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MISSION STATEMENT
QUALITY FIRST...Understanding what is required of our services, products and
support systems.
QUALITY FIRST...Committing to conform to those requirements at all times.
QUALITY FIRST...Providing defect-free products and services to our customers on
time.
CORPORATE PROFILE
Inter-Tel provides single point of contact, total communication solutions to
small and medium sized businesses. Inter-Tel's products and services include
digital communication platforms and software, computer telephone integration,
unified messaging software, network services, network and data products, and
flexible financing. The Company's Common Stock is quoted on the NASDAQ National
Market System under the symbol INTL.
COMPANY BACKGROUND
- - Inter-Tel was founded in 1969 to bring high technology, cost effective
communication systems to business. Its focus has evolved from telephone
systems to digital communication platforms, positioning itself as a single
source provider of communications solutions.
- - In addition to its U.S. sales offices, Inter-Tel is expanding
internationally, with offices in Japan and the United Kingdom. The evolving
markets in both Japan and Europe offer Inter-Tel expanding distribution
opportunities. Inter-Tel's AXXESS platform is available in English and
Japanese, with more languages planned.
- - Inter-Tel is a leading provider of Computer Telephone Integration,
enabling users to handle multiple data and communication tasks from their
PCs. Inter-Tel's CTI solutions are available for desktop and system level
applications.
- - Inter-Tel's communication platforms adhere to computer and telephone
industry standards and incorporate open architecture interfaces, allowing
for greater flexibility in creating communication applications. Companies
are able to tailor applications to enhance their operations and to increase
productivity.
- - Digital communication has been a consistent focus for Inter-Tel. In 1993,
Inter-Tel was the first manufacturer to base a digital communication
platform on Digital Signal Processing (DSP) technology, and has expanded
its product offerings to utilize advanced digital services such as T-1 and
ISDN.
- - Articles in industry publications have helped increase Inter-Tel's
presence in the marketplace. In 1994, Inter-Tel was featured in Fortune
magazine as a "Company to Watch," and in 1995, Inter-Tel products received
editor's choice awards from Computer Telephony magazine, Teleconnect and
What To Buy For Business. The Inter-Tel Axxent was named "1995 Product of
the Year" by Computer Telephony magazine.
- - Through its variety of advanced communication platforms, Inter-Tel is
ready to take advantage of opportunities from the rapidly changing
communication market. As new technologies such as voice over the Internet
take hold, Inter-Tel intends to incorporate these technologies into its
service offerings.
TO OUR SHAREHOLDERS
1995 marked the fourth consecutive year that Inter-Tel achieved record results.
The continuing success of our open architecture AXXESS software and hardware,
plus our strategy to provide businesses with digital communication platforms,
Computer Telephone Integration (CTI), unified messaging software, network
services, network and data products, and flexible financing, all from a single
source, coupled with the extraordinary performance by Inter-Tel's associates,
contributed to these results.
Looking forward, Inter-Tel is rapidly transforming itself from a telephone
systems supplier to a communications services and software company. Inter-Tel
already receives a substantial portion of its revenue and profits from services
and software. It is our goal to generate more of our revenue and profits from
services and software than from telephone systems by the year 2000.
FINANCIAL SUMMARY
In 1995 Inter-Tel's sales and earnings both set new records. Sales increased
21.4% to $148.8 million, compared to sales of $122.6 million during 1994. Net
income for the year was $8.5 million or $.71 per share after a special charge
which was taken in the second quarter, an increase of 42.1% over net income of
$5.9 million or $.55 per share for 1994. Per share income in 1995 was based on
approximately 1.1 million additional average shares outstanding, as a result of
a public offering of 2 million shares in August 1995.
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The results for all periods include the operations of American Telcom
Corporation of Georgia, Inc. and Access West, Inc., which joined Inter-Tel in
May of 1995. These acquisitions reflect Inter-Tel's continuing strategy to
expand the number of its direct sales offices in North America.
Inter-Tel entered 1996 with $39.6 million in cash on its balance sheet and no
debt. These factors, plus Inter-Tel's accelerating profits and its strong
products and services, place Inter-Tel in an enviable position to capture
opportunities in the rapidly changing world of digital communications.
HISTORIC EVENTS
Historic events, with worldwide impact, are shaping the telecommunications
industry in the United States. During 1995, AT&T announced plans to divide
itself into three enterprises and in February 1996 President Clinton signed into
law the Telecommunication Act of 1996, which replaces communications
legislation first enacted in 1934. I believe that these two events will create
enormous opportunities for years to come for well positioned companies like
Inter-Tel.
The dismantling of AT&T should reduce the competitive pressures in the
marketplace, and the Telecommunication Act of 1996 interjects an additional
element of confusion and opportunity into the market, while leveling the playing
field. These factors should place Inter-Tel in a position to grow at faster than
historical rates and to gain market share.
Inter-Tel is one of the only companies in the United States currently providing
a total telecommunications solution to small and medium size companies. This
fact, along with the opportunities created by the Telecommunication Act of
1996, gives Inter-Tel the ability to offer additional products and services to
its customers and to supply clear solutions to a fragmented marketplace. These
circumstances further enhance Inter-Tel's strategy to provide a variety of
communications services and software from a single source.
