-----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, L3gQoVeVwqRiGUQ+wx/0yx1o1t1P+g1MDqFeRUZRblBRAdElisTqleZe+EXu4RkB dTpX2gGqfhtmAuCXAqw1LQ== 0000950134-03-004009.txt : 20030317 0000950134-03-004009.hdr.sgml : 20030317 20030317113113 ACCESSION NUMBER: 0000950134-03-004009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20030131 FILED AS OF DATE: 20030317 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-16231 FILM NUMBER: 03605278 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-Q 1 d04021e10vq.txt FORM 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended January 31, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 0-16231 XETA Technologies, Inc. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Oklahoma 73-1130045 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employee incorporation or organization) Identification No.) 1814 W. Tacoma, Broken Arrow, OK 74012-1406 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) 918-664-8200 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X ----- ----- Number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Class Outstanding at February 28, 2003 - ----------------------------- ---------------------------------------- Common Stock, $.001 par value 9,702,952 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets - January 31, 2003 and October 31, 2002 Consolidated Statements of Operations - For the Three months ended January 31, 2003 and 2002 Consolidated Statement of Shareholders' Equity - November 1, 2002 through January 31, 2003 Consolidated Statements of Cash Flows - For the Three months ended January 31, 2003 and 2002 Notes to Consolidated Financial Statements 2 XETA TECHNOLOGIES, INC. CONSOLIDATED BALANCE SHEETS
ASSETS January 31, 2003 October 31, 2002 ---------------- ---------------- (Unaudited) Current Assets: Cash and cash equivalents $ 1,448,458 $ 1,966,734 Current portion of net investment in sales-type leases and other receivables 861,096 1,015,096 Trade accounts receivable, net 10,250,047 9,478,706 Inventories, net 7,187,714 7,801,781 Deferred tax asset, net 577,286 592,643 Prepaid taxes 896,628 1,195,539 Prepaid expenses and other assets 421,155 165,657 ---------------- ---------------- Total current assets 21,642,384 22,216,156 ---------------- ---------------- Noncurrent Assets: Goodwill, net of accumulated amortization prior to adoption of SFAS 142 25,768,568 25,782,462 Net investment in sales-type leases, less current portion above 466,778 519,270 Property, plant & equipment, net 10,454,826 10,457,718 Capitalized software production costs, net of accumulated amortization of $1,098,065 and $1,053,066 192,956 237,955 Other assets 158,525 170,424 ---------------- ---------------- Total noncurrent assets 37,041,653 37,167,829 ---------------- ---------------- Total assets $ 58,684,037 $ 59,383,985 ================ ================ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 3,288,337 $ 3,288,337 Revolving line of credit 2,000,000 -- Accounts payable 3,903,049 6,119,135 Unearned revenue 1,991,590 2,078,741 Accrued liabilities 1,743,854 1,968,771 Other Liabilities 178,132 181,501 ---------------- ---------------- Total current liabilities 13,104,962 13,636,485 ---------------- ---------------- Noncurrent liabilities: Long-term debt, less current portion above 10,742,928 11,565,012 Accrued long-term liabilities 196,783 240,955 Unearned service revenue 224,587 233,859 Noncurrent deferred tax liability, net 1,400,499 1,186,680 ---------------- ---------------- 12,564,797 13,226,506 ---------------- ---------------- Commitments and contingencies Shareholders' equity: Preferred stock; $.10 par value; 50,000 shares authorized, 0 issued -- -- Common stock; $.001 par value; 50,000,000 shares authorized, 10,721,740 and 10,721,740 issued at January 31, 2003 and October 31, 2002, respectively 10,721 10,721 Paid-in capital 12,193,029 12,193,029 Retained earnings 23,163,491 22,672,256 Accumulated other comprehensive loss (108,304) (110,353) Less treasury stock, at cost (2,244,659) (2,244,659) ---------------- ---------------- Total shareholders' equity 33,014,278 32,520,994 ---------------- ---------------- Total liabilities and shareholders' equity $ 58,684,037 $ 59,383,985 ================ ================
The accompanying notes are an integral part of these consolidated balance sheets. 3 XETA TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS UNAUDITED
For the Three Months Ended January 31, 2003 2002 ---------------- ---------------- Systems sales $ 8,725,109 $ 7,345,041 Installation and service revenues 6,116,505 6,066,839 Other revenues 589,791 351,184 ---------------- ---------------- Net sales and service revenues 15,431,405 13,763,064 ---------------- ---------------- Cost of systems sales 6,428,212 5,035,386 Installation and services costs 4,360,407 4,727,050 Cost of other revenues & corporate COGS 723,691 741,252 ---------------- ---------------- Total cost of sales and service 11,512,310 10,503,688 ---------------- ---------------- Gross profit 3,919,095 3,259,376 ---------------- ---------------- Operating expenses: Selling, general and administrative 2,937,355 2,614,807 Amortization 45,000 45,000 ---------------- ---------------- Total operating expenses 2,982,355 2,659,807 ---------------- ---------------- Income from operations 936,740 599,569 Interest expense (179,677) (254,960) Interest and other income 50,172 111,631 ---------------- ---------------- Subtotal (129,505) (143,329) Income before provision for income taxes 807,235 456,240 Provision for income taxes 316,000 180,000 ---------------- ---------------- Net income $ 491,235 $ 276,240 ================ ================ Earnings per share Basic $ 0.05 $ 0.03 ================ ================ Diluted $ 0.05 $ 0.03 ================ ================ Weighted average shares outstanding 9,702,952 9,237,952 ================ ================ Weighted average equivalent shares 9,941,968 9,880,989 ================ ================
The accompanying notes are an integral part of these consolidated statements. 4 XETA TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY UNAUDITED
Common Stock Treasury Stock ------------------------------------- ------------------------------------- Shares Issued Par Value Shares Amount ---------------- ---------------- ---------------- ---------------- Balance-October 31, 2002 10,721,740 $ 10,721 1,018,788 $ (2,244,659) Components of comprehensive income: Net income -- -- -- -- Unrealized gain/loss on hedge, net of tax of $1,320 -- -- -- -- Total comprehensive income ---------------- ---------------- ---------------- ---------------- Balance-January 31, 2003 10,721,740 $ 10,721 1,018,788 $ (2,244,659) ================ ================ ================ ================ Accumulated Other Comprehensive Retained Paid-in Capital Loss Earnings Total ---------------- ----------------- ---------------- ---------------- Balance-October 31, 2002 $ 12,193,029 $ (110,353) $ 22,672,256 $ 32,520,994 Components of comprehensive income: Net income -- -- 491,235 491,235 Unrealized gain/loss on hedge, net of tax of $1,320 -- 2,049 -- 2,049 ---------------- Total comprehensive income 493,284 ---------------- ----------------- ---------------- ---------------- Balance-January 31, 2003 $ 12,193,029 (108,304) $ 23,163,491 $ 33,014,278 ================ ================= ================ ================
