UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission File Number:
December 31, 1994 0-10211
INTER-TEL, INCORPORATED
Incorporated in the State of Arizona I.R.S. No. 86-0220994
7300 West Boston Street
Chandler, Arizona 85226
(602) 961-9000
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock
(10,407,176 shares outstanding as of March 15, 1995)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (S 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K - [X].
The aggregate market value of the voting stock held by non-affiliates
of the registrant, based upon the last reported sales price in NASDAQ National
Market System on March 15, 1995, was approximately $70,000,000. Shares of Common
Stock held by each executive officer and director have been excluded in that
such persons may be deemed to be affiliates.
Materials have been incorporated by reference into this Report from the
following documents: (1) materials from the registrant's Proxy Statement
relating to its 1995 Annual Meeting of Shareholders have been incorporated by
reference into Part III and Part IV and (2) documents from the registrant's Form
S-1 Registration Statements (Nos. 2-70437 and 33-70054), Form S-8 Registration
Statements (Nos. 2-94805, 33-40353 and 33-73620), Annual Reports on Form 10-K
for the years December 31, 1984 and 1988, and current reports on Form 8-K dated
July 17, 1987, August 3, 1988 have been incorporated by reference into Part IV,
Item 14. Portions of the Annual Report to Shareholders for the year ended
December 31, 1994 are incorporated by reference into Part II.
INTER-TEL, INCORPORATED
1994 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Page
----
Item 1 Business 4
Item 2 Properties 23
Item 3 Legal Proceedings 23
Item 4 Submission of Matters to a Vote
of Security Holders 23
PART II
Item 5 Market for the Registrant's Common Stock
and Related Stockholder Matters 23
Item 6 Selected Financial Data 25
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of
Operations 25
Item 8 Financial Statements and Supplementary
Data 31
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 45
PART III
Item 10 Directors and Executive Officers of the
Registrant 45
Item 11 Executive Compensation 45
Item 12 Security Ownership of Certain Beneficial
Owners and Management 45
Item 13 Certain Relationships and Related
Transactions 45
PART IV
Item 14 Exhibits, Financial Statement Schedule
and Reports on Form 8-K 46
PART I
ITEM 1. BUSINESS
The Company
Inter-Tel designs, produces and markets telephone systems, applications
and services to businesses and other organizations requiring small to medium
size telephone system installations. The Company is a leading supplier to this
market, with an installed base estimated at approximately 160,000 systems and
3,300,000 telephones. The Company's products and services include telephone
switches and telephones, maintenance, leasing and support services, long
distance calling services, and voice processing and other telecommunications
applications. The Company's wide range of products support installations of 5 to
500 telephones, with the Company's principal system sales consisting of systems
supporting 11 to 200 telephones. Based on information obtained from industry
sources, the Company believes that systems supporting 5 to 500 telephones
represent approximately 95% of all domestic telephone system installations, and
that the market for these systems and related applications in the United States
was in excess of $4 billion in 1994.
The Company has developed a broad distribution network of direct sales
offices and dealers which markets the Company's products to small to medium size
organizations and divisions or departments of larger organizations, including
Fortune 500 companies, large service organizations and governmental agencies. In
the United States, the Company has 23 direct sales offices and a growing network
of hundreds of dealers who purchase directly from the Company. The Company also
has approximately 20 dealers in the United Kingdom and Europe and is in the
process of establishing a dealer network in Japan and Asia.
The Company's strategy is to offer to its customers, through a broad
distribution network, a single source for their full range of telephony
requirements, and to provide to its market segment, on a cost-effective basis,
advanced technologies that have achieved acceptance in the market for larger
systems.
Total Telephony Solution. The Company seeks to differentiate itself
from many of its competitors by offering a broad range of products and services
that provides customers with a total telephony solution. 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
principal product lines consist of a wide array of telephone switches and
telephones. In addition, the Company offers maintenance, leasing and support
services, long distance calling services including 800 and WATS services and
toll fraud protection software, voice mail, automated attendant and other
telecommunications applications, and support for interactive voice response.
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. Through an
expanding number of the Company's direct sales offices, customers can acquire
and finance all of these products and services under the Company's Totalease
program.
Expansion of Products and Services. The Company seeks to provide to its
market segment, on a cost-effective basis, advanced technologies which have
achieved acceptance in the market for larger systems. In many cases,
technologies are developed as software upgrades or add-ons to existing products.
Ongoing research and development efforts are also directed to the development of
new products, applications and services for sale into the Company's extensive
customer base and to new customers. The Company commenced commercial shipments
of its newest product line, the AXXESS telephone system, in the fourth quarter
of 1993. AXXESS is a fully-digital, software-intensive system which incorporates
digital signal processing (DSP) components and an open-architecture interface.
The DSP components enable the Company to implement full-duplex speakerphones,
conferencing and other voice processing functions through upgradable software
and a reduced number of hardware components. The interface, AxxessLink, enables
the AXXESS telephone system to interact with applications and databases on
attached computers. The Company has developed a tightly-integrated voice
processing package which operates through AxxessLink. AxxessLink will also
permit customers to integrate their telephone systems with computer-based
applications such as automatic database look-up, call accounting, call center
appalications (ACD--Automatic Call Distribution), facsimile store and forward,
and electronic data interchange between customers and vendors. The Company is
also increasing the number of sales offices through which it offers its
Totalease program and its long distance calling services.
Through computer-telephone integration (CTI) and advanced network
services, Inter-Tel provides the enabling technology that enhances the way
businesses do business. CTI features range from automatic number identification
(ANI), which allows for the identification of an incoming call, to screen pops
in which a variety of information on a given customer will appear on the screen
of a telephony-integrated computer when that customer calls in.
Expansion of Distribution Channels. The Company continues to expand its
distribution channels through a growing network of direct and indirect dealers,
expansion of the Company's direct sales force and extension into international
markets. Historically, the Company distributed a significant portion of its
products through Premier Telecom Products, Inc. ("Premier"), an exclusive,
private label distributor, and through other distributors, which in turn sold
its products through dealers. In April 1993, the Company began to establish
direct dealer relationships, while retaining a non-exclusive relationship with
Premier. Through December 31, 1994, the Company had established sales
relationships with hundreds of direct dealers and continues to expand this
network. Sales to Premier are no longer significant. The Company believes that
establishment of this network will facilitate 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. Sales of
the Company's new AXXESS product line are made solely through its direct sales
offices, direct dealers and international distribution channels.
Internationally, 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 also 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
considers additional acquisition opportunities on an ongoing basis.
Industry Background
In recent years, advances in telecommunications technologies have
facilitated the development of increasingly sophisticated telephone systems and
applications. Users increasingly rely upon a variety of applications, including
conference calls, speakerphones, voice processing, automated attendant and voice
processing, to improve communications within their organizations and with
customers and vendors. In addition, the integration of telecommunications and
computing technologies has made possible new applications that further enhance
productivity. Examples are automatic call distribution (which provides for
queuing and prioritization of incoming calls), call accounting (which permits
accounting for telephone usage and toll calls), facsimile (FAX) storage and
forwarding, electronic data interchange between customers and vendors, and the
use of ANI (automatic number identification) coupled with "Database Look-up,"
where customer information is retrieved automatically from a computerized
database when the customer calls.
The Company believes that the market it serves, telephone systems and
applications supporting 5 to 500 telephones, represents approximately 95% of all
system installations in the United States and, according to industry surveys,
total sales to end users in this market, including new installations, upgrades
and enhancements and telephony applications such as voice processing, accounted
for more than $4 billion in 1994. These systems and applications are acquired by
small to medium size businesses and by small to medium size facilities of large
organizations, including Fortune 500 companies, large service organizations and
governmental agencies.
The market for small to medium size telephone installations has been
characterized in recent periods by consolidation among market participants. The
breakup of the Bell telephone system in 1984, which removed restrictions on the
ability of the regional Bell operating companies to purchase telephone systems
and equipment from independent suppliers and to resell such systems and
equipment to end user customers, led to an increase in the number of, and the
competition among, independent suppliers and distributors. As a result of the
competition in recent periods, many of these companies have left the market or
been acquired, and a smaller number of firms remain as the principal suppliers
and distribution outlets.
Advanced features and applications initially have been introduced to
the market for large systems. However, small to medium size businesses and other
organizations are increasingly requiring advanced features and applications as
well as a high level of service and support, at a more effective
price-performance point, in order to improve efficiency and enhance
competitiveness.
Products and Services
The Company has a broad range of products designed to support the needs
of businesses and other organizations requiring small to medium size telephone
system installations. The Company's principal products are telephone systems
which support installations of 5 to 500 telephones, with the Company's principal
system sales consisting of systems supporting 11 to 200 telephones with
suggested retail prices ranging from $1,500 to $200,000 per system depending on
configuration. The Company also offers maintenance, leasing and support
services, long distance calling services, and voice processing and other
telecommunication applications.
Telephone Systems
GLX and GLX+/GMX 48
The Company's GLX and GLX+ product lines support up to 12 telephones
and 6 outside "trunk" lines that connect to the local telephone utility. 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+, which began commercial shipments in the
third quarter of 1993, has an LCD display and supports voice processing. The
Company markets its GLX and GLX+ product lines through dealers.
The 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 is a cost-effective system that 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.
IMX-1224/2460, IMX-256 and IMX-416/832
The IMX line of products offers a full range of features including
extensive call control and system management capabilities. These systems are
marketed through the Company's direct sales offices, to direct dealers, and on a
private-label basis through Premier. The 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 IMX-256 and
IMX-416/832 are 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 (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, in each case depending upon configuration.
AXXESS
The Company commenced commercial shipments of its newest product, the
AXXESS system in the fourth quarter of 1993. In 1994, the Company released
AXXESS version 2.0, a system that supports a total of 12 to 120 telephones and
trunk lines, at a suggested retail price ranging from approximately $8,000 to
$70,000. The system incorporates fully-digital processing and transmission to
the desktop and AxxessLink, an open architecture interface which allows the
system to be integrated with and controlled by attached computers such as 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.
AXXESS system telephones incorporate user-friendly, 6 by 16 character
LCD displays with menu keys that permit the user to select from multiple menu
choices or access additional menu screens. AxxessoryTalk, the integrated voice
processing application permits push-button 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 English or
Japanese voice prompts and LCD displays and allowing the user to switch from one
language to the other. Additional languages can be added in the future.
The open architecture interface permits tightly integrated connection
to a PC or workstation system bus, using several industry standard interfaces,
to provide efficient access to voice processing and other applications on the PC
or workstation. Potential applications include database look-up (which utilizes
called-ID information to retrieve customer information automatically from a
computerized database), automated attendant, interactive voice response,
automatic call distribution (which queues and prioritizes income calls), and
call accounting (which permits the monitoring of telephone usage and toll cost).
The AXXESS system is managed through a Microsoft Windows-based interface on a
PC, to facilitate installation, system configuration and programming.
The AXXESS system utilizes advanced software to configure and utilize
real-time digital signal processing (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
speakerphones 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 processors. Accordingly, the
software can be readily ported to other hardware platforms. The Company intends
to port the AXXESS software to faster micro processors which will permit the
AXXESS to grow to a much larger size, in order to enhance the functionality and
performance of these larger systems and to permit a migration path from the
smaller AXXESS system as a customer's system requirements increase.
Product Features
The Company's products provide a broad range of features that meets the
needs of small to medium size businesses and other organizations. The
cost-effective GLX system incorporates a smaller subset of features than the GMX
and IMX systems. The new AXXESS system incorporates new, advanced features, as
indicated below. Selected features utilized by one or more systems include the
following:
Call Handling. Call handling features are used to establish and
administer basic telephone communications. They include the following:
* Automated attendant. The automated attendant serves as an
electronic operator that routes calls to individual telephone
stations in accordance with the touch-tone selections of the
outside caller.
* Automatic call distribution (ACD). 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
supervisor receives real time and historical reports on status of
group.
* Automatic database retrieval ("Screen Pop"). Based on calling
number, customer's database record "pops" to a PC screen during
ring-in.
* Automatic route selection (ARS). The system selects an optimal
method to place the call based on the available transmission
facilities.
* Call forward to outside telephone numbers. Provides a means to
forward incoming calls to any other telephone number worldwide.
Direct inward system access (DISA). Provides a means for outside
callers to dial directly into individual phones without connecting
to the operator or automated attendant. Local utility access is
unlimited for making outside calls, but is controlled by a
security procedure.
* Integrated speakerphone. Each executive telephone has an internal
speakerphone standard. Other AXXESS key telephones can be pro-
grammed to operate as speakerphones through database programming.
* Least cost routing (LCR). The system automatically identifies the
least cost method for placing a call, among the various local and
long distance carriers available to the system.
* Menu key feature operation. The 6 x 16 character LCD display on
the executive version telephone for the AXXESS system displays the
multiple options available at any time during the telephone call.
Functions may be selected by depressing a single button or key, or
alternative menus may be selected in the same manner.
* 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.
* Off-hook voice announce (OHVA) calls. Allows outside calls to be
announced and either accepted or rejected, even if the called
party is on the line.
* Optional data port module. Modems and data connections may be
connected to any phone without adding a special line or additional
wiring to the system controller.
* System forwarding by type of call and status. By adding more
intelligence to the call forwarding process, each call can be
routed based on a variety of options. This allows calls on the
main number and private numbers to be handled separately, day or
night.
