<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sections 240.14a-11(c) or sections
240.14a-12
XETA CORPORATION
- -------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
XETA CORPORATION
- -------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
----------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
----------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
----------------------------------------------------------------------
5) Total fee paid:
----------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
--------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE> 2
XETA
CORPORATION
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
Notice is hereby given that the Annual Meeting of Shareholders of XETA
Corporation will be held at the Tulsa Marriott Southern Hills located at 1902
East 71st Street, Tulsa, Oklahoma, on March 31, 1998 at 6:30 p.m., local time,
for the following purposes:
1. To elect six (6) members to the Company's Board of Directors to
serve until the next annual meeting of shareholders and until their
successors have been elected and qualified;
2. To authorize the Board to effect a stock split by amending the
Company's Certificate of Incorporation, or to effect no stock split, in
the Board's discretion, without further shareholder approval, prior to
the next annual meeting of shareholders.
3. To ratify the selection of Arthur Andersen, LLP, as independent
certified public accountants for the Company for the fiscal year ending
October 31, 1998; and
4. To transact such other business as may properly come before the
meeting or any adjournment or adjournments thereof.
The Board of Directors has fixed the close of business on February 2, 1998, as
the record date for the determination of shareholders entitled to notice of and
to vote at the Annual Meeting or any adjournment or adjournments thereof. Only
shareholders of record at such time will be so entitled to vote. The Company's
Proxy Statement is attached.
IT IS IMPORTANT THAT YOUR STOCK BE REPRESENTED AT THE ANNUAL MEETING REGARDLESS
OF THE NUMBER OF SHARES YOU HOLD. IF YOU DO NOT EXPECT TO ATTEND THE MEETING IN
PERSON, PLEASE SIGN, DATE, AND RETURN THE ENCLOSED PROXY IN THE ACCOMPANYING
ENVELOPE. THE GIVING OF THIS PROXY DOES NOT AFFECT YOUR RIGHT TO VOTE IN PERSON
IN THE EVENT YOU ATTEND THE MEETING.
By Order of the Board of Directors
Robert B. Wagner
Secretary
February 27, 1998
<PAGE> 3
XETA
CORPORATION
4500 South Garnett, Suite 1000
Tulsa, Oklahoma 74146
PROXY STATEMENT
SOLICITATION OF PROXIES
This Proxy Statement is being furnished to shareholders of XETA Corporation
(the "Company") by its Board of Directors to solicit proxies for use at the
Annual Meeting of Shareholders to be held on March 31, 1998, at the Tulsa
Marriott Southern Hills located at 1902 East 71st Street, Tulsa, Oklahoma, at
6:30 p.m., local time, or at such other time and place to which the Annual
Meeting may be adjourned.
The purpose of the Annual Meeting is (i) to elect six members to the
Company's Board of Directors to serve for the ensuing year and until their
successors are elected; (ii) to authorize the Board in its sole discretion to
effect a stock split during the ensuing year by amending the Company's
Certificate of Incorporation, or to effect no stock split; (iii) to ratify the
selection of Arthur Andersen, LLP as the Company's independent certified public
accountants for the fiscal year ending October 31, 1998; and (iv) at the
discretion of the proxy holders, to transact any other business that may
properly come before the Annual Meeting or any adjournment thereof.
Whether or not you intend to be present at the Annual Meeting, you are
urged to promptly complete and return the accompanying proxy card in the
envelope provided. If you are present at the Annual Meeting and wish to vote
your shares in person, the accompanying proxy will, at your request, be returned
to you at the Annual Meeting. Any shareholder giving a proxy has the power to
revoke it at any time before it is exercised by executing a subsequently dated
proxy, submitting a notice of revocation to the Company, or attending the Annual
Meeting and voting in person.
Proxies properly executed and returned will be voted in accordance with the
specifications marked on the proxy card. Proxies containing no specifications
will be voted in favor of the proposals described in this Proxy Statement.
Abstentions and broker non-votes will be counted for determining the presence of
a quorum but are not counted as votes cast in the tabulation of votes at the
meeting. Votes will be tabulated by a representative of the Company.
It is expected that this Proxy Statement and the accompanying form of proxy
will first be mailed to shareholders on or about February 27, 1998. The cost of
preparing, assembling and mailing the Notice of Annual Meeting of Shareholders,
Proxy Statement and form of proxy and the solicitation of proxies will be paid
by the Company. The Company will pay the expenses incurred by brokers, banks and
other persons holding stock in their names or the names of their nominees in
forwarding proxy materials to the beneficial owners of such stock.
VOTING SECURITIES
The Company's only class of voting securities is Common Stock. Shareholders
are entitled to one vote per share of Common Stock held. At the close of
business on February 2, 1998, the record date for the determination of
shareholders entitled to notice of and to vote at the Annual Meeting, there were
___________ shares of Common Stock outstanding, excluding ___________ shares
held in treasury. The presence in person or by proxy of the holders of a
majority of the outstanding shares of Common Stock on the record date, exclusive
of shares held in treasury, is necessary to constitute a quorum at the Annual
Meeting.
<PAGE> 4
ELECTION OF DIRECTORS
(ITEM 1)
Six directors, constituting the entire Board of Directors of the Company,
are to be elected at the Annual Meeting. Members of the Board of Directors are
elected for one year terms. Management's nominees to the Board for the coming
year, all of whom are currently members of the Board, are as follows:
<TABLE>
<CAPTION>
NAME AND AGE POSITIONS WITH COMPANY DIRECTOR SINCE
------------ ---------------------- --------------
<S> <C> <C>
Ron B. Barber Director March, 1987
Age 43
Donald T. Duke Director March, 1991
Age 48
Dr. Robert D. Hisrich Director March, 1987
Age 53
Jack R. Ingram President, Chief Executive Officer March, 1989
Age 54 and Director
Ronald L. Siegenthaler Executive Vice September, 1981
Age 54 President and Director
Robert B. Wagner Vice President of Finance, March, 1996
Age 36 Chief Financial Officer,
Secretary and Director
</TABLE>
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 Bovaird
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.
2
<PAGE> 5
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.
None of the foregoing nominees has any family relationship to any other
nominee. There are no arrangements or understandings between any of the named
individuals and any other person or persons pursuant to which any of the named
individuals are to be elected as directors.
BOARD MEETINGS AND COMMITTEES
The Board of Directors of the Company held 3 meetings during the fiscal
year ended October 31, 1997. All other action taken by the Board of Directors
was consented to in writing by a memorandum of action in lieu of a meeting, to
which all incumbent directors subscribed. Directors meet their responsibilities
not only by attending Board and committee meetings but also through
communication with members of management on matters affecting the Company. Each
director attended 75% or more of the meetings held by the Board.
