Plan permits, or prior to Closing shall be amended to permit, employees of Seller who are hired by Purchaser to roll or directly transfer their vested account balances to a "QUALIFIED EMPLOYEE PENSION PLAN" at no cost to Purchaser. 5.19.7 Miscellaneous Benefit Plan Matters. Neither Seller nor any other entity, whether or not incorporated, which is deemed to be under "COMMON CONTROL" (as defined in Section 414 of the Code, or 4001(b) of ERISA) with Seller ("COMMONLY CONTROLLED ENTITY") maintains or contributes to any "EMPLOYEE PENSION BENEFIT PLAN" (within the meaning of Section 3(2)(A) of ERISA) that (a) is a "DEFINED CONTRIBUTION PLAN" described in Section 3(34) of ERISA or Section 414(i) of the Code, or a "DEFINED BENEFIT PLAN" described in Section 3(35) of ERISA or Section 414(j) of the Code, and (b) gives rise, or will give rise, to any liability of Seller for (i) any delinquent premium payments due under Section 4007 or ERISA with respect to any such defined benefit plan, or (ii) any unpaid minimum funding contributions that would result in the imposition of a lien on any assets of Seller pursuant to Section 412(c)(11) of the Code or Section 302(c)(11) of ERISA. Neither Seller nor any "COMMONLY CONTROLLED ENTITY" (as defined in ERISA) sponsors or sponsored, maintains or maintained, any defined benefit plan that has been, or will be, terminated in a manner that would result in any liability of Seller to the Pension Benefit Guaranty Corporation or that would result in the imposition of a lien on any assets of Seller pursuant to Section 4068 of ERISA. At no time during the five-year period immediately preceding the first day of the year in which the Closing Date occurs has Seller or any Commonly Controlled Entity participated in or contributed to any "MULTI-EMPLOYER PLAN" (within the meaning of Section 4001(a)(3) of ERISA or Section 414(f) of the Code), or had an obligation to participate in or contribute to any such multi-employer plan. No agreement subject to Section 4204 of ERISA has been entered into in connection with the Asset 16 17 Purchase. None of the Welfare Plans provides for or promises retiree medical, disability or life insurance benefits to any current or former employee, officer, or director of Seller. 5.20 Litigation and Legal Compliance. Except as set forth in Schedule 5.20, there is no material claim, action, suit or proceeding, pending or, to the knowledge of the Seller and the Principal Shareholder, threatened against or affecting Seller, at law or in equity, or before or by any Governmental Authority having jurisdiction over Seller. No written notice of any claim, action, suit or proceeding, whether pending or threatened, has been received by the Seller and, to the Principal Shareholder's and Seller's knowledge, there is no basis therefor. Except to the extent set forth in Schedule 5.20, the Seller has conducted and is conducting the Business in compliance with all Laws applicable to Seller, the Assets or the operation of the Business. 5.21 Taxes. Except as set forth in Schedule 5.21, Seller has timely filed all requisite federal, state, local and other tax returns for all fiscal periods for which the applicable statute of limitations has not expired, and has duly paid in full or made adequate provision in the Financial Statements for the payment of all Taxes for all periods for which the applicable statute of limitations has not expired. Seller has duly withheld and paid or remitted all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, shareholder or other person or entity that required withholding under any applicable Law, including, without limitation, any amounts required to be withheld or collected with respect to social security, unemployment compensation, sales or use taxes or workers' compensation. There are no examinations in progress or claims against Seller relating to Taxes for any period or periods prior to and including the Effective Date and no written notice of any claim for Taxes, whether pending or threatened, has been received. Seller has not granted or been requested to grant any extension of the limitation period applicable to any claim for Taxes or assessments with respect to Taxes. Seller is not a party to any tax allocation or sharing agreement and is not otherwise liable or obligated to indemnify any person or entity with respect to any Taxes. The amounts shown as accruals for Taxes in the Financial Statements as of August 31, 2000 are, and at Closing will be, sufficient for the payment of all Taxes for all fiscal periods ended on or before that date. Seller currently utilizes the accrual method of accounting for income tax purposes. Such method of accounting has not changed in the past five (5) years. 5.22 Solvency. Seller is not insolvent, and will not be rendered insolvent by the transfer contemplated by this Agreement. Seller assets exceed its liabilities, and Seller is currently paying its obligations as they become due. 5.23 Change of Name. Except as set forth in Schedule 5.23, Seller has not conducted business under any name during the past five (5) years other than Key Metrology Integration, Inc. or KMI. 5.24 Books and Records. The books of account, minute books, stock record books, and other records of Seller, are complete and correct in all material respects, have been maintained in accordance with sound business practices, and all of them have been made available for inspection by Purchaser. 17 18 5.25 Disclosure. Seller has fully provided Purchaser and its representatives with all the information that Purchaser has requested in analyzing whether to consummate the Asset Purchase. None of the information so provided nor any representation or warranty of Seller contained in this Agreement contains any untrue statement of a material fact, or omits to state a material fact necessary to make such representation, warranty or statement, in light of the circumstances under which they were made, not misleading. 