AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 31, 1995
REGISTRATION NO.33-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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INTER-TEL, INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Arizona 86-0220994
- ------------------------------ --------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
7300 West Boston Street
Chandler, Arizona 85226-3224
(602) 961-9000
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
STEVEN G. MIHAYLO
Chairman of the Board of Directors
and Chief Executive Officer
Inter-Tel, Incorporated
7300 West Boston Street
Chandler, Arizona 85226-3224
(602) 961-9000
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
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COPIES TO:
Jeffrey D. Saper, Esq.
Patrick J. Schultheis, Esq. Stanton D. Wong, Esq.
Robert G. Day, Esq. Karen A. Dempsey, Esq.
Wilson, Sonsini, Goodrich & Rosati Pillsbury Madison & Sutro
Professional Corporation P. O. Box 7880
650 Page Mill Road San Francisco, California 94120
Palo Alto, California 94304-1050 (415) 493-9300
(415) 983-1000
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Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.
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If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<TABLE>
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CALCULATION OF REGISTRATION FEE
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<CAPTION>
<S> <C> <C> <C> <C>
Title of each class of securities Amount to be Proposed maximum offering Proposed maximum agregate Amount of
to be registered registered(1) price per share(2) offering price(2) registration fee
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Common Stock, no par value ....... 3,277,500 shares $15.9375 $52,235,156 $18,013
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<FN>
(1) INCLUDES 427,500 SHARES WHICH THE UNDERWRITERS HAVE THE OPTION TO
PURCHASE TO COVER OVER-ALLOTMENTS, IF ANY.
(2) ESTIMATED SOLELY FOR THE PURPOSE OF COMPUTING THE AMOUNT OF THE REGISTRATION
FEE, BASED ON THE AVERAGE OF THE HIGH AND LOW PRICES FOR THE COMMON STOCK AS
REPORTED ON THE NASDAQ NATIONAL MARKET ON JULY 25, 1995, IN ACCORDANCE WITH
RULE 457(C) PROMULGATED UNDER THE SECURITIES ACT OF 1933.
</FN>
</TABLE>
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURUTIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JULY 31, 1995
2,850,000 SHARES
#############################################################################
IMAGE OMITTED
(SEE NARRATIVE DESCRIPTION BELOW OR IN "APPENDIX FOR GRAPHICS AND IMAGES".)
PICKUP: "P1"
=============================================================================
IMAGE: "INTER-TEL"
=============================================================================
#############################################################################
COMMON STOCK
Of the 2,850,000 shares of Common Stock offered hereby, 2,000,000 shares are
being sold by Inter-Tel, Incorporated ("Inter-Tel" or the "Company") and 850,000
shares are being sold by the Selling Shareholders. The Company will not receive
any of the proceeds from the sale of shares by the Selling Shareholders. The
Company's Common Stock is traded on the Nasdaq National Market under the symbol
INTL. On July 28, 1995, the last reported sale price of the Common Stock on the
Nasdaq National Market was $17.375 per share. See "Price Range of Common Stock."
SEE "RISK FACTORS" COMMENCING ON PAGE 4 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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Proceeds to
Price to Underwriting Proceeds to Selling
Public Discount(1) Company(2) Shareholders(2)
Per Share ... $ $ $ $
Total(3) .... $ $ $ $
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(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company estimated at $700,000.
(3) A Selling Shareholder has granted to the Underwriters a 30-day option to
purchase up to 427,500 additional shares of Common Stock solely to cover
over-allotments, if any. If the Underwriters exercise this option in full,
the Price to Public will total $ , the Underwriting Discount will total
$ and the Proceeds to Selling Shareholders will total $ . See
"Underwriting."
The shares of Common Stock are offered by the several Underwriters named
herein, subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part. It is expected that delivery of the
certificates representing such shares will be made against payment therefor at
the office of Montgomery Securities on or about , 1995.
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MONTGOMERY SECURITIES
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
SUTRO & CO. INCORPORATED
, 1995
<PAGE>
AXXESS is a fully-digital, software-
intensive system which incorporates
DSP components and open architecture
interfaces. The AxxessLink interface
enables the AXXESS telephone system
to interact with applications and
databases on attached computers.
{PICTURE-GRAPHIC}
The schematic below illustrates certain
ways in which the AXXESS system can
enhance productivity through the
AxxessLink interface.
{SCHEMATIC-GRAPHIC}
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
This Prospectus includes trademarks of the Company and other companies.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements, including notes thereto,
appearing elsewhere in, or incorporated by reference into, this Prospectus.
Unless otherwise indicated, the information contained in this Prospectus assumes
no exercise of the Underwriters' over- allotment option.
THE COMPANY
Inter-Tel is a single point of contact, full service provider of business
telephone systems, telecommunications software applications, computer telephony
integration (CTI), voice processing software and long distance calling services,
as well as maintenance, leasing and support services. Because of the modular
design and high level of software content in the Company's products, including
its AXXESS and Inter-Tel Axxent systems, customers can readily increase the size
and functionality of their systems as their future telecommunications needs
change. The Company believes that it is a leading supplier of small to medium
size business telephone systems.
The Company has developed a distribution network of direct sales offices and
dealers which sells the Company's products to small to medium size organizations
and to divisions or departments of larger organizations, including Fortune 500
companies, large service organizations and governmental agencies. In the United
States, the Company has 25 direct sales offices and a growing network of
hundreds of dealers who purchase directly from the Company. The Company is also
in the process of expanding its international dealer network.
<TABLE>
THE OFFERING
<CAPTION>
<S> <C>
Common Stock offered by the Company ................... 2,000,000 shares
Common Stock offered by the Selling Shareholders ..... 850,000 shares
Common Stock to be outstanding after the Offering .... 12,750,231 shares(1)
Use of Proceeds ....................................... For potential acquisitions, strategic alliances,
working capital, infrastructure and general
corporate purposes
Nasdaq National Market Symbol ......................... INTL
</TABLE>
<TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA(2)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
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1990 1991 1992 1993 1994 1994 1995
------- ------- ------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales ........................ $70,785 $71,509 $87,211 $102,377 $122,617 $58,465 $70,894
Gross profit ..................... 26,421 27,280 33,626 39,586 49,135 22,957 29,064
Operating income ................. 4,106 2,121 5,153 6,440 8,813 4,053 4,527(3)
Net income (loss):
Continuing operations ............ $ 1,964 $ 1,016 $ 3,189 $ 3,896 $ 5,949 $ 2,650 $ 3,109(3)
Discontinued operations .......... (523) (5,148) -- -- -- -- --
------- ------- ------- -------- -------- ------- -------
Net income (loss) ................ $ 1,441 $(4,132) $ 3,189 $ 3,896 $ 5,949 $ 2,650 $ 3,109(3)
======= ======= ======= ======== ======== ======= =======
Income (loss) per share:
Continuing operations ............ $ .23 $ .12 $ .37 $ .43 $ .55 $ .24 $ .28(3)
Discontinued operations .......... (.06) (.61) -- -- -- -- --
------- ------- ------- -------- -------- ------- -------
Net income (loss) ................ $ .17 $ (.49) $ .37 $ .43 $ .55 $ .24 $ .28(3)
======= ======= ======= ======== ======== ======= ========
Weighted average shares and share
equivalents ...................... 8,731 8,405 8,612 8,982 10,852 10,848 11,129
</TABLE>
JUNE 30, 1995
------------------------
AS
ACTUAL ADJUSTED(4)
--------- --------------
BALANCE SHEET DATA:
Working capital ................. $38,890 $ 71,081
Total assets ..................... 75,249 107,440
Shareholders' equity ............. 48,682 80,873
- ---------------------
(1) Based upon shares outstanding as of June 30, 1995. Excludes (i) 863,200
shares issuable upon exercise of stock options outstanding as of June 30,
1995, (ii) 524,488 additional shares reserved for future issuance
pursuant to the Company's stock option plans and (iii) 50,000 shares
issuable upon exercise of an outstanding warrant. See "Capitalization."
(2) Financial data for all periods have been restated to reflect two
acquisitions in May 1995, each accounted for as a pooling of interests.
See "Selected Consolidated Financial Data."
(3) Operating income includes a special charge of $1,315,000, which reduced net
income by $815,000, or $.07 per share. This special charge reflects the
costs associated with integrating the operations of the two acquired
companies. Without this special charge, the Company would have reported
operating income of approximately $5,842,000 and net income of approximately
$3,924,000, or $.35 per share, in the six months ended June 30, 1995.
(4) Adjusted to give effect to the sale of 2,000,000 shares of Common Stock
offered by the Company hereby at an assumed public offering price of
$17.375 per share and the application of the estimated net proceeds
therefrom. See "Use of Proceeds" and "Capitalization."
3
<PAGE>
RISK FACTORS
In evaluating the Company's business, prospective investors should carefully
consider the following factors in addition to the other information presented in
this Prospectus and the documents incorporated by reference herein.
RAPID TECHNOLOGICAL CHANGE AND DEPENDENCE ON NEW AND TIMELY PRODUCT
INTRODUCTIONS
The market for the Company's systems, products and services is characterized
by rapid technological change and continuing demand for new products, features
and applications. Current competitors or new market entrants may develop new
products or product features that could adversely affect the competitive
position of the Company's products. Accordingly, the timely introduction of new
products and product features, as well as new telecommunications applications,
will be a key factor in the Company's future success. Occasionally, new products
contain undetected errors or "bugs" when released. Such bugs may result from
bugs contained in software products offered by the Company's suppliers or other
third parties that are intended to be compatible with the Company's products,
over which the Company has little or no control. Although the Company seeks to
minimize the number of bugs in its products by its test procedures and strict
quality control, there can be no assurance that its new products will be error
free when introduced. Any significant delay in the commercial introduction of
the Company's products due to bugs, any design modifications required to correct
bugs or any impairment of customer satisfaction as a result of bugs could have a
material adverse effect on the Company's business and operating results. In
addition, new products often take several months before their manufacturing
costs stabilize, which may adversely affect operating results for a period of
time following introduction. The Company recently announced its new Inter-Tel
Axxent telephone system, an OS/2 version of its voice processing software, and a
number of upgrades to its existing AXXESS systems. In the event that the Company
were to fail to successfully introduce new systems, products or services or
upgrades to its existing systems or products on a regular and timely basis,
demand for the Company's existing systems, products and services could decline,
which could have a material adverse effect on the Company's business and
operating results. There can be no assurance that the Company will be able to
successfully develop new systems, products, services, technologies and
applications on a timely basis as required by changing market needs or that new
systems or products or enhancements thereto, including its recently announced
products and upgrades, when introduced by the Company will achieve market
acceptance. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
The Company has recently developed and continues to develop products designed
to address the emerging market for the convergence of voice and data
applications, or computer telephony integration. If the CTI market fails to
develop or grows more slowly than the Company anticipates, or if the Company is
unable for any reason to capitalize on this emerging market opportunity, the
Company's business and operating results could be materially adversely affected.
DEPENDENCE UPON CONTRACT MANUFACTURERS AND COMPONENT SUPPLIERS
Certain components used in the Company's systems, including certain
microprocessors, integrated circuits, power supplies and voice processing
interface cards, are currently available from a single source or limited sources
of supply, and certain of these components, including integrated circuits, are
currently in limited supply. In addition, the Company currently manufactures its
products through a limited number of contract manufacturers located in the
United States, the Philippines and the People's Republic of China. Foreign
manufacturing facilities are subject to changes in governmental policies,
imposition of tariffs and import restrictions and other factors beyond the
Company's control. Varian Associates, Inc. ("Varian") currently manufactures a
significant portion of the Company's products at Varian's Tempe, Arizona
facility, including substantially all of the printed circuit boards used in the
AXXESS and Inter-Tel Axxent systems. From time to time, the Company has
experienced delays in the supply of components and finished goods and there can
be no assurance that the Company will not experience such delays in the future.
The Company's reliance on third party manufacturers involves a number of
additional risks, including reduced control over delivery schedules, quality
assurance and costs. Any delay in delivery or shortage of supply of components
or finished goods from Varian or any other supplier, or the Company's
4
<PAGE>
inability to develop in a timely manner alternative or additional sources if and
when required, could damage the Company's relationships with current and
prospective customers and could materially and adversely affect the Company's
business and operating results. The Company has no long term agreements with its
suppliers that require the suppliers to provide fixed quantities of components
or finished goods at set prices. There can be no assurance that the Company will
be able to continue to obtain components or finished goods in sufficient
quantities or quality or on favorable pricing and delivery terms in the future.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Manufacturing."
COMPETITION
The market for the Company's telephone system products is highly competitive
and in recent periods has been characterized by pricing pressures and business
consolidations. The Company's competitors include AT&T Corp. ("AT&T") and
Northern Telecom Limited ("NorTel"), as well as Comdial Corporation ("Comdial"),
EXECUTONE Information Systems, Inc. ("Executone"), Mitel Corporation ("Mitel"),
Panasonic, Siemens ROLM Communications Inc. ("ROLM"), Toshiba and others. The
Company also competes against the regional Bell operating companies (RBOCs),
which offer systems produced by one or more of the aforementioned competitors
and also offer Centrex systems in which automatic calling facilities are
provided through equipment located in the telephone company's central office.
Competition by the RBOCs could increase significantly if the RBOCs are granted
the right to manufacture telephone systems and equipment themselves and/or to
bundle the sale of equipment with telephone calling services, activities which
to date they have been restricted from undertaking. Recent legislative
initiatives would have the effect of increasing competition from the RBOCs.
In the market for voice processing applications, including voice mail, the
Company competes against Centigram Communications Corporation ("Centigram"),
Octel Communications Corporation ("Octel"), Active Voice Corporation ("Active
Voice"), Applied Voice Technology, Inc. ("AVT") and other competitors, including
telephone systems manufacturers such as AT&T, NorTel and ROLM, which offer
integrated voice processing systems under their own label as well as through
various OEM arrangements. Certain of the Company's competitors may achieve
marketing advantages by bundling their voice processing equipment with sales of
telephone systems, or by designing their telephone systems so that they do not
readily integrate with independent voice processing systems. Inter-Tel expects
that the development of industry standards and the acceptance of open systems
architectures in the voice processing market will reduce technical barriers to
market entry and lead to increased competition.
In the market for long distance services, the Company competes against AT&T,
MCI Telecommunications Corporation ("MCI"), Sprint Corporation ("Sprint") and
other suppliers, certain of which also supply the long distance calling and
network services that the Company resells. Although the Company acquires a
variety of long distance calling services in bulk from certain long distance
carriers, there can be no assurance that the Company will be able to purchase
long distance calling services on favorable terms from one or more of such
providers in the future. In addition, a substantial majority of prospective new
long distance customers for the Company currently purchase long distance calling
services from the Company's competitors. The Company believes that it is likely
to face increased competition in the long distance calling services market to
the extent that telecommunications deregulation enables RBOCs to supply long
distance calling and network services or enables RBOCs and others to bundle long
distance, local telephone and wireless services. Moreover, the Company expects
to face increased competition in the future because low technical barriers to
entry will allow new market entrants.
Many of the Company's competitors have significantly greater financial and
technical resources, name recognition and marketing and distribution
capabilities than the Company. The Company expects that competition will
continue to be intense in the markets addressed by its products and services,
and there can be no assurance that the Company will be able to compete
successfully in the future. See "Business--Competition."
PRODUCT PROTECTION AND INFRINGEMENT
The Company's future success is dependent in part upon its proprietary
technology. The Company has no patents and relies principally on copyright and
trade secret law and contractual provisions to
5
<PAGE>
protect its intellectual property. There can be no assurance that any copyright
owned by the Company will not be invalidated, circumvented or challenged or that
the rights granted thereunder will provide competitive advantages to the
Company. Further, there can be no assurance that others will not develop
technologies that are similar or superior to the Company's technology or that
duplicate the Company's technology. As the Company expands its international
operations, effective intellectual property protection may be unavailable or
limited in certain foreign countries. There can be no assurance that the steps
taken by the Company will prevent misappropriation of its technology. Litigation
may be necessary in the future to enforce the Company's intellectual property
rights, to protect the Company's trade secrets, to determine the validity and
scope of the proprietary rights of others, or to defend against claims of
infringement or invalidity. Such litigation could result in substantial costs
and diversion of resources and could have a material adverse effect on the
Company's business and operating results.
From time to time, the Company is subject to proceedings alleging
infringement by the Company of intellectual property rights of others. If any
such claim is asserted against the Company, the Company may seek to obtain a
license under the third party's intellectual property rights. There can be no
assurance that a license will be available on terms acceptable to the Company or
at all. In the alternative, the Company could resort to litigation to challenge
any such claim, and the Company is currently engaged in one such proceeding. See
"Business--Legal Proceedings." Any such litigation could require the Company to
expend significant sums and could require the Company to pay significant
damages, develop non- infringing technology or acquire licenses to the
technology which is the subject of the asserted infringement, any of which could
have a material adverse effect on the Company's business and operating results.
In the event that the Company is unable or chooses not to license such
technology or decides not to challenge such third party's rights, the Company
could encounter substantial and costly delays in product introductions while
attempting to design around such third party rights, or could find that the
development, manufacture or sale of products requiring such licenses could be
foreclosed.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS; LIMITED BACKLOG
The Company's quarterly operating results depend upon a variety of factors,
including the volume and timing of orders received during the quarter, the mix
of products sold and mix of distribution channels, general economic conditions,
patterns of capital spending by customers, the timing of new product
announcements and releases by the Company and its competitors, pricing pressures
and the availability and cost of products and components from the Company's
suppliers. The Company's customers typically require the immediate shipment and
installation of systems. As a result, the Company has historically operated with
a relatively small backlog, and sales and operating results in any quarter are
principally dependent on orders booked and shipped in that quarter. Moreover,
market demand for investment in capital equipment such as telephone systems and
applications is largely dependent on general economic conditions, and can vary
significantly as a result of changing conditions in the economy as a whole. The
Company's expense levels are based in part on expectations as to future sales
and, if sales levels do not meet expectations, operating results could be
adversely affected. Because sales of systems through the Company's dealers
produce lower gross margins than sales through the Company's direct sales
organization, operating results will vary based upon the mix of sales through
direct and indirect channels. Although the Company to date has been able to
resell the rental streams from leases under its Totalease program profitably and
on a substantially current basis, the timing and profitability of lease resales
from quarter to quarter could impact operating results, particularly in an
environment of fluctuating interest rates. Long distance sales have, in recent
periods, grown at a faster rate than the Company's overall net sales and such
sales have lower gross margins than the Company's core business. As a result,
gross margins could be adversely affected in the event that long distance
calling services continue to increase as a percentage of net sales. In addition,
the Company is subject to seasonality in its operating results, as net sales for
the first and third quarters are frequently less than those experienced in the
fourth and second quarters, respectively. As a result of these and other
factors, the Company has in the past and could in the future experience
fluctuations in sales and operating results on a quarterly basis. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
6
<PAGE>
MANAGEMENT OF GROWTH; IMPLEMENTATION OF NEW MANAGEMENT INFORMATION SYSTEMS
The growth in the Company's business has placed, and is expected to continue
to place, a significant strain on the Company's personnel, management and other
resources. The Company's ability to manage any future growth effectively will
require it to attract, train, motivate and manage new employees successfully, to
integrate new employees into its overall operations and to continue to improve
its operational, financial and management information systems. In particular, in
1995 the Company expects to begin implementation of new management information
systems (MIS). The Company believes the new MIS systems will significantly
affect many aspects of its business, including its accounting, operations,
purchasing, sales and marketing functions. The successful implementation of such
systems is expected to be crucial to the Company's provision of services and to
enable future growth. There can be no assurance that the Company will implement
its new MIS systems in an efficient and timely manner or that the new systems
will be adequate to support the Company's operations. Following the initial
implementation of the new MIS systems, the Company's corporate offices are
expected to be moved to another location in Phoenix, Arizona. There can be no
assurance that such move will be accomplished in an orderly and efficient
manner.
The Company has made strategic acquisitions in the past and expects to
continue to do so in the future. Acquisitions require a significant amount of
the Company's management attention and financial and operational resources, all
of which are limited. The integration of acquired entities may also result in
unexpected costs and disruptions, and significant fluctuations in, or reduced
predictability of, operating results from period to period. There can be no
assurance that an acquisition will not adversely affect the business
relationships of the Company or the acquired entity with their respective
suppliers or customers. Further, there can be no assurance that the Company will
successfully integrate the acquired operations or achieve any of the intended
benefits of an acquisition. The Company's failure to manage its growth
effectively could have a material adverse effect on its business and operating
results. See "Use of Proceeds."
RELIANCE ON DEALER NETWORK
A substantial portion of the Company's net sales are made through its network
of independent dealers. The Company faces intense competition from other
telephone system and voice processing system manufacturers for such dealers'
attention, as most of the Company's dealers carry products which compete with
the Company's products. The Company has no long term agreements with any of its
dealers, and there can be no assurance that any such dealer will not promote the
products of the Company's competitors to the detriment of the Company's
products. The loss of any significant dealer or group of dealers, or any event
or condition adversely affecting the Company's dealer network, could have a
material adverse effect on the Company's business and operating results. In
recent years the Company has effected a number of strategic acquisitions of
resellers of telephony products and integrated these operations with its
existing direct sales operations in the same geographic areas and in other
strategic markets. There can be no assurance that one or more of the Company's
dealers will not be acquired by a competitor and that the loss of any such
dealer so acquired will not adversely affect the Company's business and
operating results. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business--Sales and Distribution."
RISKS OF PROVIDING LONG DISTANCE SERVICES
Inter-Tel depends on a reliable supply of telecommunications services and
information from several long distance carriers. Because it does not own
transmission facilities, the Company relies on long distance carriers for the
provision of network services to the Company's customers and for billing
information. Long distance services are subject to extensive and uncertain
governmental regulation on both the federal and state level. There can be no
assurance that the promulgation of certain regulations, such as regulations
requiring the reduction of direct-dial billing rates, will not adversely affect
the Company's business and operating results. The Company currently resells long
distance services pursuant to contracts with three of the six largest long
distance carriers with U.S. networks, and is negotiating a similar contract with
a fourth. These contracts typically have a multi-year term in which the
Company's prices are relatively fixed and have minimum use requirements. There
can be no assurance that the Company will meet
7
<PAGE>
minimum use commitments, will be able to negotiate lower rates with carriers in
the event of any decrease in end user rates or will be able to extend its
contracts with long distance carriers at prices favorable to the Company. The
Company's ability to continue to expand its long distance service operations
will depend on its ability to continue to secure reliable long distance services
from a number of long distance carriers and the willingness of such carriers to
continue to make telecommunications services and billing information available
to the Company on favorable terms. See "Business--Products and Services."
