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:
September 30, 1996 0-10211
INTER-TEL, INCORPORATED
Incorporated in the State of Arizona I.R.S. No. 86-0220994
120 North 44th Street
Phoenix, Arizona 85034-1822
(602) 302-8900
--------------
Common Stock
(12,949,431 shares outstanding as of September 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 to 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--September 30, 3
1996 and December 31, 1995
Condensed consolidated statements of income--three 4
and nine months ended September 30, 1996 and
September 30, 1995
Condensed consolidated statements of cash flows 5
--three and nine months ended September 30, 1996 and
September 30, 1995
Notes to condensed consolidated financial 6
statements--September 30, 1996
Item 2. Management's Discussion and Analysis of Financial 7
Condition and Results of Operations
PART II. OTHER INFORMATION 18
SIGNATURES 19
EXHIBIT 11.1 20
2
<PAGE>
PART I. FINANCIAL INFORMATION
INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (1)
<TABLE>
<CAPTION>
(In thousands) September 30, December 31,
1996 1995
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents $34,950 $39,640
Accounts receivable -- net 34,876 29,789
Inventories 24,373 20,580
Net investment in sales-leases 7,234 3,629
Prepaid expenses and other assets 7,380 4,501
-------- --------
TOTAL CURRENT ASSETS 108,813 98,139
PROPERTY & EQUIPMENT 13,573 11,813
OTHER ASSETS 11,942 8,815
-------- --------
$134,328 $118,767
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $11,870 $11,262
Other current liabilities 14,458 11,254
-------- --------
TOTAL CURRENT LIABILITIES 26,328 22,516
DEFERRED TAXES AND OTHER LIABILITIES 13,881 11,134
SHAREHOLDERS' EQUITY
Common stock 59,557 58,966
Retained earnings 34,794 26,422
Equity adjustment for foreign
currency translation (158) (112)
-------- --------
94,193 85,276
Less receivable from Employee
Stock Ownership Trust (74) (159)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 94,119 85,117
-------- --------
$134,328 $118,767
======== ========
</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.
3
<PAGE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (1)
<TABLE>
<CAPTION>
Three Months Nine Months
(In thousands except Ended September 30, Ended September 30,
per share amounts) 1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES $ 47,435 $ 38,343 $ 133,384 $ 110,400
Cost of sales 27,819 22,424 75,348 64,836
-------- -------- --------- ---------
GROSS PROFIT 19,616 15,919 58,036 45,564
-------- -------- --------- ---------
Research & development 1,568 1,488 4,933 4,368
Selling, general and administrative 13,895 10,908 40,233 31,739
Special charge -- -- -- 1,315 (2)
-------- -------- --------- ---------
15,463 12,396 45,166 37,422
-------- -------- --------- ---------
OPERATING INCOME 4,153 3,523 12,870 8,142 (2)
Interest and other income 393 499 1,356 1,064
Interest expense (10) (14) (43) (91)
-------- -------- --------- ---------
INCOME BEFORE TAXES 4,536 4,008 14,183 9,115 (2)
Income taxes 1,847 1,508 5,811 3,414
-------- -------- --------- ---------
NET INCOME $ 2,689 $ 2,500 $ 8,372 $ 5,701 (2)
======== ======== ========= =========
NET INCOME PER SHARE $ 0.20 $ 0.20 $ 0.63 $ 0.49 (2)
======== ======== ========= =========
Average number of common
shares outstanding 13,443 12,343 13,385 11,566
======== ======== ========= =========
</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 $9.5 million and net income of approximately
$6.5 million, or $.56 per share, in the nine months ended September 30, 1995.