5 XETA TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended January 31, 2003 2002 --------------- --------------- Cash flows from operating activities: Net income $ 491,235 $ 276,240 --------------- --------------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 245,259 266,627 Amortization 45,000 45,000 Loss on sale of assets -- 703 Provision for (reversal of) returns & doubtful accounts receivable -- (48,200) Provision for excess and obsolete inventory 81,082 56,123 Change in assets and liabilities, net of acquisitions: Decrease in net investment in sales-type leases & other receivables 206,492 993,166 (Increase) decrease in trade receivables (771,341) 5,242,559 (Increase) decrease in inventories 532,985 (7,610) Decrease in deferred tax asset 15,357 225,422 (Increase) in prepaid expenses and other assets (243,599) (22,853) (Increase) decrease in prepaid taxes 298,911 (354,954) Increase (decrease) in accounts payable (2,216,086) 457,266 (Decrease) in unearned revenue (96,423) (278,825) Increase in accrued income taxes 9,556 82,820 (Decrease) in accrued liabilities (269,089) (722,273) Increase in deferred tax liabilities 216,837 164,636 --------------- --------------- Total adjustments (1,945,059) 6,099,607 --------------- --------------- Net cash provided by (used in) operating activities (1,453,824) 6,375,847 --------------- --------------- Cash flows from investing activities: Additions to property, plant & equipment (244,186) (562,752) Proceeds from sale of assets 1,818 -- --------------- --------------- Net cash used in investing activities (242,368) (562,752) --------------- --------------- Cash flows from financing activities: Proceeds from draws on revolving line of credit 2,000,000 7,300,000 Principal payments on debt (822,084) (1,822,087) Payments on revolving line of credit -- (11,622,000) --------------- --------------- Net cash provided by (used in) financing activities 1,177,916 (6,144,087) --------------- --------------- Net decrease in cash and cash equivalents (518,276) (330,992) Cash and cash equivalents, beginning of period 1,966,734 597,889 --------------- --------------- Cash and cash equivalents, end of period $ 1,448,458 $ 266,897 =============== =============== Supplemental disclosure of cash flow information: Cash paid during the period for interest $ 240,338 $ 443,987 Cash paid during the period for income taxes $ 14,183 $ 62,078 Contingent consideration paid to target shareholder $ -- $ 1,000,000
The accompanying notes are an integral part of these consolidated statements. 6 XETA TECHNOLOGIES, INC. JANUARY 31, 2003 (Unaudited) 1. BASIS OF PRESENTATION The consolidated financial statements herein include the accounts of XETA Technologies, Inc. and its wholly-owned subsidiaries, U.S. Technologies Systems, Inc. ("UST") and Xetacom, Inc. (the "Company" or "XETA"). Xetacom's operations have been insignificant to date. All significant intercompany accounts and transactions have been eliminated. The accompanying consolidated financial statements have been prepared by the Company, without an audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures, normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States, have been condensed or omitted pursuant to those rules and regulations. However, the Company believes that the disclosures made are adequate to make the information presented not misleading when read in conjunction with the consolidated financial statements and the notes thereto included in the Company's latest financial statements filed as part of the Company's Annual Report on Form 10-K, Commission File No. 0-16231. Management believes that the financial statements contain all adjustments necessary for a fair statement of the results for the interim periods presented. All adjustments made were of a normal recurring nature. The results of operations for the interim period is not necessarily indicative of the results for the entire fiscal year. These statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's Annual Report on Form 10-K, which was filed with the SEC on January 29, 2003, reflecting the operating results of the Company. 2. INVENTORIES: Inventories are stated at the lower of cost (first-in, first-out or average) or market and consist of the following components:
January 31, October 31, 2003 2002 -------------- -------------- (Unaudited) Finished goods and spare parts $ 7,726,051 $ 8,234,020 Raw materials 358,627 354,380 -------------- -------------- 8,084,678 8,588,400 Less- reserve for excess and obsolete inventories 896,964 786,619 -------------- -------------- Total inventories, net $ 7,187,714 $ 7,801,781 ============== ==============
3. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment consist of the following:
Estimated Useful January 31, October 31, Lives 2003 2002 ---------------- ---------------- ---------------- (Unaudited) Building 20 $ 2,397,954 $ 2,397,954 Data processing and computer field equipment 3-5 10,237,176 10,011,196 Land -- 611,582 611,582 Office furniture 5 1,089,876 1,073,851 Auto 5 126,743 126,743 Other 3-7 634,213 634,213 ---------------- ---------------- Total property, plant and equipment 15,097,544 14,855,539 Less- accumulated depreciation 4,642,718 4,397,821 ---------------- ---------------- Total property, plant and equipment, net $ 10,454,826 $ 10,457,718 ================ ================
7 4. ACCRUED LIABILITIES: Accrued liabilities consist of the following:
January 31, October 31, 2003 2002 ---------------- ---------------- (Unaudited) Commissions $ 551,082 $ 428,460 Vacation 408,774 481,228 Payroll 188,306 417,171 Bonuses 111,981 213,735 Interest 13,221 11,265 Other 470,490 416,912 ---------------- ---------------- Total current 1,743,854 1,968,771 Noncurrent liabilities 196,783 240,955 ---------------- ---------------- Total accrued liabilities $ 1,940,637 $ 2,209,726 ================ ================
5. UNEARNED REVENUE: Unearned revenue consists of the following:
January 31, October 31, 2003 2002 ---------------- ---------------- (Unaudited) Customer deposits $ 957,844 $ 897,171 Service contracts 731,189 785,067 Warranty service 295,963 366,586 Systems shipped but not installed 4,750 28,866 Other 1,844 1,051 ---------------- ---------------- Total current unearned revenue 1,991,590 2,078,741 Noncurrent unearned service contract revenue 224,587 233,859 ---------------- ---------------- Total unearned revenue $ 2,216,177 $ 2,312,600 ================ ================
6. 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. 8 The tax effect of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:
January 31, October 31, 2003 2002 ---------------- ---------------- Deferred tax assets: (Unaudited) Nondeductible reserves $ 511,613 $ 466,292 Prepaid service contracts 144,924 168,210 Unamortized cost of service contracts 42,381 52,788 Other 101,807 119,418 ---------------- ---------------- Total deferred tax asset 800,725 806,708 ---------------- ---------------- Deferred tax liabilities: Intangible assets and other 1,489,939 1,257,404 Tax income to be recognized on sales-type lease contracts 58,360 50,062 Unamortized capitalized software development costs 75,639 93,279 ---------------- ---------------- Total deferred tax liability 1,623,938 1,400,745 ---------------- ---------------- Net deferred liability $ (823,213) $ (594,037) ================ ================
7. CREDIT AGREEMENTS: At January 31, 2003, long-term debt consisted of the following:
January 31, October 31, 2003 2002 ---------------- ---------------- (Unaudited) Bank line of credit, due March 31, 2003, secured by a borrowing base of accounts receivable and inventories $ 2,000,000 $ -- Term loan, payable in monthly installments of $259,861, due November 30, 2003 collateralized by all assets of the Company 11,693,765 12,473,349 Real estate term note, payable in monthly installments of $14,166, due November 30, 2003, secured by a first mortgage on the Company's headquarters building 2,337,500 2,380,000 ---------------- ---------------- 16,031,265 14,853,349 Less-current maturities 5,288,337 3,288,337 ---------------- ---------------- $ 10,742,928 $ 11,565,012 ================ ================
Interest on all outstanding debt under the credit facility accrues at either a) the London Interbank Offered Rate (which was 1.42% at January 31, 2003) plus 3.75% or b) the bank's prime rate (which was 4.75% at January 31, 2003) plus 1%. The credit facility requires, among other things, that the Company maintain a minimum net worth, working capital and debt service coverage ratio and limits capital expenditures. At January 31, 2003, the Company was either in compliance with the covenants of the credit facility or had received the appropriate waivers from its bank. 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. 8. STOCK OPTIONS: Accounting for stock options issued to employees is governed by SFAS 123, "Accounting for Stock Based Compensation." Generally, SFAS 123 requires companies to record in their financial statements the 9 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 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 3 Months Ended January 31, ------------------------------------- 2003 2002 ---------------- ---------------- Net income as reported $ 491,235 $ 276,240 Less: total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects 179,187 160,315 ---------------- ---------------- Pro forma net income $ 312,048 $ 115,925 EARNINGS PER SHARE: As reported - Basic $ .05 $ .03 As reported - Diluted $ .05 $ .03 Pro forma - Basic $ .03 $ .01 Pro forma - Diluted $ .03 $ .01
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 (4.46% to 5.78%), dividend yield (0.00%), expected volatility (80.50% to 86.31%), and expected life (6 years). 9. FOOTNOTES INCORPORATED BY REFERENCE: Certain footnotes are applicable to the consolidated financial statements, but would be substantially unchanged from those presented in the Company's Annual Report on Form 10-K, Commission File No. 0-16231, filed with the Securities and Exchange Commission on January 29, 2003. Accordingly, reference should be made to those statements for the following: Note Description 1 Business and Summary of Significant Accounting Policies 2 Acquisitions 3 Accounts Receivable 8 Income Taxes 10 Stock Options 11 Earnings Per Share 12 Commitments 13 Major Customers and Concentration of Credit Risk 14 Employment Agreements 15 Contingencies 16 Retirement Plan 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS, WHICH ARE SUBJECT TO THE PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THESE STATEMENTS INCLUDE, WITHOUT LIMITATION, STATEMENTS CONCERNING EXPECTATIONS REGARDING: OUR FINANCIAL POSITION INCLUDING SALES, REVENUES, GROSS MARGINS, OPERATING MARGINS AND EXPENSES; TRENDS AND CONDITIONS IN THE U.S. ECONOMY AND IN THE COMMUNICATIONS TECHNOLOGY INDUSTRY AND HOSPITALITY MARKETS; AND OUR ABILITY TO IMPLEMENT OUR CURRENT BUSINESS PLAN. THESE AND OTHER FORWARD-LOOKING STATEMENTS (GENERALLY IDENTIFIED BY SUCH WORDS AS "EXPECTS," "PLANS," "BELIEVES," "ANTICIPATES" "FORECASTS," "PREDICTS," AND SIMILAR WORDS OR EXPRESSIONS) ARE NOT GUARANTEES OF PERFORMANCE BUT RATHER REFLECT OUR CURRENT EXPECTATIONS, ASSUMPTIONS AND BELIEFS BASED UPON INFORMATION CURRENTLY AVAILABLE TO US. INVESTORS ARE CAUTIONED THAT ALL FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES WHICH ARE DIFFICULT TO PREDICT AND THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED. MANY OF THESE RISKS AND UNCERTAINTIES ARE DESCRIBED UNDER THE HEADING "OUTLOOK AND RISK FACTORS" BELOW. CONSEQUENTLY, ALL FORWARD-LOOKING STATEMENTS SHOULD BE READ IN CONJUNCTION WITH THE RISK FACTORS DISCUSSED HEREIN AND THROUGHOUT THIS REPORT TOGETHER WITH THE RISK FACTORS IDENTIFIED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K, WHICH WAS FILED ON JANUARY 29, 2003. GENERAL For the quarter ending January 31, 2003, we earned $491,000 on revenues of $15.4 million. These results represent an increase in earnings of 78% and an increase in revenues of 12% compared to the first quarter of last year. Most of these improvements came from the sale of communications products to our commercial customers augmented by the steady revenues and gross profits derived from our services activities. The percentage increase in earnings on a much lower increase in revenues reflects the strict cost controls and improved efficiencies that we have put in place over the past 21 months and demonstrates the leverage that is now inherent in our operations such that incremental improvements in revenues produce significant earnings improvements. Despite these encouraging results, we continue to operate in the midst of very fragile economic conditions marked by a high degree of pessimism by our customers. Our customers' pessimism causes close scrutiny of nearly all capital expenditures, resulting in lengthened sales cycles and greater competitive pressures. Currently, we believe the single most important factor causing this pessimism is geopolitical concerns centered on the situation in the Middle East, specifically the U.S.' current confrontation with Iraq ("Iraqi situation"). Feedback from our customer base coupled with media reports and public statements by economic pundits leads us to believe that capital spending in the United States is unlikely to revert to a "normal" level until these geopolitical issues are resolved. Until then, we will continue to cautiously implement growth initiatives only to the extent that they can be supported by our current revenues or through market development funding from Avaya or other suppliers. Should economic conditions worsen, we will rapidly revert to a defensive posture in an effort to remain profitable. Notwithstanding the current macro-economic conditions, we continue to firmly believe in the strategic vision that we began pursuing three years ago. That strategy was based in large part on the technological changes that were emerging at the time, specifically the convergence of voice and data technologies. We also believed that by emerging from our roots in the lodging industry to the general commercial