UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the
the Securities Exchange Act of 1934 (Amendment No.     )

 

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Soliciting Material Pursuant to §240.14a-12Under Rule 14a-12

 

XETA Technologies, Inc.

(Name of Registrant as Specified In Its Charter)

 

XETA Technologies, Inc.

(Name of Person(s) Filing Proxy Statement if other than the Registrant)

 

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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

TO BE HELD APRIL 8, 20087, 2009

 

To the Shareholders of XETA Technologies, Inc.

 

The 20082009 Annual Meeting of Shareholders of XETA Technologies, Inc. (the “Company”) will be held at the Renaissance Tulsa Hotel and Convention CenterCompany’s corporate headquarters located at 6808 South 107th East Avenue, Tulsa,1814 W. Tacoma Street, Broken Arrow, Oklahoma, on April 8, 20087, 2009 at 6:30 p.m.10:00 a.m., local time, for the following purposes:

 

(1)               To elect seven (7) members to the Company’s Board of Directors to serve until the next annual meeting of shareholders;

 

(2)               To approve a stock option exchange program under which eligible Company employees will be offered the opportunity to exchange their eligible stock purchase options under the Company’s existing equity compensation plans for a smaller number of new options at a lower exercise price;

(3)               To ratify the selection of Tullius Taylor Sartain & SartainHoganTaylor LLP as independent certified public accountants for the Company for the 20082009 fiscal year; and

 

(3)(4)               To transact such other business as may properly come before the meeting or any adjournment of the meeting.

 

Only shareholders of record at the close of business on February 26, 2008,24, 2009, the record date fixed by the Board of Directors, will be entitled to notice of and to vote at the Annual Meeting.

 

Your vote is important.  Whether or not you expect to attend the meeting in person, we urge you to vote your shares at your earliest convenience.PLEASE SIGN, DATE AND RETURN YOUR PROXY IN THE ENCLOSED ENVELOPE, OR VOTE BY INTERNET BY FOLLOWING THE INSTRUCTIONS ON YOUR PROXY CARD.  Submitting your proxy now will not prevent you from voting your shares at the meeting if you desire to do so, as your proxy is revocable at your option.

 

 

By Order of the Board of Directors

 

 

/s/ Robert B. Wagner

 

 

 

/s/ Robert B. Wagner

 

Robert B. Wagner

 

Corporate Secretary

February 27, 2009

February 26, 2008

 

Important Notice Regarding the Availability of Proxy Materials

for the Shareholder Meeting To Be Held April 8, 20087, 2009

 

Our Proxy Statement and Annual Report to shareholders for the fiscal year ended October 31, 20072008 are available on our corporate website at www.xeta.com.

 


 

1814 W. Tacoma Street

Broken Arrow, Oklahoma  74012

PROXY STATEMENT

 

This proxy statement is furnished to the shareholders of XETA Technologies, Inc. (“XETA” or the “Company” or “we” or “us”) by our Board of Directors to solicit proxies for use at our annual meeting of shareholders (the “Annual Meeting”).  The Annual Meeting will be held on April 8, 2008,7, 2009, at the Renaissance Tulsa Hotel and Convention CenterXeta’s home office located at 6808 South 107th East Avenue, Tulsa,1814 W. Tacoma Street, Broken Arrow,, Oklahoma, at 6:30 p.m.10:00 a.m., local time.

 

This proxy statement and the accompanying proxy card will first be mailed to shareholders on March 18, 2008.17, 2009.

 

INFORMATION ON VOTING

 

Who Can Vote

 

Only shareholders of record at the close of business on February 26, 2008,24, 2009, the record date fixed by the Board of Directors, will be entitled to vote at the Annual Meeting.Each record holder is entitled to one vote per share of Common Stock registered to the holder on the record date.   As of February 26, 2008,24, 2009, there were 10,254,31010,293,176 shares of Common Stock outstanding.

 

How You Can Vote

 

You may vote in person at the Annual Meeting or by proxy.  We encourage you to vote by proxy even if you plan to attend the meeting.  Proxies properly executed and received by us in time to be voted at the Annual Meeting will be voted in accordance with the specifications marked on the proxy card.  Signed proxies which are returned to us with no voting specifications marked will be voted “FOR” the proposals described in this proxy statement and in the discretion of the persons named in the proxy on any other matter which may properly come before the meeting.

 

The process by which you vote depends upon how you hold your shares, as follows:

If you hold your shares in your own name as the stockholder of record, you may vote by mail or the internet.  To vote by mail, complete, sign, and return the enclosed proxy card in the envelope provided.provided to: Proxy Services, c/o Computershare Investor Services, P.O. Box 43126, Providence, RI 02940.  To vote using the internet, follow the voting instructions described on the proxy card.  Shareholders who vote by internet do not need to return the proxy card.

 

If you hold your shares in a stock brokerage account or through another nominee such as a bank, your shares are held in what is known as “street name.”   You are the beneficial owner of the shares but the broker or other nominee is considered to be the record holder for purposes of voting the shares.  As the beneficial owner, however, you have the right to direct your broker or other nominee on how to vote the shares in your account.  To do so, follow the voting instructions on the form you receive from theyour broker or nominee.  If you hold your shares in street name and you wish to vote in person at the Annual Meeting, you must obtain a legal proxy issued in your name from your broker or other nominee, giving you the right to vote the shares.

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How You Can Change Your Vote

 

You may change your vote by revoking your proxy at any time before voting takes place at the Annual Meeting.  You may revoke your proxy by notifying the Secretary of the Company in writing, by submitting another proxy with a later date, or by notifying the Company and voting in person at the Annual Meeting.  Meeting.  If you hold your shares in street name, you must contact your broker or other nominee regarding how to revoke your proxy and change your vote.

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Quorum

 

A quorum is necessary to conduct the business of the meeting. This means that holders of a majority of the outstanding shares of common stock must be represented at the meeting, either in person or by proxy.

 

Votes Required for Approval

 

Under our bylaws, for all matters submitted at the Annual Meeting, including the election of directors, as well as any other business which may properly come before the meeting, requires the affirmative vote of a majority of the shares present in person or represented by proxy at the Annual Meeting and entitled to vote.vote thereon is necessary for approval.

 

How Votes are Counted

 

Abstentions and broker “non-votes” are both counted as shares present in determining whether the quorum requirement is satisfied.  However, they receive different treatment for purposes of whether they are considered shares present and entitled to vote on a matter.  A broker non-vote occurs when a nominee holding shares for a beneficial owner does not vote on a particular proposal because the nominee does not have discretionary voting power with respect to that item and has not received voting instructions from the beneficial owner.  Broker non-votes, therefore, are excluded from the number of shares present and entitled to vote on a matter and consequently do not count against the matter.  Abstentions, on the other hand, are counted in the total number of votes present and entitled to vote on a matter and thus have the same effect as a vote against the matter.

 

PROPOSAL 1

ELECTION OF DIRECTORS

 

Nominees for Election as Directors

 

A Board of Directors consisting of seven members is proposed to be elected at the Annual Meeting.  Members of the Board are elected for one-year terms.  The nominees for election to the Board and the positions they currently hold with us are listed below, followed by their biographies.  All of the nominees except Greg D. Forrest, our CEO,Ozarslan A. Tangun currently serve as directors of the Company.  S. Lee CrawleyMr. Tangun is new to this year’s slate of directors and was appointedrecommended as a nominee by the Board effective February 1, 2008 to fill the vacant seat created by the resignationfollowing categories of persons:  security holders, non-management directors, and our former Board Chairman Jack R. Ingram.  Mr. Crawley was nominated by a non-management director.Chief Executive Officer.  All of the nominees have indicated they are willing to serve, if elected.  If any nominee should become unable to serve due to unforeseen circumstances, the personsperson(s) designated as proxies will have full discretion to cast votes for another person recommended by the Board.

 

The Board of Directors unanimously recommends that shareholders vote “FOR” the election of the seven nominees listed below.

 

Name

 

Positions with Company

 

Age

Donald T. Duke

 

Chairman of the Board

 

5859

S. Lee Crawley

Director

65

Richard R. Devenuti

Director

50

Greg D. Forrest

 

Chief Executive Officer and President

 

46

Ron B. Barber

Director

53

S. Lee Crawley

Director

6447

Dr. Robert D. Hisrich

 

Director

 

63

Edward F. Keller

Director

6764

Ronald L. Siegenthaler

 

Director

 

6466

Ozarslan A. Tangun

Shareholder (>5%); Advisor to the Board

37

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Mr. Duke has been a director since 1991 and became our Board Chairman on July 1, 2007.  He is a consultant to the oil and gas industry and an independent investor.  From 1980 until August 2002, Mr. Duke was in senior management in the oil and gas industry, including time as President and Chief Operating Officer of Hadson Petroleum (USA), Inc., a domestic oil and gas subsidiary of Hadson Corporation, where he was responsible for all phases of exploration and production, land, accounting, operations, product marketing and budgeting and planning.

 

        Mr. Forrest has been our Chief Executive Officer since June 7, 2007 and our President since July 2005.  He also served as our Chief Operating Officer from July 2005 until he became CEO in July of last year.  He first joined XETA as a Director of Sales over the Seattle branch sales and service operations in August, 2004 when the Company acquired Bluejack Systems, LLC.  Mr. Forrest was the CEO, principal owner and founder of Bluejack.  Prior to founding Bluejack, Mr. Forrest founded and operated several other fast-growing companies in the communications, clothing and commercial interior industries.2


 

Mr. Barber Crawleyhas been a director since 1987.  He is a shareholder in the law firm of Barber & Bartz, a Professional Corporation, in Tulsa, Oklahoma, which serves as counsel to the Company.  Mr. Barber has been engaged in the private practice of law since October 1980, and is also a certified public accountant licensed in Oklahoma.

Mr. Crawley was appointed to the Board on February 1, 2008.  He has an extensive background in business and financial management, with an emphasis on business transactions and profit improvement.  His professional experience includes functioning as CEO, CFO, and COO for several public and private companies, including Flint Engineering and Construction Company (CEO, 1992-1997) and Vantage Point Energy, a public exploration and production company (CEO, 1986-1992).  He also serves as Chairman of Intellevue, a software technology company he invested in in 1998.  Since May 2000 he has been the managing member of Corporate Finance Associates-Tulsa LLC, a mergers and acquisitions advisory firm. CFA-Tulsa is a senior shareholder in Corporate Finance Associates Worldwide, a national M&A firm which Mr. Crawley joined in May 2004.  He serves as its Vice Chairman.

Mr. Devenuti was appointed to the Board on May 1, 2008.  He is currently the Chief Operating Officer for EMC Corporation’s CMA division.  Prior to joining EMC, Mr. Devenuti spent nearly 20 years at Microsoft, where he served in several senior executive positions.  At the time of his retirement from Microsoft in 2007, he was Senior Vice President for Microsoft Services.  He also served as Microsoft’s Chief Information Officer and Vice President of Worldwide Operations, among other positions, during his tenure there.  Mr. Devenuti also serves on the Board of Directors for St. Jude Medical, Inc.

Mr. Forrest has been our Chief Executive Officer since June 7, 2007 and our President since July 2005.  He also served as our Chief Operating Officer from July 2005 until he became CEO.  He first joined XETA as a Director of Sales over our Seattle branch sales and service operations in August, 2004 upon our acquisition of Bluejack Systems, LLC, a company founded, owned, and operated by Mr. Forrest.  Prior to founding Bluejack, Mr. Forrest founded and operated several other fast-growing companies in the communications, clothing and commercial interior industries, including Bluejack.  He attended the University of Michigan.

 

Dr. Hisrich has been a director since 1987.  He holds the Garvin Professor of Global Entrepreneurship and is Director of the Global Entrepreneurship Center at the Thunderbird School of Global Management in Glendale, Arizona.  He is also a marketing and management consultant.  Previously he occupied the A. Malachi Mixon III Chair in Entrepreneurial Studies and was Professor of Marketing and Policy Studies at the Weatherhead School of Management at Case Western Reserve University in Cleveland, Ohio.  Prior to assuming such positions, he occupied the Boviard Chair of Entrepreneurial Studies and Private Enterprise and was Professor of Marketing at the College of Business Administration for the University of Tulsa.  He has also held a number of other academic positions and served on several editorial boards, including the Editorial Board of the Journal of Small Business and Enterprise Development, of which he is currently a member.  Dr. Hisrich is a member of the Board of Directors of Noteworthy Medical Systems, Inc. and NeoMed Technologies.

