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 April 30,July 31, 2010
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 o No x
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 |
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|
Non-accelerated filer o |
| Smaller reporting company x |
(Do not check if a smaller reporting company) |
|
|
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 May 21,August 23, 2010 there were 10,301,30810,699,186 shares of the registrant’s common stock, par value $0.001, outstanding.
| PAGE | |||
PART I. FINANCIAL INFORMATION |
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ITEM 1. FINANCIAL STATEMENTS (Unaudited) |
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Consolidated Balance Sheets - | 3 | |||
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4 | ||||
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Consolidated Statement of Shareholders’ Equity - For the | 5 | |||
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Consolidated Statements of Cash Flows - For the | 6 | |||
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7 | ||||
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| 15 | |||
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| 19 | |||
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| 19 | |||
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| 19 | |||
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
| 21 | ||
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| 21 | |||
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| 21 | |||
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| 21 | |||
XETA TECHNOLOGIES, INC. AND SUBSIDIARY
|
| (UNAUDITED) |
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| April 30, 2010 |
| October 31, 2009 |
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| (UNAUDITED) |
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| July 31, 2010 |
| October 31, 2009 |
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ASSETS | ASSETS |
| ASSETS |
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Current assets: |
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Cash and cash equivalents |
| $ | 5,601,225 |
| $ | 4,731,926 |
|
| $ | 3,765,276 |
| $ | 4,731,926 |
|
Current portion of net investment in sales-type leases and other receivables |
| 1,005,537 |
| 470,025 |
|
| 1,207,697 |
| 470,025 |
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Trade accounts receivable, net |
| 10,475,209 |
| 13,832,452 |
|
| 14,540,631 |
| 13,832,452 |
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Inventories, net |
| 4,559,408 |
| 5,036,198 |
|
| 4,864,340 |
| 5,036,198 |
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Deferred tax asset |
| 1,262,491 |
| 1,136,351 |
|
| 1,325,200 |
| 1,136,351 |
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Prepaid taxes |
| 86,054 |
| 39,784 |
|
| 65,613 |
| 39,784 |
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Prepaid expenses and other assets |
| 2,223,064 |
| 2,057,514 |
|
| 2,271,230 |
| 2,057,514 |
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Total current assets |
| 25,212,988 |
| 27,304,250 |
|
| 28,039,987 |
| 27,304,250 |
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Noncurrent assets: |
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Goodwill |
| 12,004,187 |
| 12,031,975 |
|
| 14,303,926 |
| 12,031,975 |
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Intangible assets, net |
| 457,610 |
| 570,740 |
|
| 1,032,017 |
| 570,740 |
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Net investment in sales-type leases and other receivables, less current portion above |
| 334,891 |
| 335,413 |
|
| 327,404 |
| 335,413 |
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Property, plant & equipment, net |
| 6,708,364 |
| 6,825,916 |
|
| 6,655,190 |
| 6,825,916 |
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Deferred tax asset |
| 94,864 |
| 739,216 |
|
| — |
| 739,216 |
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Other assets |
| 444 |
| — |
| |||||||||
Total noncurrent assets |
| 19,600,360 |
| 20,503,260 |
|
| 22,318,537 |
| 20,503,260 |
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Total assets |
| $ | 44,813,348 |
| $ | 47,807,510 |
|
| $ | 50,358,524 |
| $ | 47,807,510 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY | LIABILITIES AND SHAREHOLDERS’ EQUITY |
| LIABILITIES AND SHAREHOLDERS’ EQUITY |
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Current liabilities: |
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Current portion of long-term debt |
| $ | — |
| $ | 1,183,475 |
|
| $ | — |
| $ | 1,183,475 |
|
Accounts payable |
| 4,565,480 |
| 5,785,225 |
|
| 5,997,032 |
| 5,785,225 |
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Current portion of obligations under capital lease |
| 157,081 |
| 154,072 |
|
| 145,155 |
| 154,072 |
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Current unearned services revenue |
| 4,002,529 |
| 5,194,601 |
|
| 4,729,261 |
| 5,194,601 |
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Accrued liabilities |
| 3,107,108 |
| 3,444,396 |
|
| 3,950,248 |
| 3,444,396 |
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Total current liabilities |
| 11,832,198 |
| 15,761,769 |
|
| 14,821,696 |
| 15,761,769 |
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Noncurrent liabilities: |
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Accrued long-term liability |
| 144,100 |
| 144,100 |
|
| 144,100 |
| 144,100 |
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Long-term portion of obligations under capital lease |
| 26,776 |
| 106,076 |
|
| — |
| 106,076 |
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Noncurrent unearned services revenue |
| 51,701 |
| 36,691 |
|
| 49,215 |
| 36,691 |
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Noncurrent deferred tax liability |
| 222,417 |
| — |
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Total noncurrent liabilities |
| 222,577 |
| 286,867 |
|
| 415,732 |
| 286,867 |
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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 issued at April 30, 2010 and October 31, 2009 |
| 11,255 |
| 11,255 |
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Common stock; $.001 par value; 50,000,000 shares authorized, 11,654,071 issued at July 31, 2010 and 11,256,193 issued at October 31, 2009 |
| 11,653 |
| 11,255 |
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Paid-in capital |
| 13,773,873 |
| 13,704,460 |
|
| 15,623,224 |
| 13,704,460 |
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Retained earnings |
| 21,068,312 |
| 20,223,169 |
|
| 21,581,086 |
| 20,223,169 |
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Less treasury stock, at cost (954,885 shares at April 30, 2010 and 993,763 shares at October 31, 2009) |
| (2,094,867 | ) | (2,180,010 | ) | |||||||||
Less treasury stock, at cost (954,885 shares at July 31, 2010 and 993,763 shares at October 31, 2009) |
| (2,094,867 | ) | (2,180,010 | ) | |||||||||
Total shareholders’ equity |
| 32,758,573 |
| 31,758,874 |
|
| 35,121,096 |
| 31,758,874 |
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Total liabilities and shareholders’ equity |
| $ | 44,813,348 |
| $ | 47,807,510 |
|
| $ | 50,358,524 |
| $ | 47,807,510 |
|
The accompanying notes are an integral part of these consolidated financial statements.
XETA TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
|
| For the Three Months |
| For the Six Months |
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| For the Three Months |
| For the Nine Months |
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| Ended April 30, |
| Ended April 30, |
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| Ended July 31, |
| Ended July 31, |
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| 2010 |
| 2009 |
| 2010 |
| 2009 |
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| 2010 |
| 2009 |
| 2010 |
| 2009 |
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Systems sales |
| $ | 5,742,637 |
| $ | 7,789,138 |
| $ | 16,609,695 |
| $ | 16,374,891 |
|
| $ | 8,536,584 |
| $ | 6,522,569 |
| $ | 25,146,279 |
| $ | 22,897,460 |
|
Services |
| 11,377,908 |
| 9,841,649 |
| 23,494,765 |
| 19,834,882 |
|
| 12,166,889 |
| 10,524,397 |
| 35,661,654 |
| 30,359,279 |
| ||||||||
Other revenues |
| 77,452 |
| 125,816 |
| 137,680 |
| 126,855 |
|
| 188,300 |
| 136,271 |
| 325,980 |
| 263,126 |
| ||||||||
Net sales and services revenues |
| 17,197,997 |
| 17,756,603 |
| 40,242,140 |
| 36,336,628 |
|
| 20,891,773 |
| 17,183,237 |
| 61,133,913 |
| 53,519,865 |
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Cost of systems sales |
| 4,173,003 |
| 5,809,523 |
| 12,249,590 |
| 12,151,888 |
|
| 6,021,390 |
| 4,639,749 |
| 18,270,980 |
| 16,791,637 |
| ||||||||
Services costs |
| 7,782,674 |
| 6,768,814 |
| 16,013,754 |
| 13,752,553 |
|
| 8,223,095 |
| 7,505,892 |
| 24,236,849 |
| 21,258,445 |
| ||||||||
Cost of other revenues & corporate COGS |
| 455,920 |
| 435,275 |
| 853,555 |
| 883,045 |
|
| 434,436 |
| 425,480 |
| 1,287,991 |
| 1,308,525 |
| ||||||||
Total cost of sales and services |
| 12,411,597 |
| 13,013,612 |
| 29,116,899 |
| 26,787,486 |
|
| 14,678,921 |
| 12,571,121 |
| 43,795,820 |
| 39,358,607 |
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Gross profit |
| 4,786,400 |
| 4,742,991 |
| 11,125,241 |
| 9,549,142 |
|
| 6,212,852 |
| 4,612,116 |
| 17,338,093 |
| 14,161,258 |
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Operating expenses |
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Selling, general and administrative |
| 4,262,343 |
| 4,081,197 |
| 9,387,626 |
| 8,537,306 |
|
| 5,178,574 |
| 4,388,488 |
| 14,566,200 |
| 12,925,794 |
| ||||||||
Amortization |
| 187,230 |
| 335,006 |
| 374,085 |
| 657,257 |
|
| 206,386 |
| 344,727 |
| 580,471 |
| 1,001,984 |
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Impairment of goodwill & other assets |
| — |
| 14,000,000 |
| — |
| 14,000,000 |
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Total operating expenses |
| 4,449,573 |
| 4,416,203 |
| 9,761,711 |
| 9,194,563 |
|
| 5,384,960 |
| 18,733,215 |
| 15,146,671 |
| 27,927,778 |
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Income from operations |
| 336,827 |
| 326,788 |
| 1,363,530 |
| 354,579 |
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Income (loss) from operations |
| 827,892 |
| (14,121,099 | ) | 2,191,422 |
| (13,766,520 | ) | |||||||||||||||||
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Interest expense |
| (4,744 | ) | (28,498 | ) | (10,914 | ) | (58,401 | ) |
| (4,372 | ) | (20,810 | ) | (15,286 | ) | (79,211 | ) | ||||||||
Interest and other income |
| 17,272 |
| 3,998 |
| 38,527 |
| 15,378 |
| |||||||||||||||||
Interest and other income (expense) |
| 20,254 |
| (1,159 | ) | 58,781 |
| 14,219 |
| |||||||||||||||||
Net interest and other income (expense) |
| 12,528 |
| (24,500 | ) | 27,613 |
| (43,023 | ) |
| 15,882 |
| (21,969 | ) | 43,495 |
| (64,992 | ) | ||||||||
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Income before provision for income taxes |
| 349,355 |
| 302,288 |
| 1,391,143 |
| 311,556 |
| |||||||||||||||||
Provision for income taxes |
| 137,000 |
| 119,000 |
| 546,000 |
| 126,000 |
| |||||||||||||||||
Income (loss) before provision for income taxes |
| 843,774 |
| (14,143,068 | ) | 2,234,917 |
| (13,831,512 | ) | |||||||||||||||||
Provision (benefit) for income taxes |
| 331,000 |
| (5,544,000 | ) | 877,000 |
| (5,418,000 | ) | |||||||||||||||||
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Net income |
| $ | 212,355 |
| $ | 183,288 |
| $ | 845,143 |
| $ | 185,556 |
| |||||||||||||
Net income (loss) |
| $ | 512,774 |
| $ | (8,599,068 | ) | $ | 1,357,917 |
| $ | (8,413,512 | ) | |||||||||||||
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Earnings per share |
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Earnings (loss) per share |
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Basic |
| $ | 0.02 |
| $ | 0.02 |
| $ | 0.08 |
| $ | 0.02 |
|
| $ | 0.05 |
| $ | (0.84 | ) | $ | 0.13 |
| $ | (0.82 | ) |
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Diluted |
| $ | 0.02 |
| $ | 0.02 |
| $ | 0.08 |
| $ | 0.02 |
|
| $ | 0.05 |
| $ | (0.84 | ) | $ | 0.13 |
| $ | (0.82 | ) |
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Weighted average shares outstanding |
| 10,230,851 |
| 10,225,395 |
| 10,212,244 |
| 10,223,944 |
|
| 10,533,335 |
| 10,223,753 |
| 10,328,689 |
| 10,223,881 |
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Weighted average equivalent shares |
| 10,284,564 |
| 10,225,411 |
| 10,252,895 |
| 10,223,973 |
|
| 10,611,403 |
| 10,223,753 |
| 10,386,218 |
| 10,223,881 |
|
The accompanying notes are an integral part of these consolidated financial statements.
