-----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, Bq66/t3j6hUJXRF9L2mc6ePtoOJk2c6ysY4EYDnjP4lhoSNiJ+/nYK7lgFvjAB4W p/R8TT0jroZChXAJb1upDg== 0000950134-97-004676.txt : 19970616 0000950134-97-004676.hdr.sgml : 19970616 ACCESSION NUMBER: 0000950134-97-004676 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19970430 FILED AS OF DATE: 19970613 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: XETA CORP CENTRAL INDEX KEY: 0000742550 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 731130045 STATE OF INCORPORATION: OK FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-16231 FILM NUMBER: 97624102 BUSINESS ADDRESS: STREET 1: 4500 S GARNETT STE 1000 CITY: TULSA STATE: OK ZIP: 74146 BUSINESS PHONE: 9186648200 MAIL ADDRESS: STREET 1: 4500 S GARNETT SUITE 1000 CITY: TULSA STATE: OK ZIP: 74146 10QSB 1 FORM 10-QSB FOR QUARTER ENDED APRIL 30, 1997 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB [X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR QUARTER ENDED APRIL 30, 1997 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 0-16231 XETA Corporation - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Oklahoma 73-1130045 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4500 S. Garnett, Suite 1000, Tulsa, Oklahoma 74146 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) 918-664-8200 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Not Applicable - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Check whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- -------- Number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Class Outstanding at June 1, 1997 - -------------------------------- --------------------------- Common Stock, $.10 par value 2,005,906 Page 1 of 16 consecutive pages Exhibit Index appears on Page 20. 2 PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS Page No. Consolidated Balance Sheets - April 30, 1997 3 and October 31, 1996 Consolidated Statements of Operations - For the 4 Six months ending April 30, 1997 and 1997 Consolidated Statements of Shareholder's Equity - 5 November 1, 1996 through April 30, 1997 Consolidated Statements of Cash Flows - For the 6 Six months ending April 30, 1997 and 1996 Notes to Consolidated Financial Statements 7
3 XETA CORPORATION CONSOLIDATED BALANCE SHEETS
ASSETS April 30, 1997 October 31, 1996 ---------------- ---------------- (Unaudited) Current Assets: Cash and cash equivalents $ 3,887,510 $ 3,549,101 Current portion of net investment in sales-type leases 2,119,987 2,217,672 Other receivables, net 1,966,241 1,516,479 Inventories, net (Note 4) 1,704,485 1,041,496 Current deferred tax asset, net (Note 7) 83,867 92,897 Prepaid expenses and other assets 246,628 156,233 Prepaid taxes -- 173,785 ---------------- ---------------- Total current assets 10,008,718 8,747,663 ---------------- ---------------- Noncurrent Assets: Net investment in sales-type leases, less current portion above 1,908,569 2,737,358 Purchased long distance contracts (Note 2) 960,418 -- Property, plant, & equipment, net (Note 5) 491,613 394,906 Capitalized software production costs, net of accumulated amortization of $300,066 at April 30, 1997 and $268,914 at Oct. 31, 1996 446,592 325,816 Other assets 126,806 158,677 ---------------- ---------------- Total noncurrent assets 3,933,998 3,616,757 ---------------- ---------------- Total assets $ 13,942,716 $ 12,364,420 ================ ================ LIABILITIES & SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 865,521 $ 371,473 Unearned revenue (Note 6) 2,776,630 2,274,294 Accrued liabilities 737,792 666,838 Accrued federal and state income taxes 122,455 -- ---------------- ---------------- Total current liabilities 4,502,398 3,312,605 ---------------- ---------------- Unearned service revenue (Note 6) 914,358 1,388,998 ---------------- ---------------- Noncurrent deferred tax liability, net (Note 7) 506,361 591,984 ---------------- ---------------- Commitments (Note 2) Shareholders' equity: Common stock; $.10 par value; 10,000,000 shares authorized, 2,192,653 and 2,182,653 issued at April 30, 1997 and October 31, 1996, respectively 219,265 218,265 Paid-in capital 4,788,450 4,736,413 Retained earnings 3,271,624 2,375,895 ---------------- ---------------- 8,279,339 7,330,573 Less treasury stock, at cost (259,740) (259,740) ---------------- ---------------- Total shareholders' equity 8,019,599 7,070,833 ---------------- ---------------- Total liabilities & shareholders' equity $ 13,942,716 $ 12,364,420 ================ ================
The accompanying notes are an integral part of these statements. 3 4 XETA CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
For the Three Months For the Six Months Ending April 30, Ending April 30, ------------------------- ------------------------- 1997 1996 1997 1996 ----------- ----------- ----------- ----------- Sales of systems $ 2,949,858 1,990,880 4,032,650 4,030,096 Installation and service revenues 2,245,930 1,703,625 4,063,867 3,246,406 ----------- ----------- ----------- ----------- Net sales and service revenues 5,195,788 3,694,505 8,096,517 7,276,502 ----------- ----------- ----------- ----------- Cost of sales 1,926,809 1,224,743 2,572,003 2,467,557 Installation and service cost 1,447,696 1,130,886 2,590,967 2,120,287 ----------- ----------- ----------- ----------- Total cost of sales and service 3,374,505 2,355,629 5,162,970 4,587,844 ----------- ----------- ----------- ----------- Gross profit 1,821,283 1,338,876 2,933,547 2,688,658 ----------- ----------- ----------- ----------- Operating expenses: Selling, general and administrative 997,146 755,454 1,671,524 1,444,739 Engineering, research and development, and amortization of capitalized software production costs 105,796 98,181 204,664 195,538 ----------- ----------- ----------- ----------- Total operating expenses 1,102,942 853,635 1,876,188 1,640,277 ----------- ----------- ----------- ----------- Income from operations 718,341 485,241 1,057,359 1,048,381 Interest and other income 167,548 149,958 335,370 289,861 ----------- ----------- ----------- ----------- Income before provision for income taxes 885,889 635,199 1,392,729 1,338,242 Provision for income taxes 321,000 239,000 497,000 500,000 ----------- ----------- ----------- ----------- Net income $ 564,889 $ 396,199 $ 895,729 $ 838,242 =========== =========== =========== =========== Income per common and common equivalent share Primary and fully diluted $ .24 $ .17 $ .38 $ .36 =========== =========== =========== =========== Weighted average shares outstanding 2,002,681 1,980,638 1,998,956 1,951,624 =========== =========== =========== =========== Weighted average shares equivalents 2,357,796 2,349,036 2,349,708 2,338,797 =========== =========== =========== ===========
The accompanying notes are an integral part of these statements. 4 5 XETA CORPORATION CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY NOVEMBER 1, 1996 THROUGH April 30, 1997 (Unaudited)
Common Stock Treasury Stock --------------------------- ------------------------- Number of Shares Issued Paid-in Retained & Outstanding Par Value Shares Amount Capital Earnings -------------- --------- -------- --------- ---------- ---------- Balance - October 31, 1996 2,182,653 $218,265 (189,747) $(259,740) $4,736,413 $2,375,895 Stock options exercised 10,000 1,000 12,125 Tax benefit of stock options 39,912 Net Income 895,729 --------- -------- -------- --------- ---------- ---------- Balance - April 30, 1997 2,192,653 $219,265 (189,747) $(259,740) $4,788,450 $3,271,624 ========= ======== ======== ========= ========== ==========
The accompanying notes are an integral part of these statements. 5 6 XETA CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For The Six Months Ending ------------------------------------ April 30, 1997 April 30, 1996 ---------------- ---------------- Cash flows from operating activities: Net income $ 895,729 $ 838,242 ---------------- ---------------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 95,721 78,283 Amortization of capitalized software production costs 31,152 27,456 (Gain) loss on sale of assets -- (14,076) Provision for doubtful accounts receivable 18,000 30,000 Change in assets and liabilities: (Increase) decrease in net investment in sales-type leases 926,474 (1,162,694) (Increase) in other receivables (467,762) 313,855 (Increase) decrease in inventories (662,989) 124,535 Decrease in prepaid income taxes 173,785 -- (Increase) decrease in deferred tax asset 9,030 33,381 (Increase) in prepaid expenses and other assets (58,524) (106,600) Increase (decrease) in accounts payable 494,048 (24,187) Increase in unearned revenue 27,696 553,899 Increase in accrued income taxes 162,367 24,209 (Decrease) in accrued liabilities 70,954 (147,799) Increase (decrease) in deferred tax liabilities (85,623) 61,821 ---------------- ---------------- Total adjustments 734,329 (207,917) ---------------- ---------------- Net cash provided by (used in) operating activities 1,630,058 630,325 ---------------- ---------------- Cash flows from investing activities: Purchases of long distance contracts (960,418) -- Additions to capitalized software (151,928) (90,681) Additions to property, plant & equipment (192,428) (118,088) Proceeds from sale of assets -- 28,948 ---------------- ---------------- Net cash used in investing activities (1,304,774) (179,821) ---------------- ---------------- Cash flows from financing activities: Exercise of stock options 13,125 167,541 ---------------- ---------------- Net cash provided by financing activities 13,125 167,541 ---------------- ---------------- Net increase (decrease) in cash and cash equivalents 338,409 618,045 Cash and cash equivalents, beginning of period 3,549,101 2,788,709 ---------------- ---------------- Cash and cash equivalents, end of period $ 3,887,510 $ 3,406,754 ================ ================ Supplemental disclosure of cash flow information: Cash paid during the period for interest $ 471 $ 739 Cash paid during the period for income taxes $ 455,454 $ 55,000
The accompanying notes are an integral part of these statements. 6 7 XETA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 1997 (Unaudited) (1) BASIS OF PRESENTATION The consolidated financial statements included herein include the accounts of XETA Corporation and its wholly-owned subsidiary, Xetacom, Inc. Xetacom's operations have been insignificant to date. All significant intercompany accounts and transactions have been eliminated. The consolidated financial statements have been prepared by the Company, without an audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The Company believes that the disclosures made in these financial statements are adequate to make the information presented not misleading when read in conjunction with the consolidated financial statements and the notes thereto included in the Company's latest financial statements filed as part of the Company's Annual Report on Form 10-KSB, Commission File No. 0-16231. Management believes that the financial statements contain all adjustments necessary for a fair statement of the results for the interim periods presented. All adjustments made were of a normal recurring nature. (2) OPERATOR SERVICES BUSINESS AND PURCHASED LONG DISTANCE CONTRACTS Effective April 1, 1997, the Company became a sub-agent of MCI to market, on a non-exclusive basis, a wide variety of long distance services to commercial customers, including the hospitality industry. Simultaneously, the Company entered into a marketing alliance with Americom Communications Services, Inc. ("ACSI") to jointly market these MCI services to the hotel industry. The two companies will share equally in the "Net Commissions" earned from those services. "Net Commissions" are defined as those revenues earned from the long distance contracts after deductions for commissions paid to the customer hotels and payments to XETA for equipment and service fees relating to any equipment provided by XETA. Also effective April 1, 1997, the Company purchased ACSI's interest in existing long distance contracts at 71 hotels for $1,108,000. The purchase price included a payment for the contracts of $960,000, which has been capitalized, and reimbursement of certain equipment fees on installed equipment. The capitalized costs will be amortized ratably over the three year life of the long distance contract at each hotel. A majority of these 71 hotels receive long distance services jointly from MCI and another carrier. The remaining hotels are served exclusively by MCI. The purchase agreement includes ACSI's interest in commissions earned from both carriers. Under the terms of the purchase agreement, the Net Commissions earned each month from these 71 properties are divided as follows: the first $40,000 are paid to XETA, the next $45,000 are paid to ACSI and any remaining Net Commissions are shared equally. After April 1, 2000, all Net Commissions are shared equally. 7 8 Previous to the purchase agreement, ACSI 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 ACCI's interest in the 71 hotel contracts, which were collateralized by the loans, the Company guaranteed ACSI's indebtedness. The amount of the guarantee at April 30, 1997 was $567,194. The Company believes that ACSI's earnings from its share of Net Commissions as well as other revenue sources pledged by ACSI 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. (3) REVOLVING CREDIT AGREEMENT The company maintains a $1,000,000 revolving line of credit with its bank. There are no outstanding advances under the credit agreement. (4) INVENTORIES The following are the components of inventories:
April 30, October 31, 1997 1996 ----------- ----------- (Unaudited) Raw materials $ 737,381 $ 577,054 Finished goods and spare parts 1,126,352 623,690 ----------- ----------- 1,863,733 1,200,744 Less reserve for excess and obsolete inventory (159,248) (159,248) ----------- ----------- $ 1,704,485 $ 1,041,496 =========== ===========
(5) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following:
April 30, October 31, 1997 1996 ----------- ----------- (Unaudited) Computer field equipment $ 960,299 $ 797,825 Office furniture 116,564 112,976 Other 161,964 147,001 ----------- ----------- 1,238,827 1,057,802 Less accumulated depreciation (747,214) (662,896) ----------- ----------- $ 491,613 $ 394,906 =========== ===========
8 9 (6) UNEARNED INCOME Unearned income consists of the following:
April 30, October 31, 1997 1996 ----------- ----------- (Unaudited) Service contracts $ 1,491,972 $ 1,570,872 Warranty service 501,072 379,753 Systems shipped, but not installed 278,207 63,829 Customer deposits 460,960 209,357 Other deferred revenue 44,419 50,483 ----------- ----------- Total current deferred revenue 2,776,630 2,274,294 Noncurrent unearned service revenues 914,359 1,388,998 ----------- ----------- $ 3,690,989 $ 3,663,292 =========== ===========
(7) INCOME TAXES The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:
April 30, October 31, 1997 1996 ----------- ----------- (Unaudited) Deferred tax assets: Prepaid service contracts $ 32,748 $ 51,083 Nondeductible reserves 213,430 198,822 Book depreciation in excess of tax 8,991 15,902 Other 34,716 50,675 ----------- ----------- Total deferred tax asset 289,885 316,482 ----------- ----------- Deferred tax liabilities: Unamortized capitalized software development costs (151,842) (110,778) Tax income to be recognized on sales-type lease contracts (494,577) (638,831) Other (65,960) (65,960) ----------- ----------- Total deferred tax liability (712,379) (815,569) ----------- ----------- Net deferred tax liability $ (422,494) $ (499,087) =========== ===========
(8) INTEREST AND OTHER INCOME Interest and other income recorded in the accompanying financial statements, consists primarily of interest income earned from sales-type leases and cash investments. 9 10 (9) FOOTNOTES INCORPORATED BY REFERENCE Certain footnotes are applicable to the consolidated financial statements, but would be substantially unchanged from those presented in the Company's Annual Report on Form 10-KSB, Commission File No. 0-16231, filed with the Securities and Exchange Commission on January 29, 1997. Accordingly, reference should be made to those statements for the following:
Note Description ---- ----------- 1 Business and summary of significant accounting policies 3 Cash and cash equivalents 4 Income taxes 6 Accrued liabilities 8 Stock options 9 Commitments 10 Major customers and concentrations of credit risk 11 Employment agreements 12 Contingency 13 Earnings per share 15 Retirement plan
10 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS During the second quarter of fiscal 1997, XETA Corporation (the "Company"), earned net income of $565,000 on net sales of $5,196,000, both record quarterly results. For the six months ending April 30, 1997, the Company earned net income of $896,000 on net sales of $8,097,000. Additional analysis of these results is presented under "Results of Operations" below. During the second quarter, the Company became a sub-agent of MCI to market, on a non-exclusive basis, a wide variety of long distance services to commercial customers, including the hotel industry. These services include direct dial, operator assisted and calling card long distance calls which are marketed under a variety of MCI tradenames. As an MCI sub-agent, the Company will earn commissions on MCI calls made from customer locations. The Company believes that it will enjoy a competitive advantage in the hotel industry by offering a unique package of industry-leading equipment and services. In addition to long distance service from MCI, one of the three major long distance carriers, this package will include XETA call accounting equipment and services at no additional operating expense or capital commitment to the hotel. The primary target for this service will be medium to large hotel management groups which control the long distance contracts for multiple properties. Concurrent with becoming an MCI sub-agent, the Company entered into a marketing alliance with Americom Communications Services, Inc. ("ACSI") in which ACSI will market MCI services exclusively for XETA. ACSI has been a sales agent of the Company since 1989 representing call accounting products to some of the Company's major customers. ACSI is owned and controlled by Bob Jones, a former executive officer and founder of XETA. Under the terms of the marketing alliance with ACSI, the two companies will share equally in the "Net Commissions" earned from customers contracting for its long distance package. Net Commissions are defined as commissions earned from MCI less deductions for commissions paid to customer hotels and fees paid to the Company for equipment and services provided by XETA to the hotel. In conjunction with the sub-agency and marketing alliance agreements, the Company purchased ACSI's interest in existing long distance contracts at 71 hotels for $1,108,000. The purchase price included payment for the contracts of $960,000. The remainder of the purchase price represents reimbursement of certain fees for equipment installed at the hotels. The majority of these 71 hotels receive long distance services jointly from MCI and another carrier. The remaining hotels are served exclusively by MCI. The purchase agreement includes ACSI's interest in revenues from both carriers. Under the terms of the purchase agreement, the Net Commissions earned each month from these properties will be divided as follows: the first $40,000 is paid to the Company, the next $45,000 is paid to ACSI and the remainder is shared equally. After April 1, 2000, all Net Commissions are shared equally. The effective date of the sub-agency, marketing alliance and purchase agreements was April 1, 1997. However, because of the normal delay in reporting of commissions earned from the long distance carriers, there 11 12 were no revenues or expenses recorded for these activities during the second quarter of fiscal 1997. Management expects the revenues earned from the purchased contracts to begin making contributions to earnings during the third quarter. For a further discussion of the risk factors associated with this new service offering and the purchase of the long distance contracts, please see the "Outlook and Risk Factors" section below. The discussion which follows provides analysis of the major factors and trends which management believes had the most significant impact on the financial condition of the Company as of April 30, 1997 and the results of its operations for the quarter and six months ending April 30, 1997 as compared to those same periods one year ago. Also included in this discussion are the major factors, trends and risks which management believes will affect the outlook for the Company. This analysis should be read in conjunction with the Consolidated Financial Statements and Notes thereto contained in this report. FINANCIAL CONDITION For the six months ending April 30, 1997, the Company's cash balances have increased $338,000. This increase consists of cash generated from operations of $1,630,000 and cash from exercises of stock options of $13,000. The largest single use of cash was the purchase of long distance contracts with 71 hotels for $1.1 million, requiring $960,000 in cash. Other uses of cash were investments in equipment of $192,000 and investments in capitalized software production costs of $152,000. The equipment investment is primarily to support the placement of call accounting systems in the field to support PBX service locations and long distance service contracts. Under both of these service offerings, customers generally receive a call accounting system for their use during the duration of the contract. The investment in capitalized software production costs relates to continued development of the Company's XPANDER system which is more fully described below. Management considers the Company's financial condition to be strong despite the use of nearly $1 million to purchase long distance contracts under its new MCI long distances services business. Cash balances still represent approximately 28% of total assets, working capital exceeds $5.5 million, and the current ratio is 2.2. Management believes that present working capital and future operating cash flows will be sufficient to meet anticipated operating needs and planned capital expenditures. These planned operating and capital needs include continued expansion of the Company's service staff to maintain the Company's commitment to high quality service over the rapidly increasing customer base and placement of additional call accounting systems under PBX and long distance service contracts. Beyond these anticipated needs to support the expansion of current operations, management continually evaluates other alternatives to effectively utilize cash balances and other available assets. The purchase of long distance contracts from ACSI was the result of those evaluations. Other possibilities include the purchase of additional long distance contracts, synergistic acquisitions, further expansion of the Company's XETAPLAN program and renewal of the Company's stock 12 13 repurchase program. Some of these alternatives have been utilized effectively in the past three years to expand the Company's business and enhance shareholder value. To assist the Company in these evaluations, management has engaged a member of the board of directors to locate and evaluate potential opportunities which would make effective use of the Company's strong financial condition to enhance long term shareholder value. RESULTS OF OPERATIONS Net sales and service revenues increased $1,501,000 or 41% in the second quarter of fiscal 1997 compared to the second quarter of fiscal 1996. This increase included a 48% increase in systems sales and 32% increase in installation and service revenues. For the first six months of fiscal 1997, net sales and service revenues increased $820,000 or 11% compared to the first six months of fiscal 1996. This smaller increase consisted of an unchanged level of systems sales together with a 25% increase in installation and service revenues. The increase in systems sales during the second quarter is due to an increase in sales of PBX systems. Although sales of new PBX's were down significantly in the first quarter, the amount of orders received for future installations surged during that quarter. This surge of new orders resulted in record second quarter PBX sales of $2.7 million, an increase of 110% over the second quarter of fiscal 1996, and brought the year to date sales of PBX systems to $3.3 million, a 26% increase over the first six months of fiscal 1996. Offsetting these increases has been the decline in sales of call accounting systems from the inflated levels experienced during the first and second quarters of fiscal 1996. Those inflated call accounting sales were related to the mandated changes in the North American Numbering Plan ("NANP") which required most of the Company's customers to purchase new systems or upgrade their existing systems. The second quarter is the final quarter in which call accounting sales will have to compare against NANP inflated levels. The Company continues to enjoy healthy call accounting sales, albeit at more historical levels. The increases in installation and service revenues are due primarily to increases in installations of new PBX systems and in expansion of the base of customers under PBX service contracts. Revenues from PBX service related activities now represent more than 50% of total installation and service revenues, and like most of the Company's service revenues, are recurring in nature. Revenues earned from installation and service activities related to call accounting products declined 5% during the second quarter of fiscal 1997 and declined 1% for the first six months of the year compared to the prior year. This decline was expected given the decline in installations of new call accounting systems during fiscal 1997 to date versus fiscal 1996. Gross margins earned on net sales and service revenues were 35% in the second quarter of fiscal 1997 compared to 36% for the same period in the prior year and were 36% for the first six months of fiscal 1997 compared to 37% for the first six months of fiscal 1996. Gross margins earned on systems sales, which vary greatly by product line, were 35% in the second quarter of fiscal 1997 compared to 38% in the second quarter of 13 14 fiscal 1996, reflecting a greater percentage of lower margin PBX sales during the quarter as compared to last year. Gross margins earned on systems sales during the first six months of fiscal 1997 were 36% compared to 39% for the previous year also reflecting a higher percentage of PBX's sold compared to call accounting systems. Gross