STRATEGIC OPPORTUNITIES
Inter-Tel will continue to focus on opportunities which will provide profitable
growth while increasing shareholder value. Every associate at Inter-Tel is
linked with our shareholders through profit sharing and through our Continual
Improvement Process, which is designed to reduce cost and increase customer
satisfaction. In addition, all of Inter-Tel's senior associates participate in
long-term incentive compensation plans which reward them when our share price
increases. In other words, Inter-Tel's associates only receive these benefits if
our shareholders benefit.
The strategic opportunities created by the voluntary break-up of AT&T and the
Telecommunication Act of 1996 should accelerate the integration of
telecommunications and data communication technology. Inter-Tel intends to take
full advantage of these opportunities. The modular transportability of
Inter-Tel's AXXESS software platform allows it to be ported to standard computer
servers, which will allow for even tighter integration of telecommunications and
data communications.
To expand its capabilities and to benefit from increased integration of these
applications, Inter-Tel is in the process of developing an entire line of
networking and server software, which will be available is scheduled for
shipment in late 1996 or early 1997. We believe these software products will
give Inter-Tel an advantage in the rapidly evolving field of Computer Telephone
Integration and will allow us to broaden our distribution channels to include
the thousands of computer resellers and Value Added Resellers (VARs) in the
computer industry.
Our product development, along with the expansion of our distribution channels,
both domestically and internationally, should allow Inter-Tel rapid and
consistent growth for the foreseeable future. The rapidly changing market
dynamics in the United States, the union of European nations and the breakdown
of the Keiretsu system of interlocking corporate relationships in Japan are all
key factors which present Inter-Tel with opportunities to expand its
distribution. We will continue to add direct sales offices and/or dealers in all
of these markets while developing additional distribution channels.
Finally, the opportunity to increase the software, network services, integration
services and CTI components of Inter-Tel's business is greatly enhanced because
of the market dynamics in the United States. It is our belief that these
segments of our business, along with our international business, will grow at
faster rates than our traditional
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telephone systems business. Faster growth, along with the higher margins
associated with the software, integration services and CTI parts of our business
should produce superior financial results, which should benefit everyone
associated with Inter-Tel.
FUTURE PROSPECTS
As we look toward the future, our experienced, long-term associates are excited
about the opportunities in a rapidly changing digital world. Future prospects
have never been better for Inter-Tel. Our rock solid financial position, plus
our superior software capabilities, advanced products and services, an expanding
product line and growing distribution are all ingredients for future success.
When some pundits are questioning the viability of the current business and
economic environment, Inter-Tel looks to the future with excitement and
unwavering commitment. We are confident that our efforts will benefit our
customers, provide economic security for our associates and reward our
shareholders.
Sincerely,
/s/ STEVEN G. MIHAYLO
- ---------------------------
Steven G. Mihaylo
Because of the complex communication offerings available today, customers
benefit from a single source solution. Inter-Tel's broad products and services
span six market segments, including:
- - Digital Communication Platforms
- - Computer Telephone Integration
- - Unified Messaging Software
- - Network Services
- - Network and Data Products
- - Flexible Financing
These offerings provide the technologies companies need to eliminate the
confusion and expense of dealing with multiple vendors.
Despite rapid industry changes, Inter-Tel remains focused on the fundamental
principles of good business: a commitment to customer satisfaction, an emphasis
on continual improvement and a history of financial stability.
DIGITAL COMMUNICATION PLATFORMS
Inter-Tel offers an extensive line of digital communication platforms and
software to meet the requirements of small-to-medium sized businesses. The
Inter-Tel Axxent and AXXESS incorporate the power and flexibility of Computer
Telephone Integration (CTI) technology. Using this technology, companies can
tailor applications designed to enhance operations and increase productivity.
Because Inter-Tel's communications platforms conform to established computer and
telephone industry standards, customers can choose from a variety of either
system level or desktop applications. In addition, advanced digital services,
including T-1 and ISDN, are used with Inter-Tel's platforms, providing some of
the best combinations of services available.
As technology evolves and as Inter-Tel continues to introduce new communication
platforms, Inter-Tel will offer new applications which enhance business
productivity. Its innovative communication server platform, scheduled for
release in late 1996, is a PC-based network server that uses predominantly
off-the-shelf industry standard computer and telephony hardware, as well as
Inter-Tel's AXXESS call processing and voice processing software running on
Windows NT. These innovations, combined with standard computer and telephone
protocols, are expected to provide advanced communication services for
Inter-Tel's customers. MIS managers, who traditionally have worked in a computer
oriented environment, now can incorporate digital communication applications
into their computer systems.
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As more companies conduct business over the Internet, Inter-Tel's communication
server software will allow access to the Internet. The Internet can be used as a
tool for marketing, sales and customer support, in addition to being a low-cost
alternative to fax, express mail and other forms of communication. Future plans
include voice over the Internet, which will allow users to talk to anyone around
the world for the price of a local phone call, and the ability to run World Wide
Web pages on the communication server.
Inter-Tel's communication server software is designed to work with
client/server-based technology, allowing customers to choose the features they
need to enhance their productivity. Inter-Tel's communication server software
will creates a true client/server environment. Inter-Tel is providing digital
communication platforms that offer efficient, cost-effective communication
solutions that will incorporate future technologies and applications. AXXESS
voice processing software is currently available in English and Japanese, with
more languages planned.
COMPUTER TELEPHONE INTEGRATION
Companies with immediate access to information typically are more productive,
have lower operating costs and can service their customers more effectively. CTI
technology provides access to information which, in turn, can enhance a
company's bottom line.