XETA TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(UNAUDITED)
|
| Common Stock |
| Treasury Stock |
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| Common Stock |
| Treasury Stock |
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| Shares Issued |
| Par Value |
| Shares |
| Amount |
| Paid-in Capital |
| Retained Earnings |
| Total |
|
| Shares Issued |
| Par Value |
| Shares |
| Amount |
| Paid-in Capital |
| Retained Earnings |
| Total |
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Balance- October 31, 2009 |
| 11,256,193 |
| $ | 11,255 |
| 993,763 |
| $ | (2,180,010 | ) | $ | 13,704,460 |
| $ | 20,223,169 |
| $ | 31,758,874 |
|
| 11,256,193 |
| $ | 11,255 |
| 993,763 |
| $ | (2,180,010 | ) | $ | 13,704,460 |
| $ | 20,223,169 |
| $ | 31,758,874 |
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Issuance of restricted common stock from treasury |
| — |
| — |
| (38,878 | ) | 85,143 |
| (85,143 | ) | — |
| — |
|
| — |
| — |
| (38,878 | ) | 85,143 |
| (85,143 | ) | — |
| — |
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Issuance of common stock |
| 397,878 |
| 398 |
| — |
| — |
| 1,499,602 |
| — |
| 1,500,000 |
| |||||||||||||||||||||||||
Issuance of warrants |
| — |
| — |
| — |
| — |
| 279,000 |
| — |
| 279,000 |
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Stock-based compensation |
| — |
| — |
| — |
| — |
| 154,556 |
| — |
| 154,556 |
|
| — |
| — |
| — |
| — |
| 225,305 |
| — |
| 225,305 |
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Net income |
| — |
| — |
| — |
| — |
| — |
| 845,143 |
| 845,143 |
|
| — |
| — |
| — |
| — |
| — |
| 1,357,917 |
| 1,357,917 |
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Balance- April 30, 2010 |
| 11,256,193 |
| $ | 11,255 |
| 954,885 |
| $ | (2,094,867 | ) | $ | 13,773,873 |
| $ | 21,068,312 |
| $ | 32,758,573 |
| ||||||||||||||||||||
Balance- July 31, 2010 |
| 11,654,071 |
| $ | 11,653 |
| 954,885 |
| $ | (2,094,867 | ) | $ | 15,623,224 |
| $ | 21,581,086 |
| $ | 35,121,096 |
|
The accompanying notes are an integral part of these consolidated financial statements.
XETA TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
| For the Six Months |
|
| For the Nine Months |
| ||||||||
|
| Ended April 30, |
|
| Ended July 31, |
| ||||||||
|
| 2010 |
| 2009 |
|
| 2010 |
| 2009 |
| ||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
| ||||
Net income |
| $ | 845,143 |
| $ | 185,556 |
| |||||||
Net income (loss) |
| $ | 1,357,917 |
| $ | (8,413,512 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
| ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
| |||||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
|
|
|
|
| |||||||||
Depreciation |
| 598,184 |
| 454,306 |
|
| 906,435 |
| 722,944 |
| ||||
Amortization |
| 374,085 |
| 657,260 |
|
| 580,471 |
| 1,001,984 |
| ||||
Impairment of goodwill & other assets |
| — |
| 14,000,000 |
| |||||||||
Stock-based compensation |
| 134,729 |
| 144,598 |
|
| 200,240 |
| 219,476 |
| ||||
Loss on sale of assets |
| — |
| 3,764 |
|
| — |
| 3,764 |
| ||||
Provision for returns & doubtful accounts receivable |
| 30,000 |
| 380,000 |
|
| 45,000 |
| 395,000 |
| ||||
Provision for excess and obsolete inventory |
| 51,000 |
| 51,000 |
|
| 76,500 |
| 76,500 |
| ||||
Deferred taxes |
| 546,000 |
| 9,952 |
|
| 814,466 |
| (5,547,052 | ) | ||||
Change in assets and liabilities: |
|
|
|
|
|
|
|
|
|
| ||||
Increase in net investment in sales-type leases & other receivables |
| (534,990 | ) | (851,209 | ) |
| (729,663 | ) | (7,440 | ) | ||||
Decrease in trade accounts receivable |
| 3,327,243 |
| 5,397,361 |
| |||||||||
(Increase) decrease in trade accounts receivable |
| (323,541 | ) | 8,628,795 |
| |||||||||
Decrease in inventories |
| 425,790 |
| 323,383 |
|
| 338,080 |
| 295,968 |
| ||||
Increase in prepaid expenses and other assets |
| (165,994 | ) | (153,289 | ) | |||||||||
(Increase) decrease in prepaid expenses and other assets |
| (200,708 | ) | 109,831 |
| |||||||||
(Increase) decrease in prepaid taxes |
| (46,270 | ) | 40,819 |
|
| (25,829 | ) | 31,219 |
| ||||
Decrease in accounts payable |
| (1,219,745 | ) | (1,796,759 | ) |
| (589,907 | ) | (2,739,735 | ) | ||||
Decrease in unearned revenue |
| (1,177,062 | ) | (334,108 | ) |
| (554,824 | ) | (446,734 | ) | ||||
Decrease in accrued liabilities |
| (317,461 | ) | (815,269 | ) | |||||||||
Increase (decrease) in accrued liabilities |
| 483,251 |
| (408,020 | ) | |||||||||
Total adjustments |
| 2,025,509 |
| 3,511,809 |
|
| 1,019,971 |
| 16,336,500 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Net cash provided by operating activities |
| 2,870,652 |
| 3,697,365 |
|
| 2,377,888 |
| 7,922,988 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
| ||||
Additions to property, plant & equipment |
| (741,587 | ) | (328,675 | ) |
| (1,046,070 | ) | (636,586 | ) | ||||
Proceeds from sale of assets |
| — |
| 5,064 |
|
| — |
| 5,064 |
| ||||
Acquisitions, net of cash acquired |
| — |
| (701,957 | ) |
| (1,000,000 | ) | (802,887 | ) | ||||
Investment in capitalized service contracts |
| — |
| (750,000 | ) |
| — |
| (750,000 | ) | ||||
Net cash used in investing activities |
| (741,587 | ) | (1,775,568 | ) |
| (2,046,070 | ) | (2,184,409 | ) | ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
| ||||
Principal payments on debt |
| (1,183,475 | ) | (85,545 | ) |
| (1,183,475 | ) | (128,317 | ) | ||||
Net payments on revolving line of credit |
| — |
| (1,764,861 | ) |
| — |
| (2,524,130 | ) | ||||
Payments on capital lease obligations |
| (76,291 | ) | (73,396 | ) |
| (114,993 | ) | (110,630 | ) | ||||
Payments to acquire treasury stock |
| — |
| (55,951 | ) |
| — |
| (58,157 | ) | ||||
Net cash used in financing activities |
| (1,259,766 | ) | (1,979,753 | ) |
| (1,298,468 | ) | (2,821,234 | ) | ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Net increase (decrease) in cash and cash equivalents |
| 869,299 |
| (57,956 | ) | |||||||||
Net (decrease) increase in cash and cash equivalents |
| (966,650 | ) | 2,917,345 |
| |||||||||
|
|
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents, beginning of period |
| 4,731,926 |
| 63,639 |
|
| 4,731,926 |
| 63,639 |
| ||||
Cash and cash equivalents, end of period |
| $ | 5,601,225 |
| $ | 5,683 |
|
| $ | 3,765,276 |
| $ | 2,980,984 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
| ||||
Cash paid during the period for interest |
| $ | 18,336 |
| $ | 65,595 |
|
| $ | 22,679 |
| $ | 87,523 |
|
Cash paid during the period for income taxes |
| $ | 46,270 |
| $ | 79,491 |
|
| $ | 47,582 |
| $ | 102,095 |
|
Non-cash investing and financing activity: |
|
|
|
|
| |||||||||
Issuance of common stock for acquisition |
| $ | 1,500,000 |
| $ | — |
| |||||||
Issuance of warrants for acquisition |
| $ | 279,000 |
| $ | — |
|
The accompanying notes are an integral part of these consolidated financial statements.