The Board of Directors has an Audit Committee and Compensation Committee,
both of which were established in April 1987. There is no nominating committee
or committee performing the functions of a nominating committee.
The Audit Committee consists of directors Ron B. Barber, Jack R. Ingram and
Donald T. Duke. This Committee advises the Board with respect to the engagement
of independent public accountants and reviews the results of the annual audit,
the adequacy of the Company's internal accounting procedures, and any
transactions between the Company and its officers, directors or entities
controlled by them. The Audit Committee did not meet independently of meetings
of the Board of Directors during fiscal 1997.
The Compensation Committee consists of directors Ron B. Barber, Robert D.
Hisrich and Donald T. Duke. This Committee advises the Board with respect to the
election or appointment of executive officers and makes recommendations to the
Board concerning compensation of executive officers and awards to executive
officers and others under employee incentive plans. The Compensation Committee
did not meet independently of meetings of the Board of Directors during the 1997
fiscal year.
RECOMMENDATION AND VOTE
The Board of Directors recommends a vote "FOR" the election of all of the
nominees listed above as directors of the Company. The affirmative vote of a
majority of the shares of the Company Common Stock represented at the Annual
Meeting is required for such approval.
3
<PAGE> 6
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known to the Company as
of December 31, 1997 regarding beneficial ownership of the Company's Common
Stock, par value $.10 per share, by (i) each person known by the Company to own
more than five percent (5%) of such Common Stock, (ii) each director and nominee
for election as a director of the Company, (iii) each executive officer named in
the Summary Compensation Table, and (iv) all directors and executive officers of
the Company as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
NAME AND ADDRESS OF BENEFICIAL PERCENT OF
OF BENEFICIAL OWNER OWNERSHIP(1) CLASS
------------------- ----------------- ----------
<S> <C> <C>
Jack R. Ingram 384,700 (2) 17.3 %
XETA Corporation
4500 S. Garnett, Suite 1000
Tulsa, OK 74146
Ronald L. Siegenthaler 309,257 (3) 13.9 %
P.O. Box 571300
Tulsa, OK 74157
Donald E. Reigel 50,351 (4) 2.3 %
XETA Corporation
5350 Manhattan Circle, Suite 210
Boulder, CO 80303
Ron B. Barber 31,520 1.4 %
One Ten Occidental Place
110 W. 7th Street, Suite 200
Tulsa, OK 74119
Robert B. Wagner 24,300 (5) 1.1 %
XETA Corporation
4500 S. Garnett, Suite 1000
Tulsa, OK 74146
Donald T. Duke 11,400 (6) *
1701 Morningstar
Edmond, OK 73034
Robert D. Hisrich 12,900 (7) *
10900 Euclid Avenue
Cleveland, OH 44106
All officers and
directors as a
group (10 persons) 883,028 (2)-(8) 39.7 %
</TABLE>
------------------------------
*Less than 1%
(1) Ownership is direct unless otherwise indicated.
(2) Includes 2,500 shares held by Mr. Ingram's wife and options to
purchase 200,000 shares of the Company's common stock which are
presently exercisable.
4
<PAGE> 7
(3) Includes 109,257 shares held by Mr. Siegenthaler as Trustee of the Ronald
L. Siegenthaler Revocable Living Trust dated September 25, 1995, as
amended, and options to purchase 200,000 shares which are presently
exercisable.
(4) Includes options to purchase 37,500 shares of the Company's common
stock, which are presently exercisable.
(5) Includes 1,300 shares held by Mr. Wagner as custodian for his minor
children and options to purchase 20,000 shares of the Company's common
stock which are presently exercisable. Excludes options to purchase 5,000
shares which are not presently exercisable.
(6) Includes options to purchase 10,000 shares of the Company's common stock
which are presently exercisable.
(7) Includes 900 shares held by Dr. Hisrich as custodian for his minor child,
and options to purchase 10,000 shares of the Company's common stock which
are presently exercisable.
(8) Includes 100 shares held by an officer not named in the table, as
custodian for his minor child; 1,000 shares owned by the adult son of an
officer not named in the table, who share the same household (the officer
disclaims beneficial ownership as to these shares); and options granted
to officers not named in the table to purchase an aggregate of 43,000
shares, which options are presently exercisable.
EXECUTIVE OFFICERS
The executive officers and significant employees of the Company, their
ages, positions held with the Company and length of time in such positions are
set forth below. There are no family relationships between or among any of the
named individuals. There are no arrangements or understandings between any of
the named individuals and any other person or persons pursuant to which any of
the named individuals are to be elected as officers.
<TABLE>
<CAPTION>
NAME AND AGE POSITIONS WITH COMPANY OFFICER SINCE
------------ ---------------------- -------------
<S> <C> <C>
Jack R. Ingram President, Chief July, 1990
Age 54 Executive Officer and
Director
Ronald L. Siegenthaler Executive Vice President August, 1990
Age 54 and Director
Robert B. Wagner Chief Financial Officer, March, 1989
Age 36 Secretary and Treasurer
Donald E. Reigel Vice President of June, 1995
Age 43 Marketing & Sales
Tom Crofford Vice President of January, 1988
Age 45 Engineering
Thomas A. Luce Vice President of June, 1986
Age 41 Service
Charles R. Rowland Vice President of January, 1984
Age 56 Manufacturing
</TABLE>
Brief descriptions of the business experience of Messrs. Ingram,
Siegenthaler and Wagner are set forth under the section of this Proxy Statement
entitled "Election of Directors."
5
<PAGE> 8
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.
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. 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. 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.
6
<PAGE> 9
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation of
the Company's President and Chief Executive Officer and the next four most
highly compensated executive officers of the Company.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
-------------------------------------------------
(a) (b) (c) (d) (e) (i)
NAME AND ALL
PRINCIPAL OTHER
POSITION YEAR SALARY BONUS OTHER COMPENSATION (1)
------------ ---- ------ ----- ----- --------------
<S> <C> <C> <C> <C> <C>
Jack R. Ingram 1997 $ 90,000 $206,482 - -
President and Chief 1996 90,000 235,334 - $6,000
Executive Officer 1995 90,000 229,334 - 6,000
Ronald L. Siegenthaler 1997 - - $ 102,000(2) -
Executive Vice 1996 - 195,334 893,750(3) -
President 1995 - 189,334 - -
Donald E. Reigel 1997 75,000 159,591 46,901(4) 6,257
Vice President of 1996 75,000 103,223 33,602(4) 3,263
Marketing and Sales 1995 75,000 25,444 130,582(4) 6,000
Tom R. Crofford 1997 88,461 23,783(5) 33,750(3) 3,396
Vice President of 1996 81,580 - 228,625(3) 3,160
Engineering 1995 80,658 - - 2,322
Thomas A. Luce 1997 82,686 23,783(5) 79,625(3) 3,172
Vice President of 1996 77,050 - - 3,026
Service 1995 75,689 - - 2,653
</TABLE>
-----------------------------
(1) Represents the Company's contributions to the employee's account
under the Company's 401(k) plan.