5.26 No Implied Representations. Notwithstanding anything to the contrary contained in this Agreement, the Seller and the Principal Shareholder have not made any representation or warranty whatsoever, express or implied, other than those representations and warranties of the Seller and the Principal Shareholder expressly set forth in this Agreement. 5.27 Accuracy of Information Furnished. This Agreement and the attached schedules and exhibits are free of any untrue statements of material fact and do not omit to state a material fact necessary to make the statements contained in this Agreement and the attached schedules and exhibits not misleading. To the best of Seller's knowledge, there is nothing which has not been set forth or disclosed in this Agreement and the attached exhibits which currently materially adversely affects the Business or the Assets. 5.28 Location. Except as to items that may be out for service or repair or with sales representatives for marketing purposes, all tangible personal property included in the Assets is currently found at the locations set forth in Schedule 5.28. 5.29 Warranty Claims. Except as set forth in Schedule 5.29, there are no warranty claims for defective work completed by the Business existing, pending or, to the knowledge of the Seller, threatened against the Business or Seller. 5.30 Management and Ownership. All of Seller's directors and shareholders are as identified in Schedule 5.30. ARTICLE VI REPRESENTATIONS AND WARRANTIES OF PURCHASER Purchaser represents and warrants to Seller as follows: 6.1 Organization. Purchaser is a corporation duly organized, validly existing and in good standing under the Laws of the State of Oklahoma. Attached as Schedule 6.1 are true, correct, and complete copies of Purchaser's Certificate of Incorporation and Bylaws, and all amendments thereto, and a Certificate of Purchaser's Good Standing from the Secretary of State of Oklahoma dated within ten (10) days of the Closing Date. Purchaser is duly authorized and qualified under all applicable Laws to carry on its business in the places and in the manner now conducted. Purchaser has the requisite power and authority to own, lease and operate its assets and properties and to carry on its business as such business is currently being conducted. 6.2 Authority. Purchaser has the full legal right, power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The execution, delivery 18 19 and performance of this Agreement have been approved by the board of directors of Purchaser. Attached as Schedule 6.2 is a true and correct copy of the Resolutions adopted and unanimously approved by Purchaser's Directors authorizing the Asset Purchase by written memorandum of action. No additional corporate proceedings on the part of Purchaser are necessary to authorize the execution and delivery of this Agreement and the consummation by Purchaser of the transactions contemplated hereby. 6.3 Enforceability. This Agreement has been duly and validly executed and delivered by Purchaser, and, assuming the due authorization, execution and delivery by Seller and the Principal Shareholder, constitutes valid and binding agreements of Purchaser, enforceable against Purchaser in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally and subject, as to enforceability, to general principles of equity. 6.4 Non-Contravention. The execution and delivery of this Agreement by Purchaser do not, and the consummation by Purchaser of the transactions contemplated hereby will not, violate or result in a breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in a right of termination or acceleration under any of the terms, conditions or provisions of (i) Purchaser's Certificate of Incorporation or Bylaws, (ii) any Law applicable to Purchaser or any of its properties or assets or (iii) any note, bond, mortgage, indenture, deed of trust, license, franchise, permit, concession, contract, lease or other instrument, obligation or agreement of any kind to which Purchaser is now a party or by which Purchaser or any of its properties or assets may be bound or affected. 6.5 Consents. No declaration, filing or registration with, or notice to, or authorization, consent or approval of, any Governmental Authority is necessary for the execution and delivery of this Agreement by Purchaser or the consummation by Purchaser of the transactions contemplated hereby. 6.6 No Implied Representations. Notwithstanding anything to the contrary contained in this Agreement, Purchaser has not made any representation or warranty whatsoever, express or implied, other than those representations and warranties of Purchaser expressly set forth in this Agreement. 6.7 Litigation. There is no suit, action, administrative proceeding or other proceeding or governmental investigation pending, or to Purchaser's knowledge, threatened against Purchaser that, if adversely determined to Purchaser could have a material adverse effect on the ability of Purchaser to perform its obligations hereunder. 6.8 Disclosure. Purchaser has fully provided Seller and its representatives with all the information that Seller has requested in analyzing whether to consummate the Asset Purchase. None of the information so provided nor any representation or warranty of Purchaser contained in this Agreement contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements herein or therein, in light of the circumstances under which they were made, not misleading. To Purchaser's knowledge, there is nothing which has 19 20 not been set forth or disclosed in this Agreement that could have a material adverse effect on Purchaser's ability to perform its obligations hereunder. ARTICLE VII CERTAIN COVENANTS 7.1 Conduct of Business. Seller shall conduct the Business up to the date of Closing in the normal and regular manner, and will not enter into any contact except as may be required in the ordinary course of business. Except with respect to disclosure to their respective attorneys, financial advisors and officers and employees with a need to know, or as otherwise required by law, the parties shall insure that the existence of this Agreement is kept in strictest confidence prior to Closing, and no party shall disclose the terms hereof to any person, before Closing, without each party's prior written consent. 