margins earned on installation and service revenues were 36% in both the second quarter and first half of fiscal 1997 which represents a slight improvement over the previous year. Operating expenses increased 29% in the second quarter of fiscal 1997 compared to last year and increased 14% for the first six months of fiscal 1997 compared to last year. These increases relate primarily to increased legal costs associated with pending litigation and increases in commissions and executive bonuses which are directly related to the increases in sales and profitability. Interest and other income increased $18,000 or 12% during the second quarter of fiscal 1997 and increased $46,000 or 16% during the first half of fiscal 1997, compared to the same periods a year ago. This increase resulted primarily from increases in cash balances on hand. The majority of the Company's interest income is derived from its sales-type lease program, marketed under the name, XETAPLAN. Many of the NANP related call accounting sales made during fiscal years 1994, 1995 and 1996 were made under the XETAPLAN program, and as a result, the Company's interest income from those sales-type leases grew steadily during that period. As those contracts mature, less of each customer's monthly payment represents payment of interest, therefore interest income from this source will begin to decline. The Company has recorded a provision for federal and state income taxes of $321,000 in the second quarter of fiscal 1997 and $497,000 for the first six months of fiscal 1997, representing an effective tax rate of 36% for both periods. This compares to an effective tax rate of 37% for those same periods in 1996. The slightly lower tax rate reflects a reduction in the estimated state tax provision for fiscal 1997. OUTLOOK AND RISK FACTORS The statements contained in this section entitled "Outlook and Risk Factors" are based on current expectations. The statements are forward-looking and actual results may differ materially. Management believes that as a result of favorable second quarter results and sales orders received for installations during the last half of the fiscal year, the Company is well-positioned to exceed last year's sales and net income levels. This belief is founded on the favorable results in the second quarter as well as the order activity for third and fourth quarter installations. Additionally, since the Company earns recurring service revenues from nearly all installed systems, the increased sales of new PBX systems in the second quarter will provide immediate increases in service revenues for the remainder of the year. As discussed above, during the second quarter, the Company became a sub-agent of MCI to provide long distance services to commercial customers, primarily hotels. Also, the Company paid nearly $1 million to ACSI for 14 15 existing long distance contracts which include services provided by MCI and another carrier, U.S. Long Distance Corp. ("USLD"). Prior to entering into these agreements, the Company reviewed the available past history of revenues from these contracts and believes that it will earn an acceptable rate of return on this investment and that this new service line will be accretive to earnings immediately. However, because the majority of the contracts were with customers only recently secured under MCI contracts by ACSI, there were no historical revenues available for review on the majority of sites. To provide additional security for its investment in these contracts, the Company will receive the first $40,000 of Net Commissions earned each month prior to ACSI receiving any revenue from these sites. Prior to the Company's acquisition of the revenues earned from the 71 purchased long distance contracts, these revenues were pledged as collateral by ACSI to secure loans from USLD to Americom. These loans were secured by commissions earned and to be earned from these contracts as well as other contracts not part of the Purchase Agreement between ACSI and the Company. In order to obtain these revenues free and clear of USLD's security interest, the Company guaranteed approximately $567,000 in ACSI's indebtedness to USLD in exchange for a release of USLD's security interest against ACSI's USLD commissions. The Company has, in turn, taken a security interest in all of ACSI's revenues from USLD as well as all commissions due ACSI under the marketing alliance and from other sales of Company products, to secure any amount which may become due from ACSI to the Company under the Purchase Agreement. While no assurance can be given, management believes that future commissions from the carrier will be sufficient to liquidate ACSI's indebtedness to USLD according to its payment terms At June 1, 1997, the Company had not recorded any portion of this guarantee as a liability in its financial statements. The Company's annual distributorship agreement with Hitachi Telecom (USA), Inc. ("Hitachi") expired on March 31, 1997. The Company is currently reviewing the renewal contract proposed by Hitachi. The Company considers its relationship with Hitachi to be very good and strongly believes that the agreement will be renewed on mutually beneficial terms. In the interim, both parties are continuing to operate under the same procedures and terms of the existing agreement. If for some reason, however, a renewal cannot be achieved, the Company's operating results could be lower than those expected. The Company continues to commit the majority of its research and development resources into development of XPANDER, its first PBX related proprietary product. Management believes the market for XPANDER is continuing to grow, but that it is still too early to predict when demand will be strong enough to forecast significant revenues from sales of this product. The Company has applied for a patent on XPANDER, but it is too early in the application process to determine whether the Company will receive a patent and the protections associated therewith. The Company is involved in two matters of pending litigation (See "Legal Proceedings" in Part II below). In both cases, management believes its legal position is strong and no loss contingencies have been recorded in the financial statements. Should the outcome of either of these matters be unfavorable however, the Company may have to record expenses which 15 16 might cause operating results to be materially lower than those expected. The Company's Form 10KSB for the year ended October 31, 1996 contains an expanded discussion of risk factors which should be read in conjunction with this report. 16 17 PART II. OTHER INFORMATION Item 1. Legal Proceedings ABTS In June 1995, Associated Business Telephone Systems, ("ABTS") initiated an action against the Company which is currently pending in the United States District Court for the Northern District of Oklahoma. ABTS claims' are based upon allegations of breach of warranty, breach of contract, and tortious interference with ABTS' relationship with certain of its customers, arising in connection with (i) a Distributor's Agreement entered into between the Company and D & P Investments in 1986, pursuant to which the Company sold to D & P Investments certain call accounting systems, and (ii) a Maintenance Agreement between the Company and ABTS pursuant to which the company furnished maintenance services for such systems. D & P Investments has allegedly assigned its claim for breach of the Distributor's Agreement to ABTS. The Company has filed a counterclaim against ABTS and a third-party claim against D & P Investments and Communication Equipment Brokers based upon breach of contract. Both ABTS and the Company seek money damages. During this past fiscal quarter, the trial date in this action was rescheduled for December, 1997. The discovery phase of this litigation is scheduled to terminate in September, 1997. PHONOMETRICS Phonometrics Inc., a Florida based corporation, has filed numerous lawsuits against telecommunications equipment manufacturers and hotels who use such equipment (e.g., PBX, call accounting and answer confirmation systems), in various federal courts throughout the country, most notably the Southern District of Florida (the "Florida litigation") and the Northern District of California (the California litigation"), alleging infringement of a patent held by Phonometrics. While the Company has not been named as a defendant in any of these cases, several of its customers are named defendants in the Florida and California litigation and have notified the Company that they seek indemnification under the terms of their contracts with the Company. The cases brought against these customers were filed between June, 1994 and April, 1996. 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. In each of these lawsuits, the plaintiff is seeking damages of an unspecified amount, based upon a reasonable royalty of the hotels' profits derived from use of the allegedly infringing equipment during a 17 18 period commencing six years prior to the filing of each lawsuit and ending October 30,1990. The Florida litigation has been stayed (i.e., suspended) pending the outcome of an appeal by Phonometrics of the lower court's decision against Phonometrics in its case against Northern Telecom. Because the issues in the Florida litigation are substantively similar to those presented in the Northern Telecom case, the court in the Florida litigation has stated that it will enter final judgment in favor of all of the hotels sued by Phonometrics in the event of a decision by the appeals court in favor of Northern Telecom. At present, a hearing date for oral arguments in the Northern Telecom appeal has not yet been scheduled. The California litigation has been stayed pending the outcome of the Florida litigation. Items 2 and 3 of Part II have been omitted because they are inapplicable or the response thereto is negative. Item 4. At the regularly scheduled annual shareholders' meeting held on March 20, 1997, management's nominees for election to the Board of Directors were elected to office without contest by votes cast as follows:
Name of Director For Against ---------------- --- ------- Ron Barber 1,759,758 8,920 Donald Duke 1,759,458 8,720 Robert Hisrich 1,750,758 17,820 Jack Ingram 1,759,758 9,020 Ron Siegenthaler 1,759,308 9,770 Robert Wagner 1,759,458 9,220
Shareholders' at the annual meeting also voted upon a proposal to grant the Board of Directors discretion to declare a stock split on a basis of 5-to-4, 4-to-3, 3-to-2, or 2-to-1, if at all, and to amend the Company's Certificate of Incorporation to effect a corresponding reduction in the par value of the stock, if the Board deems it to be appropriate and in the best interests of the Company to do so at any time prior to the next annual meeting of shareholders. The proposal was passed by an affirmative vote of 1,531,701 shares (76.66%) of outstanding voting stock in favor, 42,064 shares (2.11%) against, and 129,788 shares (6.50%) shares abstaining. 18 19 Item 5 of Part II has been omitted because it is inapplicable or the response thereto is negative. Item 6. (a) Exhibits - See the Exhibit Index at Page 15. (b) Reports on Form 8-K - During the quarter for which this report is filed, the Registrant did not file any reports with the Securities and Exchange Commission on Form 8-K. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. XETA CORPORATION (Registrant) Dated: June 11, 1997 By: /s/ JACK R. INGRAM --------------------------------- Jack R. Ingram President Dated: June 11, 1997 By: /s/ ROBERT B. WAGNER --------------------------------- Robert B. Wagner Vice President of Finance 19 20 EXHIBIT INDEX
SEC. NO. Description - -------- ----------- (2) Plan of acquisition, reorganization, arrangement, liquidation or succession - None. (3) Articles of Incorporation and Bylaws - previously filed as Exhibits 3.1, 3.2, and 3.3 to the Registrant's Registration Statement on Form 5.1, Registration No. 33-7841. (4) Instruments defining rights of security holders, including indentures - previously filed as Exhibits 3.1, 3.2 and 3.3 to the Registrant's Registration Statement on Form S-1, Registration No. 33-7841. (10) Material Contracts 10.1 Authorized Sales Subagent Agreement dated April 1, 1997 between L.D. Communications, Inc. and XETA Corporation 10.2 L.D. Communications Operator Services Plan dated April 1, 1997 between L.D. Communications, Inc. and XETA Corporation 10.3 Marketing Alliance dated April 1, 1997 between Americom Communications Services, Inc. and XETA Corporation 10.4 Purchase Agreement dated April 1, 1997 between Americom Communications Services, Inc. and XETA Corporation 10.5 Release and Consent to Assignment dated April 18, 1997 by U.S. Long Distance, Inc. for the benefit of XETA Corporation 10.6 Guaranty Agreement dated April, 1997 by XETA Corporation for the benefit of U.S. Long Distance, Inc. (11) Statement re: computation of per share earnings - Inapplicable. (15) Letter re: unaudited interim financial information - Inapplicable. (18) Letter re: change in accounting principles - Inapplicable. (19) Report furnished to security holders - None. (22) Published report regarding matters submitted to a vote of security holders - None. (23) Consents of experts and counsel 23.1 Consent of Arthur Andersen LLP (24) Power of attorney - None. (27) Financial Data Schedule (99) Additional exhibits - None.