(2) Represents fixed-fee retainer.
(3) Represents the dollar value of the difference between the price
paid for shares of the Company's common stock upon exercise of
stock options and the market value of such stock on the date of
exercise.
(4) Represents sales commissions paid.
(5) Represents an annual bonus equal to 1% of the Company's after tax
net income pursuant to a plan authorized by the Board of Directors
on July 29, 1997, effective commencing the 1997 fiscal year.
7
<PAGE> 10
The following table sets forth certain information regarding stock options
exercised during the 1997 fiscal year by persons named in the Summary
Compensation Table and the number and value of unexercised options held by such
persons as of the fiscal year-end. The Company has not granted stock
appreciation rights.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FY-END OPTION VALUES
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of Securities Value of Unexercised
Shares Acquired Value Realized Underlying Unexercised In-the-Money Options
Name on Exercise (#) ($)(1) Options at FY-End (#)(2) at FY-End ($)(3)
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Jack R. Ingram - - 200,000 3,600,000
Ronald L. Siegenthaler - - 200,000 3,600,000
Donald E. Reigel - - 37,500 655,125
Tom R. Crofford 3,000 34,500 16,000 288,000
Thomas A. Luce 7,000 80,500 30,500 549,000
</TABLE>
------------------------------------
(1) Value is based upon the difference between the fair market value
of the securities underlying the options on the date of exercise
and the exercise price.
(2) All of the options held by the persons named in this table were
exercisable at fiscal year end.
(3) Based upon the difference between the fair market value of the
securities underlying the options at fiscal year-end ($19.00 per
share) and the exercise price.
The Company compensates its directors who are not officers of the Company
$250.00 per meeting attended. While the Company does not have any formal
arrangement to grant stock options to its directors, the Company has previously
granted stock options to all of its outside directors. Generally, these options
are for 10,000 shares, with a vesting period of one year and an exercise period
of ten years. No other compensation was paid to directors for their services as
such during the Company's 1997 fiscal year.
EMPLOYMENT AGREEMENTS
The Company has a written employment agreement with Jack R. Ingram
concerning the terms of his compensation as the Company's President and Chief
Executive Officer. Under the agreement, Mr. Ingram receives a $90,000 base
salary, plus quarterly and annual bonuses. The quarterly bonus is based upon 50%
of the Company's quarterly net income, not to exceed $10,000 per quarter. The
annual bonus, which was amended in July, 1997 effective for the 1997 fiscal
year, is based upon seven percent (7%) of the Company's after-tax net income,
with no maximum cap. The annual bonus is paid on or before January 31 of each
year. In the event Mr. Ingram's employment with the Company is terminated for
reasons other than his resignation, Mr. Ingram will receive the full amount of
any annual and quarterly bonus earned but unpaid through the date of
termination. Mr. Ingram will forfeit any unpaid bonuses in the event of his
resignation. Mr. Ingram's employment with the Company is at-will.
The Company also has a written agreement with Ronald L. Siegenthaler
concerning the terms of his compensation as the Company's Executive Vice
President. Under this agreement, which was amended in July, 1997 effective for
the 1997 fiscal year, Mr. Siegenthaler receives a monthly retainer of $8,500.
Mr. Siegenthaler is entitled to receive the full amount of any unpaid fee due
him upon his termination of employment for any reason, including his
resignation. Mr. Siegenthaler is retained by the Company on an at-will basis.
8
<PAGE> 11
The Company entered into a written agreement with Donald E. Reigel on June
12, 1995, concerning the terms of his employment as Vice President of Marketing
and Sales. Pursuant to the terms of the agreement, Mr. Reigel receives a salary
of $75,000, plus a commission equal to 0.25% of the Company's monthly net sales
and service revenues. The agreement also provides for an annual bonus equal to
3% of the increase in the Company's annual net sales and service revenues over
those revenues for the previous fiscal year. Mr. Reigel will forfeit the right
to receive any bonus for the then current fiscal year in the event of
termination of his employment unless he is terminated by the Company without
cause, in which case he will be entitled to receive a bonus, if any, on a
prorated basis.
Mr. Reigel is subject to standard confidentiality restrictions, as well as
to a twelve month non-solicitation agreement upon termination of his employment
for any reason while Jack Ingram remains President of the Company, and a
thirty-day non-solicitation agreement if Mr. Ingram is not President at the time
of Mr. Reigel's termination. There is no set term to Mr. Reigel's employment by
the Company.
RELATED TRANSACTIONS
Mr. Barber, a director of the Company, is a shareholder in the law firm of
Barber & Bartz, a Professional Corporation, general counsel to the Company.
During the fiscal year ended October 31, 1997, the Company paid or accrued legal
fees to Barber & Bartz in the approximate amount of $292,000.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely upon a review of Forms 3 and 4 and amendments thereto
furnished to the Company during its most recent fiscal year and Forms 5 and
amendments thereto furnished to the Company with respect to its most recent
fiscal year and written representations made to the Company by its directors and
officers and by certain beneficial owners of more than ten percent of its Common
Stock, the Company knows of no director, officer, or beneficial owner of more
than ten percent of the Company's Common Stock who has failed to file on a
timely basis reports of beneficial ownership of the Company's Common Stock as
required by Section 16(a) of the Securities Exchange Act of 1934, as amended.
STOCK SPLIT PROPOSAL
(Item 2)
In March, 1997 the shareholders approved a proposal submitted by the Board
of Directors that authorized the Board in its discretion to effect a stock split
prior to the 1998 Annual Meeting. The Board has not effected a stock split to
date and its authority to do so under the 1997 shareholder resolution will
expire in March of this year. The Board believes it would be in the best
interests of the Company for the Board to maintain the ability to effect a stock
split when it believes prudent to do so, without the necessity of having to call
a special meeting of the shareholders separate from the annual meeting to vote
on such a proposal.
