-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, H2/14mDq3kG1tOe0n2aSo8NxsULHyt/I9tgi6LCc/oRfMyGz8oiawpMwMTTgm8Gm vZ1ZAlgGnY39b6ld8g4aJQ== 0000950134-98-002062.txt : 19980317 0000950134-98-002062.hdr.sgml : 19980317 ACCESSION NUMBER: 0000950134-98-002062 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980131 FILED AS OF DATE: 19980316 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: XETA CORP CENTRAL INDEX KEY: 0000742550 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 731130045 STATE OF INCORPORATION: OK FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-16231 FILM NUMBER: 98566496 BUSINESS ADDRESS: STREET 1: 4500 S GARNETT STE 1000 CITY: TULSA STATE: OK ZIP: 74146 BUSINESS PHONE: 9186648200 MAIL ADDRESS: STREET 1: 4500 S GARNETT SUITE 1000 CITY: TULSA STATE: OK ZIP: 74146 10QSB 1 FORM 10-QSB FOR QUARTER ENDED JANUARY 31, 1998 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB [X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR QUARTER ENDED JANUARY 31, 1998 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 0-16231 XETA Corporation ' - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Oklahoma 73-1130045 ' - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer ' ' incorporation or organization) Identification No.) 4500 S. Garnett, Suite 1000, Tulsa, Oklahoma 74146 ' - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) 918-664-8200 ' - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Not Applicable ' - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Check whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ' --- --- Number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Class Outstanding at March 1, 1998 - -------------------------------- ---------------------------- Common Stock, $.10 par value 2,051,771 Page 1 of 20 consecutive pages Exhibit Index appears on Page 19. 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Page No. -------- Consolidated Balance Sheets - January 31, 1998 3 and October 31, 1997 Consolidated Statements of Operations - For the 4 Three months ending January 31, 1998 and 1997 Consolidated Statements of Shareholder's Equity - 5 November 1, 1997 through January 31, 1998 Consolidated Statements of Cash Flows - For the 6 Three months ending January 31, 1998 and 1997 Notes to Consolidated Financial Statements 7 2 3 XETA CORPORATION CONSOLIDATED BALANCE SHEETS
ASSETS ------ January 31, 1998 October 31, 1997 ------------------ ------------------ (Unaudited) Current Assets: Cash and cash equivalents $ 5,276,308 $ 6,011,841 Current portion of net investment in sales-type leases 2,049,540 2,122,405 Other receivables, net 2,562,451 1,501,843 Inventories, net (Note 4) 1,640,091 1,498,748 Deferred tax asset, net (Note 7) 95,531 61,743 Prepaid expenses and other assets 125,136 75,827 ------------------ ------------------ Total current assets 11,749,057 11,272,407 ------------------ ------------------ Noncurrent Assets: Net investment in sales-type leases, less current portion above 1,224,011 1,381,818 Purchased long distance contracts, net (Note 2) 887,742 938,958 Property, plant & equipment, net (Note 5) 684,294 634,905 Capitalized software production costs, net of accumulated amortization of $363,066 at Jan. 31, 1998 and $333,066 at Oct. 31, 1997 548,783 537,578 Other assets 62,818 54,197 ------------------ ------------------ Total noncurrent assets 3,407,648 3,547,456 ------------------ ------------------ Total assets $15,156,705 $14,819,863 ================== ================== LIABILITIES & SHAREHOLDER'S EQUITY ---------------------------------- Current liabilities: Accounts payable $ 613,897 $ 591,822 Unearned revenue (Note 6) 3,138,796 2,877,785 Accrued liabilities 413,614 739,696 Accrued federal and state income taxes 591,720 118,874 ------------------ ------------------ Total current liabilities 4,758,027 4,328,177 ------------------ ------------------ Unearned service revenue (Note 6) 541,259 603,433 ------------------ ------------------ Noncurrent deferred tax liability, net (Note 7) 519,275 551,720 ------------------ ------------------ Commitments (Note 2) Shareholders' equity: Common stock; $.10 par value; 10,000,000 shares authorized, 2,230,785 and 2,207,285 issued at January 31, 1998 and October 31, 1997, respectively 223,078 220,728 Paid-in capital 4,880,490 4,859,340 Retained earnings 5,206,904 4,516,205 ------------------ ------------------ 10,310,472 9,596,273 Less treasury stock, at cost (972,328) (259,740) ------------------ ------------------ Total shareholders' equity 9,338,144 9,336,533 ------------------ ------------------ Total liabilities & shareholders' equity $15,156,705 $14,819,863 ================== ==================
