-----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, B+2CyINhi353UbprWuZh+4tVAsblxd1gk0zBa0jUiHIx2wiE8UJiinR38pfyFVxR Qs1oWa+AmK9uNqXq4q1KmQ== 0000950134-99-008243.txt : 19990915 0000950134-99-008243.hdr.sgml : 19990915 ACCESSION NUMBER: 0000950134-99-008243 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990731 FILED AS OF DATE: 19990914 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: 10-Q SEC ACT: SEC FILE NUMBER: 000-16231 FILM NUMBER: 99710903 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 10-Q 1 FORM 10-Q FOR QUARTER ENDED JULY 31, 1999 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 31, 1999 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 0-16231 XETA Corporation - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Oklahoma 73-1130045 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1814 West Tacoma, Broken Arrow, OK 74012-1406 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) 918-664-8200 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) 4500 S. Garnett, Suite 1000, Tulsa, OK 74146 - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Class Outstanding at September 1, 1999 - -------------------------------- -------------------------------- Common Stock, $.05 par value 3,977,308 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets - July 31, 1999 and October 31, 1998 Consolidated Statements of Operations - For the Three and nine months ending July 31, 1999 and 1998 Consolidated Statement of Shareholders' Equity - November 1, 1998 through July 31, 1999 Consolidated Statements of Cash Flows - For the Nine months ending July 31, 1999 and 1998 Notes to Consolidated Financial Statements 2 3 XETA CORPORATION CONSOLIDATED BALANCE SHEETS ASSETS
July 31, 1999 October 31,1998 ------------- --------------- (Unaudited) Current Assets: Cash and cash equivalents $ 4,178,103 $ 3,238,218 Current portion of net investment in sales-type leases 2,048,726 1,500,095 Other receivables, net 4,003,785 3,561,201 Inventories, net 3,371,420 2,022,256 Deferred tax asset, net 564,412 575,587 Prepaid expenses and other assets 178,484 73,895 ------------ ------------ Total current assets 14,344,930 10,971,252 ------------ ------------ Noncurrent Assets: Net investment in sales-type leases, less current portion above 3,083,714 1,210,939 Purchased service and long distance contracts, net 914,736 2,537,437 Property, plant & equipment, net 3,972,698 2,817,370 Capitalized software production costs, net of accumulated amortization of $543,066 at July 31, 1999 and $453,066 at Oct. 31, 1998 648,740 655,370 Other assets 217,280 99,618 ------------ ------------ Total noncurrent assets 8,837,168 7,320,734 ------------ ------------ Total assets $ 23,182,098 $ 18,291,986 ============ ============ LIABILITIES & SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,780,132 $ 1,747,009 Unearned revenue 4,830,680 3,096,217 Accrued liabilities 1,060,822 824,454 Accrued federal and state income taxes -- 181,876 ------------ ------------ Total current liabilities 7,671,634 5,849,556 ------------ ------------ Unearned service revenue 1,598,097 730,314 ------------ ------------ Noncurrent deferred tax liability, net 580,510 526,881 ------------ ------------ Commitments Shareholders' equity: Preferred stock; $.10 par value; 50,000 shares authorized, 0 issued -- -- Common stock; $.05 par value; 10,000,000 shares authorized, 4,636,702 and 4,572,568 issued at July 31, 1999 and October 31, 1998, respectively 231,835 228,628 Paid-in capital 5,373,855 5,135,818 Retained earnings 10,632,326 7,568,905 ------------ ------------ 16,238,016 12,933,351 Less treasury stock, at cost (2,906,159) (1,748,116) ------------ ------------ Total shareholders' equity 13,331,857 11,185,235 ------------ ------------ Total liabilities & shareholders' equity $ 23,182,098 $ 18,291,986 ============ ============
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, 1999 1998 1999 1998 ---- ---- ---- ---- Installation and service revenues $4,989,077 $ 3,432,990 $13,417,619 $ 9,564,188 Sales of systems 4,630,361 3,438,804 12,124,335 8,475,713 Long distance services 169,758 310,444 534,445 759,508 ---------- ----------- ----------- -------------- Net sales and service revenues 9,789,196 7,182,238 26,076,399 18,799,409 ---------- ----------- ----------- -------------- Installation and service cost 3,231,949 2,185,549 8,650,114 5,986,941 Cost of sales 2,899,146 2,486,024 7,299,636 5,766,507 Cost of long distance services 57,274 151,653 181,097 315,024 ---------- ----------- ----------- -------------- Total cost of sales and service 6,188,369 4,823,226 16,130,847 12,068,472 ---------- ----------- ----------- -------------- Gross profit 3,600,827 2,359,012 9,945,552 6,730,937 ---------- ----------- ----------- -------------- Operating expenses: Selling, general and administrative 1,370,227 1,069,940 3,592,460 3,079,776 Engineering, research and development 162,074 96,299 390,662 286,885 Amortization 415,502 81,216 1,385,550 243,648 ---------- ----------- ----------- -------------- Total operating expenses 1,947,803 1,247,455 5,368,672 3,610,309 ---------- ----------- ----------- -------------- Income from operations 1,653,024 1,111,557 4,576,880 3,120,628 Interest and other income 170,192 171,341 450,541 505,206 ---------- ----------- ----------- -------------- Income before provision for income taxes 1,823,216 1,282,898 5,027,421 3,625,834 Provision for income taxes 712,000 477,000 1,964,000 1,346,000 ---------- ----------- ----------- -------------- Net income $1,111,216 $ 805,898 $ 3,063,421 $ 2,279,834 ========== =========== =========== ============== Earnings per share Basic $ 0.28 $ 0.20 $ 0.76 $ 0.56 ========== =========== =========== ============== Diluted $ 0.24 $ 0.17 $ 0.66 $ 0.48 ========== =========== =========== ============== Weighted average shares outstanding 3,974,334 4,089,752 4,021,689 4,061,796 ========== =========== =========== ============== Weighted average shares equivalents 4,642,350 4,721,206 4,623,435 4,738,406 ========== =========== =========== ==============