7.2 Future Cooperation; Final Equity Value; Tax Matters. The Principal Shareholder, Seller and Purchaser shall each deliver or cause to be delivered to the other following the Closing such additional instruments as the other may reasonably request for the purpose of fully carrying out this Agreement. Purchaser will, and will cause its officers, directors and employees to, cooperate with Seller and its representatives in their review and verification of the Closing Equity Value determined by Purchaser, pursuant to Section 2.3. Seller will cooperate and use its best efforts to causes its officers, directors and employees to cooperate with Purchaser at and after the Closing in furnishing information, evidence, testimony and other assistance in connection with any actions, proceedings, arrangements or disputes of any nature with respect to matters pertaining to all tax periods prior to the Closing. Purchaser will provide Seller and the Principal Shareholder with access to such of Seller's books and records as may be reasonably requested by Seller or the Principal Shareholder in connection with federal, state and local tax matters relating to periods prior to the Closing. The party requesting cooperation, information or actions under this Section 7.2 shall reimburse the other party for all reasonable out-of-pocket costs and expenses paid or incurred in connection therewith, which costs and expenses shall not, however, include per diem charges for employees or allocations of overhead charges. 7.3 Access. Between the date of this Agreement and the Closing Date, Seller shall give Purchaser and its authorized representatives reasonable access upon reasonable notice during reasonable business hours and in such manner as not unduly to disrupt their respective normal business activities, to any and all premises, properties, contracts, commitments, books, records and affairs of the Business and shall cause its officers and employees to furnish to Purchaser any and all financial, technical and operating data and other information pertaining to the Business as Purchaser may from time to time reasonably request; provided, however, that such access shall not include access to any item or property not related to the Business. 7.4 Vendor and Customer Introductions. Seller shall make arrangements reasonably satisfactory to Purchaser for representatives of the Purchaser to meet Seller's vendors and customers. Seller will be permitted to have a representative at each such meeting. 7.5 Preservation and Continuity of Representations. Seller and the Principal Shareholder, jointly and severally, hereby covenant with Purchaser that from and after the Effective 20 21 Date and through the Closing Date or the earlier termination of the Agreement, each of the Seller and the Principal Shareholder shall use its and his best efforts to ensure that all of the representations and warranties set forth in Article V hereof shall be true in all material respects as of the Closing Date as if repeated at and as of such time, and shall advise Purchaser promptly of any material adverse change or deviation in or from any of the representations and warranties herein from the Effective Date through the Closing Date. 7.6 Effect of Purchaser's Due Diligence. Purchaser's due diligence review shall not relieve Seller or the Principal Shareholder of any duties concerning their respective representations, warranties, covenants or agreements contained in this Agreement. 7.7 Filings with SEC. Between the Effective Date and the Closing, or promptly thereafter, Purchaser may have to make certain filings with the Securities and Exchange Commission. To the extent that information concerning the Principal Shareholder and/or Seller is required to be included in such filings as required by applicable law, Seller and the Principal Shareholder shall supply or cause Seller's auditors and other advisors to supply such information, in the manner and form reasonably requested by Purchaser, at Purchaser's cost, promptly and in any event not later than twenty (20) days after receipt of such request. ARTICLE VIII CONDITIONS TO PURCHASER'S OBLIGATION TO CLOSE Each and every obligation of Purchaser under this Agreement that has to be performed on or after the date hereof shall be subject to the satisfaction or waiver by Purchaser on or before the Closing Date of the following conditions: 8.1 Representations. The representations and warranties made by Seller in this Agreement shall be correct in all material respects on and as of the Closing Date, with the same force and effect as though such representations and warranties had been made on the Closing Date. Seller shall have delivered to Purchaser a certificate to that effect dated the Closing Date and signed by an officer of Seller. 8.2 Performance. All the terms, covenants and conditions of this Agreement to be complied with or performed by Seller on or before the Closing Date shall have been fully complied with or performed in all material respects or waived by Seller. Purchaser shall have delivered to Seller a certificate to that effect dated the Closing Date and signed by an officer of Purchaser. 