UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) | |
OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
For the quarterly period ended July 31, 2009
OR
For the quarterly period ended July 31, 2008
OR
o | 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 Street, 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 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). Yes xo No o
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).
Large accelerated filer o |
| Accelerated filer o | ||||
| ||||||
Non-accelerated filer o |
| Smaller reporting company x | ||||
(Do not check if a smaller |
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|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
As of August 31, 2008,28, 2009 there were 10,254,31010,222,861 shares of the registrant’s common stock, par value $0.001, outstandingoutstanding.
PAGE | ||
PART I. FINANCIAL INFORMATION |
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ITEM 1. FINANCIAL STATEMENTS (Unaudited) |
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Consolidated Balance Sheets - July 31, | 3 | |
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4 | ||
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Consolidated Statement of Shareholders’ Equity - For the Nine Months Ended July 31, | 5 | |
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Consolidated Statements of Cash Flows - For the Nine Months Ended July 31, | 6 | |
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7 | ||
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ITEM |
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
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2
XETA TECHNOLOGIES, INC. AND SUBSIDIARY
(UNAUDITED)
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| (UNAUDITED) |
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| July 31, 2008 |
| October 31, 2007 |
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| July 31, 2009 |
| October 31, 2008 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
| $ | 74,177 |
| $ | 402,918 |
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| $ | 2,980,984 |
| $ | 63,639 |
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Current portion of net investment in sales-type leases and other receivables |
| 773,723 |
| 490,033 |
|
| 364,502 |
| 353,216 |
| ||||
Trade accounts receivable, net |
| 23,442,635 |
| 16,236,137 |
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| 11,382,724 |
| 19,995,498 |
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Inventories, net |
| 5,839,652 |
| 4,296,574 |
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| 5,108,844 |
| 5,236,565 |
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Deferred tax asset, net |
| 670,698 |
| 916,259 |
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Deferred tax asset |
| 418,420 |
| 588,926 |
| |||||||||
Prepaid taxes |
| 51,693 |
| 19,737 |
|
| 33,374 |
| 64,593 |
| ||||
Prepaid expenses and other assets |
| 1,276,467 |
| 517,757 |
|
| 1,622,308 |
| 1,608,113 |
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Total current assets |
| 32,129,045 |
| 22,879,415 |
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| 21,911,156 |
| 27,910,550 |
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Noncurrent assets: |
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Goodwill |
| 26,323,411 |
| 26,365,093 |
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| 15,845,869 |
| 26,825,498 |
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Intangible assets, net |
| 219,600 |
| 104,042 |
|
| 729,855 |
| 828,825 |
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Net investment in sales-type leases, less current portion above |
| 118,145 |
| 136,493 |
|
| 358,976 |
| 103,037 |
| ||||
Property, plant & equipment, net |
| 10,736,742 |
| 10,610,820 |
|
| 6,997,784 |
| 10,722,539 |
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Deferred tax asset |
| 213,548 |
| — |
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Other assets |
| 15,563 |
| — |
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| — |
| 2,271 |
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Total noncurrent assets |
| 37,413,461 |
| 37,216,448 |
|
| 24,146,032 |
| 38,482,170 |
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Total assets |
| $ | 69,542,506 |
| $ | 60,095,863 |
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| $ | 46,057,188 |
| $ | 66,392,720 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
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Current liabilities: |
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Current portion of long-term debt |
| $ | 171,123 |
| $ | 171,123 |
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| $ | 1,226,248 |
| $ | 1,354,565 |
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Revolving line of credit |
| 6,109,050 |
| 2,758,660 |
|
| — |
| 2,524,130 |
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Accounts payable |
| 7,652,706 |
| 5,670,240 |
|
| 4,001,866 |
| 6,691,550 |
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Current portion of obligations under capital lease |
| 146,798 |
| — |
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| 152,589 |
| 148,225 |
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Current unearned revenue |
| 3,450,622 |
| 2,212,247 |
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Current unearned service revenue |
| 3,211,064 |
| 3,237,296 |
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Accrued liabilities |
| 4,027,172 |
| 3,565,031 |
|
| 3,526,417 |
| 4,593,725 |
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Total current liabilities |
| 21,557,471 |
| 14,377,301 |
|
| 12,118,184 |
| 18,549,491 |
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Noncurrent liabilities: |
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Long-term debt, less current portion above |
| 1,226,214 |
| 1,354,530 |
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Accrued long-term liability |
| 144,100 |
| 211,300 |
|
| 144,100 |
| 144,100 |
| ||||
Long-term portion of obligations under capital lease |
| 297,743 |
| — |
|
| 145,154 |
| 260,148 |
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Noncurrent unearned service revenue |
| 64,335 |
| 81,650 |
|
| 55,759 |
| 56,393 |
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Noncurrent deferred tax liability, net |
| 5,186,359 |
| 4,631,917 |
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Noncurrent deferred tax liability |
| — |
| 5,545,692 |
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Total noncurrent liabilities |
| 6,918,751 |
| 6,279,397 |
|
| 345,013 |
| 6,006,333 |
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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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| — |
| — |
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Common stock; $.001 par value; 50,000,000 shares authorized, 11,256,193 and 11,233,529 issued at July 31, 2008 and October 31, 2007, respectively |
| 11,256 |
| 11,233 |
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Common stock; $.001 par value; 50,000,000 shares authorized, 11,256,193 issued at July 31, 2009 and October 31, 2008 |
| 11,255 |
| 11,255 |
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Paid-in capital |
| 13,428,126 |
| 13,189,311 |
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| 13,636,544 |
| 13,493,395 |
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Retained earnings |
| 29,834,370 |
| 28,483,280 |
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| 22,126,202 |
| 30,539,714 |
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Less treasury stock, at cost (1,001,883 shares at July 31,2008 and 1,018,788 shares at October 31, 2007) |
| (2,207,468 | ) | (2,244,659 | ) | |||||||||
Less treasury stock, at cost (994,695 shares at July 31, 2009 and 1,001,883 shares at October 31, 2008) |
| (2,180,010 | ) | (2,207,468 | ) | |||||||||
Total shareholders’ equity |
| 41,066,284 |
| 39,439,165 |
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| 33,593,991 |
| 41,836,896 |
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Total liabilities and shareholders’ equity |
| $ | 69,542,506 |
| $ | 60,095,863 |
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| $ | 46,057,188 |
| $ | 66,392,720 |
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The accompanying notes are an integral part of these consolidated balance sheets.financial statements.
3
XETA TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
|
| For the Three Months |
| For the Nine Months |
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| For the Three Months |
| For the Nine Months |
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| Ended July 31, |
| Ended July 31, |
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| Ended July 31, |
| Ended July 31, |
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| 2008 |
| 2007 |
| 2008 |
| 2007 |
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| 2009 |
| 2008 |
| 2009 |
| 2008 |
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Systems sales |
| $ | 10,662,567 |
| $ | 8,657,120 |
| $ | 28,648,487 |
| $ | 23,446,191 |
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| $ | 6,522,569 |
| $ | 10,662,567 |
| $ | 22,897,460 |
| $ | 28,648,487 |
|
Services |
| 12,028,241 |
| 9,463,504 |
| 31,887,653 |
| 27,032,719 |
|
| 10,524,397 |
| 12,028,241 |
| 30,359,279 |
| 31,887,653 |
| ||||||||
Other revenues |
| 512,724 |
| 127,669 |
| 1,428,950 |
| 509,100 |
|
| 136,271 |
| 512,724 |
| 263,126 |
| 1,428,950 |
| ||||||||
Net sales and service revenues |
| 23,203,532 |
| 18,248,293 |
| 61,965,090 |
| 50,988,010 |
|
| 17,183,237 |
| 23,203,532 |
| 53,519,865 |
| 61,965,090 |
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Cost of systems sales |
| 7,846,284 |
| 6,684,447 |
| 21,174,666 |
| 17,919,182 |
|
| 4,639,749 |
| 7,846,284 |
| 16,791,637 |
| 21,174,666 |
| ||||||||
Services costs |
| 8,373,080 |
| 6,557,194 |
| 23,104,061 |
| 19,021,635 |
|
| 7,505,892 |
| 8,373,080 |
| 21,258,445 |
| 23,104,061 |
| ||||||||
Cost of other revenues & corporate COGS |
| 781,806 |
| 477,190 |
| 1,707,157 |
| 1,367,060 |
|
| 425,480 |
| 781,806 |
| 1,308,525 |
| 1,707,157 |
| ||||||||
Total cost of sales and service |
| 17,001,170 |
| 13,718,831 |
| 45,985,884 |
| 38,307,877 |
|
| 12,571,121 |
| 17,001,170 |
| 39,358,607 |
| 45,985,884 |
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Gross profit |
| 6,202,362 |
| 4,529,462 |
| 15,979,206 |
| 12,680,133 |
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| 4,612,116 |
| 6,202,362 |
| 14,161,258 |
| 15,979,206 |
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Operating expenses |
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Selling, general and administrative |
| 4,870,068 |
| 3,705,080 |
| 12,795,830 |
| 10,946,501 |
|
| 4,388,488 |
| 4,870,068 |
| 12,925,794 |
| 12,795,830 |
| ||||||||
Amortization |
| 265,152 |
| 183,721 |
| 722,563 |
| 470,765 |
|
| 344,727 |
| 265,152 |
| 1,001,984 |
| 722,563 |
| ||||||||
Impairment of Goodwill & Other Assets |
| 14,000,000 |
| — |
| 14,000,000 |
| — |
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Total operating expenses |
| 5,135,220 |
| 3,888,801 |
| 13,518,393 |
| 11,417,266 |
|
| 18,733,215 |
| 5,135,220 |
| 27,927,778 |
| 13,518,393 |
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Income from operations |
| 1,067,142 |
| 640,661 |
| 2,460,813 |
| 1,262,867 |
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(Loss) income from operations |
| (14,121,099 | ) | 1,067,142 |
| (13,766,520 | ) | 2,460,813 |
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Interest expense |
| (96,401 | ) | (28,536 | ) | (268,117 | ) | (38,923 | ) |
| (20,810 | ) | (96,401 | ) | (79,211 | ) | (268,117 | ) | ||||||||
Interest and other income |
| 99 |
| 8,729 |
| 27,394 |
| 35,190 |
| |||||||||||||||||
Interest and other income (expense) |
| (1,159 | ) | 99 |
| 14,219 |
| 27,394 |
| |||||||||||||||||
Total interest and other expense |
| (96,302 | ) | (19,807 | ) | (240,723 | ) | (3,733 | ) |
| (21,969 | ) | (96,302 | ) | (64,992 | ) | (240,723 | ) | ||||||||
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Income before provision for income taxes |
| 970,840 |
| 620,854 |
| 2,220,090 |
| 1,259,134 |
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Provision for income taxes |
| 380,000 |
| 244,000 |
| 869,000 |
| 504,000 |
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(Loss) income before provision for income taxes |
| (14,143,068 | ) | 970,840 |
| (13,831,512 | ) | 2,220,090 |
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(Benefit) provision for income taxes |
| (5,544,000 | ) | 380,000 |
| (5,418,000 | ) | 869,000 |
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Net income |
| $ | 590,840 |
| $ | 376,854 |
| $ | 1,351,090 |
| $ | 755,134 |
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Net (loss) income |
| $ | (8,599,068 | ) | $ | 590,840 |
| $ | (8,413,512 | ) | $ | 1,351,090 |
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Earnings per share |
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(Loss) earnings per share |
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Basic |
| $ | 0.06 |
| $ | 0.04 |
| $ | 0.13 |
| $ | 0.07 |
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| $ | (0.84 | ) | $ | 0.06 |
| $ | (0.82 | ) | $ | 0.13 |
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Diluted |
| $ | 0.06 |
| $ | 0.04 |
| $ | 0.13 |
| $ | 0.07 |
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| $ | (0.84 | ) | $ | 0.06 |
| $ | (0.82 | ) | $ | 0.13 |
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Weighted average shares outstanding |
| 10,254,310 |
| 10,214,741 |
| 10,241,861 |
| 10,214,741 |
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| 10,223,753 |
| 10,254,310 |
| 10,223,881 |
| 10,241,861 |
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Weighted average equivalent shares |
| 10,254,310 |
| 10,214,741 |
| 10,246,811 |
| 10,214,741 |
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| 10,223,753 |
| 10,254,310 |
| 10,223,881 |
| 10,246,811 |
|
The accompanying notes are an integral part of these consolidated financial statements.