EX-10.1 2 AUTHORIZED SALES SUBAGENT AGREEMENT 1 EXHIBIT 10.1 AUTHORIZED SALES SUBAGENT AGREEMENT AGREEMENT made this 1 day of April 1997 by and between L.D. COMMUNICATIONS, INC. ("LDCI"), 6575 West Loop South, Suite 420, Bellaire, TX 77401 a Texas Corporation and XETA Corporation ("Subagent"), An Oklahoma Corporation, with principal offices located at 4500 S Garnett, Suite 1000, Tulsa OK 74146. WHEREAS, LDCI wishes to expand all commercial entities' access to MCI Commercial Dial "1" Long Distance Service, MCI Prism Plus, MCI Prism I, MCI Preferred, MCI Vision, MCI 800, MCI Card, MCI Corporate Account Service, MCI Corporate Account Service Plus, MCI Hospitality Services, Dedicated Leased Line Services and MCI Forum (the "MCI Services"), as described in MCI Tariff FCC No 1, any state tariff, and amendments thereto or successor tariffs (together, the "Tariff"); and WHEREAS, Subagent desires to market the MCI Services set forth herein as an independent Authorized Sales Subagent of LDCI; NOW, THEREFORE, the parties agree as follows: 1. Grant of Subagency. Subject to the terms of this agreement, Subagent is hereby appointed an independent subagent authorized to solicit, on behalf of MCI, commercial customers (as distinguished from residential customers) for MCI Services. 2. Sales Subagency. a) Subagent hereby accepts the appointment by LDCI as its authorized representative to solicit orders from commercial customer for MCI Services subject to the terms and conditions of this Agreement. b) LDCI shall pay subagent a commission on monthly usage revenues from orders for Services solicited by Agency and accepted by MCI, based on the commission table below. Commission percentage is based on total monthly revenues. $ 0 - XX9,999 XX % $ X00,000 - X99,999 XX % $ X00,000 - X99,999 XX % $ X00,000 - X99,999 XX % $ X00,000 and above XX %
The monthly usage revenues eligible for commission hereunder include monthly recurring usage revenue from services sold by Subagent but do not include: 1) any MCI charges for goods or services that are not tariffed; 2) pass through access/egress (or related) charges imposed by third parties; 3) any non-recurring charge imposed in MCI Tariff FCC No.1; 4) MCI Directory Assistance Services; 5) any taxes or surcharges applicable to services; and 6) any promotional or other credits granted by MCI. The effective rate of commissions hereunder will be derived by applying the applicable commission rate set forth above to eligible charges incurred under MCI Tariff FCC No. 1 during a monthly billing period. 1 CONFIDENTIAL AGENT INFORMATION LDCI 3/97 AGENT INITIAL____________ LDCI INITIAL____________ 2 c) Unless otherwise agreed in writing by LDCI, commission shall not be payable for monthly usage derived from any person or entity that was an MCI customer at the time of order solicitation or within thirty (30) days prior thereto. Commission shall not be payable on monthly usage derived from any person or entity that is an MCI National account. Commission shall not be payable on any usage derived from any person or entity controlled by Subagent. d) Subagent shall not solicit orders by means of telemarketing without prior written consent of LDCI. If Subagent solicits by means of telemarketing, Subagent shall coordinate with LDCI to ensure that no PIC change order resulting from telemarketing is submitted without confirmation by one of the means required by FCC regulations. MCI may take steps to confirm compliance with this provision including without limitation contacting MCI customers solicited by Subagent. e) Subagent may not delegate all or any portion of the Subagency appointment under this Agreement to any third party without prior express written consent of LDCI and under a written agreement satisfactory to LDCI. Breach of this provision shall be deemed an irregular marketing activity. LDCI shall not be liable to pay commissions under this Agreement or otherwise for revenue generated by any unauthorized subagent. 3. Relationship Of Parties. a) Subagent will have no authority to bind LDCI or MCI by contract or otherwise or to make representations as to the policies or procedures of LDCI/MCI other than as specifically authorized by the Agreement. LDCI/MCI and Subagent acknowledge and agree that their Subagency relationship arising from this Agreement does not constitute or create a general agency, joint venture, partnership, employee relationship or franchise between them and that Subagent is an independent contractor with respect to the services provided by it under this Agreement. b) Subagent will identify itself as an Authorized Sales Agent of MCI only with respect to the MCI Services and will otherwise identify itself as an independent business. Unless specifically authorized in writing, neither LDCI/MCI nor Subagent will make any express or implied agreement, guarantees or representations, or incur any debt, in the name of or on behalf of the other. c) Subagent's employees will not be deemed to be LDCI/MCI employees or joint employees and for their supervision, daily direction and control. LDCI/MCI will not be responsible for worker's compensation, disability benefits, unemployment insurance, withholding taxes, social security and other taxed and benefits for Subagent's employees. 4. Training And Certification. a) MCI shall provide product sales training for each of the MCI services as provided for in this agreement. Subagent and Subagent employees may not solicit orders for any MCI Services until trained in product sales for that product by MCI. 5. Sales Aids. a) Subagent shall us LDCI/MCI-approved marketing materials and order forms only. 2 CONFIDENTIAL AGENT INFORMATION LDCI 3/97 AGENT INITIAL____________ LDCI INITIAL____________ 3 b) SUBAGENT SHALL MAKE NO REPRESENTATION OR WARRANTIES RELATING TO THE SERVICES EXCEPT AS SET FORTH IN SALES LITERATURE APPROVED IN WRITING BY LDCI/MCI OR AS SET FORTH IN THE FORM OR FORMS OF ORDERS PROVIDED BY SUBAGENT BY LDCI/MCI, OR AS OTHERWISE EXPRESSLY PERMITTED BY LDCI/MCI. 6. Reporting; Payment. a) LDCI will provide Subagent with monthly commission reporting, which will include the usage of each customer solicited by Subagent and for which commission is due hereunder. b) LDCI will pay commissions monthly. LDCI will use reasonable efforts to calculate and pay commissions within ten (10) days following payment to LDCI by MCI, which is approximately sixty (60) days after the close of an applicable billing month. 7. Order Acceptance. Subagent expressly acknowledges that its appointment hereunder is as a sales representative for MCI Services offered through LDCI, that any solicitation by Subagent of orders from customers for the MCI services will be subject to MCI's acceptance, in its sole discretion, of such orders and the availability, from time to time, of the MCI Services, and that LDCI will have no responsibility or liability whatsoever to Subagent with respect to continued availability or operation of the MCI Services or MCI's acceptance or, or failure to accept, orders therefore from customers solicited by Subagent. 8. Standards Of Conduct. In performing duties under this Agreement, Subagent will observe the highest standard of integrity and fair dealing with members of the public. Subagent will do nothing which would tend to discredit, dishonor, reflect adversely upon or in any manner injure the reputation of LDCI or MCI. 9. Tradenames And Trademarks. a) During the term of this Agreement, unless otherwise instructed by MCI, Subagent may refer to itself as an MCI Authorized Sales Agent, but solely in connection with the marketing of MCI Services to commercial customers hereunder. Subagent may use only such other MCI trademarks, tradenames, and services marks ("Marks") as may be authorized by MCI in writing, subject to any and all limitations contained in the grant of the right of such use. b) Upon termination of this Agreement, any permission or right to Marks granted hereunder will cease to exist and Subagent will immediately cease any use of such marks and immediately cease referring to itself as an MCI Authorized Sales Agent 10. Non-Competition/Confidentiality. a) During the term of this agreement and for as long as LDCI is paying commission under this Agreement but in no event for fewer than ninety (90) days after termination of the Agreement subagent will not promote, sell or provide leads for the services to 3 CONFIDENTIAL AGENT INFORMATION LDCI 3/97 AGENT INITIAL____________ LDCI INITIAL____________ 4 commercial customer, of any other person or entity that offers services identical or similar to any one or more of the MCI services. b) Any confidential specifications, drawing, sketches, data or technical material ("Information"), furnished or disclosed by LDCI/MCI to Subagent hereunder, will be deemed the exclusive property of LDCI/MCI. In addition, any customer names or lists identifying MCI customer as such and related information or data ("Customer Information") are the exclusive property of LDCI/MCI, and are to be used by Subagent solely in the performance of its obligations and duties hereunder and are to be returned to LDCI/MCI upon termination of this Agreement. c) During the term of this Agreement and for a period of three (3) years after termination of this Agreement, Subagent agrees not to reveal, divulge, make known, sell, exchange, lease or in any other way transfer any Information or Customer Information to any third party or to utilize such Information or Customer Information in direct or indirect competition with MCI or any of its other Agents. Subagent agrees that monetary damages for breach of its obligations under this section may not be adequate and that LDCI/MCI will be entitled to injunctive relief with respect thereto. Notwithstanding the foregoing, it is understood and agreed that nothing herein shall prohibit the Subagent from selling either during or after the term of this Agreement, telecommunications systems (e.g., call accounting, voice mail, answer detection, PBX systems and related products) to hotels and other customers, including the MCI Services customers. Moreover, upon termination of this agreement nothing herein shall prohibit Subagent from selling services offered by any other carrier that are similar or identical to the MCI services, to any MCI customer upon the expiration of such customer's contract for the MCI services. d) LDCI hereby agrees to keep confidential all information concerning Subagent's activities under this Agreement and the amount of commissions paid to the Subagent hereunder or to the Subagent's customers, and will not disclose any such information to any third party (except MCI as may be necessary to enable MCI and/or LDCI to perform under this Agreement) or any other subagent of LDCI, except as may otherwise be required by law. 11. Term And Termination. a) The term of this Agreement is (3) three years and will thereafter be renewed automatically for an additional term of one (1) year unless either party notifies the other in writing of its desire to terminate the Agreement at least ninety (90) days prior to the expiration of the initial term. This Agreement may be terminated: (a) immediately upon written notice from LDCI that LDCI's contract with MCI has been terminated; (b) for breach by Subagent of any provision of this Agreement provided that written notice of such breach has been given to Subagent and such breach has not been cured within thirty (30) days after delivery of such notice; (c) immediately upon notice by LDCI/MCI in the event LDCI/MCI discovers any irregular marketing activity by Subagent or irregular customer activity by customers solicited by Subagent. b) After normal expiration of the term LDCI shall (a) continue to pay commission for a period of six (6) months at the commission rate applicable under Section 2.b. hereof (direct sales commission) for the last full month prior to expiration on monthly usage revenues calculated in accordance with Section 2.b. If LDCI terminated this Agreement pursuant to Section 11.a.