Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended January 31, 2011
OR
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o |
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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)
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Oklahoma
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73-1130045 |
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(State or other jurisdiction of
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(I.R.S. Employee |
incorporation or organization)
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Identification No.) |
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1814 W. Tacoma Street, Broken Arrow, OK
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74012-1406 |
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(Address of principal executive offices)
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(Zip Code) |
918-664-8200
(Registrants 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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Not applicable þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company (as defined by Rule 12b-2 of the
Exchange Act).
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
(Do not check if a smaller reporting company)
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Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes o No þ
As of March 3, 2011 there were 10,779,757 shares of the registrants common stock, par value
$0.001, outstanding.
XETA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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(UNAUDITED) |
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January 31, 2011 |
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October 31, 2010 |
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ASSETS
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Current assets: |
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Cash and cash equivalents |
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$ |
721,985 |
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$ |
1,003,180 |
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Current portion of net investment in
sales-type leases and other receivables |
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612,537 |
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996,148 |
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Trade accounts receivable, net |
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18,328,219 |
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17,805,992 |
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Inventories, net |
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6,429,522 |
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6,715,076 |
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Deferred tax asset |
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1,196,966 |
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1,168,544 |
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Prepaid taxes |
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81,390 |
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69,980 |
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Prepaid expenses and other assets |
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2,817,373 |
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2,402,111 |
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Total current assets |
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30,187,992 |
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30,161,031 |
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Noncurrent assets: |
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Goodwill |
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18,214,166 |
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17,783,911 |
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Intangible assets, net |
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2,988,797 |
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3,161,791 |
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Net investment in sales-type leases and other receivables,
less current portion above |
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233,265 |
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326,454 |
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Property, plant & equipment, net |
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7,570,668 |
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6,931,927 |
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Total noncurrent assets |
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29,006,896 |
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28,204,083 |
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Total assets |
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$ |
59,194,888 |
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$ |
58,365,114 |
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LIABILITIES AND SHAREHOLDERS EQUITY
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Current liabilities: |
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Current portion of long-term debt |
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$ |
337,500 |
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$ |
337,500 |
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Revolving line of credit |
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3,391,918 |
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1,756,361 |
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Accounts payable |
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7,803,404 |
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10,031,900 |
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Current portion of obligations under capital lease |
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78,623 |
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122,401 |
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Current unearned services revenue |
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5,976,995 |
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6,529,330 |
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Accrued liabilities |
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5,008,328 |
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3,883,303 |
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Total current liabilities |
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22,596,768 |
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22,660,795 |
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Noncurrent liabilities: |
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Long-term debt, less current portion above |
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172,514 |
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255,315 |
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Accrued long-term liability |
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100,100 |
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144,100 |
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Noncurrent unearned services revenue |
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37,440 |
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48,629 |
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Noncurrent deferred tax liability |
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395,945 |
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12,417 |
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Total noncurrent liabilities |
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705,999 |
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460,461 |
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Contingencies |
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Shareholders equity: |
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Preferred stock; $.10 par value; 50,000 shares
authorized, 0 issued |
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Common stock; $.001 par value; 50,000,000
shares authorized, 11,654,071 issued at
January 31, 2011 and October 31, 2010 |
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11,653 |
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11,653 |
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Paid-in capital |
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15,669,918 |
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15,662,689 |
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Retained earnings |
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22,167,327 |
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21,596,383 |
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Less treasury stock, at cost (891,830 shares at
January 31, 2011 and 923,835 shares at October 31, 2010) |
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(1,956,777 |
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(2,026,867 |
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Total shareholders equity |
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35,892,121 |
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35,243,858 |
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Total liabilities and shareholders equity |
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$ |
59,194,888 |
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$ |
58,365,114 |
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The accompanying notes are an integral part of these consolidated financial statements.
3
XETA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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For the Three Months |
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Ended January 31, |
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2011 |
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2010 |
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Systems sales |
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$ |
11,987,842 |
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$ |
10,867,058 |
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Services |
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15,296,203 |
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12,116,857 |
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Other revenues |
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122,317 |
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60,228 |
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Net sales and services revenues |
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27,406,362 |
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23,044,143 |
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Cost of systems sales |
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8,945,436 |
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8,076,587 |
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Services costs |
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11,017,103 |
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8,231,080 |
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Cost of other revenues & corporate COGS |
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447,841 |
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397,635 |
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Total cost of sales and services |
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20,410,380 |
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16,705,302 |
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Gross profit |
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6,995,982 |
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6,338,841 |
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Operating expenses |
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Selling, general and administrative |
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5,837,558 |
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5,125,283 |
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Amortization |
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312,048 |
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186,855 |
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Total operating expenses |
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6,149,606 |
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5,312,138 |
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Income from operations |
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846,376 |
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1,026,703 |
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Interest expense |
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(19,275 |
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(6,170 |
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Interest and other income |
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112,843 |
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21,255 |
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Net interest and other income |
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93,568 |
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15,085 |
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Income before provision for income
taxes |
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939,944 |
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1,041,788 |
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Provision for income taxes |
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369,000 |
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409,000 |
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Net income |
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$ |
570,944 |
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$ |
632,788 |
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Earnings per share |
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Basic |
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$ |
0.05 |
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$ |
0.06 |
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Diluted |
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$ |
0.05 |
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$ |
0.06 |
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Weighted average shares outstanding |
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10,741,534 |
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10,237,405 |
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Weighted average equivalent shares |
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10,809,696 |
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10,277,361 |
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The accompanying notes are an integral part of these consolidated financial statements.
4
XETA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
(UNAUDITED)
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Common Stock |
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Treasury Stock |
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Shares Issued |
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Par Value |
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Shares |
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Amount |
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Paid-in Capital |
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Retained Earnings |
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Total |
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Balance- October
31, 2010 |
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11,654,071 |
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$ |
11,653 |
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923,835 |
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$ |
(2,026,867 |
) |
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$ |
15,662,689 |
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$ |
21,596,383 |
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$ |
35,243,858 |
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Issuance of
restricted common
stock from treasury
(net of 7,441
forfeited shares) |
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(32,005 |
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70,090 |
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(70,090 |
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Stock-based
compensation |
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77,319 |
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77,319 |
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Net income |
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570,944 |
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570,944 |
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Balance- January
31, 2011 |
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11,654,071 |
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$ |
11,653 |
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891,830 |
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$ |
(1,956,777 |
) |
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$ |
15,669,918 |
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$ |
22,167,327 |
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$ |
35,892,121 |
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The accompanying notes are an integral part of these consolidated financial statements.