Mr. Keller has been a director since April 2007.  He was an executive in the banking industry for over twenty years until he retired in September 2006 as the Chairman and CEO of JP Morgan Chase in Oklahoma, a position he held for 10 years.  He previously served in a similar capacity with Bank One in Oklahoma, Bank IV and the Fourth National Bank.  Mr. Keller is a native of Oklahoma and continues to be involved in a number of community and business organizations.  He is a director of the St. Francis Health System, a trustee of the Oklahoma City Memorial Institute for the Prevention of Terrorism, a director of the Tulsa Metropolitan Chamber of Commerce, a trustee of Oklahoma State University-Tulsa, a director of the Oklahoma Foundation of Excellence, and a director of the Southwestern Graduate School of Banking at Southern Methodist University.

 

Mr. Siegenthaler has been a director since the Company’s inception in 1981.  He served as the Company’s Executive Vice President from July 1990 until March 1999.  Since 1974, he has been involved as partner, shareholder, officer, director, or sole proprietor in a number of business entities with significant involvement in fabrication and marketing of steel, steel products and other raw material, real estate, oil and gas, and telecommunications.  He is also CEO of Myriad Technologies, Inc., through which he has managed his personal investment portfolio and promoted sales activities for his own private investments.

 

Mr. Tangun is the founder and managing member of Patara Capital Management, LP, an investment partnership founded in April, 2006.  Prior to establishing Patara Capital, he was employed by Southwest Securities (NYSE SWS), the largest full service brokerage firm based in Texas, from 1995 to 2006.  During that time, Mr. Tangun held the position of Director of Research for over six years.  He also held the positions of Senior VP and Associate Director of Research.   During his tenure at SWS, he chaired the mandatory review committee for new research ideas across the industries covered by SWS, including software, healthcare, telecom, energy, semiconductors, and consumer.  Mr. Tangun received many honors and recognition during his career as a research analyst, including being ranked as the #1 analyst by The Wall Street Journal in the specialty retail sector in 2002. He has been regularly quoted in local and national media and has appeared on various television programs to provide commentary on the general stock market and economic conditions as well as specific companies.  Mr. Tangun graduated from the University of Iowa with an MBA concentration in finance.  He is a CFA charter holder.

 

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CORPORATE GOVERNANCE

 

The Board reviews its governance practices on an ongoing basis in light of the Sarbanes-Oxley Act of 2002, the rules and regulations of the United States Securities and Exchange Commission (“SEC”), and the listing standards of the NASDAQ Stock Market (“NASDAQ”).

 

Director Independence

 

Our Board of Directors must have at least a majority of independent directors.  Under the NASDAQ rules applicable to us, in order for a director to be deemed independent, the board must determine that the individual does not have a relationship, (includingincluding any of those listed by NASDAQ that will preclude a finding of independence)independence, that would interfere with the individual’s exercise of independent judgment in carrying out his or her responsibilities as a director.  Applying this standard, the Board has determined that Messrs. Crawley, Devenuti, Duke, Keller, Hisrich, and Siegenthaler, all incumbent board members, and Mr. Tangun, a nominee for Board membership, are independent within the meaning of the NASDAQ standards for board service.  In its deliberations on independence, the Board considered whether Mr. Siegenthaler’s stock ownership which is slightly over 10%, andposition, or the fact that his adult son is employed by the Company as a sales representative.  The Board determined that neither of these relationshipsrepresentative, would interfere with Mr. Siegenthaler’shis ability to exercise independent judgment as a director.  Mr. Barber is not an independent director due to his association with Barber & Bartz, the Company’s outside legal counsel, and Mr. Forrest willdoes not qualify as an independent director since he is an executive officer of the Company.

 

Board Meetings and Attendance

 

Our Board of Directors held sixfour meetings during fiscal 2007.2008, in addition to conducting business via written consents.  Each director attended at least 75% of the aggregate number of board meetings and meetings held by all committees on which he then served.served during the fiscal year.  The Company encourages its local directors to attend the annual meeting of shareholders.  At last year’s annual meeting, all of the local, then incumbent directors were present, as well as Mr. Duke who resides in the Oklahoma City area.

 

Committees of the Board

 

There are three standing committees of the Board of Directors: the Audit Committee, the Compensation Committee, and the Nominating and Governance Committee.  Each of these committees operates under a written charter approved by the Board.  A copy of each committee’s charter is posted under Governance Documents in the Governance section inon the Investor Relations sectionpage of our website at www.xeta.com.  The Board has determined that all of the members of the three standing committees are independent according to NASDAQ’s independence standards for service on these committees, including in the case of the members of the Audit Committee, the stricter independence requirements imposed by SEC rule and NASDAQ for audit committee membership.

 

Audit Committee

 

The current members of the Audit Committee are Mr. Crawley, its Chairman, Mr. Duke, (Chairman), Dr. Hisrich, and Mr. Keller.Ed Keller, who is currently on our Board but whose term will expire upon the election of directors at the Annual Meeting. The Board of Directors has determined that the Audit Committee has at least two members—Mr.Messrs. Crawley and Mr. Duke—who qualify as an “audit committee financial expert” as that term is defined by SEC rules.  The Audit Committee met sixfive times during the 20072008 fiscal year.

 

The Audit Committee assists the Board in fulfilling its responsibility for oversight of the quality and integrity of the accounting, auditing and financial reporting practices of the Company.  Among other things,In this regard, the Audit Committee is responsible for, among other things, selecting and retaining the Company’s independent public accountants; pre-approving the engagement of the independent accountants for all audit-related services and permissible, non-audit related services; reviewing in advance the scope and focus of the annual audit; and reviewing and discussing with management and the auditors the financial reports of the Company, the audited financial statements, the auditor’s report, the management letter, and the quality and adequacy of the Company’s internal controls.  The Audit Committee is also responsible, in the absence of a separate finance committee of the Board, for assisting the Board in fulfilling its responsibility to oversee the financial affairs of the Company.  In this regard, the Audit Committee will review and make recommendations to the Board about the financial affairs and policies of the Company.

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Compensation Committee

 

The members of the Compensation Committee are Mr. Duke, (Chairman),its Chairman, Dr. Hisrich, and Mr. Keller.  Mr. Siegenthaler isparticipates as a non-voting member of the Committee.  The Compensation Committee met oncethree times during fiscal 2007.  The Committee also conducts business via telephone, e-mail communications and by written consent.2008.

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The Compensation Committee oversees the Company’s compensation and benefits policies and programs and establishes and/or reviews the philosophy, objectives and goals of such policies and programs.  The Committee’s primary responsibilities include: determining the compensation of the Company’s CEO, CFO and other executive officers, including awards to such persons under the Company’s cash-based incentive and long-term equity-based plans; reviewing and recommending compensation of directors to the Board; and administering the Company’s equity-based incentive plan.  The process and procedures followed by the Compensation Committee in considering and determining executive compensation are described below under the heading “Compensation Discussion and Anaylsis.Analysis.”

 

Nominating and Governance Committee

 

The members of the Nominating and Governance Committee are Mr. Keller, (Chairman)its Chairman, Mr. Duke and Mr. Siegenthaler.  During the 20072008 fiscal year, the Nominating and Governance Committee conducted its business via telephone, e-mail communications and informal discussions and written consents.culminating in a meeting subsequent to fiscal year end at which the current slate of directors was nominated.

 

The Nominating and Governance Committee is responsible for identifying, recruiting, and evaluating qualified persons to serve on our Board of Directors and recommending such individuals to the Board for nomination for election as directors; evaluating director independence and the size and composition of the Board; reviewing and ratifying Committeecommittee assignments recommended by the Board Chairman and submitting such recommendations to the Board for approval; considering director nominations by shareholders; reviewing related person transactions involving directors; overseeing corporate governance matters; and leading the process for succession planning.

 

Director Nomination Process.    The Nominating and Governance Committee’s process to identify candidates for election to the Board involves requesting recommendations from members of the Board and individuals personally known to them, and from senior level executive officers.  The process for evaluating candidates includes gathering and reviewing a candidate’s biographical and background information, and personal meetings with the candidate by members of the Nominating and Governance Committee and other Board members, if appropriate.  While we have not established specific minimum qualifications for a position on our Board, nominees are selected on the basis of broad experience, wisdom, integrity, understanding of our business environment, the ability to make independent analytical inquiries and the need to maintain a majority of independent members on the Board.  The Nominating and Governance Committee also considers any other qualities that a candidate may possess that could add to the overall quality, diversity and skill of the Board, as well as the candidate’s ability to devote adequate time to Board duties.

 

Shareholder Nominations.    The Nominating and Governance Committee will consider board candidates proposed in good faith by a shareholder.  Shareholders who wish to recommend a candidate to the Nominating and Governance Committee for consideration should submit the candidate’s name and biographical information to the Nominating and Governance Committee of the Board, c/o Donald T. Duke, Board Chairman, XETA Technologies, Inc., 1814 West Tacoma, Street, Broken Arrow, OK  74012.   The Nominating and Governance Committee will evaluate shareholder-recommended candidates in substantially the same manner that it evaluates candidates submitted by others.  If the Board determines to nominate a candidate recommended by a shareholder, then the candidate’s name will be included in our proxy card for the next annual meeting of shareholders.

 

Shareholders may also be entitled to nominate director candidates directly, without any action or recommendation on the part of the Nominating and Governance Committee or the Board.  For nominations to be considered at next year’s annual meeting, shareholders must follow the procedures set forth in a recent bylaw amendment adopted by the Board.  Under these procedures, a shareholder must submit written notice of the shareholder’s nomination which must be received by us not later than 120 days prior to the anniversary date of the mailing dateimmediately preceding annual meeting of our proxy materials for the previous year’s annual meeting,shareholders, so long as the date of the meeting is not changed by more than 30 days from the anniversary date of the previous year’s meeting.  If the date of the meeting is changed by more than such 30 days, then the notice must be received no later than the 10th day following the date on which notice of the meeting is mailed

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to shareholders or is announced publicly. The notice must include the following information:  (1) a brief description of the candidate to be nominated; (2) the name and record address of the shareholder; (3) the class and number of shares beneficially owned by the shareholder; (4) a representation that the shareholder is a holder of record entitled to vote at the meeting and intends to appear in person or by proxy at the meeting to make the nomination; and (5) a description of any arrangement or understanding between such shareholder and the person to be nominated by such shareholder.  The notice should be addressed to:  Corporate Secretary, XETA Technologies, Inc., 1814 W. Tacoma, Street, Broken Arrow, OK  74012.

 

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Code of Ethics

 

We have adopted a financial officer Code of Ethics that applies to our Chief Executive Officer, Chief Financial Officer, and any principal accounting officer, controller and other persons who perform similar functions for the Company.  A copy of this Code of Ethics is posted under Governance Documents in the Governance section on the Investor Relations page of our website at www.xeta.com.

 

Communications with Directors

 

Shareholders who wish to communicate with the Board of Directors or an individual director may do so by sending their correspondence in writing to XETA Technologies, Inc., Attention Board of Directors (or individual named director) at 1814 West Tacoma Street, Broken Arrow, Oklahoma 74012.  Any such communications will be delivered directly to the Board or named director.

 

COMPENSATION DISCUSSION AND ANAYLSIS

 

This Compensation Discussion and Analysis provides a narrative review of the objectives and elements of compensation paid to the Company’s executive officers named in the Summary Compensation Table below.  For fiscal 2007,2008, these named executive officers (“NEOs”) are:

 

·                  Greg Forrest, President and Chief Executive Officer

·                  Jack Ingram, former Chief Executive Officer

·Robert Wagner, Chief Financial Officer

 

Compensation of NEOs is established by the Company’s Compensation Committee (the “Committee).  In addition to determining NEO compensation, the Committee oversees the Company’s compensation plans and policies and administers the Company’s equity compensation programs.  A complete discussion of the Committee and its membership is included in the Corporate Governance section of this proxy statement.