(a) hereof, LDCI's commission payment obligations shall survive termination for a number of monthly equal to the number of completed calendar 4 CONFIDENTIAL AGENT INFORMATION LDCI 3/97 AGENT INITIAL____________ LDCI INITIAL____________ 5 months of the term of this Agreement prior to termination not to exceed six (6) months. Upon termination for any other reason, LDCI's commission payment obligations shall cease. 12. Limitation Of Liability. a) Subagent agrees to hold LDCI free and harmless from any loss, damage, or cost, including legal expenses and counsel fees, that LDCI becomes liable for by reason of an act of Subagent in marketing in the Services, including but not limited to misrepresenting to customers the Services or the terms under which the Services are made available by LDCI. LDCI agrees to hold Subagent free and harmless from any loss, damage, or cost, including legal expenses and counsel fees, that Subagent becomes liable for to third persons by reason of any negligent or wrongful act of LDCI in the performance of this Agreement. b) LDCI will have no liability to Subagent for commissions that might have been earned hereunder but for the inability or failure of MCI to provide Services to any person solicited by Subagent or in the event of discontinuation or modification of the Services. c) Subagent acknowledges and agrees that LDCI directly or through other sales agents may offer MCI Services and that Subagent will be entitled to no compensation for sales make through such other channels. In the event LDCI received conflicting orders for services from different subagents or MCI employees, LDCI/MCI may in its sole discretion determine who will receive credit for such orders. In the event of such conflicts relating to orders for MCI Services, LDCI/MCI may in its discretion compensate Subagent as if the order were for a service subject to commission. d) NEITHER PARTY WILL BE LIABLE TO THE OTHER FOR SPECIAL INDIRECT, CONSEQUENTIAL DAMAGES, WHETHER OR NOT FORESEEABLE, OR PUNITIVE DAMAGES. e) In the event LDCI is required to enforce or preserve its rights hereunder, Subagent will pay all of LDCI's reasonable attorney's fees and costs, including allocable costs of in-house counsel, incurred in connection with any such successful action. 13. Notices. Notices to be given pursuant to this Agreement will be in writing and will be deemed to have been duly and properly given on the earlier of (a) the date such notice has been received or (b) five (5) days after deposit of such notice in the United States Mail, postage prepaid, to be delivered by certified mail, return receipt requested addressed to the Subagent at the address given above or at such address as it may designate in writing from time to time and addressed to LDCI at: Mr. Richard Akers, President & CEO L.D Communications, Inc. 6575 West Loop South, Suite 420 Bellaire, TX 77401 or at such address it may designate in writing from time to time. 5 CONFIDENTIAL AGENT INFORMATION LDCI 3/97 AGENT INITIAL____________ LDCI INITIAL____________ 6 14. Compliance With Law. a) Subagent will, at its own expense, operate in full compliance with all laws, rules and regulations applicable to, and maintain in force all licenses and permits required for, its performance under this Agreement. b) Subagent will notify LDCI in writing immediately of the commencement or threatened commencement or any action, suite or proceeding, and if the issuance or threatened issuance of any order, writ, injunction, award of decree of any court, agency or other governmental instrumentality, involving Subagent's activities under this Agreement or which may affect Subagent's ability to perform its obligations hereunder. 15. Non-Waiver. No failure by either party to take action on account of any default by the other will constitute a waiver of any such default or of the performance required of the other. 16. Impossibility Of Performance. Neither LDCI/MCI nor Subagent will be liable for loss or damage or deemed to be in breach of this Agreement if its failure to perform its obligations results from (a) compliance with any law, ruling, order, regulation, requirement of federal, state or municipal government or department or agency thereof or court of competent jurisdiction; (b) acts of God; (c) acts of omissions of the other party; (d) fires, strikes, war, insurrection or riot; (e) or any other cause beyond its reasonable control. Any delay resulting therefrom will extend performance accordingly or excuse performance, in whole or in part, as may be reasonable. 17. Binding Effect. This Agreement will be binding upon and inure to the benefit of the parties their successors and assigns; provided, however, that Subagent may not assign or otherwise transfer this Agreement or any of its interest herein without the prior and express written consent thereto by LDCI. Neither the whole nor any part of the interest of Subagent in this appointment will be transferred or assigned by operation of law. 18. Severability. No provision of this Agreement which may be deemed unenforceable will in any way invalidate any other provision of this Agreement, all of which will remain in full force and effect. 19. Controlling Law And Entire Agreement. This Agreement, with Attachments, will be governed by the domestic laws of the State of Texas; constitutes the entire Agreement between Subagent and LDCI with respect to the subject matter hereof; and supersedes all prior Agreements and representations, written or oral, concerning the subject matter herein. This Agreement cannot be changed or modified except by written amendment signed by Subagent and LDCI. 6 CONFIDENTIAL AGENT INFORMATION LDCI 3/97 AGENT INITIAL____________ LDCI INITIAL____________ 7 20. Heading. This section numbers and captions appearing in this Agreement are insured only as a matter of convenience and are in no way intended to define, limit, construe or describe the scope or intent of such sections of this Agreement, or in any way affect this Agreement. IN WITNESS THEREOF, the parties have executed this Agreement this 1st day of April, 1997. XETA Corporation L.D. Communications, Inc. ---------------------------- (Subagent) /s/ Jack R. Ingram /s/ Greg Fallin ---------------------------- ---------------------------- (Authorized Signature) Greg Fallin President Vice President - Sales ---------------------------- ----------------------------- (Title) (Title) 4/1/97 4/1/97 ---------------------------- ---------------------------- (Date) (Date) 7 CONFIDENTIAL AGENT INFORMATION LDCI 3/97 AGENT INITIAL____________ LDCI INITIAL____________ EX-10.2 3 LD COMMUNICATIONS OPERATOR SERVICES PLAN 1 EXHIBIT 10.2 L.D. COMMUNICATIONS OPERATOR SERVICES PLAN 1. DEFINITION The word "you" in this Plan refers to the undersigned agent authorized by premise owner to select the operator services MCI/Telecom*USA for its telephone(s). 2. PREMISES TELEPHONES This plan covers the telephone lines submitted in writing to L.D. Communications to be included in L.D. Communications operator service agreement with MCI/Telecom*USA. 3. COMMISSION L.D. Communications will pay the commission on all operator services revenues as reported by MCI/Telecom*USA and specified in Exhibits, "Commission Schedules". L.D. Communication's obligation to pay commissions will commence on the date that MCI/Telecom*USA first implements the selection of MCI/Telecom*USA through L.D. Communication's agreement with MCI/Telecom*USA as the 10XXX, 0-, 0+, 01+, 00- provider on covered telephone lines. L.D. Communications will direct MCI/Telecom*USA to remit such commissions directly to you. 4. TERM This plan begins on the date it is fully executed by you and L.D. Communications and will remain effective for a period of 36 months, unless terminated earlier. This agreement may be terminated without liability (except for obligations incurred before the termination date) upon ninety (90) days written notice in the event L.D. Communication's contract with MCI/Telecom*USA is terminated for any reason. 5. AUTHORITY You warrant that you are the party authorized to select MCI/Telecom*USA operator services for the telephones submitted under this agreement. You represent and warrant that the telephones which are provided the Services are not subject to any contract for Operator Services. You also agree that if any other party claims against L.D. Communications or MCI/Telecom*USA for commissions from such telephones, you will be responsible for any such claim (that is, indemnify L.D. Communications or MCI/Telecom*USA and hold L.D. Communications or MCI/Telecom*USA harmless from any loss, cost, or expense resulting from such claim) and will pay L.D. Communications or MCI/Telecom*USA's reasonable attorneys' fees resulting from any such claim. 6. REPORTS L.D. Communications will furnish you with monthly statements showing Commissionable Revenue generated from Premises Telephones as reported by MCI/Telecom*USA to L.D. Communications. 7. COMPLIANCE You will comply with applicable state law relating to operator services. 8. PAYMENT DATE MCI/Telecom*USA will provide you commission payments approximately forty-five (45) days following the end of a billing month. 9. CONFIDENTIALITY L.D. Communications agrees that it will keep confidential all information concerning the agent's activities under this Plan and the amount of commissions paid to the agent hereunder or the agent's customers, and will not disclose any such information to any third party (except MCI as many be necessary to enable MCI and/or L.D. Communications to perform under this Plan) or any other agent of L.D. Communications, except as may otherwise be required by law. 10. LIABILITY L.D. Communications, Inc. may off set against commissions due Agent/Owner any obligations Agent/Owner may have to MCI/Telecom*USA under this or any other arrangement with MCI/Telecom*USA or L.D. Communications, Inc. Agent Initial LDCI Initial -------- --------- CONFIDENTIAL AGENT INFORMATION 2 11. GENERAL Except in cases involving willful or wanton conduct, L.D. Communications and MCI/Telecom*USA's liability to you is limited to its obligations to pay commissions as described herein. L.D. COMMUNICATIONS SHALL NOT BE LIABLE FOR ANY INDIRECT, SPECIAL, INCIDENTAL, CONSEQUENTIAL OR PUNITIVE LOSS OR DAMAGE OF ANY KIND, INCLUDING LOST PROFITS (WHETHER OR NOT L.D. COMMUNICATIONS WAS ADVISED OF THE POSSIBILITY OF SUCH LOSS OR DAMAGE), BY REASON OF ANY ACT OR OMISSION IN ITS PERFORMANCE UNDER THIS AGREEMENT. This is the entire agreement of the parties with respect to its subject matter and supersedes all prior agreements concerning the subject matter. This agreement cannot be amended except by a signed written agreement. Authorized Agent L.D. Communications Company XETA Corporation - ----------------------------------- (Company Name) By: /a/ Jack R. Ingram By: /s/ Greg Falin -------------------------------- -------------------------------- (Authorized Signature) (Authorized Signature) Name: Jack R. Ingram Name: Greg Fallin -------------------------------- ------------------------------- (Please Print) (Please Print) Date: 4/1/97 Date: 4/1/97 -------------------------------- ------------------------------- Offer Expires: Contract Number: CONFIDENTIAL AGENT INFORMATION LDCI 2/97 3 EXHIBIT A REVISED COMMISSION SCHEDULE Total monthly commissionable revenue(1) of Agent will determine the applicable commission rate for that month as specified in the following commission schedule.(2) The percentage rate will be applied to the total monthly commissionable revenue to determine the commission for that particular month. $ 0 - XXXXX XX% + (100% OF PIF, Telecom*USA Only)(3) $XXXXX - XXXXXX XX% + (100% OF PIF, Telecom* USA Only)(3) $XXXXX - XXXXXX XX% + (100% OF PIF, Telecom*USA Only)(3)
