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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended October 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-16231
XETA Corporation
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(Exact name of registrant as specified in its charter)
Oklahoma 73-1130045
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4500 S. Garnett, Suite 1000, Tulsa, Oklahoma 74146
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (918) 664-8200
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Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.10 par value
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
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Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained herein, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [X]
The issuer's revenues for its most recent fiscal year were
$12,385,000.
The aggregate market value of the issued and outstanding voting stock
held by non-affiliates of the registrant as of December 31, 1995 (based upon
the average bid and asked prices of these shares) was approximately
$28,390,350.
The number of shares outstanding of the registrant's Common Stock as
of December 31, 1995 was 2,134,820.
Exhibit Index appears at Page 31.
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PART I
ITEM 1. BUSINESS
DEVELOPMENT AND DESCRIPTION OF BUSINESS
XETA Corporation (the "Company") provides telecommunications systems
and services to the lodging industry. The Company's products include PBX
systems, voice mail, call accounting and answer detection. These products
represent the primary systems used by hotels to provide telephone-related
services and amenities to their guests, as well as the information necessary to
bill guests for telephone calls and properly manage the telecommunications
environment at the hotel. Installation and service of the Company's products
represents an integral part of the Company's business and, together with the
reliability of its products, forms the foundation of the Company's reputation
in the lodging industry.
PRODUCTS
PBX Systems. A PBX connects the hotel to outside telephone networks
operated by common carriers and routes calls to, from and between extensions
within the hotel. The Company provides PBX systems (also known as "switches")
through a nation-wide, nonexclusive distributorship with Hitachi Telecom (USA),
Inc. ("Hitachi"). The Company sells Hitachi's HCX 5000 Series Digital
Communications systems. The Hitachi 5000 Series PBX is equipped with Hitachi's
WelCOMM lodging specific software and is a state-of-the-art telephone system
designed to integrate with nearly all aspects of the hotel's operations.
The Company's distributorship agreement with Hitachi is renewable on
March 31 of each year. The pricing structure provided in the distributorship
agreement is dependent upon the Company's purchase of a designated number of
systems annually. Management believes that the Company will meet the annual
purchase requirements for the current contract year and that the agreement will
be renewed on March 31, 1996 on the same or similar terms. The Company's
ability to meet the purchase requirements during any contract year ultimately
depends upon the volume and timing of sales orders it receives. The Company's
inability to meet the annual purchase requirements or to renew the agreement on
the same or similar terms could have a material, adverse effect on the
Company's PBX activities.
As part of its package of PBX related products, the Company also
offers voice mail systems. Most of the Company's sales of voice mail are in
conjunction with the sale of a new PBX system, although the Company also sells
voice mail systems on a stand alone basis. The Company distributes these
systems under a nationwide, nonexclusive agreement with Centigram
Communications Corporation ("Centigram"), which agreement is cancellable by
either party upon ninety (90) days notice. The Centigram systems are equipped
with lodging specific software. While it has been the Company's experience
that Centigram systems are the preferred voice mail
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system among its customers, management believes that the cancellation of the
Centigram agreement, or the occurrence of any other event which would render
Centigram unable to supply its systems or parts to the Company, would not have
a material adverse effect on the Company.
Subsequent to the end of the fiscal year, the Company announced that
it was nearing completion of development of a new PBX related product to be
marketed under the name "XPANDER". XPANDER is the Company's first proprietary
product related to its PBX product line and is designed with the same
diagnostic and remote service capabilities that have always been standard in
the Company's call accounting products. XPANDER is designed primarily to
respond to a growing desire by hoteliers to add additional telephone extensions
in their hotel rooms. These additional extensions will be utilized primarily
by guests who wish to make data calls to and from the hotel via a laptop
computer or fax machine while still having the capability to make or receive
voice calls on a separate telephone line. While the volume of these types of
calls is currently small, hotels are facing the potential of being perceived as
lacking a critical guest amenity if such service is not provided. The current
industry solution to this need is to increase the size of the existing PBX.
For most models, this solution is expensive both in terms of initial
acquisition costs and on-going maintenance costs. XPANDER is designed as an
addition to an existing PBX to provide additional working telephone extensions
in each room at significantly lower acquisition and on-going service costs.
While XPANDER can transmit both voice and data calls, it is designed to handle
data calls quickly and reliably.
A prototype of XPANDER has been demonstrated to the Company's major
customers and to date, has been favorably received. However, this market is in
its initial stages of development and the full potential of the market cannot
yet be determined. The success of XPANDER will depend to a great degree on how
strongly the market believes that additional telephone extensions are an
essential guest amenity and on the number of extensions that are ultimately
added. Field testing of XPANDER is expected to be completed during the
Company's second fiscal quarter and sales and installations should begin during
the last half of fiscal 1996. While no assurance can be given, management
believes that sales of XPANDER will represent a significant part of the
Company's revenue base as this market emerges.
Call Accounting Products. Call accounting systems act as a strategic
link between a hotel's PBX and its guest billing system to enable the hotel to
earn revenue from guest calls. These systems capture certain telephone usage
information, calculate call charges and resale mark-ups and transmit the
charges to the hotel's guest billing system. The Company designs and
manufactures all of its call accounting products. Each product contains
internal diagnostic components and proprietary software to detect automatically
a wide variety of software and hardware malfunctions. When a malfunction is
detected, the systems "phone home" to the Company's service center ("Service
Center") via remote diagnostic
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modem and alert the Company's service technicians of an error. Service
technicians can then run further diagnostic procedures and correct most system
malfunctions without the need of a field service call. In addition, telephone
pricing tariffs, custom software features and operating system software can be
remotely maintained and updated by the Service Center via modem.
The Company's primary call accounting products include the XL Series
call accounting systems and the XPERT answer confirmation systems. The Company
offers three XL Series call accounting products, the XL100, XL300 and XL500 for
small, medium and large hotels, respectively. Answer confirmation systems are
a complementary product to call accounting and were designed to minimize guest
charges for unanswered calls and to allow hotels to bill for answered calls of
short duration which systems previously treated as unanswered. Most call
accounting systems, including the Company's call accounting systems, record and
bill guests for all calls which exceed a designated duration, resulting in the
billing of some unanswered calls and the loss of revenues for completed calls
whose duration was less than the designated threshold. The Company's XPERT
system monitors trunk voltages associated with outgoing calls to confirm
whether a call has been answered.
The Company has designed its XL Series and XPERT systems to operate as
stand-alone systems or together in the same personal computer ("PC") as a fully
integrated system, thus reducing the acquisition and future service costs of
the system.
The Company has developed other call accounting hardware and software
products such as the "BUFFY XL," "Remote Alarm," "DM-1" and "XXAM." These
products are usually sold in conjunction with the Company's other systems to
enhance their operation or to provide additional features.
SYSTEM SERVICE AND WARRANTY
General. Since its inception, the Company has sought to distinguish
itself from its competitors by building a reputation for prompt, quality
installation and service of its systems. Through the use of remote technology
which has been designed into all of the Company's systems, technicians in the
Service Center are able to quickly diagnose and in most cases, correct system
malfunctions. In the event that on-site service is needed, the Company can
dispatch a technician from the Service Center or from one of seventeen regional
locations in which the Company has a trained technician. In addition, the
Company has informal arrangements with a network of third party service
contractors who can provide service to the Company's systems with guidance from
the Service Center.
The Company provides a basic one-year limited warranty, generally from
the date of installation, against defects in equipment manufactured by the
Company. Service beyond the warranty period is provided on call accounting and
answer confirmation systems under remote and direct maintenance agreements.
Under a remote service agreement, coverage of the equipment includes only
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those malfunctions which can be corrected either via modem or through verbal
instructions given to the customer over the telephone. Direct service
agreements include the remote service coverage plus on-site service and parts
and labor coverage for defects in equipment provided by the Company. The
Company provides remote or direct service to its customers generally under one
year contracts. However, the Company has agreements with several of its major
customers to provide two to four years of additional service beyond the
warranty date. Revenues from service contracts are recognized ratably over the
life of the contract and although the multi-year contracts discussed above
generally do not provide for annual price increases, the Company believes that
these contracts will produce acceptable profit margins throughout their term.
The Company's PBX service program combines the Company's reputation
for superior service with the quality of the Hitachi PBX and the unique
features of a XETA XL Series call accounting system. Like all of the Company's
service programs, the PBX service plans are designed specifically for the
demanding environment of the lodging industry and rely heavily on the Company's
extensive remote diagnostic capabilities and nationwide network of technicians.
Based on the increase in PBX systems under warranty and service contracts, the
Company increased its regional service locations from ten to seventeen during
fiscal 1995. Management expects to continue to expand its presence into
additional major metropolitan U. S. cities as the Company obtains service
contracts in those cities.
SOFTWARE AND PRODUCT DEVELOPMENT
Most of the Company's research and development activities during the
past year were spent on development of XPANDER, which included extensive
hardware as well as software development. XPANDER is a proprietary computer
designed for the specific application of providing additional working
extensions in conjunction with an existing PBX and transmitting telephone calls
on those extensions. While this product does not run on a PC, it is designed
to accept PC- type printed circuit boards. Management believes that this
design concept as well as other proprietary features will spawn future
applications of XPANDER as development and technology advances. While no
assurance can be given, management believes that XPANDER will likely be the
platform for the Company's future products.
MARKETING
General. Marketing telecommunications products and services to the
lodging industry is a complex, difficult and usually extended process. The
typical sales cycle for PBX and call accounting products is three to six
months, but can often run much longer. This extended sales cycle is the
product of competing financial interests which include the lack of capital and
borrowing ability and tight budgetary controls. In addition, the sales process
is further complicated by the variety of decision-makers often involved in
these purchases. These decision-makers can be on-site financial or operating
officers, hotel owners, outside
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telecommunications consultants, property management company officials or hotel
chain management. These factors have led to the design of flexible and
innovative marketing programs by the Company.
Since 1985, the Company has made extensive use of its XETAPLAN
program. The XETAPLAN Service Agreement is a turnkey program in which the
Company provides a call accounting and/or answer confirmation system and direct
service of the system in exchange for a fixed monthly fee for a specified term,
usually three, four or five years. The primary benefits of the XETAPLAN
program to the customer are generally no upfront cash outlays and the ability
to budget the costs of the program for several years in advance. These
transactions are structured by the Company in such a way that they typically
qualify for sales-type lease treatment for accounting purposes and are
therefore recorded as a sale by the Company even though title to the equipment
usually remains with the Company.
