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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, 1996
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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(Name of small business issuer in its charter)
Oklahoma 73-1130045
- --------------------------------- --------------------------------------
(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: (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. [ # ]
The issuer's revenues for its most recent fiscal year were $13,441,000.
The aggregate market value of the issued and outstanding voting stock held
by non-affiliates of the registrant as of December 31, 1996 (based upon the
average bid and asked prices of these shares) was approximately $12,140,266.00.
The number of shares outstanding of the registrant's Common Stock as
of December 31, 1996 was 1,997,906.
Exhibit Index appears at Page 19.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement to be filed with the Securities and
Exchange Commission in connection with the Annual Meeting of Shareholders to be
held March 20, 1997 are incorporated into Part III, Items 10 through 12 hereof.
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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 confirmation. 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 private branch exchange ("PBX", also known as a "Switch")
connects the hotel to outside telephone networks operated by common carriers
and routes calls to, from and between extensions in the hotel. PBX systems are
manufactured by a relatively small number of well-known vendors. The Company
provides PBX's through a distributorship agreement with one such vendor,
Hitachi Telecom (USA), Inc. ("Hitachi"). The Company sells Hitachi's HCX
5000(R) Series Digital Communications systems which are equipped with Hitachi's
WelCOMM(R) lodging specific software and are state-of- the-art telephone
systems which integrate with nearly all aspects of the hotel's operations.
The Company's distributorship agreement with Hitachi is a nation-wide,
non-exclusive arrangement that is renewable each March 31 upon the mutual
agreement of the parties. The pricing structure provided in the
distributorship agreement is dependent upon either purchasing a designated
number of new systems or meeting a specified dollar volume of total purchases
each contract year. The Company's ability to meet those requirements
ultimately depends upon the volume and timing of sales orders it receives. The
Company is in its fourth year as a distributor of Hitachi PBX's and considers
its relationship with Hitachi to be good.
As part of its package of PBX related products, the Company also offers
peripheral systems such as voice mail systems, analog telephones,
uninterruptable power supplies, announcement systems, etc. These products are
generally sold in conjunction with the sale of a new PBX system and, with the
exception of voice mail systems, are purchased from regional or national
distributors of those products. The Company sells voice mail systems under a
nation-wide, non- exclusive distributorship agreement with Centigram
Communications Corporation ("Centigram").
The Company's first proprietary PBX related product, marketed under the name
"XPANDER", has been under development for two years and has now been installed
and is operating in three hotels. XPANDER is designed primarily to respond to
growing demand for additional telephone line access in hotel rooms. This
demand is being driven by guests who desire to connect their laptop computers
to public or private computer networks while still having the capability to
make or receive voice calls on a separate telephone line. To provide this
guest amenity, hotels will have to increase the capacity of their existing PBX,
which typically is expensive both in initial acquisition costs and in on-going
maintenance costs. XPANDER provides additional working extensions for an
existing PBX, usually at significantly lower acquisition and maintenance costs.
XPANDER has also been designed to function with any PBX system and includes the
same diagnostic and remote service capabilities that have always been standard
in the Company's call accounting products. The Company anticipates that
production models of the system will be available during the second quarter of
fiscal 1997. See "Outlook and Risk Factors" under "Management's Discussion and
Analysis" below for a further discussion of XPANDER.
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 such as the room number from which the call was made, the number
dialed and the length of the call; uses that information to calculate call
charges, markups and taxes; and then transmits the charges to the hotel's guest
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billing system. All of the Company's call accounting products are designed and
manufactured by the Company and interface to virtually all types of PBX's and
hotel billing systems. Each of the systems are designed with the Company's
service standards in mind and therefore include extensive 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 modem and alert the Company's service technicians of an
error. Technicians can then perform further diagnostic procedures from the
Service Center and can correct most 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.
The Company's primary call accounting products include the XL Series call
accounting systems and XPERT answer confirmation systems. The Company offers
call accounting products marketed under the names XL100, XL300 and XL500 for
small, medium and large hotels, respectively. A fourth call accounting system,
the XL700, was introduced during fiscal 1996 and is designed for large hotels
with very high volumes of calls which require greater multi-tasking abilities
than the Company's XL500 system. Answer confirmation systems are a
complementary product to call accounting and are designed to minimize guest
charges for unanswered calls and to allow hotels to bill for answered calls of
short duration which would otherwise be treated as unanswered and therefore not
billed. Most call accounting systems, including the Company's systems, record
and bill guests for calls which exceed a designated duration without regard as
to whether the call was answered. Thus, some unanswered calls are billed and
some completed calls are not billed because their duration was more or less,
respectively, than the designated duration. The Company's XPERT systems
monitor trunk voltages associated with outgoing calls to confirm whether a call
has been answered, thereby improving the accuracy of the hotel's guest billings
and reducing guest complaints for improper charges.
Both the XL Series and the XPERT systems operate on personal computer-based
platforms. The systems are designed to operate as stand-alone systems or can
be combined in the same personal computer as a fully integrated system, thus
reducing acquisition and future service costs.
The Company has developed other call accounting hardware and software
products such as the "BUFFY XL," "BUFFY +," "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. Service has been the cornerstone of the Company's success since
its inception. The hotel environment is a 24 hour-per-day, demanding
environment in which hotels expect nearly immediate access to their
telecommunications service provider. To meet this need, extensive remote
capabilities have been designed into each of the Company's products so that
technicians in the Service Center are able to quickly diagnose, and in most
cases, correct system malfunctions. This capability, accompanied by the
on-site service performed by the Company's regional service technicians and a
nation-wide network of third party service providers, forms the foundation of
the Company's commitment to distinguish itself from its competitors through
service to its systems.
Warranty and Service Agreements. The Company provides a one-year limited
warranty, generally from the date of installation, on call accounting products
manufactured by the Company. After the warranty period, service to the
Company's call accounting products is available under remote and direct service
agreements. Under a remote service agreement, coverage of the equipment
includes only those malfunctions which can be corrected via modem or through
verbal instructions given to the customer over the telephone. Direct service
agreements include remote service coverage plus on-site service and parts and
labor coverage for defects in equipment provided by the Company. The Company's
service agreements are generally for one year in duration, although several of
the Company's major customers have contracted for multi-year agreements.
Revenues from service contracts are recognized ratably over the life of the
contract. Although the multi-year contracts generally do not provide for annual
price increases, the Company believes that these contracts will produce
acceptable profit margins throughout their term.
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The Company also provides a one-year limited warranty against defects in PBX
equipment provided by the Company. Generally, the Company's warranty is
supported by warranties on the components from the various manufacturers of the
equipment, including Hitachi and Centigram. Any labor costs associated with
fulfilling the warranty requirements are borne by the Company. Subsequent to
the warranty period or for hotels who already have Hitachi PBX systems
installed, the Company offers a PBX service plan that is designed for the
demanding environment of the lodging industry and is unique compared to the
Company's competitors. This service program includes parts and labor coverage
on the PBX plus a XETA XL Series call accounting system and other service
options designed to meet the specific needs of each customer and build a
long-term relationship with that customer. Since entering the PBX market in
1993, the Company has been successful in securing PBX service contracts. These
contracts currently represent a significant and growing source of recurring
revenues.