XETA TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
April 30,July 31, 2010
(Unaudited)
1. BASIS OF PRESENTATION:
XETA Technologies, Inc. (“XETA”, the “Company”, “we”, “us”, or “our”), an Oklahoma corporation formed in 1981, is a leading integrator of advanced communications technologies with nationwide sales and service. XETA provides sales, design, project management, implementation, and maintenance services in support of the products it represents. The Company sells and/or supports products produced by several manufacturers including Avaya, Inc. (“Avaya”), Mitel Corporation (“Mitel”), and Samsung Business Communications Systems (“Samsung”). In addition,Through its recent acquisition of the assets of Hotel Technology Solutions, Inc. (“Lorica”) the Company provides high speed internet access, network monitoring services, and guest help desk services to the hospitality industry. The Company also manufactures and markets a line of proprietary call accounting systems to the hospitality industry.
The Company prepared the accompanying unaudited consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “Commission”). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to those rules and regulations. The Company believes that the disclosures are reasonably adequate to ensure the information is not misleading. Management suggests that these condensed financial statements be read in conjunction with the consolidated financial statements and the notes thereto made a part of the Company’s Annual Report on Form 10-K. The Company filed the 10-K as Commission File No. 0-16231, with the Commission on January 8, 2010. Management believes that the financial statements contain the necessary adjustments for a fair statement of the results for the interim periods presented. All adjustments were of a normal recurring nature. The results of operations for the interim period are not necessarily indicative of the results for the entire fiscal year.
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate the value:
The carrying value of cash and cash equivalents, customer deposits, trade accounts receivable, sales-type leases, accounts payable and short-term debt approximate their respective fair values due to their short maturities.
Based upon the borrowing rates currently available to the Company for bank loans with similar terms and average maturities, the fair value of the long-term debt approximates the carrying value.
Segment Information
The Company has three reportable segments: services, commercial system sales, and hospitality system sales. Services revenues represent revenues earned from installing and maintaining systems for customers in both the commercial and hospitality segments. The Company defines commercial system sales as sales to the non-hospitality industry.
The reporting segments follow the same accounting policies used for the 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 April 30,July 31, 2010 and 2009:
|
| Services |
| Commercial |
| Hospitality |
| Other |
| Total |
|
| Services |
| Commercial |
| Hospitality |
| Other |
| Total |
| ||||||||||
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Sales |
| $ | 11,377,908 |
| $ | 4,727,332 |
| $ | 1,015,305 |
| $ | 77,452 |
| $ | 17,197,997 |
|
| $ | 12,166,889 |
| $ | 7,296,428 |
| $ | 1,240,156 |
| $ | 188,300 |
| $ | 20,891,773 |
|
Cost of sales |
| (7,782,674 | ) | (3,456,380 | ) | (716,623 | ) | (455,920 | ) | (12,411,597 | ) |
| (8,223,095 | ) | (5,136,934 | ) | (884,456 | ) | (434,436 | ) | (14,678,921 | ) | ||||||||||
Gross profit |
| $ | 3,595,234 |
| $ | 1,270,952 |
| $ | 298,682 |
| $ | (378,468 | ) | $ | 4,786,400 |
|
| $ | 3,943,794 |
| $ | 2,159,494 |
| $ | 355,700 |
| $ | (246,136 | ) | $ | 6,212,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Sales |
| $ | 9,841,649 |
| $ | 5,279,778 |
| $ | 2,509,360 |
| $ | 125,816 |
| $ | 17,756,603 |
|
| $ | 10,524,397 |
| $ | 4,032,103 |
| $ | 2,490,466 |
| $ | 136,271 |
| $ | 17,183,237 |
|
Cost of sales |
| (6,768,814 | ) | (3,961,332 | ) | (1,848,191 | ) | (435,275 | ) | (13,013,612 | ) |
| (7,505,892 | ) | (2,828,437 | ) | (1,811,312 | ) | (425,480 | ) | (12,571,121 | ) | ||||||||||
Gross profit |
| $ | 3,072,835 |
| $ | 1,318,446 |
| $ | 661,169 |
| $ | (309,459 | ) | $ | 4,742,991 |
|
| $ | 3,018,505 |
| $ | 1,203,666 |
| $ | 679,154 |
| $ | (289,209 | ) | $ | 4,612,116 |
|
The following is a tabulation of business segment information for the sixnine months ended April 30,July 31, 2010 and 2009:
|
| Services |
| Commercial |
| Hospitality |
| Other |
| Total |
|
| Services |
| Commercial |
| Hospitality |
| Other |
| Total |
| ||||||||||
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Sales |
| $ | 23,494,765 |
| $ | 14,765,913 |
| $ | 1,843,782 |
| $ | 137,680 |
| $ | 40,242,140 |
|
| $ | 35,661,654 |
| $ | 22,062,341 |
| $ | 3,083,938 |
| $ | 325,980 |
| $ | 61,133,913 |
|
Cost of sales |
| (16,013,754 | ) | (10,997,365 | ) | (1,252,225 | ) | (853,555 | ) | (29,116,899 | ) |
| (24,236,849 | ) | (16,134,299 | ) | (2,136,681 | ) | (1,287,991 | ) | (43,795,820 | ) | ||||||||||
Gross profit |
| $ | 7,481,011 |
| $ | 3,768,548 |
| $ | 591,557 |
| $ | (715,875 | ) | $ | 11,125,241 |
|
| $ | 11,424,805 |
| $ | 5,928,042 |
| $ | 947,257 |
| $ | (962,011 | ) | $ | 17,338,093 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Sales |
| $ | 19,834,882 |
| $ | 11,576,483 |
| $ | 4,798,408 |
| $ | 126,855 |
| $ | 36,336,628 |
|
| $ | 30,359,279 |
| $ | 15,608,586 |
| $ | 7,288,874 |
| $ | 263,126 |
| $ | 53,519,865 |
|
Cost of sales |
| (13,752,553 | ) | (8,763,099 | ) | (3,388,789 | ) | (883,045 | ) | (26,787,486 | ) |
| (21,258,445 | ) | (11,591,536 | ) | (5,200,101 | ) | (1,308,525 | ) | (39,358,607 | ) | ||||||||||
Gross profit |
| $ | 6,082,329 |
| $ | 2,813,384 |
| $ | 1,409,619 |
| $ | (756,190 | ) | $ | 9,549,142 |
|
| $ | 9,100,834 |
| $ | 4,017,050 |
| $ | 2,088,773 |
| $ | (1,045,399 | ) | $ | 14,161,258 |
|
Stock-Based Compensation Plans
The Company applies the provisions of ASC 718, “Compensation — Stock Compensation”, which requires companies to measure all employee stock-based compensation awards using a fair value method and recognize compensation cost in its financial statements. The Company recognizes the fair value of stock-based compensation awards as selling, general and administrative expense in the consolidated statements of operations on a straight-line basis over the vesting period. Compensation expense was recognized in the statements of operations as follows:
|
| 2010 |
| 2009 |
| ||
Three months ended April 30, |
| $ | 60,669 |
| $ | 74,233 |
|
|
|
|
|
|
| ||
Six months ended April 30, |
| $ | 134,729 |
| $ | 144,598 |
|
|
| 2010 |
| 2009 |
| ||
Three months ended July 31, |
| $ | 65,510 |
| $ | 74,878 |
|
|
|
|
|
|
| ||
Nine months ended July 31, |
| $ | 200,240 |
| $ | 219,476 |
|
Use of Estimates
The preparation of the financial statements conforms to the accounting principles generally accepted in the U.S., and requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities: disclosure of contingent assets and liabilities at the date of the financial statements; and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates.
New Accounting Pronouncements
In FebruaryJuly 2010 the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-20, “Receivables (Topic 310): Disclosure about the Credit Quality of Financing Receivables and the Allowance for Credit Losses”. ASU 2010-20 requires disclosures designed to enhance transparency regarding credit losses and the credit quality of loan and lease receivables. Disclosures include an evaluation of the nature of credit risk inherent in the entity’s financing receivables; how the risk is analyzed to arrive at the allowance for credit losses and the changes and reasons for changes in the allowance for credit losses. Under this guidance, the allowance for credit losses and fair value are to be disclosed by portfolio segment. ASU 2010-20 will be effective for fiscal years beginning on or after December 31, 2010. The adoption of this guidance is not expected to have an impact on the Company’s consolidated financial statements.