CTI technology links two of the most important business tools -- the computer
and the telephone -- into one seamless environment for virtually all the
communication needs of a company. CTI technology allows users to perform
multiple tasks, from data handling, to answering telephone calls on the desktop
PC. Inter-Tel is bringing CTI technology to many diverse companies through
desktop and system level applications. Its advanced communication platforms
enable users to process calls using their PC and with Windows interface.
AXXESSORY Connect software provides a Windows interface for the AXXESS platform,
allowing users to answer phone calls from their desktop PCs. Using the AXXESS
Desktop Interface, AXXESSORY Connect provides industry standard protocols to
integrate with other Windows applications such as personal information managers.
Incoming calls will trigger a "screen pop" containing customer records or other
pertinent information to a user, reducing wait times and enhancing customer
service. Inter-Tel is working with a number of third party software developers
to create a seamless working environment for database, personal organizer, or
terminal emulation programs with AXXESSORY Connect.
In addition, system level applications can help companies manage calls at peak
efficiency. Automatic Call Distribution, for example, routes incoming calls,
based on various criteria, to call center agents. It also collects, analyzes and
reports real-time call processing information.
The market for CTI is a rapidly expanding, experiencing dynamic growth.
According to the Alliance of Computer-based Telephony Applications Suppliers, in
1995, the CTI market totaled $1.48 billion. In 1996, it is expected to double to
$3.3 billion and by 1999, the CTI market is expected to $7 billion. Industry
experts predict a compounded annual growth rate of 35 percent from 1996 through
2000.
As CTI technology becomes more widespread, Inter-Tel will continue to create
products and services that help companies increase their productivity.
UNIFIED MESSAGING SOFTWARE
The manner in which companies process information can be as important as the
information itself. As a leader in voice processing software, Inter-Tel develops
voice processing platforms that tightly integrate with communication platforms.
Inter-Tel offers the following voice processing platforms to work with its
communication platforms: AXXESSORY Talk, Axxent Talk, and the IVX500. All three
platforms include the open, industry standard Multi Vendor Interface Protocol
(MVIP), a standard for connecting multi vendor PC-based boards in voice
processing, data switching and video applications. AXXESSORY Talk also offers a
fax back feature, which allows customers to have documents faxed to them,
freeing employees from spending valuable time at the fax machine.
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As the need to merge different types of messages continues to evolve, Inter-Tel
is developing unified messaging software. Unified messaging software integrates
e-mail, fax and voice mail through one universal inbox at both the PC and the
phone. Using a Graphical User Interface (GUI) such as Windows, users are able to
see all of the different types of messages they have received.
Inter-Tel is developing unified messaging software to work in conjunction with
the Microsoft Exchange messaging application, included with Windows 95.
Inter-Tel's software will conform to the Messaging Application Programming
Interface (MAPI) standard developed by Microsoft and will work with the
AXXESSORY Talk digital voice processing platform.
The first release, scheduled for summer 1996, will provide users with access to
voice mail from their PCs and will be used in conjunction with Microsoft
Exchange and a GUI media player to play back messages. The software will have
the ability to pull voice messages over to the PC as an object, allowing the
user to embed voice messages into e-mail or fax messages. Unified messaging
software should improve workplace productivity and provide the flexibility to
retrieve messages anywhere from a phone or a PC connected to a modem.
NETWORK SERVICES
Effective communication begins with effective network services. These services
include domestic and international long distance, dedicated services such as T-1
and ISDN, and videoconferencing, which can enhance the way a company sends and
receives information. Inter-Tel provides these services and more through its
NetSolutions division. Through a combination of digital communication platforms,
software and comprehensive services, Inter-Tel is able to meet the communication
requirements of businesses.
Using digital fiber optic technology and high capacity T-1, 56K and ISDN
facilities, NetSolutions provides advanced telecommunication solutions. Also, as
part of its long distance service, Inter-Tel NetSolutions offers a feature-rich
calling card that can be used worldwide. Offering both cost efficiency and
reliability, the NetSolutions calling card provides the convenience and features
of its long distance services. One telephone call accesses the network, and
individual account codes help track calls for easy account management.
In addition, Inter-Tel NetSolutions offers call accounting services which
feature detailed invoices and customized reports that can help customers
identify individual costs, potential needs and specific calling patterns. Each
month, customers can receive three reports -- area code summary, traffic
summary, and frequently called numbers -- in addition to their billing
statement. Specialized management reports are also available that address many
diverse business needs.
As company travel budgets continue to shrink, videoconferencing is also becoming
more accepted in today's business environment. Videoconferencing services can
help companies save time and money by reducing business travel and allowing for
fast, efficient decision making. Along with group and desktop platforms offered
by Inter-Tel's Factored Products division, NetSolutions provides
videoconferencing network services including ISDN, Switched 56, and T-1 to
businesses of any size.
NETWORK AND DATA PRODUCTS
Inter-Tel's Networking solutions connect computers within a building or across
the country. Local Area Networks (LANs) and Wide Area Networks (WANs) are the
means by which data and communication are relayed throughout organizations.
Inter-Tel designs, installs and services total communication and data packages,
including LANs and WANs, that help companies effectively relay information.
Inter-Tel has the resources and capabilities to get different types of equipment
"talking" to each other.