* Uniform call distribution. As calls arrive into the system for
special services like order desks and "800" lines, this feature
spreads the call traffic evenly over the service group. In this
manner no "agent" becomes overloaded while another agent has
nothing to do. If all agents are busy, the outside callers hear a
pre-recorded announcement and are routed to the next available
agent.
Messaging. Messaging is used to notify telephone users that someone has
tried to reach them while out of the office. These messages can range from
simple callbacks to voice processing notifications, and include the following:
* Caller ID. In areas where this service is offered by the telephone
utility, called ID displays to the called party the name and
telephone number of the calling party using the AXXESS LCD
display.
* Digital voice processing hunt groups. This capability allows
multiple conversations to be in progress on the voice processing
system using a single extension number via a single wiring
connection, without using up telephone ports.
* 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.
* Off premises notification. Allows callers to leave messages for
employees who are off site and then have the system call them
periodically at a programmable, pre-selected number to inform them
that messages are waiting.
* Special message notification. Provides telephone users with a
light and alphanumeric display when voice processing messages are
waiting.
Administration. These capabilities are used to manage system resources.
Offered features include the following:
* Attached personal computer programming. Allows service personnel
to connect a laptop computer to the system and load the
programming information at the end of the session.
* Day/night toll restriction by station and trunk. This feature
allows a business to toll-restrict individual telephones when the
office is locked.
* Flexible DID ring-in assignments. Dialing information is sent to
the system from the telephone company to identify to the system
the actual number that was dialed by the caller. This allows the
system to provide a large number of direct-dial telephone numbers
with a much smaller number of actual telephone lines. Each number,
as recognized by the system when the system is called, can be
handled in a special manner for greetings, messages or routing to
service groups.
* Integrated administration processor. the system processor is
connected to a permanently connected keyboard and computer display
for system administration.
* Integrated SMDR/SMDA. Systems feature an internal "Station Detail
Message Recording" 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 "Station Message
Detail Recording" feature.
* 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.
* Tenant groups and departments. The system may be configured to
support multiple firms or different departments of the same firm
through a single system. The numbering directory can be fully
customized and the system can appear to operate as a completely
separate system for each separate group.
Applications and Services
The company offers a range of applications and services to its end user
customers, including the following:
Voice Processing Applications
The Company has developed its own voice processing product for the new
AXXESS system called AxxessoryTalk. This voice processing product is highly
integrated with the AXXESS system via the Company's AxxessLink software. It will
be able to support up to 500 mailboxes, up to 16 simultaneous voice ports and up
to 30 hours of messages. The system will also incorporate a paging application.
The Company has also 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.
Long Distance Calling Services
The Company resells a variety of popular long distance calling
services, including 1+ domestic and international toll calling, 800 services,
WATS services, T-1 transmission services, network switching and toll-fraud
protection software. 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 is licensed to resell long distance services in
approximately 20 states with the intention to become licensed in all 50 states
and, by acquiring long distance calling services in bulk for resale, is price
competitive in many of these markets. The Company is seeking to increase its
number of long distance calling customers and its volume of long distance
services, which would enable the Company to become increasingly price
competitive in a greater number of markets.
Totalease Program
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, through 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 is 60 months, with the customer entitled to renew at a specified price
for an additional 36 to 60 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.
Other Products
Inter-Tel established the Factored Products Division in 1994 to provide
"single sourcing" of the industry's leading telecommunications products.
Factored Products represents products that Inter-Tel has endorsed as the leading
communications peripherals needed in many day-to-day functions. Businesses
require telecommunications products to provide increased productivity, ease of
operations and reliability. Many of these products interface with Inter-Tel
telephone systems. Inter-Tel's product selection consists of videoconferencing,
battery backup, headsets, surge protection, paging equipment, wireless
communications, and data multiplexers. The Company represents leading
manufacturers such as Compression Labs, Tandberg, APC, ACS, Ditek, Valcom, ADC
Kentrox and other leading telecommunications vendors. Factored Products is
providing a value service to our distribution network and additional incremental
revenue to the Company.
Sales and Distribution
The Company has developed a broad distribution network of direct sales
offices and dealers which market the Company's products to small to medium size
organizations and divisions or departments of larger organizations. In the
United States, the Company has 23 direct sales offices and a growing network of
hundreds of dealers who purchase systems directly from the Company. Direct
dealers are typically located in geographic areas in which the Company does not
maintain direct sales offices. The Company maintains a dealer support office and
direct sales office in the United Kingdom and has a network of approximately 20
dealers in the United Kingdom and Europe. In addition, in 1993 the Company
opened a dealer support office and direct sales office in Japan and is in the
process of establishing dealers in Asia.
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 has
expanded its direct sales office personnel from a total of 282 persons at
December 31, 1990 to a total of 473 at December 31, 1994. In addition, the
Company restructured its United States distribution organization in 1993 in
order to establish a channel of direct dealers for the Company's principal
products. From 1987 until 1993, Premier Telecom served as an exclusive
private-label distributor for sales of the Company's IMX products to dealers in
North America. The Company rendered this arrangement non-exclusive and commenced
sales to direct dealers in April 1993. Sales to Premier now represent less than
2% of total revenues. Through December 31, 1994, the Company has established
direct dealer relationships with hundreds of dealers.
The Company's sales through its direct sales offices have increased
from 58.8% of net sales in 1991 to 66.3% of net sales in 1994. Sales to
distributors and dealers, including Premier, have decreased from 41.2% of net
sales in 1991 to 33.7% of net sales in 1994.
Sales of systems through the Company's direct dealers typically
generate lower gross margins than sales through the Company's direct sales
organization, although direct sales typically require higher levels of sales,
marketing, general and administrative expenses. Accordingly, the Company's
margins may vary from period to period depending upon the mix of distributor,
dealer and direct sales. Direct dealers typically enter into non-exclusive
reseller contracts for a term of one or more years. The Company generally
provides support and other services to the reseller pursuant to the terms of the
agreement. The agreements often include requirements that the reseller 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.
International sales, which to date have been made through the Company's
United Kingdom and Japan subsidiaries, accounted for approximately 1.5% of net
sales in 1994. In order to sell its products to customers in other countries,
the Company must comply with local telecommunications standards. The Company's
new AXXESS system can be readily altered through software modifications, which
the Company believes will facilitate compliance with these 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.
Research and Development
The Company's research and development efforts over the last several
years have been focused primarily on development of the Company's new AXXESS
system. Current efforts are related to completing the AxxessLink interface,
porting AXXESS software to larger versions of the AXESS hardware platform and to
industry-standard computer architectures, and the development of additional
applications and features. Applications under development for the new AXXESS
system and software include a Windows-based system accounting package that will
allow end users to manage and monitor system use, and applications which utilize
caller-ID information to access computer-based customer databases and enhance
the productivity of telephone users. The software-based architecture of the
AXXESS system facilitates maintenance and support, upgrades, and incorporation
of additional features and functionality.
The Company had a total of 63 personnel engaged in research and
development as of December 31, 1994. Research and development expenses were
$4,536,882; $4,114,385 and $3,928,393 for 1994, 1993 and 1992, respectively.
Manufacturing
The Company manufactures substantially all of its systems through third
party subcontractors located in the United States, South Korea and the
Philippines. 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. The Company maintains written
agreements with its principal suppliers. The Company provides a forecast
schedule to its suppliers and revises the forecast on a periodic basis.
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. From time to
time, the Company experiences delays in the supply of components and finished
goods. Delay or lack of supply from existing sources or the inability to develop
alternative sources if and when required in the future could materially and
adversely affect operating results.
Customer Service and Support
The Company believes that customer service and support is a critical
component of customer satisfaction and the success of the Company's business.
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.
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 initiated in 1991, Inter-Tel implements quality processes
throughout its business 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 a one year warranty 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 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 Northern Telecom, as
well as Comdial, Executone, Iwatsu, Mitel, NEC, Nitsuko, Panasonic, ROLM,
Toshiba and others. Many of these competitors have significantly greater
financial, marketing and technical resources than the Company. 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 by
legislative or judicial action (as currently pursued by the RBOCs) 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. In addition, certain of the Company's
competitors market systems designed specifically for very small or very large
organizations, markets which the Company's current products do not specifically
address. In the market for voice processing applications, including voice
processing, the Company competes against Centigram Communications Corporation,
Octel Corporation, AVT and other competitors, certain of which have
significantly greater resources than the Company. In the market for long
distance services, the Company competes against AT&T, MCI, US Sprint and other
competitors, many of which have significantly greater resources than the
Company. 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. The Company believes that
it competes favorably in its markets with respect to the performance, features
and price of its systems, as well as the level of service and support that the
Company provides to its customers. Certain of the Company's competitors have
significantly greater name recognition and distribution capabilities than the
Company, although the Company believes that it has developed a competitive
distribution presence in certain markets, particularly those where the Company
has direct sales offices. 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 continue to compete successfully.
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 relies principally upon a
combination of copyright and trade secret laws and contractual provisions to
establish and protect its proprietary rights in its systems. The Company
generally enters into confidentiality agreements with its employees and
suppliers, and limits access to its proprietary information. There can be no
assurance that these protections will be adequate to deter misappropriation of
the Company's technologies or independent third party development of similar
technologies or product features.
From time to time, the Company is subject to assertions that the
Company's products infringe the intellectual property rights of third parties.
Such claims could require the Company to expend significant sums in litigation,
could require the Company to pay damages, and could require the Company to
develop non-infringing technology or to acquire licenses to the technology which
is the subject of the claimed infringement.
Employees
As of December 31, 1994, the Company had a total of 727 employees, of
whom 566 were engaged in sales, marketing and customer support, 63 in quality,
manufacturing and related operations, 63 in research and development, and 35 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. The Company believes that its employee relations are excellent.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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 39 Executive Vice President
W. Kris Brown 41 Vice President
Michael J. Sargent 45 Vice President
Hiroshige Sugihara 35 Vice President
Kurt R. Kneip 32 Vice President, Chief
Financial Officer, and
Secretary/Treasurer
Gary Edens 53 Director
Maurice H. Esperseth 69 Director
C. Roland Haden 54 Director
Norman Stout 37 Director
Kathleen R. Wade 41 Director
MR. MIHAYLO, the founder of the Company, has served as Chairman of the
Board of Directors of the Company since September 1983, as President since March
1984, 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 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 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 office, the first direct office in
Florida, and has expanded the Florida direct offices to include Tallahassee, Ft.
Lauderdale and, most recently, North Miami. Mr. Brown obtained a B.A. in
Marketing in 1980 from the University of South Florida at Tampa.
MR. SARGENT was promoted to Vice President, Marketing and Strategic
Programs in January 1995. In this position, he will be 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. Sargent holds a Bachelor of Science Degree in Computer Systems
Engineering.
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 with the accounting firm of Ernst & Young. Mr. Kneip is a
certified public accountant, and holds an undergraduate degree in Commercial
Economics from South Dakota State University and a Masters Degree in
Professional Accountancy from the University of South Dakota.
MR. EDENS was elected as a director of the Company in October 1994. He
has been 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. He is an active leader in
various business, civic and philanthropic organizations.
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 from 1978 to 1987. Dr. Haden holds a doctoral
degree in Electrical Engineering from the University of Texas and has served on
the faculties of the University of Oklahoma and Texas A & M University.
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.
The Board of Directors has an Audit Committee and a Compensation
Committee. The Audit Committee, consisting of Directors Wade, Stout and
Esperseth, is charged with reviewing the Company's annual audit and meets with
the Company's independent auditors to review the Company's internal controls and
financial management practices. The Compensation Committee, consisting of
Messrs. Esperseth, Edens and Haden, recommends to the Board of Directors
compensation for the Company's key employees and administers the Company's stock
option plans.
ITEM 2. 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 19
locations in the United States and two locations overseas. The Company's
aggregate monthly payments under these leases are currently $181,000. The
Company believes that its existing facilities are adequate to meet its current
needs and that additional or alternative space will be available as necessary in
the future on commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
The Company has no legal proceedings in process or pending for which it
believes an unfavorable outcome would have a material adverse impact on the
financial position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS
Inter-Tel common stock is traded over-the-counter (symbol INTL) and
since February 1983 has been included in the NASD national market system. As of
February 1, 1995 there were of record approximately 1,000 shareholders of the
Company's common stock. The Company believes there are approximately 2,000
additional beneficial holders of the Company's Common Stock. The following table
sets forth high and low closing prices reported by NASDAQ.
Inter-Tel has never paid a cash dividend on its common stock and
presently does not intend to do so. Future dividend policy will depend on
Company earnings, capital requirements for growth, financial conditions and
other factors.