In February 2010 the FASB issued ASU 2010-09, “Subsequent Events: Amendments to Certain Recognition and Disclosure Requirments”Requirements”. The guidance in ASU 2010-09 removes the requirement for SEC filers to disclose the date through which subsequent events have been evaluated. The adoption of this update did not have a material impact on the Company’s financial position or results of operations.
In November 2009 the Company adopted Accounting Standards Codification (“ASC”) 810, “Consolidation”. ASC 810 changes the accounting and reporting for minority interests, which are now recharacterized as non-controlling interests and classified as a component of equity. The Company does not have any minority interests; therefore the adoption of this statement did not have an impact on the Company’s consolidated financial statements.
In November 2009 the Company adopted ASC 805, “Business Combinations”. Under ASC 805, 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 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 Company will applybegan applying the guidance prospectively to business combinations.combinations in fiscal 2010.
In November 2009 the Company adopted ASC 350 “Intangibles — Goodwill and Other”. The guidance amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of intangible assets. The intent of the guidance is to improve the consistency between the useful life of a recognized intangible asset under the accounting standards and the period of the expected cash flows used to measure the fair value of the asset. The Company will applybegan applying the guidance prospectively to intangible assets acquired after adoption.in fiscal 2010.
In October 2009 the FASB issued ASU 2009-13, “Revenue Recognition - Multiple-Deliverable Revenue Arrangements”. The guidance in ASU 2009-13 amends the criteria for separating consideration in multiple-deliverable arrangementsarrangements. The guidance eliminates the estimated fair value approach for revenue allocation between the separate units of accounting and replaces it with a sales-based approach referred so as the relative-selling-price method. ASU 2009-13 expands required disclosures related to a company’s multiple-deliverable revenue arrangements. ASU 2009-13 is effective prospectively for fiscal years beginning on or after June 15, 2010. The Company is currently assessing the impact that adoption will have on required disclosures, its financial position orand results of operations.
Other accounting standards that have been issued or proposed that do not require adoption until a future date are not expected to have a material impact on our consolidated financial statements upon adoption.
2. ACCOUNTS RECEIVABLE:
Trade accounts receivable consist of the following:
|
| April 30, |
| (Audited) |
| ||
|
|
|
|
|
| ||
Trade accounts receivables |
| $ | 10,931,766 |
| $ | 14,393,681 |
|
Less- reserve for doubtful accounts |
| (456,557 | ) | (561,229 | ) | ||
Net trade accounts receivables |
| $ | 10,475,209 |
| $ | 13,832,452 |
|
|
| July 31, |
| (Audited) |
| ||
|
|
|
|
|
| ||
Trade accounts receivable |
| $ | 15,090,558 |
| $ | 14,393,681 |
|
Less- reserve for doubtful accounts |
| (549,927 | ) | (561,229 | ) | ||
Net trade accounts receivable |
| $ | 14,540,631 |
| $ | 13,832,452 |
|
On January 14, 2009, Nortel Networks Corporation filed for bankruptcy protection in the United States Bankruptcy Court for the District of Delaware. Subsequent to the filing the administrators of the bankruptcy adopted a business disposal strategy. Under the strategy, the administrators segmented Nortel into three primary business units: Virtual Service Switches, CDMA businesses and Enterprise Solutions. We conducted all of our Nortel business through the Enterprise Solutions unit.
On December 18, 2009, Avaya completed the purchase of Nortel’s Enterprise Solutions business unit. Nortel owes XETA approximately $700,000 in pre-petition accounts receivable. On July 17, 2009 the bankruptcy court granted ourXETA’s request for offset of $116,000 in charges we owed to Nortel at the time of the filing. In fiscal year 2009, wethe Company recorded $350,000 as a reserve against possible Nortel bad debts. Nortel has untilfiled its plan of reorganization on July 13,12, 2010 (the “Nortel Plan”). XETA’s claim is classified as a Class 3 claim, “General Unsecured Claims”. The Nortel Plan states that priority non-tax claims and secured claims will be paid in full, but that Class 3 claims will be impaired. No indication or estimate is given as to filethe potential extent of the impairment. According to the Nortel Plan, XETA and other Class 3 claimants will receive a pro rata share of the assets of Nortel at the time the Nortel Plan goes into affect. The next significant action in this matter is expected to be Nortel’s filing of a Disclosure Statement in mid-September providing more information regarding Nortel’s assets and potentially an estimate of payouts to Class 3 creditors. Based on the information presently available, the Company can make no further determination regarding the adequacy of its reorganization plan; however,reserve in this date is subject to further extension. Until the administrators file Nortel’s reorganization plan our ability to assess the probability of recovering pre-petition amounts due is limited.
matter. The Company iswill continue to carefully followingfollow developments associated with the bankruptcy case and will assert its legal rights and defenses as appropriate.
3. INVENTORIES:
Inventories are stated at the lower of average cost or market and consist of the following:
|
| April 30, |
| (Audited) |
|
| July 31, |
| (Audited) |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Finished goods and spare parts |
| $ | 5,552,419 |
| $ | 5,977,703 |
|
| $ | 5,899,077 |
| $ | 5,977,703 |
|
Less- reserve for excess and obsolete inventories |
| (993,011 | ) | (941,505 | ) |
| (1,034,737 | ) | (941,505 | ) | ||||
Total inventories, net |
| $ | 4,559,408 |
| $ | 5,036,198 |
|
| $ | 4,864,340 |
| $ | 5,036,198 |
|
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following:
|
| Estimated |
| April 30, |
| (Audited) |
|
| Estimated |
| July 31, |
| (Audited) |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Building and building improvements |
| 3-20 |
| $ | 3,340,945 |
| $ | 3,253,693 |
|
| 3-20 |
| $ | 3,378,035 |
| $ | 3,253,693 |
|
Data processing and computer field equipment |
| 2-7 |
| 3,680,252 |
| 3,248,126 |
|
| 2-7 |
| 3,977,439 |
| 3,248,126 |
| ||||
Software development costs, work-in-process |
| N/A |
| 208,194 |
| 197,097 |
|
| N/A |
| 227,862 |
| 197,097 |
| ||||
Software development costs of components placed into service |
| 3-10 |
| 2,708,930 |
| 2,697,806 |
|
| 3-10 |
| 2,731,310 |
| 2,697,806 |
| ||||
Hardware |
| 3-5 |
| 643,635 |
| 643,635 |
|
| 3-5 |
| 643,635 |
| 643,635 |
| ||||
Land |
| –– |
| 611,582 |
| 611,582 |
|
| — |
| 611,582 |
| 611,582 |
| ||||
Office furniture |
| 5-7 |
| 807,985 |
| 779,588 |
|
| 5-7 |
| 813,556 |
| 779,588 |
| ||||
Auto |
| 5 |
| 540,575 |
| 537,300 |
|
| 5 |
| 545,548 |
| 537,300 |
| ||||
Other |
| 3-7 |
| 145,779 |
| 149,484 |
|
| 3-7 |
| 145,779 |
| 149,484 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total property, plant and equipment |
|
|
| 12,687,877 |
| 12,118,311 |
|
|
|
| 13,074,746 |
| 12,118,311 |
| ||||
Less- accumulated depreciation and amortization |
|
|
| (5,979,513 | ) | (5,292,395 | ) |
|
|
| (6,419,556 | ) | (5,292,395 | ) | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total property, plant and equipment, net |
|
|
| $ | 6,708,364 |
| $ | 6,825,916 |
|
|
|
| $ | 6,655,190 |
| $ | 6,825,916 |
|
5. INCOME TAXES:
The tax provision reflects the effective Federal tax rate plus the composite state income tax rates adjusted for states that require minimum tax payments even if tax losses are incurred. Generally, we expect our tax provision rate to be approximately 40%.
6. CREDIT AGREEMENTS:
In November 2009, the Company entered into a one-year loan agreement with a new financial institution. This agreement replaced our previous credit facility, which was scheduled to mature on November 30, 2009. The loan agreement consists of an $8.5 million revolving credit facility collateralized by trade accounts receivable, inventories, and real estate.
At April 30,July 31, 2010, the Company did not have an outstanding balance on the revolving line of credit. The Company had approximately $8.5 million available under the revolving line of credit at April 30,July 31, 2010. The advance rates are defined in the agreement, but are generally at the rate of 75% on qualified trade accounts receivable and 50% of qualified inventories and real estate, subject to a maximum of $2.0 million each. Long term debt consisted of the following:
|
| April 30, |
| (Audited) |
|
| July 31, |
| (Audited) |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Term note, payable with a fixed payment of $1,183,475 due November 30, 2009, collateralized by a first mortgage on the Company’s building |
| $ | — |
| $ | 1,183,475 |
|
| $ | — |
| $ | 1,183,475 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Less-current maturities |
| — |
| 1,183,475 |
|
| — |
| 1,183,475 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Total long-term debt, less current maturities |
| $ | — |
| $ | — |
|
| $ | — |
| $ | — |
|
Interest on all outstanding debt under the credit facility accrues at the greater of either the London Interbank Offered Rate (“LIBOR”) (0.28%(0.305% at April 30,July 31, 2010) plus 3.0% or 4.5%. The credit facility contains several financial covenants common in such agreements including tangible net worth requirements, limitations on the amount of funded debt to annual earnings before interest, taxes, depreciation and amortization, limitations on cash dividends, and debt service coverage requirements. At April 30,July 31, 2010 the Company was in compliance with the covenants of the credit facility.
