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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended January 31, 2011
 OR
 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.
  Oklahoma
    
    73-1130045(State or other jurisdiction of
    
    (I.R.S. Employeeincorporation or organization)
    
    Identification No.)1814 W. Tacoma Street, Broken Arrow, OK
    
    74012-1406(Address of principal executive offices)
    
    (Zip Code)
 (Registrants telephone number, including area code)
 (Former name, former address and former fiscal year, if changed since last report)
  þ o
  þ
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
(Do not check if a smaller reporting company)
    
    Smaller reporting company þ
  o þ




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##### 



PAGEPART I. FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTS (Unaudited)Consolidated Balance Sheets  January 31, 2011 and October 31, 2010
    
    
    3Consolidated Statements of Operations  For the
Three Months Ended January 31, 2011 and 2010
    
    
    4Consolidated Statement of Shareholders Equity  For the
Three Months Ended January 31, 2011
    
    
    5Consolidated Statements of Cash Flows  For the
Three Months Ended January 31, 2011 and 2010
    
    
    6Notes to Consolidated Financial Statements
    
    
    7ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS
    
    
    13ITEM 4. CONTROLS AND PROCEDURES
    
    
    17PART II. OTHER INFORMATIONITEM 1. LEGAL PROCEEDINGS
    
    
    17ITEM 1A. RISK FACTORS
    
    
    18ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    19ITEM 3. DEFAULTS UPON SENIOR SECURITIES
    
    
    19ITEM 5. OTHER INFORMATION
    
    
    19ITEM 6. EXHIBITS
    
    
    20Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
   2




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(UNAUDITED)January 31, 2011
    
    
    October 31, 2010ASSETSCurrent assets:Cash and cash equivalents
    
    $
    721,985
    
    
    $
    1,003,180Current portion of net investment in
sales-type leases and other receivables
    
    
    612,537
    
    
    
    996,148Trade accounts receivable, net
    
    
    18,328,219
    
    
    
    17,805,992Inventories, net
    
    
    6,429,522
    
    
    
    6,715,076Deferred tax asset
    
    
    1,196,966
    
    
    
    1,168,544Prepaid taxes
    
    
    81,390
    
    
    
    69,980Prepaid expenses and other assets
    
    
    2,817,373
    
    
    
    2,402,111Total current assets
    
    
    30,187,992
    
    
    
    30,161,031Noncurrent assets:Goodwill
    
    
    18,214,166
    
    
    
    17,783,911Intangible assets, net
    
    
    2,988,797
    
    
    
    3,161,791Net investment in sales-type leases and other receivables,
less current portion above
    
    
    233,265
    
    
    
    326,454Property, plant & equipment, net
    
    
    7,570,668
    
    
    
    6,931,927Total noncurrent assets
    
    
    29,006,896
    
    
    
    28,204,083Total assets
    
    $
    59,194,888
    
    
    $
    58,365,114LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Current portion of long-term debt
    
    $
    337,500
    
    
    $
    337,500Revolving line of credit
    
    
    3,391,918
    
    
    
    1,756,361Accounts payable
    
    
    7,803,404
    
    
    
    10,031,900Current portion of obligations under capital lease
    
    
    78,623
    
    
    
    122,401Current unearned services revenue
    
    
    5,976,995
    
    
    
    6,529,330Accrued liabilities
    
    
    5,008,328
    
    
    
    3,883,303Total current liabilities
    
    
    22,596,768
    
    
    
    22,660,795Noncurrent liabilities:Long-term debt, less current portion above
    
    
    172,514
    
    
    
    255,315Accrued long-term liability
    
    
    100,100
    
    
    
    144,100Noncurrent unearned services revenue
    
    
    37,440
    
    
    
    48,629Noncurrent deferred tax liability
    
    
    395,945
    
    
    
    12,417Total noncurrent liabilities
    
    
    705,999
    
    
    
    460,461ContingenciesShareholders equity:Preferred stock; $.10 par value; 50,000 shares
authorized, 0 issued
    
    
    
    
    