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the continued service of, and its ability to
attract and retain, qualified technical, marketing, sales and managerial
personnel. The competition for such personnel is intense, and the loss of any of
such persons, as well as the failure to recruit additional key technical and
sales personnel in a timely manner, would have a material adverse effect on the
Company's business and operating results. There can be no assurance that the
Company will be able to continue to attract and retain the qualified personnel
necessary for the development of its business. The Company currently does not
have employment contracts with any of its employees. See "Business--Employees."
POSSIBLE VOLATILITY OF STOCK PRICE
The Company believes that factors such as announcements of developments
relating to the Company's business, fluctuations in the Company's operating
results, general conditions in the telecommunications industry or the worldwide
economy, changes in legislation or regulation affecting the telecommunications
industry, an outbreak of hostilities, a shortfall in revenue or earnings from
securities analysts' expectations, announcements of technological innovations or
new products or enhancements by the Company or its competitors, developments in
intellectual property rights and developments in the Company's relationships
with its customers and suppliers could cause the price of the Company's Common
Stock to fluctuate, perhaps substantially. In addition, in recent years the
stock market in general, and the market for shares of technology stocks in
particular, have experienced extreme price fluctuations, which have often been
unrelated to the operating performance of affected companies. There can be no
assurance that the market price of the Company's Common Stock will not
experience significant fluctuations in the future, including fluctuations that
are unrelated to the Company's performance. See "Price Range of Common Stock."
CONCENTRATION OF OWNERSHIP
Immediately following this offering, the Company's Chairman of the Board of
Directors and Chief Executive Officer will beneficially own approximately 25% of
the outstanding shares of the Common Stock (approximately 22% if the
Underwriters' over-allotment option is exercised in full). As a result, he will
have the ability to exercise significant influence over all matters requiring
shareholder approval. In addition, the concentration of ownership could have the
effect of delaying or preventing a change in control of the Company. See
"Selling Shareholders."
THE COMPANY
The Company was incorporated in Arizona in July 1969. Its principal offices
are located at 7300 West Boston Street, Chandler, Arizona 85226 and its
telephone number at that address is (601) 961-9000. As used in this Prospectus,
"Inter-Tel" or the "Company" refers to Inter-Tel, Incorporated and its
subsidiaries.
8
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered by it hereby are estimated to be $32.2 million, based on an
assumed public offering price of $17.375 per share and after deduction of the
estimated underwriting discount and offering expenses. A portion of the net
proceeds may be used to finance acquisitions of resellers of telephony products,
other strategic acquisitions or corporate alliances. The Company considers such
acquisitions on an ongoing basis, but has no current commitments for any
acquisition which would have a material impact on the Company's results of
operations or financial condition. The Company intends to use the balance of the
net proceeds primarily for working capital, capital expenditures relating to the
upgrade of infrastructure and other general corporate purposes. In particular,
the Company expects to use up to $5.0 million of the net proceeds of the
offering for capital expenditures relating to the implementation of new MIS
systems. Pending such uses, the Company will invest the net proceeds in
investment grade short term income producing investments. The Company will not
receive any proceeds from the sale of shares by the Selling Shareholders.
DIVIDEND POLICY
The Company has paid no cash dividends on its Common Stock since its
incorporation and anticipates that for the foreseeable future it will continue
to retain any earnings for use in its business. The Company's credit agreement
limits the Company's ability to pay cash dividends on its Common Stock.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol INTL. The following table sets forth, for the periods indicated, high and
low reported sale prices per share of the Common Stock as reported on the Nasdaq
National Market.
HIGH LOW
-------- --------
1993
First Quarter ...................... $ 5 1/8 $ 4
Second Quarter ..................... 8 4 1/2
Third Quarter ...................... 7 3/8 5 1/8
Fourth Quarter ..................... 12 6
1994
First Quarter ...................... 12 1/8 8 5/8
Second Quarter ..................... 11 8 1/2
Third Quarter ...................... 10 1/8 7
Fourth Quarter ..................... 9 3/4 6
1995
First Quarter ...................... 13 6 7/8
Second Quarter ..................... 16 1/8 11 9/16
Third Quarter (through July 28) ... 17 3/4 14 7/8
On July 28, 1995, the last reported sale price of the Common Stock on the
Nasdaq National Market was $17.375 per share. As of June 30, 1995, the Company
had approximately 752 holders of record of its Common Stock.
9
<PAGE>
<TABLE>
CAPITALIZATION
The following table sets forth the short term debt and capitalization of the
Company at June 30, 1995 and as adjusted to give effect to the issuance and sale
by the Company of 2,000,000 shares of Common Stock offered hereby at an assumed
public offering price of $17.375 per share, and the application of the estimated
net proceeds therefrom.
<CAPTION>
JUNE 30, 1995
-----------------------
ACTUAL AS ADJUSTED
--------- -------------
(IN THOUSANDS)
<S> <C> <C>
Short term debt ........................................... $ -- $ --
========= =============
Long term debt ............................................ $ -- $ --
Shareholders' equity:
Common stock, no par value, 30,000,000 shares authorized,
10,750,231 shares issued and outstanding, 12,750,231
shares issued and outstanding as adjusted(1) .............. 27,739 59,930
Retained earnings ......................................... 21,160 21,160
Equity adjustment for foreign currency translation ....... (5) (5)
Receivable from Employee Stock Ownership Trust ........... (212) (212)
--------- -------------
Total shareholders' equity ................................ 48,682 80,873
--------- -------------
Total capitalization ...................................... $48,682 $80,873
========= =============
<FN>
- ----------
(1) Excludes (i) 863,200 shares issuable upon exercise of stock options
outstanding as of June 30, 1995, (ii) 524,488 additional shares reserved for
future issuance pursuant to the Company's stock option plans and (iii)
50,000 shares issuable upon exercise of an outstanding warrant at an
exercise price of $4.25 per share.
</FN>
</TABLE>
10
<PAGE>
<TABLE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table summarizes certain selected consolidated financial data
of the Company and its subsidiaries. The selected consolidated financial data as
of and for each of the five years ended December 31, 1994 and the six months
ended June 30, 1994 and 1995 have been restated to include the financial results
of American Telcom Corp. of Georgia, Inc. and Access West, Inc., which were both
acquired in May 1995 in transactions accounted for as poolings of interests.
Such acquisitions did not constitute "significant business combinations" within
the meaning of the rules of the Securities and Exchange Commission. The selected
consolidated financial data, exclusive of the acquisitions, as of December 31,
1993 and 1994, and for each of the years in the three-year period ended December
31, 1994, are derived from consolidated financial statements that have been
audited by Ernst & Young LLP, independent auditors, which are incorporated by
reference into this Prospectus. The selected consolidated financial data,
exclusive of the acquisitions, as of December 31, 1990, 1991 and 1992 and for
each of the years in the two-year period ended December 31, 1991 are derived
from audited consolidated financial statements not included in this Prospectus.
The selected consolidated financial data as of June 30, 1995 and for the
six-month periods ended June 30, 1994 and 1995 are derived from unaudited
consolidated financial statements which are incorporated by reference into this
Prospectus. The unaudited consolidated financial statements include all
adjustments, consisting of normal recurring accruals, which the Company
considers necessary for a fair presentation of the financial position and the
results of operations for these periods. Operating results for six months ended
June 30, 1995 are not necessarily indicative of the results that may be expected
for the entire fiscal year ending December 31, 1995 or future periods. The data
presented below should be read in conjunction with the Consolidated Financial
Statements and Notes thereto and other financial information incorporated by
reference into this Prospectus.
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
---------------------------------------------------- ----------------------
1990 1991 1992 1993 1994 1994 1995
--------- ---------- --------- ---------- ---------- --------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales .................... $70,785 $71,509 $87,211 $102,377 $122,617 $58,465 $ 70,894
Cost of sales ................ 44,364 44,229 53,585 62,791 73,482 35,508 41,830
--------- ---------- --------- ---------- ---------- --------- ------------
Gross profit ................. 26,421 27,280 33,626 39,586 49,135 22,957 29,064
Research and development .... 3,380 3,638 3,928 4,114 4,537 2,135 2,880
Selling, general and
administrative ............... 18,935 21,521 24,545 29,032 35,785 16,769 20,342
Special charge ............... -- -- -- -- -- -- 1,315(1)
--------- ---------- --------- ---------- ---------- --------- ------------
Operating income ............. 4,106 2,121 5,153 6,440 8,813 4,053 4,527
Interest and other income ... 550 515 664 282 904 285 565
Interest expense ............. 1,106 944 727 445 120 62 77
Income taxes ................. 1,586 676 1,901 2,381 3,648 1,626 1,906
--------- ---------- --------- ---------- ---------- --------- ------------
Net income (loss):
Continuing operations ........ 1,964 1,016 3,189 3,896 5,949 2,650 3,109(1)
Discontinued operations ..... (523) (5,148) -- -- -- -- --
--------- ---------- --------- ---------- ---------- --------- ------------
Net income (loss) ............ $ 1,441 $(4,132) $ 3,189 $ 3,896 $ 5,949 $ 2,650 $ 3,109(1)
========= ========== ========= ========== ========== ========= ============
Income (loss) per share:
Continuing operations ........ $ .23 $ .12 $ .37 $ .43 $ .55 $ .24 $ .28(1)
Discontinued operations ..... (.06) (.61) -- -- -- -- --
--------- ---------- --------- ---------- ---------- --------- ------------
Net income (loss) ............ $ .17 $ (.49) $ .37 $ .43 $ .55 $ .24 $ .28(1)
========= ========== ========= ========== ========== ========= ============
Weighted average shares and
share equivalents ............ 8,731 8,405 8,612 8,982 10,852 10,848 11,129
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1990 1991 1992 1993 1994 1995
--------- --------- --------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital .... $10,285 $ 8,228 $12,514 $ 34,198 $ 37,245 $38,890
Total assets ........ 42,095 41,118 37,568 57,270 67,418 75,249
Shareholders' equity 21,025 16,806 19,382 38,542 45,098 48,682
<FN>
- ----------
(1) Operating income includes a special charge of $1,315,000, which reduced net
income by $815,000, or $.07 per share. This special charge reflects costs
associated with integrating the operations of the two acquired companies.
Without this special charge, the Company would have reported operating
income of approximately $5,842,000 and net income of approximately
$3,924,000, or $.35 per share, in the six months ended June 30, 1995.
</FN>
</TABLE>
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
Inter-Tel is a single point of contact, full service provider of business
telephone systems, telecommunications software applications, computer telephony
integration, voice processing software and long distance calling services, as
well as maintenance, leasing and support services.
The Company has developed a network of direct sales offices and dealers which
sells the Company's products, and in recent periods the Company has focused on
expanding its direct sales capabilities and its dealer network. The Company has
effected a number of strategic acquisitions of resellers of telephony products
and integrated these operations with its existing direct sales operations in the
same geographic areas and in other strategic markets.
Sales of systems through the Company's dealers typically generate lower gross
margins than sales through the Company's direct sales organization, although
direct sales typically require higher levels of selling, general and
administrative expenses. In addition, the Company's long distance and network
services typically generate lower gross margins than sales of system products.
Accordingly, the Company's margins may vary from period to period depending upon
distribution channel and product mix. In the event that sales through dealers or
sales of long distance services increase as a percentage of net sales, the
Company's overall gross margin would decline.
The Company's operating results depend upon a variety of factors, including
the volume and timing of orders received during a period, the mix of products
sold and mix of distribution channels, general economic conditions, patterns of
capital spending by customers, the timing of new product announcements and
releases by the Company and its competitors, pricing pressures and the
availability and cost of products and components from the Company's suppliers.
In addition, the Company is subject to seasonality in its operating results, as
net sales for the first and third quarters are frequently less than those
experienced during the fourth and second quarters, respectively.
All periods have been restated to reflect the acquisitions of American
Telcom Corp. of Georgia, Inc. and Access West, Inc. in May 1995. Each
transaction was accounted for as a pooling of interests.
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data of the
Company expressed as a percentage of net sales for the periods indicated:
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------- -----------------
1992 1993 1994 1994 1995
-------- -------- -------- -------- --------
Net sales ................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales ............ 61.5 61.3 59.9 60.7 59.0
-------- -------- -------- -------- --------
Gross profit ............. 38.5 38.7 40.1 39.3 41.0
Research and development 4.5 4.0 3.7 3.7 4.0
Selling, general and
administrative .......... 28.1 28.5 29.2 28.7 28.7
Special charge ........... -- -- -- -- 1.9
-------- -------- -------- -------- --------
Operating income ......... 5.9 6.2 7.2 6.9 6.4
Interest and other income 0.8 0.3 0.7 0.5 0.8
Interest expense ......... 0.8 0.4 0.1 0.1 0.1
Income taxes ............. 2.2 2.3 3.0 2.8 2.7
-------- -------- -------- -------- --------
Net income ............... 3.7% 3.8% 4.8% 4.5% 4.4%
======== ======== ======== ======== ========
12
<PAGE>
SIX MONTHS ENDED JUNE 30, 1995 COMPARED TO SIX MONTHS ENDED JUNE 30, 1994
Net sales increased 21.3% to $70.9 million in the first six months of 1995
from $58.5 million in the first six months of 1994. The increase was primarily
attributable to increased shipments of AXXESS systems and software products
through the Company's dealer network and direct sales offices, and an increase
in sales of long distance services.
Gross profit increased to $29.1 million, or 41.0% of net sales, in the first
six months of 1995 from $23.0 million, or 39.3% of net sales, in the first six
months of 1994. The increase in gross margin was primarily due to a higher
percentage of sales derived from AXXESS systems and software, which was offset
in part by a higher percentage of sales through dealers and increased sales of
the Company's long distance services.
Research and development expenses increased to $2.9 million, or 4.0% of net
sales, in the first six months of 1995 from $2.1 million, or 3.7% of net sales,
in the first six months of 1994. This increase was primarily attributable to
expenses relating to the introduction of new products, including the AXXESS
version 3.0, the Inter-Tel Axxent and AxxessoryTalk version 3.0. The Company
expects that research and development expenses will continue to increase in
absolute dollars as the Company continues to develop and enhance existing and
new technologies and products. These expenses may vary, however, as a percentage
of net sales.
Selling, general and administrative expenses increased to $20.3 million, or
28.7% of net sales, in the first six months of 1995 from $16.8 million, or 28.7%
of net sales, in the first six months of 1994. This increase in absolute dollars
was primarily attributable to the costs associated with hiring and training
approximately 40 sales personnel throughout Inter-Tel's 25 direct sales offices.
Higher sales commissions were also paid based upon increased levels of net
sales. The Company expects that selling, general and administrative expenses
will increase in absolute dollars, but may vary as a percentage of net sales.
Interest and other income in both periods consisted primarily of interest
income.
Net income increased 17.3% to $3.1 million, or $.28 per share, in the first
six months of 1995 from $2.7 million, or $.24 per share, in the first six months
of 1994. Net income includes a special charge of approximately $815,000, or $.07
per share, reflecting the costs associated with integrating the operations of
the two acquired companies. The special charge principally includes costs
associated with redundancy in inventories, equipment abandonment, the
combination and relocation of business operations, employee terminations, and
the write-off of intangible assets. Without this special charge, the Company
would have reported net income of $3.9 million, or $.35 per share, in the six
months ended June 30, 1995, an increase of 48.1% over net income of $2.7 million
in the first six months of 1994.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Net sales increased 19.8% to $122.6 million in 1994 from $102.4 million in
1993. The increase in net sales was primarily attributable to increased sales of
telephone systems through the Company's direct sales offices and its dealer
network. The remaining increases occurred in long distance sales and other
operations. Shipments to the expanded dealer network more than offset decreased
shipments to Premier Telecom Products, Inc. ("Premier"), previously the
Company's private label distributor. Shipments to Premier are no longer
significant.
Gross profit increased to $49.1 million, or 40.1% of net sales, in 1994 from
$39.6 million, or 38.7% of net sales, in 1993. This increase in gross margins
reflected the transition from Premier and other distributors to the direct
dealer network and the expansion of AXXESS system and software sales.
Research and development expenses increased to $4.5 million, or 3.7% of net
sales, in 1994 from $4.1 million, or 4.0% of net sales, in 1993. These expenses
in both 1994 and 1993 were directed principally to the continued development of
the AXXESS and Inter-Tel Axxent software and systems and voice processing
software applications.
Selling, general and administrative expenses increased to $35.8 million, or
29.2% of net sales in 1994, from $29.0 million, or 28.5% of net sales, in 1993.
This reflected increased incentive and other compensation, additional personnel
to support the direct dealer network and expenses associated with the start up
of the Company's Asian subsidiary.
13
<PAGE>
Interest and other income increased in 1994 principally from the investment
for a full year of the funds received in a public offering of the Company's
Common Stock in November 1993 and funds generated through operating cash flow.
Net income increased 52.7% to $5.9 million, or $.55 per share, in 1994 from
$3.9 million, or $.43 per share, in 1993. Net income per share in 1994 is based
on an additional 1.8 million average shares outstanding in 1994, reflecting the
1993 public offering.
YEAR ENDED DECEMBER 31, 1993 COMPARED TO YEAR ENDED DECEMBER 31, 1992
Net sales increased 17.4% in 1993 to $102.4 million from $87.2 million in
1992. The increase in net sales primarily reflected increased sales through the
Company's direct sales offices, including new customer sales and higher sales
through the Company's Totalease program. Sales to the Company's network of
direct dealers following the transition in the distribution channel, which
commenced in April 1993, offset a decline in sales to Premier. Sales to Premier
decreased to $10.1 million, or 9.9% of net sales, in 1993 from $17.1 million, or
19.6% of net sales, in 1992.
In 1993, gross profit increased to $39.6 million, or 38.7% of net sales, from
$33.6 million, or 38.5% of net sales, in 1992. Gross margins improved in 1993
because of higher sales through the Company's direct sales channel and increased
sales through the Company's Totalease program, as well as higher gross margins
on sales to direct dealers following the transition away from Premier.
Research and development expenses increased to $4.1 million in 1993 from $3.9
million in 1992 and were 4.0% and 4.5% of net sales, respectively. These
expenses in both periods were directed principally to continued development of
the Company's new AXXESS system.
Selling, general and administrative expenses increased to $29.0 million, or
28.5% of net sales, in 1993, from $24.5 million, or 28.1% of net sales, in 1992.
This increase reflected increased compensation, additional personnel to support
the Company's direct dealer network and a one-time expense associated with the
Company's move into its new headquarters. Such increases were partially offset
by reductions in key executive incentive compensation.
Interest and other income in 1993 consisted primarily of interest income.
Interest and other income in 1992 was derived principally from a gain on the
sale of the Company's headquarters, as well as interest income relating to the
refund of import duties. Interest expense during 1993 decreased principally
because of lower interest rates and reduced long and short term borrowings.
Net income in 1993 increased to $3.9 million, or $.43 per share, from $3.2
million, or $.37 per share, in 1992.
INFLATION/CURRENCY FLUCTUATION
Inflation and currency fluctuations have not previously had a material impact
on Inter-Tel's operations. International sales and procurement agreements have
traditionally been denominated in U.S. currency. Moreover, a significant amount
of contract manufacturing has been or is expected to be moved to domestic
sources. The expansion of international operations in the United Kingdom and
Europe and anticipated increased sales in Japan and Asia and elsewhere could
result in higher international sales as a percentage of total revenues, but
international revenues are currently not significant.
LIQUIDITY AND CAPITAL RESOURCES
The Company continues to expand its dealer network, which has required and is
expected to continue to require working capital for increased accounts
receivable and inventories. During the first six months of 1995, accounts
receivable and inventories increased approximately $9.1 million. This increase
was principally funded by operating cash flow and existing cash balances. The
Company also expended approximately $3.9 million during the first six months of
1995 for property and equipment. The Company intends to continue to make
significant capital expenditures through the end of 1995, principally relating
to the implementation of the Company's new MIS systems. At June 30, 1995, the
Company had $10.4 million in cash and equivalents, which represents a decrease
of approximately $5.0 million from December 31, 1994.
14
<PAGE>
The Company has a loan agreement with Bank One, Arizona, N.A. This agreement
provides for a $5.0 million, unsecured, revolving line of credit, which is being
used primarily to support international letters of credit to suppliers.
Outstanding balances bear interest at the bank's prime rate. In the fourth
quarter of 1993, the Company repaid all long and short term debt from a portion
of the net proceeds received from its 1993 public offering. The remaining
proceeds were added to working capital.
The Company offers to its customers lease financing and other services,
including its Totalease program, through its Inter-Tel Leasing subsidiary. The
Company funds its Totalease program in part through the sale to financial
institutions of rental income streams under the leases. Resold Totalease rentals
totaling $27.0 million and $19.9 million remain unbilled at June 30, 1995 and
December 31, 1994, respectively. The Company is obligated to repurchase such
income streams in the event of defaults by lease customers and, accordingly,
maintains reserves based upon loss experience and past due accounts. Although
the Company to date has been able to resell the rental streams from leases under
the Totalease program profitably and on a substantially current basis, the
timing and profitability of lease resales could impact the Company's business
and operating results, particularly in an environment of fluctuating interest
rates. If the Company is required to repurchase rental streams and realize
losses thereon in amounts exceeding its reserves, its operating results will be
adversely affected.
The Company believes that the net proceeds from this offering and its working
capital and credit facilities, together with cash generated from operations,
will be sufficient to fund purchases of capital equipment, finance any cash
acquisitions which the Company may consider and provide adequate working capital
for the foreseeable future. However, to the extent that additional funds are
required in the future to address working capital needs and to provide funding
for capital expenditures, expansion of the business or additional acquisitions,
the Company will seek additional financing. There can be no assurance that
additional financing will be available when required or on acceptable terms.
15
<PAGE>
BUSINESS
Inter-Tel is a single point of contact, full service provider of business
telephone systems, telecommunications software applications, computer telephony
integration (CTI), voice processing software and long distance calling services,
as well as maintenance, leasing and support services. Because of the modular
design and high level of software content in the Company's products, including
its AXXESS and Inter-Tel Axxent systems, customers can readily increase the size
and functionality of their systems as their future telecommunications needs
change. The Company believes that it is a leading supplier of small to medium
size business telephone systems.
The Company has developed a distribution network of direct sales offices and
dealers which sells the Company's products to small to medium size organizations
and to divisions or departments of larger organizations, including Fortune 500
companies, large service organizations and governmental agencies. In the United
States, the Company has 25 direct sales offices and a growing network of
hundreds of dealers that purchase directly from the Company. The Company is also
in the process of expanding its international dealer network.
INDUSTRY BACKGROUND
In recent years, advances in telecommunications technologies have facilitated
the development of increasingly sophisticated telephone systems and
applications. Telecommunications systems have evolved from simple analog
telephones to sophisticated digital systems and applications. Users increasingly
rely upon a variety of applications, including conference calling,
speakerphones, voice processing and automated attendant, to improve
communications within their organizations and with customers and vendors.