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 April 30, 2010 |
|
| For the Three Months Ended July 31, 2010 |
| ||||||||||||
|
| Income |
| Shares |
| Per Share |
|
| Income |
| Shares |
| Per Share |
| ||||
Basic EPS |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income |
| $ | 212,355 |
| 10,230,851 |
| $ | 0.02 |
|
| $ | 512,774 |
| 10,533,335 |
| $ | 0.05 |
|
Dilutive effect of stock options |
|
|
| 53,713 |
|
|
|
|
|
| 78,068 |
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Diluted EPS |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income |
| $ | 212,355 |
| 10,284,564 |
| $ | 0.02 |
|
| $ | 512,774 |
| 10,611,403 |
| $ | 0.05 |
|
|
| For the Three Months Ended April 30, 2009 |
|
| For the Three Months Ended July 31, 2009 |
| ||||||||||||
|
| Income |
| Shares |
| Per Share |
|
| Loss |
| Shares |
| Per Share |
| ||||
Basic EPS |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income |
| $ | 183,288 |
| 10,225,395 |
| $ | 0.02 |
| |||||||||
Net loss |
| $ | (8,599,068 | ) | 10,223,753 |
| $ | (0.84 | ) | |||||||||
Dilutive effect of stock options |
|
|
| 16 |
|
|
|
|
|
| — |
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Diluted EPS |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income |
| $ | 183,288 |
| 10,225,411 |
| $ | 0.02 |
| |||||||||
Net loss |
| $ | (8,599,068 | ) | 10,223,753 |
| $ | (0.84 | ) |
|
| For the Nine Months Ended July 31, 2010 |
| ||||||
|
| Income |
| Shares |
| Per Share |
| ||
Basic EPS |
|
|
|
|
|
|
| ||
Net income |
| $ | 1,357,917 |
| 10,328,689 |
| $ | 0.13 |
|
Dilutive effect of stock options |
|
|
| 57,529 |
|
|
| ||
|
|
|
|
|
|
|
| ||
Diluted EPS |
|
|
|
|
|
|
| ||
Net income |
| $ | 1,357,917 |
| 10,386,218 |
| $ | 0.13 |
|
|
| For the Six Months Ended April 30, 2010 |
| ||||||
|
| Income |
| Shares |
| Per Share |
| ||
Basic EPS |
|
|
|
|
|
|
| ||
Net income |
| $ | 845,143 |
| 10,212,244 |
| $ | 0.08 |
|
Dilutive effect of stock options |
|
|
| 40,651 |
|
|
| ||
|
|
|
|
|
|
|
| ||
Diluted EPS |
|
|
|
|
|
|
| ||
Net income |
| $ | 845,143 |
| 10,252,895 |
| $ | 0.08 |
|
|
| For the Six Months Ended April 30, 2009 |
|
| For the Nine Months Ended July 31, 2009 |
| ||||||||||||
|
| Income |
| Shares |
| Per Share |
|
| Loss |
| Shares |
| Per Share |
| ||||
Basic EPS |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income |
| $ | 185,556 |
| 10,223,944 |
| $ | 0.02 |
| |||||||||
Net loss |
| $ | (8,413,512 | ) | 10,223,881 |
| $ | (0.82 | ) | |||||||||
Dilutive effect of stock options |
|
|
| 29 |
|
|
|
|
|
| — |
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Diluted EPS |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income |
| $ | 185,556 |
| 10,223,973 |
| $ | 0.02 |
| |||||||||
Net loss |
| $ | (8,413,512 | ) | 10,223,881 |
| $ | (0.82 | ) |
Options to purchase 901,699712,450 shares of common stock at an average exercise price of $6.99$5.82 and 1,398,0001,269,900 shares of common stock at an average exercise price of $6.06$6.42 were not included in the computation of diluted earnings per share for the three months ended April 30,July 31, 2010 and 2009, respectively, because inclusion of these options would be antidilutive. Options to purchase 925,042834,595 shares of common stock at an average exercise price of $6.90$5.23 and 1,398,0001,269,900 shares of common stock at an average exercise price of $6.06$6.42 were not included in the computation of diluted earnings per share for the sixnine months ended April 30,July 31, 2010 and 2009, respectively, because inclusion of these options would be antidilutive.
8. CONTINGENCIES:
In addition to potential losses related to Nortel’s pre-petition receivables, the Company may be subject to preference payment claims asserted by Nortel. It is routine in bankruptcy proceedings for the debtor in possession or bankruptcy trustee to assert a statutory “preference claim” to seek to recover payments made by the bankrupt entity to creditors during the 90-day period immediately preceding the filing of the bankruptcy petition. This period is known as the “preference period”. Although the debtor is entitled to make a claim based solely upon when the payments were made, the payments are not recoverable if they were made in the debtor’s ordinary course of dealings with the creditor. Nortel has filed a schedule showing approximately $1.6 million in payments made to the Company during the preference period. To date Nortel has not asserted a preference claim against the Company. However, if a preference claim is brought, the Company believes it has good defenses to any such potential claim against it, including that the subject payments were made in the ordinary course of the Company’s business dealings with Nortel. These defenses must be argued on each individual Company invoice paid during the preference period. The Company has not completed its evaluation of its potential defenses against each individual invoice. As such the Company is unable at this time to determine the extent, if any, of any material loss that might occur if a claim to recover preference payments is asserted. Therefore, no provision for loss has been made beyond the amount discussed above related to unpaid invoices at the time of the bankruptcy filing.
9. 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 $177,536$139,492 at April 30,July 31, 2010. Accumulated amortization of the leased licenses at April 30,July 31, 2010 was $278,984.$317,028. Amortization 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 April 30,July 31, 2010, are as follows:
|
| Capital |
|
| Capital |
| ||
|
|
|
| |||||
2010 |
| $ | 161,435 |
| ||||
2011 |
| 26,906 |
| |||||
Total minimum lease payments |
| 188,341 |
|
| $ | 147,982 |
| |
Less- imputed interest |
| 4,484 |
|
| 2,827 |
| ||
Present value of minimum payments |
| 183,857 |
|
| 145,155 |
| ||
Less-current maturities of capital lease obligation |
| 157,081 |
|
| 145,155 |
| ||
Long-term capital lease obligation |
| $ | 26,776 |
|
| $ | — |
|
10. SUBSEQUENT EVENTS:ACQUISITIONS:
In connection with the preparation of the Consolidated Financial Statements for the six months ended April 30, 2010, the Company has evaluated subsequent events for potential recognition and disclosures through the date of financial statement issuance.
On May 24, 2010, the Company completed the purchase of the operating assets of Hotel Technologies Solutions, Inc., dbad/b/a Lorica Solutions (“Lorica”), a privately-held company headquartered in Buffalo, New York. Lorica is an emerging leader in the delivery of high-speed internet access and network administration to the hospitality industry. Under the terms of the purchase agreement, total consideration to be paid by the Company is $2.8 million plus certain assumed liabilities. The purchase price included $833,000 paid in cash at closing; 397,878 shares of XETA common stock valued at $1.5 million based on the May 21, 2010 closing price of $3.77; five year warrants to purchase 150,000 shares of XETA common stock at $3.77;$3.77 valued at $279,000; and $167,000 in cash deposited into an escrow account as required under the purchase agreement. The Company used existing cash to fund the cash portion of the purchase price. The acquisition is not material to the Company’s financial position or results of operations.
The fair values of the assets acquired and liabilities assumed for Lorica are provisional and are based on the information available as of the acquisition date. The Company believes that the information available provides a reasonable basis for estimating the fair value but additional information may be necessary to finalize the valuation. The provisional measurements of fair value are subject to change. The Company expects to finalize the valuation and complete the purchase price allocation as soon as practicable but no later than one year from the acquisition date.
11. SUBSEQUENT EVENTS:
On AprilAugust 2, 2010, the Company entered into a non-binding Lettercompleted the purchase of Intent to purchase100% of the voting stock of Pyramid Communications Services, Inc., (“Pyramid”) a Dallas, Texas based privately held company providing communications equipment and related services. Pyramid’s 2009 revenues exceeded $10.0 million. The purchase price included $1.8 million paid in cash at closing; $675,000 in subordinated promissory notes payable to the sellers in eight quarterly installments bearing interest at three percent per year; $200,000 in cash deposited into an escrow account as required under the purchase agreement; and $100,000 payable to the former CEO of Pyramid in thirty six monthly installments under personal goodwill and non-compete agreements. Additionally, the Company is currently conducting due diligenceretired $648,222 in principal and accrued interest on Pyramid’s financial condition and operations.outstanding line of credit with its bank. The Company expectsused $2.65 million from existing cash balances to closefund the purchase price. The acquisition is not material to the Company’s financial position or results of operations.