 

General Compensation Philosophy

 

The focal point of the Committee’s compensation philosophy is to enhance long-term shareholder value.  To do this, the Committee believes that performance-based compensation should include modest but competitive base salaries and benefits coupled with significant “at risk” compensation opportunities.  “At risk” compensation should include an annual incentive bonus program to reward near-term performance coupled with equity-based awards to reward long-term performance.

 

The Company designs its compensation programs to attract, motivate and retain quality managers who will improve long term shareholder value.  Under the Company’s compensation programs, the higher an executive’s level of responsibility, the greater proportion of his compensation will be dependent upon the Company’s performance and the executive’s individual performance and contributions.

 

Compensation Process

 

In implementing and administering the Company’s compensation plans, the Committee employs an encompassing analytical approach.  The Committee assesses, as described below, a variety of information, both objective and subjective in nature.  The Committee believes that no formulas or objective measures can fully or adequately take into account the full range of considerations in assessing individual performance or setting compensation.  The Committee’s deliberations therefore are inherently subjective in nature and are influenced by the experience and judgment of its members.

 

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To carry out the Company’s compensation philosophy and to discharge its duties under its charter, the Committee meetsholds a series of meetings after the close of each fiscal year to consideryear. At these meetings, the Committee considers a range of information. This information, includesincluding “hard” data relative to the Company’s financial and operating performance scorecard during the year as well as the performance and trading levels of the Company’s common stock. Additionally, the Company provides the Committee with historical compensation data on each NEO regarding previous salary levels, annual incentive

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awards, and previous equity awards andincluding the current status of such awards. Other information includes reviews of the Company’s significant accomplishments during the year, the Committee’s view of the individual performance and contributions of each NEO, and Committee members’ individual and collective opinion(s) of the current compensation market for each NEO’s discipline.

 

The items included in the Company performance scorecard include various financial measurements including performance around revenues, earnings, net operating margin, EBITDA and EBITDA margin, and returns on equity, assets, and invested capital. Operating measurements include gross profits, gross margins, sales contribution (defined as gross margin less sales expense as a percentage of revenues), operating expense as a percent of revenues, and revenue mix. The Committee places emphasis on those financial measurements which in its view are of most significance to shareholders, such as return on equity, net operating margins, and growth in revenues.

 

Additionally, at the Committee’s annual review the CEO makes recommendations for adjustments in base salaries, annual incentive compensation awards, and equity grants. These recommendations are based on data chosen by the CEO and may include competitive pay data gleaned from public company filings, research performed by a compensation consultant, and the CEO’s evaluation of each executive’s performance, including his own, against goals established for such executives at the beginning of each fiscal year.

 

The Committee considers all of this information together with its own evaluation of each NEO’s unique capabilities and their past and expected contribution toward the Company’s performance objectives. The Committee then processes such information through the subjective review and evaluation mentioned above, which it believes is of vital importance to balance the interests of all stakeholders in the process.

 

Overview of Elements of Executive Compensation

 

The key elements of NEO compensation are: base salaries, an annual incentive program, and long term equity compensation. Additionally, NEO’s may participate in the Company’s standard benefits programs on the same terms as all other employees. These benefit programs include health and welfare benefits, vacation and sick leave benefits, and a 401(k) retirement savings plan
(“401(k) Plan”). Under the Company’s 401(k) Plan, all employees have the opportunity, but are not required, to invest the Company’s matching contributions in XETA common stock.

 

The Company does not have employment, severance, or change-of-control agreements with anyeither of its NEO’s.

 

Base Salary. The Company pays a base salary to each NEO. The Committee believes that base salaries should be competitive, but modest for each NEO’s area of responsibility. The Committee believes that setting modest base salaries, coupled with significant annual and long term incentive compensation opportunities (discussed below), provides a balanced and clear incentive for NEOs to pursue prudent initiatives designed to achieve superior long-termlong term performance.

 

Base pay is set at the commencement of employment and is reviewed annually for adjustment based on the Committee’s view of changes in market conditions and changes in the NEO’s level of responsibilities. Base pay is also reviewed for adjustment when an NEO assumes a different executive office or position with the Company during the fiscal year.

 

Annual Incentive Compensation. The Company pays an annual incentive bonus to NEOs based on Company profitability and the individual performance of each NEO. The annual incentive compensation component is an integral part of the Company’s overall compensation philosophy, particularly in relation to the interaction between the annual incentive bonus and base salary. The annual incentive bonus is intended to be a self-correcting tool that provides robust rewards in conjunction with expanding profit levels and correspondingly constricts executive compensation when profitability narrows.

 

7


The annual incentive bonus is paid from an aggregate bonus pool accrued during the year for NEOs and other key non-sales employees of the Company to tangibly recognize the leadership and sacrifice of many of its key employees.   In recent years, due to an extended period of poor industry and Company fundamentals, the amount of this bonus pool was set on a discretionary basis.  This practice continued through fiscal 2007.  At its annual compensation review subsequent to the close of fiscal 2007, the Committee authorized a total bonus pool of $317,000 on a discretionary basis for distribution to key employees.  From this pool, $100,000 was awarded in the form of cash bonuses to the Company’s CEO and CFO.  The remaining $217,000 was awarded to other key non-sales employees, also as cash bonuses.

 

7


Due toAt the improvement in the financial health and prospectsbeginning of the Company, beginning in fiscal 2008, the Committee has set a target amount for the total bonus pool to be 10% of the Company’s annual pre-tax, pre-bonus profits. Additionally, the Committee has set targets to award 50% of the total bonus pool for distribution among the Company’s NEO’s and non-sales executive directordirectors and to pay between 33% and 50% of each executive’ssuch person’s annual incentive bonus in restricted stock awards. All of these targets are subjectThe Committee has the discretion to the Committee’s discretion and may be adjustedadjust actual awards under this bonus pool upward or downward based on a variety of factors including the size of the bonus pool and the NEO’s progress toward his targeted equity ownership (discussed below). On December 18, 2008, the Committee authorized a total bonus pool of $380,000. From this pool, the Committee awarded aggregate cash bonuses of $145,350 to the Company’s two NEO’s and two non-sales executive directors. Also from the pool, the Committee awarded restricted stock grants to the same four persons which represented 25% of each officer’s total bonus awards.

 

Long-TermLong Term Equity Compensation. The Committee believes that the element of long-termlong term equity compensation should be sufficient to provide NEOs the potential for meaningful wealth creation through stock price appreciation. This opportunity serves to further motivate NEOs to enhance the value of the stock and more heavily aligns their interests with that of the shareholders. Additionally, the Committee believes that equity awards can be an effective retention tool and thus grants awards with multi-year vesting periods. In setting this portion of compensation, the Committee factors in the total number of outstanding equity awards and the expiration periods of each such award, in order to balance the Committee’s goal of promoting equity ownership by executives against the potential dilution which such awards can have upon current and future shareholders. The Committee has set a general target of maximum potential dilution of 15%, but has not set a restriction on exceeding that level if, in its judgment, conditions warrant.

 

Traditionally, the Committee has granted equity awards in the form of stock options, typically with three year vesting on a cliff or pro rata basis.  These awards were granted from time-to-time based on Company performance, dilution considerations, recruiting of new executives, and/or to recognize additional responsibilities assumed by an executive.  Additionally, since the implementation of Financial Accounting Standard 123(R), and up until the Company’s financial performance began to improve in late fiscal 2006, the Committee was reluctant to burden the Company’s already weak operating results with the additional compensation expense required by the new standard.

Beginning in fiscal 2008, the Committee will consider annual grants of long-term equity compensation asAs part of its comprehensive review of total executive compensation.  In addition toofficer compensation each year, the Committee considers annual grants of long term equity compensation in the form of stock options, the Committee may consider granting restricted stock, or other forms of share-based compensation in the future which are provided foravailable in the Company’s 2004 Omnibus Stock Incentive Plan (the “2004 Omnibus Plan”) and 2000 Stock Option Plan (the “2000 Plan”).

 

InAt the beginning of fiscal 2007,2008, the Company’s long timeCommittee set equity ownership targets as provided below for the positions of CEO and second largest shareholder stepped downCFO and Mr. Forrest, then serving as the Company’s President, was named CEO.  Tofor all Executive Directors to promote continuation of the historically strong alignment between the Company’s officers and its shareholders, the Committee has set equity ownership targets for the positions of CEO, CFO, and Executive Directors as provided below:shareholders.

Title

 

Equity Target
(shares)

(shares)

CEO and President

 

250,000

CFO

 

125,000

Executive Directors

 

100,000

 

Annually,As part of its annual review of officer compensation, the Committee will monitormonitors each executive’sofficer’s progress toward achieving these equity targets. Shares held in the Company’s 401(k) Plan count toward meeting the targets above. Because this is a new program for the Company, the Committee has not established timelines for achieving these targets.

 

Material Factors Affecting Executive Compensation in Fiscal 2007 and 2008

 

Effective December 1, 2006, as a result of its annual review of Company and executive performance, the Committee approved base salary increases for Mr. Forrest and Mr. Wagner of $20,000 and $15,000, respectively, bringing Mr. Forrest’s annual salary at that time to $185,000 and Mr. Wagner’s to $125,000.  Mr. Forrest’s salary adjustment was made in part to reflect the steady increase over time in his duties and responsibilities since becoming the Company’s President on July 6, 2005, as the Company’s then CEO Jack Ingram began transitioning responsibilities to Mr. Forrest.  The adjustment in Mr. Wagner’s base salary was similarly based in part on his increased span of control in assuming responsibility for the Company’s contact center operations, material logistics, purchasing, and information technology functions.  The December 2006 salary increases for both executives also reflect the Committee’s view that the Company’s CEO and CFO base salaries had ceased to be competitive.

8


On June 7, 2007, Jack Ingram resigned as the Company’s CEO and Mr. Forrest was appointed as the Company’s CEO, while retaining the position of President.  Subsequently on July 5, 2007, the Committee increased Mr. Forrest’s base salary to $197,000 in recognition of his assumption of additional responsibilities as CEO.  At the same time and in order to recognize their expanded leadership roles, increase their equity interests, and to balance short and long-term incentives, stock options were granted to Mr. Forrest for 40,000 shares and to Mr. Wagner for 25,000 shares.  These options were granted under the 2004 Omnibus Plan and have a strike price of $3.25 per share, the fair market value of the Company’s stock on the date of grant.  These options vest on January 5, 2011 (3½ years after the date of grant) and have a term of 7 years from the date of grant.

On December 5, 2007,15, 2008, the Committee met to conductand concluded its annual compensation review. The Committee awarded annualcash incentive bonuses to Mr. Forrest and Mr. Wagner of $50,000 each,$53,925 and $49,050, respectively and restricted stock awards of 9,986 and 9,083 shares, respectively, in recognition of the Company’s improved financial results for fiscal 2007.2008. In fiscal 20072008 the Company doubled itsCompany’s earnings increased 44% compared to the prior year, and made positive progress in several key areas, including improving return on equity improved from 1.9% in fiscal 2006 to 3.6% in fiscal 2007 to 4.9% in fiscal 2008 and improving net operating margin improved from 1.2% in fiscal 2006 to 2.0% in fiscal 2007.2007 to 2.4% in fiscal 2008. The increase in annual incentivecash and restricted stock awards in fiscal 2007 compared to fiscal 2006 reflects2008 reflect both the Company’s pay-for-performance philosophy, in which the Company’s relatively modest base salaries are supplemented by relatively robust annual bonuses awarded as Company performance improves.  Theseimproves, and the Company’s commitment to align officer compensation with the long-term interests of shareholders. The restricted stock awards were made on December 15, 2008 and the cash bonuses were paid in cash on January 11, 2008.9, 2009. The restricted stock awards vest in three equal installments on January 15, 2010, 2011, and

 

Also as part of its annual compensation review, the Committee made a cost-of-living adjustment to Mr. Forrest’s base salary, increasing it to $203,000 per year.  The Committee also evaluated Mr. Wagner’s base salary in light of continuing market-driven pressures on financial executive compensation, as well as Mr. Wagner’s expanded responsibilities following the departure of Mr. Ingram in June 2007.  In response to these two factors, the Committee increased Mr. Wagner’s base salary to $145,000 per year.8


2012. Also on December 5, 2007, long term15, 2008, long-term equity incentive awards in the form of stock options were granted to Mr. Forrest and Mr. Wagner for 20,00030,000 and 10,00025,000 shares, respectively. In granting these options, the Committee weighed several factors including its goal to increase the weighting of total executive compensation toward long term incentives;long-term incentives, the impact of additional equity incentive awards onof the Company’s operating results; the stock ownershipstockownership targets that have been established for executives;NEO’s and executive directors; and the total number of stock options outstanding in relation to total shares outstanding. These options have a strike price of $4.14$1.77 per share, the fair market value of the Company’s stock on the date of grant. The options vest on December 5, 2010 (3June 15, 2011 (3.5 years after the date of grant) and have a term of 67 years from the date of grant.

