XETA Xeta Technologies, Inc. (MM)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

SCHEDULE 14A

PROXY STATEMENT PURSUANT TO SECTION 14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934

Filed by the Registrant þ      Filed by a Party other than the Registrant o

Check the appropriate box:

o		Preliminary Proxy Statement

o		Confidential, for use of the Commission Only (as permitted by Rule 14a-6(e)(2))

þ		Definitive Proxy Statement

o		Definitive Additional Materials

o		Soliciting Material Pursuant to Rule 14a-12

XETA TECHNOLOGIES, INC.

(Name of Registrant as Specified in Its Charter)

N/A

(Name of Person(s) Filing Proxy Statement, if other than Registrant)

Payment of Filing Fee (Check the appropriate box):

o		No fee required.

o		Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

(1)		Title of each class of securities to which transaction applies:
(2)		Aggregate number of securities to which transaction applies:
(3)		Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):
(4)		Proposed maximum aggregate value of transaction:
(5)		Total fee paid:

þ		Fee paid previously with preliminary materials.

o		Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the form or schedule and the date of its filing.

(1)		Amount Previously Paid: NA
(2)		Form, Schedule or Registration Statement No.: NA
(3)		Filing party: NA
(4)		Date Filed: NA

 

 

XETA TECHNOLOGIES, INC.

 

April 18, 2011

 

To the Shareholders of XETA Technologies, Inc.:

 

You are cordially invited to attend a special meeting of shareholders of XETA Technologies, Inc., an Oklahoma corporation (“XETA,” “we,” “us” or “our”) to be held on May 26, 2011 at 10:00 a.m., Central time, at XETA’s principal executive offices, 1814 W. Tacoma Street, Broken Arrow, Oklahoma 74012.

 

On February 8, 2011, we entered into the Agreement and Plan of Merger among PAETEC Holding Corp. (“PAETEC”) and Hera Corporation, an indirect wholly-owned subsidiary of PAETEC (the “merger agreement”). If the transactions contemplated by the merger agreement are completed, we will become an indirect wholly-owned subsidiary of PAETEC, and you will be entitled to receive $5.50 per share in cash, without interest and less any required withholding taxes, for each share of XETA common stock, $0.001 par value (the “common shares”), that you own at the time of the merger.

 

After careful consideration, our board of directors, acting on the recommendation of a special committee of independent directors consisting of Eric Grimshaw, S. Lee Crawley and Ozarslan Tangun, unanimously approved the merger agreement and the merger and related transactions and unanimously determined that the merger is advisable and fair to, and in the best interests of, XETA shareholders. Our board of directors unanimously recommends that you vote “FOR” the proposal to approve and adopt the merger agreement .

 

The merger cannot be completed unless shareholders holding at least a majority of the outstanding common shares on the record date approve and adopt the merger agreement. The completion of the merger is also subject to the satisfaction or waiver of other conditions. More information about the merger is contained in the accompanying proxy statement.

 

We encourage you to read the accompanying proxy statement in its entirety because it explains the proposed merger, the documents related to the merger and other related matters.

 

Whether or not you plan to attend the special meeting, please take the time to submit a proxy by following the instructions on your proxy card as soon as possible. If your common shares are held in an account at a broker, dealer, commercial bank, trust company or other nominee, you should instruct your broker, dealer, commercial bank, trust company or other nominee how to vote in accordance with the voting instructions that will be furnished to you by your broker, dealer, commercial bank, trust company or other nominee.

 

We appreciate your support of XETA.

 

Sincerely,

 

Ronald L. Siegenthaler

Chairman of the Board

 

The merger has not been approved or disapproved by the Securities and Exchange Commission or any state securities commission. Neither the Securities and Exchange Commission nor any state securities commission has passed upon the merits or fairness of the merger or upon the adequacy or accuracy of the information contained in this proxy statement. Any representation to the contrary is a criminal offense.

 

The accompanying proxy statement is dated April 18, 2011 and is first being mailed to shareholders on or about April 18, 2011.

 

XETA TECHNOLOGIES, INC.
1814 W. Tacoma Street
Broken Arrow, Oklahoma 74012
(918) 664-8200

 

TO THE SHAREHOLDERS OF XETA TECHNOLOGIES, INC.:

 

NOTICE IS HEREBY GIVEN that the special meeting of shareholders of XETA Technologies, Inc., an Oklahoma corporation, will be held on May 26, 2011 at 10:00 a.m., Central time, at XETA’s principal executive offices, 1814 W. Tacoma Street, Broken Arrow, Oklahoma 74012 for the following purposes:

 

1. To approve and adopt the Agreement and Plan of Merger, dated as of February 8, 2011 by and among XETA Technologies, Inc., an Oklahoma corporation (“XETA,” “we,” “us” or “our”), PAETEC Holding Corp., a Delaware corporation (“PAETEC”), and Hera Corporation, an Oklahoma corporation and an indirect wholly-owned subsidiary of PAETEC (the “merger agreement”);

 

2. To approve an adjournment or postponement of the special meeting, if necessary or appropriate, to solicit additional proxies for the adoption of the merger agreement; and

 

3. To transact any other business as may properly come before the special meeting and at any adjournment or postponement of the special meeting.

 

For more information about the merger and the other transactions contemplated by the merger agreement, please review the accompanying proxy statement and the merger agreement attached as Annex A.

 

The board of directors has fixed the close of business on April 5, 2011 as the record date for the determination of shareholders entitled to notice of and to vote at this special meeting and at any adjournment or postponement thereof. For ten days prior to the meeting, a complete list of shareholders entitled to vote at the meeting will be available for examination by any shareholder, for any purpose relating to the meeting, during ordinary business hours at our principal offices located at 1814 W. Tacoma Street, Broken Arrow, Oklahoma.

 

Please submit your proxy or voting instructions as soon as possible to make sure that your shares are represented and voted at the special meeting, whether or not you plan to attend the special meeting. Whether you attend the special meeting or not, you may revoke a proxy at any time before it is voted by filing with our corporate secretary a duly executed revocation of proxy, by properly submitting a proxy either by mail, the Internet or telephone with a later date or by appearing at the special meeting and voting in person. You may revoke a proxy by any of these methods, regardless of the method used to deliver your previous proxy. Attendance at the special meeting without voting will not itself revoke a proxy. If your shares are held in an account at a broker, dealer, commercial bank, trust company or other nominee, you must contact your broker, dealer, commercial bank, trust company or other nominee to revoke your proxy. If you are a participant in the XETA Technologies Stock Fund under the XETA Technologies, Inc. 401(k) plan, you may instruct the 401(k) plan trustee how to vote the common shares credited to your account as of the record date by following the directions on the reverse side of the enclosed proxy card, except that voting instructions from plan participants must be received no later than 5:00 p.m., Central time on May 25, 2011.

 

XETA shareholders who do not vote in favor of the approval and adoption of the merger agreement will have the right to seek appraisal and the fair value of their shares, but only if they perfect their appraisal rights by complying with the required procedures under Oklahoma law. See “Approval of the Merger Agreement — Appraisal Rights” beginning on page 46 of the accompanying proxy statement.

 

All shareholders are cordially invited to attend the special meeting.

 

By order of the board of directors,

 

Robert B. Wagner

Corporate Secretary

 

SUMMARY VOTING INSTRUCTIONS

 

Ensure that your XETA common shares can be voted at the special meeting by submitting your proxy or contacting your broker, dealer, commercial bank, trust company or other nominee.

 

If your XETA common shares are registered in the name of a broker, dealer, commercial bank, trust company or other nominee: check the voting instructions that will be forwarded to you by your broker, dealer, commercial bank, trust company or other nominee to see which voting options are available or contact your broker, dealer, commercial bank, trust company or other nominee in order to obtain directions as to how to ensure that your common shares are voted with respect to the proposals at the special meeting.

 

If you are a participant in the XETA Technologies Stock Fund under the XETA Technologies, Inc. 401(k) plan: you may instruct the 401(k) plan trustee how to vote the common shares credited to your account as of the record date by following the directions on the reverse side of the enclosed proxy card, except that voting instructions from plan participants must be received no later than 5:00 p.m., Central time on May 25, 2011.

 

If your XETA common shares are registered in your name: submit your proxy as soon as possible by telephone, via the Internet or by signing, dating and returning the enclosed proxy card in the enclosed postage-paid envelope, so that your common shares can be voted in favor of the proposals at the special meeting.

 

Instructions regarding Internet voting are included on the proxy card.

 

For additional questions about the merger, assistance in submitting proxies or voting XETA common shares, or to request additional copies of the proxy statement or the enclosed proxy card, please contact:

 

 

105 Madison Avenue
New York, New York 10016
(212) 929-5500 (Call Collect)
or
Call Toll-Free (800) 322-2885

 

Email: proxy@mackenziepartners.com

 

 

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS
FOR THE SPECIAL SHAREHOLDERS’ MEETING TO BE HELD ON MAY 26, 2011

 

The following proxy materials for the special meeting of shareholders are available at www.proxyvote.com :

 

1. The proxy statement for the special meeting of shareholders; and

 

2. The form of proxy card being distributed to shareholders in connection with the special meeting of shareholders.

 

TABLE OF CONTENTS

 

 

XETA TECHNOLOGIES, INC.
1814 W. Tacoma Street
Broken Arrow, Oklahoma 74012
(918) 664-8200

 

 

PROXY STATEMENT

 

 

This proxy statement contains information related to a special meeting of shareholders of XETA Technologies, Inc., an Oklahoma corporation (“XETA,” “we,” “us” or “our”) to be held on May 26, 2011, at 10:00 a.m., Central time, at XETA’s principal executive offices, 1814 W. Tacoma Street, Broken Arrow, Oklahoma 74012 and at any adjournments or postponements thereof. We are furnishing this proxy statement to shareholders of XETA as part of the solicitation of proxies by XETA’s board of directors for use at the special meeting. This proxy statement is dated April 18, 2011 and is first being mailed to shareholders on or about April 18, 2011.

 

SUMMARY

The Companies
(page 18)

 

 

The Merger
(page 52)

 

Payment for Common Shares
(page 53)

 

Treatment of Options, Warrants and Restricted Shares
(page 40)

	•	the total number of common shares that would have been acquired upon the exercise of the option, multiplied by

	•	the excess, if any, of the merger consideration over the exercise price to acquire a common share under such option.

 

Our Share Price
(page 67)

 

Recommendation of our Board of Directors and Special Committee; Reasons for Recommending the Approval and Adoption of the Merger Agreement
(page 27)

 

Background of the Merger
(page 19)

 

Opinion of Stifel, Nicolaus & Company, Incorporated
(page 30)

 

Financing of the Merger
(page 39)

 

Interests of XETA Directors and Executive Officers in the Merger
(page 39)

	•	as of April 5, 2011, XETA’s directors and executive officers (and affiliates and affiliated investment entities) owned in the aggregate 2,100,161 common shares (including vested and unvested restricted shares, but excluding common shares issuable upon the exercise of options to purchase common shares);

	•	as of April 5, 2011, XETA’s directors and executive officers held stock options to purchase 555,900 common shares in the aggregate, having exercise prices ranging from $1.59 to $4.30 per share and an aggregate weighted average exercise price of $2.68 per common share. At the effective time of the merger, each holder of an option will be entitled to receive (except for holders of options granted on December 28, 2011 that will vest with respect to only 50% of the shares covered by such options), an amount equal to the excess, if any, of $5.50, without interest, over the exercise price per share of such option, less any required withholding taxes;

	•	as of April 5, 2011, XETA’s executive officers and directors held outstanding restricted shares covering 24,843 common shares in the aggregate. All unvested restricted shares held by XETA’s employees, including its executive officers, will fully vest immediately prior to the effective time of the merger and represent rights to receive, in lieu thereof, the merger consideration pursuant to the terms of the merger agreement;

	•	our current and former directors and officers will continue to be indemnified and will have the benefit of liability insurance until six years after the effective time of the merger;
	•	in connection with the execution of the merger agreement, Ronald L. Siegenthaler, our Chairman of the Board, Greg D. Forrest, our Chief Executive Officer and President and a director, and Patara Capital, LP, an entity affiliated with Ozarslan A. Tangun, a director of XETA, who together represent, in the aggregate, beneficial ownership of approximately 16% of the outstanding common shares, each, solely in his or its capacity as a shareholder of XETA, entered into separate voting agreements, pursuant to which they agreed to vote common shares for which they have the right to vote in favor of approval and adoption of the merger agreement and the transactions contemplated by the merger agreement and in favor of any postponement or adjournment of the special meeting to solicit additional proxies; and
	•	if the merger is consummated, any shareholder derivative claims that are currently pending or that are brought against the directors and officers of XETA by current shareholders would likely be extinguished.