SOFTWARE AND PRODUCT DEVELOPMENT
Most of the Company's research and development activities during the past
year were spent on continued development of the XPANDER system (See "PBX
Systems" under "Products" above). This project includes significant hardware
and software development. Although the XPANDER system is now being sold,
development of significant product features is continuing. Management believes
that many additional applications will be forthcoming from the XPANDER design
and expects this product to be a platform for additional future products. In
addition to XPANDER, the Company completed development of its XL700 call
accounting system during fiscal 1996 (See "Call Accounting Products" above).
The Company expects expenditures on research and development activities in
fiscal 1996 to be indicative of annual expenditures for the foreseeable future.
MARKETING
General. The marketing of telecommunications products to the hotel industry
is typically a complex process involving extended sales cycles of three to six
months and often much longer. This complexity is a function of the number and
variety of decision-makers often involved in the purchase of this type of
equipment for use at a hotel. Therefore, in addition to the quality of its
products and services, the Company attributes its success in marketing its
products and services to its proven ability to develop long-term relationships
with a network of these decision-makers, which include corporate hotel chain
personnel, property management company officials, industry consultants, hotel
owners and on-site financial or operating officers. These channels were
established primarily as the Company marketed its call accounting products and
now are used to market the Company's PBX products and services, including the
XPANDER system.
Another important factor in the Company's marketing of its products has been
the development of innovative and flexible sales programs which help reduce the
initial capital outlay or ease the approval process for purchase of the
Company's systems. These programs have been developed in response to the lack
of capital and borrowing ability or the tight budgetary controls generally
present in the hotel market. The most extensively used of these programs has
been the Company's XETAPLAN program for call accounting equipment. Under this
program, the Company installs a call accounting and/or answer confirmation
system and maintains it under the same terms as a direct maintenance agreement
for a period of three, four or five years in exchange for a fixed monthly fee.
The primary benefits of the program to the customer are the lack of upfront
cash outlays and the ability of the customer to budget the costs of the program
several years in advance. Additionally, the form of the XETAPLAN program as a
service agreement generally allows for a less formal approval process by the
customer than a typical capital equipment purchase. From the Company's
viewpoint, most XETAPLAN agreements meet the requirements for sales-type lease
accounting and are therefore recorded as a sale even though title to the
equipment usually remains with the Company.
PBX Marketing. In addition to the general factors discussed above regarding
marketing to the hotel industry, the PBX market is characterized by fierce
competition from other vendors as well as from other Hitachi distributors. The
Company's response has been to offer a package of value-added services in its
PBX product and service offering. This offering includes such amenities as
providing a XETA XL Series call accounting system, a specified number of free
service calls each month and weekly appointments by certified service
technicians to correct minor malfunctions or to perform routine maintenance.
To date, the Company's unique service offering, plus its overall
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quality of service has been well-received in the marketplace and has been a key
factor in the Company's sustained growth over the past two years.
Sales Staff and Agents. At December 31, 1996, the Company employed 10
persons directly involved in the sales and marketing of its products and
services. In addition, since 1989 the 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 some of the Company's major customers such as Marriott
Host/Marriott International and U.S. Long Distance Corporation. The Company
considers its relationship with Mr. Jones to be good. The Company has also
engaged other sales agents to represent its products to certain segments of the
hotel market, but none of these agents represent the products to major
customers of the Company.
MAJOR CUSTOMERS
Marriott International/Marriott Host and its affiliates, which include
Marriott's full service properties as well as Residence Inn by Marriott,
Courtyard by Marriott and Fairfield Inn by Marriott properties (collectively
"Marriott") is a major customer of the Company. Revenues from Marriott include
sales of new systems, both call accounting and PBX systems, and revenues from
installation and service activities. Marriott has been a customer of the
Company since 1986. Management considers its relationship with Marriott to be
good and expects this relationship to continue to grow. However, the loss of
Marriott as a customer would have a material adverse effect on the operating
results and financial condition of the Company. The Company has other
significant customers which have multiple installations of the Company's
products, but the loss of one of these customers would not result in material
losses for the Company.
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
marketing programs, products and its style of service to the 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 proprietary products from an inventory of
components, parts and sub-assemblies obtained from various suppliers. The
Company purchases the components 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 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 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 the XPANDER, the
volume and complexity of printed circuit boards is greater than for any
previous product in the Company's history. The Company monitors outside
contractor's facilities and procedures to review production techniques, quality
control procedures and internal controls over Company-owned inventory. During
the past year, the Company has upgraded its testing
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equipment, assembly area and 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, 1996, the Company employed 89 employees, including 2
part-time employees.
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 has
applied for registration of the mark "XPANDER," although the U.S. Patent and
Trademark Office ("PTO") has initially refused registration of the name as
being merely descriptive and therefore not entitled to trademark protection.
The Company is entitled to respond to the PTO's action by February 5, 1997,
which the Company intends to do. If the Company is unsuccessful in registering
the mark "XPANDER" on the principal register of the PTO, the Company may seek
registration on the supplemental register. The Company does not believe that
the inability to trademark the name "XPANDER" on either the principal or
supplemental register would have a significant adverse effect upon the success
of this product.
The Company has recently filed a patent application on the technology for
"XPANDER," although no assurance can be given that the patent will ultimately
be issued. Other than this pending application, the Company holds no patents
for its hardware or software technology. The Company claims copyrights on all
of its proprietary circuit boards and software.
In recent years, several telecommunications equipment manufacturers and
hotel users of telecommunications equipment, including some of the Company's
hotel customers, have been sued for patent infringement by Phonometrics, Inc.
The Company has not been named as a defendant in this litigation, but several
of its customers have notified the Company that they seek indemnity from the
Company under contractual indemnity provisions. The Company's right to make,
use and/or sell its products is not affected by the litigation since the patent
upon which Phonometrics' claims are based expired in October, 1990. (See
"Legal Proceedings" below for a further discussion of this litigation).
INDUSTRY REGULATION
The Federal Communications Commission (the "FCC") and state governments
regulate the telecommunications industry, although none of the Company's
business activities are directly regulated by the FCC or the states.
Regulations or policy decisions adopted by the FCC, however, can substantially
affect the industry in which the Company is engaged, such as the FCC's 1981
decision to remove restrictions on the resale of telephone transmission service
which created a substantial market for telephone call accounting systems. No
recent action by the FCC or other recent law or regulation has had or is
expected to have a significant impact upon the Company's business (except as
otherwise discussed below with respect to the NANP).
The Company was positively impacted for seven fiscal quarters starting in
the fourth quarter of fiscal 1994 and ending in the second quarter of fiscal
1996, by changes in the telephone numbering system used in the United States
and most of North America, known as the North American Numbering Plan ("NANP").