5
XETA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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For the Three Months |
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Ended January 31, |
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2011 |
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2010 |
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Cash flows from operating activities: |
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Net income |
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$ |
570,944 |
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$ |
632,788 |
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Adjustments to reconcile net income to net
cash provided by operating activities: |
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Depreciation |
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428,834 |
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285,801 |
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Amortization |
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312,048 |
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186,855 |
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Stock-based compensation |
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70,999 |
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74,060 |
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Provision for returns & doubtful accounts receivable |
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15,000 |
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15,000 |
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Provision for excess and obsolete inventory |
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25,500 |
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25,500 |
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Deferred taxes |
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369,000 |
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409,001 |
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Change in assets and liabilities: |
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Decrease (increase) in net investment in sales-type leases & other receivables |
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476,800 |
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(77,062 |
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(Increase) decrease in trade accounts receivable |
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(346,983 |
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68,599 |
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Decrease in inventories |
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298,045 |
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191,797 |
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Increase in prepaid expenses and other assets |
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(407,587 |
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(339,706 |
) |
Increase in prepaid taxes |
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(11,410 |
) |
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(5,295 |
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(Decrease) increase in accounts payable |
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(2,228,496 |
) |
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306,130 |
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Decrease in unearned revenue |
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(787,360 |
) |
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(17,022 |
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Increase in accrued liabilities |
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936,976 |
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348,647 |
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Total adjustments |
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(848,634 |
) |
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1,472,305 |
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Net cash (used in) provided by operating activities |
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(277,690 |
) |
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2,105,093 |
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Cash flows from investing activities: |
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Additions to property, plant & equipment |
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(1,181,629 |
) |
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(206,193 |
) |
Acquisitions, net of cash acquired |
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(330,854 |
) |
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Net cash used in investing activities |
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(1,512,483 |
) |
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(206,193 |
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Cash flows from financing activities: |
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Principal payments on debt |
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(82,801 |
) |
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(1,183,475 |
) |
Net proceeds on revolving line of credit |
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1,635,557 |
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Payments on capital lease obligations |
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(43,778 |
) |
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(37,961 |
) |
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Net cash provided by (used in) financing activities |
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1,508,978 |
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(1,221,436 |
) |
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Net (decrease) increase in cash and cash equivalents |
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(281,195 |
) |
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677,464 |
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Cash and cash equivalents, beginning of period |
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1,003,180 |
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4,731,926 |
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Cash and cash equivalents, end of period |
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$ |
721,985 |
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$ |
5,409,390 |
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Supplemental disclosure of cash flow information: |
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Cash paid during the period for interest |
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$ |
25,102 |
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$ |
13,651 |
|
Cash paid during the period for income taxes |
|
$ |
11,410 |
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|
$ |
5,295 |
|
The accompanying notes are an integral part of these consolidated financial statements.
6
XETA TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 31, 2011
(Unaudited)
1. BASIS OF PRESENTATION:
XETA Technologies, Inc. (XETA, the Company, we, us, or our), an Oklahoma corporation
formed in 1981, is a leading provider of advanced communications solutions with nationwide sales
and service. We provide a wide variety of applications including voice messaging, wireless voice
and data solutions, video applications, contact center solutions, unified communication, and high
speed internet access solutions to hospitality and conference center customers. We sell and/or
support communications solutions produced by several manufacturers including Avaya, Inc. (Avaya),
Mitel Corporation (Mitel), Samsung Business Communications Systems (Samsung), Juniper Networks,
Polycom, Microsoft and ShoreTel Corporation (ShoreTel).
The Company prepared the accompanying unaudited consolidated financial statements pursuant to the
rules and regulations of the Securities and Exchange Commission (the Commission). Certain
information and footnote disclosures normally included in annual financial statements prepared in
accordance with accounting principles generally accepted in the United States of America have been
condensed or omitted pursuant to those rules and regulations. The Company believes that the
disclosures are reasonably adequate to ensure the information is not misleading. Management
suggests that these condensed financial statements be read in conjunction with the consolidated
financial statements and the notes thereto made a part of the Companys Annual Report on Form 10-K.
The Company filed the 10-K as Commission File No. 0-16231, with the Commission on January 25, 2011
and subsequently amended on January 28, 2011 and February 25, 2011. Management believes that the
financial statements contain the necessary adjustments for a fair statement of the results for the
interim periods presented. All adjustments were of a normal recurring nature. The results of
operations for the interim period are not necessarily indicative of the results for the entire
fiscal year.
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of each class of
financial instruments for which it is practicable to estimate the value:
|
|
The carrying value of cash and cash equivalents, customer deposits, trade accounts receivable,
sales-type leases, accounts payable and short-term debt approximate their respective fair
values due to their short maturities. |
|
|
Based upon 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. |
Segment Information
The Company has three reportable segments: services, commercial system sales, and hospitality
system sales. Services revenues represent revenues earned from installing and maintaining systems
for customers in both the commercial and hospitality segments. The Company defines commercial
system sales as sales to the non-hospitality industry.
The reporting segments follow the same accounting policies used for the Companys consolidated
financial statements and are described in the Summary of Significant Accounting Policies in the
Companys Form 10-K described above. Company management evaluates a segments performance based on
gross margins. Assets are not allocated to the segments. Sales outside of the U.S. are
immaterial.
7
The following is a tabulation of business segment information for the three months ended January
31, 2011 and 2010:
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|
Commercial |
|
|
Hospitality |
|
|
|
|
|
|
|
|
|
Services |
|
|
Systems |
|
|
Systems |
|
|
Other |
|
|
|
|
|
|
Revenues |
|
|
Sales |
|
|
Sales |
|
|
Revenue |
|
|
Total |
|
2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
$ |
15,296,203 |
|
|
$ |
9,711,076 |
|
|
$ |
2,276,766 |
|
|
$ |
122,317 |
|
|
$ |
27,406,362 |
|
Cost of sales |
|
|
(11,017,103 |
) |
|
|
(7,417,096 |
) |
|
|
(1,528,340 |
) |
|
|
(447,841 |
) |
|
|
(20,410,380 |
) |
Gross profit |
|
$ |
4,279,100 |
|
|
$ |
2,293,980 |
|
|
$ |
748,426 |
|
|
$ |
(325,524 |
) |
|
$ |
6,995,982 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
$ |
12,116,857 |
|
|
$ |
10,038,581 |
|
|
$ |
828,477 |
|
|
$ |
60,228 |
|
|
$ |
23,044,143 |
|
Cost of sales |
|
|
(8,231,080 |
) |
|
|
(7,540,985 |
) |
|
|
(535,602 |
) |
|
|
(397,635 |
) |
|
|
(16,705,302 |
) |
Gross profit |
|
$ |
3,885,777 |
|
|
$ |
2,497,596 |
|
|
$ |
292,875 |
|
|
$ |
(337,407 |
) |
|
$ |
6,338,841 |
|
Stock-Based Compensation Plans
The Company applies the provisions of ASC 718, Compensation Stock Compensation, which requires
companies to measure all employee stock-based compensation awards using a fair value method and
recognize compensation cost in its financial statements. The Company recognizes the fair value of
stock-based compensation awards as selling, general and administrative expense in the consolidated
statements of operations on a straight-line basis over the vesting period. Compensation expense
was recognized in the statements of operations as follows:
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|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
Three months ended January 31, |
|
$ |
70,999 |
|
|
$ |
74,060 |
|
|
|
|
|
|
|
|
Use of Estimates
The preparation of the financial statements conforms to the accounting principles generally
accepted in the U.S., and requires management to make estimates and assumptions affecting the
reported amounts of assets and liabilities: 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 may differ from these estimates.