8.3 Waiting Periods. All other governmental or regulatory approvals the absence of which would have a material adverse effect upon the conduct of the Business by Purchaser or Purchaser's ownership or control of the Assets or the Business shall have been obtained, and (x) no suit, action or proceeding by any Governmental Authority shall be pending and (y) Purchaser shall not have been advised in writing by any Governmental Authority that such Governmental Authority intends to file or commence any suit, action or proceeding, which, in either case, seeks to enjoin, restrain or prohibit the consummation of the transactions contemplated by this Agreement or to impose limitations on the ability of Purchaser to exercise full rights of ownership of the Assets 21 22 or require the divestiture by Purchaser of any of the Assets. Purchaser shall deliver to Seller copies of any writing referred to above in this section promptly upon receipt. 8.4 Proceedings. Prior to the Closing Date, no material litigation shall have been initiated by any federal, state or local governmental or public body or department or agency thereof or any other person questioning the legality of the transactions contemplated by this Agreement which, in the opinion of counsel to Purchaser, makes it undesirable to proceed with such transactions. 8.5 Material Adverse Change. Other than planned and permitted withdrawals of cash, securities and personal items at the Principal Shareholder's discretion, no material adverse change shall have occurred in the Business between August 31, 2000 and the Closing Date. 8.6 Required Permits and Consents. Purchaser shall have received (i) its own counterparts of, or effective assignment of, or temporary or interim authority to operate pending the issuance of, all Permits and (ii) all required consents satisfactory to Purchaser to assignment to Purchaser of all Material Contracts (and the agreement to any modifications reasonably requested by Purchaser). 8.7 Due Diligence. Purchaser shall have completed its due diligence examination of Seller and found the Asset Purchase to be in all respects satisfactory to Purchaser. 8.8 Board Approval. Purchaser's Board of Directors shall have given its approval to the closing of the Asset Purchase. 8.9 Closing Documents. Purchaser shall have received all of the following items: 8.9.1 Legal Opinion. The written opinion with respect to Washington law of Lane Powell Spears Lubersky LLP, counsel to Seller, dated the Closing Date, to the effect that: (a) Seller is a corporation duly formed, validly existing and in good standing, under the laws of the State of Washington; (b) Seller has the requisite power and authority as a corporation to execute and deliver, and to perform and observe the provisions of, this Agreement; (c) This Agreement has been duly authorized, executed and delivered by Seller's directors and shareholders and is the legal, valid and binding obligation of Seller enforceable in accordance with its terms (subject to customary bankruptcy and equitable remedies exceptions). 8.9.2 Myers' Employment Agreement. The Employment Agreement as executed by Douglas W. Myers. 22 23 8.9.3 Key Employee Agreements. Fully executed Nondisclosure/Noncompetition and Employment Agreements in the form of Exhibit 8.9.3 from all of Seller's employees who are named in Schedule 8.9.3. 8.9.4 Independent Contractor Agreements. Fully executed Independent Contractor Agreements in the form of Exhibit 8.9.4 from the persons named in Schedule 8.9.4. 8.9.5 Supplier and Vendor Contracts. Fully executed contracts or agreements, or assignments of Seller's existing contracts and agreements, with the suppliers and vendors of the Business deemed necessary by Purchaser to the continued operation and success of the Business as identified in Schedule 8.9.5. 8.9.6 Consulting Agreements. A list of Seller's customers/clients of Seller to be attached hereto as Schedule 8.9.6, from whom Seller shall cooperate with Purchaser in obtaining, within thirty (30) days after Closing, fully executed Consulting Agreements in the form of Exhibit 8.9.6. 8.9.7 Bill of Sale. A duly executed the Bill of Sale in the form as Exhibit 8.9.7. 8.9.8 Releases. Duly recorded and filed releases of all outstanding mortgages covering any of the Assets and termination statements for all outstanding UCC financial statements, amendments and assignments covering any of the Assets. 8.9.9 Clearance Certificate. A "tax clearance certificate" from the appropriate regulatory agencies in Washington and each other state in which Seller is qualified to do business stating that all sales and use taxes have been paid through a date no earlier than thirty (30) days prior to the Closing. 8.9.10 Closing Certificate. A certificate in the form of Exhibit 8.9.10, dated as of the Closing Date and signed by Seller and the Principal Shareholder, verifying the satisfaction of the conditions set forth in Sections 8.1 through 8.5 hereof. 8.9.11 Additional Documents. All such other certificates and documents consistent with this Agreement as Purchaser or its counsel shall have reasonably requested. ARTICLE IX CONDITIONS TO SELLER'S OBLIGATION TO CLOSE Each and every obligation of Seller under this Agreement to be performed on or after the date hereof shall be subject to the satisfaction or waiver by Seller on or before the Closing Date of the following conditions: 9.1 Representations. The representations and warranties made by Purchaser in this Agreement shall be correct in all material respects on and as of the Closing Date, with the same force and effect as though such representations and warranties had been made on the Closing Date. 23 24 Purchaser shall have delivered to Seller a certificate to that effect dated the Closing Date and signed by an officer of Purchaser. 9.2 Performance. All the terms, covenants and conditions of this Agreement to be complied with or performed by Purchaser on or before the Closing Date shall have been fully complied with or performed in all material respects or waived by Seller. Purchaser shall have delivered to Seller a certificate to that effect dated the Closing Date and signed by an officer of Purchaser. 