The NANP is the ultimate responsibility of the FCC. The most significant
change in the NANP with respect to hotel telecommunications equipment was the
change in area codes to include middle digits other than one or zero. The
Company developed modifications to its call accounting systems so that its
systems would comply with the new numbering plan, which resulted in the seven
quarter surge in orders for software upgrades and new call accounting systems.
(For a further discussion on the effect of the NANP on the Company's results of
operations, see "Management's Discussion and Analysis" below).
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None of the Company's products or services require approval from any
governmental agency. The Company's computer products are subject to radio
frequency emanation standards imposed by the FCC. The cost of complying with
such standards, as well as with any applicable environmental laws, is
immaterial.
ITEM 2. PROPERTIES
The Company leases its principal executive office, assembly and Service
Center, all of which are located on two floors of a ten story office building
in Tulsa, Oklahoma. The building and surrounding property are considered to be
in good condition. The Company's lease expires on April 30, 1998, but may be
renewed at the Company's option for one more year. 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
Phonometrics, Inc., a Florida based corporation, has filed numerous lawsuits
against telecommunications equipment manufacturers and hotels who use such
equipment (e.g., PBX, call accounting and answer confirmation systems), in
various federal courts throughout the country, most notably the Southern
District of Florida (the "Florida litigation") and the Northern District of
California (the "California litigation"), alleging infringement of a patent
held by Phonometrics. While the Company has not been named as a defendant in
any of these cases, several of its customers are named defendants and have
notified the Company that they seek indemnification under the terms of their
contracts with the Company. Because there are other equipment vendors
implicated along with the Company in the cases filed against its customers, the
Company has not assumed the outright defense of its customers in any of these
actions.
In each of the lawsuits, 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 each lawsuit and ending October 30, 1990. The plaintiff
is not seeking an injunction against continued use of the equipment and is
barred from doing so since the patent expired in October, 1990.
In March, 1996, the Florida litigation pending against the hotels was stayed
by the Court, pending the outcome of the Florida cases filed by Phonometrics
against the PBX equipment manufacturers. Likewise, the California litigation
has been stayed pending the outcome of the Florida litigation. All of the
Florida cases against the PBX manufacturers (except one, which was still
pending as of December 27, 1996), have been decided on their merits in favor of
the equipment manufacturers. In ruling in favor of one such manufacturer,
Northern Telecom, the Court found that the allegedly infringing equipment did
not contain an instantaneous digital display of the cost of the call, a call-
completion signal, or a settable charge selector (thumbwheels), all of which,
the Court held, must be present to support a claim of infringement by
Phonometrics. The Company believes that the same arguments advanced by
Northern Telecom can be made with respect to the Company's equipment.
In light of these rulings, the Florida court lifted its stay of the hotel
cases on December 27, 1996 and scheduled a hearing for February 13, 1997 to
consider which, if any, of the hotel cases should be dismissed. At the
hearing, the Court will consider whether Phonometrics may proceed against those
hotels who use equipment manufactured by companies, such as the Company, that
Phonometrics has not sued; and whether the Court's ruling in the Northern
Telecom case precludes Phonometrics from alleging infringement by equipment,
like the Company's, which lacks an instantaneous digital display, a
call-completion signal, or a settable charge selector. Depending upon how the
Court rules on these questions, the cases against the Company's customers could
be dismissed.
Simultaneously with the proceedings at the trial level in the Florida
litigation, an appeals court is hearing Phonometrics' appeal of the Florida
Court's ruling in the Northern Telecom case and in other equipment
manufacturers' cases. Briefs have been filed in the Northern Telecom appeal
and oral arguments, although not yet
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scheduled, may be heard in the next few months. A ruling against Phonometrics
on appeal would, it is believed, provide strong precedent against Phonometrics'
position in the remaining cases and have a "domino effect," virtually disposing
of all other similar cases. On the other hand, if the appeals court reverses
the trial court's ruling in the Northern Telecom case, the Florida litigation
would most likely resume.
In patent infringement cases, damages may only be recovered for a period
commencing six years immediately prior to the filing of the lawsuit but in no
event after the expiration of the patent. Since Phonometrics' patent expired
in October, 1990, it is unlikely that Phonometrics would sue the Company
directly at this point, since it would neither be entitled to collect damages
against the Company nor prevent the Company from making or selling the
allegedly infringing products. The Company is cautiously optimistic that the
trial and appeal's court rulings in the next several months could dispose of
the litigation against its customers, although no such assurance can be given.
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 certain of
its customers, arising in connection with (i) a Distributor's Agreement entered
into between the Company and D & P Investments in 1986, pursuant to which the
Company sold to D & P Investments certain call accounting systems, and (ii) a
Maintenance Agreement between the Company and ABTS pursuant to which the
Company furnished maintenance services for such systems. D & P Investments has
allegedly assigned its claim for breach of the Distributer's Agreement to ABTS.
ABTS seeks damages in the amount of $1,000,000. In April, 1996 the Company was
successful in having the case transferred to the United States District Court
for the Northern District of Oklahoma. The Company denies all of the
allegations made by ABTS and is vigorously defending this action. The Company
has filed an application with the Court for permission to amend its pleadings
to include a counterclaim against ABTS and cross-claims against D & P
Investments and Communication Equipment Brokers for breach of contract,
pursuant to which the Company seeks damages in an amount in excess of $75,000.
A trial date has been set in April, 1997.
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.
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."
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>
1996 1995
---- ----
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
Quarter Ending:
--------------
January 31 20 3/8 6 1/2 3 3/4 1 5/8
April 30 11 1/2 6 3/8 5 5/8 2 3/4
July 31 11 7 1/2 6 1/8 4 1/8
October 31 10 7 1/2 6 1/2 3 7/8
</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.
As of October 31, 1996, the latest practicable date for which such
information is available, the Company had 140 shareholders of record. In
addition, based upon information received annually from brokers holding stock
in the Company on behalf of beneficial owners, the Company has approximately
1,100 beneficial shareholders.
No sales of unregistered securities were made by the Company during its 1996
fiscal year.
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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, 1996, the Company reported net income
of $1,585,000, a 5% increase over the previous year, on net revenues of
$13,441,000, a 9% increase over the previous year. Management considers these
results to be very positive considering the underlying factors which
contributed to this success. These underlying factors are primarily the
increase in revenues from PBX related activities, both sales of PBX systems and
PBX service revenues, which more than offset the expected decline in sales of
call accounting and answer confirmation systems.
To fully understand the fiscal 1996 operating results, a short review of the
previous year's results is in order. Fiscal 1995 operating results were
positively impacted by the mandated changes in dialing patterns which began in
late 1994. These changes, which required most hotels to upgrade or replace
their call accounting and answer confirmation systems, resulted in a surge in
orders for these systems during the final quarter of fiscal 1994 through the
second quarter of fiscal 1996. These orders were a key factor in the Company's
growth during that period, but call accounting sales have since declined to
more historical levels. During the same period, the Company was continuing its
strategy to pursue the PBX market. Since its entry into this market in 1993,
the Company has committed significant resources to this effort including the
hiring of experienced sales staff, establishment of regional sales offices,
training of installation and service personnel and beginning in fiscal 1995,
investments in research and development activities. The operating results for
fiscal 1996 which produced growth in sales and net income despite the
substantial decrease in call accounting and answer confirmation systems sales,
give positive confirmation to management's strategy to pursue this market.