 

Also as part of its annual compensation review, the Committee elected to not adjust Mr. Forrest’s or Mr. Wagner’s base salaries at this time. This determination was made after consideration of several factors including current and forecasted macro economic conditions, the Company’s recent cost containment measures which included targeted reduction in employee levels, the Committee’s view of executive base salaries in relation to the current market for similar positions, and continued increased weighting of executive compensation toward equity incentives.

COMPENSATION COMMITTEE REPORT

 

The following report of the Compensation Committee shall not be deemed to be “soliciting material” or to otherwise be considered “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as amended or the Exchange Act of 1934 except to the extent the Company specifically incorporates it by reference into such filing.

 

January 23, 200822, 2009

 

To the Board of Directors of XETA Technologies, Inc.

 

Given our role in providing guidance on compensation philosophy and the administration of that policy in making specific compensation decisions for the named executive officers, we participated in the preparation of the Compensation Discussion and Analysis and discussed the Compensation Discussion and Analysis with management. Based on the review and discussions, we recommend to the Board of Directors that the Compensation Discussion and Analysis be included in the proxy statement.

 

 

The Compensation Committee

 

Donald T. Duke, (Chair)Chairman

 

Robert D. Hisrich

 

Edward F. Keller

9


 

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

 

None of the members of the Compensation Committee of our Board is an officer or employee of the Company.       Mr. Siegenthaler, a non-voting member of the Compensation Committee was formerly an executive vice president of the Company during the 1990s.1990’s.

 

No executive officer of the Company serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on our Compensation Committee.

 

EXECUTIVE OFFICERS

 

Our executive officers are as follows:

 

Name

 

Positions with Company

 

Age

Greg D. Forrest

 

Chief Executive Officer and President

 

4647

Robert B. Wagner

 

Chief Financial Officer Executive Director of
Operations and Secretary

 

4647

 

9


Mr. Forrest was appointed our Chief Executive Officer (“CEO”) on June 7, 2007. He has been our President since July 2005 and also served as our Chief Operating Officer from July 2005 until he became CEO. Previously he was Director of Sales over our Seattle branch sales and service operations. Mr. Forrest joined XETA in August 2004 upon our acquisition of Bluejack Systems, LLC, a company which he founded, owned and served as CEO. Prior to founding Bluejack, Mr. Forrest founded and operated several fast-growing companies in the communications, clothing and commercial interior industries. He attended the University of Washington.

 

Mr. Wagner joined us in July 1988 as Chief Accounting Officer and becamehas been our Chief Financial Officer insince March 1989.1989 and was our Chief Accounting Officer for nearly eleven years prior to that. He assumed the duties of Executive Director of Operationshas served on January 2, 2007.  He was a member of our Board of Directors from March 1996 until April 2004. Mr. Wagner is a certified public accountant licensed in Oklahoma and received his bachelorBachelor of scienceScience degree in accounting from Oklahoma State University.

 

EXECUTIVE COMPENSATION

 

Summary Compensation Table

 

The following table presents information regarding compensation of each of the Company’s named executive officers for services rendered in fiscal 2007.2008.

 

Name & Principal Position

 

FY

 

Salary
$

 

Bonus
$

 

Stock
Awards
$

 

Option
Awards
$ (1)

 

Non-Equity
Incentive Plan
Compensation
$

 

All Other
Compensation
$ (2)

 

Total
$

Greg Forrest

 

2007

 

189,388

 

50,000

 

—

 

32,213

 

—

 

22,301

 

293,902

Chief Executive Officer and President

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Jack Ingram

 

2007

 

76,000

 

—

 

—

 

—

 

—

 

13,395

 

89,395

Chief Executive Officer (3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Robert Wagner

 

2007

 

125,019

 

50,000

 

—

 

17,146

 

—

 

5,887

 

198,052

Chief Financial Officer and Executive
Director of Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Chief Executive Officer and President

 

FY

 

Salary 
$

 

Bonus 
$

 

Stock 
Awards 
$

 

Option 
Awards 
$(1)

 

Non-Equity 
Incentive Plan 
Compensation 
$

 

All Other
 Compensation 
$(2)

 

Total 
$

 

Greg Forrest

 

2008

 

203,939

 

53,925

 

—

 

64,531

 

—

 

25,682

 

348,076

 

Chief Executive Officer and President

 

2007

 

189,388

 

50,000

 

—

 

32,213

 

—

 

22,301

 

293,902

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Robert Wagner

 

2008

 

144,039

 

49,050

 

1,949

 

35,462

 

—

 

10,670

 

241,169

 

Chief Financial Officer

 

2007

 

125,019

 

50,000

 

—

 

17,146

 

—

 

5,887

 

198,052

 

 

(1)                            The expense for options awards above was computed in accordance with Statement of Financial Accounting Standards No. 123R (“SFAS 123R”).  For a discussion on the assumptions and methodologies used to value the option awards granted in fiscal 2007, please see the discussion in the “Grants of Plan-based Awards” table presented below.

(2)                            The following table provides detail for the aggregate amount under “All Other Compensation” for each of the executive officers:

The expense for options awards above were computed in accordance with Statement of Financial Accounting Standards No. 123R (“SFAS 123R”). The options represented in the table above were valued using the Black Scholes valuation method using the assumptions presented in the table below. The expected life of the option was based on the Company’s experience that NEO’s generally hold options until near their expiration date.

 

 

 

 

FY

 

Expected  
Life

 

Expected  
Volatility

 

Risk Free  
Rate of  
Return

 

Dividend  
Yield

 

 

 

 

 

2008

 

6 1/2

 

74.3697

%

4.725

%

0.0

%

 

 

 

 

2007

 

5 1/2

 

68.6571

%

3.550

%

0.0

%

 

 

 

 

2006

 

4 1/2

 

73.5095

%

4.570

%

0.0

%

 

 

(2)

The following table provides detail for the aggregate amount under “All Other Compensation” for each of the executive officers:

 

 

FY

 

401(k) 
Matching 
Contributions

 

Unused 
Vacation 
Time Paid

in Cash

 

Car 
Allowance

 

Other 
Perquisites

 

Total 
$

 

Mr. Forrest

 

2008

 

10,580

 

8,602

 

6,500

 

—

 

25,682

 

 

 

2007

 

6,205

 

—

 

3,000

 

13,096

(a)

22,301

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mr. Wagner

 

2008

 

5,862

 

4,808

 

—

 

—

 

10,670

 

 

 

2007

 

5,887

 

—

 

—

 

—

 

5,887

 

(a)

In fiscal 2007, the Company paid for landscaping valued at $10,230 at Mr. Forrest’s private residence to enable the Company to hold a series of customer marketing and investor relations events at his home during the PGA

 

10


 

 

 

FY

 

401(k)
Matching
Contributions

 

Unused
Vacation
Time Paid
in Cash

 

Car
Allowance

 

Other
Perquisites

 

Total
$

Mr. Forrest

 

2007

 

6,205

 

—

 

3,000

 

13,096

(a)

22,301

 

 

 

 

 

 

 

 

 

 

 

 

 

Mr. Ingram

 

2007

 

4,164

 

9,231

 

—

 

—

 

13,395

 

 

 

 

 

 

 

 

 

 

 

 

 

Mr. Wagner

 

2007

 

5,887

 

—

 

—

 

—

 

5,887

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)The Company paid for landscaping valued at $10,230 at Mr. Forrest’s private residence to enable the Company to hold a series of customer marketing and investor relations events at his home during the 2007 PGA Championship.championship. The value of the landscaping was based on the amount paid by the Company to the vendor. Subsequent to the PGA event, the Company purchased certain catering and entertaining supplies from Mr. Forrest for use by the Company at similar events in the future. The personal benefit received by Mr. Forrest from use of these items is included in this column and valued at 10% of the original cost paid to vendors for the supplies as evidenced by receipts.  The last component of this column is an amount the Company reimbursed Mr. Forrest for professional services provided to him by his personal accountant.

 

(3)                            Mr. Ingram was our CEO until he resigned on June 7, 2007.  Prior to his resignation, Mr. Ingram’s annual base salary was $120,000.

Grants of Plan-Based Awards

 

The following table presents information regarding the incentive awards granted to the Company’s named executive officers during fiscal year 2007.2008.

 

 

Grant
Date

 

Estimated Future Payouts
Under Non-Equity
and Equity
Incentive Plan Awards

 

All Other
Option
Awards:
Number of
Shares of
Stock
(#)

 

Exercise
Price of
Option
Awards
($/Sh)

 

Grant
Date
Fair
Value of
Option
Awards (b)

 

Grant 
Date

 

Estimated Future Payouts 
Under Non-Equity 
and Equity 
Incentive Plan Awards

 

All Other 
Option 
Awards: 
Number of 
Shares of 
Stock 
(#)

 

Exercise 
Price of 
Option 
Awards 
($/Sh)

 

Grant 
Date 
Fair 
Value of 
Option 
Awards (b)

 

Mr. Forrest

 

7/5/2007

 

(a)

 

40,000

 

$

3.25

 

$

89,576

 

12/5/2007

 

(a)

 

20,000

 

$

4.14

 

$

49,500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mr. Ingram

 

—

 

(a)

 

—

 

$

—

 

$

—

 

 

 

 

 

 

 

 

 

 

Mr. Wagner

 

7/5/2007

 

(a)

 

25,000

 

$

3.25

 

$

55,985

 

12/5/2007

 

(a)

 

10,000

 

$

4.14

 

$

24,750

 

 

(a)The Company’s non-equity and equity incentive award plans are described under “Elements of Executive Compensation” in the Compensation Discussion and Analysis above.  On December 1, 2006, the Compensation Committee granted cash bonuses to Mr. Forrest, Mr. Ingram, and Mr. Wagner of $20,000 each.  These bonuses were distributed in quarterly installments in January, April, July, and October of 2007.

(b)The grant date fair value was calculated using the Black Scholes valuation method.  In computing the fair value, the Company used an expected option life of 6½ years, a risk free rate of return of 4.725%, an expected volatility of 74%, and a dividend yield of 0%.  No turnover was assumed in calculating the fair value of shares granted to the named executive officers.  The expected option life was based on the Company’s experience that NEO’s generally hold options until near their expiration date.

11


(a)

 

The Company’s non-equity and equity incentive award plans are described under “Elements of Executive Compensation” in the Compensation Discussion and Analysis above. On December 5, 2007, the Compensation Committee granted cash bonuses to Mr. Forrest and Mr. Wagner of $50,000 each. These bonuses were paid on January 11, 2008.

(b)

The grant date fair value was calculated using the Black Scholes valuation method and employing the assumptions provided above as part of the “Summary Compensation Table”.

 

Outstanding Option Awards at Fiscal 20072008 Year-End

 

The following table presents information regarding the outstanding equity awards held by each of the named executive officers as of October 31, 2007.2008.