 

Conditions to the Merger
(page 61)

	•	approval by the holders of a majority of the outstanding common shares entitled to vote on the merger;
	•	receipt of required antitrust or regulatory approvals, if any;
	•	the absence of any law, regulation, order or injunction prohibiting the merger;
	•	the accuracy of the other party’s representations and warranties (subject to customary materiality qualifiers and other qualifying disclosures which are not necessarily reflected in the merger agreement);
	•	the other party’s compliance with its covenants and agreements contained in the merger agreement;

	•	the aggregate number of appraisal shares being less than 15% of the outstanding common shares as of the record date for the special shareholders’ meeting; and

	•	there not having been a material adverse effect on the business, financial condition or results of operations of XETA and its subsidiaries (subject to certain limitations) or the ability of XETA to consummate the transactions under the merger agreement, which has not been cured.

 

Termination of the Merger Agreement
(page 62)

	•	by the mutual written consent of PATEC, Merger Sub and us;
	•	by either PAETEC or us if:

	•	the merger has not been consummated by July 31, 2011, and the party seeking to terminate has not materially breached its representations, warranties or covenants under the merger agreement in any manner that caused or resulted in the failure of the merger to be consummated by such time;
	•	a court with competent jurisdiction or a governmental authority issues a final non-appealable order, decree or ruling that permanently restrains, enjoins or prohibits the merger and the party seeking to terminate has complied with its obligation to use its reasonable best efforts to do, or cause to be done, all things necessary, proper or advisable under applicable law to consummate the merger, including its obligation to obtain certain governmental consents; or
	•	the merger agreement is not adopted by the XETA shareholders;

	•	by us if:

	•	PAETEC or Merger Sub materially breaches any of their representations, warranties or covenants in the merger agreement such that the conditions to closing cannot be satisfied and such breach is not cured before the earlier of (i) 30 days after XETA gives notice to PAETEC and (ii) July 31, 2011, and so long as XETA has not materially breached any of its representations, warranties or covenants; or
	•	subject to certain limitations and the payment of a termination fee (see “Termination Fee” below), and provided that we have not breached the non-solicitation provisions set forth in the merger agreement (including the obligation to negotiate in good faith with PAETEC to make adjustments to the terms and conditions of the merger agreement for a period of five business days), our board of directors either (i) withdraws or modifies its recommendation regarding the merger or (ii) approves a superior proposal (after determining in good faith (following consultation with outside counsel) that

		the failure to do so would be inconsistent with our board’s fiduciary duties under applicable law and after taking into account any amendments to the merger agreement that PAETEC agreed to make) and concurrently with such termination we enter into an acquisition agreement regarding such superior proposal;

	•	by PAETEC if:

	•	XETA materially breaches any of its representations, warranties or covenants in the merger agreement such that the conditions to closing cannot be satisfied and such breach is not cured before the earlier of (i) 30 days after PAETEC gives notice to XETA and (ii) July 31, 2011, and so long as PAETEC or Merger Sub has not materially breached any of its representations, warranties or covenants; or
	•	our board of directors withdraws or modifies its recommendation regarding the merger.

 

Termination Fee
(page 63)

 

Voting Agreements
(page 64)

 

Certain Material United States Federal Income Tax Consequences
(page 48)

 

Appraisal Rights
(page 46 and Annex C)

 

Regulatory Matters
(page 45)

 

Delisting and Deregistration of Common Shares
(page 50)

 

Litigation Relating to the Merger
(page 50)

 

The following questions and answers are intended to address briefly some commonly asked questions regarding the merger, the merger agreement and the special meeting. These questions and answers may not address all questions that may be important to you as a shareholder. Please refer to the summary of the merger agreement and the more detailed information contained elsewhere in this proxy statement and the annexes to this proxy statement.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

This proxy statement contains forward-looking statements that involve risks, uncertainties and assumptions. If such risks or uncertainties materialize or such assumptions prove incorrect, the results of XETA and its consolidated subsidiaries could differ materially from those expressed or implied by such forward-looking statements and assumptions. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including statements about the ability to complete the proposed transaction; the expected benefits and costs of the transaction; management plans relating to the transaction; the expected timing of the completion of the transaction; the expected outcome of certain litigation relating to the merger; any statements of the plans, strategies and objectives of management for future operations, including the execution of integration plans; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. Risks, uncertainties and assumptions include the possibility that expected benefits may not materialize as expected; that, prior to the completion of the transaction, XETA’s business may not perform as expected due to transaction-related uncertainty or other factors; that integration strategies cannot be successfully implemented; and other risks that are set forth in XETA’s filings with the SEC, which are available without charge at www.sec.gov. XETA assumes no obligation and does not intend to update these forward-looking statements.

 

We are furnishing this proxy statement to XETA shareholders as part of the solicitation of proxies by the XETA board of directors for use at the special meeting.

 

We will hold the special meeting on May 26, 2011, at 10:00 a.m., Central time, at XETA’s principal executive offices, 1814 W. Tacoma Street, Broken Arrow, Oklahoma 74012. Seating will be limited to shareholders. Admission to the special meeting will be on a first-come, first-served basis.

 

The special meeting is being held for the following purposes:

 

 

 

XETA’s board of directors, acting on the recommendation of a special committee of independent directors appointed to review and evaluate the merger, unanimously recommends that our shareholders vote “FOR” the approval and adoption of the merger agreement and “FOR” the adjournment or postponement of the special meeting, if necessary or appropriate, to solicit additional proxies.

 

Only holders of record of XETA common shares at the close of business on April 5, 2011, the record date, are entitled to notice of and to vote at the special meeting. On the record date, April 5, 2011, 10,779,707 XETA common shares were issued and outstanding and held by 180 holders of record. Holders of record of XETA common shares on the record date are entitled to one vote per common share at the special meeting on each proposal. For 10 days prior to the meeting, a complete list of shareholders entitled to vote at the meeting will be available for examination by any shareholder, for any purpose relating to the meeting, during ordinary business hours at our principal offices located at 1814 W. Tacoma Street, Broken Arrow, Oklahoma 74012.

 

A quorum is necessary to hold a valid special meeting. Under our certificate of incorporation, a quorum will be present at the special meeting if holders of one-third of our total outstanding common shares entitled to be voted at the special meeting are present, in person or by proxy.

 

Approval of the Merger Agreement

 

The approval and adoption of the merger agreement by our shareholders requires the affirmative vote of the holders of at least a majority of XETA’s common shares outstanding and entitled to vote at the special meeting, either in person or by proxy.

 

Because the affirmative vote required to approve the proposal to adopt the merger agreement is based upon the total number of XETA common shares outstanding, if you (i) fail to submit a proxy, (ii) fail to vote in person at the special meeting, (iii) abstain or (iv) fail to provide your bank, brokerage firm or other nominee with voting instructions, as applicable, this will have the same effect as a vote “AGAINST” the proposal to adopt the merger agreement.

Adjournment or Postponement of the Special Meeting

 

The adjournment or postponement of the special meeting, if necessary or appropriate, to solicit additional proxies, requires the affirmative vote of holders of a majority of our common shares present in person or represented by proxy at the special meeting and entitled to vote on the matter, whether or not a quorum is present. Because the affirmative vote required to approve a proposal to adjourn or postpone the special meeting is based upon the total number of XETA common shares represented at the meeting and because abstentions and broker non-votes will be counted as common shares present at the special meeting, abstentions and broker non-votes will have the same effect as a vote “AGAINST” a proposal to adjourn or postpone the special meeting. However, a failure to vote your common shares will have no effect on the outcome of any vote to adjourn or postpone the special meeting. Any signed proxies received by us for which no voting instructions are provided on the matter will be voted “FOR” an adjournment or postponement of the special meeting to solicit additional proxies. Any adjournment or postponement of the special meeting for the purpose of soliciting additional proxies will allow our shareholders who have already sent in their proxies to revoke them at any time prior to their use at the special meeting as adjourned or postponed.

 

Any adjournment may be made without notice, other than by an announcement made at the special meeting of the time, date and place of the adjourned meeting. However, if the adjournment is for 30 days or more, or if after the adjournment a new record date is fixed for the adjourned meeting, notice of the adjourned meeting will be given to each shareholder of record entitled to notice of and to vote at the meeting.

 

Other Proposals

 

The approval of any other items properly brought before the special meeting requires that holders of more of XETA’s common shares vote in favor of the proposal than vote against the proposal, unless the item is one for which a different vote is required by Oklahoma law or XETA’s bylaws.

 

Voting by Proxy or in Person at the Special Meeting

 

Holders of record can ensure that their common shares are voted at the special meeting or any postponement or adjournment of the special meeting by completing, signing, dating and delivering the enclosed proxy card in the enclosed postage-paid envelope. Submitting by this method or voting by telephone or the Internet as described below will not affect your right to attend the special meeting and to vote in person. If you plan to attend the special meeting and wish to vote in person, you will be given a ballot at the special meeting. Simply attending the special meeting, however, will not revoke your proxy.

 

If you hold your shares in “street name,” which means your common shares are held of record on April 5, 2011 by a broker, dealer, commercial bank, trust company or other nominee, you must provide the record holder of your common shares with instructions on how to vote your common shares in accordance with the voting directions provided by your broker, dealer, commercial bank, trust company or other nominee. If you do not provide your broker, dealer, commercial bank, trust company or other nominee with instructions on how to vote your shares, your common shares will not be voted, which will have the same effect as voting “AGAINST” the approval and adoption of the merger agreement. Please refer to the voting instruction card that will be sent to you by your broker, dealer, commercial bank, trust company or other nominee to see if you may submit voting instructions using the Internet or telephone. If you wish to vote your common shares held in “street name” at the special meeting, you must bring to the special meeting a proxy from the record holder of the common shares authorizing you to vote at the special meeting.

 

If you are a participant in the XETA Technologies Stock Fund under the XETA Technologies, Inc. Retirement Plan, which we refer to as the 401(k) plan, you may instruct the 401(k) plan trustee how to vote the common shares credited to your account as of the record date. Please follow the directions on the reverse side of the enclosed proxy card, except that voting instructions from plan participants must be received no later than 5:00 p.m., Central time on May 25, 2011. Participants in the 401(k) plan must vote through the

Bank of Oklahoma, the 401(k) plan trustee, and may not vote the common shares held on their behalf by telephone, the Internet or in person at the special meeting.

 

Telephone and Internet Voting

 

Our holders of record and many shareholders who hold their common shares through a broker, dealer, commercial bank, trust company or other nominee will have the option to submit their proxy cards or voting instruction cards electronically by telephone or the Internet. Please note that there are separate arrangements for using the telephone depending on whether your common shares are registered in our records in your name or in the name of a broker, dealer, commercial bank, trust company or other nominee. Some brokers, dealers, commercial banks, trust companies or other nominees may also allow voting through the Internet. If you hold your common shares through a broker, bank or other nominee, you should check the voting instructions that will be forwarded to you by your broker, dealer, commercial bank, trust company or other nominee to see which options are available.

 

Please read and follow the instructions on your proxy or voting instruction card carefully.

 

We do not expect that any matter other than the proposal to approve and adopt the merger agreement will be brought before the special meeting. If, however, other matters are properly presented at the special meeting, the persons named as proxies will vote in accordance with their best judgment with respect to those matters.

 

Submitting a proxy on the enclosed form does not preclude a shareholder from voting in person at the special meeting. A shareholder of record may revoke a proxy at any time before it is voted by filing with our corporate secretary a duly executed revocation of proxy, by properly submitting a proxy by mail, the Internet or telephone with a later date or by appearing at the special meeting and voting in person. A shareholder of record may revoke a proxy by any of these methods, regardless of the method used to deliver the shareholder’s previous proxy. Attendance at the special meeting without voting will not itself revoke a proxy. If your common shares are held in street name, you must contact your broker, dealer, commercial bank, trust company or other nominee to revoke your proxy.