During the past year, the Company utilized the XETAPLAN program
extensively with one of its major customers to provide the customer with XL
Series call accounting systems to enable the customer to comply with changes in
the North American Numbering Plan ("NANP") (See "Industry Regulation" below).
The ability of the Company to provide the equipment under the XETAPLAN program
with terms and conditions that were customized for this particular transaction
was an important factor in the Company's ability to retain this base of
accounts and realize the significant increase in sales revenues and operating
profits during the past fiscal year.
PBX Marketing. The factors discussed above regarding the marketing of
products generally to the lodging industry apply equally to the marketing of
PBX's. In addition, however, the PBX market is marked by fierce competition
from other vendors as well as from other Hitachi distributors. The Company
offers a unique service package to its PBX customers by providing an XL Series
call accounting system and a specified number of free service calls each month.
To date, this program has been successful and has resulted in the Company
quickly becoming an established PBX service provider to the lodging industry.
An important part of marketing PBX systems is to assist customers with
the arrangement of financing for the systems. The Company has relationships
with several third party financing sources who are familiar with the equipment
and market for these products. In most cases, the Company introduces these
sources to the customer who then works directly with the financing source to
secure financing of the system. The Company's ability to assist its customers
in finding alternative sources of capital helps in many instances to reduce the
overall cost of the system to the customer and, consequently, promote sales by
the Company.
Sales Staff and Agents. At December 31, 1995, the Company employed
ten persons directly involved in the sales and marketing of its products and
services. In addition, since March 1989, the
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Company has engaged Robert A. Jones, a co-founder and former executive officer
and director of the Company, as an independent sales agent to represent the
Company's call accounting products on an exclusive basis to many of the
Company's major customers such as Marriott International/Marriott Host and U.S.
Long Distance Corporation. The Company considers its relationship with Mr.
Jones to be good.
MAJOR CUSTOMERS
During fiscal year 1995, the Company earned approximately 24% of net
sales and service revenues from sales of systems to one customer, Marriott
International/Marriott Host and its affiliates. The Company has a good
relationship with this customer, as it has historically, and management expects
such relationship to continue. However, the loss of this customer would have a
material adverse effect upon the Company. The Company had no other single
customer which accounted for more than 10% of the Company's net sales and
service revenues during the year.
COMPETITION
The competition for sales of both PBX and call accounting products is
fierce and is dominated by a few companies. Competition in both product lines
includes large, well-known companies which have greater name recognition and
more resources than the Company, but who do not concentrate their product and
service offerings on the lodging market. As a result, although this
competition is formidable, the Company has created a niche by customizing its
products and its style of service to the unique requirements of the lodging
industry. Management believes that while the Company competes effectively on
the basis of price and product features, its most effective tool has been the
Company's commitment to distinguish itself by concentrating on the performance
and reliability of its systems and by providing the highest level of service
possible.
MANUFACTURING
The Company assembles all of its products from an inventory of
components, parts and sub-assemblies obtained from various suppliers. The
Company purchases the components used to manufacture its PC-based and
proprietary products from a variety of distributors at prices which fluctuate
based on demand and volumes purchased. Some components, although widely
distributed, are manufactured by a single, usually foreign source and are
therefore subject to shortages and price fluctuations if manufacturing is
interrupted. The Company maintains adequate inventories of components to
mitigate short-term shortages and believes the ultimate risk of long-term
shortages is minimal. Also, the rapid pace of change in the technology of
PC-based components has resulted in some components being phased out of
production. The Company has typically been able to substitute more advanced
components without substantial redesign of its systems and with minimal effect
on overall system cost. There can be no assurance given, however, that future
obsolescence of key
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components would not result in unanticipated delays in shipments of systems due
to redesign and testing of assemblies.
The Company uses outside contractors to assemble its proprietary
printed circuit boards. The components and the blank circuit boards are
purchased and inventoried by the Company and supplied to the outside contractor
for assembly and quality control testing. Due to the nature and design of
XPANDER, the Company's newest product, the variety and volume of printed
circuit boards required is expected to be significantly greater than for any
previous product in the Company's history. In anticipation of this need,
representatives of the Company have visited outside contractors' facilities to
review production techniques, quality control procedures and internal controls
over customer inventories. The Company also anticipates upgrading its testing
equipment and assembly procedures to minimize failures due to mishandling. As
part of the Company's current procedures, completed systems are powered on and
allowed to "burn- in" before being prepared for a specific customer location.
Final testing of the equipment and software is performed prior to shipment.
EMPLOYEES
At December 31, 1995, the Company employed 84 employees, including 1
part-time employee.
COPYRIGHTS, PATENTS AND TRADEMARKS
The Company has registered as United States domestic trademarks the
names "XETA," "XETAXCEL," "XACT," "XPERT," "XPERT+," and "XL" for use in the
marketing of its services and systems to the lodging industry. The Company is
applying for registration of the mark "XPANDER" and has abandoned its use and
application for trademark registration of the mark "XETACHI."
The Company currently holds no patents and has no pending patent
applications for its hardware or software technology. The Company does claim a
copyright on its proprietary circuit boards. While management believes that
the ownership of patents, copyrights and registered trademarks is less
significant to the success of the Company than its proprietary technology and
the quality and type of its service and technical expertise, there may be
patents or copyrights unknown to the Company which could affect its right to
make, use and sell its products.
In recent years, several hotels, including some of the Company's
customers, have been named as defendants in litigation filed by Phonometrics,
Inc. alleging patent infringement arising from the hotels' use of PBX, call
accounting and answer detection systems. (See "Legal Proceedings" below for a
further discussion of this litigation.) The patent claimed by the plaintiff in
this litigation expired in October 1990. Although the Company is exposed to
liability for damages to the plaintiff under contractual indemnity provisions
with its customers, the Company's right to make, use and sell its call
accounting systems is not threatened by this litigation.
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INDUSTRY REGULATION
A portion of the Company's growth in sales revenues and operating
profits during fiscal 1995 relates to changes in regulation of the
telecommunications industry. Because the types of telecommunications services
available and the numbers of users of those services have been increasing in
almost geometric proportions, the telephone industry was faced with limitations
of the existing phone numbering system. This system, known as the North
American Numbering Plan, is the telephone numbering scheme used in the United
States and most of North America. The NANP is administered by a subsidiary of
the Regional Bell Operating Companies, but is ultimately responsible to
governmental regulatory agencies, such as the Federal Communications Commission
in the United States and similar agencies in Canada and the Caribbean Basin.
There were several fundamental changes in the NANP, but the most significant
change with respect to hotel telecommunications equipment was the change to
begin issuing area codes with middle digits other than one or zero. The
Company responded during fiscal 1993 to the announcement of these upcoming
changes by commencing development of modifications to its systems so that its
systems would comply with the new numbering plan, which began taking effect
during fiscal 1995. Beginning in the fourth quarter of fiscal 1994, the
Company experienced a surge in orders for new call accounting systems to both
comply with the changes in the NANP and to upgrade to the Company's new XL
Series PC- based systems. To a much lesser degree, the Company also earned
revenues from the sale and installation of upgrades of Hitachi PBX's to bring
them into compliance with the NANP changes. While the Company does not expect
to receive any additional orders with respect to upgrading systems for the
NANP, at December 31, 1995, there was still a backlog of approximately $535,000
representing additional systems sales and installation revenues from previous
orders. Management anticipates that these installations will be completed by
the end of the Company's second fiscal quarter of 1996.
Both federal and state governments regulate the telecommunications and
related industries. The federal agency vested with primary jurisdiction over
the telecommunications industry is the FCC. Many peripheral industries such as
the call accounting industry, while not directly regulated by the FCC, are
nevertheless substantially affected by the enforcement of its regulations and
changes in its regulatory policy. Since June 1981, when the FCC removed
restrictions on the resale of telephone transmission service, there has been a
substantial market for telephone call accounting systems. To date, hotels and
businesses engaged in the resale of telephone service to guests or clients have
not been required to file tariffs with the FCC or obtain its authorization to
engage in such resale. However, no assurance can be given that the FCC will
not in the future require such tariffs or otherwise regulate the resale of
telephone usage by the lodging or other industries in such a manner as to
adversely affect the market for the Company's call accounting systems.
Legislation has been introduced in Congress in recent years which is
intended to open all telecommunications markets to
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competition through de-regulation. While these bills would, among other
things, remove current restrictions on manufacturing imposed on the Bell
operating companies and allow such companies under certain conditions to engage
in the manufacturing and provision of certain types of telecommunications
equipment, it is difficult to predict whether the hospitality
telecommunications industry in general, or the Company in particular, would be
impacted in the event such legislation were passed.
The FCC has adopted regulations imposing radio frequency emanation
standards for computing equipment. Based upon independent test reports, all of
the Company's current call accounting and answer confirmation systems have been
certified and are in compliance with applicable regulations for computer
products marketed for use primarily in a commercial, industrial or business
environment. Engineering modifications to these products may obligate the
Company to retest them for FCC compliance. Failure to comply could preclude
the Company from selling non-complying products in the United States until
appropriate modifications are made. The Company intends to conduct FCC tests
on new products as necessary. Presently, none of the Company's products
require approval from any governmental agency except as described above.
The costs of complying with all applicable environmental laws is
immaterial.
ITEM 2. PROPERTIES
The Company's principal executive office, assembly and Service Center
consists of approximately 20,238 square feet of leased space in a ten story
office building located in Tulsa, Oklahoma. The building and surrounding
property are considered to be in good condition. The Company's lease is
scheduled to expire on April 30, 1997, but may be renewed at the Company's
option for two additional one year terms. The lease contains no provisions
relating to rent escalations. While the Company believes that it is in
substantial compliance with zoning ordinances applicable to its present leased
facilities, if the Company were found to be in violation of such ordinances,
the Company believes that such violation would not have a material adverse
effect on its business.
The Company also leases office space in Boulder, Dallas, Indianapolis,
and Marlton, New Jersey, and has informal office arrangements throughout the
United States from which its regional sales and service staff operate.