New Accounting Pronouncements
In December 2010 the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) 2010-29, Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma
Information for Business Combinations. ASU 2010-29 requires that if comparative financial
statements are presented, the company disclose revenue and earnings of the combined entity as
though the business combination had occurred as of the beginning of the comparable prior annual
reporting period only. ASU 2010-20 also expands the supplemental pro forma disclosures to include
a description and amount of material, nonrecurring pro forma adjustments that are attributable to
the business combination. ASU 2010-29 will be effective for fiscal years beginning after December
15, 2010. The Company will apply the guidance to material business combinations after adoption.
In December 2010 the FASB issued ASU 2010-28, Intangibles Goodwill and Other (Topic 350): When
to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative
Carrying Amounts. ASU 2010-28 modifies Step 1 of the goodwill impairment test for reporting units
with zero or negative carrying amounts by requiring an entity to perform Step 2 of the goodwill
impairment test if it is more likely than not that a goodwill impairment exists. This update will
be effective for fiscal years
beginning after December 15, 2010. The adoption of this guidance is not expected to have a
material impact on the Companys consolidated financial statements.
8
In July 2010 the FASB issued ASU 2010-20, Receivables (Topic 310): Disclosure about the Credit
Quality of Financing Receivables and the Allowance for Credit Losses. ASU 2010-20 requires
disclosures designed to enhance transparency regarding credit losses and the credit quality of loan
and lease receivables. Disclosures include an evaluation of the nature of credit risk inherent in
the entitys financing receivables; how the risk is analyzed to arrive at the allowance for credit
losses and the changes and reasons for changes in the allowance for credit losses. Under this
guidance, the allowance for credit losses and fair value are to be disclosed by portfolio segment.
The adoption of this guidance did not have a material impact on the Companys consolidated
financial statements.
In October 2009 the FASB issued ASU 2009-13, Revenue Recognition Multiple-Deliverable Revenue
Arrangements. The guidance in ASU 2009-13 amends the criteria for separating consideration in
multiple-deliverable arrangements. The guidance eliminates the estimated fair value approach for
revenue allocation between the separate units of accounting and replaces it with a sales-based
approach referred so as the relative-selling-price method. ASU 2009-13 expands required disclosures
related to a companys multiple-deliverable revenue arrangements. The adoption of this guidance
did not have a material impact on the Companys consolidated financial statements.
Other accounting standards that have been issued or proposed that do not require adoption until a
future date are not expected to have a material impact on our consolidated financial statements
upon adoption.
2. ACCOUNTS RECEIVABLE:
Trade accounts receivable consist of the following:
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|
|
|
|
|
|
|
|
|
(Audited) |
|
|
|
January 31, |
|
|
October 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable |
|
$ |
18,899,562 |
|
|
$ |
18,352,519 |
|
Less- reserve for doubtful accounts |
|
|
(571,343 |
) |
|
|
(546,527 |
) |
|
|
|
|
|
|
|
Net trade accounts receivable |
|
$ |
18,328,219 |
|
|
$ |
17,805,992 |
|
|
|
|
|
|
|
|
On January 14, 2009, Nortel Networks Corporation filed for bankruptcy protection in the United
States Bankruptcy Court for the District of Delaware. Subsequent to the filing the administrators
of the bankruptcy adopted a business disposal strategy. Under the strategy, the administrators
segmented Nortel into three primary business units: Virtual Service Switches, CDMA businesses and
Enterprise Solutions. We conducted all of our Nortel business through the Enterprise Solutions unit
which was purchased by Avaya in December 2009.
Nortel owes XETA approximately $700,000 in pre-petition accounts receivable. On July 17, 2009 the
bankruptcy court granted XETAs request for offset of $116,000 in charges owed to Nortel at the
time of the filing. In fiscal year 2009, the Company recorded $350,000 as a reserve against
possible Nortel bad debts. Nortel filed its plan of reorganization on July 12, 2010 (the Nortel
Plan). XETAs claim is classified as a Class 3 claim, General Unsecured Claims. The Nortel
Plan states that priority non-tax claims and secured claims will be paid in full, but that Class 3
claims will be impaired. No indication or estimate is given as to the potential extent of the
impairment. According to the Nortel Plan, XETA and other Class 3 claimants will receive a pro rata
share of the assets of Nortel at the time the Nortel Plan goes into affect but the Administrator
has provided no guidance as to an expected payout level. Based on the information presently
available, the Company can make no further determination regarding the adequacy of its reserve in
this matter. The Company will continue to carefully follow developments associated with the
bankruptcy case and will assert its legal rights and defenses as appropriate.