    
    Common stock; $.001 par value; 50,000,000
shares authorized, 11,654,071 issued at
January 31, 2011 and October 31, 2010
    
    
    11,653
    
    
    
    11,653Paid-in capital
    
    
    15,669,918
    
    
    
    15,662,689Retained earnings
    
    
    22,167,327
    
    
    
    21,596,383Less treasury stock, at cost (891,830 shares at
January 31, 2011 and 923,835 shares at October 31, 2010)
    
    
    (1,956,777
    )
    
    
    (2,026,867
    )Total shareholders equity
    
    
    35,892,121
    
    
    
    35,243,858Total liabilities and shareholders equity
    
    $
    59,194,888
    
    
    $
    58,365,114
   3




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For the Three MonthsEnded January 31,2011
    
    
    2010Systems sales
    
    $
    11,987,842
    
    
    $
    10,867,058Services
    
    
    15,296,203
    
    
    
    12,116,857Other revenues
    
    
    122,317
    
    
    
    60,228Net sales and services revenues
    
    
    27,406,362
    
    
    
    23,044,143Cost of systems sales
    
    
    8,945,436
    
    
    
    8,076,587Services costs
    
    
    11,017,103
    
    
    
    8,231,080Cost of other revenues & corporate COGS
    
    
    447,841
    
    
    
    397,635Total cost of sales and services
    
    
    20,410,380
    
    
    
    16,705,302Gross profit
    
    
    6,995,982
    
    
    
    6,338,841Operating expensesSelling, general and administrative
    
    
    5,837,558
    
    
    
    5,125,283Amortization
    
    
    312,048
    
    
    
    186,855Total operating expenses
    
    
    6,149,606
    
    
    
    5,312,138Income from operations
    
    
    846,376
    
    
    
    1,026,703Interest expense
    
    
    (19,275
    )
    
    
    (6,170
    )Interest and other income
    
    
    112,843
    
    
    
    21,255Net interest and other income
    
    
    93,568
    
    
    
    15,085Income before provision for income
taxes
    
    
    939,944
    
    
    
    1,041,788Provision for income taxes
    
    
    369,000
    
    
    
    409,000Net income
    
    $
    570,944
    
    
    $
    632,788Earnings per shareBasic
    
    $
    0.05
    
    
    $
    0.06Diluted
    
    $
    0.05
    
    
    $
    0.06Weighted average shares outstanding
    
    
    10,741,534
    
    
    
    10,237,405Weighted average equivalent shares
    
    
    10,809,696
    
    
    
    10,277,361
   4




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Common Stock
    
    
    Treasury StockShares Issued
    
    
    Par Value
    
    
    Shares
    
    
    Amount
    
    
    Paid-in Capital
    
    
    Retained Earnings
    
    
    TotalBalance- October
31, 2010
    
    
    11,654,071
    
    
    $
    11,653
    
    
    
    923,835
    
    
    $
    (2,026,867
    )
    
    $
    15,662,689
    
    
    $
    21,596,383
    
    
    $
    35,243,858Issuance of
restricted common
stock from treasury
(net of 7,441
forfeited shares)
    
    
    
    
    
    
    
    
    
    
    (32,005
    )
    
    
    70,090
    
    
    
    (70,090
    )
    
    
    
    
    
    
    Stock-based
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    77,319
    
    
    
    
    
    
    
    77,319Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    570,944
    
    
    
    570,944Balance- January
31, 2011
    
    
    11,654,071
    
    
    $
    11,653
    
    
    
    891,830
    
    
    $
    (1,956,777
    )
    
    $
    15,669,918
    
    
    $
    22,167,327
    
    
    $
    35,892,121
   5




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For the Three MonthsEnded January 31,2011
    
    
    2010Cash flows from operating activities:Net income
    
    $
    570,944
    
    
    $
    632,788Adjustments to reconcile net income to net
cash provided by operating activities:Depreciation
    
    
    428,834
    
    
    
    285,801Amortization
    
    
    312,048
    
    
    
    186,855Stock-based compensation
    
    
    70,999
    
    
    