ITEM 3. LEGAL PROCEEDINGS
PHONOMETRICS
Since July, 1994, eight of the Company's customers have notified the
Company that they have been sued in separate lawsuits filed in the United
States District Court for the Southern District of Florida by Phonometrics,
Inc., a Florida based corporation (referred to as "Phonometrics" or the
"plaintiff"), for alleged patent infringement by the hotels' PBX, call
accounting and answer
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detection systems. The Company has supplied call accounting, answer detection,
or both kinds of systems to a number of these customers' hotels. Seven of the
eight customers are seeking indemnity from the Company under contractual patent
infringement indemnity provisions. To date the Company has not been named as a
party in any of these lawsuits, although one customer has recently renewed its
demand for indemnity and has threatened to add the Company as a party to the
lawsuit in the event the customer and the Company do not reach terms on
indemnity. Because there are other vendors implicated along with the Company
in the cases filed against the Company's customers, the extent to which the
Company should bear responsibility in relation to all the vendors implicated is
unknown at this time. Therefore, the Company has not yet assumed the outright
defense of its customers in any of these actions.
In each of the lawsuits against the Company's customers, the plaintiff
is seeking damages of an unspecified amount, based upon a reasonable royalty of
the hotels' profits derived from use of the allegedly infringing equipment
during a period commencing six years prior to the filing of the lawsuit and
ending October 30, 1990. The plaintiff is not seeking an injunction against
continued use of the systems and is barred from doing so since the patent
expired in October, 1990. In some cases, the Company did not supply any of its
systems to certain hotel locations included in the lawsuits until after the
expiration of the plaintiff's patent; therefore, the plaintiff is barred by law
from collecting damages from the Company's customers with regard to these
particular hotel sites.
Phonometrics, Inc. has filed numerous suits against telecommunications
equipment manufacturers and vendors and, more recently, against a number of
hotel chains, alleging infringement of the same patent in each of these cases.
At least one of these cases has proceeded through the appellate stage and was
resolved in favor of the defendant equipment manufacturer. Many of the actions
filed by Phonometrics are filed before the same court in which the Company's
customers have been sued. Because of the similar nature of these actions, many
of the defendants, including the Company's customers, have been awaiting the
outcome of motions filed in other Phonometrics' cases, since the outcome of
such motions may impact or be dispositive of the lawsuits brought against the
Company's customers. There is currently pending a summary judgment motion in
an action brought by Phonometrics against Northern Telecom, Inc., an equipment
manufacturer. Oral arguments were held on this motion in April, 1995, however
no ruling has yet been made by the court.
This litigation remains in its early stages, making it premature to
predict its outcome with any degree of certainty. Nevertheless, management
believes at this time that it can successfully defend its equipment against the
allegation of infringement made by Phonometrics. In the event that the Company
is either named as a defendant in these suits or assumes their defense on
behalf of its customers, the Company intends to vigorously defend these actions
both on the merit of Phonometrics' claims, as well as the proper measure of
damages. In the event,
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however, that Phonometrics was to prevail in its actions against the Company's
customers, and the Company was in turn deemed obligated to indemnify its
customers to the full extent of a judgment (or portion thereof if allocated
among multiple equipment vendors) based upon a royalty of hotel phone profit,
such a result could have a material adverse effect on the Company.
ABTS
On June 16, 1995, Associated Business Telephone Company ("ABTS"), a
New Jersey corporation, brought suit against the Company in the Superior Court
of Camden County, New Jersey, based upon allegations of breach of warranty,
breach of contract, and tortious interference with ABTS' relationships with its
customers, arising in connection with (i) a Distributor's Agreement entered
into between the Company and a sister company of ABTS in 1986, pursuant to
which the Company sold to the sister company numerous call accounting systems
which were warehoused and eventually installed by ABTS in various hotels, and
(ii) a Maintenance Agreement pursuant to which the Company furnished
maintenance services for such systems. ABTS seeks damages in the amount of
$1,000,000, without being specific as to the basis for this sum. On July 31,
1995, the Company filed an answer in this matter through local counsel in New
Jersey and subsequently had the case removed to the United States District
Court for the District of New Jersey on October 27, 1995. The parties are
proceeding with discovery. A court ordered settlement conference is scheduled
for March 7, 1996, however, there have been no settlement discussions between
the parties. The Company denies all allegations made by the plaintiff and
intends to vigorously defend this action.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
PRINCIPAL MARKET
The Company's Common Stock, $.10 par value, is currently traded on the
over-the-counter market and is reported in the National Association of
Securities Dealers Automated Quotation ("NASDAQ") System under the symbol
"XETA."
STOCK PRICE AND DIVIDEND INFORMATION
The high and low bid prices for the Company's Common Stock, as
reported by the National Association of Securities Dealers through its NASDAQ
System, for each of the quarters during the Company's two most recent fiscal
years are set forth below. These prices reflect inter-dealer prices, without
adjustment for retail mark-ups, mark-downs or commissions and may not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
1995 1994
---- ----
High Low High Low
---- --- ---- ---
Quarter Ending:
--------------
<S> <C> <C> <C> <C>
January 31 3 3/4 1 5/8 1 3/8 1 1/4
April 30 5 5/8 2 3/4 2 7/8
July 31 6 1/8 4 1/8 3 1
October 31 6 1/2 3 7/8 2 7/8 2
</TABLE>
The Company has never paid cash dividends on its Common Stock. Payment
of cash dividends is dependent upon the Company's earnings, capital
requirements, overall financial condition and other factors deemed relevant by
its Board of Directors. The Company is currently committed to reinvesting its
available capital in the future growth and success of the Company. It is
therefore unlikely that the Company would pay cash dividends in the foreseeable
future.
APPROXIMATE NUMBER OF SHAREHOLDERS
As of October 31, 1995, the latest practicable date for which such
information is available, the Company had 164 shareholders of record.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
For the fiscal year ending October 31, 1995, the Company reported record
revenues and net income of $12,385,000 and $1,514,000, respectively. These
results were attributable to continued acceptance of the Company's PBX product
and service offering, expansion of the Company's installation and service
revenues, and the surge in orders of call accounting and answer confirmation
systems as a result of the mandated changes in the telephone dialing patterns.
In addition to producing these record results, the Company invested heavily in
new product development to continue the expansion of the Company's revenue base
in the future.
The following is a detailed discussion and analysis of the major factors
and trends which management believes has had the most significant impact on the
financial condition of the Company as of October 31, 1995, and the results of
the Company's operations for the fiscal year ending October 31, 1995 as
compared to 1994. This analysis should be read in conjunction with the
Consolidated Financial Statements and Notes thereto contained in this report.
RESULTS OF OPERATIONS
Net sales and service revenues increased $5,003,000 or 68% during fiscal
year 1995 compared to fiscal 1994. This increase consisted of a $3,217,000 or
83% increase in systems sales and $1,786,000 or 51% increase in installation
and service revenues. The increase in systems sales represents an increase in
PBX systems sales of $2,333,000 or 165% and an increase in call accounting
sales of $885,000 or 36% during fiscal 1995 compared to fiscal 1994.
In 1993, when the Company became a nation-wide distributor of Hitachi
Telecom USA, Inc. ("Hitachi") to distribute Hitachi's HCX Series 5000 PBX
systems, the Company's goal was to add a new dimension to its business by
providing an additional line of equipment and services to its existing customer
base. Over the past two years, the Company invested heavily in new personnel
and training of existing personnel to establish its reputation as a qualified
competitor in the lodging PBX market. The fiscal 1995 results represent the
successful culmination of those investments. While no assurance can be given,
management believes that the Company can continue to build on the success
experienced to date to further increase the revenues from its PBX activities.
The increase in sales of call accounting systems has been due to
customer acceptance of the Company's XL Series call accounting systems and a
surge in orders for new systems from customers needing to comply with the
mandated changes in the telephone numbering plan, known as the North American
Numbering Plan ("NANP"). Beginning in the fourth quarter of fiscal 1994, the
Company began experiencing a surge in orders for new XL Series call
14
<PAGE> 15
accounting systems as well as upgrades to existing call accounting systems as
customers sought to comply with the changes in the NANP. Revenues from
shipments and installations of these orders peaked during the first quarter of
fiscal 1995 and continued, on a declining basis, each quarter throughout the
year. Management does not expect any further significant orders related to the
NANP upgrades, however, installations of orders previously received are
expected to continue through the second quarter of fiscal 1996, at which time
revenues from sales of call accounting systems are expected to return to
historical levels.
The Company has always placed great emphasis on the service provided to
its customers, both during and after the installation process. The reputation
the Company has built for providing quality service to its customers has been
the cornerstone of the Company's long-term success and has been critical to the
rapid expansion of its PBX product and service line. Revenues from all of the
Company's service activities grew 51% during fiscal 1995 compared to the
previous year. Over 65% of the Company's service revenues are earned from
recurring maintenance contracts and, while no assurance can be given,
management does not anticipate any significant deterioration in its base of
customers under contract. Furthermore, the Company believes that it can
continue to significantly expand the base of PBX systems under service
contracts for the foreseeable future.
The gross margins earned on net sales and service revenues were 42% for
the year ending October 31, 1995 compared to 41% for the previous year. These
margins reflect a weighted average of the margins of the Company's various
products and services and will therefore vary in accordance with the mix of
sales. This overall margin is expected to decline somewhat next year as the
sales of the higher margin call accounting products are expected to become a
smaller factor in overall sales.
Due primarily to this margin effect, management believes that fiscal
1996 net income will likely be slightly lower than in fiscal 1995, although
total sales in fiscal 1996 are expected to be slightly higher than total sales
in fiscal 1995. Management expects that both total sales and net income will
resume their growth starting in fiscal 1997; however, such growth is dependent
upon the continued acceptance of the Company's PBX product and service line, as
well as the timing and nature of development of the market for XPANDER and the
acceptance of this product. (See the discussion on research and development,
below, under "Results of Operations," and "Products" under "ITEM 1. BUSINESS"
above, for additional discussion on the XPANDER product and market). This
growth outlook can also be affected by the rapid technological change which
characterizes the computer industry in general, as well as the various other
factors discussed throughout this report, including but not limited to the
continuance of the Company's relationships with its major customers, the
Company's ability to attract and retain key sales and service personnel and,
notwithstanding the Company's belief that its legal position in both cases is
strong, an unfavorable outcome in pending litigation.
15
<PAGE> 16
Operating expenses increased $734,000 or 31% during fiscal 1995 compared
to fiscal 1994. This increase was primarily the result of increases in
selling, general and administrative ("SGA") expenses. SGA expenses increased
primarily due to increases in commissions and executive bonuses which are
directly related to increases in sales and net income. Other increases in SGA
related to increases in sales and administrative personnel. During the year,
the Company added two sales offices and staffed each with an experienced
salesman and support staff. The Company also added accounting staff to support
the growth in the size of the Company.