1994 High Low
---- ---- ---
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
1993 High Low
---- ---- ---
First Quarter 5 1/8 4
Second Quarter 8 4 1/2
Third Quarter 7 3/8 5 1/8
Fourth Quarter 12 6
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
Financial Summary
<CAPTION>
(In thousands, except per share amounts and ratios) For the years ended December 31,
1994 1993 1992 1991 1990
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales .................................. $112,165 $ 92,524 $ 81,137 $ 68,140 $ 68,072
Cost of sales .............................. 66,216 56,121 49,950 42,570 42,806
Research & development ..................... 4,537 4,114 3,928 3,638 3,380
Selling, general and
administrative ........................... 32,456 25,842 22,252 19,941 17,828
-----------------------------------------------------------------------------------------------------------------------------------
Operating income ........................... 8,956 6,447 5,007 1,991 4,058
-----------------------------------------------------------------------------------------------------------------------------------
Interest and other income .................. 924 282 669 515 550
Interest expense ........................... 65 407 699 923 1,089
-----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes
and discontinued operations ............. 9,815 6,322 4,977 1,583 3,519
Income taxes ............................... 3,730 2,398 1,859 634 1,574
Income from continuing
operations ............................... 6,085 3,924 3,118 949 1,945
Loss From discontinued
operations ................................ -- -- -- (5,148) (522)
-----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) .......................... $ 6,085 $ 3,924 $ 3,118 $ (4,199) $ 1,423
-----------------------------------------------------------------------------------------------------------------------------------
Income (loss) per share:
Continuing operations ...................... $ 0.58 $ 0.45 $ 0.37 $ 0.12 $ 0.23
Discontinued operations .................... -- -- -- (0.64) (0.06)
-----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) per
share ..................................... $ 0.58 $ 0.45 $ 0.37 $ (0.52) $ 0.17
-----------------------------------------------------------------------------------------------------------------------------------
Average shares
outstanding ............................... 10,573 8,703 8,333 8,126 8,452
-----------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Total assets ............................... $ 64,112 $ 54,627 $ 36,156 $ 40,176 $ 41,384
Working capital ............................ 37,629 34,270 12,400 8,150 10,228
Long-term debt ............................. -- -- 2,098 6,007 7,896
Shareholders' equity ....................... 45,265 38,615 19,437 16,932 21,217
-----------------------------------------------------------------------------------------------------------------------------------
KEY RATIOS
Current ratio .............................. 3.83 3.78 1.93 1.50 1.89
Term debt/equity ........................... 0.11 0.36 0.37
Return on equity -
continuing operations ...................... 0.16 0.20 0.18 0.04 0.09
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
Inter-Tel designs, produces and markets business telephone systems,
voice processing software, applications software and services to businesses and
other organizations requiring small to medium size telephone system
installations. Inter-Tel's products and services include telephone switches and
telephones, maintenance, leasing and support services, long distance calling
services, voice mail and other telecommunications applications. The Company's
Common Stock is quoted on the NASDAQ National Market System under the symbol
INTL.
Net sales of the Company have increased substantially in each of the
past three years. Such increases were 21%, 14% and 19% in 1994, 1993 and 1992,
respectively, over the preceding year.
The Company in recent periods has focused on expanding its direct sales
capabilities and establishing a direct dealer network. In 1994, the Company
completed the transition from Premier Telecom, Inc. as a former, private label
distributor to its own network of direct dealers. In 1994, shipments to Premier
constituted less than 2% of net sales. In addition, in recent years the Company
has effected a number of supporting, 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.
The markets served by the Company have been characterized by rapid
technological changes and increasing customer requirements. The Company has
sought to address these requirements through the development of software
enhancements and improvements to existing systems and the introduction of new
products and applications. In recent periods, the Company has focused on the
development of its new, fully-digital AXXESS telephone software and system. The
Company commenced commercial shipments of the AXXESS in the fourth quarter of
1993. An enhanced AXXESS software was released in 1994.
The Company offers to its customers a unique package of lease financing
and other services under the name Totalease. Totalease provides to customers
lease financing, maintenance and support services, long distance services, fixed
price upgrades and other benefits. The Company finances this program through the
resale of lease rental streams to financial institutions, and formerly through
its bank credit facility.
Results of Operations
The following table sets forth certain statement of operations data of
the Company expressed as a percentage of net sales:
Year Ended December 31
1994 1993 1992
------ ----- ----
Net sales 100.0% 100.0% 100.0%
Cost of sales 59.0 60.7 61.6
---- ---- ----
Gross margin 41.0 39.3 38.4
Research and development 4.1 4.4 4.8
Selling, general and administrative 28.9 27.9 27.4
---- ---- ----
Operating income 8.0 7.0 6.2
Interest and other income 0.8 0.3 0.8
Interest expense 0.1 0.4 0.9
Income taxes 3.3 2.6 2.3
--- --- ---
Net income 5.4% 4.3% 3.8%
---- ---- ----
Year Ended December 31, 1994 Versus Year Ended December 31, 1993
Net sales increased 21.2% to $112.2 million in 1994 from $92.5 million
in 1993. Sales from direct sales offices accounted for approximately $14.5
million of the increase, with wholesale distribution sales increasing
approximately $4.5 million. The remaining increases occurred in long distance
sales and other operations. Wholesale shipments to the expanded direct dealer
network more than offset decreased shipments to Premier Telecom. Shipments to
this former private label distributor are no longer significant.
Gross profit percentages improved to 41.0% in 1994 from 39.3% in 1993.
This reflected the transition to the direct dealer network and the expansion of
AXXESS software and systems sales.
Research and Development expenses increased to $4.5 million in 1994
from $4.1 million in 1993. While this is 4.1% of 1994 total sales, including
direct sales office sales, it represents a substantial 9% of wholesale division
shipments, including shipments to the direct sales offices. These expenses in
both 1994 and 1993 were directed principally to the continued development of the
AXXESS software and system. The Company expects that research and development
expenses will continue to increase in the future 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 $32.5
million, or 28.9% of net sales in 1994, from $25.8 million or 27.9% 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. The Company expects that selling,
general and administrative expenses will increase as the Company continues to
invest in expansion of product offerings and its distribution system, but may
vary as a percentage of sales.
Interest and other income increased in 1994 principally from the
investment for a full year of the funds received in the 1993 public offering and
funds generated through operating cash flow.
Net income increased 55.1% to $6.1 million or $.58 a share in 1994,
from $3.9 million or $.45 a share in 1993. Net income per share in 1994 is based
on approximately 2 million more average shares outstanding than in 1993,
reflecting the public stock sale in 1993 and the acquisition of Southwest
Telephone Systems, Inc.
Year Ended December 31, 1993 Versus Year Ended December 31, 1992
For the year ended December 31, 1993, net sales increased 14.1% to
$92.5 million from $81.1 million for 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 growing 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
10.9% of net sales in 1993 from $17.1 million, or 21.1% of net sales in the
corresponding 1992 period.
In 1993, gross profit increased to $36.4 million, or 39.3% of net
sales, from $31.2 million, or 38.4% of net sales, in 1992. Gross margin 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 Premier transition.
Research and development expenses increased to $4.1 million in 1993
from $3.9 million in 1992 and were 4.4% and 4.8% of net sales, respectively.
These expenses in both periods were directed principally to continued
development of the Company's new AXXESS software and system.
Selling, general and administrative expenses increased to $25.8
million, or 27.9% of net sales, in 1993, from $22.3 million, or 27.4% 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.
Other income in 1993 consisted primarily of interest income. 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 25.8% to $3.9 million or $.45 per share
from $3.1 million or $.37 per share in 1992. This increase reflected the higher
level of net sales, improved gross margin and reduced interest expense, offset
in part by the cost of the Company's move into a new headquarters facility.
Discontinued Operations
In 1993, the Company sold a facility related to previously discontinued
operations subject to remediation related to fuel tank leakage. The Company had
reserved for such remediation approximately $400,000, which management believes
is adequate to cover such possible costs.
Accounting Changes
During the first quarter of 1993, the Company adopted Financial
Accounting Standards Board (FASB) Statement 109, "Accounting for Income Taxes,"
on a prospective basis. This adoption had no material impact on the Company's
consolidated financial statements.
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
During the fourth quarter of 1994, the Company executed a $5 million
Credit Agreement with Bank One, Arizona, N.A., which is being used primarily to
support international letters of credit to suppliers. In the fourth quarter of
1993, the Company prepaid 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 funds its Totalease program in part through the sale to
financial institutions of rental income streams under the leases. Totalease
rentals resold totaling $19.9 million remain unbilled at December 31, 1994. The
Company maintains reserves against potential recourse following the resales
based upon loss experience and past due accounts.
The Company continues to expand its dealer network, which is expected
to require working capital for increased receivables and inventories. During
1994, receivables and inventories increased approximately $4.2 million, which
was funded by operating cash flow. At December 31, 1994, the Company had $15.3
million in cash and equivalents.
The Company believes that 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 may be 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 consider
additional financing.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Ernst & Young LLP, Independent Auditors
Shareholders and Board of Directors
Inter-Tel, Incorporated
We have audited the accompanying consolidated balance sheets of Inter-Tel,
Incorporated and subsidiaries as of December 31, 1994 and 1993 and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Inter-Tel,
Incorporated and subsidiaries at December 31, 1994 and 1993, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1994, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Phoenix, Arizona
January 27, 1995
<TABLE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1994 and 1993
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
1994 1993
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents ........................................................... $ 15,278,606 $ 14,588,223
Accounts receivable, less allowances of
$1,106,000 in 1994 and $607,000 in 1993 ..................................... 15,983,639 12,630,879
Inventories .................................................................... 14,257,878 13,370,571
Net investment in sales-leases ................................................. 1,612,807 1,498,400
Refundable and deferred taxes .................................................. 1,871,822 2,415,462
Prepaid expenses and other assets .............................................. 1,930,713 2,075,968
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS ........................................................... 50,935,465 46,579,503
PROPERTY, PLANT & EQUIPMENT .................................................... 5,714,898 3,077,148
OTHER ASSETS ................................................................... 7,462,034 4,970,661
-----------------------------------------------------------------------------------------------------------------------------------
$ 64,112,397 $ 54,627,312
-----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ............................................................... $ 4,498,633 $ 4,927,563
Other current liabilities ...................................................... 8,807,725 7,382,247
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES ...................................................... 13,306,358 12,309,810
DEFERRED TAXES ................................................................. 2,616,944 1,208,364
OTHER LIABILITIES .............................................................. 2,923,749 2,494,595
SHAREHOLDERS' EQUITY
Common stock, no par value - authorized 30,000,000
shares, issued and outstanding - 10,378,944 shares
in 1994 and 10,285,431 shares in 1993 ...................................... 27,334,505 27,044,141
Retained earnings .............................................................. 18,316,945 12,231,684
Currency trranslation adjustment ............................................... (121,836) (292,538)
45,529,614 38,983,287
-----------------------------------------------------------------------------------------------------------------------------------
Less receivable from Employee Stock Ownership Trust ............................ 264,268 368,744
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY .................................................... 45,265,346 38,614,543
-----------------------------------------------------------------------------------------------------------------------------------
$ 64,112,397 $ 54,627,312
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1994, 1993 and 1992
<CAPTION>
1994 1993 1992
------ ------ -------
<S> <C> <C> <C>
NET SALES ............................................... $ 112,164,790 $ 92,523,543 $ 81,136,654
Cost of sales ........................................... 66,215,725 56,120,656 49,949,988
-----------------------------------------------------------------------------------------------------------------------------------
GROSS PROFIT ............................................ 45,949,065 36,402,887 31,186,666
Research & development .................................. 4,536,882 4,114,385 3,928,393
Selling, general and administrative ..................... 32,456,192 25,841,873 22,251,596
-----------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME ........................................ 8,955,991 6,446,629 5,006,677
-----------------------------------------------------------------------------------------------------------------------------------
Interest and other income ............................... 924,613 281,921 669,067
Interest expense ........................................ (65,343) (406,383) (699,246)
-----------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES .............................. 9,815,261 6,322,167 4,976,498
INCOME TAXES
Current ................................................. 3,020,000 1,357,000 1,465,000
Deferred ................................................ 710,000 1,041,331 393,591
-----------------------------------------------------------------------------------------------------------------------------------
3,730,000 2,398,331 1,858,591
-----------------------------------------------------------------------------------------------------------------------------------
NET INCOME .............................................. $ 6,085,261 $ 3,923,836 $ 3,117,907
-----------------------------------------------------------------------------------------------------------------------------------
NET INCOME PER SHARE .................................... $ 0.58 $ 0.45 $ 0.37
-----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 1994, 1993 and 1992
<CAPTION>
Currency Receivable
Common Retained Translation From
Stock Earnings Adjustment ESOP Total
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1991 ............. $ 11,581,510 $ 5,189,941 $ 62,887 $ -- $16,834,338
Exercise of stock options ................ 230,948 230,948
Net income ............................... 3,117,907 3,117,907
Loss on currency translation ............. (243,039) (243,039)
Loan to ESOP, less collection ............ (456,248) (456,248)
-----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1992 ............. 11,812,458 8,307,848 (180,152) (456,248) 19,483,906
Issuance of 1,800,000 shares of
of common stock .................... 14,766,000 14,766,000
Exercise of stock options ................ 282,663 282,663
Tax benefit from stock options ........... 110,000 110,000
Stock issued in acquisition .............. 73,020 73,020
Net income ............................... 3,923,836 3,923,836
Loss on currency translation ............. (112,386) (112,386)
Collection from ESOP ..................... 87,504 87,504
-----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1993 ............. 27,044,141 12,231,684 (292,538) (368,744) 38,614,543
Exercise of stock options ................ 187,364 187,364
Tax benefit from stock options ........... 103,000 103,000
Net income ............................... 6,085,261 6,085,261
Gain on currency translation ............. 170,702 170,702
Collection from ESOP ..................... 104,476 104,476
-----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 ............. $ 27,334,505 $ 18,316,945 $ (121,836) $ (264,268) $ 45,265,346
-----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES
INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1994, 1993 and 1992
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
1994 1993 1992
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income ................................................. $ 6,085,261 $ 3,923,836 $ 3,117,907
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation and amortization ......................... 1,513,400 1,372,750 1,833,467
Provision for losses on receivables ................... 943,544 738,064 505,613
Provision for inventory valuation ..................... 449,554 198,120 115,011
Net contribution to ESOP .............................. 104,476 87,504 43,752
Increase in other liabilities ......................... 429,154 1,241,907 191,918
Gain on sale of property and equipment ................ (18,460) (13,882) (305,904)
Deferred income taxes ................................. 710,000 1,041,331 393,591
Effect of exchange rate changes ....................... 170,702 (112,386) (243,039)
Changes in operating assets and liabilities ........... (5,720,244) (2,969,931) (2,003,346)
-----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES .................. 4,667,387 5,507,313 3,648,970
-----------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Additions to property and equipment ........................ (4,095,917) (1,249,731) (564,630)
Proceeds from sale of property and equipment ............... 62,872 254,547 1,186,737
Cash used in acquisitions .................................. (131,323) (812,316) --
-----------------------------------------------------------------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES ........ (4,164,368) (1,807,500) 622,107
-----------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from credit line .................................. -- 81,857,000 51,669,175
Payments on credit line .................................... -- (85,681,032) (52,895,143)
Proceeds from new term notes ............................... -- -- 1,800,000
Payments on long-term debt ................................. -- (2,629,370) (3,607,222)
Net proceeds from stock offering ........................... -- 14,766,000 --
Purchase of treasury stock ................................. -- -- (30,000)
Funding for ESOP ........................................... -- -- (500,000)
Proceeds from exercise of stock options .................... 187,364 282,663 230,948
-----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ........ 187,364 8,595,261 (3,332,242)
-----------------------------------------------------------------------------------------------------------------------------------
INCREASE IN CASH AND EQUIVALENTS ........................... 690,383 12,295,074 938,835
CASH AND EQUIVALENTS AT BEGINNING OF YEAR .................. 14,588,223 2,293,149 1,354,314
-----------------------------------------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS AT END OF YEAR ........................ $ 15,278,606 $ 14,588,223 $ 2,293,149
-----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes.