9
3. INVENTORIES:
Inventories are stated at the lower of average cost or market and consist of the following:
|
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|
|
|
|
|
|
|
|
|
|
(Audited) |
|
|
|
January 31, |
|
|
October 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
Finished goods and spare parts |
|
$ |
7,546,349 |
|
|
$ |
7,785,951 |
|
Less- reserve for excess and obsolete inventories |
|
|
(1,116,827 |
) |
|
|
(1,070,875 |
) |
|
|
|
|
|
|
|
Total inventories, net |
|
$ |
6,429,522 |
|
|
$ |
6,715,076 |
|
|
|
|
|
|
|
|
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following:
|
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|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
(Audited) |
|
|
|
Useful |
|
January 31, |
|
|
October 31, |
|
|
|
Lives |
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
Building and building improvements |
|
3-20 |
|
$ |
3,420,231 |
|
|
$ |
3,379,059 |
|
Data processing and computer field equipment |
|
2-7 |
|
|
4,917,782 |
|
|
|
4,438,556 |
|
Software development costs, work-in-process |
|
N/A |
|
|
98,067 |
|
|
|
272,097 |
|
Software development costs of components placed
into service |
|
3-10 |
|
|
2,929,244 |
|
|
|
2,731,310 |
|
Hardware |
|
3-5 |
|
|
643,635 |
|
|
|
643,635 |
|
Land |
|
|
|
|
611,582 |
|
|
|
611,582 |
|
Office furniture |
|
5-7 |
|
|
944,493 |
|
|
|
880,635 |
|
Autos |
|
5 |
|
|
710,608 |
|
|
|
710,608 |
|
Other |
|
3-7 |
|
|
754,600 |
|
|
|
156,131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property, plant and equipment |
|
|
|
|
15,030,242 |
|
|
|
13,823,613 |
|
Less- accumulated depreciation and amortization |
|
|
|
|
(7,459,574 |
) |
|
|
(6,891,686 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property, plant and equipment, net |
|
|
|
$ |
7,570,668 |
|
|
$ |
6,931,927 |
|
|
|
|
|
|
|
|
|
|
5. INCOME TAXES:
The tax provision reflects the effective Federal tax rate plus the composite state income tax rates
adjusted for states that require minimum tax payments even if tax losses are incurred. Generally,
we expect our tax provision rate to be approximately 40%.
6. CREDIT AGREEMENTS:
At January 31, 2011 the Companys credit facility consisted of a loan agreement with a commercial
bank including a $8.5 million revolving credit agreement collateralized by trade accounts
receivable, inventories, and real estate. The facility matures on November 5, 2011. Advance rates
are defined in the agreement, but are generally at the rate of 75% on qualified trade accounts
receivable and 50% of qualified inventories and real estate. The credit facility contains several
financial covenants common in such agreements including tangible net worth requirements,
limitations on the amount of funded debt to annual earnings before interest, taxes, depreciation
and amortization, limitations on cash dividends, and debt service coverage requirements. Interest
on the loan agreement accrues at the greater of either a) the London Interbank Offered Rate
(LIBOR) (0.26% at January 31, 2011) plus 3.00% or b) 4.5%. The outstanding balance on the
revolving line of credit was $3.4 million at January 31, 2011. At January 31, 2011 we were in
compliance with the covenants of the credit facility.
10
At January 31, 2011 the Company was paying 4.5% on the revolving line of credit borrowings.
On August 2, 2010 the Company purchased the common stock of Pyramid Communications Services, Inc.
The purchase price included subordinated promissory notes payable to the sellers in quarterly
installments through July 31, 2012 bearing interest at 3% per year. At January 31, 2011 the total
notes payable was $510,000. We reduced our balance through scheduled principal payments by $83,000
in the first quarter of fiscal 2011.
7. EARNINGS PER SHARE:
The Company computes basic earnings per common share by dividing net income by the weighted average
number of shares of common stock outstanding during the reporting periods. Dividing net income by
the weighted average number of shares of common stock and dilutive potential common stock
outstanding during the reporting periods computes diluted earnings per common share. A
reconciliation of net income and weighted average shares used in computing basic and diluted
earnings per share is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended January 31, 2011 |
|
|
|
Income |
|
|
Shares |
|
|
Per Share |
|
|
|
(Numerator) |
|
|
(Denominator) |
|
|
Amount |
|
Basic EPS |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
570,944 |
|
|
|
10,741,534 |
|
|
$ |
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of stock options |
|
|
|
|
|
|
68,162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
570,944 |
|
|
|
10,809,696 |
|
|
$ |
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended January 31, 2010 |
|
|
|
Income |
|
|
Shares |
|
|
Per Share |
|
|
|
(Numerator) |
|
|
(Denominator) |
|
|
Amount |
|
Basic EPS |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
632,788 |
|
|
|
10,237,405 |
|
|
$ |
0.06 |
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of stock options |
|
|
|
|
|
|
39,956 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
632,788 |
|
|
|
10,277,361 |
|
|
$ |
0.06 |
|
|
|
|
|
|
|
|
|
|
|
Options to purchase 715,500 shares of common stock at an average exercise price of $4.71 and
993,438 shares of common stock at an average exercise price of $6.63 were not included in the
computation of diluted earnings per share for the three months ended January 31, 2011 and 2010,
respectively, because inclusion of these options would be antidilutive.
8. CAPITAL LEASES:
During 2008 the Company leased software licenses under an agreement that is classified as a capital
lease. The book value of the licenses is included in the balance sheet as property, plant, and
equipment and was $63,406 at January 31, 2011. Accumulated amortization of the licenses at January
31, 2011 was $393,114. Amortization of assets under the capital lease is included in depreciation
expense. As of January 31, 2011 the future minimum lease payments required under the lease is
$67,265 and the present value of the net minimum lease payments is $66,618. At January, 31, 2011
future minimum lease payments required under a vehicle lease assumed in a recent acquisition is
$12,410 and the present value of the lease payments is $12,005.
11
9. ACQUISITIONS:
On November 19, 2010, the Company completed the purchase of certain operating assets of New Vision
Comunications, Inc., (New Vision) a privately-held company based in Omaha, Nebraska providing
communications equipment and related services. The purchase price included $331,000 paid in cash
at closing and a hold-back of $45,000 to be paid to the seller subject to reductions related to the
final value of the net assets purchased.
The fair values of the assets acquired and liabilities assumed for New Vision are provisional and
are based on the information available as of the acquisition date. The Company believes that the
information available provides a reasonable basis for estimating the fair value but additional
information may be necessary to finalize the valuation. The provisional measurements of fair value
are subject to change. The Company expects to finalize the valuation and complete the purchase
price allocation as soon as practicable but no later than one year from the acquisition date.
10. SUBSEQUENT EVENT:
On February 8, 2011, the Company entered into a merger agreement with PAETEC Holding Corp., a
Delaware corporation (PAETEC), and Hera Corporation, an Oklahoma corporation and an indirect
wholly-owned subsidiary of PAETEC (Hera). Under the terms and subject to the conditions of the
Merger Agreement, Hera will merge with and into XETA (the Merger), with XETA surviving the Merger
as an indirect wholly-owned subsidiary of PAETEC. The Merger Agreement has been approved
unanimously by the board of directors of each of XETA and PAETEC.
At the effective time of the Merger, each share of XETA common stock issued and outstanding
immediately prior to the effective time (other than shares held in the treasury of XETA or any
subsidiary of XETA and any shares owned by PAETEC or any of its subsidiaries) will be automatically
converted into the right to receive $5.50 in cash, without interest (the Merger Consideration).
