<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-16231
XETA Corporation
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Oklahoma 73-1130045
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4500 S. Garnett, Suite 1000, Tulsa, Oklahoma 74146
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
918-664-8200
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
Number of shares outstanding of each of the registrant's classes of common
stock, as of the latest practicable date.
Class Outstanding at March 1, 1999
- -------------------------------- ----------------------------
Common Stock, $.10 par value 2,034,537
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets - January 31, 1999
and October 31, 1998
Consolidated Statements of Operations - For the Three months
ending January 31, 1999 and 1998
Consolidated Statement of Shareholder's Equity - November 1,
1998 through January 31, 1999
Consolidated Statements of Cash Flows - For the Three months
ending January 31, 1999 and 1998
Notes to Consolidated Financial Statements
2
<PAGE> 3
XETA CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
January 31, 1999 October 31, 1998
---------------- ----------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 3,348,561 $ 3,238,218
Current portion of net investment in
sales-type leases 1,446,923 1,500,095
Other receivables, net 2,957,014 3,561,201
Inventories, net 2,345,233 2,022,256
Deferred tax asset, net 595,246 575,587
Prepaid expenses and other assets 200,315 73,895
---------------- ----------------
Total current assets 10,893,292 10,971,252
---------------- ----------------
Noncurrent Assets:
Net investment in sales-type leases,
less current portion above 1,772,147 1,210,939
Purchased service and long distance contracts,
net 2,089,342 2,537,437
Property, plant & equipment, net 3,560,977 2,817,370
Capitalized software production costs, net of
accumulated amortization of $483,066 at Jan
31, 1999 and $453,066 at Oct. 31, 1998 661,824 655,370
Other assets 136,805 99,618
---------------- ----------------
Total noncurrent assets 8,221,095 7,320,734
---------------- ----------------
Total assets $ 19,114,387 $ 18,291,986
================ ================
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,103,267 $ 1,747,009
Unearned revenue 3,461,943 3,096,217
Accrued liabilities 442,343 824,454
Accrued federal and state income taxes 516,008 181,876
Total current liabilities 5,523,561 5,849,556
---------------- ----------------
Unearned service revenue 1,035,346 730,314
---------------- ----------------
Noncurrent deferred tax liability, net 464,556 526,881
---------------- ----------------
Commitments
Shareholders' equity:
Preferred stock; $.10 par value; 50,000 shares
authorized, 0 issued - -
Common stock; $.10 par value; 10,000,000
shares authorized, 2,316,284 and 2,286,284
issued at January 31, 1999 and October
31, 1998, respectively 231,628 228,628
Paid-in capital 5,336,218 5,135,818
Retained earnings 8,365,444 7,568,905
---------------- ----------------
13,933,290 12,933,351
Less treasury stock, at cost (1,842,366) (1,748,116)
---------------- ----------------
Total shareholders' equity 12,090,924 11,185,235
---------------- ----------------
Total liabilities & shareholders' equity $ 19,114,387 $ 18,291,986
================ ================
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
XETA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months
Ending January 31,
1999 1998
------------ ------------
<S> <C> <C>
Installation and service revenues $ 3,995,599 $ 2,890,515
Sales of systems 2,829,168 1,956,809
Long distance services 221,515 203,499
------------ ------------
Net sales and service revenues 7,046,282 5,050,823
------------ ------------
Installation and service cost 2,523,141 1,754,133
Cost of sales 1,687,824 1,245,257
Cost of long distance services 86,057 75,222
------------ ------------
Total cost of sales and service 4,297,022 3,074,612
------------ ------------
Gross profit 2,749,260 1,976,211
------------ ------------
Operating expenses:
Selling, general and administrative 1,008,599 875,783
Engineering, research and development 102,634 100,659
Amortization 478,095 81,216
------------ ------------
Total operating expenses 1,589,328 1,057,658
------------ ------------
Income from operations 1,159,932 918,553
Interest and other income 147,607 179,146
------------ ------------
Income before provision for income
taxes 1,307,539 1,097,699
Provision for income taxes 511,000 407,000
------------ ------------
Net income $ 796,539 $ 690,699
============ ============
Earnings per share
Basic $ 0.39 $ 0.34
============ ============
Diluted $ 0.34 $ 0.29
============ ============
Weighted average shares outstanding 2,029,533 2,003,912
============ ============
Weighted average shares equivalents 2,316,960 2,357,117
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
XETA CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
NOVEMBER 1, 1998 THROUGH January 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Treasury Stock .
