UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended Commission File Number:
June 30, 1996 0-10211
INTER-TEL, INCORPORATED
Incorporated in the State of Arizona I.R.S. No. 86-0220994
120 North 44th Street, Suite 200
Phoenix, Arizona 85034-1822
(602) 302-8900
Common Stock
(12,928,981 shares outstanding as of June 30, 1996)
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 periods that the registrant was
required file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
<PAGE>
INDEX
INTER-TEL, INCORPORATED AND SUBSIDIARIES
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets--June 30, 3
1996 and December 31, 1995
Condensed consolidated statements of income--Three 4
and six months ended June 30, 1996 and June 30, 1995
Condensed consolidated statements of cash flows 5
--Three and six months ended June 30, 1996 and
June 30, 1995
Notes to condensed consolidated financial 6
statements--June 30, 1996
Item 2. Management's Discussion and Analysis of Financial 7
Condition and Results of Operations
PART II. OTHER INFORMATION 19
SIGNATURES 21
EXHIBIT 11.1 22
2
<PAGE>
PART I. FINANCIAL INFORMATION
INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands) June 30, December 31,
1996 1995
---- ----
ASSETS
CURRENT ASSETS
Cash and equivalents $ 31,924 $ 39,640
Accounts receivable - net 35,044 29,789
Inventories 20,842 20,580
Net investment in sales-leases 5,913 3,629
Prepaid expenses and other assets 5,390 4,501
--------- ---------
TOTAL CURRENT ASSETS 99,113 98,139
PROPERTY & EQUIPMENT 12,410 11,813
OTHER ASSETS 9,869 8,815
--------- ---------
$ 121,392 $ 118,767
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable 6,798 $ 11,262
Other current liabilities 10,736 11,254
--------- ---------
TOTAL CURRENT LIABILITIES 17,534 22,516
DEFERRED TAXES AND OTHER LIABILITIES 12,513 11,134
SHAREHOLDERS' EQUITY
Common stock 59,453 58,966
Retained earnings 32,105 26,422
Equity adjustment for foreign
currency translation (110) (112)
--------- ---------
91,448 85,276
Less receivable from Employee
Stock Ownership Trust (103) (159)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 91,345 85,117
--------- ---------
$ 121,392 $ 118,767
========= =========
3
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INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (1)
<TABLE>
<CAPTION>
(In thousands, except Three Months Six Months
per share amounts) Ended June 30, Ended June 30,
1996 1995 1996 1995
----- ------ ----- ------
<S> <C> <C> <C> <C>
NET SALES $ 43,736 $ 36,924 $ 85,949 $ 71,942
Cost of sales 24,628 21,665 47,529 42,409
-------- -------- -------- --------
GROSS PROFIT 19,108 15,259 38,420 29,533
Research & development 1,661 1,422 3,365 2,880
Selling, general, and administrative 13,138 10,572 26,338 20,731
Special charge -- 1,315(2) -- 1,315(2)
-------- -------- -------- --------
14,799 13,309 29,703 24,926
-------- -------- -------- --------
OPERATING INCOME 4,309 1,950(2) 8,717 4,607(2)
Interest and other income 517 247 963 553
Interest expense (29) (44) (33) (78)
-------- -------- -------- --------
INCOME BEFORE TAXES 4,797 2,153(2) 9,647 5,082(2)
Income taxes 2,013 811 3,964 1,906
-------- -------- -------- --------
NET INCOME $ 2,784 $ 1,342(2) $ 5,683 $ 3,176(2)
======== ======== ======== ========
NET INCOME PER SHARE $ .21 $ .12(2) $ .43 $ .28(2)
======== ======== ======== ========
Average number of shares
outstanding 13,431 11,239 13,358 11,177
======== ======== ======== ========
</TABLE>
(1) Financial data for all periods have been restated to reflect the acquisition
of Florida Telephone Systems, Inc. in May 1996, accounted for as a pooling of
interests.
(2) Operating income in 1995 includes a special charge of $1,315,000, which
reduced net income by $815,000, or $.07 per share. This special charge reflects
the costs associated with integrating the operations of the two acquired
companies. Without this special charge, the Company would have reported
operating income of approximately $3,240,000 and net income of approximately
$2,139,000, or $.19 per share, in the quarter ended June 30, 1995, and operating
income of approximately $5,842,000 and net income of approximately $3,924,000,
or $.35 per share, in the six months ended June 30, 1995.