The Board of Directors has therefore approved a resolution which would
authorize the Board to amend Article VI of the Company's Certificate of
Incorporation to effect a stock split of the Company's Common Stock along with a
corresponding reduction in par value, or not amend the Certificate of
Incorporation and effect no stock split, as determined by the Board of Directors
in its discretion (the "Stock Split Proposal"). The Board has directed that the
Stock Split Proposal be submitted to the Company's shareholders for
consideration and approval. Under the terms of the Stock Split Proposal, the
Board of Directors will be granted authority to effect a single stock split
within the confines of the Proposal at any time prior to the next Annual Meeting
of Shareholders if the Board believes that an increase in the number of shares
of Common Stock may improve the trading market for the Company's Stock.
If the Stock Split Proposal is approved by shareholders, the Board of
Directors will be given the discretion to effect a stock split, without further
shareholder action, of not less than 5-for-4 nor greater than 2-for-1 (the
"Stock Splits"), or to effect no stock split. The Board of Directors believes
that this latitude is necessary, given the nature of the stock market and the
changing market price of the Common Stock.
9
<PAGE> 12
If the Stock Split Proposal is approved by the shareholders of the Company
at the Annual Meeting, a stock split will be effected only upon a determination
by the Board of Directors that a stock split is in the best interests of the
Company and the shareholders. In connection with any determination by the Board
of Directors to such effect, the Board will also select, at its discretion, one
of the Stock Splits proposed based upon prevailing market conditions, the likely
effect on the market price of the Common Stock and other relevant factors. The
remaining alternative Stock Splits would be abandoned by the Board without
further action by the shareholders.
Shareholders may approve or reject the proposed Stock Splits in whole but
not in part. The effective date of any stock split will be selected by the Board
of Directors (the "Effective Date") on or prior to the Company's next Annual
Meeting of Shareholders. If no stock split is effected by such date, the
authority of the Board of Directors to declare the stock split will expire.
The Stock Split Proposal also authorizes a corresponding reduction in par
value of the Company's Common Stock in relation to the ratio of the Stock
Splits. The proposed amendments to Article VI of the Company's Certificate of
Incorporation would reduce the par value per share of the Company's Common Stock
from $.10 to $.08, $.075, $.06 and $.05 in the case of a 5-for-4, 4-for-3,
3-for-2 and 2-for-1 Stock Split, respectively.
The resolution of the Shareholders approving the proposed alternative
amendments to Article VI of the Company's Certificate of Incorporation is
attached to this Proxy Statement as Appendix "A".
PURPOSES AND EFFECT OF THE STOCK SPLIT
The purpose of the stock split, if the Board elects to declare one, would
be to increase the marketability and liquidity of the Common Stock through
greater availability of shares for purchase and sale and a wider distribution
among a larger number of shareholders. Management believes that an increase in
the number of shares outstanding would encourage and facilitate trades in the
Common Stock which would, it is believed, establish a more liquid market in the
Common Stock and result in a wider distribution of the Common Stock. Although it
is not possible to predict the precise impact the stock split would have on the
trading price of the Company's Common Stock, the stock split would reduce the
per share trading price of the Common Stock, but not necessarily in the same
proportion as the increase in the number of outstanding shares.
All existing rights of shareholders will remain unchanged by the stock
split, and the relative ownership position of any shareholder, except for
immaterial variations caused by the procedures to avoid fractional shares
(discussed below), will remain unchanged. Because the par value of the Company's
Common Stock will be reduced in relation to the ratio of the Stock Splits, the
aggregate par value of the Company's Common Stock and the Company's paid-in
capital and retained earnings will be unaffected. The only change in the
Company's financial statements as a result of a stock split will be the
presentation of earnings per share, which will be reduced proportionately for
any stock split effected for all accounting periods presented.
The stock split, if undertaken in the discretion of the Board, would have
the following effect upon the number of shares of Common Stock outstanding
(which was ____________ as of the Record Date, of which ____________ were
treasury shares), assuming no other change in the number of shares of Common
Stock outstanding after the Record Date, and without taking into account any
reduction in the number of outstanding shares resulting from the procedures for
treatment of fractional shares described below.
<TABLE>
<CAPTION>
Common Stock
Stock Split Outstanding
----------- ------------
<S> <C>
5-for-4 ________
4-for-3 ________
3-for-2 ________
2-for-1 ________
</TABLE>
10
<PAGE> 13
All outstanding stock options on the Effective Date of the stock split
would be proportionately adjusted in the number of shares subject to such rights
in the event of a stock split. As of January 5, 1998, there were 579,335 shares
of the Company's Common Stock subject to stock purchase options. Because the
stock split, if effected, may range from 5-for-4 to 2-for-1 and because the
number of outstanding shares of Common Stock may change prior to the Effective
Date (e.g., upon the exercise of any outstanding stock options), existing
shareholders cannot now predict the total number of shares of Common Stock that
they will hold after the stock split, or the total number of shares of Common
Stock that will be outstanding after the stock split.
The Company's Common Stock is listed for trading on the Nasdaq National
Market System. The new shares to be issued as a result of the stock split will
be included in the Company's listing on Nasdaq. Consummation of the stock split
will have no material federal tax consequences to stockholders.
FRACTIONAL SHARES AND ADDITIONAL SHARE CERTIFICATES
No certificates or script representing fractional share interests will be
issued, and no such fractional interests will entitle the holder thereof to
vote, or to any rights as a shareholder of the Company with respect to such
fractional interests. In lieu of any such fractional interests, the Company will
pool all fractional share interests otherwise issuable and make arrangements
with Chemical Mellon Shareholder Services (the "Agent") or other third party to
act as agent for the account of all shareholders who would otherwise be entitled
to receive said fractional shares, to sell such shares on behalf of such
shareholders. As soon as practicable after the Effective Date, the Agent will
sell such interests on the basis of prevailing market prices of the Common Stock
as reported on the Nasdaq National Market System at the time of such sales, and
the Agent or the Company will pay to the holders of such interests their pro
rata share of the proceeds derived from the sale of such fractional interests.
All costs of such sale will be borne by the Company.
As soon as practicable following the Effective Date of the stock split, the
Company will mail to each shareholder of record on the Effective Date a share
certificate representing the number of shares of Common Stock that, when
aggregated with each shareholder's present number of shares, will equal the
proportionate increase in the total number of shares held by the stockholder on
the Effective Date. For example, if the Board effects a 5-for-4 stock split, and
a shareholder owns 100 shares of Common Stock on the Effective Date, the Company
will mail to such shareholder a share certificate for 25 shares which, when
added to the shareholder's 100 shares, will represent a total stock ownership of
125 shares.