The accompanying notes are an integral part of these statements. 4 5 XETA CORPORATION CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY NOVEMBER 1, 1998 THROUGH JULY 31, 1999 (Unaudited)
Common Stock Treasury Stock . --------------------------- ---------------------------- Number of Shares Issued Paid-in Retained & Outstanding Par Value Shares Amount Capital Earnings ------------- --------- -------- ----------- ---------- ----------- Balance - October 31, 1998 2,286,284 $228,628 (264,547) $(1,748,116) $5,135,818 $ 7,568,905 Stock options exercised 32,067 3,207 49,469 Tax benefit of stock Options exercised 188,568 Treasury stock acquired (65,150) (1,158,043) Two-for-one stock Split 2,318,351 (329,697) Net Income 3,063,421 --------- -------- -------- ----------- ---------- ----------- Balance - July 31, 1999 4,636,702 $231,835 (659,394) $(2,906,159) $5,373,855 $10,632,326 ========= ======== ======== =========== ========== ===========
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, 1999 1998 ----------- ----------- Cash flows from operating activities: Net Income $ 3,063,421 $ 2,279,834 ----------- ----------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 311,940 220,234 Amortization 1,385,550 243,648 Loss on sale of assets -- 14,517 Provision for doubtful accounts receivable 27,000 67,000 Change in assets and liabilities: (Increase) decrease in net investment in sales-type leases (2,421,406) 577,176 Increase in other receivables (469,584) (1,209,342) Increase in inventories (1,349,164) (839,581) (Increase) decrease in deferred tax asset 11,175 (405,740) Increase in prepaid expenses and other assets (222,251) (32,646) Increase in accounts payable 33,123 579,557 Increase in unearned revenue 2,602,246 351,763 Increase in accrued income taxes 6,692 205,125 Increase in accrued liabilities 236,368 28,544 Increase (decrease) in deferred tax liabilities 53,629 (47,660) ----------- ----------- Total adjustments 205,318 (247,405) ----------- ----------- Net cash provided by operating activities 3,268,739 2,032,429 ----------- ----------- Cash flows from investing activities: Additions to capitalized software (83,370) (178,998) Additions to property, plant & equipment (1,467,268) (1,522,225) Addition to purchase price of service contracts 327,151 -- Proceeds from sale of assets -- 852 ----------- ----------- Net cash used in investing activities (1,223,487) (1,700,371) ----------- ----------- Cash flows from financing activities: Purchase of treasury stock (1,158,043) (1,221,813) Exercise of stock options 52,676 92,900 ----------- ----------- Net cash used in financing activities (1,105,367) (1,128,913) ----------- ----------- Net increase (decrease) in cash and cash equivalents 939,885 (796,855) Cash and cash equivalents, beginning of period 3,238,218 6,011,841 ----------- ----------- Cash and cash equivalents, end of period $ 4,178,103 $ 5,214,986 =========== =========== Supplemental disclosure of cash flow information: Cash paid during the period for interest $ 15,752 $ 19,051 Cash paid during the period for income taxes $ 1,899,810 $ 1,572,799
The accompanying notes are an integral part of these statements. 6 7 XETA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS July 31, 1999 (Unaudited) (1) BASIS OF PRESENTATION The consolidated financial statements included herein include the accounts of XETA Corporation and its wholly-owned subsidiary, Xetacom, Inc. Xetacom's operations have been insignificant to date. All significant intercompany accounts and transactions have been eliminated. The consolidated financial statements have been prepared by the Company, without an audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The Company believes that the disclosures made in these financial statements are adequate to make the information presented not misleading when read in conjunction with the consolidated financial statements and the notes thereto included in the Company's latest financial statements filed as part of the Company's Annual Report on Form 10-KSB, Commission File No. 0-16231. Management believes that the financial statements contain all adjustments necessary for a fair statement of the results for the interim periods presented. All share and per share amounts have been restated to reflect the effect of the two-for-one stock split on August 13, 1999. All adjustments made were of a normal recurring nature. (2) INVENTORIES The following are the components of inventories:
July 31, October 31, 1999 1998 ----------- ----------- (Unaudited) Raw materials $ 1,287,680 $ 1,092,278 Finished goods and spare parts 2,408,740 1,254,978 ----------- ----------- 3,696,420 2,347,256 Less reserve for excess and obsolete inventory (325,000) (325,000) ----------- ----------- $ 3,371,420 $ 2,022,256 =========== ===========
7 8 (3) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following:
July 31, October 31, 1999 1998 ----------- ----------- (Unaudited) Building $ 2,397,954 $ 1,565,601 Data processing and computer field equipment 1,619,991 1,368,075 Land 611,582 611,582 Office furniture 434,735 136,143 Other 355,575 271,171 ----------- ----------- 5,419,837 3,952,572 Less accumulated depreciation (1,447,140) 1,135,202 ----------- ----------- $ 3,972,697 $ 2,817,370 =========== ===========
(4) UNEARNED INCOME Unearned income consists of the following:
July 31, October 31, 1999 1998 ----------- ----------- (Unaudited) Service contracts $ 1,472,877 $ 1,245,506 Customer deposits 1,903,452 688,778 Warranty service 1,208,683 951,238 Systems shipped, but not installed 125,544 69,364 Other deferred revenue 120,124 141,331 ----------- ----------- Total current deferred revenue 4,830,680 3,096,217 Noncurrent unearned service revenues 1,598,097 730,314 ----------- ----------- $ 6,428,777 $ 3,826,531 =========== ===========
8 9 (5) INCOME TAXES The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:
July 31, October 31, 1999 1998 --------- ---------- (Unaudited) Deferred tax assets: Prepaid service contracts $ 476,564 $ 347,322 Nondeductible reserves 296,875 315,585 Unamortized cost of service contracts 36,732 -- Other 52,006 35,078 --------- --------- Total deferred tax asset 862,177 697,985 --------- --------- Deferred tax liabilities: Unamortized capitalized software development costs 220,572 222,826 Tax income to be recognized on sales-type lease contracts 539,479 250,479 Unamortized cost of long distance contracts 100,611 110,190 Other 17,613 65,784 --------- --------- Total deferred tax liability 878,275 649,279 --------- --------- Net deferred tax asset (liability) $ (16,098) $ 48,706 ========= =========
(6) INTEREST AND OTHER INCOME Interest and other income recorded in the accompanying financial statements consists primarily of interest income earned from sales-type leases and cash investments. (7) EARNINGS PER SHARE All earnings per share amounts disclosed herein have been calculated under the provisions of SFAS 128 and reflect the two-for-one stock split on August 13. Basic earnings per common share were computed by dividing net income by the weighted average number of shares of common stock outstanding during the reported period. A reconciliation of net income and weighted average shares used in computing basic and diluted earnings per share is as follows:
For the Quarter Ending July 31 ------------------------------------- Income Shares Per-Share (Numerator) (Denominator) Amount ----------- ------------- --------- Basic EPS - 1999 Net income $1,111,216 3,974,334 $.28 Options issued to employees 668,013 Diluted EPS Net income $1,111,216 4,642,350 $.24 Basic EPS - 1998 Net income $ 805,898 4,089,752 $.20 Options issued to employees 631,454 Diluted EPS Net income $ 805,898 4,721,206 $.17
9 10
For the Nine Months Ending July 31 ------------------------------------- Income Shares Per-Share (Numerator) (Denominator) Amount ----------- ------------- --------- Basic EPS - 1999 Net income $3,063,421 4,021,689 $.76 Options issued to employees 601,746 Diluted EPS Net income $3,063,421 4,623,435 $.66 Basic EPS - 1998 Net income $2,279,834 4,061,796 $.56 Options issued to employees 676,610 Diluted EPS Net income $2,279,834 4,738,406 $.48
(8) FOOTNOTES INCORPORATED BY REFERENCE Certain footnotes are applicable to the consolidated financial statements, but would be substantially unchanged from those presented in the Company's Annual Report on Form 10-KSB, Commission File No. 0-16231, filed with the Securities and Exchange Commission on January 28, 1999. Accordingly, reference should be made to those statements for the following:
Note Description ---- ----------- 1 Business and summary of significant accounting policies 4 Accrued liabilities 6 Income taxes 7 Revolving Credit Agreement 8 Purchased Service and Long Distance Contracts 9 Stock options 11 Commitments 12 Major Customers and Concentration of Credit Risk 13 Employment Agreements 14 Contingency 15 Retirement plan
10 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS For the quarter ending July 31, 1999, XETA Corporation (the "Company") earned net income of $1.111 million or $.24 per share (diluted) on revenues of $9.789 million compared to net income of $.806 million or $.17 per share (diluted) on revenues of $7.182 million reported for the quarter ending July 31, 1998. For the nine month period ending July 31, 1999, the Company earned net income of $3.063 million or $.66 per share (diluted) on revenues of $26.076 million. This compares to net income of $2.280 million or $.48 per share (diluted) on revenues of $18.799 million for the nine months ending July 31, 1998. Note that all references to shares and per share amounts reflect the two-for-one stock split on August 13, 1999 to shareholders of record on July 30, 1999. These revenues and earnings were the result of many factors including the continued surge in orders for the Company's call accounting systems, continued market acceptance of its PBX product and service offerings, and a favorable mix in revenues which enhanced the gross margins earned on total systems sales. These factors offset slight declines in the gross margins earned on service revenues. Additionally, the quarterly and year-to-date results were achieved while simultaneously amortizing approximately one-fourth and three-fourths, respectfully, of the cost of the PBX contracts which were purchased in the fourth quarter of fiscal 1998. Also during the quarter, the Company announced plans to expand beyond the lodging industry into the commercial market by entering the voice and data communications business. As part of this effort, the Company hired Jon A. Wiese, a former executive with Lucent Technologies, Inc., as President. The Company's former President, Jack R. Ingram, remains as Chief Executive Officer and Chairman of the Board. The Company's plan to expand into the commercial market is based upon its belief that changes in the communications market which are currently being seen will cause voice and data networks to converge, leading to a demand within the commercial market for a "single network" distribution channel proficient in both voice