<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED JULY 31, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-16231
XETA Corporation
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Oklahoma 73-1130045
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4500 S. Garnett, Suite 1000, Tulsa, Oklahoma 74146
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
918-664-8200
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the registrant (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
past 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
Number of shares outstanding of each of the registrant's classes of common
stock, as of the latest practicable date.
Class Outstanding at September 1, 1997
- -------------------------------- --------------------------------
Common Stock, $.10 par value 2,014,572
Page 1 of 20 consecutive pages
Exhibit Index appears on Page 19.
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS Page No.
--------
Consolidated Balance Sheets - July 31, 1997 3
and October 31, 1996
Consolidated Statements of Operations - For the 4
Nine months ending July 31, 1997 and 1997
Consolidated Statements of Shareholders Equity - 5
November 1, 1996 through July 31, 1997
Consolidated Statements of Cash Flows - For the 6
Nine months ending July 31, 1997 and 1996
Notes to Consolidated Financial Statements 7
2
<PAGE> 3
XETA CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
July 31,1997 October 31,1996
------------ ---------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 4,781,063 $ 3,549,101
Current portion of net investment in
sales-type leases 2,105,328 2,217,672
Other receivables, net 1,894,822 1,516,479
Inventories, net (Note 4) 1,519,216 1,041,496
Current deferred tax asset, net (Note 7) 88,356 92,897
Prepaid expenses and other assets 203,385 156,233
Prepaid taxes -- 173,785
------------ ------------
Total current assets 10,592,170 8,747,663
------------ ------------
Noncurrent Assets:
Net investment in sales-type leases,
less current portion above 1,552,401 2,737,358
Purchased long distance contracts, net (Note 2) 990,174 --
Property, plant & equipment, net (Note 5) 545,369 394,906
Capitalized software production costs, net of
accumulated amortization of $316,566 at July
31, 1997 and $268,914 at Oct. 31, 1996 497,011 325,816
Other assets 103,103 158,677
------------ ------------
Total noncurrent assets 3,688,058 3,616,757
------------ ------------
Total assets $ 14,280,228 $ 12,364,420
============ ============
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 686,833 $ 371,473
Unearned revenue (Note 6) 2,762,347 2,274,294
Accrued liabilities 766,067 666,838
Accrued federal and state income taxes 206,464 --
------------ ------------
Total current liabilities 4,421,711 3,312,605
------------ ------------
Unearned service revenue (Note 6) 706,990 1,388,998
------------ ------------
Noncurrent deferred tax liability, net (Note 7) 496,270 591,984
------------ ------------
Commitments (Note 2)
Shareholders' equity:
Common stock; $.10 par value; 10,000,000
shares authorized, 2,204,319 and 2,182,653
issued at July 31, 1997 and October
31, 1996, respectively 220,432 218,265
Paid-in capital 4,831,465 4,736,413
Retained earnings 3,863,100 2,375,895
------------ ------------
8,914,997 7,330,573
Less treasury stock, at cost (259,740) (259,740)
------------ ------------
Total shareholders' equity 8,655,257 7,070,833
------------ ------------
Total liabilities & shareholders' equity $ 14,280,228 $ 12,364,420
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
XETA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ending July 31, Ending July 31,
--------------------------- ---------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales of systems $ 2,704,285 $ 1,185,027 $ 6,736,935 $ 5,215,123
Installation and service revenues 2,594,940 1,781,685 6,658,807 5,028,091
------------ ------------ ------------ ------------
Net sales and service revenues 5,299,225 2,966,712 13,395,742 10,243,214
------------ ------------ ------------ ------------
Cost of sales 1,877,706 735,422 4,449,709 3,202,979
Installation and service cost 1,638,130 1,119,482 4,229,097 3,239,769
------------ ------------ ------------ ------------
Total cost of sales and service 3,515,836 1,854,904 8,678,806 6,442,748
------------ ------------ ------------ ------------
Gross profit 1,783,389 1,111,808 4,716,936 3,800,466
------------ ------------ ------------ ------------
Operating expenses:
Selling, general and administrative 915,044 647,839 2,586,568 2,092,578
Engineering, research and development,
and amortization of capitalized