The discussion that follows provides additional 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, 1996, and
the results of its operations for the fiscal year ending October 31, 1996 as
compared to 1995. Also included in this discussion are major factors, trends
and risks which management believes will affect the outlook for the Company.
This analysis should be read in conjunction with the Consolidated Financial
Statements and Notes thereto contained in this report.
RESULTS OF OPERATIONS
The 9% increase in net sales and service revenues can be analyzed more
properly by product line. Total revenues from call accounting related
activities decreased 18% to $5,554,000 while revenues from PBX related
activities increased 41% to $7,887,000.
The decrease in call accounting related revenues consisted of a 40% decrease
in sales of call accounting systems and a 3% increase in call accounting
installation and service activities. The decrease in sales of call accounting
systems was expected as the surge in orders for new call accounting systems
related to the mandated changes in the North American Numbering Plan ("NANP")
subsided at the end of the second quarter of fiscal 1996 and sales of these
systems returned to more historical levels. The 3% increase in call accounting
installation and service activity is consistent with the stability of the
Company's customer base. Because of the quality of the Company's systems and
its reputation for prompt and professional service, the Company has
historically retained a high percentage of its customers year after year, most
of whom maintain service contracts with the Company. Slightly over half of the
Company's call accounting related revenues come from these service contracts
which produce a stable source of recurring revenues.
The 41% increase in PBX related activities includes a 21% increase in sales
of PBX systems and an 82% increase in PBX installation and service revenues.
These increases are the result of the continued market acceptance of the
Company's PBX program. The Company became a distributor of Hitachi PBX systems
and began selling and servicing these systems in 1993. Although firmly
established as a quality provider of call accounting systems, the Company had
to earn its reputation as a capable PBX vendor and service provider, which it
has successfully done over the past three years by providing competitive prices
on new systems, value-added service to systems under warranty or service
contract and certified service personnel to work on the systems, and by
establishing additional regional service locations to meet customer demand. As
a result, the Company is now one of the market leaders
10
<PAGE> 11
for providing PBX's to the hotel industry and its PBX customer base is growing
both in quantity and in quality. While the PBX market remains highly
competitive and price sensitive, the Company now has the opportunity to bid on
many brand name properties and can compete effectively with more well-known
competitors.
The gross margins earned on net sales and service revenues decreased from
42% in fiscal 1995 to 37% in fiscal 1996. This decline partially consisted of
a decrease in gross margins earned on systems sales from 45% in fiscal 1995 to
38% in fiscal 1996. This decline was expected and reflects the larger
proportion of PBX systems sales compared to prior years. PBX systems, as a
distributed product in a highly competitive market earn significantly lower
gross margins than the Company's proprietary call accounting systems. Another
component of the overall decline in gross margins earned is a slight decline in
the gross margin earned on installation and service revenues from 38% in fiscal
1995 to 36% in fiscal 1996. While the percentage gross margin earned in fiscal
1996 for installation and service related activities is below management's
target, the margin improved during the last half of the year and management
considers the profitability of this portion of its business to be acceptable.
Operating expenses increased 1% during fiscal 1996 compared to fiscal 1995.
This increase consisted of a 12% increase in sales and marketing costs
reflecting increases in the number of salesman employed for the full year
compared to fiscal 1995 and a slight increase in commissions expense due to the
increase in sales. This increase was partially offset by decreases in
engineering and research and development expenses. While the total amount
expended on engineering costs and development of new products increased during
the year, the amounts recorded as expense in fiscal 1996 actually declined due
to the greater proportion of these expenditures which were eligible for
capitalization as software production costs under the applicable accounting
rules. Another portion of the overall decline in operating expense was due to
a decrease in bad debt expense. Other operating expenses were relatively
unchanged during the year.
As mentioned above, a portion of the Company's expenses have been
capitalized as software production costs during fiscal 1996. This amount,
which was $197,000 in fiscal 1996, represents amounts expended in development
of the Company's new PBX related product, XPANDER. This product is the
Company's first PBX related proprietary product and is designed to meet the
growing need for hotels to provide multiple telephone line access in their
guest rooms. Recent surveys by hoteliers indicate that up to 58% of business
travelers now carry laptop computers with them as they travel. This trend,
taken together with the growing dependence on electronic mail and the internet
is driving a need for travelers to have the ability to hook their computers to
a telephone line for data transmission and still be able to make and receive
voice phone calls. For hoteliers who desire to meet this need, they will need
to add capacity to their existing PBX. XPANDER is designed to be a
cost-effective alternative to buying more PBX equipment, both in terms of
acquisition costs and on-going maintenance costs. At December 31, 1996, the
Company had three XPANDER systems installed and a fourth in the installation
backlog. To date, all of the installed systems have performed as designed and
no significant hardware or software flaws have been detected.
Interest and other income increased 76% or $285,000 during fiscal 1996
compared to fiscal 1995. This increase was primarily the result of increases
in interest income from XETAPLAN sales-type leases and from increases in
interest income earned on cash investments. Many of the call accounting
systems sales made during the surge in orders related to the NANP were made
under the Company's XETAPLAN program and as a result, the Company is earning
interest income each month from those contracts.
The Company has recorded a provision for federal and state income taxes of
$904,000. This provision represents an effective tax rate of 36% compared to
38% for fiscal 1995 reflecting a reduction in the estimated state tax provision
for fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash balances increased $760,000 during fiscal 1996. This
increase included cash earned from operations of $983,000 and cash received
from the exercise of stock options of $183,000. A portion of the increase in
cash, $238,000, was invested in equipment, which included upgrading the
Company's computer network,
11
<PAGE> 12
equipping additional personnel, and supporting the Company's PBX service
program. Another portion of the increase in cash, $197,000, was invested in
capitalized software production costs.
Management considers the Company's financial condition to be strong and
believes that its present working capital and future operating cash flows will
be sufficient to meet anticipated operating needs and planned capital
expenditures. Management is continually evaluating alternatives to effectively
utilize the Company's cash balances and capital resources to enhance
shareholder value. During the past three years these evaluations resulted in
the 1994 stock repurchase program and the expansion of the XETAPLAN program.
During that same period, management has evaluated several potential synergistic
acquisitions and continues to do so. These analyses have afforded management
the opportunity to explore its potential borrowing ability with its bank and to
discuss potential secondary offerings with other financial contacts. While the
Company's ability to obtain additional capital in the future would depend upon
a multitude of factors including maintaining or improving its current financial
condition and the specifics of any proposed transaction, management believes
that sufficient capital could be obtained at a reasonable cost to finance an
acquisition or other expansion of the Company's operations.
OUTLOOK AND RISK FACTORS
The statements contained in this section entitled "Outlook and Risk Factors"
are based on current expectations. The statements are forward-looking and
actual results may differ materially.