--------------------------- ------------------------- ---------- ----------
Number of
Shares Issued Paid-in Retained
& Outstanding Par Value Shares Amount Capital Earnings
------------- --------- ------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance -
October 31, 1998 2,286,284 $228,628 (264,547) $(1,748,116) $5,135,818 $7,568,905
Stock options
exercised 30,000 3,000 27,000
Tax benefit of stock
Options exercised 173,400
Treasury stock
acquired (5,200) (94,250)
Net Income 796,539
--------- --------- ------- ----------- ---------- ----------
Balance -
January 31, 1999 2,316,284 $ 231,628 (269,747) $(1,842,366) $5,336,218 $8,365,444
========= ========= ======= =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 6
XETA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months
Ending January 31,
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 796,539 $ 690,699
----------- -----------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 73,701 66,142
Amortization 478,095 81,216
Gain on sale of assets - 357
Provision for doubtful accounts receivable 9,000 9,000
Change in assets and liabilities:
(Increase) decrease in net investment in
sales-type leases (508,036) 230,672
(Increase) decrease in other receivables 595,187 (1,069,608)
Increase in inventories (322,977) (141,343)
Increase in deferred tax asset (19,659) (33,788)
Increase in prepaid expenses and
other assets (163,607) (57,930)
Increase (decrease) in accounts payable (643,742) 22,075
Increase in unearned revenue 670,758 198,837
Increase in accrued income taxes 507,532 472,846
Decrease in accrued liabilities (382,111) (326,082)
Decrease in deferred tax liabilities (62,325) (32,445)
----------- -----------
Total adjustments 231,816 (580,051)
----------- -----------
Net cash provided by
operating activities 1,028,355 110,648
----------- -----------
Cash flows from investing activities:
Additions to capitalized software (36,454) (41,196)
Additions to property, plant & equipment (817,308) (116,749)
Proceeds from sale of assets - 852
----------- -----------
Net cash used in
investing activities (853,762) (157,093)
----------- -----------
Cash flows from financing activities:
Purchase of treasury stock (94,250) (712,588)
Exercise of stock options 30,000 23,500
----------- -----------
Net cash used in financing activities (64,250) (689,088)
----------- -----------
Net increase (decrease) in cash and
cash equivalents 110,343 (735,533)
Cash and cash equivalents, beginning of period 3,238,218 6,011,841
----------- -----------
Cash and cash equivalents, end of period $ 3,348,561 $ 5,276,308
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 7,101 $ -
Cash paid during the period for income taxes $ 85,452 $ 6,034
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE> 7
XETA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 1999
(Unaudited)
(1) BASIS OF PRESENTATION
The consolidated financial statements included herein include the
accounts of XETA Corporation and its wholly-owned subsidiary, Xetacom, Inc.
Xetacom's operations have been insignificant to date. All significant
intercompany accounts and transactions have been eliminated.
The consolidated financial statements have been prepared by the
Company, without an audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. The Company believes that the disclosures made in these
financial statements are adequate to make the information presented not
misleading when read in conjunction with the consolidated financial statements
and the notes thereto included in the Company's latest financial statements
filed as part of the Company's Annual Report on Form 10-KSB, Commission File No.
0-16231. Management believes that the financial statements contain all
adjustments necessary for a fair statement of the results for the interim
periods presented. All adjustments made were of a normal recurring nature.