 

 

Number
of Securities
Underlying
Unexercised
Options (#)
Exercisable

 

Number
of Securities
Underlying
Unexercised
Options (#)
Unexercisable

 

Option
Exercise
Price
($)

 

Option
Expiration
Date

 

 

Number 
of Securities 
Underlying 
Unexercised 
Options (#) 
Exercisable

 

Number 
of Securities 
Underlying 
Unexercised 
Options (#) 
Unexercisable

 

Option 
Exercise 
Price 
($)

 

Option 
Expiration 
Date

 

Mr. Forrest

 

—

 

40,000

(1)

$

2.95

 

10/19/2011

 

 

—

 

40,000

(1)

$

2.95

 

10/19/2011

 

 

—

 

40,000

(2)

$

3.25

 

07/05/2014

 

 

—

 

40,000

(2)

$

3.25

 

07/05/2014

 

 

 

 

 

 

 

 

 

 

 

—

 

20,000

(3)

$

4.14

 

12/05/2013

 

Mr. Ingram

 

35,000

 

—

 

$

3.63

 

10/31/2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mr. Wagner

 

26,000

 

—

 

$

4.38

 

01/02/2008

 

 

12,000

 

—

 

$

18.13

 

04/16/2010

 

 

12,000

 

—

 

$

18.13

 

04/16/2010

 

 

25,000

 

—

 

$

3.63

 

10/31/2011

 

 

25,000

 

—

 

$

3.63

 

10/31/2011

 

 

—

 

20,000

(1)

$

2.95

 

10/19/2011

 

 

—

 

20,000

(1)

$

2.95

 

10/19/2011

 

 

—

 

25,000

(2)

$

3.25

 

07/05/2014

 

 

—

 

25,000

(2)

$

3.25

 

07/05/2014

 

 

—

 

10,000

(3)

$

4.14

 

12/05/2013

 

(1)                            These awards vest in one installment on October 19, 2009.

 

(2)                            These awards vest in one installment on January 5, 2011.

 

(3)                            These awards vest in one installment on December 5, 2010.

11


COMPENSATION OF DIRECTORS

 

We changed the compositionpay our non-employee directors an annual fee of director compensation during fiscal 2007 when we separated the roles of$25,000 for their services. In addition, our Chairman of the Board and Chief Executive Officer as of July 1, 2007.  Since then, the standard annual feeis paid to non–employee directors for their services is $25,000.  The Chairman of the Board receives an additional annual fee of $55,000 annually and committee chairmen receiveare paid an additional annual fee of $16,000 annually for each chairmanship. Presently Mr. Duke serves as chairman of the Audit and Compensation committees,committee, but has waived the fee for these services.  Prior to July 2007, our directors received an annual fee of $9,600 for board membership, $8,000 annually for committee service, and $16,000 annually for chairing a committee.this service. All fees are paid monthly. We also reimburse our non-local directors their reasonable travel expenses to attend Board and Committee meetings and the annual shareholder meeting.

 

It has also been the Company’s practice on occasion to grant stock options to its outside directors, typically upon their election or appointment to the Board. Options (noted in the table below) were granted during fiscal 20072008 to Mr. KellerCrawley and Mr. Devenuti upon histheir election to the Board and to Mr. Duke upon his appointment as Chairman of the Board.

12


 

The following table presents information regarding the compensation of non-executive directors during fiscal 2007.2008.

 

 

Fees Earned 
or Paid 
in Cash 
$

 

 Option 
Awards 
($) (1)

 

All 
Other 
Compensation 
($)

 

Total 
$

 

Mr. Duke

 

80,000

 

27,966

(2)

—

 

107,966

 

Chairman of the Board

 

 

 

 

 

 

 

 

 

Chairman, Compensation Committee

 

 

 

 

 

 

 

 

 

 

Fees
Earned
or Paid
in Cash
$

 

Option
Awards
($)

 

All
Other
Compensation
($)

 

Total
$

 

 

 

 

 

 

 

 

 

 

Mr. Barber

 

14,733

 

—

 

10,795

(3)

25,529

 

 

12,500

 

—

(3)

—

 

12,500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mr. Duke

 

66,935

 

9,076

(1)

—

 

76,011

 

Chairman of the Board

 

 

 

 

 

 

 

 

 

Chairman, Audit & Compensation Committees

 

 

 

 

 

 

 

 

 

Mr. Crawley

 

25,417

 

6,518

(4)

—

 

31,935

 

Chairman, Audit Committee

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mr. Devenuti

 

20,500

 

3,626

(5)

—

 

24,126

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dr. Hisrich

 

25,400

 

—

 

—

 

25,400

 

 

25,000

 

—

(6)

—

 

25,000

 

Member, Audit & Compensation Committees

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mr. Keller

 

23,917

 

3,473

(2)

—

 

27,390

 

 

41,000

 

6,055

(7)

—

 

47,055

 

Chairman, Nominating Committee

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Member, Audit & Compensation Committees

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mr. Siegenthaler

 

41,397

 

—

 

8,333

(4)

49,731

 

 

25,000

 

—

(8)

25,000

(8)

50,000

 

Member, Nominating Committee

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)                      Upon his appointment as non-executive Chairman of the Board, Mr. Duke was awarded options for 25,000 shares of common stock which vest in two equal installments on July 2,

(1)

Total option-related expense recognized for financial reporting purposes for the fiscal year ended October 31, 2008 and 2009, respectively.  Mr. Duke’s option was granted at the strike price of $3.25 per share, the market value of the stock at the time of grant and expires on July 5, 2014.  The dollar amount shown reflects the total option-related expense recognized for financial reporting purposes for the fiscal year ended October 31, 2007 in accordance with Statement of Financial Accounting Standards No. 123R (“SFAS 123R”), assuming no forfeitures.

(2)

Upon his appointment as non-executive Chairman of the Board, Mr. Duke was awarded options for 25,000 shares of common stock with vesting in two equal installments on July 2, 2008 and 2009, respectively. Mr. Duke’s option was granted at the strike price of $3.25 per share, the market value of the stock at the time of grant and expires on July 5, 2014. The grant date fair value of this award calculated in accordance with FAS 123(R) was $2.24 per share. Mr. Duke holds options to purchase 30,000 shares of common stock as of October 31, 2008.

(3)

Mr. Barber resigned from the Board effective April 30, 2008. Mr. Barber holds options to purchase 13,000 shares of common stock as of October 31, 2008.

(4)

Mr. Crawley holds one option for 10,000 shares of common stock which was granted to him upon his appointment to the Board on February 1, 2008. The option vests on February 1, 2011 and has a strike price of $4.30, the market value of the stock at the time of grant and expires on February 1, 2014. The grant date fair value of this award calculated in accordance with FAS 123(R) was $2.61 per share.

(5)

Mr. Devenuti holds one option for 10,000 shares of common stock which was granted to him upon his appointment to the Board on May 1, 2008. The option vests on May 1, 2011 and has a strike price of $3.55, the market value of the stock at the time of grant and expires on May 1, 2014. The grant date fair value of this award calculated in accordance with FAS 123(R) was $2.61 per share.

 

(2)                      Upon his election to the Board at the annual meeting on April 3, 2007, Mr. Keller was granted an option for 10,000 shares of common stock vesting on April 5, 2010.  Mr. Keller’s option was granted at the strike price of $3.12, the market value of the stock at the time of grant and expires on April 5, 2012.  The dollar amount shown reflects the total option-related expense recognized for financial reporting purposes for the fiscal year ended October 31, 2007 in accordance with Statement of Financial Accounting Standards No. 123R (“SFAS 123R”), assuming no forfeitures.12


 

(3)                      Prior to July 2007, Mr. Barber received an annual fee of $15,000, paid monthly, to serve as an adviser  to the audit committee.

(4)                      Effective July 1, 2007, Mr. Siegenthaler was appointed as a special liaison between the Board and the Company’s executive officers and management.  Mr. Siegenthaler is responsible to the Board for engaging with management and employees on behalf of the Board as appropriate, in all areas of the Company’s operations. Mr. Siegenthaler receives an annual fee of $25,000, paid monthly, to serve in this capacity.

(6)

Dr. Hisrich holds options to purchase 13,000 shares of common stock as of October 31, 2008.

(7)

Mr. Keller holds one option for 10,000 shares of common stock which was granted to him after his election to the Board at the annual meeting on April 3, 2007. The option vests on April 5, 2010 and has a strike price of $3.12, the market value of the stock at the time of grant and expires on April 5, 2012. The grant date fair value of this award calculated in accordance with FAS 123(R) was $1.81 per share.

(8)

Mr. Siegenthaler serves as a special liaison between the Board and the Company’s executive officers and management. Mr. Siegenthaler is responsible to the Board for engaging with management and employees on behalf of the Board as appropriate, in all areas of the Company’s operations. Mr. Siegenthaler receives an annual fee of $25,000, paid in monthly installments, to serve in this capacity. Mr. Siegenthaler holds options to purchase 13,000 shares of common stock as of October 31, 2008.

 

RELATED TRANSACTIONS

 

Mr.Ron Barber was a member of our Board of Directors during the 2008 fiscal year until his resignation from the Board on April 30, 2008. He is a principal shareholder in the law firm of Barber & Bartz, a Professional Corporation, which serves as outside general counsel to the Company. During the fiscal year ended October 31, 2007,2008, the Company paid legal fees to Barber & Bartz in the approximate amount of $133,165.$257,560. Mr. Barber was also paid $10,795$12,500 during the fiscal year for serving in his individual capacity as an advisory roleadvisor to the Audit Committee.

 

Related Transactions Policy. We have adopted a written policy for the approval or ratification of “related person transactions.” For purposes of our policy, related person transactions include any transaction, arrangement or relationship expected to exceed $120,000 in any calendar year which involves the Company and any officer, director, director nominee, or persons who own in excess of 5% of the Company’s stock, or any of their respective family members. The policy requires officers and directors to annually complete a Company questionnaire designed to elicit information about potential related person transactions. Under the Company’s Corporate Code of Conduct

13


applicable to all officers and directors, such persons have a duty to disclose potential conflicts of interest to the Company’s Chief Executive or Chief Financial Officer or to the Board. When related person transactions or potential transactions are identified by these or any other method, they are referred for review to the Nominating and Governance Committee if the transaction involves a director, or to the Audit Committee in all other cases.

 

The policy requires the appropriate Committee to take into account the extent of the related person’s interest in the transaction; the benefits of the transaction to the Company; whether the terms of the transaction are no less favorable than could be obtained in arm’s–lengtharm’s-length dealings with an unrelated third party under similar circumstances; the aggregate value of the transaction; whether the transaction involves a conflict of interest; the impact the transaction could have on the independence of a director if it involves a director or an immediate family member of the director; as well as any other factors that the Committee deems appropriate to its review.

 

On-going related person transactions are subject to annual review under the policy. The policy also provides standing pre-approvals for the following transactions:

 

·                  compensation paid to an officer or director if approved by the Compensation Committee;

·                  grants of equity awards to any executive officer or director if made under the Company’s existing equity plans or future plans that receive shareholder approval;

·                  interests that arise solely from participation in a Company employee benefit plan that is maintained for the general benefit of all Company employees;

·                  interests that arise solely from stock ownership if all other owners benefit pro rata; and

·                  any transaction with another company if the related person’s only relationship with that company is as a non-officer employee, director or owner of less than 10% of that company.

13


PROPOSAL 2

APPROVAL OF STOCK OPTION EXCHANGE PROGRAM

Overview of Proposal

On January 22, 2009, our Board directed our Compensation Committee to develop an option exchange program that would re-invigorate our option program as a meaningful incentive and retention tool for executives and other key employees. On February 3, 2009 our Compensation Committee approved, subject to stockholder approval, the exchange of certain outstanding stock options held by current employees (“Eligible Employees”), including executive officers, for a smaller number of new options. The options included in the proposed program are those options that have an exercise price between $2.95 and $4.14 and are scheduled to expire in October, 2011 or later (the “Eligible Options”). Former employees and non-employee directors are not eligible to participate in the program. Participation in the program by Eligible Employees is voluntary.