4
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INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)(1)
<TABLE>
<CAPTION>
(In thousands, except Three Months Six Months
per share amounts) Ended June 30, Ended June 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
NET INCOME $ 2,784 $ 1,342 $ 5,683 $ 3,176
Adjustments to reflect operating activities:
Depreciation and amortization 973 584 1,894 1,112
Changes in operating assets and liabilities (8,906) (5,027) (16,136) (7,780)
Other 565 2,127 2,695 2,015
-------- -------- -------- --------
NET CASH PROVED BY (USED IN)
OPERATING ACTIVITIES (4,584) (974) (5,864) (1,477)
INVESTING ACTIVITIES
Proceeds from disposal of property
and equipment 132 -- 132 1
Additions to property and equipment (873) (1,397) (2,470) (4,002)
-------- -------- -------- --------
NET CASH PROVIDED BY INVESTING
ACTIVITIES (741) (1,397) (2,338) (4,001)
FINANCING ACTIVITIES
Payments on long-term debt -- (2) -- (6)
Proceeds from exercise of stock options 397 208 486 305
-------- -------- -------- --------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 397 206 486 299
DECREASE IN CASH AND EQUIVALENTS (4,928) (2,165) (7,716) (5,179)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 36,852 12,553 39,640 15,567
-------- -------- -------- --------
CASH AND EQUIVALENTS AT END OF PERIOD $ 31,924 $ 10,388 $ 31,924 $ 10,388
======== ======== ======== ========
</TABLE>
(1) Financial data for all periods have been restated to reflect the acquisition
of Florida Telephone Systems, Inc. in May 1996, accounted for as a pooling
of interests.
5
<PAGE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 1996
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation of
the results for the interim periods presented have been included. Operating
results for the three and six months ended June 30, 1996 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1996. For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's annual report on Form 10-K for
the year ended December 31, 1995.
NOTE B--INCOME PER SHARE
Primary income per share is based on the weighted average number of common
shares outstanding during each period and common stock equivalents.
NOTE C--RESTATEMENT FOR POOLING OF INTERESTS
The financial statements for all prior periods have been restated to include the
accounts of Florida Telephone Systems, Inc. ("FTS"), which was acquired by the
Company in a pooling of interests transaction in May 1996, in which 48,193
shares of Inter-Tel Common Stock were issued. FTS did not constitute a
significant subsidiary as defined under the regulations. In the statements of
income for the six months ended June 30, 1995 net sales increased by $1.0
million and net income increased by $67,000 as a result of the restatement. The
restatement did not affect earnings per share for the six months ended June 30,
1995. In the statements of income for the three months ended March 31, 1996 net
sales and net income increased by $472,000 and $23,000, respectively, as a
result of the restatement. The restatement did not affect earnings per share for
the first quarter, but was dilutive by approximately $.01 per share for the six
months ended June 30, 1996.
6
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NOTE D--SPECIAL CHARGE
Net income in the three months and six months ended June 30, 1995 includes a
special charge reflecting the costs associated with integrating the operations
of American Telcom Corp. of Georgia, Inc. and Access West, Inc. during May 1995.
The special charge principally includes costs associated with redundancy in
inventories, equipment abandonment, the combination and relocation of business
operations, employee reductions, and the write-off of intangible assets. Without
this special charge, the Company would have reported net income of $2.2 million,
or $.19 per share for the second quarter, and $4.0 million, or $.36 per share,
in the six months ended June 30, 1995.
PART I.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Inter-Tel is a single point of contact, full service solutions integrator
providing AXXESS and Axxent digital communication platforms, AxxessoryTalk voice
processing platforms, call processing software and voice processing software
along with various other productivity enhancing software applications,
computer-telephony integration, and network services and long distance calling
services, as well as maintenance, leasing and support services. The Company's
Common Stock is quoted on the Nasdaq National Market System under the symbol
INTL.
This Report on Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Actual results could differ materially from
those projected in the forward-looking statements as a result of many risk
factors, including, without limitation, those set forth under "Factors That May
Affect Future Results Of Operations" below.
Results of Operations
Net sales for the second quarter of 1996 increased 18.4% to $43.7
million from $36.9 million in the second quarter of 1995. Net sales increased
19.5% to $85.9 million in the first six months of 1996 from $71.9 million in the
first six months of 1995. For the six months ended June 30, 1996 sales from
wholesale distribution accounted for approximately $5.6 million of the increase,
with direct sales office sales increasing approximately $4.6 million. The
remaining increases occurred in long distance sales and other operations.
7
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The following table sets forth certain statement of operations data of
the Company expressed as a percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Sales 56.3 58.7 55.3 58.9
----- ----- ----- -----
Gross profit 43.7 41.3 44.7 41.1
Research and development 3.8 3.9 3.9 4.0
Selling, general and
administrative 30.0 28.6 30.7 28.9
Special charge -- 3.6 -- 1.8
----- ----- ----- -----
Operating income 9.9 5.2 10.1 6.4
Interest and other income 1.2 0.7 1.1 0.7
Interest expense 0.1 0.1 -- 0.1
Income taxes 4.6 2.2 4.6 2.6
----- ----- ----- -----
Net income 6.4% 3.6 % 6.6% 4.4%
===== ===== ===== =====
</TABLE>
Gross profit for the second quarter of 1996 increased 25.2% to $19.1
million, or 43.7% of net sales, from $15.3 million, or 41.3% of net sales, for
the second quarter of 1995. Gross profit increased to $38.4 million, or 44.7% of
net sales, in the first six months of 1996 from $29.5 million, or 41.1% of net
sales, in the first six months of 1995. Gross margin increased primarily as a
result of higher sales of AXXESS digital communication platforms, call
processing software and voice processing software as a percentage of net sales,
which was offset in part by a higher percentage of sales through dealers and
increased sales of the company's network services and long distance calling
services.