(2) INVENTORIES
The following are the components of inventories:
<TABLE>
<CAPTION>
January 31, October 31,
1999 1998
---------- ----------
(Unaudited)
<S> <C> <C>
Raw materials $1,182,477 $1,092,278
Finished goods and spare parts 1,487,756 1,254,978
---------- ----------
2,670,233 2,347,256
Less reserve for excess and
obsolete inventory (325,000) (325,000)
---------- ----------
$2,345,233 $2,022,256
========== ==========
</TABLE>
7
<PAGE> 8
(3) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
January 31, October 31,
1999 1998
------------- -------------
(Unaudited)
<S> <C> <C>
Construction in progress $ 2,253,074 $ 1,565,601
Data processing and computer field equipment 1,448,938 1,368,075
Land 611,582 611,582
Office furniture 145,671 136,143
Other 310,614 271,171
------------- -------------
4,769,879 3,952,572
Less accumulated depreciation (1,208,902) 1,135,202
------------- -------------
$ 3,560,977 $ 2,817,370
============= =============
</TABLE>
(4) UNEARNED INCOME
Unearned income consists of the following:
<TABLE>
<CAPTION>
January 31, October 31,
1999 1998
----------- -----------
(Unaudited)
<S> <C> <C>
Service contracts $1,160,979 $1,245,506
Warranty service 890,279 951,238
Systems shipped, but not installed 104,505 69,364
Customer deposits 1,237,195 688,778
Other deferred revenue 68,985 141,331
---------- ----------
Total current deferred revenue 3,461,943 3,096,217
Noncurrent unearned service revenues 1,035,346 730,314
---------- ----------
$4,497,289 $3,826,531
========== ==========
</TABLE>
8
<PAGE> 9
(5) INCOME TAXES
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below:
<TABLE>
<CAPTION>
January 31, October 31,
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Deferred tax assets:
Prepaid service contracts $ 358,431 $ 347,322
Nondeductible reserves 316,250 315,585
Other 47,027 35,078
------------ ------------
Total deferred tax asset 721,708 697,985
------------ ------------
Deferred tax liabilities:
Unamortized capitalized software
development costs 225,020 222,826
Tax income to be recognized on sales-type
lease contracts 250,479 250,479
Unamortized cost of long distance and
Service contracts 115,519 175,974
------------ ------------
Total deferred tax liability 591,018 649,279
------------ ------------
Net deferred tax asset $ 130,690 $ 48,706
============ ============
</TABLE>
(6) INTEREST AND OTHER INCOME
Interest and other income recorded in the accompanying financial
statements, consists primarily of interest income earned from sales-type leases
and cash investments.
9
<PAGE> 10
(7) FOOTNOTES INCORPORATED BY REFERENCE
Certain footnotes are applicable to the consolidated financial
statements, but would be substantially unchanged from those presented in the
Company's Annual Report on Form 10-KSB, Commission File No. 0-16231, filed with
the Securities and Exchange Commission on January 28, 1999. Accordingly,
reference should be made to those statements for the following:
<TABLE>
<CAPTION>
Note Description
---- -----------
<S> <C>
1 Business and summary of significant accounting policies
4 Accrued liabilities
6 Income taxes
7 Revolving Credit Agreement
8 Purchased Service and Long Distance Contracts
9 Stock options
10 Earnings per share
11 Commitments
12 Major Customers and Concentration of Credit Risk
13 Employment Agreements
14 Contingency
15 Retirement plan
</TABLE>
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
For the quarter ending January 31, 1999, XETA Corporation (the "Company")
reported net income of $797,000 or $.34 per share (diluted) compared to $691,000
or $.29 per share (diluted) earned during the first quarter of fiscal 1998, a
15% increase. Revenues in the first quarter of fiscal 1999 were $7.046 million
compared to revenues of $5.051 million earned in the first quarter of fiscal
1998, a 40% increase. Quarterly net income was significantly impacted by
amortization of approximately one-fourth of the purchase price paid for the
service contracts acquired from Williams Communications Solutions, LLC ("WCS"),
in the fourth quarter of fiscal 1998. Management estimates that this
amortization, which will continue at the same rate throughout fiscal 1999,
decreased net income $.09 per share (diluted) for the quarter.