(1) Billed Revenue Net of Optional Owner Surcharge (2) Less any bad debt holdback as determined and withheld by MCI/Telecom*USA. The current bad debt withholding for MCI Premier Operator Services is xxxx (XX). The current bad debt withholding for Telecom*USA Operator Services is xxxx percent(XX%). (3) Less any commission paid to subaccounts as determined by authorized agent. Commissionable revenue is revenue generated, reported and commissioned under L.D. Communication's billing agreement with MCI/Telecom*USA from operator services calls generated by MCI/Telecom*USA's operator services carried on MCI/Telecom*USA's network. Operator services calls means long distance calls dialed with the 10XXX, 0-, 0+, 01, or 00- dialing pattern (and excluding calls dialed with the 950- XXXX and 800 dialing patterns), such as collect calls, billed to third party calls, telephone calling card calls and other forms of credit card billed calls. Notwithstanding, MCI 800COLLECT and MCI CARD revenues shall be commissionable under this agreement on a month to month basis for as long as MCI/Telecom*USA continues to include such revenues and under such terms and revenue calculations as MCI/Telecom*USA (in there sole Discretion) reports and pays commission under L.D. Communications agreement with MCI/Telecom*USA. The commission percentage will be applied to the total monthly commissionable revenue as reported and paid by MCI/Telecom*USA. Authorized Agent L.D. Communications Company XETA Corporation - ---------------------------------- (Company Name) By: /s/ Jack R. Ingram By: /s/ Greg Fallin ------------------------------- ---------------------------- (Authorized Signature) (Authorized Signature) Name: Jack R. Ingram Name: Greg Fallin ----------------------------- -------------------------- (Please Print) (Please Print) Date: 5/28/97 Date: 6/2/97 --------------------------- -------------------------- Fed. Tax ID# 73-113-0045 ---------------------- CONFIDENTIAL AGENT INFORMATION LDCI 2/97 EX-10.3 4 MARKETING ALLIANCE 4/1/97 1 EXHIBIT 10.3 MARKETING ALLIANCE AGREEMENT This Agreement is made and entered into this 1st day of April, 1997, by and between XETA Corporation, an Oklahoma corporation, whose principal office is located at 4500 S. Garnett, Suite 1000, Tulsa, Oklahoma 74146 ("XETA") and Americom Communications Services, Inc., an Oklahoma corporation, whose principal office is located at 1325 E. 35th Place, Suite 200, Tulsa, OK 74105 ("Americom"). RECITALS WHEREAS, XETA and Americom have each separately entered into an "L.D. Communications Operator Services Plan" and an "Authorized Sales Subagent Agreement" with L.D. Communications, Inc. ("LDCI") (collectively the "LDCI Agreements") pursuant to which XETA and Americom are each authorized by LDCI to promote, market and sell to commercial entities operator services ("0+") and direct dial long distance services ("1+") offered by MCI as such services are more specifically described in the LDCI Agreements (the "MCI Services"); and WHEREAS, XETA and Americom desire to market the MCI Services to commercial customers, including without limitation hotels, pay phone operators and time-share owners/operators; and WHEREAS, XETA and Americom believe that by joining forces in the marketing of the MCI Services, they will each benefit from the other's expertise and contacts in the hotel telecommunications industry and maximize their return under the LDCI Agreements; and WHEREAS, XETA and Americom therefore desire to enter into an alliance by which they solicit customers for the MCI Services under a service offering which includes XETA equipment (where appropriate) and is marketed under the "XETA" name, subject to the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the mutual covenants contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. SCOPE OF AGREEMENT; CONDITION PRECEDENT. This Agreement shall apply to all sales activities conducted and generated by either party from and after the date of this Agreement pursuant to its authority under the LDCI Agreements, and to all commission revenues generated therefrom (provided, however, that sales of the MCI Services to XETA or Americom for use by them in their own businesses shall be exempt from this Agreement). In addition, all commission revenues generated by Americom's existing MCI Services customers, as identified in Schedule "I(a)" attached hereto and incorporated herein (the "Existing Accounts"), shall be subject to the terms of this Agreement. XETA shall pay Americom a sum as set forth in that certain Purchase Agreement of even date herewith between the parties hereto (the "Purchase Agreement") in exchange for the incorporation of the Existing Accounts into this Agreement. Notwithstanding anything herein to the contrary, this Agreement shall be conditional upon and shall have no force and effect until such time as the purchase price for the Existing Accounts is paid by XETA to Americom pursuant to the terms of the Purchase Agreement. 2 2. MARKETING ALLIANCE. The parties agree that any offering of MCI Services to be made by XETA or Americom pursuant to the LDCI Agreements shall be marketed to the customer under marketing plans jointly developed by XETA and Americom (the "MCI Services offering"). All contracts with the customer for the MCI Services offering developed hereunder (the "customer contracts") shall be entered into between XETA and the customer regardless of whether XETA or Americom is responsible for the sale. The commissions payable by MCI as generated by such contracts shall be shared by XETA and Americom in accordance with the terms of Section 7 below. 3. XETA EQUIPMENT. Any call accounting or related equipment to be included in the MCI Services offering shall be provided by XETA. Title to all such equipment shall remain in XETA until such time as the customer contract provides, if at all, for the passage of title to the customer. It is understood and agreed that no commission will be paid to Americom by XETA for any XETA equipment which may be included in the MCI Services offering, and that any such equipment is hereby specifically excluded from the terms of any other agreement between XETA and Americom for the payment of commissions to Americom on the sale of XETA equipment. 4. TERM OF AGREEMENT. (a) Unless terminated earlier in accordance with Section 4(b) below, this Agreement shall be for an initial term of three (3) years from the date hereof (the "Initial Term") and shall automatically be renewed for one year terms annually thereafter (the "Renewal Terms"), unless either party shall notify the other in writing at least 90 days prior to the expiration of the Initial Term or any Renewal Term of its desire to terminate the Agreement at the end of such term. The Initial Term and any Renewal Term are collectively referred to herein as the "Term." (b) This Agreement shall terminate automatically and without notice upon the death of Robert A. Jones. 5. EXCLUSIVITY. (a) During the Term of this Agreement, Americom shall not promote or sell 0+ or 1+ services to any entity, or provide leads for such services to commercial customers, except for the MCI Services marketed pursuant to the LDCI Agreements. Notwithstanding the foregoing, nothing herein shall prohibit Americom from servicing its existing accounts for similar services offered through U.S. Long Distance as identified on Schedule I(b) attached hereto and incorporated herein (the "USLD Accounts"). Upon the expiration of the USLD Accounts, Americom shall promote the MCI Services to such customers, which accounts would then be subject to the terms of this Agreement. (b) During the Term of this Agreement, XETA shall not promote or sell 0+ or 1+ services to any entity, or provide leads for such services to commercial customers, except for the MCI Services marketed pursuant to the LDCI Agreements. 2 3 6. RESPONSIBILITIES OF THE PARTIES. The parties shall be responsible for the following: (a) Americom shall use its best efforts to market the MCI Services throughout the term of this Agreement. (b) XETA shall receive from MCI and/or LDCI all commission payments earned under the LDCI Agreements and shall disburse such commission revenue to the customer, Americom and XETA respectively, in accordance with the terms of the customer's contract with XETA and the terms of Section 7 below. XETA shall also (i) produce and distribute to the customer any reports which may be required under the customer contract to account to the customer for its portion of the commission revenue, and (ii) generate the "war room reports" set forth on Schedule II as may be required by the customer contract and submit such reports to Americom. (c) Americom shall deliver the war room reports produced by XETA to the customer and will provide the customer with an analysis of such report and will otherwise consult with and assist the customer in its evaluation and understanding of such report as may be requested by the customer or determined by XETA or Americom to be necessary and appropriate. (d) The responsibilities described in (b) and (c) above shall continue to be performed by the parties for as long as any customer contract signed during the Term hereof remains in effect, notwithstanding the termination of this Agreement. (e) Each party shall be responsible for its own costs and expenses incurred in connection with the performance of its marketing activities and duties under this Agreement (e.g., compensation of employees, marketing costs, travel, etc.), except as otherwise provided under Section 7(b)(v) below. 7. COMMISSION REVENUES AND DIVISION. (a) All revenues generated by (i) commission payments made by MCI and/or LDCI pursuant to the LDCI Agreements, including without limitation the PIF and all per call commissions, (ii) any start-up fees paid by the customer pursuant to the terms of the customer contract, and (iii) any other charges or fees paid by the customer pursuant to the terms of its customer contract, shall constitute and be referred to herein as the "Gross Commission Pool". (b) The following charges shall be deducted from the Gross Commission Pool on a monthly basis, and the balance remaining shall constitute the "Net Commission Pool": (i) Equipment charges as described in detail on Schedule III attached hereto and incorporated herein; (ii) Credits, if any, granted to the customer for future XETA equipment and/or services; 3 4 (iii) Commissions paid to the customer pursuant to the customer contract, net of any amounts deducted from such commission payments pursuant to the terms of such contract; (iv) A war room report generation fee consisting of a one-time start-up fee per customer equal to $65.00 and a monthly fee per customer as determined in accordance with Schedule II attached hereto and incorporated herein; and (v) Any specific costs or expenses which the parties mutually agree to share and deduct from the Gross Commission Pool, such as those associated with specially designed marketing brochures, etc. (c) The Net Commission Pool shall be divided equally between XETA and Americom on a monthly basis, except as otherwise specifically provided pursuant to the terms of Section 4 of the Purchase Agreement. (d) XETA shall remit a check to Americom for its share of the Net Commission Pool by the 15th day of the month following the month during which Gross Commission revenues are actually received by XETA. Such check shall be accompanied by a written report detailing the calculation of the Net Commission Pool. In the event the Net Commission Pool is a negative number at the end of any month, one-half of such debit shall be deducted from Americom's share of future Net Commission Pool revenues; provided, however, that Americom shall not be liable to XETA for its share of any cumulative debit except from commissions earned by Americom pursuant to the terms of this Agreement. (e) Commission revenues generated by any customer contract signed during the Term of this Agreement and payable by MCI and/or LDCI pursuant to the LDCI Agreements shall continue to be collected and disbursed in accordance with the terms of this Section 7 notwithstanding the termination of this Agreement. 8. STANDARDS OF CONDUCT. In performing marketing activities under this Agreement, the parties shall observe the highest standard of integrity and fair dealing with members of the public. Neither party will do anything which would tend to discredit, dishonor, reflect adversely upon or in any manner injure the reputation of the other. 