Research and development expenses for the second quarter of 1996
increased to $1.7 million, or 3.8% of net sales, from $1.4 million, or 3.9% of
net sales, for the second quarter of 1995. Research and development expenses
increased to $3.4 million, or 3.9% of net sales, in the first six months of 1996
from $2.9 million, or 4.0% of net sales, in the first six months of 1995. The
increases in both periods were primarily attributable to expenses relating to
the development and introduction of new products, including expansion of the
AXXESS digital communication platform to 512 ports, expansion of the Inter-Tel
Axxent digital communication platform to 36 ports, AxxessoryTalk version 4.0
voice processing software, and continuing development of other call processing
and voice processing software, CTI products and a line of call processing, voice
processing, unified messaging, and internet software which is designed to work
on standard IBM compatible X86 servers. The Company expects that research and
development expenses may continue to increase in absolute dollars as the Company
continues to develop new call processing and voice processing software and
enhance existing technologies and products. These expenses may vary, however, as
a percentage of net sales.
Selling, general and administrative expenses for the second quarter of
1996 increased 24.3% to $13.1 million, or 30.0% of net sales, from $10.6
million, or 28.6%
8
<PAGE>
of net sales, for the second quarter of 1995. Selling, general and
administrative expenses increased to $26.3 million, or 30.6% of net sales, in
the first six months of 1996 from $20.7 million, or 28.8% of net sales, in the
first six months of 1995. The increases, both in total dollars and as a
percentage of sales, for the quarter and six months ended June 30, 1996, were
primarily attributable to the costs associated with the implementation of the
Company's management information systems, including higher depreciation,
maintenance, consulting fees, personnel costs and related expenses. In addition,
the Company increased its sales and technical training staff, expanded its
credit management group and made increases in receivables reserves. The Company
also continues to hire and train additional sales personnel throughout
Inter-Tel's direct sales offices and provide additional marketing resources and
sales personnel for the expanded dealer network and for network services and
long distance services. Higher sales commissions were also paid based upon
increased levels of net sales. The Company expects that selling, general and
administrative expenses may continue to increase in absolute dollars, but may
vary as a percentage of net sales.
Other income in both periods consisted primarily of interest income and
increased in 1996 by the temporary investment of the net proceeds from the
public offering of common stock in August 1995. Interest expense during 1996 has
been virtually eliminated.
Net income for the second quarter increased 108% to $2.8 million ($.21
per share) compared to net income of $1.3 million ($.12 per share) for the
second quarter of 1995. Net income increased 78.9% to $5.7 million, or $.43 per
share, in the first six months of 1996 from $3.2 million, or $.28 per share, in
the first six months of 1995. The 1996 earnings per share calculations were
affected by the issuance of an additional 2,000,000 shares of stock as a result
of the Company's secondary stock offering that closed in August 1995. Net income
in the second quarter of 1995 includes a special charge of approximately
$815,000, or $.07 per share, reflecting the costs associated with integrating
the operations of the American Telcom Corp. of Georgia, Inc. and Access West,
Inc. in May 1995. The special charge principally includes costs associated with
redundancy in inventories, equipment abandonment, the combination and relocation
of business operations, employee terminations, and the write-off of intangible
assets.
Inflation/Currency Fluctuation
9
<PAGE>
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 sales in Japan and Asia and elsewhere could result in
higher international sales as a percentage of total revenues, but international
revenues are currently not significant.
Liquidity and Capital Resources
The Company continues to expand its dealer network, which has required
and is expected to continue to require working capital for increased accounts
receivables and inventories. During the first six months of 1996, accounts
receivable and inventories increased approximately $5.5 million. Accounts
receivable and inventories have increased in part due to higher revenues. The
increase in accounts receivable and inventories during 1996 was principally
funded by operating cash flows and existing cash balances. During the first six
months of 1996, accounts payable also decreased approximately $4.5 million due
primarily to the delayed payment of 1995 year end expenses as a result of the
conversion to the Company's new information systems during the fourth quarter of
1995. In addition, the Company made capital expenditures totaling $2.5 million
in the first six months of 1996. The Company anticipates additional capital
expenditures during 1996, principally relating to improvement of the operation
of the Company's management information systems. At June 30, 1996, the Company
had $31.9 million in cash and equivalents, which represents a decrease of
approximately $7.7 million from December 31, 1995.