    74,060Provision for returns & doubtful accounts receivable
    
    
    15,000
    
    
    
    15,000Provision for excess and obsolete inventory
    
    
    25,500
    
    
    
    25,500Deferred taxes
    
    
    369,000
    
    
    
    409,001Change in assets and liabilities:Decrease (increase) in net investment in sales-type leases & other receivables
    
    
    476,800
    
    
    
    (77,062
    )(Increase) decrease in trade accounts receivable
    
    
    (346,983
    )
    
    
    68,599Decrease in inventories
    
    
    298,045
    
    
    
    191,797Increase in prepaid expenses and other assets
    
    
    (407,587
    )
    
    
    (339,706
    )Increase in prepaid taxes
    
    
    (11,410
    )
    
    
    (5,295
    )(Decrease) increase in accounts payable
    
    
    (2,228,496
    )
    
    
    306,130Decrease in unearned revenue
    
    
    (787,360
    )
    
    
    (17,022
    )Increase in accrued liabilities
    
    
    936,976
    
    
    
    348,647Total adjustments
    
    
    (848,634
    )
    
    
    1,472,305Net cash (used in) provided by operating activities
    
    
    (277,690
    )
    
    
    2,105,093Cash flows from investing activities:Additions to property, plant & equipment
    
    
    (1,181,629
    )
    
    
    (206,193
    )Acquisitions, net of cash acquired
    
    
    (330,854
    )
    
    
    Net cash used in investing activities
    
    
    (1,512,483
    )
    
    
    (206,193
    )Cash flows from financing activities:Principal payments on debt
    
    
    (82,801
    )
    
    
    (1,183,475
    )Net proceeds on revolving line of credit
    
    
    1,635,557
    
    
    
    Payments on capital lease obligations
    
    
    (43,778
    )
    
    
    (37,961
    )Net cash provided by (used in) financing activities
    
    
    1,508,978
    
    
    
    (1,221,436
    )Net (decrease) increase in cash and cash equivalents
    
    
    (281,195
    )
    
    
    677,464Cash and cash equivalents, beginning of period
    
    
    1,003,180
    
    
    
    4,731,926Cash and cash equivalents, end of period
    
    $
    721,985
    
    
    $
    5,409,390Supplemental disclosure of cash flow information:Cash paid during the period for interest
    
    $
    25,102
    
    
    $
    13,651Cash paid during the period for income taxes
    
    $
    11,410
    
    
    $
    5,295
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XETA TECHNOLOGIES, INC. AND SUBSIDIARIES
 
 Notes to Consolidated Financial Statements
 January 31, 2011
  BASIS OF PRESENTATION:
   Fair Value of Financial Instruments
  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
    7




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Commercial
    
    
    HospitalityServices
    
    
    Systems
    
    
    Systems
    
    
    OtherRevenues
    
    
    Sales
    
    
    Sales
    
    
    Revenue
    
    
    Total2011Sales
    
    $
    15,296,203
    
    
    $
    9,711,076
    
    
    $
    2,276,766
    
    
    $
    122,317
    
    
    $
    27,406,362Cost of sales
    
    
    (11,017,103
    )
    
    
    (7,417,096
    )
    
    
    (1,528,340
    )
    
    
    (447,841
    )
    
    
    (20,410,380
    )Gross profit
    
    $
    4,279,100
    
    
    $
    2,293,980
    
    
    $
    748,426
    
    
    $
    (325,524
    )
    
    $
    6,995,9822010Sales
    
    $
    12,116,857
    
    
    $
    10,038,581
    
    
    $
    828,477
    
    
    $
    60,228
    
    
    $
    23,044,143Cost of sales
    
    
    (8,231,080
    )
    
    
    (7,540,985
    )
    
    
    (535,602
    )
    
    
    (397,635
    )
    
    
    (16,705,302
    )Gross profit
    
    $
    3,885,777
    
    
    $
    2,497,596
    
    
    $
    292,875
    
    
    $
    (337,407
    )
    