The number of new stock options would be determined using exchange ratios designed to result in the new stock options having a fair value approximately equal to the stock options that are exchanged. The option exchange program would also be virtually expense neutral from an accounting perspective.

Stockholder approval of the option exchange program applies only to the stock option exchange program described in this proxy statement. If the Company were to implement a different stock option exchange program in the future, it would once again need to seek shareholder approval.

Reasons for the Exchange Program

Stock option grants are a critical component of our compensation philosophy, the focal point of which is to increase long-term shareholder value. We believe stock options help us achieve this objective in several important ways: by aligning the employees’ interests with those of our shareholders; by motivating employees’ performance toward our long term success; and, through the use of options with multi-year vesting periods, by encouraging our executives and employees who have received option grants to continue their employment with us.

Despite our improved financial performance during the past two fiscal years, our stock price has declined, primarily because of an overall stock market downturn and macro economic conditions. Presently, approximately 92% of our outstanding stock options are “underwater,” which includes 124,700 options (or 8.9% of the total options outstanding) held by current employees with exercise prices between $9.06 and $18.13. This means that the vast majority of our historically granted stock options have little or no perceived value to the employees who hold them and are therefore no longer effective as incentives to motivate and retain these employees.

Our Board of Directors believes that it is critical to our future success to revitalize the incentive value of our stock option program to retain employees and create in them a personal stake in the long term financial success of the Company. The Board believes that without the proper balance between the long term components of our compensation structure (i.e., equity awards) and its short term components (i.e., salary and bonus), key employees are not properly motivated to align their interests with those of the stockholders and work toward reward for their contributions based upon increases in share value. The Board also recognizes the competition in our industry to attract and recruit top talent. The Board believes that it has a responsibility to address these issues and to properly incentivize our key employees. Consequently, the Board has proposed the option exchange program described below.

Eligible Options

The Eligible Options are those options outstanding under our stock option plans that have an exercise price between $2.95 and $4.14. These options cover 388,400 shares and represent only 28% of the Company’s total outstanding stock options. The number of employees holding Eligible Options as of January 30, 2009 was 149. Of the total number of Eligible Options, 180,000 or 46% are held by our two executive officers.

As of January 30, 2009, there were a total of 1,402,800 outstanding stock options under our equity compensation plans. Ninety-two percent (92%) of these options are underwater. A large number of these options are held by current employees and some have exercise prices ranging from as high as $9.06 to $18.13. Nevertheless, options with exercise prices of $4.15 or greater are being excluded from the proposed exchange program because the Board of Directors determined the extent to which these options

14


are underwater, coupled with their relatively short remaining contractual lives of less than two and one-half years, results in their having negligible value in an option exchange.

Of the Eligible Options, 103,100 were granted under our 2000 Stock Option Plan and 285,000 were granted under our 2004 Omnibus Stock Incentive Plan.  Both the 2000 Stock Option Plan and the 2004 Omnibus Stock Plans are qualified plans as that term is defined in the Internal Revenue Code.

Exchange Ratios

In working with our Compensation Committee to develop a stock option exchange program pursuant to the Board’s direction, Company management hired CBIZ Valuation Group LLC to provide a valuation analysis of the Eligible Options.  This analysis was used to assist in the determination of the value of the options relative to the replacement options.  The exchange ratios for the option exchange program—that is, how many current options a participating employee must surrender in order to receive one new option—were (and will be if the program is approved by the stockholders) determined using the Black Scholes option valuation model. This is the same valuation method we have used to value outstanding options for accounting purposes when expensing them.

The actual exchange ratio will be determined at the time the exchange program commences.  Our intent is to establish exchange ratios that will result in the issuance of replacement options with a fair value equal to (or less than) the fair value of the stock options surrendered in the exchange program.  The option exchange proposed will be cost neutral to the Company.

Under the proposed exchange program, Eligible Employees will be given the opportunity to exchange their stock options that have an exercise price between $2.95 and $4.14 and an expiration date of October 2011 or later, for new stock options to purchase a fewer number of shares.  The ratio of old options surrendered to new options granted will vary depending upon the exercise price of the surrendered options, as illustrated in the table below.  Assuming that 100% of Eligible Employees participate in the exchange program and applying the exchange ratios described below, options covering 388,100 shares would be surrendered and cancelled, while new options covering 227,117 shares would be issued, resulting in a net reduction of 160,983 shares subject to outstanding awards or approximately 11% of all outstanding options.

The table below reflects information on the Eligible Options and the exchange ratio as of January 30, 2009:

Strike
Price

 

Options
to be
Exchanged

 

Fair Value
of Option
to be
Surrendered

 

Fair Value
of Option
to be
Issued

 

Exchange
Rate

 

New
Options
Issued

 

Net
Reduction
in Overhang
as of
1/30/2009

 

$

2.95

 

153,898

 

$

0.530

 

$

1.000

 

1.8868

 

81,566

 

5.2

%

$

3.25

 

56,446

 

$

0.750

 

$

1.000

 

1.3333

 

42,335

 

1.0

%

$

3.63

 

103,400

 

$

0.570

 

$

1.000

 

1.7544

 

58,938

 

3.2

%

$

4.14

 

60,000

 

$

0.580

 

$

1.000

 

1.7241

 

34,800

 

1.8

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

373,744

 

Blended Exchange Rate

 

1.7173

 

217,639

 

11.1

%

Program Participation

Because the decision whether to participate in the stock option exchange program is completely voluntary, we are not able to predict who or how many Eligible Employees will elect to participate, how many stock options will be surrendered for exchange, or the number of new options that may be issued.

15


Implementing the Stock Option Exchange Program

If stockholders approve the option exchange program, the program may be commenced at any time within six (6) months following stockholder approval, as determined by the Compensation Committee. Even if the shareholders approve the stock option exchange program, the Board of Directors will retain the authority, in its sole discretion, to terminate or postpone the program at any time prior to the closing of the actual exchange offer to Eligible Employees (described below), or to exclude certain options or Eligible Employees from participating in the stock option exchange program due to tax, regulatory or accounting reasons or because their participation would be inadvisable or impractical.

Upon commencement of the option exchange program, Eligible Employees will be offered the opportunity to participate in the exchange under a Tender Offer Statement to be filed by us with the SEC and distributed to all Eligible Employees. Employees will be given at least twenty (20) business days in which to accept the offer of the new options in exchange for the surrender of their Eligible Options. The surrendered options will be cancelled on the first business day following this election period. The new options will be granted on the date of cancellation of the old options and will have an exercise price at least equal to the fair market value of our common stock on the date of grant of such new options.  Surrendered options will be returned to their respective plans (either the 2000 Stock Option Plan or the 2004 Omnibus Stock Incentive Plan, as applicable) and will be available for future grant under such plans.

If on the date that the exchange program commences, the holder of Eligible Options is no longer an employee of the Company for any reason (including layoff, termination, voluntary resignation, death or disability), that person will not be entitled to participate in the program. An employee who elects to participate in the program and tenders his or her options for exchange must also continue to be employed with the Company on the date of the new grant in order to receive the new options.

A vote by an employee in favor of this proposal at the Annual Meeting does not constitute an election to participate in the exchange program.

Description of New Options Issued in Exchange

Exercise Price of New Options.  All new options issued in the exchange program will be granted with an exercise price at least equal to the fair market value of our common stock on the date of grant of the new option.

Vesting of New Options.  New options granted in the exchange program will vest beginning one year from the date of grant of the new option.  This means that Eligible Employees who elect to participate in the exchange program must complete an additional year of service to the Company before their new options would be exercisable, regardless of whether the old options surrendered were partially or wholly vested.  All new options granted under the exchange program will vest 50% at the end of the first year and 25% each at the end of the second and third years from the date of grant.

Term of New Options.  Each of the new options will have an expiration date that is six years from the date of grant.

Other Conditions of New Options.  The new options will be subject to the terms and conditions of either the Company’s 2000 Stock Option Plan or the 2004 Omnibus Stock Incentive Plan, depending upon the plan under which the new option is granted.   New option grants calculated according to the exchange ratios will be rounded down to the nearest whole share on a grant-by-grant basis.  New options will not be issued for fractional shares.

U.S. Federal Income Tax Consequences

The exchange of options pursuant to the exchange program should be treated as a non-taxable event for U.S. federal income tax purposes.  No income should be recognized for U.S. federal income tax purposes by either the Company or participating employees upon the cancellation of surrendered options and the grant of new options in the exchange.  All new options granted under the option exchange program will be qualified stock options for U.S. federal income tax purposes.

16


Accounting Impact

The intent of the program is that it will not result in the Company incurring any additional compensation expense.  Based on this objective, the average fair value of each new stock option granted to employees in exchange for surrendered stock options, measured as of the date such awards are granted, will be “cost neutral” (other than immaterial incremental compensation expense that might result from fluctuations in our stock price after the exchange ratios have been set but before the exchange actually occurs). The unamortized compensation expense from the surrendered options and incremental compensation expense, if any, associated with the new options granted under the exchange program will be recognized over the service period of the new options.  If any portion of the new options granted is forfeited prior to the completion of the service condition due to termination of employment, the compensation cost for the forfeited portion of the award will not be recognized.

Potential Modification to Terms to Comply with Governmental Requirements

The terms of the option exchange program will be described in a Tender Offer Statement that we will file with the SEC. Although we do not anticipate that the SEC would require us to modify the terms materially, it is possible that we will need to alter the terms of the option exchange to comply with potential SEC comments.

Effect on Stockholders

The option exchange program is designed to provide renewed incentives and motivate Eligible Employees to continue to create stockholder value and reduce the number of shares currently subject to outstanding options, thereby avoiding the dilution in ownership that normally results from supplemental grants of new stock options. While we cannot predict which or how many employees will elect to participate in the exchange program, please see the “Exchange Ratios” section above for the approximate reduction of the number of shares underlying options outstanding assuming that 100% of Eligible Options are exchanged and replacement option grants are made in accordance with the exchange ratios set out above.

Required Vote

The affirmative vote of a majority of the shares represented and entitled to vote on this proposal at the Annual Meeting is required to approve the stock option exchange program.

Recommendation of the Board of Directors

Our Board of Directors has unanimously approved the stock option exchange program outlined above and recommends that you vote FOR Proposal 2.

 

PROPOSAL 23

INDEPENDENT PUBLIC ACCOUNTANTS

 

The Audit Committee has selected HoganTaylor, LLP (“HoganTaylor”), formerly known as Tullius Taylor Sartain & Sartain LLP (“TTSS”), as the independent public accountants to perform an integrated audit of the Company’sour financial statements for the fiscal year ending October 31, 2009.  TTSS audited the Company’s financial statements for the fiscal year ended October 31, 2008 and 2007.

TTSS became HoganTaylor on January 7, 2009, when TTSS, our independent registered public accounting firm, and Hogan & Slovacek, P.C. merged their operations to become HoganTaylor, LLP.  At that time the respective employees, partners and shareholders of the merged firms became employees and partners of HoganTaylor, which has continued the practices of each of the merged firms and has assumed the role as our independent registered public accounting firm.  Representatives of TTSSHoganTaylor are expected to be present at the Annual Meeting with the opportunity to make a statement if they desire to do so and to respond to appropriate questions.  While ratification of the Company’s selection of accountants by the Company’s shareholders is not required, in the event of a negative vote on such ratification, the Company’s Audit Committee will reconsider its selection.  Even if the selection is ratified, the Audit Committee in its discretion may change the appointment at any time during the year if it determines that such change would be in the best interests of the Company and its shareholders.  TTSS audited the Company’s financial statements for the fiscal years ended October 31, 2007 and 2006.

 

17


The Board of Directors unanimously recommends that shareholders vote “FOR” the appointment of Tullius Taylor Sartain & SartainHoganTaylor LLP as the Company’s independent public accountants.