The Company has a loan agreement with Bank One, Arizona, NA which
provides for a $5.0 million, unsecured revolving line of credit. The credit
facility is annually renewable and is available through April 30, 1997. Under
the credit facility, the Company has the option to borrow at a prime rate or
adjusted LIBOR interest rate. During the six months ended June 30, 1996, the
credit facility was used primarily to support international letters of credit to
suppliers.
During the third quarter of 1995, the Company completed a public stock
offering. A portion of the net proceeds may be used to finance strategic
acquisitions or corporate alliances. The Company intends to use the balance of
the net proceeds primarily for working capital, capital expenditures relating to
the upgrade of infrastructure and other general corporate purposes.
The Company offers to its customers lease financing and other services,
including its Totalease program, through its Inter-Tel Leasing subsidiary. The
Company funds these programs in part through the sale to financial institutions
of rental income streams under the leases. Resold lease rentals totaling $51.2
million and $37.3 million remain unbilled at June 30, 1996 and December 31,
1995, respectively. The Company is obligated to repurchase such income streams
in the event of defaults by lease customers and, accordingly, maintains reserves
based
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upon loss experience and past due accounts. Although the Company to date has
been able to resell the rental streams from leases under its lease program
profitably and on a substantially current basis, the timing and profitability of
lease resales could impact the Company's business and operating results,
particularly in an environment of fluctuating interest rates and economic
uncertainty. If the Company is required to repurchase rental streams and realize
losses thereon in amounts exceeding its reserves, its operating results will be
adversely affected.
The Company believes that its working capital and credit facilities,
together with the net proceeds from its 1995 public offering and cash generated
from operations, will be sufficient to fund purchases of capital equipment,
finance cash acquisitions which the Company may consider and provide adequate
working capital for the foreseeable future. However, to the extent that
additional funds are required in the future to address working capital needs and
to provide funding for capital expenditures, expansion of the business or
additional acquisitions, the Company will seek additional financing. There can
be no assurance that additional financing will be available when required or on
acceptable terms.
Factors That May Affect Results of Future Operations
In evaluating the Company's business, prospective investors should carefully
consider the following factors in addition to the other information presented in
this Form 10-Q.
Rapid Technological Change And Dependence On New And Timely Product
Introductions
The market for the Company's software, products and services is
characterized by rapid technological change and continuing demand for new
products, features and applications. Current competitors or new market entrants
may develop new products or product features that could adversely affect the
competitive position of the Company's products. Accordingly, the timely
introduction of new products and product features, as well as new call
processing and voice processing applications, will be a key factor in the
Company's future success. Occasionally, new products contain undetected errors
or "bugs" when released. Such bugs may result from bugs contained in software
products offered by the Company's suppliers or other third parties that are
intended to be compatible with the Company's products, over which the Company
has little or no control. Although the Company seeks to minimize the number of
bugs in its products by its test procedures and strict quality control, there
can be no assurance that its new products will be error free when introduced.
Any significant delay in the commercial introduction of the Company's products
due to bugs, any design modifications required to correct bugs or any impairment
of customer satisfaction as a result of bugs could have a material adverse
effect on the Company's business and operating results. In addition, new
products often take several months before their manufacturing costs stabilize,
which may adversely affect operating results for a period of time following
introduction. The Company introduced ISDN on its AXXESS digital communication
platform to controlled product
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introduction, expanded the size of the AXXESS and Inter-Tel Axxent platforms,
and introduced a number of upgrades to its existing AxxessoryTalk and IVX-500
voice processing platforms during the past 12 months. In the event that the
Company were to fail to successfully introduce new platforms, software products
or services or upgrades to its existing platforms or products on a regular and
timely basis, demand for the Company's existing platforms, software products and
services could decline, which could have a material adverse effect on the
Company's business and operating results. There can be no assurance that the
Company will be able to successfully develop new platforms, software products,
services, technologies and applications on a timely basis as required by
changing market needs or that new platforms, software products or enhancements
thereto, including its recently announced products and upgrades, when introduced
by the Company will achieve market acceptance. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The Company has recently developed and continues to develop software
products designed to address the emerging market for the convergence of voice
and data applications, namely computer telephone integration ("CTI"). If the CTI
market fails to develop or grows more slowly than the Company anticipates, or if
the Company is unable for any reason to capitalize on this emerging market
opportunity, the Company's business and operating results could be materially
adversely affected.