Faulkner Information Services notes that in most companies, communication
traffic is made up of about 50 percent voice traffic and 50 percent data
traffic. Industry analysts predict that by the year 2000, data traffic will
comprise approximately 80 percent of this total. As the importance and quantity
of data traffic has steadily increased, the successful transmission of data
traffic has become the primary reason for companies to create strong, efficient
LANs and/or WANs. As businesses need to increase their networking services,
Inter-Tel will be there to offer effective operation of these networks.
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FLEXIBLE FINANCING
Inter-Tel combines all of its products and services with a full range of
affordable financing programs. With Inter-Tel, customers can acquire their
telephony and computer platforms, software applications and services, as well as
financing, all from a single source.
Inter-Tel's Totalease program provides the customer with a total system solution
at a fixed monthly cost. The Totalease program includes full system maintenance
and training, fixed equipment add-on and upgrade provisions, risk of loss,
guaranteed renewal options and other services. With Totalease, Inter-Tel manages
the responsibilities and risks associated with ownership of communications
equipment. Customers can then focus their time on their business.
Inter-Tel also offers a full line of low cost lease purchase financing. Lease
terms range from 24 to 84 months with $1.00, fixed and fair market value
purchase options. In addition, Inter-Tel offers customized financing packages
and new business leases for customers with special financial needs. By offering
this type of financing to acquire Inter-Tel products and services, the customer
has the comfort of predictable monthly costs and maintaining a direct, long term
relationship with Inter-Tel.
Leasing is a viable option for businesses that want technology without paying up
front acquisition costs. Inter-Tel's leasing programs provide a total solution
at a set monthly cost, making advanced technology affordable.
THE FUTURE OUTLOOK
Recent changes in telecommunication laws will help define information services
in the future. The Telecommunication Act of 1996 and AT&T's announcement that it
will divide itself into three enterprises will have a dramatic impact on the
communication industry and will create numerous opportunities for Inter-Tel in
the years to come.
These historic events, while leveling the playing field, have also injected an
element of confusion into the market. This gives Inter-Tel the ability to offer
additional products and services to its customers and to supply clear solutions
to a fragmented marketplace. Inter-Tel will continue to offer its customers
quality products and services, with a high degree of customer satisfaction.
Because of its philosophy of providing a total communication solution, Inter-Tel
is strongly positioned to benefit from these changes with its broad scope of
advanced products and services.
Inter-Tel is poised to capture opportunities from the rapidly changing
communication market. As new technologies such as voice over the Internet take
hold in the marketplace, Inter-Tel will incorporate these technologies into its
service offerings. In its 27-year history, Inter-Tel has always strived for 100%
customer satisfaction. Inter-Tel's dedication to continual improvement is
reflected in its products, and recognition from industry publications highlights
Inter-Tel's presence in the marketplace.
Inter-Tel anticipates predictable growth in the foreseeable future through its
product development and the expansion of its distribution channels, both
domestically and internationally. Changes in the communication market in the
United States, the union of European nations and opportunities in Japan are all
key factors that present Inter-Tel with opportunities to grow.
The ability to foresee future developments and create usable applications has
never been more important. The continued push toward CTI technology is
broadening the scope of how companies conduct business. As technology continues
to advance in the workplace, Inter-Tel will strive to take advantage of those
opportunities.
With its advanced software, products and service capabilities, its commitment to
emerging technologies and its strong financial position, Inter-Tel is bringing
total communication solutions to business.
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SELECTED FINANCIAL DATA
FINANCIAL SUMMARY (1)
<TABLE>
<CAPTION>
(In thousands, except
per share amounts and ratios) For the years ended December 31,
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Net sales $148,846 $122,617 $102,377 $87,211 $71,509
Cost of sales 87,031 73,482 62,791 53,585 44,229
Research & development 5,764 4,537 4,114 3,928 3,638
Selling, general and
administrative 42,609 35,785 29,032 24,545 21,521
Special charge 1,315 (2) -- -- -- --
- -------------------------------------------------------------------------------------------------------
Operating income 12,127 (2) 8,813 6,440 5,153 2,121
- -------------------------------------------------------------------------------------------------------
Interest and other income 1,674 904 282 664 515
Interest expense (101) (120) (445) (727) (944)
Income before income taxes and
discontinued operations, 13,700 (2) 9,597 6,277 5,090 1,692
Income taxes 5,249 3,648 2,381 1,901 676
- -------------------------------------------------------------------------------------------------------
Income from continuing
operations 8,451 5,949 3,896 3,189 1,016
Loss from discontinued
operations -- -- -- -- (5,148)
- -------------------------------------------------------------------------------------------------------
Net income (loss) $8,451 (2) $5,949 $3,896 $3,189 $(4,132)
- -------------------------------------------------------------------------------------------------------
Net Income (loss) per share:
Continuing operations $0.71 $0.55 $0.43 $0.37 $0.12
Discontinued operations -- -- -- -- (.61)
- -------------------------------------------------------------------------------------------------------
Net income (loss) $0.71 $0.55 $0.43 $0.37 $(.49)
Average shares outstanding 11,953 10,852 8,982 8,612 8,405
- -------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Total assets $118,402 $67,418 $57,270 $37,568 $41,118
Working capital 75,511 37,245 34,198 12,514 8,228
Long-term debt -- -- 188 2,184 6,007
Shareholders' equity 85,045 45,098 38,542 19,382 16,806
- -------------------------------------------------------------------------------------------------------
KEY RATIOS
Current ratio 4.39 3.25 3.32 1.87 1.49
Term debt/equity -- -- -- 0.11 0.36
Return on equity-continuing operations 0.19 0.15 0.20 0.19 0.05
- -------------------------------------------------------------------------------------------------------
</TABLE>
(1) Financial data for all periods have been restated to reflect the
acquisitions of American Telcom Corp. of Georgia, Inc. and Access West, Inc. in
May 1995, each accounted for as a pooling of interests.