RECOMMENDATION AND VOTE
The Board of Directors recommends a vote "FOR" the authorization and
approval of this proposal. The affirmative vote of the holders of a majority of
the shares of stock of the Company entitled to notice of and to vote at the
Annual Meeting is required to adopt the Stock Split Proposal.
INDEPENDENT PUBLIC ACCOUNTANTS
(Item 3)
The Board of Directors has selected Arthur Andersen, LLP as the independent
public accountants to audit the Company's financial statements for the fiscal
year ending October 31, 1998. Representatives of Arthur Andersen, LLP are
expected to be present at the Annual Meeting with the opportunity to make a
statement if they desire to do so and to respond to appropriate questions. While
ratification of the Company's selection of accountants by the Company's
shareholders is not required, in the event of a negative vote on such
ratification, the Company's Board of Directors will reconsider its selection.
Arthur Andersen, LLP audited the Company's financial statements for the year
ended October 31, 1997.
FINANCIAL INFORMATION - INCORPORATED BY REFERENCE
A copy of the Company's 1997 Annual Report, which includes the Company's
Form 10-KSB containing all financial statements as well as Management's
Discussion and Analysis of Financial Condition and Results of Operations
11
<PAGE> 14
(the "MD&A"), is being provided to the stockholders along with this Proxy
Statement. In regard to the Stock Split Proposal, the Financial Statements
appearing on pages ________ of the Form 10-KSB, and the MD&A appearing on pages
____ through ____ of the Form 10-KSB, are incorporated herein by reference.
SHAREHOLDER PROPOSALS
Under regulations of the Securities and Exchange Commission, shareholders
are entitled to submit proposals on matters appropriate for shareholder action
at subsequent annual meetings of the Company in accordance with those
regulations. In order for shareholder proposals for the Company's next annual
meeting to be eligible for consideration for inclusion in the proxy statement
and proxy relating to such meeting, they must be received by the Company no
later than October 5, 1998. Such proposals should be directed to XETA
Corporation, 4500 South Garnett, Suite 1000, Tulsa, Oklahoma 74146, Attention:
President.
OTHER MATTERS
As of the date of this Proxy Statement, the Board of Directors knows of no
matter other than those described herein that will be presented for
consideration at the Annual Meeting. However, should any other matters properly
come before the Annual Meeting or any adjournment thereof, it is the intention
of the persons named in the accompanying Proxy to vote in accordance with their
best judgment in the interest of the Company.
By Order of the Board of Directors
Robert B. Wagner
Secretary
Tulsa, Oklahoma
February 27, 1998
<PAGE> 15
Appendix "A"
RESOLUTION OF SHAREHOLDERS
RESOLVED, that prior to the Company's next Annual Meeting of Shareholders,
Article VI of the Company's Certificate of Incorporation, which currently
authorizes 10,000,000 shares of Common Stock, par value $.10 per share, and
500,000 shares of Preferred Stock, par value $.10 per share, shall be deleted
and substituted with one of the following alternative provisions to be selected
by the Board of Directors, in its discretion:
IF THE BOARD DECLARES A FIVE-FOR-FOUR STOCK SPLIT:
ARTICLE VI
The total authorized number of shares which the Corporation
shall have authority to issue shall consist of 10,500,000 shares,
10,000,000 shares of which shall be classified as Common Shares of the
par value of $.08 per share, and 500,000 shares of which shall be
classified as Preferred Shares, $.10 par value per share.
Simultaneously with the effective date of this amendment (the
"Effective Date"), each four shares of Common Stock issued and
outstanding on the Effective Date shall automatically and without any
action on the part of the holder thereof be reclassified as and changed
into five shares of the Company's Common Stock, par value $.08 per
share.
IF THE BOARD DECLARES A FOUR-FOR-THREE STOCK SPLIT:
ARTICLE VI
The total authorized number of shares which the Corporation
shall have authority to issue shall consist of 10,500,000 shares,
10,000,000 shares of which shall be classified as Common Shares of the
par value of $.075 per share, and 500,000 shares of which shall be
classified as Preferred Shares, $.10 par value per share.
Simultaneously with the effective date of this amendment (the
"Effective Date"), each three shares of Common Stock issued and
outstanding on the Effective Date shall automatically and without any
action on the part of the holder thereof be reclassified as and changed
into four shares of the Company's Common Stock, par value $.075 per
share.
IF THE BOARD DECLARES A THREE-FOR-TWO STOCK SPLIT:
ARTICLE VI
The total authorized number of shares which the Corporation
shall have authority to issue shall consist of 10,500,000 shares,
10,000,000 shares of which shall be classified as Common Shares of the
par value of $.06 per share, and 500,000 shares of which shall be
classified as Preferred Shares, $.10 par value per share.
Simultaneously with the effective date of this amendment (the
"Effective Date"), each two shares of Common Stock issued and
outstanding on the Effective Date shall automatically and without any
action on the part of the holder thereof be reclassified as and changed
into three shares of the Company's Common Stock, par value $.06 per
share.
<PAGE> 16
IF THE BOARD DECLARES A TWO-FOR-ONE STOCK SPLIT:
ARTICLE VI
The total authorized number of shares which the Corporation
shall have authority to issue shall consist of 10,500,000 shares,
10,000,000 shares of which shall be classified as Common Shares of the
par value of $.05 per share, and 500,000 shares of which shall be
classified as Preferred Shares, $.10 par value per share.
Simultaneously with the effective date of this amendment (the
"Effective Date"), each one share of Common Stock issued and
outstanding on the Effective Date shall automatically and without any
action on the part of the holder thereof be reclassified as and changed
into two shares of the Company's Common Stock, par value $.05 per
share.
FURTHER RESOLVED, that notwithstanding the approval by the shareholders of
the foregoing proposed alternative amendments, at any time prior to the filing
of any amendment to the Company's Certificate of Incorporation pursuant hereto
effecting either a five-for-four, four-for-three, three-for-two or two-for-one
stock split, the Board of Directors may, in its discretion, abandon such
proposed alternative amendments without further action by the shareholders.
2
<PAGE> 17
APPENDIX B
XETA CORPORATION PROXY FOR ANNUAL MEETING OF SHAREHOLDERS
MARCH 31, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Jack R. Ingram and Ronald L. Siegenthaler, or
either of them, as proxies and attorneys for the undersigned (with full power
to act alone and to designate substitutions), hereby revoking any prior Proxy,
and hereby authorizes them to represent the undersigned and to vote as
designated below, all the shares of Common Stock of XETA Corporation held of
record by the undersigned on February 2, 1998, at the Annual Meeting of
Shareholders to be held March 31, 1998, or any adjournment or postponement
thereof.