Dependence Upon Contract Manufacturers And Component Suppliers
Certain components used in the Company's digital communication platforms,
including certain microprocessors, integrated circuits, power supplies and voice
processing interface cards, are currently available from a single source or
limited sources of supply, and certain of these components, including integrated
circuits, are currently in limited supply. In addition, the Company currently
manufactures its products through a limited number of contract manufacturers
located in the United States, the Philippines and the People's Republic of
China. Foreign manufacturing facilities are subject to changes in governmental
policies, imposition of tariffs and import restrictions and other factors beyond
the Company's control. Varian Associates, Inc. ("Varian") currently manufactures
a significant portion of the Company's products at Varian's Tempe, Arizona
facility, including substantially all of the printed circuit boards used in the
AXXESS and Inter-Tel Axxent digital communication platforms. From time to time,
the Company has experienced delays in the supply of components and finished
goods and there can be no assurance that the Company will not experience such
delays in the future. The Company's reliance on third party manufacturers
involves a number of additional risks, including reduced control over delivery
schedules, quality assurance and costs. Any delay in delivery or shortage of
supply of components or finished goods from Varian or any other supplier, or the
Company's inability to develop in a timely manner alternative or additional
sources if and when required, could damage the Company's relationships with
current and prospective customers and could
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<PAGE>
materially and adversely affect the Company's business and operating results.
The Company has no long term agreements with its suppliers that require the
suppliers to provide fixed quantities of components or finished goods at set
prices. There can be no assurance that the Company will be able to continue to
obtain components or finished goods in sufficient quantities or quality or on
favorable pricing and delivery terms in the future.
Competition
The market for the Company's digital communication platforms is highly
competitive and in recent periods has been characterized by pricing pressures
and business consolidations. The Company's competitors include Lucent
Technologies, formerly AT&T Corp. ("AT&T") and Northern Telecom Limited
("NorTel"), as well as Comdial Corporation ("Comdial"), EXECUTONE Information
Systems, Inc. ("Executone"), Mitel Corporation ("Mitel"), Panasonic, Siemens
ROLM Communications Inc. ("ROLM"), Toshiba and others. The Company also competes
against the regional Bell operating companies ("RBOCs"), which offer systems
produced by one or more of the aforementioned competitors and also offer Centrex
systems in which call processing facilities are provided through equipment
located in the telephone company's central office. Competition by the RBOCs
could increase significantly if the RBOCs are granted the right to manufacture
telephone systems and equipment themselves and/or to bundle the sale of
equipment with telephone calling services, activities which to date they have
been restricted from undertaking. Recent legislative initiatives could have the
effect of increasing competition from the RBOCs.
In the market for voice processing software applications, including voice
mail, the Company competes against Centigram Communications Corporation
("Centigram"), Octel Communications Corporation ("Octel"), Active Voice
Corporation ("Active Voice"), Applied Voice Technology, Inc. ("AVT") and other
competitors, including telephone systems manufacturers such as Lucent
Technologies, formerly AT&T, NorTel and Siemens ROLM, which offer voice
processing systems under their own label as well as through various OEM
arrangements. Certain of the Company's competitors may achieve marketing
advantages by bundling their voice processing equipment with sales of telephone
systems, or by designing their telephone systems so that they do not readily
integrate with independent voice processing systems. Inter-Tel expects that the
development of industry standards and the acceptance of open systems
architectures in the voice processing market could reduce technical barriers to
market entry and lead to increased competition.
In the market for network services and long distance calling services, the
Company competes against AT&T, MCI Telecommunications Corporation ("MCI"),
Sprint Corporation ("Sprint") and other suppliers, certain of which also supply
the network services and long distance calling services that the Company
resells. Although the Company acquires a variety of network services and long
distance calling services in bulk from certain long distance carriers, there can
be no
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assurance that the Company will be able to purchase those services on favorable
terms from one or more of such providers in the future. In addition, a
substantial majority of prospective new long distance customers for the Company
currently purchase network services and long distance calling services from the
Company's competitors. The Company believes that it is likely to face increased
competition in the network services and long distance calling services market to
the extent that telecommunications deregulation enables RBOCs to supply network
services and long distance calling services or enables RBOCs and others to
bundle network services and long distance, local telephone and wireless
services. Moreover, the Company expects to face increased competition in the
future because low technical barriers to entry will allow new market entrants.
Many of the Company's competitors have significantly greater financial and
technical resources, name recognition and marketing and distribution
capabilities than the Company. The Company expects that competition will
continue to be intense in the markets addressed by its products and services,
and there can be no assurance that the Company will be able to compete
successfully in the future.
Management Of Growth; Implementation And Improvement Of Management Information
Systems
The growth in the Company's business has placed, and is expected to
continue to place, a significant strain on the Company's personnel, management
and other resources. The Company's ability to manage any future growth
effectively will require it to attract, train, motivate and manage new employees
successfully, to integrate new employees into its overall operations and to
continue to improve its operational, financial and management information
systems. In particular, the Company implemented new management information
systems (MIS) late in 1995. The Company believes the new MIS systems will
significantly affect many aspects of its business, including its accounting,
operations, purchasing, sales and marketing functions. The successful
implementation of such systems is crucial to the Company's provision of services
and to enable future growth. The Company has experienced some difficulty in the
implementation of its new MIS systems. This difficulty has increased the
Company's costs, has had an adverse effect on the Company's ability to provide
products and services to its customers on a timely basis, and, in addition, has
caused some delay in coordinating accounting and financial results. There can be
no assurance that the Company will correct the problems it is experiencing in
the implementation and improvement of the new MIS systems on a timely basis. If
such difficulties continue, the Company's business and operating results could
be materially and adversely affected. In addition, there can be no assurance
that, once successfully implemented, the new MIS systems will be adequate to
support the Company's operations.