The accompanying notes are an integral part of these statements. 3 4 XETA CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
For the Three Months Ending January 31, 1998 1997 ---- ---- Installation and service revenues $2,890,515 $1,817,937 Sales of systems 1,956,809 1,082,792 Long distance services 203,499 - ----------------- ----------------- Net sales and service revenues 5,050,823 2,900,729 ----------------- ----------------- Installation and service cost 1,754,133 1,143,271 Cost of sales 1,245,257 645,194 Cost of long distance services 75,222 - ----------------- ----------------- Total cost of sales and service 3,074,612 1,788,465 ----------------- ----------------- Gross profit 1,976,211 1,112,264 ----------------- ----------------- Operating expenses: Selling, general and administrative 926,999 674,378 Engineering, research and development, and amortization of capitalized software production costs 130,659 98,868 ----------------- ----------------- Total operating expenses 1,057,658 773,246 ----------------- ----------------- Income from operations 918,553 339,018 Interest and other income 179,146 167,822 ----------------- ----------------- Income before provision for income taxes 1,097,699 506,840 Provision for income taxes 407,000 176,000 ----------------- ----------------- Net income $ 690,699 $ 330,840 ================= ================= Earnings per share Basic $ 0.34 $ 0.17 ================= ================= Diluted $ 0.29 $ 0.14 ================= ================= Weighted average shares outstanding 2,003,912 1,995,352 ================= ================= Weighted average shares equivalents 2,357,117 2,345,180 ================= =================
The accompanying notes are an integral part of these statements. 4 5 XETA CORPORATION CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY NOVEMBER 1, 1997 THROUGH January 31, 1998 (Unaudited)
Common Stock Treasury Stock . --------------------------- -------------------------- Number of Shares Issued Paid-in Retained & Outstanding Par Value Shares Amount Capital Earnings ------------- --------- ------ ------ ------- -------- Balance - October 31, 1997 2,207,285 $220,728 (189,747) $(259,740) $4,859,340 $4,516,205 Stock options exercised 23,500 2,350 21,150 Treasury stock acquired (32,600) (712,588) Net Income 690,699 --------- --------- ------- ---------- ---------- ---------- Balance - January 31, 1998 2,230,785 $ 223,078 (222,347) $ (972,328) $4,880,490 $5,206,904 ========= ========= ======= ========== ========== ==========
The accompanying notes are an integral part of these statements. 5 6 XETA CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Three Months Ending January 31, 1998 1997 ---- ---- Cash flows from operating activities: Net Income $ 690,699 $ 330,840 --------------- ---------------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 66,142 43,245 Amortization of capitalized software production costs and long distance contracts 81,216 14,652 (Gain) loss on sale of assets 357 - Provision for doubtful accounts receivable 9,000 9,000 Change in assets and liabilities: (Increase) decrease in net investment in sales-type leases 230,672 273,548 (Increase) in other receivables (1,069,608) (165,654) (Increase) decrease in inventories (141,343) (183,352) Decrease in prepaid income taxes - 173,785 (Increase) decrease in deferred tax asset (33,788) (28,276) (Increase) decrease in prepaid expenses and other assets (57,930) (62,583) Increase (decrease) in accounts payable 22,075 78,288 Increase (decrease) in unearned revenue 198,837 303,286 Increase in accrued income taxes 472,846 52,920 Increase (decrease) in accrued liabilities (326,082) (417,321) Increase (decrease) in deferred tax liabilities (32,445) (63,238) --------------- ---------------- Total adjustments (580,051) 28,300 --------------- ---------------- Net cash provided by operating activities 110,648 359,140 --------------- ---------------- Cash flows from investing activities: Additions to capitalized software (41,196) (84,662) Additions to property, plant & equipment (116,749) (48,660) Proceeds from sale of assets 852 --------------- ---------------- Net cash used in investing activities (157,093) (133,322) --------------- ---------------- Cash flows from financing activities: Purchase of treasury stock (712,588) Exercise of stock options 23,500 6,563 --------------- ---------------- Net cash provided by (used in) financing activities (689,088) 6,563 --------------- ---------------- Net increase (decrease) in cash and cash equivalents (735,533) 232,381 Cash and cash equivalents, beginning of period 6,011,841 3,549,101 --------------- ---------------- Cash and cash equivalents, end of period $5,276,308 $3,781,482 =============== ================ Supplemental disclosure of cash flow information: Cash paid during the period for interest $ - $ 282 Cash paid during the period for income taxes $ 6,034 $ 108,462