1. ELECTION OF DIRECTORS:
[ ] FOR all nominees listed [ ] WITHHOLD AUTHORITY to vote
below (except as marked for all nominees below.
to the contrary below).
Ron B. Barber, Donald T. Duke, Robert D. Hisrich, Jack R. Ingram, Ronald L.
Siegenthaler; and Robert B. Wagner
(INSTRUCTION: To withhold authority to vote for any individual nominee, write
that nominee's name on the space provided below.)
- -------------------------------------------------------------------------------
2. PROPOSAL TO AMEND THE CERTIFICATE OF INCORPORATION TO EFFECT A FIVE-FOR-
FOUR, FOUR-FOR-THREE, THREE-FOR-TWO, OR TWO-FOR-ONE STOCK SPLIT, OR TO
EFFECT NO STOCK SPLIT, IN THE BOARD'S SOLE DISCRETION, PRIOR TO THE NEXT
ANNUAL MEETING OF SHAREHOLDERS.
[ ] For [ ] Against [ ] Abstain
3. PROPOSAL TO RATIFY THE SELECTION OF ARTHUR ANDERSEN LLP AS INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS FOR THE COMPANY FOR THE 1998 FISCAL YEAR.
[ ] For [ ] Against [ ] Abstain
(continued on other side)
(continued from other side)
4. IN THEIR DISCRETION ON ANY OTHER MATTERS THAT MAY PROPERLY COME BEFORE THE
MEETING.
This Proxy, when properly executed, will be voted in the manner directed
herein by the undersigned shareholder. If no direction is made, this Proxy
will be voted FOR the three foregoing proposals.
- ------------------------------------- -------------------------------------
(Signature) (Print Name)
- ------------------------------------- -------------------------------------
(Signature) (Print Name)
NOTE: Signature(s) should follow exactly as your name appears on your
stock certificate. In case of joint ownership each owner should sign.
Executors, administrators, guardians, trustees, etc. should add their title as
such and where more than one executor, etc. is named, a majority must sign. If
the signer is a corporation, please sign full corporate name by a duly
authorized officer.
Dated:_____________, 1998
<PAGE> 18
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, 1997, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the two years in the period ended October 31, 1997. 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, 1997, and the results of their operations
and their cash flows for each of the two years in the period ended October 31,
1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Tulsa, Oklahoma
December 5, 1997
F-1
TENTATIVE & PRELIMINARY
<PAGE> 19
XETA CORPORATION
CONSOLIDATED BALANCE SHEET
OCTOBER 31, 1997
<TABLE>
<CAPTION>
ASSETS
(Note 2)
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents (Note 1) $ 6,011,841
Current portion of net investment in sales-type leases (Note 9) 2,122,405
Trade accounts receivable, net of allowance of $118,722 1,501,843
Inventories, net (Note 5) 1,498,748
Deferred tax asset, net (Note 4) 61,743
Prepaid expenses and other 75,827
------------
Total current assets 11,272,407
------------
NONCURRENT ASSETS:
Net investment in sales-type leases, less current portion above (Note 9) 1,381,818
Property, plant and equipment, net (Note 1 and 14) 634,905
Purchased long distance contracts, net of accumulated amortization
of $85,360 (Note 3) 938,958
Capitalized software production costs, net of accumulated
amortization of $333,066 537,578
Other 54,197
------------
Total noncurrent assets 3,547,456
------------
Total assets $ 14,819,863
============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 591,822
Unearned revenue (Note 7) 2,877,785
Accrued liabilities (Note 6) 739,696
Accrued taxes 118,874
------------
Total current liabilities 4,328,177
------------
UNEARNED SERVICE REVENUE (Note 7) 603,433
------------
NONCURRENT DEFERRED TAX LIABILITY, net (Note 4) 551,720
------------
COMMITMENTS (Notes 3, 9, 11 and 15)
SHAREHOLDERS' EQUITY (Note 8):
Common stock; $.10 par value; 10,000,000 shares authorized,
2,207,285 issued 220,728
Paid-in capital 4,859,340
Retained earnings 4,516,205
------------
9,596,273
Less- Treasury stock, at cost (259,740)
------------
Total shareholders' equity 9,336,533
------------
Total liabilities and shareholders' equity $ 14,819,863
============
</TABLE>
The accompanying notes are an integral
part of this consolidated balance sheet.
F-2
TENTATIVE & PRELIMINARY
<PAGE> 20
XETA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years
Ended October 31,
----------------------------
1997 1996
----------- -----------
<S> <C> <C>
SYSTEM SALES $ 9,405,120 $ 6,552,424
INSTALLATION AND SERVICE REVENUES 9,355,360 6,888,350
----------- -----------
NET SALES, INSTALLATION AND SERVICE REVENUES 18,760,480 13,440,774
----------- -----------
COST OF SYSTEM SALES 6,074,116 4,072,157
INSTALLATION AND SERVICE COSTS 5,884,096 4,385,535
----------- -----------
TOTAL COST OF SALES, INSTALLATION AND SERVICE 11,958,212 8,457,692
----------- -----------
Gross profit 6,802,268 4,983,082
OPERATING EXPENSES 4,139,027 3,155,981
----------- -----------
INCOME FROM OPERATIONS 2,663,241 1,827,101
INTEREST AND OTHER INCOME, net (Note 1) 667,069 662,240
----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES 3,330,310 2,489,341
PROVISION FOR INCOME TAXES (Note 4) 1,190,000 904,000
----------- -----------
NET INCOME $ 2,140,310 $ 1,585,341
=========== ===========
INCOME PER COMMON AND COMMON EQUIVALENT SHARE (Note 13) $ .90 $ .68
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 2,006,255 1,971,061
=========== ===========
WEIGHTED AVERAGE EQUIVALENT SHARES - Primary 2,365,244 2,334,316
=========== ===========
</TABLE>
The accompanying notes are an integral
part of these consolidated statements.
F-3
TENTATIVE & PRELIMINARY
<PAGE> 21
XETA CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED OCTOBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
Common Stock Treasury Stock
-------------------------- ----------------------
Number of Paid-in Retained
Shares Issued Par Value Shares Amount Capital Earnings
------------- --------- ------ ------ ------- --------
<S> <C> <C> <C> <C> <C> <C>
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
Stock options exercised 24,632 2,463 -- -- 43,828 --
Tax benefit of stock options -- -- -- -- 79,099 --
Net income -- -- -- -- -- 2,140,310
--------- -------- -------- --------- ---------- ----------
BALANCE AT OCTOBER 31, 1997 2,207,285 $220,728 (189,747) $(259,740) $4,859,340 $4,516,205
========= ======== ======== ========= ========== ==========
</TABLE>
The accompanying notes are an integral
part of these consolidated statements.