software production costs 104,170 110,599 308,834 306,137
------------ ------------ ------------ ------------
Total operating expenses 1,019,214 758,438 2,895,402 2,398,715
------------ ------------ ------------ ------------
Income from operations 764,175 353,370 1,821,534 1,401,751
Interest and other income 159,301 181,330 494,671 471,191
------------ ------------ ------------ ------------
Income before provision for income
taxes 923,476 534,700 2,316,205 1,872,942
Provision for income taxes 332,000 200,000 829,000 700,000
------------ ------------ ------------ ------------
Net income $ 591,476 $ 334,700 $ 1,487,205 $ 1,172,942
============ ============ ============ ============
Income per common and common
equivalent share
Primary and fully diluted $ 0.25 $ 0.14 $ 0.63 $ 0.50
============ ============ ============ ============
Weighted average shares outstanding 2,010,326 1,987,667 2,002,830 1,963,726
============ ============ ============ ============
Weighted average shares equivalents 2,373,982 2,350,818 2,354,147 2,348,448
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
XETA CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
NOVEMBER 1, 1996 THROUGH July 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Treasury Stock
--------------------------- ---------------------------
Number of
Shares Issued Paid-in Retained
& Outstanding Par Value Shares Amount Capital Earnings
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance -
October 31, 1996 2,182,653 $ 218,265 (189,747) $ (259,740) $ 4,736,413 $ 2,375,895
Stock options
exercised 21,666 2,167 -- -- 31,891 --
Tax benefit of
stock options -- -- -- -- 63,161 --
Net Income -- -- -- -- -- 1,487,205
------------ ------------ ------------ ------------ ------------ ------------
Balance -
April 30, 1997 2,204,319 $ 220,432 (189,747) $ (259,740) $ 4,831,465 $ 3,863,100
============ ============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 6
XETA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For The Nine Months Ending
----------------------------
July 31,1997 July 31,1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 1,487,205 $ 1,172,942
------------ ------------
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 141,356 115,845
Amortization of capitalized software
production costs and long distance contracts 81,796 41,184
(Gain) loss on sale of assets -- (14,076)
Provision for doubtful accounts receivable 27,000 35,000
Change in assets and liabilities:
(Increase) decrease in net investment in
sales-type leases 1,297,301 (869,984)
(Increase) in other receivables (405,343) (146,818)
(Increase) decrease in inventories (477,720) 102,488
Decrease in prepaid income taxes 173,785 --
Decrease in deferred tax asset 4,541 13,085
(Increase) decrease in prepaid expenses and
other assets 8,422 (51,510)
Increase (decrease) in accounts payable 315,360 (106,432)
Increase (decrease) in unearned revenue (193,955) 216,021
Increase in accrued income taxes 269,624 105,986
Increase (decrease) in accrued liabilities 99,229 (153,847)
Increase (decrease) in deferred tax liabilities (95,714) 41,018
------------ ------------
Total adjustments 1,245,682 (672,040)
------------ ------------
Net cash provided by
operating activities 2,732,887 500,902
------------ ------------
Cash flows from investing activities:
Purchases of long distance contracts (1,024,318) --
Additions to capitalized software (218,849) (142,733)
Additions to property, plant & equipment (295,643) (171,215)
Proceeds from sale of assets 3,827 28,948
------------ ------------
Net cash used in
investing activities (1,534,983) (285,000)
------------ ------------
Cash flows from financing activities:
Exercise of stock options 34,058 182,666
------------ ------------
Net cash provided by financing activities 34,058 182,666
------------ ------------
Net increase in cash and
cash equivalents 1,231,962 398,568
Cash and cash equivalents, beginning of period 3,549,101 2,788,709
------------ ------------
Cash and cash equivalents, end of period $ 4,781,063 $ 3,187,277
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 855 $ 244
Cash paid during the period for income taxes $ 726,328 $ 156,750
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE> 7
XETA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1997
(Unaudited)
(1) BASIS OF PRESENTATION
The consolidated financial statements included herein include the
accounts of XETA Corporation and its wholly-owned subsidiary, Xetacom, Inc.
Xetacom's operations have been insignificant to date. All significant
intercompany accounts and transactions have been eliminated.