The Company has made strategic acquisitions in the past and expects to
continue to do so in the future. Acquisitions require a significant amount of
the Company's management attention and financial and operational resources, all
of which are limited. The integration of acquired entities may also result in
unexpected
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<PAGE>
costs and disruptions, and significant fluctuations in, or reduced
predictability of, operating results from period to period. There can be no
assurance that an acquisition will not adversely affect the business
relationships of the Company or the acquired entity with their respective
suppliers or customers. Further, there can be no assurance that the Company will
successfully integrate the acquired operations or achieve any of the intended
benefits of an acquisition. The Company's failure to manage its growth
effectively could have a material adverse effect on its business and operating
results.
Product Protection And Infringement
The Company's future success is dependent in part upon its proprietary
technology. The Company has no patents and relies principally on copyright and
trade secret law and contractual provisions to protect its intellectual
property. There can be no assurance that any copyright owned by the Company will
not be invalidated, circumvented or challenged or that the rights granted
thereunder will provide competitive advantages to the Company. Further, there
can be no assurance that others will not develop technologies that are similar
or superior to the Company's technology or that duplicate the Company's
technology. As the Company expands its international operations, effective
intellectual property protection may be unavailable or limited in certain
foreign countries. There can be no assurance that steps taken by the Company
will prevent misappropriation of its technology. Litigation may be necessary in
the future to enforce the Company's intellectual property rights, to protect the
Company's trade secrets, to determine the validity and scope of the proprietary
rights of others, or to defend against claims of infringement or invalidity.
Such litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on the Company's business and operating
results.
From time to time, the Company is subject to proceedings alleging
infringement by the Company of intellectual property rights of others. If any
such claim is asserted against the Company, the Company may seek to obtain a
license under the third party's intellectual property rights. There can be no
assurance that a license will be available on terms acceptable to the Company or
at all. In the alternative, the Company could resort to litigation to challenge
any such claim, which could require the Company to expend significant sums and
could require the Company to pay significant damages, develop non-infringing
technology or acquire licenses to the technology which is the subject of the
asserted infringement, any of which could have a material adverse effect on the
Company's business and operating results. In the event that the Company is
unable or chooses not to license such technology or decides not to challenge
such third party's rights, the Company could encounter substantial and costly
delays in product introductions while attempting to design around such third
party rights, or could decide that the development, manufacture or sale of
products requiring such licenses should be discontinued.
Potential Fluctuations In Quarterly Results; Limited Backlog
15
<PAGE>
The Company's quarterly operating results depend upon a variety of
factors, including the volume and timing of orders received during the quarter,
the mix of products sold, mix of distribution channels, general economic
conditions, patterns of capital spending by customers, the timing of new product
announcements and releases by the Company and its competitors, pricing
pressures, the level of the Company's operating expenses and the availability
and cost of products and components from the Company's suppliers. The Company's
customers typically require immediate shipment and installation of platforms and
software. As a result, the Company has historically operated with a relatively
small backlog, and sales and operating results in any quarter are principally
dependent on orders booked and shipped in that quarter. Moreover, market demand
for investment in capital equipment such as digital communication platforms and
associated call processing and voice processing software applications is largely
dependent on general economic conditions, and can vary significantly as a result
of changing conditions in the economy as a whole. The Company's expense levels
are based in part on expectations as to future sales and, if sales levels do not
meet expectations, operating results could be adversely affected. Because sales
of digital communication platforms through the Company's dealers produce lower
gross margins than sales through the Company's direct sales organization,
operating results will vary based upon the mix of sales through direct and
indirect channels. Although the Company to date has been able to resell the
rental streams from leases under its Totalease program profitably and on a
substantially current basis, the timing and profitability of lease resales from
quarter to quarter could impact operating results, particularly in an
environment of fluctuating interest rates. Long distance sales have, in recent
periods, grown at a faster rate than the Company's overall net sales and such
sales have lower gross margins than the Company's core business. As a result,
gross margins could be adversely affected in the event that long distance
calling services continue to increase as a percentage of net sales. In addition,
the Company is subject to seasonality in its operating results, as net sales for
the first and third quarters are frequently less than those experienced in the
fourth and second quarters, respectively. As a result of these and other
factors, the Company has in the past and could in the future experience
fluctuations in sales and operating results on a quarterly basis. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Reliance On Dealer Network
A substantial portion of the Company's net sales is made through its network of
independent dealers. The Company faces intense competition from other telephone
system and voice processing system manufacturers for such dealers' business, as
most of the Company's dealers carry products that compete with the Company's
products. The Company has no long term agreements with any of its dealers, and
there can be no assurance that any such dealer will not promote the products of
the Company's competitors to the detriment of the Company's products. The loss
of any significant dealer or group of dealers, or any event or condition
adversely affecting the Company's dealer network, could have a material adverse
effect on the Company's business and operating results. In recent years
16
<PAGE>
the Company has effected a number of strategic acquisitions of resellers of
telephony products and integrated these operations with its existing direct
sales operations in the same geographic areas and in other strategic markets.