(2) Operating income includes a special charge of $1,315,000, which reduced net
income by $815,000, or $.07 per share. This special charge reflects the costs
associated with integrating the operations of the two acquired companies.
Without this special charge, the Company would
<PAGE> 8
have reported operating income of approximately $13.4 million and net income of
approximately $9.3 million, or $.78 per share, in the year ended December 31,
1995.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
Inter-Tel provides single point of contact, total communication
solutions to small and medium sized businesses. Inter-Tel's products and
services include digital communication platforms and software, computer
telephone integration, unified messaging software, network services, network and
data products, and flexible financing. The Company's Common Stock is quoted on
the Nasdaq National Market System under the symbol INTL.
The Company has developed a network of direct sales offices and dealers
which sells the Company's products, and in recent periods the Company has
focused on expanding its direct sales capabilities and its dealer network. The
Company has effected a number of strategic acquisitions of resellers of
telephony products and integrated these operations with its existing direct
sales operations in the same geographic areas and in other strategic markets.
Sales of systems through the Company's dealers typically generate lower
gross margins than sales through the Company's direct sales organization,
although direct sales typically require higher levels of selling, general and
administrative expenses. In addition, the Company's long distance and network
services typically generate lower gross margins than sales of software and
system products. Accordingly, the Company's margins may vary from period to
period depending upon distribution channel and product mix. In the event that
sales through dealers or sales of long distance services increase as a
percentage of net sales, the Company's overall gross margin could decline. This
is possible, because other high margins products, like software, could offset
lower margin products.
The Company's operating results depend upon a variety of factors,
including the volume and timing of orders received during a period, the mix of
products sold and mix of distribution channels, general economic conditions,
patterns of capital spending by customers, the timing of new product
announcements and releases by the Company and its competitors, pricing pressures
and the availability and cost of products and components from the Company's
suppliers. In addition, the Company is subject to seasonality in its operating
results, as net sales for the first and third quarters are frequently less than
those experienced during the fourth and second quarters, respectively.
The markets served by the Company have been characterized by rapid
technological changes and increasing customer requirements. The Company has
sought to address these requirements through the development of software
enhancements and improvements to existing systems and the
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introduction of new products and applications. The Company's research and
development efforts over the last several years have been focused primarily on
developing new products like the Inter-Tel Axxent system, enhancing the CTI
capabilities of the AXXESS product, as well as expanding the capacity of the
Company's AXXESS and AXXESSORY Talk systems. Current efforts are related to
support of industry standard CTI interfaces, development of additional
applications and features, and the development of a LAN-based Communications
Server incorporating the Company's Call Processing and Voice Processing
software. New applications under development include Primary and Basic Rate
ISDN, networking, and unified messaging. The software-based architecture of the
AXXESS system facilitates maintenance and support, upgrades, and incorporation
of additional features and functionality.
The Company offers to its customers a unique package of lease financing
and other services under the name Totalease. Totalease provides to customers
lease financing, maintenance and support services, long distance services, fixed
price upgrades and other benefits. The Company finances this program through the
resale of lease rental streams to financial institutions, and formerly through
its bank credit facility.
Net sales of the Company have increased substantially in each of the
past three years. Such increases were 21%, 20% and 17% in 1995, 1994 and 1993,
respectively, over the preceding year.
All periods have been restated to reflect the acquisitions of American
Telcom Corp. of Georgia, Inc. and Access West, Inc. in May 1995. Each
transaction was accounted for as a pooling of interests.
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RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data of
the Company expressed as a percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31
1995 1994 1993
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 58.5 59.9 61.3
---- ---- ----
Gross margin 41.5 40.1 38.7
Research and development 3.9 3.7 4.0
Selling, general and administrative 28.6 29.2 28.5
Special charge 0.9 0.0 0.0
--- --- ---
Operating income 8.1 7.2 6.2
Interest and other income 1.1 0.7 0.3
Interest expense 0.1 0.1 0.4
Income taxes 3.4 3.0 2.3
--- --- ---
Net income 5.7% 4.8% 3.8%
---- ---- ----
</TABLE>
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YEAR ENDED DECEMBER 31, 1995 VERSUS YEAR ENDED DECEMBER 31, 1994
Net sales increased 21.4% to $148.8 million in 1995 from $122.6 million
in 1994. Sales from direct sales offices accounted for approximately $9.7
million of the increase, with wholesale distribution sales increasing
approximately $10.7 million. The remaining increases occurred in long distance
sales and other operations.
Gross profit increased to $61.8 million, or 41.5% of net sales in 1995
from $49.1 million, or 40.1% of net sales in 1994. This reflected the
transition to the direct dealer network and the expansion of AXXESS software
and systems sales.
Research and development expenses increased to $5.8 million, or 3.9% of
net sales in 1995 from $4.5 million, or 3.7% of net sales, in 1994. These
expenses in both 1995 and 1994 were directed principally to the continued
development of the AXXESS and Inter-Tel Axxent software and systems, unified
messaging and voice processing software applications and CTI applications.