market, we were entering a vastly larger market that would provide us with large potential growth rates even if the overall market grew only modestly. From a research and development viewpoint, the march toward converged telecommunications products has continued unabated despite slow economic conditions during the past two years. During that time, Avaya has released a raft of new products, all of which are Internet Protocol-based technology. Customer acceptance of this technology is gaining steam as well. With few exceptions, customers who are making purchasing decisions are opting for the new technology in an effort to not be "left behind" with traditional voice switches. In summary, we are facing a mixed bag of data. From a long-term view, we believe that we are in a very large market that is poised at the beginning of a new product cycle that is revolutionary in its scope. We also believe that our company is well-positioned to capitalize on these factors as one of a handful of national 11 providers of complex, converged technology solutions. However, current macro-economic conditions coupled with the debt on our balance sheet present us with significant short-term challenges. We believe that it is in the best long-term interest of our shareholders to preserve the technical competence and market position that we have built in the last three years. However, should the current economic conditions continue or worsen in the short-term, we may be forced to take actions which could set us back in the pursuit of our long-term strategy. The following discussion presents additional information regarding our financial condition and results of operations for the quarter ending January 31, 2003 and should be read in conjunction with our comments above as well as the Outlook and Risk Factors discussion contained at the end of this section of the report. FINANCIAL CONDITION For the three months ending January 31, 2003, cash used by operations was $1.5 million. This cash consisted of positive cash flows from earnings and non-cash charges of $863,000 and reductions in inventories of $533,000. Cash used in operations consisted of reductions in accounts payable of $2.2 million and an increase in trade accounts receivable of $771,000. Other working capital changes contributed cash of $138,000. The negative cash flows from operations were expected as a result of the surge in revenues experienced during the last month of the 4th quarter of fiscal 2002 and the first quarter just ended. Most of these orders were for larger systems, which generally have longer and more complex implementation schedules and therefore also have longer cash cycles. At the end of the quarter, our accounts payable balance had returned to more normal levels reflecting the cash paid for equipment purchases. The quality of our accounts receivable at January 31, 2003 remains within our targets as days sales outstanding on billed receivables was 43 days and the percentage of outstanding receivables beyond 60 days past due was 9%. In addition to supporting our growth, cash was used in the quarter to make scheduled principal payments on our term debt of $822,000 and to fund capital expenditures of $242,000, most of which is related to the Company's ERP system implementation. We funded our cash needs during the quarter by drawing $2 million on our working capital revolver. Presently, we do not have any further availability under the revolver; therefore it is essential that we generate positive cash flows in the second quarter from earnings and working capital in order to sustain our operations. We expect our second quarter revenues to be at similar or lower levels than our first quarter revenues, so we do not expect additional pressure on our working capital in the immediate future. However, while no assurance can be given, we believe that our banking partners would provide limited additional working capital if we were able to demonstrate that our needs were driven by increased revenues. Although we have made all scheduled principal and interest payments on time, as a result of our low levels of profitability caused by the economic conditions discussed above and throughout this report, we have not been able to meet some of the financial covenants contained in our credit facility. To date, our banking partners have agreed to waive these defaults. It is likely that we will continue to not be in full compliance with these financial covenants until revenues and earnings improve for several consecutive quarters. Until that time, we will likely have limited availability to additional working capital. See "Outlook and Risk Factors" below for a further discussion of the risks associated with the Company's credit facility. RESULTS OF OPERATIONS For the first quarter of fiscal 2003, our revenues were $15.4 million, an increase of 12% over the first quarter of last year. This increase consisted of a 19% increase in systems sales; a 1% increase in installation and service revenues; and a 68% increase in other revenues. Our gross profit margins in the first quarter improved to 25.4% compared to 23.7% in the prior year and our operating expenses increased 12% compared to last year's levels. As a result of these factors, our first quarter net income was $491,000, a 78% improvement over last year. Discussed below are the major revenue, gross margin, and operating expense items that affected our financial results during the first quarter of fiscal 2003. 12 Systems Sales. The increase in systems sales consisted of an increase in sales of equipment and systems to commercial customers of $2.4 million or 44%, partially offset by a decrease in sales of systems to lodging customers of $995,000 or 50%. The increase in sales to commercial customers reflects our continued market penetration in the commercial sector and excellent customer satisfaction with our implementation of systems. We believe we are well-positioned to serve customers who need to implement complex, networked, converged communications systems for their businesses. However, despite the results of the first quarter the rate of orders received for new systems declined dramatically beginning in mid-December of last year and continued through the end of February. Subsequently, and through the date of the filing of this report, order rates have improved modestly. We believe, that order rates are likely to continue to be depressed until the Iraqi situation is resolved. We believe that the decline in the sale of systems to the lodging industry is also being affected by these factors; however, the lodging industry also continues to suffer from the after-effects of the September 11th tragedy and the resulting slump specific to the travel industry. To combat these issues, we are cautiously initiating a few, limited growth tactics. Specifically, we are hiring additional sales personnel to focus on mid-market opportunities in strategic cities in the United States. We define mid-market as a customer who generally has more than 100 employees, but is not a large, multi-national or "Fortune 500" type customer. Furthermore, our emphasis is on mid-market companies that have a need for