4
XETA TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(UNAUDITED)
|
| Common Stock |
| Treasury Stock |
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| Shares Issued |
| Par Value |
| Shares |
| Amount |
| Paid-in Capital |
| Retained Earnings |
| Total |
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Balance- October 31, 2007 |
| 11,233,529 |
| $ | 11,233 |
| 1,018,788 |
| $ | (2,244,659 | ) | $ | 13,189,311 |
| $ | 28,483,280 |
| $ | 39,439,165 |
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Stock options exercised $.001 par value |
| 22,664 |
| 22 |
| — |
| — |
| 90,193 |
| — |
| 90,215 |
| |||||
Issuance of restricted common stock |
| — |
| — |
| (16,905 | ) | 37,191 |
| (37,191 | ) | — |
| — |
| |||||
Tax benefit of stock options |
| — |
| — |
| — |
| — |
| 4,032 |
| — |
| 4,032 |
| |||||
Stock based compensation |
| — |
| — |
| — |
| — |
| 181,782 |
| — |
| 181,782 |
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Net Income |
| — |
| — |
| — |
| — |
| — |
| 1,351,090 |
| 1,351,090 |
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Balance- July 31, 2008 |
| 11,256,193 |
| $ | 11,255 |
| 1,001,883 |
| $ | (2,207,468 | ) | $ | 13,428,127 |
| $ | 29,834,370 |
| $ | 41,066,284 |
|
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| Common Stock |
| Treasury Stock |
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| Shares Issued |
| Par Value |
| Shares |
| Amount |
| Paid-in Capital |
| Retained Earnings |
| Total |
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Balance- October 31, 2008 |
| 11,256,193 |
| $ | 11,255 |
| 1,001,883 |
| $ | (2,207,468 | ) | $ | 13,493,395 |
| $ | 30,539,714 |
| $ | 41,836,896 |
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Purchase of treasury stock |
| — |
| — |
| 31,728 |
| (58,157 | ) | — |
| — |
| (58,157 | ) | |||||
Issuance of restricted common stock from treasury |
| — |
| — |
| (38,916 | ) | 85,615 |
| (85,615 | ) | — |
| — |
| |||||
Stock based compensation |
| — |
| — |
| — |
| — |
| 228,764 |
| — |
| 228,764 |
| |||||
Net loss |
| — |
| — |
| — |
| — |
| — |
| (8,413,512 | ) | (8,413,512 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Balance- July 31, 2009 |
| 11,256,193 |
| $ | 11,255 |
| 994,695 |
| $ | (2,180,010 | ) | $ | 13,636,544 |
| $ | 22,126,202 |
| $ | 33,593,991 |
|
The accompanying notes are an integral part of thisthese consolidated financial statement.statements.
5
XETA TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
| For the Nine Months |
| ||||
|
| Ended July 31, |
| ||||
|
| 2008 |
| 2007 |
| ||
Cash flows from operating activities: |
|
|
|
|
| ||
Net income |
| $ | 1,351,090 |
| $ | 755,134 |
|
|
|
|
|
|
| ||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
|
|
|
|
| ||
Depreciation |
| 528,811 |
| 393,304 |
| ||
Amortization |
| 722,563 |
| 470,765 |
| ||
Stock based compensation |
| 181,782 |
| 78,554 |
| ||
Loss (gain) on sale of assets |
| 425 |
| (5,000 | ) | ||
Provision for returns and doubtful accounts receivable |
| 7,924 |
|
|
| ||
Provision for excess and obsolete inventory |
| 76,500 |
| 76,500 |
| ||
Increase in deferred tax liability |
| 600,156 |
| 761,583 |
| ||
Change in assets and liabilities, net of acquisitions: |
|
|
|
|
| ||
Increase in net investment in sales-type leases and other receivables |
| (265,342 | ) | (133,155 | ) | ||
Increase in trade account receivables |
| (7,180,367 | ) | (2,351,832 | ) | ||
(Increase) decrease in inventories |
| (1,590,301 | ) | 577,068 |
| ||
Decrease (increase) in deferred tax asset |
| 245,561 |
| (290,095 | ) | ||
Increase in prepaid expenses and other assets |
| (774,273 | ) | (367,411 | ) | ||
(Increase) decrease in prepaid taxes |
| (31,956 | ) | 6,385 |
| ||
Increase (decrease) in accounts payable |
| 1,982,387 |
| (171,013 | ) | ||
Increase in unearned revenue |
| 1,146,906 |
| 876,757 |
| ||
Increase in accrued liabilities |
| 210,632 |
| 817,952 |
| ||
Total adjustments |
| (4,138,592 | ) | 740,362 |
| ||
|
|
|
|
|
| ||
Net cash (used in) provided by operating activities |
| (2,787,502 | ) | 1,495,496 |
| ||
|
|
|
|
|
| ||
Cash flows used in investing activities: |
|
|
|
|
| ||
Additions to property, plant & equipment |
| (841,549 | ) | (848,326 | ) | ||
Proceeds from sale of property, plant and equipment |
| — |
| 5,000 |
| ||
Net cash used in investing activities |
| (841,549 | ) | (843,326 | ) | ||
|
|
|
|
|
| ||
Cash flows from financing activities: |
|
|
|
|
| ||
Net borrowings (reductions) on revolving line of credit |
| 3,350,390 |
| (642,999 | ) | ||
Principal payments on long-term debt |
| (128,316 | ) | (128,318 | ) | ||
Payments on capital lease obligations |
| (11,979 | ) | — |
| ||
Exercise of stock options |
| 90,215 |
| — |
| ||
Net cash provided by (used in) financing activities |
| 3,300,310 |
| (771,317 | ) | ||
|
|
|
|
|
| ||
Net (decrease) in cash and cash equivalents |
| (328,741 | ) | (119,147 | ) | ||
|
|
|
|
|
| ||
Cash and cash equivalents, beginning of period |
| 402,918 |
| 174,567 |
| ||
Cash and cash equivalents, end of period |
| $ | 74,177 |
| $ | 55,420 |
|
|
|
|
|
|
| ||
Supplemental disclosure of cash flow information: |
|
|
|
|
| ||
Cash paid during the period for interest, net of $161,772 capitalized in 2007 |
| $ | 268,919 |
| $ | 54,234 |
|
Cash paid during the period for income taxes |
| $ | 55,208 |
| $ | 26,159 |
|
Capital lease obligations incurred |
| $ | 456,520 |
| $ | — |
|
|
| For the Nine Months |
| ||||
|
| Ended July 31, |
| ||||
|
| 2009 |
| 2008 |
| ||
Cash flows from operating activities: |
|
|
|
|
| ||
Net (loss) income |
| $ | (8,413,512 | ) | $ | 1,351,090 |
|
|
|
|
|
|
| ||
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: |
|
|
|
|
| ||
Depreciation |
| 722,945 |
| 528,811 |
| ||
Amortization |
| 1,001,983 |
| 722,563 |
| ||
Impairment of Goodwill & Other Assets |
| 14,000,000 |
| — |
| ||
Stock based compensation |
| 219,476 |
| 181,782 |
| ||
Loss on sale of assets |
| 3,764 |
| 425 |
| ||
Provision for returns & doubtful accounts receivable |
| 395,000 |
| 7,924 |
| ||
Provision for excess and obsolete inventory |
| 76,500 |
| 76,500 |
| ||
(Decrease) increase in deferred tax liability |
| (5,504,010 | ) | 600,156 |
| ||
Change in assets and liabilities: |
|
|
|
|
| ||
Increase in net investment in sales-type leases & other receivables |
| (7,440 | ) | (265,342 | ) | ||
Decrease (increase) in trade accounts receivable |
| 8,628,795 |
| (7,180,367 | ) | ||
Decrease (increase) in inventories |
| 295,968 |
| (1,590,301 | ) | ||
(Increase) decrease in deferred tax asset |
| (43,042 | ) | 245,561 |
| ||
Decrease (increase) in prepaid expenses and other assets |
| 109,831 |
| (774,273 | ) | ||
Decrease (increase) in prepaid taxes |
| 31,219 |
| (31,956 | ) | ||
(Decrease) increase in accounts payable |
| (2,739,735 | ) | 1,982,387 |
| ||
(Decrease) increase in unearned revenue |
| (446,734 | ) | 1,146,906 |
| ||
(Decrease) increase in accrued liabilities |
| (408,020 | ) | 210,632 |
| ||
Total adjustments |
| 16,336,500 |
| (4,138,592 | ) | ||
|
|
|
|
|
| ||
Net cash provided by (used in) operating activities |
| 7,922,988 |
| (2,787,502 | ) | ||
|
|
|
|
|
| ||
Cash flows from investing activities: |
|
|
|
|
| ||
Additions to property, plant & equipment |
| (636,586 | ) | (841,549 | ) | ||
Proceeds from sale of assets |
| 5,064 |
| — |
| ||
Acquisitions, net of cash acquired |
| (802,887 | ) | — |
| ||
Investment in capitalized service contracts |
| (750,000 | ) | — |
| ||
Net cash used in investing activities |
| (2,184,409 | ) | (841,549 | ) | ||
|
|
|
|
|
| ||
Cash flows from financing activities: |
|
|
|
|
| ||
Principal payments on debt |
| (128,317 | ) | (128,316 | ) | ||
Net (payments) borrowings on revolving line of credit |
| (2,524,130 | ) | 3,350,390 |
| ||
Payments on capital lease obligations |
| (110,630 | ) | (11,979 | ) | ||
Payments to acquire treasury stock |
| (58,157 | ) | — |
| ||
Exercise of stock options |
| — |
| 90,215 |
| ||
Net cash (used in) provided by financing activities |
| (2,821,234 | ) | 3,300,310 |
| ||
|
|
|
|
|
| ||
Net increase (decrease) in cash and cash equivalents |
| 2,917,345 |
| (328,741 | ) | ||
|
|
|
|
|
| ||
Cash and cash equivalents, beginning of period |
| 63,639 |
| 402,918 |
| ||
Cash and cash equivalents, end of period |
| $ | 2,980,984 |
| $ | 74,177 |
|
|
|
|
|
|
| ||
Supplemental disclosure of cash flow information: |
|
|
|
|
| ||
|
|
|
|
|
| ||
Cash paid during the period for interest |
| $ | 87,523 |
| $ | 268,919 |
|
Cash paid during the period for income taxes |
| $ | 102,095 |
| $ | 55,208 |
|
Capital lease obligations incurred |
| $ | — |
| $ | 456,520 |
|
The accompanying notes are an integral part of these consolidated financial statements.
6
XETA TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
July 31, 20082009
(Unaudited)
1. BASIS OF PRESENTATION:
XETA Technologies, Inc. (“XETA” or the “Company”) is a leading providerintegrator of advanced communications technologies with nationwide sales and service. XETA serves a diverse group of business clients in sales, engineering, project management, installation,implementation, and service support. The Company sells products produced by a variety of manufacturers including Avaya, Inc. (“Avaya”), Nortel Networks Corporation (“Nortel”), and Mitel Corporation (“Mitel”). In addition, the Company manufactures and markets a line of proprietary call accounting systems to the hospitality industry. XETA is an Oklahoma corporation.
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, although the Company believes that the disclosures are adequate to reasonably insure 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 Company’s Annual Report on Form 10-K, Commission File No. 0-16231, which was filed with the Commission on January 7, 2008.23, 2009. Management believes that the financial statements contain all adjustments necessary 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 lodginghospitality system sales. Services revenues represent revenues earned from installing and maintaining systems for customers in both the commercial and lodginghospitality segments. The Company defines commercial system sales as sales to the non-lodgingnon-hospitality industry.
The reporting segments follow the same accounting policies used for the Company’s consolidated financial statements and are described in the Summary of Significant Accounting Policies in the Company’s Form 10-K described above. Company management evaluates a segment’s performance based on gross margins. Assets are not allocated to the segments. Sales outside of the U.S. are immaterial.