The consolidated financial statements have been prepared by the
Company, without an audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The Company believes that the
disclosures made in these financial statements are adequate to make the
information presented not misleading when read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company's latest financial statements filed as part of the Company's Annual
Report on Form 10-KSB, Commission File No. 0-16231. Management believes that
the financial statements contain all adjustments necessary for a fair statement
of the results for the interim periods presented. All adjustments made were of
a normal recurring nature.
(2) OPERATOR SERVICES BUSINESS AND PURCHASED LONG DISTANCE CONTRACTS
Effective April 1, 1997, the Company became a sub-agent of MCI to
market, on a non-exclusive basis, a wide variety of long distance services to
commercial customers, including the hospitality industry. Simultaneously, the
Company entered into a marketing alliance with Americom Communications
Services, Inc. ("AMERICOM") to jointly market these MCI services to the hotel
industry. The two companies will share equally in the "Net Commissions" earned
from those services. "Net Commissions" are defined as those revenues earned
from the long distance contracts after deductions for commissions paid to the
customer hotels and payments to XETA for equipment and service fees relating to
any equipment provided by XETA.
Also effective April 1, 1997, the Company purchased AMERICOM's
interest in existing long distance contracts at 71 hotels for $1,108,000. The
purchase price included a payment for the contracts of $1,024,000, which has
been capitalized, and reimbursement of certain equipment fees on installed
equipment. The capitalized costs will be amortized ratably over the estimated
future life of these contracts. A majority of these 71 hotels receive long
distance services jointly from MCI and another carrier. The remaining hotels
are served exclusively by MCI. The purchase agreement includes AMERICOM's
interest in commissions earned from both carriers. Under the terms of the
purchase agreement, the Net Commissions earned each month from these 71
properties are divided as follows: the first $40,000 are paid to XETA, the next
$45,000 are paid to AMERICOM and any remaining Net Commissions are shared
equally. After April 1, 2000, all Net Commissions are shared equally.
7
<PAGE> 8
Previous to the purchase agreement, AMERICOM had obtained loans from
one of the carriers secured by future commissions to be earned under various
long distance contracts, including those contracts purchased by the Company. To
effect the transfer of AMERICOM's interest in the 71 hotel contracts, which
were collateralized by the loans, the Company guaranteed AMERICOM's
indebtedness. The amount of the guarantee at July 31, 1997 was $470,861. The
Company believes that AMERICOM's earnings from its share of Net Commissions as
well as other revenue sources pledged by AMERICOM will be sufficient to retire
the indebtedness in accordance with the terms of the loans, therefore no
liability has been recorded related to the guarantee.
(3) REVOLVING CREDIT AGREEMENT
The company maintains a $1,000,000 revolving line of credit with its
bank. There are no outstanding advances under the credit agreement.
(4) INVENTORIES
The following are the components of inventories:
<TABLE>
<CAPTION>
July 31, October 31,
1997 1996
------------ ------------
(Unaudited)
<S> <C> <C>
Raw materials $ 710,298 $ 577,054
Finished goods and spare parts 968,166 623,690
------------ ------------
1,678,464 1,200,744
Less reserve for excess and
obsolete inventory (159,248) (159,248)
------------ ------------
$ 1,519,216 $ 1,041,496
============ ============
</TABLE>
(5) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
July 31, October 31,
1997 1996
------------ ------------
(Unaudited)
<S> <C> <C>
Computer field equipment $ 1,036,173 $ 797,825
Office furniture 116,564 112,976
Other 179,627 147,001
------------ ------------
1,332,364 1,057,802
Less accumulated depreciation (786,995) (662,896)
------------ ------------
$ 545,369 $ 394,906
============ ============
</TABLE>
8
<PAGE> 9
(6) UNEARNED INCOME
Unearned income consists of the following:
<TABLE>
<CAPTION>
July 31, October 31,
1997 1996
------------ ------------
(Unaudited)
<S> <C> <C>
Service contracts $ 1,548,659 $ 1,570,872
Warranty service 633,387 379,753
Systems shipped, but not installed 26,781 63,829
Customer deposits 456,597 209,357
Other deferred revenue 96,923 50,483
------------ ------------
Total current deferred revenue 2,762,347 2,274,294
Noncurrent unearned service revenues 706,990 1,388,998
------------ ------------
$ 3,469,337 $ 3,663,292
============ ============
</TABLE>
(7) INCOME TAXES