 

Audit Fees and Services

 

The following table sets forth the fees for professional services rendered during fiscal 20072008 and fiscal 20062007 by the Company’s registered public accounting firm, HoganTaylor (formerly known as Tullius Taylor Sartain & Sartain LLP:

Sartain):

 

 

Fiscal 2008

 

Fiscal 2007

 



 


Fiscal 2007

 


Fiscal 2006

 

 

 

 

 

 

Audit Fees(1)

 

$

87,000

 

$

83,500

 

 

$

89,000

 

$

87,000

 

Audit-Related Fees(2)

 

7,000

 

7,000

 

 

19,750

 

7,000

 

Tax Fees

 

—

 

—

 

 

—

 

—

 

All Other Fees

 

—

 

—

 

 

—

 

—

 

(1)        Includes audit of our annual financial statements and review of our quarterly reports on Form 10–Q,10-Q, as well as services that are normally provided by the Company’s independent registered public accounting firm in connection with statutory and regulatory filings or engagements and services that generally only the independent registered public accounting firm can reasonably provide, such as comfort letters,

statutory audits, attest services, consents and assistance with and review of documents filed with the SEC.

 

(2)         Relates to the audit of the Company’s 401(k) retirement plan.plan and analysis of the FASB Interpretation No. 48 clarifying certain aspects of accounting for uncertain tax positions, including issues related to the disclosure, recognition and measurement of those tax positions.

14


 

The Audit Committee of the Board of Directors has established a written policy to pre-approve audit and non-audit related services to be provided by the Company’s independent auditor prior to engaging the auditor for such purposes.  Pursuant to the policy, the Audit Committee will annually review the services and fees that the auditor may provide to the Company during the following 12 months.  Following such review, the Committee will issue a statement to the Company’s Chief Financial Officer as to the general services and fees that the Committee has pre–approved.pre-approved.  The pre-approval generally extends for a period of 12 months or such shorter period as may be specifically indicated by the Committee.  All other services to be performed by the auditors that are not included in the Committee’s annual pre-approval statement must be submitted to the Committee in advance for specific approval.

 

REPORT OF AUDIT COMMITTEE

 

January 4, 200822, 2009

 

To the Board of Directors of XETA Technologies, Inc.:

 

The Audit Committee oversees XETA’s financial reporting process on behalf of the Board of Directors.  Management has the primary responsibility for the financial statements and the reporting process including the systems of internal controls.  We have reviewed and discussed with management and with the independent auditors the Company’s audited financial statements as of and for the year ended October 31, 2007.2008.

 

We have discussed with the independent auditors the matters required to be discussed by Statement on Auditing Standards No. 61, Communication with Audit Committees, as amended, by the Auditing Standards Board of the American Institute of Certified Public Accountants.

 

We have received and reviewed the written disclosures and the letter from the independent auditors required by

18


Independence Standard No. 1—Independence Discussions with Audit Committees—as amended, by the Independence Standards Board, and have discussed with the auditors the auditors’ independence.

 

Based on the reviews and discussions referred to above, we recommend to the Board of Directors that the financial statements referred to above be included in the Company’s Annual Report on Form 10-K for the year ended October 31, 2007.2008.

 

The Audit Committee,

 

S. Lee Crawley, Chairman

Donald T. Duke Chairman

Robert D. Hisrich

Edward F. Keller

15


 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The following table sets forth certain information known to the Company as of February 14, 200817, 2009 regarding beneficial ownership of the Company’s Common Stock, par value $.001 per share, by (a) each person known by the Company to own more than five percent (5%) of the Company’s Common Stock, (b) each director and nominee for election as a director of the Company, (c) each executive officer named in the Summary Compensation Table, and (d) all directors and executive officers of the Company as a group.

 

 

 

Amount and Nature

 

 

 

Name and Address
of Beneficial Owner(1)

 

of Beneficial
Ownership(2)

 

Percent of
Class

 

 

 

 

 

 

 

Directors, Director Nominees
and Executive Officers

 

 

 

 

 

 

 

 

 

 

 

Ronald L. Siegenthaler
P.O. Box 571300
Tulsa, OK74157

 

1,117,003

(3)

10.88

%

 

 

 

 

 

 

Ron B. Barber

525 S. Main Street, Suite 800
Tulsa, OK74103

 

118,472

 

1.15

%

 

 

 

 

 

 

Greg D. Forrest

 

103,160

(4)

1.00

%

 

 

 

 

 

 

Robert B. Wagner

 

72,075

(5)

 

 

 

 

 

 

 

 

Dr. Robert D. Hisrich
15249 North 59th Ave.
Glendale, AZ 85306

 

56,550

 

 

*

 

 

 

 

 

 

Donald T. Duke
1505 Vandivort
Edmond, OK 73034

 

54,500

 

 

*

 

 

 

 

 

 

Ed Keller
5314 S. Yale, Suite 205
Tulsa, OK 74135

 

11,600

 

0

 

 

 

 

 

 

 

S. Lee Crawley
2431 E. 51st St., Suite 600
Tulsa, OK 74103

 

0

 

0

 

 

 

 

 

 

 

All officers and directors as a group

 

1,533,158

 

14.79

%

 

 

 

 

 

 

(8 persons)

 

 

 

 

 

 

 

 

 

 

 

Others Known to Own 5%

 

 

 

 

 

 

 

 

 

 

 

Patara Capital LP
5050 Quorum Drive, Suite 312
Dallas, TX 75254

 

616,000

(6)

6.00

%

 

 

 

 

 

 

William M. Sams
750 North St. Paul, Suite 1650
Dallas, TX 75201

 

570,000

(7)

5.56

%

 

 

 

 

 

 

Deanna K. Ingram

7777 S. Jamestown

Tulsa, OK  74135

 

518,579

(8)

5.06%

 

 

 

 

 

 

 

Jon A. Wiese

11509 S. Granite Ave.

Tulsa, OK  74137

 

580,000

(9)

5.66%

 

 

 

Amount and Nature

 

 

 

Name and Address

 

of Beneficial

 

Percent of

 

of Beneficial Owner(1)

 

Ownership(2)

 

Class

 

 

 

 

 

 

 

Directors, Director Nominees and Executive Officers

 

 

 

 

 

 

 

 

 

 

 

Ronald L. Siegenthaler

 

 

 

 

 

8716 S. Peoria

 

 

 

 

 

Tulsa, OK 74132

 

1,122,003

(3)

10.96

%

 

 

 

 

 

 

Ozarslan Tangun

 

552,351

(4)

5.4

%

5050 Quorum Drive, Suite 312

 

 

 

 

 

Dallas, TX 75254

 

 

 

 

 

 

 

 

 

 

 

Greg D. Forrest

 

117,774

(5)

1.15

%

 

 

 

 

 

 

Robert B. Wagner

 

79,093

(6)

*

 

 

 

 

 

 

 

Donald T. Duke

 

 

 

 

 

1505 Vandivort

 

 

 

 

 

Edmond, OK 73034

 

72,000

 

*

 

 

 

 

 

 

 

Robert D. Hisrich

 

 

 

 

 

15249 North 59th Ave.

 

 

 

 

 

Glendale, AZ 85306

 

56,550

 

*

 

 

 

 

 

 

 

S. Lee Crawley

 

 

 

 

 

2431 E. 51st St., Suite 600

 

 

 

 

 

Tulsa, OK 74105

 

20,985

 

*

 

 

 

 

 

 

 

Ed Keller

 

 

 

 

 

5314 S. Yale, Suite 205

 

 

 

 

 

Tulsa, OK 74135

 

11,600

 

0

 

 

1619


Richard R. Devenuti

 

 

 

 

 

12819 SE 38th St., #335

 

 

 

 

 

Bellevue, WA 98006

 

0

 

0

 

 

 

 

 

 

 

All officers and directors as a group

 

1,479,726

 

14.34

%

 

 

 

 

 

 

(8 persons)

 

 

 

 

 

 

 

 

 

 

 

Others Known to Own 5%

 

 

 

 

 

 

 

 

 

 

 

William M. Sams

 

 

 

 

 

750 North St. Paul, Suite 1650

 

 

 

 

 

Dallas, TX 75201

 

570,000

(7)

5.56

%

 

 

 

 

 

 

Dimensional Fund Advisors LP

 

 

 

 

 

Palisades West, Building One

 

 

 

 

 

6300 Bee Cave Road

 

 

 

 

 

Austin, TX 78746

 

534,799

(8)

5.22

%

 

 

 

 

 

 

Deanna K. Ingram

 

 

 

 

 

7777 S. Jamestown

 

 

 

 

 

Tulsa, OK 74135

 

518,579

(9)

5.06

%

 

 

 

 

 

 

Jon A. Wiese

 

 

 

 

 

11509 S. Granite Ave.

 

 

 

 

 

Tulsa, OK 74137

 

580,000

(10)

5.66

%

*Less than one percent of the shares outstanding.

 

(1)                    Address is that of the Company’s principal office at 1814 W. Tacoma Street, Broken Arrow, Oklahoma 74012 unless otherwise indicated.

(2)                    Except as indicated in the footnotes to this table, the persons named in the table have sole voting and investment power with respect to all shares shown as beneficially owned by them, subject to community property laws where applicable.  The number of shares beneficially owned includes the number of shares of Common Stock that such persons presently have the right to acquire pursuant to unexercised options under the Company’s stock option plans, as follows:  13,000 shares for Mr. Siegenthaler; 37,000 shares for Mr. Wagner; 13,000 shares for Dr. Hisrich; 29,500 shares for Mr. Duke; and 92,500 shares for all directors and executive officers as a group (8 persons).

(3)                    Includes 129,000 shares held by Mr. Siegenthaler’s wife’s trust.  All of the shares held directly by Mr. Siegenthaler are pledged.

(4)                 Held by Mr. Tangun through Patara Capital, LP, Patara Partners, LP and Patara Capital Management, LP, for each of which he is managing member.  Mr. Tangun has shared investment and voting power over these shares.

(5)                 Includes 100,000 shares held by Bluejack Systems LLC, a limited liability company owned by Mr. Forrest; and 7,788 shares, the equivalent number of shares held as units for Mr. Forrest’s account by the Company’s 401(k) retirement plan, over which Mr. Forrest has shared investment power and no voting power.

(6)                 Includes 4,400 shares held by Mr. Wagner as custodian for his minor children, over which he has sole voting and investment power; and 7,610 shares, the equivalent number of shares held as units for Mr. Wagner’s account by the Company’s 401(k) retirement plan, over which Mr. Wagner has shared investment power and no voting power.

(7)                 Based on a Schedule 13G/A filed with the SEC on February 8, 2008.

(8)                 Based on a Schedule 13G/A filed with the SEC on February 9, 2009, which states: Dimensional Fund Advisors LP (“Dimensional”), an investment advisor registered under Section 203 of the Investment Advisors Act of 1940, furnishes investment advice to four investment companies registered under the Investment Company Act of 1940, and serves as investment manager to certain other commingled group trusts and separate accounts.  These investment companies, trusts and accounts are the “Funds.”  In its role as investment advisor or manager, Dimensional possesses investment and/or

20

(1)

Address is that of the Company’s principal office at 1814 W. Tacoma Street, Broken Arrow, Oklahoma 74012 unless otherwise indicated.

(2)

Except as indicated in the footnotes to this table, the persons named in the table have sole voting and investment power with respect to all shares shown as beneficially owned by them, subject to community property laws where applicable. The number of shares beneficially owned includes the number of shares of Common Stock that such persons presently have the right to acquire pursuant to unexercised options under the Company’s stock option plans, as follows: 13,000 shares for Mr. Siegenthaler; 13,000 shares for Mr. Barber; 54,046 shares for Mr. Wagner; 13,000 shares for Dr. Hisrich; 17,000 shares for Mr. Duke; and 110,046 shares for all directors and executive officers as a group (8 persons).

(3)

Includes 129,000 shares held by Mr. Siegenthaler’s wife’s trust.

(4)

Includes 100,000 shares held by Bluejack Systems LLC, a limited liability company owned by Mr. Forrest; and 3,160 shares, the equivalent number of shares held as units for Mr. Forrest’s account by the Company’s 401(k) retirement plan, over which Mr. Forrest has shared investment power and no voting power.