 

XETA has retained MacKenzie Partners, Inc. to assist in the solicitation of proxies for the special meeting for a fee of $12,000, plus reimbursement of reasonable out-of-pocket expenses. XETA’s directors, officers and employees may also solicit proxies by personal interview, mail, e-mail, telephone, facsimile or other means of communication. These persons will not be paid additional remuneration for their efforts. XETA will also request brokers and other fiduciaries to forward proxy solicitation material to the beneficial owners of common shares that the brokers and fiduciaries hold of record. Upon request, XETA will reimburse them for their reasonable out-of-pocket expenses. All other expenses of the solicitation of proxies will be borne by XETA, except that under the merger agreement, we and PAETEC have each agreed to pay 50% of (i) the SEC and other filing fees incident to the proxy materials for this special meeting and (ii) the costs and expenses associated with printing the proxy materials.

 

If you need assistance in completing your proxy card or have questions regarding the special meeting, please contact MacKenzie Partners, Inc. toll-free at (800) 322-2885, collect at (212) 929-5500 or by email at proxy@mackenziepartners.com.

 

The following is a description of the material aspects of the merger. While we believe that the following description covers the material terms of the merger, the description may not contain all of the information that is important to you. We encourage you to read carefully this entire document, including the merger agreement attached to this proxy statement as Annex A, for a more complete understanding of the merger. The following description is subject to, and is qualified in its entirety by reference to, the merger agreement.

 

XETA Technologies, Inc.

 

1814 W. Tacoma Street

Broken Arrow, Oklahoma 74012

(918) 664-8200

 

We are an Oklahoma corporation and a leading provider of advanced communications solutions with nationwide sales and service applications including voice messaging, wireless voice and data solutions, video applications, contact center solutions, unified communication and high speed internet access solutions. We market our products and services to a variety of companies, such as enterprise-class multi-location, mid-market and large companies located throughout the United States. We also market our solutions and services to several vertical markets such as hospitality, education, federal government and healthcare. We sell and/or support communications solutions produced by several manufacturers including Avaya, Inc., Mitel Corporation, Samsung Business Communications Systems, Juniper Networks, Polycom, Microsoft and ShoreTel Corporation. Our professional services offerings include network architecture and engineering, contact center consulting, wireless solution architecture, information security consulting, proactive network monitoring, network remediation and help desk services. We deliver our services through a nationwide network of company-employed design engineers, service technicians and qualified third party service providers. Our service delivery is coordinated in our contact center, located at our headquarters in Broken Arrow, Oklahoma, and our network operations center is located in Hazelwood, Missouri.

 

Our common shares are listed on the NASDAQ Global Market under the symbol “XETA.”

 

PAETEC Holding Corp.

 

One PAETEC Plaza

600 Willowbrook Office Park

Fairport, New York 14450

(585) 340-2500

 

PAETEC Holding Corp., which we refer to as PAETEC, is a Delaware corporation. PAETEC is a communications services and solutions provider guided by the principle that delivering superior customer service is the key to competing successfully with other communications services providers. PAETEC’s primary business, as operated through its various subsidiaries, is providing business end-user customers in metropolitan areas with a package of integrated communications services that encompasses data services, including broadband Internet access services and virtual private network services, and voice services, including local telephone services and domestic and international long distance services.

 

Hera Corporation

 

One PAETEC Plaza

600 Willowbrook Office Park

Fairport, New York 14450

(585) 340-2500

 

Hera Corporation, which we refer to as Merger Sub, is an Oklahoma corporation and, to date, has engaged in no activities other than those incident to its formation and to the transactions contemplated by the

merger agreement, described below. Merger Sub is an indirect wholly-owned subsidiary of PAETEC. Upon consummation of the proposed merger, Merger Sub will merge with and into XETA and will cease to exist.

 

XETA, PAETEC and Merger Sub entered into the merger agreement on February 8, 2011. In the merger agreement, PAETEC agreed to acquire XETA through a merger of Merger Sub with and into XETA, with XETA surviving as an indirect wholly-owned subsidiary of PAETEC. The following will occur in connection with the merger:

 

 

 

It is expected that the directors of Merger Sub immediately prior to the effective time will be the initial directors of the surviving corporation and the officers of Merger Sub immediately prior to the effective time will be initial officers of the surviving corporation.

 

As part of the ongoing evaluation of our business, our board of directors and members of our senior management regularly review and assess opportunities to achieve long-term strategic goals, including potential opportunities for business combinations, acquisitions, dispositions, internal restructurings and other strategic alternatives.

 

During June 2010, Greg D. Forrest, our chief executive officer, was contacted by the president and chief executive officer of a privately-held integrated communications and managed services provider, which we refer to as Company A, regarding a potential commercial transaction or business relationship between Company A and XETA. On June 15, 2010, Company A and XETA entered into a Mutual Nondisclosure Agreement to better assure the protection and preservation of the confidential or proprietary information to be disclosed to or shared with each other. These commercial discussions turned to discussions regarding a possible business combination or strategic alliance involving XETA and Company A. For the remainder of June, at industry conferences and through telephone calls, the two individuals discussed the potential benefits and disadvantages

of such a business combination. During this time, Mr. Forrest discussed these conversations with certain members of our board of directors and our regular outside legal counsel, Barber & Bartz, PC. On June 28, 2010, Mr. Forrest was told by the president of Company A that a written proposal regarding a strategic combination between the two companies would be sent to him shortly.

 

On July 12, 2010, Mr. Forrest received a written non-binding unsolicited indication of interest and proposal from Company A, setting forth the general business terms of a proposed strategic acquisition transaction with XETA and proposing an acquisition consideration of $4.50 cash per share; this proposal was conditioned upon a number of assumptions, including XETA having $6.5 million in cash and no outstanding debt as of June 30, 2010. To assist XETA in analyzing this proposal and evaluating strategic alternatives that may be available for our company, certain members of our board of directors discussed engaging an independent investment banking firm and forming a special committee of independent directors to analyze and evaluate these strategic alternatives. Management and certain members of the board of directors of XETA conferred during this time on a day-to-day basis with attorneys at Barber & Bartz.

 

XETA management at this time had been involved to a significant extent in evaluating and negotiating a number of potential acquisitions of other businesses. At a telephonic special meeting held on July 16, 2010, our board of directors determined, for reasons of resource allocation and process efficiency, to approve the establishment of a special committee of the board, to be composed of independent, disinterested directors, to consider whether the company should pursue strategic alternatives and to oversee further negotiations with Company A.

 

At XETA’s regularly scheduled two-day board meeting held on July 21-22, 2010 in Tulsa, the board reviewed the qualifications of the directors and concluded that S. Lee Crawley, Eric Grimshaw and Ozarslan A. Tangun were independent and disinterested. The board then organized the special committee (the “special committee”), appointed Messrs. Crawley, Grimshaw and Tangun to serve as the members of the special committee, and designated Mr. Grimshaw as its chairman. Mr. Grimshaw was selected chairman of the special committee principally due to his many years’ experience as a corporate and securities lawyer representing publicly-held companies.

 

The board also authorized the special committee to (a) retain an investment bank to assist it in considering strategic alternatives and advise the board regarding any potential acquisitions that might result from such process; (b) retain such other advisors as the committee might deem appropriate; (c) negotiate the terms of a proposed transaction; (d) consider the fairness of any proposed transaction or any alternative transaction to XETA and its shareholders and report its recommendation to the full board; and (e) take all other actions that the special committee deemed necessary or desirable in connection with the foregoing.

 

Following the July 21st session of the two-day board meeting, Mr. Forrest contacted the president of Company A and explained to him the process that the board was undertaking.

 

In January 2010, we engaged Michael Carney, a former investment banker, as a consultant to assist our corporate development efforts, in financial analysis of acquisition opportunities and post-acquisition integration strategy and implementation. For his services, Mr. Carney was paid $10,000 per month, plus reimbursement of his out-of-pocket expenses. He also received $49,000 in 2010 as incentive compensation under a formula based on the value of completed acquisitions and other performance factors. Because we had limited sources of capital for cash acquisitions of businesses, in June 2010, Mr. Forrest asked Mr. Carney for his recommendations of qualified investment bankers to advise our management on capital-raising alternatives to fund our future acquisitions. From Mr. Carney’s experience as an investment banker, Mr. Carney knew that a senior banker at another investment banking firm, Stifel Nicolaus Weisel, had significant experience and expertise in XETA’s industry sector, although Mr. Carney had not had any business collaborations with this senior banker.

 

Mr. Carney recommended to Mr. Forrest that he meet with representatives of Stifel Nicolaus Weisel to discuss potential capital raising alternatives for our future acquisitions. In June and July 2010, Mr. Forrest met with representatives of Stifel Nicolaus Weisel on this topic and asked them after this meeting to make a presentation to our board of directors at an upcoming meeting. At the July 22nd session of our two-day board

meeting, as scheduled, representatives of Stifel Nicolaus Weisel met with our board of directors and made a presentation on capital raising alternatives to fund future acquisitions.

 

Immediately following the July 22nd session of the board meeting, the special committee held its first meeting and invited Mr. Carney, and afterwards, the Stifel Nicolaus Weisel representatives, to participate in the meeting. The committee members first met with Mr. Carney and asked him about any prior relationships that he had with Stifel Nicolaus Weisel. Next, the special committee discussed with one of the representatives of Stifel Nicolaus Weisel whether Stifel Nicolaus Weisel could serve as financial advisor to the special committee regarding its evaluation of strategic alternatives for XETA.

 

Prior to the meetings referenced above, Stifel Nicolaus Weisel had not been engaged to perform any services for XETA, and other than the senior banker’s acquaintance with Mr. Carney, Stifel Nicolaus Weisel did not have any relationship with XETA.

 

On July 26, 2010, the special committee retained Mayer Brown LLP as its special legal counsel. Mayer Brown had from time to time previously advised our company on a limited basis, when requested, regarding specified securities law disclosure matters.

 

On July 28, 2010, at a telephonic meeting of the special committee, the special committee members interviewed representatives of Stifel Nicolaus Weisel for the purpose of discussing the retention of Stifel Nicolaus Weisel to assist the committee in evaluating strategic alternatives. Attorneys from Mayer Brown and Barber & Bartz also attended this telephonic meeting.

 

The special committee had scheduled an interview for August 2, 2010, with another investment banking firm regarding such firm’s serving as financial advisor, but approximately three days prior to that interview, the firm informed the special committee that it was cancelling the interview and withdrawing its name from consideration, citing as reasons its lack of capacity and capabilities at that time to serve as financial advisor in connection with an engagement of this nature.

 

On August 2, 2010, the special committee met in the offices of Barber & Bartz in Tulsa (Mr. Tangun was out of the United States and attended by telephone). At this meeting, representatives of Mayer Brown and Barber & Bartz advised the special committee members with regard to their legal duties and responsibilities and their fiduciary obligations. Following this meeting, Mr. Grimshaw contacted Stifel Nicolaus Weisel representatives and advised them that they had been retained by the special committee.

 

On August 5, 2010, at a telephonic meeting of the special committee, the special committee discussed with Stifel Nicolaus Weisel a process for proceeding ahead and directed Stifel Nicolaus Weisel to be the point of contact for the company in discussions with Company A. At this meeting, Stifel Nicolaus Weisel and the special committee also discussed options for maximizing value for XETA’s shareholders, including a managed auction process. The special committee determined to meet on Monday of every week by telephone conference or other means to update its members and advisors regarding the progress of negotiations and other pertinent matters.

 

For each subsequent meeting of the special committee, representatives of Stifel Nicolaus Weisel and representatives of Barber & Bartz and Mayer Brown attended each meeting. Between the date of the formation of the special committee on July 21, 2010, and February 8, 2011, the date the definitive merger agreement with PAETEC was executed, the special committee met a total of 39 times.

 

On August 9, 2010, the special committee held a telephonic meeting and heard the results of Stifel Nicolaus Weisel’s conversations with Company A’s president. At this meeting, Stifel Nicolaus Weisel informed the committee that the president of Company A was not inclined to participate in an auction process for XETA. The committee members also discussed with Stifel Nicolaus Weisel matters pertaining to XETA’s valuation. At the next special committee meetings held on August 16 and 20, 2010, the committee discussed with Stifel Nicolaus Weisel the status of discussions with Company A. During this time, Stifel Nicolaus Weisel met with our management and assisted with an analysis of our long-term business plan.