On September 2, 2010, the Company completed the purchase of the operating assets of Data-Com Telecomunications, Inc., (“Data-Com”) a New Jersey based privately held company providing communications equipment and related services to the greater New York City area. The purchase price was $3.070 million cash. Of this purchase during its third fiscal quarter.amount, $604,000 was put into escrow until certain tax liabilities are determined; customer overpayments are resolved; and the final value of the net assets purchased is established. The acquisition is not material to the Company’s financial position or results of operations.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Preliminary Note Regarding Forward-Looking Statements
This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, relating to future events and our future performance and results. Many of these statements appear in the discussions under the headings “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” All statements other than those that are purely historical may be forward-looking statements. Forward-looking statements can generally be identified by words such as “expects,” “anticipates,” “may,” “likely,” “plans,” “believes,” “intends,” “projects,” “estimates,” and similar words or expressions. Forward-looking statements are not guarantees of performance, but rather reflect management’s current expectations, estimates, and forecasts about the industry and markets in which we operate, and our assumptions and beliefs based upon information currently available to management. Investors are cautioned that all forward-looking statements are subject to certain risks and uncertainties which are difficult to predict or which we are unable to control, and that could cause actual results to differ materially from those projected, including but not limited to such factors as the condition of the U.S. economy and its impact on capital spending trends in the Company’s markets, the risk that various closing conditions for acquisitions that we have announced this past quarter may not be satisfied or waived; andmarkets; whether the integration of therecently acquired businesses into that of the Company and realization of anticipated synergies and growth opportunities from the transaction may not occur;such transactions are successful; success in our overall strategy; the financial condition of our suppliers and changes by them in their distribution strategies and support,support; the Nortel Networks bankruptcy filing and the potential negative impact that such action will continue toit may have on the Company’s prepetition accounts receivable claim against Nortel products and services offering;or if Nortel succeeds in bringing a preference claim against the Company; unpredictable quarter to quarter revenues,revenues; changes in Avaya’s strategies regarding the provision of equipment and services to its customers, and in its policies regarding the availability of tier IV hardware and software support; inconsistent gross profit margins, the Company’s ability to maintain and improve upon current gross profit margins; continuing acceptance and success of the Mitel product and services offering, availability of credit to finance growth,growth; intense competition and industry consolidation,consolidation; dependence upon a few large wholesale customers in the Company’s Managed Services offering,offering; and the availability and retention of revenue professionals and certified technicians. These and other risks and uncertainties are discussed under the heading “Risk Factors” under Part I of the Company’s Form 10-K for the fiscal year ended October 31, 2009 (filed with the Commission on January 8, 2010) and in updates to such risk factors set forth in Item 1A of Part II of this quarterly report. As a result of these risks and uncertainties, actual results may differ materially and adversely from those expressed in forward-looking statements. Consequently, investors are cautioned 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.
Overview
Strategy.
In advance of fiscal 2010, senior management conducted its periodic review of the strategic direction of the Company. This review resulted in a threefold refinement of the strategic focus and direction of the organization. First, we will continue to emphasizeorganization including: continued emphasis on aggressive growth in our managed services business. Second, we willbusiness; use of our unique position to search out and pursue organic and acquisitive growth opportunities resulting from Avaya’s acquisition of Nortel’s enterprise business. Finally we willbusiness (NES); and advance a longer-term business initiative focused on the sales, design, integration and maintenance and repair of collaborative technologies and advanced applications.
Management believes these refinements of our longstanding strategies are necessaryappropriate to fully realize the benefits of our investments in high value talent and competencies, to capitalize on the market realignment resulting from Avaya’s acquisition of NortelNES and to ready ourselves in anticipation of growth in demand for advanced applications and collaborative technologies.
AtEven though we are experiencing growth in our services revenue, the endoverall market for our products and services remains challenging. While some of the first fiscal quarter of 2010 it appeared our market wascustomers are enjoying improvements in the early stages of recovery from the economic downturn that affected ourtheir business throughout fiscal 2009. Presently market indicators,and are therefore purchasing and implementing new communications systems, many others remain
while tepid, pointcautiously optimistic about near-term economic improvement and are continuing to market growthlimit new spending and are furthering their efforts to reduce ongoing operating costs. Consequently, we have not experienced an overall improvement in the second halfpurchases of 2010. However, as evidenced by our results in the second fiscal quarter of 2010 market conditions remain challenging. We are optimistic that the Company is positioned to capitalize on opportunities resulting from an improving economy.
In April 2010 the Company signed a letter of intent to purchase Pyramid Communicastions Services, Inc. (“Pyramid”), a privately held company headquartered in Dallas, Texas. Pyramid provides communications equipmentnew systems and related services. The transaction is targeted to close duringAdditionally, some of our major customers have faced unique challenges in their operations which have slowed expected orders. Finally, the Company’s third fiscal quarter subject to the executionacquisition of NES by Avaya has created a definitive purchase agreement, satisfactory completion of due diligence,pause in some customers’ normal buying patterns as they evaluate Avaya’s technology roadmap and other customary closing conditions.service strategies.
On May 24, 2010, the Company completed the purchase of the operating assets of Hotel Technologies Solutions, Inc., dbad/b/a Lorica Solutions (“Lorica”), a privately-held company headquartered in Buffalo, New York. Lorica is an emerging leader in the delivery of high-speed internet access and network administration to the hospitality industry. The terms of the purchase agreement are described in Note 10 of the Notes to Consolidated Financial Statements.
On August 2, 2010, the Company completed the purchase of the stock of Pyramid Communications Services, Inc. (“Pyramid”), a privately held company headquartered in Dallas, Texas. Pyramid provides communications equipment and related services with 2009 revenues in excess of $10.0 million. The terms of the purchase agreement are described in Note 11 of the Notes to Consolidated Financial Statements.
Operating Summary.
In the secondthird quarter of fiscal 2010, we recorded net income of $212,000$513,000 on revenues of $20.9 million compared to a net loss of $8.6 million on revenues of $17.2 million compared to net income of $183,000 on revenues of $17.8 million in the secondthird quarter of last year. For the first sixnine months of fiscal 2010, we earned $845,000$1.4 million in net income on revenues of $40.2$61.1 million compared to a net incomeloss of $186,000$8.4 million on revenues of $36.3$53.5 million for the first sixnine months of last year. TheseIn the third quarter of fiscal 2009, we recorded an impairment charge on goodwill and other assets of $14.0 million and related tax benefit of $5.5 million. Our non-GAAP net income was $98,000 for the first nine months of last year. Apart from the impairment charges recorded in 2009, the improved 2010 results primarily reflect an increase in revenues and gross profits partially offset by increased operationgselling, general and administrative costs. We discuss this and other contributing factors in more detail under “Results of Operations” below.
Financial Position Summary.
Since October 31, 2009, we have generated positive cash flows from operations of $2.9$2.4 million and we primarily used these cash flows to reduce borrowings, purchase the net operating assets of Lorica and make capital expenditures to support our operations. We have improved our working capital approximately 16%15%. 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 six-monthnine-month periods ended April 30,July 31, 2010 and 2009 and should be considered in conjunction with our above comments as well as the “Risk Factors” section below.
Financial Condition
During the first twothree fiscal quarters of 2010 our working capital increased by 16%15% to $13.4$13.2 million. We generated $2.9$2.4 million in cash flows from operations. These cash flows included earnings and non-cash charges of $2.0 million; a decrease in accounts receivable of $3.3$3.2 million; a decrease in inventory of $426,000;$338,000; an increase in accrued liabilities of $483,000; and a decrease in deferred taxes of $546,000.$814,000. These positive cash flow items were partially offset by an increase in accounts receivable of $324,000; a decrease in unearned revenue of $555,000; a decrease in accounts payable of $1.2 million; a decrease in unearned revenue of $1.1 million; a decrease in accrued liabilities of $317,000;$590,000; and other changes in working capital items. These items netted to a decrease in cash of $747,000.$956,000. Non-cash charges included amortization of $374,000;$580,000; depreciation of $598,000;$906,000; provisions for doubtful accounts receivable and obsolete inventories of $81,000;$122,000; and stock-based compensation of $135,000.$200,000.
We used these positive cash flows to pay off term debt of $1.2 million; to purchases the net operating assets of Lorica of $1.0 million, acquire capital assets of $742,000;$1.1 million; and fund other financing and investing activities of $76,000.$115,000. The acquisition of capital assets was part of normal replacement of Information Technology infrastructure and headquarters facility improvements.
At April 30,July 31, 2010, our cash balance was $5.6$3.8 million and there was no outstanding balance on our working capital revolver. In accordance with the collateral base defined in the credit facility, $8.5 million was available for borrowing on the $8.5 million facility at the end of the quarter. The working capital revolver is scheduled to mature on November 5, 2010. We expect to renew this instrument for a 12-month or longer period prior to the expiration. It is possible that the renewal could result in higher borrowing costs and/or reduced availability for unsecured borrowings.
We expect to utilize a variety of common financing tools to fund acquisitions. We believe our cash balances, expected free cash flows from operations, and available borrowing capacity will be our primary sources of capital. However, we also expect to employ seller financing in the form of subordinated notes, earn-out agreements, indemnity hold-backs, and occasionally restricted stock and/or warrants. The level to which we employ these various methods, particularly the use of our equity, will depend upon a multitude of factors which are unique to each negotiation. In addition to the available capacity under our working capital line of credit, we believe we have access to a variety of capital sources such as private placements of subordinated debt, and public or private sales of equity to finance investments beyond our current needs.
Results of Operations
In the secondthird quarter of fiscal 2010 revenues were $17.2$20.9 million compared to $17.8$17.2 million in the secondthird quarter 2009. Our net income in the secondthird quarter of fiscal 2010 was $212,000,$513,000, compared to a net incomeloss of $183,000$8.6 million in the same quarter a year ago. TheseApart from the impairment charges on goodwill and other assets of $14.0 million recorded in the third quarter of fiscal 2009, these results primarlyprimarily reflect increased services and equipment revenues partially offset by lower equipment revenueshigher selling, general and higher operatingadministrative costs. In the first sixnine months of the year, revenues were $40.2$61.1 million compared to $36.3$53.5 million for the first sixnine months of fiscal 2009. Our net income for the first sixnine months of fiscal 2010 was $845,000$1.4 million compared to a net incomeloss of $186,000$8.4 million in the first sixnine months of fiscal 2009. The year-to-date results, excluding the impairment charge recorded in 2009, primarily reflect our strong first and third quarter results in all of our major revenue and gross profit categories. The narrative below provides further explanation of these results.
Systems Sales.