</TABLE>
<PAGE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1994, 1993 and 1992
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements
include the accounts of Inter-Tel, Incorporated and all significant subsidiaries
(the Company). Intercompany accounts and transactions have been eliminated in
consolidation.
Cash and Equivalents: Cash and equivalents include all highly liquid
investments with a remaining maturity of three months or less at date of
acquisition.
Inventories: Inventories, consisting principally of telephone systems,
computer equipment and related components, are stated at the lower of cost
(first-in, first-out method) or market.
Property, Plant and Equipment: Property, plant and equipment is stated
at cost. Depreciation is computed using the straight-line method over the
estimated useful life of the related property. Leasehold improvements are
depreciated over the shorter of the related lease terms or the estimated useful
lives of the improvements.
Excess of Purchase Price Over Net Assets Acquired: Purchase prices of
acquired businesses that are accounted for as purchases have been allocated to
the assets and liabilities acquired based on the estimated fair market values on
the respective acquisition dates. Based on these values the excess purchase
prices over the fair market value of the net assets acquired are being amortized
over 5 to 40 years. Accumulated amortization through December 31, 1994 was
$362,196.
Sales-Leases: The discounted present values of minimum rental payments
under sales-type leases are recorded as sales, net of provisions for continuing
administration and other expenses over the lease period. The costs of systems
installed under these sales-leases, net of residual values at the end of the
lease periods, are recorded as costs of sales. Gains or losses resulting from
the sale of rental income from such leases are recorded as adjustments to the
original sales amounts.
Income Taxes: Deferred income taxes result from timing differences in
the recognition of revenues and expenses for financial reporting and income tax
purposes.
Pooling of Interest: The financial statements for periods prior to 1994
have been restated to include the accounts of Southwest Telephone Systems, Inc.
("Southwest"), which was acquired by the Company in a pooling of interests
transaction in May 1994, in which 161,558 shares of Inter-Tel common stock were
issued. Southwest does not constitute a significant subsidiary as defined by the
Securities and Exchange Commission. In the consolidated statements of income,
net sales and net income were increased as a result of the restatement as
follows:
Year ended December 31,
1993 1992
Net sales $3,264,387 $2,347,644
Net income 114,104 85,809
Net income per share $0.00 $0.00
Total shareholders' equity was increased by $312,000 as of January 1,
1992 as a result of the restatement.
Income Per Common Share: Income per common share is based on the
weighted average number of common shares outstanding during each year and common
stock equivalents.
Reclassifications: Certain reclassifications have been made to the 1993
and 1992 financial statements to conform to the 1994 presentation.
NOTE B -- NET INVESTMENT IN SALES-LEASES
Net investment in sales-leases represents the value of sales-leases
presently held under the Company's Totalease program. The Company currently
sells the rental income from some of the sales-leases. The Company maintains
reserves against potential recourse following the resales based upon loss
experience and past due accounts. Activity during the years was as follows:
Year Ended December 31
1994 1993 1992
Sales of rental income ............ $12,423,000 $ 9,586,000 4,500,000
Sold income remaining
unbilled at end of year ......... 19,894,000 11,908,000 4,268,000
Allowance for uncollectible
minimum lease payments
and recourse liability at
end of year ..................... 1,198,000 911,000 677,000
The Company does not expect any significant losses from the recourse
provisions related to the sale of rental income. The Company is compensated for
administration and servicing of rental income sold.
NOTE C -- PROPERTY, PLANT & EQUIPMENT
December 31
1994 1993
Computers and equipment $11,635,742 $8,370,903
Transportation equipment 1,625,397 1,243,488
Furniture and fixtures 2,316,007 2,513,448
Leasehold improvements 657,504 559,059
Land 130,458 130,458
------- -------
16,365,108 12,817,356
Less: Accumulated depreciation
and amortization 10,650,210 9,740,208
---------- ---------
$5,714,898 $3,077,148
========== ==========
NOTE D -- OTHER ASSETS
December 31
1994 1993
Long-term 8% note receivable
due in 2003 ............................. $1,351,038 $1,363,000
Net investment in sales-leases ............... 4,157,895 1,471,651
Excess of purchase price over net
assets acquired, net .................... 1,313,334 1,314,282
Other assets ................................. 639,767 821,728
---------- ----------
$7,462,034 $4,970,661
========== ==========
NOTE E-- OTHER CURRENT LIABILITIES
December 31
1994 1993
Compensation and employee benefits ........... $4,097,291 $2,790,391
Sundry taxes ................................. 560,102 669,375
Other accrued expenses ....................... 2,149,738 1,908,328
Deferred revenues ............................ 2,000,594 2,014,153
---------- ----------
$8,807,725 $7,382,247
========== ==========
NOTE F -- CREDIT LINE
All of the Company's long-term and short-term debt was prepaid in
November 1993 upon the issuance and sale of common stock in a public offering.
The Company maintains a $5,000,000 unsecured bank credit line at prime rate to
cover international letters of credit and for other purposes. The credit
agreement matures in May 1996 and contains certain restrictions and financial
covenants. At December 31, 1994, $1,473,000 of the credit line was committed
under letter of credit arrangements.
NOTE G -- LEASES
Rental expense amounted to $ 2,178,216, $1,717,770 and $1,187,282 in
1994, 1993 and 1992, respectively.
Noncancellable operating leases are primarily for buildings. Certain of
the leases contain provisions for renewal options and scheduled rent increases.
At December 31, 1994, future minimum commitments under noncancellable leases,
including a 15 year lease for its headquarters facility, are: 1995 --
$1,894,393; 1996 -- $1,711,856; 1997 -- $1,420,882; 1998 -- $1,297,082; 1999 ---
$ 1,086,591; thereafter -- $3,474,055.
NOTE H -- INCOME TAXES
Effective January 1, 1993, the Company adopted Financial Accounting
Standards Board (FASB) Statement No. 109, "Accounting for Income Taxes." Under
Statement 109, the liability method is used in accounting for income taxes.
Under this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. Prior to the adoption of Statement
109, income tax expense was determined using the deferred method under the
provisions of Accounting Principles Board Opinion No. 11. Deferred tax expense
was based on items of income and expense that were reported in different years
in the financial statements and tax returns and were measured at the tax rate in
effect in the year the difference originated.
As permitted by Statement 109, the Company elected not to restate the
financial statements of any prior years. The adoption of FASB Statement 109 had
no material impact on pretax income from continuing operations for the twelve
months ended December 31, 1994 and 1993.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax liabilities and assets as of December
31, are as follows:
1994 1993
Deferred tax liabilities:
Accelerated depreciation .............. $ 29,000 $ 205,000
Lease--sales and reserves ............. 4,466,000 2,621,000
------------ ------------
Total deferred tax liabilities ............. $ 4,495,000 $ 2,826,000
------------ ------------
Deferred tax assets:
Inventory basis differences ........... 944,000 $ 798,000
Accounts receivable reserves .......... 409,000 244,000
Maintenance reserve ................... 355,000 353,000
Accrued vacation pay .................. 426,000 349,000
Foreign loss carryforwards ............ 355,000 --
Other -- net .......................... 1,491,000 922,000
------------ ------------
Deferred tax assets ................... 3,980,000 2,666,000
Less valuation reserve ................ 355,000 --
------------ ------------
Net deferred tax assets .................... 3,625,000 2,666,000
------------ ------------
Net deferred tax liabilities ............... $ 870,000 $ 160,000
------------ ------------
During 1994, the Company incurred a loss carryforward for foreign tax
purposes of approximately $830,000 which will begin to expire in 1999.
The deferred tax effect of timing differences is as follows:
1992
Inventory basis differences ............................. $ 153,612
Accelerated depreciation ................................ (485,463)
Accrued vacation pay .................................... (4,171)
State franchise tax ..................................... (8,740)
Bad debts ............................................... (10,061)
Accrued expenses ........................................ 102,436
Lease - sales ........................................... 545,575
Other ................................................... 106,812
---------
$ 400,000
---------
Federal and state income taxes consisted of the following:
Liability Liability Deferred
Method Method Method
1994 1993 1992
Federal .................. $ 3,365,000 $ 2,068,000 $ 1,477,000
State .................... 365,000 330,000 382,000
----------- ----------- -----------
$ 3,730,000 $ 2,398,000 $ 1,859,000
----------- ----------- -----------
The principal reasons for the difference between total income tax
expense and the amount computed by applying the statutory federal income tax
rate to income before taxes are as follows:
1994 1993 1992
Federal tax at statutory rates
applied to pre-tax income ........... 34% 34% 34%
State tax net of federal benefit ......... 3 4 5
Valuation reserve increase
for foreign losses .................. 3 -- --
Amortization of goodwill ................. -- -- 1
Other - net .............................. (2) -- (2)
--- --- ---
38% 38% 38%
--- --- ---
During 1993, the Company disposed of an investment in a hotel and office complex
which made available related deferred tax benefits of approximately $2.6
million.
NOTE I -- EQUITY TRANSACTIONS
In a public offering in November and December 1993, the Company sold
1,800,000 shares of previously unissued common stock. During 1992, the Board of
Directors authorized cancellation of 3,001,696 shares of common stock held in
treasury, reverting such shares to authorized but unissued shares. Common stock
and additional paid-in capital accounts were reduced by an amount equal to the
cost of treasury stock canceled.
Under the Company's Long-Term Incentive Plan, selected officers and key
employees are granted options to purchase common stock of the Company at not
less than fair market value at date of grant. The options are exercisable at the
end of their ten year term, but may become exercisable in annual installments if
predetermined performance goals and share market value increases are met. During
1994, previously granted options to 420,000 shares at prices of $7.50 to $9.25
per share were canceled and options to purchase 650,000 shares were granted to
an expanded group of optionees at the then fair market value of $6.00 per share.
Under other previous stock option plans, directors, officers and key
employees may purchase common stock of the Company at amounts not less than the
fair market value at the date of grant. These options generally have a term of
five years and are exercisable over four years commencing one year from the date
of grant.
Option activity for the past three years under all plans is as follows:
Number of Shares
1994 1993 1992
Outstanding at beginning of year ..... 720,250 322,150 564,000
Granted .............................. 672,000 598,000 87,000
Exercised ............................ (98,750) (193,400) (214,600)
Expired or canceled .................. (424,000) (6,500) (114,250)
-------- -------- --------
Outstanding at end of year ........... 869,500 720,250 322,150
-------- -------- --------
Exercise price range ................. $1.12-$9.63 $1.12-$9.25 $1.12-$3.00
Exercisable at end of year ........... 75,000 78,750 137,838
-------- -------- --------
At December 31, 1994, the Company has reserved 1,499,488 shares of
Common Stock for issuance in connection with the stock option plans. In
addition, there is an outstanding warrant for the purchase of 50,000 shares of
common stock at $4.25 a share, which expires March 25, 1996.
NOTE J -- RETIREMENT PLANS
The Company has two retirement plans for the benefit of all of its
employees. Under its 401(k) Retirement Plan, participants may contribute an
amount not exceeding 15 percent of compensation received during participation in
the Plan. The Company makes voluntary annual contributions to the Plan based on
a percentage of contributions made by Plan participants of up to 10 percent of
compensation. Contributions to the Plan totaled $248,000; $196,000; and $156,000
in 1994, 1993 and 1992, respectively.
In 1992, the Company initiated an Employee Stock Ownership Plan (ESOP),
advancing $500,000 to the ESOP Trust for the purpose of purchasing common stock
of the Company. The Trust purchased 153,500 shares of the Company's common stock
in July 1992. The loan is to be repaid over 5 years with 7.5% interest. As the
principal amount of the loan is repaid to the Company through Company annual
contributions, the equivalent number of shares released are allocated to
employees' accounts to be held until retirement. Total shares so allocated were
30,037; 27,942 and 14,391 in 1994, 1993 and 1992, respectively. Contributions to
the ESOP totaled $125,000 in 1994 and 1993 and $62,500 in 1992 and are based
upon the historic cost of the shares purchased by the ESOP.