The accompanying notes are an integral part of these statements. 6 7 XETA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS January 31, 1998 (Unaudited) (1) BASIS OF PRESENTATION The consolidated financial statements included herein include the accounts of XETA Corporation and its wholly-owned subsidiary, Xetacom, Inc. Xetacom's operations have been insignificant to date. All significant intercompany accounts and transactions have been eliminated. The consolidated financial statements have been prepared by the Company, without an audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The Company believes that the disclosures made in these financial statements are adequate to make the information presented not misleading when read in conjunction with the consolidated financial statements and the notes thereto included in the Company's latest financial statements filed as part of the Company's Annual Report on Form 10-KSB, Commission File No. 0-16231. Management believes that the financial statements contain all adjustments necessary for a fair statement of the results for the interim periods presented. All adjustments made were of a normal recurring nature. (2) COMMITMENT In April 1997, the Company entered the long distance services market through a sales sub-agency agreement with MCI and through a marketing alliance with Americom Communications Services, Inc. ("Americom"). Simultaneously, the Company purchased Americom's interest in existing long distance contracts at 71 hotels. Previous to the Company's purchase of these contracts, Americom had obtained loans from the long distance carrier, which were secured by future commissions to be earned. To effect the transfer of ownership in these contracts, the Company guaranteed Americom's indebtedness. At January 31, 1998, the amount of the guarantee was $366,000. (3) REVOLVING CREDIT AGREEMENT The company maintains a $1,000,000 revolving line of credit with its bank. There are no outstanding advances under the credit agreement. 7 8 (4) INVENTORIES The following are the components of inventories:
January 31, October 31, 1998 1997 ---------- ---------- (Unaudited) Raw materials $ 803,644 $ 712,546 Finished goods and spare parts 1,051,447 1,001,202 ---------- --------- 1,855,091 1,713,748 Less reserve for excess and obsolete inventory (215,000) (215,000) ---------- ---------- $1,640,091 $1,498,748 ========== ========== (5) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following: January 31, October 31, 1998 1997 ---------- ---------- (Unaudited) Computer field equipment $1,163,751 $1,105,379 Office furniture 129,687 127,527 Other 308,178 253,328 ---------- ---------- 1,601,616 1,486,234 Less accumulated depreciation (917,322) (851,329) ---------- ---------- $ 684,294 $ 634,905 ========== ========== (6) UNEARNED INCOME Unearned income consists of the following: January 31, October 31, 1998 1997 ---------- ---------- (Unaudited) Service contracts $1,419,111 $1,522,597 Warranty service 689,718 685,955 Systems shipped, but not installed 222,010 42,825 Customer deposits 696,802 508,359 Other deferred revenue 111,155 118,049 ---------- ---------- Total current deferred revenue 3,138,796 2,877,785 Noncurrent unearned service revenues 541,259 603,433 ---------- --------------- $3,680,054 $3,481,218 ========== ==========
8 9 (7) INCOME TAXES The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:
January 31, October 31, 1998 1997 ---------- ---------- (Unaudited) Deferred tax assets: Prepaid service contracts $ 29,281 $ 32,305 Nondeductible reserves 213,490 207,502 Other 2,637 20,559 --------- ---------- Total deferred tax asset 245,408 260,366 ---------- ---------- Deferred tax liabilities: Unamortized capitalized software development costs (186,586) (182,777) Tax income to be recognized on sales-type lease contracts (416,606) (501,606) Other (65,960) (65,960) ---------- ---------- Total deferred tax liability (669,152) (750,343) ---------- ---------- Net deferred tax liability $ (423,744) $ (489,977) ========== ==========
