-----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, RqYN5qu7KY66V5VIzreSTbsvQ/Y/fs03hypjauVkdXRwINoj01l0hjup4Ipf50ws Ke0jcnSgh/i0WSgKsWoErA== 0000950134-97-006749.txt : 19970918 0000950134-97-006749.hdr.sgml : 19970918 ACCESSION NUMBER: 0000950134-97-006749 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970731 FILED AS OF DATE: 19970912 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: XETA CORP CENTRAL INDEX KEY: 0000742550 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 731130045 STATE OF INCORPORATION: OK FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-16231 FILM NUMBER: 97679442 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 JULY 31, 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 JULY 31, 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 September 1, 1997 - -------------------------------- -------------------------------- Common Stock, $.10 par value 2,014,572 Page 1 of 20 consecutive pages Exhibit Index appears on Page 19. 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Page No. -------- Consolidated Balance Sheets - July 31, 1997 3 and October 31, 1996 Consolidated Statements of Operations - For the 4 Nine months ending July 31, 1997 and 1997 Consolidated Statements of Shareholders Equity - 5 November 1, 1996 through July 31, 1997 Consolidated Statements of Cash Flows - For the 6 Nine months ending July 31, 1997 and 1996 Notes to Consolidated Financial Statements 7 2 3 XETA CORPORATION CONSOLIDATED BALANCE SHEETS
July 31,1997 October 31,1996 ------------ --------------- (Unaudited) ASSETS Current Assets: Cash and cash equivalents $ 4,781,063 $ 3,549,101 Current portion of net investment in sales-type leases 2,105,328 2,217,672 Other receivables, net 1,894,822 1,516,479 Inventories, net (Note 4) 1,519,216 1,041,496 Current deferred tax asset, net (Note 7) 88,356 92,897 Prepaid expenses and other assets 203,385 156,233 Prepaid taxes -- 173,785 ------------ ------------ Total current assets 10,592,170 8,747,663 ------------ ------------ Noncurrent Assets: Net investment in sales-type leases, less current portion above 1,552,401 2,737,358 Purchased long distance contracts, net (Note 2) 990,174 -- Property, plant & equipment, net (Note 5) 545,369 394,906 Capitalized software production costs, net of accumulated amortization of $316,566 at July 31, 1997 and $268,914 at Oct. 31, 1996 497,011 325,816 Other assets 103,103 158,677 ------------ ------------ Total noncurrent assets 3,688,058 3,616,757 ------------ ------------ Total assets $ 14,280,228 $ 12,364,420 ============ ============ LIABILITIES & SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 686,833 $ 371,473 Unearned revenue (Note 6) 2,762,347 2,274,294 Accrued liabilities 766,067 666,838 Accrued federal and state income taxes 206,464 -- ------------ ------------ Total current liabilities 4,421,711 3,312,605 ------------ ------------ Unearned service revenue (Note 6) 706,990 1,388,998 ------------ ------------ Noncurrent deferred tax liability, net (Note 7) 496,270 591,984 ------------ ------------ Commitments (Note 2) Shareholders' equity: Common stock; $.10 par value; 10,000,000 shares authorized, 2,204,319 and 2,182,653 issued at July 31, 1997 and October 31, 1996, respectively 220,432 218,265 Paid-in capital 4,831,465 4,736,413 Retained earnings 3,863,100 2,375,895 ------------ ------------ 8,914,997 7,330,573 Less treasury stock, at cost (259,740) (259,740) ------------ ------------ Total shareholders' equity 8,655,257 7,070,833 ------------ ------------ Total liabilities & shareholders' equity $ 14,280,228 $ 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 Nine Months Ending July 31, Ending July 31, --------------------------- --------------------------- 1997 1996 1997 1996 ------------ ------------ ------------ ------------ Sales of systems $ 2,704,285 $ 1,185,027 $ 6,736,935 $ 5,215,123 Installation and service revenues 2,594,940 1,781,685 6,658,807 5,028,091 ------------ ------------ ------------ ------------ Net sales and service revenues 5,299,225 2,966,712 13,395,742 10,243,214 ------------ ------------ ------------ ------------ Cost of sales 1,877,706 735,422 4,449,709 3,202,979 Installation and service cost 1,638,130 1,119,482 4,229,097 3,239,769 ------------ ------------ ------------ ------------ Total cost of sales and service 3,515,836 1,854,904 8,678,806 6,442,748 ------------ ------------ ------------ ------------ Gross profit 1,783,389 1,111,808 4,716,936 3,800,466 ------------ ------------ ------------ ------------ Operating expenses: Selling, general and administrative 915,044 647,839 2,586,568 2,092,578 Engineering, research and development, and amortization of