multi-site, networked communications systems that fit well with our nation-wide implementation capabilities. From a long-term perspective, we believe that such customers are key to our success since we should have the opportunity to sell our full-range of systems and services, including recurring maintenance services to them. Currently, many of our sales of equipment are to Avaya customers. In these cases, Avaya invites us into the account to provide the equipment and installation as part of their Business Partner program. However, we are not permitted to sell our own service plans to these customers and therefore our ability to generate recurring revenue from this customer base is limited. By locating and securing our own customers through this Mid-market initiative, we expect to begin building a base of recurring revenue. Our efforts to expand in this area are being funded largely by cash incentives received from Avaya under their market development programs available to their dealer network. Given our present low level of earnings and limited access to working capital, these initiatives must gain traction and quickly produce gross profit contributions for us to continue to pursue them. Installation and Service Revenues. Installation and service revenues consist of the following:
Three Months Ending January 31, ----------------- ----------------- 2003 2002 ----------------- ----------------- Contract & Time and Materials (T&M) revenues $ 4,242,000 $ 4,543,000 Commercial installations 756,000 615,000 Lodging installations 424,000 423,000 Consulting 695,000 486,000 ----------------- ----------------- Total installation and service revenue $ 6,117,000 $ 6,067,000 ================= =================
The 7% decline in contract and T&M revenues consisted of an increase of 7% to contract revenues offset by a decrease of 39% in T&M revenues. The increase in contract revenues came from a modest expansion of our lodging customer base in both PBX and call accounting systems under contract. The decline in T&M revenues came from both our commercial and lodging customer bases as customers either chose different service providers or deferred routine maintenance of their systems. In addition, the overall demand for hourly services has declined as fewer customers are expanding their employee bases or moving employees which generates service billings for us. To ensure our competitive position, we have recently re-instituted lower hourly pricing for our services. By doing so, we believe our rates will compare favorably to smaller, regional service providers even though we have nationwide capabilities. 13 We recognize revenues from installation activities upon completion of the installation, which for larger systems often means that the equipment is shipped and systems revenues is recognized in one month and installation revenues on that system are recognized in a subsequent month. In the first quarter of fiscal 2003, revenues earned from installations of systems for commercial customers increased 23% which partially reflects the increase in commercial systems sales, but also reflects the fact that installation of some larger systems which shipped in the first quarter will be installed in the second quarter. Revenues from installations of systems for lodging customers were unchanged despite the decline in lodging systems sales reflecting installations of systems during the first quarter which were shipped in the fourth quarter of last year. Consulting revenues increased 43% and reflects professional design and project management services provided to support the increase in sales of systems to commercial customers. Gross Margins. The gross margin earned on total sales and service revenues in the first quarter was 25.4% compared to 23.7% for the same period last year. This increase consisted of increases in gross margins for installation and service revenues and an increase in the gross margins earned on Other revenues. These improvements were partially offset by a decrease in the gross margins earned on systems sales. The gross margins earned on sales of systems was 26.3% down from 31.4% last year. This decline reflects both a decline in gross margins earned on sales of systems to commercial customers and a decrease in the percentage of total systems sold to lodging customers, which generally earn a higher profit margin. The decline in gross margins earned on sales to commercial customers reflects a higher mix of larger systems sold which often carry lower gross profit margins and the overall competitive pressures present in the market. The gross margin earned on installation and service revenues was 28.7%, up from 22.1% last year. This increase primarily reflects improvements in the gross margins earned in our National Service Center which serves our lodging and commercial contract customers. The continued integration of our commercial and lodging services offerings and improved efficiencies in processes and systems have produced these improvements. Gross margins earned on our other installation and service revenue streams was relatively unchanged. A final component to our gross margins are the margins earned on other revenues and its corporate cost of goods sold expenses. Other revenues typically represent sales and cost of goods sold on equipment or services outside our normal provisioning processes and in the first quarter was dominated by the sale of a large data maintenance contract. In this transaction, which is an annual contract directly between Avaya and the customer, the service obligations are borne entirely by Avaya and we serve as a sales agent. Corporate cost of goods sold represents our material logistics and purchasing functions that supports all of our revenue streams. These expenses declined 15% in the first quarter compared to last year reflecting the effects of our tight cost controls. Operating Expenses. Operating expenses increased 12% in the first quarter. This increase is entirely related to the loss of certain financial incentive programs previously offered by Avaya. These programs, which have been material to our operating results in the past, have been curtailed and/or replaced by Avaya. Beginning in our second fiscal quarter, we will be realizing new financial incentives that have been approved and paid by Avaya to support our sales expansion initiatives into a few new markets (see discussion under "Systems Sales" above regarding these sales initiatives). Under these new programs, Avaya grants specific requests for cost reimbursements based on a business plan submitted by us. Previously, we earned financial incentives based on a combination of the volume of our purchases and our marketing-related expenditures. Our other sales and general and administrative expenses were relatively unchanged between the two periods. Interest Expense and Other Income. Interest and other expense was $130,000 in the first quarter of this year compared to $143,000 in the first quarter of last year. This improvement reflects a 29% decrease in interest expense partially offset by a 55% decrease in interest and other income. The decrease in interest expense reflects lower average debt outstanding during the two periods under comparison. The lower interest income in the first period is due to a decrease in the average amount of sales-type lease receivables outstanding. Both interest expense and interest income are expected to continue to decline. 