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below:
<TABLE>
<CAPTION>
July 31, October 31,
1997 1996
------------ ------------
(Unaudited)
<S> <C> <C>
Deferred tax assets:
Prepaid service contracts $ 39,679 $ 51,083
Nondeductible reserves 192,359 198,822
Book depreciation in excess of tax 8,991 15,902
Other 38,077 50,675
------------ ------------
Total deferred tax asset 279,106 316,482
------------ ------------
Deferred tax liabilities:
Unamortized capitalized software
development costs (168,984) (110,778)
Tax income to be recognized on sales-type
lease contracts (452,077) (638,831)
Other (65,960) (65,960)
------------ ------------
Total deferred tax liability (687,021) (815,569)
------------ ------------
Net deferred tax liability $ (407,915) $ (499,087)
============ ============
</TABLE>
(8) INTEREST AND OTHER INCOME
Interest and other income recorded in the accompanying financial
statements, consists primarily of interest income earned from sales-type leases
and cash investments.
9
<PAGE> 10
(9) FOOTNOTES INCORPORATED BY REFERENCE
Certain footnotes are applicable to the consolidated financial
statements, but would be substantially unchanged from those presented in the
Company's Annual Report on Form 10-KSB, Commission File No. 0-16231, filed with
the Securities and Exchange Commission on January 29, 1997. Accordingly,
reference should be made to those statements for the following:
Note Description
---- -----------
1 Business and summary of significant accounting policies
3 Cash and cash equivalents
4 Income taxes
6 Accrued liabilities
8 Stock options
9 Commitments
10 Major customers and concentrations of credit risk
11 Employment agreements
12 Contingency
13 Earnings per share
15 Retirement plan
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
During the quarter ending July 31, 1997, XETA Corporation (the "Company")
earned net income of $591,000 on net sales of $5,299,000, both record quarterly
results. For the nine months ending July 31, 1997, the Company earned net
income of $1,487,000 on net sales of $13,396,000.
The Company's recent success is due to a combination of factors which include
continued strong acceptance of the Company's PBX product and service offering,
continued rapid expansion of the Company's service base and the expanding
hospitality market. Management believes these factors will continue to be a
positive force driving the Company's financial results through fiscal 1998. In
addition, the Company's new products, namely the XPANDER and the MCI long
distance offering are well-positioned to begin making more significant
contributions to operating results in the future.
The discussion which follows provides analysis of the major factors and trends
which management believes had the most significant impact on the financial
condition of the Company as of July 31, 1997 and the results of its operations
for the quarter and nine months ending July 31, 1997 as compared to those same
periods one year ago. Also included in this discussion are the 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.
FINANCIAL CONDITION
For the nine months ending July 31, 1997, the Company's cash balances have
increased $1,232,000. This increase consists of cash generated from operations
of $2,733,000 and cash from exercises of stock options of $34,000. A portion of
these funds have been utilized in various investing activities including the
purchase of long distance contracts for $1.1 million, investments in
capitalized software production costs of $219,000 and additions to property and
equipment of $296,000. The investment in capitalized software production costs
relates to the continued development of the Company's XPANDER system which is
more fully described below. The additions of property and equipment were mainly
to support installations of call accounting systems at customer locations under
PBX service or MCI long distance contracts.
Management considers the Company's financial condition to be strong. Cash
balances represent approximately 33% of total assets and over 50% of book
value. In addition, working capital exceeds $6.1 million and the current ratio
is 2.4. Management believes that present working capital will be sufficient to
meet anticipated operating needs and planned capital expenditures. Future
anticipated operating needs include continued expansion of the Company's
service staff to maintain the Company's commitment to high quality service over
the rapidly increasing customer base and placement of additional call
accounting systems under PBX and long distance service contracts. Anticipated
capital needs consist primarily of plans to relocate the Company's
11
<PAGE> 12
headquarters into a larger, Company-owned facility that will support future
growth. Management estimates the cost of the relocation at $2 million.