capitalized software production costs 104,170 110,599 308,834 306,137 ------------ ------------ ------------ ------------ Total operating expenses 1,019,214 758,438 2,895,402 2,398,715 ------------ ------------ ------------ ------------ Income from operations 764,175 353,370 1,821,534 1,401,751 Interest and other income 159,301 181,330 494,671 471,191 ------------ ------------ ------------ ------------ Income before provision for income taxes 923,476 534,700 2,316,205 1,872,942 Provision for income taxes 332,000 200,000 829,000 700,000 ------------ ------------ ------------ ------------ Net income $ 591,476 $ 334,700 $ 1,487,205 $ 1,172,942 ============ ============ ============ ============ Income per common and common equivalent share Primary and fully diluted $ 0.25 $ 0.14 $ 0.63 $ 0.50 ============ ============ ============ ============ Weighted average shares outstanding 2,010,326 1,987,667 2,002,830 1,963,726 ============ ============ ============ ============ Weighted average shares equivalents 2,373,982 2,350,818 2,354,147 2,348,448 ============ ============ ============ ============
The accompanying notes are an integral part of these statements. 4 5 XETA CORPORATION CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY NOVEMBER 1, 1996 THROUGH July 31, 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 21,666 2,167 -- -- 31,891 -- Tax benefit of stock options -- -- -- -- 63,161 -- Net Income -- -- -- -- -- 1,487,205 ------------ ------------ ------------ ------------ ------------ ------------ Balance - April 30, 1997 2,204,319 $ 220,432 (189,747) $ (259,740) $ 4,831,465 $ 3,863,100 ============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of these statements. 5 6 XETA CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For The Nine Months Ending ---------------------------- July 31,1997 July 31,1996 ------------ ------------ Cash flows from operating activities: Net Income $ 1,487,205 $ 1,172,942 ------------ ------------ Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 141,356 115,845 Amortization of capitalized software production costs and long distance contracts 81,796 41,184 (Gain) loss on sale of assets -- (14,076) Provision for doubtful accounts receivable 27,000 35,000 Change in assets and liabilities: (Increase) decrease in net investment in sales-type leases 1,297,301 (869,984) (Increase) in other receivables (405,343) (146,818) (Increase) decrease in inventories (477,720) 102,488 Decrease in prepaid income taxes 173,785 -- Decrease in deferred tax asset 4,541 13,085 (Increase) decrease in prepaid expenses and other assets 8,422 (51,510) Increase (decrease) in accounts payable 315,360 (106,432) Increase (decrease) in unearned revenue (193,955) 216,021 Increase in accrued income taxes 269,624 105,986 Increase (decrease) in accrued liabilities 99,229 (153,847) Increase (decrease) in deferred tax liabilities (95,714) 41,018 ------------ ------------ Total adjustments 1,245,682 (672,040) ------------ ------------ Net cash provided by operating activities 2,732,887 500,902 ------------ ------------ Cash flows from investing activities: Purchases of long distance contracts (1,024,318) -- Additions to capitalized software (218,849) (142,733) Additions to property, plant & equipment (295,643) (171,215) Proceeds from sale of assets 3,827 28,948 ------------ ------------ Net cash used in investing activities (1,534,983) (285,000) ------------ ------------ Cash flows from financing activities: Exercise of stock options 34,058 182,666 ------------ ------------ Net cash provided by financing activities 34,058 182,666 ------------ ------------ Net increase in cash and cash equivalents 1,231,962 398,568 Cash and cash equivalents, beginning of period 3,549,101 2,788,709 ------------ ------------ Cash and cash equivalents, end of period $ 4,781,063 $ 3,187,277 ============ ============ Supplemental disclosure of cash flow information: Cash paid during the period for interest $ 855 $ 244 Cash paid during the period for income taxes $ 726,328 $ 156,750