In addition to the research and development costs included in operating
expenses, the Company spent $123,000 on software development costs which, under
the applicable accounting rules, qualified as software production costs and
were capitalized. During the past fiscal year, the Company has been developing
a PBX-related product named XPANDER. This product is intended to meet the
needs of hotels who desire to provide multiple telephone line extensions in
each room. This need is being driven by the explosion in the use of "notebook
size" personal computers and fax machines. Through the use of XPANDER, hotels
which desire to add at least 100 telephone extensions to their present phone
systems may do so without substantially increasing the size of their PBX, and
generally at substantially lower acquisition and on-going maintenance costs.
The Company has demonstrated XPANDER to most of its major customers and to
date, their response has been positive. While the Company expects to begin
field testing the equipment in the near future, revenues from XPANDER are not
expected until the last half of fiscal 1996. The success of XPANDER will
depend in large part upon hotel guest demand for additional telephone
extensions in guest rooms and the lodging industry's commitment to provide this
amenity to its guests.
Interest and other income decreased $169,000 or 31% during fiscal 1995
compared to fiscal 1994. Other income in fiscal 1994 included a $400,000
nonrecurring gain on the sale of the Company's ownership interest in XETA
Reservations Systems, Inc. (See Note 5 to the Consolidated Financial
Statements for a complete discussion of this transaction). Excluding this
gain, interest and other income increased approximately $231,000 reflecting the
increase in interest income earned from the Company's net investment in
sales-type leases and from the Company's cash investments.
For the year ending October 31, 1995, the Company recorded a provision
for income taxes of $913,000 compared to a provision for income taxes of
$66,000 for fiscal 1994. This increase in tax expense is due to the increase
in pre-tax income recognized in fiscal 1995 compared to fiscal 1994 and to the
realization in fiscal 1994 of $389,000 in tax benefits relating to reversing
timing differences. During fiscal 1995, the Company realized an additional
$108,000 in tax benefits related to reversing timing differences. There are no
remaining tax benefits available to offset future taxable income.
16
<PAGE> 17
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash balances increased $1,158,000 during fiscal 1995
reflecting primarily current year profits. Of the total increase in cash
$1,311,000 was produced from operations. Investing activities, consisting
primarily of additions in equipment to support the Company's PBX service
program and to equip additional offices and investments in capitalized software
production costs, consumed $238,000. Approximately $85,000 was received from
stock option and warrant exercises during the year.
Management considers the Company's cash position and capital resources
to be strong and believes that its working capital position is sufficient to
meet future anticipated operating needs. Management continually evaluates
alternatives for the effective use of its cash balances and other capital
resources. During the past two years, these evaluations have resulted in the
stock repurchase program and the expansion of the Company's Xetaplan program.
The Company's profitability and capital resources have also enabled it to
continue to invest in research and development of new products, such as the XL
Series products and XPANDER. Such product development is critical to the
Company's long- term success. While no assurance can be given, management
believes that if additional opportunities arise, additional capital could be
obtained either through bank loans or secondary stock offerings.
17
<PAGE> 18
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS OF THE COMPANY PAGE
----
Report of Independent Public Accountants F-1
Consolidated Financial Statements
Consolidated Balance Sheet - October 31, 1995 F-2
Consolidated Statements of Operations - For
the Years Ended October 31, 1995 and 1994 F-3
Consolidated Statements of Shareholders' Equity -
For the Years Ended October 31, 1995 and 1994 F-4
Consolidated Statement of Cash Flows - For the
Years Ended October 31, 1995 and 1994 F-5
Notes to Consolidated Financial Statements F-6
18
<PAGE> 19
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Xeta Corporation:
We have audited the accompanying consolidated balance sheet of Xeta Corporation
(an Oklahoma corporation) and subsidiaries as of October 31, 1995, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the two years in the period ended October 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Xeta Corporation
and subsidiaries as of October 31, 1995, and the results of their operations
and their cash flows for each of the two years in the period ended October 31,
1995, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Tulsa, Oklahoma
December 15, 1995
F-1
<PAGE> 20
XETA CORPORATION
CONSOLIDATED BALANCE SHEET
OCTOBER 31, 1995
<TABLE>
ASSETS
------
(Note 2)
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents (Note 3) $2,788,709
Current portion of net investment in sales-type leases (Note 10) 1,472,249
Other receivables, net (Note 13) 1,328,445
Inventories, net (Note 6) 884,764
Deferred tax asset, net (Note 4) 282,185
Prepaid expenses and other 94,755
------------
Total current assets 6,851,107
------------
NONCURRENT ASSETS:
Net investment in sales-type leases, less current portion above (Note 10) 3,018,142
Property, plant and equipment, net (Note 17) 329,525
Capitalized software production costs, net of accumulated amortization of $214,002 184,013
Other 213,917
------------
Total noncurrent assets 3,745,597
------------
Total asset $ 10,596,704
============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 441,581
Unearned revenue (Note 8) 1,968,019
Accrued liabilities (Note 7) 661,363
Accrued income taxes 538,566
------------
Total current liabilities 3,609,529
------------
UNEARNED SERVICE REVENUE (Note 8) 1,687,817
------------
NONCURRENT DEFERRED TAX LIABILITY, NET (Note 4) 475,921
------------
COMMITMENTS (Notes 10, 14 and 18)
SHAREHOLDERS' EQUITY (Notes 5 and 9):
Common stock; $.10 par value; 10,000,000 shares authorized, 2,003,320 issued 200,332
Paid-in capital 4,092,291
Retained earnings 790,554
------------
5,083,177
Less- Treasury stock, at cost (259,740)
------------
Total shareholders' equity 4,823,437
------------
Total liabilities and shareholders' equity $ 10,596,704
============
</TABLE>
The accompanying notes are an integral
part of this consolidated balance sheet.
F-2
<PAGE> 21
XETA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years
Ended October 31,
--------------------------------
1995 1994
----------- -----------
<S> <C> <C>
SYSTEM SALES $ 7,111,936 $ 3,894,615
INSTALLATION AND SERVICE REVENUES 5,272,684 3,486,360
----------- -----------
NET SALES, INSTALLATION AND SERVICE REVENUES 12,384,620 7,380,975
----------- -----------
COST OF SYSTEM SALES 3,928,024 1,960,605
INSTALLATION AND SERVICE COSTS 3,279,019 2,362,721
----------- -----------
TOTAL COST OF SALES, INSTALLATION AND SERVICE 7,207,043 4,323,326
----------- -----------
Gross profit 5,177,577 3,057,649
----------- -----------
OPERATING EXPENSES:
Selling, general and administrative 2,641,675 1,915,781
Engineering 143,561 126,685
Research and development 287,166 253,371
Amortization of capitalized software production costs 54,912 97,572
----------- -----------
Total operating expenses 3,127,314 2,393,409
----------- -----------
INCOME FROM OPERATIONS 2,050,263 664,240
INTEREST AND OTHER INCOME, net (Notes 5 and 12) 377,072 544,993
----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES 2,427,335 1,209,233
PROVISION FOR INCOME TAXES (Note 4) 913,000 66,000
----------- -----------
NET INCOME $ 1,514,335 $ 1,143,233
=========== ===========
INCOME PER COMMON AND COMMON EQUIVALENT SHARE (Note 16)
$ .68 $ .51
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 1,799,398 1,860,179
=========== ===========
WEIGHTED AVERAGE EQUIVALENT SHARES - Primary 2,228,916 2,234,643
=========== ===========
</TABLE>
The accompanying notes are an integral
part of these consolidated statements.
F-3
<PAGE> 22
XETA CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED OCTOBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
Common Stock Treasury Stock
--------------------------- ----------------------
Retained
Earnings
Number of Paid-in (Accumulated
Shares Issued Par Value Shares Amount Capital Deficit)
------------- --------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE AT OCTOBER 31, 1993 1,964,620 $196,462 - $ - $4,011,185 $(1,867,014)
Treasury stock acquired - - (189,747) (259,740) - -
Net income - - - - - 1,143,233
--------- -------- -------- --------- ---------- -----------
BALANCE AT OCTOBER 31, 1994 1,964,620 196,462 (189,747) (259,740) 4,011,185 (723,781)
Stock options exercised 13,700 1,370 - - 12,330 -
Stock warrants exercised 25,000 2,500 - - 30,313 -
Tax benefit of stock options
and warrants - - - - 38,463 -
Net income - - - - - 1,514,335
--------- -------- -------- --------- ---------- -----------
BALANCE AT OCTOBER 31, 1995 2,003,320 $200,332 (189,747) $(259,740) $4,092,291 $ 790,554
========= ======== ======== ========= ========== ===========
</TABLE>
The accompanying notes are an integral
part of these consolidated statements.
F-4
<PAGE> 23
XETA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years
Ended October 31,
-----------------------
1995 1994
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,514,335 $1,143,233
---------- ----------
Adjustments to reconcile net income to net cash provided by operating
activities-
Depreciation 152,343 212,600
Amortization of capitalized software production costs 54,912 97,572
Gain on sale of assets (13,303) (10,332)
Provision for doubtful accounts receivable 60,000 60,000
Provision for excess and obsolete inventory 13,515 120,959
Gain on sale of XRS stock (Note 5) - (400,000)
Change in assets and liabilities-
Increase in net investment in sales-type leases (1,849,544) (1,947,730)
(Increase) decrease in other receivables (425,909) 86,586
Increase in inventories (187,872) (150,312)
Decrease in prepaid income taxes 188,714 219,453
Decrease (increase) in deferred tax asset 19,958 (127,210)
Increase in prepaid expenses and other assets (149,870) (33,796)
Increase in accounts payable 199,836 46,328
Increase in unearned revenue 694,514 1,241,145
Increase in accrued liabilities 738,300 127,503
Increase in deferred tax liabilities 300,988 -
---------- -
Total adjustments (203,418) (457,234)
---------- ----------
Net cash provided by operating activities 1,310,917 685,999
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of XRS stock (Note 5) - 400,000
Additions to property, plant and equipment (148,603) (211,546)
Additions to capitalized software production costs (123,371) -
Proceeds from sale of assets 34,259 18,063
---------- ----------
Net cash provided by (used in) investing activities (237,715) 206,517
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercises of stock options and warrants 84,976 -
Purchase of treasury stock - (259,740)
---------- ----------
Net cash received by (used in) financing activities 84,976 (259,740)
---------- ----------
Net increase in cash and cash equivalents 1,158,178 632,776
CASH AND CASH EQUIVALENTS, beginning of year 1,630,531 997,755
---------- ----------
CASH AND CASH EQUIVALENTS, end of year $2,788,709 $1,630,531
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 343 $ 1,417
========== ==========
Cash paid during the year for income taxes $ 51,072 $ 103,577
========== ==========
</TABLE>
The accompanying notes are an integral
part of these consolidated statements.