The following is a tabulation of business segment information for the three months ended July 31, 20082009 and 2007.2008:
|
| Services |
| Commercial |
| Lodging |
| Other |
| Total |
| |||||
2008 |
|
|
|
|
|
|
|
|
|
|
| |||||
Sales |
| $ | 12,028,241 |
| $ | 8,366,333 |
| $ | 2,296,234 |
| $ | 512,724 |
| $ | 23,203,532 |
|
Cost of sales |
| (8,373,080 | ) | (6,161,782 | ) | (1,684,502 | ) | (781,806 | ) | (17,001,170 | ) | |||||
Gross profit |
| $ | 3,655,161 |
| $ | 2,204,551 |
| $ | 611,732 |
| $ | (269,082 | ) | $ | 6,202,362 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
2007 |
|
|
|
|
|
|
|
|
|
|
| |||||
Sales |
| $ | 9,463,504 |
| $ | 6,522,225 |
| $ | 2,134,895 |
| $ | 127,669 |
| $ | 18,248,293 |
|
Cost of sales |
| (6,557,194 | ) | (5,152,119 | ) | (1,532,328 | ) | (477,190 | ) | (13,718,831 | ) | |||||
Gross profit |
| $ | 2,906,310 |
| $ | 1,370,106 |
| $ | 602,567 |
| $ | (349,521 | ) | $ | 4,529,462 |
|
7
|
| Services |
| Commercial |
| Hospitality |
| Other |
| Total |
| |||||
2009 |
|
|
|
|
|
|
|
|
|
|
| |||||
Sales |
| $ | 10,524,397 |
| $ | 4,032,103 |
| $ | 2,490,466 |
| $ | 136,271 |
| $ | 17,183,237 |
|
Cost of sales |
| (7,505,892 | ) | (2,828,437 | ) | (1,811,312 | ) | (425,480 | ) | (12,571,121 | ) | |||||
Gross profit |
| $ | 3,018,505 |
| $ | 1,203,666 |
| $ | 679,154 |
| $ | (289,209 | ) | $ | 4,612,116 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
2008 |
|
|
|
|
|
|
|
|
|
|
| |||||
Sales |
| $ | 12,028,241 |
| $ | 8,366,333 |
| $ | 2,296,234 |
| $ | 512,724 |
| $ | 23,203,532 |
|
Cost of sales |
| (8,373,080 | ) | (6,161,782 | ) | (1,684,502 | ) | (781,806 | ) | (17,001,170 | ) | |||||
Gross profit |
| $ | 3,655,161 |
| $ | 2,204,551 |
| $ | 611,732 |
| $ | (269,082 | ) | $ | 6,202,362 |
|
The following is a tabulation of business segment information for the nine months ended July 31, 20082009 and 2007.2008:
|
| Services |
| Commercial |
| Hospitality |
| Other |
| Total |
| |||||||||||||||||||||
2009 |
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Sales |
| $ | 30,359,279 |
| $ | 15,608,586 |
| $ | 7,288,874 |
| $ | 263,126 |
| $ | 53,519,865 |
| ||||||||||||||||
Cost of sales |
| (21,258,445 | ) | (11,591,536 | ) | (5,200,101 | ) | (1,308,525 | ) | (39,358,607 | ) | |||||||||||||||||||||
Gross profit |
| $ | 9,100,834 |
| $ | 4,017,050 |
| $ | 2,088,773 |
| $ | (1,045,399 | ) | $ | 14,161,258 |
| ||||||||||||||||
|
| Services |
| Commercial |
| Lodging |
| Other |
| Total |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Sales |
| $ | 31,887,653 |
| $ | 23,171,342 |
| $ | 5,477,145 |
| $ | 1,428,950 |
| $ | 61,965,090 |
|
| $ | 31,887,653 |
| $ | 23,171,342 |
| $ | 5,477,145 |
| $ | 1,428,950 |
| $ | 61,965,090 |
|
Cost of sales |
| (23,104,061 | ) | (17,247,331 | ) | (3,927,335 | ) | (1,707,157 | ) | (45,985,884 | ) |
| (23,104,061 | ) | (17,247,331 | ) | (3,927,335 | ) | (1,707,157 | ) | (45,985,884 | ) | ||||||||||
Gross profit |
| $ | 8,783,592 |
| $ | 5,924,011 |
| $ | 1,549,810 |
| $ | (278,207 | ) | $ | 15,979,206 |
|
| $ | 8,783,592 |
| $ | 5,924,011 |
| $ | 1,549,810 |
| $ | (278,207 | ) | $ | 15,979,206 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
2007 |
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Sales |
| $ | 27,032,719 |
| $ | 17,253,332 |
| $ | 6,192,859 |
| $ | 509,100 |
| $ | 50,988,010 |
| ||||||||||||||||
Cost of sales |
| (19,021,635 | ) | (13,328,915 | ) | (4,590,267 | ) | (1,367,060 | ) | (38,307,877 | ) | |||||||||||||||||||||
Gross profit |
| $ | 8,011,084 |
| $ | 3,924,417 |
| $ | 1,602,592 |
| $ | (857,960 | ) | $ | 12,680,133 |
|
Stock-Based Compensation Plans
The Company accounts for stock-based compensation in accordance with Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”). SFAS No. 123(R) requires companies to measure all employee stock-based compensation awards using a fair value method and recognize compensation cost in its financial statements. The valuation provisions of SFAS 123(R) apply to new awards and to awards that are outstanding at the effective date and subsequently modified or cancelled. The Company adopted on a prospective basis SFAS 123(R) beginning November 1, 2005 for stock-based compensation awards granted after that date and for unvested awards outstanding at that date using the modified prospective application method. The Company recognizes the fair value of stock-based compensation awards as selling, general and administrative expense as appropriate 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:
|
| 2008 |
| 2007 |
|
| 2009 |
| 2008 |
| ||||
Three months ended July 31, |
| $ | 65,221 |
| $ | 30,685 |
|
| $ | 74,878 |
| $ | 65,221 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Nine months ended July 31, |
| $ | 181,782 |
| $ | 78,554 |
|
| $ | 219,476 |
| $ | 181,782 |
|
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
New Accounting Pronouncements
In June 2006,2009 the Financial Accounting Standards Board (“FASB”) issued InterpretationStatement of Financial Accounting Standards No. 48168, “The FASB Accounting Standards Codification (“FIN 48”Codification”), and the Hierarchy of Generally Accepted Accounting for Uncertainty in Income Taxes—an interpretationPrinciples - a replacement of FASB Statement No. 109,162” (“SFAS No. 168”). SFAS No. 168 establishes the Codification as the source of authoritative accounting principles recognized by the FASB to clarify certain aspectsbe applied in the preparation of financial statements in conformity with GAAP. The Codification will supersede existing non-SEC accounting and reporting standards. This
8
Statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009.
In June 2009 the FASB issued Statement of Financial Accounting Standards No. 167, “Amendments to FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities” (“SFAS No. 167”). SFAS No. 167 replaces the quantitative based calculation for determining which variable interest entities have a controlling financial interest with an approach that is expected to be primarily qualitative. The requirement for consolidation will be based on the reporting entity’s ability to direct the activities of the other entity’s economic performance as well as the other entity’s purpose and design. The reporting entity will be required to provide additional disclosures regarding involvement with variable interest entities and any significant changes in risk exposure resulting from that involvement. SFAS No. 167 will be effective for fiscal years beginning after November 15, 2009. The Company does not currently have any variable interest relationships; therefore, the adoption of SFAS No. 167 is not expected to have a material impact on the Company’s financial position or results of operations.
In June 2009 the FASB issued Statement of Financial Accounting Standards No. 166, “Accounting for Transfers of Financial Assets - an amendment of FASB Statement No. 140” (“SFAS No. 166”). SFAS No. 166 amends FASB Statement No. 140 by removing the concept of a qualifying special-purpose entity and modifies the financial-components approach used in that statement. SFAS No. 166 limits the circumstances in which a transferor derecognizes a portion of a financial asset or when the transferor has continuing involvement with the financial asset. The statement establishes conditions for reporting a transfer of a portion of a financial asset as a sale. SFAS No. 166 will be effective for fiscal years beginning after November 15, 2009. The adoption of this statement is not expected to have a material impact on the Company’s financial position or results of operations.
In May 2009 the FASB issued Statement of Financial Accounting Standards No. 165, “Subsequent Events” (“SFAS No. 165”). SFAS No. 165 establishes the general standards of accounting for uncertain tax positions,and disclosures required for events occurring after the balance sheet date but before financial statements are issued or are available to be issued. Under SFAS No. 165 the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet, including issues relatedthe estimates inherent in the process of preparing financial statements, are required to be recognized in the financial statements. Subsequent events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after the balance sheet date but before financial statements are issued or are available to be issued should not be recognized in the financial statements. Subsequent events that are not recognized in the financials statements may need to be disclosed to prevent the financial statements from being misleading. The disclosure should include the nature of event and an estimate of the financial effect or a statement that an estimate cannot be made. SFAS No. 165 is effective for interim and annual financial periods ending after June 15, 2009.
In April 2009 the FASB issued FASB Staff Position (“FSP”) on Financial Accounting Standard No. 115-2 and No. 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments”, which amends the other-than-temporary impairment guidance in U.S. GAAP for debt securities. The intent of the FSP is to provide guidance on the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements; it does not amend existing recognition and measurement guidance related to other-than-temporary impairments of those tax positions.equity securities. The Company adoptedFSP is effective for financial statements issued for interim and annual periods ending after June 15, 2009. The implementation of this interpretationFSP is not expected to have a material impact on November 1, 2007 and there was no impact to the Company’s financial statements.position or results of operations.
In September 2006,April 2009 the FASB issued FSP FAS No. 107-1 and APB No. 28-1, “Interim Disclosures about Fair Value of Financial Instruments”, which requires a company to disclose the fair value of its financial instruments for interim reporting periods. FSP FAS No. 107-1 and APB No. 28-1 is effective for interim periods ending after June 15, 2009.
On November 1, 2008 the Company adopted Statement of Financial Standards No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States, and expands disclosures about fair value measurements. This statement does not require any new fair value
9
measurements; rather, it applies under other accounting pronouncements that require or permit fair value measurements. The provisionsFASB issued FSP SFAS No. 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13, which amends SFAS No. 157 to remove certain leasing transactions from its scope. The FASB issued FSP SFAS No. 157-2, “Effective Date of FASB Statement No. 157”, which delays the effective date of SFAS No. 157 for all non-financial assets and non-financial liabilities, except for items that are effective forrecognized or disclosed at fair value in the financial statements on a recurring basis, until fiscal years beginning after November 15,
8
Table 2008. The FASB issued FSP SFAS No. 157-3, “Determining the Fair Value of Contents
2007.a Financial Asset When the Market for That Asset Is Not Active”, which clarifies the application of SFAS No. 157 in a market that is not active and provides guidance in key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. On April 2009 the FASB issued FSP SFAS No. 157-4, “Determining the Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”, which provides additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased and guidance on identifying circumstances that indicate a transaction is not orderly. FSP SFAS No. 157-4 is effective for interim and periods ending after June 15, 2009. The Company does not expect the adoption of SFAS No. 157 todid not have a material impact on the Company’s consolidated financial position or results of operations.
In December 2007 the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141(R)”). Under SFAS No. 141(R), an entity is required to recognize the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration at their fair value on the acquisition date. It further requires that acquisition-related costs are recognized separately from the acquisition and expensed as incurred, restructuring costs generally be expensed in periods subsequent to the acquisition date, and changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period impact income tax expense. The adoption of SFAS No. 141(R) will change the accounting treatment for business combinations on a prospective basis beginning in the first quarter of fiscal year 2010.
In December 2007 the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51” (“SFAS No. 160”). SFAS No. 160 changes the accounting and reporting for minority interests, which will be recharacterized as non-controlling interests and classified as a component of equity. SFAS No. 160 is effective for us on a prospective basis for business combinations with an acquisition date beginning in the first quarter of fiscal year 2010. As of July 31, 2008,2009, the Company did not have any minority interests,interests; therefore the adoption of SFAS No. 160 is not expected to have an impact on the Company’s consolidated financial statements.
On February 20, 2008 the FASB issued FASB Staff Position (“FSP”) on Financial Accounting Standards No. 140-3, “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions”. The FSP provides guidance on the accounting for a transfer of a financial asset and a repurchase financing. Repurchase financing is a repurchase agreement that relates to a previously transferred financial asset between the same counterparties (or consolidated affiliates of either counterparty), that is entered into contemporaneously with, or in contemplation of, the initial transfer. Under the FSP, a transferor and transferee will not separately account for a transfer of a financial asset and a related repurchase financing unless: (a) the two transactions have a valid and distinct business or economic purpose for being entered into separately; and (b) the repurchase financing does not result in the initial transferor regaining control over the financial asset. An initial transfer of a financial asset and repurchase financing that are entered into contemporaneously with, or in contemplation of, one another shall be considered linked unless all of the following criteria are met at the inception of the transaction:
·The initial transfer and the repurchase financing are not contractually contingent on one another.
·The repurchase financing provides the initial transferor with recourse to the initial transferee upon default.
·The financial asset subject to the initial transfer and repurchase financing is readily obtainable in the marketplace.
·The financial asset and repurchase agreement are not coterminous (the maturity of the repurchase financing must be before the maturity of the financial asset).