14 Tax Provision. The Company has recorded a combined federal and state tax provision of 39% in all periods presented reflecting the effective federal tax rate plus the estimated composite state income tax rate. Operating Margins. Net income as a percent of revenues was 3% for the first quarter compared to 2% for the same period last year. We believe that our current business model and current debt levels will support a target operating margin of 8%. However, we will have to realize sustained growth in systems sales to reach that target. OUTLOOK AND RISK FACTORS The following discussion is an update to the "Outlook and Risk Factors" discussed in the Company's Annual Report on Form 10-K for the year ended October 31, 2002. The discussions in the report regarding "Dealer Agreements", "Dependence Upon Avaya", "Dependence Upon a Few Suppliers", "Hiring and Retaining Key Personnel", "Competition", "Lodging Industry", and "Stock Market Volatility" are still considered current and should be given equal consideration together with the matters discussed below. We believe the U.S. economy is being negatively impacted by concerns about the Iraqi situation and those concerns are affecting our business. Our order rates from our Commercial sector customers grew for six straight months during the last half of 2002. However, beginning in mid-December, those order rates for new equipment declined dramatically and have not recovered. Initially, we believed the decline was due to holiday-related vacations, but we now believe many customers are choosing not to make purchasing decisions until there is a resolution regarding a potential war in the Middle East. The evidence to support our belief is anecdotal and is based on discussions with customers and public comments made by economists and other industry pundits. There is a general consensus that if a war is begun, it is likely to do so during our second quarter and that resolution should come within a few weeks or months. After that, many believe the U.S. economy is poised for a rapid recovery. However, if the start of a war is delayed or if perceptions develop that the war is not going well, any recovery in our business would likely be delayed. It is likely that we will continue to be in default of one or more of the financial covenants in our credit facility and our banking partners may not continue to grant waivers and/or provide working capital. Based on the recent decline in order rates for new systems from our commercial sector, it is likely that our operating results will be lower in the second quarter than those presented in this report. If this occurs, we will continue to not be in compliance with one or more of the financial covenants in our credit facility. There can be no assurance given that our banking partners will waive future defaults and continue to provide a working capital line of credit. They may, in fact, request that we replace the current credit facility with one at another financial institution. In the event this request is made, there can be no assurance that we could move the credit facility to another lender on similar terms or under any terms. Our sales initiative directed at the "mid-market" may not be successful and may produce operating losses. As discussed above, we are adding sales personnel in a few targeted cities to focus on potential "Mid-market" customers. In the short-term, however, our ability to fund the necessary operating and capital expenditures to expand our sales force is largely dependent upon Avaya's financial support of this project. The projected time frame of available funding is approximately six months. Therefore if this initiative is not contributing to our profitability within six to nine months, it is likely we will have to abandon this initiative. Other Risk Factors. In addition to the specific risk factors discussed above, the following general factors can also impact our overall performance and results of operations: the threat of additional acts of terrorism within the United States and the impact of those threats on the overall economy, financial markets and customer spending attitudes; future growth of the IP networking market; uncertainties inherent with rapidly changing technologies and customer demand; the cost and effects of legal claims and proceedings; and relationships with suppliers; vendors and customers. 15 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risks relating to our operations result primarily from changes in interest rates. In November 2001, we entered into interest rate swap agreements with each of its banking partners for the purpose of hedging against future increases in interest rates. The interest rate swap agreements allow us to pay a fixed interest rate of 3.32% (before application of the bank's pricing margin) on a portion of its outstanding debt. At January 31, 2003, we had $6.365 million of outstanding debt subject to interest rate fluctuations. A hypothetical 10 percent change in such interest rates would not have a material effect upon our consolidated results of operations or cash flows. ITEM 4. CONTROLS AND PROCEDURES. (a) Evaluation of Disclosure Controls and Procedures. Based on their evaluation as of a date within 90 days of the filing date of this Quarterly Report on Form 10-Q, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-14 (c) and 15d-14 (c) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) are effective to ensure that information required to be disclosed by the Company in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. (b) Changes in Internal Controls. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. There were no significant deficiencies or material weaknesses, and therefore there were no corrective actions taken. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. During the fiscal quarter for which this report is filed, there were no material developments of which we are aware in the Phonometrics' litigation, which we are monitoring. A detailed description of the Phonometrics' cases is contained in our Annual Report on Form 10-K for the fiscal year ended October 31, 2002 filed with the Commission on January 29, 2003. ITEMS 2 - 5 have been omitted because they are not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits (filed herewith): SEC Exhibit No. Description --------------- ----------- 10.14 Third Amendment to Amended and Restated Credit Agreement dated effective as of December 1, 2002 among XETA Technologies, Inc., the Lenders and the Agent. 99.1 Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certificate of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K - During the quarter for which this report is filed, the Company filed no reports on Form 8-K. 