9. INDEMNIFICATION. Each party (the "Indemnifying Party") shall indemnify, defend and hold the other (the "Indemnified Party") harmless from and against any claim, liability, obligation, loss, damage, assessment, judgment, cost and expense of any kind or character arising out of or attributed to (i) a breach or default by the Indemnifying Party under its LDCI Agreements, (ii) any negligent or wrongful act or omission of the Indemnifying Party in the performance of its marketing activities which are the subject of this Agreement or in the performance of its other responsibilities hereunder, or (iii) misrepresenting to customers the MCI Services or the XETA equipment or the terms under which the MCI Services and the XETA equipment are provided to the customer; provided, however, that the Indemnified Party shall within a reasonable time of becoming aware of any such claim, suit or proceeding, give notice of same to the Indemnifying Party. The Indemnifying Party shall be entitled to assume the defense thereof with counsel of its choice. The Indemnified Party shall have the right to employ its own 4 5 counsel in any such case, but the fees and expenses of such counsel shall be at the expense of the Indemnified Party unless: (i) the Indemnifying Party has failed to assume the defense thereof and employ counsel; or (ii) the named parties to any such action (including impleaded parties) include XETA and Americom, and the Indemnifying Party shall have been advised by the Indemnified Party's counsel that there may be one or more legal defenses available to the Indemnified Party that may be different from or additional to those available to the Indemnifying Party. In the event that the Indemnifying Party fails to assume the defense of the Indemnified Party within twenty (20) days of being notified of the existence of a claim, the Indemnified Party shall have the right to undertake the defense, compromise or settlement of such action; provided, however, that the Indemnified Party shall not pay, settle or compromise any such matter without prior consultation with the consent of the Indemnifying Party, which consent shall not be unreasonably withheld. NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES, WHETHER OR NOT FORESEEABLE. 10. NOTICES. Notices to be given pursuant to this Agreement shall be in writing and shall be deemed to have been duly and properly given on the earlier of (a) the date such notice has been received or (b) five (5) days after deposit of such notice in the United States Mail, postage prepaid, to be delivered by certified mail, return receipt requested, addressed to the recipient party at the address given above or at such address as it may designate in writing from time to time. 11. BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of the parties and their successors and assigns; provided, however, that neither party may assign or otherwise transfer this Agreement or any of its interest herein without the prior and express written consent of the other party. 12. CONTROLLING LAW AND ENTIRE AGREEMENT. This Agreement and the Schedules attached shall be governed by the laws of the State of Oklahoma. This Agreement (including the attached Schedules) and the Purchase Agreement constitutes the entire Agreement between XETA and Americom with respect to the subject matter hereof; and supersedes all prior Agreements and representations, written or oral, concerning the subject matter herein. This Agreement cannot be changed or modified except by written amendment signed by both parties. IN WITNESS THEREOF, the parties have executed this Agreement on the day and year first written above. "XETA" "Americom" XETA Corporation, an Oklahoma Americom Communications Services, Inc., corporation an Oklahoma corporation By /s/ Jack R. Ingram By /s/ Robert A. Jones -------------------------- --------------------------- Jack R. Ingram, President Robert A. Jones, President 5 EX-10.4 5 PURCHASE AGREEMENT 4/1/97 1 EXHIBIT 10.4 PURCHASE AGREEMENT This Agreement is entered into effective the 1st day of April, 1997 by and between XETA Corporation, an Oklahoma corporation ("XETA") and Americom Communications Services, Inc., an Oklahoma corporation ("Americom"). RECITALS WHEREAS, Americom, pursuant to agreements with L.D. Communications, Inc. ("LDCI"), has previously marketed MCI's Telecom/USA long distance services to 71 Starwood Lodging Corporation hotel properties, which properties generate commissions paid to Americom by MCI and/or LDCI; and WHEREAS, Americom and XETA have entered into a Marketing Alliance Agreement of even date herewith (the "Marketing Agreement"), pursuant to which they have agreed to pool their efforts in marketing MCI long distance services to commercial customers; and WHEREAS, XETA and Americom desire to include Americom's existing Starwood Lodging Corporation customer accounts in the marketing alliance formed pursuant to the terms of the Marketing Agreement, including commission revenues paid by U.S. Long Distance, Inc. ("USLD") on specific zero-plus long distance calls pursuant to the terms of an agreement dated September 4, 1996 among USLD, Americom and Starwood Lodging Corporation, as amended (the "USLD/Starwood Agreement"); and WHEREAS, in furtherance thereof, Americom desires to transfer such customer accounts to XETA upon the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the mutual promises contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. PURCHASE OF CONTRACT RIGHTS. Americom hereby sells, assigns and transfers to XETA and XETA hereby purchases from Americom all of Americom's right, title and interest in and to commissions from MCI and/or LDCI and from USLD, earned by Americom from and after April 1, 1997 (the "Effective Date") with respect to the 71 Starwood Lodging Corporation hotel properties listed on Schedule I attached hereto and incorporated herein, together with the contracts underlying the generation of such commissions (the "Existing Accounts"). The parties specifically acknowledge and agree that from and after the Effective Date, the Existing Accounts and the parties' respective rights and obligations with respect thereto shall be governed by the terms of the Marketing Agreement (which is incorporated herein by this reference), except as otherwise specifically provided in Section 4 below. 2 2. PURCHASE PRICE. The purchase price to be paid by XETA for the Existing Accounts shall be One Million One Hundred Seven Thousand Nine Hundred Sixty One Dollars and No Cents ($1,107,961.00). The purchase price shall be paid in cash (or cash equivalent) upon satisfaction of the conditions set forth in Section 5 below. Americom hereby acknowledges and agrees that all commissions it received and/or earned from XETA on the sale of equipment under XETAPLAN Contracts to the Existing Accounts are hereby reversed and cancelled, and that the purchase price stated above reflects adjustments made for the reversal and cancellation of such commissions, the refunding to Americom of all XETAPLAN down payments made by Americom on the Existing Accounts, and the sharing by XETA and Americom of any start-up fees imposed pursuant to customer contracts executed by the Existing Accounts. Americom further acknowledges and agrees that all XETAPLAN Contracts executed by it in connection with the Existing Accounts shall be cancelled as of the Effective Date upon satisfactory completion of the due diligence condition set forth in Section 5 below, and that Americom shall remain liable to XETA for any XETAPLAN payments due under such contracts prior to their cancellation. 3. REPRESENTATIONS AND COVENANTS OF AMERICOM. Americom hereby makes the following representations and enters into the following covenants: (a) Except as otherwise provided in the next sentence, all of the Existing Accounts are currently under contract with Americom to receive MCI long distance services. The Existing Accounts listed on Schedule II attached hereto and incorporated herein are currently also under contract with USLD to receive operator services from USLD only on interstate calling card calls which go out through dialer equipment provided by USLD. (b) Provided that USLD consents to the assignment of rights by Americom hereunder, neither the execution of this Agreement nor the consummation of the transactions contemplated hereby will constitute a breach of or default under any agreement between Americom and U.S. Long Distance ("USLD"), or Americom and LDCI. (c) Immediately upon execution of this Agreement, Americom will, in cooperation with XETA, take all action as may be necessary to cause MCI and USLD to pay the respective commissions generated by the Existing Accounts to XETA. (d) Neither Americom nor Starwood Lodging Corporation are in default under any of the customer contracts underlying the Existing Accounts. (e) Except for the claim of USLD against commissions paid or to be paid by USLD on those of the Existing Accounts listed on Schedule II attached hereto, all of the accounts and contract rights transferred hereby to XETA are free and clear of all liens, claims and encumbrances of any nature whatsoever. 2 3 (f) Americom shall execute any and all other documentation that XETA may reasonably request to effect the transfer of the Existing Accounts to XETA as contemplated herein, including without limitation an Assignment and General Conveyance in form and substance satisfactory to XETA. Americom shall also cooperate with XETA in obtaining any and all consents or approvals as XETA may deem necessary to effect the transactions contemplated hereby. 4. DIVISION OF COMMISSIONS. The Net Commission Pool (as that term is defined under the Marketing Agreement) generated each month by the Existing Accounts from April 1, 1997 through March 31, 2000 shall be divided by XETA and Americom on a monthly basis as follows: (a) The first $40,000 collected shall be paid 100% to XETA; (b) The next $45,000 collected shall be paid 100% to Americom; and (c) Thereafter the remaining dollars collected shall be shared equally by the parties hereto. From and after April 1, 2000, the monthly Net Commission Pool shall be divided equally between the parties. In the event that USLD withholds payment of the commissions or any portion thereof earned by Americom under the USLD/Starwood Agreement, which commissions have been assigned to XETA hereunder, Americom hereby agrees to pay to XETA for contribution to the Gross Commission Pool under the Marketing Agreement, an amount equal to the amount withheld by USLD. Such payment shall be made no later than five (5) business days after the date such amount would have been remitted by USLD. In order to secure its obligation hereunder, Americom hereby creates and grants to XETA a security interest in any and all commissions or other payments that are now or may hereafter be due and owing to Americom by (i) XETA under any sales agreement with Americom, oral or written, whether now existing or hereafter created, including without limitation the Marketing Agreement, and (ii) USLD under any agreement, oral or written, between Americom and USLD. Americom hereby agrees to sign and deliver to XETA at any time or from time to time as XETA may reasonably request, one or more Financing Statements pursuant to the applicable sections of the Oklahoma Uniform Commercial Code in form satisfactory to XETA, in order to create, perfect and maintain a valid security interest in the foregoing collateral. 