F-5
<PAGE> 24
XETA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED
OCTOBER 31, 1995
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS
Xeta Corporation (Xeta or the Company) was incorporated in 1981 for the purpose
of developing, manufacturing and marketing call accounting systems. During
1993, the Company became a nation-wide distributor of third-party manufactured
PBX systems. Xeta sells primarily to the lodging industry and is thus
dependent upon the condition of the hospitality economic sector.
Xetacom, Inc. (Xetacom), a wholly owned subsidiary of the Company, was
incorporated in February 1989 to provide long distance telephone services to
the lodging industry. Xetacom's operations have been insignificant to date.
Xeta Reservation Systems, Inc. (XRS), was incorporated in April 1990 to provide
automated reservation services to the leisure industry. See Note 5 for a
complete discussion of the Company's accounting for its investment in XRS and
the sale of all of its ownership interest in XRS in December 1993.
LEASE ACCOUNTING
A portion of the Company's revenues has been generated using sales-type leases.
The Company has sold systems to end- users under these sales-type leases to be
paid over three-, four- and five-year periods. Because the present value
(computed at the rate implicit in the lease) of the minimum payments under
these sales-type leases equals or exceeds 90 percent of the fair market value
of the systems and/or the length of the lease exceeds 75 percent of the
estimated economic life of the equipment, the Company recognizes the net effect
of these transactions as a sale as required by generally accepted accounting
principles.
Interest income from a sales-type lease represents that portion of the
aggregate payments to be received over the life of the lease which exceeds the
present value of such payments using a discount factor equal to the rate
implicit in the underlying leases.
F-6
<PAGE> 25
REVENUE RECOGNITION
The Company recognizes revenue from sales-type leases as discussed above under
the caption "Lease Accounting". Service revenue is recognized monthly over the
life of the related sales-type lease or service agreement on a straight-line
basis. Revenue from sales and installations of call accounting systems is
generally recognized 75 percent upon shipment of the system with the remaining
25 percent recognized upon installation where the Company is responsible for
installation. Revenue from sales of PBX systems are generally recognized 100
percent upon installation. Service and installation costs are expensed as
incurred.
Systems sales include revenues earned under revenue sharing arrangements in
which the Company installs equipment at end- user locations and shares in a
portion of the end-user's phone revenues. Under these contracts, title to the
equipment remains with the Company. Termination of the arrangement occurs
either by the purchase of the equipment by the end-user or by either party
exercising its right to cancel the contract. As the end-user pays the revenue
sharing invoices, credits are earned which may be used to reduce the purchase
price of the equipment. The Company amortizes its costs under these contracts
proportionately based on the ratio of credit earned to the total purchase price
of the system.
PROPERTY, PLANT AND EQUIPMENT
The Company capitalizes the cost of all significant property, plant and
equipment additions including equipment manufactured by the Company and
installed at customer locations under revenue sharing arrangements and most PBX
service agreements. Depreciation is computed over the estimated useful life of
the asset or the terms of the lease for leasehold improvements, whichever is
shorter, on a straight-line basis. When assets are retired or sold, the cost
of the assets and the related accumulated depreciation are removed from the
accounts and any resulting gain or loss is included in income. Maintenance and
repair costs are expensed as incurred.
RESEARCH AND DEVELOPMENT AND CAPITALIZATION OF SOFTWARE PRODUCTION COSTS
The Company devotes significant resources to the research, development and
production of software to be used in its call accounting and other computer
systems. The Company capitalizes software production costs related to a
product upon the establishment of technological feasibility as defined by
generally accepted accounting principles. Amortization is provided on a
product-by-product basis based upon the estimated useful life of the software
(generally three years). All other research and development costs (including
those related to software for which technological feasibility has not been
established) are expensed as incurred.
INCOME TAXES
Several items of income and expense, including certain sales revenues under
sales-type leases, are included in the financial statements in different years
than they are included in the income tax returns.
F-7
<PAGE> 26
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
WARRANTY AND UNEARNED REVENUE
The Company typically provides a one-year warranty from the date of
installation of its systems. The Company defers a portion of each system sale
to be recognized as service revenue during the warranty period. The amount
deferred is generally equal to the sales price of a maintenance contract for
the type of system under warranty and length of the warranty period.
The Company also records deposits received on sales orders, prepayments for
maintenance contracts and sales revenues attributable to systems shipped but
not installed as deferred revenues.
2. REVOLVING CREDIT AGREEMENT:
In May 1994, the Company's revolving line of credit was increased from $200,000
to $350,000. The amended loan agreement expires on March 31, 1996. Advances
under the amended agreement are based on the Company's current receivables and
are limited to $350,000. Substantially all of the Company's assets are
collateralized under the agreement which also contains provisions which impose
certain restrictions on the Company and requires the Company to meet certain
financial ratios. At October 31, 1995, the Company was in compliance with the
credit agreement. No advances have been made under this agreement during 1995.
In conjunction with a distributorship agreement, the Company has provided a
$75,000 letter of credit agreement to the vendor. The letter of credit reduced
the Company's available credit line for other uses to $275,000. The letter of
credit expired on December 31, 1995, and the vendor has indicated that they
will no longer require the letter of credit.
3. CASH AND CASH EQUIVALENTS:
Cash and cash equivalents at October 31, 1995 consist of money market accounts
and commercial bank accounts. All deposits held in the Company's money market
accounts are available to offset overdrafts in the commercial checking
accounts.
4. INCOME TAXES:
Effective November 1, 1993, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. SFAS 109
requires recognition of deferred tax liabilities and assets for expected future
consequences of events that have been included in a company's financial
statements or tax return. Under this method, deferred tax liabilities and
assets are determined based on the difference between the financial statement
and tax bases of assets and liabilities using enacted tax rates. The adoption
of SFAS 109 had no effect on the Company's reported net income.
F-8
<PAGE> 27
The income tax provision for the years ending October 31, 1995 and 1994
consists of the following:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Current provision - federal $ 490,916 $127,210
Deferred provision - federal 335,702 261,491
State income taxes 194,000 66,000
--------- --------
1,020,618 454,701
Recognition of previously reserved tax asset (107,618) (388,701)
--------- --------
Total provision $ 913,000 $ 66,000
========= ========
</TABLE>
The reconciliation of the statutory income tax rate to the effective income tax
rate is as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
------------
1995 1994
---- ----
<S> <C> <C>
Statutory rate 34% 34%
Recognition of previously reserved tax assets (4)% (34)%
State income taxes 8% 6%
--- ----
Effective rate 38% 6%
=== ====
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities as of October 31, 1995
are presented below:
<TABLE>
<S> <C>
Deferred tax assets:
Prepaid service contracts $ 128,397
Nondeductible reserves 299,873
Book depreciation in excess of tax 23,780
Other 44,036
---------
Total deferred tax asset 496,086
---------
Deferred tax liabilities:
Unamortized capitalized software development costs (62,564)
Tax income to be recognized on sales-type lease contracts (535,808)
Other (91,450)
---------
Total deferred tax liability (689,822)
---------
Net deferred tax liability $(193,736)
=========
</TABLE>
5. XETA RESERVATION SYSTEMS, INC. (XRS):
In December 1993, the Company sold all of its ownership interest in XRS for
$400,000. The Company has recorded a gain of that amount during the year ended
October 31, 1994 since the
F-9
<PAGE> 28
carrying value of its investment in XRS was zero at the time. XRS was formed
in April 1990 to provide automated reservation services to the leisure
industry.
6. INVENTORIES:
The following are the components of inventories at October 31, 1995:
<TABLE>
<S> <C>
Raw materials $447,090
Finished goods and spare parts 573,307
---------
1,020,397
Less- Reserve for excess and obsolete inventory 135,633
---------
Inventories, net $ 884,764
=========
</TABLE>
7. ACCRUED LIABILITIES:
Accrued liabilities consist of the following at October 31, 1995:
<TABLE>
<S> <C>
Bonuses $431,516
Taxes other than income 139,443
Vacation 47,035
Commissions 22,936
Other 20,433
--------
$661,363
========
</TABLE>
8. UNEARNED REVENUE:
Unearned revenue consists of the following at October 31, 1995:
<TABLE>
<S> <C>
Service contracts $1,177,599
Warranty service 487,673
Customer deposits 208,065
Systems shipped but not installed 44,305
Other 50,377
----------
Total current unearned revenue 1,968,019
Noncurrent unearned service revenue 1,687,817
----------
$3,655,836
==========
</TABLE>
9. STOCK OPTIONS:
The Company has a stock option plan (the Plan) for officers and key employees.
The Board of Directors determines the option price, not to be less than fair
market value, at the date of grant.
F-10
<PAGE> 29
The options expire ten years from the date of grant and are exercisable at a
rate of 33 1/3 percent per year after a one-year waiting period.
<TABLE>
<CAPTION>
Outstanding Options
-----------------------
Price Per
Number Share
------- ----------
<S> <C> <C>
Balance, October 31, 1994 135,500 $1.00-1.25
Granted -
Exercised (3,700) $1.00
-------
Balance, October 31, 1995 131,800 $1.00-1.25
=======
</TABLE>
At October 31, 1995, options to purchase 128,133 shares are exercisable and
27,500 shares were available for future grants under the Plan. Subsequent to
October 31, 1995, Plan options to purchase 29,000 shares were exercised at an
exercise price of $1.00 per share.
The Company has also granted options outside the Plan to certain officers and
directors. These options generally expire ten years from the date of grant and
are exercisable over the period stated in each option. The table below
presents information regarding options granted outside the Plan.
<TABLE>
<CAPTION>
Outstanding Options
---------------------
Price
Per
Number Share
------ -----
<S> <C> <C>
Balance, October 31, 1994 620,000(1) $1.00-1.53
Exercised (10,000) $1.00
-------
Balance, October 31, 1995 610,000 $1.00-1.53
=======
</TABLE>
(1) Includes options granted under employment agreements to both the
President and Executive Vice President at an exercise price of $1.00.