10
The FSP is effective for financial statements issued for fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. Earlier application is not permitted. The Company does not currently utilize repurchase financing; therefore, the implementation of this FSP is not expected to have a material impact on the Company’s financial position or results of operations.
In March 2008 the FASB issued SFAS No. 161, “Disclosure about Derivative Instruments and Hedging Activities, an amendment of SFAS No. 133”, (“SFAS No. 161”). This statement requires that objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation. The Company is required to adopt SFAS No. 161 on or before November 1, 2009. The Company currently does not participate in any derivative instruments or hedging activities as defined under SFAS No. 133 and therefore it is unlikely that the adoption of SFAS No. 161 will have any impact on the Company’s consolidated financial statements.
In April 2008 the FASB issued FASB Staff Position on Financial Accounting Standard No. 142-3, “Determination of the Useful Life of Intangible Assets”, which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of intangible assets under SFAS No. 142 “Goodwill and Other Intangible Assets”. The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of the expected cash flows used to measure the fair value of the asset under SFAS No. 141 (revised 2007) “Business Combinations” and other U.S. generally accepted accounting principles. The Company will adopt this FSP in the first quarter of fiscal 2010 and will apply the guidance prospectively to intangible assets acquired after adoption.
In May 2008 the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“FAS No.162”SFAS No. 162”). SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements. SFAS No. 162 isbecame effective 60 dayson November 15, 2008 following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles”. The implementation of this standard willdid not have a material impact on the Company’s consolidated financial position and results of operations.
Goodwill and Other Long-lived Assets
The Company accounts for goodwill under the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). Under SFAS 142, goodwill recorded as a part of a business combination is not amortized, but instead is subject to at least an annual assessment for impairment by applying a fair-value-based test. During the third quarter the Company experienced a continued decline in revenues in its commercial equipment reporting unit due to poor economic conditions and uncertainty regarding Nortel’s product line. Additionally, the Company also experienced a sustained decline in its market capitalization. These factors, taken together, prompted an interim test for impairment. The Company conducted step 1 of its review as of July 31, 2009 and engaged an independent valuation consultant to assist in the formulation of fair values for each of its reporting units. In order to make this assessment, the Company prepared a long-term forecast of the operating results and cash flows associated with the major reporting units of its business. The forecast was prepared to determine the net discounted cash flows associated with each of these units. The Company, with the assistance of its valuation consultant, also developed market-based approaches to estimate the value of its reporting units. These market-based approaches utilize current valuations of businesses similar to the Company’s and apply various valuation techniques to estimate fair value. These estimated income-based and market-based valuations were weighted and the corresponding valuation was then compared to the book value of each of the reporting units. Making this assessment requires a great deal of judgment, including the growth rates of various business lines, gross margins, operating margins, discount rates, and the capital expenditures needed to support the projected growth in revenues. The valuation consultant engaged to assist in this evaluation examined additional data regarding competitors and market conditions which also required a great amount of subjectivity and assumptions. The methodologies used in this interim analysis were consistent with the methodologies and valuation techniques used in past impairment assessments. Based on completion of step 1 of the analysis, management determined that the carrying value of the commercial equipment reporting unit was greater than its estimated fair value and therefore an impairment of the goodwill associated with this unit exists.
11
Management has estimated the impairment to be between $9 million and $13 million and an impairment charge of $11.0 million was recorded in the third fiscal quarter representing the Company’s best estimate of the probable impairment at this time. The Company will adjust the impairment charge, if necessary, after completing step two of its impairment test in connection with its next periodic report filing with the Securities and Exchange Commission.
In accordance with FASB Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” an impairment loss on long-lived assets used in operations is recorded when events and circumstances indicate that the carrying amount of the asset may not be recoverable. During the third fiscal quarter, it was determined that certain identifiable assets related to our Oracle ERP platform were impaired because the Company estimates that full cost of the system cannot be reasonably recovered based on near-term projected financial results. An impairment charge of $3.0 million was recorded as of July 31, 2009 to reduce the Company’s carrying value of this asset to the mid-point of management’s estimate of the replacement cost of an ERP system that would be adequate for the Company’s current and near-term operating needs.
2. ACCOUNTS RECEIVABLE:
Accounts receivable consistsconsist of the following:
|
| July 31, |
| (Audited) |
| ||
|
|
|
|
|
| ||
Trade receivables |
| $ | 23,597,028 |
| $ | 16,411,981 |
|
Less reserve for doubtful accounts |
| (154,393 | ) | (175,844 | ) | ||
Net trade receivables |
| $ | 23,442,635 |
| $ | 16,236,137 |
|
|
| July 31, |
| (Audited) |
| ||
|
|
|
|
|
| ||
Trade accounts receivables |
| $ | 11,938,936 |
| $ | 20,188,378 |
|
Less reserve for doubtful accounts |
| (556,212 | ) | (192,880 | ) | ||
Net trade accounts receivables |
| $ | 11,382,724 |
| $ | 19,995,498 |
|
9
TableOn January 14, 2009 Nortel filed for bankruptcy protection in the United States. The administrators of Contentsthe bankruptcy have adopted a business disposal strategy. Under this strategy, the administrators have segmented Nortel into three business units: Virtual Service Switches, CDMA businesses and Enterprise Solutions. We conduct all of our Nortel business through the Enterprise Solutions unit. On July 21, 2009, the administrators of the bankruptcy announced they had entered into a stalking horse assets and share sale agreement with Avaya for the Enterprise Solutions unit and this process is proceeding. Due to the nature of the stalking horse auction process, a final determination of the purchaser of the Enterprise Solutions unit is not expected until near the end of our fiscal year. At the time of Nortel’s filing, they owed approximately $685,000 for services rendered under the Company’s wholesale managed services program in which the Company is engaged by Nortel to provide field technical services to Nortel’s end-user customers. At the time of filing this Form 10-Q the deadline for filing a plan of reorganization was September 11, 2009, but this date is subject to extension. Until Nortel files its reorganization plan; our ability to assess the probability of recovering pre-petition amounts due is limited. As of July 31, 2009 we have recorded $350,000 as a reserve against possible bad debts. On July 17, 2009 the bankruptcy court granted the Company’s request for offset of $116,000 in charges the Company owed Nortel at the time of the filing. We are following developments in the bankruptcy case and will assert our available legal rights and defenses when appropriate.
3. INVENTORIES:
Inventories are stated at the lower of cost (first-in, first-out or average) or market and consist of the following:
|
| July 31, |
| (Audited) |
|
| July 31, |
| (Audited) |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Finished goods and spare parts |
| $ | 6,709,559 |
| $ | 5,068,227 |
|
| $ | 6,010,738 |
| $ | 6,084,830 |
|
Less- reserve for excess and obsolete inventories |
| (869,907 | ) | (771,653 | ) |
| (901,894 | ) | (848,265 | ) | ||||
Total inventories, net |
| $ | 5,839,652 |
| $ | 4,296,574 |
|
| $ | 5,108,844 |
| $ | 5,236,565 |
|
12
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following:
|
| Estimated |
| July 31, |
| (Audited) |
| ||
|
|
|
|
|
|
|
| ||
Building and building improvements |
| 3-20 |
| $ | 2,927,261 |
| $ | 2,686,753 |
|
Data processing and computer field equipment |
| 2-7 |
| 3,169,779 |
| 2,556,878 |
| ||
Software development costs, work-in-process |
| N/A |
| 2,291,619 |
| 3,792,567 |
| ||
Software development costs of components placed into service |
| 3-10 |
| 6,275,087 |
| 4,355,953 |
| ||
Hardware |
| 3-5 |
| 605,876 |
| 599,751 |
| ||
Land |
| — |
| 611,582 |
| 611,582 |
| ||
Office furniture |
| 5-7 |
| 944,048 |
| 947,094 |
| ||
Auto |
| 5 |
| 516,185 |
| 539,184 |
| ||
Other |
| 3-7 |
| 239,533 |
| 239,533 |
| ||
|
|
|
|
|
|
|
| ||
Total property, plant and equipment |
|
|
| 17,580,970 |
| 16,329,295 |
| ||
Less- accumulated depreciation |
|
|
| (6,844,228 | ) | (5,718,475 | ) | ||
|
|
|
|
|
|
|
| ||
Total property, plant and equipment, net |
|
|
| $ | 10,736,742 |
| $ | 10,610,820 |
|
Interest costs related to an investment in long-lived assets are capitalized as part of the cost of the asset during the period the asset is being prepared for use. The Company capitalized $161,772 in interest costs in the nine months ended July 31, 2007.
|
| Estimated |
| July 31, |
| (Audited) |
| ||
|
|
|
|
|
|
|
| ||
Building and building improvements |
| 3-20 |
| $ | 3,119,404 |
| $ | 3,054,563 |
|
Data processing and computer field equipment |
| 2-7 |
| 3,225,850 |
| 3,351,229 |
| ||
Software development costs, work-in-process |
| N/A |
| 220,911 |
| 2,069,234 |
| ||
Software development costs of components placed into service |
| 3-10 |
| 2,619,700 |
| 6,631,805 |
| ||
Computer hardware |
| 3-5 |
| 631,848 |
| 615,657 |
| ||
Land |
| — |
| 611,582 |
| 611,582 |
| ||
Office furniture |
| 5-7 |
| 779,588 |
| 944,048 |
| ||
Auto |
| 5 |
| 502,521 |
| 516,185 |
| ||
Other |
| 3-7 |
| 293,938 |
| 239,533 |
| ||
|
|
|
|
|
|
|
| ||
Total property, plant and equipment |
|
|
| 12,005,342 |
| 18,033,836 |
| ||
Less- accumulated depreciation and amortization |
|
|
| (5,007,558 | ) | (7,311,297 | ) | ||
|
|
|
|
|
|
|
| ||
Total property, plant and equipment, net |
|
|
| $ | 6,997,784 |
| $ | 10,722,539 |
|
5. INCOME TAXES:
The Company has recorded a tax provision of $869,000 or 39% and $504,000 or 40% forreflects the nine months ended July 31, 2008 and 2007, respectively, reflecting the statutory federaleffective Federal tax rate of 34% plus a blendedthe composite state income tax rate of approximately 5% and the impact ofrates adjusted for states that require minimum income tax payments in certain states. The Company currently estimates its annual effective incomeeven if tax losses are incurred. Generally, we expect our tax provision rate for fiscal 2008 atto be approximately 40%.
10The tax effect of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:
|
| July 31, |
| (Audited) |
| ||
Deferred tax assets: |
|
|
|
|
| ||
Net operating loss carryforward |
| $ | 1,889,299 |
| $ | 1,158,195 |
|
Currently nondeductible reserves |
| 555,173 |
| 353,000 |
| ||
Accrued liabilities |
| 451,458 |
| 172,258 |
| ||
Prepaid service contracts |
| 34,895 |
| 43,547 |
| ||
Stock based compensation expense |
| 230,559 |
| 144,525 |
| ||
Other |
| 33,067 |
| 29,488 |
| ||
Total deferred tax asset |
| 3,194,451 |
| 1,901,013 |
| ||
|
|
|
|
|
| ||
Deferred tax liabilities: |
|
|
|
|
| ||
Intangible assets |
| 1,219,942 |
| 5,051,498 |
| ||
Depreciation |
| 675,945 |
| 1,788,933 |
| ||
Other |
| 643,936 |
| — |
| ||
Tax income to be recognized on sales-type lease contracts |
| 22,660 |
| 17,348 |
| ||
Total deferred tax liability |
| 2,562,483 |
| 6,857,779 |
| ||
Net deferred tax asset (liability) |
| $ | 631,968 |
| $ | (4,956,766 | ) |
13
|
| July 31, |
| (Audited) |
| ||
Net deferred asset (liability) as presented on the balance sheet: |
|
|
|
|
| ||
Current deferred tax asset |
| $ | 418,420 |
| $ | 588,926 |
|
Noncurrent deferred tax asset (liability) |
| 213,548 |
| (5,545,692 | ) | ||
Net deferred tax asset (liability) |
| $ | 631,968 |
| $ | (4,956,766 | ) |
The tax effect of impairment charges recognized as of July 31, 2009 resulted in a decrease in noncurrent deferred tax liabilities of approximately $5.5 million. For tax purposes the Company is amortizing its goodwill balances over a statutory life of 15 years. The combination of these tax deductions and lower levels of taxable income generated from operations in recent years has created net operating losses that are reflected in the Company’s balance sheet as deferred tax assets. Management believes that future operating income will be sufficient to realize these loss carryforwards and that no valuation allowance is required.