4
<PAGE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (1)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
(In thousands) 1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
NET INCOME $2,689 $2,500 $8,372 $5,701
Adjustments to reflect operating activities:
Depreciation and amortization 1,107 587 3,002 1,703
Changes in operating assets and liabilities (863) (5,441) (16,999) (13,236)
Other 2,209 1.561 4,903 3,562
------ ------ ------ ------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 5,142 (793) (722) (2,270)
INVESTING ACTIVITIES
Proceeds from disposal of property
and equipment 11 5 143 6
Additions to property and equipment (2,232) (1,892) (4,702) (5,894)
------ ------ ------ ------
NET CASH USED IN INVESTING
ACTIVITIES (2,221) (1,887) (4,559) (5,888)
FINANCING ACTIVITIES
Net proceeds from sale of common stock -- 30,664 -- 30,664
Payments on long-term debt -- (1) -- (7)
Proceeds from exercise of stock options 105 163 591 468
------ ------ ------ ------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 105 30,826 591 31,125
INCREASE (DECREASE) IN CASH
AND EQUIVALENTS 3,026 28,146 (4,690) 22,967
CASH AND EQUIVALENTS
AT BEGINNING OF PERIOD 31,924 10,388 39,640 15,567
------ ------ ------ ------
CASH AND EQUIVALENTS
AT END OF PERIOD $34,950 $38,534 $34,950 $38,534
======= ======= ======= =======
</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)
September 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 nine months ended September 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
l0-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 year 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 nine months ended September 30, 1995 net sales increased by $1.5
million and net income increased by $124,000 as a result of the restatement. The
restatement increased earnings per share by approximately $.01, from $.48 to
$.49 per share, for the nine months ended September 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
<PAGE>
NOTE D - SPECIAL CHARGE
Net income in the three months and nine months ended September 30, 1995 included
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 included 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 approximately
$6.5 million, or $.56 per share, in the nine months ended September 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 and voice processing software along with
various other productivity enhancing software applications, computer telephone
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 third quarter of 1996 increased 24% to $47.4 million
from $38.3 million in the third quarter of 1995. Net sales increased 21% to
$133.4 million in the first nine months of 1996 from $110.4 million in the first
nine months of 1995. For the nine months ended September 30, 1996, sales from
direct sales offices accounted for approximately $9.4 million of the increase,
with wholesale distribution increasing approximately $7.6 million. The remaining
increases occurred in network and long distance sales and other operations.
The following table sets forth selected statement of operations data
expressed as a percentage of net sales for the periods indicated:
7
<PAGE>
Three Months Nine months
Ended September 30, Ended September 30,
1996 1995 1996 1995
---- ---- ---- ----
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 58.6 58.5 56.5 58.7
----- ----- ----- -----
Gross profit 41.4 41.5 43.5 41.3
Research and
development 3.3 3.9 3.7 4.0
Selling, general
and administrative 29.3 28.4 30.2 28.7
Special charge -- -- -- 1.2
----- ----- ----- -----
Operating Income 8.8 9.2 9.6 7.4
Interest and other
income 0.8 1.3 1.0 1.0
Interest expense 0.0 0.0 0.0 0.1
Income taxes 3.9 4.0 4.3 3.1
----- ----- ----- -----
Net income 5.7 6.5 6.3 5.2
----- ----- ----- -----
Gross profit for the third quarter of 1996 increased 23% to $19.6
million, or 41.4% of net sales, from $15.9 million, or 41.5% of net sales, for
the third quarter of 1995. Gross profit increased to $58.0 million, or 43.5% of
net sales, in the first nine months of 1996 from $45.6 million, or 41.3% of net
sales, in the first nine months of 1995. Gross margin decreased slightly during
the third quarter based on the different mix of sales of products and services,
and customer concessions caused by problems incurred with the Company's new
management information systems since the implementation of and conversion to the
new systems in late 1995. Gross margin was higher for the nine months ended
September 30, 1996 compared to the same period for 1995. This increase was
primarily a result of higher sales, as a percentage of total net sales, of
AXXESS digital communication platforms, call processing software and voice
processing software, 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, in addition to the factors discussed above regarding
the third quarter.
Research and development expenses for the third quarter of 1996
increased to $1.6 million, or 3.3% of net sales, from $1.5 million, or 3.9% of
net sales, for the third quarter of 1995. Research and development expenses
increased to $4.9 million, or 3.7% of net sales, in the first nine months of
1996 from $4.4 million, or 4.0% of net sales, in the first nine months of 1995.
The increases in both periods were primarily attributable to expenses relating
to the development and introduction of new products, including the introduction
of ISDN to the AXXESS digital communication platform, expansion of the AXXESS
digital communication platform to 512 ports and the addition of ISDN primary
rate capability, expansion of the Inter-Tel Axxent digital communication
platform to 36 ports, AxxessoryTalk version 4.0 voice processing software,
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 run under Microsoft Windows
8
<PAGE>
NT on standard IBM compatible X86 servers. The Company expects that research and
development expenses will continue to increase in the future 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 third quarter of
1996 increased 27% to $13.9 million, or 29.3% of net sales, from $10.9 million,
or 28.4% of net sales, for the third quarter of 1995. Selling, general and
administrative expenses increased to $40.2 million, or 30.2% of net sales, in
the first nine months of 1996 from $31.7 million, or 28.7% of net sales, in the
first nine months of 1995. The increases, both in total dollars and as a
percentage of sales, for the quarter and nine months ended September 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
continues to hire and train additional sales personnel throughout Inter-Tel's
direct sales offices and to 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 will continue to increase in the future in absolute
dollars, but may vary as a percentage of net sales.