The accompanying notes are an integral part of these statements. 6 7 XETA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS July 31, 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. ("AMERICOM") 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 AMERICOM's interest in existing long distance contracts at 71 hotels for $1,108,000. The purchase price included a payment for the contracts of $1,024,000, which has been capitalized, and reimbursement of certain equipment fees on installed equipment. The capitalized costs will be amortized ratably over the estimated future life of these contracts. 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 AMERICOM'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 AMERICOM 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, AMERICOM had obtained loans from one of the carriers secured by future commissions to be earned under various long distance contracts, including those contracts purchased by the Company. To effect the transfer of AMERICOM's interest in the 71 hotel contracts, which were collateralized by the loans, the Company guaranteed AMERICOM's indebtedness. The amount of the guarantee at July 31, 1997 was $470,861. The Company believes that AMERICOM's earnings from its share of Net Commissions as well as other revenue sources pledged by AMERICOM will be sufficient to retire the indebtedness in accordance with the terms of the loans, therefore no liability has been recorded related to the guarantee. (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:
July 31, October 31, 1997 1996 ------------ ------------ (Unaudited) Raw materials $ 710,298 $ 577,054 Finished goods and spare parts 968,166 623,690 ------------ ------------ 1,678,464 1,200,744 Less reserve for excess and obsolete inventory (159,248) (159,248) ------------ ------------ $ 1,519,216 $ 1,041,496 ============ ============
(5) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following:
July 31, October 31, 1997 1996 ------------ ------------ (Unaudited) Computer field equipment $ 1,036,173 $ 797,825 Office furniture 116,564 112,976 Other 179,627 147,001 ------------ ------------ 1,332,364 1,057,802 Less accumulated depreciation (786,995) (662,896) ------------ ------------ $ 545,369 $ 394,906 ============ ============
8 9 (6) UNEARNED INCOME Unearned income consists of the following:
July 31, October 31, 1997 1996 ------------ ------------ (Unaudited) Service contracts $ 1,548,659 $ 1,570,872 Warranty service 633,387 379,753 Systems shipped, but not installed 26,781 63,829 Customer deposits 456,597 209,357 Other deferred revenue 96,923 50,483 ------------ ------------ Total current deferred revenue 2,762,347 2,274,294 Noncurrent unearned service revenues 706,990 1,388,998 ------------ ------------ $ 3,469,337 $ 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:
July 31, October 31, 1997 1996 ------------ ------------ (Unaudited) Deferred tax assets: Prepaid service contracts $ 39,679 $ 51,083 Nondeductible reserves 192,359 198,822 Book depreciation in excess of tax 8,991 15,902 Other 38,077 50,675 ------------ ------------ Total deferred tax asset 279,106 316,482 ------------ ------------ Deferred tax liabilities: Unamortized capitalized software development costs (168,984) (110,778) Tax income to be recognized on sales-type lease contracts (452,077) (638,831) Other (65,960) (65,960) ------------ ------------ Total deferred tax liability (687,021) (815,569) ------------ ------------ Net deferred tax liability $ (407,915) $ (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 quarter ending July 31, 1997, XETA Corporation (the "Company") earned net income of $591,000 on net sales of $5,299,000, both record quarterly results. For the nine months ending July 31, 1997, the Company earned net income of $1,487,000 on net sales of $13,396,000. The Company's recent success is due to a combination of factors which include continued strong acceptance of the Company's PBX product and service offering, continued rapid expansion of the Company's service base and the expanding hospitality market. Management believes these factors will continue to be a positive force driving the Company's financial results through fiscal 1998. In addition, the Company's new products, namely the XPANDER and the MCI long distance offering are well-positioned to begin making more significant contributions to operating results in the future. 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 July 31, 1997 and the results of its operations for the quarter and nine months ending July 31, 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 nine months ending July 31, 1997, the Company's cash balances have increased $1,232,000. This increase consists of cash generated from operations of $2,733,000 and cash from exercises of stock options of $34,000. A portion of these funds have been utilized in various investing activities including the purchase of long distance contracts for $1.1 million, investments in capitalized software production costs of $219,000 and additions to property and equipment of $296,000. The investment in capitalized software production costs relates to the continued development of the Company's XPANDER system which is more fully described below. The additions of property and equipment were mainly to support installations of call