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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-16231
XETA Corporation
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(Name of small business issuer in its charter)
Oklahoma 73-1130045
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
4500 S. Garnett, Suite 1000, Tulsa, Oklahoma 74146
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (918) 664-8200
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Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.10 par value
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
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Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained herein, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ X ]
The issuer's revenues for its most recent fiscal year were $18,760,000.
The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant as of December 31, 1997 (based upon the
average bid and asked prices of such shares) was approximately $29,030,577.
The number of shares outstanding of the registrant's Common Stock as
of December 31, 1997 was 2,223,285 (including 222,347 treasury shares).
Exhibit Index appears at Page 19.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement to be filed with the Securities and
Exchange Commission in connection with the Annual Meeting of Shareholders to be
held April 2, 1998 are incorporated into Part III, Items 10 through 12 hereof.
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PART I
ITEM 1. BUSINESS
DEVELOPMENT AND DESCRIPTION OF BUSINESS
XETA Corporation (the "Company"), an Oklahoma corporation formed in 1981,
provides telecommunications products and services to the lodging industry.
These products include various PBX and call accounting systems. Such products
represent the primary systems used by hotels to provide telephone-related
services and amenities to their guests, as well as the information necessary to
bill guests for telephone calls and properly manage the telecommunications
environment at the hotel. Installation and service of the Company's products
represents an integral part of the Company's business and, together with the
reliability of its systems, forms the foundation of the Company's reputation in
the lodging industry.
PRODUCTS
PBX Products. A private branch exchange ("PBX") connects the hotel to
outside telephone networks operated by common carriers and routes calls to,
from and between extensions in the hotel. PBX systems are manufactured by a
relatively small number of well-known vendors. The Company provides PBX's to
its customers through a distributorship agreement with Hitachi Telecom (USA),
Inc. ("Hitachi"). Hitachi's 5000(R) Series Digital Communications systems are
the current model distributed by the Company. These systems are equipped with
Hitachi's WelCOMM(R) lodging specific software and are state-of-the-art
telephone systems which integrate with nearly all aspects of the hotel's
operations. The Company's nation-wide, non-exclusive distributorship agreement
with Hitachi is renewable annually based upon purchasing volumes and the mutual
agreement of the parties. The Company is in its fifth year as a Hitachi
distributor and considers its relationship with Hitachi to be good.
The Company also offers a variety of PBX related products such as voice mail
systems, analog telephones, uninterruptable power supplies, announcement
systems, etc. These products are generally sold in conjunction with the sale
of new PBX systems and, with the exception of voice mail systems, are purchased
from regional and national suppliers. The Company sells voice mail systems
under a nation-wide, non-exclusive distributorship agreement with Centigram
Communications Corporation ("Centigram").
The Company has developed a proprietary PBX related product, marketed under
the name "XPANDER(R)", to respond to the growing demand for additional
telephone line access in hotel rooms. This demand is being driven by guests
who desire to connect portable computers to public and private computer
networks, such as the Internet, while still having the capability to make and
receive voice calls on a separate telephone line. To respond to this growing
demand, hotels must increase the capacity of their existing PBX, which is
typically expensive both in initial acquisition costs and in on- going
maintenance costs. XPANDER(R) provides the needed increase in capacity for
existing PBX's, usually at significantly lower acquisition and maintenance
costs. XPANDER(R) has been designed to function with any manufacturer's PBX
system and includes the same diagnostic and remote service capabilities that
have always been standard in the Company's call accounting systems. To date,
installation and operation of the twelve systems that have been installed have
been satisfactory. The Company continues to devote substantial resources to
the development of additional features and capabilities of the XPANDER(R)
system. (See "Software and Product Development" below and "Outlook and Risk
Factors" under "Management's Discussion and Analysis" for a further discussion
of XPANDER(R).)
Call Accounting Products. Call accounting systems act as a strategic link
between a hotel's PBX and its guest billing system to enable the hotel to earn
revenue from guest calls. These systems capture certain telephone usage
information such as the room number from which the call was made, the number
dialed and the length of the call; use that information to calculate call
charges, markups and taxes; and then transmit the charges to the hotel's guest
billing system. All of the Company's call accounting products are designed and
manufactured by the Company and interface to virtually all types of PBX's and
hotel billing systems.
The Company's primary call accounting products include the XL(R) Series call
accounting systems and XPERT(R) answer confirmation systems. The Company
offers call accounting products marketed under the names XL100,
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XL(R)300, XL(R)500 and XL(R)700 to meet the needs of small to large hotels.
Development of a variation of the XL(R) Series systems, tentatively called
Virtual XL, is currently being completed. Virtual XL is designed to operate on
a hotel's Local Area Network ("LAN"), thereby providing more accessibility to
the reporting features of the XL(R) software. Answer confirmation systems are
a complementary product to call accounting and are designed to minimize guest
charges for unanswered calls and to allow hotels to bill for answered calls of
short duration which would otherwise be treated as unanswered and therefore not
billed. Most call accounting systems, including the Company's systems, record
and bill guests for calls which exceed a designated duration without regard to
whether the call was answered. Thus, some unanswered calls are billed and some
completed calls are not billed because their duration was more or less,
respectively, than the designated duration. The Company's XPERT(R) systems
provide confirmation of the status of the call by monitoring trunk voltages
associated with outgoing calls, thereby improving the accuracy of the hotel's
guest billings and reducing guest complaints for improper charges.
Both the XL(R) Series and the XPERT(R) systems operate on personal
computer-based platforms. The systems are designed to operate as stand-alone
systems or, with the exception of the XL(R)700 and Virtual XL, can be
integrated as one unit capable of performing both call accounting and answer
confirmation functions, thereby reducing the customer's acquisition and service
costs. Additionally, the XPANDER(R) system can operate the XL(R) Series
software while simultaneously providing additional telephone extensions.
The Company has developed other call accounting hardware and software
products such as the "BUFFY +," "DM-1" and "XXAM." These products are usually
sold in conjunction with the Company's other systems to enhance their operation
or to provide additional features.
SYSTEM SERVICE AND WARRANTY
General. Service has been the cornerstone of the Company's success since
its inception. The Company's market, the hotel industry, is a 24 hour-per-day,
demanding environment in which any significant problem with the
telecommunications systems quickly rises to crisis status. Beyond designing
and building reliable systems, the Company has taken several steps throughout
its history to meet this need. First, extensive remote service capabilities
have been designed into each of the Company's products so that technicians in
the Service Center are able to quickly diagnose, and in most instances, correct
system malfunctions without the need of an on-site service call. Secondly, for
those cases in which an on-site service call is required, the Company has built
a national network of Company technicians as well as third party service
providers. Since the addition of PBX products in 1993, the Company has rapidly
increased the number of regional service technicians. This increase in
staffing has been needed to meet installation needs and to provide the higher
degree of on-site service required for PBX systems as compared to call
accounting products. These service capabilities and infrastructure form the
foundation of the Company's commitment to distinguish itself from its
competitors through service to its systems.
Warranty and Service Agreements. The Company provides a one-year limited
warranty, generally from the date of installation, on call accounting products
manufactured by the Company. After the warranty period, service for call
accounting products is available under remote and direct service agreements.
Under a remote service agreement, coverage of the equipment includes only those
malfunctions which can be corrected via modem or through verbal instructions
given to the customer over the telephone. Direct service agreements include
remote service coverage plus on-site service and parts and labor coverage for
defects in equipment provided by the Company. The Company's service
agreements, most of which are direct agreements, are generally for one year in
duration, although several of the Company's major customers have contracted for
multi-year agreements.
The Company also provides a one-year limited warranty against defects in PBX
equipment provided by the Company. Generally, the Company's warranty is
supported by warranties on the components from the various manufacturers of the
equipment, including Hitachi and Centigram. Any labor costs associated with
fulfilling the warranty requirements are borne by the Company. Subsequent to
the warranty period or for hotels who already have Hitachi PBX systems
installed, the Company offers a unique, hotel-oriented PBX service plan. This
service plan includes parts and labor coverage on the PBX plus a XETA XL(R)
Series call accounting system and other service options designed to meet the
specific needs of each customer and build a long-term relationship with that
customer.
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For XPANDER(R) systems, the Company provides warranty and service agreements
similar to those offered on call accounting systems.
Long Distance Services. In April, 1997, the Company began offering a
variety of MCI long distance services to hospitality customers. The Company
offers these services as an authorized sales subagent pursuant to agreements
with L.D. Communications, Inc. ("LDCI"), which has agreements with MCI for the
sale of MCI's long distance services. LDCI is a Houston-based
telecommunications firm which specializes in operator services for hotels,
hospitals and public/private payphones. In conjunction with entering into this
relationship, the Company formed a marketing alliance with Americom
Communications Services, Inc. ("Americom") to jointly market the MCI services
to the hotel industry. Americom is owned by Robert Jones, a co-founder and
former officer and director of the Company. The Company's agreements with LDCI
have primary terms of thirty-six months, but allow LDCI to terminate the
agreements earlier should its underlying contracts with MCI be terminated for
any reason.
Under its agreements with LDCI, the Company earns commissions on calls made
by guests at customer locations which have contracted for MCI's long distance
services through the Company. Under this arrangement, the Company does not
resell long distance minutes and is not required to meet any quotas for numbers
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 the remaining net commission is shared with
Americom according to a formula set out in the marketing alliance agreement.
Concurrent with the establishment of the marketing alliance with Americom,
the Company purchased Americom's interest in existing long distance contracts
at 71 hotels for $1.1 million. A majority of these hotels receive long
distance services from MCI and another carrier; the remaining hotels are served
exclusively by MCI. Most of the contracts purchased were with hotels who had
only recently subscribed for MCI long distance services and the conversion to
MCI was not complete at the time of the Company's purchase. Because the
conversion process has been somewhat slower than anticipated, revenues for this
new product offering have been lower than expected. (See "Management's
Discussion and Analysis" below for further discussion).
SOFTWARE AND PRODUCT DEVELOPMENT
Most of the Company's research and development activities during the past
year were devoted to the XPANDER(R) system (See "PBX Products" above). This
project includes significant hardware and software development. Although
XPANDER(R) is now in production, development continues on additional features
of the system as well as additional applications of this platform. The Company
expects development of XPANDER(R) related applications to continue at the same
pace for the foreseeable future. To a much lesser degree, the Company also
worked on development of the Virtual XL system (See "Call Accounting Products"
above). The purpose of this development was to enable the XL call accounting
software to run on hotel LANs and to incorporate graphical user interface
features for accessing the XL software.
MARKETING
General. The decision making process for hotel telecommunications equipment
and services is highly fragmented and can involve a wide range of personnel
such as corporate hotel chain personnel, property management company officials,
industry consultants, hotel owners and on-site financial or operating officers.
This range of potential sales channels creates complexity and extends the sales
cycle for the type of products sold by the Company. As a result of the
Company's experience and reputation within the industry, the Company has built
long term relationships with many individuals within each of these groups,
which has been a key factor in the Company's success.
Currently, the hotel industry is in a strong economic cycle in which
occupancy, room rates and profits are all increasing. As a result, the
industry also currently enjoys ease of capital formation and a flurry of new
hotel construction. These factors, coupled with the Company's strong industry
relationships, have been important to the Company's success over the past 18 to
24 months. Traditionally, however, the development of innovative and flexible
sales programs has also been a key factor in the marketing of the Company's
products. These programs were developed in response to the lack of capital and
borrowing ability or the tight budgetary controls which have historically
characterized the hotel industry. The most extensively used of these programs
has been the Company's XETAPLAN program for call accounting products. Under
this program, the Company installs a call accounting and/or answer confirmation
system and maintains it under the same terms as a direct maintenance agreement
for a
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period of three to five years in exchange for a fixed monthly fee. The primary
benefits of a XETAPLAN to the customer are the lack of upfront cash outlays and
the ability to budget costs for several years in advance. Additionally, since
the XETAPLAN is styled as a service agreement, it generally requires a less
formal approval process by the customer than a typical capital equipment
purchase. From the Company's viewpoint, most XETAPLAN agreements meet the
requirements for sales-type lease accounting and are therefore recorded as a
sale even though title to the equipment usually remains with the Company.
Another marketing program, the Risk Free Purchase Plan, was developed during
the roll-out of answer confirmation technology and involved revenue sharing
arrangements. Although the need for the Risk Free Plan declined as the answer
confirmation product cycle matured, similar revenue sharing arrangements or the
XETAPLAN program may be utilized in the future to market the Company's
XPANDER(R) system.
PBX Marketing. Notwithstanding the fact that the hotel industry is
experiencing rapid expansion, the PBX market is characterized by fierce
competition from other vendors as well as from other Hitachi distributors. To
respond to this competition, the Company has developed a package of value-added
services in its PBX product and service offering. This package includes such
amenities as providing an XL Series call accounting system, a specified number
of free service calls each month and weekly appointments by certified service
technicians to correct minor malfunctions or to perform routine maintenance.
In addition, the Company has made substantial investments in training its
technicians to service the Hitachi product line and in expanding its staff of
regional technicians. These investments have helped to ensure the delivery of
a high level of quality service and have provided continuity of service
throughout the Company's nation-wide network so that customers with multiple
locations are assured that service quality will be essentially the same in all
locations.
Sales Staff and Agents. At December 31, 1997, the Company employed 11
persons directly involved in the sales and marketing of its products and
services. In addition, since 1989 the Company has engaged Robert A. Jones
through Americom, as an independent sales agent to represent the Company's call
accounting products on an exclusive basis to some of the Company's major
customers such as Marriott Host/Marriott International and U.S. Long Distance
Corporation. The Company considers its relationship with Mr. Jones to be good.
The Company has also engaged other sales agents to represent its products to
certain hotels or segments of the market, but none of these agents represent
products to major customers of the Company.
MAJOR CUSTOMER
Marriott International/Marriott Host and its affiliates, which include
Marriott's full service hotels as well as Residence Inn by Marriott, Courtyard
by Marriott, and Fairfield Inn by Marriott (collectively "Marriott"), is a
major customer of the Company. Revenues from Marriott include sales of new PBX
and call accounting products as well as revenues earned from installation and
service activities. Marriott has been a customer of the Company since 1986.
Management considers its relationship with Marriott to be good and expects this
relationship to continue to grow. The loss of Marriott as a customer, however,
would have a material adverse effect on the operating results and financial
condition of the Company.
COMPETITION
The competition for sales of both PBX and call accounting products is fierce
and is dominated by a few companies. Competition in both product lines
includes large, well-known companies which have greater name recognition and
more resources than the Company, but who do not concentrate their product and
service offerings on the lodging market. Although this competition is
formidable, the Company has created a niche by customizing its marketing
programs, products and its style of service to the requirements of the lodging
industry. In addition to adapting the Company to this specialized niche and
creating effective pricing structures and product features, management believes
that the Company's most effective tool in the battle for market share has been
the Company's commitment to distinguish itself by concentrating on the
performance and reliability of its systems and by providing the highest level
of service possible.
The competition for contracts for long distance services is also fierce and
dominated by large, well-known companies, primarily the large long distance
companies. Typically, to win the competition to provide long distance services
to a multi-property customer, the winner will provide an up front cash bonus
and significant monthly
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commissions on calls made at each property. The Company has made several
proposals to provide such services and has tried to compete by including XL(R)
Series call accounting systems and services along with up front cash bonuses.
To date, however, the Company has not secured any significant contracts beyond
those purchased from Americom (See "Long Distance Services" under "Services"
above).
MANUFACTURING
The Company assembles all of its proprietary products from an inventory of
components, parts and sub-assemblies obtained from various suppliers. The
Company purchases the components from a variety of distributors at prices which
fluctuate based on demand and volumes purchased. Some components, although
widely distributed, are manufactured by a single, usually foreign source and
are therefore subject to shortages and price fluctuations if manufacturing is
interrupted. The Company maintains adequate inventories of components to
mitigate short-term shortages and believes the ultimate risk of long-term
shortages is minimal. Also, the rapid pace of change in the technology of
PC-based components has resulted in some components being phased out of
production. The Company has typically been able to substitute more advanced
components without substantial redesign of its systems and with minimal effect
on overall system cost. There can be no assurance given, however, that future
obsolescence of key components would not result in unanticipated delays in
shipments of systems due to redesign and testing of assemblies.
The Company uses outside contractors to assemble its proprietary printed
circuit boards. The components and blank circuit boards are purchased and
inventoried by the Company and supplied to the outside contractor for assembly
and quality control testing. The Company monitors outside contractor's
facilities and procedures to review production techniques and quality control
procedures. The Company also performs various quality control procedures,
including powering up completed systems and allowing them to "burn-in" before
being prepared for a specific customer location, and performing final testing
prior to shipment.
EMPLOYEES
At December 31, 1997, the Company employed 112 employees, including 1
part-time employee.
COPYRIGHTS, PATENTS AND TRADEMARKS
The Company has registered as United States domestic trademarks the names
"XETA," "XETAXCEL," "XACT," "XPERT," "XPERT+," "XL" and "XPANDER" for use in
the marketing of its services and systems to the lodging industry. All of
these marks are registered on the principal register of the United States
Patent and Trademark Office ("PTO"), with the exception of XPANDER(R) which is
registered on the supplemental register.
The Company has a patent pending on the technology for XPANDER(R). No
assurance can be given that a patent will ultimately be issued by the PTO.
Other than this pending application, the Company holds no patents for its
hardware or software technology. The Company claims copyrights on all of its
proprietary circuit boards and software.
GOVERNMENT REGULATION
The Federal Communications Commission (the "FCC") and state governments
regulate the telecommunications industry. The FCC's decision in 1981 to remove
restrictions on the resale of telephone transmission service created a
substantial market for telephone call accounting systems, upon which the
Company capitalized by entering the telephone call accounting market. None of
the Company's business activities, however, are directly regulated by the FCC
or the states. No recent action by the FCC or existing law or regulation has
had or is expected to have a significant impact upon the Company's business.
None of the Company's products or services require approval from any
governmental agency. The Company's computer products are subject to radio
frequency emanation and electrical safety standards imposed by the FCC. The
cost of complying with such standards, as well as with any applicable
environmental laws, is immaterial.
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ITEM 2. PROPERTIES
The Company leases its principal executive office, assembly and Service
Center, all of which are located on two floors of a ten story office building
in Tulsa, Oklahoma. The building and surrounding property are considered to be
in good condition. The Company's lease expires on April 30, 1999.
On October 1, 1997, the Company entered into a contract to purchase a
thirteen acre tract of land within a suburban business park located
approximately three miles from the Company's present location, for the purpose
of constructing a facility specifically designed for the Company's operations.
The purchase price is $611,582. A title examination revealed an easement on
the property which the Company has required be vacated as a condition to
closing. It is expected that this condition can be satisfied, and closing of
the purchase is to take place within five days after completion of proceedings
to vacate the easement. Plans for the new headquarters are near completion and
would enable the Company to house all of its current Tulsa operations on one
floor, as well as provide for future expected growth. Estimated cost of
construction is $2 million. The Company plans to use its cash reserves to
finance both the land purchase price and the cost of construction. Currently,
the Company expects to occupy the planned facilities just prior to the
expiration of its current lease, if construction goes as planned.
The Company leases other office space in Boulder, Dallas, Indianapolis,
Altamonte Springs, Florida and Marlton, New Jersey from which its regional
sales staff operates. The Company has informal office arrangements with its
regional technicians to allow for some storage of spare parts.
ITEM 3. 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' 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 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.
Extensive discovery has been conducted by the Company. On September 9, 1997,
the Company filed a motion for summary judgment in its favor on all claims
brought by ABTS against the Company. A hearing is set on the motion for
summary judgment, together with a pre-trial conference, on January 30, 1998.
The trial date in this action is currently scheduled for February 17, 1998.
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") 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
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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. Oral arguments in the Northern Telecom appeal were
heard on December 4, 1997, and on January 15, 1998, the United States Court of
Appeals for the Federal Circuit affirmed the Florida court's decision against
Phonometrics, finding that as a matter of law the accused products cannot
infringe Phonometrics' patent. The California litigation has been stayed
pending the outcome of the Florida litigation.
In light of the foregoing ruling by the United States Court of Appeals, and
in light of the language in the Florida court's order which stayed the hotel
cases pending the Northern Telecom appeal, which has now been resolved in favor
of Northern Telecom, the Company expects that the Florida litigation will be
resolved in the near future in favor of its hotel customers. The Company is
also optimistic that this precedent will be used by the court in California to
resolve the California litigation in favor of the hotels.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock, $.10 par value, is currently traded on the
over-the-counter market and is reported in the National Association of
Securities Dealers Automated Quotation ("NASDAQ") System under the symbol
"XETA."
The high and low bid prices for the Company's Common Stock, as reported by
the National Association of Securities Dealers through its NASDAQ System, for
each of the quarters during the Company's two most recent fiscal years are set
forth below. These prices reflect inter-dealer prices, without adjustment for
retail mark-ups, mark-downs or commissions and may not necessarily represent
actual transactions.
<TABLE>
<CAPTION>
1997 1996
---- ----
High Low High Low
---- --- ---- ---
Quarter Ending:
- --------------
<S> <C> <C> <C> <C>
January 31 8 5/8 6 3/4 20 3/8 6 1/2
April 30 10 3/8 6 3/4 11 1/2 6 3/8
July 31 15 5/8 9 1/4 11 7 1/2
October 31 22 3/4 14 1/4 10 7 1/2
</TABLE>
The Company has never paid cash dividends on its Common Stock. Payment of
cash dividends is dependent upon the Company's earnings, capital requirements,
overall financial condition and other factors deemed relevant by its Board of
Directors. The Company is currently committed to reinvesting its available
capital in the future growth and success of the Company. It is therefore
unlikely that the Company would pay cash dividends in the foreseeable future.
As of October 31, 1997, the latest practicable date for which such
information is available, the Company had 117 shareholders of record. In
addition, based upon information received annually from brokers holding stock
in the Company on behalf of beneficial owners, the Company has approximately
2,000 beneficial shareholders.
No sales of unregistered securities were made by the Company during its 1997
fiscal year.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
For the fiscal year ending October 31, 1997, the Company reported net
income of $2.1 million on net sales of $18.8 million, both record amounts.
These results represent a 35% increase in net income and 40% increase in net
sales. Management attributes this growth to the continued market acceptance of
the Company's product and service offerings and the overall health of the
lodging industry.
During the year, the Company took several steps to expand its
business. By far the most rewarding was the continued focus on expanding its
base of PBX customers through sales of new PBX systems and through securing
contracts to service existing PBX installations. Also, the Company continued
development of its first proprietary PBX product, XPANDER(R). Finally, the
Company became authorized as a sales sub-agent to market MCI long distance
services. These developments, as well as additional analysis of the major
factors and trends which management believes had the most significant impact on
the financial condition of the Company as of October 31, 1997 and the results
of its operations for the fiscal year ending October 31, 1997 compared to 1996,
are discussed below.
RESULTS OF OPERATIONS
The overall increase in net sales of 40% consists of an increase in
systems sales of 44% and an increase in installation and service revenues of
36%. However, a clearer picture of the trends in the Company's business can be
found by examining the revenues earned by product line. During fiscal 1997,
total revenues earned from PBX related activities increased $5.4 million or 68%
while revenues from call accounting related activities decreased $59,000 or 1%.
The increase in PBX related revenues consists of an increase of $3.1
million in sales of new PBX systems and an increase of $2.3 million in PBX
installation and service revenues, both representing 68% gains. After four
years of offering PBX installation and maintenance services to the lodging
industry, the Company has clearly established itself as a major competitor in
this field. The success of this endeavor has been due to the Company's ability
to provide an innovative package of equipment and services at competitive
prices and the establishment of a consistently high level of quality service
throughout its national network of Company technicians. Another important
factor in the Company's recent success is the strength of the overall
hospitality market, which is enjoying strong occupancy percentages while
charging higher average room rates. This healthy market is fueling
refurbishment of existing hotels and new construction of smaller, suite-type
hotels. Management believes that the Company's strong growth rates for its PBX
product line reflect both the Company's gaining of market share, evidenced by
the fact that the Company now has PBX service contracts with several major,
multi-property hotel groups with whom the Company had no prior existing
relationship, and the expansion of the overall lodging market. .
Included in PBX systems sales are sales of XPANDER(R) systems, the
Company's first proprietary PBX product. XPANDER(R) is designed to be a cost
effective solution for hotels to meet increasing guest demand for multiple
telephone line access in hotel rooms. During fiscal 1997, the Company began
production of XPANDER(R) units and six systems were installed during the year.
Revenues from these systems were relatively immaterial in fiscal 1997; however,
management believes that this product will become a significant source of sales
and service revenues as demand continues to grow.
The decrease in revenues earned from call accounting related
activities consists of a decrease of $256,000 or 13% in call accounting systems
sales and an increase of $197,000 or 6% in call accounting service revenues.
The decrease in call accounting systems sales was expected as these sales have
returned to their historical levels from the inflated levels experienced during
the seven quarters from August, 1994 to April, 1996 related to mandated changes
in dialing patterns in North America. Generally, call accounting is a mature
product line and most hoteliers have aligned themselves with particular call
accounting vendors. Therefore, the Company's sales of new call accounting
systems are limited to replacement systems and systems to support new hotel
construction by the Company's existing customers. However, since most of the
Company's call accounting customers purchase a service contract from the
Company after expiration of their standard limited warranty, service revenues
earned from call accounting related activities continues to grow.
During the year, the Company became an authorized sales sub-agent of
various MCI long distance services, focusing primarily on 0+ service (operator
assisted and calling card calls), to the hotel industry. The Company also
signed a marketing alliance agreement with Americom Communications Services,
Inc. ("Americom"), to jointly market these services to the lodging market.
Concurrent with the execution of the marketing alliance, the Company
10
<PAGE> 11
purchased 71 long distance contracts from Americom for $1.1 million. A
majority of these hotels receive 0+ long distance services from MCI and another
carrier. The remaining hotels are served exclusively by MCI. Most of these
purchased contracts were with hotels which only recently contracted for MCI
service and therefore required action on the part of MCI for conversion to MCI
service. This conversion process has been much slower than expected and as a
result, revenues earned from these contracts have been lower than expected and
were immaterial compared to the overall revenues of the Company during fiscal
1997. Subsequent to year end, revenues have increased to more acceptable
levels, although still below initial expectations. Due to the results
experienced so far from this new service offering, management cannot provide
assurance as to whether this new product offering will produce significant
revenues in the future.
Gross margins earned on net sales and service revenues decreased from
37% in fiscal 1996 to 36% in fiscal 1997. This decrease consisted of a
decrease in the gross margins earned on systems sales from 38% in fiscal 1996
to 35% in fiscal 1997. This decline in margins earned on systems sales
reflects the increasing proportion of PBX sales as a percentage of total net
systems sales. The gross margins earned on sales of new PBX systems are
significantly lower than those earned on sales of new call accounting systems,
since PBX's are a distributed product in a highly competitive market. The
decline in gross margins caused by the decline in margins on systems sales was
partially offset by a small increase in the gross margins earned on
installation and service revenues from 36% in fiscal 1996 to 37% in fiscal
1997, which was within management's target range. Historically, the margins
earned on installation and service revenues has ranged between 36% and 38%.
Management is not currently aware of any trends that would affect its future
service margins.
Operating expenses increased 31% in fiscal 1997 compared to fiscal
1996. This increase primarily consisted of increases in expenses related to
sales levels and profitability such as commissions and bonuses. Other expenses
which increased during the year included amortization expense and legal fees.
Amortization expense increased as a result of the cost of the 71 long distance
contracts purchased from Americom. The purchase price of $1.1 million is being
amortized over the expected life of the underlying contracts. Legal fees
increased as a result of the Company's vigorous defense, including extensive
discovery, in the ABTS case (see Legal Proceedings, Note 12 to the Consolidated
Financial Statements). In addition to fees paid as of year end, the Company
has accrued approximately $85,000 in expected additional costs to complete its
defense through the scheduled trial date in February, 1998.
Interest and other expense increased 1% in fiscal 1997 compared to
fiscal 1996. Interest income earned by the Company consists of interest earned
on the Company's XETAPLAN sales-type leases and cash investments. During the
period of inflated call accounting systems sales from August, 1994 to April,
1996, the Company installed many of its systems under the Company's XETAPLAN
program. These XETAPLAN contracts qualified for sales-type lease accounting
treatment and as a result, the Company was able to recognize a sale and a lease
receivable at the time the contract was placed in service. Each month, as
payments are made on these sales-type leases, the Company earns interest income
on the outstanding lease receivable. This portfolio of XETAPLANs, which ranged
from three to five years in length, is beginning to mature and therefore is
producing less interest income each month. Largely offsetting this decline is
the interest income earned on the increase in cash balances derived from
profits and from XETAPLAN payments. If and when the Company's cash balances
are used for expansion (See "Liquidity and Capital Resources" below), the
decline in interest income due to the maturing of the XETAPLAN portfolio will
become more apparent.
The Company has recorded a provision for federal and state income
taxes of $1.19 million, reflecting a combined tax rate of 36% for fiscal 1997
which is the same as for fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1997, the Company's cash balances increased $2.5 million
to $6.0 million. This increase was primarily from cash earned from operations
of $4.2 million. Of this increase, $1.8 million was used in various investing
activities. These included the purchase of 71 long distance contracts from
Americom for $1.0 million (additional reimbursements of start-up costs not
reflected as investing activities in the cash flow statement were paid to
Americom, bringing the total of this transaction to $1.1 million as previously
described) (see "Results of Operations" above). Additionally, $453,000 was
invested in equipment, primarily related to placing call accounting systems in
the field to support the Company's PBX and long distance service offerings, but
also including additions to computer systems to support the Company's growth in
personnel. Finally, $276,000 was invested in capitalized software production
costs.
Management considers the Company's financial condition to have
improved during fiscal 1997 from its already strong position at the beginning
of the year and believes that its present working capital and future operating
cash
11
<PAGE> 12
flows will be sufficient to meet anticipated operating needs and planned
expenditures. During the last quarter of fiscal 1997, the Company set plans
for two significant future expenditures: the construction of a new facility to
house the Company's Tulsa operations and the adoption of a stock buy-back
program. Currently, the Company is in contract to purchase a 13 acre tract of
land in a developed, suburban business park located approximately 3 miles from
its present location. Closing on the land is scheduled to take place
immediately following the satisfaction of a title requirement raised by the
Company, which management expects will be satisfactorily resolved.
Simultaneously, the Company is finalizing plans for a new 35,000 square foot
headquarters facility which would house all of the Company's current Tulsa
operations. The Company expects to invest approximately $2 million in this
project.
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 stock repurchased
will be dictated by overall financial and market conditions and the program
will be reviewed on a regular basis. Subsequent to October 31, 1997, the
Company repurchased 32,600 shares of its stock in open market transactions
totaling $713,000.
Management continually evaluates other alternatives to utilize its
cash balances and capital resources. The Company has, during the past three
years, evaluated several potential synergistic acquisitions to expand its
presence in the lodging industry, and intends to continue to do so in the
future.. These analyses have afforded management the opportunity to explore its
potential borrowing ability with its bank and to discuss potential secondary
stock offerings with other financial contacts. In addition, management
believes that the Company's recent stock price more closely reflects the proper
value of the Company compared to previous years and hence, makes the stock a
viable alternative for use in compensating a potential acquisition target's
owners. While the Company's ability to obtain additional debt or equity
capital in the future would depend upon a multitude of factors, including the
specifics of any proposed transaction, management believes that sufficient
capital could be obtained at a reasonable cost to finance an acquisition or
other expansion of the Company's operations.
OUTLOOK AND RISK FACTORS
The statements in this section entitled "Outlook and Risk Factors," as
well as other statements throughout this report regarding trends or future
performance or events, are based on management's current expectations. These
statements are forward-looking and actual results may differ materially. All
such statements should be read in conjunction with the risk factors discussed
herein and elsewhere in this report.
Management will continue to pursue its present strategy focused on
providing telecommunications equipment and service to the lodging industry. In
the near-term, growth should continue from expansion of the Company's base of
PBX customers through sales of new PBX systems and through securing service
contracts on existing PBX systems. Management believes that the Company is in
a position to continue to increase its market share in the near term in this
expanding market. Near-term growth should also be achieved through accelerated
market acceptance of the XPANDER(R) system. While a slow-down in the growth of
the hospitality sector of the U.S. economy is not predicted in the immediate
future, such a slow-down would most likely have an adverse effect on the
Company's growth rate.
The Company sells PBX systems under a distributorship agreement with
Hitachi Telecom (USA), Inc., ("Hitachi"). The Company considers its
relationship with Hitachi to be good and strongly believes that future renewals
to its distributorship agreement can be negotiated on mutually beneficial
terms, however, if such a renewal could not be achieved, the Company's
operating results could be lower than those expected.
Long-term growth for the Company will more likely be achieved through
development of additional innovative new products and through acquisitions of
existing technologies or businesses. To that end, management is devoting
significant attention and resources into each of these areas, some or all of
which will need to be successful for the Company to maintain the growth in
sales and net income that it has recently enjoyed. Most important to the
Company's long-term growth and success however, is maintaining the Company's
reputation for quality service that is tailored to the needs of the hospitality
industry.
One of the by-products of the healthy hospitality industry has been a
surge in consolidation of ownership of hotel properties. Much of this activity
has been fueled by real estate investment trusts ("REIT's"), an investment
vehicle designed to allow investors to pool their capital in a tax free
corporate structure in to order to invest in commercial real estate. Although
some hotel companies operate as traditional REIT's, the requirements of
maintaining REIT status, as prescribed by the Internal Revenue Code, prohibit
traditional REIT's from benefiting
12
<PAGE> 13
from the profitability of the operations of a hotel. A hybrid entity, called a
Paired-Share REIT, avoids some of these disadvantages by pairing ownership in
two entities, one being the property owner (similar to the traditional REIT)
and the other being the hotel operating company. This operating structure
allows the Paired-Share REIT to enjoy not only the rental income from the real
estate owned, but also the profitability generated by the hotel's operations,
all essentially in a tax-free corporate entity. The formation of Paired-Share
REIT's has been prohibited by the IRS since 1983, but 4 such entities were
allowed to continue operating under the structure, none of which were
significant hotel owners or operators until recently. Two of those entities
have begun to accelerate their growth by making significant acquisitions of
hotel properties and in some cases, entire hotel chains. As a result,
significant personnel changes are taking place within some of the Company's
customers. While management believes that its reputation and strong industry
relationships will prove beneficial as ownership consolidation continues, the
ultimate potential impact of these changes to the Company's business and future
growth is not known, and on a case-by-case basis, could range from a
significantly improved relationship to a significantly impaired or severed
relationship.
The Company believes that it is taking the necessary steps to avert
any possible disruption in its business that might occur as a result of the
so-called "Year 2000 Problem". This potential problem relates to the
programming logic in nearly all computers in which years are input as only
two-digits, representing the last two digits of the year. The leading digits
are usually embedded in the programming logic as "19" with the result that if
"00" is input as the year, the computer relates it to the year 1900 rather than
the year 2000. In order to address this problem in its own products, the
Company has developed changes to the software for its various products and will
be field-testing those changes at several locations with its major customers
over the next few months. After successful field testing and debugging, this
software upgrade will be rolled-out to all of the Company's customers. It is
not expected that this upgrade will produce significant revenues for the
Company. The Company has or will address the requirements to bring all of its
internally used systems into year 2000 compliance. These include systems for
such critical functions as service, accounting and product development. The
costs associated with year 2000 compliance are not expected to be material.
The Company is involved in two matters of pending litigation (See
"Legal Proceedings" under Part I above). No loss contingencies, other than the
estimated costs of bringing one of the cases to trial in February 1998, have
been recorded in the financial statements. Should the outcome of either of
these matters be unfavorable, however, the Company may have to record expenses
which might cause operating results to be materially lower than those expected.
The Company continues to focus nearly all of its research and
development activities on the XPANDER(R) system and potential XPANDER(R)-based
future products. Much of the Company's long-term anticipated growth is linked
to the success of these development activities. To date, management has not
encountered any technological barriers that would prevent the Company from
pursuing continued development toward new capabilities and products based on
the XPANDER(R) platform. However, some of the hardware and software
development underway is highly complex and a technological barrier could arise
which might delay or prevent the Company from realizing the anticipated revenue
gains from these products. To date, the Company is not aware of any competitor
products similar to XPANDER(R) and management believes that the limited nature
of the hospitality market niche provides some protection from potential
development of competing products by larger, more well-financed companies. To
further solidify its position, the Company has applied for a patent on
XPANDER(R), but it is too early in the application process to determine whether
the Company will receive a patent and the protections associated therewith.
13
<PAGE> 14
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS OF THE COMPANY PAGE
- -------------------------------------------- ----
<S> <C>
Report of Independent Public Accountants F-1
Consolidated Financial Statements
Consolidated Balance Sheet - October 31, 1997 F-2
Consolidated Statements of Operations - For
the Years Ended October 31, 1997 and 1996 F-3
Consolidated Statements of Shareholders' Equity -
For the Years Ended October 31, 1997 and 1996 F-4
Consolidated Statements of Cash Flows - For the
Years Ended October 31, 1997 and 1996 F-5
Notes to Consolidated Financial Statements F-6
</TABLE>
14
<PAGE> 15
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS; COMPLIANCE WITH SECTION 16(A) OF THE
EXCHANGE ACT.
The directors, executive officers and significant employees of the Company
are set forth below. All officers and members of the Board of Directors serve
for a term of one year or until their successors are duly elected and
qualified. Directors may be removed by holders of 66 2/3% of the Company's
outstanding voting shares.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Jack R. Ingram 54 President, Chief Executive Officer and
Director
Ronald L. Siegenthaler 54 Executive Vice President and Director
Robert B. Wagner 36 Vice President of Finance, Chief Financial
Officer, Treasurer, Secretary and
Director
Tom R. Crofford 45 Vice President of Engineering
Charles H. Rowland 56 Vice President of Manufacturing
Thomas A. Luce 41 Vice President of Service
Donald E. Reigel 43 Vice President of Marketing and Sales
Ron B. Barber 43 Director
Donald T. Duke 47 Director
Dr. Robert D. Hisrich 52 Director
</TABLE>
A brief account of the business experience for the past five years of the
individuals listed above follows.
MR. INGRAM has been President of the Company since July 1990 and a director
of the Company since March 1989. Mr. Ingram's business experience prior to
joining the Company was concentrated in the oil and gas industry. Mr. Ingram
holds a Bachelor of Science Degree in Petroleum Engineering from the University
of Tulsa.
MR. SIEGENTHALER has been Executive Vice President of the Company since July
1990 and a director of the Company since its incorporation. Since 1974,
through SEDCO Investments, a partnership in which Mr. Siegenthaler is a
partner, and as an individual, Mr. Siegenthaler has been involved as partner,
shareholder, officer, director, or sole proprietor of a number of business
entities with significant involvement in fabrication and marketing of steel,
steel products and other raw material, real estate, oil and gas, and
telecommunications. Mr. Siegenthaler received his Bachelor's Degree in Liberal
Arts from Oklahoma State University.
MR. WAGNER joined the Company in July 1988 as Chief Accounting Officer. He
became the Company's Vice President of Finance and Chief Financial Officer in
March, 1989, and a member of the Board of Directors in March 1996. Mr. Wagner
is a Certified Public Accountant licensed in Oklahoma and received his Bachelor
of Science Degree in Accounting from Oklahoma State University.
MR. CROFFORD joined the Company in October 1982 as a design engineer and has
been its Vice President of Engineering since January 1988. Mr. Crofford has
worked in the field of computer engineering since 1977. He is a member of the
Institute of Electrical and Electronics Engineers.
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.
15
<PAGE> 16
MR. LUCE joined the Company in November 1982 as Installment Director. He
was later promoted to Director of Installation and Service and became Vice
President of Service in June 1986.
MR. REIGEL joined the Company in June 1993 as PBX Product Sales Manager. He
was promoted to Vice President of Marketing and Sales in June 1995. Prior to
his employment with the Company, Mr. Reigel served as a national accounts sales
manager for WilTel Communications Systems for approximately a year and a half.
He has been active in the development of major national accounts in the
telecommunications industry since 1987. Mr. Reigel received his Bachelor of
Science Degree in Business from the University of Colorado.
MR. BARBER has served as general counsel to the Company since its
incorporation. He has been a director of the Company since March 1987. Mr.
Barber has been engaged in the private practice of law since October 1980 and
is a shareholder in the law firm of Barber & Bartz, a Professional Corporation,
in Tulsa, Oklahoma. Mr. Barber is also a Certified Public Accountant licensed
in Oklahoma. He received his Bachelor of Science Degree in Business
Administration (Accounting) from the University of Arkansas and his Juris
Doctorate Degree from the University of Tulsa.
MR. DUKE has been a director of the Company since March 1991. He is
President of Duke Resources, an oil and gas consulting firm, and a principal in
Tandem Oil and Gas Company, L.L.C. Prior to joining Tandem Oil and Gas
Company, he was President and Chief Operating Officer of Hadson Petroleum
(USA), Inc., a domestic oil and gas subsidiary of Hadson Corporation and was
responsible for all phases of exploration and production, land, accounting,
operations, product marketing and budgeting and planning. Mr. Duke has a
Bachelor of Science Degree in Petroleum Engineering from the University of
Oklahoma.
DR. HISRICH has been a director of the Company since March 1987. He
occupies the A. Malachi Mixon III Chair in Entrepreneurial Studies and is
Professor of Marketing and Policy Studies at the Weatherhead School of
Management at Case Western Reserve University in Cleveland, Ohio. Prior to
assuming such positions, he occupied the Boviard Chair of Entrepreneurial
Studies and Private Enterprise and was Professor of Marketing at the College of
Business Administration for the University of Tulsa. He is also a marketing
and management consultant. He is a member of the Board of Directors of the
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.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely upon a review of Forms 3 and 4 furnished to the Company during
its most recent fiscal year, and Forms 5 and written representations related
thereto furnished to the Company with respect to its most recent fiscal year,
the Company knows of no director, officer, or beneficial owner of more than ten
percent (10%) of its common stock who failed to file on a timely basis reports
required by Section 16(a) of the Securities Exchange Act of 1934, as amended,
during the most recent fiscal year.
16
<PAGE> 17
ITEM 10. EXECUTIVE COMPENSATION.
That portion of the Company's definitive Proxy Statement appearing under the
caption "Executive Compensation," to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A on or before February 27, 1998 and to be
used in connection with the Company's Annual Meeting of Shareholders to be held
April 2, 1998 is hereby incorporated by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
That portion of the Company's definitive Proxy Statement appearing under the
caption "Security Ownership of Certain Beneficial Owners and Management," to be
filed with the Securities and Exchange Commission pursuant to Regulation 14A on
or before February 27, 1998 and to be used in connection with the Company's
Annual Meeting of Shareholders to be held April 2, 1998 is hereby incorporated
by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
That portion of the Company's definitive Proxy Statement appearing under the
caption "Related Transactions," to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A on or before February 27, 1998 and to be
used in connection with the Company's Annual Meeting of Shareholders to be held
April 2, 1998 is hereby incorporated by reference.
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The Company filed no reports on Form 8-K during the last quarter of
the fiscal year ended October 31, 1997.
(b) Exhibits made a part of this report are set forth in the Exhibit Index
which appears at Page 19.
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
XETA CORPORATION
JANUARY 27, 1998 BY: /s/Jack R. Ingram
-----------------------------------------
JACK R. INGRAM, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
JANUARY 27, 1998 /s/Jack R. Ingram
--------------------------------------------
JACK R. INGRAM, PRESIDENT,
CHIEF EXECUTIVE OFFICER AND DIRECTOR
JANUARY 27, 1998 /s/Robert B. Wagner
--------------------------------------------
ROBERT B. WAGNER, VICE PRESIDENT OF FINANCE,
CHIEF FINANCIAL OFFICER, AND DIRECTOR
JANUARY 23, 1998 /s/Donald T. Duke
--------------------------------------------
DONALD T. DUKE, DIRECTOR
JANUARY 26, 1998 /s/Ronald L. Siegenthaler
--------------------------------------------
RONALD L. SIEGENTHALER, DIRECTOR
18
<PAGE> 19
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Xeta Corporation:
We have audited the accompanying consolidated balance sheet of Xeta Corporation
(an Oklahoma corporation) and subsidiaries as of October 31, 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.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Tulsa, Oklahoma
December 5, 1997
F-1
<PAGE> 20
XETA CORPORATION
CONSOLIDATED BALANCE SHEET
OCTOBER 31, 1997
ASSETS
(Note 2)
<TABLE>
<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
<PAGE> 21
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:
Selling, general and administrative 3,629,250 2,751,715
Engineering 120,076 116,440
Research and development 240,189 232,914
Amortization of capitalized software production costs 149,512 54,912
----------- -----------
Total 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
<PAGE> 22
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
<PAGE> 23
XETA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years
Ended October 31,
----------------------------
1997 1996
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
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
<PAGE> 24
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
<PAGE> 25
REVENUE RECOGNITION
The Company recognizes revenue from sales-type leases as discussed above under
the caption "Lease Accounting". Service revenue is recognized monthly over the
life of the related sales-type lease or service agreement on a straight-line
basis. Revenue from sales and installations of call accounting systems is
generally recognized 75 percent upon shipment of the system with the remaining
25 percent recognized upon installation where the Company is responsible for
installation. Revenue from sales of PBX systems are generally recognized 100
percent upon installation. Service and installation costs are expensed as
incurred.
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
<PAGE> 26
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 DISTRANCE CONTRACTS:
Effective April 1, 1997, the Company became authorized as a sales subagent to
market, on a nonexclusive basis, a wide variety of MCI long distance services to
commercial customers, including the hospitality industry. Simultaneously, the
Company entered into a marketing alliance with Americom Communications Services,
Inc. ("AMERICOM") to jointly market these 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
<PAGE> 27
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
<PAGE> 28
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
<PAGE> 29
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
<PAGE> 30
9. COMMITMENTS:
Minimum future annual payments to be received and paid under various leases are
as follows:
<TABLE>
<CAPTION>
Sales-Type
Lease Payments Operating
October 31, Receivable Leases
- ----------- --------------- ----------
<S> <C> <C> <C>
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
<PAGE> 31
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
F-13
<PAGE> 32
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.
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 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
<PAGE> 33
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
<PAGE> 34
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEC No. Description
- ------- -----------
<S> <C>
(2) PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR SUCCESSION - None.
(3) (ii) BYLAWS - Previously filed as Exhibit 3(ii) to the Company's Annual Report on Form 10-KSB for the fiscal
year ended October 31, 1994.
(4) INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES - Previously filed as Exhibits 3.1,
3.2 and 3.3 to the Company's Registration Statement on Form S-1, Registration No. 33-7841.
(9) VOTING TRUST AGREEMENT - None.
(10) MATERIAL CONTRACTS -
10.1 HCX500(R) Authorized Distributor Agreement dated April 1, 1997 between Hitachi Telecom (USA), Inc.
and XETA Corporation - Omitted as substantially identical to the Authorized Distributor Agreement
dated April 8, 1993 between Hitachi America, Ltd. and XETA Corporation which was previously filed
as Exhibit 10.1 to the Company's Annual Report on Form 10-KSB for the fiscal year ended
October 31, 1993.
10.2 Contract for Sale of Real Estate dated October 1, 1997 between Badger Meter, Inc. as Seller and
the Company as Buyer.
10.3 Letter Agreement dated November 24, 1997 regarding Contract Extension between Badger Meter, Inc.
and the Company.
(11) STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS - None.
(13) ANNUAL OR QUARTERLY REPORTS, FORM 10-QSB None.
(16) LETTER ON CHANGE IN CERTIFYING ACCOUNTANT - None.
(18) LETTER ON CHANGE IN ACCOUNTING PRINCIPLES - None.
(21) SUBSIDIARIES OF THE COMPANY -
(22) PUBLISHED REPORT REGARDING MATTERS SUBMITTED TO VOTE - None.
(23) CONSENT OF EXPERTS AND COUNSEL -
23.1 Consent of Arthur Andersen, L.L.P.
(24) POWER OF ATTORNEY - None.
(27) FINANCIAL DATA SCHEDULE
(99) ADDITIONAL EXHIBITS - None.
</TABLE>
19
<PAGE> 1
09/09/97
EXHIBIT 10.2
[REALTOR LOGO]
"THIS IS A LEGALLY BINDING CONTRACT; IF NOT UNDERSTOOD SEEK ADVICE FROM AN
ATTORNEY."
CONTRACT FOR SALE OF REAL ESTATE
THIS CONTRACT is entered into by and between BADGER METER, INC.,
("Seller") and XETA CORPORATION ("Buyer").
Upon approval by both Seller and Buyer, as evidenced by their signatures hereto,
a valid and binding contract of sale shall exist, the Effective Date of which
shall be the latest date for approval by all parties as indicated below, and the
terms and conditions of which are as follows:
1. SALE. Seller agrees to sell and convey to Buyer by warranty deed and Buyer
agrees to purchase the following described real estate (the "Property") located
in Tulsa County, Oklahoma:
See attached Exhibit "A", being the east 13 acres of the 20.475 acre site.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
together with all improvements thereon, if any, in their present condition,
ordinary wear and tear excepted.
2. PURCHASE PRICE: The total purchase price is $611,582.00, payable as
follows:
$10,000.00 on execution of this Contract, as earnest money and part payment of
the purchase price (the "Earnest Money"), receipt of which is acknowledged by
Seller, which has been delivered to the Broker identified below. The Earnest
Money shall be deposited with FirsTitle & Abstract Services, Inc. ("Escrow
Agent") in an escrow account within three (3) days of the Effective Date of this
Contract; and the balance of the purchase price in cash, cashier's or certified
check upon delivery of the deed (the "Closing").
3. FINANCING CONDITIONS: The obligations of the Buyer are specifically subject
to the provisions of the Financing Supplemental Agreement, if any, attached to
and made a part of this Contract as Exhibit N/A.
4. CONDITION OF PROPERTY, SELLER'S REPRESENTATIONS, INSPECTIONS, AND DISCLAIMER:
The Buyer agrees and acknowledges that Seller, Broker(s) and their agents, are
not experts regarding the condition of the Property. No representations,
warranties, or guarantees regarding the condition of the Property, or
environmental hazards, are expressed or implied except as may be specified by
Seller in Paragraphs 4(A), 4(B) and 11 below.
(A) FLOOD. Seller represents to the best of Seller's knowledge the Property
has not been damaged or affected by flood, storm run off water, or storm sewer
backup. Within 60 days from the Effective Date of this Contract, Buyer, at
Buyer's expense, may enter upon the Property to investigate and conduct tests to
satisfy himself/herself as to flood and/or water history and water risk
attendant to the Property. If, upon Buyer's investigation, the Buyer is
dissatisfied with any of the flood and water history and water risk attendant to
the Property, the Buyer may cancel and terminate this Contract and receive a
refund of the Earnest Money by delivering written notice to the Seller as
provided in Paragraph 15 below within twenty-four (24) hours of the expiration
of the time period specified in this paragraph.
(B) ENVIRONMENTAL REPRESENTATIONS AND INSPECTIONS. EXCEPT AS MAY BE
SPECIFIED IN PARAGRAPH 11 BELOW, Seller represents to the best of Seller's
knowledge, that there have been no hazardous substances, as defined by the
Federal Environmental Protection Agency, stored, released, disposed or used on
the Property, including underground storage tanks; that there have been no
special use permits, variances, or other land use authorizations issued
concerning waste disposal on the Property; that the Property is neither listed
with, nor adjacent to a site listed with, the Environmental Protection Agency
as a hazardous waste site; and that Seller has received no notice of any legal
or administrative proceedings regarding environmental issues affecting the
Property.
Within 60 days from the Effective Date of this Contract, Buyer, Buyer's
agents, employees, independent contractors, engineers, surveyors, and
representatives, shall have the right to enter upon the Property to survey,
inspect, and conduct such environmental, soil, air, hydrocarbon, chemical,
carbon, asbestos, lead-based paint, and other tests Buyer deems necessary
or appropriate. If the results of any such tests are unsatisfactory to Buyer,
Buyer may cancel and terminate this Contract by delivering written notice to
the Seller as provided in Paragraph 15 below, within twenty-four (24) hours
of the expiration of the time period specified in this paragraph and receive
a full refund of all Earnest Money deposited.
/s/ [ILLEGIBLE] /s/ [ILLEGIBLE]
--------------- ---------------
Buyer Seller
STANDARD/LAND 8/96 (A111) Copyright 1996 - Greater Tulsa Association of
REALTORS(R) - All rights reserved Page 1 of 4 Pages
<PAGE> 2
CONTRACT FOR SALE
(C) ACCEPTANCE OF PROPERTY. If Buyer fails to (i) investigate the water and
flood history, water risk, or environmental risk attendant to the Property; or
(ii) deliver such notices in the manner specified, Buyer accepts the flood and
water history and water risk, and any environmental risk attendant to the
Property and accepts all portions of the Property which are subject to Buyer's
right of inspection in Paragraphs 4(A) and 4(B) above, in the condition or state
which existed at the expiration of the time periods stated in the above
paragraphs. Unless otherwise agreed upon, in writing, Buyer, by Closing or
taking possession of the Property, shall be deemed to have accepted the Property
in its then condition, including fixtures and equipment, if any. No warranties,
express or implied, by Seller, or Seller's agents, with reference to the
condition of the Property or any fixtures or equipment shall be deemed to
survive the Closing.
(D) RISK OF LOSS. Until Closing or transfer of possession, risk of loss to
the Property, ordinary wear and tear excepted, shall be upon Seller; after
Closing or transfer of possession, whichever comes first, such risk shall be
upon Buyer.
5. NON-FOREIGN SELLER. Seller represents and warrants that at the time of
acceptance hereof and at Closing, Seller is not a "foreign person" as such term
is defined in Section 1445(f) of the Internal Revenue Code of 1954. At the
Closing, and as a condition thereto, Seller shall furnish to Buyer an affidavit,
in form and substance acceptable to Buyer, signed under penalty of perjury and
containing Seller's United States Social Security and/or taxpayer identification
numbers, to the effect that Seller is not a foreign person within the meaning of
Section 1445(f) of the Internal Revenue Code.
6. TAXES AND PRORATIONS: The Seller shall pay in full: (i) all special
assessments against the Property upon the date of Closing, whether or not
payable in installments; (ii) all taxes, other than general ad valorem taxes for
the current calendar year, which are a lien on the Property upon the date of
Closing, including the cost of documentary stamps to be attached to the Deed;
and (iii) the cost of any item of workmanship or material furnished on or prior
to the date of Closing which is or may become a lien on the Property. Unless
otherwise specified in Paragraph 11, the following items shall be prorated
between the Seller and the Buyer as of the date of Closing: (i) rents, if any;
and (ii) general ad valorem taxes for the current calendar year, provided that,
if the amount of such taxes has not been fixed, the proration shall be based
upon the rate of levy for the previous calendar year. The Buyer and Seller shall
each pay one-half (1/2) of any Escrow or Closing fees charged.
7. CLOSING: Subject to the provisions of Paragraph 6 and subject to the
fulfillment of any conditions to the Closing specified in Paragraph 11, the
Closing shall be held on or before December 15, 1997 (the "Closing Date"). If
there are valid objections to title which require correction, the Closing Date
shall be extended for the time permitted under Paragraph 6. At or prior to the
Closing, the Seller shall deliver to the Listing Broker a duly executed and
acknowledged warranty deed conveying the Property to the Buyer, for delivery to
the Buyer upon payment of the purchase price. Unless otherwise agreed in writing
possession shall be transferred at Closing.
8. BREACH OR FAILURE TO CLOSE: If after the Seller has performed Seller's
obligations under this Contract and, if within five (5) days after the date
specified for Closing under Paragraph 8, the Buyer fails to make payments or to
perform any other obligation of the Buyer under this Contract, then the Seller
may, at Seller's option, cancel and terminate this Contract and retain all sums
paid by the Buyer, but not to exceed 5% of the purchase price, as liquidated
damages, or pursue any other legal or equitable remedy for the breach of this
Contract by the Buyer. The Seller and the Buyer agree that the undersigned
Broker(s) may retain and shall be paid one-half (1/2) of such retained funds,
not exceeding the agreed upon commission for services in obtaining this
Contract. If the Buyer performs all of the obligations of Buyer and Seller
breaches this Contract or fails to perform any of Seller's obligations, then
Buyer shall be entitled to either cancel and terminate this Contract, return the
abstract, if any, to Seller and receive a refund of the Earnest Money, or pursue
any other legal or equitable remedy. In the event of any court action or
proceeding to enforce any provision hereof, the prevailing party shall be
entitled to receive from the other party all reasonable costs of the action,
including attorneys' fees.
9. EFFECT: This Contract shall be executed in compliance with Paragraph 14 below
and when executed by both Seller and Buyer, shall be binding upon and inure to
the benefit of Seller and Buyer, their heirs, legal representatives, successors
and assigns. This Contract sets forth the complete understanding of Seller and
Buyer and supersedes all previous negotiations, representations, and agreements
between them and their agents. This Contract can only be amended or modified by
a written agreement signed by Seller and Buyer. In executing this Contract,
both Seller and Buyer agree to the terms of the Broker(s) Receipt and Agreement
contained below.
/s/ [ILLEGIBLE] /s/ [ILLEGIBLE]
------------------ -----------------
Buyer Seller
STANDARD/LAND 8/96 (A111) Copyright 1996 - Greater Tulsa Association of
REALTORS(R) - All rights reserved Page 2 of 4 Pages
<PAGE> 3
CONTRACT FOR SALE
10. SPECIAL CONDITIONS:
(A) Seller acknowledges that Buyer is simultaneously making offers on
multiple real estate sites, including the Property. Seller grants
to Buyer the right to conduct a feasibility study on the Property
during the first sixty (60) days immediately following the
Effective Date of this Contract. The feasibility study may
include, at Buyer's sole discretion and without limitation, an
examination of topography, soil samples, physical building
layouts, environmental, flooding, purchase incentives, taxes, tax
abatements and utilities. Buyer shall have the right, in its sole
and absolute discretion and without liability to Seller, to
cancel this Contract at any time during said sixty (60) day
period, upon written notice to Seller. Upon such cancellation,
Buyer shall receive a full refund of all earnest money deposited,
except that Seller shall be entitled to request that Buyer waive
any remaining portion of sixty (60) days in the event a bona fide
purchaser makes an offer to purchase the property at any time
during the sixty day period. In the event Buyer refuses, Seller
shall be entitled to retain the earnest money in the event Buyer
subsequently elects to cancel the Contract as set forth above.
(B) Buyer and Seller agree to cooperate and assist with the
construction of a 35' drainage way as noted on Exhibit "A", the
cost of which shall be at Buyer's sole expense. Seller agrees to
grant easements for this construction as required on Exhibit "A".
11. SUPPLEMENTAL AGREEMENTS: THE FOLLOWING SUPPLEMENTAL AGREEMENTS, IF ANY,
ARE ATTACHED TO AND BECOME A PART OF THIS CONTRACT.
Exhibit "A" - Legal Description
Exhibit "B" - Title Insurance and Survey Supplemental Agreement
12. AGENCY DISCLOSURE/COMMISSION: The Oklahoma Real Estate Commission has
adopted the following rule:
Rule 605-10-15-2 - Agency Disclosure: After July 1, 1990, in every
real estate sales transaction involving a licensee, as agent or
principal, the licensee must clearly disclose to the Buyer and Seller
the agency relationship(s). The disclosure must be made prior to the
Buyer and Seller entering into a binding agreement with each other;
and when a binding agreement is signed, the prior agency disclosure
must be confirmed in a separate provision, incorporated in or attached
to that agreement.
The parties to this transaction hereby acknowledge that, prior to the parties
entering into this Contract, the following disclosures were clearly made to each
of the parties:
The Listing Broker, as defined below, is acting as the agent of:
The Seller X Both the Seller and Buyer (Consensual Dual
----- ----- Limited Agent)
The Selling Broker, as defined below, is acting as the agent of:
The Seller The Buyer X Both the Seller and Buyer
----- ----- ----- (Consensual Dual Limited Agent).
The Selling Broker is not acting as an agent for the Buyer or Seller.
-----
It is further acknowledged and agreed by the parties that the Seller will pay
the Listing Broker 6% of the purchase price at Closing as a commission for
services rendered in this real estate transaction.
13. BINDING EFFECT AND ENFORCEABILITY OF CONTRACT: Before this Contract shall
be binding and can be enforced by either party, the following acts of execution
and deliveries shall be completed:
EXECUTION AND DELIVERY OF CONTRACT DOCUMENTS, COUNTERPARTS. The
parties agree that the Contract between them shall be evidenced by
either a single executed Contract upon which each of them shall
place their signatures, or by each of them placing their signatures
on separate complete (carbon, photo or fax) copies "counterparts" of
the Contract documents. The Contract shall be binding only upon the
delivery to each party, or their agent, of either (I) a Contract
containing the original signature of both parties or (II) a
counterpart containing either the original or a copy of the signature
of the other party.
/s/ [ILLEGIBLE] /s/ [ILLEGIBLE]
------------------ -----------------
Buyer Seller
STANDARD/LAND 8/96 (A111) Copyright 1996 - Greater Tulsa Association of
REALTORS (R) - All rights reserved Page 3 of 4 Pages
<PAGE> 4
CONTRACT FOR SALE
14. NOTICE: Any notice provided for herein shall be given in writing, sent by
(a) personal delivery, (b) United States mail, postage prepaid, or (c) by FAX,
to the Escrow Agent, with copies to the other parties, addressed as follows:
To Escrow Agent: Closing Agent:
FirsTitle & Abstract Services, Inc. FirsTitle & Abstract Services, Inc.
--------------------------------------- -----------------------------------
c/o David Hageman c/o David Hageman
--------------------------------------- -----------------------------------
7666 East 61st Street 7666 East 61st Street
--------------------------------------- -----------------------------------
Suite 230 Suite 230
--------------------------------------- -----------------------------------
Tulsa, OK 74133 Tulsa, OK 74133
--------------------------------------- -----------------------------------
FAX (918) 461-1416 FAX (918) 461-1416
--------------------------------------- -----------------------------------
Phone No. (918) 250-1641 Phone No. (918) 250-1641
--------------------------------------- -----------------------------------
To Buyers: To Sellers:
Xeta Corporation Badger Meter, Inc.
--------------------------------------- -----------------------------------
c/o Jack Ingram c/o Rod Cumber
--------------------------------------- -----------------------------------
4500 S. Garnett, Suite 1000 6118 E. 15th St.
--------------------------------------- -----------------------------------
Tulsa, OK 74146 Tulsa, OK 74112
--------------------------------------- -----------------------------------
--------------------------------------- -----------------------------------
FAX FAX (918) 832-9962
--------------------------------------- -----------------------------------
Phone No. (918) 664-8200 Phone No. (918) 836-8411
--------------------------------------- -----------------------------------
or such other address as shall hereafter be designated in writing. Any such
notice shall be deemed to have been given upon receipt by the Escrow Agent.
15. BROKER(S) RECEIPT AND AGREEMENT: The Buyer and Seller mutually warrant and
represent that the undersigned Broker(s) is/are the only Broker(s) involved in
this transaction. The undersigned Tulsa Properties, Inc. Broker acknowledges
receipt of the Earnest Money referred to in Paragraph 2 and agrees to deposit it
with the Escrow Agent in accordance with the terms of the above Contract,
applicable laws, rules, and regulations governing such funds. The Broker(s)
and/or Escrow Agent shall be entitled to accept Buyer's personal check for the
Earnest Money and endorse it for deposit without recourse. If Seller does not
approve the above Contract the Earnest Money shall be returned to Buyer.
APPROVED AND AGREED TO BY BUYER: APPROVED AND AGREED TO BY SELLER:
This 25 day of September, 1997 This 1st day of October, 1997
XETA CORPORATION BADGER METER, INC.
--------------------------------------- -----------------------------------
By: /s/ [ILLEGIBLE] By: /s/ [ILLEGIBLE]
--------------------------------------- -----------------------------------
Its: President Its: President
--------------------------------------- -----------------------------------
--------------------------------------- -----------------------------------
LISTING BROKER: SELLING BROKER:
This 26 day of September, 1997 This 26 day of October, 1997
TULSA PROPERTIES, INC. TULSA PROPERTIES, INC.
--------------------------------------- -----------------------------------
By: /s/ W.H. MIZENER By: /s/ ROBERT D. STEPHENS
W.H. Mizener Robert D. Stephens
--------------------------------------- -----------------------------------
Principal Broker Sales Associate
ALWAYS HAVE YOUR TITLE EXAMINED BY AN EXPERIENCED TITLE ATTORNEY.
STANDARD/LAND 8/96 (A111) Copyright 1996 - Greater Tulsa Association of
REALTORS(R) - All rights reserved
Page 4 of 4 Pages
<PAGE> 5
EXHIBIT "A"
Exhibit "A" is a map of a Land Plat depicting the entire 20.475-acre site
within which the 13.00 acres which is the subject of the Contract of Sale for
Real Estate sits. The map depicts the location and shape of the 13.00 acres
within the 20.475-acre site. The image of the 13.00-acre tract can best be
described by its legal description, as follows:
Part of Lot One (1), Block One (1), GREENWAY BUSINESS PARK III, an Addition
to the City of Broken Arrow, Tulsa County, State of Oklahoma, according to
the Recorded Plat No. 4796, being more particularly described as follows:
BEGINNING at a point 466 feet East of the Northwest corner of said Lot 1;
thence S 89 degrees 53'46" E 643.85 feet; thence N 35 degrees 58'48" E 170
feet; thence Southeasterly 52.65 feet along a curve to the left with a
radius of 717.36 feet and a tangent bearing of S 54 degrees 01'12" E;
thence S 58 degrees 13'32" E 156.16 feet; thence Southeasterly 161.88 feet
along a curve to the left with a radius of 441.39 feet; thence S 41 degrees
03'02" W 393.26 feet; thence South 60.20 feet; thence S 00 degrees 02'00" W
263.30 feet; to a point on the North right-of-way line of West Tacoma
Street; thence continuing along said right-of-way the following: N 89
degrees 55'59" W 155.22 feet; Northwesterly 118.36 feet along a curve to
the right with a radius of 276.21 feet; N 65 degrees 20'27" W 14.17 feet;
Westerly 137.44 feet along a curve to the left with a radius of 320.21
feet; N 89 degrees 55'59" W 260 feet; Southwesterly 140.56 feet along a
curve to the left with a radius of 540.65 feet; thence N 00 degrees
18'14" E 610.86 feet to the point of beginning.
<PAGE> 6
EXHIBIT "B"
For use with contract forms
approved by the Greater Tulsa
Association of REALTORS (R)
TITLE INSURANCE AND SURVEY SUPPLEMENTAL AGREEMENT
THIS AGREEMENT supplements and is part of the attached Contract of
Sale of Real Estate (the "Contract")
between BADGER METER, INC. (SELLER)
--------------------------------------------------------
and XETA CORPORATION (BUYER)
------------------------------------------------------------
dated this_______day of______________, 19__ relating to the following
described real estate:
See attached Exhibit "A", being the east 13 acres of the 20.475 acre site.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
In lieu of the provisions of Paragraph 6 of the Contract, which has been
stricken, the following shall be substituted:
1. TITLE AND SURVEY
A. Seller shall, at Seller's expense, within 15 days after waiver
or expiration of Buyer's cancellation right under Paragraph 11
(Special Conditions) to the Contract:
(a) Furnish Buyer a Commitment for title insurance from a
title insurance company acceptable to Buyer (the "Title
Commitment"), addressed to the Buyer, covering the Property,
and binding the title company to issue to Buyer, at closing,
an ALTA standard form Owner's Policy of Title Insurance (the
"Title Policy"), in the amount of the purchase price, with
such Title Commitment setting forth the status of the title to
the Property, showing and having attached copies of all liens,
claims, encumbrances, easements, rights-of-way, encroachments,
reservations, restrictions, and any other matters affecting
the Property.
INITIAL
[ILLEGIBLE]
[ILLEGIBLE]
ALTA
(b) Furnish Buyer two (2) copies of a survey of the Property,
prepared by a licensed surveyor, dated or updated no more than
six (6) months prior to the effective date of this Contract
(the "Survey"). The Survey shall show:
(1) The boundary lines, dimensions and area of
the land indicated thereon;
(2) The location of all fences, buildings,
driveways, monuments, and other improvements
located within the boundary lines;
(3) The location of all setback lines;
(4) The location of all easements, alleys,
streets, roads, rights-of-way, and other
matters of record affecting such land,
together with the instrument, book and page
number indicated;
(5) If the Property is unplatted, a metes and
bounds description of the Property;
(6) The scale, the North direction, the beginning
point, distance to the nearest intersecting
street, and point of reference from which the
Property is measured;
(7) If the Property is located in (i) a floodway;
(ii) a 100-year flood plain; (iii) a "flood
prone area", as defined by the United States
Department of Housing and Urban Development,
pursuant to the U.S. Flood Disaster
Protection Act of 1973, as amended; or (iv)
an area classified by the Federal Emergency
Management Agency as having special flood
hazards, reflected by Flood Insurance Rate
Map Panel Number _____________________ ,
dated _____________________________ ,
covering the area in which the Property is
situated; and shall identify the portion of
the Property located in such floodway,
100-year flood plain, flood prone area, or
flood hazard area.
Such Survey shall be in a form sufficient to permit the title
company issuing the Title Policy to remove the printed survey
exception from the policy.
B. Notwithstanding anything to the contrary contained in this
Contract, in the event the transaction contemplated by this
Contract does not close, for any reason, Buyer shall be
responsible for the payment of the cost of the Survey.
/s/ [ILLEGIBLE] /s/ [ILLEGIBLE]
--------------- ---------------
BUYER SELLER
TITLE INS. & SURVEY SUPPLEMENTAL 8/96 (A215) Page 1 of 2 Pages
<PAGE> 7
TITLE INSURANCE AND SURVEY SUPPLEMENTAL AGREEMENT
C. The legal description of the Property contained in the Survey, if
different from the description contained in Exhibit "A" attached to
this Contract, once approved by Buyer and Seller, shall be substituted
for the description of the Property contained in such Exhibit, and the
Contract shall be deemed amended by the substitution of the legal
description of the Property contained in the Survey as a new Exhibit
"A", without the necessity of the parties executing any further
amendment to the Contract.
D. Buyer shall have ten (10) days from the receipt of the information
referred to above to examine the same and specify to Seller, in
writing, those items subject to which Buyer will accept title to the
Property (the "Permitted Encumbrances"), and those matters which Buyer
finds objectionable (the "Encumbrances"). No matter in the Title
Commitment shall be construed as a valid Encumbrance to title under
this Contract unless it is so construed under the Title Examination
Standards of the Oklahoma Bar Association, where applicable. In case
of valid Encumbrances to the title in the Title Commitment, Seller
shall have 30 days, or such additional time as may be agreed to, in
writing, by Seller and Buyer, to cure or remove such Encumbrances. If
Buyer does not deliver to Seller a written notice, specifying those
items which are Permitted Encumbrances and Encumbrances, within ten
(10) days after the receipt by Buyer of the information referred to
above, then all of the items reflected in the Title Commitment and
Survey shall be considered to be Permitted Encumbrances.
E. On the date of closing of this transaction, as provided in the
Contract, Seller shall furnish to Buyer a copy of the Title
Commitment, fully marked and initialed by the title company issuing
the Owner's Title Policy, which marked Title Commitment shall reflect
the exceptions and provisions to be contained in the Owner's Title
policy upon issuance thereof. The Title Commitment shall commit to
issue to Buyer an owner's policy of title insurance, covering all of
the Property, in the sum of the purchase price, and written on an
American Land Title Association (ALTA) Owner's Policy form, or its
equivalent, and, except for the Permitted Encumbrances as defined
above, showing only the printed exceptions and exclusions contained in
the said ALTA form of Owner's Title Policy. The premium charged by the
title company for the expense of providing such Title Policy shall be
borne by Seller.
F. The Title Commitment shall permit deletion of the Survey exceptions,
at Buyer's sole cost and expense. Additional extended coverage,
including waiver of the standard exceptions and an ALTA standard
zoning endorsement, which reflects the zoning classification of the
Property, shall also be provided by Seller, at Buyer's request, and
costs for such extended coverage in excess of the base policy premium
shall be reimbursed to Seller by Buyer at closing.
G. Seller may, but shall have no obligation to, at Seller's sole cost and
expense, cure or remove all Encumbrances. If Seller fails to cause all
of the Encumbrances to be removed or cured at least ten (10) days
prior to the closing date, or if Seller notifies Buyer of Seller's
decision not to cure or remove some, or all, of the Encumbrances,
Buyer's sole remedy shall be to:
(1) Terminate this Contract by giving Seller written notice
thereof, which notice must be given within five (5) days after
Seller notifies Buyer of Seller's decision not to cure or
remove the Encumbrances; in which event, the earnest money,
together with all interest earned thereon, shall be returned
to Buyer, and neither party shall have any further rights,
duties, or obligations hereunder; or
(2) Elect to purchase the Property subject to the Permitted
Encumbrances and the Encumbrances not so removed or cured; in
which event, the Encumbrances not removed or cured shall be
deemed Permitted Encumbrances.
ALL OTHER PROVISIONS of the attached Contract not amended herein shall remain
in full force and effect.
<TABLE>
<S> <C>
APPROVED AND AGREED TO BY BUYER APPROVED AND AGREED TO BY SELLER
This 25 day of September, 1997 This 1st day of October, 1997
XETA CORPORATION BADGER METER
- ---------------------------- --------------------------------
By: /s/ [ILLEGIBLE] By: /s/ [ILLEGIBLE]
------------------------ ----------------------------
Its: President Its: President
----------------------- ----------------------------
</TABLE>
Page 2 of 2 Pages
TITLE INS. & SURVEY SUPPLEMENTAL 8/96 (A215)
<PAGE> 1
EXHIBIT 10.3
[TULSA PROPERTIES, INC. LETTERHEAD]
November 24, 1997
Mr. Rod Cumber
Badger Meter, Inc.
6118 East 15th Street
Tulsa, Oklahoma 74112
Re: Contract Extension
Dear Mr. Cumber:
XETA Corporation received Tuesday, November 18, 1997, the ALTA survey prepared
by Lewis Engineering which indicates a drainage easement in the middle of the
property. The easement, which runs from north to south, directly impacts the
proposed development by XETA Corporation.
The City of Broken Arrow has scheduled a special commissioners' meeting for
Tuesday, November 25, 1997 at 8:00 a.m. to approve vacating the easement. Once
the commissioners have given their approval, it will take approximately 45 days
for the easement to be officially vacated and recorded.
XETA Corporation fully intends on purchasing the property and continues to work
closely with their development team. However, they cannot allow their earnest
money to become non-refundable with the drainage issue yet to be resolved.
Therefore, XETA Corporation requests an extension until the easement has been
vacated and officially recorded. Once that occurs, they will close on the
property within five (5) business days.
Please execute in the space provided below acknowledging your acceptance of the
contract extension. Thank you for your cooperation and we look forward to the
successful consummation of this transaction.
Sincerely,
TULSA PROPERTIES, INC.
/s/ Robert D. Stephens
Robert D. Stephens
Associate
RDS/dc1492
APPROVED:
XETA CORPORATION BADGER METER, INC.
By: /s/ Jack Ingram By: /s/ W. H. Vander Heyden
---------------------------- ---------------------------------
Jack Ingram President, Industrial Dir.
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
XETACOM, Inc., an Oklahoma corporation
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
and to all references to our Firm included in or made a part of the Form S-8
made by Xeta Corporation on August 28, 1995. 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
January 23, 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 F-2 AND F-3 OF THE COMPANY'S 10KSB FOR THE YEAR ENDING OCTOBER 31, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> OCT-31-1997
<CASH> 6,011,841
<SECURITIES> 0
<RECEIVABLES> 1,501,843
<ALLOWANCES> 0
<INVENTORY> 1,498,748
<CURRENT-ASSETS> 11,272,407
<PP&E> 634,905
<DEPRECIATION> 0
<TOTAL-ASSETS> 14,819,863
<CURRENT-LIABILITIES> 4,328,177
<BONDS> 0
0
0
<COMMON> 220,728
<OTHER-SE> 9,115,805
<TOTAL-LIABILITY-AND-EQUITY> 14,819,863
<SALES> 18,760,480
<TOTAL-REVENUES> 18,760,480
<CGS> 11,958,212
<TOTAL-COSTS> 11,958,212
<OTHER-EXPENSES> 0
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<INCOME-TAX> 1,190,000
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<NET-INCOME> 2,140,310
<EPS-PRIMARY> .90
<EPS-DILUTED> .90
</TABLE>