9.3 Proceedings. Prior to the Closing Date, no material litigation shall have been initiated by any United States governmental or public body or department or agency thereof or any other person questioning the legality of the transactions contemplated by this Agreement which, in the opinion of counsel to Seller, makes it undesirable to proceed with such transactions. 9.4 Closing Documents. Seller shall have received from Purchaser the following items: 9.4.1 Legal Opinion. Seller shall have received an opinion of counsel to Purchaser, dated the Closing Date, to the effect that: (a) Purchaser is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Oklahoma; (b) Purchaser has the requisite power and authority as a corporation to execute and deliver, and to perform and observe the provisions of, this Agreement; and (c) This Agreement has been duly authorized, executed and delivered by Purchaser's board of directors and is a legal, valid and binding obligation of Purchaser enforceable in accordance with its terms (subject to customary bankruptcy and equitable remedies exceptions). 9.4.2 Employment Agreement. The Employment Agreement. 9.4.3 Resolutions. In a form and content reasonably satisfactory to Seller, resolutions of the Board of Directors Purchaser duly approving and authorizing the execution, delivery and performance of this Agreement and the transactions and agreements contemplated by or referred to herein. 9.4.4 Closing Certificate. A certificate in the form of Exhibit 9.4.4, dated as of the Closing Date and signed by Purchaser, verifying the satisfaction of the conditions set forth in Sections 9.1 through 9.3 hereof. 9.4.5 Price. The Purchase Price to Seller and any instrument deemed reasonably necessary by Seller and its counsel to evidence Purchaser's assumption of the Assumed Liabilities. 24 25 ARTICLE X INDEMNIFICATION 10.1 Survival of Representations and Warranties. The parties hereto agree that their respective representations, warranties, covenants, and agreements contained herein shall survive the Closing for a period of two (2) years after the Closing Date except that those covenants, representatives and warranties made by Seller with respect to Environmental Matters, Employee Benefits and Taxes (Sections 5.15, 5.19 and 5.21 hereof) shall survive the Closing for such periods of time that the Governmental Authority having jurisdiction over the subject matter of those covenants, representations and warranties may be empowered to assess a liability or deficiency with respect to any of the matters covered thereby (the "INDEMNIFICATION PERIOD"). 10.2 Indemnification by the Seller. Subject to the other provisions of this Article X, the Seller and the Principal Shareholder agree to save and indemnify Purchaser against, and hold it harmless from, any and all liabilities, of every kind, nature and description, fixed or contingent, including without limitation reasonable attorney fees and expenses incurred in connection with any action, claim or proceeding relating to such liabilities ("DAMAGES"), arising from the breach of any of his representations, warranties, covenants, or agreements, contained herein or in the Exhibits or Schedules hereto, a claim for which is asserted in writing by Purchaser during the Indemnification Period. 10.3 Indemnification by Purchaser. Purchaser agrees to save and indemnify the Seller against and to hold him harmless from any and all Damages arising from the breach of any of Purchaser's representations, warranties, covenants or agreements contained herein or the Exhibits hereto, a claim for which is asserted in writing by Seller during the Indemnification Period. 10.4 Claims. All claims for Damages shall be computed net of the present value of all readily ascertainable future tax benefits associated therewith. No claim shall be made for matters adequately covered by insurance, nor may any party recover punitive damages as part of its Damages. 10.5 Defense of Claims. Each party entitled to indemnification under this Article X (the "INDEMNIFIED PARTY") agrees to notify the party required to provide indemnification (the "INDEMNIFYING PARTY") with reasonable promptness of any claim asserted against it in respect of which the Indemnifying Party may be liable under this Agreement, which notification shall be accompanied by a written statement setting forth the basis of such claim and the manner of calculation thereof. The Indemnifying Party shall have the right, at its election, to defend or compromise any such claim at its own expense with counsel of its choice; provided, however, that (i) such counsel shall have been approved by the Indemnified Party, which approval shall not be unreasonably withheld or delayed; (ii) the Indemnified Party may participate in such defense if it so chooses with its own counsel and at its own expense; and (iii) any such defense or compromise shall be conducted in a manner which is reasonable and not prejudicial to the Indemnified Party's interest in such matter. In the event the Indemnifying Party does not undertake to defend or compromise the claim, the Indemnifying Party shall promptly notify the Indemnified Party of its intention not to undertake to defend or compromise the claim, and the 25 26 Indemnifying Party shall be bound by (a) the final decree of any court of competent jurisdiction deciding the validity and amount of the claim asserted against the Indemnified Party, and (b) any compromise of such claim made with the prior consent of the Indemnifying Party, which shall not be unreasonably withheld or delayed. 10.6 Extension of Time. To the extent that an Indemnified Party delivers written notice of a claim for Damages against an Indemnifying Party prior to the expiration of the Indemnification Period, reasonably identifying the basis for the claim and the amount of any reasonably ascertainable Damages, the Indemnification Period shall be extended for such claim until such claim is resolved by a Final Determination. 