Digital technology has facilitated the integration of computing and
telecommunications technologies, also known as computer telephony integration,
which has made possible a number of new applications that further enhance
productivity. Examples of these applications include automatic call distribution
(which provides for queuing and prioritization of incoming calls), call
accounting (which permits accounting for telephone usage and toll calls),
facsimile storage and forwarding, electronic data interchange between customers
and vendors and the use of automatic number identification coupled with
"database look-up," where customer information is retrieved automatically from a
computerized database when the customer calls.
Historically, advanced technologies and applications have been initially
introduced in large telecommunications systems. However, small to medium size
businesses and other organizations, as well as small to medium size facilities
of larger organizations, are increasingly requiring advanced features and
applications at a more effective price-performance point, in order to improve
efficiency and enhance competitiveness.
Following the breakup of the Bell telephone system in 1984, which removed
restrictions on the ability of the RBOCs to purchase telephone systems and
equipment from independent suppliers and to resell such systems and equipment to
end users, the market for telecommunications systems and applications became
increasingly fragmented. The number of independent suppliers and distributors of
telecommunications equipment initially increased, but increased levels of
competition led to consolidation among suppliers and distributors. In addition,
different telecommunications systems and applications were often available from
only one or a limited number of suppliers, which required businesses seeking
complete telecommunications systems to work with a number of different
suppliers. A business seeking a telephone system, voice mail and long distance
services would most likely purchase the products and services from three
separate vendors.
As businesses' telecommunications requirements have become more advanced, the
integration of the different parts of a system has become increasingly
difficult. The system integration, service and support capabilities of
telecommunications suppliers have become significant competitive factors. In
order to meet the needs of end users, suppliers have been increasingly required
to develop close relationships with end users.
16
<PAGE>
STRATEGY
The Company's strategy is to offer to its customers, through a broad
distribution network, a single source for their full range of telecommunications
requirements, and to provide to its market segment, on a cost-effective basis,
advanced technologies and services that have achieved acceptance in the market
for larger systems.
o Offer Total Telephony Solution
The Company offers a broad range of products and services that provides
customers with a single source to fulfill their current and future
telecommunications and telephony needs. Inter-Tel couples this solution-oriented
approach with a high level of customer service and a commitment to quality
throughout the Company's operations. The Company's telephone switches and
telephones can be integrated with the Company's long distance calling services,
voice mail, automated attendant and other telecommunications applications,
support for interactive voice response and leasing and support services. Because
of the modular design of the Company's systems and the high level of software
content in its products, customers can readily increase the size and
functionality of their systems as their telephony needs change by purchasing
additional equipment, applications or services or by upgrading to new systems or
advanced versions of existing systems. The Company believes that many of its
customers prefer to purchase telephony equipment and services from a single
source because of the convenience, consistency of service, ease of upgrade and
confidence in the performance of integrated systems and services.
o Provide Advanced Products
The Company seeks to provide its customers with advanced telecommunications
technologies on a cost-effective basis. In many cases, the Company develops new
technologies as software upgrades or add-ons to existing products. Ongoing
research and development efforts are directed to the development of new
products, applications and services for sale into the Company's existing
customer base and to new customers. The Company's AXXESS telephone system is a
fully-digital, software-intensive system which incorporates digital signal
processing (DSP) components and open architecture interfaces. These interfaces
enable the AXXESS telephone system to interact with applications and databases
on attached computers, and permit customers to integrate their telephone systems
with a number of computer-based applications, including automatic database
look-up, call accounting, automatic call distribution, facsimile storage and
forwarding and exchange of electronic data between customers and vendors. The
Company recently announced the introduction of the Inter-Tel Axxent telephone
system, which is intended to bring many of the advanced features and
functionality of the AXXESS system to smaller businesses. The Inter-Tel Axxent
is expected to have a high level of computer telephony integration and full
function plug-in voicemail. Through CTI and advanced network services, Inter-Tel
provides technology that is designed to enable its customers to improve their
efficiency and enhance their competitiveness.
o Broaden Range of Services
The Company seeks to expand the range of telephony services it offers to end
users. In addition to its telephone systems and software, Inter-Tel offers a
variety of long distance calling services, including domestic and international
calling services, 800 calling services, dedicated services, voice and video
conferencing and customized billing. Inter-Tel's strategy is to increase the
volume of its long distance services, which the Company expects will enable it
to become increasingly price competitive. The Company's Totalease program
enables an end user to acquire a full range of telephony systems, applications,
maintenance and support services, as well as lease financing, from a single
source. In addition, the Company resells to end users a number of the industry's
leading telecommunications products, including voice and video conferencing
equipment, headsets, paging equipment and wireless communications equipment.
o Expand Distribution Channels
The Company continues to expand its distribution channels through a growing
network of dealers, expansion of the Company's direct sales force and extension
into international markets. The Company has established sales relationships with
hundreds of dealers and continues to expand this network. The Company believes
that expansion of this network and the Company's direct sales offices will
facilitate the
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expansion of the Company's overall distribution network and enhance the
Company's access to end user customers, thereby enabling the Company to better
satisfy customer requirements. The Company is in the process of establishing
dealer networks in Japan and Asia and is expanding its dealer network in the
United Kingdom and Europe. The Company has expanded its direct sales activity in
recent periods through strategic acquisitions of resellers of telephony products
and services in areas where the Company has existing direct sales offices and
other strategic markets, and considers additional acquisition opportunities on
an ongoing basis. The Company also intends to expand its distribution channels
by selling certain of its CTI products and services through computer equipment
dealers and software resellers.
PRODUCTS AND SERVICES
The Company has a broad range of products designed to support the needs of
businesses and other organizations requiring telephone system installations. The
Company's principal products are telephone systems which support installations
of 5 to 500 telephones, CTI, voice processing software and long distance calling
services. The Company's principal system sales consist of systems supporting 11
to 200 telephones with suggested retail prices of up to $200,000 per system
depending on configuration. The Company also offers maintenance, leasing and
support services, and resells other telecommunications products.
TELEPHONE SYSTEMS
AXXESS. The Company's AXXESS version 2.0 supports a total of 12 to 160
telephones and trunk lines, and has a suggested retail price ranging from
approximately $8,000 to $70,000. The system incorporates fully-digital
processing and transmission to the desktop and several open architecture
interfaces which allow the system to be integrated with and controlled by
attached personal computers (PCs) and workstations. The system incorporates over
one million lines of proprietary, object-oriented C++ software developed by the
Company, which facilitates upgrades and incorporation of additional features and
functionality.
The Company recently announced the introduction of AXXESS version 3.0, a
system that expands the system capacity to 256 telephones and trunk lines and
enhances the open architecture capabilities of the system. In addition, version
3.0 will port the software to faster microprocessors, which is expected to
permit the AXXESS system to continue to expand and to enhance the functionality
and performance of these larger systems as a customer's system requirements
increase. Commercial shipments are expected to begin in the third quarter of
1995.
AXXESS "Executive" telephones incorporate user-friendly, 6x16 character LCD
displays with menu keys that permit the user to select from multiple menu
choices or access additional menu screens. AxxessoryTalk, the Company's
integrated voice processing application, permits pushbutton selection of voice
processing commands appearing on the LCD display, as well as voice-prompted
selections through the telephone keypad. The system is multi-lingual, offering
multiple voice prompts and LCD displays and allowing the user to switch from one
language to the other. The Company expects to add additional languages in the
future.
The AXXESS system supports several open architecture interfaces that allow
external computers to interact and control the AXXESS system through industry
standard interfaces. The AXXESS system supports an RS-232 system-level
interface, an RS-232 Hayes-based desktop interface and a Windows Dynamic Data
Exchange (DDE) interface through the AxxessoryConnect product. The Company has
Developer Toolkits available that include the detailed interface specifications,
application notes and development tools to assist third party software
developers to develop vertical market applications for the AXXESS products.
AXXESS applications include database look-up (which utilizes caller-ID
information to retrieve customer information automatically from a computerized
database), automated attendant, call center applications, interactive voice
response, automatic call distribution (which queues and prioritizes incoming
calls) and call accounting (which permits the monitoring of telephone usage and
toll cost). The Company recently announced support of the Microsoft Telephone
Application Programming Interface (TAPI) in AxxessoryConnect version 2.0, which
is currently scheduled for release in the third quarter of 1995, and support of
the Novell Telephony Services Application Programming Interface (TSAPI), which
is currently scheduled for release in the fourth quarter of 1995. The AXXESS
system is managed through a Windows-based interface on a PC, to facilitate
installation, system configuration and programming.
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The AXXESS system utilizes advanced software to configure and utilize
real-time DSP semiconductor components incorporated into the system hardware.
The use of DSPs and related software lowers system costs, permits higher
functionality and increases system flexibility. For example, DSPs can be
configured by the system manager for different combinations of speakerphones,
conference capabilities and other DSP-based facilities. The system's
speakerphones incorporate full-duplex technology, which permits the telephone to
transmit in both directions at the same time without the necessity to override
one speaker's voice to prevent feedback interference.
The AXXESS software is written in a high-level, object-oriented language
which can operate on many commonly used microprocessors.
Inter-Tel Axxent. The Company recently announced the introduction of the
Inter-Tel Axxent telephone system, which is expected to begin commercial
shipment in the third quarter of 1995. The Inter-Tel Axxent system incorporates
fully-digital processing and transmission to the desktop and several open
architecture interfaces. Small businesses are demanding additional telephony
applications such as voicemail, speakerphones, conferencing and caller ID.
Inter-Tel Axxent is designed to bring many of the advanced features and
functionality of the AXXESS system to smaller installations on a cost-effective
basis while enabling users to migrate to an AXXESS system as their
telecommunications needs evolve.
Inter-Tel Axxent supports a total of 4 to 16 telephones and 8 trunk lines,
and is expected to have a suggested retail price ranging from approximately
$3,000 to $13,000. Inter-Tel Axxent system telephones, like those of the AXXESS
system, incorporate user-friendly LCD displays with menu keys. Inter-Tel Axxent
contains the same open architecture interfaces as AXXESS, which permit
integrated connection to a PC or workstation and enable a number of CTI
features. The Inter-Tel Axxent system is housed in a standard PC mid-tower
chassis, which is expected to enhance the upgradeability of the system.
IMX 1224/2460, IMX 256 and IMX 416/832. The IMX line of products offers a
broad range of features including extensive call control and system management
capabilities. The analog IMX 1224/2460 systems support up to 60 telephones and
24 trunk lines, with a modular design that allows capacity to be increased in
increments of 6 telephones and 6 trunk lines. The digital IMX 256 and IMX
416/832 systems are currently the Company's largest systems. The IMX 256
supports as many as 256 ports, which may be allocated by the end user among
telephones and trunk lines in order to best meet the end user's needs. IMX 416
supports up to 416 ports and the IMX 832 supports up to 832 ports. Each of the
IMX 256, IMX 416 and IMX 832 is expandable using insertable modules (which are
common to each of these platforms) in increments of 8 or 16 telephones, 8 trunk
lines or 24 digital-connection T-1 trunk lines. The suggested retail price per
system of the IMX 1224/2460 ranges from approximately $5,000 to $30,000, the
suggested retail price per system of the IMX 256 ranges from approximately
$25,000 to $75,000, and the suggested retail price per system of the IMX 416/832
ranges from approximately $40,000 to $200,000.
GLX and GLX+/GMX 48. The Company's GLX and GLX+ analog product lines support
up to 12 telephones and 6 outside trunk lines. They are designed for small
businesses such as restaurants, shops and professional offices. The GLX and GLX+
systems feature internal speakerphones, call forwarding capability and an
optional data port for modems and data connections. In addition, the GLX+ has an
LCD display and supports single line telephones and voice processing.
The analog GMX 48 supports up to 48 telephones and 24 trunk lines. The system
is modular and permits expansion in increments of 8 telephones and 4 trunk
lines. The GMX product offers many features found on larger systems, including
advanced messaging capabilities. The GMX 48 is used by professional offices,
manufacturing operations, large retail stores and financial institutions. The
Company sells these systems primarily through dealers and direct sales offices.
The suggested retail price per system of the GLX ranges from approximately
$1,500 to $5,000; the suggested retail price per system of the GMX ranges from
approximately $3,000 to $20,000.
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Product Features. The Company's telephone systems provide a broad range of
standard features, including automated attendant, call forward, off premises
notification and day/night toll restrictions. The AXXESS system incorporates
more advanced features, certain of which are described below.
o Automatic call distribution (ACD). Incoming calls are distributed evenly
over a service group and customers hear pre-recorded announcements telling
them they will be handled by the next available agent. ACD supervisors
receive real time and historical reports on the status of the group(s).
o Automatic database retrieval ("screen pop"). Based on the calling number,
the system accepts a modem tone prior to accepting the customer call. This
modem tone is used to identify the customer and to retrieve (or "pop")
information from the customer's database to the user's computer screen.
o Multi-lingual feature operation. The AXXESS system can be readily adapted
to other languages by changing the voiced prompts and the menus on the LCD
displays. The AXXESS system currently offers English and Japanese
versions.
o Caller ID. In areas where this service is offered by the telephone
utility, the AXXESS LCD display enables the name and telephone number of
the calling party to be displayed to the called party.
o Integrated voice processing. Tight integration between the voice
processing system and the telephone system allows telephones to display
each waiting message and provides a means for the user to randomly select
among messages by pressing a single button. Features such as play, record,
pause, skip and delete appear on the LCD display of the AXXESS executive
telephone for rapid access and instant processing.
o Personal computer programming. Allows service personnel to connect a
laptop computer and program the system using a Microsoft Windows based
graphical user interface.
o Integrated SMDR/SMDA. Systems feature an internal Station Message Detail
Recording (SMDR) report generator which summarizes calling patterns in a
variety of ways to assist in management of system usage. Further reports
may be generated by transferring call details to a specialized computer
using the SMDR. Station Message Detail Accounting (SMDA) enables the end
user to format and manipulate the information received by the system.
o Single database management. Many systems require attached computer
applications such as voice processing and call accounting systems to be
programmed and administrated separately. The single database management
capability of the AXXESS system allows the installer to program a variety
of options on both the telephone system and attached computer
simultaneously in a single programming session.
CTI AND SOFTWARE PRODUCTS
The Company has developed the AxxessoryConnect software application that
provides a Windows interface for the AXXESS telephones. The enhanced graphical
interface uses the AXXESS Desktop Interface and provides DDE and Microsoft TAPI
interfaces to allow integration with other Windows applications. Using the DDE
interface, customer records can be automatically displayed on the PC screen when
a new call starts to ring the telephone. The AxxessoryConnect application allows
integration with many personal information managers and contact management
applications such as DayTimer Organizer, Lotus Organizer and Commence.
The Company has also developed the Inside Track call accounting application.
The Inside Track application is a Windows program that works with all of
Inter-Tel's telephone systems and provides detailed call accounting reports
which allow customers to track telephone costs, monitor for toll fraud and
abuse, and allocate costs across departments.
VOICE PROCESSING PRODUCTS AND APPLICATIONS
The Company has developed AxxessoryTalk, its own voice processing product for
the AXXESS system. This voice processing product is integrated with the AXXESS
system via the Company's AxxessLink software. It supports up to 500 mailboxes,
up to 16 simultaneous voice ports and up to 30 hours of messages.
The system also incorporates a paging application.
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The Company has incorporated the features of AxxessoryTalk into its new IVX
500 voice processing platform. This product provides enhanced voice processing
capabilities to the GLX/GMX/IMX products. The Company's products also support
interactive voice response applications through industry-standard protocols.
The Company recently announced AxxessoryTalk version 3.0, which runs on the
OS/2 operating system and supports 500 mailboxes and up to 32 simultaneous port
connections. AxxessoryTalk 3.0 also supports a Fax Back feature that allows
customers to call in and have documents faxed back to them. Commercial shipments
are expected to commence in the third quarter of 1995. Both the AxxessoryTalk
and IVX 500 products include the open, industry-standard multi-vendor interface
protocol (MVIP). MVIP is a standard for connecting multi-vendor PC-based boards
in voice processing, data switching and video applications.
OTHER SERVICES AND PRODUCTS
Long Distance Calling and Network Services. The Company, through its
Inter-Tel Netsolutions, Inc. subsidiary, resells a variety of popular long
distance calling services, including domestic and international calling
services, 800 calling services, dedicated services, voice and video
conferencing, customized billing and a variety of other telecommunication
services. The Company believes that certain of its customers desire the
convenience of acquiring long distance calling services through the same vendor
that the customer uses to purchase its other telephony equipment and services.
The Company currently resells long distance services pursuant to contracts with
three of the six largest U.S. long distance carriers, and is negotiating a
similar contract with a fourth. These contracts typically have a multi-year
term, during which the Company's prices are relatively fixed, and have minimum
use requirements. There can be no assurance that the Company will meet its
minimum use commitments, will be able to negotiate lower rates with carriers in
the event of any decrease in end user rates or will be able to extend its
contracts with long distance carriers on prices favorable to the Company. The
Company is currently tariffed to resell long distance services in 20 states, and
intends to become tariffed in all 50 states.
The Company markets its long distance calling and network services through
its direct sales force. The Company provides training to the sales force to
increase the knowledge and expertise required to sell long distance services.
Inter-Tel's sales force sells long distance calling and network services
together with its other products to the same customers, which the Company
believes offers it a competitive advantage over certain of its competitors. The
Company also allows selected dealers to sell long distance calling and network
services. The Company utilizes a combination of long distance carriers to
provide competitive rates and services for dealers and customers using these
long distance network services. The Company seeks to increase the number of its
long distance calling customers and the volume of its long distance services, in
order to obtain more favorable pricing from its vendors.
Leasing Services. The Company offers its Totalease program through its
Inter-Tel Leasing, Inc. subsidiary. Totalease enables an end user to acquire a
full range of telephony systems, applications, maintenance and support services,
as well as lease financing, from a single vendor. The Totalease contract
provides a total system solution to the customer at a set monthly cost, with
system expansion available at predictable additional fees. The typical Totalease
contract has a term of 60 months, with the customer entitled to renew at a
specified price for up to an additional 36 months. The Company intends to
introduce single invoice billing, which will enable customers to manage all
telephone related payables, including lease payments, maintenance obligations,
upgrades, system expansion and long distance calling services through a single
monthly bill from Inter-Tel.
Inter-Tel also offers a full line of lease purchase financing to enable
customers to acquire Inter-Tel equipment. This leasing is available through the
Company's direct offices and dealers. The lease terms range from 24 to 84 months
with $1.00 and fair market value purchase options. By offering this type of
financing to acquire Inter-Tel equipment, the customer is able to lease directly
from the manufacturer. In
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addition, Inter-Tel, or the Inter-Tel dealer, gains an additional competitive
advantage in the marketplace by maintaining a close customer relationship. The
payment streams from these leases are sold from time to time to financial
institutions in conjunction with the leases from the Totalease program.
Other Products. Inter-Tel established its factored products division in 1994
to provide "single sourcing" of the industry's leading telecommunications
products. The factored products division resells products that Inter-Tel has
endorsed as the leading communications peripherals needed in many day-to-day
functions. Many of these products interface with Inter-Tel telephone systems.
Inter-Tel's product selection consists of voice and video conferencing, battery
backup, headsets, surge protection, paging equipment, wireless communications
and data multiplexers. The Company represents leading manufacturers such as
Compression Labs, Inc., Tandberg Telecom, American Power Conversion Corp., ACS
Enterprises, Inc., Ditek Industries, Inc., Valcom, Inc., Kentrox Industries,
Inc. and other leading telecommunications vendors.
SALES AND DISTRIBUTION
The Company has developed a network of direct sales offices and dealers which
sells the Company's products. In the United States, the Company has 25 direct
sales offices and a growing network of hundreds of dealers who purchase systems
directly from the Company. Dealers are typically located in geographic areas in
which the Company does not maintain direct sales offices. The Company is in the
process of expanding its international dealer network.
The Company believes that its success depends in part upon the strength of
its distribution channels and the ability of the Company to maintain close
access to end user customers. In recent periods, the Company has sought to
improve its access to end user customers by effecting strategic acquisitions of
resellers of telephony products and services in markets in which the Company has
existing direct sales offices and in other strategic markets. The Company
intends to further expand its distribution channels by selling certain of its
CTI products and services through computer equipment dealers and software
resellers.
The Company typically enters into non-exclusive contracts with its dealers
for a term of one or more years. Inter-Tel generally provides support and other
services to the dealer pursuant to the terms of the agreement. The agreements
often include requirements that the dealer meet or use its best efforts to meet
minimum annual purchase quotas. The Company's experience is that dealers
maintain low inventories of the Company's products and, accordingly, the Company
has experienced insignificant stock rotation returns and price protection
credits to date. The Company faces intense competition from other telephone
system and voice processing system manufacturers for its dealers' attention, as
most of the Company's dealers carry products which compete with the Company's
products. There can be no assurance that any such dealer will not promote the
products of the Company's competitors to the detriment of the Company's
products. The loss of any significant dealer or group of dealers, or any event
or condition adversely affecting the Company's dealer network, could have a
material adverse effect on the Company's business and operating results. See
"Risk Factors--Reliance on Dealer Network."
International sales have not been significant to date, and have been made
through the Company's United Kingdom and Japan subsidiaries. In order to sell
its products to customers in other countries, the Company must comply with local
telecommunications standards. The AXXESS system can be readily altered through
software modifications, which the Company believes will facilitate compliance
with local regulations. In addition, the AXXESS system has been designed to
support multi-lingual functionality, and currently supports English and
Japanese. The Company is presently establishing dealer networks in Japan and
Asia and is expanding its dealer network in the United Kingdom and Europe. The
Inter-Tel Axxent system is currently awaiting regulatory approval
internationally. International sales are subject to a number of risks, including
changes in foreign government regulations and telecommunications standards,
export license requirements, tariffs and taxes, other trade barriers,
fluctuations in currency exchange rates, difficulty in collecting accounts
receivable, difficulty in staffing and managing foreign operations and political
and economic instability. Fluctuations in currency exchange rates could cause
the
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Company's products to become relatively more expensive to customers in a
particular country, leading to a reduction in sales or profitability in that
country. In addition, the costs associated with developing international sales
may not be offset by increased sales in the short term, or at all.
CUSTOMER SERVICE AND SUPPORT
The Company believes that service and support is a critical component of
customer satisfaction and the success of the Company's business. Inter-Tel's
telecommunications expertise enables it to provide its customers with a variety
of systems consulting services. The Company assists customers in evaluating
their system requirements and in integrating the hardware, software and network
components of the customers' systems.
The Company operates a Technical Support "hotline" to provide a full range of
telephone support to its distributors, dealers and end user customers, free of
charge through a toll free number. The Company also provides on-site customer
support and, through remote diagnostic procedures, has the ability to detect and
correct system problems from its Technical Support facilities.