 

At a special committee telephonic meeting held on August 26, 2010 and at the request of the special committee, Stifel Nicolaus Weisel made a presentation to the special committee members, and discussed

preliminary valuation considerations and an overview of certain strategic alternatives available to the company, based upon its analysis to that date. The special committee reviewed these various strategic alternatives, including (i) maintaining the status quo and operating the business as it has been operated, (ii) having the company pursue an active acquisition program and (iii) a sale of the company, either for cash or for stock, to a strategic or financial buyer. The special committee then discussed the advantages and disadvantages of each alternative, including timing, execution risk and the ongoing consolidation trends in XETA’s industry sectors, as well as our company’s strengths and weaknesses and relative position in our marketplace compared to our competitors. Stifel Nicolaus Weisel reviewed with the special committee members certain suggested potential parties to be contacted about interest in a strategic transaction with XETA.

 

In numerous telephone conference meetings of the special committee and its advisors during the remainder of August and through mid-September, the special committee reviewed multiple drafts of a confidential information memorandum regarding XETA to be sent to interested third parties that had executed confidentiality agreements satisfactory to us, and monitored the continuing discussions between Stifel Nicolaus Weisel and Company A. On September 1, 2010, as a result of its working with our management regarding XETA’s long-term business plan, Stifel Nicolaus Weisel provided the special committee with a revised preliminary financial analysis.

 

At the request of the special committee, Stifel Nicolaus Weisel representatives had informed Company A of the timeline that would be required in order for the special committee and its advisors to sufficiently review and analyze the requisite information for an evaluation of strategic alternatives, and to return with recommendations for the full board of directors. Substantive discussions with Company A were also delayed due to negotiations regarding the terms of a confidentiality agreement sufficient for XETA’s interests. On September 15, 2010, a new confidentiality agreement was executed by XETA and Company A, and the prior June 15, 2010 confidentiality agreement was terminated. Shortly thereafter, XETA began sharing financial data and related information requested by Company A.

 

On September 16, 2010, with the concurrence of the other members of the special committee, Mr. Tangun held a meeting with the president of Company A in Dallas, Texas, and discussed with the president certain background and high-level information regarding XETA and Company A.

 

During the remainder of September and into October, Stifel Nicolaus Weisel contacted by telephone approximately 42 potential strategic and financial buyers regarding their interest in reviewing information concerning a possible transaction. Stifel Nicolaus Weisel notified these potential buyers of an October 14, 2010 deadline to submit their initial indicative bids.

 

On October 14, 2010, an initial indicative bid was received from Company B, a strategic party backed by a financial sponsor, which provided for an indicative price range of $3.54 to $4.41 per share. Following October 14th, Stifel Nicolaus Weisel contacted an additional five potential interested parties, making a total of 47 potential buyers contacted.

 

During October, the special committee met regularly and heard reports from Stifel Nicolaus Weisel regarding negotiations and discussions with Company A, as well as the status of indications of interest from other potential interested parties.

 

On October 21, 2010, Company A indicated orally that it would be willing to make an indicative offer for all of XETA’s equity in an all-cash transaction of $5.35 per share, but that its offer was dependent on its gaining exclusivity with XETA in order for Company A to complete its due diligence and negotiate and finalize a transaction. At the special committee telephonic meeting on October 22, 2010, the committee determined that it would take this indicative offer to the full XETA board, although it would need to receive a written preliminary offer from Company A.

 

On October 28, 2010, at a regular meeting of the board of directors at XETA’s headquarters in Broken Arrow, the full board heard a report from the special committee on the progress and current status of the process. Representatives from Stifel Nicolaus Weisel, Barber & Bartz and Mayer Brown attended this board meeting. The representatives from Stifel Nicolaus Weisel discussed with the board members certain strategic

alternatives available to the company and its financial analysis. Mayer Brown and Barber & Bartz advised the full board regarding their fiduciary duties.

 

Later that day, representatives of Stephens Inc., investment bankers for PAETEC, contacted Greg Forrest to express interest in pursuing a transaction with XETA. PAETEC was one of the companies that had been initially contacted by Stifel Nicolaus Weisel on behalf of the special committee, but it had indicated at that time that it was not interested in pursuing a transaction with XETA.

 

On November 2, 2010, at the request of the special committee, Stifel Nicolaus Weisel responded to Company A, and informed Company A that if Company A could improve its indicative offer to $5.50 cash per share, XETA would be willing to grant Company A exclusivity for a short period of time in order to negotiate a transaction with XETA. On November 3, Company A submitted a written preliminary proposal and indication of interest to XETA, but its indicative offer price remained at $5.35 per share. The special committee held a telephonic meeting on November 3 with its advisors and determined that the president of Company A should be invited to come to Broken Arrow and meet with XETA management to see if Company A could improve its price.

 

In early November 2010, the special committee authorized our management to work with Stifel Nicolaus Weisel and begin assembling and implementing an electronic due diligence data room for the potential buyers’ due diligence purposes.

 

On November 8, 2010, at a special committee telephonic meeting, the committee decided that it would be appropriate to move forward with Company A on an exclusive basis for a short period of time, but because a limited exclusivity period was a condition to proceeding with Company A, the committee determined that it would present Company A’s proposal to our board of directors and recommend this approach to our board.

 

On November 9, 2010, at a special telephonic meeting of our board of directors, the board authorized the special committee to negotiate a non-binding letter of intent with Company A having a limited, binding exclusivity provision.

 

On November 11, 2010, an initial indicative bid was received from Company C, a strategic party, which evidenced an initial indicative range of $4.24 to $4.85 per share.

 

On November 15, 2010, following negotiations with Company A, we executed a non-binding letter of intent with Company A. The letter of intent contained an indication of interest from Company A to merge with XETA for a cash merger consideration of $5.35 per share, calculated on a fully diluted basis using the treasury stock method; this provision was conditioned on the assumption that there were no change of control payments or other similar obligations to employees of XETA triggered by such a transaction, and to the extent any such payments or obligations were triggered, the merger consideration would be reduced accordingly. In the letter of intent, XETA granted Company A the exclusive right to negotiate with XETA for a 45-day period (until December 30, 2010), with an option to extend for an additional 15 days if we were provided with an initial draft of a definitive agreement on or before December 30th. Company A agreed that it would notify us immediately if it intended to modify any key term contained in the letter of intent, and that, in such event, we would have the right to immediately terminate the exclusivity period upon written notice by XETA to Company A.

 

On November 16 and November 23, 2010, Greg Forrest and other members of XETA management met with representatives of Company A and its parent company.

 

On November 24, 2010, the president of Company A telephoned Stifel Nicolaus Weisel representatives and informed them that Company A remained interested in pursuing a transaction, but was not prepared to pay its indicated $5.35 per share. On November 28, 2010, we gave Company A its written notice that we were terminating Company A’s rights to negotiate exclusively with XETA. At a special committee telephonic meeting held on November 26, 2010, the committee members discussed with Stifel Nicolaus Weisel and legal counsel the termination of Company A’s exclusivity rights, and determined to continue to engage again with the remaining interested parties.

 

On December 2, 2010, an initial indicative bid was received from Company D, a strategic party, which evidenced an initial indicative range of $3.50 to $3.85 per share. Company D was informed by Stifel Nicolaus Weisel representatives, acting at the direction of the special committee, that its indicative bid was insufficient and that it should be increased in order to be able to participate in a management presentation and meet with our management in Broken Arrow. Company D subsequently agreed to increase its initial indicative range to $3.85 to $4.19 per share.

 

At the special committee telephonic meeting held on December 6, 2010, the committee members were informed that Company A had decided to wait for XETA’s fourth quarter fiscal 2010 results before it would consider resubmitting any indicative offer that would contain a revised valuation.

 

In early December 2010, PAETEC executed and returned to Stifel Nicolaus Weisel the form of non-disclosure agreement, and was sent the confidential information memorandum. On December 10, 2010, PAETEC submitted an initial indicative bid to the special committee, which provided for an indicative range of $4.25 to $5.00 per share.

 

Through December 15, 2010, of the 47 potential buyers contacted, 10 companies had signed non-disclosure agreements with us. Seven of these 10 companies were strategic parties and three were financial parties. These 10 companies received a copy of the confidential information memorandum. Of these 10 companies, a total of five companies (including Company A) had submitted initial indicative offers to XETA. At such time, the cumulative range of indicative bids from the remaining four companies ranged from $3.50 to $5.00 per share.

 

During December 2010, and extending into early January, representatives of PAETEC, Company B, Company C and Company D — the remaining companies that had submitted initial indicative bids — met in separate meetings with XETA management at our headquarters in Broken Arrow and participated in management presentations. In the meantime, Stifel Nicolaus Weisel, acting on behalf of the special committee, indicated to each of these companies that the timetable for the process going forward was for the final bids from these companies (along with a marked-up form of definitive merger agreement) to be submitted to the special committee by no later than January 31, 2011.

 

On December 20, 2010, the special committee at its regular telephonic meeting discussed the status of the four remaining parties to the process — PAETEC, Company B, Company C and Company D — and received a progress update on the completion of the electronic due diligence data room containing the financial and other information regarding XETA, which these parties were then accessing.

 

On December 22, 2010, PAETEC representatives met with our management at our headquarters in Broken Arrow, and participated in a presentation by our management concerning XETA.

 

On December 27, 2010, the special committee at its regular telephonic meeting discussed the PAETEC meeting at XETA headquarters and also discussed the management meetings with the other three companies that had already been completed or were scheduled.

 

Since 2006, we have traditionally made in December of each year our annual cash incentive compensation awards and equity compensation grants to our key employees and senior management team, because the financial results for our most recently completed fiscal year are by then substantially known. In accordance with this prior practice, on December 9, 2010, the compensation committee of our board of directors held a regularly scheduled meeting in which it considered and approved the annual awards, which were granted conditionally subject to the audit committee’s later acceptance and approval of our 2010 financial results. On that same day, immediately following the compensation committee’s meeting, our board of directors, at a special meeting, ratified these conditional grants. On December 28, 2010, after the acceptance and approval by the audit committee of our fiscal 2010 financial results, these 2010 cash incentive compensation awards and equity compensation grants consisting of stock options and restricted share awards to members of our senior management team and our key employees, became effective. See “— Interests of XETA Directors and Executive Officers in the Merger — Effect of the Merger Agreement on Options, Warrants and Restricted Shares.”

 

At the special committee telephonic meeting on January 3, 2011, the committee discussed a final bid process letter and learned that each of the four interested parties had indicated that a final deadline of January 31, 2011 to submit a final bid and a marked-up copy of the definitive merger agreement was sufficient.

 

At a special telephonic meeting of the board of directors held on January 6, 2011, the full board was briefed by the special committee of the status of the ongoing process. Representatives of Mayer Brown and Barber & Bartz reviewed with the full board the proposed form of definitive merger agreement.

 

With respect to stock options granted under our 2000 Stock Option Plan, upon a change in control of our company, the vesting of any unvested options automatically accelerates according to the terms of the plan. With respect to options and restricted share awards granted under our 2004 Omnibus Stock Incentive Plan, upon such a change in control, the vesting of unvested options and unvested restricted shares will accelerate if our compensation committee determines to accelerate vesting. The proposed merger with PAETEC and Merger Sub would constitute a “change in control” under our 2004 Omnibus Stock Incentive Plan. At the special meeting of the board of directors on January 6, 2011, the directors discussed the accelerated vesting of the equity compensation awards held by XETA officers and employees and recommended that, with respect to options granted on December 28, 2010 under the 2004 Omnibus Stock Incentive Plan to our four senior executive officers, only 50% of the total shares covered by those options should vest upon a change in control. Our compensation committee later determined that vesting of all unvested shares covered by options and all restricted shares under the 2004 Omnibus Stock Incentive Plan should accelerate upon the change in control, except that vesting with respect to only 50% of the total shares covered by options granted on December 28, 2010 to our four senior executive officers would accelerate in such event. See “— Interests of XETA Directors and Executive Officers in the Merger — Effect of the Merger Agreement on Options, Warrants and Restricted Shares.”