Options of 50,000 each were granted on August 1,1991 and 1992 and
November 30, 1993. Each of these options were immediately
exercisable on the date of grant.
Subsequent to October 31, 1995, options granted outside the Plan were exercised
representing 100,000 shares. The exercise price on all the shares was $1.00
per share.
10. COMMITMENTS:
Minimum future annual payments to be received and paid under various leases are
as follows:
<TABLE>
<CAPTION>
Sales-Type
Lease Payments Operating
October 31, Receivable Leases
- ----------- ----------- -------
<S> <C> <C>
1996 $1,710,328 $141,666
1997 1,699,865 70,833
1998 1,245,113 -
1999 343,106 -
2000 6,798 -
---------- --------
$5,005,210 $212,499
========
Less- Imputed interest (514,819)
----------
Present value of minimum payments $4,490,391
==========
</TABLE>
F-11
<PAGE> 30
The Company incurred operating lease costs of approximately $142,000 and
$137,000 in 1995 and 1994, respectively.
11. MAJOR CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK:
Sales of systems to Marriott International/Marriott Host represented 24 percent
and 20 percent of the Company's revenues for the years ended October 31, 1995
and 1994, respectively. Marriott International/Marriott Host owns various
properties served by the Company's equipment and functions as a managing agent
for owners of other properties. Sales of systems to Wyndam Hotels, Ltd.
represented approximately 11 percent of total revenues for the year ended
October 31, 1994.
The Company's products are designed and marketed to meet the specific
telecommunications needs of the lodging industry and the Company extends credit
to its customers in the normal course of business, including under its
sales-type lease program. As a result, the Company is subject to changes in
the economic, regulatory or other conditions which, in turn, may impact the
Company's overall credit risk. However, because the Company's products are
essential, revenue-producing assets of the customer and because the ultimate
credit risk typically rests with the individual hotel where the equipment is
installed, management considers the Company's credit risk to be satisfactorily
diversified and that the allowance for doubtful accounts is adequate to absorb
estimated losses at October 31, 1995.
12. INTEREST AND OTHER INCOME:
Interest and other income is primarily the recognition of interest income on
the Company's sales-type lease receivables and income earned on short-term
investments plus, in 1994, the gain on the sale of XRS (see Note 5).
13. OTHER RECEIVABLES:
The following are the components of other receivables at October 31, 1995:
<TABLE>
<S> <C>
Trade receivables $1,433,072
Less- Reserve for doubtful accounts (104,627)
----------
$1,328,445
==========
</TABLE>
14. EMPLOYMENT AGREEMENTS:
The Company has entered into employment agreements with certain officers. One
agreement provides for an annual base salary for the President and annual and
quarterly bonuses, based on the Company's total sales and after-tax net income,
not to exceed $200,000 per year and $10,000 per quarter, respectively. The
Company has also entered into an employment agreement with its Executive Vice
President which provides for an annual bonus upon the same terms as the annual
bonus granted to the President and CEO, except that the Executive Vice
President will not forfeit unpaid bonuses upon his resignation from office.
F-12
<PAGE> 31
In accordance with an employment agreement entered into during 1995, the
Company's Vice President of Marketing and Sales earns an annual salary,
commissions and bonus. Commissions and bonuses earned under the agreement are
based on total net revenues and the increase, if any, in annual net revenues.
Bonuses and commissions earned under the employment agreements were $452,814
and $237,851 for the years ending October 31, 1995 and 1994, respectively.
15. CONTINGENCY:
Since August 1994, the Company has been notified by eight of its customers that
they have been sued in separate lawsuits by Phonometrics, Inc., a Florida based
corporation, for alleged patent infringement by the customers' PBX, call
accounting and answer detection systems. The Company has supplied call
accounting, answer detection, or both systems to a number of these customers'
hotels. Seven of the eight customers are seeking indemnity from the Company
under contractual patent infringement indemnity provisions. The Company has
not been named in any of the lawsuits. Because there are several other vendors
implicated in the lawsuits, the Company has not assumed the outright defense of
its customers. Management has reason to believe it can ultimately distinguish
its systems from the claims of the plaintiff's patent, but also believes it is
premature to predict to what extent, if any, the Company may become involved in
the defense of its customers. In management's opinion, the resolution of this
matter will not have a material adverse impact on the financial condition or
future results of operations of the Company.
16. EARNINGS PER SHARE:
Earnings per common and common equivalent share were determined on the
assumption that all options, where dilutive, were exercised at the beginning of
the period, or if issued during fiscal-year-ending October 31, 1995, at the
time of issuance. Under the treasury stock method of accounting for options
and warrants, outstanding shares were decreased by the number of shares that
could have been purchased with the proceeds and tax benefits from the exercise.
These proceeds were determined using the quarterly average share price for
primary EPS. In the fiscal 1994 EPS calculation, the treasury stock
repurchases were subject to a limitation of 20 percent of the outstanding
shares, with the remaining proceeds from assumed exercise increasing the
earnings for per share purpose by tax-effected interest earnings "as if" the
proceeds had been invested in U.S. Treasury securities at the beginning of the
fiscal year. EPS assuming full dilution would not be materially different than
primary EPS.
F-13
<PAGE> 32
17. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following at October 31, 1995:
<TABLE>
<S> <C>
Data processing and computer field equipment $661,473
Office furniture 108,731
Other 106,277
--------
Total property, plant and equipment 876,481
Less- accumulated depreciation (546,956)
--------
Total net property, plant and equipment $329,525
========
</TABLE>
18. RETIREMENT PLAN:
The Company began a 401(k) retirement plan ("Plan") on November 1, 1994. In
addition to employee contributions, the Company makes discretionary matching
and nonelective contributions to the Plan based on percentages set by the Board
of Directors. Contributions made by the company to the Plan were $79,048 for
the year ending October 31, 1995.
F-14
<PAGE> 33
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
19
<PAGE> 34
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The directors, executive officers and significant employees of the
Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Jack R. Ingram 52 President, Chief Executive Officer and Director
Ronald L. Siegenthaler 52 Executive Vice President and Director
Robert B. Wagner 34 Vice President of Finance, Chief Financial Officer, Treasurer and
Secretary
Tom R. Crofford 43 Vice President of Engineering
Charles H. Rowland 54 Vice President of Manufac-turing
Thomas A. Luce 39 Vice President of Service
Donald E. Reigel 41 Vice President of Marketing and Sales
Ron B. Barber 41 Director
Donald T. Duke 45 Director
Dr. Robert D. Hisrich 50 Director
</TABLE>
All officers and members of the Board of Directors serve for a term of
one year or until their successors are duly elected and qualified. Directors
may be removed by holders of 66 2/3% of the Company's outstanding voting
shares.
Based solely upon a review of Forms 3 and 4 furnished to the Company
during its most recent fiscal year, and Forms 5 and related written
representations furnished to the Company with respect to its most recent fiscal
year, the Company knows of no director, officer, or beneficial owner of more
than ten percent (10%) of its common stock who failed to file on a timely basis
reports required by Section 16(a) of the Securities Exchange Act of 1934, as
amended, during the most recent fiscal year.
MR. INGRAM has been President of the Company since July 1990 and a
director of the Company since March 1989. He was President of Ingram Oil
Company, based in Tulsa, Oklahoma, since its inception in 1984 until its sale
in February 1991. Prior to that, Mr. Ingram held various managerial positions,
including Senior Vice President of the Eastern Region, with Santa Fe - Andover
Oil Company. Mr. Ingram holds a Bachelor of Science Degree in Petroleum
Engineering from the University of Tulsa.
MR. SIEGENTHALER has been Executive Vice President of the Company
since July 1990 and a director of the Company since its incorporation. Since
1974, through SEDCO Investments, a partnership in which Mr. Siegenthaler is a
partner, and as an individual, Mr. Siegenthaler has been involved as partner,
shareholder, officer, director, or sole proprietor of a number of
20
<PAGE> 35
business entities with significant involvement in real estate, oil and gas,
telecommunications, fabrication and marketing of steel, steel products and
other raw materials, and restaurant franchising. Mr. Siegenthaler received his
Bachelor's Degree in Liberal Arts from Oklahoma State University.
MR. WAGNER joined the Company in July 1988 as Chief Accounting
Officer. He became the Company's Vice President of Finance and Chief Financial
Officer in March, 1989. Prior to his employment with the Company, Mr. Wagner
was an independent auditor in the Tulsa, Oklahoma office of Price Waterhouse.
Mr. Wagner is a Certified Public Accountant licensed in Oklahoma and received
his Bachelor of Science Degree in Accounting from Oklahoma State University.
MR. CROFFORD joined the Company in October 1982 as a design engineer.
He was promoted to Manager of Engineering in October 1983 and to Vice President
of Engineering in January 1988. Mr. Crofford has worked in the field of
computer engineering since 1977. Mr. Crofford is a member of the Institute of
Electrical and Electronics Engineers.
MR. ROWLAND joined the Company in December 1982 as Production Manager
and was promoted to Vice President of Manufacturing in January 1984. Mr.
Rowland has 23 years electronic manufacturing experience, including production
testing, assembly line layout and production control management.
MR. LUCE joined the Company in November 1982 as Installation Director.
He was later promoted to Director of Installation and Service and became Vice
President of Service in June 1986.
MR. REIGEL joined the Company in June 1993 as PBX Product Sales
Manager. He was promoted to Vice President of Marketing and Sales in June
1995. Prior to his employment with the Company, Mr. Reigel served as a
National Accounts Sales Manager for WilTel Communications systems for
approximately a year and a half. He has been active in the development of
major national accounts in the telecommunications industry since 1987. Mr.
Reigel received his Bachelor of Science Degree in Business from the University
of Colorado.
MR. BARBER has served as general counsel to the Company since its
incorporation. He has been a director of the Company since March 1987 and was
Senior Vice President from August 1987 until March 1989. Mr. Barber has been
engaged in the private practice of law since October 1980 and is a shareholder
in the law firm of Barber & Bartz, a Professional Corporation, in Tulsa,
Oklahoma. Mr. Barber is also a Certified Public Accountant licensed in
Oklahoma. He received his Bachelor of Science Degree in Business
Administration (Accounting) from the University of Arkansas and his Juris
Doctorate Degree from the University of Tulsa.