The Company's continued growth in revenues was due to significant increases in
the sales of its call accounting and PBX systems as well as increases in
revenues earned from service activities. The Company has achieved these results
through the continued acceptance of its PBX and call accounting product and
service offerings by the hotel market.
The discussion which follows provides further analysis of the major factors and
trends which management believes had the most significant impact on the
financial condition of the Company as of January 31, 1999 and the results of
operations for the quarter then ended as compared to the same period a year ago.
Also included in this discussion are the major factors, trends and risks which
management believes will affect the outlook for the Company. This analysis
should be read in conjunction with the Consolidated Financial Statements and
Notes thereto contained in this report.
FINANCIAL CONDITION
During the first quarter of fiscal 1999, the Company's cash balances increased
$110,000. This increase consisted of cash earned from operations of $1.028
million, offset by cash used in investing activities of $.854 million and cash
used in financing activities of $64,000.
Investing activities primarily included cash used for continued construction of
the Company's new headquarters and purchases of furnishings for the building.
Construction of the facility is substantially complete and the Company is
scheduled to relocate during its second fiscal quarter. Management does not
expect the relocation effort to result in any significant interruptions to its
service operations or its installation schedule. The Company expects to spend
less than $350,000 to complete the construction and furnishing of the new
building.
During the quarter, the Company also spent $94,000 under its ongoing stock
buy-back program. This financing activity was partially offset by $30,000
received from the exercise of employee stock options. On February 5, 1999, the
Company's board of directors approved an increase in the stock buy-back program.
Beginning with the first quarter of fiscal 1999, the Company will allocate
one-half of its after-tax net income to the program. In addition, the directors
approved a one-time allocation of $500,000 to the program. Purchases of stock
under the program are made in open market transactions, the
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<PAGE> 12
timing of which are dictated by overall financial and market conditions. The
directors review the program regularly.
In September, 1998, the Company purchased approximately 100 Hitachi PBX service
contracts and the associated spare parts inventory from WCS. Since the closing,
WCS has been shipping the inventory to the Company for testing. Final closing
and purchase of the inventory will most likely occur during the Company's second
fiscal quarter. Per the contract, the Company has a remaining payment of
$415,000 to make toward the inventory although this number is subject to
adjustment based on the outcome of the testing.
Management believes that the Company's financial condition is strong. The
Company will continue to evaluate opportunities to expand its business through
acquisition of existing businesses or assets as well as through the addition of
synergistic products or services. While no assurance can be given, management
believes that it would have access to significant debt or equity financing
should any contemplated expansion require additional capital.
RESULTS OF OPERATIONS
The increase in revenues of $1.995 million in the first quarter of fiscal 1999
compared to the first quarter of fiscal 1998 consisted of increases in all the
Company's revenue categories. Service revenues increased $1.105 million or 38%,
sales of systems increased $.872 million or 45%, and long distance revenues
increased $18,000 or 9%. The following discussion analyzes the Company's
revenues by product line.
PBX Revenues. Sales of PBX systems increased $.470 million or 31% during the
first quarter. Service revenues from PBX related activities grew $.912 million
or 48% during the first quarter compared to the same quarter a year ago.
Continued market acceptance of the Company's PBX product offering and the
overall strength of the hotel industry fueled this growth in PBX related
revenues. All of the revenues earned from sales of new PBX systems in the first
quarter of fiscal 1999 were under the Company's distributorship agreement with
Hitachi. Management expects sales of PBX's under its new distributorship
agreement with Lucent to begin during the Company's second quarter. The Company
anticipates selling both manufacturers' systems throughout fiscal 1999. In
addition to the factors described above, the growth in PBX service revenues also
reflects revenues earned from the service contracts purchased from WCS in the
fourth quarter of fiscal 1998.
Call Accounting Revenues. Sales of call accounting systems increased $.402
million or 96% in the first quarter. Revenues from call accounting installation
and service related activities increased $.193 million or 20%. The healthy hotel
market has also helped sales of new call accounting systems. In addition, the
Company is enjoying a surge in orders of its network-friendly Virtual XL(TM)
Series call accounting system. This product, introduced in 1998, performs all
the functions of the Company's XL(R) Series call accounting system and can be
connected to private and/or public networks to allow remote access to reports.