(8) INTEREST AND OTHER INCOME Interest and other income recorded in the accompanying financial statements, consists primarily of interest income earned from sales-type leases and cash investments. 9 10 (9) FOOTNOTES INCORPORATED BY REFERENCE Certain footnotes are applicable to the consolidated financial statements, but would be substantially unchanged from those presented in the Company's Annual Report on Form 10-KSB, Commission File No. 0-16231, filed with the Securities and Exchange Commission on January 29, 1998. Accordingly, reference should be made to those statements for the following: Note Description ---- ----------- 1 Business and summary of significant accounting policies 3 Operator services business and purchased long distance contracts 4 Income taxes 6 Accrued liabilities 8 Stock options 9 Commitments 10 Major customers and concentrations of credit risk 11 Employment agreements 12 Contingency 13 Earnings per share 15 Retirement plan 10 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS For the quarter ending January 31, 1998, XETA Corporation (the "Company") reported net income of $691,000 on net sales of $5,051,000. These results represent gains of 109% and 74% in net income and net sales, respectively, compared to the first quarter of fiscal 1997. The Company's growth continues to be rooted in the increasing market acceptance of the Company's product offerings, specifically the Company's PBX related products and services. The discussion which follows provides further analysis of the major factors and trends which management believes had the most significant impact on the financial condition of the Company as of January 31, 1998 and the results of its operations for the quarter then ended as compared to the same period one year ago. Also included in this discussion are the major factors, trends and risks which management believes will affect the outlook for the Company. This analysis should be read in conjunction with the Consolidated Financial Statements and Notes thereto contained in this report. FINANCIAL CONDITION During the first quarter of fiscal 1998, the Company's cash balances decreased $736,000 reflecting primarily the Company's repurchase of stock in accordance with its on-going stock buy-back plan. Cash flows from operations were $111,000 including net income of $691,000, which was partially offset by changes in working capital accounts and other operating activities. The largest change in working capital that caused a decline in the cash earned from operations was the $1,070,000 increase in accounts receivable during the quarter reflecting some delay in collections on accounts. Management has been aggressively pursuing collection of these accounts and collections have improved subsequent to the end of the quarter. On October 30, 1997, the Company's board of directors adopted a stock buy-back program in which management is authorized to spend up to one-third of net income for fiscal 1997 and for each subsequent fiscal quarter thereafter until the program is terminated. During the first quarter, 32,600 shares of Company stock were purchased in open market transactions totaling $713,000. The buy-back program is reviewed on a regular basis and future purchases will be based upon overall financial and market conditions. In addition to the items discussed above, the Company invested $157,000 in additional property and equipment, primarily field equipment to support PBX customer installations, but also internal equipment additions to support the growth in the Company's employee base. Management considers the Company's financial condition to still be strong. Cash balances represent approximately 35% of total assets and over 50% of book value. In addition, working capital is nearly $7 million and the current ratio is 2.5. Management believes that present working capital and funds earned from future operations 11 12 will be sufficient to meet the working capital needs required by the Company's current expansion. This current expansion includes increases in the Company's service and installation staff to meet the rapidly increasing customer base and the placement of additional call accounting systems under PBX and long distance service contracts. Additional capital is being invested in the expansion of the Company's physical facilities. Subsequent to January 31, 1998, the Company completed the purchase of a 13-acre tract of land in a developed, suburban business park located approximately 3 miles from the Company's present headquarters. Management anticipates that construction of a new 35,000 square foot facility will begin during the second fiscal quarter. This facility will house all of the Company's current Tulsa operations. Construction and relocation should be completed within one year and is estimated to cost $2.5 million. In addition to expansion of the Company's business and facilities and the stock buy-back