and data solutions. The Company intends to establish itself as such a distribution channel through a series of selective acquisitions, supplemented by internal growth. The Company will continue to further develop its existing market position in the lodging industry. See "Outlook and Risk Factors" below for a further discussion of the Company's expansion plans. The discussion which follows provides further analysis of the matters mentioned above as well as other major factors and trends which management believes had the most significant impact on the financial condition of the Company as of July 31, 1999 and the results of operations for the quarter and nine month periods then ended as compared to the same periods a year ago. Also included in this discussion are the major factors, trends and risks which management believes will affect the outlook for the Company. This analysis should be read in conjunction with the Consolidated Financial Statements and Notes thereto contained in this report. 11 12 FINANCIAL CONDITION For the nine month period ending July 31, 1999, the Company's cash balances increased $.940 million reflecting cash earned from operations of $3.269 million offset by cash used in investing activities of $1.223 million and cash used in financing activities of $1.105 million. Investing activities primarily included cash used for completing the construction of the Company's new headquarters and purchases of computer equipment and furnishings for the building. The Company relocated to its new facilities in mid-March. Financing activities primarily consisted of purchases of the Company's common stock under its on-going stock repurchase program. On February 5, 1999, the Company's board of directors approved an increase in the repurchase program to include one-half of each quarter's net income. Previously, one-third of net income had been allocated to stock repurchases. In addition, the directors approved a one-time allocation of $500,000 to the program. Purchases under the program are made in open market transactions, the timing of which are dictated by overall financial and market conditions. The directors review the program regularly. During the first six months of the year, the Company spent $1.158 million to purchase 130,300 common shares. No shares were repurchased during the third quarter of the fiscal year. In September 1998, the Company purchased approximately 100 Hitachi PBX service contracts and the associated spare parts inventory from Williams Communications Solutions, LLC ("WCS"). On May 12, 1999, the Company made a final payment of $156,000 under the purchase agreement. This payment represented the negotiated purchase price for the inventory and a reduction in the purchase price of the service contracts to reflect the net effect of additional contracts identified after the initial closing and contracts which, by subsequent agreement of the parties, were not eligible to be purchased. As a result of the reduction in the amount paid for the service contracts, the Company's third quarter operating results reflect a downward adjustment in the monthly amortization expense related to these contracts. As previously disclosed, amortization of this purchase will be completed at the end of the current fiscal year. Management believes that the Company's financial condition is strong and that this strength will play a key role in the Company's plans to expand beyond the lodging industry into the commercial voice and data communications business. As part of the stated growth strategy, management is currently evaluating several acquisition opportunities. The Company is also exploring its potential debt capacity to finance potential acquisitions and while no assurance can be given, believes that sufficient debt financing can be arranged to complete the initial stages of its expansion strategy. Beyond debt financing, management believes that additional sources of capital will be available including secondary stock offerings, subordinated debt, owner financing and private placements of both debt and equity instruments. See also "Outlook and Risk Factors" below for a further discussion of the Company's expansion plans. 12 13 RESULTS OF OPERATIONS Total revenues for the three and nine month periods ending July 31, 1999 increased 36% and 39%, respectively, compared to those same periods in fiscal 1998. The third quarter increase consisted of an increase in installation and service revenues of $1.556 million or 45%, an increase in systems sales of $1.192 million or 35%, and a decrease in long distance revenues of $141,000 or 45%. The increase in total revenues for the year to date period consisted of an increase in installation and service revenues of $3.853 million or 40%, an increase in systems sales of $3.649 million or 43%, and a decrease in long distance revenues of $225,000 or 30%. The following discussion analyzes the Company's revenues by product line. PBX Revenues. Sales of PBX systems increased $359,000 or 12% during the third quarter and increased $1.540 million or 22% for the year to date period. Revenues from PBX service related activities increased $1.165 million or 48% during the third quarter of fiscal 1999 and increased $3.0 million or 46% for the year to date period. These increases are being fueled primarily by continued market acceptance of the Company's PBX product and service offerings. The Company enjoys a very positive reputation in the lodging industry for its installation and maintenance services as well as its products. This reputation, coupled with a healthy and expanding hotel industry, has resulted in significant expansion of the Company's share of the PBX market during the past four years. Other