MR. DUKE has been a director of the Company since March 1991. He is
President of Duke Resources, an oil and gas consulting firm, and a principal in
Tandem Oil and Gas Company, L.L.C. Prior to
21
<PAGE> 36
joining Tandem Oil and Gas Company, he was President and Chief Operating
Officer of Hadson Petroleum (USA), Inc., a domestic oil and gas subsidiary of
Hadson Corporation and was responsible for all phases of exploration and
production, land, accounting, operations, product marketing and budgeting and
planning. Mr. Duke joined Hadson Petroleum in 1987 as Senior Vice President of
Operations. Mr. Duke has a Bachelor of Science Degree in Petroleum Engineering
from the University of Oklahoma.
DR. HISRICH has served as a director of the Company since March 1987.
He occupies the A. Malachi Mixon III Chair in Entrepreneurial Studies and is
Professor of Marketing and Policy Studies at the Weatherhead School of
Management at Case Western Reserve University in Cleveland, Ohio. Prior to
assuming such positions, he occupied the Bovaird Chair of Entrepreneurial
Studies and Private Enterprise and was Professor of Marketing at the College of
Business Administration for the University of Tulsa. He is also a marketing
and management consultant. He is a member of the Boards of Trustees of
Barrington College and of Gordon College, a member of the Editorial Boards of
the Journal of Venturing and the American Journal of Small Business, and a
member of the Boards of Directors of the Oklahoma Private Enterprise Forum and
Tulsa Innovation Center. Dr. Hisrich received his Bachelor of Arts Degree in
English and Science from DePaul University and his Master of Business
Administration Degree (Marketing) and Ph.D. in Business Administration
(Marketing, Finance, and Quantitative Methods) from the University of
Cincinnati.
22
<PAGE> 37
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth information concerning the compensation
of the Company's President, Executive Vice President and Vice President of
Marketing and Sales. No other executive officer of the Company received a
total salary and bonus which exceeded $100,000 during fiscal 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------- ----------------------
Name and Common Stock All
Principal Underlying Other
Position Year Salary Bonus Other Options Compensation
- --------- ---- ------ ----- ----- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Jack R. Ingram 1995 $ 90,000 $229,334 - - $6,000(1)
President
1994 $ 90,000 $138,926 - - -
1993 $ 90,000 $ 43,607 - 50,000 -
Ronald L. Siegenthaler 1995 - $199,334 - - -
Executive Vice
President 1994 - $ 98,926 - - -
1993 - $ 13,607 - 50,000 -
Donald E. Reigel 1995 $ 75,000 $ 25,444 $130,582(2) - $6,000(1)
Vice President of
Marketing and Sales 1994 $ 75,000 - $ 65,091(2) - -
1993 $ 31,250 - $ 444(2) 37,500 -
</TABLE>
_____________________________
(1) Represents the Company's contributions to the employee's account under
the Company's 401(k) plan, in accordance with the terms of such plan.
(2) Represents sales commissions paid to Mr. Reigel.
23
<PAGE> 38
No stock options or stock appreciation rights were granted by the
Company to any of the persons named in the Summary Compensation Table during
the Company's fiscal year ended October 31, 1995, nor were options exercised by
such persons during the Company's fiscal year ended October 31, 1995. The
following table sets forth certain information regarding unexercised options
held by such persons as of the fiscal year-end.
FY-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised Options In-the-Money Options
at FY-End at FY-End
------------------------------ --------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Jack R. Ingram 200,000 - $1,150,000(1) -
Ronald L. Siegenthaler 300,000 - $1,725,000(1) -
Donald E. Reigel 25,000 12,500 $ 130,500(2) $ 65,250(2)
</TABLE>
_______________________________
(1) Based on the difference between the fair market value of the
securities underlying the options at fiscal year-end and the exercise price of
$1.00 per share.
(2) Based on the difference between the fair market value of the
securities underlying the options at fiscal year-end and the exercise price of
$1.53 per share.
Commencing in March, 1995, the Company began compensating its outside
directors $250.00 per meeting attended. While the Company does not have any
formal arrangement to grant stock options to its directors, the Company has
previously granted stock options to all of its outside directors. Generally,
these options are for 10,000 shares, with a vesting period of one year and an
exercise period of ten years. No other compensation was paid to directors for
their services as such during the Company's 1995 fiscal year.
24
<PAGE> 39
EMPLOYMENT AGREEMENTS
The Company has a written employment agreement with Jack R. Ingram,
its President and Chief Executive Officer, concerning the terms of his
compensation. The agreement provides that for each year during which he is
employed, Mr. Ingram will receive an annual bonus based on the Company's total
sales and after-tax net income, provided the Company's total sales for such
fiscal year exceed $5,000,000. The bonus amount is equal to a percentage of
the Company's after- tax net income, calculated by dividing the Company's total
sales for the year by $5,000,000, and multiplying such factor by 5%, with the
percentage capped at ten percent (10%) and the dollar amount capped at
$200,000. Pursuant to a recent amendment to the agreement approved by the
Board, this bonus is to be paid on or before January 31 each year. The
agreement further provides for a quarterly bonus, not to exceed $10,000 per
quarter, equal to fifty percent (50%) of the Company's quarterly net income.
If Mr. Ingram is terminated from his employment, the full amount of any annual
and quarterly bonus earned will become due and payable immediately. Mr. Ingram
will forfeit any annual and quarterly bonus installments not paid in the event
he resigns from office. Mr. Ingram receives a $90,000 base salary under the
agreement. Mr. Ingram's employment with the Company is at-will, with no set
term.
The Company also has a written agreement with Ronald L. Siegenthaler,
the Company's Executive Vice President, concerning the terms of his
compensation as an officer of the Company. Mr. Siegenthaler is compensated on
the basis of an annual bonus upon the same terms as the annual bonus paid to
Mr. Ingram, except that Mr. Siegenthaler will not forfeit any bonus payment
upon his resignation from office. Any bonus earned by Mr. Siegenthaler is paid
on or before January 31 each year. Mr. Siegenthaler is retained on an at-will
basis, and this arrangement may be terminated by either party at any time.
The Company entered into a written agreement with Donald E. Reigel on
June 12, 1995, concerning the terms of his employment as Vice President of
Marketing and Sales. Pursuant to the terms of the agreement, Mr. Reigel
receives a salary of $75,000, plus a commission equal to 0.25% of the Company's
monthly net sales and service revenues. Prior to August 1, 1995, Mr. Reigel's
commissions were based only on PBX sales and service revenues, and call
accounting sales and service revenues when generated in conjunction with a PBX
sale. The rate of commissions paid to Mr. Reigel prior to August 1, 1995 were
dependent upon the margin of profit produced by the sale.
Under the agreement, on August 1, 1995, Mr. Reigel became entitled to
earn an annual bonus of 3% of the increase in the Company's annual net sales
and service revenues over those revenues for the previous fiscal year. For the
four months ending October 31, 1995, Mr. Reigel was paid a bonus on the amount
that fourth quarter net revenue exceeded $2,500,000. For fiscal 1996, Mr.
Reigel's bonus will be paid on the amount that fiscal 1996 net revenue exceeds
$10,000,000. Mr. Reigel will forfeit the right to
25
<PAGE> 40
receive any bonus for the then current fiscal year upon termination of his
employment unless he is terminated by the Company without cause, in which case
he will be entitled to receive a bonus, if any, on a prorated basis.
Mr. Reigel is subject to standard confidentiality restrictions, as
well as to a twelve month non-solicitation agreement upon termination of his
employment for any reason while Jack Ingram remains President of the Company,
and a thirty-day non-solicitation agreement if Mr. Ingram is not President at
the time of Mr. Reigel's termination. There is no set term to Mr. Reigel's
employment by the Company.
26
<PAGE> 41
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information known to the
Company as of December 31, 1995, the most recent practicable date, unless
otherwise footnoted, regarding beneficial ownership of the Company's Common
Stock, par value $.10 per share, by (i) each person who is known by the Company
to own more than five percent of such Common Stock, (ii) all directors and
nominees of the Company, (iii) each of the executive officers named in the
Summary Compensation Table, and (iv) all directors and executive officers of
the Company as a group:
<TABLE>
<CAPTION>
Amount and Nature
Name and Address of Beneficial Percent of
of Beneficial Owner Ownership(1) Class
------------------- ----------------- ----------
<S> <C> <C>
Jack R. Ingram 384,700 (2) 16.48%
XETA Corporation
4500 S. Garnett, Suite 1000
Tulsa, OK 74146
Ronald L. Siegenthaler 374,669 (3) 16.05%
P.O. Box 571300
Tulsa, OK 74157
SEDCO Investments 171,314 8.02%
P.O. Box 571300
Tulsa, OK 74157
Ron B. Barber 31,520 (4) 1.46%
One Ten Occidental Place
110 W. 7th Street, Suite 200
Tulsa, OK 74119
Donald E. Reigel 29,389 (5) 1.36%
XETA Corporation
5330 Manhattan Circle, Suite D
Boulder, CO 80303
Robert B. Wagner 21,800 (6) 1.01%
XETA Corporation
4500 S. Garnett, Suite 1000
Tulsa, OK 74146
Donald T. Duke 11,400 (7) *
1701 Morningstar
Edmond, OK 73034
Robert D. Hisrich 12,900 (8) *
10900 Euclid Avenue
Cleveland, OH 44106
</TABLE>
_______________________________
(Footnotes appear on next page)
27
<PAGE> 42
<TABLE>
<CAPTION>
Amount and Nature
Name and Address of Beneficial Percent of
of Beneficial Owner Ownership(1) Class
------------------- ----------------- ----------
<S> <C> <C>
All officers and
directors as a group
(10 persons) 942,678 (2)-(9) 34.87%
</TABLE>
_______________________________
*Less than 1%
(1) Ownership is direct unless otherwise indicated.
(2) Includes 2,500 shares held by Mr. Ingram's wife and options to
purchase 200,000 shares of the Company's common stock which are
presently exercisable.
(3) Includes 171,314 shares held by SEDCO Investments, an Oklahoma
general partnership in which Mr. Siegenthaler is a general partner;
options to purchase 200,000 shares which are presently exercisable;
and 3,355 shares held by Mr. Siegenthaler's adult son who resides
with him. Mr. Siegenthaler disclaims beneficial ownership over the
shares held by his son.
(4) Includes options to purchase 30,000 shares of the Company's common
stock which are presently exercisable.
(5) Includes options to purchase 25,000 shares of the Company's common
stock, which are presently exercisable. Excludes options to purchase
12,500 shares of the Company's common stock which are not exercisable
until July, 1996.
