UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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:
March 31, 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
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Common Stock
(12,791,124 shares outstanding as of March 31, 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 to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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INDEX
INTER-TEL, INCORPORATED AND SUBSIDIARIES
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets--March 31, 3
1996 and December 31, 1995
Condensed consolidated statements of income--three 4
months ended March 31, 1996 and March 31, 1995
Condensed consolidated statements of cash flows 5
--three months ended March 31, 1996 and
March 31, 1995
Notes to condensed consolidated financial 6
statements--March 31, 1996
Item 2. Management's Discussion and Analysis of Financial 7
Condition and Results of Operations
PART II. OTHER INFORMATION 17
SIGNATURES 18
EXHIBIT 11.1 19
2
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PART I. FINANCIAL INFORMATION
INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands) March 31, December 31,
1996 1995
ASSETS --------- ------------
CURRENT ASSETS
Cash and equivalents $ 36,698 $ 39,577
Accounts receivable - net 32,060 29,635
Inventories 20,654 20,505
Net investment in sales-leases 5,259 3,629
Prepaid expenses and other assets 5,460 4,467
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TOTAL CURRENT ASSETS 100,131 97,813
PROPERTY & EQUIPMENT 12,493 11,773
OTHER ASSETS 9,665 8,816
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$ 122,289 $ 118,402
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 7,734 $ 11,167
Other current liabilities 14,238 11,135
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TOTAL CURRENT LIABILITIES 21,972 22,302
DEFERRED TAXES AND OTHER LIABILITIES 12,340 11,055
SHAREHOLDERS' EQUITY
Common stock 58,905 58,816
Retained earnings 29,376 26,500
Equity adjustment for foreign
currency translation (173) (112)
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88,108 85,204
Less receivable from Employee
Stock Ownership Trust (131) (159)
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TOTAL SHAREHOLDERS' EQUITY 87,977 85,045
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$ 122,289 $ 118,402
========= =========
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INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands, except Three Months Ended
per share amounts) March 31, 1996 March 31, 1995
-------------- --------------
NET SALES $ 41,741 $ 34,559
Cost of sales 22,762 20,606
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GROSS PROFIT 18,979 13,953
Research & development 1,704 1,458
Selling, general, and administrative 12,890 9,893
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14,594 11,351
OPERATING INCOME 4,385 2,602
Interest and other income 446 311
Interest expense (4) (33)
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INCOME BEFORE TAXES 4,827 2,880
Income taxes 1,951 1,095
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NET INCOME $ 2,876 $ 1,785
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NET INCOME PER SHARE $ .22 $ .16
======== ========
Average number of shares
outstanding 13,245 11,068
======== ========
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INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended
(In thousands) March 31, 1996 March 31, 1995
-------------- --------------
OPERATING ACTIVITIES
NET INCOME $ 2,876 $1,785
Adjustments to reflect operating activities:
Depreciation and amortization 916 528
Changes in operating assets and liabilities (4,746) (2,702)
Other (440) (126)
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NET CASH USED IN OPERATING
ACTIVITIES (1,394) (515)
INVESTING ACTIVITIES
Proceeds from disposal of property
and equipment 10 5
Additions to property and equipment (1,584) (2,608)
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NET CASH USED IN INVESTING
ACTIVITIES (1,574) (2,603)
FINANCING ACTIVITIES
Proceeds from exercise of stock options 89 97
-- --
NET CASH PROVIDED BY FINANCING
ACTIVITIES 89 97
DECREASE IN CASH AND EQUIVALENTS (2,879) (3,021)
CASH AND EQUIVALENTS AT
BEGINNING OF PERIOD 39,577 15,530
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CASH AND EQUIVALENTS AT
END OF PERIOD $36,698 $12,509
======= =======
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INTER-TEL, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 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 months ending March 31, 1996 are not necessarily
indicative of the results that may be expected for the year ended 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 earnings per share assume that outstanding common shares were increased
by shares issuable upon the exercise of all outstanding stock options to which
market price exceeds exercise price less shares which could have been purchased
with related proceeds.
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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 increased 20.8% to $41.7 million in the first quarter of 1996
from $34.6 million in 1995. Sales from direct sales offices accounted for
approximately $1.6 million of the increase, with wholesale distribution sales
increasing approximately $3.1 million. The remaining increases occurred in long
distance sales and other operations.
The following table sets forth selected statements of income data as a
percentage of net sales:
Three months and year
Ended March 31,
1996 1995
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Net Sales 100.0% 100.0%
Cost of sales 54.5 59.6
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Gross profit 45.5 40.4
Research and development 4.1 4.2
Selling, general and administrative 30.9 28.6
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Operating Income 10.5 7.6
Interest and other income 1.1 0.9
Interest expense 0.0 0.1
Income taxes 4.7 3.2
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Net income 6.9% 5.2%
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Gross profit for the first quarter of 1996 increased 36.0% to $19.0
million, or 45.5% of net sales, from $14.0 million, or 40.4% of net sales in the
first quarter 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 increased to $1.7 million, or 4.1% of
net sales, in the first quarter of 1996 from $1.5 million, or 4.2% of net sales,
in the first quarter of 1995. This increase was 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 an
entire line of call processing and voice processing 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 increased to $12.9
million, or 30.9% of net sales, in the first quarter of 1996 from $9.9 million,
or 28.6% of net sales, in the first quarter of 1995. This increase was 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 appropriate 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 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 first quarter of 1996 was $2.9 million ($.22 per
share) compared to net income of $1.8 million ($.16 per share) for the first
quarter of 1995, an increase of 61.1%. The 1996 first quarter earnings per share
calculation was 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.