Interest and other income in both periods consisted primarily of
interest income.
Interest expense during the first nine months of 1996 was virtually
eliminated and other income increased principally as a result of the temporary
investment of the net proceeds from public offerings of common stock in late
1993 and during August, 1995.
Net income for the third quarter increased 8% to $2.7 million ($.20 per
share) compared to net income of $2.5 million ($.20 per share) for the third
quarter of 1995. Net income increased 47% to $8.4 million, or $.63 per share in
the first nine months of 1996, from $5.7 million, or $.49 per share, in the
first nine 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 public offering of common stock that closed in August 1995. Net
income in the second quarter of 1995 included 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 included costs associated with
redundancy in inventories, equipment abandonment, the combination and relocation
of business operations, employee terminations, and the write-off of intangible
assets.
9
<PAGE>
Inflation/Currency Fluctuation
Inflation and currency fluctuations have not previously had a material
impact on Inter-Tel's operations. International sales and procurement agreements
have traditionally been denominated in U.S. currency. Moreover, a significant
amount of contract manufacturing has been or is expected to be moved to domestic
sources. The expansion of international operations in the United Kingdom and
Europe and anticipated sales in Japan and Asia and elsewhere could result in
higher international sales as a percentage of total revenues, but international
revenues are currently not significant.
Liquidity and Capital Resources
The Company continues to expand its dealer network, which has required
and is expected to continue to require working capital for increased accounts
receivable and inventories. During the first nine months of 1996, accounts
receivable and inventories increased approximately $8.9 million. This increase
was principally funded by operating cash flow and existing cash balances. The
Company also expended approximately $4.7 million during the first nine months of
1996 for property and equipment. At September 30, 1996, the Company had $35.0
million in cash and equivalents, which represents an increase of approximately
$3.0 million from June 30, 1996, but a decrease of approximately $4.7 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 nine months ended September 30, 1996,
the credit facility was used primarily to support international letters of
credit to suppliers.
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 $57.3 million and $37.3 million remain unbilled at September 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 upon loss experience and past due accounts. Although
the Company to date has been able to resell the rental streams from leases under
the Totalease program profitably and on a substantially current basis, the
timing and profitability of lease resales could impact the Company's business
and operating results, particularly in an environment of fluctuating interest
rates. If the Company is required to repurchase rental streams and realize
losses thereon in amounts exceeding its reserves, its operating results will be
adversely affected.
The Company believes that its working capital and credit facilities,
together with cash generated from operations, will be sufficient to fund
purchases of capital equipment, finance any cash acquisitions which the Company
may consider and
10
<PAGE>
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
telecommunications applications, will be a key factor in the Company's future
success. Occasionally, new products contain undetected errors or "bugs" when
released. Such bugs may result from defects 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.
During the past twelve months, the Company introduced ISDN on its AXXESS digital
communication platform, 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. In the event that the Company were to fail
to successfully introduce new software, products or services or upgrades to its
existing systems or products on a regular and timely basis, demand for the
Company's existing 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 software, products, services, technologies and applications on a timely
basis as required by changing market needs or that new software or products or
enhancements thereto, including its recently announced products and upgrades,
when introduced by the Company will achieve market acceptance.
11
<PAGE>
The Company has recently developed and continues to develop products
designed to address the emerging market for the convergence of voice and data
applications, or computer telephony integration. If the computer telephony
integration ("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 communications
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 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 communications platforms is highly
competitive and in recent periods has been characterized by pricing pressures
and business consolidations. The Company's competitors include Lucent
Technologies 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
12
<PAGE>
equipment located in the telephone company's central office. Competition by the
RBOCs may increase significantly in the future, as the RBOCs have been granted
the right to manufacture telephone systems and equipment themselves and/or to
bundle the sale of equipment with telephone calling services.