Beyond these anticipated uses of working capital, management is continually
evaluating other alternatives to effectively utilize its strong financial
condition. The purchase of long distance contracts earlier this year is a
result of such evaluations. The purchase of additional similar contracts is
another likely use of available funds. Other possibilities include acquisitions
and further expansion of the Company's XETAPLAN program. The Company has
engaged a member of the board of directors to assist the Company in identifying
and qualifying potential acquisition opportunities.
RESULTS OF OPERATIONS
Net sales and service revenues increased $2.3 million or 79% in the third
quarter of fiscal 1997 compared to the third quarter of fiscal 1996. This
increase included an increase in systems sales of $1.5 million or 128%,
primarily consisting of increases in sales of PBX systems, and an increase in
installation and service revenues of $813,000 or 46%. For the first nine months
of fiscal 1997, net sales and service revenues increased $3.1 million or 31%.
This increase consists of increases in systems sales of $1.5 million or 29% and
increases in installation and service revenues of $1.6 million or 32%.
The increases in systems sales in the comparison periods is due to substantial
increases in the sales of new PBX systems. Although installations, and
therefore revenues, from new PBX's were depressed early in the fiscal year,
orders for new systems surged resulting in strong sales results in the second
and third quarters. While order activity has slowed somewhat from its peak
earlier in the year, orders and backlog remain strong compared to historical
levels. Management believes the strength of its PBX sales is partially due to
increases in market share and partially related to the on-going expansion of
the hospitality business. Since entering this market in fiscal 1993, the
Company has steadily built its reputation from being just a call accounting
company to being able to provide quality PBX systems and support as well. As a
result, the Company has been effective in selling PBX's to its existing call
accounting customers as well as selling to property management companies and
hotel chains that were not previous customers of the Company. Also, like other
providers, the Company is enjoying the overall expansion of the hospitality
market which has included many major refurbishments of existing hotels, new
construction of smaller, suite-type or "extended stay" hotels and may begin to
also include new construction of larger, "luxury" properties. Partially
offsetting the increase in PBX sales has been a decline in the sales of call
accounting systems from the inflated levels experienced from the fourth quarter
of fiscal 1994 through the second quarter of fiscal 1996. Those inflated levels
were related to the mandated changes in the North American Numbering Plan
("NANP") which caused most of the Company's customers to upgrade or replace
their existing systems. The surge in NANP related call accounting sales ended
in the second quarter of fiscal 1996. Call accounting sales since that time
have consistently exceeded management's targets, even though such sales
represent declines from
12
<PAGE> 13
previous levels. Sales of call accounting systems during the third quarter, the
first quarter to compare against non-NANP inflated sales, were up 26%.
The increases in installation and service revenues are due primarily to
increases in installations of new PBX systems, which generate one-time
installation revenue and recurring monthly service revenues, and in expansion
of the base of customers under PBX service contracts, which generate recurring
monthly revenue. Installation and service revenues from these PBX related
sources increased 79% in the third quarter of fiscal 1997 and increased 65% for
the nine months to date period ending July 31, 1997. Installation and service
revenues from call accounting sources increased, albeit more modestly, 12%
during the third quarter of fiscal 1997 and 3% for the year to date period.
Gross margins earned on net sales and service revenues was 34% for the third
quarter of fiscal 1997 compared to 37% in the third quarter of fiscal 1996. For
the nine month period, the gross margin on net sales and service revenues was
35% in fiscal 1997 compared to 37% in fiscal 1996. This decline in gross
margins is due to the decline in the gross margins earned on systems sales
which reflects the greater proportion of lower margin PBX systems sales. The
gross margins earned on installation and service revenues is unchanged in the
periods under comparison.
Operating expenses increased 34% in the third quarter of fiscal 1997 compared
to last year and increased 21% for the first nine months of fiscal 1997
compared to the same period in fiscal 1996. These increases are related to
increases in commissions and executive bonuses and are reflective of the
increases in revenues and profitability. Other increases include legal
expenses, which are associated with pending litigation, amortization expense
associated with the long distance contracts purchased earlier in the year, and
small increases in sales and administrative personnel to support the Company's
growth.