The Company has a large backlog of orders for call accounting systems, primarily
Virtual XL(TM) Series systems. Most of these orders will be installed in fiscal
1999 and represent upgrades or replacements of existing XETA systems and
therefore do not represent an increase in the Company's installed base of call
accounting customers.
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<PAGE> 13
Long Distance Services. Revenues earned from long distance services increased
$18,000 in the first quarter compared to the first quarter of fiscal 1998. Due
to the competitive pressures in the long distance segment of the hotel industry,
the Company does not expect this portion of its business to expand in the
future.
Gross Margins. Gross margins earned on total revenues were 39% in the first
quarter of both fiscal 1999 and fiscal 1998. The gross margin earned on
installation and service revenues declined to 37% in the current quarter from
39% in the first quarter of the previous year. Despite the decrease, this gross
margin is comparable to the historical margins earned on installation and
service revenues in the past and are within management's target range for this
portion of its business. The gross margin earned on systems sales in the first
quarter was 40% compared to 36% earned in the first quarter of the previous
year. This increase was due primarily to a greater proportion of call accounting
sales, which is a higher margin product than PBX systems. The gross margins
earned on long distance revenues were 61% in the first quarter compared to 63%
in the first quarter one year ago.
Operating Expenses. Operating expenses increased $531,000 or 50% in the first
quarter compared to the first quarter of fiscal 1998. This increase includes an
increase of $397,000 in amortization expense, most of which is related to the
amortization of purchased PBX service contracts. The purchase of these contracts
from WCS was consummated in the fourth fiscal quarter of fiscal 1998 and is
being amortized over a one year period which approximates the average life of
the contracts purchased. The remaining increase in operating expenses of
$134,000 consists primarily of increases in commissions and executive bonuses
which increase in conjunction with increases in sales and net profits.
Interest and Other Income. Interest and other income decreased $32,000 or 18% in
the first quarter compared to the same period a year ago. Most of this decrease
reflects the decline in cash balances on hand which are invested in money market
accounts.
Tax Expense. The Company has recorded a combined federal and state tax provision
of 39% of income before taxes compared to a combined rate of 37% in the first
quarter of fiscal 1998. The increase in the tax rate reflects primarily an
increase in estimated state income taxes, which fluctuate based on the Company's
sales volumes in each state.
OUTLOOK AND RISK FACTORS
The statements contained in this section are based on current expectations. The
statements are forward-looking in nature and actual results may differ
materially. All such statements should be read in conjunction with the risk
factors discussed herein and elsewhere in this report. Those statements should
also be read in conjunction with the Company's Form 10-KSB for the year ended
October 31, 1998 which contains an expanded discussion of risk factors that
should be read in conjunction with this report. Particular attention should be
paid to the Company's disclosures in the Form 10-KSB regarding the potential
effect of the year 2000 ("Y2k") on its business.
The Company is currently enjoying a surge in orders for call accounting systems,
primarily its Virtual XL(TM) Series systems, which can be connected to
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<PAGE> 14
private and public networks. Management expects most of the orders currently in
its backlog to be installed and recognized as revenues during fiscal 1999.
Subsequently, sales of call accounting systems should return to recent
historical levels.
The Company is in the early stages of its relationship with Lucent. Many of the
Company's sales and service technicians have been trained on the Lucent system
and the Company is actively marketing the Lucent Guestworks(TM) PBX. To date,
the Company has received two orders for Lucent systems. While no assurance can
be given, management believes that the Lucent system will enable the Company to
compete more effectively in some segments of the market, specifically large
hotels. For the Lucent product offering to be successful however, the Company
must quickly establish itself as a quality installer and service provider of
Lucent products. The Company's performance in these areas over the next few
quarters will largely determine the success of its Lucent product offering.
The Company is continuing to evaluate the potential effect of the Y2k problem on
its business. As of the date of filing this report, management believes that the
disclosures provided in the Company's Annual Report for fiscal 1998 accurately
reflect the current state of those evaluations.