In the secondthird quarter of fiscal 2010 systems sales decreasedincreased approximately $2.0 million or 26%31% compared to the same period last year. This decreaseincrease includes a $552,000$3.3 million or 11% decrease81% increase in sales of systems to commercial customers and a $1.5$1.3 million or 60%50% decrease in sales of systems to hospitality customers. Year-to-date systems sales increased $235,000$2.2 million or 1%10% compared to last year. This increase includes aan increase in sales of systems to commercial customers of $3.2$6.5 million or 28%41% which was offset by a decrease in sales of systems to hospitality customers of $3.0$4.2 million or 62%58%. The secondthird quarter decreaseincrease in systems sales reflects a large project with one of our major customers in the education vertical market. Orders for systems to other commercial customers are above last year’s pace but reflect the general unpredictable nature of this segment of our business. We expect uneven growthbusiness and reluctance on the part of thesome customers to make significant new investments in technology. In addition, uncertain U.S. economy in the second half of fiscal year 2010. Given the increased visibility in our systems sales business expectancies, we are cautiously optimistic about the balance of the year; however, the market continueseconomic conditions continue to present many complex challenges. Furthermore,challenges to our hospitality customers as evidenced by the decline in revenues in our hospitality systems sales, some sectors of the economy remain mired in difficult economic circumstances. Based on our experience, we believe thethis sector. The hospitality industry as a whole is experiencing cyclical weakness in demand. In response this market segmentdemand and has limited its spending on new communications equipment and solutions.
Services Revenues.
Services revenues consist of the following:
|
| For the Three Months Ended |
| For the Six Months Ended |
|
| For the Three Months Ended |
| For the Nine Months Ended |
| ||||||||||||||||
|
| 2010 |
| 2009 |
| 2010 |
| 2009 |
|
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| ||||||||
Maintenance & repair |
| $ | 8,233,000 |
| $ | 7,050,000 |
| $ | 15,731,000 |
| $ | 14,026,000 |
|
| $ | 8,253,000 |
| $ | 7,358,000 |
| $ | 23,984,000 |
| $ | 21,384,000 |
|
Implementation |
| 2,527,000 |
| 2,272,000 |
| 6,289,000 |
| 4,457,000 |
|
| 3,164,000 |
| 2,469,000 |
| 9,453,000 |
| 6,926,000 |
| ||||||||
Cabling |
| 618,000 |
| 520,000 |
| 1,475,000 |
| 1,352,000 |
|
| 750,000 |
| 697,000 |
| 2,225,000 |
| 2,049,000 |
| ||||||||
Total Services revenues |
| $ | 11,378,000 |
| $ | 9,842,000 |
| $ | 23,495,000 |
| $ | 19,835,000 |
|
| $ | 12,167,000 |
| $ | 10,524,000 |
| $ | 35,662,000 |
| $ | 30,359,000 |
|
Maintenance and repair revenues increased 17% and 12%, respectively in the secondthird quarter and year-to-date periods. This year-to-date performance reflects the continued success of our wholesale services programs and repair revenues.revenues as well as the addition to our base of maintenance customers associated with the purchase of Lorica in the third quarter of fiscal 2010. We continue to aggressively market our national service footprint and multi-product line technical capabilities to existing and potential wholesale service partners such as network service providers, and large voice and data integrators. We also continue to market our service capabilities to end-users. We expect growth in these programs to positively impact our maintenance and repair revenues for the foreseeable future.
Implementation revenues increased 11%28% in the secondthird fiscal quarter reflecting an increase in revenues from our Professional Services Organization (“PSO”) and a decrease in ourrelatively flat installation revnues driven by lower equipment revenues. For the year-to-date period, Implementation revenues increased 41%36% reflecting an increase in revenues from PSO and strong first quarter installation revenues.PSO. We attribute this to increasing demand for more complex communications systems requiring significant fee-generating design and engineering services. 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 increased 19%8% and 9%, respectively in the secondthird fiscal quarter and year-to-date periods. These increases are primarily from a new wholesale service program added late in fiscal 2009.
Gross Margins.
The table below presents the gross margins earned on our primary revenue streams:
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| For the Three |
| For the Six |
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| For the Three |
| For the Nine |
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Gross Margins |
| 2010 |
| 2009 |
| 2010 |
| 2009 |
|
| 2010 |
| 2009 |
| 2010 |
| 2009 |
|
Systems sales |
| 29.5 | % | 28.9 | % | 27.3 | % | 26.7 | % | |||||||||
Services revenues |
| 31.6 | % | 31.2 | % | 31.8 | % | 30.7 | % |
| 32.4 | % | 28.7 | % | 32.0 | % | 30.0 | % |
Systems sales |
| 27.3 | % | 25.4 | % | 26.3 | % | 25.8 | % | |||||||||
Other revenues |
| -7.6 | % | 40.2 | % | 4.2 | % | -24.5 | % |
| 70.7 | % | 41.4 | % | 42.6 | % | 9.6 | % |
Corporate cost of goods sold |
| -2.2 | % | -2.0 | % | -1.8 | % | -2.0 | % |
| -1.8 | % | -2.0 | % | -1.8 | % | -2.0 | % |
Total |
| 27.8 | % | 26.7 | % | 27.6 | % | 26.3 | % |
| 29.7 | % | 26.8 | % | 28.4 | % | 26.5 | % |
Gross margins on systems sales in the third quarter and the year-to-date periods are above our target of 23% to 25% for systems revenues. Our consistent performance above our expected targets in this area is due to disciplined pricing practices and pricing support received from our manufacturers in the form of project-specific discounts and incentive rebates which are recorded as reductions to cost of goods sold. These discounts and incentives are material to our gross margins.
Gross margins earned on Services revenues primarily reflect an increase in recurring service revenues combined with improved cost controls, the use of third party Quality Service Partners, and improved utilization of our professional services personnel for consulting and fee-based engagements. These items contributed to gross Services margins in our target range of 30-35%.
Gross margins on systems sales in the second quarter and the year-to-date periods are slightly above our target of 23% to 25% for systems revenues. This success is due to continued focus on costs throughout the supply chain, disciplined pricing practices and pricing support received from our manufacturers in the form of project-specific discounts and incentive rebates which are recorded as reductions to cost of goods sold. These discounts and incentives are material to our gross margins.
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 other revenues from the sale of Avaya maintenance contracts on which we earn either a commission or gross profit. We have no continuing service obligation associated with these revenues and gross profits. This is an unpredictable revenue stream that depends on the expiration dates of existing contracts, installation dates of new systems, customer type as defined by Avaya, and number of years that customers contract for services. 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 $33,000 in the secondthird quarter were $5.4 million or 25.8% of revenues compared to$4.7 million or 27.5% of revenues in the third quarter of fiscal 2009 excluding $14.0 million in impairment charges recorded in the third quarter of fiscal 2009. Our operating expenses were 24.8% of revenues in the first three quarters of fiscal 2010 compared to 26.0% last year, excluding the second quarter of fiscal 2009. Operating expenses were 25.9% of revenuesimpairment charges. As discussed in the second quarter comparedoverview above, we have made strategic choices to 24.9%focus on aggressively expanding our managed services business and on expanding through acquisitions. We have increased our expenditures to support these strategies. These expenditures coupled with slower than expected growth in the second quarter last year. Operating expensesour systems sales and increased $567,000 or 6% for the first half of fiscal 2010 comparedinvestments in our Information Technology group to the same period a year ago. Operating expenses were 24.3% of revenuesincrease efficiencies and improve customer satisfaction has resulted in the first half of fiscal 2010 compared to 25.3% last year. The level ofour operating expenses as a percentage of revenues are aboveto continue to exceed our targets. We consider it tactically appropriate, given our strong cash flows, to support operating expenses above our targets in the near term to capitalize on these opportunities to expand our revenues and increase our net profit margins. Therefore we have increased our expenditures to support our key strategies to grow our managed services business and to execute on our acquisition strategy. Also, we have increased investments in our Information Technology group to increase efficiencies and improve customer satisfaction.
Interest Expense and Other Income.
Net interest and other income was $13,000$16,000 in the secondthird quarter of fiscal 2010 compared to $25,000$22,000 in net other expense in the secondthird quarter of fiscal 2009. Net interest and other income was $28,000$43,000 for the six-monthnine-month period ended April 30,July 31, 2010 compared to $43,000$65,000 in net other expense in the same period last year. This reflects both reduced debt levels and lower interest rates.
Tax Provision.
The tax provision reflects the effective Federal tax rate plus the composite state income tax rates adjusted for states that require minimum tax payments even if tax losses are incurred. Generally, we expect our tax provision rate to be approximately 40%.
ITEM 4T.4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. Based on an evaluation conducted as of April 30,July 31, 2010 by our management, including our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), our CEO and CFO have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are effective to reasonably ensure that information required to be disclosed in reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Controls. There were no changes in our internal controls during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, these controls over financial reporting.
On May 26, 2010 the Company and Pangaia Partners agreed to a confidential settlement and mutual release agreement in the lawsuit originally filed by Pangaia against two of its former employees who are currently employed by the Company. The suit, which was filed in Bergen County Superior Court of New Jersey Law Division, sought to enforce non-competition agreements between Pangaia and its former employees, and involved claims of unfair competition, tortuous interference with prospective economic advantage, tortuous interference with contract, misappropriation of trade secrets, conversion and unjust enrichment. The Company was named as an additional defendant in this lawsuit on November 10, 2009. The settlement of this matter is not material to the Company’s financial condition or results of operations.None.
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, 2009 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 2009 fiscal year have not materially changed.
The acquisition and integration of businesses by the Company may not produce the desired financial and/or operating results.