program, the Company is continually evaluating other alternatives to effectively utilize its cash balances and capital resources. These primarily include evaluation of potential synergistic acquisitions of existing businesses or divisions, which would expand its presence in the lodging or telecommunications industries. These types of activities resulted in the Company's entrance into the long distance services business and the purchase of 71 long distance contracts during the second quarter of fiscal 1997. While no assurance can be given, management believes that additional sources of capital, both debt and equity, would be available to the Company to consummate an acquisition, should existing cash balances be insufficient. RESULTS OF OPERATIONS Net sales and service revenues increased $2.15 million or 74% during the first quarter of fiscal 1998 compared to the first quarter of fiscal 1997. This increase in revenues consisted of an increase in installation and service revenues of $1.08 million or 59%, an increase in systems sales of $874,000 or 81%, and an increase in long distance revenues of $203,499. While each of these categories reported healthy increases, a clearer picture of the trends in the Company's business can be found by examining the revenues earned by each of the Company's three product lines. Revenues earned from PBX products and services increased $1.9 million or 122%, call accounting related revenues increased $51,000 or 4% and revenues from long distances services, a new product line, increased $203,000. The increase in revenues from PBX activities included an increase of $904,000 or 143% in sales of new PBX's and an increase of $992,000 or 107% in PBX installation and service revenues. Management believes that the strong sales of PBX systems is due primarily to the continued and growing acceptance of the Company's product and service package for PBX systems, but also due to the expanding hospitality market. In addition to providing a 24 hour-per-day Service Center and regionally based service technicians, the Company also provides its PBX customers with an innovative package of equipment and services that have helped to distinguish the Company from its competitors. This package includes a XETA XL Series call accounting system and a predetermined number of free labor hours each month. These free hours allow customers to make some 12 13 changes to their phone systems or receive non-emergency maintenance as part of their regular monthly service fee. Providing this innovative package and maintaining the quality of installation and maintenance services to the Company's growing customer base has gained the Company a reputation as a market leader resulting in continued sales to those same customers. Another key factor in the Company's current growth is the overall expanding hospitality industry, which is enjoying strong occupancy rates while being able to also charge higher room rates. These trends are fueling a building boom in some sectors of the industry, mainly smaller, extended stay hotels; however, some new construction and major renovation of larger, full service, business hotels is also occurring. The Company is enjoying its share of this business. The increase in revenues from call accounting related activities consisted of a decrease in sales of new call accounting systems of $30,000 or 7% which was offset by a $81,000 or 9% increase in revenues from installation and service of call accounting systems. Despite the decrease, management considers the sales of call accounting systems, a mature product line, to be satisfactory. The increase in call accounting service revenues reflects the fact that the Company is able to consistently maintain and increase its base of call accounting customers under service agreements even though sales of new call accounting systems has returned to historical levels. Revenues earned from long distance services, which began in April 1997, were $203,000 for the first quarter of fiscal 1998. The Company provides MCI long distance services through sales sub-agency agreements with L.D. Communications, Inc. ("LDCI") and also through a marketing alliance with Americom Communications Services, Inc. ("Americom"). Under its agreements with LDCI, the Company earns commissions on certain calls made by guests at customer locations that have contracted for MCI's long distance services through the Company. The Company does not resell long distance minutes and is not required to meet any quotas for number of calls or minutes, but simply earns a commission on particular guest calls as defined in the contract. A portion of the commission