In the market for voice processing applications, including voice mail,
the Company competes against Centigram Communications Corporation ("Centigram"),
Octel Communications Corporation ("Octel"), Active Voice Corporation ("Active
Voice"), Applied Voice Technology, Inc. ("AVT") and other competitors, including
telephone systems manufacturers such as Lucent Technologies, NorTel and Siemens
ROLM, which offer integrated voice processing systems under their own label as
well as through various OEM arrangements. Certain of the Company's competitors
may achieve marketing advantages by bundling their voice processing equipment
with sales of telephone systems, or by designing their telephone systems so that
they do not readily integrate with independent voice processing systems.
Inter-Tel expects that the development of industry standards and the acceptance
of open systems architectures in the voice processing market will reduce
technical barriers to market entry and lead to increased competition.
In the market for long distance services, the Company competes against
AT&T Corp., MCI Telecommunications Corporation, Sprint Corporation and other
suppliers, certain of which also supply the long distance calling and network
services that the Company resells. Although the Company acquires a variety of
long distance calling services in bulk from certain long distance carriers,
there can be no assurance that the Company will be able to purchase long
distance calling services on favorable terms from one or more of such providers
in the future. In addition, a substantial majority of prospective new long
distance customers for the Company currently purchase long distance calling
services from the Company's competitors. The Company believes that it is likely
to face increased competition in the long distance calling services market to
the extent that telecommunications deregulation enables RBOCs to supply long
distance calling and network services or enables RBOCs and others to bundle long
distance, local telephone and wireless services. Moreover, the Company expects
to face increased competition in the future because low technical barriers to
entry will allow new market entrants.
Many of the Company's competitors are substantially larger, and 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
13
<PAGE>
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 new MIS systems significantly affect many
aspects of the Company's business, including its accounting, operations,
purchasing, sales and marketing functions. The Company has experienced some
difficulty in the implementation of these 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 successfully complete
the total automation and integration of the MIS systems in their current
configuration. In addition, one of the Company's primary MIS systems software
vendors has filed for protection under Chapter 11 of the Bankruptcy Code in the
U.S. District Court, District of Arizona, which may further complicate the steps
necessary for a full integration. The Company is currently reviewing remedial
steps and alternatives, including (1) methods to improve reliability of data and
performance in the current MIS systems and configuration; (2) variations to the
current configuration; and (3) the possibility of the selection of alternative
providers. Any of such actions could result in additional costs and could result
in further delays in obtaining fully-functional MIS systems, which could have a
material adverse effect on the Company's business and operating results.
The Company has made strategic acquisitions in the past and expects to
continue to do so in the future. Acquisitions require a significant amount of
the Company's management attention and financial and operational resources, all
of which are limited. The integration of acquired entities may also result in
unexpected costs and disruptions, and significant fluctuations in, or reduced
predictability of, operating results from period to period. There can be no
assurance that an acquisition will not adversely affect the business
relationships of the Company or the acquired entity with their respective
suppliers or customers. Further, there can be no assurance that the Company will
successfully integrate the acquired operations or achieve any of the intended
benefits of an acquisition. The Company's failure to manage its growth
effectively could have a material adverse effect on its business and operating
results.
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 the steps
14
<PAGE>
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 noninfringing
technology or acquire licenses to the technology which is the subject of the
asserted infringement, any of which could have a material adverse effect on the
Company's business and operating results. In the event that the Company is
unable or chooses not to license such technology or decides not to challenge
such third party's rights, the Company could encounter substantial and costly
delays in product introductions while attempting to design around such third
party rights, or could find that the development, manufacture or sale of
products requiring such licenses could be materially inhibited.
Reliance on Dealer Network
A substantial portion of the Company's net sales are made through its
network of independent dealers. The company faces intense competition from other
telephone system and voice processing system manufacturers for such dealers'
business, as most of the Company's dealers carry products which compete with the
Company's products. The Company has no long term agreements with any of its
dealers, and there can be no assurance that any such dealer will not promote the
products of the Company's competitors to the detriment of the Company's
products. The loss of any significant dealer or group of dealers, or any event
or condition adversely affecting the Company's dealer network, could have a
material adverse effect on the Company's business and operating results. In
recent years the Company has effected a number of strategic acquisitions of
resellers of telephony products and integrated these operations with its
existing direct sales operations in the same geographic areas and in other
strategic markets. There can be no assurance that one or more of the Company's
dealers will not be acquired by a competitor and that the loss of any such
dealer so acquired will not adversely affect the Company's business and
operating results.
Risks of Providing Long Distance and Network 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
15
<PAGE>
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.