Information taken from customer call records allows feedback into Inter-Tel's
Quality First continuous improvement process, thus providing a road map for
continuous product and service enhancements. Each direct sales office is given a
periodic service activity report summarizing the reasons that technicians are
asking for assistance and common issues that give rise to technical inquiries.
This allows them to analyze trends in their service operations and provide
better customer service.
RESEARCH AND DEVELOPMENT
The Company's research and development efforts over the last several years
have been focused primarily on development and improvement of the AXXESS system
as well as the development of CTI and other advanced applications. Current
efforts are related to porting AXXESS software to smaller (Inter-Tel Axxent) and
larger (AXXESS version 3.0) versions of hardware, supporting additional
industry-standard open architecture interfaces (including TAPI and TSAPI, among
others), supporting facsimile features using MVIP, developing multi-system
networking capabilities, developing fiber optic interfaces on the AXXESS
product, enhancing the functionality of the AxxessoryTalk and IVX-500 (voice
processing) products, adapting the AXXESS and AxxessoryTalk products to
international markets and developing additional switch applications and features
that enhance the integration with advanced NetSolutions services and products.
The Company had a total of 91 personnel engaged in research and development
as of June 30, 1995. Research and development expenses were $3.9 million, $4.1
million, $4.5 million and $2.9 million in 1992, 1993, 1994 and the first six
months of 1995, respectively.
MANUFACTURING
The Company manufactures substantially all of its systems through third party
subcontractors located in the United States, the Philippines and the People's
Republic of China. These subcontractors use both standard and proprietary
integrated circuits and other electronic devices and components to produce
telephone switches, telephones and printed circuit boards to the Company's
engineering specifications and designs. The suppliers also inspect and test the
equipment before delivering them to the Company, which performs systems
integration, software loading, final testing and shipment. Inter-Tel is
increasing its use of domestic subcontractors. Varian, a multinational
electronics company, currently manufactures a significant portion of the
Company's products, including substantially all of the printed circuit boards
used in the AXXESS and Inter-Tel Axxent systems, at Varian's Tempe, Arizona
facility. If Varian or any of the Company's other manufacturers were unable or
unwilling to manufacture the Company's products in the future, the Company could
experience substantial delays in finding alternative sources, which could have a
material adverse effect on the Company's business and operating results.
While the Company maintains written agreements with its principal suppliers,
none of such agreements requires the suppliers to provide fixed quantities of
components or finished goods at set prices on a long term basis. The Company
provides rolling forecast schedules to its suppliers and revises the forecast on
a periodic basis.
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Foreign manufacturing facilities are subject to changes in governmental
policies, imposition of tariffs and import restrictions, and other factors
beyond the Company's control. Certain of the microprocessors, integrated
circuits and voice processing interface cards used in the Company's systems are
currently available from a single or limited sources of supply. The Company's
reliance on third party manufacturers involves a number of additional risks,
including reduced control over delivery schedules, quality assurance and costs.
From time to time, the Company has experienced delays in the supply of
components and finished goods, and there can be no assurance that the Company
will not experience such delays in the future. Any delay in delivery or shortage
of supply of components or finished goods from existing suppliers, or the
Company's inability to develop in a timely manner alternative or additional
sources if and when required, could materially and adversely affect the
Company's business and operating results. There can be no assurance that the
Company will be able to continue to obtain components or finished goods in
sufficient quantities or quality or on favorable pricing and delivery terms in
the future. See "Risk Factors--Dependence Upon Contract Manufacturers and
Component Suppliers."
QUALITY
The Company believes that the quality of its systems, customer service and
support, and other aspects of its organization is a critical element of meeting
the needs of its customers. Through its Quality First continuous improvement
process, Inter-Tel implements quality processes throughout its operations. The
Company has established formal procedures to ensure responsiveness to customer
requests, to monitor response times and to measure customer satisfaction. The
Company has also established means by which all end users, including customers
of the Company's resellers, can make product enhancement requests directly to
the Company. The Company supports its dealers through an extensive training
program at the Company's facility and at dealer sites, a toll free telephone
number for sales and technical support and the provision of end user marketing
materials. The Company typically provides one to two year warranties on its
systems to end users. In manufacturing, the Company continuously monitors the
quality of the products produced on its behalf by the Company's manufacturing
subcontractors, and is extending the Company's Quality First continuous
improvement process to its suppliers.
COMPETITION
The market for the Company's telephone system products is highly competitive
and in recent periods has been characterized by pricing pressures and business
consolidations. The Company's competitors include AT&T and NorTel, as well as
Comdial, Executone, Mitel, Panasonic, ROLM, Toshiba and others. The Company also
competes against the RBOCs, which offer systems produced by one or more of the
aforementioned competitors and also offer Centrex systems in which automatic
calling facilities are provided through equipment located in the telephone
company's central office. Competition by the RBOCs could increase significantly
if the RBOCs are granted the right to manufacture telephone systems and
equipment themselves and/or to bundle the sale of equipment with telephone
calling services, activities which to date they have been restricted from
undertaking. Recent legislative initiatives would have the effect of increasing
competition from the RBOCs. Key competitive factors in the sale of telephone
systems and related applications include performance, features, reliability,
service and support, name recognition, distribution capability and price.
In the market for voice processing applications, including voice mail, the
Company competes against Centigram, Octel, Active Voice, AVT and other
competitors, including telephone systems manufacturers such as AT&T, NorTel and
ROLM, which offer integrated voice processing systems under their own label as
well as through various OEM arrangements. Certain of the Company's competitors
may achieve marketing advantages by bundling their voice processing equipment
with sales of telephone systems, or by designing their telephone systems so that
they do not readily integrate with independent voice processing systems.
Inter-Tel expects that the development of industry standards and the acceptance
of open systems architectures in the voice processing market will reduce
technical barriers to market entry and lead to increased competition. Key
competitive factors in the sale of voice processing applications include
performance, features, name recognition and price.
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In the market for long distance services, the Company competes against AT&T,
MCI, Sprint and other suppliers, certain of which also supply the long distance
calling and network services that the Company resells. Although the Company
acquires a variety of long distance calling services in bulk from certain long
distance carriers, there can be no assurance that the Company will be able to
purchase long distance calling services on favorable terms from one or more of
such providers in the future. In addition, a substantial majority of prospective
new long distance customers for the Company currently purchase long distance
calling services from the Company's competitors. The Company believes that it is
likely to face increased competition in the long distance calling services
market to the extent that telecommunications deregulation enables RBOCs to
supply long distance calling and network services or enables RBOCs and others to
bundle long distance, local telephone and wireless services. Moreover, the
Company expects to face increased competition in the future because of low
technical barriers to entry will allow new market entrants. Key competitive
factors in the sale of long distance services include name recognition, price
and performance.
Many of the Company's competitors have significantly greater financial and
technical resources, name recognition and marketing and distribution
capabilities than the Company. The Company expects that competition will
continue to be intense in the markets addressed by the Company, and there can be
no assurance that the Company will be able to compete successfully in the
future.
INTELLECTUAL PROPERTY RIGHTS
In addition to the factors discussed above, the Company's ability to compete
successfully depends on its ability to protect the proprietary technology
contained in its products. The Company has no patents and relies principally on
copyright and trade secret law and contractual provisions to protect its
intellectual property. There can be no assurance that any copyright owned by the
Company will not be invalidated, circumvented or challenged or that the rights
granted thereunder will provide competitive advantages to the Company. Further,
there can be no assurance that others will not develop technologies that are
similar or superior to the Company's technology or duplicate the Company's
technology. As the Company expands its international operations, effective
intellectual property protection may be unavailable or limited in certain
foreign countries. There can be no assurance that the steps taken by the Company
will prevent misappropriation of its technology. Litigation may be necessary in
the future to enforce the Company's intellectual property rights, to protect the
Company's trade secrets, to determine the validity and scope of the proprietary
rights of others, or to defend against claims of infringement or invalidity.
Such litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on the Company's business and operating
results.
From time to time, the Company is subject to proceedings alleging
infringement by the Company of intellectual property rights of others. If any
such claim is asserted against the Company, the Company may seek to obtain a
license under the third party's intellectual property rights. There can be no
assurance that a license will be available on terms acceptable to the Company or
at all. In the alternative, the Company could resort to litigation to challenge
any such claim, and the Company is currently engaged in one such proceeding. See
"Business--Legal Proceedings." Any such proceedings could require the Company to
expend significant sums in litigation and could require the Company to pay
significant damages, develop non-infringing technology or acquire licenses to
the technology which is the subject of the asserted infringement, any of which
could have a material adverse effect on the Company's business and operating
results. See "Risk Factors--Product Protection and Infringement."
EMPLOYEES
As of June 30, 1995, the Company had a total of 896 employees, including 237
engaged in sales, marketing and customer support, 92 in quality, manufacturing
and related operations, 91 in research and development and 36 in finance and
administration. The Company's future success will depend upon its ability to
attract, retain and motivate highly qualified employees, who are in great
demand. None of the
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Company's employees is represented by a labor union with respect to their
employment by the Company, and the Company believes that its employee relations
are good. See "Risk Factors--Dependence on Key Personnel."
PROPERTIES
The Company maintains its corporate headquarters in an 85,000 square foot
building located in Chandler, Arizona pursuant to a lease that expires in 2008.
The Company also leases sales and support offices in a total of 25 locations in
the United States and two locations overseas. The Company expects to move its
corporate offices to another location in Phoenix, Arizona in the fourth quarter
of 1995. Following such move, the Company believes that its facilities will be
adequate to meet its current needs and that additional or alternative space will
be available as necessary in the future on commercially reasonable terms. See
"Risk Factors--Management of Growth; Implementation of Management Information
Systems."
LEGAL PROCEEDINGS
The Company is involved from time to time in litigation incidental to its
business. The Company believes that the outcome of current litigation will not
have a material adverse effect upon its results of operations or financial
condition and will not disrupt the normal operations of the Company.
26
<PAGE>
MANAGEMENT
The executive officers and directors of the Company are as follows:
NAME AGE POSITION
- -------------------- ----- ----------------------------------------------------
Steven G. Mihaylo .. 51 Chairman of the Board of Directors and Chief
Executive Officer
Thomas C. Parise ... 40 President and Chief Operating Officer
Craig W. Rauchle ... 40 Executive Vice President
W. Kris Brown ....... 41 Vice President
Michael J. Sargent . 45 Vice President, Marketing and Strategic Programs
Hiroshige Sugihara . 35 Vice President, Asia/Pacific
Kurt R. Kneip ....... 33 Vice President, Secretary, Treasurer and Chief
Financial Officer
Gary D. Edens ....... 53 Director
Maurice H. Esperseth 70 Director
C. Roland Haden .... 54 Director
Norman Stout ........ 37 Director
Kathleen R. Wade ... 42 Director
Mr. Mihaylo, the founder of the Company, has served as Chairman of the Board
of Directors of the Company since September 1983 and as Chief Executive Officer
of the Company since its formation in July 1969. Mr. Mihaylo also served as
President of the Company from July 1969 until September 1983 and again from
March 1984 until December 1994, and as Chairman of the Board of Directors from
July 1969 to October 1982. Mr. Mihaylo also is a director of MicroAge, Inc. and
Microtest, Inc.
Mr. Parise was elected President and Chief Operating Officer of the Company
in December 1994. He has been Senior Vice President of the Company since 1986.
He is also President of Inter-Tel Integrated Services, Inc., a wholly owned
research and development, manufacturing and distribution subsidiary of the
Company. Mr. Parise joined the Company in 1981 and became Branch General Manager
of the Phoenix direct sales office in 1982. In 1983, he became the Mountain
Regional Vice President, and in January 1985 he was appointed Vice President of
Operations and Sales Support.
Mr. Rauchle was elected Executive Vice President in December 1994. He had
been Senior Vice President of the Company and continues as President of
Inter-Tel DataCom, Inc., a wholly owned sales subsidiary of the Company. In
addition, he currently serves the Company and all subsidiaries in corporate
strategic planning and mergers and acquisitions activities. Mr. Rauchle joined
the Company in 1979 as Branch General Manager of the Denver direct sales office
and in 1983 was appointed the Central Region Vice President and subsequently the
Western Regional Vice President. From 1990 to 1992, Mr. Rauchle served as
President of Inter-Tel Communications, Inc.
Mr. Brown became a Vice President of the Company in December 1994, when he
was promoted to President of Inter-Tel Communications, which is one of the
Company's Regional Direct Sales Subsidiaries. In 1987, he was promoted to
Regional Vice President of the Southeast Region. Mr. Brown joined the Company in
1985 as the General Manager of the Tampa direct sales office.
Mr. Sargent was promoted to Vice President, Marketing and Strategic Programs,
in January 1995. In this position, he is responsible for business development
and strategic analysis of current practices with the goal of attaining
substantial corporate growth. Mr. Sargent joined Inter-Tel in 1984 as a software
design engineer and progressed through sales engineering and sales management,
serving as the Director of Sales and Marketing for the past four years.
Mr. Sugihara has been Vice President of the Company and President of
Inter-Tel Japan, Inc. since June 1993. Born in Osaka, Japan, Mr. Sugihara was
with Forval Corporation, a publicly traded Japanese company, from 1984 to 1992
and in 1989 established Forval America, Inc., where he served as Vice
President/Secretary/Treasurer and member of the Board of Directors.
Mr. Kneip has served as Vice President and Chief Financial Officer of the
Company since September 1993. He was elected Secretary and Treasurer in October
1994. He joined the Company in May 1992 as Director of Corporate Tax, after
seven years in public accounting, including six years with the accounting firm
of Ernst & Young. Mr. Kneip is a certified public accountant.
27
<PAGE>
Mr. Edens was elected as a director of the Company in October 1994. He was a
broadcasting media executive from 1970 to 1994, serving as Chairman and Chief
Executive Officer of Edens Broadcasting, Inc. from 1984 to 1994 when that
corporation's nine radio stations were sold. He presently is President of The
Hanover Companies, Inc., an investment firm.
Mr. Esperseth has been a director of the Company since October 1986. Mr.
Esperseth joined the Company in January 1983 as Senior Vice President-Research
and Development, after a 32-year career with GTE, and served as Executive Vice
President of Inter-Tel from 1986 to 1988. Mr. Esperseth retired as an officer of
the Company on December 31, 1989.
Dr. Haden has been a director of the Company since 1983. Dr. Haden has been
Vice Chancellor and Dean of Engineering of Texas A&M University since 1993.
Previously, he served as Vice Chancellor of Louisiana State University from 1991
to 1993, Dean of the College of Engineering and Applied Sciences at Arizona
State University from 1989 to 1991, Vice President for Academic Affairs at
Arizona State University from 1987 to 1988, and Dean of the College of
Engineering and Applied Sciences at Arizona State University from 1978 to 1987.
Mr. Stout was elected a director of the Company in October 1994. Mr. Stout
has been President of Superlite Block, a manufacturer of concrete block since
February 1993. Prior thereto he was employed by Bouhem-Fields, Inc. of Dallas,
Texas, a manufacturer of crushed stone, as Chief Executive Officer from 1990 to
1993 and as Chief Financial Officer from 1986 to 1990. Previously, Mr. Stout was
a certified public accountant with Coopers & Lybrand.
Ms. Wade was elected a director of the Company in April 1994. Ms. Wade is
also a director and Co-Chief Executive Officer of Continental Homes Holding
Corporation, having been employed by this multi-market production homebuilder
and mortgage company and its predecessor since 1978. Prior thereto, Ms. Wade, a
certified public accountant, was employed by Ernst & Ernst, an international
accounting firm.
<TABLE>
SELLING SHAREHOLDERS
The following table sets forth certain information as of June 30, 1995
regarding the beneficial ownership of the Company's Common Stock, and as
adjusted to reflect the sale of the shares of Common Stock offered hereby, of
each Selling Shareholder:
<CAPTION>
SHARES BENEFICIALLY NUMBER OF SHARES BENEFICIALLY
OWNED PRIOR TO OFFERING SHARES BEING OWNED AFTER OFFERING
------------------------ -------------- ------------------------
NAME NUMBER PERCENTAGE SOLD NUMBER PERCENTAGE
- ------------------------- ----------- ------------ -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Steven G. Mihaylo(1) .... 3,801,000 35.4% 610,000 3,191,000 25.0%
Sarah N. Mihaylo Trust(2) 100,000 * 100,000 -- *
Emily N. Mihaylo Trust(3) 100,000 * 100,000 -- *
Ray Ryan ................. 71,265 * 23,745 47,520 *
Thomas C. Parise(4) ..... 61,250 * 10,310 50,940 *
Keith Benfield ........... 17,816 * 5,945 11,871 *
<FN>
- ----------
* Less than 1%
(1) Includes 1,250,000 shares held by ALA MOANA-95, L.L.C., an Arizona limited
liability company controlled by Mr. Mihaylo, 610,000 of which are being sold
in this offering (1,037,500 if the Underwriters' over-allotment option is
exercised in full). If the Underwriters' over-allotment option is exercised
in full, Mr. Mihaylo will own beneficially 2,763,500 shares, or 21.7% of the
outstanding shares after this offering. Mr. Mihaylo is the Chairman of the
Board of Directors and Chief Executive Officer of the Company.
(2) Sarah N. Mihalyo, the beneficiary of the trust, is the daughter of Mr.
Mihaylo.
(3) Emily N. Mihaylo, the beneficiary of the trust, is the daughter of Mr.
Mihaylo.
(4) Mr. Parise is the President and Chief Operating Officer of the Company.
</FN>
</TABLE>
28
<PAGE>
UNDERWRITING
Montgomery Securities, Donaldson, Lufkin & Jenrette Securities Corporation
and Sutro & Co. Incorporated (the "Underwriters") have severally agreed, subject
to the terms and conditions set forth in the Underwriting Agreement, to purchase
from the Company and the Selling Shareholders the number of shares of Common
Stock indicated below opposite their respective names at the public offering
price less the underwriting discount set forth on the cover page of this
Prospectus. The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent, and that the
Underwriters are committed to purchase all of such shares if any are purchased.
UNDERWRITER NUMBER OF SHARES
--------------------------------------------------- ----------------
Montgomery Securities ..............................
Donaldson, Lufkin & Jenrette Securities Corporation
Sutro & Co. Incorporated ...........................
----------------
Total .............................................. 2,850,000
================
The Underwriters have advised the Company and the Selling Shareholders that
they initially propose to offer the shares of Common Stock to the public on the
terms set forth on the cover page of this Prospectus. The Underwriters may allow
to selected dealers a concession of not more than $ per share, and the
Underwriters may allow, and such dealers may reallow, a concession not more than
$ per share to certain other dealers. After the offering, the price and other
selling terms may be changed by the Underwriters. The Common Stock is offered
subject to receipt and acceptance by the Underwriters, and to certain other
conditions, including the right to reject orders in whole or part.
A Selling Shareholder has granted an option to the Underwriters, exercisable
during the 30-day period after the date of this Prospectus, to purchase up to a
maximum of 427,500 additional shares of Common Stock to cover over-allotments,
if any, at the same price per share as the initial 2,850,000 shares to be
purchased by the Underwriters. To the extent that the Underwriters exercise this
option, each of the Underwriters will be committed, subject to certain
conditions, to purchase such additional shares in approximately the same
proportion as set forth in the above table. The Underwriters may purchase such
shares only to cover over-allotments made in connection with this offering.
The Underwriting Agreement provides that the Company and certain Selling
Shareholders will indemnify the Underwriters against certain liabilities,
including civil liabilities under the Securities Act of 1933, as amended (the
"Securities Act"), or will contribute to payments the Underwriters may be
required to make in respect thereof.
The Company's executive officers and the Selling Shareholders, who will
collectively beneficially own an aggregate of approximately 3,300,000 shares of
Common Stock following the offering (2,900,000 shares if the Underwriters'
over-allotment option is exercised in full), have agreed that without the
consent of the Underwriters acting jointly, they will not, directly or
indirectly offer, sell, contract to sell or otherwise dispose of any shares of
Common Stock or any securities convertible into or exchangeable therefor for a
period of 90 days from the date of this Prospectus. The Company has agreed that,
for a period of 90 days from the date of this Prospectus, it will not, without
the written consent of the Underwriters acting jointly, directly or indirectly,
offer, sell, contract to sell or otherwise dispose of any shares of Common Stock
or any securities, convertible or exchangeable therefor, subject to limited
exceptions.
From time to time, certain of the Underwriters or their affiliates have
provided, and may continue to provide, investment banking services to the
Company.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby and
certain other matters relating to Arizona law will be passed upon for the
Company by Kristi S. Bonfiglio, the Company's General Counsel. Certain other
legal matters are being passed upon for the Company and certain Selling
Shareholders by Wilson, Sonsini, Goodrich & Rosati, Professional Corporation,
Palo Alto, California. Pillsbury Madison & Sutro, San Francisco, California, are
acting as counsel for the Underwriters in connection with certain legal matters
relating to the shares of Common Stock offered hereby.
29
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy and information statements and other information
with the Securities and Exchange Commission (the "Commission"). Reports, proxy
statements and other information may be inspected and copied (at prescribed
rates) at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's
regional offices located at Seven World Trade Center, 13th Floor, New York, New
York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such material also can be obtained from the Public Reference Branch of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates.
The Company has filed with the Commission a registration statement on Form
S-3 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act. This Prospectus does not
contain all of the information set forth in the Registration Statement, certain
parts of which are omitted in accordance with the rules and regulations of the
Commission. For further information, reference is hereby made to the
Registration Statement.
INFORMATION INCORPORATED BY REFERENCE
The following documents filed with the Commission (File No. 0-10211) pursuant
to the Exchange Act are incorporated herein by reference:
1. The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994 filed pursuant to Section 13 of the Exchange Act.
2. The Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1995.
3. The description of the Company's Common Stock contained in its
Registration Statement on Form 8-A filed with the Commission on February
26, 1982 pursuant to Section 12(g) of the Exchange Act.
4. All reports and other documents subsequently filed by the Company pursuant
to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date
of this Prospectus and prior to the termination of this offering.
Any statement incorporated herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein, in a Prospectus Supplement or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of the Registration Statement or this Prospectus.
The Company will provide without charge to each person, including any
beneficial owner, to whom this Prospectus is delivered, upon the written or oral
request of such person, a copy of any and all of the documents which are
incorporated herein by reference (other than exhibits to such documents, unless
such exhibits are specifically incorporated by reference into such document).
Requests for such documents should be directed to Inter-Tel, Incorporated, 7300
West Boston Street, Chandler, Arizona 85226- 3224, or by calling (602) 961-9000.