In addition, immediately prior to the effective time of the Merger, all remaining forfeiture
restrictions applicable to restricted shares of XETA common stock will expire and the holders
thereof will be entitled to receive the Merger Consideration with respect to each such share.
Certain options to purchase shares of XETA common stock outstanding immediately prior to the
effective time shall become fully vested immediately prior to the effective time. Holders of
warrants and vested options will be entitled to receive (in each case, in accordance with the terms
of their respective plans and agreements) the product of (i) the number of shares of XETA common
stock that would have been acquired upon the exercise of the stock option or warrant, multiplied by
(ii) the excess, if any, of the Merger Consideration over the exercise price to acquire a share of
XETA common stock under such option or warrant. The Merger Consideration will be approximately $61
million in the aggregate.
The consummation of the Merger is subject to customary conditions, including, without limitation,
(a) approval by the holders of a majority of the outstanding shares of XETAs common stock entitled
to vote on the Merger, (b) receipt of any required antitrust or regulatory approvals (including, if
applicable, the expiration or termination, as the case may be, of the waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976), and (c) the absence of any law, regulation,
order or injunction prohibiting the Merger. Moreover, each partys obligation to consummate the
Merger is subject to certain other conditions, including, without limitation, (i) the accuracy of
the other partys representations and warranties (subject to customary materiality qualifiers and
other qualifying disclosures which are not necessarily reflected in the Merger Agreement), (ii) the
other partys compliance with its covenants and agreements contained in the Merger Agreement, (iii)
there not being holders of more than 15% of the outstanding shares of XETA common stock properly
exercising appraisal rights and (iv) there not having been a material adverse effect on the
business, financial condition or results of operations of XETA and its subsidiaries (subject to
certain limitations) or the ability of XETA to consummate the transactions under the Merger
Agreement that has not been cured.
The Merger Agreement contains customary representations, warranties and covenants of XETA, PAETEC
and Acquisition Sub, including, among others, covenants by XETA to conduct its business in the
ordinary course during the interim period between the execution of the Merger Agreement and
consummation of the Merger and not to engage in certain types of transactions during such period.
12
On February 14 and 16, 2011, three separate putative stockholder class action complaints were
filed in the District Court of Tulsa County, State of Oklahoma against the Company, the members of
our board of directors, and PAETEC Holding Corp. (PAETEC) and its indirect subsidiary Hera
Corporation (Hera). The lawsuits concern the proposed merger with PAETEC, and generally assert
claims alleging, among other things, that each member of our board of directors breached his
fiduciary duties by agreeing to the terms of the merger and by allegedly failing to provide
stockholders with material information related to the proposed merger; and that PAETEC and Hera
aided and abetted the alleged breaches of fiduciary duty by the members of the Companys board of
directors. The lawsuits seek, among other things, class action certification and monetary and
injunctive relief. The Company believes that all claims asserted in the lawsuits are without merit
and are merely opportunistic.
|
|
|
ITEM 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Preliminary Note Regarding Forward-Looking Statements
This report contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, relating to future events and our future performance and results.
Many of these statements appear in the discussions under the headings Risk Factors, and
Managements Discussion and Analysis of Financial Condition and Results of Operations. All
statements other than those that are purely historical may be forward-looking statements.
Forward-looking statements can generally be identified by words such as expects, anticipates,
may, likely, plans, believes, intends, projects, estimates, and similar words or
expressions. Forward-looking statements are not guarantees of performance, but rather reflect
managements current expectations, estimates, and forecasts about the industry and markets in which
we operate, and our assumptions and beliefs based upon information currently available to
management. Investors are cautioned that all forward-looking statements are subject to certain
risks and uncertainties which are difficult to predict or which we are unable to control, and that
could cause actual results to differ materially from those projected, including but not limited to
such factors as failure to obtain shareholder approval or failure to satisfy other conditions
required for the consummation of the pending merger; failure or delay in consummation of the
pending merger for other reasons; changes in laws or regulations; the condition of the U.S. economy
and its impact on capital spending in our markets; the successful integration of recently acquired
businesses into ours and realization of anticipated synergies and growth opportunities from these
transactions; changes in Avayas marketing and dealer channel strategy; unpredictable quarter to
quarter revenues; continuing success of our Mitel product and service offerings; our ability to
maintain and improve upon current gross profit margins; intense competition and industry
consolidation; dependence upon a few large wholesale customers for the recent growth in our Managed
Services offering; and the availability and retention of revenue professionals and certified
technicians. These and other risks and uncertainties are discussed under the heading Risk Factors
under Part I of the Companys Form 10-K for the fiscal year ended October 31, 2010 (filed with the
Commission on January 25, 2011 and amended on January 28, 2011 and February 25, 2011) and in
updates to such risk factors set forth in Item 1A of Part II of this quarterly report.
Overview
PAETEC Merger.
On February 8, 2011 we entered into a merger agreement with PAETEC Holding Corp., a Delaware
corporation (PAETEC), and Hera Corporation, an Oklahoma corporation and an indirect wholly-owned
subsidiary of PAETEC (Hera). Under the terms and subject to the conditions of the Merger
Agreement, Hera will merge with and into XETA (the Merger), with XETA surviving the Merger as an
indirect wholly-owned subsidiary of PAETEC. Our shareholders will receive $5.50 in cash for each
share of stock held upon approval of the merger by our shareholders. Additional terms and
conditions of the proposed merger are provided in Note 10 to the Condensed Consolidated Notes to
Financial Statements above.
13
PAETEC offers a comprehensive suite of IP, voice, data, and Internet services, as well as
enterprise communications management software, network security solutions, CPE, and managed
services. We will become a part of PAETECs managed services portfolio which consists of a wide
variety of products including hosted services, service lifecycle management software, and Allworx
IP-PBXs. These managed services can be sold on a stand-alone basis, but is often bundled with a
variety of PAETECs network services to drive more revenues and deeper relationships with
customers.
The Merger is expected to close in the third fiscal quarter. The merger agreement includes
covenants by us to conduct business in the ordinary course during the interim period between the
execution of the Merger Agreement and consummation of the Merger and not to engage in certain types
of transactions during such period. Additionally, while integration planning is ongoing during
this period, none of our operations can be integrated into PAETECs prior to the closing of the
transaction. As a result of these factors, we are operating in a manner consistent with previously
stated strategic, financial and operating goals.
Strategy.
To adjust to market conditions and to improve the profitability and predictability of our business,
we are continuing to shift our go-to-market strategy from an equipment-centric model to a
customer-centric model through the addition of new professional and managed services offerings and
through adding new relationships with manufacturers. Additionally, we expect to continue to
augment our organic growth through acquisitions and other corporate development activities.