Management will continue to pursue a strategy focused on providing
telecommunications equipment and services to the lodging industry. Growth in
near-term revenues from this strategy is expected to come primarily from
continued increases in the Company's base of customers under PBX service
agreements, while longer-term growth will more likely be achieved through the
introduction of innovative new products, such as the Company's XPANDER system.
Management believes that installation and service revenues will produce the
majority of the Company's revenue growth in fiscal 1997. Installation and
service revenues from PBX service contracts and other PBX related activities is
expected to provide the largest percentage increase in revenues as the
Company's reputation for such services grows. Installation and service
revenues earned from call accounting related activities are directly related to
the sale of new call accounting systems and to the retention of existing
customers. Because sales of new call accounting systems are expected to remain
at historical levels, growth in the related service revenues is expected to be
modest. The Company's base of call accounting customers is its most important
source of recurring revenue, hence management will attempt to ensure that these
customers are retained by maintaining the Company's high standards for quality
service. Furthermore, since these call accounting customers also represent an
important source of new customers for sales of PBX systems and PBX service
contracts, retention of these customers is also important to the growth of the
Company's PBX related revenues.
The market for new call accounting systems is mature and sales of these
systems are expected to return to historical levels from the inflated revenues
experienced during the seven quarters from August, 1994 to April, 1996. The
market for new PBX systems is also mature, but the Company expects to achieve
growth of about 5% in revenues from sales of these systems as it continues to
increase its market share. Management believes that this increase in sales of
new PBX systems is achievable and, in fact could be conservative, as the
Company continues to gain a favorable reputation in the PBX market, especially
among the Company's prestigious call accounting customers. However, because it
is still a new player in this market, any major failure in providing quality
PBX service could result in dramatically lower sales than those forecast.
Also, the Company sells PBX systems under a distributorship agreement with
Hitachi Telecom (USA), Inc. ("Hitachi"). The Company considers its
relationship with Hitachi to be good and strongly believes that future renewals
to its distributorship agreement can be negotiated on mutually beneficial
terms; however, if such a renewal could not be achieved, the Company's
operating results could be lower than those expected.
During fiscal 1997, the Company expects sales of its new XPANDER system to
be less than 10% of total net sales and service revenues. Actual results could
be materially higher, primarily dependent on the rate of the development of
this market and the perceived quality and cost effectiveness of the XPANDER
system. Management believes that market demand is growing for additional
telephone lines in guest rooms. However, how
12
<PAGE> 13
and when that demand translates into sales is difficult to predict. This
growing need is not expected to be a significant source of new revenue to the
hotel, but will more likely be analyzed by hotel decision makers as a guest
amenity and as such, an additional investment needed by the hotel to maintain
occupancy levels and compete with other local hotels. Typically, demand for
such amenities grows slowly at first, then very rapidly as hotels rush to meet
competitors' standards. Management expects that demand for this amenity will
follow the same pattern, although it is still too early to predict when demand
will be strong enough to forecast significant revenues from sales of XPANDER.
As revenues from PBX systems sales and total installation and service
revenues increase and revenues from higher margin call accounting systems sales
decrease, the gross margins earned on total net sales decline. The majority of
this expected degradation has already occurred as total gross margins declined
from 42% in fiscal 1995 to 37% in fiscal 1996. Management expects only a
slight decrease, if any, in overall gross margins during fiscal 1997. While
difficult to predict due to the timing of installation activities and the
varying nature of the service revenues earned, the gross margins earned on
installation and service revenues are expected to remain stable for the
foreseeable future and thus help hold overall margins steady even though
systems sales continue to shift toward lower margin PBX sales. Any significant
positive impact on total gross margins would likely come from another surge in
installations of call accounting systems. Such a surge is unlikely in
management's opinion.
The Company is involved in two matters of pending litigation (See "Legal
Proceedings" under Part I above). In both cases, management believes its legal
position is strong and no loss contingencies have been recorded in the
financial statements. Should the outcome of either of these matters be
unfavorable however, the Company may have to record expenses which might cause
operating results to be materially lower than those expected.
As discussed above, the Company has focused it research and development
activities on its XPANDER product and, as such, much of the Company's long-term
anticipated growth is linked to the success of this product. Furthermore, the
XPANDER technology is expected to be the Company's hardware platform for future
products. Should the market for XPANDER fail to develop as expected or should
unforeseen technical difficulties arise which delay or stop the development of
this product or expected future XPANDER-based products, the anticipated growth
in revenues might be delayed or unrealized. To date, the Company is not aware
of any competitor products similar to XPANDER and management believes that the
limited nature of the hotel market niche provides some protection from
potential development of competing products by larger, more well-financed
companies. To further solidify its position, the Company has applied for a
patent on XPANDER, but it is too early in the application process to determine
whether the Company will receive a patent and the protections associated
therewith.
13
<PAGE> 14
<TABLE>
<S> <C>
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, 1996 F-2
Consolidated Statements of Operations - For
the Years Ended October 31, 1996 and 1995 F-3
Consolidated Statements of Shareholders' Equity -
For the Years Ended October 31, 1996 and 1995 F-4
Consolidated Statements of Cash Flows - For the
Years Ended October 31, 1996 and 1995 F-5
Notes to Consolidated Financial Statements F-6
</TABLE>
14
<PAGE> 15
F-3
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, 1996, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the two years in the period ended October 31, 1996. 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, 1996, and the results of their operations
and their cash flows for each of the two years in the period ended October 31,
1996, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Tulsa, Oklahoma
December 13, 1996
F-1
<PAGE> 16
XETA CORPORATION
CONSOLIDATED BALANCE SHEET
OCTOBER 31, 1996
ASSETS
(Note 2)
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents (Note 3) $ 3,549,101
Current portion of net investment in sales-type leases (Note 9) 2,217,672
Trade accounts receivable, net of allowance of $114,892 1,516,479
Inventories, net (Note 5) 1,041,496
Deferred tax asset, net (Note 4) 92,897
Prepaid expenses and other 156,233
Prepaid taxes 173,785
------------
Total current assets 8,747,663
NONCURRENT ASSETS:
Net investment in sales-type leases, less current portion above (Note 9) 2,737,358
Property, plant and equipment, net (Note 14) 394,906
Capitalized software production costs, net of accumulated
amortization of $268,914 325,816
Other 158,677
------------
Total noncurrent assets 3,616,757
------------
Total assets $ 12,364,420
============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 371,473
Unearned revenue (Note 7) 2,274,294
Accrued liabilities (Note 6) 666,838
------------
Total current liabilities 3,312,605
UNEARNED SERVICE REVENUE (Note 7) 1,388,998
------------
NONCURRENT DEFERRED TAX LIABILITY, NET (Note 4) 591,984
------------
COMMITMENTS (Notes 9, 11 and 15)
SHAREHOLDERS' EQUITY (Note 8):
Common stock; $.10 par value; 10,000,000 shares authorized, 2,182,653
issued 218,265
Paid-in capital 4,736,413
Retained earnings 2,375,895
------------
Less- Treasury stock, at cost (259,740)
------------
Total shareholders' equity 7,070,833
------------
Total liabilities and shareholders' equity $ 12,364,420
============
</TABLE>
The accompanying notes are an integral part of this consolidated balance sheet.