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. XETA Technologies, Inc. (Registrant) Dated: March 14, 2003 By: /s/ Jack R. Ingram ----------------------------- Jack R. Ingram Chief Executive Officer Dated: March 14, 2003 By: /s/ Robert B. Wagner ----------------------------- Robert B. Wagner Chief Financial Officer 17 PRINCIPAL EXECUTIVE OFFICER CERTIFICATION I, Jack R. Ingram, certify that: 1. I have reviewed this quarterly report on Form 10-Q of XETA Technologies, Inc; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 14, 2003 /s/ Jack R. Ingram - ----------------------- Jack R. Ingram Chief Executive Officer 18 PRINCIPAL FINANCIAL OFFICER CERTIFICATION I, Robert B. Wagner, certify that: 1. I have reviewed this quarterly report on Form 10-Q of XETA Technologies, Inc; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5 The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 14, 2003 /s/ Robert B. Wagner - ----------------------- Robert B. Wagner Chief Financial Officer 19 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- --------------------------------------------------- 10.14 Third Amendment to Amended and Restated Credit Agreement dated effective as of December 1, 2002 among XETA Technologies, Inc., the Lenders and the Agent. 99.1 Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certificate of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
EX-10.14 3 d04021exv10w14.txt THIRD AMENDMENT TO AMENDED/RESTATED CREDIT AGRMT. EXHIBIT 10.14 THIRD AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT THIS THIRD AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT ("Amendment") is made and entered into this 1st day of December, 2002, but effective as of December 1, 2002 (the "Amendment Date"), by and among XETA Technologies, Inc., an Oklahoma corporation (the "Borrower"), Bank One, Oklahoma, N.A., and U.S. Bank National Association, as Lenders under the Credit Agreement referred to below (the "Lenders"), and Bank One, Oklahoma, N.A., as Agent (in such capacity, the "Agent"), with reference to the following: A. The Borrower, the Lenders and the Agent are parties to that certain Amended and Restated Credit Agreement dated as of October 31, 2001, as amended by that certain First Amendment to Amended and Restated Credit Agreement dated effective as of June 1, 2002, and as further amended by that certain Second Amendment to Amended and Restated Credit Agreement dated effect as of September 10, 2002 (the "Credit Agreement"). B. The Borrower has requested that the Lenders and the Agent (i) extend the availability of the Revolving Credit Facility and the maturity of the Revolving Loans, and (ii) waive certain Defaults arising by virtue of the Borrower's failure to comply with certain financial covenants set forth in the Credit Agreement at October 31, 2002. The Lenders and the Agent have agreed to the foregoing requests, subject to 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. WAIVERS. Effective as of the Amendment Date, and subject to the Borrower's satisfaction of the conditions precedent set forth in Section 4 of this Amendment, the Lenders and the Agent agree to waive the Borrower's non-compliance with Sections 6.24.2 (Debt Service Coverage Ratio) of the Credit Agreement at October 31, 2002, and any consequences of such non-compliance (other than as set forth in this Amendment). The foregoing waivers do not extend to any other existing Default or Unmatured Default (whether or not known to the Borrower, the Lenders or the Agent) or to any Default or Unmatured Default that may arise or occur after the Amendment Date. Nothing contained in this Amendment shall be construed as waiving any other term or condition of the Credit Agreement or any of the other Loan Documents or as obligating the Lenders or the Agent to waive any future noncompliance or Default. 3. MODIFICATION OF FACILITIES. Effective as of the Amendment Date, and subject to the Borrower's satisfaction of the conditions precedent set forth in this Amendment: A. Extension of Revolving Credit Facility. The availability of the Revolving Credit Facility and the maturity of the Revolving Loans are hereby extended from November 30, 2002 to March 31, 2003. Accordingly, the definition of the term "Revolving Credit Facility Termination Date" appearing in Section 1.1 of the Credit Agreement is hereby amended by replacing the reference to the date "October 31, 2002" (as subsequently amended to "November 30, 2002.") with the date "March 31, 2003." B. No Obligation to Grant Further Extensions. The Borrower acknowledges that, notwithstanding the references in the Credit Agreement and this Amendment to dates or periods of time subsequent to March 31, 2003, (i) the Lenders will not be obligated to further extend the availability of the Revolving Credit Facility, (ii) the Lenders have given no assurances or commitment that any extension request will be approved, (iii) the Lenders may refuse any extension request in the exercise of their sole and absolute discretion, and (iv) if any extension request is approved, the Lenders may condition such approval on the Borrower's satisfaction of certain requirements, including the making of further modifications to the Credit Agreement and/or the terms of the Facilities. C. Renewal Note. The Borrower agrees to make, execute and deliver to each Lender a renewal Revolving Note (each, a "Renewal Revolving Note"), substantially in the form attached hereto as Exhibit "F-1B." The Renewal Revolving Notes are hereinafter collectively referred to as the "Renewal Notes." The Renewal Notes shall be in renewal, extension and replacement of, but not in satisfaction or as a novation of, the respective Notes delivered pursuant to the Credit Agreement, and from and after the Amendment Date, unless the context otherwise requires, all references to the "Revolving Notes" appearing in the Credit Agreement or any other Loan Documents shall mean and refer to the Renewal Revolving Notes. 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. The Borrower shall have duly and validly authorized, executed and delivered to the Agent and the Lenders the following documents, each in form and substance satisfactory to the Lenders: (i) this Amendment; and (ii) the Renewal Revolving Notes; B. Resolutions. The Agent shall have received a copy of the resolutions of the Board of Directors of the Borrower authorizing the execution and delivery of this Amendment and the performance by the Borrower of its obligations under this Amendment, the Credit Agreement (as amended by this Amendment) and the Renewal Notes. 2 C. Consent of Guarantor. The "Consent of Guarantor" appearing after the Borrower's signature to this Amendment shall have been duly and validly authorized, executed and delivered to the Lender by the Guarantor. D. Accuracy of Representations and Warranties. All representations and warranties made by the Borrower in the Credit Agreement and the other Loan Documents 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). E. No Default. There shall not have occurred any additional 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. F. Waiver/Amendment 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 waiver/amendment fee of $16,579.32 (which amount is equal to 1/10th of 1% of the remaining aggregate Commitments). 