Selling, general and administrative expenses increased to $42.6
million, or 28.6% of net sales in 1995, from $35.8 million, or 29.2% of net
sales, in 1994. This reflected increased incentive and other compensation, costs
associated with the implementation of new information systems, additional
personnel to support the direct dealer network and expanded long distance
operations, and expenses associated with expansion of operations of the
Company's Asian subsidiary.
Interest and other income increased in 1995 principally from the
investment of the funds received from the August 1995 public offering and funds
generated through operating cash flow.
Net income increased 42.1% to $8.5 million, or $.71 per share, in 1995
after a special charge recognized in the second quarter, from $5.9 million, or
$.55 per share, in 1994. Without the special charge, net income would have been
$9.3 million, or $.78 per share, for the year. In addition, net income per share
in 1995 is based on an additional 2 million average shares outstanding in August
1995, reflecting the 1995 public stock offering.
The special charge reflects the costs associated with integrating the
operations of American Telcom Corp. of Georgia, Inc. and Access West, Inc. 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.
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YEAR ENDED DECEMBER 31, 1994 VERSUS YEAR ENDED DECEMBER 31, 1993
Net sales increased 19.8% to $122.6 million in 1994 from $102.4 million
in 1993. The increase in net sales was primarily attributable to increased sales
of telephone systems through the Company's direct sales offices and its dealer
network. The remaining increases occurred in long distance sales and other
operations. Wholesale shipments to the expanded direct dealer network more than
offset decreased shipments to Premier Telecom. Shipments to this former private
label distributor are no longer significant.
Gross profit increased to $49.1 million, or 40.1% of net sales, in 1994
from $39.6 million, or 38.7% of net sales, in 1993. This increase in gross
margins reflected the transition from Premier and other distributors to the
direct dealer network and the expansion of AXXESS software and systems sales.
Research and development expenses increased to $4.5 million, or 3.7% of
net sales in 1994 from $4.1 million, or 4.0% of net sales, in 1993. These
expenses in both 1994 and 1993 were directed principally to the continued
development of the AXXESS software and systems and voice processing software
applications.
Selling, general and administrative expenses increased to $35.8
million, or 29.2% of net sales in 1994, from $29.0 million, or 28.5% of net
sales, in 1993. This reflected increased incentive and other compensation,
additional personnel to support the direct dealer network, and expenses
associated with the start up of the Company's Asian subsidiary.
Interest and other income increased in 1994 principally from the
investment for a full year of the funds received in the 1993 public offering and
funds generated through operating cash flow.
Net income increased 52.7% to $5.9 million, or $.55 per share, in 1994
from $3.9 million, or $.43 per share, in 1993. Net income per share in 1994 is
based on an additional 1.8 million average shares outstanding in 1994,
reflecting the 1993 public stock offering.
DISCONTINUED OPERATIONS
In 1993, the Company sold a facility related to previously discontinued
operations subject to remediation related to fuel tank leakage. The Company had
reserved for such remediation approximately $400,000, which management believes
is adequate to cover such possible costs.
7
<PAGE> 14
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 require working capital for increased accounts receivable and
inventories. During 1995, receivables and inventories increased approximately
$17.7 million. This increase was principally funded by operating cash flow and
existing cash balances. The Company also expended approximately $7.9 million
during 1995 for property and equipment, principally relating to the
implementation of the Company's new MIS systems. At December 31, 1995, the
Company had $39.6 million in cash and equivalents, which represents an increase
of approximately $24.0 million from December 31, 1994.
The Company has a loan agreement with Bank one, Arizona, N.A. This
agreement provides for a $5 million, unsecured, revolving line of credit, which
is being used primarily to support international letters of credit to suppliers.
Outstanding balances bear interest at the bank's prime rate. In August 1995, The
Company received approximately $30.7 million from a public offering. The
proceeds were used in 1995 for working capital, capital expenditures and other
general corporate purposes. A portion of the net proceeds may be used to finance
acquisitions of resellers of telephony products, other strategic acquisitions or
corporate alliances. In the fourth quarter of 1993, the Company repaid all long
and short term debt from a portion of the net proceeds received from its 1993
public offering. The remaining proceeds were added to working capital.
The Company offers to its customers lease financing and other services,
including its Totalease program, through its Inter-Tel Leasing subsidiary. The
Company funds its Totalease program in part through the sale to financial
institutions of rental income streams under the leases. Resold Totalease rentals
totaling $37.3 million and $19.9 remain unbilled at December 31, 1995 and 1994,
respectively. The Company is obligated to repurchase such income streams in the
event of defaults by lease customers and, accordingly, maintains reserves based
on loss experience and past due accounts. Although the Company to date has been
able to resell the rental streams from leases under
8
<PAGE> 15
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 realizes
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 provide adequate working capital for the foreseeable future.
However, to the extent that additional funds may be required in the future to
address working capital needs and to provide funding for capital expenditures,
expansion of the business or additional acquisitions, the Company will consider
additional financing. There can be no assurance that additional financing will
be available when required or on acceptable terms.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, ("Statement 121")," which requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount.
Statement 121 also addresses the accounting for long-lived assets that are
expected to be disposed of. The Company will adopt Statement 121 in the first
quarter of 1996 and, based on current circumstances, does not believe the effect
of the adoption will be material.