 

The form of definitive merger agreement was sent to the four interested parties on January 8, 2011. Separate drafts of the disclosure schedules were furnished to these parties on January 20, 2011.

 

Throughout January, XETA management furnished additional information requested by the four interested parties, which information was posted in the electronic due diligence data room so that all participants could have the same access to this information.

 

On January 14, 2011, Company C notified the special committee and Stifel Nicolaus Weisel that it did not wish to submit a final bid. On January 25, 2011, Company B notified the special committee and Stifel Nicolaus Weisel that it did not wish to submit a final bid.

 

On January 31, 2011, Company D submitted an offer of $3.88 cash per share and PAETEC submitted an offer of $5.25 cash per share. The special committee held a telephonic meeting late on January 31st to discuss the offers. At the meeting, the special committee determined to continue to pursue discussions with both Company D and PAETEC.

 

On January 31 and February 1, 2011, Stifel Nicolaus Weisel communicated with representatives of Company D and PAETEC concerning the terms of their final bids. Company D was informed that its offer was inadequate; in response to these communications, Company D submitted a revised offer of $4.57 per share. PAETEC requested a short exclusivity period to negotiate with XETA, which period was subsequently orally defined to be between five and seven days.

 

In a telephonic meeting of the special committee held on February 2, the special committee compared the terms of the offers from Company D and PAETEC. Lawyers from Mayer Brown and Barber & Bartz compared the terms of the two draft definitive merger agreements that Company D and PAETEC had submitted. At the request of the special committee, Stifel Nicolaus Weisel made a presentation concerning the valuation of XETA. As a result of this meeting, the special committee instructed Stifel Nicolaus Weisel to offer to PAETEC a limited exclusivity period in order to negotiate with XETA, which limited exclusivity was dependent upon PAETEC’s increasing its offer to $5.50 per share and deleting or revising certain terms that it had requested from PAETEC’s draft definitive merger agreement.

 

At a meeting of our board of directors held by conference telephone on Thursday, February 3, 2011, the special committee discussed with the board the status of the offers. A partner from Mayer Brown and a shareholder from Barber & Bartz made a presentation to the board of directors, comparing the terms of the two draft definitive merger agreements. At the request of the special committee, representatives of Stifel Nicolaus Weisel then made a presentation of Stifel Nicolaus Weisel’s views regarding XETA’s valuation. The special committee recommended to the board of directors that the special committee and its advisors be authorized to negotiate a five-day exclusivity agreement with PAETEC in order to negotiate the terms of a definitive merger agreement, conditioned on PAETEC’s increasing its offer to $5.50 per share and deleting or revising certain terms contained in its marked draft of the definitive merger agreement. The board authorized the special committee and its advisors to pursue the superior bid from PAETEC and to negotiate such an exclusivity agreement with PAETEC so that a fully-negotiated merger agreement would be ready for approval by both companies’ boards of directors on February 7 or 8. The board then temporarily adjourned the meeting, and determined to reconvene the meeting on the following Monday, February 7, 2011.

 

On February 3, Company D was informed by Stifel Nicolaus Weisel that XETA was pursuing a limited exclusive arrangement with another party.

 

On February 3, 2011, XETA and PAETEC executed an exclusivity agreement, granting PAETEC the right to negotiate exclusively with XETA until the exclusivity period expired at 5:00 p.m., Eastern Standard Time, on February 8, 2011, and prohibiting XETA from negotiating or furnishing information to other interested parties during such time. In addition, the exclusivity agreement evidenced the parties’ agreement to increase the purchase price to $5.50 per share, revise language in the draft merger agreement regarding certain representations, provide that Ronald L. Siegenthaler, Ozarslan A. Tangun, and Greg D. Forrest would execute voting agreements with PAETEC (and thereby agree, subject to the terms thereof, to support and vote their shares in favor of the merger) and fix the Termination Fee in the definitive merger agreement at $1,920,000, which amount is approximately 3% of XETA’s enterprise value.

 

Between February 4 and February 6, 2011, the terms of the definitive merger agreement were negotiated between management of XETA, Stifel Nicolaus Weisel, Barber & Bartz and Mayer Brown, on behalf of XETA, and management of PAETEC, Stephens Inc. and PAETEC’s legal counsel, Harter Secrest & Emery LLP, on behalf of PAETEC.

 

On February 6, 2011, the special committee received additional updates by telephone regarding the terms of the definitive merger agreement and the valuation of XETA from Stifel Nicolaus Weisel and legal counsel.

 

On the morning of February 7, 2011, the full board of directors reconvened and continued their board meeting that they had temporarily adjourned on February 3rd, and continued the discussion with XETA’s financial and legal advisors regarding the valuation of XETA and the terms of the proposed merger agreement. On the afternoon of February 7, 2011, the full board of directors met again in a separate special telephonic meeting called to consider the proposed transaction. A partner from Mayer Brown and a shareholder from Barber & Bartz described the draft terms of the definitive merger agreement with PAETEC, as they had been negotiated as of that time, including the conditions to closing. Legal counsel then described the proposed actions to be taken by the board of directors and discussed with the board members the directors’ fiduciary duties in connection with their actions. Afterwards, Stifel Nicolaus Weisel made its presentation regarding the valuation of XETA to our board of directors.

 

Between February 7 and February 8, 2011, XETA, PAETEC and their respective advisors continued to negotiate and finalize the terms of the merger agreement and the ancillary documents. On February 8, 2011, Mayer Brown sent revised drafts of the merger agreement to our board of directors. On February 8, 2011, the special committee determined that it would report to the full board that the special committee had approved the terms of the definitive merger agreement draft and had unanimously recommended that the board approve and authorize the definitive merger agreement and the transactions contemplated thereby.

 

On the evening of February 8, 2011, the full board of directors met again telephonically to consider the proposed transaction. Stifel Nicolaus Weisel reviewed with the board its final valuation presentation, answered further questions from the board members and delivered a verbal opinion to the board that, as of February 8th,

the merger consideration of $5.50 per share in cash to be received by holders of XETA common shares in the merger pursuant to the merger agreement was fair to such holders, from a financial point of view. Attorneys from Mayer Brown and Barber & Bartz reviewed the board’s fiduciary duties in connection with its approval of the merger agreement and related transactions. After discussion with management and the advisors regarding the terms of the merger agreement and related agreements and the transactions contemplated thereby, the board of directors unanimously (a) determined that the merger is in the best interests of XETA and its shareholders, and declared it advisable to enter into the merger agreement, (b) approved the execution, delivery and performance of the merger agreement and the consummation of the transactions contemplated thereby, including the merger, (c) resolved to recommend that the shareholders approve the adoption of the merger agreement and directed that the matter be submitted for consideration by the shareholders of XETA at the special meeting and (d) approved a modification to the bylaws of XETA to grant the board of directors the authority to fix the date of the annual shareholders’ meeting each year instead of XETA being required to hold the annual meeting in March of each year.

 

Later on February 8, 2011, Stifel Nicolaus Weisel delivered its written opinion to the board of directors that, as of the date of the Opinion and based upon and subject to the procedures followed, assumptions made, matters considered and limitations of the review undertaken in such written Opinion, the merger consideration of $5.50 per share in cash to be received by holders of XETA common shares in the merger pursuant to the merger agreement was fair to such holders, from a financial point of view.

 

On February 8, 2011, XETA, PAETEC and Merger Sub executed the merger agreement and related ancillary agreements.

 

On February 9, 2011, PAETEC and XETA announced the merger and related transactions by issuing a joint press release, and XETA filed a Current Report on Form 8-K with the SEC.

 

Subsequent to XETA’s filing of its preliminary proxy statement for its special meeting of shareholders on March 11, 2011, Stifel Nicolaus Weisel became aware that it had applied a risk premium to the weighted average cost of capital (“WACC”) calculation as opposed to the cost of equity calculation that was incorporated into the WACC. After becoming aware of such miscalculation, Stifel Nicolaus Weisel recalculated its discount rates used in its Discounted Cash Flow Analysis prepared in connection with the delivery to the board of directors of XETA of its opinion that the merger consideration to be received by holders of XETA common shares was fair to such holders, from a financial point of view. See “— Opinion of Stifel, Nicolaus & Company, Incorporated ” on page 30.

 

On March 29, 2011, at a telephonic meeting of our board of directors, representatives of Stifel Nicolaus Weisel made a presentation to our board of directors regarding the miscalculation and its recalculated discounted cash flow analysis. The Stifel Nicolaus Weisel representatives stated that the miscalculation did not affect Stifel Nicolaus Weisel’s conclusions as of February 8, 2011, and noted that the miscalculation did not affect the opinion of Stifel Nicolaus Weisel, as of February 8, 2011, that the merger consideration of $5.50 per share in cash to be received by holders of XETA common shares in the merger under the merger agreement was fair to such holders from a financial point of view. Afterwards, the board of directors concluded that the miscalculation and the revised financial analysis did not affect the board’s prior determinations regarding its approval and adoption of the merger agreement and the advisability of the merger.

 

Our Board of Directors and Special Committee Recommendation

 

On February 8, 2011, our special committee of independent directors that had been appointed to review and evaluate the merger unanimously determined that the merger agreement is in the best interests of XETA and our shareholders, and recommended to our full board of directors that our board of directors approve the merger agreement. At a special meeting of our board of directors convened on February 8, 2011, our board of directors (all of whom were unaffiliated with PAETEC or Merger Sub) unanimously adopted and declared advisable the merger agreement and unanimously determined that the merger is in the best interests of XETA

and its shareholders. Accordingly, our board of directors recommends that our shareholders vote “FOR” approval and adoption of the merger agreement.

 

Our Reasons for the Merger

 

In reaching its decision to approve the merger agreement, the merger and the other transactions contemplated by the merger agreement, authorize XETA to enter into the merger agreement and recommend that our shareholders vote to approve and adopt the merger agreement and the transactions contemplated by the merger agreement, our board of directors consulted with its and the special committee’s financial and legal advisors and our management. In addition, our board of directors acted based on the unanimous recommendation of the special committee, as well as other factors such as those described more fully below.

 

Our board of directors and the special committee considered a number of potentially positive factors, including the following material factors:

 

 

 

 

 

 

 

 

 

 

The special committee and our board of directors also considered and balanced against the potentially positive factors a number of potentially negative factors concerning the merger, including the following material factors:

 

 

 

After taking into account all of the factors set forth above, as well as others, the special committee and our board of directors determined that the potentially positive factors outweighed the potentially negative factors. Furthermore, our board of directors determined that the merger agreement, the merger and the other transactions contemplated by the merger agreement are advisable, fair to and in the best interests of XETA and our shareholders. The board of directors has approved the merger agreement, the merger and the other transactions contemplated by the merger agreement by a unanimous vote of the directors and recommends that our shareholders vote to approve and adopt the merger agreement and the transactions contemplated by the merger agreement at the special meeting.

 

The special committee and our board of directors did not assign relative weights to the above factors or the other factors considered by them. In addition, the special committee and our board of directors did not reach any specific conclusion on each factor considered, but conducted an overall analysis of these factors. Individual directors may have given different weights to different factors.

 

On August 5, 2010, the special committee of our board of directors retained Stifel Nicolaus Weisel to act as its financial advisor and to provide a fairness opinion in connection with the merger contemplated by the merger agreement. On February 8, 2011, Stifel Nicolaus Weisel delivered to the board of directors its oral opinion, which was later confirmed in writing that day, that, as of February 8, 2011 and based upon and subject to the procedures followed, assumptions made, matters considered and limitations of the review undertaken in such written Opinion, the merger consideration to be received by holders of XETA common shares was fair to such holders, from a financial point of view.

 

The full text of the written Opinion of Stifel Nicolaus Weisel is attached as Annex B to this proxy statement and is incorporated into this document by reference. The summary of Stifel Nicolaus Weisel’s Opinion set forth in this proxy statement is qualified in its entirety by reference to the full text of the Opinion. Shareholders are urged to read the Opinion carefully and in its entirety for a discussion of the procedures followed, assumptions made, other matters considered and limits of the review undertaken by Stifel Nicolaus Weisel in connection with such Opinion.