factors helping to fuel the growth in PBX related revenues has been the focus on technology by hotel owners and managers and the acquisition of service contracts from WCS in the fourth quarter of fiscal 1998. The current focus on technology in the industry is the result of the desire to ensure that all computer and telecommunications systems will function properly in the year 2000 and beyond. This desire and the accompanying time deadline has resulted in somewhat shorter sales cycles. During the third quarter of fiscal 1999, the Company completed its first installations of Lucent systems, for which the Company became a distributor in November, 1998. The Company expects to continue to sell and install both Hitachi and Lucent systems for the foreseeable future. Call Accounting Revenues. Sales of call accounting systems in the third quarter of fiscal 1999 increased $.833 million or 226% and for the nine month period ending July 31, 1999, increased $2.109 million or 155%, compared to those same periods in fiscal 1998. Revenues from call accounting installation and service related activities increased $391,000 or 39% in the third quarter and $.855 million or 29% for the year to date period. The Company is enjoying a surge in orders for its new, network-friendly Virtual XL(TM) Series call accounting system. This product, introduced in 1998, performs all of the functions of the Company's XL(R) Series call accounting system, but can also be connected to private and/or public networks to allow remote access to reports. Many of the orders for these new systems represent upgrades or replacement of existing systems, however, the healthy hotel industry and the Company's continued market penetration have resulted in sales to new customers as well. The Company's backlog of orders for call accounting systems remains strong and management expects sales of call accounting related revenues to continue to show strong gains through calendar 1999. Long Distance Services. Revenues earned from long distance services decreased $141,000 or 45% for the quarter ending July 31, 1999 and decreased $225,000 or 30% for the nine months ending July 31, 1999 compared to those same periods a 13 14 year ago. This decline represents lower usage of 0+ services at customer hotels. It is not known whether this trend will continue or whether revenues will recover to previous levels. Due to competitive pressures in the long distance segment of the hotel industry, the Company is not focusing on this segment of its product offerings. Gross Margins. The gross margins earned on total revenues were 37% in the third quarter of fiscal 1999 compared to 33% in the third quarter of fiscal 1998. Gross margins earned on total revenues for the year to date period ending on July 31, 1999 were 38% compared to 36% for the same period in fiscal 1998. Gross margins earned on service revenues were 35% for the third quarter of fiscal 1999 compared to 36% for the third quarter of fiscal 1998. For the nine month period, the gross margins on service revenues were 36% in the current year compared to 37% in the previous year. The margins on service revenues are slightly below management's target range for this revenue stream, but were steady at 35% for both the second and third quarters. Management continues to monitor its cost structure and processes in its service department. It is not known at this time whether those evaluations will result in changes that could produce higher gross margins on service revenues. The gross margins earned on systems sales during the third quarter of fiscal 1999 were 37% compared to 28% a year earlier and were 40% for the year to date period in fiscal 1999 compared to 32% a year earlier. These increases reflect the higher proportion of higher margin call accounting sales during these periods. Management expects this trend to continue throughout the remainder of calendar 1999. Sales of call accounting systems are expected to trend back to historical levels in fiscal 2000. Operating Expenses. Operating expenses for the three and nine month periods ending July 31, 1999 increased 56% and 49%, respectively, compared to those same periods in fiscal 1998. The majority of the increase in both periods is due to the increase in amortization expense associated with the purchase of service contracts from WCS. The increase in amortization expense for the third quarter was $334,000 and for the year to date period was $1.142 million. As stated above under "Financial Condition", amortization of the purchase cost of the service contracts will be complete at the end of the fiscal year. Other increases in operating expenses for both periods under comparison are primarily related to sales expenses, commissions and executive bonuses which increased in conjunction with increases in sales and net income. Partially offsetting the increases in operating expenses for the nine month period was collection of a judgement against a former customer of the Company. This judgement was for $116,000 and represented payment on trade receivables which had been previously written-off as a bad debt. Interest and Other Income. When compared to the previous year, interest and other income decreased $1,000 or 1% in the third quarter and decreased $55,000 or 11% in the year to date period. These decreases included declines in interest income from cash investments due to lower cash balances during the year which were partially offset by increases in interest income earned from XETAPLAN sales-type leases. Tax Expense. The Company has recorded a combined federal and state tax provision of 39% of income before taxes compared to a combined rate of 37% in fiscal 1998. The increase in the tax rate reflects primarily