EXPERTS
The consolidated financial statements of the Company appearing in the
Company's Annual Report on Form 10-K for the year ended December 31, 1994 have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon included therein and incorporated herein by reference. Such
consolidated financial statements are incorporated herein by reference in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
30
<PAGE>
{INTER-TEL AXXENT SYSTEM GRAPHIC}
The Company's new Inter-Tel Axxent system, expected to commence commercial
shipment in the third quarter of 1995, is designed to bring many of the advanced
features and functionality of the AXXESS system to smaller installations on a
cost-effective basis.
<PAGE>
No dealer, sales representative
or any other person has been
authorized to give any information
or to make any representations in
connection with this offering other
than those contained in this
Prospectus, and, if given or made, 2,850,000 SHARES
such information or representations
must not be relied upon as having
been authorized by the Company, any
Selling Shareholder or any Underwriter.
This Prospectus does not constitute an
offer to sell or a solicitation of any
offer to buy any securities other than
the shares of Common Stock to which it IMAGE: "INTER-TEL"
relates or an offer to,or a solicitation
of, any person in any jurisdiction where
such an offer or solicitation would be
unlawful. Neither the delivery of this
Prospectus nor any sale made hereunder
shall, under any circumstances, create
an implication that there has been no
change in the affairs of the Company
or that information contained herein is
correct as of any time subsequent to the COMMON STOCK
date hereof.
---------- ----------
TABLE OF CONTENTS PROSPECTUS
---------- ----------
PAGE
--------
Prospectus Summary .....................3
Risk Factors ...........................4
The Company ............................8
Use of Proceeds ........................9
Dividend Policy ........................9
Price Range of Common Stock ............9
Capitalization .........................10
Selected Consolidated Financial Data ..11 MONTGOMERY SECURITIES
Management's Discussion and Analysis
of Financial Condition and Results of
Operations ............................12 DONALDSON, LUFKIN & JENRETTE
Business ...............................16 SECURITIES CORPORATION
Management .............................27
Selling Shareholders ...................28 SUTRO & CO. INCORPORATED
Underwriting ...........................29
Legal Matters ..........................29
Available Information ..................30 , 1995
Information Incorporated by Reference .30
Experts ................................30
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various costs and expenses payable by the
Company, other than underwriting discounts and commissions, of the sale and
distribution of the securities being registered. All of the amounts shown are
estimates except the Securities and Exchange Commission registration fee, the
Nasdaq National Market listing fee and the NASD filing fee.
SEC Registration Fee .............. $ 18,013
NASD Filing Fee ................... 5,949
Nasdaq National Market Listing Fee 17,500
Blue Sky Fees and Expenses ........ 7,500
Legal Fees and Expenses ........... 105,000
Accounting Fees and Expenses ..... 35,000
Directors' and Officers' Insurance 400,000
Printing .......................... 75,000
Transfer Agent and Registrar Fees 5,000
Miscellaneous ..................... 31,038
---------
Total ......................... $700,000
=========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Articles of Incorporation limit, to the maximum extent
permitted by Arizona law, the personal liability of directors for monetary
damages for breach of their fiduciary duties as a director. The Company's Bylaws
provide that the Company shall indemnify its officers and directors and may
indemnify its employees and other agents to the fullest extent permitted by law.
The Company has entered into indemnification agreements with its officers and
directors containing provisions which are in some respects broader than the
specific indemnification provisions contained in the Arizona General Corporation
Law. The indemnification agreements may require the Company, among other things,
to indemnify such officers and directors against certain liabilities that may
arise by reason of their status or service as directors or officers (other than
liabilities arising from willful misconduct of a culpable nature), to advance
their expenses incurred as a result of any proceeding against them as to which
they could be indemnified, and to obtain directors' and officers' insurance, if
available on reasonable terms. The Company believes that these agreements are
necessary to attract and retain qualified persons as directors and officers.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding which may result in a claim for such indemnification.
The Company currently maintains directors' and officers' liability insurance.
Reference is also made to Section 11 of the Underwriting Agreement contained
in Exhibit 1.1 hereto, indemnifying officers and directors of the Registrant
against certain liabilities.
II-1
<PAGE>
ITEM 16. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------
1.1 Underwriting Agreement.
4.1 Articles of Incorporation of the Company.*
5.1 Opinion of Kristi S. Bonfiglio, General Counsel, regarding legality
of securities being 5.1 registered.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Kristi S. Bonfiglio, General Counsel (included in
Exhibit 5.1).
24.1 Power of Attorney (see page II-3).
- ----------
* Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1988 (File No. 0-10211).
ITEM 17. UNDERTAKINGS
The undersigned Company hereby undertakes that, for purposes of determining
any liability under the Securities Act of 1993, each filing of the Company's
annual report pursuant to Section 13(a) or Section 15(d) of the Securities
Exchange Act of 1934 that is incorporated by reference in the Registration
Statement shall be deemed to be a new Registration Statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Company pursuant to provisions of the Company's Articles of Incorporation and
Bylaws, the Arizona General Corporation Law, the Underwriting Agreement or
otherwise, the Company has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Company of expenses incurred or paid by a director, officer or
controlling person of the Company in the successful defense of any action, suit
or proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered hereunder, the Company will,
unless in the opinion of its counsel the question has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy as
expressed in the Securities Act of 1993 and will be governed by the final
adjudication of such issue.
The undersigned Company hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act of 1933 shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of Prospectus shall be
deemed to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant, Inter-Tel, Incorporated, a corporation organized and existing under
the law of the State of Arizona, certifies that it has reasonable grounds to
believe that it meets all of the requirements for filing on Form S-3 and has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Chandler, State of
Arizona, on the 31st day of July, 1995.
Inter-Tel, Incorporated
By: /s/ Steven G. Mihaylo
-------------------------------
Steven G. Mihaylo,
Chairman and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Steven G. Mihaylo and Kurt R. Kneip, jointly and
severally, his attorneys-in-fact, each with power of substitution, for him in
any and all capacities, to sign any amendments to this Registration Statement
(including post-effective amendments), and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his substitute or substitutes, may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
SIGNATURE TITLE DATE
- ------------------------ ------------------------------------ ------------
/s/ STEVEN G. MIHAYLO Chairman and Chief Executive Officer
----------------------- (Principal Executive Officer) July 31, 1995
Steven G. Mihaylo
/s/ KURT R. KNEIP
----------------------- Chief Financial Officer (Principal
Kurt R. Kneip Financial Officer and Principal July 31, 1995
Accounting Officer)
/s/ GARY D. EDENS
-----------------------
Gary D. Edens Director July 31, 1995
/s/MAURICE H. ESPERSETH
-----------------------
Maurice H. Esperseth Director July 31, 1995
/s/ C. ROLAND HADEN
-----------------------
C. Roland Haden Director July 31, 1995
/s/ NORMAN STOUT
-----------------------
Norman Stout Director July 31, 1995
/s/ KATHLEEN WADE
-----------------------
Kathleen Wade Director July 31, 1995
II-3
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Consolidated Financial Data" and "Experts" in the Registration Statement (Form
S-3) and the related Prospectus of Inter-Tel, Incorporated for the registration
of 3,277,500 shares of its common stock and to the incorporation by reference
therein of our report dated January 27, 1995 with respect to the consolidated
financial statements and schedules of Inter-Tel, Incorporated included in its
Annual Report on Form 10-K for the year ended December 31, 1994, filed with the
Securities and Exchange Commission.
ERNST & YOUNG LLP
July 25, 1995
Phoenix, Arizona
II-4
<PAGE>
INTER-TEL, INCORPORATED
REGISTRATION STATEMENT ON FORM S-3
EXHIBIT INDEX
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ----------- --------------------------------------------------- ----------------
1.1 Form of Underwriting Agreement.
4.1 Articles of Incorporation of the Company.*
5.1 Opinion of Kristi S. Bonfiglio, General Counsel,
regarding legality of securities being registered.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Kristi S. Bonfiglio, General Counsel
(included in Exhibit 5.1).
24.1 Power of Attorney (see page II-3).
- ----------
* Incorporated by reference.
II-5
Draft of 7/28/95
----------------
2,850,000 SHARES
INTER-TEL, INCORPORATED
COMMON STOCK
UNDERWRITING AGREEMENT
August _____, 1995
MONTGOMERY SECURITIES
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
SUTRO & CO. INCORPORATED
c/o MONTGOMERY SECURITIES
600 Montgomery Street
San Francisco, California 94111
Dear Sirs:
Section 1. INTRODUCTORY. Inter-Tel, Incorporated, an Arizona
corporation (the "Company"), proposes to issue and sell 2,000,000 shares of its
authorized but unissued Common Stock (the "Common Stock") and certain
shareholders of the Company named in Schedule B annexed hereto (the "Selling
Shareholders") propose to sell an aggregate of 850,000 shares of the Company's
issued and outstanding Common Stock to you (sometimes called herein the
"Underwriters"). Said aggregate of 2,850,000 shares are herein called the "Firm
Common Shares." In addition, one of the Selling Shareholders proposes to grant
to the Underwriters an option to purchase up to 427,500 additional shares of
Common Stock (the "Optional Common Shares"), as provided in Section 5 hereof.
The Firm Common Shares and, to the extent such option is exercised, the Optional
Common Shares are hereinafter collectively referred to as the "Common Shares."
You have advised the Company and the Selling Shareholders that
you propose to make a public offering of your respective portions of the Common
Shares on the effective date of the registration statement hereinafter referred
to, or as soon thereafter as in your judgment is advisable.
The Company and each of the Selling Shareholders hereby
confirm their respective agreements with respect to the purchase of the Common
Shares by the Underwriters as follows:
Section 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The
Company hereby represents and warrants to the several Underwriters that:
(a) A registration statement on Form S-3 (File No. 33-_____)
with respect to the Common Shares has been prepared by the Company in conformity
with the requirements of the Securities Act of 1933, as amended (the "Act"), and
the rules and regulations (the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") thereunder, and has
-1-
<PAGE>
been filed with the Commission. The Company has prepared and has filed or
proposes to file prior to the effective date of such registration statement an
amendment or amendments to such registration statement, which amendment or
amendments have been or will be similarly prepared. There have been delivered to
you two signed copies of such registration statement and amendment, together
with two copies of each exhibit filed therewith. Conformed copies of such
registration statement and amendments (but without exhibits) and of the related
preliminary prospectus have been delivered to you in such reasonable quantities
as you have requested. The Company will next file with the Commission one of the
following: (i) prior to effectiveness of such registration statement, a further
amendment thereto, including the form of final prospectus, or (ii) a final
prospectus in accordance with Rules 430A and 424(b) of the Rules and
Regulations. As filed, such amendment and form of final prospectus, or such
final prospectus, shall include all Rule 430A Information (as hereinafter
defined) and, except to the extent that you shall agree in writing to a
modification, shall be in all substantive respects in the form furnished to you
prior to the date and time that this Agreement was executed and delivered by the
parties hereto, or, to the extent not completed at such date and time, shall
contain only such specific additional information and other changes (beyond that
contained in the latest Preliminary Prospectus) as the Company shall have
previously advised you in writing would be included or made therein.
The term "Registration Statement" as used in this Agreement shall mean
such registration statement at the time such registration statement becomes
effective and, in the event any post-effective amendment thereto becomes
effective prior to the First Closing Date (as hereinafter defined), shall also
mean such registration statement as so amended; provided, however, that such
term shall also include (i) all Rule 430A Information deemed to be included in
such registration statement at the time such registration statement becomes
effective as provided by Rule 430A of the Rules and Regulations and (ii) a
registration statement, if any, filed pursuant to Rule 462(b) of the Rules and
Regulations relating to the Common Shares. The term "Preliminary Prospectus"
shall mean any preliminary prospectus referred to in the preceding paragraph and
any preliminary prospectus included in the Registration Statement at the time it
becomes effective that omits Rule 430A Information. The term "Prospectus" as
used in this Agreement shall mean the prospectus relating to the Common Shares
in the form in which it is first filed with the Commission pursuant to Rule
424(b) of the Rules and Regulations or, if no filing pursuant to Rule 424(b) of
the Rules and Regulations is required, shall mean the form of final prospectus
included in the Registration Statement at the time such registration statement
becomes effective. The term "Rule 430A Information" means information with
respect to the Common Shares and the offering thereof permitted to be omitted
from the Registration Statement when it becomes effective pursuant to Rule 430A
of the Rules and Regulations. Any reference herein to any Preliminary Prospectus
or the Prospectus shall be deemed to refer to and include the documents
incorporated by reference therein pursuant to Form S-3 under the Act, as of the
date of such Preliminary Prospectus or Prospectus, as the case may be.
(b) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus, and each Preliminary
Prospectus has conformed in all material respects to the requirements of the Act
and the Rules and Regulations and, as of its date, has not included any untrue
statement of a material fact or omitted to state a material fact necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading; and at the time the Registration Statement becomes
effective, and at all times subsequent thereto up to and including each Closing
Date hereinafter mentioned, the Registration Statement and the Prospectus, and
any amendments or supplements thereto, will contain all material statements and
information required to be included therein by the Act and the Rules and
Regulations and will in all material respects conform to the requirements of the
Act and the Rules and Regulations, and neither the Registration Statement
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nor the Prospectus, nor any amendment or supplement thereto, will include any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading;
provided, however, no representation or warranty contained in this subsection
2(b) shall be applicable to information contained in or omitted from any
Preliminary Prospectus, the Registration Statement, the Prospectus or any such
amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by or on behalf of you specifically for use
in the preparation thereof. The documents incorporated by reference in the
Prospectus, when they were filed with the Commission, conformed in all material
respects to the requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act") and the rules and regulations of the Commission thereunder,
and none of such documents contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading.
(c) The Company does not own or control, directly or
indirectly, any corporation, association or other entity other than the
subsidiaries listed in Exhibit 22.1 to the Annual Report on Form 10-K for the
Company's most recent fiscal year (the "Company Form 10-K"). The Company and
each of its subsidiaries have been duly incorporated and are validly existing as
corporations in good standing under the laws of their respective jurisdictions
of incorporation, with full power and authority (corporate and other) to own and
lease their properties and conduct their respective businesses as described in
the Prospectus; the Company, or one of its wholly-owned subsidiaries,
beneficially owns all of the outstanding capital stock of its subsidiaries free
and clear of all claims, liens, charges and encumbrances; the Company and each
of its subsidiaries are in possession of and operating in compliance with all
authorizations, licenses, permits, consents, certificates and orders material to
the conduct of their respective businesses, all of which are valid and in full
force and effect; the Company and each of its subsidiaries are duly qualified to
do business and in good standing as foreign corporations in each jurisdiction in
which the ownership or leasing of properties or the conduct of their respective
businesses requires such qualification, except for jurisdictions in which the
failure to so qualify would not have a material adverse effect upon the Company
or the subsidiary;
(d) As of June 30, 1995, the Company had authorized and
outstanding capital stock as set forth under the heading "Capitalization" in the
Prospectus; the issued and outstanding shares of the Company's Common Stock have
been duly authorized and validly issued, are fully paid and nonassessable, are
duly listed on The Nasdaq Stock Market, have been issued in compliance with all
federal and state securities laws, were not issued in violation of or subject to
any preemptive rights or other rights to subscribe for or purchase securities,
and conform to the description thereof contained in the Prospectus. All issued
and outstanding shares of capital stock of each subsidiary of the Company have
been duly authorized and validly issued and are fully paid and nonassessable.
Except as disclosed in or contemplated by the Prospectus and the financial
statements of the Company, and the related notes thereto, included in the
Prospectus, neither the Company nor any subsidiary has outstanding any options
to purchase, or any preemptive rights or other rights to subscribe for or to
purchase, any securities or obligations convertible into, or any contracts or
commitments to issue or sell, shares of its capital stock or any such options,
rights, convertible securities or obligations. The description of the Company's
stock option, stock bonus and other stock plans or arrangements, and the options
or other rights granted and exercised thereunder, set forth in or incorporated
by reference in the Prospectus accurately and fairly presents the information
required to be shown with respect to such plans, arrangements, options and
rights.
(e) The Common Shares to be sold by the Company have been duly
authorized and, when issued, delivered and paid for in the manner set forth in
this Agreement, will be duly
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authorized, validly issued, fully paid and nonassessable, and will conform to
the description thereof contained in the Prospectus. No preemptive rights or
other rights to subscribe for or purchase exist with respect to the issuance and
sale of the Common Shares by the Company pursuant to this Agreement. No
shareholder of the Company has any right which has not been waived or satisfied
to require the Company to register the sale of any shares owned by such
shareholder under the Act in the public offering contemplated by this Agreement.
No further approval or authority of the shareholders or the Board of Directors
of the Company will be required for the transfer and sale of the Common Shares
to be sold by the Selling Shareholders or the issuance and sale of the Common
Shares to be sold by the Company as contemplated herein.
(f) The Company has full legal right, power and authority to
enter into this Agreement and perform the transactions contemplated hereby. This
Agreement has been duly authorized, executed and delivered by the Company and
constitutes a valid and binding obligation of the Company in accordance with its
terms. The making and performance of this Agreement by the Company and the
consummation of the transactions herein contemplated will not violate any
provisions of the articles of incorporation or bylaws, or other organizational
documents, of the Company or any of its subsidiaries, and will not conflict
with, result in the breach or violation of, or constitute, either by itself or
upon notice or the passage of time or both, a default under any agreement,
mortgage, deed of trust, lease, franchise, license, indenture, permit or other
instrument to which the Company or any of its subsidiaries is a party or by
which the Company or any of its subsidiaries or any of its respective properties
may be bound or affected, and which is material to the Company and its
subsidiaries, as a whole, any statute or any authorization, judgment, decree,
order, rule or regulation of any court or any regulatory body, administrative
agency or other governmental body applicable to the Company or any of its
subsidiaries or any of their respective properties. No consent, approval,
authorization or other order of any court, regulatory body, administrative
agency or other governmental body is required for the execution and delivery of
this Agreement or the consummation of the transactions contemplated by this
Agreement, except for compliance with the Act, the Blue Sky laws applicable to
the public offering of the Common Shares by the several Underwriters and the
clearance of such offering with the National Association of Securities Dealers,
Inc. (the "NASD").
(g) Ernst & Young LLP, who have expressed their opinion with
respect to the financial statements and schedules included in or incorporated by
reference in the Prospectus and in the Registration Statement, are independent
accountants as required by the Act and the Rules and Regulations.
(h) The financial statements and schedules of the Company, and
the related notes thereto, included in or incorporated by reference in the
Registration Statement and the Prospectus present fairly the financial position
of the Company as of the respective dates of such financial statements and
schedules, and the results of operations and changes in financial position of
the Company for the respective periods covered thereby. Such statements,
schedules and related notes have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis as certified by the
independent accountants named in subsection 2(g). No other financial statements
or schedules are required to be included in the Registration Statement. The
selected financial and statistical data set forth in the Prospectus under the
captions "Capitalization" and "Selected Consolidated Financial Data" fairly
present the information set forth therein on the basis stated in the
Registration Statement.
(i) Except as disclosed in the Prospectus, and except as to
defaults which individually or in the aggregate would not be material to the
Company and its subsidiaries, as a whole,
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neither the Company nor any of its subsidiaries is in violation or default of
any provision of its articles of incorporation or bylaws, or other
organizational documents, or is in breach of or default with respect to any
provision of any agreement, judgment, decree, order, mortgage, deed of trust,
lease, franchise, license, indenture, permit or other instrument to which it is
a party or by which it or any of its properties are bound; and there does not
exist any state of facts which constitutes an event of default on the part of
the Company or any such subsidiary as defined in such documents or which, with
notice or lapse of time or both, would constitute such an event of default.
(j) There are no contracts or other documents required to be
described in the Registration Statement or to be filed as exhibits to the
Registration Statement by the Act or by the Rules and Regulations which have not
been described or filed as required. The contracts so described in the
Prospectus are in full force and effect on the date hereof; and neither the
Company nor any of its subsidiaries, nor to the best of the Company's knowledge,
any other party is in breach of or default under any of such contracts.
(k) Except as disclosed in the Prospectus, there are no legal
or governmental actions, suits or proceedings pending or, to the best of the
Company's knowledge, threatened to which the Company or any of its subsidiaries
is or may be a party or of which property owned or leased by the Company or any
of its subsidiaries is or may be the subject, or related to environmental or
discrimination matters, which actions, suits or proceedings would reasonably be
expected to, individually or in the aggregate, prevent or adversely affect the
transactions contemplated by this Agreement or result in a material adverse
change in the condition (financial or otherwise), properties, business, results
of operations or prospects of the Company and its subsidiaries, as a whole; and
no labor disturbance by the employees of the Company or any of its subsidiaries
exists or is imminent which would reasonably be expected to affect adversely
such condition, properties, business, results of operations or prospects.
Neither the Company nor any of its subsidiaries is a party or subject to the
provisions of any material injunction, judgment, decree or order of any court,
regulatory body, administrative agency or other governmental body.
(l) The Company or the applicable subsidiary has good and
marketable title to all the properties and assets reflected as owned in the
financial statements hereinabove described (or elsewhere in the Prospectus),
subject to no lien, mortgage, pledge, charge or encumbrance of any kind except
(i) those, if any, reflected in such financial statements (or elsewhere in the
Prospectus), or (ii) those which are not material in amount and do not adversely
affect the use made and proposed to be made of such property by the Company and
its subsidiaries. The Company or the applicable subsidiary holds its leased
properties under valid and binding leases, with such exceptions as are not
materially significant in relation to the business of the Company and its
subsidiaries, as a whole. Except as disclosed in the Prospectus, the Company
owns or leases all such properties as are necessary to its operations as now
conducted or as proposed to be conducted.
(m) Since the respective dates as of which information is
given in the Registration Statement and Prospectus, and except as described in
or specifically contemplated by the Prospectus: (i) the Company and its
subsidiaries have not incurred any material liabilities or obligations,
indirect, direct or contingent, or entered into any material verbal or written
agreement or other transaction which is not in the ordinary course of business
or which would reasonably be expected to result in a material reduction in the
future earnings of the Company and its subsidiaries, as a whole; (ii) the
Company and its subsidiaries have not sustained any material loss or
interference with their respective businesses or properties from fire, flood,
windstorm, accident or other calamity, whether or not covered by insurance;
(iii) the Company has not paid or declared any dividends or other distributions
with respect to its
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capital stock and the Company and its subsidiaries are not in default in the
payment of principal or interest on any outstanding debt obligations; (iv) there
has not been any change in the capital stock (other than upon the sale of the
Common Shares hereunder and upon the exercise of options and warrants described
in the Registration Statement) or indebtedness material to the Company and its
subsidiaries (other than in the ordinary course of business); and (v) there has
not been any material adverse change in the condition (financial or otherwise),
business, properties, results of operations or prospects of the Company and its
subsidiaries, as a whole.
