<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 JANUARY 31, 1998
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 '
- --------------------------------------------------------------------------------
(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 March 1, 1998
- -------------------------------- ----------------------------
Common Stock, $.10 par value 2,051,771
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 - January 31, 1998 3
and October 31, 1997
Consolidated Statements of Operations - For the 4
Three months ending January 31, 1998 and 1997
Consolidated Statements of Shareholder's Equity - 5
November 1, 1997 through January 31, 1998
Consolidated Statements of Cash Flows - For the 6
Three months ending January 31, 1998 and 1997
Notes to Consolidated Financial Statements 7
2
<PAGE> 3
XETA CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
------
January 31, 1998 October 31, 1997
------------------ ------------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 5,276,308 $ 6,011,841
Current portion of net investment in
sales-type leases 2,049,540 2,122,405
Other receivables, net 2,562,451 1,501,843
Inventories, net (Note 4) 1,640,091 1,498,748
Deferred tax asset, net (Note 7) 95,531 61,743
Prepaid expenses and other assets 125,136 75,827
------------------ ------------------
Total current assets 11,749,057 11,272,407
------------------ ------------------
Noncurrent Assets:
Net investment in sales-type leases,
less current portion above 1,224,011 1,381,818
Purchased long distance contracts, net (Note 2) 887,742 938,958
Property, plant & equipment, net (Note 5) 684,294 634,905
Capitalized software production costs, net of
accumulated amortization of $363,066 at Jan.
31, 1998 and $333,066 at Oct. 31, 1997 548,783 537,578
Other assets 62,818 54,197
------------------ ------------------
Total noncurrent assets 3,407,648 3,547,456
------------------ ------------------
Total assets $15,156,705 $14,819,863
================== ==================
LIABILITIES & SHAREHOLDER'S EQUITY
----------------------------------
Current liabilities:
Accounts payable $ 613,897 $ 591,822
Unearned revenue (Note 6) 3,138,796 2,877,785
Accrued liabilities 413,614 739,696
Accrued federal and state income taxes 591,720 118,874
------------------ ------------------
Total current liabilities 4,758,027 4,328,177
------------------ ------------------
Unearned service revenue (Note 6) 541,259 603,433
------------------ ------------------
Noncurrent deferred tax liability, net (Note 7) 519,275 551,720
------------------ ------------------
Commitments (Note 2)
Shareholders' equity:
Common stock; $.10 par value; 10,000,000
shares authorized, 2,230,785 and 2,207,285
issued at January 31, 1998 and October
31, 1997, respectively 223,078 220,728
Paid-in capital 4,880,490 4,859,340
Retained earnings 5,206,904 4,516,205
------------------ ------------------
10,310,472 9,596,273
Less treasury stock, at cost (972,328) (259,740)
------------------ ------------------
Total shareholders' equity 9,338,144 9,336,533
------------------ ------------------
Total liabilities & shareholders' equity $15,156,705 $14,819,863
================== ==================
</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
Ending January 31,
1998 1997
---- ----
<S> <C> <C>
Installation and service revenues $2,890,515 $1,817,937
Sales of systems 1,956,809 1,082,792
Long distance services 203,499 -
----------------- -----------------
Net sales and service revenues 5,050,823 2,900,729
----------------- -----------------
Installation and service cost 1,754,133 1,143,271
Cost of sales 1,245,257 645,194
Cost of long distance services 75,222 -
----------------- -----------------
Total cost of sales and service 3,074,612 1,788,465
----------------- -----------------
Gross profit 1,976,211 1,112,264
----------------- -----------------
Operating expenses:
Selling, general and administrative 926,999 674,378
Engineering, research and development,
and amortization of capitalized
software production costs 130,659 98,868
----------------- -----------------
Total operating expenses 1,057,658 773,246
----------------- -----------------
Income from operations 918,553 339,018
Interest and other income 179,146 167,822
----------------- -----------------
Income before provision for income
taxes 1,097,699 506,840
Provision for income taxes 407,000 176,000
----------------- -----------------
Net income $ 690,699 $ 330,840
================= =================
Earnings per share
Basic $ 0.34 $ 0.17
================= =================
Diluted $ 0.29 $ 0.14
================= =================
Weighted average shares outstanding 2,003,912 1,995,352
================= =================
Weighted average shares equivalents 2,357,117 2,345,180
================= =================
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
XETA CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
NOVEMBER 1, 1997 THROUGH January 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Treasury Stock .
--------------------------- --------------------------
Number of
Shares Issued Paid-in Retained
& Outstanding Par Value Shares Amount Capital Earnings
------------- --------- ------ ------ ------- --------
Balance -
<S> <C> <C> <C> <C> <C> <C>
October 31, 1997 2,207,285 $220,728 (189,747) $(259,740) $4,859,340 $4,516,205
Stock options
exercised 23,500 2,350 21,150
Treasury stock
acquired (32,600) (712,588)
Net Income 690,699
--------- --------- ------- ---------- ---------- ----------
Balance -
January 31, 1998 2,230,785 $ 223,078 (222,347) $ (972,328) $4,880,490 $5,206,904
========= ========= ======= ========== ========== ==========
</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 Three Months
Ending January 31,
1998 1997
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net Income $ 690,699 $ 330,840
--------------- ----------------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 66,142 43,245
Amortization of capitalized software
production costs and long distance contracts 81,216 14,652
(Gain) loss on sale of assets 357 -
Provision for doubtful accounts receivable 9,000 9,000
Change in assets and liabilities:
(Increase) decrease in net investment in
sales-type leases 230,672 273,548
(Increase) in other receivables (1,069,608) (165,654)
(Increase) decrease in inventories (141,343) (183,352)
Decrease in prepaid income taxes - 173,785
(Increase) decrease in deferred tax asset (33,788) (28,276)
(Increase) decrease in prepaid expenses and
other assets (57,930) (62,583)
Increase (decrease) in accounts payable 22,075 78,288
Increase (decrease) in unearned revenue 198,837 303,286
Increase in accrued income taxes 472,846 52,920
Increase (decrease) in accrued liabilities (326,082) (417,321)
Increase (decrease) in deferred tax liabilities (32,445) (63,238)
--------------- ----------------
Total adjustments (580,051) 28,300
--------------- ----------------
Net cash provided by
operating activities 110,648 359,140
--------------- ----------------
Cash flows from investing activities:
Additions to capitalized software (41,196) (84,662)
Additions to property, plant & equipment (116,749) (48,660)
Proceeds from sale of assets 852
--------------- ----------------
Net cash used in
investing activities (157,093) (133,322)
--------------- ----------------
Cash flows from financing activities:
Purchase of treasury stock (712,588)
Exercise of stock options 23,500 6,563
--------------- ----------------
Net cash provided by (used in) financing activities (689,088) 6,563
--------------- ----------------
Net increase (decrease) in cash and
cash equivalents (735,533) 232,381
Cash and cash equivalents, beginning of period 6,011,841 3,549,101
--------------- ----------------
Cash and cash equivalents, end of period $5,276,308 $3,781,482
=============== ================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ - $ 282
Cash paid during the period for income taxes $ 6,034 $ 108,462
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE> 7
XETA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 1998
(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) COMMITMENT
In April 1997, the Company entered the long distance services market
through a sales sub-agency agreement with MCI and through a marketing alliance
with Americom Communications Services, Inc. ("Americom"). Simultaneously, the
Company purchased Americom's interest in existing long distance contracts at 71
hotels. Previous to the Company's purchase of these contracts, Americom had
obtained loans from the long distance carrier, which were secured by future
commissions to be earned. To effect the transfer of ownership in these
contracts, the Company guaranteed Americom's indebtedness. At January 31, 1998,
the amount of the guarantee was $366,000.
(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.
7
<PAGE> 8
(4) INVENTORIES
The following are the components of inventories:
<TABLE>
<CAPTION>
January 31, October 31,
1998 1997
---------- ----------
(Unaudited)
<S> <C> <C>
Raw materials $ 803,644 $ 712,546
Finished goods and spare parts 1,051,447 1,001,202
---------- ---------
1,855,091 1,713,748
Less reserve for excess and
obsolete inventory (215,000) (215,000)
---------- ----------
$1,640,091 $1,498,748
========== ==========
(5) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
January 31, October 31,
1998 1997
---------- ----------
(Unaudited)
Computer field equipment $1,163,751 $1,105,379
Office furniture 129,687 127,527
Other 308,178 253,328
---------- ----------
1,601,616 1,486,234
Less accumulated depreciation (917,322) (851,329)
---------- ----------
$ 684,294 $ 634,905
========== ==========
(6) UNEARNED INCOME
Unearned income consists of the following:
January 31, October 31,
1998 1997
---------- ----------
(Unaudited)
Service contracts $1,419,111 $1,522,597
Warranty service 689,718 685,955
Systems shipped, but not installed 222,010 42,825
Customer deposits 696,802 508,359
Other deferred revenue 111,155 118,049
---------- ----------
Total current deferred revenue 3,138,796 2,877,785
Noncurrent unearned service revenues 541,259 603,433
---------- ---------------
$3,680,054 $3,481,218
========== ==========
</TABLE>
8
<PAGE> 9
(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>
January 31, October 31,
1998 1997
---------- ----------
(Unaudited)
Deferred tax assets:
<S> <C> <C>
Prepaid service contracts $ 29,281 $ 32,305
Nondeductible reserves 213,490 207,502
Other 2,637 20,559
--------- ----------
Total deferred tax asset 245,408 260,366
---------- ----------
Deferred tax liabilities:
Unamortized capitalized software
development costs (186,586) (182,777)
Tax income to be recognized on sales-type
lease contracts (416,606) (501,606)
Other (65,960) (65,960)
---------- ----------
Total deferred tax liability (669,152) (750,343)
---------- ----------
Net deferred tax liability $ (423,744) $ (489,977)
========== ==========
</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, 1998. Accordingly,
reference should be made to those statements for the following:
Note Description
---- -----------
1 Business and summary of significant accounting policies
3 Operator services business and purchased long distance
contracts
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
For the quarter ending January 31, 1998, XETA Corporation (the "Company")
reported net income of $691,000 on net sales of $5,051,000. These results
represent gains of 109% and 74% in net income and net sales, respectively,
compared to the first quarter of fiscal 1997. The Company's growth continues to
be rooted in the increasing market acceptance of the Company's product
offerings, specifically the Company's PBX related products and services.
The discussion which follows provides further analysis of the major factors and
trends which management believes had the most significant impact on the
financial condition of the Company as of January 31, 1998 and the results of its
operations for the quarter then ended as compared to the same period 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
During the first quarter of fiscal 1998, the Company's cash balances decreased
$736,000 reflecting primarily the Company's repurchase of stock in accordance
with its on-going stock buy-back plan. Cash flows from operations were $111,000
including net income of $691,000, which was partially offset by changes in
working capital accounts and other operating activities. The largest change in
working capital that caused a decline in the cash earned from operations was the
$1,070,000 increase in accounts receivable during the quarter reflecting some
delay in collections on accounts. Management has been aggressively pursuing
collection of these accounts and collections have improved subsequent to the end
of the quarter.
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. During the first quarter, 32,600 shares of Company stock
were purchased in open market transactions totaling $713,000. The buy-back
program is reviewed on a regular basis and future purchases will be based upon
overall financial and market conditions.
In addition to the items discussed above, the Company invested $157,000 in
additional property and equipment, primarily field equipment to support PBX
customer installations, but also internal equipment additions to support the
growth in the Company's employee base.
Management considers the Company's financial condition to still be strong. Cash
balances represent approximately 35% of total assets and over 50% of book value.
In addition, working capital is nearly $7 million and the current ratio is 2.5.
Management believes that present working capital and funds earned from future
operations
11
<PAGE> 12
will be sufficient to meet the working capital needs required by the Company's
current expansion. This current expansion includes increases in the Company's
service and installation staff to meet the rapidly increasing customer base and
the placement of additional call accounting systems under PBX and long distance
service contracts. Additional capital is being invested in the expansion of the
Company's physical facilities. Subsequent to January 31, 1998, the Company
completed the purchase of a 13-acre tract of land in a developed, suburban
business park located approximately 3 miles from the Company's present
headquarters. Management anticipates that construction of a new 35,000 square
foot facility will begin during the second fiscal quarter. This facility will
house all of the Company's current Tulsa operations. Construction and relocation
should be completed within one year and is estimated to cost $2.5 million.
In addition to expansion of the Company's business and facilities and the stock
buy-back program, the Company is continually evaluating other alternatives to
effectively utilize its cash balances and capital resources. These primarily
include evaluation of potential synergistic acquisitions of existing businesses
or divisions, which would expand its presence in the lodging or
telecommunications industries. These types of activities resulted in the
Company's entrance into the long distance services business and the purchase of
71 long distance contracts during the second quarter of fiscal 1997. While no
assurance can be given, management believes that additional sources of capital,
both debt and equity, would be available to the Company to consummate an
acquisition, should existing cash balances be insufficient.
RESULTS OF OPERATIONS
Net sales and service revenues increased $2.15 million or 74% during the first
quarter of fiscal 1998 compared to the first quarter of fiscal 1997. This
increase in revenues consisted of an increase in installation and service
revenues of $1.08 million or 59%, an increase in systems sales of $874,000 or
81%, and an increase in long distance revenues of $203,499. While each of these
categories reported healthy increases, a clearer picture of the trends in the
Company's business can be found by examining the revenues earned by each of the
Company's three product lines. Revenues earned from PBX products and services
increased $1.9 million or 122%, call accounting related revenues increased
$51,000 or 4% and revenues from long distances services, a new product line,
increased $203,000.
The increase in revenues from PBX activities included an increase of $904,000 or
143% in sales of new PBX's and an increase of $992,000 or 107% in PBX
installation and service revenues. Management believes that the strong sales of
PBX systems is due primarily to the continued and growing acceptance of the
Company's product and service package for PBX systems, but also due to the
expanding hospitality market. In addition to providing a 24 hour-per-day Service
Center and regionally based service technicians, the Company also provides its
PBX customers with an innovative package of equipment and services that have
helped to distinguish the Company from its competitors. This package includes a
XETA XL Series call accounting system and a predetermined number of free labor
hours each month. These free hours allow customers to make some
12
<PAGE> 13
changes to their phone systems or receive non-emergency maintenance as part of
their regular monthly service fee. Providing this innovative package and
maintaining the quality of installation and maintenance services to the
Company's growing customer base has gained the Company a reputation as a market
leader resulting in continued sales to those same customers. Another key factor
in the Company's current growth is the overall expanding hospitality industry,
which is enjoying strong occupancy rates while being able to also charge higher
room rates. These trends are fueling a building boom in some sectors of the
industry, mainly smaller, extended stay hotels; however, some new construction
and major renovation of larger, full service, business hotels is also occurring.
The Company is enjoying its share of this business.
The increase in revenues from call accounting related activities consisted of a
decrease in sales of new call accounting systems of $30,000 or 7% which was
offset by a $81,000 or 9% increase in revenues from installation and service of
call accounting systems. Despite the decrease, management considers the sales of
call accounting systems, a mature product line, to be satisfactory. The increase
in call accounting service revenues reflects the fact that the Company is able
to consistently maintain and increase its base of call accounting customers
under service agreements even though sales of new call accounting systems has
returned to historical levels.
Revenues earned from long distance services, which began in April 1997, were
$203,000 for the first quarter of fiscal 1998. The Company provides MCI long
distance services through sales sub-agency agreements with L.D. Communications,
Inc. ("LDCI") and also through a marketing alliance with Americom Communications
Services, Inc. ("Americom"). Under its agreements with LDCI, the Company earns
commissions on certain calls made by guests at customer locations that have
contracted for MCI's long distance services through the Company. The Company
does not resell long distance minutes and is not required to meet any quotas for
number of calls or minutes, but simply earns a commission on particular guest
calls as defined in the contract. A portion of the commission received by the
Company is then paid to the hotel and remaining net commission is shared with
Americom according to a formula set out in the marketing alliance agreement.
During the quarter, the Company's revenues earned from long distance contracts
increased significantly from prior months, but remains below expectations.
Gross margins earned on net sales and service revenues were 39% during the first
quarter of fiscal 1998 compared to 38% for the first quarter of fiscal 1997.
This increase consisted of an increase in the gross margin earned on
installation and service revenues from 37% in the first quarter of fiscal 1997
to 39% in the first quarter of fiscal 1998. This margin is slightly higher than
the historical range of 36% to 38% on these revenues and management expects
overall gross margins earned on installation and service revenues to continue to
fall within this historical range in future quarters. The increase in gross
margins on installation and service revenues was partially offset by a decrease
in gross margins earned on systems sales from 40% in the first quarter of fiscal
1997 to 36% in the first quarter of fiscal 1998. This decline in margins earned
on systems sales reflects the higher proportion of lower margin PBX sales
compared to higher margin call accounting systems sales
13
<PAGE> 14
during the first quarter of fiscal 1998 versus the first quarter of fiscal 1997.
Operating expenses increased $284,000 or 37% in the first quarter of fiscal 1998
compared to the first quarter of fiscal 1997. A portion of this increase related
to increases in sales commissions and bonuses that are directly related to sales
and profitability, respectively. Another factor was the increase in amortization
expense related to the amortization of the purchase price of the 71 long
distance contracts purchased during the second quarter of fiscal 1997. Finally,
some increases occurred in operating expenses as a result of modest increases in
personnel related costs to support the rapid growth of the Company. While not a
significant factor in the increase in operating expenses, the Company continues
to experience elevated legal fees associated with its defense in a lawsuit
brought by a customer of the Company (See "Part II, Item 1. Legal Proceedings"
for an update on this matter.)
Interest and other income increased 11,000 or 7% for the first quarter of fiscal
1998 compared to the same quarter of fiscal 1997. This increase resulted from a
64% increase in interest income earned from cash investments offset by an 18%
decrease in interest income earned on XETAPLAN sales-type lease receivables. The
increase in earnings from cash investments reflects the significantly higher
cash balances during the fiscal 1998 period compared to the year earlier. The
decrease in interest earned from XETAPLANs reflects the declining balances of
those sales-type leases.
The Company has recorded a federal and state tax provision of $407,000,
reflecting a combined tax rate of 37% compared to an estimated combined rate of
35% in fiscal 1997. The increase in the tax rate relates to state taxes that are
estimated each year and fluctuate based on the Company's sales volumes in each
state.
OUTLOOK AND RISK FACTORS
The statements contained in this section are based on current expectations. The
statements are forward-looking in nature and actual results may differ
materially. The Company's Form 10KSB for the year ended October 31, 1997
contains an expanded discussion of risk factors that should be read in
conjunction with this report.
The Company continues to expand its market share in the hospitality industry,
which is currently a rapidly expanding and healthy market. In the near term,
management believes the Company will continue to enjoy strong sales of its
products and rapid growth of its customer base, especially for its PBX product
line. Throughout the first quarter and up to the filing of this report, the
Company's backlog of sales orders remained very strong. Currently, a slow-down
in the growth of the hospitality sector of the economy is not predicted in the
near-term; however, such a slow-down would likely negatively impact the growth
rate of the Company. Nevertheless, it is important to note that as the Company's
customer base is expanding, so is its recurring base of service revenues.
Historically, the Company has a very high customer retention rate and the
majority of those customers produce regular, monthly service revenues for the
Company. This base of recurring
14
<PAGE> 15
service revenues should help cushion the effects of a slow-down in orders for
new systems, if such a slow-down should occur.
Recently, there has been a surge in consolidation of ownership of hotel
properties, particularly by real estate investment trusts ("REITS"), some of
which have tax advantaged corporate structures. This consolidation has produced
some risks to the Company as industry personnel are shuffled and consolidated as
well. To date, the impact on the Company has been positive, but the ultimate
potential impact of these changes to the Company is still unknown.
The Company continues to invest significant resources into the development of
its XPANDER(R) system. The initial phase of the XPANDER(R) system is in
production, however, development continues on additional features and on other
XPANDER(R)-based products. To date, all installed XPANDER(R) systems are
operating satisfactorily. The market for XPANDER(R) is continuing to develop,
and while sales of these systems have not yet met management's expectations,
sales of new PBX systems have more than offset the lack of XPANDER(R) systems
ordered. Management continues to believe very strongly that a majority of
business oriented hotels will eventually convert to multiple telephone line
access and that the XPANDER(R) system will be the solution chosen by many
hoteliers.
The Company is involved in two matters of pending litigation (See "Legal
Proceedings" under Part II below). In one of these matters (Phonometrics), the
Company is only indirectly involved and based on the current status of the
litigation, management expects this matter to be resolved with no material
impact to the Company's financial statements. In the ABTS matter, the trial in
this case has been postponed pending various filings to be made by each party
and rulings to be made by the judge. No loss contingencies, other than the
estimated cost of bringing the ABTS matter to trial, have been recorded in the
financial statements. Should the ABTS case be resolved unfavorably, the Company
may have to record expenses that might cause operating results to be materially
lower than those expected.
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 including alleged violations of certain exclusivity rights
held by ABTS, 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. ABTS is seeking 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 based upon breach of contract, in which the
Company seeks money damages. Following extensive discovery, the company
filed a motion for summary judgment in September, 1997, seeking
judgment in its favor on all claims brought against it by ABTS. A
hearing was held on the motion for summary judgment on January 30, 1998
and pursuant to the court's request, the parties subsequently submitted
supplemental briefs on the motion. The court has struck the February
17, 1998 trial date which was previously set for this matter and has
set a new trial date for July 20, 1998. The parties are awaiting action
by the court with regard to a ruling on the motion for summary judgment
and a new scheduling order. The Company intends to continue to
vigorously defend this matter.
PHONOMETRICS
For the past several years, the Company has been monitoring the
progress of numerous patent infringement lawsuits filed by
Phonometrics, Inc., a Florida corporation, against certain
telecommunications equipment manufacturers and hotels who use such
equipment. 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.
The cases filed by Phonometrics against the Company's customers are
pending in the Southern District of Florida (the "Florida litigation")
16
<PAGE> 17
and the Northern District of California (the "California litigation").
In each of the lawsuits, Phonometrics is seeking damages of an
unspecified amount, based upon a reasonable royalty of the hotels'
profits derived from use of the allegedly infringing equipment during a
period commencing six years prior to the filing of the lawsuit and
ending October 30, 1990. Phonometrics is barred from seeking an
injunction against continued use of the equipment since the patent
expired in October, 1990.
With regard to the Florida litigation, the Florida court heard the
cases filed by Phonometrics against the equipment manufacturers, and
ruled against Phonometrics and in favor of the equipment manufacturers,
including Northern Telecom. The court then stayed the cases filed
against the hotels (which includes the cases involving the Company's
customers), pending the outcome of Phonometrics' appeal of the court's
decision in favor of Northern Telecom. In its order staying the hotel
cases, the Florida court stated that it would enter final judgment in
favor of all of the hotels in the event the appeals court upholds the
Florida court's decision against Phonometrics in the Northern Telecom
case. The California litigation was also stayed pending the outcome of
the Florida litigation.
On January 15, 1998, the United States Court of Appeals for the Federal
Circuit affirmed the Florida court's decision against Phonometrics and
in favor of Northern Telecom, finding that as a matter of law the
accused products cannot infringe Phonometrics' patent. However, on
February 17, 1998 Phonometrics sought to revive its case against
Northern Telecom by filing a motion with the Florida court seeking
leave to amend (for the second time) its complaint against Northern
Telecom. As of March 3, 1998, this motion was pending before the
Florida court and the stay with respect to the hotel cases remained in
place.
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: March 13, 1998 By: /s/ JACK R. INGRAM
----------------------------------
Jack R. Ingram
President
Dated: March 13, 1998 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, 1997
or performed any audit procedures subsequent to the date of our report.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Tulsa, Oklahoma
March 9, 1998
<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 10-QSB FOR THE YEAR TO DATE AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> JAN-31-1998
<CASH> 5,276,308
<SECURITIES> 0
<RECEIVABLES> 2,562,451
<ALLOWANCES> 0
<INVENTORY> 1,640,091
<CURRENT-ASSETS> 11,749,057
<PP&E> 684,294
<DEPRECIATION> 0
<TOTAL-ASSETS> 15,156,705
<CURRENT-LIABILITIES> 4,758,027
<BONDS> 0
0
0
<COMMON> 223,078
<OTHER-SE> 9,115,066
<TOTAL-LIABILITY-AND-EQUITY> 15,156,705
<SALES> 5,050,823
<TOTAL-REVENUES> 5,050,823
<CGS> 3,074,612
<TOTAL-COSTS> 3,074,612
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,097,699
<INCOME-TAX> 407,000
<INCOME-CONTINUING> 690,699
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 690,699
<EPS-PRIMARY> .34
<EPS-DILUTED> .29
</TABLE>