F-4
TENTATIVE & PRELIMINARY
<PAGE> 22
XETA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years
Ended October 31,
----------------------------
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,140,310 $ 1,585,341
----------- -----------
Adjustments to reconcile net income to net cash provided by
operating activities-
Depreciation 209,531 155,848
Amortization 149,512 54,912
(Gain) loss on sale of assets 3,859 (12,435)
Provision for doubtful accounts receivable 36,000 38,000
Provision for excess and obsolete inventory 33,666 --
Change in assets and liabilities-
(Increase) decrease in net investment in sales-type leases 1,450,807 (464,639)
Increase in other receivables (21,364) (226,034)
Increase in inventories (490,918) (156,732)
(Increase) decrease in prepaid income taxes 173,785 (173,785)
Decrease in deferred tax asset 31,154 189,288
(Increase) decrease in prepaid expenses and other assets 184,886 (6,238)
Increase (decrease) in accounts payable 220,349 (70,108)
Increase (decrease) in unearned revenue (182,074) 7,456
Increase (decrease) in accrued liabilities 72,858 (53,701)
Increase in accrued income taxes 197,973 --
Increase (decrease) in deferred tax liabilities (40,264) 116,063
----------- -----------
Total adjustments 2,029,760 (602,105)
----------- -----------
Net cash provided by operating activities 4,170,070 983,236
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of long distance contracts (1,024,318) --
Additions to property, plant and equipment (453,390) (237,742)
Additions to capitalized software production costs (275,913) (196,716)
Proceeds from sale of assets -- 28,948
----------- -----------
Net cash used in investing activities (1,753,621) (405,510)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Exercises of stock options and warrants 46,291 182,666
----------- -----------
Net cash provided by financing activities 46,291 182,666
----------- -----------
Net increase in cash and cash equivalents 2,462,740 760,392
CASH AND CASH EQUIVALENTS, beginning of year 3,549,101 2,788,709
----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 6,011,841 $ 3,549,101
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for income taxes $ 1,115,290 $ 554,595
=========== ===========
Noncash tax benefit of options exercised $ 79,099 $ 479,389
=========== ===========
</TABLE>
The accompanying notes are an integral
part of these consolidated statements.
F-5
TENTATIVE & PRELIMINARY
<PAGE> 23
XETA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED
OCTOBER 31, 1997
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.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents at October 31, 1997, consist of money market accounts
and commercial bank accounts.
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.
F-6
TENTATIVE & PRELIMINARY
<PAGE> 24
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.
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 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 five 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.
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.
F-7
TENTATIVE & PRELIMINARY
<PAGE> 25
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.
2. REVOLVING CREDIT AGREEMENT:
The Company maintains a $1,000,000 revolving line of credit with its bank. The
amended loan agreement expires on April 1, 1999. Advances under the 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, 1997, the Company was
in compliance with the credit agreement. No advances have been made under this
agreement during fiscal 1997 or 1996.
3. OPERATOR SERVICES BUSINESS AND PURCHASED LONG DISTANCE CONTRACTS:
Effective April 1, 1997, the Company became a subagent of MCI to market, on a
nonexclusive basis, a wide variety of long distance services to commercial
customers, including the hospitality industry. Simultaneously, the Company
entered into a marketing alliance with American Communications Services, Inc.
("AMERICOM") to jointly market these services to the hotel industry. The two
companies share in the net commissions earned from those services according to
a prescribed formula in the marketing alliance agreement.
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 are being amortized ratably over the estimated
future life of the 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.
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 October 31, 1997, was approximately $434,000.
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.
F-8
TENTATIVE & PRELIMINARY
<PAGE> 26
4. INCOME TAXES:
Income tax expense is based on pretax financial accounting income. Deferred
income taxes are computed using the liability method and are provided on all
temporary differences between the financial basis and the tax basis of the
Company's assets and liabilities.
The income tax provision for the years ending October 31, 1997 and 1996
consists of the following:
<TABLE>
<CAPTION>
1997 1996
----------- ---------
<S> <C> <C>
Current provision - federal $ 1,199,110 $ 585,023
Deferred provision (benefit) - federal (9,110) 261,353
State income taxes -- 101,000
Tax credits and other adjustments -- (43,376)
----------- ---------
Total provision $ 1,190,000 $ 904,000
=========== =========
</TABLE>
The reconciliation of the statutory income tax rate to the effective income tax
rate is as follows:
<TABLE>
<CAPTION>
Year Ended
October 31,
-------------
1997 1996
---- ----
<S> <C> <C>
Statutory rate 34% 34%
State income taxes 0% 4%
Tax credits and other adjustments 2% (2)%
---- ----
Effective rate 36% 36%
==== ====
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities as of October 31, 1997,
are presented below:
<TABLE>
<S> <C>
Deferred tax assets:
Prepaid service contracts $ 32,305
Nondeductible reserves 207,502
Other 20,559
--------
Total deferred tax asset 260,366
--------
Deferred tax liabilities:
Unamortized capitalized software development costs 182,777
Tax income to be recognized on sales-type lease contracts 501,606
Other 65,960
--------
Total deferred tax liability 750,343
--------
Net deferred tax liability $489,977
========
</TABLE>
F-9
TENTATIVE & PRELIMINARY
<PAGE> 27
5. INVENTORIES:
Inventories are stated at the lower of cost (first-in, first-out) or market and
consists of the following components at October 31, 1997:
<TABLE>
<S> <C>
Raw materials $ 712,546
Finished goods and spare parts 1,001,202
----------
1,713,748
Less- Reserve for excess and obsolete inventory 215,000
----------
Inventories, net $1,498,748
==========
</TABLE>
6. ACCRUED LIABILITIES:
Accrued liabilities consist of the following at October 31, 1997:
<TABLE>
<S> <C>
Bonuses $512,776
Taxes other than income 52,185
Vacation 78,679
Commissions 64,563
Other 31,493
--------
$739,696
========
</TABLE>
7. UNEARNED REVENUE:
Unearned revenue consists of the following at October 31, 1997:
<TABLE>
<S> <C>
Service contracts $1,522,597
Warranty service 685,955
Customer deposits 508,359
Systems shipped but not installed 42,825
Other 118,049
----------
Total current unearned revenue 2,877,785
Noncurrent unearned service revenue 603,433
----------
$3,481,218
==========
</TABLE>
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, 1996 109,967 $1.00-6.56
Exercised (14,632) $1.00-6.56
-------
Balance, October 31, 1997 95,335 $1.00-6.56
=======
</TABLE>
F-10
TENTATIVE & PRELIMINARY
<PAGE> 28
At October 31, 1997, options to purchase 83,667 shares are exercisable and
50,000 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, 1996 470,000 $1.00-1.53
Exercised (10,000) $1.31
-------
Balance, October 31, 1997 460,000 $1.00-1.53
=======
</TABLE>
On November 1, 1996, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock Based Compensation." SFAS 123
requires companies to record in their financial statements the compensation
expense, if any, related to stock options issued to employees. Alternatively,
SFAS 123 allows companies to choose only to disclose the impact of issued stock
options as if the expense had been recorded in the financial statements. The
Company has adopted this alternative method of accounting for stock options.