9
<PAGE> 16
AUDITOR'S REPORT
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
SHAREHOLDERS AND BOARD OF DIRECTORS
INTER-TEL, INCORPORATED
We have audited the accompanying consolidated balance sheets of Inter-Tel,
Incorporated and subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Inter-Tel,
Incorporated and subsidiaries at December 31, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
/s/Ernst & Young LLP
Phoenix, Arizona
March 20, 1996
10
<PAGE> 17
INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1994
<TABLE>
<CAPTION>
(In thousands)
- --------------------------------------------------------------------------------------------------------
1995 1994
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash and equivalents $ 39,577 $ 15,530
Accounts receivable, less allowances of
$1,811 in 1995 and $1,172 in 1994 29,635 16,895
Inventories, less allowances of $1,975 in
1995 and $1,785 in 1994 20,505 15,567
Net investment in sales-leases 3,629 1,613
Prepaid expenses and other assets 4,467 4,176
- --------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 97,813 53,781
PROPERTY, PLANT & EQUIPMENT 11,773 6,008
OTHER ASSETS 8,816 7,629
- --------------------------------------------------------------------------------------------------------
$ 118,402 $ 67,418
- --------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 11,167 $ 5,534
Other current liabilities 11,135 11,002
- --------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 22,302 16,536
DEFERRED TAX LIABILITY 7,228 3,057
OTHER LIABILITIES 3,827 2,727
SHAREHOLDERS' EQUITY
Common stock, no par value - authorized 30,000,000 shares,
issued and outstanding -- 12,764,681 shares
in 1995 and 10,658,025 shares in 1994 58,816 27,435
Retained earnings 26,500 18,049
Currency translation adjustment (112) (122)
- --------------------------------------------------------------------------------------------------------
85,204 45,362
Less receivable from Employee Stock Ownership Trust (159) (264)
- --------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 85,045 45,098
- --------------------------------------------------------------------------------------------------------
$ 118,402 $ 67,418
- --------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
11
<PAGE> 18
INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
(In thousands, except per share data)
- ---------------------------------------------------------------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
NET SALES $ 148,846 $ 122,617 $ 102,377
Cost of sales 87,031 73,482 62,791
- ---------------------------------------------------------------------------------------------------
GROSS PROFIT 61,815 49,135 39,586
Research and development 5,764 4,537 4,114
Selling, general and administrative 42,609 35,785 29,032
Special charge 1,315 -- --
- ---------------------------------------------------------------------------------------------------
OPERATING INCOME 12,127 8,813 6,440
- ---------------------------------------------------------------------------------------------------
Other income 1,674 904 282
Interest expense (101) (120) (445)
- ---------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 13,700 9,597 6,277
INCOME TAXES
Current 1,007 2,929 1,279
Deferred 4,242 719 1,102
- ---------------------------------------------------------------------------------------------------
5,249 3,648 2,381
- ---------------------------------------------------------------------------------------------------
NET INCOME $ 8,451 $ 5,949 $ 3,896
- ---------------------------------------------------------------------------------------------------
NET INCOME PER SHARE $ 0.71 $ 0.55 $ 0.43
- ---------------------------------------------------------------------------------------------------
Average number of common
shares outstanding 11,953 10,852 8,982
- ---------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
12
<PAGE> 19
INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
(In thousands)
- -------------------------------------------------------------------------------------------------------------------
Currency Receivable
Common Retained Translation From
Stock Earnings Adjustment ESOP Total
----- -------- ---------- ---- -----
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1992 $11,863 $8,204 $ (181) $(456) $19,430
Issuance of 1,800,000 shares
of common stock 14,766 14,766
Exercise of stock options 283 283
Tax benefit from stock options 110 110
Stock issued in acquisition 82 82
Net income 3,896 3,896
Loss on currency translation (112) (112)
Collection from ESOP 87 87
- -------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1993 27,104 12,100 (293) (369) 38,542
Exercise of stock options 187 187
Tax benefit from stock options 103 103
Stock issued in acquisition 41 41
Net income 5,949 5,949
Gain on currency translation 171 171
Collection from ESOP 105 105
- -------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 27,435 18,049 (122) (264) 45,098
Issuance of 2,000,000 shares
of common stock 30,670 30,670
Exercise of stock options 503 503
Tax benefit from stock options 208 208
Net income 8,451 8,451
Gain on currency translation 10 10
Collection from ESOP 105 105
- -------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 $58,816 $26,500 $ (112) $(159) $85,045
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
13
<PAGE> 20
INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
(In thousands)
- ---------------------------------------------------------------------------------------------------------
1995 1994 1993
---- ---- ----
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 8,451 $ 5,949 $ 3,896
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 2,244 1,647 1,499
Provision for losses on receivables 1,570 936 781
Provision for inventory valuation 595 551 264
Net contribution to ESOP 105 105 87
Increase in other liabilities 1,111 603 1242
(Gain) loss on sale of property and equipment 16 (18) (14)
Deferred income taxes 4,242 719 1,102
Effect of exchange rate changes 10 171 (112)
Changes in operating assets and liabilities (17,575) (5,929) (3,464)
- ---------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 769 4734 5,281
- ---------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Additions to property and equipment (7,904) (3,834) (1,080)
Proceeds from sale of property and equipment 9 63 254
Cash used in acquisitions -- (131) (812)
- ---------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING
ACTIVITIES (7,895) (3,902) (1,638)
- ---------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from credit line -- -- 81,857
Payments on credit line -- -- (85,681)
Proceeds from new term notes -- -- 110
Payments on long-term debt -- (188) (2,637)
Net proceeds from stock offering 30,670 -- 14,766
Proceeds from exercise of stock options 503 187 283
- ---------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 31,173 (1) 8,698
- ---------------------------------------------------------------------------------------------------------
INCREASE IN CASH AND EQUIVALENTS 24,047 831 12,341
CASH AND EQUIVALENTS AT BEGINNING
OF YEAR 15,530 14,699 2,358
- ---------------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS AT END OF YEAR $ 39,577 $ 15,530 $ 14,699
- ---------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
14
<PAGE> 21
INTER-TEL, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
- --------------------------------------------------------------------------------
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES
Description of Business: The Company is in the business of developing
and providing telephone systems, voice processing and long distance calling
services to businesses principally throughout the United States, as well as
providing leasing, support and maintenance services through a direct sales and
reseller network.