an increase in 14 15 estimated state income taxes, which fluctuate based on the Company's sales volumes in each state. OUTLOOK AND RISK FACTORS The statements contained in this section are based on current expectations. The statements are forward-looking in nature and actual results may differ materially. All such statements should be read in conjunction with the risk factors discussed herein and elsewhere in this report. Those statements should also be read in conjunction with the Company's Form 10-KSB for the year ended October 31, 1998 which contains an expanded discussion of risk factors that should be read in conjunction with this report. Particular attention should be paid to the Company's disclosures in the Form 10-KSB regarding the potential effect of the year 2000 ("Y2k") on its business. As discussed above, the Company has announced its plans to expand its business by providing voice and data network solutions to the commercial market. These plans are predicated, to a large degree, on the acquisition of existing voice and data communications providers. While management believes that market forces are present or emerging which will motivate potential target companies to enter into such transactions, there can be no assurance given that the Company can consummate such acquisitions. Furthermore, the voice and data markets for commercial businesses are substantial in size and the Company may face competition from larger and better capitalized companies who are pursuing the same growth strategy. Additionally, the Company will likely use a combination of debt and equity capital to finance the contemplated acquisitions. The use of these forms of capital may increase the level of risk associated with the Company's financial condition and could dilute earnings per share on the Company's core operations from those which would otherwise be reported. The Company is in the early stages of its relationship with Lucent. Many of the Company's sales and service technicians have been trained on the Lucent system and several Lucent systems have been successfully installed since the end of the second quarter. The Company is actively marketing the Lucent Guestworks(TM) PBX and while no assurance can be given, management believes that the Lucent system will enable the Company to compete more effectively in some segments of the market, specifically large hotels. For the Lucent product offering to be successful however, the Company must quickly establish itself as a quality installer and service provider of Lucent products. The Company's performance in these areas over the next few quarters will largely determine the success of its Lucent product offering. As a supplier of PC-based computer systems and proprietary software, the issues surrounding the potential effect of the year 2000 ("Y2k") on the Company's business are extremely complex. The evaluation of those issues is ongoing and will continue up to and through the beginning of the year. As of the date of this report, management believes that the disclosures provided in the Company's 1998 Annual Report accurately reflect the current state of its evaluations and its response to the Y2k issues that have come to its attention. The discussion below provides a brief update regarding the Company's actions regarding Y2k as it relates to the Company's proprietary PC-based products. 15 16 The Company is substantially complete with the notification of its customers regarding the availability of a software upgrade developed by the Company for its PC-based call accounting products. This upgrade includes patches designed to compensate for all Y2K issues of which the Company has become aware. The Company is also providing its customers under service contracts with a hardware test diskette which the Company developed for its systems. This diskette is designed to test for Y2K problems related to a system's hardware. The Company believes that many of the Y2K problems that will occur in the computer industry will be related to the hardware systems. To date, there have been no reported test failures and none are expected. Management believes that should a customer's system report a failure during testing, additional software can be written to "patch" the problem. The Company continues the process of upgrading those customers who have responded to the Company's notification and expects to have them completed by October 31, 1999. While no definite cutoff date has been set, customers who continue to delay in responding to the Company's notices risk having to wait until after December 31, 1999 to receive their upgrades. Customers who fail to respond to the Company's notices cannot be assured that their systems will function satisfactorily when using dates after December 31, 1999. Despite the fact that management believes that its systems will operate properly on and after January 1, 2000, the Company is developing contingency plans regarding staffing and location of selected inventory for the time period just before and just after January 1, 2000. Management believes it may receive a surge in service calls on or shortly after January 1, 2000, whether or not directly related to the Company's products. The Company's contingency plans are being designed to provide a prudent response to the possibility of such a surge in activity. If the volume of calls exceeds the Company's expectations, it might disrupt the Company's normal operations, including scheduled installations of new systems, thereby producing materially different operating results than those expected under normal conditions. Management continues to believe that regardless of the extent of the Y2k problems that are actually experienced in the global marketplace, a surge in litigation will ensue. As a developer of proprietary software and a service provider for telecommunications systems, the Company is vulnerable to the risk of increased litigation, despite its best efforts to mitigate the impact of the Y2k problem on its products and services. The Company is involved in three matters of pending litigation. See "Legal Proceedings" under Part II below for a further discussion of this litigation. Item 3 of Part I has been omitted as inapplicable. 