<TABLE>
NOTE K -- SUPPLEMENTAL CASH FLOW INFORMATION
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Cash paid for:
Interest $ 65,343 $406,964 $784,880
Income taxes 1,657,454 472,108 1,953,253
--------- ------- ---------
Changes in operating assets and
liabilities:
Increase in receivables (4,341,411) $(2,587,177) $(2,932,541)
(Increase) decrease in inventories (1,252,036) (3,826,682) 1,581,609
Decrease (increase) in prepaid
expenses and refundable and
deferred taxes 1,265,028 (713,944) (794,714)
(Increase) decrease in other
assets (2,491,373) 1,083,662 63,574
Increase in accounts
payable and other current
liabilities 1,099,548 3,074,210 78,726
--------- --------- ------
$(5,720,244) $(2,969,931) $(2,003,346)
----------- ----------- ----------
</TABLE>
NOTE L -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
A summary of the quarterly results of operations for the years ended
December 31, 1994 and 1993 follows:
(In thousands, except per share amounts)
<CAPTION>
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
<S> <C> <C> <C> <C>
1994
Net sales $25,465 $27,758 $27,627 $31,315
Gross margin 9,896 11,468 10,960 13,625
Net income 1,167 1,551 1,351 2,016
Net income per share $.11 $.15 $.13 $.19
Average number of
shares outstanding 10,566 10,572 10,541 10,613
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
1993
Net sales $19,657 $22,802 $24,258 $25,807
Gross margin 7,844 8,895 9,442 10,222
Net income 670 895 1,017 1,342
Net income per share $.08 $.10 $.12 $.15
Average number of
shares outstanding 8,500 8,595 8,602 9,200
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
Certain information required by Part III is omitted from this report in
that the Registrant will file a definitive proxy statement pursuant to
Regulation 14A (the "Proxy Statement") not later than 120 days after the end of
the fiscal year covered by this Report, and the information included therein is
incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to directors and executive officers is
included at the end of Part I, Item 1 on Page 20 of this report under the
caption "Directors and Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to
Pages 7 to 14 of the Company's Proxy Statement relating to its 1995 Annual
Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this Item is incorporated by reference
to Page 5 of the Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a) The following documents are filed as part of this Report:
1. Financial Statements
The following consolidated financial statements of Inter-Tel,
Incorporated, and subsidiaries, are incorporated by reference to Pages 31 to 44
of this Form 10-K:
Report of Ernst & Young LLP, Independent Auditors
Consolidated balance sheets--December 31, 1994 and 1993
Consolidated statements of income--years ended December 31, 1994,
1993 and 1992
Consolidated statements of shareholders' equity--years ended December
31, 1994, 1993 and 1992
Consolidated statements of cash flows--years ended December 31,
1994, 1993 and 1992
Notes to consolidated financial statements
2. Financial Statement Schedules
The following consolidated financial statement schedules of Inter-Tel,
Incorporated, and subsidiaries are filed as part of this Report and
should be read in conjunction with the Consolidated Financial
Statements of Inter-Tel, Incorporated and subsidiaries, and the notes
thereto.
Schedules for the three years ended December 31, 1994:
Page No.
-------
Schedule VIII--Valuation and Qualifying Accounts 52
Schedule IX--Short-term Borrowings 53
Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be set forth
therein is included in the Consolidated Financial Statements or notes thereto.
3. Exhibits
3.1(10) Articles of Incorporation, as amended.
3.2(1) By-Laws, as amended.
10.15(1) Registrant's form of standard Distributor Agreement.
10.16(1) Registrant's form of standard Service Agreement.
10.34(2) 1984 Incentive Stock Option Plan and forms of Stock
Option Agreement.
10.35(3) Agreement between Registrant and Samsung Semiconductor
and Telecommunications Company, Ltd. dated October 17,
1984.
10.37(3) Tax Deferred Savings Plan.
10.51(11) 1990 Directors' Stock Option Plan and form of Stock
Option Agreement.
10.53(12) Agreement between Registrant and Maxon Systems, Inc.
dated February 27, 1990.
10.54(12) Agreement between Registrant and Varian Tempe
Electronics Center dated February 26, 1991.
10.55(12) Agreement between Registrant and Jetcrown Industrial
Ltd. dated February 18, 1993.
10.56(13) Employee Stock Ownership Plan.
10.57(14) Loan and Security Agreement dated December 16, 1994
between Bank One, Arizona, N.A. and Inter-Tel,
Incorporated.
---------------------
(1) Previously filed with Registrant's Registration Statement on Form S-1
(File No. 2-70437).
(2) Previously filed with Registrant's Registration Statement on Form S-8
(File No. 2-94805).
(3) Previously filed with Registrant's Annual Report on Form 10-K for the year
ended November 30, 1984 (File No. 0-10211).
(10) Previously filed with Registrant's Annual Report on Form 10-K for the year
ended December 31, 1988 (File No. 0-10211).
(11) Previously filed with Registrant's Registration Statement on Form S-8
(File No. 33-40353).
(12) Previously filed with Registrant's Registration Statement on Form S-1
(File No. 33-70054).
(13) Previously filed with Registrant's Registration Statement on Form S-8
(File No. 33-73620).
(14) Filed herewith
(b) Reports on Form 8-K.
None
(c) Exhibits.
11.1 Statement re: Computation of Per Share Earnings. (Page 56)
13.0 Annual Report to Security Holders
22.1 List of Subsidiaries. (Page 55)
23.0 Consent of Independent Auditors. (Page 51)
24.1 Power of Attorney. (Included on Page 50)
10.57 Loan Agreement dated December 16, 1994 between Bank One,
Arizona, N.A. and Inter-Tel, Incorporated (Page 57)
27 Financial Data Schedule (page 68)
See Item 14(a) (3) also.
(d) Financial Statement Schedules
The response to this portion of Item 14 is submitted as a separate
section of this report. See Item 8.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant, Inter-Tel, Incorporated, has duly caused
this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
INTER-TEL, INCORPORATED
BY: /S/ Steven G. Mihaylo
------------------------------------
Steven G. Mihaylo
Chairman and Chief Executive Officer
Dated: March 23, 1995
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN 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 the power of
substitution, for him in any and all capacities, to sign any amendments to this
Report on Form 10-K, 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 Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/S/ Steven G. Mihaylo Chairman and Chief March 20, 1995
--------------------- Executive Officer
Steven G. Mihaylo
/S/ Kurt R. Kneip Vice President and March 20, 1995
----------------- Chief Financial Officer
Kurt R. Kneip
/S/ Gary D. Edens Director March 20, 1995
-----------------
Gary D. Edens
/S/ Maurice H. Esperseth Director March 20, 1995
------------------------
Maurice H. Esperseth
/S/ C. Roland Haden Director March 20, 1995
-------------------
C. Roland Haden
/S/ Norman Stout Director March 20, 1995
-------------------
Norman Stout
/S/ Kathleen R. Wade Director March 20, 1995
---------------------
Kathleen R. Wade
<PAGE>
<TABLE>
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
ADDITIONS
Balance Charged Charged
at to to Charged Balance
Beginning Costs Other to at
of & Accounts Deductions End of
DESCRIPTION Period Expenses Describe Describe Period
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994:
Deducted from asset accounts:
Allowance for doubtful
accounts ........................ $ 607,142 $ 731,622(5) $ (104,989)(3) $ 127,462(1) $1,106,313
---------- ---------- ----------- --------- ----------
Allowance for lease
accounts ......................... 910,807 235,785 104,989 53,952(1) 1,197,629
========== ========== =========== ========= ==========
Year ended December 31, 1993:
Deducted from asset accounts:
Allowance for doubtful
accounts ......................... $ 530,507 $ 442,064 $ (125,329)(3) $ 240,100(1) $ 607,142
---------- ---------- ----------- --------- ----------
Allowance for lease
accounts ......................... 676,562 296,000 125,329 (3) 187,084(1) 910,807
========== ========== =========== ========= ==========
Year ended December 31, 1992:
Deducted from asset accounts:
Allowance for doubtful
accounts ......................... $ 564,944 $ 147,000 $ 91,583(4) $ 273,020(1) $ 530,507
---------- ---------- ----------- --------- ----------
Allowance for lease
accounts ......................... 184,077 280,113 162,126(2) (50,246)(1) 676,562
========== ========== =========== ========= ==========
(1) Uncollectible accounts written off, net of recoveries.
(2) Collection on accounts in excess of assigned value at acquisition.
(3) Reclassed between appropriate valuation and qualifying accounts.
(4) Reclassed to Contingency Reserve, net of reclass from lease accounts.
(5) Adjusted for pooling of Southwest Telephone Systems, Inc.
</TABLE>
<PAGE>
<TABLE>
SCHEDULE IX - SHORT-TERM BORROWINGS
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E COL. F
-----------------------------------------------------------------------------------------------------------------------------------
Average Weighted
Maximum Amount Average
CATEGORY OF Weighted Amount Outstanding Interest Rate
AGGREGATE Balance Average Outstanding During the During the
SHORT-TERM at End of Interest During the Period Period
BORROWING Period Rate Period (2) (3)
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994:
Notes payable to bank(1).................... $ .00 N/A $ .00 $ .00 N/A
===== ==== ========== =========== =====
Year ended December 31, 1993:
Note payable to bank(1)..................... $ .00 6.75% $5,908,935 $3,188,582 6.75%
===== ==== ========== =========== =====
Year ended December 31, 1992:
Notes payable to bank(1).................... $3,824,032 6.75% $6,400,000 $4,121,482 6.80%
========== ==== ========== =========== =====
(1) Notes payable to bank represent borrowings under a line of credit borrowing
arrangement.
(2) The average amount outstanding during the period was computed by dividing
the total of month-end outstanding principal balances by 12.
(3) The weighted average interest rate during the period was computed by
dividing the actual interest expense by average short-term debt outstanding.
</TABLE>
EXHIBIT 10.57
TO
FORM 10-K ANNUAL REPORT
UNDER THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1994
LOAN AGREEMENT WITH BANK ONE, ARIZONA N.A.
DECEMBER 16, 1994
DATE: December 16, 1994
PARTIES: Borrower: INTER-TEL, INCORPORATED, an Arizona corporation.
Bank: BANK ONE, ARIZONA, NA, a national banking association.
AGREEMENT: For good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, Borrower and Bank agree as follows:
1. SCHEDULE OF TERMS.
2. Commitment Amount: $5,000,000.00.
3.1 Scheduled Commitment expiration date: May 1, 1996.
3.3 Each of the following Persons acting alone is authorized to
request Advances:
Steven G. Mihaylo, Chairman and CEO; or Kurt R. Kneip, Vice President,
Chief Financial Officer and Secretary/ Treasurer, or Ralph Marsh, Assistant
Secretary and Assistant Treasurer; or Margaret Hollingsed, Assistant
Treasurer
Each of the following Persons acting alone is authorized to request Letters
of Credit and to execute Letter of Credit Agreements:
Steven G. Mihaylo, Chairman and CEO; or Kurt R. Kneip, Vice President,
Chief Financial Officer and Secretary/ Treasurer, or Ralph Marsh, Assistant
Secretary and Assistant Treasurer; or Margaret Hollingsed, Assistant
Treasurer
3.5.1 Commitment fee: $ 15,000.00.
3.5.2 Letter of Credit Issuance Fee: Rate: 1.00% per annum.
5.1 and 6.1 Purpose of Advances and Letters of Credit: Advances are to be
used to pay reimbursement Amounts under Letter of Credit Agreements and to
support working capital. Letters of Credit are to be used to finance
inventory purchases.
5.1.2 Fiscal year of Borrower: From January 1 to December 31.
6.4.1 Financial statements due within 45 days after the end of each
fiscal quarter.
Financial statements requirements: Accrual Basis and GAAP..
Certification requirements: Borrower prepared financial statements
Person(s) to sign financial statements on behalf of Borrower:
Name: Kurt R. Kneip Title: Vice President, Chief Financial
Officer and Secretary/Treasurer
6.4.2 Financial statements due within 90 days after the end of each
fiscal year of Borrower.
Financial statements requirements: Accrual Basis and GAAP..
Certification requirements: Independent certified public
accountant satisfactory to Bank to audit financial statements and
deliver an unqualified opinion on the financial statements.
6.11.1 Minimum Tangible Net Worth: $30,000,000.00
6.11.2 Current Ratio: 1.5 to 1.0
6.11.3 Minimum Fixed Coverage Ratio 2.0 to 1.0
7.7 Capital expenditures limit: $ 7,000,000.00
7.8 Leases rental limit: $ 3,000,000.00
7.9 Indebtedness limit: $ 1,000,000.00
7.10 Maximum Net Loss: $1,250,000.00
2. DEFINITIONS. In this Agreement, the following terms shall have the following
meanings and all capitalized financial terms used and not defined in this
Agreement shall have the meanings determined in accordance with GAAP:
"Advance" means an advance by Bank to Borrower hereunder.
"Agreement" means this Loan Agreement as it may be amended, modified, extended,
renewed, restated, or supplemented from time to time.
"Approvals and Permits" means each and all approvals, authorizations, bonds,
consents, certificates, franchises, licenses, permits, registrations,
qualifications, and other actions and rights granted by or filings with any
Persons necessary, appropriate, or desirable for ownership, lease, or use by
Borrower of its assets and property or for the conduct of the business and
operations of Borrower.