10.7 Final Determination. For the purposes of this Agreement, a "FINAL DETERMINATION" shall exist when (i) the parties agree in writing upon the amount, or (ii) a court of competent jurisdiction shall have made a determination on the merits with respect thereto and appeal therefrom shall not have been taken within a timely fashion from the date of such determination. The asserting party will assign to the other party any claims against which the asserting party has been indemnified and paid as provided herein, as to which there may be claims against persons other than the Seller, and the other party in all respects shall be subrogated to the rights of the asserting party in connection therewith. 10.8 Limitations on Indemnification. (a) Notwithstanding anything to the contrary herein, except as provided in this Section 10.8, (i) Seller and the Principal Shareholder shall not be liable under this Article X unless and until the aggregate Damages exceed $50,000 (at which point Seller and the Principal Shareholder shall only become liable for the aggregate Damages in excess of $50,000, and (ii) except for claims based on fraud or intentional misrepresentation, Seller's and the Principal Shareholder's aggregate liability under this Article X shall not exceed amounts payable by Purchaser to Seller under Section 2.2. (b) Notwithstanding anything to the contrary herein, except as provided in this Section 10.8, (i) Purchaser shall not be liable under this Article X unless and until the aggregate Damages exceed $50,000 (at which point Purchaser shall only become liable for the aggregate Damages in excess of $50,000), and (ii) except for claims based on fraud or intentional misrepresentation, Purchaser's aggregate liability under this Article X shall not exceed $500,000. 10.9 Exclusivity. The remedies contained in this Article X, including any remedy arising out of, relating to, in the nature of, or caused by the violation or any breach of a representation, warranty or covenant contained in this Agreement or with respect thereto, shall be exclusive of all other statutory or common law remedies available to any party; provided, however, that nothing set forth herein shall prohibit any party from seeking specific performance or injunctive relief for any actual or threatened breach of this Agreement. 26 27 ARTICLE XI TERMINATION 11.1 General. Anything herein or elsewhere to the contrary notwithstanding, this Agreement may be terminated at any time prior to the Closing Date: (a) By mutual written consent of Seller and Purchaser; (b) By Purchaser if, through no fault of Purchaser, any of the conditions set forth in Article VIII shall not have been fulfilled, or shall become incapable of fulfillment, on or prior to November 15, 2000, and shall not have been waived; (c) By Purchaser or Seller, if the Closing Date shall not have occurred on or prior to November 15, 2000 (or such later date as shall have been approved by the parties), unless such failure of such occurrence shall be due to the failure of the party seeking to terminate this Agreement to perform or observe the covenants, agreements and conditions hereof to be performed or observed by such party at or before the Closing Date; (d) By Purchaser or Seller, if any court of competent jurisdiction or other governmental body shall have issued an order, decree or ruling or taken any other action restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement and such order, decree, ruling or other action shall not have been withdrawn within thirty (30) days after the date on which such order, decree, ruling or other action was first issued or taken, or by reason of any litigation or proceeding pending or threatened to be instituted by any person or governmental body, which, in either case in the good faith judgment of its Board of Directors will in all likelihood result in an order, decree or ruling enjoining or otherwise prohibiting the transactions contemplated by this Agreement; or (e) By Purchaser or Seller, if any representation or warranty given or made in this Agreement or any attachment by the other was untrue in any material respect as of the date given or made or as of the Closing Date, in light of the circumstances under which such representation or warranty was given or made, or if any covenant given or made in or pursuant to this Agreement, and performable by the other before and as a condition to the Closing is breached and such breach is not promptly cured after notice. 11.2 Effect. In the event of termination or abandonment by reason of Section 11.1, this Agreement shall forthwith become void and there shall be no liability of one party to the other by reason of this Agreement unless the reason for termination or abandonment was caused by the action, the failure to act, the misrepresentation, omission or breach by the party to be charged with such liability with respect to a material aspect of the contemplated transaction. 27 28 ARTICLE XII MISCELLANEOUS 12.1 Entire Agreement. This Agreement (including the Schedules and Exhibits hereto) and the documents delivered pursuant hereto constitute the entire agreement and understanding among the Principal Shareholder, Seller and Purchaser superseding any prior agreement and understanding relating to the subject matter of this Agreement, including, without limitation, the Letter of Intent and the Confidentiality Agreement entered into by Purchaser and Seller on or about June 15, 2000. This Agreement may be modified or amended only by a written instrument executed by the Principal Shareholder, Seller and Purchaser, acting through their respective officers, duly authorized by their respective Boards of Directors. 12.2 Counterparts. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute but one and the same instrument. Facsimile transmission of any signed original document and/or retransmission of any signed facsimile transmission will be deemed the same as delivery of an original. At the request of any party, the parties will confirm facsimile transmission by signing a duplicate original document. 12.3 Brokers and Agents. Other than the Seller's investment advisor, The Geneva Companies, each party hereto represents and warrants that it employed no broker or agent in connection with the transactions contemplated by this Agreement. Each party agrees to indemnify each other party against all loss, cost, damages or expense arising out of claims for fees or commissions of brokers employed or alleged to have been employed by such indemnifying party. 12.4 Notices. All notices and communications required or permitted hereunder shall be in writing and may be given by depositing the same in the United States mail, addressed to the party to be notified, postage prepaid and registered or certified with return receipt requested, or by delivering the same in person to an officer or agent of such party, as follows: If to Purchaser, addressed to them at: XETA Technologies, Inc. 1814 West Tacoma Broken Arrow, Oklahoma 74012-1406 Attn: Jon A. Wiese, President Ph.: (918) 664-8200 Fax: (918) 664-6876 with a copy (which shall not constitute notice) to: Barber & Bartz, P.C. 525 South Main, Suite 800 Tulsa, Oklahoma 74103-4511 Attn: Ron Barber, Esq. Ph.: (918) 599-7755 Fax: (918) 599-7756 28 29 If to the Seller, addressed as follows: Key Metrology Integration, Inc. 10617 N.E. 2nd Bellevue, Washington 98004 Attn: Douglas W. Myers, President Ph.: (425) 990-9330 Fax: (425) 990-8922 or the Principal Shareholder, addressed as follows: Douglas W. Myers 10617 N.E. 2nd Bellevue, Washington 98004 Ph.: (425) 990-9330 Fax: (425) 990-8922 with a copy (which shall not constitute notice) to: Lane Powell Spears Lubersky LLP 1420 Fifth Avenue, Suite 4100 Seattle, Washington 98101-2338 Attn: Gregory L. Anderson, Esq. Ph.: (206) 223-7269 Fax: (206) 223-7107 or such other address as any party hereto shall specify pursuant to this Section 12.4 from time to time. 12.5 Rights and Remedies. Except as otherwise provided herein, no delay of or omission in the exercise of any right, power or remedy accruing to any party as a result of any breach or default by any other party under this Agreement shall impair any such right, power or remedy, nor shall it be construed as a waiver of or acquiescence in any such breach or default, or of any similar breach or default occurring later; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default occurring before or after that waiver. 12.6 Reformation and Severability. In case any provision of this Agreement shall be invalid, illegal or unenforceable, it shall, to the extent possible, be modified in such manner as to be valid, legal and enforceable, but so as to most nearly retain the intent of the parties, and if such modification is not possible, such provision shall be severed from this Agreement, and in either case, the validity, legality and enforceability of the remaining provisions of this Agreement shall not in any way be affected or impaired thereby. 12.7 Governing Law. This Agreement shall be construed in accordance with the laws of the State of Oklahoma applicable to contracts to be entered into and fully performed in the State of Oklahoma by residents of the State of Oklahoma. 12.8 Further Assurances. Each party will, upon request of the other party, from time to time after the Closing, execute and deliver to the other all such further documents and instruments, 29 30 and will do or use its reasonable best efforts to cause to be done such other acts, as such other party may reasonably request more completely to consummate and make effective the contemplated transactions. 12.9 Expenses. Each party shall pay its own expenses in connection with this Agreement and the transactions contemplated by this Agreement. Seller shall indemnify Purchaser against any claims of third parties for brokerage commissions or finders fees in connection with the transactions contemplated by this Agreement insofar as such claims are alleged to be based on arrangements made by Seller or any authorized agent thereof. Seller represents that the only such arrangement made by Seller is with The Geneva Companies, Attention Mr. Ian Joseph, as to whose fees Seller shall be solely responsible. Purchaser shall indemnify Seller against any such claim of third parties for brokerage commissions or finders' fees in connection with the transactions contemplated by this Agreement insofar as they are alleged to be based on arrangements made by Purchaser. Purchaser represents that no such arrangements exist. All sales, use or other tax, duty or recording cost, if any, imposed upon the transfer of the assets and business to be acquired by Purchaser pursuant to this Agreement shall be paid by Seller. 12.10 Confidential Information. Each party agrees it and its representatives shall hold in strict confidence, and shall not use for its own account or for the account of others, nor divulge or disclose to any person without a need to know, any information and documents received from the other party and, if the transactions herein contemplated are not consummated, each party will continue to hold such information and documents in strict confidence and shall return to such other party all such documents then in such receiving party's possession (including the Schedules and Exhibits to this Agreement) without retaining copies thereof; provided, that each party's obligations under this Section 12.10 to refrain from such use and to maintain such confidentiality shall not apply to any information or documents that are in the public domain when furnished by the other or to be disclosed required by applicable law . 