F-2
<PAGE> 17
XETA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years
Ended October 31,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
SYSTEM SALES $ 6,552,424 $ 7,111,936
INSTALLATION AND SERVICE REVENUES 6,888,350 5,272,684
----------- -----------
NET SALES, INSTALLATION AND SERVICE REVENUES 13,440,774 12,384,620
----------- -----------
COST OF SYSTEM SALES 4,072,157 3,928,024
INSTALLATION AND SERVICE COSTS 4,385,535 3,279,019
----------- -----------
TOTAL COST OF SALES, INSTALLATION AND SERVICE 8,457,692 7,207,043
----------- -----------
Gross profit 4,983,082 5,177,577
----------- -----------
OPERATING EXPENSES:
Selling, general and administrative 2,751,715 2,641,675
Engineering 116,440 143,561
Research and development 232,914 287,166
Amortization of capitalized software production costs 54,912 54,912
----------- -----------
Total operating expenses 3,155,981 3,127,314
----------- -----------
INCOME FROM OPERATIONS 1,827,101 2,050,263
INTEREST AND OTHER INCOME, net (Note 1) 662,240 377,072
----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES 2,489,341 2,427,335
PROVISION FOR INCOME TAXES (Note 4) 904,000 913,000
----------- -----------
NET INCOME $ 1,585,341 $ 1,514,335
=========== ===========
INCOME PER COMMON AND COMMON EQUIVALENT SHARE (Note 13)
$ .68 $ .68
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 1,971,061 1,799,398
=========== ===========
WEIGHTED AVERAGE EQUIVALENT SHARES - Primary 2,334,316 2,228,916
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-3
<PAGE> 18
XETA CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED OCTOBER 31, 1996 AND 1995
<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> <C>
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
Stock options exercised 179,333 17,933 -- -- 164,733 --
Tax benefit of stock options -- -- -- -- 479,389 --
Net income -- -- -- -- -- 1,585,341
----------- ----------- ----------- ----------- ----------- -----------
BALANCE AT OCTOBER 31, 1996 2,182,653 $ 218,265 (189,747) $ (259,740) $ 4,736,413 $ 2,375,895
=========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral of these consolidated statements.
F-4
<PAGE> 19
XETA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years
Ended October 31,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,585,341 $ 1,514,335
----------- -----------
Adjustments to reconcile net income to net cash provided by operating
activities-
Depreciation 155,848 152,343
Amortization of capitalized software production costs 54,912 54,912
Gain on sale of assets (12,435) (13,303)
Provision for doubtful accounts receivable 38,000 60,000
Provision for excess and obsolete inventory -- 13,515
Change in assets and liabilities-
Increase in net investment in sales-type leases (464,639) (1,849,544)
Increase in other receivables (226,034) (425,909)
Increase in inventories (156,732) (187,872)
(Increase) decrease in prepaid income taxes (173,785) 188,714
Decrease in deferred tax asset 189,288 19,958
Increase in prepaid expenses and other assets (6,238) (149,870)
(Decrease) increase in accounts payable (70,108) 199,836
Increase in unearned revenue 7,456 694,514
(Decrease) increase in accrued liabilities (53,701) 738,300
Increase in deferred tax liabilities 116,063 300,988
----------- -----------
Total adjustments (602,105) (203,418)
----------- -----------
Net cash provided by operating activities 983,236 1,310,917
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (237,742) (148,603)
Additions to capitalized software production costs (196,716) (123,371)
Proceeds from sale of assets 28,948 34,259
----------- -----------
Net cash used in investing activities (405,510) (237,715)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercises of stock options and warrants 182,666 84,976
----------- -----------
Net cash provided by financing activities 182,666 84,976
----------- -----------
Net increase in cash and cash equivalents 760,392 1,158,178
CASH AND CASH EQUIVALENTS, beginning of year 2,788,709 1,630,531
----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 3,549,101 $ 2,788,709
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 912 $ 343
=========== ===========
Cash paid during the year for income taxes $ 554,595 $ 51,072
=========== ===========
Noncash tax benefit of options exercised $ 510,202 $ 7,650
=========== ===========
</TABLE>
The accompanying notes are an integral of these consolidated statements.
F-5
<PAGE> 20
XETA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED
OCTOBER 31, 1996
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. Since 1993,
the Company has been 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.
LEASE ACCOUNTING
A portion of the Company's revenues have 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 and other income is primarily the recognition of interest income on
the Company's sales-type lease receivables and income earned on short-term cash
investments. 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.
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.
F-6
<PAGE> 21
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 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.
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.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-7
<PAGE> 22
2. REVOLVING CREDIT AGREEMENT:
In April 1996, the Company's revolving line of credit was increased from
$350,000 to $1,000,000. The amended loan agreement expires on April 1, 1997.
Advances under the amended agreement are based on the Company's current
receivables. 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, 1996, the Company was in compliance with the credit agreement. No
advances have been made under this agreement during fiscal 1996.
3. CASH AND CASH EQUIVALENTS:
Cash and cash equivalents at October 31, 1996 consist of money market accounts
and commercial bank accounts.
4. INCOME TAXES:
The Company applies the provisions of 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 income tax provision for the years ending October 31, 1996 and 1995
consists of the following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Current provision - federal $ 585,023 $ 490,916
Deferred provision - federal 261,353 335,702
State income taxes 101,000 194,000
Tax credits and other adjustments (43,376) --
----------- -----------
904,000 1,020,618
Recognition of previously reserved tax asset -- (107,618)
----------- -----------
Total provision $ 904,000 $ 913,000
=========== ===========
</TABLE>
The reconciliation of the statutory income tax rate to the effective income tax
rate is as follows:
<TABLE>
<CAPTION>
Year Ended
October 31,
------------
1996 1995
---- ----
<S> <C> <C>
Statutory rate 34 % 34 %
Recognition of previously reserved tax assets - % (4)%
State income taxes 4 % 8 %
Tax credits and other adjustments (2)% - %
--- ---
Effective rate 36 % 38 %
=== ===
</TABLE>
F-8
<PAGE> 23
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, 1996
are presented below:
<TABLE>
<S> <C>
Deferred tax assets:
Prepaid service contracts $ 51,083
Nondeductible reserves 198,822
Book depreciation in excess of tax 15,902
Other 50,675
----------
Total deferred tax asset 316,482
----------
Deferred tax liabilities:
Unamortized capitalized software development costs 110,778
Tax income to be recognized on sales-type lease contracts 638,831
Other 65,960
----------
Total deferred tax liability 815,569
----------
Net deferred tax liability $ 499,087
==========
5. INVENTORIES:
The following are the components of inventories at October 31, 1996:
Raw materials $ 577,054
Finished goods and spare parts 623,690
----------
1,200,744
Less- Reserve for excess and obsolete inventory 159,248
----------
Inventories, net $1,041,496
==========
6. ACCRUED LIABILITIES:
Accrued liabilities consist of the following at October 31, 1996:
Bonuses $ 519,043
Taxes other than income 52,753
Vacation 59,035
Commissions 14,256
Other 21,751
----------
$ 666,838
7. UNEARNED REVENUE:
Unearned revenue consists of the following at October 31, 1996:
Service contracts $1,570,872
Warranty service 379,753
Customer deposits 209,357
Systems shipped but not installed 63,829
Other 50,483
----------
Total current unearned revenue 2,274,294
Noncurrent unearned service revenue 1,388,998
----------
$3,663,292
</TABLE>
F-9
<PAGE> 24
8. 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.