Potential Fluctuations in Quarterly Results; Limited Backlog
The Company's quarterly operating results depend upon a variety of factors,
including the volume and timing of orders received during the quarter, the mix
of products sold and mix of distribution channels, general economic conditions,
patterns of capital spending by customers, the timing of new product
announcements and releases by the Company and its competitors, pricing
pressures, 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 the immediate shipment and installation of systems.
As a result, the Company has historically operated with a relatively small
backlog, and sales and operating results in any quarter are principally
dependent on orders booked and shipped in that quarter. Moreover, market demand
for investment in capital equipment such as telephone systems and applications
is largely dependent on general economic conditions, and can vary significantly
as a result of changing conditions in the economy as a whole. The Company's
expense levels are based in part on expectations as to future sales and, if
sales levels do not meet expectations, operating results could be adversely
affected. Because sales of systems through the Company's dealers produce lower
gross margins than sales through the Company's direct sales organization,
operating results will vary based upon the mix of sales through direct and
indirect channels. Although the Company to date has been able to resell the
rental streams from leases under its Totalease program profitably and on a
substantially current basis, the timing and profitability of lease resales from
quarter to quarter could impact operating results, particularly in an
environment of fluctuating interest rates. Long distance sales have, in recent
periods, grown at a faster rate than the Company's overall net sales and such
sales have lower gross margins than the Company's core business. As a result,
gross margins could be adversely affected in the event that long distance
calling services continue to increase as a percentage of net sales. In addition,
the Company is subject to seasonality in its operating results, as net sales for
the first and third quarters are frequently less than those experienced in the
fourth and second quarters, respectively. As a result of these and other
factors, the Company has in the
16
<PAGE>
past and could in the future experience fluctuations in sales and operating
results on a quarterly basis.
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 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. Many of such factors are beyond the
Company's control. 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 October 31, 1996, the Company's Chairman of the Board of
Directors and Chief Executive Officer beneficially owned approximately 21% 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.
17
<PAGE>
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 Per Share Earnings
Exhibit 27.1 - Financial Data Schedule for September 30, 1995
Reports on Form 8-K -- None
18
<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 11-13-96 /s/ Steven G. Mihaylo
-------------- ------------------------------------
Steven G. Mihaylo, Chairman of the
Board and Chief Executive Officer
Date 11-13-96 /s/ Kurt R. Kneip
-------------- ------------------------------------
Kurt R. Kneip, Vice President and
Chief Financial Officer
19
EXHIBIT 11.1
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
(Thousands except Three Months Nine Months
per share amounts) Ended September 30, Ended September 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
PRIMARY
Average shares outstanding 12,929 11,804 12,872 11,100
Net effect of dilutive stock
options--based on the
treasury stock method using
average market price 514 539 513 466
------ -------- ------ --------
TOTAL 13,443 12,343 13,385 11,566
====== ======= ====== ======
Net income $2,689 $ 2,500 $8,372 $5,701
====== ======= ====== ======
Per share amount $ 0.20 $ 0.20 $ 0.63 $ 0.49
====== ======= ====== ======
FULLY DILUTED
Average shares outstanding 12,929 11,804 12,872 11,100
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 526 549 526 549
------ -------- ------ --------
TOTAL 13,454 12,353 13,398 11,649
====== ======= ====== ======
Net income $2,689 $ 2,500 $8,372 $ 5,701
====== ======= ====== ======
Per share amount $ 0.20 $ 0.20 $ 0.62 $ 0.49
====== ======= ====== ======
</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.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM THE INTER-TEL,
INCORPORATED AND SUBSIDIARIES FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 34950
<SECURITIES> 0
<RECEIVABLES> 37946
<ALLOWANCES> 3070
<INVENTORY> 24373
<CURRENT-ASSETS> 108813
<PP&E> 28805
<DEPRECIATION> 15232
<TOTAL-ASSETS> 134328
<CURRENT-LIABILITIES> 26328
<BONDS> 0
0
0
<COMMON> 59557
<OTHER-SE> 34562
<TOTAL-LIABILITY-AND-EQUITY> 134328
<SALES> 133384
<TOTAL-REVENUES> 133384
<CGS> 75348
<TOTAL-COSTS> 75348
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 43
<INCOME-PRETAX> 14183
<INCOME-TAX> 5811
<INCOME-CONTINUING> 8372
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8372
<EPS-PRIMARY> 0.63
<EPS-DILUTED> 0.62
</TABLE>