(n) Except as disclosed in or specifically contemplated by the
Prospectus, the Company and its subsidiaries have sufficient trademarks, trade
names, patent rights, copyrights, licenses, approvals and governmental
authorizations to conduct their businesses as now conducted; the expiration of
any trademarks, trade names, patent rights, copyrights, licenses, approvals or
governmental authorizations would not have a material adverse effect on the
condition (financial or otherwise), business, results of operations or prospects
of the Company or its subsidiaries, as a whole; and the Company has no knowledge
of any material infringement by it or its subsidiaries of trademark, trade name
rights, patent rights, copyrights, licenses, trade secret or other similar
rights of others, and there is no claim being made against the Company or its
subsidiaries regarding trademark, trade name, patent, copyright, license, trade
secret or other infringement which would reasonably be expected to have a
material adverse effect on the condition (financial or otherwise), business,
results of operations or prospects of the Company and its subsidiaries.
(o) The Company has not been advised, and has no reason to
believe, that either it or any of its subsidiaries is not conducting business in
compliance with all applicable laws, rules and regulations of the jurisdictions
in which it is conducting business, including, without limitation, all
applicable local, state and federal environmental laws and regulations, except
where failure to be so in compliance would not materially adversely affect the
condition (financial or otherwise), business, results of operations or prospects
of the Company and its subsidiaries, as a whole.
(p) The Company and its subsidiaries have filed all necessary
federal, state and foreign income and franchise tax returns and have paid or
accrued all taxes shown as due thereon; and the Company has no knowledge of any
tax deficiency which has been or might be asserted or threatened against the
Company or its subsidiaries which would reasonably be expected to materially and
adversely affect the business, operations or properties of the Company and its
subsidiaries.
(q) The Company is not an "investment company" within the
meaning of the Investment Company Act of 1940, as amended.
(r) The Company has not distributed and will not distribute
prior to the First Closing Date hereinafter mentioned any offering material in
connection with the offering and sale of the Common Shares other than the
Prospectus, the Registration Statement and the other materials permitted by the
Act.
(s) Each of the Company and its subsidiaries maintains
insurance of the types and in the amounts generally deemed adequate for its
business, including, but not limited to, insurance covering all real and
personal property owned or leased by the Company and its subsidiaries against
theft, damage, destruction, acts of vandalism and all other risks customarily
insured against, all of which insurance is in full force and effect.
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<PAGE>
(t) Neither the Company nor any of its subsidiaries has,
directly or indirectly, at any time during the last five years (i) made any
unlawful contribution to any candidate for public office, or failed to disclose
fully any contribution in violation of law, or (ii) made any payment to any
federal or state governmental officer or official, or other person charged with
similar public or quasi-public duties, other than payments required or permitted
by the laws of the United States or any jurisdiction thereof.
(u) The Company has not taken and will not take, directly or
indirectly, any action designed to or which has constituted or which might be
reasonably expected to cause or result in stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of the
Common Shares.
Section 3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE
SELLING SHAREHOLDERS.
(a) Each of the Selling Shareholders, including ALA MOANA-95,
L.L.C., the Sarah M. Mihaylo Trust, the Emily N. Mihaylo Trust and Thomas C.
Parise (collectively, the "Affiliated Selling Shareholders") represents and
warrants to, and agrees with, the several Underwriters that:
(i) Such Selling Shareholder has, and on the First
Closing Date and Second Closing Date hereinafter mentioned will
have, good and valid title to the Common Shares proposed to be
sold by such Selling Shareholder hereunder on such Closing Date
and full right, power and authority to enter into this Agreement
and to sell, assign, transfer and deliver such Common Shares
hereunder, free and clear of all voting trust arrangements, liens,
encumbrances, equities, security interests, restrictions and
claims whatsoever; and upon delivery of and payment for such
Common Shares hereunder, the Underwriters will acquire good and
marketable title thereto, free and clear of all liens,
encumbrances, equities, claims, restrictions, security interests,
voting trusts or other defects of title whatsoever.
(ii) Such Selling Shareholder has executed and delivered
a Power of Attorney and caused to be executed and delivered on its
behalf a Custody Agreement (hereinafter collectively referred to
as the "Shareholders Agreement") and in connection herewith such
Selling Shareholder further represents, warrants and agrees that
such Selling Shareholder has deposited in custody, under the
Shareholders Agreement, with the agent named therein (the "Agent")
as custodian, certificates in negotiable form for the Common
Shares to be sold hereunder by such Selling Shareholder, for the
purpose of further delivery pursuant to this Agreement. Such
Selling Shareholder agrees that the Common Shares to be sold by
such Selling Shareholder on deposit with the Agent are subject to
the interests of the Company and the Underwriters, that the
arrangements made for such custody are to that extent irrevocable,
and that the obligations of such Selling Shareholder hereunder
shall not be terminated, except as provided in this Agreement or
in the Shareholders Agreement, by any act of such Selling
Shareholder, by operation of law, by the death or incapacity of
such Selling Shareholder or by the occurrence of any other event.
If the Selling Shareholder should die or become incapacitated, or
if any other event should occur, before the delivery of the Common
Shares hereunder, the documents evidencing Common Shares then on
deposit with the Agent shall be delivered by the Agent in
accordance with the terms and conditions of
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this Agreement as if such death, incapacity or other event had not
occurred, regardless of whether or not the Agent shall have
received notice thereof. This Agreement and the Shareholders
Agreement have been duly executed and delivered by or on behalf of
such Selling Shareholder and the form of such Shareholders
Agreement has been delivered to you.
(iii) The performance of this Agreement and the
Shareholders Agreement and the consummation of the transactions
contemplated hereby and by the Shareholders Agreement will not
result in a breach or violation by such Selling Shareholder of any
of the terms or provisions of, or constitute a default by such
Selling Shareholder under, any indenture, mortgage, deed of trust,
trust (constructive or other), loan agreement, lease, franchise,
license or other agreement or instrument to which such Selling
Shareholder is a party or by which such Selling Shareholder or any
of its properties is bound, any statute, or any judgment, decree,
order rule or regulation of any court or governmental agency or
body applicable to such Selling Shareholder or any of its
properties.
(iv) Such Selling Shareholder has not taken and will not
take, directly or indirectly, any action designed to or which has
constituted or which might reasonably be expected to cause or
result in stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the
Common Shares.
(v) Each Preliminary Prospectus and the Prospectus,
insofar as it has related to such Selling Shareholder, has not
included any untrue statement of a material fact or omitted to
state a material fact necessary to make the statements therein not
misleading in light of the circumstances under which they were
made; and neither the Registration Statement nor the Prospectus,
nor any amendment or supplement thereto, as it relates to such
Selling Shareholder, will include any untrue statement of a
material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not
misleading.
(vi) Such Selling Shareholder is not aware that any of
the representations and warranties of the Company set forth in
Section 2 above is untrue or inaccurate in any material respect.
(b) Each of the Selling Shareholders agrees with the Company
and the Underwriters not to directly or indirectly offer to sell, sell or
contract to sell or otherwise dispose of any shares of Common Stock or
securities convertible into or exchangeable for any shares of Common Stock, or
any right to purchase or acquire Common Stock, for a period of 90 days after the
first date that any of the Common Shares are released by you for sale to the
public, without the prior written consent of all of you, which consent may be
withheld in your sole discretion.
Section 4. REPRESENTATIONS AND WARRANTIES OF THE UNDERWRITERS.
You represent and warrant to the Company and to the Selling Shareholders that
the information set forth (i) on the cover page of the Prospectus with respect
to price, underwriting discounts and commissions and terms of offering, (ii) on
the inside front cover of the Prospectus with respect to stabilization and (iii)
under "Underwriting" in the Prospectus was furnished to the Company by and on
behalf of the Underwriters for use in connection with the preparation of the
Registration Statement and the Prospectus and is correct in all material
respects. Montgomery Securities represents and warrants that they have been
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authorized by each of the Underwriters to enter into this Agreement on their
behalf and to act for them in the manner herein provided.
Section 5. PURCHASE, SALE AND DELIVERY OF COMMON SHARES. On
the basis of the representations, warranties and agreements herein contained,
but subject to the terms and conditions herein set forth, (i) the Company agrees
to issue and sell to the Underwriters 2,000,000 of the Firm Common Shares, and
(ii) the Selling Shareholders agree, severally and not jointly, to sell to the
Underwriters in the respective amounts set forth in Schedule B hereto, an
aggregate of 850,000 of the Firm Common Shares. The Underwriters agree,
severally and not jointly, to purchase from the Company and the Selling
Shareholders, respectively, the number of Firm Common Shares described below.
The purchase price per share to be paid by the several Underwriters to the
Company and to the Selling Shareholders, respectively, shall be $_____ per
share.
The obligation of each Underwriter to the Company shall be to
purchase from the Company that number of full shares which (as nearly as
practicable, as determined by you) bears to 2,850,000 in the same proportion as
the number of shares set forth opposite the name of such Underwriter in Schedule
A hereto bears to the total number of Firm Common Shares. The obligation of each
Underwriter to the Selling Shareholders shall be to purchase from the Selling
Shareholders that number of full shares which (as nearly as practicable, as
determined by you) bears to 2,850,000 in the same proportion as the number of
shares set forth opposite the name of such Underwriter in Schedule A hereto
bears to the total number of Firm Common Shares.
Delivery of certificates for the Firm Common Shares to be
purchased by the Underwriters and payment therefor shall be made at the offices
of Montgomery Securities, 600 Montgomery Street, San Francisco, California (or
such other place as may be agreed upon by the Company and you) at such time and
date, not later than the third (or, if the Firm Common Shares are priced, as
contemplated by Rule 15c6-1(c) of the Exchange Act, after 4:30 P.M. Washington,
D.C. time, the fourth) full business day following the first date that any of
the Common Shares are released by you for sale to the public, as you shall
designate by at least 48 hours prior notice to the Company (or such other time
and date, not later than one week after such third or fourth, as the case may
be, full business day as may be agreed upon by the Company and the Underwriters)
(the "First Closing Date"), provided, however, that in the event the
Registration Statement is amended or the Prospectus is supplemented between the
date hereof and the First Closing Date, you shall have the right to delay the
First Closing Date to a date (not later than one week after such third or
fourth, as the case may be, full business day) that shall allow you sufficient
time to distribute the Prospectus as amended or supplemented. (As used herein,
"business day" means a day on which the New York Stock Exchange is open for
trading and on which banks in New York are open for business and are not
permitted by law or executive order to be closed.)
Delivery of certificates for the Firm Common Shares shall be
made by or on behalf of the Company and the Selling Shareholders to you with
respect to the Firm Common Shares to be sold by the Company and by the Selling
Shareholders against payment by you of the purchase price therefor by certified
or official bank checks payable in next day funds to the order of the Company
and of the Agent in proportion to the number of Firm Common Shares to be sold by
the Company and the Selling Shareholders, respectively. The certificates for the
Firm Common Shares shall be registered in such names and denominations as you
shall have requested at least two full business days prior to the First Closing
Date, and shall be made available for checking and packaging on the business day
preceding the First Closing Date at a location in New York, New York, as may be
designated by you.
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Time shall be of the essence, and delivery at the time and place specified in
this Agreement is a further condition to the obligations of the Underwriters.
In addition, on the basis of the representations, warranties
and agreements herein contained, but subject to the terms and conditions herein
set forth, the Selling Shareholder set forth in Schedule B hereto hereby grants
an option to the several Underwriters to purchase, severally and not jointly, up
to an aggregate of 427,500 Optional Common Shares at the purchase price per
share to be paid for the Firm Common Shares, for use solely in covering any
over-allotments made by you for the account of the Underwriters in the sale and
distribution of the Firm Common Shares. The option granted hereunder may be
exercised at any time (but not more than once) within 30 days after the first
date that any of the Common Shares are released by you for sale to the public,
upon notice by you to the Company and the Selling Shareholders setting forth the
aggregate number of Optional Common Shares as to which the Underwriters are
exercising the option, the names and denominations in which the certificates for
such shares are to be registered and the time and place at which such
certificates will be delivered. Such time of delivery (which may not be earlier
than the First Closing Date), being herein referred to as the "Second Closing
Date," if at any time other than the First Closing Date shall be three full
business days after delivery of such notice of exercise. The number of Optional
Common Shares to be purchased by each Underwriter shall be determined by
multiplying the number of Optional Common Shares to be sold by the Selling
Shareholders pursuant to such notice of exercise by a fraction, the numerator of
which is the number of Firm Common Shares to be purchased by such Underwriter as
set forth opposite its name in Schedule A and the denominator of which is
2,850,000 (subject to such adjustments to eliminate any fractional share
purchases as you in your discretion may make). Certificates for the Optional
Common Shares will be made available for checking and packaging on the business
day preceding the Second Closing Date at a location in New York, New York, as
may be designated by you. The manner of payment for and delivery of the Optional
Common Shares shall be the same as for the Firm Common Shares purchased from the
Selling Shareholders as specified in the two preceding paragraphs. At any time
before lapse of the option, you may cancel such option by giving written notice
of such cancellation to the Selling Shareholders. If the option is cancelled or
expires unexercised in whole or in part, the Company will deregister under the
Act the number of Option Shares as to which the option has not been exercised.
Subject to the terms and conditions hereof, the Underwriters
propose to make a public offering of their respective portions of the Common
Shares as soon after the effective date of the Registration Statement as in your
judgment is advisable and at the public offering price set forth on the cover
page of and on the terms set forth in the Prospectus.
Section 6. COVENANTS OF THE COMPANY. The Company covenants and
agrees that:
(a) The Company will use its best efforts to cause the
Registration Statement and any amendment thereof, if not effective at the time
and date that this Agreement is executed and delivered by the parties hereto, to
become effective. If the Registration Statement has become or becomes effective
pursuant to Rule 430A of the Rules and Regulations, or the filing of the
Prospectus is otherwise required under Rule 424(b) of the Rules and Regulations,
the Company will file the Prospectus, properly completed, pursuant to the
applicable paragraph of Rule 424(b) of the Rules and Regulations within the time
period prescribed and will provide evidence satisfactory to you of such timely
filing. The Company will promptly advise you in writing (i) of the receipt of
any comments of the Commission, (ii) of any request of the Commission for
amendment of or supplement to the Registration Statement (either before or after
it becomes effective), any Preliminary Prospectus or the Prospectus or for
additional information, (iii) when the Registration Statement shall have become
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effective and (iv) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or of the institution
of any proceedings for that purpose. If the Commission shall enter any such stop
order at any time, the Company will use its best efforts to obtain the lifting
of such order at the earliest possible moment. The Company will not file any
amendment or supplement to the Registration Statement (either before or after it
becomes effective), any Preliminary Prospectus or the Prospectus of which you
have not been furnished with a copy a reasonable time prior to such filing or to
which you reasonably object or which is not in compliance with the Act and the
Rules and Regulations.
(b) The Company will prepare and file with the Commission,
promptly upon your request, any amendments or supplements to the Registration
Statement or the Prospectus which in your judgment may be necessary or advisable
to enable the Underwriters to continue the distribution of the Common Shares and
will use its best efforts to cause the same to become effective as promptly as
possible. The Company will fully and completely comply with the provisions of
Rule 430A of the Rules and Regulations with respect to information omitted from
the Registration Statement in reliance upon such Rule.
(c) If at any time within the nine-month period referred to in
Section 10(a)(3) of the Act during which a prospectus relating to the Common
Shares is required to be delivered under the Act any event occurs, as a result
of which the Prospectus, including any amendments or supplements, would include
an untrue statement of a material fact, or omit to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading, or if it is necessary at any time to amend the Prospectus, including
any amendments or supplements, to comply with the Act or the Rules and
Regulations, the Company will promptly advise you thereof and will promptly
prepare and file with the Commission, at its own expense, an amendment or
supplement which will correct such statement or omission or an amendment or
supplement which will effect such compliance and will use its best efforts to
cause the same to become effective as soon as possible; and, in case any
Underwriter is required to deliver a prospectus after such nine-month period,
the Company upon request, but at the expense of such Underwriter, will promptly
prepare such amendment or amendments to the Registration Statement and such
Prospectus or Prospectuses as may be necessary to permit compliance with the
requirements of Section 10(a)(3) of the Act.
(d) As soon as practicable, but not later than 45 days after
the end of the first quarter ending after one year following the "effective date
of the Registration Statement" (as defined in Rule 158(c) of the Rules and
Regulations), the Company will make generally available to its security holders
an earnings statement (which need not be audited) which will satisfy the
provisions of the last paragraph of Section 11(a) of the Act.
(e) During such period as a prospectus is required by law to
be delivered in connection with sales by an Underwriter or dealer, the Company,
at its expense, but only for the nine-month period referred to in Section
10(a)(3) of the Act, will furnish to you and the Selling Shareholders or mail to
your order copies of the Registration Statement, the Prospectus, the Preliminary
Prospectus and all amendments and supplements to any such documents in each case
as soon as available and in such quantities as you and the Selling Shareholders
may request, for the purposes contemplated by the Act.
(f) The Company shall cooperate with you and your counsel in
order to qualify or register the Common Shares for sale under (or obtain
exemptions from the application of) the blue sky laws of such jurisdictions as
you designate, will comply with such laws and will continue such
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qualifications, registrations and exemptions in effect so long as reasonably
required for the distribution of the Common Shares. The Company shall not be
required to qualify as a foreign corporation or to file a general consent to
service of process in any such jurisdiction where it is not presently qualified
or where it would be subject to taxation as a foreign corporation. The Company
will advise you promptly of the suspension of the qualification or registration
of (or any such exemption relating to) the Common Shares for offering, sale or
trading in any jurisdiction or any initiation or threat of any proceeding for
any such purpose, and in the event of the issuance of any order suspending such
qualification, registration or exemption, the Company, with your cooperation,
will use its best efforts to obtain the withdrawal thereof.
(g) During the period of five years hereafter, the Company
will furnish to you: (i) as soon as practicable after the end of each fiscal
year, copies of the Annual Report of the Company containing the balance sheet of
the Company as of the close of such fiscal year and statements of income,
shareholders' equity and cash flows for the year then ended and the opinion
thereon of the Company's independent public accountants; (ii) as soon as
practicable after the filing thereof, copies of each proxy statement, Annual
Report on Form 10-K, Quarterly Report on Form 10-Q, Report on Form 8-K or other
report filed by the Company with the Commission, the NASD or any securities
exchange; and (iii) as soon as available, copies of any report or communication
of the Company mailed generally to holders of its Common Stock.
(h) During the period of 90 days after the first date that any
of the Common Shares are released by you for sale to the public, without the
prior written consent of all of you, which consent may be withheld in your sole
discretion, the Company will not, directly or indirectly (other than pursuant to
outstanding stock options and warrants disclosed in the Prospectus), issue,
offer, sell, grant options to purchase (other than the grant of options pursuant
to stock option plans existing on the date hereof) or otherwise dispose of any
of the Company's equity securities or any other securities convertible into or
exchangeable for its Common Stock or other equity security.
(i) The Company will apply the net proceeds of the sale of the
Common Shares sold by it substantially in accordance with its statements under
the caption "Use of Proceeds" in the Prospectus.
(j) The Company will use its best efforts to qualify or
register its Common Stock for sale in non-issuer transactions under (or obtain
exemptions from the application of) the Blue Sky laws of the State of California
(and thereby permit market making transactions and secondary trading in the
Company's Common Stock in California), and will comply with such Blue Sky laws
and will continue such qualifications, registrations and exemptions in effect
for a period of five years after the date hereof.
You may, in your sole discretion, waive in writing the
performance by the Company of any one or more of the foregoing covenants or
extend the time for their performance.
Section 7. PAYMENT OF EXPENSES. Whether or not the
transactions contemplated hereunder are consummated or this Agreement becomes
effective or is terminated, the Company and, unless otherwise paid by the
Company, the Selling Shareholders agree to pay in such proportions as they may
agree upon among themselves all costs, fees and expenses incurred in connection
with the performance of their obligations hereunder and in connection with the
transactions contemplated hereby, including without limiting the generality of
the foregoing, (i) all expenses incident to the issuance and delivery of the
Common Shares (including all printing and engraving costs), (ii) all fees
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and expenses of the registrar and transfer agent of the Common Stock and of the
Agent, (iii) all necessary issue, transfer and other stamp taxes in connection
with the issuance and sale of the Common Shares to the Underwriters, (iv) all
fees and expenses of the Company's counsel (including fees and expenses relating
to the representation of the Selling Shareholders by the Company's counsel) and
the Company's independent accountants, (v) all costs and expenses incurred in
connection with the preparation, printing, filing, shipping and distribution of
the Registration Statement, each Preliminary Prospectus and the Prospectus
(including all exhibits and financial statements) and all amendments and
supplements provided for herein, this Agreement, any Agreement Among
Underwriters, any Selected Dealers Agreement, any Underwriters' Questionnaire,
any Underwriters' Power of Attorney and the Blue Sky memoranda, (vi) all filing
fees, attorneys' fees and expenses incurred by the Company or the Underwriters
in connection with qualifying or registering (or obtaining exemptions from the
qualification or registration of) all or any part of the Common Shares for offer
and sale under state Blue Sky or Canadian securities laws, (vii) the filing fee
of the National Association of Securities Dealers, Inc., and (viii) all other
fees, costs and expenses referred to in Item 14 of the Registration Statement.
The Underwriters may deem the Company to be the primary obligor with respect to
all costs, fees and expenses to be paid by the Company and by the Selling
Shareholders. Except as provided in this Section 7, Section 9 and Section 11
hereof, the Underwriters shall pay all of their own expenses, including the fees
and disbursements of their counsel (excluding those relating to qualification,
registration or exemption under the state Blue Sky or Canadian securities laws
and the Blue Sky memoranda referred to above). This Section 7 shall not affect
any agreements relating to the payment of expenses between the Company and the
Selling Shareholders.
The Selling Shareholders will pay (directly or by
reimbursement) all fees and expenses incident to the performance of their
obligations under this Agreement which are not otherwise specifically provided
for herein, including but not limited to (i) any fees and expenses of counsel
for such Selling Shareholders (other than fees and expenses of the Company's
counsel); and (ii) all expenses and taxes incident to the sale and delivery of
the Common Shares to be sold by such Selling Shareholders to the Underwriters
hereunder.
Section 8. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS.
