-----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, T/h4JzQwjSIYsZH4JlfA+JT18kqa7AwnLeFx353GursYLxg9OHL6abUBX7sMWlo2 dAm9KVEnFA/MXUeAlpRVbA== 0000950134-99-000518.txt : 19990129 0000950134-99-000518.hdr.sgml : 19990129 ACCESSION NUMBER: 0000950134-99-000518 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981031 FILED AS OF DATE: 19990128 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: 10KSB SEC ACT: SEC FILE NUMBER: 000-16231 FILM NUMBER: 99515393 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 10KSB 1 FORM 10-KSB FOR FISCAL YEAR END OCTOBER 31, 1998 1 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 - ------------------------------------------------------------------------------ (Name of small business issuer in its charter)
Oklahoma 73-1130045 - ------------------------------------------------ -------------------------------------- (State or other jurisdiction of incorporation or (I.R.S. Employer Identification Number) organization)
4500 S. Garnett, Suite 1000, Tulsa, Oklahoma 74146 - ------------------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) Issuer's telephone number: (918) 664-8200 ---------------------------------------------------- Securities registered under Section 12(g) of the Exchange Act: Common Stock, $0.10 par value - ------------------------------------------------------------------------------ (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. 2 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 2 3 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. 3 4 ("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 4 5 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 5 6 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. 6 7 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. 7 8 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. 8 9 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.
1998 1997 ---- ---- High Low High Low ---- ---- ---- ---- Quarter Ending: --------------- 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
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. 9 10 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 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 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 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 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 15 ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS OF THE COMPANY PAGE - -------------------------------------------- ---- 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
15 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 17 XETA CORPORATION CONSOLIDATED BALANCE SHEET OCTOBER 31, 1998 ASSETS 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 ============
The accompanying notes are an integral part of this consolidated balance sheet. F-2 18 XETA CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended October 31, --------------------------- 1998 1997 ----------- ----------- 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 =========== ===========
The accompanying notes are an integral part of these consolidated statements. F-3 19 XETA CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED OCTOBER 31, 1998 AND 1997
Common Stock Treasury Stock -------------------------- --------------------------- Number of Paid-in Retained Shares Issued Par Value Shares Amount Capital Earnings ------------- ----------- ----------- ----------- ----------- ----------- 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 =========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated statements. F-4 20 XETA CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended October 31, ----------------------------- 1998 1997 ----------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: 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 =========== ===========
The accompanying notes are an integral part of these consolidated statements. F-5 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 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 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: 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 ==========
3. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment consists of the following at October 31, 1998: 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 ==========
4. ACCRUED LIABILITIES: Accrued liabilities consist of the following at October 31, 1998: Bonuses $555,135 Vacation 102,679 Commissions 104,656 Other 61,984 -------- $824,454 ========
F-8 24 5. UNEARNED REVENUE: Unearned revenue consists of the following at October 31, 1998: 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 ==========
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:
1998 1997 ----------- ----------- 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 =========== ===========
The reconciliation of the statutory income tax rate to the effective income tax rate is as follows:
Year Ended October 31, -------------- 1998 1997 ---- ---- Statutory rate 34% 34% State income taxes 7% 0% Other (3)% 2% ---- ---- Effective rate 38% 36% ==== ====
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: Deferred tax assets: Prepaid service contracts $347,322 Nondeductible reserves 315,585 Other 35,078 -------- Total deferred tax asset 697,985 --------
F-9 25 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 ========
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 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.
Outstanding Options ------------------------ Price Per Number Share ------- ----------- 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 ======= ===========
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.
Outstanding Options ----------------------- Price Per Number Share ------- ----------- 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 ===========
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:
For the Year Ending October 31, ------------------------- 1998 1997 ---------- ---------- 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
F-11 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:
For the Year Ended October 31, 1998 ---------------------------------------- Income Shares Per-Share (Numerator) (Denominator) Amount ----------- ------------- --------- 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
For the Year Ended October 31, 1997 --------------------------------------- Income Shares Per-Share (Numerator) (Denominator) Amount ----------- ------------- --------- 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
11. COMMITMENTS: Minimum future annual payments to be received and paid under various leases are as follows:
Sales-Type Lease Payments Operating October 31, Receivable Leases ------------ ------------- ----------- 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 =============
F-12 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 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 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 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.
NAME AGE POSITION 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
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 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 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 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 19 35
EXHIBIT INDEX SEC No. Description - ------- ----------- (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.
EX-10.2 2 DEALER AGREEMENT DATED 11/6/98 1 EXHIBIT 10.2 DEALER AGREEMENT BETWEEN LUCENT TECHNOLOGIES AND XETA CORPORATION FOR BUSINESS COMMUNICATIONS SYSTEMS
TABLE OF CONTENTS 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
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. 1 3 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. 2 4 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. 3 5 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. 4 6 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. 5 7 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 6 8 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. 7 9 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. 8 10 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. 9 11 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. 10 12 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 11 13 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. 12 14 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. 13 15 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. 14 16 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. 15 17 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. 16 18 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 17 19 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 18 20 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 19 21 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. 20 22 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 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 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: sbrown@XETA.com E-mail: eingram@XETA.com --------------- ---------------- 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: sbusch@XETA.com E-mail: dreigel@XETA.com --------------- ---------------- 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: mcastens@XETA.com E-mail: rrivera@XETA.com ----------------- ---------------- 23 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: cedson@XETA.com E-mail: darlene@XETA.com --------------- ---------------- 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: hhoward@XETA.com E-mail: mshaddow@XETA.com ---------------- ----------------- 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: lrosen@XETA.com --------------- 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 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 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 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 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 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: sbrown@XETA.com E-mail: eingram@XETA.com --------------- ---------------- 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: sbusch@XETA.com E-mail: dreigel@XETA.com --------------- ---------------- 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: mcastens@XETA.com E-mail: rrivera@XETA.com ----------------- ---------------- 29 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: cedson@XETA.com E-mail: darlene@XETA.com --------------- ---------------- 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: hhoward@XETA.com E-mail: mshaddow@XETA.com ---------------- ----------------- 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: lrosen@XETA.com --------------- 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 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 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 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 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 EX-21 3 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 SUBSIDIARIES OF THE COMPANY --------------------------- XETACOM, Inc., an Oklahoma corporation EX-23.1 4 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, 1998 or performed any audit procedures subsequent to the date of our report. /s/ ARTHUR ANDERSEN LLP Tulsa, Oklahoma January 25, 1999 EX-27 5 FINANCIAL DATA SCHEDULE
5 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. YEAR OCT-31-1998 OCT-31-1998 3,238,218 0 3,561,201 0 2,022,256 10,971,252 2,817,370 0 18,291,986 5,849,556 0 0 0 228,628 10,956,607 18,291,986 25,447,232 25,447,232 16,452,711 16,452,711 0 0 0 4,907,700 1,855,000 3,052,700 0 0 0 3,052,700 1.50 1.30
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