There can be no assurance that one or more of the Company's dealers will not be
acquired by a competitor and that the loss of any such dealer so acquired will
not adversely affect the Company's business and operating results. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Risks Of Providing Network Services And Long Distance Services
Inter-Tel depends on a reliable supply of telecommunications services and
information from several long distance carriers. Because it does not own
transmission facilities, the Company relies on long distance carriers for the
provision of network services to the Company's customers and for billing
information. Long distance services are subject to extensive and uncertain
governmental regulation on both the federal and state level. There can be no
assurance that the promulgation of certain regulations, such as regulations
requiring the reduction of direct-dial billing rates, will not adversely affect
the Company's business and operating results. The Company currently resells long
distance services pursuant to contracts with four of the six largest long
distance carriers with U.S. networks. These contracts typically have a
multi-year term in which the Company's prices are relatively fixed and have
minimum use requirements. There can be no assurance that the Company will meet
minimum use commitments, will be able to negotiate lower rates with carriers in
the event of any decrease in end user rates or will be able to extend its
contracts with long distance carriers at prices favorable to the Company. The
Company's ability to continue to expand its long distance service operations
will depend on its ability to continue to secure reliable long distance services
from a number of long distance carriers and the willingness of such carriers to
continue to make telecommunications services and billing information available
to the Company on favorable terms.
Dependence On Key Personnel
The Company is dependent on the continued service of, and its ability to
attract and retain, qualified technical, marketing, sales and managerial
personnel. The competition for such personnel is intense, and the loss of any of
such persons, as well as the failure to recruit additional key technical and
sales personnel in a timely manner, would have a material adverse effect on the
Company's business and operating results. There can be no assurance that the
Company will be able to continue to attract and retain the qualified personnel
necessary for the development of its business.
Possible Volatility Of Stock Price
The Company believes that factors such as announcements of developments
relating to the Company's business, fluctuations in the Company's operating
results, general conditions in the telecommunications industry or the worldwide
17
<PAGE>
economy, changes in legislation or regulation affecting the telecommunications
industry, an outbreak of hostilities, a shortfall in revenue or earnings from
securities analysts' expectations, announcements of technological innovations or
new products or enhancements by the Company or its competitors, developments in
intellectual property rights and developments in the Company's relationships
with its customers and suppliers could cause the price of the Company's Common
Stock to fluctuate, perhaps substantially. In addition, in recent years the
stock market in general, and the market for shares of technology stocks in
particular, have experienced extreme price fluctuations, which have often been
unrelated to the operating performance of affected companies. There can be no
assurance that the market price of the Company's Common Stock will not
experience significant fluctuations in the future, including fluctuations that
are unrelated to the Company's performance.
Concentration Of Ownership
As of July 1, 1996, the Company's Chairman of the Board of Directors and
Chief Executive Officer beneficially owned approximately 22% of the outstanding
shares of the Common Stock. As a result, he has the ability to exercise
significant influence over all matters requiring shareholder approval. In
addition, the concentration of ownership could have the effect of delaying or
preventing a change in control of the Company.