5. DUE DILIGENCE CONDITION PRECEDENT. Americom shall promptly provide XETA for its review with access to and/or copies of all financial records, agreements and contracts relating to the provision of telecommunication and/or long distance services to Americom's USLD customers and to the Existing Accounts, as well as such other documentation that 3 4 XETA may reasonably request (including without limitation all agreements between Americom and USLD) to satisfy itself (i) as to the economic and financial aspects of the business underlying the marketing alliance, and as to the legal aspects of the transactions contemplated herein, (ii) that the marketing by Americom of MCI long distance services to the Existing Accounts or to any other customers does not violate the terms of any agreement between Americom and USLD, (iii) that no third party has or will have any claim to the commissions generated by the Existing Accounts, except for any claim by USLD against the commissions paid or to be paid by USLD on the Existing Accounts, (iv) that all consents and approvals that may be required from USLD, LDCI, MCI and/or Starwood Lodging Corporation, to the transfer of the Existing Accounts to XETA have been obtained (specifically including, without limitation, the written consent of USLD to the assignment by Americom of Americom's rights under the Master Agency Agreement with USLD dated November, 1992, as amended, as they relate to those of the Existing Accounts listed on Schedule II hereto), (v) that the transfer of the Existing Accounts to XETA shall not violate the terms of or result in a breach of any agreement between Americom and the Existing Accounts, including without limitation the USLD/Starwood Agreement, or between Americom and USLD, including without limitation any loan agreement, note or security agreement. In addition, Americom shall deliver the following to XETA, all of which shall be in form and substance satisfactory to XETA: (a) confirmation from MCI that MCI will pay commissions on the Existing Accounts directly to XETA, (b) copies of signed written contracts between Americom and Starwood Lodging Corporation as to the provision of MCI services to the Existing Accounts, (c) an amendment to the USLD/Starwood Agreement, signed by Starwood Lodging Corporation, relating to (among other things) the provision of MCI/Telecom*USA services. The purchase price to be paid by XETA for the Existing Accounts shall not be paid until the foregoing due diligence conditions have been met to XETA's reasonable satisfaction in its sole discretion. 6. INDEMNITY. Americom hereby agrees to indemnify and hold XETA harmless from and against any claim, liability, obligation, loss, damage, judgment, cost and expense of any kind or character arising out of or attributed to any claim by USLD or any other third party to any commission or portion thereof generated by the Existing Accounts from and after the Effective Date. 7. BINDING EFFECT; MODIFICATIONS. This Agreement shall be binding upon and inure to the benefit of the parties and their successors and assigns; provided, however, that neither party may assign or otherwise transfer this Agreement or any of its interest herein without the prior and express written consent of the other party. This Agreement cannot be changed or modified except by written amendment signed by both parties. 8. CONTROLLING LAW. This Agreement shall be governed by the laws of the State of Oklahoma. 4 5 IN WITNESS THEREOF, the parties have executed this Agreement on the day and year first written above. "XETA" "Americom" XETA Corporation, an Oklahoma Americom Communications Services, Inc., corporation an Oklahoma corporation By /s/ Jack R. Ingram By /s/ Robert A. Jones --------------------------------- -------------------------------------- Jack R. Ingram, President Robert A. Jones, President 5 EX-10.5 6 RELEASE AND CONSENT TO ASSIGNMENT 1 EXHIBIT 10.5 RELEASE AND CONSENT TO ASSIGNMENT This Consent to Assignment and Release is made and entered into this 18th day of April, 1997 by U.S. Long Distance, Inc., a Texas corporation ("USLD") to and for the benefit of XETA Corporation, an Oklahoma corporation ("XETA"). FOR good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, USLD agrees to and does hereby release any and all liens, security interests, claims, rights of set off, and other rights of any nature whatsoever, against any and all assets of Americom Communications Services, Inc., an Oklahoma corporation (Borrower), including without limitation any present or future commissions earned by Borrower from USLD or any other person or entity, any revenues or rights of Borrower to payment, any contract rights held by Borrower, and any equipment of Borrower, which USLD holds or claims as collateral security or otherwise for the payment of the following indebtedness of Borrower to USLD: (i) that certain Renewal and Extension of Promissory Notes dated October 1, 1996 in the original principal amount of $166,716.76, and (ii) that certain loan against future commissions in the amount of $520,000 evidenced by that certain Promissory Note dated September 11, 1996 in the amount of $520,000, made pursuant to the Addendum No. 2 dated September 11, 1996 to Master Agency Agreement dated November 20, 1992 by and between Borrower and USLD. This release is given in exchange for, and all of USLDs collateral rights are being replaced by, that certain Guaranty Agreement of even date herewith made by XETA Corporation for the benefit of USLD, a copy of which is attached hereto as Exhibit "A." In furtherance of the foregoing release, USLD agrees to promptly file UCC termination statements where necessary to terminate its security interests in assets of Borrower. USLD further consents to the assignment by Borrower to XETA of all present and future commissions owing by USLD to Borrower, together with the contract rights underlying such commissions, set forth in the Assignment from Borrower to XETA, a copy of which is attached hereto as Exhibit "B." IN WITNESS WHEREOF, the undersigned has executed and delivered this Release and Consent to Assignment the day and year first above written. U. S. Long Distance, Inc. By: /s/ Larry M. Jones ---------------------------- Title: ------------------------- EX-10.6 7 GUARANTY AGREEMENT 1 EXHIBIT 10.6 GUARANTY AGREEMENT This Guaranty Agreement is made and entered into this _____ day of April, 1997, by XETA Corporation, an Oklahoma corporation ("XETA" or the "Guarantor"), to and for the benefit of U.S. Long Distance, Inc., a Texas corporation ("USLD"). RECITALS WHEREAS, USLD has extended two loans to Americom Communications Services, Inc., an Oklahoma corporation ("Americom" or the "Borrower"), as follows: (i) a loan in the amount of $166,716.76, as evidenced by a promissory note entitled "Renewal and Extension of Promissory Notes" in the original principal amount of $166,716.76 dated October 1, 1996, and (ii) a loan in the amount of $520,000, as evidenced by a promissory note in the amount of $520,000 dated September 11, 1996 (which loan is further described in that certain Addendum No. 2 dated September 11, 1996 to Master Agency Agreement between Americom and USLD), such evidences of indebtedness being collectively referred to herein as the "Notes"; and WHEREAS, as an inducement for and in consideration of USLD agreeing to release all rights, liens, and security interests in or other claims against the assets of Borrower as collateral for payment of the Notes, including without limitation claims against present or future commissions or other revenues of any kind earned by Borrower, XETA has agreed to guarantee the Notes. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, XETA agrees as follows: 1. XETA hereby absolutely and unconditionally guarantees the prompt payment, as and when due, whether at maturity, by acceleration or otherwise, of the Notes, together with any and all renewals, extensions and changes in form thereof (collectively the "Guaranteed Indebtedness"). 2. Extensions and renewals of the Guaranteed Indebtedness may be made from time to time without notice of any kind. Such extensions, renewals and changes in form shall be binding on Guarantor and shall in no way reduce the Guarantor's liabilities hereunder. 3. Presentment, demand, protest, notice of protest and notice of dishonor of the Guaranteed Indebtedness and also notice of acceptance by USLD of this Guaranty Agreement (this "GUARANTY") are hereby expressly waived. 4. USLD may, without notice and without affecting the liability of the Guarantor hereunder, take and hold security for the payment of this Guaranty or the Guaranteed Indebtedness and may exchange, enforce, waive, add to or release security and may apply such 2 security and direct the order or manner of sale thereof as USLD, in its discretion, may determine. 5. Before proceeding hereunder against the Guarantor, USLD shall not be required to: (a) proceed against the Borrower or any other guarantor or party, whether a party to this Guaranty or otherwise; (b) proceed against or exhaust any other security securing the Guaranteed Indebtedness; or (c) pursue any other remedy whatsoever. 6. Until all the Guaranteed Indebtedness shall have been paid in full, the Guarantor shall not have any right of subrogation or right to participate in any security now or hereafter held by USLD. 7. If the maturity of the Guaranteed Indebtedness is accelerated either in accordance with the terms of the Notes or any other agreement or writing pertaining to or securing the Guaranteed Indebtedness, this Guaranty shall also be accelerated without demand or notice of any kind. 8. This Guaranty is binding upon the Guarantor's successors and assigns. 9. The obligations of the Guarantor hereunder shall constitute a present and continuing guaranty of payment and not of collectibility only, shall be absolute and unconditional, shall not be subject to any counterclaim, setoff, deduction or defense the Guarantor may at any time have against the Borrower or any other person, and shall remain in full force and effect without regard to any event whatsoever (whether or not the Guarantor shall have any knowledge or notice thereof or shall have consented thereto), including without limitation: (a) Any extensions, renewals or changes in form of the Notes, any assignment or transfer of any part thereof, any renewals or extension of the terms of payment of the Notes or the granting of time in respect of the payment thereof, or any furnishing or acceptance of security or any release of any security so furnished or accepted for the Notes; (b) Any waiver, consent, extension, forbearance or other action or inaction under or in respect of this Guaranty or the Notes, or any exercise of or failure to exercise any right, remedy or power in respect hereof or thereof; (c) Any failure, neglect or omission of USLD to protect, in any manner, the collection of the Guaranteed Indebtedness, or any portion thereof, or any security given therefor; (d) Any bankruptcy, insolvency, reorganization, arrangement, readjustment, composition, liquidation or similar proceedings with respect to the Borrower or the Guarantor; 2 3 (e) Any default by the Borrower, the Guarantor or the invalidity or any unenforceability of, or any misrepresentation, irregularity or other defect in, the Notes or this Guaranty. 10. In the event payment of the Indebtedness, or any part thereof, is held to constitute a preference or other avoidable transfer under the Bankruptcy Code, 11 U.S.C. Section 101 et seq., as amended, or other similar bankruptcy laws, or if for any other reason USLD is required to refund any such payment or pay the amount thereof to any other party, such payment shall be deemed not to have been made and shall not constitute a release of Guarantor from any liability hereunder, but Guarantor agrees to pay such amount to USLD upon demand and this Guaranty shall continue to be effective or shall be reinstated, as the case may be, to the extent of any such payment or payments. 11. To induce USLD to accept this Guaranty, Guarantor represents and warrants to USLD that all balance sheets, income statements and other financial statements or data which have been furnished by Guarantor to USLD fairly and accurately represent Guarantor's financial condition as of the dates for which such statements and information are furnished, on a consistent basis. 12. This Guaranty shall be a contract made under and governed by the laws of the State of Oklahoma. IN WITNESS WHEREOF, the undersigned have executed and delivered this Guaranty to USLD as of the ____ day of April, 1997. "Guarantor" XETA CORPORATION By: /s/ Jack R. Ingram ------------------------------------------ Jack R. Ingram, President 3 EX-23.1 8 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, 1996 or performed any audit procedures subsequent to the date of our report. ARTHUR ANDERSEN LLP Tulsa, Oklahoma June 11, 1997 EX-27 9 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON PAGES 3 AND 4 OF THE COMPANY'S 10QSB FOR THE YEAR TO DATE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 6-MOS OCT-31-1997 APR-30-1997 3,887,510 0 1,966,241 0 1,704,485 10,008,718 491,613 0 13,942,716 4,502,398 0 0 0 219,265 8,060,074 13,942,716 5,195,788 5,195,788 3,374,505 3,374,505 0 0 0 885,889 321,000 564,889 0 0 0 564,889 .24 .24
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