 

It is understood that the Opinion is solely for the information and benefit of, and directed to, our board of directors for its information and assistance in connection with its evaluation of the financial terms of the merger. The Opinion did not constitute a recommendation to XETA or our board of directors as to whether we should enter into the merger agreement or effect the merger or any other transaction contemplated by the merger agreement, nor does the Opinion constitute a recommendation to any shareholder as to how such shareholder should vote with respect to the merger or any other matter, or as to whether or not such

shareholder should enter into any voting, support or shareholders’ agreement in connection with the merger or exercise any dissenters’ or appraisal rights that may be available to such shareholder. The Opinion does not address the relative merits of the merger and any alternatives to the merger which may have been available to or considered by our board or directors or XETA and does not address the underlying decision of our board of directors or XETA to proceed with or effect the merger, or any other aspect of the merger.

 

Stifel Nicolaus Weisel’s Opinion is limited to whether, as of the date of the Opinion, the merger consideration to be received by the holders of XETA common shares pursuant to the merger was fair to such holders, from a financial point of view. The Opinion does not consider, address or include: (i) any other strategic alternatives currently (or which have been or may be) contemplated by XETA or our board of directors; (ii) the legal, financial reporting, tax, accounting or regulatory consequences of the merger on XETA or our shareholders; (iii) the fairness of the amount or nature of any compensation to be paid or payable to any of our officers, directors or employees, or class of such persons, in connection with the merger, whether relative to the merger consideration to the public holders of XETA common shares or otherwise; or (iv) the treatment of, or effect of the merger on, stock options or other share-based awards.

 

In connection with its Opinion, Stifel Nicolaus Weisel:

 

(1) reviewed certain publicly available financial and other data with respect to XETA, including the consolidated financial statements for recent years and interim periods to October 31, 2010 and certain other relevant financial and operating data relating to XETA made available to Stifel Nicolaus Weisel from published sources and from the internal records of XETA;

 

(2) reviewed the financial terms and conditions of the merger agreement as set forth in the draft thereof, dated as of February 8, 2011, furnished to Stifel Nicolaus Weisel;

 

(3) reviewed certain publicly available information concerning the trading of, and the trading market for, XETA common shares;

 

(4) compared XETA from a financial point of view with certain other companies broadly in the advanced communications industry and in particular the VAR, Technology Services and Technology Distribution subsectors, which Stifel Nicolaus Weisel deemed to be relevant;

 

(5) considered the financial terms, to the extent publicly available, of selected recent business combinations of companies broadly in the advanced communications industry and in particular the network system integration, support services and product distribution subsectors that had been announced, which Stifel Nicolaus Weisel deemed to be comparable, in whole or in part, to the merger;

 

(6) reviewed and discussed with representatives of the management of XETA certain information of a business and financial nature regarding XETA, furnished to Stifel Nicolaus Weisel by them with the consent of our board of directors, including financial forecasts and related assumptions of XETA that our board of directors directed Stifel Nicolaus Weisel to utilize for purposes of its analysis;

 

(7) made inquiries regarding and discussed the merger and the merger agreement and other matters related thereto with XETA’s counsel; and

 

(8) performed such other analyses and examinations as Stifel Nicolaus Weisel deemed appropriate.

 

In connection with Stifel Nicolaus Weisel’s review, it did not assume any obligation to independently verify, and did not independently verify, the foregoing information and relied on it being accurate and complete in all material respects.

 

With respect to the financial forecasts for XETA provided to Stifel Nicolaus Weisel by our management, upon XETA’s advice and with the consent of our board of directors, Stifel Nicolaus Weisel assumed for purposes of its Opinion that the forecasts had been reasonably prepared on bases reflecting the best currently available estimates and judgments of our management at the time of preparation as to the future financial performance of XETA and that such forecasts provided a reasonable basis upon which Stifel Nicolaus Weisel could form its Opinion. Stifel Nicolaus Weisel acknowledged that we do not publicly disclose internal management forecasts of the type provided to Stifel Nicolaus Weisel by our management in connection with

the review by Stifel Nicolaus Weisel of the transaction. These forecasts were not prepared with a view toward public disclosure. In addition, these forecasts were based upon numerous variables and assumptions that are inherently uncertain, including, without limitation, factors related to general economic, market and competitive conditions. Accordingly, actual results could vary significantly from those set forth in these forecasts. Stifel Nicolaus Weisel did not assume any liability for these forecasts. Stifel Nicolaus Weisel further relied upon our assurances that we were unaware of any facts that would make any information provided by us or on our behalf incomplete or misleading.

 

Stifel Nicolaus Weisel assumed that there have been no material changes in our financial condition, results of operations, business or prospects since the date of the financial statements contained in our Annual Report on Form 10-K for the period ended October 31, 2010. Stifel Nicolaus Weisel also relied on, without assuming any obligation to independently verify, the accuracy and completeness of all advice of our counsel and independent accountants as to all legal, financial reporting, tax, accounting and regulatory matters with respect to XETA, the merger and the merger agreement, including, without limitation, the legal status and financial reporting of litigation involving XETA.

 

Stifel Nicolaus Weisel assumed that the merger will be consummated in a manner that complies in all respects with the applicable provisions of the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, and all other applicable federal and state statutes, rules and regulations, and that all governmental, regulatory or other consents and approvals necessary for the consummation of the merger will be obtained without any adverse effect on the expected benefits of the merger in any way meaningful to its analysis. Stifel Nicolaus Weisel did not assume responsibility for making, and did not make, an independent evaluation, appraisal or physical inspection of any of the assets or liabilities (including any contingent, derivative or other off-balance-sheet assets or liabilities) of XETA, nor was Stifel Nicolaus Weisel furnished with any such evaluations or appraisals.

 

Stifel Nicolaus Weisel’s Opinion was based on economic, monetary, market and other conditions as in effect on, and the information made available to Stifel Nicolaus Weisel as of, the date of its Opinion. Accordingly, although subsequent developments may affect its Opinion, Stifel Nicolaus Weisel has not assumed any obligation to update, revise or reaffirm its Opinion. Stifel Nicolaus Weisel also assumed that the merger will be consummated in accordance with the terms described in the draft merger agreement, without any waiver modification or amendment of any terms or conditions thereof, the effect of which would be in any way meaningful in its analysis.

 

The summary set forth below does not purport to be a complete description of the analyses performed by Stifel Nicolaus Weisel, but describes, in summary form, the material elements of the presentation that Stifel Nicolaus Weisel made to our board of directors on February 7, 2011, in connection with Stifel Nicolaus Weisel’s Opinion.

 

Except as otherwise noted, the information utilized by Stifel Nicolaus Weisel in its analyses, to the extent that it is based on market data, is based on market data as it existed on or before February 8, 2011 and is not necessarily indicative of current market conditions. The analyses described below do not purport to be indicative of actual future results, or to reflect the prices at which any securities may trade in the public markets, which may vary depending upon various factors, including changes in interest rates, dividend rates, market conditions, economic conditions and other factors that influence the price of securities.

 

Some of the summaries of financial analyses performed by Stifel Nicolaus Weisel include information presented in tabular format. In order to fully understand the financial analyses performed by Stifel Nicolaus Weisel, you should read the tables together with the text of each summary. The tables alone do not constitute a complete description of the financial analyses. Considering the data set forth in the tables without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of the financial analyses performed by Stifel Nicolaus Weisel.

 

Selected Comparable Company Analysis.   Based on public and other available information, Stifel Nicolaus Weisel calculated XETA’s implied enterprise value (which Stifel Nicolaus Weisel defined as fully

diluted market capitalization, plus total debt, less cash, cash equivalents and marketable securities) and XETA’s implied fully diluted equity value, in each case, using multiples of calendar year CY 2010 revenues, adjusted earnings before interest, taxes, stock-based compensation, depreciation and amortization, or EBITDA, pro forma revenues and pro forma EBITDA (pro forma financials take into account the four acquisitions XETA made during FY2010) and projected CY 2011 revenues and EBITDA which multiples were implied by the estimated enterprise values and equity values, and projected revenues and EBITDA of the selected companies listed below. CY 2010 and projected CY 2011 information for XETA was provided by our management. Projections for the selected companies were based upon First Call Consensus estimates, publicly available investment banking research and public filings. Stifel Nicolaus Weisel believes that the 13 companies listed below have operations similar to certain operations of XETA, but noted that none of these companies have identical management, composition, size and/or combination of businesses as XETA:

 

 

The following table sets forth the valuation multiples of the Selected Comparable Companies based on February 4, 2011 closing prices:

 

 

The following table sets forth the summary multiples indicated by this analysis:

 

 

The multiples derived from the implied estimated enterprise values and applicable projected revenues and EBITDA of the companies listed above were calculated using data that excluded all extraordinary items and non-recurring charges, and were pro forma for pending acquisitions.

 

The implied XETA per share equity values below were each calculated based on a range of multiples of first quartile to third quartile. The quartiles were calculated using statistical interpolation to divide the probability distribution into four equal areas. In each case, Stifel Nicolaus Weisel multiplied the ratios derived from its analysis by XETA’s actual, pro forma or estimated revenues and EBITDA, as applicable, to calculate enterprise value, and subtracting XETA’s net debt position to derive equity value. Using the treasury stock method, Stifel Nicolaus Weisel then derived XETA’s implied per share equity value.

 

 

Selected Comparable Transactions Analysis.   Based on public and other available information, Stifel Nicolaus Weisel calculated XETA’s implied enterprise value and implied equity value based on multiples of last 12 months (LTM) revenues and pro forma revenues and adjusted EBITDA and pro forma EBITDA (pro forma financials take into account the four acquisitions XETA made during FY2010), implied by 19 acquisitions of companies listed below in the telecommunications network, design integration and maintenance sectors; system integration sector; and network hardware and software distribution sectors that had been announced since January 1, 2008. The acquisitions reviewed in this analysis were the following:

 

 

The following table sets forth the multiples indicated by this analysis and the multiples implied by the proposed transaction:

 

 

The implied XETA per share equity values below were each calculated based on a range of multiples of first quartile to third quartile. The quartiles were calculated using statistical interpolation to divide the probability distribution into four equal areas. In each case, Stifel Nicolaus Weisel multiplied the ratios derived from its analysis by XETA’s actual and pro forma revenues and EBITDA, as applicable, to calculate enterprise value, and subtracting XETA’s net debt position to derive equity value. Using the treasury stock method, Stifel Nicolaus Weisel then derived XETA’s implied per share equity value:

 

 

No transaction used in the comparable transaction analysis is identical to the merger. However, Stifel Nicolaus Weisel chose such transactions based on, among other things, a review of transactions involving companies in the telecommunications network, design integration and maintenance sectors; system integration sector; and network hardware and software distribution sectors announced since January 1, 2008, Stifel Nicolaus Weisel’s knowledge about XETA, the industries in which XETA operates, the geographical and operational nature of XETA’s business and the similarity of the applicable target companies in the transactions to XETA with respect to the size, mix, margins and other characteristics of their businesses. Accordingly, an analysis of the results of the foregoing is not mathematical; rather it involves complex considerations and judgments concerning differences in financial and operating characteristics of the target companies and other factors that could affect the public trading value of the companies and the transactions to which XETA and the merger are being compared.

 

Since the filing of the preliminary proxy statement, Stifel Nicolaus Weisel became aware that it had applied a risk premium to the weighted average cost of capital (“WACC”) calculation as opposed to the cost of equity calculation that was incorporated into the WACC. After becoming aware of such miscalculation, Stifel Nicolaus Weisel recalculated its discount rates used in its Discounted Cash Flow Analysis prepared in connection with the delivery to the board of directors of XETA of its opinion that the merger consideration to be received by holders of XETA common shares was fair to such holders, from a financial point of view.

When recalculated, the range of discount rates used in these analyses changes from 14.2% — 18.2% to 13.1% — 17.1%. A description of the resulting recalculated Discounted Cash Flow Analysis is included below.