The obligations of the several Underwriters to purchase and pay for the Firm
Common Shares on the First Closing Date and the Optional Common Shares on the
Second Closing Date shall be subject to the accuracy of the representations and
warranties on the part of the Company and the Selling Shareholders herein set
forth as of the date hereof and as of the First Closing Date or the Second
Closing Date, as the case may be, to the accuracy of the statements of Company
officers and the Selling Shareholders made pursuant to the provisions hereof, to
the performance by the Company and the Selling Shareholders of their respective
obligations hereunder, and to the following additional conditions:
(a) The Registration Statement shall have become effective not
later than 5:00 P.M. (or, in the case of a registration statement filed pursuant
to Rule 462(b) of the Rules and Regulations relating to the Common Shares, not
later than 10:00 P.M.), Washington, D.C. time, on the date of this Agreement, or
at such later time as shall have been consented to by you; if the filing of the
Prospectus, or any supplement thereto, is required pursuant to Rule 424(b) of
the Rules and Regulations, the Prospectus shall have been filed in the manner
and within the time period required by Rule 424(b) of the Rules and Regulations;
and prior to such Closing Date, no stop order suspending the effectiveness of
the Registration Statement shall have been issued and no proceedings for that
purpose shall have been instituted or shall be pending or, to the knowledge of
the Company, the Selling Shareholders or you, shall be contemplated by the
Commission; and any request of the Commission for inclusion of
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additional information in the Registration Statement, or otherwise, shall have
been complied with to your satisfaction.
(b) You shall be satisfied that since the respective dates as
of which information is given in the Registration Statement and Prospectus, (i)
there shall not have been any change in the capital stock (other than pursuant
to the exercise of outstanding options and warrants disclosed in the Prospectus)
of the Company or any of its subsidiaries or any material change in the
indebtedness (other than in the ordinary course of business) of the Company or
any of its subsidiaries, (ii) except as set forth or contemplated by the
Registration Statement or the Prospectus, no material verbal or written
agreement or other transaction shall have been entered into by the Company or
any of its subsidiaries, which is not in the ordinary course of business or
which would reasonably be expected to result in a material reduction in the
future earnings of the Company and its subsidiaries, (iii) no loss or damage
(whether or not insured) to the property of the Company or any of its
subsidiaries shall have been sustained which materially and adversely affects
the condition (financial or otherwise), business, results of operations or
prospects of the Company and its subsidiaries, (iv) no legal or governmental
action, suit or proceeding affecting the Company or any of its subsidiaries
which is material to the Company and its subsidiaries or which affects or may
affect the transactions contemplated by this Agreement shall have been
instituted or threatened and (v) there shall not have been any material change
in the condition (financial or otherwise), business, management, results of
operations or prospects of the Company and its subsidiaries which makes it
impractical or inadvisable in your judgment to proceed with the public offering
or purchase the Common Shares as contemplated hereby.
(c) There shall have been furnished to you on each Closing
Date, in form and substance satisfactory to you, except as otherwise expressly
provided below:
(i) An opinion of Wilson, Sonsini, Goodrich & Rosati,
Professional Corporation, counsel for the Company and the Selling
Shareholders, addressed to you and dated the First Closing Date, or the
Second Closing Date, as the case may be, to the effect that:
(1) Each of the Company and its Material Subsidiaries has
been duly incorporated and is validly existing as a corporation in
good standing under the laws of its jurisdiction of incorporation,
is duly qualified to do business as a foreign corporation and is
in good standing in all other jurisdictions where the ownership or
leasing of properties or the conduct of its business requires such
qualification, except for jurisdictions in which the failure to so
qualify would not have a material adverse effect on the Company
and its subsidiaries, and has full corporate power and authority
to own its properties and conduct its business as described in the
Registration Statement (as used herein, "Material Subsidiary"
means any subsidiary of the Company deemed to be such by you and
the Company and any corporation (i) of which more than 50% of the
voting stock is owned or controlled by the Company or by one or
more of its subsidiaries and (ii) to such counsel's knowledge
either (x) the total assets of which represent 5% or more of the
total assets of the Company and its subsidiaries consolidated as
of the end of the Company's most recent fiscal quarter or (y) the
net sales of which represent 5% or more of the net sales of the
Company and its subsidiaries consolidated for the six months ended
June 30, 1995 or (z) the Company's and its other subsidiaries'
equity in the income from continuing operations before income
taxes, extraordinary items and cumulative effect of a change in
accounting principle of such corporation exceeds 5% of such income
of the Company and its subsidiaries consolidated for the six
months ended June 30, 1995);
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(2) The authorized, issued and outstanding capital stock
of the Company is as set forth under the caption "Capitalization"
in the Prospectus; all necessary corporate proceedings have been
taken in order to authorize validly such authorized Common Stock;
all outstanding shares of Common Stock (including the Firm Common
Shares and any Optional Common Shares to be sold by the Selling
Shareholders) have been duly and validly issued, are fully paid
and nonassessable, and, to such counsel's knowledge, were not
issued in violation of or subject to any preemptive rights or
other rights to subscribe for or purchase any securities; without
limiting the foregoing, to such counsel's knowledge, there are no
preemptive or other rights to subscribe for or purchase any of the
Common Shares to be sold by the Company hereunder;
(3) All of the issued and outstanding shares of capital
stock of the Material Subsidiaries have been duly and validly
authorized and issued and are fully paid and nonassessable and are
owned beneficially by the Company free and clear of all liens,
encumbrances, equities, claims, security interests, voting trusts
or other defects of title whatsoever;
(4) The certificates evidencing the Common Shares to be
delivered hereunder are in due and proper form under Arizona law,
and when duly countersigned by the Company's transfer agent and
registrar, and delivered to you or upon your order against payment
of the agreed consideration therefor in accordance with the
provisions of this Agreement, the Common Shares represented
thereby will be duly authorized and validly issued, fully paid and
nonassessable, and, to such counsel's knowledge, will not have
been issued in violation of or subject to any preemptive rights or
other rights to subscribe for or purchase securities;
(5) Except as disclosed in or specifically contemplated
by the Prospectus, to such counsel's knowledge, there are no
outstanding options, warrants or other rights requiring the
issuance of, and no commitments to issue, any shares of capital
stock of the Company or any security convertible into or
exchangeable for capital stock of the Company;
(6) (a) The Registration Statement has become effective
under the Act, and, to the best of such counsel's knowledge, no
stop order suspending the effectiveness of the Registration
Statement or preventing the use of the Prospectus has been issued
and no proceedings for that purpose have been instituted or are
pending or contemplated by the Commission; any required filing of
the Prospectus and any supplement thereto pursuant to Rule 424(b)
of the Rules and Regulations has been made in the manner and
within the time period required by such Rule 424(b);
(b) The Registration Statement, the Prospectus and each
amendment or supplement thereto (except for the financial
statements and schedules included therein as to which such counsel
need express no opinion) comply as to form in all material
respects with the requirements of the Act and the Rules and
Regulations;
(c) To such counsel's knowledge, there are no franchises,
leases, contracts, agreements or documents of a character required
to be disclosed in the Registration Statement or Prospectus or to
be filed as exhibits to the Registration Statement or to
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the Company's Annual Report on Form 10-K which are not disclosed
or filed, as required;
(d) To such counsel's knowledge, there are no legal or
governmental actions, suits or proceedings pending or threatened
against the Company or its subsidiaries which are required to be
described in the Prospectus which are not described as required;
(e) The documents incorporated by reference in the
Prospectus (except for any financial statements and schedules
included in such documents as to which such counsel need express
no opinion), when they were filed with the Commission, complied as
to form in all material respects with the requirements of the
Exchange Act and the rules and regulations of the Commission
thereunder;
(7) The Company has the requisite corporate power and
authority to enter into this Agreement and to sell and deliver the
Common Shares to be sold by it to the several Underwriters; this
Agreement has been duly and validly authorized by all necessary
corporate action by the Company, has been duly and validly
executed and delivered by and on behalf of the Company, and is a
valid and binding agreement of the Company in accordance with its
terms, except as enforceability may be limited by general
equitable principles, bankruptcy, insolvency, reorganization,
moratorium or other laws affecting creditors' rights generally and
except as to those provisions relating to indemnity or
contribution for liabilities arising under the Act as to which no
opinion need be expressed; and no approval, authorization, order,
consent, registration, filing, qualification, license or permit of
or with any court, regulatory, administrative or other
governmental body is required for the execution and delivery of
this Agreement by the Company or the performance by the Company of
its obligations set forth in this Agreement, except such as have
been obtained and are in full force and effect under the Act and
such as may be required under applicable Blue Sky laws in
connection with the purchase and distribution of the Common Shares
by the Underwriters and the clearance of such offering with the
NASD;
(8) The execution and delivery of this Agreement and the
performance by the Company of its obligations set forth in this
Agreement will not result in the breach of, or constitute, either
by itself or upon notice or the passage of time or both, a default
under, any agreement, mortgage, deed of trust, lease, franchise,
license, indenture, permit or other instrument known to such
counsel to which the Company or any of its subsidiaries is a party
or by which the Company or any of its subsidiaries or any of its
or their property may be bound or affected which is material to
the Company and its subsidiaries, as a whole, or violate any of
the provisions of the articles of incorporation or bylaws, or
other organizational documents, of the Company or any of its
subsidiaries or, so far as is known to such counsel, violate any
statute, judgment, decree, order, rule or regulation of any court
or governmental body having jurisdiction over the Company or any
of its subsidiaries or any of its or their property;
(9) The Company is not in violation of its articles of
incorporation or bylaws, none of the Material Subsidiaries is in
violation of its articles of incorporation or, to such counsel's
knowledge, bylaws or other organizational documents, and, to such
counsel's knowledge, neither the Company nor any Material
Subsidiary is in
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breach of or default with respect to any provision of any
agreement, mortgage, deed of trust, lease, franchise, license,
indenture, permit or other instrument filed as an exhibit to the
Registration Statement or the Company Form 10-K to which the
Company or any such subsidiary is a party or by which it or any of
its properties may be bound or affected, except where such default
would not materially adversely affect the Company and its
subsidiaries, taken as a whole;
(10) To such counsel's knowledge, no holders of
securities of the Company have rights which have not been waived
or fulfilled to the registration of shares of Common Stock or
other securities, because of the filing of the Registration
Statement by the Company or the offering contemplated hereby;
(11) To such counsel's knowledge, this Agreement and the
Shareholders Agreement have been duly authorized, executed and
delivered by or on behalf of each of the Selling Shareholders; the
Agent has been duly and validly authorized to act as the custodian
of the Common Shares to be sold by each such Selling Shareholder;
and, to such counsel's knowledge, the execution and delivery of
this Agreement and the Shareholders Agreement by each Selling
Shareholder and the performance by the Selling Shareholders of
their obligations set forth herein and therein, will not result in
a breach of, or constitute a default under, any indenture,
mortgage, deed of trust, trust (constructive or other), loan
agreement, lease, franchise, license or other agreement or
instrument to which any of the Selling Shareholders is a party or
by which any of the Selling Shareholders or any of their
properties may be bound and which is material to any Selling
Shareholder, or violate any statute, judgment, decree, order, rule
or regulation known to such counsel of any court or governmental
body having jurisdiction over any of the Selling Shareholders or
any of their properties; and to such counsel's knowledge, no
approval, authorization, order or consent of any court, regulatory
body, administrative agency or other governmental body is required
for the execution and delivery of this Agreement or the
Shareholders Agreement or the performance by the Selling
Shareholders of their obligations set forth in this Agreement,
except such as have been obtained and are in full force and effect
under the Act and such as may be required under the rules of the
NASD and applicable Blue Sky laws;
(12) To such counsel's knowledge, the Selling
Shareholders have full right, power and authority to enter into
this Agreement and the Shareholders Agreement and to sell,
transfer and deliver the Common Shares to be sold on such Closing
Date by such Selling Shareholders hereunder and good and valid
title to such Common Shares so sold, free and clear of all liens,
encumbrances, equities, claims, restrictions, security interests,
voting trusts, or other defects of title whatsoever, has been
transferred to the Underwriters (whom counsel may assume to be
bona fide purchasers) who have purchased such Common Shares
hereunder; and
(13) To such counsel's knowledge, this Agreement and the
Shareholders Agreement are valid and binding agreements of each of
the Selling Shareholders in accordance with their terms except as
enforceability may be limited by general equitable principles,
bankruptcy, insolvency, reorganization, moratorium or other laws
affecting creditors' rights generally and except with respect to
those provisions relating
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to indemnities or contributions for liabilities under the Act, as
to which no opinion need be expressed.
In rendering such opinion, such counsel may rely as to the
matters set forth in paragraphs (11), (12) and (13), on opinions of
other counsel retained by the Selling Shareholders, as to matters of
local or regulatory law, on opinions of local or regulatory counsel,
and as to matters of fact, on certificates of the Selling Shareholders
and of officers of the Company and of governmental officials, in which
case their opinion is to state that they are so doing and that the
Underwriters are justified in relying on such opinions or certificates
and copies of said opinions or certificates are to be delivered to
counsel for the Underwriters. Such counsel shall also include a
statement to the effect that nothing has come to such counsel's
attention that would lead such counsel to believe that either at the
effective date of the Registration Statement or at the applicable
Closing Date the Registration Statement or the Prospectus, or any such
amendment or supplement (other than the financial statements and
schedules and other financial or statistical data set forth therein, as
to which such counsel need express no belief), contains any untrue
statement of a material fact or omits to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading;
(ii) Such opinion or opinions of Pillsbury Madison & Sutro,
counsel for the Underwriters, dated the First Closing Date or the
Second Closing Date, as the case may be, with respect to the
incorporation of the Company, the sufficiency of all corporate
proceedings and other legal matters relating to this Agreement, the
validity of the Common Shares, the Registration Statement and the
Prospectus and other related matters as you may reasonably require, and
the Company and the Selling Shareholders shall have furnished to such
counsel such documents and shall have exhibited to them such papers and
records as they may reasonably request for the purpose of enabling them
to pass upon such matters. In connection with such opinions, such
counsel may rely on representations or certificates of officers of the
Company and governmental officials.
(iii) A certificate of the Company executed by the Chairman of
the Board or President and the chief financial or accounting officer of
the Company, dated the First Closing Date or the Second Closing Date,
as the case may be, to the effect that:
(1) The representations and warranties of the Company set
forth in Section 2 of this Agreement are true and correct as of
the date of this Agreement and as of the First Closing Date or the
Second Closing Date, as the case may be, and the Company has
complied with all the agreements and satisfied all the conditions
on its part to be performed or satisfied on or prior to such
Closing Date;
(2) The Commission has not issued any order preventing or
suspending the use of the Prospectus or any Preliminary Prospectus
filed as a part of the Registration Statement or any amendment
thereto; no stop order suspending the effectiveness of the
Registration Statement has been issued; and to the best of the
knowledge of the respective signers, no proceedings for that
purpose have been instituted or are pending or contemplated under
the Act;
(3) Each of the respective signers of the certificate has
carefully examined the Registration Statement and the prospectus;
to the best of his knowledge, the Registration Statement and the
Prospectus and any amendments or supplements thereto
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contain all statements required to be stated therein regarding the
Company and its subsidiaries; and neither the Registration
Statement nor the Prospectus nor any amendment or supplement
thereto includes any untrue statement of a material fact or omits
to state any material fact required to be stated therein or
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading;
(4) Since the initial date on which the Registration
Statement was filed, no agreement, written or oral, transaction or
event has occurred which should have been set forth in an
amendment to the Registration Statement or in a supplement to or
amendment of any prospectus which has not been disclosed in such a
supplement or amendment;
(5) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, and except
as disclosed in or contemplated by the Prospectus, there has not
been any material adverse change or a development which would be
reasonably likely to result in a material adverse change in the
condition (financial or otherwise), business, properties, results
of operations or management of the Company and its subsidiaries,
as a whole; and no legal or governmental action, suit or
proceeding is pending or threatened against the Company or any of
its subsidiaries which is material to the Company and its
subsidiaries, as a whole, whether or not arising from transactions
in the ordinary course of business, or which may adversely affect
the transactions contemplated by this Agreement; since such dates
and except as so disclosed, neither the Company nor any of its
subsidiaries has entered into any verbal or written agreement or
other transaction which is not in the ordinary course of business
or which would reasonably be expected to result in a material
reduction in the future earnings of the Company or incurred any
material liability or obligation, direct, contingent or indirect,
made any change in its capital stock (except pursuant to exercise
of stock options and warrants as disclosed in the Prospectus),
made any material change in its short-term debt or funded debt or
repurchased or otherwise acquired any of the Company's capital
stock; and the Company has not declared or paid any dividend, or
made any other distribution, upon its outstanding capital stock
payable to shareholders of record on a date prior to the First
Closing Date or Second Closing Date; and
(6) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus and except
as disclosed in or contemplated by the Prospectus, the Company and
its subsidiaries have not sustained a material loss or damage by
strike, fire, flood, windstorm, accident or other calamity
(whether or not insured).
(iv) On the date before this Agreement is executed and also on
the First Closing Date and the Second Closing Date a letter addressed
to you from Ernst & Young LLP, independent accountants, the first one
to be dated the day before the date of this Agreement, the second one
to be dated the First Closing Date and the third one (in the event of a
Second Closing) to be dated the Second Closing Date, in form and
substance satisfactory to you.
(v) On the First Closing Date or the Second Closing Date, as
the case may be, a certificate, dated such Closing Date and addressed
to you, signed by or on behalf of each of
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the Selling Shareholders to the effect that the representations and
warranties of such Selling Shareholder in this Agreement are true and
correct, as if made at and as of the First Closing Date or Second
Closing Date, as the case may be, and such Selling Shareholder has
complied with all the agreements and satisfied all the conditions on
its part to be performed or satisfied prior to the First Closing Date
or Second Closing Date, as the case may be.
(vi) On or before the First Closing Date, letters from each
officer of the Company, in form and substance satisfactory to you,
confirming that for a period of 90 days after the first date that any
of the Common Shares are released by you for sale to the public, such
person will not directly or indirectly sell or offer to sell or
otherwise dispose of any shares of Common Stock or any right to acquire
such shares without the prior written consent of all of you, which
consent may be withheld your sole discretion.
All such opinions, certificates, letters and documents shall
be in compliance with the provisions hereof only if they are satisfactory to you
and to Pillsbury Madison & Sutro, counsel for the Underwriters. The Company
shall furnish you with such manually signed or conformed copies of such
opinions, certificates, letters and documents as you request. Any certificate
signed by any officer of the Company and delivered to you or to counsel for the
Underwriters shall be deemed to be a representation and warranty by the Company
to the Underwriters as to the statements made therein.
If any condition to the Underwriters' obligations hereunder to
be satisfied prior to or at the First Closing Date is not so satisfied, this
Agreement at your election will terminate upon notification by you to the
Company and the Selling Shareholders without liability on the part of any
Underwriter or the Company or the Selling Shareholders except for the expenses
to be paid or reimbursed by the Company and by the Selling Shareholders pursuant
to Sections 7 and 9 hereof and except to the extent provided in Section 11
hereof.
Section 9. REIMBURSEMENT OF UNDERWRITERS' EXPENSES.
Notwithstanding any other provisions hereof, if this Agreement shall be
terminated by you pursuant to Section 8 hereof, or if the sale to the
Underwriters of the Common Shares at the First Closing is not consummated
because of any refusal, inability or failure on the part of the Company or the
Selling Shareholders to perform any agreement herein or to comply with any
provision hereof, the Company agrees to reimburse you and the other Underwriters
upon demand for all out-of-pocket expenses that shall have been reasonably
incurred by you and them in connection with the proposed purchase and the sale
of the Common Shares, including but not limited to fees and disbursements of
counsel, printing expenses, travel expenses, postage, telegraph charges and
telephone charges relating directly to the offering contemplated by the
Prospectus. Any such termination shall be without liability of any party to any
other party except that the provisions of this Section, Section 7 and Section 11
shall at all times be effective and shall apply.
Section 10. EFFECTIVENESS OF REGISTRATION STATEMENT. You, the
Company and the Selling Shareholders will use your, its and their best efforts
to cause the Registration Statement to become effective, to prevent the issuance
of any stop order suspending the effectiveness of the Registration Statement
and, if such stop order be issued, to obtain as soon as possible the lifting
thereof.
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Section 11. INDEMNIFICATION.
(a) The Company and each of the Affiliated Selling
Shareholders, jointly and severally, agree to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of the Act against any losses, claims, damages, liabilities or expenses,
joint or several, to which such Underwriter or such controlling person may
become subject, under the Act, the Exchange Act, or other federal or state
statutory law or regulation, or at common law or otherwise (including in
settlement of any litigation, if such settlement is effected with the written
consent of the Company), insofar as such losses, claims, damages, liabilities or
expenses (or actions in respect thereof as contemplated below) arise out of or
are based upon any untrue statement or alleged untrue statement of any material
fact contained in the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state in any of them a material fact
required to be stated therein or necessary to make the statements in any of them
not misleading, or arise out of or are based in whole or in part on any
inaccuracy in the representations and warranties of the Company or the Selling
Shareholders contained herein or any failure of the Company or the Selling
Shareholders to perform their respective obligations hereunder or under law; and
will reimburse each Underwriter and each such controlling person for any legal
and other expenses reasonably incurred by such Underwriter or such controlling
person in connection with investigating, defending, settling, compromising or
paying any such loss, claim, damage, liability, expense or action; provided,
however, that neither the Company nor the Affiliated Selling Shareholders will
be liable in any such case to the extent that any such loss, claim, damage,
liability or expense arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto in reliance upon and in conformity with the
information furnished to the Company pursuant to Section 4 hereof; and provided
further, that with respect to any untrue statement or omission or alleged untrue
statement or omission made in the Registration Statement, any Preliminary
Prospectus, the Prospectus, or any amendment or supplement thereto, each
Affiliated Selling Shareholder shall not be liable under this paragraph for an
amount in excess of the proceeds received by the Affiliated Selling Shareholder
for the Common Shares sold by such Affiliated Selling Shareholder to the
Underwriters; and provided further, that the indemnity provided in this Section
11(a) with respect to any Preliminary Prospectus shall not inure to the benefit
of any Underwriter from whom the person asserting any losses, claims, charges,
liabilities or litigation based upon any untrue statement or alleged untrue
statement of any material fact or omission or alleged omission to state therein
a material fact, if a copy of the Prospectus in which such untrue statement or
alleged untrue statement or omission was corrected has not been sent or given to
such person within the time required by the Act and the Rule and Regulations
thereunder, unless such failure is the result of noncompliance by the Company
with Section 6(e) hereof; and provided further, that no Affiliated Selling
Shareholder shall be liable in any case pursuant to this Section 11 to the
extent any such loss, claim, damage or liability arises out of or is based upon
an untrue statement or omission or alleged omission made in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto, in reliance upon and in conformity with information
furnished to the Company in writing by any other Selling Shareholder; and
provided further, that no Affiliated Selling Shareholder shall be required to
provide indemnification or reimbursement hereunder until the Underwriter or
control person seeking indemnification or reimbursement shall have first made a
claim therefor against the Company and such claim has not been paid by the
Company for a period of not less than 45 days. The Company and the Affiliated
Selling Shareholders may agree, as among themselves, as to their respective
amounts of such liability for which they each shall be responsible. In addition
to their other obligations under this Section 11(a), the Company and the
Affiliated Selling Shareholders agree that, as an interim measure during the
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pendency of any claim, action, investigation, inquiry or other proceeding
arising out of or based upon any statement or omission, or any alleged statement
or omission, or any inaccuracy in the representations and warranties of the
Company or the Selling Shareholders herein or failure to perform its obligations
hereunder, all as described in this Section 11(a), they will reimburse each
Underwriter on a quarterly basis for all reasonable legal or other expenses
incurred in connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the Company's
or the Affiliated Selling Shareholders' obligation to reimburse each Underwriter
for such expenses and the possibility that such payments might later be held to
have been improper by a court of competent jurisdiction. To the extent that any
such interim reimbursement payment is so held to have been improper, each
Underwriter shall promptly return it to the Company together with interest,
compounded daily, determined on the basis of the prime rate (or other commercial
lending rate for borrowers of the highest credit standing) announced from time
to time by Bank of America National Trust and Savings Association, San
Francisco, California (the "Prime Rate"). Any such interim reimbursement
payments which are not made to an Underwriter within 30 days of a request for
reimbursement, shall bear interest at the Prime Rate from the date of such
request. This indemnity agreement will be in addition to any liability which the
Company or the Selling Shareholders may otherwise have.