    $
    6,338,841
 Stock-Based Compensation Plans
  2011
    
    
    2010Three months ended January 31,
    
    $
    70,999
    
    
    $
    74,060
 Use of Estimates
  New Accounting Pronouncements
    8




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ACCOUNTS RECEIVABLE:
  (Audited)January 31,
    
    
    October 31,2011
    
    
    2010Trade accounts receivable
    
    $
    18,899,562
    
    
    $
    18,352,519Less- reserve for doubtful accounts
    
    
    (571,343
    )
    
    
    (546,527
    )Net trade accounts receivable
    
    $
    18,328,219
    
    
    $
    17,805,992
    9




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INVENTORIES:
  (Audited)January 31,
    
    
    October 31,2011
    
    
    2010Finished goods and spare parts
    
    $
    7,546,349
    
    
    $
    7,785,951Less- reserve for excess and obsolete inventories
    
    
    (1,116,827
    )
    
    
    (1,070,875
    )Total inventories, net
    
    $
    6,429,522
    
    
    $
    6,715,076
 PROPERTY, PLANT AND EQUIPMENT:
  Estimated
    
    
    
    
    
    (Audited)Useful
    
    January 31,
    
    
    October 31,Lives
    
    2011
    
    
    2010Building and building improvements
    
    3-20
    
    $
    3,420,231
    
    
    $
    3,379,059Data processing and computer field equipment
    
    2-7
    
    
    4,917,782
    
    
    
    4,438,556Software development costs, work-in-process
    
    N/A
    
    
    98,067
    
    
    
    272,097Software development costs of components placed
into service
    
    3-10
    
    
    2,929,244
    
    
    
    2,731,310Hardware
    
    3-5
    
    
    643,635
    
    
    
    643,635Land
    
    
    
    
    611,582
    
    
    
    611,582Office furniture
    
    5-7
    
    
    944,493
    
    
    
    880,635Autos
    
    5
    
    
    710,608
    
    
    
    710,608Other
    
    3-7
    
    
    754,600
    
    
    
    156,131Total property, plant and equipment
    
    
    
    
    15,030,242
    
    
    
    13,823,613Less- accumulated depreciation and amortization
    
    
    
    
    (7,459,574
    )
    
    
    (6,891,686
    )Total property, plant and equipment, net
    
    
    
    $
    7,570,668
    
    
    $
    6,931,927
 INCOME TAXES:
  CREDIT AGREEMENTS:
   10




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EARNINGS PER SHARE:
  For the Three Months Ended January 31, 2011Income
    
    
    Shares
    
    
    Per Share(Numerator)
    
    
    (Denominator)
    
    
    AmountBasic EPSNet income
    
    $
    570,944
    
    
    
    10,741,534
    
    
    $
    0.05Dilutive effect of stock options
    
    
    
    
    
    
    68,162Diluted EPSNet income
    
    $
    570,944
    
    
    
    10,809,696
    
    
    $
    0.05
 For the Three Months Ended January 31, 2010Income
    
    
    Shares
    
    
    Per Share(Numerator)
    
    
    (Denominator)
    
    
    AmountBasic EPSNet income
    
    $
    632,788
    
    
    
    10,237,405
    
    
    $
    0.06Dilutive effect of stock options
    
    
    
    
    
    
    39,956Diluted EPSNet income
    
    $
    632,788
    
    
    
    10,277,361
    
    
    $
    0.06
  CAPITAL LEASES:
   11




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ACQUISITIONS:
   SUBSEQUENT EVENT:
      12




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ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Preliminary Note Regarding Forward-Looking Statements
  Overview
 PAETEC Merger.
   13




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Strategy.
     Operating Summary
  Financial Position Summary
   14




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Financial Condition
    Results of Operations
  Systems Sales.
   15




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Services Revenues
  For the Three Months EndedJanuary 31,2011
    
    
    2010Maintenance & repair
    
    $
    10,283,000
    
    
    $
    7,498,000Implementation
    
    
    4,108,000
    
    
    