We have recently announced the acquisition of Lorica Solutions. In addition we are negotiating a stock purchase agreement and conducting due diligence to purchase all of the capital stock of Pyramid Communication Services, Inc. These developments are a part of our stated strategy to take advantage of the current disruption in our market by acquiring assets that increase our market share and establish a presence
in the advanced communications applications market segment. Integrating new operating assets into an existing organization is a complex business proposition. Expected synergies and growth often do not materialize as planned. We will use existing cash balances to fund the acquisitions and their integration costs. Furthermore, we will devote significant time and effort to improve the probablity of success for these investments. However, no assurance can be given that these acquisitions will meet our expectations for revenues and operating results, or that our capital could have been used more efficiently to improve our financial condition or operating results.
Nortel’s Chapter 11 Bankruptcy filing and subsequent sale of its enterprise solution business to Avaya may negatively impact our revenues and/or financial condition.
Nortel filed a voluntary petition for Chapter 11 bankruptcy protection on January 14, 2009. To date Nortel has not filed its plan of reorganization. In the meantime the administrators of the bankruptcy have adopted a business disposal strategy, pursuant to which they have sold the Nortel enterprise solution business (“NES”) to Avaya. All of the foregoing developments pose a variety of risks to our business, as follows:
·Uncertainty surrounding Nortel’s bankruptcy has significantly dampened demand for equipment in this product line. Until Nortel files it plan of reorganization, this uncertainty is likely to continue. Nortel has until July 13, 2010 to file its plan of reorganization unless such date is further extended by the court. Although Avaya’s acquisition of NES may help to reduce the uncertainly in the market over the course of fiscal 2010, in the near term we anticipate continued weakness in demand for Nortel equipment.
·We are owed approximately $717,000 in pre-petition accounts receivable less approximately $116,000 in approved offsets for amounts we owed to Nortel at the time of the filing. 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.
·Nortel has filed a statement of financial affairs under which it shows payments to the Company against multiple invoices of approximately $1.6 million which were made during the 90-day statutory “preference period” under bankruptcy law. XETA’s figure for these payments is $1.135 million. As such, these payments are considered “preference payments” and are subject to a “preference claim” which can be asserted by Nortel. Bankruptcy law allows the debtor to recover these payments unless the creditor successfully establishes that the payments were made in the ordinary course of business between the debtor and creditor or if the payments were offset by subsequent new value given by XETA in the form of goods or services. If Nortel elects to assert a preference claim against the Company for this amount or any portion thereof and the Company is unable to successfully defend the claim, the Company would have to return any such amounts to Nortel.
·Avaya’s purchase of NES may result in a significant disruption and/or material decline in our revenues and gross profits. NES is both one of our major suppliers and is an important customer in that NES outsources significant volumes of service calls to us under various managed services programs NES has with end-user customers. Avaya and NES are large, complex companies with global operations. They have had very different marketing strategies and both have long, deep cultural traditions. The integration of these two companies will be challenging and disruptive to the market. There can be no assurance given that the combination of Avaya and NES will not have near-term and/or long-term material, negative impact on our operating results, financial position, market position, and overall reputation.
Avaya’s recently publishedimplemented requirements regarding minimum level service agreements and hardware and software upgrade requirements could have a material, negative impact on our services gross margins.
Avaya has announcedimplemented new policies, effective July 1, 2010, requiring all customers to contract with Avaya for minimum service levels to access Tier IV support, and to maintain their software at no more than two trailing major version releases than the current version. We are evaluating theThe impact of these changes to our business.business will be negative, but the materiality of the impact is uncertain at this time. These impacts could include a significant decline in our services gross margins if we are required to purchase Avaya service contracts on behalf of all of our customers. Conversly,Conversely, if we chose to forego such purchases on behalf of our customers, we risk reduced customer satisfaction due to the lack of access to Avaya’s Tier IV support. We might also experience reduced sales of new Avaya systems if customers choose to abandon the product line due to increased costs for the mandantorymandatory Avaya maintenance contract.
Table Avaya has provided some transition relief in the form of Contents
Itblanket contracts and other exceptions to its stated policy, but it is too early to determine with confidence the long-term impact of these changes on our business. Avaya continues to refine these changes based on feedback from end users and business partners and we anticipate modifications to the plan based on this input. At this time, no assurance can be given that these policy changes if implemented by Avaya will not have a material, adverse impact on our operating results beginning as soon as fiscal 2011.
Nortel’s Chapter 11 Bankruptcy filing and subsequent sale of its enterprise solution business to Avaya may negatively impact our revenues and/or financial condition.
Nortel filed a voluntary petition for Chapter 11 bankruptcy protection on January 14, 2009. On July 12, 2010 Nortel filed its plan of reorganization which was essentially a plan of liquidation. This matter poses a variety of risks to our business, as follows:
· | Uncertainty surrounding Nortel’s bankruptcy has significantly dampened demand for equipment in this product line as existing Nortel customers evaluate costs and risks associated with maintaining their commitment to the Nortel platform and the associated Avaya product roadmap versus transitioning their installed based to other manufacturers’ platform. | |
· | We are owed approximately $717,000 in pre-petition accounts receivable less approximately $116,000 in approved offsets for amounts we owed to Nortel at the time of the filing. Nortel’s July 12 filing classifies our claim as a Class 3 “General Unsecured” claim. As such, our claim will be impaired and any distribution made by Nortel to Class 3 unsecured creditors will be shared among such creditors on a pro-rata basis. We do not know the extent to which this receivable will be impaired but it is apparent we will not collect the full amount. If this claim is not collectible in large part, we could experience material, negative operating results in the near term. | |
· | Nortel has filed a statement of financial affairs under which it shows payments to the Company against multiple invoices of approximately $1.6 million which were made during the 90-day statutory “preference period” under bankruptcy law. XETA’s figure for these payments is $1.14 million. As such, these payments are considered “preference payments” and are subject to a “preference claim” which can be asserted by Nortel. Bankruptcy law allows the debtor to recover these payments unless the creditor successfully establishes that the payments were made in the ordinary course of business between the debtor and creditor or if the payments were offset by subsequent new value given by XETA in the form of goods or services. If Nortel elects to assert a preference claim against the Company for this amount or any portion thereof and the Company is unable to successfully defend the claim, the Company would have to return any such amounts to Nortel. | |
· | Avaya’s purchase of the Nortel enterprise solution business (“NES”) may result in a significant disruption and/or material decline in our revenues and gross profits. NES is both one of our major suppliers and is an important customer in that NES outsources significant volumes of service calls to us under various managed services programs that NES has with end-user customers. Avaya and NES are large, complex companies with global operations. They have had very different marketing strategies and both have long, deep cultural traditions. The integration of these two companies will be challenging and disruptive to the market. There can be no assurance given that the combination of Avaya and NES will not have near-term and/or long-term material, negative impact on our operating results, financial position, market position, and overall reputation. |
The acquisition and integration of businesses by the Company may not produce the desired financial and/or operating results.
We have recently completed the acquisition of the operating assets of Lorica Solutions and the stock of Pyramid Communication Services, Inc. These developments are a part of our stated strategy to take advantage of the current disruption in our market by acquiring assets that increase our market share and establish a presence in the advanced communications applications market segment. Integrating new operating assets into an existing organization is a complex business proposition. Expected synergies and growth often do not materialize as planned. We used existing cash balances to fund the acquisitions and their integration costs. Furthermore, we will devote significant time and effort to improve the probability of success for these investments. However, no assurance can be given that these acquisitions will meet our expectations for revenues and operating results, or that our capital could have been used more efficiently to improve our financial condition or operating results.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
None.
Exhibits (filed herewith):
SEC Exhibit No. |
| Description |
2.1 | Asset Purchase Agreement dated May 10, 2010 between XETA Technologies, Inc. as Purchaser, Hotel Technology Solutions, Inc. as Seller, and Seller Principals.* | |
PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST. SUCH PORTIONS HAVE BEEN FILED SEPARATELY WITH THE COMMISSION WITH THE REGISTRANT’S APPLICATION FOR CONFIDENTIAL TREATMENT. | ||
2.2 | Stock Purchase Agreement dated July 9, 2010 by and among Sellers, Pyramid Communications Services, Inc. and XETA Technologies, Inc.* | |
PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST. SUCH PORTIONS HAVE BEEN FILED SEPARATELY WITH THE COMMISSION WITH THE REGISTRANT’S APPLICATION FOR CONFIDENTIAL TREATMENT. | ||
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. |
* | The schedules to this Exhibit have been omitted pursuant to Item 601(b)(2) of Regulation S-K. A list of the omitted schedules appears at the end of the Exhibit. The Registrant hereby agrees to furnish a copy of any omitted schedules to the Commission upon request. |
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: September 3, 2010 | By: | /s/ Greg D. Forrest |
Greg D. Forrest | ||
Chief Executive Officer | ||
Dated: September 3, 2010 | By: | /s/ Robert B. Wagner |
Robert B. Wagner | ||
Chief Financial Officer |
EXHIBIT INDEX
SEC Exhibit No. | Description | |
2.1 | Asset Purchase Agreement dated May 10, 2010 between XETA Technologies, Inc. as Purchaser, Hotel Technology Solutions, Inc. as Seller, and Seller Principals.* | |
PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST. SUCH PORTIONS HAVE BEEN FILED SEPARATELY WITH THE COMMISSION WITH THE COMPANY’S APPLICATION FOR CONFIDENTIAL TREATMENT. | ||
2.2 | Stock Purchase Agreement dated July 9, 2010 by and among Sellers, Pyramid Communications Services, Inc. and XETA Technologies, Inc.* | |
PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST. SUCH PORTIONS HAVE BEEN FILED SEPARATELY WITH THE COMMISSION WITH THE COMPANY’S APPLICATION FOR CONFIDENTIAL TREATMENT. | ||
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31.1 |
| Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer |
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31.2 |
| Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer |
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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. |
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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. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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* |
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EXHIBIT INDEX
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