"Borrower Loan Documents" means the Loan Documents executed or delivered by
Borrower from time to time.
"Business Day" means a day of the year on which banks are not required or
authorized to close in Phoenix, Arizona.
"Collateral" means the property, interests in property, and rights to property
securing any or all Obligations from time to time.
"Commitment" means the agreement of Bank in Sections 3.1 and 3.2 to issue
Letters of Credit and to make Advances pursuant to the terms and conditions in
Letter of Credit Agreements and herein.
"Commitment Amount" means the amount specified in Section 1.
"Current Assets" means current assets under GAAP, provided that, regardless of
GAAP, Current Assets shall not include: accounts receivable other than trade
accounts receivable; receivables due from stockholders, directors, officers,
partners, members, employees, subsidiaries, and other affiliates; promissory
notes, including the portion due within the current period, unless the
obligation evidenced thereby has been independently verified to Bank by an
independent certified public accountant; accrued interest receivable; income tax
refunds receivable; prepaid expenses; cash surrender value of life insurance
policies; guarantee or performance deposits; and dealer reserves.
"Current Liabilities" means current liabilities under GAAP and, in addition, the
following: all indebtedness to stockholders, directors, officers, partners,
members, employees, subsidiaries, and other affiliates that is not subordinated
to the satisfaction of Bank to the obligations of Borrower under the Loan
Documents as to Liens and Encumbrances, time and right of payment, and rights
against Collateral.
"Customer" means a customer of Borrower.
"ERISA" means the Employee Retirement Income Security Act of 1974 and the
regulations and published interpretations thereunder, as in effect from time to
time.
"Event of Default" has the meaning specified in the Note and the other Loan
Documents.
"Existing Letter(s) of Credit" means any and all letter(s) of credit issued by
Bank at the request of Borrower prior to the date of this Agreement, as to which
letter(s) of credit the date that is the Standard Number of Days after the last
date for payment of drafts drawn or drawn and accepted thereunder is after the
date of this Agreement.
"Fixed Coverage Ratio" defined as (i) Net Income before Interest, Lease and Tax
Expense; divided by: (ii) Interest, Lease and Current Maturities Long Term Debt
on a rolling four qurter basis.
"GAAP" means generally accepted accounting principles consistently applied.
"Governmental Authority" means any government, any court, and any agency,
authority, body, bureau, department, or instrumentality of any government.
"Intangible Assets" means all intangible assets under GAAP, provided that,
regardless of GAAP, Intangible Assets shall include: copyrights; franchises;
goodwill; licenses; loan origination fees; non-competition covenants;
organization or formation expenses; patents; shares of the capital stock of
Borrower; service marks; service names; trademarks; tradenames; write-up in the
book value of any asset in excess of the acquisition cost of the asset to
Borrower; any amount, however designated on the balance sheet, representing the
excess of the purchase price paid for assets or stock acquired over the value
assigned thereto on the books of Borrower; unamortized debt discount; deferred
discount; computer software; and research and development costs and expenses.
"Letter of Credit Agreement" means Bank's standard form Application and
Agreement for Commercial Letter of Credit, Bank's standard form Application for
Standby Letter of Credit and Standby Letter of Credit Agreement, or other
standard application and agreement for letters of credit in use by Bank from
time to time.
"Letters of Credit" means the letters of credit in Bank's standard form from
time to time issued pursuant to Section 3.1 and any Existing Letters of Credit.
"Lien or Encumbrance" and "Liens and Encumbrances" mean, respectively, each and
all of the following: (i) any lease or other right to use; (ii) any assignment
as security, conditional sale, grant in trust, lien, mortgage, pledge, security
interest, title retention arrangement, other encumbrance, or other interest or
right securing the payment of money or the performance of any other liability or
obligation, whether voluntarily or involuntarily created and whether arising by
agreement, document, or instrument, under any law, ordinance, regulation, or
rule (federal, state, local, or foreign), or otherwise; and (iii) any option,
right of first refusal, other right to acquire, or other interest, or right.
"Loan Documents" means this Agreement, the Note, the Letter of Credit Agreements
executed and delivered by Borrower in connection with Letters of Credit from
time to time, and any other agreements, documents, or instruments from time to
time evidencing, guarantying, securing, or otherwise relating to the Note, as
they may be amended, modified, extended, renewed, or supplemented from time to
time.
"Loan Party" means Borrower and each other Person that from time to time is or
becomes obligated to Bank under any Loan Document or grants any Collateral.
"Material Adverse Change" means any change in the assets, business, financial
condition, operations, prospects, or results of operations of any Loan Party or
any other event or condition that (i) materially and adversely affects the
likelihood of performance by any Loan Party of any of the Obligations, (ii)
materially and adversely affects the ability of any Loan Party to perform any of
the Obligations, (iii) materially and adversely affects the legality, validity,
or binding nature of any of the Obligations or any Lien or Encumbrance securing
any of the Obligations, or (iv) materially and adversely affects the priority of
any Lien or Encumbrance securing any of the Obligations.
"Note" means the Promissory Note, dated of even date herewith, of Borrower
payable to Bank, as it may be amended, modified, extended, renewed, restated, or
supplemented from time to time.
"Obligations" means the obligations of the Loan Parties under the Loan Documents
(including, without limitation, the obligation to pay Reimbursement Amounts).
"Permitted Exceptions" means Liens and Encumbrances in favor of Bank, leases of
inventory for fair consideration in the ordinary course of Borrower's business,
Liens and Encumbrances shown on financial statements of Borrower delivered to
Bank prior to the date of this Agreement, Liens and Encumbrances otherwise
disclosed to Bank in writing prior to the date of this Agreement, other Liens
and Encumbrances consented to by Bank in writing from time to time in its
absolute and sole discretion and purchase money security interests.
"Person" means a natural person, a partnership, a joint venture, an
unincorporated association, a limited liability company, a corporation, a trust,
any other legal entity, or any Governmental Authority.
"Reimbursement Amount" means the amount Borrower is obligated to pay to Bank
under a Letter of Credit Agreement in respect of a draft drawn or drawn and
accepted under the respective Letter of Credit, which amount shall be the amount
of the draft or acceptance and all costs, expenses, fees, and other amounts then
payable by Borrower to Bank under the Letter of Credit Agreement.
"Standard Number of Days" means the standard number of days established by Bank
from time to time to allow for delivery to Bank of drafts drawn under letters of
credit issued by Bank and presented to financial institutions other than Bank
for delivery to Bank. Bank may change such number of days at any time and from
time to time in its absolute and sole discretion without notice to Borrower and
may have a different number of days for commercial letters of credit and standby
letters of credit.
"Tangible Net Worth" means (i) the sum of all capital accounts of Borrower
(including, without limitation, any paid-in capital, capital surplus, and
retained earnings), less (ii) the sum of the value on Borrower's books of all
Intangible Assets.
"Unmatured Event of Default" means any condition or event that with notice,
passage of time, or both would be an Event of Default.
3. LETTERS OF CREDIT AND LOAN FACILITY
3.1 Letters of Credit.
3.1.1 Issuance of Letters of Credit. Subject to the terms and
conditions of this Agreement and the Letter of Credit Agreements and subject to
the policies, procedures, and requirements of Bank in effect from time to time
for issuance of Letters of Credit (including, without limitation, payment of
letter of credit fees), Bank agrees to issue, from time to time on or before the
scheduled Commitment expiration date set forth in Section 1, Letters of Credit
upon request by and for the account of Borrower, provided that as to each
requested Letter of Credit Borrower has delivered to Bank a completed and
executed Letter of Credit Agreement, and provided further that the date that is
the Standard Number of Days after the last date for payment of drafts drawn or
drawn and accepted under a requested Letter of Credit is before the scheduled
Commitment expiration date set forth in Section 1. Each reference in this
Agreement to "issue" or "issuance" or other forms of such words in relation to
Letters of Credit shall also include any extension or renewal of a Letter of
Credit. Upon occurrence of an Event of Default or an Unmatured Event of Default,
Bank, in its absolute and sole discretion and without notice, may suspend the
commitment to issue Letters of Credit. In addition, upon occurrence of an Event
of Default, Bank, in its absolute and sole discretion and without notice, may
terminate the commitment to issue Letters of Credit.
3.1.2 Issuance Procedure. To obtain a Letter of Credit, Borrower
shall complete and execute a Letter of Credit Agreement and submit it to the
letter of credit department of Bank. Upon receipt of a completed and executed
Letter of Credit Agreement, Bank will process the application in accordance with
the policies, procedures, and requirements of Bank then in effect. If the
application meets the requirements of Bank and is within the policies of Bank
then in effect, Bank will issue the requested Letter of Credit.
3.1.3 Reimbursement of Bank for Payment of Drafts Drawn or Drawn
and Accepted Under Letters of Credit. The obligation of Borrower to reimburse
Bank for payment by Bank of drafts drawn or drawn and accepted under a Letter of
Credit shall be as provided in the respective Letter of Credit Agreement. Bank
will notify Borrower of payment by Bank of a draft drawn or drawn and accepted
under a Letter of Credit and of the respective Reimbursement Amount and will
give Borrower the election (i) to pay the Reimbursement Amount pursuant to the
respective Letter of Credit Agreement or (ii) to pay the Reimbursement Amount by
Bank making an Advance subject to the terms and conditions of this Agreement and
applying the proceeds of the Advance to pay the Reimbursement Amount. If
Borrower does not communicate to Bank its election within two Business Days
after notification by Bank of payment of the draft or acceptance, Borrower shall
be deemed to have elected to pay the Reimbursement Amount by Bank making an
Advance hereunder, provided that if the terms and conditions in this Agreement
for an Advance hereunder are not satisfied, Borrower shall be deemed to have
elected to pay the Reimbursement Amount pursuant to the Letter of Credit
Agreement. Each Advance to pay a Reimbursement Amount shall be dated the date
that Bank pays the respective draft or acceptance and shall accrue interest from
and after such date. If Borrower is to pay the Reimbursement Amount pursuant to
the Letter of Credit Agreement, Borrower shall also pay to Bank interest on the
Reimbursement Amount from and including the date Bank pays the respective draft
or acceptance at the Interest Rate (defined in the Note) until the Reimbursement
Amount and such interest are paid in full, provided that if Borrower fails to
pay the Reimbursement Amount and accrued interest thereon within five (5) days
after notification by Bank to Borrower of payment of the respective draft or
acceptance, interest thereafter shall accrue at the Default Rate (as such term
is defined in the Note). Such interest shall be computed on the basis of a
360-day year and accrue on a daily basis for the actual number of days elapsed.
Notwithstanding the above, if Borrower elects or is deemed to have elected to
pay the Reimbursement Amount pursuant to the Letter of Credit Agreement and
fails to pay the Reimbursement Amount and interest thereon within five (5) days
after notification by Bank to Borrower, Bank, in its absolute and sole
discretion and without notice to Borrower and regardless of whether the terms
and conditions in this Agreement for Advances are satisfied, may make an Advance
under this Agreement in the amount of the Reimbursement Amount and accrued
interest thereon and apply the proceeds of such Advance to pay the Reimbursement
Amount and accrued interest.
3.2 Loan Facility. Subject to the terms and conditions of this Agreement,
Bank agrees to make Advances to Borrower from time to time on or before the
scheduled Commitment expiration date specified in Section 1. Advances shall be
on a revolving basis. Advances repaid may be re-borrowed subject to the terms
and conditions herein. Although the outstanding principal of the Note may be
zero from time to time, the Loan Documents shall remain in full force and effect
until the Commitment terminates and all Obligations are paid and performed in
full. Upon occurrence of an Event of Default or an Unmatured Event of Default,
Bank, in its absolute and sole discretion and without notice, may suspend the
commitment to make Advances. In addition, upon occurrence of an Event of
Default, Bank, in its absolute and sole discretion and without notice, may
terminate the commitment to make Advances. The obligation of Borrower to repay
Advances is evidenced by the Note.
3.3 Letters of Credit and Advances. Letters of Credit may be issued and
Advances may be made by Bank at the oral or written request of the respective
Person or Persons designated in Section 1. Such Person or Persons are hereby
authorized by Borrower to request Letters of Credit and Advances, to execute and
deliver Letter of Credit Agreements on behalf of Borrower, and to direct
disposition of the proceeds of Advances until written notice of the revocation
of such authority is received from Borrower by Bank and Bank has had a
reasonable time to act upon such notice. Bank shall have no duty to monitor for
Borrower or to report to Borrower the use of Letters or Credit or proceeds of
Advances. Advances shall be disbursed by Bank in the manner agreed upon by Bank
and Borrower from time to time.
3.4 Limit on Letters of Credit and Advances. Anything in the Loan Documents
to the contrary notwithstanding, the sum from time to time of (i) the aggregate
amount of outstanding and undrawn Letters of Credit, (ii) the aggregate amount
of outstanding and unpaid drafts drawn or drawn and accepted under Letters of
Credit, (iii) the aggregate amount of unpaid Reimbursement Amounts, and (iv) the
amount of outstanding and unpaid Advances shall not exceed the Commitment
Amount.
3.5 Fees. Borrower agrees to pay to Bank the following fees, which shall be
earned by Bank on the date due under the Loan Documents and shall be
non-refundable to Borrower:
3.5.1 Commitment Fee. A fee for the Commitment in the amount set
forth in Section 1, payable on or before the date hereof.
3.5.2 Attorneys' Costs, Expenses, and Fees. Attorneys costs,
expenses, and fees for Bank's counsel in the amount specified by Bank, payable
on or before the date hereof.