Interest and other income declined 12% or $22,000 during the third quarter of
fiscal 1997 and increased 5% or $23,000 during the first nine months of fiscal
1997, compared to the same periods a year ago. The decline in the third quarter
reflects lower interest income earned on XETAPLAN sales-type leases, due to the
aging of these contracts, and the fact that fiscal 1996's results included the
reversal of approximately $30,000 in sales tax related accruals. The increase
in the year to date amounts primarily reflects higher interest income earned on
cash balances this year versus fiscal 1996, partially offset by the fact that
fiscal 1996's results included the reversal, throughout the year, of the sales
tax related accrual discussed above.
The Company has recorded a provision for federal and state income taxes of
$332,000 in the third quarter of fiscal 1997 and $829,000 for the first nine
months of fiscal 1997. This represents an effective tax rate of 36% for both
periods compared to an effective tax rate of 37% for the same periods in fiscal
1996. The slightly lower tax rate reflects a reduction in the estimated state
tax provision for fiscal 1997.
13
<PAGE> 14
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.
During the second quarter, the Company became a sub-agent of MCI to provide
long distance services to commercial customers, primarily hotels. Also, the
Company paid $1.1 million to Americom Communications Services, Inc. ("ASCI")
for existing long distance contracts which include services provided by MCI and
another carrier, U.S. Long Distance Corp. ("USLD"). Prior to entering into
these agreements, the Company reviewed the available past history of revenues
from these contracts and believes that it will earn an acceptable rate of
return on this investment. The majority of the contracts purchased were with
customers only recently secured under MCI contracts and therefore required
action on the part of MCI for conversion to MCI service. MCI's performance has
been slower than anticipated and, as a result, the full expected benefits to
XETA have been delayed. The Company has had numerous meetings with all the
parties involved in this project and is currently executing a plan that
management believes will improve the MCI conversion process and will result in
increased revenues in the future.
Prior to the Company's acquisition of the revenues earned from the 71 purchased
long distance contracts, these revenues were pledged as collateral by AMERICOM
to secure loans from USLD to ASCI. These loans were secured by commissions
earned and to be earned from these contracts as well as other contracts not
part of the Purchase Agreement between AMERICOM and the Company. In order to
obtain these revenues free and clear of USLD's security interest, the Company
guaranteed approximately $567,000 in AMERICOM's indebtedness to USLD in
exchange for a release of USLD's security interest against AMERICOM's USLD
commissions. The Company has, in turn, taken a security interest in all of
AMERICOM's revenues from USLD as well as all commissions due AMERICOM under the
marketing alliance and from other sales of Company products, to secure any
amount which may become due from AMERICOM to the Company under the Purchase
Agreement. While no assurance can be given, management believes that future
commissions from the carrier will be sufficient to liquidate AMERICOM's
indebtedness to USLD according to its payment terms At August 1, 1997, the
remaining balance of ASCI indebtedness was $471,000. The Company has not
recorded any portion of this guarantee as a liability in its financial
statements.
The Company's distributorship agreement with Hitachi Telecom (USA), Inc.
("Hitachi") expires annually on March 31. Typically, as has been the case the
last two years and is currently the case, the written contract expires before
the parties execute a new agreement. In the interim, the two companies continue
to operate without interruption under the same procedures and terms as the most
recent contract, albeit without the assurance of a binding written contract
with a definite term. The Company considers its relationship with Hitachi to be
very good and due to the mutually beneficial nature of the companies'
relationship, expects that a new contract for the current year will be executed
by both parties in the near future on generally the same terms and conditions
as the previous contract.
14
<PAGE> 15
The Company continues to commit the majority of its research and development
resources into development of XPANDER, its first PBX related proprietary
product. Management believes the market for XPANDER is continuing to grow, but
that it is still too early to predict when demand will be strong enough to
forecast significant revenues from sales of this product. The Company has
applied for a patent on XPANDER, but the process has not proceeded to the point
which it can be determined whether the Company will receive a patent and the
protections associated therewith.
The Company is involved in two matters of pending litigation (See "Legal
Proceedings" in Part II below). 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.