6. CREDIT AGREEMENTS:
The Company’sCompany has a credit facility consists of a revolving line of credit and term loan with a commercial bank. The agreementbank that includes a mortgage that matures on September 30, 2009 with amortization based on a 13-year life,term loan and a $7.5 million revolving line of credit. The facility matures on September 30, 2009. The term loan, which is collateralized with a first mortgage on the Broken Arrow, Oklahoma, headquarters, amortizes based on a 13 year life. The revolving line of credit agreementis used to finance growth in working capital needs. Tradeand is collateralized by qualifying trade accounts receivable and inventories collateralize the revolving line of credit.inventories. The Company had approximately $6.109 millionis in discussions with several lenders, including its existing lender, to establish a new credit facility and $2.759 million, respectively,expects to have a new agreement established prior to the expiration of its current agreement.
At July 31, 2009 the Company did not have an outstanding balance on the revolving line of credit.credit and had approximately $2.524 million outstanding at October 31, 2008. The Company had approximately $1.4$5.2 million available under the revolving line of credit at July 31, 2008.2009. Advance rates are defined in the agreement, but are generally at the rate of 80% on qualified trade accounts receivable and 40% of qualified inventories. The revolving line of credit matures on September 30, 2009. Long-termLong term debt consisted of the following:
|
| July 31, |
| (Audited) |
|
| July 31, |
| (Audited) |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Real estate term note, payable in monthly installments of $14,257 plus interest, plus a fixed payment of $1,198,061 due September 30, 2009, collateralized by a first mortgage on the Company’s building |
| $ | 1,397,337 |
| $ | 1,525,653 |
| |||||||
Term note, payable in monthly installments of $14,257 plus interest, plus a fixed payment of $1,198,061 due September 30, 2009, collateralized by a first mortgage on the Company’s building |
| $ | 1,226,248 |
| $ | 1,354,565 |
| |||||||
|
|
|
|
|
|
|
|
|
|
| ||||
Less-current maturities |
| 171,123 |
| 171,123 |
|
| 1,226,248 |
| 1,354,565 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Total long-term debt, less current maturities |
| $ | 1,226,214 |
| $ | 1,354,530 |
|
| $ | — |
| $ | — |
|
Interest on all outstanding debt under the credit facility accrues at either a) the London Interbank Offered Rate (2.461%(“LIBOR”) (0.279% at July 31, 2008)2009) plus 1.25% to 2.75% depending on the Company’s funded debt to cash flow ratio, or b) the bank’s prime rate (5.0%(3.25% at July 31, 2008)2009) minus 0% to minus 1.125% also depending on the Company’s funded debt to cash flow ratio. At July 31, 2008,2009 the Company was paying 4.125%2.875% on the revolving line of credit borrowings and 4.211%3.00% on the mortgage.mortgage note. 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 capital spending, and debt service coverage requirements. At July 31, 2009, the Company was either in compliance with the covenants of the credit facility or had received the appropriate waivers from its bank.
14
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 July 31, 2008 |
|
| For the Three Months Ended July 31, 2009 |
| ||||||||||||
|
| Income |
| Shares |
| Per Share |
|
| Income |
| Shares |
| Per Share |
| ||||
Basic EPS |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income |
| $ | 590,840 |
| 10,254,310 |
| $ | 0.06 |
| |||||||||
Net loss |
| $ | (8,599,068 | ) | 10,223,753 |
| $ | (0.84 | ) | |||||||||
Dilutive effect of stock options |
|
|
| — |
|
|
|
|
|
| — |
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Diluted EPS |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income |
| $ | 590,840 |
| 10,254,310 |
| $ | 0.06 |
| |||||||||
Net loss |
| $ | (8,599,068 | ) | 10,223,753 |
| $ | (0.84 | ) |
|
| For the Three Months Ended July 31, 2007 |
|
| For the Three Months Ended July 31, 2008 |
| ||||||||||||
|
| Income |
| Shares |
| Per Share |
|
| Income |
| Shares |
| Per Share |
| ||||
Basic EPS |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income |
| $ | 376,854 |
| 10,214,741 |
| $ | 0.04 |
|
| $ | 590,840 |
| 10,254,310 |
| $ | 0.06 |
|
Dilutive effect of stock options |
|
|
| — |
|
|
|
|
|
| — |
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Diluted EPS |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income |
| $ | 376,854 |
| 10,214,741 |
| $ | 0.04 |
|
| $ | 590,840 |
| 10,254,310 |
| $ | 0.06 |
|
11
|
| For the Nine Months Ended July 31, 2009 |
| ||||||
|
| Income |
| Shares |
| Per Share |
| ||
Basic EPS |
|
|
|
|
|
|
| ||
Net loss |
| $ | (8,413,512 | ) | 10,223,881 |
| $ | (0.82 | ) |
Dilutive effect of stock options |
|
|
| — |
|
|
| ||
|
|
|
|
|
|
|
| ||
Diluted EPS |
|
|
|
|
|
|
| ||
Net loss |
| $ | (8,413,512 | ) | 10,223,881 |
| $ | (0.82 | ) |
|
| For the Nine Months Ended July 31, 2008 |
| ||||||
|
| Income |
| Shares |
| Per Share |
| ||
Basic EPS |
|
|
|
|
|
|
| ||
Net income |
| $ | 1,351,090 |
| 10,241,861 |
| $ | 0.13 |
|
Dilutive effect of stock options |
|
|
| 4,950 |
|
|
| ||
|
|
|
|
|
|
|
| ||
Diluted EPS |
|
|
|
|
|
|
| ||
Net income |
| $ | 1,351,090 |
| 10,246,811 |
| $ | 0.13 |
|
|
| For the Nine Months Ended July 31, 2007 |
|
| For the Nine Months Ended July 31, 2008 |
| ||||||||||||
|
| Income |
| Shares |
| Per Share |
|
| Income |
| Shares |
| Per Share |
| ||||
Basic EPS |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income |
| $ | 755,134 |
| 10,214,741 |
| $ | 0.07 |
|
| $ | 1,351,090 |
| 10,241,861 |
| $ | 0.13 |
|
Dilutive effect of stock options |
|
|
| — |
|
|
|
|
|
| 4,950 |
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Diluted EPS |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income |
| $ | 755,134 |
| 10,214,741 |
| $ | 0.07 |
|
| $ | 1,351,090 |
| 10,246,811 |
| $ | 0.13 |
|
Options to purchase 1,269,900 shares of common stock at an average exercise price of $6.42 and 1,029,500 shares of common stock at an average exercise price of $7.28 and 978,668 shares of common stock at an average exercise price of $7.00 were not included in the computation of diluted earnings per share for the three months ended July 31, 20082009 and 2007,2008, respectively, because inclusion of these options would be antidilutive. Options to purchase 1,269,900 shares of common stock at
15
an average exercise price of $6.42 and 844,900 shares of common stock at an average exercise price of $8.08 and 1,068,668 shares of common stock at an average exercise price of $6.69 were not included in the computation of diluted earnings per share for the nine months ended July 31, 20082009 and 2007,2008, 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 $443,839$291,666 at July 31, 2008.2009. Accumulated amortization of the leased equipmentlicenses at July 31, 20082009 was $12,681.$168,854. Amortization of assets under the capital lease is included in depreciation expense. The future minimum lease payments required under the capital lease and the present value of the net minimum lease payments as of July 31, 2008,2009, are as follows:
|
| Capital |
|
| Capital |
| ||
|
|
|
|
|
|
| ||
1 Year |
| $ | 161,435 |
|
| $ | 161,435 |
|
2 Years |
| 161,435 |
|
| 147,982 |
| ||
3 Years |
| 147,982 |
| |||||
Total minimum lease payments |
| 470,852 |
|
| 309,417 |
| ||
Less- imputed interest |
| 26,311 |
|
| 11,674 |
| ||
Present value of minimum payments |
| 444,541 |
|
| 297,743 |
| ||
Less-current maturities of capital lease obligation |
| 146,798 |
|
| 152,589 |
| ||
Long-term capital lease obligation |
| $ | 297,743 |
|
| $ | 145,154 |
|
129. SUBSEQUENT EVENTS:
The Company evaluated subsequent events through August 28, 2009. The Company is not aware of any significant events that occurred subsequent to the balance sheet date but prior to the filing of this report that would have a material impact on our financial position or results of operations.
16
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Preliminary Note Regarding Forward-Looking Statements
In the following discussion, we make forward-looking statements aboutconcerning future performance, events performance and results. SuchOther than purely historical statements, all others are not guarantees of performance, but rather reflect our current expectations, estimates, and forecasts about the industry and markets where we operate.likely forward-looking. Forward-looking statements generally include words such as “expects,” “anticipates,” “may”,“may,” “plans,” “believes,” “intends,” “projects,” “estimates,” “targets,” “may,” “should” and similar words or expressions. Such statements reflect our perspective on the industry and markets in which we operate. Any statements containing estimates and forecasts are not guarantees of performance, but rather, our assumptions and beliefs based upon information currently available to us. These statements are subject to risks and uncertainties that are difficult to predict or are beyond our control, such as customer demand for advanced communications products; an uncertain,control. Examples of these risks include: the condition of U.S. economy and its impact on capital spending trends within our market; our ability to successfully developspending; reduced availability of credit; the Mitel product and services offering;Nortel Networks bankruptcy filing; the financial condition of our suppliers and changes in their distribution strategies and support; technological changes; fluctuating marginsour ability to maintain and improve current gross profit margins; unpredictable quarter to quarter revenues; continuing market success of the Mitel product mix; failure to expandand services offerings; intense competition; industry consolidation; our dependence upon a few large wholesale service relationships; thecustomers in our Managed Services offering; and our ability to attract and retain highly skilled personneltalented sales, operational and technical competencies; and intense competition.personnel. These and other risks and uncertainties are discussed under the heading “Risk Factors” under Part I of the Company’s Form 10-K for the fiscal year ended October 31, 20072008 (filed with the Commission on January 7, 2008)23, 2009), and in updates to such risk factors set forth in Item 1A of Part II of this quarterly report and our quarterly reports for the first and second quarter ofduring fiscal 2008.2009. Because of these risks and uncertainties, actual results may differ materially and adversely from those expressed in forward-looking statements. Consequently, we caution investors to read and consider all forward-looking statements in conjunction with such risk factors and uncertainties. The Private Securities Litigation Reform Act of 1995 provides a safe-harbor for forward-looking statements made by the Company.
Strategy.
In fiscal 2008, we haveDuring the third quarter management continued to lead execution of the five primary strategies identified at the outset of fiscal 2009. These strategies include: continue to acquire market share through targeted sales activities; take advantage of Avaya’s new channel-centric go-to-market strategy; focus on three primary strategies: acquire, penetrate,fast growing applications such as unified communications; focus on industry verticals such as hospitality, healthcare and retaineducation; and augment growth through targeted customers; expand our wholesale service offerings;acquisitions.
In addition to monitoring trends in order rates and improve organizational alignmentholding discussions with customers, management also monitors macroeconomic conditions, sales trends among our major business partners.suppliers, and sales activity across the communications industry. Based on information derived from these activities, management believes that market conditions will remain challenging for the fourth fiscal quarter and perhaps beyond. As such, in the third quarter management developed and executed a multi-pronged cost reduction plan designed to align sales and operating costs with market conditions.
The reductions were carefully designed to aggressively reduce costs, while preserving the key resources necessary to fully realize growth opportunities as the market recovers. The beneficial effects of these actions were only partially realized in the third quarter. Management anticipates the full benefit of these measures will materialize in the fourth quarter, and into next fiscal year.
Our sales efforts target large, multi-location, national, or super-regional customers. Our national technical footprintthird quarter financial results reflect an impairment charge on goodwill and 24/7/365 contact center are complimentaryother assets of $14.0 million. Poor economic conditions and uncertainty regarding Nortel’s product line contributed to the communication needs of these customers. Additionally, these larger enterprises often have a mixture of manufacturer platforms within their communications equipment portfolio and our ability to sell and service both the Avaya and Nortel product lines is an important competitive advantage. Becausecontinued deterioration of our extensive arraycommercial equipment business. Additionally, we experienced a sustained decline in our market valuation. These factors, taken together, prompted a review of productsthe value of goodwill and services,certain other long-lived assets. Through applying the applicable accounting rules, we enjoy multiple sales opportunities with these customers, including new product sales, implementationdetermined that the carrying cost of advanced applications,our Oracle ERP would not be recovered over the near term and that a varietywrite-down of potential service relationships. Oncethat asset to its estimated replacement cost was appropriate. Accordingly, we establishrecorded a relationship with a customer,$3.0 million impairment on this asset. Likewise, we search for opportunities to penetrate deeper intoconducted step one of the account by assessingimpairment test on goodwill and determined that the customer’s communications needs, proposing appropriate technologies, establishing or expanding the service relationship, and proposing equipment and service solutions to other divisions or subsidiaries.carrying
We launched our wholesale service offering in fiscal 2006 and its success has been a key contributor to our growth in recurring revenue. Under this service offering, we collaborate with manufacturers, network service providers and systems integrators to provide services to their end-user customers. In many instances, we provide field resources to carry out service responsibilities. However, under a full outsourcing arrangement we may provide a broader range of services, including call center support, remote technical support, on-site labor and spare parts. Our entry into the wholesale services market has succeeded because of excellent service to end-user customers and our willingness to create and execute flexible service programs and billing arrangements. The continued success of this strategic initiative is a vital ingredient to our long-term goal of shifting our revenue mix toward more recurring services revenues.