3.5.3 Letter of Credit Issuance Fee. A fee for the issuance of the
Letter of Credit computed on the amount of the Letter of Credit and at the rate
per annum set forth in Section 1., payable upon issuance of the Letter of
Credit.
3.6 Mandatory Prepayments. If for any reason at any time the sum of (i) the
aggregate amount of outstanding and undrawn Letters of Credit, (ii) the
aggregate amount of outstanding and unpaid drafts drawn or drawn and accepted
under Letters of Credit, (iii) the aggregate amount of unpaid Reimbursement
Amounts, and (iv) the amount of outstanding and unpaid Advances exceeds the
Commitment Amount, Borrower, without notice or demand, shall immediately make a
payment to Bank in an amount equal to the sum of (A) such excess and (B) accrued
and unpaid interest thereon.
3.7 Collateral Upon Event of Default. Upon an Event of Default and demand
by Bank in its absolute and sole discretion, Borrower shall immediately deliver
to Bank as security for all Obligations immediately available funds in an amount
equal to the sum of (i) aggregate amount of outstanding and undrawn letters of
Credit, and (ii) the aggregate amount of outstanding and unpaid drafts drawn or
drawn and accepted under Letters of Credit. Borrower hereby grants to Bank a
security interest in all such funds delivered to Bank to secure payment and
performance of the Obligations.
4. CONDITIONS PRECEDENT TO EACH ADVANCE AND LETTER OF CREDIT. Bank shall be
obligated to issue a Letter of Credit or make an Advance when requested by
Borrower only if the representations and warranties by the Loan Parties in the
Loan Documents are accurate on and as of this Agreement and on and as of the
date of issuance of the Letter of Credit or of making the Advance before and
after giving effect to the Letter of Credit or the Advance and the application
of the proceeds of the Advance. Delay or failure by Bank to insist on
satisfaction of any condition of issuance of a Letter of Credit or making an
Advance shall not be a waiver of such condition precedent or any other condition
precedent. If Borrower is unable to satisfy any condition precedent of issuance
of a Letter of Credit or making an Advance, the issuance of the Letter of Credit
or the making of the Advance shall not preclude Bank from thereafter declaring
the condition or event causing such inability to be an Event of Default.
5. BORROWER REPRESENTATIONS AND WARRANTIES.
5.1 Closing Representations and Warranties. Borrower represents and
warrants to Bank as of the date of this Agreement:
5.1.1 Purpose of Advances and Letters of Credit. Borrower intends
to use Advances and Letters of Credit only for the purposes described in Section
1.
5.1.2 Accurate Information. All information in any loan
application, financial statement, certificate, or other document and all other
information delivered by or on behalf of Borrower to Bank in obtaining the
Commitment is correct and complete. There are no omissions therefrom that result
in any such information being incomplete, incorrect, or misleading as of the
date thereof. There has been no Material Adverse Change as to Borrower since the
date of such information. All financial statements heretofore delivered to Bank
by Borrower accurately present the financial condition and results of operations
of Borrower as at the dates thereof and for the periods covered thereby. The
fiscal year of Borrower is as set forth in Section 1.
5.1.3 Legal Proceedings; Hearings, Inquiries, and Investigations.
Except as disclosed to Bank in writing prior to the date of this Agreement, (i)
no legal proceeding is pending or, to the best knowledge of Borrower, threatened
before any arbitrator, other private adjudicator, or Governmental Authority to
which Borrower is a party or by which Borrower or any assets or property of
Borrower may be bound or affected that if resolved adversely to Borrower could
result in a Material Adverse Change, and (ii) no hearing, inquiry, or
investigation relating to Borrower or any assets or property of Borrower is
pending or, to the best knowledge of Borrower, threatened by any Governmental
Authority.
5.1.4 Taxes. Borrower has filed or caused to be filed all tax
returns (federal, state, local, and foreign) required to be filed by Borrower
and has paid all taxes and other amounts shown thereon to be due (including,
without limitation, any interest and penalties).
5.1.5 No Event of Default or Unmatured Event of Default. No Event
of Default and no Unmatured Event of Default has occurred and is continuing.
5.1.6 No Approvals. No approval, authorization, bond, consent,
certificate, franchise, license, permit, registration, qualification, or other
action or grant by or filing with any Person is required in connection with the
execution, delivery, or performance by Borrower of the Borrower Loan Documents.
5.1.7 No Conflicts. The execution, delivery, and performance by
Borrower of the Borrower Loan Documents will not conflict with, or result in a
violation of or a default under: any applicable law, ordinance, regulation, or
rule (federal, state, or local); any judgment, order, or decree of any
arbitrator, other private adjudicator, or Governmental Authority to which
Borrower is a party or by which Borrower or any of the assets or property of
Borrower is bound; any of the Approvals or Permits; or any agreement, document,
or instrument to which Borrower is a party or by which Borrower or any of the
assets or property of Borrower is bound.
5.1.8 Execution and Delivery and Binding Nature of Borrower Loan
Documents. The Borrower Loan Documents have been duly executed and delivered by
or on behalf of Borrower. The Borrower Loan Documents are legal, valid, and
binding obligations of Borrower, enforceable in accordance with their terms
against Borrower, except as such enforceability may be limited by bankruptcy,
insolvency, moratorium, reorganization, or similar laws and by equitable
principles of general application.
5.1.9 Approvals and Permits; Assets and Property. Borrower has
obtained and there are in full force and effect all Approvals and Permits.
Borrower owns or leases all assets and property necessary for conduct of the
business and operations of Borrower. Such assets and property are not subject to
any Liens and Encumbrances, other than Permitted Exceptions.
5.1.10 ERISA. Borrower is in compliance with ERISA. No Reportable
Event or Prohibited Transaction (as defined in ERISA) or termination of any plan
has occurred and no notice of termination has been filed with respect to any
plan established or maintained by Borrower and subject to ERISA. Borrower has
not incurred any material funding deficiency within the meaning of ERISA or any
material liability to the Pension Benefit Guaranty Corporation in connection
with any such plan established or maintained by Borrower. Borrower is not a
party to any Multiemployer Plan (as defined in ERISA).
5.1.11 Environmental Matters. To the best knowledge of Borrower
after due investigation, Borrower is in compliance in all material respects with
all environmental, all health, and all safety laws, ordinances, regulations, and
rules (federal, state, and local) applicable to Borrower, the assets or property
of Borrower, the business or operations of Borrower, or the products or services
of Borrower. Borrower does not have any material existing or contingent
liability in connection with any disposal, generation, manufacture, processing,
production, release, storage, transportation, treatment, or use of any hazardous
or toxic substance or waste.
5.1.12 Investment Company Act; Public Utility Holding Company Act.
Borrower is not an "investment company" or a company controlled by an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended. Borrower is not a "holding company" within the meaning of the Public
Utility Holding Company Act of 1935, as amended.
5.1.13 Margin Securities. Borrower is not engaged in the business
of extending credit for the purpose of purchasing or carrying margin stock
(within the meaning of Regulation U issued by the Board of Governors of the
Federal Reserve System). No proceeds of any Advance will be used to purchase or
carry any margin stock or extend credit to others for the purpose of purchasing
or carrying margin stock or for any purpose that violates or is inconsistent
with Regulation X of the Board of Governors.
5.1.14 Corporation, Limited Liability Company, or Partnership
Existence, Authority, and Authorization. If Borrower is a corporation, a limited
liability company, or a partnership, Borrower is validly existing, and in the
case of a corporation or limited liability company is in good standing, under
the laws of the jurisdiction of its formation or organization and has the
requisite power and authority to execute, deliver, and perform the Borrower Loan
Documents. The execution, delivery, and performance by Borrower of the Borrower
Loan Documents have been duly authorized by all requisite action by or on behalf
of Borrower and will not conflict with, or result in a violation of or a default
under, the certificate of incorporation or bylaws, the limited liability company
operating agreement, or the partnership agreement of Borrower, as the case may
be. If Borrower is not formed or organized under the law of the State of
Arizona, Borrower is qualified to do business as a foreign corporation, limited
liability company, or partnership, as the case may be, and in the case of a
corporation or limited liability company is in good standing, under the law of
the State of Arizona.
5.2 Representations and Warranties Upon Requests for Advances or Letters of
Credit. Each request for an Advance or a Letter of Credit shall be a
representation and warranty by Borrower to Bank that the representations and
warranties in this Section 5 are correct and complete as of the date of the
Advance or Letter of Credit and that the conditions precedent in Section 4 are
satisfied as of the date of the Advance or Letter of Credit.
5.3 Representations and Warranties Upon Delivery of Financial Statements,
Documents, and Other Information. Each delivery by Borrower to Bank of financial
statements, other documents, or information after the date of this Agreement
(including, without limitation, documents and information delivered in obtaining
an Advance) shall be a representation and warranty that such financial
statements, other documents, or information is correct and complete, that there
are no omissions therefrom that result in such financial statements, other
documents, or information being incomplete, incorrect, or misleading as of the
date thereof, and that such financial statements accurately present the
financial condition and results of operations of Borrower as at the dates
thereof and for the periods covered thereby.
6. BORROWER AFFIRMATIVE COVENANTS. Until the Commitment terminates in full,
until all Letters of Credit expire or are drawn in full, until all drafts drawn
under or drawn and accepted under Letters of Credit are paid in full, and until
the Obligations are paid and performed in full, Borrower agrees that:
6.1 Use of Advances. Borrower shall use Advances only for the purposes
described in Section 1.
6.2 Further Assurances, Costs and Expenses of Borrower's Performance of
Covenants and Satisfaction of Conditions. Borrower shall promptly execute,
acknowledge, and deliver and, as appropriate, cause to be duly filed and
recorded such additional agreements, documents, and instruments and do or cause
to be done such other acts as Bank may reasonably request from time to time to
better assure, perfect, preserve, and protect the rights and remedies of Bank
under the Loan Documents. Borrower shall perform all of its obligations and
satisfy all conditions under the Loan Documents at its sole cost and expense.
6.3 Books and Records; Access By Bank. Borrower shall maintain a single,
standard, modern system of accounting (including, without limitation, a single,
complete, and accurate set of books and records of its assets, business,
financial condition, liabilities, operations, property, prospects, and results
of operations) in accordance with good accounting practices. Borrower shall
furnish to Bank all information concerning Borrower and the assets, business,
financial condition, liabilities, operations, property, prospects, and results
of operation of Borrower as Bank reasonably requests from time to time. During
business hours Borrower shall give representatives of Bank access to all assets,
property, books, records, documents and personnel of Borrower and shall permit
Bank representatives to inspect such assets and property, to audit, copy,
examine, and make excerpts from the books, records, and documents, and to make
inquiry of Borrower and Borrower's personnel and receive answers. Borrower
shall, and shall cause the personnel of Borrower, to cooperate and assist Bank
and Bank's representatives. In this regard, without limitation, Bank shall have
the right to conduct semi-annual inspections of the receivables and inventory of
Borrower. In addition, Bank shall have the right to verify any information
provided by Borrower to Bank by inquiry to any appropriate third Persons.
6.4 Information and Statements. Borrower shall furnish to Bank:
6.4.1 Fiscal Period Financial Statements. As soon as available and
in any event within the number of days set forth in Section 1 after the end of
each fiscal period of Borrower set forth in Section 1, except the last period in
each fiscal year of Borrower, copies of the balance sheet of Borrower as of the
end of such fiscal period and statements of income and retained earnings and a
statement of cash flow of Borrower for such fiscal period and for the portion of
the fiscal year of Borrower ending with such fiscal period, in each case setting
forth in comparative form the figures for the corresponding period for the
preceding fiscal year, all in reasonable detail, prepared in accordance with the
requirements in Section 1, containing the certifications specified in Section 1
and signed on behalf of Borrower by the person(s) named in Section 1.
6.4.2 Annual Financial Statements. As soon as available and in any
event within the number of days set forth in Section 1 after the end of each
fiscal year of Borrower, copies of the balance sheet of Borrower as of the end
of such fiscal year and statements of income and retained earnings and a
statement of cash flow of Borrower for such fiscal year, in each case setting
forth in comparative form the figures for the preceding fiscal year of Borrower,
all in reasonable detail and prepared in accordance with the requirements in
Section 1, containing the certifications specified in Section 1.
6.5 Law; Judgments; Material Agreements; Approvals and Permits. Borrower
shall comply with all laws, ordinances, regulations, and rules (federal, state,
local, and foreign) and all judgments, orders, and decrees of any arbitrator,
other private adjudicator, or Government Authority relating to Borrower or the
assets, business, operations, or property of Borrower. Borrower shall comply in
all material respects with all material agreements, documents, and instruments
to which Borrower is a party or by which Borrower or any of the assets or
property of Borrower is bound or affected. Borrower shall obtain and maintain in
full force and effect all Approvals and Permits and shall comply with all
conditions and requirements of all Approvals and Permits.
6.6 Taxes and Other Indebtedness. Borrower shall pay and discharge (i)
before delinquency all taxes, assessments, and governmental charges or levies
imposed upon it, upon its income or profits, or upon any of its assets or
property, (ii) when due all lawful claims (including, without limitation, claims
for labor, materials, and supplies), that, if unpaid, might become a Lien or
Encumbrance upon any of its assets or property, and (iii) when due, all its
other indebtedness. 6.7 Assets and Property. Borrower shall maintain, keep, and
preserve all of its assets and property (tangible and intangible) necessary or
useful in the proper conduct of its business and operations in good working
order and condition, ordinary wear and tear excepted.