18
<PAGE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM l. LEGAL PROCEEDINGS--Not Applicable
ITEM 2. CHANGES IN SECURITIES--Not Applicable
ITEM 3. DEFAULTS ON SENIOR SECURITIES--Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES
HOLDERS
1. On May 2, 1996, at the Company's annual meeting of shareholders, the
shareholders of the Company elected the following directors, each of
whom was a nominee of the Company:
Name Votes For Votes Withheld
---- --------- --------------
Steven G. Mihaylo 10,962,778 177,841
Gary D. Edens 10,962,606 178,013
Maurice H. Esperseth 10,960,778 179,841
C. Roland Haden 10,962,778 177,841
Norman Stout 10,962,606 178,013
Kathleen R. Wade 10,962,271 178,348
2. The proposal to approve adoption of an Amendment to the Company's
1990 Directors Stock Option Plan received the following votes:
Votes For Percentage
For: 10,703,963 96.08%
Against: 377,488 3.39%
Abstain 26,904 0.24%
Broker Non Vote: 32,264 0.29%
3. The proposal to approve adoption of an Amendment to Article IX,
Paragraph 1 of the Company's Restated Articles of Incorporation
regarding Indemnification received the following votes:
Votes For Percentage
For: 10,198,409 91.54%
Against: 843,374 7.57%
19
<PAGE>
Abstain: 96,036 0.86%
Broker Non Vote: 2,800 .03%
4. The proposal to approve adoption of an Amendment to Article IX,
Paragraph 2 of the Company's Restated Articles of Incorporation
regarding Director Liability received the following votes:
Votes For Percentage
For: 10,166,904 91.26%
Against: 941,111 8.45%
Abstain 32,604 0.29%
ITEM 5. OTHER INFORMATION
In May 1996, Florida Telephone Systems, Inc. ("FTS") was acquired by
the Company in an exchange of stock. A total of 48,193 shares was
exchanged for all the outstanding stock of FTS. This acquisition did
not meet the criteria of a significant subsidiary under the
regulations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
Exhibit 11.1 - Computation of Earnings Per Share
Exhibit 27.1 - Financial Data Schedule for June 30, 1996
Exhibit 27.2 - Financial Data Schedule (Restated) for March 31, 1996
and December 31, 1995
Reports on Form 8-K -- None
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTER-TEL, INCORPORATED
Date August 14, 1996 /s/ Steven G. Mihaylo
------------------ --------------------------------
Steven G. Mihaylo,
Chairman of the Board
and Chief Executive Officer
Date August 14, 1996 /s/ Kurt R. Kneip
------------------ --------------------------------
Kurt R. Kneip,
Vice President
and Chief Financial Officer
21
EXHIBIT 11.1
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
(Thousands except Three Months Six Months
per share amounts) Ended June 30, Ended June 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
PRIMARY
Average shares outstanding 12,874 10,777 12,843 10,748
Net effect of dilutive stock
options--based on the
treasury stock method
using average market price 557 462 515 429
------- ------- ------- -------
TOTAL 13,431 11,239 13,358 11,177
======= ======= ======= =======
Net Income $ 2,784 $ 1,342 $ 5,683 $ 3,176
======= ======= ======= =======
Per share amount $ .21 $ .12 $ .43 $ .28
======= ======= ======= =======
FULLY DILUTED
Average shares outstanding 12,874 10,777 12,843 10,748
Net effect of dilutive stock
options--based on the treasury
stock method using the quarter-
end market price, if higher than
the average market price 609 512 609 512
------- ------- ------- -------
TOTAL 13,483 11,289 13,452 11,260
======= ======= ======= =======
Net income $ 2,784 $ 1,342 $ 5,683 $ 3,176
======= ======= ======= =======
Per share amount $ .21 $ .12 $ .42 $ .28
======= ======= ======= =======
</TABLE>
Note: Financial data for all periods have been restated to reflect three
acquisitions in May 1996 and May 1995, each accounted for as a pooling of
interests in which 318,366 total shares were issued.
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM THE INTER-TEL,
INCORPORATED AND SUBSIDIARIES FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 31924
<SECURITIES> 0
<RECEIVABLES> 37638
<ALLOWANCES> 2594
<INVENTORY> 20842
<CURRENT-ASSETS> 99113
<PP&E> 26678
<DEPRECIATION> 14268
<TOTAL-ASSETS> 121392
<CURRENT-LIABILITIES> 17534
<BONDS> 0
0
0
<COMMON> 59453
<OTHER-SE> (213)
<TOTAL-LIABILITY-AND-EQUITY> 91345
<SALES> 85949
<TOTAL-REVENUES> 85949
<CGS> 47529
<TOTAL-COSTS> 47529
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 33
<INCOME-PRETAX> 9647
<INCOME-TAX> 3964
<INCOME-CONTINUING> 5683
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5683
<EPS-PRIMARY> .43
<EPS-DILUTED> .42
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM THE INTER-TEL,
INCORPORATED AND SUBSIDIARIES FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND YEAR
ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH RESTATED FINANCIAL
STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> MAR-31-1996 DEC-31-1995
<EXCHANGE-RATE> 1 1
<CASH> 36852 39640
<SECURITIES> 0 0
<RECEIVABLES> 34816 31571
<ALLOWANCES> 2589 1782
<INVENTORY> 20740 20580
<CURRENT-ASSETS> 100544 98139
<PP&E> 26332 24739
<DEPRECIATION> 13803 12926
<TOTAL-ASSETS> 122737 118767
<CURRENT-LIABILITIES> 22300 22516
<BONDS> 0 0
0 0
0 0
<COMMON> 59056 58966
<OTHER-SE> (304) (271)
<TOTAL-LIABILITY-AND-EQUITY> 122737 118767
<SALES> 42213 151070
<TOTAL-REVENUES> 42213 151070
<CGS> 22901 88134
<TOTAL-COSTS> 22901 88134
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 5 105
<INCOME-PRETAX> 4850 13747
<INCOME-TAX> 1951 13747
<INCOME-CONTINUING> 2899 8498
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2899 8498
<EPS-PRIMARY> .22 .71
<EPS-DILUTED> .22 .71
</TABLE>