Finally, we strive to align our Company’s sales, marketing, and services programs with those of our manufacturing partners. Avaya and Nortel approach the communications technology market differently and therefore we have assigned separate executive sales management to each manufacturer’s products and services. Our Avaya sales and marketing efforts focus on partnering with Avaya’s national sales force to sell equipment to large and medium sized enterprises and to sell Avaya implementation and post-warranty
1317
maintenance contracts. Our Nortel initiatives focus on creating relationships with Nortel’s regional sales managementvalue of goodwill is estimated to sell equipmentbe impaired between $9.0 million and applications. In addition,$13.0 million. Accordingly, we workrecorded an impairment charge of $11.0 million as our best estimate of the impairment at the time of filing this report. We will adjust the impairment charge, if necessary, after completing step two of the impairment test during our fourth fiscal quarter. These items are discussed in additional detail in “Results of Operations” below and in Note 1 to deepen our relationships with key Nortel services decision makers to create wholesale service offerings for large Nortel end-users. Since starting this initiative in late fiscal 2006, we have improved our relationships and penetration with both Nortel and Avaya, resulting in a demonstrable increase in equipment and services revenues.the Consolidated Condensed Financial Statements above.
In early fiscal 2008 we became a dealer for Mitel, selling theirApril 2009 XETA purchased the assets of Summatis Communications, LLC (“Summatis”) located in Southboro, MA. Summatis provides communications systemssolutions, integration and maintenance services primarily to smaller propertiestargeted at the Nortel product line. The acquisition strengthens our presence in the hospitality market thereby opening up a new segmentnortheastern U.S. and adds to our Nortel competencies. While the acquisition is not material to our financial position or results of operations, it represents an incremental step in our overall acquisitions strategy.
On January 14, 2009 Nortel Networks Corporation filed for bankruptcy protection in the United States Bankruptcy Court for the District of Delaware. The administrators of the marketbankruptcy have adopted a business disposal strategy. Under this strategy, the administrators have segmented Nortel into three business units: Virtual Service Switches, CDMA businesses and Enterprise Solutions. We conduct all of our Nortel business through the Enterprise Solutions unit. On July 21, 2009, the administrators of the bankruptcy announced they had entered into a stalking horse assets and share sale agreement with Avaya for us. Additionally, the Mitel product line provides us an opportunityEnterprise Solutions unit and this process is proceeding. Due to serve certain hotel chainsthe nature of the stalking horse auction process, a final determination of the purchaser of the Enterprise Solutions unit is not expected until near the end of our fiscal year. Nortel is one of our major suppliers and represents a significant portion of our business. As such this filing is of considerable concern. At the time of filing this Form 10-Q, our post-petition relationship with Nortel continues without interruption. However, management companies who have standardizedrecognizes the potential impact of Nortel’s filing on the Mitel platform.Company’s financial performance (see Item 1A. “Risk Factors” below). Nortel owes XETA approximately $685,000 in pre-petition accounts receivable. Presently, Nortel has until September 11, 2009 to file its reorganization plan. However, this date is subject to further extension. Until a plan of reorganization is filed, our ability to assess the probability of recovering pre-petition amounts due is limited. On July 17, 2009 the bankruptcy court granted our request for offset of $116,000 in charges we owed Nortel at the time of the filing. As of July 31, 2009 we have recorded $350,000 as a reserve against possible Nortel bad debts. We are following developments in the bankruptcy case and will assert our legal rights and defenses as appropriate.
Operating Summary.
In the third quarter of fiscal 20082009 we earnedrecorded a net loss of $8.6 million on revenues of $17.2 million compared to net income of $591,000 on revenues of $23.2 million compared to net incomein the third quarter of $377,000 on revenueslast year. Excluding the $14.0 million impairment charge and related tax benefit of $18.2$5.5 million in the third fiscal quarter, of last year.our non-GAAP net loss was $87,000. For the first nine months of fiscal 2008,2009 we earned $1.351recorded a net loss of $8.4 million in net income on revenues of $61.9$53.5 million compared to net income of $755,000$1.4 million on revenues of $51.0$62.0 million. TheseExcluding the impairment charge and tax benefit, our non-GAAP net income for the first nine months of fiscal 2009 was $98,000. Apart from the impairment charges to goodwill and our Oracle ERP system which are discussed in more detail above, these results primarily reflect the successful execution of our strategies discussed abovechallenging market conditions stemming from the ongoing macroeconomic contraction and the associated decline in demand for commercial systems. We discuss this and other contributing factors such as our large equipment and implementation project with the Miami Dade County Public School system (“M-DCPS”) system all of which are discussed in more detail under “Results of Operations” below.
Financial Position Summary.
Since October 31, 2007,2008 we have generated positive cash flows from operations of $7.9 million, primarily through the collections of accounts receivable. We have used these cash flows to reduce borrowings and have improved our working capital increased approximately 24%5%. This is due in part to the receivables associated with the M-DCPS project that have grown rapidly due to the complex procedures required to collect the funds from both the school district and the Federal agency that administers the project funding . The growth in these receivables has resulted in increased borrowings on our working capital revolver in fiscal 2008. We discuss these and other financial items in more detail under “Financial Condition” below.
The following discussion presents additional information regarding our financial condition and results of operations for the three- and nine-month periods ended July 31, 20082009 and 20072008 and should be considered in conjunction with our above comments as well as the “Risk Factors” section below.
Cash used by operations for the nine months ended July 31, 2008 was $2.8 million. As stated above, the complex and lengthy procedures required to collect funds on the M-DCPS project has resulted in higher than expected growth in accounts receivable and increased short-term borrowing on our revolving credit facility. The M-DCPS project is jointly funded by the school district and the Federal Government. Generally, the school district pays ten percent (10%) of the project plus amounts for certain equipment and services not covered by the program and the federal government pays approximately ninety percent (90%) of the qualifying expenditures. Under the rules of the program, the Universal Service Administration Company which is the agency tasked with administering this program, cannot release funding until they receive proof of payment from the school district. These requirements have extended the collection period on these projects beyond our original expectations. The collection of these accounts is not in question and we are regularly receiving payments on projects, however we do not expect collection of all the proceeds until well into the first quarter of fiscal 2009.
In addition to the cash used by operations, we invested approximately $842,000 in capital projects, including $417,000 in equipment and fixtures, as part of our normal replacement and refurbishment cycles. Additionally, we invested $424,000 in the continued implementation of Oracle’s eBusiness Suite. Early in the second fiscal quarter of fiscal 2008, we completed the cutover of the last major functional module to the Oracle platform. During the remainder of fiscal 2008, we expect to implement additional features, including sales management, customer relationship management and an online service ticket creation and tracking system.
At July 31, 2008 our total borrowings were $7.5 million, consisting of a mortgage on our headquarters building of $1.4 million and $6.1 million due on our revolving line of credit. At July 31, 2008 there was $1.4 million
1418
available under
During the revolver to meetfirst three fiscal quarters of 2009 our working capital needs.increased by 5% to $9.8 million. We believe that the current amountgenerated $7.9 million in cash flows from operations. These cash flows included a decrease in accounts receivable of $8.6 million and a decrease in inventory of $296,000. These increases were partially offset by a decrease in deferred tax liabilities of $5.5 million; a decrease in accounts payable of $2.7 million; a decrease in accrued liabilities of $408,000; and other changes in working capital available underitems, which netted a decrease in cash of $356,000. The impairment charge to goodwill and other assets of $14.0 million did not impact cash flows in the period. Other Non-cash charges included amortization of $1.0 million; depreciation of $723,000; provisions for doubtful accounts receivable and obsolete inventories of $471,000; stock-based compensation of $219,000; and a loss on the sale of assets of $4,000.
We used these positive cash flows to reduce borrowings on our revolvingworking capital line of credit is sufficientby $2.5 million; to meet our needs for the remaindermake asset purchases of fiscal 2008. In addition, we believe that should the need arise, we could arrange supplemental short-term financing under acceptable terms and prices.
The table below presents our contractual obligations at July 31, 2008capitalized hospitality service contracts as well as payment obligations over the next five years:certain net assets of Summatis, together totaling $1.53 million; acquire capital assets of $636,000; reduce our mortgage balance through scheduled principal payments by $128,000; and fund other financing and investing activities of $169,000. The acquisition of capital assets included $414,000 spent as part of normal replacement of our Information Technology infrastructure and headquarters facility improvements. The remaining $222,000 was spent on our Oracle ERP implementation.
|
|
|
| Payments due by period |
| ||||||||
|
| Total |
| Less than |
| 2 – 3 |
| 4 – 5 |
| ||||
Contractual Obligations |
|
|
|
|
|
|
|
|
| ||||
Long-term debt |
| $ | 1,461,453 |
| $ | 226,680 |
| $ | 1,234,773 |
| $ | — |
|
Capital lease |
| 470,852 |
| 161,435 |
| 309,417 |
| — |
| ||||
Operating leases |
| 541,650 |
| 299,110 |
| 241,580 |
| 960 |
| ||||
Total |
| $ | 2,473,955 |
| $ | 687,225 |
| $ | 1,785,770 |
| $ | 960 |
|
At July 31, 2009 there were no outstanding draws on our working capital revolver. Based on the collateral base defined in the credit facility, there was $5.2 million available for borrowing on the $7.5 million facility at the end of the quarter and our cash balance was $3.0 million. We believe our cash balances and available borrowing capacity are sufficient to support our operating requirements for the foreseeable future. The working capital revolver and the mortgage on our headquarters facility are scheduled to mature on September 30, 2009. We are in discussions with several lenders, including our existing bank, to secure a new credit facility prior to the expiration of our existing agreement. We expect to establish a new credit facility prior to the expiration of the current agreement. However, given current credit market conditions, it is likely any new credit agreement will contain higher borrowing costs and/or reduced availability for unsecured borrowings. In addition to the available capacity under our working capital line of credit, to finance investments beyond our current operating needs we believe we may have access to a variety of capital sources such as private placements of subordinated debt, and public or private sales of equity.
In the third quarter of fiscal 2008 our2009 revenues increased $5.0were $17.2 million or 27%compared to $23.2 million in the third quarter 2008. Our net loss in the third quarter of fiscal 2009 was $8.6 million compared to net income of $591,000 compared to the thirdsame quarter lasta year and our net income increased $214,000 or 57%.ago. In the first nine months of the year, our revenues increased $11.0were $53.5 million or 22%compared to $62.0 million for the first nine months of fiscal 2008. Our net loss for the first nine months of fiscal 2009 was $8.4 million compared to net income of $1.4 million in the first nine months of fiscal 2008. Net of the impairment charges and our earnings increased $596,000 or 79%. Thesetax benefits recorded in the third quarter we incurred a non-GAAP net loss of $87,000 in the third quarter and generated non-GAAP net income of $98,000 year-to-date. Apart from the impairment charges on goodwill and other assets of $14.0 million which are discussed above under “Overview”, these results primarily reflect increased revenues in all of our major revenue categories coupled with higher margins onlower sales of equipment.commercial systems and lower commissions earned from the sale of Avaya post-warranty maintenance contracts. The year-to-date results were also impacted by the $350,000 bad debt provision associated with Nortel’s bankruptcy filing. The narrative below provides further explanation of these results.
Services Revenues.