received by the Company is then paid to the hotel and remaining net commission is shared with Americom according to a formula set out in the marketing alliance agreement. During the quarter, the Company's revenues earned from long distance contracts increased significantly from prior months, but remains below expectations. Gross margins earned on net sales and service revenues were 39% during the first quarter of fiscal 1998 compared to 38% for the first quarter of fiscal 1997. This increase consisted of an increase in the gross margin earned on installation and service revenues from 37% in the first quarter of fiscal 1997 to 39% in the first quarter of fiscal 1998. This margin is slightly higher than the historical range of 36% to 38% on these revenues and management expects overall gross margins earned on installation and service revenues to continue to fall within this historical range in future quarters. The increase in gross margins on installation and service revenues was partially offset by a decrease in gross margins earned on systems sales from 40% in the first quarter of fiscal 1997 to 36% in the first quarter of fiscal 1998. This decline in margins earned on systems sales reflects the higher proportion of lower margin PBX sales compared to higher margin call accounting systems sales 13 14 during the first quarter of fiscal 1998 versus the first quarter of fiscal 1997. Operating expenses increased $284,000 or 37% in the first quarter of fiscal 1998 compared to the first quarter of fiscal 1997. A portion of this increase related to increases in sales commissions and bonuses that are directly related to sales and profitability, respectively. Another factor was the increase in amortization expense related to the amortization of the purchase price of the 71 long distance contracts purchased during the second quarter of fiscal 1997. Finally, some increases occurred in operating expenses as a result of modest increases in personnel related costs to support the rapid growth of the Company. While not a significant factor in the increase in operating expenses, the Company continues to experience elevated legal fees associated with its defense in a lawsuit brought by a customer of the Company (See "Part II, Item 1. Legal Proceedings" for an update on this matter.) Interest and other income increased 11,000 or 7% for the first quarter of fiscal 1998 compared to the same quarter of fiscal 1997. This increase resulted from a 64% increase in interest income earned from cash investments offset by an 18% decrease in interest income earned on XETAPLAN sales-type lease receivables. The increase in earnings from cash investments reflects the significantly higher cash balances during the fiscal 1998 period compared to the year earlier. The decrease in interest earned from XETAPLANs reflects the declining balances of those sales-type leases. The Company has recorded a federal and state tax provision of $407,000, reflecting a combined tax rate of 37% compared to an estimated combined rate of 35% in fiscal 1997. The increase in the tax rate relates to state taxes that are estimated each year and fluctuate based on the Company's sales volumes in each state. OUTLOOK AND RISK FACTORS The statements contained in this section are based on current expectations. The statements are forward-looking in nature and actual results may differ materially. The Company's Form 10KSB for the year ended October 31, 1997 contains an expanded discussion of risk factors that should be read in conjunction with this report. The Company continues to expand its market share in the hospitality industry, which is currently a rapidly expanding and healthy market. In the near term, management believes the Company will continue to enjoy strong sales of its products and rapid growth of its customer base, especially for its PBX product line. Throughout the first quarter and up to the filing of this report, the Company's backlog of sales orders remained very strong. Currently, a slow-down in the growth of the hospitality sector of the economy is not predicted in the near-term; however, such a slow-down would likely negatively impact the growth rate of the Company. Nevertheless, it is important to note that as the Company's customer base is expanding, so is its recurring base of service revenues. Historically, the Company has a very high customer retention rate and the majority of those customers produce regular, monthly service revenues for the Company. This base of recurring 14 15 service revenues should help cushion the effects of a slow-down in orders for new systems, if such a slow-down should occur. Recently, there