Historically, our revenues have been closely associated with a few major vendors such as Avaya,
Nortel, and Hitachi. Our strategy to increase our services revenues coupled with rapid changes in
our market requires us to diversify our relationships to more manufacturers as well as develop new
customer relationships, particularly related to our managed services business. As a result, in the
last two years we have expanded our relationships with manufacturers from five to seventeen,
greatly increasing the number of hardware and software applications we sell. We have also expanded
our service offerings to include more data-centric services such as managed network services,
hospitality guest support services (help desk), wireless long-range bridging, data security
consulting, and environment virtualization. These changes are creating opportunities for us to
earn additional revenues from existing customers as well as create opportunities with new
customers. We believe these expanded capabilities will lead to improved predictiablitily and
profitability in our business and will help to diversify our revenues.
In fiscal 2010, we initiated a corporate development effort to identify and make investments which
create rapid scale and scope to our business. As a result of those efforts we completed the
acquisition of three companies and absorbed the operating assets of a fourth business unit which
was being dissolved by its owner. These acquisitions provided: (i) new geographic presence for us
in the northeastern and southwestern regions of the country; (ii) new high speed product and
service offering for our hospitality vertical market; and (iii) personnel and applications to
launch our new network operations center. We expect to continue to use cash flows and debt
financing to further these corporate development activies in fiscal 2011.
On November 19, 2010, we completed the purchase of certain operating assets of New Vision
Comunications, Inc. (New Vision), a privately-held company based in Omaha, Nebraska providing
communications equipment and related services. The terms of the purchase agreement are described
in Note 9 of the Notes to Consolidated Financial Statements.
Operating Summary.
In the first quarter of fiscal 2011, we recorded net income of $571,000 on revenues of $27.4
million compared to net income of $633,000 on revenues of $23.0 million in the first quarter of
last year. The 2011 results primarily reflect an increase in revenues and gross profits offset by
increased selling, general and administrative costs, including $324,000 in costs associated with
the PAETEC merger process and other corporate development activities. We discuss this and other
contributing factors in more detail under Results of Operations below.
Financial Position Summary.
Since October 31, 2010, our working capital position remained relatively unchanged at $7.6 million.
Cash from operations and net borrowing on the revolving line of credit was primarily used to reduce
accounts
payable, make capital expenditures to support our operations and purchase the net operating assets
of New Vision. We discuss these and other financial items in more detail under Financial
Condition below.
14
The following discussion presents additional information regarding our financial condition and
results of operations for the three-month periods ended January 31, 2011 and 2010 and should be
considered in conjunction with our above comments as well as the Risk Factors section below.
Financial Condition
At January 31, 2011 our working capital was $7.6 million compared to $7.5 million at October 31,
2010. We used our cash balances and $1.6 million short-term
borrowings from our $8.5 million line of credit to fund our operating activities, acquisition activities and capital expenditures
during the quarter.
Our capital expenditures in the first quarter were $1.2 million which included approximately
$688,000 in expenditures to build our new network operations center (NOC) in Hazelwood, Missouri.
The NOC facility provides a platform for a variety of new revenue streams including proactive
network monitoring, remote break/fix of network devices, and help desk services. The expenditures
above included remodeling a small area in our headquarters facility to create redundancy for the
NOC. We used cash of $331,000 to purchase the net operating assets of New Vision. This small
acquisition provides us with new personnel and applications to integrate Microsoft applications
more effectively with other products and applications we sell. The remaining capital expenditures
made in the first quarter were for implementation of a CRM tool to increase our sale management
capabilities and to support normal replacement cycles of technology infrastructure.
At January 31, 2011, our cash balance was $722,000 and we had a $3.4 million outstanding balance on
our line of credit. In accordance with the collateral base defined in the credit facility, $5.1
million was available for borrowing on the facility at the end of the quarter. At January 31,
2011, we were in compliance with the covenants of the credit facility.
Results of Operations
In the first quarter of fiscal 2011 revenues were $27.4 million compared to $23.0 million in the
first quarter 2010. Our net income in the first quarter of fiscal 2011 was $571,000, compared to a
net income of $633,000 in the same quarter a year ago. Our 2011 results include $324,000 in
professional fees associated with the process which led to the merger agreement with PAETEC as well
as other corporate development activities. Without these costs, our net income would have been
$769,000 in the first quarter of fiscal 2011, a 21% increase over the first quarter of fiscal 2010.
The narrative below provides further explanation of these results.
Systems Sales.
In the first quarter of fiscal 2011 systems sales increased approximately $1.1 million or 10%
compared to the same period last year. This increase includes a $1.4 million or 175% increase in
sales of systems to hospitality customers and a $328,000 or 3% decrease in sales of systems to
commercial customers. The increase in our hospotitality systems sales reflects a modest rebound in
that market sector and a large sale of voice and data equipment to a UK-based hospitality location
in the first quarter. This sale was made possible as a result of the acquisition of Lorica in
fiscal 2010 and will generate recurring network monitoring fees through our new NOC once
installation is complete in fiscal 2011. The decrease in sales of systems to commercial customers
reflects continued softness in the overall economy coupled with shipping delays by Avaya. Orders
affected by these delays are expect to ship in our second fiscal quarter.
15
Services Revenues.
Services revenues consist of the following:
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
|
January 31, |
|
|
|
2011 |
|
|
2010 |
|
Maintenance & repair |
|
$ |
10,283,000 |
|
|
$ |
7,498,000 |
|
Implementation |
|
|
4,108,000 |
|
|
|
3,762,000 |
|
Structured cabling |
|
|
905,000 |
|
|
|
857,000 |
|
|
|
|
|
|
|
|
Total Services revenues |
|
$ |
15,296,000 |
|
|
$ |
12,117,000 |
|
|
|
|
|
|
|
|
Maintenance and repair revenues increased 37% in the first quarter. This increase reflects the
continued success of our wholesale services programs and repair revenues as well as the addition to
our base of maintenance customers associated with acquisitions in the third and fourth quarters of
fiscal 2010. We continue to aggressively market our national service footprint and multi-product
line technical capabilities to existing and potential wholesale service partners such as network
service providers, and large voice and data integrators. We also continue to market our service
capabilities to end-users. We expect growth in these programs to positively impact our maintenance
and repair revenues for the foreseeable future.