Our services revenues increased $2.6 million or 27% in the third quarter and $4.9 million or 18% for the year-to-date periods compared to the same periods last year. Services revenues consist of the following:
|
| For the Three Months Ended |
| For the Nine Months Ended |
| ||||||||
|
| 2008 |
| 2007 |
| 2008 |
| 2007 |
| ||||
Contract & T&M |
| $ | 7,202,000 |
| $ | 6,745,000 |
| $ | 21,438,000 |
| $ | 19,059,000 |
|
Implementation |
| 3,864,000 |
| 2,075,000 |
| 8,250,000 |
| 5,988,000 |
| ||||
Cabling |
| 962,000 |
| 644,000 |
| 2,199,000 |
| 1,986,000 |
| ||||
Total Services revenues |
| $ | 12,028,000 |
| $ | 9,464,000 |
| $ | 31,887,000 |
| $ | 27,033,000 |
|
Contract and time-and-materials (T&M) revenues increased 7% and 12%respectively in the third quarter and year-to-date periods. These growth rates reflect slowing growth in our base of commercial contract revenues, weak demand for T&M services throughout fiscal 2008, and the relative stability of our lodging maintenance contract base, which represents approximately 50% of our total Contract and T&M revenues. As discussed above, one of our primary strategies is to grow our commercial maintenance revenues to improve our profit margins and the predictability of our results. We are pleased with the continued growth of this part of our business, even though the rate of growth in commercial contract revenues has decreased during fiscal 2008 due to fewer additions of new customer programs. Under most of our large commercial maintenance contracts, our customer is a network service provider, manufacturer, or a technology integrator who has the direct contractual relationship with the end-user of the equipment. These customers contract with end-users who are often large, national enterprises to provide a range of services which include servicing the communications equipment and ancillary technology. Competition is fierce for the opportunity to contract with these large end-users and a range of service delivery issues must be addressed. This process can take months as details are debated and negotiated. Once the end user selects their service provider, the contracting process is often prolonged as well. Finally, the transition of services to a new provider is often stretched out over several months to minimize the impact to the end-user. Our involvement in this process varies from full participation with our customer in the sales process to being transparent to the end user. Regardless of our role in the sales process, our ability to impact the pace of decisions and the pace of contract negotiations is usually minimal. Because of these reasons and the fact that there a only few large opportunities available at any given time, the timing our acquisition of new revenues in this area is unpredictable. Through the first nine months of fiscal 2008, we are encouraged by the number and size of
15
new service program opportunities. and we are confident that we will eventually incorporate many of these opportunities into our service revenue base.
Throughout fiscal 2008, we have experienced a decline in T&M revenues. We believe this decline is largely due to macro economic conditions that have slowed the growth of customer workforces and reduced non-essential spending.
Implementation revenues increased 86% and 38%, respectively in the third fiscal quarter and year-to-date periods. These increases are attributable to growth in systems sales and also reflect M-DCPS system implementations. The pace of installations at M-DCPS accelerated toward the end of the second fiscal quarter and continued through most of the third quarter generating record implementation revenues for the third fiscal quarter.
Cabling revenues increased 49% and 11%, respectively in the third fiscal quarter and year-to-date periods. This revenue category was also helped by the surge in installations of systems under the M-DCPS contract as a large portion of the schools required reconfiguration of their communications wiring.
Systems Sales.
In the third quarter of fiscal 2008,2009 systems sales increaseddecreased approximately $2.0$4.1 million or 23%39% compared to the same period last year. This increasedecrease includes a $1.8$4.3 million or 28% increase52% decrease in sales of systems to commercial customers andpartially offset by a $161,000$194,000 or 8% increase in sales of systems to lodginghospitality customers. Year-to-date systems sales increased $5.2decreased $5.8 million or 22%20% compared to last year. This decrease includes an increasea decrease in sales of systems to commercial customers of $5.9$7.6 million or 34% and a decrease33% which was partially offset by an increase in sales of systems to lodginghospitality customers of $716,000$1.8 million or 12%33%. The increasedecrease in systems sales to commercial customers primarily reflects sales of systemsdifficult comparisons related to M-DCPS. Shipmentsthe revenues earned from the Miami-Dade County Public School’s (“M-DCPS”) project. Additionally macroeconomic conditions, Nortel’s bankruptcy and installationsshipments scheduled for M-DCPS accelerated in the last half of the second fiscal quarter and continued strong through most of the third quarter but delayed at the customers’ request, impacted our sales results.
19
Throughout fiscal quarter.2008 we enjoyed strong commercial systems sales, installation revenues, and cabling revenues generated by the series of orders received from M-DCPS. In total, these orders generated over $10 million in revenues for the Company during the year. We anticipate completion of this projecthave not received a similar order during our fourth fiscal quarter. Orders for systems2009, making comparisons to commercial customers other than M-DCPS are slightly below last year’s pace. We believeresults more difficult. Additionally, customers continue to reduce capital spending in response to recessionary conditions, and access to credit remains problematic. As these conditions have intensified, customers have limited their capital spending to necessity purchases and investments with clear, rapid returns. Finally, uncertainty around the Nortel bankruptcy continues to severely dampen demand for equipment in this decline primarily reflects customers extending the sales cycle due to uncertainty in the U.S. economy.product line.
The quarterly and year to date growth in sales of systems to lodginghospitality customers, particularly during a challenging hospitality market, reflects our continued success in this niche market and the early success ofmarket. Results support our newstrategy to expand our product offering to Mitel product offering. The Mitel product line providesproducts which has provided us with the opportunity to work with certain hotel chains and property management companies that have previously standardized on the Mitel product line. TheWhile we anticipate continued success in the hospitality market, given economic conditions, downward pressure on revenues in this segment may intensify and as such revenues may be at or less than historical levels in the fourth quarter of the fiscal year.
Services Revenues.
Services revenues consist of the following:
|
| For the Three Months Ended |
| For the Nine Months Ended |
| ||||||||
|
| 2009 |
| 2008 |
| 2009 |
| 2008 |
| ||||
Contract & T&M |
| $ | 7,358,000 |
| $ | 7,202,000 |
| $ | 21,384,000 |
| $ | 21,438,000 |
|
Implementation |
| 2,469,000 |
| 3,864,000 |
| 6,926,000 |
| 8,251,000 |
| ||||
Cabling |
| 697,000 |
| 962,000 |
| 2,049,000 |
| 2,199,000 |
| ||||
Total Services revenues |
| $ | 10,524,000 |
| $ | 12,028,000 |
| $ | 30,359,000 |
| $ | 31,888,000 |
|
Contract and time-and-materials (T&M) revenues increased 2% and decreased 0.3%, respectively in the third quarter and year-to-date periods. This year-to-date performance reflects relatively flat revenues in our wholesale services programs and a modest decline in salesT&M service revenues. We believe T&M revenues were influenced by general economic conditions as customers reduced spending on non-critical services. We continue to aggressively market our national service footprint and multi-product line technical capabilities to end-users, network service providers, and large integrators of systems to lodging customers is a difficult comparison to fiscal 2007. Results for fiscal 2007 werevoice and data technologies. In the third quarter we realized beneficial returns from the new service programs with Marriott International and Lockheed Martin Corporation that we secured in the second quarter. Additionally, the acquired customer relationships from Summatis beneficially influenced by an acceleration of orders from customers wantingour results. We expect these new programs and relationships to avoid a mid-year manufacturer’s price increase. Because of strong order ratespositively impact our Contract & T&M revenues for the foreseeable future.
Implementation revenues decreased 36% and 16%, respectively in the third fiscal quarter and year-to-date periods. These declines, while significant, reflect a lower rate of decline than the corresponding decrease in systems sales, traditionally the primary driver of these revenues. We attribute this to increasing demand for more complex communications systems requiring significant fee-generating design and engineering services provided by 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, however, as customers displace conventional communications platforms and adopt more complex systems, we anticipate growth in this area of our business through the fee-based utilization of these highly skilled technical resources.
Cabling revenues decreased 28% and 7%, respectively in the third fiscal quarter and year-to-date lodging equipmentperiods. The third quarter decline in cabling revenues is primarily associated with the difficult comparisons to fiscal 2008 which were helped significantly by the M-DCPS orders are outpacing last year.as discussed above.
Gross Margins.
The table below presents the gross margins earned on our primary revenue streams:
|
| For the Three |
| For the Nine |
| ||||
Gross Margins |
| 2008 |
| 2007 |
| 2008 |
| 2007 |
|
Services revenues |
| 30.4 | % | 30.7 | % | 27.5 | % | 29.6 | % |
Systems sales |
| 26.4 | % | 22.8 | % | 26.1 | % | 23.6 | % |
Other revenues |
| 22.1 | % | 40.9 | % | 62.2 | % | 38.8 | % |
Corporate cost of goods sold |
| -1.7 | % | -2.2 | % | -1.9 | % | -2.1 | % |
Total |
| 26.7 | % | 24.8 | % | 25.8 | % | 24.9 | % |
The gross margins earned on Services revenues reflect mixed results in this area of our business. In the third fiscal quarter, record levels of implementation revenues, slight improvement in T&M revenues, and some adjustments in the Services cost structure combined to produce gross margins above 30%, which is a key metric for this portion of our business. On a year-to-date basis, our Services gross margins are lagging behind last year’s performance and reflect a cost structure based on faster growth. Consequently, we have made adjustments to our cost structure in the fourth fiscal quarter to continue to address this issue and will
1620
|
| For the Three |
| For the Nine |
| ||||
Gross Margins |
| 2009 |
| 2008 |
| 2009 |
| 2008 |
|
Services revenues |
| 28.7 | % | 30.4 | % | 30.0 | % | 27.5 | % |
Systems sales |
| 28.9 | % | 26.4 | % | 26.7 | % | 26.1 | % |
Other revenues |
| 41.4 | % | 22.1 | % | 9.6 | % | 62.2 | % |
Corporate cost of goods sold |
| -2.0 | % | -1.6 | % | -2.0 | % | -1.9 | % |
Total |
| 26.8 | % | 26.7 | % | 26.5 | % | 25.8 | % |
continue
Gross margins earned on Services revenues reflect mixed results between improved margins earned on our contract & T&M services which were offset by significantly lower margins earned on implementation activities. As a result of improved cost controls and reduced headcounts, we earned higher gross margins on our contract & T&M services revenues in the third quarter and in the year-to-date periods. However, due to monitorlower utilization of installation and professional services personnel in the balance between revenue growthimplementation department and difficult comparisons to the third quarter of fiscal 2008, our gross margins in this area suffered dramatically in the third quarter. For the year-to-date period implementation gross margins are also down, but cost structurereductions and on-boarding the new Samsung service program have helped to trydampen the impact of lower revenues in this area. Similar to maintain our targeted profitability levels for this portionthe Samsung program, developing additional billable consulting services which are not directly associated with new system installations is an important aspect of our business.services strategy to create more predictability and higher gross margins in this area.
Gross margins on systems sales in the third fiscal quarter and the year-to-date period were up over last year and exceedperiods are above our target of 23% to 25% for systems revenues. This trend is consistent for system sales to our commercial and lodging customers. We continue to receive strongconsiderable pricing support from our vendorsmanufacturers in the form of project-specific discounts and incentive rebates. These incentives are material to our gross margins and we work diligently to maximize this support; however, no assurance can be given that future support will continue at historical levels.
The final component of our gross margins is the margins earned on other revenues and our corporate cost of goods sold. We earn the majority of our 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. In the first nine monthsthree quarters of fiscal 2009 we experienced a dramatic drop in other revenues as compared to the year,same period last year. Some decline in this segment was expected as we enjoyed significantly higher commission revenuesbenefited from salesaccelerated customer decisions throughout 2008. In 2008 many customers accelerated their purchases or renewals of Avaya maintenance contracts. These revenues were material to our overall operating incomeservice contracts in all periods presented.anticipation of manufacturer-driven changes in the structure of these service programs. This is an unpredictable revenue stream that depends on the expiration dates of existing contracts, installation dates of new systems, the customer type as defined by Avaya, and the number of years that customers contract for services. Consequently, it is unlikely thatWhile no assurance can be given, we can sustain the results enjoyed in the first three quartersexpect sales of theAvaya service contracts to return to pre fiscal year.2008 levels. Other revenues may also include sales and cost of goods sold on equipment or services sold outside our normal provisioning processes. 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.
Operating Expenses.