has been a surge in consolidation of ownership of hotel properties, particularly by real estate investment trusts ("REITS"), some of which have tax advantaged corporate structures. This consolidation has produced some risks to the Company as industry personnel are shuffled and consolidated as well. To date, the impact on the Company has been positive, but the ultimate potential impact of these changes to the Company is still unknown. The Company continues to invest significant resources into the development of its XPANDER(R) system. The initial phase of the XPANDER(R) system is in production, however, development continues on additional features and on other XPANDER(R)-based products. To date, all installed XPANDER(R) systems are operating satisfactorily. The market for XPANDER(R) is continuing to develop, and while sales of these systems have not yet met management's expectations, sales of new PBX systems have more than offset the lack of XPANDER(R) systems ordered. Management continues to believe very strongly that a majority of business oriented hotels will eventually convert to multiple telephone line access and that the XPANDER(R) system will be the solution chosen by many hoteliers. The Company is involved in two matters of pending litigation (See "Legal Proceedings" under Part II below). In one of these matters (Phonometrics), the Company is only indirectly involved and based on the current status of the litigation, management expects this matter to be resolved with no material impact to the Company's financial statements. In the ABTS matter, the trial in this case has been postponed pending various filings to be made by each party and rulings to be made by the judge. No loss contingencies, other than the estimated cost of bringing the ABTS matter to trial, have been recorded in the financial statements. Should the ABTS case be resolved unfavorably, the Company may have to record expenses that might cause operating results to be materially lower than those expected. 15 16 PART II. OTHER INFORMATION Item 1. Legal Proceedings ABTS In June, 1995, Associated Business Telephone Systems ("ABTS") initiated an action against the Company which is currently pending in the United States District Court for the Northern District of Oklahoma. ABTS claims' are based upon allegations of breach of warranty, breach of contract including alleged violations of certain exclusivity rights held by ABTS, and tortious interference with ABTS' relationship with certain of its customers, arising in connection with (i) a Distributor's Agreement entered into between the Company and D & P Investments in 1986, pursuant to which the Company sold to D & P Investments certain call accounting systems, and (ii) a Maintenance Agreement between the Company and ABTS pursuant to which the company furnished maintenance services for such systems. D & P Investments has allegedly assigned its claim for breach of the Distributor's Agreement to ABTS. ABTS is seeking damages in the amount of $1,000,000. The Company has filed a counterclaim against ABTS and a third-party claim against D & P Investments based upon breach of contract, in which the Company seeks money damages. Following extensive discovery, the company filed a motion for summary judgment in September, 1997, seeking judgment in its favor on all claims brought against it by ABTS. A hearing was held on the motion for summary judgment on January 30, 1998 and pursuant to the court's request, the parties subsequently submitted supplemental briefs on the motion. The court has struck the February 17, 1998 trial date which was previously set for this matter and has set a new trial date for July 20, 1998. The parties are awaiting action by the court with regard to a ruling on the motion for summary judgment and a new scheduling order. The Company intends to continue to vigorously defend this matter. PHONOMETRICS For the past several years, the Company has been monitoring the progress of numerous patent infringement lawsuits filed by Phonometrics, Inc., a Florida corporation, against certain telecommunications equipment manufacturers and hotels who use such equipment. While the Company has not been named as a defendant in any of these cases, several of its customers are named defendants and have notified the Company that they seek indemnification under the terms of their contracts with the Company. Because there are other equipment vendors implicated along with the Company in the cases filed against its customers, the Company has not assumed the outright defense of its customers in any of these actions. The cases filed by Phonometrics against the