accounting systems at customer locations under PBX service or MCI long distance contracts. Management considers the Company's financial condition to be strong. Cash balances represent approximately 33% of total assets and over 50% of book value. In addition, working capital exceeds $6.1 million and the current ratio is 2.4. Management believes that present working capital will be sufficient to meet anticipated operating needs and planned capital expenditures. Future anticipated operating 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. Anticipated capital needs consist primarily of plans to relocate the Company's 11 12 headquarters into a larger, Company-owned facility that will support future growth. Management estimates the cost of the relocation at $2 million. Beyond these anticipated uses of working capital, management is continually evaluating other alternatives to effectively utilize its strong financial condition. The purchase of long distance contracts earlier this year is a result of such evaluations. The purchase of additional similar contracts is another likely use of available funds. Other possibilities include acquisitions and further expansion of the Company's XETAPLAN program. The Company has engaged a member of the board of directors to assist the Company in identifying and qualifying potential acquisition opportunities. RESULTS OF OPERATIONS Net sales and service revenues increased $2.3 million or 79% in the third quarter of fiscal 1997 compared to the third quarter of fiscal 1996. This increase included an increase in systems sales of $1.5 million or 128%, primarily consisting of increases in sales of PBX systems, and an increase in installation and service revenues of $813,000 or 46%. For the first nine months of fiscal 1997, net sales and service revenues increased $3.1 million or 31%. This increase consists of increases in systems sales of $1.5 million or 29% and increases in installation and service revenues of $1.6 million or 32%. The increases in systems sales in the comparison periods is due to substantial increases in the sales of new PBX systems. Although installations, and therefore revenues, from new PBX's were depressed early in the fiscal year, orders for new systems surged resulting in strong sales results in the second and third quarters. While order activity has slowed somewhat from its peak earlier in the year, orders and backlog remain strong compared to historical levels. Management believes the strength of its PBX sales is partially due to increases in market share and partially related to the on-going expansion of the hospitality business. Since entering this market in fiscal 1993, the Company has steadily built its reputation from being just a call accounting company to being able to provide quality PBX systems and support as well. As a result, the Company has been effective in selling PBX's to its existing call accounting customers as well as selling to property management companies and hotel chains that were not previous customers of the Company. Also, like other providers, the Company is enjoying the overall expansion of the hospitality market which has included many major refurbishments of existing hotels, new construction of smaller, suite-type or "extended stay" hotels and may begin to also include new construction of larger, "luxury" properties. Partially offsetting the increase in PBX sales has been a decline in the sales of call accounting systems from the inflated levels experienced from the fourth quarter of fiscal 1994 through the second quarter of fiscal 1996. Those inflated levels were related to the mandated changes in the North American Numbering Plan ("NANP") which caused most of the Company's customers to upgrade or replace their existing systems. The surge in NANP related call accounting sales ended in the second quarter of fiscal 1996. Call accounting sales since that time have consistently exceeded management's targets, even though such sales represent declines from 12 13 previous levels. Sales of call accounting systems during the third quarter, the first quarter to compare against non-NANP inflated sales, were up 26%. The increases in installation and service revenues are due primarily to increases in installations of new PBX systems, which generate one-time installation revenue and recurring monthly service revenues, and in expansion of the base of customers under PBX service contracts, which generate recurring monthly revenue. Installation and service revenues from these PBX related sources increased 79% in the third quarter of fiscal 1997 and increased 65% for the nine months to date period ending July 31, 1997. Installation and service revenues