Our total operating expenses increased $1,246,000 or 32%$13.6 million in the third quarter of fiscal 20082009 compared to the third quarter of fiscal 2007.2008. Operating expenses, including the $14.0 million impairment charges, were 22.1%109.0% of revenues in the third quarter compared to 21.3%22.1% in the third quarter last year. OperatingExcluding the impairment charges, operating expenses increased $2,101,000 or 18% forwere 27.5% of revenue in the year to date period compared to the same period a year ago.third quarter. Operating expenses were 21.8%52.2% of revenues in the first three quarters of fiscal 20082009 compared to 22.4% for the same period21.8% last year. The growth inExcluding the impairment charges operating expenses in the first three quarters of fiscal 2009 were 26.0% of revenues. Apart from the impairment charges recognized in the third fiscal quarter, reflects severalour year-to-date operating expenses reflect the following factors:
· Personnel additionsA significant bad debt provision in response to exploit new managed services opportunitiesthe Nortel bankruptcy filing
·The addition of sales expense as a result of the Summatis acquisition
· Increased expenditures to support the Oracle eBusiness platform
·Increased board of directorlegal fees to support the addition of independent membership to thelitigation and board
·Increased non-cash charges related to stock compensation expense for equity grants provided to management and key employees governance activities
· Increased amortization ofof: the Oracle platform capitalized costs in association with its expanded utilization; and intangible assets associated with the expanded implementationrecent acquisitions of service contracts and customer lists
For the year,21
The level of operating expenses have been impacted by allas a percentage of revenues is above our targets and we took steps in the third quarter to bring these costs more in line with our expectations. These steps included reductions of our sales force and sales support staffs, company-wide temporary suspension of the factors listed above. Partially offsetting these increases were improved salesmatching contribution on our 401k Plan, and marketing incentives received from manufacturersa mandatory week of unpaid leave for each employee in the first fiscal quarter. The incentivescompany. These steps were taken during the last half of the third quarter and had minimal impact to our third quarter results. Presently, rapidly declining systems sales make it difficult to meet our targets for operating expenses as a percent of revenues. Furthermore, we receive from manufacturersconsider it tactically appropriate, given our strong cash flows, to support the sales and marketing of their products comeoperating expenses above our targets in the formnear term to take advantage of payments for growthimproving economic conditions in sales of their products, reimbursement for certain, pre-approved marketing programs, and additions to sales-related headcount. The amount of these funds was higher than normal in the first quarter due to special growth incentives offered by one of our manufacturers. These funds returned to normal levels in the second and thirdsubsequent quarters. Our expenditures to promote our managed services business and to support the Oracle platform have exceeded our projection to date in fiscal 2008. We believe, however that operating expenses will diminish to 18% to 20% of revenues over the next two to four years as we realize economies of scale.
Interest Expense and Other Income.
Net interest and other expense was $96,000$22,000 in the third quarter of fiscal 20082009 compared to $20,000$96,000 in net other expense in the third quarter of fiscal 2007.2008. Net interest and other expense was $240,000$65,000 for the nine-month period ended July 31, 20082009 compared to $4,000$241,000 in net other expense in the same period last year. This increasedecrease reflects both lower interest rates and a reduction in expense reflects the discontinuation of capitalizing interest expense related to the implementation of the Company’s Oracle platform and higher than average borrowings in the periods presented.
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Table of Contentsborrowings.
Tax Provision.
We recorded a combined Federal and state tax provision of 39% for both the third quarter of fiscal 2008 and fiscal 2007. For the nine-month period ended July 31, 2008, we recorded a tax provision of 39% compared to a tax provision of 40% for the first nine months of fiscal 2007. 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%.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Changes in interest rates represents the primary market risk relating to our operating results. We did not use derivative financial instruments for speculative or trading purposes during the three-month period ended July 31, 2008.
Interest Rate Risk. Due to utilization of variable interest rate debt, we are subject to the risk of fluctuation in interest rates in the normal course of business. Our credit facility bears interest at a floating rate at either the London Interbank Offered Rate (2.461% at July 31, 2008) plus 1.25% to 2.75% or the bank’s prime rate (5.0% at July 31, 2008) less 0.0% to minus 1.125%. A hypothetical 1% increase in interest rates would not have a material impact on our financial position or cash flows.
ITEM 4.4T. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. Based on an evaluation conducted as of July 31, 20082009 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.Controls. There were no changes in our internal controls during the last fiscal quarter that have materially affected, or in other factors that could materially affect, or isare reasonably likely to materially affect, these controls subsequent to the date of their evaluation.over financial reporting.
On or aboutDuring the fiscal quarter covered by this report, AMTEL had still not filed its dismissal of the arbitration claim filed in April 8, 2008 by Design Business Communications, Inc., d/b/a/ American Telephone (“AMTEL”) filed a claim with the American Arbitration Association against the Companyus and Hitachi Telecom (USA) Inc. (“HITEL”) alleging a breach of AMTEL’s Authorized Distributorship Agreement with HITEL (the “Distributor(“Distributor Agreement”). The Companydismissal is involved in this matter by virtue of the fact that in 2006, the Company acquired HITEL’s PBX business and agreed to fulfill HITEL’s surviving service obligationsbe filed pursuant to its authorized distributors under their distributor agreements with HITEL. The AMTEL Distributor Agreement provides that AMTEL may order and the Company shall provide “spare parts, software and third level technical support as required for the maintenance of HITEL PRODUCT for a period of ten years from the ship date of the HITEL PRODUCT.” In April 2007, AMTEL placed an order with the Company under the Distributor Agreement for 48 new telephones totaling approximately $12,200; however, this product had previously been discontinued by HITEL. Because this order has not been fulfilled, AMTEL claims that the Company is in breach of the Distributor Agreement and that as a result, AMTEL has suffered damages in the amount of $5 million (for loss of service and spare part revenues; loss of business reputation; loss of customers; and possible claims by AMTEL customers for breach of its service
18
obligations and sales and service warranties). While HITEL is also contesting AMTEL’s claim, it has notified the Company that it will seek indemnity against the Company under the terms of the 2006 purchase and salea settlement agreement between HITEL and the Company. The Company has offered to assume the defense of HITEL in this matter under a reservation of rights; however HITELcase, which has refused this offer. The Company is vigorously contesting this matterbeen described in our previous periodic and along with HITEL, may seek a stay of the arbitration pending discussions among the parties concerning a possible resolution to AMTEL’s claims. If the arbitration proceeds as scheduled, the Company expects the arbitration to be completed during the first quarter of fiscal 2009.annual reports.
In addition to the foregoing,Additionally, we are involved as a defendant in an employment related matter and as a plaintiff in another matter both of which we consider to be routine and incidental to the operation of our business. We do not believe that either of these proceedingsthis proceeding will have a material affect on our financial position or results of operations.
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The information presented below is an update to the “Risk Factors” included in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 20072008 and should be read in conjunction therewith. Except as set forth below, the Risk Factors included in the Company’s Form 10-K for its 20072008 fiscal year have not materially changed.
Our business is affected by capital spending. Current economic conditions and the ability of our customers to access credit may continue to reduce capital spending for the foreseeable future.
The U.S. economy is mired in a recessionary contraction and, despite efforts by the Federal Government to stabilize the banking and financial systems, credit availability remains limited for nearly all enterprises, hence the outlook for corporate profits is uncertain. These factors are contributing to a high degree of uncertainty concerning capital spending. Because our business is affected by capital spending for technology and equipment, we may continue to experience declining demand for our products. This could have a material, negative impact on our operating results and financial condition.
We may incur additional goodwill and other asset impairments.
Our business has been and may continue to be materially adversely affected by the current macroeconomic conditions. During the fiscal year we have experienced a significant decline in revenues in our commercial equipment reporting unit and a sustained decline in our market capitalization. Based on the results of an interim test for impairment, management determined that goodwill associated with our commercial equipment reporting unit was impaired and accordingly we recorded an impairment charge of $11.0 million in the third fiscal quarter. This represents our best estimate of the probable impairment at this time. We may have to adjust the impairment charge after completing step two of the impairment test in connection with our next periodic report filing with the Securities and Exchange Commission. Furthermore, we could experience further deterioration in this area or other areas of our business which might create additional impairment of our remaining goodwill balances. Additional impairment charges could have a material adverse effect on our financial condition and results of operations. See Note 1 to our Consolidated Financial Statements for additional information regarding our goodwill and other asset impairment charges.
Nortel’s Chapter 11 bankruptcy filing may result in both a short-term and long-term financial loss for the Company.
Nortel filed a voluntary petition for Chapter 11 bankruptcy protection on January 14, 2009. We are owed approximately $685,000 in pre-petition accounts receivable less approximately $116,000 in approved offsets for amounts we owed to Nortel at the time of the filing. If our pre-petition claims are not collectible either in whole or in large part, we could experience material, negative operating results in the near term. Based on filings approved by the bankruptcy court allowing Nortel to fund post-petition business operations, we have continued to provide services to Nortel’s end-user customers under our wholesale services relationship, which currently produces approximately $3 million in annual revenues. To date, payment for these services have been paid generally according to their terms which were significantly tightened after the filing.
The administrators of the bankruptcy have adopted a business disposal strategy. Under this strategy, the administrators have segmented Nortel into three business units: Virtual Service Switches, CDMA businesses and Enterprise Solutions. We conduct all of our Nortel business through the Enterprise Solutions unit. On July 21, 2009, the administrators of the bankruptcy announced they had entered into a stalking horse assets and share sale agreement with Avaya for the Enterprise Solutions unit and this process is proceeding. Due to the nature of the stalking horse auction process, a final determination of the purchaser of the Enterprise Solutions unit is not expected until near the end of our fiscal year. Because neither Avaya nor other potential bidders have publicly stated their operating and marketing strategy should they prevail in the auction process, it is impossible for us to predict the impact of this process to our business. We believe we can present compelling value propositions to any potential purchaser of Nortel enterprise business unit, but the ultimate success of those strategies cannot be assured.
Avaya’s strategies regarding the provision of equipment and services to itstheir customers are changing dramatically and maycould have a material impact on our operating results.
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Avaya is repositioning itself as a hardware and software vendormanufacturer providing a wide range of voice communications hardware and applications to its customers. As part of this strategy, Avaya is segmenting its hardware maintenance and software support. The new software support offerings include technical support for specific voice applications and upgrade services to ensure customers can access all software patches and upgrades. Currently, we earn revenues from some of our customers, particularly lodginghospitality customers, to provide the products and services now being included by Avaya in its new software support offerings. These changes could have a material, negative impact on our operating results if our revenues or margins are reduced in response to these mandated changes by Avaya.
If economic conditions in the U.S. continue be uncertain or deteriorate further, our revenues, gross margins and net income could be negatively impacted.
In the first nine months of fiscal 2008, we have seen a decline in order rates for new equipment and for some discretionary (i.e. T&M) services that we offer. We believe that these declines are largely due to uncertainty about the condition and near-term future of the U.S. economy. These uncertainties have caused some customers to delay capital spending. Should these uncertainties persist or worsen, it is likely that our business would continue to experience the effects.
Our long-term targeted levels of profitability may not be achievable.
In fiscal 2007, we set targets for our net profit margins, measured as net income divided by revenues, to be 4% to 6% within three to five years. These targets reflected more detailed key financial goals such as consistently earning gross margins on Services revenues in the 30% to 35% range, earning gross margins on total revenues at more than 30%, and lowering operating expenses to less than 20% of revenues. We believe that economies of scale in our business, particularly in our Services, Sales, Accounting and Administrative functions, will be the key driver toward meeting these financial targets. To date in fiscal 2008, we have experienced revenue growth of 22%; however we have not realized significant improvements in Services gross margins or in operating expenses when measured as a percent of revenues. While we continue to believe that our profitability targets will ultimately be achieved as we continue to expand our revenue base, we have yet to prove this operating model through actual results.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
(a) None.
19(b) None.
(c) Issuer Purchases of ContentsEquity Securities
On October 29, 2008 the Board of Directors approved a stock repurchase program authorizing the Company to use up to $1.0 million to repurchase its outstanding common stock on the open market. Since the inception of the program, we have repurchased a total of 31,728 shares of our common stock for a total cash investment of $58,157. This program does not have an expiration date. The following table presents repurchase activity for the third quarter of fiscal 2009:
Fiscal |
| Total Number of Shares |
| Average Price Paid per |
| Total |
| Approximate |
| ||
|
|
|
|
|
|
|
|
|
| ||
May 2009 |
| — |
| $ | — |
| — |
| $ | 944,049 |
|
June 2009 |
| — |
| — |
| — |
| 944,049 |
| ||
July 2009 |
| 1,000 |
| 2.21 |
| 1,000 |
| 941,843 |
| ||
Total |
| 1,000 |
| $ | 2.21 |
| 1,000 |
| $ | 941,843 |
|
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
(a) None.
Exhibits (filed herewith):
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SEC Exhibit No. |
| Description |
|
|
|
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. |
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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: | By: |
|
|
| Greg D. Forrest |
|
| Chief Executive Officer |
|
| |
Dated: | By: |
|
|
| Robert B. Wagner |
|
| Chief Financial Officer |
2126
EXHIBIT INDEX
SEC Exhibit No. |
| Description |
|
|
|
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. |
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