16 17 PART II. OTHER INFORMATION Item 1. Legal Proceedings The Company first reported on the matter of Allendale Mutual Insurance Co. v. XETA Corporation, Hitachi Telecom (USA), Inc., Public Service Company of Colorado, AT&T, US West Long Distance, Inc., and Does 1-100, in its Quarterly Report on Form 10-Q for the fiscal quarter ending January 31, 1999. There have been no material developments in this case since the Company's last reporting of this matter in its Quarterly Report on Form 10-Q for the quarter ending April 30, 1999. The matter of Associated Business Telephone Systems, Inc. ("ABTS"), plaintiff, vs. XETA Corporation, defendant and third-party plaintiff, vs. D&P Investments, Inc. ("D&P"), which the Company last reported on in its Quarterly Report on Form 10-Q for the fiscal quarter ending April 30, 1999, has been set for trial on November 15, 1999. The parties failed to reach agreement following court-mandated settlement negotiations. On September 1, 1999, the Company filed a motion for partial summary judgment on certain of ABTS' contract and tort claims. Since 1994, when the Company was first notified by one of its hotel customers that the customer had been sued in Federal court for patent infringement by Phonometrics, Inc., a Florida company, the Company has been monitoring numerous patent infringement lawsuits filed by Phonometrics against certain telecommunications equipment manufacturers and hotels who use such equipment. While the Company has not been named as a defendant in any of these cases, several of its customers are named defendants and have notified the Company that they seek indemnification under the terms of their contracts with the Company. To the knowledge of the Company, there have been no material developments in this case since the Company last reported on this matter in its Quarterly Report on Form 10-Q for the fiscal quarter ended April 30, 1999. Item 2. Changes in Securities and Use of Proceeds. (a) The Company declared a two-for-one stock split on its Common Stock, par value $.10 per share, for shareholders of record on July 30, 1999, with an effective date of August 13, 1999. Simultaneously, the Company changed the par value of its Common Stock from $.10 per share to $.05 per share. Subparts (b) through (d) of Item 2 and all of Items 3, 4, and 5 have been omitted because they are inapplicable or the responses thereto are negative. 17 18 Item 6. (a) Exhibits - See the Exhibit Index at Page 19. (b) Reports on Form 8-K - On July 28, 1999, the Company filed a voluntary report with the Securities and Exchange Commission on Form 8-K. This filing reported on the Company's plans to expand its business activities beyond the lodging industry and reported the engagement of Jon A. Wiese to lead the expansion effort. 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 13, 1999 By: /s/Jack R. Ingram Jack R. Ingram Chief Executive Officer Dated: September 13, 1999 By: /s/Robert B. Wagner Robert B. Wagner Chief Financial Officer 18 19 EXHIBIT INDEX SEC. NO. Description - -------- ----------- (2) Plan of acquisition, reorganization, arrangement, liquidation or succession - None. (3) (i) Articles of Incorporation - previously filed as Exhibits 3.1 and 3.2 to the Registrant's Registration Statement on Form S-1, Registration No. 33-7841. Amendment No. 1 to Amended and Restated Certificate of Incorporation - previously filed as Exhibit 4.2 to the Company's Post-Effective Amendment No. 1 to Registration Statement on Form S-8, Registration No. 33-62173 (ii) Bylaws - previously filed as Exhibit 3(ii) to the Company's Annual Report on Form 10-KSB for the fiscal year ended October 31, 1994, Commission File No. 0-16231 Third Amendment to Bylaws - previously filed as Exhibit 4.4 to the Company's Post-Effective Amendment No. 1 to Registration Statement on Form S-8, Registration No. 33-62173. (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 June 17, 1999 letter to Jon A. Wiese outlining terms of compensation as President. 10.2 Stock Purchase Option dated June 17, 1999 granted to Jon A. Wiese. (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-10.1 2 LETTER TO JON A. WEISE-TERMS OF COMPENSATION 1 EXHIBIT 10.1 June 17, 1999 Mr. Jon Wiese 11509 South Granite Avenue Tulsa Oklahoma 74137 Dear Jon, It is my pleasure to document our offer of employment to you. The offer is for the office of President of XETA Corporation. In addition, we would like you to serve as a Director. The Directorship will require the approval of shareholders, which we will request in conjunction with our annual meeting next spring. Until that time, we would like for you to attend the Board meetings. Your salary will be $90,000 per year. In addition you will receive a quarterly bonus of 25% of XETA's after tax net income up to a maximum of $5,000 per fiscal quarter. You will also receive an annual bonus of 3.5% of XETA's after tax net income for the fiscal year. The quarterly bonus is paid at the end of the month following the fiscal quarter. The annual bonus is paid in January following the end of the fiscal year. The first quarterly and annual bonuses will be prorated to your date of employment. Should you voluntarily terminate your employment