The Company is involved in three matters of pending litigation. See "Legal
Proceedings" under Part II below for a further discussion of this litigation.
Item 3 of Part I has been omitted as inapplicable.
14
<PAGE> 15
17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On November 20, 1998, the Company was served with notice that it had
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 20, 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. This matter is in the
early stages of litigation. A scheduling conference was held on
February 26, 1999 at which certain procedural matters were addressed,
however no dates were set with respect to discovery cut-off, additional
conferences among the parties, or pretrial or trial dates, pending the
results of certain preliminary discovery requested of Hitachi. 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"), was initiated in June, 1995 and was
first reported by the Company in its Form 10-QSB for the fiscal quarter
ending July 31, 1995. No significant developments have occurred in this
case since the Company's last reporting of this matter in its Annual
Report on Form 10-KSB for the fiscal year ended October 31, 1998.
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
15
<PAGE> 16
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. No
significant developments have occurred in this case, to the knowledge
of the Company, since the Company last reported on this matter in its
Annual Report on Form 10-KSB for the fiscal year ended October 31,
1998.
Items 2, 3, 4, and 5 of Part II have been omitted because they are inapplicable
or the response thereto is negative.
Item 6.
(a) Exhibits - See the Exhibit Index at Page 18.
(b) Reports on Form 8-K - During the quarter for which this report is
filed, the Registrant did not file any reports with the Securities and
Exchange Commission on Form 8-K.
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
XETA CORPORATION
(Registrant)
Dated: March 11, 1999 By: /s/ JACK R. INGRAM
----------------------------------
Jack R. Ingram
President
Dated: March 11, 1999 By: /s/ ROBERT B. WAGNER
----------------------------------
Robert B. Wagner
Vice President of Finance
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEC. NO. Description
- -------- -----------
<S> <C>
(2) Plan of acquisition, reorganization, arrangement, liquidation
or succession - None.
(3) Articles of Incorporation and Bylaws - previously filed as
Exhibits 3.1, 3.2, and 3.3 to the Registrant's Registration
Statement on Form 5.1, Registration No. 33-7841.
(4) Instruments defining rights of security holders, including
indentures - previously filed as Exhibits 3.1, 3.2 and 3.3 to
the Registrant's Registration Statement on Form S-1,
Registration No. 33-7841.
(10) Material Contracts - none
(11) Statement re: computation of per share earnings-Inapplicable.
(15) Letter re: unaudited interim financial information-
Inapplicable.
(18) Letter re: change in accounting principles-Inapplicable.
(19) Report furnished to security holders-None.
(22) Published report regarding matters submitted to a vote of
security holders - None.
(23) Consents of experts and counsel
23.1 Consent of Arthur Andersen LLP
(24) Power of attorney - None.
(27) Financial Data Schedule
(99) Additional exhibits - None.
</TABLE>
<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.
ARTHUR ANDERSEN LLP
Tulsa, Oklahoma
March 11, 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 3 AND 4 OF THE COMPANY'S 10-Q FOR THE YEAR TO DATE AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-END> JAN-31-1999
<CASH> 3,348,561
<SECURITIES> 0
<RECEIVABLES> 2,957,014
<ALLOWANCES> 0
<INVENTORY> 2,345,233
<CURRENT-ASSETS> 10,893,292
<PP&E> 3,560,977
<DEPRECIATION> 0
<TOTAL-ASSETS> 19,114,387
<CURRENT-LIABILITIES> 5,523,561
<BONDS> 0
0
0
<COMMON> 231,628
<OTHER-SE> 11,859,296
<TOTAL-LIABILITY-AND-EQUITY> 19,114,387
<SALES> 7,046,282
<TOTAL-REVENUES> 7,046,282
<CGS> 4,297,022
<TOTAL-COSTS> 4,297,022
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,307,539
<INCOME-TAX> 511,000
<INCOME-CONTINUING> 796,539
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 796,539
<EPS-PRIMARY> .39
<EPS-DILUTED> .34
</TABLE>