Implementation revenues increased 9% in the first fiscal quarter reflecting an increase in
installation revenues and relatively flat revenues from our Professional Services Organization
(PSO). In the near term, Implementation revenues will continue to be closely aligned with the
sale of new systems. From a long term perspective, we are expanding and diversifying our service
offerings to a more data- and consulting-centric model. The recent construction of the NOC to
provide proactive data and voice network monitoring and help desk services is a direct outcome of
our strategy to become more relevant to the needs of CIOs and reduce our dependency on systems
sales to drive implementation and PSO revenues.
Cabling revenues increased 6% in the first fiscal quarter of 2011.
Gross Margins.
The table below presents the gross margins earned on our primary revenue streams:
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|
|
|
|
|
|
|
|
|
|
For the Three |
|
|
|
Months Ended |
|
|
|
January 31, |
|
Gross Margins |
|
2011 |
|
|
2010 |
|
Systems sales |
|
|
25.4 |
% |
|
|
25.7 |
% |
Services revenues |
|
|
28.0 |
% |
|
|
32.1 |
% |
Other revenues |
|
|
48.7 |
% |
|
|
19.3 |
% |
Corporate cost of goods sold |
|
|
-1.4 |
% |
|
|
-1.5 |
% |
Total |
|
|
25.5 |
% |
|
|
27.5 |
% |
Gross margins on systems sales in the first quarter are above our target of 23% to 25% for systems
revenues. While we experience a wide range of gross margins on individual systems sales, our
consistent overall performance above our expected targets in this area is due to disciplined
pricing practices and pricing support received from our manufacturers in the form of
project-specific discounts and incentive rebates which are recorded as reductions to cost of goods
sold. These discounts and incentives are material to our gross margins. Despite our success in
maintaining our equipment margins within or exceeding our targets, we continue to believe we will
face increasing pressure on these margins as our market evolves.
Our service margins declined in the first quarter due to uneven distribution of implementation
revenues during the quarter, the short-term impact of the start-up of our network operations
center, and general inefficiencies from integrating newly acquired operations into our existing
systems and processes. Revenues earned from implementation of new systems was weak in the second
half of the quarter resulting in lower margins due to the fixed cost structure of this portion of
our business. We took steps to address the inefficiencies in our service delivery model in the
first quarter as we continued to integrate the operations of the fiscal 2010 acquisitions. These
steps included some reductions in technical force where there was overlap with legacy operations.
We expect steady improvement of these issues throughout fiscal 2011 as integration efforts
continue.
The
final components of our gross margins are the margins earned on other revenues and our corporate
cost of goods sold. We earn the majority of other revenues from the sale of Avaya maintenance
contracts on which we earn either a commission or gross profit. We have no continuing service
obligation associated with these revenues and gross profits. This is an unpredictable revenue
stream that depends on the expiration dates of
existing contracts, installation dates of new systems, customer type as defined by Avaya, and
number of years that customers contract for services. These revenues increased by $62,000 or 103%
in the first quarter of fiscal 2011 compared to the prior year. Despite this increase, these
results were lower than our expectation as many customers have delayed decisions regaring
long-term Avaya service contracts until there is more clarity regarding Avayas product and service
strategies. These revenues vary in both sales volume and gross margins earned. Corporate cost of
goods sold represents our material logistics and purchasing functions that support all of our
revenue segments.
16
Operating Expenses.
Our total operating expenses in the first quarter were $6.1 million or 22.4% of revenues compared
to $5.3 million or 23.1% of revenues in the first quarter of fiscal 2010. The modest improvement
in operating expenses as a percent of revenues was realized despite $324,000 in non-recurring
expenses for professional fees and other costs related to the PAETEC merger and other corporate
development activities. These expenses included professional fees such as investment banking and
legal fees, tax services, and travel costs directly associated with integration activities.
Interest Expense and Other Income.
Net interest and other income was $94,000 in the first quarter of fiscal 2011 compared to $15,000
in net other income in the first quarter of fiscal 2010.
Tax Provision.
The tax provision reflects the effective Federal tax rate plus the composite state income tax rates
adjusted for states that require minimum tax payments even if tax losses are incurred. Generally,
we expect our tax provision rate to be approximately 40%.
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|
ITEM 4. |
|
CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures. Based on an evaluation conducted as of January
31, 2011 by our management, including our Chief Executive Officer (CEO) and our Chief Financial
Officer (CFO), our CEO and CFO have concluded that our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
Exchange Act) are effective to reasonably ensure that information required to be disclosed 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,
and that such information is accumulated and communicated to our management, including the CEO and
CFO, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Controls. There were no changes in our internal controls during the last
fiscal quarter that have materially affected, or are reasonably likely to materially affect, these
controls over financial reporting.
PART II. OTHER INFORMATION
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|
|
ITEM 1. |
|
LEGAL PROCEEDINGS. |
On February 14 and 16, 2011, three separate putative stockholder class action complaints were
filed in the District Court of Tulsa County, State of Oklahoma against the Company, the members of
our board of directors, and PAETEC Holding Corp. (PAETEC) and its indirect subsidiary Hera
Corporation (Hera). The lawsuits concern the proposed merger between us and PAETEC, and
generally assert claims alleging, among other things, that each member of our board of directors
breached his fiduciary duties by agreeing to the terms of the merger and by allegedly failing to
provide stockholders with material information related to the proposed merger; and that PAETEC and
Hera aided and abetted the alleged breaches of fiduciary duty by the members of our board of
directors. The lawsuits seek, among other things, class action certification and monetary and
injunctive relief. We believe that all claims asserted in the lawsuits are without merit and are
merely opportunistic.
17
The information presented below is an update to the Risk Factors included in the Companys Annual
Report on Form 10-K for the fiscal year ended October 31, 2010 and should be read in conjunction
therewith. Except as set forth below, the Risk Factors included in the Companys Form 10-K for its
2010 fiscal year have not materially changed.
The proposed merger with PAETEC is subject to satisfaction or waiver of certain customary
conditions, including the approval of the merger by our stockholders.
Until all conditions to the merger agreement are satisfied, we cannot be certain that the proposed
merger will close. We will incur significant transaction costs relating to the proposed merger,
whether or not the merger is completed. Completion of the merger is subject to the satisfaction or
waiver of certain customary conditions set forth in the merger agreement, including without
limitation the approval of the merger agreement by our stockholders, receipt of any required
antitrust approvals (or termination or expiration of applicable waiting periods), the accuracy of
the representations and warranties of the parties and compliance by the parties with their
respective obligations under the merger agreement. The transaction is expected to close in the
third quarter of fiscal 2011. However, no assurances can be given that the transaction
contemplated by the merger agreement will be consummated or, if not consummated, that we will enter
into a comparable or superior transaction with another party.
Our future business and financial position may be adversely affected if the merger is not
completed.