12.11 Publicity. Seller and Purchaser each agree that, without the written consent of the other, it will not issue a press release or otherwise publicly disclose the transactions contemplated by this Agreement (including but not limited to the Purchase Price) except as may be required by law. Any public announcement of this Asset Purchase will be made by Purchaser and Seller jointly and simultaneously, and the wording of any such announcement will be mutually agreed upon unless, in the reasonable judgment of counsel for Purchaser, any laws, rules or regulations to which Purchaser is subject (including the rules of NASDAQ) mandate other wording, in which event such other laws, rules or regulations as interpreted by Purchaser and its counsel shall control; provided, however, that from and after the Closing, Purchaser shall be entitled to issue press releases or otherwise publicly disclose its acquisition of the Business. 12.12 Equitable Relief. Each party recognizes that the other is likely to suffer irreparable damage if the provisions of Sections 12.10 or 12.11 are not specifically enforced. In the event of a dispute concerning any of these sections, each party agrees that the other may, without posting bond or security, obtain an temporary or permanent injunction restraining the consummation of any action or transaction prohibited thereby pending determination of such dispute. The provisions of Sections 12.10 and 12.11 shall likewise be enforceable by a decree of specific performance. In the event of litigation relating to such provisions, if the court 30 31 determines that either party or any of its employees, agents or representatives has breached any thereof, the injured party shall be entitled to recover from the breaching party its reasonable fees, costs, and expenses (including attorney fees) incurred in connection with the prosecution of any equitable or legal proceedings and any appeal therefrom. 12.13 Dispute Resolution. Subject to Section 12.12, any dispute under this Agreement which is not settled by mutual agreement among the parties hereto, shall be finally settled by binding arbitration, conducted by and in accordance with the rules then in effect of the American Arbitration Association. The costs of the arbitration, including administrative and arbitrators' fees, shall be shared equally by the parties. Each party shall bear its own costs and attorneys' and witness' fees. The prevailing party in any arbitration, as determined by the arbitration panel, shall be entitled to an award against the other party in the amount of the prevailing party's costs and reasonable attorneys' fees. In making any such award, the arbitration panel shall take into consideration the outcome of the proceeding and the reasonableness of the conduct of each such party in connection with the dispute, in light of the facts known to such party at the time such party engaged in such conduct. The arbitration panel shall not have authority to award punitive damages. The arbitration shall be held in Denver, Colorado. 12.14 Captions. The captions and headings in this Agreement are for convenience only and will not be considered in interpreting any provision of this Agreement. Unless otherwise indicated, all article and section references are to the articles and sections of this Agreement and all references to day are to calendar days. Whenever under the terms of this Agreement, the time for performance of a covenant or condition falls upon a Saturday, Sunday or Oklahoma state holiday, such time for performance will be extended to the next business day. 12.15 Successors. This Agreement and all of the provisions of this Agreement shall be binding upon and inure to the benefit of Purchaser and Seller and their respective successors and permitted assigns. Neither this Agreement nor any of the rights, interests or obligations under this Agreement may be assigned by either of the parties to this Agreement without the prior written consent of the other party. Nothing contained in this Agreement, express or implied, is intended to confer upon any person or entity other than the parties to this Agreement and their successors in interest and permitted assignees (if any), any rights or remedies under or by reason of this Agreement. 12.16 Waiver. Either Purchaser or Seller shall have the right to waive any one or more conditions precedent to Closing and to proceed with the transactions contemplated by this Agreement, without, however, releasing the other of its obligations from any liability for loss or damage sustained by reason of any such breach of any representation, warranty or covenant. 12.17 Exhibits. The Schedules and Exhibits referred to in this Agreement are incorporated by reference into this Agreement. 31 32 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. "Purchaser" "Seller" XETA TECHNOLOGIES, INC. KEY METROLOGY INTEGRATION, INC. By /s/ JON A. WIESE By /s/ D. W. MYERS, PRESIDENT -------------------------- --------------------------------------- Jon A. Wiese, President Douglas W. Myers, President "Principal Shareholder" /s/ D. W. MYERS --------------------------------------- DOUGLAS W. MYERS, individually /s/ D. W. MYERS, TRUSTEE --------------------------------------- DOUGLAS WENDELL MYERS, TRUSTEE OF THE DOUGLAS WENDELL MYERS REVOCABLE LIVING TRUST 32 EX-21 6 d83418ex21.txt SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 SUBSIDIARIES OF THE COMPANY U.S. Technologies Systems Inc., a Missouri corporation XETACOM, Inc., an Oklahoma corporation EX-23.1 7 d83418ex23-1.txt CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report and to all references to our Firm included in or made a part of the Forms S-8 made by Xeta Technologies, Inc. on August 28, 1995 and August 25, 2000. It should be noted that we have not audited any financial statements of the Company subsequent to October 31, 2000, or performed any audit procedures subsequent to the date of our report. ARTHUR ANDERSEN LLP Tulsa, Oklahoma January 29, 2001 -----END PRIVACY-ENHANCED MESSAGE-----