 

The recalculated WACC was based on the following inputs: (1) a calculated 17.5% cost of equity (using a levered volatility measure (beta) of 1.01 based on the median 2-year weekly adjusted beta of the selected comparable companies (source: Bloomberg), an equity risk premium of 6.7% (reflecting the historical equity risk premium per Ibbotson’s Long-Horizon Equity Risk Premium), a microcap equity size premium of 6.3% (source: Ibbotson 30-year Micro-Cap Equity Size Premium), and a risk-free rate of 3.6% (based on the U.S. 10-Year Treasury yield)), (2) a pre-tax cost of debt of 6.2% and (3) a tax rate of 40.0%. The resulting cost of equity of 17.5% and after-tax cost of debt of 3.7% were weighted using a debt-to-equity ratio of 21.0% to derive a weighted average cost of capital, or WACC, of 15.1%. Further in calculating the Discounted Cash Flow Analysis as described below, a range of discount rates was then applied reflecting the addition of 1% and 2% to, and the subtraction of 1% and 2% from, the recalculated WACC.

 

Discounted Cash Flow Analysis.   Stifel Nicolaus Weisel used two approaches: in the first approach, Stifel Nicolaus Weisel estimated the terminal value of the projected cash flows by applying exit multiples to XETA’s estimated 2015 EBITDA, which multiples ranged from 5.0x to 7.0x. Stifel Nicolaus Weisel then discounted the cash flows projected through 2015 and the terminal value to present values using rates ranging from 13.1% to 17.1%. In the second approach, Stifel Nicolaus Weisel estimated the perpetual cash flows by applying annual growth rates of 2.0% to 4.0% to XETA’s estimated 2015 free cash flow and then discounted the cash flows projected through 2015 and the perpetual cash flows to present values using rates ranging from 13.1% to 17.1%. These two methods of analysis indicated two ranges of aggregate values, each of which were then decreased by XETA’s estimated net debt of $2.9 million as of February 1, 2011, to calculate a range of equity values. These equity values were then divided by fully diluted shares outstanding to calculate implied equity values per share ranging from $6.96 to $8.29. Stifel Nicolaus Weisel noted that the value of consideration to be received by holders of the common shares pursuant to the merger was $5.50.

 

The following table sets forth the range of implied equity values per share calculated using the estimated terminal value of projected cash flows:

 

 

The following table sets forth the range of implied equity values per share calculated using perpetual cash flows:

 

 

Premiums Paid Analysis.   Stifel Nicolaus Weisel reviewed the consideration paid in 79 selected acquisitions involving an aggregate value between approximately $20 million and $500 million announced since January 1, 2010. Stifel Nicolaus Weisel calculated the premiums paid in these transactions over both the applicable stock price of the target company one day, one week and one month prior to the announcement of the proposed acquisition, and calculated the implied per share value based on third and first quartile metrics.

 

 

Stifel Nicolaus Weisel noted that the premiums implied by the merger were 44.7%, 55.9% and 65.3% for the period one day, one week and one month prior to February 4, 2010.

 

The foregoing description is only a summary of the analyses and examinations that Stifel Nicolaus Weisel deemed material to its Opinion. It is not a comprehensive description of all analyses and examinations actually conducted by Stifel Nicolaus Weisel. The preparation of a fairness opinion necessarily is not susceptible to partial analysis or summary description. Stifel Nicolaus Weisel believes that its analyses and the summary set forth above must be considered as a whole and that selecting portions of its analyses and of the factors considered, without considering all analyses and factors, would create an incomplete view of the process underlying the analyses set forth in its presentation to us. In addition, Stifel Nicolaus Weisel may have given various analyses more or less weight than other analyses, and may have deemed various assumptions more or less probable than other assumptions. The fact that any specific analysis has been referred to in the summary above is not meant to indicate that this analysis was given greater weight than any other analysis. Accordingly, the ranges of valuations resulting from any particular analysis described above should not be taken to be the view of Stifel Nicolaus Weisel with respect to the actual value XETA.

 

Based upon the foregoing analyses and the assumptions and limitations set forth in full in the text of Stifel Nicolaus Weisel’s Opinion, Stifel Nicolaus Weisel was of the opinion that, as of the date of Stifel Nicolaus Weisel’s Opinion, the merger consideration to be received by the holders of XETA common shares in the merger pursuant to the merger agreement was fair to such holders, from a financial point of view.

 

As more fully described in “— Background of the Merger” beginning on page 19 of this proxy statement, Stifel Nicolaus Weisel acted as financial advisor to XETA in connection with the merger. We paid Stifel Nicolaus Weisel a retainer fee of $100,000 and a fee of $500,000 upon the delivery of its Opinion, and neither of such fees was contingent upon consummation of the merger. Stifel Nicolaus Weisel will receive a transaction fee of $1.0 million upon consummation of the merger, which amount will be reduced by the retainer fee and opinion fee which we previously paid. Stifel Nicolaus Weisel will not receive any other significant payment or compensation contingent upon the successful consummation of the merger. In addition, we agreed to reimburse Stifel Nicolaus Weisel for its reasonable out-of-pocket expenses, including fees and disbursements of counsel, and to indemnify Stifel Nicolaus Weisel for certain liabilities arising out of its engagement. There are no other material relationships that existed during the two years prior to the date of Stifel Nicolaus Weisel’s Opinion or that are mutually understood to be contemplated in which any compensation was received or is intended to be received as a result of the relationship between Stifel Nicolaus Weisel and any party to the merger. Stifel Nicolaus Weisel or its affiliates may seek to provide investment banking services to PAETEC or its affiliates in the future, for which Stifel Nicolaus Weisel would seek customary compensation. In the ordinary course of business, Stifel Nicolaus Weisel and its affiliates and its and their clients may transact in the equity securities of XETA and PAETEC and may at any time hold a long or short position in such securities. Stifel Nicolaus Weisel’s internal Fairness Opinion Committee approved the issuance of its Opinion.

Projected Financial Information

 

In the course of the process resulting in the merger agreement, our management prepared and provided to Stifel Nicolaus Weisel, PAETEC, and the other parties that entered into confidentiality agreements non-public, projected financial information, which was based on our management’s estimate of our future financial performance as of the date they were prepared. The projected financial information covered the fiscal years 2011 and 2012, and, when available, fiscal year 2013. In addition, our management provided to Stifel Nicolaus

Weisel, for purposes of its financial analyses, adjusted projected financial information for fiscal year 2010 that eliminated expenses that our management determined were non-recurring in nature and also provided Stifel Nicolaus Weisel pro forma financials for 2010 taking into account the four acquisitions XETA completed during fiscal year 2010. We made available to PAETEC and the other potential buyers all of the information necessary to permit PAETEC and the others to make the adjustments we provided to Stifel Nicolaus Weisel. The projected financial information provided to Stifel Nicolaus Weisel and the adjusted projected financial information provided to Stifel Nicolaus Weisel (the “Forecasts”) were also provided by our management to our board of directors.

 

For purposes of certain of the analyses described above under “Approval of the Merger Agreement — Opinion of Stifel, Nicolaus & Company, Incorporated,” Stifel Nicolaus Weisel, at the direction of our management and the board of directors, converted the Forecasts from a fiscal-year basis to a calendar-year basis in order to facilitate the comparison of XETA’s financial information to companies that report their financial information on a calendar-year basis. Furthermore, for purposes of the discounted cash flow analysis described above under “Approval of the Merger Agreement — Opinion of Stifel, Nicolaus & Company, Incorporated,” Stifel Nicolaus Weisel, at the direction of our management and the board of directors, extrapolated from the Forecasts projected revenue, EBITDA and EBIT for 2014 through 2015 using constant growth rates.

 

The Forecasts were not prepared with a view to public disclosure and are included in this proxy statement only because Forecasts were provided to our board of directors, Stifel Nicolaus Weisel and the potential buyers. The Forecasts were not prepared with a view to compliance with the published guidelines of the SEC or the guidelines established by the American Institute of Certified Public Accountants regarding projections. Our Independent Registered Public Accounting Firm has not examined, compiled or performed any procedures with respect to the Forecasts and accordingly does not provide any form of assurance with respect to the Forecasts. Neither we nor any of our representatives (including Stifel Nicolaus Weisel) has made or makes any representations to any person regarding the ultimate performance of XETA compared to the information contained in the Forecasts, and neither we nor any of our affiliates intend to provide any update or revision thereof, except as required by law.

 

Furthermore, the Forecasts:

 

 

 

 

 

 

In light of the foregoing factors and the uncertainties inherent in the Forecasts, shareholders are cautioned not to place undue, if any, reliance on the Forecasts.

 

The Forecasts are summarized in the following table:

 

 

 

 

 

 

PAETEC, the ultimate parent company of Merger Sub, will provide Merger Sub with sufficient funds to pay for all common shares to be acquired in the merger. The total amount of funds necessary to pay all merger consideration and customary fees and expenses in connection with the merger agreement and the transactions contemplated therein is estimated to be approximately $63 million, which will be used to pay shareholders of XETA, holders of options and warrants to purchase XETA common shares and to repay outstanding indebtedness under certain credit facilities of XETA. PAETEC has advised us that they expect to provide funds for these payments to Merger Sub, either as a capital contribution or as an intercompany loan. PAETEC will obtain such funds from cash on hand and/or cash generated from general corporate activities, or from amounts available under PAETEC’s existing credit facilities. The consummation of the merger is not conditioned upon any financing arrangements.

 

In considering the recommendation of our board of directors to vote for the proposal to approve and adopt the merger agreement, shareholders should be aware that XETA’s executive officers and directors have agreements or arrangements that may provide them with interests that may differ from, or be in addition to, those of shareholders generally. Our board of directors was aware of these interests and considered them, among other matters, in determining the recommendation set forth in this proxy statement.

 

Consideration Payable Pursuant to the Merger

 

As of April 5, 2011, XETA’s directors and executive officers (and affiliates and affiliated investment entities) owned in the aggregate 2,100,161 common shares (including vested and unvested restricted shares, but excluding common shares issuable upon the exercise of options to purchase common shares). Of this amount, Ronald L. Siegenthaler, our Chairman of the Board, Greg D. Forrest, our Chief Executive Officer and President and a director, and Patara Capital, LP, an entity affiliated with Ozarslan A. Tangun, a director of

XETA, held approximately 1,787,524 common shares on February 8, 2011, representing approximately 16% of XETA’s outstanding common shares, which are subject to the voting agreements. The beneficial ownership of each director and executive officer as of April 5, 2011 is further described under the heading “Share Ownership.”

 

Effect of the Merger Agreement on Options, Warrants and Restricted Shares

 

Options

 

As of April 5, 2011, XETA’s directors and executive officers held options to purchase 555,900 common shares in the aggregate, with exercise prices ranging from $1.59 to $4.30 per share and an aggregate weighted average exercise price of $2.68 per share.

 

With respect to stock options granted under our 2000 Stock Option Plan, upon a change in control of our company, vesting of any unvested options automatically accelerates according to the terms of the plan. With respect to options granted under our 2004 Omnibus Stock Incentive Plan, upon such a change of control, the vesting of unvested options will accelerate if the compensation committee of our board of directors determines to accelerate vesting. The proposed merger with PAETEC and Merger Sub will constitute a “change in control” under our 2004 Omnibus Stock Incentive Plan. At a special meeting of the board of directors held on January 6, 2011, our board of directors discussed the accelerated vesting of the equity compensation awards held by our officers and employees and recommended that, with respect to options granted on December 28, 2010 under the 2004 Omnibus Stock Incentive Plan to our four senior executive officers, only 50% of the total shares covered by those options should vest upon a change of control.

 

Our compensation committee then determined that vesting of all unvested shares covered by options under the 2004 Omnibus Stock Incentive Plan would accelerate upon the occurrence of the change in control, except that vesting with respect to only 50% of the total shares covered by options granted on December 28, 2010 to our four senior executive officers would accelerate in such event; any rights to the remainder of the shares covered by those options would terminate. See “— Background of the Merger.”

 

All options will be cancelled upon consummation of the merger. Holders of vested options will be entitled to receive (in each case, less any required withholding tax and in accordance with the terms of their respective agreements) an amount equal to the product of

 

 

If the exercise price per share of any option equals or exceeds the applicable merger consideration, such amount shall be zero.

 

The table below sets forth information regarding the options held by XETA’s directors and executive officers as of April 5, 2011 having an exercise price per share less than the merger consideration.