(6) Includes 1,300 shares held by Mr. Wagner as custodian for his minor
children and options to purchase 17,500 shares of the Company's
common stock which are presently exercisable.
(7) Includes options to purchase 10,000 shares of the Company's common
stock which are presently exercisable.
(8) Includes 900 shares held by Dr. Hisrich as custodian for his minor
child, and options to purchase 10,000 shares of the Company's common
stock which are presently exercisable.
(9) Includes 100 shares held by an officer not named in the table, as
custodian for his minor child, and options granted to officers not
named in the table to purchase an aggregate of 76,000 shares which
are presently exercisable.
28
<PAGE> 43
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Ron Barber, a director of the Company, is a shareholder in the law firm
of Barber & Bartz, general counsel to the Company. During the fiscal year
ended October 31, 1995, the Company paid or accrued legal fees to Barber &
Bartz in the approximate amount of $103,000.
For a description of certain transactions with management in which the
amount involved exceeds $60,000, see the discussion under "Executive
Compensation," above.
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The Company filed no reports on Form 8-K during the last quarter of the
fiscal year ended October 31, 1995.
(b) Exhibits made a part of this report are set forth in the Exhibit Index
which appears at Page 31.
29
<PAGE> 44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
XETA CORPORATION
JANUARY 24, 1996 BY: /s/Jack R. Ingram
----------------------------------
JACK R. INGRAM, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
JANUARY 24, 1996 /s/Jack R. Ingram
------------------------------------
JACK R. INGRAM, PRESIDENT, CHIEF
EXECUTIVE OFFICER AND DIRECTOR
JANUARY 24, 1996 /s/Robert B. Wagner
------------------------------------
ROBERT B. WAGNER, VICE PRESIDENT OF
FINANCE, CHIEF FINANCIAL OFFICER, TREASURER
AND SECRETARY
JANUARY 22, 1996 /s/Donald T. Duke
------------------------------------
DONALD T. DUKE, DIRECTOR
JANUARY 19, 1996 /s/Ronald L. Siegenthaler
-------------------------------------
RONALD L. SIEGENTHALER, DIRECTOR
30
<PAGE> 45
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEC No. Description Page
- ------- ----------- ----
<S> <C> <C>
(2) PLAN OF ACQUISITION, REORGANIZATION, ARRANGE-
MENT, LIQUIDATION OR SUCCESSION - None.
(3) (ii) BYLAWS - Previously filed as Exhibit 3(ii)
to the Company's Annual Report on Form 10-KSB for
the fiscal year ended October 31, 1994.
(4) INSTRUMENTS DEFINING RIGHTS OF SECURITY
HOLDERS, INCLUDING INDENTURES - Previously
filed as Exhibits 3.1, 3.2 and 3.3 to the
Company's Registration Statement on Form S-1,
Registration No. 33-7841.
(9) VOTING TRUST AGREEMENT - None.
(10) MATERIAL CONTRACTS -
10.1 Agreement between Don Reigel and the
Company dated June 12, 1995. 32
(11) STATEMENT RE: COMPUTATION OF PER SHARE
EARNINGS - None.
(13) ANNUAL OR QUARTERLY REPORTS, FORM 10-QSB None.
(16) LETTER ON CHANGE IN CERTIFYING ACCOUNTANT - None.
(18) LETTER ON CHANGE IN ACCOUNTING PRINCIPLES - None.
(21) SUBSIDIARIES OF THE COMPANY - 35
(22) PUBLISHED REPORT REGARDING MATTERS SUBMITTED
TO VOTE - None.
(24) CONSENT OF EXPERTS AND COUNSEL -
24.1 Consent of Arthur Andersen, L.L.P. 36
(25) POWER OF ATTORNEY - None.
(27) FINANCIAL DATA SCHEDULE
(28) INFORMATION FROM REPORTS FURNISHED TO STATE
INSURANCE REGULATORY AUTHORITIES - None.
(99) ADDITIONAL EXHIBITS - None.
</TABLE>
31
<PAGE> 1
EXHIBIT 10.1
June 9, 1995
Mr. Don Reigel
XETA Corporation
5330 Manhattan Circle, Suite D
Boulder, Colorado 80303
Re: Promotion
Dear Don:
This letter will serve as our formal agreement with respect to the terms of
your promotion to Vice President of Marketing and Sales.
You will be promoted to this position effective June 12, 1995. As Vice
President of Marketing and Sales, you will be responsible for all sales
personnel (including the Americom group and other outside sales agents), who
will report directly to you. You will report directly to the Company's
President.
Your salary will continue to be $75,000 per year, and your existing commission
plan will remain in effect for revenue recognized through July 31, 1995.
Effective August 1, 1995, you will be entitled to commissions and bonuses, in
addition to your salary, on the following basis:
COMMISSION: 0.25% of the Company's net sales and service
revenues, to be calculated monthly and paid on or before the end of
the following calendar month.
BONUS: 3% of the increase only in the Company's annual net sales and
service revenues ("net revenue"), as compared to the net revenue for
the immediately preceding fiscal year, to be paid in one lump sum on
or before the January 31 of the year following the close of the
Company's fiscal year. For purposes of calculating the amount of
bonus to be paid for your services from August 1, 1995 through October
31, 1995, the "increase" will be the amount that net revenue for the
fourth quarter of fiscal 1995 exceeds $2,500,000. For purposes of
calculating the amount of bonus to be paid for your services during
fiscal 1996, the "increase" will be the amount that net revenue for
the fiscal year ending October 31, 1996 exceeds $10,000,000.
In no event will the amount of any net revenue recognized by the Company as a
result of any acquisition or merger be included in the basis for calculating
your commissions or bonus hereunder.
32
<PAGE> 2
Mr. Don Reigel
June 9, 1995
Page 2
In the event your employment with XETA is terminated at any time either
voluntarily by you or for cause by XETA, you will forfeit the right to receive
any bonus amount for the fiscal year in which you were terminated, but not any
unpaid bonus due you for the previous fiscal year. In the event XETA
terminates your employment without cause, your bonus will be paid to you,
prorated as follows: the "increase" will be measured based upon net revenue
earned by the Company during the fiscal year in which you are terminated
through the month in which you are terminated, compared to the average monthly
net revenue of the preceding year, times the number of months worked by you in
the fiscal year in which you were terminated.
For example: If you are terminated without cause in the fifth month
of fiscal 1998, and the Company's average monthly net revenue in
fiscal 1997 was $1,000,000 per month, and the net revenue in fiscal
1998 through the month of termination was $6,500,000, then the
"increase" is $1,500,000 and the bonus amount is $45,000.
"Cause" under this agreement shall mean fraud, theft and other criminal
conduct, insubordination or malfeasance of a material nature, or gross
negligence.
In consideration of the foregoing, you agree that for a period of twelve (12)
months following the termination of your employment under any circumstances
(including resignation), you will not directly or indirectly, for yourself or
on behalf of any other person, corporation or other entity, (i) solicit any
individual or entity which is a customer of the Company at the time of your
termination of employment, for or with regard to any products or services being
offered by the Company at the time of your termination, including without
limitation call accounting, answer detection, voice mail, and PBX equipment,
and installation and maintenance services related to such equipment (assuming
that such products and services are then being offered for sale by the
Company); or (ii) induce or attempt to induce any individual or entity, which
is a customer of the Company at the time of your termination of employment, to
cancel, lapse or fail to renew any contract, agreement or other arrangement it
has with the Company as of the date of your termination; PROVIDED, HOWEVER,
that in the event I am not President of the Company at the time of your
termination, then these restrictions will expire thirty (30) days after your
termination. With regard to entities with which the Company has a "master
agreement" in effect at the time of your termination for the provision of
equipment and/or services, "customer" will include all properties for which the
party under contract with the Company has the authority to make purchase
decisions, as well as all properties to which the Company is providing
equipment and/or services at the time of your termination.
You further acknowledge that in the course of performing your duties as Vice
President of Marketing and Sales, you will have access to proprietary and trade
secret information of the Company, including without limitation records, plans,
products, system designs, proprietary technology and software, customer lists
and other customer data, technical data, pricing information, memoranda, notes,
product research and development information, business operations and
techniques, and financial information and programs (collectively referred to
herein as the "Confidential Information"). In consideration of this promotion,
you represent and covenant that you will not copy or use any of the
Confidential Information for your own personal gain, nor will you disclose,
divulge, furnish, make accessible or provide any of the
33
<PAGE> 3
Mr. Don Reigel
June 9, 1995
Page 3
Confidential Information to any third party (except in the performance of your
duties as an employee of the Company), without the prior written consent of the
Company.
Nothing in this letter should be construed as altering the status of your
employment as an employee-at-will.
If you are in agreement with the terms and conditions of your promotion as
outlined in this letter, please sign this letter below and return it to me. A
copy of this letter is enclosed for your records.
Sincerely,
/s/ Jack R. Ingram
Jack R. Ingram
AGREED TO AND ACCEPTED this
12th day of June, 1995.
/s/ Don Reigel
- ---------------------------------
Don Reigel
34
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
XETACOM, Inc., an Oklahoma corporation
35
<PAGE> 1
EXHIBIT 24.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
and to all references to our Firm included in or made a part of the Form S-8
made by Xeta Corporation on August 28, 1995. It should be noted that we have
not audited any financial statements of the Company subsequent to October 31,
1995 or performed any audit procedures subsequent to the date of our report.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Tulsa, Oklahoma
January 29, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM OCTOBER 31,
1995 BALANCE SHEET, YEAR TO DATE OPERATING & CASH FLOW STATEMENTS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-KSB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-END> OCT-31-1995
<CASH> 2,788,709
<SECURITIES> 0
<RECEIVABLES> 1,328,445
<ALLOWANCES> 0
<INVENTORY> 884,764
<CURRENT-ASSETS> 6,851,107
<PP&E> 329,525
<DEPRECIATION> 0
<TOTAL-ASSETS> 10,596,704
<CURRENT-LIABILITIES> 3,609,529
<BONDS> 0
<COMMON> 200,332
0
0
<OTHER-SE> 4,882,845
<TOTAL-LIABILITY-AND-EQUITY> 10,596,704
<SALES> 12,384,620
<TOTAL-REVENUES> 12,384,620
<CGS> 7,207,043
<TOTAL-COSTS> 7,207,043
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,427,335
<INCOME-TAX> 913,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,514,335
<EPS-PRIMARY> .68
<EPS-DILUTED> .68
</TABLE>