If the merger agreement with PAETEC is terminated and the merger is not consummated, we will have
incurred substantial expenses without realizing the expected benefits of the merger. In addition,
we may also be subject to additional risks including, without limitation:
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|
|
upon termination of the merger agreement under
specified circumstances, we may be required to pay
PAETEC a termination fee of $1.92 million; |
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|
|
|
substantial costs related to the merger, such
as legal, accounting and financial advisory fees,
must be paid regardless of whether the merger is
completed; and |
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|
|
potential disruption to the current plan,
operations, businesses and distraction of our
workforce and management team. |
Litigation related to the Merger could adversely affect our financial results.
Several putative stockholder class action complaints were filed against us, the members of our
board of directors, and PAETEC in connection with the proposed merger. The cost of defending such
lawsuits and paying any judgment or settlement in connection therewith could have an adverse impact
on our financial results in the event these amounts exceed our insurance limits or are not covered
by those limits.
The proposed merger creates unique risks in the time leading up to closing, and there are also
risks of completing the conditions to closing.
The merger agreement generally requires us to operate our business in the ordinary course pending
consummation of the proposed merger, but restricts us, without PAETECs consent, from taking
certain specified actions until the merger is complete or the merger agreement is terminated.
Additionally, matters relating to the merger may require substantial commitments of time and
resources, which could otherwise have been devoted to other beneficial opportunities. There may
also be potential difficulties in employee retention pending consummation of the merger. Any loss
of business opportunities or key personnel could have an adverse impact on future business, and, as
a result, result in lower future sales and earnings.
18
If we are unable to complete our proposed merger our stock price could suffer.
The termination of the merger agreement would likely result in a decline in our stock price to the
extent that our stock price reflects a market assumption that we will complete the merger and our
stockholders will receive the merger consideration specified in the merger agreement.
Nortels Chapter 11 Bankruptcy filing and subsequent sale of its enterprise solution business to
Avaya may negatively impact our revenues and/or financial condition.
Nortel filed a voluntary petition for Chapter 11 bankruptcy protection on January 14, 2009. On
July 12, 2010 Nortel filed its plan of reorganization which was essentially a plan of liquidation.
This matter poses a variety of risks to our business, as follows:
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|
|
Uncertainty surrounding Nortels bankruptcy
has significantly dampened demand for equipment in
this product line as existing Nortel customers
evaluate costs and risks associated with
maintaining their commitment to the Nortel platform
and the associated Avaya product roadmap versus
transitioning their installed based to other
manufacturers platform. |
|
|
|
|
We are owed approximately $717,000 in
pre-petition accounts receivable less approximately
$116,000 in approved offsets for amounts we owed to
Nortel at the time of the filing. Nortels July 12
filing classifies our claim as a Class 3 General
Unsecured claim. As such, our claim will be
impaired and any distribution made by Nortel to
Class 3 unsecured creditors will be shared among
such creditors on a pro-rata basis. We do not know
the extent to which this receivable will be
impaired but it is apparent we will not collect the
full amount. If this claim is not collectible in
large part, we could experience material, negative
operating results in the near term. |
|
|
|
|
Avayas purchase of the Nortel enterprise
solution business (NES) may result in a
significant disruption and/or material decline in
our revenues and gross profits. NES is both one of
our major suppliers and is an important customer in
that NES outsources significant volumes of service
calls to us under various managed services programs
that NES has with end-user customers. Avaya and NES
are large, complex companies with global
operations. They have had very different marketing
strategies and both have long, deep cultural
traditions. The integration of these two companies
will be challenging and disruptive to the market.
There can be no assurance given that the
combination of Avaya and NES will not have
near-term and/or long-term material, negative
impact on our operating results, financial
position, market position, and overall reputation. |
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|
ITEM 2. |
|
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. |
None.
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|
|
ITEM 3. |
|
DEFAULTS UPON SENIOR SECURITIES. |
None.
|
|
|
ITEM 5. |
|
OTHER INFORMATION. |
None.
19
Exhibits (filed herewith):
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|
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|
|
SEC Exhibit No. |
|
Description |
|
|
|
|
|
|
2.1 |
|
|
Agreement and Plan of Merger among PAETEC Holding Corp., Hera Corporation and
XETA Technologies, Inc. dated Feburary 8, 2011 (incorporated by reference to Exhibit
2.1 to the Companys Current Report on Form 8-K filed with the U. S. Securities and
Exchange Commission on February 10, 2011). |
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|
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|
|
|
3.1 |
|
|
Amendment to Section 2.1 of the Companys Amended and Restated Bylaws
(incorporated by reference to Exhibit 3.1 to the Companys Current Report on Form 8-K
filed with the U.S. Securities and Exchange Commission on February 10, 2011) |
|
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|
31.1 |
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Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer |
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31.2 |
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Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer |
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|
32.1 |
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Certification of Chief Executive Officer Pursuant to Title 18, United States
Code, Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |
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32.2 |
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|
Certification of Chief Financial Officer Pursuant to Title 18, United States
Code, Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |
20
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.
|
|
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|
|
|
XETA Technologies, Inc.
(Registrant)
|
|
Dated: March 4, 2011 |
By: |
/s/ Greg D. Forrest
|
|
|
|
Greg D. Forrest |
|
|
|
Chief Executive Officer |
|
|
Dated: March 4, 2011 |
By: |
/s/ Robert B. Wagner
|
|
|
|
Robert B. Wagner |
|
|
|
Chief Financial Officer |
|
21
EXHIBIT INDEX
|
|
|
|
|
SEC Exhibit No. |
|
Description |
|
|
|
|
|
|
2.1 |
|
|
Agreement and Plan of Merger among PAETEC Holding Corp., Hera Corporation and
XETA Technologies, Inc. dated Feburary 8, 2011 (incorporated by reference to Exhibit
2.1 to the Companys Current Report on Form 8-K filed with the U. S. Securities and
Exchange Commission on February 10, 2011). |
|
|
|
|
|
|
3.1 |
|
|
Amendment to Section 2.1 of the Companys Amended and Restated Bylaws
(incorporated by reference to Exhibit 3.1 to the Companys Current Report on Form 8-K
filed with the U.S. Securities and Exchange Commission on February 10, 2011) |
|
|
|
|
|
|
31.1 |
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer |
|
|
|
|
|
|
31.2 |
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer |
|
|
|
|
|
|
32.1 |
|
|
Certification of Chief Executive Officer Pursuant to Title 18, United States
Code, Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |
|
|
|
|
|
|
32.2 |
|
|
Certification of Chief Financial Officer Pursuant to Title 18, United States
Code, Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |
22