The Company's Form 10KSB for the year ended October 31, 1996 contains an
expanded discussion of risk factors which should be read in conjunction with
this report.
15
<PAGE> 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
ABTS
In June 1995, Associated Business Telephone Systems, ("ABTS")
initiated an action against the Company which is currently pending in
the United States District Court for the Northern District of
Oklahoma. ABTS claims' are based upon allegations of breach of
warranty, breach of contract, and tortious interference with ABTS'
relationship 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. The Company has filed a counterclaim against ABTS and a
third-party claim against D & P Investments and Communication
Equipment Brokers based upon breach of contract. Both ABTS and the
Company seek money damages. The trial date in this action has been
scheduled for December 15, 1997, and discovery is scheduled to
terminate on September 2, 1997. ABTS, D & P Investments and
Communication Equipment Brokers have filed an application with the
court, which the Company has opposed, seeking to extend these dates
for a period of 90 days. As of the writing of this report, the court
has not yet ruled on the application. On September 9, 1997, the
Company filed a motion for summary judgement in its favor on all
claims brought by ABTS against the Company.
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 in the Florida
and California litigation and have notified the Company that they seek
indemnification under the terms of their contracts with the Company.
The cases brought against these customers were filed between June,
1994 and April, 1996. 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 these lawsuits, the plaintiff is seeking damages of an
unspecified amount, based upon a reasonable royalty of the hotels'
16
<PAGE> 17
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 Florida litigation has been stayed (i.e., suspended) pending the
outcome of an appeal by Phonometrics of the lower court's decision
against Phonometrics in its case against Northern Telecom. Because the
issues in the Florida litigation are substantively similar to those
presented in the Northern Telecom case, the court in the Florida
litigation has stated that it will enter final judgment in favor of
all of the hotels sued by Phonometrics in the event of a decision by
the appeals court in favor of Northern Telecom. A hearing for oral
arguments in the Phonometrics appeal of the decision in the Northern
Telecom case is scheduled to be held during the week of October 6,
1997.
The California litigation has been stayed pending the outcome of the
Florida litigation.
Items 2, 3, 4, and 5 of Part II have been omitted because they are inapplicable
or the response thereto is negative.
Item 6.
(a) Exhibits - See the Exhibit Index at Page 18.
(b) Reports on Form 8-K - During the quarter for which this report is
filed, the Registrant did not file any reports with the Securities and
Exchange Commission on Form 8-K.
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
XETA CORPORATION
(Registrant)
Dated: September 10, 1997 By: /s/ JACK R. INGRAM
-----------------------------------
Jack R. Ingram
President
Dated: September 10, 1997 By: /s/ ROBERT B. WAGNER
-----------------------------------
Robert B. Wagner
Vice President of Finance
18
<PAGE> 19
EXHIBIT INDEX
SEC. NO. Description
-------- -----------
(2) Plan of acquisition, reorganization, arrangement, liquidation
or succession - None.
(3) Articles of Incorporation and Bylaws - previously filed as
Exhibits 3.1, 3.2, and 3.3 to the Registrant's Registration
Statement on Form 5.1, Registration No. 33-7841.
(4) Instruments defining rights of security holders, including
indentures - previously filed as Exhibits 3.1, 3.2 and 3.3 to
the Registrant's Registration Statement on Form S-1,
Registration No. 33-7841.
(10) Material Contracts - none
(11) Statement re: computation of per share earnings -
Inapplicable.
(15) Letter re: unaudited interim financial information -
Inapplicable.
(18) Letter re: change in accounting principles - Inapplicable.
(19) Report furnished to security holders - None.
(22) Published report regarding matters submitted to a vote of
security holders - None.
(23) Consents of experts and counsel
23.1 Consent of Arthur Andersen LLP
(24) Power of attorney - None.
(27) Financial Data Schedule
(99) Additional exhibits - None.
19
<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. It should be noted that we have
not audited any financial statements of the Company subsequent to October 31,
1996 or performed any audit procedures subsequent to the date of our report.
ARTHUR ANDERSEN LLP
Tulsa, Oklahoma
September 10, 1997
20
<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 3 AND 4 OF THE COMPANY'S 10QSB FOR THE YEAR TO DATE AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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