from call accounting sources increased, albeit more modestly, 12% during the third quarter of fiscal 1997 and 3% for the year to date period. Gross margins earned on net sales and service revenues was 34% for the third quarter of fiscal 1997 compared to 37% in the third quarter of fiscal 1996. For the nine month period, the gross margin on net sales and service revenues was 35% in fiscal 1997 compared to 37% in fiscal 1996. This decline in gross margins is due to the decline in the gross margins earned on systems sales which reflects the greater proportion of lower margin PBX systems sales. The gross margins earned on installation and service revenues is unchanged in the periods under comparison. Operating expenses increased 34% in the third quarter of fiscal 1997 compared to last year and increased 21% for the first nine months of fiscal 1997 compared to the same period in fiscal 1996. These increases are related to increases in commissions and executive bonuses and are reflective of the increases in revenues and profitability. Other increases include legal expenses, which are associated with pending litigation, amortization expense associated with the long distance contracts purchased earlier in the year, and small increases in sales and administrative personnel to support the Company's growth. Interest and other income declined 12% or $22,000 during the third quarter of fiscal 1997 and increased 5% or $23,000 during the first nine months of fiscal 1997, compared to the same periods a year ago. The decline in the third quarter reflects lower interest income earned on XETAPLAN sales-type leases, due to the aging of these contracts, and the fact that fiscal 1996's results included the reversal of approximately $30,000 in sales tax related accruals. The increase in the year to date amounts primarily reflects higher interest income earned on cash balances this year versus fiscal 1996, partially offset by the fact that fiscal 1996's results included the reversal, throughout the year, of the sales tax related accrual discussed above. The Company has recorded a provision for federal and state income taxes of $332,000 in the third quarter of fiscal 1997 and $829,000 for the first nine months of fiscal 1997. This represents an effective tax rate of 36% for both periods compared to an effective tax rate of 37% for the same periods in fiscal 1996. The slightly lower tax rate reflects a reduction in the estimated state tax provision for fiscal 1997. 13 14 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. 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 $1.1 million to Americom Communications Services, Inc. ("ASCI") for 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. The majority of the contracts purchased were with customers only recently secured under MCI contracts and therefore required action on the part of MCI for conversion to MCI service. MCI's performance has been slower than anticipated and, as a result, the full expected benefits to XETA have been delayed. The Company has had numerous meetings with all the parties involved in this project and is currently executing a plan that management believes will improve the MCI conversion process and will result in increased revenues in the future. Prior to the Company's acquisition of the revenues earned from the 71 purchased long distance contracts, these revenues were pledged as collateral by AMERICOM to secure loans from USLD to ASCI. 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 AMERICOM and the Company. In order to obtain these revenues free and clear of USLD's security interest, the Company guaranteed approximately $567,000 in AMERICOM's indebtedness to USLD in exchange for a release of USLD's security interest against AMERICOM's USLD commissions. The Company has, in turn, taken a security interest in all of AMERICOM's revenues from USLD as well as all commissions due AMERICOM under the marketing alliance and from other sales of Company products, to secure any amount which may become due from AMERICOM 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 AMERICOM's indebtedness to USLD according to its payment terms At August 1, 1997, the remaining balance of ASCI indebtedness was $471,000. The Company has not recorded any portion of this guarantee as a liability in its financial statements. The Company's distributorship agreement with Hitachi Telecom (USA), Inc. ("Hitachi") expires annually on March 31. Typically, as has been the case the last two years and is currently the case, the written contract expires before the parties execute a new agreement. In the interim, the two companies continue to operate without interruption under the same procedures and terms as the most recent contract, albeit without the assurance of a binding written contract with a definite term. The Company considers its relationship with Hitachi to be very good and due to the mutually beneficial nature of the companies' relationship, expects that a new contract for the current year will be executed by both parties in the near future on generally the same terms and conditions as the previous contract. 