 

 

 

 

Warrants

 

In May 2010, in connection with an acquisition we made, we granted to the seller, Hotel Technologies Solutions, Inc. d/b/a Lorica Solutions, warrants exercisable immediately to purchase up to 150,000 of our common shares at an exercise price of $3.77 per share. The warrant agreement contains terms and provisions that permit the holder of the warrants to exercise the warrants in a net-issuance cashless exercise. We understand that the holder intends to fully exercise its warrants through a net-issuance cashless exercise.

 

Restricted Shares

 

As of April 5, 2011, XETA’s executive officers held outstanding restricted share awards granted under our 2004 Omnibus Stock Incentive Plan covering a total of 24,843 common shares. Our directors are not eligible to receive restricted share awards. Immediately prior to the effective time of the merger, all remaining forfeiture restrictions applicable to outstanding restricted share awards will expire and the holders thereof will be entitled to receive the $5.50 per share cash merger consideration with respect to each such share, less applicable tax withholdings.

 

At the special meeting of the board of directors held on January 6, 2011, our board of directors recommended that vesting of the restricted shares awards granted under the 2004 Omnibus Stock Incentive Plan should accelerate upon the change in control that would result from the merger. Our compensation committee then determined that vesting of all such unvested restricted share awards would accelerate upon the occurrence of such change in control. See “— Options” above.

 

The table below sets forth information regarding the restricted shares held by XETA’s executive officers as of April 5, 2011.

 

 

In addition, prior to the effectiveness of the merger, XETA’s board of directors, or the compensation committee of the board of directors, expects to adopt a resolution providing that dispositions by certain XETA officers and directors of their common shares and stock options in connection with the merger, shall be exempt from liability under Section 16(b) of the Securities Exchange Act of 1934, as amended, pursuant to Rule 16b-3 under such Act.

 

Change in Control Severance Plan

 

On December 9, 2010, our board of directors adopted an Executive Change in Control Severance Plan for certain of our executives. The board of directors designated Greg D. Forrest, our Chief Executive Officer and President, Robert B. Wagner, our Chief Financial Officer, Paul Comeau, our Chief Operating Officer, and Don Reigel, our Chief Sales Officer, as participants under the plan.

 

Severance benefits are triggered under the severance plan upon the participant’s termination of employment with XETA and its subsidiaries upon an “involuntary termination of employment” during the one-year period following a change in control. Under the severance plan, the proposed merger with PAETEC constitutes a change in control event. An involuntary termination of employment is defined under the severance plan as a termination of the participant’s employment by XETA or its subsidiaries for reasons other than “cause,” or as a voluntary termination of employment by the participant for “a good reason event.”

 

For purposes of the severance plan, “cause” means (i) the conviction of the participant for any felony involving dishonesty, fraud or breach of trust, (ii) intentional disclosure of our confidential information contrary to company policies, (iii) intentional engagement in any competitive activity which would constitute a breach of the participant’s duty of loyalty, (iv) the willful and continued failure of participant to substantially perform his duties for us (other than as a result of incapacity due to physical or mental illness), or (v) the willful engagement by the participant in gross misconduct in the performance of his or her duties that materially injures our company.

 

A “good reason event” means the occurrence after a change in control of any one of the following events or conditions: (a) a change (other than a nominal one) in the participant’s position or duties as they were in effect immediately before the change in control; (b) XETA assigns the participant any duties inconsistent with, or takes action that materially diminishes, the participant’s position, authority, duties or responsibilities in effect immediately before the change in control; (c) XETA materially reduces the participant’s base salary or annual cash compensation; (d) the participant is relocated to a workplace more than a 50-mile radius outside of the participant’s workplace prior to the change in control; or (e) XETA breaches a provision of the severance plan which results in a material adverse effect on the participant.

 

The severance plan provides for a single lump-sum cash payment based on a multiple of the participant’s annual cash compensation, which includes his (i) base salary, plus (ii) the annual cash incentive award established by the board of directors (or if such annual cash incentive has not been established, then the greater of the participant’s previous year’s annual cash incentive award or the average of such awards for generally the preceding three years). The multiple is one and one-half times annual cash compensation for XETA’s Chief Executive Officer and one times annual cash compensation for all other participants. The severance plan also provides for continued life and medical insurance coverage for 12 months following the date of the participant’s involuntary termination subject to certain conditions and limitations set forth in the severance plan.

In order to be entitled to receive severance benefits, the participant is required by the severance plan to execute and deliver to us a release and waiver of claims against XETA and to continue to abide by applicable company policies regarding confidential information, non-disclosure and other policies that survive termination of employment.

 

XETA has the right to terminate or amend the severance plan at any time without the consent of the participant, except during the one-year period following a change in control.

 

Indemnification of Directors and Officers

 

XETA is organized under the laws of the State of Oklahoma. Section 18-1031 of the Oklahoma General Corporation Act (“OGCA”) permits a corporation to include in its charter documents, and in agreements between the corporation and its directors and officers, indemnification rights in addition to those expressly set forth in the OGCA. XETA’s certificate of incorporation provides for the indemnification of XETA’s directors to the fullest extent permissible under the OGCA.

 

In addition, XETA’s bylaws provide that XETA is required to indemnify its directors, officers, employees and agents, in each case to the fullest extent permitted by the OGCA. XETA’s bylaws also provide that XETA shall advance expenses incurred by a director, officer, employee or certain agents in advance of the final disposition of any action or proceeding, and permit XETA to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in that capacity regardless of whether XETA would otherwise be permitted to indemnify him or her under the provisions of the OGCA.

 

In the merger agreement, PAETEC has agreed that the certificate of incorporation and bylaws of the surviving corporation in the merger will contain provisions no less favorable with respect to indemnification and exculpation from liabilities of the present and former directors, officers and employees of XETA than those in effect as of the date of the merger agreement and that such provisions will not be amended, repealed or otherwise modified for six years from the effective time of the merger in any way that would affect adversely the rights of any directors, officers, employees, fiduciaries or agents of XETA or any of its subsidiaries in respect of actions or omissions occurring at or prior to the effective time of the merger.

 

Under the merger agreement, PAETEC and the surviving corporation will honor and fulfill in all respects the indemnification obligations of XETA, including the advancement of expenses incurred in the defense of any action or suit, incurred prior to the effective time of the merger. Until the sixth anniversary of the effective time of the merger, the surviving corporation will maintain in effect directors’ and officers’ liability insurance with benefits and coverage levels that are no less favorable than XETA’s existing policies in respect of acts or omissions occurring at or prior to the effective time of the merger, provided that in satisfying such obligations, PAETEC and the surviving corporation will not be obligated to pay annual premiums in excess of 300% of the amount paid by XETA for coverage for its last full fiscal year. If the annual premiums of such insurance coverage exceed such amount, PAETEC will obtain a policy with the greatest coverage available for a cost not exceeding such amount.

 

Summary of Aggregate Proceeds that May be Received by XETA’s Directors and Executive Officers

 

The table below sets forth information regarding the aggregate proceeds that may be received by each of XETA’s directors and executive officers in connection with the merger. These amounts are described in further detail above under “— Consideration Payable Pursuant to the Merger” and “— Effect of the Merger Agreement on Options, Warrants and Restricted Shares.”

 

 

 

 

 

 

 

 

Voting Agreements

 

Concurrently with the execution and delivery of the merger agreement, Messrs. Siegenthaler and Forrest, and Patara Capital, LP, whom we refer to as the “Signing Shareholders”, each, solely in his or its capacity as a shareholder of XETA, entered into separate voting agreements with PAETEC. Under the voting agreements, the Signing Shareholders have agreed to vote, or cause to be voted, common shares for which they have the right to vote in favor of the approval and adoption of the merger agreement, in favor of any postponement or adjournment of the special meeting to solicit additional proxies, against certain other acquisition proposals, against certain extraordinary transactions involving XETA (including any reorganization, recapitalization, liquidation or winding-up of XETA) and against any action of XETA requiring the approval of XETA’s shareholders that would adversely affect the consummation of the transactions contemplated by the merger agreement.

In the voting agreements, the Signing Shareholders have agreed not to, on or after the date of the voting agreements, among other things, grant any proxies or enter into any arrangement to vote any of their common shares, sell, assign, transfer, encumber or dispose of any of their common shares or attempt to execute any statutory appraisal or similar rights with regard to their common shares. The Signing Shareholders also have agreed not to knowingly take any action to solicit or initiate other acquisition proposals or to engage in negotiations with any person the Signing Shareholder knows is considering making, has made, or has agreed to endorse, another acquisition proposal. Each voting agreement will terminate upon the earliest to occur of (i) the termination of the merger agreement in accordance with its terms or (ii) the effective time of the merger.

 

Claims Against Directors

 

There are shareholder derivative lawsuits pending against current directors of XETA relating to the merger. If the merger is consummated, any such claims that are currently pending or that could be brought against such directors of XETA by current shareholders would likely be extinguished. See “— Litigation Relating to the Merger.”

 

We have never paid dividends. Pursuant to the merger agreement, we are prohibited from declaring or paying any dividends or making any similar distributions to our shareholders.

 

The merger consideration was determined through arm’s-length negotiations between XETA and PAETEC.

 

Under the merger agreement, each of the parties has agreed to use its reasonable best efforts to complete the merger, including making filings with and obtaining all necessary approvals and consents from various federal and state governmental authorities. We do not expect that the completion of the merger will be subject to any federal or state regulatory requirements other than filings under applicable securities laws and the filing of certain merger documents with the Secretary of State of the State of Oklahoma. The parties have determined that approvals under applicable antitrust laws or regulations (such as the Hart-Scott-Rodino Antitrust Improvements Act of 1976) will not be required in order to complete the merger. If any such additional governmental approvals or actions are required, we expect that those approvals or actions will be sought by the parties. There can be no assurance, however, that any additional approvals or actions will be obtained. For a description of the obligations of XETA, PAETEC and Merger Sub related to third party consents and regulatory approvals, see “The Merger Agreement — Additional Agreements — Consents and Release of Liens” and “— Government Filings; Efforts” beginning on page 60.

 

Stifel Nicolaus Weisel acted as financial advisor to XETA in connection with the merger. We paid Stifel Nicolaus Weisel a retainer fee of $100,000 and a fee of $500,000 upon the delivery of its Opinion, and neither of such fees was contingent upon consummation of the merger. Stifel Nicolaus Weisel will receive a transaction fee of $1.0 million upon consummation of the merger, which amount will be reduced by the retainer fee and opinion fee that we have previously paid. XETA has also agreed to reimburse Stifel Nicolaus Weisel for its reasonable expenses (not to exceed $75,000, other than as approved by XETA) and to indemnify Stifel Nicolaus Weisel and certain related parties against certain liabilities and expenses related to or arising out of Stifel Nicolaus Weisel’s engagement, including liabilities under federal securities laws.

 

If the merger is completed, our shareholders are entitled to appraisal rights under Section 18-1091 of the OGCA, provided that they comply with the conditions established by Section 18-1091.

 

The discussion below is not a complete summary regarding a XETA shareholder’s appraisal rights under Oklahoma law and is qualified in its entirety by reference to the text of the relevant provisions of Oklahoma law, which are attached to this proxy statement as Annex C. Shareholders intending to exercise appraisal rights should carefully review Annex C. Failure to follow precisely any of the statutory procedures set forth in Annex C may result in a termination or waiver of these rights.

 

A record holder of common shares who makes the demand described below with respect to such shares, who continuously is the record holder of such shares through the effective time of the merger, who otherwise complies with the statutory requirements of Section 18-1091 and who neither votes in favor of the merger nor consents thereto in writing will be entitled to an appraisal by an Oklahoma state district court (the “Court”), of the fair value of his, her or its common shares in lieu of the consideration that such shareholder would otherwise be entitled to receive pursuant to the merger agreement. All references in this summary of appraisal rights to a “shareholder” or “holders of common shares” are to the record holder or holders of common shares. Except as described herein, shareholders of XETA will not be entitled to appraisal rights in connection with the merger.

 

Under Section 18-1091, where a merger is to be submitted for approval at a meeting of shareholders, not fewer than 20 days prior to the meeting, a constituent corporation must notify each of the holders of common shares for whom appraisal rights are available that such appraisal rights are available and include in each such notice a copy of Section 18-1091. This proxy statement shall constitute such notice to the record holders common shares.

 

Shareholders who desire to exercise their appraisal rights must satisfy all of the conditions of Section 18-1091. Those conditions include the following: