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U.S. 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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-16231
XETA Corporation
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(Name of small business issuer in its charter)
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Oklahoma 73-1130045
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(State or other jurisdiction of incorporation or (I.R.S. Employer Identification Number)
organization)
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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 [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained herein, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year were $25,447,232.
The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant as of December 31, 1998 (based upon the
average bid and asked prices of such shares) was approximately $27,657,517.
The number of shares outstanding of the registrant's Common Stock as of
December 31, 1998 was 2,021,737 (excluding 264,547 treasury shares). Exhibit
Index appears at Page 20.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement to be filed with the Securities and
Exchange Commission in connection with the Annual Meeting of Shareholders to be
held March 25, 1999 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, which are the primary
systems used by hotels to provide telephone-related services to their guests.
These products also provide 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. In September 1998, the Company significantly increased its PBX service
base by acquiring approximately 100 PBX service contracts from Williams
Communications Solutions, L.L.C., together with Williams' related inventory of
spare parts, for a total cash purchase price of $2,275,000.
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. Since 1993, the Company has
distributed the Hitachi 5000(R) Series Digital Communications System under a
nation-wide, non-exclusive distributorship. In November, 1998, the Company
signed a similar distributorship agreement with Lucent Technologies to sell
Lucent's Guestworks(TM) PBX. Both the Hitachi and Lucent systems are equipped
with lodging specific software and are state-of-the-art telephone systems which
integrate with nearly all aspects of the hotel's operations.
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, which is now owned by Mitel, Inc. ("Mitel").
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, including
the Internet, while still having the ability to make and receive voice calls on
a separate telephone line. To respond to this growing demand, hotels must
increase the existing capacity of their 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. The Company continues to devote resources to
the development of additional features and capabilities of the XPANDER(R)
system.
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 markets its call accounting products as the Virtual XL(TM)
Series ("VXL"(TM) Series), XL(R) Series and XPERT(R) answer confirmation
systems. The Company sells its VXL(TM) and XL(R) systems under a variety of
sizes to meet the needs of small to large hotels. The VXL(TM) product line was
introduced during 1998 and is designed to operate on a hotel's Local Area
Network ("LAN") or a hotel management company's Wide Area Network ("WAN"). If
connected to a LAN or WAN that is also connected to the Internet, the VXL(TM)
can also be accessed via an Internet connection. All of the
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Company's call accounting systems have user codes and password protections to
reduce the opportunity of unauthorized access. The connectivity features of the
VXL(TM) provide for much greater accessibility to the reporting features of the
system.
Answer confirmation systems are a complimentary 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. 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.
All of the Company's call accounting products operate on personal
computer-based platforms. In the case of the XL(R) systems, the call
accounting and answer confirmation functions can, depending on the size of the
system, be combined into one integrated system, thereby reducing the customer's
acquisition and maintenance costs. Additionally, the XPANDER(R) system can
operate the XL(R) Series software while simultaneously providing additional
telephone extensions. The Company also has developed a buffering system, BUFFY+,
to allow for the capture of call information for later billing should the call
accounting system fail or become slowed by a high volume of calls or extensive
requests for reports.
SYSTEM SERVICE AND WARRANTY
General. The Company is committed to distinguishing itself from its
competitors through service to its systems. The hotel industry is a 24
hour-per-day, demanding environment in which any significant problem with the
telecommunications system can quickly rise to crisis status. In addition to
developing and building reliable systems, the Company has designed extensive
remote service capabilities into each of its systems and has built a national
network of Company technicians as well as third party service providers to meet
the needs of this environment. The remote service capabilities, which have been
a critical element of the Company's products since its inception, enable
technicians at the Company's Service Center to quickly diagnose, and in most
instances, correct system malfunctions without the need of an on-site service
call. Until the time in which the Company became a distributor, installer and
service provider of PBX systems, the Company's need for regionally located
service employees was relatively minor. However, with the addition of the PBX
product line and the tremendous growth of that business over the past five
years, the Company has had to rapidly increase the number of regional service
technicians. Currently, nearly half of the Company's service department
personnel are based outside of the Company's Service Center.
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
are generally for one year in duration. Due to the critical nature of call
accounting systems to the telephone revenues of the hotel, the majority of the
Company's customers elect to purchase service agreements.
With regard to PBX equipment provided by the Company, the Company either
sells the equipment with the manufacturer's warranty, or provides its own
one-year warranty against defects in the equipment which in turn is supported by
a similar warranty from the manufacturer to the Company. Any labor costs
associated with fulfilling the warranty requirements are generally borne by the
Company. Subsequent to the warranty period, the Company offers a unique,
hotel-oriented PBX service plan. This service plan includes parts and labor
coverage on the PBX plus a XETA call accounting system as well as other service
options designed to meet the specific needs of each customer and build a
long-term relationship with that customer.
For XPANDER(R) systems, the Company provides warranty and service
agreements similar to those offered on call accounting systems.
Long Distance Services. The Company markets 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.
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("LDCI"), which has agreements with MCI for the sale of MCI's long distance
services. The Company's agreements with LDCI expire in April, 2000, but allow
LDCI to terminate the agreements earlier should its underlying contracts with
MCI be terminated for any reason. The Company markets long distance services
jointly with Americom Communications Services, Inc. ("Americom") under a
marketing alliance agreement. Americom is owned by Robert Jones, a co-founder
and former officer and director of the Company.
The Company earns commissions on calls made by guests at customer locations
which have contracted for MCI's long distance services through the Company. A
portion of the commission earned is then paid to the hotel and the remaining net
commissions are shared with Americom according to a formula set out in the
marketing alliance agreement. The source of most of the Company's long distance
revenues is hotels which previously had long distance contracts with Americom.
The Company purchased these contracts from Americom in conjunction with the
Company's entry into the long distance services market in April 1997 and the
creation of the marketing alliance with Americom. There has not been a
substantial increase in the number of customers signing up for the Company's
long distance service offering beyond these purchased contracts.
SOFTWARE AND PRODUCT DEVELOPMENT
For the past several years, most of the Company's development efforts were
devoted to the XPANDER(R) system (See "PBX Products" above). The Company has
developed both the hardware and software for this system. During the past year,
most XPANDER(R) development was spent on enhancements to the system.
Generally, these enhancements are being made so that guest extensions hooked to
the XPANDER(R) system perform and have the same features as guest extensions
hooked to the hotel's PBX. A by-product of its work on XPANDER(R) was the
VXL(TM) system which was introduced in fiscal 1998.
MARKETING
General. The decision making process for purchasing 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. The Company has utilized its experience and reputation in the industry
to build long-term relationships with individuals within these groups. These
relationships, together with reliability of its products and quality of its
installation and service, are key to the Company's past and future success. The
Company primarily uses its direct sales staff to develop and maintain these
relationships.
Although the lodging industry is currently in a favorable economic cycle
resulting in strong cash flows and affordable capital for new equipment
purchases, tight budgetary controls and lack of capital and borrowing ability
historically characterize this sector of the economy. To that end, the Company
has developed innovative and flexible sales programs to help customers acquire
the Company's products, primarily its call accounting products. The most
extensively used of these programs has been the XETAPLAN program. Under the
XETAPLAN program, the Company installs a call accounting and/or answer
confirmation system and maintains it under the same terms as a direct
maintenance agreement for a period of three to five years in exchange for a
fixed monthly fee. This program enables the customer to avoid an up front cash
outlay and to budget the costs for the equipment and service for the length of
the agreement. Due to the nature and structure of the XETAPLAN contract and the
relevant accounting rules, most XETAPLAN agreements are accounted for as sales
of systems even though title to the equipment usually remains with the Company.
PBX Marketing. The PBX market is characterized by fierce competition among
all vendors as well as from other Hitachi and Lucent distributors. Buying
decisions are based on a number of factors including price, the brand of PBX
being offered, the vendor's reputation for quality installation and service
after the sale, as well as a host of other factors specific to the customer. To
enhance its competitive position, the Company has developed a package of
value-added services to its PBX product and service offering. This package
includes such amenities as providing an XL(R) or VXL(TM) Series call
accounting system, a specified number of free labor hours each month and weekly
appointments by certified technicians to correct minor malfunctions or to
perform routine maintenance. The Company also invests in training its service
technicians and expansion of its staff of regional technicians to be able to
meet customer service requirements. These investments have helped to ensure a
high level of quality service and have provided continuity of service throughout
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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, 1998, the Company employed 13
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 including Marriott Host/Marriott International. The Company considers
its relationship with Mr. Jones to be good and does not believe that its
relationship with Marriott Host/Marriott International is predicated on the
basis of its relationship with Mr. Jones. 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 Host/Marriott International 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. Management believes its relationship with Marriott to be
good and expects this relationship to continue to grow. While revenues earned
from Marriott each year have always been significant, the Company is currently
enjoying a surge in orders from Marriott for new VXL(TM) call accounting
systems. Most of these orders will be reflected as revenues in fiscal 1999.
Starwood Hotels and Resorts ("Starwood") and Prime Hospitality Corp.
("Prime") are also major customers of the Company. Revenues from Starwood and
Prime include sales of PBX and call accounting systems and service revenues.
Revenues from Starwood also include revenues earned from long distance services.
These revenues are primarily from those contracts purchased in 1997 which
constitute substantially all of the Company's long distance revenues. Starwood
and Prime own and/or operate hotels under a variety of well-known name brands.
COMPETITION
The Company believes that its most effective weapon in competing in its
market is the commitment to distinguish itself by concentrating on the
performance and reliability of its systems and by providing the highest level of
service possible. As a result, the Company has developed its entire operating
philosophy on meeting the unique needs of the hospitality niche. That philosophy
includes the innovative marketing and service programs discussed above.
Competition in this niche is fierce and competitors range from large, well-known
and well-financed companies to small, regional or local distributors, many of
which do not concentrate their efforts on the hospitality market but are simply
located near the prospective customer. These competitors are formidable and
nearly every sale, especially PBX systems sales, is a hard fought victory. While
the Company believes that its reputation and nation wide presence contribute
significantly to its success, there can be no assurance given that the Company
will be able to continue to expand its market share in the future.
The competition for the type of long distance service provided by the
Company is also fierce and is dominated by very large, well-known companies,
primarily the large long distance carriers. Typically, these competitors are
able to secure these contracts by providing customers with large up front cash
bonuses and large monthly commissions on calls made on the customer's
telephones. The Company has not been able to compete effectively on this basis
and as a result, no significant long distance contracts have been secured beyond
those purchased from Americom in fiscal 1997 (See "Long Distance Services" under
"Services" above).
MANUFACTURING
The Company assembles all of its proprietary products, which include its
PC-based systems and the XPANDER(R) system, from an inventory of components,
parts and sub-assemblies obtained from various suppliers. These components are
purchased from a variety of regional and national 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
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inventories of components to mitigate short-term shortages and believes the
ultimate risk of long-term shortages is minimal. All of the Company's call
accounting products are now based on PC technology, which is continually and
rapidly changing. As a result, some of the components originally designed for
use in the Company's systems have been phased out of production and replaced by
more advanced technology. To date, these substitutions have not forced the
Company to substantially redesign its systems and there has been 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 performs various quality control
procedures, including powering up completed systems and allowing them to
"burn-in" before being assembled into a final unit for a specific customer
location, and performing final testing prior to shipment.
EMPLOYEES
At December 31, 1998, the Company employed 149 employees.
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 also has a pending trademark
application on file to register the mark "Virtual XL."
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. None of the Company's business
activities, however, are directly regulated by the FCC or the states. 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
Currently, 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 on this space expires on
April 30, 1999.
Due to the Company's rapid growth in recent years, the April 1999
expiration of the lease on its current facilities and the unfavorable lease
rates in the Tulsa market, the Company has built a new, one-story, 37,000 square
foot facility in Broken Arrow, Oklahoma to house its present Tulsa operations.
The new facility will have 65% more square feet than the Company's present
facility. The building is located on a 13 acre tract of land owned by the
Company in a suburban business park located approximately three miles from the
Company's present location. The Company anticipates moving its operations into
the new facility well in advance of the expiration of its current lease.
The Company leases other office space in Boulder, Dallas, Indianapolis,
Tampa, 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
On November 20, 1998, the Company was served with notice that it has been
named as one of several defendants in a lawsuit styled ALLENDALE MUTUAL
INSURANCE CO. V. XETA CORPORATION, HITACHI TELECOM (USA), INC., PUBLIC SERVICE
COMPANY OF COLORADO, AT&T, US WEST LONG DISTANCE, INC., AND DOES 1-100, filed in
the United States District Court for the District of Colorado on July 30, 1998.
This case involves the failure of a Hitachi PBX system located in a Marriott
hotel in Denver, Colorado, for which XETA had assumed service responsibilities.
The plaintiff alleges that the defendants were negligent in the manufacture,
design, installation, inspection, service, supervision, and provision of
materials, electric power, telephone service, and supplies in connection with
the PBX system. The plaintiff also alleges that the Company was grossly
negligent in its service and repair of the PBX system. The plaintiff alleges
that, as a result of the defendants' negligence, Marriott suffered property
damage, business interruption, and loss of revenue, for which the plaintiff, as
Marriott's insurer, has paid Marriott the sum of $926,518.84. The plaintiff also
alleges that the PBX system's failure constituted a breach by the Company of its
contract with Marriott and also gave rise to a product liability claim against
the Company, Hitachi, and Does 1-100, for defective design or manufacture of the
system. In its complaint, the plaintiff states that its damages are $926,518.84,
but demands judgment "in an amount to be determined at trial." The plaintiff
also requests its costs, attorney fees, and prejudgment interest. The Company
denies liability in this matter and intends to vigorously defend this lawsuit.
The matter of ASSOCIATED BUSINESS TELEPHONE SYSTEMS, INC. ("ABTS"),
PLAINTIFF, VS. XETA CORPORATION, DEFENDANT AND THIRD-PARTY PLAINTIFF, VS. D&P
INVESTMENTS, INC. ("D&P"), is pending before the United States District Court
for the Northern District of Oklahoma. This matter, which was initiated by ABTS
in June, 1995, arises from a 1986 distributor's agreement between the Company
and D&P, pursuant to which the Company sold call accounting systems to D&P for
resale, and a maintenance agreement between the Company and ABTS pursuant to
which the Company furnished maintenance services for such systems. On motion by
the Company, the court has dismissed some of ABTS' claims, including a breach of
warranty claim, thereby reducing the stated amount of damages sought by ABTS
from $1,000,000 to approximately $809,000. ABTS' remaining claims are based on
breach of contract, including alleged violations of certain exclusivity rights
held by ABTS, and tortious interference with certain customer relationships. The
Company's counterclaim against ABTS and third-party claim against D&P, which is
an affiliate of ABTS, are based upon breach of contract. The Company is seeking
in excess of $3,000,000 in damages in these claims. Several trial dates have
been set and passed in this matter, and in August, 1998, the Court re-opened
discovery on the limited issue of damages. The Court has postponed setting
another pretrial hearing or trial date pending the completion of such discovery
and its ruling on motions related thereto. The Company intends to continue to
vigorously defend ABTS' claims against it and to pursue all of its counterclaims
and third-party claims against ABTS and D&P.
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Since 1994, when the Company was first notified by one of its hotel
customers that the customer had been sued in Federal court for patent
infringement by PHONOMETRICS, INC., a Florida company, the Company has been
monitoring numerous patent infringement lawsuits filed by Phonometrics 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. Phonometrics is
seeking damages of an unspecified amount, based upon a reasonable royalty of the
hotels' profits derived from use of the allegedly infringing equipment during a
period commencing six years prior to the filing of such lawsuit and ending
October 30, 1990.
All of the cases filed by Phonometrics against the Company's customers were
originally filed in, or transferred to, the United States District Court for the
Southern District of Florida. These cases were stayed in 1997, pending the
outcome of Phonometrics' lawsuit against one of the equipment manufacturers,
Northern Telecom. In 1998, after all available appeals by Phonometrics were
exhausted, Phonometrics lost its case against Northern Telecom and was ordered
to pay Northern Telecom's attorney's fees. In the Northern Telecom case, the
court ruled that in order to establish infringement of Phonometrics' patent, the
allegedly infringing call accounting equipment must display cumulative costs in
real time as they accrue, and display these costs on a visual digital display.
The Company's systems do not have either of these elements. In light of the
Northern Telecom ruling, on October 26, 1998, the Florida court dismissed all of
the cases against the hotels, noting that Phonometrics failed to allege either
of these specific elements of infringement in its complaint, and giving
Phonometrics twenty days from the date of the court's order to file amended
complaints, which Phonometrics did not do. On December 8, 1998 the Florida court
closed all of the hotel cases. Phonometrics, however, is appealing the court's
October 26th order dismissing its complaints against the hotels. The Company
will continue to monitor this latest attempt by Phonometrics to resurrect its
lawsuits against 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.
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1998 1997
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High Low High Low
---- ---- ---- ----
Quarter Ending:
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January 31 23 5/8 17 1/4 8 5/8 6 3/4
April 30 25 3/8 17 1/4 10 3/8 6 3/4
July 31 23 3/8 18 3/4 15 5/8 9 1/4
October 31 19 1/2 13 22 3/4 14 1/4
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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, 1998, the latest practicable date for which such
information is available, the Company had 109 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 2,200
beneficial shareholders.
No sales of unregistered securities were made by the Company during its
1998 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, 1998, the Company reported record
net income and revenues of $3.053 million and $25.447 million, respectively.
These results represented a 43% increase in net income and a 36% increase in
revenues. During fiscal 1998, the Company continued its focus on providing PBX
and call accounting products and services to the lodging industry, and its
record results were achieved due to the increasing market acceptance of the
Company's product offerings and the robust hospitality market.
There were several developments during fiscal 1998 that management believes
will have a significant impact on future years. These developments included the
acquisition of approximately 100 PBX service contracts, the execution of a
non-exclusive distributorship agreement to represent Lucent Technology's
("Lucent") Guestworks(TM) PBX's to the lodging industry, and the construction of
a new facility to house the Company's headquarters and Service Center. 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, 1998 and results of its operations
for the fiscal year ending October 31, 1998 compared to 1997, are discussed
below.
RESULTS OF OPERATIONS
The 36% increase in revenues consists of a 41% increase in installation and
service revenues, a 22% increase in sales of systems, and a 495% increase in
long distance revenues. Alternatively, the Company's results can be reviewed by
product line. During fiscal 1998, revenues earned from PBX related activities,
including sales of new systems, installations and service, increased $5.0
million or 38%, revenues from call accounting related activities increased
$824,000 or 15%, and revenues from the Company's long distance service offering
increased $828,000 or 495%. The following discussion analyzes the Company's
revenues by product line.
Sales of PBX systems increased $1.588 million or 21% while revenues from
PBX installation and service activities increased $3.447 million or 61% during
fiscal year 1998. The growth in revenues earned from PBX related activities
continues to be fueled by broad acceptance of the Company's PBX product and
service offering and the robust growth of the overall hotel industry. Industry
awareness of the Company's PBX product offering has grown steadily since the
Company added PBX's to its product line five years ago. This increased awareness
has allowed the Company to develop relationships with several hotel ownership
groups and management companies with which the Company had no prior
relationship. These relationships have produced significant revenues during
fiscal 1998, both in sales of new systems and in service revenues from new
maintenance contracts. Another important factor in the increase in sales of PBX
systems has been the strength of the overall hotel industry. During fiscal 1998,
there was a boom in construction of new hotels, primarily smaller, extended-stay
type properties, and in remodeling of existing hotels. Both of these trends
generated significant sales of PBX systems for the Company.
Included in the increase in revenues from call accounting related
activities was an increase in sales of call accounting systems of $407,000 or
26% and an increase in call accounting service revenues of $417,000 or 11%.
Sales of call accounting systems were stronger than expected as construction of
new hotels and overall spending on hotel technology helped to fuel sales of new
systems. This, in turn, generated increased installation and service revenues.
Also contributing to the increase in call accounting related revenues for fiscal
1998 were revenues earned from customers under the Company's long distance
service offering. The Company provides call accounting equipment and service to
its long distance customers and a portion of the long distance commissions
earned from those customers is allocated to call accounting systems and service
revenues. Fiscal 1998 was the first full year of operations for the Company's
long distance services, therefore revenues from this source showed a substantial
increase.
Revenues from the Company's long distance service offering increased
$828,000 or 495% in fiscal 1998 compared to fiscal 1997. Note that revenues from
long distance service began during the third quarter of fiscal 1997 and
therefore did not represent a full year of operations for comparison purposes.
Substantially all of the long distance service revenues are earned from those
contracts that were purchased by the Company upon its entry into this market in
April, 1997. The Company has found it very difficult to compete in this market.
Typically, competition is for service to a group of hotel properties controlled
by one owner or management company. These companies typically solicit bids on a
package of
10
<PAGE> 11
telecommunications services which include operator assisted long distance
services, which the Company offers, as well as a wide variety of other
telecommunications services which the Company does not offer. The bidding for
these packages is then fiercely carried out by the major long distance carriers
who can offer large up front cash payments to secure the business. As a result
of these competitive factors, management does not expect revenues from this
source to grow in the future.
Gross margins on total revenues decreased to 35% in fiscal 1998 from 36% in
fiscal 1997. The gross margin earned on installation and service revenues was
35% in fiscal 1998 compared to 37% in fiscal 1997. Management believes this
decline is temporary and is due to increases in staffing and increased
utilization of third party technicians as the Company responded to the continued
rapid growth of its business. This growth necessitated the reorganization of the
Company's Service Center into functional and geographical regions each with a
management and support team for each area. The addition of these levels of
management in addition to the overall increases in the number of regional
technicians required to service the Company's installed based contributed to the
decline in margins. Management is hopeful that gross margins on installation and
service revenues will return to historical levels in the near future. The gross
margin earned on systems sales in fiscal 1998 was 33% compared to 35% in fiscal
1997. This decline is attributable to a decline in gross margins earned on the
sale of PBX systems reflecting sales of smaller systems primarily to smaller,
extended-stay hotels. This segment of the market is highly price-driven and is
very competitive. The gross margin earned on long distance services was 59% in
fiscal 1998 compared to 65% earned in fiscal 1997. The gross margins earned on
long distance revenues in fiscal 1998 are representative of the margins expected
by management in the future.
Operating expenses increased 15% in fiscal 1998 compared to fiscal 1997.
This increase included an increase in amortization expense related to the 1997
purchase of long distance contracts for a full year compared to only five months
in fiscal 1997. Amortization in fiscal 1998 also included one partial month of
amortization of the purchase of PBX service contracts which was consummated in
September, 1998 (see discussion of purchase of PBX service contracts under
"Liquidity and Capital Resources" below). Also increasing in fiscal 1998 were
general and administrative expenses related to increases in personnel and
accrued costs related to the Company's relocation. Lastly, costs such as
commissions and executive bonuses increased in conjunction with increases in
sales and net profits. Partially offsetting these increases was a decrease in
legal fees as the activity surrounding the ABTS case was substantially less in
fiscal 1998, although the case is still on going (see "Legal Proceedings" above
and the Notes to the Consolidated Financial Statements).
Interest income increased 6% in fiscal 1998 compared to fiscal 1997. This
increase was primarily related to increases in interest income earned from cash
investments, as cash balances remained high for most of the year (until the
acquisition of PBX service contracts in September 1998). Interest income earned
from XETAPLAN contracts remained steady as many of the expiring XETAPLAN
contracts were renewed preventing a decline in interest income from this source.
The Company recorded a provision for federal and state income taxes of
$1.855 million or 38% of pre-tax income compared to $1.190 million or 36% in
fiscal 1997. The Company increased its effective tax rate to more appropriately
reflect the estimated multi-state tax provision.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1998, the Company's cash balances decreased $2.774 million
reflecting cash earned from operations of $3.216 million offset by cash used in
investing activities of $4.594 million and cash used in financing activities of
$1.396 million.
Investing activities included the acquisition of land and construction of
the Company's new headquarters for approximately $2.157 million and the
acquisition of PBX service contracts for $1.860 million. The Company anticipates
spending an additional $800,000 to complete the construction of its new
facility. As discussed above, in September, 1998, the Company acquired
approximately 100 PBX service contracts from Williams Communications Solutions,
LLC ("WCS"). These contracts represented substantially all of WCS's base of
Hitachi PBX systems under service contract. The cash paid at closing was $1.860
million which included a payment of $1.695 million for the contracts and an
initial payment of $165,000 toward the purchase of WCS' spare parts inventory
for this business. The remaining payment for the inventory, $415,000, will be
made after completion of testing of the inventory. The portion of the purchase
price allocated to the service contracts will be amortized over a one-year
period. This period approximates the average life of the contracts
11
<PAGE> 12
and reflects the fact that although some of the contracts may have an extended
term, management believes it must earn the customers' business within the first
year of taking over service or risk cancellation. The Company expects to
generate approximately $2.0 million in annual revenues from the customers it
retains.
Financing activities consisted primarily of the repurchase of Company stock
in accordance with a stock buy-back plan adopted by the Company's board of
directors in October, 1997. Under the plan, the Company is authorized to spend
up to one-third of net income for stock repurchases. The plan began with
one-third of fiscal 1997 net income as a starting point. During the year the
Company repurchased 74,800 common shares for $1.488 million. The program will be
reviewed on a regular basis and future repurchases will be dictated by overall
financial and market conditions.
Although the transactions discussed above have substantially decreased the
Company's cash balances as of October 31, 1998, management believes that the
Company's financial condition remains strong. In addition to its strong working
capital position, the Company's lack of debt and access to capital markets
provide some assurance that the Company has substantial capabilities should
additional opportunities for acquisitions arise. The availability of such
capital would depend upon a multitude of factors, including the specifics of any
proposed transaction. To that end, management is continuing to evaluate
opportunities as they arise. However, management is presently taking a less
aggressive position toward these opportunities as the Company works through
several recent developments in its business. These include the recent addition
of the WCS contracts, the installation of several hundred new VXL(TM) call
accounting systems currently in the installation backlog, the addition of the
Lucent Guestworks(TM) PBX product line, and the Company's relocation to its new
facility scheduled to occur during the second fiscal quarter.
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.
The Company is committed to pursuing its strategy of providing
telecommunications equipment and service to the hospitality industry. Management
believes that it can continue to be successful in this endeavor through
expansion of its base of customers, primarily through new installations of PBX
systems. The Company's recent decision to distribute Lucent PBX systems was
driven by this desire to continue to rapidly expand its customer base as well as
its market share. Management believes that the Lucent Guestworks(TM) product
will enable the Company to expand into some segments of its market, specifically
large hotels, in which it cannot effectively compete at the present time. It
also enables the Company to sell to some hotel management companies who have a
strong desire to standardize their properties on the Lucent system.
The Company sells PBX and voice mail systems under distribution agreements
with Hitachi Telecom (USA), Inc. ("Hitachi"), Lucent and Mitel, Inc. The Company
considers its relationship with all of these manufacturers to be good, although
the Company does not have extensive experience with Lucent yet. The agreements
with Hitachi and Lucent both contain certain volume commitments to earn the
pricing structure that is outlined in the distributorship agreement. Should the
Company fail to meet those requirements, the Company's future profit margins
could suffer. As market acceptance of the new Lucent product offering becomes
more apparent, it is possible that a re-alignment of volume commitments may be
necessary in future renewals of these contracts. Management does not believe,
however, that such re-alignments would have a material, adverse impact on its
business.
The Company's success has always been attributable, in part, to the
development of innovative new products. The Company has spent significant
resources in the last few years on the development of a proprietary PBX product,
XPANDER(R). To date, sales of XPANDER(R) have been below management's
expectations and presently, there is no expectation that XPANDER(R) will
begin contributing materially to the Company's revenues or operating results.
However, a by-product of the Company's XPANDER(R) development efforts was the
innovation of the VXL(TM) series call accounting system. Sales of these systems
have been explosive during the first quarter of fiscal 1999 and the Company
should enjoy a very strong year in call accounting revenues as a result. Most of
these orders for VXL(TM) systems are from existing call accounting customers who
are choosing to upgrade their present systems. Therefore, although management
expects a surge in call accounting systems sales during fiscal 1999, on-going
future service revenues from call accounting systems
12
<PAGE> 13
under service contract will not increase proportionately as a result of the
orders received to date for this product.
Since the middle of 1997, the Company has been assessing the potential
effect of the year 2000 ("Y2K") on its business. This evaluation, conducted
primarily by the Company's engineering department, is ongoing and will continue
up to and through the beginning of that year. Since the Company supplies PC
based systems and develops proprietary software for those systems, the issues
surrounding the Y2K problem are extremely complex. In relation to the Company's
proprietary software, the Company has addressed Y2K issues as described below.
For its PC-based product lines, which include the XL(R) and VIRTUAL XL(TM) Call
Accounting Series, XPERT(R) Answer Detection Systems and BUFFY+ call buffering
systems, the Company has developed a software upgrade which includes patches
designed to compensate for all Y2K issues for which the Company has become
aware. This upgrade is available to all of the Company's customers with XL(R)
and VIRTUAL XL(TM) systems. For those customers with service contracts on their
systems, the upgrade will be provided with their regular rate table update.
Customers not under service contracts will be required to pay a nominal fee to
receive the upgrade. All of the Company's customers are being contacted to make
them aware of the software upgrade.
The Company has also tested its proprietary software on various hardware
configurations. This was necessary because the Company has installed PC systems
with hardware components manufactured by a variety of suppliers. The software in
these components reacts differently based on the hardware manufacturer, the
version of the software used, and the date manufactured. Management believes
that its software upgrade obviates all of the hardware Y2K problems known to
management. As a precaution, however, the Company is supplying its customers
under maintenance agreements with a hardware test diskette. This test verifies
whether the customer's hardware will function properly when operating the
Company's software after December 31, 1999. These tests began December 28, 1998.
To date, there have been no reported failures and management does not expect
there to be any as the test continues. Should a customer's system report a
failure during the test, the Company believes that additional software could be
written to "patch" the problem.
The Company's other major proprietary systems that are not PC-based, such
as the XD(R), XDM(TM), XACT(R), and XXAM(TM) systems, are not expected to be
affected by Y2K.
The discussion above outlines the Company's assessment and response to Y2K
problems as they relate to the Company's proprietary products as of the date of
filing this report. As stated above, evaluation of this matter is on-going and
the Company will respond to further Y2K issues as they arise. Presently,
management is very optimistic that its proprietary systems installed at customer
locations will perform their essential functions, including the pricing of
telephone calls and the transmission of that information to hotel property
management systems, after December 31, 1999. However, less favorable scenarios
could develop. Management believes that the most reasonably likely worst case
scenario is that its systems experience a variety of problems related to
hardware malfunctions which had not previously presented themselves and which
therefore were not part of the software upgrade provided by the Company. The
hardware test discussed above is designed to surface as many of these hardware
issues as possible. However, there can be no assurance given that the Company's
systems, including those that have been upgraded, will perform satisfactorily
when using dates after December 31, 1999.
The PBX and voice mail products which the Company distributes are also
susceptible to Y2K problems. The Company has been advised by each of the
manufacturers of these systems that the manufacturer has evaluated its products
and has developed software upgrades designed to enable proper functioning of the
systems when utilizing dates after December 31, 1999. The Company has performed
no tests on these upgrades and can give no assurance that these manufacturers
have adequately evaluated their products for Y2K exposure or that the upgrades
provided will resolve all potential Y2K problems.
The Company has also assessed its internal technology systems for exposure
to Y2K problems. These systems include its service and accounting systems as
well as software and hardware used in product development. The Company has or
will be purchasing and installing the necessary upgrades to bring these systems
into Y2K compliance. As for the remainder of the Company's infrastructure, no
specific Y2K assessment has been made to date and no contingency plans have been
developed in the event that the Company experiences a catastrophic loss of
electric power or phone service.
The Company has incorporated its Y2K efforts into its normal operations
and as such, specific data regarding the costs of the activities described above
is not available. However, management estimates that the costs incurred during
fiscal 1998 for Y2K compliance were approximately $150,000 and that Y2K costs
for fiscal 1999 will also be
13
<PAGE> 14
approximately $150,000. These amounts do not include the cost of management time
in analyzing and planning regarding Y2K issues.
Due to the extreme complexity of this issue, there can be no assurance
given that the Company's response to these issues will prevent disruption in its
business on January 1, 2000. Also, it is possible that the Company's Service
Center may well become overwhelmed by calls on or shortly after January 1, 2000
regarding Y2K issues or concerns, whether or not directly related to the
Company's products. If such a volume of calls should occur, it might delay the
Company's ability to conduct its normal operations and could negatively affect
the Company's reputation. Furthermore, other Y2K problems which have not been
foreseen could cause a disruption to the Company's operations, possibly
resulting in damage to its reputation and materially different operating
results. These Y2K problems could be totally unrelated to the Company's products
or customers and still have a significant impact on the Company's operations.
Finally, management believes that regardless of the extent of Y2K problems in
the global marketplace, a surge in litigation will ensue. As a developer of
proprietary software and a service provider for telecommunications systems, the
Company is vulnerable to the risk of increased litigation, despite its best
efforts to mitigate the impact of the Y2K problem on its products and services.
The Company is involved in three 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, have been recorded in the
financial statements. Should the outcome of any 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.
14
<PAGE> 15
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, 1998 F-2
Consolidated Statements of Operations - For
the Years Ended October 31, 1998 and 1997 F-3
Consolidated Statements of Shareholders' Equity -
For the Years Ended October 31, 1998 and 1997 F-4
Consolidated Statements of Cash Flows - For the
Years Ended October 31, 1998 and 1997 F-5
Notes to Consolidated Financial Statements F-6
</TABLE>
15
<PAGE> 16
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Xeta Corporation:
We have audited the accompanying consolidated balance sheet of Xeta Corporation
(an Oklahoma corporation) and subsidiary as of October 31, 1998, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the two years in the period ended October 31, 1998. 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
subsidiary as of October 31, 1998, and the results of their operations and their
cash flows for each of the two years in the period ended October 31, 1998, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Tulsa, Oklahoma
December 4, 1998
F-1
<PAGE> 17
XETA CORPORATION
CONSOLIDATED BALANCE SHEET
OCTOBER 31, 1998
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,238,218
Current portion of net investment in sales-type leases 1,500,095
Trade accounts receivable, net of allowance of $168,513 3,561,201
Inventories, net 2,022,256
Deferred tax asset, net 575,587
Prepaid expenses and other 73,895
------------
Total current assets 10,971,252
------------
NONCURRENT ASSETS:
Net investment in sales-type leases, less current portion 1,210,939
Property, plant and equipment, net 2,817,370
Purchased service and long distance contracts, net of accumulated
amortization of $346,891 2,537,437
Capitalized software production costs, net of accumulated
amortization of $453,066 655,370
Other 99,618
------------
Total noncurrent assets 7,320,734
------------
Total assets $ 18,291,986
============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,747,009
Unearned revenue 3,096,217
Accrued liabilities 824,454
Accrued income taxes 181,876
------------
Total current liabilities 5,849,556
------------
UNEARNED SERVICE REVENUE 730,314
------------
NONCURRENT DEFERRED TAX LIABILITY, net 526,881
------------
COMMITMENTS
SHAREHOLDERS' EQUITY:
Preferred stock; $.10 par value; 50,000 shares authorized, 0 issued
Common stock; $.10 par value; 10,000,000 shares authorized,
2,286,284 issued 228,628
Paid-in capital 5,135,818
Retained earnings 7,568,905
Less- Treasury stock, at cost (1,748,116)
------------
Total shareholders' equity 11,185,235
------------
Total liabilities and shareholders' equity $ 18,291,986
============
</TABLE>
The accompanying notes are an integral
part of this consolidated balance sheet.
F-2
<PAGE> 18
XETA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years
Ended October 31,
---------------------------
1998 1997
----------- -----------
<S> <C> <C>
INSTALLATION AND SERVICE REVENUES $13,219,687 $ 9,355,360
SYSTEM SALES 11,232,402 9,237,813
LONG DISTANCE SERVICES 995,143 167,307
----------- -----------
NET SALES, INSTALLATION AND SERVICE REVENUES 25,447,232 18,760,480
----------- -----------
INSTALLATION AND SERVICE COSTS 8,535,823 5,884,096
COST OF SYSTEMS SALES 7,505,397 6,014,731
COST OF LONG DISTANCE SERVICES 411,491 59,385
----------- -----------
TOTAL COST OF SALES, INSTALLATION AND SERVICE 16,452,711 11,958,212
----------- -----------
Gross profit 8,994,521 6,802,268
----------- -----------
OPERATING EXPENSES:
Selling, general and administrative 3,992,470 3,629,250
Engineering 255,593 120,076
Research and development 127,778 240,189
Amortization 381,521 149,512
----------- -----------
Total operating expenses 4,757,362 4,139,027
----------- -----------
INCOME FROM OPERATIONS 4,237,159 2,663,241
INTEREST AND OTHER INCOME, net 670,541 667,069
----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES 4,907,700 3,330,310
PROVISION FOR INCOME TAXES 1,855,000 1,190,000
----------- -----------
NET INCOME $ 3,052,700 $ 2,140,310
=========== ===========
INCOME PER SHARE - BASIC $ 1.50 $ 1.07
=========== ===========
INCOME PER SHARE - DILUTED $ 1.30 $ .90
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 2,029,983 2,006,255
=========== ===========
WEIGHTED AVERAGE EQUIVALENT SHARES 2,342,540 2,365,244
=========== ===========
</TABLE>
The accompanying notes are an integral
part of these consolidated statements.
F-3
<PAGE> 19
XETA CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED OCTOBER 31, 1998 AND 1997
<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, 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
Stock options exercised 78,999 7,900 -- -- 85,000 --
Tax benefit of stock options -- -- -- -- 191,478 --
Treasury Stock purchased -- -- 74,800 (1,488,376) -- --
Net income -- -- -- -- -- 3,052,700
----------- ----------- ----------- ----------- ----------- -----------
BALANCE AT OCTOBER 31, 1998 2,286,284 $ 228,628 264,547 $(1,748,116) $ 5,135,818 $ 7,568,905
=========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral
part of these consolidated statements.
F-4
<PAGE> 20
XETA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years
Ended October 31,
-----------------------------
1998 1997
----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 3,052,700 $ 2,140,310
----------- -----------
Adjustments to reconcile net income to net cash provided by
operating activities-
Depreciation 299,192 209,531
Amortization 381,521 149,512
Loss on sale of assets 14,577 3,859
Provision for doubtful accounts receivable 76,000 36,000
Provision for excess and obsolete inventory -- 33,666
Change in assets and liabilities-
Decrease in net investment in sales-type leases 793,189 1,450,807
Increase in other receivables (2,135,358) (21,364)
Increase in inventories (523,508) (490,918)
Decrease in prepaid income taxes -- 173,785
(Increase) decrease in deferred tax asset (513,844) 31,154
(Increase) decrease in prepaid expenses and other assets (43,489) 184,886
Increase in accounts payable 1,155,187 220,349
Increase (decrease) in unearned revenue 345,313 (182,074)
Increase in accrued liabilities 84,758 72,858
Increase in accrued income taxes 254,479 197,973
Decrease in deferred tax liabilities (24,839) (40,264)
----------- -----------
Total adjustments 163,178 2,029,760
----------- -----------
Net cash provided by operating activities 3,215,878 4,170,070
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of long distance contracts (1,860,000) (1,024,318)
Additions to property, plant and equipment (2,497,096) (453,390)
Additions to capitalized software production costs (237,781) (275,913)
Proceeds from sale of assets 852 --
----------- -----------
Net cash used in investing activities (4,594,025) (1,753,621)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock (1,488,376) --
Exercises of stock options and warrants 92,900 46,291
----------- -----------
Net cash provided by (used in) financing activities (1,395,476) 46,291
----------- -----------
Net increase (decrease) in cash and cash equivalents (2,773,623) 2,462,740
CASH AND CASH EQUIVALENTS, beginning of year 6,011,841 3,549,101
----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 3,238,218 $ 6,011,841
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for income taxes $ 2,116,908 $ 1,115,290
=========== ===========
Noncash tax benefit of options exercised $ 191,478 $ 79,099
=========== ===========
</TABLE>
The accompanying notes are an integral
part of these consolidated statements.
F-5
<PAGE> 21
XETA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED
OCTOBER 31, 1998
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS
Xeta Corporation (Xeta or the Company) develops, manufactures and markets call
accounting systems and is 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, provides 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, 1998, 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> 22
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> 23
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.
RECLASSIFICATIONS
Certain reclassifications have been made to the income statement to conform with
the 1998 presentation.
2. INVENTORIES:
Inventories are stated at the lower of cost (first-in, first-out) or market and
consists of the following components at October 31, 1998:
<TABLE>
<S> <C>
Raw materials $1,092,278
Finished goods and spare parts 1,254,978
----------
2,347,256
Less- reserve for excess and obsolete inventory 325,000
----------
Inventories, net $2,022,256
==========
</TABLE>
3. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following at October 31, 1998:
<TABLE>
<S> <C>
Construction in progress $1,565,601
Data processing and computer field equipment 1,368,075
Land 611,582
Office furniture 136,143
Other 271,171
----------
Total property, plant and equipment 3,952,572
Less- accumulated depreciation 1,135,202
----------
Total property, plant and equipment, net $2,817,370
==========
</TABLE>
4. ACCRUED LIABILITIES:
Accrued liabilities consist of the following at October 31, 1998:
<TABLE>
<S> <C>
Bonuses $555,135
Vacation 102,679
Commissions 104,656
Other 61,984
--------
$824,454
========
</TABLE>
F-8
<PAGE> 24
5. UNEARNED REVENUE:
Unearned revenue consists of the following at October 31, 1998:
<TABLE>
<S> <C>
Service contracts $1,245,506
Warranty service 951,238
Customer deposits 688,778
Systems shipped but not installed 69,364
Other 141,331
----------
Total current unearned revenue 3,096,217
Noncurrent unearned service revenue 730,314
----------
$3,826,531
==========
</TABLE>
6. 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, 1998 and 1997,
consists of the following:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Current provision - federal $ 1,584,000 $ 1,199,110
Deferred benefit - federal (77,000) (9,110)
State income taxes 348,000 --
----------- -----------
Total provision $ 1,855,000 $ 1,190,000
=========== ===========
</TABLE>
The reconciliation of the statutory income tax rate to the effective income tax
rate is as follows:
<TABLE>
<CAPTION>
Year Ended
October 31,
--------------
1998 1997
---- ----
<S> <C> <C>
Statutory rate 34% 34%
State income taxes 7% 0%
Other (3)% 2%
---- ----
Effective rate 38% 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, 1998,
are presented below:
<TABLE>
<S> <C>
Deferred tax assets:
Prepaid service contracts $347,322
Nondeductible reserves 315,585
Other 35,078
--------
Total deferred tax asset 697,985
--------
</TABLE>
F-9
<PAGE> 25
<TABLE>
<S> <C>
Deferred tax liabilities:
Tax income to be recognized on sales-type lease contracts 250,479
Unamortized capitalized software development costs 222,826
Unamortized cost of long distance and service contracts 175,974
--------
Total deferred tax liability 649,279
--------
Net deferred tax asset $ 48,706
========
</TABLE>
7. 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, 1998, the Company was
in compliance with the credit agreement. No advances have been made under this
agreement during fiscal 1998 or 1997.
8. PURCHASED SERVICE AND LONG DISTANCE CONTRACTS:
In September, 1998, the Company purchased substantially all of the Hitachi PBX
service contracts from Williams Communications Solutions, LLC (WCS) for
$1,695,000. The Company took responsibility for the 94 service contracts and 9
warranty customers between October 15, 1998 and December 1, 1998 based on a
predetermined schedule. The Company will amortize the purchase price over the
estimated useful life of the contracts which is approximately one year. In
addition to the service contracts, the Company also purchased WCS' spare parts
inventory. At closing, $165,000 was paid to WCS toward the purchase of the
inventory with the remaining $415,000 to be paid after testing is completed.
In April, 1997, the Company purchased existing long distance contracts at 71
hotels for $1,108,000 from its marketing alliance partner in the long distance
services business, Americom Communications Services, Inc. (Americom). 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. 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,
1998, was approximately $169,000. 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.
9. STOCK OPTIONS:
The Company had a stock option plan (the Plan) for officers and key employees.
The Plan expired on April 18, 1998. Under the terms of the Plan, the Board of
Directors determined the option price, not to be less than fair market value, at
the date of grant.
F-10
<PAGE> 26
Options granted under the Plan 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, 1997 95,335 $ 1.00-6.56
Granted 40,000 $ 17.50
Exercised (48,999) $ 1.00-6.56
------- -----------
Balance, October 31, 1998 86,336 $1.00-17.50
======= ===========
</TABLE>
At October 31, 1998, options to purchase 40,500 shares are exercisable.
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, 1997 460,000 $ 1.00-1.53
Exercised 30,000 $ 1.00
-----------
Balance, October 31, 1998 430,000 $ 1.00-1.53
===========
</TABLE>
Accounting for stock options issued to employees is governed by Statement of
Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock Based
Compensation." Generally, SFAS 123 requires companies to record in their
financial statements the compensation expense, if any, related to stock options
issued to employees. Under an alternative accounting method adopted by the
Company, SFAS 123 allows the Company to only disclose the impact of issued stock
options as if the expense had been recorded in the financial statements. 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,
-------------------------
1998 1997
---------- ----------
<S> <C> <C>
NET INCOME:
As reported $3,052,700 $2,140,310
Pro forma $2,945,408 $2,122,572
EARNINGS PER SHARE:
As reported - Basic $ 1.50 $ 1.07
As reported - Diluted $ 1.30 $ .90
Pro forma - Basic $ 1.45 $ 1.06
Pro forma - Diluted $ 1.26 $ .90
</TABLE>
F-11
<PAGE> 27
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% to 5.70%), dividend yield (0.00%),
expected volatility (83.82% to 107.47%), and expected life (6 years).
10. EARNINGS PER SHARE:
The Company adopted Statement of Financial Accounting Standards No. 128 (SFAS
128), "Earnings Per Share," effective December 31, 1997, and all earnings per
share amounts disclosed herein have been calculated under the provisions of SFAS
128. Basic earnings per common share were computed by dividing net income by the
weighted average number of shares of common stock outstanding during the
reported period. A reconciliation of net income and weighted average shares used
in computing basic and diluted earnings per share is as follows:
<TABLE>
<CAPTION>
For the Year Ended October 31, 1998
----------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Basic EPS
Net income $3,052,700 2,029,983 $1.50
Options issued to employees 312,557
Diluted EPS
Net income $3,052,700 2,342,540 $1.30
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended October 31, 1997
---------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Basic EPS
Net income $2,140,310 2,006,255 $1.07
Options issued to employees 358,989
Diluted EPS
Net income $2,140,310 2,365,244 $ .90
</TABLE>
11. 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>
1999 $ 1,833,926 $ 147,109
2000 931,544 40,039
2001 370,978 18,711
2002 15,951 18,558
------------- ----------
3,152,399 $ 224,417
==========
Less- Imputed interest 441,365
-------------
Present value of minimum payments $ 2,711,034
=============
</TABLE>
F-12
<PAGE> 28
The Company incurred operating lease costs of approximately $264,000 and
$323,000 in 1998 and 1997, respectively.
On October 30, 1997, the Company's Board of Directors adopted a stock buy-back
program in which management was authorized to spend up to one-third of net
income for fiscal 1997 and for each subsequent fiscal quarter thereafter until
the program is terminated. During the year, the Company purchased 74,800 shares
in open market transactions at an average price of $19.90. The timing and the
amount of future stock repurchases, if any, will be dictated by overall
financial and market conditions and the program will be reviewed on a regular
basis.
12. 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
22 percent and 23 percent of the Company's revenues for the years ended October
31, 1998 and 1997, respectively. 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.
During fiscal 1998, revenues earned from Starwood Hotels and Resorts and from
Prime Hospitality were 11 percent and 10 percent, respectively. Both of these
companies are relatively new customers to the Company. The Company considers its
relationship with both to be good.
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, 1998.
13. 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.
F-13
<PAGE> 29
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 $793,000 and $608,000 for the years ending October 31, 1998 and 1997,
respectively.
14. CONTINGENCY:
The Company is the defendant in two lawsuits and is involved in one other matter
of litigation through indemnification agreements with several customers. On
November 20, 1998, the Company was notified that it was named as part of a group
of defendants in a lawsuit brought by Allendale Mutual Insurance Co.
("Allendale"). This case involves the failure of a Hitachi PBX system located at
one of the Company's customer locations. The PBX system was under a maintenance
contract with the Company when the failure of the PBX system occurred.
Allendale, the insurance carrier for the Company's customer, alleges that as a
result of the defendants' negligence, the customer suffered property damage,
business interruption, and loss of revenue for which Allendale paid $926,519.
Allendale also alleges that the PBX's failure constituted a breach by the
Company of its contract with the customer and that this failure also gives rise
to a product liability claim against the Company, Hitachi and other unnamed
defendants. The Company denies liability in this matter and will vigorously
defend itself in this lawsuit. Currently, the Company's insurance carrier is
providing the defense for the Company in this matter.
Since 1995, the Company has been a defendant in a lawsuit brought by Associated
Business Telephone Systems, Inc. ("ABTS"), a former customer of the Company. The
Company has vigorously defended itself in this lawsuit and as a result, some of
ABTS' initial claims have been dismissed and their claim for damages has been
reduced to $809,000. The Company has also filed a counter-claim against ABTS,
based on breach of contract, seeking damages in excess of $3 million. The court
has recently re-opened discovery on the limited issue of damages and as a
result, there currently is no trial date set in this matter. The Company intends
to continue its vigorous defense against ABTS' claims as well as continuing to
pursue its own claims against ABTS.
The final matter of litigation involves a group of patent infringement cases in
which several of the Company's customers are among the defendants. Phonometrics,
Inc., a Florida company brought these cases against several telecommunications
equipment manufacturers and hotels that use such equipment. The Company was not
named in any of the suits, but several of the hotel defendants notified the
Company that they were seeking indemnification under the terms of their
agreements with the Company. The Company has not assumed the outright defense of
any of these customers. Phonometrics is seeking damages based on a reasonable
royalty of the hotel's profits derived from use of the allegedly infringing
equipment. All of the hotel related cases were stayed by the court pending the
outcome of one of the cases against an equipment manufacturer. By the end of
1998, Phonometrics had lost all of its available appeals in this case and had
been ordered to pay the manufacturer's costs and attorney fees. As a result of
this outcome, the court dismissed and closed all of the cases against the
hotels. Phonometrics is appealing the dismissal of the hotel cases. The Company
will continue to monitor this attempt by Phonometrics to resurrect these cases.
F-14
<PAGE> 30
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 $160,000 and
$129,000 for the years ending October 31, 1998 and 1997, respectively.
F-15
<PAGE> 31
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 55 President, Chief Executive Officer and
Director
Ronald L. Siegenthaler 55 Executive Vice President and Director
Robert B. Wagner 37 Vice President of Finance, Chief Financial
Officer, Treasurer, Secretary and
Director
Tom R. Crofford 47 Vice President of Engineering
Charles H. Rowland 57 Vice President of Manufacturing
Thomas A. Luce 42 Vice President of Service
Donald E. Reigel 44 Vice President of Marketing and Sales
Ron B. Barber 44 Director
Donald T. Duke 49 Director
Dr. Robert D. Hisrich 54 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.
16
<PAGE> 32
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 been a director of the Company since March 1987. He 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, which serves as counsel to the Company. 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 Energy Co. L.L.C., an oil and gas consulting and investment
firm. Mr. Duke has been in senior management in the oil and gas industry since
1980, including time as President and Chief Operating Officer of Hadson
Petroleum (USA), Inc., a domestic oil and gas subsidiary of Hadson Corporation,
where he 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 Bovaird 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 and amendments thereto
furnished to the Company during its most recent fiscal year and Forms 5 and
amendments thereto furnished to the Company with respect to its most recent
fiscal year and written representations made to the Company by its directors and
officers and by certain beneficial owners of more than ten percent of its Common
Stock, the Company knows of no director, officer, or beneficial owner of more
than ten percent of the Company's Common Stock who has failed to file on a
timely basis reports of beneficial ownership of the Company's Common Stock as
required by Section 16(a) of the Securities Exchange Act of 1934, as amended,
except as follows. The Company utilizes an internal reporting system which legal
counsel to the Company implemented and operates to assist the Company's officers
and directors with compliance with their Section 16 reporting obligations. All
of the Company's officers and directors complied with this internal reporting
system, but subsequent clerical error, which was only discovered after the
relevant reporting periods, resulted in a failure to generate and timely file
the corresponding Forms 4 and 5 for Mr. Reigel, Mr. Rowland and Mr. Luce.
Consequently, Mr. Reigel failed to timely file two reports (a Form 4 and the
subsequent Form 5), both of which related to the same single transaction; Mr.
Rowland failed to timely file two reports (a Form 4 and the subsequent Form 5),
both of which related to two related transactions (a stock option exercise and
sale of underlying shares); and Mr. Luce failed to timely file two reports (a
Form 4 and the subsequent Form 5), both of which related to the same single
transaction.
17
<PAGE> 33
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 22, 1999
and to be used in connection with the Company's Annual Meeting of Shareholders
to be held March 25, 1999 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 22, 1999 and to be used in connection with the Company's
Annual Meeting of Shareholders to be held March 25, 1999 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 22, 1999 and to be
used in connection with the Company's Annual Meeting of Shareholders to be held
March 25, 1999 is hereby incorporated by reference.
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Exhibits made a part of this report are set forth in the Exhibit Index which
appears at Page 20.
(b) The Company filed one report on Form 8-K during the last quarter of the
fiscal year ended October 31, 1998, as follows:
Item Reported Date Filed
------------- ----------
Acquisition of Assets October 2, 1998
Pro forma financial information December 4, 1998
(filed by amendment to Form 8-K)
18
<PAGE> 34
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
XETA CORPORATION
JANUARY 28, 1999 BY: /s/ Jack R. Ingram
----------------------------------
JACK R. INGRAM, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
In accordance with 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 28, 1999 /s/ Jack R. Ingram
--------------------------------------
JACK R. INGRAM, PRESIDENT,
CHIEF EXECUTIVE OFFICER AND DIRECTOR
JANUARY 28, 1999 /s/ Robert B. Wagner
--------------------------------------
ROBERT B. WAGNER, VICE PRESIDENT OF
FINANCE, CHIEF FINANCIAL OFFICER,
AND DIRECTOR
JANUARY 26, 1999 /s/ Donald T. Duke
--------------------------------------
DONALD T. DUKE, DIRECTOR
JANUARY 27, 1999 /s/ Ronald L. Siegenthaler
--------------------------------------
RONALD L. SIEGENTHALER, DIRECTOR
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EXHIBIT INDEX
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, 1998
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 Dealer Agreement Between Lucent Technologies and XETA
Corporations Systems effective as of November 6, 1998.
(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.
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<PAGE> 1
EXHIBIT 10.2
DEALER AGREEMENT BETWEEN LUCENT TECHNOLOGIES AND XETA
CORPORATION FOR BUSINESS COMMUNICATIONS SYSTEMS
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TABLE OF CONTENTS
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1.0 DEFINITIONS..............................................................................................1
2.0 DEALER APPOINTMENT.......................................................................................3
3.0 DEALER RESPONSIBILITIES..................................................................................4
4.0 INSTALLATION, WARRANTY AND POST-WARRANTY SERVICES........................................................6
5.0 DEALER ORDERS............................................................................................8
6.0 DEALER CANCELLATION OF ORDERS............................................................................8
7.0 PRODUCT, PRODUCT COMPONENTS,AND SOFTWARE LICENSE CHANGES.................................................8
8.0 DEALER PRICES AND DISCOUNTS..............................................................................9
9.0 DEALER PRICE LIST AND DISCOUNT CHANGES...................................................................9
10.0 LUCENT BILLING AND DEALER PAYMENT.......................................................................10
11.0 DEALER FORECAST AND REPORTS.............................................................................10
12.0 TITLE AND RISK OF LOSS..................................................................................11
13.0 INSURANCE...............................................................................................11
14.0 USE OF INFORMATION......................................................................................11
15.0 LICENSE.................................................................................................13
16.0 TRADEMARKS..............................................................................................13
17.0 PRODUCT WARRANTY........................................................................................14
18.0 LIMITATION OF LIABILITY.................................................................................15
19.0 INDEMNITY...............................................................................................16
20.0 INFRINGEMENT............................................................................................17
21.0 TERMINATION OF AGREEMENT................................................................................17
22.0 EFFECTS OF TERMINATION..................................................................................18
23.0 SURVIVAL OF OBLIGATIONS.................................................................................19
24.0 FORCE MAJEURE...........................................................................................19
25.0 SECURITY INTEREST.......................................................................................20
26.0 SEVERABILITY............................................................................................20
27.0 ASSIGNMENT..............................................................................................20
28.0 NON-WAIVER..............................................................................................21
29.0 CHOICE OF LAW AND DISPUTES..............................................................................21
30.0 NOTICES.................................................................................................22
31.0 ENTIRE AGREEMENT........................................................................................22
32.0 TERM....................................................................................................22
PRODUCT APPENDIX:GUESTWORKS(TM) PRODUCTS.........................................................................23
PRODUCT APPENDIX: DEFINITY(R) ECS PRODUCTS......................................................................28
</TABLE>
<PAGE> 2
AGREEMENT NO.: NEDA4 981100
DEALER AGREEMENT BETWEEN LUCENT TECHNOLOGIES AND
XETA CORPORATION FOR BUSINESS COMMUNICATIONS SYSTEMS
This Dealer Agreement ("Agreement") is effective as of November 6, 1998
and is between Lucent Technologies Inc.("Lucent"), a Delaware corporation,
through its Business Communications Systems unit ("BCS"), with offices at 211
Mount Airy Road, Basking Ridge, New Jersey 07020, and Xeta Corporation,
("Dealer"), an Oklahoma corporation, with offices at 5350 Manhattan Circle,
Suite 210, Bolder, CO. 80303.
WHEREAS, Lucent desires in certain geographic areas of the United
States to have others with the necessary marketing capabilities, integrity and
dedication to End User satisfaction to assist Lucent in marketing complete
business telecommunications systems to End Users;
WHEREAS, Dealer represents that it has the necessary marketing
capabilities, integrity and dedication to sell forecast quantities of complete
Lucent business telecommunications systems to End Users located in Dealer's
Area.
WHEREAS, the parties represent that each will conduct its business in a
manner that reflects favorably on the quality image of itself, the other party
and Lucent's Products;
WHEREAS, Lucent has relied upon these Dealer representations and
forecasts as the basis for granting Dealer the right to market its Lucent
Products in the Area;
NOW, THEREFORE, Lucent and Dealer hereby agree as follows:
1.0 DEFINITIONS
For the purposes of this Agreement, the following terms and their
definitions shall apply:
1.1 "Area" means the specific geographic area in which Dealer or one of
its Dealers has agreed to market Lucent Products in accordance with this
Agreement. The specific geographic areas that comprise the Area are identified
by city, state, county and zip code or other appropriate description in Appendix
B.
1.2 "Dealer Service" means one or more of those services Dealer may
choose to perform itself for Lucent Products in the Area. Dealer Services
include system configuration to the End User, installation, warranty, and
provision of post-warranty on-site maintenance.
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1.3 "End User" means a third party to whom Dealer markets or sells
Lucent Products within the Area for use by such third party in the ordinary
course of its business and not for resale; End User does not include any Lucent
BCS Global Account or any office, department, agency, or defense installation of
the United States Government.
1.4 "Lucent Product" means a Lucent equipment model identified in a
Product Appendix to this Agreement that Dealer has purchased directly from
Lucent through its BCS Distribution Development and Management group or an order
source within Lucent designated by the BCS Distribution Development and
Management group (collectively, "DDM") and that carries the standard Lucent
warranty when resold to an End User. Lucent Products under this agreement are
new only. Each Lucent Product consists of one or more Product Components. The
set of Product Components that may be used to equip a Lucent Product is
determined solely by Lucent, which has the right to reject any order placed by
Dealer that does not reflect rational complete Lucent Products or reasonable
inventory requirements.
1.5 "Lucent Service" means one or more of those services provided by
Lucent that Dealer may choose to resell as a Lucent Service Sales Agent,
including system configuration, installation, provision of post-warranty and
on-site and remote maintenance service, and Professional Services. Lucent
Service also includes post-warranty remote maintenance service separate from
post-warranty on-site maintenance service, which Dealer may offer in conjunction
with Dealer Service. Lucent Services, including the prices at which they may be
offered to end users and the commissions payable on their sale, and the price at
which Lucent will provide remote maintenance service as a subcontractor for
Dealer Service are described and identified in the Dealer Handbook.
1.6 "Product Component" means an item of equipment identified by a
Lucent equipment price element code. To the extent that a Product Component
contains or consists of any firmware or software, an End User shall have the
right to use such firmware or software in accordance with Section 15.0.
1.7 "Software" means any computer program that is composed of routines,
subroutines, instructions, processes, algorithms, and like ideas or know-how,
owned by or licensed to Lucent and or one or more of its suppliers, regardless
of the medium of delivery, including revisions, patches and updates of the same.
1.8 "Territory" means the United States of America, including the
District of Columbia but excluding 1) the Commonwealth of Puerto Rico and all
other territories, protectorates and possessions of the United States of
America, and 2) the geographical areas defined as the "Primary Area of
Responsibility" for Cincinnati Bell Telecommunication Services Inc. (the
operating area of Cincinnati Bell Telephone Company in the states of Ohio,
Indiana and Kentucky). The above listed exclusions do not preclude Dealer from
making sales calls and obtaining contracts with customers headquartered in the
excluded areas so long as all Lucent Products under such contracts are installed
outside the excluded areas.
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2.0 DEALER APPOINTMENT
2.1 Lucent hereby appoints Dealer, and Dealer hereby accepts an
appointment, to be an authorized Lucent Dealer for the limited purpose of
marketing and selling from authorized marketing locations in the Area the Lucent
Products listed in a Product Appendix to End Users within the Area and the
Territory in accordance with the terms and conditions of this Agreement. If
Dealer has marketed or sold new or Classic Lucent Products to an End User as
defined in Section 1.5 hereof, which Lucent Products are installed and used at
premises within Dealer's Area, Dealer may market and sell limited quantities of
Lucent Products to other locations of that End User outside the Area but in the
Territory. Lucent's appointment of Dealer is predicated on Dealer's agreement to
market the Lucent Products in the Area and to achieve the Area forecast
submitted pursuant to Section 11.0 of this Agreement. Lucent Products installed
outside the Area will not be considered by Lucent when determining whether
Dealer has achieved its Area forecast submitted pursuant to Section 11 of this
Agreement. Dealer's sales of Lucent Products outside the Area (unless
specifically permitted by this Section 2.1), Dealer's failure to limit its
marketing efforts and sales of Lucent Products to authorized locations or
authorized End-Users, or Dealer's failure to achieve levels of sales acceptable
to Lucent in the Area shall, among others, be grounds for termination or
nonrenewal of this Agreement.
2.2 Dealer shall have no right to authorize others to resell or market
Lucent Products and any such authorization or attempted authorization shall be
void and without effect. Dealer's sales of Lucent Products to other resellers
shall be grounds for termination or nonrenewal of this Agreement. Dealer is not
authorized to employ sales agents (other than an employee of Dealer located at
an authorized Dealer marketing location) or other independent contractors to
market Lucent Products. Dealer agrees that it has no exclusive right to market
the Lucent Products set forth in a Product Appendix hereto in the Area or
Territory, and that no franchise is granted to Dealer herein. No payment of any
fee or equivalent charge is required of Dealer by Lucent as a condition of this
Agreement.
2.3 Lucent expressly reserves both the right to contract with others to
market Lucent Products in the Territory and the Area and to itself directly
engage in such marketing.
2.4 The relationship of the parties under this Agreement shall be, and
shall at all times remain, one of independent contractors and not that of
franchisor and franchisee, joint venturers, or principal and agent. Neither
party shall have any authority to assume or create obligations on the other's
behalf with respect to Lucent Products, and neither party shall take any action
that has the effect of creating the appearance of its having such authority.
2.5 Dealer, directly or through a contractor, shall be solely
responsible for payment of all their unemployment, Social Security and other
payroll taxes including contributions from Dealer when required by law. No
person furnished by Dealer to sell Products or provide Services under this
agreement shall under any circumstances be deemed to be an employee of Lucent.
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2.6 Dealer may market Lucent Products only from the authorized
marketing locations set forth in a Product Appendix. During the term of this
Agreement, no new or additional Dealer marketing location(s) may be established
in or outside of the Area to market Lucent Products without prior written
authorization from Lucent.
2.7 Dealer may not market or sell Lucent Products to any Lucent BCS
Global Account, or any office, department, agency, or defense installation of
the United States Government. Dealer is not appointed or authorized to market or
sell Lucent Products to any Lucent BCS Global Account or to the United States
Government by reason of the fact that Dealer has, in the past, sold used or
unused products manufactured by Lucent to such Global Accounts or to the United
States Government.
3.0 DEALER RESPONSIBILITIES
3.1 Dealer has previously submitted to Lucent an "Authorized Dealer
Application". Dealer certifies and warrants that, to the best of its knowledge,
such information is current, accurate, complete and not misleading. Dealer also
agrees during the term of this Agreement to notify Lucent immediately in writing
and describe in detail any significant or material change in such information.
3.2 Dealer agrees to devote its best efforts to promote and market
Lucent Products to End Users within the Area. Dealer also warrants that it will
conduct its business in a manner that reflects favorably on the quality image of
Lucent Products and on the good name, goodwill or reputation of Lucent and will
not employ deceptive, misleading or unethical practices that are or might be
detrimental to Lucent or its Products.
3.3 Dealer shall not purchase or otherwise obtain Lucent Products for
resale from any source other than DDM unless a Lucent Product is not available
from BCS on a timely basis, in which case Dealer may purchase that Lucent
Product from the Lucent Catalogs or the NPSC, provided that such purchases are
only to meet a specific customer need. Dealer's purchase or resale of an unused
product originally manufactured by Lucent that, if purchased from DDM, would be
a Lucent Product under this Agreement, shall be grounds for immediate
termination of this Agreement.
3.4 Dealer shall provide and consistently maintain a staff of
adequately trained and competent sales personnel, knowledgeable of the
specifications, features and advantages of the Lucent Products. Such personnel
shall be made aware of the restrictions on use of Lucent's Information as set
forth in Section 14.0. All training that Lucent requires Dealer personnel to
undergo that enables Dealer to market and demonstrate Lucent Products
effectively shall be provided at no charge to Dealer. All other marketing or
Lucent Product training requested by the Dealer and offered by Lucent, will be
furnished to Dealer at Lucent's standard rates, terms and conditions. However,
Lucent will waive such fees to train the first 10 Dealer sales personnel.
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3.5 If Dealer chooses to provide Dealer Service, Dealer shall provide
and consistently maintain a staff of services personnel, trained on the Lucent
Products to Lucent's specifications. Such personnel shall be made aware of the
restrictions on use of Lucent's Information as set forth in Section 14.0. All
services training that Lucent requires Dealer personnel to undergo, or other
services training requested by the Dealer and offered by Lucent, will be
furnished to Dealer at Lucent's standard rates, terms and conditions. . However,
Lucent will waive such fees to train the first 50 Dealer technicians and 5
Dealer CSRs. If Dealer has subcontracted with Lucent to perform all or part of
Dealer Service to an End User and Dealer installs unused product (s)
manufactured by Lucent but not purchased from DDM as part of that End User's
system, in addition to any other remedies available to Lucent, Lucent may
terminate any Dealer licenses to use Lucent maintenance software and may also
terminate its subcontracts with Dealer to perform Dealer Service. If Dealer has
sold a Lucent Product system and a Lucent Post-Warranty Maintenance service
contract to an End User, Dealer will advise such End User that addition of
unused product (s) to the Lucent Product system may void Lucent's warranty and
cause Lucent to terminate the service contract.
3.6 Dealer agrees to purchase and maintain a working Lucent system
either as a demonstration model or as Dealer's primary telecommunications system
at Dealer's principal marketing location.
3.7 Dealer shall inform End Users of the Services available from
Dealer.
3.8 Dealer shall report promptly to Lucent all known or suspected
Lucent Product defects or safety problems and keep Lucent informed of End User
complaints with respect to Lucent Products or Services.
3.9 Dealer shall provide Lucent reasonable access to Dealer's premises
during normal business hours to inspect and verify Dealer performance of its
obligations under this Agreement, including the right to inspect and audit
Dealer's records relating to Lucent Product transactions in and out of Dealer's
Area, Dealer's purchases and sales of unused products, Distribution Functions
and Dealer Services.
3.10 Dealer shall comply with all applicable requirements of federal,
state and local laws, ordinances, administrative rules and regulations,
including, by way of illustration and not limitation, all requirements of Part
68 of the Federal Communication Commission's (FCC) Rules and Regulations and the
Federal Export Administration Act of 1969, 50 U.S.C. app. Sections 2401-2414.
3.11 To ensure timely delivery to End Users, Dealer shall maintain,
subject to availability from Lucent, an adequate inventory of Lucent Products.
Upon request, Dealer shall make available to Lucent the status of Dealer's
current inventory of Lucent Product Components.
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3.12 Dealer shall have the capability of providing End Users reasonable
financing alternatives to facilitate the procurement of Lucent Products and
Dealer Services. Dealer shall furnish evidence of such capability to Lucent upon
request.
3.13
a. To ensure fulfillment of Lucent's Product and Software
warranties to End Users, to ensure End User safety, to ensure End Users
receive the latest information concerning the use of Lucent Products
and enhancements thereto, to maintain End User satisfaction, and to
assist Lucent in tracking equipment maintenance obligations and
materiel accountability, Dealer agrees to maintain and make available
to Lucent on reasonable request an accurate and complete list of
Dealer's Lucent Product and Software End Users by name, installation
address, the Lucent Product Components furnished to each End User, the
transaction date, and (for End Users who elect to install their own
systems only), all serial numbers associated with the new Lucent
Products, Software or new Lucent Product Components. The obligation to
maintain and make such information available to Lucent shall survive
expiration or termination of this Agreement. Lucent will use this
information solely for the purposes set forth in this Section 3.13.
b. If Lucent is to install the Products, Dealer shall give the
information described in 3.13 a., above, to the Lucent Branch where the
End User is located, in the agreed format, as soon as Dealer's order
process is completed. This will enable the customer to receive the
Lucent Warranty on the new Lucent Products and Software, and if the
customer has a Post Warranty Maintenance contract and has like
products, the new Lucent Products will automatically be added to that
contract when the Warranty expires.
3.14 Dealer shall keep accurate accounts, books and records relating to
the business of Dealer with respect to Lucent Products and Dealer Services in
accordance with generally accepted commercial and business accounting principles
and practices that are sufficient for Lucent to ascertain Dealer's compliance
with its obligations under this Agreement.
3.15 Dealer agrees to participate in Lucent's Customer Satisfaction
Surveys. Lucent may conduct performance reviews of all Dealer responsibilities.
3.16 By the fifth (5th) business day of each month, in a format to be
provided by Lucent to Dealer, Dealer will submit a point-of-sale report of sales
made the previous month, by ZIP code, line and station size for new or upgraded
systems, type of system, and the total price Dealer paid to Lucent for the
equipment sold in each ZIP code.
4.0 INSTALLATION, WARRANTY AND POST-WARRANTY SERVICES
4.1 Lucent agrees to furnish any Lucent Services required by End Users
purchasing Lucent Products from Dealer, as Dealer requests, until Dealer's
installation and maintenance personnel have completed training to the
satisfaction of Lucent. During such interim period, Dealer agrees to propose
Lucent, and only Lucent, Services in connection with
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each End User purchase of Lucent Products under this Agreement, and Dealer will
apply for appointment as a Lucent Service Sales Agent. Connection of unused
product (s) manufactured by Lucent to the Lucent Product system may void
Lucent's warranty to such End User and cause Lucent to terminate the Lucent
Services contract with such End User.
4.2 After such training has been completed, Services may be furnished
by the Dealer for Lucent Products under this Agreement, as required by End Users
purchasing such Lucent Products. To ensure Dealer provision of high quality
Services to End Users, Dealer shall perform such Services competently and in
accordance with any applicable Lucent standards. The indemnity obligations of
Dealer under Section 19.1 shall apply to any Services furnished by Dealer to End
Users. If Dealer desires to have Lucent perform certain Services for Dealer's
End Users, Dealer may continue to function as a Lucent Service Sales Agent.
4.3 Lucent's appointment of Dealer to market Lucent Products hereunder
is predicated on Dealer's agreement that it will hold itself out as authorized
by Lucent to provide Services only as to Lucent Products hereunder and will, to
the sole satisfaction of Lucent, clearly distinguish its authorization to
provide Services for such Lucent Products and its lack of authorization to
provide Services for other Lucent-manufactured equipment, unless such
authorization is provided by written agreement with Lucent. Dealer also agrees
to inform End Users of such distinction in Dealer's marketing (including
brochures or other printed or written materials) of Lucent Products and of any
other Lucent equipment. In addition to any other events of termination set forth
in this Agreement, Dealer's failure to distinguish between its authorization to
offer Services as to Lucent Products and its lack of authorization to offer
Services as to other Lucent equipment or to inform End Users of such distinction
shall entitle Lucent to terminate this Agreement upon written notice to Dealer.
4.4 Dealer may incorporate Lucent's remote maintenance support features
in its Services Offers to End Users. Lucent will serve as Dealer's subcontractor
for such remote maintenance. NO LICENSE IS GRANTED, AND NO TITLE OR OTHER
OWNERSHIP RIGHTS IN LUCENT'S INTELLECTUAL PROPERTY RELATED TO LUCENT'S PROVISION
OF REMOTE MAINTENANCE SUPPORT SHALL PASS TO DEALER UNDER THIS AGREEMENT OR AS A
RESULT OF ANY PERFORMANCE HEREUNDER. Dealer agrees to provide Lucent with
accurate information on End User port capacity, software attachments, and other
information required in order for Lucent to invoice Dealer accurately for such
remote support. Failure to provide such accurate information or to update it on
a timely basis shall entitle Lucent to terminate this Agreement upon written
notice to Dealer. Connection of unused product (s) manufactured by Lucent but
not purchased from DDM as part of an End User's system may, in addition to any
other remedies available to Lucent, permit Lucent to terminate any Dealer
licenses to use Lucent maintenance software and also terminate its subcontract
(s) with Dealer to perform Dealer Service.
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5.0 DEALER ORDERS
5.1 Orders for Lucent Products submitted by Dealer shall refer to this
Agreement's identification number and shall contain the information necessary
for proper delivery and invoicing of Product Components including, without
limitation, the date of the order, a description of and the price element code
for Product Components to be furnished and any shipping instructions. All orders
submitted by Dealer shall be deemed to incorporate and be subject to the terms
and conditions of this Agreement as well as any supplemental terms and
conditions agreed to in a writing signed by the authorized representatives of
both parties. All other terms and conditions contained on any order form or
correspondence originated by Dealer are rejected and shall have no effect.
Lucent may require that Product Components be ordered only in factory-packed
quantities or in minimum order amounts. Lucent reserves the right to reject any
order or portion thereof, which right will not be exercised unreasonably..
5.2 Lucent will ship Lucent Products ordered by Dealer only to the
authorized shipping location(s) within the Area specified in a Product Appendix,
or only if Lucent is installing the Products, to the premises of an End User
within the Area.
6.0 DEALER CANCELLATION OF ORDERS
Dealer may, upon prior written notice to Lucent, cancel any order or
portion thereof except with respect to Lucent Product Components that have
already been delivered by Lucent to a carrier for shipment to Dealer. Dealer
agrees to pay to Lucent, upon any such cancellation, a liquidated amount equal
to fifteen percent (15%), if the canceled order is not for a configured system
or systems, or twenty percent (20%), if the canceled order is for a configured
system or systems, of the purchase price of the canceled portion of the order to
compensate Lucent for its costs and expenses associated with such cancellation.
If an order is delayed or suspended for more than two months at the request of,
or for reasons attributable to, Dealer, such order shall be considered as having
been canceled and will be subject to the cancellation charges set forth in this
Section.
7.0 PRODUCT, PRODUCT COMPONENTS,AND SOFTWARE LICENSE CHANGES
7.1 Lucent may without the consent of Dealer, but with ninety (90) days
advance written notice to Dealer, delete any Lucent Product from Appendix A and,
upon thirty (30) days advance written notice to Dealer, delete any Lucent
Product Component listed in Appendix A.
7.2 Lucent may, at any time without advising Dealer, make changes in
the Lucent Products or Lucent Product Components or modify the drawings and
specifications relating thereto, or substitute Lucent Products or Lucent Product
Components of later design to fill an order, provided the changes, modifications
or substitutions under normal and proper use do not adversely impact upon form,
fit or function or are recommended by Lucent to enhance safety. Lucent may, at
any time with ten days advance written notice to Dealer, change the terms of its
End User Software License.
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8.0 DEALER PRICES AND DISCOUNTS
8.1 The prices applicable to Dealer orders requesting shipment within
Lucent's then current Lucent Product shipment intervals shall be determined in
accordance with: (i) Lucent's Dealer List prices in effect on the date an order
is accepted by Lucent (i.e., the date it is entered in Lucent's order processing
system); (ii) the Dealer discount schedule in effect on the date the order is
accepted by Lucent; and (iii) the provisions of this Section 8.0. Lucent's
current Dealer Prices and Dealer discount and rebate schedules are contained in
the Dealer Handbook. Dealer orders requesting delayed shipment (i.e., shipment
on dates beyond Lucent's then current Lucent Product shipment intervals) shall
be subject to price increases and discount decreases that become effective
before shipment.
8.2 The discount applicable to Dealer orders placed, and not
subsequently canceled, during the term of this Agreement and any subsequent term
of a substantially similar Agreement, will be determined based on the then
effective discount schedule and the actual dollar value, based on Dealer List
Prices, of all orders placed and not subsequently canceled during the
immediately preceding quarter. The otherwise applicable discount percentage will
be reduced by an amount set forth in the then effective discount schedule for
the quarter following any quarter in which Lucent learns of Lucent Product sales
by Dealer not in conformance with the terms of Section 2.1 of this Agreement.
8.3 Lucent may verify or audit Dealer's Lucent Product sales records or
rebate calculations and request copies of invoices, shipping documents, payment
records and the like in connection with such audits, which requests will not be
unreasonably refused.
9.0 DEALER PRICE LIST AND DISCOUNT CHANGES
9.1 Lucent may decrease Dealer list prices or increase discounts or
rebates in the Dealer discount or rebate schedules without advance notice to or
the consent of Dealer. Lucent agrees to provide written notice of any such price
or discount changes and the effective date thereof. Lucent agrees to provide to
Dealer on previously ordered Lucent Products either a) a recomputation of the
amounts payable for all orders accepted by Lucent within sixty (60) days prior
to the effective date of the applicable price decrease or discount increase, or
b) a recomputation of Dealer charges based on actual inventory held by Dealer at
Dealer's authorized shipping location on the date Dealer receives notification
of the applicable price decrease or discount increase, whichever is greater .
Lucent reserves the right to audit associated inventory levels. The difference
between the recomputed amounts and previously invoiced amounts will be reflected
as a credit to Dealer's account. Lucent also may institute promotional price
decreases or discount increases at any time under such terms and conditions as
Lucent in its sole discretion shall determine are appropriate. Promotional
prices and discounts shall apply only during the period specified by Lucent and
there shall be no recomputation of amounts payable by Dealer for orders placed
prior to such period.
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9.2 Lucent may, without the prior consent of Dealer, increase Dealer
list prices or decrease discounts or rebates in the Dealer discount or rebate
schedules provided Lucent furnishes Dealer written notice of any such changes
sixty (60) days in advance of the effective date.
9.3 Unless expressly stated to the contrary, Dealer list prices do not
include taxes or Lucent's charges for related domestic transportation or storage
services. Lucent's Dealer list prices do include its standard packing for
domestic shipment. All Lucent Product prices are F.O.B. Lucent's shipping point.
Unless Dealer furnishes Lucent a valid tax exemption certificate, Dealer shall
pay all applicable taxes, however designated, resulting from this Agreement or
any activities hereunder (exclusive of any tax based on or measured by net
income).
10.0 LUCENT BILLING AND DEALER PAYMENT
Invoices for Lucent Products will be sent by Lucent upon shipment, or
as soon thereafter as practicable. Unless Dealer is otherwise notified by Lucent
in writing, Dealer shall pay the invoiced amount in full on receipt of Lucent's
invoice. Payments not received within thirty (30) days of the invoice date may,
at Lucent's option, incur a late payment charge that shall be computed at the
rate of one and one-half percent (1-1/2%) of the overdue amount per month or the
maximum lawful rate, whichever is lower. The amount of Dealer credit or terms of
payment may be changed or credit withdrawn by Lucent at any time upon notice to
Dealer in writing, unless Dealer provides Lucent with adequate assurance of
performance, as that phrase is used in Section 2-609 of the Uniform Commercial
Code as adopted in Delaware within ten days of any such written notice.
11.0 DEALER FORECAST AND REPORTS
11.1 Upon execution of this Agreement, Dealer shall submit to Lucent a
forecast of total Lucent Product orders to be placed by Dealer during the
contract term. The forecast must specify, for each quarter, the total dollar
order volume (based on Dealer Price List prices) and the dollar value and total
unit quantities of each Lucent Product construct (i.e., average configuration of
Lucent Product Components in an initial End User installation of a Lucent
Product model) to be ordered. In the event of price increases or discount
decreases, as described in Section 9.2 hereof, Dealer may amend its current
forecast within 30 days of the receipt of written notice of such price changes.
11.2 Lucent may reject any forecast submitted by Dealer if, in Lucent's
sole judgment, such forecast does not project either: (1) the level of Lucent
Product orders Lucent reasonably requires of Dealer to achieve its marketing
objectives in the Area; or (2) a realistic assessment of Dealer's potential
successful marketing opportunities in the Area during the forecast period.
Lucent shall notify Dealer in writing within thirty (30) days of receipt of
Dealer's forecast if Lucent has rejected such forecast or it will be deemed to
have been accepted by Lucent.
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11.3 Dealer shall submit the forecast of Lucent Product orders and
actual Lucent Product installation data specified in Section 11.1 in a format
specified by Lucent.
12.0 TITLE AND RISK OF LOSS
12.1 Title (except for firmware and software) and risk of loss or
damage to Lucent Products shall pass to Dealer: (i) at the time Lucent or its
supplier delivers possession of the Lucent Products to a carrier; or (ii) if
there is no carrier, at the time Dealer takes possession of the Lucent Products
at Lucent's or its supplier's plant or warehouse or other facility. Claims for
shortages or for merchandise damaged during shipment must be filed with the
freight carrier by Dealer. Lucent will cooperate with Dealer but will not assume
responsibility for the processing or collection of claims. Dealer may make no
deductions from invoices for claims against a carrier.
12.2 TO BE EFFECTIVE, DEALER REJECTION OR REVOCATION OF ACCEPTANCE OF
NONCONFORMING GOODS MUST BE MADE BY WRITTEN NOTICE TO LUCENT WITHIN TEN (10)
DAYS AFTER DELIVERY. LUCENT PRODUCTS REJECTED OR NOT ACCEPTED BY DEALER MUST BE
RETURNED WITHIN THIRTY (30) DAYS IN THEIR ORIGINAL PACKAGING IN ACCORDANCE WITH
LUCENT'S INSTRUCTIONS. A restocking charge in the amount of twenty percent (20%)
of the purchase price will apply to returns, accepted by Lucent, of products
ordered in error by Dealer.
13.0 INSURANCE
Dealer shall maintain, during the term of this Agreement, all insurance
and bonds required by any applicable law, including but not limited to: (1)
workers' compensation insurance as prescribed by the laws of all states in which
work pursuant to this Agreement is performed; (2) employer's liability insurance
with limits of at least $1 million per occurrence; and (3) comprehensive
personal liability insurance coverage (including products liability coverage and
comprehensive automobile liability coverage) with limits of at least $1 million
for bodily injury, including injury to any one person and $1 million on account
of any single occurrence, and $1 million for each occurrence of property damage,
or in lieu of such limits, bodily injury and property damage liability insurance
(including products liability and comprehensive automobile coverage) with a
combined single limit of at least $2 million per occurrence. Dealer shall name
Lucent as an Additional Insured on all such policies. Upon request of Lucent,
Dealer shall furnish adequate proof of such insurance.
14.0 USE OF INFORMATION
All technical and business information, Dealer List prices, discounts
or rebates, and trade secrets in any form, furnished to Dealer under or in
contemplation of this Agreement and identified as or known by Dealer to be
proprietary to Lucent (all hereinafter designated "Information") shall remain
the property of Lucent. Unless Lucent otherwise expressly agrees in writing,
such Information: (i) shall be treated in confidence by Dealer and used by
Dealer only
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for the purposes of performing Dealer's obligations under this Agreement; (ii)
shall not be disclosed to anyone, except to employees of Dealer and End Users to
whom such disclosure is necessary to the use for which rights are granted
hereunder; (iii) shall not be reproduced or copied in whole or in part, except
as necessary for use as authorized in this Agreement; and (iv) shall, together
with any copies thereof, be returned, be destroyed or, if recorded on an
erasable storage medium, be erased when no longer needed or when this Agreement
terminates, whichever occurs first. Any copies made as authorized herein shall
contain the same copyright notice or proprietary notice or both that appear on
the Information copied. The above conditions do not apply to any part of the
Information (i) which is or becomes known to the receiving party or its
affiliates free of any obligation to keep same in confidence; (ii) which is or
becomes generally available to the public without breach of this Agreement; or
(iii) which is developed by the receiving party or its affiliates. The
obligation of confidentiality and restrictions on use of Information shall exist
for a period of (i) five (5) years after the termination of this Agreement, or
(ii) ten (10) years after the receipt of such Information, whichever is longer.
All technical and business information and trade secrets in any form,
furnished to Lucent under or in contemplation of this Agreement and identified
as or known by Lucent to be proprietary to Dealer (all hereinafter designated
"Information") shall remain the property of Dealer. Unless Dealer otherwise
expressly agrees in writing, such Information: (i) shall be treated in
confidence by Lucent and used by Lucent only for the purposes of performing
Lucent's obligations under this Agreement; (ii) shall not be disclosed to
anyone, except to employees of Lucent and End Users to whom such disclosure is
necessary to the use for which rights are granted hereunder; (iii) shall not be
reproduced or copied in whole or in part, except as necessary for use as
authorized in this Agreement; and (iv) shall, together with any copies thereof,
be returned, be destroyed or, if recorded on an erasable storage medium, be
erased when no longer needed or when this Agreement terminates, whichever occurs
first. Any copies made as authorized herein shall contain the same copyright
notice or proprietary notice or both that appear on the Information copied. The
above conditions do not apply to any part of the Information (i) which is or
becomes known to the receiving party or its affiliates free of any obligation to
keep same in confidence; (ii) which is or becomes generally available to the
public without breach of this Agreement; or (iii) which is developed by the
receiving party or its affiliates. The obligation of confidentiality and
restrictions on use of Information shall exist for a period of (i) five (5)
years after the termination of this Agreement, or (ii) ten (10) years after the
receipt of such Information, whichever is longer.
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15.0 LICENSE
15.1 Upon delivery of Lucent Product firmware and software to Dealer,
Lucent grants to Dealer a personal and non-exclusive right to use such licensed
materials ("Licensed Materials") in the Area and Territory solely to fulfill its
duties and obligations under this Agreement. NO TITLE OR OTHER OWNERSHIP RIGHTS
IN INTELLECTUAL PROPERTY OR OTHERWISE IN THE LICENSED MATERIAL OR ANY COPY
THEREOF SHALL PASS TO DEALER UNDER THIS AGREEMENT OR AS A RESULT OF ANY
PERFORMANCE HEREUNDER.
15.2 Dealer agrees: (i) to make only those copies of Software necessary
for its use under this Agreement and assure that such copies contain any
proprietary or copyright notice appearing on the Software being copied; (ii) not
to reverse engineer, decompile or disassemble the Licensed Materials or
otherwise attempt to learn the source code, structure, algorithms or ideas
underlying the Licensed Materials; (iii) not to export the Licensed Materials
out of the Territory, and (iv) not to use the Software directly for any third
person or permit any third person to use the Software except as necessary under
this Agreement.
15.3 Lucent further grants to Dealer the right to furnish Licensed
Materials to End Users coincident with the sale of Lucent Products utilizing
such Licensed Materials, provided, however, that unless the Licensed Materials
come with a limited use license, which may be in the form of a shrink-wrap
(break-the-seal) agreement, provided by Lucent, Dealer obtains agreement in
writing from the End User, before or at the time of furnishing each copy of
Licensed Materials, in the form set forth in an Appendix to this Agreement.
16.0 TRADEMARKS
16.1 Lucent grants Dealer permission to utilize certain Lucent
designated trademarks, insignia, and symbols ("Marks") in Dealer's advertising
and promotion of Lucent Products furnished hereunder, provided such use conforms
to Lucent's standards and guidelines. Dealer shall not do business under any
Mark or any derivative or variation thereof, and Dealer shall not directly or
indirectly hold itself out as having any relationship to Lucent or its
affiliates other than as an "Authorized Lucent Dealer" or other Lucent approved
term. Except as provided in Section 22.2.2, Marks may only be used by Dealer to
advertise and promote the Lucent Products during the term of this Agreement.
Marks are not to be used by Dealer in any way to imply Lucent's endorsement of
products, licensed materials or services not furnished hereunder, such as used
or unused products originally manufactured by Lucent. Marks are not to be used
by Dealer in advertising or marketing materials, including print, radio,
television, broadcast facsimile, telemarketing or Internet websites, that reach
End User prospective customers outside Dealer's Area. Such uses of Marks will be
cause for immediate termination of this Agreement. Dealer will not alter or
remove any Mark applied to Lucent Products without the prior written approval of
Lucent. Nothing in this Agreement creates in Dealer and Dealer agrees not to
assert, any rights in the Marks.
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16.2 All Dealer-initiated advertisements or promotions using Marks or
any reference thereto, whether under a promotional allowance program or
otherwise, shall receive to pre-publication review and approval by Lucent with
respect to, but not limited to context, style, appearance, composition, timing
and media.
16.3 This Agreement does not give Dealer any rights to use the logo or
trademark of AT&T Corp. Such rights cannot be obtained under this Agreement or
any other Agreement with Lucent Technologies Inc.
17.0 PRODUCT WARRANTY
17.1 Dealer may, but is not required to, provide warranties and
remedies in addition to but not less than the warranties and remedies set forth
in Section 17.2. Dealer shall inform the End User of Lucent's Limitation of
Liability as set forth in Section 18 of this Agreement, in a reasonable manner.
Lucent hereby warrants to Dealer the title of the Lucent Products purchased
under this Agreement. This warranty of title is the only warranty provided to
Dealer.
17.2 Dealer shall, before or at the time of delivery of Lucent
Products, advise an End User of the following:
(i) that the Lucent Products may contain remanufactured parts
that are equivalent to new in performance and appearance;
(ii) that there is a toll fraud exclusion in Lucent's
warranty, with a specific reference to the words of that exclusion and an
explanation of the meaning of those words;
(iii) that the Lucent Products are warranted on the Delivery
or In-Service Date, whichever is applicable, and for a period of one (1) year
thereafter to operate in accordance with Lucent's standard published
specifications and if any Lucent Products are not operational during the
warranty period, that the End User shall notify the Dealer who at its option
will replace or repair those Lucent Products without charge.
Replaced Lucent Products become the property of Dealer; and
(iv) THAT LUCENT AND ITS AFFILIATES AND SUPPLIERS MAKE NO
OTHER WARRANTIES EXPRESS OR IMPLIED AND SPECIFICALLY DISCLAIM ANY WARRANTY OF
MERCHANTABILITY OR OF FITNESS FOR A PARTICULAR PURPOSE.
17.3 EXCEPT FOR THE WARRANTY OF TITLE TO DEALER AND THE LIMITED PRODUCT
WARRANTY TO DEALER'S END USERS REFERENCED IN THIS SECTION, LUCENT, ITS
AFFILIATES AND SUPPLIERS MAKE NO WARRANTIES EXPRESS OR IMPLIED AND SPECIFICALLY
DISCLAIM ANY WARRANTY OF MERCHANTABILITY OR OF FITNESS FOR A PARTICULAR PURPOSE.
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17.4 The indemnity obligations of Dealer under Section 19.1 shall apply
to Dealer's provision of End User warranty assistance services and to any
failure to refer to and explain the toll fraud exclusion to an End User.
18.0 LIMITATION OF LIABILITY
EXCEPT FOR PERSONAL INJURY AND EXCEPT FOR THE LIABILITY EXPRESSLY
ASSUMED BY LUCENT UNDER SECTIONS 19 AND 20 OF THIS AGREEMENT, THE LIABILITY OF
LUCENT AND ITS PARENT OR AFFILIATES FOR ANY CLAIMS, LOSSES, DAMAGES OR EXPENSES
FROM ANY CAUSE WHATSOEVER (INCLUDING CLAIMS OF INFRINGEMENT AND ACTS OR
OMISSIONS OF THIRD PARTIES) REGARDLESS OF THE FORM OF ACTION, WHETHER IN
CONTRACT, TORT OR OTHERWISE, SHALL NOT EXCEED THE LESSER OF THE DIRECT DAMAGES
PROVEN OR THE REPAIR, REPLACEMENT COSTS (INCLUDING THE COSTS OF COVER) OR
PURCHASE PRICE OF THE PRODUCTS OR SERVICE THAT DIRECTLY GIVES RISE TO THE CLAIM.
IN NO EVENT SHALL LUCENT OR ITS PARENT OR AFFILIATES BE LIABLE TO DEALER OR TO
ANY OTHER COMPANY OR ENTITY FOR ANY INCIDENTAL, RELIANCE, CONSEQUENTIAL OR ANY
OTHER INDIRECT LOSS OR DAMAGE (INCLUDING LOST PROFITS OR REVENUES OR CHARGES FOR
COMMON CARRIER TELECOMMUNICATION SERVICES OR FACILITIES ACCESSED THROUGH OR
CONNECTED TO PRODUCTS ["TOLL FRAUD"]) ARISING OUT OF THIS AGREEMENT. NO ACTION
OR PROCEEDING AGAINST LUCENT MAY BE COMMENCED MORE THAN TWELVE (12) MONTHS AFTER
THE CAUSE OF ACTION ACCRUES. THIS SECTION SHALL SURVIVE FAILURE OF AN EXCLUSIVE
REMEDY.
EXCEPT FOR PERSONAL INJURY, THE LIABILITY OF DEALER AND ITS PARENT OR
AFFILIATES FOR ANY CLAIMS, LOSSES, DAMAGES OR EXPENSES FROM ANY CAUSE WHATSOEVER
(INCLUDING CLAIMS OF INFRINGEMENT AND ACTS OR OMISSIONS OF THIRD PARTIES)
REGARDLESS OF THE FORM OF ACTION, WHETHER IN CONTRACT, TORT OR OTHERWISE, SHALL
NOT EXCEED THE LESSER OF THE DIRECT DAMAGES PROVEN OR THE REPAIR, REPLACEMENT
COSTS (INCLUDING THE COSTS OF COVER) OR PURCHASE PRICE OF THE PRODUCTS OR
SERVICE THAT DIRECTLY GIVES RISE TO THE CLAIM. IN NO EVENT SHALL DEALER OR ITS
PARENT OR AFFILIATES BE LIABLE TO LUCENT OR TO ANY OTHER COMPANY OR ENTITY FOR
ANY INCIDENTAL, RELIANCE, CONSEQUENTIAL OR ANY OTHER INDIRECT LOSS OR DAMAGE
(INCLUDING LOST PROFITS OR REVENUES OR CHARGES FOR COMMON CARRIER
TELECOMMUNICATION SERVICES OR FACILITIES ACCESSED THROUGH OR CONNECTED TO
PRODUCTS ["TOLL FRAUD"]) ARISING OUT OF THIS AGREEMENT. NO ACTION OR PROCEEDING
AGAINST DEALER MAY BE COMMENCED MORE THAN TWELVE (12) MONTHS AFTER THE CAUSE OF
ACTION ACCRUES. THIS SECTION SHALL SURVIVE FAILURE OF AN EXCLUSIVE REMEDY.
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19.0 INDEMNITY
19.1 Dealer will indemnify Lucent for the full amount of any settlement
or final judgment that arises out of a claim or suit by a third party to the
extent that such claim or suit is based on strict tort liability, breach of a
warranty provided by Dealer, or the intentional or negligent acts or omissions
of Dealer. Dealer's obligation to indemnify Lucent will be reduced in proportion
to which the settlement or final judgment is attributable to the strict tort
liability of Lucent, breach of a Lucent warranty, or the intentional or
negligent acts or omissions of Lucent, unless liability for such acts or
omissions of Lucent is otherwise excluded in other sections of this Agreement,
or the negligent acts or omissions of any other third party not under Dealer's
direct control. Dealer's obligation to indemnify Lucent shall be contingent
upon: (1) Lucent promptly notifying Dealer in writing of the existence of any
claim or suit that may result in a settlement or judgment for which Dealer may
be obligated to indemnify Lucent; (2) Lucent giving Dealer full opportunity and
authority to assume sole responsibility to settle and defend any such claim or
suit; and (3) Lucent furnishing to Dealer upon reasonable request all
information and assistance that Dealer deems to be reasonably required to settle
or defend such claim or suit. Dealer will also indemnify Lucent for the full
amount of any settlement or final judgment that arises out of a claim or suit by
a third party based on Dealer's establishment of its relationship with Lucent,
whatever the nature of the claim or suit. These indemnities are in lieu of all
other obligations of Dealer, express or implied, in law or in equity, to
indemnify Lucent for claims or suits covered by this section. Dealer's liability
to indemnify Lucent shall in no event exceed $500,000.
19.2 Unless Lucent's liability is otherwise limited or excluded in
other sections of this Agreement, Lucent will indemnify Dealer for the full
amount of any settlement or final judgment that arises out of a claim or suit by
a third party to the extent that such claim or suit is based on the strict tort
liability of Lucent, breach of a Lucent warranty, or the intentional or
negligent acts or omissions of Lucent. Lucent's obligation to indemnify Dealer
shall be reduced in proportion to which the settlement or final judgment is
attributable to the strict tort liability of Dealer, breach of a Dealer
warranty, or the intentional or negligent acts or omissions of Dealer or any
other third party not under Lucent's direct control. Lucent's obligation to
indemnify Dealer will be contingent upon: (1) Dealer promptly notifying Lucent
in writing of the existence of any claim or suit that may result in a settlement
or final judgment for which Lucent may be obligated to indemnify Dealer; (2)
Dealer giving Lucent full opportunity and authority to assume sole
responsibility to settle or defend any such claim or suit; and (3) Dealer
furnishing to Lucent upon reasonable request all information and assistance
available to Dealer that Lucent deems to be reasonably required to settle or
defend such claim or suit. THIS INDEMNITY IS IN LIEU OF ALL OTHER OBLIGATIONS OF
LUCENT, EXPRESS OR IMPLIED, IN LAW OR IN EQUITY, TO INDEMNIFY DEALER FOR CLAIMS
OR SUITS COVERED BY THIS SECTION. LUCENT'S LIABILITY TO INDEMNIFY DEALER SHALL
IN NO EVENT EXCEED $500,000.
19.3 The party electing to take responsibility for settling or
defending any claim or suit covered by this Section 19.0 will be responsible for
the attorney's fees and costs incurred by said party to settle or defend such
claim or suit.
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20.0 INFRINGEMENT
20.1 Lucent will defend or settle, at its own expense, any action
brought against Dealer or an End User, to the extent that it is based on a claim
that the normal use or sale of any Lucent Products provided under this Agreement
infringe any United States patent, trademark or copyright, that any licensed
materials provided under this Amendment infringe any United States copyright or
violate the trade secret of a third party. Lucent will pay those costs, damages
and attorneys' fees finally awarded against Dealer or an End User in any such
action attributable to any such claim, but such defense, settlements and
payments are conditioned on the following: (i) that Lucent shall be notified
promptly in writing by Dealer or an End User of any such claim; (ii) that Lucent
shall have sole control of the defense of any action on such claim and of all
negotiations for its settlement or compromise; (iii) that Dealer or End User
shall cooperate in a reasonable way to facilitate the settlement or defense of
such claim, and that Dealer or End User has made no statement or taken any
action that might hamper or undermine Lucent's defense or settlement; (iv) that
such claim does not arise from modifications to Lucent Products or licensed
materials not authorized by Lucent or from use or combination of the Lucent
Products with software and/or apparatus or equipment not supplied or specified
by Lucent; (v) that such claim does not arise from adherence to Dealer's or End
User's instructions or the use of items, materials or information of Dealer's or
End User's origin, design or selection; and (vi) that should Lucent Products or
licensed materials become, or in Lucent's opinion, be likely to become, the
subject of such claim of infringement, then Dealer or End User shall permit
Lucent, at Lucent's option and expense, either to: (1) procure for Dealer or End
User the right to continue using the Lucent Products or licensed materials, or
(2) replace or modify the same so that it is not subject to such claim and is
functionally equivalent or (3) upon failure of (1) and (2) above despite the
reasonable efforts of Lucent, remove the infringing Lucent Product or terminate
Dealer's or End User's rights under the license and refund the purchase price or
fee paid less a reasonable allowance for use, damage and obsolescence. In the
event that a claim of infringement arises for which the liability of Lucent is
excepted under (iv) or (v) above, Dealer or End User will defend and save Lucent
harmless to the same extent and subject to the same limitations as apply to
Lucent when Lucent is liable hereunder. This Section 20.0 states the entire
liability of Lucent with respect to infringement by Lucent Products or licensed
materials provided hereunder.
21.0 TERMINATION OF AGREEMENT
21.1 Unless either party gives written notice of its intent not to
renew to the other ninety (90) days in advance of the termination date, this
Agreement will automatically renew for an additional term. Either party may
terminate this Agreement without cause on ninety (90) days notice.
21.2 Lucent may terminate this Agreement upon thirty (30) days prior
written notice to Dealer if: (i) Dealer markets or sells Lucent Products outside
the Area except as specifically permitted in Section 2.1; (ii) Dealer fails to
limit its marketing efforts to authorized locations or End-Users as defined in
Section 1.5; (iii) Dealer fails to make reasonable commercial efforts to achieve
levels of sales that comply with the Lucent Product forecasts for the Area
submitted pursuant to Section 11.0; (iv) Dealer fails to provide an acceptable
quality of service to End
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Users in accordance with Lucent's Quality Policy; or (v) there occurs any
material change in the management or control of Dealer.
21.3 Except as otherwise provided in this Agreement, either party may
terminate this Agreement upon thirty (30) days prior written notice if the other
party has defaulted in the performance or has breached its obligations under
this Agreement, and such breach or default remains uncured for a period of
twenty (20) business days following receipt of notice of such breach or default.
21.4 Lucent may terminate this Agreement upon twenty-four (24) hours
written notice if Dealer has: (i) become insolvent, invoked as a debtor any laws
relating to the relief of debtors' or creditors' rights, or has had such laws
invoked against it; (ii) become involved in any liquidation or termination of
its business; (iii) been involved in an assignment for the benefit of its
creditors; (iv) sold or attempted to resell Lucent Products to any third party
other than an End User or an authorized Dealer; (v) appointed or attempted to
appoint any unauthorized agent or unauthorized manufacturer's representatives
for Lucent Products; (vi) purchased unused products manufactured by Lucent from
a source other than DDM or sold or attempted to resell any unused products
manufactured by Lucent that, if purchased through DDM, would be a Lucent Product
under this Agreement; (vii) remotely accessed PBX locations maintained by Lucent
directly; (viii) activated software features without compensation to Lucent;
(ix) misrepresented, by statement or by omission, Dealer's authority to resell
under this or any other written agreement with Lucent that is limited to
specific Lucent products or services, by stating or implying, by use of a Lucent
Mark or otherwise, that the authority granted in this or such other agreement
applies to any Lucent product or service not covered by this or such other
agreement, or (x) failed to comply with Lucent's guidelines for the proper use
of Lucent's Marks.
21.5 Dealer may terminate this Agreement on twenty-four (24) hours
written notice if Lucent has: (i) become insolvent, invoked as a debtor any laws
relating to the relief of debtors' or creditors' rights, or has had such laws
invoked against it; or (ii) become involved in any liquidation or termination of
its business; (iii) been involved in an assignment for the benefit of its
creditors.
21.6 Notwithstanding such termination rights, each party reserves all
of its legal rights and equitable remedies, including without limitation those
under the Uniform Commercial Code.
21.7 Neither party shall be liable to the other on account of
termination of this Agreement, either for compensation or for damages of any
kind or character whatsoever, on account of the loss by Lucent or Dealer of
present or prospective profits on sales or anticipated sales, good will, or
expenditures, investments or commitments made in connection therewith or in
connection with the establishment, development or maintenance of Dealer's
business.
22.0 EFFECTS OF TERMINATION
22.1 Notwithstanding any other provisions of this Agreement,
termination or expiration of this Agreement shall automatically accelerate the
due date of all invoices for Lucent
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Products, such that they shall become immediately due and payable not later than
the effective date of termination.
22.2 Upon termination or expiration of this Agreement, Dealer shall
immediately:
22.2.1 provide Lucent with the first right to repurchase any
Lucent Products in Dealer's possession or control and not already identified to
an executed End User contract or outstanding proposal. The price Lucent shall
pay to Dealer to repurchase Lucent Products shall be the price paid by Dealer.
Dealer shall make such Lucent Products available to Lucent within ten (10)
business days of Lucent's notice to Dealer of its intent to exercise such right;
22.2.2 discontinue any and all use of Marks, including but not
limited to such use in advertising or business material of Dealer, except to
identify the Lucent Products; provided that if Lucent does not repurchase
Dealer's remaining inventory, Dealer may continue using Marks as authorized in
this Agreement for an additional ninety (90) days for the limited purpose of
marketing such inventory to End Users after termination is effective;
22.2.3 remove and return to Lucent or destroy at Lucent's
request, any and all promotional materials supplied without charge by Lucent
except those necessary for the limited purpose of marketing existing Dealer
inventory pursuant to Section 22.2.2;
22.2.4 return all Lucent proprietary Information, Licensed
Materials and Software, except that which Lucent determines is necessary to
operate and maintain previously furnished Lucent Products;
22.2.5 cease holding itself out, in any manner, as a Lucent
authorized Dealer of the Lucent Products; and
22.2.6 notify and arrange for all publishers and others
(including, but not limited to, publisher of telephone and business directories)
who may identify, list or publish Dealer's name as a Lucent authorized Dealer of
Lucent Products, to discontinue such listings.
23.0 SURVIVAL OF OBLIGATIONS
The respective obligations of Dealer and Lucent under this Agreement
that by their nature would continue beyond the termination, cancellation or
expiration of this Agreement, shall survive termination, cancellation or
expiration hereof, such as, by way of example only, the obligations pursuant to
the following Sections: USE OF INFORMATION, LICENSE, TERMINATION OF AGREEMENT,
LIMITATION OF LIABILITY, INDEMNITY and TRADEMARKS.
24.0 FORCE MAJEURE
Except for Dealer's obligation to make timely payments, neither party
shall be held responsible for any delay or failure in performance to the extent
that such delay or failure is
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caused by fires, embargoes, explosions, labor disputes, government requirements,
civil or military authorities, acts of God, inability to secure raw materials or
transportation facilities, acts or omissions of carriers or suppliers or any
other causes beyond the parties' control whether or not similar to the
foregoing.
25.0 SECURITY INTEREST
Dealer hereby grants Lucent and its assignees a purchase money security
interest in all Lucent Products and Lucent Product Components the title to which
passes to Dealer under this Agreement and any proceeds therefrom including
accounts receivable, installment contracts, chattel paper and other instruments
arising therefrom, until all charges including shipping and late payment
charges, if any, are paid in full. When requested to do so by Lucent, Dealer
agrees to execute promptly, to deliver to Lucent and have filed all documents,
including financing statements, deemed necessary by Lucent to perfect, maintain
or protect its security interest. A copy of this Agreement may be filed to
perfect Lucent's security interests.
26.0 SEVERABILITY
If any section, or clause thereof, in this Agreement is held to be
unenforceable, then the meaning of such section or clause will be construed so
as to render it enforceable, to the extent feasible; and if no reasonable
interpretation would save such section or clause, it will be severed from this
Agreement and the remainder will remain in full force and effect. However, in
the event such section or clause is considered an essential element of this
Agreement by either Lucent or Dealer, the parties shall promptly negotiate a
replacement therefor.
27.0 ASSIGNMENT
Dealer shall not assign any right or interest under this Agreement or
delegate any work or other obligation to be performed or owed by Dealer under
this Agreement without the prior written consent of Lucent, which consent shall
not be unreasonably withheld. Any assignment or delegation by Dealer without
such consent shall be void and ineffective. By the provision of notice thereof
in accordance with this Agreement, Lucent shall have the right to assign this
Agreement and to assign its rights and delegate its obligations and liabilities
under this Agreement, either in whole or in part (an "Assignment"), to any
entity that is, or that was immediately preceding such Assignment, a current
subsidiary, business unit, division or other affiliate of Lucent. The notice of
Assignment shall state the effective date thereof. Upon the effective date and
to the extent of the Assignment, Lucent shall be released and discharged from
all obligations and liabilities under this Agreement. Such Assignment, release
and discharge shall be complete and shall not be altered by the termination of
the affiliation between Lucent and the entity assigned rights or delegated
obligations and liabilities under this Agreement.
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28.0 NON-WAIVER
No course of dealing, course of performance or failure of either party
strictly to enforce any term, right or condition of this Agreement shall be
construed as a waiver of any term, right or condition.
29.0 CHOICE OF LAW AND DISPUTES
29.1 The construction, interpretation and performance of this Agreement
shall be governed by the local laws of the State of Delaware.
29.2 Any controversy or claim, whether based on contract, tort, strict
liability, fraud, misrepresentation, or any other legal theory, related directly
or indirectly to this Agreement (the "Dispute") shall be resolved solely in
accordance with the terms of this Section, except as set forth in paragraph 29.6
below.
29.3 If the Dispute cannot be settled by good faith negotiation between
the parties, Lucent and Dealer will submit the Dispute to non-binding mediation.
If complete agreement cannot be reached within thirty (30) days of submission to
mediation, any remaining issues will be resolved by binding arbitration in
accordance with paragraphs 28.4 and 28.5 below. The Federal Arbitration Act, 9
U.S.C. Sections 1 to 15, not state law, will govern the arbitrability of all
Disputes.
29.4 A single arbitrator who is knowledgeable in the telecommunications
products field or in commercial matters will conduct the arbitration. The
arbitrator's decision and award will be final and binding and may be entered in
any court with jurisdiction. The arbitrator will not have authority to limit,
expand or otherwise modify the terms of this Agreement.
29.5 The mediation and, if necessary, the arbitration will be conducted
under the then current rules of the alternate dispute resolution (ADR) firm
selected by the parties, or if the parties are unable to agree on an ADR firm,
the parties will conduct the mediation and, if necessary, the arbitration under
the then current rules and supervision of the American Arbitration Association
(AAA). Lucent and Dealer will each bear its own attorneys' fees associated with
the mediation and, if necessary, the arbitration. Lucent and Dealer will pay all
other costs and expenses of the mediation/arbitration as the rules of the
selected ADR firm provide. The parties and their representatives shall hold the
existence, content and result of the mediation and arbitration in confidence.
29.6 Unless both parties agree otherwise, Disputes relating to Dealer's
compliance with Section 16 of this Agreement (Trademarks) shall be exempt from
the dispute resolution processes described in this Section.
21
<PAGE> 23
30.0 NOTICES
All notices under this Agreement shall be in writing and shall be given
in person, by facsimile, by receipted courier or by certified U.S. mail,
addressed to the addresses set forth at the beginning of this Agreement or to
such other address as either party may designate by written notice to the other.
All written notices sent by mail shall be sent first class or better, postage
prepaid. All notices shall be deemed to have been given on the earlier of the
date actually received or the fifth day after mailing.
31.0 ENTIRE AGREEMENT
The terms and conditions contained in this Agreement supersede all
prior oral or written understandings between the parties and constitute the
entire Agreement between them concerning the subject matter of this Agreement
and shall not be contradicted, explained or supplemented by any course of
dealing between Lucent or any of its affiliates and Dealer or any of its
affiliates. This Agreement shall not be modified or amended except by a writing
signed by an authorized representative of the party to be charged.
32.0 TERM
This Agreement shall be effective as of Nov 06 1998 , and shall have a
term of two years beginning on said date.
IN WITNESS WHEREOF the parties have caused this Agreement to be signed by their
duly authorized representatives.
LUCENT TECHNOLOGIES INC. XETA CORPORATION
By: /s/ Blair Conley By: /s/ Jack R. Ingram
--------------------------- ---------------------------------.
Name: Blair Conley Name: Jack R. Ingram
Title: General Manager Title: President
Date: 11/6/98 Date:
22
<PAGE> 24
PRODUCT APPENDIX: GUESTWORKS(TM) PRODUCTS
A. Products
GuestWorks(TM), and associated adjuncts and accessories.
B. Authorized Area
The Fifty states of the United States of America including Washington D. C.
C. Marketing Location(s)
XETA CORPORATION NATIONAL SALES OFFICES
MR. STEVE BROWN MR. ERROL INGRAM
National Account Manager National Account Manager
XETA Corporation XETA Corporation
4003 Lincoln Drive West, Suite I 3500 Oak Lawn, Suite 400
Marlton, NJ 08053 Dallas, TX 75219
PH: 609-988-7179 PH: 214-528-8838
FX: 609-988-7197 FX: 214-528-9990
E-mail: [email protected] E-mail: [email protected]
--------------- ----------------
MR. SEAN BUSCH MR. DONALD E. REIGEL
National Account Manager Vice President of Sales and Marketing
XETA Corporation XETA Corporation
300 Main Street, Suite 510 5350 Manhattan Circle, Suite 210
Lafayette, IN 47901 Boulder, CO 80303
PH: 765-742-8844 PH: 303-499-8578
FX: 765-742-6672 FX: 303-499-8579
E-mail: [email protected] E-mail: [email protected]
--------------- ----------------
MR. MARTY CASTENS MR. RON RIVERA
National Account Manager National Account Sales Engineer
XETA Corporation XETA Corporation
4500 South Garnett Road, Suite 1000 5350 Manhattan Circle, Suite 210
Tulsa, OK 74146 Boulder, CO 80303
PH: 918-664-8200 PH: 303-543-0286
FX: 918-664-6876 FX: 303-499-8579
E-mail: [email protected] E-mail: [email protected]
----------------- ----------------
23
<PAGE> 25
MR. CLYDE EDSON MS. DARLENE SCHRINER
National Account Manager PBX Project Manager
XETA Corporation XETA Corporation
1180 Spring Centre South Boulevard, Suite 340 5350 Manhattan Circle, Suite 210
Altamonte Springs, FL 32714 Boulder, CO 80303
PH: 407-774-1235 PH: 303-499-8578
FX: 407-774-3242 FX: 303-499-8579
E-mail: [email protected] E-mail: [email protected]
--------------- ----------------
MR. HARVE HOWARD MR. MIKE SHADDOW
National Account Manager National Account Manager
XETA Corporation XETA Corporation
4500 South Garnett Road, Suite 1000 19130 Wind Dancer Street
Tulsa, OK 74146 Lutz, FL 33549
PH: 918-664-8200 PH: 813-920-7030
FX: 918-664-6876 FX: 813-926-2928
E-mail: [email protected] E-mail: [email protected]
---------------- -----------------
MS. LISA ROSENTHAL
National Account Sales Assistant
XETA Corporation
5350 Manhattan Circle, Suite 210
Boulder, CO 80303
PH: 303-499-8577
FX: 303-499-8579
E-mail: [email protected]
---------------
D. Shipping Locations(s)
XETA Corporation
4500 South Garnett Road, Suite 1000
Tulsa, OK 74146
PH: 918-664-8200
FX: 918-664-6876
E. For the Products covered by this Product Appendix, the following
replaces Section 1.3 of the Agreement:
1.3 "End User" means a third party with a hotel or motel business to
whom Dealer markets or sells Products within the Area for hotel or motel use by
such third party in the ordinary course of its business and not for resale; End
User does not include any office, department, agency, or defense installation of
the United States Government Marketing opportunities for sales of GuestWorks
systems to third parties for use in health care or senior citizens' residence
facilities must be individually reviewed with and approved by Lucent
Technologies to be certain that the system will meet the customer's needs and
that the sale will
24
<PAGE> 26
not expose Lucent Technologies to claims based on the system's unsuitability for
such uses or similar theories.
F. For the products covered by this Product Appendix, all references in Section
2.7 to Lucent BCS Global Accounts are deleted.
G. For the products covered by this Product Appendix, the following is added to
the Agreement as Section 5.3:
5.3 Circuit packs and 8400 Series DCP telephones offered under this
Product Appendix are intended for use with GuestWorks systems only. Orders for
DCP telephones beyond those provided in the GuestWorks packaged offers will be
rejected if the number of telephones ordered exceeds 10% of the total telephone
capacity of the system ordered. Orders for circuit packs will be considered on
an exception basis only. Failure to meet the requirements of this subsection
will be grounds for immediate termination of this Product Appendix, and
depending on the circumstances, may lead to termination of the Agreement to
which this is appended.
H. For the products covered by this Product Appendix, the following is the End
User Software License referred to in Section 15 of the Agreement:
END USER SOFTWARE LICENSE
LIMITED WARRANTY AND LIMITED LIABILITY
COMPATIBILITY. THE SOFTWARE IS NOT WARRANTED FOR NON-COMPATIBLE
SYSTEMS.
SOFTWARE. Lucent Technologies warrants that if the Software does not
substantially conform to its specifications, the end-user customer
("You") may return it to the place of purchase within 90 days after the
date of purchase, provided that You have deployed and used the Software
solely in accordance with this License Agreement and the applicable
Lucent Technologies installation instructions. Upon determining that
the returned Software is eligible for warranty coverage, Lucent
Technologies will either replace the Software or, at Lucent
Technologies's option, will offer to refund the License Fee to You upon
receipt from You of all copies of the Software and Documentation. In
the event of a refund, the License shall terminate.
DISCLAIMER OF WARRANTIES. LUCENT TECHNOLOGIES MAKES NO WARRANTY,
REPRESENTATION, OR PROMISE TO YOU NOT EXPRESSLY SET FORTH IN THIS
AGREEMENT. LUCENT TECHNOLOGIES DISCLAIMS AND EXCLUDES ANY AND ALL
IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE. LUCENT TECHNOLOGIES DOES NOT WARRANT THAT THE SOFTWARE OR
DOCUMENTATION WILL SATISFY YOUR REQUIREMENTS, THAT THE SOFTWARE OR
DOCUMENTATION ARE
25
<PAGE> 27
WITHOUT DEFECT OR ERROR, OR THAT THE OPERATION OF THE SOFTWARE WILL BE
UNINTERRUPTED. ALSO, LUCENT TECHNOLOGIES DOES NOT WARRANT THAT THE
SOFTWARE WILL PREVENT, AND LUCENT TECHNOLOGIES WILL NOT BE RESPONSIBLE
FOR, UNAUTHORIZED USE (OR CHARGES FOR SUCH USE) OF COMMON CARRIER
TELECOMMUNICATION SERVICES OR FACILITIES ACCESSED THROUGH OR CONNECTED
TO THE SOFTWARE (TOLL FRAUD). Some states do not allow the exclusion of
implied warranties or limitations on how long an implied warranty
lasts, so the above limitation may not apply to You. This warranty
gives You specific legal rights which vary from state to state.
EXCLUSIVE REMEDY AND LIMITATION OF LIABILITY. EXCEPT FOR BODILY INJURY
PROXIMATELY CAUSED BY LUCENT TECHNOLOGIES' NEGLIGENCE, YOUR EXCLUSIVE
REMEDY AND LUCENT TECHNOLOGIES' ENTIRE LIABILITY ARISING FROM OR
RELATING TO THIS LICENSE AGREEMENT OR TO THE SOFTWARE OR DOCUMENTATION
SHALL BE LIMITED TO DIRECT DAMAGES IN AN AMOUNT NOT TO EXCEED $10,000.
LUCENT TECHNOLOGIES SHALL NOT IN ANY CASE BE LIABLE FOR ANY SPECIAL,
INCIDENTAL, CONSEQUENTIAL, INDIRECT, OR PUNITIVE DAMAGES, EVEN IF
LUCENT TECHNOLOGIES HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGES. LUCENT TECHNOLOGIES IS NOT RESPONSIBLE FOR LOST PROFITS OR
REVENUE OR SAVINGS, LOSS OF USE OF THE SOFTWARE, LOSS OF DATA, COSTS OF
RECREATING LOST DATA, THE COST OF ANY SUBSTITUTE EQUIPMENT OR PROGRAM,
CHARGES FOR COMMON CARRIER TELECOMMUNICATION SERVICES OR FACILITIES
ACCESSED THROUGH OR CONNECTED TO THE SOFTWARE (TOLL FRAUD), OR CLAIMS
BY ANY PERSON OTHER THAN YOU. THESE LIMITATIONS OF LIABILITY SHALL
APPLY NOTWITHSTANDING THE FAILURE OF AN EXCLUSIVE REMEDY. Some states
do not allow the exclusion or limitation of incidental or consequential
damages, so the above limitation or exclusion may not apply to You.
Lucent Technologies grants You a personal, non-transferable and
non-exclusive right to use, in object code form, all software and
related documentation furnished under the Agreement between Lucent
Technologies and [Dealer]. This grant shall be limited to use with the
equipment for which the software was obtained or, on a temporary basis,
on back-up equipment when the original equipment is inoperable. Use of
software on multiple processors is prohibited unless otherwise agreed
to in writing by Lucent Technologies. You agree to use your best
efforts to see that your employees and users of all software licensed
under this Agreement comply with these terms and conditions and You
will refrain from taking any steps, such as reverse assembly or reverse
compilation, to derive a source code equivalent of the software.
You are permitted to make a single archive copy of software. Any copy
must contain the same copyright notice and proprietary marking as the
original software. Use of software
26
<PAGE> 28
on any equipment other than that for which it was obtained, removal of
the software from the United States, or any other material breach shall
automatically terminate this license.
If the terms of this license differ from the terms of any license
packaged with the software, the terms of the license packaged with the
software shall govern.
I. [For Dealers licensing the Orange Label Flash Card only.] The following new
Section 33 is added to the Agreement with respect to this Product Appendix:
33. SOFTWARE LICENSE, ORANGE LABEL FLASH CARD MEDIUM
A. Lucent grants Dealer a personal, non-transferable and non-exclusive
right to use, in object code form, GuestWorks software ("the Software")
solely for the purpose of providing maintenance service on GuestWorks
PBX systems. Title to and ownership of all Software shall remain with
Lucent. Dealer will refrain from taking any steps, such as reverse
assembly or reverse compilation, to derive a source code equivalent of
the Software or to develop other software. Dealer will use its best
efforts to ensure that its employees and users of the Software comply
with these terms and conditions.
B. Dealer may make a single archive copy of software. Any such copy
must contain the same copyright notice and proprietary markings that
the original Software contains. Use of the Software on any equipment
other than that for which it was obtained, removal of the Software from
the United States, use of the Software for any purpose other than
maintenance of Guestworks PBX systems or any other material breach of
the software license shall immediately and automatically terminate this
license and will be cause for immediate termination of all Authorized
Dealer Agreements between Dealer and Lucent.
J. [For Dealers licensing the Orange Label Flash Card only]. Section 21.4 of the
Agreement is amended by adding the language that is underscored and printed in
bold, as follows:
21.4 Lucent may terminate this Agreement upon twenty-four (24) hours
written notice if Dealer has: (i) become insolvent, invoked as a debtor any laws
relating to the relief of debtors' or creditors' rights, or has had such laws
invoked against it; (ii) become involved in any liquidation or termination of
its business; (iii) been involved in an assignment for the benefit of its
creditors; (iv) sold or attempted to resell Lucent Products to any third party
other than an End User without Lucent's written consent; (v) appointed or
attempted to appoint any unauthorized agent or unauthorized manufacturer's
representatives for Lucent Products; (vi) sold or attempted to resell any Lucent
Products not previously authorized by Lucent under this Agreement or that are
obtained from a source other than Lucent; (vii) remotely accessed PBX locations
maintained by Lucent directly; (viii) activated software features without
compensation to Lucent OR VIOLATED THE TERMS OF THE SOFTWARE LICENSE GRANTED BY
ADDING SECTION 33 TO THE AGREEMENT IN CONNECTION WITH A PRODUCT APPENDIX FOR
GUESTWORKS SYSTEMS; (ix) misrepresented, by statement or by omission, Dealer's
authority to resell under this or any other written agreement with Lucent that
is limited to specific Lucent products or services, by stating or implying, by
use of a Lucent Mark or otherwise, that the authority granted in this or such
other agreement applies
27
<PAGE> 29
to any Lucent product or service not covered by this or such other agreement, or
(x) failed to comply with Lucent's guidelines for the proper use of Lucent's
Marks. Notwithstanding such termination rights, Lucent reserves all of its legal
rights and equitable remedies, including without limitation those under the
Uniform Commercial Code.
28
<PAGE> 30
PRODUCT APPENDIX: DEFINITY(R) ECS PRODUCTS
A. Products
DEFINITY(R) ECS Products and associated Adjuncts and Accessories as it
strictly relates to the Hospitality Industry
B. Authorized Area
The Fifty states of the United States of America including Washington
D. C.
C. Marketing Location (s)
XETA CORPORATION NATIONAL SALES OFFICES
MR. STEVE BROWN MR. ERROL INGRAM
National Account Manager National Account Manager
XETA Corporation XETA Corporation
4003 Lincoln Drive West, Suite I 3500 Oak Lawn, Suite 400
Marlton, NJ 08053 Dallas, TX 75219
PH: 609-988-7179 PH: 214-528-8838
FX: 609-988-7197 FX: 214-528-9990
E-mail: [email protected] E-mail: [email protected]
--------------- ----------------
MR. SEAN BUSCH MR. DONALD E. REIGEL
National Account Manager Vice President of Sales and Marketing
XETA Corporation XETA Corporation
300 Main Street, Suite 510 5350 Manhattan Circle, Suite 210
Lafayette, IN 47901 Boulder, CO 80303
PH: 765-742-8844 PH: 303-499-8578
FX: 765-742-6672 FX: 303-499-8579
E-mail: [email protected] E-mail: [email protected]
--------------- ----------------
MR. MARTY CASTENS MR. RON RIVERA
National Account Manager National Account Sales Engineer
XETA Corporation XETA Corporation
4500 South Garnett Road, Suite 1000 5350 Manhattan Circle, Suite 210
Tulsa, OK 74146 Boulder, CO 80303
PH: 918-664-8200 PH: 303-543-0286
FX: 918-664-6876 FX: 303-499-8579
E-mail: [email protected] E-mail: [email protected]
----------------- ----------------
29
<PAGE> 31
MR. CLYDE EDSON MS. DARLENE SCHRINER
National Account Manager PBX Project Manager
XETA Corporation XETA Corporation
1180 Spring Centre South Boulevard, Suite 340 5350 Manhattan Circle, Suite 210
Altamonte Springs, FL 32714 Boulder, CO 80303
PH: 407-774-1235 PH: 303-499-8578
FX: 407-774-3242 FX: 303-499-8579
E-mail: [email protected] E-mail: [email protected]
--------------- ----------------
MR. HARVE HOWARD MR. MIKE SHADDOW
National Account Manager National Account Manager
XETA Corporation XETA Corporation
4500 South Garnett Road, Suite 1000 19130 Wind Dancer Street
Tulsa, OK 74146 Lutz, FL 33549
PH: 918-664-8200 PH: 813-920-7030
FX: 918-664-6876 FX: 813-926-2928
E-mail: [email protected] E-mail: [email protected]
---------------- -----------------
MS. LISA ROSENTHAL
National Account Sales Assistant
XETA Corporation
5350 Manhattan Circle, Suite 210
Boulder, CO 80303
PH: 303-499-8577
FX: 303-499-8579
E-mail: [email protected]
---------------
D. Shipping Location (s)
XETA Corporation
4500 South Garnett Road, Suite 1000
Tulsa, OK 74146
PH: 918-664-8200
FX: 918-664-6876
E. For the products covered by this Product Appendix, all references in
Section 1.3 and 2.7 to Lucent BCS Global Accounts are deleted.
1.3 "End User" means a third party to whom Dealer markets or sells
Products for use by such third party in the ordinary course of its business
within the Area or Territory and not for resale.
30
<PAGE> 32
F. For the products covered by this Product Appendix, the following is the
End User Software License for the operating software for Conversant systems
referred to in Section 9 of the Agreement:
END USER SOFTWARE LICENSE
LIMITED WARRANTY AND LIMITED LIABILITY
COMPATIBILITY. THE SOFTWARE IS NOT WARRANTED FOR NON-COMPATIBLE
SYSTEMS.
SOFTWARE. Lucent Technologies warrants that if the Software does not
substantially conform to its specifications, the end-user customer
("You") may return it to the place of purchase within 90 days after the
date of purchase, provided that You have deployed and used the Software
solely in accordance with this License Agreement and the applicable
Lucent Technologies installation instructions. Upon determining that
the returned Software is eligible for warranty coverage, Lucent
Technologies will either replace the Software or, at Lucent
Technologies' option, will offer to refund the License Fee to You upon
receipt from You of all copies of the Software and Documentation. In
the event of a refund, the License shall terminate.
DISCLAIMER OF WARRANTIES. LUCENT TECHNOLOGIES MAKES NO WARRANTY,
REPRESENTATION, OR PROMISE TO YOU NOT EXPRESSLY SET FORTH IN THIS
AGREEMENT. LUCENT TECHNOLOGIES DISCLAIMS AND EXCLUDES ANY AND ALL
IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE. LUCENT TECHNOLOGIES DOES NOT WARRANT THAT THE SOFTWARE OR
DOCUMENTATION WILL SATISFY YOUR REQUIREMENTS, THAT THE SOFTWARE OR
DOCUMENTATION ARE WITHOUT DEFECT OR ERROR, OR THAT THE OPERATION OF THE
SOFTWARE WILL BE UNINTERRUPTED. ALSO, LUCENT TECHNOLOGIES DOES NOT
WARRANT THAT THE SOFTWARE WILL PREVENT, AND LUCENT TECHNOLOGIES WILL
NOT BE RESPONSIBLE FOR, UNAUTHORIZED USE (OR CHARGES FOR SUCH USE) OF
COMMON CARRIER TELECOMMUNICATION SERVICES OR FACILITIES ACCESSED
THROUGH OR CONNECTED TO THE SOFTWARE (TOLL FRAUD). Some states do not
allow the exclusion of implied warranties or limitations on how long an
implied warranty lasts, so the above limitation may not apply to You.
This warranty gives You specific legal rights which vary from state to
state.
EXCLUSIVE REMEDY AND LIMITATION OF LIABILITY. EXCEPT FOR BODILY INJURY
PROXIMATELY CAUSED BY LUCENT TECHNOLOGIES' NEGLIGENCE, YOUR EXCLUSIVE
REMEDY AND LUCENT TECHNOLOGIES'S ENTIRE LIABILITY ARISING FROM OR
RELATING TO THIS LICENSE AGREEMENT OR TO THE SOFTWARE OR DOCUMENTATION
SHALL BE LIMITED TO DIRECT DAMAGES IN AN AMOUNT NOT TO
31
<PAGE> 33
EXCEED $10,000. LUCENT TECHNOLOGIES SHALL NOT IN ANY CASE BE LIABLE FOR
ANY SPECIAL, INCIDENTAL, CONSEQUENTIAL, INDIRECT, OR PUNITIVE DAMAGES,
EVEN IF LUCENT TECHNOLOGIES HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGES. LUCENT TECHNOLOGIES IS NOT RESPONSIBLE FOR LOST PROFITS OR
REVENUE OR SAVINGS, LOSS OF USE OF THE SOFTWARE, LOSS OF DATA, COSTS OF
RECREATING LOST DATA, THE COST OF ANY SUBSTITUTE EQUIPMENT OR PROGRAM,
CHARGES FOR COMMON CARRIER TELECOMMUNICATION SERVICES OR FACILITIES
ACCESSED THROUGH OR CONNECTED TO THE SOFTWARE (TOLL FRAUD), OR CLAIMS
BY ANY PERSON OTHER THAN YOU. THESE LIMITATIONS OF LIABILITY SHALL
APPLY NOTWITHSTANDING THE FAILURE OF AN EXCLUSIVE REMEDY. Some states
do not allow the exclusion or limitation of incidental or consequential
damages, so the above limitation or exclusion may not apply to You.
Lucent Technologies grants You a personal, non-transferable and
non-exclusive right to use, in object code form, all software and
related documentation furnished under the Agreement between Lucent
Technologies and [Dealer]. This grant shall be limited to use with the
equipment for which the software was obtained or, on a temporary basis,
on back-up equipment when the original equipment is inoperable. Use of
software on multiple processors is prohibited unless otherwise agreed
to in writing by Lucent Technologies. You agree to use your best
efforts to see that your employees and users of all software licensed
under this Agreement comply with these terms and conditions and You
will refrain from taking any steps, such as reverse assembly or reverse
compilation, to derive a source code equivalent of the software.
You are permitted to make a single archive copy of software. Any copy
must contain the same copyright notice and proprietary marking as the
original software. Use of software on any equipment other than that for
which it was obtained, removal of the software from the United States,
or any other material breach shall automatically terminate this
license.
If the terms of this license differ from the terms of any license
packaged with the software, the terms of the license packaged with the
software shall govern.
G. [For Dealers licensing the Orange Label Flash Card only.] The
following new Section 26 is added to the Agreement with respect to this Product
Appendix:
26. SOFTWARE LICENSE, ORANGE LABEL FLASH CARD MEDIUM
A. Lucent grants Dealer a personal, non-transferable and non-exclusive
right to use, in object code form, DEFINITY ECS software ("the
Software") solely for the purpose of providing maintenance service on
DEFINITY ECS PBX systems. Title to and ownership of all Software shall
remain with Lucent. Dealer will refrain from taking any steps, such as
reverse assembly or reverse compilation, to derive a source
32
<PAGE> 34
code equivalent of the Software or to develop other software. Dealer
will use its best efforts to ensure that its employees and users of the
Software comply with these terms and conditions.
B. Dealer may make a single archive copy of software. Any such copy
must contain the same copyright notice and proprietary markings that
the original Software contains. Use of the Software on any equipment
other than that for which it was obtained, removal of the Software from
the United States, use of the Software for any purpose other than
maintenance of DEFINITY ECS PBX systems or any other material breach of
the software license shall immediately and automatically terminate this
license and will be cause for immediate termination of all Authorized
Dealer Agreements between Dealer and Lucent.
H. [For Dealers licensing the Orange Label Flash Card only]. Section 15.4
of the Agreement is amended by adding the language that is underscored and
printed in bold, as follows:
15.4 Lucent may terminate this Agreement upon twenty-four (24) hours
written notice if Dealer has: (i) become insolvent, invoked as a debtor
any laws relating to the relief of debtors' or creditors' rights, or
has had such laws invoked against it; (ii) become involved in any
liquidation or termination of its business; (iii) been involved in an
assignment for the benefit of its creditors; (iv) sold or attempted to
resell Lucent Products to any third party other than an End User
without Lucent's written consent; (v) appointed or attempted to appoint
any unauthorized agent or unauthorized manufacturer's representatives
for Lucent Products; (vi) sold or attempted to resell any Lucent
Products not previously authorized by Lucent under this Agreement or
that are obtained from a source other than Lucent; (vii) remotely
accessed PBX locations maintained by Lucent directly; (viii) activated
software features without compensation to Lucent OR VIOLATED THE TERMS
OF THE SOFTWARE LICENSE GRANTED BY ADDING SECTION 26 TO THE AGREEMENT
IN CONNECTION WITH A PRODUCT APPENDIX FOR DEFINITY ECS SYSTEMS; (ix)
misrepresented, by statement or by omission, Dealer's authority to
resell under this or any other written agreement with Lucent that is
limited to specific Lucent products or services, by stating or
implying, by use of a Lucent Mark or otherwise, that the authority
granted in this or such other agreement applies to any Lucent product
or service not covered by this or such other agreement, or (x) failed
to comply with Lucent's guidelines for the proper use of Lucent's
Marks. Notwithstanding such termination rights, Lucent reserves all of
its legal rights and equitable remedies, including without limitation
those under the Uniform Commercial Code.
33
<PAGE> 35
IN WITNESS WHEREOF the parties have caused this Agreement to be signed by their
duly authorized representatives.
LUCENT TECHNOLOGIES INC. XETA CORPORATION
By: /s/ Blair Conley By: /s/ Jack R. Ingram
-------------------------- ------------------------------------
Name: Blair Conley Name: Jack R. Ingram
Title: General Manager Title: President
Date: 11/6/98 Date:
34
<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,
1998 or performed any audit procedures subsequent to the date of our report.
/s/ ARTHUR ANDERSEN LLP
Tulsa, Oklahoma
January 25, 1999
<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, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> OCT-31-1998
<CASH> 3,238,218
<SECURITIES> 0
<RECEIVABLES> 3,561,201
<ALLOWANCES> 0
<INVENTORY> 2,022,256
<CURRENT-ASSETS> 10,971,252
<PP&E> 2,817,370
<DEPRECIATION> 0
<TOTAL-ASSETS> 18,291,986
<CURRENT-LIABILITIES> 5,849,556
<BONDS> 0
0
0
<COMMON> 228,628
<OTHER-SE> 10,956,607
<TOTAL-LIABILITY-AND-EQUITY> 18,291,986
<SALES> 25,447,232
<TOTAL-REVENUES> 25,447,232
<CGS> 16,452,711
<TOTAL-COSTS> 16,452,711
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,907,700
<INCOME-TAX> 1,855,000
<INCOME-CONTINUING> 3,052,700
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,052,700
<EPS-PRIMARY> 1.50
<EPS-DILUTED> 1.30
</TABLE>