Company's customers are pending in the Southern District of Florida (the "Florida litigation") 16 17 and the Northern District of California (the "California litigation"). In each of the lawsuits, Phonometrics is seeking damages of an unspecified amount, based upon a reasonable royalty of the hotels' profits derived from use of the allegedly infringing equipment during a period commencing six years prior to the filing of the lawsuit and ending October 30, 1990. Phonometrics is barred from seeking an injunction against continued use of the equipment since the patent expired in October, 1990. With regard to the Florida litigation, the Florida court heard the cases filed by Phonometrics against the equipment manufacturers, and ruled against Phonometrics and in favor of the equipment manufacturers, including Northern Telecom. The court then stayed the cases filed against the hotels (which includes the cases involving the Company's customers), pending the outcome of Phonometrics' appeal of the court's decision in favor of Northern Telecom. In its order staying the hotel cases, the Florida court stated that it would enter final judgment in favor of all of the hotels in the event the appeals court upholds the Florida court's decision against Phonometrics in the Northern Telecom case. The California litigation was also stayed pending the outcome of the Florida litigation. On January 15, 1998, the United States Court of Appeals for the Federal Circuit affirmed the Florida court's decision against Phonometrics and in favor of Northern Telecom, finding that as a matter of law the accused products cannot infringe Phonometrics' patent. However, on February 17, 1998 Phonometrics sought to revive its case against Northern Telecom by filing a motion with the Florida court seeking leave to amend (for the second time) its complaint against Northern Telecom. As of March 3, 1998, this motion was pending before the Florida court and the stay with respect to the hotel cases remained in place. Items 2, 3, 4, and 5 of Part II have been omitted because they are inapplicable or the response thereto is negative. Item 6. (a) Exhibits - See the Exhibit Index at Page 18. (b) Reports on Form 8-K - During the quarter for which this report is filed, the Registrant did not file any reports with the Securities and Exchange Commission on Form 8-K. 17 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. XETA CORPORATION (Registrant) Dated: March 13, 1998 By: /s/ JACK R. INGRAM ---------------------------------- Jack R. Ingram President Dated: March 13, 1998 By: /s/ ROBERT B. WAGNER ---------------------------------- Robert B. Wagner Vice President of Finance 18 19 EXHIBIT INDEX SEC. NO. Description - -------- ----------- (2) Plan of acquisition, reorganization, arrangement, liquidation or succession - None. (3) Articles of Incorporation and Bylaws - previously filed as Exhibits 3.1, 3.2, and 3.3 to the Registrant's Registration Statement on Form 5.1, Registration No. 33-7841. (4) Instruments defining rights of security holders, including indentures - previously filed as Exhibits 3.1, 3.2 and 3.3 to the Registrant's Registration Statement on Form S-1, Registration No. 33-7841. (10) Material Contracts - none (11) Statement re: computation of per share earnings - Inapplicable. (15) Letter re: unaudited interim financial information - Inapplicable. (18) Letter re: change in accounting principles - Inapplicable. (19) Report furnished to security holders - None. (22) Published report regarding matters submitted to a vote of security holders - None. (23) Consents of experts and counsel 23.1 Consent of Arthur Andersen LLP (24) Power of attorney - None. (27) Financial Data Schedule (99) Additional exhibits - None. 19 EX-23.1 2 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report and to all references to our Firm included in or made a part of the Form S-8 made by Xeta Corporation on August 28, 1995. It should be noted that we have not audited any financial statements of the Company subsequent to October 31, 1997 or performed any audit procedures subsequent to the date of our report. /s/ ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP Tulsa, Oklahoma March 9, 1998 EX-27.1 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON PAGES 3 AND 4 OF THE COMPANY'S 10-QSB FOR THE YEAR TO DATE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS OCT-31-1998 JAN-31-1998 5,276,308 0 2,562,451 0 1,640,091 11,749,057 684,294 0 15,156,705 4,758,027 0 0 0 223,078 9,115,066 15,156,705 5,050,823 5,050,823 3,074,612 3,074,612 0 0 0 1,097,699 407,000 690,699 0 0 0 690,699 .34 .29
-----END PRIVACY-ENHANCED MESSAGE-----