Principles of Consolidation: The consolidated financial statements
include the accounts of Inter-Tel, Incorporated and all significant subsidiaries
(the Company). Intercompany accounts and transactions have been eliminated in
consolidation.
Cash and Equivalents: Cash and equivalents include all highly liquid
investments with a remaining maturity of three months or less at date of
acquisition. Excess cash and equivalents are primarily invested in mutual funds
comprised of foreign and domestic high quality dollar denominated money market
instruments rated A-1 by Standard & Poor's Ratings Group, or equivalent.
Inventories: Inventories, consisting principally of telephone systems,
computer equipment and related components, are stated at the lower of cost
(first-in, first-out method) or market.
Property, Plant and Equipment: Property, plant and equipment is stated
at cost. Depreciation is computed using the straight-line method over the
estimated useful life of the related property. Leasehold improvements are
depreciated over the shorter of the related lease terms or the estimated useful
lives of the improvements.
Excess of Purchase Price Over Net Assets Acquired: Purchase prices of
acquired businesses that are accounted for as purchases have been allocated to
the assets and liabilities acquired based on the estimated fair market values on
the respective acquisition dates. Based on these values the excess purchase
prices over the fair market value of the net assets acquired are being amortized
over 5 to 40 years. Accumulated amortization through December 31, 1995 was
$485,056.
Sales-Leases: The discounted present values of minimum rental payments
under sales-type leases are recorded as sales, net of provisions for
15
<PAGE> 22
continuing administration and other expenses over the lease period. The costs of
systems installed under these sales-leases, net of residual values at the end of
the lease periods, are recorded as costs of sales. Gains or losses resulting
from the sale of rental income from such leases are recorded as adjustments to
the original sales amounts.
Income Taxes: Deferred income taxes result from temporary differences
in the recognition of revenues and expenses for financial reporting and income
tax purposes.
Advertising: The cost of advertising is expensed as incurred. The
Company incurred $318,000; $431,000; and $424,000 in advertising costs during
1995, 1994 and 1993, respectively.
Stock Based Compensation: The Company grants stock options for a fixed
number of shares to employees with an exercise price equal to the fair market
value of the shares at the date of grant. The company accounts for stock option
grants in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and accordingly, recognizes no
compensation expense for these stock option grants.
Impact of Recently Issued Accounting Standards: In March 1995, the
Financial Accounting Standards Board issued Statement No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
("Statement 121")," which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. Statement 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. The
Company will adopt Statement 121 in the first quarter of 1996 and, based on
current circumstances, does not believe the effect of the adoption will be
material.
Use of Estimates: The preparation of the financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Poolings of Interests: The financial statements for periods prior to
1995 have been restated to include the accounts of American Telcom Corp. of
Georgia, Inc. ("American Telcom") and Access West, Inc. ("Access West"). Each
corporation was acquired by the Company in pooling of interests transactions in
May 1995, in which 279,081 shares of Inter-Tel common stock were issued.
American Telcom and Access West did not constitute significant
16
<PAGE> 23
subsidiaries as defined by the Securities and Exchange Commission. In the
consolidated statements of income, net sales and net income were
increased/(decreased) as a result of the restatement as follows:
<TABLE>
<CAPTION>
(In thousands, except per share amounts) Year ended December 31,
1994 1993
<S> <C> <C>
Net sales $10,452 $9,853
Net income (136) (28)
Net income per share $ (.03) $ (.02)
</TABLE>
Total shareholders' equity was decreased by $53,000 as of January 1,
1993 as a result of the restatement. The Company also recorded a special charge
of $1,315,000 in 1995 principally associated with integrating the acquired
companies.
Net Income Per Common Share: Net income per common share is based on
the weighted average number of common shares outstanding during each year and
common stock equivalents.
Reclassifications: Certain reclassifications have been made to the 1994
and 1993 financial statements to conform to the 1995 presentation.
NOTE B -- NET INVESTMENT IN SALES-LEASES
Net investment in sales-leases represents the value of sales-leases
presently held under the Company's Totalease program. The Company currently
sells the rental income from some of the sales-leases. The Company maintains
reserves against potential recourse following the resales based upon loss
experience and past due accounts. Activity during the years was as follows:
<TABLE>
<CAPTION>
(In thousands) Year Ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Sales of rental income $25,106 $12,423 $ 9,586
Sold income remaining
unbilled at end of year 37,256 19,894 11,908
Allowance for uncollectible
minimum lease payments
and recourse liability at
end of year 1,513 1,198 911
</TABLE>
The Company does not expect any significant losses from the recourse
provisions related to the sale of rental income. The Company is compensated for
administration and servicing of rental income sold.
17