    3,762,000Structured cabling
    
    
    905,000
    
    
    
    857,000Total Services revenues
    
    $
    15,296,000
    
    
    $
    12,117,000
    Gross Margins
  For the ThreeMonths EndedJanuary 31,Gross Margins
    
    2011
    
    
    2010Systems sales
    
    
    25.4
    %
    
    
    25.7
    %Services revenues
    
    
    28.0
    %
    
    
    32.1
    %Other revenues
    
    
    48.7
    %
    
    
    19.3
    %Corporate cost of goods sold
    
    
    -1.4
    %
    
    
    -1.5
    %Total
    
    
    25.5
    %
    
    
    27.5
    %
     16




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Operating Expenses
  Interest Expense and Other Income
  Tax Provision
  
 ITEM 4.
    
    CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures.
 Changes in Internal Controls
 
 PART II. OTHER INFORMATION
 
 ITEM 1.
    
    LEGAL PROCEEDINGS.
   17




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ITEM 1A.
    
    RISK FACTORS.
  The proposed merger with PAETEC is subject to satisfaction or waiver of certain customary
conditions, including the approval of the merger by our stockholders.
  Our future business and financial position may be adversely affected if the merger is not
completed.
  
    
    upon termination of the merger agreement under
specified circumstances, we may be required to pay
PAETEC a termination fee of $1.92 million;
    
    substantial costs related to the merger, such
as legal, accounting and financial advisory fees,
must be paid regardless of whether the merger is
completed; and
    
    potential disruption to the current plan,
operations, businesses and distraction of our
workforce and management team.
 Litigation related to the Merger could adversely affect our financial results.
  The proposed merger creates unique risks in the time leading up to closing, and there are also
risks of completing the conditions to closing.
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If we are unable to complete our proposed merger our stock price could suffer.
  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.
  
    
    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.
    
    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.
 
 ITEM 2.
    
    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
  
 ITEM 3.
    
    DEFAULTS UPON SENIOR SECURITIES.
  
 ITEM 5.
    
    OTHER INFORMATION.
  
  19




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ITEM 6.
    
    EXHIBITS.
  SEC Exhibit No.
    
    Description2.1
    
    
    Agreement and Plan of Merger among PAETEC Holding Corp., Hera Corporation and
XETA Technologies, Inc. dated Feburary 8, 2011 (incorporated by reference to Exhibit
2.1 to the Companys Current Report on Form 8-K filed with the U. S. Securities and
Exchange Commission on February 10, 2011).3.1
    
    
    Amendment to Section 2.1 of the Companys Amended and Restated Bylaws
(incorporated by reference to Exhibit 3.1 to the Companys Current Report on Form 8-K
filed with the U.S. Securities and Exchange Commission on February 10, 2011)31.1
    
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer31.2
    
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer32.1
    
    
    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.
  20




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SIGNATURES
  XETA Technologies, Inc.
(Registrant)Dated:  March 4, 2011
    By:
    /s/ Greg D. ForrestGreg D. ForrestChief Executive OfficerDated:  March 4, 2011
    By:
    /s/ Robert B. WagnerRobert B. WagnerChief Financial Officer  21




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##### Table of Contents



SEC Exhibit No.
    
    Description2.1
    
    
    Agreement and Plan of Merger among PAETEC Holding Corp., Hera Corporation and
XETA Technologies, Inc. dated Feburary 8, 2011 (incorporated by reference to Exhibit
2.1 to the Companys Current Report on Form 8-K filed with the U. S. Securities and
Exchange Commission on February 10, 2011).3.1
    
    
    Amendment to Section 2.1 of the Companys Amended and Restated Bylaws
(incorporated by reference to Exhibit 3.1 to the Companys Current Report on Form 8-K
filed with the U.S. Securities and Exchange Commission on February 10, 2011)31.1
    
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer31.2
    
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer32.1
    
    
    Certification of Chief Executive Officer Pursuant to Title 18, United States
Code, Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.32.2
    
    
    Certification of Chief Financial Officer Pursuant to Title 18, United States
Code, Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
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