The options generally 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, 1995 131,800 $1.00-1.25
Granted 17,500 $ 6.56
Exercised (39,333) $1.00-1.25
----------
Balance, October 31, 1996 109,967 $1.00-6.56
==========
</TABLE>
At October 31, 1996, options to purchase 90,633 shares are exercisable and
10,000 shares were available for future grants under the Plan.
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, 1995 610,0001 $1.00-1.53
Exercised (140,000) $1.00-1.31
---------- ----------
Balance, October 31, 1996 470,000 $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.
Effective November 1, 1996, the Company will adopt Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock Based Compensation."
SFAS 123 requires companies to record in their financial statements the
expense, if any, related to stock options issued to employees and to disclose
how such expense was computed. Alternatively, companies may adopt the new
standard but choose only to disclose the impact of issued stock options as if
the expense had been recorded in the financial statements. The Company will
adopt this alternative method of accounting and future financial statements
will include such disclosures.
F-10
<PAGE> 25
9. 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> <C>
1997 $2,568,415 $ 202,911
1998 2,129,218 106,368
1999 810,680 24,881
2000 21,873 13,569
2001 9,705 152
----------- ----------
$ 5,539,891 $ 347,881
==========
Less- Imputed interest (584,861)
-----------
Present value of minimum payments $ 4,955,030
===========
</TABLE>
The Company incurred operating lease costs of approximately $215,000 and
$142,000 in 1996 and 1995, respectively.
10. MAJOR CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK:
Marriott International/Marriott Host ("Marriott") is a major customer of the
Company. The Company has systems installed at various Marriott owned or managed
hotels under the brands "Marriott," "Residence Inn by Marriott," "Courtyard by
Marriott," and "Fairfield Inn by Marriott." Sales of systems to Marriott
represented 23 percent and 24 percent of the Company's revenues for the years
ended October 31, 1996 and 1995, respectively. In addition to sales of systems,
the Company earns maintenance revenues from over 400 Marriott properties
currently under various maintenance contracts. Marriott has been a major
customer of the Company since 1986 and management considers its relationship
with Marriott to be good. However, the loss of Marriott as a customer would
have a material adverse effect on the Company's operating results and financial
condition.
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 and regulatory environments 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, 1996.
11. 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
F-11
<PAGE> 26
$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. Beginning in fiscal 1997, the Executive Vice President's annual bonus
will be limited to $100,000.
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 $573,000
and $453,000 for the years ending October 31, 1996 and 1995, respectively.
12. CONTINGENCY:
Phonometrics, Inc. a Florida based corporation, has filed numerous lawsuits
against telecommunications equipment manufacturers and hotels who use such
equipment (e.g., PBX, call accounting and answer detection systems), in various
federal courts throughout the country, most notably the Southern District of
Florida (the "Florida litigation") and the Northern District of California (the
"California litigation"), alleging infringement of a patent held by
Phonometrics. While the Company has not been named as a defendant in any of
these cases, several of its customers are named defendants and have notified
the Company that they seek Indemnification under the terms of their contracts
with the Company. Because there are other equipment vendors implicated along
with the Company in the cases filed against its customers, the Company has not
assumed the outright defense of its customers in any of these actions.
In each of the lawsuits, 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 each lawsuit and ending October 30, 1990. The plaintiff
is not seeking an injunction against continued use of the equipment and is
barred from doing so since the patent expired in October 1990.
In March 1996, the Florida litigation pending against the hotels was stayed by
the Court, pending the outcome of the Florida cases filed by Phonometrics
against the PBX equipment manufacturers. Likewise, the California litigation
has been stayed pending the outcome of the Florida litigation. All of the
Florida cases against the PBX manufacturers (except one, which was still
pending as of December 27, 1996), have been decided on their merits in favor of
the equipment manufacturers. In ruling in favor of one such manufacturer,
Northern Telecom, the Court found that the allegedly infringing equipment did
not contain an instantaneous digital display of the cost of the call, a
call-completion signal, or a settable charge selector (thumbwheels), all of
which, the Court held, must be present to support a claim of infringement by
Phonometrics. The Company believes that the same arguments advanced by Northern
Telecom can be made with respect to the Company's equipment.
In light of these rulings, the Florida court lifted its stay of the hotel cases
on December 27, 1996 and scheduled a hearing for February 13, 1997 to consider
which, if any, of the hotel cases should be dismissed. At the hearing, the
Court will consider whether Phonometrics may
F-13
<PAGE> 27
proceed against those hotels who use equipment manufactured by companies, such
as the Company, that Phonometrics has not sued, and whether the Court's ruling
in the Northern Telecom case precludes Phonometrics from alleging infringement
by equipment, like the Company's, which lacks an instantaneous digital display,
a call-completion signal, or a settable charge selector. Depending upon how the
Court rules on these questions, the cases against the Company's customers could
be dismissed.
Simultaneously with the proceedings at the trial level in the Florida
litigation, an appeals court is hearing Phonometrics' appeal of the Florida
Court's ruling in the Northern Telecom case and in other equipment
manufacturers' cases. Briefs have been filed in the Northern Telecom appeal and
the oral arguments, although not yet scheduled, may be heard in the next few
months. A ruling against Phonometrics on appeal would, it is believed, provide
strong precedent against Phonometrics' position in the remaining cases and have
a "domino effect," virtually disposing of al other similar cases. On the other
hand, if the appeals court reverses the trial court's ruling in the Northern
Telecom case, the Florida litigation would most likely resume.
In patent infringement cases, damages may only be calculated during the six
years immediately prior to the filing of the lawsuit but in no event after the
expiration of the patent. Since Phonometrics' patent expired in October 1990,
it is unlikely that Phonometrics would sue the Company directly at this point,
since it would neither be entitled to collect damages against the Company nor
prevent the Company from making or selling the allegedly infringing products.
The Company is cautiously optimistic that the trial and appeal's court rulings
in the next several months could dispose of the litigation against its
customers, although no such assurance can be given.
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 certain of
its customers, arising in connection with (i) a Distributor's Agreement entered
into between the Company and D&P Investments in 1986, pursuant to which the
Company sold to D&P Investments certain call accounting systems, and (ii) a
Maintenance Agreement between the Company and ABTS pursuant to which the
Company furnished maintenance services for such systems. D&P Investments has
allegedly assigned its claim for breach of the Distributor's Agreement to ABTS.