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Inflation/Currency Fluctuation
Inflation and currency fluctuations have not previously had a material
impact on Inter-Tel's operations. International procurement agreements have
traditionally been denominated in U.S. currency. Moreover, a significant amount
of contract manufacturing has been or is expected to be moved to domestic
sources. The expansion of international operations in the United Kingdom and
Europe and anticipated increased sales in Japan and Asia and elsewhere could
result in higher international sales as a percentage of total revenues, but
international revenues are currently not significant.
Liquidity and Capital Resources
The Company continues to expand its dealer network, which has required
and is expected to continue to require working capital for increased accounts
receivables and inventories. During the first three months of 1996, accounts
receivable and inventories increased approximately $2.6 million. This increase
was principally funded by existing cash balances. In addition, the Company made
capital expenditures totalling $1.6 million in the first quarter of 1996. The
Company intends to continue to make significant capital expenditures during
1996, principally relating to improvement of the Company's management
information systems. At March 31, 1996, the Company had $36.7 million in cash
and equivalents, which represents a decrease of approximately $2.9 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. The credit facility is being used primarily to
support international letters of credit to suppliers.
During the third quarter of 1995, the Company completed a secondary
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 its Totalease program in part through the sale to financial
institutions of rental income streams under the leases. Resold Totalease rentals
totaling $44.2 million and $37.3 million remain unbilled at March 31, 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 upon loss experience and past due accounts. Although
the Company to date has
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been able to resell the rental streams from leases under the Totalease program
profitably and on a substantially current basis, the timing and profitability of
lease resales could impact the Company's business and operating results,
particularly in an environment of fluctuating interest rates. If the Company is
required to repurchase rental streams and realize losses thereon in amounts
exceeding its reserves, its operating results will be adversely affected.
The Company believes that 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 its Inter-Tel Axxent digital communication
platform during 1995, an OS/2 version of its voice processing software, and a
number of upgrades to its existing
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AXXESS digital communication platform and call processing software during the
past several 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 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
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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 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 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
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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 Of New Management Information Systems
The growth in the Company's business has placed, and is expected to
continue to place, a significant strain on the Company's personnel, management
and other resources. The Company's ability to manage any future growth
effectively will require it to attract, train, motivate and manage new employees
successfully, to integrate new employees into its overall operations and to
continue to improve its operational, financial and management information
systems. In particular, 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 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 costs and disruptions, and significant fluctuations in, or reduced
predictability of, operating results from period to period. There can be no
assurance that an
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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
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
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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
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 the
Company has effected a number of strategic acquisitions of resellers of
telephony products and integrated these operations with its existing direct
sales
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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
economy, changes in legislation or regulation affecting the telecommunications
industry, an outbreak of hostilities, a shortfall in revenue or earnings from
securities
16
<PAGE>
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 April 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.
INTER-TEL, INCORPORATED AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. 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 --Not Applicable
ITEM 5. OTHER INFORMATION--Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
Exhibits:
11.1 Computation of Earnings per Share
27 Financial Data Schedule
Reports on Form 8-K:
No reports filed during quarter
17
<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 May 15, 1996 /s/ Steven G. Mihaylo
-------------------- --------------------------
Steven G. Mihaylo
Chairman of the Board and
Chief Executive Officer
Date May 15, 1996 /s/ Kurt R. Kneip
-------------------- ------------------------------------
Kurt R. Kneip
Vice President and
Chief Financial Officer
18
EXHIBIT 11.1
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(In thousands, except Three Months Ended
per share amounts) March 31, 1996 March 31, 1995
-------------- --------------
PRIMARY
Average shares outstanding 12,773 10,672
Net effect of dilutive stock options--
based on the treasury stock method
using average market price 472 396
------- -------
TOTAL 13,245 11,068
======= =======
Net income $ 2,876 $ 1,785
======= =======
Per share amount $ .22 $ .16
======= =======
FULLY DILUTED
Average shares outstanding 12,773 10,672
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 543 467
------- -------
TOTAL 13,316 11,139
======= =======
Net income $ 2,876 $ 1,785
======= =======
Per share amount $ .22 $ .16
======= =======
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
INTER-TEL, INCORPORATED AND SUBSIDIARIES FINANCIAL STATEMENTS FOR THE QUARTER
ENDED MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 36698
<SECURITIES> 0
<RECEIVABLES> 34638
<ALLOWANCES> 2578
<INVENTORY> 20654
<CURRENT-ASSETS> 100131
<PP&E> 26221
<DEPRECIATION> 13728
<TOTAL-ASSETS> 122289
<CURRENT-LIABILITIES> 21972
<BONDS> 0
0
0
<COMMON> 58905
<OTHER-SE> 29072
<TOTAL-LIABILITY-AND-EQUITY> 122289
<SALES> 41741
<TOTAL-REVENUES> 41741
<CGS> 22762
<TOTAL-COSTS> 22762
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4
<INCOME-PRETAX> 4827
<INCOME-TAX> 1951
<INCOME-CONTINUING> 2876
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2876
<EPS-PRIMARY> .22
<EPS-DILUTED> .22
</TABLE>
