-----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, FY0F3HbnFU1wkugEPv2iOai9o+M8YTHnjDv0dacSniSzfFARzTmF5AiH5AsyK0VV Fkw8KzAwfd8QmKWVY48vyA== 0000950134-01-000842.txt : 20010209 0000950134-01-000842.hdr.sgml : 20010209 ACCESSION NUMBER: 0000950134-01-000842 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20001031 FILED AS OF DATE: 20010208 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/A SEC ACT: SEC FILE NUMBER: 000-16231 FILM NUMBER: 1528121 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/A 1 d83925ae10-ka.txt AMENDMENT TO FORM 10-K - FISCAL YEAR END 10/31/00 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A [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). 2 EXPLANATORY NOTE This filing amends the presentation on the balance sheet of the current portion of long term debt and Footnote 9 regarding the Company's credit facility, as contained in Item 8, and related information contained in Item 6, to correct inadvertent errors in this information as previously filed. No other changes are made to the Company's report on Form 10-K as filed with the Commission on January 29, 2001. 3 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 15,145 8,021 5,122 6,944 5,435 Total Assets 74,149 25,316 18,292 14,820 12,364 Long Term Debt 17,983 0 0 0 0 Shareholders' Equity 25,565 14,551 11,185 9,337 7,071
4 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
5 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 6 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 $ 6,820,754 $ -- 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 28,138,135 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 7 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 8 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 9 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 10 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 11 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 12 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 13 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 14 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 15 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 16 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 17 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 18,783,333 Acquisition hold-back, payable in accordance with the purchase agreement 3,000,000 -------------- 25,803,765 Less-current maturities 7,820,754 -------------- $ 17,983,011 ==============
Maturities of long-term debt for each of the years ended October 31, are as follows: 2001 $ 7,820,754 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 18 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 19 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 20
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 21 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 22 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 23 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 24 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 February 7, 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. February 7, 2001 /s/ Jack R. Ingram -------------------------------------------- JACK R. INGRAM, CHIEF EXECUTIVE OFFICER AND DIRECTOR February 7, 2001 /s/ Jon A. Wiese -------------------------------------------- JON A. WIESE, PRESIDENT February 7, 2001 /s/ Robert B. Wagner -------------------------------------------- ROBERT B. WAGNER, CHIEF FINANCIAL OFFICER, VICE PRESIDENT OF FINANCE, AND DIRECTOR February 7, 2001 /s/ Donald T. Duke -------------------------------------------- DONALD T. DUKE, DIRECTOR February 7, 2001 /s/ Ronald L. Siegenthaler -------------------------------------------- RONALD L. SIEGENTHALER, DIRECTOR 25 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.
26 Exhibit Index
SEC No. Description - ------- ----------- (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--
27 Exhibit Index
SEC No. Description - ------- ----------- Incorporated by reference to Exhibit 10.10 to the Registrant's Form 10-Q for the quarter ended April 30, 2000, filed on June 14, 2000 (File No. 0-16231). *10.12 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
28 Exhibit Index
SEC No. Description - ------- ----------- 5.19.1 Pension Plan(s) 5.19.2 Welfare Plan(s) - none 5.28 Locations 5.30 Officers, Directors & Shareholders 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 (Filed herewith) (24) POWER OF ATTORNEY - None. (99) ADDITIONAL EXHIBITS - None.
* Previously filed. ** Previously filed with the original Annual Report on Form 10-K filed on January 29, 2001. EX-23.1 2 d83925aex23-1.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. /s/ ARTHUR ANDERSEN LLP Tulsa, Oklahoma February 7, 2001 -----END PRIVACY-ENHANCED MESSAGE-----