ABTS seeks damages in the amount of $1,000,000. In April 1996, the Company was
successful in having the cash transferred to the United States District Court
for the Northern District of Oklahoma. The Company denies all of the
allegations made by ABTS and is vigorously defending this action. The Company
has filed an application with the Court for permission to amend its pleadings
to include a counterclaim against ABTS and cross-claims against D&P Investments
and Communication Equipment Brokers for breach of contract, pursuant to which
the company seeks damages in an amount in excess of $75,000. A trial date has
been set in April 1997.
13. 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, 1996, 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. EPS assuming full dilution would not be materially different than primary
EPS.
14. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following at October 31, 1996:
<TABLE>
<S> <C>
Data processing and computer field equipment $ 797,825
Office furniture 112,976
Other 147,001
-----------
Total property, plant and equipment 1,057,802
Less- accumulated depreciation (662,896)
Total net property, plant and equipment $ 394,906
===========
</TABLE>
15. 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 $98,000 and
$79,000 for the years ending October 31, 1996 and 1995, respectively.
F-14
<PAGE> 28
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, COMPLIANCE WITH SECTION 16(A) OF THE
EXCHANGE ACT.
The directors, executive officers and significant employees of the Company
are set forth below. 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.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Jack R. Ingram 53 President, Chief Executive Officer and
Director
Ronald L. Siegenthaler 53 Executive Vice President and Director
Robert B. Wagner 35 Vice President of Finance, Chief Financial
Officer, Treasurer, Secretary and
Director
Tom R. Crofford 44 Vice President of Engineering
Charles H. Rowland 55 Vice President of Manufacturing
Thomas A. Luce 40 Vice President of Service
Donald E. Reigel 42 Vice President of Marketing and Sales
Ron B. Barber 42 Director
Donald T. Duke 46 Director
Dr. Robert D. Hisrich 51 Director
</TABLE>
A brief account of the business experience for the past five years of the
individuals listed above follows.
MR. INGRAM has been President of the Company since July 1990 and a director
of the Company since March 1989. Mr. Ingram's business experience prior to
joining the Company was concentrated in the oil and gas industry. 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 business
entities with significant involvement in fabrication and marketing of steel,
steel products and other raw material, real estate, oil and gas, and
telecommunications. 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, and a member of the Board of Directors in March 1996. 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 and has
been its Vice President of Engineering since January 1988. Mr. Crofford has
worked in the field of computer engineering since 1977. He is a member of the
Institute of Electrical and Electronics Engineers.
15
<PAGE> 29
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 Installment 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. 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 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 has a
Bachelor of Science Degree in Petroleum Engineering from the University of
Oklahoma.
DR. HISRICH has been 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 Boviard 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 Board of Directors of the
Boviard Supply Company, Jameson Inn, Inc., and Noteworthy Medical Systems,
Inc., a member of the Editorial Boards of the Journal of Venturing and the
Journal of Small Business Management, and a member of the Board of Directors of
Enterprise Development, Inc. 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.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
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.
16
<PAGE> 30
ITEM 10. EXECUTIVE COMPENSATION.
That portion of the Company's definitive Proxy Statement appearing under the
caption "Executive Compensation," to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A on or before February 28, 1997 and to be
used in connection with the Company's Annual Meeting of Shareholders to be held
March 20, 1997 is hereby incorporated by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
That portion of the Company's definitive Proxy Statement appearing under the
caption "Security Ownership of Certain Beneficial Owners and Management," to be
filed with the Securities and Exchange Commission pursuant to Regulation 14A on
or before February 28, 1997 and to be used in connection with the Company's
Annual Meeting of Shareholders to be held March 20, 1997 is hereby incorporated
by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
That portion of the Company's definitive Proxy Statement appearing under the
caption "Related Transactions," to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A on or before February 28, 1997 and to be
used in connection with the Company's Annual Meeting of Shareholders to be held
March 20, 1997 is hereby incorporated by reference.
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, 1996.
(b) Exhibits made a part of this report are set forth in the Exhibit Index
which appears at Page 19.
17
<PAGE> 31
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 23, 1997 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 23, 1997 /s/Jack R. Ingram
-----------------------------------------
JACK R. INGRAM, PRESIDENT, CHIEF
EXECUTIVE OFFICER AND DIRECTOR
JANUARY 23, 1997 /s/Robert B. Wagner
-----------------------------------------
ROBERT B. WAGNER, VICE PRESIDENT OF
FINANCE, CHIEF FINANCIAL OFFICER,
AND DIRECTOR
JANUARY 17, 1997 /s/Donald T. Duke
-----------------------------------------
DONALD T. DUKE, DIRECTOR
JANUARY 22, 1997 /s/Ronald L. Siegenthaler
-----------------------------------------
RONALD L. SIEGENTHALER, DIRECTOR
18
<PAGE> 32
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
(2) PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, 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 HCX500(R) Authorized Distributor Agreement dated April 1, 1996
between Hitachi Telecom (USA), Inc. and XETA Corporation -
Omitted as substantially identical to the Authorized
Distributor Agreement dated April 8, 1993 between Hitachi
America, Ltd. and XETA Corporation which was previously filed
as Exhibit 10.1 to the Company's Annual Report on Form 10-KSB
for the fiscal year ended October 31, 1993.
(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 -
(22) PUBLISHED REPORT REGARDING MATTERS SUBMITTED TO VOTE - None.
(23) CONSENT OF EXPERTS AND COUNSEL -
23.1 Consent of Arthur Andersen, L.L.P.
(24) POWER OF ATTORNEY - None.
(27) FINANCIAL DATA SCHEDULE
(28) INFORMATION FROM REPORTS FURNISHED TO STATE INSURANCE REGULATORY
AUTHORITIES - None.
(99) ADDITIONAL EXHIBITS - None.
</TABLE>
19
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
XETACOM, Inc., an Oklahoma corporation
<PAGE> 1
EXHIBIT 23.1
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.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Tulsa, Oklahoma
January 24, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON
PAGES F-2 AND F-3 OF THE COMPANY'S 10KSB FOR THE FISCAL YEAR ENDING OCTOBER 31,
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-END> OCT-31-1996
<CASH> 3,549,101
<SECURITIES> 0
<RECEIVABLES> 1,516,479
<ALLOWANCES> 0
<INVENTORY> 1,041,496
<CURRENT-ASSETS> 8,747,663
<PP&E> 394,906
<DEPRECIATION> 0
<TOTAL-ASSETS> 12,364,420
<CURRENT-LIABILITIES> 3,312,605
<BONDS> 0
0
0
<COMMON> 218,265
<OTHER-SE> 7,112,308
<TOTAL-LIABILITY-AND-EQUITY> 12,364,420
<SALES> 13,440,774
<TOTAL-REVENUES> 13,440,774
<CGS> 8,457,692
<TOTAL-COSTS> 8,457,692
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,489,341
<INCOME-TAX> 904,000
<INCOME-CONTINUING> 1,585,341
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,585,341
<EPS-PRIMARY> .68
<EPS-DILUTED> .68
</TABLE>