6.8 Insurance. In addition to any insurance required under any of the other
Loan Documents, Borrower shall maintain workmen's compensation insurance,
product and public liability insurance, insurance on its assets and property now
or hereafter owned, and such other forms of insurance as is customary in the
industry of Borrower, against such casualties, risks, and contingencies, in such
amounts, and with such insurance companies as are satisfactory to Bank, in its
reasonable discretion. Borrower shall deliver to Bank from time to time as Bank
may request, schedules setting forth all insurance then in effect and copies of
the policies.
6.9 Environmental Laws. Without limiting the generality of Section 6.5,
Borrower shall comply with all environmental, all health, and all safety laws,
ordinances, regulations, and rules (federal, state, local, and foreign)
applicable to Borrower, the business or operations of Borrower, the assets or
property of Borrower, or the products or services of Borrower. Borrower may use
and store for its own use hazardous or toxic substances. Borrower shall not
dispose of, generate, manufacture, process, produce, release, transport, or
treat or otherwise store or use any hazardous or toxic substances or wastes.
Borrower shall notify Bank immediately of any environmental inquiry or claim
from any Governmental Authority or other Person relating to Borrower or any
assets, property, business, operations, product, or service of Borrower. 6.10
ERISA. Borrower shall fund each Defined Benefit Plan and Defined Contribution
Plan (as such terms are defined in ERISA) established or maintained by or for
Borrower so that there is never an Accumulated Funding Deficiency (as defined in
Section 412 of the Internal Revenue Code of 1986, as amended).
6.11 Financial Covenants. Except as otherwise noted, all financial
computations shall be made in accordance with GAAP. Until the Commitment
terminates in full and until the Obligations are paid and performed in full, or,
if so specified in Section 1, for the respective period(s) specified in Section
1, Borrower agrees that Borrower shall maintain:
6.11.1 Tangible Net Worth. A minimum Tangible Net Worth in the
amount set forth in Section 1.
6.11.2 Current Ratio. A minimum current ratio as set forth in
Section 1, calculated by dividing Borrower's Current Assets by Borrower's
Current Liabilities.
6.11.3 Fixed Coverage Ratio. A minimum Fixed Coverage Ratio in the
amount set forth in Section 1.
6.11.4 Maximum Net Loss Net Loss not in excess of the amount set
forth in Section 1.
6.12 Corporation, Limited Liability Company, or Partnership Existence. If
Borrower is a corporation, a limited liability company, or a partnership,
Borrower shall continue to be validly existing, and in the case of a corporation
or a limited liability company in good standing, under the law of the
jurisdiction of its organization or formation. If Borrower is not formed or
organized under the laws of the State of Arizona, Borrower shall continue to be
qualified to do business as a foreign corporation, limited liability company, or
partnership, as the case may be, and in the case of a corporation or limited
liability company to be in good standing, under the law of the State of Arizona.
7. BORROWER NEGATIVE COVENANTS. Until the Commitment terminates in full, until
all Letters of Credit expire or are drawn in full, until all drafts drawn or
drawn and accepted under Letters of Credit are paid in full, and until the
Obligations are paid and performed in full, Borrower agrees:
7.1 Corporation, Limited Liability Company, and Partnership Restrictions.
If Borrower is a corporation, a limited liability company, or a partnership,
Borrower shall not issue any material amount of capital stock or other
securities of or any limited liability company interest or partnership interest
in Borrower or grant any material amount of option(s), right-of- first-refusal,
warrant, or other right to purchase or acquire any capital stock or other
securities of or any limited liability company interest or partnership interest
in Borrower. Borrower shall not be dissolved or liquidated. Borrower shall not
amend, modify, restate, supplement, or terminate its certificate of
incorporation or bylaws, its limited liability company operating agreement, or
its partnership agreement, as the case may be. If a corporation, Borrower shall
not reorganize itself or consolidate with or merge into any other corporation or
any limited liability company or permit any other corporation or any limited
liability company to be merged into Borrower. If a limited liability company,
Borrower shall not consolidate or merge with any corporation, any other limited
liability company, or any other legal entity.
7.2 Change in or Reacquisition of Ownership Interests in Borrower. In
addition to any requirement in any other Loan Document, if Borrower is a
corporation, a limited liability company, or a partnership, Borrower shall not
repurchase any material amount of capital stock of or any limited liability
company interest or partnership interest in Borrower or any material amount of
option(s), right-of-first refusal, warrant or other right to purchase any
material amount of capital stock or other securities of or any limited liability
company interest or partnership interest in Borrower. In addition, Borrower
shall not suffer to occur or exist, whether occurring voluntarily or
involuntarily, after the date of this Agreement any change in the legal or
beneficial ownership of any capital stock of or limited liability company
interest or partnership interest in Borrower, without the prior written consent
of Bank in its absolute and sole discretion.
7.3 Name, Fiscal Year, Accounting Method, and Lines of Business. Borrower
shall not change its name, fiscal year, or method of accounting. Borrower shall
not directly or indirectly, engage in any business other than the telecom
products, telecom networks, voice processing software, long distance services,
specialized computer-telephony software applications, telephone systems,
telephonic switches and telephones, maintenance, leasing and support services,
long distance calling services, and voice mail and other telecommunications
applications business, discontinue any material lines(s) of business, or
substantially alter its method of doing business.
7.4 Acquisitions, Loans, Investments, Guaranties, Subordinations. Borrower
shall not directly or indirectly (i) acquire by purchase, lease, or otherwise
all or substantially all the assets of any other person, (ii) make any loan or
advance to any other Person, (iii) purchase or otherwise acquire any capital
stock or other securities of any other Person, any limited liability company
interest or partnership interest in any other Person, or any warrants or other
options or rights to acquire any capital stock or securities of any other Person
or any limited liability company interest or partnership interest in any other
Person, (iv) make any capital contribution to any other Person, (v) otherwise
invest in or acquire any interest in any other Person, (vi) guaranty or
otherwise become obligated in respect of any indebtedness of any other Person,
or (vii) subordinate any claim against or obligation of any other Person to
Borrower to any other indebtedness of such Person.
Notwithstanding the above, Borrower may otherwise invest in or acquire any
interest in any other Person, not to exceed $5,000,000.00 in any one instance or
$15,000,000.00 in the aggregate in any one year.
7.5 Disposition of All or Substantially All Assets. Borrower shall not
sell, transfer, lease, or otherwise dispose of all or any substantial part of
the assets, business, operations, or property of Borrower.
7.6 Negative Pledge. Except for Permitted Exceptions, Borrower shall not
grant or suffer to exist any Lien or Encumbrance upon any assets or property of
Borrower.
7.7 Capital Expenditures. Borrower shall not, in any twelve (12) month
period, acquire additional fixed assets that have an aggregate total cost to
Borrower in excess of the amount set forth in Section 1, excluding acquisitions.
7.8 Leases. Borrower shall not enter into any lease of personal property
that would cause Borrower's total rental obligations for all leases of personal
property in any fiscal year of Borrower to exceed the amount set forth in
Section 1.
7.9 Indebtedness. Borrower shall not assume, create, incur, or permit to
exist any indebtedness, except (i) existing indebtedness disclosed on financial
statements delivered to Bank prior to the date of this Agreement, (ii) the
Obligations, and (iii) other indebtedness and trade obligations and normal
accruals in the ordinary course of business not yet due and payable, in the case
of (i), (ii), and (iii) in excess in the aggregate of the amount set forth in
Section 1.
7.10 Maximum Net Loss. The maximum net loss for any quarter, cumulative for
an four quarters or any two consecutive quarters shall not exceed the amount-set
forth in Section 1..
8. BANK'S OBLIGATIONS TO BORROWER ONLY. The obligations of Bank under this
Agreement are for the benefit of Borrower only. No other Person shall have any
rights hereunder or be a third-party beneficiary hereof.
9. PROVISIONS IN NOTE GOVERN THIS AGREEMENT. This Agreement is subject to
certain terms and provisions in the Note, to which reference is made for a
statement of such terms and provisions.
10. COUNTERPART EXECUTION AND FACSIMILE DELIVERY. This Agreement may be executed
in one or more counterparts, each of which shall be deemed an original and all
of which together shall constitute one and the same document. Signature pages
may be detached from the counterparts and attached to a single copy of this
Agreement to physically form one document. Delivery of executed copies of this
Agreement may be made by facsimile transmission with the same effect as delivery
of executed originals of this Agreement.
DATED as of the date first above stated.
BANK ONE, ARIZONA, NA,
a national banking association
By:
------------------------------------
Name: Craig Hoskin
Title: Vice President
INTER-TEL, INC.,
an Arizona corporation
By:
------------------------------------
Name: Kurt R. Kneip
Title: Vice President/Chief Financial Officer/
Secretary/Treasurer
<TABLE>
EXHIBIT 11.1
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<CAPTION>
Years Ended December 31,
1994 1993 1992
---- ---- ----
(In thousands, except per share amounts)
<S> <C> <C> <C>
PRIMARY
Average shares outstanding 10,344 8,503 8,180
Net effect of dilutive stock options--
based on the treasury stock method
using average market price 229 200 153
--- --- ---
TOTAL 10,573 8,703 8,333
====== ===== =====
Income from continuing operations $6,085 $3,924 $3,118
------ ------ ------
Net income $6,085 $3,924 $3,118
====== ====== ======
Income per share:
Continuing operations $ .58 $ .45 $ .37
------ ------ ------
Net income $ .58 $ .45 $ .37
====== ====== ======
FULLY DILUTED
Average shares outstanding 10,344 8,503 8,180
Net effect of dilutive stock options--
based on the treasury stock method
using the year-end market price,
if higher than the average market
price 229 236 194
--- --- ---
TOTAL 10,573 8,739 8,374
====== ===== =====
Income from continuing operations $6,085 $3,924 $3,118
------ ------ ------
Net income $6,085 $3,924 $3,118
====== ====== ======
Income per share:
Continuing operations $ .58 $ .45 $ .37
------ ------ ------
Net income $ .58 $ .45 $ .37
====== ====== ======
</TABLE>
The Statement Re: Computation of Per Share Earnings for periods prior to 1994
has been restated to include the accounts of Southwest Telephone Systems, Inc.,
which was accounted for as a pooling of interest.
EXHIBIT 22.1
SUBSIDIARIES OF INTER-TEL, INCORPORATED
Listed below are all the subsidiaries of Inter-Tel, Incorporated, as
well as the jurisdiction under the laws of which each was organized, and the
percentage of the outstanding voting stock of each owned by Inter-Tel,
Incorporated.
Percentage State or
of Voting Jurisdiction
Name Stock Owned of Organization
----- ----------- ----------------
Inter-Tel Integrated Systems, Inc. ........... 100% Arizona
Inter-Tel Communications, Inc. ............... 100% Arizona
Inter-Tel Leasing, Inc. ...................... 100% Arizona
Inter-Tel Midwest, Inc. ...................... 100% Delaware
Inter-Tel Incorporated-New Jersey ............ 100% Delaware
Inter-Tel NetSolutions, Inc. ................. 100% Texas
Inter-Tel DataCom, Inc. ...................... 100% California
Southwest Telephone Systems, Inc. ............ 100% New Mexico
Inter-Tel Equipment (UK), Ltd ................ 100% United Kingdom
Inter-Tel Japan, Inc. ........................ 100% Japan
EXHIBIT 23.0--CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference to page 31 of this Form
10-K of our report dated January 27, 1995 of Inter-Tel, Incorporated.
Our audits also included the financial statement schedules of
Inter-Tel, Incorporated listed in Item 14(a). These schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion based upon our audits. In our opinion, the financial statement schedules
referred to above, when considered in relation to the basic financial statements
taken as a whole, present fairly in all material respects the information set
forth therein.
We also consent to the incorporation by reference in the Registration
Statement (Form S-3 No. 33-58161), Registration Statement (Form S-8 No.
2-94805), in the Registration Statement (Form S-8 No. 33-40353), and in the
Registration Statement (Form S-8 No. 33-73620) of our report dated January 27,
1995, with respect to the consolidated financial statements incorporated herein
by reference and our report included in the preceding paragraph with respect to
the financial statement schedules included in this Form 10-K of Inter-Tel,
Incorporated.
Phoenix, Arizona /S/ ERNST & YOUNG LLP
March 17, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information
extracted from the Inter-Tel, Incorporated and
subsidiaries financial statements for the year
ended December 31, 1994 and is qualified in its
entirety by reference to such financial statements
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 15,278,606
<SECURITIES> 0
<RECEIVABLES> 17,089,639
<ALLOWANCES> 1,106,000
<INVENTORY> 14,257,878
<CURRENT-ASSETS> 50,935,465
<PP&E> 16,365,108
<DEPRECIATION> 10,650,210
<TOTAL-ASSETS> 64,112,397
<CURRENT-LIABILITIES> 13,306,358
<BONDS> 0
<COMMON> 27,334,505
0
0
<OTHER-SE> 142,432
<TOTAL-LIABILITY-AND-EQUITY> 64,112,397
<SALES> 112,164,790
<TOTAL-REVENUES> 112,164,790
<CGS> 66,215,725
<TOTAL-COSTS> 66,215,725
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 65,343
<INCOME-PRETAX> 9,815,261
<INCOME-TAX> 3,730,000
<INCOME-CONTINUING> 6,085,261
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,085,261
<EPS-PRIMARY> .58
<EPS-DILUTED> .58
</TABLE>