(b) Each Underwriter will severally indemnify and hold
harmless the Company, each of its directors, each of its officers who signed the
Registration Statement, the Selling Shareholders and each person, if any, who
controls the Company or any Selling Shareholder within the meaning of the Act,
against any losses, claims, damages, liabilities or expenses to which the
Company, or any such director, officer, Selling Shareholder or controlling
person may become subject, under the Act, the Exchange Act, or other federal or
state statutory law or regulation, or at common law or otherwise (including in
settlement of any litigation, if such settlement is effected with the written
consent of such Underwriter), insofar as such losses, claims, damages,
liabilities or expenses (or actions in respect thereof as contemplated below)
arise out of or are based upon any untrue or alleged untrue statement of any
material fact contained in the Registration Statement, any Preliminary
Prospectus, the Prospectus, or any amendment or supplement thereto, or arise out
of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or alleged
omission was made in the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any amendment or supplement thereto, in reliance upon and in
conformity with the information furnished to the Company pursuant to Section 4
hereof; and will reimburse the Company, or any such director, officer, Selling
Shareholder or controlling person for any legal and other expense reasonably
incurred by the Company, or any such director, officer, Selling Shareholder or
controlling person in connection with investigating, defending, settling,
compromising or paying any such loss, claim, damage, liability, expense or
action. In addition to its other obligations under this Section 11(b), each
Underwriter severally agrees that, as an interim measure during the pendency of
any claim, action, investigation, inquiry or other proceeding arising out of or
based upon any statement or omission, or any alleged statement or omission,
described in this Section 11(b) which relates to information furnished to the
Company pursuant to Section 4 hereof, it will reimburse the Company (and, to the
extent applicable, each officer, director, Selling Shareholder or controlling
person) on a quarterly basis for all reasonable legal or other expenses incurred
in connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the
Underwriters' obligations to reimburse the Company (and, to the extent
applicable, each officer, director, Selling Shareholder or controlling person)
for such expenses and the possibility that such payments might later be held to
have been improper by a court of competent jurisdiction.
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To the extent that any such interim reimbursement payment is so held to have
been improper, the Company (and, to the extent applicable, each officer,
director, Selling Shareholder or controlling person) shall promptly return it to
the Underwriters together with interest, compounded daily, determined on the
basis of the Prime Rate. Any such interim reimbursement payments which are not
made to the Company within 30 days of a request for reimbursement, shall bear
interest at the Prime Rate from the date of such request. This indemnity
agreement will be in addition to any liability which such Underwriter may
otherwise have.
(c) Promptly after receipt by an indemnified party under this
Section of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against an indemnifying party
under this Section, notify the indemnifying party in writing of the commencement
thereof; but the omission so to notify the indemnifying party will not relieve
it from any liability which it may have to any indemnified party for
contribution or otherwise than under the indemnity agreement contained in this
Section or to the extent it is not prejudiced as a proximate result of such
failure. In case any such action is brought against any indemnified party and
such indemnified party seeks or intends to seek indemnity from an indemnifying
party, the indemnifying party will be entitled to participate in, and, to the
extent that it may wish, jointly with all other indemnifying parties similarly
notified, to assume the defense thereof with counsel reasonably satisfactory to
such indemnified party; provided, however, if the defendants in any such action
include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be a conflict
between the positions of the indemnifying party and the indemnified party in
conducting the defense of any such action or that there may be legal defenses
available to it and/or other indemnified parties which are different from or
additional to those available to the indemnifying party, the indemnified party
or parties shall have the right to select separate counsel to assume such legal
defenses and to otherwise participate in the defense of such action on behalf of
such indemnified party or parties. Upon receipt of notice from the indemnifying
party to such indemnified party of its election so to assume the defense of such
action and approval by the indemnified party of counsel, the indemnifying party
will not be liable to such indemnified party under this Section for any legal or
other expenses subsequently incurred by such indemnified party in connection
with the defense thereof unless (i) the indemnified party shall have employed
such counsel in connection with the assumption of legal defenses in accordance
with the proviso to the preceding sentence (it being understood, however, that
the indemnifying party shall not be liable for the expenses of more than one
separate counsel, approved by you in the case of paragraph (a), representing the
indemnified parties who are parties to such action) or (ii) the indemnifying
party shall not have employed counsel reasonably satisfactory to the indemnified
party to represent the indemnified party within a reasonable time after notice
of commencement of the action, in each of which cases the fees and expenses of
counsel shall be at the expense of the indemnifying party.
(d) If the indemnification provided for in this Section 11 is
required by its terms but is for any reason held to be unavailable to or
otherwise insufficient to hold harmless an indemnified party under paragraphs
(a), (b) or (c) of this Section 11 in respect of any losses, claims, damages,
liabilities or expenses referred to herein, then each applicable indemnifying
party shall contribute to the amount paid or payable by such indemnified party
as a result of any losses, claims, damages, liabilities or expenses referred to
herein (i) in such proportion as is appropriate to reflect the relative benefits
received by the Company, Affiliated Selling Shareholders and the Underwriters
from the offering of the Common Shares or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company, Affiliated Selling
Shareholders and the Underwriters in connection with the statements or omissions
or inaccuracies in
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the representations and warranties herein which resulted in such losses, claims,
damages, liabilities or expenses, as well as any other relevant equitable
considerations. The respective relative benefits received by the Company,
Affiliated Selling Shareholders and the Underwriters shall be deemed to be in
the same proportion, in the case of the Company and the Affiliated Selling
Shareholders as the total price paid to the Company and to the Affiliated
Selling Shareholders, respectively, for the Common Shares sold by them to the
Underwriters (net of underwriting commissions but before deducting expenses),
and in the case of the Underwriters as the underwriting commissions received by
them bears to the total of such amounts paid to the Company and the Affiliated
Selling Shareholders and received by the Underwriters as underwriting
commissions. The relative fault of the Company, Affiliated Selling Shareholders
and the Underwriters shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact or the inaccurate or the
alleged inaccurate representation and/or warranty relates to information
supplied by the Company, Affiliated Selling Shareholders or the Underwriters and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission. The amount paid or payable by
a party as a result of the losses, claims, damages, liabilities and expenses
referred to above shall be deemed to include, subject to the limitations set
forth in paragraph (c) of this Section 11, any legal or other fees or expenses
reasonably incurred by such party in connection with investigating or defending
any action or claim. The provisions set forth in paragraph (c) of this Section
11 with respect to notice of commencement of any action shall apply if a claim
for contribution is to be made under this paragraph (d); provided, however, that
no additional notice shall be required with respect to any action for which
notice has been given under paragraph (c) for purposes of indemnification. The
Company, Affiliated Selling Shareholders and the Underwriters agree that it
would not be just and equitable if contribution pursuant to this Section 11 were
determined solely by pro rata allocation (even if the Underwriters were treated
as one entity for such purpose) or by any other method of allocation which does
not take account of the equitable considerations referred to in this paragraph.
Notwithstanding the provisions of this Section 11, no Underwriter shall be
required to contribute any amount in excess of the amount of the total
underwriting commissions received by such Underwriter in connection with the
Common Shares underwritten by it and distributed to the public. Notwithstanding
the provisions of this Section 11, no Affiliated Selling Shareholder shall be
required to contribute any amount in excess of the proceeds received by the
Affiliated Selling Shareholder for the Common Shares sold by such Affiliated
Selling Shareholder to the Underwriters. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute pursuant to this
Section 11 are several in proportion to their respective underwriting
commitments and not joint.
(e) It is agreed that any controversy arising out of the
operation of the interim reimbursement arrangements set forth in Sections 11(a)
and (b), including the amounts of any requested reimbursement payments and the
method of determining such amounts, shall be settled by arbitration conducted
under the provisions of the Constitution and Rules of the Board of Governors of
the New York Stock Exchange, Inc. or pursuant to the Code of Arbitration
Procedure of the NASD. Any such arbitration must be commenced by service of a
written demand for arbitration or written notice of intention to arbitrate,
therein electing the arbitration tribunal. In the event the party demanding
arbitration does not make such designation of an arbitration tribunal in such
demand or notice, then the party responding to said demand or notice is
authorized to do so. Such an arbitration would be limited to the operation of
the interim reimbursement provisions contained in Sections 11(a) and (b) and
would not resolve the ultimate propriety or enforceability of the obligation to
reimburse expenses which is created by the provisions of such Sections 11(a) and
(b) hereof.
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Section 12. DEFAULT OF UNDERWRITERS. It shall be a condition
to this Agreement and the obligation of the Company and the Selling Shareholders
to sell and deliver the Common Shares hereunder, and of each Underwriter to
purchase the Common Shares in the manner as described herein, that, except as
hereinafter in this paragraph provided, each of the Underwriters shall purchase
and pay for all the Common Shares agreed to be purchased by such Underwriter
hereunder upon tender to the Underwriters of all such shares in accordance with
the terms hereof. If any Underwriter or Underwriters default in your or their
obligations to purchase Common Shares hereunder on either the First or Second
Closing Date and the aggregate number of Common Shares which such defaulting
Underwriter or Underwriters agreed but failed to purchase on such Closing Date
does not exceed 10% of the total number of Common Shares which the Underwriters
are obligated to purchase on such Closing Date, the nondefaulting entities shall
be obligated severally, in proportion to their respective commitments hereunder,
to purchase the Common Shares which such defaulting entities agreed but failed
to purchase on such Closing Date. If any Underwriter or Underwriters so default
and the aggregate number of Common Shares with respect to which such default
occurs is more than the above percentage and arrangements satisfactory to you
and the Company for the purchase of such Common Shares by other persons are not
made within 48 hours after such default, this Agreement will terminate without
liability on the part of any nondefaulting Underwriter or the Company or the
Selling Shareholders except for the expenses to be paid by the Company and the
Selling Shareholders pursuant to Section 7 hereof and except to the extent
provided in Section 11 hereof.
In the event that Common Shares to which a default relates are
to be purchased by the nondefaulting entities or by another party or parties,
you or the Company shall have the right to postpone the First or Second Closing
Date, as the case may be, for not more than five business days in order that the
necessary changes in the Registration Statement, Prospectus and any other
documents, as well as any other arrangements, may be effected. As used in this
Agreement, the term "Underwriter" includes any person substituted for an
Underwriter under this Section. Nothing herein will relieve you or a defaulting
Underwriter from liability for its default.
Section 13. EFFECTIVE DATE. This Agreement shall become
effective immediately as to Sections 7, 9, 11, 14 and 16 and, as to all other
provisions, (i) if at the time of execution of this Agreement the Registration
Statement has not become effective, at 2:00 P.M., California time, on the first
full business day following the effectiveness of the Registration Statement, or
(ii) if at the time of execution of this Agreement the Registration Statement
has been declared effective, at 2:00 P.M., California time, on the first full
business day following the date of execution of this Agreement; but this
Agreement shall nevertheless become effective at such earlier time after the
Registration Statement becomes effective as you may determine on and by notice
to the Company or by release of any of the Common Shares for sale to the public.
For the purposes of this Section 13, the Common Shares shall be deemed to have
been so released upon the release for publication of any newspaper advertisement
relating to the Common Shares or upon the release by you of telegrams (i)
advising Underwriters that the Common Shares are released for public offering,
or (ii) offering the Common Shares for sale to securities dealers, whichever may
occur first.
Section 14. TERMINATION. Without limiting the right to terminate this
Agreement pursuant to any other provision hereof:
(a) This Agreement may be terminated by the Company by notice
to you and the Selling Shareholders or by you by notice to the Company and the
Selling Shareholders at any time prior to the time this Agreement shall become
effective as to all its provisions, and any such termination shall be without
liability on the part of the Company or the Selling Shareholders to any
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<PAGE>
Underwriter (except for the expenses to be paid or reimbursed by the Company and
the Selling Shareholders pursuant to Sections 7 and 9 hereof and except to the
extent provided in Section 11 hereof) or of any Underwriter to the Company or
the Selling Shareholders (except to the extent provided in Section 11 hereof).
(b) This Agreement may also be terminated by you prior to the
First Closing Date by notice to the Company and the Selling Shareholders (i) if
additional material governmental restrictions, not in force and effect on the
date hereof, shall have been imposed upon trading in securities generally or
minimum or maximum prices shall have been generally established on the New York
Stock Exchange or on the American Stock Exchange or in the over the counter
market by the NASD, or trading in securities generally shall have been suspended
on either such Exchange or in the over the counter market by the NASD, or a
general banking moratorium shall have been established by federal, New York or
California authorities, (ii) if an outbreak or escalation of major hostilities
or other national or international calamity or any substantial change in
political, financial or economic conditions shall have occurred or shall have
accelerated or escalated to such an extent, as, in your judgment, to affect
adversely the marketability of the Common Shares, (iii) if any adverse event
shall have occurred or shall exist which makes untrue or incorrect in any
material respect any statement or information contained in the Registration
Statement or Prospectus or which is not reflected in the Registration Statement
or Prospectus but should be reflected therein in order to make the statements or
information contained therein not misleading in any material respect, or (iv) if
there shall be any action, suit or proceeding pending or threatened, or there
shall have been any development or prospective development involving
particularly the business or properties or securities of the Company or any of
its subsidiaries or the transactions contemplated by this Agreement, which, in
your judgment, may materially and adversely affect the Company's business or
earnings and makes it impractical or inadvisable to offer or sell the Common
Shares. Any termination pursuant to this subsection (b) shall be without
liability on the part of any Underwriter to the Company or the Selling
Shareholders or on the part of the Company or the Selling Shareholders to any
Underwriter (except for expenses to be paid or reimbursed by the Company and the
Selling Shareholders pursuant to Sections 7 and 9 hereof and except to the
extent provided in Section 11 hereof).
Section 15. FAILURE OF THE SELLING SHAREHOLDERS TO SELL AND
DELIVER. If one or more of the Selling Shareholders shall fail to sell and
deliver to the Underwriters the Common Shares to be sold and delivered by such
Selling Shareholders at the First Closing Date under the terms of this
Agreement, then the Underwriters may at their option, by written notice from you
to the Company and the Selling Shareholders, either (i) terminate this Agreement
without any liability on the part of any Underwriter or, except as provided in
Sections 7, 9 and 11 hereof, the Company or the Selling Shareholders, or (ii)
purchase the shares which the Company and other Selling Shareholders have agreed
to sell and deliver in accordance with the terms hereof. In the event of a
failure by one or more of the Selling Shareholders to sell and deliver as
referred to in this Section, either you or the Company shall have the rights to
postpone the Closing Date for a period not exceeding seven business days in
order that the necessary changes in the Registration Statement, Prospectus, and
any other documents, as well as any other arrangements, may be effected.
Section 16. REPRESENTATIONS AND INDEMNITIES TO SURVIVE
DELIVERY. The respective indemnities, agreements, representations, warranties
and other statements of the Company, of its officers, of the Selling
Shareholders and of the several Underwriters set forth in or made pursuant to
this Agreement will remain in full force and effect, regardless of any
investigation made by or on behalf of any Underwriter or the Company or any of
its or their partners, officers or directors or any
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<PAGE>
controlling person, or the Selling Shareholders, as the case may be, and will
survive delivery of and payment for the Common Shares sold hereunder and any
termination of this Agreement.
Section 17. NOTICES. All communications hereunder shall be in
writing and, if sent to the Underwriters shall be mailed, delivered or
telegraphed and confirmed to you at 600 Montgomery Street, San Francisco,
California 94111, Attention: David A. Baylor, Esq., with a copy to Pillsbury
Madison & Sutro, 235 Montgomery Street, San Francisco, California 94104,
Attention: Stanton D. Wong, Esq.; and if sent to the Company or the Selling
Shareholders shall be mailed, delivered or telegraphed and confirmed to the
Company at 7300 West Boston Street, Chandler, Arizona 85226, Attention: Mr.
Steven G. Mihaylo, with a copy to Wilson, Sonsini, Goodrich & Rosati,
Professional Corporation, 650 Page Mill Road, Palo Alto, California 94304,
Attention: Jeffrey D. Saper, Esq. The Company, the Selling Shareholders or you
may change the address for receipt of communications hereunder by giving notice
to the others.
Section 18. SUCCESSORS. This Agreement will inure to the
benefit of and be binding upon the parties hereto, including any substitute
Underwriters pursuant to Section 12 hereof, and to the benefit of the officers
and directors and controlling persons referred to in Section 11, and in each
case their respective successors, personal representatives and assigns, and no
other person will have any right or obligation hereunder. No such assignment
shall relieve any party of its obligations hereunder. The term "successors"
shall not include any purchaser of the Common Shares as such from any of the
Underwriters merely by reason of such purchase.
Section 19. REPRESENTATION OF UNDERWRITERS. Except as
otherwise expressly provided herein, any action under or in respect of this
Agreement taken by you jointly or by Montgomery Securities will be binding upon
all the Underwriters.
Section 20. PARTIAL UNENFORCEABILITY. The invalidity or
unenforceability of any Section, paragraph or provision of this Agreement shall
not affect the validity or enforceability of any other Section, paragraph or
provision hereof. If any Section, paragraph or provision of this Agreement is
for any reason determined to be invalid or unenforceable, there shall be deemed
to be made such minor changes (and only such minor changes) as are necessary to
make it valid and enforceable.
Section 21. APPLICABLE LAW. This Agreement shall be governed
by and construed in accordance with the internal laws (and not the laws
pertaining to conflicts of laws) of the State of California.
Section 22. GENERAL. This Agreement constitutes the entire
agreement of the parties to this Agreement and supersedes all prior written or
oral and all contemporaneous oral agreements, understandings and negotiations
with respect to the subject matter hereof. This Agreement may be executed in
several counterparts, each one of which shall be an original, and all of which
shall constitute one and the same document.
In this Agreement, the masculine, feminine and neuter genders
and the singular and the plural include one another. The section headings in
this Agreement are for the convenience of the parties only and will not affect
the construction or interpretation of this Agreement. This Agreement may be
amended or modified, and the observance of any term of this Agreement may be
waived, only by a writing signed by the Company, Selling Shareholders and you.
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<PAGE>
Any person executing and delivering this Agreement as
Attorney-in-fact for the Selling Shareholders represents by so doing that he has
been duly appointed as Attorney-in-fact by such Selling Shareholder pursuant to
a validly existing and binding Power of Attorney which authorizes such
Attorney-in-fact to take such action. Any action taken under this Agreement by
any of the Attorneysin-fact will be binding on all Selling Shareholders.
If the foregoing is in accordance with your understanding of
our agreement, kindly sign and return to us the enclosed copies hereof,
whereupon it will become a binding agreement among the Company, the Selling
Shareholders and the several Underwriters including you, all in accordance with
its terms.
Very truly yours,
INTER-TEL INCORPORATED
By _____________________________
Its _________________________
SELLING SHAREHOLDERS
By _____________________________
(Attorney-in-fact)
The foregoing Underwriting Agreement
is hereby confirmed and accepted by
us in San Francisco, California as
of the date first above written.
MONTGOMERY SECURITIES
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
SUTRO & CO. INCORPORATED
By MONTGOMERY SECURITIES
By ______________________
Managing Director
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SCHEDULE A
Number of Firm
Common Shares
Name of Underwriter To Be Purchased
- ------------------- ---------------
Montgomery Securities ........................................
Donaldson, Lufkin & Jenrette
Securities Corporation .....................................
Sutro & Co. Incorporated......................................
TOTAL ................................................... 2,850,000
=========
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SCHEDULE B
Number of Firm
Common Shares to
be Sold by Selling
Name of Selling Shareholder Shareholders
- --------------------------- ------------------
ALA MOANA-95, L.L.C....................................... 610,000
Sarah M. Mihaylo Trust.................................... 100,000
Emily N. Mihaylo Trust.................................... 100,000
Ray Ryan.................................................. 23,745
Thomas C. Parise.......................................... 10,310
Keith Benfield............................................ 5,945
-------
Total ............................................... 850,000
=======
Number of Optional
Common Shares to
be Sold by Selling
Name of Selling Shareholder Shareholder
- --------------------------- ------------------
ALA MOANA-95, L.L.C....................................... 427,500
` -------
Total ............................................... 427,500
=======
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1667 N. Batavia Street
Orange, California 92667-3508
Telephone (714) 283-1600
Telephone (310) 921-7100
Facsimile (714) 283-2600
INTER-TEL
July 31, 1995
Inter-Tel, Incorporated
7300 W. Boston Street
Chandler, Arizona 85226
Re: Registration Statement on Form S-3
Ladies and Gentlemen:
I have examined the Registration Statement on Form S-3 to be filed by Inter-Tel,
Incorporated, an Arizona corporation (the "Company") with the Securities and
Exchange Commission on or about July 31, 1995, in connection with the
registration under the Securities Act of 1933, as amended, of 3,277,500 shares
of the Company's Common Stock, no par value (the "Shares"), 2,000,000 of which
are authorized but heretofore unissued and 1,277,500 of which (including an
over-allotment option to purchase 427,500 shares) will be sold by certain
selling shareholders. The Shares are to be sold to the underwriters for resale
to the public as described in the Registration Statement and pursuant to the
Underwriting Agreement filed as an exhibit thereto. As general counsel to the
Company, I have examined the proceedings proposed to be taken in connection with
said sale and issuance of the Shares.
It is my opinion that, upon completion of the proceedings being taken or
contemplated to be taken prior to the issuance of the Shares, the Shares when
issued and sold in the manner described in the Registration Statement will be
legally and validly issued, fully paid and nonassessable.
I consent to the use of this opinion as an exhibit to the Registration
Statement, and further consent to the use of my name wherever appearing in the
Registration Statement, including the Prospectus constituting a part thereof,
and any amendment thereto.
Very truly yours,
/s/ Kristi S. Bonfiglio
Kristi S. Bonfiglio
General Counsel