Had the Company recorded compensation expense related to its stock option plans
in accordance with SFAS 123, the Company's net income and earnings per share
would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
For the Year Ending
October 31,
----------------------
1997 1996
---- ----
<S> <C> <C>
NET INCOME:
As reported $2,140,310 $1,585,341
Pro forma $2,122,572 $1,572,158
EARNINGS PER SHARE:
As reported $ .90 $ .68
Pro forma $ .90 $ .67
</TABLE>
The fair value of the options granted was estimated at the date of grant using
the Modified Black-Scholes European pricing model with the following
assumptions: risk free interest rate (5.38%), dividend yield (0.00%), expected
volatility (107.47%), and expected life (6 years).
F-11
TENTATIVE & PRELIMINARY
<PAGE> 29
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>
1998 $ 2,476,328 $ 235,518
1999 1,155,759 138,127
2000 260,586 39,714
2001 12,744 18,436
2002 - 18,284
----------- ----------
$ 3,905,417 $ 450,079
==========
Less- Imputed interest (401,194)
-----------
Present value of minimum payments $ 3,504,223
===========
</TABLE>
The Company incurred operating lease costs of approximately $323,000 and
$215,000 in 1997 and 1996, respectively.
On October 30, 1997, the Company's board of directors adopted a stock buy-back
program in which management is authorized to spend up to one-third of net
income for fiscal 1997 and for each subsequent fiscal quarter thereafter until
the program is terminated. The timing and the amount of the stock repurchased,
if any, will be dictated by overall financial and market conditions and the
program will be reviewed on a regular basis.
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." Revenues from Marriott represented
23 percent of the Company's revenues for the years ended October 31, 1997 and
1996. 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, 1997.
F-12
TENTATIVE & PRELIMINARY
<PAGE> 30
11. EMPLOYMENT AGREEMENTS:
During fiscal 1997, the Company's board of directors adopted a bonus plan for
certain officers of the Company. Under the plan, annual bonuses are earned based
upon after-tax net income. In addition, the President is eligible for a
quarterly bonus based upon after-tax net income, subject to a maximum of $10,000
per quarter. The Company also has agreements with two of its directors to
perform services outside of their functions as board members. One of the board
members serves as the Company's Executive Vice President and concentrates on
sales, marketing and investor relations activities. The other board member
primarily researches and evaluates potential acquisitions. Compensation under
these agreements is a fixed monthly sum plus out-of-pocket expenses. Both
directors are considered independent contractors.
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 bonuses. Commissions and bonuses earned under the agreement are
based on total net revenues and the increase, if any, in annual net revenues.
Bonuses, commissions and other payments earned under the agreements described
above were $608,000 and $573,000 for the years ending October 31, 1997 and
1996, 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, although
one customer has demanded that it do so.
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.
The District Court in the Florida litigation (the "District Court") has heard
the cases filed against the equipment manufacturers (the "manufacturer cases"),
including Northern Telecom Inc., and found against Phonometrics and in favor of
the manufacturers. The Florida litigation against the hotels (the "hotel
cases") has been stayed pending the outcome of Phonometrics' appeal of the
Northern Telecom decision to the Federal Circuit Court. Oral arguments in such
appeal were heard on December 4, 1997, and the case now awaits a decision by
the appeals court. In its order staying the hotel cases pending the outcome of
the Northern Telecom appeal, the District Court stated that it will enter final
judgment in the hotel cases in favor of the hotels if the Federal Circuit Court
agrees with the District Court's determination of the scope of Phonometrics'
patent, as ruled in the manufacturer cases.
F-13
TENTATIVE & PRELIMINARY
<PAGE> 31
The California litigation has been stayed pending the outcome of the Florida
litigation. While it is not possible to predict the outcome of Phonometrics'
appeal of the Northern Telecom ruling or the outcome of the California
litigation, the Company remains cautiously optimistic that should Phonometrics
lose its appeal, the Florida litigation against the Company's customers would
most likely be resolved in favor of such customers, which in turn would
establish favorable precedent for use in the California litigation.
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. The Company has filed a
counterclaim against ABTS and a third-party claim against D&P Investments and
Communications Equipment Brokers based upon breach of contract. The trial date
for this case is scheduled for February 17, 1998, and discovery is
substantially complete. The Company has filed a motion for summary judgement in
its favor on all claims brought by ABTS against the Company. The Company's
motion has not yet been ruled on by the court. The Company intends to continue
to vigorously defend this action.
13. EARNINGS PER SHARE:
For fiscal year 1997, 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 the year, 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.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per
Share, which establishes standards for computing and presenting earnings per
share ("EPS") for entities with publicly held common stock or potential common
stock. SFAS No. 128 simplifies the standards for computing EPS and makes them
comparable to international EPS standards. It replaces the presentation of
primary EPS with a presentation of basic EPS, which excludes dilution. It also
requires dual presentation of basic and diluted EPS on the face of the income
statement for all entities with complex capital structures. In accordance with
SFAS No. 128, the Company will adopt this new standard on November 1, 1997. Had
SFAS No. 128 been applied to the periods presented in these financial
statements, pro forma basic EPS would have been $1.07 and $.80 for the years
ending October 31, 1997 and 1996, respectively. Pro forma dilutive EPS would
not be different from primary EPS presented in these financial statements.
F-14
TENTATIVE & PRELIMINARY
<PAGE> 32
14. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following at October 31, 1997:
<TABLE>
<S> <C>
Data processing and computer field equipment $ 1,105,379
Office furniture 127,527
Other 253,328
-----------
Total property, plant and equipment 1,486,234
Less- accumulated depreciation (851,329)
-----------
Total net property, plant and equipment $ 634,905
===========
</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 $129,000 and
$98,000 for the years ending October 31, 1997 and 1996, respectively.
F-15
TENTATIVE & PRELIMINARY