with XETA prior to the scheduled time of any bonus payment, that bonus, along with any future bonus, will be forfeited. In the event of involuntary termination, you will be eligible for the bonuses earned up to the date of termination. You will also be granted non-qualified options to buy 200,000 shares of XETA stock. You will vest in 50,000 options upon the commencement of your employment and 50,000 on each of the first three anniversaries of your employment. I want to thank you again for the time and effort you expended in visiting with our Board yesterday. All of the Board members are delighted with your acceptance of our offer pending the successful resolution of the Lucent non-compete issue. I am also reflecting the attitude of all of the Board by telling you that I personally am enthusiastically looking forward to this association. Sincerely, /s/ Jack R. Ingram President EX-10.2 3 STOCK PURCHASE OPTION-JON A. WEISE 1 EXHIBIT 10.2 STOCK PURCHASE OPTION This Stock Purchase Option is granted on this 17th day of June, 1999, by XETA Corporation, an Oklahoma corporation ("XETA"), to Jon A. Wiese ("Wiese") in conjunction with and pursuant to the terms of his employment by XETA. RECITALS WHEREAS, XETA has hired Wiese as XETA's President, and Wiese has accepted such employment on this date and will take office on August 2, 1999; and WHEREAS, as an inducement to Wiese to accept such employment and as part of the compensation to be paid to him as President of the Company, XETA agreed to grant Wiese options to purchase 200,000 shares of XETA's common stock, par value $.10 per share; NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, XETA hereby grants the following Stock Purchase Option to Wiese: 1. Option to Purchase. XETA hereby grants to Wiese the option to purchase 200,000 shares of common stock, par value $.10 per share, of XETA (the "Options"), subject to the terms and conditions set forth herein. The shares to be issued from time to time upon exercise of the Options shall be unregistered and "restricted" as that term is defined in Rule 144 of the rules to the Securities Act of 1933, as amended. 2. Vesting of Options. The Options shall vest in Wiese in four installments of 50,000 shares each on the 2nd day of August, 1999, 2000, 2001 and 2002. Any unvested Options shall terminate and become void in the event of termination of Wiese's employment with XETA for any reason (including death). 3. Exercise of Options. The Options shall be exercisable from time to time in whole or in part for a period of ten (10) years from and after the date of vesting (the "Option Period"). The Options shall be exercisable by Wiese only and shall not be assignable or transferable except as provided in Section 5 below. Subject to the conditions and limitations set forth herein, the Options shall be exercisable by delivering to XETA on any business day prior to expiration of the Option Period (i) a written notice specifying the number of shares Wiese desires to purchase, and (ii) cash or certified funds in payment of the exercise price. Such items shall be sent to XETA at its corporate headquarters, addressed to the attention of Chief Financial Officer. 2 4. Purchase Price. The exercise price of the Options shall be $23.25 per share, representing the fair market value of the Company's stock on the date of grant. 5. Death of Wiese. In the event of the death of Wiese, any Options not vested prior to death shall be forfeited and become void; and any Options that were vested prior to death may be exercised by the estate of Wiese or by a person who acquires the right to exercise such Option by bequest or inheritance from Wiese, subject to the same conditions upon exercise to which Wiese was subject. 6. Termination of Employment. In the event of the termination of Wiese's employment for any reason, any options not vested prior to such termination shall be forfeited and become void. 7. Adjustment. In the event the outstanding shares of common capital stock of XETA as a whole are increased, decreased, changed into, or exchanged for a different number or kind of shares or securities of XETA, whether through stock dividends, stock splits, reclassifications, merger, or the like, an approximate and proportionate adjustment shall be made in the number, kind and per share exercise price of shares subject to any unexercised portion of the Options. Any such adjustment shall be made without a change in the total price applicable to the unexercised portion of the Options, but with a corresponding adjustment in the price for each share covered by the Options. IN WITNESS WHEREOF, the undersigned has caused this Stock Purchase Option to be executed on the day and year first above written. XETA Corporation /s/ Jack R. Ingram President Accepted as of the 17th day of June, 1999. /s/ Jon A. Wiese EX-23.1 4 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report and to all references to our Firm included in or made a part of the Form S-8 made by Xeta Corporation on August 28, 1995. It should be noted that we have not audited any financial statements of the Company subsequent to October 31, 1998 or performed any audit procedures subsequent to the date of our report. ARTHUR ANDERSEN LLP Tulsa, Oklahoma September 13, 1999 EX-27 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON PAGES 3 AND 4 OF THE COMPANY'S 10Q FOR THE YEAR TO DATE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS OCT-31-1999 JUL-31-1999 4,178,103 0 4,003,785 0 3,371,420 14,344,930 3,972,698 0 23,182,098 7,671,634 0 0 0 231,835 13,100,022 23,182,098 9,789,196 9,789,196 6,188,369 6,188,369 0 0 0 1,823,216 712,000 1,111,216 0 0 0 1,111,216 .28 .24
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