14 15 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 the process has not proceeded to the point which it can be determined 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 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. 15 16 PART II. OTHER INFORMATION Item 1. Legal Proceedings ABTS In June 1995, Associated Business Telephone Systems, ("ABTS") initiated an action against the Company which is currently pending in the United States District Court for the Northern District of Oklahoma. ABTS claims' are based upon allegations of breach of warranty, breach of contract, 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. The trial date in this action has been scheduled for December 15, 1997, and discovery is scheduled to terminate on September 2, 1997. ABTS, D & P Investments and Communication Equipment Brokers have filed an application with the court, which the Company has opposed, seeking to extend these dates for a period of 90 days. As of the writing of this report, the court has not yet ruled on the application. On September 9, 1997, the Company filed a motion for summary judgement in its favor on all claims brought by ABTS against the Company. 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' 16 17 profits derived from use of the allegedly infringing equipment during a 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. A hearing for oral arguments in the Phonometrics appeal of the decision in the Northern Telecom case is scheduled to be held during the week of October 6, 1997. The California litigation has been stayed pending the outcome of the Florida litigation. Items 2, 3, 4, and 5 of Part II have been omitted because they are inapplicable or the response thereto is negative. Item 6. (a) Exhibits - See the Exhibit Index at Page 18. (b) Reports on Form 8-K - During the quarter for which this report is filed, the Registrant did not file any reports with the Securities and Exchange Commission on Form 8-K. 17 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. XETA CORPORATION (Registrant) Dated: September 10, 1997 By: /s/ JACK R. INGRAM ----------------------------------- Jack R. Ingram President Dated: September 10, 1997 By: /s/ ROBERT B. WAGNER ----------------------------------- Robert B. Wagner Vice President of Finance 18 19 EXHIBIT INDEX SEC. NO. Description -------- ----------- (2) Plan of acquisition, reorganization, arrangement, liquidation or succession - None. (3) Articles of Incorporation and Bylaws - previously filed as Exhibits 3.1, 3.2, and 3.3 to the Registrant's Registration Statement on Form 5.1, Registration No. 33-7841. (4) Instruments defining rights of security holders, including indentures - previously filed as Exhibits 3.1, 3.2 and 3.3 to the Registrant's Registration Statement on Form S-1, Registration No. 33-7841. (10) Material Contracts - none (11) Statement re: computation of per share earnings - Inapplicable. (15) Letter re: unaudited interim financial information - Inapplicable. (18) Letter re: change in accounting principles - Inapplicable. (19) Report furnished to security holders - None. (22) Published report regarding matters submitted to a vote of security holders - None. (23) Consents of experts and counsel 23.1 Consent of Arthur Andersen LLP (24) Power of attorney - None. (27) Financial Data Schedule (99) Additional exhibits - None. 19 EX-23.1 2 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report and to all references to our Firm included in or made a part of the Form S-8 made by Xeta Corporation on August 28, 1995. It should be noted that we have not audited any financial statements of the Company subsequent to October 31, 1996 or performed any audit procedures subsequent to the date of our report. ARTHUR ANDERSEN LLP Tulsa, Oklahoma September 10, 1997 20 EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON PAGES 3 AND 4 OF THE COMPANY'S 10QSB FOR THE YEAR TO DATE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS OCT-31-1997 JUL-31-1997 4,781,063 0 1,894,822 0 1,519,216 10,592,170 545,369 0 14,280,228 4,421,711 0 0 0 220,432 8,434,825 14,280,228 5,299,225 5,299,225 3,515,836 3,515,836 0 0 0 923,476 332,000 591,476 0 0 0 591,476 .25 .25
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