5. REPRESENTATIONS AND WARRANTIES. All representations and warranties of Borrower contained in Article V of the Credit Agreement remain true and correct (except to the extent any representations and warranties as to the Borrower's financial condition relate solely to an earlier specified date) and 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 execute, deliver and perform its obligations under this Amendment, the Credit Agreement (as amended by this Amendment) and the Renewal Notes. B. Binding Obligations; Enforceability. This Amendment, the Credit Agreement (as amended by this Amendment) and the Renewal 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 Renewal 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 3 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, 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 Renewal Notes. D. No Material Adverse Change. Since October 31, 2002 (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. B. 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. C. 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. D. Reimbursement of Expenses. The Borrower agrees to pay the reasonable fees and out-of-pocket expenses of The Drummond Law Firm, counsel to the Agent, incurred in connection with the preparation of this Amendment and the consummation of the transactions contemplated hereby. E. Release by Borrower. In consideration of the waivers and other agreements of the Lenders and the Agent contained herein, the Borrower, for itself and its officers, directors, agents, employees, successors and assigns, hereby releases, acquits and forever discharges each of the Lenders and the Agent, and each of their respective parent, subsidiary and affiliated companies and each of their respective officers, directors, agents, employees, successors, and 4 assigns, and all other persons acting for or on behalf of the Lenders and/or the Agent, of and from any and all manner of actions, causes of actions, suits, debts, accounts, conveyances, agreements, damages, claims, demands, liabilities, costs, and expenses of whatsoever kind or nature, including attorney's fees, in law or in equity, known or unknown, anticipated or unanticipated and howsoever arising or accruing, which the Borrower may now have or may claim to have against the parties released or any of them, including, without limitation, those arising out of or relating in any way to the Credit Agreement or the administration of the Facilities thereunder, any other Loan Document or any other agreement or document relating to the Facilities. It is understood and agreed by the Borrower that this is a full and final release covering any and all of the Borrower's actions, claims, debts, judgment, damages, objections, costs, attorney's fees, demands or liabilities, whether known or unknown, undisclosed and/or unanticipated, which may have arisen, or may arise from any act or omission, prior to the date of the execution and delivery of this Amendment. F. No Course of Dealing. This Amendment shall not establish a course of dealing or be construed as evidence of any willingness or commitment on the part of the Agent or the Lenders to grant other or future waivers or consents, should any be requested, or to agree to other or future amendments to or modifications of the Credit Agreement or the terms and conditions applicable to the Facilities. [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK. SIGNATURES APPEAR ON FOLLOWING PAGE.] 5 IN WITNESS WHEREOF, the Borrower, the Lenders and the Agent have executed and delivered this Amendment on the day and year first set forth above. XETA TECHNOLOGIES, INC. By: /s/ Robert B. Wagner ---------------------------------- Name: Robert B. Wagner Title: Secretary and Chief Financial Officer Revolving Loan Commitment BANK ONE, OKLAHOMA, N.A., from and after Amendment Date: Individually and as Agent $1,100,000.00 By: /s/ Tipton J. Burch ---------------------------------- Name: Tipton J. Burch Title: First Vice President Revolving Loan Commitment U.S. BANK NATIONAL ASSOCIATION from and after Amendment Date: (formerly known as Firstar Bank, N.A., $900,000.00 successor by merger to Firstar Bank Missouri, National Association) By: /s/ David L. Orf ---------------------------------- Name: David L. Orf Title: Vice President EXHIBITS Exhibit F-1B - Form of Renewal Revolving Note 6 CONSENT OF GUARANTOR The undersigned hereby (i) acknowledges and consents to the execution and delivery of the above and foregoing Third 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, 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, decrease, 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 Second Amendment to Credit Agreement. U.S. TECHNOLOGIES SYSTEMS, INC. By: /s/ Robert B. Wagner --------------------------- Name: Robert B. Wagner ------------------------- Title: Vice President ------------------------ 7 RENEWAL REVOLVING NOTE (Exhibit F-1B) $ December 1, 2002 ----------------- Tulsa, Oklahoma XETA Technologies, Inc., an Oklahoma corporation (the "Borrower"), promises to pay to the order of _________________ (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, N.A., 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 Amended and Restated Credit Agreement dated as of October 31, 2001, as amended by that certain First Amendment to Amended and Restated Credit Agreement dated effective as of June 1, 2002, as further amended by that certain Second Amendment to Amended and Restated Credit Agreement dated effective as of September 10, 2002, and as further amended by that certain Third Amendment to Amended and Restated Credit Agreement dated effective as of December 1, 2002 (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, N.A., 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 renewal, extension and replacement for that certain Revolving Note dated as of October 31, 2001, executed by the Borrower payable to the order of the Lender in the stated principal amount of $__________ (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: ------------------------------------------------ Print Name: Robert B. Wagner Title: Secretary and Chief Financial Officer EX-99.1 4 d04021exv99w1.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. Section 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of XETA Technologies, Inc. (the "Company") on Form 10-Q for the fiscal quarter ended January 31, 2003, as filed with the Securities and Exchange Commission (the "Report"), I, Jack R. Ingram, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Jack R. Ingram --------------------------- Jack R. Ingram Chief Executive Officer March 14, 2003 EX-99.2 5 d04021exv99w2.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. Section 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of XETA Technologies, Inc. (the "Company") on Form 10-Q for the fiscal quarter ended January 31, 2003, as filed with the Securities and Exchange Commission (the "Report"), I, Robert B. Wagner, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Robert B. Wagner ---------------------------- Robert B. Wagner Chief Financial Officer March 14, 2003 -----END PRIVACY-ENHANCED MESSAGE-----