(5)

Includes 4,400 shares held by Mr. Wagner as custodian for his minor children, over which he has sole voting and investment power; and 5,629 shares, the equivalent number of shares held as units for Mr. Wagner’s account by the Company’s 401(k) retirement plan, over which Mr. Wagner has shared investment power and no voting power.

(6)

Based on a Schedule 13G/A filed with the SEC on February 14, 2008 by Patara Capital, LP on behalf of itself and Patara Partners, LP and Patara Capital Management, LP, all of whom are reported to have shared power to vote and dispose of the shares.

(7)

Based on a Schedule 13G/A filed with the SEC on February 8, 2008.

(8)

Based on a Schedule 13G/A filed with the SEC on October 10, 2007. Of the 518,579 shares included in the report, Ms. Ingram reports sole power to vote and dispose of 492,579 shares as trustee of the Jack R. Ingram Revocable Trust, and of 26,000 shares in her individual capacity.

(9)


voting power over the securities of the Issuer described in this schedule that are owned by the Funds, and may be deemed to be the beneficial owner of the shares of the Issuer held by the Funds.  However, all securities reported in this schedule are owned by the Funds.  Dimensional disclaims beneficial ownership of such securities.

(9)                 Based on a Schedule 13G/A filed with the SEC on February 17, 2009.  Of the 518,579 shares included in the report, Ms. Ingram reports shared power to vote and dispose of 492,579 shares as co-trustee of Family Trust, and sole power to vote and dispose of 26,000 shares in her individual capacity.

(10)Reflects options which are presently exercisable and will expire (if not exercised) as follows:  180,000 on 8/1/2009; 200,000 on 8/1/2010; and 200,000 on 8/1/2011.  Mr. Wiese is shown as a 5% beneficial owner solely by reason of these outstanding options, of which the Company has direct knowledge.  Except for these outstanding options, the Company has no other information or knowledge regarding Mr. Wiese’s security holdings, if any, in the Company.

 

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

 

Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers and persons who hold more than ten percent (10%) of our stock, to report their initial ownership and any subsequent changes in ownership of our stock to the SEC.  SEC regulations impose specific deadlines for filing these reports and we are required to disclose in this proxy statement any failure to comply with these regulations.  Based on our review of these filings and the written representations of our directors, executive officers and 10% shareholders, we believe that during fiscal 2007,2008, our directors, executive officers and 10% stockholders complied with all Section 16(a) filing requirements, with these exceptions:.  Two reports on Form 4, each reporting a single transaction for Ed Keller, were filed one day late.late; and one Form 4 transaction by Ron Siegenthaler was reported late on Form 5.

17


 

SHAREHOLDER PROPOSALS FOR 2009

 

The deadline for submitting a shareholder proposal intended to be included in the Company’s proxy statement and form of proxy for next year’s annual meeting is November 17, 2008.2009.  Such proposals must comply with the provisions of Rule 14a–814a-8 of the Securities and Exchange Act of 1934, as amended.   A shareholder who wishes to present a proposal for consideration at next year’s annual meeting outside of the Company’s proxy materials must give us notice of the proposal no later than November 17, 20082009 as required by our bylaws.  Such notice must include (1) a brief description of the proposal and the reasons for making the proposal; (2) the name and record address of the shareholder; (3) the class and number of shares beneficially owned by the shareholder; (4) a representation that the shareholder is a holder of record entitled to vote at the meeting and intends to appear in person or by proxy at the meeting to present such business; and (5) a description of any arrangement or understanding in connection with such business between suchthe shareholder and any other person(s) in connection with the business of the proposal,(identifying them by name), and any material interest of the shareholder in such business.

 

All shareholder proposals must be received by us on or before the deadline in order to be considered timely and should be delivered or mailed to our Corporate Secretary at the address shown in the next section below.

 

ANNUAL REPORT ON FORM 10-K

 

We are mailing our 20072008 annual report to shareholders (which includes our Annual Report on Form 10–K10-K for the fiscal year ended October 31, 2007)2008) with this Proxy Statement.  Our Form 10–K10-K for the year ended October 31, 20072008 is also available on our website at www.xeta.com.  In addition, any person solicited by this Proxy Statement is entitled to request in writing a copy of the Form 10-K and we will provide it without charge.  Such requests should be submitted to the Corporate Secretary addressed as follows:

 

ATTN: Corporate Secretary

XETA Technologies, Inc.

1814 W. Tacoma Street

Broken Arrow, Oklahoma 74012

 

21


SOLICITATION EXPENSES

 

The cost of soliciting proxies will be borne by the Company.  Employees of the Company may solicit proxies personally or by telephone without additional compensation. Upon request, we will reimburse the reasonable costs incurred by brokers, banks, or other nominees for mailing proxy materials and annual shareholder reports to the beneficial owners of the shares they hold of record.

 

OTHER MATTERS

 

As of the date of this Proxy Statement, the Board of Directors knows of no matter other than those described herein that will be presented for consideration at the Annual Meeting.  However, should any other matters properly come before the Annual Meeting or any adjournment thereof, it is the intention of the persons named in the accompanying proxy to vote in accordance with their best judgment.

 

By Order of the Board of Directors

 

/s/ Robert B. Wagner

Robert B. Wagner

Secretary

Broken Arrow, Oklahoma

February 26, 2008

18


Electronic Voting Instructions

You can vote by Internet!

Available 24 hours a day, 7 days a week!

Instead of mailing your proxy, you may choose the voting method outlined below to vote your proxy.

VALIDATION DETAILS ARE LOCATED BELOW IN THE TITLE BAR.

Proxies submitted by the Internet must be received by 1:00 a.m., Central Time, on April 8, 2008.

Vote by Internet

·    Log on to the Internet and go to www.investorvote.com

·    Follow the steps outlined on the secured website.

Using a black ink pen, mark your votes with an X as shown in this example. Please do not write outside the designated areas.

x

Annual Meeting Proxy Card

123456

C0123456789

12345

IF YOU HAVE NOT VOTED VIA THE INTERNET FOLD ALONG THE PERFORATION, DETACH AND RETURN THE BOTTOM PORTION IN THE ENCLOSED ENVELOPE.

A. Proposals – The Board of Directors recommends a vote FOR all the nominees listed and FOR Proposal 2.

1.

ELECTION OF DIRECTORS

For

Against

Abstain

For

Against

Abstain

For

Against

Abstain

01 - Ron B. Barber

o

o

o

02 - Lee Crawley

o

o

o

03 - Donald T. Duke

o

o

o

04 - Greg D. Forrest

o

o

o

05 - Robert D. Hisrich

o

o

o

06 - Edward F. Keller

o

o

o

07 - Donald T. Duke

o

o

o

For

Against

Abstain

2.

To ratify the selection of Tullius Taylor Sartain & Sartain LLP as the Company’s independent certified public accountants for the 2008 fiscal year.

o

o

o

3.

IN THEIR DISCRETION ON ANY OTHER MATTERS THAT MAY PROPERLY COME BEFORE THE MEETING.

 

 

 

 

/s/ Robert B.

Non-Voting Items Wagner

 

 

 

 

 

Robert B. Wagner

 

 

Change of Address – Please print new address below.

C.   Authorized Signatures – This section must be completed for your vote to be counted. – Date and Sign Below

NOTE:   Signature(s) should follow exactly as name appears on your stock certificate. In case of joint ownership, each owner should sign. Executors, administrators, guardians, trustees, etc., should add their title as such and where more than one executor, etc. is named, a majority must sign. If signer is a corporation, please sign full corporate name by duly authorized officer.

Date (mm/dd/yyyy) – Please print date below.

Signature 1 – Please keep signature within the box.

Signature 2 – Please keep signature within the box.

/       /

Secretary

 

 

Broken Arrow, Oklahoma

February 27, 2009

22


 

c/o Computershare
2 N. LaSalle Street
Chicago, IL 60602

IF YOU HAVE NOT VOTED VIA THE

VOTE BY INTERNET FOLD ALONG THE PERFORATION, DETACH AND RETURN THE BOTTOM PORTION IN THE ENCLOSED ENVELOPE.

 

Have your proxy card available when you access the website www.envisionreports.com/XETA
and follow the simple instructions to record your vote.

 

VOTE BY MAIL

Please mark, sign and date your proxy card and return it in the postage-paid envelope

provided or return it to: Proxy – XETA TECHNOLOGIES, INC.Services, c/o Computershare Investor Services, P.O. Box 43126, Providence, RI 02940.

 

ThisVote 24 hours a day, 7 days a week.
If you vote by internet, do not mail your proxy is solicited on behalf of the Board of Directors for the Annual Meeting of Shareholders tocard.

If voting by mail, this proxy card must be held on Tuesday, April 8, 2008signed and dated below.
Please fold and detach card at perforation before mailing.

XETA TECHNOLOGIES, INC.

This proxy is solicited on behalf of the Board of Directors for the
Annual Meeting of Shareholders to be held on Tuesday, April 7, 2009.

 

The undersigned hereby appoints Donald T. Duke and Robert B. Wagner, or either of them, as proxies and attorneys for the undersigned (with full power to act alone and to designate substitutions), hereby revoking any prior Proxy, and hereby authorizes them to represent the undersigned and to vote as designated on the reverse side, all the shares of Common Stock of XETA Technologies, Inc. held of record by the undersigned on February 26, 200824, 2009 at the Annual Meeting of Shareholders to be held on April 8, 2008,7, 2009, or any adjournment or postponement thereof.

Dated:

2009

Signature

Signature (if held jointly)

NOTE: Signature(s) should follow exactly as name appears on your stock certificate. In case of joint ownership, each owner should sign. Executors, administrators, guardians, trustees, etc., should add their title as such and where more than one executor, etc. is named, a majority must sign. If signer is a corporation, please sign full corporate name by duly authorized officer.

PLEASE DATE, SIGN AND RETURN THE PROXY CARD PROMPTLY, USING THE ENCLOSED ENVELOPE.


YOUR VOTE IS IMPORTANT

If you do not vote by internet, please sign and date this proxy card and return it promptly in the enclosed postage-paid envelope, or otherwise to: Proxy Services, c/o Computershare Investor Services, P.O. Box 43126, Providence, RI 02940, so your shares will be represented at the Annual Meeting.  If you vote by internet, it is not necessary to return this proxy card.

Please fold and detach card at perforation before mailing.

XETA TECHNOLOGIES, INC.

PROXY

 

This Proxy, when properly executed, will be voted in the manner directed herein by the undersigned shareholder.  If no direction is made, this Proxy will be voted FOR the twothree following proposals.proposals.

 

PLEASE DATE, SIGN AND RETURN THE PROXY CARD PROMPTLY, USING THE ENCLOSED ENVELOPE.

1.

ELECTION OF DIRECTORS – The Board of Directors recommends a vote FOR each of the listed nominees.

Nominees:

 

FOR

 

AGAINST

 

ABSTAIN

 

Nominees:

 

FOR

 

AGAINST

 

ABSTAIN

 

(1)

 

S. Lee Crawley

 

o

 

o

 

o

 

(5)

 

Robert D. Hisrich

 

o

 

o

 

o

 

(2)

 

Richard R. Devenuti

 

o

 

o

 

o

 

(6)

 

Ronald L. Siegenthaler

 

o

 

o

 

o

 

(3)

 

Donald T. Duke

 

o

 

o

 

o

 

(7)

 

Ozarslan A. Tangun

 

o

 

o

 

o

 

(4)

 

Greg D. Forrest

 

o

 

o

 

o

 

 

 

 

 

 

 

 

 

 

 

2.

APPROVAL OF STOCK OPTION EXCHANGE PROGRAM – The Board of Directors recommends a vote FOR this

proposal.

oFOR

oAGAINST

oABSTAIN

3.

RATIFICATION OF ACCOUNTANTS – The Board of Directors recommends a vote FOR this proposal.

To ratify the selection of HoganTaylor, LLP as the Company’s independent certified public accountants for the 2009 fiscal year.

oFOR

oAGAINST

oABSTAIN

4.

IN THEIR DISCRETION ON ANY OTHER MATTERS THAT MAY PROPERLY COME BEFORE THE MEETING.

(CONTINUED ON REVERSE SIDE)